Today’s News September 15, 2015

• Are We Heading Into a "Debt Supernova"?

  Financial luminaries such as Ray Dalio, Kenneth Rogoff, Bill Gross, Kyle Bass, BCA Research,  John Mauldin and Martin Armstrong think that we’re at the end of a debt supercycle.

  Former director of the Office of Management and Budget said we’re facing a “debt supernova“.

  Former Fed chief Alan Greenspan said recently

  Debt, deficits and entitlement programs are all coming to a head in a few months, all over the world.

  The European chief executive of Goldman Sachs Asset Management warns:

  There is too much debt and this represents a risk to economies.

  ***

  The demographics in most major economies – including the US, in Europe and Japan – are a major issue – and present us with the question of how we are going to pay down the huge debt burden. With life expectancy increasing rapidly, we no longer have the young, working populations required to sustain a debt-driven economic model in the same way as we’ve managed to do in the past.

  The world’s most prestigious financial institution, the Bank of International Settlements (BIS) – known as the “Central Banks’ Central Bank” –  writes:

  We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines …

   

  The sum of non-financial private and government debt has not fallen
  since the crisis ….  Total debt in advanced
  economies has continued to expand (by 36 percentage points of GDP since 2007),
  with some exceptions mainly reflecting the recent decline in private sector debt in a
  limited number of countries. Meanwhile, total debt in emerging market economies
  has risen even more (by 50 percentage points).

   

  ***

   

  Aggregate private debt has barely stabilised, let alone started to correct downwards, even in the corporate sector. And government debt continues to rise steadily, in a manner reminiscent of Japan’s trend deterioration in the 1990s.

  BIS notes that this is a recipe for disaster:

  Early warning indicators of banking stress pointed to risks arising from strong credit
  growth …. Credit-to-GDP gaps – the deviation of private sector credit from
  its long-term trend – were well above 10% in Brazil and China. This ratio was also
  above 10% for a number of [other] countries … including Indonesia, Singapore and Thailand …. In the past, two thirds of all readings above this threshold were followed by serious banking strains in the subsequent three years.

  It’s not just conservatives who think that debt is too high.  Liberals think so as well.

  And see this.

  

  

  

  

• USDJPY, Nikkei 225 Tumbles After Disappointing "No Change" From Bank Of Japan

  We noted earlier the premature exuberation in USDJPY and Nikkei 225 – despite most of the sell-side not expecting anything from The BoJ – and it appears the banks were right and the FOMO traders wrong. The Bank of Japan made no change to its monetary policy (no increased buying, no shift in ETF allocations, and no NIRP for now). BoJ members spewed forth their usual mix of “everything is awesome” and “any quarter now” for the recovery but the market wasn’t buying it. That leaves only one thing left to cling to for a “we must buy” crowd – no change today ‘guarantees’ moar QQE in October.

  “No Change”

  • *BANK OF JAPAN LEAVES MONETARY POLICY UNCHANGED AS FORECAST
  • *BOJ RETAINS PLAN FOR 80T YEN ANNUAL RISE IN MONETARY BASE
  • *BOJ: CPI LIKELY TO BE ABOUT 0% FOR TIME BEING
  • *BOJ: TO CONTINUE QQE UNTIL STABLE 2% INFLATION MAINTAINED

  Nikkei plunges…

  

   

  And USDJPY tumbled…

  

   

  Of course – the propaganda attached to the statement was sickening…

  • *BOJ SAYS EASING IS EXERTING INTENDED EFFECTS (a collapse in householding spending and real wages)
  • *BOJ SEES ECONOMY CONTINUING TO RECOVER MODERATELY (heading back into 4th recession in 4 years)

  It’s not our fault…

  • *BOJ: EXPORTS, PRODUCTION AFFECTED BY SLOW DOWN IN EMERGING MKTS

  “More or less” is the new normal…

  • *BOJ: PRODUCTION HAS BEEN MORE OR LESS FLAT
  • *BOJ: EXPORTS HAVE BEEN MORE OR LESS FLAT
  • *YAMAMOTO: JAPANESE ECONOMY IS TREADING WATER

  Better spend some more on ETFs…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Public School Students Are The New Inmates In The American Police State

  Submitted by John Whitehead via The Rutherford Institute,

  “Every day in communities across the United States, children and adolescents spend the majority of their waking hours in schools that have increasingly come to resemble places of detention more than places of learning. From metal detectors to drug tests, from increased policing to all-seeing electronic surveillance, the public schools of the twenty-first century reflect a society that has become fixated on crime, security and violence.”—Investigative journalist Annette Fuentes

  In the American police state, you’re either a prisoner (shackled, controlled, monitored, ordered about, limited in what you can do and say, your life not your own) or a prison bureaucrat (police officer, judge, jailer, spy, profiteer, etc.).

  Indeed, at a time when we are all viewed as suspects, there are so many ways in which a person can be branded a criminal for violating any number of laws, regulations or policies. Even if you haven’t knowingly violated any laws, there is still a myriad of ways in which you can run afoul of the police state and end up on the wrong side of a jail cell.

  Unfortunately, when you’re a child in the American police state, life is that much worse.

  Microcosms of the police state, America’s public schools contain almost every aspect of the militarized, intolerant, senseless, overcriminalized, legalistic, surveillance-riddled, totalitarian landscape that plagues those of us on the “outside.”

  From the moment a child enters one of the nation’s 98,000 public schools to the moment she graduates, she will be exposed to a steady diet of draconian zero tolerance policies that criminalize childish behavior, overreaching anti-bullying statutes that criminalize speech, school resource officers (police) tasked with disciplining and/or arresting so-called “disorderly” students, standardized testing that emphasizes rote answers over critical thinking, politically correct mindsets that teach young people to censor themselves and those around them, and extensive biometric and surveillance systems that, coupled with the rest, acclimate young people to a world in which they have no freedom of thought, speech or movement.

  If your child is fortunate enough to survive his encounter with the public schools, you should count yourself fortunate.

  Most students are not so lucky.

  By the time the average young person in America finishes their public school education, nearly one out of every three of them will have been arrested.

  More than 3 million students are suspended or expelled from schools every year, often for minor misbehavior, such as “disruptive behavior” or “insubordination.” Black students are three times more likely than white students to face suspension and expulsion.

  For instance, a Virginia sixth grader, the son of two school teachers and a member of the school’s gifted program, was suspended for a year after school officials found a leaf (likely a maple leaf) in his backpack that they suspected was marijuana. Despite the fact that the leaf in question was not marijuana (a fact that officials knew almost immediately), the 11-year-old was still kicked out of school, charged with marijuana possession in juvenile court, enrolled in an alternative school away from his friends, subjected to twice-daily searches for drugs, and forced to be evaluated for substance abuse problems.

  As the Washington Post warns: “It doesn’t matter if your son or daughter brings a real pot leaf to school, or if he brings something that looks like a pot leaf—okra, tomato, maple, buckeye, etc. If your kid calls it marijuana as a joke, or if another kid thinks it might be marijuana, that's grounds for expulsion.”

  Many state laws require that schools notify law enforcement whenever a student is found with an “imitation controlled substance,” basically anything that look likes a drug but isn’t actually illegal. As a result, students have been suspended for bringing to school household spices such as oregano, breath mints, birth control pills and powdered sugar.

  It’s not just look-alike drugs that can get a student in trouble under school zero tolerance policies. Look-alike weapons (toy guns—even Lego-sized ones, hand-drawn pictures of guns, pencils twirled in a “threatening” manner, imaginary bows and arrows, even fingers positioned like guns) can also land a student in detention.

  Acts of kindness, concern or basic manners can also result in suspensions. One 13-year-old was given detention for exposing the school to “liability” by sharing his lunch with a hungry friend. A third grader was suspended for shaving her head in sympathy for a friend who had lost her hair to chemotherapy. And then there was the high school senior who was suspended for saying “bless you” after a fellow classmate sneezed.

  Unfortunately, while these may appear to be isolated incidents, they are indicative of a nationwide phenomenon in which children are treated like suspects and criminals, especially within the public schools.

  The schools have become a microcosm of the American police state, right down to the host of surveillance technologies, including video cameras, finger and palm scanners, iris scanners, as well as RFID and GPS tracking devices, employed to keep constant watch over their student bodies.

  Making matters worse are the police.

  Students accused of being disorderly or noncompliant have a difficult enough time navigating the bureaucracy of school boards, but when you bring the police into the picture, after-school detention and visits to the principal’s office are transformed into punishments such as misdemeanor tickets, juvenile court, handcuffs, tasers and even prison terms.

  In the absence of school-appropriate guidelines, police are more and more “stepping in to deal with minor rulebreaking—sagging pants, disrespectful comments, brief physical skirmishes. What previously might have resulted in a detention or a visit to the principal’s office was replaced with excruciating pain and temporary blindness, often followed by a trip to the courthouse.”

  Thanks to a combination of media hype, political pandering and financial incentives, the use of armed police officers to patrol school hallways has risen dramatically in the years since the Columbine school shooting (nearly 20,000 by 2003). Funded by the U.S. Department of Justice, these school resource officers (SROs) have become de facto wardens in the elementary, middle and high schools, doling out their own brand of justice to the so-called “criminals” in their midst with the help of tasers, pepperspray, batons and brute force.

  The horror stories are legion.

  One SRO is accused of punching a 13-year-old student in the face for cutting the cafeteria line. That same cop put another student in a chokehold a week later, allegedly knocking the student unconscious and causing a brain injury. In Pennsylvania, a student was tased after ignoring an order to put his cell phone away.

  Defending the use of handcuffs and pepper spray to subdue students, one Alabama police department reasoned that if they can employ such tactics on young people away from school, they should also be permitted to do so on campus.

  Now advocates for such harsh police tactics and weaponry will tell you that school safety should be our first priority lest we find ourselves with another Sandy Hook. What they will not tell you is that such shootings are rare. As one congressional report found, the schools are, generally speaking, safe places for children.

  In their zeal to crack down on guns and lock down the schools, these cheerleaders for police state tactics in the schools might also fail to mention the lucrative, multi-million dollar deals being cut with military contractors such as Taser International to equip these school cops with tasers, tanks, rifles and $100,000 shooting detection systems.

  Indeed, the transformation of hometown police departments into extensions of the military has been mirrored in the public schools, where school police have been gifted with high-powered M16 rifles, MRAP armored vehicles, grenade launchers, and other military gear. One Texas school district even boasts its own 12-member SWAT team.

  According to one law review article on the school-to-prison pipeline, “Many school districts have formed their own police departments, some so large they rival the forces of major United States cities in size. For example, the safety division in New York City’s public schools is so large that if it were a local police department, it would be the fifth-largest police force in the country.”

  The ramifications are far-reaching.

  The term “school-to-prison pipeline” refers to a phenomenon in which children who are suspended or expelled from school have a greater likelihood of ending up in jail. One study found that “being suspended or expelled made a student nearly three times more likely to come into contact with the juvenile justice system within the next year.”

  Not content to add police to their employee rosters, the schools have also come to resemble prisons, complete with surveillance cameras, metal detectors, drug-sniffing dogs, random locker searches and active shooter drills. The Detroit public schools boast a “‘$5.6 million 23,000-sq ft. state of the art Command Center’ and ‘$41.7 million district-wide security initiative’ including metal detectors and ID system where visitors’ names are checked against the sex offender registry.”

  As if it weren’t bad enough that the nation’s schools have come to resemble prisons, the government is also contracting with private prisons to lock up our young people for behavior that once would have merited a stern lecture. Nearly 40 percent of those young people who are arrested will serve time in a private prison, where the emphasis is on making profits for large megacorporations above all else.

  Private prisons, the largest among them being GEO and the Corrections Corporation of America, profit by taking over a state’s prison population for a fee. Many states, under contract with these private prisons, agree to keep the prisons full, which in turn results in more Americans being arrested, found guilty and jailed for nonviolent “crimes” such as holding Bible studies in their back yard. As the Washington Post points out, “With the growing influence of the prison lobby, the nation is, in effect, commoditizing human bodies for an industry in militant pursuit of profit… The influence of private prisons creates a system that trades money for human freedom, often at the expense of the nation’s most vulnerable populations: children, immigrants and the poor.”

  This profit-driven system of incarceration has also given rise to a growth in juvenile prisons and financial incentives for jailing young people. Indeed, young people have become easy targets for the private prison industry, which profits from criminalizing childish behavior and jailing young people. For instance, two Pennsylvania judges made headlines when it was revealed that they had been conspiring with two businessmen in a $2.6 million “kids for cash” scandal that resulted in more than 2500 children being found guilty and jailed in for-profit private prisons.

  It has been said that America’s schools are the training ground for future generations. Instead of raising up a generation of freedom fighters, however, we seem to be busy churning out newly minted citizens of the American police state who are being taught the hard way what it means to comply, fear and march in lockstep with the government’s dictates.

  As I point out in my book Battlefield America: The War on the American People, with every school police raid and overzealous punishment that is carried out in the name of school safety, the lesson being imparted is that Americans—especially young people—have no rights at all against the state or the police.

  I’ll conclude with one hopeful anecdote about a Philadelphia school dubbed the “Jones Jail” because of its bad reputation for violence among the student body. Situated in a desperately poor and dangerous part of the city, the John Paul Jones Middle School’s student body had grown up among drug users, drug peddlers, prostitutes and gun violence. “By middle school,” reports The Atlantic, most of these students “have witnessed more violence than most Americans who didn't serve in a war ever will.”

