Archives for September 2015

the definition of irony

Americans are starting to do dumb things with their money? devil

the definition of irony

Courtesy of Joshua Brown, The Reformed Broker

via Business Insider, September 22nd:

Screen Shot 2015-09-27 at 9.43.09 AM

In a press briefing on Tuesday, Mike Wilson, chief investment officer of Morgan Stanley wealth management, said consumer behavior was starting to show signs of excess as the economic recovery reaches its later stages.

Here’s Wilson (emphasis added):

“Consumers are feeling pretty good, and they are starting to spend money again, and they’re starting to do dumb things. They’re starting to borrow money, they’re starting to maybe buy that house they shouldn’t or that car they shouldn’t.”


You mean things like this?

via Securities-Based Lending By Paul Meyer, Securities Litigation & Consulting Group (SLCG):

The securities industry has long targeted the liability side of the customer’s balance sheet as an opportunity to cross-sell banking products, increase wallet share, and diversify revenue streams away from cyclical trading commissions. Thanks to aggressive marketing by broker-dealers, investors are borrowing against their securities portfolios at a furious pace.

At Morgan Stanley, SBLs totaled almost $38 billion at the end of 2014, a 70% increase in just two years. UBS’s SBLs increased 54% over the same period. Most of this growth has come from non-purpose lending. Total margin debt, as reported by the New York Stock Exchange, is at an all-time high of $507 billion. With $16 trillion worth of client assets in street name, there is still a lot of potential collateral waiting to be encumbered. Substantial profit margins in the lending business make SBLs a lucrative product for broker-dealers. Last year alone Morgan Stanley and UBS earned a combined $4 billion in net interest income just by opening their doors for business.

and like this?

To market these loans, broker-dealers use advertising – disguised as client education – that is often misleading, one-sided, and not fairly balanced with disclosure of the risks associated with SBLs. UBS, for example, extols the wisdom of “borrowing with a vision for your future” and “maximizing the power of your invested assets.”

Morgan Stanley portrays borrowing as a way to “unlock the value of [the customer’s] portfolio.” It claims that borrowing “puts the value of [the customer’s] assets to work.”

Merrill Lynch tells clients that borrowing money will “keep [their] investment strategy on track.” After reading these characterizations of borrowing, a customer cannot not be blamed for concluding that he is imprudent if he is not borrowing against his portfolio.

Since adviser behavior is driven by personal financial considerations, broker dealers offer meaningful incentives to their brokers for recommending SBLs.

Morgan Stanley’s compensation plan is typical. The broker earns an annual gross commission of 0.40% to 0.50% of his clients’ loan balances outstanding. Morgan Stanley also pays its Financial Advisors based on growth in the volume of loans made to clients. For example, a broker who recommends $25 million in new loans is paid a cash bonus (deferred for only five years) of over $100,000. At UBS brokers are also paid based on the total value of the loans their clients have taken on. UBS even rewards secretaries suggesting SBLs as an alternative to customers who are calling to withdraw money from their accounts.

Because if so, I definitely agree. Consumers really are doing dumb things. And they have plenty of help.

Someone unexpected agrees with me about historical valuation metrics


Someone unexpected agrees with me about historical valuation metrics

Courtesy of Joshua M. Brown, The Reformed Broker

A couple of weeks back, I dropped an atomic bomb on the idea that historical valuation across decades carries an appreciable amount of implication or signal for investors. My argument was grounded in common sense – one thing I’ve learned from years of studying the history of markets is that it’s not different this time, it’s different every time.

The piece went crazy online and I got a ton of feedback on it. I’d say about 90/10 positive to negative. You can read it here, in case you missed it:

And now, a brief rant about historic valuation (TRB)

Adam Parker at Morgan Stanley apparently agrees with me. He put out a note to clients this week basically saying that many of the methods we use to measure corporate valuations no longer work, and haven’t worked in a long time.

Here’s Parker (via Myles Udland):

Think again about Black Friday being smaller than Amazon Prime Day. This is a great example of how the new economy is taking over the old and how historical relationships between economic factors and consumption just no longer apply. You can’t use 1975 logic to analyze the 2015 world. Over 20% of companies in the top 1500 by market capitalization in the US have zero inventory dollars. The largest, GOOGL, is forecasted to be a $70 billion revenue company with zero inventory. The ways to measure the economy and corporate results are clearly different today than they were 30 years ago, when only 5% of the biggest 1500 US equities had zero inventory dollars. So, in our view, healthcare, consumer, and technology can perform well while industrials and metals and mining perform poorly. That could last for a while and doesn’t have to mean revert because in 1975 it seemed logical in some textbooks.People thought Pluto was a planet back then also, and that the Red Sox and Patriots would never win championships. They were wrong.

Josh here – No one is suggesting that stocks shouldn’t trade on the basis of earnings and revenues. Rather, the point is that there are entirely new business models emerging in the new century for which there simply aren’t appropriate comps for in economic history. Looking at price/book multiples from steel mills and copper smelters in the 1970’s as a guideline for understanding Google is pretty dumb.

Profit margins can certainly contract from here, but find a bottom at far higher levels than they did in, say, the early 1980’s. Which means those waiting for the single-digit PE ratios that kicked off the ’82-2000 Bull Market may end up waiting a long time, possibly their entire lives, before getting a buy signal.

A realization of this fact is in order.


Morgan Stanley’s stock market guru explains why everything you know is worthless (Yahoo Finance)


The Market In Pictures – The Aging Bull

Courtesy of Lance Roberts of STA Wealth Management

In January, I did a chart analysis of the markets suggesting that being overly optimistic going into 2015 could be dangerous.  

"As we enter into 2015, analyst calls for a continued "bull market" advance have never been louder. There have been a litany of articles written recently discussing how the stock market is set for a continued bull rally. The are some primary points that are common threads among each of these articles which are: 1) interest rates are low, 2) corporate profitability is high, and; 3) the Fed's monetary programs continue to put a floor under stocks. The problem is that while I do not disagree with any of those points – they are all artificially influenced by outside factors. Interest rates are low because of the Federal Reserve's actions, and corporate profitability is high due to accounting rule changes following the financial crisis. Lastly, the Fed's liquidity program artificially inflated stock prices.

While the media continues to pound the table with all of the bullish arguments that should continue to drive the current advance in the markets, it is only prudent to at least attempt an understanding of the counter arguments. The "risk" to investors is not a continued rise in the financial markets, but the eventual reversion that will occur. Like Wyle E. Coyote, since most individuals only consider the "bull case," as it creates a confirmation bias to support their "greed factor", they never see the "cliff" until it is far to late."

As we end the third quarter of the year, those warnings have come to pass. However, the debate that began this year remains – are we still within an ongoing multi-year bull market OR has the next cyclical bear market taken hold?

The series of charts below is designed to allow you to draw your own conclusions.  I have only included commentary where necessary to clarify chart construction or analysis.

If you have any questions, or comments, send me a tweet:  @lanceroberts

Valuation Measures

The following chart shows Tobin's "Q" ratio and Robert Shiller's "Cyclically Adjusted P/E (CAPE)" ratio versus the S&P 500. James Tobin of Yale University, Nobel laureate in economics, hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs.

The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. Dr. Robert Shiller, also a Nobel Prize winning Yale professor, created CAPE to smooth earnings variations and volatility over time. CAPE is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings.  If the ratio is above the long-term average of around 16x, the stock market is considered expensive. Currently, the CAPE is at 25.5x, and the Q-ratio is at 1.02.


My friend Doug Short regularly publishes Ed Easterling's valuation work.  Ed Easterling, Crestmont Research, has done extensive studies on valuation and resulting long-term returns.


 The next two charts are variants on Robert Shiller's CAPE. The first is just a pure analysis of CAPE as compared to the S&P 500.

[For More On Shiller's CAPE Debate read: "Is Shiller's CAPE Really B.S." and "Shiller's CAPE, A Better Measure"]


The next chart shows the deviation of valuations from their long-term average.


Measures Versus The Economy


One of Warren Buffet's favorite valuation measures is Market Cap to GDP. I have modified this analysis utilizing real, inflation-adjusted, S&P 500 market capitalization as compared to real GDP.  I have also noted the long-term median level as well as the average since 1990.


Since the stock market should be a reflection of the underlying economy, then the amount of leverage, or margin debt, in the market as a percentage of GDP could provide an important clue.


Deviation Measures

The following charts are measures of deviation from underlying trends or averages. The greater the deviation from the long-term trends or averages; the greater the probability of a reversion back to, or beyond, those trends or averages.

The first chart is the 72-month rate of change in the price of the S&P 500 relative to the index itself. Large spikes in the rate of change have normally been seen prior to intermediate and long-term market peaks.


The next chart is the deviation in the price of both the S&P 500 and Wilshire 5000 from the 36-Month moving average.  For more discussion on this chart read this.


The chart below is the same basic analysis but utilizing a 50-week moving average which is a more "real-time" variation. Importantly, note that historically when the market has significantly broken the 50-week moving average in the past, it has denoted a change in market trend. 


This potential change in trend can be more clearly seen in the chart below. Note: The market has not currently broken the previous bullish trend line that begin in 2009, however, historically it has just been a function of time. 


The volatility index (VIX) is representative of investors "fear" of a correction in the market. Low levels represent investor complacency and no fear of a market correction. Despite the recent correction to date, investor complacency remains elevated. 


Just For Good Measure

I recently wrote about the importance of "record market highs" stating:

"…while markets have risen over time, the markets spend roughly 95% of their time making up for previous losses."


And A Reminder

Recently, John Hussman tweeted this chart of the S&P 500 that lists all of the warnings signs of a crash that we are experiencing now.  


"Anatomy of a textbook pre-crash bubble. Don't rely on further blowoff, but don't be shocked. Risk dominates. Hold tight."

This analysis can tell us much about where we are within the current market cycle if we choose to pay attention. While it is certainly easy to bet on "hope," it is important to remember that it is far harder to make up losses when things go wrong. 

What has always separated successful professional gamblers from the "weekend sucker" is knowing when to step away from the table.


Coast is Clear Until 2019


Coast is Clear Until 2019

Courtesy of Wade of Investing Caffeine

Business Foresight

The economic recovery since the Great Financial Crisis of 2008-09 has been widely interpreted as the slowest recovery since World War II. Bill McBride of Calculated Risk captures this phenomenon incredibly well in his historical job loss chart (see red line in chart below):

Source: Calculated Risk

Source: Calculated Risk

History tells us that the economy traditionally suffers from an economic recession twice per decade, but we are closing in on seven years since the last recession with little evidence of impending economic doom.

So, are we due? Logic would dictate that since this recovery has been the slowest in a generation, the duration of this recovery should also be the longest. Strategist Ed Yardeni of Dr. Ed’s Blog uses data from historical economic cycles and CEI statistics (Coincident Economic Indicators) to make the same case. Based on his analysis, Yardeni does not see the next recession arriving until March 2019 (see chart below). If you take a look at the last five previous cycle peaks, recoveries generally last for an additional five and a half years (roughly 65 months). Since the last rebound to a cyclical peak occurred in October 2013, 65 months from then would imply the next downturn in March 2019.

Source: Dr. Ed's Blog

Source: Dr. Ed’s Blog

Typically, an economy loses steam and enters a recession after a phase of over-investment, tight labor conditions, and an extended period of tight central bank monetary policies. Over the last seven years, we have experienced quite the opposite. Corporations have been very slow to invest or hire new employees. For those employees hired, many of them are “under-employed” (i.e., working part-time), or in other words, these workers desire more employment hours. The slower-than-expected growth has created an output gap. Scott Grannis at Calafia Beach Pundit estimates this gap to approximate $2.8 trillion (see chart below). The CBO expects a smaller gap estimate of about $580 billion to narrow over the next few years. By Grannis’s calculations, there is a reservoir of 5 – 10 million jobs that could be tapped if the economy was operating more efficiently.

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

Bolstering his argument, Grannis points out that the risk of a recession rises when there are significant capacity constraints and tight money. He sees the opposite happening – an enormous supply of unused capacity remains underutilized as he describes here:

“Today, money is abundant and resources are abundant. Even energy is abundant, because its price has fallen by over 50% in the past year or so. Corporate profits are near record highs, the supply of labor is virtually unconstrained, energy is suddenly cheap, and productive capacity is relatively abundant.”

While new uncertainties have been introduced (e.g., slowing China, potential government shutdown/sequestration, emerging market weakness), the reality remains there is always uncertainty. Even if you truly believe there is more uncertainty today relative to yesterday, the economy has some relatively strong shock absorbers to ride out the volatility.

There are plenty of potentially bad things to worry about, but if it’s a cyclical recession that you are worried about, then why don’t you grab a seat, order a coconut drink with an umbrella, and wait another  three and a half years until you reach the circled date of March 2019 on your calendar.

Wade W. Slome, CFA, CFP® at

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) , but at the time of publishing, SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Self-Driving “WEpod” Shuttles Hit the Road in Europe; Autonomous Car Updates

Courtesy of Mish.

This November, in the Netherlands, the WEpod six-person passenger van, will become the world’s first self-driving vehicle in regular traffic, where cars and trucks also go.

The WEpod can be booked using an app which will allow passengers to reserve a seat and specify their starting points and their destinations. Vehicles are expected to select their itineraries independently.

The electric pod was originally designed by French vehicle manufacturer and robotic specialists EasyMile. It was developed for Citymobil2, an EU-funded project looking at automated road transport systems across urban Europe.

Through Citymobil2, the electric driverless shuttles have already transported 19,000 passengers in Vantaa, Finland and carried passengers on the EPFL university campus, in Lausanne, Switzerland.

The vehicles will initially ride on a fixed route, but it is expected to expand to more routes and other regions in the Netherlands from May 2016 onwards.

Test Phase

The test phase will be on real streets and roads, but not during rush hour. The WEpods will have additional equipment such as cameras, radar, laser and GPS to track the environment.

The maximum initial speed of a WEpod will be a painfully slow 25 kilometers per hour (15.53 miles per hour).

I suspect that may be too slow for safety reasons, not too fast.

Regardless, this will all be worked out soon enough.

Audi on Highway

Looking for highway tests? Then check this out….

