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Bank Of England Leads Push For Deposit Confiscation - Japan, China, Russia Against Bail-Ins

Bank of England officials led by Mark Carney, the Bank of England governor, are attempting to bridge sharp differences among leading G20 countries as they prepare a landmark set of proposals aimed at tackling the problem of “too big to fail” banks according to the Financial Times today.

Talks under the auspices of the global Financial Stability Board (FSB) over the summer are approaching a key stage as officials aim to clinch an agreement on bail-ins and the bailing in of creditors including depositors of banks.

Finance officials are hoping to pave the way for proposals to be tabled at the G20 leaders meeting at the Brisbane summit in November.

The issue is of major consequence to globally systemic lenders such as Citigroup, Barclays and BNP Paribas, as some will have to issue billions of dollars of fresh bonds earmarked to carry losses.

The issue is of major consequence also to depositors who could see their savings confiscated as happened in Cyprus.

The complexity of the topic and differences between countries’ legal regimes and corporate structures are raising questions over how detailed any framework will be.

Japan is one of the countries with problems with bail-in plans amid concerns that they are not easily compatible with the structure of its banking system. Its banks are heavily deposit-funded, and officials are uncomfortable about the idea of bail-ins.

Japanese banks are already vulnerable and bail-ins could hurt consumer sentiment in the already struggling Japanese economy. Concerns in Tokyo are said to be sufficiently profound for it to push its case right up to the summit itself.

China is also sceptical about the notion of private sector bail-ins given its banks are state-owned. “There are some very entrenched positions,” one official told the FT.

Russia is likely to oppose the coming bail-in regime as well as many other large creditor nations.

Mr Carney, who also chairs the FSB, said in March he wanted to “break the back” of the too big to fail issue this year. He said regulators sought by Brisbane to have cracked two major issues – on the loss  absorbing capacity that big banks have to hold and on contractual provisions in derivatives contracts.

Bail-ins are coming to banks in the western world with consequences for depositors.

Must read guide to and research on deposit confiscation and banks that are vulnerable to deposit confiscation can be read here:
Protecting Your Savings In The Coming Bail-In Era

The Ambitious Plan To Break California Into 6 States – A Model For The Future?

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

The more I’ve thought about potential solutions to the gigantic mess we have found ourselves in as a species, the more I have come to believe we need to break apart into a vast multitude of city-states. The revolutionary concept of America in the first place was this idea of “self-governance,” something we do not posses an iota of in this day and age. As was noted recently in an academic paper published by Princeton and Northwestern, these United States have mutated into nothing short of an oligarchy. In fact, the study demonstrated that the will of the people has essentially zero impact on legislation whatsoever.

In centuries prior, the idea of “representative-democracy” in which people elect people to represent their interests in a far off capital seemed like a reasonable solution to a very real problem. Information took a very long time to get from one place to another, so you had to trust someone else to essentially negotiate for you on issues of national significance. Moreover, in such a disconnected world, centralization was not only more efficient, it seemed like the only way. As such, things became highly centralized, so much so that things have now morphed into a global oligarchy that wields almost total power. Meanwhile, the billions of plebs have no say whatsoever in the affairs that govern their lives; including whether they will be financially secure, posses any civil liberties at all or end up in jail for a wide litany of non-violent “crimes.”

With the incredible tools we now possess, thanks primarily to the Internet, we no longer need centralization of government. Nor do we really need representatives to vote for us on the issues that most greatly affect out lives. As any American understands, the diversity of cultural, economic, and political sentiments vary greatly throughout the land. It’s not just the obvious ones, such as the differences between “northerners” and “southerners,” but wide discrepancies exists within states themselves. For example, Austin is nothing like much of the rest of Texas, and the Denver/Boulder area where I live is very distinct from much of the rest of Colorado. The examples are simply too many to list, but I am of the belief that people are capable of, and should be free to, decide the most important things that affect their lives at a local level (with the exception of obvious things such as violence or aggression toward one another).

The founding fathers’ original idea of many “United States” allowed for different ideals to be expressed in a wide variety of ways, and is in my opinion one of the most advantageous attributes of our nation. But why stop there? Why not allow different areas and municipalities break off even further into far more autonomous type structures than we have today?

Of course many people will answer, what about slavery? The truth of the matter is that this abomination in the United States seemingly had to be resolved through a bloody conflict given the economic interests in the south at the time. The founders decided one war  was enough, and let this horrible practice be tackled almost a hundred years later through violent conflict. I hope that we have advanced enough as a species that we can come to a global consensus that certain things are illegal everywhere. Slavery, murder, rape, etc. Other than these (and other) obvious evils we can all agree on, decentralized legislation seems to make sense to me in this day and age. While I strongly disagree with “global government” a global consensus on certain things we can all agree upon as reprehensible anywhere on earth seems completely reasonable.

With that in mind, the man who recently purchased the entire 30,000 Silk Road Bitcoins from the feds has proposed to break California into six separate parts. The measure has already collected far more than the 800,000 signatures” needed to to get it on the state ballot.

From Wired:

Like Hollywood or Manhattan, Silicon Valley occupies a singular place on the American cultural and economic landscape. Unlike those other locales, however, the Valley’s more idiosyncratic political leanings have led to murmurings of secession more typical of rural hinterlands that already feel cut off through sheer physical isolation. That chatter has culminated in a measure that appears headed for the statewide ballot to split California into six separate states, of which Silicon Valley would be one.


While ostensibly a plan to make the entire state of 38 million people more governable, the six-state initiative is being led and funded by a member of the Silicon Valley elite, many of whom would no doubt welcome the increased political clout that would likely come from carving out their own statehood. In the hands of most, the six-state initiative would look like a pure stunt. But with Silicon Valley behind it, this effort’s chances at the ballot box can’t be dismissed out of hand. Unlike most other would-be revolutionaries, Silicon Valley has a long record of taking ideas that sound outlandish at the time—affordable computers in every home, private rocket ships—and managing to make them real. It also has a seemingly endless stream of money that, combined with heavy doses of ingenuity and shamelessness, give its goofball ideas the fuel they need to take off.


Leading the six-state push is Tim Draper, a wealthy third-generation venture capitalist known for his theatrics. He hosts the superhero-themed Draper University of Heroes, a kind of motivational cram session for would-be startup entrepreneurs, and once wore a Captain America costume himself on a magazine cover. Last month, he bought nearly 30,000 bitcoins auctioned off by the U.S. Marshals Service after authorities had seized them from online black market Silk Road. In short, he’s exactly the kind of guy with the time, money, and temperament to push a wacky-sounding ballot measure.


“Our gift to California is this—it’s one of opportunity and choice,” Draper said at a press conference yesterday where he announced the campaign had collected far more than 800,000 signatures needed to get the measure on the ballot. “We’re saying, make one failing government into six great states.”


The campaign in favor of the measure argue that six states will mean six state governments more responsive to local concerns, rather than the unwieldy process of orchestrating the state’s 158,000 square miles entirely from Sacramento.


With the six-state proposal, the Californian Ideology appears to be seeking out its final, fullest, most ironic realization by underwriting Silicon Valley’s emancipation from California itself.


And why wouldn’t Silicon Valley seek to be free? Through the lens of its own sensibility, at least, California looks like the worst kind of incumbent, an ancient and inefficient institution mired in old ways of doing business, a monopolist that holds onto power through manipulation, not innovation. To six-state supporters, holding onto the idea of a single California represents, at best, an irrational sentimentality, a commitment to the past grounded in lazy logic and unexamined assumptions. Breaking up California is exactly the kind of “disruption” that titillates the venture capitalist imagination. In the process, the new state of Silicon Valley—which would stretch from San Francisco to Monterey–would also, conveniently, separate its great and greatly concentrated wealth from the poorer parts of the state.


The Valley’s “hacker way” has so far proven a clumsy fit for the strategic complexity of the political process, which relies more on realism than idealism. Before California would officially break up, per the U.S. Constitution, the existing state legislature would still have to sign off, which it’s unlikely to do for a host of reasons, not least being the tax revenue lost to Silicon Valley seceding. Congress would also have to approve what would amount to the dilution of its own power by granting California twelve senators instead of the current two.

At this point, I’d like to make it clear I don’t think this will become a reality in the near-term. In fact, it is likely that decentralization will first occur in the economic and technological areas of human society way before it happens on the political level. The reasons for this should be obvious.  

We are already seeing decentralization take over in all sorts of economic areas. Information flow in general and alternative media specifically, currency (Bitcoin), transportation (Uber, Lyft), and manufacturing (3D-printing). When the political process fully implodes in the West, we’ll look to decentralized successes in other areas and apply them to politics.