  According to investigative reporters Jeff Deeney, “School police officers patrolled the building at John Paul Jones, and children were routinely submitted to scans with metal detecting wands. All the windows were covered in metal grating and one room that held computers even had thick iron prison bars on its exterior… Every day… [police] would set up a perimeter of police officers on the blocks around the school, and those police were there to protect neighbors from the children, not to protect the children from the neighborhood.”

  In other words, John Paul Jones, one of the city’s most dangerous schools, was a perfect example of the school-to-prison, police state apparatus at work among the nation’s youngest and most impressionable citizens.

  When management of John Paul Jones was taken over by a charter school that opted to de-escalate the police state presence, stripping away the metal detectors and barred windows, local police protested. In fact, they showed up wearing Kevlar vests. Nevertheless, school officials remained determined to do away with institutional control and surveillance, as well as aggressive security guards, and focus on noncoercive, nonviolent conflict resolution with an emphasis on student empowerment, relationship building and anger management.

  The result: a 90% drop in serious incidents—drug sales, weapons, assaults, rapes—in one year alone. As one fifth-grader remarked on the changes, “There are no more fights. There are no more police. That's better for the community.”

  The lesson for the rest of us is this: you not only get what you pay for, but you reap what you sow.

  If you want a nation of criminals, treat the citizenry like criminals.

  If you want young people who grow up seeing themselves as prisoners, run the schools like prisons.

  But if you want to raise up a generation of freedom fighters, who will actually operate with justice, fairness, accountability and equality towards each other and their government, then run the schools like freedom forums. Remove the metal detectors and surveillance cameras, re-assign the cops elsewhere, and start treating our nation’s young people like citizens of a republic and not inmates in a police state.

  

  

  

  

  

• USDJPY Surges Ahead Of BoJ Statement, China Strengthens Yuan As Washington Folds On Cybersecurity Sanctions

  It appears someone is betting on Kuroda and his cronies to do something later this evening (just like they did as The Fed stopped QE3 back in October) in some wierd monetray policy quid pro quo of – dump Yen all you like as long as the carry trade is alive and well. USDJPY is up from 119.85 to 120.50 (and NKY up over 400 points from US session lows), as perhaps the fact that The BoJ's ETF-buying kitty is running dry at a crucial time. Chinese equity markets are extending yesterday's losses as margin debt declines to a 9 month low (still +62% YoY), injects another CNY50bn and strengthens the Yuan fix for the 3rd day in a row; but in a somewhat embarrassing move, Washington has decided not to impose sanctions on China ahead of Xi's first state visit next week.

   

  Japan was excited…

  JPY dumping against the USD is some odd anticipation of moar QQE from Kuroda…

  

  Because the last 10 have worked so well.

  This is what the big banks think…

  Goldman Sachs: A key focus point in BOJ Governor Kuroda’s press conference will be the potential influence of the US FOMC rate hike on the BOJ’s decision making on its own monetary policy given that the FOMC will have its policy meeting on Sep 16-17. The other point is the impact of the renewed crude oil price decline and foreign demand risk on the BOJ’s 2% inflation target and the BOJ’s responses to this impact

   

  We can find little in the way of hard data to corroborate the BOJ’s “virtuous circle” between wages and consumption. BOJ governor Haruhiko Kuroda spoke recently in New York about a second virtuous circle which sees rising corporate earnings spurring capex, but this is also looking somewhat tenuous, in our view. The BOJ has tended to focus only on the fall in crude oil prices as a reason for the recent CPI slowdown. That said, we think the BOJ will be eventually acknowledge rising downside risks in the much more fundamental form of the output gap, wages and inflation expectations, all of which the BOJ itself has said will be key to gauging the medium-term price outlook. Accordingly, our base scenario is still premised on the BOJ easing monetary policy further at its end-October monetary policy meeting.

   

  The exhaustion of additional monetary stimulus options is something of a problem. We think it would be difficult for the central bank to accelerate JGB purchases from the current ¥80 tn per year given the gradual reduction in the scope for purchasing.

   

  BoAML: Taking a broader view of Japan’s economic outlook, we identify three check-points for maintaining our (and probably BoJ’s) optimistic view. First, non-financial corporations' profit margins reached an all-time high in 2Q, as shown in Financial Statements Statistics of Corporations by Industry, and conditions for corporate earnings are good. Although margin improvement has started to feed through to capital expenditure and household income / consumption, the current pace is still moderate. Whether or not this benign cycle of earnings translating into expenditure accelerates far enough in 3Q onwards for the government and BoJ to achieve their policy targets will be one key element to watch. Second, trends in the US economy here on. We believe contribution of external demand to 3Q growth will be zero or slightly negative. Japan’s exports to China are expected to remain weak, affected by the slowdown in China. In this context we believe the extent to which a revival in Japan’s exports to the US (via the economic recovery there) can offset the weak exports to China will be a key aspect in external demand outlook. Third, impact of the turmoil in the financial markets since mid-August. Our main scenario is for heightened risk-aversion in the financial markets proving temporary. However, if a 10%-plus rise in the yen and/or a fall in the stock market were to persist (Nikkei 225 drops below 18,000, or yen appreciates and approaches ¥115/$), this will likely have a material impact on Japan’s economy, and hence, merits continued vigilance.

   

  Citi: With renewed weakness in crude oil prices since summer partly reflecting worrisome developments in the Chinese economy, the BoJ’s scenario for the CPI reaching the vicinity of 2% YoY around the first half of FY2016 now looks even less likely to materialize, in our view. However, if inflation does not pick up as policymakers anticipate solely because of declining energy prices, the BoJ may not take additional easing measures unless inflationary expectations are affected negatively. We note, however, there are already early signs for declining inflationary expectations, albeit still tentative at the moment.

   

  Deutsche: The question is whether the BoJ will ease further, but we see little likelihood of this. The BoJ will probably only ease further in response to events that would make the outlook for 2% inflation impossible. Inflation expectations could fall due to a decline in oil prices like last year, but oil prices have not fallen to the extent they did in 2014. In addition, regarding the output gap, BoJ Governor Haruhiko Kuroda at the Upper House Financial Affairs Committee on the 10th said "There is a good chance that GDP will be positive in Jul-Sep", indicating that he does not anticipate a decline in the underlying trend in inflation due to economic deterioration. If the BoJ does ease further we expect it would focus on qualitative measures such as increasing ETF purchases and extending the duration of JGB purchases. In that case, we expect the superlong sector would outperform. Kuroda indicated on the 10th that the Bank was not considering reducing or abolishing the IOER rate. A rate cut, including negative rates, is unlikely. BoJ Board Member Sayuri Shirai's panel discussion remarks on the 8th gave numerous reasons for maintaining the IOER rate, but we see one compelling explanation for why the Bank cannot use negative rates. Excluding the BoJ, the banks' surplus deposits have enabled the smooth absorption of JGBs equaling over 200% of GDP. The probability that negative rates would destabilize the JGB market therefore makes such a policy unlikely from the perspective of managing national risk.

  Which can all be summed up thus – "we do not think The BoJ has any good reason to ease tonight… but then again, you never know!"

  So, of course, where USDJPY goes – so goes Nikkei 225… Up 400 points from US session lows…

  

  *  *  *

  Then China slams open…

  With an immediate ban on anything that doesn't say "everything is awesome"

  • *CHINA TO SHUT STATE CULTURE COS. WITH IMPROPER CONTENT: XINHUA

  More open mouth operations…

  • *CHINA SHOULD STABILIZE YUAN INSTEAD OF LET IT FALL: INFO DAILY
  • *UNCERTAINTY BROUGHT BY YUAN FALL WOULD HURT EXPORTS: INFO DAILY

  China strengthens the Yuan fix for the 3rd day in a row and inject snoather CNY50bn

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3665 AGAINST U.S. DOLLAR
  • *PBOC TO INJECT 50B YUAN WITH 7-DAY REVERSE REPOS: TRADER
  • *HONG KONG DOLLAR QUOTED NEAR UPPER END OF PERMITTED RANGE

  

  After last night's tumble…

  

   

  Chinese equity markets are extending losses at the open…

  • *FTSE CHINA A50 SEPT. FUTURES ADVANCE 0.5%
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 2.2% TO 3,208.74
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 2.3% TO 3,043.80

  But flows continue to leave…

  • *CHINA END-AUG. EQUITY FUNDS NET VALUE FALLS 44% ON MONTH

  As delveraging continues…

  • *SHANGHAI MARGIN DEBT BALANCE FALLS TO NINE-MONTH LOW

  But bear in mind, margin debt remains +62% YoY…

  

  *  *  *

  And finally, Washington folds ahead of China's visit… (as WaPo reports)

  The United States will not impose economic sanctions on Chinese businesses and individuals before the visit of China President Xi Jinping next week, a senior administration official said Monday.

   

  The decision followed an all-night meeting on Friday in which senior U.S. and Chinese officials reached "substantial agreement" on several cybersecurity issues, said the administration official, who spoke on the condition of anonymity because of the topic's sensitivity.

   

  The potential for sanctions in response to Chinese economic cyberespionage is not off the table and China's behavior in cyberspace is still an issue, the official said. "But there is an agreement, and there are not going to be any sanctions" before Xi arrives on Sept. 24, the official said.

   

  The breakthrough averted what would have raised a new point of tension with the Chinese that could have overshadowed the meeting — and Xi's first state visit.

   

  "They came up with enough of a framework that the visit will proceed and this issue should not disrupt the visit," the official said. "That was clearly [the Chinese] goal." 

  Charts: Bloomberg

  

  

  

  

  

• Fourth Turning: Crisis Of Trust, Part 2

  Submitted by Jim Quinn via The Burning Platform blog,

  In Part 1 of this article I discussed the catalyst spark which ignited this Fourth Turning and the seemingly delayed regeneracy. In Part 2 I will ponder possible Grey Champion prophet generation leaders who could arise during the regeneracy.

  

  The nearly seven year reign of Barack Obama has resulted in furthering wealth inequality, in spite of his socialistic rhetoric. Notwithstanding his Nobel Peace Prize, military spending is at all-time highs and we are engaged in actual and proxy wars across the Middle East and in the Ukraine. Race relations have never been worse. Poverty levels have never been worse. Real median household income is lower than it was in 1989. Real hourly wages are at 50 year lows. Home ownership has plunged to 50 year lows, as middle class workers have been kicked out of their homes and young people are saddled with so much student loan debt and bleak job opportunities they will never have an opportunity to own. The ownership society pushed by Clinton and Bush, with the proliferation of Wall Street created “exotic” subprime mortgages, peddled to people incapable of paying their mortgages, blew up the world in 2008, and the fall out will last for decades.

  

  Meanwhile, Wall Street banks have reaped $700 billion of ill-gotten profits since 2010 as the Federal Reserve has handed them trillions of interest free funds to gamble with, while rigging the financial markets, and paying their executives obscene bonuses. The hubris and arrogance of the Wall Street titans is appalling, as they buy politicians, write toothless financial regulations (Dodd Frank) for their bought off politicians to pass, report fraudulent financial results with the stamp of approval from the FASB, blatantly rig interest rate, currency, stock and commodities markets, and use deception and propaganda to distract and mislead the public through their corporate media mouthpieces – dependent upon Wall Street advertising revenue to thrive.

  And still, Obama has not prosecuted one banker for the largest control fraud in world history, as he assumed the role of useful puppet to the vested financial interests. I’m sure he will be paid handsomely after he leaves office in 2017, just as Bill Clinton, Alan Greenspan, and Ben Bernanke have been richly rewarded by their Deep State benefactors for a job well done.

  

  Illegal immigrants are pouring over our borders with encouragement from the Obama administration. Obamacare has proven to be a giveaway to health insurance conglomerates, hospital corporations, and drug companies, as insurance costs are driven higher, care deteriorates, and deficits soar ever higher. The welfare state has grown to immense proportions, with 46 million Americans remaining on food stamps, proving the reported unemployment rate of 5.1% to be a fraud. The labor participation rate of 62.6% is at levels last seen in 1977 and far below the 67.1% rate achieved from 1997 through 2000. The politicians and corporate media applaud $600 billion deficits as an achievement, while 10,000 Boomers turning 65 per day is guaranteed to drive future deficits back over $1 trillion per year.

  Laurence Kotlikoff, economics professor at Boston University, reveals the truth about our true fiscal mess. Our unfunded liabilities are too damn big and our current deficits are a lie:

  “I told them the real (2014) deficit was $5 trillion, not the $500 billion or $300 billion or whatever it was announced to be this year. Almost all the liabilities of the government are being kept off the books by bogus accounting. The government is 58% underfinanced. Social Security is 33% underfinanced. So, the entire government enterprise is in worse fiscal shape than Social Security is, but they are both in terrible shape. So, how much is America on the hook for in the future?  If you take all the expenditures that the government is expected to make, as projected by the Congressional Budget Office (CBO), all the spending on defense, repairing the roads, paying for the Supreme Court Justices’ salaries, Social Security, Medicare, Medicaid, welfare, everything and take all those expenditures into the future and compare that to all the taxes that are projected to come in, and the difference is $210 trillion.  That’s the fiscal gap.  That’s our true debt.”