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Balloons in Search of Needles


Thoughts from the Frontline: Balloons in Search of Needles

By John Mauldin

I love waterfalls. I’ve seen some of the world’s best, and they always have an impact. The big ones leave me awestruck at nature’s power. It was about 20 years ago that I did a boat trip on the upper Zambezi, ending at Victoria Falls. Such a placid river, full of game and hippopotamuses (and the occasional croc); and then you begin to hear the roar of the falls from miles away. Unbelievably majestic. From there the Zambezi River turns into a whitewater rafting dream, offering numerous class 5 thrills. Of course, you wouldn’t want to run them without a serious professional at the helm. When you’re looking at an 8-foot-high wall of water in front of you that you are going to have to go up (because it’s in the way); well, let’s just say it’s a rush.

If there were rapids like this in the United States, it’s doubtful professional outfits could get enough liability insurance to make a business of running them. In Zimbabwe we just signed a piece of paper. Our guides swore nobody had ever been lost – well, except for a few people who disobeyed the rules and leaped in the water in the calm sections because it was 100° out. That’s where the crocs are. They promised we wouldn’t run into any in the rapids, which was good. More than a few of us got dumped in the water trying to run the rapids, but they had teams of kayakers who got you out quickly. The canyon below the falls is unbelievable, and below that is the even more impressive Bakota Gorge. And yes, you then had to walk to the top of the canyon up a switchback trail to get home. I would do it all over again in a heartbeat, but I would spend at least three months training for the hike out. That was most definitely not in the full-disclosure-of-risks one-page piece of paper.

It would be hard to miss an analogy to the stock market. Everything’s peaceful and calm, you’re drinking some fabulous wine, eating some fantastic fresh game and fish, looking at all the beautiful animals as you drift easily with the current. Anybody can steer the boat in a bull market. Until the rapids hit and the bottom falls out.

As an aside, while the large waterfalls are majestic and awe-inspiring, the smaller ones are more hypnotic. I love the sound of falling water. I could listen for hours.

The one place I don’t like to see waterfalls is on stock charts. Those leave me awestruck at the market’s power. They do have the power to focus the mind, however, especially when we own the shares that just went over the falls.

The US stock market is having the most turbulent year we’ve seen in a while.  It’s not terrible by historical standards, but we have a full quarter to go. And next week it’ll be October, a month in which the stock market has run into trouble before. With all that in mind, this week I want to take a look at where stocks stand and maybe offer a thought or two about the events that could bring us to the next waterfall.

Not Niagara Falls Yet

Here is how the waterfall looks so far this year. Barely a 10% move peak to trough, and it lasted for just a few days. We see a lot of jostling, followed by the harrowing plunge in August, and then a partial (less than halfway) recovery. Where do we go from here?

Let’s start with the macro view. Back in July I showed you some research that I did with Ed Easterling of Crestmont Research. This was before the China sell-off accelerated into the headlines, so it is very interesting to read again in hindsight. (See “It’s Not Over Till the Fat Lady Goes on a P/E Diet”).

Our view is that we are still in a secular bear market, and have been since the 2000 Tech Wreck. You may find that view surprising, since the benchmarks have roughly tripled since the 2009 low. Our analysis looks at price/earnings ratios to identify when bull and bear markets begin or end. P/E multiples were close to 50 in year 2000. In order for that bear market to end, they needed to drop into the very low double-digit or single-digit range, which has been the signal for the end of every long-term secular bear cycle for over 100 years. That hasn’t happened during the intervening 15 years.

Can a secular bear market last 15 years? Yes. Some have lasted even longer, like 1966-1981 and 1901-1920. So this one isn’t unprecedented. And please note that the long-term secular cycles can have cyclical movements inside them. Again, we see secular cycles in terms of valuation and the shorter cyclical cycles in terms of price. (Unless this time is different) long-term secular bear market cycles will always end in a period of low valuations.

Currently, P/E ratios (or any other valuation metric you want to use) are not low enough to provide the boost that typically starts a new bull market. They were closer in 2009 than today, but have never dipped into the area that would mark the end of the bear market and the onset of the new bull. We’re still riding the same bear.

What’s taking so long? Our best guess is that stocks were so richly valued at the 2000 peak that it is taking the better part of a generation to work off that excess. In order for this bear to end – and the new bull cycle to begin – valuations need to tumble. That can happen only if prices drop considerably or earnings rise without pulling prices higher.

Obviously, there can be many trading opportunities within a secular bull or bear cycle, but Ed’s research says we have three long-term options from here.

  1. If P/E ratios decline toward 10 or below, we will be near the end of this secular bear. A new bull cycle should follow.
  2. If P/E ratios stay near where they are, we will be in what Ed calls “secular hibernation.” This would mean a lot of sideways price movement, with dividends having to deliver the lion’s share of stock market returns.
  3. If P/E/ ratios rise further, we will go back into the kind of “secular bubble” that created the Tech Wreck. I recall those years vividly, and I would rather not relive them.

Now, combine this market situation with what appears to be a global economic slowdown. China is a big factor, but not the only one. The entire developed world is in slow-growth mode. At some point it will likely dip into recession territory. Canada is already there. I don’t think they will be alone for long. Japan and Europe are weak.

I think the next true move to lower valuations will be a cyclical bear market combined with a recession. Can the stock market hold on to today’s valuations in a recession? Nothing is impossible, but I wouldn’t bet the farm on it, either. I can’t find an example of stock prices and valuations staying in place in the midst of a recession. Prices can fall slowly or they can fall fast, but I feel confident they will do one or the other.

Speaking of Bubbles

Our old friend Robert Shiller popped up last week in a Financial Times interview. Shiller is the father of CAPE, the cyclically adjusted price/earnings multiple, which looks back ten years to account for earnings cyclicality. He is also a Yale professor and a Nobel economics laureate.

Shiller’s CAPE has been saying for several years that stocks are seriously overvalued.

In his FT interview, Shiller dropped the “B” word:

It looks to me a bit like a bubble again, with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market.

When will the bubble burst? Shiller is less helpful there. He said the recent bout of volatility “shows that people are thinking something, worried thoughts. It suggests to me that many people are re-evaluating their exposure to the stock market. I’m not being very helpful about market timing, but I can easily see aftershocks coming.

Now, if you aren’t very confident about timing, it’s arguably better not to use words like bubble and aftershock. You can be sure the media and analysts will jump all over them, just as I’m doing right now.

In any case, Ed Easterling and Bob Shiller reach similar conclusions (though for different reasons). Neither sees a very bullish future, though both are unsure about timing. So when will we know the end is nigh? Sadly, we probably won’t, unless we begin to see signs that a recession is building in the United States.

Balloons in Search of Needles

As the old proverb goes, no one rings a bell at the top. The same applies at the bottom.

Let’s imagine the stock market as a whole bunch of balloons. One or two can pop loudly and everyone will jump and then laugh it off. You now have deflated debris hanging from your string.

Eventually, enough balloons will pop that the weight of the debris overwhelms the remaining balloons’ ability to keep the string aloft. Then your whole bunch falls down.

The last balloon to pop wasn’t any bigger or smaller than the others; it just happened to be last. In like manner, some kind of catalyst sets off every market collapse. It is usually something that would be survivable by itself. The plunge occurs because of all the previous balloons that bit the dust, but pundits and the media always like to point the finger at the most recent event.

So, if Easterling and Shiller are right, balloons are popping and making investors nervous, but there’s not enough damage yet to drag down the whole bundle. What are some candidates for the last balloon?

A Chinese “hard landing” is probably the biggest, most obvious balloon right now. And actually, China is big enough for multiple balloons. Their stock market downturn produced one pop already. Beijing’s currency adjustment may have been another one.

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

The article Thoughts from the Frontline: Balloons in Search of Needles was originally published at

Dallas Fed Region Activity Bad as Expected

Courtesy of Mish.

The Dallas Fed Manufacturing Survey was as bad as expected in relation to Bloomberg Econoday Consensus of -9.0.

The Dallas Fed rounds out a full run of negative indications on the September factory sector with the general activity index remaining in deeply negative ground at minus 9.5. New orders are at minus 4.6 which, however, is an 8 point improvement from August. Production is actually in positive ground at 0.9.

Other readings include a decline in the workweek and the fifth straight contraction for employment. Price readings show little change for inputs but, like other reports, contraction for finished prices.

The Texas economy has been depressed all year by the energy sector while the nation’s factory sector continues getting hurt by weak foreign demand and strength in the dollar.

Additional Details

Here are some additional details from the Dallas Fed Survey.

Texas factory activity was essentially flat in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained near zero (0.9), suggesting output held steady for a second month in a row after several months of declines.

Other indexes of current manufacturing activity increased in September, but some remained in negative territory. The new orders index posted a second negative reading but rose 8 points to -4.6, and the growth rate of orders index also remained below zero but rose to -4.3. The shipments index pushed to around zero from -3, and the capacity utilization index posted its first positive reading in eight months, coming in at 4.9.

Perceptions of broader business conditions remained weak in September. The general business activity index, which has been negative all year, rose 6 points to -9.5. The company outlook index plunged to -10.3 in August but recovered somewhat this month, climbing to -5.2.

Labor market indicators reflected employment declines and shorter workweeks. The September employment index posted a fifth consecutive negative reading, falling to -6.1. Twelve percent of firms reported net hiring, while 18 percent reported net layoffs. The hours worked index fell markedly from 0.6 to -11.1, suggesting a decline in workweek length from August.

Price and wage pressures were mixed in September. The raw materials prices index came in near zero—suggesting stable input prices—after a -8 reading last month. The finished goods prices index remained negative at -10.9, although it was up from a multiyear low of -15.7 in August. Meanwhile, the wages and benefits index remained positive but edged down to 15.6.

Mike “Mish” Shedlock

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Ackman Loses $700 Million Instantly After Valeant Gets Drug Pricing Subpoena

Courtesy of ZeroHedge. View original post here.

Yet another nail in the Biotech Bubble's coffin as Bloomberg reports Valeant receives a subpoena from House Democrats over "massive price increases." The stock is down 12 % on the news extending the collapse of the last few days and weighing very heavily on the broad Biotech index.


It's been an ugly week…

As Bloomberg reports,

Valeant Pharmaceuticals International Inc. shares fell as much as 14 percent after Democrats in the U.S. House asked to subpoena the company for documents relating to drug price increases, the latest move by politicians seeking to curb price hikes on acquired drugs.

“We believe it is critical to hold drug companies to account when they engage in ‘a business strategy of buying old neglected drugs and turning them into high-priced specialty drugs,’" 18 Democratic representatives wrote in a letter to Jason Chaffetz, the chairman of the House’s committee on oversight and government reform. They highlighted Valeant’s heart drugs Nitropress and Isuprel, whose prices increased by 212 percent and 525 percent the day that Valeant acquired them.

Very bad news for Bill Ackman and his 20 million shares…

Charts: Bloomberg

Obama: “America Has Few Economic Interests In Ukraine”… And This Very Big One

Courtesy of ZeroHedge. View original post here.

As part of his UN speech seeking to restore a crumbling Pax Americana, president Obama, eager to cover up US involvement in the Ukraine presidential coup of early 2014 (who can forget Victoria Nuland "strategy" interception in which she laid out the post-coup lay of the land, while saying "fuck the EU"), just said that "America has few economic interest in Ukraine."

Few, perhaps, but quite substantial.

Presenting exhibit A, from May 2014, just weeks after the Ukraine presidential coup was complete, the press release from Burisma Holdings, one of the largest private gas producers in Ukraine.

Burisma Holdings, Ukraine’s largest private gas producer, has expanded its Board of Directors by bringing on Mr. R Hunter Biden as a new director.

R. Hunter Biden will be in charge of the Holdings’ legal unit and will provide support for the Company among international organizations. On his new appointment, he commented: “Burisma’s track record of innovations and industry leadership in the field of natural gas means that it can be a strong driver of a strong economy in Ukraine. As a new member of the Board, I believe that my assistance in consulting the Company on matters of transparency, corporate governance and responsibility, international expansion and other priorities will contribute to the economy and benefit the people of Ukraine.”

The Chairman of the Board of Directors of Burisma Holdings, Mr. Alan Apter, noted: “The company’s strategy is aimed at the strongest concentration of professional staff and the introduction of best corporate practices, and we’re delighted that Mr. Biden is joining us to help us achieve these goals.”

R. Hunter Biden is a counsel to Boies, Schiller & Flexner LLP, a national law firm based in New York, USA, which served in cases including “Bush vs. Gore”, and “U.S. vs. Microsoft”. He is one of the co-founders and a managing partner of the investment advisory company Rosemont Seneca Partners, as well as chairman of the board of Rosemont Seneca Advisors. He is an Adjunct Professor at Georgetown University’s Masters Program in the School of Foreign Service.

Mr. Biden has experience in public service and foreign policy. He is a director for the U.S. Global Leadership Coalition, The Center for National Policy, and the Chairman’s Advisory Board for the National Democratic Institute. Having served as a Senior Vice President at MBNA bank, former U.S. President Bill Clinton appointed him an Executive Director of E-Commerce Policy Coordination under Secretary of Commerce William Daley. Mr. Biden served as Honorary Co-Chair of the 2008 Obama-Biden Inaugural Committee.

Mr. Biden is a member of the bar in the State of Connecticut, and the District of Columbia, the U.S. Supreme Court, and the Court of Federal Claims. He received a Bachelor’s degree from Georgetown University, and a J.D. from Yale Law School.

R. Hunter Biden is also a well-known public figure. He is chairman of the Board of the World Food Programme U.S.A., together with the world’s largest humanitarian organization, the United Nations World Food Programme. In this capacity he offers assistance to the poor in developing countries, fighting hunger and poverty, and helping to provide food and education to 300 million malnourished children around the world.

Company Background:
Burisma Holdings is a privately owned oil and gas company with assets in Ukraine and operating in the energy market since 2002. To date, the company holds a portfolio with permits to develop fields in the Dnieper-Donets, the Carpathian and the Azov-Kuban basins. In 2013, the daily gas production grew steadily and at year-end amounted to 11.6 thousand BOE (barrels of oil equivalent – incl. gas, condensate and crude oil), or 1.8 million m3 of natural gas. The company sells these volumes in the domestic market through traders, as well as directly to final consumers.

* * *

Meanwhile, elsewhere:

The Week Begins On A Scary Note

Courtesy of John Rubino.

