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What Happens When 30,000 People Run The Beijing "Airpocalypse" Marathon In "Hazardous" Smog

Some 30,000 participants were wondering if the organizers of today's 34th Beijing International Marathon would cancel the event after "a toxic fog enveloped the Chinese capital and smog levels soared to “hazardous” levels." Adding to the confusion, and concerns, even the People’s Daily, the Communist Party’s mouthpiece newspaper, cautioned athletes against taking part in the 26.2-mile race, reporting that Beijing’s air was “not suitable for outdoor activities”.  As the Telegraph reports, "Beijing authorities admitted their city’s air was "severely polluted” on Sunday while the US embassy, which also monitors smog levels, described the situation as "hazardous". The Marathon organizers' answer, however, was that the Marathon would proceed as scheduled.

As a reminder, this is what the Beijing Air pollution tracker said 8 hours ago when the marathon was due to begin:

10-18-2014 12:00 to 10-19-2014 11:59; PM2.5 24hr avg; 320.6; 370; Hazardous

— BeijingAir (@BeijingAir) October 19, 2014

And to think China was so demonstratively eager to reform not only its massive debt overhang, but its air as well: "Li Keqiang, China’s prime minister, vowed to “declare war” on pollution in March but Beijing’s “airpocalypse” marathon capped a calamitous month for the city’s environmental authorities."

Once the green light was given, most competitors chose to ignore the health warnings, instead donning facemasks they hoped would prevent toxic air invading their lungs as they gathered in Tiananmen Square ahead of the race’s 8am start.

 "It was really exhausting," said Ma Dong, a 22-year-old male runner who was among those to use a mask. “Lots of athletes pulled out halfway because of the haze. It was really uncomfortable wearing a mask during the marathon as you can't breathe freely.”


Organisers told the Beijing News they handed out 140,000 water-soaked sponges to athletes, advising them to "clean" their skin after it was “exposed to the air”.


Luo Changping, a Chinese journalist, posted a photograph of one runner sporting a military-style gas mask. “I’m not running the marathon. I’m going back to the World War,” the journalist wrote.


Not all made it to the finish line across town near Beijing’s Bird’s Nest stadium. “Some of the runners have given up in the 2014 Beijing Marathon due to serious air pollution,” the People’s Daily reported.


Ying Wei, a 23-year-old runner, admitted his “lung hurt quite badly during and after the race”.

Just give it a few more weeks: we are confident the pain will simply go away.

In any event, the end result was a surreal photo album of the "airpocalypse" marathon, perhaps the best harbinger of the globalized future, as of thousands of people jogged across downtown Beijing in gasmasks.

At least there was no Ebola scare to force the runners to wear full Hazmat suits...

The #2014BeijingMarathon has started amid heavy #smog.

— CCTVNEWS (@cctvnews) October 19, 2014

Crazy #China! Marathon tough enough - air for #Beijing #marathon 20x @WHO safe level. Face masks on. (@Pic: @PDChina)

— Jon Williams (@WilliamsJon) October 19, 2014

Beijing marathon today.

— Wei Gu (@weigu) October 19, 2014

Running #BeijingMarathon in a gas mask -- Big thx to @china_chas who spoke to @BBCWorld:

— Silvia Costeloe (@scosteloe) October 19, 2014

As if a marathon wasn't hard enough - #BeijingMarathon runners wear masks to combat smog

— BBC News (World) (@BBCWorld) October 19, 2014

On your marks, get set, wheeze! Beijing marathon sets off in heavy smog.

— jonathanwatts (@jonathanwatts) October 19, 2014

Some of the runners have given up in the 2014 Beijing Marathon due to the serious air pollution in Beijing.

— People's Daily,China (@PDChina) October 19, 2014

Beijing marathoners just ran through pollution more than 13 times the level considered safe.

— Mashable (@mashable) October 19, 2014

Beijing Marathon runners forced to wear masks to combat smog (PHOTO: AP)

— Fox News (@FoxNews) October 19, 2014

Wealth Inequality Is Not A Problem, It’s A Symptom

From Raúl Ilargi Meijer of The Automatic Earth

Wealth Inequality Is Not A Problem, It’s A Symptom

A comment on an article that comments on a book. I don’t think either provides, for the topic they deal with, the depth it needs and deserves. Not so much a criticism, more a ‘look further, keep digging, and ye shall find more’. And since the topic in question is perhaps the most defining one of our day and age, it seems worth it to me to try and explain.

The article in question is Charles Hugh Smith’s Why Nations (and organizations) Fail: Self-Serving Elites, and the book he references is Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James Robinson.

Charles starts off by saying:

The book neatly summarizes why nations fail in a few lines:


(A nation) is poor precisely because it has been ruled by a narrow elite that has organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it.

The Amazon blurb for the book states that the writers “conclusively show that it is man-made political and economic institutions that underlie economic success (or lack of it)”, and continues with examples used such as ancient Rome, North Korea, Zimbabwe, the Congo, to make the point that some countries get rich and others don’t, because of differences in leadership structures. That in itself certainly seems true, but that doesn’t necessarily make it the whole story.

In the case of the Congo, for instance, the perhaps richest place on earth when it comes to resources, there’s not only the devastating history it’s had to endure with incredibly cruel Belgian colonial powers, there’s to this day a lot of western involvement aimed at keeping the region off balance, and feed different tribes and peoples with weaponry up the wazoo, in order to allow the west to keep plundering it. It’s not just about national goings-on, it’s – also – a supra-national thing.

That’s one of two shortcomings in the material, the breadth and width of why nations and organizations fail their people but serve their masters. In the present day, national boundaries, whether they are physical or merely legal/political, are not the best yardsticks anymore by which to measure and gauge events.

The second shortcoming, in my view, is that inequality, a theme so popular that even Janet Yellen addressed it this week in what can only be seen as her worst possible impression of Marie Antoinette, and expressed her ‘worry’ about wealth inequality in America. The very person publicly responsible for that inequality thinks it’s ‘just awful’. Go bake a cake, gramps.

Wealth inequality is but a symptom of what goes on. Charles Hugh Smith has a few graphs depicting just how bad wealth inequality has become in the US. We all know those by now. It’s bad indeed. But where does that come from? Charles touches on it, but still hits a foul ball:

I submit that this dynamic of failure – the concentrated power and wealth of self-serving elites – is scale-invariant, meaning that it is equally true of communities, towns, cities, states, nations and empires alike: all fail when they’re run for the benefit of a narrow elite. There is a bitter irony in the ease with which American pundits discern this dynamic in developing-world kleptocracies while ignoring the same dynamic in America.


One would imagine it would be easier to see the elites-inevitably-cause-failure in one’s home country, but the pundits by and large are members of the Clerisy Upper Caste, well-paid functionaries, apparatchiks, lackeys, factotums, toadies, sycophants and apologists for the very elites that are leading America down the path of systemic failure as the ontological consequence of their self-serving consolidation of wealth and power.

Here’s the thing: especially after WWII, though before that already as well, the western world woke up to the need for international co-operation. Dozens of organizations were established to structure that co-operation. But then, in yet another fountain of unintended consequences, something man is better at than just about anything else, we let those organizations loose upon the world without ever asking what happened to what they were intended for, or whether the original grounds for founding them still existed, and whether they should perhaps be abolished or put on a tight leash.

These are questions that should be asked about any large-scale organization. Be they multinational corporations, global banks, Google or indeed the United States of America. We can’t just assume these powers, which gather more power as time goes by, share and serve the purposes of the people. What if they gradually come to serve only their own purpose, and it contradicts that of the people? Should we not get that leash out?

Turns out, we never do. If someone would suggest today to break up the USA, because its present status contradicts that which the Founding Fathers had in mind (and there are plenty of arguments to be made that such contradictions exist in plain view), (s)he would not even be sent to a nuthouse, because no-one would take him/her serious enough to do so.

But wealth inequality still rises rapidly within America, and it doesn’t serve the people. So why does it happen, and why do we let it? Because the inequality that matters most is not wealth, but power. And we’ve been made to believe that we still have that power, but we don’t. Voting in elections has the same function today as singing around a Christmas tree: everyone feels a strong emotional connection, but it’s all just become one giant TV commercial.

Even if families are genuinely happy to meet up and exchange gifts and stories, it’s all modeled after the building blocks handed to us by chain stores. It isn’t really our story anymore, and Jesus certainly wasn’t born in a manger: he was born in a MacMansion and the first thing the child saw was his mom’s fake boobs, a wall-sized TV and an iPhone.

In that same vein, we lost the stories bitterly fought and suffered for by our grandparents through two world wars and the brutal invasions of Vietnam and Iraq, the stories of how we can best keep ourselves safe and out of – international – trouble. Not just military trouble, but economic and political trouble. These things are no longer our decision. We founded supra-national, indeed global, institutions for that. And then let them slip out of our sight.

The US is a bit of an outlier here, simply because it’s older. But the IMF, the World Bank, UN, NATO and the EU absolutely all fit the picture of organizations that have – happily – grown beyond our range of view, and that exhibit the exact same inverted pyramid characteristics we see on wealth inequality, only for these organizations it’s not wealth that floats and concentrates increasingly from the bottom to the top, it’s power.

Wealth comes after that. And one shouldn’t confuse that order. Because power buys wealth infinitely faster than wealth buys power.

All these supra-national institutions were established with good intentions – at least from some of the founders. But then we forgot, ignored, to check on them, and they accumulated ever more power when we weren’t watching (we were watching TV, remember?)

And what we see now is that any effort, any at all, to break up the IMF, World Bank, UN, NATO and EU would be met with the same derision that an effort to break up the USA would be met with. We have built, in true sorcerer’s apprentice or Frankenstein fashion, entities that we cannot control. And they have taken over our lives. They serve the interests of elites, not of the people. So why do we let them continue to exist?

What powers do we have left when it comes to bailing out banks, invading countries, making sure our young people have jobs when they leave school? We have none. We lost the decision making power along the way, and we’re not getting it back unless we quit watching the tube (or the plasma) and fight for it. Until we do, power will keep floating to the top like so much excrement; it’s a law of – human – nature.

That the people we voluntarily endow with such control over our lives would also use that control to enrich themselves, is so obvious it barely requires mentioning. But that doesn’t mean this is about wealth inequality, that’s not the main issue, in fact it’s not much more than an afterthought. It’s about the power we have over our lives. Or rather, the power we don’t have.

Reading The Road Map To A Police State

Submitted by Aaron Tao via Ludwig von Mises Institute,

Rise of the Warrior Cop: The Militarization of America's Police Forces, by Radley Balko, PublicAffairs, 2013

"There is no crueler tyranny than that which is perpetuated under the shield of law and in the name of justice." —Charles de Montesquieu

If there was any silver lining to the horrifying events that took place in Ferguson, Missouri which riled the month of August, it has finally brought the issue of police militarization to the forefront. As outrageous as the police shooting death of unarmed 18-year-old Michael Brown was, the brutal law enforcement response in the form of running roughshod over the First Amendment and resorting to quasi-martial law to mostly peaceful protests by local residents and activists was worse. To many observers, what took place in a Midwest suburb was indistinguishable from scenes out of occupied Iraq.

How did this happen? For an answer, the writings of investigative journalist Radley Balko are an invaluable resource. Perhaps more than any other person, Balko has reported substantially on police militarization and injustice across the country for years.

The full details can be found in his book Rise of the Warrior Cop: The Militarization of America's Police Forces . This important book, which was recently released in its paperback edition, could not have arrived at a better time. Despite going into an intellectually rigorous analysis of law, politics, and history, Balko has a gift for storytelling, which highlights many heartbreaking stories and makes Rise of the Warrior Cop an accessible and gripping read.

