ZeroHedge RSS Feed

Russia Or China - Washington's Conflict Over Who Is Public Enemy #1

Submitted by Michael Klare via,

America’s grand strategy, its long-term blueprint for advancing national interests and countering major adversaries, is in total disarray. Top officials lurch from crisis to crisis, improvising strategies as they go, but rarely pursuing a consistent set of policies. Some blame this indecisiveness on a lack of resolve at the White House, but the real reason lies deeper. It lurks in a disagreement among foreign policy elites over whether Russia or China constitutes America’s principal great-power adversary.

Knowing one’s enemy is usually considered the essence of strategic planning. During the Cold War, enemy number one was, of course, unquestioned: it was the Soviet Union, and everything Washington did was aimed at diminishing Moscow’s reach and power. When the USSR imploded and disappeared, all that was left to challenge U.S. dominance were a few “rogue states.” In the wake of 9/11, however, President Bush declared a “global war on terror,” envisioning a decades-long campaign against Islamic extremists and their allies everywhere on the planet. From then on, with every country said to be either with us or against us, the chaos set in. Invasions, occupations, raids, drone wars ensued -- all of it, in the end, disastrous -- while China used its economic clout to gain new influence abroad and Russia began to menace its neighbors.

Among Obama administration policymakers and their Republican opponents, the disarray in strategic thinking is striking. There is general agreement on the need to crush the Islamic State (ISIS), deny Iran the bomb, and give Israel all the weapons it wants, but not much else. There is certainly no agreement on how to allocate America’s strategic resources, including its military ones, even in relation to ISIS and Iran. Most crucially, there is no agreement on the question of whether a resurgent Russia or an ever more self-assured China should head Washington’s enemies list. Lacking such a consensus, it has become increasingly difficult to forge long-term strategic plans. And yet, while it is easy to decry the current lack of consensus on this point, there is no reason to assume that the anointment of a common enemy -- a new Soviet Union -- will make this country and the world any safer than it is today.

Choosing the Enemy

For some Washington strategists, including many prominent Republicans, Russia under the helm of Vladimir Putin represents the single most potent threat to America’s global interests, and so deserves the focus of U.S. attention. “Who can doubt that Russia will do what it pleases if its aggression goes unanswered?” Jeb Bush asserted on June 9th in Berlin during his first trip abroad as a potential presidential contender. In countering Putin, he noted, “our alliance [NATO], our solidarity, and our actions are essential if we want to preserve the fundamental principles of our international order, an order that free nations have sacrificed so much to build.”

For many in the Obama administration, however, it is not Russia but China that poses the greatest threat to American interests. They feel that its containment should take priority over other considerations. If the U.S. fails to enact a new trade pact with its Pacific allies, Obama declared in April, “China, the 800-pound gorilla in Asia, will create its own set of rules,” further enriching Chinese companies and reducing U.S. access “in the fastest-growing, most dynamic economic part of the world.”

In the wake of the collapse of the Soviet Union, the military strategists of a seemingly all-powerful United States -- the unchallenged “hyperpower” of the immediate post-Cold War era -- imagined the country being capable of fighting full-scale conflicts on two (or even three fronts) at once. The shock of the twenty-first century in Washington has been the discovery that the U.S. is not all-powerful and that it can’t successfully take on two major adversaries simultaneously (if it ever could). It can, of course, take relatively modest steps to parry the initiatives of both Moscow and Beijing while also fighting ISIS and other localized threats, as the Obama administration is indeed attempting to do. However, it cannot also pursue a consistent, long-range strategy aimed at neutralizing a major adversary as in the Cold War. Hence a decision to focus on either Russia or China as enemy number one would have significant implications for U.S. policy and the general tenor of world affairs.

Choosing Russia as the primary enemy, for example, would inevitably result in a further buildup of NATO forces in Eastern Europe and the delivery of major weapons systems to Ukraine. The Obama administration has consistently opposed such deliveries, claiming that they would only inflame the ongoing conflict and sabotage peace talks. For those who view Russia as the greatest threat, however, such reluctance only encourages Putin to escalate his Ukrainian intervention and poses a long-term threat to U.S. interests. In light of Putin’s ruthlessness, said Senator John McCain, chairman of the Senate Armed Services Committee and a major advocate of a Russia-centric posture, the president’s unwillingness to better arm the Ukrainians “is one of the most shameful and dishonorable acts I have seen in my life.”

On the other hand, choosing China as America’s principal adversary means a relatively restrained stance on the Ukrainian front coupled with a more vigorous response to Chinese claims and base building in the South China Sea. This was the message delivered to Chinese leaders by Secretary of Defense Ashton Carter in late May at U.S. Pacific Command headquarters in Honolulu. Claiming that Chinese efforts to establish bases in the South China Sea were “out of step” with international norms, he warned of military action in response to any Chinese efforts to impede U.S. operations in the region. “There should be... no mistake about this -- the United States will fly, sail, and operate wherever international law allows.”

If you happen to be a Republican (other than Rand Paul) running for president, it’s easy enough to pursue an all-of-the-above strategy, calling for full-throttle campaigns against China, Russia, Iran, Syria, ISIS, and any other adversary that comes to mind. This, however, is rhetoric, not strategy. Eventually, one or another approach is likely to emerge as the winner and the course of history will be set.

The “Pivot” to Asia

The Obama administration’s fixation on the “800-pound gorilla” that is China came into focus sometime in 2010-2011. Plans were then being made for what was assumed to be the final withdrawal of U.S. forces from Iraq and the winding down of the American military presence in Afghanistan. At the time, the administration’s top officials conducted a systematic review of America’s long-term strategic interests and came to a consensus that could be summed up in three points: Asia and the Pacific Ocean had become the key global theater of international competition; China had taken advantage of a U.S. preoccupation with Iraq and Afghanistan to bolster its presence there; and to remain the world’s number one power, the United States would have to prevent China from gaining more ground.

This posture, spelled out in a series of statements by President Obama, Secretary of State Hillary Clinton, and other top administration officials, was initially called the “pivot to Asia” and has since been relabeled a “rebalancing” to that region. Laying out the new strategy in 2011, Clinton noted, “The Asia-Pacific has become a key driver of global politics.  Stretching from the Indian subcontinent to the western shores of the Americas... it boasts almost half of the world’s population [and] includes many of the key engines of the global economy.” As the U.S. withdrew from its wars in the Middle East, “one of the most important tasks of American statecraft over the next decade will therefore be to lock in substantially increased investment -- diplomatic, economic, strategic, and otherwise -- in the Asia-Pacific region.”

This strategy, administration officials claimed then and still insist, was never specifically aimed at containing the rise of China, but that, of course, was a diplomatic fig leaf on what was meant to be a full-scale challenge to a rising power. It was obvious that any strengthened American presence in the Pacific would indeed pose a direct challenge to Beijing’s regional aspirations. “My guidance is clear,” Obama told the Australian parliament that same November. “As we plan and budget for the future, we will allocate the resources necessary to maintain our strong military presence in this region. We will preserve our unique ability to project power and deter threats to peace.”

Implementation of the pivot, Obama and Clinton explained, would include support for or cooperation with a set of countries that ring China, including increased military aid to Japan and the Philippines, diplomatic outreach to Burma, Indonesia, Malaysia, Vietnam, and other nations in Beijing’s economic orbit, military overtures to India, and the conclusion of a major trade arrangement, the Trans-Pacific Partnership (TPP), that would conveniently include most countries in the region but exclude China.

Many in Washington have commented on how much more limited the administration’s actions in the Pacific have proven to be than the initial publicity suggested. Of course, Washington soon found itself re-embroiled in the Greater Middle East and shuttling many of its military resources back into that region, leaving less than expected available for a rebalancing to Asia. Still, the White House continues to pursue a strategic blueprint aimed at bolstering America’s encirclement of China. “No matter how many hotspots emerge elsewhere, we will continue to deepen our enduring commitment to this critical region,” National Security Adviser Susan Rice declared in November 2013.

For Obama and his top officials, despite the challenge of ISIS and of disintegrating states like Yemen and Libya wracked with extremist violence, China remains the sole adversary capable of taking over as the world’s top power.  (Its economy already officially has.) To them, this translates into a simple message: China must be restrained through all means available. This does not mean, they claim, ignoring Russia and other potential foes. The White House has, for example, signaled that it will begin storing heavy weaponry, including tanks, in Eastern Europe for future use by any U.S. troops rotated into the region to counter Russian pressure against countries that were once part of the Soviet Union. And, of course, the Obama administration is continuing to up the ante against ISIS, most recently dispatching yet more U.S. military advisers to Iraq. They insist, however, that none of these concerns will deflect the administration from the primary task of containing China.

Countering the Resurgent Russian Bear

Not everyone in Washington shares this China-centric outlook. While most policymakers agree that China poses a potential long-term challenge to U.S. interests, an oppositional crew of them sees that threat as neither acute nor immediate. After all, China remains America’s second-leading trading partner (after Canada) and its largest supplier of imported goods. Many U.S. companies do extensive business in China, and so favor a cooperative relationship. Though the leadership in Beijing is clearly trying to secure what it sees as its interests in Asian waters, its focus remains primarily economic and its leaders seek to maintain friendly relations with the U.S., while regularly engaging in high-level diplomatic exchanges. Its president, Xi Jinping, is expected to visit Washington in September.

Vladimir Putin’s Russia, on the other hand, looks far more threatening to many U.S. strategists. Its annexation of Crimea and its ongoing support for separatist forces in eastern Ukraine are viewed as direct and visceral threats on the Eurasian mainland to what they see as a U.S.-dominated world order. President Putin, moreover, has made no secret of his contempt for the West and his determination to pursue Russian national interests wherever they might lead. For many who remember the Cold War era -- and that includes most senior U.S. policymakers -- this looks a lot like the menacing behavior of the former Soviet Union; for them, Russia appears to be posing an existential threat to the U.S. in a way that China does not.

Among those who are most representative of this dark, eerily familiar, and retrograde outlook is Senator McCain. Recently, offering an overview of the threats facing America and the West, he put Russia at the top of the list:

“In the heart of Europe, we see Russia emboldened by a significant modernization of its military, resurrecting old imperial ambitions, and intent on conquest once again. For the first time in seven decades on this continent, a sovereign nation has been invaded and its territory annexed by force. Worse still, from central Europe to the Caucuses, people sense Russia’s shadow looming larger, and in the darkness, liberal values, democratic sovereignty, and open economies are being undermined.”

For McCain and others who share his approach, there is no question about how the U.S. should respond: by bolstering NATO, providing major weapons systems to the Ukrainians, and countering Putin in every conceivable venue. In addition, like many Republicans, McCain favors increased production via hydro-fracking of domestic shale gas for export as liquefied natural gas to reduce the European Union’s reliance on Russian gas supplies.

