Today’s News September 30, 2015

• Paul Craig Roberts: Obama Deifies American Hegemony

  Authored by Paul Craig Roberts,

  Today is the 70th anniversary of the UN. It is not clear how much good the UN has done. Some UN Blue Hemet peacekeeping operations had limited success. But mainly Washington has used the UN for war, such as the Korean War and Washington’s Cold War against the Soviet Union. In our time Washington had UN tanks sent in against Bosnian Serbs during the period that Washington was dismantling Yugoslavia and Serbia and accusing Serbian leaders, who tried to defend the integrity of their country against Washington’s aggression, of “war crimes.”

  The UN supported Washington’s sanctions against Iraq that resulted in the deaths of 500,000 Iraqi children. When asked about it, Clinton’s Secretary of State said, with typical American heartlessness, that the deaths of the children were worth it.

  In 2006 the UN voted sanctions against Iran for exercising its right as a signatory of the non-proliferation treaty to develop atomic energy. Washington claimed without any evidence that Iran was building a nuclear weapon in violation of the non-proliferation treaty, and this lie was accepted by the UN. Washington’s false claim was repudiated by all 16 US intelligence agencies and by the International Atomic Energy Agency inspectors on the ground in Iran, but in the face of the factual evidence the US government and its presstitute media pressed the claim to the point that Russia had to intervene and take the matter out of Washington’s warmonger hands. Russia’s intervention to prevent US military attacks on Iran and Syria resulted in the demonization of Russia and its president, Vladimir Putin. “Facts?!, Washington don’t need no stinkin’ facts! We got power!” Today at the UN Obama asserted America’s over-riding power many times: the strongest military in the world, the strongest economy in the world.

  The UN has done nothing to stop Washington’s invasions and bombings, illegal under international law, of seven countries or Obama’s overthrow by coup of democratic governments in Honduras and Ukraine, with more in the works.

  The UN does provide a forum for countries and populations within countries that are suffering oppression to post complaints—except, of course, for the Palestinians, who, despite the boundaries shown on maps and centuries of habitation by Palestinians, are not even recognized by the UN as a state.

  On this 70th anniversary of the UN, I have spent much of the day listening to the various speeches. The most truthful ones were delivered by the presidents of Russia and Iran. The presidents of Russia and Iran refused to accept the Washington-serving reality or Matrix that Obama sought to impose on the world with his speech. Both presidents forcefully challenged the false reality that the propagandistic Western media and its government masters seek to create in order to continue to exercise their hegemony over everyone else.

  What about China? China’s president left the fireworks to Putin, but set the stage for Putin by rejecting US claims of hegemony: “The future of the world must be shaped by all countries.” China’s president spoke in veiled terms against Western neoliberal economics and declared that “China’s vote in the UN will always belong to the developing countries.”

  In the masterly way of Chinese diplomacy, the President of China spoke in a non-threatening, non-provocative way. His criticisms of the West were indirect. He gave a short speech and was much applauded.

  Obama followed second to the President of Brazil, who used her opportunity for PR for Brazil, at least for the most part. Obama gave us the traditional Washington spiel:

  The US has worked to prevent a third world war, to promote democracy by overthrowing governments with violence, to respect the dignity and equal worth of all peoples except for the Russians in Ukraine and Muslims in Somalia, Libya, Iraq, Afghanistan, Syria, Yemen, and Pakistan.

  Obama declared Washington’s purpose to “prevent bigger countries from imposing their will on smaller ones.” Imposing its will is what Washington has been doing throughout its history and especially under Obama’s regime.

  All those refugees overrunning Europe? Washington has nothing to do with it. The refugees are the fault of Assad who drops bombs on people. When Assad drops bombs it oppresses people, but when Washington drops bombs it liberates them. Obama justified Washington’s violence as liberation from “dictators,” such as Assad in Syria, who garnered 80% of the vote in the last election, a vote of confidence that Obama never received and never will.

  Obama said that it wasn’t Washington that violated Ukraine’s sovereignty with a coup that overthrew a democratically elected government. It was Russia, whose president invaded Ukraine and annexed Crimera and is trying to annex the other breakaway republics, Russian populations who object to the Russophobia of Washington’s puppet government in Ukraine.

  Obama said with a straight face that sending 60 percent of the US fleet to bottle up China in the South China Sea was not an act of American aggression but the protection of the free flow of commerce. Obama implied that China was a threat to the free flow of commerce, but, of course, Washington’s real concern is that China is expanding its influence by expanding the free flow of commerce.

  Obama denied that the US and Israel employ violence. This is what Russia and Syria do, asserted Obama with no evidence. Obama said that he had Libya attacked in order to “prevent a massacre,” but, of course, the NATO attack on Libya perpetrated a massacre, an ongoing one. But it was all Gaddafi’s fault. He was going to massacre his own people, so Washington did it for him.

  Obama justified all of Washington’s violence against millions of peoples on the grounds that Washington is well-meaning and saving the world from dictators. Obama attempted to cover up Washington’s massive war crimes, crimes that have killed and displaced millions of peoples in seven countries, with feel good rhetoric about standing up to dictators.

  Did the UN General Assembly buy it? Probably the only one present sufficiently stupid to buy it was the UK’s Cameron. The rest of Washington’s vassals went through the motion of supporting Obama’s propaganda, but there was no conviction in their voices.

  Vladimir Putin would have none of it. He said that the UN works, if it works, by compromise and not by the imposition of one country’s will, but after the end of the Cold War “a single center of domination arose in the world”—the “exceptional” country. This country, Putin said, seeks its own course which is not one of compromise or attention to the interests of others.

  In response to Obama’s speech that Russia and its ally Syria wear the black hats, Putin said in reference to Obama’s speech that “one should not manipulate words.”

  Putin said that Washington repeats its mistakes by relying on violence which results in poverty and social destruction. He asked Obama: “Do you realize what you have done?”

  Yes, Washington realizes it, but Washington will not admit it.

  Putin said that “ambitious America accuses Russia of ambitions” while Washington’s ambitions run wild, and that the West cloaks its aggression as fighting terrorism while Washington finances and encourages terrorism.

  The President of Iran said that terrorism was created by the US invasion of Afghanistan and Iraq and by US support for the Zionist destruction of Palestine.

  Obama’s speech made clear that Washington accepts no responsibility for the destruction of the lives and prospects of millions of Muslims. The refugees from Washington’s wars who are overflowing Europe are the fault of Assad, Obama declared.

  Obama’s claim to represent “international norms” was an assertion of US hegemony, and was recognized as such by the General Assembly.

  What the world is faced with is two rogue anti-democratic governments—the US and Israel—that believe that their “exceptionalism” makes them above the law. International norms mean Washington’s and Israel’s norms. Countries that do not comply with international norms are countries that do not comply with Washington and Israel’s dictates.

  The presidents of Russia, China, and Iran did not accept Washington’s definition of “international norms.”

  The lines are drawn. Unless the American people come to their senses and expel the Washington warmongers, war is our future.

  

  

  

  

  

• Global 'Wealth' Destruction – World Market Cap Plunges $13 Trillion To 2 Year Lows

  Since the start of June, global equity markets have lost over $13 trillion.

  

  (The last time global market dropped this much – Bernanke unleashed QE2)

  World market capitalization has fallen back below $60 trillion for the first time since February 2014 as it appears the world's central planners' print-or-die policy to create wealth (and in some magical thinking – economic growth) has failed – and failed dramatically.

  

   

  To rub more salt in the wounds of monetray policy mumbo-jumbo, despite endless rate cuts and balance sheet expansion around the world, the last 4 months have seen an 18% collapse – the largest since Lehman.

  It appears "Wealth" creation is just as transitory as The Fed thinks every other outlier is.

  Charts: Bloomberg

  

  

  

  

  

• China's Leadership: Brilliant Or Clueless?

  Submitted by Charles Hugh-Smith of OfTwoMinds blog,

  What worked in the post-global financial meltdown era of 2008-2014 will not work the same magic in the next seven years.

  I am often amused by the Western media's readiness to attribute godlike powers of long-term planning and Sun-Tzu-like strategic brilliance to China's leadership. A well-known anecdote illustrates the point.

  Zhou Enlai, Premier of China in the Mao era, who when asked by Henry Kissinger about the French Revolution, is reputed to have replied, "It's too early to say."

  This is generally taken to express the Chinese Long View, i.e. that the events of 1789 are still playing out.

  But accounts of those present discount this interpretation. Zhou understood Kissinger's query as being about the 1968 general strike in France. That social revolution was still actively in play in the early 1970s when Zhou and Kissinger were meeting, so the time frame was definitely present-day, not the 18th century.

  China's dramatic rise since the early 1980s, when Deng Xiaoping's reforms occurred, has been nothing short of phenomenal. This remarkable success has to be attributed in some measure to the leadership's policies and decisions of the past three decades.

  This economic success is the foundation of those who see China's leadership as brilliant.

  But the policies and decisions that worked so well in the boost phase of growth–what we might call the era of low-hanging fruit–do not necessarily work in the next phase, where growth has matured and all the costs that were ignored in the boost phase must now be addressed and paid.

  If we look at the problems in China's economy, environment and foreign policy, it seems the leadership is making it up as they go along, with the one overriding goal being to maintain the domestic political control of the Communist Party.

  

  On the economic front, China's leadership has actively pursued policies that expanded the shadow banking system and conventional banking system into a $28 trillion debt bubble. This explosive expansion of credit has fueled a real estate bubble of monumental proportions, and a $10 trillion stock market bubble that is now bursting (as all bubbles eventually do, despite claims that "this time it's different").

  Rather than being brilliant, this is a disaster, as bubbles don't dissipate without profound systemic consequences.

  

  rather than deal with the crumbling of the real estate bubble, China's leaders have inflated a stock bubble that promises to bankrupt the tens of millions of households that placed bets in the casino with borrowed money (margin accounts).

  

  On the foreign policy front, China has accomplished the near-impossible, i.e. driving all its neighbors into a united front, as Vietnam, the Philippines, Korea and Japan are all being forced by Chinese belligerence and over-reaching territorial claims to set aside their differences and strengthen ties with the U.S.

  Were someone to craft a foreign policy designed to unite all of China's potential enemies into a powerful alliance, this would be the top choice.

  The Chinese leadership is acting for all the world as if it moves from strength to strength, when the reality is the opposite: the leadership moves from one catastrophically ill-planned misadventure to the next.

  It is easy to predict the unraveling of the real estate and stock market bubbles and the subsequent collapse of China's multi-trillion dollar shadow banking system. Having united all its potential enemies into one camp, China has undone decades of careful diplomacy and boxed itself into a diplomatic corner. Now that it has publicly issued extravagant territorial claims, China cannot back down without losing face; but if it continues to push its claims, it further alienates potential allies and pushes them to strengthen ties with the U.S. and other nations threatened by China's bellicose claims.

  In the Great Game, one should never risk one's position before one has the means to defend that position. China is aggressively pursuing territorial claims that is cannot defend without isolating itself–a policy that would doom its export-and-resource dependent economy.

  There are few if any historical precedents for China's leaders to follow. the boost phase of plucking low-hanging fruit is the easy part, the fun part, the exciting part.

  Dealing with the aftermath of burst credit/asset bubbles, environmental destruction, corruption, wealth inequality, global recession and China's aggressive claim to territory in the South China Sea is the hard part, the not-fun part, the part rife with the potential for catastrophic errors in policy and judgment.

  What worked in the post-global financial meltdown era of 2008-2014 (i.e. inflating a $15 trillion credit bubble) will not work the same magic in the next seven years, but there is little evidence that China's leadership (or indeed, the leadership of the U.S. Japan and the European Union) have a Plan B that will replace strategies that are yielding diminishing returns and raising the risks of a systemic failure.

  Brilliant or clueless? As Zhou observed, it's too early to tell.

  

  

  

  

  

• Peak Japaganda: Advisers Call For More QE (But Admit Failure Of QE); China's Yuan Hits 3-Week High

  Asian markets are bouncing modestly off a weak US session, buoyed by more unbelievable propaganda from Japan. Abe's proclamations that "deflationary mindset" has been shrugged off was met with calls for more stimulus, more debt monetization, and an admission by Etsuro Honda (Abe's closest adviser) that Japan "is not growing positively" and more QE is required despite trillions of Yen in money-printing having failed miserably, warning that raising taxes to pay for extra budget "would be suicidal." Japanese data was a disaster with factory output unexpectedly dropping 0.5% and retail trade missing. Markets are relatively stable at the open as China margin debt drop sto a 9-month low. PBOC strengthened the Yuan fix for the 3rd day in a row to its strongest in 3 weeks.

