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China Has Lost 55% Of Its Most Valuable Resource

Submitted by Simon Black of Sovereign Man blog,

A few days ago I had a conversation with the Chief Operating Officer for our agricultural fund in Chile.

We were discussing water, and he told me that roughly 60% of California right now is suffering “extreme drought” conditions. 30% of the state is in “severe drought”. And 10% of the state is only under “drought”.

In other words, roughly the entire state - the 8th largest economy in the world – is facing a severe shortage of water.

But if you think that’s bad, China is about to take over the spotlight yet again.

A study by China’s Ministry of Water Resources found that approximately 55% of China’s 50,000 rivers that existed in the 1990s have disappeared.

Moreover, China is over-exploiting its groundwater by 22 billion cubic meters per year; yet its per-capita water consumption is less than one third of the global average.

This is astounding data.

More than 400 major cities in China are short of water, with some 110 facing “serious scarcity”.

Beijing and other northern cities get most of their water from underground aquifers. Over the last five decades, China has had to drill increasingly deeper to gain access to water.

Another challenge China faces is logistics. More than 60% of China’s water is in the southern part of the country, but most of the usage is in the north and along the coastlines.

When you consider that this is a country that has almost one fifth of the world’s population and is soon to become the world’s biggest economy, this is rapidly becoming a global problem.

The Chinese are of course well aware of this and are trying to mitigate the consequences by diversifying internationally, or as I call, planting multiple flags.

In China’s case, it’s a ‘water flag’.

Since the most efficient way to save water is not to use it, a sensible strategy is to import water-intensive goods and commodities. Corn and wheat are great examples.

China has been acquiring land across Africa and South America; last week when I was in Ethiopia, the place was crawling with Chinese delegates in the ag business.

The goal is to increase China’s food supply, reduce its dependence on the US for grain imports, and reduce its domestic water demand.

China has the economic capacity to do this. Most nations don’t.

Globally, some two billion people face a water deficit, and dozens of countries have to import water.

Throughout history, water has been the most important resource in the world and a major cause for conflict.

As far back as the ancient Sumerians, wars would break out over control of water supplies in Mesopotamia.

Today, 47% of the world’s non-polar land mass is supplied by rivers shared by two or more states simultaneously. This is an always present but latent source of potential conflict.

We can see that in South East Asia where the Mekong countries bicker over who has the right to build dams and otherwise exploit the river.

All of those countries, plus Bangladesh, India and Myanmar are furious with China’s plans to commandeer more of upstream river sources for itself.

In Ethiopia, where I was just a few days ago, the Grand Ethiopian Renaissance Dam project on the Blue Nile is causing a major diplomatic row with Egypt.

The Egyptians see themselves as the historical “rightful owners” of the Nile River, and they’re in desperate need of the water.

Water availability has enormous political, military, economic, and social implications. And it’s foolish to simply sweep this reality under the rug.

My guess is that tens of thousands of our readers may live in a city experiencing severe water shortages. It’s easy to ignore the problem and trust politicians to fix it. But this is a dangerous course of action.

First of all, stock up. Water keeps, so you won’t be worse off for having a little extra in case there’s a small disruption.

Bigger picture, it may make sense to consider a small bolt hole in a country with abundant per-capita water resources (Georgia, Uruguay, parts of Chile, etc.)

And for investors, owning productive agricultural property in these locations will likely prove to be an excellent investment as farmland in many parts of the world dries up.

More on that another time.

For $1 Million You Have A Choice: 15 Square Meters In Monaco Or A Trailer In The Hamptons

A few days ago, when we looked at what is one of the last tax havens in the world, the principality of Monaco, we uncovered not only the world's most expensive Penthouse costing a whopping $400 million, but got some perspective on how far one's dollar really goes, or doesn't. Because when it comes to asset inflation there is a world for the "rest of us", where according to Janet Yellen "inflation is noisy" and any spikes should be ignored, and one for the 1%, where inflation is essentially off the charts. In fact, a world where as the following anecdote fiat prices hardly matter.

Case in point: if a billionaire has a measly $1 million burning a hole in their pocket, they have a choice: they can spend it in Monaco where, "for $1 million, you could buy about 15 square meters (160 square feet) of space" or they can spend it in Wall Street's favorite summer retreat, the Hamptons, where the seven figure number would buy them... a trailer.

As the NYT reports, via Gothamist, a family just sold their trailer in Montauk for a million dollars. 

The transformation of the whole of the east end of Long Island into a 1% paradise is something remarkable. The Times traces how just a few years ago Montauk was still something of a well-off worker's paradise, replete with drunken firemen and cheap crash pads. But now even Jimmy Buffett has been unsuccessful in purchasing a trailer in Montauk Shores, which sits at the very edge of Long Island.

“It was the Wild West back then,” Cherie Doughan, one of the former trailer owners, told the Times. “Or I guess you’d call it the Wild East. People sure knew how to party.”

Doughan recalls her father sitting in a bathtub in their front yard, beer in hand, inviting passersby to join him for a dip.

“I hate to sell it. I don’t want to sell it, I just don’t, but there it is,” Doughan said, explaining that they need the money to help pay for her mother's assisted living home.

Of course it is not the motor home itself that is being acquired, it is the land beneath it:

With dark wood paneling, two stuffy bedrooms and an intact 1970s kitchen, the Doughans’ mobile home will almost certainly be replaced. The new owners will be basically buying the land, paying more than 100 times what Mr. Doughan did, for one of the primest parcels in Montauk Shores.


It may not be one of the plots directly on the bluff over Ditch Plains, but it is on a larger, 2,000-square-foot lot, with room for a double-wide mobile home and a new deck, a luxury the narrower waterfront parcels, each 1,200 square feet, do not enjoy. The added space can mean a lot to someone willing to pay seven figures for a beach retreat. And the Doughans’ plot still has unobstructed ocean views, out over a plaza in the center of the park.

So $1.1 million for a 2,000 square foot lot? "Insanity", most people will interject here: this is such a clear signal there is an epic bubble that the only question is when does it burst.  Well, sure. But others are trying to spin even this:

While residents insist the general vibe of the mobile home park hasn't changed, the idea of someone who could afford a $1.1 million dollar parcel of land on which to build a new trailer seems to negate the vibe of a blue collar paradise. Not so, according to the Corcoran real estate agent quoted in the piece: “If you think about it, it’s still one of the best deals on the East End,”

And now, for all those who wish to be able to afford such "best deals" in the future, back to BTFATH.

Meet The LMCI - The Fed’s New Goal-Seeked, 19-Factor Labor Market Regression Rigmarole

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

In the rush to make QE’s taper and the follow-on “forward guidance” appear more data-related than of due concerns about the structural (and ultimately philosophical) flaws in the economy, the regressionists of the Federal Reserve have come up with more regressions. The problem was always Ben Bernanke’s rather careless benchmarking to the unemployment rate. In fact, based on nothing more than prior regressions the Fed never expected the rate to drop so quickly.

Given that the denominator was the driving force in that forecast error, the Fed had to scramble to explain itself and its almost immediate violation of what looked like an advertised return to a “rules regime.” When even first mentioning taper in May 2013, Bernanke was careful to allude to the crude deconstruction of the official unemployment as anything but definitive about the state of employment and recovery.

So at Jackson Hole last week, Bernanke’s successor introduced the unemployment rate’s successor in the monetary policy framework. Janet Yellen’s speech directly addressed the inconsistency:

As the recovery progresses, assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve’s dual mandate. Indeed, in its 2012 statement on longer-run goals and monetary policy strategy, the FOMC explicitly recognized that factors determining maximum employment “may change over time and may not be directly measurable,” and that assessments of the level of maximum employment “are necessarily uncertain and subject to revision.”

Economists inside the Fed (remember, these are statisticians far more than anything resembling experts on the economy) have developed a factor model to determine what Yellen noted above – supposedly they will derive “nuance” solely from correlations.

A factor model is a statistical tool intended to extract a small number of unobserved factors that summarize the comovement among a larger set of correlated time series.2 In our model, these factors are assumed to summarize overall labor market conditions. What we call the LMCI is the primary source of common variation among 19 labor market indicators. One essential feature of our factor model is that its inference about labor market conditions places greater weight on indicators whose movements are highly correlated with each other. And, when indicators provide disparate signals, the model’s assessment of overall labor market conditions reflects primarily those indicators that are in broad agreement.

Below is their list of the 19 factors included in that statistical conglomeration, the LMCI:

Of the nineteen, there are an inordinate number of surveys to go along with the more traditional statistical figurings like the unemployment rate and private payroll employment. What is conspicuously lacking is any measure of income. In fact, of those nineteen only one refers to wages at all and that is the average hourly earnings rather than a more comprehensive measure of earned income. And, as you will note from the far right column, the calculated correlation of the wage figure is the third lowest of the data set.

What does this mathematical reconstruction of the labor market tell us about the labor market? If you believe the figures, this has been one of the best recoveries on record. No, seriously:

From December 1982 until the official economic peak in July 1990, the Fed’s new tool for nuance gained a total of 319 index points, or an average monthly change of 3. That was during what was an unequivocal and inarguable recovery and robust expansion (we can debate how much of it was artificial, particularly later in the decade, but there was no debate, as now, that economic growth was there).

By comparison, the LMCI shows a total gain of 290 points from July 2009 through what are apparently the latest estimates at the end of Q1. On an average monthly basis, the index in this recovery gained 5 per month, besting by a wide margin the 1982-90 expansion.

The reason for that is the unemployment rate. The Fed helpfully breaks down the contributions to changes in the index and, unsurprisingly, the three largest factors driving this epic recovery in jobs nuance are the Establishment Survey, the estimate of jobless claims and, somehow, the unemployment rate. Those statistical oddities, more than any assurance of actual growth and recovery, actually offer up confirmation bias directly within the index creation.

The idea, as Yellen more than suggested last week, was to try to get a handle on labor market slack without “rewarding” the deterioration in labor participation that is inarguably skewing labor perceptions as far, far too positive. So they come up with a new “factor model” where the largest positive contribution still comes from the deterioration in labor participation (the pink portions in the chart above).

If the overall impression of the factor model’s comparison to actual growth in the 1980’s wasn’t enough to disqualify its use, then this surely should be. But rest assured, these kinds of regressions are only going to grow in importance in setting monetary policy under the Yellen regime. The amount of math, which behaved so poorly previously, is set to rise exponentially as actual experience with the actual economy is totally replaced via regression and multi-layered statistics.

This will be called a transition from “discretionary” monetary policy under Bernanke/Greenspan to a “rules based” approach. The latter sounds far more appealing given what has transpired, and even to what the Fed is now willing to admit as largely ineffective. However, it still represents the same old problems as rules or not, when setting those rules in the first place it simply re-arranges discretion from less clearly defined to simply setting the variables. And if the discretion and subjectivity in setting the variables is as poorly constructed as this LMCI, then what does it matter this change in the first place? The answer may be simply PR and “confidence” (the full and various meanings of that word).

Of the models in the Fed’s arsenal, however, this labor “nuance” has to be among the least formidable. It almost seems like it was slapped together haphazardly just to fill the void left by the participation problem cutting into the pre-programmed end to QE. But more than that, it displays exactly the basic kind of ignorance you would expect of a group that places mathematics before understanding (if it isn’t a regression equation, it simply doesn’t exist to them).

Even if the model represented a somewhat realistic assessment, it stills doesn’t tell us much about the actual economic trajectory. By focusing on the beancount raw numbers of these various sub-parts, the FOMC and the orthodox economists using this construction will over-emphasize the most cursory of the labor market aspects – the numerical number of jobs. That, as we well know today, is not much use where the economy is being transformed by “some” structural shift. In other words, the model will count as “good” the replacement of high-value productive jobs with low-value “asset inflation” service jobs (ie, the bartender economy), seeing recovery where only persistent drain exists.

The emphasis on the short run and the persistent appeal to generic activity leaves these mathematicians blind to what a real economy consists of – wealth and the valuable trade of labor for work in productive action. Nowhere does income, the true measure of economic strength, penetrate this moribund monstrosity. That is how this measure can look at the labor market post-2000 and see it as equal or better than what came before.

Back to Yellen:

Second, wage developments reflect not only cyclical but also secular trends that have likely affected the evolution of labor’s share of income in recent years. As I noted, real wages have been rising less rapidly than productivity, implying that real unit labor costs have been declining, a pattern suggesting that there is scope for nominal wages to accelerate from their recent pace without creating meaningful inflationary pressure. However, research suggests that the decline in real unit labor costs may partly reflect secular factors that predate the recession, including changing patterns of production and international trade, as well as measurement issues. If so, productivity growth could continue to outpace real wage gains even when the economy is again operating at its potential.

That is just nonsense – the only way “productivity growth could continue to outpace real wage gains” is under a system of financial repression that substitutes debt for wealth. In other words, nominal redistribution via massive credit production is exchanged for actual economic advance, but since the orthodox practitioner can’t tell the difference (monetary neutrality, after all, must be preserved no matter how much incoherence and convolution is needed to maintain it) it leaves behind all these mysteries in “need” of mathematical solutions, including so many poorly suited to the ideals.

