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How does capital get allocated to the public stock markets?  Through the following means:

  • Initial Public Offerings [IPOs]
  • Follow-on offerings of stock (including PIPEs, etc.)
  • Employees who give up wage income in exchange for stock, or contingent stock (options)
  • Through rights offerings
  • Company-issued warrants and convertible preferred stock, bonds, and bank debt (rare)
  • Receiving equity in exchange for other claims in bankruptcy
  • Issuing stock to pay for the purchase of a private company
  • And other less common ways, such as promoted stocks giving cheap shares to vendors to pay for goods or services rendered.  (spit, spit)

How does capital get allocated away from the public stock markets?  Through the following means:

  • Companies getting acquired with payment fully or partially in cash.  (including going private)
  • Buybacks, including tender offers
  • Dividends
  • Buying for cash company-issued warrants and convertible preferred stock, bonds, and bank debt
  • Going dark transactions are arguable — the company is still public, but no longer has to publish data publicly.

I’m sure there are more for each of the above categories, but I think I got the big ones.  But note what largely does not matter:

  • The stock price going up or down, and
  • who owns the stock

Now, I have previously commented on how the stock price does have an effect on the actual business of the company, even if the effects are of the second order:

My initial main point is this: capital allocation to public companies does not in any large way depend on what happens in secondary market stock trading, but on what happens in the primary market, where shares are traded for cash or something else in place of cash.  When that happens, businessmen make decisions as to whether the cash is worth giving up in exchange for the new shares, or shares getting retired in exchange for cash.

In the secondary market, companies do not directly get any additional capital from all the trading that goes on.  Also, in the long run, stocks don’t care who owns them.  The prices of the stocks will eventually reflect the value of the underlying claims on the business, with a lot of noise in the process.

My second main point is this: as a result, indexing, or any other secondary market investment management strategy does not affect capital allocation much at all.  Companies going into an index for the first time typically have been public for some time, and do not issue new shares as a direct consequence of going into the index.  The price may jump, but that does not affect capital allocation unless the company does decide to issue new shares to take advantage of captive index buyers who can’t sell, which doesn’t happen often.

The same is true in reverse for companies that get kicked out of an index: they do not buy back and retire shares as a direct consequence of going into the index.  They may buy back shares when the price falls, but not because there aren’t indexers in the stock anymore.

So why did I write about this this evening?  I get an email each week from Evergreen Gavekal, and generally, I recommend it.  Generally it is pretty erudite, so if you want to get it, email them and ask for it.

In their most recent email, Charles Gave (a genuinely bright guy that I usually agree with) argues that indexing is inherently socialist because you lose discipline in capital allocation, and allocate to companies in proportion to their market capitalization, which is inherently pro-momentum, and favors large companies that have few good opportunities to deploy capital.

I agree that indexing is slightly pro-momentum as a strategy, and maybe, that you can do better if you remove the biggest companies out of your portfolio.  Where I don’t agree is that indexing changes capital allocation to companies all that much, because no cash gets allocated to or from companies as a result of being in an index.  As a result, indexing is not an inherently socialistic strategy, as Gave states.

Rather, it is a free-market strategy, because no one is constrained to do it, and it shrinks the economic take of the fund management industry, which is good for outside passive minority investors.  Let clever active managers earn their relatively high fees, but for most people who can’t identify those managers, let them index.

If indexing did lead to misallocation of capital, we would expect to see non-indexed assets outperform indexed over the long haul.  In general, we don’t see that, and so I would argue the indexing is beneficial to the investing public.

I write this as one who makes all of his money off of active value investing, so I have no interest in promoting indexing for its own sake.  I just agree with Buffett that most people should index unless they know a clever active manager.

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

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In her 2014 memoir “Hard Choices,” Clinton reiterated her support for human-rights advocates in China. She specifically criticized the Great Firewall, writing that after she made comments about the right to dissent in China in 2011, “censors went right to work erasing mentions of my message from the Internet.”

 

But the issue of Chinese repression — and Cisco’s role — was already known by then. In 2009, weeks after Clinton’s State Department had named Cisco a finalist for the secretary of state’s Awards for Corporate Excellence (ACE), a report from the Electronic Freedom Foundation noted “Cisco’s deep involvement” in building the Chinese government’s censorship system. The report pointed out that “Cisco engineers gave a presentation acknowledging the repressive uses for their technology.”

 

Daniel Wade, an attorney who represented Chinese dissidents in a lawsuit against Cisco, told IBTimes that “Cisco knew full well that its products were going to be used to suppress and facilitate the torture of democracy activists.”

 

“Crony capitalism has defined Clinton’s career, from her tenure on the board of Walmart, to the Wall Street execs whom she surrounded herself with at the State Department, to her allegiance to Cisco, even as it violated principles on which she staked her tenure,” said David Segal, executive director of the Internet freedom advocacy group Demand Progress.

