• The Media-Opoly: Cancelled, From Saturday Night, It's Conspiracy Theory Rock!

  A day after we ran “Meet Your “Independent” Media, America“, in which we showed how prime time entertainment like 60 Minutes is strategically and voluntarily “planted” with propaganda trolls and “concerns” thus crushing any “unbiased” credibility mainstream US media may have, we dug into the archives to bring you “Conspiracy Theory Rock.”

  This cartoon created by SNL cartoonist Robert Smigel in 1998 ran once in a “TV Funhouse” segment, and has been since removed from all subsequent airings of the Saturday Night Live episodes. As a reminder, 90% of US media is currently controlled by 6 corporations: General Electric, News Corp., Disney, Viacom, Time Warner and CBS…

  

  

  … whose shareholders vastly overlap.

  Michaels claimed the edit was done because it “wasn’t funny.”

  Well, it’s funny now because for once the propaganda facade of the mainstream media cracked from within, and the result was this critique of corporate media ownership, including then NBC’s ownership by General Electric/Westinghouse, and how only the stuff the owners deem appropriate is distributed for general consumption.

  We doubt the current parent of NBC (and CNBC), Comcast, would play it either.

  

  

  

  

• Inside A Mid-East Coup: A Closer Look At The Russia-Iran Power Play

  Earlier today, we ventured to characterize the breakdown of Washington’s strategy in Syria as the worst US foreign policy blunder since Vietnam. 

  To be sure, that’s a bold claim, but it’s supported by the sheer number of missteps, bad outcomes, and outright absurdities that have developed in the Mid-East as a result of the effort to oust Bashar al-Assad. 

  At the most basic level, the support provided by Washington, Riyadh, and Doha for the various Sunni extremist groups battling for control of Syria has created a humanitarian crisis of epic proportions. Hundreds of thousands of people are dead and millions are displaced. As tragic as the situation already is, the conditions are ripe for it to get even worse if the move by Brussels to force recalcitrant EU countries into accepting a migrant quota system they are opposed to ends up triggering a dangerous bout of xenophobia in the Balkans.

  Washington’s move to train and arm the Syrian opposition has of course also led directly to the creation of a group of black flag-waving jihadists that have taken the term “extremists” to a whole new level on the way to producing a series of slickly-produced videos depicting the murder of Westerners. This same group is now stomping around between Syria and Iraq wreaking havoc on civilians and committing acts so heinous that even al-Qaeda has condemned them.

  Of course the outright chaos the West has managed to create in Syria has now come full circle, providing Iran and Russia with a unique opportunity to tip the scales and seize power in the Mid-East. 

  What’s important to understand here, is that this isn’t confined to Syria.

  That is, Iran isn’t content to preserve its supply line with Hezbollah and Russia isn’t content to play spoiler to the US by propping up Assad. There’s something far more meaningful going on here and it can be readily observed in Iraq.

  For years, Iran exercised its influence in Iraq via various Shiite militias controlled by Quds commander Qasem Soleimani. Now, it looks as though the deal struck between Tehran and Moscow in July included a power play designed to gradually muscle the US out of the way in Baghdad. The first concrete evidence of this came late last month when Iraq announced an intelligence sharing agreement with Russia and Syria but the story goes far deeper than that. Consider the following from The Washington Institute:

  On September 21, the Wall Street Journal reported that forces under the command of Iran, Russia, and Bashar al-Assad were coordinating efforts to secure the Syrian regime. As Moscow sends advanced aircraft, armored vehicles, and more, Iran’s Iraqi Shiite proxies have simultaneously stepped up their recruitment and deployment for the Syria war. Since July, their Syria-focused online campaigns have jumped significantly (see chart), morphing from infrequent mentions in late 2014/early 2015 to a full-fledged recruitment program involving a number of newer Iranian-backed groups. These Shiite fighters are now spread across Syria, primarily in the western part of the country, launching operations from the suburbs of Damascus to Idlib.

   

  

   

  Following the June 2014 seizure of Mosul and much of northern Iraq by the so-called Islamic State/ISIS, a group called Kataib al-Imam Ali (KIA) announced its creation. Formed by Iranian-controlled splinter elements from Muqtada al-Sadr’s Mahdi Army, KIA is probably best known for its fierce battlefield reputation and particularly gory videos featuring severed heads and men being cooked above open flames.

   

  When compared to other organizations, KIA’s Syria-focused recruitment and propaganda campaign has been the largest. Using messages issued via its offices, billboards, and social media, the group has actively recruited new members, especially around Najaf, Iraq. These efforts began with online imagery connecting its fighters with Sayyeda Zainab, an important Shiite shrine near Damascus. Other posts have announced that Jaafar al-Bindawi, the militia’s former head of training and logistics, would be leading the deployment in Syria, while Ali Nizam would serve as the new logistical director for Syrian affairs.

   

  While this effort marks the group’s first publicized deployments to Syria, KIA is no newcomer to the war. Prior to its formal creation, and with Iranian assistance, elements of the militia were very active in Syria beginning in 2013. Alaa Hilayl, one of the group’s heavily glorified “martyrs” and leader of its submilitia Kataib Malik al-Ashtar, was one of the first Shiite commanders to publicly announce combat operations in the Aleppo area in spring 2013.

   

  Meanwhile, Harakat Hezbollah al-Nujaba (HHN, a.k.a. “The Hezbollah Movement of the Outstanding,” or simply Harakat al-Nujaba) has been the other main Iraqi Shiite player in Syria recruitment, and its background is similar to KIA’s. HHN emerged from Iranian-controlled Sadrist splinter group Asaib Ahl al-Haq (AAH) in 2013 and is led by that group’s cofounder, Sheikh Akram Kaabi.

   

  Internet-based propaganda and recruitment materials (mainly through social media) often serve as harbingers of larger moves by Iran’s Iraqi Shiite proxies. This summer, these groups began to disseminate a collection of professionally produced imagery in a highly organized manner, all aimed at raising awareness of the Syria fight and calling for new recruits.

   

  Previously, in fall 2014, the Iranian-backed Iraqi Shiite group Kataib Sayyid al-Shuhada (KSS) instituted a sporadic Internet recruitment program. The group’s fighters were primarily deployed for a failed campaign on Syria’s southern front that lasted into early 2015. Meanwhile, HHN initiated its own limited recruitment program from December to April. Both programs demonstrated that Iraqi Shiites would once again play a major role in Syria (see PolicyWatch 2430, “Iraqi Shiite Foreign Fighters on the Rise Again in Syria”). Yet these moves were only the tip of the iceberg.

   

  While May and June were relatively quiet on this front, Iraqi Shiite recruitment for Syria quickly began to rise in July and spiked in August. September saw slightly decreased recruitment and propaganda posts online, but the traffic was still sizable enough to be regarded as a continuation of the Syria program.

   

  According to fighters who promoted recruitment material or were sent to Syria in late July, training for the deployment often lasted around thirty days and took place in Lebanon or Iran. Considering that most training regimens for Shiite fighters heading to Syria have lasted between two and six weeks (depending on specialization), Iran likely timed the uptick in deployments to best demonstrate unity of arms with Russia and Assad. Specifically, the main spike in recruitment activity began in earnest on July 3, the first reports of experienced KIA fighters deploying to Syria emerged on July 20, and Qasem Soleimani — commander of Iran’s elite Qods Force — met with Russian officials on July 24.

  And here’s a map from ISW which “depicts confirmed locations of Iranian Revolutionary Guard Corps (IRGC) commanders in Iraq between October 2014 and October 2015.” ISW continues: “orange markers indicate where IRGC personnel were spotted in an area witnessing active military operations [and] asterisks indicate a Soleimani sighting”:

  

  In short, what’s happened here is that once Tehran secured the support of the Russian air force juggernaut, the IRGC diverted its Iraqi militias to Syria, where they will now join Hezbollah and ensure that Putin’s airstrikes are bolstered when needed by effective ground support. 

  The announcement this week by Baghdad that Iraq would welcome Russian airstrikes against ISIS indicates that once Moscow and Tehran have restored Assad and stabilized Syria, the joint air and ground campaign will move to Iraq, a strategic shift that will complete what we have characterized as an outright Mid-East coup. 

  If this thesis materializes, it will mean that the West’s attempt to destabilize the Assad regime has not only failed, but has in fact opened the door for Iran to seize control of the Mid-East and for Russia to reestablish itself as a global superpower capable of bringing its influence to bear on any nation at any time. 

  It’s your move Washington, and the stakes couldn’t possibly be higher…

  

  

  

  

• Will The Failure Of Central Banking Lead To Global Bloodshed: The French Revolution Case Study

  Submitted by Michael Lebowitz of 720 Global

  Shorting the Federal Reserve – Part Deux

  The sequence of events leading up the French Revolution are likely unfamiliar to most. Yet money printing and a debauched French currency played no small part in those events. As a sequel to “Shorting the Federal Reserve”, 720 Global aims to provide an historical example of excessive money printing which lead to financial crisis, and ultimately the revolution of a major sovereign nation. More than a history lesson, this article effectively illustrates the road on which the U.S. and many other nations currently travel. The story relayed in this article is not a forecast for what may happen but a simple reminder of what has repeatedly happened in the past.

  As you read, notice the story lines the French politicians used to persuade the opposition and justify money printing. Note the similarities to the rationales used by central bankers and neo?Keynesians today. Then, as now, it is promoted as a cure for economic ills with manageable consequences and where failure to generate a sustainable recovery are thought to be a failure of not having acted boldly enough.

  Our gratitude to the late Andrew D. White, on whose work we relied heavily. The exquisite account of France circa the 1780?1790’s was well documented in his paper entitled “Fiat Money Inflation in France” published in?1896. Any unattributed quotes were taken from his paper.

  Before The Presses Rolled

  During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands. For example, in 1776 newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes as his recently fired predecessor argued. Necker was ultimately replaced 7 years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back.

  By the late 1780’s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective but the deficit was very slow to decrease. The problem, however, was the citizens were tired of the economic stagnation that resulted from belt tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:

  “Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self?denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few”.

  By 1789, commoners, politicians and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned).

  This was a stark departure from the silver and gold backed Livre, the currency of France at the time. Assembly debate was lively, with strong opinions on both sides of the issue. Those against it understood that printing fiat money failed miserably many times in the past. In fact, the John Law/Mississippi bubble crisis of 1720 was caused by an over issue of paper money. That crisis caused, in White’s words, “the most frightful catastrophe France had then experienced”. History was on the side of those opposed to the new plan.

  Those in favor looked beyond history and believed this time would be different. They believed the amount of money printed could be controlled and ultimately pulled back if necessary. It was also argued new money would encourage people to spend and economic activity would surely pick up. Another popular argument was France would benefit by selling the confiscated lands to its people and these funds would help pay off its debts. In addition, land ownership by the masses strengthened French patriotism.

  The debate was won by those in favor of printing. As we have seen many times before and after this event, hope and greed won out over logic, common sense and most importantly, history. Per White? “But the current toward paper money had become irresistible. It was constantly urged, and with a great show of force, that if any nation could safely issue it, France was now that nation; that she was fully warned by her severe experience under John Law; that she was now a constitutional government, controlled by an enlightened, patriotic people,??not, as in the days of the former issues of paper money, an absolute monarchy controlled by politicians and adventurers; that she was able to secure every livre of her paper money by a virtual mortgage on a landed domain vastly greater in value than the entire issue; that, with men like Bailly, Mirabeau and Necker at her head, she could not commit the financial mistakes and crimes from which France had suffered under John Law, the Regent Duke of Orleans and Cardinal Dubois”. This time was different in their collective minds!

  April 1790

  The final decree was passed and 400 million Assignats, backed by confiscated church property, were issued. The notes were quickly put into circulation and “engraved in the best style of the art”, as shown below.

  

  As one might suspect the church decried the action, but the large majority of French were in favor. The press and assemblymen extolled the virtues of this new money. They spoke and wrote of future prosperity and an end to the economic oppression. They thought they found a cure for their economic ills.

  Upon the issuance of the new money, economic activity picked up almost immediately. As expected, the money allowed for a portion of the national debt to be paid off as well. Confidence and trade expanded. The summer of 1790 proved to be an economic boom time for France.

  Fall 1790

  The good times were limited. By October, economic activity was back in decline and with it came a renewed call for more money printing. Per White? “The old remedy immediately and naturally recurred to the minds of men. Throughout the country began a cry for another issue of paper”. The deliberations regarding money printing were rekindled with many of the same arguments on both sides of the debate re?hashed. A new argument for those in favor of printing was simply that the original 400 million Assignats was not enough.

  While those favoring money printing acknowledged the dangers of their actions, they were also dismissive about them at the same time. These Assemblymen believed if a little medicine appeared to work with no side effects why not take more. Debate this time around was easier for the pro?printing consortium. Of note was a well?respected elder statesman of the Assembly and national hero named Gabriel Riqueti, Comte de Mirabeau (Mirabeau). During the first round of debates, Mirabeau was strongly against the issuance of the new currency. In fact he said the following: “A nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium” in regards to paper money. He even called the issuance of money “a loan to an armed robber”.

