Today’s News September 27, 2015

• Jim Grant Explains How To Hedge Against The Coming Money Paradrop

  Submitted by Christopher Gisiger via Finanz Und Wirtschaft,

  James Grant, Wall Street expert and editor of the investment journal Grant’s Interest Rate Observer, warns of ever more extreme central bank policies and bets on the comeback of gold.

  The global financial markets are under severe stress. The postponed interest rate hike in the United States, the fast cooldown of the Chinese economy and the crash in the commodity complex are causing a great amount of unease among investors. Fear is growing that the world slips into recession. "Central bank policy is intended to paper over the cracks in the systems. Seven years after the outbreak of the financial crisis we’re paying for this with a lack of growth", says James Grant. The sharp thinking editor of the iconic Wall Street newsletter Grant’s Interest Rate Observer draws worrisome parallels between the command based central planning of the Chinese economy and the economic policies in the West. He also doubts that Fed Chair Janet Yellen is the right fit for the top job at the world’s most powerful central bank. Looking for protection he points to gold and shares of gold miners.

  *  *  *

  Jim, since the fall of Lehman Brothers seven years have passed now. In what kind of world are investors living in today?

  It seems longer ago, doesn’t it? Certain things have not changed. The first of those permanent things is the nature of human beings who operate in markets and their tendency to buy high and sell low. That is just as it was the day before Lehman failed and it’s just as it will be forever. What’s new and different is the larger than life presence of government in our markets, both with respect to regulation and with respect to the management and the production and the manipulation of money.

  Are you referring to super low interest rates?
  There is nothing so terribly new about very low interest rates. In the 19th century interest rates fell for most of the area from the end of the Napoleonic wars in 1815 to the turn of the 20th century. But something new under the sun might be very well the hyperactivity of our central banks.

  But without their interventions we might be even worse off today.
  We are living in the age of magical thinking. Governments through central banks have muscled down money market interest rates to zero and in some cases below zero. Not content with that, they have implemented what economists chose to call "the portfolio balance channel". That’s a very fancy phrase meaning higher stock prices in the interest of rising aggregate demand. That was the theory of the Bernanke Fed and it certainly was the theory of the Chinese communists who sponsored the fly away levitation of the Shanghai A-shares. So the world over – and this goes for Europe as well – central bankers have taken it upon themselves to sponsor great bull markets in the hopes of making people spend more because they will feel richer. That was the theory. But they neglected to think through the full consequences of these policies.

  The slowdown in China is putting the financial markets under a lot of stress. How bad is the situation?
  If I were a member of the ruling elite of the Chinese communist party I would say to myself: "Wait a second, we were just doing what the capitalist West was doing for the sake of economic recovery:  Manipulating interest rates, administering asset prices through QE and inducing people through broad winks and nudges to taking risks and thereby seeding bull markets. When things went to smash in 2008 they didn’t arrest short sellers but they did threaten them as well. So what are we doing that’s different?" What China is doing different is that they’re doing it more ham handed. But aren’t there rather obvious analogies between old fashioned marxist central planning of the entire economy and our style of western central banking in which they seek to impose certain outcomes through the manipulation of prices?

  Is China set for a hard landing?
  I think China is very worrying. The macroeconomic data are largely made up and their methods are almost predestined to fail as the methods of command and control and suppression of the price mechanism are always predestined to fail. And then, on top of that, what’s scary is the reaction of the West: Instead of questioning those principles we talk about that the Chinese are just not as proficient in these techniques.

  China was a main concern for the Federal Reserve not to raise interest rates at their recent meeting. Was this the right decision?
  I was hoping that they would choose to act if only as a mercy to change the subject. I mean can we talk about something more interesting like the weather? Of course, it’s not just about one quarter of one percent of scarcely discernable monetary tightening. It’s about the idea of something in the way of a normal structure of interest rates in the time to come. But here it is again: Seven years after the fall of Lehman the biggest and supposedly most dynamic, most resilient economy in the world is still not strong enough to absorb that. That is the message from the Fed. So no wonder the markets are worried.

  Usually stocks rally when the Fed stays easy. Not this time. Is Fed Chair Janet Yellen still on top of things?
  Here is a a very revealing fact: According to the Wall Street Journal when Janet Yellen goes to the airport to catch a flight she arrives hours early. Now, what does that tell you about her personality type? She’s really, really anxious. I think this is a personality type that perhaps is better suited not for high command. If a difficult decision needs to be taken a person who’s so anxious or so much of an impulsive risk minimizer is perhaps not the best qualified to take sometimes a leap into the dark. But that’s what investing and the management of money is everything about: At one point you have to take a leap in the dark because you can’t know the future. So this says a lot about a person who manages the world’s reserve currency without thinking of making too much of it.

  So far there are few signs of inflation however. If anything, economists are concerned about deflation.
  We see no inflation in the supermarket but we have already seen a great deal of it on Wall Street. Also, what exactly is wrong with low inflation? Many accredited economists and central bankers want us to think that unless the rate of debasement of money is 2% or higher we’re all in danger of some catastrophic economic event. Says who? This is one of these moments in which I feel utterly isolated from mainstream financial and monetary thinking. I ask myself: Are we at Grant’s crazy or are they? I guess we’ll know more in twenty years.

  So what’s next for the global financial markets?
  The mispricing of biotech stocks or corn and soybeans is of no great consequence to financial markets at large. Interest rates are another matter. They are universal prices: They discount future cash flows, calibrate risks and define investment hurdle rates. So interest rates are the traffic signals of a market based economy. Ordinarily, some are amber, some are red and some are green. But since 2008 they have mainly been green.

  You’re saying there’s an accident waiting to happen?
  The central banks lifted off the stock market so that aggregate demand is going to rise. But they forgot to consider that aggregate supply is likely also to rise: Oil drillers will have it easier to find financing with which to drill the marginal well and to produce the marginal barrel of oil. This will weight on the market causing lower oil prices which will lead the central bankers in return to print still more money to save us from what they call "the risk of deflation." So it’s seemingly a never ending, circular process of so called stimulus leading to still more stimulus and unconventional ideas leading to radical ideas. I dare to say that we have not yet seen the most radical brainwaves of the mandarins running our central banks.

  What do you think this will look like?
  They don’t keep those things as a secret. They talk quite openly about "direct monetary funding" which is what Milton Friedman had in mind when he coined the phrase “helicopter money”. So the next idea is just bypassing the banking system altogether and mailing out checks to the citizens.

  Would something like that even work?
  All this monetary stimulus does two things in a reciprocal way: It pushes failure into the future and brings consumption into the present. Providing marginal businesses with very cheap credit is inviting companies that have passed their useful days of their commercial lives to pretending some kind of an afterlife thanks to the subsidies from the central banks. But capitalism is inherently a dynamic system based on entrepreneurship and to new inventions. It’s a little bit like the forest for the trees: You need life but you also need death. Without death there is no room for a new generation and what you get is Japan: Standing timbers of ancient age, none of them too healthy. Quantitative easing and artificially low interest rates reduce the dynamics, the growth and the vibrancy of economic life.

  Now the fear of corporate failures is growing. You can see that in the widening spreads in the junk bond market.
  The junk bond market has been characterized by very loose protections to the creditors. Those protections have been mainly eviscerated or weakened during this cycle of very aggressive lending and borrowing. That’s why I think the recovery rates on junk bonds in default will be lower and the final permanent losses to capital will be higher this cycle. But this should not be confused with the apocalypse. This is how finance works. This is the cycle of psychology of bull markets and bear markets, of boom and bust: There is euphoria and that mellows to complacency and at length it ripens to apprehension and then to fear and finally to abject terror – and that’s when you buy!

  So where do you see opportunities for investors right now? Emerging markets for instance have crashed already pretty hard.
  We see the beginnings of opportunity in some of the emerging markets. Still, I don’t think this is the moment to get involved broadly. But at least some securities have been marked down to levels at which  you can say: "Ok, that’s at least interesting". One of them is Sberbank. It’s a very good bank and it happens to be in Russia, a rather forbidding place at the moment. But Sberbank came through the 2008/09 experience with shining colors, its management is first rate and it has terrific scale. So altogether it’s a first rate bank now greatly under strain owned to the difficulties in Russia. But I think it will survive and do well. Another interesting stock is the Moscow Stock Exchange. Like Sberbank it’s well managed, cheap and a good business. There are also Avianca, an airline in Colombia and Grupo Nutresa, a midcap food distributor and processor which is called the Nestlé of Columbia.

  Where else do you see opportunities?
  This is a monetary moment. I think we are looking at the beginning of the world’s reappraisal of the words and deeds of central bankers like Janet Yellen and Mario Draghi. What we’re waiting for is a sufficient recognition of the monetary disorder. You see monetary disorder manifested in super low interest rates, in the mispricing of credit broadly and you see it in the escalation of radical monetary nastrums that are floating out of the various central banks and established temples of thought: Negative real rates, negative nominal rates and the idea of helicopter money. So you need some hedge against things not going according to the script and that makes gold and gold mining equities terrifically interesting now.

  Are there any gold mining stocks you would recommend specifically?
  Anything that the Canadian mining entrepreneur Pierre Lassonde is involved with, is interesting. He is a very unusual mining entrepreneur because he is a businessman first and and geologist second. He wants a return on investment rather than just digging a hole in the ground out of which comes gold. He is involved especially with Euro-Nevada and with a very low priced speculative mining company called Newgold. Barrick Gold is another stock that is an attractive speculation because it is highly encumbered and in the not so distant future it faces a debt drama. But the shares are priced for that and if gold goes higher they have huge potential.

  

  

  

  

  

• Paul Craig Roberts Warns "The Entire World May Go Down The Tubes Together"

  Submitted by Paul Craig Roberts,

  Washington’s IQ follows the Fed’s interest rate – it is negative. Washington is a black hole into which all sanity is sucked out of government deliberations.

  Washington’s failures are everywhere visible. We can see the failures in Washington’s wars and in Washington’s approach to China and Russia.

  The visit of Chinese President Xi Jinping, was scheduled for the week-end following the Pope’s visit to Washington. Was this Washington’s way of demoting China’s status by having its president play second fiddle to the Pope? The President of China is here for week-end news coverage? Why didn’t Obama just tell him to go to hell?

  Washington’s cyber incompetence and inability to maintain cyber security is being blamed on China. The day before Xi Jinping’s arrival in Washington, the White House press secretary warmed up President Jinping’s visit by announcing that Obama might threaten China with financial sanctions.

  And not to miss an opportunity to threaten or insult the President of China, the US Secretary of Commerce fired off a warning that the Obama regime was too unhappy with China’s business practices for the Chinese president to expect a smooth meeting in Washington.

  In contrast, when Obama visited China, the Chinese government treated him with politeness and respect.

  China is America’s largest creditor after the Federal Reserve. If the Chinese government were so inclined, China could cause Washington many serious economic, financial, and military problems. Yet China pursues peace while Washington issues threats.

  Like China, Russia, too, has a foreign policy independent of Washington’s, and it is the independence of their foreign policies that puts China and Russia on the outs with Washington.

  Washington considers countries with independent foreign policies to be threats. Libya, Iraq, and Syria had independent foreign policies. Washington has destroyed two of the three and is working on the third. Iran, Russia, and China have independent foreign policies. Consequently, Washington sees these countries as threats and portrays them to the American people as such.

  Russia’s President Vladimir Putin will meet with Obama next week at the UN meeting in New York. It is a meeting that seems destined to go nowhere. Putin wants to offer Obama Russian help in defeating ISIS, but Obama wants to use ISIS to overthrow Syrian President Assad, install a puppet government, and throw Russia out of its only Mediterranean seaport at Tartus, Syria. Obama wants to press Putin to hand over Russian Crimea and the break-away republics that refuse to submit to the Russophobic government that Washington has installed in Kiev.

  Despite Washington’s hostility, Xi Jinping and Putin continue to try to work with Washington even at the risk of being humiliated in the eyes of their peoples. How many slights, accusations, and names (such as “the new Hitler”) can Putin and Xi Jinping accept before losing face at home? How can they lead if their peoples feel the shame inflicted on their leaders by Washington?

  Xi Jinping and Putin are clearly men of peace. Are they deluded or are they making every effort to save the world from the final war?

  One has to assume that Putin and Xi Jinping are aware of the Wolfowitz Doctrine, the basis of US foreign and military policies, but perhaps they cannot believe that anything so audaciously absurd can be real. In brief, the Wolfowitz Doctrine states that Washington’s principal objective is to prevent the rise of countries that could be sufficiently powerful to resist American hegemony. Thus, Washington’s attack on Russia via Ukraine and Washington’s re-militarization of Japan as an instrument against China, despite the strong opposition of 80 percent of the Japanese population.

