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Hans-Werner Sinn Fears Europe's "Very Messy" Easy-Money Endgame

Authored by Hans-Werner Sinn, originally posted at Project Syndicate,

The euro has brought a balance-of-payments crisis to Europe, just as the gold standard did in the 1920s. In fact, there is only one difference between the two episodes: During today’s crisis, huge international rescue packages have been available.

These rescue packages have relieved the eurozone’s financial distress, but at a high cost. Not only have they enabled investors to avoid paying for their poor decisions; they have also given overpriced southern European countries the opportunity to defer real depreciation in the form of a reduction of relative prices of goods. This is necessary to restore the competitiveness that was destroyed in the euro’s initial years, when it caused excessive inflation.

Indeed, for countries like Greece, Portugal, or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30%, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10-15%. But Portugal and Italy have so far failed to deliver any such “real depreciation,” while relative prices in Greece and Spain have fallen by only 8% and 6%, respectively.

Revealingly, of all the crisis countries, only Ireland managed to turn the corner. The reason is obvious: its bubble already burst at the end of 2006, before any rescue funds were available. Ireland was on its own, so it had no option but to implement massive austerity measures, reducing its product prices relative to other eurozone countries by 13% from peak to trough. Today, Ireland’s unemployment rate is falling dramatically, and its manufacturing sector is booming.

In relative terms, Greece received most of Europe’s bailout money and showed the largest increase in unemployment. The official loans granted to the country by the European Central Bank and the international community have increased more than sixfold during the past five years, from €53 billion ($58 billion) in February 2010 to €324 billion, or 181% of GDP, now. Nevertheless, the unemployment rate has more than doubled, from 11% to 26%.

There are four possible economic and policy responses to this state of affairs. First, Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it. Second, the south can deflate. Third, the north can inflate. And, fourth, countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency.

Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls, as in Cyprus in 2013.

European politics has focused so far on providing public credit to the crisis countries at near-zero interest rates, which eventually may morph into transfers. But now the ECB is attempting to break the impasse through quantitative easing (QE). The ECB’s stated goal is to reflate the eurozone, thereby reducing the euro’s external value, by purchasing more than €1.1 trillion worth of assets. According to ECB President Mario Draghi, the inflation rate, which currently stands at just below 0%, is to be raised to an average of just below 2%.

This would offer southern European countries a way out of their competitiveness trap, because if prices remained unchanged in the south, while the northern countries inflated, the southern countries could gradually reduce their goods’ relative prices without feeling too much pain. Of course, in that case the north needs to inflate faster than by just 2%.

If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today.

I do expect QE to bring about some inflation. Given that an exchange rate is the relative price of a currency, as more euros come into circulation, their value has to fall substantially to establish a new equilibrium in the currency market. Experience with similar programs in the United States, the United Kingdom, and Japan has shown that QE unleashes powerful forces of depreciation. QE in the eurozone will thus bring about the inflation that Draghi wants via higher import and export prices. Whether this effect will be sufficient to revitalize southern Europe remains to be seen.

There is a risk that Japan, China, and the US will not sit on their hands while the euro loses value, with the world possibly even sliding into a currency war. Moreover, the southern EU countries, instead of leaving prices unchanged, could abandon austerity and issue an ever greater volume of new bonds to stimulate the economy. Competitiveness gains and rebalancing would fail to materialize, and, after an initial flash in the pan, the eurozone would return to permanent crisis. The euro, finally and fully discredited, would then meet a very messy end.

One can only hope that this scenario does not come to pass, and that the southern countries stay the course of austerity. This is their last chance.

"I'm Not Stupid" Monsanto Lobbyist Refuses To Drink Weedkiller After Proclaiming "It Won't Hurt You"

"Do as I say, not as I do," appears to be the message from a controversial lobbyist who claimed that the chemical in Monsanto’s Roundup weed killer was safe for humans refused to drink his own words when a French television journalist offered him a glass... "I'm not stupid," he proclaims... you be the judge...


In a preview of an upcoming documentary on French TV, Dr. Patrick Moore tells a Canal+ interviewer that glyphosate, the active ingredient in Roundup herbicide, was not increasing the rate of cancer in Argentina.


Extrait : Bientôt dans vos assiettes... - Interview de Patrick Moore



Entertaining transcript:

“You can drink a whole quart of it and it won’t hurt you,” Moore insists.


“You want to drink some?” the interviewer asks. “We have some here.”


“I’d be happy to, actually,” Moore replies, adding, “Not really. But I know it wouldn’t hurt me.”


“If you say so, I have some,” the interviewer presses.


“I’m not stupid,” Moore declares.


“So, it’s dangerous?” the interviewer concludes.


But Moore claims that Roundup is so safe that “people try to commit suicide” by drinking it, and they “fail regularly.”


“Tell the truth, it’s dangerous,” the interviewer says.


“It’s not dangerous to humans,” Moore remarks. “No, it’s not.”


“So, are you ready to drink one glass?” the interviewer continues to press.


“No, I’m not an idiot,” Moore says defiantly. “Interview me about golden rice, that’s what I’m talking about.”


At that point, Moore declares that the “interview is finished.”


“That’s a good way to solve things,” the interviewer quips.


“Jerk!” Moore grumbles as he storms off the set.


Peak Gold? Goldman Calculates There Is Only 20 Years Of Gold Supply Left

Late last year, when looking at a Goldcorp slideshow, we noticed something surprising: the gold miner had forecast that 2015 would be the year when gold production would peak among the mining industry.


To be sure Goldcorp was really just pitching its own balance sheet, and was more focused on its far more levered gold-mining competitors going out of business...

... and hence facilitating "peak production" this year as one after another producer is forced to file for bankruptcy, than actually making a statement on how much gold remains to be mined in the ground. Because the last thing even the most healthy gold miner, with the lowest production cost wants, is to face a world in which their primary commodity is running out.

Which may just be this world.

According to a report issued by Goldman's Eugene King looking at commodity scarcity, the chart below "shows that there are only 20 years of known mineable reserves of gold and diamonds."

Some futher observations on gold and scarcity in general from Goldman:

The combination of very low concentrations of metals in the Earth’s curst, and very few high-quality deposits, means some things are truly scarce. Perhaps unsurprisingly, these are the so-called precious metals (and diamonds), and that their value is derived from the fact they are rare.


Their relatively scarcity, and the market’s belief that new discoveries will be limited, is what drives the price of these super rare commodities. Take diamonds as perhaps the most extreme example. A diamond has very little intrinsic value. Its value is determined by a belief that it is rare and, for a natural diamond, unique.


Gold has been used as a measure of wealth for more than 4,000 years, as the ancient Egyptians soon worked out that gold was not only shiny and heavy, but rare.

Of course, this analysis is meaningless in a vacuum: if the "known reserves" of gold plunge in the coming decade, no matter how many gold futures and GLD short sales are conducted by the BIS, the price will have to go up, and it will go up high enough to where a new surge of gold miners will come online and find thousands of new tons of gold reserves around the globe.

Unless they don't, and Goldman is correct that "peak gold" may have arrived. This will be even more true if over the coming years the long overdue fiat economic panic finally washes over the globe, and a revulsion toward central bank policies forces a scramble into gold whose value (if not price since fiat currencies will be redundant) soars.

The answer is unclear, but what is certain is that like the price of oil over the past decade and until last fall when price discovery finally became somwhat credible, what happens in the physical realm has absolutely zero marginal impact on the price of commodity which has about 100 ounces in deliverable paper contracts for every ounce in underlying. It will be only after the gold price distortions via the derivative market are eliminated that such trivial price-formation forces as supply and demand are once again relevant.


Greek Deputy FinMin Confirms Athens Is "Prepared For Rift" With Europe

Just days after Greek FinMin Yanis Varoufakis' comments about hoping the Greek people will continue to back the government "after the rift," were played down by Syriza; ekathimerini reports that Alternate Finance Minister Euclid Tsakalotos on Friday made waves by seeming to confirm that the Greek government was "always prepared for a rift" with its European creditors - "If you don't entertain the possibility of a rift in the back of your mind then obviously the creditors will pass the same measures as they did with the previous [government]," (which perhaps explains why default risks are soaring back to post-crisis highs).


As ekathimerini reports, alternate Finance Minister Euclid Tsakalotos on Friday made waves by saying that the Greek government was "always prepared for a rift."

Tsakalotos, who is the ministry's key official for international economic relations, made the comment during an interview on Star television channel, prompting a flurry of reactions and criticism on social media.


Tsakalotos was speaking just two days after Finance Minister Yanis Varoufakis was caught on camera during a visit to Crete on the occasion of Greece's Independence Day telling a citizen that he hoped Greeks would continue to back the government "after the rift."