The US markets awoke to news of several big, disturbing overseas events:

Glencore implodes. Think of Swiss commodities giant Glencore as a modern version of Enron, in the sense that it owns physical assets like mines and oil wells around the world and runs perhaps the biggest commodities derivatives trading desk. And — also like Enron — it’s apparently unprepared for extreme commodity price volatility. This morning its stock price plunged even further and its credit default swaps — the cost of insuring payment on its its bonds — blew out to record levels.

If Glencore loses its investment grade rating as now seems likely, its access to cheap capital will evaporate and it will fail. This matters for several reasons, the most important of which is the company’s unspecified but certainly huge derivatives book which, like AIG’s in 2008, is a serious threat to the leveraged speculating community.

Commodities from oil to gold are down hard on the news.

Saudi Arabia cashes out. The world’s dominant oil exporter can’t pay its bills with crude at $50 a barrel so it’s spending down foreign exchange reserves and borrowing hand over fist. This morning it was reported that the Saudi sovereign wealth fund — a major player in global bond and equity markets — was cashing out and bringing its money back home.

The amounts in question — $70 billion so far — are potentially a big deal for the funds that manage this money and are now seeing major outflows. According to one article: “Institutions such as State Street, Northern Trust and BNY Mellon…are therefore also likely to have been hit hard by the Gulf governments’ cash grab.”

VW execs investigated for fraud. Illustrating the difference between car makers and banks, the German government is considering criminal charges for the actual human Volkswagen executives responsible for falsifying auto emission results. That’s good for the world in general but potentially very bad for the German economy, which is a big exporter of cars, and for global equity indexes, which include the major car companies.

Stock markets around the world were spooked by these and other stories, with most major exchanges down between 1% and 2%.

Visit John's Dollar Collapse blog here.

Who Messed With Janet Yellen’s and the Pope’s Speeches Last Week?

Courtesy of Pam Martens.

Pope Francis Addresses a Joint Session of Congress on September 24, 2015

Pope Francis Addresses a Joint Session of Congress on September 24, 2015

Both Fed Chair Janet Yellen and Pope Francis delivered speeches on Thursday of last week that took an odd turn of events. A section of the Pope’s official speech transcript that slammed the finance industry was gutted before the Pope delivered his address to a joint session of Congress. In the case of Yellen, evidence strongly suggests that egregiously bad event planning sabotaged her speech at the University of Massachusetts in Amherst, triggering media hysteria and prognostications of how fast Stanley Fischer, the Fed’s Vice Chairman, would slide into Yellen’s seat as Chair of the Fed.

The official transcript of the Pope’s speech to Congress appears here. It contains the following passage:

“Here I think of the political history of the United States, where democracy is deeply rooted in the mind of the American people. All political activity must serve and promote the good of the human person and be based on respect for his or her dignity. ‘We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness’ (Declaration of Independence, 4 July 1776). If politics must truly be at the service of the human person, it follows that it cannot be a slave to the economy and finance.”

The C-Span video of the Pope’s address, available here, shows the above section was gutted from the address when the Pope spoke to Congress.

Apparently, someone did not want finance, as in Wall Street, to be slammed by the Pope. Of course, the Pope is correct — the United States and its people are now enslaved to Wall Street — with no relief in sight from the body the Pope was addressing. So out of touch is Congress with the needs of the “human person” that a Gallup poll taken last month showed just 14 percent of Americans approve of the job Congress is doing. That fact no longer needs to trouble members of Congress since “human persons” no longer elect them. They are now elected by multi-million-dollar attack ad campaigns filling the airwaves against their opponents, funded by corporations, courtesy of the U.S. Supreme Court’s Citizens United decision.

Continue Here


Whole Lotta Bear Markets Goin’ On

Courtesy of John Rubino.

The Dow and S&P 500 have fallen by around 10% since August, which in normal times would be hardly worth mentioning. But below the surface, in what used to be the market’s hottest sectors, much more serious damage is taking place.

Biotech, which had an epic bull market during the era of QE and the Affordable Care Act, had begun to crater even before Hillary Clinton proposed price controls for pharmaceuticals. Last week it went straight down.

Biotech ETF

Solar stocks had a quiet bull market that accompanied the technology’s emergence as heir apparent to fossil fuels. But now they’re quietly crashing:

Solar ETF

Junk bonds, which are essentially the equities of highly-leverage companies (because they turn back into equity when the bonds default and reluctant creditors are forced to take ownership of the junk issuers) have tanked in the past few months and are now far below their 50 and 200-day moving averages.

Junk bond ETF

One group that isn’t plunging is the gold miners. But that’s mainly because they had their crash while everything else was still rising, and are now at historically cheap levels. Here’s an ETF that tracks the junior gold mining stocks:

GDXJ Sept 2015

What does it mean when several high-flying sectors crash all at once? If history is still a reliable guide (a big if in today’s manipulated world) it means the internal structure of the market is deteriorating much more quickly than the behavior of the Dow and S&P 500 seem to imply.

When stocks in general catch up to the carnage in yesterday’s hot sectors, we’ll get something a lot more extreme than a simple correction. And when that happens the odds of the Fed raising US interest rates drop to zero.

Visit John's Dollar Collapse blog here

Germany’s Immigration Challenge


Outside the Box: Germany’s Immigration Challenge

By John Mauldin

This immigration crisis in Europe is a big deal, and it’s a bigger deal for Germany than for any other European country. Germany is directly in the firing line, both geographically and in terms of how many of the migrants want to settle there. Nearly 40% of migrants choose Germany as their preferred final destination, while the only other nation that is chosen by more than 10% of migrants is Hungary, at 18%.

Daniel Stelter is a very wired German economist and business thinker. He wrote to me a couple days ago, said he had read my remarks on Germany and the immigration crisis in last week’s Thoughts from the Frontline, and recommended to my attention a couple of articles he had just written on the issue. They are today’s Outside the Box.

In his note to me, Daniel says:

I doubt that it will work out as politicians hope. In theory we agree: well-educated people come to Germany to help us deal with the demographic crisis we face. The reality is that a big part of the immigrants will not be able to fulfill these hopes as they are illiterate, etc. We would have to invest heavily to make this happen, but politicians shy away from doing so. I have summarized what the scenarios are and what we would have to do to make it happen in this two-part comment for the Globalist, which you might want to have a look at. To be clear: Germany looks like ending up with more problems than less if we don’t change gears fast.

Please note that Stelter is not anti-immigration. His first piece below, “Germany’s Immigration Challenge,” enumerates the difficulties to be faced if Germany is to greatly increase immigration and lays bare a number of misconceptions about Germany’s ability to do so; but he doesn’t stop there. In the second piece, “Germany: A 10-Point Plan to Deal with the Immigration Challenge,” he thoroughly details what it would actually take for Germany to sustainably integrate the current wave of immigrants. This is a no-nonsense, no-holds-barred effort to confront the immigration crisis. Whether or not you think Stelter’s scheme can be realized, this (or something much like it) is what it will take to get the job done, not just in Germany but throughout Europe. This is going to be a costly endeavor no matter what, and it is going to happen as services and retirement payments are cut due to strained budgets. Which is going to strain nerves. This is the type of problem that has led to Marine Le Pen in France and others throughout Europe on the radical right and left beginning to show real strength in the polls. (Take a look at this piece on Le Pen from yesterday.)

Perhaps I am more fretful than I should be after my dinner with George Friedman, who loves Europe but doesn’t think the EU is the answer, nor that will it last in its current form.

I spent much of the day and will continue long into the evening in a planning session for the 2016 Strategic Investment Conference. It will be held in Dallas May 24-27, and I truly believe it will be my best conference ever. Part of the new emphasis is going to be on the ability of attendees to network with one another. There are cool new technologies that allow us to do that. The biggest “problem” is trying to sort out who the speakers will be this year: we have an embarrassment of riches. Well, that problem plus the half-dozen other major priorities that are already demanding lots of attention. I actually remember a time in my life when I felt that I could read the sports page and watch TV while still dealing with business and raising seven kids, plus being involved in politics and church, etc.

The irony is that I have this fabulous media system throughout the house, and I am ashamed to say that it is rarely used, except when kids or friends come over to watch something. I know I’m not the only person with insufficient bandwidth, because I hear it from friends everywhere. And the availability of great information is only going to increase. I am told that someday we’ll each have an information “butler” to help us handle the load, but that cool new personal AI app is going to have to wait for a lot more power in our computers and phones and monster upgrades in software.

I suppose it will come much like the speech-recognition technology that I’m using to write this letter. Given that I’m actually a relatively slow and clumsy typist, it has really increased my productivity. But I can’t tell you how many versions of this software I bought over the last 12 years that were not ready for prime time. I suspect that the introduction of techno-butlers will go much the same way. We’ll endure a lot of hype, spend our money, and be less than satisfied with the results. But by version 12.5, iButler will actually be a tool we can’t live without. If its development proceeds at the same pace as speech-recognition, then my personal butler might not show up ready for work until sometime in the late ’20s. On the other hand, the technological transformation is accelerating, so…

While we’re at it, I really do hope that Mike West over at Biotime can figure out how to make a new or at least a younger version of me, or at least the parts of me that I’m going need, by then.

You have a great week.

Your trying not to overload your inbox analyst,

John Mauldin, Editor
Outside the Box

Germany’s Immigration Challenge

We have to make an honest assessment of costs and benefits of the migration crisis.

By Daniel Stelter
September 13, 2015

Germany is considered a rational, fact-driven country, not an emotionally driven one. And yet, based on the current immigration debate in Germany, even the advocates of more immigration have little more to offer than emotional arguments.

Given our nation’s history, Germans want to help wherever and however possible. Offering asylum to those in danger is deeply rooted in our society and even those who look for a better living are welcomed by a large segment of German society.

The advocates of more openness point to the benefits which an aging and shrinking population receives from more immigration and they see the potential costs as rather minimal, at least for a rich country like Germany.

That is a rather rose-tinted assumption because it underestimates the financial costs, overestimates the benefits from immigration and clearly overestimates the financial capacity of Germany.

Being overly optimistic helps neither the immigrants themselves nor the cause of promoting greater openness in German society.

Tremendous costs

Proponents of more immigration to Germany refer to the shrinking workforce and the significant unfunded liabilities for pensions and health care, estimated at least at about four times the country’s GDP.

The ultimate answer about how significant more immigration is in that context depends on what the net contribution of immigrants is to the German economy.

Aside from the fact that the answer is very contested, even well beyond the realm of politics in the field of academic literature, there is an additional problem. No one can tell for sure, as the qualification of immigrants, especially refugees, is not registered.

Supporters of immigration point to the high number of academics immigrating, such as Syrian doctors. Critics point to a high number of uneducated and illiterate people. Most probably, Germany is receiving a mix of both, very well educated and uneducated people.

Even making a very optimistic assumption – that 50% of the one million immigrants expected in 2015 are well educated, willing to be integrated and want to contribute to the German society, while the other 50% will remain largely dependent on public support – we can make a simple calculation.

If the 50% share of skilled immigrants before long were to earn 80,000 euros on a per capita basis – well above Germany’s average income of about 40,000 euros – and paid taxes of 40%, their annual contribution to society in form of taxes would be about 16 billion euros per year.

Availability of only high-skill jobs

At the same time, assuming a social welfare cost of about 25,000 euros per “non-productive” immigrant, those costs would total 12.5 billion euros annually. That would still leave a positive net contribution to German society and the nation’s economy

This underscores that it is obviously critical from an economic point of view to attract a high share of productive immigrants.

But this matters for more than just economic considerations. As an advanced industrial democracy, Germany offers plentiful immigration opportunities for skilled people.

However, unlike the past when large swaths of low-skilled people came to Germany, the supply of low-skilled jobs in the manufacturing sector is drying up quite rapidly, not least due to the increased automation of German industry.

What is available are jobs in the services economy which require language skills and an ability to do abstract reasoning. Germany ought to be quite focused on this issue – not because it is heartless but prudent.

The country has made plenty of mistakes on the immigration front in the past, which ought not to be repeated. Not embracing an active, skills-based approach to the management of immigration – à la Canada or Australia – was one such mistake.

Does it matter?

Of course, one could conclude that net costs of a few billion per year do not matter for a country as rich as Germany. This is true – but only from the current perspective.

If one shifts from static to dynamic analysis and realizes that immigration into Germany may very well continue at the current speed, the picture looks quite different.

  • Assuming a total pool of five million immigrants flowing in and a more likely mix of 30% skilled immigrants to 70% unskilled or low-skilled ones, the net costs would rise to 38 billion euros per year.
  • Over a time horizon of 30 years, this would easily lead to costs of more than one trillion Euros. That is close to the entire costs of German reunification between 1990 and 2010.

Not as rich as it claims

Let’s also understand that Germany is not as rich as it claims. Besides the unfunded liabilities for the aging society of more than 400% of GDP, the strategy to exit from nuclear energy is expected to cost German consumers and businesses about 1 trillion euros.

Even that might be manageable if the euro were structured in a sound manner. As things stand, rescuing the Euro will at least cost another trillion euros. Add in the backlog of investments in public infrastructure and another trillion euros is gone.

A plan for immigration

Obviously, Germany needs to spend its money intelligently. But we also need to change our behavior.

From both an economic point of view, as well as from a humanitarian point of view and from the vantage point of providing of solid integration perspective in German society, we have to make the best out of the wave of immigration coming to Europe and Germany.

Germany: A 10-Point Plan to Deal With the Immigration Challenge

What does it take to make sure that the immigrants now arriving are integrated in a sustainable manner?

By Daniel Stelter
September 14, 2015

Reduce bureaucracy

The process of accepting someone as a refugee in Germany takes too long. We need to define safe countries, like Albania, and send immigrants from these countries back directly.

With all sympathy for their interest in a better living, they are not threatened by war or discrimination. On the other hand, refugees from countries in (civil) war should be accepted fast.

Get to work

It is very important to get immigrants into work once they are in Germany. It is bad for both skills and motivation levels if people cannot work.

Learning the German language is of utmost importance and should be mandatory. Ideally from day one onwards, immigrants should have to start learning the language.

And as long as the immigrants don’t have a job, they should do community service. This advances their integration into society and would give a clear signal: Everyone coming to Germany has to contribute to the common good with his or her abilities.

Significant investments in education and integration

We need to register skills in order to find the appropriate job or define the necessary next steps in education. Education will the biggest challenge.

