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WalMart's Leaked Anti-Union Training Video

Last month, we asked: “Why Is WalMart Mysteriously Shuttering Stores Nationwide For Plumbing Issues?” The story, which has since gone viral, goes like this. WalMart inexplicably closed five geographically distinct locations across the US, citing persistent plumbing issues. These pesky “clogs and leaks” are apparently so endemic at the shuttered stores that they will need to remain closed for at least six months. 

Needless to say, the 2,200 or so employees whose jobs ‘went down the drain’ so to speak were skeptical given that no one had seen any evidence that the plumbing was indeed bad and considering the fact that WalMart gave them virtually no notice whatsoever before closing the stores. Local media quickly picked up on the issue and discovered that no plumbing permits had been filed in any of the cities where the stores were closed and the LA Times subsequently discovered that at one location, the Pico Rivera WalMart in California, $500,000 in renovations had been completed in the previous year including plumbing repairs.

As it turns out, the Pico Rivera location isn’t just any old WalMart. In fact, as we documented in “Did WalMart Close A California Store To Punish Employees Who Protested Labor And Working Conditions?”, the store’s employees have been at the forefront of pickets, walkouts, sit-ins, protests, and various and sundry other demonstrations aimed at raising awareness about working conditions and management’s retaliatory tendencies when it comes to workers who escalate concerns. These demonstrators have enjoyed the support of The United Food and Commercial Workers International Union who last year prevailed in a Canadian Supreme Court case stemming from a 2004 incident in which the company closed a Quebec store after employees voted for representation by the union. Now, the UFCW is seeking a labor board injunction in connection with the plumbing incident. 

Now, a “New Associate Orientation” video has surfaced. In the nine minute clip (entitled “Protect Your Signature”) WalMart patiently explains to new hires why unions are bad.

Regardless of your stance on organized labor, it’s difficult to describe the video as anything other than a hilariously transparent (and poorly acted) piece of propaganda. The video is below (along with the Spanish version for our bilingual audience), but here are some highlights.

The clip begins with an attractive female associate who assures new employees that “the people in this store are a second family to me” before claiming that “there’s no retailer who offers more job security than WalMart” (until the ‘plumbing’ breaks that is).

Fast forward to the 3:00 mark and a friendly-looking male associate tells you that despite any misgivings you may be having about what was invariably a necessity-driven decision to work at WalMart, “you made a great choice and the company is glad you’re here.” 

The associate then issues a dire warning: But the reality is, you’re not the only one looking to get your foot in the door. Labor unions are really interested in WalMart.” 

What follows are five straight minutes of brazen anti-union rhetoric including the following highly amusing soundbites:

From the male associate:

“Our company is the first to have open and direct communication with our associates.” 

“We don’t think a labor union is necessary here and because our associates have said time after time that they don’t want a union, we usually don’t spend a lot of time talking about it.”

From a second female associate:

“I don’t get it, how would it make any sense for our associates to join a union that wants to damage our reputation?”


“The truth is, unions are businesses that make their money by convincing people like you and me to give them a part of our paychecks.”

“At WalMart, employees are used to having their voice heard — for free.” 

From a supposedly semi-retired part-time associate who apparently works in the stock room:

“Believe me, joining a union isn’t something I EVER want to do again.”

Then it’s back to the first associate who talks with union members "all the time":

“Union members shop at our stores. I talk to them all the time and I hear them complain about their jobs.”

And summing things up is associate number two again who doesn’t understand why, with “all he’s got at WalMart” he would ever want organized labor:

“With everything I’ve got here, I’m not willing to trade it for a union.”

Without further ado we present "Protect Your Signature", a WalMart production:


Our "Junkie Economy" Will Soon Hit Rock Bottom

Submitted by Bill Bonner via Bonner & Partners,

Addicted to Debt

Yesterday, U.S. stocks continued their climb, with a 26-point step-up to yet another all-time high for the Dow. Treasurys, meanwhile, continued to sell off. The yield on the 10-year T-note – which moves in the opposite direction to prices – rose 8 basis points to 2.2%. This follows last week’s turbulent action in the bond market, which saw Treasury yields hit a six-month high.

We have our eye on the U.S. bond market. Prices have been going up – and yields have been going down – for 32 years. And as prices have risen to the highest levels ever recorded, so has the amount of debt.

It is as though the world couldn’t get enough of the stuff. It got to be like heroin: The more debt the world took on, the more it wanted… and the bigger the dose it needed to get a buzz on.

But after the 2008 credit crisis, it is as though the major developed economies are immune to the stuff.

The Fed, the Bank of England, the Bank of Japan, and now the European Central Bank, have been buying it on the street corners. In the largest quantities ever.

But nothing much happens. At least, not in the real economy.

Sooner or later (a phrase we can’t seem to avoid), the entire economy is bound to get the shakes.

But we don’t know when sooner, or later, will come.

If it comes now, it will be a source of great satisfaction here at the Diary. “Finally,” we will say to no one in particular. “We knew it couldn’t last!”

A Healthy End to the Bond Bull?

There is an alternative explanation for falling bond prices. Bond prices should fall, and yields should rise, when economic growth picks up. As economic growth rates speed up, wages tend to rise… and people open up their wallets. Demand starts to outstrip the supply of goods and services. This drives up consumer prices. And interest rates start to rise. As rates go up, that raises bond yields and drives down bond prices.

This would be a healthy end to the epic bull market in bonds. A robust economy would allow central banks to raise rates and still allow debts to be paid down.

But that is not what is happening. And it won’t happen. Junkies rarely go out and get a job... and gradually “taper off” their habit. No. They have to crash... hit bottom... and sink into such misery that they have no choice but to go cold turkey.

Now, major central banks are committed to QE and ZIRP forever. They have created an economy that is addicted to EZ money. It will have to be smashed to smithereens before the feds change their policies.

An Impotent Fed

As colleague Chris Hunter reported yesterday to paid-up Bonner & Partners subscribers in The B&P Briefing:

In April, industrial production fell for the fifth straight month. And in May, consumer sentiment fell to a seven-month low.


And now GDP growth is flat-lining… Following the 0.1% annualized growth rate in the first quarter, the Atlanta Fed’s “real-time” GDPNow forecasting model is predicting 0.7% growth for the second quarter.


The U.S. economy may not be in an official recession – often measured by two back-to-back quarters of negative GDP growth – but it’s not far off…

Oh, but what about the big boost the economy was supposed to get from lower oil prices? What happened to that? Didn’t happen. Americans didn’t spend their gasoline savings; they saved them instead.

After adjusting for inflation, the median household income is down 10% since 2000. So it’s no wonder most Americans aren’t feeling very expansive.

And now, the price of oil is going back up. After hitting a low of $44 in March, today a barrel of U.S. crude oil sells for just under $59.

That leaves the Fed’s “stimulus” just as impotent as it has been for the last six years.

Interest rates remain ultra low. But the real economy remains as flat and dull as a joint session of Congress.

And the markets shudder...

"One Of These Things Is Not Like The Other"

It is very rare to see Dow Industrials hitting new highs as Dow Transports prints new range lows... one of them is wrong here...


h/t Brad Wishak


As Dana Lyons recently noted,

...while not all divergences mark tops, many tops are marked by divergences. So it has been the case with this version. Several major intermediate-term or cyclical tops saw this negative divergence among the Transports, including 1937, 1946, 1961, 1973, 1981, 1998, 2000 and 2007.


Currently the DJIA is at a 52-week high while the Transports are well off of their own high. But while Dow Theorists may have you running for the hills, the historical track record following similar divergences is less than ominous. That said, on the occasions when this divergence did have teeth, it bit portfolios hard.

  *  *

What Is The Future For Saudi Aramco?

Submitted by Gaurav Agnihotri via,

In a move that could shake up the dynamics of the global oil and gas industry, the desert Kingdom is restructuring its national oil company, Saudi Aramco.

With revenues of more than $1 billion per day, Saudi Aramco is easily the largest energy company in the world in terms of both production and company value. According to reports from Saudi Arabia’s Al Arabiya News Channel, the Saudi King is separating Saudi Aramco from the country’s powerful Oil Ministry. The restructuring plan, which was proposed by the King’s son, Deputy Crown Prince Mohammad Bin Salman, includes the creation of a Supreme Council of Saudi Aramco. The Deputy Crown Prince will head up the Supreme Council.

Why Restructure Saudi Aramco?

As the biggest global exporter of petroleum liquids, Saudi Arabia is considered by many as the undisputed king of oil and gas, as it possesses nearly 16 % of the world’s proven oil reserves. But it has a competitiveness problem, with the company’s operations often used to pursue political objectives. In 2014, Sadad Al Husseini, a former top executive at Aramco, said, “Aramco produces almost 9.5 million barrels a day, and if it needs to replace these reserves it needs to add almost 35 billion barrels of new reserves every 10 years. That's a very large challenge."