  While Mirabeau clearly understood the effects of printing money, he was now swayed by the arguments of a stronger economy. He also appreciated the benefits of making a large class of landholders for the first time. Mirabeau reversed his opinion and joined the ranks of those believing France could control the inflationary side effects. He now argued for one more issue of Assignats. As a precautionary measure he insisted that as soon as paper became abundant, self?governing laws of economics would ensure the money was retired. Mirabeau went as far  as recommending the new amount of printed money should be enough to pay down the entire debt of France ? 2,400 million!

  The naysayers warned of the ills of the proposed second printing. Of note was Necker. If you recall he was partially responsible for the debt buildup that led to France’s problems. Necker “predicted terrible evils” and offered other means to accomplish economic growth. His opinions were not popular and Necker was “spurned as a man of the past” by the Assembly and ultimately left France forever. A powerful pamphlet, written by Du Pont de Nemours was popular amongst the nays and was read to the Assembly. It declared that doubling the money supply would “simply increase prices, disturb values, alarm capital, diminish legitimate enterprise, and so decreases the demand for both products and for labor. The only persons to be helped by it are the rich who have large debts to pay”.

  The arguments of Neckar and Du Pont de Nemours fell on deaf ears. Those in favor rebutted with comments that printing more money was “the only means to insure happiness, glory and liberty to the French nation”. They took the prior debate a step further and now theorized that the gold and silver Livres would be undesirable as Assignats would be the only currency people demanded.

  On the 29th of September 1790, a bill authorizing the issuance of 800 million Assignats was passed. The bill also decreed that when Assignats were paid back to the government for land they should be burned. This added measure was thought of as a way to ensure the newly printed money was not inflationary.

  White commented: “France was now fully committed to a policy of inflation; and, if there had been any question of this before, all doubts were removed” he went on discussing how “exceedingly difficult it is stopping a nation once in the full tide of a depreciating currency”.

  It turns out the money returned to the government wasn’t burned but was re?issued in smaller denominations. Within a short period 160 million was paid to the government for lands and was reissued “under the pleas of necessity”.

  June 1791

  Nine months after the second issue of 800 million Assignats, and another cycle of good economic activity followed by bad, pressure grew for more money printing. With little fanfare or debate, a new issue of 600 million was issued. With it, once again came “solemn pledges to keep down the amount in circulation”.

  This experience, like the previous two, was followed by a brief period of optimism that quickly faded. With each successive printing came currency depreciation and higher prices. Despite the beliefs of those in favor of printing, hoarding of gold and silver backed coins was occurring. The French people were watching their paper money lose value and becoming more interested in preserving their wealth. The coins were in limited supply while paper money was being printed with increasing frequency. In their minds, gold and silver offered the stability that  paper money was rapidly losing.

  “Still another troublesome fact began to now appear. Though paper money had increased in amount, prosperity had steadily diminished. In spite of all the paper issues, commercial activity grew more and more spasmodic. Enterprise was chilled and business became more and more  stagnant”.

  With each new issue came increased trade and a stronger economy. The problem was the activity wasn’t based on anything but new money. As such, it had very little staying power and the positive benefits quickly eroded. Businesses were handcuffed. They found it hard to make any decisions in fear the currency would continue to drop in value. Prices continued to rise. Speculation and hoarding were becoming the primary drivers of the economy. “Commerce was dead; betting took its place”. With higher prices, employees were laid off as merchants struggled to cover increasing costs.

  The only ones truly benefiting were manufacturers producing goods for foreign countries and the stock brokers. The rapidly declining value of their currency attracted orders from other countries that were now able to purchase French goods very cheaply. Those businesses and consumers that relied on goods from outside the country were battered by higher prices. With the increased money supply and economic uncertainty the “ordinary motives for savings and care diminished”. Speculation increased significantly. While some stock investors in the urban regions were exploiting the condition, the onus fell on the working man. Inflation, weakening currency and lack of jobs was damaging to a large majority of Frenchmen.

  The economic conditions also brought on more crime and increased instances of bribery of government officials. Conditions were described by White as “the decay of a true sense of national pride”.

  December 1791

  A new issue of 300 million more Assignats was ordered to be printed. With that decree it was also ordered that a previous limit on the total amount to be printed be repudiated. By this point it was estimated the value of their currency was cut in half and inflation was rampant.

  April?July 1792

  Another 600 million Assignats were printed. The presses rolled on and after a few more printings it was estimated a total of 3,500 million Assignats now existed. The issuances continued through 1792 and 1793.

  “The consequences of these over issues now began to be more painfully evident to the people at large. Articles of common consumption became enormously dear and prices were constantly rising. Orators in the Legislative Assembly, clubs, local meetings and elsewhere now endeavored to enlighten people by assigning every reason for this depreciation save the true one. They declaimed against the corruption of the ministry, the want of patriotism among the Moderates, the intrigues of the emigrant nobles, the hard?heartedness of the rich, the monopolizing  spirit of the merchants, the perversity of the shopkeepers, ???each and all of these as causes of the difficulty”.

  French Revolution

  Throughout 1792 and 1793 there were instances of mobs demanding basic necessities such as bread, sugar and coffee. Peaceful demonstrations turned violent and plundering of the local shops was commonplace. The French Revolution was born.

  Money printing was not the sole cause of the revolution, but it certainly helped light the fuse. In all fairness, the French people were demanding the same liberties they helped America fight for. The idea of a Monarchy was fading and those supporting democratic principles were leading the charge. In hindsight, money printing was a last ditch effort to create prosperity and keep the Revolution at bay. Poverty and despair spread through France. Malnutrition and hunger due to lost employment and inflation fed the Revolution. In 1792 a republic was proclaimed and in the following year King Louis XVI was sent to the guillotines. 

  Conclusion

  The story retold in this article echoes that of other nations before and after it. The language, promises, and ultimately the excuses used by the politicians are a familiar refrain. There is nothing new with money printing or “quantitative easing” as modern day central bankers call it. Despite the passing of over 200 years and substantial development in the world, plus ça change (the more that changes, the more it is the same thing).

  As stressed in part 1 of this series “Shorting the Federal Reserve”, gold has a long history serving as a tool of wealth preservation. After numerous financial crises caused by the debasement of currencies have modern day economists and central bankers finally figured out how to print money with no consequences? Despite our wishes to the contrary, every action still has an equal and opposite reaction (consequence). The investment pundits who see nothing wrong with the actions of the world central banks regard holding gold as ridiculous. We consider an allocation to gold as a matter of prudence given what we have seen and expect to see from central bankers desperate to maintain status quo.

  Hopefully after reading this and “Shorting the Federal Reserve” you will understand a little protection may go a long way in what may not be as clear cut an economic future as some would lead us to believe.

  

  

  

  

  

• Global Dollar Funding Shortage Intesifies To Worst Level Since 2012

  The last time we observed one of our long-standing favorite topics (first discussed in early 2009), namely the global USD-shortage which manifests itself in times of stress when the USD surges against all foreign currencies and forces even the BIS and IMF to notice, was in March of this year, when we explained that “unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks’ own actions that have led to this global currency funding mismatch – a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place.”

  Furthermore JPM conveniently noted that “given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis.”

  To which we rhetorically added: “who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don’t answer that rhetorical question).”

  All this was happening when the market was relentlessly soaring to all time highs, completely oblivious of this dramatic dollar shortage, which just a few months later would manifest itself quite violently first in the Chinese devaluation and sale of Treasurys, and then in the unprecedented capital outflow from emerging markets as the great petrodollar trade – just as we warned in November of 2014 – went into reverse. In fact, there are very few now who do not admit the Fed is responsible for both the current cycle of soaring volatility, or what may be a market crash (as DB just warned) should the Fed not take measures to stimulate “inflation expectations” (read: more easing).

  In any event, since March we have received numerous requests for follow-up of where said funding shortage is now. So here are the latest observations on the current level of the global dollar funding shortage as measured by the Dollar fx basis, courtesy of JPM:

  The dollar fx basis declined further over the past two months. The 5-year dollar fx basis weighted across six DM currencies declined to a new  low for the year and the lowest level since the summer of 2012 during the euro debt crisis.

  In other words: the USD funding shortage is even worse than it was when we looked at it in March, it still is a function of conflicting central bank liquidity flows, and while not as bad as it was at its all time worst levels in late 2011, it is slowly but surely getting there with every passing week that the Fed does not ease monetary conditions. 

  A brief history of the three key periods of global USD-funding shortfalls:

  • The first episode immediately after the Lehman bankruptcy coincided with a US banking crisis that quickly became a global banking crisis via cross border linkages. Financial globalization meant that Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Lehman crisis made both European and Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert euro or yen funding into dollar funding as they were unable to access dollar funding markets directly.
  • The second episode of very negative dollar basis took place during the Euro debt crisis. The sovereign crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage. European banks and companies that had dollar assets to fund had to pay a hefty premium in fx swap markets to convert their euro funding into dollar funding. Those European banks and companies that were unable to do so, were forced to liquidate dollar assets such as dollar denominated bonds and loans to reduce their need for dollar funding
  • The third phase of very negative dollar basis started at the end of last year. Monetary policy divergence has for sure played a role during the end of 2014 and the beginning of this year. The ECB’s and BoJ’s QE has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections raising the supply of euro and yen funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis. And we did see these funding imbalances in cross border corporate issuance.

  More from JPM:

  Similar to the beginning of this year, the decline in the dollar fx basis is raising questions regarding shortage in dollar funding. This is because the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and an even more negative basis currently points to more intense shortage of USD funding relative to the beginning of the year.

   

  Figure 5 shows that the current negativity of the dollar fx basis represents the third major episode since the Lehman crisis. Before the Lehman crisis the fx basis was remarkably stable hovering around zero as funding markets were well balanced. After the Lehman crisis, funding markets experienced persistent imbalances with an almost structural shortage of dollar funding.

  The conclusion:

  In all, continued monetary policy divergence between the US and the rest of the world as well as retrenchment of EM corporates from dollar funding markets are sustaining an imbalance in funding markets making it likely that the current episode of dollar funding shortage will persist.

  What does this mean in simple terms? Think back to what David Tepper said several weeks ago on CNBC when, contrary to popular opinion, he admitted he was bearish on risk assets mostly as a result of the “reserve streams” going in two different ways. This is precisely what the dollar shortage as quantified by the negative dollar basis is telling us: the policy divergence between the “tight” Fed and the ultra loose ECB and BOJ is starting to reach extreme levels, and will likely continue until the basis blows out to its theoretical limit of -50bps as set by the Fed-ECB swap line.

  At that point either the Fed will be forced to admit it was beaten by the market, and either cut rates (to negative) while perhaps unleashing even more QE to offset the monetary imbalance with the rest of the world, or it will once again engage in even more swap lines with foreign central banks as the dollar funding shortage moves beyond simply synthetic and into an actual shortage of USD “bills” all in electronic credit format of course, because as we further explained last week, it is simply impossible to satisfy all global USD-denominated claims.

  

  

  

  

  

• Manifesto – The Values of Value Investing

  

  I rarely share letters we write to IMA’s clients, but I decided to share this “Value Investor’s Manifesto” I wrote for our clients in July. It should be a helpful tool to frame recent volatility in an appropriate perspective. It’s just eight pages long, but it’s probably one of the most important pieces of writing I have done in a long, long time. Here is the first part, the introduction.

  Manifesto

  By Vitaliy Katsenelson, CFA

  Part One: Introduction

  The relationship between a client and a money manager is like a marriage: even if you’re married to the right person, it’s just a matter of time before your relationship will hit hard times that test the strength of your marriage. After all, life is not linear, it’s full of ups and downs. The downs will ultimately test a couple’s commitment to one another.

  Just like life, stock returns are anything but linear. Over the last one hundred-plus years, stocks returned about 11% a year on average. But if you were to look at stock market returns on an annual basis, they were usually anything but 11%. This 11% average is the culmination of a very combustible mixture of numbers that individually bear very little resemblance to the average they result in.

  Side effects of nonlinearity of stock behavior clearly show up in investor returns. The financial services market research firm DALBAR studied historical returns of mutual funds and actual (realized) returns of investors who invested in those mutual funds. DALBAR’s findings were stunning. For decades fund investors had significantly underperformed the mutual funds they invested in, not by a percent or two but by a mile, capturing only a small fraction of the returns of those mutual funds.

  For a civilian (nonprofessional) investor, understanding the investment process of a fund manager is usually difficult. Often, performance is the only thing investors can judge objectively, so recent performance overshadows all other metrics. Investors compare the most recent returns of their favorite new mutual fund versus the returns of the one they’re holding. If the new mutual fund has done better recently, they’ll sell the old one and buy the new one. This often results in buying high and selling low.

