Today’s News September 24, 2015

• Paul Craig Roberts: Democracy Has Departed The West

  Authored by Paul Craig Roberts,

  Before the West spreads democracy abroad maybe it could get some for itself. The US is an oligarchy in which government is answerable to six powerful private interest groups. In Europe governments are answerable to the EU, Washington, and private bankers and not to their peoples. In the UK the military brass has declared its hold on the reins of power.

  Jeremy Corbyn is the first Labourite to lead the Labour Party in a long time. Considering the stupidity and immorality of the Tories, Corbyn could become prime minister of Britain. Should this occur, Corbyn would shift the budget priorities away from supporting Washington’s wars toward refurbishing the social welfare state that made life for ordinary Britishers more secure and less stressful.

  A senior serving general of the British army said that the army would not allow the people to “put a maverick in charge of the country’s security. The Army just wouldn’t stand for it and would use whatever means possible, fair or foul, to prevent that.”

  In other words, a democratic outcome unacceptable to the English military will be overthrown. Just like in Egypt.

  Here we have the incongruity of Washington and London bringing democracy to others through what Vladimir Putin calls “airstrike democracy,” while tolerating a democracy deficit themselves. The safest conclusion is that democracy is a cloak for an aggressive agenda, not a value in itself to the US and UK elites, who rule and who intend to continue to rule these countries for their personal benefit.

  Jonathan Cook reports that the use of “whatever means possible, fair or foul,” against Labour prime ministers who actually stood for the people rather than for the elites is not unique to Corbyn. Labour Prime Minister Harald Wilson faced similar pressure and resigned. 

  As far as I can tell, not only has democracy departed the Western world, but also compassion, empathy for others, morality, integrity, respect for truth, justice, faithfulness, and self-respect. Western civilization has become a hollow shell. There is nothing left but greed and coercion and the threat of coercion. When I read—hopefully incorrect reports—that Russia’s President Putin desires to be a partner of the West, I wonder why such a powerful country, which has emerged into light out of darkness, wants to be Satan’s partner. I assume that the reports are untrue or that Putin is acting in the interest of humankind to defuse the dangerous situation created by Washington and its NATO sock puppets.

  Russia should not forget the courageous speech that Venezuelan President Hugo Chavez gave to the UN on September 20, 2006. Standing at the podium, Chavez said that on the previous day George W. Bush stood here, “Satan himself, speaking as if he owned the world. You can still smell the sulfur.” The purpose of America, Chavez said, is “to preserve the pattern of domination, exploitation and pillage of the peoples of the world.”

  Chavez’s words were too much truth for US politicians. Nancy Pelosi, the multimillionaire Speaker of the US House of Representatives, said that such a speech was to be expected from an “everyday thug.”

  Elsewhere the response was different. Rafael Correa, currently President of Ecuador, said that Chavez had insulted Satan, because although Satan is evil like Washington, he is al least intelligent, and Washington is completely stupid.

  The Western World is on its last legs. Unemployment is horrendous for European and American youth—primarily for the educated. Young American women, driven by student debt, advertise on Internet sites for “sugar daddies” to whom they will supply sex for financial support. The easy answer—“education is the solution”— is a lie. Ph.Ds cannot get jobs, because university budgets are cut in order to save money for wars and bank bailouts and 75% of the remaining budget is used by administrations to pay themselves large salaries and perks. NYU, for example, provides its higher administrative personnel with expensive summer homes. University presidents in America have multimillion dollar incomes, while the students drown in debt.

  The Wall Street Mentality—unlimited Greed—has taken over American life, and this greed has been exported to Europe, which had achieved a sharing relationship between labor and capital. Today Europe, like the US, is an opportunity wasteland for the young. Greece has been sacrificed for the private bankers, and Italy, Spain, and Portugal are waiting in the wings. In the place of independent European countries, a fascist centralized authority is rising.

  As millions of refugees from Washington and its NATO enablers’ wars seek refuge in Europe, budgets for social welfare are further pressed.

  In recent years we have witnessed that private bankers acting through the EU were able to appoint the governments of the allegedly democratic governments of Greece and Italy.

  In the Western World the aristocracy of wealth is being re-established. If Russia and China join this “partnership,” then billions of peoples will be ruled by a handful of mega-rich elites.

  The world is on the knife edge. The West is lost. Russia and China could go down with the West, because both Russia and China suffered tyranny and look to the West for the paths to freedom and liberty. But Western paths lead to “domination, exploitation and pillage of the peoples of the world.”

  Will Russia and China participate in the pillage, or will they resist it, standing firm for humanity?

  

  

  

  

  

• Is Volkswagen About To Unleash The Next Deflationary Wave?

  With the new car bubble peaking, and the world's automakers having ramped up production across the globe after seeing Fed-driven signals that all is well and all is going to get better…

  

   

  …the slowdown in China already has many hitting the panic button (with production plunging, capacity utilization tumbling, and workweeks tumbling).

  

   

  With this week's 'exogenous' diesel-defect 'event', the inventory-problem that US automakers are facing…

  

   

  …is nothing compared to the potentially catacylysmic wave of deflationary pricing (and deflationary lack of demand for raw materials) that VW faces with its record inventory.

   

  Inventories of Finished Goods…

  

  Charts: Bloomberg

  The last time inventories spiked on this scale… right into an 'exogenous' event… it ended very very badly!

  Think we are exaggerating, think again… (via Reuters)

  The Volkswagen emissions scandal has rocked Germany's business and political establishment and analysts warn the crisis at the car maker could develop into the biggest threat to Europe's largest economy.

   

  Volkswagen is the biggest of Germany's car makers and one of the country's largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.

   

  Volkswagen Chief Executive Martin Winterkorn paid the price for the scandal over rigged emissions tests when he resigned on Wednesday and economists are now assessing its impact on a previously healthy economy.

   

  "All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis," ING chief economist Carsten Brzeski told Reuters.

   

  "If Volkswagen's sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole," he added.

   

  Volkswagen sold nearly 600,000 cars in the United States last year, around 6 percent of its 9.5 million global sales.

   

  …

   

  In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly two percent of the whole workforce.

   

  In addition, automobiles and car parts are Germany's most successful export — the sector sold goods worth more than 200 billion euros ($225 billion) to customers abroad in 2014, accounting for nearly a fifth of total German exports.

   

  "That's why this scandal is not a trifle. The German economy has been hit at its core," said Michael Huether, head of Germany's IW economic institute.

  Some observers also see some irony in the scandal.

  While the German economy defied the euro zone debt crisis and, so far, the economic slowdown in China, it could now be facing the biggest downside risk in a long while from one of its companies.

   

  "The irony of all of this is that the threat could now come from the inside, rather than from the outside," Brzeski said.

  When the largest carmaker in the world faces a sudden (and extremely likely) implosion in sales at the same time as holding a record inventory having ramped at a record pace in the last two quarters, the ripple through into the German economy, European economy, and world economy is extremely deflationary… which leaves only one thing – Moar QE, or QQE, or Q€.

  *  *  *

  And, as we explained before, if you are relying on more easing from The PBOC… it has made absolutely no difference whatsoever in the past 10 years…

  

  Charts: Bloomberg

  And all of this on top of the fact that the subprime auto loan market is set to collapse…

  To sum up…

  • The only way automakers are making sales is by lowering credit standards to truly mind-numbing levels and increasing residuals to make the monthly nut affordable…. that cannot last.
  • China's economic collapse has crushed forecasts for the automakers.
  • Inventories of new cars are already at record highs.
  • Inventories of luxury high-quality used cars are at record highs and prices are tumbling.
  • And July saw a massive surge in producton.
  • What comes next is simple… a production slump

  We're gonna need a German bailout… or more chemical plant explosions…

  

  

  

  

  

• Japanese Stocks Tumble After Holiday, China Default Risk Hits 2 Year Highs As Yuan Weakens For 4th Day

  AsiaPac stocks are broadly lower at the open, folowing US' lead as after being closed for 3 days, Japanese stocks open and catch down to global weakness with Nikkei 225 at 2-week lows. It appears it is time to "get back to work Mr.Kuroda," as stocks are below Black Monday's lows. Following last night's dismal data, China credit risk rose once again to new 2 year highs. Once again, industrial metals are under pressure with iron ore, copper, and aluminum all lower (following "peak steel" comments). After 3 days of weakening (and Xi's comments that China won't weaken), PBOC weakend the Yuan fix again, pushing the offshore-onshore spread to 2-week wides (over 500 pips apart).

   

  After 3 days of holidaying, selling resumes in Japanese stocks… ahead of tonight's Japan PMI.

  

   

   

  The good news to start the day in China, delveraging begins again…

  • *SHANGHAI MARGIN DEBT BALANCE FALLS FIRST TIME IN THREE DAYS

  As it appears the excitement of high beta fraud is back with ChiNext and Shenzhen outperforming this week…

  

   

  But the path remains similar (albeit a little faster)…

  

   

  Once again China injects more liquidity…

  • *PBOC TO INJECT 80B YUAN WITH 14-DAY REVERSE REPOS: TRADER

  And industrial metals are all lower after…

  • *CHINA STEEL OUTPUT TO DROP TO 810 MLN TONS IN `15: CUSTEEL
  • *CHINA STEEL OUTPUT HAS PEAKED, CUSTEEL'S YANG SAYS IN I'VIEW

  But China default risk continues to leak higher…

  

   

  Following Xi's comments that China will not devalue the Yuan (and 3 days of devaluing the Yuan), PBOC weakened the Yuan fix again tonight…

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3791 AGAINST U.S. DOLLAR

  

   

   

  Notably the spread between Onshore and Offshore Yuan has pushed to a 2-week high…

  

   

  Charts: Bloomberg

  

  

  

  

  

• The Worst Part Is Central Bankers Know Exactly What They Are Doing

  Submitted by Brandon Smith via Alt-Market.com,

  The best position for a tyrant or tyrants to be in, at least while consolidating power, is tyranny by proxy. That is to say, the most dangerous tyrants are those the people do not recognize: the tyrants who hide behind scarecrows and puppets and faceless organizations. The worst position for the common citizen to be in is a false sense of security and understanding, operating on the assumption that tyrants do not exist or that potential tyrants are really just greedy fools acting independently from one another.

  Sadly, there are a great many people today who hold naïve notions that our sociopolitical dynamic is driven by random chaos, greed and fear. I’m sorry to say that this is simply not so, and anyone who believes such nonsense is doomed to be victimized by the tides of history over and over again.

