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America's National Debt Bomb Caused By The Welfare State

Submitted by Richard Ebeling via,

The news is filled with the everyday zigzags of those competing against each other for the Democrat and Republican Party nominations to run for the presidency of the United States. But one of the most important issues receiving little or no attention in this circus of political power lusting is the long-term danger from the huge and rising Federal government debt.

The Federal debt has now crossed the $19 trillion mark. When George W. Bush entered the White House in 2001, Uncle Sam’s debt stood at $5 trillion. When President Bush left office in January of 2009, it had increased to $10 trillion. Now into seven years of Barack Obama’s presidency, the Federal debt has almost doubled again.

And it is going to get much worse, according to the Congressional Budget Office. On January 26, 2016, the CBO released it latest “Budget and Economic Outlook” analysis for the next ten years, from 2016 to 2026.

Continuing Deficits and Growing National Debt

The economists at the CBO estimate that the Federal budget deficit for the fiscal year, 2016, will be $544 billion, or $105 billions more than Uncle Sam’s budget deficit in fiscal year 2015. And each year’s budget deficit will continue to be larger than the previous year from here on. Indeed, the CBO estimates the Federal government’s annual deficits will once more be over $1 trillion starting in 2022 and thereafter.

Between 2016 and 2026, the Federal debt, as a result, is projected to increase by a cumulative amount of almost $9.5 trillion, for a total national debt of around $30 trillion just ten years from now.

The reason for the continuing ocean of Federal red ink is the fact that while government revenues are projected to be around 49.5 percent higher in fiscal year 2026 ($5,035 trillion) than in fiscal year 2016 ($3.376 trillion), government spending will be over 63 percent more in fiscal year 2016 ($6,401 trillion) than in fiscal year 2016 ($3,919 trillion).

Understanding the Fiscal History of America

The famous Austrian-born economist, Joseph A. Schumpeter (1883-1950), once wrote an article on, “The Crisis of the Tax State” (1918). He said the following about a country’s fiscal history:

“[A country’s] budget is the skeleton of the state stripped of all misleading ideologies – a collection of hard facts . . . The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which its results are put . . . The view of the state, of its nature, its forms, its fate [are] seen form the fiscal side . . .


“The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare – all this and more is written in its fiscal history, stripped of all phrases. He who know how to listen to its message here discerns the thunder of world history more clearly than anywhere else . . . The public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life.”

A hundred years ago, around 1913, before the beginning of the First World War, all levels of government in the United States – Federal, State, and local – taxed and spent less than 8 percent of national income, with the Federal government absorbing less than half of this amount.

By 1966, Federal outlays alone took 17.2 percent of Gross Domestic Product and are projected to rise to 21.2 percent in 2016 and will to 23.1 percent of GDP by 2026. Over the fifty years between 1966 and 2016, government outlays as a percentage of GDP increased by nearly 24 percent, and will be growing more over the next decade.

The Welfare State Drives the Deficits and the Debt

What can America’s fiscal history, as Schumpeter suggested, tell us about the direction and drift of government over the last half-century and looking to the future? Perhaps not too surprisingly for both supporters and critiques of the welfare state, it has been and is being driven by the continuing expansion of the “mandatory spending” of the redistributive “entitlement” programs.

In 1966, the intergenerational redistribution program known as Social Security absorbed 2.6 percent of GDP; in 2016, it will suck up 4.9 percent, for a nearly 90 percent increase. And by 2026, Social Security spending will represent 5.9 percent of GDP, for a 20 percent increase over the coming decade. (See my article, “There is No Social Security Santa Claus.”)

Major Federal-funded health care programs (Medicare, Medicaid and related programs) siphoned off a mere 0.1 percent of GDP in 1966; in 2016 this will have increased to 5.6 percent of GDP, a more than 500 percent increase over fifty years. By 2026, the CBO estimates, these Federal health care programs (now including ObamaCare) will take 6.6 percent of GDP, for a nearly 18 percent increase in the next ten years. (See my article, “For Healthcare the Best Government Plan is No Plan.”)

Summing over all of these and related mandatory entitlement spending programs, in 1966 the redistributive welfare state absorbed 4.5 percent of the nation’s Gross Domestic Product; in 2016 this will be 13.3 percent of GDP, and 15 percent of GDP in 2026. Or a 317 percent increase over the fifty years between 1966 and 2016, and an additional 13 percent increase between 2016 and 2026.

Due to all of the deficit spending to finance this redistributive largess over what the government collects in tax revenues to fund it, interest on the Federal debt will increase from 1. 4 percent of GDP in 2016 to 3.0 percent of GDP in 2026, or more than a 100 percent increase in the interest cost on the national debt over the next ten years as a percentage of GDP.

Welfare state spending plus mandatory interest payments on the Federal debt now absorbs around 60 percent of everything Uncle Sam spends.

For a point of comparison in this tilted direction of government spending, all non-entitlement spending represented 11. 5 percent of GDP in 1966, and will be down to 6.5 percent of GDP in 2016 and is projected to be 5.2 percent of GDP in 2026. This represents a decrease as a percentage of GDP in non-entitlement spending of 45 percent over the last fifty years, and another 20 percent decline as a percentage of GDP over the coming decade.

Now in absolute terms all government spending has grown over the last fifty years. But what America’s fiscal history highlights, looking over the half-century that is behind us, is that it is the dynamics of a growing domestic welfare state that is fundamentally driving the country’s financial ruin.

The Force of Collectivist Ideology and Political Privilege

This has been coming about due to two fundamental and interconnected factors at work: First, the ideology of a right to other people’s wealth and income, and, second, the democratization of political privilege.

For more than a century, now, the older American political tradition of classical liberalism, with its belief in individual liberty, economic freedom and constitutionally limited government, has been slowly but surely eroded by the “progressive” ideal of political, social and economic collectivism.

These dangers were already present in the late nineteenth century with the rise of the socialist movement, and its then appearance on this side of the Atlantic. “The workers,” however, were not the vanguard of socialism in either Europe or America. It was mostly intellectuals and political philosophers who arrogantly dreamed dreams of new and “better worlds” designed and planned according to what they considered a more moral and “socially just” society. (See my article,“American Progressives are Bismarck’s Grandchildren.”)

Its Not Your Fault and Others Owe You

Over the decades, for a century now, the socialist criticisms of capitalist society have eaten away, little by little, the understanding, belief in, and desire for a truly free market society. Your pay seems to be too low in comparison to what you think or have been told you deserve? It must be due to the exploitation and unfairness of profit-making businessmen.

You’re afraid that you might not have the health care you want or the retirement money you think you’ll need, surely it must because “the rich” have squandered their unearned wealth on things other than what “the people” really need. Your child cannot go to the topnotch college or university you would want them to attend for your offspring’s future? That can be cured along with those other injustices by taxing or regulating those who have more than you, and who don’t deserve it.

The social game is rigged; nothing is your fault, it is all due to those who have more than you, and who don’t pay their “fair share” to fund what “working people” like you need and have a “right” to.

When such thinking is repeated enough, time-after-time over years and, now, generations, a large number of people in our society implicitly take it all to be true. If only government has sufficient taxing and regulating authority, the world can be made better for “the many” against the greed and social disregard of the few (the “one percent.”)

Losing the Spirit and Practice of Individualism

The dangers in all this was warned about long ago, for instance, by J. Laurence Laughlin, an economist who was the founder of the economics department at the University of Chicago. In his 1887 book, The Elements of Political Economy Laughlin said:

“Socialism, or the reliance on the state for help, stands in antagonism to self-help, or the activity of the individual. That body of people certainly is the strongest and the happiest in which each person is thinking for himself, is independent, self-respecting, self-confident, self-controlled and self-mastered. Whenever a man does a thing for himself he values it infinitely more than if it is done for him, and he is better for having done it . . .


“If, on the other hand, men constantly hear it said that they are oppressed and downtrodden, deprived of their own, ground down by the rich, and that the state will set all things right for them in time, what other effect can that teaching have on the character and energy of the ignorant than the complete destruction of all self-help?


“They begin to think that they can have commodities which they have not helped to produce. They begin to believe that two and two make five. It is for this reason that socialistic teaching strikes at the root of individuality and independent character, and lowers the self-respect of men who ought to be taught self-reliance . . .


“The right policy is a matter of supreme importance, and we should not like to see in our country the system of interference as exhibited in the paternal theory of government existing in France and Germany.”

What Professor Laughlin feared and warned about nearly 130 years ago has increasingly come to pass with the social attitudes and political desires and demands of too many of our fellow countrymen. European collectivism invaded and continues to conquer America’s original spirit and politics of individualism.

The Rise of Democratized Privilege

The other force at work in bringing about our growing fiscal socialism is what I would suggest calling democratized privilege. Before the rise of democratic governments in the nineteenth century, the State was seen as a political force for exploitation and abuse. Under monarchy, kings and princes used their taxing and policing powers to plunder their subjects for their own gain as while as for the benefit of the aristocrats and noblemen who gave allegiance, obedience and support to the monarch. Power, privilege and plunder were for the political few at the expense of the many in society.

At first the call for democratic government was to place limits on the powers of kings and their lords-of-the-manor supporters, so to restrain political abuses that threatened or violated individuals’ rights in their lives, liberty and private property.

But with the rise of socialist and welfare-statist ideas as the nineteenth century progressed, there emerged a new ideal: a welfare-providing government for “the masses.” The view came to be that government was no longer a fearful master needed restraint and limits. No, democratically-elected government was now conceived as “the people’s” servant to do its bidding and to provide it with benefits.

People hoping to gain favors and privileges from new democratic governments formed themselves into groups of common economic interests. In this way, they aimed to pool the costs of the lobbying and politicking that was required to obtain what they increasingly came to view as their “right,” that is, to those things to which they were told and demanded they were “entitled.”

