Dec 182018

Titian The rape of Europe 1560-62


It took me a while to decide which word(s) best define the past year and the next one, but I think this is pretty much it. 2018 was chaotic more than anything else, and that chaos will give rise to mayhem in 2019.

What I think is striking is that this is true across the board, in all walks of life so to speak. In finance, in politics, in energy markets, in ecological matters, and perhaps most of all in the ways all these topics are being covered by what once were trusted media.

I’m going to have to come back to all these topics separately, so it’s promising to be a very busy holiday season, but it’s also good to try and put them together in one place, if only to show how interconnected everything is. And how futile it is to look at the economy without seeing its connection to energy flows and ecosystems. And vice versa.


In finance and economics, we’ve seen an avalanche of falling numbers recently, in stock prices, bond prices, housing, across the globe, and obviously that evokes a lot of comments in the financial press. But that press, and bankers investors on their own, still talk about markets.

However, as I wrote in April 2018, if there is no price discovery, and there isn’t, there ARE NO markets, and it would be good and beneficial if many more people absorb that simple reality. Many more so-called traders and investors would be a start, but by no means enough. Lots more people who have nothing to do with the ‘markets’ should understand why there is no such thing anymore.

As long as you limit it to stock and bond markets, it may appear fine that people don’t understand. But as soon as you acknowledge there are no housing markets either for the exact same reasons, the story changes considerably. Because then it becomes clear that all -former- markets, bar none, have been eviscerated by central bank policies that sought to prop up banks, often highly successfully so, which they knew could only happen at the expense of communities and societies.

We’ve ended up with scores of mom and pop ‘investors’ who own hugely overpriced stocks and homes, while their pensions funds hold zillions ‘worth’ of bonds and also increasingly stocks. The link between pensions and AAA-rate assets was pulverized in the process. That looks set to continue, and worsen, in 2019. But that may be just the look of things. Because there really are no markets, there is no price discovery.

What is still there is a lot of talk about whether the Fed -and other central banks- will raise rates further or not, or will stop or continue their asset buying schemes. Central banks are the only game in town, there are no markets, nobody knows what anything is really worth because the Fed etc. took the discovery process beyond their reach.

And now all those financial ‘subjects’ are sitting on all this stuff that only appears to have value, and that value hinges exclusively on what Draghi, Kuroda, Yellen and now Jay Powell have decided things are worth. And yes, it does make matters appear okay, but because they can’t do QE forever, all of those values will need to be re-assessed by actual markets once Powell et al. are either thrown out or decide for themselves to leave the arena.

It won’t be pretty, it will be devastating. It’s impossible to say if it will come to a head in 2019, because the Fed can lower rates a bit again after its recent rate hikes and prop up the zombie for longer. Then again Draghi can’t do that anymore since he’s already in negative rate territory, and while the euro could fall to parity with the USD as a consequence, there’s a limit to that too.

Anyway, more on that later.


Energy and ecology seem to become more intertwined as we go along, though that may well be a trompe oeil, trick of the eye. Still, if you see and read what people have to say about things like the big COP24 event in Katowice last week, it’s obvious that the 2nd law of Thermodynamics is a hard one to internalize. Because that law seems to say that the use of energy, period, produces waste, while all these mostly well-meaning folk are merely focusing on shifting between energy sources.

There is surprisingly little attention for not using energy in the first place, which the 2nd Law appears to stipulate is the only way to stop the rot. And it’s entirely feasible to build homes that use 70-80% less power to heat and cool, or to design a transport system in a city that saves that much energy.

But the ‘leaders’, politicians and business people, prefer to address solar panels and wind turbines that allow for the amount of energy used to fall only moderately, which when combined with the economic growth that nobody questions, will lead to the use of ever more energy.

And I get that, you need to shrink your present economies, and the models they’re based on, in order to save the planet. I’m not so much talking about climate change, since the earth is a system so complex we should really be very cautious about deriving any conclusions about it from simplified models, but the species extinction reported in 2018 is another, and more immediately convincing, story.

Still, conferences like COP24, or its predecessor COP21 which I wrote about 3 years ago in CON21, are not just entirely useless, they move everything backward that all the worried boys and girls are so worried about.

The movers and shakers of the world all owe their positions to the economies, and therefore the levels of energy use, that the worried people now want to move away from. And then they turn to the same movers and shakers to make that happen. Sorry, no can do. All you’ll get is lip service from people looking for money and power, who are not interested in being proved wrong if they are.

Today’s climate discussion is a road to nowhere where down the line there’ll be nobody left to talk to and no birds singing. You yourself probably won’t be there either. There is not one politician who will volunteer to give up their power if that could save the world their children will have to live in. They’ll come up with a story where their position is save and so is that world, and they’re more than likely to believe it.


As for the media, the tale gets darker fast. It didn’t start in 2018, but it did become a lot more outspoken. As I’ve said before, there are three targets for the former trusted sources of impartial news, even as those sources rapidly become more partial as we move forward. And that of course has to do with their new business model I wrote about a lot: writing negative stories about Donald Trump became an obvious source of revenue well before he was president.

Once he was elected, the media doubled down. They wrote against Trump at first thinking he would be beaten in the GOP primaries, then some more when he faced Hillary, then because they didn’t like him in the White House, and finally because he turned out to be the business proposition that quite literally kept them alive. What was it, over 100,000 new subscribers for the NYT a MONTH at a certain point?! Would CNN and Rachel Maddow even exist anymore without the Donald?

But that also means that the MSM cannot report anything positive about the man, with the exception of a bombing campaign in a faraway sandbox, and that is pretty crazy. No matter where you stand politically, not even Trump can do everything wrong, but CNN, MSNBC, WaPo,NYT et al can’t say it out loud, because their new readers and viewers want negative stories.

I’m not at all a Trump fan, I find it insane that America can’t find a single person among its 320 million inhabitants who could better represent it, but I also saw well over two years ago that the reporting on Trump was so biased someone had to restore at least some balance. And if that was to be me, so be it.

It’s like the entire US -and UK- press has become the National Enquirer, where the questions of truth or accuracy have become, and/or always was, a complete afterthought, irrelevant to whatever is actually published. And the readers and viewers caught inside the echo chamber will never know any better than that that is what the world really looks like.

It’s the ‘old’ media’s response to the threat of social media, a fight they cannot possibly win in the end, but not one they will relinquish easily; it will be the end of them. So there’s Trump, and then there’s Russia and Julian Assange. And there’s a live shooting practice going on in which all three are fair game.

According to two reports published just yesterday in the NY Times and the BBC, African Americans and French Yellow Vests were targeted by Russian bots, trolls, give them a name. What these once trusted media no longer understand, or don’t care about, is that they are effectively saying that African Americans and Yellow Vests are all so stupid and so unconvinced and unconvincing in their political convictions that a bunch of poorly defined Russians made them throw their votes away from Hillary Clinton and towards Trump.

Like African Americans have no opinions and therefore in the end no functioning brains. Like their f*king robots, some inferior lifeform. Is there anything you can say that is more racist than that? I come up empty. And I understand Kanye.

And that the ‘Russians’ caused tens of thousands of Frenchmen and -women to put on a yellow vest and protest Macron’s dismantling of -very- long-standing labor rights and taxation ‘reforms’ that benefit the rich French elite. You cannot insult two such vast yet diverse groups of people, who seem to have little if anything in common, African Americans and Yellow Vests, you cannot insult them more or worse than such reports do.

And they simply don’t see it. In their view, and which they -rightly by now- trust their public will eat up like hot cakes, their 24/7 anti-Trump and anti-Russia campaigns have been so convincing that they can basically say anything at all by now. If Trump or the Russians deny, that’s just what they would do if they were guilty. Assange can’t deny anything at all, they’ve totally silenced him. They being the US deep state in liaison with the MSM.


That’s how we’re about to enter 2019, how we’re about to move from chaos to mayhem. It is scary not just because of what we see happening today, but even more because we’ve never seen anything remotely like it. Sure, US media, any country’s media, have always supported government strategic lies in times of warfare or other tensions.

But an overall campaign against a sitting president, comprised of dozens of articles a day consisting of mere allegations and rumors, let alone the same against a state nuclear power arguably mightier than the US itself, and a journalist who’s the only one in his profession who’s actually done what journalists should do, not the well-paid follow the party line thing going on at the MSM, all this is unprecedented.

And given what we’ve seen in 2018 in the realm of banned social media accounts, in a wider sense of the word, we can only wonder how much worse the censorship can get in the mayhem year of 2019.

Can the Automatic Earth, and for instance our friends at Zero Hedge, only continue to exist next year if we agree to increasingly become the poodles of the ruling political classes, intelligence services, and their press masters and lackeys?

It’s starting to look that way. So in closing, I want to call on you to support us by donating a Christmas gift, and preferably a recurring one all through the 2019 mayhem year, so we know we can continue to present you with an alternative to the ‘appropriate’ information you’re ‘supposed’ to be receiving.

It’s later than you think.