  There is nothing random or coincidental about our political systems or economic structures. There are no isolated tyrants and high-level criminals functioning solely on greed and ignorance. And while there is certainly chaos, this chaos is invariably engineered, not accidental. These crisis events are created by people who often refer to themselves as “globalists” or “internationalists,” and their goals are rather obvious and sometimes openly admitted: at the top of their list is the complete centralization of government and economic power that is then ACCEPTED by the people as preferable. They hope to attain this goal primarily through the exploitation of puppet politicians around the world as well as the use of pervasive banking institutions as weapons of mass fiscal destruction.

  Their strategic history is awash in wars and financial disasters, and not because they are incompetent. They are evil, not stupid.

  By extension, perhaps the most dangerous lie circulating today is that central banks are chaotic operations run by intellectual idiots who have no clue what they are doing. This is nonsense. While the ideological cultism of elitism and globalism is ignorant and monstrous at its core, these people function rather successfully through highly organized collusion. Their principles are subhuman, but their strategies are invasive and intelligent.

  That’s right; there is a conspiracy afoot, and this conspiracy requires created destruction as cover and concealment. Central banks and the private bankers who run them work together regardless of national affiliations to achieve certain objectives, and they all serve a greater agenda. If you would like to learn more about the details behind what motivates globalists, at least in the financial sense, read my article 'The Economic Endgame Explained.'

  Many people, including insiders, have written extensively about central banks and their true intentions to centralize and rule the masses through manipulation, if not direct political domination. I think Carroll Quigley, Council on Foreign Relations insider and mentor to Bill Clinton, presents the reality of our situation quite clearly in his book “Tragedy And Hope”:

  "The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank … sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

  This "world system of financial control" that Quigley speaks of has not yet been achieved, but the globalists have been working tirelessly towards such a goal.  The plan for a single global currency system and a single global economic authority is outlined rather blatantly in an article published in the Rothschild owned 'The Economist' entitled 'Get Ready For A Global Currency By 2018'.  This article was written in 1988, and much of the process of globalization it describes is already well underway.  It is a plan that is at least decades in the making.  Again, it is foolhardy to assume central banks and international bankers are a bunch of clumsy Mr. Magoos unwittingly driving our economy off a cliff; they know EXACTLY what they are doing.

  Being the clever tyrants that they are, the members of the central banking cult hope you are too stupid or too biased to grasp the concept of conspiracy. They prefer that you see them as bumbling idiots, as children who found their father’s shotgun or who like to play with matches because in your assumptions and underestimations they find safety. If you cannot identify the agenda, you can do nothing to interfere with the agenda.

  I have found that the false notion of central bank impotence is growing in popularity lately, certainly in light of the recent Fed decision to delay an interest rate hike in September. With that particular event in mind, let’s explore what is really going on and why the central banks are far more dangerous and deliberate than people are giving them credit for.

  The argument that the Federal Reserve is now “between a rock and a hard place” keeps popping up in alternative media circles lately, but I find this depiction to be inaccurate. It presumes that the Federal Reserve "wants"  to save the U.S. economy or at least wants to maintain our status quo as the “golden goose.” This is not the case.  America is not the golden goose.  In truth, the Fed is exactly where it wants to be; and it is the American people who are trapped economically rather than the bankers.

  Take, for instance, the original Fed push for the taper of quantitative easing; why did the Fed pursue this in the first place? QE and zero interest rate policy (ZIRP) are the two pillars holding up U.S. equities markets and U.S. bonds. No one in the mainstream was demanding that the Fed enact taper measures. And when the Fed more publicly introduced the potential for such measures in the fall of 2013, no one believed it would actually follow through. Why? Because removing a primary support pillar from under the “golden goose” seemed incomprehensible to them.

  In September of that year, I argued that the Fed would indeed taper QE. And, in my article “Is The Fed Ready To cut America’s Fiat Life Support?” I gave my reasons why. In short, I felt the Fed was preparing for the final collapse of our economic system and the taper acted as a kind of control valve, making a path for the next leg down without immediate destabilization. I also argued that all stimulus measures have a shelf life, and the shelf life for all QE and ZIRP is quickly coming to an end. They no longer serve a purpose except to marginally slow the collapse of certain sectors, so the Fed is systematically dismantling them.

  I received numerous emails, some civil and some hostile, as to why I was crazy to think the Fed would ever end QE. I knew the taper would be instituted because I was willing to accept the real motivation of central banks, which is to undermine and destroy economies within a particular time frame, not secure economies or kick the can indefinitely. In light of this, the taper made sense. One great pillar is gone, and now only ZIRP remains.

  After a couple of meetings and preplanned delays, the Fed did indeed follow through with the taper in December of that year. In response, energy markets essentially imploded and stocks became steadily more volatile over the course of 2014, leading to a near 10% drop in early fall followed by foreign QE efforts and false hints of QE4 by Fed officials as central banks slowed the crisis to an easier to manage pace while easing the investment world into the idea of reduced stimulus policies and reduced living standards; what some call the "new normal".

  I have held that the Fed is likely following the same exact model with ZIRP, delaying through the fall only to remove the final pillar in December.

  For now, the Fed is being portrayed as incompetent with markets behaving erratically as investors lose faith in their high priests. This is exactly what the bankers that control the Fed prefer. Better to be seen as incompetent than to be seen as deliberately insidious. And who knows, maybe a convenient disaster event in the meantime such as a terrorist attack or war (Syria) could be used to draw attention away from the bankers completely.

  Strangely, Bloomberg seems to agree (at least in part) with my view that the taper model is being copied for use in the rate hike theater and that a hike is coming in December.

  Meanwhile, some Federal Reserve officials once again insinuate that a hike will be implemented by the end of the year while others hint at the opposite.

  Other mainstream sources are stating the contrary, with Pimco arguing that there will be no Fed rate hike until 2016.  Of course, Pimco made a similar claim back in 2013 against any chance of a QE taper.  They were wrong, or, they were deliberately misleading investors.

  Goldman Sachs is also redrafting their predictions and indicating that a Fed rate hike will not come until mid-2016. With evidence indicating that Goldman Sachs holds considerable influence over Fed policy (such as exposed private meetings on policy between Fed officials and banking CEO's), one might argue that whatever they “predict” for the rate hike will ultimately happen. However, I would point out that if Goldman Sachs is indeed on the inside of Fed policy making, then they are often prone to lying about it or hiding it.

  During the taper fiasco in 2013, Goldman Sachs first claimed that the Fed would taper in September. They lost billions of dollars on bad currency bets as the Fed delayed.

  Then, Goldman Sachs argued that there would be no taper in December of that year; and they were proven to be wrong (or disingenuous) once again.

  Today, with the interest rate fiasco, Goldman Sachs claimed a Fed rate hike would likely take place in September. They were wrong. Now, once again, they are claiming no rate hike until next year.

  Are we beginning to see a pattern here?

  How could an elitist-run bank with proven inside connections to the Federal Reserve be so wrong so often about Fed policy changes? Well, losing a billion dollars here and there is not a very big deal to Goldman Sachs. I believe they are far more interested in misleading investors and keeping the public off guard, and are willing to sacrifice some nominal profits in the process. Remember, these are the same guys who conned nations like Greece into buying toxic derivatives that Goldman was simultaneously betting against!

  The relationship between international banks like Goldman Sachs and central banks like the Federal Reserve is best summed up in yet another Carroll Quigley quote from “Tragedy And Hope”:

  "It must not be felt that these heads of the world’s chief central banks were themselves substantive powers in world finance. They were not. Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down. The substantive financial powers of the world were in the hands of these investment bankers (also called “international” or “merchant” bankers) who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks."

  Goldman Sachs and other major banks act in concert with the Fed (or even dictate Fed actions) in conditioning public psychology as much as they manipulate finance. First and foremost, globalists require confusion. Confusion is power.  What better way to confuse and mislead the investment world than to place bad bets on Fed policy changes?

  Heading into the end of 2015, we are only going to be faced with ever mounting mixed messages and confusion from the mainstream media, international banks and central banks. It is important to always remember, though, that this is by design. A common motto of the elite is “order out of chaos,” or “never let a good crisis go to waste.” Think critically about why the Fed has chosen to push forward with earth-shaking policy changes this year that no one asked for. What does it have to gain? And realize that if the real goal of the Fed is instability, then it has much to gain through its recent and seemingly insane actions.

  

  

  

  

  

• The Wind At Our Backs

  On my Tastytrade show recently, I’ve been mentioning how I believe the bears have “the wind at their backs” now. I pondered to myself what precisely what I meant by that phrase, and I wanted to share some thoughts on where my head is at on this topic.

  From March 2009 through December 2014, the bulls had the wind at their backs. Early on, it was a full-on gale-force hurricane, provided by the $18 trillion of freshly-minted, asset-inflating “money” provided by the helpful central banks of (a) China (b) Europe (c) Japan (d) the good old US of A.

  

  During those long, awful years, almost any downtick was bought. It took a few years for the market to get completely and utterly confident of this unseen wind. In 2010 and 2011, the market had some pretty big bouts of weakness, which got bears like me excited, but those drops were swiftly shaken off.  From October 2011 forward, the dips became more and more shallow, and it eventually reached a point that bears were put into the position of the proverbial picking up dimes in front of a steamroller.

  The entire Buy The F*cking Dip meme (BTFD) became well-entrenched and well-known. Every single spate of weakness was a buying opportunity, and the momentum of worldwide markets went into a full-blown whirlygig-spin in China, as uneducated farmers and bumpkins wandered into new brokerage offices and handed over their savings to make easy money in the completely fake Chinese stock market.

  As we sit here now, of course, things have changed quite a bit, but my thesis is that the BTFD psyche is still fairly deeply-ingrained. After all, this psychosis has been with us for seven years – SEVEN YEARS – now, and it’s not just going to disappear overnight. It’s going to take many, many disappointments on the part of the bulls until they finally get the message (just as it took many, many years for dullards like me to finally realize that shorting wasn’t working out so great).

  So, in miniature, we wind up with situations like what I posted about at 5:30 this morning, a time which the bulls were naturally celebrating, since a hard drop on the ES (summoned by dreadful economic data from China) had been reversed into a maybe-there’s-more-easing gain. The image I sloppily put together suggested a reversal at that time, and that was within a single ES point of being the high of the day.