No longer were redistributive privileges to be limited to the few, as under the old system of monarchy. Now privileges and favors were to be available to all, heralding a new age, an Age of Democratized Privilege. More and more people are dependent upon government spending of one form or another for significant portions of their income. And what the government does not redistribute directly, it furnishes indirectly through industrial regulations price and production controls, and occupational licensing procedures.

Government Dependency and Resistance to Repeal

As dependency upon the State has expanded, the incentives to resist any diminution in either governmental spending or intervention have increased. All cuts in government spending and repeal of interventions threaten an immediate and often significant reduction in the incomes of the affected, privileged groups.

And since many of the benefits that accrue to society as a whole from greater market competition and more self-responsibility are not immediate but rather are spread out over a period of time, there are few present-day advocates of a comprehensive reversal of all that makes up the modern welfare state, and most certainly not in an election year.

While it may not be the center of political discussion and debate in this election year, the dilemma of ever-worsening government deficits and expanding national debt is not going to go away.

It will have to be, eventually, faced and confronted. But as Joseph Schumpeter pointed out to us, the fiscal history of a country tells us the underlying ideological and cultural currents at work that pull a nation in a particular direction.

The real dilemma is not whether this or that government program can be cut or reduced in terms of how fast it is growing at present and future taxpayers’ expense. The real challenge is to reverse the political and cultural trends toward more and growing fiscal redistributive socialism.

This will require a strong and articulate revival of a culture and a politics of individualism. It is, ultimately, a battle of ideas, not budgetary line items.

Here Is The Real Reason Why Authorities Want To Ban High Denomination Bank Notes

Over the past month, one of the more alarming developments in Europe has been the move to eliminate high denomination bank notes like the €500 bill.

Indeed, as Bank of America reports, having changed its mind on the matter over the past few years, the ECB is now considering abolishing the €500 note. In a recent interview, Executive Board member Benoit Coeure said that "the ECB is assessing the fate of the €500 euro banknote, as concerns about its use in money laundering and crime grow and its usefulness for large payments comes into question" adding that "competent authorities increasingly suspect that they are being used for illegal purposes, an argument that we can no longer ignore." (like all other ECB matters, there appears to be infighting on this issue too, and subsequently another ECB member Yves Mersch stated that the he would like to see "proof that high-denomination notes are used by criminals").

So what, big deal, eliminate it. The people will still have 5, 10, 20, 50, 100 and 200 euro bills right.

Well, here's the thing: the €500 note is the second highest currency denomination in G10, after the CHF1,000 note. More importantly, the total value of €500 notes in circulation amounts to €306.8bn and has been rising.

As a share of the value of total euros in circulation, the €500 note is the second-highest, after the €50 note.

In other words, if overnight the €307 billion worth of €500 bills were eliminated, the notional value of the entire amount of European physical currency in circulation would decline by 30% to €700 billion!

And there you have it: while it may not be banning all European cash outright, we are confident the ECB would be delighted if one third of it was to start, while pretending to be fighting financial crime, terrorism, corruption and dryg dealers. 

Of course, what Europe would be truly doing is setting the scene for ever more aggressive NIRP, and by removing the highest denomination bank notes, it would make evading negative that much more difficult and costly (albeit would certainly favor gold).

Here Bank of America points out that while abolishing the €500 note may even end up weakening the EUR currency. This is what it said:

"we would expect that abolishing a note that represents almost 30% of the total Euros in circulation would be negative for the currency, keeping everything else constant. The share of the €500 note in the total value of Euros in circulation has been falling since 2009 and this has coincided with a weakening Euro in real effective terms. This is not evidence of causality, but we should not ignore it.


If we are right, the Euro will weaken, primarily against the USD and the CHF. The USD is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the Euro as a store of value. However, the CHF could also benefit, having the largest note denomination in G10 economies. Indeed, the CHF1000 note is already very popular, representing more than 60% of the CHF  notes in circulation, unless the SNB follows the example of the ECB and also abolishes the CHF1000 note.

Maybe not: the EUR would certainly not weaken against the Dollar if at the same time as Europe is eliminating its highest denomination bill, the US were to likewise to eliminate its own "high denomination" bills. This is the push by current Harvard School of Government senior fellow Peter Sands who recently was booted from beleaguered British bank Standard Chartered (whose exposure to China is among the highest in Europe).

Sands appeared on CNBC earlier today to double down on his "modest proposal" that the US should eliminate its highest denominated bill, aka the Benjamins, because doing so would "deter tax evasion, financial crime, terrorism and corruption."


Ok fine, remove the $100 bill: surely it won't affect much right.

Wrong. As the latest Treasury data shows, $1.08 trillion of the total $1.38 trillion in physical US currency exist in the form of $100 bills.



In other words, there is now an all too explicit "trial balloon" push to ban the one banknote that accounts for a whopping 78% of all US currency in circulation.

So there you have the real reason why suddenly high denomination bank notes are the target: it is not because "drug dealers" and tax-evaders use them, but because between banning Europe's €500 bill and the US $100 bill, over 56% of all physical currency currently in circulation in Europe and the US would disappear.

And all in the name of "fighting crime", when the real reason is to set the stage for NIRP and to progressively move down the chain and ban increasingly smaller denominations.

Will this drive to start the elimination of physical cash succeed? We don't know, but for once the Greeks are far ahead of the curve. As Kathimerini reports, "citizens who keep cash outside the banking system are running in droves to bank branches to ask for details and clarifications on reports that the European Central Bank is planning to withdraw 500-euro notes."

With the country already in a seven-year crisis, many people have opted to hide their money at home, in vaults, mattresses and other places. Banking sources say that many people have chosen 500-euro notes because they are more practical for carrying and hiding – after all, just 20 such notes come to 10,000 euros.


In 2015 alone deposits in Greece declined by 40 billion euros, with banks estimating that at least 20 billion of that went into safe deposits and mattresses.


Following the publication that European authorities were questioning whether it makes sense to have 500-euro notes in circulation, many in Greece – especially older people – rushed to deposit the money in their accounts. ECB governing council member Benoit Coeure spoke yesterday in favor of the withdrawal of the largest notes, stressing that the ECB will make a decision to that effect soon.


A new Morgan Stanley survey on Greece showed that 80 percent of people who withdrew their deposits from the banking system in recent months have not returned them, with 93 percent being determined not to do so. The survey also found that confidence in the Greek banking system remains low, as 62 percent of people are uncomfortable about placing money in a bank account.

Naturally, by removing the highest denomination bank note, all Europe would do is make it that much more difficult to find alternatives to holding large amounts of money in physical form and thus outside the banking system, where money is about to be taxed with negative rates.

There is the question whether this no to clever ploy will backfire, and instead of forcing people out of cash, instead lead to a run on bank cash, which will then be converted into physical precious markets. The Greeks have already figured it out; we wonder how long until the US population follows suit.

Millennials Now Prefer Socialism To Capitalism

On Tuesday, Bernie Sanders swept to victory in the New Hampshire primary over rival Hillary Clinton.

To be sure, Sanders was expected to win. Handily.

Still, there’s something surreal about the fact that America is edging ever closer to a situation that will see an avowed socialist square off against one of the country’s quintessential capitalists for the keys to The White House.

As we and others have documented, the American electorate is fed up with politics as usual in Washington. Many voters have no hope that the system can be changed as long as both parties continually field mainstream, establishment candidates all of whom are connected to powerful lobbyists, Wall Street, and corporate America.

So disgruntled are Americans that the candidates with the most buzz around their campaigns are Donald Trump and Bernie Sanders.

The capitalist and the socialist.

Against that backdrop we present the following interesting chart from a recent YouGov survey and brief color from WaPo. As you can see, respondents younger than 30 now rate socialism more favorably than capitalism. We suppose it’s all that good will towards Wall Street.

From WaPo's Catherine Rampell

In my column today, I mentioned that one reason millennials prefer Bernie Sanders to Hillary Clinton is that they’re not just willing to look past Sanders’s socialism — they actually like his socialism. It’s a feature, not a bug.


Here are some of the data I was referring to.


In a recent YouGov survey, respondents were asked whether they had a “favorable or unfavorable opinion” of socialism and of capitalism. Below are the results of their answers, broken down by various demographic groups.


Democrats rated socialism and capitalism equally positively (both at 42 percent favorability). And respondents younger than 30 were the only group that rated socialism morefavorably than capitalism (43 percent vs. 32 percent, respectively).

*  *  *

"Feel the Bern"...

Through The Looking Glass On Rates

Submitted by John Browne via Euro Pacific Capital,

On January 29th, Japan’s central bank governor, Haruhiko Kuroda, announced that the Bank of Japan would introduce a Negative Interest Rate Policy, or NIRP, on bank reserve deposits held in excess of the minimum requisite. The European Central Bank, and central banks in Switzerland, Denmark and Sweden have already partially blazed this mysterious trail. The banks have done so in order to weaken their respective currencies and to light a fire under inflation. Swiss national bonds now carry negative rates out to maturities of eleven years, meaning investors must lock up funds for eleven years to receive even a small positive nominal return!

There are economists and investors to whom these policies seem logical. After all, if low interest rates are good, wouldn’t negative rates be better? Many have argued that the “zero bound’, or the point past which rates can go no lower, is simply the same type of archaic thinking that brought us the gold standard and moral hazard.

These contemporary economists like to suggest that markets should become comfortable with negative rates and accept that they have an important role to play in the “science” of modern finance. But this analysis ignores the fundamental absurdity of the concept.

Money has a time value. Funds available today are worth more to the owner than money available tomorrow. I would imagine that, if asked, 100% of people would choose to receive $10,000 today rather than the same sum a year from now. Many might even pay for the quicker delivery. Even if we allow for the unlikely possibility that real deflation exists, and that consumers are therefore making sensible decisions in deferring purchases, life is uncertain and consumers are impatient. That’s why banks have always had to offer interest to savers to lock up their funds on account. Paying for the privilege of not spending one’s money is a completely new development in human history, and one that I believe is at odds with fundamental concepts of economics and psychology.