Apr 232018
 April 23, 2018  Posted by at 12:46 pm Finance Tagged with: , , , , , , , , ,  12 Responses »

René Magritte La trahison des images 1929


“[Price discovery] is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers”, says Wikipedia. Perhaps not a perfect definition, but it’ll do. They add: “The futures and options market serve all important functions of price discovery.”

What follows from this is that markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is.

Given the interdependence between the two, we must conclude that when there is no price discovery, there are no functioning markets. And a market that doesn’t function is not a market at all. Also, if you don’t have functioning markets, you have no investors. Who’s going to spend money purchasing things they can’t determine the value of? (I know: oh, wait..)


Ergo: we must wonder why everyone in the financial world, and the media, is still talking about ‘the markets’ (stocks, bonds et al) as if they still existed. Is it because they think there still is price discovery? Or do they think that even without price discovery, you can still have functioning markets? Or is their idea that a market is still a market even if it doesn’t function?

Or is it because they once started out as ‘investors’ or finance journalists, bankers or politicians, and wouldn’t know what to call themselves now, or simply can’t be bothered to think about such trivial matters?

Doesn’t a little warning voice pop up, somewhere in the back of their minds, in the middle of a sweaty sleepless night, that says perhaps they shouldn’t get this one wrong? Because if you think about, and treat, a ‘thing’, as something that it’s not at all, don’t you run the risk of getting it awfully wrong?

A cow is not a dinner table; but both have four legs. And “Art is Art, isn’t it? Still, on the other hand, water is water. And east is east and west is west and if you take cranberries and stew them like applesauce they taste much more like prunes than rhubarb does. Now you tell me what you know”. And when you base million, billion, trillion dollar decisions, often involving other people’s money, on such misconceptions, don’t you play with fire -or worse?


This may seem like pure semantics without much practical value, but I don’t think it is. I think it’s essential. What comes to mind is René Magritte’s painting “La Trahison des Images”, better known as “Ceci n’est pas une pipe”, (The Treachery of Images – this is not a pipe). People now understand -better- what he meant, but they were plenty confused in the late 1920s when he painted it.

An image of a pipe is not a pipe. In Magritte’s words: “The famous pipe! How people reproached me for it! And yet, could you stuff my pipe? No, it’s just a representation, is it not? So if I had written on my picture ‘This is a pipe’, I’d have been lying!”.

But isn’t that what the entire financial community is doing today? Sure, they’re making money right now, but that doesn’t mean there are actual markets. They don’t have to go through “the process of determining the price of an asset in the marketplace..” I.e. they don’t have to check if the pipe is a real pipe, or just a picture of one.



What killed price discovery, and thereby markets? Central banks did. What they did post-2008 is two-fold: they bought many, many trillions in ‘assets’, mortgage-backed securities, sovereign bonds, corporate bonds, etc., often at elevated prices. It’s hard to gauge how much exactly, but it’s in the $20+ trillion range. Just so all these things wouldn’t be sold at prices markets might value them at after going through that terrible process of ‘price discovery’.

Secondly, of course, central banks yanked down interest rates. Until they arrived at ultra low interest rates (even negative ones), which have led to ultra low yields and the perception of ultra low volatility, ultra low risk, ultra low fear, which in turn contributed to ultra low savings (in which increasing household debt also plays a major role). As a consequence of which we have ultra high prices for stocks, housing, crypto(?), and I’m sure I still forget a number of causes and effects.

People wanting to buy a home are under the impression they can get “more home for their buck” because rates are so low, which in turn drives up home prices, which means the next buyers pay a lot more than they would have otherwise, and get “less home for their buck”. In the same vein, ultra-low rates allow for companies to borrow on the cheap to buy back their own stock, which leads to surging stock prices, which means ‘investors’ pay more per share.


Numbers of the S&P 500 and its peers across the world are still being reported, but what do they really represent? Other than what central banks and financial institutions have bought and sold? There’s no way of knowing. If you buy a stock, or a bond, or a home, you no longer have a means of finding out what they are truly worth.

Their value is determined by central banks printing debt out of thin air, not by what it has cost to build a home, or by what a company has added to its value through hard work or investment in labor, knowledge or infrastructure. These things have been rendered meaningless.

Central banks determine what anything is worth. The problem is, that is a trap. And your money risks being stuck in that trap. Because you’re not getting any return on your savings, you want to ‘invest’ in something, anything, that will get you that return. And the only guidance you have left is what central banks purchase. That is a much poorer guidance than an actual market place. The one thing you can be sure of is that you’re paying more for ‘assets’ -probably much more- than you would have had central banks remained on the sidelines.

The Fed may (officially?) have quit purchasing ‘assets’, but the Bank of Japan and ECB took over with a vengeance (oh, to be a fly on the wall at the BIS); in Q1 2017 the latter two bought over $1 trillion in paper. The Bank of Japan has effectively become its nation’s bondmarket. The European Central Bank is not far behind that role in Europe.

And the ‘market’, or rather the 2-dimensional picture of a market, depends only on what they do. The one remaining question then is when will this end? Some say it can go on forever, or, you know, till these policies have restored growth and confidence. But can, will, anyone have confidence in a market that doesn’t function? Martin Armstrong recently addressed the issue:


The Central Bank Crisis on the Immediate Horizon

While the majority keep bashing the Federal Reserve, other central banks seem to escape any criticism. The European Central Bank under Mario Draghi has engaged in what history will call the Great Monetary Experiment of the 21st Century – the daring experiment of negative interest rates. A look behind the scenes reveals that this experiment has been not just a failure, it has undermined the entire global economic structure.

We are looking at pension funds being driven into insolvency as the traditional asset allocation model of 60% equity 40% bonds has failed to secure the future with negative interest rates. Then, the ECB has exceeded 40% ownership of Eurozone government debt. The ECB realizes it can not only sell any of its holdings ever again, it cannot even refuse to reinvest what it has already bought when those bonds expire. The Fed has announced it will not reinvest anything.

Draghi is trapped. He cannot stop buying government debt for if he does, interest rates will soar. He cannot escape this crisis and it is not going to end nicely. When this policy collapses, forced by the free markets (no bid), CONFIDENCE will collapse rapidly. Once people no longer believe the central banks can control anything, the end has arrived. We will be looking at the time at the WEC. We will be answering the question – Can a central bank actually fail?


So where do you go from here? Everything you -think you- know about markets is potentially useless and doesn’t apply to what you see before you today. There are many voices who talk about similarities and comparisons with what happened to markets for instance in 1987, but what’s the value of that?

Back then, to all intents, constructions, and purposes, markets were functioning. There was price discovery. There were some ‘novel’ instruments, such as portfolio insurance, that you could argue influenced markets, but nothing on the scale or depth of what we see today with high-frequency trading, robots, Kurodas and Draghis.

The temptation is obvious, and large, to compare today’s financial world with that of any point in the past that seems to fit, even if not perfectly. But the lack of price discovery means any such comparisons must of necessity be way off the mark; you cannot stuff that 2-D pipe.

The BIS-designed unity in central bank policies is under threat, as Armstrong indicates. The Fed has moved towards quantitative tightening, not investing or even re-investing, and raising rates, but it doesn’t look like the ECB will be able to follow that change of direction. It can’t stop ‘investing’ because it has become too big a player. The Bank of Japan appears to be in that same bind.

Central bankers jumped into the markets to save them (or so goes the narrative), but they will instead end up killing them. In fact, they killed them the minute they entered the fray. Markets can’t survive without price discovery, and vice versa. The moment it becomes clear that Draghi MUST keep buying sovereign debt from countries with failing economies, the game is up.


All those trillions created by central banks, and the even much bigger amounts conjured up by the creation of loans by commercial banks, will have to be eradicated from the system before markets and price discovery can return. And return they will. There are lots of things wrong with our economic and financial machinery, but functioning markets are not wrong.

Things run off the rails when governments and central banks start interfering, not when markets are allowed to function. But it’s long turned into a giant game of whack-a-mole, in which economists and other know-it-betters are forced to plug one hole by digging another, and so forth.

The best we can hope for is some sort of controlled demolition, but the knowledge and intelligence required to make that happen don’t appear to be available. The political climate certainly isn’t either. A politician who campaigns on “let’s take this sucker down slowly” will always lose out to one who claims to know not only how to save it, but to let it bloat even more.

The Draghis of the world will continue to believe they are in control until they are not. At first, some people will start taking out their money while it’s still there, and then after that the rest will trample over each other in a bloody stampede on the way to the exits trying to save what’s left. After the first $100 trillion is gone, we’ll be able to survey the terrain, but by then we won’t, because we’ll be too busy trying to save ourselves.

And I know you’ve heard this before, and I know central banks bought us 10 years of respite. But it was all fake, it was all just a picture of a pipe. They had to pile on insane amounts of debt on your heads, kill off your pension systems and make markets a meaningless term, to achieve that respite.

They had to kill the markets to create the illusion that there still were markets. With the implied promise that they would be able to get out when they had ‘restored growth’.

But you can’t buy growth. And yet that is the only trick they have up their sleeves, and the only thing the emperor is wearing. Next up: a rabbit and a hat. And a pipe. And then the lights go out and someone shouts “FIRE!”.





