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Paul Craig Roberts Rages: Truth Is Now A Crime Against The State

Authored by Paul Craig Roberts,

The entire Western edifice rests on lies. There is no other foundation. Just lies.

This makes truth an enemy. Enemies have to be suppressed, and thus truth has to be suppressed.

Truth comes from foreign news sources, such as RT, and from Internet sites, such as this one.

Thus, Washington and its vassals are busy at work closing down independent media.

Washington and its vassals have redefined propaganda. Truth is propaganda if it is told by countries, such as Russia and China, that have independent foreign policies.

Propaganda is truth if told by Washington and its puppets, such as the EU Observer.

The EU Observer, little doubt following Washington’s orders, has denounced RT and Sputnik News for “broadcasting fabrications and hate speech from their bureaus in European Union cities.”

Often I appear on both RT and Sputnik. In my opinion both are too restrained in their reporting, fearful, of course, of being shut down, than full truth requires. I have never heard a word of hate speech or propaganda on either. Washington’s propaganda, perhaps, but not the Russian government’s.

In other words, the way Washington has the news world rigged, not even independent news sites can speak completely clearly.

The Western presstitutes have succeeded in creating a false reality for insouciant Americans and also for much of the European Union population.

A sizable percentage of these insouciant peoples believe that Russia invaded Ukranine and that Russia is threatening to invade the Baltic States and Poland. This belief exists despite all intelligence of all Western governments reporting that there is no sign of any Russian forces that would be required for invasion.

The “Russian invasion,” like “Saddam Hussein’s weapons of mass destruction and al Qaeda connections,” like “Assad of Syria’s use of chemical weapons against his own people,” like “Iranian nukes,” never existed but nevertheless became the reality in the Western media. The insouciant Western peoples believe in non-existent occurrencies.

In other words, just to state the obvious noncontroversial fact, the Western “news” media is a propaganda ministry from which no truth emerges.

Thus, the Western World is ruled by propaganda. Truth is excluded. Fox “news,” CNN, the NY Times, Washington Post, and all the rest of the most accomplished liars in world history, repeat constantly the same lies. For Washington, of course, and the military/security complex.

War is the only possible outcome of propaganda in behalf of war. When the irresponsible Western media brings Armageddon to you, you can thank the New York Times and the rest of the presstitutes for the destruction of yourself and all your hopes for yourself and your children.

Stephen Lendman, who comprises a good chunk of the remaining moral conscience of the West, explains the situation:

EU Bashes “Russian Propaganda”

by Stephen Lendman


Western major media march to the same drummer – dutifully regurgitating managed news misinformation garbage, willfully burying hard truths on issues mattering most.


Alternative sources beholden to truth and full disclosure operate by different standards – engendering ire among Western nations wanting their high crimes suppressed – bashing sources revealing them.


The EU Observer (EUO) claims independent credentials while supporting policies responsible news sources denounce.


Independently reporting hard truths isn’t its long suit. Its editor, Lisbeth Kirk, is the wife of former Danish European Parliament member Jens-Peter Bonde. Human Rights Watch’s European and Central Asian advocacy director Veronika Szente Goldston calls its journalists “the most in-your-face in Brussels.”


EUO irresponsibly bashed Russia’s Sputnik News and RT International – two reputable sources for news, information and analysis – polar opposite Western media propaganda.


It shamelessly called their reporting valued by growing millions “broadcasting fabrications and hate speech from their bureaus in EU cities.”


It touted plans by EU officials to counter what they called “use and misuse of communications tools…play(ing) an important role in the dramatic political, economic and security-related developments (in) Eastern (European countries) over the past 18 months.”


It drafted a nine-page “action plan” intended to convey “positive” messages. It’ll increase funding to blast out Europe’s view of things more effectively.

It wants EU policies promoted in former Russian republics the old-fashioned way – by repeating Big Lies often enough until most people believe them.

A new EU foreign service cell called East StratComTeam operating by September will run things – functioning as a European ministry of propaganda.


It’ll “develop dedicated communication material on priority issues…put at the disposal of the EU’s political leadership, press services, EU delegations and EU member states.”


Material circulated in Russia and other EU countries aims to let news consumers “easily understand that political and economic reforms promoted by the EU can, over time, have a positive impact on their daily lives” – even though precisely the opposite is true.


It wants so-called benefits Europeans enjoy explained to people continent-wide. Will millions of unemployed, underemployed and impoverished people buy what’s plainly untrue from their own experience?


Sputnik News, RT, US independent sources like the Progressive Radio Network and numerous others steadily gain audience strength at the expense of scoundrel media people abandon for good reason.


Growing numbers want truth and full disclosure on things affecting their lives and welfare. Politicians in Western countries want ordinary people treated like mushrooms – well-watered and in the dark.


RT’s editor-in-chief Margarita Simonyan said “the European Union is diligently trying to stifle the alternative voice of RT, at a time when in Europe there are hundreds of newspapers, television channels and radio stations, which set out only one point of view on what is happening in the world.”


The BBC is Fox News with an English accent. US so-called public radio and broadcasting are no different – telling listeners and viewers everything except what they most need to know.


Simonyan explained “Britain (has) an entire army brigade of 1,500 men…whose tasks include the fight against Russia on social networks. NATO has a task force aimed at countering Russian influence throughout the world.”


“Only recently, Deutsche Welle launched a 24-hour television channel in English to counter RT. At the same time, nearly all the major Western media, including the BBC, DW and Euronews have long disseminated their information in the Russian language, while Radio Liberty, funded directly by the US government, broadcasts in Russian.”


“(I)f after all this, the EU still complains that they are losing the ‘information war’ against Russia, perhaps it’s time to realize that” growing numbers of people are fed up with being lied to.


People want reliable sources of news, information and analysis unavailable through mainstream Western sources using propagandists masquerading as journalists.

Goldman Just Crushed The "Strong Fundamentals" Lie; Cuts EPS, GDP, Revenue And Profit Forecasts

In the past week, the one recurring theme among the permabullish parade on financial propaganda TV has been to ignore the closed stock market and banks in suddenly imploding Greece, the situation in Puerto Rico, the recent plunge in US stocks which are now unchanged for the year, and what may be the beginning of the end of the Chinese bubble and instead focus on the "strong" US fundamentals, especially among tech stocks - the only shiny spot an an otherwise dreary landscape (and definitely ignore the energy companies; nobody wants to talk about those). So we decided to take a look at just what this "strength" looks like.

Well, we already saw the collapse in hedge fund hotel Micron Technology, which plunged 30% after it slashed its guidance last week. Alas that may be just the beginning. Here are the year-over-year revenue "growth" estimates for some of the biggest tech companies in Q2:

  • Hewlett Packard: -7.3%
  • IBM: -14.2%
  • Microsoft: -5.5%
  • Intel -4.5%
  • Texas Instruments -1.1%
  • Western Digital -7.2%
  • Ericsson -19.6%
  • Qualcomm -13.9%
  • NetApp -11.3%

And that is the best sector among the "strong fundamentals" story.

In fact, the only bright light in the entire tech space may well be AAPL whose sales are expected to grow 29%. We wish Tim Cook lot of strength if the recent Chinese market crash has dampened discretionary spending and demand for AAPL gizmoes in China. He will need it.

But what's worse is that while reality will clearly be a disaster, there is always hype and always hope that the great rebound is just around the corner, if not in Q2 then Q3, or Q4, etc.

This time even the hype is be over because none other than the most influential bank on Wall Street, the one all other sellside "strategists" religiously imitate, Goldman Sachs, just slashed its EPS and S&P500 year end price forecast for both 2015 and 2016.

Here is Goldman with its explanation why it is lowering S&P 500 EPS:

We reduce our near-term earnings forecasts to incorporate diminished US GDP growth, a stronger dollar, and lower crude prices. Since October 2014 when we published our previous EPS forecast, expected 2015 real GDP growth has declined by 70 basis points (to 2.4% from 3.1%), the trade-weighted US dollar has strengthened by 9%, and crude prices have dropped by nearly 30%. In response to these macro headwinds and two additional quarters of realized earnings data, we lower our 2015 EPS target by $8 to $114 (from $122) and reduce our 2016 EPS by $5 to $126 (from $131). Energy EPS alone will decline by $8 in 2015, from $13 to $5.


We maintain our 2015 S&P 500 target of 2100. Reduced EPS growth will be offset by a stable P/E. We previously forecast higher earnings with a P/E contraction. Our new EPS forecast is $114 (down from $122) reflecting slower GDP growth than we had originally assumed, a stronger US dollar, and a collapse in Energy company profits. S&P 500 will post just 1% EPS growth in 2015.... Initial Fed hike in December will allow P/E to end 2015 at an elevated 16.7x

So earnings are bad and getting worse, but for Goldman that is not a reason to cut its S&P forecast simply because the economy is weaker than expected and also getting worse which means the rate hike originally forecast to take place in June is now set to take place in December, and thus boost P/E multiples (it won't of course but that will be Greece's fault).

