ZeroHedge RSS Feed

Obama Putting Vacation On Hold, Returning To Washington For "Unspecified Meetings"

Earlier we joked that "it is rumored, although unlikely, that a city devolving into a state of emergency and actual curfew, will be enough for the president to take a break from his golf game and make a teleprompted statement later today." Just a few short hours later, in a stunning development and in what may well be a first for the president, Obama announced he planned to take a break in the middle of his Martha's Vineyard vacation and return to Washington on Sunday night for "unspecified meetings with Vice President Joe Biden and other advisers."

According to CBS "The White House has been cagey about why the president needs to be back in Washington for those discussions. Part of the decision appears aimed at countering criticism that Obama is spending two weeks on a resort island in the midst of so many foreign and domestic crises."

Well, he is. But one wonders if the president taking a break from taking a break will fix everything overnight. If Obama was indeed serious about fixing things, instead he should have announced that he was staying on the Vineyard for the next two years.

More from CBS:

Those crises turned the first week of Obama's vacation into a working holiday. He made on-camera statements on U.S. military action in Iraq and the clashes between police and protesters in Ferguson, Missouri. He called foreign leaders to discuss the tensions between Ukraine and Russia, as well as between Israel and Hamas."


"I think it's fair to say there are, of course, ongoing complicated situations in the world, and that's why you've seen the president stay engaged," White House spokesman Eric Schultz said.


Obama is scheduled to return to Martha's Vineyard on Tuesday and stay through next weekend.


Even though work has occupied much of Obama's first week on vacation, he still found plenty of time to golf, go to the beach with his family and go out to dinner on the island.


He also attended a birthday party for Democratic adviser Vernon Jordan's wife, where he spent time with former President Bill Clinton and Hillary Rodham Clinton.

So... futures open limit up in a few hours as the algos price in even more global destruction and resulting monetary "stimulus"?

US Military Releases Clip Of Assault On US Humvee (In ISIS Possession)

Or, as we like to call it, a promotion for the latest Keynesian GDP-boosting voodoo cult: the busted Humvee falacy.

We congratulate US Centcom on blowing up another Made in the USA Humvee. GDP boost: 0.001%.

That said, it appears that the US humanitarian assault in Iraq, which has 'mission creeped' into supporting the Kurdish resistance, may have succeeded in regaining control of Iraq's largest dam: moments ago Al-Sumaria TV cited Kurdish forces who insist they have captured the Mosul Dam from Islamic State fighters. 

The question is for how long, and what happens if ISIS decides to simply blow it up next time and put Baghdad under 16 feet of water? Will that be spun as another "mission accomplished" for US intervention in Iraq?

India, Spain Testing Suspected Ebola Patients; Liberian Quarantine Center Raided

While the Ebola outbreak in west Africa has long since left the "under control" stage, things are about to go from worse to inconceivable for the poverty stricken African nations, after Liberian officials said they Ebola could soon spread through the capital's largest slum after residents raided a quarantine center for suspected patients and took items including blood-stained sheets and mattresses.

According to AP, the violence in the West Point slum occurred late Saturday and was led by residents angry that patients were brought from other parts of the capital to the holding center. It was not immediately clear how many patients had been at the center.  West Point residents went on a "looting spree," stealing items from the clinic that were likely infected, said a senior police official, who spoke on the condition of anonymity because he was not authorized to brief the press. The residents took mattresses, sheets and blankets that had bloodstains, which could spread the infection.

It goes without saying that if and when Ebola strikes the heart of one of the poorest ghettos in Africa, then there is no model that can predict just how far and wide the disease could spread.

And speaking of spreading, what many have feared may have come to pass after Spain announced it was investigating a suspected case of Ebola after a Nigerian man presented symptoms of the virus at a hospital in Alicante several days after flying in from the West African country.

The Telegraph reports:

The man, who has not been named but is said to be in his 30s, was admitted into San Joan hospital in Alicante on Saturday evening where he was being treated in an isolation unit.


Hospital sources confirmed he was suffering a fever of 38.3 degrees Celsius (100.9F) as well as "other symptoms associated with Ebola - including physical discomfort, vomiting and bleeding".


The patient told doctors that he had arrived in Spain from Nigeria "a few days ago".


Hospital authorities said they had "activated protocol" to deal with the infectious disease while they awaited test results.

But even that is nothing compared to what may transpire if what the Times of India reported moments ago, turns out to be accurate: three persons from Ebola-affected Nigeria, who arrived here Saturday morning, have been admitted to the Ram Manohar Lohia Hospital for screening and treatment if required. The three Nigerians, aged 79, 37 and 4 years had fever and their tests were being done at the National Centre for Disease Control (NCDC), Delhi, an official release said here.

In addition to this, a 32-year-old Indian from Durg in Chhattisgarh who returned from Nigeria has been admitted to a hospital in Bhilai. His samples are also being tested at NCDC, the release said. WHO has said air travel, even from Ebola-affected countries, is low-risk for transmission of the disease. WHO has reported a total of 2,127 cases and 1,145 deaths due to Ebola from affected countries.

India is the second most populous country in the world with a population of over 1.2 billion.

Looking for the Signal? Expect No Fresh Help from Yellen and Draghi at Jackson Hole

There are four main issues that investors will be wrestling with in the week ahead.  First, as we saw before the weekend, geopolitical developments can still roil the markets.  Second, economic data from the US, Europe and Japan has been disappointing.  This has helped extend the rally in the bond and stock markets.  


Third, the euro was fairly resilient, unable to take out the August 6 low last week. The dollar remained in the upper end its four-month trading range against the yen, even though US yields fell to their lowest level in 14 months. 


Fourth, in light of the recent economic developments, the Kansas City Federal Reserve's Jackson Hole confab at the end of next week, is hoped to generate new insight into the thinking of policy makers. Both, Fed head Yellen and ECB's President Draghi will speak there on August 22.  




There are three geopolitical flash points on investors' radar screens:  Gaza, Iraq and Ukraine.  There have been some encouraging developments that suggest near-term stabilization in Gaza, though the basis for a sustainable and politically viable resolution still does not appear at hand.  Moreover, once again, though, in a different way, Israel's deterrence doctrine appears to have failed again.  It is this failure of deterrence that then requires Israel forces to act in ways ensures that its military victories lose in the court of public opinion.  


The inability to protect the territorial integrity of Iraq has seen the conflict escalate there.  Outside of a brief market reaction when the US decided to strategically bomb part of Iraq to slow the advance of the ISIS insurgents and/or to defend US personnel, this conflict has generally not had much-direct impact on the capital markets.   One dimension of this conflict that continues to appear under-appreciated in the media is the role of the larger Saudi Arabia-Iran confrontations through proxies.    


Of these geopolitical flash points, the situation in the Ukraine stands out.  Russia is integrated into the world economy as both a customer and energy provider, especially in Europe.  A disruptive impulse will hit an already fragile economic situation in the euro area.    It can only add to the downside risks to growth and prices.  Developments remain fluid amid conflicting media reports.  However, despite that some observers interpreted at conciliatory by Putin, it seems clear that he has not abandoned his goal of destabilizing Kiev and carving another piece out of Ukraine.  


Economic Data


US:  The highlight of the week is the July CPI figures on August 19.  The consensus expects the headline rate to tick down to 2.0% from 2.1% and the core rate to be unchanged at 1.9%.  We place the risk on the upside.  The rental market is tight, and this may translate into higher core prices.  Medical care costs may be rising, and to filters into core prices.  In addition to the CPI, the US reports housing starts.  In June, the seasonally adjusted annualized rate fell below 900k for the first time since September 2013.  They are expected to have rebounded in July.  On the other hand, existing home sales, reported later in the week, trended up in Q2 after weakening in Q1.  They may pullback in July.  Lastly, following the disappointing Empire State August Survey (14.69 from 25.60; the consensus forecast was 20.00), this week's Philly Fed survey will also draw attention.  Some economists have already revised down Q3 growth forecasts; more may follow.  


EMU:  The preliminary PMI reports are of chief interest.  The unexpected stagnation of the euro area economy in Q2 and the outright contraction in Germany was disappointing to say the least.  While the US economy will likely slow sequentially in Q3, the euro area can do better.  A small decline in the manufacturing and service sector readings will translate into a softer composite, but it will remain in the 52-54 range that has confined it since the end of last year.  This is consistent with slow growth.  We look for a 0.1-0.2% Q3 GDP.  


UK:  The consensus expects the UK to report lower inflation and stronger retail sales. We suspect there is some upside risk to CPI, partly owing to the base effect.  Retail sales should bounce back after the weakness seen in May and June.  The risk here also seems to be on the upside.  


Japan:  We have suggested that Japanese policy makers had likely written off Q2 due to the sales tax and that any policy response would depend on the economic performance in Q3.  In the week ahead, Japan reports July department store sales.  Investors and policy makers will learn whether consumers remain on strike.  Foreign demand likely improved.  Exports are expected to have risen by 3.8% after falling 1.9% year-over-year in June.  Imports may have fallen.   As a consequence, the trade deficit is likely to have been reduced.  


Central Bank Minutes:  Minutes from the recent FOMC and BOE meetings will be released.  While there is a clear consensus to wind down QE on schedule, other issues, like the timing of the first rate hike and which instruments will be used to neutralize the excess reserves, are unresolved.  That said the nature of minutes gives greater expression to a wider range of opinion than may be found among the voters on the FOMC.   The key policy signals come from the Yellen, Fischer and Dudley.  


