Sep 17

Today’s News September 17, 2015

  • The Hype Surrounding Today's Federal Reserve's Interest Rate Decision is Way Overblown

    Today the Federal Reserve will meet and announce at 2PM NY time whether or not they are hiking rates. The fact that there is so much mainstream media attention being placed on this announcement as one that could tank the US stock markets if they announce a rate hike versus cause it to soar if they announce further delays is absurd if one pauses for a rational second to consider the following. The US Federal Reserve cut interest rates to 0.00% to 0.25% on 16 December 2008, and it has been at this level for more than 6½ years now! Furthermore, starting in about the last quarter of 2009, the mainstream media has been speculating that the Feds would raise interest rates. This means that for 23 consecutive quarters, the mainstream media has speculated that the Feds would raise interest rates, and for 23 straight quarters, the Feds have issued a bunch of rambling nonsense about “subdued inflation trends” and low US unemployment imbedded within a non-wavering statement that they will maintain a fed funds rate at 0% to 0.25%. Just check out the consistency of the statements they have released every few months for the past 6½ consecutive years below (I have only posted their decision from one statement per year though all FOMC statements every year for the past 6½ years state the same basic nonsense.)

     

    Release Date: August 12, 2009

    “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

    Release Date: August 10, 2010

    “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

    Release Date August 9, 2011

    “The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

    Release Date: August 1, 2012

    “The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

    Release Date: July 31, 2013

    “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

    Release Date: July 30, 2014

    “In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

    Release Date: July 29, 2015

    “The Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

     

    Even more ridiculous is the Fed’s modification of this standardized statement after stating in 2013 that they would hike interest rates if the “official” (but very fake) unemployment rate dropped below 6.5 % and their “official” (but very fake) inflation statistic was projected to be “no more” than 2.5%. Given that the latest “official” inflation rate through the 12 months ended July 2015 was 0.2%, which is “no more” than the given 2.5% inflation target, and the latest “official” inflation rate was 5.10%, well below the 6.5% target at which the Feds stated they would start raising the Fed Funds rate in 2013, one would think that an interest rate hike today was guaranteed if one trusts the bankers’ rhetoric. However, if one simply looks at the facts, one will realize that the Feds’ word is worth next to nothing, as all their policy decisions are driven by what is best for their masters (industrialists, statists and corporatists), and never by what is best for the country.

     

    The facts are as follows. The “official” unemployment rate has been below 6.5% and the “official” inflation rate has been “no more” than 2.5% for 17 consecutive months. Consequently, we have met the conditions for 17 consecutive months for the Feds to start raising interest rates but yet no interest rate raise has transpired. Why? Janet Yellen knew that if she raised interest rates 17 months ago (when their stated conditions for raising interest rates were initially met), that this action would have had disastrous consequences for US stock markets and for hundreds of trillions of notional amounts of derivative contracts, the vast majority of which are directly tied to interest rates. Furthermore, it appears that 17 months ago, they had not yet provided ample opportunity to their crony corporate friends to exit the US stock market. Consequently, they could not have chosen to start manufacturing a stock market decline 17 months ago for fear of angering the ruling class that lords over them. Consequently, the Federal Reserve bankers merely altered the language contained in their statements regarding the conditions that had to be met for them to start raising interest rates. Instead of stating that they would raise interest rates if projected inflation was “no more” than 2.5% and if unemployment dropped below 6.5%, they stated that they would only raise interest rates by assessing realized and expected “progress…towards its objectives of maximum employment and 2% inflation.”

     

    The facts show the total absurdity of paying attention to anything Central Bankers state, as their statements should have zero credibility among the people after this inspection of their past statements and actions. Unsurprisingly, mainstream media journalists seem to be waiting with bated breath upon every word that comes forth from Janet Yellen’s lips. Furthermore, to add to this mountain of absurdity, is a 0.25% rate raise even significant after nearly 7 consecutive years of 0% to 0.25% interest rates? When Nixon took the world off the Bretton Woods standard in 1971, and Jimmy Carter called upon Paul Volcker to repair the world’s loss of faith in the USD, note that Volcker raised Fed Funds rates by a whopping 10.75% from 4.75% to 15.5% in less than two years from 1977 to 1979, and then again, by another 4.5% in the next year to 20%. Today, even a 2% raise in interest rates seems unfathomable, as such an interest rate raise may cause so many defaults on interest rate driven derivative contracts that chaos and financial Armageddon may ensue.

     

    In other words, it is absurd that the global financial system today is so fragile and so overblown with hot air, that the more than quadrillion dollars of notional value of derivatives and the entire US stock market’s fate is now balanced on a fulcrum that could tip into a deep slide by interest rate increases that would be viewed as insignificant and piddling just a few decades ago. This is absurdity at its finest. Furthermore, if you wonder why I don’t refer to the “official” $700+ trillion of derivatives contracts in use today, since an accounting trick was used to knock the notional value of global derivatives overnight in half from $1.4 quadrillion to $700 trillion a few years back, yes, the real notional value of global derivatives is still $1.4 quadrillion.

     

    So will the Feds raise interest rates later today? Given their past history, I believe the answer is no and that they are engaging in the same bluster and using their mainstream media pawns to spread propaganda that they may raise interest rates. Consequently, this would allow the MSM to spin continued inaction and paralysis on their end into a “positive” for US stock markets. However, this is pure speculation on my end as predicting the decisions of psychopaths is not a science or an art or even worthy of anyone’s attention. We all know that the US Federal Reserve causes massive price distortions that the MSM likes to falsely call “booms”. We all know as well that the US Federal Reserve bankers deliberately unwind the massive price distortions they create from time to time, ensuring that their crony corporate friends are informed of this move well in advance of the time they decide to execute it. History has proven that crony industrialists and corporatists don’t tend to have their riches destroyed by “busts”. Quite to the contrary, they tend to enrich themselves on the “bust” cycle of this equation as well. To crony corporatists, the artificially engineered “bust” part of the cycle is just another opportunity to become even richer.

     

    Consequently, this is not an article about predicting the Feds decision on interest rates later today, because as I stated, there is no science or art or even anything to be gained by predicting the moves of psychopaths. To do so is tantamount to flipping a coin, stating that it will come up heads, and when it does, to pat oneself on the back in an absurd congratulatory manner for this accurate “prediction”. Who cares if I’m right and the Feds do nothing as usual? Even more importantly, who cares if I’m wrong and the Feds hike interest rates? A guess is just a guess and nothing more. Whatever the decision today, there will likely be a knee-jerk reaction to this decision in US stock markets, and it could even be a significant knee-jerk reaction, but if the Fed bankers decide not to raise interest rates, this is NOT a win for the US stock market despite any short-term knee-jerk reaction that may falsely interpret this decision as a win. On the contrary, unless the Feds decide to raise interest rates by 0.50%, a 0.25% raise is not going to really affect any markets significantly in the long run unless they are followed by quarterly raises every quarter. In the end, whatever the Feds announce at 2PM NY time today should not affect your long-term outlook on markets as neither of the two possible decisions will significantly alter the future fate of global markets. Instead, the most important thing to understand is the massive fraud that is systemic in the global financial system and to allow a deep and complex understanding of this fraud to drive your investment decisions. This understanding is much more important than the Fed’s interest rate decision later today. If one doesn’t understand the systemic fraud in this system, one will be driven to poor decisions by knee-jerk reactions to short-term events rather than to build and formulate a strategy that will ignore short-term knee-jerk reactions and survive and thrive in the long-term. With off-the-charts volatility in US, Japanese, Chinese and European markets caused by 6-sigma and 7-sigma events, as I discuss in the below vlog, trying to build an investment strategy around these banker-created, HFT algo driven, short-term volatile events is pure foolishness.

     

    This article is a commentary on the complete absurdity of the state of our global financial system that has been created by foolish Central Banker monetary policies designed to benefit only the smallest sliver of society, the disinformation that passes as “news” today, the lack of integrity in MSM financial journalism, and the fact that one must separate the wheat from the chaff to understand how to formulate intelligent investment strategies moving forward no matter if the Feds decide to do nothing or decide to hike interest rates by a piddling 0.25% later today. Oh, and one last comment. Yes I do realize, and have realized for decades, that the official economic indicators stated by governments worldwide are falsified. Real inflation in the US is a minimum of 2% to 3% higher than the “official” statistic and real unemployment in the US is a minimum of 4 to 5 times higher than the “official” 5.10% statistic. But since the Feds used these fake statistics in their statements to provide the timeline of when they would hike the Fed Funds rate, I thought that it would be particularly absurd to illustrate that even when their fake targets are met using their fake statistics, the Fed bankers still renege on their previous promises to raise interest rates due to the calamity that significantly higher interest rates would wreak upon the notional 1.4 quadrillion of outstanding derivatives contracts.

     

    Additional commentary available below in our latest SmartKnowledgeU vlogs:

     

    SKU_Vlog_005: Use 6 Sigma Events to Predict Market Behaviorv

    SKU_ Vlog_006: We’re in a Bear Market for Honor & Integrity

    SKU_Vlog_007: Society Has Success All Wrong

     

     

    About the author: JS Kim is the Managing Director of SmartKnowledgeU, a fiercely independent investment research, analysis and education firm that provides investment and wealth preservation strategies to combat the systemic fraud of the global banking and investment industry. Come by SmartKnowledgeU to learn more. Click on this link to download a free excerpt to JS Kim’s book, The Golden Gift (Solutions to our Global Banking & Monetary Crisis), available until 18 September 2015 only.

