Financial Markets are a Game

Courtesy of EconMatters

Forget about Market Multiples: Totally Meaningless Sell-Side Crap

Anyone thinking about investing in financial markets should realize that most of the professionals who are on the inside, i.e., have power and access to information and capital to move markets, do not view financial markets as investment vehicles, decisions about P/E ratios, equity multiples, etc. but rather see financial markets as a giant game of making money.

Financial Markets are Giant Criminal Playgrounds

Consequently the first thing all ‘investors’ need to realize is that markets are crooked, always have been, and always will be despite year after year of new regulations trying to prevent ‘crooked behavior’! Once you understand that the market is a giant game, and you stop thinking about the market from a valuation sense or a fundamentals standpoint; your next task is to identify the rules of the game, or the way the game is being played during your ‘investment horizon’ as in, when you as an investor are risking your capital in the markets.

Market Makers Never Risk Anything: They Make Markets Move Directionally

Most of the games in the market are about fooling other investors and taking their money, but there are all types of games, some actually can benefit average investors who actually believe in the fundamentals and a fair market. The problem is that you as an average investor will be thinking that the fundamentals are why an asset is going up, which can be the case, but the party will end while you are still looking at the same fundamentals that are in place, and the game players have already sold the stock or asset and bought derivatives in the opposite direction because they are Making the party to be over, there is no guess work involved on their end as they are Market Makers!

Sell Dungarees to the Gold Rush Crowds

In short, fundamentals do not matter in financial markets! This is the hardest thing that investors have to learn about financial markets because they have been so conditioned to believe that the financial markets are based upon the fundamentals because of all the folks who sell shovels and axes to the market participants. The amount of money made off of the financial markets over its history probably surpasses the amounts of money made from financial assets. Again the game within the game.

An Example of Game Playing

I will give you an example of a recent game just to get your mind to start thinking in terms of the games behind the financial markets. So remember when the Federal Reserve was dovish at the September Meeting and the markets had sold off in a tizzy fit, don`t be fooled there was a game already in place, and it played out according to the predetermined script.

What you have to realize is that this game, and the entire game of selling the markets off because of “China Turmoil” had very little to do with China and a whole lot to do with pushing the financial markets down into quarter end. So when the new money came into financial markets for the Christmas Rally of the 4th quarter the game players have a low base from which to work from and have a monster fourth quarter. Most of the real money is made in derivatives off of the movement in the core assets due to the massive amount of leverage that can be attained. Therefore if you know where the market is going ahead of time because you are the market maker and are the one pushing prices up or down; (conveniently you also know where and when markets are going to stop going down because you are the one pushing them down) you can bet that as these same game players were selling the market down towards the end of the third quarter in September, these same game players were building massive derivative positions in the opposite direction before they covered their shorts and went long with the rest of the Long Only Money that came into financial markets on October 1st.

What is so special about October 1st?

Just think what kind of money comes into financial markets October 1st: Monthly 401k allocations, 4th Quarter Capital, and financial markets were at a discount relative to most of the year, plus the natural short covering in the markets, this is the type of game these market makers love to play. They get a much bigger return for their buck, than just buying at the top of the market and pushing financial markets up another 3% to all time new highs with the same amount of initial capital. This is why these same market makers pushed the financial markets down in the third quarter to begin with, these moves were already pre-determined well in advance and had very little to do with china or growth concerns or the Federal Reserve. Those were just excuses, it’s not like any of those factors suddenly changed and were fixed magically on October 1st. It’s a game, try and figure out how the game is being played and get on the same side as the power of the market makers who are moving asset prices all around the game board!

Beware of Clearing Out Stops in Opposite Direction of the “Real Move”

If you remember in September the markets didn`t go straight down right after the dovish announcement, in fact the market makers pushed the S&P up 20 points real fast in a final clear out all the overhead stops before taking it down big time about 145 S&P points. And you can bet they were taking the other side of the derivatives market on that overhead stops clear out move, so they were positioned at the best possible price to make a fortune on the slam down into the end of 3rd quarter selling where the average investor probably thought the world was coming to an end! And voila October 1st comes around and all the world`s problems are solved, bad employment number, bad economic data, all viewed in a positive light because the real thing that matters is who is positioned for the 4th quarter rally, the Market Makers that`s who!

Discover as many Games and Rules of the Game as possible and What Different Games Structures Look Like so you can understand Price Action of Assets

There literally are so many games that are played within financial markets that it would take a 500 page book to outline them all, from the micro, micro option games to the spoofing tricks, to the coordinated functioning of Algos across entire unrelated asset classes, to afterhours games, to market close games.

In the end, Remember it is a Game

It may be serious business to you as an investor, this may be your retirement savings. However, the players who move the market are already set for life, they could retire today and never have to work another day in their life and still have 5 homes. These people play the game more out of habit, the joy of making more money, and the prestige and power that comes from being a player in the markets and moving even higher up the food chain. What happens on a daily, weekly, quarterly, yearly basis doesn’t really affect their quality of life one bit.

It is just the icing on the cake, they have already won the game of life by being market makers in the first place. They rarely lose, it takes an outlier even to catch them off guard like a natural disaster that came out of nowhere, and they have even been known to buy up markets or hold markets up, until they can get positioned on the right side of the natural disaster trade.

The large Financial Institutions who are major players have a different motive as public entities with shareholders to keep happy. They make most of their trading money by front running order flow, traditional market making activities, front running clients and their proprietary research with the goals of having good profitable quarters, meeting bonus targets and not getting caught rigging markets when colluding. Also, limiting and isolating the damage from the inevitable collusion when they do get caught! They are playing the Corporate Game as well as the Game of the Financial Markets.

Pragmatic Approach to Financial Markets

It is very hard for you the average investor because you are trying to figure out what markets Should do, you are a Market Taker. Market Makers on the other hand dictate what the market Does, they define the rules of the Game! Thus your goal as an investor isn`t to study charts, the fundamentals or economic tea leaves, but rather to figure out what the large Game Players are doing, and can you piggyback on their coattails or Market Moves, as they Move Price like pawns on a Chess board!


Europe in Deflation: Got (cheap) Milk?


Europe in Deflation: Got (cheap) Milk? 

Why falling food prices are not a boon for Europe's economy

By Elliott Wave International

In the early 1990s, two simple words from a genius ad campaign radically transformed the way the U.S. consumer saw it: "Got Milk?"

Suddenly, the narrative changed from an obligatory drink you had to finish as a kid, along with eating your vegetables — into a sexy, funny, and above all desirable treat for all ages.

Until now.

In Europe, in 2015, famous celebrities donning milk mustaches no longer light the public's passion for lactose — as prices for milk have spoiled. Here, a September 8, 2015 CNN Money article captures the curdled state of affairs:

"So much milk is sloshing around the European Union that milk is often cheaper than bottled water. In UK, a liter bottle of water costs around $1.50, a liter of milk $1… Wholesale milk prices have collapsed by 20% this year."

Except that, it's not just the price of milk that's gone sour. According to data from April 2015, "supermarket prices in the UK have fallen at the steepest rate in eight years," including meat, milk, cheese, and vegetables. (The Telegraph)

There's no disputing the decline is a disaster for dairy farmers and the like. But cheaper food costs — well, according to the mainstream financial experts — that's a boon for consumers and commodity-dependent companies.

According to one October 12, 2015 USA Today article:

"The big drop in raw materials costs is going into somebody's pocket… proving a rare opportunity to pocket savings but maintain retail prices and strong demand."

This idea is nothing new. It gained mainstream traction back in 2014, when a 60% crash in crude oil prices inspired the "goodflation" movement. And in May 2015, when the UK's Consumer Price Index plunged into negative territory for the first time in 55 years, the move was hailed as good news:

"This looks like the mild and benign variety of deflation… Instead we should welcome the positive effects that lower food and energy prices bring for households at a time when wages are rising strongly, unemployment is falling, and the economy is growing." (May 19 Daily Mail)

But here's the thing; we've crunched the numbers. We've checked and rechecked all the inventory. And the results couldn't be clearer: Declining food and energy prices have not contributed to and/or secured rising wages, falling unemployment, or strong economic growth.

Here, the following chart from our September European Financial Forecast, puts this reality in stark focus:

"Play with the numbers however you like, but no amount of slicing and dicing can hide the fact that deflation has moved in, made itself comfortable and is now checking out what's free to eat."