German schools even today fail to integrate and educate the children (and grandchildren) of migrants who have been in the country in some cases for some decades.

The school performance of children from Turkey, the Arab world and Africa is significantly below the average. We need to invest significantly, as this will define which share of migrants will become productive members of our society and which share will depend on social welfare.

Defend our values

Not only skills and language are important. In addition, we need to emphasize our principles and values. This includes freedom of speech and religion, women’s rights, tolerance for minorities and non-violence.

We have to make clear that integration will only work this way and is expected from everyone. Simply arriving is not enough to stay.

Canada, while generally being very welcoming to immigration, every year sends back about 10,000 immigrants – not necessarily for lack of integration, but it is not a one-way street.

Mandatory schooling

Participation in language school and courses on values and rules in Germany need to be mandatory for every new arrival. Just as Brazil does with its bolsa familia, the payment of social welfare should be linked to language and values training.

In doing so, we would convey the image of Germany as we should – a country willing to help, but also a country in which everyone has to make a contribution. Everyone who expects help and support needs to be willing to learn the language.

Recruit qualified immigrants

It is clear that a selection process as in Canada and Australia succeeds in attracting better-qualified migrants.

Besides refugees from war and people in their home countries, who need our support and where economic considerations should play no role, Germany should become more attractive for well-qualified migrants and be more active in advertising the opportunity to build a new life here.

As a consequence, we should actively open the way for legal immigration to Germany. As a result, the applicants could spend their savings on building a new life here, instead of spending it on smugglers.


Both sides, the migrants and the German population, need to accept immigration as a lifetime decision. It is not a temporary refuge.

Again, Canada proves the point: If it is seen as permanent, both sides, the migrant and the accepting country, work harder to make integration work.

That has been a particular shortcoming of Germany’s immigration policies in the past, especially regarding Turks.

Help in the poor countries

It would be cheaper and more effective to help the people in safe countries such as Albania, who aim for a better life, with direct financial and organizational support. The EU should invest there and help to build democratic institutions and a working rule of law.

Fostering peace

The current wave of immigration is the result of conflicts which have lasted for decades already – and will likely last decades more.

This is amplified by a demographic development which leads to a high number of young people without a credible perspective of finding a job in their home country. This, in turn, increases the propensity not just for social strife, but even for (civil) war.

The West needs to reconsider its strategy fundamentally. The current U.S.-led approach of favoring military intervention over development aid only leads to even more destabilization.

Be all in

The humanitarian and financial costs of such a strategy are enormous. But if we don’t do this, we will have much higher costs to incur.

Whoever speaks of the benefits of immigration also needs to make sure that all the groundwork is laid so that the possible benefits are also realized. Making the necessary investments can by no means be taken for granted.

In conclusion, the current and future wave of immigration to Germany could be beneficial for our country – but only if we address the challenge with full force.

Unfortunately, it seems as if, just as in the eurozone crisis, that our various countries’ leaderships – Germany’s included – are failing at the task.

There is no denying that any solution involves shouldering huge costs for all citizens, natives and migrants. Those who hope that the wave will end soon should think again: Sub-Saharan Africa’s population is about to grow by 600 million over the next 20 years.

100 million or more of those mostly young people will look for a better life in the north. We had better learn now how to deal with it.

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Important Disclosures

Playing the Chinese Trump Card


Thoughts from the Frontline: Playing the Chinese Trump Card

By John Mauldin

“I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind.”

– Donald Trump, 2011

Back in the olden days (pre-2000 or so), information junkies like me relied on printed newspapers, paper magazines, TV newscasts, and snail-mail newsletters. All these channels still exist, but they can’t begin to compete with the constant stream of data rushing into our tablets and smartphones. And on some days the stream rushes faster.

Last week, for instance, it seemed I couldn’t go five minutes without another story on either (a) China or (b) Donald Trump. For a day or so, I really wondered if someone had planted malware in my browser to make me think all other topics were inconsequential. It was all Trump and China, all day and all night. China has pushed the Fed into second place (for a few days at least) – perhaps we should be grateful that at least something has. Of course, there is the little problem that a bear market might be in the offing. Commodity prices seem to be in the toilet. Global currency markets are throwing up. Isn’t the world supposed to be on vacation in August?

Let’s see if we can find a connecting thought or three among all these topics. Plus, I want to show you how the current market meltdown is being brought to you courtesy of your friendly US Federal Reserve Bank. As our starting point, though, let’s cast an eye at The Donald and Chinese currency manipulation.

“Nobody Does Anything”

As we all know by now, on Aug. 11 the People’s Bank of China changed the way it manages the renminbi daily trading band against the US dollar. The result was a two-day drop for the RMB and a lot of consternation on trading floors around the world.

Taking questions at an event in Michigan that day, Donald Trump had this to say:

I think you have to do something to rein in China. They devalued their currency today. They’re making it absolutely impossible for the United States to compete, and nobody does anything. China has no respect for President Obama whatsoever, whatsoever.

Well, you have to take strong action. How can we compete? They continuously cut their currency. They devalue their currency. And I have been saying this for years. They have been doing this for years. This isn’t just starting. This was the largest devaluation they have had in two decades. They make it impossible for our businesses, our companies to compete.

They think we’re run by a bunch of idiots. And what’s going on with China is unbelievable, the largest devaluation in two decades. It’s honestly – great question – it’s a disgrace.”

Before you dismiss this as nonsense, remember that it comes from a Wharton School graduate.

Still not impressed? You’re right; it is indeed nonsense. Trump and all those who prattle on about Chinese currency manipulation have the economic comprehension of a parakeet. Is Trump really so clueless?

In one sense, it doesn’t matter. Trump isn’t talking to most of us. He draws an audience of frustrated, mostly middle-class Americans who are still hurting from the Great Recession. They want to blame someone. China is an easy target. So are illegal immigrants and Mexico and other faceless culprits. Furthermore, his audience has legitimate concerns. They are fully aware that both political parties ignore them.

A recent Gallup poll shows that 75% of our country believes there is significant corruption in government. They’re tired of it. They want to try something different. It is telling that a recent Michigan poll of Republican party activists found that 55% would go with either untested non-politicians or Ted Cruz, who is about as much of an outsider as you can find inside the Washington DC Beltway. I find almost nothing attractive about Donald Trump, but significant numbers in both parties have clearly demonstrated that they are looking for real change. Shades of Greece and Syriza’s coming to power, or France and the startling surge by Marine Le Pen’s Front National. The US is beginning to experience what our European friends have been living through the past few years.

Back to Trump and currency manipulation. I could do a sentence-by-sentence analysis of his populist harangue on China, but let’s take the really egregious statement:

How can we compete? They continuously cut their currency. They devalue their currency. And I have been saying this for years. They have been doing this for years. This isn’t just starting. This was the largest devaluation they have had in two decades. They make it impossible for our businesses, our companies to compete.

No, they haven’t. This whole myth that China has purposely kept their currency undervalued needs to be completely excised from the economic discussion. First off, the two largest currency-manipulating central banks currently at work in the world are (in order) the Bank of Japan and the European Central Bank. And two to four years ago the hands-down leading manipulator would have been the Federal Reserve of the United States. The leaders/aggressors in the currency wars come and go.

Today, the euro is off over 30% from its highs, as is the Japanese yen. Numerous other currencies are likewise well into double-digit slides. China has moved maybe 3 to 4%. Oh, wow.

Secondly, Donald (and to be fair I should address this to Senators Schumer and Graham, et al., too) the Chinese have not been continuously cutting their currency for years. In fact, if they have manipulated their currency, it was first to make it even stronger when the dollar was falling and then to hold those gains in the face of the steadily rising dollar. Meanwhile the rest of the world (Japan, Europe, Great Britain, Brazil, India, among others) was letting their currencies drift down. The simple fact is that the Chinese currency rose by 20% over the last five years up until a week ago, for reasons we will examine a little later. It is utterly wrong-headed to call a 20% rise over almost 10 years “continuous devaluation.” Yes, prior to that time they did allow their currency to devalue rather precipitously, but if you look back and think about it, they were faced with something of a crisis at the time. Most currencies do fall during periods of economic stress.

Don’t get me wrong. The United States and China have a several-page list of issues that need to be worked out between them. If you read my recent book on China, you learned about more than a few of those problems. But given that the Federal Reserve has been the most egregious currency manipulator in the world over the last five years, hearing the pot calling the kettle black probably sticks in the craw of most non-US citizens. I understand it makes for a great populist harangue. It’s always easiest to blame our problems on someone else. But it doesn’t get us anywhere we want to go.

Back to the main story. Let’s look at this fascinating chart from my friend Chris Whalen over at the Kroll Bond Rating Agency:

Chris writes:

With the end of QE in sight in 2014, the dollar began to climb against most major currencies with the exception of the yuan, which remained effectively pegged against the dollar because of intervention by the PBOC. The yuan has, in fact, appreciated steadily against the dollar since 2006 and continued to move higher within the managed foreign exchange regime maintained by the Chinese government. Until last week, the PBOC had been using its foreign exchange reserves to cope with the increased demand for dollars from domestic investors. The decision to end the defense of the currency has economic as well as financial ramifications. For example, investors are starting to wonder just how much foreign currency debt China has accumulated to fund infrastructure investment as well as foreign ventures, and whether this total is reflected in official debt statistics.

Oil and copper are priced in dollars. From the point of view of China, and much of the rest of the world, oil is up several times in the last 15 years, and copper is up 2 to 3 times, even after the recent selloffs. From an inflation-adjusted standpoint, the rest of the world just sees things as getting back to normal. A strong dollar can do that.

Chinese Déjà Vu

Trump’s China complaints are nothing new. I wrote an entire issue on this topic five years ago (and Jonathan Tepper and I dealt with it at length in both Endgame and Code Red.) At that time, economist Paul Krugman and a group of senators led by New York Democrat Chuck Schumer wanted to impose a 25% tariff on Chinese imports. This is from my March 20, 2010, issue:

I probably shouldn't take on a Nobel Laureate who got his prize for his work on trade, but this truly scares me. People pay attention to this nonsense, including the five senators, led by Schumer of New York, who want to start the process of targeting China.

First, the Chinese have got to be wondering what they have to do to make these guys happy. In 2005 they were demanding a 30% revaluation of the Chinese yuan. And over the next three years the yuan actually rose by 22% at a gradual and sustained pace. Then the credit crisis hit, and China again pegged their currency [even as the dollar got weaker!]. From their standpoint, what else were they to do? Force their country into a recession to appease our politicians?

They responded by a massive forcing of loans to their businesses and governments and huge infrastructure projects. Kind of like our stimulus, except they got a lot more infrastructure to show for their money. It remains to be seen how wise that policy was, and how large the bad (non-performing) loans will be that came from that push – just as there are those (your humble analyst included) who do not think the way we went about the stimulus plan in the US was the wisest allocation of capital.

But the reality is that the Chinese will do what is in their best interest. I wrote in 2005 that the yuan would rise slowly over time. The political posturing of Schumer, et al., was counterproductive then, and it still is now.

My prediction? The Chinese will begin to allow the yuan to rise again sometime this year, just as they did three years ago, because it will be to their advantage. A stronger yuan will act as a buffer to inflation, which they may face due to the massive stimulus they created. They are going to need some help in that area. But it will be 5–7% a year, so as not to create a shock to their export economy. Not 25% at one time. And at some point they will allow the yuan to float against the dollar. They know they will have to in order to get the currency status they want.

Back then, it was Schumer and Krugman who wanted to “rein in” China. Now we have Trump saying more or less the same things. Look at what happened in the intervening five years, in this chart from Krugman’s home-base New York Times.



And sure enough, right on schedule and as I predicted in 2010, the RMB began to slowly rise and rose through early 2014. This was about the same time that “China stopped acting Chinese,” as I wrote earlier this month. At about that time, China Beige Book detected a noticeable shift in Chinese business behavior, when companies stopped using the government’s stimulus to add new capacity.

Our hypothesis, you may recall, is that the Chinese monetary stimulus began going into stocks instead of capital improvement projects. That inflow led to the stock bubble that has popped over the last few weeks. Which resulted in an apparent panic in the halls of Chinese government.

Code Red at the PBOC

Sorting through the approximately 47,000 China reports people sent me in the last 10 days, I see two broad categories of analysis.

In one corner are those who think Beijing is frantic to juice its economy. They point to the disappointing export numbers that came out shortly before the PBOC currency action. The theory is that letting the renminbi fall a bit will help keep the export machine running. For what it’s worth, the Chinese economy is indeed slowing down. This morning we learned that their manufacturing index had registered below 50 for the sixth straight month.

In the other corner are those who say the PBOC action has little or nothing to do with China’s present economic situation. It was instead a key step in efforts to internationalize the renminbi and see it added to the International Monetary Fund’s reserve currency basket – the so-called Special Drawing Rights or SDR.

Those who read Code Red, my 2013 book with Jonathan Tepper, will probably guess that I lean toward the second interpretation. I’ve been anticipating competitive currency devaluations from many countries. The term “currency war” might be too strong, but I expect more such moves to be made. As Japan has demonstrated, devaluation is the logical next step in the monetary game everyone is playing.

(Speaking of Japan, we learned this week that their GDP shrank at a 1.6% annual pace last quarter. Slowing exports were a big factor, and you can bet that some of the missing export volume would have gone to China.)

I wrote in 2013 and have been saying since that if China does float the RMB, the currency will go down in value, not up. The amount of capital tied up in China that would like to move offshore will make the recent currency moves seem like a summer picnic.

Every time the Chinese open the currency-trading window, their currency is going to slip to the bottom of the band. It is hardly currency manipulation if the market is telling you that your currency is valued too high. Even China, with its massive dollar reserves, does not have enough money to maintain its currency at its current value should they try to float the RMB. See for reference Great Britain’s little run-in with George Soros, circa 1992.

So what is China up to? President Xi Jinping is trying to balance two conflicting objectives. He knows China’s closed economy is unsustainable and that they must liberalize their trade and monetary policies. That means letting market forces set things like the RMB exchange rate.

Letting markets rule is hard, even if you aren’t a communist. Xi governs a country of a billion-plus people who are accustomed to central planning. Going all the way to Adam Smith’s laissez faire isn’t in the cards, but even small steps won’t be easy.

On the other hand, more than a few Chinese have built their own versions of laissez faire. Those with money have found numerous ways to get it across the border in recent years. They have also bought hard assets, because they don’t trust the government to engineer a soft landing.