The ECB, as did the Bank of Japan (BoJ), cited economic stimulation as its main reason for negative rates. These sentiments were recently cited in a blog post by former Fed President Narayana Kocherlakota where he urged his former Fed colleagues to bring rates into negative territory. The logic is that people and businesses would refuse to pay to keep their money on deposit, and would instead withdraw those funds to spend and invest. However, zero percent interest rates do not appear to have had this affect. The money may, in fact, have been spent, but the growth never materialized. So will the dead horse we are beating suddenly get up if we beat it harder? Apparently so.

Only eight days before taking the dramatic and highly debatable step to trigger negative rates, Bank of Japan President Haruhiko Kuroda had assured his Parliament in Tokyo that such a policy was not even being considered (Reuters, 1/21/16). But less than six days later, after attending the World Economic Forum in Davos, his position had changed. Did private discussions with world leaders in Davos convince him that a serious international recession and credit crisis would unfold unless all central bankers could fire all available weaponry?

After the financial crisis of 2008, the U.S. Fed and the Bank of England (BoE) followed the lead of Japan to experiment with QE and ZIRP, even though those policies never delivered a recovery to the Japanese. The Fed and BoE unleashed stimulation with unprecedented vigor at home and then urged acceptance by other central banks. In essence, a huge global debt crisis was to be cured, or at least postponed, by even more international liquidity based on massive debt creation and the socialization of bank losses.

Much of the massive synthetic liquidity created by the QE experiment was funneled into financial assets. This diverted business investment away from job-creating investment in plants, equipment and employment. Wages remained stagnant and consumer demand and GDP growth were disappointingly flat. According to data from the Bureau of Economic Analysis, expansion of real U.S. GDP growth between 2009 and 2015 averaged 1.4 percent per year or less than half the average rate of 3.5 percent experienced between 1930 and 2008.

Meanwhile, ZIRP has caused mal-investment along with an unhealthy reach by banks and investors for high yield, but riskier investments. This became most obvious in the high yield debt market, which now is being hit hard by the fall in oil prices.

Negative interest rates mean that borrowers are paid to borrow. This serves as a powerful inducement for companies to borrow up to the hilt to buy other companies, to pay dividends that are unjustified by earnings levels and to invest in financial assets. Often this includes buying back their own corporate shares thereby increasing earnings per share, the share price and linked executive bonuses.

For savers, negative rates discourage savings, stifling future business investment and consumer demand. However, central banks hope that discouraged savers will instead be lured into spending on consumer products and create short-term economic growth albeit at the price of future growth.

Negative interest rates mean that lenders have to pay borrowers and that depositors have to pay banks to keep and use their money. One does not require a PhD in economics to recognize this as an unnatural distortion that will create more problems than it solves.

If individual and business depositors draw down their balances, the deposit base of banks will fall as will the velocity of money circulation. This will not only discourage lending, but, through reverse leverage, cause bank liquidity problems. Should banks with loans to high-yield companies and emerging market nations, especially those hit by falling oil prices, see their loans become non-performing at the same time as deposits are falling, a potentially catastrophic banking crisis could threaten. Since the Financial Crisis of 2008, over $50 trillion dollars of new debt have been added globally to the levels that precipitated the banking crisis in the first place.

Negative interest rates act effectively as a hidden tax funneled directly to banks. They are inherently unhealthy. Currently, they could indicate also a measure of unease among two of the four most powerful central banks. If so, that could well escalate. Depositors should be aware acutely of the hidden risks to their deposits. Already, nations with looming bank liquidity problems, such as Russia and many in Africa, are increasing their levels of bank deposit insurance to reduce potential political unrest.

Readers know that we have felt for many months that the U.S. is far from ready for interest rate increases. We are of the opinion, now echoed by others, that the U.S. will see zero and possibly even negative interest rates before it experiences a one percent Fed rate. This does not bode well for our future.

Subprime Auto Is "NOT" The Next Big Short, Citi Insists

We’ve been shouting from the rooftops about the dangers inherent in the subprime auto market for more than a year.

Auto debt in America has joined student loan debt in the trillion dollar bubble club and part of the reason why is that Wall Street is once again perpetuating the “originate to sell” model whereby lenders relax underwriting standards because they know they’ll be able to offload the credit risk.

Looser standards mean the eligible pool of borrowers expands, but it also means the loans being pooled and securitized by Wall Street are increasingly dubious. Data from Experian shows that terms for new and used car loans are beginning to border on the absurd, as the percentage of new vehicles with financing rose to 86.6% in Q3 (that’s up from 79.9% in 2010), the average amount financed climbed $1,137 from the same period a year ago, and the average loan term inched up to 67 months.

There’s also evidence - from the NY Fed - to suggest that a higher and higher percentage of auto loan originations are going to borrowers with lower credit scores. Here’s the chart (note the highlighted portion in the bottom right hand corner):

For those who might have missed it, the industry went full-retard in November when Skopos Financial - the king of unbelievably bad securitizations - sold a deal in which 14% of the loans "backing" $154 million in new ABS were made to borrowers with no credit score at all

Given all of the above, you can see why some money managers would be interested in shorting that paper and according to Citi, quite a few hedge fund managers, inspired by "The Big Short" are inundating banks wil requests to bet agains the market. "We have received an explosion of calls from equity and hedge fund investors looking to short auto ABS," Citi's Mary Kane wrote in a note out last month. 

For her part, Mary doesn't think it's a good idea. Here's why: 

There are four principal reasons to NOT short auto ABS: 1) consistent and stable long-term performance through numerous cycles; 2) robust credit enhancement protecting principal at risk 3) auto loan growth historically in line while securitization rates remain low, 4) originate-to-sell practices are not and have never been prevalent. Data shows that auto loan growth is not out of line with historical growth and that auto loan financing is not excessively reliant on the ABS market. The auto ABS securitization rate varied from 15–28% from 2004–present. Currently at 16%, it shows that most US auto loans are held on lenders’ balance sheet.


Now first of all, Mary can say the originate to sell model isn't "prevalent" all she wants, but it's at 16% and at one point around 2010 was nearly a third of the market, so we're not entirely sure what counts as "prevalent", but it's definitely a big piece of the puzzle. Additionally, auto loan ABS supply rose by something like 25% in 2015 and the types of deals getting done clearly involve shoddy credits.

Of course you'd think that if this was such a "bad" idea, then Citi would gladly dream-up some bespoke deals, take the other side of the trade, and sit back as the premiums come in. 

In any event, we suppose the point is this: just because the originate to sell model isn't as "prevalent" as it could be in some hypothetical world where the market is even riskier than it is now, doesn't mean that shorting specific issues isn't a good idea. Especially when the Skopos Financials and Santander Consumers of the world are selling deals that are obviously filled with junk. Unfortunately, there's no way to get synthetic exposure to the market and Kane is correct that shorting the cash bonds would likely turn into an expensive proposition. 

Kane's conclusion: "It seems like too many people have seen the movie “The Big Short” and are starting to think the movie heroes’ short strategy would translate to the ABS market. By the way, the ABS conference did NOT take place at Caesar’s Palace that year as per the film, it was at The Venetian. So, it’s not wise to believe everything you see in a movie and hit films are not the best source for trade ideas." 

Right. Movies "aren't the best source for trade ideas." 

Neither are sellside desks.

Just ask a Goldman client.

Oil Headline Rescues Stocks From Bloodbath As Precious Metals Soar

Market Psychology has swung from this...


To this...Losing SPY Religion


And seemingly back.

*  *  *

Gold grabs the headlines today. After beginning to surge yesterday, Hong Kong's reopen sparked a spike which then accelerated all day.


This was gold's best day since Nov 2008 and the highest level in a year...


With the best quarter in 30 years...


Perhaps even more stunning is the collapse in USDJPY since Kuroda unleashed NIRP - this is the worst 2-week drop (Yen strength) since LTCM in 1998...


Damn It, Janet!


It seems much of today's turmoil began as Hong Kong re-opened last night...


An OPEC Rumor - which struck perfectly as the S&P broke 1812 - a crucial technical level (January's intraday low back to Feb 2014)... And just look at VIX!!! Does that look like a "normal" market?


Spiked stocks briefly (enabling NASDAQ to briefly get green before dropping), and the soared again...


Techs managed to scramble green in the last hour but financials were the biggest loser...


Deutsche Bank's dead-cat-bounce died and is back to tracking Lehman's analog...


And it is spreading to US banks - Sub financial credit risk is up 18% this week - the worst week since at least 2011...


High Yield Bond yields and Leveraged Loan prices are at their worst levels since 2009...


Treasury yields crashed overnight - 2Y was down 10bps and 10Y down 20bps at its apex, before a miraculous bid for USDJPY appeared and rescued risk...


The yield curve (2s10s) collapsed even further below 100bps - to Dec 07 lows near 95bps at its lows today - leading financials lower...


The last time 2s10s was flattening and at these levels was Jan 2005


FX markets were volatile early on (with a huge drop in USDJPY when HK opened) and the USD drifted weaker...


The biggest 2-week drop in USD Index in 4 years...


Crude and Copper slumped as Gold & Silver surged...


As front-month crude plunged relative to 2nd month crude to 5 year lows..


Charts: Bloomberg

Bonus Chart: If everything is awesome, why is USA default risk on the rise?

Jeff Gundlach: Gold To $1,400 As Faith In Central Banks Is Lost

It's a day ending in -day, which means it is time for another Jeff Gundlach fire sermon, as transcribed by Reuters. And while in his most recent address to the mortals the new bond king from DoubleLine focused on tremors in the bond market, predicting that "credit fund bankruptcies are coming," and that "the VIX needs to surge above 40 before a bottom can be made in the high-yield junk bond market", today he focused on a topic we have been covering all day, namely the collapse of faith in central bankers and the ascent of gold as a preferred asset class to paper money and bank deposits.