I believe the current overly centralized paradigm parasitically engulfing the planet will experience a series of spectacular collapses in the years ahead that will make 2008 look like practice. As the centralized beast episodically implodes upon itself, we will have a historic chance to remake our world in a new way that will better serve humanity. That new paradigm will consist of freedom through decentralization, and I can’t wait to see it.

In fact, it’s already started.

For recent articles on our generation’s most significant battle; Centralization vs. Decentralization, check out the following articles:

Ex-CIA Officer Claims that Open Source Revolution is About to Overthrow Global Oligarchy

Networks vs. Hierarchies: Which Will Win? Niall Furguson Weighs In

Vietnam Says China Backing Down In Oil Rig Dispute

Submitted by Andy Tully via,

A leading Vietnamese military officer said July 16 that China’s decision to remove a huge oil rig from waters claimed by both countries shows that it is backing down in a dispute that has raged since May.

Maj. Gen. Le Ma Luong told PetroTimes, a Vietnamese news outlet, that China was moving the rig because of Vietnam’s “strong reactions” to its presence in the South China Sea near the Paracel Islands. The region is near the Vietnamese coast but Beijing considers it Chinese territory.

In the interview, Luong dismissed a suggestion by the Voice of Vietnam, a state run news agency, that the rig was being moved to protect it from the approaching Typhoon Rammasun. The general called that “just an excuse.”

The China National Petroleum Corp. said the operation was ending now that the rig had found “signs of oil and gas.” It said the company would assess the findings before deciding on its next steps.

Meanwhile, it said, the rig was being moved to undisputed waters near the Qiongdongnan basin.
In Beijing, the Chinese Foreign Ministry said moving the rig should not be interpreted as a retreat from inclement weather or from Vietnam, but simply that it had completed its work of exploring for oil in the area. It also reiterated the assertion that the Paracel Islands are Chinese territory.

Still, China may be motivated by a desire to improve relations with neighboring Vietnam, according to Bonnie Glaser, who specializes in Asian affairs at the Center for Strategic and International Affairs, a Washington think tank. “It could be a face-saving way to end the over two-month-long standoff with Vietnam,” she said.

Beijing set up the oil rig, the $1 billion Haiyang Shiyou 981, on May 1 in the disputed waters, triggering violent and often deadly demonstrations in Vietnam. There also were daily confrontations at sea between Vietnamese boats that tried to approach the rig and Chinese coast guard vessels sent to protect it.

Regardless of why China withdrew the rig, the move is likely to ease fears harbored by arge majorities of Asians that Beijing’s overall territorial claims could lead to war, according to a survey by the Pew Research Center in Washington.

The poll was conducted in 11 Asian countries from March – even before China moved the oil rig off Vietnam’s coast – to June. In the Philippines, 93 percent of respondents feared war, 85 percent in Japan shared that concern, and 84 percent in Vietnam felt the same.

Fully 83 percent of those surveyed in South Korea, which enjoys warm commercial relations with China, expressed concern for peace in the region, and that worry was shared by 62 percent of respondents in China itself.

All told, Pew reports, majorities in nine of the 11 countries feared military conflict.

Spot The China Liquidity Crisis

Presented with little comment aside to ask, if everything's so hunky-dory over in China then why, on the first day in a while that the PBOC decides not to conduct repo operations (i.e. inject a bucketload of cheap money), does the 7-day repo rate (the cost of borrowing money) spike to 6-month highs? (Hint: it's a rhetorical question)



Simply put - you can kiss goodbye any hopes of China ceasing its exuberant credit creation... (especially now that the CCFD ponzi scheme has been exposed via Qingdao -and drastically reduced that channel). Reforms are all talk and the bubble will just grow bigger with fewer and fewer attractive outlets for that hot money (now that the US real estate transmission channel has been identified and likely closed)... cue real inflation.

Citi: "Asset Markets Are Ill-Prepared For Any Risk-Negative Shock"

This is a tricky period for asset markets, warns Citi's Steven Englander. Positioning still reflects a risk-on view but the risk-on enthusiasm is in EM, equities and Asia rather than peripheral Europe. Investors are still long risk, despite the geopolitical tensions and Fed Chair Yellen’s modest nod to the risk of faster than expected tightening, Englander cautions, concluding that investors continue to anticipate a soft landing despite all the discussion to the contrary.


Via Citi's Steven Englander,

This is a tricky period for asset markets. Positioning still reflects a risk-on view but the risk-on enthusiasm is in EM, equities and Asia rather than peripheral Europe. There has been some buying back of USD against G10 but investors are long Asia Pacific versus USD in its place. Geopolitical developments in Russia/Ukraine and the MidEast are having localized impacts, if that. Investors took note of a somewhat changes Yellen tone, but are treating the Fed as an outer-orbit risk rather than as an asteroid taking dead aim.

The two big risk events are the US CPI and next week’s FOMC. We already saw equities  come off a little today, short and medium term note yields move up, and 10yr Treasury yields fall in line with equities. We suspect that investors will hedge a small part of long risk positions in coming days, but only languidly. They have begun to discount non-press conference meetings as being like the ECB’s non-forecast meetings, unlikely to generate much waves.

Despite the backing up of US two year yields, sideways moves in equities and some strengthening of USD within G10, investors are not really prepared for any sort of fixed income unfriendly event. So we are likely to see modest upside risk-positive response to low inflation or dovish surprises and significant position cutting if expectations of Fed normalizing were brought forward.
Consider Figure 1. Below which shows d/d, w/w and MTD currency moves against the USD.  What is surprising, as indicated by the little red arrows, is that all G10 currencies are down versus USD on a MTD basis and generally on a d/d and w/w basis as well. The impression of USD weakness comes because most major EM currencies are stronger, despite geo-political concerns and it is more common for EM to be a high-beta version of G10 than to have the opposite sign.  When we get  high yielders outperforming this way,  we are not in a market afraid of a liquidity squeeze.

Within G10 continental Europe is doing worse than the commodity currencies or UK.


The correct interpretation is that investors are still long risk, despite the geopolitical tensions and Fed Chair Yellen’s modest nod to the risk of faster than expected tightening. However they have shifted away from European risk towards even higher beta risk, but risk that is less exposed to economic weakness in the euro zone and fallout from the Russia/Ukraine crisis.

Some of this we can directly measure. Our CitiFX flows show a lot of buying of Asian currencies in recent months, but pace of buying has diminished sharply over the last month.

Figure 2a, 2b: Real money and leveraged have bought a lot of Asian currencies


Similarly CitiFX Access shows a that the long Asia position increased sharply in Q2.


...and looking the correlation of HFR’s daily macro return index with asset prices the strongest correlation by far remains with equity prices, although there may be some recent hedging of these positions by shorting Treasury notes.
Bottom line is that we continue to see investors anticipating a soft landing despite all the discussion to the contrary.

Possible Epidemic? The Chikungunya Virus Is Starting To Spread In America

Submitted by Michael Snyder of The American Dream blog,

Cases of the chikungunya virus are appearing in the United States at a level that is far higher than anything health officials have seen in recent years, and now there are two confirmed cases of people that have not even traveled out of the country getting the virus.  That means that the chikungunya virus is starting to spread in America, and once it starts spreading it is really hard to stop.  Instead of spreading human to human, this virus actually spreads “person-to-mosquito-to-person”.  If you live in an area of the country where there are a lot of mosquitos, you should pay close attention to this article.  You do not want to get the chikungunya virus.  According to Slate, the name of this virus “comes from a Makonde word meaning ‘that which bends up,’ referring to the contortions sufferers put themselves through due to intense joint pain.”  That does not sound fun at all.

Fortunately, the U.S. has not really been affected by this disease in recent years, but an epidemic has already been declared in Puerto Rico, and some experts are now saying that it is only a matter of time before we see one in the United States.

From 2006 to 2013, the largest number of cases of the chikungunya virus in the U.S. in a single year was just 65.

But by July 15th of this year there were already 357 reported cases, and health officials are bracing for the worst.

Of course of biggest concern is what just happened in Florida.  For the first time, health officials have isolated cases of the chikungunya virus that they know were transmitted locally

U.S. health officials on Thursday confirmed two locally acquired cases of chikungunya in Florida. In Puerto Rico, the government has declared an epidemic of the mosquito-borne virus, with reports of more than 200 diagnosed cases since June 25 in San Juan and surrounding areas.


On Thursday, the CDC confirmed a 50-year-old male in Palm Beach, Fla. was diagnosed with the virus, and had not recently traveled outside the country. Florida state health officials are also reporting a 41-year-old woman in Miami Dade Country has been diagnosed with locally transmitted chikungunya. The CDC has not yet provided confirmation on the second case. Local transmission occurs when the insect bites a person with the infection and then transmits the virus by biting others.

So if you live in south Florida, you should really be trying to avoid mosquitos right about now.

But Florida is not the only state that is on high alert at this point.