McCain’s views are shared by many of the Republican candidates for president. Jeb Bush, for instance, described Putin as “a ruthless pragmatist who will push until someone pushes back.” Senator Ted Cruz, when asked on Fox News what he would do to counter Putin, typically replied, “One, we need vigorous sanctions… Two, we should immediately reinstate the antiballistic missile batteries in Eastern Europe that President Obama canceled in 2009 in an effort to appease Russia. And three, we need to open up the export of liquid natural gas, which will help liberate Ukraine and Eastern Europe.” Similar comments from other candidates and potential candidates are commonplace.

As the 2016 election season looms, expect the anti-Russian rhetoric to heat up. Many of the Republican candidates are likely to attack Hillary Clinton, the presumed Democratic candidate, for her role in the Obama administration’s 2009 “reset” of ties with Moscow, an attempted warming of relations that is now largely considered a failure. “She’s the one that literally brought the reset button to the Kremlin,” said former Texas Governor Rick Perry in April.

If any of the Republican candidates other than Paul prevails in 2016, anti-Russianism is likely to become the centerpiece of foreign policy with far-reaching consequences. “No leader abroad draws more Republican criticism than Putin does,” a conservative website noted in June. “The candidates’ message is clear: If any of them are elected president, U.S. relations with Russia will turn even more negative.”

The Long View

Whoever wins in 2016, what Yale historian Paul Kennedy has termed “imperial overstretch” will surely continue to be an overwhelming reality for Washington. Nonetheless, count on a greater focus of attention and resources on one of those two contenders for the top place on Washington’s enemies list. A Democratic victory spearheaded by Hillary Clinton is likely to result in a more effectively focused emphasis on China as the country’s greatest long-term threat, while a Republican victory would undoubtedly sanctify Russia as enemy number one.

For those of us residing outside Washington, this choice may appear to have few immediate consequences. The defense budget will rise in either case; troops will, as now, be shuttled desperately around the hot spots of the planet, and so on. Over the long run, however, don’t think for a second that the choice won’t matter.

A stepped-up drive to counter Russia will inevitably produce a grim, unpredictable Cold War-like atmosphere of suspicion, muscle-flexing, and periodic crises. More U.S. troops will be deployed to Europe; American nuclear weapons may return there; and saber rattling, nuclear or otherwise, will increase. (Note that Moscow recently announced a decision to add another 40 intercontinental ballistic missiles to its already impressive nuclear arsenal and recall Senator Cruz’s proposal for deploying U.S. anti-missile batteries in Eastern Europe.) For those of us who can remember the actual Cold War, this is hardly an appealing prospect.

A renewed focus on China would undoubtedly prove no less unnerving. It would involve the deployment of additional U.S. naval and air forces to the Pacific and an attendant risk of armed confrontation over China’s expanded military presence in the East and South China Seas. Cooperation on trade and the climate would be imperiled, along with the health of the global economy, while the flow of ideas and people between East and West would be further constricted. (In a sign of the times, China recently announced new curbs on the operations of foreign nongovernmental organizations.) Although that country possesses far fewer nuclear weapons than Russia, it is modernizing its arsenal and the risk of nuclear confrontation would undoubtedly increase as well.

In short, the options for American global policy, post-2016, might be characterized as either grim and chaotic or even grimmer, if more focused. Most of us will fare equally badly under either of those outcomes, though defense contractors and others in what President Dwight Eisenhower first dubbed the “military-industrial complex” will have a field day. Domestic needs like health, education, infrastructure, and the environment will suffer either way, while prospects for peace and climate stability will recede.

A country without a coherent plan for advancing its national interests is a sorry thing. Worse yet, however, as we may find out in the years to come, would be a country forever on the brink of crisis and conflict with a beleaguered, nuclear-armed rival.

The "Smartest Money" Is Liquidating Stocks At A Record Pace: "Selling Everything That’s Not Bolted Down"

Just over two years ago, at the Milken global conference, the head of Apollo Group Leon Black said that "this is an almost biblical opportunity to reap gains and sell" adding that his firm has been a net seller for the last 15 months, ending with the emphatic punchline that Apollo is "selling everything that is not nailed down."

Roughly at that time the great stock buyback binge began, which coupled with two more central banks entering the stock levitation "wealth effect" bonanza, provided ample opportunity for the biggest asset managers in the world to sell into.

But while we knew that both "vanilla" institutions and hedge funds were actively selling in the public markets, it was not until last week when we got the most candid glimpse of just how much. We described it last week when citing Bank of America who said that "BofAML clients were big net sellers of US stocks in the amount of $4.1bn, following four weeks of net buying. Net sales were the largest since January 2008 and led by institutional clients—after three weeks of net buying, institutional clients’ net sales last week were the largest in our data history."


Today, we got definitive confirmation that the truly "smartest money in the room", those who dabble not in the bipolar public markets but in private equity had indeed started "selling everything that is not nailed down" several years ago hitting a climax this past quarter, when Bloomberg reported that two years after Leon Black's infamous statement, "other private-equity firms are following suit - dumping stakes into the markets at a record clip."

According to Bloomberg data, firms including Blackstone Group and TPG have been "capitalizing on record stock markets around the world to sell shares, mostly in their companies that have already gone public. Globally, buyout firms conducted 97 stock offerings in the second quarter, more than in any other three-month period."

And who are these core investors selling their equity stakes to: mostly to the companies themselves...


... but what's worse, as directors and ultimate decision-makers, they are forcing their very companies to lever up even more to fund these buybacks of "insider" stock!


Since Black made his comments in April 2013, the MSCI World Index has gained 18%, stretching valuations even higher. Bloomberg adds that "headwinds that threaten to rattle global equities are everywhere -- from the Greek and Puerto Rican debt crises to an eventual increase in U.S. interest rates" but in a world in which central banks are the first and last backstop to a market drop, there is "no risk"... which is why the insiders are taking every advantage to liquidate.

"It’s clear that we are currently in an environment of frothy valuations,” said Lise Buyer, founder of IPO advisory firm Class V Group.

Her disturbing punchline: "The insiders - those with the most knowledge - are finding this a very good time to take some money off the table."

This year, private-equity firms sold $73 billion of their buyouts to the public, a record amount over a six month period, Bloomberg data show.

Some examples:

The biggest such deal this year came in May when Blackstone sold 90 million shares, or $2.69 billion worth, of hotel-chain Hilton Worldwide Holdings Inc. in a secondary offering. Blackstone took the company private in 2007 for $26 billion and did an IPO in December 2013, raising $2.7 billion. After the latest sale, Blackstone’s stake in Hilton fell to 46 percent from 82 percent before the IPO, Bloomberg data show.


The largest European exit so far this year was the $2.46 billion IPO of online car dealership Auto Trader Group Plc in London, where Apax Partners sold shares. In Asia, private-equity firm China Aerospace Investment Holdings Ltd. sold 2.3 million shares in a $2.12 billion IPO of China National Nuclear Power Co.

Which leads to a paradox: the PE firms, now focused on selling the remainder of their equity positions in massive peak credit bubble LBOs from the 2006-2007 period via secondaries have nothing left to take public, and as a result  they’re doing fewer initial offerings: PE-backed IPOs have had the slowest start to the year since 2010, selling $8.2 billion in stock.

The reason: "many of the larger companies that were swooped up during the buyout boom that ended in 2007 have already gone public. Today’s selling is largely private-equity owners getting out of those assets."

“It’s been a lot more about harvesting public positions than creating new ones through IPOs,” said Cully Davis, co-head of equity capital markets for the Americas at Credit Suisse Group AG. “The markets are open and the financial sponsors are pretty astute about timing their exits.”

In other words, the insiders are not only selling, they are liquidating every last share they can find.

In an echo of Leon Black, Frank Maturo, vice chairman of equity capital markets at UBS AG, said, “Private equity is selling everything that’s not bolted down. With the robust valuations in today’s market, they are accelerating monetizations of companies they own.”

But what does the smart money know, anyway... aside, of course, from selling when they can not when they have to.

And now back to CNBC and their paper-money "trader" talking heads saying there is only upside from here to eternity. Let's see if we have these right: "the money is still on the sidelines", "there is a wall of worry", "Greece is a dip-buying opportunity", actually "everything is a dip-buying opportunity", "stocks are not a bubble, it is bonds that are a bubble", "the economic recovery is just around the corner" and "99% percentile valuations are just slightly stretched if you seasonally-adjusted them enough times."

That about covers it.

Who Will Be The Last To Crash?

Submitted by Paul Rosenberg via,

This is the question that astute investors are forced to ask themselves these days. No reasonable person believes that a system of ever-expanding debt can resolve painlessly. It simply cannot happen… not, at least, until 2+2 stops equaling four.

But the international money system, while deeply interconnected, can implode in sections. In fact, it’s highly unlikely that it will crash as a single unit.

So, if you have significant moneys to invest, you end up coming back to our question: Who will be the last to crash? Once you decide that, you can concentrate your assets in that place, hoping to come through the crash with at least most of your value intact.

Let’s look at several aspects of this:

#1: Background statistics:
  • World debt is upwards of $200 trillion, and growing steadily. World GDP is $70-some trillion, only about a third of the debt. This debt will not be paid back. Massive amounts of debt will have to be written off in losses.

  • US debt is north of $18 trillion. (Amazingly, *cough*, it hasn’t changed in months *cough*.) Forward promises are north of $200 trillion, meaning that a child born today is responsible to repay $625,000. And since roughly half the US population pays no income tax… and presuming that this newborn will be a member of the productive half… he or she is born $1.25 million in debt. Such repayments will never happen. Most of those debts will not be repaid.

  • Japan is worse off than the US. The UK is bad. Many EU countries are worse.

These numbers, by the way, are ignoring more than a quadrillion dollars of derivatives and lots of other monkey business. (Rehypothecation, *cough*, *cough*.)

#2: No one wants to rock the boat.

Informed men and women understand that the entire system is unstable. Probably a majority of them are simply hoping that it holds together until they die. A few dream that magical new inventions will kick-start the system into a new orgy of debt, blowing an even larger super-bubble that lasts through their hopefully longer lifetimes.

But informed people also know that the system stands almost wholly upon confidence. If the sheep get scared enough to run away, the whole thing ends… and no one is ready for it to end.

So, heavy investors speak in soothing tones. They don’t want to spook the masses.

#3: We’ve already had warning shots.

Last year, the International Monetary Fund (IMF) published a horrifying paper, called The Fund’s Lending Framework and Sovereign Debt. That paper, in turn, was based upon one from December of 2013, called Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten.

The December 2013 document, right at the start, says that “financial repression” is necessary. Here’s what it says (emphasis mine):

The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression… [T]his claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.