The Bank of England's MPC meeting may have been more contentious.  A dissent or two is within the realm of expectations, which seem to carry more weight that dissents at the Federal Reserve.  Some observers see MPC member David Miles as the most likely to dissent, though we are less sanguine.  


The pendulum of market sentiment has swung quite hard in response to Carney's presentation of the Quarterly Inflation Report, driving interest rates and sterling lower.  It is difficult to envision the minutes being as dovish, which highlight the risk that the pendulum swings back, lifting sterling and short-term interest rates.  In addition, in an interview in the Sunday Times, Carney seemed to contradict what he appeared to have signaled last week by saying that the BOE will not wait until real wages rise before raising rates.  


What economists euphemistically call "temporal inconsistencies" with Carney's forward guidance is frustrating investors goes beyond the strategic ambiguity often seen from central bankers.  The Federal Reserve, the ECB and the Bank of Japan communications have challenges, but none appear to be as self-contradictory as the BOE, which has made some observers raise questions of the credibility of its forward guidance.  


Price Action


Several times in recent year, investors have thought the US economy was on the verge of accelerating, and have been disappointed.  It is being played out again now. The disappointment comes after a strong dollar rally and leaves the greenback vulnerable. The inability euro to fall to new lows following its own poor data and the inability of the Dollar Index to make new highs  may be warning signs.  The drop in US yields argues against buying dollars for yen.   There is nothing that says sterling has bottomed after shedding 5.5 cents since mid-July, but we are more inclined to look for a near-term bounce.  


The decline in US yields remains a critical element shaping the investment climate.  Nearly half of the decline in the 10-year yields, thus far, this quarter, took place last week (9 of 19 bp).  The same is true for the UK (16 of 34).  In Germany, the 10-year bund yield fell below zero for the first time, and the 11 bp decline last week brought the quarter-to-date decline in 29 bp.  For its part, the 10-year JGB yield fell be 50 bp for the first time in sixteen months.  


Given growth and inflation expectations it is difficult to see the value in US 10-year bonds with 2.34% prevailing yields.  Technical analysis warns that a break of the 2.30% area could spur a move toward 2.16%.  German 10-year yields are in record low territory and hence in uncharted waters.  The 2-year yield is negative.  As noted above, we are concerned that the pendulum has swung too hard in the UK, and this warns of some backing and filling with rates.  


The DAX and CAC suffered dramatic downside reversals before the weekend.  The price action was not quite a damaging in the FTSE, but it did settle on its lows too, surrendering most of its earlier gains.  The US S&P 500 was turned back from a key level.  It is difficult to see the core bond yields rising if the equity markets see follow through selling at the start of the week.  


The Sept oil futures contract fell to five-month lows last week near $95.25 a barrel.  It staged an upside reversal before the weekend.  A move above $95.70 would suggest the leg down from $106.65 in June is over.  More broadly, commodity prices (CRB) are also technically poised to move higher in the near-term.  


Jackson Hole


Many observers play up the significance of the Jackson Hole gathering of monetary officials.  We demur.  By the time that Yellen and Dudley speak on August 22, the market will be winding down before next weekend. Yellen will likely use her talk on "Re-evaluating Labor Market Dynamics" to argue the case of there being significant slack (under-utilization) in the labor market.  Moreover, because she is likely speaking as herself, and not representing the Federal Reserve as she does, for example, before Congress and in her post-FOMC press conferences, the risk is her tone may be somewhat more dovish.  Her leadership style seems to preclude signaling any new initiative in Jackson Hole. 



For Draghi too, Jackson Hole does not seem like a particularly likely forum for some policy revelation.  He will likely use this opportunity to discuss, even candidly, the challenges that the euro area faces and how its policy framework differs from the US.    September and October will be important months for the euro area.   The TLTRO facility will be launched.  Updated forecasts from the ECB staff and the results of the asset quality review and bank stress tests will available (before the ECB formally take on supervisory responsibility).

One Shot, In Critical Condition, 7 Arrested After Protesters Break Ferguson Curfew

As we reported last night, when the Ferguson curfew hitting at midnight, while most of the protesters dispersed, many still remained on the streets despite a clear warning by the police department that anyone still rioting/looting/protesting would be arrested. Which is when things went from bad to worse for yet another night. In roughly chronological order:

Demonstrators have made a barricade of cars across West Florissant.

— Antonio French (@AntonioFrench) August 17, 2014

Tear Gas deployed. Smoke filling the road in front of protesters. #stl #ferguson #MikeBrown

— FOX2now (@FOX2now) August 17, 2014

Police vehicles, armored cars are on the move. They're marching toward the crowd. #stl #Ferguson

— FOX2now (@FOX2now) August 17, 2014

“There was no convincing them”: Police use tear gas on curfew breakers

— FOX2now (@FOX2now) August 17, 2014

This canister makes it seem like smoke after all. #Fergurson

— William H. Powell (@WPowell19) August 17, 2014

Too many young men talking about they're ready to die tonight. #Ferguson

— Antonio French (@AntonioFrench) August 17, 2014

And then this happened:

Gun shots.

— Antonio French (@AntonioFrench) August 17, 2014

@ChrisHayesTV reports: A witness says someone was shot at the corner of Canfield and West #Florissant #stl

— FOX2now (@FOX2now) August 17, 2014

Mo HP Capt Johnson: Shooting victim tonight in critical condition. Police car was shot at tonight.

— FOX2now (@FOX2now) August 17, 2014

According to Reuters, Missouri State Highway Patrol Captain Ron Johnson said the person shot at a restaurant was in critical condition. Police were unable to identify the victim, who he said was not shot by police, and that the alleged shooter was still at large. Well, what else would he say: that the cops shot yet another Fergusonite?

As we warned yesterday, all that is needed for the racial divide in this country to reach levels (of violence) not seen in generations, is for one or more people to die, whether in Ferguson or elsewhere, while protesting along racial lines. We can only hope that the person in critical condition makes a recovery or else this may well be just the beginning of what we have warned for years will happen when a record wealth/class/religious/ethnic divide, largely aided and abetted by the administration, finally spills out on the streets and the people demand a reversion to the mean: something which for those who follow history happens with clockwork regularity when the divide between the haves and the have nots reaches record levels.

So to summarize last night's events, here is KTVI with a first person account of the latest nightly rioting in Ferguson:

More tear gas and gun-fire in the streets during another violent night in Ferguson and leaving many to wonder when will it end.


One person shot, a police car hit by gun-fire, and seven arrests as police enforced the governor’s new curfew.   Police fired smoke bombs and tear gas at protesters who didn’t want to leave after the midnight curfew rolled around.  Police got reports of people on the roof at Red’s Barbecue.  Then they saw a man in the street with a gun and they found a man shot in the neck, critically hurt.  That is when the SWAT Team came in.


Police tried to move back the crowd with smoke bombs and tear gas to try to get to the shooting victim.  By the time police got to the scene near Red’s the victim was already gone.  He was taken to the hospital in a private car.


Authorities arrested seven people for failing to disperse the area around.  At around 1am it appeared that police had removed all of the protesters.


Captain Ron Johnson talks about dealing with the protesters at curfew time. “There was a shooting victim near QuikTrip and Red’s Barbeque.  As we approached Red’s Barbecue we deployed tear gas.  The first can of gas that was deployed was there.  In an effort to get back and get to the shooting victim.  Also, a police car at that location was shot at.”


We don’t have any details on whether that police car was hit.  But, we don’t believe that anyone was injured.


We did get video overnight of police processing the car used to take the shooting victim to the hospital.  County police tell FOX 2 that the shooting victim is in critical condition.  The circumstances surrounding the shooting are still unclear.

It is rumored, although unlikely, that a city devolving into a state of emergency and actual curfew, will be enough for the president to take a break from his golf game and make a teleprompted statement later today.

Ferguson Protesters Refuse To Leave As Midnight Curfew Approaches; Police In Riot Gear Present: Live Feeds

As reported earlier, the governor of Missouri announced earlier his afternoon that starting midnight, a curfew will be imposed on Ferguson until 5 am as part of the state of emergency unviled by the governor. The only problem is that with about an hour to go, the protesters have filled the streets and are refusing to disperse, even as police in riot gear is present and roadblocks have been setup.

Police in riot gear right now in Ferguson. Via @kodacohen

— PzFeed Top News (@PzFeed) August 17, 2014

The local police have cordoned off local storefronts as if expecting a repeat of last night's looting, which suggests that everyone now expects that the imposed curfew will be violated

#Ferguson St. Louis city cops protecting shops

— David Carson (@PDPJ) August 17, 2014

Furthermore, and quite unexpectedly, none other than the founder of Twitter appears to be on the scene, livetweeting himself:

— Jack (@jack) August 17, 2014

— Jack (@jack) August 17, 2014

Back from school in New Orleans for #Ferguson. South city native!

— Jack (@jack) August 17, 2014

"At 11:30 we rolling out. I love my people too much. 11:30. Let's roll." #Ferguson

— Jack (@jack) August 17, 2014

So will this be another violent night, this time with mass arrests, as the Ferguson population violates the governor's curfew, or will everyone manage to get along? Track the events in real time as they are about to unfold with these three live feeds.