In his latest communication with the outside world, Gundlach said that gold prices are likely to reach $1400 an ounce "as investors lose faith in central banks", Reuters reported.

"The evidence that negative rates are harmful and not helpful has piled up to the point that the 'In Central Banks We Trust' mantra has finally been laid bare as a hoax," Gundlach said.

Well, yes, even Bloomberg finally admitted it.

But the question is why does Gundlach see gold rising to only $1400. After all if, as JPM calculated the ECB, BOJ and Fed will cut rates to as low at -4.5%, then gold - as the only form of currency that will remain in physical form and is not taxable (at least until the government confiscates it) - will end up far, far higher than just $1,400, which is less than 15% from the current price.

Indeed, if the Chinese population decides to reallocate just a tiny fraction of their $25 trillion in deposits away from cash and into gold ahead of the inevitable massive Chinese devaluation, the question is how many zeroes Gundlach's forecast will be off by.

Anyway, back to Gundlach who said that negative rates are highly correlated with equities, particularly with banks and financials. Their stocks have come under severe selling pressure as negative rates would hurt their balance sheets.

"What's scaring people is the '12 rate hikes in three years' in the dots. When are they going to change the dots? They are still there," Gundlach said about the Fed's dot plot.

He repeeated that "the market is going to humiliate the Fed. It's bizarro to have rate hike projections while at the same time, Yellen is talking about negative rates. What a mess."

Gundlach's predictive track record speaks for itself:  last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China's slowing economy would pressure emerging markets. In 2014, Gundlach correctly also forecast U.S. Treasury yields would fall, not rise as many others had expected.

"The Fed raising rates in this environment is unthinkable," Gundlach said. Gundlach also told Reuters that he purchased more Puerto Rico general obligation bonds at around 70 cents on the dollar. He added: "You make money on the short side. The market is moving too fast for the Fed to keep up."

Or, if one wants to avoid the threat of idiotic short squeezes driven by idiotic headlines such as the recurring "OPEC is cutting production" hoax (note: the Saudis aren't cutting anything until the US shale sector lies in a rubble of chapter 11s and 7s), one can just buy gold.

Yes, the BIS will do its best to slam it down with naked shorting, but that only provides lower entry points to accumulate positions in a commodity which as even the Amazon Post's Keynesian lackey correctly put it, is "a bet that the people in charge don't know what they're doing." 

If by now it is not clear that the people in charge are idiots - and the US 2016 presidential race should have sealed it - it never will be.

"Billions Lost"

Submitted by Lance Roberts via,

Companies Lose Billions On Stock Buybacks

I recently wrote an article about why “Benchmarking Your Portfolio Is A Losing Bet.” In that missive, I discussed all the things that benefit a mathematically calculated index versus what happens in an actual portfolio of securities. One of those issues was the impact of share buybacks:

“The reality is that stock buybacks are a tool used to artificially inflate bottom line earnings per share which, ultimately, drives share prices higher. As John Hussman recently noted:


The preferred object of debt-financed speculation, this time around, is the equity market. The recent level of stock margin debt is equivalent to 25% of all commercial and industrial loans in the U.S. banking system. Meanwhile, hundreds of billions more in low-quality covenant-lite debt have been issued in recent years.”

Note the surge in debt to fund those buybacks.

“The importance of buybacks cannot be overlooked. The dollar amount of sales, or top-line revenue, is extremely difficult to fudge or manipulate. However, bottom line earnings are regularly manipulated by accounting gimmickry, cost cutting, and share buybacks to enhance results in order to boost share prices and meet expectations. Stock buybacks DO NOT show faith in the company by the executives but rather a LACK of better ideas for which to use capital for.”

The entire article is worth a read to understand how indices and your portfolio are two very different things.

I bring this up because surges in stock buybacks are late bull market stage events. This is something I have repeatedly warned about in the past it is a false premise that companies repurchase stock at high prices because they have faith in their company. Such actions eventually lead to rather negative outcomes as capital is misallocated to non-productive resources.

Bernard Condon via AP picked up on this issue:

“When a company shells out money to buy its own shares, Wall Street usually cheers. The move makes the company’s profit per share look better, and many think buybacks have played a key role pushing stocks higher in the seven-year bull market.


But buybacks can also sap companies of cash that they could be using to grow for the future, no matter if the price of those shares rises or falls.


Defenders of buybacks say they are a smart use of cash when there are few other uses for it in a shaky global economy that makes it risky to expand. Unlike dividends, they don’t leave shareholders with a tax bill. Critics say they divert funds from research and development, training and hiring, and doing the kinds of things that grow the businesses in the long term.


Companies often buy at the wrong time, experts say, because it’s only after several years into an economic recovery that they have enough cash to feel comfortable spending big on buybacks. That is also when companies have made all the obvious moves to improve their business — slashing costs, using technology to become more efficient, expanding abroad — and are not sure what to do next to keep their stocks rising.


‘For the average company, it gets harder to increase earnings per share,’ says Fortuna’s Milano. ‘It leads them to do buybacks precisely when they should not be doing it.’


And, sure enough, buybacks approached record levels recently even as earnings for the S&P 500 dropped and stocks got more expensive. Companies spent $559 billion on their own shares in the 12 months through September, according to the latest report from S&P Dow Jones Indices, just below the peak in 2007 — the year before stocks began their deepest plunge since the Great Depression.”

While buybacks work great during bull market advances, as individuals willfully overlook the fundamentals in hopes of further price gains, the eventual collision of reality with fantasy has been a nasty event. This is shown in the chart below of the S&P 500 Buyback Index versus the S&P 500 Total Return.

If this was the Dr. Phil Show, I am sure he would ask these companies;

“Well, how is that working out for you ?”

Tax Withholding Paints Real Employment Picture

I always find the mainstream media and blogosphere quite humorous around employment reporting day. The arm waving and cheering, as the employment report is released, reaches the point of hilarity over some of the possibly most skewed and manipulated economic data released by any government agency.

Think about it this way. How can you have the greatest level of employment growth since the 1990’s and the lowest labor force participation rate since the 1970’s? Or, how can you have 4.9% unemployment but not wage growth? Or, 95.1% of the population employed but 1/3rd of employable Americans no longer counted?

The importance of employment, of course, is that individuals must produce first in order to consume. Since the economy is nearly 70% based on consumption, people need to be working to create economic growth. Of course, there is another problem with the data. How can you have 4.9% unemployment and an economic growth rate of sub-2%?

A recession is coming and a look at real employment data, the kind you can’t fudge, tells us so. David Stockman recently dug into the data.

“If we need aggregated data on employment trends, the US government itself already publishes a far more timely and representative measure of Americans at work. It’s called the treasury’s daily tax withholding report, and it has this central virtue: No employer sends Uncle Sam cash for model imputed employees, as does the BLS in its trend cycle projections and birth/death model; nor do real businesses forward withholding taxes in behalf of the guesstimated number of seasonally adjusted payroll records for phantom employees who did not actually report for work.


My colleague Lee Adler…now reports that tax collections are swooning just as they always do when the US economy enters a recession.


The annual rate of change in withholding taxes has shifted from positive to negative. It has grown increasingly negative in inflation adjusted terms for more than a month and it is the most negative growth rate since the recession.”

“Needless to say, the starting point for overcoming the casino’s blind spot with respect to the oncoming recession is to recognize that payroll jobs as reported by the BLS are a severely lagging indicator. Here is what happened to the headline jobs count in just the 12 months after May 2008. The resulting 4.6% plunge would amount to a nearly a 7 million job loss from current levels.”

Good point.

Is The Yield Curve Indicator Broken?

As one indicator after another is signaling that the U.S. economy is on the brink of a recession (see here and here), the bulls are desperately clinging to the yield curve as “proof” the economy is still growing.

There are a couple of points that need to be addressed based on the chart below.

  1. As shown in the chart above, the 2-year Treasury has a very close relationship with the Effective Fed Funds Rate. Historically, the Federal Reserve began to lift rates shortly after economic growth turned higher. Post-2000 the Fed lagged in raising rates which led to the real estate bubble / financial crisis. Since 2009, the Fed has held rates at the lowest level in history artificially suppressing the short-end of the curve.
  2. The artificial suppression of shorter-term rates is likely skewing the effectiveness of the yield curve as a recession indicator.
  3. Lastly, negative yield spreads have historically occurred well before the onset of a recession. Despite their early warnings, market participants, Wall Street, and even the Fed came up with excuses each time to why “it was different.” 

Just as the yield spread was negative in 2006, and was warning of the onset of a recession, Bernanke and Wall Street all proclaimed that it was a “Goldilocks Economy.” It wasn’t.

Here is the point, as shown in the chart above, the Fed should have started lifting rates as the spike in economic growth occurred in 2010-2011. If they had, interest rates on the short-end of would have risen giving the Fed a policy tool to combat economic weakness with in the future. However, assuming a historically normal response to economic recoveries, the yield curve would have been negative some time ago predicting the onset of a recession in the economy about…now.  Of course, such would simply be a confirmation of a majority of other economic indicators that are already suggesting the same.

Just some things to think about.

Lines Around The Block To Buy Gold In London; Banks Placing "Unusually Large Orders For Physical"

This is the best quarterly performance for Gold in 30 years...


And as Mike Krieger of Liberty Blitzkrieg blog details, physical demand is soaring...

First, let’s look at the improved fundamentals. Gold bugs will exasperatingly proclaim that fundamentals have been great for the past four years yet the price plunged anyway, so who cares about fundamentals? To this I would respond with two observations. First, large institutional investors and sovereign wealth funds have been anticipating a rate hike cycle for a very long time now. They didn’t know when, but they expected it. The fact that the gold bugs never believed this is irrelevant; what matters is that big money believed it, and it was perceived to be very gold negative. In their minds, this anticipated rate hike cycle would confirm that things were getting back to normal, and if things are normal you don’t need to own gold, right?