In the introduction, Balko begins with the provocative question:

How did we evolve from a country whose founding statesmen were adamant about the dangers of armed, standing government forces — a country that enshrined the Fourth Amendment in the Bill of Rights and revered and protected the age-old notion that the home is a place of privacy and sanctuary — to a country where it has become acceptable for armed government agents dressed in battle garb to storm private homes in the middle of the night — not to apprehend violent fugitives or thwart terrorist attacks, but to enforce laws against nonviolent, consensual activities?

In the first chapter, Balko traces classical history and its lessons on America’s Founders as well their own experiences under British rule. As students of the Enlightenment, they were familiar with how the Roman Republic was overthrown by ambitious military leaders and how the Praetorian Guard in the Empire era, which not only acted as bodyguards for the emperor but also took on many policing roles as well, was responsible for much political intrigue and instability. In the lead-up to the American Revolution, British authorities used the hated writs of assistance to enforce tax laws and to crackdown on contraband in the colonies. This type of general warrant allowed for authorities to “search broad groups of people, for evidence of any number of crimes, sometimes over long stretches of time.” As bad as they were, Balko noted that in contrast to what police can do today, the writs of assistance could not be exercised at night and they required a knock-and-announcement before entry into a private home. Finally, it was the deployment of British soldiers to enforce the law that brought long-simmering tensions to a boil. After the Revolutionary War, with these abuses still fresh on their minds, the Founders framed and ratified a Constitution with a Bill of Rights.

The Fourth Amendment, in particular, was written explicitly to prohibit general warrants and to reinforce the Castle Doctrine, an even older principle carried over from the British common law that can be traced back to antiquity. The Castle Doctrine simply reinforces the timeless idea that "a man’s home is his castle." As explained by Balko:

Implicit in the sentiment is not only the right to repel criminal intruders but also the idea that the state is permitted to violate the home's sanctity only under limited circumstances, only as a last resort, and only under conditions that protect the threshold from unnecessary violence. Thus, before entering without permission, government agents must knock, announce and identify themselves, state their purpose, and give the occupants the opportunity to let them in peacefully. … The announcement requirement under English law was not a formality, as it has become in police raids today. It was elemental. Its purpose was to give the homeowner the opportunity to avoid violence, distress, and the destruction of his property.

Balko also goes into interesting detail regarding the Third Amendment, the "runt piglet of the Bill of Rights," which contains the seemingly antiquated provision that prohibits the quartering of soldiers in private homes. The case law pertaining to the amendment is scant but Balko asks us to consider why the Founders placed such an importance on it. Read in light of the Castle Doctrine, it makes sense that those who revere the principle that "a man’s home is his castle" would not tolerate their homes being occupied by soldiers. But most importantly, "the amendment was a placeholder for the broader aversion to a standing army. … It represented a long-standing, deeply ingrained resistance to armies patrolling American streets and policing American communities."

Until the Civil War and Reconstruction, active duty troops were rarely if ever used for domestic law enforcement. In the early American republic, law enforcement was left mostly in private hands. Close-knit communities with shared values relied mostly on social stigma and shaming to maintain order. Professional full-time prosecutors didn’t exist, and it fell upon crime victims themselves to initiate the charges before a grand jury, a panel of private citizens who had the power to indict. The citizen militia was called out for only the worst cases that required force. But as urbanization advanced and an increasingly diverse population grew, it brought the need for changes.

One particularly interesting historical fact noted by Balko is that after the fall of Rome, centralized metropolitan police forces were not to be formed for almost another two millennia. In places that developed strong civil liberties traditions such as England and the American republic, people remained suspicious of standing armies, martial law, and powerful executives. In the United States, the New York Police Department (NYPD) was not formed until 1845. Modeled after London’s famous "bobbies," political leaders had to wage major public relations campaigns to win over the trust of citizens. Major efforts were taken to distinguish the police from soldiers, and to ensure they were responsive to elected officials and the public. But in many jurisdictions, the police became a little too responsive to politicians, acted as corrupt henchmen for anyone who won office, and oppressed minorities and outsiders. The issue of police corruption was serious enough that it became a plank in the progressive movement by the early twentieth century. Reformers introduced the concept of professionalism which "transformed the job of police officer from a perk of patronage to a formal profession with its own standards, specialized knowledge, and higher personnel standards and entry requirements." Although it helped address the problem of corruption, this new policy began to subtly separate the police from the communities they supposedly served and protected.

The meat of Balko’s story focusing on police militarization began in the 1960s. During this time, the civil rights, antiwar, and counterculture movements became very active while the overall crime rates soared. As the liberal Warren Court expanded the rights of the accused in a number of notable rulings, the law-and-order types became greatly alarmed that society was falling apart. As his critics on the right continued their attacks that he was "soft" on crime, President Lyndon B. Johnson oversaw the creation of two government institutions to fight crime that would have huge future ramifications:

  1. the Bureau of Narcotics and Dangerous Drugs (BNDD), which eventually would become the modern Drug Enforcement Agency (DEA), the leading government agency fighting the War on Drugs.
  2. the Law Enforcement Assistance Administration (LEAA), to "stream the federal funding, equipment, and technology to state and local law enforcement agencies."

This would go on to set a large precedent for future programs like Byrne grants and the Pentagon’s 1033 program as "Johnson’s successors would quickly discover that introducing a funding spigot like LEAA, then threatening to pull it away, was an effective way to persuade local police agencies to adopt their preferred polices."

The modern War on Drugs would officially begin under President Richard Nixon after winning on a law-and-order campaign and appealing to the “Silent Majority.” The focus of the Nixon’s administration’s anticrime effort would be on drugs, which they thought was the common denominator among racial minorities, the counterculture, and the antiwar movement that alienated “ignored America.” The Nixonites pushed for massive funding for the BNDD and LEAA, demanded no-knock warrants for federal drug agents, and even temporarily shutdown the U.S-Mexican border in Operation Intercept. In 1969, the first SWAT raid was carried out in Los Angeles against the Black Panthers. Despite the raid being a disaster "practically, logistically, and tactically," it was a major success in public relations and SWAT teams would spread to nearly every city in America in the following decades. Despite being originally designed for emergency situations where violence was needed to end violence such as bank robberies and hostage scenarios, mission creep was unavoidable and SWAT teams would go on to be used for everything from breaking up neighborhood poker games, enforcing underage drinking laws, and performing regulatory inspections, as meticulously documented by Balko. Fast forward to modern day, it is now estimated that SWAT raids occur up to 40,000 times per year across the United States.

This can be traced back to the Reagan administration when SWAT tactics began to be increasingly used in fighting the drug war. Hardliners in his administration saw a "biblical struggle between good and evil, and in the process turn[ed] the country’s drug cops into holy soldiers." Noting the inconsistent reverence supposed limited government conservatives have for Reagan, Balko had this to say:

Conservatives had always held the somewhat contradictory position that government can’t be trusted in any area of society except when it comes to the power to arrest, detain, imprison, and execute people. But Reagan didn't dance around the contradiction, he embraced it. He blamed crime on big government — and in the same breath demanded that the government be given significantly more power to fight it.

Under Reagan, the FBI was brought into enforcing drug laws, health professionals who favored treatment for drug abusers were purged from the bureaucracy, and sweeping new policies such as civil asset forfeiture (the legal theory that property itself can be guilty of a crime and be seized without the owner even being charged) were embraced. Perhaps the most radical action was that Reagan sought to amend the Posse Comitatus Act and bring the military into the Drug War.

Balko notes that:

By the end of the 1980s, joint task forces brought together police officers and soldiers for drug interdiction. National Guard helicopters and U-2 spy planes flew the California skies in search of marijuana plants. When suspects were identified, battle-clad troops from the National Guard, the DEA and other federal and local law enforcement agencies would swoop in to eradicate the plants and capture the people growing them.

After Reagan was succeeded by Vice President George H.W. Bush, the same course continued. Bush Sr. appointed hardliner Bill Bennnet (who once called for beheading drug dealers on Larry King live and even "urged children to turn in their friends who used drugs to the police") as drug czar and ramped up rhetoric that the drug war was a moral crusade between good and evil. Drug treatment programs were stripped of funding, while additional cash flowed into law enforcement and new prison construction. Perhaps the most significant were the Byrne grants that were created in a 1988 crime bill which would send billions in federal cash to police departments over the next twenty-five years and allow "the White House another way to impose its crime policy on local law enforcement." But in Balko’s view, the program's most harmful legacy was the "creation of hundreds of regional and multijurisdictional narcotics task forces" that were often unaccountable and financially rewarded for making many busts in the following decades.

Reformers and activists hoped the election of Bill Clinton would bring changes to the War on Drugs but sadly, that would not be the case. Instead, Clinton "encouraged paramilitary raids against low-level offenders — even users" and cracked down hard on medical marijuana facilities in order to send a political message despite legalization in a number of states. In addition, the Bryne grants picked up steam as they incentivized "police departments across the country to prioritize drug crimes over other investigations." Perversely, the funds were awarded based on the "number of overall arrests, the number of warrants served, or the number of drug seizures." As a result, actually reducing crime was not favored and instead, grants were given to police departments that were making lots of seizures regardless of size and easy arrests (e.g., low level drug offenders).

During this time, the Supreme Court continued to whittle away the Fourth Amendment and further militarization was promoted through the creation of infamous 1033 program as relationships between the federal government and local police departments deepened. High-profile tragedies in the 1990s involving heavily militarized law enforcement such as Ruby Ridge and the Waco Siege served mostly as partisan fodder as the right temporarily became critics only to fall silent when George W. Bush became President.

Bush Jr. followed the moral crusade script and continued the paramilitary raids against medical marijuana facilities and patients despite some initial lip service to federalism. After the September 11th terrorist attacks, drug warriors did not fail to waste a good crisis and used the opportunity to attempt to link the new fear of terrorism to drug use. In addition, the new War on Terror created another "ratchet effect" that ballooned an already-growing National Security State and furthered militarized the police. Thanks to generous anti-terrorism grants from the Department of Homeland Security which dwarfed even the 1033 program, police departments across the country upgraded their arsenals with automatic weapons, drones, armored vehicles, and other military equipment. But since terrorist attacks are incredibly rare, police used their new gear for drug raids instead. Meanwhile, the Supreme Court continued its siege on the Castle Doctrine and the Fourth Amendment with its decisions in United States v. Banks and Hudson v. Michigan.

Many people desiring "hope and change" put their faith in Barack Obama for a drug war détente and an overall repudiation of the Bush policies, but as with what happened with Clinton, they were in for a very bitter disappointment. Obama expanded the trend of police militarization by pouring a record $2 billion into the Byrne grants. This was part of his 2009 economic stimulus package, overseeing "more federal raids on marijuana dispensaries in four years than George W. Bush had presided in over eight," promoting greater forfeiture takings by the Justice Department, and continuing to give away hundreds of millions in federal surplus military equipment to local and state police departments.

Near the end of the book, Balko offers a number of proposed reforms to rollback police militarization and restore the workings of a free society. These ideas include the practical as well as politically unattainable, but at very least, provide a working road map:

  1. Scaling back and ending the War on Drugs.
  2. Halting SWAT mission creep such as prohibiting their use by regulatory agencies.
  3. Increasing transparency such as detailed warrant tracking and requiring the use of body cameras on raids where the videos could then be made public upon request.
  4. Embracing authentic community policing by “taking cops out of patrol cars to walk beats and become a part of the communities they serve” to rebuild trust among the people they serve.
  5. Changing police culture by moving away from “us versus them” combat mindset and toward emphasizing counseling and dispute resolutions for resolving conflict in routine problems.
  6. Increasing accountability and ensuring police are not above the law by imposing stronger liability on officers who make egregious errors (this proposal would most likely be fought tooth-and-nail by police unions).