Varoufakis' comment was subsequently played down by SYRIZA commentators who said he might have been referring to a possible rift with vested interests in Greece rather than with the country's creditors.


Apparently in the same vein, Tsakalotos said on Friday, "If you don't entertain the possibility of a rift in the back of your mind then obviously the creditors will pass the same measures as they did with the previous [government]." "We are creating ambiguity with the creditors intentionally because they have to know that we are prepared for a rift, otherwise you can't negotiate," he said.


He added that the new government is intent on backing "those who lost a lot in the crisis, and that we are prepared, if things do not go well, for a rift."


Prior to his comments, Tsakalotos took part in a meeting with Varoufakis and Prime Minister Alexis Tsipras.

*  *  *

So is the plan to bleed the EU for as much as possible for as long as possible... then pull the Grexit "rift" card, pivot to Russia/China? Time is ticking loudly...

Invest in Food




......Submitted by Bullion Bulls Canada - Written by Jeff Nielson - (click for original)

(Independantly written)


At first glance, the title to this commentary seems facile, especially to those readers in higher income brackets. The reality, however, is that “investing in food” is a risk-free means of generating an annual return on one’s investment that would likely exceed the return one could earn on almost any other investment – despite the fact that nearly all other asset classes carry significant risks.


Indeed, with many asset classes currently at extreme “bubble” levels in their valuations (notably stocks,bonds, and real estate), the term “risk” is gross understatement. Putting any new money into any such assets (or simply keeping one’s wealth exposed to these sectors) is nothing less than financial suicide. In comparison to financial suicide; the opportunity for a risk-free return on one’s investing today obviously merits further scrutiny.



It is in this environment of extreme financial risk and perpetually spiraling food prices where we consider the proposition of food as an investment asset class. We begin by looking at the “fundamentals” of this market/investment class. And what we see (from this perspective) is extremely encouraging: food prices consistently soaring by roughly 20% per year, and significantly more for some categories of food (notably meat products).


With soaring food costs being a serious drain on the budgets of most families, our challenge is to find some way of turning this financial drain into a means of preserving/protecting our wealth: by investing in food. Regardless of one’s economic bracket; this is an investment opportunity which can be pursued by all of us.


Even those living in small apartments almost certainly have at least one closet whose space can be ‘sacrificed’ in order to capitalize on this risk-free opportunity. For those with more expansive residences; perhaps they have an entire room (rooms?) which can be devoted to “food investment”.


The proposition behind investing in food is simple. With all of us being food-consumers; we would greatly benefit by being able to pay “today’s prices” for particular food products, rather than the inflated prices of next month, six months from now, a year from now, etc. The longer we were/are able to continue paying today’s price, the greater the future savings.


It is this “future savings” which represents the risk-free return on our investment. At that point; the total, potential return on our investment is the product of four factors:


1) The total amount of space available for food storage (along with the types/categories of food one is capable of storing).

2) The total “shelf life” of particular categories of food products.

3) The annual “food inflation” rate.

4) Our own monthly/annual food consumption.


With the majority of people now living in multi-unit housing of some sort, where the total living space is relatively modest; the first factor may be the greatest limitation on the potential return from this investment. For those (more fortunate) individuals able to devote entire rooms (or perhaps a garage) to such investing; the earning/savings potential will be significantly greater.


There is also the issue of what specific types of food products one is capable of storing. Obviously “non-perishable goods” is the general category of food product which immediately comes to mind. However, for those individuals ready/willing/able to devote freezer-space to their food investing, suddenly the opportunity for savings and earnings is considerably expanded.


With meat/fish/poultry being near the top of the list when it comes to the food-inflation spiral; having a large freezer available for investing expands this investment opportunity. Indeed, for the average family; the annual savings on their food bill from a freezer full of meat would likely pay for the freezer itself, with the “investor” then able to earn an additional, annual return from this category of investing.


This brings us to our second factor, as we consider the practical parameters/limitations of investing in food. Many non-perishable goods can be stored almost indefinitely. Some can only be (safely) stored for a year or two. And in the case of food we store in a freezer; the shelf-life is likely no more than a year, and considerably less for many freezer goods.


The first two factors define our “capacity” for investing in food: total storage space available, and the length of time those goods can be stored (and still consumed). Once the food investor has calculated (and utilized) his/her capacity for this form of investing, our savings/profit becomes a simple function of the food-inflation rate.


The higher the inflation rate on the particular categories of goods we have stored, the greater our savings/profit. Thus this makes it incumbent on the food investor to carefully consider how best to allocate available storage space, and (for some) the available dollars to fund their food-investing. The better the job that the investor does on choosing his/her categories of products for storage, the greater the return.


Of course even with infinite space/dollars available for food investment, there is a final, practical reality which will act as a constraint for most of us when it comes to food investment: our own consumption-rate. Obviously, if we “invest” in a five-year supply of a particular food product which can only be stored safely for two years, we have misallocated funds, as some of our “investment” would spoil before we could consume it – and lock-in our profit.



We also need to consider the bulk of particular goods. A particular non-perishable item may be able to be safely stored for several years, but if it’s extremely bulky, it still might represent a “poor investment”. Conversely, items such as spices represent relatively high value/savings, while requiring minimal space, and have an extremely long shelf-life. It is partly for this reason that spices were quasi-currencies in previous, historical eras.


For homeowners, who have considerable living space, but (for whatever reason) have little storage space available for food investing; building a structure for food storage, such as a shed or (expanded) garage is a cost outlay which would likely pay for itself over a relatively short-term period – at which point the storage space would then generate a permanent, risk-free return.


One qualification must be added here, in order to account for the limited down-side to investing in food. With food prices soaring at an uneven rate; should we happen to purchase a particular category of food product at the peak of some spike in price, it is certainly within the realm of possibility that prices for that category of food could potentially decline – temporarily – thus reducing our overall return.


However, opposite to that very limited quasi-risk, we face the very real prospect of an imminent explosion in food prices, which would dwarf even the horrific spiral of (in particular) the past 10 years. Regular readers have seen the chart below many times in the past:



This insane, suicidal explosion in the U.S. monetary base does not suggest that the U.S. will face hyperinflation (of the U.S. dollar) in some relatively near-term horizon; it guarantees it. As we see the Euro-zone just (proudly) announce the conjuration of more than a trillion, new units of its own funny-money, and as we see the corrupt/incompetent Harper regime relentlessly destroy the Canadian dollar; obviously other Western populations will meet a similar fate with their own, paper funny-money.


While we can sacrifice consumption of many categories of goods in the face of a hyperinflationary spiral, we cannot avoid food consumption. At some point (likely between the end of this year and the middle of 2016); we will face an economic crisis characterized by the deflationary crashes of all the bubble-assets, with ‘sympathetic’ crashes for most other asset classes.


However, what readers need to understand is that a purely “deflationary” crash is no longer possible for thebankrupt regimes of the Western world. In order for any national economy to deflate; it must have savings it can cannibalize, in order to survive that deflationary shock (as was the case in “the Great Depression”).


The debtor-regimes of the West not only have no savings, most are already hopelessly insolvent, and teetering on bankruptcy, despite the lies to the contrary by the Corporate media, and our own, corrupt governments. In the revenue crisis which accompanies any deflationary crash; our insolvent governments will have two – and only two – choices: declare outright bankruptcy, or conjure-up their funny-money in quantities that dwarf even the sickening spike represented by the previous chart.


Such insanity would guarantee a full, hyperinflationary death-spiral in a matter of weeks, or several months at most, despite the near omnipotence of the One Bank when it comes to its currency manipulation. Indeed, this is why the less-corrupt East is not only busily crafting its own parallel financial system, next to the doomed financial/monetary Ponzi-scheme currently operated by the West, it’s about to assume control of the new, reserve currency: China’s renminbi.


For Western inhabitants, about to be devastated by a financial/economic cataclysm which is literally beyond the comprehension of any of us; we have two choices when it comes to protecting ourselves (apart fromsignificant holdings of gold and silver). Invest in food, or move to China.




......Submitted by Bullion Bulls Canada - Written by Jeff Nielson - (click for original)

(Independantly written)




Another Oligarch Preaches To The Peasants: Charlie Munger Says "Prepare For Harder World"

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

While several exceptionally wealthy and successful people have admirably come out and spoken passionately of the broken nature of financial markets and the political system, as well as the threat this poses to society in general (think Paul Tudor Jones and Nick Hanauer), there have been several examples of oligarchs coming out and conversely demonstrating their complete disconnect from reality, as well as a disdain for the masses within a framework of incredible arrogance.