  “Democracy?” “Washington’s hegemony don’t need no stinkin’ democracy,” declares Washington’s puppet ruler of Japan as he, as Washington’s faithful servant, over-rides the vast majority of the Japanese population.

  Meanwhile, the real basis of US power—its economy—continues to crumble. Middle class jobs have disappeared by the millions. US infrastructure is crumbling. Young American women, overwhelmed with student debts, rent, and transportation costs, and nothing but lowly-paid part-time jobs, post on Internet sites their pleas to be made mistresses of men with sufficient means to help them with their bills. This is the image of a Third World country.

  In 2004 I predicted in a nationally televised conference in Washington, DC, that the US would be a Third World country in 20 years. Noam Chomsky says we are already there now in 2015. Here is a recent quote from Chomsky:

  “Look around the country. This country is falling apart. Even when you come back from Argentina to the United States it looks like a third world country, and when you come back from Europe even more so. The infrastructure is collapsing. Nothing works. The transportation system doesn’t work. The health system is a total scandal–twice the per capita cost of other countries and not very good outcomes. Point by point. The schools are declining . . .”

  Another indication of a third world country is large inequality in the distribution of income and wealth. <a href="https://en.wikipedia.org/wiki/List_of_countries_by_income_equality and https://www.cia.gov/library/publications/the-world-factbook/fields/2172…. “>According to the CIA itself, the United States now has one of the worst distributions of income of all countries in the world. The distribution of income in the US is worse than in Afghanistan, Albania, Algeria, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Benin, Bosnia/Herzegovina, Burkina Faso, Burundi, Cambodia, Cameroon, Canada, Cote d’Ivoire, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Germany, Ghana, Greece, Guinea, Guyana, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, South Korea, Kyrgyzstan, Laos, Latvia, Liberia, Lithuania, Luxembourg, Macedonia, Malawi, Mali, Malta, Mauritania, Mauritius, Moldova, Mongolia, Montenegro, Morocco, Nepal, Netherlands, New Zealand, Nicaragua, Niger, Nigeria, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Senegal, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan, Tajikistan, Tanzania, Timor-Leste, Tunisia, Turkey, Turkmenistan, Uganda, Ukraine, UK, Uzbekistan, Venezuela, Vietnam, and Yemen.

  The concentration of US income and wealth in the hands of the very rich is a new development in my lifetime. I ascribe it to two things.

  One is the offshoring of American jobs. Offshoring moved high productivity, high-value-added American jobs to countries where the excess supply of labor results in wages well below labor’s contribution to the value of output. The lower labor costs abroad transform what had been higher American wages and salaries and, thereby, US household incomes, into corporate profits, bonuses for corporate executives, and capital gains for shareholders, and in the dismantling of the ladders of upward mobility that had made the US an “opportunity society.”

   

  The other cause of the extreme inequality that now prevails in the US is what Michael Hudson calls the financialization of the economy that permits banks to redirect income away from driving the economy to the payment of interest in service of debt issued by the banks.

  Both of these developments maximize income and wealth for the One Percent at the expense of the population and economy.

  As Michael Hudson and I have discovered, neoliberal economics is blind to reality and serves to justify the destruction of the economic prospects of the Western World. It remains to be seen if Russia and China can develop a different economics or whether these rising superpowers will fall victim to the “junk economics” that has destroyed the West. With so many Chinese and Russian economists educated in the US tradition, the prospects of Russia and China might not be any better than ours.

  The entire world could go down the tubes together.

  

  

  

  

  

• Reflexivity Wrecks Fed Credibility, Crushes 2016 Rate Hike Hopes

  With Janet Yellen choking back the vomit as she shifted The Fed's stance to a "hawkish hold," markets remain just as confused (and disconnected) as they were after The FOMC's "dovish hold." The problem, as Deutsche explains, is The Fed's reliance on 'conventional' inflation dynamics (and its mean-reversion – higher in this case) as opposed to actual market expectations (which are collapsing), leaving them open to a major Type II policy error –  the risk of rejecting something that is, in actuality, true. The Fed's credibility is teetering on the brink as inflation 'reflexivity' – that is, Fed expectations strengthen the dollar, depress risk in general and commodities in particular, with lower commodities driving headline inflation lower – raises the prospect that the Fed fails to raise rates at all in 2016.

  For many asset classes there has been nothing but a roundtrip, risk on before the Fed, replaced by risk off. However the momentum especially in say high yield, some dollar pairs (especially vs. EM) and to some extent equities appears to be headed towards revisiting what had been earlier sell-off lows in the China devaluation panic.

   

  For some investors the Fed’s failure to raise rates is viewed as the culprit in the risk reversal, even though for many investors the Fed was viewed as being in a “dovish hold”, reflecting a more sanguine outlook for inflation as well as global growth concerns. The former view suggests that the Fed is still very much on track for hikes later this year and all will therefore be well as the start to normalization will instill confidence in the economic outlook and “remove” uncertainty that might otherwise be plaguing risk assets. And consistent with this it is the official view of our economist colleagues that the Fed will raise rates in December and then again twice more in 2016.

   

  Yellen, in her speech late last week, specifically included herself in the group of FOMC members that expect to raise rates later this year and as such seemed to redirect the market’s perception of the September decision toward a “hawkish hold” rather than a “malign” dovish hold. The malign dovish hold is one in which the Fed delays lift-off because it is concerned about the vigor of activity domestically and abroad. The hawkish hold, in contrast, leaves rate hikes on the table for 2015, and is likely to keep downward pressure on inflation, risk assets, the general level of yields, and the slope of the curve.

   

  The potential issue with Yellen’s position is that it is based largely on an entirely conventional view of inflation dynamics, whereby headline inflation over time is expected to revert to the more stable core measure. This entails assigning a greater “weight” to inflation survey data rather than traded market inflation compensation, posits that the long-run inflation trend is unchanged, and assumes no changes in the relationship between core and headline inflation. This is all conventional stuff, but remains exposed to risks that inflation dynamics have changed. For example, we have highlighted statistical evidence that suggests that headline inflation “Granger causes” core inflation rather than vice versa since the crisis in the US, with a similar and somewhat more robust effect evident in the European HICP data.

   

  This result could be deceptively important in that, if it persists, it suggests that expectations of Fed hikes could be having a negative effect on the inflation metric that drives them. That is, Fed expectations strengthen the dollar, depress risk in general and commodities in particular, with lower commodities driving headline inflation lower.

   

  This would be less problematic if headline inflation did not feed back into the core measure, as base effects would lead the decline in headline inflation to dissipate over time. The problem is that there is demonstrable pass through into core, with the risk being that “transitory” influences could in fact be depressing the longer-run trend. Even if this statistical behavior is a transitory cyclical effect stemming from the financial crisis, the reality is that 1) the dollar linkage demonstrates the relevance of the global economy, and 2) other major economies are in worse shape than the US economy.

  Ultimately the issue remains Type 2 error risk – the risk of rejecting something that is, in actuality, true.

  Risk assets remain negatively correlated with real yields – a signal distinct from pre-crisis behavior that we interpret as reflecting market concerns over a policy error. While it is possible that risk-off dynamics will be limited in scope and hence acceptable if not desirable, it is also possible that risk off could overly tighten financial conditions in a fashion that precludes, rather than reflects, a more balanced recovery domestically and abroad.

  We think there are scenarios for the next few months that might allow the Fed to raise rates, even this year. However we continue to believe these scenarios are unlikely to materialize and the market is therefore prone to dismiss them.

   

  In our view they do not represent good risk/reward for investors. On the contrary we think the path of least resistance for market pricing is to continue to deflate Fed expectations through 2016.

   

  The prospect that the Fed fails to raise rates at all in 2016 is rising. Almost by its very nature we think the market needs to ease financial conditions for the Fed first, if the Fed is going to be able to achieve lift off.

  Morgan Stanley confirms this "paradox" as they note…

  We see an unusual discrepancy in real yields vs. inflation breakevens in the US and the Eurozone. Forward real yields imply the Fed will tighten monetary policy above our estimate of the real terminal rate, even though inflation breakevens price a large and persistent inflation undershoot.

   

  In our view, either real rates are too high or breakevens are too low. If inflation breakevens are right about persistently low inflation, the Fed will not be able to normalize real rates, let alone take them into restrictive territory. Nevertheless, the market is pricing this scenario when viewed through the lens of 5-year forward 5-year (5y5y) and 10y20y real yields and inflation breakevens.

   

  

   

  Could the Fed embark on a hiking cycle that, in its totality, would amount to a policy mistake? Could the Fed tighten monetary conditions to the extent that inflation never returns to its own 2 percent inflation target? This seems implausible to us, especially in light of the cautious nature of the Fed’s recent decision to delay liftoff at the September FOMC meeting. For the Fed to make one policy mistake is human. For the Fed to make a series of policy mistakes over a multi-year period is unthinkable.

  The TIPS market appears to be pricing in a lengthy policy mistake.

  

   

  We give the last word to Deutsche Bank who raise considerable doubts about risk assets in either a "dovish" or "hawkish" Fed world… Much has been discussed around why the market seems so divided on whether the Fed should be hiking or delaying amidst what on paper looks like a tight labor market.

  • The argument for hiking is that inflation risks are around the corner and it is unlikely that global woes alone can derail the US economy, even if they temporarily weaken inflation.
  • The argument for delaying is that even if you accept the underlying strength of the US economy (secular stagnation fears aside, etc.), balance sheet economics dominates the business cycle and may be a leading indicator of future economic weakness, while the cycle itself is a lagging indicator of prior financial conditions.

  The easiest way to appreciate balance sheet concerns is in terms of (risk) asset price returns, reflecting deleveraging in various sectors, especially energy and commodities, which shows up in emerging market currency stress, high yield and to some extent equities. Real yields (on Treasuries) are essentially “too high” for these asset prices to stabilize and the danger is that financial conditions continue to tighten.

  

  In turn this raises the risk that the domestic corporate sector, facing weaker pricing power at home and abroad, curtails the expansion to defend profits and manage an otherwise deteriorating debt burden.

  *  *  *

  So to sum up…

  • It was a hawkish hold after all. Yellen dispelled any uncertainty in her speech late last week. That leaves us bearish risk and looking for sub-2 percent in 10y yields with a flattening of the curve.
  • We think the risk of Type 2 error should dominate the Fed’s thinking because the balance sheet leads the business cycle. While some sectors are still enjoying what were less restrictive conditions a year or two ago, the effect of deleveraging is evident in energy and commodities more generally, high yield and equities. Rising real rates have been negative for asset prices, and pre-crisis dynamics suggest that this negative correlation reflects market concerns over a policy error. Rate hikes are likely to cause further tightening of financial conditions, ultimately hindering growth.
  • The path of least resistance for market pricing is to continue to depress rate hike expectations, to the extent that the Fed might not be able to raise rates at all through the end of 2016.

  Once again The Fed falls foul of linear-thinking as reflexivity leaves them wishing to appear dovishly hawkish… is it any wonder Yellen is sick of it.

  Or put another way, the more (potentially erroneously) economically-confident "hawkish" The Fed talks, the less and less likely 'markets' are to price in long-run economic growth, thus defeating The Fed's hope not to surprise the market… get back to work Mr. Yellen.

  

  

  

  

  

• Rumors Persist That The CIA Helps Export Opium From Afghanistan

  Submitted by Kit O'Connell via TheAntiMedia.org,

  Despite billions spent to eradicate opium crops in Afghanistan, the crop is more popular than ever there, leading many to wonder whether some U.S. forces may actually be encouraging its growth and the heroin it later becomes.

  In July, the Centers for Disease Control warned of record-breaking numbers of heroin deaths in the United States. “Heroin use more than doubled among young adults ages 18–25 in the past decade,” the CDC reported.

  In the same month, it was reported that opium production is stronger than ever in Afghanistan, which now produces 90 percent of the world’s supply of the plant that’s refined to create heroin. This rise in production would have been impossible prior to the U.S.-led invasion, and it comes despite some $8.4 billion spent in counternarcotics efforts by the U.S., specifically designated to wipe out opium production in Afghanistan.

  In fact, as Global Post reported in October, under the watchful eye of the U.S., opium use expanded to new parts of Afghanistan and growers now make use of modern, advanced agricultural technologies.