With capital controls that were leaky anyway and the economy slowing down, Beijing might have loosened the RMB band even if SDR inclusion weren’t on the table. The fact that it is on the table, and that the IMF had dropped heavy hints that China should let the RMB float, made now a good time to start the process.

I believe a free-floating renminbi is the ultimate goal, but the PBOC is still a long way from that point. They will let it adjust gradually. How far? If they believe their own statements, they will let the market answer that question.

What happens when Beijing doesn’t like the market’s answer? They will ignore the market and do whatever they think will maintain social stability.

While I was in the midst of writing this, George and Meredith Friedman (of Stratfor) stopped by the hotel here in New York for a brief visit. As is typical when we’re together, we immediately began to discuss the topic of the day, which was China’s currency issues. George sees the world through a geopolitical lens with an economic tint. I, on the other hand, see the world through an economic lens with a geopolitical tint.

George argues forcefully that Xi is ruthlessly attempting to restructure an economy that has allowed 20 to 25% of its citizens to achieve a middle-class lifestyle. Much of the rest of the country lives a lifestyle that is on par with that of Bolivia. The disparity between the coast and the rural interior areas is quite wide – a situation not entirely unlike the one Mao found himself in 70–80 years ago. The Chinese leadership remembers the lessons of that era, and Xi is determined not to allow the privileged few to put the system at risk.

I have written on numerous occasions about the absolutely staggering amount of money that has been leaving China, even with capital controls. We are talking tens if not hundreds of billions of dollars. The effects on global markets are truly breathtaking.

I saw one sign this week that underscores both Beijing’s challenges and its boldness. The New York Times reported on Aug. 16 that Chinese government agents have secretly visited expatriates in the US and pressured them to return to China. This behavior would be a violation of US law. The Obama administration reportedly demanded a halt to the activity.

China apparently regards some expatriates, especially those caught up in the recent anti-corruption drive, as fugitives from justice. That may be true, but it is also certainly true that these people brought a lot of Chinese capital to the US with them. And capital leaving the country doesn’t further Beijing’s larger objectives.

While I doubt Chinese expatriates have removed enough cash from China to truly move the country’s needle, China’s aggressive pursuit of them serves as a useful warning to others who might be planning such moves.

As an aside, I mentioned this item to George. He smiled and gave me that “you poor little naïve boy look” that he pulls off so well with me. “They know they can’t compel the former Chinese citizen to come home. They just ask how his parents or children are doing.” The message is understood.

Hard Landing or Soft?

Much depends on how well China juggles all the ponderous economic balls it has in the air, and by “much” I mean “the entire global economy.” We should all hope they get it right.

If all goes well over the next year or so,

  • The PBOC will gradually take its hand off the scale and let the renminbi float freely,
  • Beijing will find ways to swing the economy from export-driven to consumer-driven,
  • Chinese stock valuations will return to a more realistic level,
  • Debt levels will hold steady or shrink, and
  • The nations that have been shipping raw materials to China will make their own adjustments.

A lot to ask for? Yes. We need all these things to happen, but some of them don’t coexist naturally.

For example, Chinese state and private debt currently total about 300% of GDP. If you think that the GDP number they publish is too high, the debt percentage goes even higher. China has a lot of debt any way you look at it, and much of it is dollar-denominated.

A devalued renminbi makes dollar-denominated debt more expensive. Chinese companies that borrowed dollars just saw their debt-servicing costs jump higher. Those who complied with Beijing’s command to seek domestic revenue instead of exports will feel the squeeze the most.

Far be it from me to underestimate the Chinese leadership’s management ability or their willingness to force change. They have done the seemingly impossible before. They might do it again, but their odds are certainly not improving and may be getting worse.

Chinese leaders often give with one hand and take away with the other. I can easily imagine them opening up the currency as the IMF and the West want, while at the same time working behind the scenes to “discourage” Chinese citizens from taking advantage of the new opportunities that result.

If that’s the plan, it will likely be negative for Western markets that have attracted Chinese assets in recent years. London and New York penthouses – which are being emptied of Russians – may have even fewer prospective buyers. 

That’s small potatoes, though. Our real problems will start if China suffers a hard landing or their growth falls to 1 or 2%. I am not predicting that, but we need to consider the possibility. The chances are more than remote.

Monetary Missiles

You can debate whether China is serious about opening its closed economy to market forces. I think it’s clear that at the very least they want to look as if they are opening the closed economy. That the PBOC held a news conference to explain its actions last week was significant, despite the brevity of the explanation.

Does Beijing have a detailed road map that lays out a specific route from here to there? I don’t think so. I think they realize the markets would outguess any predetermined path. Instead, they’re taking one step at a time, observing the results, and then taking another step.

That is a smart strategy. The risk is that it could lead the Chinese leadership to places it doesn’t want to go. Then what?

The Chinese may have stopped acting Chinese, but on one level nothing has changed. Maintaining social order and keeping the current regime in power are still the top priorities. They will not let the markets put those goals in danger.

I have said for a long time that the US economy will muddle through all our domestic challenges and that our main risks come from exogenous shocks. A China hard landing is one of the top two such possible shocks. The other is a hard, sudden Eurozone breakup.

Either development would almost certainly push the US into a recession, and a global recession would follow. Global growth has recently fallen to the 2% range, which is actually quite troubling. If you have invested some money in emerging markets, you’ve probably noticed that there is true panic taking hold in them.

The European risk may have diminished, but it is still there. Greece is not the only problem. The catastrophe would be a Greece-like crisis in Italy, Spain, or France. The IMF and Germany put together could not paper over those debts.

If there are simultaneous shocks in both China and Europe, we will see a deep global recession. That will spark a real currency war. The small skirmishes we’ve seen so far are tiny in comparison to the monetary missiles that central banks would launch at each other.

Every Central Banker for Himself

The headline on Bloomberg at the close of the markets today is “Stocks fall most in four years as China dread sinks global markets,” with the article talking about the fall in emerging markets leading the US stock market down. Shades of 1998. The US markets were down over 3% today, culminating in the worst week in four years. “To energy shares already snared in a bear market, add semiconductor stocks, which crossed the threshold by capping a decline of more than 20 percent. Apple Inc. also entered a bear market, while the Dow Jones Industrial Average entered a so-called correction with a decline of 10 percent from its last record. Biotechnology, small caps, media, transportation and commodity companies have also entered corrections.” (Bloomberg)

I’ve been talking about this sort of outcome for well over a year. It wasn’t all that long ago that the governor of the Central Bank of India, Raghuram Rajan, gave a controversial speech lecturing the Federal Reserve on the effects of US monetary policy on global markets. He warned that the weak monetary policy of the US Federal Reserve was going to create a great deal of damage in emerging markets and that we wouldn’t like the result.

It wasn’t long after that US Fed Vice Chairman Stanley Fischer replied in a major monetary speech. Let me translate what he said into comprehensible English: “Rajan, I understand your concern, but you need to understand that we have bigger fish to fry and that we are going to run US monetary policy for our own benefit. Stop whining and figure it out.” Understand, Fischer is at the very top of the pantheon of economic gods of the world. Rajan is one of the most respected economists and central bankers in the emerging-market world. This was no ordinary exchange.

I have written at least four letters about the probability of problems developing in the emerging-market world because of US Federal Reserve policy, and I have detailed the links between our policy and problems in those countries’ economies. Now, we may be on the verge of a crisis.

The low rates and massive amounts of money created by quantitative easing in the US showed up in emerging markets, pushing down their rates and driving up their currencies and markets. Just as Rajan (and I) predicted, once the quantitative easing was taken away, the tremors in the emerging markets began, and those waves are now breaking on our own shores. The putative culprit is China, but at the root of the problem are serious liquidity problems in emerging markets. China’s actions just heighten those concerns.

As an aside, people are wondering why the euro and the yen have recently been strengthening against the dollar. It’s because the US stock market is finally rolling over, and money is going to those areas of the world where quantitative easing is still being practiced with a vengeance. Is that logical? Please, don’t try to tell the markets to be logical. Market players have bought the narrative that quantitative easing means a rising stock market, and they’re going to stick to that narrative until it falls flat on its face. The markets can deal with only one narrative at a time.

Donald Trump wants to “rein in” China. Exactly how will anybody rein in anything if we tumble into another global recession, when it will be every country for itself? Not even Donald Trump knows how to make trouble on that scale.

Vacation Time

In exactly 15 minutes I’m going to be officially on vacation for the next 10 days. I’m going to hit the send button and rush out the door to go see “Jersey Boys” down the street on Broadway, and will probably try to sing along with a few of the hits. They do bring back memories. Over the next week I will be visiting friends. Jack Rivkin and Doug Kass will be in the Hamptons tomorrow. I will then get back to the mainland, rent a car, and drive north, probably spending a night in Salem playing tourist before heading off to Woody Brock’s summer home in Gloucester. Then it’s down to Boston for a few days to be with Steve Cucchiaro before he takes us to Newport to spend a few nights on his racing catamaran. Then I’ll head back to Dallas for an evening with my kids.

Frankie Valli is waiting. I’m outta here. You have yourself a great week. (And yes, I will actually be paying attention to what’s happening out there, because that’s my nature. But I really will try to spend time with friends relaxing and recharging my batteries for what is going to be a very hectic fall.)

You’re getting ready to kick back analyst,

John Mauldin

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Catalan Separatist Parties Victorious, Unprecedented Voter Turnout

Courtesy of Mish.

The showdown in Spain between the independence parties and Madrid is sure to heat up following today's elections.

Here is a link to the Live Vote Totals.

With 70% of the vote counted, the parliament totals look like this:

In terms of popular vote, it appears the separatists will fall short of an absolute majority. Separatists will get about 47% of the popular vote.

Pro-Independence Rally on Friday

Above image from Financial Times.

Current totals show prime minister Mariano Rajoy's conservative Popular party is going down in a crushing defeat with only 8.46% of the vote.

Mish Shedlock


Total Lunar Eclipse September 27-28: Where to See It, How to Photograph It

Courtesy of Mish.

There is a Total Lunar Eclipse tonight visible of most of the US. You may want to watch it. The moon will likely appear strong read or orange, giving the name “blood moon”.

click on table for sharper image

The Penumbral phase is weak and not easily seen so you may wish to observe it at other times.

Photographer Michael Frye took a time series of the Lunar Eclipse Over the Trona Pinnacles last April.

I missed that eclipse because it totally clouded up here. I will likely miss the one tonight because of clouds.

If your mission is to photograph the the moon, see the above article and also his article Photographing the Lunar Eclipse.

Oak tree and lunar eclipse sequence, December 10, 2011, Sierra foothills, California. ©Michael Frye

Michael Frye is one of the best, if not the best landscape photographer in the US.

Continue Here

Greater Fools and Bigger Liars

Courtesy of The Automatic Earth.

Harris&Ewing The Capitol in the snow 1917

Societies in decline have no use for visionaries

– Anaïs Nin

The moment we heard that John Boehner would resign, the first thing that came to mind was: the next one will be a Greater Fool and a Bigger Liar. For all of his obvious faultlines, Boehner is human. As was evident for all to see Thursday when the Pope -Boehner’s as Catholic as JFK and Jesus Christ- came to see ‘him’ in ‘his’ Senate. Even smiled reading that the Pope had asked Boehner to pray for him.

But Boehner was really of course just a man who through time increasingly became a kind of barrier between a president and his party on the one hand, and Boehner’s own, increasingly ‘out there’, party on the other. He moved from far right to the right middle just to keep the country going. In essence, that’s little more than his job, but just doing your job can get you some nasty treatment these days in the land of the free.

So now we’ll get a refresher course in government shutdown, though there’s no guarantee that Boehner’s successor will be enough of a greater fool to cut his/her (make that his) new-found career short by actually letting it happen. At least not before December.

The government shutdown is a threat like Janet Yellen’s rate hike, one which always seems to disappear right around the next corner, a process that eats away at credibility much more than participants are willing and/or able to acknowledge. Until it’s too late.

Now that it’s clear they lost on Obamacare, Republicans demand that funding for Planned Parenthood must stop, as the women’s group is accused of ‘improperly selling tissue harvested from aborted fetuses’, something it vehemently denies. And there we’re right back to the shadow boxing multi-millionaire tragic comedy act the US Congress has been for years now.

So yeah, by all means let it shut down. Thing is, as much as Boehner was always already a walking safety hazard, there’s guys waiting in the wings who’d love to end Obama’s presidency any which way they can. The official GOP viewpoint may be that Da Donald is a greater fool, but that view isn’t shared by the entire caucus. Again, so yeah, bring it on, like the rate hike, let’s see you do it.

It’s not a little ironic that one day after the Pope holds his hand, Boehner leaves a squabble behind that involves aborted fetuses. Where I come from, no accusations of people either eating babies or selling their tissue is taken serious, ever. We call that folklore.

Meanwhile, Anarchy In The US is a distinct possibility. It’s probably a good thing all these guys still have paymasters, wouldn’t want to have them make their own decisions. More irony: Boehner brought more donations into the GOP caucus than anyone else. They’ll miss him yet.

Also meanwhile, European and US exchanges were up on Friday as if no investor ever saw a Volkswagen in their lives. Even as there’s no escaping the idea that VW’s illegal drummings go way beyond the 11 million vehicles they themselves fessed up to, and the millions more from other carmakers. Where I come from, we call this endemic fraud.

This little graphic from T&E seems to indicate that VW was the least worst of the offenders. And it will be very hard for politicians to find a carpet left big enough to sweep this under. Class action lawsuits are being prepared for investors and car owners, and politics doesn’t trump courts, at least not everywhere.



Merkel and Hollande and all of their lower level minions will have to cut their losses and offer their carmakers to the vultures, or risk getting severely burned in the process. Or is it already too late? The German Green Party claims Merkel knew of the rigged emissions tests. For now, the government is in steep denial:

German Greens Claim Merkel Government Knew Emissions Tests Were Rigged

The German Green party has claimed that the German Government, led by Chancellor Angela Merkel, knew about the software car manufacturers used to rig emissions tests in the US. The Green party has said it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.”

