Archives for September 2014

RX For Revisionist Bunkum: A Lehman Bailout Wouldn’t Have Saved The Economy

Courtesy of David Stockman via Contra Corner

Here come the revisionists with new malarkey about the 2008 financial crisis. No less august a forum than the New York Times today carries a front page piece by journeyman financial reporter James Stewart suggesting that Lehman Brothers was solvent; could and should have been bailed out; and that the entire trauma of the financial crisis and Great Recession might have been avoided or substantially mitigated:

What happened that September was the culmination of circumstances reaching back years – of ordinary people too eager to borrow, of banks too eager to lend and of Wall Street financial engineers reaping multimillion-dollar bonuses. Even so, saving Lehman from complete collapse might have shielded the economy from what turned out to be a crippling blow.

That is not just meretricious nonsense; its a measure of how thoroughly corrupted public discourse about the fundamental financial and economic realities of the present era has become owing to the cult of central banking. For crying out loud, yes, there would have been a Great Recession – even had Lehman been pawned off to Barclays with a taxpayer guarantee or if it had been bailed-out in some other manner.

In fact, the Barclay’s logo did end up on Lehman’s 7th Avenue glass tower shortly after the September 15th screen shot below. Yet the decision to allow Lehman’s stock and bondholders to take a severe haircut first did not cause the thundering collapse of the housing and credit markets, nor the loss of the artificially bloated level of consumption spending, jobs and income that had accompanied the giant financial bubble that finally burst in September 2008.

The villain is the Greenspan Fed and the rampage of debt and speculation its cheap money and “wealth effects” coddling of Wall Street had engendered over the previous two decades. When Greenspan took office in 1987, total credit market debt outstanding was $10.5 trillion, but by the time of the Lehman event it was nearly $53 trillion. This means that the debt burden on the US economy had soared by 5X during a period when nominal GDP grew by only 2.9X. That’s called leveraging up big time—–and it fueled a party of consumption and speculation like the nation had not experienced since the 1920s, or even then.

Moreover, within the household sector the explosion of debt was even more stunning owing to the Greenspan policies of cheap mortgage rates and the overt encouragement of American families to raid their home ATM machines. As shown below, household debt ballooned from just $2.7 trillion when Greenspan took charge of the Eccles Building in August 1987 to nearly $14 trillion on the eve of the crisis.


And there can be little doubt as to what explains the above mountain of household debt. American households were raiding their home ATM machines – that is, cashing out the equity in their homes – in order to indulge in a massive orgy of consumption spending that they had not earned. In fact, at the peak in 2005-2007, households were extracting cash from their ATMs at nearly a $1 trillion annual rate, ballooning their disposable incomes by upwards of 8%. That is, they were buying flat screen TVs, granite top kitchen counters, restaurant dinners and trips to the mall with money they hadn’t earned, and based on rapidly rising leverage ratios that couldn’t be sustained.

What caused the Great Recession, therefore, was the day of reckoning when the household borrowing mania reached its limit. As shown below, the swing in household spending funded by withdrawals from home ATM machines was massive and violent. At its peak extent between 2006 and 2010 – it amounted to a reversal of nearly $1.4 trillion. Yes, when a gigantic, artificial spending bubble of this magnitude is pricked, the repercussions do cascade through the main street economy taking down sales, jobs and incomes as they go.

Accordingly, the chart below explains the Great Recession, not some revisionist gumming from the bowels of the New York Fed as to how the economy could have been “saved” if only Tiny Tim Geithner had gotten the word on Sunday evening September 14th that Lehman was “solvent” after all. In fact, the name on the glass tower above had nothing to do with the crash of household borrowing at upwards of 30 million home ATMs depicted in the graph below.

Moreover, what caused the recession to be so painful and deep is that the phony prosperity of the Greenspan era could no longer be fueled by pushing households deeper into debt. By the fall of 2008, “peak debt” had been reached in the household sector, and a modest deleveraging was begun owning to upwards of $1 trillion in mortgage defaults. But this wasn’t a recoverable loss of “aggregate demand”  per the Keynesian mantra at the Bernanke Fed. The US economy was drastically squeezed by the Great Recession because artificial mortgage fueled spending was being liquidated all across America, not because punters in Lehman stock and bonds lost their shirts, and deservedly so.

Household Leverage Ratio - Click to enlarge


In short, the Great Recession was about the abrupt end of the great financial party conducted by the Maestro. During his 19 year reign, the nation underwent a collective LBO, raising it leverage ratio from a historically sound and sustainable 1.5X national income to 3.5X on the eve of the Lehman collapse. Those two extra turns of debt amounted to $30 trillion at the time the US economy buckled in 2008; they were a measure of both the folly of the Greenspan/Bernanke spending party that had been financed by the Fed’s cheap money policies, and the enormity of the adjustment that was brought to bear on the US economy when the bubble finally collapsed.


Not surprisingly, upwards of $12 trillion in household wealth was destroyed by the financial crisis and the deep recession which followed. But given the enormous inflation of housing prices and risk asset values which had been driven by the debt bubble, it is ludicrous to suggest that save for not saving Lehman, the housing crash pictured below would not have happened. In fact, between late 1994 and early 2006 home prices in America rose each and every month for about 125 straight months, rising by nearly 140% over the period.


Needless to say, the above wasn’t sustainable and didn’t reflect either the free market at work or greed running rampant in the towns and cities of America. It was the cheap money and Wall Street coddling policies of the Fed which generated the housing binge, and the gambling hall known as Lehman Brothers that had gone along for the ride.

It is therefore especially misfortunate that mainstream journalists like Stewart take up the revisionist line that Lehman was “solvent”, and that a great mistake was made in not throwing it a life line. Well, it just doesn’t fricking matter whether it was “solvent”.  It was self-evidently illiquid because it – like the rest of Wall Street – had funded tens of billions of illiquid, opaque and drastically over-valued long-term assets in the short-term money markets. It was a classic, massive funding mismatch and there is no doubt whatsoever about what caused it, and why it happened.

What caused it, of course, is the fundamental tool of Fed policy – that is, pegging the money market rate (federal funds) and holding it rigidly in place until a well telegraphed decision to change it is announced from the Eccles Building.  Stated differently, Fed policy inherently offers a big fat yield curve arbitrage to Wall Street and a guarantee that it can be taken to the bank day after day.

By contrast, in the pre-Fed era money market rates could move by hundreds of basis points per day, and that most definitely did deter large banks from loading up on illiquid assets and funding their books with hot money. To be sure, there were plenty of punters prior to 1913, but the game was played in the call money market and their were no illusions among the participants.

Broker loans were instantly callable, and were called without hesitation by the street’s bankers when frothy markets took a dive. Needless to say, speculation was held in check by the discipline of the call money market and no one proposed to make a living by generating giant balance sheets with recklessly mismatched funding.

The latter is a disease of the Greenspan/Bernanke/Yellen era of Keynesian central banking and massive manipulation of financial market prices and rates. Its why the balance sheet of Goldman and Morgan had reached $2 trillion with hundreds of billions of hot money funding, and why Lehman’s $800 billion balance sheet was not even remotely liquid. Indeed, the idea that the Wall Street gambling houses were “solvent” but only needed a liquidity injection goes to the very heart of the matter, explains why financial crises have become endemic in the current era and why bailouts have become standard operating procedure.

Central bank apparatchiks like Tim Geithner and journalist fellow travelers like Stewart would have viewed the call market panics of the pre-Fed era as “bank runs” that needed to be stopped at all hazards. By contrast, they were, in fact, a healthy financial therapeutic that kept speculation reasonably in check.

But money market pegging by the central bank, to use Friedman’s phrase, always and everywhere causes bank runs and liquidity crises in the canyons of Wall Street. Tempt the titans of finance with the opportunity to scalp prodigious profits by ballooning their balance sheets with sticky assets that yield more than the pegged cost of hot money, and they will do it every time.

And when a black swan comes calling, the value of all those sticky assets will not be what’s on the books, but what can be salvaged in a plunging market when hot money lenders want their money back….and now.  So of course Lehman was insolvent and massively so. It had funded itself so that its assets were only worth their fire sale price.

The great error of September 2008, therefore, was not in failing to bailout Lehman. It was in providing a $100 billion liquidity hose to Morgan Stanley and an even larger one to Goldman.  They too were insolvent. That was the essence of their business model.

Not surprisingly, Greenspan co-architect in creating this madness was Alan Blinder. As he told Stewart in today’s article,  there was no doubt that the Fed could have saved Lehman and should have:

"Of course the Fed can stop a run,” said Mr. Blinder, the economist. “That’s what it’s all about.”

That’s right. Its policies inherently generate runs, and then it stands ready with limitless free money to rescue the gamblers.  You can call that pragmatism, if you like. But don’t call it capitalism.

Draghi Pressures ECB to Buy “Junk-Rated” Loan Bundles of Greece and Cyprus

Courtesy of Mish.

On September 4, ECB President pulled out a financial bazooka including a pledge to build up the ECB’s balance sheet by another €1 trillion.

Draghi confirmed the asset purchases would “include the real estate, the RMBS, real estate ABS. It would also include a fairly wide range of ABS containing loans to the real economy,” but only “the senior tranches, and the mezzanine tranches only if there is a guarantee.

Now, just three weeks later, he wants to buy outright junk, presumably without guarantees.

Please consider Mario Draghi pushes for ECB to accept Greek and Cypriot ‘junk’ loan bundles.

Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank.

The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter.

However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the eurozone’s largest economy.

Bundesbank president Jens Weidmann, who also sits on the ECB’s policy making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks.

Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would heighten concerns about potential conflicts of interest between the ECB’s role as monetary policy maker and bank supervisor.

While the safer slices – or senior tranches – of Greek and Cypriot ABS only make up a tiny proportion of Europe’s securitisation market, it would free up billions in liquidity for banks in two of the eurozone’s weakest economies, and potentially boost lending to credit-starved smaller businesses in the currency area’s periphery.

Free Up Liquidity?

The idea that swapping money for junk will free up liquidity is as ridiculous as moving a rotting fish from your pantry to the living room in hopes the stench will go away.

In this case, the stench on Greek bank balance sheets will not go away. Instead, stench will also appear on the balance sheet of the ECB….

Continue Here

The U.S. Government Is Borrowing About 8 Trillion Dollars A Year

Courtesy of Michael Snyder of The Economic Collapse

The U.S. government is borrowing about 8 trillion dollars a year, and you are about to see the hard numbers that prove this.  When discussing the national debt, most people tend to only focus on the amount that it increases each 12 months.  And as I wrote about recently, the U.S. national debt has increased by more than a trillion dollars in fiscal year 2014.  But that does not count the huge amounts of U.S. Treasury securities that the federal government must redeem each year.  When these debt instruments hit their maturity date, the U.S. government must pay them off.  This is done by borrowing more money to pay off the previous debts.  In fiscal year 2013, redemptions of U.S. Treasury securities totaled $7,546,726,000,000 and new debt totaling $8,323,949,000,000 was issued.  The final numbers for fiscal year 2014 are likely to be significantly higher than that.

So why does so much government debt come due each year?

Well, in recent years government officials figured out that they could save a lot of money on interest payments by borrowing over shorter time frames.  For example, it costs the government far more to borrow money for 10 years than it does for 1 year.  So a strategy was hatched to borrow money for very short periods of time and to keep "rolling it over" again and again and again.

This strategy has indeed saved the federal government hundreds of billions of dollars in interest payments, but it has also created a situation where the federal government must borrow about 8 trillion dollars a year just to keep up with the game.