The problem is that this assumption is quickly being called into question. Sure the Fed hiked rates once, but it is starting to look more and more like a policy error. Meanwhile, other major central banks around the world are going in the opposite direction, toward negative rates. I am a huge believer in market psychology, and the psychology dominating the minds of most institutional investors over the past few years has been that things were slowly getting back to normal. This has weighed on institutional demand for gold in a big way, and been a meaningful factor in the bear market (manipulation aside). If this psychology shifts, the shift back into gold could be very meaningful.


While that backdrop is interesting in its own right, what may make the move into gold that much more explosive is the lack of alternative investments…


– From the February 3, 2016 post: GOLD – It’s Time to Pay Attention

What a difference a couple of weeks can make. The Telegraph is reporting the following:

BullionByPost, Britain’s biggest online gold dealer, said it has already taken record-day sales of £5.6m as traders pile into gold following fears the world is on the brink of another financial crisis.


Rob Halliday-Stein, founder and managing director of the Birmingham-based company, said takings today had already surpassed the firm’s previous one-day record of £4.4m in October 2014.


BullionByPost, which takes orders of up to £25,000 on the website but takes higher amounts over the phone, explained it had received a few hundred orders overnight and frantic numbers of phone calls this morning.


“The bullion market has been building with interest since the end of last year but this morning things have gone bananas,” said Mr Halliday-Stein. “Some London banks are placing unusually large orders for physical gold.”


London-based ATS Bullion added it had been inundated with orders for the past week. The firm has sold 4,000 gold bars and coins since February 1, a 40pc rise on the same period a year ago when it sold 1,500.


“It’s been crazy – it’s been the best week since 2012. We’ve had people queuing round the block,” said Michael Cooper of ATS Bullion, a family run firm that trades online and also from an outlet in the West End.

But that’s just part of the story. As reported by the World Gold Council, the buying really started to pick up in the fourth quarter, courtesy of the Chinese and central banks. Reuters notes:

Buying by central banks as well as Chinese investors seeking protection from a weakening currency helped lift demand for gold in the final quarter of last year and the trend looks set to continue, the World Gold Council said on Thursday.


Chinese demand for gold coins surged 25 percent in the fourth quarter from a year earlier as consumers sought to protect their wealth after Beijing devalued the yuan currency. But stock market turmoil and a slowing economy knocked consumer sentiment and Chinese demand for gold for jewelry fell 3 percent from a year earlier, WGC said.


Central banks have been buying gold to diversify their reserves away from the U.S. dollar and their purchases edged up to 588.4 tonnes last year, second only to a record high 625.5 tonnes in 2013, the report showed.


Central bank buying accelerated sharply in the second half of last year and jumped 25 percent in the fourth quarter, from a year earlier, as the need to diversify was reinforced by falling oil prices and reduced confidence in the global economy, WGC said.


Chinese demand for gold totaled 985 tonnes last year, followed by India on 849 tonnes. They accounted for nearly 45 percent of total global demand, with consumer demand up 2 percent and 1 percent respectively in those countries.

Think about the lack of gold buying from the U.S. relative to its global wealth and it becomes quite easy to see where the fuel for the next bull market will come from.

Meanwhile, on the supply side…

Global supply of gold fell 4 percent last year to 4,258 tonnes, partly because of slower mine production.


Mining companies have scaled back since 2013 in a bid to slash costs and mine production shrank in the fourth quarter of 2015, the first quarterly contraction since 2008, WGC said.

For related articles, see:

GOLD – It’s Time to Pay Attention

4 Mainstream Media Articles Mocking Gold That Should Make You Think

The War on Cash is About to Go into Hyperdrive

The global Central Banks have declared War on Cash.


Historically, one of the safest things to do when the markets begin to collapse is to move a significant portion of your holdings to cash. As the old adage says, during times of deflation, “cash is king.”


The notion here is that cash is a safe haven. And while earning 1-2% in interest doesn’t do much in terms of growing your wealth, it sure beats losing 20%+ by holding on to stocks or bonds during their respective bear markets


However, in today’s world of fiat-based Central Planning, cash represents a REAL problem for the Central Banks.


The reason for this concerns the actual structure of the financial system. As I’ve outlined previously, that structure is as follows:


1)   The total currency (actual cash in the form of bills and coins) in the US financial system is a little over $1.36 trillion.


2)   When you include digital money sitting in short-term accounts and long-term accounts then you’re talking about roughly $10 trillion in “money” in the financial system.

3)   In contrast, the money in the US stock market (equity shares in publicly traded companies) is over $20 trillion in size.


4)   The US bond market  (money that has been lent to corporations, municipal Governments, State Governments, and the Federal Government) is almost twice this at $38 trillion.


5)   Total Credit Market Instruments (mortgages, collateralized debt obligations, junk bonds, commercial paper and other digitally-based “money” that is based on debt) is even larger $58.7 trillion.


6)   Unregulated over the counter derivatives traded between the big banks and corporations is north of $220 trillion.


When looking over these data points, the first thing that jumps out at the viewer is that the vast bulk of “money” in the system is in the form of digital loans or credit (non-physical debt).


Put another way, actual physical money or cash (as in bills or coins you can hold in your hand) comprises less than 1% of the “money” in the financial system.


Here is the financial system in picture form. I’m not including hard assets such as gold, real estate, or the like. We’re only talking about relatively liquid financial assets items that can be sold (turned into cash) quickly.




Of course, Wall Street will argue that the derivatives market is notional in value (meaning very little of this is actually “at risk”). However, even if we remove derivatives from the mix, the system is still very clearly based on credit, with only a small sliver of actual physical cash outstanding:



Put simply, the vast majority of wealth in the US is in fact digital wealth that moves from bank to bank without ever being converted into actual physical cash.


As far as the Central Banks are concerned, this is a good thing because if investors/depositors were ever to try and convert even a small portion of this “wealth” into actual physical bills, the system would implode (there simply is not enough actual cash).


Remember, the current financial system is based on debt. The benchmark for “risk free” money in this system is not actual cash but US Treasuries.


In this scenario, when the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.


A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).


This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.


To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.


When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.


As a result of this, virtually every monetary action taken by the Fed since this time has been devoted to forcing investors away from cash and into risk assets. The most obvious move was to cut interest rates to 0.25%, rendering the return on cash to almost nothing.


However, in their own ways, the various QE programs and Operation Twist have all had similar aims: to force investors away from cash, particularly physical cash.


After all, if cash returns next to nothing, anyone who doesn’t want to lose their purchasing power is forced to seek higher yields in bonds or stocks.


The Fed’s economic models predicted that by doing this, the US economy would come roaring back. The only problem is that it hasn’t. In fact, by most metrics, the US economy has flat-lined for several years now, despite the Fed having held ZIRP for 5-6 years and engaged in three rounds of QE.


Let me put this very bluntly. The Fed and other Central Banks literally took the nuclear option in dealing with the 2008 bust. They have done everything they can to trash cash and force investors/ depositors into risk assets. But these polices have failed to generate growth.


Rather than admit they are completely wrong, Central Banks are reverting to more and more extreme measures to destroy cash and force investors to move into risk against their will.


Over 20% of global GDP is currently sporting NEGATIVE yields on their bonds.


This is just the start of a much larger strategy of declaring War on Cash.


Indeed, we've uncovered a secret document outlining how the Fed plans to incinerate savings to force investors away from cash and into riskier assets.


We’re talking cash bans, NIRP, even a carry tax on PHYSICAL CASH (meaning the longer the bill is out of the system the less it is worth).


We detail this paper and outline three investment strategies you can implement right now to protect your capital from the Fed's sinister plan in our Special Report Survive the Fed's War on Cash.


We are making 100 copies available for FREE the general public.


To lock in one of the few remaining…


Click Here Now!


Best Regards

Phoenix Capital Research













The Most Ominous Warning That Oil Storage Is About To Overflow Has Arrived

It was just last week when we said that Cushing may be about to overflow in the face of an acute crude oil supply glut.

“Even the highly adaptive US storage system appears to be reaching its limits,” we wrote, before plotting Cushing capacity versus inventory levels. We also took a look at the EIA’s latest take on the subject and showed you the following chart which depicts how much higher inventory levels are today versus their five-year averages.



And now with major US refiners dumping crude, as we detailed overnight, those fears are surging.

U.S. Energy Information Administration data on Wednesday showed inventories at the Cushing, Oklahoma delivery hub hit a record 64.7 million barrels last week - just 8 million barrels shy of its theoretical limit - stoking concerns that tanks may overflow in coming weeks.




And now, given the "super-contango" in 3-month it is extremely clear that storage concerns are at their highest in 5 years...


Simply put, as one trader noted, speculators are now "making the leap to Cushing storage never being more full... will actually overfill, or even stop taking crude oil deliveries outright."

Euro PIIGS Starting To Squeal Again

Via Dana Lyons' Tumblr,

The stock markets of the so-called PIIGS are breaking down on an absolute and relative basis – not a positive development for global markets.

The PIIGS are starting to squeal again in Europe. No, not the kind that produces pancetta or linquica or bangers. We are talking about the continent’s debt-laden, economically-challenged countries known by the acronym PIIGS, namely, Portugal, Ireland, Italy, Greece and Spain. These nations are essentially economic dead weight for Europe considering their plight. That said, all financial markets are cyclical – nothing straight-lines. And indeed, despite the apparent inevitable downfall that awaits the Eurozone as a result of the PIIGS, the associated equity markets have actually been quite buoyant for the better part of the last 4 years. Not so anymore.

We have posted before a composite that we constructed consisting of equally-weighted portions of each of the PIIGS’ stock markets. We call it…the PIIGS Composite. The composite starts in 2006 and hit an all-time low in June 2012, amid the Europe/PIIGS near-meltdown. Following Mr. Draghi’s “whatever it takes” moment, the PIIGS Composite shot up off the mat, rallying nearly 75% in 3 years before peaking in May of last year. Since then, the composite has gradually leaked lower. Around the start of the year, the leak turned into a gusher. As of this week, the PIIGS Composite is at near 3-year lows, approaching levels last seen in 2012.