We maintain our S&P 500 price target of 2100 for 2015, as the negative impact of our lower EPS is offset by a later-than-previously-expected Fed hike. Our US economics team now believes the first hike will take place in December rather than September. S&P 500 P/E, which is historically rich, will stay elevated through the remainder of 2015, but will compress when the Fed starts its tightening cycle in December. Looking forward, S&P 500 will rise alongside earnings, increasing 5% in 2016 and 2017 to 2200 and 2300, respectively

So... the combination of deteriorating earnings and an even bigger slowdown in the economy ends up being a wash and keeping the S&P year end price target at 2100.

Ah, the magic of financial Goldman's financial gibberish.

So aside from Goldman's 21x forward multiple (because 114 non-GAAP is about 100 GAAP which means Goldman is expecting a 21 Price to GAAP Earnings multiple) simply due to the Fed's hike delay from June to December, is there any good news?


In fact, this is what Goldman's David Kostin has to say: "Macro headwinds diminish 2015 earnings growth prospects. S&P 500 sales will fall by 2% in 2015, the first annual decline in five years. Margins will slip to 8.9%. Energy is a drag on both sales and margins." Let's just focus on the "near-term" slip before we worry about the "long-term rebound."

And before the intrepid questions of "this is only due to energy" arise, here is Goldman explaining that the weakness was broad, and impacted every single sector.

We lowered 2015 EPS levels in all 10 sectors, with Energy and internationally-exposed Information Technology declining most. We trimmed nearly $2 from our 2015 Energy EPS estimate after further cutting both expected sales growth and margins (see Exhibit 1). Information Technology EPS was cut by $2, due to the sector’s leverage to diminished economic growth and foreign exchange risk (60% of sector revenues generated abroad versus 33% for S&P 500).

But wait, there's more: because in addition to its EPS forecast, Goldman also slashed its GDP and the 10Y yield forecast as well.

We expect US GDP will grow at an average annualized rate of 2.4% in 2015 and 2.8% in 2016. In contrast, last October our assumed growth rates for the US economy equaled 3.1% and 3.0% for 2015 and 2016, respectively (see Exhibit 2). While our previous assumptions incorporated a sizeable 18% decline in crude oil prices, the actual decline has been twice as large, averaging 36% on a year-over-year basis.


So ok, Goldman had a 25% error in its forecast in just under 9 months. Does that mean that the vampire squid is even remotely remorseful or concerned about the credibility of its 2017 and 2018 (yes, 2018) forecasts?  Not at all: those are expected to remain completely unchanged on the back of some of the highest EPS gains in recent history. In fact, putting in context, Goldman now expects just 1% EPS growth in 2015 which will then magically soar to 11% in 2016 before "stabilizing" to a "modest" 7% annual EPS growth rate.

We expect S&P 500 operating EPS of $134 (+7%) in 2017 and $143 (+7%) in 2018. We expect S&P 500 ex-Financials and Utilities revenue will increase by 6% in 2017 and by 5% in 2018. Coupled with stable margins of 9.3%, ex-Financials and Utilities EPS should rise by 6% and 5%, respectively. We assume Financials and Utilities EPS growth of 10% during 2016 and 13% in 2017.

With just a little hyperbole, we can say that the only way S&P EPS will grow at that pace is if the S&P ends up buying back half its float.

But while one can double seasonally adjust non-GAAP BS until a massive loss becomes a huge profit, one item can not be fabricated: sales. It is here that Goldman has far less to say for obvious reasons.

Our new forecast assumes Energy sales will shrink 32%, pulling aggregate S&P 500 sales growth into negative territory for the first time in five years. We expect S&P 500 sales per share to decline by 2% in 2015, in line with consensus.

Yes you read that right "sales per share", because if buybacks can boost Non-GAAP earnings, why not revenues too. 

If there is a silver lining on the horizon it is one: "We forecast Health Care will grow sales faster than consensus expects."

The corporations thank you Obamacare.

* * *

So to summarize: the first revenue drop for the S&P in 5 years, a major downward revision in EPS now expecting just 1% increase in 2015 EPS, a 25% cut to GDP forecasts, a machete taken to corporate profits and 10 Yields, and not to mention double digit sales declines for some of the most prominent tech companies in the world.

And that, in a nutshell, is the "strong fundamentals" that everyone's been talking about.

The Air We Breathe

From the Slope of Hope: A few years ago, I was chatting with an acquaintance of mine who happens to be pretty rich. I don't know the exact figure, but his net worth was probably something like $80 million. He was definitely in "ultra-high net worth" territory and quite obviously never needed to work another day in his life.

He was bemoaning to me the fact that if he hadn't sold his energy company so early, he would be "a billionaire by now." My heart didn't exactly ache for the guy, but his complaint (which these days I think is referred to as a "humblebrag") made an impression.

I was reminded of this last week, when I was reading in Quora an article about the definition of "success.' One of the respondents related a conversation he was having with a friend who had $2 billion and was complaining that he wasn't worth as much as Larry Page, who is worth $15 billion.

What is it about money such that people are never satisfied? Most of us have heard about the study that shows that money does, in fact, correlate closely with happiness, up to a level of income about $40,000 per year (adjusted for your location). After that, the marginal benefit begins to fall off, and after a certain amount, it gets fairly meaningless.

It certainly makes sense that, say, a young adult out of college making $60,000 per year is probably a lot more content and satisfied than someone working at Shake Shack for $25,000 per year. But it also makes sense that an investment banker making $900,000 per year is probably no happier than the person who likewise is making $35,000 per year less. Money, at that level, has stopped moving the happiness dial.

An interesting metaphor hit me, which I'd like to offer for your consideration: the air we breathe. Imagine for a moment that we treated air the same way we treat money.

What I mean by that is that air is: what if it was unevenly distributed? Most people would have enough to fill their lungs day to day and get by. Some people might wheeze and gasp, barely hanging on. Others suffocate to death. And a few have stockpiled enough air for fifty lifetimes.........or a hundred.......or a million.

How would we, as as race, feel about this? We might witness Mark Zuckerberg breathing freely and without a care, confident that in his secret underground caves, he has a stockpile of the oxygen he requires just in case he lives for the next fifty million years. And yet we pass on the street bodies of people who have violently died, having suffocated for want of air.

This, clearly, would be unacceptable, because not only would we be outraged that any human on the planet couldn't get enough to breathe, but also because, frankly, Mark Zuckerberg doesn't need air for the next fifty million years. The air, we would all agree, has to be shared.

But we don't need to agree to this because, happily, the availability and distribution of air for our lungs isn't within the domain of human decision-making. It's widely- and freely-distributed, doesn't cost anyone anything to use, and not only would it be impractical to "hoard" it, but doing so would be silly.

The air we breathe, then, is the idealized expression of socialism. From each his according to his abilities (which, in this case, are naught). To each according to his needs (which are more or less the same). Air is a fair resource, and occasional debates about pollution notwithstanding, it's something that seven billion people share peaceably.

Now I realize that air isn't the same as cash, and I'm as fond of the latter as the next fellow. And, let me assure you, I'm not proposing the wisdom of a government making sure we all have the same quantity of assets. That little 80-year experiment was kind of a flop that created untold misery and put the entire human species at risk of extinction. Luckily, we got past it.

But all the same, I can't help but think of this little analog and wonder to myself if it might help yield some insight as to the foolhardiness of human greed and the limits of covetousness any wise person need pursue. The pursuit of success that leads to creating employment, good jobs, a better world, and all that happy hoo-ha is perfectly good, and if it happens to make you rich along the way, well, that's just icing on the cake.

But remember that there's really only so much of that stockpiled oxygen in your caves that you really need, and it might do you some good to share some of it (at your own discretion, not by government edict) now and then. Hyperventilation can't hold a candle to the good feelings of helping out a fellow traveler here on our little planet.

The Care And Feeding Of A Financial Black Hole

Submitted by Dmitry Orlov via Club Orlov blog,

A while ago I had the pleasure of hearing Sergey Glazyev—economist, politician, member of the Academy of Sciences, adviser to Pres. Putin—say something that very much confirmed my own thinking. He said that anyone who knows mathematics can see that the United States is on the verge of collapse because its debt has gone exponential. These aren't words that an American or a European politician can utter in public, and perhaps not even whisper to their significant other while lying in bed, because the American eavesdroppers might overhear them, and then the politician in question would get the Dominique Strauss-Kahn treatment (whose illustrious career ended when on a visit to the US he was falsely accused of rape and arrested). And so no European (never mind American) politician can state the obvious, no matter how obvious it is.

The Russians have that pretty well figured out by now. Yes, maintaining a dialogue and cordial directions with the Europeans is important. But it is well understood that the Europeans are just a bunch of American puppets with no will or decision-making authority of their own, so why not talk to the Americans directly? Alas, the Americans too are puppets. The American officials and politicians are definitely puppets, controlled by corporate lobbyists and shady oligarchs. But here's a shocker: these are also puppets—controlled by the simple imperatives of profitability and wealth preservation, respectively. In fact, it's puppets all the way down. And what's at the bottom is a giant, ever-expanding, financial black hole.