  Any money manager, whether he is managing separate accounts or a mutual fund, will go through stretches where he looks smarter or dumber than he really is, though his IQ hasn’t actually changed.

  When we look smarter than we are, we’re not worried about what clients think of us (though we try to temper their expectations of our future brilliance). At that point our biggest concern is our own self-perception: we don’t want success to go to our heads and result in overconfidence.

  On the flip side, it’s just a matter of time before we look dumber than we are, and that’s when our relationship with a client gets tested. Especially if it’s a very new relationship and the client hasn’t had a chance to experience our brilliance.

  Historically, value investing (owning undervalued companies) has done significantly better than other strategies. Paradoxically, the reason it has done well in the long run is because it did not work consistently in the short run. If something works consistently (key word), everybody piles into it and it stops working.

  These aforementioned cycles of temporary brilliance and dumbness are not just common to us mere mortals. Even Warren Buffett’s Berkshire Hathaway goes through them. As just one example, in 1999, when the stock market went up 21% Berkshire Hathawaystock declined 19%. In 1999 the financial press was writing obituaries for Buffett’s investment prowess.

  Suddenly, in 1999 Buffett’s IQ was lagging the market by 40%. At the time investors were infatuated with internet stocks that were not making money but that were supposed to have a bright future. Investors were selling unsexy “old economy” stocks that Buffett owned to buy the “new economy” ones.

  If at the end of 1999, you were to sell Berkshire Hathaway and buy the S&P 500 instead, you would have done the easy thing, but it would have been a large (though very common) mistake. Over the next three years Berkshire Hathaway gained over 30% while the S&P declined over 40%. During the year 1999 Buffett’s IQ did not change much; in fact the (book) value of businesses Berkshire Hathaway owned went up by 0.5% that year. But in 1999 the market’s attention was somewhere else and it chose to price Berkshire Hathaway 19% lower.

  Where are we going with this? We look at the relationship with our clients as a partnership. For this partnership to work we need to communicate on the same wavelength. In this letter we would like to establish this common wavelength.

  Part Two: The Values of Value Investing 

  To read part TWO of this manifesto, titled the “Values of Value Investing” follow this link or this http://ima?usa.com/receive-manifesto/

  Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.   

  To receive Vitaliy’s future articles by email  click here.

  

  

  

  

• Who Owns Your Presidential Candidate?

  By Jake Anderson of Antimedia

  It’s a new era of American politics. With regard to campaign finance, the Citizens United Supreme Court ruling — and the arguably worse McCutcheon v. FEC ruling — opened the doors to unrestricted corporate funding of our national elections.

  The primary mechanism in place facilitating this flood of private money is the super PAC. You’ve probably heard of super PACs and how they’ve essentially taken over the role traditionally filled by individual campaign donors in Political Action Committees (PACs). But super PACs aren’t the end of it. There are puppet political non-profits, business associations, and now, single-candidate “dark money” outfits that, as of September 21, have already raised $25.1 million —  five times the amount spent by this time in the 2012 election cycle.

  Small, private donors still exist, of course. Their campaign contributions are still capped at about $5,000 per individual, making them the tip of the iceberg in political campaign spending. Enter super PACs and single-candidate committees, who, because of the aforementioned SCOTUS rulings, have the ability to slither in between campaign finance laws and flood our elections with unlimited corporate money. The “dark money” 501(c) groups, sometimes known as “social welfare” organizations, are particularly insidious because, unlike super PACs, they are not required to disclose their donors to the public. Since they are legally viewed as a type of business, they don’t have to disclose disbursements until the IRS requires it. This means there is essentially a network of politically advantageous winks and nods, whereby candidates receive unlimited parallel spending from an interconnected syndicate of super PACs, non-profits, and business associations.

  Of the 20 biggest spenders, only one is openly committed to a liberal viewpoint, which gives conservatives an advantage. That said, while Democrats have questioned the legality of “dark money” groups, they have not discounted the possibility of utilizing this tactic in addition to super PACs, which must legally disclose the source of their funds within a few weeks (though several groups have found loopholes allowing them to wait up to 7 weeks).  

  Needless to say, this is an election in which most of the candidates are seeking support from wealthy donors instead of the citizens they are supposed to be representing.

  Despite the arguably undemocratic, obfuscating nature of our nation’s campaign finance laws and the blatant corporatist agenda mandated by the Supreme Court, let’s attempt to break down the major sources of political spending so far in the 2016 presidential election. You may be surprised to find out who is donating money to your candidate — and how that contribution may affect future policy positions.

  JEB BUSH

  The one-time prospective GOP front-runner has taken a beating in recent polls, with many politicos saying extreme factions of the conservative party aren’t happy with his more centrist attitudes toward gay marriage, immigration, and abortion rights. But the big establishment money still has his back.

  Corporate and other Special Interest donors (top 5):

  • Goldman Sachs ($161,100)
  • Neuberger Berman LLC ($65,800)
  • Bank of America ($43,750
  • Citigroup Inc ($41,500)
  • Tenet Healthcare ($35,900)

  Super PAC/“Dark Money”:

  The Right to Rise super PAC supports Jeb Bush and has raised over $100 million. As of mid-September, the group planned to spend $24 million on television ads in Iowa, New Hampshire, and South Carolina. According to the Florida Center for Investigative Reporting, the primary donor list for Jeb Bush’s super PAC includes various spheres of influence:

  “Texas oil men, New York investment bankers, Miami healthcare company owners, and three former ambassadors — two of whom served under Bush’s brother, former President George W. Bush — gave 25 contributions of $1 million each. Mike Fernandez, the Cuban-American billionaire founder of Coral Gables-based MBF Healthcare Partners, gave $3 million, the largest contribution to Right to Rise.”

  Other wealthy members of the PAC include:

  • “Hushang Ansary, Iran’s ambassador to the United States from 1967 to 1969. He serves as a trustee of the George W. Bush Library. Ansary and his wife Shahla became U.S. citizens in the 1980s.

  • Richard Kinder, chairman and chief executive of oil and gas pipeline company Kinder Morgan. His net worth is $10 billion. Kinder’s wife Nancy also contributed $1 million to Right to Rise.

  • Alfred Hoffman, U.S. ambassador to Portugal from 2005 to 2007. He founded Florida-based real estate company WCI Communities.

  • Nextera Energy, the publicly traded parent company of Florida Power & Light, which provides electrical service to nearly half of the state. Last year, Nextera reported more than $15 billion in revenue.

  • Julian Robertson Jr., New York hedge fund manager whose net worth is $3.4 billion. He made his fortune investing in golf resorts and vineyards in New Zealand.”

  Jeb Bush, total raised so far: over $114 million

  HILLARY CLINTON  

  In her career as a politician, Hillary Clinton’s top donors have been Citigroup Inc., Goldman Sachs, DLA Piper, JPMorgan Chase & Co, and Morgan Stanley. Many say such alliances irrevocably endear her to said institutions, rendering her incapable of reigning in financial corruption on Wall Street.

  Her 2016 donors are slightly different, but really very much the same.

  Corporate and other Special Interest donors (top 5):

  • Morgan & Morgan ($274,767)
  • Sullivan & Cromwell ($148,100)
  • Akin, Gump et al ($125,598)
  • Yale University ($95,434)
  • Latham & Watkins ($94,580)

  Note: Morgan Stanley, Time Warner, JPMorgan Chase & Co and others are high on the list as well.

  It is also important to point out that the lobbying and law firm Akin, Gump, Strauss, Hauer & Feld, which employees many of Hillary’s lobbying “bundlers,” took donations from two of the biggest private prison contractors, Corrections Corporation of America and Geo Group, with fees totaling almost $300,000.

  Super PAC/”Dark Money”:

  Priorities USA Action is the super PAC supporting Hillary Clinton in the 2016 election. So far, the group has raised $25 million in only three months. Predictably, hardline progressives stringently object to Clinton using the wealthy billionaires of Priorities to raise money, but supporters say there is really no choice if she is to compete with the Republicans in a general election.

  The most notable Priorities super PAC donors are George Soros and Steven Spielberg, but the list includes 31 individual donors who contributed over $200k each.

  It’s fair to point out that Hillary Clinton recently made headlines by embracing a tactic to publically reveal big corporate donors. Whether this is political posturing or not, I will leave to the reader. According to the Los Angeles Times:

  “Companies like Google Inc. — and even Shell Oil — touting environmental awareness have been exposed supporting shadowy organizations skeptical of climate change.”

  Hillary Clinton, total raised so far: over $45 million

  CHRIS CHRISTIE

  Chris Christie, the two-term governor of New Jersey, is currently polling at 1%, but that has not stopped him from garnering the support of super PAC America Leads, which has raised $11 million with the support of 137 contributors, several of them billionaires. The PAC recently released its donor list. Politico describes what is perhaps the most noteworthy entry:

  “Winecup-Gamble Inc., a Nevada ranch owned by former Reebok CEO Paul Fireman, gave the group $1 million. Fireman, who lives outside Boston, plans a massive, $4.6 billion casino in Jersey City if state voters approve a constitutional amendment to allow gambling outside of Atlantic City.”

  Other America Leads donors include:

  • Las Vegas casino mogul Stephen Wynn
  • Hedge fund manager Steve Cohen and his wife Alexandra, who contributed a combined $2 million
  • Quicken Loans chairman Daniel Gilbert gave $750,000.
  • Home Depot founder Ken Langone gave $250,000
  • Anheuser-Busch heir August Busch ponied up $100,000.
  • Hewlett-Packard CEO Meg Whitman donated $100,000.
  • Wrestling mogul Linda McMahon gave $250,000.
  • George Harms Construction gave $25,000 (and it’s worth noting this company acquired more than $100 million in New Jersey state agency contracts in 2014)
  • Ferreira Construction gave $100,000 (also worth pointing out the $34 million this company received from the New Jersey Turnpike Authority, also in 2014)
  • Public Service Enterprise Group gave $250,000.

  Chris Christie, total raised so far: over $11 million

  BERNIE SANDERS

  Bernie Sanders entered the race as a democratic socialist dark horse but has quickly earned the feverish admiration of a wide spectrum of both progressive leftists and centrists, many of whom applaud his stated goal of taking on big banks and crony capitalism to fight for the middle class. Others see him as the unfortunate sequel to Obama, someone with grandiose reformist ideas who lacks the mettle and fearlessness truly necessary to stand up to the military-industrial complex and machinations of the Deep State.

  One point concerning Bernie Sanders can’t be denied: his campaign financing is leagues above the others in terms of ethical sourcing. Sanders has refused super PAC money and continues to reiterate he will not use a super PAC or any shady billionaire money for the 2016 election. His full list of of regular PAC and individual donors, most of which is labor union money, is listed below, courtesy of OpenSecrets.org:

  Machinists/Aerospace Workers Union	$105,000
  Teamsters Union	$93,700
  National Education Assn	$89,242
  United Auto Workers	$79,750
  United Food & Commercial Workers Union	$72,500
  Communications Workers of America	$68,000
  Laborers Union	$64,000
  Carpenters & Joiners Union	$62,000
  National Assn of Letter Carriers	$61,000
  American Assn for Justice	$60,500
  American Fedn of St/Cnty/Munic Employees	$58,198
  Intl Brotherhood of Electrical Workers	$53,100
  United Transportation Union	$48,500
  Sheet Metal Workers Union	$47,000
  Operating Engineers Union	$46,100
  Service Employees International Union	$44,014
  UNITE HERE	$42,875
  United Steelworkers	$41,750
  American Postal Workers Union	$37,700
  American Federation of Teachers	$36,112

  A report from October 1st shows that Bernie Sanders has nearly matched Hillary Clinton’s 3rd quarter campaign donations without using a super PAC.

  Bernie Sanders, total funds raised so far: $26 million

  JOHN KASICH

  In a normal election cycle, John Kasich, the Governor of Ohio, might be polling higher than 5%. He is more of a centrist candidate that appeals to the base and has actual experience governing. Rumors persist that he may be tapped for VP on the eventual GOP nominee’s ticket, but so far Kasich maintains he isn’t interested in that.

  Corporate and other Special Interest donors:

  His donor list has been called a “who’s who of prominent Ohio political donors.” This list includes:

  “Abigail Wexner, philanthropist and wife to Les Wexner, founder of The Limited; John P. McConnell, the chief executive officer of Worthington Industries and majority owner of the Columbus Blue Jackets; and John and Ann Wolfe, former owner of The Dispatch.”

  Another interesting Kasich PAC donor is a Montana company called MMWP12 LLC. This company contributed $500,000 and is connected to Mark Kvamme, who spearheaded JobsOhio, the private, non-profit group whose goal was to create jobs in the Kasich-run state of Ohio.

  Super PAC/”Dark Money”:

  John Kasich’s super PAC is called New Day For America. The group has drawn contributions from 166 donors, totaling $11 million so far, over half of which is from Ohio.

  According to Politico, the major names on this list include:

  • “Wendt Family Trust, Schottenstein Management Company and Tom Rastin, an Ohio-based Republican donor who donated to then-Pennsylvania governor Tom Corbett’s re-election campaign in the 2014 cycle.