One of the biggest reasons for Aramco’s restructuring would be to become a more commercially-driven organization, whose aim is to maximize its financial value and compete directly with big oil firms on a global level. The separation from the Oil Ministry could reduce political meddling and provide more leeway for the company to make commercial decisions. Also, the restructuring of its oil ministry would signify a generational shift and create a new vision for how the government develops its future energy and economic strategies.

What Are The Consequences Of This Restructuring?

The restructuring of Aramco could change global oil and gas dynamics. The biggest energy company in the world may become even more aggressive in its oil exploration spending. According to Saudi Aramco’s 2014 annual report, “[t]he bulk of this spending (exploration and production) will be in our upstream activities to ensure we maintain adequate spare crude oil production capacity to help stabilize the world oil market whenever disruptions occur.”

By moving away from its oil ministry, Aramco will have the operational flexibility to pursue growth along commercial lines. Saudi Arabia is already producing 10.3 million barrels a day. If Saudi Aramco succeeds in increasing its production levels, it could exacerbate the glut in global supplies and push down prices. Aramco had earlier embarked on a $10 billion investment plan that prioritized the development of domestic shale gas resources. The company will likely pursue this more aggressively in the years ahead, using lessons learned from the US shale patch. That will allow the country to use more natural gas for domestic electricity purposes, freeing up more oil for export.

Saudi Arabia budget insulated from effects of low oil prices

Image source: EIA

Along with upstream growth, Saudi Aramco also has ambitious goals for its downstream sector. It is already the world’s sixth largest refiner. Along with its equity interests in domestic and international refineries, one of Aramco’s objectives is to become the second largest exporter of refined products after United States by 2017. The current restructuring could result in a formal division of its upstream and downstream business resulting in better financial and commercial control.

Who Stands To Gain The Most From This Move?

The service providers and international suppliers of Saudi Aramco could be the biggest beneficiaries of this restructuring as increased spending on exploration and production activities would mean more business for these players. Companies like Sembcorp Marine Limited, Keppel Corporation Limited and others could profit from the reshuffling. So far, more than 75,000 oil and gas jobs have been lost globally in 2015 due to volatile oil prices. Aramco has been one of the few companies that have actually increased their head count. One can expect the oil giant to step up its hiring process even further, especially in the E&P sector.

The Gloves Come Off: Moody's Warns Of Greek "Deposit Freeze" As Schauble "Won't Rule Out Default"

Ever since Syriza took over the Greek government and has refused, at least until now, to concede to every Troika demand of perpetuating a status quo which it was elected with a mandate to overturn, Europe has done everything in its power to make not only Syriza's life increasingly difficult and hostile, but has taken every opportunity to turn the Greek population against its rulers, in hopes that a more "moderate", technocrat government would replace the "radical leftists." So far it has failed, despite the best attempts by the ECB and the European Commission to sput a terminal bank run.

The problem for Greece is that the government has run out of cash. Long ago in fact, and as reported earlier, the country has just two weeks of cash left and the next IMF payment will certainly not be made unless the IMF first finds a way to inject some more money into Greece (so the IMF can essentially repay the IMF), which however won't happen without a deal first being implemented.

The other problem is that Greece has run out of time to get a deal in order, especially since with every incremental negotiation, the Syriza government repeats it has substantial "red lines" it won't cross, something the Troika takes as a direct ultimatum. And the ECB, the IMF and the European Commission are not good at handling ultimatums.

Which is perhaps why the push to force a terminal bank run in Greece took on an added urgency today when first Moody's and then Schauble, did everything in their power to strongarm Tsipras into agreeing with Troika demands, or else suffer the consequences of a Grexit: one which will have dire consequences for all of Europe, but which Europe is naively ignoring just because the recent launch of the ECB's QE is making the underlying tension in the economy and financial markets (which no longer exist courtesy of precisely this QE).

The gloves officially came off just before the market open today when Moody's released a report titled "Outlook for Greece’s banking system is negative" in which it did the unthinkable: it explicitly said that the worst case for Greece is now an all but certain outcome if the government doesn't concede to the Troika, or Institutions, or whatever they are called today.

To wit:

The outlook for the Greek banking system is negative, primarily reflecting the acute deterioration in Greek banks’ funding and liquidity, says Moody’s Investors Service in a new report published recently. These pressures are unlikely to ease over the next 12-18 months and there is a high likelihood of an imposition of capital controls and a deposit freeze.

Ordinarily, a statement like that by Moody's would be unthinkable, and would lead to an immedate, business-ending lawsuit by any other country, except for Greece which right now can't even afford the legal fees. And remember: the catalyst for everything getting better and Greece getting new cash is i) either a new government, ii) the current government conceding to Troika demands or iii) Grexit, and in neither case will Greece retaliate.

In other words, Moody's is great when it comes to picking on defenseless "credits." It would never say the same thing about any other country of course.

And then, perhaps just the confirm that both gloves are off, moments ago the WSJ reported that German FinMin, Wolfgang Schauble, said he couldn’t rule out a Greek default, a stance that will add pressure on Athens as negotiations over much-needed financing enter their final stretch.

Asked whether he would repeat an assurance he gave in late 2012 that Greece wouldn't default, Wolfgang Schäuble told The Wall Street Journal and French daily Les Echos that “I would have to think very hard before repeating this in the current situation.”


“The sovereign, democratic decision of the Greek people has left us in a very different situation,” he said, referring to the January election that delivered a radical-left government bent on reversing five years of creditor-mandated austerity and painful economic overhauls.

Yes, it's funny how "sovereign, democratic" decisions of any people leave a regime catering exclusively to supernational, technocratic banking oligarch elites leaves everyone in a very different situation.

What does all of this mean? Two things:

First, the Greece drama is almost over - indeed, having emptied its last remaining piggybank in the form of its IMF reserve capital, Greece now has no more funds and it can no longer raid its municipals and pensioners as they too are out of money. So one way or another, the endless Greek headlines will cease at midnight on June 4, when Greece either has a deal in hand with Europe or its fails to pay the IMF, which will being a 30 day grace period countdown, after which Greece will be officially in default, leading to a prompt expulsion from the Eurozone once the ECB yanks its ELA funds which now account for nearly two-thirds of all Greek deposits.

Second, both outcomes are now equally likely, which means volatility - currently dormant - will pick up in the next 2 weeks. It is unclear if said vol will be realized, but the front VIX contract, current at an artificially depressed level of just under 15, will likely be a good hedge if anyone is still long Greek bonds.

There is one outstanding question: perhaps after all this, the Greeks should just ask themselves if this is the kind of "European" partner they want to bind their fate to: a partner that will do everything in its power to subvert a democratically elected government, even if, or rather especially if, it means a wholesale "bail-in" for Greek depositors, who may lose as much as 70 cents on ever Euro: an outcome we predicted over two years ago when the Cyprus blueprint showed just how effectively it could be done.

And after Greece is done soul searching, the people of Spain, Italy, Portugal and Ireland should ask the same question, because if we have a Grexit in two weeks, then these PIIS countries are next.

Google Apologizes For "Nigger House" Search Result

"Do no evil..." that is part from the racist stuff, would appear to be Google's new meme as The Guardian reports the somewhat unbelievable fact that searches which include the racist slur “nigger” were shown to find the White House in Google Maps. “Some inappropriate results are surfacing in Google Maps that should not be, and we apologise for any offence this may have caused. Our teams are working to fix this issue quickly,” a Google spokesperson said, claiming that it had been experiencing “escalated attacks to spam Google Maps over the past few months”.

As The Guardian details,  searches for “nigger house”, in a global view of the world, and for “nigger king”, when focused on in the Washington DC greater area, return with the home of the US president Barack Obama as either the primary search result or one of three.

At the time of writing, the racist search results had not been fixed. They were first exposed by the Washington Post on Tuesday.

It is not the first time a Google search-based product has appeared to be racist. In 2010, the company’s search auto-complete system suggested racist queries after simply typing “why”, while its advertising system was shown to be 25% more likely to bring up ads for criminal record checks when searching for traditionally black names.

Both systems are automated, taking user input from the billions of searches performed using Google to predict likely queries and results.

But Google was also forced to shut off its crowd-sourced Map Maker system for Google Maps, which allowed user-generated corrections and additions to maps, after pranks including a picture of an Android robot urinating on an Apple logo.

Google said it had been experiencing “escalated attacks to spam Google Maps over the past few months”.

Whether the latest incident is a hack by a third-party or an issue with Google’s algorithm is unknown.


Source: The Guardian

Overheard In The FX Rigging "Cartel" Chatroom: "Mess This Up And Sleep With One Eye Open

As promised, the Justice Department has extracted guilty pleas in FX rigging cases involving JP Morgan, Citi, RBS, and Barclays and as we said twice last week and once this morning, the banks received waivers which ensured that none of the penalties that should rightfully be associated with those pleas will actually apply to the banks. 

What do traders say to one another when conspiring to rig a $5 trillion-a-day market you ask?  Here are some examples from the Barclays consent order:

One particular chat room, referred to by the participating traders and other traders as the “Cartel” included FX traders from Citigroup, JP Morgan, UBS, RBS and Barclays who specialized in trading the Euro.