  • GOP Debate Post-Mortem: Trump Top, Fiorina Flourish, Carson Crumbles

    While Lindsay Graham was a clear winner in the undercard (like being the tallest midget?), the main event was a mosh-pit of anatagonistic self-abuse for The GOP as candidates ran rough-shod over each other and the moderators. Fiorina stood up to Trump (though not too aggressively) and Trump replied how beautiful Fiorina's face was, Paul was bowled over (by Trump), and Trump was ironically dismissed as "a great entertainer" as the debate took place in great entertainer Ronald Reagan's library. It was clear that "the rest" of the GOP field was not about to let Trump dominate… and he didn't but the night was, in one word, chaos. Trump spoke the most as expected and in most polls was voted as 'winner' with Fiorina gaining most.

    CNN's Jeff Zeleny seemed to confirm social media's view that Graham was the undercard winner

    Sen. Lindsey Graham had the strongest performance of any candidate in the first debate. Graham topped the talk-time…

    • Graham: 19:47
    • Santorum: 15:38
    • Jindal: 13:06
    • Pataki: 10:58

    From start to finish, his one-liners delighted the crowd, his command of policy was unmatched, particularly on national security and foreign policy. He exuded substance. And he shows that experience pays. The question is whether voters want that experience. And, of course, whether he will ever be able to debate the full field.

    But the bookies sum it all up… Odds to suspend/end campaign by Nov. 1

    George Pataki

    • Odds pre-debate: 40%
    • Odds post-debate: 55%

    Lindsey Graham

    • Odds pre-debate 42%
    • Odds post-debate 42%

    Rick Santorum

    • Odds pre-debate: 34%
    • Odds post-debate: 40%

    Bobby Jindal

    • Odds pre-debate: 33%
    • Odds post-debate: 40%

    So Pataki is gone? Which is somewhat comical given Trump's later comment that

    "Pataki wouldn't be elected dog-catcher right now"

    *  *  *

    The main event started with what felt like an hour of introductions then the big one hit…

    The first heads-up was Fiorina vs Trump as she positioned him as a "great entertainer," which is ironic given the debate was being held in Ronald Reagan's (an entertainer) library, but declined to answer if Trump was "qualified" to put his finger on the nuclear button:

    • *FIORINA SAYS UP TO VOTERS TO DECIDE IF TRUMP IS QUALIFIED

    Then Trump began…

    • *TRUMP SAYS RAND PAUL SHOULDN'T BE ON DEBATE STAGE

    Which the eye surgeon swung at…

    • *PAUL SAYS TRUMP'S ATTACKS ARE WHAT HAPPENS IN `JUNIOR HIGH'

    Carson came across quiet again…

    Retired Neurosurgeon Ben Carson was surging in the polls coming into Wednesday night’s debate, but he has done little this evening to draw voters to his candidacy. He has had few, if any, memorable statements.

    But actually spoke more than last time and managed some good points…

    Bush had more of a presence that last time but his most notable moment was to Trump's negativity on his brother…

    “Your brother’s administration gave us Barack Obama because the last 3 years were such a disaster.”

     

    “It was such a disaster those last few months that Abraham Lincoln couldn’t have been elected,” Trump says at CNN’s Republican presidential debate

     

    Bush opened back-and-forth by saying of Trump: “The lack of judgment and lack of understanding about how the world works is really dangerous”

    or put another way…

    But disappointed his mum…

    Trump and Cruz were the most "uncivil" according to US News…

    *  *  *

     

    Donald Trump summed it all it in 7 seconds

    Responding to Paul, Trump pounded him with "I never attacked him on his looks, and believe me, there’s plenty of subject matter right there.”

    But Paul made some good points…

    Mid way through, CNN re-ignited the Trump-Fiorina battle…

    The only thing Kasich said was:

    • *KASICH SAYS TAX RATES ON CARRIED INTEREST SHOULD NOT BE CHANGED

    Trump added:

    • *TRUMP ON TAXES: THE HEDGE FUND GUYS WON'T LIKE ME

    For a brief moment, there was some agreement with Trump…

    “We are the only ones dumb enough, stupid enough” to offer citizenship to babies born in U.S. to parents here illegally “and we take care of the baby for 85 years,” Donald Trump.

     

    Trump says 14th amendment says birthright citizenship “is not correct and in my opinion it makes absolutely no sense”

     

    Rand Paul says “I hate to admit it but Mr. Trump has a point here” and says there’s never been a “direct supreme court case” on children born to immigrants in the U.S. illegally

     

    Carly Fiorina says you “cant just wave your hands and say the 14th amendment is going to go away.” “It will take an extremely arduous vote in congress” and “a long arduous process in court”

    Politico offers some inisght with Trump's 7 most memorable debate lines…

    1. First words: “I’m Donald Trump. I wrote the art of the deal. I say not in a braggadocious way. I’ve made billions and billions of dollars.”

     

    2. Asked to respond to Carly Fiorina: “First of all, Rand Paul shouldn’t even be on this stage. He’s number 11.”

     

    3. On himself: “Believe me. My temperament is very good, very calm.”

     

    4. On Paul: “I never attacked him on his looks, and believe me there’s plenty of subject matter right there.”

     

    5. On George Pataki: “He wouldn’t be elected dog-catcher right now.”

     

    6. On his multiple bankruptcies: “People are very, very, impressed with what I’ve done. The business people.”

     

    7. A left-handed compliment to Jeb Bush: “More energy tonight. I like that.”

    Trump and Bush managed the handshake that Trump and Carson didn't…

    And here is CNN's protracted way of adding to ad revenues… POTUS nicknames…

     

    *  *  *

     

    As expected, Trump spoke most… more than Paul, Walker, & Huckabee combined

    Quite different allocations that last time…

    *  *  *

    Polls suggested trump was the clear winner…

    But the big surge by Fiorina and plunge for Carson was most notable.

    As CNN notes, the second Republican debate was supposed to be the one where candidates like Jeb Bush, Scott Walker and other would-be frontrunners ganged up on Trump.

    But Trump's greatest antagonist on Wednesday night was Carly Fiorina. Fiorina, who got into the main event at the 11th hour, was aggressive and concise in taking on Trump.

     

    She countered his attacks against her business acumen, challenged his remarks about her appearance, and demonstrated her knowledge of foreign policy — a slight against Trump's inability to cite specifics in a recent Meet The Press interview.

     

    No one on stage Wednesday night showed as much passion, nor demonstrated as much poise, as Fiorina –– which could yield major results among Republicans who don't support Donald Trump.

    And as Google Politics shows, search interest in Fiorina and Trump soared…

    We are all winners though…

    *  *  *

    Finally, this excellent tweet summed up the circus perfectly…

     

  • The Real Reasons Why The Fed Will Hike Interest Rates

    Submitted by Brandon Smith via Alt-Market.com,

    For the past several months, the chorus of voices crying out over the prospect of a Federal Reserve interest rate hike have all been saying essentially the same thing – either they can’t do it, or they simply won’t do it. This is the same attitude the chorus projected during the initial prospects of a QE taper. Given the trends and evidence at hand I personally will have to take the same position on the rate hike as I did with the taper – they can do it, and they probably will do it before the year is over.

    I suppose we may know more after the conclusion of the Fed meeting set for the 16th and 17th of this month. August retail sales data and industrial production numbers have come in, and they are not impressive even with the artificial goosing such stats generally receive. However, I do not expect that they will have any bearing whatsoever on the interest rate theater. The Fed’s decision has already been made, probably months in advance.

    The overall market consensus seems to be one of outright bewilderment, so much so that markets have reentered the madness of "bad news is good news" as stocks explode on any negative data that might suggest the Fed will delay. The so-called experts cannot grasp why the Fed would even entertain the notion of a rate hike at this stage in the game. Hilariously, it is Paul Krugman who is saying what I have been saying for the past year when he states:

    "I really find it quite mysterious that the Fed is eager to raise rates given that, they’re going to be wrong one way or the other, we just don’t know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other."

    Yes, why does the Fed seem so eager? Every quarter since the bailouts began no one has been asking for interest rates to increase. No one. Only recently has the Bank for International Settlements warned of market turmoil due to the long term saturation of markets caused by low interest policies, yet it was the BIS that had been championing low rates and easy money for years. The IMF has warned that a U.S. rate increase at this time would cause a market crisis, yet the IMF has also been admonishing low rate policies, policies that they had also been originally supporting for years.

    Confused yet? The investment world certainly seems to be. In fact, the overall market attitude towards a rate hike appears to be a heightened sense of terror, and I believe this has been amply reflected in global stock behavior over the past three months in particular. With thousands of points positive and negative spanned in only a couple of trading sessions, stock market indexes around the world are beginning to behave like seizure victims, jerking and convulsing erratically.

    This has, of course, all been blamed on China’s supposed economic “contagion.” But you can read why that is utter nonsense in my article “Economic crisis goes mainstream – What happens next?”

    The bottom line is, the Federal Reserve has been the primary driver of the massive financial bubbles now in place in most of the world’s markets, and much of this was accomplished through ZIRP (zero interest rate policy). Hopefully many of the readers here can recall the tens of trillions of dollars of overnight lending by the Fed to international banks and corporations that was exposed during the initial TARP (Troubled Asset Relief Program – aka bailout) audit. You know, the trillions in lending that mainstream naysayers claimed was "not" contributing to the overall debt picture of the U.S. Well, reality has shown that ZIRP and overnight lending has indeed directly and indirectly created debt bubbles in numerous areas.

    The most vital of areas at this time is perhaps the debts accrued by major banks and companies that have relied on overnight loans to facilitate massive stock buybacks. It has been these buybacks that have artificially supported stocks for years, and whenever ZIRP was not enough, the Fed stepped in with yet another QE program to give particular indicators a boost. The main purpose of this strategy was to ensure that markets would NOT reflect the real underlying instability of our economic system. The Fed has been pumping up banks and markets not only in the U.S., but across the globe.  Why?  We'll get to that, but keep in mind that it takes time and careful strategy to wear down a population and condition them to accept far lower living standards as the "new normal" (and it takes a sudden crisis event to convince a population to be happy with such low standards given the frightening alternative).