  • Floyd Kvamme (Mark Kvamme’s father), the retired venture capitalist, who donated $100,000

  • Philip Geier Jr. of the Geier Group, who donated $500,000 and is a member of New Day for America’s board

  • Jim Dicke, a big player in the Ohio Republican Party and the chairman emeritus of the Crown Equipment Corp. Dicke donated $250,000.”

  Kasich also has a separate PAC called New Day For America Independent.

  John Kasich, total funds raised: over $11,730,730

  CARLY FIORINA

  Former Hewlett-Packard CEO Carly Fiorina’s unexpected ascension as a viable GOP candidate was buoyed by three primary factors: her neoconservative war hawk ideology; her vociferous stance against Planned Parenthood, which appeals to the GOP’s dominant right wing base; and her secretary-to-CEO personal life story.

  Corporate and other Special Interest donors (top 5):

  • LISI Inc – $12,400
  • Renaissance Technologies – $10,800
  • Western Care Construction – $10,800
  • Echo Pacific Construction – $10,400
  • Wilson, Sonsini et al – $8,100

  Super PAC/”Dark Money”:

  Perhaps as a result of her history as an executive of HP, Carly Fiorina’s super PAC, Carly For America, is full of deep-pocketed Silicon Valley donors. This includes:

  • Venture capitalist Tom Perkins – $25,000
  • Former Intel CEO Paul Otellini – $5,000
  • Former CEO of Univision, Jerry Perenchio, who donated a whopping $1.6 million
  • Former head of World Wrestling Entertainment and Connecticut Senate candidate Linda McMahon – $10,000
  • Palo Alto-based physicist Charles Munger – $100,000
  • Robert Day, who founded the Los Angeles asset management firm TCW – $100,000

  The most mysterious donation, one that is actually being investigated by the FEC, concerns a $500,000 contribution from one of Ted Cruz’s super PACs, Keep the Promise 1. It is currently unknown why this donation was made.

  Carly Fiorina, total funds raised so far: over $1.6 million

  MARCO RUBIO

  Marco Rubio, the junior United States senator from Florida, is another potential dark horse in this race because he appeals to the right wing of the Republican base while still striking Reaganesque tones during the debates. In fact, many pundits have noted the eerie similarities between Rubio and 2000 GOP candidate George W. Bush. Others have pointed out that Rubio’s Cuban American ethnicity could help Republicans win much-needed Latino votes.

  Corporate and other Special Interest donors (top 5):

  • Goldman Sachs – $65,830
  • Steward Health Care – $49,400
  • Titan Farms – $23,200
  • Florida Crystals – $21,700
  • Oracle Corp – $21,600

  Super PAC/”Dark Money”:

  According to the latest filings, the Marco Rubio super PAC, Conservative Solutions PAC, has drawn in $16 million, doubling the funds earned from his private donors. Over 75% of this money came from just four donors:

  • Norman Braman, a longtime friend of Rubio who happens to be a billionaire auto dealer and former owner of the Philadelphia Eagles. Braman has been called Rubio’s “secret weapon” because he despises Jeb Bush and says he will spend anywhere from $10 to $25 million on Rubio’s campaign
  • Lawrence J. Ellison, the chairman of Oracle Corp who has donated $3 million
  • Philanthropist Laura Perlmutter (wife to Isaac Perlmutter, the billionaire CEO of Marvel Entertainment) donated $2 million
  • Besilu Stables, a horse racing company in Miami, donated $2.5 million

  The Rubio campaign is also the beneficiary of a considerable amount of “dark money.” The source is a 501(c)(4) nonprofit called Conservative Solutions Project, which has raised an additional $15.8 million. The nonprofit, which, of course, is not required to disclose its donors, launched a massive ad campaign attacking President Obama’s Iran deal.

  Marco Rubio, total funds raised so far: over $31.9 million

  DONALD TRUMP

  Donald Trump has stated repeatedly that he will self-finance his campaign and will not accept any special interest donations. His net worth is heavily contested, but Forbes estimates it is approximately $4.5 billion. Trump claims he will spend up to $100 million of his own money on the 2016 presidential election.

  While the legacy of Trump as a self-made financial titan has catapulted him to an iconic status, Alternet.org posted an article debunking much of this fictitious fanfare. The article traces the roots of a $40-$200 million inheritance Trump received from his father, money that was bilked from governmental financing programs during the Great Depression; Trump parlayed that money into a series of businesses that went bankrupt, skirting SEC regulations and taking advantage of every tax loophole available in order to build his empire.

  Donald Trump, total funds raised so far: $100 million (amount he pledged to his own campaign)

  TED CRUZ

  Ted Cruz is the junior U.S. Senator from Texas who made a name for himself by reading Green Eggs and Ham on the Senate floor as part of a symbolic filibuster of Obama’s Affordable Healthcare Act. He was also one of the 47 signatories of a letter sent to Iran stating that President Obama lacked the authority to negotiate with Ayatollah Khomenei.

  More recently, he has led a weak coalition of congressmen aiming to shut down the federal government for the second time in as many years. His objective — and one of his major campaign platforms, in addition to repealing Obamacare and the Iran Deal — is to defund Planned Parenthood.

  Corporate and other Special Interest donors (top 5):

  Woodforest National Bank	$75,200
  Morgan Lewis LLP	$68,850
  Gibson, Dunn & Crutcher	$52,950
  Pachulski, Stang et al	$41,000
  Jennmar Corp	$40,850

  Super PAC/”Dark Money”:

  Ted Cruz’s campaign actually has four super PACs, all funded by Robert Mercer, a Long Island hedge fund magnate and climate change denier. Combined, they raised $31 million in the first four weeks of his campaign. Contributors to these super PACs include:

  • Koch brothers’ political network, 97% of which came from a single contribution from Robert Mercer himself
  • Billionaires Farris and Dan Wilks, who generated most of their wealth from the West Texas fracking boom –  donated $15 million

  Ted Cruz, total funds raised so far: over $31 million

  BEN CARSON

  Ben Carson, the retired John Hopkins neurosurgeon, was dead in the water a few weeks ago, but his numbers saw an unlikely bounce after the second debate. While Carson put his foot in his mouth when he suggested the U.S. marines were unprepared for combat, he startled many by suggesting that had George W. Bush sworn off petroleum in the wake of 9/11, taking bold diplomatic action over military strikes, the nation may have averted the incredibly costly war on terror. With his poll numbers rising, many pundits now wonder whether he could be tapped as VP.

  Corporate and other Special Interest donors (top 5):

  Coca-Cola Co	$21,850
  West Coast Venture Capital	$21,600
  Trailiner Corp	$10,800
  Ankom Technology	$10,400
  Jea Senior Living	$10,000

  Super PAC/”Dark Money”:

  Like Ted Cruz, Ben Carson has more than one super PAC. One Vote, a super PAC led by Republican strategist Andy Yates, and Run Ben Run. Even before Carson decided to run, the National Draft Ben Carson for President Committee raised $13.5 million. Reports have surfaced that there is tumult and discord between the two primary super PACs, but as long as the money keeps pouring in, Carson doesn’t seem to be phased. Recently, he doubled down on anti-Muslim rhetoric, which seems to have bumped his fundraising figures even higher, bringing him to $20 million this quarter.

  Very little information has been released about the bigger disbursements stemming from Carson’s super PACs. But interestingly, despite the big money pouring in, Carson has flourished with small donors. In fact, “eighty-four percent [of Carson’s donors] wrote checks for less than $500.”

  Ben Carson, total funds raised so far: over $20 million

  MIKE HUCKABEE

  The former governor of Arkansas’ private donors are relatively small and unremarkable. His super PAC, Pursuing America’s Greatness, has received only two primary donations. In fact, almost all the money contributed to the super PAC came from one man: Ronald Cameron of Little Rock, Arkansas, the poultry magnate who donated $3 million. Notably, Cameron, who runs agribusiness giant Mountaire Corporation, which earned $1.22 billion in 2009, has been listed as a major contributor to the Koch Brothers political network.

  Other contributions include $500,000 from Sharon Herschend of Herschend Family Entertainment and $50,000 each from real estate investor Jon K. Gibson and Cary Maguire, president of Maguire Oil.

  Mike Huckabee, total funds raised so far: over $3 million

  RAND PAUL

  According to one insider, libertarian-leaning, low-polling Rand Paul could soon be dropping out of the race. Paul’s super PAC America’s Liberty PAC has received most of its money from only two donors:

  • George Macricostas, CEO of RagingWire, a data center operator – $1.1 million
  • Libertarian donor Jeffrey Yass, leader of trading firm Susquehanna International Group – $1 million

  Rand Paul, total funds raised so far: $3.1 million

  As you can see, the 2016 presidential election is, for the most part, an all-out corporate donor war. It’s important to remember that many of these totals are likely not current, as campaigns strategically withhold donation amounts. We also don’t know the full extent of “dark money” stemming from nonprofits and business associations. What we do know is that this will be the most expensive election in history. The Koch brothers alone have a budget of $889 million. When added to the spending expected from the Democrats and Republicans, we’re looking at a possible price tag of $5 billion.

  If you have information on any significant campaign funds not included in this article, please email us or leave a comment.

  

  

  

  

• The Unwind Of QE Means The "S&P Should Be Trading At Half Of Its Value", Deutsche Bank Warns

  In his latest weekly note, DB’s derivatives analyst Alekandar Kocic focuses on the interplay between US inflation expectations and US equities, and points out something curious, and very much spot on:

  Policy response to the crisis post-2008 consisted of unprecedented injection of liquidity, transfer of risk from private to public balance sheet, and reduction of volatility from its toxic levels. The net result was near-zero rate levels and collapse of volatility across the board, while different market sectors developed high degrees of coordination. The last effect has been an indirect result of the central banks’ flows and the distortions they introduced in the bond market. In this environment other markets acted as a complement to rates (through which monetary policy was transmitted) and crowding out there pushed investors to articulate their views elsewhere. Their participation was a function of amount of liquidity injection. As a consequence everything was trading off of US inflation expectations as the main expression of the QE effects.

  That was the case for the first 5 years of “unconventional policy” until some time in 2013. Then something snapped. Kocic continues:

  With deflation as the main risk tackled by monetary policy, its success or failure was gauged by the ability to reflate the economy. Inflation expectations and breakevens were therefore signals for risk-on or risk-off trade. In fact, most market sectors, from FX to EM equities, were trading in high coordination with breakevens. Taper tantrum was the end of these correlations and a beginning of dispersion across different assets. In effect, it was the unwind of the “QE” trade, its first phase. While most other assets, like credit spreads, EM equities or different currencies, do not have a logical connection with US breakevens, US equities do. The dispersion between these assets and breakevens was an expected consequence of policy unwind. However, for US equities this unwind distorted their “natural” correlation with inflation. Persistence of these dislocations is just a manifestation of to what extent QE has been an important driver of post-2008 markets.

  Which brings us to the punchline:

  Since 2013, stocks rallied while disinflationary pressures were reinforced by a strong USD, low commodity prices and a decline in global demand. If pre-2013 coordination between the two is taken as a reference, then based on current stock prices breakevens should trade about 1.5% wider. This means the Fed should be hiking because inflation is above target. Alternatively, given the current level of inflation, S&P should be trading at half of its value.

  Wait, the S&P should be trading at 900… or even less? Yes, according to the following Deutsche Bank chart:

  

  Only one question remains: which breaks first – do inflation expectations surge higher, soaring by some 150 bps to justify equity valuations, or do equities crash?

  Is reconciliation likely – and, if so, in which direction? Are we returning to the pre-crisis world, or we are in a completely new regime?

  The answer will come from none other than the Fed and by now, even Janet Yellen knows that one word out of place, one signal to the market that the QE-inflation trade will converge with stocks crashing instead of inflation rising (which, unless the Fed launched QE4, NIRP of even helicopter money now appears inevitable), and some $10 trillion in market cap could evaporate overnight.

  Is it any wonder that Yellen is exhibiting “health issues” during her speeches: the realization that the fate of the biggest stock market bubble lies on your shoulders would make anyone “dehydrated.”

  In retrospect, Ben Bernanke knew exactly what he was doing when he got out of Dodge just as the endgame was set to begin.

  

  

  

  

  

• "How Will The Public Receive News Of More QE, NIRP, Cash Bans And Capital Controls?"

  Submitted by Eugen Bohm-Bawerk 

  The Fed unsurprisingly chickened out from the much touted September hike. International conditions and a disapproval from Mr. Market was enough to unnerve an increasingly bewildered FOMC board.

  Less well known is the fact that the FOMC gave a strong, and unexpected, signal to the Pavlovian world of central bank front runners. Dovish hold as the enlightend call it. It is all about managing expectations – see Goebbelnomics where we said:

  As the Keynesian revolution was merged with the models of Robert Lucas, it eventually morphed into something called neoclassical economic thought. The general gist was that economic agents can be tricked into changing their behaviour through surprises in monetary policy, which yes, has somewhat miraculously become the mainstay of central bank economists… … the academic transition led to the “economics of money shifting to economics of psychology”.