One Barclays FX trader, when he became the main Euro trader for Barclays in 2011, was desperate to be invited to join the Cartel because of the trading advantages from sharing information with the other main traders of the Euro. After extensive discussion of whether or not this trader “would add value” to the Cartel, he was invited to join for a “1 month trial,” but was advised “mess this up and sleep with one eye open at night.”


On one occasion, a Barclays FX trader explicitly discussed with a JP Morgan trader coordinating the prices offered for USD/South African Rand to a particular customer, stating, in a November 4, 2010 chat, “if you win this we should coordinate you can show a real low one and will still mark it little lower haha.” After the JP Morgan trader suggested that they “prolly shudnt put this on perma chat,” the Barclays trader responded “if this is the chat that puts me over the edge than oh well. much worse out there.” 


On June 10, 2011, the Barclays trader stated explicitly in another chat that “we trying to manipulate it a bit more in ny now . . . a coupld buddies of mine and I.”


As the future Co-Head of UK FX Hedge Fund Sales (who was then a Vice President in the New York Branch) wrote in a November 5, 2010 chat: “markup is making sure you make the right decision on price . . . which is whats the worst price i can put on this where the customers decision to trade with me or give me future business doesn’t change . . . if you aint cheating, you aint trying.”


And here's The NY Times summing up what today's hollow admissions and paltry fines actually mean for the banks and traders who engaged in this "brazen heads I win tails you lose" trillion-dollar conspiracy:

For the banks, though, life as a felon is likely to carry more symbolic shame than practical problems. Although they could be technically barred by American regulators from managing mutual funds or corporate pension plans or perform certain other securities activities, the banks have obtained waivers from the Securities and Exchange Commission that will allow them to conduct business as usual. In fact, the cases were not announced until after the S.E.C. had time to act.


And at least for now, the Justice Department did not indict any traders or sales employees whose errant instant messages underpin the criminal cases against the banks. The banks long ago dismissed most of the employees suspected of wrongdoing, though the New York State financial regulator, Benjamin M. Lawsky, forced Barclays to dismiss eight additional employees thought to be at the center of the scheme.

In sum: fines which amount to a tiny fraction of the amount of money that was likely made as a result of gaming the fix, no consequences in terms of curtailing the banks' businesses, and eight new "dismissed" traders who will promptly find other lucrative job opportunities in the still-corrupt world of high finance.

Mission accomplished.

Why Investors Make The Same Mistakes... Over And Over Again

Everything seems to be moving in the right direction for investors these days. The global economy is doing great, with strong growth in Asia and robust recovery signs from the US economy. Even in Europe we can see the first indications of a revival. As a consequence, investors are buying stocks with renewed confidence and the most important stock markets across the globe are listed at historical record levels.

‘It’s party time on the trading floor’ is a phrase you would hear in professional circles, but all of a sudden the party was abruptly ended by the organization that started it: the Fed. Janet Yellen, chair of the board at the Federal Reserve, openly expressed her dissatisfaction with the party atmosphere on the financial markets. According to Yellen, the valuations on the stock market are ‘very high’ and this could potentially 'lead to trouble'. The statement surprised many investors and Yellen’s words quickly sparked a sell-off.

Investors should not be so shocked, however, since Janet Yellen had already raised this issue of valuations in the past. She specifically referred to excessive valuations in certain segments of the market last summer. At that time, Yellen had her sights set on the biotechnology sector and rightly so. All of this underlines that Yellen is a different type of chair than her predecessor, Ben Bernanke, who never saw danger coming. Not even when the real estate bubble burst in 2006/2007.

What Yellen is doing, in fact, is preparing the markets for the inevitable: a rate hike. The short term rate of the Fed (officially, the Federal Funds Rate) has been listed at 0% since the financial crisis. Never before in history it happened that the Fed lowered its short-term interest rate to zero percent, let alone for more than 6 years. The long-term consequences of this policy are anybody’s guess, which is why Yellen wants to normalize rates as soon as possible.

In short, we are looking at a new rate cycle, which is something we already wrote about last year and something that is of major importance to investors. A new rate cycle often goes hand in hand with higher highs in the market, but at the same time it also the last signals the start of the final stretch of this bullish phase. The first phase of a rate cycle is a great time to safeguard your profits and decrease your exposure to stocks. Selling at a profit is something you do in a market that is (strongly) on the up, not when prices are going down. Nevertheless, we see the opposite happening in the market today.

What we are seeing is that, after years of being on the sidelines, the masses are starting to see the benefits of the stock market. Investing in stocks is mainstream again and, even more, if you are not investing in stocks you are not cool. Frequent updates and commentary regarding the financial markets are back in mainstream media and the underlying message is clear: there is no other choice than investing in stocks. Savings accounts are worthless, bonds are bad, and in the long term you ‘always win’. That is the voice of the media.

Let’s be clear here: as an investor you always have a choice. There is always a segment that no one is looking at or that no one wants anything to do with. Even more, there are often multiple segments that are interesting. Today these ‘secret’ or unwanted segments are gold and silver mining stocks, Chinese stocks, and different commodities… Unfortunately many investors are not interested in these segments at all. The reason, however, is simple: these assets are not going through the roof today while the rest of the market is in ‘great shape’. Let this be a lesson: this is the mistake the masses make time and time again. Buying into hot market segments and following the herd is not the way to financial freedom, to the contrary. This is what causes drama in many families time and time again.

Our analysis indicates that we are slowly – but surely – turning onto the last stretch of this bullish phase, most likely followed by a fierce correction. Of course, the last phase is often the most powerful, but not always the most profitable. Even more, when the correction strikes, those final quick gains will swiftly vanish. At that time many investors will wake up to yet another stock market hangover. Unfortunately, the fault is their own. The right time for going all-out on stocks was 2009 / 2010, when the market just broke out to the upside. Today, with new market highs almost every week and the Fed sounding the alarm, is not a great time. Never forget the most basic rule of investing: buy low, sell high.

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The Real Reason For the Oil Crash… And Why It Could Happen In Other Asset Classes

It looks like Oil’s bounce is over.


Traders have been playing for a rise in Oil based on two things:


1)   Oil being sharply oversold due to its 60% collapse in the span of six months.

2)   We’re heading into “drive season” (the summer) in which gas demand increases.


This has seen Oil surge 45% since its March 2015 bottom.


However, the larger story for Oil, like all things, concerns the US Dollar. Below is a chart showing Oil against an inverted chart of the US Dollar chart (so if the US Dollar strengthens, the blue line falls).


You can note the close correlation between the two:



It is not coincidence that Oil bottomed the very same day that the Us Dollar peaked and began to correct. Oil exploration is an extremely capital intensive business: drilling a new Oil well costs at a minimum ~$4 million… and can easily run up into the $100+ million range.


Unless it has a multi-billionaire for a backer… any Oil exploration company will issue debt to drill. This debt is denominated in US Dollars. When you borrow in US Dollars you are effectively shorting US Dollars.


When the US Dollar rally starting in July 2014 this forced the price of Oil down… which in turn made many new Oil projects uneconomical… which lead to Oil companies going bust and defaulting on their debt.


And so the US Dollar carry trade took down Oil.


With that in mind, consider the price of Oil against the recent strength in the US Dollar:



Oil has a ways to catch up… and if the US Dollar continues to strengthen, (remember the above chart for the US Dollar is inverted, so if the US Dollar strengthens, the blue line falls) Oil will collapse.


This is jut one small part of the massive $9 trillion in US Dollars that has been borrowed and invested elsewhere. To put this number into perspective, it’s larger than the economies of Germany and Japan combined.


The US Dollar bull market is not over… Indeed, if the US Dollar carry trade really begins to blow up… we could see another Crisis that would be even worse than 2008.


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


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


To pick up yours, swing by….


Best Regards

Phoenix Capital Research





Even Harvard Economists Admit Fed Policy Has "Created Dangerous Risks"

No lesser establishment economist than Martin Feldstein - Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research - has some warning words of wisdom for The Fed today: "...the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole." When even The Ivory Tower is losing faith, you know The Fed is in trouble...


Excerpted from Project Syndicate...

But the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole. The very low interest rates that now prevail have driven investors to take excessive risks in order to achieve a higher current yield on their portfolios, often to meet return obligations set by pension and insurance contracts.


This reaching for yield has driven up the prices of all long-term bonds to unsustainable levels, narrowed credit spreads on corporate bonds and emerging-market debt, raised the relative prices of commercial real estate, and pushed up the stock market’s price-earnings ratio to more than 25% higher than its historic average.


The low-interest-rate environment has also caused lenders to take extra risks in order to sustain profits. Banks and other lenders are extending credit to lower-quality borrowers, to borrowers with large quantities of existing debt, and as loans with fewer conditions on borrowers (so-called “covenant-lite loans”).


Moreover, low interest rates have created a new problem: liquidity mismatch. Favorable borrowing costs have fueled an enormous increase in the issuance of corporate bonds, many of which are held in bond mutual funds or exchange-traded funds (ETFs). These funds’ investors believe – correctly – that they have complete liquidity. They can demand cash on a day’s notice. But, in that case, the mutual funds and ETFs have to sell those corporate bonds. It is not clear who the buyers will be, especially since the 2010 Dodd-Frank financial-reform legislation restricted what banks can do and increased their capital requirements, which has raised the cost of holding bonds.