Are Political Winds Turning Against the Fed?

The popular view concerning the Fed is that it is apolitical. Anyone who considers the timing of the Fed’s actions knows this is false. However, for the vast majority of Americans, including financial professionals, the Fed is thought to be an apolitical entity focusing exclusively on economic and financial matters.


The first indication that this was inaccurate occurred during Bernanke’s reappointment as Fed Chairman in 2009. The media tried to claim that Bernanke was the savior of capitalism, but the fact of the matter was that there was strong opposition to his re-appointment. After all, Bernanke had not only missed the crisis but had in fact repeatedly stated it was contained.


From a competence perspective, Bernanke should not have been reappointed. He had an abysmal track record and had in fact allowed the entire financial system to nearly implode. Small wonder then that numerous members of Congress were against his reappointment.


During this period, an intense lobbying effort was made on Bernanke’s behalf. Lost amidst the bustle of articles concerning this situation was the following tidbit:


I was advised that rejecting [Bernanke's] nomination would cause markets to nose dive, which would hurt retirees and families saving for their future. I am not enthusiastic in my support. " - Senator Barbara Mikulski (D- MD)


Here is a US Senator who was advised that not reappointing Bernanke would mean a collapse of the markets. The argument was financial in nature, but it is clear that the Fed was no longer an apolitical body. Bernanke was another political figurehead, who needed support in order to retain control.


Barack Obama reappointed Bernanke as Fed Chairman in August 2009. Obama had made a point of disparaging the Bush Presidency for leaving the US economy in shambles during his election and the initial stages of his first term. So it is of note that Obama decided to reappoint Bernanke, who, as Bush’s Fed Chairman, had been a key player in allowing the Crisis to happen.


As this stage, Bernanke’s tenure as Fed Chairman became closely aligned with the Obama Presidency, a fact that became increasingly clear in the lead up to the 2012 Presidential election when numerous Republican candidates, particularly Mitt Romney and Newt Gingrich began to single out the Fed, particularly its then Chairman, Ben Bernanke, as a political issue that needed to be dealt with.


Indeed, there is no clearer evidence that the Fed became a political organization than Bernanke’s announcement of QE 3 in September 2012, just two months before the election. This move was a clear and unprecedented political intervention on the part of Bernanke to aid Obama in his campaign for re-election. We know this because:


1)   The Fed had only just ended QE 2 a few months before in June 2012.

2)   US GDP growth was 1.7% in the second quarter of 2012, well above the 1.3% from the second quarter of 2011 and only slightly below the 2.0% from 1Q12.


Moreover, Bernanke didn’t just launch QE 3 in September 2012; that same month he also promised to keep interest rates at zero through 2015.


Regardless of one’s personal views, at this point it was clear that the Bernanke Fed was viewed as a political extension of the Obama administration. This politicization intensified after Bernanke stepped down and Janet Yellen was appointed Fed Chair in 2014.


Indeed, the New Yorker notes that Yellen is the most liberal Fed Chairman in recent history:


Yellen is notable not only for being the first female Fed chair but also for being the most liberal since Marriner Eccles, who held the job during the Roosevelt and Truman Administrations. Ordinarily, the Fed’s role is to engender a sense of calm in the eternally jittery financial markets, not to crusade against urban poverty.


Yellen has even touted her version of liberal social justice in speeches. She recently stated that the Fed should continue its accommodative policy even AFTER the economy is back on track:


"And so even when the headwinds have diminished to the point where the economy is finally back on track and it's where we want it to be, it's still going to require an unusually accommodative monetary policy," she is quoted as saying in the article that stresses Yellen's role as public servant.


"I come from an intellectual tradition where public policy is important, it can make a positive contribution, it’s our social obligation to do this," she says in an online version of the article. "We can help to make the world a better place." idUSKBN0FJ1I820140714


We realize we’ve covered a lot of ground here. So we want to do a brief recap.


1)   The Fed, which is supposed to be apolitical, has become increasingly politicized in the post-2008 era.

2)   This politicization has intensified in recent years to the point that former Fed Chairman Bernanke actively boosted the economy with QE 3 to help the Obama administration’s reelection bid.

3)   Today’s Fed is openly political in its monetary views on social justice.


In this light there has been a recent shift in political attitudes towards the Federal Reserve. That shift finds Congress pushing to crack down on the Fed’s monetary policies… particularly the fact that the Fed never has to answer to anyone.


New legislation is being introduced to make the Fed accountable to Congress.


So it is good news that today the ‘‘Federal Reserve Accountability and Transparency Act of 2014” was introduced into Congress. It requires that the Fed adopt a rules-based policy…


Thus the rule would describe how the Fed’s policy instrument, such as the federal funds rate, would change in a systematic way in response to changes in the intermediate policy inputs, such as inflation or real GDP. The rule would also have to be consistent with the setting of the actual federal funds rate at the time of the submission.


The Fed, not Congress, would choose its Directive Policy Rule and how to describe it.  But if the Fed deviated from its rule, then the Chair of the Fed would have to “testify before the appropriate congressional committees as to why the [rule] is not in compliance.”  The Comptroller General of the United States would determine whether or not the Directive Policy Rule was in compliance and report to Congress.


This represents the beginning of something BIG for the Fed. The actual process will months. But we need to be aware of this change because it would greatly rein in the Fed’s actions going forward. Given than the Fed is the driving force for the capital markets and risk today, this issue is of major import.


This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at


This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research






With Half Of City Residents Delinquent, Detroit Restarts Water Shut-Offs

"Utility disconnection is always considered a last resort, obviously because of consequences for households," but as Detroit News reports, but water-providers can expect more controversy, as a month-long moratorium against shutting off water for those behind on their bills expired last night. Halting service to people that don't pay generate outrage among not just Detroit residents but a wider audience who proclaim 'water should be a right'. However, as one utility director noted, "We've seen a lot more payments...They need that little kick in the pants to get in here and do it." Water industry experts say cities with high delinquency rates sometimes have few other effective options for getting customers to catch up on their bills. Roughly half of Detroit’s 170,000 customers were delinquent as of last spring.


Water utilities in Detroit can expect more controversy as Detroit News reports,

...a monthlong moratorium against shutting off water for those behind on their bills expires at the end of the day Monday.


Crews are set to resume water shutoffs Tuesday after weeks of promoting how residents behind on their bills can get on a payment plan or get help paying.


Other Metro Detroit cities, facing a financial pinch from unpaid bills, have gotten results by halting service to people who don’t pay.

With some success...

“Last summer, we shut it off for the first time ever,” Square said. Service was stopped to 150 homes, and 350 other customers paid up to avoid being cut off.


The result: Hamtramck’s water fund now has a $1.8 million surplus, Square said.


“We’ve seen a lot more payments,” said Randall Blum, Eastpointe’s finance director. “They need that little kick in the pants to get in here and do it.”

But [shutting off water], which has produced some positive results,
generated outrage among some people in Detroit and beyond, who say
access to water should be a right

But as the companies themselves note, its simply not viable...

“It’s not viable to let paying the water bill come to be seen as an option,” said Tom Curtis, deputy executive director of government affairs for the American Water Works Association, which represents more than 4,800 water systems nationwide.


“The utilities have an obligation to the broader city to make sure the utility is viable and sustainable to serve all the residents and business,” Curtis said. “You can’t let uncollected bills go on and on without a significant consequence.”


Utilities have fixed costs, and someone must help cover those expenses to maintain service, said Bob Raucher, who studies the economics of water for Stratus Consulting of Boulder, Colorado.


“There’s so much neglected infrastructure and so many regulatory requirements that the problems are compounding. If they aren’t selling water and people aren’t paying their bills, they still have these fixed obligations,” said Raucher. “It’s a real conundrum everywhere. Detroit is an extreme case.”

The numbers remain high...

In a release Monday, the department said about 24,400 residents are on payment plans.


Detroit suspended water service to nearly 17,000 residents from March to late July, when officials temporarily halted shut-offs.Many of those whose service was cut brought their accounts up to date quickly, and their water was restored.


Detroit’s average residential delinquency is $540 and the average monthly household bill is about $75.


Roughly half of Detroit’s 170,000 customers were delinquent as of last spring.




“We give customers a certain amount of leniency in their bills,” said spokeswoman Sarah Holsapple.


“Of course, if they haven’t paid after a certain amount of time, we’d have to shut off their water. That’s our absolute last resort.”

*  *  *
Free water is a right? And so are 49ers season tickets... oh wait.

2 Year Paper Sold At Highest Bid To Cover Since May As Yield Declines, Lowest Directs Since June 2013

If there is any concern of massive curve flattening, or even inversion, the bond market sure wasn't aware of it today when moments ago some $29 billion in 2 Year bonds were sold at a yield of 0.530%, stopping through the 0.532% When Issued, and below the 0.544% from last month which was the highest since May 2011.

The Bid to Cover rose from 3.220 to 3.479%, the highest since May's 3.519%, and certainly not hitting of any lack of demand for the short-end. The internals showed a marked move away from Directs, who took down just 12.14% of the auction, half of the TTM average of 23.4% and the lowest since June 2013, however this was more than offset by the surge in Indirects, whose 39.8% was the highest since March when they were allotted 40.93%. Finally, Dealers were left holding less than half of the bag, or 48.0%, only the first time PDs ended up with less than half the auction since March 2014. Overall, a rather strong auction, as can be further validated by looking at the move tighter across the curve.

As Argentina Peso Plummets To Record, BofA Warns Of Looming Economic Crisis

After spending time in Argentina, BofA's Marcos Buscaglia is concerned... The perception of many locals is that the risks of an economic/currency crisis before year-end have increased significantly. This compares to a view they had before of a muddle-through till the 2015 presidential elections. Policy decision-making is ever more concentrated, and the administration has radicalized, but the severe economic downturn will change political incentives in 2015, in BofA's view. With the official peso rate at record lows once again, the black-market Dolar-Blue tumbled to over 14/USD - a record low indicating dramatic devaluation ahead (which of course, sends ARS-denominated stocks surge to record highs).


Imagine the headlines on CNBC Argentina... think of the wealth effect...


as markets price in massive devaluation... 14.04 Black-market Peso...


A more recent snapshot of the "Dolar Blue" collapse:

Not pretty, and as BofA warns, Argentina: on a slippery slope?

We spent three days in Buenos Aires last week, meeting government officials, economists, political analysts, market participants, corporates and members of the opposition parties. Below are our main takeaways.

A presidential election that seems too far away

The most striking change compared with our previous visits is that now many of the locals we spoke to think it likely Argentina will undergo an economic/currency crisis before the transfer of power to a new administration in December 2015. Previously, the consensus seemed to be of a muddling through or a small contraction at the worst. In this sense, the presidential elections seem farther away now in economic terms.

What do we mean by economic/currency crisis? We expect the demand for pesos to fall and the demand for dollars to increase. The default will likely increase external restrictions as well as the fiscal deficit and monetary financing. This would mean higher inflation and pressure on the peso and on reserves. Deteriorating sentiment and a wider gap between the official and the parallel FX rates would dent investment, spending and hiring decisions even more. This will likely further hurt fiscal revenues, which will require more peso issuance, and so forth.

What would be the catalysts to trigger a downward fall? We think there are several potential negative news items in coming weeks, while the only potential positive – but surprising – news would be an unexpected remedy to the default.

The local media report a dispute between central bank (BCRA) President Fabrega and Finance Minister Kicillof. Fabrega’s resignation would spur demand for USD, in our view. In addition, unions are pushing for a reopening of wage negotiations. Wages are increasing slower than inflation, so a new round of wage hikes would not be surprising. It is reported a general strike will be called for this Thursday by dissident Peronists unions. In addition, events that cement the view that the absence from voluntary debt markets will be more protracted may destabilize demand for pesos.

In our view, the social situation seems precarious, and the many we spoke to did not rule out additional social conflicts toward year-end. December has been turbulent in recent years. In 2013, amid widespread electricity cuts and a police strike, there were lootings in many provinces. The social situation has not improved since then: employment has dropped and disposable income is probably falling at low double digits yoy at this point.

External conditions tightened

External conditions have not only tightened due to lower expected financing from abroad in coming months, but also because export prices have dropped sharply and because farmers are restricting grain exports. By our estimates, farmers exported about $520mn less in the four weeks after the default compared to before the default.


On top of this, grain exports are likely to drop next year. Since May/June, soybean, wheat and corn prices have dropped by 20%. At the current international prices and the current exchange rate, planting wheat and corn is not profitable in many areas, according to some locals we met. If there is no sufficient weakening of the peso in coming weeks, the harvest may contract in 2015 compared to in 2014. [ZH: Which would be devastating for Gartman's short Grains trade]

Central bank started moving, where will it end?