Jan 032018

GordonParks Untitled, Paris, France 1951


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Financial Markets Are No Longer A Mechanism For Price Discovery (Guinn)
Stocks Start 2018 On Positive Note But Investor Confidence Keeps Falling (BBG)
Baltic Dry Index Plunges Most In 2 Years (ZH)
The Next Financial Crisis Will Be Worse Than the Last One (Nomi Prins)
China’s Small Banks Dumped on Signs of More Policy Pain in 2018 (BBG)
Brits Spend 5 Times More Of Their Pay On Rail Fares Than EU Commuters (Mirror)
US Blocks MoneyGram Sale To China’s Ant Financial (R.)
Australia Property Market Is Repeating US Mortgage Mistakes (AFR)
Bankers Work Around The Clock To Iron Out EU Finance Reforms (R.)
Welcome to 2018 – We Are All Connected (Krieger)
Athens To Propose Transfer Of Migrants To Ankara (K.)



Thsis is what people tend to forget. Things look normal. But the more normal they look, the more risk there is.

Financial Markets Are No Longer A Mechanism For Price Discovery (Guinn)

This Time It’s Different. It’s not different because people really got it right this time (in ways they missed every other time) about some new technology that’s going to Change The World! Electric cars, cryptocurrency, AI and automation, these may all be fabulous things, and they may well prove to be game-changers for productivity and returns on capital down the line, but if you think any of those things explain current valuations, you’re nuts. You’re also wrong. It’s different because financial markets are no longer a mechanism for price discovery and the pricing of risk of capital allocation decisions. Markets have been made into a utility. More to the point, they have been made into a political utility, a tool for ensuring wealth and stability of our political structures.

The easing tools we dabbled in to stabilize prior business cycles were brought to bear instead as tools for propping up and expanding financial asset prices. Beyond the direct marginal price impact of the easing itself, central bankers tailored communications policies to create Pavlovian responses to every narrative. Our President tweets about the policy implications when the S&P 500 hits new highs, for God’s sake. This isn’t a secret, y’all. The singular intent of every central banker in the world is to keep the prices of financial assets from going down, and the singular intent of every government that puts those central bankers in power is to ensure that they do so, in order to retain social stability.

Sure, there’s a dual mandate. But the mandates aren’t employment and price stability. They’re (1) expanding financial asset prices and (2) effectively marketing the idea of corresponding wealth effects to the public. Markets have also rapidly become a social utility, an inextricable part of every contract between governments and the governed. Underfunded pensions and undersized boomer 401(k) accounts mean that ownership of risky assets is not a choice driven by diversification or relative return expectations, but by the fact that it is the only asset they can buy that has any potential of meeting the returns they would need to be adequately funded.

Let’s say that you are running a state pension plan that is 65% funded. Your legislature is telling you that no help is coming from the state budget. You and every member of your agency will be fired if you even suggest cutting benefits, if you even have that authority. Your consultant or internal staff just did their new mean reversion-based capital markets return projections, and higher valuations mean projected returns on everything are lower. What’s worse, your funded status assumes returns that are higher than anything on their sheet. You are being presented with a Hobson’s Choice — behind Door #1, you get fired, and behind Door #2, you lever up your stock exposure with an increased private equity allocation. This a brutal position to be in.

Read more …

While you were sleeping.

Stocks Start 2018 On Positive Note But Investor Confidence Keeps Falling (BBG)

Stocks kicked off 2018 on a positive note, as U.S. equities led the MSCI All-Country World Index to its best start since 2013. To the bears, every move higher only serves to underscore a growing divergence between stocks and sentiment. State Street Global Markets’ index of institutional investor confidence, which differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, fell for a fifth straight month in December, the firm said last week. What’s jarring is how the measure has fallen as the MSCI index of stocks has soared, after largely moving in line with the benchmark in the first half of 2017.

The latest reading of 94.8 puts State Street’s the index further below 100, which is “neutral,” or where investors are neither increasing nor decreasing their long-term allocations to risky assets. By region, sentiment fell in both North America and Asia, but rose strongly in Europe in what State Street said is a sign that that European-based investors are becoming less concerned that political risks could derail the strong economic performance in that region.

Read more …

Our old friend the Baltic has a say as well.

Baltic Dry Index Plunges Most In 2 Years (ZH)

The last six months have seen an almost unprecedented surge in world macro-economic data upside-beats as the so-called ‘global coordinated growth’ narrative surprised more dismal economists. Until recently, The Baltic Dry shipping index had confirmed that narrative… But The Baltic Dry Index has dropped for 8 straight days, tumbling over 21% – the biggest drop since Jan 2015…

While there is seasonality in the index, this is a notable decoupling… (as Bloomberg notes, peak season typically boosts trade volume and pricing, benefiting liners. The industry’s slack capacity remains a drag on rate increases.) But in a longer-term context, the decoupling between global trade volumes and the Baltic Dry Index is vast…

As the overbuilding of vessels in previous credit-fueled bubblicious malinvestment booms continues to ripple through markets still.

Read more …

Good risk overview by Nomi.

The Next Financial Crisis Will Be Worse Than the Last One (Nomi Prins)

If you look at the stock and asset markets, as Donald Trump tends to do (and as Barack Obama did, too), you’d think all is fine with the world. The Dow Jones Industrial Average rose about 24% this year. The Dow Jones U.S. Real Estate Index rose 6.20%. The price of one Bitcoin rose about 1,646%. On the flip side of that euphoria however, is the fact that the median wage rose just 2.4% and has remained effectively stagnant relative to inflation.

And although the unemployment rate fell to a 17-year low of 4.1%, the labor force participation rate dropped to 62.7%, its lowest level in nearly four decades—particularly difficult for new entrants to the workforce, such as students graduating under a $1.3 trillion pile of unrepayable or very challenging student loan debt. (Not to worry though: Goldman Sachs is on that, promoting a way to profit from this debt by stuffing it into other assets and selling those off to investors, a la shades of the subprime mortgage crisis.)

Those of us living in the actual world without billionaire family pedigrees possess a healthy dose of skepticism over the “Make America Great Again” sect that believes Trump has transformed America “hugely,” for record-setting markets don’t imply economic stability, nor do 40% corporate tax cuts translate into 40% wage growth. We can march forward into 2018 carrying that knowledge with us.

Read more …

Can consolidation save the system?

China’s Small Banks Dumped on Signs of More Policy Pain in 2018 (BBG)

China’s smaller banks started the New Year with a double whammy from regulators and investors, and more pain may be looming. Bank of Tianjin tumbled by as much as 12% in the first two trading days, the biggest two-day decline since its Hong Kong listing in March 2016, after rallying at the end of last year. Bank of Jinzhou, Bank of Qingdao, and Huishang Bank fell by more than 3%. In contrast, bigger rivals have rallied. A policy announcement on Friday highlighted China’s tough stance toward smaller banks, which are already a target of government efforts to reduce leverage in the financial system. The People’s Bank of China said it will set up a mechanism for lowering banks’ reserve requirements as needed during the Lunar New Year festival next month, letting national lenders use as much as 2 %age points of reserves to meet liquidity needs for 30 days. The small banks, which are often the most cash-strapped, were excluded.

“This shows regulators are unrelenting in deleveraging efforts,” said Richard Cao at Guotai Junan Securities. Small banks seeking liquidity will have to borrow from bigger banks at higher costs, he added. China’s smaller banks have borne the brunt of a deleveraging campaign since April last year which has pushed up their borrowing costs, weakened profit growth and increased solvency risks, Natixis said in a December report. Funding for smaller banks “has clearly worsened” because they lack large deposit bases, said Alicia Garcia Herrero, the firm’s chief economist for Asia Pacific. The extensive branch networks of larger lenders lure deposits that act as a buffer as policy makers push ahead with deleveraging. Regulators ramped up financial supervision last year, targeting excessive interbank lending as well as the shadow financing that has helped some smaller lenders expand aggressively.

Read more …

it’s still Thatcher time in Britain. Never went away. She’s supposed to have said: A man who, beyond the age of 26, finds himself on a bus can count himself as a failure.

Brits Spend 5 Times More Of Their Pay On Rail Fares Than EU Commuters (Mirror)

Millions of British commuters are having a miserable morning as rail fares go up by 3.4%. The eye-watering above inflation hike is the biggest for five years. So just wait until you compare it to what some commutes cost on the continent. New research by the Trades Union Congress (TUC) shows Brits spend up to five times as much of their salary than some of their counterparts in Europe. An average worker travelling from Chelmsford, Essex, to central London will have to pay 13% of their salary for a £381 monthly season ticket, the TUC said. That compares with 2% for similar-length commute in France (£66), 3% in Italy (£65), 4% in Germany (£118) and 5% in Spain (£108) and Belgium (£144). Season tickets will increase a third faster than wages in 2018, the TUC warned.