  In other words, in spite of a nearly 30-point reversal in favor of the bulls overnight, the wind was at the back of the bears. Even though the feeling sucked at the time, we frankly had nothing to worry about, because as incredible as it may seem, it’s the bears (all three of us) that are in charge now, as opposed to the government welfare queens known as equity bulls.

  I am aggressively positioned right now. I have 117 – count ’em, 117 – short positions, and although there isn’t a single instance where I don’t hold my breath with fear before I fire up my iPad to see where the market is at, the cold fact of the matter is that anyone who looks at the chart below and thinks we are at the cusp of anything resembling a bull market is clinically insane and should be locked up for the protection of themselves and society at large:

  

  

  

  

  

• Government Shutdown & Debt Limit Questions Answered

  A federal shutdown due to a funding lapse looks no less likely than it did two weeks ago, and Goldman Sachs believes the probability is nearly 50%. The Senate is expected to begin voting later this week on a funding extension, but the House looks unlikely to act until shortly before the September 30 deadline. The following attempts to answer the main questions surrounding the shutdown, debt limit, and ramifications…

  • The current debate does not involve the debt limit. However, Congress looks increasingly likely to set the next expiration of spending authority around the time of the debt limit deadline. This is likely to lead to renewed negotiations to increase the caps on spending for 2016 and 2017, but could also cause greater uncertainty among consumers and market participants than a shutdown alone would.
  • Based on recent daily cash flows at the Treasury, we estimate that the upcoming deadline to raise the debt limit is likely to fall slightly earlier than we previously expected, potentially coming around mid-November.

  Q: Why are we talking about a shutdown again?

  Congressional Republicans lack the votes to pass the spending bill they want, but are hesitant to pass a simple extension instead. Federal spending authority expires September 30, and some conservative lawmakers have announced they will only support an extension that strips the Planned Parenthood Federation of American (PPFA) of federal funding. There is sufficient support in the House to do so, but not in the Senate, and the President would be very likely to veto such a bill. By contrast, it is likely that a “clean” extension of spending authority that does not address the issue could pass both chambers of Congress and become law, albeit with more Democratic support than Republicans. That may be how the issue ultimately gets resolved, but Republican congressional leaders are likely to first try to pass their preferred legislation.

  Q: Is Congress any closer than they were two weeks ago to resolving the funding extension and avoiding a government shutdown?

  Not really. On September 18, the House passed legislation to defund PPFA. The Senate considered similar legislation over the summer, but it won only 53 votes, 7 short of the 60 normally needed to move forward. Neither chamber has voted yet to extend spending authority past the current September 30 expiration, though preparations are being made in the Senate to do so.

  Q: What is the outlook?

  Murky. Two weeks ago we wrote that we thought the probability of a shutdown was nearly 50%, though we leaned slightly against a lapse in funding actually occurring. Since then, the political temperature around the issue has fallen and risen; Republican leaders have offered potential plans to avoid a shutdown, but none have won the support of the group of Republican lawmakers in the House driving the opposition to a clean extension of spending authority. At this point we continue to lean slightly against a shutdown, but it would hardly be surprising if it did ultimately happen, particularly because some Republican leaders might ultimately see a short shutdown as the best way out of the current situation.

  Q: What’s the schedule from here?

  Things may start to move later this week. The Senate is expected to vote on legislation later this week to extend government spending authority past September 30. The initial version is likely to include a provision to block funding to PPFA. Assuming this first attempt fails, Senate Republicans are then likely to bring up a “clean” extension of spending authority. The House, which is in recess until Thursday (September 24), looks unlikely to take up spending legislation this week, and may wait to receive whatever spending extension the Senate passes. The upshot is that, unsurprisingly, it looks like the issue will be resolved no sooner than September 30.

  Q: How does the current situation compare to the 2013 shutdown?

  They look very similar. With only a week to go before the funding deadline, the situation bears close resemblance to the situation in 2013, when congressional Republicans were split over whether to use the extension of spending authority to block implementation of the Affordable Care Act (ACA). At that point, there had been sufficient support in the House to do so, but not in the Democratic-majority Senate; the Senate now has a Republican majority, but they still lack the 60 votes needed to send legislation that Democrats oppose to the President’s desk. The ultimate decision is seen to rest with House Speaker Boehner who, just like in 2013, faces pressure from conservative members of his caucus to reject a clean spending extension, even if doing so results in a shutdown.

  That said, the current situation differs from 2013 in some respects. The PPFA issue has received a fair amount of attention, but it does not appear to be as politically salient as the ACA was in 2013. At that point, around 80 House Republicans signed on to the plan to use spending legislation to block ACA implementation; only about 30 have signed on to the current gambit. Public opinion polls show less unanimity among self-identified Republicans this time around as well; a smaller majority opposes PPFA than opposed the ACA in 2013. In one recent poll, a majority of Republicans, despite supporting the defunding of PPFA in principle, opposed shutting down the government over it, in contrast to 2013 when some polling suggested a narrow majority of Republicans supported shutting the government as a way to block ACA implementation.

  Q: What would the economic effect of a shutdown be?

  Real GDP growth in Q4 would decline by at least -0.2pp for each week the government is shut down. We think about a potential shutdown having four basic effects: (1) the direct effect of furloughing federal workers; (2) the direct effect of reduced federal spending on purchased goods and services; (3) the direct effect on private-sector activities (e.g., halted projects awaiting federal approvals, etc), and (4) the indirect effect of a shock to confidence on employment, investment and consumer spending. The first category has the largest effect, we believe. If a shutdown occurs next week and were handled the same way as prior shutdowns, about 40% of federal workers would be sent home—the rest would be exempted because of their job responsibilities—representing about $2bn in lost compensation for each week that funding lapsed and lowering real GDP growth in Q4 by just under 0.2pp for each week of shutdown. That effect would roughly reverse in Q1 (assuming the shutdown had ended) as federal output returns to a normal level.

  The direct effect on federal procurement of goods and services would be much smaller, particularly at the outset, since delayed orders would likely be made up once the shutdown has ended. We would expect virtually no effect on federal investment and purchases of durable goods, which have long lead times and generally rely on private-sector production that would be unaffected by the shutdown. There are some examples of contracted services that might be affected—for example, janitorial and food services for which there would be no need if federal employees were not at work—but these are relatively small. Anecdotally, federal procurement of services actually declined at a slower sequential rate in Q42013 than it did in any of the four prior quarters.

  The direct and indirect effects on the private sector are harder to quantify. The White House Office of Management and Budget released a report shortly after the 2013 shutdown that detailed some effects of the shutdown on private activity, such as stalled transportation and energy projects and delayed export shipments due to a halt in processing of federal permits and export licenses; and delays in lending due to the inability to verify income via the Internal Revenue Service (IRS), for example. It is difficult to estimate what effect this might have had on output, particularly since much of the postponed activity was probably made up during the same quarter.

  On a monthly basis, our Current Activity Index declined slightly in October 2013, though less than it did around other important fiscal deadlines and well within its typical month to month range (Exhibit 1, left panel). That said, one area where the effect of the shutdown did show up fairly clearly was consumer confidence, where sentiment dropped for three weeks, bottoming around the time the debt limit was finally increased on October 16 of that year (Exhibit 1, right panel). Overall, this sort of effect suggests that there could be a modest negative impact on growth from a shutdown beyond the direct effect from furloughed workers, so we would expect that each week of shutdown should reduce real GDP growth in the quarter by at least 0.2pp. That said, assuming a shutdown is short-lived, the growth effect would reverse the following quarter.

  

   

  Q: What would happen to economic data releases?

  Nearly all government data releases would be postponed. In 2013, virtually all scheduled releases of economic data collected by the federal government were postponed until after the government reopened. There are two notable exceptions: first, jobless claims numbers were released on schedule in 2013, even though other key labor market data, like the monthly employment report, were not. Second, the Fed continued to release data on schedule because, as an independent agency, it does not rely on Congress for funding. Releases from private organizations (e.g., ISM, NFIB, Conference Board and University of Michigan, to name a few) would be unaffected.

  Q: How would financial markets respond?

  We would expect a muted market reaction. The main reason is that the shutdown itself is likely to be seen as a temporary event with little bearing on the medium-term outlook. While it is true that previous shutdowns have been associated with a rise in equity volatility, as shown in Exhibit 2, this was generally the case with shutdowns that overlapped with debt limit deadlines—the 1990 and 2013 shutdowns—rather than other shutdowns where the debt limit deadline was not about to be reached.

  

   

  Q: Does this debate have anything to do with the debt limit?

  Not yet. Unlike the last government shutdown, which happened to overlap with a debt limit deadline two weeks later, raising the debt limit isn’t currently being debated. However, the extension of spending authority that is expected to pass soon may be constructed so that it expires around the time of the next debt limit deadline later this year.

  Q: When will the debt limit be reached?

  Probably in November. The Treasury estimates that the “extraordinary measures” it uses to increase borrowing capacity under the debt limit will not be exhausted before late October. As of the end of August, the Treasury appeared to have exhausted most of its bookkeeping strategies, with only about $60bn remaining (mainly the $23bn of the Exchange Stabilization Fund that is invested in Treasuries and $36bn related to the Civil Service Retirement and Disability Fund). However, it also has a substantial cash balance ($146bn as of September 18), which will provide an additional cushion once the Treasury exhausts its borrowing capacity. In the past, the Treasury has based the projected deadline for raising the debt limit that it announces to Congress assuming that the cash balance will not be allowed to go under $50bn, though on occasion it has allowed it to dip to $30bn preceding a debt limit increase.

  

   

  If the Treasury once again bases the deadline it announces to Congress on a $50bn minimum cash balance, we would expect the deadline to fall sometime in mid-November (Exhibit 3). Absent an increase in the debt limit, Treasury’s cash balance would probably run dry sometime by early December. This is in line with our previous estimate, as well as the Congressional Budget Office’s August estimate, though cash flows over the last few weeks—in particular, revenues were a touch lighter than we expected—suggest the deadline might come closer to the front of the late-November to early-December range we had previously estimated in July.

  

  

  

  

  

• Confession Of An Economist: Writing To Impress Rather Than Inform

  If you have ever felt that in addition to being a quasi cargo cult (which in the case of central planners borders on religious dogma) rather than an actual science, not to mention far more destructive, economics was purposefully obtuse and opaque, meant to sound sophisticated and generally “baffle with bullshit” when in reality it was hollow, often contradictory and sometimes meaningless by design, then the following confession by David Hakes, professor of economics at the University of Northern Iowa is for you.