BCRA started allowing the peso to weaken, sending it from 8.28 to 8.40 per USD last week, not surprisingly during the first week in which it showed a decline in reserves. In a country where locals compare their ex-ante expected return from peso term deposits with the expected weakening of the peso, the move made clear that returns from term deposits were negative once measured in dollars. In sum, we think the small moves made by the BCRA increase the demand for USD rather than reduce it. This happened in December 2013/January 2014. As a result, pressure for a larger devaluation likely will increase after this move. We think that BCRA will resist a larger FX move as much as possible, but it may have difficulty avoiding a larger devaluation if reserves keep falling.

It takes only two to tango

Local political analysts characterize the current government’s decision process as highly centralized in Cristina Kirchner, with an increased access to her by Kicillof over other members of the administration. Moreover, they believe the government actions in the pari passu case should be understood in political rather than economic terms. According to this view, Cristina Kirchner does not have a candidate for the 2015 presidential elections, so they believe she is more concerned about her legacy than about the elections. Right or wrong, their view is that by fighting the holdouts, she thinks she gains more for her future political career than by giving up to holdouts.

Negotiations with holdouts in 2015 are still feasible

The many we we met expect the government will be able to pass the bill to implement local payment of Exchange Bonds (EB) and to offer a voluntary swap into local law. Most opposition members said they will not vote in favor of the bill, so the real question is whether the government can keep its rank and file united. Although there seem to be some cracks in the government coalition, the combination of electoral rules and fiscal distribution rules makes representatives dependent on the national government, so are unlikely to block this bill.

There is some disagreement among local economists and political analysts over whether the government will be ready to negotiate with holdouts in January once the Right Upon Future Offers (RUFO) clause expires. The RUFO is not the only impediment to negotiations. It seems local laws and the will to negotiate with all holdouts simultaneously – and not just with the plaintiffs of the pari passu case – also weigh on the government’s decisions. We are in the group that believes that the pressure from slumping activity will make the chances of some negotiations with holdouts more feasible in 2015, but these may take the form of a new offer to all holdouts rather than staying with the plaintiffs of the pari passu case.

Massa and Macri on the rise

Many locals believe that Argentina’s economic difficulties will be negative for Daniel Scioli’s chances of carrying the presidential elections. This is in stark contrast with our April 2014 visit amid the adjustments and negotiations with creditors, when Scioli was the favorite. Some recent polls show Mauricio Macri and Sergio Massa may have gained ground against Scioli.

Stuck in the Middle with Merkel? Upcoming German State Elections

German politics will become more interesting starting this weekend.  On Sunday, the largest state in the former East Germany, Saxony will hold its local election.  The key issue is how does the anti-euro Alternative for Germany (AfD) do.  

In May, much to the chagrin of Chancellor Merkel, the AfD garnered enough vote to secure representation in the EU Parliament.  In Saxony, it actually polled better than in the country as a whole (10% vs.7%).  We argued at the time that the votes for anti-EMU parties (like the AfD, but also the UKIP) cannot be taken at face value, as polls show that not all supporters were as anti-EMU as the candidates campaigning.  Those parties were siphoning or channeling protest votes in general. 

Saxony is a case in point.  The AfD recognizes that its anti-EMU position is not playing as well in Saxony and have toned that rhetoric down.  Instead, they have been emphasizing their conservative social platform instead.  These issues include promoting discipline in schools, opposing using the government to empower women, resisting pressure to use gender neutral language, and rejecting forcing schools to including handicap children.  It wants to strengthen protection for families and opposes efforts to ease citizenship for foreigners.

In some ways, the AfD is similar to the US Tea Party.  Many of the AfD supporters appear to have been more comfortable in the major center-right parties, like the Christian Democrat Union (CDU) or the Free Democrat Party (FDP).  However, the CDU did not secure a majority and hence has to govern in a coalition with Social Democrat Party (SPD).  Merkel has made some concessions to the SPD on social issues, which the AfD supports do not agree with.  At the same time, the FDP have imploded and did not secure enough votes to be represented in the Bundestag, the lower chamber of parliament.   

The AfD then is a challenge to Merkel's right, in a similar fashion as the US Tea Party is challenge to the traditional conservative leadership of the Republican Party.  A chief difference is that the Tea Party, at least up until now, has sought to capture control of the Republican Party, rather than splinter and form a new party. 

The AfD needs to garner 5% of the vote in Saxony to be represented in the local government, and the recent polls suggest it will be close.   Polls indicate it may get 5-7% of the popular vote.   However, even if it gets the 5%, this is still a let down from how it did in the state in the EU parliament election.  This should be a warning to other protest parties that the cathartic experience may not be repeated.  This may also impact their negotiating position within the EU parliament.

While the election in Saxony sees a challenge to Merkel from the right, on September 14 the elections in Thuringia and Brandenburg elections will pose a challenge from the left.  This is particularly true of Thuringia, the birthplace of Martin Luther, Bach and Goethe.  The incumbent government is the same coalition as on the national level--CDU-SPD.  However, the weaker economic performance of the state is seeing support for the former Communist party, now the Left, increase.  There is an outside chance that it captures a plurality of the vote, especially if disgruntled SPD voters support it rather than casting their lot with the CDU.

Such an outcome could help influence the national politics.  The Left advocates controversial programs like bank nationalization and caps on income.  This is not to say such policies would be enacted by Merkel on the federal level, but they could help shape the debate.

The other state election on September 14 is in Bradenburg, which is also the home of the federal capital Berlin.  It is currently governed by an SPD-Left coalition.  In the 2009 election, the coalition drew 60% of the vote.  Polls suggest it will not do quite as well this time, but will still garner sufficient support to remain the governing coalition.

A strong showing by SPD, Left and Greens in state elections can influence the future of German politics.   The demise of the FDP is what forced Merkel and the CDU to form a coalition with the SPD after last year's election.  The SPD had little choice, as well.  The national leaders rejected a coalition with the Left, but it may have been more pragmatic than ideological.  The combined SPD, Green, Left vote was shy of the majority needed to govern. 

The next national election is in 2017.  One of Merkel's critiques of her predecessor and benefactor Kohl, was that he overstayed his welcome.  She had intimated, according to press reports, that she might not complete her current term, seemingly interested in a larger European role or a global role (as in UN).  However, such speculation has quieted, and it is now expected that she will not only complete her current term, but stand for another.  A pincer movement by her opposition, the AfD on the right and the SPD, Greens and Left on the other side, may get her to reconsider the lesson from Kohl's experience.

Lastly, while staying in the realm of politics, and looking down field a bit, recall that Lithuania will join the monetary union at the start of 2015, and this will trigger a change in the voting at the ECB.  The changes will mean that the national central bank governors will not all vote at each meeting, and this includes Germany.  As a German candidate, Weber, was to have been Trichet's successor before he unexpectedly resigned, a German will likely succeed Draghi.  Weidmann is the obvious choice.  There is some speculation that Draghi may not complete his term, perhaps becoming the next Italian president.    Our European contacts  do not give much credence to such speculation, but it is important for investors to know of such scenarios. 

It Begins: Council On Foreign Relations Proposes That "Central Banks Should Hand Consumers Cash Directly"

... A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money

      - Ben Bernanke, Deflation: Making Sure "It" Doesn't Happen Here, November 21, 2002

A year ago, when it became abundantly clear that all of the Fed's attempts to boost the economy have failed, leading instead to a record divergence between the "1%" who were benefiting from the Fed's aritficial inflation of financial assets, and everyone else (a topic that would become one of the most discussed issues of 2014) and with no help coming from a hopelessly broken Congress (who can forget the infamous plea by a desperate Wall Street lobby-funding recipient "Get to work Mr. Chariman"), we wrote that "Bernanke's Helicopter Is Warming Up."

The reasoning was very simple: in a country (and world) drowning with debt, there are only two options to extinguish said debt: inflate it away or default. Anything else is kicking the can while making the problem even worse. Because while the Fed has been successful at recreating the world's biggest asset bubble (in history), it has failed to stimulate broad, "benign" demand-pull inflation as the trickle down effects of its "wealth effect" have failed to materialize 6 years after the launch of the Fed's unconventional monetary policies.

In other words, a world stuck in the last phase before complete Keynesian collapse, had no choice but to gamble "all in" with the last and only bluff it had left before admitting the economic system it had labored under, one which has borrowed so extensively from the future to fund the present that there is no future left, has failed.

The only question left was when would the trial balloons for such monetary paradrops start to emerge.

We now know the answer, and it is today.

Moments ago a stunning article appearing in the "Foreign Affaird" publication of the influential and policy-setting Council of Foreign Relations, titled "Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People." 

In it we read the now conventional admission of failure by Keynesians, who however, unwilling to actually admit they have been wrong, urge the even more conventional solution: do more of the same that has lead to the current financial cataclysm, only in this case the authors advocate no longer pretending that the traditional monetary channels work but to, literally, paradrop money. To wit:

To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.


Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.

A third, and most important outcome, would be the one we have forecast from the beginning of this ridiculous central bank experiment: "hyperinflation" (which is not simply runaway inflation as it is often incorrectly designated -  it is outright evisceration of the prevailing monetary system), which has been avoided for now, but which is inevitable in a world in which only the wholesale destruction of the fiat reserve currency is the one option left to inflate away the debt overhang.

So without further ado, here is the first official trial balloon - the article that one day soon will be seen as the canary in the paradropmine, and the piece that will finally get the rotor of Bernanke's, now Yellen's infamous helicopter finally spinning. Highlights ours:

Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People

From Foreign Affairs, by Mark Blyth and Eric Lonergan

In the decades following World War II, Japan’s economy grew so quickly and for so long that experts came to describe it as nothing short of miraculous. During the country’s last big boom, between 1986 and 1991, its economy expanded by nearly $1 trillion. But then, in a story with clear parallels for today, Japan’s asset bubble burst, and its markets went into a deep dive. Government debt ballooned, and annual growth slowed to less than one percent. By 1998, the economy was shrinking.

That December, a Princeton economics professor named Ben Bernanke argued that central bankers could still turn the country around. Japan was essentially suffering from a deficiency of demand: interest rates were already low, but consumers were not buying, firms were not borrowing, and investors were not betting. It was a self-fulfilling prophesy: pessimism about the economy was preventing a recovery. Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.

As Bernanke made clear, the concept was not new: in the 1930s, the British economist John Maynard Keynes proposed burying bottles of bank notes in old coal mines; once unearthed (like gold), the cash would create new wealth and spur spending. The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.

Today, most economists agree that like Japan in the late 1990s, the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance. Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse. It’s well past time, then, for U.S. policymakers -- as well as their counterparts in other developed countries -- to consider a version of Friedman’s helicopter drops. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.


In theory, governments can boost spending in two ways: through fiscal policies (such as lowering taxes or increasing government spending) or through monetary policies (such as reducing interest rates or increasing the money supply). But over the past few decades, policymakers in many countries have come to rely almost exclusively on the latter. The shift has occurred for a number of reasons. Particularly in the United States, partisan divides over fiscal policy have grown too wide to bridge, as the left and the right have waged bitter fights over whether to increase government spending or cut tax rates. More generally, tax rebates and stimulus packages tend to face greater political hurdles than monetary policy shifts. Presidents and prime ministers need approval from their legislatures to pass a budget; that takes time, and the resulting tax breaks and government investments often benefit powerful constituencies rather than the economy as a whole. Many central banks, by contrast, are politically independent and can cut interest rates with a single conference call. Moreover, there is simply no real consensus about how to use taxes or spending to efficiently stimulate the economy.

Steady growth from the late 1980s to the early years of this century seemed to vindicate this emphasis on monetary policy. The approach presented major drawbacks, however. Unlike fiscal policy, which directly affects spending, monetary policy operates in an indirect fashion. Low interest rates reduce the cost of borrowing and drive up the prices of stocks, bonds, and homes. But stimulating the economy in this way is expensive and inefficient, and can create dangerous bubbles -- in real estate, for example -- and encourage companies and households to take on dangerous levels of debt.

That is precisely what happened during Alan Greenspan’s tenure as Fed chair, from 1997 to 2006: Washington relied too heavily on monetary policy to increase spending. Commentators often blame Greenspan for sowing the seeds of the 2008 financial crisis by keeping interest rates too low during the early years of this century. But Greenspan’s approach was merely a reaction to Congress’ unwillingness to use its fiscal tools. Moreover, Greenspan was completely honest about what he was doing. In testimony to Congress in 2002, he explained how Fed policy was affecting ordinary Americans:

"Particularly important in buoying spending [are] the very low levels of mortgage interest rates, which [encourage] households to purchase homes, refinance debt and lower debt service burdens, and extract equity from homes to finance expenditures. Fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well."