The Composite weakness is not just significant on an absolute basis. As the chart shows, it is also breaking down on a relative basis versus the DJ Euro STOXX 50, a proxy for the more established, “blue chip” stocks in Europe. Like all higher-beta sectors, stock market bulls want to see the PIIGS outperforming the lower-beta blue chips. That can be an indication of a willingness of investors to take on risk, a healthy condition for a bull market. In other words, when the PIIGS are outperforming, it is symptomatic of a “risk-on” environment. Conversely, when they are lagging, it is a sign of “risk-off”.

As the chart indicates, risk-off is decidedly the case at present as the PIIGS:STOXX 50 Ratio just broke sharply lower, through a shallow year-long uptrend. Looking at prior trend breaks in the ratio, e.g., mid-2008, late-2009, and mid-2014, we see that substantial bouts of weakness ensued throughout European markets, particularly in the PIIGS. These also led to scares among some or all of the PIIGS pertaining to their economic viability.

On an individual basis, the PIIGS markets are each sucking wind to varying degrees, from hyperventilation to suffocation.

By far, the winner has been Irish stocks. The Irish ISEQ Index was at a 52-week high as recently as early December. It then ran into, and bounced precisely off, the 61.8% Fibonacci Retracement of the 2007-2009 decline. It has fallen since, recently accelerating to the downside to near 52-week lows. Should the global equity selloff get worse, this market is in danger of playing “catch-down” as investors sell what they can instead of what they want.



Since breaking its post-2012 Up trendline, Italy’s FTSE MIB Index has dropped to almost a 3-year low now, recently breaking the key 61.8% Fibonacci Retracement of the 2012-2015 rally.



Spain’s IBEX 35 is telling a similar story.



In the suffocation category, Portugal’s PSI 20 Index is within spitting distance of a 20-year low.



And the biggest loser among the PIIGS? It’s Greece, whose Athex General Index is at a 25-year low.



This is not a pretty situation shaping up for the Eurozone once again. Whatever benefit that accrued as a result of “whatever it takes” may have largely run its course. Again, it will not be a straight line lower. However, the absolute and relative breakdowns in the PIIGS Composite suggests that the post-2012 run-up is over. Thus, while the PIIGS rally of the past several years may have tasted like Jamon Iberico and Prosciutto di Parma to investors, they may have to settle for scrapple and spam from any rallies in the near future.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

BNP Pulls Plug On US Energy Sector, Will Exit RBL Lending

Back in 2012, BNP Paribas exited the North American reserve-based lending market, when it sold its RBL unit to Wells in an effort to shore up its balance sheet amid the turmoil generated by the eurozone debt crisis.

A little over two years later, in the fall of 2014, BNP got back into the RBL game in the US. That probably wasn’t a good idea.

Just a few months after the bank jumped back in, the Saudis moved to bankrupt the US shale complex and it’s been all downhill from there with crude plunging and America’s cash flow negative producers careening towards insolvency.

We’ve been warning since early last year that it was just a matter of time before banks start to shrink the borrowing bases of uneconomic producers’ credit facilities. In other words, with the door to the HY market now slammed shut as spreads blow out and investors panic, the last lifeline for many in the O&G space is about to be cut, as no bank wants to be caught flat-footed if things get as bad as many people think they will.

On Thursday, we learn that BNP is now set to exit the RBL market for the second time in five years.

“BNP Paribas is reining back lending to the US energy sector, potentially tightening a squeeze for cash-strapped producers struggling with the collapse in oil prices,” FT reports. “The Paris-based bank is pulling out of the business of reserve-based lending, a vital source of liquidity for many oil and gas companies with big capital needs and irregular cash flows.”

“Given the current environment in the oil and gas market and the poor outlook for future fundamentals in the short to medium term, BNP Paribas has had to make adjustments to some of its businesses and has decided to stop the redevelopment of its reserve-based lending business,” the bank said, in a statement.

BNP will continue to service existing clients, but its exit from new business is a rather inauspicious move. Indeed, it suggests that when credit lines are reassessed again in April, we’re likely to see further cuts. “During the previous round of ‘redeterminations’ last autumn, banks cut limits for most customers between 10 and 20 per cent,” FT continues. That’s likely to be the case again in two months, Wells CFO John Shrewsberry said this week at an industry conference in Florida.

As a reminder, virtually the entire sector is cash flow negative. Without access to credit lines, everyone goes belly up. Of course with crude at $27, no one wants the assets the companies have pledged as collateral. As we outlined three weeks ago, some oil and gas drillers’ assets are only fetching a fraction of what they owe at auction.

Amusingly, banks are cutting their own throats by shrinking the credit facilities. That is, you don't necessarily want to bankrupt someone who owes you a lot of money, especially when you won't be able to recover much by selling off the collateral. 

But alas, there's really no choice at this juncture. There's no end in sight to the oil market malaise with Iran ramping up production and a recalcitrant Saudi Arabia dug in for a long war of attrition. 

We anxiously await the next bank to pull the RBL plug and we're even more anxious to find out just how much the banks have provisioned for the losses that are sure to pile up rapidly once the entire sector loses access to its revolvers. 

As a reminder, America's long list of cash flow negative producers are sitting on $325 billion in debt. 

It's Not Just Deutsche Bank...

While broad-based contagion from Deustche Bank's disintegration is clear in European, US, and Asian bank risk, there is another major financial institution whose counterparty risk concerns just went vertical...

Credit Suisse...

With the stock at 27-year lows, it appears investors are seriously questioning Chief Executive Officer Tidjane Thiam’s restructuring plans.

Everyone Jumping On The Bandwagon: BofA Says To Stay Long Gold Until $1,375, "$1,550 A Possibility"

First it was Goldman confirming that when it comes to penning "investment theses", all Wall Street knows how to do is jump on a momentum bandwagon, when it said overnight that  there’s scope for gold prices to "extend much higher over time." Now it's Bank of America's turn.

Here is the latest chart magic from BofA's technical strategist Paul Ciana:

Staying long gold


Gold prices are breaking above triple resistance forming a technical bottom and channel breakout. This projects gold higher to 1,315 and 1,375. The gap in the distribution on the left shows 1,550 is a possibility, though we are not making that our target at this point.


We remain long gold on a technical basis.



Normally, these recommendations would be enough to send gold plunging; however with gold soaring over $50 on the day, its biggest move since September 2013...

... despite bullish calls by not only Goldman and BofA but even Dennis Gartman, perhaps this time it's different?

Gold Surges 3.2% To $1,241/oz As Deutsche Bank And Other Stocks Fall Sharply

Gold Surges 3.2% To $1,241/oz As Deutsche Bank And Other Stocks Fall Sharply

Gold has surged over 3% today on increased safe haven demand as stocks and in particular bank stocks see sharp falls. German shares have nose dived again and German colossus Deutsche Bank has fallen over 8%.

Futures - 1 Day Relative Performance -

A host of negative factors sent investors fleeing riskier assets. Oil prices slid on inventory data and on concerns about slowing global growth as Federal Reserve Chair Janet Yellen warned of several risks facing the U.S. and Chinese economies, and the global economy.


Gold and Silver News and Commentary

Central banks and Chinese buyers helping to spur gold demand – Reuters

Flight to safety sends gold surging above $1,200 to 8-1/2 month highs after Yellen – Reuters

Indian gold demand to climb in 2016 as buyers seek safe haven – Reuters

Gold demand jumps as fear grips markets – Telegraph

Banks drag European shares down as investors seek safety in gold – Independent

VIDEO: JP MORGAN – Gold Rally Breaks the Bullion Downtrend – Bloomberg

VIDEO: I’ve never liked gold-but I do now: Trader – CNBC

Why Gold Has Been on a Tear in 2016 – Fortune

“It’s Probably Something” – Gold Surges Above $1200; USDJPY, Oil, Stocks Plunge – Zero Hedge

China is on a massive gold buying spree – CNN Money

Click here


LBMA Gold Prices

11 Feb: USD 1,223.25, EUR 1,080.80 and GBP 847.33 per ounce
10 Feb: USD 1,183.40, EUR 1,052.29 and GBP 816.56 per ounce
9 Feb: USD 1,188.90, EUR 1,061.90 and GBP 822.31 per ounce
8 Feb: USD 1,173.40, EUR 1,050.16 and GBP 810.44 per ounce
5 Feb: USD 1,158.50, EUR 1,035.58 and GBP 797.40 per ounce


GoldCore Note: Banks, economists, brokers, financial advisers and other experts did not see the first crisis coming in 2008 and they are not seeing it now.

A handful of people are warning about the risks and again they are largely being ignored. Investors and savers will again bear the brunt for the inability to look at the reality of the financial and economic challenges confronting us today.

Diversification remains the key to weathering the second global financial crisis.


Has The Global Recession Begun In Earnest?

Whilst riding in the car with my girlfriend and talking about how close we are to a possible financial Armageddon, she couldn’t help but notice the tone of  my last Zerohedge article, and that maybe the entire site,was decidedly negative, bordering on the side of paranoia, inciting the rabble to potential violence. Having viewed some of the comments myself,there are definitely a couple of rather unstable people out there.So I began to wonder what was the appropriate response should be. “it is not paranoia if they really are out to get you!” I retorted. But as in 2007, whilst some had seen the writing on the wall ,the ones claiming that there was something very wrong in the markets were being told that we were fear-mongers, that we used exaggeration and continual repetition to alter the perception of the public in order to achieve a desired outcome, that how could we possibly believe what we were saying to be true… so I thought the best way was to systematically list the things I know to be.... 