  With this in mind it seem untenable that the radical change in the dot-plots is due to a rogue, independent minded FOMC member. On the contrary, everything coming out of the Federal Reserve is well coordinated and is there to signal to the rest of the world where the Fed would like speculators to place their bets, or in this case, should not put their money.

  

  With the probability of the Federal Reserve’s funds rate going negative in 2016 suddenly much higher, the one way bet on a stronger dollar (and hence emerging market crash) is put into question. Investors will thus think twice before sending their money into the dollar from now on. This is obviously a desperate move from the FOMC in a futile attempt to stem the emerging market capital exodus.

  As the chart below shows, large movements in the dollar coincide with emerging market bubbles and busts. The FOMC, wrongly, believes the strong dollar causes the bust, but in reality it is just a symptom of massive capital misallocations unable to service their debt and a consequent retrenchment in the Eurodollar leverage and velocity. Insisting on maintaining the unsustainable capital flows will only make the inevitable bust that must larger.

  In other words, by adding international developments to the FOMC action function the health of the Eurodollar has become the de facto guiding target for the Fed. The Global Central Bank has officially been born.

  

  It also tells investors, especially Wall Street banks with USD2.2 trillion held in a depository account at the Federal Reserve, that they should not necessarily expect to receive 25 basis points on their excess reserves for ever. Some of these banks were undoubtedly looking forward to the day the FOMC was forced to raise the rate on excessive reserves (IOER) because it  would create even more scarce “capital” for the banks to play around with. In addition, those same reserves the Fed is paying banks to hold are part of an intricate  re-hypothecated collateralised financial chain, helping to prop up risk throughout the investable world. We touched upon this in Corporate Foie Gras.  

  To banks, excess reserves are a highly valuable commodity. It receives an income (the IOER) as an immobile cash pile at the Fed and can simultaneously be used to trade ever rising markets.

  However, the recipient of such collateral will use the very same collateral for their funding needs (re-hypothecation), creating long collateral chains dependent on the excessive reserves staying put.

  However, if the cost of keeping  reserves increases it will at some point be better to use the money directly – id est. withdrawing the money from the Fed. Note, the original holder of these deposits only benefits from the IOER and the first link in the collateralised chain. If the interest received  go negative (and markets drop) it is easy to see that the cost of maintaining excess reserves will easily outweigh the benefits. The holder will thus refrain from keeping reserves at the Fed. This will in turn break the collateralised re-hypothecated chain, which will lead to widespread deflation (just as the QE’s wreaked havoc with the shadow banking system) and a general market sell-off through a fall in collateral velocity and leverage.

  In the latest update on depository institutions Federal Reserve deposit holdings we may just have gotten a taste of what to expect. Banks withdrew an unprecedented USD405bn in one week; incidentally a week when the S&P500 lost more than 6 per cent. Hardly a coincidence.

  

  So why would the FOMC risk so much by signalling NIRP when they could just keep interest rates unchanged and leave it at that? First of all, we don’t think they have a clue on what is going on behind the most obvious  – the thing that is seen to use an expresson from Bastiat. The perception of central bank omnipotence may be a thing on Wall Street, but we don’t buy it.

  Secondly, as mentioned above, they want to stem the strong dollar movement (which is just another way of saying propping up a crumbling Eurodollar).

  Third, and this is where we think the Fed is going with this, they need to make sure there is a bid on TSYs as the global vendor funding machine is currently in reverse. Emerging markets and commodity producers have become net sellers of TSYs on a 12mth rolling basis and if the Eurodollar deflates further from here this selling will only intensify.

  Imagine what would happen to “risk” if the all the banks, pension- hedge- and mutual funds would sell stocks and corporate bonds to buy TSYs in a deflationary down spiral. Rosengren’s Ternary Mandate would obviously not be met according to standard.

  

  To assure a TSY bid, NIRP, or the possibility of NIRP, should induce banks to reallocate their excessive reserves to the treasury market; especially if there were a chance the Fed may lure them in with hints of both QE4 and NIRP.

  In Europe something very similar happened. When the ECB lowered the deposit rate to zero banks moved funds from the deposit account to the current account to avoid the added cost of using the overnight deposit account, but then slowly moved money out of the ECB system and into sovereign bonds.

  

  The striking similarity between Greek bond yields and excess liquidity within the euro bloc clearly suggest banks started to front run the ECB by buying sovereign bonds as the cost of holding excess reserves rose and the lure of buying sovereign bonds increased due to hints of ECB QE.

  

  Greek yields are obviously affected by the dire political situation and negotiations with the quadriga and can make massive moves on the whims of European politicians. However, investor front running the ECB with the use of excess reserves is clearly shown in other markets too, such as the Bunds, Oats and BTPs thus substantiating our argument. 

  

  The European experience with NIRP is exactly what the Fed is looking for. Releasing excess reserves to buy the TSYs being sold by panicking emerging markets. In addition, the mere mentioning of NIRP could actually deter further dollar strength.

  The fact that the re-hypothecated collateral chains that currently holds up risk will break and become highly deflationary and that the dollar strengthens because of a crumbling Eurodollar and not some perceived strength in the US economy will be lost on our money masters.

  We believe the US will be in recession before the end of 2016 and then things will be really interesting. How will the public receive news of more QE, NIRP, forward guidance, cash bans and capital control in a time when faith in central bank omnipotence disappears?

  Ceterum censeo Federal Reserve esse delendam

  

  

  

  

  

• Physical Cash Poses a HUGE Problem For Central Banks

  More and more institutions are trying to make it harder for you to move your money into cash.

   

  Globally, over $5 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.

   

  Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000.

   

  This sounds laughable to most people, but it is a reality in Europe… and in the US, in some regions. Louisiana has made it illegal to purchase second hand goods using cash.

   

  This is just the beginning. The War on Cash will be spreading in the coming weeks.

  The reasoning is simple. Most large financial entities are insolvent. As a result, if a significant amount of digital money is converted into actual physical cash, the firm would very quickly implode.

   

  This is precisely what happened in 2008…

   

  When the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.

   

  A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

   

  This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

   

  To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

   

  When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

   

  None of these issues have been resolved. The big banks remain as leveraged as ever and at risk of implosion should a significant percentage of capital get pulled into physical cash.

   

  European banks as a whole are leveraged at 26 to 1. In simple terms, this means they have just €1 in capital for every €26 in assets (bought via borrowed money).

   

  This is why whenever things get messy in Europe, the ECB and EU begin implementing capital controls.

   

  Consider what recently happened in Greece. Depositors began to flee the banks in droves, so they declared a bank holiday. This holiday included safe deposit boxes… so all the bullion or physical cash Greeks had stashed there remained locked up… just like the “digital” money in their savings accounts.

   

  Again, it was impossible to get cash out of the banks… even cash that technically wasn’t “in the system” anymore but sitting in safe deposit banks.

   

  The US financial system isn’t any better. Indeed, the vast majority of it is in digital money. Actual currency is just a little over $1.36 trillion. Bank accounts are $10 trillion. Stocks are $20 trillion and Bonds are $38 trillion.

   

  And at the top of the heap are the derivatives markets, which are over $220 TRILLION.

   

  If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades.

   

  Mind you, this is the same bank that is now refusing to let clients store cash in safe deposit boxes.

   

  This is just the tip of the iceberg. As anyone can tell you, it’s all but impossible to move large amounts of money into cash in the US. Even the large banks will routinely ask you for 24 hours notice if you need $10,000 or more in cash. These are banks will TRLLLIONS of dollars worth of assets on their books.

   

  This is just the beginning.

   

  Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings.

   

  We detail this paper and outline three investment strategies you can implement

  right now to protect your capital from the Fed's sinister plan in our Special Report

  Survive the Fed's War on Cash.

   

  We are making 1,000 copies available for FREE the general public.

   

  To pick up yours, swing by….

  http://www.phoenixcapitalmarketing.com/cash.html

   

  Best Regards

  Phoenix Capital Research

   

   

   

   

  

  

  

  

• China Trolls Obama, Says "Routine" Mass Shootings Expose Failure Of U.S. Politics

  We already noted that it has been a bad 24 hours for US foreign policy, when hours after the US blamed Russia of targeting civilians, it was the US itself which bombed a hospital in Afghanistan, killing 9 Doctors without Borders staffers, 3 children and other innocent bystanders.

  The president got the brunt of it during yesterday’s press conference, when he got a very targeted question from Reuters’ White House reporter Julia Edwards who asked Obama point blank “how do you respond to critics who say Putin is outsmarting you, that he took a measure of you in Ukraine and he felt he could get away with it?”

  The exchange can be seen 41:30 into the clip below:

  Obama’s meandering response:

  Yes, I’ve heard it all before.  (Laughter.) I’ve got to say I’m always struck by the degree to which not just critics but I think people buy this narrative.

   

  Let’s think about this.  So when I came into office seven and a half years ago, America had precipitated the worst financial crisis in history, dragged the entire world into a massive recession.  We were involved in two wars with almost no coalition support.  U.S. — world opinion about the United States was at a nadir — we were just barely above Russia at that time, and I think potentially slightly below China’s.  And we were shedding 800,000 jobs a month, and so on and so forth. 

   

  And today, we’re the strongest large advanced economy in the world — probably one of the few bright spots in the world economy.  Our approval ratings have gone up.  We are more active on more international issues and forge international responses to everything from Ebola to countering ISIL. 

   

  Meanwhile, Mr. Putin comes into office at a time when the economy had been growing and they were trying to pivot to a more diversified economy, and as a consequence of these brilliant moves, their economy is contracting 4 percent this year.  They are isolated in the world community, subject to sanctions that are not just applied by us but by what used to be some of their closest trading partners.  Their main allies in the Middle East were Libya and Syria — Mr. Gaddafi and Mr. Assad — and those countries are falling apart.  And he’s now just had to send in troops and aircraft in order to prop up this regime, at the risk of alienating the entire Sunni world. 

   

  So what was the question again?  (Laughter.)

  Laughter indeed, but yes: Obama really needed a reminder what the question was as he completely failed to answer it. He did try to pivot back modestly toward the end of the near-800 word response saying the following…

  we’re not going to make Syria into a proxy war between the United States and Russia.  That would be bad strategy on our part.  This is a battle between Russia, Iran, and Assad against the overwhelming majority of the Syrian people.  Our battle is with ISIL, and our battle is with the entire international community to resolve the conflict in a way that can end the bloodshed and end the refugee crisis, and allow people to be at home, work, grow food, shelter their children, send those kids to school.  That’s the side we’re on.

   

  This is not some superpower chessboard contest.  And anybody who frames it in that way isn’t paying very close attention to what’s been happening on the chessboard.

  … actually a superpower chessboard contest is precisely what this is, and while Obama can argue whether or not Putin is outsmarting him, someone else on the global chessboard is smelling blood. That someone is China, and this time China, which as we profiled before is aligning itself not with the US but with Russia in the Syria proxy war – because that’s precisely what it is – targeted not the US foreign policy failures, but Obama’s domestic problems, namely the “routine” series of mass shootings taking place in the US which according to an Op-Ed in China’s premier media outlet, Xinhia, “exposes failure of US politics.”

  Here is the full Op-Ed posted by Xinhua’s editors:

  Obama’s “routine” on mass shooting exposes failure of U.S. politics

   

  The Americans were startled once again when tragic news break out about the deadly campus shooting in Oregon on Thursday.

   

  However, the United States is “the only advanced country on earth that sees these kinds of mass shootings every few months,” just like President Barack Obama has painfully acknowledged.

   

  Obama, angry and frustrated, criticized that the nation’s response to mass shootings has become “routine,” from press coverage, to his own comments, to the fruitless debate over gun control.

   

  It is obvious that the country has grown “numb” to mass shootings like Thursday’s incident in Oregon, where a 20-year-old gunman killed at least nine people at a community college.

   

  There have been 296 shootings so far this year in the United States, claiming more than 370 innocent lives, and it was the 15th time Obama has pleaded for gun control legislation since taking office in 2009.

   

  How come a country as powerful as the United States has been unable to stop this kind of brutal attacks against innocent civilians?

   

  The problem is deeply rooted in the country’s political system, where bipartisan politics and interest groups exert huge influence, to the point that security of the American people have to give way to political correctness and corporate interests.

   

  Opinion polls have repeatedly shown that an overwhelming majority of Americans favor stricter gun control rules, yet no legislation on that front can be expected in the near future.

   

  Even the Newtown massacre in 2012 that killed 20 children and six adults failed to break the impasse in Washington over gun control.

   

  The biggest surprise to the world in the wake of Oregon shooting is that there was no surprise for such cold-blooded murders to happen again and again in the United States.

   

  Defects in the U.S. political system have not only caused inaction, but also panic that alarmed the world, as an imminent government shutdown resulting from political wrestle on the Capitol Hill last month posed danger to both the U.S. economy and the world market.