  In it the economist explains how he was turned down when he wrote articles that could easily be understood by a broad audience. So he made them more difficult to understand and got published immediately.

  Reader can form their own conclusion.

  from Econ Journal Watch

  Confession of an Economist: Writing to Impress Rather than Inform

  Think back to your first years in graduate school. The most mathematically complex papers required a great deal of time and effort to ead. The papers were written as if to a private club, and we felt proud when we successfully entered the club. Although I copied the style of these overly complex and often poorly written papers in my first few research attempts, I grew out of it quite quickly. I didn’t  do so on my own. I was lucky to be surrounded by mature confident researchers at my first academic appointment. They taught me that if you are confident in your research you will write to include, not exclude. You will write to inform, not impress. It is with apologies to my research and writing mentors that I report the following events.

  The preference falsification in which I engaged was to intentionally take a simple clear research paper and make it so complex and obscure that it successfully impressed referees. That is, I wrote a paper to impress rather than inform—a violation of my most closely held beliefs regarding the proper intent of research. I often suspected that many papers I read were intentionally complex and obscure, and now I am part of the conspiracy.

  A colleague presented a fairly complex paper on how firms might use warranties to extract rent from certain users of their products. No one in the audience seemed to follow the argument. Because I found the argument to be perfectly clear, I repeatedly defended the author and I was able to bring the audience to an understanding of the paper. The author was so pleased that I was able to understand his work and explain it to others that he asked me if I was willing to coauthor the paper with him. I said I would be delighted.

  I immersed myself in the literature for a few of months so that I could more precisely fit our contribution into the existing literature. We managed to reduce the equations in the paper to six. At this stage the paper was perfectly clear and was written at a level so that it could reach a broad audience. When we submitted the paper to risk, uncertainty, and insurance journals, the referees responded that the results were self-evident. After some degree of frustration, my coauthor suggested that the problem with the paper might be that we had made the argument too easy to follow, and thus referees and editors were not sufficiently impressed. He said that he could make the paper more impressive by generalizing the model. While making the same point as the original paper, the new paper
  would be more mathematically elegant, and it would become absolutely impenetrable to most readers. The resulting paper had fifteen equations, two propositions and proofs, dozens of additional mathematical expressions, and a mathematical appendix containing nineteen equations and even more mathematical expressions. I personally could no longer understand the paper and I could not possibly present the paper alone.

  The paper was published in the first journal to which we submitted. It took two years to receive one referee report. The journal sent it out to a total of seven referees, but only one was able to write a report on it. Apparently he was sufficiently impressed. While the audience for the original version of the paper was broad, the audience for the published version of the paper has been reduced to a very narrow set of specialists and mathematicians. Even for mathematicians, the paper may no longer pass a cost-benefit test. That is, the time and effort necessary to read the paper may exceed the benefits received from reading it. I am now part of the conspiracy to intentionally make simple ideas obscure and complex.

  The story does not end here. A year later at an economics conference I sat on a panel composed of editors of economics journals. The session was charged with instructing young professors on how to get published. Because I was involved in a number of other sessions, I paid little attention to the names and affiliations of my colleagues on the panel. When it was my turn to speak, along with other advice, I told the story described above. When the next panelist was introduced, I was embarrassed to see that he was the editor of the journal that had published our incomprehensible paper. To reduce the level of embarrassment for both of us, I explained that our paper was handled through the U.S. editorial office of his journal, not the U.K. office which he manages. As an aside, to demonstrate just how small the world has become, we later discovered that my eldest daughter had studied in the editor’s department while in the United Kingdom during the previous semester.

  In conclusion, I wish I could promise that in the future I will always write to inform rather than to impress. But although confession may be good for the soul, it does not inoculate us from future sin. If in the future a referee or an editor suggests that I “generalize the model” or “make the model dynamic” when I feel that the change is an unnecessary complication which will likely cloud the issue rather than illuminate it, I will probably do as they requested rather than fight for clarity. That situation aside, I plan to redouble my efforts to write to inform rather than impress, to advise young researchers to do the same, and to be careful when criticizing referees and editors because they may be sitting next to me.

  h/t zeetubes

  

  

  

  

  

• In Major Humiliation, Government Admits Nearly 6 Million Fingerprints Were Stolen In OPM Hack

  What began with an alleged attempt by Kim Jong-un to sabotage Seth Rogen and James Franco for plotting to assassinate his likeness on film, and what reached peak absurdity when Penn State claimed that Chinese hacker spies had taken control of the university’s engineering department, culminated with what’s been variously described as “the largest theft of US government data ever” and an attack “so vast in scope and ambition that the usual practices for dealing with traditional espionage cases [do] not apply.”

  Those rather dramatic sounding characterizations refer of course to the alleged breach of the Office of Personnel Management by Chinese hackers. 

  That attack compromised some 22 million government employees. For its part, Beijing initially called the accusations that the attack emanated from China “irresponsible” and “groundless.”

  Amusingly, the counter-hacking system that is supposed to prevent things like this from happening is called “Einstein” and by the US government’s own admission, it’s already obsolete. Unfortunately, Congress’ now famous inability to do what they were elected to do (i.e. legislate) has left the US unable to pass a cyber security initiative that would help the US better protect itself against attacks like that which occurred on the OPM. 

  In any event, cyber security was back in the spotlight (actually it never really left) last week when the US decided that slapping Chinese entities with sanctions for their alleged role in hundreds of cyber attacks on the US over the course of the last half decade was probably a bad idea ahead of a visit by Chinese President Xi Jinping, who some analysts predicted simply would not make the trip if Washington was unwilling to do Beijing the courtesy of waiting until Xi was back in China before handing down sanctions. 

  But while the Obama administration did indeed relent on the timing of the cyber sanctions, new revelations regarding the theft of “biometric ID authentication markers” (a.k.a fingerprints) look set to make Xi’s visit a bit more uncomfortable than it otherwise would have been, especially in light of comments he made in a speech in Seattle. Here’s Wired with more:

  When hackers steal your password, you change it. When hackers steal your fingerprints, they’ve got an unchangeable credential that lets them spoof your identity for life. When they steal 5.6 million of those irrevocable biometric identifiers from U.S. federal employees—many with secret clearances—well, that’s very bad.

   

  On Wednesday, the Office of Personnel Management admitted that the number of federal employees’ fingerprints compromised in the massive breach of its servers revealed over the summer has grown from 1.1 million to 5.6 million. OPM, which serves as a sort of human resources department for the federal government, didn’t respond to WIRED’s request for comment on who exactly those fingerprints belong to within the federal government. But OPM had previously confirmed that the data of 21.5 million federal employees was potentially compromised by the hack—which likely originated in China—and that those victims included intelligence and military employees with security clearances.

   

  The revelation comes at a particularly ironic time: During the U.S. visit of Chinese president Xi Jinping, who said at a public appearance in Seattle that the Chinese government doesn’t condone hacking of U.S. targets, and pledged to partner with the U.S. to curb cybercrime.

   

  “As part of the government’s ongoing work to notify individuals affected by the theft of background investigation records, the Office of Personnel Management and the Department of Defense have been analyzing impacted data to verify its quality and completeness,” reads OPM’s statement posted to its website. “During that process, OPM and [the Department of Defense] identified archived records containing additional fingerprint data not previously analyzed. Of the 21.5 million individuals whose Social Security Numbers and other sensitive information were impacted by the breach, the subset of individuals whose fingerprints have been stolen has increased from a total of approximately 1.1 million to approximately 5.6 million.”

  And while the government was of course in full damage control mode, swearing that “as of now, the ability to misuse fingerprint data is limited,” they better be right, because as Wired goes on to note, “the national security implications of having the fingerprints of high-level federal officials in the hands of hackers who are potentially employed by a foreign government” are far from clear. 

  Now all of that assumes that a state actor is indeed behind the attack and frankly, assuming that to be true is to accept the narrative that China, Iran, and Russia have now formed a kind of cyber “Axis of Evil” and that narrative plays right into the hands of policymakers who are desperate to perpetuate the existing juxtaposition of world powers. 

  What comes next we can’t say but one thing seems abundantly clear: regardless of who’s doing the hacking, the US government is completing inept when it comes to stopping it and on that note, we close with the following from Senator Ben Sasse:

  “The American people have no reason to believe that they’ve heard the full story and every reason to believe that Washington assumes they are too stupid or preoccupied to care about cyber security.”

  

  

  

  

  

• The Colossal Failure Of Central Bank 'Trickledown'

  Submitted by Jeffrey Snider via Alhambra Investment Partners,

  With global economic perceptions finally creeping toward financial perceptions (not stocks) despite the enormous and mostly ongoing “stimulus” almost everywhere, it is useful to review once more the assumed general mechanisms.

  

   

  Step 1 is really the most basic and traditional element of central banking, as liquidity, broadly speaking here, is currency elasticity in its more modern format. Increasing liquidity is supposed to lead to Step 2, more credit/debt. Step 2 flows to Step 3, which is (hopefully) the bulk of that debt “creating” some real economy “demand.” Step 4 is where spending (demand), even if concentrated in certain parts of the economy (redistribution), leads to more jobs and productive investment which broadens out (“trickle out”) the redistributionary flow to the rest.

  For the most part, central banks (including the Fed) are stuck on Step 1 almost a decade later. There has been some flow to Step 2 (credit) but it’s abundantly clear that an enormous proportion of that debt elevation has yielded very little toward Step 3, intead a great deal in fostering asset price inflation. Even if you argue that Step 3 has been yielded into the real economy to some limited extent, it is beyond dispute that it hasn’t led to Step 4.

  When economists speak of “clogged transmission channels” this is the receiver of that ire; how Step 1 can be so successful yet not transmute into Step 2 and beyond has left economists and monetary policymakers exasperated (and stuck within themselves). The wholesale monetary system, by contrast, isn’t so certain about even liquidity, meaning that there isn’t even any real evidence to suggest that Step 1 has been completed. The most direct evidence offered about liquidity is only that there hasn’t been another panic, but that is an exceedingly low standard to the point of irrelevance. If monetary theory is to do what it proclaims, that is nowhere near enough (especially as even that minimal capacity is highly questionable again this year).