  We now know for sure Barack Obama is not the Grey Champion of this Fourth Turning. He has only worsened the three core elements of this Crisis – debt, civic decay, and global disorder. Since his ascension to power, U.S. and global debt has expanded at an astounding rate never seen in world history. Class, race, political and cultural divides have grown to vast proportions. The world is exploding in violence, refugees flooding over borders, civil wars, proxy wars, riots, currency wars and economic depressions caused by U.S. military interventions and monetary policies.

  The world is becoming increasingly chaotic and the American people are seeking a leader who can bring order, make tough decisions, and capture the zeitgeist of this moment in history. They are in search of a prophet generation (Boomer) Grey Champion, whose arrival marks the moment of darkness, adversity and peril as the Fourth Turning careens towards its climax. The Grey Champion doesn’t necessarily have to be a good person, but they must lead and display tremendous confidence in their cause and path. Franklin, Lincoln, and FDR have many detractors, but during their Fourth Turnings, they most certainly led, casting aside obstacles (sometimes illegally) and enduring dark days and bleak prospects for success. Is there someone of that stature ready to lead the American people now?

  Gray Champion?

  

  

  “Americans have always been blind to the next turning until after it fully arrives.

  Most of today’s adult Americans grew up in a society whose citizens dreamed of perpetually improving outcomes: better jobs, fatter wallets, stronger government, finer culture, nicer families, smarter kids, all the usual fruits of progress. Today, deep into the Third Turning, these goals feel like they are slipping away. Many of us wish we could rewind time, but we know we can’t – and we fear for our children and grandchildren.

  Many Americans wish that, somehow, they could bring back a saecular spring now. But seasons don’t work that way. As in nature, a saecular autumn can be warm or cool, long or short, but the leaves will surely fall. The saecular winter can hurry or wait, but history warns that it will surely be upon us.

  We may not wish the Grey Champion to come again – but come he must, and come he will.” – The Fourth Turning – Strauss & Howe – 1997

  When Strauss and Howe wrote these words eighteen years ago, halfway through the Unraveling, the American Dream was already turning into a nightmare. Perpetually improving outcomes have turned into a perpetually declining standard of living for most Americans. Fear for the futures of our children and grandchildren were warranted. Millennials have been lured into and enslaved by $1.3 trillion of student loan debt, left with limited job opportunities and low pay, priced out of the housing market, and handed a $200 trillion bill by their elders. Despite factual data showing that default rates on for-profit student loans were even three times as high as subprime mortgages in the early 2000s, the government took over the student loan market in 2009 and proceeded to dole out $500 billion (taxpayer money) in new debt over the next six years to anyone that could fog a mirror and scribble an X on a loan document.

  The criminal enterprises known as for profit colleges such as: University of Phoenix, Corinthian, ITT Tech, Strayer, and Devry, have absconded with the money, provided dreadful education, graduated about 20% of enrollees, and left millions of suckers with billions of debt. With default rates now exceeding 50%, students are angry, demanding relief from their own stupidity. Hard working taxpayers who have struggled to put themselves and their kids through college are angry they will foot the bill for defaults that anyone with a high school diploma could see would happen. Trust in the government’s decision making process and motives have been rightfully shattered.

  It is clear the Obama administration purposely enslaved young people in debt to artificially lower the unemployment rate for political purposes. The issuance of colossal amounts of subprime auto loan debt (begun by Ally Financial when it was owned by the Federal government) has also been politically motivated to artificially increase GDP figures and pump up the financial results of the US automakers (GM, Chrysler) saved with taxpayer funds in 2009. There are no free markets left. Everything is manipulated for a political reason or to benefit a particular constituent. The average American pays the price, while the connected .1% are further enriched.

  

  When young people protested against the true enemies of the people on Wall Street in 2011, they were maced, beaten, tear gassed, trampled by horses and imprisoned by the enforcers of the surveillance police state. The working middle class has seen their real wages stagnate for the last 50 years, as the dollar was unpegged from gold, politicians were free to run up the national debt with no short term consequences, and citizens were turned into consumers through media propaganda, the peddling of debt by Wall Street, and the complete and utter failure of our educational system.

  While working class Americans have seen no advancement in their real wages in almost a half century, the cost of their food, energy, education, healthcare, housing, and taxes have risen astronomically. It is no coincidence the Wall Street bankers stepped in to offer prodigious levels of consumer debt in the form of credit card, mortgage and auto loans to allow Americans to pretend their standard of living hasn’t fallen. Excessive levels of debt leads to excessive profits for the moneyed interests. The last 35 years have been a grand national delusion.

  

  Trust in the economic system, financial markets, political parties, mainstream media, and generational social contract has been destroyed. Rampant irresponsible fraud, abuse, deception, and deceit by the moneyed interests, lackey politicians, their government apparatchiks, media mouthpieces, and legal system have shattered the illusion the establishment is looking out for your best interests. The revelations by Edward Snowden of illegal mass surveillance, militarization of local police forces, military exercises in US cities, attempts to roll back the 2^nd Amendment, and trying to control the internet has revealed the true nature of the corporate fascist state. The disintegration of trust began slowly after 9/11 but accelerated rapidly over the last three years. Our leaders have done the exact opposite of what needed to be done after 2008. Everything they have implemented has failed. The average American is worse off than they were in 2009 at the depths of the recession.

  The highly educated, white collar, sociopath masters of the universe have captured the levers of power in this country. The world is enthralled and mesmerized by a gray haired academic troll-like figure who will ascend her monetary throne and pronounce whether her and her fellow central bank lackeys will raise an obscure inconsequential interest rate from 0% to .25%. This is nothing but a meaningless diversion as her owners (Wall Street banks), their corporate brethren, captured politicians, pliable judiciary, and media mouthpieces rig the financial markets to enrich themselves while impoverishing the masses and drowning current and future generations in un-payable debt. Harry Markopolos, who uncovered Bernie Madoff’s Ponzi scheme, while the SEC and criminal co-conspirator Wall Street bankers willfully ignored the blatant easily identifiable fraud, captures the essence of why trust in our economic, financial, regulatory, political, judicial and journalistic systems has collapsed:

  “Government has coddled, accepted, and ignored white collar crime for too long. It is time the nation woke up and realized that it’s not the armed robbers or drug dealers who cause the most economic harm, it’s the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives.” – Harry Markopolos, Congressional Testimony

  The men who retain the levers of power are the same men who were in command when the Crisis struck in 2008. They are even more powerful and rich today than prior to the financial collapse provoked by their unbridled greed and avarice. They believed they could engineer a recovery by promoting confidence in the Wall Street banks through the issuance of prodigious amounts of debt to solve a crisis caused by too much debt. Total debt outstanding in the U.S. rose from $52 trillion in 2009 to $59 trillion today, at the behest of the government and their Federal Reserve cohorts.

  While rational thinking Americans have continued to pay down their mortgage debt and reduce credit card usage, the Federal government through their insolvent (if using mark to market accounting) entities Fannie and Freddie, along with their monopoly on student loan issuance, and their massive deficit spending, have accounted for more than 100% of the $7 trillion increase. Total global debt approaches $230 trillion, up approximately $70 trillion since the crisis began.

  

  The mood change in the country is palpable as economic misery besets the middle class; race wars break out in urban ghettos across the land; push back against the police state intensifies; distrust of a rigged financial system keeps people out of the market; young people are priced out of the housing market by Wall Street price manipulation; productive good paying jobs dwindle; government bureaucrats prove themselves inept at everything they attempt; illegal immigrants pour over the southern border overwhelming the social safety net when it is already stretched thin; and faith in both political parties is close to zero. The regeneracy has been delayed, but this has allowed the anger, bitterness, and dismay with the government to grow to staggering proportions. The country is growing desperate for someone to lead. Ignoring the debt, civic decay and global disorder is no longer acceptable. It’s time for someone to step forward and tell the people the truth.

  “Soon after the catalyst, a national election will produce a sweeping political realignment, as one faction or coalition capitalizes on a new public demand for decisive action. Republicans, Democrats, or perhaps a new party will decisively win the long partisan tug of war. This new regime will enthrone itself for the duration of the Crisis. Regardless of its ideology, that new leadership will assert public authority and demand private sacrifice. Where leaders had once been inclined to alleviate societal pressures, they will now aggravate them to command the nation’s attention. The regeneracy will be solidly under way.” – The Fourth Turning – Strauss & Howe – 1997

  The Grey Champion is likely to be elevated through an election, but it isn’t a requirement. Ben Franklin and Samuel Adams were the intellectual and firebrand Grey Champions of the American Revolution. They inspired the revolutionaries through writings and oratory. Lincoln and FDR were elected Grey Champions, but Lincoln only won 40% of the popular vote in a four way race, while FDR won in a landslide with 57% of the vote over Hoover. It was clear Lincoln didn’t have a mandate, as Southern states began seceding after his election. No one can argue Franklin, Adams, Lincoln or FDR united everyone in a common cause. They actually aggravated the societal pressures that had been ignored or deferred by their predecessors. Compromise was not an option for these men. They were going to lead based upon their own criteria. You were either with them or against them. And many were against them.

  It is widely believed only 20% of colonial Americans were strong supporters of the American Revolution, with 20% Loyalists, and the rest sitting on the fence. Franklin’s own son remained a Loyalist throughout the fight. Half the country departed the Union upon Lincoln’s election and his support in the North was lukewarm at best. Lincoln captured 55% of the vote in the 1864 election, with only northern states voting. Even though FDR won landslide popular vote victories in 1932 and 1936, his detractors and enemies were many. FDR’s confiscation of gold and antagonism toward big business convinced a number of wealthy businessmen to approach General Smedley Butler to lead a coup against FDR and install a fascist regime to run the country. So, it is clear Grey Champions are not universally loved or supported. They have the ability to ignore the complexity of life and focus on one simple imperative: society must prevail.

  Until three months ago the 2016 presidential election was in control of the establishment. The Party was putting forth their chosen crony capitalist figureheads – Jeb Bush and Hillary Clinton. They are hand-picked known controllable entities who will not upset the existing corrupt system. They are equally acceptable to Goldman Sachs, the Federal Reserve, the military industrial complex, the sickcare industry, mega-corporate America, the moneyed interests, and the never changing government apparatchiks. The one party system is designed to give the appearance of choice, while in reality there is no difference between the policies of the two heads of one party and their candidate products. But now Donald Trump has stormed onto the scene from the reality TV world to tell the establishment – You’re Fired!!!

  As Hillary’s crimes and lies catch up to her and Jeb Bush drowns in a sea of irrelevance, low energy, and passionless rhetoric, Trump and Bernie Sanders have surged ahead in the polls. The country is tired of the Clinton and Bush dynasties. They are tired of the existing ruling authority. My initial reaction to Trump’s entering the presidential race was scorn. He’s a bloviating, egocentric, self-promoting, reality TV parody of himself. After seeing him in action for the last three months it has become apparent the country deserves a president like Trump.

  He represents everything we’ve become as a nation. Sound bites, no substance, self-involved, boastful, and in constant attack mode are the qualities necessary to lead America today. Facebook twitter nation merits a president like Trump. Bill Clinton playing sax on Arsenio and Obama’s weekly guest appearances on the Daily Show or Jimmy Fallon Show has already tainted and made a mockery of the office of the president.

  Trump was born in 1946 putting him in the Boomer Prophet generation, so he fits the mold of Grey Champion from a generational perspective. Hillary and Jeb are also Boomers, with Sanders from the Silent generation. Trump has struck a nerve with a wide swath of middle class America with his anti-illegal immigration rhetoric, disdain for the elitist mainstream media, unflinching assessment of his second string GOP opponents, and exuberant confidence in his own abilities.

  Building a wall on our southern border, going after billionaire hedge fund managers, cutting government spending, and negotiating trade deals that don’t ship American jobs overseas, are resonating with fed up households across America. Some polls show Trump with significant support among blacks and Hispanics. The linear thinking supporters of the status quo are flabbergasted and outraged by Trump’s popularity. The ruling classes never anticipate the mood shift of the peasants as they look down on the masses from their gated estates and penthouse suites. The country is looking for someone who can tear down the entire fetid, corrupt, rotting structure.

  The moneyed interests are still betting on Hillary or Jeb, but they are getting nervous. There is still time for them to pull the old Ross Perot play by threatening Trump or his family with harm or making him an offer he can’t refuse in financial terms. But, with the Middle East awash in blood, refugees flooding into Europe, China experiencing an epic meltdown, oil producing countries suffering depressions, emerging market economic systems collapsing under the weight of unpayable promises, the Federal Reserve panicked as recession approaches with interest rates at zero bound, and stock, bond and real estate bubbles approaching the inescapable pin, the stars are aligning for a 2^nd crisis more perilous and catastrophic than the 2008 catalyst event. The onset of phase two of this Crisis in 2016 will produce a populace more desperate, less trusting of the establishment and likely to turn towards someone like Trump, in despair.

  No matter who is elected in November 2016, there is no turning back. Winter is here and Spring is many years away. Grim times will befall the world. The potential for tragic consequences is growing by the day. The storm clouds are gathering on the horizon. There will certainly be famine, chaos, death, destruction, and war. Let’s pray our Grey Champion can lead us through the valley of death to a new High.

  

  “The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it.” – Strauss & Howe – The Fourth Turning

  In Part 3 I will try to assess which channels of distress are likely to burst forth with the molten ingredients of this Fourth Turning, and lastly make some educated guesses about potential climaxes.