So what happens when the rest of the world decides that it does not want to loan us 8 trillion dollars a year at ultra-low interest rates?

Well, the game will be over and we will be in a massive amount of trouble.

I am about to share with you some numbers that were originally reported by CNS News.  As you can see, far more debt is being redeemed and issued today than back during the middle part of the last decade…


Redeemed: $7,546,726,000,000

Issued: $8,323,949,000,000

Increase: $777,223,000,000


Redeemed: $6,804,956,000,000

Issued: $7,924,651,000,000

Increase: $1,119,695,000,000


Redeemed: $7,026,617,000,000

Issued: $8,078,266,000,000

Increase: $1,051,649,000,000


Redeemed: $7,206,965,000,000

Issued: $8,649,171,000,000

Increase: $1,442,206,000,000


Redeemed: $7,306,512,000,000

Issued: $9,027,399,000,000

Increase: $1,720,887,000,000


Redeemed: $4,898,607,000,000

Issued: $5,580,644,000,000

Increase: $682,037,000,000


Redeemed: $4,402,395,000,000

Issued: $4,532,698,000,000

Increase: $130,303,000,000


Redeemed: $4,297,869,000,000

Issued: $4,459,341,000,000

Increase: $161,472,000,000

The only way that this game can continue is if the U.S. government can continue to borrow gigantic piles of money at ridiculously low interest rates.

And our current standard of living greatly depends on the continuation of this game.

If something comes along and rattles this Ponzi scheme, life in America could change radically almost overnight.

In the United States today, we have a heavily socialized system that hands out checks to nearly half the population.  In fact, 49 percent of all Americans live in a home that gets direct monetary benefits from the federal government each month according to the U.S. Census Bureau.  And it is hard to believe, but Americans received more than 2 trillion dollars in benefits from the federal government last year alone.  At this point, the primary function of the federal government is taking money from some people and giving it to others.  In fact, more than 70 percent of all federal spending goes to "dependence-creating programs", and the government runs approximately 80 different "means-tested welfare programs" right now.  But the big problem is that the government is giving out far more money than it is taking in, so it has to borrow the difference.  As long as we can continue to borrow at super low interest rates, the status quo can continue.

But a Ponzi scheme like this can only last for so long.

It has been said that when the checks stop coming in, chaos will begin in the streets of America.

The looting that took place when a technical glitch caused the EBT system to go down for a short time in some areas last year and the rioting in the streets of Ferguson, Missouri this year were both small previews of what we will see in the future.

And there is no way that we will be able to "grow" our way out of this problem.

As the Baby Boomers continue to retire, the amount of money that the federal government is handing out each year is projected to absolutely skyrocket.  Just consider the following numbers…

-Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, more than 70 million Americans are on Medicaid, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

-When Medicare was first established, we were told that it would cost about $12 billion a year by the time 1990 rolled around.  Instead, the federal government ended up spending $110 billion on the program in 1990, and the federal government spent approximately $600 billion on the program in 2013.

-It is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025.

-At this point, Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years.  That comes to approximately $328,404 for every single household in the United States.

-In 1945, there were 42 workers for every retiree receiving Social Security benefits.  Today, that number has fallen to 2.5 workers, and if you eliminate all government workers, that leaves only 1.6 private sector workers for every retiree receiving Social Security benefits.

-Right now, there are approximately 63 million Americans collecting Social Security benefits.  By 2035, that number is projected to soar to an astounding 91 million.

-Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years.

-The U.S. government is facing a total of 222 trillion dollars in unfunded liabilities during the years ahead.  Social Security and Medicare make up the bulk of that.

Yes, things seem somewhat stable for the moment in America today.

But the same thing could have been said about 2007.  The stock market was soaring, the economy seemed like it was rolling right along and people were generally optimistic about the future.

Then the financial crisis of 2008 erupted and it seemed like the world was going to end.

Well, the truth is that another great crisis is rapidly approaching, and we are in far worse shape financially than we were back in 2008.

Don't get blindsided by what is ahead.  Evidence of the coming catastrophe is all around you.

Yeah I said it.

Yeah I said it.

Courtesy of 


Yes, this is basically what the “rally” has come to. Change is due in one direction or the other, the present condition is unsustainable.


Debt Rattle Sep 30 2014: Why The Fed WILL Raise Rates

Courtesy of The Automatic Earth.

Herbert Mayer Honi soit qui mal y pense: Aug 1939

This is not the first time I’ve written on this topic, but I want to do it again, because rate hikes, when they come, will have a tremendous effect on everybody’s loves and economies, wherever you live. And because I think there’s still far too much complacency out there, far too much ‘conviction’ that higher rates will come only after a comfortable period of time, and even then only gradually.

There are three steps in the Fed’s ‘policies’. There’s QE, which will end in October. There’s ultra low interest rates, which have so far been maintained. And then there’s the dollar, whose rate many people still think is determined by the ‘markets’, even if the Fed is in effect the ‘markets’. When the Fed buys, or makes third parties buy, bonds and stocks (and we know it has), it’s not going to let the dollar roam free. That makes no sense.

Which means the rising dollar (about 10% vs the euro in mere weeks) is due to Fed actions. The Fed manipulates what it can. It’s the motivation behind its actions that catches people on the wrong foot. Most continue to have this idea that Janet Yellen, and Ben Bernanke before her, seek and sought their alleged dual mandate of full employment and price stability. Ironically, those are two things they have zero control over.

What they do instead, what motivates their actions, is seek to maximize Wall Street bank profits, and, in the same vein and same breath, hide these banks’ losses. Once you realize and acknowledge that, policies over the past 8 years – and before, cue Greenspan – make a lot more sense then when you try to see them through that alleged dual mandate view.

QE is all but done. This alone already has started a capital flight move away from emerging markets. Many of whom will soon look a whole lot less emerging because of it. The capital will continue to flow back to the global financial center from the periphery, leaving dozens of countries and companies scrambling to find dollars to pay off the loans that looked so cheap.

The rising dollar will only make that worse. And moreover, it will catch many other countries, for instance southern European ones, in the same dragnet the emerging economies were already in. If and when your currency loses 10%+ against the currency more commodities and debts are denominated in, and you have such debts and need such commodities, you stand to lose, in all likelihood, a lot.

That leaves interest rates. Given the recent Fed actions on QE and the dollar, why would it NOT raise rates? The dual mandate? To affect price stability in the US? With the dollar moving the way it has, that’s gone anyway. To help Americans get jobs? The only reason US jobless numbers are not much higher is A) millions left the job market altogether and B) millions who were once account managers are now burger flippers, WalMart greeters and self-employed.

The definitions were changed as we went along, that’s why, at least officially, unemployment is not at 15% or 20%. And that is al part of the same opaque truth, that nothing the Fed did since 2008 has mattered one bit when it comes to jobs for Americans. All it has effectively achieved is that trillions of dollars in Main Street money and future obligations were shifted to Wall Street.

The objectives of the Fed’s dual mandate have turned out to be a total joke when the chips came down. Not surprising, because they were always a joke to begin with. A central bank should not be involved in job creation, and it should not hand trillions of dollars to the banks that are its owners, to ostensibly keep prices stable in the real economy, where none of those trillions end up. It’s all just a joke, albeit a very costly one.

QE was never meant to benefit Main Street. Neither was the suppression of the dollar. Why then would the Federal Reserve NOT hike rates only to protect the real American economy? Nothing it has done so far has been aimed at that goal, so why start now? There’s no logic there.

The Fed will continue to do what it’s done all these years: enact those policies that promise to bring the greatest profits to the banks that own it. And right now, those profits are not in more bond buying, and not in artificially low rates, and not in an artificially low dollar. Simply because that’s what everybody else is betting on, and the money when that happens is on the opposite side of the bet.

I cited this piece by Philip Van Doorn at MarketWatch 5 weeks ago, and it’s as relevant now as it was then:

Big US Banks Prepare To Make Even More Money

[..] … the debate at the Federal Reserve has now shifted to the timing of interest rate increases. Most economists expect the federal funds rate to begin climbing in the second half of 2015, but it could well happen sooner than that. For most banks, the extended period of low interest rates has become quite a drag on earnings. Net interest margins – the spread between the average yield on loans and investments and the average cost for deposits and borrowings – are still being squeezed, since banks realized the bulk of the benefit of very low interest rates years ago

Once you you’ve metastasized that, and the truth about the dual mandate thing, and you’ve read the ‘Secret Goldman Tapes’ stories earlier this week, which showed in a blinding fashion how Goldman Sachs controls the Fed, not the other way around, then maybe your idea about those ‘soft slow’ rate hikes are due for a review as well.

Just look at what Dallas Fed head Richard Fisher had to say over the weekend:

Fisher Says Fed Must Weigh Wage Pressures in Setting Rate Policy

“I don’t want to fall behind the curve here,” Fisher said in a Fox News interview. “I think we could suddenly get a patch of high growth, see some wage-price inflation, and that is when you start to worry.” Fisher dissented on Sept. 17 at the last meeting of the Federal Open Market Committee, when the Fed retained a pledge to keep rates near zero for a “considerable time” after its asset purchases halt at the end of next month.

He called U.S. second-quarter growth “uber strong,” referring to the upward revision last week to an annualized rate of 4.6% from 4.2% previously estimated, and said history had shown that wage pressures could accelerate when unemployment got below current levels of 6.1%. In addition, Fisher said surveys of wage-price pressures in the Dallas Fed’s district, which includes Texas, northern Louisiana and southern New Mexico, were the highest since before the recession, and other indictors were also buoyant. “We’re going to be releasing some data on Monday and Tuesday, our new surveys, that I think will just knock your socks off,” he said.

I’d say Fisher is uber happy, and those data did come in as he predicted – though I think everyone wearing socks still has them on. Fisher wants that rate hike now, not next summer or fall. And he has a voice, even if he himself and fellow hawk Philly Fed head Charles Plosser are poised to step down some 6 months from now. I’m reading ‘experts’ who claim that will relieve the pressure on Yellen and her doves, but it’s the other way around: they’re going to make sure their – departing – voices will be heard one last time.

But of course down the line that’s all theater. The rate hike is a foregone conclusion. As is the mayhem it will give birth to. Prepare yourselves accordingly. And from now on always keep in the back of your mind what the Fed really is. It is not your friend. Unless you too own a piece.

Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named

Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named

The Continent is now teetering on the edge of a "Japan-style" deflation. Here's our take on it.

By Elliott Wave International

It's happened. The one economic comparison Europe has dreaded more than any other; the name that's akin to Lord Voldemort for investors has been uttered: "deflation."

And it's not just "deflation." You can still spin that term in a positive light if you get creative enough. Say, for example,

"Falling prices during deflation actually encourage consumers to spend."

But once you add the following two very distinct words, there's no way to turn that frown upside down. And those words are"Japan-style" deflation.

"Japan has languished in a deflationary cycle pretty much since the late 1990s, its once booming economy reduced to 'lost decades' of stagnation. Europe is now teetering on the edge." (Sept. 19, Associated Press)

Which begs an obvious question: Weren't Europe's central banks supposed to prevent this very scenario from happening via their unprecedented, 4-year-long campaign of "money-printing," bond-buying and interest-rate-slashing?

The answer to that question is… yes. Those actions were indeed supposed to boost inflation.

What's more, no one can say the European Central Bank didn't utilize every available tool in their arsenal to try and accomplish that end. The problem is they were fighting a losing battle.

And, we are both happy and sad at the same time to report that from the very beginning, when the first rate cut was loaded into the save-the-economy cannon, we at Elliott Wave International foresaw that Europe's retreat toward deflation was unavoidable.