Do you like your black hole? If you aren't sure you like it, then let me ask you some other questions: Do you like the fact that your credit cards still work, or that you can still keep money in the bank and even get cash out of an ATM machine, or that you are either receiving or hope to eventually receive a pension? Do you like the fact that you can get useful things—food, gas, airline tickets—for mere pieces of paper with pictures of dead white men on them? Do you like the fact that you have internet access, that the lights are on, and that there is water on tap? Well, if you like these things, then you must also like the financial black hole, because that's what's making all of these things possible in spite of your country being bankrupt. Perhaps it's a love-hate relationship: you love being able to pretend that everything is still OK even though you know it isn't, and you wish to enjoy a bit more of the business-as-usual before it all goes to hell, be it for a few more days or another year or two; but you hate the fact that eventually the black hole will suck you in, after which point things will definitely... suck.

In the United States, so far the black hole has been sucking in individual families (although it does sometimes suck in entire cities, like Detroit, Michigan, or Bakersfield, California, or Camden, New Jersey). With the help of the fraudulent mortgage racket, it sucks in houses, and spits them out again encumbered with bad debt. With the help of the medical industry, it sucks in sick people and spits them out again, bankrupt. With the help of the higher education racket, it sucks in hopeful young people, and spits them out as graduates, with worthless degrees and saddled with mountainous student debt. With the help of the military-industrial complex, it sucks in just about anything and spits out corpses, invalids, environmental damage, terrorists and global instability. And so on.

But the black hole can also suck in entire countries. Right now it's busy trying to suck in Greece, but it's having a hard time with it, because Greece is, of all things, a democracy. This has the black hole's puppets in quite a state at the moment, and starting to clamor for “regime change” in Greece, so that Greece can be made to capitulate before the black hole gets hungry.

The way the black hole sucks in entire countries is as follows. If the black hole doesn't have enough to suck in for a period of time, it gets hungry and makes the financial markets go into free-fall. The financial instruments of countries that happen to be farther away from the black hole—out on the periphery—fall faster. In search of a “safe haven,” money floods out of these countries and into the “core” countries that are clustered tightly around the black hole—the US, Germany, Japan and a few others. The black hole gobbles up this money, but is then hungry for more. But since the periphery countries are now financially too weak to resist, they can easily be turned into black hole fodder. This is done by saddling the country with a foreign debt it can never repay, then forcing it to keep making payments against this debt by making it a condition for maintaining a financial lifeline—keeping the banks open, the ATMs stocked, the lights on and so on. To be able to make the payments, the country is forced to dismantle its society and economy through the imposition of austerity, to privatize everything in sight turning it into collateral for more loans, and to surrender its sovereignty to some transnational organizations, such as the IMF and the ECB, which are directly involved in the care and feeding of the black hole.

Who is in charge of all this? you might ask. If all there is is the black hole, the puppets charged with its care and feeding, and its hapless victims, then who is making the decisions? Well, it turns out that the black hole is sentient. But it is also very, very stupid. And the way is enforces its will is by destroying the minds of its puppets—by making them unable to understand certain things. However, stupidity is a double-edged sword, and in enforcing its will in this manner the black hole also thwarts its own purpose.

For example, some time ago the black hole happened upon a rather large item it wanted to suck in, but couldn't. The item is called Russian Federation. It controls a huge territory that is full of all sorts of natural resources the black hole would love to turn into loan collateral and suck in. The problem is that it is full of Russians, who are a difficult people for the black hole's puppets to deal with. They keep telling the puppets to please keep their toes on the other side of that red line over there, and if they don't then click goes the safety on their guns, precluding further discussion.


This situation calls for negotiation, but the black hole, which, as I mentioned, is very, very stupid, has just one negotiating tactic. It makes its demands, and then waits for the other side to capitulate. If that doesn't work, it applies pressure: imposes sanctions, attacks the currency, complicates financial transactions, arrests the country's foreign assets and so on—and waits for the other side to capitulate. And if that doesn't work either, then the country gets bombed to rubble by NATO or, if NATO doesn't want to come along, by the US alone. That generally works, but in the case of Russia it doesn't. But the black hole, if you recall, is very, very stupid, so it keeps trying anyway. As it does, the minds of its puppets get really warped, to a point where they don't understand what's going on at all.


For example, everybody knows by now that pressuring Russia doesn't work: according to Newton's Third Law, every action produces an equal and opposite reaction, and Russia is big enough that pushing it doesn't cause it to move at all—it just causes whoever is pushing it to hurt themselves. It's like trying to shift the Earth's orbit by jumping off a chair while keeping your knees locked—which is a good ploy if you are clamoring for medical attention. In fact, the Russians are rather grateful for the sanctions, because now they have a reason to finally get serious about investing in domestic economic development and self-sufficiency. But the puppets, having had their minds warped by the black hole, cannot see that, so they just keep pushing, wrecking their own economies in the process.


Since the sanctions don't work, it is time to exercise the military option. Doing so requires concocting a casus belli—a reason to go to war. The black hole does this by hallucinating: Russia invaded Crimea!—sure, a few hundred years ago, and has been there ever since, most recently based on an international agreement, but never mind! (Oh, and legally Crimea was never actually made part of the Ukraine because Nikita Khrushchev botched the paperwork when handing it over.) OK, never mind that, but then Russia invades the Ukraine!—on every day that has the letter “D” in it, but it's very sneaky and withdraws its troops before anybody can snap a single picture of them there. OK, never mind that either, but then Russia is poised to invade Estonia, Latvia and Lithuania, and maybe Poland too. Invade how? You mean like take a bus to the music festival in J?rmala? Consider it done, but the festival is already over and the invading music fans are back home. OK, never mind that either. But the puppets keep saying “Russian aggression!” over and over again. It's the brain damage caused by proximity to the black hole. Look at this poor guy, for instance. He keeps flapping his lower jaw, going “Russian aggression! Russian aggression!” while trying to self-soothe by fondling the rump of his imaginary pet cow. God help him.

Back to the real world: the poor puppets are unable to understand that there is no military option when it comes to Russia: it's a nuclear power with an excellent strategic deterrent, a well-defended territory, and no aggressive intentions against anyone. But the puppets, with their warped minds, cannot see that, and so they pile various kinds of obsolete military junk along Russia's borders, and are even threatening to bring into Europe the entirely obsolete Pershing medium-range nuclear missiles. They are obsolete because the Russians now have the S-300 system with which to shoot them all down. The military option just isn't going to work, but don't tell that to the puppets—they cannot absorb such information without sustaining further neurological damage.

Back to Greece: tiny Greece certainly isn't mighty Russia, but it nevertheless refused to capitulate to the demands of the black hole. It was asked to completely wreck its society and its economy as a condition for maintaining its financial lifelines from the IMF and the ECB. Most inconveniently for the black hole and its puppets, Greece is not some obscure “third world” country peopled by dark-skinned people you wouldn't want your daughter to marry, but a European nation that is the cradle of European civilization and democracy. Greece managed to elect a government that tried to negotiate in good faith, but the puppets don't negotiate—they demand, threaten and cause damage until they get their way—or until their heads explode.

This one will be interesting to watch. If the black hole does succeed in sucking in Greece, then which country is next? Will it be Italy, Spain or Portugal? And, as that process continues, at what point will enough people say that enough is enough? Because when they do, the black hole will shrivel up. It's not a real black hole that's made up of incredibly dense matter—so dense that its gravitational field traps even light. It's a fake black hole, made up of everyone's combined greed. It has greed at its core, and fear all around it, and it sustains itself by feeding on fear. If it can continue sucking in people, families and entire countries, it can keep the greed at its core alive, but if it can't, then the greed will also turn to fear, and it will shrivel up and die. And I hope that when it dies all of its brain-damaged puppets will snap out of it, realize how deluded they have been, and go find something useful to do—farm sheep, grow vegetables, dig for clams...

Chinese QE Calls Officially Begin: Bond Swap "Sucks Liquidity", "Contributes To Stock Slump", Broker Claims

On Monday, we highlighted what we called an “insane” debt chart and explained what it means for the PBoC. Here’s a recap:

China has launched a bewildering hodge-podge of hastily construed easing measures that can't seem to get out of their own way. Perhaps the most poignant example of this is how the country’s massive local government debt swap effort — which, as a reminder, aims to restructure a provincial government debt load that amounts to 35% of GDP — is effectively making it more difficult for the PBoC to keep a lid on rates, even as the central bank has embarked on a series of policy rate cuts. 


Despite it all, China will likely continue to cut rates over the course of the next six months in a futile attempt to avert an economic and financial market collapse. In the end, the only recourse will be ZIRP and ultimately QE.


With that in mind, consider the following chart from SocGen which shows the projected supply for local government bond issuance in China. If the new muni bonds issued as part of the debt swap program are effectively treasury bonds — as Citi contends— then ask yourself the following question: how effective can benchmark rate cuts possibly be in terms of keeping a lid on rates with CNY20 trillion in new supply of what are effectively treasury bonds flooding the market? The answer is “not very effective,” which means that someone will need to soak up that supply directly. Enter Chinese QE.


As a reminder, we've long said China's LGB refi initiative would eventually form the backbone of Chinese QE. Here is what we said in March when the program was in its infancy: "It seems as though one way to address the local government debt problem would be for the PBoC to simply purchase a portion of the local debt pile and we wonder if indeed this will ultimately be the form that QE will take in China." Similarly, UBS has suggested that when all is said and done, the PBoC will end up buying the new munis outright. From a March client note:

Chinese domestic media citing "sources" saying that the authorities are considering a Chinese "QE" with the central bank funding the purchase of RMB 10 trillion in local government debt. In fact, the "sources" seem to be some brokerage research reports speculating ways of addressing the stock of local government debt, following the MOF announcement that local governments have been given a RMB 1 trillion quota to issue bonds to replace other forms of local government debt.