Are You Sitting Comfortably? Then I’ll Begin:

Where to even begin...we started off with fears about oil and China, followed by an assortment of political tensions, Brazil’s faltering economy and if that wasn’t enough, attention has been drawn to Japan’s flip flop and race to the bottom in rates. With the addition of tightening in financial conditions in European Banking credit,Portugal and the Greek tragedy back on the table and now various houses concerned about recent macro-economic data which is indicating a possible slow-down in the economy, concerns abound.



Fiat money refers to any currency lacking intrinsic value that is declared legal tender by a government.

As valid currency solely by virtue of a government declaration, fiat money is not backed by any commodity, such as gold, but only by the full faith and credit of the bearer. In this respect, unlike currencies backed by gold or silver, fiat money does not have any intrinsic value (e.g., remember when all bank notes used to carry the phrase , “I promise to pay the bearer”?)

Now that we know the money used today is nothing more than paper backed up by full faith and a government decree, the next logical questions are, 1) Where does it come from?, and 2) Who has the power to create money? In the case of the US Dollar, it is not the government. The Federal Reserve System (Fed) is one of the ways in which money is created today (the other being fractional reserve banking).

Central banks create money from thin air, which is then used to for buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn supposedly boosts investment by encouraging banks to make more loans, but instead the banks use the funds to buy other assets.


Have You Ever Played Monopoly ?  

Imagine that one player can print all the money they want.

Before long, that one player will own everything, and everyone else is broke or in debt.  

For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. This implies that debt must grow exponentially in order for the monetary system to remain solvent.

However, exponential growth can only be maintained over a finite period of time. Just in case of Ponzi schemes, during this time the scam works and investors are paid in full to attract future investors. Everyone believes therefore that the scheme works. But when the exponential growth slows down, the pyramid collapses, primarily because the initial interest rate that was set was too high. Bernard Madoff's Ponzi scheme has shown that choosing a lower interest rate prolongs the time the scam works. Banks indeed work with even lower interest rates, so draw your own conclusion.


Here is a Real World Example

Banks are required to hold a capital cushion against liabilities, but it doesn’t cover their total potential liabilities. Rather, they are only required to hold sufficient assets to cover some of their potential liabilities (a “fractional reserve”) and this can be easily masked .This is how Italian banks and the Italian government are helping each other in pretending that they are more solvent than they really are: the banks buy government properties (everything from office buildings to military barracks) from the government, and pay for them with government bonds. The government then leases the buildings back from the banks, and the banks pool the properties and then issue asset backed securities. The Italian government then slaps a “guarantee” on these securities, which makes them eligible for repo with the ECB. The banks then repo (repurchase agreement)  these ABS with the ECB and take the proceeds to buy more Italian government bonds. Rinse and repeat. 


The Issue Hinges on “Credibility” and “Confidence”.

The art and craft involved in managing a good Ponzi scheme is in how well the perpetrators can position themselves for the inevitable crash and bust before it actually happens. While things are going relatively well for all in the economy, the financial elite spend their time and money buying up land, industry, war materials, yachts and anything else you can imagine. When the economy finally cracks completely, they are prepared to survive, and perhaps hoping to usher in a new world. Just look at the recent history of luxury real estate purchases or gold repatriation.


DEBT TO GDP: The Math Simply Doesn’t Add Up

  The last US GDP report was noteworthy in three respects. First, nominal GDP growth continued to decelerate, and is now at levels that have been historically consistent with recessions. Second, health care accounted for more than one-fifth of real GDP growth, but this was largely driven by Obamacare. Third, it marked a full decade that the annual rate of real GDP growth failed to break above 3%. The textbook definition of a recession is a downturn in economic activity, characterized by at least two consecutive quarters of decline in a country's gross domestic product (GDP). So take that away.



This is not a good sign…but to simplify it even further (and I know some of you have seen this before, but to those who have not…):

Some stats about the US government:

U.S. Tax revenue: $2,170,000,000,000

 Fed budget: $3,820,000,000,000

New debt: $ 1,650,000,000,000

National debt: $18,990,000,000,000

Recent budget cuts: $ 38,500,000,000


Now, remove 8 zeroes and pretend it’s a household budget:

Annual family income: $21,700

Money the family spent: $38,200

New debt on the credit card: $18,990

Outstanding balance on the credit card: $142,710

Total budget cuts: $385!!!!!


The Newest Monetary Contagion

As more central banks resort to negative interest rates, will economic conditions take a turn for the worse?  

After Japan lowered the interest rate it pays on bank reserves to negative territory, 23% of global GDP is now overseen by central banks with negative policy rates, while 24% of the market value of the world’s largest companies ($2 billion-plus market cap) are based in economies with negative policy rates.  The wider adoption of negative rates on excess bank reserves, designed to force banks to pump more of their excess reserves into the real economy rather than keeping them on deposit at the central bank, is an acknowledgment that years of quantitative easing have done little to spur real economic activity. The BOJ’s bond purchases have expanded its balance sheet to 75% of GDP from 35% in 2013, compared to the U.S. Federal Reserve’s 25% of GDP. Yet growth in Japanese bank lending, now 2.2% per year, has barely budged. Companies are sitting on about $2 trillion in cash(Corporate cash and deposits increased 4.3 percent from a year earlier to 231 trillion yen ($1.9 trillion) at the end of December, close to last March’s all-time high of 233 trillion yen, according to Bank of Japan data.), and real wages have declined. The market’s verdict on Japan’s latest move is a resounding thumbs down. After the ECB lowered its deposit facility rate to negative territory in 2014 and despite a sharp decline in its currency, Eurozone growth this year is only expected to be an anemic 1.6%. Sweden and Denmark who also adopted these negative interest rate policies in 2014 are showing growth of 0.8% for Sweden and a contraction of 0.1% for Denmark. 

This new contagion is the latest confirmation that competing economies are in a “race to the bottom.” As global growth rates continue to shrink, each economy is forced to resort to “beggar thy neighbor” policies to steal growth from other countries. Simply put, negative policy rates are simply the latest fad designed to keep currencies depressed, in an effort to support exports and avoid deflation. It may seem counter-intuitive, but a strong currency is not necessarily in a nation's best interests.


Beggar Thy Neighbor

A weak domestic currency makes a nation's exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products. This improvement in the terms of trade generally translates into a lower current account deficit (or a greater current account surplus), higher employment, and faster GDP growth. The stimulative monetary policies that usually result in a weak currency also have a positive impact on the nation's capital and housing markets, which in turn boosts domestic consumption through the wealth effect.

Since it is not too difficult to pursue growth through currency depreciation – whether overt or covert – it should come as no surprise that if Nation A devalues its currency, Nation B will soon follow suit, followed by Nation C, and so on. This is the essence of competitive devaluation.

This phenomenon is also known as "beggar thy neighbor," which, far from being the Shakespearean drama that it sounds like, actually refers to the fact that a nation which follows a policy of competitive devaluation is vigorously pursuing its own self-interests to the exclusion of everything else.

However, some of the worst fears about negative interest rates are that the banks would pass them on to consumers, causing them to withdraw their deposits and stash the money under their mattresses—as of yet it has not yet come to pass. However, to the extent the banks absorb the cost of the negative interest rate on their own, profit margins will come under even further pressure than they have already, adding to the stress on the credit markets.


Now Let’s Move Briefly On To Brazil.

Brazil is not the same country it was in 1930, but it’s economy is sure looking that way. The country is facing its worst economic crisis since the Great Depression in the United States. This year will be another year of contraction. Labor markets are shedding employees and inflation, once under control, is now over 10.6%. There is no end in sight to this crisis. China won’t save it. A weaker dollar won’t save it. A lot of Brazil’s problems are boring, old school budget woes…As the B in BRICS, Brazil is supposed to be in the vanguard of fast-growing emerging economies. Instead it faces political dysfunction and perhaps a return to rampant inflation. That our own debt to GDP ratio is over 102% whist Brazil’s is around 66% should tell you something.

The Drugs Don’t Work

When the drugs don’t work it is time to put the priest on notice that he may be called at any minute to perform the last rights.

Given the recent moves in the stock and credit markets it is further proof that QE and low interest rates are not working but they remain the favored and only tool available to the Bank of Japan and ECB to keep their patients alive.

As it becomes ever clearer that the drugs are losing their potency the gloom deepens on the prospects for economic growth. Banks do not make money in a negative interest rate environment nor one in which the risk of corporate and sovereign default rises.

Table of bank performance prior to todays debacle;

This Time, It’s Different?

Many economists have already compared the years 1929–1932 to those of 2007–2009, and the current period of recovery to the time period 1933–1939. It was only a matter of time before they began to look for a comparison between the recession of 1937 and a potential "double dip" today.

The 2007-2009 recession was mostly blamed on a housing bubble. After a run-up in housing prices in the early part of the decade, home prices plummeted, then thousands of borrowers couldn't afford to pay their loans. Meanwhile, Wall Street sold financial instruments tied to the loans that were eventually discovered to be of little value (after seeing The Big Short, I may be being a little kind in that assessment)

Looking at other recessions, we can see their shocks. Albeit in hindsight, the recession of 2001 was caused by the 'Internet Bubble,' in which internet stocks and businesses eventually fell to much lower price.

The recession of 1973-1975 in the U.S. came about from rocketing gas prices, because OPEC raised oil prices and embargoed oil exports to the U.S. Other major factors included heavy government spending on the Vietnam War, and a Wall Street stock crash in 1973-74.

“This time its different”?, These words are often uttered near the peak of bull markets, as dewy-eyed investors attempt to justify unsustainable market trends by arguing that the past is no longer a relevant guide to the future.

They are , without a doubt , the four most dangerous words in investing. 

The deep recession  in 1937 and 1938 had several causes. When the U.S. was trying to get out of the Great Depression, it spent a lot of money. That was the New Deal — President Franklin Roosevelt's plan to get the economy moving — which started in 1933,not to dissimilar to our current QE program initiated by various central banks.

But as the economy appeared to be recovering in 1937 and because Congress wanted to balance the budget, the government pulled back on spending and then raised taxes. That was enough of a 'shock' to put the economy into recession. Unemployment rose again and business profits declined, as did business investing.