  

  

  

  

  

• Caught On Tape: Topless Femen Protesters Storm Muslim Debate "Whether Wives Should Be Beaten"

  If Europe was concerned about Christian-Muslim cross religious and cultural differences before, and in light of the recent influx of Syrian refugees into the continent, events over the weekend confirmed such concerns are poignantly valid.

  This Saturday, during a conference at the Muslim Salon in Pontoise near Paris on the role of Muslim women, two Muslim fundamentalist imams were debating the question of “whether wives should be beaten or not”, Telegraph reports that two Femen protester activists, aged 25 and 31, “ripped off their Arab-style cloaks and jumped on to the stage on Saturday evening. One had the slogan “No one subjugates me” inked across her torso. The other bore the words “I am my own prophet.”

  

  Chaos immediately erupted. The imams promptly left the stage but not before taking a long, hard look at the half-nued protesters, who grabbed microphones and shouted feminist slogans in French and Arabic before being roughly bundled off the stage by about 15 men and handed over to police. Video footage of the incident shows a man apparently kicking one of the women.

  Telegraph adds that according to Ms Shevchenko, a spokeswoman for the feminist group, some of the men shouted “dirty whores” and “kill them”. She thanked the police for protecting the two women, who were taken into custody. They were released after being questioned by prosecutors, who said they would continue investigating what happened. Conference organisers said they would press charges against the activists.

  They were not alone in taking exception to the presence of fundamentalist preachers at the event, where shopping and cooking were showcased as appropriate “feminine activities”. One speaker at the conference has reportedly posted calls on social networks for women to veil their faces or risk hellfire and sexual assault in the afterlife.

  The showdown took place after nearly 6,000 people signed an online petition against the event. At the same time, twitter posts called for the protesters to be stoned or collectively raped. On Facebook, the conference organisers urged Muslims to “stand together” and attend the final day of the event on Sunday. They said it was “the victim of an anti-Muslim media frenzy.”

  The chaos that erupted when the women stormed the stage was caught on video.

  

  

  

  

  

• Iraq War Veteran Blows Whistle On Shameless Propaganda Being Taught At Police Academies

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  

  Before getting into the meat of this post, I want to start off by stating a fact: There is no “war on police” happening in America today. What is happening is a growing movement of people who want police accountability, profess a desire to reform the justice system so that we stop incarcerating people for the  oxymoron of “victimless crimes,” and an end to the widespread thieving of the public without due process via a practice known as civil asset forfeiture.

  I’ve covered these topics extensively over the years. Here are just a few examples:

  The United States: 5% of the World’s Population, 25% of its Prisoners

  Don’t Mess with Texas – Police Raid and Shutdown Lemonade Stand Run by 7 and 8-Year-Old Girls

  Chart of the Day – America’s Prison Population Over the Past 100 Years

  Denver Police Arrest “Jury Nullification” Activist for Passing Out Informational Pamphlets

  Land of the Unfree – Police and Prosecutors Fight Aggressively to Retain Barbaric Right of “Civil Asset Forfeiture”

  The DEA Strikes Again – Agents Seize Man’s Life Savings Under Civil Asset Forfeiture Without Charges

  Asset Forfeiture – How Cops Continue to Steal Americans’ Hard Earned Cash with Zero Repercussions

  The public grievances listed earlier are reasonable demands which any civilized culture would insist upon. Nevertheless, many police departments across the country are taking these criticisms as part of some imagined “war on police” which simply doesn’t exist. Rather than showing even a sliver of introspection by looking inward at the mistakes policing has made in recent years, many officers are becoming defensive, combatant and have resorted to lies in order to dismiss the concerns of the public.

  This is precisely what an Iraq war veteran witnessed recently while training at a police academy. He shared his story with the Daily Beast under the pseudonym Clayton Jenkins. Here are some excerpts:

  The War on Cops is a grossly inaccurate response to recent police killings which are on track for another year that will rival the safest on record. Gunfire deaths by police officers are down 27 percent this year, according to the Officer Down memorial page, and police killings in general are at a 20-year low, given current numbers for 2015. Police deaths in Barack Obama’s presidency are lower than the past four administrations, going all the way back to Ronald Reagan’s presidency.

   

  Not a single iota of evidence supports a War on Police, but it has become a battle cry among some in the academy.

   

  Over 80 percent of police departments in the United States are facing issues with low recruitment numbers. As an Iraq War veteran I sought to solidify my chance of employment working in law enforcement by attending a local police academy. I enjoyed serving my country as military police and will do such now as a sworn police officer back home.

   

  What are they telling us in a post-Michael Brown academy? The culture of police brutality is infrequently addressed, but what is continually mentioned is the notion that there is a War on Police.

   

  “The Obama Administration and Eric Holder are undermining the police. We have officers dying left and right and he’s dicking off in Alaska,” says one of my instructors, referring to the president’s trip to Alaska last week.

   

  I understand as a law enforcement professional—and as someone capable of fairly reading mountains of data—that the Drug War has been unfairly used as a tool of oppression against the black community. It is why the American public overall has shown they have less confidence in police in recent times.

   

  But there is no War on Police. This Us vs. Them mentality still prevails even in fresh academy cadets. Perhaps some of these people will become future jackbooted, truncheon wielding oppressors. Or perhaps they will encounter the reality that betrays the fear they are taught.

  Now watch the following recruitment video for the Portsmouth, Virginia police department…

  Meanwhile, a Portsmouth officer was recently indicted after fatally shooting 18-year-old William Chapman after he was caught shoplifting.

  This looks like a scene from Gaza, not the America we imagine.

  

  Please tell me. Who has declared war on who?

   

  

  

  

  

  

• Goldman Warns: VIX Is Not Going Back To Low-Teens, No Matter What Fed Does

  While equities do tend to be lower one-, two-, and three-months after a Fed rate hike, S&P 500 realized volatility and VIX levels have been fairly well contained. However, Goldman Sachs warns not to expect VIX to calm down and settle back into the low teens like it was from 2013 to mid-August 2015. New normal trend VIX levels should now be 4-5 points higher than the average level of 14 experienced in 2013-2014 given the current state of the economy.

  Via Goldman Sachs,

  Question: Where are we now in terms of historical VIX levels and levels of S&P 500 realized market volatility?

  Answer: The VIX is at 23.2, about 3 pts above its 1990-present average and 9 points above its 2013-2014 average.

  The VIX landed at 23.2 last Friday. That is about three points below its median level of 26 over the last three recessions, 3.4 points above its long-run average of 19.8 back to 1990 and nine points above its 2013-2014 average of 14.2. S&P 500 one-month realized volatility currently stands at 31.7, ten-day at 26.7. A VIX trading well below short-term realized market volatility suggests the options market is expecting a moderation in market swings going forward relative to what we experienced in August. That may also mean that option investors are also expecting no hike this week.

  Question: If the Fed doesn’t hike this week will the VIX go down.

  Answer: Yes. 38% of recent SPX options flow has been short-dated and that flow may roll to longer maturities.

  We do think the VIX moves lower if the Fed doesn’t hike this week. Why? Because options have an expiration date. There has been a tremendous amount of uncertainty priced post China’s currency devaluation plus additional uncertainty surrounding the September 17 meeting. Investors have flocked to short-dated weekly S&P 500 options to trade the recent market swings. We estimate that on a typical day since mid-August 38% of options traded on the SPX have had maturities of ten days or less.

   

  

   

  That number has approached 50% over the last five trading days. If the Fed does not hike, hedges may be taken off or rolled out to later meeting dates. That could apply downward pressure on shorter-dated options, leading to a lower VIX. At the same time, that may just push out the duration or timing of the uncertainty; which could mean that the VIX could swing lower only to shift higher prior to the next few meetings.

  Question: Even if the VIX calms down will it settle back into the low teens like it was from 2013 to mid-August 2015?

  Answer: We don’t think so. The U.S. economic landscape & cross asset metrics both suggest a VIX in the high-teens.

  Point 1. The business cycle: In last week’s edition of The Buzz we estimated that baseline VIX levels of 18 would be justified given the current U.S. economic landscape. Our point is not that the VIX will go to 18 tomorrow. It is that trend VIX levels should now be 4-5 points higher than the average level of 14 experienced in 2013-2014 given the current state of the economy. In the same way that we have argued that VIX levels in the high 20’s and above are consistent with recessions (and therefore the VIX should have dropped over the past couple of weeks) we also argue that VIX levels in the high teens are more consistent with the current ISM level in the low 50’s. VIX levels in the low teens are more consistent with ISM levels in the upper 50’s.

   

  Point 2. Cross asset risk levels are higher: Our benchmarking work in the last two editions of The Buzz suggested that VIX levels were around 5 points low relative to EM FX, U.S. HY spreads, oil and rates moving into mid-August. Our point here is that if the VIX was listening to other markets then baseline levels of 18-19 would have been justified in mid-August before the equity decline. While the economic data could improve, at the current time the U.S. economic picture and cross asset analysis both suggest similar baseline VIX numbers of 18-19.

   

  The counterpoint to the thesis that a VIX in the high-teens may be justified would be that with so much short-dated option flow in the system, if the Fed doesn’t hike, the VIX might collapse as investors trade out of shorter-dated options. There are few data releases between the September and October to convince the committee to hike in October, which leaves the VIX with two months to potentially swing lower. Options markets are clearly focused on EM as well therefore a VIX collapse back to the low teens may require a global reduction in risk, which might take a while.

  Question: How have equities and the VIX reacted around past rate hikes?

  Answer: Equities lower on moderate volatility.

  In the remainder of this report we focus on how S&P 500 returns, VIX and SPX realized volatility levels have reacted around past rate hikes. Our analysis shows that while equities do tend to be lower one-, two-, and three-months after a Fed rate hike, S&P 500 realized volatility and VIX levels have been fairly well contained. One argument for why that has happened is that the Fed doesn’t tend to hike into a weak economy. U.S. GDP rates and ISM levels have been strong surrounding the first rate hike. What worries many investors now is that if the Fed does hike this week they would be hiking during a period of high uncertainty surrounding the U.S. and global economic landscape at the same time that financial conditions have been deteriorating. The cushion may simply be lower now than in the past. The implications and potential imbalances around six years of zero interest rates and global central bank adjustments have also worried investors. If the Fed does hike this week equities may take it poorly unless the communication is for a slow normalization path.

  *  *  *

  S&P 500 returns are typically lower once the Fed starts raising rates

  We analyze S&P 500 returns and peak to trough max drawdowns prior to and post the last three rate hike cycles.

  

  S&P 500 returns and max drawdowns prior to the initial rate hikes in 1994, 1999, 2004

  • S&P 500 returns prior to each rate hike were positive: Median S&P 500 returns were +5%, +7%, and +17%, during the 3-, 6-, and 12-months before the initial hike. The S&P 500 was up 3/3 times in the month prior by a median of +2.9%. We take that to mean that good news was good news and the S&P 500 was responding to a stronger economy.
  • Max Drawdown Analysis: While returns three months leading into the first rate hike were positive over each of the three periods, the ride was not always smooth. The maximum peak-to-trough S&P 500 returns in the three months prior to each rate hike were: -1.6%, -6.3% and -5.8% in 1994, 1999 and 2004, respectively.

  S&P 500 returns and max drawdowns post the initial rate hikes in 1994, 1999, 2004

  • S&P 500 Returns on the day the Fed hiked rates were -2.3%, 1.6% and 0.4% with a median return of +0.10% one-week after the Fed started raising rates. S&P 500 returns were negative one-, two-, and three months after each initial rate hike across each period. The median S&P 500 return was -5.9% three-months post rate hike.
  • Max Drawdown Analysis: Peak to trough drawdowns were larger after a hike than before. We estimate that the max drawdowns three-months after a rate hike were -7.2%, -10.6%, -6.8% (1994, 1998, 2004).

  The impact of rate hikes on volatility has historically been muted

  

  S&P 500 realized volatility levels in 1994 and 2004 were low going into and sub-10 coming out of the first rate hike. The maximum level of S&P 500 1m realized volatility in the year prior to the 1994 and 2004 rate hikes was 17.1 with a max VIX level of 22.7 on a rolling daily basis. One-month realized volatility was sub-10 one month after both initial hikes and the maximum VIX level in the one-month surrounding the initial hikes was a modest 17.3. VIX levels three-months after the initial hike were 16.2 and 13.2 in 1994 and 2004, respectively.

  The first rate hike in June of 1999 was sandwiched between the fallout from Long Term Capital Management over the back half of 1998 and the bursting of the tech bubble in the spring of 2000. In short, realized volatility was elevated coming into 1999. That said, realized volatility declined into the June rate hike and was also lower 1m later. One-month realized volatility levels were around 20 one- and three-months prior to the first hike and were lower afterward; at 14, 19 and 18, one-, two- and three-months after the hike. Higher levels of realized volatility meant that VIX levels were also higher in 1999 relative to 1994 and 2004. The VIX landed at 21.1 on the day of the rate hike and was 24.6 and 26.5 one- and three-months after the first hike.

  Bottom line: While S&P 500 returns were lower post the last three rate hikes, S&P 500 realized volatility and VIX levels were moderate, with no volatility spikes.

  

  

  

  

  

• Jeffrey Brown: To Understand The Oil Story, You Need To Understand Exports

  Submitted by Adam Taggart via PeakProsperity.com,

  Despite the attention-grabbing economic volatility that is dominating headlines, it's important to keep our eye on the energy story firmly in focus. This is especially true as the headlines we regularly read about Peak Oil being dead " are "manifestly false" according to this week's podcast guest, petroleum geologist Jeffrey Brown. 