And so, here we are barely a month into the new LGB debt swap initiative (which, you're reminded, has already morphed into a Chinese LTRO program after the PBoC, recognizing that banks would be generally unwilling to take a 300bps hit in the swap, promised to allow participating banks to pledge the new munis for cash loans which can then be re-lent in the real economy at 6-7%) and the calls have begun for outright QE. Here's Bloomberg:

PBOC should directly or indirectly buy local gov bonds to ease concern that long-term interest rates will climb and help lower leverage, Haitong Securities analysts led by Jiang Chao write in a note today.


Local govts will use up 150-200b yuan of debt swap quota per week: Haitong


About 1.4t yuan of quota remaining, to be used up in 7-8 wks: Haitong


China may announce 3rd installment of debt swap quota in 4Q: Haitong


Local debt issuance sucks liquidity, reduces banks’ capital to buy bonds, contributes to stock slump: Haitong

Note that this rather hyperbolic appeal for implementing full-on QE in China checks all the boxes: there's a reference to bond market illiquidy, an assertion about constraints on bank balance sheets (which, with credit creation stalling in China, is a big deal), and most importantly, a contention that somehow, the LGB debt swap program is contributing to the implosion of China's all-important equity bubble. 

A few more 'independent' assessments like these is likely all the PBoC will need to justify joining the global QE parade.

No End In Sight For Higher-Education Malinvestment

Submitted by Doug French via The Mises Institute,

Those of us leaning in the Austrian direction see bubbles and malinvestments around every corner and assume, wrongly as it turns out, the market will right these wrongs lickety-split. But, for the moment a rational market is no match for cheap money. “Any college that is thinking about capital expansion, now is a very good time,” Robert Murray, an economist at Dodge Data told the Wall Street Journal. “Several years down the road, the climate might not be as good.”

Now being a good time because stock market gains have pumped up endowments, “and low interest rates have created a favorable environment for colleges to build,” writes Constance Mitchell Ford. The campus building boom marches on.

In 2014 colleges and universities commenced construction on $11.4 billion worth of projects, a 13 percent increase from the previous year. It’s the largest dollar value of construction starts since the heady days of 2008.

Ms. Ford’s piece highlights a $2 billion project at Cornell and sixteen new buildings at Columbia worth $6 billion. But here in Auburn, Alabama the campus has been a construction zone since 2008 when I arrived. Multiple new dorms, a basketball arena, a fancy student center, and various new classroom buildings have been constructed at a time when funding from the state has been cut back. What’s now underway is the largest scoreboard in college football, with a plan to expand the stadium next.

Back in the 1985–86 school year, full time tuition at Auburn for a non-resident was $2,585. Thirty years later it is now $28,040. That’s a compounded annual growth rate of 8.27 percent.

According to Bloomberg, college tuition and fees have increased 1,120 percent since records began in 1978, and the rate of increase in college costs has been “four times faster than the increase in the consumer price index.”

Tuiton at state schools is rising even faster says Peter Cappelli, professor of management at the Wharton School of the University of Pennsylvania. He told Becky Quick on CNBC’s “Squawk Box” the cost of an education has risen 50 percent faster at state schools versus private in roughly the last decade.

Cappelli said a critical question is whether students will graduate in the first place, noting that only 40 percent of full-time students earn a degree within four years, and 30 million — and perhaps as many as 35 million — young adults do not finish their studies.

Unfinished college is as useful as an unfinished building.

College degrees are similar to what Austrians call higher-order goods. It’s believed a student will gain knowledge and seasoning in college, making him or her more productive and a candidate for a high-paying career. The investment of time and money in knowledge are undertaken for the payoff of higher productivity and a high future income. Higher education is the higher-order means to a successful career.

The assumption is those high-pay jobs, (A) will require a college degree, and (B) they will be plentiful when the student graduates. Borrowing $100,000 to earn a law degree is a malinvestment if the student ends up writing briefs for $15 per hour. A recent graduate of the Charleston School of Law put fliers on cars announcing that he or she had borrowed $200,000 to attend school and is now working at Walmart for $35,000 a year.

A post on the “Above The Law” blog revealed, “As of the 2013–2014 academic year, the total cost of a three-year J.D. degree from Charlotte Law was $123,792.00, while the median loan debt per graduate was $159,208.00. Just 34 percent of the class of 2014 was employed in full-time, long-term jobs where bar passage was required. ...”

“More college graduates are working in second jobs that don’t require college degrees,” writes Hannah Seligson in the New York Times, “part of a phenomenon called ‘mal-employment.’ In short, many baby-sitters, sales clerks, telemarketers and bartenders are overqualified for their jobs.”

Ludwig von Mises wrote in Human Action,

The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder’s fault was not overinvestment, but an inappropriate employment of the means at his disposal.

As it is now, parents and students still have the belief that college is the way to, if not riches, at least a well-paying career. In a 2011 piece for with what turned out to be the hasty title of “The Higher-Education Bubble Has Popped” I quoted PayPal founder and early Facebook investor Peter Thiel, who questioned the value of higher education. He told TechCrunch,

A true bubble is when something is overvalued and intensely believed. Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.

Like most bubbles this one is being fueled by debt. USA Today reports, 40 million borrowers owe $29,000 each, totaling $1.2 trillion outstanding. Student loan debt is easy to get, but hard to get rid of. It’s hard to pay back without a high salary, nor can it be bankrupted away. “Government either guarantees or owns most of the student loans and has the power to sue and to garnish wages, tax refunds, and federal benefits like Social Security when borrowers default,” Kelley Holland writes.

Defaults are plentiful. In the third quarter of last year, the three-year default rate was roughly 13.7 percent, with the average amount in default per borrower just over $14,000.

These debtors “are postponing marriage, childbearing and home purchases, and ... pretty evidently limiting the percentage of young people who start a business or try to do something entrepreneurial,” says Mitch Daniels, president of Purdue University

I administer funds for a small scholarship for graduating high school seniors in my old home town. This year, for the first time, an applicant wrote that he needed financial help for college because his father, a veterinarian, can’t help his children because he’s struggling to make payments on his own student debt.

The college boom is not just on campus. Student housing developers have been riding the college boom as well. Two years ago in a piece for The Freeman, I wrote about developers cashing in building dorms. These developers have even found Auburn, with its population of only 50,000. A project called 160 Ross has long-time residents in an uproar with its high density. But as much as locals don’t like it, students have snapped up units at $599 a bed.

That rack rate has large student housing developers coming to town and CV Ventures is ready to break ground for a six-story mixed-used project on just one acre featuring 456 beds, stumbling distance from the college bars, with a Waffle House across the street.

Meanwhile, everyday we hear about how online courses being the death knell for brick-and-mortar institutions. For the moment traditional colleges seem safe. “Because traditional campuses offer peer and teacher interaction,” writes Ron Kennedy, “as well as a plethora of other important benefits often sought by traditional, college-aged students, there will remain a need for traditional education.”

More importantly, Kennedy continues, “Research has shown that students who interact face-to-face with their instructors and other students tend to be more academically balanced than their online counterparts. This is one reason why most employers still prefer students who have attended traditional campuses.”

Trees don’t grow to the sky and neither will tuition. However, it’s doubtful young people will suddenly stay home with their parents and work toward degrees taking online classes. Parents who can afford it want to relive their college days vicariously through their kids.

The higher education bubble continues to inflate.


For Greeks The Nightmare Is Just Beginning: Here Come The Depositor Haircuts

With capital controls already imposed on Greece, some have wondered if this is as bad as it gets. Unfortunately, as the Cyprus "template" has already shown us, for Greece the nightmare on Eurozone street is just beginning.

As a reminder, over the past few months there have been recurring rumors that as part of its strong-arming tactics the ECB may eventually move to raise the haircuts the Bank of Greece is required to apply to assets pledged by Greek banks as collateral for ELA. The idea is to ensure the haircuts are representative of both the deteriorating condition of Greece's banking sector and the decreased likelihood that Athens will reach a deal with its creditors.

Flashback to April when, on the heels of a decree by the Greek government that mandated the sweep of “excess” cash balances from local governments to the Bank of Greece’s coffers, Bloomberg reported that the ECB was considering three options for haircuts on ELA collateral posted by Greek banks. “Haircuts could be returned to the level of late last year, before the ECB eased its Greek collateral requirements; set at 75 percent; or set at 90 percent,” Bloomberg wrote, adding that “the latter two options could be applied if Greece is in an ‘orderly default’ under a formal ECB program or a ‘disorderly default.’” 

While it’s too early to say just how “orderly” Greece’s default will ultimately be, default they just did if only to the IMF (for now), in the process ending their eligibility under the bailout program and ending any obligation by the European Central Bank to maintain its ELA or its current haircut on Greek collateral, meaning the ECB will once again reconsider their treatment of assets pledged for ELA and as FT reported earlier today, Mario Draghi may look to tighten the screws as early as tomorrow:

When the Eurozone’s central bankers meet in Frankfurt on Wednesday, they could make a decision which some officials fear could push one or more of Greece’s largest banks over the edge.