I’ve commented on such figures in the past, with the two most popular posts on the subject being:

A Billionaire Lectures Serfs in Davos – Claims “America’s Lifestyle Expectations are Far Too High”

An Open Letter to Sam Zell: Why Your Statements are Delusional and Dangerous

The latest example comes from Charlie Munger, Warren Buffett’s right hand man, who tends to demonstrate an incredible capacity for verbal diarrhea. Recall his commentary on gold: “gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939.”  

Moving along, Mr. Munger provided some typically insensitive commentary at an event yesterday in Los Angeles. Bloomberg reports that:

(Bloomberg) — Charles Munger, who became a billionaire while helping Warren Buffett build Berkshire Hathaway Inc., predicted it’s going to get tougher for consumers to maintain their standard of living in coming decades.


“We should all be prepared for adjusting to a world that is harder,” Munger, 91, said Wednesday at an event in Los Angeles, in response to a question about the increase in the size of the Federal Reserve’s balance sheet since the 2008 financial crisis. “You can count on the purchasing power of money to go down over time. And you can almost count that you’ll have more trouble in the next 50 years than the last.”


“Somebody my age has lived through the best and easiest period that ever happened in the history of the world — the lowest death rates, the highest investment production, biggest increases in most people’s standards of living,” Munger said. “If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life.”

There’s a staggering amount of offensiveness in such few words. First off, he says that: “We should all be prepared for adjusting to a world that is harder.” Who is included in the word “all” here. Certainly not his fellow oligarchs, who already bailed themselves out in incredible fashion and have been spending the years since protecting themselves from the horrible future they’ve created. No, he is speaking to the masses, the plebs, the serfs, the peasants, the ruled. He is telling them tough luck, just try to avoid cannibalism in the future. Meanwhile, if you get close to my castle I’ll have you shot down like a dog.

He then shows his cards once again with the statement: If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life.”

50 years of life? What about those us who haven’t had the pleasure of being alive so long. What about the millennials, the teenagers, and the babies being born right now? He couldn’t give a shit, which is exactly why he and his buddies went out of their way to protect the wealthy, older generations with their bailouts in 2008/09. Conveniently, this is the exact demographic he belongs to.

His comments are particularity striking when you take them in context of yesterday’s article from the Wall Street Journal: Executive Pensions Are Swelling at Top Companies. If you think these guys are going to be dealing with the “hard times” ahead like everyone else, think again.

From the WSJ:

Top U.S. executives get paid a lot to do their jobs. Now many are also getting a big boost in what they will be paid after they stop working.


Executive pensions are swelling at such companies as General Electric Co., United Technologies Corp. and Coca-Cola Co. While a significant chunk of the increase is the result of arcane pension accounting around issues like low interest rates and longer lifespans, the rest reflects very real improvements in the executives’ retirement prospects.


New mortality tables released last fall by the American Society of Actuaries extended life expectancies by about two years. That, as well as low year-end interest rates, helped push pension gains higher than many companies had expected. The result is much higher current values for plans with terms like guaranteed annual payouts, which are no longer offered to most rank-and-file workers.

Note that these guaranteed annual payouts are no longer offered to most rank-and-file workers. There are peasants and there are oligarchs. The peasants are the ones Munger speaks to.

 GE Chief Executive Jeff Immelt’s compensation rose 88% last year to $37.3 million. Meanwhile, excluding $18.4 million in pension gains, his pay actually fell slightly to $18.9 million.


In all, Mr. Immelt’s pension is valued at about $4.8 million a year for life. The company puts its current value at about $70 million, up from around $52 million a year ago.


At Lockheed Martin Corp., CEO Marillyn Hewson’s total pay rose 34% to $33.7 million last year, with $15.8 million of that stemming from pension gains. An extra column in the proxy statement’s compensation table strips out those gains, showing her pay up about 13% to $17.9 million.


Executive pensions generally don’t consume the attention that pensions for the rank and file do. For years, as costs of traditional pension plans have risen amid low interest rates and longer lifespans, big companies have been closing them to new employees or even freezing benefits in place, often continuing with only a 401(k) plan for all but the oldest workers.


Last June, Lockheed Martin told its nonunion employees that it would stop reflecting salary increases in their pension benefits starting next year, and that the benefits would stop growing with additional years of work starting in 2020.

Just in case you needed further evidence of how all “public” policy, especially the actions of the Federal Reserve, are specifically designed to enrich the 0.01% at the expense of everyone else, let’s take a look at some excerpts from a CNBC article published today: Fed Policies Have Cost Savers $470 Billion:

The Federal Reserve’s efforts to stimulate the U.S. economy after the financial crisis ended up costing savers nearly half a trillion dollars in interest income, according to report released Thursday.


Since the central bank dropped interest rates to near zero at the end of 2008, savers have labored under plain-vanilla bank accounts and money market funds that have yielded close to nothing. Critics have long said the Fed’s quantitative easing efforts have boosted asset prices, particularly in the stock market, but exacted severe costs across other parts of the economy.

If QE really helps everyone, then why has income inequality exploded? The answer, of course, is that QE picked winners and losers. Naturally, the winners have been the oligarchs, and the losers have been everyone else.

Thanks for playing.

*  *  *

For related articles, see:

As the Middle Class Evaporates, Global Oligarchs Plan Their Escape from the Impoverished Pleb Masses

Just Another Tale from the Oligarch Recovery – $100 Million Homes Being Built on Spec

The Pitchforks are Coming…– A Dire Warning from a Member of the 0.01%

A Billionaire Lectures Serfs in Davos – Claims “America’s Lifestyle Expectations are Far Too High”

An Open Letter to Sam Zell: Why Your Statements are Delusional and Dangerous

China Hard Landing: Blame The Smog

Earlier this week, we got further evidence of just how quickly China’s economy is slowing down (hard landing anyone?) when the March manufacturing PMI printed in contraction territory, the employment sub index dove to Lehman levels, and rail freight fell 9%. While disconcerting, this isn’t all that surprising given that if one looks at what really matters (i.e electricity usage, rail freight volume, and credit growth), it’s pretty clear that China’s economy isn’t expanding at anywhere near the targeted 7% and hasn’t been for quite some time: 

And the weakness may well persist as PM Li wages “war” on a familiar adversary: smog. Beijing is set to close all major coal power plants by 2016 including an 845-megawatt plant owned by China Huaneng Group. They’ll be replaced by natural gas facilities that will generate two-and-a-half times the power. As Bloomberg reports, this should have a fairly dramatic effect on air quality: 

Shutting all the major coal power plants in the city, equivalent to reducing annual coal use by 9.2 million metric tons, is estimated to cut carbon emissions of about 30 million tons, said Tian Miao, a Beijing-based analyst at North Square Blue Oak Ltd., a London-based research company with a focus on China.

It may also have a noticeable effect on economic output. Here’s Deutsche Bank: 

Almost universal from companies is a lack of understanding of the public reported GDP numbers and a lack of correlation to what they see. Many names see the actual GDP rate in China for the past 3 years as being more like the 5-6% level and that 2015 is likely to be at a similar year. Interestingly most feel that the region’s ability to achieve anything more than this (i.e. 8+%) is severely constrained for the next few years by the much needed pollution control.


Mentioning pollution and corruption in China is not new; however, the sharp increase in state focus on both issues is clear. The slowing of the economy may be the price of fixing these issues…

The costs to China’s sputtering economic growth machine aren’t likely to be small either. In fact, Bloomberg estimates suggest industrial output may have to be slashed by a fifth in order for Beijing to hit its own pollution targets and by up to 40% if China wants its citizens to be able to breathe the same air as the rest of the world: 

How big is the hit? China's government is targeting a PM2.5 level of 35 micrograms per cubic meter. In 2014, the level was about 60. Our estimate suggests that without any changes in industrial structure or other abatement efforts, getting there would require a reduction in industrial output of as much as 20 percent.


Getting down to the international clean air standard would be even tougher. The level recommended by the World Health Organization is 10 micrograms per cubic meter. Absent other measures, that would mean taking China’s industrial output down 40 percent.

*  *  *

So there you have it. Expect the Chinese economy to decelerate further going forward and expect Beijing to blame it on the smog.

Japanese Government Bonds Are Crashing - Biggest Surge in Yields In 2 Years

Whether due to contagion from the surge in US Treasury yields or a double whammy of weak household spending and Retail Trade data indicating that Abenomics is an utter failure is unclear, but yields across the entire JGB complex are spiking by the most in over 2 years. 10Y yields are up almost 9bps (not much you say) except that is from 32bps to 41bps!! 2Y and 5Y JGB yields have roundtripped from last week's Fed-driven plunge. Is the BoJ/GPIF losing control of the largest and now most illiquid bond market in the world?