Stream 1:

Watch live streaming video from activistworldnewsnow at

Stream 2:

Stream 3:

Broadcast live streaming video on Ustream

"God Willing, We Will Raise The Flag Of Allah In The White House" - A Deeper Look Inside ISIS

"God willing, we will raise the flag of Allah in the White House."

This is what an ISIS militant told the camera when we watched the first two parts of Vice News' groundbreaking inside look into the Islamic State's caliphate, which showed how, in part one, the highly organized Jihadist force came seemingly out of nowhere, and in an unprecedented landgrab in Iraq and Syria, succeeded in forming its own sovereign and religious state; in part two, reporter Medyan Dairieh, who spent three weeks in the Islamic State, looked at how ISIS indoctrinates children into fundamentalist ideology and took a stroll through an ISIS military parade proudly featuring confiscated (or is that gifted?) US vehicles.

And while we still don't know if ISIS is anywhere near close to making good on its threat to the American president's place of residence, here are the next two parts of Vice's 5-part "Islamic State" series.

In part 3, the VICE News crew observes how Sharia law is enforced in the capital Raqqa: it joins the "Hisbah", or the Sharia police on their daily patrols during Ramadan, and witnesses how they check on shops and scrutinize produce, while at the same time ensuring their strict rules on women’s appearances are adhered to. The crew then goes to an Islamic State prison and speaks with inmates accused of abusing drugs and selling alcohol. The prisoners’ punishments are revealed as well as how they have since “rediscovered” their devotion to the Islamic faith since their incarceration — but are yet to be granted permission to declare their allegiance to the caliph, Abu Bakr al-Baghdadi.


In part 4 VICE News visits the Sharia courts where those accused of infractions are sentenced to harsh penalties, including death by crucifixion. But the courts don’t just handle crime. Citizens can bring all manners of complaints, including family disputes, and see the Islamic State’s form of justice doled out.

With unprecedented access, VICE News reporter Medyan Dairieh also visits the section of the court specifically set up for Christians, where the Islamic State discusses its treatment of minorities, and sees a former Armenian Catholic Church that has been converted into an Islamic center.

Why The Fed Can't, And Won't, Let The Stock Market Crash

When it comes to the stock market, while the biggest, and according to many only, beneficiary of the Fed's ZIRP/QE policies of the past 6 years has been the wealthiest 1%, the reality is that said top crust of US society no longer needs the S&P to continue its relentless, manipulated and centrally-planned levitation.

Between a third Hamptons residence, a 5th Ferrari, and a 7th French villa, not to mention a few tons of gold, the super wealthy have long since booked their paper profits, and transferred their "wealth" out of the intangible and into actual, physical assets.

Therefore it is not the 1% that would suffer the most should the S&P have a post-Lehman like 50%+ wipe out, which also means that the Federal Reserve's only mandate of pushing asset prices to ever higher levels while pretending it does so to boost employment and keep inflation at 2% is no longer for the benefit of the uber-wealthy.

So why can't, or rather won't, the Fed let the bubble market collapse once again? Simple - as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys. This compares to less than 10% for Japan which also explains why for Abe, the only lifeline left is pushing pension funds out of their existing asset allocation sweet spot and forcing them to buy stocks. Whether this gambit will work is unknown.

What, however, is known is that in a country like Germany between 2005 and 2012 the Pension funds asset rotation out of stocks and into bonds has been truly unprecedented, with stocks plummeting from 30%+ of total exposure to less than 5%!  It also explains why Germany was, is and always will be leery of allowing the ECB to pursue asset bubble-inflating policies which would barely benefit pension funds on the equity side, while any rising inflation would crush the mark-to-market value of bond holdings.

But back to the US: while the 1%'s paper fungible, market-driven wealth has been long converted into other hard asset formats, it is the paper gains for the future retirees that are on the chopping block should the S&P 500 "get it." As such, it is the fate of future retirement funds, and in fact, the very core of the US welfare state that is at stake should there be a massive market crash. In which case what happened in Ferguson will be a polite stroll in the park compared to the chaos that would ensue should another generation of Americans wake up with half or more of their paper wealth wiped out overnight.

None of which touches on the most important question: will the Fed be able to avoid a market crash?

The answer of course is no. But while we have explained countless times why central-planning always fails in the end, we will give the podium to Fred Hickey, aka the High-Tech Strategist, who gives a very poetic summary of what the Fed's endgame will look like:

The Fed hasn't made the world a better place with its interventions. It has created moral hazard, encouraged the formation of asset bubbles that eventually pop (leaving economic messes), widened the wealth inequality gap to record levels, discouraged savings and investment, severely penalized retirees on fixed incomes, encouraged spending, funded massive government deficit spending by monetizing the debts, lengthened the recession and likely reduced the number of jobs that would have been created if the economy had been allowed to take its normal course. Eventually the Fed's policy interventions will also have created debilitating, widespread consumer inflation, the "cruelest tax" against the poor and middle classes.

And the final nail in the failed Keynesian school of economic thought's coffin, will come when a hundred million current and future retirees wake up one day, realize that the welfare state dream is over, and suddenly realize they have nothing left to lose.

It is only then that the 1% will be truly in peril, as one after another revolution in the history of the world has shown all too clearly.

Congressman Hank Johnson Will Introduce Bill To Stop The Militarization Of Police

Submitted by Michael Krieger of Liberty Blitzkrieg

Congressman Hank Johnson of Georgia Will Introduce Bill to Stop the Militarization of Police

As I pointed out yesterday in my detailed thoughts on Ferguson, President Obama has once again proved his irrelevance and uselessness by failing to say anything meaningful on the disturbing events of the past week. In fact, he only decided to address it personally and publicly yesterday after being heavily criticized for issuing a press release about the party he attended in Martha’s Vineyard as civilians in Missouri clashed with a paramilitary police force.

Despite Obama’s complete apathy, there are some Congressmen forcefully speaking out against the trend from “both sides” of the increasingly meaningless Republican and Democrat divide. The most noteworthy thus far appears to be Democrat Rep. Hank Johnson of Georgia’s 4th Congressional district. In fact, he has sent a Dear Colleague letter to fellow representatives of his intention to introduce the Stop Militarizing Law Enforcement Act in September when Congress returns from recess.

The Hill reports that:

A Democratic congressman from Georgia is drafting legislation to limit a Pentagon program that provides surplus military equipment to local law enforcement.


Rep. Hank Johnson is pushing the legislation amid the situation in Ferguson, Mo., where an armed police presence has taken to the streets after mass protests over a police shooting.


Our main streets should be a place for business, families, and relaxation, not tanks and M16s,” Johnson wrote in a Dear Colleague letter sent Thursday to other members of Congress.


“As the tragedy in Missouri unfolds, one thing is clear. Our local police are becoming militarized,” Johnson’s office said in a statement.


Johnson said he will introduce the bill in September, when Congress returns from a five-week recess. He has been worked on the legislation for months, but his office said the current situation highlights the need for the bill.


Johnson criticized the Pentagon’s ’1033? program, which offers surplus military equipment to state and local law enforcement, including M16 rifles and mine-resistant ambush protected vehicles (MRAP).

Considering that most mainstream media watching Americans had no idea how out of control the police militarization had become, perhaps Rep. Johnson’s bill has a fighting chance. If it is to pass, bi-partisan support is crucial and this is hopefully one of those issues libertarians and progressives can find common ground on. There is reason to be somewhat optimistic considering Rand Paul’s op-ed in Time yesterday titled: We Must Demilitarize the Police. Here are some excerpts:

If I had been told to get out of the street as a teenager, there would have been a distinct possibility that I might have smarted off. But, I wouldn’t have expected to be shot.


The outrage in Ferguson is understandable—though there is never an excuse for rioting or looting. There is a legitimate role for the police to keep the peace, but there should be a difference between a police response and a military response.


The images and scenes we continue to see in Ferguson resemble war more than traditional police action.


When you couple this militarization of law enforcement with an erosion of civil liberties and due process that allows the police to become judge and jury—national security letters, no-knock searches, broad general warrants, pre-conviction forfeiture—we begin to have a very serious problem on our hands.


The militarization of our law enforcement is due to an unprecedented expansion of government power in this realm. It is one thing for federal officials to work in conjunction with local authorities to reduce or solve crime. It is quite another for them to subsidize it.


Americans must never sacrifice their liberty for an illusive and dangerous, or false, security. This has been a cause I have championed for years, and one that is at a near-crisis point in our country.

However, passing such a bill will be no easy task. For example, in June Rep. Alan Grayson (D-Fla.) introduced an amendment to H.R. 4435, the National Defense Authorization Act, which would have prohibited funds from being used to transfer certain kinds of military surplus to local police departments. Sadly, the vote wasn’t even close. It failed 62-355, including a no vote from Rep. Lacy Clay (D-Mo.), whose district includes Ferguson. Reason reported on this tragedy:

In June, the House of Representatives voted on a series of amendments to H.R. 4435, the National Defense Authorization Act.  Among the amendments was one by Rep. Alan Grayson (D-Fla.) which would’ve prohibited funds from being used to transfer certain kinds of military surplus to local police departments. The amendment failed by a wide margin, with only 62 votes for and 355 against.