The Transport Ministry denied knowing that the software was being used in new vehicles, however. The timing of the questions has raised concerns over whether the German government knew about the activities at Volkswagen stretching back to 2009. “The federal government admitted in July, to an inquiry from the Greens, that the [emissions] measurement practice had shortcomings. Nothing happened,” said Oliver Krischer, a German Green party lawmaker.

That written response the Financial Times reports on either exists or it does not. Let’s see it. Simple. If it does exist, Merkel’s in trouble. Then again, the EU knew about the defeat device at least two years ago. It’s starting to look as if everyone was involved. And you can’t fire everyone.

EU Warned On Devices At Centre Of VW Scandal Two Years Ago

EU officials had warned of the dangers of defeat devices two years before the Volkswagen emissions scandal broke, highlighting Europe’s failure to police the car industry. A 2013 report by the European Commission’s Joint Research Centre drew attention to the challenges posed by the devices, which are able to skew the results of exhaust readings. But regulators then failed to pursue the issue — despite the fact the technology had been illegal in Europe since 2007. EU officials said they had never specifically looked for such a device themselves and were not aware of any national authority that located one.

Matthias Müller was announced as VW’s new head honcho. Now there’s a greater fool if ever you saw one. Who can possibly want that gig? His predecessor Winterkorn left the top post, but to date not the one as head of Porsche. Ergo, he presides over those who lead the internal investigation at the company. And even if Winterkorn is bought off and out, VW is still as big of a hornet’s nest as you can find. The company’s corporate -and legal- structure, which includes unsavorily close ties to the governments of both Lower Saxony -which owns 20% of the company, in (highly) preferred stock- and federal Germany, virtually guarantees it.

Nor does it stop there. Both the German and British governments now stand accused of perverting EU law on emissions. The Wall Street Journal asks how much the EU itself knew. Easy answer: plenty. Inevitable. Key words: spin doctors, damage control.

This morning’s Bild am Sonntag, which claims to be in the possession of an ‘explosive document’, reports first that a October 7 deadline has been handed VW by Berlin to ‘fix’ its problems, and second that engineering giant Bosch, which provided the -initial?!- “defeat device” software, warned VW as long as 8 years ago, in 2007, that the software was for internal testing purposes only. VW‘s own technicians “warned about illegal emissions practices” in 2011, the Frankfurter Allgemeine Sonntagszeitung cites an internal report as saying.

And that’s just the beginning. Or rather, the beginning may have been much earlier. Bloomberg writes, in an article called “Forty Years Of Greenwashing” that “On 23 July 1973, the EPA accused [Volkswagen] of installing defeat devices in cars it wanted to sell in the 1974 model year.” Great, now we have to wonder what Gerald Ford knew? Dick Nixon?

In perhaps an ill-timed effort to divert attention away from her car industry, Merkel dreams of more global power:

Germany Battles Past Ghosts as Merkel Urges Greater Global Role

Europe’s dominant country is stepping out from its own shadow. Seventy years after Germany’s defeat at the end of World War II, Chancellor Angela Merkel’s government is signaling a willingness to assume a bigger role in tackling the world’s crises without fear of offending allies like the U.S. Spurred into more international action by the refugee crisis, Merkel on Wednesday prodded Europe to adopt a “more active foreign policy” with greater efforts to end the civil war in Syria, the source of millions fleeing to safety. As well as enlisting the help of Russia, Turkey and Iran, Merkel said that will mean dialogue with Bashar al-Assad, making her the first major western leader to urge talks with the Syrian president.

Germany’s position as Europe’s biggest economy allowed Merkel and her finance minister, Wolfgang Schaeuble, to assume a leading role during the euro-area debt crisis centered on Greece, but the change in focus to beyond Europe’s borders is very much political. After decades of relying on industrial prowess – now under international scrutiny as a result of the Volkswagen scandal – globalization and the necessity to keep Europe relevant are opening up options for Merkel to make Germany a less reluctant hegemon.

Syria has spurred “a rethink in German foreign policy,” Magdalena Kirchner at the German Council on Foreign Relations in Berlin, said. “As the refugee crisis developed, the view took hold that this conflict can no longer be fenced off or ignored. With her stance on the crisis, Merkel may be prodding other European leaders toward a bigger international engagement.”

And Angela’s Germany tells the ECB to take a hike and grow a pair while they’re at it. For a country that spent the best part of the year telling Greece to stick to the law and the plan or else, that’s quite something.

ECB Faces Defiance on Bank Oversight as Germany Hoards Power

The ECB faces increasing defiance from euro-area governments reluctant to cede control over their lenders, highlighted by a German bill that chips away at the ECB’s supervisory powers. The Bundestag, the lower house of parliament, votes Thursday on an amendment to Germany’s banking act that would allow the Finance Ministry in Berlin to issue rules on banks’ recovery plans, risk management and internal decisions under a bill implementing European Union rules for winding down failing banks. The ECB, which assumed supervisory powers over euro-area banks last November, is considering complaining at the European Commission, asking the EU’s executive arm to take Germany to court over the legislation.

As for Angela and the refugee issue, no changes any faster than a frozen molasses flow. Germany announced it will spend €4 billion on refugees already in the country, but votes to stop who’s still coming. As if that’s a serious option. They’re going to do it with gunboats, no less. Agianst overloaded dinghies.

EU To Use Warships To Curb Human Traffickers

The EU will use warships to catch and arrest human traffickers in international waters as part of a military operation aimed at curbing the flow of refugees into Europe, the bloc’s foreign affairs chief has said. “The political decision has been taken, the assets are ready,” Federica Mogherini said on Thursday at the headquarters of the EU’s military operation in Rome. The first phase of the EU operation was launched in late June. It included reconnaissance, surveillance and intelligence gathering, and involved speaking to refugees rescued at sea and compiling data on trafficker networks. The operation currently involves four ships – including an Italian aircraft carrier – and four planes, as well as 1,318 staff from 22 European countries.

Beginning on October 7, the new phase will allow for the seizure of vessels and arrests of traffickers in international waters, as well as the deployment of European warships on the condition that they do not enter Libyan waters. “We will be able to board, search, seize vessels in international waters, [and] suspected smugglers and traffickers apprehended will be transferred to the Italian judicial authorities,” Mogherini said. “We have now a complete picture of how, when and where the smugglers’ organisations and networks are operating so we are ready to actively dismantle them,” she said.

Those 1,318 staff could be used to help and rescue refugees, who will keep coming. Another 17 drowned in the Aegean Sea this Sunday morning. That should be the no. 1 priority. Instead, Europe’s policy of death continues unabated. France started bombing Syria -again- and Putin can and will no longer be ignored when it comes to his sole Middle East stronghold. We’ve created a god-awful mess, and not even god’s alleged man-on-the-earth, the underwhelming Pope Francis, does more than stammer a few hardly audible scripted lines about it.

It’s all about power and money, and none of it is about people. In other ‘news’, China securitizes its markets in a pretty standard desperate greater fools’ last move. As I said earlier, Beijing’s Rocking the Ponzi.

China Becomes Asia’s Biggest Securitization Market

China’s fledging securitization market is soaring, as Beijing looks for new ways to ease lending to firms amid the country’s slowest period of economic growth in more than two decades. In the past few months, Chinese officials have laid out new rules to expand and quicken the process for car makers and other lenders to issue debt by bundling together pools of underlying loans. Issuance of asset-backed securities in the world’s second largest economy rose by a quarter in the first eight months of 2015—to $26.3 billion from $20.8 billion in the same period last year, according to data publisher Dealogic. Though the Chinese securitization market took flight just last year, it has already become Asia’s biggest, outpacing other, more developed markets like South Korea and Japan.

China’s new economic reality, no matter what Xi tells Obama, was revealed by China Daily. Imagine a company in the US, or an EU country, announcing 100,000 lay-offs in one go. For China, it’s the first of many, though not all may be publicly announced.

Chinese Mining Group Longmay To Cut 100,000 Coal Jobs (China Daily)

The largest coal mining group in Northeast China is cutting 100,000 jobs within the next three months to reduce its losses – one of the biggest mass layoffs in recent years. Heilongjiang Longmay Mining Holding Group Co Ltd, which has a 240,000 workforce, said a special center would be created to help those losing their jobs to either relocate or start their own businesses. Chairman of the group Wang Zhikui said the job losses were a way of helping the company “stop bleeding”. It also plans to sell its non-coal related businesses to help pay off its debts, said Wang.

In Japan, desperate fool Shinzo Abe moves on to Abenomics 2.0 with three entirely fresh but as yet unnamed new “arrows”. Here’s thinking Japan doesn’t need Abenomics 2.0, it needs Abe 2.0. Or tomorrow will be even worse than today.

Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy

Japan’s prime minister Shinzo Abe, fresh from a bruising battle over unpopular military legislation, announced Thursday an updated plan for reviving the world’s third-largest economy, setting a GDP target of 600 trillion yen ($5 trillion). Abe took office in late 2012 promising to end deflation and rev up growth through strong public spending, lavish monetary easing and sweeping reforms to help make the economy more productive and competitive.

So far, those “three arrows” of his “Abenomics” plan have fallen short of their targets though share prices and corporate profits have soared. “Tomorrow will definitely be better than today!” Abe declared in a news conference on national television. “From today Abenomics is entering a new stage. Japan will become a society in which all can participate actively.”

Participate actively in the downfall of both Abe and the nation, that is.

As for you, unless you stop clinging to the silly notion of an economic recovery–let alone perpetual growth–you too are a greater fool, the quintessential one. And until you do, you’re a bigger liar too. You lie to yourself. Just so others can lie to you too.

What is happening in today’s world is a total downfall, both economic and moral, and the two are closely intertwined. What’s more, though we’re blind to it, as Anaïs Nin said, “Societies in decline have no use for visionaries.” Our societies therefore end up with liars only. Nobody else gets a shot at the title. There’s no use for anything but lies.

All leaders, as we can see these days wherever we look, talk the talk but don’t walk the walk. Every single one of them schemes and lies and hides their acts from public scrutiny. Political leaders, corporate leaders, the lot. This behavior is so ubiquitous we’ve come to see it as inevitable, even normal.

Whether it’s the economy, climate, the planet, warfare, your future obligations, your pensions, the future of your children, nobody in power tells you the truth. Human life is fast losing the value we would like to tell ourselves we assign to it. We don’t, do we? Children drown in the Mediterranean every day, and we let them drown, it’s not just our leaders who do.

Children also get shot to bits in various theaters of war (or rather, invasion) in faraway countries that our leaders involve us in, our tax dollars pay for, and our media don’t show. What the European refugee crisis shows us is that there are no faraway countries anymore, or theaters of war. Our own technological advances have taken care of that. They’re on our doorstep. And sending in the military is only going to make it worse.

Our technological advances haven’t come with moral advances, quite the contrary, our morals turn out to be a thin layer of mere cheap veneer. What advances we’re making are the last death rattle of a society in decline, and a dying civilization. All we have left to look forward to from here on in is cats in a sack. And we owe that to ourselves.


US On The Ropes: China To Join Russian Military In Syria While Iraq Strikes Intel Deal With Moscow, Tehran

Courtesy of ZeroHedge. View original post here.

Last Thursday, we asked if China was set to join Russia and Iran in support of the Assad regime in Syria. 

Our interest was piqued when the pro-Assad Al-Masdar (citing an unnamed SAA “senior officer”), said Chinese “personnel and aerial assets” are set to arrive within weeks. To the uninitiated, this may seem to have come out of left field, so to speak. However, anyone who has followed the conflict and who knows a bit about the global balance of power is aware that Beijing has for some time expressed its support for Damascus, most notably by voting with Russia to veto a Security Council resolution that would have seen the conflict in Syria referred to the Hague. Here’s what China had to say at the May 22, 2014 meeting: 

For some time now, the Security Council has maintained unity and coordination on the question of Syria, thanks to efforts by Council members, including China, to accommodate the major concerns of all parties. At a time when seriously diverging views exist among the parties concerning the draft resolution, we believe that the Council should continue holding consultations, rather than forcing a vote on the draft resolution, in order to avoid undermining Council unity or obstructing coordination and cooperation on questions such as Syria and other major serious issues. Regrettably, China’s approach has not been taken on board; China therefore voted against the draft resolution.

In other words, China could see the writing on the wall and it, like Russia, was not pleased with where things seemed to be headed. A little more than a year later and Moscow has effectively called time on the strategy of using Sunni extremist groups to destabilize Assad and given what we know about Beijing’s efforts to project China’s growing military might, it wouldn’t exactly be surprising to see the PLA turn up at Latakia as well. 

Sure enough, Russian media now says that according to Russian Senator Igor Morozov, Beijing has decided to join the fight. Here’s Pravda (translated): 

According to the Russian Senator Igor Morozov, Beijing has taken decision to take part in combating IS and sent its vessels to the Syrian coast.

Igor Morozov, member of the Russian Federation Committee on International Affairs claimed about the beginning of the military operation by China against the IS terrorists. "It is known, that China has joined our military operation in Syria, the Chinese cruiser has already entered the Mediterranean, aircraft carrier follows it," Morozov said.

According to him, Iran may soon join the operation carried out by Russia against the IS terrorists, via Hezbollah. Thus, the Russian coalition in the region gains ground, and most reasonable step of the US would be to join it. Although the stance of Moscow and Washington on the ways of settlement of the Syrian conflict differs, nonetheless, low efficiency of the US coalition acts against terrorists is obvious. Islamists have just strengthened their positions.

As Leonid Krutakov told Pravda Ru in an interview, the most serious conflict is currently taking place namely between China and the US. Moscow may support any party, the expert believes, and that is what will change the world order for many years.

Clearly, one has to consider the source here, but as noted above, if Beijing is indeed set to enter the fray, it would be entirely consistent with China's position on Syria and also with the PLA's desire to take a more assertive role in international affairs. 

Meanwhile, it now looks as though the very same Russian-Iran "nexus" that's playing spoiler in Syria is also set to take over the fight against ISIS in Iraq, as Baghdad has now struck a deal to officially share intelligence with Moscow and Tehran. Here's CNN:

Iraq says it has reached a deal to share intelligence with Russia, Iran and Syria in the fight against ISIS militants.

The announcement on Saturday from the Iraqi military cited "the increasing concern from Russia about thousands of Russian terrorists committing criminal acts within ISIS."

The news comes amid U.S. concerns about Russia's recent military buildup in Syria and would appear to confirm American suspicions of some kind of cooperation between Baghdad and Moscow.