  As concerning as the fact that global oil production has plateaued over the past decade, despite trillions invested in trying to goose it higher, are Brown's forecasting model for oil exports. His Export Land Model shows how rising internal consumption can swing (and has swung) countries from major exporters to permanent importers within a dizzyingly short period of time:

  The crucial issue to understand about what has happened after 2005 is that we’ve had a very large increase in global gas production and natural gas liquids, but a much slower increase in crude plus condensate.

   

  So, what I think has happened is the actual crude oil production has basically flatlined while the liquids associated with natural gas production, condensate and natural gas liquids, have continued to increase. So, we ask for the price of oil, we get the price of Brent or WTI; but when you ask for the volume of oil, you get some combination of crude, condensate, natural gas liquids, biofuels. So, the fact is that substitution has worked and is working in that they’re bringing on alternative substitutes, but they're only partial substitutes. The actual, physical volume of crude oil production has probably been flat to down since 2005. Over the past ten years, it has taken us trillions of dollars, basically, to keep us on an undulating plateau in actual crude oil production. What happens going forward?

   

  So, basically, the conventional wisdom is the fact that we’ve seen an increase in liquids production, seems there’s no evidence of the peak in sight. And, I think in regard to crude oil production, that argument is manifestly false. I think that we’ve probably seen a peak in actual crude oil production, 45 and lower API gravities, despite trillions of dollars of upstream capex expenditures.

   

  I started wondering in late 2005 what happens to oil exports from an exporting country, given a production decline and rising consumption. And, so I just started, I just constructed a simple little model. I assumed a production of about two million barrels a day or so at peak, consumption of one, and assumed production falls about 5% per year, basically what the North Sea did, and assumed consumption increases to 2.5% per year. What the model showed was that exports, net exports would go to zero in only nine years, even though a roughly modest production decline. So, the easy way to state it is giving an ongoing, inevitable decline in production, unless an exporting country cuts their domestic oil consumption at the same rate as the rate of decline in production, or at a faster rate, it’s a mathematical certainty that the net export decline rate, what they actually ship out to consumers will exceed the rate of decline in production. And, furthermore, it accelerates. 

  Click the play button below to listen to Chris' interview with Jeffrey Brown (43m:48s)

   

  

  

  

  

  

• Barclays Slashes China GDP Projections After Weak Data

  When looking at forecasts for China’s GDP growth it’s best to ignore the projection itself and focus on the direction of the revision. 

  That is, there’s still a certain degree to which the sellside has to retain some semblance of politeness when it comes to estimating Chinese output and indeed, even if some trailblazing research team were to decide to break decorum and officially cut estimates to between 0% and 4% (which probably represents a more accurate estimation of how the economy is actually performing) it would be largely pointless because there’s exactly zero chance of the NBS admitting anything like that. Given that, it’s not so much about whether the number is 6.8% or 6.7 or 6.6%, it’s about whether analysts see continued downside risks on the horizon.

  With that in mind, and against the backdrop of the worst FAI growth in 15 years, we bring you the following excerpts from Barclays where the EM research team has cut its estimates for Chinese GDP growth in 2015/2016 (note the expectations for monetary policy and the bit about equity and FX turmoil weighing on sentiment).

  *  *  *

  From Barclays

  We lower our 2015 GDP growth forecast to 6.6%y/y (from 6.8%) and to 6.0% for 2016 (from 6.6%). The downward revisions reflect the faster-than-earlier-expected slowdown in both property investment (to 3.5% YTD) and manufacturing investment (to 8.9% YTD) and continued headwinds to investment into 2016. The new (and lower) base following the NBS 2014 GDP revision on 9 September added c.10bp to the 2015 forecast. In detail, the latest manufacturing PMI as well as the August data confirmed a deterioration in sequential momentum in Q3. Despite strong property sales (14.7% y/y in August), developers have focused on inventory rundowns and earnings growth rather than new construction. As a result, the double-digit contraction in housing starts has persisted for 10 months (-16.7%). Meanwhile, falling commodity prices and a widening PPI deflation rate (to -5.9%) are discouraging manufacturers’ inventory restocking amid soft domestic and external demand. The stock market crash and rising CNY depreciation expectations are also hurting investor and consumer confidence, adding downward pressure to growth in the coming quarters. Looking into 2016, we believe the three major headwinds highlighted in the medium term – excess capacity in many industries, oversupply in the housing market and high debt burdens (especially among local governments) – together with anti-corruption and policy uncertainties will continue to weigh on growth.

  We continue to look for more fiscal and monetary easing to support growth but we don’t expect that to change the economy’s structural softening trend. The weakness in recent data confirms that growth is losing momentum despite a fast-growing service sector (rising to 50% of GDP and growing at 8.4% YTD in Q2 2015). This suggests more fiscal support and monetary easing are required to stabilise growth. Indeed, to cushion the growth slowdown, the central government has recently announced a series of measures to support infrastructure investment, such as underground pipes, water and clean energy. These measures include bond issues and PBoC capital injection to policy banks, a third round of local government debt swap (CNY3.2trn in total), and accelerated projects approval by the NDRC. On monetary policy, our base case continues to look for one more interest rate cut in Q4 to lower the real cost of funding and 2 RRR cuts to offset the liquidity drain from capital outflows. Despite the intensifying capital control measures post the 11 August FX regime shift and the PBoC’s heavy intervention in the FX markets, we expect the capital outflows to persist in the coming quarters. That said, to stabilise the USDCNY in the near term, the PBoC will likely continue to be reactive rather than preemptive in monetary easing. And a stronger USDCNY target set by the PBoC will imply more RRR cuts in the near term.

  

  

  

  

  

  

• A Panicked Brazil Promises Billions In Austerity, Does 180 On Budget After Downgrade

  Exactly two weeks after conceding that a primary surplus was no longer in the cards after budget data in July came in meaningfully worse than expected, Brazil is scrambling to restore some semblance of confidence in the government’s ability to close a yawning budget gap by implementing austerity even as political turmoil has made embattled FinMin Joaquim Levy’s life a living hell of late. 

  On the heels of a painful S&P downgrade, Brazil now says it plans to enact some BRL26 billion in primary spending cuts for the 2016 budget on the way to achieving in a primary surplus that amounts to 0.7% of GDP.

  In other words, a complete 180 from what the government said prior to the downgrade.

  Needless to say, reconciling tax increases and budget cuts with the party mandate won’t be easy. “Budget cuts and tax increases discussed by govt in response to Brazil’s credit rating downgrade don’t agree with central tenets of Workers’ Party,” Bloomberg notes, citing an unnamed party official. 

  Particularly divisive will be the CPMF revival which isn’t likely to be approved. Here’s Bloomberg with a bit more on the announcement: 

  Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades.

   

  The government will reduce 26 billion reais ($6.8 billion) in expenditures from next year’s budget in large part by capping salaries of civil servants and suspending exams for new entrants, Levy said Monday. Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions.

   

  “We know this effort to cut spending will only take us so far, so as would happen in any country in the world in a moment of reduced economic activity and tax income, you have to seek out other resources,” Levy told reporters. “We’re trying to find that balance.”

   

  Obviously, the market will cast a wary eye towards the effort even as one assumes Brazil is to be applauded for trying, especially given the hugely contentious political environment and the threat of further social upheaval. 

  And here’s Goldman with the full breakdown:

  The authorities announced today a number of spending cuts and expenditure saving measures (worth an estimated R$26.0bn) and tax increases and a reduction of a number of tax breaks/benefits (estimated to yield approximately R$45.8bn). The key objective is to improve the federal government fiscal balance from the -R$30.5bn (-0.5% of GDP) deficit announced on August 29, to a +R$34.4bn (+0.55% GDP) surplus.

   

  Most of the proposed adjustment will come from higher taxes; particularly from the reinstatement of the controversial Financial Transactions Tax at a rate of 0.2% which is expected to yield a substantial R$32bn.

   

  Minister Levy stated that the tax should “not last more than 4 years.” Furthermore, approximately R$10bn will come from the reduction in projected outlays with civil servants which is likely to elicit strong rejection by the main public sector unions.

   

  Many of the measures require Congressional approval of several pieces of legislation which, in our assessment, adds significant implementation risk. Given the administration record low level of popularity and its weak and increasingly fragmented support base in Congress we expect some of these measures to face significant resistance (to be either rejected or watered down during the legislative debate), particularly the approval of the widely rejected CPMF tax.

   

  In all, we expect the 2016 budget discussion to be a drawn-out, jumpy and noisy process with a significant risk that only a subset of the proposed measures will clear Congress and with fiscal yields below the government proposal. Furthermore, we could not fail to notice that in today’s announcement there were no medium- and long-term fiscal measures to arrest the projected upward drift in mandatory spending (e.g., social security reform).

   

  Overall, we remain of the view that a deep, permanent, structural fiscal adjustment remains front-and-center on the policy agenda to restore both domestic and external balance. In our assessment, at the end of the fiscal consolidation process Brazil needs to end up with a primary surplus of 3.0% to 3.5% of GDP (which is still quite distant from today’s fiscal reality). This would be the level of primary surplus that would put gross public debt on a clear declining trajectory; something that is required for Brazil to rebuild fiscal buffers and regain policy room to use fiscal counter-cyclically, whenever needed and appropriate.

   

  Given the very slow pace of fiscal consolidation, and its poor quality geared towards tax hikes and investment cuts), the burden of current account adjustment will likely continue to fall disproportionately on monetary policy and the BRL.

  The question now, is whether this was a good move.

  That is, is it better to simply stick with the projection of a primary deficit and let the market be pleasantly surprised if things miraculously turn a corner, or is it better to try and head off further pressure on the country’s credit rating by rolling out a largely non-credible plan to plug the budget gap and risk surprising on the down side?

  We’ll see, but at least in the short term, Goldman is probably correct to assume that in the absence of a stable political situation, the BRL will remain in focus and if FX pass-through picks up and the Fed hikes, we may need to see a Selic hike. 

  For an indication of how things are going, simply watch the data points on this chart:

  

  

  

  

  

  

• "Ineffective & Reckless" Fed Is An "Engine of Disaster"

  Excerpted from John Hussman's Weekly Market Comment,

  The beauty of truth, and the beast of dogma

  Other “relationships” that are used to justify activist monetary policy have similarly weak support when one actually takes the effort to examine the data. You’ll find a similar shotgun scatter of uncorrelated points if you plot unemployment versus general price inflation, for example. It’s unfortunate that the Federal Reserve is actually allowed and even encouraged to impose massive distortions on the U.S. economy based on relationships that are indistinguishable from someone sneezing on a sheet of graph paper.

  We do know one thing very clearly, and we should have learned it during the housing bubble – suppressed interest rates encourage yield-seeking speculation, enable low-quality creditors access to the capital markets, direct scarce savings toward unproductive malinvestment, subsidize leveraged carry-trades, and unleash a whole host of “structured” products “engineered” by financial institutions to directly or indirectly piggyback on the good faith and credit of Uncle Sam.

  When you examine historical data and estimate actual correlations and effect sizes, the dogmatic belief that the Fed can “fine tune” anything in the economy is utter hogwash. At the same time, the demonstrated ability of the Fed to provoke yield-seeking speculation and malinvestment is as clear as day. An activist Federal Reserve is an engine of disaster and little more. Even with the best intentions, a dogmatic Fed, unrestrained by reasonable rules and constraints, is a reckless and deceptive beast, constantly offering to heal the nation with precisely the same actions that inflicted the wounds in the first place.

  Truth, on the other hand, is beautiful. Economic relationships that are supported in real-world data are a sight to behold. You want to see some relationships you can count on? The chart below shows the relationship between the 3-month Treasury bill and the ratio of the monetary base (currency and bank reserves) to nominal GDP, in data since 1929. Notice something. Without paying banks interest to hold excess reserves idle in the banking system, the Fed could reduce its balance sheet by more than one-third (over $1.4 trillion) without pushing short-term interest rates above zero. That excess base money does nothing to support the real economy.

  Nobody’s desired level of saving, consumption, or real investment changes just because the Fed has chosen to force the economy to hold more base money and fewer Treasury bonds. But somebody has to hold that cash at every point in time – and nobody wants to hold it. So it simply acts as a hot potato, encouraging yield-seeking speculation in the financial markets. In my view, the most urgent action the Federal Reserve should take is to cease reinvestment of principal as the holdings on its balance sheet mature, in order to reduce this massive pool of idle base money, which does nothing but to promote speculation. No increase in interest rates would need to result from that action.

  …

  After years of speculation, we currently estimate a 10-year nominal expected total return for the S&P 500 close to zero – much the same as we projected in real time at the market peak in 2000. The Federal Reserve seems to have no idea what it has done. Poor long-term market returns and severe interim losses are now baked in the cake as a result of obscene valuations. There is no way to undo this outcome – only to manage the consequences.

  

  With regard to a possible quarter-point hike this week in the amount of interest that the Fed pays banks on idle excess reserves, our view – frankly – is that it doesn’t matter. From a longer-term standpoint, poor stock market returns and the likelihood of 40-55% market losses from the recent peak are already baked in the cake.