 

- From the International Business Times article: Hillary Clinton, Cisco And China: Company Funded Foundation, Was Lauded By Clinton Despite Role In Repression

As many suspected, it turns out that the Clinton Foundation is indeed a tepid cesspool of crony corporate and government donations used to buy influence at the highest levels of Washington D.C. This shouldn’t surprise anyone paying attention, but it will hopefully wake up some Democrats still buying into the deep rooted myth of Hillary Clinton.

David Sirota and his colleagues at International Business Times have been relentless in uncovering several extremely important examples of her pathological cronyism. I highlighted his very important work just last week in the post, This is How Hillary Does Business – An Oil Company, Human Rights Abuses in Colombia and the Clinton Foundation. Here’s an excerpt:

The details of these financial dealings remain murky, but this much is clear: After millions of dollars were pledged by the oil company to the Clinton Foundation — supplemented by millions more from Giustra himself — Secretary Clinton abruptly changed her position on the controversial U.S.-Colombia trade pact. Having opposed the deal as a bad one for labor rights back when she was a presidential candidate in 2008, she now promoted it, calling it “strongly in the interests of both Colombia and the United States.” The change of heart by Clinton and other Democratic leaders enabled congressional passage of a Colombia trade deal that experts say delivered big benefits to foreign investors like Giustra.

 

The details of her family’s entanglements in Colombia echo talk that the Clintons have blurred the lines between their private business and philanthropic interests and those of the nation. And Hillary Clinton’s connections to Pacific Rubiales and Giustra intensify recent questions about whether big donations influenced her decisions as secretary of state.

As it turns out, this was just an appetizer. Despite claiming to be a strong advocate for human rights in China, it turns out she is an even stronger advocate for corporate donations. From the International Business Times:

Cisco Systems had a public relations problem: Having invested $16 billion in the Chinese market, the technology giant was suddenly facing congressional scrutiny over its alleged complicity in building the so-called Great Firewall that helps China’s authoritarian regime censor information and surveil its citizens.

 

The San Jose, California, company endured a high-profile Senate hearing about its Chinese operations in 2008 and reaffirmed its “continued commitment to China.” But the issue wouldn’t die. A group of investors stormed the company’s annual meeting in November 2009, pressing a shareholder resolution that would force the company to prevent the Chinese government from using Cisco technology to engage in what critics said was widespread human-rights abuse.

 

That’s when then-Secretary of State Hillary Clinton tossed the company a lifeline. Weeks after Cisco executives killed the shareholder initiative, Cisco was honored as a finalist for the State Department’s award for “outstanding corporate citizenship, innovation and democratic principles.” The next year, the company won the award. While the honors were for the company’s work in the Middle East, they gave Cisco a well-timed opportunity to change the subject and present itself as a champion of human rights.

 

What Clinton did not say at the State Department award ceremonies was that Cisco had been pumping money into her family’s foundation. Though the foundation will not release an exact timeline of the contributions, records reviewed by International Business Times show that Cisco had by December 2008 donated from $500,000 to $1 million to the foundation. The company had hired lobbying firms run by former Clinton aides. After the money flowed into the foundation, Clinton’s State Department not only lauded Cisco’s human rights record, it also delivered millions of dollars worth of new government contracts to the company.

 

Internet freedom advocates say Clinton’s moves helped Cisco whitewash its image and also raise questions about the sincerity of her often-stated commitment to human rights.

 

“Crony capitalism has defined Clinton’s career, from her tenure on the board of Walmart, to the Wall Street execs whom she surrounded herself with at the State Department, to her allegiance to Cisco, even as it violated principles on which she staked her tenure,” said David Segal, executive director of the Internet freedom advocacy group Demand Progress.

 

But the issue of Chinese repression — and Cisco’s role — was already known by then. In 2009, weeks after Clinton’s State Department had named Cisco a finalist for the secretary of state’s Awards for Corporate Excellence (ACE), a report from the Electronic Freedom Foundation noted “Cisco’s deep involvement” in building the Chinese government’s censorship system. The report pointed out that “Cisco engineers gave a presentation acknowledging the repressive uses for their technology.”

 

In 2010, the Clinton Foundation gave Cisco CEO John Chambers a high-profile speaking role at its “Turning Ideas Into Action” annual meeting. Cisco also won an ACE that year — just before the Human Rights Law Foundation filed a lawsuit against Cisco outlining what the foundation’s executive director, Terri Marsh, said was the “key role Cisco played in the design, construction, and maintenance of China’s Internet surveillance system.”

 

In an interview with IBTimes, Marsh said that “Cisco’s conduct has enabled an unprecedented and widespread crackdown on religious minorities, Tibetans, and democracy activists in China.” Cisco’s work in China, she said, “runs contrary to Secretary Clinton’s stated commitment to ‘a single Internet where all of humanity has equal access to knowledge and ideas.’”