   

  We begin the evening in Asia with some exceptional double-talk from who else but the Japanese leadership.

  First Abe:

  • *ABE: WILL RESHUFFLE CABINET ON OCT. 7 (should fix everything)
  • *ABE: WOMEN AND ELDERLY SHOULD BE TAPPED BEFORE IMMIGRANTS (not quite sure what he means there)
  • *ABE: CLOSE TO ESCAPING DEFLATION (nope!)
  • *JAPAN HAS SHRUGGED OFF `DEFLATIONARY MINDSET,' ABE SAYS (nope!)
  • *JAPAN'S CPI HAS `MADE A TURNAROUND,' PRIME MINISTER ABE SAYS (nope!)

  Japan just dipped back into deflation…

  

   

  Then came Former Economy Minister Takenaka:

  • *TAKENAKA: JAPAN SHOULD COMPILE 5T YEN EXTRA BUDGET IN AUTUMN (fiscal stimulus, ok)
  • *TAKENAKA: FOLLOWED BY MORE BOJ EASING (well who else is going to monetize that debt?)
  • *TAKENAKA: YEN IN 'COMFORTABLE RANGE' OF 115-120 VS DOLLAR

  Then one of Abe's closest advisers accidentally spilled some truthiness (as The FT reports):

  Japan needs more economic stimulus to stave off a serious shock from China, according to one of Prime Minister Shinzo Abe’s closest advisers.

   

  Etsuro Honda, an architect of Abenomics in his role as special adviser to Mr Abe, said passing a supplementary budget to boost the stagnant economy was an “urgent task”.

   

  “I don’t think we should call it a technical recession yet, but generally speaking, the Japanese economy is in a static situation,” Mr Honda said in an interview with the Financial Times. “It is not growing positively.”

  And he is right – as Japan heads for Quintuple Dip recession…

  

   

  and it appears, despite China's reassurance, all is not well…

  “I’m sure that something serious is happening in China,” he said, arguing that a shift towards the service industry in China could not explain how far its imports have fallen, or other measures such as electricity consumption.

  And do not even think about raising taxes to cover this additional budget…

  Mr Honda said: “Definitely if something serious happens outside of Japan, like the Lehman shock, we cannot raise consumption tax. It would be suicidal.

   

  “At this moment, all that I can say is ‘I don’t know’.”

  And then Japanese data hit – and it was a disaster…

  • Japan Aug. Industrial Production Falls 0.5% M/m; Est. +1% (oops!)
  • *JAPAN AUG. RETAIL SALES UNCHANGED M/M (Exp. +0.5%)

  *  *  *

  Following Daiichi Chuo's bankruptcy:

  • *DAIICHI CHUO SAYS FILED FOR BANKRUPTCY AFTER OVER INVESTING
  • *DAIICHI CHUO TRADES IN TOKYO, FALLS TO AS LOW AS 1 YEN

  

   

  Other shipbuilders are under pressure:

  • *DAEWOO SHIPBUILDING FALLS 8% IN SEOUL TRADING

  And today's bounce in Glencore has the rest of the commodity/miner sector in confidence-boostingh mode…

  • *FORTESCUE CEO SAYS CO. CAN WEATHER VOLATILITY IN MARKETS
  • *FORTESCUE IN 'FANTASTIC POSITION' AFTER CUTTING COSTS: CEO
  • *FORTESCUE COULD BRING IN INVESTOR TO SPEED DEBT PAYMENT: CEO

  And Aussie miners are bouncing modestly (apart from South32)

  *  *  *

  China opened with more de-dollarization…

  • *PBOC TO PROMOTE CURRENCY SWAP COOPRATION W/ KYRGYZSTAN C. BANK
  • Central banks of two countries agree to promote cooperation in currency swap and local currency settlement, according to a statement posted on People’s Bank of China website.

  And some good news on deleveraging…

  • *SHANGHAI MARGIN DEBT BALANCE FALLS TO NINE-MONTH LOW
  • Outstanding balance of Shanghai margin lending dropped for fifth day, falling 0.8%, or 4.7b yuan, to 573.4b yuan on Tuesday, lowest level since Dec. 4.

  The PBOC fixed The Yuan stronger for the 3rd day in a row (under pressure from offshore Yuan) to its strongest in 3 weeks

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3613 AGAINST U.S. DOLLAR

  

  But offshore Yuan remains notably stronger than onshore still…

  

   

  Chinese stocks are modestly higher pre-market…

  • *FTSE CHINA A50 OCTOBER FUTURES RISE 0.6% IN SINGAPORE
  • *CHINA'S CSI 300 STOCK-INDEX FUTURES RISE 0.8% TO 3,103.4

  And Interbank lending markets remain entirely suppressed…

  

   

  Here's why you may want to care about that…

  

   

  Simply put – as the mainland squeeze bleeds out to Hong Kong, it creates a liquidity suck out from the rest of the world, reducing carry trade 'power' and thus derisking any and every leveraged portfolio's exposure to US equities. When (or if) SHIBOR finally snaps then we will see the real impact (just as we saw shockwaves after CNY devalued unexpectedly).

  

  *  *  *

  Crude has faded as Asia opens after the bigger than expected API inventory build…

  

   

   

  Charts: Bloomberg

  

  

  

  

  

• Forget Glencore: This Is The Real "Systemic Risk" Among The Commodity Traders

  Back in July, long before anyone was looking at Glencore (or Asia’s largest commodity trader, Noble Group which we also warned last month was due for a major crash, precisely as happened overnight) which everyone is looking at now that its CDS is trading points upfront and anyone who followed our suggestion last March to go long its then super-cheap CDS can take a few years off, we had a rhetorical question:

  Which will be first: Trafigura, Mercuria or Glencore

  — zerohedge (@zerohedge) July 22, 2015

  Judging by what happened less than two months later, it appears that we have our answer: for now at least, Glencore, which is now flailing and which Bloomberg reported moments ago is set to meet with its bond investors tomorrow (supposedly to allay their fears of an imminent insolvency), is firmly the “answer” to our rhetorical question.

  And yet, something stinks.

  First, a quick look at Trafigura bonds reveals that the contagion from the Glencore commodity-trader collapse, which “nobody could possibly predict” two months ago and which has rapidly become the market’s biggest black swan, has spread and we now have a new contender. And while Trafigura’s equity is privately held, it does have publicly-traded bonds. They just cratered:

  

   

  … sending the yield soaring to junk-bond levels.

  

   

  As discussed below, this may just be the beginning for the company which, because it does not have publicly traded equity – but has publicly traded debt – has so far managed to slip under the radar.

  But who is Trafigura? Only the world’s third largest private commodity trader after Vitol and Glencore.

  From the company’s own description:

  Trafigura is one of the world’s leading independent commodity trading and logistics houses. We’re at the heart of the global economy. Every day and around the world, we are advancing trade – reliably, efficiently and responsibly. We see global trade as a positive force and we go further to make trade work better.

  More important than some pitchbook boilerplate, is the company’s history: Trafigura was formed in 1993 by Claude Dauphin and Eric de Turckheim when It split off from a group of companies managed by Marc Rich, aka “the king of oil” in 1993.

  Who is March Rich? Why the founder of Glencore of course who as a reminder, was indicted in 1983 on 65 criminal counts including income tax evasion, wire fraud, racketeering, and trading with Iran during the oil embargo. Upon learning his prison sentence may be as long as 300 years, Rich promptly fled to Switzerland; he was so afraid of US authorities, he even skipped his daughter’s funeral in 1996.

  Marc Rich got a presidential pardon from Bill Clinton in a decision which was blessed by the kingpin of corruption, former DOJ head Eric Holder.  Clinton himself later expressed regret for issuing the pardon, saying that “it wasn’t worth the damage to my reputation.“

  But back to Trafigura, whose summary financials reveal that the company – with $127.6 billion in revenues in 2014 and $39 billion in assets – is absolutely massive. In fact, in terms of turnover, it is virtually the same size as Glencore.

  

  

   

  But the most important and relevant numbers are on neither of the pretty annual report grabs above. They are highlighted in red in the excerpt from the company’s interim report: the $6.2 billion in non-current debt and $15.6 billion in current debt for a grand total of 21.9 billion in debt!

  

  Now, this is less than Glencore’s $31 billion (the implication being that Trafigura has a solid $6 billion equity cushion although judging by the bond plunge the market is starting to seriously doubt this) but the problem is that Trafigura’s EBITDA is lower. Much lower.

  According to CapIq, Trafigura had $1.8 billion in LTM EBITDA, suggesting a debt/EBITDA leverage ratio of a whopping 12x. If one wants to be generous and annualizes the company’s disclosed 6-month EBITDA (for the period ended 3/31/2015) of $1.1 billion, the EBITDA grows to $2.2 billion. This lowers the debt/EBITDA for Trafigura to “only” 10x.

  Indicatively, Glencore’s own debt/EBITDA, and the reason for so much conerns about the company’s solvency, is about half of Trafigura’s.

  At least on the surface, it appears that Trafigura, which is as reliant on the ups and down of commodity trading as Glencore, is far more levered, and exposed, to any commodity crush than the Swiss giant.

  But what really set off our alarm bells, is that a quick skim through the company’s annual report reveals something disturbing: a commissioned report titled “Too Big To Fail: Commodity Trading Firms and Systemic Risk” whose purpose was to explain why, as the title implies, commodity trading firms are not systemically important. The timing, just months before a historic rout for commodity traders, is odd to say the least.

  

  As a general take, any time someone first brings up, and then tries to talk down the impact of something as being “Too Big To Fail”, run.

  More seriously, there are two problems with this analysis: as events in the past week have shown, commodity trading firms clearly carry a systemic risk: after all, one after another news outlet rushed to explain why yesterday’s market plunge was the result of Glencore fears. It would have been the same with Trafigura’s equity plunge… if the company had publicly-traded equity instead of just debt.

  The second problem is the subheader to the paper:

  Trafigura commissioned a white paper this year on commodity trading firms and systemic risk. Its author, Craig Pirrong, explains why he believes these firms are unlikely to have a destabilising effect on the global economy.

  The paper’s conclusion: “Commodity trading firms are not a source of systemic risk.“

  Oops.

  Who is Craig Pirrong? As the NYT explained in a 2013 article titled “Academics Who Defend Wall St. Reap Reward“, Pirrong, a University of Houston professor, is just a member of that all too pervasive “paid expert for hire” group, academics without actual credibility inside their own circles, and who as a result will “opine” on anything and everything – usually involving Wall Street regulatory and “risk” matters, just to get paid.

  This is precisely what Trafigura did when it commissioned him to “explain” why Trafigura is not systemic. Ironically it did so in August, just as all hell was about to break loose for the commodity traders, especially the most systemic ones.

  And while the market has shown how the paid opinions of such “experts for hire” should be completely ignored, the question remains: just what was Trafigura so concerned about when it commissioned a well-compensated study meant to goal-seek the company’s explicit conclusion: that it is not systemic, when it obviously is.

  Opinions aside, at the end of the the market will decide just who is systemic and who isn’t. One look at the price of Trafigura’s bonds above has given us the answer: it is a move comparable to what happened to Lehman bonds – if not equity – the day after the bankruptcy filing.

  

  Clearly the Lehman bonds could not believe what just happened until it was too late. For Glencore, and increasingly Trafigura, the bond price is finally signalling the realization that “this is indeed happening.”

  * * *

  We’ll save our discussion of Mercuria for another day.

  

  

  

  

• Gold: "The More Ridiculous The System Gets, The More Valuable It Becomes"

  Submitted by Simon Black via SovereignMan.com,

  Nearly four months ago on June 2nd, something very unusual happened in Edmonton, Alberta, Canada.

  The price of propane actually became negative, hitting an unbelievable -0.625 cents per gallon.

  It’s hard to believe that the price of a productive commodity could become so beat down by the market that producers would practically have to pay you to take it off their hands.

  Now that’s cheap. And completely nuts.

  This actually happens from time to time with certain commodities. And there are a number of reasons for it.