  Across the pond, our friend Albert Edwards at SocGen strikes the right note, I think:

  “The clamour for the Fed not to enact the long-awaited ¼% rate hike next week is growing by the day. Misgivings come not just from reputable mainstream commentators, but now also the World Bank has repeated the IMF’s recent words of caution in advising delay. What a load of nonsense! My esteemed colleague Kit Juckes characterizes the current consensus thinking as ‘If the Fed hikes, pestilence, plague and never-ending deflation will follow.’ Well even those like me who see a deflationary bust awaiting think the Fed should hike next week – because the longer you leave it, the bigger the financial market excesses become, and the bigger the risk of financial dislocation and global recession ensuing. Have we learned nothing from the 2008 Great Recession? Just get on with it!”

  …

  The real problem isn’t what the Fed may do, but the ultimately unavoidable consequences of what the Fed has already done. The cost of reckless Fed-induced yield seeking will likely be felt first in the financial markets as previous paper gains evaporate, while defaults on excessive low-quality covenant-lite credit will emerge over the course of the economic cycle, and the impact of malinvestment will be to limit productivity and economic growth over the longer run. This is all rather inevitable except in the eyes of those who haven’t watched and memorized a dozen adaptations of the same movie.

  Again, as I noted in The Line Between Rational Speculation and Market Collapse, investors should remember that the Fed did not tighten in 1929, but instead began cutting interest rates on February 11, 1930 – nearly two and a half years before the market bottomed. The Fed cut rates on January 3, 2001 just as a two-year bear market collapse was starting, and kept cutting all the way down. The Fed cut the federal funds rate on September 18, 2007 – several weeks before the top of the market, and kept cutting all the way down.

   

  “What will matter significantly for investors is the condition of market internals, credit spreads, and other risk-sensitive measures in the event that U.S. economic activity begins to further reflect the downturn that is already evident abroad. It is that evidence of investor risk-preferences that will determine the proper response to any change in Fed policy.”

  In short, my view is that activist Fed policy is both ineffective and reckless (and the historical data bears this out), and that the Federal Reserve has pushed the financial markets to a precipice from which no gentle retreat is ultimately likely. Similar precipices, such as 1929 and 2000, and even lesser precipices like 1906, 1937, 1973 and 2007 have always had unfortunate endings (see All Their Eggs in Janet’s Basket for a review). A quarter-point hike will not cause anything. The causes are already baked in the cake. A rate hike may be a trigger with respect to timing, but that’s all. History suggests we should place our attention on valuations and market internals in any event.

  

  

  

  

  

• "The Danger Is That It Bursts Just Like In The US": Sweden Goes Full Krugman, Gets Massive Housing Bubble

  Earlier this year, Riksbank Deputy Governor Per Jansson expressed his displeasure with comments made in April of last year by everyone’s favorite Nobel laureate Paul Krugman. The dispute revolves around Sweden’s decision in 2010 to raise rates, a move Krugman says turned the country into a Japan-style deflationary deathtrap. To wit, from Krugman’s blog: 

  “In 2010 Sweden’s economy was doing much better than those of most other advanced countries. But unemployment was still high, and inflation was low. Nonetheless, the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates.”

   

  “There was some dissent within the Riksbank over this decision. Lars Svensson, a deputy governor at the time — and a former Princeton colleague of mine — vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013.”

   

  “Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.”

  Krugman went on to accuse the Riksbank of being a bunch of job-hating heretics who don’t believe that printing mountains of fiat currency solves economic problems and who are motivated by an overwhelming desire to perpetuate global inequality by enriching creditors at the expense of impoverished debtors. They are, Krugman said, sadomonetarists. 

  For his part, Per Jansson wasn’t particularly pleased with Krugman’s assessment, suggesting that he “write fewer articles and have more of a look at the data and then come back again.”

  “I don’t know why he does that; it’s a mystery and it doesn’t make him come across as a guy who is very well informed,” Jansson added.

  Why did Sweden start raising rates in 2010? Well, as we noted in March, “the bank’s actions were not indicative of an institution suffering from some psychotic desire to drive up unemployment and inflict pain upon the masses, they were in fact based on ‘normal things’ like inflation and a housing bubble and the fact that the rate of household credit expansion was running some 50% ahead of overall economic growth.”

  In any event, Krugman needn’t have been concerned, because as you can see from the following, and as discussed here on Sunday evening, Sweden not only stopped hiking, but in fact plunged headlong into NIRPdom.

  

  So one would think, if Krugman is correct, that cutting rates by 235 bps since 2011 all the way down to -0.35% would have things humming along nicely in terms of “healthy” inflation. Only, that’s not what’s happened. This is:

  

  Meanwhile, the housing bubble and household credit expansion issues the Riksbank was so concerned about have predictably gotten far worse thanks to record low rates. To wit, from Bloomberg: 

  The worsening housing shortage — exacerbated by record immigration — and surging house prices reveal that deeper financial instability risks lie ahead.  The combination of already too-high household debt and negative rates “may ultimately be very costly for the economy,'” the central bank said last week in its monetary policy report.

   

  
  

  And as we saw earlier this month when the Riksbank remained on hold ahead of Mario Draghi, keeping a lid on krona strength (i.e. fighting to ensure that inflation doesn’t crater) may turn out to be increasingly difficult going forward with the ECB widely expected to expand PSPP, meaning that ironically, once everyone goes full Keynes, it makes it ever more difficult for anyone to realize the benefits because one country’s easing simply negates another’s, necessitating still more easing by the first country, and around we go. Case in point, from Riksbank Governor Stefan Ingves: “…any rapid strengthening of krona would pose risk to inflation rise [so] Riksbank won’t be passive if ECB makes big changes in its policy.”

  Worse still, not only is Sweden bumping up against diminishing returns in its easing efforts, but as we discussed at length in July, for a time things had actually begun to move in the wrong direction, as investors fretted about the lack of market depth created by the Riksbank’s QE program. “The financial conditions — the currency and the bond yields — are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S told Bloomberg. So in other words, even as risks associated with NIRP (e.g. excessive debt buildup and a worsening housing bubble) have materalized, some of expected benefits (e.g. rising inflation) have not, which certainly begs the question if the risk/reward profile associated with NIRP and expanded QE is still attractive.

  Of course it’s not all bad. Unemployment has fallen dramatically and GDP data from previous quarters was revised up in what Goldman called a “non-neglible way” on Friday.

  

  But the question one has to ask here is this: what, ultimately, has ZIRP and then NIRP and QE actually done for Sweden? The effect on inflation has clearly been muted (the Riksbank’s protestations aside) and the effect on the housing market has been to inflate what looks like a rather formidable bubble. Meanwhile, the global currency wars mean the upward pressure on the krona is likely to persist no matter what the Riksbank does. If we assume that GDP and unemployment would have, at least to some extent, improved on their own, one could quite plausibly make the argument that all Sweden has done with monetary policy since 2010 is embed an enormous amount of risk into the economy without getting much back.

  Of course when that rather inconvenient suggestion is made, central bankers in the new normal almost always blame lawmakers or regulators or someone other than themselves and Sweden is apparently no different. Here, for instance, is what the bank had to say earlier this month:

  “Low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. Current debt levels already pose a substantial risk to the Swedish economy. It is thus essential that the Riksdag (the Swedish parliament), the Government and other authorities implement measures to reduce this risk. If no measures are taken, this, in combination with the low level of interest rates, will further increase the risks, which may ultimately be very costly for the economy.”

  As for Ingves, well, he’s not optimistic (via FT):

  Sweden’s central bank governor has warned that new crisis-busting tools policymakers are embracing around the world to counter asset bubbles and other financial dangers are susceptible to political inaction and turf wars.

   

  Stefan Ingves, governor of the Riksbank, said so-called macroprudential policies — such as capital requirements and leverage limits — had so far failed in Sweden where house prices and personal debt levels have soared to record levels.

   

  “Macroprudential, particularly if markets are going up, up, up is about saying ‘no’. Apparently that’s hard to do,” Mr Ingves said.

  One could easily say the same thing about the Riksbank although, to be fair, the central bank would also be in control of macroprudential policy making if it had its way, but that doesn’t exonerate NIRP. That is, we might replace one word from the quote above and get this: “sound money, particularly if markets are going up, up, up is about saying ‘no’ but apparently that’s hard for central bankers to do.” At least one banker in Stockholm agrees: 

  “To have such a low interest rate at the same time as Sweden has rather good economic growth and rapid increases in house prices — it seems crazy,” said one senior banker.

  But Ingves has his story and he’s sticking to it: “We deal with inflation, we keep an eye on the exchange rate, we do our best to reach our inflation target. But that means that somebody else has to deal with the problem we have in our housing market.” 

  On that note, we’ll close with the following from Lars Jonung, professor emeritus at Lund University, who told newspaper Dagens Nyheter the following:

  “[The Riksbank] have lowered rates too much, absolutely. It creates meaningful financial risks and increases household debt. The danger is that it bursts just as it did in the US and Iceland.”

   

  *  *  *

  Bonus: As Krugman said last week in the Japanese context, countries “need to reach a point where everyone believes that they have pulled out of deflation. And then if that can be believed, then they may be able to stay out of trouble thereafter”.

  Do you “believe” in “hockeynesian” success stories? The Riksbank apparently does…

  

  

  

  

  

  

• Sep 15 – US Rate Hikes Will Bring Volatility To EMs
  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 13/100 EXTREME FEAR

  PREVIOUS CLOSE: 14/100 EXTREME FEAR

  ONE WEEK AGO: 10/100 EXTREME FEAR

  ONE MONTH AGO: 11/100 EXTREME FEAR

  ONE YEAR AGO: 43/100 FEAR

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 15.22% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 24.25. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: EXTREME FEAR The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating extreme fear.

  PIVOT POINTS

  EURUSD | GBPUSD | USDJPY | USDCAD | AUDUSD | EURJPY | EURCHF | EURGBP| GBPJPY | NZDUSD | USDCHF | EURAUD | AUDJPY 
   

  S&P 500 (ES) | NASDAQ 100 (NQ) | DOW 30 (YM) | RUSSELL 2000 (TF) | Euro (6E) |Pound (6B) 

  EUROSTOXX 50 (FESX) | DAX 30 (FDAX) | BOBL (FGBM) | SCHATZ (FGBS) | BUND (FGBL) 

  CRUDE OIL (CL) | GOLD (GC)

   

  MEME OF THE DAY – HEY GIRL…

   

  UNUSUAL ACTIVITY

  MYE Director Purchase 5,000 @$12.7959
  DG Chief Executive Officer Purchase 4,300 @$70.7253                      
  NVET Director Purchase 10,000 @$4.786
  HPQ Oct weekly2 28 CALLS active @$.61-.62
  P Sep weekly4 CALL Activity 20 CALLS 700+ @$.39
  YNDX SEP 11 CALL Activity @$.45 1k+

  More Unusual Activity…

  HEADLINES

  Malcolm Turnbull becomes Australian PM after Abbott ousted

  NY Fed: Consumers Expect Lower Short- and Medium-Term Inflation

  Opec raises 2015 global oil demand growth forecast, cuts 2016

  Genscape data shows a potential inventory draw –ForexLive

  ECB PSPP: +13.022bn to EUR314.469bn (prev +11.91bn to 301.447bn)

  ECB CBPP: +3.892bn to EUR116.107bn (prev +1.099bn to 112.215bn)

  ECB ABSPP: +366m to EUR11.86bn (prev +382m to 11.494bn)

  ECB Bonnici: Too early to decide on new stimulus

  ECB Weidmann: Data shows need for steady hand

  ECB Coeure: Euro members need to share more sovereignty on economic policy

  CA Teranet/National Bank HPI (YoY) (Aug): 5.40% (prev 5.10%)

  ESMA raises its market risk indicator to highest level

  BIS Highlights Trouble Spots for Global Economy –WSJ

  S&P: US rate hikes will bring volatility to EMs

   

  GOVERNMENTS/CENTRAL BANKS

  Malcolm Turnbull becomes Australian PM after Abbott ousted –Rtrs

  NY Fed: Consumers Expect Lower Short- and Medium-Term Inflation

  ECB Bonnici: It’s ‘Too Early’ To Decide On New Stimulus –ForexLive

  ECB Coeure: Euro members need to share more sovereignty on economic policy –BBG

  ECB Weidmann: Data Shows The Need For A Steady Hand — ForexLive

  ECB Review Of Greek Banks Under Way, Could Be Done End-October –BBG

  Draghi seen expanding QE by economists fearing shallow recovery –BBG Poll

  Bloomberg survey of economists has the majority seeing the ECB raising QE –ForexLive

  BoE Weale: Rates Will Rise Relatively Soon –Rtrs

  EU Dijsselbloem: Eurozone Must Share More Banking Risks –Rtrs

  Riksbank Gov Ingves Sees Flaws In Crisis-Busting Tools –FT

  Syriza and ND deadlocked in polls –Kathimerini

   

  GEOPOLITICS

  Russian Envoy: Syria seeks peace conference in Moscow –BBG

  French President Hollande: French airstrikes will be necessary in Syria –Rtrs

  MARKETS RISK WARNINGS:

  ESMA raises its market risk indicator to highest level

  BIS Highlights Trouble Spots for Global Economy –WSJ

  FIXED INCOME

  ECB PSPP: +13.022bn to EUR314.469bn (prev +11.91bn to 301.447bn)

  ECB CBPP: +3.892bn to EUR116.107bn (prev +1.099bn to 112.215bn)

  ECB ABSPP: +366m to EUR11.86bn (prev +382m to 11.494bn)