  With photos circulating in 2010 that show U.S. soldiers patrolling opium fields, questions remain about what America’s real involvement may be in the opium trade. As Abby Martin noted in a 2014 investigation for Media Roots, while the Taliban had all but eradicated opium, it began to thrive just months after American forces replaced the Taliban-led government in 2001.

  Martin noted that the CIA has long been tied to the global drug trade, where it’s accused of putting more effort into controlling rather than eradicating illicit substances. She added,

  “Circumstantial evidence aside, there is no conclusive proof that the CIA is physically running opium out of Afghanistan. However, it’s hard to believe that a region under full US military occupation – with guard posts and surveillance drones monitoring the mountains of Tora Bora – aren’t able to track supply routes of opium exported from the country’s various poppy farms (you know, the ones the US military are guarding).”

  According to a January report from Mother Jones, the DEA agent formerly in charge of the agency’s efforts in Afghanistan reported repeated conflict between DEA eradication efforts and CIA agents:

  “[Edward] Follis says the DEA and CIA often bumped heads in Afghanistan. … While hinting that the CIA sometimes turned a blind eye to the Afghan drug trade, Follis won’t get into specifics. In his book, [‘The Dark Art: My Undercover Life in Global Narco-Terrorism,’] he writes, ‘Almost everywhere in the world I worked, I had static with the CIA. We’re often working the same terrain, but with different legal and moral parameters … They exist completely in the shadows.’”

  Among the groups profiting off the Afghan opium trade — and the failed efforts to eradicate it — is the mercenary group Academi, better known by its former name, Blackwater. In April, RT reported that Academi earned $569 million from counternarcotics contracts in Afghanistan.

  “[T]he notorious company has been the biggest beneficiary of counternarcotics expenditure in the war-torn country,” RT wrote.

  Watch “The Worst Narco-State in History? After 13-Year War, Afghanistan’s Opium Trade Floods the Globe” below:

  

  

  

  

  

• Gold "Tightness": When There's No More To Sell, There's No More To Buy (At Any Price)

  Submitted by Chris Martenson via PeakProsperity.com,

  One of our long-running themes here is that the truly historic and massive flows of gold from West to East is (someday) going to stop, for the simple reason that there will be no more physical bullion left to move. 

  It’s just a basic supply vs. demand issue.  At current rates of flow, sooner or later the West will entirely run out of physical gold to sell to China and India.  Although long before that hard limit, we suspect that the remaining holders of gold in the West will cease their willingness to part with their gold. 

  So the date at which “the West runs out of gold to sell” is somewhere between now and whenever the last willing Western seller parts with their last ounce.  As each day passes, we get closer and closer to that fateful moment. 

  This report centers on preponderance of fascinating data revealing the extent of the West's massive dis-hoarding of physical gold, for the first time, begins to allow us to start estimating the range of end-dates for the flow to the East.

  Here’s the punchline: there’s an enormous and growing disconnect between the cash and physical markets for gold. This is exactly what we would expect to precede a major market-shaking event based on a physical gold shortage.

  Stopping the Flows

  There are only two outcomes that will stop the process of Western gold flowing East, one illegitimate and the other legitimate. 

  1. It becomes illegal to sell gold.  This is the favored approach of central planners who prefer to force change by dictate rather than via free markets and free will.   Unfortunately, this strain of political intervention is dominant in the West, particularly in the US and EU.
  2. The price of gold dramatically rises. A large increase in the price of gold will (paradoxically) cause greater demand for gold in the West and (sensibly) less demand in the East. This is what should legitimately happen given current supply and demand dynamics. But it may not. 

  There’s always a 3^rd option, we suppose: economically carpet-bombing China and India's financial systems to scare/force some gold back out. Consider such an approach along the ‘economic hitman’ lines of thinking. 

  This would be done, for example, by having outside interests sell the Rupee furiously, driving down its value and forcing the Indian monetary authorities to defend it by using up foreign reserves to buy the Rupee. Then wait for India to run out of foreign reserves and then casually ‘suggest’ that its government use gold sales to continue defending its currency.  India's leaders would have to find ways to somehow ‘coax’ gold from its citizens.  I think we can all imagine the sorts of draconian rules and penalties that desperate governments would deploy in such a situation.

  As a side note, I believe this is the same process that was used to ‘coax’ a lot of gold out of the GLD trust since 2012. After enough bear raids on the price of gold, which began somewhat suspiciously almost exactly on the date that QE3 was announced, Western gold ‘investors’ lost interest in the yellow metal, sold their GLD shares in droves, and hundreds of tons of gold were liberated from that stockpile.

  What is truly odd from a chart perspective: this hammering down of gold started just after it had broken to the upside out of a textbook perfect triangle, when it looked seemingly ready to head off to higher values:

  

  But in the days immediately following the QE3 announcement, gold shed $100, then barely recovered, and just wandered lower until it was violently slammed from $1550 to $1350 over one night (of course) in April 2013.

  Now this was highly fortuitous for the ever-lucky Federal Reseve. After launching the largest money printing campaign in US history, the Fed did not need gold heading any higher, possibly providing a signal that would cast doubt on the wisdom or possible effectiveness of its easy-money policies. Policies, mind you, that the years since have proven to do little more than enrich the banker class and the 0.1%, as well as lard the system with extraordinary levels of new indebtedness and liquidity.

  The Fed Indeed Cares About Gold

  Gold, when unfettered, has a habit of sending signals that the Fed really doesn’t like. Therefore the Fed is at the top of everyone’s suspect list when it comes to wondering who might be behind the suspicious gold slams. Whether the Fed does it directly is rather doubtful; but they have a lot of useful proxies out there in their cartel network.

  To reveal the extent to which gold sits front and center in the Fed’s mind, and how they think of it, here’s an excerpt from a 1993 FOMC meeting’s full transcript. Note that the full meeting notes from Fed meetings are only released years after the fact. The most recent ones available are only from 2009. Listen to what this FOMC voting member had to say about gold:

  At the last meeting I was very concerned about what commodity prices were doing. And as you know, they got lucky again and told us that the rate of inflation was higher than we thought it was.

   

  Now, I know there's nothing to it but they did get lucky. I've had plenty of econometric studies tell me how lucky commodity prices can get. I told you at the time that the reason I had not been upset before the March FOMC meeting was that the price of gold was well behaved.

   

  But I said that the price of gold was moving. The price of gold at that time had moved up from 328 to 344, and I don't know what I was so excited about! I guess it was that I thought the price of gold was going on up. Now, if the price of gold goes up, long bond rates will not be involved.

   

  People can talk about gold's price being due to what the Chinese are buying; that's the silliest nonsense that ever was. The price of gold is largely determined by what people who do not have trust in fiat money system want to use for an escape out of any currency, and they want to gain security through owning gold.

   

  A monetary policy step at this time is a win/win. I don't know what is going to happen for sure. I hope Mike is correct that the rate of inflation will move back down to 2.6 percent for the remaining 8 months of this calendar year. If we make a move and Mike is correct, we could take credit for having accomplished this and the price of gold will soon be down to the 328 level and we can lower the fed funds rate at that point in time and declare victory.

  (Source – Fed)

  There it is, in black and white from an FOMC member’s own mouth spelling out the primary reason why I hold gold: I lack faith in our fiat money system. He nailed it.  Or rather, I have very great faith that the people managing the money system will print too much and ultimately destroy it. Same thing, said differently.

  And of course the people at the Fed are acutely aware of gold's role as a barometer of people’s faith in ‘fiat money.’ Of course they track it very carefully, discuss it, and worry about it when it is sending ‘the wrong signals.’ I would, too, if in their shoes.

  The Federal Reserve Note (a.k.a. the US dollar) is literally nothing more than an idea.  It has no intrinsic value. America's money supply is just digital ones and zeros careening about the planet, accompanied by a much smaller amount of actual paper currency. The last thing an idea needs is to be exposed as fraudulent. Trust is everything for a currency — when that dies, the currency dies.

  The other thing you can note from these FOMC minutes is that gold pops up 19 times in the conversation. The Fed members are are actively and deliberately discussing its price, role in setting interest rates, and the psychological impact of a rising or falling gold price.

  Later in that same meeting Mr. Greenspan says:

  My inclination for today–and I'm frankly most curious to get other people's views–would be to go to a tilt toward tightness and to watch the psychology as best we can. By the latter I mean to watch what is happening to the bond market, the exchange markets, and the price of gold…

   

  I have one other issue I'd like to throw on the table. I hesitate to do it, but let me tell you some of the issues that are involved here. If we are dealing with psychology, then the thermometers one uses to measure it have an effect. I was raising the question on the side with Governor Mullins of what would happen if the Treasury sold a little gold in this market.

   

  There's an interesting question here because if the gold price broke in that context, the thermometer would not be just a measuring tool. It would basically affect the underlying psychology. Now, we don't have the legal right to sell gold but I'm just frankly curious about what people's views are on situations of this nature because something unusual is involved in policy here. We're not just going through the standard policy where the money supply is expanding, the economy is expanding, and the Fed tightens. This is a wholly different thing.

  The recap of all this is that the Fed watches the price of gold carefully, frets over whether the price of gold is ‘sending the right signals’ to market participants, and pays attention to gold's impact on market psychology (with an eye to controlling it).

  In short, the Fed keeps a close eye on the "golden thermometer".

  Back to the supply story for gold.  Not long after gold began its downward price movement in 2012, the GLD trust began coughing up a lot of gold, eventually shedding more than 500 tonnes; a truly massive amount.

  

  (Source)

  In my mind, the absolute slamming of gold in 2013 was done by a few select entities and represents one of the clearest cases of price manipulation on the recent record.  While we can debate the reasons ‘why’ gold was manipulated lower or ‘who’ did it, to me, there’s no question about how it was done. Or that it was done. 

  Massive amounts of paper gold were dumped into a thin overnight market with the specific intent of driving down the price of gold.

  It’s an open and shut case of price manipulation. Textbook perfect. 

  Even if these bear raids were performed by self-interested parties that made money while doing it, you can be sure the Fed was smiling thankfully in the background and that the SEC wasn’t going to spend one minute looking into whether any securities laws were broken (especially those related to price manipulation). Gold's falling "thermometer" was exactly what the central planners wanted the world to see.

  Down and Out

  The paper markets for gold are centered in the US, while the physical market for gold is centered in London (but increasingly Shanghai).  It’s safe to say that the paper markets set the spot price, while the physical movement of gold originates in London.

  What’s increasingly obvious is the growing disconnect between the paper and physical markets. This is exactly what we’d expect to see if the paper markets were pushing in one direction (down) while physical gold was heading in a different direction (out).

  The tension between these ‘down and out’ movements is building and, according to a senior manager of one of the largest gold refineries in the world located in Switzerland, the current price of gold “has no correlation to the physical market.”

  He notes a lot of on-going tightness in the physical market. Unsurprisingly, gold is moving from West to East with vaults in London supplying much of the physical metal that's being refined into fresh kilo bars and sent off to China and India.

  But given the astonishing amount of physical demand, why has the price of gold been heading steadily lower over the past several years? 

  The aforementioned Swiss refiner is equally perplexed:

  If I am honest, the only thing I could share now with you would be that I’m perplexed about the discrepancy between the prices and the situation of the physical market. This is something I still do not understand and is a riddle for me every day. For all people who are interested in precious metals, the physical side of this business should be given more emphasis.

  (Source – Transcript)

  There’s no mystery as to demand going up in China and India as the price went down. Interested buyers will buy more at a lower price.

  But its a big mystery as to why Western “investors” seem more interested in selling gold than buying it right now.

  Evidence of Physical Tightness

  Besides the first-hand experience of the Swiss refiner, there have been numerous stories in the main stream press also pointing to tightness in the London physical gold market as well as relentless demand from China and India being the driver of that condition:

  Gold demand from China and India picks up

  Sep 2, 2015

   

  London’s gold market is showing tentative signs of increased demand for bullion from consumers in emerging markets, after the price of the precious metal fell to its lowest level in five years in July.

   

  The cost of borrowing physical gold in London has risen sharply in recent weeks. That has been driven by dealers needing gold to deliver to refineries in Switzerland before it is melted down and sent to places such as India, according to market participants.

   

  “[The rise] does indicate there is physical tightness in the market for gold for immediate delivery,” said Jon Butler, analyst at Mitsubishi.

   

  The move comes as Indian gold demand picked up in July, with shipments of gold from Switzerland to India more than trebling. Most of that gold is likely to originally come from London before it is melted down into kilobars by Swiss refineries, according to analysts.

   

  In the first half of this year, total recorded exports of gold from the UK were 50 per cent higher than the first half of 2014, on a monthly average basis, according to Rhona O’Connell, head of metals for GFMS at Thomson Reuters. More than 90 per cent was headed for a combination of China, Hong Kong and Switzerland.