Over in Texas, there have been five confirmed cases of the chikungunya virus so far.  The following is an excerpt about one that was just discovered in Montgomery County

The Montgomery County Public Health District is confirming their first case of the Chikungunya virus.


“The individual is a male teenager of Montgomery County who has recently traveled outside of the United States,” said Jennifer Nichols-Contella, Public Information Officer for the Montgomery County Public Health District.

And health officials in Kentucky were quite alarmed when they recently found a confirmed case in their state

“We have been testing our first potential cases of Chikungunya virus in Kentucky residents who recently traveled to areas where the disease is present, and have received confirmation of one positive result so far,” said Dr. Kraig Humbaugh, state epidemiologist and DPH deputy commissioner.

Overall, there are now 30 states that have confirmed cases.  In every case but the two in Florida mentioned above, it involved someone that had traveled internationally and came back…

The Center for Disease Control and state health departments are monitoring cases of Chikungunya, a virus that causes high fever, joint and muscle pain and headaches.


The virus has been reported in 153 cases linked to international travel, said Kristen Norlund, CDC spokeswoman, “meaning someone went to a place where the virus was circulating, got infected and then came back.”


Louisiana is one of 30 states with confirmed cases in residents who traveled internationally.

With so many cases already, it is going to be really difficult to keep a lid on this outbreak.  All it is going to take is a few well-timed mosquito bites and we could be off to the races.

Fortunately, the chikungunya virus is usually not fatal.  But if you do get it, you will probably remember the experience for the rest of your life

With illness onset, the person develops high fever, chills, and joint pain, followed in some by a rash on the trunk, limbs and face lasting 3-4 days. Muscle and joint pain last about one week. Joint pain is often severe and in some people lasts longer, up to several months.

And just because it is usually not fatal does not mean that there would not be a lot of deaths during a full-blown epidemic.  The following analysis is from an article about the virus by Jeff Danner

The current epidemic in the Dominican Republic may provide some insight.  Since chikungunya struck the Dominican Republic in early April, there have been almost 200,000 cases, an incidence rate of 20 per thousand for this nation of 10 million people.  If the Southeast, with a population approximately 80 million, had the same incidence rate as the Dominican Republic, we would expect 1.5 million cases in the first 100 days of an epidemic.  However, due to widespread availability of insect repellent here and our stay-inside-the-air-conditioned-space lifestyles, our incidence rate is likely to be lower.  For the sake of argument, let’s assume our incidence rate will be 1/3 that of the Dominican Republic.  This would translate to a half a million cases in the first hundred days, and we would then project approximately 10 million cases in the first year.  With chikungunya’s fatality rate of 0.4%, an epidemic of this scale would kill 40,000, with fatalities being disproportionately among the very old and very young.

And the chikungunya virus is not the only virus carried by mosquitos that health officials are alarmed about this summer.

In Massachusetts, officials have confirmed a case of eastern equine encephalitis, which is fatal about a third of the time

The Massachusetts Department of Health just confirmed that a July 15th laboratory test in Plymouth County has tested positive for EEE, a dangerous virus that can cause inflammation of the brain and in one third of cases, death.


Even though the only reported case of EEE in Massachusetts was more than 80 miles to our east, our chances in western Massachusetts of getting it just went up. But it probably wouldn’t be the mosquitoes bringing it here.


Birds are typically the long range carrier of triple E, taking the disease over many miles. Mosquitoes then bite the birds and become the local source for infection when they bite a human.

For decades, Americans really haven’t had to be concerned about the deadly diseases that are carried by mosquitos that cause so much problems in much of the rest of the world.

But now things are changing.

We are seeing very unusual disease outbreaks all over the planet, and the next great pandemic could be just around the corner.

Over in Africa, one of the worst outbreaks of the ebola virus ever recorded has already killed more than 600 people in Guinea, Liberia and Sierra Leone.

If that virus ends up traveling over to the United States, it will make the chikungunya virus look like a Sunday picnic.

It has been a really long time since the U.S. has had to deal with a full-blown health crisis.

Hopefully the chikungunya virus will not turn into one.

But as the globe continues to become a smaller and more interconnected place, experts warn that it is only a matter of time before the next great pandemic hits us.

MSFT/IBM Boomerang'd As Russia Retaliates, Prepares To Cease Imports Of US IT

With the German economy already suffering (and AMD cutting its outlook), it appears Putin's promise to ensure Obama's action will see retaliation are starting to weigh as much on the rest of the world as Western media suggest US sanctions are weighing on Russia. This time, after blocking foreign cars and Intel/AMD chips, Bloomberg reports the State Duma, Russia’s lower house of parliament, is drafting a bill to require government agencies and state-run enterprises to give preference to local providers of software and hardware. For some context, IBM, Microsoft, HP, Cisco, Oracle, and Germany’s SAP SE had combined revenue of 285 billion rubles ($8.1 billion) from Russia (with 77% coming from government and SOEs). “This all has to do with sanctions,” warned one Russian politician.


As Bloomberg reports,

Russia’s parliament is preparing new regulations to reduce its reliance on foreign technology suppliers after the U.S. imposed sanctions against some of its largest companies, a move that could hurt sales at vendors such as Microsoft Corp. (MSFT) and International Business Machines Corp. (IBM)


The State Duma, Russia’s lower house of parliament, is drafting a bill to require government agencies and state-run enterprises to give preference to local providers of software and hardware, according to a document from the commission for strategic information systems obtained by Bloomberg News. The paper addresses criteria for tender processes such as favoring products that don’t have imported, licensed components.




IBM, Microsoft, Hewlett-Packard Co. (HPQ), Cisco Systems Inc. (CSCO), Oracle Corp. (ORCL) and Germany’s SAP SE had combined revenue of 285 billion rubles ($8.1 billion) from Russia last year, according to estimates by the Russian Academy of Sciences included in the commission document. About 77 percent of the sales were contracts from the government and state-controlled companies, it said.


With the lack of regulation in post-Soviet Russia that governs the award of technology contracts, foreign vendors account for 67 percent of software used in the country and about 90 percent of hardware, according to the commission. Foreign software may have hidden capabilities such as “bugs” and “backdoors,” giving suppliers access to confidential data, Chernogorov said.


“This all has to do with sanctions,” said Andrey Chernogorov, executive secretary of the commission, said in a phone interview. “Given the current international tensions, substituting imports with local software and hardware becomes the key to ensuring self sufficiency.”

*  *  *

As Putin recently opined, the boomerangs are coming home...

“The US is certainly one of the world’s leaders. At some point it seemed that it was the only leader and a uni-polar system was in place. Today it appears that is not the case. Everything in the world is interdependent and once you try to punish someone, in the end you will cut off your nose to spite your face,” he said.

MH17 Will Usher In A Completely New Kind Of War - One The US Cannot Win

Submitted by Simon Black of Sovereign Man blog,

Russians aren’t exactly known for having a great sense of humor. But the language is full of bizarre, often hilarious expressions like “perebrasyvanie kakashkami”.

Literally translated this means “throwing shit”. And it applies right about now—when a bunch of people is standing around blaming one another for something that has gone heinously wrong.

“Heinously wrong” is somewhat of an understatement.

The MH17 disaster is so bad that it’s made people forget about the roving army of fanatics that has taken over half of Iraq and parts of Syria in their quest to build a global caliphate.

This is much bigger. And there’s so much pent up tension between rising powers right now, there’s serious risk of it turning into a much greater conflict.

It seems ironic that the world was in a similar situation exactly a hundred years ago.

After the assassination of Archduke Franz Ferdinand in Sarajevo, Austria-Hungary issued a series of ultimatums to the Kingdom of Serbia, and ultimately declared war on July 28, 1914.

Tensions in Europe and around the world were at boiling point. The primacy of the British and other European colonial powers was waning, as recently formed unitary states of Germany and Italy were on the rise.

With so many rising powers, it was inevitable that conflict would ultimately ensue. Even if Franz Ferdinand’s assassination wouldn’t have happened, some other tinder would have lit the fire.

Similar conditions exist today.

Just like a century ago when waning British power invited a power struggle among rising nations, waning US power is creating conflict with Russia, China, etc.

A century ago, they settled it on the battlefield. Everyone knew war would eventually come to Europe. But the great miscalculation was they presumed it would be just another 19th century limited war.

It was anything but.

The great war brought brutal mass killings, bombings, heavy artillery, gassing, etc. And it changed warfare forever.

This time around, the way we conduct war is different. Similarly, leaders are miscalculating, thinking that they can scare their opponents with warships and fighter jets.

But modern warfare isn’t fought with boots on the ground. In 2014, cyberwar and economic war looms.

And this type of war is something that will affect literally every person who is plugged in to the global financial system.