Here's a quick recap of what led us to that conclusion.

— 2011 —

January 2011: The "D" word is way off the mainstream radar. Soaring oil, grain, and commodity prices has fueled widespread fears of runaway inflation. Writes one January 22, 2011 LA Times article:

"Around the world, many countries aren't confronted with the debilitating forces of deflation, but the opposite — inflation. Annualized inflation in the euro zone rose above the 2% target rate for the first time in more than 2 years."

February 2011: The European Central Bank unveils its brand-new Long Term Refinancing Operations (LTRO), extending nearly half a trillion euros in 3-year loans to banks at negligible interest rates — to stimulate the economy (and inflation).

July 2011: U.K.'s consumer price index declines, prompting a sigh of relief, not a shudder of fear from the Bank of England, who says "we can now breathe a little easier."


Our August 2011 European Financial Forecast:

"We maintain our stance, however, that the looming threat is not inflation but deflation. Far from a sense of relief, the Banks' paramount feelings should soon develop into an unrelenting dread."

September 2011: U.K.'s consumer price index peaks at 5.2% and officially sets the downtrend in motion.

— 2012 —

January 2012: The Bank of England adds another 50 billion pounds to its asset purchase program, bringing its 3-year campaign of "money-printing" to 325 billion. The European Central Bank is less than 14 years old, yet total assets at the ECB breach 3 trillion.

February/March 2012: U.K. producer price inflation comes in higher than expected, prompting one U.K. economist to say: "PPI: Another wake-up call for apoplithorismosphobes," the clinical term for those who fear deflation. The economist goes on to recommend that sufferers "seek therapy." (March 12 Wall Street Journal)


Our July 2012 European Financial Forecast:

"Our models say that inflation rates will keep failing until they're again measuring the rate of deflation as they last did briefly in 2009."

August 2012 European Financial Forecast makes the first comparison of Europe to Japan:

"European leaders," by slashing rates and printing money "seem determined to replicate Japan's experience. Their efforts will not stop consumer price deflation."

— 2014 —

May 2014 European Financial Forecast:

"The chart shows that British CPI accelerated lower after falling from a counter-trend peak of 5.2% back in September 2011, with year-over-year price growth just ticks above its late-2009 low.

"More than half of the 28 EU nations either teeter on the brink of deflation or have succumbed to falling prices already.

"The following chart shows that economic stagnation has reached even Germany, Europe's most robust economy."

September 2014 European Financial Forecast:

"In a related phenomenon, the press has now jumped on the slew of similarities between Europe's flagging economy and Japan's… Clearly, the parallel paths of the two regions have become impossible for the press to ignore.

"The central bank's latest deflation-fighting contrivance is a €400 billion package of targeted LTRO loans, which are designed to compel banks to lend to ordinary business owners. Also like Japan, the ECB has slashed its main refinancing rate to 0.15% and now charges for banks' overnight deposits. The result? Shown below, Europe's largest economy, Germany, just contracted 0.2%; French economic output has ground to a halt; and Italy just entered its third recession since 2008.

The world has finally woken up to the possibility of a Japan-style deflation in Europe — years after the writing was already on the wall.

Now, our newest European Financial Forecast provides you with objective, ahead-of-the-turn analysis of what's to come.

The best part is, Elliott Wave International's Investor Open House is still underway.

Get instant free access to the complete latest European Financial Forecast, with its critical insights into the next wave of sea changes in store for the economies across the pond. Don't miss out on this opportunity to read EWI's premier subscriber reports FREE >>

This article was syndicated by Elliott Wave International and was originally published under the headline Europe: The ONE Economic Comparison That Must Not Be Named… Was Just Named

“Come Hell or High Water” Promise Morphs Into “Infinity and Beyond”

Courtesy of Mish.

In 2010, vice-president Joe Biden publicly vowed the US would be “totally out” of Afghanistan “come hell or high water, by 2014.”

In a few short months, 2014 will be gone. Are US troops out of Afghanistan? Nope. Iraq? Nope. Instead, we have troops in Syria.

Political Promises

Political promises should never be believed.

Today the US signed an extension allowing US forces to remain in Afghanistan until “at least” 2024.

At Least Until 2024

The Guardian reports a new Afghanistan pact means America’s Longest War Will Last Until at Least 2024.

The longest war in American history will last at least another decade, according to the terms of a garrisoning deal for US forces signed by the new Afghanistan government on Tuesday.

Long awaited and much desired by an anxious US military, the deal guarantees that US and Nato troops will not have to withdraw by year’s end, and permits their stay “until the end of 2024 and beyond.”

The entry into force of the deal ensures that Barack Obama, elected president in 2008 on a wave of anti-war sentiment, will pass off both the Afghanistan war and his new war in Iraq and Syria to his successor. In 2010, his vice-president, Joe Biden, publicly vowed the US would be “totally out” of Afghanistan “come hell or high water, by 2014.”

Under the Bilateral Security Agreement’s annexes, the US military will have access to nine major land and airbases, to include the massive airfields at Bagram, Jalalabad and Kandahar, staging areas not only for air operations in Afghanistan but the US drone strikes that continue across the border in tribal Pakistan.

The additional bases – in Kabul, Mazar-i-Sharif, Herat, Helmand, Gardez and Shindand – ensure the reach of the US military throughout Afghanistan….

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You can’t even spell “capitulation”

You can’t even spell “capitulation”

Courtesy of 

People are starting to freak out a little.

A massive amount of individual stocks have dropped more than 20 percent from their 52-week highs this fall and this is beginning to dawn on folks. The bullshittiness of the S&P 500’s year-to-date gain – driven by an ever-dwindling handful of gigantic darling stocks – is starting to lose relevance. The lack of participation by a growing number of stocks and sectors is all people want to talk about this week, despite the fact that the long-term trend for large caps is still intact.

For one glaring example of this, let’s look at the rate of descent for the NYSE advancers vs decliners (large pane) and compare it with the price action in the S&P 500 index (top pane). As you can see, the cumulative total of net advancers on the NYSE is dropping rapidly while the S&P 500’s price barely budges. We’re within a few points from record high prices, but each day fewer stocks are playing along.


This can resolve itself to the upside, of course, it certainly did in February and August. But the longer this divergence persists, the more anxious people get – and with good reason.

But it’s not quite panic. It’s just concern, for now.

It’s important to look at what real panic looks like as a reminder. It just so happens that today is the six-year anniversary of one of the most panicky days of all time. On September 29th, 2008, the Dow Jones Industrial Average recorded its largest one-day point loss of all time.

Let’s take a trip back via the magic of my Googling skills…


Screen Shot 2014-09-29 at 5.39.58 PM


New York Times:

Screen Shot 2014-09-29 at 5.42.06 PM



Screen Shot 2014-09-29 at 5.42.51 PM

If you’re new to the market or haven’t been around through a period like the one chronicled above, you don’t get to use the word “panic” and you damn well don’t get to throw around the term “capitulation”, which I actually heard someone on the air say today. Dude, you can’t even spell “capitulation.”

The recent deterioration we’ve seen in market internals absolutely has investors a bit on edge. But let’s keep it in perspective.

Reader Question on a Credit-Based Society: Can Interest Ever Be Repaid?

Courtesy of Mish.

Reader Mike wonders how interest can ever be repaid in a credit-based economy.

Hi Mish,

I wonder if you would be able to comment on this from Bill Gross in For Wonks Only:

"A credit-based financial economy (as opposed to pure cash) depends on an ever-expanding outstanding level of credit for its survival. Without additional credit, interest on previously issued liabilities cannot be paid absent the sale of existing assets, which in turn would lead to a vicious cycle of debt deflation, recession and ultimately depression.

Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding interest."

This seems to correlate to reality 100% but the implications are stunning. It means that assets must increase in value at the rate of the original loan plus all interest payments ever made. It also means there will be a very major reversal at some point as there will be a moment when the last loan that someone will actually pay gets written and the system will not be able to expand. I always assumed that debt levels would just reach a very high plateau and stay there but Gross is saying that is not possible.

If the system we have requires the interest to be created every year (in the form of new loans) to survive that seems like the very definition of a ponzi scheme.

Do you know the mechanical reason why the interest payments need to be created by issuing new debt? It is possible, of course, that you disagree with Bill Gross but he probably knows more about how debt works than any man alive so my assumption is that you agree with his viewpoint.

I'm sure you get endless requests for articles but this is such a fundamental question I would be extremely grateful (as I'm sure would many other people) if you are able to write a reply as an article.


Exponential Math

We are in this mess precisely because of fractional reserve lending and never-ending policy of inflation by central banks that do not seem to understand the long-term ramifications of exponential math.

I have covered the exponential math aspect before. For details, please see Money as Communication: A Purposely "Non-Educational" Fallacious Video by the Atlanta Fed….

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Is the Stock Market Top In?

Courtesy of Charles Hugh-Smith of OfTwoMinds 

The pool of greater fools willing and able to buy assets at higher prices with leveraged free money has been drained by six years of credit/risk expansion.

[Picture from WikiImages at Pixabay ~ Ilene]

Is the top in U.S. stocks in? The consensus is "no"–corporate profits are rising, the U.S. economy is recovering and has reached "escape velocity," i.e. it can continue expanding even as the Federal Reserve ends its monetary stimulus (QE) and plans the first increase in interest rates since the zero-interest rate policy (ZIRP) was launched in response to the Global Financial Meltdown.