The European Central Bank’s governing council is poised to impose tougher haircuts on the collateral Greek lenders place in exchange for the emergency loans. If the haircuts are tough enough, it could leave banks struggling to access vital funding.


The ECB on Sunday imposed an €89bn ceiling for so-called emergency liquidity assistance, effectively putting the Greek banking system into hibernation. If, to reflect the increased risk of default, the ECB now applied bigger discounts to the Greek government bonds and government-backed assets which lenders use as collateral, that could leave banks struggling to roll over those emergency overnight loans.


Some on its policy-making governing council feel that Athens’ exit from a programme — notwithstanding its 11th-hour request for an extension and third bailout — leaves the ECB with little choice but to take actions that would, in effect, cut the Bank of Greece’s emergency support to Greek lenders.


Some eurozone officials fear that the position at Greece’s biggest lenders is so tight the ECB could be in danger of pushing some weaker banks over the edge if tougher haircuts are imposed.

Recall that in mid-June, Greek banks were said to have had as much as €32 billion in ELA eligible collateral that served as a buffer going forward. Since then, the ELA cap has been lifted by around €5 billion, meaning that a generous estimate (and we say "generous" because according to JPM, Greek banks ran out of ELA collateral weeks ago) puts the buffer at a little more than €25 billion. 

As the haircut rises, that buffer disappears and once the discount applied to the collateral reaches a certain level, an implied depositor haircut materializes. Why? Because by simple balance sheet rules, assets must match liabilities (leaving a token €0.01 for shareholder equity) and once the haircuts eat through the collateral buffer, the implied value of Greece's pledged assets (currently at around €125 billion) will quickly fall below the value of Greek banks' unsecured liabilities which sit at around (but really under) €120 billion as of the date capital controls were imposed in Greece over the weekend. These liabilities are better known as "deposits."

At that point, a depositor haircut is required.

Although the collateral haircuts aren't public, the face value of pledged collateral is (it can be found on the BoG's balance sheet) as is the ELA cap, meaning it's possible to estimate the current haircut and, starting with the assumption that a generous €25 billion buffer remained as of the ECB's Sunday freeze of the ELA ceiling at €89 billion, project the implied depositor bail-in for different collateral haircut assumptions.

Here is the summary sensitivity analysis indicating what a specific ELA haircut translates to in terms of deposit haircut.


Another way of showing this dynamic is presenting the ELA haircut on the X-axis and the corresponding deposit haircut on the Y-axis once the critical "haircut" threshold of 60% in ELA haircuts is crossed.

As can be seen raising the haircut to 75% implies a €33 billion (or 37%) depositor bail-in or "haircut", while raising the haircut to 90% implies a €67 billion (or 55%) hit.

Note that the latter scenario looks quite familiar to what happened in Cyprus, and indeed that's not at all surprising because if, as Dijsselbloem himself said, Cyrpus is a "template", then the next step after capital controls is a depositor bail-in. 

And while we wish we could have some good news for the Greek population, this outcome may have been preordained by none other than Goldman whose Hugh Pill, who on June 28 suggested the following:

The core constituency of the current Greek government -- pensioners and public employees -- has enjoyed the first claim on remaining government cash reserves. Only when those cash reserves are exhausted will that constituency face the direct implications of the liquidity squeeze the political impasse between Greece and its creditors has created. And only then will the alignment of domestic political interests within Greece change to allow a way forward.

And as Goldman's former employee and current head of the ECB is about to have his way, the pensioners and public employees will be the first to suffer - first with capital controls and then with ever increasing haircuts on their deposits.

In other words, in order for the Troika to finally achieve its goal of either forcing Tsipras to relent or inflicting enough pain on Syriza's "core constituency of pensioners and public sector employees" to compel them to drive the PM from office, after capital controls come the depositor haircuts, first small, then ever greater until Greece collectively Cries Uncle and begs Europe to take it back while presenting Merkel with Tsipras and Varoufakis' heads on a proverbial (and metaphorical, we hope) silver platter. 

How China Lost an Entire Spain in 17 Days

By EconMatters


Concerned about a tumbling equity market, PBOC moved to cut both interest rates and the reserve requirement ratio for banks over the weekend.  However, increasingly wary of a market bubble in China, investors still sent Shanghai Composite spiraling down another 3.3% on Monday after the dramatic 7.4% plunge last Friday despite the support from the central bank.



Chaos on Three Continents


Investors are also unnerve by the latest development of Greece just days before a total default and Grexit out of EU, and the news that Puerto Rico could become another Greece of the U.S. facing a financial crisis and cannot pay back its $70 billion in municipal debt.


Read: China's $370 Billion Margin Call


VIX Spike


MarketWatch reported that VIX spiked 33% to above 18, the highest since February, implying that investors are very nervous about the chaos going around.


Beijing Targets Soft Landing?


If you think U.S. stocks are lofty trading at an average of 16 times last year's earnings, the average Chinese stock is now trading at 30 times earnings.


Analysts at HSBC think the China's central bank was trying to engineer a "soft landing" for stocks. But this could be a difficult balancing act trying to shore up investors' confidence while keeping a lid on the speculative fever among Chinese retailer investors (Remember those Chinese housewives who bought up 300 tons of gold and made Goldman Sachs swallow their gold selling recommendation?)



Read: Is China Under The Skyscraper Curse?



$1.3 trillion, an Entire Spain, in 17 Days

The Shanghai Composite has fallen 21.5% since its June 12 peak wiping out ~ $1.3 trillion in market cap. To put this in perspective, Quartz pointed out that the ~ $1.3 trillion loss in market cap, in 17 days, is close to the combined market capitalization of Spain’s four stock exchanges, and it’s not even counting losses in Shenzhen, China’s other major bourse.


Size Does Matter 

Greece has been the center of financial market attention for the past few months.  With a record $370 billion in margin trades, the Chinese stock market is looking even more ominous.


Only time will tell if Beijing's able to turn the situation (i.e. slowing economy with a bubbling equity market) around.  But if the world's biggest trading nation suddenly has a crisis of some sort, it would be a catastrophe of a different scale.  Size does matter when it comes to financial collapse, and China could do far worse damage than any Grexit or PIIGS debt default.


Chart Source: Quartz


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When Disruption Gets Too Disruptive

With massive strikes in France and now drivers shooting passengers, Uber is making headlines everywhere. While some might say any publicity is good publicity (and any disruption is good disruption), for the firm valued at $50 billion (with a stunning operating loss of $470 million and revenues of only $415 million) perhaps there is a limit to both press and disruption...


As Bloomberg reported yesterday from a recent prospectus:


And that's what makes Uber worth $50 billion to the Shubik Dollar Auction private equity holders.

And, as Bloomberg details, Uber has a multitude of problems...

Uber also routinely upsets regulators, which are challenging or banning the company from California to India. Last week, French President François Hollande said Uber's service is illegal and called for it to be dismantled. The latest bump in the road involves drivers in China scamming Uber via fake fares. Uber faces challenges practically everywhere, and we’ve mapped out some of the highlights below.



Perhaps - given this global furore - Uber's disruption is too disruptive.

And now this...

A Florida Uber driver has been reportedly suspended pending a police investigation after he broke the company’s anti-gun policy and shot a passenger who was allegedly choking him during an argument.


Clearwater police are investigating after the passenger in an Uber vehicle was allegedly shot Sunday night during an altercation with the driver, 74-year-old Steven Rayow. Passenger Marc Memel, 60, was shot in the foot and treated and released from a local hospital, a local NBC affiliate reported.


“There was a gentleman sitting in his car and there was like blood dripping out of the car so I was concerned what was going on,” Justin Smith, who works at Union Burger on Mandalay Avenue, told the station. “I came back inside to get a couple of rags to just to make sure he wasn’t bleeding out or anything, but it wasn’t nothing like vital.”


Police spokesman Rob Shaw said: “The driver basically told us that the passenger started choking him. He had his hands around his neck, and in fear of losing consciousness, that’s when the driver of the car pulled out a gun, and in the ensuing struggle, that gun went off.”


Police said Mr. Rayow is a retired New York City Police officer and has a concealed weapons permit.


A new Uber policy prohibits riders or drivers from possessing a gun. An Uber spokesman said Mr. Rayow’s access to the Uber platform has been removed, NBC reported.


Sunday’s incident is a glaring example of why Uber needs to be regulated, with drivers getting a level 2 background check, Public Transportation Commission Executive Director Kyle Cockream told NBC.

*  *  *

Problems aside, Uber was raising a $1.5 billion funding round as recently as May that would value the closely held technology company at $50 billion.

The six-year-old company has recently begun to put more cash toward hiring lobbyists.