TUC general secretary Frances O’Grady said: “Many commuters will look with envy to their continental cousins, who enjoy reasonably priced journeys to work.” Mick Cash, general secretary of the Rail, Maritime and Transport union, added: “While the British passenger is being pumped for cash, the same private companies are axing safety-critical staff and security on our trains and stations. “It’s a national scandal that private profit comes before public safety on our rail network. “Even worse, with 75% of Britain’s railways in overseas hands, it is the British people who are subsidising state-run rail operations across the continent. The Department for Transport today insisted 97% fares go back to the railways and will help fund the biggest modernisation since Victorian times, including Thameslink, Crossrail and the Great North Rail project.

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Too close to banking.

US Blocks MoneyGram Sale To China’s Ant Financial (R.)

A U.S. government panel rejected Ant Financial’s acquisition of U.S. money transfer company MoneyGram International over national security concerns, the companies said on Tuesday, the most high-profile Chinese deal to be torpedoed under the administration of U.S. President Donald Trump. The $1.2 billion deal’s collapse represents a blow for Jack Ma, the executive chairman of Chinese internet conglomerate Alibaba Group, who owns Ant Financial together with Alibaba executives. He was looking to expand Ant Financial’s footprint amid fierce domestic competition from Chinese rival Tencent’s WeChat payment platform.

Ma, a Chinese citizen who appears frequently with leaders from the highest echelons of the Communist Party, had promised Trump in a meeting a year ago that he would create 1 million U.S. jobs. MoneyGram shares were down 8.5% at $12.06 in after-market trading. The companies decided to terminate their deal after the Committee on Foreign Investment in the United States (CFIUS) rejected their proposals to mitigate concerns over the safety of data that can be used to identify U.S. citizens, according to sources familiar with the confidential discussions. “Despite our best efforts to work cooperatively with the U.S. government, it has now become clear that CFIUS will not approve this merger,” MoneyGram Chief Executive Alex Holmes said in a statement.

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Really? It’s hard to say if there’s a bubble?

Australia Property Market Is Repeating US Mortgage Mistakes (AFR)

For all the endless discussion of housing prices in Australia, it is very hard to tell if there is a bubble. Sydney price-to-income ratios are the second highest in the world—above London and New York—but hey, Sydney is a great place to live. Supply is constrained by zoning laws, two national parks, a mountain range, and an ocean. Yet demand continues to grow, so prices tend to rise. I don’t know if there’s a bubble in the Australian housing market, but there are some very troubling markers that suggest impudent borrowing and lending. Just the sort of things that preceded the US housing implosion nearly a decade ago. And I worry that bankers, borrowers, and regulators seem not to have learned the lessons of that very painful piece of economic history.

First, the markers. Australia lenders will let you borrow a lot compared to your income. If one adjusts for tax and exchange rates and uses an online mortgage calculator, it is easy to see than a major Australian bank will lend about 25% more for the same income level compared with what a major US bank will now lend. Not only can one borrow a lot, the structure of the loans is often very risk. A staggering 35.4% of home loans in Australia are interest only, according to recent APRA figures. That has dropped from above 40% thanks to APRA’s recent 30% cap on the amount of new loans that can be interest only. Don’t forget that a key trigger of the US housing meltdown was when five-year adjustable rate mortgages could not be refinanced, and borrowers faced steep upticks every quarter in their interest rates.

Interest-only loans in Australia typically have a five-year horizon and to date have often been refinanced. If this stops then repayments will soar, adding to mortgage stress, delinquencies, and eventually foreclosures. So-called “liar loans”, where borrowers provide inaccurate information about their income, assets, or expenses to lenders seem both prevalent and on the rise. A UBS survey in late 2017 found that approximately 30% of home loans, or $500 billion worth could be affected.

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Oh well, the idea I guess is commendable.

Bankers Work Around The Clock To Iron Out EU Finance Reforms (R.)

Bankers will work through the night to iron out last-minute hitches before Wednesday’s launch of a major change to European Union financial markets that aims to apply lessons from the financial crisis nearly a decade ago. The new rules are already a year late due to their complexity, with regulators having to issue 11th-hour guidance to banks and financial firms to avoid freezing up trades as well as calming nerves of those not yet fully compliant. The new regime shines a spotlight on the innards of stock, bond, commodity and derivatives markets by forcing banks, asset managers and traders to report detailed information on trillions of euros in transactions. Banks and trading firms have spent millions of euros getting ready for the big day.

A report from Expand, part of the Boston Consulting Group and IHS Markit, has estimated that top global banks and asset managers will have spent £1.5bn ($2.1bn) this year to comply with the rules. Royal Bank of Scotland’s NatWest Markets has conducted a “soft launch”. From 2 January to 4 January, some of its staff will work through the night. “Day one will hopefully go smoothly and we are as ready as we can be,” Giovanni Mazzocchi, head of macro distribution in Europe for Barclays, said. “There are a few overnighters going on to make sure everything will work on the day.”

Credit rating agency Standard & Poor’s said there would likely be more losers than winners from the changes. The aim is to boost transparency and strengthen investor protection to avoid some of the problems of the 2007-2009 financial crisis. Stock, bond, derivatives, commodity and other trades must all be reported to a repository, giving regulators a trove of data to track trades and try to spot bubbles early after failing to see the last crisis coming. When the rules go live on Wednesday, fund managers and others must for the first time fill in a transaction report with up to 65 bits of data within 15 minutes of a trade – or risk being fined.

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I wish I could share Mike Krieger’s optimist visions of internet and social media. I can’t. I see them divide people at least as much as bringing them together.

Welcome to 2018 – We Are All Connected (Krieger)

Over the course of 2017, I spent a lot of time detailing where we stand as a species and where I think we’re going. To summarize, I think the positive impact of the internet and social media on humanity is still very much in its infancy. The more connected we become to one another across the planet, the more we’ll realize we have far more in common with one another than we do with the sociopathic oligarchs and politicians in charge of our respective nation-states.

Much of the 20th century was defined by unimaginable human conflict and terror, unleashed upon the public by crazed elites and rulers who were able to successfully manipulate large populations. The key to preventing a repeat of this sort of thing in the 21st century is billions of human beings across the planet communicating and sharing friendship with one another to the point we can no longer be tricked in killing each other. We need to learn to see “the other” in ourselves and voluntarily collaborate with our fellow humans on the challenges that face us in order to bring our species to the next level. This isn’t just a pipe-dream or insane utopian ramblings, I think it’s entirely possible.

[..] When I think about 2018 and beyond, I see a species in the early stages of a historic transformation. We are moving away from hierarchies and into networks. Away from centralization and into decentralization. From the unconscious to the conscious. That said, the old system isn’t gone just yet. It remains a dangerous zombie, and its benefactors will fight to keep their schemes alive. The years ahead will be characterized by increased tension between the old and the new. What comes next is up to us. Never forget that we are all connected. That you have tremendous power to impact the world based on your everyday thoughts and actions. Understand that we don’t have to live this way. Fill your heart with love, not hate. Stay true to your higher nature. If enough of us do this, the future is unimaginably bright.

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As Berlin and Brussels deck it out with Erdogan, they force Greece to consider an approach.

Athens To Propose Transfer Of Migrants To Ankara (K.)

In a bid to reduce overcrowding at migrant reception centers on the Aegean islands, the government is to propose to Turkey that asylum seekers who are not high on the list of eligibility for protection be transferred to camps on the mainland and subsequently to Turkey, Kathimerini understands. “We are asking that we be allowed to conduct returns either directly from the islands or from the mainland in the context of the EU-Turkey joint statement,” a government official told Kathimerini, referring to a deal between Brussels and Ankara signed in March 2016 aimed at curbing migrant smuggling across the Aegean. According to sources, Turkish government officials have indicated that Ankara will respond to Greece’s request in the first half of January.

During a landmark visit to Greece last month, the first by a Turkish head of state in 65 years, President Recep Tayyip Erdogan and Greek Prime Minister Alexis Tsipras agreed to cooperate more closely in tackling the refugee crisis. According to sources, Erdogan accepted Tsipras’s request that Turkey take back migrants from the Greek mainland as well as the islands. It remains unclear, however, whether officials in Brussels approve of the deal. Tsipras’s government is keen to ease pressure on reception centers by jumpstarting the return of migrants to Turkey, a process that has largely halted as new arrivals often lodge applications for asylum. By ensuring that those being returned are not refugees from war zones such as Syria, authorities believe they will overcome the objections of some within leftist SYRIZA who have taken a tough stance against returns to Turkey.

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To make a prairie it takes a clover and one bee,
One clover, and a bee.
And revery.
The revery alone will do,
If bees are few.

– “To make a prairie”, Emily Dickinson

Sep 192017
 September 19, 2017  Posted by at 12:52 pm Finance Tagged with: , , , , , , , , ,  11 Responses »

Wynn Bullock Child on a Forest Road 1958


A few days ago, former Reagan Budget Director and -apparently- permabear (aka perennial bear) David Stockman did an interview (see below) with Stuart Varney at Fox -a permabull?!-, who started off with ‘the stock rally goes on’ despite a London terror attack and the North Korea missile situation. His first statement to Stockman was something in the vein of “if I had listened to you at any time after the past 2-3 years, I’d have lost a fortune..” Stockman shot back with (paraphrased): “if you’d have listened to me in 2000, 2004, you’d have dodged a bullet”, and at some point later “get out of bonds, get out of stocks, it’s a dangerous casino.” Familiar territory for most of you.