   

  London remains the world’s biggest centre for trading and storing gold.

  (Source)

  Shipments and exports are up very strongly and nearly all of that gold is headed to just two countries; China and India. 

  India Precious Metals Import Explosive – August Gold 126t, Silver 1,400t

  Sept 10, 2015

   

  In the month of August 2015, India imported 126 tonnes of gold and 1,400 tonnes of silver, according to data from Infodrive India. Gold import into India is rising after a steep fall due to government import restrictions implemented in 2013.

   

  Year-to-date India has imported 654 tonnes of gold, which is 66 % up year on year. 6,782 tonnes in silver bars have crossed the Indian border so far this year, up 96 % y/y.

   

  Gold import is set to reach an annualized 980 tonnes, which would be up 26 % relative to 2014 and would be the second highest figure on (my) record – my record goes back to 2008.

   

  Silver import is on track to reach an annualized 10,172 tonnes, up 44 % y/y! This would be a staggering 37 % of world mining.

  (Source)

  With China and India’s combined appetite for gold being higher than total world mining output, it only stands to reason that somebody has to be parting with their physical gold and those entities appear to be substantially located in the US and UK.

  When There's No More To Sell, There's No More To Buy

  All the above evidence of a tightening physical market for gold is just the tip of the iceberg.

  In Part 2: Why Gold Is Headed Higher & May Be Unavailable At Any Price we look at the frightening inventory declines in bullion storage that the LBMA and the COMEX have experienced over the past year.

  We then lay out how this deliberate suppression of gold prices by the central planners is destined to end: with MUCH higher prices for gold, and much less availability. In fact, there is high likelihood we will experience a point at which it may be nearly impossible for the average investor to acquire physical gold, as there will be no sellers willing to part with it.

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

   

  

  

  

  

  

• Question Of The Day

  Presented with no comment…

   

  

   

  Source: Investors.com

  

  

  

  

• Meet The Man Who Prevented World War III

  Submitted by Erico Matias Tavares via Sinclair & Co.,

  You may have never heard of Vasili Arkhipov. And yet life as we know it on this planet could have ended if it were not for his crucial intervention during the Cuban Missile Crisis.

  Born in 1926, Arkhipov saw action as a minesweeper during the Soviet-Japanese war in August 1945. Two years later he graduated from the Caspian Higher Naval School, serving in the Black Sea and Baltic submarine fleets – just in time for the start of the Cold War, which would stay with him for the rest of his service.

  During the 1950s the Soviets became very concerned about the US’ lead in submarines. They eventually rushed the development and construction of the K-19, the first of two new Hotel-class ballistic missile submarines. However, things did not go smoothly. Eleven people died due to accidents and fires during the construction phase. To top everything off, the champagne bottle used in the inauguration ceremony failed to break.

  These were frightening omens for the crew. But they could scarcely imagine the events that would unfold soon after.

  Arkhipov was appointed deputy commander of the K-19 in its maiden voyage in July 1961, under the command of Captain Nikolai Zateyev. After a few days conducting exercises off the coast of Greenland, the submarine developed a major leak in its reactor coolant system, leading to the failure of the cooling pumps. Radio communications were affected and the crew was unable to contact Moscow.

  With no backup system, Zateyev ordered the seven members of the engineering crew to come up with a solution and avoid a nuclear meltdown. This required the men to work in high radiation for extended periods. Sacrificing their own lives, they bootstrapped a secondary coolant system and kept the reactor from a meltdown.

  The incident irradiated the entire crew, including Arkhipov. All members of the engineering crew and their divisional officer died of radiation exposure within a month. Fifteen more sailors died from the aftereffects of radiation exposure over the following two years. This incident was immortalized in the 2002 Hollywood movie “K-19: The Widowmaker”, starring Harrison Ford and Liam Neeson (both featuring terrible Russian accents).

  The Cold War started heating up soon after. In July of 1962, Soviet leader Nikita Khrushchev agreed to Cuba’s request to place nuclear missiles in Cuba as a deterrent to future US interference, pursuant to the Bay of Pigs invasion debacle a few years earlier. In mid-October, a US reconnaissance airplane produced evidence of medium and long range Soviet ballistic missiles on the site, sending alarm bells ringing in Washington DC.

  US President John F. Kennedy promptly established a military blockade to prevent further missiles from entering Cuba and demanded that the missiles be dismantled and returned to the Soviet Union. Over the following days the world came close to the brink of nuclear war as the two blocks vigorously asserted their positions.

  Nobody realized at the time just how close to disaster they really were. And that’s where Arkhipov would make his decisive contribution to world history.

  Arkhipov was second-in-command in the nuclear-armed Foxtrot-class submarine B-59, part of a flotilla of four submarines protecting Soviet ships on their way to Cuba. On October 27, as they approached the US imposed quarantine line, US Navy ships in pursuit started dropping depth charges to force the B-59 to surface for identification – completely unaware that it was carrying nuclear weapons.

  The explosions rocked the submarine which went dark except for emergency lights. With the air-conditioning down, temperature and carbon dioxide levels rose sharply. The crew was hardly able to breathe.

  Unable to contact Moscow and under pressure from the Americans for several hours, Captain Valentin Savitsky finally lost his nerve. He assumed that war had broken out between the two countries and decided to launch a nuclear torpedo. He would not go down without a fight.

  However, unlike the other submarines in the flotilla, the three officers onboard the B-59 had to agree unanimously to launch the nuclear torpedo. As the other officer sided with Savitsky, only Arkhipov stood in the way of launching World War III.

  An argument broke out between the three, but Arkhipov was able to convince the Captain not to launch the torpedo. How was he able to prevail under such stressful conditions? He was actually in charge of the entire flotilla and as such was equal in rank to Savitsky. But the reputation he had gained during the K-19 incident may have been the decisive factor in convincing the other officers to abort the launch. That detail may have made all the difference.

  The submarine eventually surfaced and awaited orders from Moscow, averting what would have been a nuclear holocaust. The Cuban Missile Crisis ended a few days later.

  This crucial episode of the Cold War only became known to the West after the collapse of the Soviet Union many years later.

  Arkhipov continued to serve in the Soviet Navy, commanding submarines and later submarine squadrons. He was promoted to rear admiral in 1975 and became head of the Kirov Naval Academy. In 1981, he was promoted to vice admiral, retiring a few years later. The radiation he was exposed to in the K-19 incident contributed to his death in 1998, at age 72. 

  It is frightening to ponder how closely the civilized world came to the brink of extinction. It was only a click away, with two out of three in favor.

  It may not have been the only time either. Who knows how many more Soviet and American personnel played a decisive role in averting nuclear annihilation? One person can indeed change the fate of the world.

  We should never let their stories be forgotten.

  

  

  

  

  

• As A Very "Grim" Earnings Season Unfolds, All Eyes Will Be On This Company

  Earlier this week we said that with the third quarter just days away from the history books, Wall Street is preparing for the worst earnings season since 2009, with Factset further noting that “if the index reports a decline in earnings for Q3, it will mark the first back-to-back quarters of earnings declines since 2009.”

  We presented the following table from ISI which showed that not only is the US now officially in a revenue recession, with every single quarter in 2015 set to post a decline from the previous year, with even the overly optimistic consensus case of a 4% increase in Q1 2016 revenues unable to regain sales last seen in Q3 2014, but S&P500 expected earnings in Q1 2016 of 119, a 6% increase from the previous year, will barely put the market back to levels seen in Q3 2014. 

  

  But before we get there we have to get through Q3: a quarter when not only revenues are set to tumble another 5%, but this time not even hundreds of billions in buybacks will prevent the  EPS from sliding, and according to Factset, Q3 EPS are set to tumble 4.5%.

  In other words, while the revenue recession continues, the S&P 500 is about to enter its first earnings recession in six years.

  Earlier today the mainstream media caught up noting that “Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon” and added some facts of its own: expectations for future quarters are falling as well. A rolling 12-month forward earnings per share forecast now stands near negative 2 percent, the lowest since late 2009, when it was down 10.1 percent, according to Thomson Reuters I/B/E/S data.

  

  “The 3.9 percent estimated decline in third-quarter profits – down sharply from a July 1 forecast for a 0.4 percent dip – would be the first quarterly profit decline for the S&P 500 since the third quarter of 2009.”

  “Earnings recessions aren’t good things. I don’t care what the state of the economy is or anything else,” said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston. Michael is clearly paid the “big bucks” for a reason.

  Another investor paid big bucks is Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia, who cited earnings growth as one of the drivers of the market: “How can we drive the market higher when all of these signals aren’t showing a lot of prosperity?”

  How indeed.

  And while in the past attention has traditionally fallen on AAPL as the marginal source of growth, this time not even AAPL can save the market-leading tech sector. As we showed two weeks ago, even with AAPL, Q3 Info-Tech EPS are set to record their first annual drop since Q2 2013. Should AAPL stumble if as some suggest iPhone 6S sales are far weaker than expected, and watch the bottom fall out from under the market.

  

   

  But it isn’t AAPL that everyone will be looking at this quarter – the company that will make or break the Q3 earnings season is not even a tech company at all, but a financial: it’s Bank of America.

  The reason, as Factset points out, is that thanks to a base effect from a very weak Q3 in 2014, Bank of America is not only projected to be the largest contributor to year-over-year earnings growth for the Financials sector, but it is also projected to be the largest positive contributor to year-over-year earnings for the entire S&P 500!

  The positive contribution from Bank of America to the earnings for the Financials sector and the S&P 500 index as a whole can mainly be attributed to an easy comparison to a year-ago loss. The mean EPS estimate for Bank of America for Q3 2015 is $0.36, compared to year-ago EPS of -$0.01. In the year-ago quarter, the company reported a charge for a settlement with the Department of Justice, which reduced EPS by $0.43. Bank of America has only reported a loss in two (Q1 2014 and Q3 2014) of the previous ten quarters.

  

  This is how big BofA’s contribution to Q3 earnings season will be: if Bank of America is excluded from the index, the estimated earnings growth rate for the Financials sectors would fall to 0.7% from 8.2%, while the estimated earnings decline for the S&P 500 would increase to -5.9% from -4.5%.

  

  In other words, if BofA has some major and unexpected litigation provision or some “rogue” loss as a result of marking its deeply underwater bond portfolio to market as Jefferies did last week pushing its fixed income revenue (not profit) negative, the drop in the S&P will increase by a whopping 30%, and all due to just one company.

  Finally, if the market which has been priced to perfection for years finally cracks – and by most accounts it will be on the back of bank earnings which have not been revised lower to reflect a reality in which the long awaited recovery was just pushed back to the 8th half of 2012, and where trading revenues are again set to disappoint – then the recently bearish David Tepper will once again have the final laugh because not only will the new direction in corporate revenues and earnings by confirmed, but a very violent readjustment in the earnings multiple would be imminent. As a reminder, Tepper hinted that the new fair multiple of the S&P 500 would drop from 18x to 16x. Applying a Q3 EPS of 114 and, well, readers can do their own math…

  

  

  

  

  

• The UN Unveils Plan Pushing For Worldwide Internet Censorship

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  The United Nations has disgraced itself immeasurably over the past month or so.

  In case you missed the following stories, I suggest catching up now:

  The UN’s “Sustainable Development Agenda” is Basically a Giant Corporatist Fraud

  Not a Joke – Saudi Arabia Chosen to Head UN Human Rights Panel

  Fresh off the scene from those two epic embarrassments, the UN now wants to tell governments of the world how to censor the internet. I wish I was kidding.

  From the Washington Post:

  On Thursday, the organization’s Broadband Commission for Digital Development released a damning “world-wide wake-up call” on what it calls “cyber VAWG,” or violence against women and girls. The report concludes that online harassment is “a problem of pandemic proportion” — which, nbd, we’ve all heard before.

   

  But the United Nations then goes on to propose radical, proactive policy changes for both governments and social networks, effectively projecting a whole new vision for how the Internet could work.

   

  Under U.S. law — the law that, not coincidentally, governs most of the world’s largest online platforms — intermediaries such as Twitter and Facebook generally can’t be held responsible for what people do on them. But the United Nations proposes both that social networks proactively police every profile and post, and that government agencies only “license” those who agree to do so.

  People are being harassed online, and the solution is to censor everything and license speech? Remarkable.

  How that would actually work, we don’t know; the report is light on concrete, actionable policy. But it repeatedly suggests both that social networks need to opt-in to stronger anti-harassment regimes and that governments need to enforce them proactively.