Even as more people awaken to the realities of a growing police state, the challenges to restoring a free society are vast and likely to be resisted every inch of the way by entrenched interests. As Abigail Hall and Christopher Coyne pointed out in their political-economic analysis of police militarization in the Spring 2013 issue of The Independent Review:

Government agencies’ inherent tendency is to expand beyond their designers’ initial aims and goals. Special-interest groups exacerbate this problem by seeking to expand their power and influence. The onset of crises — whether real or manufactured — begins a long, far-reaching process that erodes the already imperfect constraints on the government’s power … citizens must become skeptical of the possibility of establishing permanent constraints on government power. This skepticism ultimately requires recognition and appreciation of the realities of government power and a rejection of government action as a solution to the perceived crises.

After reading through Rise of the Warrior Cop, if there be a single lesson we should grasp, it is that police militarization and the War on Drugs are intimately tied. The former cannot be reversed unless the latter is ended. Thanks to the War on Drugs, the Castle Doctrine crumbled, the United States ended up with the largest incarcerated population in world history, and the Officer Friendlies of yesteryear have been replaced by a de-facto standing army clothed like Darth Vader.

There is a wide range of opinions among commentators today on what extent the United States is becoming/is a police state. In Balko’s conclusion, "it would be foolish to wait until it becomes one to get concerned." If you were at all disturbed by the events in Ferguson or wondering why your local police department has an armored vehicle with a belt-fed, turreted .50 caliber machine gun, you owe it to yourself to read this book.

Why Abenomics Failed: There Was A "Blind Spot From The Outset", Goldman Apologizes

Ever since Abenomics was announced in late 2012, we have explained very clearly (for example here, here, here, here, here, here and here) that the whole "shock and awe" approach to stimulating the economy by sending inflation into borderline "hyper" mode in a country whose main problem has to do with an aging population demographic cliff and a global market that no longer thinks Walkmen and Sony Trinitrons are cool and instead can find all of Japan's replacement products for cheaper and at a higher quality out of South Korea, was doomed to failure.

Very serious sellsiders, economists and pundits disagreed and commended Abe on his second attempt at fixing the country by doing more of what has not only failed to work for 30 years, but made the problem worse and worse.

Well, nearly two years later, or roughly the usual delay before the rest of the world catches up to this website's "conspiratorial ramblings", the leader of the very serious economist crew, none other than Goldman Sachs, formally admits that Abenomics was a failure, and two weeks after Goldman also admitted that now Japan is informally (and soon officially) in a triple-drip recession, begins the scapegoating process when in a note by its Naohiko Baba, it says that Abenomics failed because all along it was based on two faulty "misconceptions and miscalculations." Ironically, the same "misconceptions and miscalculations" that frame the Keynesian "recovery" debate in every insolvent developed world country which is devaluing its currency to boost its exports and economy, when in reality all it is doing is propping up its stock market, allowing the 1% of the population to cash out and leaving the 99% with the economic collapse that inevitably follows.

So what happened with Abenomics, and why did Goldman, initially a fervent supporter and huge fan - and beneficiary because those trillions in fungible BOJ liquidity injections made their way first and foremost into Goldman year end bonuses  - change its tune so dramatically? Here is the answer from Goldman Sachs.

Blind spot from the outset in “weak yen = export recovery” scenario


A weak yen boosts export price competitiveness, fueling a recovery in export volume that supports a sustained economic recovery via improved corporate earnings, capex recovery, and wage growth. At least, this was the scenario painted when bold monetary easing was launched as the first arrow of Abenomics to induce yen depreciation. Government officials and market participants alike believed for a long time that the yen’s rapid depreciation thereafter would at some point drive an export recovery. However, a tangible recovery in export volume is yet to materialize.


Actually, this is not the first time a weaker yen has failed to revive exports. Since the 1990s, Japan has experienced four phases of yen appreciation followed by  depreciation, but in none of those phases was there any clear correlation between exchange rate and export volumes. Equating yen depreciation with export recovery would appear to invite multiple misconceptions and miscalculations (see Exhibit 1).



Firstly, a weaker yen does not necessarily result in lower export prices (on a local currency basis). Since a weak yen also increases exporters’ input prices, it is  unlikely that export prices will fall at the same rate that the yen declines in value. Export prices also have a more limited impact on export volume than global demand, making the latter a more important determinant for exports.

Odd: nobody could think of any of this before Abenomics was launched resulting in the largest domestic misery in Japan in over three decades?

The combination of these two misconceptions has led to a miscalculation about the latest phase of yen depreciation. Export prices have not decreased as much as in past yen depreciation phases and global demand has lacked vigor. Fiscal austerity, chiefly in the US and Europe and implemented around the same time as Abenomics, has weighed on activity, resulting in a muted global economic recovery. This alone is a key factor behind the miscalculation of the export recovery scenario, in addition to which Japan’s export volume has been less responsive to global demand than before.

Let the scapegoating begin: here are the two misconceptions why, according to Goldman, Abenomics failed:

Misconception 1: Export prices do not fluctuate as much as forex


It appears to be commonly accepted that a strong yen increases export prices and lowers export volume, negatively impacting the Japanese economy, whereas a weak yen lowers export prices, raising the price competitiveness of Japanese products and in turn spurring an export recovery, with positive implications for the economy. We see two misconceptions here. First is that export prices do not fluctuate as much as forex. When the yen is strengthening, prices of Japanese products rise on a local currency basis and price competitiveness falls, while the opposite is true when the yen is weakening. However, in past yen depreciation phases, export prices on a contract currency basis have only fallen by around 30% of the rate of yen depreciation. Looking at the 12-month average, excluding extreme forex movements, the fluctuation in export prices is minor (see Exhibit 2).



Given that imported input costs fall and that hiking export prices undermines competitiveness when the yen is strong, the gap between the rate of yen appreciation and the degree of increase in export prices is large. In phases of yen depreciation, yen-based input prices rise, so covering higher costs does not require export prices to fall as much as the yen declines in value.


Miscalculation 1: Export prices have not fallen as much as in past phases of yen depreciation


One miscalculation regarding the current phase of yen depreciation is that the decline in export prices relative to how far the yen has weakened has been milder than in past phases of yen depreciation. This is because rising crude oil prices and other fuel-related costs have inflated manufacturers’ input prices by 6.1% on aggregate since September 2012 and manufacturers have not been able to lower export prices and at the same cover the higher input costs. When the yen weakened in 1995-1998 and between late 1999 and early 2002, manufacturers’ input prices fell only marginally despite higher import prices driven by the weak yen. This made it easy for manufacturers to lower export prices to factor in the weaker yen. Conversely, when the yen depreciated between 2004 and 2007,  manufacturers’ input prices rose 20% on aggregate on sharply higher crude oil prices, and they were able to hike export prices (see Exhibit 3).



We see other factors behind the narrower decline in export prices this time. One is external considerations regarding government-led efforts to rapidly weaken the yen since the launch of Abenomics. The US has supported the BOJ’s quantitative and qualitative easing as a means of helping Japan escape deflation. However, concerns about the yen’s sharp depreciation are evident within the US. In January this year, US Treasury Secretary Jacob Lew made comments seeking to curb excessive yen weakness, saying that Japan would not see long-term growth if it overly relies on the forex rate. More recently, on September 22, William C. Dudley, president of the Federal Reserve Bank of New York, said that if the US dollar were to gain substantially in value then trade figures would worsen, impacting economic growth. Partly because US midterm elections are looming, there is consideration on the Japanese export industry side not to cause trade friction by using the weak yen to lower export prices and provoke a backlash from the US auto industry and other exportrelated sectors. We believe this stance is also intended to give Japan an advantage in remaining negotiations with the auto sector in the final stages of Trans-Pacific Partnership (TPP) talks. Therefore, we think one reason the 25% fall in the value of the yen has not led to lower export prices is foreign diplomacy and trade friction considerations.


It is also possible companies have not ventured to lower export prices. The Development Bank of Japan (DBJ) has conducted a survey asking manufacturers why they have chosen to keep manufacturing functions in Japan. Interestingly, 54% of respondents cited mother factories (for production of core components) and 27% high-value-added production as key factors after management and R&D. Mass production of commodity products was a low 7.6%. An even higher percentage, more than 60%, cited product and service quality and performance as sources of their competitiveness, while a mere 1% said the currency afforded them a competitive advantage. Products still manufactured in Japan for export tend to offer high-value-added with strengths in terms of quality and performance, or are essential core components with high price and volume elasticity (i.e., products whose sales volumes increase if local sales prices fall), as opposed to mass-produced items. We think Japanese companies may also feel they can preserve the brand image of Japanese products as offering high-value-added and high  performance by maintaining a certain local sales price. For the above reasons, we think Japanese companies in the latest phase of yen depreciation have likely adopted a strategy of securing yen profits arising from the currency’s lower value without cutting export prices (See Exhibit 4).



Misconception 2: The key determinant of export volumes is global demand, not prices


The second misconception is the commonly held belief that export volumes will recover if prices of Japanese products fall in export markets. Even in past yen depreciation phases the correlation between export prices (contract currency basis) and export volumes has changed from time to time, meaning lower export prices do not always translate into higher export volumes. From the end of 1999 in particular, although export prices dropped sharply as the yen weakened due to the BOJ’s zero interest rate policy and quantitative easing, export volumes also slid in the face of cooling overseas demand resulting from the bursting of the IT bubble.



In short, overseas demand is the key determinant of Japan’s real exports. Indeed, exports and our Global Leading Indicator (GLI), a gauge of global economic trends, are closely correlated (see Exhibit 6).



Miscalculation 2: Elasticity of export volume versus global demand falls, global demand softens


A major miscalculation in the latest phase of yen depreciation is that global economic recovery has been muted owing to fiscal austerity undertaken mainly in the US and Europe during 2013. That the export volume reaction to global demand has been weaker than in the past has acted as a further headwind against the Japanese export recovery scenario. Comparing our export volume model calculations, in which export prices and GLI are explanatory variables, with actual export volume, we note that the latter has been constantly below the former since around the March 2011 earthquake (see Exhibit 7).



We see several reasons why Japan’s export volume has not kept pace with the global economy: (1) Japanese companies have offshored production; (2) Japanese products are now less competitive than overseas products from other Asian economies and elsewhere; and (3) Japanese companies have adopted a strategy of emphasizing quality and brand and decided not to lower prices to gain global share (see Exhibits 8 and 9).



We think exports have failed to recover during the latest yen depreciation phase due to several misconceptions and miscalculations: (1) Yen weakness does not necessarily result in a decline in export prices and this has been the case more so this time; (2) the impact of lower export prices on export volume is far more limited than global demand (GLI) in the first place; (3) despite the correlation between GLI and export volume, the offshoring of production and lower competitiveness of Japanese products have resulted in export volume being consistently below GLI since the March 2011 earthquake; and (4) the lackluster US and European economic recoveries have raised the risk of a further slowdown.

There is more, but the point is clear: we hear your apology loud and clear, Goldman, and we accept it - after all you couldn't possibly tell the truth two years ago when this Keynesian insanity, which incidentally is being tried everywhere around the globe and will have the same results, was about to begin.

And now, where is Abe's Imodium? He is going to need it.