I happen to think Stockman is right, and if anything, he doesn’t go far enough, strong enough. What that makes me I don’t know, what’s deeper and longer than perennial or perma? But it’s Varney’s assumption that he would have lost a fortune that triggered me this time around. Because it’s an assumption built on an assumption, and pretty soon it’s assumptions all the way down.

First, that fortune is not real, unless and until he sells the stocks and bonds he made it with. If he has, that would indicate that he doesn’t believe in the market anymore, which is not very likely for a permabull to do. So Varney probably still has his paper ‘fortune’. I’m using him as an example, of course, of all the permabulls and others who hold such paper.

Presumably, they often also think they have made a fortune, and presumably they also think that means they are smart. But that begs a question: how can it be smart to put one’s money into paper that is ‘worth’ what it is today ONLY because the world’s central banks have been handed the power to save the ailing banks that own them with many trillions of freshly printed QE? And no, there can be no doubt of that.

And there are plenty other data that tell the story. The world’s central banks have blown giant bubbles all over the place. That’s where the bulls’ “fortunes” come from. They are bubble fortunes. It has nothing to do with being smart. And of course, as I’ve said many times before, there are no investors left to begin with, because you can’t be an investor if there are no functioning markets, and for a market to function you need price discovery.

Which is exactly what central banks have killed. No-one has one iota of a clue what anything is really worth, what the difference between ‘price’ and ‘value’ is. Stockman at one point suggests people should hold on to Microsoft, but does he really believe that Bill Gates will remain standing when everyone around him crashes? That tech stocks are immune to the impending crash for some reason? If true, that would seem to indicate that tech stocks represent real value while -virtually- no others do. Hard to believe.

Please allow me to insert a graph. This one is from Tyler Durden the other day, and it paints a clear picture as much as it raises a big question. It suggests that until December 2016 the S&P and the ‘real economy’ were in lockstep. I think not. But one thing’s for sure: ever since January, i.e. the Trump presidency, the gaping gap between the two has grown so fast it’s almost funny.



Not that I would for one moment wish to blame Trump for that; he’s merely caught up in a wave much larger than an election or a White House residency. What is happening to the US -and global- economy goes back decades, not months. Which makes the graph puzzling, too, obviously. Just ask the new-fangled platoons of waiters and greeters with multiple jobs in America. And/or the 50-60-70% who can’t afford a $500 emergency bill, the 97 million who live paycheck to paycheck.. America’s already crashing, it’s just a matter of waiting for the markets to catch up with America’s reality. That’s what price discovery is about. Here’s another, similar, graph. Note: I don’t really want to go and find the best graphs, we’ve posted and re-posted so many of them it would feel like an insult to everyone involved.



But I digress. This was to be about Stuart Varney and the platoons and legions of permabulls out there. As I said, many of them, make that most, will feel they’ve made their fortune because they’re smart. Even if riding a Yellen and Draghi and Abenomics wave has zilch to do with intelligence. But there’s another side to that supposed smartness. And Stockman is on to it.

The large majority of people who think they got rich because they’re smart will also lose their ‘fortunes’ because they think they’re smart. It is inevitable, it’s a mathematical certainty. And not only because the central banks are discussing various forms of tapering. It’s a certainty because those who think they’re smart will hold on to their ‘assets’ too long. Because the markets will become much less liquid. Because the doors through which people will have to pass to escape the fire are too narrow to let them all though at the same time.

Fortunes built on central banks largesses are virtual. You have to sell your assets to make them real. But the same mechanics that blew the bubbles in housing, stocks, bonds et al also keep people from selling them. Until it’s too late. It may seem easier to sell stocks and bonds than homes, and it is, but in a crash it’s harder than one might think. And prices can come down very rapidly in very little time.

So perhaps the right way to look at this is to tell yourself you were not smart at all when you made that fortune, but now you’re going to smarten up. There will be a few people who do that, but only a few. Most will feel confident that they can see the crash coming in time to get out. Because they’re smart enough. After all, they just made a fortune, right?

It’s not just individuals. Pension funds have been accumulating huge portfolios in ever riskier ‘assets’. Which of them will be able to react fast enough if things start unraveling? And for the lucky few that will, what are they going to buy with the money? Bonds, stocks? Gold perhaps? Crypto? Everyone at once?

Don’t let’s forget that one of the main characteristics -and its consequences- of the everything bubble the central banks granted us is far too often overlooked: leverage. Low interest rates have made borrowing stupidly cheap, and so everyone has borrowed. As soon as things start crashing, there will be margin calls, lines of credit will be withdrawn, people and institutions will have to panic sell (everything including crypto) just to try to stay somewhat afloat, it’s all very predictable and we’ve seen it all before.

But yes, you’re right. The rally continues. And we can’t know what will trigger the downfall, nor can we pinpoint the timing. Still, it should be enough to know that it’s coming. Alas, for many it is not. They’re blinded by the light. But even that light is not real. It’s entirely virtual.






Jul 012016
 July 1, 2016  Posted by at 9:26 am Finance Tagged with: , , , , , , , ,  2 Responses »

Harris&Ewing Oil for salads 1918

Japan Deflation Intensifies (R.)
Japan’s Prices Keep Falling in Challenge to Abe, Kuroda (BBG)
China QE Dwarfs Japan and EU (VW)
China To ‘Tolerate’ Weaker Yuan (R.)
China Is Headed For A 1929-Style Depression: Andy Xie (MW)
Asian Factories Struggle, Brexit Throws Up New Threats (R.)
Europe Post-Brexit (Brad Setser)
EU Approves Italian Contingency Plan To Guarantee Bank Liquidity (R.)
The Italian Job (DDMB)
Standard & Poor’s Cuts EU Credit Rating (G.)
Price Discovery, RIP (David Stockman)
Scientists Warn Of ‘Global Climate Emergency’ Over Jet Stream Shift (Ind.)
Refugees Encounter a Foreign Word: Welcome (NY Times)



Abenomics and BOJ stimulus are dismal failures. So what to do? Moar of the same of course. How much longer can Abe remain in power?

Japan Deflation Intensifies (R.)

Japanese manufacturers’ confidence was subdued in June and service-sector sentiment deteriorated from three months ago on weak consumption, a central bank survey showed, in discouraging signs for a fragile economy grappling with a strong yen and slack overseas demand. The results of the survey could have been much worse had it captured the gloom from Britain’s vote last week to leave the EU, which spread turmoil in financial markets and put pressure on the Bank of Japan to expand its stimulus later this month. Separate data on Friday showed household spending fell for the third straight month in May and core consumer prices suffered their biggest annual drop since 2013, keeping policymakers under pressure to do more to spur growth.

“Worsening sentiment for non-manufacturers represents weak demand. This gives the government an incentive to increase stimulus spending,” said Daiju Aoki at UBS Securities. “If the government announces the size of stimulus spending shortly after the upper house election next week, the BOJ could ease policy at the end of the month,” he said. The BOJ’s closely-watched quarterly tankan survey showed the headline index for big manufacturers’ sentiment stood at plus 6, unchanged from three months ago and better than a median market forecast of plus 4. Big non-manufacturers’ sentiment index worsened to plus 19 from plus 22, the survey showed, as retailers felt the pain from weak domestic consumption and a slowdown in spending among overseas tourists.

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“The yen strengthened about 8% against the dollar in June.”

Japan’s Prices Keep Falling in Challenge to Abe, Kuroda (BBG)

With a little more than a week until Japan goes to the polls for an upper-house election, a batch of economic data released Friday underscores the challenge Prime Minister Shinzo Abe faces in convincing voters that his policies are working. Consumer prices excluding fresh food fell for a third straight month and household spending declined, undermining efforts to revitalize the world’s third-largest economy. While corporate confidence and unemployment were unchanged, there is still little pressure for higher wages. Friday’s data followed reports earlier this week showing that industrial production fell more than economists had forecast and retail sales were flat in May, adding to concern that Japan’s recovery may be faltering after the economy returned to growth in the first quarter.

The U.K.’s vote to leave the European Union has strengthened the yen and roiled financial markets, increasing risks to corporate earnings for Japanese companies. The data will put more pressure on Bank of Japan Governor Haruhiko Kuroda to expand monetary stimulus at the policy meeting later this month, especially with the stronger yen and the central bank far from its 2% inflation target. “Given concerns over the effects of the Brexit vote and the strengthening yen, there is a high chance that the BOJ will ease further at its July meeting,” said Hiroaki Muto at Tokai Tokyo Research Center. “If the BOJ doesn’t move this time, there’s a possibility that the yen will strengthen further.” The Topix index dropped about 9% in June, plunging on June 24 with the Brexit vote, the most since the aftermath of the 2011 earthquake. The yen strengthened about 8% against the dollar in June.

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Chinese deflation.