 

She added: “We are disappointed that the State Department has chosen to reward rather than condemn such a company, and believe that the United States should instead be sending a clear message to American technology corporations that complicity in global human rights abuses is not acceptable.”

 

Daniel Wade, an attorney who represented Chinese dissidents in a lawsuit against Cisco, told IBTimes that “Cisco knew full well that its products were going to be used to suppress and facilitate the torture of democracy activists.”

 

The Electronic Frontier Foundation, which today works with Cisco on an Internet encryption project, said Cisco technology enabled violent repression by the Chinese government.

 

“We have ample evidence to indicate that the technology Cisco created was instrumental in the tracking down of religious minorities, detaining them, and murdering them,” said Rainey Reitman, the EFF’s activism director. “Unfortunately, there hasn’t been a full public accounting.”

There’s shameless, and then there’s Hillary Clinton. She is in a league all by herself.

*  *  *

For related articles, see:

All Hail Hillary – Iowa Students Locked in Classrooms as Clinton Arrives at College to Visit “Everyday Iowans”

This is How Hillary Does Business – An Oil Company, Human Rights Abuses in Colombia and the Clinton Foundation

Hillary Clinton Exposed Part 1 – How She Aggressively Lobbied for Mega Corporations as Secretary of State

Hillary Clinton Exposed Part 2 – Clinton Foundation Took Millions From Countries That Also Fund ISIS








Having previously explained the 175,846,629,768 reasons why former Fed Chair Ben Bernanke would join Citadel - the most-levered hedge fund in the world and alleged conduit of fed put protection; we thought it intriguing to note what billionaire Citadel Ken Griffin had to say about Bernanke and his policies just 2 years ago...

The revolving door between Wall Street and Washington doesn’t often involve big banks like Citigroup or Goldman Sachs anymore. Instead, as Forbes' Nathan Vardi reports, hedge fund and private equity firms have become the destination of choice. They are richer and guys like Bernanke feel they are less controversial than the big banks.

But, ironically, Griffin has been publicly critical of some of the more prominent Federal Reserve policies that were implemented on Bernanke’s watch. He particularly took some shots at those policies in 2013, as Bernanke was coming close to finishing his run at the Fed.

In a statement on Thursday,

Griffin said that Bernanke “has extraordinary knowledge of the global economy and his insights on monetary policy and the capital markets will be extremely valuable to our team and to our investors.”

But two years ago - he was not so sure...

Here are some of Griffin’s criticisms of Federal Reserve policy during the Bernanke years.

 

To The Economic Club of Chicago, May 2013:

 

“I think QE3 is a terrible idea because we are now reaching the point where the Fed is becoming captive to our political institutions. You see with the Fed owning several trillion dollars of U.S. Treasuries it’s easy to imagine that at the next confirmation hearing the questions posed by politicians will be of the nature, will you continue to help subsidize the cost of the U.S. federal government’s borrowings even at the ensuing risk of potentially creating uncontrollable inflation? That last part won’t be asked but that will be the risk. And I think there will be real pressure on picking people to the Federal Reserve board who will appease our politicians and continue to try to drive interest rates to an artificially low level, very worried about that, very worried about that.”

 

To The Milken Institute Conference, April 2013:

 

“The Federal Reserve is really trying to counteract a number of the very poor policies that are coming from our legislative and executive branches and it’s damn near impossible to overcome the headwinds created by Obamacare, an inability to reform tax policy, inability to thoughtfully create jobs in our country and the Fed’s policies are doing two things that I am very gravely concerned about. Number one is we have all learned over the years that if you reduce the cost of capital you increase your use of fixed assets and you take out jobs. Corporate America seeing an ever increasing cost for its employee base and extraordinary low interest rates is taking every step they can possibly take to reduce employment, to build factories abroad and domestically to substitute technology and automated processes for people. So one of the very sad negative characteristics of the Fed’s policies is it’s leading to job destruction.”

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This 'flip-flopping' though, is understandable - the only 'edge' any fund has anymore is an inside line on monetary policy headlines and actions and the fee generation from running the Fed's trades likely came with some quid pro quo...








Submitted by Thad Beversdorf via FirstRebuttal.com,

Screen Shot 2015-04-16 at 12.32.35 PM

Is mainstream media really going to ignore that Marco Rubio’s campaign is named after the late 1990′s think tank called a ‘Project for a New American Century’ (PNAC), founded by Head Neocon – Bill Kristol?  And this is no coincidence.  Guess who’s doing the Sunday talk show circuit campaigning for a Rubio presidency?  You know it…

 

Now as a reminder the PNAC is a lobby group formed by a host of neocons at the end of the 1990′s with an objective of war in the Middle East.  See if you recognize a few of the notable names of people that signed the PNAC’s founding statement of principles; Dick Cheney, Donald Rumsfeld, Ron Perle and Paul Wolfowitz.  You’ll note these guys became Vice President, Secretary of Defense, Chairman of the Defense Policy Board and Deputy Secretary of Defense, respectively, under president Bush about six months before 9/11.