   

  At one point toward the end of the paper, the U.N. panel concludes that “political and governmental bodies need to use their licensing prerogative” to better protect human and women’s rights, only granting licenses to “those Telecoms and search engines” that “supervise content and its dissemination.”

  So we’re supposed to be lectured about human rights from an organization that named Saudi Arabia head of its human rights panel? Got it.

  Regardless of whether you think those are worthwhile ends, the implications are huge: It’s an attempt to transform the Web from a libertarian free-for-all to some kind of enforced social commons.

   

  This U.N. report gets us no closer, alas: all but its most modest proposals are unfeasible. We can educate people about gender violence or teach “digital citizenship” in schools, but persuading social networks to police everything their users post is next to impossible. And even if it weren’t, there are serious implications for innovation and speech: According to the Electronic Frontier Foundation, CDA 230 — the law that exempts online intermediaries from this kind of policing — is basically what allowed modern social networks (and blogs, and comments, and forums, etc.) to come into being.

  If we’re lucky, perhaps the Saudi religious police chief (yes, they have one) who went on a rampage against Twitter a couple of years ago, will be available to head up the project.

  What a joke.

   

  

  

  

  

  

• China Cannot Let This Happen

  Submitted by John Rubino via DollarCollapse.com,

  After borrowing — and largely wasting — $15 trillion during the Great Recession, China now looks like a typical decadent developed-world country, complete with slow growth, anemic consumer spending and unstable financial markets.

  But it’s not France, Canada or the US, where recessions happen and voters peacefully replace one major party with the other. China, within living memory, has seen civil unrest beget open rebellion beget multi-decade civil war.

  Just as Germany is never going back to hyperinflation, China will not tolerate mass protests. Which means it somehow has to find jobs for the tens of millions of citizens who aspire to middle class life. This need for growth at any price explains the borrowing/infrastructure binge of the past five years. And soon it will explain a massive devaluation/QE program. From Monday’s Wall Street Journal:

  China’s Workers Stumble as Factories Stall

   

  XIGUOZHUANG, China—For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums.

   

  The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price.

   

  Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest.

   

  In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.

   

  “Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.”

   

  But for other migrants, especially those of a younger generation who took jobs in factories along China’s coast, a return to farming isn’t an option. Nor do they necessarily want to join the service sector China sees as a cornerstone in its shift to a new economic model.

   

  Wang Chao dropped out of school when he was 15 and left his home in Anhui province. After a series of jobs up and down China’s east coast, he felt he had struck gold with a job in a textile factory near his hometown.

   

  The factory closed in July. Mr. Wang, now 19, and other workers gathered recently outside the factory premises to demand back wages. He says he is owed two months’ pay, or about 2,000 yuan, or $320. The owner of the factory, which produces cheap trousers, told workers he is in deep debt and can’t afford to pay them. He couldn’t be reached to comment.

   

  Mr. Wang hopes he can find another factory job. In Shanghai, he worked in a restaurant but doesn’t want to do that again. “Factory work is so much more comfortable in comparison, and better paid,” he said.

   

  As a result of a rural-to-urban flow that many scholars say is likely the largest in history, roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978.

   

  The migrant workforce now numbers some 274 million but the pace of its expansion has slowed, and many economists believe China now faces a shortage of unskilled labor in urban areas. A mismatch of workers’ skills and aspirations with actual labor demand has exacerbated the problem.

   

  …In August, after the factory a which made Power Wheels cars and other toys for Mattel Inc., shut its doors, hundreds of workers protested to demand unpaid wages.

   

  Such unrest has become more common. China Labour Bulletin, a Hong Kong-based watchdog, has tracked more than 1,600 labor protests and strikes in China since January, already exceeding last year’s overall tally of 1,379.

   

  The malaise has even affected workers at major state-owned enterprises. In May, thousands of workers staged protests over proposed layoffs at China National Erzhong Group Co., a debt-riddled machinery maker in Sichuan. Workers shared images on social media of banners criticizing company officials. One read: “360 yuan! How can we live on that!”

   

  In response to such disputes, local authorities have at times adopted harsh tactics, including sending police officers to break up strikes and detain protesters. But in some cases authorities have also sought to appease workers.

   

  The recent unrest is still far from the massive protests that swept over China in the late 1990s and early 2000s as state-owned enterprises laid off tens of millions of workers and local governments expropriated farmland around emerging cities for development.

   

  But the rise in frequency of strikes and protests has caused concern in Beijing, which in March urged bureaucrats across the country to prioritize “harmonious labor relations.”

  Take a surplus of young men (the result of China’s one-child policy which put a premium on male children), combine it with a shortage of good jobs, and the obvious result is instability.

  The equally-obvious solution? Easier money designed to get people borrowing and spending. So now it’s just a question of which central bank is first to address its country’s crisis (slow growth and a massive influx of refugees for the eurozone, slow growth and a demographic implosion for Japan, slow growth and global chaos for the US, and now slow growth leading to civil unrest for China) with a massive devaluation. China, given its history, might be the odds-on favorite.

  

  

  

  

  

• "Risky Business": Companies Are Now Funding Share Buybacks By Selling Bonds To Other Companies

  One of this year’s key narratives has been the degree to which US stocks have benefited from a perpetual, price insensitive bid. By that we of course mean corporate buybacks, which one might fairly characterize as having replaced the monthly flow lost to the Fed taper. 

  

  The buyback bonanza shown above is of course sponsored by ZIRP. Put simply, when borrowing costs are close to zero and when the market has become completely myopic as it relates to assessing performance, it makes sense to issue debt and plow the proceeds into EPS-inflating share repurchases. Throw in the fact that the FED-induced hunt for yield has forced risk averse investors out of govies and into corporate credit and you have a kind of goldilocks scenario for corporate issuance and buybacks. 

  This all comes at cost. That is, you can’t simply keep leveraging the balance sheet to artificially inflate earnings. Eventually, some of the proceeds from debt sales need to go towards capex or wage growth or something that’s conducive to boosting productivity, long-term growth, and competitiveness. However, that simply won’t happen in a world governed by what Hillary Clinton correctly (yes, she has managed to get at least something right believe it or not) calls the “tyranny of the next earnings report.” 

  Once you understand all of the above, you can begin to see why a lack of market depth in the secondary market for corporate credit is so dangerous.

  

  You have an environment that encourages record issuance and the proliferation of bond funds along with the now ubiquitous hunt for yield means any and all supply is promptly snapped up. But if those bonds ever have to be sold in a pinch, there’s no one home at dealer desks thanks to Volcker.  

  All of this would be bad enough as it is, but as WSJ reports, it’s exacerbated by the fact that companies are now funding their own share buybacks by selling bonds to .. wait for it.. other companies. Here’s more:

  Companies reaching for better returns on their cash have found a new favorite investment—other companies’ bonds—and they are loading up.

   

  Cash-rich companies like Apple Inc., Oracle Corp. and Johnson & Johnson are snapping up corporate bonds sold by highly rated companies such as Verizon CommunicationsInc. and Gilead Sciences Inc.

   

  More than half of corporate cash held by U.S. companies this August was invested in investment-grade corporate bonds, a record, according to investment-software company Clearwater Analytics. Meanwhile, treasurers have reduced their companies’ holdings of more traditional investments such as U.S. Treasurys, commercial paper and bank certificates of deposit.

   

  
  

   

  Companies are betting highly rated corporate bonds are safe repositories for cash that will pay higher rates than more traditional bank deposits or money-market funds. But they are also increasing the risk to an asset where principal protection is the priority.

   

  If interest rates rise quickly, the value of their lower-yielding existing bonds could plummet. A major market disruption could also make it difficult for companies to sell their holdings if they need the cash. Either could lead to write-downs or actual losses if they sell at lower prices than they paid.

   

  For now, treasurers are figuring the bet isn’t that risky. Companies’ balance sheets are in good shape, and buyers are focusing on bonds that mature within five years, which carry lower risks than bonds that take longer to mature.

   

  “To get more return, you have to take more credit risk,” said a treasurer at a large technology company that has actively been buying corporate bonds.

  Well yes, and to be sure, when companies are flush with cash it’s important to figure out how best to invest it, but then again, you now have corporate Treasurers talking like sellside credit strategists and needless to say, when you’re buying all kinds of corporate bonds at the tail end of a credit supercycle, you’re liable to get burned badly (on paper anyway) if and when rates start to rise.

  Of course companies should also consider what would happen in the event of an economic meltdown. After all, the very same conditions that would lead to a downturn and force corporate management teams to raise cash will also serve to make the secondary market for corporate credit even more illiquid than it already is. In other words, if you think there’s a dearth of buyers now, just wait until someone hits the panic button and when the firesale starts (likely after someone at a Vanguard or a BlackRock tries to transact in size to meet a wave of redemptions), corporate treasurers will find themselves in a decisively unenviable position.

  We close with the following from Harvard’s Victoria Ivashina:

  “This is a risky business. Can they get it wrong? Absolutely they can get it wrong.”

  

  

  

  

  

• Kentucky Politician Files Lawsuit Claiming A First Amendment Right To Accept Bribes

  Submitted by Mike Krieger via Liberty Blitzkrieg blog,

  It’s a rare and precious moment when a politician does something which perfectly demonstrates what he or she really thinks about democracy and power. This is one of those times.

  From the Intercept:

  The Supreme Court, in its Citizens United decision, ruled that corporations have a First Amendment right to spend unlimited amounts in elections. Now politicians in Kentucky are claiming they have a Constitutional right to receive gifts from lobbyists.

   

  In a lawsuit filed in U.S. District Court, Republican Kentucky state Sen. John Schickel, along with two Libertarian political candidates, are suing to overturn state ethics laws, claiming that the campaign contribution limit of $1,000 and a ban on gifts from lobbyists and their employers are a violation of their First and Fourteenth Amendment rights.

   

  The lawsuit notes that lobbyists and the employers of lobbyists are prohibited by Kentucky law from inviting legislators to parties, offering gifts, or paying for food for legislators. “This infringes on the legislator’s, lobbyist’s, and employer of lobbyist’s right to freedom of association, and freedom of speech,” Schickel claims in the suit.

   

  Kentucky’s ethics laws were passed in 1992 after an FBI investigation exposed a number of local politicians selling their votes.

   

  Corporations have increasingly turned to new interpretations of the First Amendment as a legal strategy.

   

  Bond-rating agencies that gave high grades to toxic mortgage-backed securities claimed in court that doing so was their First Amendment right. Lobbyists have argued that food-labeling laws undermine the meat industry’s right to free speech. And similarly, AT&T recentlyargued that net neutrality violates the ISP industry’s First Amendment rights.

  Two words: Banana Republic.

  

  

  

  

  

• Hillarinochio 2.0 – More Clinton Lies Exposed As Hidden Petraeus Emails Come To Light

  Another day, another "what difference does it make" lie exposed for the mainstream media to ignore and excuse as simple witch-huntery. However, this 'lie' is unarguable and proves once again that Hillarinochio seems to believe she is above the law.  The Obama administration has discovered a chain of emails (exchanged with retired Gen. David Petraeus when he headed the military’s U.S. Central Command, responsible for running the wars in Iraq and Afghanistan) that Clinton failed to turn over when she provided what she said was the full record of work-related correspondence as secretary of state, officials told The Associated Press on Friday. Is it any wonder her support has been plunging recently?

   

  

   

  Clinton has repeatedly denied wrongdoing.

  "When I did it, it was allowed, it was above board. And now I’m being as transparent as possible, more than anybody else ever has been," she said earlier this week, and attempted an apology.

  But as CBS reports, once again her lies have been exposed…

  The Obama administration has discovered a chain of emails that Hillary Rodham Clinton failed to turn over when she provided what she said was the full record of work-related correspondence as secretary of state, officials told The Associated Press on Friday, adding to the growing questions related to the Democratic presidential front-runner’s unusual usage of a private email account and server while in government.

   

  The messages were exchanged with retired Gen. David Petraeus when he headed the military’s U.S. Central Command, responsible for running the wars in Iraq and Afghanistan. They began before Clinton entered office and continued into her first days at the State Department. They largely pertained to personnel matters and don’t appear to deal with highly classified material, officials said, but their existence challenges Clinton’s claim that she has handed over the entirety of her work emails from the account.

  Speaking of her emails on CBS’ “Face the Nation” this week, Clinton said, “We provided all of them.” But the FBI and several congressional committees are investigating.

  The State Department’s record of Clinton emails begins on March 18, 2009 — almost two months after she entered office. Before then, Clinton has said she used an old AT&T Blackberry email account, the contents of which she no longer can access.