    Even with near zero interest, companies have still had to utilize a high percentage of profits in order to continue the stock buyback scam. We have finally arrived at a crossroads in which these companies will be forced to either stop buybacks altogether, or await another even more comprehensive stimulus infusion from the Fed. A rate increase of .25 percent might seem insignificant, until you realize that banks and companies have been cycling tens of trillions of dollars in ZIRP through their coffers and equities. At that level, a minor increase in borrowing costs swiftly accumulates into untenable debts. A rate increase will kill all overnight borrowing, it will kill stock buybacks, and thus, it will kill the fantasy that is today's stock market.

    This is why so many analysts simply cannot fathom why the Fed would raise rates, and why many people fully expect the introduction of QE4. But we need to ask some fundamental questions here…

    Again, as Krugman ponders (or doesn’t ponder, since I believe he is an elitist insider with full knowledge of what is about to happen), why does the Fed seem so eager to raise rates if the obvious result will be a drawn out market crash? Is it possible, just maybe, that the Fed does not want to prop up markets anymore? Is it possible that the Fed’s job is to destroy the American economy and the dollar, rather than protecting either? Is it possible that the Fed is just a useful tool, an institutionally glorified suicide bomber meant to explode itself in the most populated area it can find to cause maximum damage for effect? Wouldn’t this dynamic go a long way in explaining why the Fed has taken every single action it has taken since its underhanded inception in 1913?

    Will the Fed raise rates this week? I still think the Fed may "surprise" with a delay until December in order to give one more short term boost to the markets, but as I read the mainstream economic press I find the newest trend indicates I could be wrong. The trend I am speaking of has only launched in the past couple of days in the mainstream media, as outlets such as the Financial Times and CNN are now publishing arguments which claim a Fed rate hike is a “good thing”.  While it may be a "good thing" in the long run as it is vital for everything that is over-inflated in our economy to fall away and leave that which is real behind, a return to true free markets without ZIRP manipulation is NOT what the mainstream media is promoting.

    The mainstream pro-rate hike arguments are in most cases predicated on completely fabricated notions of economic recovery. CNN states:

    "At a time when the U.S. economy is chugging along at over 2% growth and the unemployment rate reflects almost full employment, there’s not much of a case for the Fed’s key interest rate to remain at historic lows…"

    As I outlined in my series written at the beginning of this year titled “One last look at the real economy before it implodes,” any growth in gross domestic product (GDP) is a farce driven primarily by government debt spending and inflation in particular necessities rather than recovery in the core economy and on main street. And, unemployment numbers are the biggest statistical con-game of all, with more than 93 million Americans not counted on the Labor Department’s rolls as unemployed because they no longer qualify for benefits.

    For a couple of months, some of the mainstream has pulled its head out of its posterior and actually begun asking the questions alternative analysts have been asking for years about the potential risks of returning market volatility and “recession” (which is really an ongoing program of hyperstagflationary collapse) in the wake of a world without steady and open fiat stimulus.  Yet, suddenly this week certain MSM establishment mouthpieces are claiming “mission accomplished” in the battle for fiscal recovery and cheerleading for a rate hike?

    What this tells me is that the narrative is being shifted and a rate hike is indeed on the way, perhaps even this week.

    It is important to note that this stampede over the edge of the cliff is not only being triggered by the Federal Reserve. Most central banks and China's PBOC in particular is definitely part of the bigger problem, but only because China is working alongside international bankers to further their goal of total economic interdependence and centralization. China’s avid pursuit of SDR (special drawing rights) inclusion and its close relationship to the IMF and the BIS must be taken into account if one is to understand why the current fiscal crisis is developing the way it is.

    China has recently announced it will be opening its onshore currency markets to foreign central banks, which essentially guarantees the inclusion of the yuan into the IMF’s SDR global currency basket by the middle of next year. The IMF’s decision to delay China’s inclusion until 2016 was clearly a calculated effort to make sure that they did not receive any blame for the market meltdown they know is coming; a meltdown that will accelerate to even more dangerous proportions as central banks begin to move away from the dollar as the world reserve and petro-currency.

    In preparation for the global shift away from the dollar, China has begun dumping dollar denominated assets at historic levels while Chinese companies have begun reducing the amount of dollars they borrow for international transactions. Is this selloff designed to liquidate assets in order to support China’s ailing markets? No, not really.

    China has been planning a decoupling from the U.S. dollar since at least 2005 when it introduced yuan denominated “Panda Bonds”, which at the time the media laughed at as some kind of novelty. In only ten years, China has slowly but surely spread yuan denominated instruments around the world in order to make China an alternative economic engine to the U.S.  China, working with the BIS and IMF, have set the dollar up for an extreme devaluation and the U.S. Treasury has been set up for inevitable bankruptcy; and guess who will ride to our rescue when all seems lost?  That's right – the IMF and the BIS.

    Will the Fed’s rate hike make U.S. bonds more desirable? Probably not.  After a short term initial boost U.S. debt instruments will return to the path of de-dollarization. In the end, I believe the Fed rate hike will encourage more selling by the largest bond holders who will seek to make as much profit as possible until the bottom begins to fall out of the dollar. As China continues to sell off their treasury and dollar holdings, there will come a time when other global investors will feel forced to sell as well to avoid being the last idiot holding the bag when extreme devaluation takes place.

    The Fed rate hike is a kind of openly engineered trigger event; one which will likely occur before the end of the year. The major globalist players within the BIS and IMF are separating themselves from this trigger as much as possible today, while warning of a coming crisis they helped to create.

    The Fed seems to be a sacrificial appendage at this point, a martyr for the cause of globalization and centralization. Bringing down the U.S. and the dollar, or at least greatly diminishing the U.S. to third world status, has the potential to greatly benefit the Fabian socialists at the top of the pyramid. Such a crisis makes the idea of centralization and global economic administration a more enticing concept.

    With a complex and disaster-prone system of interdependence causing social strife and chaos, why not just simplify everything with a global currency and perhaps even global governance? The elites will squeeze the collapse for all it’s worth if they can, and a Fed rate hike may be exactly what they need to begin the final descent.

  • Beijing's South China Sea Military Buildup Continues: The Dramatic Visual Evidence

    On Tuesday, Reuters, citing unnamed US officials, reported that Washington will not look to impose sanctions on Chinese entities allegedly behind hundreds of cyber attacks on US targets prior to Chinese President Xi Jinping’s visit to Washington next week. 

    The proposed sanctions are a sore spot for Beijing and some analysts were concerned that their imposition could jeopardize Xi’s visit. Others suggested that not moving ahead swiftly risked sending the wrong message about how seriously the US takes the alleged cyber intrusions, but that concern seems to have taken a backseat to polite diplomacy. “Imposing sanctions before Xi’s high-profile visit, which will include a black tie state dinner at the White House hosted by President Barack Obama, would be a diplomatic disaster,” one source told Reuters. 

    The decision underscores the difficult position the US finds itself in when attempting to craft the appropriate response to China’s new role as a key player on the international stage. Indeed, the world is closer to bipolarity now than at any time since the Cold War, which means a heavy handed approach by the Americans is simply not an attractive option. Nowhere is this dilemma more apparent than in the US’s response to Beijing’s land reclamation efforts in the South China Sea. 

    The construction of what’s now likely to be more than 3,000 acres of new sovereign territory atop reefs in the Spratlys has raised eyebrows among Washington’s regional allies and tensions heightened considerably after the PLA essentially threatened to shoot down a US spy plane over the new islands earlier this year. China also faces allegations from Japan that its oil and gas operations in the East China Sea violate an agreement to develop the fields jointly. 

    Despite the fact that China claimed to have largely completed its dredging efforts in the Spratlys in June, Bonnie Glaser, a senior adviser at the Center for Strategic and International Studies in Washington, tells a different story. Here’s what Glaser has to say about a series of new images shown below and available at the Asia Maritime Transparency Initiative:

    China is still dredging in the South China Sea. Satellite imagery of Subi Reef taken in early September shows dredgers pumping sediment onto areas bordered by recently built sea walls and widening the channel for ships to enter the waters enclosed by the reef. On Mischief Reef, a dredger is also at work expanding the channel to enable easier access for ships, possibly for future use as a naval base.

     

    This activity comes in the wake of assertions by China that its land reclamation has ended in the Spratly Island chain. On August 5, during the ASEAN Regional Forum in Kuala Lumpur, Chinese foreign minister Wang Yi told reporters, “China has already stopped. You look, who is building? Take a plane and look for yourself.” He did not pledge that China would refrain from construction and militarization on the newly-created islands, however.

     

    Wang Yi reiterated that China’s construction on the islands is mainly “to improve the working and living conditions of personnel there” and for “public good purposes.” To date, however, China’s activity appears focused on construction for military uses. Recently built structures on Fiery Cross Reef include a completed and freshly painted 3,000-meter runway, helipads, a radar dome, a surveillance tower, and possible satellite communication facilities.

     

    Apparent Chinese preparations for building lengthy airstrips on Subi and Mischief raise questions about whether China will pose challenges to freedom of navigation in the air and sea surrounding those land features in the future.

     

    The persistence of dredging along with construction and militarization on China’s artificial islands underscore Beijing’s unwillingness to exercise self-restraint and look for diplomatic paths to reduce tensions with its neighbors, the United States, and other nations with an interest in the preservation of peace and stability in the South China Sea. U.S. calls for all claimants in the South China Sea to halt land reclamation, construction, and militarization have been rejected by China, which views the status quo as unfavorable to its interests.

     

    On the eve of President Xi Jinping’s visit to the United States, Beijing appears to be sending a message to President Barack Obama that China is determined to advance its interests in the South China Sea even if doing so results in heightened tensions with the United States.