   

  The recurrent mass shootings in the United States deserve real reflection and pondering, since those innocent lives cannot be lost in vain.

  Yes, China – that paragon of human rights – is openly mocking the US for its own domestic policy failings. Because in the grand chessgame which Obama refuses to acknowledge, it is not so much what China says, but that it says it in the first place – something which confirms the elephant in the room, and yet which few are willing to discuss: US standing in the international arena, especially through the lens of the “other” superpowers, has rarely sunk this low.

  And if Obama’s “non-chess” competitors don’t respect him, how can the US president hope to impose the national interests of those whose interests he truly represents – as even China openly points out – namely US corporations and Wall Street companies, on the global arena?

  

  

  

  

  

• Furious Auto Workers Demand More Than "Hot Dogs And Hamburgers" As US Car Sales Soar

  If you’re a mega corporation, one of the most annoying things about employees is that they expect to be paid for their work and as if that’s not enough, they also tend to draw a parallel between the performance of the company and what their labor is worth. 

  Fortunately, the combination of ZIRP-assisted, EPS-inflating buybacks and the relative powerlessness of the American worker has served to preserve the divide between corporate management and everyday employees, but every once in awhile, beleaguered laborers start to get the idea that they’re entitled to a greater share of what they effectively create and that translates directly into calls for higher wages. 

  This situation is exacerbated when the peasantry gets together in the form of organized labor which unfairly seeks to deprive management of its capitalistic right to keep almost all of the profits from the widgets their employees produce. 

  Given the above, it comes as no surprise that the subprime loan-assisted boom in auto sales has auto workers asking for a larger piece of the pie. Here’s WSJ:

  Automobiles flew off dealer lots last month at the fastest pace in 10 years, but the good times are stirring tension between U.S. auto makers and their unionized workers that threatens to undercut the industry’s rebound.

   

  United Auto Workers union members at Fiat Chrysler Automobiles NV this week rejected for the first time in three decades a tentative agreement as inadequate, and Ford Motor Co. faces a walkout at a big truck factory as soon as Sunday.

   

  As buyers flood dealer lots, snapping up pricey pickups and sport-utility vehicles that deliver fat profits to General Motors Co., Ford and Fiat Chrysler, factory workers are demanding an end to the concessions that put the U.S. industry back on its feet after near collapse seven years ago.

   

  “We got a catered meal of hot dogs and hamburgers as our thanks while others, I’m sure, got big bonuses,” said Phil Reiter, a 44-year-old union member referring to a recent production milestone at Fiat Chrysler’s Toledo, Ohio, Jeep factory. That plant on Tuesday rejected a UAW supported contract by a more than 4-to-1 ratio.

  And while “a catered meal of hot dogs and hamburgers” should clearly be enough, these greedy assembly line workers still want more, which of course means that the auto industry needs to simply stop hiring them:

  On Thursday, the UAW confirmed that 65% of its Fiat Chrysler members spurned Fiat Chrysler’s offer, the first time in more than 30 years a proposed bargaining deal was voted down. The decision is a blow to the UAW, which has tried to reverse a persistent decline in union auto jobs by accepting concessions.

  Obviously, we’ve employed a bit of sarcasm in our presentation here, but the simple fact is that no matter what side of the organized labor debate you fall on, the situation depicted in the following graphic simply isn’t sustainable…

  

  …but we imagine that in today’s jobs market, workers’ complaints may fall on largely deaf ears because after all, manufacturing jobs clearly aren’t important when it comes to sustaining America’s feudal “robust” economic recovery:

   

  

   

  

  

  

  

  

  

• Stock Market Reaches Key Post-Crash Milestone

  By Dana Lyons, partner at J. Lyons Fund Management

  Stock Market Reaches Key Post-Crash Milestone

  The average retest period following crashes similar to that in August have bottomed an average of 27 days after the crash…that would be Friday .

  On September 4, we posted a chart showing the path of the S&P 500 following other “crashes” since 1950 that were similar to that which occurred at the end of August. Our goal was to lay out a general road map for how the index might behave in the weeks following the initial August 25 low. Specifically, we looked at drops in the S&P 500 of at least 10% within 10 days.

  As it turns out, we identified 11 prior unique crash occurrences. Among the 11, 2 of them – July 1974 and September 2008 – continued to cascade lower, nearly unabated, for several more months. The other 9 resulted in an initial low in relatively short order. Here is the chart from that September 4 post:

  

  What general takeaways did the chart present us? Here are a few noteworthy items that we wrote in the prior post:

  • Of the 9, there was just 1 “V-Bottom” – September 2001 – that was never subject to a retest.
  • The other 8 all went on to test the initial low at some point.
  • 5 of the 9 eventually dropped below the initial low, if only marginally.
  • The quickest retest/bottom process came after the March 2001 decline and lasted just 9 days.
  • The longest bottoming process – following the July 2002 crash – lasted 55 days.
  • ****The average bottoming process lasted 27 days (which would equate to October 2 in our present situation).****
  • The median bounce between the initial low and the end of the bottoming process was +10%. That would equate to 2056 in our current circumstances.
  • The majority of the crashes (5) came after significant damage had already been done, i.e., the S&P 500 was anywhere from -7% to -25% below its 52-week high when the crash began.
  • The other 4 (1987, 1998, 2000 and 2011) began from within 2.6% of the S&P 500?s 52-week high. The recent crash started at just -1.25% below the 52-week high.

  Our conclusion from that piece was this:

  This examination would loosely suggest that the current bottoming process (assuming we are in one) may possibly persist for another month, with a possible higher bounce along the way before a possible retest of the August 25 lows.

  Obviously we don’t like to feign certainty when dealing with markets, only probabilities and possibilities. Well, flash ahead to Friday and we see that the path of the S&P 500 has fairly closely followed the path of “possibilities” suggested by the prior post-crash events, i.e., a rally followed by a retest. Whether the retest of the past few days will be successful (i.e., hold) or not is obviously yet to be determined.

  Related to that point, you will notice the significance of Friday, October 2, as it pertains to the asterisked bullet listed above. That is, the previous post-crash instances took an average of 27 days following the crash before they bottomed for good (as defined by “leading to a sustained multi-month rally”). 27 days following the August 25 crash low is Friday. We do not in any way expect that the current post-crash pattern will conform precisely to the average or median or any of the previous post-crash periods specifically. However, it does seem to be as good a time as any to update the chart to check on the S&P 500?s progress and its correlation to prior events. As mentioned above, it has followed the general path fairly closely.

  

  Friday obviously cannot be THE low since it doesn’t appear that prices will eclipse the low from Tuesday by the end of the day. However, if Tuesday was the low (not a guarantee), it did occur in close proximity to the 27-day average of prior events. More importantly, the path of the S&P 500 has followed the general post-crash path that we laid out a month ago.

  Again, whether or not the market has put in a post-crash bottom is yet to be determined. But we can see by this study that examining past patterns and price behavior attached to specific circumstances can be instructive of the reaction that prices may undergo in similar circumstances in the future. This is likely due to human nature. No matter what era one is dealing with, people will respond to various stimuli in a consistent and somewhat predictable fashion. And while we will never be able to predict price action with absolute precision, this kind of study can aid us in managing the probabilities in various situations. It certainly has aided us over the past month.

  

  

  

  

  

• Russia Claims ISIS Now On The Ropes As Fighters Desert After 60 Airstrikes In 72 Hours

  One question that’s been asked repeatedly over the past thirteen months is why Washington has been unable to achieve the Pentagon’s stated goal of “degrading and defeating” ISIS despite the fact that the “battle” pits the most advanced air force on the planet against what amounts to a ragtag band of militants running around the desert in basketball shoes. 

  

  Those of a skeptical persuasion have been inclined to suggest that perhaps the US isn’t fully committed to the fight. Explanations for that suggestion range from the mainstream (the White House is loathe to get the US into another Mid-East war) to the “conspiratorial” (the CIA created ISIS and thus doesn’t want to destroy the group due to its value as a strategic asset). 

  The implication in all of this is that a modern army that was truly determined to destroy the group could likely do so in a matter of months if not weeks and so once Russia began flying sorties from Latakia, the world was anxious to see just how long the various rebel groups operating in Syria could hold up under bombardment by the Russian air force. 

  The answer, apparently, is “less than a week.” 

  On Saturday, the Russian Ministry of Defense said it has conducted 60 bombing runs in 72 hours, hitting more than 50 ISIS targets.

  According to the ministry (Facebook page is here), Islamic State fighters are in a state of “panic” and more than 600 have deserted. 

  Here’s what happens when the Russians locate a terrorist “command center”: 

  According to The Kremlin, the structure shown in the video is (or, more appropriately, “was”) “an ISIS hardened command centre near Raqqah.” Su-34s hit it with concrete-piercing BETAB-500s setting off a series of explosions and fires that “completely destroyed the object.”  

  Here’s RT:

  Surgical airstrikes by Russian fighter jets have knocked out a number of Islamic State installations in Syria, including the battle headquarters of a jihadist group near Raqqa, according to the Russian Defense Ministry.

   

  “Over the past 24 hours, Sukhoi Su-34 and Su-24M fighter jets have performed 20 sorties and hit nine Islamic State installations,” Igor Konashenkov, Russia’s Defense Ministry spokesman, reported.

   

  Konashenkov added that yesterday evening Russian aircraft went on six sorties, inflicting strikes on three terrorist installations.

   

  “A bunker-busting BETAB-500 air bomb dropped from a Sukhoi Su-34 bomber near Raqqa has eliminated the command post of one of the terror groups, together with an underground storage facility for explosives and munitions,” the spokesman said.

   

  Commenting on the video filmed by a Russian UAV monitoring the assault near Raqqa, Konashenkov noted, “a powerful explosion inside the bunker indicates it was also used for storing a large quantity of munitions.

   

  “As you can see, a direct hit on the installation resulted in the detonation of explosives and multiple fires. It was completely demolished,” the spokesman said.

  And here’s the Russian Defense Ministry taking a page out of the US Postal Service’s “neither rain, sleet, snow, nor hail” book on the way to serving notice that nothing is going to stop the Russian air force from exterminating Assad’s enemies in Syria:

  Twenty-four hours a day #UAV’s are monitoring the situation in the ISIS activity areas. All the detected targets are effectively engaged day and night in any weather conditions.

  Now obviously one must consider the source here, but Kremlin spin tactics aside, one cannot help but be amazed with the pace at which this is apparently unfolding. If any of the above is even close to accurate, it means that Russia is on schedule to declare victory over ISIS (and everyone else it looks like) in a matter of weeks, which would not only be extremely embarrassing for Washington, but would also effectively prove that the US has never truly embarked on an honest effort to rid Syria of the extremist groups the Western media claims are the scourge of humanity.

  Summed up in 10 priceless seconds…

  

  

  

  

  

• Guest Post: "Nothing But Cattle In An Industrial Processing Facility"

  Submitted by Hardscrabble Farmer, courtesy of The Burning Platform

  There is a growing divide in the country and day by day it grows deeper and more irrevocable. All around us we see the signs, if we look for them, of decay and collapse built into the very system itself.

  If you reward indolence, it will become the norm, if we practice wholesale slaughter from the womb to a foreign wedding party others will take the cue. If we celebrate slatterns and degenerates and ridicule the wholesome and traditional we will wind up with more of one and less of another.

  The further an organism lives from it’s natural state, the more adaptable the organism will become to that which is unnatural.

  Yesterday an older farmer came to pick up his cow from my farm. She had been a guest of ours for several days to be bred by my bull and when he arrived I asked him to pull his trailer to the lower trail beside the stream and open the rear door. I explained that I would be opening a gate from one pasture and leading the animals to another, that his animals- the cow and her young heifer- would follow at the rear of the herd and when he saw them approach he would simply close the pasture gate behind them and allow them to load back in his trailer. The cattle dogs watched my every move, excited to work and anxious for their opportunity to show off to my friend. I called out to the cows- mooing to them from the trailhead- and they quickly assembled at the gate, mooing in return.

  I opened the gate, placing my hands with palms extended behind me and walked them along the trail towards the upper field. The dogs, without instruction, took up places at the right and left of the herd, keeping a close eye on the calves. When the last calves passed through the gates the dogs trotted alongside them without a sound and followed them the length of the passage. My friend stood by his trailer watching for his animals and as my herd moved into the upper pasture they spread out and put their heads down to the grass walking slowly uphill.

  The calves, younger and full of energy shot ahead past his animals and sprinted through the gate to catch up with their mothers on the green field and like clockwork his two cows passed the edge of his trailer and made a sharp right and climbed into the trailer without a hitch. The dogs came in for a pat and a couple of “good dogs!”, panting happily.

  He shut the door behind them and looked at me with a rare smile on his face, genuine and slightly surprised.