Although there is talk about offsetting these risks with macroprudential policies, no such policies exist in the US, except for the increased capital requirements that have been imposed on commercial banks. There are no policies to reduce risks in shadow banks, insurance companies, or mutual funds.


So that is the situation that the Fed now faces as it considers “normalizing” monetary policy. Some members of the Federal Open Market Committee (FOMC, the Fed’s policymaking body) therefore fear that raising the short-term federal funds rate will trigger a substantial rise in longer-term rates, creating losses for investors and lenders, with adverse effects on the economy. Others fear that, even without such financial shocks, the economy’s current strong performance will not continue when interest rates are raised. And still other FOMC members want to hold down interest rates in order to drive the unemployment rate even lower, despite the prospects of accelerating inflation and further financial-sector risks.


But, in the end, the FOMC members must recognize that they cannot postpone the increase in interest rates indefinitely, and that once they begin to raise the rates, they must get the real (inflation-adjusted) federal funds rate to 2% relatively quickly. My own best guess is that they will start to raise rates in September, and that the federal funds rate will reach 3% by some point in 2017.

*  *  *

Your move Janet!

It’s Time to Hold More Cash and Buy Gold

It’s Time to Hold More Cash and Buy Gold

- Bank of America advises owning gold
- Markets in “Twilight Zone” transition period
- Fed policy normalisation poses risks
- Own gold and cash to protect against “cleansing drop in asset prices”
- Data show markets disconnected from reality
- Fragile system vulnerable to shock
- Gold is hedge against systemic risks

Gold is a regarded as a hedge against market turbulence by Bank of America who, in a note to clients, advised holding gold and paper currency at this time.

Bloomberg report that Bank of America Merrill Lynch describe the markets as being in a “Twilight Zone” - the zone between the end of QE and the Fed beginning to raise rates to try to bring normality back into the markets.

The note highlights two problems with raising rates which are prolonging this sojourn in the Twilight Zone. The first is that the real economy in the U.S. is not currently strong enough to withstand a rise in interest rates.

The second is that raising rates could cause a shock to the markets and the economy as the practically free money juicing the markets comes at a more realistic cost and some government, corporate and household debts become unserviceable.

For these reasons, Bank of America believe that the Fed is far from taking action to return the markets to normality and “the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes.”

To deal with this they advocate adding gold to one’s portfolio along with higher levels of cash. Citing factors such as liquidity, profits, technological disruption, regulation, and income inequality they say there exists a potential for a “cleansing drop in asset prices.”

The note also indicates that data shows that the stock markets in the U.S. are somewhat disconnected from reality. While investors are apparently optimistic there is a large amount of cash “on the sidelines”. Their chart shows that the high levels of cash currently in reserve actually correspond to periods of extreme pessimism in recent years.

They note the anomaly of near record high stock prices while equity funds haemorrhage cash. “U.S. equity funds have suffered $100 billion of outflows in 2015 while the S&P 500 is near all-time highs”. They put the outflow down to U.S. investors putting cash into European and Japanese equities.

On the other hand, “buying from those not captured in flow data (sovereign wealth funds, pension funds and central banks) could be what's giving U.S. equity indices a boost.”

The note concludes that the outlook for the markets over the summer is not favorable,

“The summer months offer a lose-lose proposition for risk assets: either the macro improves and the Fed gets to hike, which will at least temporarily cause volatility; or more ominously for consensus positioning, the macro does not recover, in which case EPS downgrades drag risk-assets lower.”

For a host of disparate reasons we cover here consistently - ranging from geopolitical tensions and currency wars to gargantuan unpayable debt and other macro-economic fundamentals - we believe the entire interconnected global economic, financial and monetary systems to be extremely fragile.

As policy makers lurch from crisis to crisis it seems certain that, at some point, their ability to control the outcome of a particular shock will be wanting. History shows that crises usually spring from seemingly minor events. A correction in the stock markets - should it occur - may turn out to be a “cleansing”. But it may precipitate a larger, unforeseen crisis given the fragile state of the system.

In the event of such a crisis - and given the insane levels of debt now extant across the globe there is potential for a serious crisis - physical gold stored outside of the banking system will perform its time-honored function of protecting wealth.

We offer clients fully, segregated accounts with the most reliable vaults in the world in safe jurisdictions such as Switzerland and Singapore.

Read the storage guides below:

Essential Guide to Gold Storage in Switzerland

Essential Guide to Gold Storage in Singapore



Today’s AM LBMA Gold Price was USD 1,206.75, EUR 1,085.33 and GBP 777.57 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,219.65, EUR 1,090.24 and GBP 785.31 per ounce.

Gold fell $17.40 or 1.4 percent to $1,208.20 an ounce on yesterday, and silver slid $0.56 or 3.17 percent to $17.12 an ounce.

Yesterday, the gold price slipped for the first time in five days after an upside surprise in US housing data bolstered the U.S. dollar.

April building permits came in at 1.14 million surpassing the estimate 1.06 million and housing starts also beat expectations  at 1.135 million versus the analyst forecast of 1.02 million. In addition to the housing data the U.S. dollar was also strengthened on the news that the EU is going to ramp up their QE to buy more bonds in the next two months.

The U.S. FOMC meeting minutes from the April 28-29 meeting will be released this evening at 1800 GMT. Investors will be looking for any clues on the timing of the Fed’s first interest rate hike in nearly ten years.

Gold in Singapore near the end of trading fell 0.3 percent to $1,204 an ounce.

Greece’s next deadline is June 5th for a 305 million payment due to the IMF. They will not be able to meet the deadline without a cash for reform deal with their European Union counterparts and the IMF.

In late morning European trading gold is at $1,208.30 an ounce down 0.10%. Silver is off slightly 0.01 percent at $17.12, an ounce, while platinum is up 0.10 percent at $1,154.50 an ounce.

Breaking News and Research Here

For Caterpillar, This Is What The "Second Great Depression" Looks Like

According to the latest CAT retail sales data, Caterpillar has now reported an unprecedented 29 months of declining global retail sales, with the month of April seeing a 16% Y/Y collapse in China (after a 25% plunge in 2014 and a 20% plunge the year before), while Latin America just suffered an epic 44% Y/Y crash, the biggest going back to 2009, after a 28% drop the year before.

Or as far as the industrial and heavy equipment bellwether is concerned, the emerging markets (or BRICS) are in an unprecedented economic collapse.

To put Caterpillar's ongoing second great depression in context, during the Great Financial Crisis, CAT suffered "only" 19 months of consecutive retail sales declines. As of April 2015, this number is now 29, and there is no hope in sight of seeing an annual rebounce any time soon.

Crude Tumbles Despite 3rd Weekly Inventory Draw & Production Plunge

Following last night's 5.2 million barrel inventory draw reported by API, crude prices surged once again (bouncing off levels before the first inventory draw at the end of April). Consensus appears confused since Bloomberg median estimates were for a 1.75mm draw while survey respondents expected a 3.82 million barrel draw this morning. DOE data showed a disappointly lower than API, 2.67 million barrel draw - which initially sent crude prices tumbling... machines bid them back, and now they are plunging again. Production dropped 1.2% overall - its biggest weekly drop since July 2014.

3rd weekly inventory draw in a row...


And production plunged by the most in 10 months...


Which sent crude falling - then soaring - then dumping...


Retracing gains post API - as it appears the market was disappointed that the DOE draw was not as big as API had predicted


Charts: Bloomberg

China's Richest Man Sees Half His Net Worth Wiped Out In Seconds After Bubble Stock Instacrash

Li Hejun began the day as either China’s second-richest man according to Forbes, or richest, according to the Hurun Report (China's version of the Forbes rich list) and Le Figaro, with a fortune worth more than $30 billion. By 11am, his net worth was amazingly cut by half, and he was almost $14 billion "poorer" as shares in Li’s flagship Hanergy Thin Film plunged by 47% in Hong Kong before trading was suspended - due to Li's absence at the company's annual meeting.

While four months of supercharged stock gains were eviscerated in minutes, it was not a surprise to everyone, as one analysts called Hanergy "a disaster waiting to happen," noting that the company is working with “unproven” technology and has disclosed few details about the work that underpins its valuation.

It was all going so well, and then...


As Forbes reports, shares in Li’s flagship Hanergy Thin Film plunged by 47% in Hong Kong before trading was suspended at the request of the Hong Kong Stock Exchange...

Li’s absence at the company’s annual meeting in the former British colony this morning was behind the decline in prices, according to some reports, but there was no reason given by the company for the drop. Hanergy said in a statement it would make an announcement containing inside information later today.

Li, Hanergy’s chairman, owns more than half of Hanergy Thin Film. Li has been outspoken in defending the company, saying BU. But as Bloomberg notes, questions have been mounting for a while...