  A great deal of focus in central banking has been trying to go beyond Step 1, to induce some form of bank “reserves” to become the bedrock association of traded flow toward debt creation. The Japanese have been here for a quarter century, with nearly all of this century so far spent within some QE or another with that common intent. The results in the real economy particularly since QQE/QE10 have been disastrous.

  

  Real wages in July (the latest figures) were positive for the first time in more than two years – but only because “inflation”, one of the primary economic factors from Step 1 that is supposed to help transmit economic growth, has done the opposite as expected and intended. But that “inflation” calculation obscures somewhat the damage already done by QQE since June real wages were down 3% year-over-year despite the lower “inflation” number. June is the second most important month for Japanese as it represents one of the two “bonus months” for payouts, and to stumble that badly for June before figuring any price changes is pretty clear evidence of not only nothing beyond Step 1 for QQE, but that it may actually be harmful beside.

  

  So where the Bank of Japan might point to the unemployment rate as some kind of positive economic reflection of their monetary influence, as the Fed and Bernanke so often do, underlying that narrow labor view is all continued decay and rot. Actual labor utilization and output in Japan remains on the decline. At least when the earthquake and tsunami devastated the Japanese economy in 2011 it was a temporary setback; QQE, on the other hand, has clearly been a more or less permanent, depressive influence.

  

  With labor and earned incomes under such strain, it is little wonder “demand” has been continually suppressed. Credit doesn’t even factor. Household spending in July was barely positive (year-over-year) nominally and thus barely negative in real terms (again, “aided” by low “inflation” contrary to stated objectives). That result would be difficult on its own, but when compared to July 2014 it reveals the extent of the ongoing devastation; nominal household spending last July was 2% below July 2013, whereas real household spending was about -6%! To be flat or slightly contracting from last year’s trough is devastating.

  

  Given that it has been almost two and a half years now for QQE and the fact that it isn’t possible any longer to ignore or just dismiss (transitory?) this perpetual decay, the Bank of Japan has forced itself into yet another trap – but only one of its own making (yes, it styles the conditions for this trap and then forces itself into it, which is as absurd as it sounds; but that is monetary reality inside the orthodox bubble).

  Sources say the Bank of Japan has been quietly brainstorming the idea of overhauling its massive monetary stimulus programme over time, casting doubt on officials’ confident assertions that it can keep buying up government bonds for several more years.

   

  Sources familiar with the BOJ’s thinking say stepping up its 80 trillion yen ($665 billion) per year asset buying remains its go-to option if deflationary pressures persist, given a limited arsenal of obvious policy alternatives.

   

  But they say the central bank isn’t ruling out breaking with the money-printing programme over the longer term, as it has had little success in accelerating inflation toward its 2 percent target since it began in April 2013.

   

  “If the medicine isn’t working, you wonder whether it makes sense to keep prescribing more,” one of them said on condition of anonymity.

  Finally, some appeal toward actual science, using simple and basic observation instead of ridiculous models and regressions that have proven time and again to be useless, at best? Have we finally reached the point of central banks waking up to their fallacies? The article quoted above even makes the claim that a former BoJ policymaker actually declared QQE was never meant to “last another five, 10 years.” None of the prior QE’s were, either, so instead “temporary” measures become escalations.

  

  Again, the purpose of all of this has been to try to get beyond Step 1; all to no avail. To now add QQE to that dim view should force some serious reckoning and accountability, stripping monetary and even orthodox economic theory back down to its basic philosophies and reconstructing how they are all wrong. This would include, of course, realizing how “money” itself has evolved under the wholesale framework and how that relates to the serial asset bubbles and massive financial imbalances that might themselves be the pathology of turning this monetary “stimulus” into the very depressant thwarting Step 1 in the first place.

  

  That is what you would expect of any discipline supposedly dedicated to the scientific endeavor. If you do something and it doesn’t work but then do more of it to experiment with the dosage and your target intentions instead make it worse, you not only stop the dosage quantification experiment you halt the entire program altogether. Anyone, however, with even a passing familiarity with mainstream economics as it is and central bank practicing of it can guess what BoJ might be considering (rumored or not):

  If the BOJ bumps into trouble buying JGBs, some analysts say it could abandon the 0.1 percent interest the central bank pays on reserves the financial institutions park in BOJ accounts, or even charge a fee for them. That might particularly hurt regional banks, which are already struggling with thin margins on bond investments.

   

  “The BOJ can combine this step with an increase of risky asset purchases and call it a new version of QQE,” said Ryutaro Kono, chief Japan economist at BNP Paribas, who was once considered a candidate to fill a BOJ board vacancy.

   

  “That would effectively mean shifting the BOJ’s target to interest rates from the volume of money.”

  There are no words. After fourteen and a half years of heavy intervention in Step 1, all producing a much smaller and more fragile economy, the “answer” is to go back to Step 1 of Step 1?

  

  Japan is a useful analog in so many ways, not just about what the US and global economy can (has already?) become if allowed to follow into this same circle of Hell. It pretty much proves the incapacity of orthodoxists toward anything outside of their so very limited understanding and appreciation. In other words, the global economy is left wholly dependent on only populist revolt.

  

  

  

  

• Your Complete Guide To A World In Which The Fed Is No Longer In Control

  Back in December 2013 we pointed out something that virtually nobody had noted or discussed: when it comes to “credit” creation, China’s $15 trillion in freshly-created bank loans since the financial crisis – ostensibly the global credit buffer that allowed China to not get dragged down by the western recession – dwarfed the credit contribution by DM central banks.

  

  This is how we simplified what was happening at the time:

  In order to offset the lack of loan creation by commercial banks, the “Big 4” central banks – Fed, ECB, BOJ and BOE – have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world “Big 4” central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.

   

  How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined!

   

  And that is how – in a global centrally-planned regime which is where everyone now is, DM or EM – your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it’s really done.

  This dramatic divergence in credit creation continued for about a year, then gradually Chinese new loans topped out primarily due to regulation slamming shut debt creation in the shadow banking space, and since credit accumulation resulted in parallel build up in central bank reserves, the current period of debt creation going into reverse has led to not only China’s currency devaluation but what we first warned was Reverse QE, and has since picked up the more conventional moniker “Quantitative Tightening.”

  But while China’s credit topping process was inevitable, a far more sinister development has emerged: as we showed earlier, while DM central banks – excluding the Fed for the time being – have continued to pump liquidity at full blast into the global, fungibly-connected, financial system, there has been virtually no impact on risk assets…

  

  … especially in the US where the S&P is now down not only relative to the end of QE3, but is down 5% Y/Y – the biggest annual drop since 2008.

  This cross-flow dynamic is precisely what David Tepper was trying to explain to CNBC two weeks ago when the famous hedge fund manager declared the “Tepper Top” and went quite bearish on the stock market.

  This dynamic is also the topic of a must-read report by Citi’s Matt King titled quite simply: “Has the world reached its credit limit?” and which seeks to answer a just as important question: “Why EM weakness is having such a large impact”, a question which we hinted at 2 years ago, and which is now the dominant topic within the financial community, one which may explain why development market central bank liquidity “has suddenly stopped working.”

  King’s explanation starts by showing, in practical terms, where the world currently stands in terms of the only two metrics that matter in a Keynesian universe: real growth, and credit creation.

  

  His summary: there has been plenty of credit, just not much growth.

  So the next logical question is where has this credit been created. Our readers will know the answer: the marginal credit creator ever since the financial crisis were not the DM central banks – they were merely trying to offset private sector deleveraging and defaults; all the credit growth came from Emerging Markets in general, and China in particular.

  

   

  So while we now know that EMs were the source of credit creation, why care? Why does it matter if credit was mostly being created in EMs vs DMs, and isn’t credit created anywhere essentially the same? The answer is a resounding no, as King further explains.

  First, looking at credit creation in the post-crisis developed markets reveals something troubling: because credit creation takes places mostly in markets and is locked in central bank “outside” money which does not enter the broad monetary system, as opposed to bank credit creation in which banks issue loans thereby creating both new loans and deposits, i.e., money, the direct impect of DM central bank liquidity injections has been to created asset-price inflation. However, the offset has been far lower broad money creation – as there is far less credit demand in the first place – leading to no incremental investment, and far lower economic multipliers.

  

  Alternatively, it should come as no surprise that credit creation in EMs is the opposite: here money creation took place in the conventional loan-deposit bank-intermediated pathway, with a side effect being the accumulation of foreign reserves boosting the monetary base. Most importantly, new money created in EMs, i.e., China led to new investment, even if that investment ultimately was massively mis-allocted toward ghost cities and unprecedented commodity accumulation. It also led to what many realize is the world’s most dangerous credit bubble as it is held almost entirely on corporate balance sheets where non-performing loans are growing at an exponential pace.

  

  The good news is that at least initially the EM credit multiplier is far higher than in the DM.

  The bad news, is that even the stimulative effect of the EM multiplier is now fading.

  

   

  As a result, instead of going toward economic growth, even EM credit creation has been corrupted by the “western” bug, and is being allocated toward asset-price inflation… such as housing and markets.

  

  * * *

  The above lays out the market dynamic that took place largely uninterrupted from 2008 until the end of 2014.

  And then something changed dramatically.

  That something is what we said started taking place last November when we pointed out the “death of the petrodollar“, when as a result of the collapse in oil prices oil exporters started doing something they have never done before: they dipped into their FX reserves and started selling. This reserve liquidation first among the oil exporting emerging market, is essentially what has since morphed into a full blown capital flight from the entire EM space, and has also resulted in China’s own devaluation-driven reserve (i.e., Treasury) liquidation, which this website also noted first back in May.

  As King simply summarizes this most important kink in the story, after years of reserve accumulation, EMs have now shifted to reserve contraction which, in the simplest possible terms means, “money is being destroyed” which in turn is the source of the huge inflationary wave slowly but surely sweeping over the entire – both EM and DM – world.

  

   

  Ok, EMs are selling. But where is the money going? And won’t dumping of Treasurys push yields higher. Answering the second question first, we remind readers of a note from several weeks ago titled “Why China Liquidations May Not Spike US Treasury Yields” which is precisely what DB also said, and which Citi agrees with: while there may be upward pressure on yields it will likely be temporary, especially if there is an even greater risk-aversion reaction in risk assets. The result to EM TSY selling would be a selloff in stocks, which in turn would push investors into the “safety” of bonds, thus offsetting Chinese selling.