A 14 Year Old Explains Why Socialism Fails

Via Shrey's Finance blog (reportedly a 14 year old Brit's thoughts),


Socialism is one of the biggest breakout economic ideologies of the 20th century. Although the UK general election was won by capitalists, socialism has more advocates than ever before, as a growing contingent are proposing a redistribution of wealth. You just need to look at the 250,000 people who protested on Saturday against the Conservatives’ cuts; only for them to announce £12 billion of welfare cuts a short time later. It is easy to see from this that socialism is becoming increasingly popular in modern society as more and more people are becoming aware of the perceived inequality that exists between the affluent 1% and the rest. However, I am of the opinion that socialism cannot work in modern society, or any society, for that matter, and my reasons are below.

Firstly, socialism does not reward hard work. Say, for example, that Raj works twice as hard as Mark. Surely Raj should be entitled to twice the pay that Mark gets. However, they both get the same. Over time, Raj will grow wise to the unfairness which is blighting his life, and he will work the same amount as Mark, as, after all, they do not get proportional rewards for their labour. This creates a culture of entitlement where everyone feels as though they need rewards for minimal, or no, work. This undermines the basic human principle of “work hard, reap rewards”, and means that laziness is promoted, which can only start a chain reaction towards a gradually more irresponsible society. This means that even the young children, growing up, know that whatever they do, they will just earn the same as someone else and so do not need to work hard, as there is no hope of a large reward, so work ethics stagnate.


Moreover, socialism will also undermine innovation. The great innovators of society, such as Bill Gates, are, mostly, the ones who become members of the 1%. This shows that innovation and producing products which people actually want to buy reap gigantic financial rewards, which is part of the reason that innovation is at an all time high these days. If innovation is not so heavily rewarded through the Socialist “redistribution of wealth”, people will not want to innovate anymore, as they are getting the exact same rewards as the non-innovators, the people who, frankly, add nothing to society. This kills innovation as the rewards are going equally to everyone, in effect, rewarding the non-producers and punishing the producers. It is like, as I read on another website, taking the average of a class and giving everyone in the class the class average. Of course, the worse students in the class would jump at this proposition, however the top students would not be so joyful. This is exactly what socialism stands for, except on a larger scale.


Finally, socialism, contrary to popular belief, undermines the basic moral values of a person and promotes instant gratification. As people, after some years in a socialist society, will be predisposed to getting something for nothing almost instantaneously, they will not want to slog to get what they want and instead will become almost like a small child to his parents, in that they want everything very quickly, having done almost no work to actually achieve it. Now take the example of the small child, and just think that even adults are subscribing to this ideology! This behaviour is toxic in a modern society and will slowly kill the hard working, positive nature that characterised the American Dream. To an extent, we are already seeing this with the Obama administration, with the American public slowly becoming disaffected a-la Holden Caulfield in The Catcher in the Rye. Why should they work if they can get everything from the state?

Herein lies the problem with socialism, in that the bad eggs are rewarded and the good eggs are punished. Is this the kind of society we would like to promote? I think not.

Ukraine Halts Russian Gas Purchases After Price Talks Fail

It has been a bad day for deals and deadlines all around: first Greece is about to enter July without a bailout program and in default to the IMF with the ECB about to yank its ELA support or at least cut ELA haircuts; also the US failed to reach a nuclear deal with Iran in a can-kicking negotiation that has become so farcical there is no point in even covering it; and now moments ago a third June 30 "deal" failed to reach an acceptable conclusion when Russia and Ukraine were unable to reach an agreement on gas prices at talks in Vienna on Tuesday. As a result, Ukraine is suspending its purchase of Russian gas.

According to RT, Russian Energy Minister Aleksandr Novak and Ukraine’s Energy and Coal Minister Vladimir Demchishin both admitted to reporters that the negotiations had born no fruit. Demchishin added that there would be a new round of talks in September.

Meanwhile, Ukraine’s energy company, Naftogaz, will stop buying gas from Russia as of Wednesday, July 1.

“As of June 30, 2015, the agreement between Naftogaz and Gazprom runs out, and conditions for continued supply of Russian gas to Ukraine have not been agreed upon; Naftogaz will no longer be purchasing gas from the Russian company,” a press release by Naftogaz said.

The Russian minister seemed unhappy and said it was politically motivated and there were no grounds for it.

So what will prevent Ukraine from simply siphoning off Russian gas transiting its territory for Europe? Nothing, except its word: 

Naftogaz gave assurances that “the transit of Russian gas through Ukrainian territory to Gazprom’s European clients will continue in full, according to contracts agreed.”

Russia will not increase the discount it has offered to Ukraine on gas purchases, Novak told the media. “The price of $247 [per cubic meter of gas] is completely uncompetitive, that is why we are very surprised that Ukraine wants a much lower price – it is out of line with the current market environment.” He stressed that the price “is not subject to correction.”

Ironically, even as Kiev will begin counting down the days until the winter, Russia will continue direct supplies of gas to Ukraine’s southeast, the Donbas separatist region which has been all but forgotten by the Ukraine capital due to the ongoing civil war on location. It has been doing so since February, when Kiev claimed that it could no longer supply gas to the conflict-torn regions due to damaged pipelines.

While Gazprom insists that Kiev is still responsible for paying for the gas that goes to Donbas, it probably should not hold its breath.

Incidentally, just like the Eurogroup launched shock treatment on Greece with capital controls first and shortly deposit haircuts, all in order to force the Greek government to resign by peaceful means or otherwise, the Kiev government, just as broke and about to default on its own bonds, may have just lit the fuse under its own cabinet, because while nobody needs heating in the summer when it is hot, in 5 months it will get very cold and as Greece has shown a desperate people are unpredictable.

Should the gas cutoff continue well into the cold winter, it just may be the catalyst that forces the revulsion against a regime that has so far done the bidding of the US State Department, if not so much its own people.

"Off The Grid" Indicators Suggest US Economy Not Ready For 'Liftoff'

Via ConvergEx's Nicholas Colas,

You’re probably sick of hearing about Greece, so today we’ll offer up something completely different.  Every quarter we review a raft of unusual and less examined datasets with an eye to refining and adding perspective to our more traditional macroeconomic analyses.


This quarter’s assessment of everything from large pickup truck and firearms sales to Google search autofills for “I want to buy/sell” shows a U.S. economy that is reasonably strong but growing only very slowly.


The chief areas of concern: Food Stamp participation is still very high at 45.6 million Americans (14% of the total population) and indicators like used car prices and large pickup sales are flat. 


One good piece of news going into the July 4th long weekend: our Bacon Cheeseburger Index – a proxy for popular food prices – is down 3.7% from last year, led lower by declining bacon prices (down 18%). 

If you are in the investment game for a few years or more, you pick up enough in the way of economics knowledge to be dangerous.  You can quote the difference between U-6 and U-3 unemployment with ease, outlining a whole range of theories about which one the Fed really watches more carefully.  You can quote the yield on the 10 U.S. Treasury versus its German and Japanese counterparts and what those spreads have done in the last few weeks.  And no one parses a Fed statement like you can…  Seriously.  No one.

But how about some real world questions to test your knowledge of, well, the real world that Americans actually inhabit?  You know – like actual people.  Not the world of statistics and trend graphs. For example, do you know:

The price of a pound of ground beef?  Your first answer should not be a price.  It should be a question: chuck or beef?  Yes, there can be a difference, usually based on the amount of lean meat in the grind.  The U.S. Bureau of Labor Statistics survey of food prices for May shows a price of $4.31/lb for “Chuck” and $4.14/lb for beef, up 15-19% over last year.


The price of a new Chevy Silverado full-sized pickup truck?  As with beef, this is a trick question.  You should ask: what towing capacity, and are we talking 2 door, double cab, or crew cab?  Short box or standard?  A real work truck, with crew cab, standard bed and V-8 is $40,211 according to the company’s website.  Add the bucket front seats and a nice stereo and you are at $42,000, before applicable sales taxes.  For reference, a reasonably equipped Mercedes C-Class sedan is about the same price.


How much is dinner at Cracker Barrel?  No tricks this time – and there are over 600 locations to choose from, so don’t tell me you’ve never heard of the place.  The “Country Dinner Plate” is $7.69, which includes a main dish (choices include fried chicken livers and 2 interpretations of a catfish fillet), two sides and corn muffins or buttermilk biscuits.  You can check out their website for other menu items – they all look like good home cooking to me.

Now, none of these will ever be market-moving information, but chances are good that you now have a few more heuristic wrenches for your economic tool box.  A shiny new pickup truck with a contractor’s company name on the door shows that business is good.  Like the better part of $50,000 new truck good.  And two pounds of ground beef in the supermarket is close to $10 – real money to most Americans.

In this spirit of staying connected to things actual consumers do, every quarter we review a range of “Off the grid” economic indicators.  We don’t expect anyone will be reworking their econometric models to incorporate them.  That’s not the point.  Rather, they are meant to provide a series of windows into the actual state of the U.S. economy.  We’ve included several charts and graphs immediately after this note, but here is a summary of the data.

U.S. Supplemental Nutrition Assistance Program.  Despite the notional recovery of the American economy since 2010, there are just as many Americans enrolled in SNAP (once known as food stamps) as July 2011: 45.6 million men, women, and children as of March 2015 (most recent data available).  The good news, such as it is, is that this number is down from the peak of 47.7 million in June 2013.  Of the current enrollees in the SNAP program, 16 million (35% of the total) are children.  That number was just under 10 million in 2007.