Many observers have noted that global capital flows (from the risky periphery to the less-risky core) favor U.S. stocks and bonds–another reason to see the 5.5-year rally continue to new highs.
The case for the top being in rests on three pillars: extremes in monetary manipulation (oops, I mean policy), sentiment, leverage and liquidity, the rise of the U.S. dollar and the diminishing returns on monetary stimulus and the repression of interest rates.
A number of chart-oriented sites have made the technical case that extremes in sentiment, valuation and leverage will unwind as gravity reasserts itself. Various cyclical analyses also suggest that the current Bull rally is getting long in tooth and due for a reversal.
For an abundance of charts that call into question the consensus narrative of "onward and upward forever," please click through the excellent websites of John Hampson and Lance Roberts.
While conventional pundits are falling over themselves in their haste to issue soothing claims that a stronger dollar is good for corporate profits and the stock market, these feel-good analyses ignore the one key dynamic of a stronger dollar: profits earned in other currencies will convert to fewer dollars as the dollar strengthens. I have covered this dynamic for many years.
This means corporate profits earned overseas will decline as soon as the effects of the stronger dollar filter through to profit statements–that is, by next quarter. Given that up to 50% of global corporate profits are earned overseas, this is not a trivial dynamic.
The fact that the global economy is stumbling into recession is also ignored by those who see corporate profits rising forever. With roughly half of profits of global companies coming from overseas markets, how can a global recession not impact U.S. corporate profits?
If the stock market is indeed a discounting mechanism that prices in developments six months' out, then the hit to profits from the stronger dollar and flagging overseas sales should impact stock prices today, not in three months.
The most interesting case for the top being in is diminishing returns:
Total credit and GDP: rapidly increasing credit has a diminishing return as measured by GDP growth.
The Fed's balance sheet and the S&P 500:
Money velocity: diminishing returns:
Small biz: fading at the margins:
Federal student loans: soaring costs, diminishing returns on the degrees being bought:
The return on a college degree? Diminishing faster than you can say "default":
Labor participation and real median income: diminishing returns on all the outlandish money pumping and Federal deficit spending:
The "easy fixes"–unleashing a tsunami of cheap credit, dropping interest rates to near-zero–only work when creditworthy borrowers have productive uses for the new credit. If the cheap credit is used by marginal borrowers for speculation, the returns on those fixes are highly vulnerable to collapse once asset bubbles and risk-on carry trades pop.
Extending credit to marginal borrowers does not magically transform the borrowers' creditworthiness. All monetary easing and other stimulus does is expand the risk of a credit collapse by expanding the debt extended to risky borrowers. Marginal borrowers will still default as soon as making debt payments becomes painful/impossible; if you want evidence for this, consider how many subprime borrowers defaulted after getting lower rates on their mortgages.
Lowering interest rates does not magically make marginal borrowers creditworthy, or magically make speculative bets productive. In these two important ways, the "fixes" cannot fix what's broken. What they have done is enable more of what has failed spectacularly: extend credit and leverage to speculators who have ramped risk-on assets to the moon because cheap credit and low interest rates have enabled lucrative leveraged betting.
The fantasy was that all this cheap credit would magically flow into productive expansion of the real economy; instead, it fueled carry trades and an expansion of incredibly risky credit to subprime borrowers buying vehicles, homes with 3% down payment, etc.
The "recovery" constructed on this expansion of risk has built-in limits: once speculative trades reverse or blow up, the process reverses, and assets must be liquidated to escape the tightening noose of leverage. Once all the marginal borrowers have purchased vehicles, taken on student loans and bought houses and stocks on speculation, the pool of greater fools dries up and the deleveraging of assets purchased on margin/credit unleashes a feedback loop: selling begets more selling.
Those who believe the stock market can continue rising despite the end of the Fed's "free money for financiers" programs are implicitly claiming that the pool of greater fools is still filled to the brim. Simply put, speculating with leveraged free money and extending credit to marginal borrowers is not sustainable or productive, and the stock market seems poised to reflect three dynamics:
  1. reversion to the mean and the unwinding of extremes
  2. the decline in corporate profits resulting from a stronger U.S. dollar
  3. the pool of greater fools willing and able to buy assets at higher prices with leveraged free money has been drained by six years of credit/risk expansion.

Hong Kong Protesters Give Wednesday Deadline For Reform As Chinese Army Watches From Above


Hong Kong Protesters Give Wednesday Deadline For Reform As Chinese Army Watches From Above

Courtesy of ZeroHedge

The crowds of protesters in Hong Kong swelled overnight with some estimates that 3-400,000 "will join in a show of people's power," on the eve of the two-day National Day holiday. With neither side showing any signs of backing down, protestors remain calm and police keeping their distance – though monitoring from on high – as the Occupy Central group said it will announce plans for its next stage of civil disobedience on Wednesday if Hong Kong Chief Executive Leung Chun-ying does not meet their demands for democratic reform, including true universal elections by October 1 and Leung's resignation.

Leung has called for Occupy Central leaders to "fulfill the promise they made to society" and immediately stop the protests, which he said have gotten "out of control," adding that, for now, they could keep control without the help of the People's Liberation Army (PLA). The protest meme remains one heard around the world – in addition to their concerns about democracy and out of control local government, Hong Kong’s younger generation are worried about low-paying jobs.

As Bloomberg reports,

Pro-democracy protests swelled in Hong Kong on the eve of a two-day holiday that may bring record numbers to rallies spreading throughout the city as organizers pressed demands for free elections.

With the workday ended and temperatures dropping, thousands of people were returning to the three main demonstration points, blocking some of the city’s roadways. Hong Kong marks China’s National Day tomorrow, the 65th anniversary of the founding of the People’s Republic of China and Chung Yeung Festival on Thursday, when Hong Kong people honor their ancestors.

“It’s quite possible that at least more than 100,000, if not up to 300,000, 400,000 people, will join in the protest in a show of people’s power,” Willy Lam, adjunct professor at Chinese University of Hong Kong, said in an interview today. “They want to convince the Hong Kong government and Beijing that any use of force will be counter-productive. It will only galvanize more of the rest of Hong Kong’s 7 million people.”

And as VOA adds,

Neither side is showing any signs of backing down even as China prepares to mark its National Day on Wednesday.

In a short statement, the Occupy Central group said it will announce plans for its next stage of civil disobedience on Wednesday if Hong Kong Chief Executive Leung Chun-ying does not meet their demands for democratic reform, including true universal elections by October 1 and Leung's resignation.

Leung said he would not give into the protesters' demand for his resignation or for greater democratic reforms.

In a speech Tuesday, Leung called for Occupy Central leaders to "fulfill the promise they made to society" and immediately stop the protests, which he said have gotten "out of control."

Leung said the central government decision on Hong Kong on August 31 shows that it will not comply to illegal threats made by certain people.

He also said on Tuesday Hong Kong police would be able to maintain security without help from People's Liberation Army (PLA) troops from the mainland.

Hong Kong police have withdrawn now for more than a day and protesters are continuing their efforts to prepare for a longer, more drawn out confrontation.

But, as SCMP reports, Beijing may be keeping quiet about the Occupy Central protests, but the army appears to be keeping a keen eye on what's going on.

This picture taken by an SCMP photographer today shows a man in the People's Liberation Army using binoculars to survey the protest site in Admiralty.

A row of tripods can be seen in the windows, suggesting the occupiers have been under the watchful eye of China for some time.

Some protesters have voiced concern that authorities may return again in force later Tuesday in a bid to clear the streets before the Chinese holiday, when even more protesters are expected to join the rally.

The red star on Chinese military headquarters in Admiralty is flashing bright tonight. The star was included in renovations to the building months ago, and it was unveiled in January.

While it was unclear when it had been switched on since then, the last time the People's Liberation Army's HQ decided to stage a light show on the harbour (in June), it generated controversy and set tongues wagging on whether Beijing was emphasising its sovereignty over Hong Kong.

It's a protest meme we have seen and heard around the world…

Of those who support Occupy Central, 47 percent were under the age of 24.

In addition to their concerns about democracy, Hong Kong’s younger generation are worried about low-paying jobs and increasing competition from mainland Chinese coming to the financial hub to work.

Hong Kong University of Science and Technology professor David Zweig said the controversy surrounding the 2017 elections and concerns that Leung is taking the port city down the wrong path are not the only issues driving the protests.

“I think the other issue is that there is a lot of anger. If you look at the data in general in Hong Kong, January this year, the anger at the central government, the anger at the local government, the concerns about future job prospects and all that and anxiety in general, this is worst than anytime since the major marches of 2003," Zweig said.

"I think if we want something, sacrifices cannot be avoided. No pain, no gain, right? When I see the young people's passion, I support them from deep within my heart. I hope there won't be any bloodshed," said Fung.

New Report: Global Economies May Be on Path to Another Crash

Courtesy of Pam Martens.

U.S. Total Debt by Sector, 1916 to 2014, from International Center for Monetary and Banking Studies and CEPR Study

U.S. Total Debt by Sector, 1916 to 2014, from International Center for Monetary and Banking Studies and CEPR

Four noted economists have issued a report under the umbrellas of the International Center for Monetary and Banking Studies and the Centre for Economic Policy Research (CEPR) that is raising alarm bells at global central banks.

According to the report: “The world is still leveraging up; an overall, global deleveraging process to bring down the total debt-to-GDP ratio – or even to reduce its growth rate – has not yet started. On the contrary, the debt ratio is still rising to all-time highs.”

This, say the authors, has produced an “ongoing vicious circle of leverage and policy attempts to deleverage, on the one hand, and slower nominal growth on the other,” setting the basis “for either a slow, painful process of deleveraging or for another crisis, possibly this time originating in emerging economies (with China posing the highest risk).”

These are two key points from the study:

“Until 2008, the leveraging up was being led by developed markets, but since then emerging economies (especially China) have been the driving force of the process. This sets up the risk that they could be at the epicentre of the next crisis. Although the level of leverage is higher in developed markets, the speed of the recent leverage process in emerging economies, and especially in Asia, is indeed an increasing concern.

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The Difference Between Nominal And Real, In One Chart Courtesy Of Japan

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

For about three years, or just before the terminal Keynesian/monetarist experiment of Abenomics was launched, Japanese wages were flatlining, happily hugging the 0% Y/Y line. But that was ok, because the country had deflation or at best 0% inflation, meaning quite often real wages, adjusted for actual purchasing power, were higher than nominal wages. Then, following Abe's triumphal return after a 4 year battle with diarrhea, when he unleashed a different kind of liquidity, one impacting the BOJ's CTRL-P function, after much cajoling, threats and outright incantations, Japan's nominal wages started to slowly rise higher, and as reported earlier following the latest battery of worse than expected news out of a recessionary Japan, nominal wages in August rose by 1.4%, down from 2.4% in July, driven by overtime wages which rose 1.8% (with base wages barely eeking out a 0.6% annual rise), however also at half the Y/Y rate seen in July.

What about real wages, or wages when factoring in the soaring prices of, well, everything such as TV sets rising in price by double digits (yes, in the country that gave the world Sony), or gas and heating prices through the roof for nearly 2 years now. Sadly, here the picture is far worse. Because while the nominal wage increase is welcome, if declining, the real wage crash is quite horrifying to some 100+ million Japanese. And accelerating, because while real wages dropped -1.7% in July, in August they flat out crashed by -2.6%.

In fact, even as the great Keynesian priests of Japan distract the world by pointing out repeatedly the modest and now declining rise in nominal wages, as testament of the "success"of Abenomics, what they want everyone to ignore is what is going on with real wages.

So, without further ado, here is the difference between Nominal and Real wages, as demonstrates best by that sinking Keynesian titanic, which has already returned to recession as confirmed by the upcoming negative GDP print, Japan.

Schoolgirls Aged 14-16 Leave France, UK, Germany for Syria to Join ISIS Jihad

Courtesy of Mish.

As many as 63 seriously misguided teenaged girls from France, 40 from Germany, and 50 in the UK have left their countries to join ISIS in Syria.

The Guardian has a fascinating report on Schoolgirl jihadis: the female Islamists leaving home to join Isis fighters.

Hundreds of young women and girls are leaving their homes in western countries to join Islamic fighters in the Middle East, causing increasing concern among counter-terrorism investigators. Girls as young as 14 or 15 are travelling mainly to Syria to marry jihadis, bear their children and join communities of fighters, with a small number taking up arms. Many are recruited via social media.

Women and girls appear to make up about 10% of those leaving Europe, North America and Australia to link up with jihadi groups, including Islamic State (Isis). France has the highest number of female jihadi recruits, with 63 in the region – about 25% of the total – and at least another 60 believed to be considering the move.

In most cases, women and girls appear to have left home to marry jihadis, drawn to the idea of supporting their “brother fighters” and having “jihadist children to continue the spread of Islam”, said Louis Caprioli, former head of the French security agency Direction de la Surveillance du Territoire. “If their husband dies, they will be given adulation as the wife of a martyr.”

Five people, including a sister and brother, were arrested in France earlier this month suspected of belonging to a ring in central France that specialised in recruiting young French women, according to Bernard Cazeneuve, the interior minister.

At least 40 women have left Germany to join Isis in Syria and Iraq in what appears to be a growing trend of teenagers becoming radicalised and travelling to the Middle East without their parents’ permission.

“The youngest was 13-years-old,” Hans-Georg Maassen, president of the Federal Office for the Protection of the Constitution, told the Rheinische Post. “Four underage women left with a romantic idea of jihad marriage and married young male fighters who they had got to know via the internet.”