China QE Dwarfs Japan and EU (VW)

In July of 2014, we wrote about the huge imbalance with respect to China’s M2 money supply and nominal GDP relative to the US. At the time, China’s M2 money supply was 71% higher than the US but its economy was 56% smaller, which we said was an indication of the overvaluation of the Chinese currency. Since that time, the yuan has fallen by only 6.8% relative to the dollar. We haven’t seen anything yet. Today, the circumstances have significantly worsened. Money supply has continued to grow faster than GDP. With over $30 trillion of assets in its banking system and an underappreciated non-performing loan problem, we are convinced that China is headed for a twin banking and currency crisis. Money velocity has reached historically low levels which reflects China’s extreme credit imbalance and its crimping impact on its ability to generate future real GDP growth.

Just as worrying as the immense amount of credit built up, China has been reporting major downward revisions in its balance of payments (BoP) accounts. For more than a decade, China had been reporting an impossible twin surplus in its BoP accounts. When we wrote about this issue in 2014, we emphasized the likelihood of massive illicit capital outflows that not been accounted for. At that time, according to the State Administration of Foreign Exchange of China (SAFE), China had accumulated a BoP imbalance that was close to $9.4 trillion surplus since 2000 which we believed represented capital outflows that should have been recorded in the capital account.

The same accumulated BoP number today, revised by SAFE several times since, is now a deficit of about $2.8 trillion. Essentially, with its revisions, the SAFE has acknowledged even more capital outflows over the last 16 years than we had initially identified. On the capital account side, there was a downward revision of $10.1 trillion – from a $4.2 trillion surplus to a $5.9 trillion deficit. On the current account side, the revisions show that Chinese exports have not been as strong as initially reported over the last decade and a half. China’s current account surplus has been reduced by $2.1 trillion– going from $5.1 trillion to $2.9 trillion over the last 16 years. What we initially considered to be a $9.4 trillion imbalance has been more than proven by a $12.2 trillion revision.

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Cryptic fun.

China To ‘Tolerate’ Weaker Yuan (R.)

China’s central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5%, policy sources said. The yuan is already trading at its lowest level in more than five years, so the central bank would ensure any decline is gradual for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions. Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.

The economists and advisers are not directly briefed on policy by the People’s Bank of China (PBOC), but they have regular meetings and interactions with central bank officials and they provide policy recommendations. They said the central bank would tolerate a further weakening of the yuan this year to between 6.7-6.8 per dollar. “The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter. “The Brexit vote was a big shock. The market volatility may last for some time.”

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Good read.

China Is Headed For A 1929-Style Depression: Andy Xie (MW)

Andy Xie isn’t known for tepid opinions. The provocative Xie, who was a top economist at the World Bank and Morgan Stanley, found notoriety a decade ago when he left the Wall Street bank after a controversial internal report went public. Today, he is among the loudest voices warning of an inevitable implosion in China, the world’s second-largest economy. Xie, now working independently and based in Shanghai, says the coming collapse won’t be like the Asian currency crisis of 1997 or the U.S. financial meltdown of 2008. In a recent interview with MarketWatch, Xie said China’s trajectory instead resembles the one that led to the Great Depression, when the expansion of credit, loose monetary policy and a widespread belief that asset prices would never fall contributed to rampant speculation that ended with a crippling market crash.

China in 2016 looks much the same, according to Xie, with half of the country’s debt propping up real-estate prices and heavy leverage in the stock market — indicating that conditions are ripe for a correction. “The government is allowing speculation by providing cheap financing,” Xie told MarketWatch. China “is riding a tiger and is terrified of a crash. So it keeps pumping cash into the economy. It is difficult to see how China can avoid a crisis.” Xie’s viewpoints have at times attracted unwelcome attention. In 2006, when he was a star Asia economist at Morgan Stanley a leaked email to colleagues in which he said money laundering was bolstering growth in Singapore led to his abrupt departure from the bank. In early 2007, he termed China’s surging markets a “bubble” that could lead to a banking crisis,” and in 2009 he likened them to a “Ponzi scheme.”

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“Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher.”

Asian Factories Struggle, Brexit Throws Up New Threats (R.)

China’s vast factory sector flatlined in June as exports shrank and jobs were cut, a worrying trend evident across Asia that argues for yet more policy stimulus as doubts gather over the potency of measures taken so far. The hard times signaled by a range of surveys was not what the world needed a week after Britain’s vote to leave the European Union condemned that bloc to months, if not years, of political and economic instability. Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher. “The unimaginable has happened and the UK vote will cast a long shadow over the UK, Europe and global markets for some time to come,” warned Westpac head currency strategist Robert Rennie.

“A structurally weaker pound, a softer euro and weaker global growth beckons.” Among the many surveys out on Friday, China’s official Purchasing Managers’ Index (PMI) slipped a tick to 50 in June, dead on the level that is supposed to separate growth from contraction. One saving grace was the services sector measure, which nudged up to 53.7 in a positive sign for consumer activity. More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four-month trough of 48.6 in June, from 49.2 in May.

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“..the euro area’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand..”

Europe Post-Brexit (Brad Setser)

A few thoughts, focusing on narrow issues of macroeconomic management rather than the bigger political issues. The U.K. has been running a sizeable current account deficit for some time now, thanks to an unusually low national savings rate. That means, on net, it has been supplying the rest of Europe with demand—something other European countries need. This isn’t likely to provide Britain the negotiating leverage the Brexiters claimed (the other European countries fear the precedent more than the loss of demand) but it will shape the economic fallout. The fall in the pound is a necessary part of the U.K.’s adjustment. It will spread the pain from a downturn in British demand to the rest of the euro area.

Brexit uncertainty is thus a sizable negative shock to growth in Britian’s euro area trading partners not just to Britain itself: relative to the pre-Brexit referendum baseline, I would guess that Brexit uncertainty will knock a cumulative half a%age point off euro area growth over the next two years.* Of course, the euro area, which runs a significant current account surplus and can borrow at low nominal rates, has fiscal capacity to counteract this shock. Germany is being paid to borrow for ten years, and the average ten year rate for the euro area as a whole is around 1%. The euro area could provide a fiscal offset, whether jointly, through new euro area investment funds or simply through a shift in say German policy on public investment and other adjustments to national policy.

I say this knowing full-well the political constraints to fiscal action. The Germans do not want to run a deficit. The Dutch are committed to bringing an already low deficit down further. France, Italy and especially Spain face pressure from the Commission to tighten policy. The Juncker plan never really created the capacity for shared funding of investment. The euro area’s aggregate fiscal stance is, more or less, the sum of national fiscal policies of the biggest euro area economies. If I had to bet, I would bet that the euro area’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand. A lot depends on the fiscal path Spain negotiates once it forms a new government, given that is running the largest fiscal deficit of the euro area’s big five economies.

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€150 billion. Chump change. Wait, there was a eurozone debt crisis in 2011?

Italy’s banks can now issue bonds with the same guarantee sovereign bonds have. But only the solvent ones, as in: those who don’t need it.

This is worse than a band-aid. Just wait till the vultures wake up.

EU Approves Italian Contingency Plan To Guarantee Bank Liquidity (R.)

The European Commission has authorized an Italian government plan to guarantee liquidity for banks in the event of a financial crisis in the euro zone’s third-largest economy, an EU executive spokeswoman said on Thursday. The Commission approved the scheme last Sunday, another EU official said, days after Britain voted to leave the EU, triggering a sell-off in European bank stocks, especially in Italy, home to roughly a third of the euro zone’s bad debts. The scheme, worth up to €150 billion according to some media reports, would only be triggered in circumstances similar to the euro zone debt crisis of 2011, when some banks in the currency bloc needed to be bailed out and the interbank market had ceased to function. “Given the financial markets turmoil of recent days, the government saw it fit to prepare for all scenarios, even the most improbable, to be ready to step in to protect savers,” the Italian Treasury said in a statement.

Italian officials stressed they did not expect Italy to suffer a 2011-style meltdown in confidence but said it was prudent to plan for a worst-case scenario. Italian bank shares ended up 2% on Thursday after news of the scheme. Under the scheme, a bank can ask the government to guarantee its bond issues, ensuring that it can raise money even in troubled markets, but it only applies until the end of this year and only to banks with solvent balance sheets. “In this way, they can issue bonds that, with the assistance of the public guarantee, are similar to an Italian government bond,” said one source familiar with the scheme. [..] Rome has said it is concerned that Italian banks, which hold €360 billion of bad loans, risk attack by hedge funds betting that market turmoil, increased by last week’s Brexit vote, could tip them into a full-blown crisis.

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How Germany is blowing up the very EU that is making it rich.

The Italian Job (DDMB)

More than any of its peers, the Italian economy has suffered since joining the euro in 1999. Since 2007, its economy has contracted by 10% and suffered not one, not two, but three recessions. Competitive export-led growth has been deeply impaired by virtue of Italy’s being effectively yoked to the massive German economy. Despite the rise of China, Germany has been able to maintain its top three ranking among world exporters. The secret weapon? That would be the euro. In 1998, the year before Germany switched to the euro, the country exported $540 billion. By 2015, that figure had swelled to $1.3 trillion. Italy’s exports have also grown, but not nearly as robustly, coming in last year at $459 billion compared to $242 billion the year before it joined the euro.