This is the biggest yield spike since the Taper Tantrum...


And stocks are spiking...


As the Nikkei has gained 4000 more points that the Dow in the last 6 months...


Chart: Bloomberg

Did Saudi Arabia Just Suffer Its Largest Foreign Capital Flight In 15 Years?

The last few days have been almost the worst for the Saudi Arabian stock market in 4 years. Between low oil prices, a new King's big social welfare budget, and now "war," it appears this year's dead cat bounce from last year's exuberance is dying rather rapidly. However, what is perhaps even more troublesome for The Kingdom than the net worth destruction and potential blowback from instigating war against the Houthis is the fact that this month saw the largest drop in foreign curreny reserves on record (over 15 years) for the Arab nation... somewhat suggesting capital flight on a scale never seen before in one of the richest states in the world.


Saudi stocks plunging...


as foreign currency reserves drop by the most on record (in over 15 years)...


An almost $18bn plunge - the most ever - dragging foreign currency reserves back to the lowest in over 3 years...

and the very recent weakness in the Rial (as war began) suggests the picture will get worse...



Charts: Bloomberg

China's Demographic Destiny Disaster (In 2 Simple Charts)

China’s economy is slowing, and the debate is raging over whether the country is headed for an abrupt hard landing or whether the slowdown will stabilize into a soft landing that may already be underway. However it plays out, Schwab's Jeff Kleintop notes, one thing is clear: A return to the double-digit growth rates of years past seems unlikely. Demographics are destiny.. and China faces two unstoppable trajectories.

Via Schwab Insights,

China’s rise largely stemmed from a surplus of laborers willing to work for lower wages than the competition overseas. This allowed Chinese factories to turn out goods more cheaply than was possible elsewhere.

China isn’t the first country rise using this model. In the 1970s and 1980s, Japan relied on low-cost, export-driven economic growth to elevate itself to the second-largest economy in the world. However, Japan eventually had to change gears as the country’s birthrate declined and the number of workers fell.

China now faces a similar trajectory, as seen in the chart above. Its working-age population—defined as those between ages 15 and 64—is peaking and is set to decline in the years ahead.


China’s demographic problem has been exacerbated by the country’s “one-child” policy—a system introduced in the late 1970s that prohibits many couples from having more than one child. Although the policy has recently been relaxed slightly, according to the Chinese agency charged with population planning, the one-child policy has prevented more than 400 million births since 1979.


To put that number in perspective, the entire U.S. labor force amounts to about 150 million workers. You can see how demographic trends in those two countries might play out in the chart above.

*  *  *

That's a big demographic hole to fill with QE-lite...

Treasury Collateral Shortage Crosses The Atlantic, Makes European Landfall

In “How The ECB Is Distorting Euro Money Markets” we summarized Barclays take on the effects of ECB QE as follows: “short-end core paper will trade below -0.20%, extreme supply/demand imbalances will cause general collateral rates to trade through the depo rate, money market fund yields will turn decisively negative testing investor patience, and central banks had better make good on promises to make some of their inventory available for lending or risk impairing the functioning of the repo market (never a good idea).” A little over two weeks into the PSPP and sure enough, signs are already beginning to show that the ECB is effectively breaking the market. Last week, we got this via Reuters

The soaring cost of borrowing government bonds in secured lending markets highlights the distortions caused by the ECB's asset-purchase scheme, which analysts say could clog up Europe's financial system.


Uncertainty over how the European Central Bank will counter the scarcity of top-rated debt could further shrink repo markets -- a source of funding that is essential to the smooth running of bond markets...


One broker said every German government bond eligible for ECB purchase was now trading 'special', meaning exceptional demand had made it more expensive to borrow for three months than general collateral.

Then today, this from Mizuho’s Peter Chatwell via Bloomberg: 

Some bonds in German market are trading special in repo, Peter Chatwell, strategist at Mizuho, writes in client note.


Picture for relative-value trades has deteriorated, with the number of bonds that trade rich vs fitted curve becoming even richer.


As list of DBR specials grows, relative value in Germany may become dysfunctional until Eurosystem lends out bond holdings under QE.

Recall that we've seen a similar dynamic in the US of late with the two-year trading negative in repo. To demonstrate the dramatic effect PSPP purchases are having on the market (and by extension, how important it is for the ECB to get the securities lending operation right), consider the following from JPM (this is from one week into the program): 

The first issue of collateral shortage can be seen in the collapse of GC repo rates to negative territory since the beginning of last week for terms of greater than 3 months. 1yr Germany has been trading at close to -30bp; i.e. one can currently fund purchases of Bunds via the term repo market and achieve positive carry by even buying Bunds with yields between -20bp to -30bp. We note that this expensiveness in term repos shows how unwilling Bund holders are to depart from their collateral for more than a few days or weeks.

And in terms of liquidity — and remember here that liquidity means the degree to which you can trade without impacting prices too much, or as Howard Marks recently put it, “the key criterion isn’t “can you sell it?”, it’s “can you sell it at a price equal or close to the last price?” — the ECB pretty clearly had a rather outsized negative effect very early on. Here’s JPM again: the sharp decrease in Bund liquidity as our market depth metric; i.e. the ability to transact in size without impacting market prices too much, collapsed this week . We measure market depth by averaging the size of the three best bids and offers each day for key markets. Figure 2 shows two such measures, for 10-year cash Treasuries (market depth measured in $mn) and German Bund futures (market depth measured in number of contracts). While both UST and Bund market depth have been trending lower in recent months and while the former moved recently below the Oct 15th low, what was striking this week was the divergence between a modest increase in UST market depth vs. an abrupt decline in Bund market depth. We note this development effectively challenges the market neutrality condition of the ECB from the first week of purchases already! 

JPM goes on to explain — as they have before — that QE really just replaces one form of collateral with another and “shortage” isn’t really the appropriate term but rather “scarcity,” as “scarcity” implies that one form of collateral (in this case EGBs) has simply been made more expensive vis-à-vis another form of collateral (in this case cash). However, because cash isn’t as efficient as a form of collateral as the bonds it's replacing, the ECB has in fact engineered a shortage: 

However, this assessment is complicated by reduced usage and efficiency of cash collateral in recent years. In particular, usage of government bond collateral has increased at the expense of cash collateral by both banks and investors… 


Banks are responding positively to reduced appetite for cash collateral by the buy side as this also helps banks to increase the efficiency of their own collateral management processes via re -hypothecation of security collateral and via consolidating and optimizing collateral across OTC derivatives, securities lending and repos to meet more onerous regulatory requirements. Re -hypothecation or re -use rate of security collateral has decreased post the Lehman crisis , but at around x2 currently it makes bond collateral more efficient than cash collateral…

...and so…

In a way an argument can be made … that the ECB not only creates scarcity of one form of collateral vs . another but that it also creates shortage of collateral by replacing high efficiency collateral with low efficiency collateral. 

Here’s Barclays summing it all up: 

Importantly, the shortage of government bonds would reduce the liquidity of the repo as well as cash markets. In the legal act of its public sector purchase programme (PSPP) the ECB stated that securities purchased under the PSPP are eligible for securities lending activity, including repos. This will be very important, in our view, to mitigate any negative implications of QE purchases on the repo market’s functioning. 

And here’s Soc Gen citing liquidity as a possible reason for EU EGB relative underperformance (sans-bunds) vis-a-vis SSAs : 

Our conclusion is that, once again, the market is responding positively to aggressive monetary policy but remains somewhat distorted due to the lack of structural adjustments. The underperformance of EU bonds – unchanged since the start of PSPP, while other issuers’ curves have flattened – may be partly explained by the lack of liquidity.

Soc Gen sees large scale asset purchases effectively limiting euro issuance in the SSA space and squeezing investors into higher-yielding issues:

Some issuers have advanced their programmes to well above 25%... However, what is very significant is the much smaller share of EUR issuance...The slowdown in the pace of new EUR issuance could therefore be the result of a pause after the strong start to the year, in combination with the shift to foreign currencies. However, the lack of interest from EUR-denominated accounts is no doubt linked to the implementation of the PSPP. By squeezing spreads so much, the ECB is crowding investors out of the sector.