I invite you to explore more with me on this critically important topic in today’s podcast. You can give it a listen here:

How RenTec Made More Than $34 Billion In Profits Since 1998: "Fictional Derivatives"

Ten days ago Bloomberg reported that as a result of various tax dodges, one of the fastest-trading hedge funds in the US, Jim Simmons' Renaissance Technologies, had managed to avoid paying ordinary income tax on billions in profits, by classifying trades that often times had a holding period of minutes if not seconds, as a long-term capital gain. As part of this finding, it was reported that there would be a hearing chaired by none other than Carl "Shitty Deal" Levin scheduled for tomorrow morning when yet another tax loophole abused by not only RenTec but all of its high churn and HFT peers (because the "friends and family" Medallion is at its core the original HFT fund) would be exposed for all to see. Moments ago, in advance of tomorrow's 9:30 am hearing, the permanent subcommittee on investigations released a 93 page report on just how it was that RenTec engaged in the "improper use of this structured financial product, known as basket options."

As the preamble to the report notes:

The report outlines how Deutsche Bank AG and Barclays Bank PLC, over the course of more than a decade, sold financial products known as basket options to more than a dozen hedge funds. From 1998 to 2013, the banks sold 199 basket options to hedge funds which used them to conduct more than $100 billion in trades. The subcommittee focused on options involving two of the largest basket option users, Renaissance Technology Corp. LLC (“RenTec”) and George Weiss Associates.


The hedge funds often exercised the options shortly after the one-year mark and claimed the trading profits were eligible for the lower income tax rate that applies to long-term capital gains on assets held for at least a year. RenTec claimed it could treat the trading profits as long term gains, even though it executed an average of 26 to 39 million trades per year and held many positions for mere seconds.


Data provided by the participants indicates that basket options produced about $34 billion in trading profits for RenTec alone, and more than $1 billion in financing and trading fees for the two banks.

And considering the topic of tax-evasion and loophole abuse is a rather sensitive and politically-charged one nowadays, to say the least, one can be certain that tomorrow's hearing, full of sound and fury targeting America's wealthiest tax evaders, will be quite a spectacle.

The highlights from the report:

For the last decade, the U.S. Senate Permanent Subcommittee on Investigations has presented case histories showing how financial institutions, law firms,  accountants, and others have designed and implemented complex financial structures to take advantage of and, at times, abuse or violate U.S. tax statutes, securities regulations, and accounting rules. This investigation offers yet another detailed case study of how two financial institutions – Deutsche Bank AG and Barclays Bank PLC – developed structured financial products called MAPS and COLT, two types of basket options, and sold them to one or more hedge funds, including Renaissance Technologies LLC and George Weiss Associates, that used them to avoid federal taxes and leverage limits on buying securities with borrowed funds. While that type of option product was identified as abusive in a public memorandum by the Internal Revenue Service (IRS) in 2010, taxes have yet to be collected on many of the basket option transactions and its use to circumvent federal leverage limits has yet to be analyzed or halted.


The basket option contracts examined by the Subcommittee investigation were used by at least 13 hedge funds to conduct over $100 billion in securities trades, most of which were short-term transactions and some of which lasted only seconds. Yet the resulting short-term profits were frequently cast as long-term capital gains subject to a 20% tax rate (previously 15%) rather than the ordinary income tax rate (currently as high as 39%) that would otherwise apply to investors in hedge funds engaged in daily trading. While the banks styled the trading arrangement as an “option” under which profits from short-term trades would be treated as long term capital gains, in essence, the banks loaned the hedge funds money to finance their trading and allowed them to trade for themselves in highly leveraged positions in the banks’ proprietary accounts and reap the resulting profits. The banks offering the “options” benefited from the financing, trading, and other fees charged to the hedge funds initiating the trades. In the end, the trading conducted by the hedge funds using the basket option accounts was virtually indistinguishable from the trading conducted by hedge funds using their own brokerage accounts, and provided no justification for treating the resulting short-term trading profits as long-term capital gains.

Note that the term "illegal" is not used once in the entire 93-page doc, for the simple reason that this latest tax-evading loophole wasn't. Instead hedge funds, having the sources to do so, merely scoured the tax code and sitting down with a couple of less than "moral" banks found yet another tax evasion maneuver, as well as a way to implement it, that was available to everyone who could afford to spend millions on the appropriate tax and legal advice. Call it "capital investment" for the New Normal.

Back to the filing, we find what will surely be Carl Levin's punchline to be used and abused tomorrow: "fictional derivatives."

The facts indicate that the basket option structures examined in this investigation were devised by sophisticated financial firms to allow clients to circumvent federal taxes and leverage limits. The structures rested on two fictions. The first was that the bank, rather than the hedge fund, owned the assets being traded in the designated option accounts, even though the hedge fund bought and sold the assets, was exposed to all significant risks and rewards, and profited from the trading, with little input from the bank serving as the nominal owner of the assets. In effect, the structure purported to enable the hedge fund to purchase an “option” on its own trading activity, an arrangement that makes no economic sense outside of an effort to bypass federal taxes and leverage limits. The second fiction was that the profits from the trades controlled by the hedge fund could be treated as long-term capital gains, even for trades lasting seconds. That fiction depended upon the hedge fund claiming that the profits came from exercising the “option” rather than from executing the underlying trades. In fact, the “option” functioned as little more than a fictional derivative, permitting the hedge fund to cast short-term capital gains as long-term gains and authorizing financing at levels otherwise legally barred for a customer’s U.S. brokerage account.

And, lo and behold, one of the two main enabling banks of this tax dodge is none other than Barclays, which somehow has managed to get itself involved in virtually every possible financial scandal in the past five years.

The basket options sold by Deutsche Bank AG starting in 1998, and by Barclays Bank PLC since 2002, produced a total of more than $35 billion in trading profits, of which at least $34 billion came from options exercised after more than one year. Most of those profits came from assets which were held for less than one year but which were treated by the hedge funds holding the options as having produced long-term capital gains taxable at the lower long-term capital gains rate. The options were also used by the participating hedge funds to trade on borrowed funds using a leverage ratio of as much as 20:1, versus the much lower federal leverage limit of 2:1 that normally applies to brokerage accounts held by U.S. broker-dealers for their clients. These financially engineered products – which relied on high volume trading, leveraged funds, and artificially lowered tax rates to produce their profits – warrant greater attention from federal tax, securities, and banking regulators to prevent their continued misuse.

Some details on the actual trading strategy, with pictures.

In the basket option contracts examined by the Subcommittee, the bank always appointed the general partner of the hedge fund client to act as the investment advisor for the trading account holding the referenced assets during the duration of the option. Once appointed, the investment adviser exercised complete control over the securities included in the option account, designing its own trading strategy and using the bank’s own facilities to execute the trades. In some cases reviewed by the Subcommittee, the investment advisor used algorithms to engage in a high volume of trading, executing more than a 100,000 transactions per day.

Oops, HFTs. Even assuming you can continue your spotless trading record now that your frontrunning gig has been shown to the entire world, there goes your tax-free lunch.

Many of those trading positions lasted minutes, and the overall composition of the securities basket changed on a second-to-second basis. One basket option account later reviewed by the Securities and Exchange Commission (SEC) was found to have experienced 129 million orders in a year. In other cases, the investment adviser purchased securities whose positions remained unchanged for weeks, but all of the basket option accounts reviewed by the Subcommittee were dominated by short-term trading involving assets held less than one year.


By acting as the investment adviser, the hedge fund – the option holder – became the party that actually controlled the trading strategy, the timing of trades, and what assets were selected for the referenced account. The hedge fund was also exposed to all significant rewards and risks associated with the trading. The banks claimed that the hedge funds did not bear 100% of the risk of loss, because the banks provided so-called “gap” protection in the event of a catastrophic market failure. That risk was so small, however, that despite, for example, hundreds of millions of trades that took place in the more than 60 basket options held by RenTec over a decade, including during the worst financial crisis in a generation, neither bank was ever required to satisfy a loss due to a market failure.


To further minimize the gap risk, the option contract contained several provisions designed to limit trading losses in the account to the 10% premium provided by the hedge fund. The key provision accomplished that objective by specifying a loss threshold – sometimes called a “barrier” or “knockout” amount – which if reached would cause the option to cease to exist, or “knockout,” and trigger the ability of the bank to liquidate the account assets.


During the period of the option, the securities transactions were executed in the name of the bank and the resulting securities were held in the bank’s proprietary trading account. The accompanying profits or losses also remained within the account until the option was exercised. The hedge fund chose when to exercise the option. Although the options reviewed by the Subcommittee often had three-year terms and the hedge funds claimed they wanted longer-term financing arrangements, the hedge funds often exercised the options shortly after 12 months. In all cases examined by the Subcommittee, the option accounts paid the profits to the hedge fund option holder.