With the eurozone's real GDP flat, unemployment rising, and wages in the UK at the same level where they were years ago, the evidence is clear: deflation has not been a "good thing" for Europe's economy. In fact, much of the world is under deflation's tightening grip. And judging by the magnitude of deflation spreading through Europe, and even the U.S., the vise will not rest on food and commodity prices alone.

The best part is, we've just compiled a special free three-part report on deflation including exclusive, subscriber-grade excerpts from our European Financial Forecast and Elliott Wave Financial Forecast — that will equip you with a long-term picture of the global deflationary changes in store.

Get the full picture of what we see as a worldwide deflationary trend in our new report, Deflation and the Devaluation Derby. We cover:

  • Currency devaluation's role in the developing global crisis
  • How the self-reinforcing aspect of deflation is already apparent in commodities trading
  • Why the top 1% of earners are in for a rude awakening
  • How Europe's biggest economies are screeching to a halt
  • The hair-raising future for U.S. stocks

Just recall how swiftly the 2007-2009 financial crisis unfolded. We anticipate that the next global financial crisis could be even more sudden and severe.

Prepare now with our new report, Deflation and the Devaluation Derby. CLICK TO CONTINUE READING >>

?This article was syndicated by Elliott Wave International and was originally published under the headline Europe in Deflation: Got (cheap) Milk? Weekly Trading Webinar – 10-28-15 Weekly Trading Webinar – 10-28-15


  • 1:40 The Fed: Might it raise rates? Dec. is a terrible time. 
  • 6:34 NQ laggard at 4,637, Trade Idea
  • 11:20 BHI Trade Idea
  • 13:40 Natural Gas (SNATGAS), rolling average; there's a point at which prices won't go lower because producers will stop producing.
  • 19:25 UNG chart review (US Natural Gas Fund)
  • 21:30 LNG
  • 25:16 SNATGAS chart review march 2014 they have incredible spike, Trade Idea
  • 27:26 OIL is very high
  • 30:44 SCO Trade Idea
  • 33:35 GDP report is totally crap
  • 33:56 rate hike: we are not hiking now, but we will hike in dec
  • 37:17 SCO calls, Review Position, Trade Idea, If you don’t know what’s going to happen don’t trade
  • 48:24 LNG is gonna do something here
  • 50:00 LNG Review Position, Trade Idea
  • 55:20 UNG in 5% Portfolio puts & calls
  • 58:08 FOMC Meeting
  • 1:00:23 Everybody is going down
  • 1:01:48 FOMC Meeting: Statement
  • 1:08:00 Our market is in complete total joke
  • 1:10:13 UNG calls & puts
  • 1:14:40 Trade Idea
  • 1:17:53 Futures: S&P Trade Idea
  • 1:26:00 Index Portfolio: SQQQ is bullish
  • 1:27:15 S&P Trade Idea

Eventually The Weight Becomes Too Much To Bear

Courtesy of Dana Lyons

The “equal-weight” S&P 500 has dropped to near 3-year lows versus the cap-weighted version. Previous such events under similar conditions occurred at inauspicious times.

Continuing with the impromptu weekly theme regarding the relatively “thin” nature of the recent stock rally, today we take a look inside the S&P 500. Like yesterday’s post on the consumer discretionary sector, this one examines the “equal-weight version of the index versus the traditional cap-weighted version. Whereas the performance of the cap-weighted index can be subject to undue influence by the very largest components, a look at the equal-weight version can give us an idea of the health of the broad swathe of stocks within the index.

While the relative under-performance on the part of the equal-weight S&P 500 (as judged by the Rydex Equal-Weight S&P 500 ETF, RSP) may not be as egregious as in the consumer discretionary sector, it is still somewhat alarming. Despite the cap-weighted S&P 500 (as judged by the S&P 500 SPDR ETF, SPY) being reasonably close to its all-time highs again, the equal-weight:cap-weight ratio has dropped to near 3-year lows. Considering the context, the RSP:SPY ratio is at levels only seen just prior to substantial declines in July and back in 2007.


By “considering the context”, we mean that the cap-weighted S&P 500 is less than 3% from its all-time high. The only months, historically, that have seen the equal-weight:cap-weight (RSP:SPY) ratio at a 2-year low under those circumstances are shown below. Obviously, these did not mark the best months to be buying stocks.

  • September-November 2007
  • July 2015
  • October 2015

Again, like we have mentioned throughout the week, this situation means that the inordinate bulk of the lifting during the recent rally is being done by the biggest of stocks. It does not necessarily mean that the rest of the stocks are falling or doing poorly. It just means that they’re not doing their fair share. As it turns out, on an equal-weighted basis, the indices have basically been drifting sideways during the most recent few weeks while the biggest stocks have been rallying smartly.

So is this a big deal? Well, in July it was. And in the fall of 2007 it was. Does this mean the market is on the verge of another collapse? Not necessarily. It doesn’t even mean that the rally cannot continue, for a time. It does mean that if one wants to participate on the long side, they are likely better suited being in those relatively few stocks or areas that are carrying the market at the moment.

That said, we are big proponents of good breadth as a sign of a healthy market. The more stocks that are participating in a rally, the better the foundation for the rally. Thus, when some, or a lot, of stocks invariably fall by the wayside, there are enough strong stocks to continue to carry the burden. When there are relatively few stocks doing all the heavy lifting, there is less margin for error.

Eventually, the weight will become too much to bear for just those few stocks. And, as we saw this summer, when those relatively few leaders begin to stumble, the market will again be vulnerable to significant damage.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

Dirty Secrets, Hush Money, Conviction of Former US House Speaker Dennis Hastert; Was Justice Served? Could Gold or Bitcoin Have Helped?

Courtesy of Mish.

Reuters reports Ex-House Speaker Hastert Pleads Guilty in Hush-Money Case.

Former U.S. House Speaker Dennis Hastert pleaded guilty on Wednesday to a federal financial crime in a hush-money case stemming from allegations of sexual misconduct, marking the dramatic downfall of a once powerful politician.

In exchange for the guilty plea, federal prosecutors recommended a sentence of zero to six months imprisonment, although the judge could sentence Hastert to up to five years in prison and fine him $250,000.

Hastert, 73, pleaded guilty to one count of “structuring” – withdrawing funds from bank accounts in amounts below $10,000 to evade bank reporting rules on large cash movements. Those rules exist to detect money laundering.

In the agreement, Hastert admitted to paying $1.7 million in cash to someone he had known for decades to buy that person’s silence and compensate for past misconduct toward that individual.

Prosecutors did not spell out what the misconduct was, but unnamed law enforcement officials have told media that it was sexual and involved someone Hastert knew when he was a high school teacher and coach in his hometown of Yorkville, Illinois in the 1960s and 1970s.

In the plea agreement Hastert admitted that he reached an agreement in 2010 with the individual who was a victim of his misconduct, to pay a total of $3.5 million in hush money.

From 2010-2012 Hastert made 15 withdrawals of $50,000 each from a number of banks, meeting with the individual every few months to pay the person an installment.

In April 2012, bank employees asked Hastert for an explanation of the withdrawals and told him they had to report large transactions. After that, he started to withdraw in lower increments. From mid-2012 until late 2014 he made 106 withdrawals of amounts under $10,000 while he kept paying the unnamed individual every few months, according to the plea agreement.

If there were any sex abuse it would not lead to criminal charges because the statute of limitations ran out long ago.

“This is one more time where a person with power and authority gets to keep dirty secrets hidden,” said Barbara Blaine, founder of SNAP, an advocacy group for survivors of clerical abuse.

Hastert was the longest-serving Republican speaker in the history of the House. He left Congress in 2007 and became a lobbyist and consultant.

Sleazebag Hypocrite

Continue Here

Valeant Flash Crashes On Report CVS Terminates Its Philidor From Caremark Pharmacy Network

Courtesy of ZeroHedge. View original post here.

A few days ago we laid out Valeant's "Enron" org chart, laying out the extensive, and previously undocumented and in fact, secret, relationships between Valeant and Philidor – the specialty pharmacy whose sole customer is Valeant.

As a reminder, it was the revelation of Philidor's shady existence that was the reason for the rout that slashed the price of Valeant stock by more than half last week.