   

  The Petraeus emails, first discovered by the Defense Department and then passed to the State Department’s inspector general, challenge that claim. They start on Jan. 10, 2009, with Clinton using the older email account. But by Jan. 28 — a week after her swearing in — she switched to using the private email address on a server based out of her home in Chappaqua, New York, that she would rely on for the rest of her tenure. There are less than 10 emails back and forth in total, officials said, and the chain ends on Feb. 1.

   

  The officials weren’t authorized to speak on the matter and demanded anonymity. But State Department spokesman John Kirby confirmed that the agency received the emails in the “last several days” and that they “were not previously in the possession of the department.”

  *  *  *
  Separately Friday, State Department officials said they were providing the Benghazi-focused probe more email exchanges from senior officials pertaining to Libya. The committee broadened its scope after examining tens of thousands of documents more specifically focused on the Benghazi attack.

  *  *  *

  As we noted previously, Republicans are demanding an explanation (why aren't Democrats also?) why she can't keep her lies straight. As for the process being a witch hunt, indeed in some ways it just may be…

  

   

  And now we look forward to the upcoming Congressional kangaroo court in which the American population will be asked "what difference does it make" how many email devices Hillary used.

  

  

  

  

  

• Goldman Strikes Again: Did A Probe Into "Global Warming" Fraud Cost A Prime Minister's Job

  When Tony Abbott became Australia’s prime minister in September 2013, the chain of events that would prematurely end his tenure may already have been in motion: just a few months later China would order its out of control shadow banking system to put on hold its debt issuance machinery, which as we reported a year ago, ground to a complete stop around November 2014 (which also was the explanation for the dramatic slowdown in the US economy over the winter as the collapse in China’s Total Social Financing growth sent a deflationary ripple effect around the globe), which – as we warned at the time – would have dire consequences on all of China’s “feeder” economies, namely Brazil and Australia.

  But while we have been tracking the implosion of Brazil’s economy since December, long before the rest of the world noticed the calamitous collapse of what was once Latin America’s most vibrant economy, it was a very recent event in Australia – not the country’s parallel economic slowdown also due to China’s hard landing: that was painfully clear long in advance – that took many by surprise. Namely, the resignation of Tony Abbott almost exactly two years after becoming Prime Minister.

  And while it is easy to blame his admission of failure on external factors, namely the Chinese slowdown, a very surprising finding has emerged over the past few days, one which reveals Abbott’s “ouster” in a totally different light.

  According to Freedom of Information documents obtained by Australia’s ABC, now-former prime minister Tony Abbott’s own department discussed setting up an investigation into the Bureau of Meteorology amid media claims it was exaggerating estimates of global warming.

  Yes, it appears that the prime minister himself had dared to question to prevailing status quo on “global warming.”

  ABC reports that in August and September 2014, The Australian newspaper published reports questioning the Bureau of Meteorology’s (BoM) methodology for analyzing temperatures, reporting claims BoM was “wilfully ignoring evidence that contradicts its own propaganda.”

  Naturally, the BoM strongly rejected assertions it was altering climate records to exaggerate estimates of global warming. Nevertheless, as the following document obtained by the ABC shows, just weeks after the articles were published, Mr Abbott’s own department canvassed using a taskforce to carry out “due diligence” on the BoM’s climate records.

  As it turns out, late in 2014 the Australia government set up a taskforce to provide advice on post 2020 emissions reduction targets ahead of the United Nations Paris climate change conference in December 2015. The Department of Prime Minister and Cabinet originally wanted the taskforce to also conduct “due diligence to ensure Australia’s climate and emissions data are the best possible, including the Bureau of Meteorology’s Australian temperature dataset”.

  An accompanying brief seen by Mr Abbott noted that “in recent articles in The Australian, the BoM was accused of altering its temperature data records to exaggerate estimates of global warming”. To wit from the ABC:

  “The way the Bureau manages its climate records is recognised internationally as among the best in the world,” the brief said.

  “Nevertheless, the public need confidence information on Australia and the world’s climate is reliable and based on the best available science.”

  Inexplicably, instead of letting it go as most “status quo” governments always do, the cabinet kept pushing with demands for audits: audits which, if taken too far, may reveals some truly very “inconvenient truths” if not so much about global warming, as about the propaganda behind it and the firms that stood to profit from such propaganda.

  The pressure intensified when Mr Abbott’s business advisory council chair Maurice Newman wrote an opinion piece in the paper, demanding a Government-funded audit and review of the Bureau.

   

  The concerns centred on the Bureau’s temperature homogenisation process — the method in which it adjusts temperatures for weather sites based on factors like trees casting shade or influencing wind or if the station is moved.

  It was then that the pushback started in earnest: enter Greg Hunt, Australia’s Environment Minister who would do everything in his power to halt Abbott’s crusade to “audit” the BoM.  In a letter to Abbott in November 2014, Hunt called for the removal of the due diligence clause, pointing out that he and his parliamentary secretary, Simon Birmingham, had already “established a strengthened governance oversight of the bureau’s ongoing work in this area.” In other words, “trust us” – we are the government… we work for you.

  Both the Department of Environment and Environment Minister Greg Hunt argued against having the taskforce investigate the Bureau. One Department of Prime Minister and Cabinet bureaucrat described a Department of Environment official as being “on a campaign” to get the references to BoM removed from the taskforce’s responsibilities.

   

  Further documents appear to show Mr Hunt convinced senior cabinet members to remove any references of “due diligence” or “quality assurance”.

   

  In a letter to Mr Abbott written on November 18 last year, Mr Hunt highlighted the fact the “draft terms of reference refers to the taskforce doing due diligence on the Bureau of Meteorology’s Australian temperature data set”.

   

  “In doing this, it is important to note that public trust in the Bureau’s data and forecasts, particularly as they relate to bushfires and cyclones, is paramount,” it said. “Given the recent publicity about the Bureau’s temperature data sets, Senator Birmingham and I established a strengthened governance oversight of the Bureau’s ongoing work in this area.”

  Said otherwise, don’t you dare question global warming or else the public may lost faith in the Bureau of Meteorology’s forecasts about “bushfires and cyclones.” One couldn’t possibly make this up if one tried.

  As for the assurance Greg Hunt gave to Abbott to drop his audit, it basically was a promise to “self-regulate” better through a, drumroll, technical advisory forum:

  The strengthened governance of the Bureau that Mr Hunt referred to is the setting up a Technical Advisory Forum to review and provide advice on the Bureau’s temperature data — a recommendation from an earlier review of the Bureau’s processes.

   

  “It is important to emphasise that this is primarily a matter of meteorology, statistics and data assurance,” Mr Hunt wrote in his letter to Mr Abbott.

  This, of course, is a page right out of the Keynesian/monetarist playbook: one can’t sow seeds of doubt in the mind of the public that the most sacrosanct assumptions about the world are wrong by open government probes be it by auditing the Fed, or Hillary’s email server… or Australia’s meteorological data, so instead let’s just take their word that all the data will be scrubbed and double checked.

  A 2011 review found the Bureau’s data and analysis methods met world’s best practice but recommended a group be set up to review progress on the development and operation of the temperature data. 

   

  The 2015 panel included eminent statisticians and members have told the ABC they were in no doubt that it was set up in response to the newspaper articles. A draft letter from Mr Abbott addressed to Mr Hunt showed that Mr Abbott wanted personal updates on the panel’s review.

   

  “The credibility of Government agencies is important and must be ensured,” the letter read.

  And while the review naturally cleared the BoM of any data “goal-seeking” when it was released in June, perhaps the threat of future such audits was simply too much – three months later Abbott was gone.

  This is not Abbott’s first concern about either met data, or global warming. As the Guardian notes, Abbott previously questioned the reliability of climate science, but when he was prime minister he repeatedly said he accepted the climate was changing and humans made “a contribution”. In other public statements, Abbott said coal was “good for humanity” and wind turbines were “visually awful”.

  Perhaps the recent probe into the “statistics and data” behind the Australian Bureau of Meteorology were the straw that broke the camel’s back: clearly Abbott was not going to be appeased and would continue his probes and audits into the “conventional wisdom” behind global warming, a persistence which threatened one firm more than any other.

  Goldman Sachs.

  While we hardly have to remind readers that it is Goldman that conceived of the carbon-credit market, and was behind cap and trade, here is an (in)convenient summary of who the true puppetmaster is behind the worldwide infatuation with stopping “global warming”, and who stands to benefit the most as the world is manipulated into doing everything to kill global warming dead in its tracks, courtesy of Matt Taibbi:

  …Fast-forward to today. it’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs – its employees paid some $981,000 to his campaign – sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.Gone are HankPaulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits – a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade.

   

  The new carbon-credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.

   

  Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions: President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

   

  The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all’ electricity suppliers in the U.S. total $320 billion.

   

  Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they’re the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief ofstaff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank’s environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson’s report argued that “voluntary action alone cannot solve the climate-change problem.” A few years later, the bank’s carbon chief, Ken Newcombe, insisted that cap-and-trade alone won’t be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, “We’re not making those investments to lose money.”

   

  The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Hanis. Their business? Investing in carbon offsets, There’s also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market?

   

  “Oh, it’ll dwarf it,” says a former staffer on the House energy committee.

   

  Well, you might say, who cares? If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe – but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax-collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it’s even collected.

   

  Cap-and-trade is going to happen. Or, if it doesn’t, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees – while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.

  In short: trillions are at stake for Goldman as long as the “fight” against global warming continues. And as noted above, cap-and-trade is going to happen or “something like it will” – Goldman’s future revenues depend on it.

  In fact, the only thing that can crush this finely orchestrated plan to generate billions in private profits from the mass euphoria to “save the planet” funded, naturally, entirely by the taxpayer, is a critical piece of evidence that the data and statistics behind “global warming” has been fabricated,  something which very well may have occurred had Abbott’s plan for an audit gone too far.

  And so Abbott suddenly became a major liability, if not so much for Australia, then certainly for Goldman Sachs.

  In retrospect, while Abbott completely unexpected exit on September 14 was a shock, his Prime Ministerial replacement should come as no surprise at all: Malcolm Turnbull, as we noted, just happened to be Chairman of Goldman Sachs Australia from 1997-2001. The same Turnbull who was deposed as opposition leader in 2009 over his support for a carbon tax and an emissions trading scheme, a “scheme” that, when fully implemented, would lead to huge monetary windfalls for none other than Turnbull’s former employer: Goldman Sachs.

  So was Goldman the responsible party behind Abbott’s ouster? One can only speculate, however one thing is certain: any concerns and fears of “probes” or “audits” into Australia’s global warming “data and statistics” are now history.

  * * *

  ABC’s full FOIA revealing Abbott’s probe of BoM “data” below:

  

  

  

  

  

• Three Strategies To Make Your Life Easier As Times Get Harder

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  No risk, no gain. But risk can deliver staggering, crushing losses if it isn't limited or hedged.

  Times are going to get harder going forward, for all the reasons that are already visible in today's headlines. So what can we do to make our own lives easier as times get tougher? Here are three suggested strategies:

  1. Don't get enmeshed with dysfunctional people, families or businesses. When we're young, we're adept at making excuses for people in dysfunctional families and enterprises. We expect them to work their way out of their dysfunctions. We think we can help in this process.

  Alas, we can't. People usually can't rid themselves of dysfunction without an extraordinary effort. Getting enmeshed with a dysfunctional person/family/business can only drag you down. The only way to avoid the mess is to avoid the dysfunctional person/family/business in the first place. Wish them well and get out.

  2. Be fanatical about reducing fixed costs. This sounds so obvious, but it's really the key to surviving hard times and building productive wealth, i.e. the kind that yields income, rain or shine.

  Remarkably, people may acknowledge this in an abstract fashion but few actually live by it. The vast majority let their fixed costs rise with their income. Businesses move to pricier digs once they start feeling flush, and people move up to costlier vehicles, homes, clothing, vacations, etc.

  The ideal business has been stripped of fixed costs. For example: rent on home office: zero. Labor overhead: zero, if you hire only other free-lancers-contractors.

  Management guru Peter Drucker made the point about reducing fixed costs another way. He famously noted that "businesses don't have profits, all they have is costs." (a paraphrase)

  In other words, there's no guarantee of additional revenues/sales or profits; all we know for sure is our fixed costs, i.e. what we have to pay monthly even if our revenues are zero.

  Some fixed costs rise despite our fanatic focus. Healthcare costs rise until we qualify for Medicare. That's a given. Our only way to reduce healthcare costs is be fanatical about being healthy.