Deutsche Bank developed its basket option product in 1998, naming it the Managed Account Product Structure (MAPS). Over the next 15 years, Deutsche Bank sold 156 MAPS options, of which 96 had terms greater than one year. At their peak, those 96 options had assets with a total initial notional value of about $60 billion. Deutsche Bank sold the MAPS options to 13 hedge funds, including 36 to RenTec. Of those 36 option contracts, the first 29 had terms greater than one year. The MAPS options sold to RenTec produced profits for that hedge fund totaling about $17 billion. The MAPS options sold to all 13 hedge funds produced revenues for Deutsche Bank totaling about $570 million.



The Barclays’ basket options product was developed in 2002, at the request of RenTec, and was named COLT. Barclays sold 43 COLT options to RenTec, of which 31 had terms greater than one year. At their peak, those 31 COLT options had assets with a total initial notional value of about $62 billion. The COLT options produced trading profits for RenTec totaling about $18.5 billion. They also produced revenues for Barclays totaling about $655 million.

And so on, with all the above complexity driven by a simple motive: to reclassify short-term capital gains into long-term profits, in the process saving about 25% of the absolute profit from any transaction.

What we hope to learn from tomorrow's hearing is whether it will explain why, even as actual stock trading volumes have plunged in recent years, trading in derivatives has literally exploded. Surely everyone engaging in comparable "basket option" strategies would explain at least a part of it.


If nothing else, however, we now know why some of the biggest HFT-related hedge funds in the world: Citadel, Millennium, Balysany and DE Shaw have such an epic regulatory-to-net asset leverage as we showed before: the reason, one as old as time itself: to avoid paying tax. From the report:

In addition to avoiding taxes, the structure was used by the banks
and hedge funds to evade federal leverage limits designed to protect
against the risk of trading securities with borrowed money. Leverage
limits were enacted into law after the stock market crash of 1929, when
stock losses led to the collapse of not only the stock speculators, but
also the banks that lent them money and were unable to collect.


Had the hedge funds made their trades in a normal brokerage account,
they would have been subject to a 2-to-1 leverage limit – that is, for
every $2 in total holdings in the account, $1 could be borrowed from the
But because the option accounts were in the name of the bank,
the option structure created the fiction that the bank was transferring
its own money into its own proprietary trading accounts instead of
lending to its hedge-fund clients.


Using this structure, hedge funds piled on exponentially more debt than leverage limits allow, in one case permitting a leverage ratio of 20-to-1. The banks pretended that the money placed into the accounts were not loans to its customers, even though the hedge funds paid financing fees for use of the money. While the two banks have stopped selling basket options as a way for clients to claim long-term capital gains, they continue to use the structures to avoid federal leverage limits.

And as we showed previously:


And while we understand the Congressional the fascination with RenTec, created by Jim Simons, the 64th richest man in the world with a $15.5 billion net worth, we wonder why the NY Fed's (and the PPT's) very own favorite Spoo-buying counterparty, Citadel, which has a gross leverage of over 9x(!) is not mentioned even once.

Source: Permanent Subcommittee on Investigations

Gaza Right Now: In Pictures

The death toll among Palestinians from the Israeli offensive in the Gaza Strip reached over 500 on Monday, Gaza health officials said, as the two sides counted their dead following the bloodiest day of fighting so far in the two-week campaign. CBS reports the officials said some 3,150 Palestinians had been wounded. The IDF just announced 7 Israeli soldiers were killed today, raising the Israeli death toll to 25 (including 2 civilians). A glance at the stunning images below beggars belief that world equity markets (and Israel's) are shrugging at this escalating violence. We assume they 'believe' in the power of John Kerry.



Bombardement d'un hôpital dans la bande de Gaza

— Radio-Canada Info (@RadioCanadaInfo) July 21, 2014

#SOSPalestina RT:
"@RoaJavier: Ambulancia cruzando, mientras caían misiles lanzados por Israel en una zona de #Gaza"

— Luz Marina López (@koskita) July 21, 2014

Cuatro muertos en el bombardeo israelí de un hospital en Gaza

— El Periódico (@elperiodico) July 21, 2014

BREAKING PHOTO: Gaza last night after hundreds of rockets fired into Israel. Via mohammed saber

— PzFeed Top News (@PzFeed) July 21, 2014

BREAKING PHOTO: Gaza right now after an Israeli air strike. More than 100 rockets fired into Israel today. Reuters

— PzFeed Top News (@PzFeed) July 21, 2014

Israeli airstrike kills 20 people in Gaza - bringing the total number of dead to 501 (Reuters)

— The Telegraph (@Telegraph) July 21, 2014

#Israel drops #phosphorus bombs on #Gaza

— Press TV (@PressTV) July 21, 2014

Así está dejando Israel a #Gaza, reducida a escombros, muertos y horror. Foto del barrio de Shejaiyya ahora.

— Edgardo Rovira (@EdgardoRovira) July 20, 2014


And The IDF defends its actions...

Take a look inside: Hamas uses Shuja'iya as a fortress for its weapons.

— IDF (@IDFSpokesperson) July 20, 2014


And then there's this... an Israeli sniper killing a wounded gaza civilian...

It appears John Kerry's work is not yet complete...

Israel-palestinian Negotiations not going well. Maybe a humanitarian ceasefire. But maybe thats its. See what the morrow brings

— Richard Engel (@RichardEngel) July 21, 2014

Malaysian Airlines In Hot Water Again, This Time For Flying Above War-Torn Syria

Fool me once, shame on you; fly civilians over a war-zone twice, shame on Malaysian Airlines. In what is perhaps the most incredulous news of today (aside from Kerry's belief that he will make a difference in Gaza) is, as BNO reports, a Malaysia Airlines passenger plane flying from Kuala Lumpur to London flew over Syria on Sunday... The U.S. Federal Aviation Administration (FAA) and other organizations have warned airlines for more than a year to avoid the entire country. “Information from the International Civil Aviation Organization and open source reports of surface-to-air missile firings,” the FAA said in a notice last year, describing the risk to civilian flights as “significant.”


Source: FlightRadar24


Via BNO,

The log details published by flight tracking website Flightradar24 showed the flight path of Malaysia Airlines flight MH4, an Airbus A380 which departed Kuala Lumpur on early Sunday. The log showed the aircraft flying over Syria, which is in the midst of a raging civil war, from about 1:20 p.m. local time, flying close to the city of Homs.


Reports about Flight MH4 flying over Syria garnered the responses of thousands of people on the social networking website Twitter, where the vast majority described the airline’s route as irresponsible. It appeared Flight MH4 was routed over Syria after airspace over eastern Ukraine was closed following the shootdown of Malaysia Airlines Flight 17 last week.


No airspace restrictions are in place over much of Syria, but the U.S. Federal Aviation Administration (FAA) and other organizations have warned airlines for more than a year to avoid the entire country. “Information from the International Civil Aviation Organization and open source reports of surface-to-air missile firings,” the FAA said in a notice last year, describing the risk to civilian flights as “significant.”


There are some local flights going over to Iraq and Lebanon and Jordan, but they are not big airlines or transcontinental flights,” said Flightradar24 co-founder Mikael Robertsson.


“So Malaysia Airlines was the first flight I’ve seen going over there for like a year... I know that Iraqi Airways and Syria Air are flying over Syria sometimes. No big airlines.”

*  *  *

Of course, avoiding the world's ever-increasing warring nations is not
easy - perhaps it is time to consider trans-polar travel...

But with oil prices so high...

*  *  *

On the bright side...

#MH17 black boxes now in hands Malaysia delegation.

— Christopher Miller (@ChristopherJM) July 21, 2014

France Defies US, British Demands To Kill Mistral Sale To Putin... For Now

While the theater of Russian sanctions has been streamed to a live, and global, studio audience non-stop in recent weeks, when it comes to money actually walking, the French sale of its amphibious marine warship, the Mistral, to Russia has continued as planned (a $1 billion ship we should add). And it is this intransigence by Paris that piqued the ire of not only the UK but also the US.

First, it was British Prime Minister David Cameron who earlier today "questioned" France's plan to sell Mistral helicopter carriers to Russia, saying fulfilling such an order would be unthinkable in Britain after the downing of the Malaysian Airlines plane in Ukraine. When asked about France's plan to press ahead with a 1.2 billion-euro ($1.66 billion) contract to sell the ships to Russia, Cameron said: "Frankly in this country it would be unthinkable to fulfill an order like the one outstanding that the French have.

Well, France is not the UK which is why the US also had to chime in, and as Reuters reported moments ago:


It is unclear if said official added that fulfilling such an order in the US would be unthinkable too.