Have a look at the following recommendations from the Project for a New American Century’s apex report sent to President Clinton in September of 2000.  One year exactly before the 9/11 tragedy that became the sales pitch for an unendable war on terror similar to Reagan’s war on drugs some 35 years ago, both still going strong with no signs of slowing. The report titled “Rebuilding America’s Defenses” recommends that while the world was in the longest sustained period of global peace (acknowledged in the report) that America should establish four key objectives as it headed into the new century.  Pay particular attention to the second ‘core mission’ in the following excerpt from the report.

Screen Shot 2015-01-08 at 2.49.08 PM

Funny thing about these four core missions is that each and everyone of them came to fruition.  Not surprising given the authors became the senior military policy makers about 6 months after the recommendations were sent to outgoing President Clinton.  Now there is more than meets the eye to all of this and I won’t get into the details here but for those interested, if you want to understand the very ugly truth about how and why America is in the midst of a seemingly endless war on ‘terror’ in the Middle East have a read of an article I wrote some time ago called “The Most Essential Lessons of History that No One Wants to Admit“.

You will realize that our boy Bill Kristol is just the face of an immense amount of money and political persuasion.  Money talks and our government is for sale.  Just ask Marco Rubio what the going rate for naming rights is on a presidential campaign these days.  The power and money that Kristol represents do not provide their support without expectations.  These thugs absolutely want their return on capital.  The returns come by way of a currency only a President carries.

Anyone not interested in WWIII should be very wary of a Rubio presidency.  Marco Rubio’s financial backing will absolutely guarantee a war with Russia and a war with Russia means a war with China for it must protect its future energy supplies.  Bill Kristol and his band of armchair warriors have been lobbying for a war with Russia since at least as far back as 2004 as evidenced in the following letter to group of European heads of state.

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The letter really depicts the kind of rhetoric used by these neocons.  You can see from the list of names supporting this effort at the end of the full letter, these neocons are the very same neocons recommending the US start a series of arbitrary wars in the name of peace via the Project for a New American Century, as noted above.  Now they lack any substantive facts in their letter and so use implications and conjecture about Russia being a dictatorship, which is no more true, and probably less, than it is for the US meaning we are throwing stones in glass houses.  President Bush and Obama remember have signed several executive orders, such as the AUMF and NDAA that negate an American citizen’s constitutional rights.

The best evidence that indeed Americans’ constitutional rights to things like Habeas Corpus are negated under the combined executive orders of AUMF and NDAA is depicted in the United States Court of Appeals Second Circuit District Judge, Lewis Kaplan’s ruling statement.  He explains their plurality decision was a compromise that gives authority to suspend a citizen’s constitutional rights but only until the respective ‘war’, is over.  However this is not a compromise at all.  When the ‘war’ is a war on terror it is not only indefinite but infinite for when would we ever suggest we are no longer fighting against terrorism.  So while the District court’s ruling suggests that it limits the negation of a citizen’s constitutional rights, for all intents and purposes it limits the negation to a duration of forever, which is by definition not a limitation.

But as I so often do I digress.  My point is that Bill Kristol and his armchair warriors have been lobbying for a war with Russia in the very same way they lobbied for “multiple simultaneous major theater wars”, which they got in the Middle East.  One can only conclude then that given a Rubio presidency, war with Russia is all but guaranteed.

One of Kristol’s armchair warriors is the one and only Victoria Nuland, wife of a Kagan boy, he himself a general in the armchair army.  Note that Nuland was the conductor of the coup d’etat in Ukraine as evidenced in a recording of a conversation between her and a fellow US diplomat discussing who they were going to place as head of state in Ukraine.  Now the recording begs two questions.  What gives US diplomats the right to decide the head of state for a foreign ‘democratic’ nation?  And perhaps more interesting, how did Nuland know that there would be an opening for head of state in Ukraine given the recorded conversation took place prior to the coup d’etat and so prior to any rational notion that a replacement would be needed?  Unless of course Nuland was aware that there would soon be an opening for the role of President of Ukraine.

Anyone that still believes the US is not the most corrupt government in the world is simply in denial.  All the facts are there and to discount them is to deny them.  I’m going to leave you with perhaps the best interview I’ve ever seen with Bill Kristol by a character we can all appreciate.  Enjoy it but don’t miss the message.  Kristol is nothing but a muppet, however, the men behind Kristol are extremely dangerous and men who work in political shadows to get what they want by purchasing and threatening the careers of American legislators.  These men who work in the shadows are just the current members of the same group that forced Woodrow Wilson to approve the Central Banking Act against his better judgment in 1913 and 30 years later forced Harry Truman to support taking land from the Palestinians and calling it Israel against his better judgement.  Ample evidence shows that both took those personally regretful actions under extreme political duress by a group we now call the neocons.