And while both the company and its various shareholders, pardon the pun, valiantly defended the company and its exposure to and from Philidor – claiming there is nothing illegal in the troubling disclosures – moments ago VRX stock flash crashed…

… on the following news from Dow Jones:


Recall that Philidor is a sizable 7% of Valeant's bottom line, as per its own slides:

  • In Q3 2015, Philidor represented 6.8% of total Valeant revenue
  • In Q3 2015, Philidor represented ~7% of Valeant EBITA

And where CVS goes, others will promptly follow, not only leading to an promptly termination of any and all overinvoicing benefits Philidor provided to Valeant, but leading to a crack down on specialty pharma organizations everywhere, and likely finally inviting a federal inquiry into just what is going on, because for a pharmacy to admit that there was fire where until just now there was nothing but smoke, not even the Feds can ignore that.

Perhaps in light of this news, VRX shareholder Sequoia will reassess its hardy defense of the company as disclosed earlier today in the following letter, which came just hours before the same fund also announced two of its members resigned as independent directors from Valeant.

This Is What The “Invasion Of Europe” Looks Like

Courtesy of ZeroHedge. View original post here.

On Monday, we brought you a series of still shots along with a video which depicted the scope of Europe’s migrant crisis via drone footage.

The point in highlighting the imagery was to demonstrate just how futile the EU’s effort to establish a series of refugee “holding camps” along the Balkan route to Germany is likely to be. 

As a reminder, Jean-Claude Juncker and Angela Merkel are attempting to convince recalcitrant states to support efforts to place hundreds of thousands of asylum seekers, but a mandatory quota system only served to enrage the likes of Hungary which quickly moved to close off its borders with Serbia and Croatia and that, in turn, set off a Balkan border battle.

Now, Brussels is looking to provide shelter for the migrants as they make their way to Germany but as we noted earlier this week, these way stations will swiftly become overcrowded, unsafe refugee internment camps and they’ll likely be easy targets for vociferous anti-migrant protests or worse. 

If you needed further evidence of the extent to which any attempt to shelter the flood of asylum seekers with makeshift camps is likely to prove not only futile, but dangerous, consider the following video which vividly demonstrates just how acute the crisis has become:


As you can see, the situation is quickly spiraling out of control and it isn't at all clear that Europe can cope with the people flows even if it wanted to. This is nothing short of an epochal demographic shift and as we've documented on a number of occasions (see here and here for instance), it's not at all clear that Europeans are prepared for it.

Caution: xenophobia ahead.

See also: Europe's Next Refugee Crisis: Thousands Of Migrants Freezing To Death.


Courage to Act; Reflections on Fed Hubris; What if Whatever it Takes is Not Enough? Fed Troika?

Courtesy of Mish.

This past week, Ben Bernanke was in London promoting his book "Courage to Act". Today, Albert Edwards at Societe Generale pinged me with his thoughts.

Edwards writes …

Ben Bernanke is in London to publicise his book ‘The Courage to Act’. Although the various open events would have been fascinating, I thought it best not to attend. I would not have been able to control myself. In a repeat of the protest at the April ECB press conference I would have probably stormed the stage, thrown confetti money at him and been unceremoniously dragged out by security. But speaking to people who were there and reading the pre-vetted Q&A on the web, reminded me just how overconfident central bankers are to their very core – even after their actions are clearly ruinous. Bernanke again paraded his lack of insight of the Fed’s leading role in causing the 2008 crisis. Indeed he was self-congratulatory about the Fed’s success in averting another Great Depression, not accepting that they almost actually caused it! Central bankers are doomed to repeat the same mistake until they acknowledge their role in the last crisis and stop blaming everybody else. Unfortunately it now appears from recent comments that ECB President Mario Draghi is also demonstrating the same hubris. Indeed it is becoming clear that ECB QE is already failing.

It should not be forgotten that after Draghi's 2012 whatever it takes comment, he also said in the next breath “and believe me, it will be enough” in another demonstration of central bank overconfidence. Regular readers will know I have long been an extreme critic of central bank policies, particularly of the Fed and the Bank of England with their negligent pursuit of ultra-loose money policy in the mid-noughties policies that ultimately proved ruinous in the 2008 Global Financial Crisis. I believe the Fed and BoE have learned practically nothing from their previous mistakes and we are heading down exactly the same road to catastrophe as the financial markets creak and groan under the strain of QE-inspired, excess valuations. I would definitely now also put the Draghi ECB firmly in that same camp. Contrary to the Pavlovian salivations of the markets, the evidence is mounting that “whatever it takes” is not going to be enough.

Private Lending

Edwards cites private sector lending as evidence of ECB failure.

The goal of the ECB was to spur private lending and increase inflation. The ECB succeeded at neither, but it did create huge, destabilizing asset bubbles, as did the Fed.

Reader Comments

Reader Randy pinged me this morning with a question: "Have you read Bernanke’s book yet? Seriously Mish, I’ve never witnessed someone willingly display such hubris in my life. And it’s scary as hell."

No, I haven't read the book and do not intend to. I do not want one dime going to Bernanke.

Fed Troika

In a blog response to Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself? Reader John, offered these comments.

I watched Ben Bernanke today at the London Pimco Investment Summit. His comments were surprisingly frank: It takes ~80k jobs created a month to maintain unemployment, and if the two jobs reports between now and the December meeting are of the order of 150,000 or more the Fed should/will hike.

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Iraq To Washington: “We Don’t Need Your Help Fighting Terrorism”

Courtesy of ZeroHedge. View original post here.

Perhaps the most astounding thing about recent events in the Mid-East is the extent to which outcomes that seem far-fetched one week become reality the next. 

This dynamic began back in June when Iran’s most powerful general vowed to “surprise the world” with his next move in Syria. Just weeks later, he was in Moscow (in violation of a UN travel ban) hatching a plan with Putin to launch an all-out invasion on behalf of Assad on the way to forcibly enacting a dramatic shift in the Mid-East balance of power. Before the West had a chance to react, Moscow was establishing an air base at Latakia. 

As all of this unfolded we began to suggest that it would be only a matter of time before Russian airstrikes began in Iraq.

The setup, we contended, was just too perfect. Iran controls both the military and politics in the country and so, we speculated that The Kremlin would get a warm welcome if Putin decided to launch an air campaign against ISIS targets across Syria’s eastern border. 

Sure enough, Baghdad moved to establish an intelligence cell with Russia, Syria, and Iran in September and when PM Haider al-Abadi said he would welcome Russian airstrikes, it was clear that the US was about to be booted out of the country it “liberated” more than a decade ago. 

Subsequently, Joint Chiefs of Staff Gen. Joe Dunford traveled to Baghdad and gave Abadi an ultimatum: "…it’s either us or the Russians."

Well, despite Dunford’s contention that Abadi promised not to enlist Moscow’s help, just days later Iraq gave Moscow the green light to strike ISIS convoys fleeing Syria. 

A desperate Washington then attempted to prove that the US could still be effective at fighting terrorism by sending 30 Delta Force soldiers into battle with the Peshmerga on a prison raid mission in the Northern Iraqi town of Huwija. Conveniently, one American soldier apparently had a GoPro strapped to his helmet and the footage was almost immediately leaked to Western media. 

Our contention (and again, this is in no way an attempt to trivialize the death of Master Sgt. Joshua L. Wheeler, the first US soldier to die in Iraq since 2011): Washington sent 30 Delta Force spec ops soldiers into a fight the Pentagon knew they would win and then filmed it to prove to Baghdad and any other interested Mid-East governments that the US can fight terrorism just as effectively as the Russians. The video was then used as a pretext for Ash Carter to tell the Senate that the US is now prepared to engage directly on the ground in Iraq and Syria. The US media then proceeded to document a “new” strategy whereby at the very least, Washington is set to send Apache gunships to Iraq to assist Iraqi, Kurdish, and Iran-backed militias in the fight against ISIS. 

There are several absurd things about this strategy and we encourage you to read our assessment from Wednesday, but the point here is this: it turns out that after 13 months of ineffective airstrikes and what amounts to nearly 13 years of occupation, Iraq doesn’t want any help from the US. 

Here's NBC (because nothing says "humiliation" like the US media reporting that Baghdad has essentially told Washington "don't call us, we'll call you"): 

The Iraqi government said Wednesday it didn't ask for — and doesn't need — the "direct action on the ground" promised by the Pentagon.

The revelation came a day after Defense Secretary Ashton Carter said the U.S. may carry out more unilateral ground raids — like last week's rescue operation to free hostages — in Iraq to target ISIS militants.

Iraqi Prime Minister Haider al-Abadi's spokesman told NBC News that any military involvement in the country must be cleared through the Iraqi government just as U.S.-led airstrikes are.