  Servicing debt is a fixed cost. You have to service the debt whether you're making money or not. So eliminating debt is one critical way to reduce fixed costs.

  Frugality is exceedingly useful, but frugality is not quite the same as being fanatical about reducing fixed costs. Understanding the difference is an important part of this strategy.

  3. Learn how to calculate and manage risk. Risk is the ultimate yin/yang. If you don't take any risks, you're limited to a salary: the employer takes the risk and rewards, you get the salary and no upside.

  But if you take a risk, you can lose the gamble: the investment, the job, the house, the enterprise.

  You want to score a ten-bagger (ten-fold increase) in the stock market? Well, belly up to the roulette wheel, because most of the bets that pay off that big are extraordinarily risky.

  There is no way to eliminate risk. Life is risk. Doing great things requires taking risks. The "safe way" offloads risk and reward to others. You want the big reward, you have to take the big risk.

  When the tide is raising all boats, it's remarkably easy to rank yourself as a genius who manages risk effortlessly. Rising tides are not a good test. Its the ebb tide, when every investment is crashing in value, that tests risk management.

  It boils dowm to this: understand the risks you're taking (especially when your mutual fund manager assures you everything in your fund is low-risk) and set limits on the risks you're taking on.

  No risk, no gain. But risk can deliver staggering, crushing losses if it isn't limited or hedged (and hedges have limits, too). Anything else is illusion. This will become evident to all within the next decade as all the "sure things" melt into thin air.

  

  

  

  

  

• Japan's Abe Unveils New 'Arrows' Wish List: 20% GDP Growth, Higher Birth Rate, & Flying Pig

  Having completed his militarist plans, Japanese Prime Minister Shinzo Abe appears to have gone full fantasy-tard with his latest "plans" for the demographically-dead and debt-destroyed nation. "Creating a strong economy will continue to be my top priority," Abe said, a goal he has stunningly under-achieved as Japan heads for its 5th recession in 4 years, but, as Bloomberg reports, it is his new "arrows" of economic hope that has left analysts scratching their heads – 20% economic growth (when its gone nowhere for years), a higher birth rate (as the aging of the nation accelerates and interest in sex plunges), and allegedly a goose that lays golden eggs (well why not?). The collapse of Abe's approval says it all about his 'plan'.

  As Japan heads for a Quintuple Dip recession…

  

   

  Abe proposes three new policy pillars without tying them to his previous plan. As Bloomberg reports, it has left analysts scratching their heads…

  Speaking Thursday after his reappointment as leader of Japan’s ruling party, Abe unveiled three new "arrows" of his so-called Abenomics plan — a strong economy, child-care support and social security. When he took office in 2012, he had championed another trio — monetary stimulus, flexible fiscal policy and structural reforms.

   

  But with the new policies sounding more like objectives rather than measures to achieve them, the risk is this fresh framework muddies his communication battle to encourage Japanese households and companies to spend rather than save.

   

  "Investors like details, but all he’s done is announce targets," said Mari Iwashita, chief market economist at SMBC Friend Securities Co. in Tokyo. "The growth strategy, one of the original three arrows, has branched off into three new arrows."

   

  Speaking to reporters Thursday, Abe avoided mentioning monetary or fiscal policy, as well as tricky regulatory reforms that many economists say are already too slow. Instead, he focused on his new three objectives:

  • A strong economy, with a new gross domestic product target of 600 trillion yen ($5 trillion), up from the current 500 trillion yen. He gave no time-frame for achieving this goal.
  • Increased support for families with children to help increase the fertility rate to 1.8 births per woman, up from 1.43 in 2013.
  • Social security, including help for those who combine work and care for elderly relatives.

  As The Wall Street Journal notes, however, while Japanese stocks have boomed, business spending and private consumption have remained anemic over the past year, indicating that neither businesses nor consumers have regained confidence in the long-term outlook for Japan’s economy.

  Economists also point out that the goal could be seen as a repackaging of long-standing annual targets of 2% real growth and 2% inflation over the next five years.

  *  *  *

  But, with the population aging rapidly…

  

  And interest in sex and reproduction dwindling…

  

  Abe said Thursday he would combat the demographic woes facing Japan, whose 127-million population is aging and shrinking, threatening its status as the world’s third-largest economy.

  He certainly needs to do something…

   

  

   

  "We will put the brakes on the trend toward an aging population and the falling number of children and keep the population at 100 million 50 years from now," Abe said at party headquarters in Tokyo, without spelling out how this would be achieved.

  Many economists and investors believe structural changes, or the “third arrow” of Abenomics, are key to unlocking robust growth in Japan. But they have mostly been disappointed that Mr. Abe hasn’t gone far enough in implementing those changes, and say he isn’t likely to pick too many fights before next year’s election.

  *  *  *

  But it appears the public has finally begun to see through all the promises…

  

  "His intention to tackle the demographic issue is good," said Masamichi Adachi, senior economist at JP Morgan Securities Japan. "I’m totally in agreement with that."

  Even so, the former Bank of Japan official said that the growth target isn’t meaningful as Abe didn’t explain how, or even when, he hoped to achieve it.

  *  *  *

  More hopes and dreams sold to an aging gullible public and supported by a Central Bank that is nearing its limit of asset-purchasing.

  Charts: Bloomberg

  

  

  

  

  

• China's "Credit Mystery" Deepens, As Moody's Warns On Shadow Financing

  Last month, we took a detailed look at what we said could be a multi-trillion yuan black swan. 

  
  

  In short, one of China’s many spinning plates is the country’s vast shadow banking complex which allowed local governments to skirt borrowing restrictions leading directly to the accumulation of debt that totals some 35% of GDP and which has channeled trillions into speculative investments via the proliferation of maturity mismatched wealth management products. 

  One of the problems with the system is that it allows Chinese banks to obscure credit risk.

  As Fitch noted earlier this year, some 40% of credit exposure is effectively carried off balance sheet in China’s banking sector, making it virtually impossible to assess the extent to which banks are exposed. When considered in combination with the unofficial policy whereby the PBoC forces lenders to roll bad debt thus artificially suppressing NPLs, a picture emerges of a system that’s decidedly opaque. Here’s what we said back in May:

  The percentage of  loans which are not yet classified as non-performing but which are nonetheless doubtful is much higher than the headline NPL figure and in fact, [Fitch] seems to suggest that some Chinese banks (notably the largest lenders) may be under-reporting their special mention loans. But ultimately it’s irrelevant because between bad assets that are ultimately transferred to AMCs, loans that are channeled through non-bank financial institutions and carried as “investments classified as receivables”, and off-balance sheet financing, nearly 40% of credit risk is carried outside of traditional loans, rendering official NPL data essentially meaningless in terms of assessing the severity of the problem.

  Well don’t look now, but according to Moody’s, the practice of obscuring credit risk using one or more of the methods delineated above and outlined in these pages on any number of occasions looks to be getting worse. Here’s Bloomberg:

  China’s riskier banks are investing more customer funds in financing that is kept off their loan books, making it harder for rating companies to gauge their asset quality.

   

  There has been a surge in a balance-sheet item known as receivables, which often includes shadow funding such as trusts and wealth products, said Moody’s Investors Service. Fitch Ratings said it is hard to analyze this escalation in activity. Listed banks excluding the Big Four saw short-term investments and other assets — which include receivables — jump 25 percent in the first half, compared with total asset growth of 12 percent, data compiled by Bloomberg show.

   

  Slower growth in the world’s second-largest economy coupled with “still significant” credit expansion prompted Standard & Poor’s to cut its view of the banking industry’s economic risk to negative from stable this week. Shadow-finance assets, estimated at 41 trillion yuan ($6.4 trillion) by Moody’s at the end of 2014, have become more attractive as five interest-rate cuts by the central bank since November curbed profits from lending.

   

  “Our concern with some of these investment positions is banks are using them as a way to bypass lending restrictions,” said Grace Wu, a senior director at Fitch in Hong Kong. “Unlike bank loans, they don’t get reported into loan provisions, so it’s more difficult for us to ascertain the asset quality.”

   

  

   

  The nation’s shadow-banking industry emerged as a way for creditors to circumvent lending restrictions and for savers to attain yields higher than the legally capped deposit rate. It includes trusts, asset-management plans and wealth-management products, which package loans into products for buyers.

   

  Shanghai Pudong Development Bank Co.’s receivables made up about a quarter of assets as of June 30, according to its semi-annual financial statement. Out of 1.1 trillion yuan of receivables, 82 percent were trusts and asset-management plans that purchase trust loans, while 11 percent were other lenders’ wealth management products.

   

  The receivables climbed in the first half because the bank invested more in other lenders’ guaranteed WMPs as well as in asset-management products derived from bills issued by large banks, Shanghai Pudong said in an e-mail. It added that its credit and liquidity risks are both manageable.

  Make no mistake, assessing the risk posed by China’s shadow banking system is famously difficult and has confounded more than a few analysts and commentators, but the simple, one-line takeaway here is that NPLs at Chinese banks are likely to be orders of magnitude greater than the headline figures and indeed, we suggested as much more than two years ago:

  China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleeding-inducing $1 trillion, or roughly 15% of China’s goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is). 

  And while the consequences of a banking sector implosion are hard to assess, the fallout from social upheaval is even more indeterminate. We bring that up because as we saw last month with Shan Jiuliang head of Fanya Metals Exchange, when WMP investors suspect they may have been misled about the safety of their investment, things can go south rather quickly and what the above suggests is that far from scaling back their use of shadow conduits, at least some mid-tier banks are dramatically increasing their exposure. 

  For those interested, we’ve included our full review of Chinese WMPs below.

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  “Wealth management products in China have come under the spotlight after a series of missed payments raised concerns over the shadow banking sector that often directs credit to firms shut out from bank lending or capital markets,” Reuters said in February, after reporting that CITIC (China’s top brokerage), was looking at ways to repay investors after the issuer of one of the wealth management products the broker sold missed a $1.12 million payment to investors.

  That news came a little over a year after the now infamous “Credit Equals Gold #1 Collective Trust Product” incident and a subsequent default scare on a similar product backed by loans to a struggling coal company. 

  Although wealth management products and CTPs (which differ from WMPs) are often described as “murky” and “opaque”, the basic concept is fairly simple. WMPs are marketed to investors as a way to get more bang for their buck (er.. yuan) than they would with bank deposits. Funds from these investors are then invested at a higher rate. If the assets investors’ money is used to fund run into trouble, that’s not good news for WMP investors. Simple. 

  The main issue here is the sheer size of the market. As FT notes, “in 2010, as regulators tried to rein in the explosion in bank credit resulting from the country’s Rmb4tn economic stimulus plan, banks turned to trusts to help them comply with lending controls.” So essentially, trusts helped banks offload credit risk at the behest of the PBoC. Here’s the process whereby banks use trusts to get balance sheet relief:

  

  The amount of trust loans outstanding in China has ballooned to nearly CNY7 trillion (total trust assets under management is something like CNY14 trillion) and now, Hebei Financing Investment Guarantee Group – which, as Caixan notes, is “the largest loan guarantee company in the northern province of Hebei [and] is wholly owned by the provincial regulator of state-owned assets” – is apparently broke, and that’s bad news because it guaranteed some CNY50 billion in loans made by dozens of trusts who in turn issued wealth management products to investors. 

  In short, if Hebei can’t guarantee the loans, WMP investors could be forced to take a loss and as anyone who follows developments in China’s financial markets knows, Beijing is not particularly keen on permitting SOEs to collapse – especially if there’s a risk of rattling retail investors’ fragile psyche. Here’s FT with the story:

  Eleven shadow banks have written an open letter to the top Communist party official in northern China’s Hebei province asking for a bailout that would enable the bankrupt credit guarantee company to continue to backstop loans to borrowers. If the guarantor cannot pay, it could spark defaults on at least 24 high-yielding wealth management products (WMPs).

   

  Hebei Financing Investment Guarantee Group has guaranteed Rmb50bn ($7.8bn) in loans from nearly 50 financial institutions, according to Caixin, a respected financial magazine. More than half of this total is from non-bank lenders, mainly trust companies, who lent to property developers and factories in overcapacity industries 

   

  The letter appeals directly to the government’s concern about social stability and the fear of retail investors protesting the loss of “blood and sweat money”. The 11 companies sold 24 separate WMPs worth Rmb5.5bn.

   

  “The domino effect from the successive and intersecting defaults of these trust products involves a multitude of financial institutions, an immense amount of money, and wide-ranging public interests,” 10 trust companies and a fund manager wrote to Zhao Kezhi, Hebei party secretary.