  A negative price might imply a dramatic oversupply where the cost of storing the commodity exceeds the benefit from owning it.

  Sometimes even something like real estate can have a negative value—perhaps when a building is in such decrepit condition that the cost of tearing down the structure exceeds the land value.

  But sometimes a negative price simply means that markets are completely broken.

  The primary function of a marketplace is what’s called ‘price discovery’. This is an incredibly important role where buyers and sellers collectively determine the true value of a product, service, or asset.

  Think of it like an auction: if you really want to know what that old baseball card is worth, put it on eBay and let the market tell you.

  The problem is that, these days, markets are so heavily manipulated that the price discovery mechanism has been broken.

  Consider that the most important ‘price’ in the world is the price of money, i.e. interest rates.

  The price of money dictates, or at least heavily influences, the price of so many other major assets and commodities. Stocks. Bonds. Oil. Home prices.

  And yet, rather than leave this all-important price to be set by the market, the price of money is established by an unelected committee of central bankers.

  So by setting the price of money, they are effectively influencing the price of just about EVERYTHING. Including propane in Alberta.

  Then of course there’s the more nefarious price manipulation, much of which is coming to light now.

  There was the appalling LIBOR scandal back in 2012 when multiple banks confessed to criminal charges of conspiring to fix interest rates.

  Investors in the United States have filed a number of lawsuits alleging that banks and brokers have rigged the market for US Treasury bonds.

  The US Federal Energy Regulatory Commission has recently accused French oil company Total and British firm BP of manipulating natural gas prices.

  And both the US Department of Justice and the Swiss Competition Commission are investigating several banks for colluding to manipulate gold and silver prices.

  So in addition to markets being broken, there’s also an extraordinary amount of manipulation going on… which means that, quite often, prices mean absolutely nothing.

  Consider gold and silver, two obvious long-term stores of value whose prices have been in decline.

  Bear in mind these are paper prices, i.e. prices set in broken commodities markets, heavily influenced by central banks, and criminally manipulated by investment banks.

  So is this price really a valid indicator of their worth? Not by a long shot.

  Think about the ever-widening gulf between the ‘paper’ price of silver and the ‘physical’ price of silver… evidenced by the massive shortage in real, physical silver right now.

  The paper prices of gold and silver are set (and manipulated) in financial markets through commodities exchanges.

  It’s not like traders are huddled around bags of coins bidding on which one of them will haul it away.

  Instead they’re dealing with contracts… pieces of paper (or electrons) passed around by traders and bankers.

  In fact, the gold and silver contracts traded in commodities exchanges are designed especially for people who have no intention of ever taking physical possession of the metal.

  Case in point: the paper price for silver traded in Chicago is based on a contract that is supposed to end with physical silver being delivered to the buyer.

  But the contract specifications set by the exchange allow up to 10% FEWER ounces of silver to be delivered than what was specified in the contract.

  And in London, the London Bullion Market Association’s “Good Delivery” rules allow silver bars to be up to 25% less than what was specified in the contract.

  Amazing.

  And it certainly raises the question– who would possibly purchase 1,000 ounces of silver if the exchange was only required to deliver 750?

  Anyone who actually wants to own real gold and silver would rather buy from a local coin dealer.

  Futures contracts are for bankers and traders. Paper prices are for economists and reporters.

  The current shortage of silver, particularly in North America, is a much better reflection of its value than heavily manipulated commodities markets.

  All these contracts and prices truly reflect is how broken the financial system really is… which is actually precisely why you would want to own more gold and silver.

  Seriously, how messed up is our financial system when asset prices across the world can be so easily rigged by the very institutions that demand our trust?

  *  *  *

  This system is pure insanity, as are its prices.

  As such, I don’t let their prices guide my life. It wouldn’t bother me if the price of gold went negative, just like propane in Alberta.

  After all, I’m not trading paper currency for gold, just to trade it back for more paper currency if the ‘price’ goes up.

  The idea behind buying gold is to swap paper money for something real.

  Banks can rig its price all they want; gold’s true value comes from its function as a long-term form of savings and a hedge against a broken financial system.

  And the more ridiculous the system gets, the more valuable it becomes.

  

  

  

  

  

• Saudi Prince Calls For Royal Coup

  In the wake of the petrodollar’s dramatic collapse late last year, we’ve been keen to document the projected effect on global liquidity of net petrodollar exports turning negative for the first time in decades. We also moved to explain how this dynamic relates to the FX reserve liquidation we’re now seeing across EM. 

  Of course we’ve also endeavored to explain that while grasping the big picture is certainly critical (and even more so now that China’s efforts to support the yuan in the wake of the August 11 deval have thrust FX reserve liquidation into the spotlight), understanding what “lower for longer” means specifically for Riyadh is important as well.

  To recap, the necessity of preserving the status quo for everyday Saudis combined with funding two regional proxy wars while simultaneously defending the riyal peg isn’t exactly compatible with intentionally suppressing crude prices in an effort to outlast ZIRP and bankrupt the US shale complex. The difficulty of balancing all of this has created a current account/fiscal account outcome that makes Brazil look quite favorable by comparison and it has also forced the Saudis into the debt markets, suggesting that the kingdom’s debt-to-GDP ratio is set to rise sharply by the end of 2016 (although it would of course still look favorable by comparison in even the worst case scenarios). 

  

  Thrown in a catastrophic crane collapse at Mecca and an incredibly horrific hajj stampede (followed by some epic trolling out of Tehran) and you have a recipe for social upheaval. 

  It’s against this backdrop that we present the following from The Guardian followed by extensive commentary from Nafeez Ahmed.

  From The Guardian: 

  A senior Saudi prince has launched an unprecedented call for change in the country’s leadership, as it faces its biggest challenge in years in the form of war, plummeting oil prices and criticism of its management of Mecca, scene of last week’s hajj tragedy.

   

  The prince, one of the grandsons of the state’s founder, Abdulaziz Ibn Saud, has told the Guardian that there is disquiet among the royal family – and among the wider public – at the leadership of King Salman, who acceded the throne in January.

   

  The prince, who is not named for security reasons, wrote two letters earlier this month calling for the king to be removed.

   

  
  

   

  “The king is not in a stable condition and in reality the son of the king [Mohammed bin Salman] is ruling the kingdom,” the prince said. “So four or possibly five of my uncles will meet soon to discuss the letters. They are making a plan with a lot of nephews and that will open the door. A lot of the second generation is very anxious.”

   

  “The public are also pushing this very hard, all kinds of people, tribal leaders,” the prince added. “They say you have to do this or the country will go to disaster.”

   

  A clutch of factors are buffeting King Salman, his crown prince, Mohammed bin Nayef, and the deputy crown prince, Mohammed bin Salman.

   

  A double tragedy in Mecca – the collapse of a crane that killed more than 100, followed by a stampede last week that killed 700 – has raised questions not just about social issues, but also about royal stewardship of the holiest site in Islam. 

   

  As usual, the Saudi authorities have consistently shrugged off any suggestion that a senior member of the government may be responsible for anything that has gone wrong.

   

  Local people, however, have made clear on social media and elsewhere that they no longer believe such claims.

   

  “The people inside [the kingdom] know what’s going on but they can’t say. The problem is the corruption in using the resources of the country for building things in the right form,” said an activist who lives in Mecca but did not want to be named for fear of repercussions.

   

  “Unfortunately the government points the finger against the lower levels, saying for example: ‘Where are the ambulances? Where are the healthcare workers?’ They try to escape the real reason of such disaster,” he added.

  ???? ???? ???? ????

  ?????? ?????? -????-

  *  *  *

  Submitted by Nafeez Ahmed via Middle East Eye

  On Tuesday 22 September, Middle East Eye broke the story of a senior member of the Saudi royal family calling for a “change” in leadership to fend off the kingdom’s collapse.

  In a letter circulated among Saudi princes, its author, a grandson of the late King Abdulaziz Ibn Saud, blamed incumbent King Salman for creating unprecedented problems that endangered the monarchy’s continued survival.

  “We will not be able to stop the draining of money, the political adolescence, and the military risks unless we change the methods of decision making, even if that implied changing the king himself,” warned the letter.

  Whether or not an internal royal coup is round the corner – and informed observers think such a prospect “fanciful” – the letter’s analysis of Saudi Arabia’s dire predicament is startlingly accurate.

  Like many countries in the region before it, Saudi Arabia is on the brink of a perfect storm of interconnected challenges that, if history is anything to judge by, will be the monarchy’s undoing well within the next decade.

  Black gold hemorrhage

  The biggest elephant in the room is oil. Saudi Arabia’s primary source of revenues, of course, is oil exports. For the last few years, the kingdom has pumped at record levels to sustain production, keeping oil prices low, undermining competing oil producers around the world who cannot afford to stay in business at such tiny profit margins, and paving the way for Saudi petro-dominance.

  But Saudi Arabia’s spare capacity to pump like crazy can only last so long. A new peer-reviewed study in the Journal of Petroleum Science and Engineering anticipates that Saudi Arabia will experience a peak in its oil production, followed by inexorable decline, in 2028 – that’s just 13 years away.

  This could well underestimate the extent of the problem. According to the Export Land Model (ELM) created by Texas petroleum geologist Jeffrey J Brown and Dr Sam Foucher, the key issue is not oil production alone, but the capacity to translate production into exports against rising rates of domestic consumption.

  Brown and Foucher showed that the inflection point to watch out for is when an oil producer can no longer increase the quantity of oil sales abroad because of the need to meet rising domestic energy demand.

  In 2008, they found that Saudi net oil exports had already begun declining as of 2006. They forecast that this trend would continue.

  They were right. From 2005 to 2015, Saudi net exports have experienced an annual decline rate of 1.4 percent, within the range predicted by Brown and Foucher. A report by Citigroup recently predicted that net exports would plummet to zero in the next 15 years.

  From riches to rags

  This means that Saudi state revenues, 80 percent of which come from oil sales, are heading downwards, terminally.

  Saudi Arabia is the region’s biggest energy consumer, domestic demand having increased by 7.5 percent over the last five years – driven largely by population growth.

  The total Saudi population is estimated to grow from 29 million people today to 37 million by 2030. As demographic expansion absorbs Saudi Arabia’s energy production, the next decade is therefore likely to see the country’s oil exporting capacity ever more constrained.

  Renewable energy is one avenue which Saudi Arabia has tried to invest in to wean domestic demand off oil dependence, hoping to free up capacity for oil sales abroad, thus maintaining revenues.

  But earlier this year, the strain on the kingdom’s finances began to show when it announced an eight-year delay to its $109 billion solar programme, which was supposed to produce a third of the nation’s electricity by 2032.

  State revenues also have been hit through blowback from the kingdom’s own short-sighted strategy to undermine competing oil producers. As I previously reported, Saudi Arabia has maintained high production levels precisely to keep global oil prices low, making new ventures unprofitable for rivals such as the US shale gas industry and other OPEC producers.

  The Saudi treasury has not escaped the fall-out from the resulting oil profit squeeze – but the idea was that the kingdom’s significant financial reserves would allow it to weather the storm until its rivals are forced out of the market, unable to cope with the chronic lack of profitability.

  That hasn’t quite happened yet. In the meantime, Saudi Arabia’s considerable reserves are being depleted at unprecedented levels, dropping from their August 2014 peak of $737 billion to $672bn in May – falling by about $12bn a month.

  At this rate, by late 2018, the kingdom’s reserves could deplete as low as $200bn, an eventuality that would likely be anticipated by markets much earlier, triggering capital flight.

  To make up for this prospect, King Salman’s approach has been to accelerate borrowing. What happens when over the next few years reserves deplete, debt increases, while oil revenues remain strained?

  As with autocratic regimes like Egypt, Syria and Yemen – all of which are facing various degrees of domestic unrest – one of the first expenditures to slash in hard times will be lavish domestic subsidies. In the former countries, successive subsidy reductions responding to the impacts of rocketing food and oil prices fed directly into the grievances that generated the “Arab Spring” uprisings.

  Saudi Arabia’s oil wealth, and its unique ability to maintain generous subsidies for oil, housing, food and other consumer items, plays a major role in fending off that risk of civil unrest. Energy subsidies alone make up about a fifth of Saudi’s gross domestic product.

  Pressure points

  As revenues are increasingly strained, the kingdom’s capacity to keep a lid on rising domestic dissent will falter, as has already happened in countries across the region.