So, in order to fix debt overhangs – currently at horrifying levels – financial repression is not just an option, but required.

And of course, they’ve already had a trial run, when they stole funds directly from individual bank accounts in Cyprus.

The IMF report goes on to say:

[G]overnments can stuff debt into local pension funds and insurance companies, forcing them through regulation to accept far lower rates of return than they might otherwise demand.

[D]omestic defaults, restructurings, or conversions are particularly difficult to document and can sometimes be disguised as “voluntary.”

We have a pretty good idea of what’s coming down the pike.

But again, Goldman’s Muppets are not to be told about this. And truthfully, most of them don’t want to know.

#4: We have no view of what’s happening in the back rooms.

People make large bets on what Janet Yellen and the Fed will decide next, but when we do that, we overlook something very important:

Yellen is merely an employee of the Federal Reserve, not an owner. And we don’t know who the owners are.

We do know that the Fed is owned by private banks, and that it has a monopoly on the creation of US currency, but we really don’t know who owns the shares. The true owners are almost certainly reflected in the roster of primary dealers, who skim Federal Reserve units as they’re being made, but we don’t know much more than that.


Who are the people that Yellen takes orders from?

What do these people want?

What are their long-term positions?

Who might they protect, aside from themselves?

We don’t have real answers to any of these questions. From our perspective, the guts of the machine are hidden behind a curtain.

#5: The US is playing to win.

One thing we do know is that the US has a strong hand. Within a general deflationary situation, the Fed can print away. And they’re propping up the US markets quite well… for now.

Feeling their power (after all, they can blow up more stuff than anyone else!), the US is throwing their weight around, forcing nearly every bank in the world to play by their rules. (Think FATCA and fining foreign banks.) And for the moment, it is working.

Bullying everyone else over the long term may, however, not be viable. No one – especially people like Putin and the Chinese bosses – likes to be slapped around in public. And they are not powerless.

Conclusion: Most Bets Are on the US

Europe isn’t looking good. Japan isn’t looking good. The UK is holding, but as mentioned above, its numbers are horrible. Switzerland seems to be in-between strategies. China has problems. Russia has problems. The BRICS have never been stable.

That leaves the US. My impression is that most serious investors would rather hold dollars than yen or euros; most big businesses too. Their bets are on that the US will crash last.

So, are the Fed and the US Treasury doing this intentionally? Are they quietly pulling the pins out from under the others, making sure that they’ll be the last currency standing? I have no inside information, but I’d bet on it.

Remember, the gang on the Potomac has most Americans believing that whatever they do overseas is pure and holy. Furthermore, 99% of their serfs will reflexively obey any order they give. So, why shouldn’t they play dirty? They have the best bombs and a somnambulant public.

For now.

Black Churches Are Burning Across The South, Arson Eyed

Following the murder of nine African American churchgoers in Charleston, South Carolina last month, we said the following about the current state of American society:

The riots that left Baltimore in ashes in late April and the massacre that occurred last week at the historic Emanuel AME church in Charleston serve as vivid reminders of the extent to which American society now teeters perpetually on the edge of social upheaval. Increasingly, those who feel ‘the system’ has somehow failed them are turning to violence as a means of addressing their grievances, which betrays a complete lack of faith in the government’s ability to help create the conditions under which groups and individuals with divergent interests can coexist without sinking into a Hobbesian state of nature. 

We then made the following admittedly stark prediction: "Ultimately, it appears America has become a country wherein everyone feels marginalized and/or aggrieved in one way or another. In the absence of a dramatic societal reboot, we fear social instability is likely here to stay."

That assessment appears to have been quite accurate because over the course of just two weeks, six predominantly African American churches in the US have burned, with authorities suspecting arson in several of the blazes. NY Times has the story:

Ivestigators sifted through the burned-out shell of a black church here on Wednesday, trying to determine the cause of a fire that has left residents here anguished.


Williamsburg County officials said the fire at the Mount Zion A.M.E. Church, which took more than two hours to extinguish, began around 8:30 p.m. on Tuesday and burned through the church’s roof. Lightning storms moved through the area overnight.



The fire came as the authorities in Georgia, North Carolina, South Carolina and Tennessee investigated blazes at other churches, most of them predominantly black. Although the authorities have concluded that some of those fires were arson, officials have not yet described any of the episodes as hate crimes.


One of the fires was caused by lightning and another was electrical. Investigators also said there was no evidence that the fires at the churches were linked.

Still, it’s difficult to ignore the trend — especially in light of recent events. Indeed, Mount Zion has burned to the ground before. 20 years ago, two Ku Klux Klan members pleaded guilty to civil rights charges on the heels of a fire at the church. Here’s AFP:

"There are still a lot of questions to be answered," Williamsburg County chief deputy sheriff Stephen Gardner told reporters in Greeleyville when asked Wednesday about the cause of the Mount Zion fire.


"We haven't ruled anything in or anything out at this point," added Federal Bureau of Investigation (FBI) agent Craig Chilcott, as sniffer dogs helped police and fire investigators comb through the church ruins.


Mount Zion last burned to the ground in June 1995, in a fire that prompted the arrest of two Ku Klux Klan members in their early 20s.


The pair got prison terms after pleading guilty to federal civil rights charges, while the church won a $37.8 million lawsuit against the Christian Knights of the Ku Klux Klan and its South Carolina leader.


"Because of its prominence in the African-American community, the church has historically been a target of arson and destruction by bigots and white supremacists," said the department's National Church Arson Task Force, launched by then-president Bill Clinton in the aftermath of the 1995 Mount Zion fire.

In addition to the fire at Mount Zion, Glover Grove Baptist Church in Warrenville, South Carolina burned down on June 26, Briar Creek Road Baptist Church in North Carolina was reduced to ashes on June 24, God's Power Church Of Christ in Macon, Georgia was found on fire with the front doors wired shut on the 23rd, and bales of hay as well as a church van were set alight in front of College Hill Seventh Day Adventist church in Knoxville, Tennessee on June 21. Here are the visuals:

*  *  *

So while the jury is still out (so to speak) on whether there is indeed some discernible connection between the incidents shown above, it does appear that at least some of these fires were set intentionally which would seem to be further evidence that the fabric of American society may be ripping apart at the seams and we suspect that when December rolls around and we once again review the most-read posts of the preceding 12 months, we'll find that for the second year running, "civil unrest" is a common thread.

The Current Oil Price Slump Is Far From Over

Submitted by Arthur Berman via,

The oil price collapse of 2014-2015 began one year ago this month (Figure 1).  The world crossed a boundary in which prices are not only lower now but will probably remain lower for some time. It represents a phase change like when water turns into ice: the composition is the same as before but the physical state and governing laws are different.*

Figure 1. Daily crude oil prices, June 2014-June 2015.  Source: EIA.
(Click image to enlarge)

For oil prices, the phase change was caused mostly by the growth of a new source of supply from unconventional, expensive oil. Expensive oil made sense only because of the longest period ever of high oil prices in real dollars from late 2010 until mid-2014.

The phase change occurred also because of a profoundly weakened global economy and lower demand growth for oil. This followed the 2008 Financial Collapse and the preceding decades of reliance on debt to create economic expansion in a world approaching the limits of growth.

If the cause of the Financial Collapse was too much debt, the solution taken by central banks was more debt. This may have saved the world from an even worse crisis in 2008-2009 but it did not result in growing demand for oil and other commodities necessary for an expanding economy.

Monetary policies following the 2008 Collapse produced the longest period of sustained low interest rates in recent history. As a result, capital flowed into the development and over-production of marginally profitable unconventional oil because of high coupon yields compared with other investments.

The devaluation of the U.S. dollar following the 2008 Financial Collapse corresponded to a weak currency exchange rate and an increase in oil prices.  The fall in oil prices in mid-2014 coincided with monetary policies that strengthened the dollar.

Prolonged high oil prices caused demand destruction. This also allowed the expansion of renewable energy that could compete only at high energy costs. Concerns about global climate change and its relationship to burning oil and other fossil energy threatened the future interests of conventional oil-exporting countries. OPEC hopes to regain market share from expensive unconventional oil and renewable energy, and to renew demand for oil through several years of low oil prices.

OPEC increased production in mid-2014, and decided not to cut production at its November 2014 meeting   By January 2015 oil prices fell below $50 per barrel.

Most observers expected a sharp reduction in U.S. tight oil production after rig counts fell with lower prices. Production fell in early 2015 but recovered as new capital poured into North American E&P companies. This and the partial recovery of oil prices into the mid-$60 per barrel range gave expensive oil another day to survive and fight.

If capital continues to flow to unconventional oil companies and OPEC’s resolve stays firm, oil prices could average near the present range for many years. Oil prices will probably fall in the second half of 2015 as the ongoing production surplus and weak demand overcome the sentiment-based belief that a price recovery is already underway.

Oil prices must inevitably rise as unconventional production peaks over the next decade and oil-exporting countries increasingly consume more of their own oil. Politically driven supply interruptions will inevitably punctuate the emerging new reality with periods of higher prices.

For now, however, we have crossed a boundary and notions of normal or business-as-usual should be put aside.

A New Supply Source and Over-Production 

The main cause of the price collapse of 2014-2015 was over-production of oil.  Most of the increase came from unconventional production in the United States and Canada–tight oil, oil sands and deep-water oil. From 2008 to 2015, U.S. and Canadian production increased 7.65 million barrels per day (mmpbd). During the same period, non-OPEC production less the U.S. and Canada decreased 2.85 mmbpd and OPEC production increased 1.79 mmbpd (Figure 2).

Figure 2 . World liquids production since 2008 and the relative shares for the U.S. & Canada, OPEC and non-OPEC less the U.S. and Canada.
Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

North American unconventional and OPEC conventional production increased almost 4 mmbpd in 2014 alone (Figure 3).

Figure 3. U.S. + Canada & OPEC Liquids Production Since January 2014. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Through 2013, unconventional production growth was matched by decreases in OPEC production mostly from supply interruptions due to political events (Figure 4). The result was that prices remained high despite increases in unconventional production.

Figure 4. U.S. + Canada & OPEC Liquids Production Growth, 2011-2015. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

OPEC responded to defend its market share in mid-2014 by increasing production. Prices started falling in late June 2014 from $115 per barrel (Brent) and reached a low in late January 2015 of $47 per barrel after OPEC decided not to cut production at its November 2014 meeting.

Unconventional production slowed and fell in early 2015. Then, prices increased beginning in February and Brent has averaged $63 per barrel since May 1 (WTI average $59 per barrel). Over-production continues as different parties struggle for market share, for cash flow to survive, or both.

If high oil prices created the conditions for unconventional oil to grow and challenge OPEC’s market share, then prolonged low oil prices must be part of OPEC’s solution.  By keeping prices below the marginal cost of unconventional production (about $75 per barrel), OPEC hopes that expensive oil production will decline along with the fortunes of the companies engaged in these plays.