Among those voting against this bill, which would slow down the militarization of America’s police forces, was Rep. Lacy Clay (D-Mo.), whose district includes Ferguson, Missouri, where many Americans have gotten their first glimpse of America’s militarized police in action.


House leadership on both sides also voted against it, including Nancy Pelosi (D-Calif.), Steny Hoyer (D-Md.), Eric Cantor (R-Va.), and Kevin McCarthy (R-Calif.).

Establishment bipartisan criminality, as usual.

Supporters of the amendment include the usual civil libertarian suspects, such as Reps. Justin Amash (R-Mich.), who called attention to this vote on Twitter earlier today, John Conyers (D-Mich.), Rush Holt (D-NJ), Walter Jones (R-NC), Raul Labrador (R-Idaho), John Lewis (D-Ga.), who nevertheless called for martial law in Ferguson, Thomas Massie (R-Ky.), Jerrold Nadler (D-NY), and Mark Sanford (R-SC). Fourteen other Republicans and 43 other Democrats voted for the amendment.


See how your representative voted here.

Optimism for Rep. Johnson’s bill should come from the fact the issue has been thrust front and center due to recent events in Ferguson. That said, like anything else in American politics, actually passing legislation in the best interests of the American public is almost impossible due to the overwhelming influence of special interest money. Indeed, David Sirota noted earlier today that:

According to data compiled by Maplight, the lawmakers “voting to continue funding the 1033 Program have received, on average, 73 percent more money from the defense industry than representatives voting to defund it.” In all, the average lawmaker voting against the bill received more than $50,000 in campaign donations from the defense industry in the last two years. The report also found that of the 59 lawmakers who received more than $100,000  from defense contractors in the last two years, only four voted for Grayson’s legislation.

Given the reality of defense company spending, this battle will not be an easy one. This is why I ask you to spread this post around and contract your Senators and Representatives to make it clear this issue is very important to you and you will be watching how they vote.


Seven Charts That Leave You No Choice But To Not Feel Optimistic About The US Economy

Submitted by Shane Obata-Marusic of Triggers

Seven charts that leave you no choice but to (not) feel optimistic about the US economy

At the end of July, 2014, Quartz posted an article called “seven charts that leave you no choice but to feel optimistic about the US economy”.

Although the facts that they presented are correct, the conclusion that they drew is not.

In the following sections, we will examine and refute each of the seven pieces of evidence that were presented by QZ.



Growth in nonfarm private payroll employment (NFP) has been steady since 2012.

That said, it’s taking more money printing – aka Quantitative Easing (QE) – to achieve the same number of job gains month over month.

The following chart shows that if you deflate the gains in NFP by the increase in the Fed’s assets then you’ll see a diminishing return on QE.

Despite the fact that the labor markets have been improving for years, the Fed’s actions are having less and less of an effect.



The unemployment rate has been in decline since it peaked it late 2009.

But that’s not the whole story.

In contrast, the employment to population ratio has barely moved since 2010.

The next figure shows that, since the financial crisis, the falling unemployment rate has not been matched by a rising employment to population ratio.


This means is that unemployment rate is falling for the wrong reasons; i.e. because people are leaving the labor force.

Job Openings

Job openings have been on the rise since the middle of 2009 and are now as high as they were in 2007.

Be that as it may, job hires have been lagging openings since the summer of 2010.

As you’ll see in the following graph, hires are still well off their peak in 2006.


The labor market is better than it was but it’s still far from strong.


The housing market has improved significantly since the last depression but it’s still extremely weak by historical standards.

Often times, the financial media will present housing statistics that begin right after the last crisis.

That’s a great way to show the improvement that’s occurred this cycle; however, it doesn’t give you the proper context.

The subsequent diagram shows that new one family houses sold are still at a level that’s been associated with recessions in the past.

If this recovery was as strong as some people say it is then new home sales would be much higher than they are.



As a result of cheap financing, car sales are now at post-crisis highs.

But is the auto market as strong as it seems? Maybe not.

The ensuing chart shows that domestic auto inventories are now at their highest levels since early-mid 2001.

This means that, although sales have been rising, so has the number of autos available for sale.

If demand starts to fall off then there will be a lot of outstanding supply.

That scenario would not be good for the auto market.


Consumer Sentiment

Sentiment has been increasingly positive since 2009.

That said, it’s still lower than it was in 1995.

The succeeding figure shows that consumer sentiment has been making lower highs – i.e. lower peaks – since 2000.

This could be indicative of a loss of confidence in the financial industry.

In other words, after each bubble – first the Nasdaq, then the housing, and now the Fed bubble? – the consumer loses confidence in the system.

Intuitively this makes sense because of how many people were negatively affected by market crashes.



The S&P 500 has been on fire since it bottomed in early-mid 2009.

S?t?e?v?e? ?L?i?e?s?m?a?n?  Some will argue that its performance is a reflection of an improving economy.

Others say that it’s been driven by the Fed’s monetary policy.

Take a look at the following graph – the S&P 500 divided by the Fed’s balance sheet – and then decide for yourself.  ;)

This chart is just hilarious.

It goes to show that the Fed is to the S&P what steroids were to Barry Bonds.


Do I have to?

After reading through this piece, it should be quite clear that you don’t have to be optimistic about the US economy.

Yes, there are some bright spots; but everything’s relative.

The current expansion has been ongoing for quite some time.

Therefore, it’s unlikely that “this is just the beginning” of secular bull market.

Mission Creep: From Rescuing Iraq Refuges, The US Is Now Assisting Kurds In Fighting ISIS With Drones, F-18s

Just over a week ago, Obama announced that the US military intervention in Iraq would be solely under the pretext of "humanitarian intervention" while US troops would be deployed exclusively as "advisers", and nothing else. 7 days later, the siege on Mount Sinjar is virtually over with the US announcing that "far fewer Iraqi refugees were found on mount Sinjar", and yet the US finds it difficult to leave: something which the current president crusaded against his predecessor over. And today it was finally confirmed that the latest US airborne assault of Iraq (so far without a land invasion force) has just suffered terminal mission creep, when US airstrikes, by both F-18s and drones, were used not to protect and safeguard the besieged refuges but to aid Kuridsh forces in retaking the critical Mosul dam from ISIS militants who took control of the critical piece of infrastructure in early August.

BBC reports that the operation to recapture the country's largest dam began early on Saturday with raids by F-18 fighters and drones, US officials said.

Kurdish Peshmerga fighters have shelled militants' positions, and there is an unconfirmed report of a ground attack. Supposedly no US troops are involved in the ground attack, although with the level of lies lobbed around by everyone, it is almost assured that US marined are currently engaged in combat with ISIS.

US military officials told NBC News the decision to try to retake the dam came after intelligence showed IS militants "were not yet at a point where they could blow up the installation".


A Kurdish commander, Major General Abdelrahman Korini, told AFP that the Peshmerga had captured the eastern side of the dam and were "still advancing".


Rudaw, a Kurdish news website, said the air strikes appeared to be the "heaviest US bombing of militant positions since the start of air strikes" against IS last week. At least 11 IS fighters were killed by the air strikes, sources in Mosul told BBC News.


The dam, captured by IS on 7 August, is of huge strategic significance in terms of water and power resources. Located on the River Tigris about 50km (30 miles) upstream from the city of Mosul, it controls the water and power supply to a large surrounding area in northern Iraq.


The BBC's Jim Muir in Irbil says there are fears the dam is structurally dubious and many have warned that it could unleash a catastrophic flood if it was breached.

One wonders if it is extensive military planning that has green-lighted an operation as having "no risk" of dam breach as F-18s are launching missiles at militants located at or near the dam wall.


An image said to show Islamic State gunmen on the Mosul dam on 9 August


An FA-18 takes off from the US Navy aircraft carrier USS George HW Bush in the Gulf on Friday


For the latest update on the combat theater we go to the usual source: the Institute for the Study of War with its most updated Iraq situation plan:

So now that Obama is the latest president to suddenly find it next to impossible to extricate himself from a "land war in Asia" and mission creep for the indefinite future virtually assured, one wonders just what humanitarian excuses will be used when the first US pilot (let alone marine) is brought back home in a bodybag, and less relevantly, if the Nobel peace prize-awarding committee will suddenly have an epiphany and finally demand its trophy back.

State Of Emergency, Curfew Issued For Ferguson

It was only a matter of time before Ferguson became the Americanized version of Gaza.

After last night's looting in which the local police was inexplicably instructed to stand down by the state highway patrol, moments ago Missouri's governor ,Jay Nixon, issued a local state of emergency and imposed a nighttime curfew lasting from midnight until 5 am. As the WSJ reports, at the Greater St. Mark Family Church in St. Louis, Gov. Jay Nixon said the overwhelming number of protesters have been peaceful. But the governor said he would not allow a small number of violent rioters to emerge again in the wake of a police-involved fatal shooting of 18-year-old Michael Brown one week ago. "If we are going to have justice, we must first have and maintain peace," the governor said adding that this is a test if the "town can break the cycle of fear." From where we stand, the answer so far is a resounding no.