Hanergy uses a niche technology in the photovoltaic industry, where more than three quarters of all panels are based on solar-grade silicon. Thin film cells are more flexible but less efficient than crystalline silicon-based panels.


Prior to Wednesday’s plunge, Hanergy Thin Film’s market value had at one point risen to more then HK$300 billion. That’s larger than Japan’s Sony Corp. and almost seven times the size of First Solar Inc., the biggest U.S. solar company.




“It’s an adjustment that the market has been waiting to happen, as Hanergy’s earnings and business performance didn’t support such a high stock price or valuation,” said Gong Siwen, Shanghai-based analyst at Northeast Securities Co.


The Chinese solar company was the subject in January of an investigation by the Financial Times newspaper, which questioned its “unconventional” accounting practices.


The stock “is a disaster waiting to happen,” Geo Securities Chief Executive Officer Francis Lun said today by phone.


Bloomberg New Energy Finance released a report in March saying Hanergy is working with “unproven” technology and has disclosed few details about the work that underpins its valuation.


In a six-page examination of the Hong Kong manufacturer’s operations, the London-based researcher said it’s been unable to find a detailed list of solar-power projects that would help explain why the company’s shares surged in the past year.

Like today’s abrupt dive, Hanergy’s stock rise of 500% in the past year has been surprising to many analysts who said it was long overvalued.

Welcome to the new 'fake it til you get busted' normal.

Where Does the Gold Trade Stand


We have all read the latest crop of media articles challenging gold’s investment relevance. The typical approach to bearish gold analysis is to attribute hypothetical fears to gold investors, and then point out these concerns have failed to materialize. Sprott believes the investment thesis for gold is a bit more complex than simplistic motivations commonly cited in financial press. We would suggest gold’s relatively methodical advance since the turn of the millennium has had less to do with investor fears of hyperinflation or U.S. dollar collapse than it has with persistent desire to allocate a small portion of global wealth away from traditional financial assets and the fiat currencies in which they are priced.

At Sprott, we are amazed that gold’s role as a productive portfolio-diversifying asset is still questioned by so many. During the past decade-and-a-half, gold has posted the most consistently positive performance of any global asset, yet is still scorned by consensus. What part of gold’s track record is so difficult to understand? Figure 1, below, outlines performance of spot gold in nine global currencies during the past 15 years. Despite widely divergent monetary and financial conditions, the performance of gold since 2000 has significantly exceeded any asset class with which we are familiar. How could such an admirably performing asset continue to elicit such broad indifference?

Now that the S&P 500 Index has more than tripled from March 2009 lows, the investment world is once again replete with portfolio gains from U.S. equities. We recognize few asset classes can challenge the pedigree of the S&P 500 Index, and even fewer investors would consider gold on par with the S&P 500 as an important


Year US Dollar Euro Yuan Rupee Yen Pound CAD AUD CHF Average 2001 2.46% 8.13% 2.45% 5.90% 17.62% 5.25% 8.65% 11.80% 5.32% 7.51% 2002 24.78% 5.76% 24.78% 24.08% 12.64% 12.67% 23.48% 13.85% 3.87% 16.21% 2003 19.37% -0.21% 19.36% 13.52% 8.04% 7.80% -1.81% -11.22% 7.32% 6.91% 2004 5.54% -2.19% 5.54% 0.54% 0.66% -1.76% -2.19% 1.40% -3.10% 0.49% 2005 17.92% 35.09% 14.98% 22.23% 35.70% 31.44% 14.06% 25.84% 35.97% 25.91% 2006 23.16% 10.51% 19.11% 21.00% 24.32% 8.17% 23.46% 14.61% 14.24% 17.62% 2007 30.98% 18.46% 22.46% 16.64% 22.96% 29.28% 11.40% 17.77% 21.96% 21.32% 2008 5.78% 10.55% -1.07% 30.62% -14.10% 43.89% 29.91% 31.59% -4.90% 14.70% 2009 24.37% 21.09% 24.40% 18.88% 27.38% 12.25% 7.90% -2.39% 20.40% 17.14% 2010 29.52% 38.88% 25.02% 24.45% 12.75% 34.15% 21.95% 13.66% 16.91% 24.14% 2011 10.06% 13.51% 5.22% 30.74% 4.35% 10.65% 12.53% 9.81% 10.63% 11.94% 2012 7.14% 5.22% 6.04% 10.54% 20.84% 2.31% 4.86% 5.82% 4.39% 7.46% 2013 -28.04% -31.13% -30.15% -18.76% -12.42% -29.45% -23.13% -16.30% -30.09% -24.39% 2014 -1.72% 11.99% 0.79% 0.45% 11.81% 4.48% 7.40% 7.44% 9.92% 5.84% 4/23/2015 0.77% 12.65% 0.62% 0.79% 0.70% 4.30% 5.27% 5.75% -3.26% 3.07%

portfolio building block. However, as shown in Figure 2, below, the fact remains that even at its current level of 2,112 (4/23), the S&P 500 Index is trading today 68% lower in gold terms than at its 2000 peak. During the past two corrections in the S&P 500, during which the Index declined 50.50% (2000-2) and 57.70% (2007-9), gold provided unparalleled protection of real purchasing power in all global currencies. We believe the next correction in U.S. equities will prove no different. We are not sure what percentage in the cumulative relationship between gold and the S&P 500 will finally earn gold its deserved profile as a mandatory, diversifying portfolio asset, but we suspect we are about to find out.


Gold is an asset without peer in terms of the sheer number of investment perspectives leading to its ownership. Some perceive gold as an inflation hedge, others as a deflation hedge. During times of financial stress, some view gold as an asset to own, while safe-haven U.S. dollar traders see gold as an asset to short. Many view gold as the ultimate “risk off” asset, and just as many view gold as the ultimate “risk on” trade. What can then explain gold’s meticulous advance versus prominent fiat currencies in all but one (2013) of the past 15 years, despite the myriad of economic, fiscal and monetary conditions which prevailed during those years?

After all, since 2000 the world has witnessed at least two deflation scares (2002 and 2009), various periods of inflationary concern (2005 and 2008), exceptional U.S. GDP strength (2004) and weakness (2001 and 2009), rising (2004 and 2005) and falling U.S. short rates, rising (2003 and 2006) and falling (2002, 2008 and 2011) Treasury rates, multiple roundtrips for equities, bonds and commodities and a euro trading range of US$0.83 to US$1.60. In other words, every popular variable to which some portion of consensus attributes strong gold correlation has oscillated repeatedly during the past fifteen years, yet gold has increased in every year but one. Must there not be something happening here which defies simple categorization?

We would suggest there is indeed one overarching theme to gold’s performance which generally escapes popular reporting: we attribute gold’s comparatively consistent 15-year performance to methodical migration of global wealth from the immense pile of outstanding financial assets (roughly $300 trillion) to the comparatively tiny stock of investable gold (roughly $2.4 trillion). In essence, gold is increasingly about global willingness to hold paper assets. Given the gaping disconnect between global paper claims and underlying productive output, as well as the unwavering penchant for global central bankers to debase fiat currencies in their attempts to bridge this chasm, we believe the gold thesis remains in its early innings. While these arguments may appear detached and academic in light of recent tape action, we remain committed to our analysis because we believe it is correct. No matter what one’s individual investment perspective may be, it is difficult to argue that the world’s monetary system is not becoming increasingly dysfunctional. For these reasons, we believe gold’s most dramatic advances remain ahead of us.

The resurgent bear thesis for gold currently rests on four key assumptions:

  • protracted U.S. dollar strength, 
  • significant Fed tightening, 
  • escape velocity U.S. economic performance, and 
  • further increases in U.S. equities 

Because we believe each of these assumptions is already in the process of being disproved, we expect Western investment demand for gold to surge dramatically in coming years.

Protracted U.S. Dollar Strength?

Since gold’s September 2011 peak, Western consensus has vocally forecast U.S. dollar strength. For twoand-a-half years through mid-2014, however, no consensus view proved more off the mark—despite near universal prognostications for dollar strength, the prominent DXY Index actually declined marginally between 12/31/11 and 6/30/14 (from 80.18 to 79.78). From July 2014 through mid-March 2015, however, the DXY staged an impressive 26% rally, much to the detriment of gold and broad commodities. What powered this rally? Perhaps egged on by years of disappointment, dogged dollar bugs have unleashed in recent months a truly historic sentiment extreme. For two days in mid-March (3/10 and 3/11), the Bernstein Daily Sentiment Index for the U.S. dollar (poll of active futures traders) registered a ridiculous 97% bullish. Our favored macro impresario, Stephanie Pomboy (MacroMavens), fleshes-out the dollar-sentiment craze in Figure 3, below. As measured by aggregate net speculative shorts against the euro, yen and pound, bullish dollar speculation has inhabited unprecedented levels for several months.