Decreased Demand and Demand Destruction 

OPEC is as concerned about long-term demand as it is about market share. Oil is the only major source of revenue for many OPEC countries and low demand, potential competition from other fuel sources, and the effect of a perceived link between oil use and climate change are existential threats.

Demand growth for oil has been declining since the late 1960s (Figure 5).  OPEC hopes to stimulate demand through low oil prices back to the peak levels that existed before the price shocks of the 1970s and 1980s.

Figure 5. World Liquids Demand Growth.  Source: BP, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Demand destruction followed periods of high oil prices from 1979-1981 (Iran-Iraq War) and from 2007-2008 (demand growth from China).  2010-2014 was the longest period in history–33 months–of oil prices above $90 per barrel in real dollars (Figure 6). Since 2011, demand growth has fallen to only 0.5% per year so far in 2015 (Figure 5).

Figure 6. Crude oil prices more than $90 per barrel in 2015 dollars. Source: EIA, Federal Reserve Board and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Prolonged low oil prices may restore growth to the global economy accomplishing what the central banks have failed to do since 2008. If successful, interest rates should rise and this may restrict the flow of capital to unconventional E&P companies. Most of the capital provided to these companies comes from high-yield (“junk”) corporate bond sales, preferred share offerings, and debt. In a zero-interest rate world (Figure 7), these provide yields that are are much higher than those found in more conventional investments like U.S. Treasury bonds or money market accounts. If interest rates increase with a stronger economy, capital may flow to more productive investments that offer yields that are more competitive with higher risk tight oil offerings.

Figure 7. Federal funds interest rates January 2000-June 2015 and Brent crude oil price.
Federal Reserve Board, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Over-Production Continues

The over-production that began the oil price collapse continues and has gotten worse. The global production surplus (production minus consumption) has gone on for 17 months and has grown from 1.25 mmbpd in May 2014, just before prices began to fall, to almost 3 mmbpd in May 2015 (Figure 8).

Figure 8. World liquids production surplus or deficit and Brent crude oil price. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

We may take some comfort that the rate of increase has slowed but it is difficult to explain the increase in prices over the last few months based on supply and demand.

The production supply surplus that is largely responsible for the current oil-price collapse is not a trivial event that will likely go away soon unless production is cut either by unconventional producers or OPEC. Earlier production surpluses in May 2005 and January 2012 were higher than today but were short-lived and related to specific non-systemic factors (Figure 9).

Figure 9.  World liquids relative production surplus or deficit and Brent price in 2015 dollars, 2003-2015. 
Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

The present supply imbalance is structural and persistent. The only comparable episode in recent history was the production deficit immediately before the 2008 Financial Collapse that lasted 11 months. It was driven by growing Chinese and other Far East demand and by dwindling oil supplies following the peak of conventional production in 2005.

For now, OPEC appears committed to continued over-production to achieve its goals. Its production increased 1.4 million barrels of liquids per day during the last year (Figure 3) and some analysts suggest it might increase by an equal amount again in coming months.

Meanwhile, U.S. production has not fallen much so far. Production from the main tight oil plays fell about 77,000 bpd in January 2015, was basically flat in February and increased 51,000 bpd in March (Figure 10). This is partly because companies are high-grading well completions in the best parts of the plays. It is also because of the backlog of drilled but uncompleted wells that are being brought on production at a fraction of the incremental cost of drilling new wells.

Figure 10. Oil production from tight oil plays in the U.S. Source: Drilling Info and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

But the most significant factor is that capital flow to U.S. unconventional plays has increased. Figure 11 shows that almost $17 billion in equity offerings flowed to U.S. oil companies in the first quarter of 2015, more than in any other period since 2010. The percent of E&P equity rose to over 10% of overall issuance from an average of about 4-5% over the last decade. This can only be explained because there are no alternative investments with comparable yields and that investors believe that they are buying assets that are somehow viable at current oil prices.

Figure 11. Capital available to U.S. E&P companies in the first quarter of 2015. Source: Wall Street Journal.
(Click image to enlarge)

Tight oil companies have made the case that through increased efficiency and lower service costs that their economics are better at lower oil prices today than they were at $90 per barrel prices a few years ago. First quarter (Q1) financial results do not support this claim.

In fact, tight oil companies are losing more than twice as much money in Q1 2015 as they were in 2014. On average, companies that were spending $1.40 for every dollar they earned from operations last year are now spending $3.20 for every dollar earned (Figure 12).

Figure 12. First quarter (Q1) 2015 vs. full-year 2014 capital expenditures-to-cash flow from operations ratio.
Source: Google Finance and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Follow The Money

The strength of the U.S. dollar provides a simple and generally reliable way to cut through the complex factors that govern oil prices. A negative correlation exists between the strength of the U.S. dollar and the price of oil (Figure 13). This correlation is particularly strong beginning in about 1997.

Figure 13.  U.S. Federal Reserve Board broad dollar index and CPI-adjusted Brent and WTI crude oil prices.
Source:  Federal Reserve Board, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

The relationship is key to understanding the current oil-price collapse. Figure 14 shows the daily exchange rate of the U.S. Dollar and the Euro in relation to Brent and WTI crude oil prices.  The onset of price decline coincided with a stronger U.S. dollar beginning in June 2014 that may be related to the end of quantitative easing and to an improving U.S. economy.  The recent increase in oil prices in 2015 corresponds to weakening of the dollar that may reflect disappointingly weak first quarter 2015 U.S. GDP growth.

Figure 14. U.S. dollar/Euro exchange rate, Brent and WTI prices. Source: EIA, Oanada and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

The standard explanation for the relationship between the dollar and oil price is that global oil transactions are carried out in U.S. dollars. When the dollar is weak against other currencies, oil prices are higher and when the dollar is strong, oil prices are lower. In other words, a stronger U.S. economy and currency may reduce oil prices and vice versa. While the observation is accurate, the explanation is more complex.

Oil and other commodities are hedges against economic risk and uncertainty. Oil prices increase and decrease as risk perception rises and falls. High oil-supply risk or “fear premiums” generally manifest as short-lived, upward price spikes that are quickly integrated into forward price expectations. Following the initial shock of oil-supply risk, U.S. Treasury bond and related “flight-to-safety” investments tend to lower oil price trends as the U.S. dollar appreciates.

Supply and demand balance operates as a first-order cycle against which economic uncertainty and geopolitical risk fluctuate as second- and third-order cycles. When a  first-order supply imbalance coincides with second- or third-order economic or geopolitical factors, an upward or downward price-cycle may develop. Higher energy costs are a weight on the economy that may lower currency values.  Conversely, lower energy costs may lift the economy and currency values.

The U.S. is the world’s largest economy and the U.S.dollar is the world reserve currency. This makes the U.S. dollar a fairly reliable reflection and measure of all of these factors.

The 2014-2015 oil price collapse may be understood then as a supply surplus that occurred at a time of a strengthening U.S. economy (low economic uncertainty) and relatively low geopolitical risk (Figure 15).  The additive effect of these three cycles was a sharp decline in oil prices.

Figure 15. World liquids production or surplus, Brent price and U.S. dollar index.
Source: EIA, Federal Reserve Board and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Are Low Oil Prices Long or Short Term?

Oil price collapses in 1981-1986 and 2008-2009 are the only analogues for the present price situation (Figure 16). So far, the current price collapse seems more similar to 1981-1986 than to 2008-2009.

Figure 16. The 1981-1986 and 2008-2009 oil price collapses in the context of OPEC and
non-OPEC oil  production, oil consumption and Brent crude oil price in 2014 U.S. dollars.
Source: BP, EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

1981-1986 was a long-term event. The price collapse itself lasted for 5 years but oil prices remained below $90 per barrel in real dollars until 2007, almost 27 years.

2008-2009 was a short-term event. Prices began falling in July 2008 and reached a low point in December 2008. Prices recovered and reached $90 per barrel in April 2010 and $100 per barrel in March 2011. Then entire cycle from $90 per barrel and back again lasted a little more than 2 years.

The oil price collapse of the 1980s was similar to the present price collapse because the primary cause was a new source of supply. Non-OPEC production exceeded OPEC production in 1978 as new supply from the North Sea (U.K. and Norway), western Siberia (Russia), the Campeche Sound (Mexico) and China came on line. Unlike the present, the new supply was inexpensive conventional oil.

Oil prices had increased in 1979-1981 to more than $90 per barrel in real dollars because of supply interruptions at the beginning of the Iran-Iraq war. This caused approximately 4.3 mmbpd of demand destruction. Lower demand and continued supply growth from non-OPEC countries caused a production surplus beginning in 1982.

Oil prices fell from $106 per barrel in 1980 to $31 per barrel in 1986. OPEC cut 10 mmbpd of production between 1980 and 1985 with no effect on falling oil prices. In 1986, OPEC decided to increase production to protect market share, abandoning its role as “swing producer.”

Although neither the volume of new supply or the amount of demand destruction during the current price collapse are as great as 1981-1986, they are more similar than to 2008-2009.

The 2008-2009 oil price collapse was part of an overall crash of the entire global economy. High oil prices in 2007 and 2008 were due to a large and persistent production supply deficit because of high demand from China and the Far East, and dwindling supplies following the peak of conventional oil production in 2005 (Figures 15 and 17). The surplus had nothing to do with new supply but was completely due to decreased demand from a collapsing global economy. The surplus only lasted for 6 months and never approached the level seen in 2014-2015 (an OPEC production cut  in early 2009 limited the length of the surplus and possibly its magnitude).

Figure 17. World liquids production surplus of deficit (12-month moving average) and Brent oil price. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

High oil prices preceding the 2014-2015 price collapse began because of supply interruptions resulting from the Arab Spring. Brent price reached a maximum of $129 per barrel in April 2011 at the height of the Libyan Civil War. These events corresponded with a period of U.S. currency devaluation following the 2008 Financial Collapse and an extraordinarily weak U.S. dollar (Figures 13 and 15). The additive effects of a supply deficit, economic uncertainty and geopolitical risk resulted in high oil prices.

Case histories neither predict the present or the future but offer guidelines. These two case histories simply suggest is that the present period of low oil prices is more similar to that of the 1980s and 1990s than to that of the 2008-2009 period. That similarity means that the current phenomenon is likely to be a relatively long-term event.


The availability of capital to fund unconventional production is the key to how long low oil prices will last going forward. If the flow of capital continues, then the production surplus and lower oil prices will also continue, assuming that OPEC is able to maintain higher production levels and that demand growth remains relatively low.

Eventually, price will win and unconventional production will fall. The market will rebalance and prices will rise. If oil prices stay low for long enough, demand will increase to support those higher prices. I doubt that prices will increase to levels before mid-2014 barring politically driven shock events. $90 per barrel appears to be the empirical threshold price above which demand destruction begins.