Moving now to corporate credit and going a bit further in an effort to put the pieces together and paint a comprehensive picture, consider the effects all of the above are having outside of the market for EGBs and SSAs. From Barclays: 

The ECB QE has caused a dramatic flattening of government bond curves and caused Bunds to trade with negative yields past the 7y maturity. There is now €1.9trn of negative-yielding government debt in Europe (almost 20% of the outstanding bonds) and this has a profound impact on investor behaviour. In fact, there is strong evidence that EGB investors are already heavily involved in short-end, highly rated corporate bond markets. From June 2014 to February 2015, short-dated, highly rated paper outperformed. We believe this reflects the investment constraints of bank treasury desks, which have responded to a lack of positive yielding collateral by taking more credit risk and more rates duration risk, but are unlikely to hold long-dated credit. This will lead to a persistent bid for this area of credit, capping shorter-dated, higher-rated credit in Europe. 


The implications of lower government bond yields generally and the influx of displaced EGB investors are already being felt in credit markets, with 95% of the IG-rated market (excluding subordinated debt) trading below 1.5% yield. 

Given that, we now need to consider everything we’ve said about illiquidity in the secondary market for corporate credit lately. Recall that reduced dealer inventories (as a result of new regulations) combined with high issuance (due to corporates looking to take advantage of record low borrowing costs) and in conjunction with investors’ hunt for yield (due to misguided monetary policies), have the potential to coalesce into a nightmare scenario, or, as we put it recently:

Thanks to new regulations ostensibly designed to, among other things, bolster capital cushions and keep the market safe from the perceived perils of prop trading, banks are more reluctant to facilitate trading. This comes at the absolute worst possible time. Borrowing costs are so low that the Fed is basically daring companies not to take advantage, so while issuance is high, secondary market liquidity is non-existent meaning, effectively, that the door to the theatre is getting smaller and smaller and if someone yells “fire,” getting out is going to prove decisively difficult.  

Here’s Barclays again, with their riff on the same narrative: 

What is unique to Europe is the influx of non-traditional credit investors directly into €IG (not via ETF or the like) and their behaviour. Where the motivation is primarily to ‘hide away’ from negative bund yields, anecdotal evidence suggests the focus is on buying bonds of ’large, stable’ companies, with little discrimination between issuers of that kind. The risk is that we have what could be called a ‘Tesco moment’ where one of these ‘large, stable’ companies runs into negative headlines. Significant selling from non-traditional credit investors could ensue, which could spread into other credits owned by this segment. With reduced dealer balance sheet, there could be few buyers of such paper (in particular given tight valuations) and the spread widening could be disproportionate. 

...and Howard Marks simplifying things:

Usually, just as a holder’s desire to sell an asset increases (because he has become afraid to hold it), his ability to sell it decreases (because everyone else has also become afraid to hold it). Thus (a) things tend to be liquid when you don’t need liquidity, and (b) just when you need liquidity most, it tends not to be there. 

*  *  *

Coming full circle, we can see that some of the strain here could be alleviated if the ECB is able to implement an effective securities lending program so that €1 trillion of in-demand collateral isn’t locked away where the repo market can’t access it. JPM’s suggestion is for euro area NCBs to utilize existing relationships with dealers to facilitate this, and for dealers to then relax collateral standards “to ease the pressure on one country’s GC repo levels,” and to allow cash for collateral, in effect reversing the effect of the ECB’s low efficiency for high efficiency swap. 

China's Stock Bubble Leaves BNP Speechless: "What Happens Next Is An Unknown-Unknown"

Earlier this month, we identified the reason why Chinese stocks have continued to rise in the face of overwhelming evidence that the country’s economy is decelerating quickly. While the first part of the 8-month run can be plausibly attributed to PSL, the furious buying that began in late November looks to be at least partly attributable to the fact that thanks to tighter regulations on lending outside the traditional banking system, China’s $2 trillion shadow banking complex needed somewhere to put cash to work and that somewhere turns out to be the giant bubble that is the SHCOMP. Here’s more: 

Because according to Reuters, it is precisely China's trust firms, with total assets of $2.2 trillion, and who together with Banker Acceptances comprise the bulk of China's shadow banking pipeline, and no longer able (or willing) to lend to China's small companies and individuals due to a spike in regulation, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans.


In other words, instead of using their vast cash hoard of over $2 trillion to re-lend and stimulate China's economy, China's unregulated, shadow banking conduits are now directly buying stocks!

Shortly thereafter we highlighted the 7 main reasons for the Chinese stock ramp all of which boil down to one thing: liquidity. Here they are, courtesy of UBS:

With no significant change in China's macro or corporate fundamentals, the visible rebound in China's A-share market since November appears to have been largely liquidity driven. We think this, in turn, may have been fuelled by a number of factors including:

1. new funds flowing into the stock market from household saving, real estate, commodities and trust markets;

2. banks' bridge loans provided to investors who lost access to other high-yield shadow banking products as the result of tighter regulation;

3. the PBC's easing of liquidity conditions via a variety of "targeted easing" tools (e.g. MSL, PSL, etc.);

4. the official launch of Mutual Market Access (MMA) between the Hong Kong and Shanghai exchanges;

5. long-term expectations for SOE reform and A-shares entering the MSCI index next June;

6. increased use of leverage by retail investors via margin trading; and


7. market sentiment being boosted by expectations for further policy easing.

Meanwhile, February’s RRR cut failed to meaningfully lower China’s interbank rates, likely due to continued sizable capital outflows and significant liquidity withdrawals from China’s money markets by recent IPO applications.

Meanwhile, China’s securities regulator warned investors that not wanting to miss out on the next leg up is not a good investment strategy to follow, especially in a market as frothy as this one. Now, BNP is out with a note calling China’s equity bubble “a microcosm for the overall economy: unsustainable growth in leverage masking ever-deteriorating fundamentals and increasing future downside risks.” Here’s more: 

Against all odds, the best performing asset class on the planet over the last nine months or so has been Chinese equities…’s not the economy (as we’ve been saying for months)...

What underlies these extraordinary gains? It is certainly not economic fundamentals. Led by the accelerating real estate slump (China: It’s Only Just Begun), China’s GDP growth has steadily slowed with reported 2014 GDP growth of 7.4% the slowest in almost twenty years. A range of ‘hard’ economic indicators such as electricity production and rail cargo volumes suggest even slower growth. Our preferred ‘real, real’ GDP estimate flags that output growth could have been as low as c.4½% in 2014 (China: Fit as a Fiddle). While the usual data fog around the Lunar New Year partially clouds analysis, high frequency indicators that generate early estimates of GDP growth suggest that the growth has continued to slide in 2015Q1… must be liquidity….

By definition therefore equities’ stellar performance has been a function of liquidity driven multiple expansion. The P/E ratios for the Shanghai and Shenzhen markets have roughly doubled since August to c.19x and c.44x respectively. While still a long way short of the incredible highs of 70-80x reached during the 2006-2007 bubble, multiples are now rapidly approaching their post-GFC highs. One obvious source of fresh liquidity which could have powered equities’ bull-run is from the long-delayed introduction of the Hong KongShanghai ‘stock connect’ last November. The scheme, formerly known as ‘the through train’, allows two trading between the Shanghai A-share market and the Hang Seng. Two-way flows however have been relatively meagre. An initial aggregate quota of RMB300bn was set for northbound flows into Shanghai. So far only about a cumulative RMB125bn has flowed north, leaving RMB175bn of the aggregate quota unfilled. And northbound buy orders have in turn typically only accounted for around ¾% of the Shanghai market’s daily turnover…

...and it comes from a predictable place, leverage…

Far from a surge in external liquidity, an increasingly self-feeding domestic frenzy fuelled by leverage appears to be the key driver….Margin purchases have been running well ahead of redemptions ensuring that the outstanding stock of margin debt has ballooned by over RMB1 trillion since August; equivalent to more than 1% of GDP…

...and castles built on quicksand (i.e. margin debt) will likely collapse…

Margin purchases are now accounting for almost 20% of equities daily turnover which itself has soared to wholly unprecedented levels in another sign of self-feeding speculative frenzy. What happens next is clearly an ‘unknown-unknown’. By definition detached from fundamentals, speculative bubbles are inherently re-enforcing in the short-term and frequently last longer than expected. The longer they continue, however, the larger the eventual bursting. 


*  *  *

As a reminder: 

Why Is Russia Building Massive Underground Bomb Shelters?

Submitted by Michael Snyder via The End of The American Dream blog,

Did you know that the Russians have a massive underground complex in the Ural mountains that has been estimated to be approximately 400 square miles in size?  In other words, it is roughly as big as the area inside the Washington D.C. beltway.  Back in the 1990s, the Clinton administration was deeply concerned about the construction of this enormous complex deep inside Yamantau mountain, but they could never seem to get any straight answers from the Russians.  The command center for this complex is rumored to be 3,000 feet directly straight down from the summit of this giant rock quartz mountain.  And of course U.S. military officials will admit that there are dozens of other similar sites throughout Russia, although most of them are thought to be quite a bit smaller.  But that is not all that the Russians have been up to.