    And more from Gregory Poling, a fellow with the Sumitro Chair for Southeast Asia Studies and the Pacific Partners Initiative at CSIS and AMTI director.

    Earlier this year, the addition of an airfield on Fiery Cross Reef provided a more southerly runway capable of handling most if not all Chinese military aircraft. And in June, satellite photos indicated that China was preparing to lay down another runway at Subi Reef. New photos taken on September 3 show grading work at Subi, providing further evidence that runway construction there is planned. Meanwhile work at the Fiery Cross airfield is well advanced, with China recently laying down paint.

     

    Satellite photos taken on September 8 contain an unanticipated development, indicating that China may be preparing to construct another airstrip at Mischief Reef. These images show that a retaining wall has been built along the northwest side of the reef, creating a roughly 3,000-meter rectangular area. 

    And the new visuals:

    We’ll close with the following from Robert Kaplan, a senior fellow at the Center for a New American Security in Washington who spoke to Bloomberg: 

    “The Chinese have a classic Sun Tzu philosophy of incremental steps. Because it is small steps, the Americans and their allies will not be able to respond in a strong fashion because they will seem to be over reacting. That is what makes China’s approach so infuriating.”

  • China Injects More Liquidity, Strengthens Yuan As Foreigners Dump Record Amount Of Japanese Stocks

    The evening started with disappointing Japanese trade data cross the board – weakest imports, exports, and trade balance in 6 months – which follows the largest selling of Japanese stocks by foreigners ever. China opened with the first rise in margin debt in 6 days, stocks were mixed in the pre-open after last night's epic farce ramp. PBOC strengthened the Yuan fix modestly and also injected another CNY 40 billion.

     

    Japanese trade data was disappointing…

    • *JAPAN AUG. EXPORTS RISE 3.1% Y/Y, EST.. +4.3%
    • *JAPAN AUG. IMPORTS FALL 3.1% Y/Y, EST -2.5%
    • *JAPAN AUG. TRADE DEFICIT IS 569.7B YEN, EST 540.0B

    All at 6-month lows and missed expectations.

    Foreigners have never sold more Japanese stocks ever…

     

    Which explains why The BoJ was buying so heavily!! And for now, a rampacious bid open is being sold…

     

    *  *  *

    Then China opens..

    And Margins are on the rise again…

    • *SHANGHAI MARGIN DEBT BALANCE RISES FIRST TIME IN FIVE DAYS

    Stocks are mixed after last night's epic ramp idiocy..

    • *CHINA'S SHANGHAI COMPOSITE INDEX FALLS 1% TO 3,119.89 AT OPEN
    • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 0.7% TO 3,287.66

     

    Regulator's pressure appears to be paying off…

    PBOC added more liquidity…

    • *CHINA PBOC TO CONDUCT REVERSE REPOS: TRADER
    • *PBOC TO INJECT 40B YUAN WITH 7-DAY REVERSE REPOS: TRADER

    And then strengthgened the Yuan fix…

    • *CHINA SETS YUAN REFERENCE RATE AT 6.3670 AGAINST U.S. DOLLAR

     

     

    Charts: Bloomberg

  • The Fallacy Of "Buy Land – They're Not Making Any More"

    Submitted by Peter St.Onge via The Mises Institute,

    “Buy land — they’re not making any more!” is an old investing chestnut, and a common sense one to boot. Economically, it’s also completely false.

    As counterintuitive as it may seem, we make land all the time. It just doesn’t look like land.

    Why? Because land’s value doesn’t come from its ability to cover up the naked earth. Land’s value comes from its economic usefulness. From the value of things that can be done using that land (Rothbard’s “marginal revenue product” of the land). And that value is, indeed, changing all the time. Economically, from a price perspective, then, we make land all the time.

    Step back a moment and ask why land has value anyway. Why do people want land? Well, obviously, because you can put stuff there — including yourself — plus buildings, swimming pools, and factories.

    Now, anybody who’s visited West Texas knows there is plenty of building space in the world. You could drive for hours and meet nobody. There’s lots of space for that factory of yours. But it’s not really space itself that makes land valuable. It’s location. As in, there’s only so much room in Manhattan. Or Central London.

    Once again, though, it’s not the actual space that matters. It’s the access. Put a strip mall on Manhattan surrounded by crocodile-filled moats and snipers and it will have low value. The value is in access. So Manhattan is valuable because it’s easy to get to other parts of Manhattan. And it’s easy for other people to get to you. Customers, partners, and friends can all easily visit you if your apartment or office is in Manhattan, moatless and sniperless.

    So if it’s the access that matters, are they making new access? Of course. They’re doing it all the time.

    New highways, new exits, new streets, mass transit, pedestrian malls are being regularly constructed. These all effectively “make new land” because they offer access to existing space. They turn relatively “dead zones” into "useful zones," or new land.

    What are some of the meta-trends on land as investment, then?

    First: roads. This was a bigger value-driver a generation ago in the US, as new roads made the suburbs more accessible, helping to drain many cities even as US population grew. Outside the US (Mexico, Thailand, Russia), new roads are still a big deal, and even in the US, new highways can reshape values — draining old neighborhoods and building value in new ones. The decline of cities like Baltimore or Detroit are partly thanks to those beautiful roads that redistribute access to the suburbs.

    Second: population. In the US “rust belt” of declining manufacturing, many regions have dropped in price simply because people are leaving. Detroit homes for $100 is emblematic, although of course there are also political reasons some cities are so cheap — in particular, taxes and crime.

    And that brings us to politics. Real estate can be cheapened shockingly quickly by taxes and crime, and those traditional drivers have been joined in recent decades by environmental politics.

    Environmentalists, by taking land off the market, effectively squeeze the remaining accessible locations. Driving up the price. Regions like Seattle or San Francisco are poster children of this environmental squeeze, with modest homes even in remote suburbs costing upward of a million dollars. On the other extreme, cities like Dallas or Houston have kept prices down despite exploding populations by allowing farmland to be converted to residential, commercial, or industrial use.

    Beyond the access and political angles, land is also vulnerable to “network effects.” In other words, the neighbors matter. Gentrification or urban decay can be hard to predict. Even in a compact city with rising population like Washington, DC, it can be hard to predict where the middle class or rich want to colonize, and where they want to flee.

    There are clues, of course — in large US cities, gays moving into a neighborhood, new coffee shops or art galleries are some leading indicators that property prices might swing up. But gentrification has it’s own mind; even in a booming city it might go into some other neighborhood. New York’s Harlem or Silicon Valley’s East Palo Alto are two very accessible locations with low prices because of perceptions of the neighbors.

    So, while they’re not “making” land, they are constantly making things that affect land price. Access, regulations, changing neighbors. These are the kinds of factors that make land valuable, not it’s ability to cover the earth.

    And so land comes back to earth, joining boring old commodities like wheat or copper. Just as vulnerable to changing supply and demand factors.

    And if you are looking for something they’re not “making more of?” Well, gold does come close. Hence its appeal. They do mine new gold all the time, but the costs are high enough that gold is a very “inelastic” commodity. It comes close to “they’re not making more.”

    Beyond that? Develop your ultimate resource: yourself.

     

  • "Truthful" Trump, "Calm" Carson & The Naysaying-Nine – 2nd Republican Debate Live Feed

    And then there were eleven (in tonight's main event). With everyone ready to rumble with The Donald, Carson ever-so-quietly gaining ground, and Fiorina showing face alongside the men, tonight's Round Two of the Republican Presidential Nomination debate should be full of fireworks. Trump is odds-on to have the most to say but all eyes will likely be on CNN's anchors (and whether they go full Megyn Kelly), just what will Trump say, the rematch of Rand vs Christie, and of course the mano-a-womano Trump-Fiorina slam, especially after President Obama said there is "nothing patriotic about talking down America," or, it appears, telling the truth. Grab some popcorn…

     

    The frantic fifteen…(Note – Santorum, Jindal, Pataki, Graham were all demoted to the under-card debate earlier at 6pmET)

     

    And the front-runners…

     

    Trump tops the Searches…

     

    CNN explains the rules – no biting, no punching below the waist…

     

    Live Stream (via CNN)… (click image for link to CNN feed – no embed provided)

    *  *  *

    And do not forget to fill out your Bingo Card…

    *  *  *

    NBC News offers A Viewer's Guide to Tonight's Debate

    Given just how much has changed in the GOP race after the first debate and given the upcoming end to the fundraising quarter (Sept. 30!), the pressure is on for the 11 Republican candidates to perform at tonight's second debate in California at 8:00 pm ET. We'll find out which of the second-tier candidates (who all thought they'd be first tier by now) moves up or falls back. Think Walker, Paul, Rubio, Christie, Huckabee, and Kasich. Here's what each candidate needs to do:

    • Donald Trump: He needs to keep defying political gravity. Once again, he's probably going to feel like Bruce Lee in a Kung Fu movie — with everyone (opponents, moderators) coming after him. Can he fend them off once again? He's also a candidate in need of a second act (we think). Can he put some policy meat on the bones?
    • Ben Carson: Can the mild-mannered Carson keep the momentum he has in the polls? Once you lose it, you often don't get it back. And this is his first time FRONT and CENTER. So he can't just disappear for periods of a time, even if he wants to.
    • Jeb Bush: Tagged as Mr. Low Energy by Trump, Jeb needs to be able to flex his muscles — especially with Republicans looking to see how he might fare against Hillary. He also should be prepared for other candidates NOT named Trump to come after him as a way to show off their OWN anti-establishment bona fides.
    • Marco Rubio: Maybe no one had a better debate last time around but so little to show for it afterward. He might be the most talented unscripted pol in the stage. Can he show it again?
    • Scott Walker: Maybe no one needs a strong performance more than Walker does. From first or second in the polls to 10th place, Walker needs to turn things around ASAP. As aides told NBC's Kelly O'Donnell: "If he gets the chance to mix it up, he's going to" do that.
    • Carly Fiorina: Like Carson, she needs to keep her momentum. And with a likely clash coming with Trump, she can't back down. (As she told CNBC's John Harwood: "Mr. Trump's going to be hearing quite a lot from me.")
    • Ted Cruz: As he's become Robin to Trump's Batman, can Cruz steal the spotlight, especially with a possible government shutdown looming?
    • Mike Huckabee: He sure got his Kim Davis moment a few days ago (and largely shut out Cruz from sharing the stage). With a Davis question likely coming, can Huckabee demonstrate, like he did in 2007-2008, that he still has what it takes to be the GOP's best debate performer?
    • Rand Paul: Paul was definitely feisty in the first debate, but it didn't get much traction. What does he do to stand out this time? Like Walker, he's a candidate who, financially speaking, badly needs a good showing.
    • John Kasich: His advertising push in New Hampshire has paid dividends so far. Can he use this debate to catapult himself in the national polls, too?
    • Chris Christie: In addition to Walker, Christie needs a strong performance — just to avoid being left out of the conversation heading into October's third GOP debate.