It is more difficult to predict how the second- and third-order effects of economic uncertainty and geopolitical risk may affect supply and demand fundamentals and, therefore, price.  These are the wild cards that could change the  outcome that I describe.

The most likely case is that oil prices will decrease in the second half of 2015 and that financial distress to all oil producers will increase. The hope and expectation that the worst is over will fade as the new reality of prolonged low oil prices is reluctantly accepted.

We have had a year of lower oil prices. Based on available data, I see no end in sight yet. The market must balance before things get better and prices improve. That can only happen if production falls and demand increases. That will take time.

We have crossed a boundary and things are different now.

China Races To Rescue Stocks As Margin Mania Unwind Wreaks Havoc

As outlined earlier today, Chinese equities re-plunged on Wednesday, retracing Tuesday’s bounce and returning stocks to their post-PBoC crash levels, hit on Monday after a desperation dual rate cut failed to trump margin jitters and ATM lines in Greece. 

As tipped in “The Biggest Threat To Chinese Stocks: Shadow Lending Crackdown”, margin trading above and beyond officially sanctioned broker limits has likely added somewhere between CNY500 billion and CNY1 trillion to the official (and already stratospheric) CNY2.2 trillion in margin lending that’s poured into the market since last summer. Here’s BofAML on shadow lending and why it’s important going forward.

Based on limited available data, we estimate that SHCOMP could drop to the 2,500 range (some 40% down from the current level) for large-scale margin call to be triggered at the broker-run margin financing facilities (MFs). However, this doesn't mean that margin call is not a serious risk right now. In our view, the selling pressure so far has mainly come from stock-related borrowings via various unofficial channels where the leverage is much higher. 


Besides MFs, there are many forms of leverage for stock purchases, including umbrella trust, financing companies, P2P platforms, stock-collateralized loans, wealth management products tied to stocks' performance, and even some personal, SME and corporate loans might have been diverted to buy stocks. The size of the other forms of leverage can easily be double or triple of that of MFs’ by our estimate (A-share fund flows analysis, Jun 8). In our view, these leverages are more risky than MFs because they are less transparent and lightly regulated, if at all - for example, anecdotally, we saw many cases of 10x leverage vs. less than 1x at MFs; and also unlike MFs, the other borrowings are often used to buy small caps which tend to be more speculative. 

The “umbrella trusts” mentioned above are a particularly noxious vehicle that effectively allows retail investors to borrow from unsuspecting depositors to make leveraged bets on stocks. As a reminder, here’s how they work: Brokerages are only allowed to facilitate margin trading for investors whose account balances total at least CNY500K, and even then, traders can only lever up 2X. Clearly that’s no fun, so brokerages naturally looked for ways to skirt the rules. Umbrella trusts offered a way around the restrictions and while the mechanics can be made to sound complex, the idea is actually quite simple. An umbrella trust is set up like a CDO. The senior tranche is sold by banks to clients who receive a fixed payout (like a coupon payment), only instead of CDS premiums (in the case of a synthetic structure) or cash flows (from a cash structure), the ‘coupon’ payments are generated by equity investments in the subordinated tranches, which are used by brokerages to skirt margin restrictions. In other words, the guys holding the senior tranches are financing the stock trades of the guys in the junior tranches.

Late last year, the South China Morning Post described the products as follows: 

This is how it begins. A trust company sets up an umbrella structured trust to cater to various stock speculators who want more than what the official margin finance limits will allow.


Under the trust are different units that are nothing but stock "pools" managed by the speculators. He or she puts up 40 yuan and gets 100 yuan from some so-called preferred investors to make the bet. That is 250 per cent gearing; it varies with different units.


The unit is then distributed to the man in the street through the banks. An unsuspecting you will become the preferred investor. Your return is capped at 6 per cent and the rest is for the speculator.


The only "protection" you have is the margin call made by the trust company on the speculator in the event of a market fall. He or she is solely responsible for topping up the margin. The so-called protection is, however, false. The product's documentation provides zero information on the identity of the speculator or his financial strength in case of a margin call. Neither does it detail the stock portfolio nor its liquidity in case of forced sale.


If the market goes south, one will end up with nothing. "I couldn't even begin to call it a high or low-risk product, as all necessary information is missing," a private banker in Hong Kong said.

But umbrella trusts and structured funds aren't the only way investors can skirt official margin trading restrictions in China. As Bloomberg reports, P2P loans — which have exploded in popularity in the US and are now being securitized — have also become popular among Chinese traders looking to "amplify" their bets.

Via Bloomberg:

As more Chinese jumped into the market in the hope of instant wealth, peer-to-peer websites offering loans for stock investing have mushroomed. They are among a multitude of sources of leverage outside of traditional margin financing that threaten to complicate any efforts to prevent an unruly reversal of China’s stock market boom, which is already faltering.


“While we can regulate margin finance within a brokerage, for those financing activities which are not within the securities houses, it’s very difficult to regulate,” said Ronald Wan, the chief executive officer of Partners Capital International, an investment bank in Hong Kong.


The perils of debt-fueled trading were underscored in past weeks, as the unwinding of margin loans helped drive China’s benchmark index into a bear market.


Online peer-to-peer, or P2P, lending accounts for just a small part of total leverage, yet it has expanded rapidly and attracted the type of investors who can least afford losses -- those that don’t qualify for traditional margin loans.


About 40 online lenders helped arrange more than 7 billion yuan of loans for stock purchases in the first five months of 2015, according to Shanghai-based Yingcan Group, which tracks China’s more than 1,500 such credit providers. Lending volumes surged 44 percent in May from April, Yingcan estimates.


The sites are popular because they allow high levels of leverage, and lack the restrictions brokers impose on margin finance accounts, such as high deposits and limits on the types of stocks against which clients can borrow.


“The threshold for lending on peer-to-peer websites is lower, this suggests that investors who borrow through these sites tend to be weaker financially,” said Shen Meng, a Beijing-based director at Chanson & Co., an investment bank.


Zhang the investor says he can borrow up to five times his capital using P2P sites, while brokers only allow leverage of up to three times. He can also take positions in an almost unlimited number of stocks, while brokers only extend margin finance for 900 of the shares traded in Shanghai and Shenzhen.

As should be abundantly clear from the above, China's equity miracle is in large part attributable to the leverage employed by retail investors who have used a bewildering variety of unofficial channels to avoid margin restrictions. As the market cracks and as the media shines new light on the shadowy vehicles investors use to pyramid risk, the unwind appears to have begun. In a testament to just how determined China is to keep the bottom from falling out, the China Securities Regulatory Commission is now racing to implement new margin trading rules and cut fees. From Bloomberg again:

China announced additional steps aimed at boosting equity markets, including speeding up the introduction of new margin-trading rules and cutting stock-transaction fees, after markets tumbled again on Wednesday.


The China Securities Regulatory Commission will no longer require brokerages to force the sale of stock held by clients with insufficient collateral, and will allow “reasonable rollover” in margin trading, it said on its microblog on Wednesday. China’s two bourses will reduce the fees by 30 percent starting Aug. 1, the Shanghai Stock Exchange said on its microblog the same day.


“While the reduction in transaction fee is symbolically supportive, easing margin requirements is more significant potentially as it may reduce the level of margin calls and forced selling,” Tony Hann, who manages $350 million as head of emerging markets at Blackfriars Asset Management Ltd. in London, said by e-mail.


Brokerages can securitize the right to profit from margin trading and short selling operations, the CSRC said. The regulator also said it will also let all brokerages sell short-term bonds, expanding a pilot program.


China Securities Depository & Clearing Co. will trim transaction fees by 33 percent on Aug. 1, it said in a statement on its website.

So, Beijing is set to "rollover" margin trading much as it does NPLs, which is simply another attempt on the part of the Politburo to forestall the deleveraging process, only this time the kick-the-can approach is being applied to brokerages as opposed to bank balance sheets.

Meanwhile, it appears as though the country's securities regulator is set to support the issuance of what amount to brokerage fee-backed securities, a structured credit abomination insane enough to make even the most corrupt Wall Street trading desks cringe. 

"Leverage your dream"...


U.S. Admits Paying Terrorists For Services Rendered In Syria

Submitted by Brandon Tourbeville via,

When researchers such as myself have reported that the United States is funding al-Qaeda, Nusra, ISIS and other related terror organizations in Syria, we were not kidding. Still, despite the fact that even the U.S. government itself has admitted that it was funding terroristsdirectly and indirectly through Saudi Arabia, the suggestion was met with disbelief, ridicule, or either entirely ignored.

Now, however, the United States government has admitted that it funds terrorists on the ground in Syria yet again, this time placing an individual dollar amount on the assistance provided.

According to the Pentagon, Syrian “rebels” being trained and “vetted” by the United States are receiving “compensation” to the tune of anywhere between $250 to $400 per month to act as America’s proxy forces in the Middle East. Reuters reports that the payment levels were confirmed by the Pentagon and also that the Secretary of Defense Ashton Carter and Navy Commander Elissa Smith both separately admitted the fact that these “new” terrorists are receiving a stipend.

Reuters also reported on alleged obstacles the Pentagon claims it is facing regarding the ability to train the death squad volunteers due to a lack of ability to “vet” them appropriately as well as a bizarre incident where fighters abandon the mission after having received training from the US military. The reason provided by the Pentagon was that the fighters did not want to sign a contract to avoid fighting Assad. But, in the same report, the Pentagon states that there was no such contract – only one requiring them to “respect human rights” and “the rule of law,” so the reason provided for the disappearance of these fighters lacks legitimacy. One can only speculate as to where these “trainees” disappeared to.

Of course, “human rights” and the “rule of law” have never been concerns before, even as the United States has funded, armed, trained, and directed jihadists on the ground from the very beginning of the Syrian crisis. Neither has there been any concern over the presence of “moderate” rebels that have never actually existed in Syria. After all, it should be remembered that the United States own Defense Intelligence Agency was recently forced to release and declassify documents which admitted that not only did the US know that the “rebellion” was made up of al-Qaeda and Nusra forces but that these organizations and similar groups were attempting to create a “Salafist principality” in the east of Syria and West of Iraq. The DIA docs also show that the US was supporting all of these efforts. In reality, of course, the US was directing these efforts.

Make no mistake, the United States is not funding “moderate vetted rebels” to fight ISIS or al-Qaeda. The US is funding jihadist terrorists and mercenaries to work alongside ISIS and al-Qaeda (if they are not members of these organizations already) to overthrow the secular government of Bashar al-Assad. Virtually every person of a moderate persuasion in Syria has long come over to the side of the Syrian government. Indeed, there was never such a thing as a moderate rebel in Syria to begin with and the reality on the ground has not changed since.