Russia too had an opinion. As Interfax reported, "suspension of the Mistral contract would bring Russia much smaller damage than the damage France would suffer, should France backtrack on its obligation to deliver two helicopter carriers to the Russian Navy, said Deputy Prime Minister Dmitry Rogozin."

"Billions of euros stand behind these contracts. France has always been very pragmatic. I doubt that [Paris will backtrack on its obligations]," Rogozin told reporters in Samara on Monday.


"Suspension of the contract would bring 99% less damage to Russia than to France, as we have every right to claim the money and the deck components made by Russia's Baltzavod which France will have to disassemble," the deputy prime minister said.


"Russia has large-scale assembling know-how today. We can build such ships on our own, if required," he said.

So it was all up to France, which appears to have come up with a compromise of sorts, when moments ago it announced that while it is far "too late" to cancel the transaction of the first warship which will be delivered in October, regardless of how much farther European sanctions escalate, France would be willing to cancel the sale of the second Russian Mistral ship should sanctions be raised. Why? Because Russia still has not paid for said ship.

Of course, keep in mind that this is the same France which was already punished to the tune of $9 billion a few weeks ago when the US slapped a record fine on BNP, and which resulted in a statement by none other than the head of the French central bank (issued on the US independence day) that the BNP case would merely encourage "diversification" away from the dollar. 

 The reason for the fine? As Putin explained previously: to make blackmail France into selling any more ships to Russia.

Said otherwise, the US certainly does not enjoy being presented with counter-blackmail, and the second France warned that the USD may lose its reserve currency status, it was time to strike. What better way to do so than to show the world who is (still) boss than by depriving the French economy out of hundreds of million in much needed funds.

As for who the biggest loser is here, Russia was at least right about that. As the Telegraph reported moments ago: "the head of France’s business federation has called for an end to the 75pc tax rate and to the 35-hour working week, saying the country’s economy is “catastrophic”. Pierre Gattaz, president of the Medef – France’s equivalent of the CBI – said the 75pc tax that companies are forced to pay on employees’ annual salaries above €100,000 (£79,000) was damaging France’s competitiveness.

“It’s a symbol which, like the 35 hours, has gone around the planet, and it’s destructive. I never meet a single Chinese or American who doesn’t bring it up,” said Mr Gattaz. “The economic situation of the country is catastrophic … if France was a company, it would be going bankrupt.”

So sadly while France certainly has dire need for the funds, it will ultimately be forced to admit that, at least for now, the US is its superior, and once sanctions are once again raised, it will have no choice but to terminate the option for any more Russian ships... even if it means pushing its already "catastrophic" economy even deeper into the redline.

One wonders: with allies like these, is Paris certain it needs Russia as an enemy?

Saxobank: "Be Warned" Of Delayed Market Reaction To "Escalation Of Global Turmoil"

Authored by Steen Jakobsen, Chief Economist of Saxobank,

There are causes worth dying for, but none worth killing for” – Albert Camus

The world is increasingly becoming engaged in civil wars and general turmoil where Camus' words could and should play a central but never will. This article is one of the hardest to write as war is never about right or wrong. They are per definition always wrong and extremely personal and emotional. The fact is, however, that we need to put "the risk of wars" into our macro outlook as they are increasing not only in intensity but also in the numbers of casualties.

I will not condone anyone or any party involved in the present conflicts – I learned my hard lesson advocating the removal of Saddam Hussein, only to learn that his successors are just as bad. Therefore, Camus’ words will remain my mantra.

The simplest way to “measure” geopolitical risk is to look at the price of energy. Energy is everything for a macro economist as it’s a tax on the economy when high, and a discount when low. High energy consumption levels makes it a critical part of any projection but despite this, energy assumptions are often exogenous (given!).

Think about this: Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office. Likewise, the rest of your day will be one big consumption of energy. The world's energy resources are primarily extracted from “volatile” or underdeveloped regions, creating a real risk of disruption of supply. Herein lies a clear and quantifiable risk.

The way I measure this geopolitical risk is through measuring the spread between the 5th contract of WTI crude oil and the first contract. Of course, there are other factor at work, but in the absence of a better alternative, I use this.

 Source: Bloomberg, Saxo Bank

As can be seen, since July 15 the “war premium” or more neutral “disruption premium” have increased by USD 2 and the world's consumers are now paying two dollars more per barrel of WTI crude. Overall there are many factors influencing the crude market but the price of energy remains the one component we need to know is stable and preferably falling.

The overall impact from war is negative despite the glorified analysis of how World War II stopped the recession – think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria. Many will argue it’s different this time, back then we were too dependent on the Middle East!  Sure, but prices were only between 10 and 25 US dollars a barrel back then!


Now we have lived with an oil rise in excess of  USD 100 more or less since 2007! Crude is now four times higher in price than during the “inflationist” 1970s – the era in which we ended  the Bretton Woods system of monetary management and where central banks started targeting inflation instead.

No, the signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market, however, maintains a steady hand: Israel will be contained inside a couple of weeks, Russia vs. Ukraine will find a solution. The non-acceptance of tail-risk (Black Swans) is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters.

Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant………except for the fact that for world growth to keep increasing we need to continue to see growth in Africa, the Middle East and Eastern Europe.

We need to accept that the world is now truly global – we smiled while globalisation reduced prices and made our companies more profit, now the escalation of wars reflect a world where growth is low, energy is expensive and increasingly hard to get and that we have gone full circle with macro and interventionist policies.

The escalation of turmoil in the world is yet to play a role for the market, but be warned: everything economic has a delayed reaction of nine to twelve month – whenever there is an action there will be a reaction. If the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact on not only world growth but also on markets. But don't ever forget that the real losers are the individual families losing loves ones. No, Camus got it right. There is nothing worth killing for, plenty to fight for.

Netflix Meets EPS, Beats On International Subs, Guides To Lower Q3 EPS And Domestic Subs

Moments ago Netflix reported Q2 Revenue and EPS which were precisely in line with Wall Street estimates, at $1.34 billion and $1.15 EPS. None of this mattered, because just like Amazon, nobody cares about where NFLX is now, everyone is much more focused on where it will be at some indefinite point in the future, with an emphasis on what many believe is virtually unlimited subscriber growth both in the US, but primarily, in the international market. Here is what NFLX reported to its subs growth.

  • Paid Domestic Subscribers rose to 35.085 million. The sequential increase of 708K was the smallest since Q2 2012. The Y/Y increase of 22.6%, likewise, was the weakest since 2012. Total streaming adds increased by 570K, just above the expected 540 increase. What's more troubling is that NFLX predicted that Q3 total domestic streaming adds will increase by 1.33 million, below the Wall Street estimate of 1.4 million.
  • Paid International Subscribers was the silver lining: it was here that NFLX reported that total subs rose to 13.8 million, an increase of 1.118 million, above the 0.97 million expected. And improving the international trend, NFLX hopes that in Q3 international subscribers will rise by a whopping 2.36 million, far above the 1.74 million expected.

So far so good. The problem, as those who tend to short the stock now and then know all too well, is that a major portion of the company's profit is generated by the doomed DVD business.  In Q2 this generated a profit of $92.8 million, however don't expect this to last as the decline curve here is dramatic as any other typical runoff business usually is: indeed, it was $16 million less than a year ago and declining fast.

As for the contribution profit of the company's fastest growing segment, international subs, it once again was a net drain of cash, soaking up some $15.3 million in Q2, which was the smallest negative cash burn since Q2 2011... but was still a cash burn.

The hope, of course, is that sooner or later the International business will become breakeven and generate incremental profits. So far, it hasn't.  This is what NFLX had to say about international growth:

Our international contribution loss of ($15.3) million has been rapidly approaching contribution profitability as we see improvements across all existing markets. Our broad success from Argentina to Finland has convinced us to further invest aggressively in global expansion. Our European expansion this quarter will add new expenses to the segment, so we expect a consolidated contribution loss of ($42) million for the international segment in Q3. Even after our upcoming expansion in Europe, we’ll only address about one-third (271 million of 728 million ) of current global broadband households, providing a great opportunity to build on our international success beyond 2014. As explained in our Long Term Letter, our plan remains to run at about global break-even to fund investment in global expansion.

Putting it all together, here is how much cash NFLX has generated in every quarter for the past three years.

In brief, in Q2, NFLX generated some $16.3 million in total cash, which however would have been substantially negative had it not been for the runoff DVD business.

So will international subs continue growing at a pace that will offset the tapering growth of domestics and certainly offset the declining contribution of the melting DVD ice cube?

That's folks continues to be the 64k question. Or rather 710x question, because that, on an LTM basis, is what what is NFLX EV/Free Cash Flow is (and we use the simple EV calculation, ignoring all the billions in off balance sheet liabilities, which would make this number well over 1,000x.