    And, as we noted previously, while initial denial by virtually everyone, especially the so-called pundits none of whom anticipated Trump's unprecedented surge in the polls, turned slowly into much publicized anger, now comes the bargaining phase, and as Bloomberg political commentator Mark Halperin who admits spending "about 60 percent of my waking hours talking about Donald Trump" explores, the panicked GOP establishment is now scrambling to find ways to "stop" the Trump Juggernaut.

    According to him, the core GOP and especially his republicans contenders, may attack Trump through four possible frames:

    • Trump can’t be trusted because he is an egomaniac with a bad character.
    • Trump is a liberal and unprincipled.
    • Trump is not close to being fit to be a serious president or commander-in-chief.
    • Trump is a politician, not a businessman/outsider.

    But what Trump (and every GOP establishmentarian) really cares about…

  • In China 1300 Hedge Funds "Did Not Fight The Central Bank" And Are Now Liquidating

    When it comes to manipulating stock markets, there is the Western way in which central banks either directly, or – like in the US – indirectly, thanks to a very close relationship between the NY Fed and the world’s most levered hedge fund Citadel, documented here since 2010 – in which central bank trading desks end up buying index futures or merely use massively-sized orders to spoof the market higher (and very rarely lower), and then there is the Chinese way in which the local plunge protection team named the “National Team”, which has already spent around $300 billion to (ineffectively) halt the bursting of the Chinese stock bubble – buys individual stocks.

    The problem with both strategies is that they both ultimately fail to keep asset prices artificially propped up, but while the western approach at least provides some temporary relief which in the case of the S&P has now lasted almost 7 years, the Chinese approach is an abysmal failure, especially since unlike the US, China’s PPT – whether it wants to or not – has to report its single-name stock purchases.

    Recall on July 22 we reported that China’s Securities Finance Corp, the central bank-backed market bailout institution, had quietly become among top 10 shareholders of many listed-firms. “Among its various other investments, at least eight firms have confirmed that the CSF is now a top-10 shareholder, which include property developer Dulexe Family, Hualan Biological Engineering, resource purifying developer SJ Environment Protection, Yunnan Tin Company Group, Fujian Cosunter Pharmaceutical Co, Hunan Er-Kang Pharmaceutical Co, digital map provider NavInfo Co, and retailer Friendship & Apollo.”

    This direct intervention in individual names would continue for over a month, and it had spectacular results… for a very brief period of time.

    As Bloomberg reports, “Eastern Gold Jade rallied by the 10 percent daily limit on Aug. 17, the first trading day after disclosing China Securities Finance had accumulated a 4.2 percent stake as its third-biggest shareholder.”

    When the filings came in – showing China Securities Finance Corp. had taken major stakes in companies as part of its market-rescue effort – traders jumped to buy what they dubbed on social media as “the King’s favorite concubines.” It was a drunken orgy of backrunning the central bank. No risk right? Wrong.

    Because that’s when the hangover started, and gains quickly evaporated with the stock of Eastern Gold Jade tumbling 49% in the month since the announcement, compared with a 24 percent retreat for the Shanghai Composite. Even after the losses, the Shenzhen-based company – which reported a 37 percent drop in net income last year – trades at 4.7 times price-to book.

    And just like 13F clones end up getting burned more often than not, so too unfortunately for the Chinese copycats, an endorsement from the equity market’s savior has done nothing to ensure outsized returns. In fact, as Bloomberg adds, it was just the opposite – the stock picks have trailed the broader market. The 46 companies that reported the agency as a top 10 shareholder in the past two months lost an average 29 percent since the announcement, versus a 21 percent drop for the Shanghai Composite Index.

    One suggestion proposed by BBG is that the underperformance is a sign that the pace of China Securities Finance purchases is slowing as authorities become less concerned about an equity-market freefall. “While the agency will remain in the market for years to come, it won’t normally step in unless there’s unusual volatility and systemic risks, the China Securities Regulatory Commission said on Aug. 14.”

    However, we fail to see where the systemic risk was overnight when the Shanghai Composite soared by nearly 6% at one point before closing up 4.9% its biggest intraday surge in years, after two days of vicious declines in Chinese stocks. Far more likely, the fast buyers realized upside was capped and with memories of the recent collapse still fresh in everyone mind, fast buyers turned even faster sellers especially since the government backstop was no longer guaranteed.

    But if the pain was focused only on retail sellers, that would be understandable – after all “mom and pop” (or grandma and farmer in China’s case) are best known for buying high (and on margin), and selling low.  However, in a separate Bloomberg piece we learn that a far bigger loser than retail were China’s supposed “smartest money” investors, the countless hedge funds formed in the past year to chase the artificial market surge.

    From Bloomberg:

    The newfangled industry, short on expertise and ways to protect itself from market declines, has seen almost 1,300 funds liquidate amid China’s $5 trillion stocks selloff, and a similar number may be at risk, according to Howbuy Investment Management Co. Now, a government crackdown on short selling and other hedging strategies have made prospering in a bear market difficult.

     

    In the most devastating blow to domestic hedge funds, China has imposed new restrictions on trading in stock-index futures, a key investment strategy to dampen volatility and avoid big losses.

     

    “It spells the end, at least temporarily, for China domestic hedge funds,” Hao Hong, chief China strategist at BOCOM International Co. in Hong Kong, said in an interview.

    There is a key difference between US “hedge funds” and those in China: most of them are long-only, meaning they bet solely on rising markets. “Even before government restrictions on practices such as short-selling, many limited hedging so they maximize benefits from a market that had advanced almost 50 percent in the two years through 2014 and rallied another 60 percent through mid-June. William Ma, Hong Kong-based chief investment officer of Gottex Penjing Asset Management (HK Ltd.), said that most of the liquidated funds were launched in April and May when valuations were high, making them the “first and largest wave” of closures. While funds set up late last year or early in 2015 still face liquidation risk if the market drops further, they are fewer in number and have high cash positions, said Ma, whose firm invests in hedge funds.”

    The bottom line: “more than 50 percent of long-only new products launched this year have liquidated, according to estimates from Guo Tao, a board member of the Hedge Fund Talents Association, affiliated with the Zhejiang provincial government, whose members collectively manage about 300 billion yuan.”

    And to think, if only these hedge funds had not blindly followed in the footsteps of the PBOC, and copycatted its strategies, they would still be alive.

    The irony is even greater: if only these hedge funds had fought the Chinese version of the Fed, and shorted the stocks the PBOC had been buying, while shorting the overall market, they would be massively outperforming now. Perhaps there is a lesson in there, somewhere as the world awaits the Fed’s most “important decision ever”…

    Then again, not everyone blew up: “The real hedge funds,” which use risk-management tools including stock index futures, recorded mostly positive returns in the June to August period amid the market turmoil, Guo said.

    Ah yes, speaking of indices, going back to the first topic, the deplorable performance of the Chinese PPT, Bloomberg notes “in terms of what it bought, the government fund has done a terrible job,” said Francis Lun, chief executive officer at Geo Securities Ltd. in Hong Kong. “They should have just bought index stocks.”“

    Indeed they should: after all that’s what the Fed does. Actually, what China should have done is even simpler – listen to our advice:

  • Massive 8.3 Magnitude Quake Shakes Chile, Tsunami Waves Arrive, Copper Jumps

    A powerful earthquake strikes off the coast of Chile.

    The quake, originally measured at 7.2, has reportedly been upgraded to 8.3. 

    “Widespread hazardous tsunami waves are possible”, warns the Pacific Tsunami Warning Center. 

    Copper is jumping:

    From the USGS:

    The United States Geological Survey, using computer models, estimates that some 1.1 million people may have felt strong shaking as a result of the earthquake. This includes about 54,000 people who may have experienced “very strong” shaking, and some 4,000 who may have experienced “severe” shaking. The worst hit city would have been Illapel. Nearly 10 million others may have felt light to moderate shaking.

    And from CBS:

    U.S. officials said the quake struck just offshore in the Pacific at 7:54 p.m. and was centered about 141 miles north-northwest of Santiago. It said the quake was 4.8 miles below the surface.

     

    Chile’s emergency office warned that big waves caused by the quake could hit the coast by 11 p.m.

     

    The National Weather Service warning tsunami waves could strike Hawaii around 2:30 a.m. Thursday, local time.

    More from AP:

    A powerful magnitude-8.3 earthquake shook Chile’s capital Wednesday night, causing buildings to sway and people to take refuge in the streets. Several strong aftershocks hit within minutes as tsunami alarms sounded in the nearby port of Valparaiso.