  PBOC allows liquidity injection tools in interbank market –MNI

  Italy Public Debt At E2.199.2 Trillion in July, State Revs Rise –MNI

  UK households are sitting on a £173bn debt time bomb –Mail

  CORPORATES: Sanofi tests waters with chunky offer –IFR

  FX

  EM FX: EM currencies tumble back to 2002 levels –FT

  HKD: HKMA sells $6.59bn to market to bolster HKD within trading band –Rtrs

  JPY and EUR COMMENT: Goldman says QE to weigh on yen and euro as Fed holds this week –BBG

  ENERGY/COMMODITIES

  WTI futures settle -1.4% at $44.00 per barrel

  Brent futures settle -3.7% at $46.37 per barrel

  CRUDE: Opec raises 2015 global oil demand growth forecast, cuts 2016 estimate

  CRUDE: Genscape data shows a potential inventory draw –ForexLive

  CRUDE: Moody’s: Sustained overcapacity, low oil prices will pressure global offshore drillers through 2017

  METALS: Copper Slides, China Data Reinforces Demand Fears –CNBC

  GASOLINE: Gasoline Leads Oil Prices Lower –WSJ

  EQUITIES

  S&P 500 provisionally closes -0.4% at 1,952

  DJIA provisionally closes -0.4% at 16,370

  Nasdaq provisionally closes -0.4% at 4,805

  M&A: Mylan commences offer to acquire Perrigo

  M&A: Oil Search Turns Down Woodside’s $8bn Takeover Plan –Rtrs

  M&A: Solera Agrees To $6.5Bln Acquisition By Vista Equity Affiliate –MW

  M&A: Qualcomm Acquires Capsule, No Terms Disclosed –Forbes

  M&A: Trinity Mirror in talks to buy rival Local World –Rtrs

  RETAIL: Alibaba blasts Barron’s story that warns of 50% stock drop –MW

  TECH: Apple says iPhone pre-orders are looking good –CNBC

  TECH: Nintendo Names Tatsumi Kimishima As President to Succeed Iwata –BBG

  TECH: Facebook Looks to Bring Virtual Reality to Mobile Devices

  BANKS: Bank Of America Officials Worried About Moynihan Vote –WSJ

  BANKS: Credit Suisse Said Nearing $80 Million Settlement Over Dark Pool –BBG

  BANKS: Deutsche Bank to cut workforce by a quarter –Rtrs sources

  BANKS: Deutsche Bank Prepares To Shut Russian Operations –Rtrs source

  AUTOS: Ford Europe Post 12% Increase In Sales For August –BBG

  AUTOS: Porsche and Audi unveil electric cars to take on Tesla –Rtrs

  CRA: Moody’s changes outlook on E.ON’s Baa1 rating to negative

  INDUSTRIALS: Airbus Set to Open Jetliner Production Plant in the US –WSJ

  EMERGING MARKETS

  CHINA: PBOC Ma Jun: Chinese Economy Will Do Better Than Market Expectations –Forexlive

  CHINA: China Banks Sell Massive CNY723.8 Bln In Forex In August –MNI

  CHINA: China seizes up to $157bn of unspent local government budgets –Rtrs

  S&P: US rate hikes will bring volatility to EMs

  CHINA: Bank lending accelerates in China –FT

   

  MALAYSIA: Malaysia central bank keeps rate on hold –MW 

  

  

  

  

  

• Stunning Video Emerges As 1000s Flee California Wildfires After Governor Calls 'State Of Emergency'

  As if the drought was not disheartening enough, wildfires are now raging across many parts of northen and southern California focing Governor Jerry Brown to call a state of emergency. Nowhere is the crisis more evident than in NorCal's Lake County where, as The LA Times reports, the untamed wildfire forced chaotic evacuations, is consuming hundreds of homes and businesses, and has outrun the efforts of a growing army of firefighters to corral it. However, as the following clip shows, one car-driver ran the gauntlet and managed to outrun "the worst tragedy Lake County has ever seen," in a scene right out of a disaster movie.

  The pictures from CA's newest fire are simply apocalyptic. Too hot, too dry, for too long pic.twitter.com/1tEXCbY1L0

  — Bill McKibben (@billmckibben) September 14, 2015

   

  

   

  As Reuters reports,

  A swiftly spreading wildfire destroyed hundreds of homes and forced thousands of residents to flee as it roared unchecked through the northern California village of Middletown and nearby communities, fire officials said on Sunday.

   

  The so-called Valley Fire, now ranked as the most destructive among scores of blazes that have ravaged the drought-stricken Western United States this summer, came amid what California fire officials described as "unheard of fire behavior" this season.

   

  A separate fire raging since Wednesday in the western Sierras has leveled more than 130 buildings and was threatening about 6,400 other structures, with thousands of residents under evacuation orders there, too, the California Department of Forestry and Fire Protection (Cal Fire) reported.

   

  Governor Jerry Brown declared a state of emergency in both areas, and mandatory evacuations were expanded as shifting winds sent flames and ash from the Valley Fire toward a cluster of towns in the hills north of Napa Valley wine country.

  As the following clip shows, locals had no time to prepare as they ran the gauntlet to survival…

  "Middletown is basically gone," said one local evacuee.

  "I saw flames all around … The wind was insane. I have never been so scared," she said.

   

  Mark Donpineo, 54, said he and two friends were trapped by the fire for four hours Saturday evening at a golf course in Hidden Valley Lake, taking cover in a culvert until the flames had passed.

   

  "We got some towels, wetted them down and basically saw the fire coming. You could hear explosions of propane tanks, the ridge was totally on fire, trees were blowing up," he said.

   

  Meanwhile, Cal Fire reported that 81 homes and 51 outbuildings had been lost in the four-day-old Butte Fire, which has charred more than 65,000 acres in the mountains east of Sacramento but was 20 percent contained.

   

  As of Sunday, firefighters were battling nearly three dozen large blazes or clusters of fires in California and six other Western states, according to the National Interagency Fire Center in Boise, Idaho.

  Sheriff Brian Martin described the fire as “the worst tragedy Lake County has ever seen.”

  

  

  

  

  

• A Flock Of Black Swans

  Submitted by Jeff Thomas via InternationalMan.com,

  In 1999, the Federal Reserve, under Alan Greenspan, convinced the US Congress to repeal the Glass-Steagall Act, which had been passed in 1932 to eliminate banks’ abilities to offer loans far beyond the actual level of their deposits.

  When I learned of this development in 1999, I anticipated that it was put through to allow banks to once again recklessly loan money and that the outcome would be essentially the same as what occurred in 1929 – a depression of major proportions.

  Major depressions do not occur overnight. They go in downward waves, interrupted at intervals by false recovery waves. The first major event of what would become the Greater Depression took place in 2007 with the housing crash. A year later, right on cue, came the first of the stock market crashes.

  Since then, the US Federal Reserve and the governments and central banks of much of the world have been involved in Band-Aid solutions to postpone further crashes, in spite of the fact that the economy is, in fact, a “dead economy walking.”

  The Band-Aids have been many and various and, at some point, one of them will fail. The fact that they are all Band-Aids and not true solutions assures that, when the first one lets go, they will all fail in succession. Only at this point will the average person understand that we have been in the early stages of a depression all along.

  What will happen will be a sudden and unseen event – a trigger that suddenly sends the economy downward, followed by another, then another, as the economy tumbles inexorably downward.

  Along the way, emergency measures will be utilised to “save” the economy. They will be drastic, including confiscation of bank deposits, plus massive money creation. There will be dramatic inflation and very possibly, hyperinflation.

  But the collapse will continue, unstoppably. Like any house of cards, once it begins to actually fall, no further Band-Aids will stop the inevitable.

  So, what might that trigger be?

  Well, there is literally no one in the world who might predict that with certainty. The reason is that as so many Band-Aids have been used by so many countries in so many areas of the economy, no one can say which one will fail first: which one will be the actual trigger that causes the chain reaction.

  I believe that we are now closing in on that time. The house of cards is becoming evermore fragile and we will not need to wait much longer before the event occurs. As we get closer, increasing numbers of people are seeing the writing on the wall and, more and more, I’m being asked the same two questions.

  “What Will the Fatal Trigger Be?”

  Here’s a brief list of possible triggers:

  • Creditors dump US debt back into the US market
  • Commodity prices spike
  • A crash occurs in the stock or bond market
  • A backlash occurs from countries sanctioned by the US
  • European countries default on their debt
  • The US dollar ends as the petrocurrency (causing a sale in US treasuries)
  • The US or EU introduce significant tariffs, diminishing world trade
  • Interest rates rise, as they did in 1929
  • The paper gold market crashes, when the shortage of physical gold is revealed
  • Banks freeze or confiscate deposits
  • FATCA accelerates the demise of the US dollar as the default currency
  • A credit collapse occurs (followed by dramatic inflation or hyperinflation)

  Any of the above is capable of triggering a collapse (and, as stated, this is not by any means an exhaustive list). Therefore, it would be wise to keep an eye out for indicators that one of them may occur. Any one of them that appears to be nearing the point of becoming a reality would suggest that the tipping point may occur soon.

  “How Will I Know in Advance?”

  Whatever advance warning you may have will be based on how closely you’re following the indicators that any of the possible triggers may be nearing fruition. Some, like the overbought stock market or the rise in commodity prices could kick in at any time.

  Others, such as a bank freeze on deposits, or the collapse of the ETF market in gold, could happen quite suddenly and without any warning at all.

  In discussing the above condition with investors, they often say, “Well, if it’s inevitable and I can’t time the event, there’s no use thinking about it. We’re all going to go down with the ship, so why bother?”

  Quite frankly, I’m astonished that so many investors are so complacent that they’re prepared to shrug their shoulders and accept their own economic demise, yet this assumption is very common.

  The enemy is not the coming events; the enemy is complacency toward those events.

  The investor therefore has two viable choices: to either get blindsided by events and become an economic casualty, or be prepared (as much as possible) for the crashes, regardless of what the trigger might turn out to be.

  Creating an Escape Plan

  There can be no perfect solution – one which allows you to retain your present life, exactly as it is, within the system, whilst the system around you is in a state of collapse.

  What can be done, however, is to remove your wealth and yourself from the system as much as possible, so that the impact of the collapse is minimised.

  As a basic set of assumptions, you might consider one or more of the following actions:

  • Remove all cash from exposure to bank freezes and confiscations by placing your money (other than three months of expenses) in banks in countries where no confiscation laws exist (i.e., outside of the EU, US and Canada).
  • Convert a major portion of your cash into precious metals, to be stored in a minimum-risk jurisdiction, such as Singapore, Hong Kong or the Cayman Islands.
  • If you’re a citizen and resident of a major country that is likely to be a casualty, create a place of legal domicile in an alternate country.
  • Invest in land and/or built property in that country, or similar jurisdiction (property is the most difficult asset for any government to confiscate). Choose a country that has no annual property tax, if possible.

  This is only the most basic of formats, but it works well, either in its entirety, or in part.

  Many readers may say, “But I’m not wealthy. I can’t do any of those things.”

  Again, this is complacency talking.

  Anyone with $1,000 can create a foreign bank account. Anyone who additionally has the price of an ounce of gold can begin to remove his wealth, no matter how small, from risk.

  Anyone with a skill can secure employment in a country where the damage is likely to be lesser than in his home country.

  The cloud on the horizon is a flock of black swans. No one can predict when they might land. What can be said for certain is that, at some point, they most certainly will.

  *  *  *

  A big part of any strategy to reduce your political risk is to place some of your savings outside the immediate reach of the thieving bureaucrats in your home country. Obtaining an offshore bank account is a convenient way to do just that.

  That way, your savings cannot be easily confiscated, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard. In the event that capital controls are imposed, an offshore bank account will ensure that you have access to your money when you need it the most.

  In short, your savings in an offshore bank will largely be safe from any madness in your home country.

  Despite what you may hear, offshore banking is completely legal and is not about tax evasion or other illegal activities. It’s simply about legally diversifying your political risk by putting your liquid savings in sound, well-capitalized institutions where they’re treated the best.

  You may want to check out Going Global, our comprehensive publication where we discuss our favorite banks and jurisdictions for offshore banking including, crucially, those that still accept Americans as clients and allow them to open accounts remotely for small minimums.

  Normally, this book retails for $99. But we believe this book is so important, especially right now, that we’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

  

  

  

  

  

• The Tortoise? Or The Hair?

  Maybe it is ‘different’ this time…

   

  

   

  Source: Townhall.com

  

  

  

  

  

• "There's Just No Cash" Oil Price Increase Will Not Come Fast Enough To Save Alberta

  Submitted by David Yager via OilPrice.com,

  “There’s just no cash.” That’s the Coles Notes from a senior banker describing the book of oil service loans he manages for one of Alberta’s leading lenders. There’s simply not enough cash flow to support current levels of debt.

  Bankers and borrowers have kicked the can down the road about as far as they can as more oilfield service (OFS) and exploration and production (E&P) companies default on their loans and seek more relief on lending covenants. While a significant oil price increase to lift all the sinking boats will surely come, it won’t happen soon enough. More of the same won’t work.

  Oil industry debt is everyday news. But the discussion is about the symptoms, not the ailment.

  Companies cannot borrow their way out of debt. Equity capital is only available at distressed valuations. Specialized OFS assets will fetch only a fraction of replacement cost—if somebody actually wants them. Although oil and gas reserve valuations are down by half, borrowers are being forced to sell them anyway to repair balance sheets. The last four months of 2015 will be very difficult for any company with meaningful amounts of debt. Same for their lenders, the other signatories to the loan agreement.