Of course, Greenspan’s model crashed and burned spectacularly when the housing market imploded in 2008. Yet nothing has really changed since then. The United States merely patched its financial sector back together and resumed the same policies that created 30 years of financial bubbles. Consider what Bernanke, who came out of the academy to serve as Greenspan’s successor, did with his policy of “quantitative easing,” through which the Fed increased the money supply by purchasing billions of dollars’ worth of mortgage-backed securities and government bonds. Bernanke aimed to boost stock and bond prices in the same way that Greenspan had lifted home values. Their ends were ultimately the same: to increase consumer spending.

The overall effects of Bernanke’s policies have also been similar to those of Greenspan’s. Higher asset prices have encouraged a modest recovery in spending, but at great risk to the financial system and at a huge cost to taxpayers. Yet other governments have still followed Bernanke’s lead. Japan’s central bank, for example, has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo’s efforts have failed to counteract the country’s chronic underconsumption. In the eurozone, the European Central Bank has attempted to increase incentives for spending by making its interest rates negative, charging commercial banks 0.1 percent to deposit cash. But there is little evidence that this policy has increased spending.

China is already struggling to cope with the consequences of similar policies, which it adopted in the wake of the 2008 financial crisis. To keep the country’s economy afloat, Beijing aggressively cut interest rates and gave banks the green light to hand out an unprecedented number of loans. The results were a dramatic rise in asset prices and substantial new borrowing by individuals and financial firms, which led to dangerous instability. Chinese policymakers are now trying to sustain overall spending while reducing debt and making prices more stable. Like other governments, Beijing seems short on ideas about just how to do this. It doesn’t want to keep loosening monetary policy. But it hasn’t yet found a different way forward.

The broader global economy, meanwhile, may have already entered a bond bubble and could soon witness a stock bubble. Housing markets around the world, from Tel Aviv to Toronto, have overheated. Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending. Over the past 15 years, the world’s major central banks have expanded their balance sheets by around $6 trillion, primarily through quantitative easing and other so-called liquidity operations. Yet in much of the developed world, inflation has barely budged.

To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero. And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.


Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.

Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. Most citizens already trust their central banks to manipulate interest rates. And rate changes are just as redistributive as cash transfers. When interest rates go down, for example, those borrowing at adjustable rates end up benefiting, whereas those who save -- and thus depend more on interest income -- lose out.

Most economists agree that cash transfers from a central bank would stimulate demand. But policymakers nonetheless continue to resist the notion. In a 2012 speech, Mervyn King, then governor of the Bank of England, argued that transfers technically counted as fiscal policy, which falls outside the purview of central bankers, a view that his Japanese counterpart, Haruhiko Kuroda, echoed this past March. Such arguments, however, are merely semantic. Distinctions between monetary and fiscal policies are a function of what governments ask their central banks to do. In other words, cash transfers would become a tool of monetary policy as soon as the banks began using them.

Other critics warn that such helicopter drops could cause inflation. The transfers, however, would be a flexible tool. Central bankers could ramp them up whenever they saw fit and raise interest rates to offset any inflationary effects, although they probably wouldn’t have to do the latter: in recent years, low inflation rates have proved remarkably resilient, even following round after round of quantitative easing. Three trends explain why. First, technological innovation has driven down consumer prices and globalization has kept wages from rising. Second, the recurring financial panics of the past few decades have encouraged many lower-income economies to increase savings -- in the form of currency reserves -- as a form of insurance. That means they have been spending far less than they could, starving their economies of investments in such areas as infrastructure and defense, which would provide employment and drive up prices. Finally, throughout the developed world, increased life expectancies have led some private citizens to focus on saving for the longer term (think Japan). As a result, middle-aged adults and the elderly have started spending less on goods and services. These structural roots of today’s low inflation will only strengthen in the coming years, as global competition intensifies, fears of financial crises persist, and populations in Europe and the United States continue to age. If anything, policymakers should be more worried about deflation, which is already troubling the eurozone.

There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. Because they are more efficient, helicopter drops would require the banks to print much less money. By depositing the funds directly into millions of individual accounts -- spurring spending immediately -- central bankers wouldn’t need to print quantities of money equivalent to 20 percent of GDP.

The transfers’ overall impact would depend on their so-called fiscal multiplier, which measures how much GDP would rise for every $100 transferred. In the United States, the tax rebates provided by the Economic Stimulus Act of 2008, which amounted to roughly one percent of GDP, can serve as a useful guide: they are estimated to have had a multiplier of around 1.3. That means that an infusion of cash equivalent to two percent of GDP would likely grow the economy by about 2.6 percent. Transfers on that scale -- less than five percent of GDP -- would probably suffice to generate economic growth.


Using cash transfers, central banks could boost spending without assuming the risks of keeping interest rates low. But transfers would only marginally address growing income inequality, another major threat to economic growth over the long term. In the past three decades, the wages of the bottom 40 percent of earners in developed countries have stagnated, while the very top earners have seen their incomes soar. The Bank of England estimates that the richest five percent of British households now own 40 percent of the total wealth of the United Kingdom -- a phenomenon now common across the developed world.

To reduce the gap between rich and poor, the French economist Thomas Piketty and others have proposed a global tax on wealth. But such a policy would be impractical. For one thing, the wealthy would probably use their political influence and financial resources to oppose the tax or avoid paying it. Around $29 trillion in offshore assets already lies beyond the reach of state treasuries, and the new tax would only add to that pile. In addition, the majority of the people who would likely have to pay -- the top ten percent of earners -- are not all that rich. Typically, the majority of households in the highest income tax brackets are upper-middle class, not superwealthy. Further burdening this group would be a hard sell politically and, as France’s recent budget problems demonstrate, would yield little financial benefit. Finally, taxes on capital would discourage private investment and innovation.

There is another way: instead of trying to drag down the top, governments could boost the bottom. Central banks could issue debt and use the proceeds to invest in a global equity index, a bundle of diverse investments with a value that rises and falls with the market, which they could hold in sovereign wealth funds. The Bank of England, the European Central Bank, and the Federal Reserve already own assets in excess of 20 percent of their countries’ GDPs, so there is no reason why they could not invest those assets in global equities on behalf of their citizens. After around 15 years, the funds could distribute their equity holdings to the lowest-earning 80 percent of taxpayers. The payments could be made to tax-exempt individual savings accounts, and governments could place simple constraints on how the capital could be used.

For example, beneficiaries could be required to retain the funds as savings or to use them to finance their education, pay off debts, start a business, or invest in a home. Such restrictions would encourage the recipients to think of the transfers as investments in the future rather than as lottery winnings. The goal, moreover, would be to increase wealth at the bottom end of the income distribution over the long run, which would do much to lower inequality.

Best of all, the system would be self-financing. Most governments can now issue debt at a real interest rate of close to zero. If they raised capital that way or liquidated the assets they currently possess, they could enjoy a five percent real rate of return -- a conservative estimate, given historical returns and current valuations. Thanks to the effect of compound interest, the profits from these funds could amount to around a 100 percent capital gain after just 15 years. Say a government issued debt equivalent to 20 percent of GDP at a real interest rate of zero and then invested the capital in an index of global equities. After 15 years, it could repay the debt generated and also transfer the excess capital to households. This is not alchemy. It’s a policy that would make the so-called equity risk premium -- the excess return that investors receive in exchange for putting their capital at risk -- work for everyone.


As things currently stand, the prevailing monetary policies have gone almost completely unchallenged, with the exception of proposals by Keynesian economists such as Lawrence Summers and Paul Krugman, who have called for government-financed spending on infrastructure and research. Such investments, the reasoning goes, would create jobs while making the United States more competitive. And now seems like the perfect time to raise the funds to pay for such work: governments can borrow for ten years at real interest rates of close to zero.

The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy. In the United Kingdom, for example, policymakers have taken years to reach an agreement on building the high-speed rail project known as HS2 and an equally long time to settle on a plan to add a third runway at London’s Heathrow Airport. Such large, long-term investments are needed. But they shouldn’t be rushed. Just ask Berliners about the unnecessary new airport that the German government is building for over $5 billion, and which is now some five years behind schedule. Governments should thus continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly.

If cash transfers represent such a sure thing, then why has no one tried them? The answer, in part, comes down to an accident of history: central banks were not designed to manage spending. The first central banks, many of which were founded in the late nineteenth century, were designed to carry out a few basic functions: issue currency, provide liquidity to the government bond market, and mitigate banking panics. They mainly engaged in so-called open-market operations -- essentially, the purchase and sale of government bonds -- which provided banks with liquidity and determined the rate of interest in money markets. Quantitative easing, the latest variant of that bond-buying function, proved capable of stabilizing money markets in 2009, but at too high a cost considering what little growth it achieved.

A second factor explaining the persistence of the old way of doing business involves central banks’ balance sheets. Conventional accounting treats money -- bank notes and reserves -- as a liability. So if one of these banks were to issue cash transfers in excess of its assets, it could technically have a negative net worth. Yet it makes no sense to worry about the solvency of central banks: after all, they can always print  more money.

The most powerful sources of resistance to cash transfers are political and ideological. In the United States, for example, the Fed is extremely resistant to legislative changes affecting monetary policy for fear of congressional actions that would limit its freedom of action in a future crisis (such as preventing it from bailing out foreign banks). Moreover, many American conservatives consider cash transfers to be socialist handouts. In Europe, which one might think would provide more fertile ground for such transfers, the German fear of inflation that led the European Central Bank to hike rates in 2011, in the middle of the greatest recession since the 1930s, suggests that ideological resistance can be found there, too.

Those who don’t like the idea of cash giveaways, however, should imagine that poor households received an unanticipated inheritance or tax rebate. An inheritance is a wealth transfer that has not been earned by the recipient, and its timing and amount lie outside the beneficiary’s control. Although the gift may come from a family member, in financial terms, it’s the same as a direct money transfer from the government. Poor people, of course, rarely have rich relatives and so rarely get inheritances -- but under the plan being proposed here, they would, every time it looked as though their country was at risk of entering a recession.

Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. For one thing, they would quickly increase spending, and central banks could implement them instantaneously, unlike infrastructure spending or changes to the tax code, which typically require legislation. And in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices. They would also would help address inequality -- without skinning the rich.

Ideology aside, the main barriers to implementing this policy are surmountable. And the time is long past for this kind of innovation. Central banks are now trying to run twenty-first-century economies with a set of policy tools invented over a century ago. By relying too heavily on those tactics, they have ended up embracing policies with perverse consequences and poor payoffs. All it will take to change course is the courage, brains, and leadership to try something new.

JPMorgan Sees 50% Chance Of ECB QE By Year-End, Will Ease More Next Week

Wondering why US and European stocks knee-jerked higher in the last hour - wonder no more. JPMorgan released a report stating they expect the ECB to ease next week, masking some policy changes next week to make TLTROs more attractive and even a slight disappointment in data may trigger sovereign QE (30% chance next week and 50% by year-end).

Of course, the kicker in all of this discussion of QE is that the ECB is already doing it - willing to buy whetever bonds European banks buy via repo agreements (with no haircut) - and with yields already at record lows (or negative) in the face of record-high 'real' financing costs for non-financials, the exuberance appears misplaced.


Via JPMorgan,

ECB to ease next week, as QE debate intensifies  

  • We expect the ECB to make some policy changes next week to make TLTROs more attractive
  • These changes are a holding operation, as the ECB assesses the incoming data
  • Three data points will be key to watch and even a slight disappointment may trigger sovereign QE
  • Apart from the data, the level of opposition on the Governing Council is currently hard to gauge
  • We think the chances of sovereign QE are over 30% by year-end and almost 50-50 next year

We now expect the ECB to take some further policy steps at next week’s meeting. The ECB could try to boost the attractiveness of the upcoming TLTROs by cutting the entire interest rate corridor by 10bp, but removing the 10bp spread it was going to charge above the refi rate for the funds and, albeit with a lower likelihood, by increasing the initial allowances above 7% of banks’ real economy loan books (excluding mortgages). This means that banks will be able to lock in even more funding for up to four years at an even lower interest rate of just 0.05%. Making this announcement next week would support take-up at the first TLTRO in mid-September by reducing some incentives to wait for the December tender. In addition, we think that Draghi will make a more definitive statement about what the ABS purchase programme will look like. It is possible that the ECB goes beyond the current plan to buy ABS by also purchasing other private assets, but we are not convinced by this.
The key assumption underlying this new forecast is that sovereign QE remains controversial. If that is true, then the rationale for these relatively small policy changes would be to buy time and allow a bit more wait-and-see, which is something the Bundesbank would be able to support, in our view. For the same reason, the Bundesbank may agree to Draghi ramping up the rhetoric about sovereign QE, for example with a statement that “the Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate, including large-scale purchases of private and public assets, should it become necessary.” This statement would make clearer what unconventional instruments would mean. But, this statement would be more data dependent than the one made in June about possible ABS purchases and the hope would be that it has a significant impact in itself.
But, while we still do not expect the ECB to actually deliver a sovereign QE programme, we think that the likelihood has increased substantially and that things could move very quickly. In particular, we think that the likelihood has increased to almost 50% next year and that it is now over 30% by year-end.