  

   

  But while one can debate what the impact on money destruction would be on equities and treasurys, a far clearer picture emerges when evaluting the impact on the underlying economy. As King, correctly, summarizes without the capex boost from energy (which won’t come as long as oil continues its downward trajectory), and DM investment continues to decline, there is an unprecedented build up in inventory, which in turn is pressuring both capacity utilization, the employment rate, and soon, GDP once the inevitable inventory liquidation takes place.

  

  The take home is highlighted in the chart above, but just in case it is missed on anyone here it is again: the “fundamentals point overwhelmingly downwards.”

  But wait, won’t central banks react this time as they have on all those prior occasions (QE1, QE2, Operation Twist, QE3, BOE QE1, BOJ QQE1, ECB QE1, etc)? Well, they’ll surely try… but even they know that every incremantal attempt to stimulate the private sector will have increasingly less impact. In other words, the CBs are not out of firepower, it is just that their ammo is almost nil. The reason for that: the “multiplier have fallen” because after 7 years of doing the same thing, this time it just may not work…

  

  Furthermore, while we have listed the numerous direct interventions by central banks over the past 7 years, the reality is that an even more powerful central bank weapon has been central bank “signalling”, i.e., speaking, threatening and cajoling. As Citi summarizes “The power of CBs’ actions has stemmed more from the signalling than from the portfolio balance effect.“

  

  So now that the “signalling” pathway is fading, all that’s left are the flows – the same flows which, with very good reason, left David Tepper scratching his head. Flows, which, when one takes into account emerging market reserve liquidation to offset central bank purchases, paints  a very ugly picture: one in which the central banks are for the first time since 2009, finally losing control as their inflows are unable to offset the EM outflows.

  

   

  Where does that leave us? Well, all else equal, the New New Normal, the world in which central banks are no longer in control as a result of EM reserve liquidation, will be world in which slower credit growth translated into, you guessed it, slower overall growth, or as Citi states the conudnrum: “Even a deceleration in credit growth is negative for GDP growth.”

  This is precisely the secular stagnation which we have been warning about since 2009.

  

   

  * * *

  What is the conclusion?

  It’s not a pretty one for either the central bankers, nor the Keynesian economists, nor those who believe asset prices can keep rising in perpetuity, because it means that payment for the free lunch from the past 7 years is finally coming due.

  

  But at least it is a simple conclusion: we are now at the credit plateau, or as Citi puts it: “Credit growth requires willing borrowers as well as lenders; we may be nearing the limits for both.”

  

  

  

  

  

• Endgame: Putin Plans To Strike ISIS With Or Without The U.S.

  On Sunday, we noted that Washington’s strategy in Syria has now officially unravelled.

  John Kerry, speaking from London following talks with British Foreign Secretary Philip Hammond, essentially admitted over the weekend that Russia’s move to bolster the Assad regime at Latakia effectively means that the timing of Assad’s exit is now completely indeterminate. Here’s how we summed up the situation:

  Moscow, realizing that instead of undertaking an earnest effort to fight terror in Syria, the US had simply adopted a containment strategy for ISIS while holding the group up to the public as the boogeyman par excellence, publicly invited Washington to join Russia in a once-and-for-all push to wipe Islamic State from the face of the earth. Of course The Kremlin knew the US wanted no such thing until Assad was gone, but by extending the invitation, Putin had literally called Washington’s bluff, forcing The White House to either admit that this isn’t about ISIS at all, or else join Russia in fighting them. The genius of that move is that if Washington does indeed coordinate its efforts to fight ISIS with Moscow, the US will be fighting to stabilize the very regime it sought to oust. 

  Revelations (which surprised no one but the Pentagon apparently) that Moscow is coordinating its efforts in Syria with Tehran only serve to reinforce the contention that Assad isn’t going anywhere anytime soon, and the US will either be forced to aid in the effort to destroy the very same Sunni extremists that it in some cases worked very hard to support, or else admit that countering Russia and supporting Washington’s regional allies in their efforts to remove Assad takes precedence over eliminating ISIS. Because the latter option is untenable for obvious reasons, Washington has a very real problem on its hands – and Vladimir Putin just made it worse.

  As Bloomberg reports, The Kremlin is prepared to launch unilateral strikes against ISIS targets if the US is unwilling to cooperate. Here’s more: 

  President Vladimir Putin, determined to strengthen Russia’s only military outpost in the Middle East, is preparing to launch unilateral airstrikes against Islamic State from inside Syria if the U.S. rejects his proposal to join forces, two people familiar with the matter said.

   

  Putin’s preferred course of action, though, is for America and its allies to agree to coordinate their campaign against the terrorist group with Russia, Iran and the Syrian army, which the Obama administration has so far resisted, according to a person close to the Kremlin and an adviser to the Defense Ministry in Moscow.

   

  Russian diplomacy has shifted into overdrive as Putin seeks to avoid the collapse of the embattled regime of Bashar al-Assad, a longtime ally who’s fighting both a 4 1/2 year civil war and Sunni extremists under the banner of Islamic State. Israeli Prime Minister Benjamin Netanyahu flew to Moscow for talks with Putin on Monday, followed by Turkish President Recep Tayyip Erdogan on Tuesday.

   

  Putin’s proposal, which Russia has communicated to the U.S., calls for a “parallel track” of joint military action accompanied by a political transition away from Assad, a key U.S. demand, according to a third person. The initiative will be the centerpiece of Putin’s one-day trip to New York for the United Nations General Assembly on Sept. 28, which may include talks with President Barack Obama.

   

  “Russia is hoping common sense will prevail and Obama takes Putin’s outstretched hand,” said Elena Suponina, a senior Middle East analyst at the Institute of Strategic Studies, which advises the Kremlin. “But Putin will act anyway if this doesn’t happen.”

  And that, as they say, it that. Checkmate.

  

  The four-year effort to oust Assad by first supporting and then tolerating the rise of Sunni extremists (presaged in a leaked diplomatic cable) has failed and the Kremlin has officially served a burn notice on a former CIA “strategic asset.”

  There are two things to note here. 

  First, Russia of course is fully aware that the US has never had any intention of eradicating ISIS completely. As recently as last week, Moscow’s allies in Tehran specifically accused Washington of pursuing nothing more than a containment policy as it relates to ISIS, as allowing the group to continue to operate in Syria ensures that the Assad regime remains under pressure. 

  Second, even if Russia does agree to some manner of managed transition away from Assad, you can be absolutely sure that Moscow is not going to risk the lives of its soldiers (not to mention its international reputation) only to have the US dictate what Syria’s new government looks like and indeed, Tehran will have absolutely nothing of a regime that doesn’t perpetuate the existing Mid-East balance of power which depends upon Syria not falling to the West. Additionally – and this is also critical – Russia will of course be keen on ensuring that whoever comes after Assad looks after Russia’s interests at its naval base at Tartus. This means that even if the US, Saudi Arabia, and Qatar are forced to publicly support a managed transition, Washington, Riyadh, and Doha will privately be extremely disappointed with the outcome which begs the following question: what will be the next strategy to oust Assad and will it be accompanied by something even worse than a four-year-old bloody civil war and the creation of a band of black flag-waving militants bent on re-establishing a medieval caliphate?

  

  

  

  

  

• Caption Contest: Pope "Outs" Obama?

  It’s all clear now…

  

  

  Source: @billyoblenis

  

  

  

  

  

• Is The Bank Of Spain Quietly Pulling Its Gold From Catalonia Ahead Of This Weekend's Vote?

  This weekend, Catalonia’s long-running push for independence from Spain could get a boost if separatists manage to secure an absolute parliamentary majority in regional elections. Here’s a brief summary via FT for those unfamiliar: 

  If the independence movement has its way, the Catalan regional election on Sunday will bring [the independence process] to a dramatic climax. Should the pro-secession parties gain an absolute majority in parliament, they will press ahead with a plan to separate the prosperous region from the rest of Spain within 18 months.

   

  Both the pro- and anti-independence sides look to Barcelona as the crucial battleground. Global tourist magnet, former Olympic host city and all-round architectural jewel, the city has traditionally been seen as an uphill climb for the independence campaign. Supporters of the union with Spain expect Barcelona and its densely populated suburbs to act as their main line of defence against the secessionist onslaught.

   

  “What happens to Catalonia on September 27 will not depend on the independentistas. It will depend on the men and women in the metropolitan area of Barcelona who are not independentistas, and who traditionally don’t vote in the regional elections. If they vote this time, no one will be able to break Catalonia away from the rest of Spain,” Xavier García Albiol, the leader of the conservative Popular party in Catalonia, said this week.

  As for how likely it is that CDC and ERC will be able to secure the 68 seats they need to move forward with independence, Citi thinks they’ll ultimately come up short, but as the following graphs show, it’s a close call:

  

  Against that backdrop, we present the following with no further comment other than to ask if perhaps the Bank of Spain knows something everyone else doesn’t and is preparing for every contingency.

  Via VilaWeb (Google translated):

  This afternoon held an unusual movement in the branch of the Bank of Spain, Barcelona, ??Catalonia Square. Over thirty armored vans were entering and leaving the building shortly after an unknown direction. Many people have the photographed. The Bank of Spain has refused to comment on the operation or indicate that it was but people working in the area have said that is not a normal deployment.

   

  Several readers VilaWeb explained that Monday early morning was a similar deployment.

   

  

   

  

   

  
  

  
  

  

  

  

  

• Petrobras Default Looms Under $90B Dollar-Denominated Debt

  There is blood on the streets wherever you look in Brazil today, but probably of most interest to the hundreds of US asset managers (the ones managing your mutual funds) is what happens to Petrobras as it remains so widely held. As we noted below, bond prices are collapsing and default risk is soaring, and with the nation's currency collapsing amid the lower-for-longer oil prices, $90 billion of dollar-denominated debt could soon potentially be too burdensome for the company to repay.

  Default Risk is exploding…

  

  And as New York Shock Exchange details,

  S&P recently lowered Brazil's credit rating to junk status. It later downgraded 60 corporate and infrastructure entities in Brazil, including cutting Petrobras (NYSE:PBR) two notches to "BB." Petrobras has been reeling from a corruption scandal that reportedly involved Petrobras' executives and directors awarding suppliers over-inflated contracts in exchange for kickbacks. The scandal has cost the company billions of dollars, and has been a blow to the reputation of Brazil's President Dilma Rousseff.