Finally, those wondering what original content is down the NFLX pipeline, here is the full story:

Earlier this month, Netflix original series and documentaries received 31 Emmy nominations, more than double the 14 we received in our first year of releasing original programming. In its first year of eligibility, Orange received 12 nominations, more than any other comedy series, while nominations for House of Cards grew from 9 last year to 13 this year. Notably, these two shows were nominated for Outstanding Comedy Series and Outstanding Drama Series while The Square, which received 4 nominations, is up for Outstanding Documentary. It is quite rare for a single network to receive nominations in all three of these categories as well as Outstanding Lead Actor and Outstanding Lead Actress for both drama (Kevin Spacey and Robin Wright for House of Cards) and comedy (Ricky Gervais for Derek and Taylor Schilling for Orange.)


Hemlock Grove debuted July 11 and has already begun to build on its Season 1 audience. We have been very pleased with the second season of Derek that launched in May and with the launch of our latest original documentary The Battered Bastards of Baseball.


In the coming weeks, we will premiere the all new 4th and final season of The Killing (8/1) and a new adult animated comedy BoJack Horseman (8/22). Also in August, we will release Mission Blue (8/15) from the Oscar-winning director of The Cove, Fisher Stevens.


Reflecting the increasingly global nature of the Netflix service, we now have original series in production around the world, involving some of the best storytellers working in television and film today. Marco Polo, a historical adventure from Executive Producer Harvey Weinstein, is shooting in Kazakhstan and Malaysia. In New York there is Marvel’s Daredevil, the first of our original series from Marvel Television, as well as the already eagerly-anticipated third season of Orange is the New Black; while in Baltimore, production is underway on the third season of House of Cards. In the Florida Keys, the creators of Damages (Glenn Kessler, Daniel Zelman, and Todd Kessler) are shooting a dark family thriller with an ensemble cast led by Kyle Chandler, Sissy Spacek, Sam Shepard, Linda Cardellini, Ben Mendelsohn, and Norbert Leo Butz. Sense8, a mind-bending series from the Wachowskis (The Matrix trilogy, Cloud Atlas) and J. Michael Straczynski (Babylon 5), began production in San Francisco last month, is now in Chicago, and will shoot in many international locations this year.


In August, production begins in Los Angeles on Grace and Frankie, a comedy led by Jane Fonda, Lily Tomlin, Martin Sheen and Sam Waterston; and in Colombia, Brazilian director José Padilha (Elite Squad, Robocop) will begin filming Narcos with an all-star international cast led by Wagner Moura.


During the quarter, we announced our first-ever talk show, hosted by Chelsea Handler, the popular comedian and best-selling author. As with scripted programming, but unlike news or sports, fewer people are watching talk shows live and are instead watching stacked episodes on DVR or online in the days and weeks following initial airing. Our intent is to produce a show with Handler and her team that reflects this shift to on-demand enjoyment and that will appeal to a global audience. Handler recently taped her first special for Netflix -- a stand-up show that’s been sold out across the U.S., the U.K. and Ireland -- and will produce four more in 2015 before we launch the talk show in early 2016.

Finally good luck with the whole "Net Neutrality" thing. Ironically, the bigger NFLX gets, the more likely the distributors will collude to squeeze every last drop of cash from the company.

Full NFLX press release

Oil Jumps As Stocks Dump-And-Pump But Close Lower

Equity prices tumbled early on - giving up all Friday's gains - before rampaging phoenix-like (thanks to an AUDJPY driven short squeeze) back to 'unch' after rumors of ceasefire discussions in Israel rolled around trading desks. Oil - it appears - was looking at the death-toll (and the fact that Hamas can only accept a deal that denies Israel's existence) and soared back towards $105 (its 2nd biggest day in over a month) notably divergent from stocks. The Russell 2000 was the laggard all day (ramped the most of the lows on the squeeze) and Trannies the leader. Since the MH17 headlines hit, the Nasdaq is the only index green, Treasury yields are -4bps, and oil up almost $4. The USD ended the day unch, 30Y Yield -2.5bps, gold, silver, and copper up modestly, and VIX up 0.5 vols at 12.7. Stocks closed on the weak side.


Friday's gains gone then regained... V-shaped recoveries everywhere... lower highs though...


Shorts triple squeezed today... but ended weak...


On the day, the morning dump was met by the AUDJPY pump.... to fill the gap... The Russell 2000 is -1.4% YTD and has crossed its 200DMA every day in the last 3 days...


Since MH17 Headlines, most indices are still red except Nasdaq of course.. why not buy the most growth-sensitive stocks at a time when geopolitical angst look sset to slow global growth (ask Germany)..


AUDJPY was in charge all day...


As an FYI - we note the selling in US equity futures started as Europe opened...


Bonds sold off (yields rose) as Obama spoke and did not unleash more sanctions hell and rumors of cease-fire discussions helped..


Credit markets remain less exuberant at what great news world war 3 is...


It appears Oil prices are continuing to reflect notably concerns about geopolitical tensions... but stocks not (not oil inverted to show 'negative' implications)


And bonds appear to reflect safe haven concerns (or growth concerns) a little more than stocks...


Since MH17 headlines hit, gold and silver are up...


Charts: Bloomberg

Ron Paul: What The Press Isn't Reporting About The MH17 Disaster

Authored by Ron Paul via The Ron Paul Institute,

Just days after the tragic crash of a Malaysian Airlines flight over eastern Ukraine, Western politicians and media joined together to gain the maximum propaganda value from the disaster. It had to be Russia; it had to be Putin, they said. President Obama held a press conference to claim – even before an investigation – that it was pro-Russian rebels in the region who were responsible. His ambassador to the UN, Samantha Power, did the same at the UN Security Council – just one day after the crash!
While western media outlets rush to repeat government propaganda on the event, there are a few things they will not report.

They will not report that the crisis in Ukraine started late last year, when EU and US-supported protesters plotted the overthrow of the elected Ukrainian president, Viktor Yanukovych. Without US-sponsored “regime change,” it is unlikely that hundreds would have been killed in the unrest that followed. Nor would the Malaysian Airlines crash have happened. 


The media has reported that the plane must have been shot down by Russian forces or Russian-backed separatists, because the missile that reportedly brought down the plane was Russian made. But they will not report that the Ukrainian government also uses the exact same Russian-made weapons.


They will not report that the post-coup government in Kiev has, according to OSCE monitors, killed 250 people in the breakaway Lugansk region since June, including 20 killed as government forces bombed the city center the day after the plane crash! Most of these are civilians and together they roughly equal the number killed in the plane crash. By contrast, Russia has killed no one in Ukraine, and the separatists have struck largely military, not civilian, targets.


They will not report that the US has strongly backed the Ukrainian government in these attacks on civilians, which a State Department spokeswoman called “measured and moderate.”


They will not report that neither Russia nor the separatists in eastern Ukraine have anything to gain but everything to lose by shooting down a passenger liner full of civilians.


They will not report that the Ukrainian government has much to gain by pinning the attack on Russia, and that the Ukrainian prime minister has already expressed his pleasure that Russia is being blamed for the attack.


They will not report that the missile that apparently shot down the plane was from a sophisticated surface-to-air missile system that requires a good deal of training that the separatists do not have.


They will not report that the separatists in eastern Ukraine have inflicted considerable losses on the Ukrainian government in the week before the plane was downed.


They will not report how similar this is to last summer’s US claim that the Assad government in Syria had used poison gas against civilians in Ghouta. Assad was also gaining the upper hand in his struggle with US-backed rebels and the US claimed that the attack came from Syrian government positions. Then, US claims led us to the brink of another war in the Middle East. At the last minute public opposition forced Obama to back down – and we have learned since then that US claims about the gas attack were false.

Of course it is entirely possible that the Obama administration and the US media has it right this time, and Russia or the separatists in eastern Ukraine either purposely or inadvertently shot down this aircraft. The real point is, it's very difficult to get accurate information so everybody engages in propaganda. At this point it would be unwise to say the Russians did it, the Ukrainian government did it, or the rebels did it. Is it so hard to simply demand a real investigation?

With ISIS Now Controlling 35% Of Syria And Most Of Its Oil Fields, Iraq Issues An Ultimatum To The US

Remember when the extremist Al Qaeda spinoff ISIS (or, now known as Islamic State following the formation of its own caliphate in the middle of Iraq and Syria) was still a "thing" two weeks ago? In this case out of sight does not mean out of mind, and while the world has found a new story line to follow in the middle east with the war between Israel and Gaza, now in its 14th day - whenever it is not busy responding to emotional appeals about the MH 17 crash - ISIS has continued to expand and as Al Arabiya reports it "is now in control of 35 percent of the Syrian territory following a string of victories, the London-based Syrian Observatory for Human Rights said Friday."