Uncertainty in the data and the Governing Council

To avoid QE, we think that three things need to happen in the data over the next 1-2 months.

  • First, the official activity data must realign themselves with where the surveys currently are, with IP in particular needing to bounce in July/August.
  • Second, the surveys themselves must start to show signs of stabilization and give hope that they could move higher again.
  • Third, inflation expectations in financial markets must at the very least stabilize after the recent falls.

If there is disappointment in these areas, with the second and third probably being the most important, then things could move pretty quickly. For now, our current forecasts are consistent with improvement in the first two areas, which marginally tilts the balance against QE.
We would however emphasize that the level of uncertainty is very high at present, both in terms of how the macro-economy evolves but also in how far the Governing Council has already shifted towards sovereign QE. The first version of Draghi’s speech was certainly very dovish and it did argue that monetary policy should play a central role in boosting aggregate demand. But, it can be read as calling on other policymakers to help boost growth as monetary policy is unable to do it alone. In this sense, it did not clearly signal that the ECB needs to go beyond the measures that it announced in June and that it has yet to implement.
The revised version of the speech of course signals much greater concern and hence a much higher likelihood of sovereign QE, even if other policymakers respond slowly. What prompted this last minute change? We believe it was the combination of signs that growth is weakening and the rapidity with which market-based measures of inflation expectations have recently fallen. In particular, when growth weakens, the ECB tends to be much more intolerant of low inflation, high unemployment and inflation expectations edging lower. Crucially, if inflation expectations fall, it undermines the anchoring of the ECB’s medium-term inflation forecast and would be seen as an expression of doubt in the central bank’s willingness and/or ability to meet its mandate. In our view, this underlies the urgency signalled by the final version of Draghi’s speech and means that the evolution of the data in the near-term will be crucial.
Apart from the data, there is also uncertainty about where the Governing Council currently stands. The Bundesbank is unlikely to have shifted its fundamental concern about moral hazard and its view that governments should do more. But, it has not been fighting the idea that growth is slowing in the Euro area and in Germany, and it will recognise the importance of inflation expectations remaining anchored. It has also recognised recently that many Euro area countries have made progress in the necessary adjustments and it views some of the current headwinds to growth relating to external factors. For this reason, we are less sure how strong the Bundesbank’s opposition to QE would actually be. We do think however that the Bundesbank will at least try to play for time by allowing some ECB easing next week and then hoping that growth improves and that market-based measures of inflation expectations stop falling (after all they are still close to 2%). If the latter happens, it can point to the Survey of Professional Forecasters, which did not show any decline in early August. What is less clear, in our view, is where the rest of the Governing Council stands and whether Draghi is willing to do sovereign QE without explicit Bundesbank support. For sure, Draghi appears to be putting a real challenge to the Governing Council and it is quite clear in which direction Draghi would like to go. As a result, we note that all ECB governors will now have to reveal their real views on the issue.

*  *  *

But will it help at all?

These are "market" rates... i.e. what real risk is being priced at away from the hand of Draghi...


*  *  *

The kicker in all of this discussion of QE is that the ECB is already doing it - willing to buy whetever bonds European banks buy via repo agreements (with no haircut)... so just who is this for?

...And The Market Breaks (Again)



Via BATS Options Status


Which might help explain this...

Durables Goods (Ex Boeing) Suffer Biggest Drop Of 2014

The headline print of a record-breaking 22.6% gain - smashing the 8.0% expectation - hides the extremely obvious factor of the largest civilian aircraft orders (an entirely one-off non-repeatable factor). Durables ex Transportation collapsed from a 3% gain to a 0.8% drop - the biggest drop in 2014, missing expectations by the most in 8 months. Perhaps even more concerning, non-defense ex-aircraft new orders dropped 0.5% (missing expectations of a 0.2% gain).




Boeing orders from UK air show lead to nondef aircraft orders increased 318%

Transportation Equipment orders in July were $133 billion, up from $76.3 billion in June; driven by Nondefense aircraft and parts new orders at $70.3 billion, up from $16.9 billion

Here is a chart of what happens as everyone scrambles to order Boeing jets ahead of what may be the upcoming "expiration" of the ExIm bank: nothing short of an outlier print for transportations nondefense aircraft and parts new orders:


Reality is much less pretty, with the 0.8% drop in ex-transports the largest of 2014.


The Status Quo's Model Of "How The World Works" Is Broken

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Status Quo is dysfunctional because its model of how the world works is broken.

Much has been written about the dysfunction in Washington D.C. Pundits have been wringing their hands for years over the rise of bitter partisan politics and the resulting gridlock. The impact of this--what I have termed profound political disunity--extends beyond the narrow confines of domestic politics, a reality reflected in Foreign Affairs new survey of our winter of political discontent, Dysfunction Junction.

But all these discussions of our dysfunctional politics ignore the larger truth, which is the entire model of the Status Quo is broken. Even if reformers succeeded in ridding the political system of cronyism and favors-for-campaign-contributions--two essentially impossible reforms, given the legalistic cover provided for cronyism and bought and paid for representatives, the basic model of "how the world works" that dominates the world-view of leaders across the political spectrum would remain broken.


There are only three alternatives:
  1. The current gridlock continues, and the policies in place grind on with minor tweaks.
  2. The Democrats win a sweeping victory and are able to unilaterally impose their reforms.
  3. The Republicans win a sweeping victory and are able to unilaterally impose their reforms.
  Why do we know the entire model is broken? Because all three alternatives lead to a continuation of the same ruinous model of "how the world works":
  1. A continued reliance on Keynesian Cargo Cult "stimulus," i.e. borrowing and blowing trillions of dollars to prop up inefficient, bloated, corrupt, wasteful crony-capitalist cartels and politically untouchable fiefdoms.
  2. The continued destruction of open, transparent markets via intervention by the central state and bank.
  3. The continued expansion of the Welfare State, i.e. entitlements such as Medicaid and ObamaCare subsidies and implicit entitlements such as farm price supports, corporate tax breaks, mortgage interest deductions, etc.
  4. The continued expansion of the National Security State, whose premises are A) everyone on the planet is guilty until proven innocent and B) only Total Information can protect "us" (i.e. the National Security State itself) from threats.
  5. The continued erosion of civil liberties via death by a thousand cuts.
  6. The rising dependence on borrowed money to fund standard government services.
  7. The rising dependence on manipulated/gamed statistics to manage perceptions that the Status Quo is eternal, powerful and improving everyone's lives, even as it serves the narrow interests of self-serving Elites and insiders.
  8. The expansion of a Permanent War State that recognizes no boundaries between domestic and international threats, hence the militarization of local police forces and the rise of private mercenaries in the guise of for-profit domestic prisons and police forces.
  9. A central bank (the Federal Reserve) that will continue to support the most rapacious, opaque and self-serving financial Elites with free money for financiers.
  10. The continuing purchase of political favors by monied Elites via lobbying and campaign contributions.
  11. An ever-rising dependence on generating the appearance of stability, transparency, competence and expertise as a substitute for actual stability, transparency, competence and expertise. In other words, an expanding reliance on gaming dysfunctional systems rather than actually repairing dysfunctional systems.
  12. An increasing reliance on zero-interest rates, debt and free money for financiers as the "fix" for every economic ill.

The Status Quo is dysfunctional because its model of how the world works is broken. It won't matter if gridlock remains in place or one of the parties gets to impose its "brand" of policy-tweaks; since no one on the political spectrum has any concept that the current model described in these 12 points is broken, fixing the political dysfunction won't fix the systemic dysfunction.

Ukraine Releases Video Of Captured Russian Troops; They "Entered Accidentally" Russia Claims As Putin-Poroshenko Meeting Begins

Moments ago, Russian president Vladimir Putin arrived in Minsk, Belarus where upon the initiative of Belarusian President Alexander Lukashenko a summit between the Customs Union (Russia, Belarus and Kazakhstan) and Ukraine will be held on Tuesday. As Interfax adds, the meeting will also be attended by three European commissioners - EU High Representative for Foreign Affairs and Security Policy Catherine Ashton, Trade Commissioner Karel De Gucht and European Commission Vice President, Energy Commissioner Gunther Oettinger.

Amusingly, Putin's arrival did not proceed without incident...

Putin is running late, and the Ukrainian delegation is annoyed that he keeps everyone waiting.

— Nataliya Vasilyeva (@NatVasilyevaAP) August 26, 2014

This will be second meeting in the past three months between Putin and Ukrainian President Petro Poroshenko organized with the mediation of a president a third country. However, official confirmation that a separate meeting between Putin and Poroshenko will take place does not yet exist.

As noted earlier, the main reason for the recent ramp in futures is because someone activated the de-escalation algo sending futs promptly from overnight lows to highs, on hopes there will be some resolution of Ukraine's proxy civil war, and maybe a detente between Russia and Europe, where the latter is now on the verge of a triple-dip recession due to "costs" against Russia.

And yet, a potential complication may arise following the release of a video just hours before the meeting which allegedly shows Russian soldiers who were captured on Ukraine territory on Tuesday, "sharply escalating a dispute over Moscow's alleged backing for separatist rebels in the east of the former Soviet republic" according to Reuters. Alas, that's not what the de-escalation algo thinks which is currenly buying up everything in sight, now that Ukraine has cried invading wolf one too many times.

As Reuters reports, a Moscow military source told Russian news agencies that a group of soldiers had surrendered to Ukrainian forces after crossing the border by accident. Needless to say, Ukraine didn't buy it: "This wasn't a mistake, but a special mission they were carrying out," military spokesman Andriy Lysenko said in a televised briefing.

He also said separatists were attacking the southeastern border town of Novoazovsk "at this very minute" and Ukrainian forces had destroyed 12 armoured infantry vehicles in the area.

Reuters further notes that Russia has always denied assertions by Ukraine, backed by the United States and the European Union, that it has been sending arms and troops across the border to support the pro-Moscow separatists. "Tuesday's video provided the strongest evidence yet to back up Kiev's claims of direct Russian military involvement, which Moscow has always disputed. It came a day after Ukraine's state security service said it had detained 10 Russian paratroopers who had crossed the border in a column of several dozen armed infantry vehicles."

In footage posted on the official Facebook page of the Ukrainian government's "anti-terrorist operation", the men were shown dressed in camouflage fatigues. One of them, who identified himself as Ivan Milchakov, listed his personal details, including the name of his paratroop regiment, which he said was based in the Russian town of Kostroma.


"I did not see where we crossed the border. They just told us we were going on a 70 km (45-mile) march over three days," he said. "Everything is different here, not like they show it on television. We've come as cannon fodder," he said in the video. Another man in the footage, who gave his name as Sergeant Andrei Generalov, said: "Stop sending in our boys. Why? This is not our war."


Russian news agencies quoted a defence ministry source as confirming that Russian servicemen had crossed into Ukraine but saying they did so inadvertently.


"The soldiers really did participate in a patrol of a section of the Russian-Ukrainian border, crossed it by accident on an unmarked section, and as far as we understand showed no resistance to the armed forces of Ukraine when they were detained," the source said.

So, accidental invasion (into what is technically the Donetsk Republic) then? Judging by the market's reaction it is merely confirmation of more pent-up de-invasions.

Full clip below:

Frontrunning: August 26

  • That will teach the UAE who's boss: U.S. Won’t Consult Syria on Militant Strikes: White House (BBG)
  • Putin Set to Meet Poroshenko as Ukraine Tensions Escalate (BBG)... but the de-escalation algo?
  • Tim Hortons’ Canadian Fans Squeamish of American Hookup (BBG)
  • Israeli air strikes target more Gaza high-rises (Reuters)
  • How Steve Ballmer Became a Rookie Basketball Mogul (WSJ)
  • Buffett to Help Finance Burger King Tax-Saving Deal (BBG)
  • U.S. Factories Keep Losing Ground to Global Rivals (WSJ)
  • Boehner, Camp Profit From Corporate Bid to Avoid U.S. Tax (BBG)
  • Experimental U.S. hypersonic weapon destroyed seconds after launch (Reuters)
  • The Neo-Neocons (WSJ)
  • China Said to Consider $16 Billion EV-Charging Fund (BBG)
  • California wine country quake losses seen in the billions (Reuters)
  • Automotive Customer Satisfaction Dips for Second Straight Year (WSJ)
  • Soros-Backed Insurer Tops Paulson Bets as U.S. Rules Loom (BBG)
  • Ackman Gains 30% With Burger King, Herbalife Wagers (BBG)


Overnight Media Digest


* Berkshire Hathaway Inc chairman and CEO Warren Buffett is helping finance Burger King Worldwide Inc's takeover of Canadian coffee-and-doughnut chain Tim Hortons Inc , according to people familiar with the matter, in a surprise twist that thrusts the billionaire into a debate over U.S. taxes. (

* The Pentagon is preparing to send surveillance aircraft, including drones, into Syrian airspace to gather intelligence on Islamist targets, laying the groundwork for a possible expansion of the limited U.S. military air campaign beyond Iraq.(

* America's shale boom has raised hopes of a revival in U.S. manufacturing, in part fueled by cheaper energy. But U.S. factories still are losing ground to rivals in Asia and Europe. (

* Inc said on Monday that it has agreed to buy live-streaming gaming network Twitch Interactive Inc for about $970 million in cash.(

* A federal judge ruled against a new law in Hawaii curbing genetically modified crops, handing a victory to seed and chemical companies in a battle over modern agricultural techniques. (

* Amid the strongest market for commercial trucks in eight years, U.S. sales of natural-gas powered haulers are just inching ahead, slowed by premium prices, limited infrastructure and more efficient diesels. (

* Some of the largest financial institutions in the US say Lehman Brothers Holdings Inc needs to set aside $12.14 billion to settle claims over certain soured mortgage loans, more than double what the failed investment bank has currently set aside for the dispute. (

* A group of hedge funds that hold 1.3 billion euros ($1.72 billion) of Argentine government bonds has filed a suit against Bank of New York Mellon seeking to gain access to interest payments they are owed. (



Amidst an escalating standoff with Russia, Petro Poroshenko, Ukraine's pro-western president, called for snap parliamentary elections on Monday.