"This is an Iraqi affair and the government did not ask the U.S. Department of Defense to be involved in direct operations," spokesman Sa'ad al-Hadithi told NBC News. "We have enough soldiers on the ground."

Yes, "enough soldiers on the ground." And as we never tire of pointing out, most of those soldiers are either Iranian or Iran-backed, and now that Moscow and Tehran have established a Mid-East military alliance, Iraq no longer has any use for Washington. 

So it would appear that one video of a prison raid is far too little, far too late to convince Baghdad not to lean Russian when it comes to routing ISIS. And indeed, there's almost no question that Tehran is feeding Iraqi politicians intelligence that – right or wrong – suggests the US tacitly supports Islamic State in an effort to ensure that the group can continue to serve as a destabilizing force vis-a-vis regimes that are deemed unfriendly to Washington's regional allies. Indeed, one has to wonder whether it's a coincidence that the two countries where ISIS has established itself just happen to be the two countries wherein Iranian influence is the most pronounced. 

In any event, Iraq has just told Washington "thanks, but no thanks" just days after giving Moscow the go ahead to conduct bombing runs on ISIS. 

The writing is on the wall. The US is being booted out of the Mid-East.

The Fed Just Whacked Corporate Earnings

Courtesy of John Rubino.

The markets seemed to like what the Fed had to say yesterday, including the part about definitely, for sure, no kidding around this time raising interest rates in December. Especially elated were currency traders, who bid the US dollar up on the news.

Dollar index Oct 2015

Somewhat less enthusiastic, however, are the corporate executives who have seen their firms’ sales and earnings squeezed by a strong dollar of late. If rising rates make the dollar even stronger — as theory says they should — then presumably that makes corporate earnings even weaker. The media has been wrestling with various aspects of the dollar/corporate earnings/Fed policy connection for a while, and a consensus seems to be forming that there’s a conflict between aims and results in current monetary policy that another couple of months probably won’t resolve:

Strong Dollar Once Again Cutting Into Earnings

(Fox Business) – The strong U.S. dollar is once again emerging as a major theme this earnings season with Coca-Cola (KO) on Wednesday joining the ranks of other large multi-national companies that have seen their profits eroded overseas.

“I don’t think it’s going away anytime soon,” said Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), a public policy and economics research organization in Arlington, Virginia.

Wal-Mart (WMT) and Costco (COST), the number one and number two U.S. retailers respectively, have also told investors that the strong dollar is eating into their earnings. Wal-Mart said earlier this month that a combination of the strong dollar and wage increases for many of its employees could cut 2015 revenue by $15 billion.

The strong dollar is not a new issue for U.S. corporations: throughout 2015 an array of multi-national U.S. giants including Microsoft (MSFT), Monsanto (MON) and Caterpillar (CAT) have blamed the strong dollar after reporting disappointing earnings. According to a study by FactSet, 70% of the companies had cited the strong dollar as a negative impact on their 1Q earnings of 2015.

On Wednesday, Coke reported that its sales in Asia-Pacific fell 11% in the third quarter, while sales in Latin America dropped 14% and sales in Europe fell 7%. The three markets account for one-third of Coca-Cola’s total revenue.

Meanwhile, the US Dollar Index, which measures the U.S. currency against a basket of six global currencies, has risen by about 15% in the past 12 months.

The problem for these big multinationals occurs when their profits generated in weakened currencies such as the Euro or the Brazilian real are brought back to the U.S. and exchanged for the stronger U.S. dollar. The strong U.S. dollar also makes it more expensive to sell U.S. exports overseas, which benefits the international competitors of U.S. companies.

“It’s a very difficult situation for U.S. manufacturers,” said Waldman.


Is a Firm US Dollar a Deterrent to a Fed Rate Liftoff?

(NASDAQ) – With the FOMC decision upon us, the market is already looking ahead to the December meeting and whether the central bank will keep a rate liftoff on the table. This will be important to all global markets after the ECB rejoined the currency war last week despite Draghi saying that fx is not a policy tool as his dovish comments sent the EUR tumbling. If you believe that forex is not a policy tool then you also believe in the tooth fairy.

This puts the ball back in the Fed’s court as it has to weigh the impact on the dollar of any decision to start normalizing rates even if it tries to downplay the impact of the exchange rate.

Think about it. A rate liftoff or even expectations that it will start sooner rather than later would increase the value of the dollar. A firmer dollar, in turn, would weigh on commodities, especially crude oil. This would increase global concerns (e.g. emerging markets) and dampen US inflation expectations, making it harder for the Fed to achieve its 2% target. It would also increase concerns over an already struggling manufacturing sector where the dollar continues to be cited as a headwind on earnings.

So, the Fed is caught in the currency war after Draghi undercut the EUR and weakened it vs. the dollar, removing what would have been a cushion (i.e. weaker dollar) that would have made it easier for the Fed to consider a liftoff. Now, with the dollar back on a firmer footing, the Fed has less leeway to speed up liftoff without sending the currency higher as technicals have moved back in its favor.

Let’s assume that the Fed, after all its dithering, feels honor-bound to raise rates even in the face of slowing GDP growth and increasing global tensions. The dollar will almost certainly respond by rising or at least remaining stable at its current high level.

This in turn means that corporations will face continued pressure on sales and profits, and that the earnings recession will continue for at least another year before easy comparisons start making it possible to “grow” again.

What does that mean for the equity markets? Has there ever been an ongoing rise in share prices when corporate earnings were in a multi-year decline? That’s not rhetorical. Market historians, feel free to weigh in here.


Visit John’s Dollar Collapse blog here

3rd Quarter Advance GDP Estimate +1.5%; December Hike Odds Up to 46.5%

Courtesy of Mish.

The third quarter advance (initial) GDP estimate came in at 1.5% a bit under the Econoday Consensus of 1.7%, a bit over the Atlanta Fed GDPNow Forecast of 1.1%, and well below the Blue Chip consensus of 2.1%.

Steady domestic spending helped to prop up GDP growth in the third-quarter which came in at an annualized 1.5 percent, just shy of expectations. Final sales rose a very respectable 3.0 percent in the quarter in a gain that points to underlying momentum for the fourth quarter. Both residential and nonresidential investment slowed in the third quarter with both net exports and especially inventories also pulling down GDP. The price index came in a little lower than expected at plus 1.2 percent.

Personal consumption expenditures slowed 4 tenths but are still a major highlight at a plus 3.2 percent rate. Service spending, an area insulated from global factors, continues to show solid resilience. But it was spending on durables, including vehicles, that was the strongest consumer category in the quarter. Government purchases, another area of domestic-centered spending, also contributed to the quarter's growth.

The quarter's 1.5 percent rate is only 2 tenths lower than the average growth of the prior four quarters and comes against a difficult 3.9 percent comparison in the second quarter. Not a great result but not bad either.

Final GDPNow Forecast for 3rd Quarter

December Hike Odds Up to 46.5% 

This is a muddling along estimate, signifying nothing has changed. In light of the Fed's complete reversal yesterday, muddling through was enough to send the CME Fedwatch December rate hike odds to 46.5%.

click on chart for sharper image

For discussion of the Fed's complete reversal yesterday to a much more hawkish viewpoint, please see Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself?

Mike "Mish" Shedlock


Kickbacks, Conflicts and Darkness: Welcome to Your “Modern” Stock Market

Courtesy of Pam Martens.

New York Stock Exchange

New York Stock Exchange

By Pam Martens and Russ Martens: October 29, 2015 

Chances are pretty high that among the daily lexicon of most Americans, you are not going to hear the words “maker-taker.” And yet, outside of the debate about preventing Wall Street’s too-big-to-fail banks to create another epic taxpayer bailout in the future, the maker-taker debate is one of the hottest on Wall Street. On Tuesday of this week, the glacially-slow to respond Securities and Exchange Commission (SEC) held a full day hearing on the “maker-taker” model and other stock market structure dysfunctions.

In simple terms, maker-taker is another wealth extraction tool used by Wall Street firms to pick the public’s pocket in the name of stock market liquidity. In more complex terms, brokers servicing retail clients and institutions (like those managing your pension money) are incentivized to send their customers’ stock limit orders to trading venues that will pay them a rebate (on the premise that they are “making” liquidity) while traders who trade on those limit orders are charged a fee (on the premise they are “taking” liquidity). Thus the maker-taker model.

Finance Professor Larry Harris, of the USC Marshall School of Business, told the SEC panel on Tuesday that “fees charged to access standing limit orders are essentially kickbacks that exchanges charge people who want to trade with their clients who offer limit orders. In any other context, collecting such fees would constitute a felony. Although legal in the security markets, they are impediments to fair and orderly markets. They need to go away.”