     

    There were no immediate reports on any injuries or damage, but communications were disrupted.

     

    Chilean authorities issued a tsunami alert for the country’s entire coast, and U.S. officials posted an alert for Hawaii. Chile’s emergency office warned that big waves caused by the quake could hit the coast by 11 p.m.

     

    The U.S. Geological Survey initially reported the quake at a preliminary magnitude of 7.9 but quickly revised the reading upward to 8.3. U.S. officials said the quake struck just offshore in the Pacific at 7:54 p.m. (6:54 p.m. EDT, 1154 GMT) and was centered about 141 miles (228 kilometers) north-northwest of Santiago. It said the quake was 4.8 miles (5 kilometers) below the surface.

     

    A magnitude-8.8 quake and ensuing tsunami in central Chile in 2010 killed more than 500 people, destroyed 220,000 homes, and washed away docks, riverfronts and seaside resorts. That quake released so much energy, it actually it shortened the Earth’s day by a fraction of a second by changing the planet’s rotation.

     

    Chile is one of the world’s most earthquake-prone countries because just off the coast, the Nazca tectonic plate plunges beneath the South American plate, pushing the towering Andes cordillera to ever-higher altitudes.

     

    The strongest earthquake ever recorded on Earth happened in Chile — a magnitude-9.5 tremor in 1960 that killed more than 5,000 people.

    And here’s a look at the drama, as it unfolded:

  • "Total Failure": Pentagon Spends $41 Million Training "Four Or Five" Syrian Fighters

    Earlier today, US Central Command Gen. Lloyd Austin III seemed to suggest that US SpecOps were fighting alongside YPG in Syria. As we noted when the news hit, if true that won’t go over well with Turkey’s Erdogan, Washington’s brand new coalition partner against ISIS who has made no secret of his distrust for the YPG.

    Four hours later, the Pentagon claimed that Austin’s words were taken out of context and that in fact, US forces had not (yet) played a combat role. But just in case Washington does finally decide to admit that US boots are indeed on the ground along with Russian boots, it can always simply point to its own miserable operational failure as justification for why the previous arrangement just wasn’t going to cut it when it comes to “degrading” militant capabilities. Read on.

    As you may recall, earlier this year the Pentagon decided to try its hand at training an “appropriately vetted [group] of Syrian opposition recruits” whose mission would be to “degrade and ultimately defeat ISIL.”

    There are two immediately amusing things about the effort: 1) the notion of “appropriate vetting,” and 2) this effectively represented the DoD training a new group of Syrian fighters in an effort to destroy another group of Syrian fighters that were trained by the CIA but who ended up adding “establish medieval caliphate” to a list of operational objectives that was only supposed to include “destabilize and ultimately remove Bashar al-Assad.” 

    As we reported around three months after the new initiative was launched, things weren’t going particularly well.

    As of July, only 54 fighters had been trained and towards the end of the month – on the 30th to be specific – the group suffered its most embarrassing setback to date when its commander and deputy commander were captured by none other than al-Qaeda (who is rapidly becoming a terrorist also-ran) near the Syrian-Turkish border. 

    We’d be remiss if we didn’t point out just how ridiculous that turn of events truly was. Effectively, the newest group of US-trained Syrian fighters was on their way to fight ISIS, another group of US-trained Syrian fighters, when their leaders were captured by al-Nusra, an offshoot of al-Qaeda, whose founder and allies received US support during the Soviet-Afghan war. 

    Let’s just call that “blowback squared” or maybe “blowback cubed.”

    Of course that wasn’t the first time al-Nusra had succeeded in disrupting a US effort to train a contingent of Syrian “freedom fighters.” As The New York Times reminded us in July, last year the group “dealt a more serious blow to the CIA program, attacking and dismantling its main groups, the Syrian Revolutionaries Front and Harakat Hazm, and seizing some of their American-supplied, sophisticated antitank missiles.”

    If you thought this story couldn’t possibly get any more ridiculous, you’d have been wrong because on Wednesday, Gen. Lloyd Austin, head of the U.S. Central Command (mentioned above) and Undersecretary of Defense for Policy Christine Wormuth gave an update on the latest Pentagon effort to train and arm Syrian fighters and conceded that it was highly unlikely the DoD would hit its target of fielding a contingent that numbers more than 5,000 by the end of the year.

    What are they basing their pessimistic outlook on, you ask?  This (via Foreign Policy): 

    Only about “four or five” U.S.-trained Syrian rebels remain on the battlefield to take on the Islamic State.

    That’s right. “Four or five.” 

    So the only thing that the DoD’s estimate of the actual number of fighters currently on the ground has in common with the Pentagon’s original goal of recruiting 5,400 by the end of the year, is that both figures have a “4” and a “5” in them.

    And how much taxpayer money was spent to train and arm this anti-ISIS “force”, you ask? 

    Around $41 million. 

    We’ll leave you with following assessment from Sen. Kelly Ayotte (R-N.H.) and Sen. Jeff Sessions (R-Ala.):

    “Let’s not kid ourselves, that’s a joke. This is just a total failure.”

  • Will They Or Won't They? Five Fed Scenarios & The Market Impact

    Tomorrow's FOMC decision is the dominant topic for investors and traders across all asset classes, with FX, perhaps, the most sensitive to perceived changes (and instigator of trades via carry). As Credit Suisse details, FX volatility remains notably elevated and along with the uncertain flows surrounding so-called "risk parity" trading strategies, and the fact that 2y Treasury yields at around 0.80% are at their highest levels since 2011 – despite the less than 30% chance of a Fed hike priced in for tomorrow – only adds to the sense of uncertainty about the Fed's reaction function. In this light, how do we see the various possibilities that could emerge from tomorrow's FOMC? Here are Credit Suisse's 5 scenarios…

    As Exhibit 2 shows, short term FX implied volatility is at elevated levels, with curves typically inverted between the 1-week and 2-week tenors.

    Even beyond the immediacy of this Fed decision, the high likelihood that the Fed will still hike in 2015 even if it passes on doing so this week is contributing to levels of 3m implied volatility being near the highs of the year. As a result implied volatility curves are also inverted further out, for example between the 3m and 1y tenors (see Exhibit 3).

    An obvious contributory factor this elevated level of tension has been more general risk aversion and volatility in wider asset markets. Since June the market has had to contend with a variety of problems ranging from collapsing commodity prices to Chinese equities plunging to pressure on EM space and tremendous FX reserve declines to fears of poor performance for so-called "risk parity" trading strategies. 

    As Exhibit 4 shows, this has led not only to the more obvious price moves but also to highly unusual ones such as a sharp decline in US swap spreads (linked to the idea that bond holders such as risk-parity investors and EM central banks are offloading Treasuries).

    Such developments only deepen the sense that new and confusing forces are plaguing markets, raising the required risk premium for providing FX liquidity and by implication adding to implied volatility premia. 
     
    As for the Fed meeting, the market is pricing in around a 30% chance of a rate hike at this stage. But it still expects to see a rate hike come through by December. Our economists also believe domestic US data momentum is positive enough to compel the Fed to hike this year and think the only strong argument against doing so is the overseas environment and recent related volatility in asset markets globally. As touched on above, the fact that 2y Treasury yields at around 0.80% are at their highest levels since 2011 – despite the less than 50% chance of a Fed hike priced in for tomorrow – only adds to the sense of uncertainty about the Fed's reaction function.

    As Exhibits 6 – 7 show, despite the prevailing impression of extreme USD strength, all that has happened in the past 12 months is that the USD has moved back towards what might be considered fair value from the extremely undervalued levels last seen 12 months ago. And since the 18 March FOMC, which saw the Fed's future interest rate projections considerably lowered, the Fed's broad trade-weighted USD index has failed to make significant ground despite the collapse in many EM currencies. EUR and JPY have proved stubborn since then, while even CNY has seen only a marginal move lower (so far) despite the noise caused by last month's devaluation.

    In this light, how do we see the various possibilities that could emerge from tomorrow's FOMC? Here we consider 5 scenarios:

    1. A surprisingly hawkish Fed: We define this as a rate hike combined with no downgrade of future terminal rate projections. In this case we would expect the USD to resume trend appreciation and rally by at least 5% by the end of the year on a broad TWI basis.

     

    2. The Fed hikes but qualifies this by producing suppressed terminal rate expectations among other caveats: This should allow the USD to gain ground in line with our existing relatively muted forecast profile for the next 3 months. But the upside move is likely to be short and sharp as the subsequent period of suppressed rate expectations will reduce the potential for rate-differential and by extension FX volatility and trends.

     

    3. The Fed does not hike but makes it clear there is a high chance of a hike this year, while keeping its terminal rate expectations similar to current projections: We would expect a similar reaction to Scenario #2 above. But to the extent that the market can continue to hope for a protracted Fed hiking cycle and material monetary policy divergences persisting with other countries, there may be more lasting opportunities to establish USD longs than the case with Scenario #2.

     

    4. The Fed does not hike, it makes it clear there is a high chance of a hike this year, but still lowers its terminal rate projections: We would a modest USD sell-off of around 2-3% over a period of a couple of 1-2 weeks as the market would wonder if the Fed ever gets into a position to hike rates at all. We would use this as an opportunity to buy USD vs currencies of countries where a policy ease is likely (for example AUD or JPY) or where there are underlying and unsolved fragilities (such as EM currencies like BRL or TRY).

     

    5. A clearly dovish Fed that takes the idea of rate hikes off the table for at least 6 months: This would prove a material shock to the market and should result in material losses for the USD on a TWI basis of at least 5% in the remainder of 2015. This scenario would stress our existing USD-bullish forecast profile unless we were to expect relatively rapid dovish tilts in response by other central banks.