  About a quarter of the Saudi population lives in poverty. Unemployment is at about 12 percent, and affects mostly young people – 30 percent of whom are unemployed.

  Climate change is pitched to heighten the country’s economic problems, especially in relation to food and water.

  Like many countries in the region, Saudi Arabia is already experiencing the effects of climate change in the form of stronger warming temperatures in the interior, and vast areas of rainfall deficits in the north. By 2040, average temperatures are expected to be higher than the global average, and could increase by as much as 4 degrees Celsius, while rain reductions could worsen.

  This would be accompanied by more extreme weather events, like the 2010 Jeddah flooding caused by a year’s worth of rain occurring within the course of just four hours. The combination could dramatically impact agricultural productivity, which is already facing challenges from overgrazing and unsustainable industrial agricultural practices leading to accelerated desertification.

  In any case, 80 percent of Saudi Arabia’s food requirements are purchased through heavily subsidised imports, meaning that without the protection of those subsidies, the country would be heavily impacted by fluctuations in global food prices.

  “Saudi Arabia is particularly vulnerable to climate change as most of its ecosystems are sensitive, its renewable water resources are limited and its economy remains highly dependent on fossil fuel exports, while significant demographic pressures continue to affect the government’s ability to provide for the needs of its population,” concluded a UN Food & Agricultural Organisation (FAO) report in 2010.

  The kingdom is one of the most water scarce in the world, at 98 cubic metres per inhabitant per year. Most water withdrawal is from groundwater, 57 percent of which is non-renewable, and 88 percent of which goes to agriculture. In addition, desalination plants meet about 70 percent of the kingdom’s domestic water supplies.

  But desalination is very energy intensive, accounting for more than half of domestic oil consumption. As oil exports run down, along with state revenues, while domestic consumption increases, the kingdom’s ability to use desalination to meet its water needs will decrease.

  End of the road

  In Iraq, Syria, Yemen and Egypt, civil unrest and all-out war can be traced back to the devastating impact of declining state power in the context of climate-induced droughts, agricultural decline, and rapid oil depletion.

  Yet the Saudi government has decided that rather than learning lessons from the hubris of its neighbours, it won’t wait for war to come home – but will readily export war in the region in a madcap bid to extend its geopolitical hegemony and prolong its petro-dominance.

  Unfortunately, these actions are symptomatic of the fundamental delusion that has prevented all these regimes from responding rationally to the Crisis of Civilization that is unravelling the ground from beneath their feet. That delusion consists of an unwavering, fundamentalist faith: that more business-as-usual will solve the problems created by business-as-usual.

  Like many of its neighbours, such deep-rooted structural realities mean that Saudi Arabia is indeed on the brink of protracted state failure, a process likely to take-off in the next few years, becoming truly obvious well within a decade.

  Sadly, those few members of the royal family who think they can save their kingdom from its inevitable demise by a bit of experimental regime-rotation are no less deluded than those they seek to remove.

  *  *  *

  We would only ask if all of the above means that future vists to the US will look dissimilar to this:

  

  

  

  

  

  

• Carl Icahn Says Market "Way Overpriced", Warns "God Knows Where This Is Going"

  To be sure, no one ever accused Carl Icahn of being shy and earlier this year he had a very candid sitdown with Larry Fink at whom Icahn leveled quite a bit of sharp (if good natured) criticism related to BlackRock’s role in creating the conditions that could end up conspiring to cause a meltdown in illiquid corporate credit markets. Still, talking one’s book speaking one’s mind is one thing, while making a video that might as well be called “The Sky Is Falling” is another and amusingly that is precisely what Carl Icahn has done. 

  Over the course of 15 minutes, Icahn lays out his concerns about many of the issues we’ve been warning about for years and while none of what he says will come as a surprise (especially to those who frequent these pages), the video, called “Danger Ahead”, is probably worth your time as it does a fairly good job of summarizing how the various risk factors work to reinforce one another on the way to setting the stage for a meltdown. Here’s a list of Icahn’s concerns:

  • Low rates and asset bubbles: Fed policy in the wake of the dot com collapse helped fuel the housing bubble and given what we know about how monetary policy is affecting the financial cycle (i.e. creating larger and larger booms and busts) we might fairly say that the Fed has become the bubble blower extraordinaire. See the price tag attached to Picasso’s Women of Algiers (Version O) for proof of this.
  • Herding behavior: The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying cost. 
  • Financial engineering: Icahn is supposedly concerned about the myopia displayed by corporate management teams who are of course issuing massive amounts of debt to fund EPS-inflating buybacks as well as M&A. We have of course been warning about debt fueled buybacks all year and make no mistake, there’s something a bit ironic about Carl Icahn criticizing companies for short-term thinking and buybacks as he hasn’t exactly been quiet about his opinion with regard to Apple’s buyback program (he does add that healthy companies with lots of cash should repurchases shares). 
  • Fake earnings: Companies are being deceptive about their bottom lines.
  • Ineffective leadership: Congress has demonstrated a remarkable inability to do what it was elected to do (i.e. legislate). To fix this we need someone in The White House who can help break intractable legislative stalemates. 
  • Corporate taxes are too high: Inversions are costing the US jobs.

  Here’s more from Reuters:

  Billionaire investor activist Carl Icahn ramped up criticism of the U.S. Federal Reserve, warning about the unintended consequences of ultra low interest rates on the economy and financial markets.

   

  “They don’t understand the treacherous path they are going down,” Icahn said in an interview with Reuters, in which he also declared his support for Donald Trump as a candidate to be the next U.S. president.

   

  “God knows where this is going. It’s very dangerous and could be disastrous,” said Icahn, who has been a consistent critic of the Fed for keeping its benchmark interest rate close to zero since late 2008.

   

  Icahn said he felt compelled to raise red flags about the state of the financial markets because he believes if more big investors had warned about subprime mortgage market in 2007, the United States might have avoided the crisis that strangled the economy the following year.

   

  In a video entitled “Danger Ahead” and released on Tuesday, Icahn said the Fed’s rate policy had enabled U.S. chief executives – many of whom he describes as “nice but mediocre guys” – to pursue “financial engineering” that he said has exacerbated an already wide gap between rich and poor in America.

   

  Icahn, who slammed money managers who benefit from the so-called “carried interest” loophole under which their earnings are taxed as capital gains rather than ordinary wage income, also endorsed Donald Trump’s presidential bid.

  Trump unveiled a tax plan on Monday that he said would eliminate the loophole.

   

  “Those guys who run these companies are borrowing money very cheaply, leveraging up their companies, using it to do two things … They are going in and they are buying back stock or even worse, making stupid takeovers,” said Icahn, adding some recent acquisitions have been done at a too high a price.

   

  Much of this debt is bought via exchange-traded funds, a popular vehicle for trading baskets of bonds and stocks.

   

  Icahn said retail investors had a false sense of security about how easy it would be to sell their holdings of such debt if the market turns.

   

  “It’s like a movie theater and somebody yells fire. There is only one little exit door,” he said. “The exit door is fine when things are OK but when they yell fire, they can’t get through the exit door … and there’s nobody to buy those junk bonds.”

  Ultimately what Icahn has done is put the pieces together for anyone who might have been struggling to understand how it all fits together and how the multiple dynamics at play serve to feed off one another to pyramid risk on top of risk. Put differently: one more very “serious” person is now shouting about any and all of the things Zero Hedge readers have been keenly aware of for years.

  Full video below.

  

  

  

  

  

• The UN Just Unleashed "The Global Goals" – The Elites' Blueprint For A "United World"

  Submitted by Michael Snyder via The Economic Collapse blog,

  Have you heard of “the global goals”?  If you haven’t heard of them by now, rest assured that you will be hearing plenty about them in the days ahead.  On September 25th, the United Nations launched a set of 17 ambitious goals that it plans to achieve over the next 15 years.  A new website to promote this plan has been established, and you can find it right here.  The formal name of this new plan is “the 2030 Agenda“, but those behind it decided that they needed something catchier when promoting these ideas to the general population.  The UN has stated that these new “global goals” represent a “new universal Agenda” for humanity.  Virtually every nation on the planet has willingly signed on to this new agenda, and you are expected to participate whether you like it or not.

  Some of the biggest stars in the entire world have been recruited to promote “the global goals”.  Just check out the YouTube video that I have posted below.  This is the kind of thing that you would expect from a hardcore religious cult…

  If you live in New York City, you are probably aware of the “Global Citizen Festival” that was held in Central Park on Saturday where some of the biggest names in the music industry promoted these new “global goals”.  The following is how the New York Daily News described the gathering…

  It was a party with a purpose.

   

  A star-studded jamboree and an impassioned plea to end poverty rocked the Great Lawn in Central Park as more than 60,000 fans gathered Saturday for the fourth-annual Global Citizen Festival.

   

  The feel-good event, timed to coincide with the annual gathering of world leaders at the United Nations General Assembly, featured performances by Beyoncé, Pearl Jam, Ed Sheeran and Coldplay.

  And it wasn’t just the entertainment industry that was promoting this new UN plan for a united world.  Pope Francis traveled to New York to give the address that kicked off the conference where this new agenda was unveiled…

  Pope Francis gave his backing to the new development agenda in an address to the U.N. General Assembly before the summit to adopt the 17-point plan opened, calling it “an important sign of hope” at a very troubled time in the Middle East and Africa.

   

  When Danish Prime Minister Lars Rasmussen struck his gavel to approve the development road map, leaders and diplomats from the 193 U.N. member states stood and applauded loudly.

   

  Then, the summit immediately turned to the real business of the three-day meeting — implementation of the goals, which is expected to cost $3.5 trillion to $5 trillion every year until 2030.

  Wow.

  Okay, so where will the trillions of dollars that are needed to implement these new “global goals” come from?

  Let me give you a hint – they are not going to come from the poor nations.

  When you read over these “global goals”, many of them sound quite good.  After all, who wouldn’t want to “end hunger”?  I know that I would like to “end hunger” if I could.

  The key is to look behind the language and understand what is really being said.  And what is really being said is that the elite want to take their dream of a one world system to the next level.

  The following list comes from Truthstream Media, and I think that it does a very good job of translating these new “global goals” into language that we can all understand…

  • Goal 1: End poverty in all its forms everywhere
  • Translation: Centralized banks, IMF, World Bank, Fed to control all finances, digital one world currency in a cashless society

  • Goal 2: End hunger, achieve food security and improved nutrition and promote sustainable agriculture
  • Translation: GMO

  • Goal 3: Ensure healthy lives and promote well-being for all at all ages
  • Translation: Mass vaccination, Codex Alimentarius

  • Goal 4: Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
  • Translation: UN propaganda, brainwashing through compulsory education from cradle to grave

  • Goal 5: Achieve gender equality and empower all women and girls
  • Translation: Population control through forced “Family Planning”

  • Goal 6: Ensure availability and sustainable management of water and sanitation for all
  • Translation: Privatize all water sources, don’t forget to add fluoride

  • Goal 7: Ensure access to affordable, reliable, sustainable and modern energy for all
  • Translation: Smart grid with smart meters on everything, peak pricing

  • Goal 8: Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all
  • Translation: TPP, free trade zones that favor megacorporate interests

  • Goal 9: Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
  • Translation: Toll roads, push public transit, remove free travel, environmental restrictions

  • Goal 10: Reduce inequality within and among countries
  • Translation: Even more regional government bureaucracy like a mutant octopus

  • Goal 11: Make cities and human settlements inclusive, safe, resilient and sustainable
  • Translation: Big brother big data surveillance state

  • Goal 12: Ensure sustainable consumption and production patterns
  • Translation: Forced austerity

  • Goal 13: Take urgent action to combat climate change and its impacts*
  • Translation: Cap and Trade, carbon taxes/credits, footprint taxes

  • Goal 14: Conserve and sustainably use the oceans, seas and marine resources for sustainable development
  • Translation: Environmental restrictions, control all oceans including mineral rights from ocean floors

  • Goal 15: Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss
  • Translation: More environmental restrictions, more controlling resources and mineral rights

  • Goal 16: Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels
  • Translation: UN “peacekeeping” missions (ex 1, ex 2), the International Court of (blind) Justice, force people together via fake refugee crises and then mediate with more “UN peacekeeping” when tension breaks out to gain more control over a region, remove 2nd Amendment in USA

  • Goal 17: Strengthen the means of implementation and revitalize the global partnership for sustainable development
  • Translation: Remove national sovereignty worldwide, promote globalism under the “authority” and bloated, Orwellian bureaucracy of the UN

  If you doubt any of this, you can find the official document for this new UN agenda right here.  The more you dig into the details, the more you realize just how insidious these “global goals” really are.