Mind "The Asian Dollar Short" - Another Ticking Time Bomb Gifted By The Central Banks

Submitted by Jeffrey Snider of Alhambra Partners via Contra Corner blog,

The PBOC continues along with its path of “targeting” liquidity rather than “flooding” as has been done in the past. Expectations for Chinese action, however, seem to be resistant to getting that message. This is not something that is just now being applied, as if a sudden and unanticipated change in thinking. The entire default drama at the beginning of this year was intended to signal that the “flood” was ending, though I think the PBOC failed to follow that up for fear of further upset.

The entire point of the now-prominent SLF is exactly this targeted approach. The Wall Street Journal reports that this continues to be the only conduit the PBOC is willing to utilize.

China’s central bank is planning to inject up to 200 billion yuan ($32.8 billion) into some 20 large national and regional banks, according to banking executives briefed on the matter, in another step aimed at spurring the world’s second-largest economy.


The move—which is expected to channel money to areas the government deems important, such as public housing and small business—marks the latest of a series of targeted easing measures meant to arrest a slowdown in China’s economic growth. Last month, the People’s Bank of China pumped 500 billion yuan into the country’s five major state-owned banks.

Until this year, slowing growth had almost universally been met with broad-based monetarism, including rate cuts in the repo market. Add that history to the growing sense that the Chinese economy may be worse than feared, and the “market” expectation for a new “flood” is somewhat understandable (particularly given the almost haphazard approach in practice), however misplaced. Central banks are into an age of secular stagnation in their thinking which is a total re-assessment of past behavior. In other words, they finally (FINALLY) recognize that the costs of “flooding” the world with economically useless and inefficient monetarism are high, and that the benefits are far too scarce (though almost everyone loves those asset prices, at least on the way up).

Not only is this a full part of the PBOC action now, it is the foundation, I believe, behind what the ECB and even Fed are doing. As I wrote exactly a month ago:

That means not only is China eschewing broad liquidity expansion contrary to what is so often proclaimed, but rather the PBOC is actually recognizing, as are most other central banks, just how ineffective monetarism has been and can be. Furthermore, they are also under less illusion about the high cost of past monetarism, now looking to try to “thread the needle” of some monetary expansion that will not disturb the housing sector (bubble) in either direction. Call it managed decline or targeted growth without bubbles; whatever it is, it is a preposterous-sounding position to take.

But not everything is as it seems. While the PBOC may be taking a stand on monetarism and its character, it has been very curious that the yuan has not fully participated in the dollar turmoil marking so many other “dollar” dependent nations. While the yuan’s appreciation trend may have been altered, that has not led again to the kind of disorder that marked the currency earlier in the year.

Maybe that is due, at least in part, to these expectations that the PBOC will eventually relent on its new approach, but I also think that the PBOC is at least looking the other way on some of the “old tricks” that supported the Chinese version of the dollar short.

Analysts at banks including Everbright Securities Co., Australia & New Zealand Banking Group Ltd. and Bank of Communications Co. said over-invoicing and over-reporting may explain the 34 percent surge in exports to Hong Kong from a year earlier.


A discrepancy between Hong Kong data for imports from China and Chinese figures for exports to the city in the past highlighted the practice of over-invoicing that’s used to disguise capital inflows to bet on China’s rising currency. China’s exports increased 15.3 percent from a year earlier, the biggest increase since February 2013 and beating the 12 percent median estimate in a Bloomberg survey of analysts, according to government data released yesterday, prompting deja vu for some.

Aside from the second paragraph where I believe the author attributes the wrong factor (not to “bet on China’s rising currency” but rather to keep the flow of dollars to the Chinese corporate sector that is very short), the description and the timing of this potential “error” sets it within the context of the rapid and dramatic “rise” in the “dollar.” The pressure was at its greatest in September, as the real and ruble can ably attest.

I think that is a second unappreciated change that is taking place, and in some respects has already taken place. The dollar short was very European-centric in the 2000’s, owing to their ready participation in the housing bubble in the US (and I would even argue that the bubble itself was largely based on that European short). Since August 2007, Europe has withdrawn somewhat, if only in terms of marginal participation. That, however, does not mean that the dollar short goes away with Europe’s retrenching.

Jason Fraser of Ceredex Value Advisors alerted me to a recent IMF study, publicized here in the Financial Times, that “found” Asian corporations are more short dollars than previously estimated:

Residents of emerging markets owe hundreds of billions more dollars (and euros) than previously thought, because they have sold bonds offshore that don’t get counted in national statistics…


This borrowing creates a currency mismatch. As long as the dollar (or euro) doesn’t appreciate too quickly against the borrowers’ local currencies, the debts can be easily serviced. The danger is that these large short positions could cause a squeeze and create a desperate search for scarce dollars — exactly what happened in 2008.

I’m not sure I agree with the author’s tense on the squeeze – “could cause” maybe should be rethought to “has caused” given what transpired in August and September. Perhaps that was limited to Europe, Brazil and the usual suspects while the Asian shorts, as Chinese were over-represented, were steadied by the Hong Kong mess (which would have been collateralized by some real good or commodity).

And that brings us back to the basic analysis of the dollar short – nobody really knows much about it. It exists independent of any statistical measure and in far too many cases, including and especially policymakers, independent of knowledge and experience (closed system? The dollar short is the empirical refutation of all closed system approaches in economics). As it is in 2014 we are still finding out it is probably bigger (IMF) and more widespread than even thought now after seven years of close involvement with it.

That makes the indirect indications provided by TIC and dollar “flows” all that more concerning, especially as they represent a sort of proxy for liquidity health and systemic capacity. At some point it may become necessary for “someone” to provide all these “dollars” and if everyone is all short then there will be no one left to take up that side (rerun of 2008).

Maybe it is enough to hope that the Fed will act, but history is conclusive that they will do so only after it is obvious; which is, by then, far too late. In that respect, the dollar “tightening” in both 2013 and now in 2014 has reinforced that history. But there is another element to consider, the PBOC being representative – that the “flood” approach is now pretty much discredited as a monetary measure. That would seem to suggest if the dollar short grows far more problematic, then central banks may not just be behind the curve in their planning but also and actually reluctant to step into that void with what would have to be a “flood” since doing so would refute their “evolution” in the other direction. That would certainly suggest a reason for allowing the Hong Kong “fraud” to return. Central banks are loathe to do many things, but at the top is admit mistakes.

Market Uncertainty Has Never Been Higher

The CBOE's VVIX Index, "an indicator of the expected volatility of the 30-day forward price of the VIX" reached extreme levels this week. While all eyes are firmly focused on the to-ing and fro-ing of VIX (the so-called 'fear' indicator), it is the uncertainty of that fear (or greed) that is exploding as VVIX measures. Simply put, the chance of VIX doubling, or tripling, in the next 30 days (which include the final POMO and Fed 'end of QE' meeting), has never been higher.



Chart: Bloomberg

Markets & Ebola: Confusion, Containment, & Complexity

Via Scotiabank's Guy Haselmann,

Ebola Must Be Contained Now

President Obama and western governments are beginning to appreciate the scale of the Ebola crisis.  Unfortunately, the highly deadly virus remains rampant in western Africa and is spreading there at an alarmingly exponential rate.  Playing defense by trying to defend our borders will be insufficient since infected travels will not be identified give the long incubation period.  However, health officials are doing an admirable and prudent job immediately quarantining all victims and tracing all of their contacts.

Yet, the West must play offensive and snuff the virus out at its source. Stopping Ebola in western Africa is the only way that the virus will be beaten.  At the moment, entire societies are tragically being ravaged. These countries need desperate help, because, unlike in the West, they have poorly-equipped health care systems.  Spending more today will save much more money later. The world is too interconnected to allow the virus to move from remote areas to large urban areas.  

Nigeria did a masterful job preventing an outbreak when an infected person arrived in Lagos, a city of 11 million people.  However, not all large metropolitan areas are equipped to do so well.  There are 850 urban areas in the world with populations of 500,000 or more.  There are 26 cities that qualify as a ‘megacity’ or a city whose population is greater than 10 million people or more.   To put it in perspective, New York City is ranked 7th in population with 20 million people, but surprisingly it has the lowest population density of any ‘megacity’.

Other megacities: Tokyo 37M, Jakarta 26M, Seoul 22M, Delhi 22M, Manila 22M, Shanghai 20M, Sao Paulo 20M, Mexico City 19M, Cairo 17M, Beijing 17M, Osaka area 17M, Mumbai 17M, Guangzhou area 16M, Dhaka 15M, L.A. 15M, Kolkota 15M, Karachi 14M, Buenos Aires 13m, Istanbul 13M, Rio de Janeiro, 12M, Lagos 11M.

Clearly, many of these countries do not have adequate public health facilities to deal with Ebola.

(For sake of argument, ‘Urban area’ is defined as a continuous urban development within a metropolitan area whose physical form constitutes the essence of a city.)

There are two less obvious or less discussed economic reasons why the Obama administration may be urgently focusing more on the Ebola crises.  Flu season is about to start and the symptoms of Ebola resemble those of the Flu.   Some people with flu symptoms are likely to irrationally panic.  There are likely to become numerous and frequent headlines about people being tested for Ebola-like symptoms and they might begin to impact financial markets.  Hospitals could be overwhelmed particularly due to the vast requirements in terms of the facilities and personnel necessary in order to treat such a patient.

According to the US Census Bureau, there are over 40 million Americans who do not have health insurance.   These people are more likely to not seek medical attention at all, thus significantly increasing the risk that the virus will be spread.  The West needs to do ‘whatever it takes’ to stop Ebola immediately before one traveler brings it to a large city and we are looking at 1918 comparisons. Moreover, the desperate people in Western Africa deserve and require a global response.  For markets, the outcome is binary.

Counter-Productive Micromanagement

The Fed’s message is too complex with too many contingencies and churned with too many mixed signals.  Bullard’s comments yesterday are a case in point. One moment he says he has become ‘uncomfortable’ with official rates at zero (as have others); the next minute he says the FOMC needs to consider continuing QE3 or discussing QE4.  Enough.  Markets understand that the Fed is looking at everything and will act accordingly.   (Note:  I outlined the reasons in my note on Wednesday why continued or more QE is highly unlikely.) 

The Fed must know that there is likely to be a strong negative market reaction during the Fed’s pivot toward normalizing policy.  The recent (hollow) hints recently of more QE have foolishly juiced equity markets just as they were beginning the prudent process of preparing for a less accommodative Fed.  I say “foolishly’, because those comments will increase market volatility as the market will ultimately have to do the recalibration trade all over again.   (My note on Wednesday addressed the reasons why I believe the chances of QE4 are practically zero.)

The level of micro-management by the Fed appears to have reached a new shockingly high plateau. It was already surprising that markets were being told that policy tweaks would be impacted by ‘data dependency’.  Can a $17 trillion complex global economy really be tweaked? What ever happened to the Fed rhetoric that whatever is done now only   funnels into the broader economy 18 months from now?

  • As far as data is concerned, Unemployment Claims reached a 14 year low, which was also the lowest level as a percentage of the workforce in history
  • Once upon a time, the Fed said they were going to hike when the Unemployment Rate hit 6.5%.  Today, the rate is 5.9% and the Fed is not even finished with QE.    

Bullard also cited concern about the fall in the 5-year/5-year expected inflation rate.  Since Fed policies and regulations have monumentally distorted the price of financial securities, how can the FOMC gain any useful information from any market valuations?   Recently prices have been driven more by liquidity, fear, greed, and Fed policy, than by valuation.  It is time that the Fed stops being a source of interference and confusion.

I expect long end Treasury rates to continue to maintain a strong bid at least for the remainder of 2014.  Elevated volatility, credit widening and general risk-off themes will resume again next week.  I expect the 30-year Treasury to march toward lower yields, eventually taking out the lows of the year within the next few weeks.