We'd be remiss if we failed to note the significance here. The entire narrative is falling apart for the US, as Russia and Iran are now moving to transform the half-hearted Western effort to contain ISIS into a very serious effort to eradicate the group. Recall that just a little over a week ago, Quds Force commander Qassem Soleimani essentially accused the US of intentionally keeping Islamic State around so that the group can continue to advance Washington's geopolitical agenda by serving as a destabilizing element in Syria. According to the Pentagon, Soleimani's visit to Russia (which, you're reminded, violated a UN travel ban and infuriated opponents of the Iran nuclear deal) was "very important" in terms of accelerating the timetable on Russia's inevitable involvement in Syria. It is of course Soleimani who commands the Shiite militias battling ISIS in Iraq. Now, it appears that in addition to the cooperation in Syria, he has managed to secure a Russian-Iran partnership for Tehran's Iraqi operations as well. Here's GOP mouthpiece Fox News:

Russian, Syrian and Iranian military commanders have set up a coordination cell in Baghdad in recent days to try to begin working with Iranian-backed Shia militias fighting the Islamic State, Fox News has learned. 

Western intelligence sources say the coordination cell includes low-level Russian generals. U.S. officials say it is not clear whether the Iraqi government is involved at the moment. 

Describing the arrival of Russian military personnel in Baghdad, one senior U.S. official said, "They are popping up everywhere." 

While the U.S. also is fighting the Islamic State, the Obama administration has voiced concern that Russia's involvement, at least in Syria, could have a destabilizing effect. 

Moscow, though, has fostered ties with the governments in both Syria and Iraq. In May, Iraqi Prime Minister Haider al-Abadi flew to Moscow for an official visit to discuss potential Russian arms transfers and shared intelligence capability, as well as the enhancement of security and military capabilities, according to a statement by the Iraqi prime minister's office at the time. 

Iranian Quds Force commander Qassem Soleimani also was spotted in Baghdad on Sept 22. He met with Shia militias backed by Iran; intelligence officials believe he met with Russians as well. 

And here is ISW:

What appears to have happened here is this: Vladimir Putin has exploited both the fight against ISIS and Iran's need to preserve the regional balance of power on the way to enhancing Russia's influence over Mid-East affairs which in turn helps to ensure that Gazprom's interests are protected going forward. 

Thanks to the awkward position the US has gotten itself in by covertly allying itself with various Sunni extremist groups, Washington is for all intents and purposes powerless to stop Putin lest the public should sudddenly get wise to the fact that combatting Russia's resurrgence and preventing Iran from expanding its interests are more imporant than fighting terror.

In short, Washington gambled on a dangerous game of geopolitical chess, lost, and now faces two rather terrifyingly disastrous outcomes: 1) China establishing a presence in the Mid-East in concert with Russia and Iran, and 2) seeing Iraq effectively ceded to the Quds Force and ultimately, to the Russian army.

Divergence Drivers and the Dollar

Courtesy of Marc To Market

The main thrust of our bullish US dollar outlook is the divergence in monetary policy trajectories. We do not think the divergence has peaked and anticipate it to persist through next year and into 2017.   

Since the Federal Reserve finished QE3, the divergence has been driven by easing of policy by the European Central Bank and the Bank of Japan, and a broad number of high and medium income countries, including China. We expect the Fed to participate in the divergence by raising rates.  It has been particularly challenging this year to time the Fed's lift-off, but the vast majority of Fed officials still anticipate it taking place this year. Of course, some doubt this, and a few Fed officials prefer to wait until next year, but fund managers, corporate treasurers, pension managers and debt managers recognize the risks of a move this year.  And investment is just as much about risk management as it is about securities analysis.  

We thought it helpful to frame this week's discussion about the macro-developments in terms of the divergence meme.  On balance, we expect the developments in the week ahead to strengthen the theme.  Barring a surprise, which is always possible, the key US economic data is expected to to show that labor market slack continues to be absorbed, the core PCE deflator may tick up, and the consumer is still healthy in terms of real consumption and new auto sales.   

No fewer than eight Fed officials have speaking engagements in the week ahead.  Aside from Chicago Fed's Evans, we would be surprised if any of the speakers disagreed in tone or substance from Yellen's remarks from last week.   

On the other hand, the eurozone's preliminary read of September CPI may ease back to zero from 0.1% while the manufacturing PMI softened.  The ECB staff cut its growth and inflation forecasts earlier this month.  While ECB officials have indicated that it is still monitoring developments to understand if the flexibility of its asset purchases is necessary.  Evidence needs to accumulate, and that evidence is largely in the form of economic data.   The economic reports paint a picture of a region that is expanding by a little more than 1% annualized pace with no price pressures. The growth is too slow and inflation too low to allow the region to grow from under its debt burden. 

Before the weekend, Japan reported that August core inflation (excludes fresh food) slipped back into deflation for the first time since April 2013.  The government downgraded its economic assessment last week.   The Tankan Survey this week is expected to show minor deterioration in sentiment among the longer companies, and a somewhat more worrisome slowing in capital expenditure intentions.   

If there is one thing missing from a compelling case of further measures by the BOJ, it is an apparent lack of will. Governor Kuroda has consistently found a silver lining in the cloud of economic and price developments.  He pragmatically does not limit his assessment to the targeted core measure. Instead, he has referred to price pressures being significantly stronger if energy prices were excluded.  

It is not clear that what an increase in the monetary base of say JPY90 trillion a year will accomplish that JPY80 trillion has failed to do to, namely core consumer prices.   Nevertheless, many expect the BOJ to announce expanding is asset purchases, not just altering the composition for operational reasons, next month.  The Tankan survey will not stand in its way if that is what it wants to do. 

Sweden has responded forcefully to the threat of deflation by buying government bonds and posting a negative deposit rate.  Its economic activity remains impressive with a 3% year-over-year expansion in H1.  The manufacturing PMI this week is expected to increase from 53.2 to 54.0, which would match the 12-month average.  

In contrast, Norway's challenge is weak economic activity, not deflation.  That was what was behind last week's rate cut that surprised many.  The manufacturing PMI has been below the 50 boom/bust level since April.  The risk lies to the downside of the Bloomberg consensus 44.0 reading (from 43.3).  The Norges Bank signaled an easing bias.  It may take a few months to act on it, but unless the data turns around, that is the most likely scenario.  

The Bank of England is also wrestling with the timing of its own lift-off.  The same logic that says the Fed may have missed its best opportunity to hike when it stood pat in June suggests the BOE missed its best opportunity as well.  Although the Q2 GDP revisions are not expected to be material, the UK economy does appear to have slowed in Q3.  The UK expanded average 3% growth in H2 14, and 2.75% growth in H1 15, it is set to slow toward 2.3% in the second half.  There is no pricing power, inflation, to speak of, and the wage pressure appears, at least partly, to reflect a shift in the composition of employment.  

Indeed, sterling has lost favor as the pendulum of market sentiment has swung away from an early BOE hike.  In fact, looking at the June 2016 short-sterling futures contracts, the hawkishness peaked in late June with an implied yield 113 bp.  On September 24, the implied yield made a new life-of-contract low (high in price) of 71 bp.  

Given the developments over the past couple of months, investors are particularly sensitive to developments in China.  In the week ahead the official PMIs will be reported.  If the monetary and fiscal stimulus that China has deployed can be expected to help the large state-owned sector, than the official PMI may begin to stabilize before the Caixin measure, which tends to give more weighted to smaller, private sector firms. 

The Shanghai Composite has spent the past four weeks chopping along the trough after falling by around 45% from the mid-June high.  As it has moved broadly sideways, its impact on other markets appears to have lessened.   However, a break of the lower end of the range, around 2980, could have a new knock-on effect.  

China is very much part of the divergence story, which is one of the reasons it is succumbing to the pressure to loosen the link between the yuan and the dollar.  It was not ideology, or a new passion for markets, it was good, old pragmatism.  Linking the yuan so tightly to the dollar had become increasingly a headwind while the operational conditions for joining the SDR required some tweaking of its currency regime.   

We continue to believe the capital outflows from China are being exaggerated.  Some of the missing capital may reflect the reform measures that allow businesses greater control over their foreign exchange earnings.  Often the decline in China's reserves are cited as if it were simply a quantity of money rather than the dollar valuation of some quantity.  More than half of the decline in China's reserves over the past year can be accounted for by valuation swings.   

Nevertheless, the capital outflows that do exist, suggest that a further embrace of market forces could see the yuan lag further behind the dollar in the next leg up.  With soft non-food prices, there is still plenty of scope for the PBOC to ease further, including the reserve requirements, which were a macro-prudential tool to syphon-off some of the hot money that had flowed into China previously.  

There are a couple of other issues that will command attention.  First is the risk of a US government shutdown, if a clean temporary spending authorization bill is not passed. by the end of the month.  House Speaker Boehner's resignation as of the end of next month gives the Republican moderates an upper hand, albeit only for a few weeks.  The mid-December debt ceiling has more disruptive potential, and Boehner's replacement may need to be bloodied by confronting the White House early in his tenure.  

Second, another "last" push for the Trans-Pacific Partnership (TPP) will take place this week (in Atlanta).  There are three major outstanding issues that remain divisive: dairy trade, auto manufacturing, and patent protection for pharmaceuticals.   Each passing month without an agreement pushes the issue deeper into the US national election.  Even if an agreement is reached in the coming days, which seems unlikely, Congressional support, even on the fast-track conditions, would not place for a few months.  It could split the Democratic Party.  A Biden campaign would, of course, be in favor while Clinton's base would push her away from support, and Sanders is a clear critic.  

Third, Europe is being challenged by a number of crises simultaneously. Russia/Ukraine is simmering while a new front has been opened by Russia escalated support for Assad.  The refugee problem, primarily from Libya and Syria, where the US and European involvement has been strong is exposing new fissures in Europe and deepening pre-existing ones.  Greece has returned Syriza to power, and implementation of the agreement with the official creditors will likely be seen as a new phase of negotiations. To this list add politics in the Iberian Peninsula.

Catalonia holds elections today (September 27).  Locally the election is being billed as a referendum on independence, and the head of Catalonia promises independence within 18 months if his coalition of secessionists’ win.  Early indications suggest the turnout is heavy. The secessionists will be fought tooth and nail by Madrid, which can count on the EU and other countries for support.  A tense period lies ahead, and this is before national elections that will be held before the end of the year.   

Portugal will hold national elections next month.  Regardless of the electoral outcomes, we anticipate that next year, the IMF will step up its pressure on both Spain and Portugal to take more measure to boost growth potential while reducing debt.

The takeaway is that the near-term developments will likely strengthen the divergent forces.  Barring a particularly poor employment report (and remember that the August series is often revised up), the Fed will be guiding market expectations to still expect a hike this year.  European, Japanese, and Norwegian data will add to pressure to ease further.  The failure to reach an agreement on TPP may be dollar and yen negative if everything else could be held constant, meaning that it could be overwhelmed by the usual market noise.  Europe is facing several challenges, and a new front may open as Catalonia likely pushes harder for independence.  

Goldman Sachs: “Peak Coal” Is Here


Goldman Sachs: “Peak Coal” Is Here

Courtesy of Charles Kennedy of

“Peak coal” is here.

Goldman Sachs released a September 22 research note that predicted that coal will decline and never come back. “Peak coal is coming sooner than expected,” the investment bank concluded. “The industry does not require new investment given the ability of existing assets to satisfy flat demand, so prices will remain under pressure as the deflationary cycle continues.”

The conclusion is a stunning one, especially considering the years of predictions that coal would climb inexorably as developing countries expanded their grids and their economies grew quickly. Last December, for example, the IEA predicted that coal consumption would grow steadily in the years ahead, expanding by about 2.1 percent per year for the rest of the decade. China would account for three-fifths of the growth in demand. “We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand,” the IEA’s executive director said in December 2014.

But a lot has happened since then. Most important is the growing realization that China’s coal demand may not continue, a remarkable development, and perhaps a fatal one for many coal producers. The slowing demand for coal, along with the general commodity bust around the world, spells bad news for the coal industry. Goldman Sachs takes a dim view of coal prices for the foreseeable future. “We also reset our long-term forecast to $50/[tonne], down 23 percent from $65/[tonne], to reflect what we see as the remote likelihood that the market will tighten ever again,” the bank wrote.

In fact, it’s not just that demand growth will decline. Absolute demand will fall. Goldman Sachs predicts that global consumption of thermal coal used for electricity will dip from 6.15 billion tonnes in 2013 to just 5.98 billion tonnes in 2019. The decline is not enormous, but given the fact that not too long ago coal producers around the world expected strong growth for the next few decades, the downturn in coal demand is monumental.

Several coal producers in the U.S. have already gone bankrupt, including Alpha Natural Resources and Patriot Coal. Just this week, Arch Coal faced questions over a potential bankruptcy. Peabody, another major coal producer, is hoping to restructure some debt according to Bloomberg.

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Picture via Pixabay. 

Paul Craig Roberts Warns “The Entire World May Go Down The Tubes Together”

Courtesy of Paul Craig Roberts writing at ZeroHedge.

View original post here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Another indication of a third world country is large inequality in the distribution of income and wealth. 

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

[ and]

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

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

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

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

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

The entire world could go down the tubes together.


How US Corporations “Cooperate” With China; Xi’s China: A Place Called Hopelessness

Courtesy of Mish.

In response to Why I'm Never Going to "Two-Bit" China an anonymous reader sent links to a video on how US companies are forced to cooperate with China and an article on "Xi’s China" from the Daily Beast.

Both may be a bit over the top, or not, in the eyes of the viewer. Let's start with the video from China Uncensored.

China Tells US Tech Companies to "Cooperate"

Xi’s China: A Place Called Hopelessness

Next please consider  Xi’s China: A Place Called Hopelessness

As China’s President Xi Jinping visits the United States this week, Americans will have little sense what it’s like for his people back home. His top internet censor, Lu Wei, organized a technology summit in Seattle earlier this week.  Alibaba’s Jack Ma and Apple’s Tim Cook have been in tow, in addition to other tech giants. After a round of diplomatic pomp in Washington D.C., President Xi will address the United Nations General Assembly in New York on Monday before returning to Beijing in time for National Day celebrations at home. His message will be of success in the present and for the future.