  PBR is off about 70% over the past year, versus a 50% decline for the Brazilian ETF (NYSEARCA:EWZ) and flat growth for the S&P 500 (NYSEARCA:SPY). Investors should continue to avoid PBR for the following reasons:

  Stagnant Revenue And Earnings

  When it rains, it pours for Petrobras. In addition to the corruption scandal, a free fall in oil prices has stymied the company's revenue growth. For the first half of 2015, Petrobras' revenue was down 27% Y/Y from $71.4 billion to $52.0 billion, while EBITDA growth was flat. EBITDA margin increased to 26% in the first half of 2015 from 19% in the year-earlier period, as the company slashed cost of sales, SG&A expense and R&D.

  To stem cash burn, Petrobras slashed its five-year capital spending by 40% and has been canceling drilling contracts with suppliers such as Sete Brasil and Vantage Drilling (NYSEMKT:VTG). These are prudent steps given that oil prices are off 60% from their Q2 2014 peak and the global economy is showing signs of slowing. If sub-$60 oil prices are the new normal, stagnant revenue and earnings growth may be in the cards regardless of the company's cost-cutting measures. 

  $90B Dollar-Denominated Debt

  Zero interest rates in the U.S. have prompted investors to look to emerging markets for higher yields. Investors have provided dollar-denominated debt to companies like Petrobras at higher rates than U.S. treasuries, but lower than what companies in emerging markets could get locally. Borrowing in dollars and paying in Brazilian real had previously not been a problem.

  

   

  However, the real has depreciated over 38% against the dollar over the past year, making un-hedged dollar-denominated debt prohibitively expensive.

  In Q2, Petrobras had $134 billion in debt load, which equated to about 4.9x run-rate EBITDA – junk levels. About 70% (over $90 billion) of that was dollar-denominated, which means that it will probably take more real for Petrobras to repay its debt going forward.

  If China continues to devalue the yuan or if the U.S. raises interest rates, it could spur more capital flight out of Brazil and pressure the real further. Either way, I believe Petrobras' dollar-denominated debt will appreciate to levels that could potentially become too burdensome for the company to repay.

   

  

  

  

  

  

• 24 Sep – ECB's Nowotny Says He's Wary of Expanding Bond-Buying Program

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 31/100 FEAR

  PREVIOUS CLOSE: 31/100 FEAR

  ONE WEEK AGO: 16/100 EXTREME FEAR

  ONE MONTH AGO: 3/100 EXTREME FEAR

  ONE YEAR AGO: 16/100 EXTREME FEAR 

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 21.89% 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 22.44. This is a neutral reading and indicates that market risks appear low.

  Stock Price Strength: FEAR The number of stocks hitting 52-week lows exceeds the number hitting highs and is at the lower end of its range, indicating 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) | 10 YR T NOTE | 2 YR T  NOTE | 5 YR T NOTE | 30 YR TREASURY BOND| SOYBEANS | CORN

   

  MEME OF THE DAY – I JUST LOVE MY NEW SWEATER….

   

  UNUSUAL ACTIVITY

  ACI OCT 2.5 PUT ACTIVITY 9K @$.52 on offer

  AET  … OCT WEEKLY1 118 CALL Activity @$2.40 right by offer 3400+

  GE OCT WEEKLY1 25 CALLS 5k+ @$.29 on offer

  FENX EVP and COO purchase 3k @ 8.03

  MHFI President,SPCIQ/SNL Financial P    5,500  A  $ 92.8484

  More Unusual Activity…

  HEADLINES

   

  ECB’s Nowotny Says He’s Wary of Expanding Bond-Buying Program – BBG

  ECB’s Jazbec: No Discussions On Exiting, Prolonging QE Currently

  ECB Sources: GC May Prefer Econ. Monitoring To Oct Action – MNI Sources

  ECB Said To Replace Deutsche Bank, State Street In ABS Program – BBG

  ECB Announces New Secretary To Its Decision-Making Bodies

  ECB’s Linde Warns Of Increased Downside Risks To Spain’s Econ – RTRS

  Swiss EconMin: SNB Is Working To Weaken Franc Well Above 1.20 – WBP

  Fitch: US Govt Shutdown Would Not Have Direct Ratings Impact

  Japan’s Nishimura: China May Delay Japan 2% Inflation Tgt – ForexLive

  EZ Flash PMI Rounds Off Best Quarter For 4-Years Despite Dip In September

  German Government ‘Knew VW Was Rigging Emissions Test’ – Telegraph

  Deutsche Bank, JPM Downgrade VW On Emissions Scandal – Digital Look

  K+S Investors Urge Management To Reconsider Potash Corp Offer – WSJ

  Santander Hikes Cost Cuts Target To EUR3 Bln By 2018 – RTRS

  Total Cuts Oil Output Target As Low Prices Expected To Persist – BBG

  China Inks Deal To Buy 300 Boeing Jets – AP

   

  GOVERNMENT/ CENTRAL BANK NEWS

  ECB’s Nowotny Says He’s Wary of Expanding Bond-Buying Program – BBG

  ECB’s Jazbec Says Too Early To Discuss Modifying QE – RTRS

  ECB Announces New Secretary To Its Decision-Making Bodies

  Bank Of Spain Warns Of Increased Downside Risks To Spanish Economy – RTRS

  EU Favours Insurers, Private Equity In Capital Markets Plan – Document Via RTRS

  Fitch: US Govt Shutdown Would Not Have Direct Ratings Impact

  Swiss EconMin: SNB Is Working To Weaken Franc Well Above 1.20 – WBP

  Japan’s Nishimura: China Could Cause Delays To Japan 2% Infl. Tgt – ForexLive

  FIXED INCOME NEWS

  Treasurys Eye 5-Year Auction – CNBC

  ECB: Eurosystem Adjusts Purchase Process In ABS Programme

  Germany Sold EUR3.32 Bln In 2017 Bonds (avg yield -0.26%; bid cover 2.4 vs 1.4)

  FX NEWS

  Dollar Index Holds At 1-Month Highs In Risk-Off Trade – Investing.com

  USD/JPY Bearish Below 120.35/80 – Commerzbank Via FXStreet

  EUR/USD: Off Lows Amid Rising Stocks – FXStreet

  GBP/USD: Sterling Launches Its Fourth Session Of Losses – WBP

  China State Banks Intervene To Support Offshore Yuan – RTRS Sources

  ENERGY/ COMMODITIES NEWS

  Gold Price Hit By Rates Anxiety And Stronger Dollar – The Week

  Base Metals Claw Higher But Sentiment Remains Downbeat – Fast Markets

  Oil Nears $50 As US Stock-Draw Balances China Data – Investing.com

  EQUITY NEWS

  US Stock Futures Rise As Investors Digest Global PMIs – MarketWatch

  Asian Stock Mkts Lower After Weak China Factory Data, Europe Up As VW Rebounds – US News

  Energy Stocks Help FTSE Mount Recovery – Citywire

  German Government ‘Knew VW Was Rigging Emissions Test’ – Telegraph

  Deutsche Bank Cuts DAX Forecast On VW Woes – FT

  Deutsche Bank, JPMorgan Downgrade VW On Emissions Scandal – Digital Look

  Several K+S Investors Urge Management To Reconsider Potash Corp Offer – WSJ

  Santander Hikes Cost Cuts Target To EUR3 Bln By 2018 – RTRS

  Swiss Re Pays $2.45 Bln For Guardian Financial Services – WSJ

  Total Cuts Oil Output Target As Low Prices Expected To Persist – BBG

  BBA Aviation To Buy Landmark For $2.07 Bln – MarketWatch

  Diageo Op Profit To Be Hurt By Currency Moves – MarketWatch

  China Inks Deal To Buy 300 Boeing Jets – AP

  Moody’s: Litigation And Conduct Remediation Charges Pose Risks For UK’s Largest Banks

  Former Trader Sues Lloyds For Unfair Dismissal After Libor Probe – CNBC

  EMERGING MARKET NEWS

  Russia Pledges Counter Measures If United States Upgrades Nuclear Arms In Germany – RTRS

   

  Emerging Market Slump Raises Fears Of Capital Controls – Gulf Base

  

  

  

  

  

• Dear Janet: Here Is The Circle Jerk You Have Created Explained In 54 Words

  On Monday in “When Doves Cry: Bedeviled By Dollar ‘Dilemma’, Trapped Fed Faces FX Catch-22,” we described precisely why the Fed’s new reaction function simply can’t work given prevailing market conditions.

  The Fed adopted the so-called “clean relent” precisely because it knew that the strong dollar would, as Goldman put it, “go through the roof” at the slightest sign of hawkishness. Of course a soaring dollar would likely be more than enough to send the EM world careening into crisis as China’s new currency regime and depressed commodity prices have conspired to push commodity currencies to the brink. The resulting outflows and subsequent meltdown would almost invariably feed back into advanced economies forcing the Fed to do an embarrassing about face. Unfortunately however, US investors interpreted the Fed’s move to postpone liftoff as a sign that Yellen was worried about the economy leading directly to the worst possible outcome: risk off sentiment that triggered a post-FOMC selloff. In short: 

  The new reaction function seems to involve sensitivity to both domestic and global financial markets. In the current environment where a positive assessment of the outlook for the US economy is required to keep a bid under risk assets (i.e. in an environment where good news is good news again) but in which EM is one “symbolic” Fed hike away from careening headlong into crisis, the new reaction function can’t possibly work. 

   

  

  What the above should suggest, perhaps more than anything else, is that there’s a certain reflexivity to the entire thing and it’s especially evident when we look at how the Fed got itself into the current predicament. 

  There’s a certain line of argumentation that says the Fed missed its window to hike and ever since, the uncertainty has only grown with each passing FOMC meeting. That uncertainty serves to perpetuate outflows from EM and now, the Fed is set to use those very outflows as an excuse for why it must postpone liftoff.

  With that, we’ll close with the following concise formulation of the reflexivity problem from former Treasury economist Bryan Carter who spoke to Bloomberg:

  ”Short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses. They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.” 

   

  
  

  

  

  

  

  

• The Fed's Alice In Wonderland Economy – What Happens Next?

  Submitted by Nick Giambruno via InternationalMan.com,

  After the president of the United States, the most powerful person on the planet is the chairman of the Federal Reserve.

  Ask almost anyone on the street for the name of the U.S. president, and you’ll get a quick answer.

  But if you ask the same person what the Federal Reserve is, you’ll likely get a blank stare.

  They don’t know – partly due to the institution’s deliberately obscure name – that the Fed is really the third iteration of the country’s central bank. Or that the Fed manipulates the nation’s economic destiny by controlling the money supply.