Karim Pakzad, of the French Institute of International and Strategic Relations, said some young women had “an almost romantic idea of war and warriors.

“There’s a certain fascination even with the head and throat-cutting. It’s an adventure.”

Some British women and girls have posted pictures of themselves carrying AK-47s, grenades and in one case a severed head, as they pledge allegiance to Isis. But they are also tweeting pictures of food, restaurants and sunsets to present a positive picture of the life awaiting young women in an attempt to lure more from the UK.

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Clinkle is the New Color

Courtesy of Tim Knight from Slope of Hope

Greetings from Palo Alto. Over three years (and thousands of posts……) ago, I wrote Color and the Mania in This Valley. The thrust of my post was:

+ had received $41 million to develop an app;
+ The app sucked out loud;
+ The company deserved to fail.

Well, fail it did (as I announced in the 4th post I did about the stupid place), and in those three+ years, the bubble has just continued to inflate. 2014 makes 2011 seem downright sensible.

Which brings us to Clinkle, which is a firm founded by a 22 year old with no business successes behind him (which at least's founder could claim, as he sold his firm to Apple for a fortune). Clinkle initially received $25 million (fun fact: the same amount used to fund Google, which went on to bigger successes than building a single app) and has been ostensibly hard at work on this thing for years. Here is the mature and world-changing lad after he landed the funding:

Well, as Clinkle continued to produce nothing, they continued to garner funding, reported to be upwards of $40  million now (a number strangely coincident with Color's). Recently, at long, long last, they launched their app. Here's how they try to explain it:


So let me get this straight……..I download an app……..and then I sign up……….and they send me a Prepaid Visa Card (which I don't need), and then I can put money on the card. The wrinkle to this, apparently, is that if my friends also use Clinkle, I can transmit cash to them if I want.

Allow me to express my reaction with three letters: B, F, and D. So this is what $40 million and a crack team of engineers was able to create? (Although the money wasn't entirely wasted – – you can go to this page and check out the team member photos which, as you mouse over them, turn into zany poses – – hilarious! My goodness gracious.)

Perhaps I'm just a cranky blogger who likes to pee on the parade of this youngster who has been endowed with so much start-up cash, and in fact Clinkle is an awesome app. Let's check out the reviews on the App Store, shall we?


 So from what I saw, there were 19 reviews posted: 18 of them were 1-star (the lowest possible), and one of them was 5-star (which, I would wager, was posted by the man-child above clutching the dollar bills).

Clinkle has also added an elitist wrinkle to their little product by making it available only at certain colleges (as if the demand for this thing would otherwise overwhelm them). Perhaps they figure since Facebook started that way in 2004 (Harvard, Stanford, etc.) then surely that must be the pathway to billions.

What a bunch of feckless douchenozzles. I can't wait for this damned bubble to finally pop, because I'm not sure how much more we can all endure this without becoming irreversibly nauseous. It's not enough for…………or, soon, Clinkle………… collapse into a pile of worthless ashes. All this overfunded silliness has really got to end, because it's an unsustainable distortion of reality.

Debt Rattle Sep 29 2014: A Rare Sane European

Courtesy of The Automatic Earth.

W.H. Jackson Rice Creek near Brown’s Landing, Putnam County, FL 1890

Something tells me I make get into trouble with my Czech and Slovak friends – and readers – over this, but I was still struck by the following interview with former Czech prime minister and president Václav Klaus. I know he’s not uncontroversial, hence the anticipated ‘trouble’.

What Mr. Klaus says in this interview with the Daily Spectator’s Neil Clark is so clear and correct and to the point and glaringly obvious on what is wrong with Europe these days, that his words provide an overriding sense of remembering something that was never there, of what we’ve been missing for years now from leading European politicians. And then we can, and should, wonder why that is, why that sanity has gone MIA.

Europe, or rather Brussels, has become a political-religious cult that tolerates no doubt and no discussion. Or, as Klaus says: “The EU is a post-democratic and post-political system.” . At present, there are no politicians in any of the 28(!) EU member nations, other than your right wing Marine Le Pens and Farages, and your non-aligned Beppe Grillos, who dare utter even one serious word of criticism of the grand EU project. The EU is good, and more EU is better.

And that’s all you need to know, that epitomizes precisely what’s so deeply wrong with the project, why it should be halted before things get even worse and even more people fall victim to the grandiose illusions of what has collapsed into nothing but yet another ordinary power game. That is, there is no dialogue left, it’s been utterly stifled, and that in turn is precisely why it will fail. Here’s Klaus:

NOTE: I’m not sure why the editors picked this title, the word monstrous is not in the text, and the URL tells me it was originally called Europe Needs Systemic Change. Which, admittedly, is less catchy.

Vaclav Klaus: The West’s Lies About Russia Are Monstrous

An interview with the former Czech president, possibly the West’s last truly outspoken leader

Václav Klaus has made a habit of saying things others shy away from saying, but it doesn’t seem to have done him much harm in the popularity stakes. Quite the opposite: the 73-year-old ardently Eurosceptic free-marketeer has legitimate claims to be regarded as the most successful ‘true blue’ conservative politician in Europe over the past 25 years. He was, after all, prime minister of the Czech Republic from 1992 to 1998 and then his country’s president for a further ten years, from 2003 to 2013.

[..] What effect does Klaus think a British referendum on EU membership — and the prospect of a UK withdrawal — might have for the Continent?

‘It would send a strong signal. I was very angry, even in the communist era, looking at Britain from the outside, from behind the Iron Curtain, that Britain decided to leave EFTA to join the EEC in the early 1970s.’

It was a Conservative prime minister, Edward Heath, who took that momentous step. What, I wonder, does Klaus think of the present Conservative leader’s line on Europe?

‘I have met Mr Cameron several times and I am not so sure about his credentials on the EU. I understand he must somehow reflect the division in the whole country and in his party, but nevertheless I don’t think that in a secret ballot in a referendum that he would vote yes [for Britain to remain in the EU] — but this is only my guesstimate.’

Listen to Klaus in full flow on the absurdities of the EU and it’s hard to think why any sane individual — on left or right — would want their country to stay in it.

‘A few days ago I studied the names of the EU commissioners under Mr Juncker, and their portfolios. We in my country say that 16 is already too high for having meaningful portfolios. But the EU now has 28, more than in any country in our part of the world. If you look at the names of those portfolios, I really don’t believe my eyes.

The former Estonian prime minister is a commissioner for digital markets. As an economist I really don’t know what the term “digital markets” means. Plus there is another, a German politician, Günther Oettinger, who is the commissioner for “digital economy and society”. We would laugh in the communist era to have such names for the members of our cabinet. I can’t imagine what these commissioners are doing.’

I put it to Klaus that in the bloated and bureaucratic EU economic model, we have the worst of all worlds — one which pleases neither genuine socialists, nor Thatcherite free-marketers, and he readily agrees. ‘What we have in Europe now is not the German Soziale Marktwirtschaft — the social market economy — but the German model deteriorated by another adjective, “ecological”.’

‘I started my political career after the fall of communism with a well-known slogan: “I want to introduce markets without adjectives.” There was a big fight in the country about this phrase. They said, “Klaus wants to introduce markets without social policy.” “No,” I said. “There can be a social policy, but the slogan means a market economy with an additional social policy and not a social market.”The sequence of the words is all important. At present we are going deeper and deeper and deeper into the ecological and social market economy.’

Whatever we decide to call the current system, he adds, it clearly isn’t working for Europe.

‘I am really shocked to see leading EU and European politicians pretending that everything is OK, which is ridiculous and funny,’ Klaus says. ‘I recently read an article by a well-known German economist, Professor Sinn, who has studied the situation in Italy. He presented statistical data which showed that GDP in Italy has declined by 9% since 2000. It’s unimaginable! I don’t think communist Czechoslovakia would have survived such a long-term decline. At the same time, industrial output declined in the same period by 25%! One quarter of the economy simply disappeared.’

Klaus believes the EU is beyond reform and has called for it to be replaced with an ‘Organisation of European States’ — a simple free trade association which would not pursue political integration. He recalls his own experience at the forefront of Czechoslovakia’s Velvet Revolution in 1989.

‘When we started to change my country we quite deliberately did not use the term “reform” — we used the word “transformation”, because we wanted a systemic change. Such a systemic change is needed in Europe today.’

It’s not just on the economy that Europe has got it wrong, says Klaus. He doesn’t agree with the western elite’s current hostility towards Russia, which he believes is based on a false and outdated view of the country.

‘I remember one person in our country who at one moment was minister of foreign affairs, telling me that he hated communism so much that he was not even able to read Dostoevsky. I have remembered that statement for decades and I am afraid that the current propaganda against Russia is based on a similar argument and way of thinking. I spent most of my life in a communist Czechoslovakia under Soviet domination.

But I differentiate between the Soviet Union and Russia. Those who are not able to understand the difference are simply not looking with open eyes. I always argue with my American and British friends that although the political system in Russia is different from the system in our countries and we wouldn’t be happy to live in such a system, to compare the current Russia with Leonid Brezhnev’s Soviet Union is stupid.’ ‘The US/EU propaganda against Russia is really ridiculous and I can’t accept it.’

Klaus wants to transfer other democratic decision-making powers back to the nation states.

‘I’m not just criticising the EU arrangements — at the same time I’m very critical of global governance and the shift to transnationalism. A week ago I was in Hong Kong and I criticised the naive opening up of countries without keeping or maintaining the anchoring of the nation state. Doing this leads either to anarchy, or to global governance.

My vision for Europe is a Europe of sovereign nation states, definitely. But we have already gone well beyond simply economic integration.

The EU is a post-democratic and post-political system.’

Klaus has spent his political career standing up for sovereignty and rejecting the dominant orthodoxies of the day. Unlike other leaders in the former Soviet bloc countries, he did not feel inhibited about criticising western policies when the Berlin Wall came down. He was one of the few to oppose the Clinton/Blair ‘humanitarian’ bombardment of Yugoslavia in 1999 (he was also strongly critical of the Iraq war).

Yet he feels the freedom to hold — and express — ‘unfashionable’ views in the West is now under increasing threat.

‘If you ask me whether I think liberty is under huge attack in Europe now, I would say yes. I feel repressed by not being allowed to express my views. I have permanent troubles with this. Suddenly I have discovered, for the first time in 20 years, having been invited to be a keynote speaker at a conference, that the organisers find out I have reservations about the EU, about same-sex marriages, about the Ukraine crisis, and they say, “We are very sorry, we have already found a different keynote speaker, thank you very much.” This is something I had experienced in the communist era but not in so-called free Europe. Only a very narrow range of opinions is now considered politically correct.’

It’s to fight this worrying trend that Klaus has decided to launch a new project. ‘I am planning, if we can get the money and people together, to start a new quarterly journal in 2015 called Europe and Liberty.’

It’s hard not to wish him well. In the not too distant past, Europe did have leaders who had clear and distinct visions: on the left, the likes of Sweden’s Olof Palme and Austria’s Bruno Kreisky; on the right, de Gaulle and Margaret Thatcher. You could agree or disagree but you could never say you didn’t know what they believed in, or that the views they held were not sincere. But they’ve been replaced by a generation of bland, uninspiring, consistently ‘on-message’ politicians.

Václav Klaus is different, a throwback to the days when our leaders did stand for something and weren’t afraid to speak their minds. Let’s hope he does not turn out to be Europe’s last conviction politician.