  As the banker said, “There’s just no cash.” Here’s what it means.

  The foundation of global credit markets is based upon the borrower’s capability, obligation and commitment to pay the money back. The amount of money anybody can or should borrow is dependent upon free cash. Not forecast cash flow, not earnings before interest, taxes, depreciation, and amortization (EBITDA), not good intentions. Free cash. How much money is available to service debt after all the other bills are paid. This is the key factor behind every credit application, from a car loan or home mortgage to an operating line of credit or senior secured term debt. The more free cash you generate, the more you can borrow. When free cash drops, the opposite is true.

  But what happens when an entire industry can no longer service previous levels of debt?

  ARC Financial produces a weekly chart calculating revenue, spending and upstream cash flow for the entire Canadian E&P sector for the current and preceding 14 years. Selected data has been reproduced below. MNP added 1998, 1999 and 2000 from prior reports. ARC calculates total revenue from all oil and gas produced, then deducts direct lifting and operating costs, taxes and royalties and the administrative cost of running the business. The result is “after-tax cash flow,” which is the free cash available for exploration, development, dividends and, of course, debt servicing.

  

  Gross revenue from production sales is in blue and after-tax cash flow in red. The green line is 2015’s estimated cash flow compared to prior years. The figures are not corrected for inflation.

  While the 2014 numbers aren’t finalized, ARC estimates total revenue was an all-time record $149.2 billion, generating after-tax cash flow of $67.1 billion, the second-highest in history. Combined with capital inflows from debt and equity and inter-company transfers, E&Ps invested $75 billion on conventional and oilsands capital expenditures (CAPEX, not shown). CAPEX in 2014 was also at an all-time record which created fabulous revenue and earnings for OFS.

  This year is brutal. ARC expects revenue to plunge 33.6 percent to $99 billion, the lowest number since 2009. Except for the recession, you have to go back to 2004 to find total revenue that low. But because today’s production mix is increasingly composed of high-cost oilsands, cash flow is expected to be only $28.9 billion, 43 percent of 2014’s levels. This is the lowest level of after-tax cash flow generated by producers since 2001.

  ARC’s estimated CAPEX this year is only $39.1 billion, 52 percent of last year’s levels. That’s why the active rig count is the lowest in years.

  If the whole industry only has 43 percent of 2014’s cash flow, then in theory it can only carry 43 percent of last year’s debt. Of course, debt is not evenly distributed but the point is clear; the industry’s macro balance sheet is under severe stress. When Canada’s Big Six banks reported their earnings for the third quarter ended July 31, 2015 it was noted these lenders had total exposure to the upstream oil and gas industry of about $44 billion. Including other sources of debt (bonds, other banks, equipment leasing companies), this figure is likely only a fraction of total obligations. It could easily be $60 billion, probably much more. With so many private operators complete figures are impossible to compile.

  At current oil prices, too many producers are not generating enough free cash for their debt levels. For oilsands, some bitumen is undoubtedly produced at a cash loss. Success at current prices is based entirely on geology. Some reservoirs are less price sensitive than others. Some E&Ps have less debt than others. Hedges on future production locked in last year at much higher prices cushioned the problem. As they expire, they cannot be replaced.

  When you see reports that some producers are cutting staff, slashing dividends and selling properties, that’s because they’ve hit the debt-to-free-cash wall. OFS is also in tough shape. E&Ps have demanded suppliers cut prices and vendors have complied. Free cash from operations is either nominal or non-existent. Some are in default, some are in special credit and some are insolvent. Service companies are also slashing or cancelling dividends. Like E&Ps, you pay your shareholders AFTER you have paid your banker.

  So, if too many outfits are seriously over-levered for current prices, now what? How this affects different companies is as diverse as the companies themselves. The quickest way to de-lever balance sheets is to sell things—either shares or assets—to raise cash. But to whom? At what price? What if this can’t be done?

  Lenders are also in this mess up to their nostrils. They’ve been hoping this problem would just go away, a strategy with significant merit considering the alternative. The first quarter of 2015 was mostly shock and awe as prices tumbled. Where’s the bottom? It came on March 17 when benchmark West Texas Intermediate (WTI) crude closed US$43.39. Or so everyone thought. The first quarter average price was US$48.54. Awful, but surely it couldn’t get worse.

  The second quarter looked promising as WTI recovered significantly, reaching US$61.36 on June 10. The average price in Q2 was US$57.85. There was optimism that the worst was over. Borrowers requesting covenant waivers and forbearance letters were, for the most part, accommodated. No need to panic. Rising oil prices saved the day in 2009. Perhaps this would happen again.

  But the summer of 2015 has been brutal and set the tone for the rest of the year. Oil started to slide in July, averaging only US$50.90, and fell further in August until WTI reached a new six year low of US$38.22 on August 24. It closed on Friday September 4 at US$45.77. Futures markets, which showed materially higher forward prices earlier this year, indicate few believe crude will recover soon. The October 2016 WTI price was only US$51.59 on September 4. October 17 was US$55.47. No hedging opportunities now.

  What will lenders do? When Canada’s Big Six banks reported results for the quarter ended July 31, 2015, they declared Gross Impaired Loans of $13.8 billion, about $1.8 billion more than the same period in 2014. They set aside more funds for bad oil and gas loans but also published explanations of how their oilpatch exposure was manageable. But things got much worse in August. This figure will surely rise for year-end reports prepared as of October 31, 2015.

  In the next few months, non-performing loans (offside of covenants) will be split into two categories: salvageable and hopeless. The former could live to fight another day. The latter may end up with new owners, new lenders or completely insolvent with assets auctioned to the highest bidder.

  Salvageable loans will be those where management has demonstrated its understanding of the seriousness of breaching covenants and will have done everything possible to work with the bank, keep the credit in place and preserve shareholders’ equity. This includes cutting costs, slashing or eliminating dividends and raising equity or selling assets to reduce debt and de-leverage. Key elements include lender relationship management, presentation of all relevant data, credible forecasts and respect for who is really driving the bus. Covenants will be amended and stretched. There will be a serious effort by lenders to keep these borrowers and loans solvent to maintain the debt as an asset on their own balance sheets.

  Hopeless loans will be dealt with increasingly expeditiously. These are companies with business models that no longer work or companies which are unable or unwilling to present the information lenders require to further amend credit terms that have already been amended. Impossible demands for cash will be made from asset sales or equity injections. When this can’t be done, the file will be moved to special credit. There, the lender will do whatever it must to recover as much cash as possible. Options include selling the debt or the assets at whatever price can be secured. Shareholders’ equity will be zero, current management will likely be replaced and companies may disappear.

  Back in the last half of the 1980s, things were equally awful. Then, at least one major bank converted its loan to a drilling contractor to equity, in the form of preferred shares, coined “distress prefs.” The covenants were as rigid as the debt, but it worked. Whether lenders and borrowers will become this creative this time is not yet known. The story goes the largest drilling contractor in Canada in the 1980s was the Royal Bank of Canada. It’s safe to say they don’t ever want to get back into this business.

  There are significant pools of capital – equity and debt – waiting patiently to exploit opportunities. Valuations and calling the bottom have been major obstacles. Lenders will take care of that. Owners and equity holders on the wrong side of their debt will no longer be in a position to dictate price or value. Deals will get done.

  There is great remorse on all sides. Companies are realizing when business was good they got greedy and tried to grow faster than cash flow permitted, and used debt instead of equity to lever shareholder returns. Lenders are realizing they loaned money to management teams which talked a good story but in the end didn’t have the business model or know-how to manage the company through a serious and prolonged slump.

  To remain competitive, the Canadian oilpatch must seriously de-lever. Everybody – lenders and borrowers – will be taking a haircut until total debt is in line with free cash. Many companies will become “second owner businesses” as new lenders or owners restructure and reduce debt until it reaches a level the market can support.

  It would be great to be wrong but oil prices will not solve this problem anytime soon.

  

  

  

  

  

• Enough Already! Raise The Rate To 3 Percent

  Submitted by Calibrated Confidence

  Enough Already! Raise The Rate To 3 Percent

  Raise the Federal Funds Rate (FFR). Move the range to 0.25-0.50 percent and do it on a surprise announcement.  We should raise the rate to 3 percent overnight.  TV and all the pundits look at the same headline data and say the economy is strong.

  The analysts have their confidence in their proclamations regarding the impact of raising rates according to the recent flood of equity specific “defensive” notes.  One economist who emailed Benzinga believes any increase in rates will benefit banks through the interest paid on reserves, provided the monetary bases keeps expanding, as the Fed typically sets the IOER paid on reserves to the upper-bound of the FFR.  Let us see how well the money managers have taken advantage of all this time to diversify and prepare for any impacts from a rate increase, whether detrimental to prices or beneficial to regional banks like popular opinion says (risk parity strategies be damned).

  The 10-Year Real Rate has rebounded from negative territory and currently sits at 2.21 percent as of August, below the average of 2.40 percent since Jan 1962. Looks like the economy is saved following the brutal beating unleashed on the savers of this country in order to achieve balance in the universe by making sure GDP maintains 3 percent growth Y/Y, which it didn’t but don’t tell anyone.

  

  Introduce a little anarchy. If the economy is so strong and everyone is so well prepared, then take the rate to 3 percent overnight. Why pretend to walk the FFR up in 25 bps increments for 18-24 months? The weakness in regional Fed District Economic Conditions Index 3-Month Average as reported in the most recent Beige Book does not appear to be impacting the future earnings expectation of the S&P 500 constituents as the index remains elevated since conditions declined beginning around Q4 2010:.

  

  Take FFR to 3 Percent overnight.  Just do it!  What are you waiting for?  Yes you can, just do it!

  Since data isn’t being analyzed in the proper perspective we can just say Net Interest Margins are growing, it’s all awesome, hike those rates and expand the monetary base and keep the QE alive for the banks (although it’ll be more subtle and we know how much the Fed likes to be subtle):

  

   

  Everything is so wonderful that a rate hike would equate to saying the Fed has won. Seven years of ZIRP and a few selling periods when the Fed stopped POMO’s and QE injections, we can easily say with extreme confidence that the Fed won. And by won we mean didn’t ruin the system entirely. Except they did.

  We still have elevated levels of people not working who want a job now and a skewed participation rate thanks to demographics in the US:

  

   

  ….our debt is at an unfathomable, unrepayable and national security threat level.

  

   

  It’s all awesome again!  So much so that we should take the FFR to 3 percent overnight, not just 0.25-0.50 bps. Remember, everything is awesome again! Oh yeah, and everything is priced in according to the TV people so there’s nothing to even worry about right? Right. Wrong.  We’re repeating 2011 and we’ve wasted a year of price discovery now that we’re under 2014 levels for this same time last year.

  

   

  Sector ETFs have broken down but that doesn’t mean the economy isn’t awesome. The only data that appears to be important this time around is Housing/Auto Sales and the Jobless Rate (Unemployment Rate).

  

   

  Consumers who have heard from their evening news channels and regional newspapers that everything is so rosy have gone out and boosted expenditures while maintaining a flat savings rate (savings as a percent of disposable income).

  

  People are consuming, oil is low, and, according to analysts, the recent selloff in equities has provided households with a windfall opportunity to buy companies well-positioned in sectors with strong-growth prospects and historically low EV/EBITDA multiples. Things are so fantastic right now that no one even cares about the Margin Debt levels and the fact that the borrowing of capital is being used to get long the market. For the sake of this piece we will ignore this and never focus here again because a 3 percent overnight hike in the FFR would have no impact here or anywhere else right?  No but let’s get back to the bullish story about sun-drenched fields and Unicorns on Rainbows.

  The Buffett Indicator is a mere 2 Standard Deviations away from its mean and still below the peak in 2008, so clearly we are in a stable and rational economy given the percent of Corporate Earnings to GDP, everything is still awesome until we hit at least three Standard Deviations right?

  

   

  This piece is meant to be tongue in cheek. The current state of global markets is unstable at best. The underlying fundamentals used to place value on assets are skewed and have become severely disconnected from the pricing mechanism. Recently Ray Dalio’s Risk Parity trading has been blamed for the market correction.  The strategy has been around since 2010 and blaming it for the current turmoil is dangerous mostly because it ignores China’s FX actions, the 19+ central bank interest rate cuts in Q1 2015, and the growth of equity-linked OTC Derivatives according to data from the Bank for International Settlements aside from the FX drama, Greece, and Australian “default”.

  The seriousness attached to the speculation of a bounded range increase in FFR to 0.25-0.50 percent from 0.00-.0.25 percent is ridiculous. If the economy is so strong, as has been reiterated daily in newspapers and on TV, then 25bps should be nothing. If things are so great, let us go for 3 percent. The Swiss National Bank removed its 1.20 Euro peg and the Franc has retraced more than 78 percent of that initial move. Why can’t the Fed show some conviction and spike rates? Here’s to 3 percent FFR on amazing US economic strength!

  

   

  If it truly is widely believed things are so awesome then take rates to 3 percent and get some ammo back in the Fed’s pocket because we’re going to need it when one of these unstable and overly indebted sovereign nations begins the next leg of the epic current war. Maybe then the CME can stop incentivizing the US Fed and global central banks to trade S&P 500 e-mini futures:

  

  

  

  

  

  

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