French President Francois Hollande on Monday evicted his Socialist government of leftwingers opposed to EU austerity.

The UK head of accounting firm Deloitte has warned that political uncertainty surrounding the general election in the United Kingdom next year is at the top of the corporate agenda.

Shares of fast-food chains Burger King and Tim Hortons rose on Monday after the companies revealed they were working on a potential merger that would result in tax savings for both companies.

Lufthansa has asked the German pilots' union VC to return to talks after the breakdown of pay discussions sparked fears of another costly strike.

Cyber security firm is in talks with banks and major financial services companies to create an alternative to Bloomberg instant messaging.



* Inc said it would buy Twitch, the most popular website for watching people play games for $1 billion. To win in its bid for Twitch, Amazon had to outmaneuver a who's who of the tech world, including Google Inc, strongly suggesting that these companies think the era of video-game viewing is just starting. (

* The long fight over Hewlett-Packard Co's $11.1 billion purchase of Autonomy got a new wrinkle on Monday, which might spell more legal pressure on Autonomy executives. On Monday, Judge Charles Breyer of United States District Court in San Francisco said that HP and the lawyers suing the company must file a revised proposed settlement agreement. (

* A group of hedge funds, including George Soros's Quantum Partners and Kyle Bass's Hayman Capital, is seeking a 226 million euro ($298.4) interest payment on Argentine bonds from Bank of New York Mellon that was blocked by a United States judge last month. (

* Ann Inc, the parent company of the Ann Taylor stores, is being pressed to explore options, including a sale by the activist investor Engine Capital and the hedge fund Red Alder. In a letter made public on Monday, Engine Capital and Red Alder said they believed that the company could be worth $50 to $55 a share to an acquirer, or a 33 to 46.5 percent premium to its stock price as of Friday.(

* A cashless society is still a long way off, but automated machines that turn traditional money into virtual currency are cropping up across the globe. The trend has come to New York - Flat 128, a retailer that sells British jewelry and accessories in the West Village, is home to the first such machine in Manhattan and is becoming a destination for Bitcoin enthusiasts. Yet this new Bitcoin ATM is only a means for users to deposit cash and convert it to Bitcoins for their accounts; it does not offer cash withdrawals. (

* DraftKings, a fantasy sports site, is expected to announce that it has raised $41 million in a new round of financing. The investment was led by the Raine Group, a merchant bank that specializes in media and technology deals, and included three existing investors Redpoint Ventures, GGV Capital and Atlas Venture. (

* Governor Jerry Brown of California on Monday signed into law a measure that requires smartphones sold in California to include smarter antitheft technology, a feature that lawmakers hope will help reduce phone theft. The bill, introduced by State Senator Mark Leno and sponsored by George Gascon, San Francisco's district attorney, requires a so-called "kill switch", which would render a smartphone useless after it was stolen, to be included on all smartphones sold in California starting in July 2015. (

* Thousands of hours of television programming are becoming available to rerun on digital networks and cable channels after new residual agreements between studios and Hollywood's three largest guilds. The shows now freed from "residual gridlock" include old broadcast series like "Charlie's Angels" and "The Flying Nun" and newer made-for-cable programs like "Breaking Bad" and "Sons of Anarchy," according to John Weiser, president of United States distribution for Sony Pictures Television. (




** Billionaire investor Warren Buffett will be helping to finance Burger King Worldwide Inc's planned merger with Tim Hortons Inc, the Wall Street Journal reported. Buffett's agreement with Burger King would likely take the form of preferred shares and be valued at around $10 billion, accounting for possibly up to 25 percent of the deal, the Journal said, citing sources familiar with the matter. (

** The need to boost employment was at the forefront of New Brunswick's election campaign on Monday as the Liberals promised to improve roads and bridges while the governing Tories committed to a strategy for the shipping industry to create jobs. Liberal leader Brian Gallant announced in Moncton that he would spend C$900 million ($820.3 million) over six years on infrastructure, a plan he said would sustain about 1,700 jobs annually. (

** Canada's premiers are expected to renew their call for a public inquiry into murdered and missing aboriginal women when they gather this week in Charlottetown as the Council of the Federation. But with Prime Minister Stephen Harper continuing to reject the idea, national aboriginal leaders meeting with premiers this week will push for an alternative that would see key federal ministers sit down with aboriginal leaders to discuss the issue and potential courses of action. (


** Corporate America is making a mad rush to the exits in a bid to lower its tax bill. But experts say the odds of political intervention in the stampede have increased as a result of U.S. Burger King Worldwide Inc's plans to become Canadian. It's an issue that's gotten enormous attention in the United States. "They're declaring they're based someplace else even though most of their operations are here," U.S. President Barack Obama said of the trend in July. (

** Data centers are booming in Canada as demand grows from companies wanting to store information within borders and amid growing concern about data privacy, prompting the likes of industry giants Inc and SAP SE to expand their footprint within the country. (

** The British embassy in Washington, D.C., was forced to apologize on Sunday for a tweet playfully commemorating the 200th anniversary of the burning of the White House, when troops from present-day Canada ransacked the presidential palace. The embassy apologized for the joke two hours later, following many outraged tweets from Americans who didn't find the episode quite as funny. (

** The delay in moving Department of National Defence employees into the former Nortel campus is costing taxpayers millions of dollars, according to documents leaked to the Ottawa Citizen. The government spent C$208 million to buy the Nortel complex. At a December 2013 briefing for journalists, defence officials said it will cost another C$506 million to refit the buildings and C$41 million in "transition costs," which are the costs of existing leases at other sites throughout Ottawa and Gatineau. But a January 2014 internal document noted that additional costs were being incurred because of the delay in moving employees to the campus. (




- Inner Mongolia Baotou Steel Rare-Earth Group Hi-Tech Co Ltd plans to invest nearly 8 billion yuan ($1.30 billion) to tackle environmental problems at its smelting plants and Baotou Huamei Products Co Ltd, the company said in an announcement late on Monday.


- China's insurance funds have shown growing interest in the primary market's non-public offering on the back of increased funding activities. Their interests also reflect a structural change in the insurance industry that could bring a new group of institutional investors in the stock market, the paper said in a commentary.

- Jiangsu Hengli Highpressure Oil Cylinder Co Ltd plans to acquire a 51 percent stake in a European counterpart in the amount of 2.5 million euros ($3.3 million), according to a company announcement.


- Some 42 companies planning initial public offerings (IPO) have been blacklisted for six months due to breach of conduct, according to a report by the Securities Association of China.


- Alipay, China's largest online payment provider, announced on Monday the official launch of Zhaocai Bao, an Internet finance platform that aims to reshape financing for small businesses to the tune of 1 trillion yuan ($162 billion) within 3 years.

- Chinese nuclear companies are preparing to export nuclear power reactors as they increase involvement in foreign projects and establish a complete industry chain, company officials and engineers said. Exporting plants will help domestic manufacturers improve their technology levels and recover the huge costs of research and development.


- Sales of new homes in Shanghai in August are likely to be very sluggish after seven-day transactions remained below 150,000 sq m for the third straight week. Purchases of new homes, excluding government-funded affordable housing, fell 0.98 percent to 129,700 sq m last week, Uwin Real Estate Information Services Co said in a report.



The Times


Some time in May or June next year - in all likelihood after the general election on May 7 - the Competition and Markets Authority will publish the initial findings of its investigation into the energy market. It is an indication of the task facing the authority that analysts are not remotely confident about predicting the outcome.

The Guardian


Alex Salmond emerged as the clear winner of the second Scottish independence debate, besting Alistair Darling by a 71 percent to 29 percent margin, according to an instant Guardian/ICM poll of Scots who had watched the debate.


As members of the Co-Operative Group prepare to vote on sweeping changes to the way the troubled chain of supermarkets, chemists and funeral homes is managed, they have already been warned that the proposed shakeup may not go far enough.

The Telegraph

BRITAIN DENIED KEY EU ROLE FOR NOT PICKING A WOMAN Jean-Claude Juncker expresses frustration that "despite my repeated requests," most governments, including Britain, have put forward men for the most important positions in Europe.


Alex Salmond has been declared the victor of the second independence TV debate with Alistair Darling after the showdown descended into an angry shouting match.



Fly On The Wall Pre-Market Buzz


Domestic economic reports scheduled for today include:
Durable goods orders for July at 8:30--consensus up 5.1%
S&P Case-Shiller 20-city composite home price index for June at 9:00--consensus up 8.4% from prior year
Consumer confidence for August at 10:00--consensus 89.5



Macerich (MAC) upgraded to Outperform from Market Perform at BMO Capital
SandRidge Permian (PER) upgraded to Outperform from Market Perform at Raymond James


Arcos Dorados (ARCO) downgraded to Neutral from Buy at BofA/Merrill
Bancolombia (CIB) downgraded to Underweight from Neutral at HSBC
Cemig (CIG) downgraded to Underweight from Neutral at JPMorgan
InterMune (ITMN) downgraded to Hold from Buy at Jefferies
InterMune (ITMN) downgraded to Market Perform from Outperform at JMP Securities
InterMune (ITMN) downgraded to Neutral from Overweight at JPMorgan
LIN Media (LIN) downgraded to Equal-Weight from Overweight at Evercore
Qihoo 360 (QIHU) downgraded to Neutral from Outperform at Credit Suisse
Simon Property (SPG) downgraded to Market Perform from Outperform at BMO Capital
Tim Hortons (THI) downgraded to Neutral from Buy at Longbow


Cray (CRAY) initiated with a Buy at Stifel
Enphase Energy (ENPH) initiated with a Buy at Needham
FCB Financial (FCB) initiated with a Buy at UBS
FCB Financial (FCB) initiated with an Overweight at JPMorgan
Goldman Sachs (GS) initiated with a Buy at MKM Partners
HealthEquity (HQY) initiated with a Neutral at RW Baird
Jarden (JAH) initiated with a Buy at Deutsche Bank
Loxo Oncology (LOXO) initiated with an Outperform at JMP Securities
Macrocure (MCUR) initiated with a Buy at Nomura
Marinus Pharmaceuticals (MRNS) initiated with an Outperform at JMP Securities
Mobileye (MBLY) initiated with a Buy at Deutsche Bank
Mobileye (MBLY) initiated with a Neutral at Goldman
Mobileye (MBLY) initiated with a Neutral at RW Baird
Mobileye (MBLY) initiated with an Outperform at Wells Fargo
Mobileye (MBLY) initiated with an Overweight at Barclays
RAIT Financial (RAS) initiated with an Outperform at JMP Securities
SunEdison (SUNE) initiated with an Outperform at FBR Capital
Transocean Partners (RIGP) initiated with an Equal Weight at Barclays
VTTI Energy (VTTI) initiated with an Outperform at Wells Fargo


Amazon (AMZN) confirmed the acquisition of Twitch Interactive for approximately $970M
DISH Network (DISH) petitioned FCC to deny Comcast (CMCSA), Time Warner Cable (TWC) merger
Comtech (CMTL) confirmed it is exploring strategic alternatives
Western Digital (WDC) said CFO Tim Leyden to retire and be succeeded by Olivier Leonetti
Premier (PINC), which reported Q4 results and provided FY15 guidance, said it will acquire Aperek for $48.5M
Kite Pharma (KITE) announced positive phase 1-2a results, demonstrating the potential to treat aggressive non-Hodgkin's lymphoma with an anti-CD19 chimeric antigen receptor, or CAR, T cell therapy


Companies that beat consensus earnings expectations last night and today include:
Taomee (TAOM), Tech Data (TECD), Renren (RENN), Premier (PINC)

Companies that missed consensus earnings expectations include:
Sanderson Farms (SAFM), Regis (RGS), Prospect Capital (PSEC), iKang Healthcare (KANG), Adept Technology (ADEP), Immunomedics (IMMU)


Berkshire (BRK.A) may provide 25% of financing for Burger King (BKW)/Tim Hortons (THI) deal, WSJ says
Time Warner (TWX) to offer buyouts to 4% of cable unit's staff, Reuters reports
Burger King (BKW) wants merger despite problems with dining combos, NY Times reports (THI)
Microsoft's (MSFT) web browser, media player targeted in China probe, Telegraph reports
Cliffs Natural (CLF) CEO supports sale of non-core assets 'at right price,' WSJ says
Fairchild (FCS) to shed 15% of workforce, WSJ reports
Madison Square Garden (MSG) has more room for gains, Barron's says

De-Escalation Algo Pushes Futures To Overnight Highs

It is unclear exactly why stock futures, bonds - with European peripheral yields hitting new record lows for the second day in a row - gold, oil and pretty much everything else is up this morning but it is safe to say the central banks are behind it, as is the "de-escalation" algo as a meeting between Russia and Ukraine begins today in Belarus' capital Minsk. Belarusian and Kazakhstani leaders will also be at the summit. Hopes of a significant progress on the peace talks were dampened following Merkel’s visit to Kiev over the weekend. The German Chancellor said that a big breakthrough is unlikely at today’s meeting. Russian FM Lavrov said that the discussion will focus on economic ties, the humanitarian crisis and prospects for a political resolution. On that note Lavrov also told reporters yesterday that Russia hopes to send a second humanitarian aid convoy to Ukraine this week. What he didn't say is that he would also send a cohort of Russian troops which supposedly were captured by overnight by the Ukraine army (more shortly).