“Take him by the hand / Make him understand / The world on you depends” – The Doors

Thoughts about the Price Action

After wild swings at midweek (October 15), the US dollar spent the last two sessions of the week consolidating.   While we expect the Federal Reserve will not be distracted by the recent market turmoil, or the softening of some market-based measures of inflation expectations, and will announce the finishing of its asset purchases, we recognize that Bullard's comments cast a greater element of doubt.  This doubt may prevent a resumption of the dollar's uptrend. Broad consolidation is more likely in the days ahead. 


The dollar's advance sat on two legs: Positive developments in the US, that would lead to a Fed rate hike next year and negative developments outside the US.  The second leg remains intact. The first leg has been shaken.   We suspect that many have exaggerated the weakness of the US.   We accept that the Fed's mandates are being approached, and that the drop in oil prices is a net positive for the US, even though investment in the the energy sector may slow.   


The markets will learn this the extent to which the drop in weekly initial jobless claims to a new cyclical low (264k)a fluke around the Columbus Day holiday.  Any reading below 280k is constructive.  The market may also find that although headline inflation in the US may have softened, there may be an upward drift in the core measures, emanating for housing costs.  


The $1.2700-$1.2850 band may contain the euro.   A break down would signal a re-test of the $1.2600 area.  Last week's high was set just shy of $1.2890.    If our assessment is correct, and the market has exaggerated the dollar negatives, the risk is on the euro's downside.  


The dollar looks considerably more constructive against the yen.  Last Wednesday's range is important.  According to Bloomberg, it was JPY105.23 to JPY107.57.  The dollar finished the week on its session highs just below JPY107.00.    The RSI has turned up, and the MACDs are about to turn.  We anticipate a test on JPY107.50-60, with penetration allowing for a move to JPY108.00-20.  


Sterling recorded new lows for the year at midweek near $1.5875.  However, on both Thursday and Friday, sterling recovered, with higher highs being recorded, and a constructive pre-weekend close.   The bullish divergence in the RSI and MACDs remain intact.  The initial target is $1.6150-65 and then $1.6225-50.   


The technical outlook of the Canadian dollar did not clarify much.  The CAD1.1200 area held. A break of this, and CAD1.1160-70 is needed to confirm a top is in place, and signal a test on CAD1.11.    Retail sales and the Bank of Canada meeting on Wednesday Oct 22 may provide the spark.  


The Australian dollar is very choppy, and the technical indicators we use, do not seem to be particularly helpful presently.  Some support appears to have been established just below $0.8700, while the upside appears capped in the $0.8860 area. 


The dollar pushed through MXN13.67 on October 16, which is the highest it has been since July 2013.  Lower oil prices, and the risk-off theme in the markets took its toll.   The RSI and MACDs did not confirm the new highs, and the dollar-bearish divergence suggests the peso can recover in the days ahead.  Initial support for the dollar is seen in the MXN13.42-47 area.  A break could signal a move back to MXN13.30.  


The low the S&P 500 recorded on October 15 represented nearly a 10% drop from the record high set on September 19.  The correction was long overdue.  If it is indeed over, the 1900 level should be overcome at the start of the week.  Initially this will allow for a move toward 1920, then 1940.   The RSI has turned up and the MACDs are poised to turn.  


The US 10-year yield reached a panic low of nearly 1.86% in October 15.  We suspect this represented some sort of capitulation.  That level is unlikely to be seen again.  Overcoming the cap at 2.23%-2.26%, would allow the yield to back up toward 2.35%-2.40%.  


The CRB index reached a low in the second half of last week.  The move below 270 on October 16 represents a new two-year low.  Technical readings are stretched, but have not generated a convincing signal that a low is in place.  The November crude oil futures contract staged a key reversal on October 16, but was undermined by the lack of follow through the next day.  Resistance is pegged in the $85-$86 area.  A break below $82.50 now would warn of the risk of new lows.  


Observations based on the speculative positioning in the futures market:  


1.  The latest CFTC Commitment of Traders report covers the week ending October 14, so it does not cover the drama on October 15.  Therefore, the positioning data may be less complete then usual.  


2.  There were three significant adjustments (in excess of 10k contracts).  The gross short yen position was trimmed by 13.4k contracts to 124k.  In the Australian dollar, both bulls and bears reduced their positions significantly.  The longs were more than halved to 14.4k contracts (from 31.6k) and the shorts were culled by 13.4k contracts to 44.6k. 


3.  All the currency futures we track saw a decline in gross long positions.  They were minor (less than 5k contracts), except for the Australian dollar.  There was less of a pattern in the gross short positions.  As we have seen the gross short yen and Australian dollar were cut, but so were the gross short sterling and peso positions (-1.6k and -5.8k contracts respectively).


4.  The net short 10-year US Treasury futures position increased to 123k contracts from 92.3k.  This was a reflection of a a 47k increase in gross short positions to 543.1k.  This represents the largest gross short position since mid-2005.  We suspect that the violence of the rally in the middle of last week reflected a powerful short squeeze.  The longs felt emboldened and added 16.1k contracts to raise their position to 420k contracts.  Some likely took profits on the spike down in yields.  

Welcome To Arcadia – The California Suburb Where Rich Chinese Stash Cash In McMansions

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

The city, population 57,600, projects that about 150 older homes—53 percent more than normal—will be torn down this year and replaced with mansions. The deals happen fast and are rarely listed publicly. Often, the first indication that a megahouse is coming next door is when the lawn turns brown. That means the neighbor has stopped watering and green construction netting is about to go up.


Arcadia is a concentrated version of what’s happening across the U.S. The Hurun Report, a magazine in Shanghai about China’s wealthy elite, estimates that almost two-thirds of the country’s millionaires have already emigrated or plan to do so.


- From the Bloomberg article: Why Are Chinese Millionaires Buying Mansions in an L.A. Suburb?

The surge in foreigners buying up U.S. real estate has been well documented in recent years. Of all this buying, no nation has demonstrated a bigger increase in purchases than China. In fact, it is estimated that 24% of all foreign purchases of domestic real estate this year have come from China, up 72% from last year. In my post from July, Chinese Purchases of U.S. Real Estate hit $22 Billion as The Bank of China Facilitates Money Laundering, I noted that:

In some California communities, 90% of real estate buyers are from China. Yes, 90%. Naturally, many of them are buying multi-million dollar homes in “all cash” transactions.

Well it appears that one of those communities is the 57,000 person Los Angeles suburb known as Arcadia. The suburb had a relatively insignificant Asian population of 4% in 1980, but it is now 59%. Of course, I could care less what the ethnic mix of any particular suburb is, but what does concern me is that a lot of the recent money coming in seems to be from questionable characters. The buyers are getting access to U.S. real estate via the EB-5 visa program, and of the 10,000 of these given away this year, 85% went to the Chinese. Oh, and it’s estimated some 20% of these home sit vacant. A great use of resources.

Here are some excerpts from Bloomberg’s expose:

Ornelas is an informal broker in Arcadia, Calif., a Los Angeles suburb at the foot of the San Gabriel mountains. He’s been keeping an eye out for the builder, an Asian man with a slight comb-over who goes by Mark. Ornelas has found two older homeowners who’ve finally agreed to sell their properties, and he knows that Mark, like all developers here, needs land on which to build mansions for an influx of rich clients from mainland China.


Ornelas rattles off addresses on a nearby street. “Three-eleven, that guy, he’s wack,” he says, shaking his head. “He wants 2.8.” He means million dollars. “And then 354, they want $2 million.”The lot is 17,000 square feet. “Seventeen for 2 mil?” Mark asks, incredulous.“I know,” Ornelas says. “They’re going crazy.”A year ago the property would have gone for $1.3 million, but Arcadia is booming. Residents have become used to postcards offering immediate, all-cash deals for their property and watching as 8,000-square-foot homes go up next door to their modest split levels. For buyers from mainland China, Arcadia offers excellent schools, large lots with lenient building codes, and a place to park their money beyond the reach of the Chinese government.


The city, population 57,600, projects that about 150 older homes—53 percent more than normal—will be torn down this year and replaced with mansions. The deals happen fast and are rarely listed publicly. Often, the first indication that a megahouse is coming next door is when the lawn turns brown. That means the neighbor has stopped watering and green construction netting is about to go up.


Arcadia is a concentrated version of what’s happening across the U.S. The Hurun Report, a magazine in Shanghai about China’s wealthy elite, estimates that almost two-thirds of the country’s millionaires have already emigrated or plan to do so.


The city’s Asian population grew from 4 percent in 1980 to 59 percent in 2010.


Smith says many of the newest buyers in Arcadia don’t speak English. “They’ve just come here,” he says. “They’re on that EB—what’s it called?” He means the EB-5 visas that the U.S. grants to foreigners who plow at least $500,000 into American development projects. Congress created the program in 1990 to spur investment, and demand for the visas has grown recently. This year, for the first time, the government gave away the annual allocation of 10,000 visas before the year was over, with Chinese nationals snapping up 85 percent. Brokers in the area say it’s the most common way buyers are coming to town. “Once they obtain residency, they want to bring their family over and get the United States education,” says real estate agent Ricky Seow. “They can start a new life in California.”


In late 2013, Cheng and her mother, Wang Jun, bought a 9,000-square-foot house with a pool and spa in Arcadia for $6.5 million. According to an L.A. property filing, Wang’s husband is Cheng Qingtao. He’s CEO of China Huayang Economic & Trade Group, one of the first state-owned companies set up by the central government, which still owns a majority stake. Heli’s two-story chateau-style home is only a few miles from one owned by her aunt, who’s married to Cheng’s older brother, Cheng Qingbo. Qingbo was the first private owner of railroads in China and, by 2013, was the country’s 257th-richest person, worth an estimated $1.06 billion, Hurun says. In June, Shanghai police arrested Qingbo for allegedly duping people into investments, including a project that, China Business News says, didn’t exist.

Yep, the guy gets cuffed in China, but here in America we welcome him with open arms and he gets to buy a mansions.

For most Arcadians, it would be hard to know if Heli owned the house next door. A member of one homeowners association estimates that about 20 percent of the new purchases sit empty, and for those who don’t speak Mandarin, language barriers have made it hard to share more than a wave with neighbors. For many sales, public records provide no way to understand who the new owners are. A recorded deed may show just an English transliteration of a buyer’s name, with no signature. Some public documents provide small clues: a second address in a luxury condo near Tiananmen Square; a seal if a document has been notarized at the U.S. Embassy in Guangzhou; a husband who relinquishes rights to the land to his wife; or a signature in Chinese characters.


A few miles south, another new house, this one with Tuscan styling and Moorish window treatments, sold last year to a woman named Jin Liping. Her husband, Du Jianming, is the owner of one of China’s largest private builders of steel structures. His company has built bridges in Shanghai and connecting railways on the Tibetan Plateau. His wife bought the 8,000-square-foot house in Arcadia for $4.8 million in September 2013, around the same time the couple faced financial pressures at home. They lost three lawsuits in China related to unpaid loans, but their home in California looks in peak condition, with little red ribbons tied around the topiary by the front door.

Another criminal, welcome with open arms in America. Must be nice.

A goldenrod-yellow house on South 6th Avenue belongs to Tao Weisheng and Du Xiaojuan, who develop homes and run hotels in Chongqing. Tao is known in China for collecting calligraphy and paintings—and for reportedly paying bribes to bureaucrats. According to state-run media, in 2004, Tao and a business partner paid a local official’s gambling debt at a Macau casino. The official had given them a land certificate they needed for a loan. In 2010 the court found the official guilty of taking a bribe and gave him a suspended death sentence. The prosecutor didn’t charge Tao and his partner. The homeowners or their representatives declined to comment or did not respond to interview requests.