Just as it once was the case with China, Germany benefits from its relatively weak currency. If Germany was not tethered to its weaker-economy neighbors and was still on the Deutsche Mark, it would have a significantly stronger currency and substantially lower exports due to the price of its exports being much more expensive for world markets. Back in 2011, UBS put pencil to paper and figured that losing the common currency would trigger an immediate effective tax increase for the average German citizen of about €7,000 and between €3,500 to €4,000 every single year going forward. By contrast, swallowing half the debt of Greece, Ireland and Portugal at that time would have generated a little over €1,000 tab per citizen.

Now you see why bailing out is so easy to do, though the Germans do put on a great show of irritation at having to foot such bills. But let’s be honest. Consider the alternative. Reverse that effect and, with all else being equal, you begin to appreciate why Italy’s exports have become relatively more expensive, burdened as they are with a more expensive currency than they would have had. Consider that globalization had already done a number on the country’s once magnificent industrial base when Italy opted into the euro and left the lire behind. Since then, the country’s industrial capacity has been further decimated, shrinking by 15%. To take but one example, in 2007, Italy manufactured 24 million appliances; by 2012 it had declined to 13 million.

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S&P doesn’t mind doing useless things.

Standard & Poor’s Cuts EU Credit Rating (G.)

The European Union has suffered a downgrade of its long-term credit rating following the UK’s Brexit vote last week. In a move that will increase the borrowing costs for the 28-member bloc, the credit ratings agency S&P said the EU should see its status as a safe haven for investors reduced to AA from AA+. The agency said: “After the decision by the UK electorate to leave the EU … we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor.” International investors use credit agency reports to gauge the safety of their funds and the likelihood that their investments will become insolvent. Pension funds and other investors typically move their money to safe havens in times of uncertainty.

But concerns that the ripple effects of the Brexit vote will hit the profits of corporations in Europe, the US and Japan and hurt government finances have grown in recent days. Earlier this week S&P became the last of the three major ratings agencies to strip the UK of its last AAA rating as it warned that the economic, fiscal and constitutional risks the country faced had increased following the EU referendum result. The UK was placed on negative watch, which puts the government on notice of possible further downgrades, after S&P described the result of the vote as “a seminal event” that would “lead to a less predictable, stable and effective policy framework in the UK”. The agency added that the vote to remain in Scotland and Northern Ireland “creates wider constitutional issues for the country as a whole”.

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“..the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction.”

Price Discovery, RIP (David Stockman)

That was quick. With nearly 85% of the Brexit loss recovered in three days and the market now up for the quarter and the year, what’s not to like? After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted,

Markets were boosted by reports indicating the ECB is weighing changes to its bond-buying program, while “the Bank of England also said they are all in,” said Joe Saluzzi at Themis Trading. The ECB is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from BOE Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat.

Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will “run out of securities to buy”. Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s “buy” button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be enough to go around. It turns out, however, that the operative phrase is “under current stipulations”. In a fit of apparent prudence, the ECB determined that in buying $90 billion of government bonds and other securities per month, it would only purchase securities with a yield higher than its negative 0.4% deposit rate.

That’s right. Stumbling around in their monetary puzzle palace, the geniuses at the ECB determined that subzero rates are just fine with one condition. Namely, so long as they don’t have to pay more to own German bonds, for example, than German banks are paying to deposit excess funds at the ECB. Stated differently, the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction. But then comes the catch-22. The more bonds Draghi promises to buy, the more the casino front-runners scarf-up those same bonds on 95% repo leverage – knowing that Mario will gift them with a big fat gain on their tiny sliver of capital at risk.

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“The behaviour of the jet stream suggests massive hits to the [global] food supply and the potential for massive geopolitical unrest. There’s very strange things going on on planet Earth right now.”

Scientists Warn Of ‘Global Climate Emergency’ Over Jet Stream Shift (Ind.)

Environmental scientists have declared a “global climate emergency” after the Northern hemisphere jet stream was found to have crossed the equator, bringing “unprecedented” changes to the world’s weather patterns. Robert Scribbler and University of Ottawa researcher Paul Beckwith warned of the “weather-destabilising and extreme weather-generating” consequences of the jet stream shift. The scientists said the anomalies were most likely precipitated by man-made climate change, which caused the jet stream to slow down and create larger waves. Scribbler wrote in a post on his environmental blog on Tuesday: “It’s the very picture of weather-weirding due to climate change. Something that would absolutely not happen in a normal world.

Something, that if it continues, basically threatens seasonal integrity. The blogger explained the barrier between the two jet streams generates the strong divide between summer and winter, and the “death of winter” could commence if it is eroded as warm weather leaks into the “winter zone” of the year. He continued: “As the poles have warmed due to human-forced climate change, the Hemispherical Jet Streams have moved out of the Middle Latitudes more and more. You get this weather-destabilising and extreme weather generating mixing of seasons.” Meanwhile, Mr Beckwith confirmed the changes would usher in a sustained period of “climate system mayhem” which could prove difficult to resolve.

He said: “Our climate system behaviour continues to behave in new and scary ways that we have never anticipated, or seen before. “Welcome to climate chaos. We must declare a global climate emergency. “The behaviour of the jet stream suggests massive hits to the [global] food supply and the potential for massive geopolitical unrest. There’s very strange things going on on planet Earth right now.”

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Absolute must read. How is it possible that my adopted home away from home gets it so right, yet no-one else tries to learn from it?

Refugees Encounter a Foreign Word: Welcome (NY Times)

Much of the world is reacting to the refugee crisis – 21 million displaced from their countries, nearly five million of them Syrian — with hesitation or hostility. Greece shipped desperate migrants back to Turkey; Denmark confiscated their valuables; and even Germany, which has accepted more than half a million refugees, is struggling with growing resistance to them. Broader anxiety about immigration and borders helped motivate Britons to take the extraordinary step last week of voting to leave the EU. In the United States, even before the Orlando massacre spawned new dread about “lone wolf” terrorism, a majority of American governors said they wanted to block Syrian refugees because some could be dangerous.

Donald J. Trump, the presumptive Republican presidential nominee, has called for temporary bans on all Muslims from entering the country and recently warned that Syrian refugees would cause “big problems in the future.” The Obama administration promised to take in 10,000 Syrians by Sept. 30 but has so far admitted about half that many. Just across the border, however, the Canadian government can barely keep up with the demand to welcome them. Many volunteers felt called to action by the photograph of Alan Kurdi, the Syrian toddler whose body washed up last fall on a Turkish beach. He had only a slight connection to Canada – his aunt lived near Vancouver – but his death caused recrimination so strong it helped elect an idealistic, refugee-friendly prime minister, Justin Trudeau.

The Toronto Star greeted the first planeload by splashing “Welcome to Canada” in English and Arabic across its front page. Eager sponsors toured local Middle Eastern supermarkets to learn what to buy and cook and used a toll-free hotline for instant Arabic translation. Impatient would-be sponsors — “an angry mob of do-gooders,” The Star called them — have been seeking more families. The new government committed to taking in 25,000 Syrian refugees and then raised the total by tens of thousands. In the ideal version of private sponsorship, the groups become concierges and surrogate family members who help integrate the outsiders, called “New Canadians.” The hope is that the Syrians will form bonds with those unlike them, from openly gay sponsors to business owners who will help them find jobs to lifelong residents who will take them skating and canoeing.

Ms. McLorg’s group of neighbors and friends includes doctors, economists, a lawyer, an artist, teachers and a bookkeeper. Advocates for sponsorship believe that private citizens can achieve more than the government alone, raising the number of refugees admitted, guiding newcomers more effectively and potentially helping solve the puzzle of how best to resettle Muslims in Western countries. Some advocates even talk about extending the Canadian system across the globe. (Slightly fewer than half of the Syrian refugees who recently arrived in Canada have private sponsors, including some deemed particularly vulnerable who get additional public funds. The rest are resettled by the government.)

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Mar 192015
 March 19, 2015  Posted by at 1:09 am Finance Tagged with: , , , , , , ,  5 Responses »

John M. Fox National Peanut Corp. store on Broadway, NY 1947

Let’s start with defining what an ‘investor’ really is. A reasonable definition of an investor seems to be ‘someone who puts money into risk bearing assets that promise to produce financial gains through – increased – productivity’.

If we can agree on that, then furthermore I think we can all agree that investors need markets. And not only that, but they need functioning markets. What defines ‘functioning’ here is that ‘investors’ need to be able to discern what the value is of the assets they have already purchased and/or are thinking of purchasing in the future.

But we haven’t had any functioning markets since at least 2008. There is no price discovery left, nobody knows the actual value of anything anymore, and ‘traders’ pour money into all sorts of ‘assets’ without having one single clue as to what they are really worth. They don’t even care about the real value of the ‘assets’ they purchase. They don’t have to, because the game’s so obviously rigged and distorted.