Rubio has essentially made a deal with the devil.  He has accepted the help of perhaps the most powerful political force in Washington but it will cost him a Presidential executive order to initiate military aggression against Russia.  If we allow this to play out the blood of so many more young Americans and other young men and women around the world will be on the hands of we the people for again failing to uphold our duties as Americans, a self governed people, rather than as subservient fools.

 








By Michael Snyder at The Economic Collapse Blog Get ready for another major worldwide credit crunch.  Today, the entire global financial system resembles a colossal spiral of debt.  Just about all economic activity involves the flow of credit in some way, and so the only way to have “economic growth” is to introduce even more…

Earlier today, we were quite shocked when we heard two statements by central bankers uttered during a press briefing in Washington. The first comes from the ECB's Mario Draghi:

  • DRAGHI: LOW RATES FOR LONG PERIOD INCREASE FINANCIAL STABILITY RISKS

The second: from his supposed nemesis, if only for public consumption and not during the BIS' bimonthly meetings in Basel, Bundesbank head Jens Weidmann, who said a carbon copy replica of what Draghi had said minutes prior:

  • WEIDMANN SAYS LOW INTEREST RATES INCREASE FIN STABILITY RISKS

We were "shocked" because for once, we agree with central bankers. And to get a sense of just how right the two central bank heads are we go to Bank of America which overnight released a report in which it said that as of this moment, "53% of all global government bonds are yielding 1% or less (Chart 3)."

Let that sink in for a second.

And while you are contemplating that, here is another fact from Bank of America:

The global narrative remains maximum liquidity (Chart 2) & minimal interest rates. And it’s impossible to be max bearish with such an extravagant monetary backdrop.

 

 

Central bank assets now exceed $22 trillion, a figure equivalent to the combined GDP of US & Japan

So yes, low rates for a long period of time most certainly "increase financial stability risks" - the central planners are certainly correct about that. But next time they make that remark, perhaps someone from the media can ask Messrs Draghi or Weidmann the following question:

does the fact that central banks now collectively own nearly a third of global GDP in government bonds and equivalent assets - an amount that is greater than the GDP of first and third largest global economies, have anything to do with "low rates" and the fact that "financial stability risks" as of this moment have never been higher?

Oh, and good luck with that "renormalization."








Another month, and another confirmation that China's hard landing is if not here, then likely mere months away.

Overnight, the NBS reported that in March, Chinese house prices dropped in 69 of 70 cities compared to a year ago. According to Goldman's seasonal adjustments, in March home prices dropped another 0.5% from February, the same as the prior month's decline, suggesting that the February 28 rate cut hasn't done much to boost housing spirits.

However, it is the annual data that truly stands out, because with a drop of 6.1% this was the biggest drop in Chinese house prices in history.

 

To be sure, the PBOC is now scrambling to halt what, unless it is stopped, will become a full-blown hard landing in months, if it isn't already. As a result, as shown in the chart below it has recently engaged in several easing steps, with many more to come according to the sell-side consensus. So far these have failed to stimulate the overall economy, which continues to be pressured by a deflation-importing world, but have certainly lead to a massive surge in the Chinese stock market.

 

Incidentally, the ongoing collapse in Chinese home prices is precisely why the PBOC and the Politburo have both done everything in their power to substitute the burst housing bubble with another: that of stocks, by pushing everyone (even the illiterates) to invest as much as possible in the stock market, leading to the biggest and fastest liquidity and margin debt-driven bubble in history.

...one which has left BNP "speechless."

Unfortunately for China, as we have shown before, all Chinese attempts to do what every self-respecting Keynesian would do, i.e., replace one bubble with another, are doomed to fail for the simple reason that unlike in the US, where the bulk of assets are in financial form, in China 75% of all household wealth is in real estate.

 

And this is where things get scarier, because if one compares the history of the Chinese and US housing bubbles, one observes that it was when US housing had dropped by about 6% following their all time highs in November 2005, that the US entered a recession.

This is precisely where China is now: a 6.1% drop following the all time high peak in January of 2014. If the last US recession is any indication, the Chinese economy is now contracting!

 

So much for hopes of 7% GDP growth this year.

The good news, if any, is that Chinese home prices have another 12% to drop before China, which may or may not be in a recession, suffer the US equivalent of the Lehman bankruptcy.








Submitted by Michael Snyder via The Economic Collapse blog,

Get ready for another major worldwide credit crunch.  Today, the entire global financial system resembles a colossal spiral of debt.  Just about all economic activity involves the flow of credit in some way, and so the only way to have “economic growth” is to introduce even more debt into the system.  When the system started to fail back in 2008, global authorities responded by pumping this debt spiral back up and getting it to spin even faster than ever.  If you can believe it, the total amount of global debt has risen by $35 trillion since the last crisis.  Unfortunately, any system based on debt is going to break down eventually, and there are signs that it is starting to happen once again.