Ron Johnson of the Missouri Highway Patrol, left, and
Missouri Gov. Jay Nixon at a news conference in
Ferguson, Mo., on Friday. Associated Press

We reported previously on the events that took place in Ferguson after midnight, when yet another protest turned violent and many of the local businesses were looted. Here is some additional detail from the WSJ:

Just after midnight on Saturday, a large group of protesters moved from the sidewalks, where demonstrators had stayed peacefully till then, into the street and confronted police officers, who had donned riot gear and had been accompanied by armored vehicles for the first time since Wednesday.


But the police eventually pulled back from the scene to avoid a broader confrontation with the protesters and looters. "There was a decision made to pull our people out of there for fear for our safety and the protesters'," Sgt. Al Nothum, spokesman for the Missouri State Highway Patrol said Saturday morning. "If there was a confrontation, people were going to be seriously injured," he added.


Many of the protesters and looters wore bandannas over their faces and chanted: "No justice, no peace." Police officers formed themselves into a line, and one demanded through a megaphone: "You must clear the roadway or face arrest." Those protesters eventually backed away from the police line.


Officers wore what are known as battle-dress uniforms, or BDUs, as they stood in line. Some wore dark blue fatigues, which is a more traditional SWAT-style uniform, while others had military-style camouflage. The varying uniforms made it difficult to ascertain which department the officers were representing.


Separately, men who said they were members of a group calling itself the New Black Panther Party worked to push protesters back and maintain order, while some of the more vocal protesters cursed the police. Some protesters ran around the side of a nearby building to grab pre-made Molotov cocktails, though none was lighted or thrown.


Not long after that, the looting began. Young men with partially-covered faces kicked in the front door of a liquor store, and began looting bottles. Protesters said that store—Ferguson Market and Liquor—was the one from which Mr. Brown allegedly stole cigars and allegedly assaulted the store owner.

And with police unwilling, afraid or generally instructed not to engage, it was up to the business owners themselves to protect their property:

Sometime after 5 a.m., men who appeared to be owners of the businesses started arriving and standing in front of the looted stores to protect them. One man who arrived at Ferguson Market and Liquor had what appeared to be a pistol in his waistband, though with about an hour to go before sunrise, it appeared he hadn't used the weapon.


After daybreak on Saturday, rain poured down on Ferguson, as police vehicles swarmed into town. Officers in bright yellow jackets took up positions in front of looted businesses, encountering no resistance.


Shop owners and members of the community were out by midmorning with brooms and shovels helping to clean up the mess made by looters.

What is most troubling is that it was also unclear who, exactly, has tactical control over the security forces in the troubled city. "The Highway Patrol has been tasked with keeping the peace in Ferguson," said Sgt. Nothum, when asked about the command structure, but he couldn't say whether that means the Highway Patrol had full tactical command of the situation on the ground, a question he said he hoped to be able to clarify by the news conference scheduled for Saturday afternoon.

"I called the police four or five times, I called since 12 o'clock!" he said, expressing frustration. "I called Ferguson and they said, 'We don't have anything to do with it.' I called St. Louis County and they said 'We don't have anything to do with it.' I called the state police, and they say, 'You have to call Ferguson.' It's like a circle!"


But Highway Patrol Sgt. Nothum said he wasn't aware that police weren't responding to calls for help and that callers weren't being put through to the appropriate department. He said he was aware of the frustration people like Mr. Jacobs feel if they have encountered such a circular situation.

In other words, the local authorities went from one extreme, of overreacting to any stimulus, to the other, of completely ignoring please for help from local residents: hardly the stuff social stability is made of.

As for Fergsuon, all that's left is for someone to break the curfew and be shoot on sight: then again, if nothing else, consider all the "broken-window" GDP boosts this kind of domestic escalation could produce to the ivory tower-dwelling Keynesian econ PhDs...

The Fed Has Set the Stage For Another 2008-Style Disaster

Time and again, we’ve been told that the Great Crisis of 2008 has ended and that we’re in a recovery.


Indeed, earlier this year, we were even told by Fed Chair Janet Yellen that the Fed may in fact raise interest rates as early as next year.


If this is in fact true, how does one explain the following statement made by the Fed’s favorite Wall Street Journal reporter, Jon Hilsenrath?


One worry: As they move toward a new system, trading in the fed funds market could dry up and make the fed funds rate unstable. That could unsettle $12 trillion worth of derivatives contracts called interest rate swaps that are linked to the fed funds rate, posing problems for people and institutions using these instruments to hedge or trade.


So… the Fed may not be able to raise interest rates because Wall Street has $12 trillion in derivatives that could be affected?


Weren’t derivatives the very items that caused the 2008 Crisis? And wasn’t the problem with derivatives that they were totally unregulated and out of control?


And yet, here we find, that in point of fact, all of us must continue to earn next to nothing on our savings because if the Fed were to raise rates, it might blow up Wall Street again…


Simply incredible and outrageous.


What’s even more astounding is that Hilsenrath is in fact understating the issue here. It’s true that there are $12 trillion worth of derivatives contracts related to the fed funds rate… but total interest rate derivatives contracts are in fact closer to $192 TRILLION.


And that’s just the derivatives sitting on US commercial bank balance sheets. We’re not even including international banks!


So…the US economy is allegedly in recovery… the financial markets are fixed… and all is well in the world. But the Fed cannot risk raising interest rates to normal levels because Wall Street has over $12 trillion (more like over $100 trillion) in derivatives contracts that could blow up.


That sure doesn’t sound like things were fixed to us. If anything, it sounds like the stage is set for another 2008 type disaster.


This concludes this article. If you’re looking for the means of protecting yourself from what’s coming, swing by

to pick up a FREE investment report titled Protect Your Portfolio. It 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




Japan’s Keynesian Demise: A Cautionary Tale For Our Times

Submitted by David Stockman via Contra Corner blog,

I remember it well. That is, the fiscal rectitude of the old Japan.

During early 1981 as the Reagan White House prepared its radical fiscal plan—-what Senate Majority Leader Howard Baker famously called a “riverboat gamble”—-we were visited by a high ranking delegation from the Japanese finance ministry (MOF). It is no overstatement to say that they were absolutely shocked by the administration’s plan to enact a sweeping 30% income tax cut and double the defense budget—while expecting that it would all balance out as a result of surging economic growth immediately and large domestic spending cuts down the road.

The MOF men feared the worst—politely noting the possibility that there would be insufficient economic growth and spending cuts to pay for the Administration’s monumental tax reductions and defense build-up. Then the US would experience an outbreak of massive fiscal deficits—an unprecedented peacetime development that could roil the entire global financial system. In that apprehension the MOF men turned out to be dead right, and not because they were especially clairvoyant.

Back in those benighted times, fiscal rectitude was a widely shared commitment among government financial officials including Congressional Republicans and their conservative counterparts abroad and especially in Japan. Economic policy officials did not have to be hectored about deficits and the fact that there is no such thing as a fiscal free lunch. Indeed, notwithstanding a government led 30-year drive to rebuild their economy from the complete devastation of WWII, Japan’s public debt was only 50% of GDP as of 1980.

That was then. Today Japan’s public debt is 5X greater relative to the size of its economy and tips the scales at 250% of GDP. That is off-the-charts relative to all other large developed economies and has no parallel in previous history. In the interim, of course, Japan succumbed to the Keynesian stimulus disease, betting that after its thundering financial meltdown during the early 1990s it could borrow and print its way back to the prosperity it had known during the period of its post-war economic miracle.

The chart below is thus a cautionary tale of our times. In exactly one generation of leadership, Japan’s fiscal rectitude was lost entirely. As is made clear in what follows, its fiscal equation is now beyond rescue. It is tumbling inexorably into a financial abyss that would not have been remotely imaginable by the MOF men who came to the White House in February 1981 bearing discrete admonitions of fiscal prudence.

The slippery slope leading to today’s Keynesian demise starts with the fact that Japan’s post-war boom wasn’t a miracle at all. From the smoldering industrial ruins left by the allies’ final assault, the Japanese economy had bounded upward for three decades owing to a massive spree of public and private investment and a sweeping mercantilist industrial development and export promotion policy. The former depended upon an extraordinarily high household savings rate and the latter was fueled by blatantly protectionist policies that kept imports out and the yen’s exchange rate far below its true economic value.

Needless to say, neither prong of Japan’s economic miracle was sustainable. By the mid-1980s the Japanese capital goods and export sectors were enormously over-built. This meant that the double-digit growth in fixed asset investment which had powered Japan’s post-war GDP growth was destined for a sharp fall. Likewise, sooner or later its exchange rate repression policies would trigger an explosion of counter-protectionism in Washington, meaning that the drastically undervalued yen feeding its towering export surpluses was heading for a sharp reversal.

That’s exactly what happened after mid-1985 when a new financial sheriff came to the US Treasury. James Baker had matriculated from the Texas School of “America first” economics and did not hesitate to lower the boom on Japan’s export driven prosperity by way of the Plaza Accords of September 1985. Under the pressure of Baker’s concerted global campaign of yen buying by the major central banks, Japan’s exchange rate soared from about 260 per dollar to 130 over the next several years.

Unfortunately, Japan did not use this rather brutal assault on its mercantilist economic model to rebalance and reform its economy. Instead, its government started down the slippery slope of Keynesian stimulus and financialization that has been corroding the foundations of its post-war prosperity for the last 30 years.

In the first round, the BOJ slashed interest rates in early 1986 in order to stimulate domestic expansion, but Japan’s problem was not that the cost of capital was too high or that it suffered from insufficient industrial capacity. In fact, it was already swamped with excess capacity in steel, autos, machinery, consumer electronics and much else.