    To be clear, as discussed previously, we are not in the camp that sees the start of a Fed hike cycle as signaling the peak of USD strength. While we accept that this was more or less true in the 2004-6 Fed hiking cycle, that was only because conditions outside the US were so good then that other central banks were hiking even more aggressively, and the USD was used as a carry currency. That picture bears little resemblance to current global circumstances. 

  • Is This The Biggest Double-Top Ever?

    Presented with no comment…

     

     

    h/t @NorthmanTrader

  • Sep 17 – Obama Threatens China With Retaliation Over Hacking

    Follow The Market Madness with Voice and Text on FinancialJuice

    EMOTION MOVING MARKETS NOW: 17/100 EXTREME FEAR

    PREVIOUS CLOSE: 16/100 EXTREME FEAR

    ONE WEEK AGO: 13/100 EXTREME FEAR

    ONE MONTH AGO: 12/100 EXTREME FEAR

    ONE YEAR AGO: 37/100 FEAR

    Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 15.36% 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 21.35. 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 – I JUST LOVE MY NEW SWEATER….

     

    UNUSUAL ACTIVITY

    PAH FEB 25 CALLS .. 2250 @$.50 by offer

    HD OCT 115 CALL Activity 3.30 1900+ on offer

    RIG OCT 15 CALL Activity on offer

    HPQ SEP 28.5 CALL Activity 5k+ @$.22 on offer

    More Unusual Activity…

    HEADLINES

     

    US homebuilder confidence hits near 10-year high

    Moody’s: Fed hike would show strength of US recovery

    US Pres Obama digs in on spending cuts as US shutdown looms

    Obama threatens China with retaliation over hacking

    S&P: Japan downgraded to A+/A-1, stable outlook

    BOC’s Cote: C$ consistent with historical relationship with oil

    OECD Lowers Global Economic Forecast

    BoE Carney sticks to rate view, others more hawkish

    ECB Constancio: QE relatively small so far, has scope

    ECB Weidman: Cheap money cannot spur sustained growth

    ECB Nowotny calls inflation rate a big problem

    AB InBev approaches SABMiller to explore $275bn tie-up

     

    GOVERNMENTS/CENTRAL BANKS

    OECD Lowers Global Economic Forecast –WSJ

    S&P: Japan Ratings Lowered To ‘A+/A-1’; Outlook Is Stable

    Moody’s: Possible Fed hike shows strength of US recovery but potential volatility in EM capital flows

    US Pres Obama digs in on spending cuts as US shutdown looms –FT

    Obama threatens China with retaliation over hacking –USA Today

    BOC’s Cote: Current CAD level consistent with historical relationship with oil –ForexLive

    US Sen Reid: GOP Has ‘No Plans’ to Avert Government Shutdown –MNI

    BoE Carney sticks to rate view, others more hawkish –Rtrs

    BoE McCafferty Is Concerned That Inflation Could ‘Outpace’ Projection –Rtrs

    BOE Weale: Not Voting Hike Due China, New Commodity Price Fall –MNI

    BoE Forbes Says A Rate Hike Is Needed In The Not Too Distant Future

    BoE Agents See Some Hiring Difficulties In Skilled Roles –MNI

    ECB Lowers Capital Ratio At The Request Of The French Banking –El Pais

    ECB Constancio: QE Relatively Small So Far, Has Scope –Rtrs

    ECB Weidman: Cheap Money Cannot Spur Sustained Growth –Rtrs

    ECB Nowotny Calls Inflation Rate A Big Problem –Nasdaq

    Riksbank Minutes Show Optimism Over Inflation Prospects –MorningStar

    FIXED INCOME

    Yields remain high on Bund yield jump, Fed uncertainty –Rtrs

    UBS: Buy Treasuries and sell Bunds –FT

    Goldman: Markets Unprepared for Fed as Treasuries Seesaw –BBG

    FX

    USD: Dollar edges lower after subdued inflation reading –MW

    GBP: Sterling off to the races, up by over 1% –FT

    GBP: BOE Carney: Not Discussed Sterling Exchange Rate With Osborne –MNI

    ENERGY/COMMODITIES

    WTI futures settle +5.75% at $47.15

    US DOE Crude Inventories (WoW) Sep-11: -2104K (est 2000K; prev 2570K)

    US DOE Distillate Inventories (WoW) Sep-11: 3060K (est 300K; prev 952K)

    US DOE Cushing Crude Inventories (WoW) Sep-11: -1906K (est -311K; prev -897K)

    US DOE Gasoline Inventories (WoW) Sep-11: 2840K (est -500K; prev 384K)

    US DOE Refinery Utilization (WoW) Sep-11: 2.20% (est -0.55%; prev -1.90%)

    CRUDE: Crude jumps as US stockpiles unexpectedly drop –FT

    CRUDE: Russia Energy Min Novak: Russia doesn’t see need to cuy oil output –BBG

    O&G: Moody?s: See Oil And Gas Levels To Stay Near Recent Low Levels Moving Into 2016

    China Raises Retail Fuel Prices –Xinhua

    EQUITIES

    S&P 500 provisionally closes +0.9% at 1,995

    DJIA provisionally closes +0.8% at 16,736

    Nasdaq provisionally closes +0.6% at 4,889

    M&A: AB InBev approaches SABMiller to explore $275bn tie-up –FT

    M&A: Potash Corp, K+S not actively discussing takeover –Rtrs

    EARNINGS: FedEx Trims 2016 Forecast as First-Quarter Earnings Fall Short –BBG

    MARKETS: Short interest in S&P 500 shoots up ahead of Fed –FT

    TECH: Apple Watch bug delays software update –FT

    BANKS: Goldman’s Blankfein on Fed hike: ‘I wouldn’t do it’ –CNBC

    FUNDS: US equity ETFs have just racked up 2 massive daily inflows –FT

    O&G: Moody’s: oil firms ‘well positioned’ for downturn –FT

    O&G: Glencore raises ?1.6bn ($2.5bn) through share placement –FT

    EMERGING MARKETS

    OECD downgrades China growth forecasts –FT

    CSRC assistant chairman Zhang Yujan disciplined for serious violations –ForexLive

    Fitch: Brazil to remain in recession rest of this year with increased risks to 2016 f’csts

    Fitch Affirms Argentina Foreign Currency IDR at ‘RD’

    Thai Central Bank Holds Rate As Government Eyes Stimulus –BBG

     

    Emerging market stock allocations at all-time low –Rtrs

  • This Is The Satellite Image That Supposedly Proves The Presence Of Russian "Troops And Aircraft" In Syria

    In a day of diplomatic snafus by the Pentagon, which first admitted it had spec ops forces in Syria (remember when it was just “advisors” and the Obama administration was blaming Russia for escalating the conflict by daring to join the fight against ISIS and sending its own troops in Damascus) then promptly retracted, using the old “there was no Freudian slip” explanation, the US promptly needed another diversion to cast the blame back in Putin’s court.

    Which brings us to our post from Monday in which “anonymous” US officials told Reuters that “Russia has positioned about a half dozen tanks at a Syrian airfield where it has been steadily building up defenses” with Reuters adding that “one of the U.S. officials said seven Russian T-90 tanks were seen at the airfield near Latakia, a stronghold of Syrian President Bashar al-Assad. The two U.S. officials said Russia had also positioned artillery there” adding that “the two U.S. officials said Russia had also positioned artillery, which they said appeared.”

    Our request was simple: “We can only hope the “anonymous” US officials will soon provide photographic evidence of their claims.”

    Today, we got this “evidence” when Foreign Policy magazine released a satellite image which, according to the author Jeffrey Lewis “Leaves No Doubt That Russia Is Throwing Troops and Aircraft Into Syria.”

    On Sept. 4, the New York Times published an article suggesting that Russia had shipped prefabricated housing and a transportable air traffic control station to an airfield near Latakia. It was a great scoop, but I was pretty baffled that the New York Times didn’t bother to purchase a satellite image of the facility. Had they done so, they would have realized that they buried the lede.

     

    The satellite image shows far more than prefabricated housing and an air traffic control station. It shows extensive construction of what appears to be a military canton at Bassel al-Assad International Airport (named for Bashar’s elder brother, who died in a car accident in 1994). This canton appears designed to support Russian combat air operations from the base and may serve as a logistical hub for Russian combat forces.

     

    The scale of the construction goes even further. A large area of ground has been cleared in many different parts of the air base. There are pallets and crates everywhere. Trucks are visible driving into the site. The image drives home the implication of all those flights and shipments heading to Syria: Russia is substantially expanding its involvement.

    Is there “no doubt” as the author claims this is happening? We leave it to readers to decide. One thing that is certain is that earlier today it was the US which first admitted it had spec ops in Syria in what could be the most inconvenient Freudian slip in recent “proxy war” history, and then was promptly forced to retract it.

    As for Russian forces “undoubtedly” throwing troops into Syria, well – decide for yourself. Here is FP’s before and after satellite image “evidence.” It’s important because images such as these are the modern equivalent of Colin Powell’s vial of WMDs presented to the United Nations in 2003 to justify the war with Iraq.

    Before:

    and After:

  • Crime Pays In America: United CEO Exits With $21M Package Despite Corruption Probe

    Submitted by Mike Krieger via Liberty Blitzkrieg blog,

    Crime and corruption pay in America; you just have to be a corporate CEO, Wall Street executive, senior member of the military-industrial-intelligence complex or a politician. These so-called “elites” have perverted American justice to such a degree that not only are they now entirely above the law, they’re actually rewarded for unethical and crony behavior even after they get caught.

    Nothing sums up how completely fraudulent and corrupt the U.S. economy has become than the following story, which describes how the United Airlines CEO who stepped down in the midst of a corruption probe is rewarded with a $21 million exit package, “free flights for life,” and free parking in downtown Chicago forever. No, I’m not making this up.