  Any cow in it’s natural state, well fed, not stressed, kept on pasture rather than in confinement and handled with respect are trouble free. They thrive. They get along. They breed easily, deliver strong calves, put on muscle with ease, and are generally a pleasure to be around. Human beings share a very similar set of needs and requirements as most domesticated livestock- domesticated livestock being a creation of humans, adapted to human use and care throughout the centuries and to human habits and behaviors.

  In progressive farming- yes, that’s what industrial agriculture calls itself- animals are kept in confinement, fed diets that contain little or no grass in order to fatten them quickly not with protein rich muscle but with tallow. They are pumped full of antibiotics- not to keep sickness at bay but to kill the digestive microbes in their guts so that each pound of feed is more readily converted to a pound of fat. They stand not in fields of grass but in knee deep paddocks filled with manure. They are moved about not by family farmers who have known them since birth, respectfully and with ease, but by hirelings who shout and push them and use taser like devices to shock them into compliance from on overcrowded paddock to another, filled with fear, their bodies flooded by hormones before slaughter.

  How do we fail to make the connection? How do we not see that the further we drift from what we were meant to be and to do as human beings the more we become disoriented, obese, dysfunctional, angry, depressed, violent or passive in the extreme. These responses are the natural outcome of unnatural circumstances and we should be in no way surprised that the more we extol and promote such systems the more often we will see such behaviors. It isn’t surprising, it doesn’t require any in depth studies or introspection beyond the obvious.

  We are a product of our time and place. We live in a dystopian future that makes Brave New World look positively mundane in comparison. Mass shootings are the natural outcome of a society that mentally shackles its population while pumping it full of psychotropic drugs and violent imagery. It tells us to turn away from bullying while it dumps payloads of high explosives on hospitals and schools. It tells us to empathize with women while objectifying them via pornography and then denies young adult males the benefits of a loving wife and family unless he meets an impossible standard or forces him in direct competition with females both academically and in the workplace, putting off family formation until such a time as a woman is near menopause.

  I could go on but you get the picture.

  What is happening is- in my opinion- is engineered. You couldn’t do more if you personally placed the gun in the young man’s hand and gave him a lawful order to kill everyone in that school- and ironically is that not what we do to our drone pilots, only in different locations?

  We are being led, deliberately and inexorably to the abattoir. The only question is, are you willing to submit?

  

  

  

  

  

• "Everyone Is Doing It": How Carmakers Manipulate Emissions Test Results

  With Germany’s largest company by revenue, Volkswagen, deep in damage recovery mode, and the market still unable to decide just how systemic and profound the fallout will be from the emissions scandal which has already cost the job of VW’s CEO and which according to some will impact the GDP of Hungary and the Czech republic as much as -1.5%, many are still trying to determine not if but how many other companies – whether “clean diesel” focused or otherwise – will be impacted by the crackdown on emissions fraud.

  We don’t know the answer suffice to speculate that it will be “many” for one simpler reason: there are dozens of ways to manipulate emissions tests in both the lab and on the road, and with the temptation to “reduce” emissions all too great for management teams laser-focused on boosting profit margins, one can be certain that in this particular case not only is there more than one cockroach, there are dozens.

  The chart below from Transport and Environment shows some of the traditional ways in which carmakers manipulate CO2 emissions tests to make their cars appear more efficient:

  

   

  Worse, according to a follow-up report, it is only a matter of time before far more widespread crackdowns take place within the auto industry where emissions fraud now appears as systemic as that of the global banking sector.

  As reported earlier this week, the gap between official test results for CO2 emissions/fuel economy and real-world performance has increased to 40% on average in 2014 from 8% in 2001, according to T&E’s 2015 Mind the Gap report, which analyses on-the-road fuel consumption by motorists and highlights the abuses by carmakers of the current tests and the failure of EU regulators to close loopholes. T&E said the gap has become a chasm and, without action, will likely grow to 50% on average by 2020.

  By exploiting loopholes in the test procedure (including known differences between real-world driving and lab simulations) conventional cars can emit up to 40-45% more CO2 emissions on the road than what is measured in the lab. But the average gap between test results and real-world driving is more than 50% for some models. Mercedes cars have an average gap between test and real-world performance of 48% and their new A, C and E class models have a difference of over 50%. The BMW 5 series and Peugeot 308 are just below 50%. The causes of these big deviations have to be clarified as soon as possible.

   

  Greg Archer, clean vehicles manager at T&E, said: “Like the air pollution test, the European system of testing cars to measure fuel economy and CO2 emissions is utterly discredited. The Volkswagen scandal was just the tip of the iceberg and what lies beneath is widespread abuse by carmakers of testing rules enabling cars to swallow more than 50% more fuel than is claimed.”

   

  Greg Archer concluded: “This widening gap casts more doubt on how carmakers trick their customers in Europe to produce much better fuel efficiency in tests than can be achieved on the road. The only solution is a comprehensive investigation into both air pollution and fuel economy tests and all car manufacturers to identify whether unfair and illegal practices, like defeat devices, may be in use. There must also be a comprehensive overhaul of the testing system.”

  Who are the biggest European culprits.

  

  The cost: distorted laboratory tests cost a typical motorist €450 a year in additional fuel costs compared to what carmakers’ marketing materials claim, the report finds.

  Now multiply that by tens of millions of cars and you get a sense of the potential industry liability, especially since can be absolutely certain Europe’s US carmaking peers are just as guilty of emissions manipulation.

  Finally, to paraphrase Dr. House, everybody lies.

  

  

  

  

  

• I MiSS BoeHNeR…

  

  

  

  

  

• Airstrikes By U.S. Ally Have Killed 500 Children Since March

  By SM Gibson of Antimedia

  One of the United States’ strongest allies is currently inflicting as much carnage as any other nation in the world. Instead of being vilified for their part in a staggering amount of human rights atrocities, the critics go mute and the bloodshed is rewarded. The news regarding Saudi Arabia this week is too abundant to include in any one headline.

  According to UNICEF, the ongoing attacks by a U.S.-backed, Saudi Arabian-led coalition in Yemen have resulted in the deaths of at least 505 children since March 26, 2015. Another 710 have been left injured, and 1.7 million are at risk of malnutrition. As Daniel Johnson with the U.N. pointed out, the grievous numbers are equivalent to eight children killed or maimed in Yemen every day for six months.

  On Monday, a missile from a Saudi-led airstrike struck a Yemeni wedding reception in the village of Al-Wahijah, located near the Red Sea. The explosion resulted in 131 deaths, and the incident is being labeled as one of the deadliest attacks on civilians during the six-month conflict.

  In total, there have been 7,217 civilian casualties, including 2,355 killed and 4,862 wounded in the six months since the fighting began, according to the United Nations.

  Despite these statistics, the Minister for Foreign Affairs of Saudi Arabia — while addressing the United Nations General Assembly on Thursday evening — had the audacity to scold the international community’s inability to end the bloodshed in Syria. Abdel Ahmed Al-Jubeir hypocritically stated that the world has been “unable to save the Syrian people from the killing machine that is being operated by Bashar al-Assad.”

  It gets worse.

  Last month, it was announced that Saudi Arabia would head the U.N. Human Rights Council (yes, you read that correctly) — a decision that mirrors unfathomable satire. According to cables released by Wikileaks, Saudi Arabia — along with their despicable human rights record — originally made their way on to the council under very questionable circumstances in 2013. The cables allege that a vote-trading deal was made in secret between Britain and Saudi Arabia to ensure both countries were elected to the council.

  Days prior to the announcement that Saudi Arabia would head the UNHRC, the Saudi regime released their decision to deny the final appeal of 20-year-old Ali Mohammed al-Nimr. Aged 17 at the time of his arrest, the pro-democracy activist will be executed for taking part in an anti-government protest in 2012. Despite pleas from human rights organizations around the globe, it has been ruled that the young man will be put to death by way of crucifixion any day now.

  Even the U.N. has called for the Saudis to halt the execution. Yes, the same U.N. whose Human Rights Council they now head.

  So far in 2015, Saudi Arabia has executed at least 134 people, according to Amnesty International — most of those by beheading.

  “It is scandalous that the UN chose a country that has beheaded more people this year than ISIS to be head of a key human rights panel,” said UN Watch executive director Hillel Neuer. “Petro-dollars and politics have trumped human rights.”

  A number of U.S. politicians have recently been asked to weigh-in on Saudi Arabia and their obvious penchant for barbarity by journalist Lee Fang, from The Intercept.

  “They may be bombing civilians, which is actually not true,” Senator John McCain said when asked about civilian casualties in Yemen.

  “Civilians aren’t dying?” Fang asked.

  “No, they’re not,” the senator replied. “Oh, I’m sure civilians die in war. Not nearly as many as the Houthis have executed.”

  Fang also approached Sen. Chris Coons, (D-Del) and asked him to comment on the Saudi-led airstrikes in Yemen.

  “As the co-founder of the Human Rights Caucus in the Senate, I do think we need to pay attention to human rights all over the world, regardless of where human rights violations arise,” Coons said.

  When the Fang pressed the senator to elaborate on Saudi Arabia specifically, Coons immediately ended the conversation.

  “Coons ignored me and continued walking into the building, even though a staff member accompanying him had just informed the senator that he had “plenty of time” before his speech. The staff member offered to exchange contact information for a lengthier comment later. I emailed and did not hear back,” according to Fang.

  In case you are left pondering why you hear corporate news outlets harp on about the incivilities of numerous Middle Eastern nations ad nauseum (while the brutalities carried out by Saudi Arabia are never uttered), it is worth mentioning — coincidental or not — that the 2nd largest stockholder in Fox News (21st Century Fox) is a man by the name of Prince Alwaleed Bin Talal. The prince, who just so happens to be a member of the Saudi royal family, is also a prominent stockholder in Citigroup and Twitter.

  

  

  

  

  

• The Largest US Foreign Policy Blunder Since Vietnam Is Complete: Iran Readies Massive Syrian Ground Invasion

  On Thursday, in “Mid-East Coup: As Russia Pounds Militant Targets, Iran Readies Ground Invasions While Saudis Panic”, we attempted to cut through all of the Western and Russian media propaganda on the way to describing what Moscow’s involvement in Syria actually portends for the global balance of power. Here are a few excerpts that summarize what’s taking shape in the Middle East:

  Putin looks to have viewed this as the ultimate geopolitical win-win. That is, Russia gets to i) expand its influence in the Middle East in defiance of Washington and its allies, a move that also helps to protect Russian energy interests and preserves the Mediterranean port at Tartus, and ii) support its allies in Tehran and Damascus thus preserving the counterbalance to the US-Saudi-Qatar alliance. 

   

  Meanwhile, Iran gets to enjoy the support of the Russian military juggernaut on the way to protecting the delicate regional nexus that is the source of Tehran’s Mid-East influence. It is absolutely critical for Iran to keep Assad in power, as the loss of Syria to the West would effectively cut the supply line between Iran and Hezbollah.

   

  It would be difficult to overstate the significance of what appears to be going on here. This is nothing short of a Middle Eastern coup, as Iran looks to displace Saudi Arabia as the regional power broker and as Russia looks to supplant the US as the superpower puppet master. 

  In short, the Pentagon’s contention that Russia and Iran have formed a Mid-East “nexus” isn’t akin to the Bush administration’s hollow, largely bogus attempt to demonize America’s foreign policy critics in the eyes of the public by identifying an “axis of evil.” Rather, the Pentagon’s assessment was an attempt to come to grips with a very real effort on the part of Moscow and Tehran to tip the scales in the Mid-East away from Riyadh and Washington.

  Solidifying the Assad regime in Syria serves to shore up Hezbollah and presents Tehran with an opportunity to assert itself in the name of combatting terror. The latter point there is critical. The West has long contended that Iran is the world’s foremost state sponsor of terror, and the Pentagon has variously accused the Quds Force of orchestrating attacks on US soldiers in Iraq after cooperation between Washington and Tehran broke down in the wake of Bush’s “axis of evil” comment.

  Indeed, Iran was accused of masterminding a plot to kill the Saudi ambassador at a Washington DC restaurant in 2011.

  Now, the tables have turned. It is the US, Saudi Arabia, and Qatar who stand accused of sponsoring Sunni extremists and it is Iran, and specifically the Revolutionary Guard, that gets to play hero.

  Of course this would be largely impossible without Moscow’s stamp of superpower approval. The optics around the P5+1 nuclear deal were making it difficult for Tehran to be too public in its efforts to bolster Assad. That doesn’t mean Tehran’s support for the regime in Syria hasn’t been well documented for years, it simply means that Iran needed to observe some semblance of caution, lest its role in Syria should end up torpedoing the nuclear negotiations. Now that Moscow is officially involved, that caution is no longer obligatory and Iran is now moving to support Russian airstrikes with an outright ground incursion (just as we’ve been saying for weeks). Here’s WSJ:

  Iran is expanding its already sizable role in Syria’s multisided war in the wake of Russia’s airstrikes, despite the risk of antagonizing the U.S. and its Persian Gulf allies who want to push aside President Bashar al-Assad.