  The elite want a one world government, a one world economic system and a one world religion.  But they are not going to achieve these things by conquest.  Rather, they want everyone to sign up for these new systems willingly.

  The “global goals” are a template for a united world.  To many, the “utopia” that the elite are promising sounds quite promising.  But for those that know what time it is, this call for a “united world” is very, very chilling.

  

  

  

  

  

• Two Very Disturbing Forecasts By A Former Chinese Central Banker

  Earlier today, Yu Yongding – currently a senior fellow at the Chinese Academy of Social Sciences in Beijing but most notably a member of the PBOC’s Monetary Policy Committee from 2004 to 2006 as well as a member of China’s central planning bureau itself, the Advisory Committee of National Planning – gave a speech before the Peterson Institute, together with a slideshow.

  Since the topic was China’s debt, economic growth, corporate profitability, and since, inexplicably, it wasn’t pre-cleared by the Chinese department of truth, it was not cheerful. In fact it was downright scary. Among other things, the speech discussed:

  • Capital efficiency – low and falling (capital-output ratio rising)
  • Corporate profitability – has been falling steadily
  • Share of finance via capital market – Very low
  • Interest rate on loans – High
  • Inflation rate – producer price Index is falling

  A key observation was the troubling surge in China’s capital coefficient, first noted here two weeks ago in a presentation by Daiwa which also had a downright apocalyptic outlook on China, and wasn’t ashamed to admit that it expects a China-driven global meltdown, one which “would more than likely send the world economy into a tailspin. Its impact could be the worst the world has ever seen.”

  The former central banker also discussed the bursting of China’s market bubble. This, he said was created deliberately for two government purposes:

  • To enable debt-ridden corporates to get funds from the equity market
  • To boost share prices to stimulate demand via wealth effect

  He admits this shortsighted approach failed and “to save the city, we bombed the city” adding that it brings “authorities’ ability of crisis managing into question.”

  He also observes that the devaluation that took place on August 11 was the government’s explicit admission that its attempt to reflate an equity bubble has failed, and it was forced to find an alternative method of stimulating the economy. Of the CNY devaluaton Yu says quite clearly that it was simply to boost the economy: “In the first quarter of 2015 China’s capital account deficit is larger that than that of current account surplus” which is due to i) The Unwinding of Carry trade; ii) the diversification of financial assets by households; iii) Outbound foreign investment; and iv) capital flight.

  And now that China has officially unleashed devaluation (which Yu believes should be taken to its logical end and the RMB should float) there are very material risks: “the implication of episode can be more serious than the stock market fiasco, with much large international consequences” and that “the failure will have serious consequences on China’s financial stability”

  His ominous outlook: “Two bubbles have burst, what next?”

  To answer this question we go back to Yongding’s slidedeck, where two particular slides caught our attention: the former central banker’s projections on Chinese debt/GDP and corporate profits. They need no further commentary.

  Trajectory of corporate profitability (before interest payments) – slide 12

  

   

  and Corporate debt-to-GDP simulation (baseline scenario) – slide 15

  

  As a reminder, this is the base-case of a former central banker. One can only imagine how bad it really must be.

  * * * 

  Full presentation (pdf)

  

  

  

  

• Sep 30 – Fed's Mester: US Can Handle Rate Hike This Year

  Follow The Market Madness with Voice and Text on FinancialJuice

  EMOTION MOVING MARKETS NOW: 12/100 EXTREME FEAR

  PREVIOUS CLOSE: 12/100 EXTREME FEAR

  ONE WEEK AGO: 31/100 FEAR

  ONE MONTH AGO: 14/100 EXTREME FEAR

  ONE YEAR AGO: 15/100 EXTREME FEAR 

  Put and Call Options: EXTREME FEAR During the last five trading days, volume in put options has lagged volume in call options by 13.19% as investors make bullish bets in their portfolios. However, this is still among the highest levels of put buying seen during the last two years, indicating extreme fear on the part of investors.

  Market Volatility:  NEUTRAL The CBOE Volatility Index (VIX) is at 26.83. This is a neutral reading and indicates that market risks appear low.

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

   

  PIVOT POINTS

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

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

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

  CRUDE OIL (CL) | GOLD (GC) | 10 YR T NOTE | 2 YR T  NOTE | 5 YR T NOTE | 30 YR TREASURY BOND| SOYBEANS | CORN 

   

  MEME OF THE DAY – BEIJING AFTER VOLKSWAGEN

   

  UNUSUAL ACTIVITY

  APPS Director purchase 127K @ 1.57

  JOY Director purchase 12,200  A  $ 14.77  , 4,346  A  $ 14.8 , 2,854  A  $ 14.81  , 2,265  A  $ 14.82 , 2,435  A  $ 14.83

  Z NOV 30 Puts @ 4.70 on the offer 1600 contracts

  MU Jan 5 Put Activity @ 0.18 on the offer

  BDSI NOV 6 Calls on the offer @ 0.80 1800+

  More Unusual Activity…

  HEADLINES

   

  Fed’s Mester: US can handle rate hike this year

  Moody’s: Govt shutdown doesn’t directly affect creditworthiness of US

  ECB’s Weidmann: Deflation Concerns Have Dissipated

  Villeroy Cleared to Become Next Governor of Bank of France

  Wells Fargo cuts S&P 500’s year-end target to 2,025-2,125

  InBev Said to Line Up BofA, Santander on SABMiller Financing

  Glencore says it is ‘operationally and financially robust’

  Bank of America to Lay Off Employees in Banking, Markets

  Twitter is getting ready to drop its 140-character limit

  Ukraine group agrees on plan to pull back tanks and weapons

   

  GOVERNMENTS/CENTRAL BANKS

  Fed’s Mester: US can handle rate hike this year – Nikkei

  Moody’s: Govt. shutdown doesn’t directly affect creditworthiness of US government – Rtrs

  ECB’s Weidmann: Deflation Concerns Have Dissipated – NASDAQ

  ECB’s Makuch: Would Be Speculative To Consider Adjustments To QE – ForexLive

  ECB’s Nowotny: Risk Overstretching Mandate Without Monetary Union – FXStreet

  Villeroy Cleared to Become Next Governor of Bank of France – BBG

  Bank of France Nominee Villeroy: Mario Draghi’s current MonPol is the right one – Rtrs

  Japanese PM Abe: Japan has successfully shrugged off the ‘deflation mindset’ – BBG

  Abe adviser calls for extra stimulus in Japan – FT

  RBA under pressure to cut rates – AFR

  FIXED INCOME

  Treasury yields fall to lowest level in a month – MktWatch

  European Yields Reflect Slow Inflation Adding to Pressure on ECB – BBG

  Market liquidity warning from IMF – FT

  FX

  USD: Dollar slips as commodity currencies steady – Rtrs

  CAD: Canadian dollar hit fresh 11-year lows before rebounding – CBC

  EUR: US Dollar Pares Gains, Euro Off Daily Lows – WBP

  ECB: Forex Reserves Rise To EUR 264.7bln, Up EUR 400mln

  ENERGY/COMMODITIES

  Crude futures jump nearly 2%, ahead of weekly API Supply Report – Investing.com

  Gold ends lower for third straight session – MktWatch

  Copper Ends Longest Slump in a Month as Demand Concerns Subside – BBG

  EQUITIES

  Wall Street mixed in choppy trade – Courier Mail

  Europe closes lower as Glencore soars 16.9%, oil up 2% – CNBC

  FTSE 100 falls, with Wolseley hit by weaker revenue outlook – BBC

  Wells Fargo cuts S&P 500’s year-end target to 2,025-2,125 range – MktWatch

  M&A: InBev Said to Line Up BofA, Santander on SABMiller Financing – BBG

  M&A: Axel Springer to Purchase Majority Stake in Business Insider for $344.1mln – WSJ

  MINERS: Glencore says it is ‘operationally and financially robust’ – BBC

  AUTOS: VW chief Matthias Mueller pledges fix for emissions faults – FT

  AUTOS: Porsche board to name new CEO on Wednesday – source on Rtrs

  FINANCIALS: Bank of America to Lay Off Employees in Banking, Markets – WSJ

  FINANCIALS: Societe Generale considers closing a fifth of retail branches – FT

  FINANCIALS: RBS CEO: Could Buy Back Shares To Speed Up Govt. Exit – Rtrs

  FINANCIALS: GE And MS Said To Delay Deadline On Commercial Assets Bid – AFR

  TOBACCO: Reynolds American to sell some assets to Japan Tobacco for $5bln – MktWatch

  INDUSTRIALS: Boeing to Start Delivering Military Helicopters to India in 2018 – WSJ

  TECH: Twitter is getting ready to drop its 140-character limit – Re/Code

  TECH: Google unveils two Nexus phones, 5X and 6P – CNBC

  EMERGING MARKETS

  India’s Central Bank Cuts Key Interest Rate More Than Expected – WSJ

   

  Ukraine group agrees on plan to pull back tanks and weapons – IFX

   

  

  

  

  

  

• BofA Issues Dramatic Junk Bond Meltdown Warning: This "Train Wreck Is Accelerating"

  On Tuesday, Carl Icahn reiterated his feelings about the interplay between low interest rates, HY credit, and ETFs. The self-feeding dynamic that Icahn described earlier this year and outlined again today in a new video entitled “Danger Ahead” is something we’ve spent an extraordinary amount of time delineating over the last nine or so months. Icahn sums it up with this image:

  

  The idea of course is that low rates have i) sent investors on a never-ending hunt for yield, and ii) encouraged corporate management teams to take advantage of the market’s insatiable appetite for new issuance on the way to plowing the proceeds from debt sales into EPS-inflating buybacks. The proliferation of ETFs has effectively supercharged this by channeling more and more retail money into corners of the bond market where it might normally have never gone.

  Of course this all comes at the expense of corporate balance sheets and because wide open capital markets have helped otherwise insolvent companies (such as US drillers) remain in business where they might normally have failed, what you have is a legion of heavily indebted HY zombie companies, lumbering around on the back of cheap credit, easy money, and naive equity investors who snap up secondaries.

  This is a veritable road to hell and it’s not clear that it’s paved with good intentions as Wall Street is no doubt acutely aware of the disaster scenario they’ve set up and indeed, they’re also acutely aware of the fact that when everyone wants out, the door to the proverbial crowded theatre will be far too small because after all, that door is represented by the Street’s own shrinking dealer inventories. Perhaps the best way to visualize all of this is to have a look at the following two charts:

  

  

  So now that the wake up calls regarding everything described above have gone from whispers among sellsiders to public debates between Wall Street heavyweights to shouts channeled through homemade hedge fund warning videos, everyone is keen to have their say. For their part, BofAML is out with a new note describing HY as a “slow moving trainwreck that seems to be accelerating.” Below are some notable excerpts:

  A slow moving train wreck that seems to be accelerating

  For five months in a row now more than 50% of the sectors in our high yield index have had negative price returns. That’s the longest such streak since late 2008 (Chart 1). This isn’t to whip up predictions of utter doom and gloom as in that fateful year. But it’s a stark statistic, highlighting our principal refrain for the last several months – this isn’t just about one bad apple anymore. The weakness in high yield credit is to us not just a commodity story; it is about highly indebted borrowers struggling to grow, an investor base that cannot digest more risk, a market that has usually struggled with liquidity and an economy that refuses to rise above mediocrity. 

   

  

  The problems in the coal sector that began to surface two years ago were perhaps the canary in the coal mine in hindsight. It was easy to dismiss a tiny sector with badly managed companies in a product that was facing secular headwinds as a one-off. But then we had the collapse in oil prices, much more difficult to ignore given the sheer size of the Energy sector in high yield. Barely had the market got its head around the scale of the issue when metals and miners started showing tremors. Now it’s the entire commodity complex. 