Thus, revelations that the United States is funding a mercenary army to overthrow Assad is nothing new. The only revelation contained in these recent reports are the chicken feed denominations of money that the terrorist savages are accepting for their services in barbarity and treason on behalf of the agenda of the Anglo-American world order.

Desperate Greeks Resort To Scavenging Through Garbage To Find Food

Earlier today we documented the "heartbreaking" plight of Greece's retirees who have been reduced to lining up in front of Greek banks hoping for a chance to collect a portion of their pensions. Some went away empty handed (there were reports that only those whose last names began with "A" through "K" were paid on Wednesday) and those who did manage to leave with cash were only allowed to access a third of their usual payouts. 

This comes as Greeks may (and we emphasize "may", because nothing is certain and the Greek government has bent over backwards to claim that deposits are "safe") face a Cyprus-like depositor bail-in in the weeks ahead. 

But as bad as all of the above is, it gets still worse, because as The Telegraph reports, the beleaguered Greek populace has been reduced to collecting scrap metal and scavenging for food.

Here's more:

Piled high with rubbish congealing in the summer heat, municipal dustbin R21 on Athens' Sofokleous Street does not look or smell like a treasure trove.


But for Greece's growing army of dustbin scavengers, its deposits of rubbish from nearby stores and grocery shops make it a regular point of call.


"Sometimes I'll find scrap metal that I can sell, although if I see something that looks reasonably safe to eat, I'll take it," said Nikos Polonos, 55, as he sifted through R21's contents on Tuesday morning. "Other times you might find paper, cans, and bottles that you can get money for if you take them back to the shops for recycling."



One reason for R21's popularity is because it is just down the road from a church soup kitchen, where the drug-addicted, the poor and homeless queue up for meals three times daily.


Mr Polonos, a quietly spoken man of 55, is typical of the new class of respectably destitute. He lost his job as a construction worker three years ago, when Greece's building boom dried up, and in the current climate, cannot see himself finding paid work in the foreseeable future.


Yet he dresses as smartly as he can in second-hand trousers and shirt, and does not see himself as any kind of vagrant.


"I don't want to ever look like him," he said, gesturing to a tousle-haired drug addict slumped in a doorway near the soup kitchen. "I never believed I would end up like this, but as long as Greece is in this terrible situation, my construction skills are not in demand. A lot of my friends are doing what I do now, and some people I know are even worse off. They have turned to drugs and have no hope at all."


Perhaps the most tragic thing about the above is that, as noted in the video, this is hardly a recent development in Greece.

High unemployment has plagued the country for years and has indeed become endemic, relegating many Greeks to a life of perpetual and severe economic hardship. One can only hope that whatever the outcome of this weekend's referendum turns out to be, both Athens and Brussels will recognize the need to arrest what has become an outright humanitarian crisis.

What If Gold Is Declared Illegal?

Submitted by Bill Bonner of Bonner & Partners (annotated by's Pater Tenebrarum),

The Beginning of the End

Over the weekend, the lines in Greece stretched along the street. Around the corner. Down the block. Lines to get cash. Lines to buy gas. Lines of people eager to get their hands on something of value. Food. Fuel. Cash. Pity the poor guy who was last in line …

… the poor taxi driver, for example, standing behind 300 other people, trying to get 200 lousy euros out of an ATM. Like a tragic nightclub customer … among the last to smell the smoke. By the time he headed for the exit, it was clogged with desperate people, all struggling to get through the same narrow door at the same time.


Being the last in line usually means you have waited too long.

Image via, Al Capone’s Soup Kitchen, Chikago 1931

Remember: When a bear attacks in the woods, you don’t have to be faster than the bear. You just have to be faster than at least one other hiker…

Likewise, you don’t have to be the first one to get your money out of an ATM. You just want to be sure you get your money before the machine runs out of cash. And when a bear attacks Wall Street, you don’t have to be the first to sell. But you definitely don’t want to be the last.


People storming a bank in Shanghai in December 1948. The paper currency had just crashed, and the Kuomintang decided to make a distribution of 40 grams of gold per person. People desperately wanted to obtain their gold before the banks ran out.

Photo credit: Henri Cartier-Bresson


The Dow lost 350 points on Monday – its biggest point drop in two years. On Tuesday, Greece was expected to default on a $1.7-billion payment to the International Monetary Fund (IMF). And on the other side of the planet, analysts are looking at “the beginning of the end for Chinese stocks.”

We doubt it is the beginning of the end. More likely, it is just the end of the beginning. On Friday, the People’s Bank of China cut rates to a record low, after stocks in Shanghai slipped 7% in a single day (the equivalent of about 1,300 points on the Dow).

Analysts expected a big rally in response to the rate cut. Instead, the Shanghai Index plunged again on Monday, dropping 3%. Greece… China… said one commentator interviewed by Bloomberg: “You have a potentially very ugly situation this week.”

Our guess: Stocks in the U.S. and China have topped out. Old-timer Richard Russell, who has been studying markets since 1958, agrees:

“I believe the top has appeared, like the proverbial thief in the night. The Dow has fallen below the 18,000-point level, and is now negative for the year.

The Transports, which have led the way recently, are down triple digits for today and are only 89 points above the critical level of 8,000. The Nasdaq has closed under 5,000. At the market’s close, gold was up 5.3 at 1,179.”


Dow Transports Average and Industrial Average – the trannies have been declining for months, and following this big divergence, a first Dow Theory sell signal has now been given with the Industrials undercutting their previous reaction low as well, via StockCharts, click to enlarge.


When Gold Is Declared Illegal …

But wait … What about silver and gold? As regular readers know, we recommend having some cash on hand in case of a monetary emergency. But a reader asks:

“In the same vein as your reader’s question as to what good cash is when it’s declared illegal, what good is gold when gold is declared illegal?”

First, precious metals aren’t illegal, so far. Second, making something illegal doesn’t necessarily make it unpopular. President Roosevelt banned gold in 1933. The feds wanted complete control of money. The dollar was backed by gold. So getting control of the dollar meant getting control of gold.

Once the feds had the gold, they could devalue the dollar by resetting the dollar-gold price from $20 to $35. In an instant, people lost more than 40% of their wealth (as measured by gold).


FDR’s infamous gold grab. Under the cover of an economic emergency, the government executed one of the most brazen acts of theft yet witnessed in a democracy.


That ban lasted for 42 years. It ended in 1975, largely because of our old friend Jim Blanchard. Jim set up the National Committee to Legalize Gold and worked hard to get the ban lifted.

Today, the feds don’t need to outlaw gold. It is regarded as “just another asset,” like Van Gogh paintings or ’66 Corvettes. Few people own it. Few people care – not even the feds. They are unlikely to pay much attention to it – at least, for now.

That could change when the lines begin to grow longer. Smart people will turn to gold… not just in time, but just in case. It is a form of cash – traditionally, the best form. You can control it. And with it, you can trade for fuel, food, and other forms of wealth. Lots of things can go wrong in a crisis. Cash helps you get through it.

Generally, the price of gold rises with uncertainty and desperation. Gold is useful. Like Bitcoin and dollars in hand (as opposed to dollars the bank owes you), gold is not under the thumb of the government … or the banks. You don’t have to stand in line to get it. Or to spend it.

Yes, as more and more people turn to gold as a way to avoid standing in lines, the feds could ban it again. But when we close our eyes and try to peer into a world where gold is illegal, what we see is a world where we want it more than ever.


Buy it as long as nobody cares about it. By the time they care, you’ll want to have as much as possible.

NSA Leak: "Washington Is Negotiating With Every Nation That Borders China... So As To 'Confront' Beijing"

Another "Wikileak" of a confidential NSA intercept, and yet another crucial insight into the vision not only behind the Obama administration's desperate push for the Trans Pacific Partnership, but the strategic thinking - if one may call it so - when it comes to the entire US approach to global trade and commerce. Which may well explain why global trade has been imploding in recent years, masked first by just US QE and then by QE from all "developed" central banks.

The synopsis:

Intercepted communication between French Minister-Counselor for Economic and Financial Affiars Jean-Francois Boittin and EU Trade Section head Hiddo Houben, reveals Boittin's discontent with U.S. approach towards a WTO pact. Additionally Houben stated that the TPP (being an American initiative) seems devised as a confrontation with China.

EU Officials Perceive Lack of U.S. Leadership on Trade Issues, Skeptical of Pacific Initiative (TS//SI//OC/NF)


(TS//SI//OC/NF) Washington-based EU trade officials ascertained in late July that the U.S. administration is severely lacking in leadership when it comes to trade matters, as shown by the absence of a clear consensus on the future course of the WTO Doha Development Agenda (DDA). French Minister-Counselor for Economic and Financial Affairs Jean-Francois Boittin expressed astonishment at the level of "narcissism" and wasteful contemplation currently on display in Washington, while describing the idea of scrapping the DDA in favor of another plan--which some U.S. officials are seen to favor--as stupefying. The Frenchman further asserted that once a country makes deep cuts in its trade barriers, as the U.S. has done, it no longer has incentives to offer nor, as a consequence, a strong position from which to negotiate with emerging nations. Boittin's interlocutor, EU Trade Section head Hiddo Houben, after noting the leadership void in the Office of the U.S. Trade Representative, declared that with regard to the disagreement within his host government on DDA, a political decision must be made about what direction is to be followed. On another subject, Houben insisted that the Trans-Pacific Partnership (TPP), which is a U.S. initiative, appears to be designed to force future negotiations with China. Washington, he pointed out, is negotiating with every nation that borders China, asking for commitments that exceed those countries' administrative capacities, so as to "confront" Beijing. If, however, the TPP agreement takes 10 years to negotiate, the world-and China-will have changed so much that that country likely will have become disinterested in the process, according to Houben. When that happens, the U.S. will have no alternative but to return to the WTO. Finally, he assessed that this focus on Asia is added proof that Washington has no real negotiating agenda vis-a-vis emerging nations, including China and Brazil, or an actual, proactive WTO plan of action.




EU diplomatic


Z-3/OO/531614-11, 011622Z

Source: Wikileaks

Athens On The Potomac - It Could Never Happen Here, Right?

Submitted by John Gabriel via,

Financial experts in New York, London, and Brussels have tut-tutted Greece’s economic travails as Athens considers its future with the European Union. Why did they borrow so much money? How can they ever pay it back? Do they think that much debt is sustainable?

Instead of pointing fingers at the innumerates running Athens, they should consider our own situation. Jason Russell of the Washington Examiner shows how America’s debt projections look suspiciously like Greece’s recent history.

With all the chaos unravelling in Greece, Congress would be wise to do what it takes to avoid reaching Greek debt levels. But it’s not a matter of sticking to the status quo and avoiding bad decisions that would put the budget on a Greek-like path, because the budget is on that path already.