  And that’s just how the Fed likes it. They’d prefer Boobus americanus not understand the king-like power they wield.

  By simply choosing to utter the right words, the chairman of the Fed can create or extinguish trillions of dollars of wealth both in and outside of the U.S. He holds the economic fate of billions of people in his hands.

  So it’s no shocker that investors carefully parse everything he says. They have to, if they want to be successful. Some even go as far as to analyze the almighty chairman’s body language. Of course, the mainstream financial media revere the Fed.

  You may recall the unhealthy spectacle that occurred in 1996. That’s when Alan Greenspan, the Fed chairman at the time, spoke the now famous phrase “irrational exuberance” in what should have otherwise been a dull and forgettable speech.

  Investors heard Greenspan’s phrase to mean that the Fed would soon raise interest rates to slow the global economy.

  It’s worth mentioning that Greenspan didn’t actually say the Fed would raise rates. Nor did he intend to signal that.

  Nonetheless, the reaction was swift and panicky. U.S. markets were closed at the time, but stocks in Japan and Hong Kong dropped 3%. The German stock market fell 4%. When trading started in the U.S. market the next day, the market opened down 2%.

  Billions of dollars of wealth vanished in a period of 16 hours.

  That’s the absurd power over the global economy that the Federal Reserve gives to one human being.

  The words of the chairman can make or break the fortunes of anyone with a brokerage account.

  The Fed’s Alice in Wonderland Economy

  I almost fell out of my chair when I heard it…

  A journalist recently asked Janet Yellen, the current chair of the Federal Reserve, if the central bank would keep interest rates at 0% forever.

  Her response: “I can’t completely rule it out.”

  I was stunned.

  The deferential financial media hurried to ignore the significance of that statement. Instead, it acted the way big city police might act after making a messy arrest on a busy sidewalk. “Move along folks, nothing to see here!”

  Clearly, there was something to see. Something very important.

  Yellen’s words came amidst one of the most anticipated economic pronouncements in a generation… whether the Fed would finally raise interest rates for the first time in nine years. Short-term rates have been at zero since the 2008 financial crisis.

  Interest rates are simply the price of borrowing money. Setting them at an artificial level is nothing other than price fixing. Not surprisingly, it has led to enormous amounts of malinvestment and other distortions in the economy.

  Malinvestment is the result of faulty decision-making. Any investor or business can make a mistake, but central bank manipulation of interest rates subsidizes bad, wasteful decisions.

  Cheap borrowing costs trick companies. It causes them to plow money into plants, equipment, and other assets that appear profitable because borrowing costs are low. Only later, when the profits don’t show up, do they discover that the capital was wasted.

  Seven years of quantitative easing (QE) and Fed-engineered zero interest rates have drawn the U.S. and much of the world into an unsustainable "Alice in Wonderland" bubble economy riddled with malinvestment.

  The pundits had expected that, at this recent meeting, the Fed would move to raise rates just a little and give the global economy a tiny taste of sobriety.

  Not even that nudge materialized.

  Instead, the Fed sat on its hands. It kept interest rates at zero.

  And Janet Yellen couldn’t even rule out that rates would stay at zero forever.

  If she can’t even do that, how is she going to start a sustained series of rate hikes, as many of those same pundits now expect her to do a few months down the road?

  The truth is, seven years of 0% yields and successive rounds of money printing has so distorted the U.S. economy that it can’t handle even the tiniest increase in interest rates. It would be the pin that pricks the biggest stock and bond market bubble in all of human history. The Fed cannot let that happen.

  What Happens Next

  It’s clear that the Fed can’t raise interest rates in any meaningful way. It would trigger a financial meltdown that would quickly force them to reverse course.

  The Fed might be able to get away with a token increase, but that’s all.

  In other words, the Fed has trapped itself.

  Former Fed chairman Ben Bernanke admitted as much recently when he said he didn’t expect rates to normalize in his lifetime.

  And then, we have the current chair Janet Yellen saying that rates might stay at zero forever!

  Yellen’s belief that she has the power to suppress interest rates until the end of time is a frightening sign.

  As powerful as the Fed is, it isn’t stronger than the markets. A crisis in the markets could force rates higher even if the Fed doesn’t want them to go there. And the longer the Fed tries to sustain abnormalities like QE and 0% interest rates, the more likely it is that the whole business will end with the markets crushing the Fed.

  And that’s not even considering a collapse of the petrodollar system or China pushing the establishment of a New Silk Road in Eurasia…two catalysts that would likely force interest rates higher.

  So I’ll go ahead and disagree with Yellen and rule out the possibility that rates might stay at zero forever. They won’t, because they can’t.

  At the next sign of a market swoon or of a weakening economy, or with the next episode of deflationary jitters, the Fed will again ramp up the easy money. It could be another round of QE. Or the Fed could push interest rates into negative territory. If that fails, the Fed could go for the nuclear option and drop freshly printed money out of helicopters as Bernanke once infamously suggested – or, more likely, into everyone’s bank account. They’ll do whatever it takes, no matter what the eventual damage to the dollar’s value.

  Whatever the details, one thing should be clear. This politburo of unaccountable central planners is the greatest risk to your financial wellbeing today.

  What You Can Do About It

  It’s a terrifying thought that the actions of a few people at the Fed so endanger your financial security.

  But the facts are worse than that. There’s more to worry about than just the financial effects. The social and political implications of the Fed’s actions are even more dangerous.

  An economic depression and currency inflation (perhaps hyperinflation) are very much in the cards. These things rarely lead to anything but bigger government, less freedom, and shrinking prosperity. Sometimes they lead to much worse.

  Fortunately, your destiny doesn’t need to be hostage to what’s coming.

  *  *  *

  We’ve published a groundbreaking step-by-step manual that sets out the three essential measures all Americans should take right now to protect themselves and their families.

  

  

  

  

  

• Stocks Slide On Dreary Draghi, Crude Clobbering, & Brazilian Battering

  Who is responsible for all this? Janet – what say you?

  And why she needs to pull an emergency rate hike to calm anxious markets…

   

  Before we start on US markets, a couple of under the surface things that happened… There has been a bloodbath in Greek banks this week that has been underway…

  

   

  The Brazilian Real is collapsing-er…

  

   

  With a total meltdown after the close…

  

   

  The late-day plunge appears to due to impeachment comments:

  • Brazil’s lower house President Eduardo Cunha will address questions on impeachment procedures in response to opposition request, opposition lawmaker Mendonca Filho says.
  • Key to impeachment process is whether Cunha accepts or denies impeachment request: Mendonca Filho
  • Opposition needs to consider its next steps very carefully, should meet on the matter: Mendonca Filho
  • Lawmakers have up to 5 sessions to appeal if he denies impeachment request: Mendonca Filho
  • Congress will kill govt request to re-introduce CPMF tax: Mendonca Filho

   

  The Nasdaq Biotech index broke key support today…

  

   

  Meanwhile, The S&P 500 Put/Call Ratio has surged 12% in the last 5 days – the biggest such surge since 2009… (after which the S&P fell 9%)…

  

   

  Quite a rollercoaster day today, as futures show, a big dump on China PMI disappointment, a ramp on weak EU data and Q€ chatter, and a drop on Draghi dreariness…

  

   

  Cash indices all closed lower as Nasdaq tumbled in th elast few seconds to red…

  

   

  Leaving indices all red on the week…

  

   

  And down hard since The Post-FOMC Peak…

  

   

  Materials are the weakest post-FOMC, Utes the best (thought still red) and Financials down around 4%…

  

   

  And ahead fo Yellens peaking tomorrow, VIX term striucture slid lower…

  

   

  Credit continues to tumble…

  

   

  Treasury yields trod water in a very narrow 2bps range today…

  

   

  But The US Dollar tumbled after Europe closed (having held in steady until then).. JPY strength and AUD weakness (biggest 3-day drop since January) most notable…

  

   

  As is clear AUDJPY was the overnight driver of equity correlation algos, then EURJPY took over to the EU close, then USDJPY was back in charge…

  G182

   

  Commodities generally drifted higher on the day as USD limped lower… apart from crude's collapse…(which oddly retraced perfectly to gold for the week)

  

   

  Crude has been moronically algorithmic this week (once again)…

  

   

  Perhaps this is why…

  Crude inventories fall → oil prices jump → cash-strapped producers ramp production → crude inventories rise → oil prices drop → repeat ?.

  — Mark Constantine (@vexmark) September 16, 2015

  Charts: Bloomberg

   

  

  

  

  

• More Have Died From Selfies Than Shark Attacks Since 2013

  It appears Darwin was on to something after all. In the most stunning statistic of the new narcissistic normal's sharing economy, The Sydney Morning Herald reports that, since 2013, deaths from shark attacks have been outnumbered by deaths while taking a selfie.

  At least 11 people have died this year while trying to take a selfie, according to a Wikipedia page that tracks media reports of selfie-related injuries and deaths. At least 11 people died while trying to photograph themselves in 2014, according to the list.

   

  By comparison, just three people were killed in shark attacks last year, according to statistics from the University of Florida's International Shark Attack File. An average of six people a year have died from shark attacks in the decade to 2014 and Mashable reports that eight people have been killed in shark attacks so far this year.

   

  

   

  The figures say as much about shark fatalities as they do about the dangers of not paying attention to your surroundings – or worse, intentionally putting yourself in harm's way for the sake of a Facebook or Instagram post.

   

  And although the Wikipedia list is by no means comprehensive (at least three deaths, listed below, have not been recorded) it makes for sobering reading.

   

  Falls were the most common cause of death, accounting for eight of the 22 deaths listed over the two years, as well as the death of a 21-year-old Singaporean man, not listed on the Wikipedia page, who fell from a seaside cliff in Bali.

   

  The latest recorded death is of a Japanese tourist who slipped and fell down the stairs at the Taj Mahal on September 18.

  *  *  *
  And while some selfies are "to die for"…

  

  

  

  In Russia, the danger has apparently become so acute that in July police launched a campaign urging people to take care after about 100 people were reportedly injured while taking selfies.

  "A cool selfie could cost you your life," the Interior Ministry warned in a brochure accompanying a video and website listing risky locations to take selfies.

   

  Other tips from the Russian campaign include: "A selfie on the railway tracks is a bad idea if you value your life" and "A selfie with a weapon kills".

  

  

  

  

  

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