Asian equity markets haven’t really followed suit the US/European rally with bourses in Japan, Hong Kong, and China down 0.6%, 0.4% and 1%. The Dollar is softer against the Yen which perhaps added some pressure on Japanese equities. There isn’t much Asian headlines this morning and we suspect parts of the market (HK/China) are still busy with the ongoing earnings season. Asian credits are doing better in relative terms led by sovereigns. Indonesia’s USD bonds continued its march higher (helped by Treasuries) whilst its 5yr CDS spreads are marked 4bps tighter overnight. Asian stocks fall with the Kospi outperforming and the Shanghai Composite underperforming. MSCI Asia Pacific down 0.2% to 148.4. Nikkei 225 down 0.6%, Hang Seng down 0.4%, Kospi up 0.3%, Shanghai Composite down 1%, ASX up 0%, Sensex up 0%. 2 out of 10 sectors rise with health care, energy outperforming and utilities, telcos underperforming

European shares remain mixed though are off intraday lows with the tech and basic resources sectors underperforming and travel & leisure, retail outperforming. The German and Swedish markets are the worst-performing larger bourses, the Spanish the best. The euro is little changed against the dollar. Spanish, Portuguese, Greek, Irish, French 10yr bond yields fall; U.K. yields increase. Commodities gain, with soybeans, copper underperforming and silver outperforming. 7 out of 19 Stoxx 600 sectors rise; travel & leisure, retail outperform, tech, basic resources underperform; 51.7% of Stoxx 600 members gain, 45% decline; Eurostoxx 50 -0.2%, FTSE 100 +0.2%, CAC 40 +0%, DAX -0.4%, IBEX +0.3%, FTSEMIB -0.1%, SMI +0%.

In terms of today we are expecting a handful of data from the US including durable goods orders (Aug), the S&P/Case Shiller home price index, Conference Board Consumer Confidence (Aug) and the Richmond Fed Manufacturing (Aug). It will be a quiet day for European data flow but looking at the week ahead in Europe we have French Business Confidence surveys on Wednesday and German August unemployment and inflation data on Thursday as well as Eurozone and Italian Business Confidence surveys. Friday will see the release of German and Spanish July retail sales figures and Italian unemployment data.

Market Wrap

  • S&P 500 futures little changed at 1995.7
  • Stoxx 600 little changed at 340.4
  • US 10Yr yield down 1bps to 2.37%
  • German 10Yr yield down 1bps to 0.94%
  • MSCI Asia Pacific down 0.2% to 148.4
  • Gold spot up 0.9% to $1287.9/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Continued speculation over an ECB QE programme has provided fixed income markets with further direction as the Italian and Spanish 10yr yields print record lows for the second consecutive session.
  • Markets continue to hold their ground ahead of the key meeting between Russian President Putin and Ukraine President Poroshenko where the leaders are due to hold talks on the de-escalation of tensions between the two nations.
  • US durable goods orders is due for release at 1330BST/0730CDT and is expected to show a sharp rise from the previous month (8.00% vs. Prev. 0.70%) following Boeing’s order book at the Farnborough Airshow. At 1:00PM markets will be looking out for the results of the US 2y note auction.
  • Treasuries gain as rally in EU sovereigns continues; Italian and Spanish 10Y yields fall to new record lows, UST 10Y/bund spread widest since 1999.
  • UST curve spreads continue flattening before week’s auctions begin with $29b 2Y; 0.528% WI bid vs 0.544% award in July
  • Treasuries also may be supported by month-end index extension; Barclays estimated 0.12yrs for Treasury Index, biggest since May
  • Muni bonds will be excluded from the group of easily sellable assets that banks can use to show they’re able to survive a credit crunch, according to a person familiar with the rule
  • Russia’s Putin is set to meet his Ukrainian counterpart, Petro Poroshenko, as tensions flare on the two nations’ border; Ukraine said yesterday an armored column entered from Russia while Moscow announced plans to send a second convoy with humanitarian aid into rebel-held Ukrainian territory
  • French President Hollande’s firing of malcontent minister Arnaud Montebourg risks unleashing the ruling Socialist Party’s chief critic of budget cuts, adding to an austerity backlash stirring across Europe
  • The U.S. has begun surveillance flights over Syria after Obama gave the OK, U.S. officials said, a move that could pave the way for airstrikes against Islamic State militant targets there: AP
  • Obama, who this month ordered airstrikes against Islamist militants in Iraq, hasn’t reached a conclusion about similar actions in Syria, White House press secretary Josh Earnest said yesterday
  • Twice in the last seven days, Egypt and the United Arab Emirates have secretly launched airstrikes against Islamist-allied militias battling for control of Tripoli, Libya, four senior American officials said, in   a major escalation of a regional power struggle sparked by the Arab Spring: NYT
  • Warren Buffett is helping to finance Burger King’s planned takeover of Tim Hortons, according to people familiar with the matter, backing a buyer that would move its headquarters to Canada where corporate taxes are lower
  • Obama has criticized inversion deals, while Buffett has supported Obama’s push to increase personal income taxes on wealthiest individuals
  • Sovereign yields extend declines. Asian and European stocks  mostly lower, European equities gain. U.S. stock futures decline. WTI crude and gold higher, copper lower

US Economic Calendar

  • 8:30am: Durable Goods Orders, July, est. 8% (prior 0.7%, revised 1.7%)
    • Durables Ex-Transportation, July, est. 0.5% (prior 0.8%, revised 1.9%)
    • Capital Goods Shipments Non-Defense Excluding Aircraft, July, est. 0.7% (prior -1%, revised -0.3%)
    • Capital Goods Orders Non-Defense Excluding Aircraft, July, est. 0.2% (prior 1.4%, revised 3.3%)
  • 9:00am: FHFA House Price Index m/m, June, est. 0.3% (prior 0.4%); House Price Purchase Index, 2Q, est. 3.15% (prior 1.3%)
  • 9:00am: Standard & Poor’s/Case Shiller 20-City m/m SA, June, est. 0.0% (prior -0.31%)
    • S&P/CS Composite-20 y/y, June, est. 8.3% (prior 9.34%)
    • S&P/CS Home Price Index, June, est. 172.84 (prior 170.64)
    • S&P/CS U.S. HPI NSA, 2Q (prior 150.76)
    • S&P/CS U.S. HPI y/y, 2Q (prior 10.35%)
  • 10:00am: Consumer Confidence Index, Aug., est. 89 (prior 90.9)
  • 10:00am: Richmond Fed Manufacturing Index, Aug., est. 6 (prior 7)
  • 11:00am POMO: Fed to purchase $2b-$2.5b in 2020-2021 sector


Following on from yesterday’s Draghi inspired gains in peripheral fixed income markets, both the Spanish and Italian 10yr yields have printed record lows for the second consecutive session as participants weigh the prospect of an imminent QE programme (note the ECB meetin next on Sept. 4th). This has subsequently provided a boost for UK Gilts, although the upside has been limited as UK participants react to hawkish comments from over the weekend by BoE’s Broadbent after UK markets were closed yesterday. Elsewhere, Bunds have also extended on yesterday’s gains and 2/10’s have reached their lowest level since 2008 with markets now awaiting further direction ahead of the carefully watched meeting between Ukraine President Poroshenko and Russian

President Putin. Ahead of which, NATO’s Rasmussen has said in an FT interview that he believes Russia’s convoy is a mask for military action in Ukraine.
Prelim Barclays month end extension for Pan-Euro Agg at +0.03y (Prev. 0.12yrs, 12m average +0.03yrs)
Prelim Barclays month end extension for Sterling Agg Tsy at +0.08y
Prelim Barclays month end extension for US Treasuries +0.12yrs (Prev. 0.08yrs, 12m average +0.09yrs)


European equities trade relatively mixed heading into the North American open, with a lack of downside catalyst to weigh on prices. The FTSE 100 (+0.3%) outperforms as the UK plays catch up from yesterday’s substantial gains in European indices yesterday which saw the Eurostoxx 50 close with gains of over 2%. On a sector basis, utilities names have lagged throughout the session after GDF Suez were subject to a downgrade by UBS, which has subsequently weighed on E.ON and RWE.


Overnight, the USD index ebbed lower after failing to break above yesterday’s session highs, which subsequently saw USD/JPY break back below the 104.00 level. The USD weakness also saw EUR/USD recoup some of yesterday’s heavy losses in early trade, although these gains have since been trimmed with no pertinent fundamental newsflow. Although there is talk doing the rounds that an informal agreement was reached at Jackson Hole with Draghi wanting to see a much weaker EUR and Yellen a stronger USD, acting as a de facto tightening and thus potentially limiting the upside to US rate hikes. Finally, NZD/USD has pulled off its 6-month lows set after New Zealand trade balance data showed the first deficit since October 2013.


Heading into the North American open, both WTI and Brent crude futures are trading relatively unchanged with Brent crude futures failing to break above the USD 103.00bbl level as well supplied markets continues to supress prices. In the precious metals complex, spot gold has been seen higher from the get-go after breaking above the 200DMA at USD 1284.50 alongside the weaker USD, with participants also positioning themselves ahead of the meeting between Poroshenko and Putin.

* * *

DB's Jim Reid concludes the overnight recap

Whilst Yellen’s Jackson Hole remarks were a bit of a non-event, Draghi's luncheon speech was surprisingly dovish which has managed to keep the markets going since then. In terms of some of the highlights of his speech, our FX strategist Alan Ruskin noted there is an asymmetric policy bias to err on the easy side as well as an emphasis for more action going forward. Draghi was fairly explicit in noting that monetary policy can and should play a central role in stimulating demand which currently means an accommodative monetary policy for an extended period of time. On upcoming policy, Draghi also signalled the first TLTRO in September and noted that the ECB’s preparation for outright purchases in asset-backed security (ABS) markets is 'fast moving forward'.

On the back of those we saw European government bond yields fall sharply yesterday to multiple record lows across the board. The 10yr Italian and Spanish yields were down 10bps and 12bps, closing at new lows of 2.479% and 2.260%, respectively. The 10-year Bund yield dropped 3bps also to a fresh low of 0.948%. The 2yr Bund yield fell further into negative territory to -0.032% at the close. We can't help to think that the widespread rally in European yields will probably continue help anchor other developed government bond markets for the time being. On that note the 10-yr Treasury edged 2bp lower to 2.38% yesterday but that is still about 12bps ‘wider’ than its Spanish equivalents. With hopes of more ECB liquidity in the making, yesterday also proved to be a positive day for stocks on both sides of the Atlantic. The CAC, DAX, IBEX and FTSEMIB were all up +2.1%, +1.8, +1.8% and +2.3% on the day, respectively. The S&P 500 added +0.48% and is now just 2pts away from celebrating the 2,000 mark.

Having said all that Asian equity markets haven’t really followed suit the US/European rally with bourses in Japan, Hong Kong, and China down 0.4%, 0.1% and 0.4%, respectively as we type. The Dollar is softer against the Yen which perhaps added some pressure on Japanese equities. There isn’t much Asian headlines this morning and we suspect parts of the market (HK/China) are still busy with the ongoing earnings season. Asian credits are doing better in relative terms led by sovereigns. Indonesia’s USD bonds continued its march higher (helped by Treasuries) whilst its 5yr CDS spreads are marked 4bps tighter overnight.