A quarter-century ago, Greek debt levels were roughly 75 percent of Greece’s economy — about equal to what the U.S. has now. As of 2014, Greek debt levels are about 177 percent of national GDP. Now, the country is considering defaulting on its loans and uncertainty is gripping the economy.


In 25 years, U.S. debt levels are projected to reach 156 percent of the economy, which Greece had in 2012. That projection comes from the Congressional Budget Office’s alternative scenario, which is more realistic than its standard fiscal projection about which spending programs Congress will extend into the future.


If Congress leaves the federal budget on autopilot, debt levels will soar. Instead, spending must be reined in to avoid a Greek-style meltdown.

While we’re right to be concerned about 2040, the U.S. is in deep trouble now. Yet if you mention the debt to most Americans, they’re either confused or indifferent. “But Obama lowered the deficit.” “Just print more money.“ “It’s Reagan’s fault!”

Since most graphs look like this, I created my own user-friendly debt chart focused on three big numbers: Deficit, revenue and debt. (My first version was published a couple of years ago. This one is updated with the most recent figures).

It’s an imperfect analogy, but imagine the green is your salary, the yellow is the amount you’re spending over your salary, and the red is your MasterCard statement.

The chart is brutally bipartisan. Debt increased under Republican presidents and Democrat presidents. It increased under Democrat congresses and Republican congresses. In war and in peace, in boom times and in busts, after tax hikes and tax cuts, the Potomac flowed ever deeper with red ink.

Our leaders like to talk about sustainability. Forget sustainable — how is this sane?

Yet when a conservative hesitates before increasing spending, he’s portrayed as a madman. When a Republican offers a thoughtful plan to reduce the debt over decades, he’s pushing grannies into the Grand Canyon and pantsing park rangers on the way out. While the press occasionally griped about spending under Bush, they implore Obama to spend even more.

When I posted the earlier version of this chart, the online reaction was intense. A few on the right thought I was too tough on the GOP while those on the left claimed it didn’t matter or it’s all a big lie. Others told me that I should have weighted for this variable or added lines for that trend. They are free to create their own charts to better fit their narrative and I’m sure they will. But the numbers shown above can’t be spun by either side.

All of the figures come from the U.S. Treasury and math doesn’t care about fairness or good intentions. Spending vastly more than you have, decade after decade, is foolish when done by a Republican or a Democrat. Two plus two doesn’t equal 33.2317 after you factor in a secret “Social Justice” multiplier.

If our current president accumulates debt at the rate of his first six-plus years, the national debt will be nearly $20 trillion by the time leaves office. That is almost double what it was when he was first inaugurated.

Like many Americans, I haven’t had the privilege of visiting Greece. Unfortunately, Greece will be visiting us unless we change things and fast.

Stocks Surge Despite Dashed Hellenic Hope, Crude Carnages

Seems appropriate once again...


China did not help..


But today was all about Greece again, and CNBC's Michelle Caruso-Cabrera summed it up perfectly:

"Stocks are rallying on hopes of a deal. There is no deal! There will be no deal! Everyone's gone home"

Another day, another hope-driven spike that ends in tears and recriminations... The Dow got a lift as it broke stops through its 200DMA and Nasdaq back above 5000


The late day ramp was all machines ramping VWAP - as volume utterly collapsed...


VIX was clubbed like a baby seal... (notice the flash crash early on seemed to signal again) because why not sell Vol ahead of NFP


On the week, stocks remain driven by Greece and nothing else - not even today's mixed data (maybe NFP tomorrow will change that)


Futures show the mess more clearly...


The extent of hope is seemingly impossible to comprehend as GREK - the Greek ETF - manage to get all the way back to unchanged on the week!!!! Before giving up all its gains on the day...


Airlines were Baumgartner'd on news of a DoJ collusion at the lowest since October 2014...


Depsite the carnage in crude to 11-week lows...


High Yield bonds and stocks did not play well with each today...


Treasury yields rose notably (seemingly led by Bunds weakness as Europe rallied into its close on hope of Greek deal)...


The US Dollar Surged today led by EUR weakness (but where were all the talking heads today about how EURUSD is showing how GREXIT doesn't matter?)


For some context on Crude's move today, Silver slipped but copper and gold were flat...


Charts: Bloomberg

Bonus Chart: Ahead of tonight's China open, some food for thought...

#AskPOTUS: Your Chance To Ask The President Anything

Back in 2013 and then 2014, first JPM followed by the NYPD decided to take directly to the Tweeting public and bring up their flailing PR quotient. The result for both JPM and the NYPD was nothing short of a disaster.  Now, it is the president who has decided to interact directly with the tweeting audience as part of #AskPOTUS.

Alright, let's do this. Ready to answer your health care questions. Keep 'em coming with #AskPOTUS.

— President Obama (@POTUS) July 1, 2015

Will this latest attempt at populist pandering also end up in total disaster after the trolls take over? The answer: almost certainly, and for a courtside seat to this slow motion trainwreck here are the questions as they come in.


Jim Bianco Rages "The Recovery Ship Sailed", Bashes Big Govt Believers, Slams Greek Risk 'Deniers'

"Today is Day 1 of Year 7 of the 'recovery', and yet economists everywhere proclaims 3% growth is just around the corner," rages Jim Bianco as he addresses what 'bugs him', exclaiming "that ship has sailed." Bianco and Santelli go on to slay Keynesian big government dragons and the incessant bullshit from officials like Jack Lew who opine on Greece and other potential systemic risks as being a non-event - "what is priced in is that everything will work itself out at the 11th hour," leaving a huge asymmetric risk.


Well worth the price of admission...


'Boots On The Ground' In Greece: "Stop The German Bloodletting"

Submitted by Simon Black via,

Since my arrival into the country late May, the topic of most discussions I overhear everywhere are naturally about the debt negotiations.

I’d call opinions in support or against the Tsipras governments’ activities pretty sharply divided.

Tsipras supporters are generally fed-up with 5yrs of blood-letting “from the Germans”.

Critics, on the other hand, see the euro as some sort of abstract membership in a club that must be retained at all cost.

A minority even criticize Tsipras for—get this—being too soft.

That’s especially true where I’ve been staying here in the port-city of Piraeus, which – being the country’s biggest port, is home to mostly blue collar, working class folks where unions more or less dominate.

To illustrate the political leanings around here, I hazily recall a headline in a newsfeed summing up their worldview quite accurately: “Piraeus – a neighborhood where Syriza is not quite left-wing enough.”

Enough said.

Like most locals, I’ve been steadily hitting the ATM for the past weeks to amass some emergency cash.

I ventured out today for the first time since the capital controls were installed yesterday to have a look around.

In Piraeus, I saw a queue of at least 30 people at a branch of Alpha Bank, and about 10 people at the Bank of Piraeus, where I waited.

The mood among the people waiting was pretty cool, friendly and even throwing a few funny comments around to address the obvious elephant in the room.

Older pensioners who were waiting, being used to getting their money from the window, had dusted off their debit card and received generous help from others on using it.

Experiences were shared on efforts to withdraw cash the previous day, where the published daily withdraw limit of 60 EUR/day for citizens was in effect (and confirmed by to me by the folks on line).

Today however, having presumably exhausted their supply of 20 euro notes, this ATM machine imposed upon users a de-facto daily withdraw limit of 50 Euros – since it was only dispensing 50 Euro notes.

As has also been reported, these capital controls do not apply to foreign bank accounts; and I can confirm to be true as my foreign bank card allowed me to withdraw my self-elected amount (of 300 EUR on this occasion) without issue.

There is certainly an unusual feeling of calm in the air. Car traffic resembles a quieter “Sunday” level than a typical summer weekday going into the high tourist season.

Citizens seem a bit more polite and helpful to one another than before, with no shortage of clever comments to break the tension on everyone’s mind being all in the same boat.

My first thought was to assume a newfound “keep calm and soldier on” state of unity among the populace.

But this is Greece, not Northern Europe. the words “quiet” and “calm” never share a sentence here.

No, this was something different, I believe, more of a “laugh to keep from crying” state of mind.

And being very experienced with Greece and Greek culture for my entire life, this realization was off-putting to say the least.

I’ll forward along any additional observations during my stay and leave you with one final, personal thought.

For all the talk and preaching of the risks one takes by placing all their “flags” into the blind faith and trust of one government in the abstract, it’s nothing like witnessing it firsthand.

Greece, right here – right now, is where that all “gets real.”

But more importantly, all the benefits of a multiple flags approach also “gets real” when you’re the guy who the crisis can’t touch.

I’m able to merely observe and participate without worry, sleeping tight knowing that all that what I’ve worked to achieve in his life is out of the reach of supranational, unelected & unaccountable EU autocrats.

The Fuse on the Global Debt Bomb Has Been Lit

Greece defaulted on a debt payment to the IMF last night at midnight.


Regardless of anything else, we have now seen a developed country “go over the cliff” in terms of negotiating debt payments. This will have global implications for other indebted countries in terms of negotiating tactics going forward.


As I write this, the markets are moving higher on news that Greek PM Tsipras is willing to accept the bailout offer that the IMF made before the default. The markets are misreading this. That bailout offer has expired even if the IMF allows such a deal, the damage has been done.


At the end of the day, the “Greek” issue is in fact a “debt” issue. And Greece is just a drop in the ocean of debt sloshing around the financial system.


Consider that Puerto Rico is on the verge of default. Again the issue here is not the individual region’s debt, but the DERIVATIVES based on the debt.


The VIEs are the off-balance sheet vehicles that triggered the massive chain of counterparty defaults which de facto collapsed the U.S. financial system in 2008.  The VIEs are where the credit default swaps and other nebulous forms of OTC derivatives bet slither around.


Global debt and gross derivatives outstanding are much bigger than in 2008.   And, except for the Plan B hyperinflation of the money supply, Central Banks are out of bullets.


            Source: Investment Research Dynamics


Puerto Rico’s debt alone represents billions in dollars worth of collateral for financial firms. It is no coincidence that the firms that insure this debt are imploding.



That moves looks an awful lot like the one that kicked off the 2007-2008 collapse.



The markets may be moving for Greece, but the fact of the matter is that the fuse has been lit on the global debt bomb. It’s now only a matter of time before the REAL explosions begin.


If you've yet to take action to prepare for this, we offer a FREE investment report called the Financial Crisis "Round Two" Survival Guide that outlines simple, easy to follow strategies you can use to not only protect your portfolio from it, but actually produce profits.


We made 1,000 copies available for FREE the general public.


As we write this, there are less than 50 left.


To pick up yours, swing by….


Best Regards


Phoenix Capital Research





LTV 137% - In Unprecedented Development, Lenders Now Take Record Losses On Every Used Car Loan

This wasn't supposed to happen.