As a result, the Great Depression continued, economists say, until the U.S. entered World War II in 1941.

We are told that there will not be a repeat of 2008 but the doubts are growing, cracks are appearing.



Liquidity has a reputation for being very much in evidence when not required, and then disappearing without trace the moment you need it.There is a broad-based problem insofar as the investor base across markets has developed a greater tendency to crowd into the same trades, to be the same way round at the same time. This “herding” effect leads to markets which trend strongly, often with low day-to-day volatility, but are prone to abrupt corrections.In principle, markets could gap to a point where they went from being absurdly expensive to being absurdly cheap, without very much trading. But the existence of the feedback loop to the real economy means that the fundamentals tend also to be affected by extreme market moves: “cheap” may be a moving target. This in turn could force central banks to step back in again.In principle, markets could gap to a point where they went from being absurdly expensive to being absurdly cheap, without very much trading. But the existence of the feedback loop to the real economy means that the fundamentals tend also to be affected by extreme market moves: “cheap” may be a moving target. This in turn could force central banks to step back in again.But then we are left with a paradox,The more liquidity the central banks add, the more they disrupt the natural order of the market. On the way in, it has mostly proved possible to accommodate this; however the way out is proving not to be so easy....


 I will leave you with a quote from a book/movie set during the US civil war. 

“This isn’t the first time the world’s been upside down and it won’t be the last. It’s happened before and it’ll happen again. And when it does happen, everyone loses everything and everyone is equal. And then they all start again at taw, with nothing at all.That is, nothing except the cunning of their brains and strength of their hands… But there are always a hardy few who come through and given time, they are right back where they were before the world turned over.”

Margaret Mitchell, Gone With The Wind

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Boeing Stock Nose-Dives On News Of SEC Probe

Just when you thought The BoJ would save the day with its miraculous intervention in carry trades, this happens:


And just like that, Boeing's stocks crashes 10% dragging the major US equity markets with it. So, just as a reminder, this is a firm which the US government (via Ex-Im Bank) lends billions of US taxpayer dollars... and now the SEC is accusing them of fraud.


As Bloomberg reports,

The U.S. Securities and Exchange Commission is investigating whether Boeing Co. properly accounted for the costs and expected sales of two of its best known jetliners, according to people with knowledge of the matter.


The probe centers on projections Boeing made about the long-term profitability for the 787 Dreamliner and the 747 jumbo aircraft, said one of the people, who asked not to be named because the investigation isn’t public. Both planes are among Boeing’s most iconic, renowned for the technological advancements they introduced, as well as the development headaches they brought the company.


Underlying the SEC review is a financial reporting method known as program accounting that allows Boeing to spread the enormous upfront costs of manufacturing planes over many years. While the SEC has broadly blessed its use in the aerospace industry, critics have said the system can give too much leeway to smooth earnings and obscure potential losses.

We're gonna need more Ex-Im Bank bailouts to save this one!

Why Markets Are Crashing: "Faith In Central Banks Fails"

While Citigroup's Eric Lee thinks its "ridiculous" to talk fo a US recession, it appears the macro data and markets would strongly disagree: as Bloomberg reports:

Signals by central banks from Europe to Japan that additional stimulus is at the ready are failing to ease investor concern that global growth will keep slowing.



Citigroup’s Economic Surprise Index already indicates data in Group of 10 economies are falling short of estimates by the most since April 2013, and a selloff in crude oil and weakening credit markets are exacerbating the malaise. Yellen suggested that the central bank might delay, but not abandon, planned interest-rate increases in response to recent turmoil in financial markets.


“Over the last few years when we got bad news, equity markets would rally because they would interpret this as potential for central banks to go more dovish,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment bank unit in London.



“Now that correlation is shifting to bad news is actually bad news. Investors are concerned over central banks’ policy options given the market is driven by factors over which they have little or no control over.”

And so the headline of the day from Bloomberg seems very appropriate:

Some further clarifications from Bloomberg:

Financial markets are signaling that investors have lost faith in central banks’ ability to support the global economy.

And some more:

"The markets are wondering, well, we’ve had these non-conventional monetary policy experiments for the last six or seven years and they haven’t caused a sustainable boost to global growth, so what will the latest moves do,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “It’s a reasonable question to ask given the events of the last few weeks.”


The notion that central banks and regulators could not act if the financial panic were to turn into a serious threat to the real economy and hence to jobs looks wrong,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Central banks can bolster confidence if they really have to in order to support the real economy.”


"The period of central bank ‘shock and awe’ operations is likely to be behind us," Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist, wrote in a note on Friday. "This will be the year that ‘gravity’ will overwhelm the central bank policies," he said, recommending selling equities during rallies.

Perhaps hope, as promulgated by this recent Bloomberg addition, was not such a good strategy after all...

I don't get this argument that "hope" isn't a strategy In the long-term, hope is the only good strategy.

— Joseph Weisenthal (@TheStalwart) September 13, 2013

Saudi Arabia Makes "Final" Decision To Send Troops To Syria As US, Russia Spar Over Aleppo Strikes

As you might have heard, the opposition in Syria is in serious trouble.

Last summer, Bashar al-Assad’s army was on the ropes, as the SAA fought a multi-front war against a dizzying array of rebel forces including ISIS. Then Quds commander Qassem Soleimani went to Russia. After that, everything changed.

As of September 30 the Russian air force began flying combat missions from Latakia, rolling back rebel gains and paving the way for a Hezbollah ground offensive. Once Moscow had stopped the bleeding for the SAA (both figuratively and literally), Iran called up Shiite militias from Iraq who, alongside Hassan Nasrallah’s forces, pushed north towards Aleppo.

Now, the city is surrounded and the rebels are cut off from their supply line to Turkey. In short: it’s just a matter of time before the opposition is routed.

So much for President Obama’s “Russia will get itself into a quagmire” line.

The only thing that can save the rebels at this juncture is a direct intervention by the groups’ Sunni benefactors including Saudi Arabia, the UAE, Qatar, and Turkey.

That, or an intervention by the US.

Both the Saudis and the Turkey have hinted at ground invasions over the past two weeks and just this morning, a sokesman said Riyadh's decision to send in troops was "final."

But direct interventions are tricky. Russia has never denied it intends to bolster Syrian government forces against the rebels, all of whom Moscow deems “terrorists.” On the other hand, Washington, Riyadh, Doha, and Ankara cling to the notion that while they don’t support Assad, they’re primary goal is to fight ISIS. Well ISIS is in Raqqa, which is nowhere near Aleppo, meaning there’s no way to help the rebels out in their fight against the Russians, Iranians, and Hezbollah under the guise of battling Islamic State.

Against that backdrop we found it interesting that Moscow and Washington are now delivering conflicting accounts of airstrikes in Aleppo on Wednesday. The Pentagon, without specifying what time the strikes allegedly took place, says Russia destroyed the city’s two main hospitals.

Defence Ministry spokesman Igor Konashenkov notes that Warren didn’t provide either hospitals’ coordinates, or the time of the airstrikes, or sources of information. “Absolutely nothing,” he said, describing Warren’s report.

The Kremlin, on the other hand, says US warplanes conducted strikes at 1355 Moscow time. “Two U.S. Air Force A-10 attack aircraft entered Syrian airspace from Turkish territory,” Konashenkov said in a statement. “Reaching Aleppo by the most direct path, they made strikes against objects in the city.”

“Only aviation of the anti-ISIS coalition flew over the city yesterday,” he added.

“When asked on Wednesday whether the U.S.-led coalition could do more to help rebels in Aleppo or improve access for humanitarian aid to the city, Pentagon spokesman Colonel Steve Warren said that the coalition's focus remained on fighting Islamic State,” Reuters wrote on Thursday. The group is "virtually non-existent in that part of Syria,” Warren said.

Right. Which makes you wonder what two US Air Force A-10 attack planes were doing bombing in and around Aleppo. Is the US set to conduct airstrikes in support of the rebels, thus marking a fresh and exceptionally dangerous escalation of hostilities in the country?

As for what exactly it was that the US warplanes struck, Konashenkov will have to get back to us. He’s too busy winning a war to care right now:

“I’m going to be honest with you: we did not have enough time to clarify what exactly those nine objects bombed out by US planes in Aleppo yesterday were. We will look more carefully."

*  *  *

Below, find excerpts from “Will Russian Victories In Syria Spark A Regional War?” by Yaroslav Trofimov as originally published in WSJ

Defying U.S. predictions of a quagmire in Syria, Russia is achieving strategic victories there with this month’s Aleppo offensive. The question now is whether this is a turning point that hastens the five-year war’s end or the trigger for a counter-escalation that will drag other regional countries into the conflict.

Few expect that Moscow’s main target—the moderate rebels backed by Turkey, Saudi Arabia and the U.S.—would now be forced settle the conflict on the Kremlin’s, and Syrian President Bashar al-Assad’s, terms.

“Their victory in Aleppo is not the end of the war. It’s the beginning of a new war,” said Moncef Marzouki, who served in 2011-14 as the president of Tunisia, the nation that kicked off the Arab Spring, and who recently visited the Turkish-Syrian border. “Now, everybody would intervene.”

To be sure, Turkey and Saudi Arabia have few easy options to counter Russian military might in Syria. But because of national pride—and internal politics—neither can really afford to have the rebel cause in which they have invested so much wiped out by Moscow and its Iranian allies.

While the Obama administration has long been determined to minimize U.S. involvement there, for Turkey and Saudi Arabia the prospect of Syria falling under the sway of Russia and Iran would be a national-security catastrophe.

“The whole situation, not just for Turkey but for the entire Middle East, would be reshaped. The Western influence will fade away. The question is: Can we accept Russia, and the Iranians, calling the tune in the region?” said Umit Pamir, a former Turkish ambassador to NATO and the United Nations.