Ask the ant tribe. They’re educated, young professionals who live in near-poverty conditions, grinding away at soul-crushing jobs—not careers—that yield no personal satisfaction and zero financial growth. Typically from rural areas, most have settled in northwest Beijing, where their living quarters are cramped and they have no personal space. They’re smart, they work hard, yet receive no recognition and can’t shake off anonymity. So, people call them ants.

This year, nearly 7.5 million fresh Chinese university graduates entered the workforce, or attempted to. But because of the massive influx of new labor, increased year on year, competition has become cutthroat even as salaries have fallen, in some cases, lower than the wages received by factory workers. Cost of living continues to increase in tier-one cities, and prospects for members of the ant tribe eventually to own their own houses are slim. “I’ll never be able to get married and provide for a family. I feel like I’ll always be stuck in these six square meters,” groaned Xiao. Rent is ¥1300, or about US$200, a month. That may not seem like much, but after other expenses, most of Xiao’s ¥3,300 ($520) paycheck is gone.

In the fantasy world that the Chinese Communist Party has created for its revised history books, the state takes care of every citizen. But the ant tribe knows firsthand that this is not the case. Calling the Chinese president by his nickname, Xiao said, “Xi Dada says the youth are this country’s future, but most of us don’t have any opportunities. We graduated from university but there aren’t any jobs available to us, at least not in the subjects we studied.”

Xi Jinping’s crusade against corruption has “swatted flies” and “hunted tigers,” who conveniently are the Chinese leader’s political enemies. China’s millionaires can’t leave the country fast enough. China’s rural areas have a gaping security vacuum; forced demolitions, evictions, and land seizures still take place frequently, at times with deadly results. Soon, the CCP will begin transforming 82,000 square miles of land around Beijing into a megacity that’s about the size of Kansas, and it will hold over 100 million people, or more than one-third of America’s population. What will the ant tribe look like when that time comes? What does it mean for Chinese society when routine overtakes imagination, if it hasn’t already?

China is hardly the miracle its proponents make it out to be. And it's system of government outright sucks.

Make statements like that in China and you will get arrested, or worse….

Continue Here


How Long Will Janet Yellen Last as Fed Chair? Fed Declines to Comment on Her Health, I Will

Courtesy of Mish.

Fed Chair Janet Yellen’s health is in question after she could not read her prepared text in a lecture on inflation last Thursday.

About 50 minutes into her speech, she paused for about 25 seconds, then repeated phrases and missed words.

MarketWatch reports Yellen Stumbles Towards End of Speech at Amherstt. 

Yellen Video #1

Fed Declines to Comment

The Wall Street Journal reports Fed Declines to Comment on Yellen’s Health

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

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

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

Yellen Video #2 – Close Up

Claim Investigation

Continue Here

The Table Is Set For The Next Financial Crisis

Courtesy of Jim Quinn via The Burning Platform blog as posted at ZeroHedge (here)

The housing market peaked in 2005 and proceeded to crash over the next five years, with existing home sales falling 50%, new home sales falling 75%, and national home prices falling 30%. A funny thing happened after the peak. Wall Street banks accelerated the issuance of subprime mortgages to hyper-speed. The executives of these banks knew housing had peaked, but insatiable greed consumed them as they purposely doled out billions in no-doc liar loans as a necessary ingredient in their CDOs of mass destruction.

The millions in upfront fees, along with their lack of conscience in bribing Moody’s and S&P to get AAA ratings on toxic waste, while selling the derivatives to clients and shorting them at the same time, in order to enrich executives with multi-million dollar compensation packages, overrode any thoughts of risk management, consequences, or  the impact on homeowners, investors, or taxpayers. The housing boom began as a natural reaction to the Federal Reserve suppressing interest rates to, at the time, ridiculously low levels from 2001 through 2004 (child’s play compared to the last six years).


Greenspan created the atmosphere for the greatest mal-investment in world history. As he raised rates from 2004 through 2006, the titans of finance on Wall Street should have scaled back their risk taking and prepared for the inevitable bursting of the bubble. Instead, they were blinded by unadulterated greed, as the legitimate home buyer pool dried up, and they purposely peddled “exotic” mortgages to dupes who weren’t capable of making the first payment. This is what happens at the end of Fed induced bubbles. Irrationality, insanity, recklessness, delusion, and willful disregard for reason, common sense, historical data and truth lead to tremendous pain, suffering, and financial losses.

Once the Wall Street machine runs out of people with the financial means to purchase a home or buy a new vehicle, they turn their sights on peddling their debt products to financially illiterate dupes. There is a good reason people with credit scores below 620 are classified as sub-prime. Scores this low result from missing multiple payments on credit cards and loans, having multiple collection items or judgments and potentially having a very recent bankruptcy or foreclosure. They have low paying jobs or no job at all. They do not have the financial means to repay a large loan. Giving them a loan to purchase a $250,000 home or a $30,000 automobile will not improve their lives. They are being set up for a fall by the crooked bankers making these loans. Heads they win, tails the dupe gets kicked out of  that nice house onto the street and has those nice wheels repossessed in the middle of the night.

The subprime debacle that blew up the world in 2008 was created by the Federal Reserve, working on behalf of their Wall Street owners. When interest rates are set by central planners well below levels which would be set by the free market, based on risk and return, it creates bubbles, mal-investment, and ultimately financial system disaster. Did the Fed, Wall Street, politicians, and people learn their lesson? No. Because we bailed them out with our tax dollars and have silently stood by while they have issued $10 trillion of additional debt to solve a debt problem. The deformation of our financial system accelerates by the day.

The $3.5 trillion of QE, six years of 0% interest rates for Wall Street (why are credit card interest rates still 13%?), and $8 trillion of deficit spending by the Federal government have provided the outward appearance of economic recovery, as the standard of living for most Americans has declined significantly. With real median household income still 6.5% BELOW 2007 levels, 7.3% BELOW 2000 levels, and about equal to 1989 levels, the only way the ruling class could manufacture a fake recovery is by ramping up the printing presses and reigniting a housing bubble and an auto bubble. They even threw in a student loan bubble for good measure.

The entire engineered “housing recovery” has had a suspicious smell to it all along. The true bottom occurred in 2009 with an annual rate of 4 million existing home sales. An artificial bottom of 3.5 million occurred in 2010 after the expiration of the Keynesian first time home buyer credit that lured more dupes into the market. The current rate of 5.31 million is at 2007 crash levels and on par with 2001 recession levels. With mortgage rates at record low levels for five years, this is all we got?

What really smells is the number of actual mortgage originations that have supposedly driven this 35% increase in existing home sales. If existing home sales are at 2007 levels, how could mortgage purchase applications be 55% below 2007 levels? If existing home sales are up 35% from the 2009/2010 lows, how could mortgage purchase applications be flat since 2010?


New home sales are up 80% from the 2010 lows, but before you get as excited as a CNBC bimbo over the “surging” new home sales, understand that new home sales are still 60% BELOW the 2005 high and 25% below the 1990 through 2000 average. So, in total, there are 1.5 million more annual home sales today than at the bottom in 2010. But mortgage originations haven’t budged. That’s quite a conundrum.

As you can also see, the median price for a new home far exceeds the bubble highs of 2005. A critical thinking individual might wonder how new home sales could be down 60% from 2005, while home prices are 15% higher than they were in 2005. Don’t the laws of supply and demand work anymore? The identical trend can be seen in the existing homes sales market. The median price for existing home sales of $228,700 is an all-time high, exceeding the 2005 bubble levels. Again, sales are down 30% since 2005. I wonder who is responsible for this warped chain of events?

You guessed it – the Federal Reserve. There is no doubt these Wall Street captured academics with their models, theories, formulas, and Keynesian beliefs have created another immense bubble that endangers a global financial system already teetering on the brink of collapse due to central bank shenanigans by EU, Japanese, and Chinese central bankers. QE and ZIRP have encouraged rampant gambling by amoral greed driven financial institutions. John Hussman sums up the “solution” implemented by the serial bubble blowers at the Fed.

The main impact of suppressed interest rates is to encourage yield-seeking speculation, to give low quality creditors access to the capital markets, to misallocate scarce saving, to subsidize leveraged carry trades, to reduce the long-term accumulation of productive capital, and to foment serial bubbles and crashes.

The suppressed interest rates and Yellen Put have encouraged Wall Street hedge funds, banks, finance companies, and fly by night mortgage brokers to finance a buy and rent scheme, house flippers, and once again subprime borrowers. The withholding of foreclosures from the market and the hedge fund purchase of millions of homes drove home prices higher. The artificially low mortgage rates also allowed people to buy more house than they normally could buy, thereby driving home prices even higher. This market manipulation has now priced out all but the richest Americans from buying a home. As expected, the Wall Street machine has decided to try and steal home with two outs in the bottom of the ninth. They’ve decided loaning money to people who are incapable of repaying the loan will surely work this time.

Existing home sales fell in August by 4.8%, and the rate of increase has been decelerating over the last twelve months. Hedge funds stopped buying, first time buyers are few as they are saddled with student loan debt, and the middle class doesn’t have the financial wherewithal to trade up. The Wall Street debt machine is running out of financially able customers, so they’ve ramped up subprime lending at the worst possible time. While overall existing home sales were up 6.2% over last year, the number of subprime first mortgage originations was up 30.5%, subprime home equity loans was up 29.5%, and subprime home equity lines of credit rose 20.4%. The percentage of subprime mortgage loans is the highest since 2008. While prime lending declines, subprime lending accelerates. This will surely end well.

And this is being promoted by the government through the FHA. Subprime mortgages  are increasingly being underwritten by thinly capitalized non-banks and guaranteed by FHA. In 2012, when this data was first tracked, large banks represented 65.4% of FHA-backed loans. That number is now 29.6%. In their place, non-banks now represent 62.2% of the FHA lending. These fly by night outfits, who proliferated during the 2003 – 2008 subprime disaster, have little or no capital cushion and when these mortgages begin to default they will go bankrupt quickly, leaving the FHA (you the taxpayer) on the hook for the inevitable losses.

The FHA has been directed by their politician benefactors to pump up the housing market at any cost. You can get an FHA loan with a credit score as low as 500, so long as you have a 10% down payment. And once you hit a 580 credit score, you only need a 3.5% down payment. The FHA is exempt from the qualified mortgage requirement of a 43% debt-to-income ratio. Many loans have a debt-to-income above 55%. The FHA only looks at mortgage payments in their calculation. The FHA is willing to accept a gift or inheritance as a down payment. You could have no savings, a 500 FICO, a 50% debt-to-income and an inheritance and that would be sufficient to get you a loan.

These fly by night mortgage companies are created by slimy get rich quick hucksters who are willing to take huge risks, because there is a big difference between the risk that faces the company, and the risk that faces the owner.  He will take incredibly rich commissions on all loans he books. Wall Street is again packaging these subprime slime loans into high yielding mortgage backed securities and getting the rating agencies to stamp it with a AAA rating.

Foolish investors receiving a good yield and a guarantee from the US government, are as clueless as they were in 2008. The owner of the mortgage company doesn’t care about default risk, since some other sucker has assumed that risk. When the mortgage company goes bankrupt, the owner has no personal liability. When it all blows up again, an already bankrupt FHA will be on the hook, which really means the taxpayer will pay again. You are underwriting the new subprime crisis.

This exact same scenario is also playing out in the economically important auto market. It is clear the Fed, Treasury, Wall Street and the politicos in D.C. decided they needed to re-inflate the housing and auto bubbles to provide the appearance of economic recovery so they could resume their looting and pillaging of the national wealth. They have succeeded in ramping up auto sales from the 10.4 million annual rate in 2009 to 17.5 million in 2015, if you can call these sales. Short-term rentals is a better description. Auto leasing now accounts for 30% of “sales” (up from 22% in 2012), while subprime auto “sales” accounted for another 23.5%. The vast majority of the other sales are done with 7 year 0% financing. Does that sound like a sound business formula?

And now they’ve run out of dupes. The seasonally adjusted annual rate of sales for August 2015 was 17.2 million, flat with August 2014 and down from 17.5 million in July 2015. As the auto sales have gone flat and are poised to fall, the Wall Street finance machine has ramped up subprime lending from 18% of all loans in 2010 to 23.5% today. With overall sales flat with last year, subprime lending is up 9.6% in the last year. The pace of subprime auto loans has been more than double the pace of prime auto loans since 2010.

Over 10% of subprime auto loans are delinquent within the first twelve months. Subprime auto loan delinquency rates are soaring by 20% at Ally Financial. Santander is a Lehman Brothers in the making as their total delinquency rate approaches 20%. A critical thinking person might wonder why automaker profits are in decline, while GM and Ford stock prices are well below 2011 levels, if the auto market is booming.

The table is set for the next financial crisis. The apologists for the warped ideology that has resulted in $10 trillion of additional debt being layered on the original un-payable $52 trillion, argue subprime lending is lower than the 2008 peak, so all is well. They fail to realize the system is far more fragile and will collapse once the next Lehman moment arrives. The country is already in, or headed into recession. All economic indicators are flashing red. The stock market has fallen over 10% in the last month. Virtually every new car owner you see driving that fancy BMW, Lexus, or Volvo is underwater on their auto loan. Home price growth has stalled at record levels. Mortgage rates are poised to rise from record lows. We all know what happens next. Look out below.

Some people never learn. They follow the same path that destroyed their finances in the past. Wall Street is desperately packaging the increasing amounts of subprime slime in new derivatives of mass destruction and peddling them to clients, while shorting those same derivatives. It’s called the Goldman Sachs method. When home prices begin to tumble, these derivatives will self-destruct again. What is happening today is nothing more than rearranging the deck chairs on the Titanic. The iceberg has been struck, we’re taking on water, and this sucker is going to sink. Game Over.

“Part of the reason the Fed found it so difficult last week to justify a move away from zero interest rates is that the Fed seems incapable of recognizing, much less admitting, the speculative risks it has created. The strongest reason to normalize monetary policy was to reduce those risks, but the proper time to have done that was years ago. At this point, obscene equity valuations are already baked in the cake on valuation measures that are reliably correlated with actual subsequent stock market returns. At this point, hundreds of billions of dollars of low-grade covenant-lite debt have already been issued at risk premiums that are next to nothing. The bursting of this bubble is no longer avoidable. If history is any guide, policy makers will manage the resulting disruption by the seat of their pants, since they seem incapable of learning from history itself.” John Hussman