Lately, groups of Chinese investors have pooled their money to buy Arcadian homes, which often aren’t occupied. More than 400 residents showed up at a community meeting with the police department this spring, in part concerned about a spate of burglaries targeting empty mansions. When there are leaks or other problems with a property, even the city struggles to identify who’s responsible. “Who do we contact? Where do we contact them?” says Jim Kasama, the community development administrator for the city’s building department. “Sometimes it’s not that easy.”


With so many homes vacant and language barriers prevalent, distrust is building. There are strange rumors—local officials on the take; bridal studios as fronts for massage parlors—and stranger truths. Just steps from the Arcadia police station, a local TV news reporter uncovered a hotel being used for birth tourism. A member of one homeowners association says a developer told the local board at various meetings that three separate homes he was building were all for his own family. When the board called him on it, he said his wife couldn’t decide which one she wanted.

Well sure, when you allow corrupt Chinese billionaires in, what do you think is going to happen? They’re not used to playing by the rules.

Neighborhood disputes are getting intense. Dong Chang, a local dermatologist who told the Rotary Club that he left Taiwan in the early 1970s with “two bags of rice and a frying pan,” is suing the developer building a mansion next door for cutting down an old oak tree on his property. He’s seeking about $280,000, saying the harm was “intentional, fraudulent, oppressive, malicious, and despicably done.” It’s trickier for those without accounts in Hong Kong. Chen Ping, a local broker, says there’s a common workaround. “We call it ‘head-count wiring,’ ” she says. Buyers line up other people—friends, family, or, if need be, paid strangers—to each transfer a share. “I once had a customer who bought a $1.9 million house in Arcadia who said, ‘Not a problem. I have more than enough head counts,’ ” Chen says. Many buyers have legitimate ways to wire the funds, says broker Imy Dulake, but “there is no way we can have this much cash coming in legally.”

What’s happening in Arcadia is very similar to what I highlighted about Manhattan real estate in yesterday’s post: Meet the Pied-à-Terre Levy – The Proposed Tax that Could Crush High End NYC Real Estate.

Between private equity, hedge fund and foreign oligarchs buying, I’m surprised a single American citizen has purchased a home in the past five years.

FEMA Conducting Pandemic Drills Amidst Ebola Crisis

Submitted by Brandon Turbeville via Alt-Market blog,

In yet another curious coincidence surrounding the recent Ebola crisis, it appears that FEMA has been preparing for the appearance of a pandemic of deadly disease in the near future all along.

As part of the FEMA Pandemic Exercise Series: PANDEMIC ACCORD: 2013-14 Pandemic Influenza Continuity Exercise Strategy , the website states that,

The Federal Executive Boards in New York City and Northern New Jersey in partnership with FEMA Region II, The Department of Health and Human Services Region II, NYC Department of Health and Mental Hygiene, Securities Industry and Financial Markets Association (SIFMA) and the Clearing House Association are sponsoring a two year series of pandemic influenza continuity exercises – tabletop exercise 2013 (complete), full scale exercise 2014 – to increase readiness for a pandemic event amongst Federal Executive Departments and Agencies, US Court, State, tribal, local jurisdictional and private sector continuity.

The exercise, having been underway since 2013 is scheduled to continue to December 4th 2014. The exercise will involve eight scheduled events and/or webinars which will discuss questions surrounding continuity of operations for essential services, transportation impacts, disruption in communications and internet connectivity, disruptions to power sources and other related possible damages to the normal function of societal life. The exercises also deal with the aftermath of the pandemic including “coping with the deaths of multiple coworkers/loved ones,” “replacing staff,” and “replacing personal protective equipment for a potential next wave.”

The fictional pandemic is designed as an influenza virus spreading from person to person worldwide. Sifma describes the setting for this exercise by peppering in statistics regarding the 1918 “Spanish Flu” and projected damage done to the U.S. population as well as the U.S. economy.

The stated objectives of the exercise are “to mitigate vulnerabilities during a pandemic influenza outbreak; to identify gaps or weaknesses in pandemic planning or in organization pandemic influenza continuity plans, policies, and procedures; and encourage private and public organizations to jointly plan for, and test, their pandemic influenza plans.”

The Sifma website provides an overall summary of the exercise as well as links to webinar presentations which can be viewed for free.

Regardless of the origins of the Ebola crisis, whether it be conspiracy or gross incompetence, there are a number of aspects to the entire situation which simply do not add up. While one would not argue that preparedness on the part of the federal government regarding a possible pandemic is a bad thing, its behavior thus far has exuded anything but preparedness. Considering America’s sordid history with national emergency exercises, the ongoing FEMA pandemic exercise cannot help but raise red flags.

This Wasn't Supposed To Happen

From exuberant escape velocity 'expansion' hopes and dreams in June, to 'slowing' in September, and 'drastic downward revisions' in early October, the Goldman Sachs Global Leading Indicator has had a very troubled recent past (as QE is just 4 POMOs away from coming to an end). But nothing could prepare the avid reader for what happened to the infamous Goldman "swirlogram" this month - an epic, total collapse. As Goldman 'politely' notes, "the October Advanced reading places the global cycle deeper in the ‘Slowdown’ phase, with momentum (barely) positive and declining."

And just as amazing: the world has gone from Expansion and Recovery, to Slowdown and borderlin Contraction in the span of just 3 months.

Goldman explains,

The October Advanced reading places the global cycle deeper in the ‘Slowdown’ phase, with momentum (barely) positive and declining.



This reading agrees with the September Final GLI that the global cycle is currently in the ‘slowdown’ phase. As the Advanced GLI ‘leans’ more on the US data, we will look to the October Final GLI for confirmation of this reading.



Components mixed, market-based components worsen

Five of the seven Advanced GLI filtered components have worsened in October so far. Notably, the S&P GSCI Industrial Metals Index® and AUD and CAD TWI aggregate components, two market-based gauges, declined from last month alongside the recent growth repricing and Dollar appreciation in markets. The Philadelphia Fed headline (the Advanced proxy for the Global PMI) and Philly Fed New Orders less Inventories components also continued to come in softer, while the volatile Baltic Dry Index also declined this month after last month’s improvement.

‘Slowdown’ deepens
The October Advanced GLI locates the global industrial cycle in the ‘Slowdown’ phase, which is characterised by positive but decreasing momentum. Last month’s Final GLI also placed us in ‘Slowdown’. The October Advanced GLI ‘Slowdown’ reading moves out of the recent stable and compressed growth range and near ‘Contraction’ territory.

*  *  *


Which explains this...


And confirms concerns that this time is no different, as we noted previously,

For the past five years there has been a very clear and significant cycle to US macro data - a slight rise to start the year, notable weakness into the middle of the year, a rapid recovery into the fall, then generally flat to year-end. A year ago, we explained this cycle appears to be created by government agencies need to spend, spend, spend their budgets out ahead of fiscal year-end (Sept).



This year has been no different, aside from the knee-jerk higher in macro data - somewhat shocking in its magnitude to 'every' economist with 3, 4, and 5-sigma beats in many data - came a little earlier but to the same level of past year's exuberance (as perhaps Ex-Im concerns, Fed concerns, and election concerns sparked earlier-than-usual spend-down by agencies).

*  *  *

Of course, if this plays out... it's 'perfect' for the Fed to extend dovish language and investors to pile on into stocks on the back of the bad news... or without QE, is Fed talk no longer enough?

The Folks Who Know the Most About Their Firms… and the Economy… Are Selling the Farm

Stocks rallied last week when a non-voting member of the Fed stated something totally pointless (that the Fed should consider postponing its taper… when there’s only $5 billion left in QE anyway).

Put another way, the markets were so desperate for a Fed intervention that the idea of $5 billion coming later rather than now makes a difference some how.  It’s pathetic, but when 70-80% of market volume comes from non-thinking computer trading programs, the words “Fed” and “President” matter more than common sense.

Deep down, just about everyone knows this whole “bull” market is based on the Fed. Various pundits will prattle on about earnings and the like, but the reality is that earnings are heavily massaged. Heck even 30% of CFOs admitted in a study to knowingly overstating earnings.

Moreover, all that record cash produced by these record profits is dwarfed by the record debt that corporations took on to goose EPS through stock buybacks.

And this reveals the true state of affairs for both the economy and the stock market.

Take a look at how C-level executives have steered their companies since the 2008 Crisis. Most of the increase in profit margins came from lay offs. The extra profits produced by this combine with debt issued to buy back stock…not cap ex or hiring. 

The buyback then helps facilitate higher share prices, which said executives then use to cash out their options and dump their personal stakes in their companies at a pace not seen since 2000.

Put another way, those individuals responsible for running the largest companies in the US, who know more about their companies’ growth prospects and the economy have used the Fed’s policies to cash out.

How telling is it that they’d rather have cash than stock? They would rather have this money sitting in a bank account earning next to nothing, or in a bond earning only slightly above nothing, than in stocks.

Of course, some of the money went towards buying luxury art work and luxury real estate which helps explain the strength in those markets… but you get my point… the captains of industry don’t want to be in their own stocks.

And remember, these are also the folks at the front-lines of the economy. They know the data from their own firms before anyone else in the public does… including the Fed or BLS.

And they’re dumping stocks.

The whole mess will come crashing down, just as every other funny money fueled bubble does. The fact that we’ve got the following says it all:

1)   Corporate debt is back to 2007 PEAK levels.

2)   Stock buybacks are back to 2007 PEAK levels.

3)   Investor bullishness is back to 2007 PEAK levels.

4)   Margin debt (money borrowed to buy stocks) is at 2007 PEAK levels.

5)   Investor complacency is at a record LOW.

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

You can pick up a FREE copy at:

Best Regards

Phoenix Capital Research



Jim Chanos: "The Lesson That Shaped My Understanding Of How Fragile The System Is"

Excerpted from Steven Drobny's new book: The New House Of Money,

Chapter 2 - The Biggest Short, An Interview with Jim Chanos


Tell me about the back half of 1987. Did you do well in the stock market crash?

Yes, we did extremely well in 1987. But people forget that the market ended flat for the year. It had a big rally for eight months and then peaked at the end of August. The stock market crash was the end of the move, not the beginning. I remember vividly being at my brother’s wedding in Wisconsin the weekend it peaked, thinking that the market would never go down.

By September my performance was back to flat on the year and the October crash put us up. What really scared me in October of 1987 was that after Monday’s crash, on the Tuesday and Wednesday of that fateful week, there was a lot of concern about not getting paid, that brokerage firms would have to liquidate. That was a wake-up call that really helped us to protect ourselves later during the crisis in 2008.

It was my first lesson in the fact that if you do not watch your balance sheet correctly as a short seller, you are an unsecured creditor of a brokerage firm. It was a quick education in the importance of prime broker and credit relationships and how, for example, it was preferable to be in the US rather than London from this perspective.

That lesson also shaped my understanding of how fragile the system was. I believe the system was much closer to going down in two days in 1987 than at any point in 2008. People think I am crazy when I say that. But people who remember those two days remember that we were worried that the clearing system was not going to work and that people were not going to get paid. I was worried that I was not going to get paid our profits.


Full chapter here...