With the US consumer hunkering down in 2015 and barely spending more than in the comparble period last year, the only silver lining had been auto sales driven almost entirely by access to cheap credit; in fact, as the chart below shows while revolving credit has barely budged from its post-crisis lows with consumers still failing to fall for the "recovery" narrative, Uncle Sam's zero cost loans which are now reaching well over 6 years in average duration have provided a generous support for the US auto industry. In addition to the bubble in student loans, car loans have been the only confirmation that the US consumer - that driver of 70% of the US economy - is still alive.


So in a world in which one can buy cars now and worry about the costs later, much much later, auto sales should have been soaring as they have been in recent years, right?


Well, not for GM, which moments ago reported a surprising drop in June auto sales, which declined 3% M/M to 259,353 from the prior month, driven by an 18.1% plunge in Buick sales, with Chevy and Cadillac also posting declines, despite expectations of a 3% headline increase. This even as GM announced pickup deliveries were up 33% with the Silverado up 18%. Curiously, GM's main domestic competitor, Ford, reported a 9% drop in F-Series sales in June.


What is more surprising is that even as GM posted its first monthly sales miss in a long time, it now appears to be engaging in yet another stealth government bailout, this time not on the balance sheet but the income statement.

As GM reported, even in a month of broader decline in sales, "State and local government sales were up 6 percent in June, with full-size pickup and Tahoe PPV deliveries more than doubling."

The US government is buying GM pickup trucks now?

It gets better: "State and local government sales are up 19 percent calendar year to date."

So just what is the dollar amount of these soaring government purchases from a company that was bailed out by the same government several years ago? That information is not disclosed, as otherwise it may crush the fiction that it is the US consumer that is behind GM's powerful "rebound" and not the entity that has an unlimited balance sheet.

But what is most concerning in light of weak sales not only from GM but virtually all other carmakers, both domestic and foreign, is what was reported in the OCC's semiannual report on "Semiannual risk perspectives" in which we learned something truly stunning: according to the OCC, "60 percent of auto loans originated in the fourth quarter of 2014 had a term of 72 months or more. Extended terms are becoming the norm rather than the exception and need to be carefully managed."

But the real stunner is the following: also according to the OCC, quoting Experian, "average advance rates well above the value of the autos financed. In the fourth quarter of 2014, the average LTV for used vehicle auto loans was 137 percent." In other words banks are assured to take major losses on their loans and they are still lending at a record pace. Or rather, not so much banks because as we have shown before, the primary source of auto loans in recent years has been just one, as shown below.


Believe it or not, it gets worse:

"advance rates for borrowers across the credit spectrum are trending up, with used vehicle LTVs for subprime borrowers (credit score < 620) averaging nearly 150 percent at the end of 2014 (see figure 24)."

For those who are confused, an LTV of over 100% at origination guarantees that the lender will suffer losses on the loan (absent some dramatic price bubble which sends car prices soaring in the coming years).

This explains why the Fed stopped reported LTV data for auto loans altogether and one has to rely on period snippets of updates to get a sense of just how terrifying the real Loan to Value situation currently is.

So what is going on here? Well, for lenders, car loans have become a definitive loss leader. How do they recover the losses on the loans? "Sales of add-on products such as maintenance agreements, extended warranties, and gap insurance are often financed at origination. These add-on products in combination with debt rolled over from existing auto loans contribute to the aggressive advance rates."

In other words, in the US, the car industry has been quietly transformed to a razor-razorblade model, one in which it is not the manufacturers who benefit on the razorblade sales but the lenders!

That this too will result in an epic disaster is not a question of if but when, which is a recurring question considering there is now a bubble virtually anywhere one turns.

Source: OCC

Our "Spoiled Brat" Economy

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

By insuring spoiled brats/vested interests never face the consequences of their actions and choices, we guarantee failure of the entire system.

Spoiled brats do not take kindly to being called out as spoiled brats. Since economies are aggregates of individuals, we can anticipate howls of outraged denial at our economy being identified as spoiled rotten.

The two essential characteristics of spoiled brats are 1) a complete disregard for the burdens of those paying the bills and 2) a childishly self-absorbed sense of overweening entitlement. Spoiled brats have no sense of fiscal discipline. Indeed, it is their defining characteristic. They want what they want, and they want it now, regardless of the cost to others or the system as a whole.

In America's Spoiled Brat Economy, no vested interest is ever allowed to fail. Lost billions gambling with borrowed money? Just throw a K Street temper tantrum and threaten to close all the ATMs when you go broke, and voila, Mommy and Daddy (the federal government and Federal Reserve) come rushing with trillions of dollars to make all the bad things like well-deserved bankruptcy go away.

That tens of millions of savers must be robbed of hundreds of billions of dollars in lost interest to rebuild your banks' profits and balance sheets--the sacrifices of others are of no concern to spoiled brats.

What does not allowed to fail bring to mind? How about coddled children who are crippled by helicopter parents who do their homework for them and schools that give everybody passing grades and gold stars?

A system that doesn't allow individuals and enterprises to fail is a system that is simply taking another path to failure. Students who are given gold stars and 9th place ribbons (Meet the Fockers) cannot possibly establish a real sense of accomplishment or learn how to make a realistic assessment of their deficiencies or strengths. They are crippled by all the "help" enablers press on them.

The same is true of spoiled-brat economies. Enterprises that are never allowed to fail (for example, too big to fail banks, bankrupt cities, counties and states, defense contractors who produce failed weapons systems, healthcare organizations that cheat the government and patients, etc. etc. etc.) become deadwood that saps the vitality of the economy, dragging down the few productive sectors.

The "help" lavished on vested interests include sweetheart contracts, direct subsidies, tax credits, lines of credit, zero interest rates and a vast range of other subsidies. The entire point of the vast lobbying machine that funnels federal and Federal Reserve largesse to vested interests is about staving off the very failure that keeps economies from imploding (creative destruction).

The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009)

Innovation, Risk and the Forest Fire Analogy (July 2, 2010)

By insuring spoiled brats/vested interests never face the consequences of their actions, choices and self-absorbed greed, we guarantee failure of the entire system. So by all means, keep passing out subsidies to too big to fail banks and 9th-place ribbons, and give the brats whatever they want as soon as they start wailing, regardless of the cost to the system itself.

Crude Slumps To $57 Handle As DOE Confirms Surprise Inventory Build, Production Hovers Near Record Highs

Confirming last night's surprise API inventory build data, after 8 weeks of inventory draws, DOE reports crude oil inventories rose 2.386 million barrels. Overall production dropped a miniscule 0.09% last week but basically production remains at cycle record highs. Crude prices are dropping on the news... testing to a $57 handle.


The Builds are back...


This is the 3rd week in a row of builds at Cushing...


The result... a $57 handle for WTI


Some context for this move...

Charts: Bloomberg

Defiant Tsipras Addresses Nation, Urges "No" Referendum Vote

Come Monday, the Greek government will be at the negotiating table after the #referendum, w/better terms for the Greek people. #dimopsifisma

— Alexis Tsipras (@tsipras_eu) July 1, 2015

You're being blackmailed & urged to vote Yes to all of institutions' measures without any solution to exiting the crisis. #dimopsifisma #OXI

— Alexis Tsipras (@tsipras_eu) July 1, 2015

#??? (NO) is not just a slogan.
NO is a decisive step toward a better deal. #Greece #dimopsifisma #Greferendum

— Alexis Tsipras (@tsipras_eu) July 1, 2015

A socially just agreement that puts burden on those who can shoulder it, & not on pensioners & workers once again. #Greece #Greferendum #OXI

— Alexis Tsipras (@tsipras_eu) July 1, 2015

There are those who say that I have hidden agenda, that w/an #OXI / NO vote, I'll take #Greece out of EU.
They are flat out lying to you.

— Alexis Tsipras (@tsipras_eu) July 1, 2015

They see Europe as a superficial union w/IMF being "glue" that binds. They are not the visionaries Europe needs. #Greece #dimopsifisma #OXI

— Alexis Tsipras (@tsipras_eu) July 1, 2015

Salaries & pensions are safe.
The bank deposits of citizens who didn't withdraw their money are safe. #Greece #dimopsifisma #OXI

— Alexis Tsipras (@tsipras_eu) July 1, 2015

We owe it to our parents, our children, ourselves. It is our duty.
We owe it to history. #Greece #Greferendum #dimopsifisma #OXI

— Alexis Tsipras (@tsipras_eu) July 1, 2015

After a letter surfaced which shows Athens is ready to accept the latest proposal presented by the troika (i.e. the now expired offer from Brussels) in exchange for a third rescue package worth nearly €30 billion, Greek PM Alexis Tsipras was set to address the nation. As a reminder, a little before 5am CET, news hit that Tsipras was willing to concede to virtually all creditor demands, with a few exceptions.

There was some expectation that he would fold completely and call off the referendum. Precisely the opposite happened.

From Bloomberg:

Greek Prime Minister Alexis Tsipras called for voters to reject austerity measures in Sunday’s referendum to help end a standoff with creditors as the country gets a taste of financial meltdown.


It took a third day of capital controls, rationing pensions and the expiry of Greece’s bailout for the government in Athens to say it’s willing to accept his adversaries’ latest offer as a basis for compromise. The looming vote remains a stumbling block, along with disagreements over pensions, spending and taxes.


Come Monday, the Greek government will be at the negotiating table after the referendum, with better terms for the Greek people,” Tsipras said in a Twitter message posted as he spoke on national television. “A popular verdict is much stronger than the will of a government.”


The Greek premier spoke following a rhetorical exchange with his chief antagonists over a bid to revive negotiations. While Tsipras signaled he’s prepared to compromise on the starting point for talks, German Chancellor Angela Merkel, Europe’s dominant leader, refused to engage


Merkel and her finance minister, Wolfgang Schaeuble, burned by five months of brinkmanship, said there would be no talks on a new bailout until after the July 5 vote.


* * * 


“There can be no negotiations for a new credit program before the referendum,” the chancellor told lawmakers in a speech opening a parliamentary debate on Greece. The country has provided “no basis for talking about any serious measures” to break the deadlock, Schaeuble told reporters.


“The clock cannot be simply set back to where it was Friday night before Tsipras broke off the talks and called the referendum,” Holger Schmieding, an analyst at Berenberg Bank, wrote to clients. “A deal is still possible, but it would require more than just this letter.”

So did the bluffing Greek government take game theory too far? Or is this all part of the plan? At this point it is safe to say, nobody really knows what is going on.

* * *


Although the latest opinion polls show a narrow majority of Greeks would vote "no" in the referendum scheduled for this weekend, the bite of capital controls and threat of an imminent banking sector collapse have heaped pressure on the government which, as of midnight, became the first developed country to default to the IMF.