So what Japan needed at the time was higher market clearing interest rates to thwart its now chronic over-investment in export capacity. Instead, the BOJ’s ultra easy money flowed into the financial sector, fueling a massive bubble in real estate and corporate stocks and bonds.

This initial round of financialization induced businesses to drastically expand their debt loads. Accordingly, non-financial debt in Japan nearly tripled from its early 1980s level. As is now well known, this surging tide of both straight and convertible debt went into what was called “zeitech” or financial engineering. What it really amounted to was rampant speculation in real estate and financial assets–especially the stock of other companies within the Keiretsu groups around which Japan’s state-led development model had been organized. As shown below, the Nikkei stock index went parabolic, rising by nearly 4X during the 50 months after the Plaza Accord.

The bubble was especially acute in the real estate sector. At one point the value of land in Tokyo was equal to the total for the US. In barely a decade, land prices in Japan’s largest city rose by 5X before the spectacular crash of the 1990s. And there is no doubt as to the cause: the BOJ unleashed a monumental speculative frenzy based on cheap debt and the perception that Japan was “different” because its central bank had everyone’s back.


Needless to say, the bubble burst in spectacular fashion. From top to bottom the Nikkei dropped by 80% and real estate values by even more.Yet the painful liquidation of the BOJ’s financial bubble during the early 1990s was only the prelude. What actually happened was that the real economy in Japan went through a drastic downshift in its growth capacity owing to a more realistic exchange rate and the unavoidable disappearance of the double digit growth rates of fixed assets which had accompanied the one-time expansion of its industrial plant during the boom era. Accordingly, its trend rate of real GDP growth fell from 4-8% rates during the boom years to just 1% on average during the 1990s.

This unwelcome slowdown reflected the laws of economics speaking out loud. Japan’s domestic economy was desperately inefficient and feather-bedded; its foreign markets were now crowded with fierce competition; and it was destined to experience a sustained period of sub-normal capital investment and real estate development owing to the vast overhang of capacity from the boom years.

Unfortunately, the mandarins who run Japan Inc did not understand that they had been booming on borrowed time during the post-war heydays. That meant that Japan’s now drastically imbalanced and debt saturated economy would remain stuck in the mud in the absence of a through-going dismantlement of its rigged domestic markets and protectionist trade policies.

Alas, here’s where the Keynesian disease insinuated itself, and it came naturally to a ruling party—the LDP—-that had presided over Japan’s state-driven development model of the post-war years. The machinery of Japan’s politics was all about distribution of construction, credit and corruption among the LDP’s constituencies.

In the halcyon times, this generated roads and bridges to export ports and thereby facilitated growth of production, jobs and foreign markets—even if inefficiently done. But after the post-Plaza bubble crash, it merely churned out roads and bridges to nowhere. Paving the archipelago with cement, Japan’s politicians and bureaucrats did Keynes one better. Instead of digging holes and merely re-filling them, they dug gravel and limestone and turned it into pavement.

The chart below shows the fiscal catastrophe which resulted. During the two decades after 1990, Japan’s government expenditures rose by 45%, while its general revenues fell by 15-20%. Accordingly, a massive permanent fiscal gap was opened that fueled the parabolic rise of its debt ratio, as shown above. And this wasn’t just garden variety fiscal profligacy. As shown below, during most of this century, Japan’s general revenues have not even covered 50% of its expenditures. The math is terminal.

To be sure, the Keynesians would complain that the above chart is not a picture of “runaway spending” as denounced by Republican orators from time immemorial. And no, it is not. Spending growth has averaged less than 3% per year since 1990.

However, that observation is irrelevant to Japan’s circumstances and fails to grapple with the real fiscal driver. Namely, after 40 years of boom and the final BOJ bubble, Japan had reached a condition of “peak debt”. Already by 1990, total credit market debt—public and private—-exceeded 350% of GDP, and by now it has soared to in excess of 500%.

This condition of credit saturation means that nominal GDP growth is stuck in the low single digits, and could be liberated from that plight only by a burst of supply side growth and entrepreneurial productivity that has no chance of emerging in the statist policy and political environs of Japan Inc. In fact, nominal GDP has grown by only 1% per year since 1990, reflecting Japan’s stagnant (and now shrinking) work force and tepid productivity growth.

Needless to say, 1% growth in money incomes did not leave any room at all for net tax reductions, and could not remotely accommodate the spasm of public spending that have characterized Japan’s post-1990 Keynesian debauch. Yet prodded by mainstream economists in the US government and international institutions, Japan had dismantled its tax base in one effort after another to stimulate short-term investment. Its nominal revenues consequently fell continuously for nearly two decades. There is nothing like it in developed world experience.

Stated differently, the LDP politicians took charge of building bridges and the Keynesian economists provided the rationalization for dismantling the tax base. No more lethal fiscal combination is imaginable.

Except…..except that Japan Inc. has found it, and heartily embraced it in the form of Abenomics and its prior variants of QE and open-ended monetary expansion. Based on the lamentable advice of Ben Bernanke and other visiting fireman of the modern school of Keynesian central banking, Japan embraced the “deflation” myth and the destructive notion that the central bank must run its printing presses until inflation is revived to the 2% or so range—–thereby reflating nominal GDP, aggregate demand and the wheels of production and jobs growth in the real economy.

To begin with, of course, Japan has not suffered from anything that remotely resembles honest deflation. In most recent months, Japan’s CPI index stood at about 100—–the exact place it posted 21 years ago in early 1993.

In fact, the only “deflation” that Japan has suffered has been financial sector deflation—–real estate and equity prices and private borrowing—-and exactly so. The heights reached during the 1980s bubble were utterly artificial, unstable and an enormous deformation of capital markets.

Nevertheless, Japan adopted “ZIRP” in 1999 and thereby piled Keynesian central banking on top of its already hemorrhaging fiscal equation. As a consequence, BOJ’s balance sheet has exploded, rising from about 10% of GDP to nearly 50% today. That’s what it took by way of massive monetization of existing financial assets to pin Japan’s money market rates at zero and to push its yield curve outward along the flat line.

This amounted to financial repression on steroids, but it has been to no avail. During the approximate 15 years since it originally adopted ZIRP, Japan’s real GDP has limped along at 0.9% per year. This figure is not significantly different than the 0.7% rate it experienced in the post-crash 1990s before it launched an all-out money printing campaign.

But ZIRP has had enormous and untoward collateral effects that taken together comprise the proximate cause of Japan’s impending fiscal demise. First, Japan’s vaunted household savings rate—-the feature that funded its post-war CapEx boom—has ended up in the dustbin of history. During the last two decades it has dropped from the high teens as a percent of disposable income to a US style 3-4%.Indeed, it has gone from the highest rate in the world in the early 1980s to the lowest at present.

This untimely collapse of the savings rate will prove especially destructive for the retirement colony that comprises Japan’s demographic future. Saddled with towering public debts and rapidly shrinking work force, Japan will swiftly consume its accumulated savings as its retirement rolls soar. A decade or two down the road it will become an international pauper.

If it gets that far. The other collateral effect of ZIRP has been a gigantic fiscal lie. Namely, the delusion that Japan’s massive government debts can be financed at close to zero nominal carry cost for the indefinite future. After all, the 10-year bond now carries a yield of 0.51%—–a rate which is close enough to free for government work. Yet even then, Japan’s interest carry cost has been consuming upwards of one-third of its current revenues.

That’s why the prospect of interest rate “normalization” is such a fiscal nightmare. Were Japan somehow able to stop the inexorable growth of its public debt, the annual revenue take shown above would be consumed entirely by interest payments under a scenario of normalized interest rates.

And that brings us to the folly of Abenomics and the BOJ’s latest round of QE—-a madcap rate of balance sheet expansion that would be equivalent to $250 billion per month at the scale of the US economy. At this rate, the BOJ is absorbing almost all of the available government bond supply and on some days has actually left the private market bidless. Indeed, it is monetizing assets at such a frenzied rate that it has now become a major buyer of ETFs and other equities. In effect, the central bank in Japan no longer merely runs the casino; it has become the casino.

Still, it has only accomplished one thing: In the early run of Abenomics the world’s fast money traders went all-in with the BOJ and drove its stock index from 8,000 to 16,000 in a matter of months. But the excitement is now all over, and the actual results are pitiful—even if you believe that printing money can actually create sustainable output growth and real wealth gains.

The fact is, after the most recent quarter’s GDP wipeout, Japan’s real GDP is only 0.8% larger than it was five quarters ago when Abenomics was installed at the BOJ. And therein lies the frightful future.

Were the BOJ to actually achieve and sustain its 2% inflation target the Japanese government bond market would either collapse, or need to drastically reprice. The former case amounts to disaster now; the latter would entail fiscal collapse very soon as Japan’s revenues would be soon devoured by a surging carry cost on its towering debt.

And that gets to the ragged Keynesian excuse that all will be well once the jump in the consumption tax from 5% to 8% is fully digested. But here’s the problem: this is just the beginning of an endless march upwards of Japan’s tax burden to close the yawning fiscal gap left after the current round of tax increases, and to finance its growing retirement colony.