The New House of Money - Chapter 2 - Jim Chanos

Why Airport Screening Won't Stop Ebola, The Economist Explains

Originally posted at The Economist,

Those who got sick, and there were many, developed large, dark blisters that oozed pus and blood. Later came fever and bloody vomiting. Long before Ebola, there was the Black Death, which killed millions in the 14th century. And as with Ebola, nervous officials tried to keep the sick from entering their cities. Venetian authorities held ships at bay for 40 days—hence the word quarantine—to check for infections. Still, the disease ravaged the republic. Today countries are screening air passengers arriving from the places affected by Ebola. Will these efforts prove more effective?



Ebola has killed more than 4,000 people, nearly all of them in west Africa. But the threat to countries outside the region became clear when a Liberian man, Thomas Duncan, was diagnosed with the disease in America. He probably contracted it while helping an infected woman in Liberia. He then hopped on a plane to America. Mr Duncan died in Dallas on October 8th, the same day American officials announced that travellers from the countries hardest hit by Ebola—Guinea, Liberia and Sierra Leone—would be questioned about their health, travel and contact with the sick, and have their temperatures taken at five large airports. Quarantine is an option for those suspected of being ill. A day later Britain announced that it would screen travellers from these countries at Heathrow and Gatwick airports (and two rail terminals). African and Asian countries have been screening air passengers for months, with some using infrared cameras to detect fevers. This is in addition to the screening of all departing air travellers in the affected countries.

Some governments are dusting off measures that were previously used to combat the spread of bird flu and the Severe Acute Respiratory Syndrome (SARS). But David Heymann, a professor at the London School of Hygiene and Tropical Medicine, says screening did not stop those diseases and it is unlikely to stop Ebola. Consider Mr Duncan, who did not have a fever when leaving Liberia, nor when landing in America. He only developed symptoms a week later. American officials admit that the new screening procedures would not have caught him. It can take up to 21 days for someone to show signs of Ebola. Passengers who wish to avoid quarantine, especially in African Ebola wards, or receive treatment in the West, may also lie. Mr Duncan did not tell Liberian officials that he had been in contact with the sick.

During the SARS outbreak, some air passengers took painkillers to reduce their temperatures. Others may not know that they are infected, and infrared scanners are not always reliable. "I would expect a handful of cases in the next few months," warned Sally Davies, Britain's chief medical officer, after the screening measures were announced.


Screening may at least calm people down, however. Notwithstanding the bungled effort to diagnose and treat Mr Duncan in Texas, where a health-care worker has also tested positive for the disease, developed countries are well-equipped to contain Ebola. The announcement of screening has focused minds. It is also a measured response—not as economically painful as a full travel ban, or as inconvenient as mass screening. But the best way to stop Ebola from spreading, say health experts, is to drain the reservoir of the disease, which means tackling it in west Africa. Doing that presents an entirely different set of challenges. When it comes to stopping Ebola, the rich world's self-interest aligns neatly with the needs of the developing world. But countries in a position to help have been slow to act.

Propaganda 101 – How The Pentagon Is Trying To Rewrite Vietnam War History

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

In case you weren’t aware, the Pentagon is set to roll out a 50th anniversary commemoration of the Vietnam War. Personally, it’s hard to get excited about commemorating an event that led to the death of over 58,000 American soldiers and more than a million Vietnamese, particularly since much of it was the direct result of well documented lies and deception, such as the Gulf of Tonkin incident.

What’s worse, the Pentagon intends to rewrite history by whitewashing this period of civil unrest and government shame from American history. The propaganda is so blatant that it has resulted in many of the era’s most well known protestors and activists to come together in order to stop it.

The New York Times reports that:

WASHINGTON — It has been nearly half a century since a young antiwar protester named Tom Hayden traveled to Hanoi to investigate President Lyndon B. Johnson’s claims that the United States was not bombing civilians in Vietnam. Mr. Hayden saw destroyed villages and came away, he says, “pretty wounded by the pattern of deception.”


Now the Pentagon — run by a Vietnam veteran, Defense Secretary Chuck Hagel — is planning a 50th anniversary commemoration of the Vietnam War. The effort, which is expected to cost taxpayers nearly $15 million by the end of this fiscal year, is intended to honor veterans and, its website says, “provide the American public with historically accurate materials” suitable for use in schools.


But the extensive website, which has been up for months, largely describes a war of valor and honor that would be unrecognizable to many of the Americans who fought in and against it.


Leading Vietnam historians complain that it focuses on dozens of medal-winning soldiers while giving scant mention to mistakes by generals and the years of violent protests and anguished debate at home.


In one early iteration, the website referred to the 1968 My Lai massacre, in which American troops killed hundreds of Vietnamese civilians, as the My Lai Incident.


The glossy view of history has now prompted more than 500 scholars, veterans and activists — including the civil rights leader Julian Bond; Daniel Ellsberg, who leaked the top-secret Pentagon Papers; Lawrence J. Korb, a former assistant secretary of defense under President Ronald Reagan; and Peter Yarrow of the folk trio Peter, Paul and Mary — to join Mr. Hayden in demanding the ability to correct the Pentagon’s version of history and a place for the old antiwar activists in the anniversary events.


Mr. Hayden, 74, and other 1960s-era activists who helped him gather signatures, say they do not quarrel with honoring the sacrifice of soldiers. But they object to having the military write the story.


“All of us remember that the Pentagon got us into this war in Vietnam with its version of the truth,” Mr. Hayden said in a recent telephone interview from Berkeley, Calif., where he attended a rally to mark another 50th anniversary, that of the free-speech movement. “If you conduct a war, you shouldn’t be in charge of narrating it.”


He promised “educational materials, a Pentagon exhibit, traveling exhibits, symposiums, oral history projects and much more.” The mission, he said, is to “help the nation take advantage of a rare opportunity to turn back to a page in history and to right a wrong, by expressing its honor and respect to Vietnam veterans and their families.”

Many of the longtime activists also see the petition as deeply relevant today.


“You can’t separate this effort to justify the terrible wars of 50 years ago from the terrible wars of today,” said Phyllis Bennis, a Middle East expert who has known Mr. Hayden since the early 1970s. “When I saw this, I thought immediately, ‘We’ve got to stop this.’ ”

This problem of people in power rewriting history to serve their own ends has been an issue throughout human history, something Julian Assange recently discussed and outlined here: Video of the Day – Hologram Julian Assange Talks George Orwell, Bitcoin and Preserving Human History.

The Farce That Is Economics: Richard Feynman On The Social Sciences

Submitted by Erico Tavares of Sinclair & Co.

Richard Feynman on the Social Sciences

What do real scientists have to say about sciences that are not so real?

Born in 1918, Richard Feynman was an American theoretical physicist known for his work in a variety of fields where he made an immeasurable contribution, including quantum mechanics, quantum electrodynamics and particle physics. He was also credited with introducing the concept of nanotechnology, a breakthrough that holds so much promise today.

A professor at the California Institute of Technology, Feynman helped popularize physics through lectures and books which he made more accessible to the general public. He received many honors for his work throughout his life. He was elected to the American Physical Society, the American Association for the Advancement of Science, the National Academy of Science and the Royal Society of London. He was recently ranked as one of the ten greatest physicists of all time.

Many insights he left us with go beyond the world of physics. And we would be wise to pay close attention to them.

A Critique of the Social Sciences

Looking back at his own experience, Feynman was keenly aware of how easy our experiments can deceive us and thus of the need to employ a rigorous scientific approach in order to find the truth. Because of this, he was highly critical of other sciences which did not adhere to the same principles.

The social sciences are a broad group of academic disciplines concerned with the study of the social life of human groups and individuals, including anthropology, geography, political science, psychology and several others. Here is what he had to say about them in a BBC interview in 1981:

“Because of the success of science, there is a kind of a pseudo-science. Social science is an example of a science which is not a science. They follow the forms. You gather data, you do so and so and so forth, but they don’t get any laws, they haven’t found out anything. They haven’t got anywhere – yet. Maybe someday they will, but it’s not very well developed.

“But what happens is, at an even more mundane level, we get experts on everything that sound like they are sort of scientific, expert. They are not scientists. They sit at a typewriter and they make up something like ‘a food grown with a fertilizer that’s organic is better for you than food grown with a fertilizer that is inorganic’. Maybe true, may not be true. But it hasn’t been demonstrated one way or the other. But they’ll sit there on the typewriter and make up all this stuff as if it’s science and then become experts on foods, organic foods and so on. There’s all kinds of myths and pseudo-science all over the place.

“Now, I might be quite wrong. Maybe they do know all these things. But I don’t think I’m wrong. See, I have the advantage of having found out how hard it is to get to really know something, how careful you have about checking your experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something.

“And therefore, I see how they get their information. And I can’t believe that they know when they haven’t done the work necessary, they haven’t done the checks necessary, they haven’t done the care necessary. I have a great suspicion that they don’t know and that they are intimidating people by it. I think so. I don’t know the world very well but that’s what I think.”

To be fair, such disciplines seek to uncover and understand very complex relationships involving a volatile and even unpredictable human element. But the point that Feynman was making is that, rather than acknowledging this limitation, experts in these fields present their findings as truths, without employing the same rigor as in the physical sciences.

In the interview, Feynman singled out nutrition as an example, which has actually made progress in recent years as far as the scientific method is concerned (although everyone is still getting fat). There is, however, another social science whose “experts” have come to influence, directly or indirectly, generations of millions of people around the world. And this one fits perfectly with what he was describing.

The Dismal Science

"The dismal science" is a derogatory name for economics coined by Thomas Carlyle, the 19th century Scottish writer and philosopher. There is some debate as to why he thought of those words. But with the world coming off a huge recession in 2008 that very few economists foresaw, he could not have come up with a more prescient name.

Consider the following mainstream economic "truisms", presented in broad layman terms, which have largely governed economic policy thinking in recent decades, particularly in the Western hemisphere:

  • Saving money is a sin and should be penalized; speculation is a virtue and should be encouraged
  • The government does not need to run its finances like every other company and individual in the country; what is good for the latter is bad for the former
  • Inflation should be kept at 2% forever; that’s the exactly right number, no more, no less; if you start paying less for your food, rent and healthcare, the central bank must intervene
  • Those who take personal risks to create prosperity and jobs have obligations; everyone else has rights
  • The state can spend its citizen’s money much more intelligently than they can
  • Business cycles are bad so we must always stimulate the economy
  • When a boom in demand pursuant to a boom in credit inevitably fades away, we should create another boom in credit to revive demand again, and again, and again
  • Creating debt at a rate above an economy’s incremental productive capacity generates wealth
  • Anyhow, debt does not matter because that liability is someone else’s asset
  • Demographics don’t matter either
  • You generate so much prosperity in your job over 40+ years that you can comfortably live in your retirement of 20+ years
  • Foreign lenders only need to be concerned with regard to banana republics; the others will always pay them back
  • The capital markets follow nicely shaped probability bell curves, and so shocks and crashes are extremely rare events; the markets are “efficient”
  • The benefits of free trade outweigh the costs of a country losing its manufacturing sector as a result; the fact that domestic companies have to comply with much stricter and costlier regulations than their foreign competitors is of no consequence
  • Human behavior is governed by mathematical equations and models, even when oversimplifying assumptions are used
  • The next generation will figure out a way to pay for all the massive debts that we are creating today; otherwise the central banks will solve the problem
  • The way to create prosperity in a society is to take away resources from the productive sector and distribute them amongst the unproductive sector
  • We all admire the free markets; we just can’t let them work

The list could go on. Needless to say, every “truism” here defies common sense, let alone any rigorous scientific analysis.

For instance, there is no empirical evidence to support the view that a debt crisis can only be solved by piling on more debt, a de facto policy being implemented today in the Eurozone periphery. This is certainly not a scientific argument. And you can’t argue with it either. If the policy fails it’s only because you did not pile on the debts fast enough. The expert is always right!