Broker-dealers who process retail customer stock orders as an “agent” for the customer have a duty under the law to route stock orders to the venue which will provide best execution to their customer, not to the venue that will give the broker-dealer the biggest rebate. Professor Harris told the SEC panel that the maker-taker model undermines the agency role of broker-dealers, because “Customers whose standing limit orders were routed to maker-taker trading systems were worse off because their orders did not trade as quickly as they would have traded had they been posted at traditional exchanges.”

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All Hail Our New Lord & Master – The Stock Market

Courtesy of Charles Hugh-Smith, Of Two Minds

The all-powerful Federal Reserve is a kitten absurdly claiming in public to be a tiger. If the market threatens to drop, the Fed quickly prostrates itself and does the bidding of its Lord and Master: "No rate hikes, minons!"

By cowering in terror of a stock market tantrum, the Fed has surrendered everything: its vaunted (and completely phony) independence; its duty (yes, go ahead and laugh) to the nation and the real economy–everything.

The Fed is nothing but an abject slave of the market. It masks its servitude with Newspeak, but the reality it has only two choices: burn the market down with a series of rate hikes or surrender completely to the market, relinquishing any pretense of power or control.

The Fed is not alone; the entire financial-political system is now beholden to the stock market.

Want to impose real restrictions on the financial sector? Forget it, Congress–the market will rebel. And if the market sags–you'll cave in like all the market's servile minions because a significant chunk of your campaign contributions come from those profiteering off the market.

Corporate America–don't dare miss your quarterly earnings number or you will suffer the wrath of a market that destroys all who don't obey its demands for short-term profits at the expense of long-term profitability. Were the management of a public company bold enough to sacrifice short-term profits for long-term growth, they wouldn't survive the market's destruction of their stock price.

The stock market now dictates fiscal and monetary policy within the Empire because the American economy has been fully financialized. Profits flow not from innovation in products and services but from the financialization of every income stream.

While definitions of financialization vary, mine is:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

Another way to describe the same dynamics is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

When the profits from financializing collateral and leveraging those bets to the hilt far exceed generating wealth by creating products and services, the economy is soon hollowed out as the perverse incentives of financialization start driving every business and political decision and strategy.

Even Darth Vader now takes orders from the stock market:

We're all minions now of the stock market. All hail our Lord and Master, the stock market.

Final 3rd Quarter GDPNow Forecast vs. Consensus Estimates Ahead of 3rd Quarter GDP Release

Courtesy of Mish.

The initial 3rd Quarter GDP release is due at 8:30AM on Thursday. Inquiring minds may be interested in the GDPNow forecast vs. the Blue Chip estimates vs. the Bloomberg Consensus estimate.

GDPNow vs. Blue Chip Consensus

Bloomberg Econoday Consensus

  • GDPNow: 1.1%
  • Blue Chip: 2.1%
  • Econoday: 1.7%

If you are up in time, place your bets.

Bear in mind, GDP is so heavily revised, we will not know the true winner for another two to three months at the earliest. The "preliminary" winner will be announced at 8:30 AM. Bets taken until 8:26:30.

Mike "Mish" Shedlock


It’s what the Fed didn’t say that counts


Faces of Janet Yellen – Screen shot from Google Images

It’s what the Fed didn’t say that counts

Courteys of 

Peter Boockvar of the Lindsey Group parses today’s FOMC statement and notices a few possibly meaningful differences that leave room for a 2015 hike:

In the 1st paragraph of the FOMC statement, the Fed referred to household spending and business fixed investment as “increasing at solid rates in recent months.” Solid replaces “moderately” and I’m not sure why they changed the wording as while auto sales were “solid”, retail sales and capital spending have not been. On the labor market they said “the pace of job gains slowed and the unemployment rate held steady.” This replaces “the labor market continued to improve, with solid job gains and declining unemployment.” This of course follows two months in a row of job gains less than 150k.

 Importantly of note, the Fed completely eliminated this statement from their September meeting: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Just like that, international developments have disappeared in their eyes (I’m exaggerating) but maybe that is in response to their belief that more QE from the ECB and further easing from China will help their economies. Dream on.

 We’ve heard from many Fed members that they want to raise rates by year end. Well, they’ve got one more chance and in the 3rd paragraph they are laying out the criteria AGAIN that must be met in order to follow thru with this hope: “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress, both realized and expected, toward its objectives of maximum employment and 2% inflation.”

Josh here – the dollar rallied and stocks took off on the heels of this one. But that was already going to happen anyway :)

One major positive today was the rally in small caps. Russell 2000 (IWM) weakness was the latest thing to get stuck in everyone’s craw. And poof – now it’s all good.

small caps


Peter Boockvar
Managing Director and Chief Market Analyst
The Lindsey Group LLC

Chicago’s Sheep Dogs Approve Mayor’s Tax on Sheep; Quote of the Day “It’s Not a Piece of Art”

Courtesy of Mish.

“It’s Not a Piece of Art”

Mayor Rahm Emanuel, Chicago’s master shepherd, along with his pack of aldermatic sheep dogs, successfully rounded up, then slaughtered the very Chicago taxpayers they were supposed to watch over.

After slaughtering Chicago’s sheep with the largest tax hike in history, Emanuel commented “It’s Not a Piece of Art“.

Amen to that. Slaughters generally aren’t a piece of art.

Aldermatic Sheep Approve Emanuel’s Tax Hike

Crain’s Chicago Business reports Emanuel Gets His Huge Property Tax Hike.

The City Council has approved Mayor Emanuel’s bad-news city budget, including plans for a record $543 million city property tax hike over the next four years.

The action came on a voice vote after a relatively tepid two-hour debate. But aldermen did take a roll-call vote on the related appropriation of funds for 2016, and it was approved 36-14.

“No, it’s not a piece of art,” Emanuel told the council. “But are we better off? Yes.”

Question of the Day

Who is better off? The sheep dogs, those in bed with the mayor, the public unions, or the slaughtered sheep?

Expect More Torture

Those who survive the slaughter can expect still more torture….

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Can The US Raise Rates When Everyone Else Is Cutting Them?

Courtesy of John Rubino.

It’s understandable (sort of) that the Fed wants to raise short-term interest rates so it can cut them again in the next downturn. But what if the next downturn is already here? That’s the signal being sent by the world’s other central banks:

Sweden’s Central Bank Expands Stimulus Program

(New York Times) – Sweden’s central bank says it will expand its bond purchase stimulus program by 65 billion kronor ($7.6 billion) to help the economy and nudge inflation toward the 2 percent target.

Wednesday’s announcement means the Riksbank’s bond-buying will reach 200 billion kronor by the middle of next year, and comes as several central banks around the world consider more stimulus to fend off an economic slowdown.

Analysts said the move was in response to the potential of more stimulus from the European Central Bank in the eurozone, of which Sweden is not a member. Stimulus tends to weigh on a currency, and a rise in the Swedish krona against the euro would hurt exporters and weigh on inflation.


Draghi’s compromise with doves heralds ECB policy easing in December

(Reuters) – With some rate-setters advocating immediate policy easing last week, European Central Bank President Mario Draghi struck a compromise to keep the doves on side and set up expectations for action in December, central banking sources said.

Several influential Governing Council members argued that the ECB’s balance sheet was still relatively small, especially compared to the U.S. Federal Reserve while Denmark’s deeply negative deposit rate illustrated that there was still room to reduce rates, one source with knowledge of the discussion said.

“It needs to be understood: there is consensus at the ECB Governing Council,” a rate-setter, who asked not to be named, said. “A move in December is likely.”

“Inflation is just not moving higher, there is a risk of falling into a Japanese-style liquidity trap,” the Governing Council member said.

With inflation in negative territory, the ECB is far from its target of getting price growth to near 2 percent and its 60 billion euros (43 billion pounds) a month asset buys have proven insufficient as lower energy prices and slower growth in emerging economies have worked against it.


Japan’s retail sales fall piles pressure on BOJ

(Reuters) – Japan’s retail sales unexpectedly fell on-year in September, official data showed on Wednesday, suggesting that consumer spending lacks the momentum to make up for weak exports and factory output.

Retail sales fell 0.2 percent in September from a year earlier, compared with economists’ median estimate for a 0.4 percent rise, the Ministry of Economy, Trade and Industry said on Wednesday.