   

  Politicians in the region close to Tehran as well as analysts who have been closely following its role in Syria say a decision has been made, in close coordination with the Russians and the Assad regime, to increase the number of fighters on the ground through Iran’s network of local and foreign proxies.

  The support also could involve more Iranian commanders, military advisers and expert fighters usually assigned to these units, these people said.

   

  Wiam Wahhab, a former Lebanese minister allied to Iran and Mr. Assad, stressed that Iran wouldn’t be dispatching troops in the conventional sense. Instead, they were likely to be officers and advisers from the Islamic Revolutionary Guard Corps, or IRGC, he said.

   

  “I know there is a major battle upon us and everything needed for this battle will be made available,” said Mr. Wahhab, who has some members from his own political party fighting in Syria alongside the regime. “There is a plan to carry out offensive operations in more than one spot.”

   

  Experts believe Iran has some 7,000 IRGC members and Iranian paramilitary volunteers operating in Syria already.

   

  Separate from the regular army, the IRGC was founded in the aftermath of the 1979 revolution as an ideological “people’s army” reporting directly to the supreme leader, Iran’s top decision maker.

   

  The more than 100,000-strong force controls a vast military, economic and security power structure in Iran and is in charge of proxies across the region. Its paramilitary organization, the Basij, was the lead force in the crackdown on pro-democracy demonstrators in 2009.

   

  Since late 2012 Iran has played a lead role in organizing, training and funding local pro-regime militias in Syria, many of them members of Mr. Assad’s Alawite minority, a branch of Shiite Islam. Experts believe they number between 150,000 and 190,000—possibly more than what remains of Syria’s conventional army.

   

  What’s more, some experts estimate 20,000 Shiite foreign fighters are on the ground, backed by both Shiite Iran and its main proxy in the region, the Lebanese Shiite militia Hezbollah.

   

  About 5,000 of them are new arrivals from Iraq in July and August alone, said Phillip Smyth, a researcher at the University of Maryland. He said this figure was compiled through his own contacts with some of these fighters, flight data between Baghdad and Damascus as well as social media postings. “It looks like it was timed out to coincide with the Russian move,” Mr. Smyth said.

  Yes, it certainly does “look like” that, and it wasn’t hard to see this coming. Here’s another excerpt from our recent analysis:

  Back in June, the commander of Iran’s Quds Force, Qasem Soleimaini, visited a town north of Latakia on the frontlines of Syria’s protracted civil war. Following that visit, he promised that Tehran and Damascus were set to unveil a new strategy that would “surprise the world.” 

   

  Just a little over a month later, Soleimani – in violation of a UN travel ban – visited Russia and held meetings with The Kremlin.

  Make no mistake, this is shaping up to be the most spectacular US foreign policy debacle since Vietnam – and we don’t think that’s an exaggeration. 

  The US, in conjunction with Saudi Arabia and Qatar, attempted to train and support Sunni extremists to overthrow the Assad regime. Some of those Sunni extremists ended up going crazy and declaring a Medeival caliphate putting the Pentagon and Langley in the hilarious position of being forced to classify al-Qaeda as “moderate.” The situation spun out of control leading to hundreds of thousands of civilian deaths and when Washington finally decided to try and find real “moderates” to help contain the Frankenstein monster the CIA had created in ISIS (there were of course numerous other CIA efforts to arm and train anti-Assad fighters, see below for the fate of the most “successful” of those groups), the effort ended up being a complete embarrassment that culminated with the admission that only “four or five” remained and just days after that admission, those “four or five” were car jacked by al-Qaeda in what was perhaps the most under-reported piece of foreign policy comedy in history.

  Meanwhile, Iran sensed an epic opportunity to capitalize on Washington’s incompetence. Tehran then sent its most powerful general to Russia where a pitch was made to upend the Mid-East balance of power. The Kremlin loved the idea because after all, Moscow is stinging from Western economic sanctions and Vladimir Putin is keen on showing the West that, in the wake of the controversy surrounding the annexation of Crimea and the conflict in eastern Ukraine, Russia isn’t set to back down. Thanks to the fact that the US chose extremists as its weapon of choice in Syria, Russia gets to frame its involvement as a “war on terror” and thanks to Russia’s involvement, Iran gets to safely broadcast its military support for Assad just weeks after the nuclear deal was struck. Now, Russian airstrikes have debilitated the only group of CIA-backed fighters that had actually proven to be somewhat effective and Iran and Hezbollah are preparing a massive ground invasion under cover of Russian air support. Worse still, the entire on-the-ground effort is being coordinated by the Iranian general who is public enemy number one in Western intelligence circles and he’s effectively operating at the behest of Putin, the man that Western media paints as the most dangerous person on the planet. 

  As incompetent as the US has proven to be throughout the entire debacle, it’s still difficult to imagine that Washington, Riyadh, London, Doha, and Jerusalem are going to take this laying down and on that note, we close with our assessment from Thursday:

  If Russia ends up bolstering Iran’s position in Syria (by expanding Hezbollah’s influence and capabilities) and if the Russian air force effectively takes control of Iraq thus allowing Iran to exert a greater influence over the government in Baghdad, the fragile balance of power that has existed in the region will be turned on its head and in the event this plays out, one should not expect Washington, Riyadh, Jerusalem, and London to simply go gentle into that good night.

  

  

  

  

  

• Dollar Bulls Bends,but Will They Break?

  The unexpectedly poor September US jobs data weakened the greenback’s technical tone, as questions about the underlying strength of the world’s largest economy, and the implications for the Fed’s take-off, intensify.   The economic data the US is scheduled to release in the week ahead are not of sufficient heft to alter the pessimism that was spurred, but not caused, by the jobs data.  Recall that earlier in the week, the US reported it new flash reading on merchandise trade.  The unexpectedly large deficit caused the Atlanta Fed’s GDPNow to halve its estimate for Q3 growth to 0.9%.  

   

  No fewer than five Fed officials will speak next week and the FOMC minutes from its September meeting will be released.  The former will give an opportunity to both hawks and doves to provide their economic assessments in light of the recent economic developments.  The latter will provide some color on 1) how close the decision was to defer lift-off; 2) how confident they were that rates could still go up this year; and 3) which particular global developments are especially worrisome for the conduct of monetary policy.    

   

  The dollar’s recovery after initially selling off on the data surprise mitigated some the technical damage that had been inflicted earlier.  The Dollar Index held above the 61.8% retracement objective of the rally from the September 18 lows, which is found near 95.10.  The trend line connecting the August 24 and September 18 low came in near 94.75 (corresponds to the lower Bollinger Band) before the weekend (and almost 95.20 at the end of next week).  A break of that trendline could spur a move toward the critical 94.00 area.  The RSI is pointing lower, and the MACDs are poised to turn lower.  On the upside, a move back above 96.00 would lift the tone while the 96.50-96.70 area has to be retaken to put the bulls back in control. 

   

  The euro was rose from the lower end of its range to the upper end by the US jobs data.  It stalled at the upper end of its two-week range near $1.1330.  This area corresponds to the downtrend line drawn off the August 24 spike high (~$1.1715) and the September 18 high (~$1.1460). A break of this trendline would likely signal a move toward $1.1400 initially.  The $1.1475 area, however, key. A convincing break could spur a move to the August 24 high, if not a bit higher.   The RSI has turned higher, and the MACDs are poised to do the same.   On the downside, a loss of the $1.1180 neutralizes the technical condition.  

   

  Since late-August the dollar has been tracing out a large symmetrical triangle pattern against the yen. About three-quarters of the time, this pattern is a continuation pattern.  In the current context, this means a downside break for the dollar.  The other point that needs to be made is that this pattern is subject to false breaks.  And that is precisely what has happened on the past two Friday’s.  On September 25, the dollar broke to the upside on an intraday basis only to close back within the triangle pattern.  This past Friday, the employment shock saw the dollar break to the downside only to recovery back within it. The parameters of the pattern begin the new week around JPY120.75 and JPY119.40.  At the end of next week, they are close to JPY120.60 and JPY119.60.   

   

  The sideways trading has neutralized the technical indicators we use.  We do recognize that the triangle pattern can be resolved by neither breaking higher or lower, but continuing to move sideways through the apex of the pattern.  We often experience the yen as a rangebound currency, and when it looks like it is trending, it is moving from one range to another.  In this scenario, the price after the US jobs data reaffirmed the importance of the JPY118.60 support area.  

   

  Sterling closed September with its second nine-session losing streak since August 24. The miniscule gain on October 1 was extended the next day, spurred by the US jobs report.  It stalled in front of the week’s highs in the $1.5240-$1.5260 area.  The RSI and MACDs favor additional gains, but sterling’s inability to sustain a move above $1.52 casts doubts on the bullish technical case.   The key to the upside is the $1.5320-$1.5330 area, which corresponds to a retracement objective and the 20-day moving average.   The Bank of England meets next week; McCafferty was probably unsuccessful in getting others to join his call for an immediate hike.  

   

  The Australian dollar gained about 0.25% against the US dollar last week.  It failed to capitalize on a relatively favorable string of domestic data including an uptick in the manufacturing PMI, home sales, and retail sales.   The technical indicators are not generating strong signals presently.    The break of the $0.6980-$0.7085 range signals the direction of the next cent or so.  The Reserve Bank of Australia meets.  There is no urgency for it to act.  

   

  The technical tone of the Canadian dollar is superior to the Australian dollar.  It held on to its post-US jobs data gains to post a 1.0% advance against the US dollar over the past week.  The US dollar’s pre-weekend losses carried it to the CAD1.3185 area, which corresponds to the 61.8% retracement of the last leg up for the greenback that began on September 18 and ended with new 11-year highs on September 29.  

   

  A trendline connecting the June 18 low (~CAD1.2130) and the September 18 low (~CAD1.3015) comes in near CAD1.3140 at the start of next week.  It rises toward CAD1.3205 by the end of the week.  A break this trendline suggests a move toward CAD1.3000. On the upside, a move back above CAD1.3250-CAD1.3270 points to the end of the Canadian dollar recovery.  

   

  The November light sweet crude oil futures contract continues to carve out a descending triangle pattern.  The top is formed by connecting the highs from August 31 (~$50.05) and September 17 (~$48.05).  The bottom of the triangle is flat in the $43.60-70 area.  It broke to the top side on an intraday basis on October 1.  It was sustained on a closing basis, and the contract returned to the low end after the poor US jobs data that raised concerns about demand.   The strong close before the weekend, amid news of an additional decline in rigs, suggests a retest on the top of the triangle is likely in the days ahead.  The $46.50 area may draw prices.  

   

  The US 10-year yield fell to 1.90% after the employment data disappointment.  This matches the low from August 24.  The technical indicators warn of the risk of lower yields still but we suspect the data in the week ahead will not provide the justification for a new leg lower.  Initially, we see potential back into the 2.05%-2.08% area.  A test on the more important 2.15% area may require more important data, and/or stronger gains in equities.    

   

  The S&P 500 posted an outside up day before the weekend.  It traded on both sides of the previous day’s range and closed above the high (~1927).  It strengthens the technical significance of the 1871 low seen earlier last week.  We warned last week that a break of 1900 would yield 1870. This objective was met, seemingly exhausting the immediate selling pressure.  The next targets on the upside are in the 1963 area.  Overcoming them would lift the tone and begin healing some of the technical damage inflicted in recent weeks.  

   

   

  Observations based on speculative positioning in the futures market: 

   

  1.  There were three significant gross position adjustments by speculators in the CFTC reporting week ending September 29.  Another 10.2k short yen contracts were covering, leaving 61.8k contracts, the lowest since May.  Speculative positioning in the Mexican peso accounts for the other two significant adjustments.   Essentially the longs switched to shorts.  The gross long position was cut by a third of 16.4k contracts (leaving 31.3k), and the gross short position rose by 15.7k contracts (to 75.7k).  

   

  2.  To the extent there was an overall pattern, it was the trimming of gross long positions.  There were two exceptions.  The gross long sterling position increased by 4.8k contracts to 49.8k.  The gross long Australian dollar position rose by 1.9k contracts to 44.6k.  The gross short position adjustment was evenly mixed among the eight currency futures we track.  

   

  3.  The rise in the gross long sterling position was overwhelmed by the 8.1k contract increase in the gross short position.  This was sufficient to turn the net position back to the short side (-2k contracts) after one week net long.  

   

  4. The net 10-year US Treasury futures position (among speculators) switched to the long side for the first time since late-August.  It now stands at 22.5k contracts after having been short a net 8.5k the previous reporting week.  It is a function of 458.6k gross long contracts, which rose 10% of 44.7k contracts in the latest period.  The gross short position rose by 13.7k contracts to 436.1k.  

   

  5.  Speculators took liquidated 7.7k contracts of oil futures, leaving the bulls with 481.5k contracts. The bears left their position unchanged with 229.8k short contracts.  The net position then reflects the gross long adjustment, falling 7.7k contracts to 251.7k.  

  

  

  

  

  

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