And so we go on, clinging to every word uttered by prominent mainstream economists and central bankers as if it were the absolute undisputable truth. Just as Feynman had suggested.

And he was certainly not alone in his criticism of the social sciences. Some economists had warned years earlier that their discipline was posing as a true science. Here’s a very insightful excerpt from the 1974 Economic Sciences Nobel prize acceptance speech by Friedrich von Hayek (appropriately called “The Pretence of Knowledge”):

“It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error. It is an approach which has come to be described as the ‘scientistic’ attitude - an attitude which, as I defined it some thirty years ago, ‘is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.’"

Even Paul Krugman, a high priest of mainstream economics, is critical of his own kind. However, in his view the problem is that there are too many solutions on how to solve the world’s economic problems (instead, everyone should just follow his advice and we will all be saved!). That divergence of opinion is yet another indictment of the lack of scientific rigor and precision that permeates the economics profession today.

The Consequences

Widely accepted beliefs in myths masquerading as science have consequences. The cartoon above could not describe them any better (and it’s better to laugh indeed). Must individuals continually walk the plank as advocated by “experts” that supposedly hold all economic truth, or should we instead have a clear-headed debate as a society on how to get our economies back on track?

In January 1988, a month before his passing, Feynman warned us against becoming arrogant and complacent in our current stage of progress, which otherwise could have dire implications on future generations:

“We are at the very beginning of time for the human race. It is not unreasonable that we grapple with problems. But there are tens of thousands of years in the future. Our responsibility is to do what we can, learn what we can, improve the solutions and pass them on.

“It is our responsibility to leave the people of the future a free hand. In the impetuous youth of humanity, we can make grave errors that can stunt our growth for a long time. This we will do if we say we have the answers now, so young and ignorant as we are.

“If we suppress all discussion, all criticism, proclaiming ‘This is the answer, my friends; man is saved!’ we will doom humanity for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

“It is our responsibility as scientists, knowing the great progress which comes from a satisfactory philosophy of ignorance, the great progress which is the fruit of freedom of thought, to proclaim the value of this freedom; to teach how doubt is not to be feared but welcomed and discussed; and to demand this freedom as our duty to all coming generations.”

Right again Mr. Feynman. Now, will the real scientists please stand up?

Einsteinian Insanity? FHFA Head Mel Watt Pushes Banks To Make Extreme Risk Home Loans

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

Mel Watt is one of the most dangerous financial oligarch puppets operating in America today. The first time he came across my radar screen was back in 2009, when he “gutted” Ron Paul’s End the Fed bill while it was in subcommittee, something I outlined in the post: Leverage in PE Deals Soars Despite Fed Warnings; Amidst Insatiable Demand for Risky Fannie Mae Debt.

Then in May of this year, I zeroed in on his latest authoritarian maneuver after being appointed to head the FHFA in the post: New Massive Federal Database to Hold Financial Information on Hundreds of Millions of Americans. Here’s an excerpt:

As many as 227 million Americans may be compelled to disclose intimate details of their families and financial lives — including their Social Security numbers — in a new national database being assembled by two federal agencies.


The Federal Housing Finance Agency and the Consumer Financial Protection Bureau posted an April 16 Federal Register notice of an expansion of their joint National Mortgage Database Program to include personally identifiable information that reveals actual users, a reversal of previously stated policy.


In a May 15 letter to FHFA Director Mel Watt and CFPB Director Richard Cordray, Rep. Jeb Hensarling, R-Texas, and Sen. Mike Crapo, R-Idaho, charged, “this expansion represents an unwarranted intrusion into the private lives of ordinary Americans.”

So what’s Mel up to these days? Well, Bloomberg reports that:

A U.S. housing regulator plans new steps to encourage banks to lend to buyers with less than-perfect credit scores, according to two people with direct knowledge of the matter.

Watt will also discuss an effort that would allow borrowers to put down as little as 3 percent of the purchase price on loans backed by Fannie Mae and Freddie Mac, the people said.


Fannie Mae and Freddie Mac (FMCC), which have been under U.S. conservatorship since 2008, buy mortgages and package them into bonds on which they guarantee payments of principal and interest. Watt’s announcement is part of an effort to encourage banks to ease credit and follows a series of steps he first described in May.

It’s for the good of the people right? He’s a “liberal” so he’s always working for the little guy, right? Wrong.

The best characterization of Mr. Watt I’ve seen comes from, here it is:

While some observers consider Watt’s appointment a significant lurch to the left compared to DeMarco, (he was among those named by the Democratic Socialists of America as a member of their caucus in 2009), Watt himself has raised a tremendous amount of money from banking and real estate-related corporations and trade associations. One report from the Sunlight Foundation found that for 2009, Watt had received some 45 percent of his total campaign funds from donors in the finance and real estate sector.

This is what all these phony “liberals” do. They pretend to be champions of the poor so that they can fool their clueless constituents and thus serve the oligarchy that much more effectively. This housing plan isn’t about helping families afford homes, it’s about creating artificial demand for overpriced homes so that stuck private equity and hedge fund mangers (who can no longer make it rain in the buy-to-rent trade) have some peasants to sell to ahead of the next crash.

Rule Number 1 of Oligarch Club: Always make sure you sell to the muppets before the music stops. Here we go again.

Kudos To Herr Weidmann For Uttering Three Truths In One Speech

Submitted by David Stockman via Contra Corner blog,

Once in a blue moon officials commit truth in public, but the intrepid leader of Germany’s central bank has delivered a speech which let’s loose of three of them in a single go. Speaking at a conference in Riga, Latvia, Jens Weidmann put the kibosh on QE, low-flation and central bank interference in pricing of risky assets.

These days the Keynesian chorus in favor of policy activism is so boisterous that a succinct statement to the contrary rarely gets through - especially at Rupert Murdoch’s Wall Street yarn factory. But here’s what penetrated even Brian Blackstone’s filters:

 “The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and productivity,” he said.

Needless to say, that is not only the truth but its one that is distinctly unwelcome to the policy apparatchiks in Brussels and the politicians in virtually every European capital. Self-evidently, printing money and running up the public debt are pleasurable and profitable tasks for agents of state intervention. But reducing “structural barriers” like restrictive labor laws, private cartel arrangements and inefficiency producing crony capitalist raids on the public till are a different matter altogether. In the political arena, they involve too much short-term pain to achieve the long-run gain.

But implicit in Weidmann’s plain and truthful declaration is an even more important proposition. Namely, rejection of the mechanistic Keynesian notion that the state is responsible for every last decimal point of the GDP growth rate. Indeed, the latter has now become such an overwhelming consensus in the political capitals that to suggest doing nothing on the “stimulus” front sounds almost quaint—-a throwback to the long-ago and purportedly benighted times of laissez faire.

But perhaps stolid German statesmen like Weidmann remember a thing or two about history, and have noted that what is failing in the present era is not private capitalism, but the bloated omnipresent public state. And having almost uniquely among DM nations resisted the siren song of Keynesian activism, Germans can also observe that their economy has not plunged into some depressionary dark hole for want of sufficient fiscal activism.

Undoubtedly, they can also note that by refusing to take the Keynesian bait, Germany has achieved a level of fiscal rectitude that is utterly unique in recent years—–especially since the great financial crisis of 2008.  For good reason, therefore, Germany does not want to subsidize the fiscal irresponsibility of the rest of the EU, but that’s exactly what would happen under the Bernanke style QE that Weidmann so stoutly resists.

Unlike the bevies of Keynesian cool-aid drinkers who dominate policy in Brussels and throughout the rest of Europe, Weidmann recognizes the truth that central banks have not abolished the laws of supply and demand, and that massive bond buying under QE creates a false bid and false price for public debt.  That his antagonist, Mario Draghi, remains utterly clueless about this elementary point is perhaps explainable by their variant histories. To wit, other than his brief period as a highly paid trainee at Goldman Sachs, Draghi spent many years as a top official in the Italian treasury.

In that respect, sometimes chart pictures are indeed worth a thousand words and here is a dramatic case in point. Unconsciously or otherwise, Draghi represents the financial culture of a state which has already crossed the fiscal Rubicon, so to speak. The average interest rate on Italy’s mountainous debt is still about 4%, meaning that at its 135% debt-to-GDP ratio, Italy needs 5-6% nominal income growth every year just to tread water—-even if it runs a consistent “primary” budget surplus.

But Italy’s nominal GDP has not grown at all during the last 7 years, and has no prospect whatsoever of bursting out of the blocks at a 5-6% rate of growth.  So the only way it can survive is by means of constant and massive financial repression by the ECB. Notwithstanding all of the gumming about “low-flation” and the monetary hobgoblins of the 1930s, Draghi’s drive to push the ECB into outright QE and to massively re-expand its balance sheet by purchasing peripheral debt is about one thing alone. Namely, the monetization of public debt that can no longer be serviced by current taxes—or at least taxes that the pampered and cowardly politicians in Rome, Madrid and elsewhere are willing to impose on their electorates.

At the end of the day, here is the reason Weidmann has issued once again a loud and pointed “nein!” with respect to QE.

While he was at it, Weidman spoke the truth about the low-flation pretext for more money printing by the ECB, as well.

“The low inflationary pressure is for a large part due to the decline in energy prices and the adjustment processes in some euro-area countries—factors beyond the direct influence of the [ECB’s] monetary policy,” he said.

Undoubtedly, Herr Weidmann is aware of the facts. Here is the longer-term trend of for core inflation—ex energy and food—for the Eurozone.  Yes, consumers are enjoying a temporary respite from high oil, commodity and other import prices.  But as Weidman well knows there is no “specter of deflation” haunting Europe.

Finally, Weidmann landed a solid punch on Draghi’s scheme to pursue QE through the back door of buying what amounts to junk bonds on the secondary market. The the President of the Bundesbank rightly said that the ECB’s program to purchases bundles of loans to households and businesses, with the aim of raising money supply and boosting the flow of credit to the private sector—-

 ” transfers risks from financial institutions to the central bank and, ultimately, taxpayers. This would run counter to everything we have strived to achieve in banking regulation over the last years…..”

Kudos To Herr Weidmann For Uttering Three Truths In One Speech

by Brian Blackstone at the Wall Street Journal


German central bank President Jens Weidmann reiterated his opposition to the European Central Bank’s recent decision to purchase large sums of asset-backed securities, saying the program undermines efforts made in banking regulation.


In prepared comments to a conference in Riga, Latvia, Mr. Weidmann said he doesn’t see risks of persistent declines in consumer prices, known as deflation, though there is a risk of inflation staying too low for too long.


He urged governments to enact structural reforms to improve their economies, and pushed back against calls for Germany to enact more stimulus to beef up its economy.


“The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and productivity,” he said.


Last month, the ECB unveiled a program to purchases bundles of loans to households and businesses, with the aim of raising money supply and boosting the flow of credit to the private sector. Mr. Weidmann opposed the decision, saying it transfers risks from financial institutions to the central bank and, ultimately, taxpayers.


“This would run counter to everything we have strived to achieve in banking regulation over the last years,” he said.


Mr. Weidmann, who sits on the ECB’s 24-member governing council, signaled he has little, if any, appetite for more dramatic measures despite annual eurozone inflation rates that are far below the ECB’s target of just below 2%. Consumer prices were up 0.3% in September from one year earlier, a five-year low.


“The low inflationary pressure is for a large part due to the decline in energy prices and the adjustment processes in some euro-area countries—factors beyond the direct influence of the [ECB’s] monetary policy,” he said.


The ECB should only respond if this weakness extends to prices more broadly, he said, which economists refer to as second-round effects.

Read more here -