We believe Western dollar bullishness rests largely on investor expectations for divergent central bank behavior in coming years (U.S. tightening while Japan, Europe and China ease). However, this expectation ignores growing global disenchantment with the dollar-standard system. The world has made no secret of mounting resentment toward dollar-denominated trade. During the past two years, China, Russia, India and an array of resource-rich and resource-needy countries have announced an expanding mosaic of currencyswap and bilateral trade agreements. Why have they done this? To begin with, eroding percentages of U.S. share of global trade increasingly stretch the logic of pricing global trade-flows in dollars. As shown in Figure 4, below, U.S. share of world trade has shrunk to 8.5%, while China’s share has expanded to 13.8%. Why should China price anything in dollars?


We believe Western investors are prone to ignore the significance of shifting global economic allegiances. While we are in no way endorsing a “decline of America” argument, we do believe resentment of American dominance of the global financial system, and increasingly frequent crises emanating from that stewardship, is galvanizing resolve around the world to develop alternatives to the dollar-standard system. For those with an open mind, we believe this process is plainly evident wherever one looks.

Even at G-20 meetings, criticism of the dollar–standard system has become increasingly sharp (Argentina, Mexico and Indonesia). And more recently, even G-7 allies such as France and Germany have voiced concern over unilateral U.S. regulations, sanctions and legal dictums. In the wake of BNP Paribas’ recent U.S. fine, Bank of France Governor and ECB Governing Council member Christian Noyer raised eyebrows 7/5/14 in suggesting:

We could say that companies would have maximum interest to do the most possible transactions in other currencies. Trade between China and Europe -- do it in euros, do it in renminbi, stop doing it in dollars.

At the risk of appearing overly dramatic, we felt one especially concise exchange between President Obama and German Chancellor Angela Merkel summed things concisely this past summer. On August 26, President Obama proclaimed, “The United States is and will remain the one indispensable nation in the world. No other nation can do what we do.” The following day, German Chancellor Angela Merkel responded directly, “Even a superpower can’t solve all of the problems alone.”

While the dollar’s role in global monetary affairs is not about to disappear anytime soon, it is pretty clear the dollar’s dominance as hegemonic reserve currency diminishes with each passing day. Proof of the pudding abounds in global financial flows. Amid nonstop geopolitical events traditionally supportive of the dollar’s safe-haven status, foreign interest in U.S. financial assets has plummeted in recent years. As shown in Figure 5, below, the annual run-rate of net foreign purchases of U.S. treasuries has collapsed from $800 billion to virtually zero. These realities are particularly stark in the context of some $5 trillion of global sovereign bonds with negative yields (including German bunds in recent weeks with negative yields out nine years) and a nearly 200 basis point spread between 10-year Treasuries and bunds! 


We view the dollar’s vertiginous rally since June less as a discretionary vote of preference than a reflexive manifestation of two gut-wrenching but finite developments in global asset markets. First, a half-decade of Fed largesse has fostered trillions-of-dollars-worth of dollar-denominated debt around the globe. The Bank of International Settlements estimates this obelisk of carry trades, investments, loans and office-balance sheet commitments now stands at some $9 trillion. With the dollar up 25% since June, rough math suggests there are over $2 trillion worth of paper losses percolating on global balance sheets. In a very real sense, recent dollar strength reflects self-reinforcing urgency to settle dollar obligations before they inflict further damage. This brand of mechanical dollar demand is notorious for reversing course once the “synthetic short” is satisfied.

Second, we believe consensus underestimates the pervasive inverse relationship between oil prices and the U.S. dollar. Our friends at TrendMacro have memorialized this uncanny bond quite succinctly in Figure 6, below. Empirically, the dollar has weakened during every major oil bull market since 1973, and strengthened during every oil bear market. Leaving cause and effect for others to debate, we would suggest that if the oil price has set rough lows in the recent sell-off, a significant “component” of dollar strength may already be behind us.


We believe extreme Western spec positioning, exploding carry trades and a plummeting oil price have temporarily masked the ongoing erosion of the dollar’s hegemonic reserve-currency role. We expect the basis for much dollar enthusiasm (expectations for Fed rate increases) will prove just as misguided as consensus Fed analysis during the past half-decade. Indeed, we expect a key investment theme in 2015 to be surprising weakness in the U.S. dollar.

Significant Fed Tightening?

Perhaps the single greatest misconception about gold, especially in contemporary trading circles, is the erroneous belief that rising U.S. short-term interest rates are inherently threatening to gold’s prospects. Sprott believes rising short rates have much less to do with gold’s performance than the reasons why rates are rising and whether the Fed is deemed to be in control. After all, when gold exploded to all-time highs in January 1980, the Fed’s discount rate was 12% and fed funds were targeted at 14%. Many will object that the January 1980 experience is not germane, because conditions in 1979 were substantially unique (inflation, oil shock, Iran hostages and Hunt brothers). Conceding all decades are different, we turn to the current decade for evidence rising short rates can coexist with surging gold prices. During the past ten years, has the Fed ever raised short rates aggressively for an extended period of time? What impact did those policies have on the gold price?


In Figure 7, above, we plot the Fed’s target funds rate versus spot gold from mid-2003 through early-2007. Between June 2004 and June 2006, the FOMC increased its target funds rate by 25 basis points at 17 consecutive meetings! During the span, fed funds more than quintupled, from 1.0% to 5.25%, yet spot gold climbed 81%, from $395 to $715. Obviously, Fed tightening has far less reflexive impact on the gold price than commonly perceived. During the next few years, we find prospects for Fed tightening likely to be limited to a few symbolic gestures, the impact of which should prove virtually meaningless to gold.

Most investors have viewed Fed QE programs as discretionary efforts to target full employment and escapevelocity U.S. economic growth. We have viewed the Fed’s QE efforts as tacit admission of their concerns over lingering stress in the financial system. We believe the Fed cannot tighten meaningfully because the Fed must provide a liquidity bridge to offset insufficient non-financial credit growth in the U.S. economy (an $18 trillion economy cannot efficiently service $59 trillion in debt). In direct contrast to our views, broad consensus has incorrectly forecast three distinct cycles of unwinding of Fed asset-purchase programs during the past five years.

  • Throughout 2010, consensus projected outright Fed asset sales in late-2010 to unwind asset purchases of QE1. Instead, the Fed launched QE2 in November 2010. 
  • Throughout 2011, consensus projected outright asset sales in 2012 to unwind QE2. Instead, in September 2011, the Fed conceded not only that outright asset sales were too dangerous but that even allowing MBS to roll off naturally was far too risky for financial markets, and launched Operation Twist. 
  • Throughout 2012, consensus projected outright asset sales in 2013, to finally unwind QE1 and QE2. Instead, the Fed launched QE3, designed to gobble up MBS and Treasuries at roughly the rate of QE1 and QE2 combined.

Because most Fed projections have been so utterly wrong for so long, we give little credence to current consensus that the Fed is nearing “liftoff” of a meaningful tightening cycle.


As MacroMavens reminds us, in table 8, above, salient measures of economic performance generally rest today at levels below comparative levels at which the Fed felt compelled to launch QE2 and QE3. Even improvement in the BLS unemployment rate appears a bit pyrrhic, when viewed in the context of fourdecade lows for the labor participation rate. What is so different about 2015 that will permit the Fed to raise rates significantly when they have felt unable to do so in recent years?

Escape Velocity U.S. Economic Performance?

To us, U.S. economic performance is patently sub-par. Despite the most indulgent monetary policies in U.S. history, economic growth during the past 15 years has been the worst 15-year stretch on record. More specifically, since 2009 lows, one of the strongest bull markets in U.S. history has been accompanied by the weakest postwar economic recovery. Why has this historic U.S. economic weakness persisted? We believe central tenets of Austrian economic analysis are finally coming home to roost. Poor economic decisions and excessive debt in a world of ZIRP and nonfinancial credit growth unbacked by savings have destroyed the potential for true capital creation in the United States.

Without question, the single greatest contributor to U.S. economic activity in recent years has been the shale-led boom in the energy sector. We believe shale investments in the United States represent an interesting microcosm of ZIRP distortions. While energy represents roughly 5%-to-6% of global GDP, it represents roughly a third of global capex, by far the largest single component. We believe Fed ZIRP policies have clearly fostered overinvestment (we would say malinvestment) in domestic shale projects. We expect the $50 decline in WTI to threaten viability of a huge component of these capital investments, with significant implications for fragile U.S. economic growth and high-yield bond markets (energy 21% of total issuance), as well as U.S. regional energy economies and their supporting banks.

To us, the most telling aspect of the sub-par performance of the U.S. economy is the degree to which Fed ZIRP policies have extinguished the U.S. capex cycle. Outside the oil patch, American corporations have conceded overwhelmingly that investing in their own businesses is far less attractive than simply buying back shares. Somewhere along the line, mainstream financial analysis has given up questioning whether earnings gains from stock buybacks should be viewed as additive on balance. If shares are overvalued, every share repurchased should lead to a deduction from per-share valuations for any individual company, not an addition.