Our takeaway: one of the most vivid examples of how stretched many American households remain and a worrisome fact if the U.S. economy experiences an economic shock in the next few years.


Used Car Prices.  The price of 2-3 year old used cars has stayed remarkable firm since 2011, according to Manheim Auto Auctions proprietary sales data.  This goes counter to many “Smart money” calls for the value of used cars to decline over the last 12 months.  This is important because buoyant used car prices help support new car sales through strong trade-in values.



Our takeaway: one of the most important positives for U.S. auto industry, not only with respect to new car sales, but also low payment terms on leases and even used car financings.


Background Checks for Firearm Sales.  The current year may well set a new record for the number of instant background checks for firearm sales, as tracked by the Federal Bureau of Investigations.  As of May 2015 (latest data available), the run rate stands at 21.5 million.  That is higher than the 21.1 million of 2013, which is the current record. Not every background check results in a sale, but in our experience most of them do.  Prior to the Financial Crisis, annual background check counts never exceeded 10 million. Since 2007, there have been over 100 million such checks with the majority certainly representing a firearm sale.  There are approximately 250 million adults in the U.S.


Our takeaway: obviously a deeply contentious issue throughout the country, it pays to remember that firearms are not cheap and buying one is a reasonably large financial outlay.  The typical rifle or shotgun is several hundred dollars, and the most popular full-power rifle in America – the AR-15 – costs over $1,000 new.  So we are talking about a lot of money spent on firearms in 2015 and the continuation of a trend that is now almost a decade long.


Precious Metal Coin Sales.  The U.S. Mint publishes their sales for gold and silver coins on a monthly basis, and both are pretty slack at the moment.  The dollar value of 1 ounce gold coins (Eagles) is just $52 million on a rolling 6 month basis, right where it was in early 2009.  At its peak, the Mint was moving close to $200 million/month on average in mid-2013.  Silver coin sales show a similar trend, with an average of $57 million/month sold over the last 6 months versus over $100 million/month average in mid-2011.


Our takeaway: precious metal coin sales spike when Americans grow concerned over the health of the global financial system.  Those concerns seem to be at a low tide just now.  We’ll see what the Greek debt negotiations might do to that confidence, as well as when and if the Federal Reserve chooses to increase interest rates.


U.S. Mutual Fund Flows.  Despite a pretty consistent bull market for U.S. stocks since March 2009, mutual fund investors have been just as consistent at reducing their holdings of this asset class.  The second quarter of 2015 continues the trend, with $34 billion in outflows for April and May.  Much of that money went to overseas equities (at least on a net basis), where funds dedicated to those investments saw $30 billion of inflows.


Our takeaway: prior to 2007, mutual fund inflows and absolute performance were tied at the hip.  This is no longer the case, with stronger flows into international equities and fixed income funds.  This quarter simply continued that trend, which we view as largely demographic.


Job Quits and Consumer Confidence.  As we point out in our monthly JOLTS review, the percent of workers who quit versus being fired is a strong indicator of near term consumer confidence as measured by the University of Michigan survey.  As the accompanying chart shows, confidence has run out ahead of quits.


Our takeaway: consumer confidence is set for a near term decline to match the long term relationship with quits.


Pickup Truck Sales.  We use full sized pickup truck sales as a proxy for the health of small business in America.  Since the Financial Crisis, monthly sales of such vehicles have risen from 70,000/month to over 170,000/month now.  The most recent readings, however, show zero percentage growth from last year.


Our takeaway: Ford is in the middle of a major changeover of its full sized pickup product, and supply issues have slowed production and limited availability. For example, Ford dealers have 83 days supply versus 88-92 for GM and 89 for Dodge.  We’ll have to wait another few months to see if the slowdown in full sized pickup truck sales is permanent or simply supply-related.


Google Autofills.  One of our favorite “Off the grid” indicators, this simply lists the top items Google suggests for simple phrases like “I want to buy” or “I want to sell” when entered into the company’s search engine.  On the “Buy” side, “House” and “stock” routinely trade places for #1 – this time around “House” wins.  And, thanks to Mad Men (I am told by reliable sources), “The world a coke” is in second place this quarter.  The most commonly entered things people want to sell: “Car”, “House” and “Kidney”.  Yes, the last one makes a regular appearance in these lists, along with “Hair” and “eggs”.


Our takeaway:  not much change here since mid-2013, showing a healthy level of demand for traditional items.  And it is illegal to sell your kidney.  Hair and eggs are legal, however.


Bacon Cheeseburger Inflation Index.  Saving the best for last, we average the price changes from the Consumer Price Index for beef, cheese and bacon.  This time around, bacon is down 18% year on year, but beef (at least according to the CPI) is up 10%. Cheese is basically unchanged (down 1.1%).  That means that the cost of a bacon cheeseburger is 3.7% lower than a year ago, a welcome change from the +10% increase last year at this time.


Our takeaway: With so many pockets of food inflation rearing their heads this July 4th weekend, enjoy something that is cheaper than Independence Day 2014. I will take mine medium well, please.

So enjoy the barbeque and try not to think about the Greek drama for a few days. It will be here when you get back. Promise.

Crude Slips On Surprise API Inventory Build

After 8 weeks of drawdowns in crude inventories, API reports a 1.9 million barrel build in the past week. Crude's response is a 60c drop for now...


A crude build after 8 weeks of draws...


And the result...

Fed Examines Wealth Redistribution Program; Decides It's Not Worth It

For seven long years the Fed has aggressively defended a monetary policy regime explicitly designed to inflate the type of assets most likely to be concentrated in the hands of the wealthy. 

Despite the protestations of the man under whom these policies were implemented, the gap between the rich and everyone else has grown in post-crisis America. For evidence of this look no further than latest data on US household income, which shows that while the 0.001%, the 0.01%, the 0.1%, and the 1% have all nearly recovered their pre-crisis share of the national income, the bottom 50% of US filers' share is not only lower than it was in 2007, but is in fact lower than it was in the depths of the crisis.

For further evidence of the ballooning wealth divide, simply consult the St. Louis Fed, where researchers recently opined that the American Middle Class “is under more pressure than [anyone] thinks.” The related study shows the fate of Middle Income America diverging sharply from that of the country’s “thrivers” (the name the Fed gives to society’s upper echelon). 

And while those who, like Janet Yellen, understand how important it is to accumulate assets are doing quite well thanks to multiple iterations of unbridled money printing, the “wealth effect” — which was supposed to be the transmission mechanism whereby trillions in central bank liquidity would find its way to Main Street — simply never materialized. So, with housing becoming more unaffordable by the day and wage growth stagnant for 83% of workers, the San Francisco Fed apparently decided it was time to think about redistributing some of the hundreds of billions the FOMC has generated for America’s ultra rich in order to help out the have-nots and jump start consumer spending. Spoiler alert: after careful consideration, the bank decided redistribution probably isn’t worth the trouble. Here’s more:

*  *  *

From The Stimulative Effect Of Redistribution

The idea of taking from the rich and giving to the poor goes back long before the legend of Robin Hood. This kind of redistribution sounds desirable out of a sense of fairness. However, economists often judge a policy less on whether it is fair, and more in terms of whether it is efficient or inefficient, as well as whether it stimulates or slows economic activity.


The starting point for our simple estimate is the Consumer Expenditure Survey, which gives an annual picture of complete consumption patterns for U.S. households. The solid black line in Figure 1 plots the share of income that households consumed in 2013. The survey ranks households by income from low to high and divides them into 10 groups called deciles, with the 1st decile showing households in the bottom 10% of the income distribution, and the 10th decile showing households in the top 10%. Spending is then averaged for each decile of the income distribution. The shaded areas below the solid line reflect the share of income spent on different major expenditure categories.



The figure suggests that households at the lower end of the income distribution spend more than twice what they make. At the upper end, households spend about two-thirds of what they make. Given this large difference in the propensity to consume between low- and high-income households, we consider the economic impact of levying a $1 tax on the rich and transferring it to the poor. This would reduce the high-income household’s spending by about $0.66 and increase the low-income household’s spending by $2, assuming each group spent additional dollars at their average rates. On net, it would create an increase in spending of more than $1.25. Even if the average for households in the bottom decile is overstated and they simply consume all the income they make, Figure 1 suggests every $1 of redistribution from the top earners to the bottom one-third of the income distribution would boost spending by at least $0.33.


There are still two main reasons why this result overstates the stimulative effect of redistributing income.


By definition, income equals consumption plus savings. In addition to the consumption and income data we used to calculate the propensity to consume in Figure 1, the Consumer Expenditure Survey also contains data on household savings. One can calculate an alternative measure of propensity to consume using the sum of consumption and saving as the measure of income rather than the income reported in the survey. The resulting alternative profile of the propensity to consume across the household income distribution is shown by the dashed black line in Figure 1. This alternative measure results in a flatter profile of the propensity to consume than the conventional measure, largely because the estimates for low-income households are much lower. The revised estimates suggest these households report consumption and savings levels that are consistent with a substantially higher income than they report in the survey. At the other end of the distribution, high-income households tend to underreport their consumption, especially for basic items like food. This results in an understatement of their propensity to consume (Aguiar and Bils 2011).


Combining the measurement biases at the lower and upper ends of the income distribution suggests that the actual profile is much flatter than the initial one we discussed. 