What's more troubling is that ISIS holdings now include nearly all of Syria’s oil and gas fields. While these are hardly significant on a global scale, they certainly allow ISIS to preserve its self-sustaining and self-funding status.

One of the latest gains of the self-proclaimed “caliphate” was the seizure of the country’s biggest oil fields, in Deir el-Zour in eastern Syria, earlier in the week.


Deir Ezzor borders Homs province as well as Iraq, where the jihadist group has spearheaded a major Sunni militant offensive that has seen large swathes of territory fall out of the Baghdad government’s control.


Meanwhile, jihadists have killed 270 Syrian regime fighters, civilian security guards and employees since seizing a gas field in Homs province, the Observatory added, according to Agence France-Presse.


The London-based group described Thursday’s takeover of the Shaar field as “the biggest” anti-regime operation by the ISIS since it emerged in the Syrian conflict a year ago.


“Eleven of the dead were civilian employees, while the rest were security guards and National Defence Forces members,” he added.


A counter-attack by Bashar al-Assad’s forces on Friday left 40 ISIS militants dead, Abdel Rahman said.


The Syrian government did not officially confirm the deaths, but supporters of Assad posted photographs of the dead, and described their killings as a “massacre”.

Ironically, it only took ISIS a little over a month to take over Syria's energy infrastructure and cripple the Assad regime, something the US forces were unable to do last summer.  Perhaps it is time for the Pentagon to retain them, i.e., al-Qaeda 2.0, as mercenaries?

As for ISIS in Iraq, things continue to escalate and as the Institute for the Study of War reports, ISIS has placed IEDs in places such as Mada'in, Yusifiyah, and Mahmudiyah in the southern belts of Baghdad. Iraqi Shi'a militia executions inside Baghdad may increase in response to the VBIED wave in Shi'a neighborhoods on July 19. The deployment of volunteers from southern Iraq to Kirkuk province signifies the spread of their role to protect shrines in areas where ISIS is making advances. The reallocation of Iraqi security forces from Baghdad to Dhuluiya signals the real challenge that ISIS poses there.

ISW's conclusion is that ISIS may try to draw the ISF out of Baghdad in advance of more robust attackes there.

Visually, here are the latest areas of conflict in Iraq.

Perhaps sensing the fact that the tide of war may be shifting for the worse, Iraq has become increasingly more vocal in demanding US assistance and a few hours ago went as far as to issue an ultimatum on the US - help us now or we will find another bigger borther, one who will actually help us.

Bloomberg reports that earlier today, speaking at the Atlantic Council, the Iraqi Ambassador to U.S. Lukman Faily called for US air strikes warning that Iraqis are skeptical about U.S. intent to support Iraq in its fight against Sunni terrorist groups, and implicitly threatening that "other countries will step in to fill the vacuum if greater American support isn’t forthcoming."

Faily calls for U.S. air strikes to stop influx of terrorists from Syria, to target “terrorist camps,” and precision air strikes in urban areas “occupied by ISIL terrorists”

He also said that Iraq has chosen the U.S. as its preferred strategic partner, has bought >$10b in U.S. military equipment and plans "to buy billions more."

"If Iraqis do not believe meaningful U.S. assistance is forthcoming, they will not have enough incentives to adopt political reforms. Now more than ever the United States needs to be careful not to send mixed signals about its intentions. These mixed signals will create vacuum that will be filled by others."

Such as Russia?

As for Iraq, in the future pick better "preferred strategic partners."

The New Scariest Chart In America

For the last few years, the 'scariest' chart for Europeans has been the unending surge in youth unemployment. However, amid all the sound and fury of mainstream US media discussions of the 'recovery' in America and the President's employment track record, Constantin Gurdgiev notes another 'scariest chart of the US recovery' that remains in full 'crisis mode'...


The Duration of Unemployment In The US...


h/t True Economics blog

Russia Touts South Stream Pipeline As Europe’s Gas Lifeline

Submitted by Andy Tully via,

Russia is mounting a major publicity campaign in Europe for its proposed South Stream gas pipeline in an apparent effort to reassure its EU customers that they can rely on Russian gas for the indefinite future.

The reason for Moscow’s public relations efforts is the continuing unrest in Ukraine. EU countries now get about 30 percent of their gas from Russia, half of it piped through Ukraine. Twice, in 2006 and 2009, that flow has been interrupted. Gas flows to Europe through Ukraine are intact today, but that status may change depending on whether relations between Russia and Ukraine improve or decline.

Meanwhile, Russia is working on an alternative that it says will satisfy everyone, except perhaps Ukraine: the South Stream pipeline, which would bypass Ukraine, instead crossing the Black Sea into Central and Southern Europe.

On July 17, a major Italian newspaper, La Repubblica, published a full-page article based on information from Russia Beyond The Headlines (RBTH), an agency of the Russian government. The article bore the headline, “South Stream On Its Way to Going Ahead.”

The article is part of a broader Russian public relations effort elsewhere in Europe promoting South Stream as a source of 63 billion cubic meters of gas to EU customers per year, meeting 15 percent of Europe’s current needs.

The article in La Repubblica said many countries have agreed to provide transit rights for the pipeline. Nevertheless, the European Commission has suspended approval of the project and urged member countries to freeze work on the pipeline until Russia and Ukraine resolve their differences.

Still, several countries in Central and Southern Europe, including Germany, Italy and Bulgaria, support South Stream as a necessary alternative to the Ukraine pipeline. And here’s where the competition arises. Greece, which not long ago faced possible expulsion from the EU, is positioning itself as part of yet another alternate route.

That’s the Southern Corridor, which would combine the Trans-Anatolian Pipeline (TANAP) and the Trans-Adriatic Pipeline (TAP).

Gas would move gas from Azerbaijan, on the Caspian Sea, through Georgia and Turkey – the TANAP – then across northern Greece and end in southern Italy – the TAP. Azeri exports would start at 16 billion cubic meters of gas per year. The project would rely in large part on Greece, which would provide the longest land route for the TAP leg of the conduit.

Athens says this alternative not only would reduce Europe’s need for Russian gas, it would tap newly discovered gas sources off the coast of the Greek island of Crete. Several international oil companies, including BP, Chevron, ExxonMobil and Shell, met recently in London and expressed interest in forging alliances with Greek energy companies.

The initial investment in Cretan oil is estimated to range from between $3.4 billion and $8.1 billion – a significant amount for a country that is just now emerging from four years of economic crisis.

Key Piece of Video “Evidence” for Russian Responsibility for Malaysian Plane Shootdown Debunked

Mish is a highly-respected financial blogger.   His Global Economic Analysis site routinely wins awards such as:

One of Mish’s trademarks is to speak with knowledgeable people in various subject areas, and report on what they said.

Today, Mish debunked one of the main pieces of video “evidence” claimed by the mainstream media to prove that Russia was behind the shootdown of the Malaysian plane over Ukraine:

Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian provided this update three hours ago.

Hello Mish,


On Friday, the Daily Mail, one of the major UK tabloids carried photos and video of what was alleged to be a rebel “Buk” launcher heading back to Russia.  The article carried a claim from some Ukrainian source that the launcher was missing several missiles after having shot them at the Malaysian 777.  The article was prominently linked to the Drudge Report, and so was probably viewed by several million people.


Today, this meme made it into Uncle Sam’s official narrative, as per the following New York Times excerpt:


On the CBS program “Face the Nation,” Mr. Kerry referred to a video that the Ukrainians have made public showing an SA-11 unit heading back to Russia after the downing of the plane with “a missing missile or so.”


The video referenced by the New York Times was, in fact, posted on the Facebook account of the Ukrainian Interior Minister. The allegation was that the launcher was crossing the border with Russia.


However, going by the billboard and other features of the scenery, Russian bloggers and news sources claim to have identified the road in the video as having been taken in or near the town of Krasnoarmeisk (“Krasnoarmiysk” in Ukrainian), which has been under Kiev’s control since May.


In fact, the billboard is supposedly advertising a Krasnoarmeisk car dealership.  Also, one of the structures in the background is said to be a construction materials store on Gorkii Street, Krasnoarmeisk.


Please note that this town is (very roughly) 120 kilometers from the Russian border and 80 kilometers from where the Malaysian 777 went down.  And again, it has been under Kiev’s control since May.


At least one other clip of the “Russian Buk” that has been made available also suggests that the Ukrainians are showing their own equipment. I’m still working on researching that one for you.



Video in Question


It is beyond incredibly sloppy for Ukraine to release such a video with a clear billboard of something in Ukraine-held territory, purportedly showing a Buk missile launcher headed back to Russia.


And we are supposed to believe Kiev? Kerry?


Please be serious. If you are really interested in the truth, you do not resort to such easily disproved and sloppy bullsheet.

This is – of course, not the first piece of video “evidence” trumpeted by the MSM which has been debunked.