  At this juncture, BofAML has a rather disconcerting premonition. Essentially the banks’ strategists suggest that everything is about to become a junk bond, that corporate management teams will be tempted to resort to fraud, and that a dearth of liquidity threatens to bring the entire house of cards tumbling down:

  Around this time last year, when our view on HY began turning decidedly less rosy, the biggest pushback we got from clients was that we were too bearish. A couple of months back, as our anticipated low single digit return year looked likely to come to fruition, many clients began to sympathize with our view, but challenged us on our contention that there were issues beyond the commodity sector. Tellingly, we now have an Ex- Energy/Metals/Mining version of almost every high yield metric we track (it started off as just Ex-Energy last year). Point out the troubles in Retail and Semiconductors and pat comes the reply that one’s always been structurally weak and the other’s going through a secular decline. Mention the stirring in Telecom and we’re told that it’s isolated to the Wirelines. When we began writing this piece, Chemicals and Media were fine, and Healthcare was a safer option; not so much anymore. At this pace, we wonder just how long until our Ex-Index gets bigger than our In-Index.

  As Chart 2 shows, the malaise is spreading, albeit slowly. Price action has no doubt been violent over the last twelve months, but it has now started ensnaring non-commodity related bonds too. Over a third of the bonds that have experienced more than a 10% price loss this month belong neither to Energy nor Basic Industries. 

   

  

  Admittedly, over the last few weeks several conversations have indicated a slow acceptance that the turn of the credit cycle is upon us. That however is just the beginning. We suspect that this is the start of a long, slow and painful unwind of the excesses of the last five years.

  Along with decompression comes a tick up in defaults, and we expect those to increase in 2016 and 2017. Although a company with a poor balance sheet doesn’t necessarily default, all defaulted issuers have poor fundamentals- and we see a lot of companies with lackluster balance sheets and earnings. The difference why in one environment an issuer survives while in another it doesn’t has as much or more to do with risk aversion and the subsequent conscious decision to no longer fund the company than any change in leverage or earnings. And risk aversion, as noted above, is increasing amongst our clientele. As more investors continue to see the forest for the trees, we believe they will see what we have seen: a series of indicators that are consistent with late cycle behavior that we think clearly demonstrates a turn of the credit cycle. 

  Finally, there is other typical late-stage behavior that is observable but difficult to quantify. We often see that a cycle is approaching its end when the bad apples start visibly separating out from the pack as idiosyncratic risk surfaces. We saw this first with Energy and Retail, then Telcos and Semis, and now creeping into some of the perceived ‘safe havens’ such as Healthcare and Autos. This is also when company balance sheets that have amassed debt during the cycle start to show visible cracks and investors question whether companies have enough earnings capacity to grow into their balance sheet. Terms of issuance become more issuer-unfriendly and non-opportunistic deals go through pushing new issue yields up. This is also a time when problems surface (Volkswagen), and negative surprises have the capability to cause precipitous declines in stocks and bonds (Valeant, Glencore).

  Though we don’t and won’t pretend to predict the next corporate scandal or regulatory hurdle, what we do know is that as cycles become long in the tooth, companies could act desperately.  

  In addition to a world of lackluster earnings, bloated balance sheets, and worrying global economic conditions, we’re hard-pressed to come up with any client conversation we’ve had on HY over the last 12 months that hasn’t included a tirade on appalling bond market liquidity.  

  We’ve heard from several portfolio managers with many years of investing experience behind them that this is by far the worst they have seen. Anecdotal evidence from our trading desk also seem to support this view.

  We certainly think liquidity is a problem in this market. In fact it was the very reason that our concerns about HY became magnified last fall, as the inability to enter and exit trades easily leads to more volatility and contagion into seemingly unaffected sectors (sell not what you want to, but what you can). 

  Got all of that? If not, here’s a video summary:

  And then there is of course UBS, who has been calling for the HY apocalypse for months. Here’s their latest:

  Corporate credit markets have been under significant pressure in recent sessions, with idiosyncratic events erupting across the auto (VW), metals/mining (Glencore), TMT (Sprint, Cablevision), healthcare (Valeant) and emerging market (Petrobras) sectors, respectively. US IG and HY spreads widened 5bp and 27bp, respectively, to levels of approximately 180bp and 675bp, at or exceeding previous wides recorded in 2015.

   

  Here’s our short take: US high grade and high yield markets have suffered under the weight of weak commodity prices, heightened issuance (and the forward calendar), the rally in the long bond, rising idiosyncratic risks and illiquidity limiting the recycling of risk. Lower commodity prices are increasingly pressuring metals/mining and energy firms because prices are so low that many business models are essentially broken. Heavy supply, specifically in the high grade market, is a result of releveraging announcements to satiate equity investors and there have been few signs that management teams are retrenching – effectively setting up a standoff between equity and bond investors where ultimately the path to slower issuance is a broader re-pricing in spreads. Falling Treasury yields have chilled the demand from yield bogey buyers as rates have fallen faster than spreads have widened. Rising idiosyncratic risk, although it arguably is thematically symptomatic of late stage antics where firms are under massive pressure to boost profits (e.g., VW, Valeant), has added accelerant to the fire. And lack of liquidity has made the recycling of risk increasingly difficult.

   

  The prognosis is challenging. Why? Certain aspects are structural in nature; in the later stages of the credit and asset price cycle one should expect greater net issuance from releveraging actions and rising idiosyncratic risk. Further, illiquidity is in effect part of the unintended consequences of post-crisis regulation. However, the outlook for commodity prices and, in turn, Treasury yields is arguably more balanced, but uncertainty around demand, supply and speculative conditions is elevated. But, alas, the primary driver of credit markets remains the same: commodity prices. We believe the market is now reflecting the thesis we have outlined in recent months: lower commodity prices will trigger rising contagion, and weakness will spread to the broader credit markets (in particular lower-quality high yield). Put differently, if commodity prices go lower, index spreads will go wider. This, in our view, is a virtual certainty.

  The takeaway from this admittedly lengthy assessment is that between deteriorating fundamentals (e.g. depressed commodity prices), idiosyncratic risk factors, and the very real potentional for cross-sector contagion, the conditions are indeed ripe for, to quote BofA, the “acceleration” of the “train wreck.” 

  Make no mistake, we certainly can’t imagine a scenario in which an “accelerating train wreck” could possibly be construed as a good thing, but when it comes to HY, the situation is made immeasurably worse by the state of the secondary market for corporate credit and the proliferation of bond funds. If HY collapses entirely and the redemptions start rolling in, it’s difficult to understand how fund managers will be able to facilitate an orderly exit and on that note, we close with the following from Alliance Bernstein:

  “In theory, investors can exit an open-ended mutual fund or an ETF at will. But the growing popularity of these funds forces them to invest in an ever larger share of less liquid bonds. If everyone wants to exit at once, prices could fall very far, very fast. A lucky few may get out in time. Others will probably get trampled.”

  

  

  

  

• This Is "Getting Really Ugly, Really Fast": Two Thirds Of Recent Graduates Say US College Education Is A Ripoff

  If there was any question about whether college students in the US were getting wise to the fact that their degrees may not be worth the $35K (on average) they’re paying for them, that question was answered earlier this year with one hilarious graduation cap:

  

  Yes, “Game of Loans,” and as the student debt bubble balloons into the trillions, the federal government has come to realize that, to quote Bill Ackman, there’s “no way” students are ever going to pay back all of this debt, which is why the Obama administration is promoting (and we mean explicitly promoting) IBR programs that in many cases ensure former students will have at least a portion of their student debt forgiven thereby guaranteeing taxpayer losses on government higher education loans will run into the tens and probably hundreds of billions of dollars. 

  Assessing what role students have played in this is akin to asking what role potential homeowners played in the housing bubble. That is, the government has held up certain ideals (i.e. the right to homeownership and the right to pursue post secondary education) as inalienable and so while there’s an extent to which people have to be accountable for the money they borrow, when you pitch these things as being on par with John Locke’s natural rights and then move to effectively subsidize them by either driving interest rates into the ground or passing out trillions in loans to students who you know have no hope of paying it all back, you create a scenario whereby borrowers can then claim they were misled, mistreated, and ultimately defrauded. 

  That was the case with the housing bubble and, thanks to the fact that today’s college graduates are entering a job market that despite all the rosy rhetoric, is actually nothing more than a bartender creation machine, former students are now looking with disdain at the tens of thousands in student loans they must now figure out how to pay back while bringing in less than the median national yearly income which is itself largely insufficient when it comes to servicing large lines of credit.

  It is with all of the above in mind that we bring you the following from WSJ who reports that two thirds of students who graduated in the last nine years and whose debt matches or exceeds the national average do not believe their degree was worth the cost. Here’s more:

  Recent college graduates are significantly less likely to believe their education was worth the cost compared with older alumni and one of the main reasons is student debt, which is delaying millennials from buying homes and starting families and businesses.

   

  The insight into the generational divide comes courtesy of the second annual Gallup-Purdue Index, which polled more than 30,000 college graduates during the first six months of this year.

   

  Former Indiana Governor Mitch Daniels created the survey when he became president of Purdue University in 2013 in an effort to better understand the value of a college education from the people who should know best—alumni.

   

  The steep decline in the perception of whether a degree was worth the cost startled Brandon Busteed, Gallup’s executive director for education and workforce development.

   

  Overall, 52% of graduates of public schools “strongly agreed” that their education was worth the expense, compared with 47% of private-school graduates. Among graduates of private for-profit universities, just 26% felt the same.

   

  About two-thirds of college students graduate with debt, with an average load of about $35,000.

   

  According to the Index, only 33% of alumni who graduated between 2006 and 2015 with that amount of debt strongly agreed that their university education was worth the cost. 

  On the one hand, this suggests that going forward, students may demand some combination of the following three things, i) lower tuition, ii) better coordination between those who design curriculums and employers, and hopefully iii) efforts to create a more robust jobs market characterized by rising wage growth and real opportunity for graduates. 

  Unfortunately, the more likely outcome will be that demand for higher education will simply dry up, thereby creating an even larger divide between the skills set of America’s youth and that of job seekers around the globe. But don’t take our word for it, just ask Gallup’s executive director for education and workforce development Brandon Busteed who spoke to The Journal:

  “When you look at recent graduates with student loans it gets really ugly, really fast. If alumni don’t feel they’re getting their money’s worth, we risk this tidal wave of demand for higher education crashing down.”

  

  

  

  

  

• The Stunning "Explanation" An Insurance Company Just Used To Boost Health Premiums By 60%

  It may not have been easy for Blue Cross Blue Shield to admit to their clients their premiums are set to rise by 60% due to Supreme Court-mandated tax known as “Obamacare” but it would have been the right thing.

  Instead, in justifying the boost to the two-month medical premium from $867 to $1.365, the health insurer decided to use the following excuse: “With advances in medical technology, prescription drugs and ways to treat injuries and illnesses, Americans are living healthier lives. [i.e., living longer] Because of these changes, we must adjust your premium to stay in line with increased costs.”

  

  In other words, if you want lower costs, and avoiding 60% healthcare inflation, just do everything in your power to prevent Americans from “living healthier lives.”

  And just in case anyone is still confused why plunging gasoline prices simply refuse to translate into greater discretionary spending, please keep reading the above letter until you finally get.

  Finally, for those who are likewise confused how companies like Valeant can boost the prices of their drugs anywhere between 90% and 2300% in 2-3 years, and get away with it without nobody noticing…

  

  … also keep reading the above letter until you finally get it.

  h/t @JeffreyTetrault

  

  

  

  

  

• Low Oil Prices – Why Worry?

  Submitted by Gail Tverberg via Our Finite World blog,

  Most people believe that low oil prices are good for the United States, since the discretionary income of consumers will rise. There is the added benefit that Peak Oil must be far off in the distance, since “Peak Oilers” talked about high oil prices. Thus, low oil prices are viewed as an all around benefit.

  In fact, nothing could be further from the truth. The Peak Oil story we have been told is wrong. The collapse in oil production comes from oil prices that are too low, not too high. If oil prices or prices of other commodities are too low, production will slow and eventually stop. Growth in the world economy will slow, lowering inflation rates as well as economic growth rates. We encountered this kind of the problem in the 1930s. We seem to be headed in the same direction today. Figure 1, used by Janet Yellen in her September 24 speech, shows a slowing inflation rate for Personal Consumption Expenditures (PCE), thanks to lower energy prices, lower relative import prices, and general “slack” in the economy.