For example, Russian television has reported that 5,000 new emergency nuclear bomb shelters were scheduled to have been completed in the city of Moscow alone by the end of 2012.  Most Americans don’t realize this, but the Russians have never stopped making preparations for nuclear war.  Meanwhile, the U.S. government has essentially done nothing to prepare our citizens for an attack.  The assumption seems to be that a nuclear attack will probably never happen, and that if it does it will probably mean the end of our civilization anyway.

Needless to say, the Russians are very secretive about their massive underground facility at Yamantau mountain, and no American has ever been inside.  The following is what Wikipedia has to say about it…

Large excavation projects have been observed by U.S. satellite imagery as recently as the late 1990s, during the time of Boris Yeltsin’s government after the fall of the Soviet Union. Two garrisons, Beloretsk-15 and Beloretsk-16, were built on top of the facility, and possibly a third, Alkino-2, as well, and became the closed town of Mezhgorye in 1995. They are said to house 30,000 workers each. Repeated U.S. questions have yielded several different responses from the Russian government regarding Mount Yamantaw. They have said it is a mining site, a repository for Russian treasures, a food storage area, and a bunker for leaders in case of nuclear war. Responding to questions regarding Yamantaw in 1996, Russia’s Defense Ministry stated: “The practice does not exist in the Defense Ministry of Russia of informing foreign mass media about facilities, whatever they are, that are under construction in the interests of strengthening the security of Russia.” Large rail lines serve the facility.

Back in 1996, the New York Times reported on the continuing construction of this site.  U.S. officials were quite puzzled that the Russians were continuing to build it even though the Cold War was supposedly over at that point…

In a secret project reminiscent of the chilliest days of the cold war, Russia is building a mammoth underground military complex in the Ural Mountains, Western officials and Russian witnesses say.


Hidden inside Yamantau mountain in the Beloretsk area of the southern Urals, the project involves the construction of a huge complex served by a railroad, a highway and thousands of workers.

Within the U.S. intelligence community, there was a tremendous amount of debate at that time regarding the purposes of this facility, but what everyone agreed on was that it was going to be absolutely massive…

A report in Sovetskaya Rossiya said the project involves construction of a railroad, a modern highway and towns for tens of thousands of workers and their families.


The complex is as big as the Washington area inside the Beltway,” said an American official familiar with intelligence reports.

A couple of years later, a top U.S. general said that he believed that the complex at Yamantau had “millions of square feet available for underground facilities”

In 1998, in a rare public comment, then-Commander of the U.S. Strategic Command (STRATCOM) Gen. Eugene Habinger, called Yamantau “a very large complex — we estimate that it has millions of square feet available for underground facilities. We don’t have a clue as to what they’re doing there.”


It is believed to be large enough to house 60,000 persons, with a special air filtration system designed to withstand a nuclear, chemical or biological attack. Enough food and water is believed to be stored at the site to sustain the entire underground population for months on end.

A few years after that, in 2003, there was an article in the Washington Post by Bruce G. Blair in which Yamantau was mentioned as a potential key target for U.S. nuclear war planners…

Die-hard [U.S.] nuclear war planners actually have their eyes on targets in Russia and China, including missile silos and leadership bunkers. For these planners, the Cold War never ended. Their top two candidates [i.e., targets] in Russia are located inside the Yamantau and Kosvinsky mountains in the central and southern Urals.


Both were huge construction projects begun in the late 1970s, when U.S. nuclear firepower took special aim at the Communist Party’s leadership complex.


Fearing a decapitating strike, the Soviets sent tens of thousands of workers to these remote sites, where U.S. spy satellites spotted them still toiling away in the late 1990s.

But the Russians have not just been building giant underground facilities deep in the Urals.

They have also been constructing thousands of new underground bomb shelters in major cities such as Moscow.

The following is an excerpt from an RT article in 2010…

Nearly 5,000 new emergency bomb shelters will be built in Moscow by 2012 to save people in case of potential attacks.


Moscow authorities say the measure is urgent as the shelters currently available in the city can house no more that half of its population.


In the last 20 years, the area of air-raid defense has been developed little, and the existing shelters have become outdated. Moreover, they are located mostly in the city center, which makes densely populated Moscow outskirts especially vulnerable in the event of a nuclear attack.


In order to resolve the issue, the city has given architects a task to construct a typical model of an easy-to-build shelter that will be located all over the city 10 to 15 meters underneath apartment blocks, shopping centers, sport complexes and parks, as in case of attack people will need to reach the shelters within a minute.

Of course all of this construction cost the Russians a lot of money.

One estimate put the cost at “anywhere from half a billion to a billion dollars”

Though the bunkers are supposed to be designed to shelter the population in the event of a nuclear attack, government officials say it’s only a precaution and they do not expect such an attack or nuclear outbreak (e.g. Chernobyl) to occur. Neither RT or the Russian government provided estimates for the cost of the facilities. A Popular Mechanics article that reviewed a number of different types of bunkers and building practices had varying prices depending on the type of shelter. Since the proposed Russian bunkers would hold roughly 1000 people each (based on the population count and other details), one could estimate that the lowest price point for a bunker this size, with basic necessities like bathrooms and reserve food for a day or two, may run in the area of around $100,000 – $200,000. This would put a conservative price tag for 5000 shelters anywhere from half a billion to a billion dollars. A significant investment, indeed.

So what about us?

Has the U.S. government constructed any bunkers for the survival of the general population in the United States?

Of course not.  In the event of a nuclear war, I guess they just expect pretty much all of us to die.

The Russians also recently finished work on a brand new national defense center in Moscow that contains extensive underground facilities

Russia is launching a new national defense facility, which is meant to monitor threats to national security in peacetime, but would take control of the entire country in case of war.


The new top-security, fortified facility in Moscow includes several large war rooms, a brand new supercomputer in the heart of a state-of-the-art data processing center, underground facilities, secret transport routes for emergency evacuation and a helicopter pad, which was deployed for the first time on Nov. 24 on the Moscow River. The Defense Ministry won’t disclose the price tag for the site, but it is estimated at the equivalent of several billion dollars.

In addition, the Russians have also been developing a new anti-ballistic missile system that is designed to keep U.S. nuclear missiles from getting to their targets in the first place.

The U.S. doesn’t have anything like the S-500 that is currently being developed by the Russians.  At the latest, it is scheduled to be deployed in 2017, but there are rumors that it is already starting to be deployed today.  The following comes from

The S-500 is not an upgrade of the S-400, but a new design. It uses a lot of new technology and is superior to the S-400. It was designed to intercept ballistic missiles. It is planned to have a range of 500-600 km and hit targets at altitudes as high as 40 km. Some sources claim that this system is capable of tracking 5-20 ballistic targets and intercepting up to 5-10 ballistic targets simultaneously. It can defeat ballistic missiles traveling at 5-7 kilometers per second. It has been reported that this air defense system can also target low orbital satellites. It is planned that the S-500 will shield Moscow and the regions around it. It will replace the current A-135 anti-ballistic missile system. The S-500 missiles will be used only against the most important targets, such as intercontinental ballistic missiles, AWACS and jamming aircraft.

Sadly, most Americans are not interested in this stuff at all.

These days, most Americans just assume that the Russians are “our friends” and that a war with Russia could never possibly happen.

What they don’t realize is that the Russian people see things very, very differently.  Today, 81 percent of Russians have a negative opinion of the United States.  Our interference in the conflict in Ukraine has made the Russian people very angry, and there are many over there that now believe that a shooting war with the United States is inevitable.

And this week things between the United States and Russia got even more tense.  Barack Obama has already announced that we will be sending “non-lethal” military aid to the Ukrainians, but now the U.S. House of Representatives has overwhelmingly passed a resolution that calls for Obama to send “lethal” military aid to the government in Kiev…

Yesterday, in a vote that largely slid under the radar, the House of Representatives passed a resolution urging Obama to send lethal aid to Ukraine, providing offensive, not just “defensive” weapons to the Ukraine army – the same insolvent, hyperinflating Ukraine which, with a Caa3/CC credit rating, last week started preparations to issue sovereign debt with a US guarantee, in essence making it a part of the United States (something the US previously did as a favor to Egypt before the Muslim Brotherhood puppet regime was swept from power by the local army).


The resolution passed with broad bipartisan support by a count of 348 to 48.


According to DW,  the measure urges Obama to provide Ukraine with “lethal defensive weapon systems” that would better enable Ukraine to defend its territory from “the unprovoked and continuing aggression of the Russian Federation.”