We find the list of American corporations which chose to slash capex in 2013 and 2014, while committing massive resources toward share repurchase, to be an aspect of contemporary U.S. corporate performance that will engender lingering study in years to come. While hundreds of Fortune 500 companies (with which all U.S. investors should be familiar) have cut capex budgets far below rates of stock buybacks, we are aware of no train of institutional analysis which has yet objected to this trend. Quite simply, Fed ZIRP policies have crushed expected rates of return on capital investment and incented corporations to borrow money to retire equity–U.S. corporate income statements are now consuming U.S. corporate balance sheets at a fairly accelerated pace!

Further Increases in U.S. Equities?

Since March of 2009, valuation of U.S. equities (Russell 3000 Index) has increased by some $15.7 trillion. With coincident U.S. non-financial credit rising by some $7.4 trillion, the value of primary paper claims on U.S. productive output has increased by roughly $23.1 trillion. During this entire period, U.S. Real GDP has risen only $3.6 trillion. While we recognize the intoxicating effect of rising stock prices, there is nothing of which we are more certain than the fact that claims on productive output cannot increase almost seven times faster than output forever!

By many measures, equity prices have now surpassed relative valuation levels from which they collapsed by more than half on two occasions since 2000. Further, one could argue quite logically that the aggregate claim which U.S. equities hold over U.S. productive output in 2015 is far more tenuous than in 2000, as the load of more senior debt claims has ballooned over the period by $33.1 trillion (while coincident GDP has increased a little over $8.2 trillion). Warren Buffet suggests the ratio of equity-market-cap-to-GDP, “is probably the best single measure of where valuations stand at any given moment.” As the owner of more stocks than any other human being, Mr. Buffett is unlikely to call for a market correction anytime soon. However, as the MacroMavens iteration of Mr. Buffett’s indicator demonstrates in Figure 9, below, U.S. equities are trading at starkly rarified levels.


What about Gold Equities?

During the past 20 years (Figure 10, below), the S&P 500 and the NYSE Arca Gold Miners Index (the GDM Index) have carved out extremely lumpy surges of performance, heavily influenced by the ebb-and-flow of prevailing sentiment towards U.S. financial assets. Along the way, there have been two salient periods in which the performance of gold equities has demonstrated strong negative correlation to the S&P 500. The first period stretched from late-1996 through early-2003. From 1996 through early 2000, optimistic sentiment in equity markets became increasingly incorrigible and gold shares were pretty much left for dead. However, as the S&P 500 collapsed 51% from excessive 2000 ebullience through mid-2002, the GDM Index nearly tripled.


We see strong similarities between the 2000 experience and that unfolding today. From 2011 highs, gold shares declined 75% through November 2014 lows and remain 71% off 2011 highs, while the S&P 500 has rallied 83%! In essence optimistic sentiment in equity markets has again become increasingly incorrigible and gold shares have been left for dead. As was the case in March 2000, we believe redeployment of a small percentage of investment capital from the S&P 500 to the GDM Index is a portfolio allocation decision with exceedingly high total-return prospects!

As demonstrated in Figure 11, below, the three primary advances of gold shares during the past fifteen years have generated aggregate returns which have been nothing short of spectacular. The GDM Index has posted three roughly three-year advances since 2000, with individual gains of 342.76% (11/17/00-12/02/03), 185.62% (5/16/05-3/14/08), and 309.74% (10/27/08-9/8/11). Coincident moves in the S&P 500 during these three periods were a decline of 22.01% and gains of 10.50% and 39.70%. Despite debilitating intervening corrections for gold shares which have offset completely their prodigious gains, the fact remains that the


compound performance of gold shares during the three primary moves of the GDM Index since 2000 totaled 5,082%, while the aggregate coincident performance of the S&P 500 totaled just 20.4%. In other words, during roughly nine of the past 14 years, or some 63% of the time, gold shares have outperformed the S&P 500 by a factor of 249-to-1. In essence, when faith in U.S. financial assets has been challenged, no asset has provided a more productive portfolio hedge than gold shares. While it is impossible to foresee how gold shares will respond to any future diminution of confidence in U.S. financial assets, we believe their pedigree as a portfolio diversifying asset is both established and compelling.

At Sprott, we continue to believe high-quality gold mining companies provide significant leverage to the secular opportunity of rising gold prices. Emerging producers (and high quality miners developing new projects) bring a tangible value-creation proposition to the gold investment thesis. Despite the volatility of gold shares since 2000, their performance in up-cycles for the gold complex has provided unparalleled alpha. We are of the strong opinion that allocations toward high-quality gold shares are about to be rewarded handsomely and we look forward to communicating our progress in coming months.

Trey Reik, Senior Portfolio Manager

About the Author

Trey Reik,
Senior Portfolio Manager

I joined Sprott Asset Management USA, Inc., in March 2015. After thirteen years investing in gold-focused partnerships, I joined Sprott because I believe the firm represents one of the world’s preeminent precious metal investment franchises. In my view, gold represents an extremely compelling investment opportunity during the next decade and Sprott is exceptionally well positioned to benefit from strength in precious metal markets. Sprott has asked me to share my thoughts on gold markets with Sprott clients on a regular basis. While I look forward to doing so, I remind all readers that my views represent one opinion among many in the Sprott organization. I look forward to continuing the conversation.


This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The investments discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Past performance is no guarantee of future returns. Sprott Asset Management USA Inc., affiliates, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

5 Banks To Plead Guilty To Criminal Rigging Charges, Pay $5.6 Billion For Manipulating Markets

As the live webcast from US AG Loretta Lynch indicates, moments ago the DOJ announced five global banks including Citi, J.P. Morgan, Barclays, RBS would plead guilty to criminal charges to conspiring to manipulate FX Prices, and would pay some $5.6 billion in combined penalties to resolve a long running U.S. investigation into whether traders at the banks colluded to move foreign currency rates in directions to benefit their own positions.

More from the WSJ:

Four of the banks, J.P. Morgan Chase & Co., Barclays PLC, Royal Bank of Scotland Group PLC, and Citigroup Inc., will plead guilty to conspiring to manipulate the price of U.S. dollars and euros, authorities said.


The fifth bank, UBS AG , received immunity in the antitrust case, but will plead guilty to manipulating the Libor benchmark after prosecutors said the bank violated an earlier accord meant to resolve those allegations of misconduct. UBS will also pay an additional Libor-related fine.


Bank of America Corp. will also pay a $205 million penalty to the Fed to resolve the regulator’s foreign exchange probe. Bank of America didn’t face similar action from the Justice Department.


Authorities said euro dollar traders at the banks, who were self-described members of “The Cartel” communicated through coded language in an online chat room to coordinate attempts to move rates set at 1:15 and 4 p.m.

Turns out ratting our criminal peers out does pay after all:

One UBS trader also engaged in the same collusive behavior in the euro and dollar market, but the bank wasn’t charged over that conduct because it had obtained immunity by being the first bank to report the possible antitrust violations.

Live DOJ webcast below.

Broadcast live streaming video on Ustream

And  yet:

No traders have yet been criminally charged over the conduct, but New York’s financial regulator said it required Barclays to fire eight employees in connection with the resolution. Investigations into individuals are continuing, according to government officials.

Don't be surprised if despite the guilty criminal pleas, nobody goes to prison yet again.

In any event, we now know that aside from Libor, FX, gold, stocks and treasuries, nothing else is manipulated.

Our final question: did the DOJ accidentally forget to charge the Bank of England and its former employee Martin Mallett who was fired for FX rigging?  Recall:

Martin Mallett was dismissed by the Bank of England yesterday for “serious misconduct relating to failure to adhere to the Bank’s internal policies,” according to a statement by the central bank today.


Mallett, who worked at the bank for almost 30 years, had concerns from as early as November 2012 that conversations between traders right before benchmarks were set could lead to the rigging of those rates, according a report today by Anthony Grabiner, who was commissioned by the central bank to look into what its officials knew about practices under investigation around the world. Mallett was “uncomfortable” with the traders’ practices, yet he didn’t escalate these concerns, Grabiner said.


“We’re disappointed because we hold ourselves to the highest standards -- we have an outstanding markets division,” BOE Governor Mark Carney said at a briefing in London today. “What Lord Grabiner found was that our chief dealer was aware of circumstances in the market that could facilitate or lead to improper behavior by market participants.”

Eagerly awaiting for the answer.

ETSY Crashes Over 55% From Highs, Breaks Below IPO Price

It appears investors in ETSY just barely missed out on its 30 day IPO-back guarantee...



And here are the analysts covering this super-stock...


Which, as Union Square Ventures' Fred Wilson explains, confirms "public markets are doing a very good job of valuing public companies... and private markets need to be ratcheted back..."

Akward: After Bashing Cold Weather Excuses, Bank Of America Jumps On The "2nd Seasonal Adjustment" Bandwagon

A little over one year ago, Europe did not like the fact that it was stuck in a perpetual recession so it did something about it: it arbitrarily raised the GDP number by hundreds of billions in estimated "growth" when it added the "contribution" from prostitutes and drug dealers, and hey presto: GDP jumped in every European country (alas, Greece has since descended once more into recession).