    From the Omaha World-Herald:

    When Jeff Smisek stepped down as United Airlines’ chief executive last week amid a federal corruption probe, he didn’t walk away empty-handed. He will receive at least $21 million in cash and stock, fly free for the rest of his life and keep his company car.

     

    Then there is the parking.

     

    He can park free in downtown Chicago and at airports in Houston and Chicago for the rest of his life.

     

    The full value of Smisek’s exit package could be even higher — he’s still eligible for the incentive pay that accumulated before his resignation. In all, Bloomberg estimates he will walk away with $28.6 million. That’s more than double his pay last year, which reached $12.8 million.

     

    Smisek’s resignation was tied to a federal investigation into whether the air carrier launched a money-losing flight from Newark, New Jersey, to Columbia, South Carolina, to benefit the influential then-chairman of the Port Authority of New York and New Jersey, who owned a vacation home near Columbia.

     

    Smisek’s tenure was also pockmarked by technical glitches that briefly grounded United’s fleet this year, and a difficult merger with Continental.

    You see, he wasn’t just rewarded for corruption, he was incompetent too.

    “This is very, very typical,” said Charles Elson, chairman of the University of Delaware’s Weinberg Center for Corporate Governance.

     

    Less typical: Smisek’s non-cash compensation, including the company car, health insurance and the lifetime of free flights (and companion tickets), compensation experts say. United is even picking up the tax bill for the free flights, which the company has estimated could come to more than $437,000.

     

    “From the worker’s perspective, it’s obviously a different mentality,” said Molly Sheerer, a spokeswoman for the union, which is in the midst of contract negotiations with the airline. “We believe there’s something wrong when an executive is awarded over $25 million for failing to do his job.”

    Now here’s the real kicker…

    “The way that CEO employment agreements are written, you really have to commit a felony before they can fire you and not pay you anything,” said Paul Hodgson, a partner at BHJ Partners, a compensation research firm. “Just being bad at your job or immoral or unethical or whatever is not enough usually.”

    Heads I win, tails you lose.

    Just another day in the imperial Banana Republic.

  • Please Ignore The Freudian Slip: Pentagon Backtracks, Denies US Special Forces Are In Syria

    When NBC reported earlier that DoD confirmed US special forces were on the ground in Syria “assisting Kurdish forces in fight against ISIS” it crashed the entire carefully-structured US diplomatic narrative. Not that US spec ops are or are not on the ground in Syria – of course they are – but just like with the Russia/Ukraine escalation and even the Greek negotiation with Brussels, the question has always been one of PR spin: who will be the first to admit responsibility for upcoming escalation and who will be stuck with the blame if the ‘worst case’ scenario were to unravel.

    As such US admission would then permit Russia to admit its own troops are on the ground in Syria, “purely to fight ISIS of course” and nothing to do with protecting their vital interest, i.e., Syrian territorial sovereignty from being used by Qatar gas pipelines, in the process setting off the next stage of pre-war foreplay, one in which both sides officially admit they are on the ground, if not to challenge ISIS, then certainly to use the Assad presidency as a proxy smokescreen for whatever comes next.

    Which is why we were counting the minutes until the scrambling Pentagon would vehemently deny the NBC report. The answer: just under 4 hours.

    Which incidentally may be the first official “please ignore the Freudian slip” excuse in Pentagon history.

  • How Underfunded Are US Corporate Pension Plans?

    To be sure, we’ve written quite a bit about both public and private pension plans this year. Most notably, we’ve chronicled the deplorable state of the pension system in Illinois, where a State Supreme Court ruling in May set a de facto precedent for pension reform bids across the country. 

    But while the focus – here and elsewhere thanks to America’s growing state and local government fiscal crisis – has been on the public sector, seven years of ZIRP has taken its toll on private sector pension plans. 

    We touched on this briefly in March when we noted that ECB QE could end up widening pension deficits dramatically and as FT reported last month, “UK companies are paying less towards meeting their pension shortfalls than at any point since 2009, even as aggregate pension deficits reach their highest level in five years.” 

    For those wondering about the extent to which falling discount rates have served to create a giant, multi-hundred billion dollar underfunded liability for S&P companies, look no further than the following graphic from Citi’s Matt King which should come with a caption that reads: “You’re welcome pensioners — The Fed.” 

    More color, from Mercer:

    The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies dropped by 2% to 81% as of August 31st, 2015, rising interest rates mitigated losses in equity markets. As of August 31st, 2015, the estimated aggregate deficit of $423 billion USD increased by $44 billion as compared to the end of July. Funded status is now up by $81 billion USD from the $504 billion USD deficit measured at the end of 2014, according to Mercer,[1] a global consulting leader in advancing health, wealth and careers.

  • The Fed's Pain-Relieving Policies "Have Made The System More Vulnerable To A Crash"

    Authored by Rand Paul and Mark Spitznagel, originally posted op-ed at The Wall Street Journal,

    The recent tumult in U.S. equity markets has prompted many analysts to urge the Fed to postpone any increase in interest rates. This advice assumes that rock-bottom interest rates are balm for a weak economy, with the only possible side effect being price inflation. Yet it is the Fed’s artificially low interest rates that set up the economy for the 2008 crisis, not to mention previous crises.

    The “doves” are right to point out that higher interest rates will lead to a repricing of many securities, aka a crash. But years of near-zero interest rates have made this inevitable. Continuing on the current course will only allow structural distortions caused by these interest rates to fester and an inevitable reckoning that will be much worse than seven years ago.

    The master fallacy underlying so much economic commentary is to imagine that a handful of experts in Washington should be setting the price of borrowing money. Instead, the Fed should set markets free.

    In their theory of business cycles, the Austrian economists Ludwig von Mises and Friedrich Hayek explained several decades ago that artificially cheap credit misleads entrepreneurs and investors into doing the wrong things—which in the current financial context includes making unsustainable, levered investments in risky assets, including companies loading up on debt to buy back and boost the price of their stock. Low interest rates may create an illusion of robust markets, but eventually rates spike, assets are suddenly revealed to be too highly priced, and debt unpayable. Many firms have to cut back production or shut down, unemployment rises and the boom goes bust.

    The Austrian diagnosis leads to an unorthodox prescription: Rather than provide “stimulus” to boost demand during a slump, the Federal Reserve and Congress should stand aside. Recessions are a painful but necessary corrective process as resources—including labor—are guided toward more sustainable niches, in light of the errors made during the giddy boom period.

    In 2000 the stock market, bloated by earlier Fed rate cuts, started falling when the tech bubble burst. Markets bottomed out in 2002, as the Fed slashed rates. Although people hailed then-chairman Alan Greenspan as “the Maestro” for providing a so-called soft landing, in hindsight he simply replaced the dot-com bubble with a housing bubble.

    When the housing bubble eventually burst, the crisis was much worse than in 2000. When Lehman Brothers failed in September 2008, it seemed as if the whole financial infrastructure was in jeopardy. And Fed Chairman Ben Bernanke followed the same playbook: cut interest rates.

    When near-zero-percent interest rates did not jump-start the economy, the Fed launched a series of “quantitative easing” (QE) programs, buying unprecedented amounts of Treasurys and mortgage-backed securities. The Fed has roughly quintupled its balance sheet, going from $905 billion in early September 2008 to almost $4.5 trillion today.

    The U.S. stock market rose with each new wave of QE. Does this wealth represent genuine economic progress? Economic growth is still far below previous recoveries. Unfortunately, the performance of equities, as well as the unprecedented increase in public and private debt, may be another asset bubble in the making, leading to another inevitable crisis likely worse than in 2008.

    At its core, the market economy is a homeostatic mechanism that self-corrects by cleansing mistakes from the system. When policy makers—in the Fed or Congress—try to spare us from all pain, they cripple that mechanism and ironically make the system vulnerable to a major crash.

    Consider an analogy. When the U.S. Forest Service took a zero-tolerance approach to forest fires 100 years ago, what ultimately happened was a massive wildfire at Yellowstone National Park in 1988 that wiped out more than 30 times the acreage of any previously recorded fire. Paradoxically, by refusing to allow small fires to run their natural course, the forest managers made the entire park vulnerable to a giant inferno.

    What is true of forests holds for the economy: When governments create a lie, whether it’s a fabricated ecology of no fires or a fabricated economy of no failures, the truth reveals itself even more violently than otherwise. Attempts to stop any dips in the stock market with monetary stimulus postpone the necessary adjustments to how and where resources and workers are deployed. Interest rates are a vital signal in the market; they must be allowed to do their job—that is, they must be allowed to be free.

    The sooner Fed officials withdraw their artificial monetary injections and let interest rates rise to their natural level set by free markets rather than government decree, the sooner the economy can return to genuine, sustainable growth.

  • Refugees Vs Riot Police: A Photo Album From The Frontlines Of Europe's Migrant Crisis

    Earlier this week, Hungarian Prime Minister Viktor Orban moved to stem the flow of Syrian refugees across his country’s border with Serbia by first constructing a 100-mile fence and subsequently authorizing the arrest and prosecution of migrants who attempt to breach the barrier and enter the country illegally. 

    Orban then sent the military and mounted police to patrol the border.

    This left thousands of asylum seekers bound for Germany stranded in Serbia, staring up at 12 feet of razor wire and pondering a new route to the German “promised land.” For its part, Serbia has been transporting migrants to the border with Croatia, which says it will “direct” the refugees to where they want to go. 

    Needless to say, Orban’s border crackdown transformed an already tense situation into a veritable powder keg and on Wednesday, Hungary sent in the riot police at which point the angry migrants reportedly “became aggressive” and tried to breach the fence. 

    Next came the tear gas and water cannons. 

    Below, find the visuals courtesy of Reuters:

    *  *  *

    And meanwhile, in Germany…

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