“Policy like this should not be partisan,” said House Democrat Eliot Engel, the lead sponsor of the resolution. “That is why we are rising today as Democrats and Republicans, really as Americans, to say enough is enough in Ukraine.”

If Obama does decide to send lethal military aid to the Ukrainians, the Russians are going to flip out.

Sadly, neither side seems very interested in peace at this point.

We just continue to take even more steps along the road toward World War III, and it is a war that the United States is completely and utterly unprepared for.

The World's Greatest Oil Chokepoints, And Why Yemen Matters

About half the world's oil production is moved by tankers on fixed maritime routes, according to Reuters. The blockage of a chokepoint, even temporarily, can lead to substantial increases in total energy costs and thus, these checkpoints are crucial to global energy security. While Hormuz remains the largest chokepoint (and along with Bab el-Mandeb explains why Yemen matters so much), Malacca (as we noted previously) is quickly becoming another area of potential problems.


And while Yemen is key for The Strait of Hormuz...


With Bab el-Mandeb even more specifically problematic if Yemen tensions get too extreme...

Source: JPMorgan is China's growing presence near The Strait of Malacca that is perhaps most worrisome for the global energy order...


and here's why...


The Claims...


*  *  *

Caught On Tape: Saudi Warplanes Bomb Yemen

Yesterday we saw the tracers against the dark night sky, tonight we get the video of Saudi warplanes bombing various Houthi positions. All looks quite "decisive" to us...

Powerful explosions rocked the Houthi-held Sanaa on Thursday night as a Saudi-led coalition carried out air strikes against Shiite rebels in control of the Yemeni capital, an AFP correspondent reported.


Anti-aircraft fire erupted in response to what witnesses said were air strikes by the coalition forces against a camp at al-Istiqbal, on Sanaa's western entrance.

Via Al-Arabiya...

(note - musical accompaniment provided by Saudi Arabia, not Zero Hedge)

*  *  *

Here is the state of play in crude oil for now...


The US Housing Bubble In One Chart: Home Prices Outpace Wage Growth 13:1

If there is one chart that most clearly captures the unsustainable US home price appreciation bubble, it is the following which was released overnight from RealtyTrac: it is based on an analysis of wage growth and home price appreciation during the U.S. housing recovery of the past two years and has found home price appreciation has outpaced wage growth in 76 percent of U.S. housing markets during that time period. The conclusion: home price appreciation nationwide has outpaced wage growth by a 13:1 ratio!


Some of the other RealtyTrac report's findings:

“Home prices in many housing markets across the country found a floor in 2012 and since then have rapidly appreciated, particularly in markets attracting institutional investors, international buyers or some other flavor of cash buyer not constrained by income as much as traditional buyers,” said Daren Blomquist, vice president at RealtyTrac. “Eventually, however, those traditional buyers will need to play a bigger role in the housing market for the recovery to maintain its momentum.

What goes up, unsustainably, must come down, or at least hold it growth until wage growth finally picks up.

“Those markets with the biggest disconnect between price growth and wage growth during the last two years are most likely to see plateauing home prices in 2015 until wages catch up,” Blomquist continued. “Meanwhile, markets where wage growth has outpaced home price appreciation during the last two years are poised to see at least steady growth in home prices in 2015 in most cases.”

The math is well known to frequent readers. Nationwide, median wages have increased 1.3 percent between the second quarter of 2012 –when home prices bottomed out and started rising again — and the second quarter of 2014. Meanwhile home prices have increased 17 percent in the two years ending in December 2014, outpacing wage growth by a 13:1 ratio.

Among the 184 metro areas analyzed, the average wage growth over the two years ending Q2 2014 was 3.7 percent while the average home price appreciation in the two years ending in December 2014 was 13.4 percent.

Where it the appreciation imbalance the biggest? Home price appreciation outpaced wage growth in 140 of the 184 metro areas (76 percent) with a combined population of 176 million. Metropolitan statistical areas with the highest ratio of price appreciation to wage growth included Merced, California (141:1), Memphis, Tennessee (99:1), Santa Cruz, California (94:1), Augusta, Georgia (78:1), and Palm Bay-Melbourne-Titusville, Florida (62:1).

Other metro areas where home price appreciation has outpaced wage growth by a wide margin during the housing recovery included Sacramento, California (17:1 ratio), Riverside-San Bernardino, California (15:1 ratio), Las Vegas, Nevada (14:1 ratio), and Detroit (12:1 ratio).

“As wage growth remains fairly flat across the Ohio markets, the effects of low available inventory continue to escalate prices, creating a negative effect on home affordability for many first time, and move up home buyers,” said Michael Mahon, executive vice president at HER Realtors, covering the Ohio markets of Cincinnati, Dayton and Columbus, the latter of which has seen home price appreciation outpace wage growth by a ratio of 9:1 during the housing recovery.  “While the time to purchase is now, for home buyers to take advantage of all time low interest rates, continued stress on home affordability and credit repair shall leave many missing this prime time opportunity of home ownership.”

Among the 140 markets where home price appreciation has outpaced wage growth during the housing recovery, 45 metro areas (32 percent) with a combined population of 63 million had a median home price in December that required more than 28 percent of the median income for monthly mortgage payments — unaffordable by traditional standards.

These 45 traditionally unaffordable markets with price appreciation outpacing wage growth included Los Angeles, San Francisco, San Jose and San Diego in California, Seattle, Portland, Boston and Denver.

“The good news in Seattle is that we have higher than average income growth. The bad news in Seattle is that homes are becoming increasingly less affordable, especially in the core areas near the city,” said OB Jacobi, president of Windermere Real Estate, covering the Seattle market. “While wages in Seattle are expected to continue rising at a healthy pace, so too are housing prices. And as long as buyer demand outpaces seller supply, it is unlikely that we will see any improvement in affordability in the foreseeable future.”

“Marketing homes in areas that have home ownership costs continually outpacing wage growth means that you run into more people leaving areas for their next move, up or down,” said Mark Hughes, chief operating officer at First Team Real Estate, covering the Southern California market. “The dynamics driving the affordability, or lack of affordability, have as much to do with the new global nature of real estate as much as they have to do with the speed of local wage acceleration. Southern California will remain increasingly unaffordable from within, but a hot commodity world-wide.”

It's not all doom and gloom for homeowners:  Wage growth outpaced home price appreciation in 44 of the 184 metro areas (24 percent) analyzed with a combined population of 51 million. Metropolitan statistical areas with the lowest ratio of home price appreciation to wage growth were Hagerstown-Martinsburg, Maryland-West Virginia, Wichita, Kansas, Des Moines, Iowa, Gulfport-Biloxi, Mississippi, and Harrisburg, Pennsylvania.

Other metro areas where wage growth outpaced home price appreciation during the housing recovery included New York-Northern New Jersey-Long Island, New Haven, Connecticut, Virginia Beach, Tulsa, Oklahoma, and Raleigh, North Carolina.


Of course, the biggest determinant of home price appreciation over the past 2 years has nothing to do with US consumers, or household formation, as confirmed by the collapse in first-time homebuyers or the unprecedented depression in new mortgage origination, and everything to do with what we first suggested is one of the main drivers of the US housing bubble - foreigners parking their illegally procured cash in the US and evading taxes, now that US housing, with the NAR's anti-money laundering exemption blessing, is the new normal's Swiss Bank Account. That and flipping homes from one "all-cash" buyer to another "all-cash" buyer in hopes of a quick capital appreciation and the constant presence of the proverbial dumb money.

Until it is made overhwlemingly costly for illegal offshore wealth to be parked in NYC triplexes, or home flipping is regulated out of existence, expect the housing bubble to continue rising to even more eyewatering highs.

China "Is Not Another US", Does Not Seek "Yuan Hegemony"

Regular readers are by now well versed on the recent developments surrounding the launch of the China-led Asian Infrastructure Investment Bank, but for anyone needing a refresher, here is what it’s all about: 

...the China-led development bank essentially marks an epochal shift away from traditionally US-dominated multinational institutions like the IMF and the ADB. Meanwhile, it also represents an implicit attempt by the Chinese to usher in a kind of sino-Monroe Doctrine and solidify their regional — and, to a certain extent their international — ambitions. In a desperate attempt to undermine the effort and preserve what’s left of US hegemony, Washington aggressively lobbied its allies last year to refrain from supporting the effort. Then the UK decided to join calling the bank an “unrivaled opportunity.” That effectively opened the floodgates and in short order, a bevy of Western nations and close US allies suddenly reversed course and indicated they were likely to support the new institution.