For example, just a few days ago the IMF warned regulators to prepare for a global “liquidity shock“.  And on Friday, Chinese authorities announced a ban on certain types of financing for margin trades on over-the-counter stocks, and we learned that preparations are being made behind the scenes in Europe for a Greek debt default and a Greek exit from the eurozone.  On top of everything else, we just witnessed the biggest spike in credit application rejections ever recorded in the United States.  All of these are signs that credit conditions are tightening, and once a “liquidity squeeze” begins, it can create a lot of fear.

Over the past six months, the Chinese stock market has exploded upward even as the overall Chinese economy has started to slow down.  Investors have been using something called “umbrella trusts” to finance a lot of these stock purchases, and these umbrella trusts have given them the ability to have much more leverage than normal brokerage financing would allow.  This works great as long as stocks go up.  Once they start going down, the losses can be absolutely staggering.

That is why Chinese authorities are stepping in before this bubble gets even worse.  Here is more about what has been going on in China from Bloomberg

China’s trusts boosted their investments in equities by 28 percent to 552 billion yuan ($89.1 billion) in the fourth quarter. The higher leverage allowed by the products exposes individuals to larger losses in the event of stock-market drops, which can be exaggerated as investors scramble to repay debt during a selloff.

 

In umbrella trusts, private investors take up the junior tranche, while cash from trusts and banks’ wealth-management products form the senior tranches. The latter receive fixed returns while the former take the rest, so private investors are effectively borrowing from trusts and banks.

 

Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.

Overall, China has seen more debt growth than any other major industrialized nation since the last recession.  This debt growth has been so dramatic that it has gotten the attention of authorities all over the planet

Wolfgang Schaeuble, Germany’s finance minister says that “debt levels in the global economy continue to give cause for concern.”

 

Singling out China in particular, Schaeuble noted that “debt has nearly quadrupled since 2007″, adding that it’s “growth appears to be built on debt, driven by a real estate boom and shadow banks.”

 

According to McKinsey’s research, total outstanding debt in China increased from $US7.4 trillion in 2007 to $US28.2 trillion in 2014. That figure, expressed as a percentage of GDP, equates to 282% of total output, higher than the likes of other G20 nations such as the US, Canada, Germany, South Korea and Australia.

This credit boom in China has been one of the primary engines for “global growth” in recent years, but now conditions are changing.  Eventually, the impact of what is going on in China right now is going to be felt all over the planet.

Over in Europe, the Greek debt crisis is finally coming to a breaking point.  For years, authorities have continued to kick the can down the road and have continued to lend Greece even more money.

But now it appears that patience with Greece has run out.

For instance, the head of the IMF says that no delay will be allowed on the repayment of IMF loans that are due next month…

IMF Managing Director Christine Lagarde roiled currency and bond markets on Thursday as reports came out of her opening press conference saying that she had denied any payment delay to Greece on IMF loans falling due next month.

Unless Greece concludes its negotiations for a further round of bailout money from the European Union, however, it is not likely to have the money to repay the IMF.

And we are getting reports that things are happening behind the scenes in Europe to prepare for the inevitable moment when Greece will finally leave the euro and go back to their own currency.

For example, consider what Art Cashin told CNBC on Friday

First, “there were reports in the media [saying] that the ECB and/or banking authorities suggested to banks to get rid of any sovereign Greek debt they had, which suggests that maybe the next step will be Greece exiting,” Cashin told CNBC.

Also, one of Greece’s largest newspapers is reporting that neighboring countries are forcing subsidiaries of Greek banks that operate inside their borders to reduce their risk to a Greek debt default to zero

According to a report from Kathimerini, one of Greece’s largest newspapers, central banks in Albania, Bulgaria, Cyprus, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia have all forced the subsidiaries of Greek banks operating in those countries to bring their exposure to Greek risk — including bonds, treasury bills, deposits to Greek banks, and loans — down to zero.

Once Greece leaves the euro, that is going to create a tremendous credit crunch in Europe as fear begins to spread like wildfire.  Everyone will be wondering which nation will be “the next Greece”, and investors will want to pull their money out of perceived danger zones before they get hammered.

In the past, other European nations have been willing to bend over backwards to accommodate Greece and avoid this kind of mess, but those days appear to be finished.  In fact, the finance minister of France openly admits that the French “are not sympathetic to Greece”

Greece isn’t winning much sympathy from its debt-wracked European counterparts as the country draws closer to default for failing to make bailout repayments.

“We are not sympathetic to Greece,” French Finance Minister Michael Sapin said in an interview at the International Monetary Fund-World Bank spring meetings here.

“We are demanding because Greece must comply with the European (rules) that apply to all countries,” Sapin said.

Yes, it is possible that another short-term deal could be reached which could kick the can down the road for a few more months.

But either way, things in Europe are going to continue to get worse.