In the US, where the populist outcry to such an arbitrary "sinful" strategy to boost GDP would not work, especially not so recently after the US itself revised its own historical GDP higher by about $500 billion when it retroactively added the benefits of intangibles, trademarks, and changed the way pensions were capitalized, economists have been stumped how to rejigger numbers which refuse to comply with central-planning's "best "intentions of boosting not only the S&P to record highs, but also the economy which somehow crashes every time there is snow in the winter.

Which brings us to the most recent idiotic proposal, one which had been hinted at several months ago by the Chicago Fed, and which has gotten significant prominence in recent days after the San Fran Fed came out of the closet, and said it's not its fault it has been perpetually wrong with its permabullish forecasts (unlike the Atlanta Fed of course, whose impartial, unbiased, numbers-driven model has been spot on): it is the seasonal adjustments. Or rather, lack of a second seasonal adjustment. Because, you see, the "big thing" in economics right now is that seasonally-adjusted economic data is simply not seasonally-adjusted enough!

One wonders if the Fed looked at the Q3 GDP print of +5% with the same alarm, and said the number was too high so clearly it is time to apply a "summer seasonal adjustment" reduction to outlier numbers... to the upside. Turns out the answer is no: the only numbers the Fed cares to keep massaging, are those which are below where they should be.

And now, with the Fed giving its blessing to economists around the globe to be not only wrong, but to blame their "inaccuracy", here comes Wall Street: the one place whose economists have been even more dead wrong than those of the Fed.

Enter Bank of America, with its overnight report "Smarter seasonal dummies" in which it does precisely what has just made every economist an even greater joke, and has also jumped the shark with not only but two seasonal adjustments to GDP.

From BofA:

There has been a flood of papers on “residual seasonality” in recent weeks; here are some thoughts on the main papers. The bottom line: adjustment problems are quite real and probably bias down 1Q GDP growth by at least 1.5%, and bias up other quarters by about 0.5%.

Quite real, for sure. Unambiguously so. And this is how the data would look like in a world in which data is irrelevant, but 2x seasonally adjusted, aka goalseeked data, mattered:

BofA is quite correct when it says that "Currently, 1Q GDP is likely to come in around -1.2%, so fixing the data gets us back above zero." Fixing indeed.

Some other observations from BofA on this quite humorous topic for anyone still paying attention:

Glenn Rudebusch and colleagues at the San Francisco Fed argue that residual seasonality could exist because not all the components of GDP are adjusted and the adding-up process could create further seasonality issues. They note that the risk of problems is high in 1Q, because the overall economy has a major “seasonal recession” in 1Q and, hence, big adjustments are required to normalize the data.


Rudebusch, et al, re-adjust the data using the usual X-12-ARIMA statistical filter and find significant effects in 1Q. Notably, the new factors boost 1Q GDP growth from 0.2 to 1.8%. This seems sensible to us. Unfortunately, as we note above, GDP continues to track lower. One simple approach to update their analysis is to apply their corrected seasonal correction factor to our -1.2% tracking estimate. This suggests 1Q real GDP growth of 0.3%—still quite weak, but no longer negative.


Alternatively, one could replicate their approach by re-applying the X-12-ARIMA statistical filter to the originally adjusted GDP data, substituting our tracking estimate for the initial 1Q release of 0.2%. This allows the seasonal adjustment process to apply to the full range of data. In that case, we estimate 1Q growth would be not quite as soft, at 0.9% (Chart 1). The gap between these two revised estimates highlights the unavoidable uncertainty in this exercise: at the end of a data  sample, there isn’t as much information to clearly signal whether a surprise is just a seasonal distortion or something more fundamental. What is clear is that the current 1Q GDP data still have seasonal components that we should look past to infer the state of the economy. While tracking has drifted lower as new data have come in, 1Q may not have outright contracted once the seasonals are corrected.


Tom Stark at the Philadelphia Fed takes a different track, using “dummy variables” to pin down which parts of the data have the biggest problem. As with many other papers, he finds that the adjustment problem seems to have started in the mid- 1980s and has gotten successively worse. He finds the biggest problem for government consumption and gross investment, with weaker effects for residential and trade. From 1985 onward, GDP growth has averaged 1.9% in 1Q and 3.3%, 2.9% and 2.7%, respectively, for the subsequent quarters. Note that the implied seasonal distortion in Stark’s work is about 1%, which is smaller than Rudebusch, et al. That is because Stark’s approach gives equal weight to every year, while Rudebusch, et al’s, approach puts greater weight on recent data.


One of the compelling things about the paper is the robustness of the results. Readers should be skeptical about statistical results that don’t hold up when there are minor changes in the exact test. Stark shows that the bad 1Q is not the result of a few really bad numbers: it holds up when you exclude the extreme results of the last four years, and it is relatively consistent in terms of which sectors create the problem.


Stark also looks at alternative measures of overall economic activity and finds much smaller seasonal adjustment problems. GDP is based on an adding-up of the expenditure side of the economy. An alternative approach is to add up incomes: Gross Domestic Income (GDI). The two can diverge, particularly on a quarterly basis. Unfortunately, GDI is unavailable in the advance release, so it remains to be seen whether there are any significant 1Q distortions. But, the Philly Fed’s GDPplus—a composite of GDP and GDI; the latter is presumably estimated—has insignificant seasonal issues. It grew 1.65% in 1Q.

Things get awkward when as BofA admits, in a separate paper, none other than the Fed (?!) did not find a reason to doubt the original numbers.

Some recent pieces have been more skeptical of the significance of these results, including a paper from the Fed Board by Gilbert, et al. For example, looking at data for 2010 to 2014, they confirm that GDP growth was 1.7% lower in 1Q.  However, excluding 2011 and 2014, the drop off is just 0.2%. Moreover, they argue that the proper test for seasonal distortions is not to zero in on 1Q, but to test whether any quarter is significantly distorted (this makes it harder to prove statistical significance). The probability that any quarter averages 1.7% less than other quarters is 7%, flunking the usual 5% threshold.




A recent paper from the Chicago Fed—“The effect of winter weather on U.S. economic activity”—is the best attempt we have seen in recent years. They look at detailed data on snowfall and temperature by state and for the nation as a whole. The results show that weather effects can have a significant impact on local employment and housing activity, however, when you add it up for the nation it becomes very hard to quantify. Looking back at the very severe winter of 2013-14 they find that bad weather can only explain part of the weakness at the start of the year.



How does this finding impact the debate? It suggests some skepticism is warranted. However, after slicing and dicing the data in many ways, the result still seems economically important. Moreover, in the real world of forecasting, ultimately, a judgment has to be made: do we wait for more data to nail down the case statistically, or go with a reasonable story and reasonable evidence? We choose the latter.

BofA' conclusion: it is not our models that are wrong, it is reality!

Macroeconomic Advisers has a model that captures both the seasonal distortion and the impact of worse-than-normal winter weather. They argue that bad seasonals subtracted 1.6% from the quarter and unusually bad snow subtracted another 1.6%. We think the seasonal estimate makes sense, but the weather variable seems a bit high. The only truly bad month this winter was February. Moreover, estimates of bad winter effects are sensitive to the exact measure used. Hence, we assume a bad weather effect less than half as big.

But where things for BofA get really awkward is when one recall that just one month ago it was Bank of America itself which said that it was "in an awkward spot" because the Q1 weakness can not be explained by weather, saying that "While we would love to blame the weather for all of our bad forecasts, in reality it is hard to pin down  weather effects" To wit:

Is weather the main reason for recent weak economic data? While we would love to blame the weather for all of our bad forecasts, in reality it is hard to pin down  weather effects.


This puts us in an awkward spot today. There is a bit of an urban legend that weather can explain all of the weakness in the first quarter of last year and hence could explain all the weakness today. However, hindsight is always 20-20. In real time, the slowdown last year was a major surprise to economists even though we get data on the weather before we get data on the economy. Moreover, this winter is not nearly as bad as last winter—last year we had three bad months, this year only February was unusually bad (Chart 1). Economic fundamentals point to stronger growth ahead, and that remains our forecast. However, we can’t completely explain the recent weakness and hence there is a risk that growth does not pick up.

And here is the actual evidence. Unadjusted.

But where things get most awkward, is that none other than a Federal Reserve Bank, that of Atlanta, continues to insist that the US is effectively in a technical recession with a H1 GDP print that will be negative, thanks to a Q2 GDP of just 0.7% following as -1.0% or worse Q1 GDP.

And when even the central planners in control of the economy can't keep their lies straight, then it may be time to panic.

As for the the double, triple and so on seasonal adjustments, we eagerly await the Fed to downward revise Q2 and Q3 data for the same but inverse reason: the weather was too nice. We may have a while to wait.

Trannies Tumble, S&P/Dow Give Up Week's Gains

Bond yields are leaking higher, The USDollar is flat (but noisy), but with no macro data to spark a momo run, US equities have tumbled out of the gate... especially Dow Transports. Dow & S&P are back to unchanged on the week...



BTFD? Well we are sure the FOMC Minutes wil lbe spun dovishly.

Trannies are in trouble again - Down 6% YTD... worst start to a year since 2009 (Dow Up 2.8%)


Charts: Bloomberg