So there is no possibility that Abenomics will result in “escape velocity” Japan style and that Japan can grow its way out of it enormous fiscal trap. Instead, nominal and real growth will remain pinned to the flatline owing to peak debt, soaring retirements, a shrinking tax base and a tax burden which will rise as far as the eye can see.

Call that a Keynesian dystopia. It is a cautionary tale for our times. And Japan, unfortunately, is just patient zero.

It's A Funny Old World - One Little Old Russian Convoy

Submitted by Ben Hunt of Salient Partners Epsilon Theory blog,

You know what I've noticed? Nobody panics when things go "according to plan". Even if the plan is horrifying. If, tomorrow, I tell the press that, like, a gang banger will get shot, or a truckload of soldiers will be blown up, nobody panics, because it's all "part of the plan" But when I say that one little old mayor will die, well then everyone loses their minds!
The Joker, “The Dark Knight” (2008)

Dick Grayson:

Gosh, Economics is sure a dull subject.

Bruce Wayne:

Oh, you must be jesting, Dick. Economics dull? The glamour, the romance of commerce ... Hmm. It's the very lifeblood of our country's society."

Batman: TV Series" (1967)

It’s a funny world when stocks can soar on a -6.8% Japanese GDP print but stumble when a Russian armored personnel carrier finds itself on the wrong end of a Ukrainian howitzer shell. That’s what you get, though, in the Golden Age of the Central Banker, as all events are filtered through the narrative of central bank control. Weak Japanese GDP was “part of the plan”, to quote both The Joker and Prime Minister Abe, or at least the revised plan after the new sales tax pulled economic activity forward in Q1, and besides, this weakness just means that “help from the BOJ may be on the way”, to quote the WSJ.  Direct artillery fire on a Russian APC column in Ukrainian territory, on the other hand … well, that’s not part of anyone’s plan. It’s a significant escalation in both Russian provocation and Ukrainian response, an escalation that for the first time illuminates a warpath that no amount of central bank jawboning can derail or recast in a market-positive light.

Is this the path we’re headed down? I doubt it. There’s enough plausible deniability in the construction of this “humanitarian aid convoy” (which may or may not have some serious armament underneath those green canvas truck covers), such that both Russia and Ukraine can return to the regularly scheduled entertainment of indirect warfare through the Donetsk proxies. And so long as the fighting simmers through proxies the sanctions won’t be life-threatening to either the Russian or German economies. The economic pain is annoying, for sure, but not so overwhelming as to be catastrophic or impervious to Draghi’s tender ministrations.

But three months ago I really thought Putin would call it a day with a Crimean annexation and just enough low-level insurgency in the rest of Russian-speaking Ukraine to keep the latest cohort of kleptomaniacs in Kiev on their toes. Instead, we’re seeing Russian-supported advanced surface-to-air missile capabilities and uniformed Russian “escorts” for supply convoys, and there’s nothing low-level about that.

And as recently as two weeks ago I would have sooner challenged Tony Stewart to a dirt-track race than challenge Draghi’s determination to push forward more and more market-pleasing monetary easing policies. Instead, we got last week’s ECB press conference, where just as he did in the spring of 2012 Draghi threatened to withhold monetary easing beyond the already announced TLTRO program unless Italy and France moved forward with structural economic reforms and commensurate fiscal consolidation.

It all just goes to show how futile any sort of crystal-ball reading effort is in the politically fractured world of 1914 … ummm, sorry, I meant to write 2014. My bad. But regardless of what century you’re in, when political stability breaks down, market stability is never far behind. We’re not there yet, as the Golden Age of the Central Banker provides a wonderful political tranquilizer in the West. But the East, whether it’s China or Russia, isn’t taking the same medicine, and that’s where we should be looking for sources of political instability large enough to wake the Red King from its long sleep.

Reassessing Fundamentals is Not Conducive for High Conviction FX Trades

The US dollar has entered a corrective/consolidative phase, and its performance over the past week was mixed. The greenback lost ground against the dollar-bloc and Scandis. The Norwegian krone, lifted by a rise in the CPI and retail sales, gained almost 1.6% against the dollar to lead the majors. The dollar rose against the euro, sterling and the Japanese yen.  


The yen was the weakest of the majors, losing almost 0.6% against the dollar.  The yen's weakness was a bit surprising given its sensitivity to US yields (the 10-year yield fell to its lowest level since mid-2013, slipping below 2.35%).  The 10-year German bund yield moved below 1%, to record lows.   The 10-year JGB yield slipped below 50 bp, for its lowest level in 16-months.  


Investors are reassessing the growth outlook for the high-income countries, with knock-on effects on the expected trajectory of policy.  Although the data are mixed, it does appear that the US economy is struggling to sustain the momentum seen in Q2.  According to the Atlanta Fed model, the US economy is tracking a little below 3% here in Q3.  


The unexpected contraction in the German economy has spurred more calls for the ECB to engage in an asset purchase program, even though the full impact of its June rate cuts have not been felt, and the TLTRO facility has not yet been launched.  Meanwhile, the impact of the April 1 sales tax hike appears to be having a larger and longer-lasting impact than Japanese policy makers had expected.    Even the UK economy, the best performer in the G7, appears to have lost some momentum recently.  


The euro has established a clear trading range here in the first half of August.  It is a little over a cent wide:  $1.3335-$1.3445.  The modest bullish divergence in the RSI, we noted last week, remains intact, and the RSI has moved higher.  The MACDs are about to cross.  The euro has not traded above its 20-day moving average since July 15.  It tested it (~$1.3412) before the weekend.  A move through there could spur a move to the downtrend line drawn off the May and July highs.  It comes in near $1.3440 at the end of next week.  


The technical indicators are not generating strong signals for the yen at the moment.  The dollar remains well within the two yen range (JPY101-JPY103) that has confined the price action since mid-April.  There is no compelling sign that the US bond yield has bottomed, and the upside correction, we had anticipated in the stock market, appears to have run its course.  Both of these considerations would seem to favor a recovery of the yen.  


Sterling has shed about 5.5 cents since peaking in mid-July near $1.72.  Although technical indicators warn that it is stretched, there is nothing that rules out a marginal new low.  The 200-day moving average just below $1.6670 has been tested, the reactionary bounce has not been very convincing. This suggests the risk is still on the downside.  Initial support is pegged near $1.6630 and then $1.6600 itself.   A move above $1.6750-70 would stabilize the technical tone. 


Technical considerations are not generating high conviction ideas about the Australian dollar.  We are not convinced that its modest strength in recent days is a sign that carry trades are back in vogue, though many observers and media reports make this claim.   We think that the lower highs the Aussie is recording supports are less than constructive outlook.   Support is seen in the $0.9240-50 area, but the key area remains around $0.9200. 


The price action in the Canadian dollar is not very inspiring.  It had set two-week highs before the weekend but was unable to sustain the moment and reversed lower.   The restated July employment report was better than the original faulty report, but Canada still lost 18k full-jobs. After squeezing out some stale US dollar longs, we suspect the greenback is now in a position to re-challenge the CAD1.10 level.  


We had anticipated that dollar's high on August 6 a little above MXN13.33 was important. However, the pullback to MXN13.06 overshot our expectation (MXN13.10-15). The technical indicators suggest further dollar losses are likely, but we are less sanguine.  The 100-day average has been important in recent weeks, and it comes in now a little above MXN13.01.  The market has absorbed favorable developments (energy reform in Mexico, relatively high interest rates, strong US auto sales), with the peso rallying.  The peso is down marginally (0.33%) year-to-date.  


After recognizing the technical significance of the gap lower opening in the S&P 500 the day after the record high was made, we anticipated this week's bounce.  The bounce, arguably encouraged by the rally in bonds, has reached an important area around 1960.  Additional gains next week would suggest that the losses were corrective in nature and that new record highs should be anticipated.  On the other hand, a break below the 1930 area would suggest that only the first leg of the correction was seen, and a retest on the 1900 is likely.  


Lastly, we highlighted the technical weakness of the CRB Index.  After the small bounce on August 11, the commodity prices recorded new lows every day last week.  The losses were sufficient to fulfill a couple of technical objectives, and a bounce is now likely.  The initial target is 292 after recording a pre-weekend low near 288.50.  A secondary target is found near 297.


Observations based on the speculative positioning in the futures market:


1.  There were two significant gross position adjustments (10k contracts or more) in the reporting period ending August 12.  The gross short yen position was cut by 11.7k contracts to 93.6k.  The gross long peso position was slashed by a third to just less than 52k contacts.  


2.  The overreaching characteristic of the position adjustment was the reduction market exposure. Of the 14 gross positions we track, only two increased.  The gross long yen position increased by 2.6k contracts to 12.5k and the gross short peso position increased by almost 7k contracts to 52k.  


3.  The general reduction of speculative exposures resulted in some notable changes in net positions.  The net short euro position slipped 3k contracts to 126k, snapping a five week steak in which the net short position had increased.  The net long sterling position increased for the first time in six weeks (18.8k contracts from 12.1k).  The net short Swiss franc position fell for the first time in four weeks (17.4k contracts from 18.9k).  


4.  The net short 10-year Treasury increased to 50.2k contracts from 45.1k contracts.  Both longs and shorts increased.  The gross long position rose by 9.5k contracts to 462,5k.  The gross shorts, undeterred by the persistent rally rose by 14.6k contracts to 512.6k.