Draghi’s dovishness may have also helped cushion some of the geopolitical headlines from markets over the last 24 hours. Indeed we technically don’t have a government in France as we type this morning after French PM Manuel Valls yesterday announced that he would dissolve his government after a disagreement in his cabinet whether fiscal tightening measures (at the urge of Germany and Brussels) were impeding France’s recovery (NYT). This was the second major shakeup since Mr Hollande took over presidency in 2012. Mr. Hollande has asked PM Valls to form a new government which is expected to be announced today.

In Ukraine, the President Poroshenko yesterday tweeted that he has taken a decision to early dissolve the parliament. This comes as a delicate time with both leaders from Russia and Ukraine being scheduled to come together in Minsk today. Belarusian and Kazakhstani leaders will also be at the summit. Hopes of a significant progress on the peace talks were dampened following Merkel’s visit to Kiev over the weekend. The German Chancellor said that a big breakthrough is unlikely at today’s meeting. Russian FM Lavrov said that the discussion will focus on economic ties, the humanitarian crisis and prospects for a political resolution. On that note Lavrov also told reporters yesterday that Russia hopes to send a second humanitarian aid convoy to Ukraine this week.

In terms of data the US releases yesterday was mixed with activity surveys and housing coming in on the softer side. New home sales fell -2.4% in July against a +5.8% growth expected by the market. Dallas Fed manufacturing survey came in at 7.1 which is also below consensus of 12.8. The Markit US composite PMI also fell to 58.8 in August from 60.6 in July. The Chicago Fed National Activity Index was the better though (0.39 v 0.20 expected) for July. Away from the US, Germany’s IFO readings for August were lower across the board. Business Climate, Current Assessment and Expectations came in at 106.3, 111.1, 101.7 versus consensus of 107.0, 112.0, and 102.1, respectively.

In terms of today we are expecting a handful of data from the US including durable goods orders (Aug), the S&P/Case Shiller home price index, Conference Board Consumer Confidence (Aug) and the Richmond Fed Manufacturing (Aug). It will be a quiet day for European data flow but looking at the week ahead in Europe we have French Business Confidence surveys on Wednesday and German August unemployment and inflation data on Thursday as well as Eurozone and Italian Business Confidence surveys. Friday will see the release of German and Spanish July retail sales figures and Italian unemployment data.

Over in the US we will get initial jobless claims and the second read on Q2 GDP and July Core PCE inflation as well as the Kansas City manufacturing index all on Thursday. We close the week on Friday with July personal income growth and core PCE inflation data as well as the August Chicago purchasing managers index and University of Michigan confidence index reads.

Even Mainstream Academia Worried about Massive Bubbles in Markets

By EconMatters  



Academia Finally Sounding Alarm


As stocks set new records each month even other academic economists are starting to realize that not only is the Federal Reserve behind the curve, but that they are part of the rising risk concerns that are building in the financial system, and their failure to take responsibility for valuations that are 10% over-valued even on the most optimistic valuations, is alarming given the past bubbles and the damage that has occurred through excessively low interest rates providing far too much liquidity in the system. 


Far Too Much Liquidity in the Financial System 




Read More >>> The Fed Will Raise Rates in March 2015


Make no mistake with QE still going on, and a 25 basis points fed funds rate, combined with Japan, China, England and the ECB all providing loads of liquidity to the financial system, risk taking is off the charts, valuations are bubbly in many markets, and the entire financial system is setting itself up for another massive, deleveraging crash once again. 




There is just too much liquidity in the financial system, and the US and England are the two economies best able to start reducing overall liquidity on a global basis, the UK with a hot real estate market, and the US with a hot job market and overheated stock market. 


The point is that there is too much systemic risk right now and it is heading in the wrong direction given the fact that Britain and the United States are both performing far too well to continue to have recession era loose monetary policies. It might make sense in Japan and Europe but when you have even well performing economies with ‘recession era level’ of interest rates providing massive amounts of cheap liquidity to the financial system, no wonder we have so many bubbles in bonds and stocks.


Read More >>> The Oil Market QE Premium Is Coming out of Price

Don`t Be Fooled by the Lag Effect



The financial markets are not acting and trading normally, trust me I have seen many market cycles, and there is more liquidity in the financial system than there was in the credit bubble of 2006, this means things are out of hand once again, and the Fed needs to start soaking up this liquidity, and talking much more hawkish, just to ensure two-way markets, as right now there are far too many one-sided, all-in markets with ‘zero perceived risk’, and therein lies the risk problem.


Read More >>> Retail Sales: Newsflash, Everyone Shops Online These Days!


Prudential Regulation is Passing the Buck


The notion floated by Janet Yellen that “Prudential Regulation” will monitor and watch for risky capital allocation strategies is flat out false. As a market participant, I can tell her “Prudential Regulation” as a tool sure isn`t working right now, and there are massive bubbles in many asset classes, the markets don`t even trade correctly and there is far too much liquidity in the financial system. 


Moreover, if Janet Yellen truly believes that “Prudential Regulation” will be the answer in avoiding financial markets becoming ‘too risky’ or dangerous from a risk-taking standpoint, i.e., posing systemic risk to the entire highly correlated financial system; if she really believes this is an effective tool, then she needs to step down immediately because she is obviously not qualified for the position of Fed Chairperson! It is dangerously close to an alarming point right here, the bubbles keep building and the Fed needs to take responsibility for creating this systemic risk in financial markets.


Read More >>> The Fed Misrepresenting Inflation to Justify Inept Policy


The Federal Reserve are the only ones that can reduce the risk of another financial crisis by reigning in some of the massive liquidity that is bursting at the seams in all kinds of places with no real place to go. I don`t think they realize just how much liquidity is currently coursing through the veins of the financial markets, it is unprecedented. 


The fact that QE was allowed to go on for basically 2 straight years, and the cumulative effects of zero percent interest rates for 7 years has finally come into financial markets with a bang. There was a lag effect, and now the liquidity overflow is out of control, we are starting to build bubbles in asset classes that have no way of long term sustainability. Some markets are as much as 25% overvalued on a five year time frame. There is no way in hell that these positions are going to be solid investments five years from now!


When Economists Recognize there is a Liquidity Bubble, We Have a Serious Problem!


Martin Feldstein, Harvard University professor alludes to what many in the financial community recognize that risk-taking is out of control, financial markets are not two-sided markets anymore, there are massive mispricing`s in many markets, all spawned by too much liquidity in the system.

The Fed needs to wake up to the risk in the system that they have created, they have become complacent because of the lag effect, well there is no more lag effect, liquidity is sloshing around the financial system right now at record levels. 



The S&P 500`s latest record 2000 run, and Bond Yields at Recession Era levels because there is so much liquidity with no place to go even in sleepy August ought to wake the doves out of their slumber fogginess.  “Prudential Regulation” is not going to soak up the bubbly liquidity in the system, only Fed policy is going to reduce the current risk in the system. Stop passing the buck, and sinking your heads in the sand like ostriches, take some responsibility, and get your act together; we have a massive overflowing liquidity problem here in financial markets!


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CME Halt Electronic Gold and Silver Futures Trading Due to "Planned Software Reconfigurations"

CME Halt Electronic Gold and Silver Futures Trading Due to “Technical Glitch”

CME Group Inc., the world’s largest futures market, halted all of its Globex electronic trading markets, including gold and silver, for four hours due to a “technical glitch” yesterday. This is the second time this has happened this year.

CME halted trading on its electronic platform and said it was due to "planned software reconfigurations." CME, which owns the Chicago Board of Trade, New York Mercantile Exchange and other markets, made the reconfigurations over the weekend as part of ongoing upgrades to technology, a spokeswoman said in a statement.

Market participants were left scratching their heads as to why the "planned software reconfigurations" did not take place prior to the commencement of trading.

All other Globex electronic trading markets, including U.S. Treasury’s, oil, gold and U.S. stock indexes were affected with many markets having order routing problems.

A note on the CME Group website said "CME Globex markets will Pre-open at 20:30 Central Time and Open at 21:00 Central Time. All day and session orders, including GTDs with today's trade date will be cancelled. All GTCs that have been acknowledged will remain working."

Earlier, trading was suspended indefinitely. Any day orders that brokerages attempted to file and any orders that were filled, dated today were canceled.

The problem may be related to one of the exchange's trading engines but the exchange was still working to identify the extent of the damage according to a CME analyst.

This is not the first time that this has happened. The CME halted trading for some futures contracts for more than 90 minutes on April 8 due to “technical issues.”

The nature of the “technical issues” were not disclosed. Some analysts have warned that cyber war could see hackers, possibly state sponsored, attempt to disable and take down financial markets and exchanges as a form of financial warfare.

Security experts say China, Russia, the U.S. and other states are adept at and becoming more sophisticated at cyber espionage and warfare.

There is no speculation that this technical glitch was cyber terrorism or cyber war. However, it underlines the risk posed to financial markets and hence the importance of owning physical bullion coins and bars.


Inform yourself of the 7 Key Gold Storage Must Haves here

ISIS Are NOT Muslims

The Achtiname of Muhammad – 626 AD


They may have a profitable business model, but ISIS and other Muslim extremists who persecute Christians are disobeying a direct order from Muhammad, the founder of Islam.

Specifically, in 626 AD, Muhammad issued The Achtiname of Muhammad, also known as the Covenant or (Holy) Testament (Testamentum) of the Prophet Muhammad.

The Achtiname – shown above – ordered Muslims to protect and defend Christians, and condemned as sinners Muslims who mistreated Christians:

This is a letter which was issued by Mohammed, Ibn Abdullah, the Messenger, the Prophet, the Faithful, who is sent to all the people as a trust on the part of God to all His creatures, that they may have no plea against God hereafter. Verily God is the Mighty, the Wise. This letter is directed to the embracers of Islam, as a covenant given to the followers of Nazarene [i.e. Christians] in the East and West, the far and near, the Arabs and foreigners, the known and the unknown.


This letter contains the oath given unto them, and he who disobeys that which is therein will be considered a disobeyer and a transgressor to that whereunto he is commanded.  He will be regarded as one who has corrupted the oath of God, disbelieved His Testament, rejected His Authority, despised His Religion, and made himself deserving of His Curse, whether he is a Sultan or any other believer of Islam. Whenever monks, devotees and pilgrims gather together, whether in a mountain or valley, or den, or frequented place, or plain, or church, or in houses of worship, verily we are [at the] back of them and shall protect them, and their properties and their morals, by Myself, by My Friends and by My Assistants, for they are of My Subjects and under My Protection.


I shall exempt them from that which may disturb them; of the burdens which are paid by others as an oath of allegiance. They must not give anything of their income but that which pleases them—they must not be offended, or disturbed, or coerced or compelled. Their judges should not be changed or prevented from accomplishing their offices, nor the monks disturbed in exercising their religious order, or the people of seclusion be stopped from dwelling in their cells.


No one is allowed to plunder the pilgrims, or destroy or spoil any of their churches, or houses of worship, or take any of the things contained within these houses and bring it to the houses of Islam. And he who takes away anything therefrom, will be one who has corrupted the oath of God, and, in truth, disobeyed His Messenger.


Poll-taxes should not be put upon their judges, monks, and those whose occupation is the worship of God; nor is any other thing to be taken from them, whether it be a fine, a tax or any unjust right. Verily I shall keep their compact, wherever they may be, in the sea or on the land, in the East or West, in the North or South, for they are under My Protection and the testament of My Safety, against all things which they abhor.


No taxes or tithes should be received from those who devote themselves to the worship of God in the mountains, or from those who cultivate the Holy Lands. No one has the right to interfere with their affairs, or bring any action against them. Verily this is for aught else and not for them; rather, in the seasons of crops, they should be given a Kadah for each Ardab of wheat (about five bushels and a half) as provision for them, and no one has the right to say to them this is too much, or ask them to pay any tax.


As to those who possess properties, the wealthy and merchants, the poll-tax to be taken from them must not exceed twelve drachmas a head per year [according to Wikipedia, about 200 modern U.S. dollars].


They shall not be imposed upon by anyone to undertake a journey, or to be forced to go to wars or to carry arms; for the Islams have to fight for them. Do no dispute or argue with them, but deal according to the verse recorded in the Koran, to wit: ‘Do not dispute or argue with the People of the Book but in that which is best’ [29:46]. Thus they will live favored and protected from everything which may offend them by the Callers to religion (Islam), wherever they may be and in any place they may dwell.


Should any Christian woman be married to a Musulman [i.e. Muslim], such marriage must not take place except after her consent, and she must not be prevented from going to her church for prayer. Their churches must be honored and they must not be withheld from building churches or repairing convents.


They must not be forced to carry arms or stones; but the Islams must protect them and defend them against others. It is positively incumbent upon every one of the Islam nation not to contradict or disobey this oath until the Day of Resurrection and the end of the world.

(This is the Haddad translation; other translations here.)

ISIS and other Islamic terrorists are not true Muslims, and they have disobeyed a direct order of Muhammad.

No wonder the majority of Muslims all over the world condemn them.


U.S. Backs Hotbeds of Islamic Fundamentalism