Study Finds Treated Fracking Wastewater Still Too Toxic



Study Finds Treated Fracking Wastewater Still Too Toxic

Courtesy of Andy Tully via

One of the biggest concerns about hydraulic fracturing, or fracking, is that the vast amount of wastewater produced by the process of extracting oil and gas from shale rock deep underground is incredibly toxic.  

Most often, the wastewater is injected into disposal wells deep underground. But a process does exist to convert contaminated water into drinking water that involves running it through wastewater treatment plants and into rivers.

Now a new report says that treated wastewater could be fouling drinking water supplies.

In an article published in Environmental Science & Technology — the journal of the American Chemical Society — a team of researchers acknowledged that the disposal of fracking wastewater is a serious challenge for energy companies that use hydraulic fracturing.

The wastewater left over from the process is not only highly radioactive, but also is contaminated with heavy metals salts known as halides, which are not suitable for consumption, according to the scientists.

Energy companies can opt to use commercial or municipal water treatment plants to purify the water, which is then released into local surface water such as rivers. The problem is that the process sometimes doesn’t remove most of the halides.

When that happens, the water is treated again, with more conventional methods such as chlorinization or ozonation. But there has been concern that this method could form toxic byproducts. The researchers decided to find out whether this was true.

They diluted samples of river water that contained fracking wastewater discharged from water treatment plants in Pennsylvania and Arkansas, simulating what happens when left-over fracking water gets into local surface waters. Then they used current methods of chlorinization and ozonation on the samples to remove the halides and determine whether the water was potable.

The results were not encouraging. The researchers found that the chlorine and ozone – used to rid samples of fracking wastewater containing as little as 0.01 percent and up to 0.1 percent of halides per volume of water – also formed an array of other toxic compounds known as “disinfection byproducts,” or DBPs.

As Climate Progress pointed out, “these chemicals — trihalomethanes, haloacetic acids, bromate, and chlorite — are formed when the disinfectants used in water treatment plants react with halides, according to the Environmental Protection Agency.” All are potentially dangerous to humans, not to mention wildlife.

The results of the study have led researchers to advise the industry not to discharge fracking wastewater into surface waters, even if it has been treated.

Benefit From the Latest Energy Trends and Investment Opportunities before the mainstream media and investing public are aware they even exist. The Free Energy Intelligence Report gives you this and much more. Click here to find out more.

The Goldman Tapes and Why the Delusion of Macro-Prudential Regulation Means the Next Crash is Nigh

Courtesy of David Stockman via Contra Corner

There is nothing like the release of secret tape recordings to clarify an inconclusive debate. I recall that happening with Nixon back in the day. Even as a Washington apprentice I could see that he was a ruthless, power hungry abuser of his office, but much of official Washington just denied it. Then came the tapes. Soon there was no doubt. In short order Nixon was gone.

So now comes the Goldman tapes – 46 hours of recordings by an embedded New York Fed regulator at Goldman Sachs who got fired for attempting to, well, regulate. Would that the Carmen Segarra affair generates a Nixonian result – that is, exposure that “regulatory capture” is an endemic, potent and inextricable evil that can’t be remediated in situ.

Never mind that what Ms. Segarra was attempting to regulate–whether Goldman had a conflict of interest policy with respect to its M&A clients—-was actually none of the state’s business in the first place. If in the instant case GS was giving squinty eyed advise to its client, El Paso Corporation, because it owned a $4 billion position in the other party to the transaction, Kinder Morgan, so be it. Either the conflict was harmless or eventually Goldman’s M&A business would have been punished by the marketplace—–even stupid executives and boards wouldn’t pay huge fees to be taken to the cleaners for long.

Actually, what the tapes really show is that the Fed’s latest policy contraption – macro-prudential regulation through a financial stability committee – is just a useless exercise in CYA. Apparently, even the colony of the bubble blind which inhabits the Eccles Building has started to get nervous about financial bubbles and instability in recent months. What with junk bond yields sporting a 5 handle, the Russell 2000 trading at 80X reported profits and the IPO market having gone full-tilt manic with last week’s pricing at 27X sales of a Chinese e-commerce mass merchant that is a pure proxy for the greatest credit fueled house of cards in human history—-it needed to show some gesture of concern.

Now, it might have gone straight to the horse’s mouth. It might have asked about 70 consecutive months of zero money market rates, for instance, and the manner in which that has enabled speculators to mount massive momentum trades everywhere in the financial markets by funding any “risk asset” that generates a yield or a short-run gain with nearly zero cost options or repo. Or it might have inquired about the destruction of the market’s natural internal mechanisms of stability and financial restraint—-that is, short sellers and two way trading—that has resulted from the Greenspan/Bernanke/Yellen Put; or it might have wondered whether its bald-faced doctrine of “wealth effects” and ever rising stock prices does not in itself create a massive bias toward speculative risking taking and a blind buy-the-dips herd mentality in the casino.

But that would have been inconvenient because it would mean an abrupt end to its labor market focused policy of “accommodation” and a violent hissy fit in the casino. So Yellen and here Keynesian compatriots have invented out of whole cloth a method to drive the wildly vibrating Wall Street financial jalopy with both feet to the floor. That is, on the monetary “policy” side they intend to perpetuate ZIRP for at least another 9 months and near-ZIRP as far as the eye can see , while at the same time interposing in today’s frothy financial markets a Stanley Fischer led posse of regulators to keep speculator exuberance within safe boundaries.

At this point it is not clear which part of the Fed’s “macro-pru” initiative is the more preposterous. Why would you think that a system which required only 9 months to fire Carmen Segarra for comparatively trivial meddling in Goldman’s M&A department is capable of bubble prevention when we are talking about trillions of inflated value in the stock, bond, derivatives and real estate markets?  Or that putting a proven serial bubble generator—-that’s essentially what Fischer accomplished during his stint as head of Israel’s central bank—at the head of the financial stability committee would produce, well, financial stability?

It should be evident by now that regulatory capture and the inherent capacity of the marketplace to evade bureaucratic rules, edicts and embedded supervisors mean that “macro-pru” is a crock—an excuse to prolong a dangerous monetary experiment that is inexorably fueling a giant financial bubble and the crash which must inevitably follow.

Take the soaring issuance of sub-prime auto credit, for example, which now accounts for a record 30% of car loans and is putting people in cars at 130% loan-to-value ratios—-borrowers that have no hope of avoiding the repo man a few months down the road. On the margin, nearly all of this explosive growth is being funded in the non-bank market. That is, by freshly minted sub-prime auto lenders who have been given a sliver of equity by LBO houses and a ton of debt by the high yield market.  Who is Stanley Fischer going to crack down upon—–the LBO houses creating these fly-by-night lenders, the Wall Street underwriters lead by Goldman who are distributing the junk or Bill Gross’s yield-parched successors at PIMCO and its mutual fund competitors who are buying the stuff?

OK, Stanley Fischer being from MIT, the IMF, Citibank, the Bank of Israel—and to say nothing of his long ago supervision of Ben Bernanke’s PhD thesis which merely Xeroxed  Milton Friedman’s false claim that the Fed’s failure to engage in massive QE during 1930-1932 caused the Great Depression—-is too sophisticated to say “no auto junk, period”. What his committee will likely do is issue guidance about keeping debt-to-EBITDA ratios “prudent” at some notional leverage of say 6-8X when these newly minted auto junk yards are issuing the same.

But that’s before the underwriters parade in with a host of complications embedded in “adjusted EBITDA” to account for the fact that two fly-by-night subprime lenders, for example, just merged and therefore need a pro forma adjustment for down-the-road synergy savings; or that a newly minted lender is still scaling up its volume and that on a last month’s run-rate basis, its adjusted EBITDA ratio is 7.8X, not the 16X ratio embedded in its actual GAAP results.

And that doesn’t even account for the fact that the loan books of these start-up auto sub-primes are inherently unseasoned. It does take some time for an assistant night shift manager at a McDonald’s to become the subject of a “restructuring” initiative by the local franchisee and to subsequently default on his car loan. Indeed, the Fischer committee would even be up against the inherently vexing math of a rapidly ramping loan book. That is, while the denominator of loans issued is soaring, the numerator of delinquencies is still lagging. So loan loss reserves are invariably understated during the final blow-off stage of a financial bubble, meaning that earnings and EBITDA are over-stated and hidden leverage risk is rampant. The evidence is there in spades in the wreckage of the LBO and high yield markets during 20009-2010.

In short, even assuming that the obsequious culture of accommodation at the New York Fed so evident in the Goldman tapes could be uprooted, macro-pru is inherently impotent because of information asymmetry. What the Austrian thinkers 100 years ago said about socialism in general is true in spades with respect to the gambling casinos created by the Keynesian money printers. Without honest market prices in the trading pits and at loan desks and underwriting syndicates, financial booms and busts are inevitable, and the state’s regulators and supervisors are hopelessly at sea because they cannot hope to gather and process enough information to stymie the army of speculators chasing false prices with cheap credit.

Or to take another example, what is the Fischer committee going to do about leveraged stock buybacks? Not only is this fueling the speculative rise in the stock averages and the illusion that earnings are growing, when in fact it is only the share count which is shrinking, but it is also adding to the dangerous build-up of corporate debt that will become hugely problematic when interest rates are finally allowed to normalize.

But imagine the utter hissy fit that would instantly arise on Wall Street if the Fischer committee was even rumored to be addressing the issue of leveraged stock buybacks. It would generate a violent sell-off of the likes not seen since the House Republicans voted down TARP the first time around.

And then would come the information miasma. Wall Street would trot out the cash on the sidelines canard, arguing there is no problem here because not withstanding the current $700 billion annualized run-rate of buybacks for the S&P 500 alone, there is plenty of cash cushion available to corporate chieftains who wish to invest in their own company’s future— albeit with shareholder money, not theirs.

In truth, of course, the business sector did not delever one wit after the financial crisis.  Since the fourth quarter of 2007, business debt in the US has risen from $11 to $14 trillion. That $3 trillion gain dwarfs the $500 billion pick up in business cash balances. In fact, the rise in cash was never a sign of returning financial health in the fist place: it was only a telltale sign that by causing debt to be drastically mis-priced, the Fed was encouraging companies to artificially balloon both sides of their balance sheets.

Yet it would take the Fischer committee months to sort-out the truth and refute the sell-side propaganda—even if it had the will. Meanwhile, the bubble would continue to expand.

So here’s the thing. Our monetary politburo has its ass backwards. Macro-pru is an impossible delusion that should not be taken seriously be sensible adults. It is not, as Janet Yellen insists, a supplementary tool to contain and remediate the unintended consequence – that is, excessive financial speculation – of the Fed’s primary drive to achieve full employment and fill the GDP bathtub to the very brim of its potential.

Instead,  rampant speculation, excessive leverage, phony liquidity and massive financial instability are the only real result of current Fed policy. We are at peak debt in the household and business sectors of the private economy. Accordingly, the credit channel of monetary transmission is broken and done. Indeed, the modest pick-up in leverage in the household sector  has been exclusively among utterly marginal borrowers. That is, among students who are just treading water until the eventual day of default and sub-prime auto borrowers who are actually underwater they day they take out their loans.

No, the central bankers’ one time parlor trick has been played and leverage was ratcheted-up until it reached a peak in 2007-2008.  Now the central bankers are pushing on a string.

Household Leverage Ratio - Click to enlarge

But even as their liquidity tsunami never escapes the canyons of Wall Street, and, as an empirical matter, circulates right back to excess reserves at the New York Fed, it does have an immense untoward effect during its circular journey. Namely, it causes the most important price in all of capitalism—that is, the cost of overnight money and the speculators’ “carry” on his asset positions—to be drastically mispriced. It turns the central bank into a serial bubble machine.