Have We Forgotten What An Authentic Market Is?

Submitted by Charles Hugh Smith from Of Two Minds

Have We Forgotten What An Authentic Market Is?  

Everyone who feels forced to play along plans to exit before the whole rotten structure implodes, but that's not how collapses work.

Identifying the erosion of authenticity is intrinsically difficult for two reasons:

1. The erosion happens slowly over years or even decades, so it's difficult to recall the authenticity of a previous time as anything other than easily dismissed nostalgia.

2. The Status Quo--the state, authorities and the mainstream media--naturally claim their narrative is authentic, lest it be rejected by the public as self-serving propaganda.

When I survey the present markets for stocks, bonds and other financial securities, I am reminded of a church in which all the members espouse their faith's noble-sounding values but none actually act on these fine values.

I don't mean a church congregation beset by petty jealousies and gossip--these are characteristics of all human groups and we can't expect any congregation to be entirely free of these oh-so-human failings. In a similar fashion, any market will have companies issuing fraudulent earnings and balance sheets, etc.

The point is that an authentic system doesn't have to be perfect--it has feedback mechanisms and transparency that enable participants to sort things out because the system itself has integrity, even if all the participants do not.

A system, market, congregation, etc. claiming integrity should actually act on its principles rather than just mouth the principles as a form of perception management and self-congratulation.

According to the government, central banks and financial media, the stock and bond markets are free-market engines of capitalist growth. Yet in contrast to this fine-sounding rhetoric, the state and central bank act as if their Proper Role Is to Counteract Market Turbulence Before It Happens.

In other words, the gap between the fine-sounding free-market values and the actions of central states and banks is widening.

Does this chart of the Dow Jones Industrial Average reflect an authentic market? It looks more like a market addicted to monetary heroin, bubbles and crashes:

The more inauthentic, self-serving and manipulated the market becomes, the greater the necessity to maintain the illusion of authenticity: if the public truly understood how managed the markets really are, they would awaken to the consequences, which are all negative: once capital markets have been captured for purposes of perception management, they cease being able to discover the price of assets and risk, and allocate capital accordingly.

Simply put, capital markets that are managed to reflect positively on the current regime are intrinsically inauthentic, and incapable of performing their authentic functions of discovering price and allocating capital.

The "market turbulence" that so frightens central authorities is simply markets discounting unrealistic valuations by rediscovering the price of capital and risk. Markets in which turbulence has been unofficially banned as counter to the desired perception of the economy is a market in name only, a fake that has been stripped of the power to discover price and risk.

The systemic damage wrought by manipulation in service of "counteracting market turbulence before it happens" is two-fold: trust in the market's basic functions is eroded, and the market's self-correcting dynamic is crippled. The erosion of trust in the market's transparent functioning is reflected in the decline of trading volume generated by humans (as opposed to software trade-bots skimming pennies in millions of trades) and the abandonment of the stock market by retail investors--Mom and Pop investors.

There is no other plausible explanation for the remarkable decline in trading volumes other than an erosion of trust/participation.

Once markets have been distorted for self-serving perception-management and to enrich insiders, their ability to self-correct, i.e. re-establish equilibrium when they break down has been lost. This how manipulation of markets leads to collapse as participants--knowing the market is rigged/gamed--flee when the facade of authenticity finally crumbles.

The irony of maintaining a veneer of authenticity over a fundamentally inauthentic market is rich: the more the authorities manipulate the market to maintain high valuations and suppress turbulence, the greater the odds of a collapse of trust as inauthentic markets cannot self-correct or discover the price of assets, capital and risk. Once risk has been effectively hidden by perception management, participants lack the essential information they need to make informed decisions.

And so their decisions will be catastrophically mis-informed. This is how declines morph into crashes.

Anyone who hopes to earn a return of some sort is forced to participate in the inauthentic financial markets of today. Everyone knows they're disconnected from the real world, but they feel they have no choice but to play along.

Everyone who feels forced to play along plans to exit before the whole rotten structure implodes, but that's not how collapses work. The phantom assets have to be re-set in price and risk, and the depth of that decline will be based on the level of inauthenticity the market has reached.

The good thing about the collapse of trust and participation in phony markets is that it will clear the way for a return to markets that actually reflect fundamentals and honesty rather than perception management.

It is peculiar, isn't it, that we avoid inauthentic, phony people as dangerous to our well-being, but we are willing to place our capital in inauthentic markets, even though we are aware that they pose a great risk to our well-being.

Hysterical Fear Mongering by Media Needs to Stop

By EconMatters


Everything is Breaking News


On Friday the financial markets reacted negatively to another round of sensationalized media reports.  This time, coming out of Ukraine, which of course nobody vetted before going on air with, there were no triple sources, you know the old fashioned journalism standard. But the state of modern news media has gotten so desperate for ratings and eyeballs, that everything is ‘breaking news’ and a ‘crisis’ and ‘catastrophe of epic proportions’ that news outlets like ‘Guardian Tweets’ are now counted as legitimate journalistic sources. The quality of news, and more importantly journalistic standards, have dropped to such a degree that basically everything has slippery slopped to tabloid quality coverage of news events. 


Hyperbole, Exaggeration, and Incorrect News Reported on Daily Basis


It has gotten so bad that government policy and even financial markets are being severally influenced by facts that are exaggerated to such a degree, that they might as well be complete fabrications, because the exaggeration factor is off the charts, more than a factor of 10! For example, 1,000 people have died as a result of Ebola over the past six months, the crisis has reached epidemic proportions….Really during that same time just in the US alone 1,820 people drowned in a first world country, and 1 Million people died around the world from Mosquito related illnesses caused by initial bites. This is a ‘fourth world’ area of the world; I bet there are a half a dozen other real catastrophes in that same area that have caused far more than 1,000 deaths in six months’ time. How about not being on an Electric Grid, or having water and sewer infrastructure?


Read More >>> Every Middle East Flare Up Last 5 Years Overblown By Media


Propaganda Machines & Manipulation for Agendas


The 40,000- 100,000 Christians trapped on a mountain in Iraq turned out to be 4,000, the misinformation used to hype any news event for sensationalistic purposes is just ridiculous. Now some of this is blatant propaganda by interested parties looking to sway support for a cause, but where is the news media these days with independent fact checking, and contextual framing of news stories? 


Not a Single Quality News Outlet These Days!


I cannot find one single legitimate news source these days, and I have 700 cable channels and a fast internet connection, and no, it isn`t National Public Radio, the BBC, or Public Broadcasting Service. Some entrepreneur with bigger pockets than me should start a news organization which just gives the facts regarding the news. I know, what a concept, but it would stand out from the current crap, like a large gold oasis in the desert. 


I just want the facts, I will then decide for myself what meaning and importance to place on the news, I don`t need this done for me by exaggerating the facts so that I get the “gravity” and “severity” of the news! If one substantially exaggerates the facts, and this will lead to irrational decision making based upon inaccurate information. But the Walter Cronkite days of journalistic standards, or even the CNN standards where they just gave the latest news on a 30 minute ticker in the Ted Turner days is light years in quality from where we have devolved today with ‘Guardian Tweets’. If some news outlet just gave the facts as sourced by multiple checks it ought to be able to gain a solid foothold in the industry with the likes of Republican Fox, or Democrat CNN, or the Doom & Gloom Central at Zero Hedge.


Russia-Ukraine Fact Checking Non-Existent


But the level of Propaganda coming out of the Ukraine-Russian conflict by multiple parties with multiple agendas is at an exceedingly high level. It has been going on for six months; the news outlets should be wise to this by now that they are being used like cheap pawns in the conflict. This should incentivize them to be much more thorough in fact checking, and employ multiple sourcing of stories and news events, and no, a Guardian Tweet doesn`t count as a legitimate news source! 


Read More >>> The US Needs to Stop Meddling in Russia-Ukraine Politics

It is patently obvious by now that the US should not be involved in the Russian-Ukraine school girl fight.  Europe was right to be wary of this ‘pseudo conflict’, and if Malaysian Airlines did any kind of proper due diligence before flying over a ‘rocket launching zone’ Europe probably wouldn`t have gotten sucked into this political morass.  


The news organizations need to ask themselves this question on any story coming out of the Ukraine-Russian conflict -- Are we being used for some political agenda? Now do some independent fact checking, and if they cannot multiple-source stories, then it isn`t news that should be reported given the history of propaganda coming out of the region. No news is a far better outcome than inaccurate news, and most news coming out of the Ukraine-Russia conflict has been highly inaccurate as witnessed by “Friday`s Market Punked” Episode!


Read More >>> Malaysia Airlines Management Needs Overhaul After MH17 & MH370


The Bond Market just got ‘Punked’!


Some poor sap just bought a 10-year bond with a yield of 2.3% on Friday with an inflation rate of 2.1% with Jackson Hole coming up next week because he thought World War III was coming and the world was coming to an end, when there is no chance in hell that over a 10 year period that is a soundinvestment place for any capital! Traders and market participants are pretty bad at decision making as it is, the last thing they need is inaccurate information via sensationalized and overhyped TMZ Style News reports by the ‘journalism community’ in which to base their decision making process on.


Read More >>> The Bond Market Explained for Mohamed El-Erian


© EconMatters All Rights Reserved | Facebook | Twitter | Email Subscribe | Kindle