Our discussion of the permanent income hypothesis touched on the importance of access to credit for household consumption levels relative to income. If households have access to credit then they are able to smooth their spending in response to a temporary negative shock to income. Even if they do not have access to credit, households can still self-insure by setting aside savings to cover expenses in times of unexpected income losses. In both cases, peoples’ consumption decisions are driven mainly by their permanent income, and so a high propensity to consume in 2013 may simply reflect a temporary loss of income. The fact that households at the low end of the income distribution can consume substantially more than they earn may also suggest that they have more access to credit than is apparent. In this case, the simple back-of-the-envelope calculation may overstate what fraction of additional income these households would consume.


There is evidence that differences in propensities to consume this additional income across households are smaller than commonly assumed. 

To summarize, the San Francisco Fed took a stab at quantifying whether a small levy on the rich would have an outsized impact on the propensity of the lower and middle classes to spend, and once they determined that the answer was probably "yes", they went back and adjusted a few things to ensure the data was an 'accurate' representation of reality only to determine that in fact, people's propensity to spend doesn't really vary that much across tax brackets, so therefore, redistributive policies probably wouldn't do much for the economy after all. Conclusion: it's probably just as well that the rich keep that dollar as opposed to giving it to the poor.

Stocks Turmoil To End Q2 With Worst Run Since Lehman

Overheard at The PBOC, The SNB, The ECB, and The Fed...


Before we start, it is worth noting that this is the first consecutive quarterly loss for Trannies since Lehman...


S&P 2067.89 was all that mattered today - for the biggest US equity market to avoid its first quarterly loss since Q4 2012... It Failed!!


Q2 ends with crude the big winner, bonds the big loser, and stocks and gold modestly lower...


Q2 saw Dow Transports ugly, Dow Industrials lower, and S&P teetering on the brink. Small Caps managed a small gain as Nasdaq outperformed...


Biotechs (healthcare) dominate Q2 with Financials and Discretionary ekeing out gains. Utes were monkey-hammered and Tech closed lower on the quarter...


Ugly quarter for bonds... (30Y up 57bps in Q2!, 2Y +8bps)


*  *  *

Year-to-Date, the picture does not change too much with bonds the laggard, Crude #winning, Silver flat, gold and stocks down...


And Trannies are a disaster in 2015...


Year-to-Date, 2Y and 5Y yields are still lower but 30Y is up 37bps...


*  *  *

Overnight China hope provided some news chatter into the open...


But Greece dominated...

On the day, stocks went into full schizophrenia mode as the inevitable default and Merkel's "Nein" was whipsawed by rumors of a last minut deal and of Greeks suspending the referendum...


From pre-Greferendum, US equity indices are all lower still...


With Financials, Materials, and Tech worst...


FX markets remain "well managed" post Greece...


Treasury yields appeared to be pulled and pushed between safety bids and month- and quarter-end positioining... (ECB Sells 'em, Fed Buys 'em)


Crude rallied as the Iran Deal deadline was delayed (again) but bullion limped lower and Copper slipped...


You can't keep an over-priced irrationally bid Biotech bubble down... Investors saw bonds rallying and stocks volatility, were stunned by the moves around Greek rumors and decided to pile into the safety of Biotechs...


Chasrts: Bloomberg

Who Could Have Seen This Coming?

It appears Central Bank omnipotence is under threat once again....


Cross-Asset-Class Volatilities... equities finally catch up to reality.


It appears you can only hold an ever-expanding balloon of exuberance underwater for so long.


Charts: Bloomberg

China's "E*trade Babies" Wiped Out In Market Crash

What do you get when a bursting equity bubble meets 5X leverage, structured finance, semi-literate banana vendors, and fund "managers" with less than one year of experience?

Harrowing margin calls, panic selling, and, in the end, massive losses. 

As WSJ reports, the relentless, limit-down trading in Chinese stocks that unfolded last week and continued into Monday (despite the PBoC's best efforts to arrest the slide with an emergency rate cut) has wreaked havoc on China's rookie money managers and their unsuspecting clients with losses amounting to as much as 80% in some structured funds.

In China’s market bust, rookie fund managers and their investors are among the biggest losers.


The 10 worst-performing funds the past month are so-called structured funds, which are essentially leverage plays tracking some indexes, according to, a Chinese fund tracker. The three worst performers fell by an average of 77% during the period.


Those funds were all led by professionals with less than a year of fund-management experience, according to details on 


China’s mutual-fund industry was booming until recently. Structured funds were a star performer during a yearlong bull market. But they also have done poorly during the current market decline, which began over two weeks ago. The Shanghai Composite Index closed up 5.5% Tuesday, paring recent losses, but is still down 17% from a high in June. 


Similar to leveraged exchange-traded funds in the U.S., structured funds can give investors two or three times the performance of an index. When markets are falling, though, these funds rapidly lose value, and can accelerate a selloff... 


During the run-up, Chinese fund-management companies rushed to issue structured funds... 


The problem has been finding mutual-fund managers to head these new funds. In recent years, many experienced mutual-fund managers have left their jobs to start their own private-equity firms, which are more profitable. “A lot of junior people were promoted to become fund managers,” said Haibin Zhu, chief economist for China at J.P. Morgan Chase & Co.

Here is a visual summary of the above:

As discussed in "The Biggest Threat To Chinese Stocks: Shadow Lending Crackdown," the structured vehicles that have played a role in allowing retail investors to skirt margin restrictions were partly (or even largely) responsible for the outsized losses posted by China's greenhorns. Here's WSJ again:

Retail investors and even some institutions like structured funds because they have earned outsize returns and it is an easy way to leverage their investments without having to borrow from securities firms or banks.


The funds are usually divided into two or more tranches. 


With structured funds, the B-tranche is typically forced to sell stocks and lower leverage in a falling market, to protect the interest of the A-tranche fund investors. This has accelerated stock declines and exacerbated B-tranche losses.


The May 27 launch of the 246-million-yuan ($39.6-million) Peng Hua High Speed Railway Fund, the third-worst performer the past month among China’s 2,879 mutual funds, according to, is especially ill-timed. High-speed rail was a hot investment theme, but many of those stocks are now down 60% from their recent peaks.


The Peng Hua High Speed Railway Fund is managed by Jiao Wenlong. Mr. Jiao... He became a fund manager on May 5, the prospectus said.

Because we couldn't possibly come up with a better way to encapsulate the fantasy being sold to China's millions of newly-minted day traders by the country's newly-minted fund managers who apparently have just as little experience managing money as the people whose money they are managing have trading stocks, we'll leave you with the following from the aforementioned Jiao Wenlong: 

“Invest in the fund to leverage your dream.”

NATO Member Turkey Breaks Ranks: Slams EU Austerity, Offers Greek Aid

While perhaps not on the scale of China or Russia assistance, Turkey has thrown its hat into the Troika-Greece farce by offering financial assistance to its embattled neighbor. As ekthimerini reports, "We are ready to help Greece survive its economic crisis with cooperation in tourism, energy, trade," Turkish Prime Minister Ahmet Davutoglu said and Turkey's left-wing parties showed solidarity by adding, "we believe that apart from imposing austerity policies on peoples of Europe, there can be more reasonable agreements." While no aid has been asked fro Turkey says it is ready to evaluate options.

As ekathimerini reports,

Turkey on Tuesday said it was "ready to help" Greece out of its escalating financial crisis as its embattled neighbor edged closer to default.


"We are ready to help Greece survive its economic crisis with cooperation in tourism, energy, trade," Turkish Prime Minister Ahmet Davutoglu said in the capital, Ankara.


"We want Greece to be strong... Therefore Turkey will be positive toward any proposal for cooperation," he said in televised comments.


Davutoglu added that a Turkish delegation would travel to Greece for a high-level cooperation meeting as soon as possible to consider joint steps on the financial crisis.




Turkish Economy Minister Nihat Zeybekci said on Monday if an official proposal for financial aid is made by Greece, "we will evaluate it."


Turkey's left-wing and Pro-Kurdish Peoples' Democratic Party (HDP) also issued a message of solidarity with Greece, saying: "We are together with the Greek people and their government in their struggle for justice, equality and democracy and against austerity."


"We believe that apart from imposing austerity policies on peoples of Europe, there can be more reasonable agreements, which will be acceptable," said the co-chairs of HDP, considered the Turkish equivalent of Greece's ruling SYRIZA party.

It seems Greece has friends after all, and as we 'joked' previously:

Greece really just needs a DIP not bigger than $10 billion to last it 6 months. Should be easily 5-6x oversubscribed in 24 hours

— zerohedge (@zerohedge) June 28, 2015

Perhaps Turkey will provide the DIP?

Meanwhile, work goes on with other options... Greece hasn’t sought aid from Russia, support wouldn’t hurt, Energy Minister Panagiotis Lafazanis tells in intw with Russia’s state TV channel Rossiya 24.

  • Lack of money from EU isn’t end of world
  • Greece expects EU to be reasonable, sees too much pressure from Brussels now
  • Lafazanis reiterates that accord with Russia on gas link isn’t aimed at Europe
  • Greece might get “hundreds of millions of euros” from Russian gas transit after link starts in 2019