Not 10,000 Carmen Segarra’s could stop the boom and bust cycle thus manufactured by the money printers ensconced in the Eccles Building. Stanley Fischer’s financial stability committee, therefore, is not merely a pointless farce. Its evidence that the next financial crash is nigh.


US Bombed Wrong Refineries in Syria; Iran Seeks to Stop Oil Price Slide; Sanctions Won’t Impede Arctic Drilling

Courtesy of Mish.

US Bombed Wrong Refineries in Syria

Oil is in the news in many countries in many ways. Let's take a look starting with a couple of paragraphs buried in the Financial Times report Barack Obama Admits US Underestimated Isis.

Allied aircraft on Sunday struck three makeshift oil refineries in an area controlled by Isis in an expansion of attacks intended to damage the militant Islamist group’s financial infrastructure.

Oil has proved crucial to financing Isis’s operations, netting several million dollars a day. But the observatory said the refineries struck early on Sunday, in and around Raqqa, were owned by civilians and not Isis. A separate air strike on a plastics factory on the outskirts of Raqqa resulted in the death of a civilian, the group said.

So, we blow up refineries owned and operated by civilians and it is buried in the news, with no hint of an apology or restitution offered to the refinery owners or to Syria.

Russia Discovers Vast Pool of Oil 

Two days ago, Russia announced Arctic Well Drilled With Exxon Strikes Oil.

Russia’s state-run OAO Rosneft said a well drilled in the Kara Sea region of the Arctic Ocean with Exxon Mobil Corp. struck oil, showing the region has the potential to become one of the world’s most important crude-producing areas.

The announcement was made by Igor Sechin, Rosneft’s chief executive officer, who spent two days sailing on a Russian research ship to the drilling rig where the find was unveiled today. The well found about 1 billion barrels of oil and similar geology nearby means the surrounding area may hold more than the U.S. part of the Gulf or Mexico, he said. 

The discovery sharpens the dispute between Russia and the U.S. over President Vladimir Putin’s actions in Ukraine. The well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia’s Arctic offshore. Rosneft and Exxon won’t be able to do more drilling, putting the exploration and development of the area on hold despite the find announced today.

Output from the Kara Sea field could begin within five to seven years, Sechin said, adding the field discovered today would be named “Victory.”

Exxon was given until October 10 when other companies had to comply with sanctions immediately. Regardless of why that happened, sanctions are ridiculous.

Instead of complaining that Exxon got favoritism, we should simply kill all the sanctions.

Sanctions Won't Impede Arctic Drilling 

Bloomberg reports Russia Oil Chief Says Sanctions No Bar to Arctic Drilling

The most powerful man in Russia’s oil industry says U.S. sanctions won’t prevent the development of discoveries in the Arctic Ocean.

Igor Sechin, chief executive officer of state oil producer OAO Rosneft (ROSN) and a long-time ally of President Vladimir Putin, spent two days traveling by plane, ship and helicopter last week to announce a billion-barrel crude strike in the iceberg-prone Kara Sea region of Russia’s Arctic Ocean.

“We will continue working no matter what,” Sechin said in an interview on board a polar research vessel as he prepared to unveil the find he named Victory. “We will plan the work for next season. As I said, now we’ve drilled only the first structure — at Universitetskaya. There are more than 30.” 

The development of Arctic oil reserves is one of President Putin’s grandest ambitions. As Russia’s existing fields in Siberia run dry, the country needs to find new reserves as it vies with the U.S. to be the world’s largest oil and gas producer….

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We’ll Become ISIS

James Kunstler looks at our country from a darkened view, and from there, goes further into the shadows.

We’ll Become ISIS

Courtesy of James Kunstler

I played fiddle at a small-town, country dance last night with several other musicians and it was a merry enough time because that kind of self-made music has the power to fortify spirits. About half the dancers were over 40 and the rest were teenage girls. The absence of young men was conspicuous. Toward the end of the evening, it was just girls dancing with girls. A wonderful and fundamental tension was not present in the room.

The young men are out there somewhere in the country towns, but this society increasingly has no use or no place for them, except in the army. There is absolutely no public conversation about the near total devaluation of young men in the economic and social life of the USA, though there is near-hysterical triumphalism about the success of young women in every realm from sports to politics to business, and to go with that an equal amount of valorization for people who develop an ambiguous sexual identity.

There really is no local forum for public discussion in the flyover regions of the USA. The few remaining local newspapers are parodies of what newspapers once were, and the schools maintain a fog of sanctimony that penalizes thinking outside the bright-side box. Television and its step-child, the internet, offer only the worst temptations of hyper-sexual stimulation, artificial violence, and grandiose wealth-and-power fantasies. There aren’t even any taverns where people can gather for casual talk.

Many of the remaining jobs “out there” are jobs that can be done by anyone — certainly the office work, but also the jobs with near-zero meaning, minimal income, and no status in the national chain burger shacks and box stores — and young women are more reliably subject to control than young men jacked on testosterone, corn syrup, and Grand Theft Auto.

Of course, the idea that higher education can lift a population out of this vortex of anomie is a cruel joke, especially now with the college loan racket parasitizing that flickering wish to succeed, turning young people into debt donkeys. The shelf-life of that particular set of lies and swindles will hit its sell-by date soon in a massive debt repudiation — and the nation will come to marvel at the mendacious system it allowed itself to get sucked into. But this still only begs the question of what young men will do in such a deceitful system.

My guess is that they will shift their attention and activity from the mind-slavery of the current Potemkin economy to the very monster we find ourselves fighting overseas: a domestic ISIS-style explosion of wrath wrapped in an extreme ideology of one kind or another replete with savagery and vengeance-seeking. The most dangerous thing that any society can do is invalidate young men. When the explosion of youthful male wrath occurs in the USA, it will come along at exactly the same time as all the other benchmarks of order become unmoored — especially the ones in money and politics — which will shatter the faith of the non-young and the non-male, too. Also, just imagine for a moment the numbers of young men America has trained with military skills the past 20 years. Not all of them will be disabled with PTSD, or mollified with rinky-dink jobs at the Wal-Mart, or lost in the transports of heroin and methedrine.

The authorities will have no way to understand what is happening and we are certain to endure a long season of violence and social chaos as a result. The re-set from that will be an economy and a society that few now yammering in the HuffPo or the Tea Party will recognize. That society emerging from the ashes of the current matrix of rackets will desperately need young men to rebuild, and there will be plenty of opportunity for them — though it won’t feature fast cars, Kanye West downloads, or bottle service.

There are other ways for young men to find a useful and valued place in a society, but these are too far beyond the ken of our current meager narratives.

Top picture from Geralt at Pixabay.


The Fraud At Textura

The Fraud At Textura

Courtesy of Citron Reports by Stocklemon

Target Price — 12 Months = $4

In December of 2013, Citron Research introduced readers to Textura Corp. (NASDAQ:TXTR), documenting the CEO’s history of fraud and failed businesses, and a shadowy weave of poorly disclosed insider relationships.  In its last three quarters, Textura has missed analyst expectations and continues as a wannabe in the SaaS space.  Ignoring scant earnings results, the analysts have stood by their unfounded optimistic forecasts.  

If you are a Textura shareholder and you are a custodian of someone else’s money, you are obligated to read this report. We have done the homework that NONE of the analysts have done, and in this report we spill the truth about this “investment."

We document a recent lawsuit that is the nightmare of every Textura CPM subscriber, a case of Subcontractor vs General Contractor, disputing the one thing Textura's flagship CPM product is supposed to process:  a lawsuit-free payments ecosystem.

For the Rest of the Story You Won't Read Anywhere Else, Click Here…

(Citron always suggests for most convenient reading, download the PDF, then right-click to open all links in new windows) 

Spain Manufacturers Warn of Another Slowdown; Consumption Recovery Ends, Retail Sales Contract, Price Deflation Sets In

Courtesy of Mish.

The alleged recovery in Spain is already over. Retail sales are down month-over-month and year-over-year in July. August and September are both projected to be weak.

Vial translation from El Economista, Manufacturers and Retailers Warn of Another Consumption Slowdown.

After a slight recovery in the first months of the year, stagnation set in since June, according to almost all employers and associations of producers and distributors. The retail index INE already pointed to stagnation in June and a drop of 0.5% in July from a year earlier.

Although the decline in July from the previous month is a somewhat lower 0.2%, the situation appears to be worsening. August data will be released this week and forecast for both August and September are not positive.

Aurelio del Pino, president of Aces, the association of supermarket chains such as Carrefour, Eroski, Lidl Supercor or says in this line that "the data already published and forecasts that we confirm our claim that any increase in VAT would been disastrous for consumption."

It's something you notice the trade, but also the major manufacturers. "The recovery we have had in the first few months has been very weak," says Ignacio Larracoetxea president Promarca, an association that encompasses most of the brands leading food, beverage, household and healthcare.

And the sector is not the only well that is alerting the break. Last week, the Bank of Spain and warned that the latest information regarding the third quarter shows a "somewhat less expansive behavior of private demand" and domestic consumption, as recorded in his newsletter this September. In the case of household consumption, says survey indicators of households and retailers were in the average July and August at a lower level than the second quarter.

Reducing prices

To try to curb this stagnant consumption, or falling in recent months, large retail chains have not hesitated to continue lowering prices, even if it had to reduce their margins and also lower their figures fracturing.

Price Deflation Sets In

On September 5, Dow Jones Business News reported Spanish Prices Firmly In Negative Territory, Deflation Beckons.

INE, as the statistics institute is known, said Spain's consumer price index fell by 0.5% on the year in August, the biggest percentage decline since the country experienced a dip in prices in October last year. In July, prices had dropped by 0.3% after a few months of small increases.

Spain's European Union-harmonized consumer-price index, which is a slightly different measure than Spain's own, was also down 0.5%. That compares with a 0.4% decrease in July.

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The End of Monetary Policy

Thoughts from the Frontline: The End of Monetary Policy

By John Mauldin

We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats’ feet over broken glass
In our dry cellar…

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

–  T. S. Eliot, “The Hollow Men

What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government. This is not to say that there will no longer be events to fill the pages of Foreign Affairs' yearly summaries of international relations, for the victory of liberalism has occurred primarily in the realm of ideas or consciousness and is as yet incomplete in the real or material world. But there are powerful reasons for believing that it is the ideal that will govern the material world in the long run.

– Francis Fukuyama, The End of History and the Last Man

Francis Fukuyama created all sorts of controversy when he declared “the end of history” in 1989 (and again in 1992 in the book cited above). That book won general applause, and unlike many other academics he has gone on to produce similarly thoughtful work. A review of his latest book, Political Order and Political Decay: From the Industrial Revolution to the Globalisation of Democracy, appeared just yesterday in The Economist. It’s the second volume in a two-volume tour de force on “political order.”

I was struck by the closing paragraphs of the review:

Mr. Fukuyama argues that the political institutions that allowed the United States to become a successful modern democracy are beginning to decay. The division of powers has always created a potential for gridlock. But two big changes have turned potential into reality: political parties are polarised along ideological lines and powerful interest groups exercise a veto over policies they dislike. America has degenerated into a “vetocracy”. It is almost incapable of addressing many of its serious problems, from illegal immigration to stagnating living standards; it may even be degenerating into what Mr. Fukuyama calls a “neopatrimonial” society in which dynasties control blocks of votes and political insiders trade power for favours.

Mr. Fukuyama’s central message in this long book is as depressing as the central message in “The End of History” was inspiring. Slowly at first but then with gathering momentum political decay can take away the great advantages that political order has delivered: a stable, prosperous and harmonious society.