  

  Figure 1. “Why has PCE Inflation fallen below 2%?” from Janet Yellen speech, September 24, 2015.

  What Janet Yellen is seeing in Figure 1, even though she does not recognize it, is evidence of a slowing world economy. The economy can no longer support energy prices as high as they have been, and they have gradually retreated. Currency relativities have also readjusted, leading to lower prices of imported goods for the United States. Both lower energy prices and lower prices of imported goods contribute to lower inflation rates.

  Instead of reaching “Peak Oil” through the limit of high oil prices, we are reaching the opposite limit, sometimes called “Limits to Growth.” Limits to Growth describes the situation when an economy stops growing because the economy cannot handle high energy prices. In many ways, Limits to Growth with low oil prices is worse than Peak Oil with high oil prices. Slowing economic growth leads to commodity prices that can never rebound by very much, or for very long. Thus, this economic malaise leads to a fairly fast cutback in commodity production. It can also lead to massive debt defaults.

  Let’s look at some of the pieces of our current predicament.

  Part 1. Getting oil prices to rise again to a high level, and stay there, is likely to be difficult. High oil prices tend to lead to economic contraction.  

  Figure 2 shows an illustration I made over five years ago:

  

  Figure 2. Chart made by author in Feb. 2010, for an article called Peak Oil: Looking for the Wrong Symptoms.

  Clearly Figure 2 exaggerates some aspects of an oil price change, but it makes an important point. If oil prices rise–even if it is after prices have fallen from a higher level–there is likely to be an adverse impact on our pocketbooks. Our wages (represented by the size of the circles) don’t increase. Fixed expenses, including mortgages and other debt payments, don’t change either. The expenses that do increase in price are oil products, such as gasoline and diesel, and food, since oil is used to create and transport food. When the cost of food and gasoline rises, discretionary spending (in other words, “everything else”) shrinks.

  When discretionary spending gets squeezed, layoffs are likely. Waitresses at restaurants may get laid off; workers in the home building and auto manufacturing industries may find their jobs eliminated. Some workers who get laid off from their jobs may default on their loans causing problems for banks as well. We start the cycle of recession and falling oil prices that we should be familiar with, after the crash in oil prices in 2008.

  So instead of getting oil prices to rise permanently, at most we get a zigzag effect. Oil prices rise for a while, become hard to maintain, and then fall back again, as recessionary influences tend to reduce the demand for oil and bring the price of oil back down again.

  Part 2. The world economy has been held together by increasing debt at ever-lower interest rates for many years. We are reaching limits on this process.

  Back in the second half of 2008, oil prices dropped sharply. A number of steps were taken to get the world economy working better again. The US began Quantitative Easing (QE) in late 2008. This helped reduce longer-term interest rates, allowing consumers to better afford homes and cars. Since building cars and homes requires oil (and cars require oil to operate as well), their greater sales could stimulate the economy, and thus help raise demand for oil and other commodities.

  

  Figure 3. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

  Following the 2008 crash, there were other stimulus efforts as well. China, in particular, ramped up its debt after 2008, as did many governments around the world. This additional governmental debt led to increased spending on roads and homes. This spending thus added to the demand for oil and helped bring the price of oil back up.

  These stimulus effects gradually brought prices up to the $120 per barrel level in 2011. After this, stimulus efforts gradually tapered. Oil prices gradually slid down between 2011 and 2014, as the push for ever-higher debt levels faded. When the US discontinued its QE and China started scaling back on the amount of debt it added in 2014, oil prices began a severe drop, not too different from the way they dropped in 2008.

  I reported earlier that the July 2008 crash corresponded with a reduction in debt levels. Both US credit card debt (Fig. 4) and mortgage debt (Fig. 5) decreased at precisely the time of the 2008 price crash.

  

  Figure 4. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data from the Federal Reserve.

  

  Figure 5. US Mortgage Debt Outstanding, based on the Federal Reserve Z1 Report.

  At this point, interest rates are at record low levels; they are even negative in some parts of Europe. Interest rates have been falling since 1981.

  

  Figure 6. Chart prepared by the St. Louis Fed using data through July 20, 2015.

  I showed in a recent post (How our energy problem leads to a debt collapse problem) that when the cost of oil production is over $20 per barrel, we need ever-higher debt ratios to GDP to produce economic growth. This need for ever-rising debt contributes to our inability to keep commodity prices high enough to satisfy the needs of commodity producers.

  Part 3. We are reaching a demographic bottleneck with the “baby boomers” retiring. This demographic bottleneck causes an adverse impact on the demand for commodities.

  Demand represents the amount of goods customers can afford. The amount consumers can afford doesn’t necessarily rise endlessly. One of the problems leading to falling demand is falling inflation-adjusted median wages. I have written about this issue previously in How Economic Growth Fails.

  

  Figure 7. Median Inflation-Adjusted Family Income, in chart prepared by the Federal Reserve of St. Louis.

  Another part of the problem of falling demand is a falling number of working-age individuals–something I approximate by using estimates of the population aged 20 to 64. Figure 8 shows how the population of these working-age individuals has been changing for the United States, Europe, and Japan.

  

  Figure 8. Annual percentage growth in population aged 20 – 64, based on UN 2015 population estimates.

  Figure 8 indicates that Japan’s working age population started shrinking in 1998 and now is shrinking by more than 1.0% per year. Europe’s working age population started shrinking in 2012. The United States’ working age population hasn’t started shrinking, but its rate of growth started slowing in 1999. This slowdown in growth rate is likely part of the reason that labor force participation rates have been falling in the United States since about 1999.

  

  Figure 9. US Labor force participation rate. Chart prepared by the Federal Reserve of St. Louis.

  When there are fewer workers, the economy has a tendency to shrink. Tax levels to pay for retirees are likely to start increasing. As the ratio of retirees rises, those still working find it increasingly difficult to afford new homes and cars. In fact, if the population of workers aged 20 to 64 is shrinking, there is little need to add new homes for this group; all that is needed is repairs for existing homes. Many retirees aged 65 and over would like their own homes, but providing separate living quarters for this population becomes increasingly unaffordable, as the elderly population becomes greater and greater, relative to the working age population.

  Figure 10 shows that the population aged 65 and over already equals 47% of Japan’s working age population. (This fact no doubt explains some of Japan’s recent financial difficulties.) The ratios of the elderly to the working age population are lower for Europe and the United States, but are trending higher. This may be a reason why Germany has been open to adding new immigrants to its population.

  

  Figure 10. Ratio of elderly (age 65+) to working age population (aged 20 to 64) based on UN 2015 population estimates.

  For the Most Developed Regions in total (which includes US, Europe, and Japan), the UN projects that those aged 65 and over will equal 50% of those aged 20 to 64 by 2050. China is expected to have a similar percentage of elderly, relative to working age (51%), by 2050. With such a large elderly population, every two people aged 20 to 64 (not all of whom may be working) need to be supporting one person over 65, in addition to the children whom they are supporting.

  Demand for commodities comes from workers having income to purchase goods that are made using commodities–things like roads, new houses, new schools, and new factories. Economies that are trying to care for an increasingly large percentage of elderly citizens don’t need a lot of new houses, roads and factories. This lower demand is part of what tends to hold commodity prices down, including oil prices.

  Part 4. World oil demand, and in fact, energy demand in general, is now slowing.

  If we calculate energy demand based on changes in world consumption, we see a definite pattern of slowing growth (Fig.11). I commented on this slowing growth in my recent post, BP Data Suggests We Are Reaching Peak Energy Demand.

  

  Figure 11. Annual percent change in world oil and energy consumption, based on BP Statistical Review of World Energy 2015 data.

  The pattern we are seeing is the one to be expected if the world is entering another recession. Economists may miss this point if they are focused primarily on the GDP indications of the United States.

  World economic growth rates are not easily measured. China’s economic growth seems to be slowing now, but this change does not seem to be fully reflected in its recently reported GDP. Rapidly changing financial exchange rates also make the true world economic growth rate harder to discern. Countries whose currencies have dropped relative to the dollar are now less able to buy our goods and services, and are less able to repay dollar denominated debts.

  Part 5. The low price problem is now affecting many commodities besides oil. The widespread nature of the problem suggests that the issue is a demand (affordability) problem–something that is hard to fix.

  Many people focus only on oil, believing that it is in some way different from other commodities. Unfortunately, nearly all commodities are showing falling prices:

  

  Figure 12. Monthly commodity price index from Commodity Markets Outlook, July 2015. Used under Creative Commons license.

  Energy prices stayed high longer than other prices, perhaps because they were in some sense more essential. But now, they have fallen as much as other prices. The fact that commodities tend to move together tends to hold over the longer term, suggesting that demand (driven by growth in debt, working age population, and other factors) underlies many commodity price trends simultaneously.

  

  Figure 13. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank “Pink Sheet” data.

  The pattern of many commodities moving together is what we would expect if there were a demand problem leading to low prices. This demand problem would likely reflect several issues:

  • The world economy cannot tolerate high priced energy because of the problem shown in Figure 2. We have increasingly used cheaper debt and larger quantities of debt to cover this basic problem, but are running out of fixes.
  • The cost of producing energy products keeps trending upward, because we extracted the cheap-to-produce oil (and coal and natural gas) first. We have no alternative but to use more expensive-to-produce energy products.
  • Many costs other than energy costs have been trending upward in inflation-adjusted terms, as well. These include fresh water costs, the cost of metal extraction, the cost of mitigating pollution, and the cost of advanced education. All of these tend to squeeze discretionary income in a pattern similar to the problem indicated in Figure 2. Thus, they tend to add to recessionary influences.
  • We are now reaching a working population bottleneck as well, as described in Part 4.

  Part 6. Oil prices seem to need to be under $60 barrel, and perhaps under $40 barrel, to encourage demand growth in US, Europe, and Japan. 

  If we look at the historical impact of oil prices on consumption for the US, Europe, and Japan combined, we find that whenever oil prices are above $60 per barrel in inflation-adjusted prices, consumption tends to fall. Consumption tends to be flat in the $40 to $60 per barrel range. It is only when prices are in the under $40 per barrel range that consumption has generally risen.

  

  Figure 14. Historical consumption vs. price for the United States, Japan, and Europe. Based on a combination of EIA and BP data.

  There is virtually no oil that can be produced in the under $40 barrel range–or even in the under $60 barrel a range, if tax needs of governments are included. Thus, we end up with non-overlapping ranges:

  1. The amount that consumers in advanced economies can afford.
  2. The amount the producers, with their current high-cost structure, actually need.

  One issue, with lower oil prices, is, “What kinds of uses do the lower oil prices encourage?” Clearly, no one will build a new factory using oil, unless the price of oil is expected to be sufficiently low over the long-term for this use. Thus, adding industry will likely be difficult, even if the price of oil drops for a few years. We also note that the United States seems to have started losing its industrial production in the 1970s (Fig. 15), as its own oil production fell. Apart from the temporarily greater use of oil in shale drilling, the trend toward off-shoring industrial production will likely continue, regardless of the price of oil.

  

  Figure 15. US per capita energy consumption by sector, based on EIA data. Includes all types of energy, including the amount of fossil fuels that would need to be burned to produce electricity.

  If we cannot expect low oil prices to favorably affect the industrial sector, the primary impact of lower oil prices will likely be on the transportation sector. (Little oil is used in the residential and commercial sectors.) Goods shipped by truck will be cheaper to ship. This will make imported goods, which are already cheap (thanks to the rising dollar), cheaper yet. Airlines may be able to add more flights, and this may add some jobs. But more than anything else, lower oil prices will encourage people to drive more miles in personal automobiles and will encourage the use of larger, less fuel-efficient vehicles. These uses are much less beneficial to the economy than adding high-paid industrial jobs.

  Part 7. Saudi Arabia is not in a position to help the world with its low price oil problem, even if it wanted to. 

  Many of the common beliefs about Saudi Arabia’s oil capacity are of doubtful validity. Saudi Arabia claims to have huge oil reserves, but as a practical matter, its growth in oil production has been modest. Its oil exports are actually down relative to its exports in the 1970s, and relative to the 2005-2006 period.

  

  Figure 16. Saudi Arabia’s oil production, consumption, and exports based on BP Statistical Review of World Energy 2015 data.