   

  “In order to prevent this incident from inciting panic among common people and creating an unnecessary social influence, we represent more than a thousand investors, more than a thousand families, in asking for a resolution.”

   

  Hebei Financing stopped paying out on all loan guarantees in January, when its chairman was replaced and another state-owned group was appointed as custodian.

   

  Though Hebei Financing guaranteed loans underlying WMPs, the products themselves did not guarantee investors against losses. Caixin reported that several trust companies, fearing reputational damage, have used their own capital to repay investors. 

   

  The 11 groups behind the recent letter have taken a different approach, pressuring the government for a rescue.

  There a few things to note here. First, the reason the underling assets are going bad is because WMP investors’ money was funneled into real estate development and all manner of other parts of the economy which are now struggling mightily. Second, the idea that China should allow for defaults on trust products is nothing new. In fact, we’ve been saying just that for at least a year. Finally, and perhaps most importantly, the banks’ playing of the social instability card underscores an argument we made when China’s equity market was in the midst of its harrowing plunge last month. In “Why China’s Stock Collapse Could Lead To Revolution” we warned that “it is only a matter of time before all the ‘nouveau riche’ farmers and grandparents see all their paper profits wiped out and hopefully go silently into that good night without starting mass riots or a revolution.”

  Yes, “hopefully”, but maybe not because as is becoming increasingly clear by the day, simultaneously micro managing the stock market, the FX market, the command economy, the media, and just about every other corner of society is becoming a task too tall even for the Politburo and sooner or later, something is going to break and shatter the “everything is under control” narrative.

  Whether or not the catalyst for widespread social upheaval will be a catastrophic chain reaction in the shadow banking system we can’t say for sure, but as FT reminds us, technical defaults on trust products have in the past been met with “public protests by angry investors at bank branches.”

  Here’s a snapshot of WMP issuance (note the durations as it gives you an idea of what kind volume we’re talking about on maturing products):

  

  As you might have noticed from the above, it appears that maturity mismatch could be a real problem here. Here’s what the RBA had to say about this in a bulletin dated June of this year:

  A key risk of unguaranteed bank WMPs is the maturity mismatch between most WMPs sold to investors and the assets they ultimately fund. Many WMPs are, at least partly, invested in illiquid assets with maturities in excess of one year, while the products themselves tend to have much shorter maturities; around 60 per cent of WMPs issued have a maturity of less than three months (Graph 5). A maturity mismatch between longer-term assets and shorter-term liabilities is typical for banks’ balance sheets, and they are accustomed to managing this. However, in the case of WMPs, the maturity mismatch exists for each individual and legally separate product, as the entire funding source for a particular WMP matures in one day. This results in considerable rollover risk. 

   

  

  In other words, the WMP issuers are perpetually borrowing short to lend long. The degree to which this is the case apparently varies depending what type of WMP (or trust product) one is looking at, and we will mercifully spare you the breakdown of the market by type (other than to include the pie chart shown below), but the important thing to note here is that it seems highly likely that at least CNY8 trillion in WMPs are exposed to the “considerable rollover risk” mentioned above.

  

  Allow us to explain how this could end. If China allows a state-run guarantor like Hebei Financing Investment Guarantee Group (the subject of the FT article cited above) to go broke and that in turn triggers losses for investors in WMP products, demand for those WMPs will dry up – and right quick. If that happens, WMPs will stop rolling, freezing the market and triggering a cascade of forced liquidations of the underlying (likely illiquid) assets. 

  It’s either that, or China bails everyone out. As the RBA concludes, “a key issue is whether the presumption of implicit guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products.”

  And while that is certainly a key issue, the key issue is what those investors will do next.

  

  

  

  

  

• Fed Refuses To Comment On Yellen's Health

  While the world was focused on the content of Yellen’s Thursday speech in Amherst for clues on whether the Fed Chair would back off her disturbingly dovish outlook on the world, what was the real surprise was the delivery: as we showed previously, there was a very troubling 100 second interval at the very end of the 50 minute, 5,000+ word speech, in which the 69-year old Yellen suddenly seemed unable to read the words on the page, was rereading the same phrase over and over, paused for long stretches at a time, and then had a violent reaction that forced her to end her speech prematurely. Watch it again below.

  In the aftermath of the incident, a narrative was quickly cobbled together that Yellen had suffered from dehydration, but based on her actions and behavior, that seems improbable.

  But more disturbing was the Fed’s reaction. As the WSJ reports, a Federal Reserve spokeswoman declined Friday to say if Chairwoman Janet Yellen resumed a normal work schedule or sought follow-up medical attention a day after she appeared ill near the end of a long speech in Amherst, Mass. Ms. Yellen returned to Washington on Friday.

  From the WSJ:

  The Fed chairwoman, 69 years old, faltered roughly 50 minutes into a lecture on the economy and inflation Thursday at the University of Massachusetts Amherst. She stumbled over her prepared text, paused for long stretches several times, missed and jumbled some words in the text, and coughed before concluding her speech and leaving the stage.

   

  The stumbles were unusual for Ms. Yellen, who has spoken at length in the past at congressional testimony, news conferences and other settings without appearing off-balance.

   

  The Fed spokeswoman, Michelle Smith, on Thursday said Ms. Yellen “felt dehydrated at the end of a long speech under bright lights” and was seen by emergency medical technicians as a precaution, but “felt fine afterward” and attended a dinner on campus.

  Bloomberg News reported Ms. Yellen appeared fine after her dinner and flew back to Washington on Friday from Hartford, Conn., telling fellow passengers at the airport that she felt better. “I look good now, don’t I?” she said, according to the news outlet.

  Ms. Smith said Friday she didn’t want to comment beyond the Thursday statement.

  Why the secrecy? In the New centrally-planned Normal, in which everything is a function of money printing, where the S&P500 is always just one Fed statement away from a crash, and where the head of the Federal Reserve is ostensibly a far more powerful figure than even the US president (a figure whose health is extensively evaluated for suitability ahead of the job), the public has a right and an obligation to know how fit to serve Yellen truly is, because whatever Thursday’s two minute swoon was, it was not mere dehydration.

  Finally as we showed by the market reaction…

  

  … equity futures most certainly took the sudden concerns about Yellen’s health into consideration when making buying and selling decision. Perhaps it is time to discuss just how credible and realistic the Fed’s contingency plans  are in a world in which Yellen is no longer fit to serve – a world in which former Bank of Israel head Stanley Fischer would be poised to take control over the world’s most important central bank?

  

  

  

  

  

• The Dollar may Consolidate Before Moving Higher

  The US dollar rose against all the major and emerging market currencies over the past week, save the Russian ruble, which gained about 1.5%.  Comments from several Fed officials, and most notably Yellen, drove home the message which arguably was diluted after the FOMC meeting: A rate hike this year is still the most likely scenario.  This helped bolster the greenback. 

   

  On the other hand, ECB officials, including Draghi, underscored that the ECB is not yet ready to expand, extend, or alter the composition of its asset purchase scheme.  And despite the core CPI in Japan falling back into deflation territory, the BOJ’s Kuroda does not appear to be on the verge of increasing its aggressive asset purchase plan, though many expect him to do so at the end of next month. 

   

  The euro lost about 1% against the dollar last week and returned to the lower end of this month’s range after setting the high the day after the FOMC meeting.  The lower end of the range is found in the $1.1080-$1.1100 area.  The technical indicators are soft, and the five-day average has slipped back below the 20-day average.  Yet there is not strong momentum, and it looks like continued range-trading.  Initially, the $1.1300-$1.1330 area may contain upticks.

   

  The dollar has spent the month coiling in a triangle pattern against the yen.  Ahead of the weekend, with Yellen’s help, and rising stocks and US bond yields, the dollar broke higher.  The JPY121.25 high was the greenbacks best since September 10.  It is not uncommon to see false breaks from triangle patterns.  The close was just below the top of the pattern.  A convincing upside break would suggest a measuring objective near JPY122.50.  The technical indicators are supportive, but between the Tankan and US jobs figures, there are plenty of potential fundamental drivers. 

   

  Sterling is a dog.  It lost more than 2% against the US dollar over the past week.  It has fallen five cents since the post-FOMC high near $1.5660.  Before the weekend, sterling traded near $1.5150, which represents its lowest level since early May.    The technical indicators are soft, and the five-day moving average has broken below the 20-day average.  It spends the second half of last week below the 200-day moving average (~$1.5340).  Additional support is seen near $1.5080, with the $1.50 area of greater psychological significance.    Sterling is very streaky lately.   Recall it had a nine-day losing streak in late-August into September.  It then rallied but now has a new six-session losing streak. 

   

  The Australian dollar lost 2.5% against the US dollar last week.  It was weighed down by the poor Caixin preliminary flash manufacturing PMI for China.  Also, rate cut speculation is also picking up again.   After peaking post-Fed near $0.7280, the Aussie slumped to about $0.6940 on September 24 but reversed strongly and closed back above $0.7000. Follow through buying before the weekend was limited, which suggests the downside pressure has not been alleviated.   Stochastics and MACDs are still pointing lower, and the five-day moving average crossed below the 20-day at the end of last week.   Nevertheless, we suspect the risk is to the upside ahead of US jobs data, with potential toward $0.7100-$0.7125.  

   

  The New Zealand dollar has been trading broadly sideways in its trough through September.  It closed firmly ahead of the weekend, at its best level since September 9.  Near-term potential extends toward $0.6450.  

   

  The US dollar recorded new multi-year highs against the Canadian dollar on September 24 just below CAD1.3420.  The five-day moving average crossed back above the 20-day average.  The technical indicators do not suggest the move is exhausted.   A break of CAD1.3260 would signal a corrective phase.   In the bigger picture, the next key technical objective is found near CAD1.40. 

   

  The November crude oil futures contract was little changed last week.  The broad consolidation that has characterized this month’s activity has carved out a descending triangle.  The down sloping line connecting the highs comes in $47.00-$46.30 over the course of next week.  The horizontal line that marks the lower part of the triangle is found around $43.30.  This is a bearish pattern, and a downside break should be respected. 

   

  US 10-year Treasury yields largely moved sideways here in September.  With one day exception (September 24), the yield has stayed above 2.10%.  On the top side, the yield poked through 2.25% for three days in the middle of the month.  Technical indicators are not generating strong signals, which warns of continued consolidation. 

   

  The S&P 500 reversed lower on September 17 after reaching a high of 2020.  Follow through selling this week took the index down to 1909, off which a hammer candlestick pattern was recorded on September 24.  Buying before the weekend lifted the S&P 500 to almost 1953, which was just beyond the 38.2% retracement objective and just shy of the 20-day moving average (1956), but the close was poor and a retest on the 1900 area looks likely.  A break would signal a return to the late August lows around 1865-1870.  

   

   

  Observations from the speculative positioning in the futures market:

   

  1.  The first bucket we look at consists of the euro, Swiss franc, and sterling.  These currencies saw only minor gross position adjustments.  The 5.3k cut in gross long franc positions was the only gross position adjustment of more than 3.2k contracts.    However, the minor adjustments were sufficient to swing the net sterling position long for the first time since the last week in August.  After spending one-week net long, speculators swung back to hold a small net short position in francs.

   

  2.  The second bucket is the yen.  Both bulls and bears were active.  The gross long position rose 11.8k contracts to 48.3k.  The gross short position grew by 8.7k contracts to 72/0.  

   

  3.  The third bucket is the dollar bloc.  There were two substantial (10k contracts or more) gross position adjustments.  The bulls are picking a bottom by increasing their gross long position by 124k contracts to 40.9k.  The bears are not convinced, and added 3.7k contracts to their gross short position, raising it to 79.3k.  The Aussie bulls chopped their gross long position by 16.5k contracts to 42.7k.  The gross short position was trimmed by 4.3k contracts.  

   

  4.  The fourth bucket is the Mexican peso. Speculators began turning around their net short position. The gross long position more than doubled by jumping 25.9k contracts to 47.6k.  A little more than 17k short contracts were covered, leaving 60k.  The net short position fell to 12.4k from 55.3k contracts.  

   

  5.  The net short 10-year US Treasury position was reduced to 8.5k contracts from 39.5k.  This was the result of new speculative longs being established (33.7k contracts).  Gross shorts were increased by 2.8k contracts.  

   

  6.  The net long speculative light sweet crude oil futures position rose by 20k contacts to 259.4k. This was largely the result of 16.7k gross short contracts being bought back.  The gross long position rose by 3.4k contracts (to 229.8k)

  

  

  

  

  

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