There is no risk left in the assets, productivity – i.e. the added value – has long since ceased to be an issue, and that leaves financial gains as the only point of our definition above. But that must of necessity also mean that whoever trades in these non-functioning markets – preferably with ‘money’ borrowed on the cheap -, is not an investor.

So what are the people who do trade, while still calling themselves investors? Are they then mere ‘traders’? That doesn’t quite seem to fit.

What are they then? It may sound a bit harsh to claim they are all just plain grifters, but maybe that’s not too far off the truth after all.

One might conclude, when looking at the excessive attention ‘everyone’ paid yet again today to Janet Yellen and the Fed, waiting breathlessly to see if she utters the word ‘patience’, that those people who call themselves ‘investors’ are not even grifters, they’re nothing but yet another group of lazy bums waiting for government – and/or central bank – hand-outs.

Just much bigger hand-outs than people receive who are on foodstamps (and now you know where that much maligned inequality comes from). But they’re still hand-outs.

Nobody puts money into worthy (for lack of a better term), innovative, productive projects anymore, everyone just waits for what the Fed says and plays it safe (hand-outs). The Fed has thus eroded the investment world, and indeed the entire investment market model.

And that will come back to bite everyone. There is no more money flowing into any ‘worthy’ initiatives, it’s all going into whatever makes most money fastest, screw – increased – productivity. And since price discovery no longer exists, worthy initiatives will receive funding only through some freak accident (like a billionaire with Alzheimer’s), not by design, not through the inherent benefits of the investment model. Which is all but dead.

This cannot but have far reaching consequences, because we no longer have a model in which the best and brightest and hardest working amongst us can and will get funding to build their dreams. All money goes into either ‘Tech Boom The Sequel’, or is spent betting against whatever trend looks fit to fall first. Or a combination of the two.

The smarter amongst you, and I have to doubt that there are too many, will understand that the Fed ‘protection racket’ that has existed for years, is about to come to an end. It’s you against Wall Street now, and most of you don’t stand a chance in that arena.

A rate hike, any rate hike, or two, is the (re-)start of price discovery, at a time when everyone is ‘invested’ in ‘assets’ for which price discovery was never even considered at the time of purchasing. How fast can you unload? Who’s going to be the buyer? Are there enough fools greater than you left?

Maybe I should feel better knowing how much y’all stand to lose soon, but I don’t, because I also know how much everyone else stands to lose who already don’t have anything but debt. Emerging markets are going to get obliterated, all sorts of funds and levels of government, domestic and abroad, are going to get crushed – resulting in more services getting cut for the poor -, and so, whether you like it or not, are most Americans and Europeans who fancy calling themselves ‘investors’.

They’re not. They’re just a bunch of grifters and bums. They couldn’t (have) survive(d) in a marketplace that has actual price discovery. They couldn’t have borne the losses and recuperated. Not the way real investors do.

I found this a good and somewhat amusing summary of the feeling before Yellen’s speech today, as expressed yesterday via MarketWatch:

‘Hell Will Break Loose’ If Fed Loses Patience

It could go either way, according to the Fly from the iBankCoin blog, who spoke of extremes. “If we find out this Wednesday that [Janet Yellen] is not, in fact, patient, hell will break loose and 66 seals of hell will be broken — paving way for actual centaurs to roam, wall-kicking people in the faces with their hooves,” he wrote. “On the other hand, if Janet is patient and says so, we’re all going to make an absurd amount of money.”

Having a rigged, distorted system that fakes being a market and makes a bunch of grifters a lot of money, is not how you build a functioning society.

Oh, and you know what the worst thing of all is – if it can get any worse -? If the Fed and other central banks, post-2008, would have simply let the markets sort things out, most of the ‘money’ that has now been so horribly dislocated and mis-invested and debt-riddled, would never have existed in the first place.

The S&P would have been at 500 or so, bonds would have ‘normal’ prices and yields, actual investors would have taken their losses, and we would have had at least some sparks of brightness to look forward to. As things are, there’s only the headlights of that highspeed train coming at us from the other side of the tunnel.

Dec 092014
 December 9, 2014  Posted by at 8:04 pm Finance Tagged with: , , , , , , , ,  11 Responses »

DPC North approach, Pedro Miguel Lock, Panama Canal 1915

And on the Seventh Day, God sold his shares? What do you think, is He short the market? Short oil? Oil does look up a tad, but then the dollar lost about a percent vs the euro, so that definitely feels like a headfake from where I’m sitting. The dollar lost more vs the euro than oil gained against the dollar. Gold and silver have somewhat more solid looking gains, but that’s against the same feverish buck, so what does it really mean? We’ll have to wait and see.

Now, be honest, who’s getting nervous yet? WTI oil yesterday fell 4.5% and tumbled through $63. $63, brother, you remember when it was $80 and you were thinking wow, that’s a long way down? That’s when you took that suit to the cleaners, and that feels like just yesterday, don’t it, and here we are, it’s down another 20%+. Anyone worried about their Christmas bonuses yet? New Year’s?

The central-bank-propped-up stock exchanges didn’t even like what they saw anymore either yesterday, let alone today. Greece down -13%, Shanghai -5.4%, Argentina -7.1%, Europe on average -2.5%. And that’s on a weak dollar day… Think we’ll have a lot of those days? Think God is short the greenback?

Is oil going to break the whole facade? What do YOU think? You think that maybe we’ve had enough of this charade? Is this the one God, let alone the Yellens and Draghis on this planet can’t manipulate from their comfy seats? The Fed can buy Exxon and Conoco, and Draghi can try and support Shell and BP, or maybe the Bank of England should, but oil is a global thing, it’s not like Treasuries or Greek debt that you can just buy a $1 trillion handful of every week or so.

But maybe God found a way to keep some more of the stuff in the ground. Who was it again that said nature developed man only to get rid of a carbon imbalance on the planet, to get it out of the soil and back into the atmosphere?

God’s representatives on earth anno 2014, central bankers, can’t control oil anymore than they can consumer spending. Anything else, they’re fine. But that makes them weak, it’s their Achilles heel, the things they can’t control. It didn’t used to be that way, but today central bankers are like movie stars. Exactly because they did everything they could to keep asset prices up. These days, you never leave home without one. Or as the Rolling Stones put it 40 years ago (when central banking was something entirely different from what it is now):

When your spine is cracking and your hands, they shake
Heart is bursting and you butt’s gonna break
Your woman’s cussing, you can hear her scream
You feel like murder in the first degree

Ain’t nobody slowing down no way
Everybody’s stepping on their accelerator crude oil tanker
Don’t matter where you are
Everybody’s gonna need a ventilator central banker

US Thanksgiving weekend spending was down 11%, and movie theatre box office no less than 20%. Sure online sales and Netflix went up a notch, but come on, a 16 year low Thanksgiving box office and the second installment of the Hunger Games trailing 25% behind the first, how does that spell recovery to you? Think God liked part 1 that much better?

Americans, like everybody else, are down and out. Their spines are cracking and their hands are shaking, and they don’t have a central banker on their side. Their central banker has sold all she could to the ‘other side’, and now she has no choice but to let oil prices kill millions of jobs, unless somehow an actual supply and demand market rises from its zombie state, the same market she has been very complicit in killing off.

If you don’t have real markets, and nobody knows anymore what anything’s worth, the only thing left to drive the financial world is herd mentality. Lemmings have that too. The world is going to regret letting Yellen et al destroy the market principle, and price discovery. Capitalism as a system cannot possibly work without price discovery. It leads to the few making out – literally – like bandits in the night, to the many left with nothing but debt, and to imploding societies.

Oil is the one substance that can make them implode. Because our entire societies are built on it. And from it, too. The industry that drives it, drives everything. And bringing down its revenues by 40% and falling will break that industry, and the society it designed and built. When oil was briefly at $40 in 2008, that was less of a factor, because their was some resilience still left in the whole global economic make-up. Today, it’s whole different story.

The American miracle idea of energy independence is fully reliant on a shale patch that went over $100 billion deeper into debt every year for years running just to produce that not-so-miracle. Take away 40%+ of what revenue it did take in, and there is no independence left. All that’s left is fracking fluids in your drinking water, and a few trillion in debt that the Big Kahuna lenders will seek to unload upon the real economy.

Oil prices at some point will rise again, but by then, and when is anyone’s guess, the price fall we see today may have done so much damage to the very structure of our economies that far fewer people will be able to afford it.

Those box office and holiday sales numbers are only a first red flag for where we’re going. As are the snap elections in Greece (spinned by Brussels) and Japan: incumbents who feel they have an edge for now, and decide to grab the opportunity.

It’s panic and fear and most of all it’s volatility. That’s our foreland. A weaker dollar for a day, which lets oil prices breath a little, which in turn lets gold sit pretty while it lasts. Tomorrow could be very different all over again. But most of all, looking at the trend in a wider context, this means a whole lot more trouble for the 95% of people who live in the real economy. Much much more. There’s nobody left to protect them from anything at all that goes on. They’ve been sold out to the highest bidder and the lowest common denominator.

And they can pray to God, but I hear he might be shorting them too.