  Low oil prices are having an adverse impact on the revenues that Saudi Arabia receives for exporting oil. In 2015, Saudi Arabia has so far issued bonds worth $5 billion US$, and plans to issue more to fill the gap in its budget caused by falling oil prices. Saudi Arabia really needs $100+ per barrel oil prices to fund its budget. In fact, nearly all of the other OPEC countries also need $100+ prices to fund their budgets. Saudi Arabia also has a growing population, so it needs rising oil exports just to maintain its 2014 level of exports per capita. Saudi Arabia cannot reduce its exports by 10% to 25% to help the rest of the world. It would lose market share and likely not get it back. Losing market share would permanently leave a “hole” in its budget that could never be refilled.

  Saudi Arabia and a number of the other OPEC countries have published “proven reserve” numbers that are widely believed to be inflated. Even if the reserves represent a reasonable outlook for very long term production, there is no way that Saudi oil production can be ramped up greatly, without a large investment of capital–something that is likely not to be available in a low price environment.

  In the United States, there is an expectation that when estimates are published, the authors will do their best to produce correct amounts. In the real world, there is a lot of exaggeration that takes place. Most of us have heard about the recent Volkswagen emissions scandal and the uncertainty regarding China’s GDP growth rates. Saudi Arabia, on a monthly basis, does not give truthful oil production numbers to OPEC–OPEC regularly publishes “third party estimates” which are considered more reliable. If Saudi Arabia cannot be trusted to give accurate monthly oil production amounts, why should we believe any other unaudited amounts that it provides?

  Part 8. We seem to be at a point where major debt defaults will soon start for oil and other commodities. Once this happens, the resulting layoffs and bank problems will put even more downward pressure on commodity prices.

  Wolf Richter has recently written about huge jumps in interest rates that are being forced on some borrowers. Olin Corp., a manufacture of chlor-alkali products, recently attempted to sell $1.5 billion in eight and ten year bonds with yields of 6.5% and 6.75% respectively. Instead, it ended up selling $1.22 billion of bonds with the same maturities, with yields of 9.75% and 10.0% respectively.

  Richter also mentions existing bonds of energy companies that are trading at big discounts, indicating that buyers have substantial questions regarding whether the bonds will pay off as expected. Chesapeake Energy, the second largest natural gas driller in the US, has 7% notes due in 2023 that are now trading at 67 cent on the dollar. Halcon Resources has 8.875% notes due in 2021 that are trading at 33.5 cents on the dollar. Lynn Energy has 6.5% notes due in 2021 that are trading at 23 cents on the dollar. Clearly, bond investors think that debt defaults are not far away.

  Bloomberg reports:

  The latest round of twice-yearly reevaluations is under way, and almost 80 percent of oil and natural gas producers will see a reduction in the maximum amount they can borrow, according to a survey by Haynes and Boone LLP, a law firm with offices in Houston, New York and other cities. Companies’ credit lines will be cut by an average of 39 percent, the survey showed.

  Debts of mining companies are also being affected with today’s low prices of metals. Thus, we can expect defaults and cutbacks in areas other than oil and gas, too.

  There is a widespread belief that if prices remain low, someone will come along, buy the distressed assets at low prices, and ramp up production as soon as prices rise again. If prices never rise for very long, though, this won’t happen. The bankruptcies that occur will mean the end for that particular resource play. We won’t really be able to get prices back up to where they need to be to extract the resources.

  Thus low prices, with no way to get them back up, and no hope of making a profit on extraction, are likely the way we reach limits in a finite world. Because low demand affects all commodities simultaneously, “Limits to Growth” equates to what might be called “Peak Resources” of all kinds, at approximately the same time.

  

  

  

  

  

• EM Credit Risk Blows Out Dramatically Amid FX Bloodbath, Fed Fears, Political Risk

  In the wake of the global commodities rout which recently saw prices touch their lowest levels of the 21st century, there’s been no shortage of commentary (here or otherwise) on the pain that’s been inflicted on commodity currencies and by extension, on EM. 

  As it stands, the world’s emerging economies face a kind of perfect storm triggered by a combination of the following factors: falling commodity prices, depressed Chinese demand, and the threat of an imminent Fed hike. All of this has contributed to capital outflows, which has in turn led some reserve managers to begin liquidating their store of USD-denominated assets to help offset the bleeding and indeed, it now looks as though Brazil will eventually be forced to capitulate and dip into the reserve cookie jar to help arrest the BRL’s terrifying slide.

  All of this is of course complicated by idiosyncratic political risks.

  Take Malaysia for instance, where the 1MDB scandal threatens the political career of Prime Minister Najib Razak.

  Or Brazil, where President Dilma Rousseff’s abysmal approval rating and a fractious Congress have made implementing desperately needed austerity measures virtually impossible.

  And there is of course Turkey, where Recep Tayyip Erdo?an has effectively plunged his country into civil war in order to preserve AKP’s dominance and pave the way for constitutional amendments that will allow him to consolidate his power.

  The risks facing EM are in fact so acute and closely watched that the threat of accelerating capital outflows effectively forced the Fed to delay liftoff earlier this month. 

  With the situation deteriorating virtually by the day (and if you think we’re being hyperbolic there, just take a look at the news flow from Brazil last week), we thought it an opportune time to highlight the spike in EM credit risk as shown in the following chart:

  

  As you can see, multi-year wides on all accounts other than Russia and that’s only because the spike late last year that accompanied the plunge in crude prices and attendant ruble rout have made for a tough compare.

  So sure, go ahead and hike Janet…

  

  

  

  

  

• Why The Fed Can't Stop The Next Market Crash

  Submitted by Gregg Janke via TaoMacro.com,

  In the last article I wrote I indicated why a stock market crash may be imminent.  The reasons I gave included:

  As early as January 2014 we reached a point of Sornette finite time singularity, indicating the market may have reached a point of instability consistent with bubble market tops.

   

  The fact that market valuations were at an all-time high, second only to the extreme bubble peak of 1999-2000 era; when measured by more comprehensive metrics like market cap to GDP ratios.

   

  Deflationary pressures mount. The overall economic trend has been one of deflation due to the malinvestment of the credit and debt buildup of the past decades.   The velocity of money has been on a continuous decline for a while, and is now at record lows.  It is not just oil that is crashing, but the entire commodity complex has fallen sharply in the last few years.

   

  The Federal Reserve has stopped printing money, which was the impetus for the rise in the market.  It’s a ways off the next phase transition of what its policy regime will need to look like in order to move sentiment back in the other direction. 

  In this piece I would like to expound on the last part of why the Fed will not be able to prevent the next crash.  The recent debate surrounding Fed policy is whether or not they will start to “normalize” rates by beginning with a 25 basis point (0.25%) rate increase in the short term rate.  I contend that this debate is somewhat moot, especially once the market has initialed a waterfall selloff.
   
  When Janet Yellen decided to keep rates unchanged there was an initial jump in the markets, and then another sell off.  Now apparently she is serious about raising rates in December.  All this attention to a mere 25 basis points at best amounts to an additional potential trigger for the timing of the next market crash.  More likely its real value is just more political theater from the Fed, which is really all they are good at.
   
  The market is already over bought, overvalued, has started its decline, and is in an unstable state.  The crash will happen regardless of the endless number of random reasons attributed to it triggers.  The key question is, what will the Fed do when this happens?  Certainly the discussion of the 25 basis points becomes entertainment at that point.

  The Fed has truly run out of easy options.  They are boxed in a set of circumstances of their making.  They operate under the auspices that they are the sole institution with the knowledge and tools to navigate one crisis to the next; when in reality they are the creators of the crisis in the first place, by blowing up one bubble after the next.

  The last two recessions have seen a dramatic diminishing return of the policy tools the Fed has used.  There has been a complete phase transition from one recession to the next.

  This chart shows the difference between the policy responses of the Fed Funds rate (Short term rate) after the Tech Bubble and the 2008 crisis.
   

  

  The 2008 crisis required a much more aggressive change the in the Federal Funds Rate.  It had to be brought down to zero and held there indefinably (Until this December when they raise it…no really)

  This chart shows the difference in the monetary base, reference the Fed’s choice to introduce Quantitative Easing (QE) in response to the 2008 crisis.
   

  

  The Red area indicating the money printing after the 2008 crisis was truly unprecedented in U.S. monetary history.  It marks the end of world reserve currency credit induced expansion we have had for quite some time.  Both policy changes of the rates and especially the blow up of the monetary base represent complete phase transitions of the tools implemented by the Fed.  The increase in the monetary base with QE would have been quite unthinkable just a few years earlier.  The debate of what the appropriate response to the two crises were very different; representative the diminishing return of Fed Policy tools.

  This required exponential level of change in Fed policy is consistent with Austrian style economic theory which lets us understand that increasing levels of debt and money are needed to keep the game going just a little longer.  Unfortunately for the Fed, the gig is up.  While they struggle to find an appropriate time to introduce a 25 basis point increase in the short term rate, there awaits the next exponential transition into what will be required to stabilize the next crisis.  A crisis that will be worse than 2008 because we are that much more in debt, and the Fed has already used up its easy fixes from the last crisis.   

  What will the next transition look like?  If the previous regime of a rate reduction of 500 basis points was insufficient, even NIRP (Negative interest rates) will not work; as we would be talking about an additional few more basis points.  Negative interest rates would also punish savers and those living off fixed income even further.  This would be an awkward and likely unpopular policy to implement.  It also would have a dubious effect on the economy, as we would descend into an even deeper liquidity trap.

  The next policy regime will require even more quantitative easing, and perhaps alternative methods of the channel used for injection.  I would expect a broader spectrum of securities purchases by the Fed to perhaps include coordination of a massive expansion in government fiscal stimulus.  The last crisis resulted in the monetary base going from 800 billion to 4 trillion dollars.  The next round of QE will require a multiple of that.

  This next chart is not a prediction, but is illustrative of of the exponential nature of the next phase transition of Fed monetary policy.  Just as what was ultimately done after the 2008 crisis would have been considered unheard of prior to the crisis, so too will the next policy implementation be drastically beyond the scope of what is currently being considered.  Such is the nature of the exponential and discontinuous events that face us in a world manipulated by the Federal Reserve.

  

  The Fed was late to prevent the popping of the last two bubbles, and it’s already too late to stop the popping of this one.  The Fed is consistently behind on the timing of when to reintroduce stimulus because its only choice to deal with the bubble it’s created is let it crash, or blow it up even bigger which would result in an even harder landing.  While the Fed ponders when the rate hike comes, our question is: When does QE4 start?

  

  

  

  

  

• Crude Tumbles After API Reports Surprisingly Large Inventory Build

  After 2 weeks of solid drawdowns, API reports a huge 4.6 million barrel inventory build last week – the 2nd biggest weekly build in over 5 months. Crude prices are dropping on the news…

   

  

  And as expected crude tumbled…

  

   

  Charts: Bloomberg

  

  

  

  

  

• Carl Icahn Darling Chesapeake Energy Fires 15% Of Its Workforce

  Remember when the commodity and gas plunge was supposed to be an “unambiguously good” tailwind for discretionary US spending, something which we warned over and over would never happen as the Obamacare “mandatory tax” surge pricing for healthcare insurance more than offset and discretionary savings?

  Moments ago another 825 or so soon to be formerly paid workers just found out the hard way just how clueless the vast majority of the punditry was when Chesapeake energy just announced it would terminate 15% of its workforce, or about 825 of its 5,500 most recent employees, as a result of the “current oil and natural gas prices.”

  A longer-term chart of what unambiguously good looks like for US employees:

  

  From the press release:

  On September 29, 2015, Chesapeake Energy Corporation (the “Company”) implemented a workforce reduction initiative as part of an overall plan to reduce costs and better align its workforce with the needs of the business and current oil and natural gas commodity prices. The plan resulted in a reduction of approximately 15 percent of its workforce. In connection with the reduction, the Company estimates it will incur an aggregate of approximately $55.5 million of one-time charges in the 2015 third quarter, including related employer payroll taxes, all of which will be paid in cash during 2015.

  Surely the terminations will free up even more funds for such more important “use of proceeds” as stock buybacks and dividends, and make CHK’s top shareholder, Carl Icahn, even happier. Because it is one thing to release videos “warning” of overvalued markets (yes, we knew that already, thanks), it is another to be a true activist when the time demands it, and urge management to halt buybacks instead of laying off nearly 1000 workers.

  

  

  

  

  

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