While I am somewhat more hopeful than Professor Fukuyama is about the future of our political process (I see the rise of a refreshing new kind of libertarianism, especially among our youth, in both conservative and liberal circles, as a potential game changer), I am concerned about what I think will be the increasing impotence of monetary policy in a world where the political class has not wisely used the time that monetary policy has bought them to correct the problems of debt and market-restricting policies. They have avoided making the difficult political decisions that would set the stage for the next few decades of powerful growth.

So while the title of this letter, “The End of Monetary Policy,” is purposely provocative, the longer and more appropriate title would be “The End of Effective and Productive Monetary Policy.” My concern is not that we will move into an era of no monetary policy, but that monetary policy will become increasingly ineffective, so that we will have to solve our social and physical problems in a much less friendly economic environment.

In today’s Thoughts from the Frontline, let’s explore the limits of monetary policy and think about the evolution and then the endgame of economic history. Not the end of monetary policy per se, but its emasculation.

The End of Monetary Policy

Asset classes all over the developed world have responded positively to lower interest rates and successive rounds of quantitative easing from the major central banks. To the current generation it all seems so easy. All we have to do is ensure permanently low rates and a continual supply of new money, and everything works like a charm. Stock and real estate prices go up; new private equity and credit deals abound; and corporations get loans at low rates with ridiculously easy terms. Subprime borrowers have access to credit for a cornucopia of products.

What was Paul Volcker really thinking by raising interest rates and punishing the economy with two successive recessions? Why didn’t he just print money and drop rates even further? Oh wait, he was dealing with the highest inflation our country had seen in the last century, and the problem is that his predecessor had been printing money, keeping rates too low, and allowing inflation to run out of control. Kind of like what we have now, except we’re missing the inflation.

Let’s Look at the Numbers

The Organization for Economic Cooperation and Development has a marvelous website full of all sorts of useful information. Let’s start by looking at inflation around the world. This table is rather dense and is offered only to give you a taste of what’s available.

What we find out is that inflation is strikingly, almost shockingly, low. It certainly seems so to those of us who came of age in the ’60s and ’70s and who now, in the fullness of time, are watching aghast as stupendous amounts of various currencies are fabricated out of thin air. Seriously, if I had suggested to you back in 2007 that central bank balance sheets would expand by $7-8 trillion in the next half-decade but that inflation would be averaging less than 2%, you would have laughed in my face.

Let’s take a quick world tour. France has inflation of 0.5%; Italy’s is -0.2% (as in deflation); the euro area on the whole has 0.4% inflation; the United Kingdom (which still includes Scotland) is at an amazingly low 1.5% for the latest month, down from 4.5% in 2011; China with its huge debt bubble has 2.2% inflation; Mexico, which has been synonymous with high inflation for decades, is only running in the 4% range. And so on. Looking at the list of the major economies of the world, including the BRICS and other large emerging markets, there is not one country with double-digit inflation (with the exception of Argentina, and Argentina is always an exception – their data lies, too, because inflation is 3-4 times what they publish.) Even India, at least since Rajan assumed control of the Reserve Bank of India, has watched its inflation rate steadily drop.

Japan is the anomaly. The imposition of Abenomics has seemingly engineered an inflation rate of 3.4%, finally overcoming deflation. Or has it? What you find is that inflation magically appeared in March of this year when a 3% hike in the consumption tax was introduced. When government decrees that prices will go up 3%, then voilà, like magic, you get 3% inflation. Take out the 3% tax, and inflation is running about 1% in the midst of one of the most massive monetary expansions ever seen. And there is reason to suspect that a considerable part of that 1% is actually due to the ongoing currency devaluation. The yen closed just shy of 110 yesterday, up from less than 80 two years ago.

I should also point out that, one year from now, this 3% inflation may disappear into yesteryear’s statistics. The new tax will already be factored into all current and future prices, and inflation will go back to its normal low levels in Japan.

Inflation in the US is running less than 2% (latest month is 1.7%) as the Fed pulls the plug on QE. As I’ve been writing for … my gods, has it really been two decades?! – the overall trend is deflationary for a host of reasons. That trend will change someday, but it will be with us for a while.

Where’s my GDP?

Gross domestic product around the developed world ranges anywhere from subdued to anemic to outright recessionary:

The G-20 itself is growing at an almost respectable 3%, but when you look at the developed world’s portion of that statistic, the picture gets much worse. The European Union grew at 0.1% last year and is barely on target to beat that this year. The euro area is flat to down. The United Kingdom and the United States are at 1.7% and 2.2% respectively. Japan is in recession. France is literally at 0% for the year and is likely to enter recession by the end of the year. Italy remains mired in recession. Powerhouse Germany was in recession during the second quarter.

Let’s put those stats in context. We have seen the most massive monetary stimulation of the last 200 years in the developed world, and growth can be best described as faltering. Without the totally serendipitous shale oil revolution in the United States, growth here would be about 1%, or not much ahead of where Europe is today.

Demographics, Debt, Bond Bubbles, and Currency Wars

Look at the rest of the economic ecology. Demographics are decidedly deflationary. Every country in the developed world is getting older, and with each year there are fewer people in the working cohort to support those in retirement. Government debt is massive and rising in almost every country. In Japan and many countries of Europe it is approaching true bubble status. Anybody who thinks the current corporate junk bond market is sustainable is smoking funny-smelling cigarettes. (The song from my youth “Don’t Bogart That Joint” pops to mind. But I digrass.)

We are seeing the beginnings of an outright global currency war that I expect to ensue in earnest in 2015. My co-author Jonathan Tepper and I outlined in both Endgame and Code Red what we still believe to be the future. The Japanese are clearly in the process of weakening their currency. This is just the beginning. The yen is going to be weakening 10 to 15% a year for a very long time. I truly expect to see the yen at 200 to the dollar somewhere near the end of the decade.

ECB head Mario Draghi is committed to weakening the euro. The reigning economic philosophy has it that weakening your currency will boost exports and thus growth. And Europe desperately needs growth. Absent QE4 from the Fed, the euro is going to continue to weaken against the dollar. Emerging-market countries will be alarmed at the increasing strength of the dollar and other developed world currencies against their currencies and will try to fight back by weakening their own money. This is what Greg Weldon described back in 2001 as the Competitive Devaluation Raceway, which back then described the competition among emerging markets to maintain the devaluation of their currencies against the dollar.

Today, with Europe and Japan gunning their engines, which have considerable horsepower left, it is a very competitive race indeed – and one with far-reaching political implications for each country. As I have written in past letters, it is now every central banker for him- or herself.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

Important Disclosures

Picture at the top: Banksy. 

Carmen Segarra: Wall Street’s Spy Vs Spy

Pam Martens writes about the Segarra Tapes released last week. These tapes show how the regulation of Wall Street is a complete failure, a farce, with only punishment waiting for those who speak out as Carmen Segarra did.

William D. Cohan noted that the Segarra Tapes didn’t reveal much we didn’t already know. Sadly, this is true. Carmen Segarra provided solid evidence to what we probably suspected anyway (Why the Fed Will Always Wimp Out on Goldman). However, solid evidence may mean something still.

In spite of our jaded attitude that corruption at the “regulating authority” New York Fed is well-known, and won’t be fixed, EVER (because that’s how powerful the bankers and regulators are!), perhaps there is hope. The tapes contain clear-cut, understandable proof of conflicts, regulatory capture and self-dealing.

With some luck, the tapes could prompt a little public fury, further investigations (by entities other than the NY Fed…), greater oversight and some real reforms to our Wall Street managed banking system. As a start, Senators Elizabeth Warren and Sherrod Brown are calling for Senate Banking hearings on the conflicted dealings of the New York Fed.

Carmen Segarra: Wall Street’s Spy Vs Spy

Courtesy of Pam Martens

If you missed our coverage in 2012 of the Lower Manhattan Security Coordination Center where Wall Street sleuths from those serially charged firms like Goldman Sachs and JPMorgan dunk donuts alongside New York’s finest in a $150 million spy center, keeping tabs on the comings and goings of their own Wall Street employees as well as innocent pedestrians, then you may not fully appreciate why Carmen Segarra has been celebrated all weekend for her temerity in taping her boss and colleagues at the New York Fed, as well as employees inside the cloistered bowels of Goldman Sachs.

While Wall Street was spying on everyone else in lower Manhattan in a high tech center funded by the taxpayer, Segarra strolled over to a Spy Store, plunked down a modest sum and walked out with a tiny tape recorder. She then proceeded to capture the essence of the quintessential captured regulators who didn’t see the 2008 crash coming and won’t see the next one coming either – because their job is not to see too much. (We called the Spy Store on Saturday to ask if they had experienced an upsurge in sales of the tiny recorder. We were informed that sales were brisk but not unusual.)


The Spy Store

[There are three Spy Stores, two in NY and one in NJ. One is on corner of Christopher St & 7th Ave., with the entrance conveniently next to Bank of America. It’s the place for you if you have someone who needs spying on–your babysitter, lover, husband, boss, employee. Get the edge on your situation When You Need to Know. When is that? ALWAYS. You always need to know.]

Back to Pam:

Segarra is a lawyer and former bank examiner at the Federal Reserve Bank of New York, one of Wall Street’s key regulators, who charged in a lawsuit filed in October 2013 that she was told to change her negative examination of Goldman Sachs by colleagues, who also obstructed and interfered with her investigation. According to her lawsuit, when she refused to alter her findings, she was terminated in retaliation and escorted from the Fed premises.

After having her case tossed by a Judge whose husband was representing Goldman Sachs, Segarra turned over her 46 hours of tape recordings to ProPublica’s Jake Bernstein and public radio’s This American Life. ProPublica and This American Life released their stories on the tapes this past Friday, creating a media frenzy.

The hubbub has reached the ears of the U.S. Senate, with Senators Elizabeth Warren and Sherrod Brown calling for Senate Banking hearings on the deeply conflicted New York Fed.

Over the years, Wall Street On Parade has written about a raft of conflicts of interests at the New York Fed that would not be tolerated at any other financial regulator. During 2007 and 2008, as Citigroup entered an intractable death spiral from off balance sheet debt bombs and obscene executive pay, New York Fed Chief Tim Geithner was busy hobnobbing – enjoying 29 breakfasts, lunches, dinners and other meetings with Citi execs.

Continue here > 

Read Pam’s past coverage of the Carmen Segarra story and the deeply conflicted New York Fed at these links:

Blowing the Whistle on the New York Fed and Goldman Sachs

The Carmen Segarra Case: Welcome to New York, Wall Street and McJustice

A Mangled Case of Justice on Wall Street

Is the New York Fed Too Deeply Conflicted to Regulate Wall Street?

New Documents Show How Power Moved to Wall Street, Via the New York Fed

Intelligence Gathering Plays Key Role at New York Fed’s Trading Desk

Relationship Managers at the New York Fed and Citibank: The Job Function Ripe for Corruption

As Citigroup Spun Toward Insolvency in ’07- ’08, Its Regulator Was Dining and Schmoozing With Citi Execs

At Last We Know the Real Purpose of the Federal Reserve Bank of New York: It’s a Confessional for Traders Gone Rogue

New York Fed’s Strange New Role: Big Bank Equity Analyst

As Criminal Probes of JPMorgan Expand, Documents Surface Showing JPMorgan Paid $190,000 Annually to Spouse of the Bank’s Top Regulator

New York Fed’s Answer to Cartels Rigging Markets – Form Another Cartel