Meanwhile, very disappointing earnings reports in the U.S. are starting to really rattle investors.

For example, we just learned that GE lost 13.6 billion dollars in the first quarter…

One week following the announcement that it would dismantle most of its GE Capital financing operations to instead focus on its industrial roots, General Electric reported a first quarter loss of $13.6 billion.

 

The results were impacted by charges relating to the conglomerate’s strategic shift. A year ago GE reported a first quarter profit of $3 billion.

That is a lot of money.

How in the world does a company lose 13.6 billion dollars in a single quarter during an “economic recovery”?

Other big firms are reporting disappointing earnings numbers too

In earnings news, American Express Co. late Thursday said its results were hurt by the strong U.S. dollar, which reduced revenue booked in other countries. Chief Executive Kenneth Chenault reiterated the company’s forecast that 2015 earnings will be flat to modestly down year over year. Shares fell 4.6%.

 

Advanced Micro Devices Inc. said its first-quarter loss widened as revenue slumped. The company said it was exiting its dense server systems business, effective immediately. Revenue and the loss excluding items missed expectations, pushing shares down 13%.

And just like we saw just before the financial crisis of 2008, Americans are increasingly having difficulty meeting their financial obligations.

For instance, the delinquency rate on student loans has reached a very frightening level

More borrowers are failing to make payments on their student loans five years after leaving college, painting a grim picture for borrowers, according to the Federal Reserve Bank of New York.

 

Student debt continues to increase, especially for people who took out loans years ago. Those who left school in the Great Recession, which ended in 2009, had particular difficulty with repayment, with many defaulting, becoming seriously delinquent or not being able to reduce their balances, the New York Fed said today.

 

Only 37 percent of borrowers are current on their loans and are actively paying them down, and 17 percent are in default or in delinquency.

At this point, the American consumer is pretty well tapped out.  If you can believe it, 56 percent of all Americans have subprime credit today, and as I mentioned above, we just witnessed the biggest spike in credit application rejections ever recorded.

We have reached a point of debt saturation, and the credit crunch that is going to follow is going to be extremely painful.

Of course the biggest provider of global liquidity in recent years has been the Federal Reserve.  But with the Fed pulling back on QE, this is creating some tremendous challenges all over the globe.  The following is an excerpt from a recent article in the Telegraph

The big worry is what will happen to Russia, Brazil and developing economies in Asia that borrowed most heavily in dollars when the Fed was still flooding the world with cheap liquidity. Emerging markets account to roughly half of the $9 trillion of offshore dollar debt outside US jurisdiction.

 

The IMF warned that a big chunk of the debt owed by companies is in the non-tradeable sector. These firms lack “natural revenue hedges” that can shield them against a double blow from rising borrowing costs and a further surge in the dollar.

So what is the bottom line to all of this?

The bottom line is that we are starting to see the early phases of a liquidity squeeze.

The flow of credit is going to begin to get tighter, and that means that global economic activity is going to slow down.

This happened during the last financial crisis, and during this next financial crisis the credit crunch is going to be even worse.

This is why it is so important to have an emergency fund.  During this type of crisis, you may have to be the source of your own liquidity.  At a time when it seems like nobody has any cash, those that do have some will be way ahead of the game.








A game you can't win?

 

 

Source: Investors.com








Late last week, when we covered the various signs that "something big" may be coming, we discussed the one "exercise that people have really been buzzing about" - operation "Jade Helm", an “unconventional warfare exercise” during which the states Texas and Utah will be designated as hostile territory.

As previously profiled, "Jade Helm is a challenging eight-week joint military and Interagency (IA) Unconventional Warfare (UW) exercise conducted throughout Texas, New Mexico, Arizona, California, Nevada, Utah and Colorado,” according to an unclassified military document announcing the training drill, which runs from July 15 through September 15.

Multiple branches of the US military, including Green Berets, Navy Seals, and the 82nd Airborne Division, will participate in the 8-week long exercise, which may result in “increased aircraft in the area at night.”

Troops will be tasked with honing advanced skills in “large areas of undeveloped land with low population densities,” and will work alongside “civilians to gain their trust and an understanding of the issues.”

The exercise, in which some participants will be “wearing civilian clothes and driving civilian vehicles,” lists Texas and Utah as “hostile" territory.

The proposed theater of operations of Operation Jade Helm is shown on the map below:

 

So while there are still three months until Jade Helm officially opens, various documented reports of substantial national guard drills and troop exercises are starting to trickle in early. As Paul Joseph Watson notes, the first documented proof of National Guard drills comes from Ontario, California where National Guard troops can be seen patrolling residential streets and practicing traffic control.

In the video troops, followed by a humvee, are seen marching close to an elementary school and single family homes.

“I just watched it again and recognized the low block wall and the elementary school! It was right there where my sister and her husband live! OMG how frightening!” one YouTube commenter responded, while others insisted the patrols were a routine occurrence.