The retail sales news could add to pressure on the Bank of Japan under to expand monetary stimulus, possibly as soon as its rate review meeting on Friday, when it is also expected to slash its rosy economic and price projections, analysts say.


China Cuts Interest Rates as Policy Divergence With U.S. Widens

(Bloomberg) – China stepped up monetary easing with its sixth interest-rate cut in a year to combat deflationary pressures and a slowing economy, moving ahead of anticipated fresh stimulus by central banks from Europe to Japan and possible tightening in the U.S.

The one-year lending rate will be cut to 4.35 percent from 4.6 percent effective Saturday the People’s Bank of China said on its website on Friday, while the one-year deposit rate will fall to 1.5 percent from 1.75 percent. Reserve requirements for all banks were lowered by 50 basis points, with an extra 50 basis point reduction for some institutions.

Authorities are seeking to cushion an economy forecast to grow at the slowest annual rate in a quarter century as old growth drivers such as manufacturing and construction falter and new drivers like consumption struggle to compensate. Meantime, consumer inflation at about half the government’s target and a protracted slump in producer prices added room for additional easing.

“Clearly the People’s Bank of China is on a mission to ease policy and has been for a year,” said George Magnus, a senior independent economic adviser to UBS Group AG in London. “With the economy losing momentum, deflation embedded in the corporate sector and rebalancing making limited headway, the central bank is being directed to ease monetary policy further. And of course, this isn’t the end of the road yet.”

Does the rest of the world know something the US doesn’t? Obviously yes, which is that the global economy is tipping back into recession in an environment of historically unprecedented financial fragility. Government, consumer and business debt has never been this high, the leveraged speculating community has never been this leveraged, and unemployment in a lot of places is already too high for political comfort. Toss a recession into this mix and the result will be a whole series of possible crises, each more apocalyptic than the last.

So the other central banks are reacting as fiat currency central banks always do, with easier money. The fact that money is already as easy as it’s ever been won’t stop it from getting even easier. As one of the above articles noted, “Denmark’s deeply negative deposit rate illustrated that there was still room to reduce rates.”


Visit John's Dollar Collapse blog here

Pfizer, Allergan Said To Consider Merging; Would Be Largest Drug Deal In History

Courtesy of ZeroHedge. View original post here.

Pfizer has an enterprise value of $221 billion.

Allergan has an enterprise value of $160 billion.

The two companies combined would have a joint EV of nearly $400 billion and a market cap of well over $300 billion. That would make a potential merger between the two the largest M&A deal in history, while a "mere takeover" of Allergan by Pfizer would still rank it as the fourth largest deal in history and the largest deal in a year that is shaping up as a record for M&A.

And, according to the WSJ, such a deal may be just a few months if not weeks away. To wit:

Drug makers Pfizer Inc. and Allergan PLC are considering combining, in what would be a blockbuster merger capping off a torrid stretch for health care and other takeovers.

Pfizer recently approached Allergan about a deal, according to people familiar with the matter, with one of them adding that the process is early and may not yield an agreement. Other details of the talks are unclear.

Allergan currently has a market capitalization of $112.5 billion, meaning that a deal for the company could be the biggest announced takeover in a year that is already on pace to be the busiest ever for mergers and acquisitions.

Granted, this won't be the first time the two pharmaceutical behemoths have been said to consider merging, although it would be the first time for Allegan in its current iteration which is a combination of Forest Labs, Watson, Warner Chilcott, Actavis and, of course Alergan; furthermore this time may be also different when one considers the recent last gasp surge in deal announcements, which is nothing more than an attempt by companies to lock in their near all time high stock prices as a merger currency, while debt is still debt.

Will the deal pass regulatory scrutiny? If enough palms are greased, sure.

More complex would be the whole tax-avoidance issue: "A tie-up with Allergan could also be a way for New York-based Pfizer to lower its corporate tax rate. Allergan is based in Dublin, which has a significantly lower tax rate than the U.S."

What is more interesting will be whether the Fed will observe what would be the mother of all mergers, and finally grasp the magnitude of the mother of all equity bubbles that it has blown. Alas, the answer will once again be a resounding now, even when this debt-funded deal leads to the CEOs becoming richer than their wildest dreams, and leads to the prompt pink slipping of several tens of thousands of workers on both sides. Simply because when the bubble is this big, there is no more stopping it.

Finally, for those interested, here is a list of all the largest M&A deals to date courtesy of CityAM:

The 6 Reasons China and Russia Are Catching Up to the U.S. Military


The 6 Reasons China and Russia Are Catching Up to the U.S. Military

Courtesy of Washington's Blog

Why the Gap In Military Superiority Is Closing

China and Russia are still behind the U.S. militarily.  But they are both showing surprising breakthroughs that – sometime down the road in the future – could threaten U.S. hegemony.

The Washington Times reported last month:

Defense Secretary Ashton Carter on Wednesday warned Russia and China are quickly closing the military technology gap with the U.S. as inconsistent military budgets and slower innovation threaten America’s lead in the military world.


“It’s evident that nations like Russia and China have been pursuing military modernization programs to close the technology gap with the United States,” he continued. “They’re developing platforms designed to thwart our traditional advantages of power projection and freedom of movement. They’re developing and fielding new and advanced aircraft and ballistic, cruise, anti-ship and anti-air missiles that are longer-range and more accurate.”

The SecDef issued this warning before Russia stunned the U.S. with its long-range missile and electronic communications-jamming capacities.

How could this be happening, when U.S. military spending dwarfs that from the rest of the world?

There are six reasons …

1. Corruption and Pork.  America spends a large percentage of it’s defense spending on unnecessary military programs that:

  • The generals say aren’t helpful and don’t even want
  • Redundant personnel, programs and systems which don’t increase our war-fighting capacity
  • Equipment which is built and then immediately mothballed before it is ever used

Indeed – as many lottery winners and star athletes will tell you – it’s easy to piss away even huge sums of money over a couple of years’ time without discipline.

And plain old corruption is wasting huge sums and dramatically weakening our national securityHow much are we talking about?

Well, here's some indication: $8.5 trillion dollars in taxpayer money doled out by Congress to the Pentagon since 1996 … has never been accounted for.

2. Fighting the Wrong Wars. A closely-related issue is that the war-fighting assets are being squandered, spread thin and distracted by fighting wars which decrease our national security.

The wars in Iraq and Afghanistan were the most expensive in U.S. history, costing between between $4 trillion and $6 trillion dollars.

And we spent additional boatloads of money carrying out regime change in Libya, Syria and elsewhere.

But these wars have only caused ISIS and the Taliban to flourish.

Indeed, the majority of our defense spending is – literally – making us less secure because we’re spending money to fight the wrong wars:

  • We’re overthrowing the moderates who help insure stability
  • We’re arming and supporting brutal dictators … which is one of the main reasons that terrorists want to attack the U.S.
  • We’ve fought a series of wars for petrochemicals, instead of security
  • We expend huge sums of money on mass surveillance … but top security experts agree that mass surveillance makes us MORE vulnerable to terrorists (we’re targeting the wrong guys)

3. Never-Ending War Destroys the Economy. We’re in the longest continuous period of war in U.S. history.  The Afghanistan War has been going on for 14 years … as long as the Civil War (4 years), WW1 (4 years) and WW2 (6 years) COMBINED.

Wars which drag on are horrible for our economy.  A weak economy in turn makes it more difficult to sustain a leadership role in defense in the long-run.

And Americans are sick and tired of war. If our national security was actually threatened, it might be hard for the government to rouse our commitment and motivation.

4. More Bang for the Buck. China has the world’s largest economy when measured by “purchasing power parity” … meaning how much Chinese can buy in their their local currency in their local economy. And see this.

Therefore, China can buy locally-produced military parts and services more cheaply than the U.S. can.

As Bloomberg noted last year:

The lowest-paid U.S. soldiers earn about $18,000 a year. In comparison, in 2009, an equivalent Chinese soldier was paid about a ninth as much. In other words, in 2009, you could hire about nine Chinese soldiers for the cost of one U.S. soldier.

Even that figure doesn’t account for health care and veterans’ benefits. These are much higher in the U.S. than in China, though precise figures are hard to obtain. This is due to higher U.S. prices for health care, to higher prices in general, and because the U.S. is more generous than China in terms of what it pays its soldiers. Salaries and benefits, combined, account for a significant percentage of military expenditure.