Over the past week or two, the mainstream media have picked up on this narrative and repeated it ad naseum, making clear to anyone who’s picked up a newspaper in the last 14 days that the Bretton Woods era and US dollar hegemony are now squarely confined to the annals of history. While we think it’s certainly important for everyone to wake up to the fact that a tectonic shift is taking place among the world’s multinational institutions, we suspect that for China, the cat may have gotten a little too far out of the bag. You don’t, for instance, want to risk alienating the Western nations who have just recently thrown their support behind the venture by reinforcing the idea that the whole endeavor is nothing more than a $100 billion Chinese foreign policy instrument (especially when it is). To this end, The Global Times (a paper run by the state-controlled People’s Daily) is out with a story which purportedly describes China’s benign intentions and altruistic aspirations from the AIIB.

From The Global Times:

The establishment of the Asian Infrastructure Investment Bank (AIIB) has been depicted by a few overseas media outlets as if China is building its own version of the Bretton Woods system. 


The bank is not yet in operation, and it will take time for people to come to grips with its purpose. However, overblown hype from foreign media claiming that China is seeking financial hegemony could create preconceived notions for people who are not familiar with it…


Some foreign observers claim that the AIIB is the beginning of the Chinese yuan's hegemony. What they are actually trying to imply is that "China is another US."


This kind of statement is nonsensical, which uses historical experience to fool readers. It is divorced from the truth and shows no common sense and doesn't stand up to any scrutiny.


Through the Bretton Woods system, the US was able to wield supreme influence over its allies which had been severely battered during the war. China today is in a totally different position. 


Founding the AIIB is only a China-led initiative. Over 30 countries from Europe and Asia have so far applied to join, some of which even have territorial disputes or political divergences with China. They are not courting Beijing, or pushing yuan hegemony. What they are pursuing is the win-win principle of cooperation. 


The AIIB will not confront the WB or IMF, nor will it turn the current international monetary order upside down. The spirit of the AIIB is diversity and justice.


International relationships are entering an era of democracy that means pursuing hegemony is a wrong path whether one is an existing power or a rising power.  


China always maintains a low profile when it comes to showing the strength of our nation. Moreover, the Chinese media resists the hype over describing China as "number one" or a "superpower”...


The Bretton Woods system is a product of the old days. The new global trends created the AIIB and there is no room to look back to the old days of one currency's hegemony. 

So to summarize, China is not seeking to establish yuan hegemony and doesn’t seek to upset the existing balance of power in the world and in fact, doesn’t even like to be called “number one.” While some of this may be true, one needs to consider the source here as this certainly appears to be an attempt on China’s part to make all of the bank’s new Western recruits comfortable with the their decision to join in the face of Washington’s “you’ll be sorry” rhetoric. 

Of course actions, as they say, speak louder than words, and on that note, we’ll leave you with the following from Bloomberg:

China plans to push for yuan to take prominence in loans under the Asian Infrastructure Investment Bank and the Silk Road Fund, people familiar with the matter said.


China may encourage $100b AIIB and $40b Silk Road Fund to issue loans directly in yuan or set up yuan-denominated funds under the two institutions, according to the people, who ask not to be identified because deliberations are private.


People’s Bank of China didn’t immediately respond to faxed request for comment.

 *  *  *

De-dollarization is complete.

3 Things: No Money, Wall Street's Big Scam, Bottom 80%

Submitted by Lance Roberts via STA Wealth Management,

Much of the commentary from the more liberal leaning media has continued to tout that the rise in asset markets over the last few years are clear evidence of economic prosperity in this country. However, is that really the case?

In order for rising asset prices to be reflective of overall economic prosperity, the "wealth" generated by those rising asset prices should impact a broad swath of the American populous. Let's take a look to see if that is the case.

"Mo Money" Or No Money

In September of last year, I discussed the Federal Reserve's 2013 Survey of household finances which showed a shocking decline in the median value of net worth of families across all age brackets.

While the mainstream media continues to tout that the economy is on the mend, real (inflation-adjusted) median net worth suggests that this is not the case overall.

However, Shane Ferro from Business Insider posted a stunning piece on what has happened to American families as asset prices have surged higher. To wit:

"Nearly half of American households don't save any of their money.


If it isn't obvious, this has a broad range of implications. People who don't save won't have any buffer should the economy turn, and they lose their jobs. Longer term, people who don't save won't have the capacity to retire. It's not good."

What is clear is that rising asset prices, which have been induced by the Federal Reserve's monetary policy and suppression of interest rates, has indeed benefitted those that have assets to invest.

The findings are strikingly similar to the U.S. Federal Reserve survey from last year.

"'Savings are depleted for many households after the recession,' it found. Among those who had savings prior to 2008, 57% said they'd used up some or all of their savings in the Great Recession and its aftermath. What's more, only 39% of respondents reported having a 'rainy day' fund adequate to cover three months of expenses and only 48% of respondents said that they could not completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money."

In other words, the rich have gotten richer as rising asset prices have been a major benefit to stock-option based executives who have raked in billions. However, for the majority of the working class, it has remained primarily a struggle to survive much less actually save.

  401k Plans - Wall Street's Biggest Scam

Beginning in the 80's and 90's, Wall Street lobbied heavily to change the rules to allow companies to scrap pension plans in exchange for employee contribution plans known as 401k plans. Supposedly, this was to be a grand bargain for individuals to take control of their own financial futures.

This was a HUGE win for Wall Street as companies such as Vanguard, Fidelity and others gathered trillions of dollars in assets from company employees who contributed to those plans. It was also a win for companies which benefitted from the reduction in costly contributions required by pension plans which boosted net incomes and compensation to business owners and executives.

It all worked out great....right? Turns out, not so much for individuals.

According to a recent study, the results of shifting the responsibility of retirement savings, not to mention the risks of investing, to the individual has been grossly unsuccessful. To wit:

"$18,433 is the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute.


That's the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.


Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans' top financial worry, according to a recent Gallup poll.


But shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.


"'In America, when we had disability and defined benefit plans, you actually had an equality of retirement period. Now the rich can retire and workers have to work until they die," said Teresa Ghilarducci, a labor economist at the New School for Social Research.'"

Of course, for those in the top-10% of wage earners - "it's all good."

  The Problem For The Bottom 80%

One of the recent diatribes by the media was that falling gasoline prices would spur consumption. As I have repeatedly discussed, this is far from the truth as shifting spending from one area of the economy to another does NOT increase consumption but is rather like "rearranging deck chairs on the Titanic."

The only thing that ultimately increases consumption, or savings, is an increase in incomes. Unfortunately, for roughly 80% of American's, wage growth, and actual employment, have been an elusive reality.

When it comes to actual employment, it is hard to rationalize the mainstream media's obsession with the U-3 unemployment rate. Particularly, when it is clearly being obfuscated by the shrinkage of the labor force. As I wrote in August of 2013:

"While the Fed could certainly claim victory in achieving their 'full employment' target; the economic war will be have been soundly lost."

The Federal Reserve did ultimately achieve their target unemployment rate. However, as I have shown previously, when it comes to the primary 16-54 age group that should be working, it is hard to suggest that almost 95% of working age American's are gainfully employed.

Even more critical is the fact that for roughly 80% of American's that are working, wage growth has been non-existent. Tyler Durden at ZeroHedge wrote:

"The important math: production and non-supervisory employees, those not in leadership positions, represent 80% of the employed labor force. This is important when looking at the next chart which show the annual increases in hourly earnings just for production and nonsupervisory employees.

It is as this point that we ask that all economists avert their eyes, because it gets ugly:



As the BLS reports, not only is the annual wage growth of 80% of the work force not growing, but it is in fact collapsing to the lowest levels since the Lehman crisis!


But if the wages of the non-working supervisory 80% of the labor population are tumbling while all wages are flat that must mean that the wages of America's supervisors, aka "bosses" are...




The chart below shows what the implied annual change in supervisor hourly earnings has been since the start of the second Great Depression. Note the recent differences with the chart immediately above.



And there, ladies and gentlemen, is your soaring wage growth: all of it going straight into the pockets of those lucky 20% of America's workers who are there to give orders, to wear business suits, and to sound important.


Yes - wages are growing, for those who least need wage growth, the 'people in charge.'"

Despite many claims that the "economy" has recovered from the financial crisis, as evidenced by a surging stock market, a closer look at the majority of Americans suggests otherwise. The implications are important as the burdens on social welfare continue to swell, and the ability to pay for those entitlements becomes more questionable.

That Ain't No Margin Debt: THIS Is Margin Debt

We find it amusing how many people try to read into the tealeaves when looking at the NYSE margin debt (especially since the real leverage long ago left the CNBC TV studio in downtown Manhattan, as explained before), when the real action is half way around the world. Because, in the immortal words of Crocodile Dundee, "That is not margin debt. This is margin debt."