But labor costs aren’t the only thing that is cheaper in China. Notice that China’s gross domestic product at market exchange rates is only two-thirds of its GDP at purchasing power parity. This means that, as a developing country, China simply pays lower prices for a lot of things. Some military inputs — oil, for example, or copper — will be bought on world markets, and PPP won’t matter. For others, like complicated machinery, costs are pretty similar. But other things — food or domestically manufactured products — will be much cheaper for the U.S.’s developing rivals than for the U.S.

Those who follow global security issues have known about this issue for a long time. But somehow, this fact hasn’t penetrated the consciousness of pundits or made its way into pretty, tweet-able graphs.

5. Theft. The U.S. Naval Institute, Fiscal Times and others document that the Chinese have greatly accelerated their weapons development timeline by spying on the West and shamelessly copying our military inventions and designs.

If the NSA and other spying agencies had used their resources to stop foreign governments from stealing our crown jewels – instead of using them to gain petty advantages for a handful of knuckleheads – we'd be a lot better off today.

6. Geography.  Russia is almost twice the size of the U.S.  Russia and China together are so massive – forming such a giant swath of land-based territory, so much closer to the Middle East than America is – that it gives their militaries an advantage.

Bloomberg points out:

The U.S., situated in the peaceful, relatively unpopulated Western Hemisphere, is very far away from the location of any foreseeable conflict. China isn’t going to invade Colorado (sorry, “Red Dawn” fans!), but it might invade Taiwan or India. Simply getting our forces to the other side of the world would require enormous up-front expenditures.

The National Interest notes:

“Defeating China in these scenarios [Taiwan and South China Sea] could nonetheless be difficult and costly for the United States’ primarily as a result of the geographic advantages that China enjoys, as well as specific systems capabilities.”


A recent RAND report, “The US China Military Scorecard,” … argues that China is catching up to the U.S., is becoming more assertive and confident, and has geography on its side.

And Russia’s proximity to Ukraine, the Baltics and other neighboring countries gives it a huge advantage.

Postscript: Sadly, because we’ve squandered our resources, war games show that the U.S. is no longer invincible.

Picture via Pixabay. 


3 Things: “You Should Buy, Professionals Need To Sell”

Courtesy of Lance Roberts at STA Wealth Management

The 1998 Profits Recession

I recently quoted the importance of the current profits "recession" as it relates to potential market outcomes for investors.

"To me, the pre-conditions for this profits recession speak to downside risk, both for risk assets and for the real economy. None of the data speaks to recession in the real economy right now. We are seeing a slowing of job growth and likely of trend economic growth as well. But with a profits recession hitting, the potential for further downside is high."

Since earnings, and ultimately profits, are derived from underlying economic activity it only makes sense that profits would be a leading indicator of deteriorating economic activity. However, could the recent decline in profits be a "false flag?"

Sam Ro recently discussed this idea stating:

Corporate profits have been lackluster lately, with growth flattening out and turning negative. Declining profits typically signal that an economic recession is in our midst. But not always.

More and more analysts are coming out arguing that this could be one of those corporate profits recessions that don't coincide with economy-wide recessions.

As Jim O'Sullivan writes: 'Profits recessions are usually associated with recessions for the economy as a whole, so the data are certainly attention-grabbing. There have been exceptions, however—most notably the 1998 period we have been highlighting as fairly analogous to the current time.

Back then, global growth and exports weakened significantly, oil and other commodity prices fell sharply and the dollar surged, yet overall U.S. growth remained solid. Strength in domestic demand offset weakness in foreign demand, as we illustrate in the chart.'"


There are just two problems with Jim O'Sullivan's comments when it comes to investors. 

First, the 1998 "profits recession" did not immediately result in an economic recession and coincident "bear market", it was merely postponed as the market "melted up" in the midst of the "" bubble. In the short-term investors made gains, but the subsequent collapse wiped them out and more. 

Secondly, while there was a "profits" recession in 1998, there was not an "earnings" recession. As shown in the chart below, earnings (both operating and reported) remained stable.


It was the "earnings recession" that signaled the onset of the "bear markets" and recessions in 2001 and 2007. Much to the degree that we see today. 

While Sam is correct that this could be a 1998 style "profits recession," there are many fundamental differences between today and then. More importantly, the issue for investors, both then and today, is not paying attention to the "warning signs." 

"The point here is simple. No professional or successful investor every bought and held for the long-term without regard, or respect, for the risks that are undertaken. If the professionals are looking at "risk" and planning on how to protect their capital from losses when things go wrong – then why aren't you?

Exactly how many warnings do you need?"


Is "Net Interest Margin" Signaling Economic Weakness

Positive rate spreads have been continuously identified as a sign the economy is not entering a recessionary environment. But given the artificial suppression of interest rates at the long-end of the curve, could rate spreads be misleading this time. 

Micheal Lebowitz at 720 Global recently discussed this idea and looked at alternative measures to rate spreads as a "recession indicator." To wit:

"In the world of a zero interest rate policy, NIM may be a more valid indicator of future economic activity. In other words, economic forecasts based on the shape of the traditional curve may not be as relevant given the unprecedented monetary policy actions of the Fed.


Very low levels of interest rates are squeezing bank profits which is one of the key drivers of lending activity and a primary determinant of economic activity. Growth of the U.S. economy, even at today's below trend pace, is more dependent than ever on a continuation of credit growth.

If bank lending activity is challenged as a result of declining NIM, it would stand to reason that NIM may serve as a useful indicator of potential economic weakness. The graph below serves as a reminder of what happened the only time credit growth declined in the last 65 years – the U.S. experienced the largest financial crisis since the Great Depression."


Micheal's point is correct. Historically, yield spreads have been a good determinate of economic strength or weakness. However, in an environment where they are being artificially suppressed to support economic growth by pulling forward future consumption, the reliability becomes much more questionable. 

The problem for the Fed, and why they can't raise rates, is that a tightening of monetary policy will quickly collapse yield spreads and negatively impact economic growth by raising borrowing costs at a very inopportune time. The only reason for raising rates is to provide clearance above ZERO to reload the "policy gun" prior to the onset of the next recession. And given historical tendencies, that event is likely closer than most believe. 

You Should Buy, Professionals Need To Sell

Every day when you flip on the media, there is someone telling you that now is the time to "buy" into the market. Of course, if you are buying, then who is selling? 

BofA, courtesy of ZeroHedge, recently produced a very interesting chart that explains much of the price action of the market since the beginning of the year.


As you will notice the only "net buyers" of equities have been "individuals," while "professional" firms have been "net sellers." This is the epitome of the classic "smart money/dumb money" analysis where individuals are used by institutions to offload positions that are no longer optimal. 

The question is with corporate profits and earnings declining, weak economic data, and the threat of tighter monetary policy – will individuals once again be left "holding the bag" while institutions derisk portfolios in advance of the next decline? 

Just something to think about.

Fed Drops Risk Warnings, Opens Door for December Hike: Who’s the Fed Fooling? You, the Bond Market or Itself?

Courtesy of Mish.

In its Press Release following today's FOMC meeting, the Fed dropped all the references made last month about the softening global economy.

Who's the Fed Fooling?

  • Has the global economy stabilized in the last month? Of course not.
  • Have the risks receded? Of course not.
  • Last month China was a concern now it isn't.
  • Is China any better? Of course not.

Moreover, the economic reports from all Fed regions are in contraction, the soaring dollar will further dampen US exports, and the refugee crisis is making an enormous mess in Europe.

Nonetheless, the Fed is back to statements similar to those has the Fed had made for much of the year.

In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

Rate Hike Odds Jump But Still Below 50%

Yesterday the odds of a December hike were 33.2%. Today they are 42.6%. That's a decent jump but still below 50%.

Those odds imply a jump from 0-.25% to .25-.50%.

I still maintain the Fed might choose baby step 8th of a point hikes or quarter point ranges where the first step is an eighth of a point. Thus, the Fed might easily hike to a range .125-.375%.

Of course, if the next two jobs reports are weak, or even if the December jobs report is weak, a hike is off the table.

Mike "Mish" Shedlock


Austria Announces Fence With Slovenia; Irony of German Whine; Cascading Fences; Mish Proposed Strategy

Courtesy of Mish.

Two months ago, Austria’s chancellor Werner Faymann criticized Hungary for building a fence along its border.

Faymann proclaimed “To think that you can solve something with a fence, I believe this is wrong.”

Today, Austria Announces Fence on Slovenia Border to Slow Refugee Flows.

Europe’s migration crisis escalated on Wednesday after Austria said it would build a fence on its border with Slovenia in a bid to create an “orderly” inflow of refugees and migrants into the country.

The move marks potentially the most serious fracture in the EU’s response to the crisis, which has seen nearly 700,000 people enter Europe since the start of the year, as it would mark the first time a physical barrier is built between two members of the continent’s passport-free Schengen zone.

Johanna Mikl-Leitner, interior minister, insisted that Austria would not totally shut its border with Slovenia. Instead, the plan involved “fixed facilities in the area of border crossings”, she said.

“It’s not just about a fence . . . it is about all technical possibilities to ensure a controlled, orderly influx into our country,” she told Ö1, Austria’s national broadcaster, adding that the plan was not “at all” an attempt to close the border.

Despite repeated meetings, leaders have so far failed to come up with a unified response. While some national capitals have introduced strict border controls, others have opted to let migrants and refugees straight through, despite EU rules dictating that they should be processed when they arrive.

The crisis has strained relations Germany and Austria which burst into the open on Wednesday.

In a significant toughening of German rhetoric towards the crisis, Thomas de Maizière, interior minister, on Wednesday blamed Austria for accelerating the movement of refugees and putting the German authorities under extreme pressure.

“Austria’s behaviour in all this in the last few days has not been in order,” said Mr de Maizière, immediately after a cabinet meeting in Berlin chaired by Chancellor Angela Merkel.

He added: “We have had to complain that the refugees have been taken to specific places without any warning and after dusk and from there they have come to the German border with preparation and without any warning.” …

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Goodbye Middle Class: 51 Percent Of All American Workers Make Less Than 30,000 Dollars A Year

Courtesy of Michael Snyder at End of the American Dream

The Middle Class - Public Domain

We just got more evidence that the middle class in America is dying.  According to brand new numbers that were just released by the Social Security Administration, 51 percent of all workers in the United States make less than $30,000 a year.  Let that number sink in for a moment.  You can’t support a middle class family in America today on just $2,500 a month – especially after taxes are taken out.  And yet more than half of all workers in this country make less than that each month.  In order to have a thriving middle class, you have got to have an economy that produces lots of middle class jobs, and that simply is not happening in America today.

You can find the report that the Social Security Administration just released right here.  The following are some of the numbers that really stood out for me…

-38 percent of all American workers made less than $20,000 last year.

-51 percent of all American workers made less than $30,000 last year.

-62 percent of all American workers made less than $40,000 last year.

-71 percent of all American workers made less than $50,000 last year.

That first number is truly staggering.  The federal poverty level for a family of five is $28,410, and yet almost 40 percent of all American workers do not even bring in $20,000 a year.

If you worked a full-time job at $10 an hour all year long with two weeks off, you would make approximately $20,000.  This should tell you something about the quality of the jobs that our economy is producing at this point.

And of course the numbers above are only for those that are actually working.  As I discussed just recently, there are 7.9 million working age Americans that are “officially unemployed” right now and another 94.7 million working age Americans that are considered to be “not in the labor force”.  When you add those two numbers together, you get a grand total of 102.6 million working age Americans that do not have a job right now.

So many people that I know are barely scraping by right now.  Many families have to fight tooth and nail just to make it from month to month, and there are lots of Americans that find themselves sinking deeper and deeper into debt.

If you can believe it, about a quarter of the country actually has a negative net worth right now.

What that means is that if you have no debt and you also have ten dollars in your pocket that gives you a greater net worth than about 25 percent of the entire country.  The following comes from a recent piece by Simon Black

Credit Suisse estimates that 25% of Americans are in this situation of having a negative net-worth.

“If you’ve no debts and have $10 in your pocket you have more wealth than 25% of Americans. More than 25% of Americans have collectively that is.”

The thing is– not only did the government create the incentives, but they set the standard.

With a net worth of negative $60 trillion, US citizens are just following dutifully in the government’s footsteps.

As a nation we are flat broke and most of us are living paycheck to paycheck.  It has been estimated that it takes approximately $50,000 a year to support a middle class lifestyle for a family of four in the U.S. today, and so the fact that 71 percent of all workers make less than that amount shows how difficult it is for families that try to get by with just a single breadwinner.

Needless to say, a tremendous squeeze has been put on the middle class.  In many families, both the husband and the wife are working as hard as they can, but it is still not enough.  With each passing day, more Americans are losing their spots in the middle class and this has pushed government dependence to an all-time high.  According to the U.S. Census Bureau, 49 percent of all Americans now live in a home that receives money from the government each month.

Sadly, the trends that are destroying the middle class in America just continue to accelerate.

With a huge assist from the Republican leadership in Congress, Barack Obama recently completed negotiations on the Trans-Pacific Partnership.  Also known as Obamatrade, this insidious new treaty is going to cover nations that collectively account for 40 percent of global GDP.  Just like NAFTA, this treaty will result in the loss of thousands of businesses and millions of good paying American jobs.  Let us hope and pray that Congress somehow votes it down.

Another thing that is working against the middle class is the fact that technology is increasingly taking over our jobs.  With each passing year, it becomes cheaper and more efficient to have computers, robots and machines do things that humans once did.

Eventually, there will be very few things that humans will be able to do more cheaply and more efficiently than computers, robots and machines.  How will most of us make a living when that happens?

The robopocalypse for workers may be inevitable. In this vision of the future, super-smart machines will best humans in pretty much every task. A few of us will own the machines, a few will work a bit… while the rest will live off a government-provided income…the most common job in most U.S. states probably will no longer be truck driver.

For decades, we have been training our young people to have the goal of “getting a job” once they get out into the real world.  But in America today there are not nearly enough good jobs to go around, and this crisis is only going to accelerate as we move into the future.

I do not believe that it is wise to pin your future on a corporation that could replace you with a foreign worker or a machine the moment that it becomes expedient to do so.  We need to start thinking differently, because the paradigms that worked in the past are fundamentally breaking down.

So what advice would you give to a young adult today that is looking toward the future?

Inside the Secretive World of Tax-Avoidance Experts

Here's an enlightening look into the world of wealth managers aka tax avoidance experts. 

Inside the Secretive World of Tax-Avoidance Experts

A sociologist realized that if she were ever going to understand global inequality she would have to become one of the people who helps create it. So she trained to become a wealth manager to the ultra-rich.

By Brooke Harrington at The Atlantic

Shakespeare said that all the world’s a stage, but the sociologist Erving Goffman added that most of the interesting stuff lies behind the scenes, in what he called the “backstage” areas of everyday life.

Having spent the past eight years doing research on the international wealth-management profession, I have to agree with Goffman: The most revealing information comes from the moments when people stop performing and go off-script. Like the time one of the wealth managers I interviewed in the British Virgin Islands lost his composure and threatened to have me thrown out of the country. His ire arose from an unexpected quarter:  He took offense to my use of the term “socio-economic inequality” in the two scholarly articles I had published on the profession. I thought the articles were typically academic, which is to say, the opposite of sensationalizing and of little interest to anyone outside my field.  But my suggestion that wealth managers might be connected to inequality in any way seemed alarmingly radical to this gentleman.

I was lucky that he merely threatened me. A journalist from Newsweek actually was deported from a different tax-haven island (Jersey) for her reporting there, and was banned from re-entering the island, or any part of the U.K., for nearly two years. Even though her story was unrelated to the financial-services industry, it was expected to bring negative publicity to the island, threatening its reputation as a place to do business. The message was therefore quashed by banishment of the messenger. The wealth-management industry does not mess around.

Wealth management is a profession on the defensive. Although many people have never heard of it, it is well known to both state revenue authorities and international agencies seeking to impose the rule of law on high-net-worth individuals. Those individuals—including the 103,000 people classified as “ultra-high-net-worth” based on having $30 million or more in investable assets—pay wealth-management professionals hefty fees to help them avoid taxes, debts, legal judgments, and other obligations the rest of the world considers part of everyday life. The general public doesn’t hear much about these professionals, since there are only a few of them worldwide (just under 20,000 belong to the main professional society) and they strive to keep a low profile, both for themselves and their clients.


By the same token, when Oxfam estimates that just 1 percent of the world’s population will own more than 50 percent of the world’s wealth by 2016, it’s important to realize that such a state of affairs doesn’t just happen by itself, or even through the actions of individual wealthy people. For the most part, the wealthy are busy enjoying their wealth or making more of it; keeping those personal fortunes out of the hands of governments (along with creditors, litigants, divorced spouses, and disgruntled heirs) is the job of wealth managers.

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