 

However, another respondent insisted that the patrol was not normal.

 

“During the last few seconds I got a quick glimpse of my sister and brother-in-laws house on Fuschia. Ave,” wrote the commenter.”That motorcycle was parked almost in front of their house. They told me they saw this procession going on from their front yard. They have lived in that house for 30 or so yrs and this is the first time they have seen this type of thing in their neighborhood. Might be a common thing to do their training someplace else but not in that area.”

This is not the first such clip: a disturbing video out of Fort Lauderdale, Florida last month also showed military and law enforcement practicing the internment of citizens during martial-law style training.

Meanwhile on the eastern US easboard, the PostStar reports that nearly 600 Army and Air National Guard forces from New Jersey and New York "are preparing for the worst."

They are participating in a homeland response force drill at New Jersey's Joint Base McGuire-Dix-Lakehurst on Friday.

 

The troops specialize in rescue, security, decontamination and medical treatment.

 

The units will train to rapidly assess and identify a chemical, biological, radiological or nuclear incident.

Of course, the bigger concern is that the real motive behind this major national guard exercise is not a focus on a "defensive" drill from an outside threat, but one dealing with a domestic threat.

How is that possible, some would say? Could the national guard really be preparing for a confrontation with the US population?

Unfortunately the answer is yes, as we reported last August in "Under What Conditions Can The US Army Engage Citizens: The Army's "Civil Disturbances" Primer" which lays out not only when the US Army (and national guard) can engage the US population, but lays out clearly the protocol under which the US army is specifically permitted to engage in "PSYOPs" against the US population.

Here are the salient points, as reported previously, from the primer which begins with the umbrella statement:

Civil unrest may range from simple, nonviolent protests that address specific issues, to events that turn into full-scale riots. Gathering in protest may be a recognized right of any person or group, regardless of where U.S. forces may be operating. In the United States, this fundamental right is protected under the Constitution of the United States...

"Protected" it may be, but as usual, the interpretation of the Constitution is in the eye of the beholder, or more appropriately, gun holder. Because shortly thereafter we further read the following:

The Constitution of the United States, laws, regulations, policies, and other legal issues limit the use of federal military personnel in domestic support operations. Any Army involvement in civil disturbance operations involves many legal issues requiring comprehensive legal reviews. However, federal forces are authorized for use in civil disturbance operations under certain circumstances.

What circumstances? For the answer we turn to section, 2-8. To wit:

The Constitution of the United States provides two exceptions for which the Posse Comitatus Act does not apply. These exceptions are based upon the inherent right of the U.S. government to ensure the preservation of public order and to carrying out governmental operations within its territorial limits by force, if necessary. These two exceptions are—

  • Emergency authority. A sudden and unexpected civil disturbance, disaster, or calamity may seriously endanger life and property and disrupt normal governmental functions to such an extent that local authorities cannot control the situation. At such times, the federal government may use military force to prevent the loss of life or wanton destruction of property and to restore government functions and public order. In these circumstances, federal military commanders have the authority, in extraordinary emergency circumstances where prior authorization by the President is impossible and duly constituted local authorities are unable to control the situation, to engage temporarily in activities that are necessary to quell large-scale, unexpected civil disturbances (see DODD 3025.18).
  • Protection of federal property and functions. When the need for the protection of federal property or federal functions exists, and duly constituted local authorities are unable to, or decline to provide adequate protection, federal action, including the use of military forces, is authorized.

2-9. Laws passed by the U.S. congress include four exceptions to the Posse Comitatus Act. With the first three laws discussed below (10 USC 331–333) there is a prerequisite that the President must take personal action, including the issuance of a proclamation calling upon insurgents to disperse and retire peaceably within a limited time. The four exceptions, based on law are—

  • 10 USC 331. When a state is unable to control domestic violence and they have requested federal assistance, the use of the militia or Armed Forces is authorized.
  • 10 USC 332. When ordinary enforcement means are unworkable due to unlawful obstructions or rebellion against the authority of the United States, use of the militia or Armed Forces is authorized.
  • 10 USC 333. When a state cannot or will not protect the constitutional rights of the citizens, due to domestic violence or conspiracy to hinder execution of State or Federal law, the use of the militia or Armed Forces is authorized.
  • House Joint Resolution 1292. This resolution directs all departments of the U.S. government, upon request of the Secret Service, to assist in carrying out its statutory duties to protect government officials and major political candidates from physical harm.

In other words, if and when the US Armed Forces decide that rioting infringes upon any of these exclusions, then the constitution no longer applies and the use of lethal force becomes a viable option against US citizens.

It gets worse, because whereas one would expect that a "Constitutional expert" such as the president, Barack Obama would be the one tasked with interpreting if and when the Constitution no longer applies, the primer is quite explicit in handing over responsibility to "federal military commanders":

... federal military commanders have the authority, in extraordinary emergency circumstances where prior authorization by the President is impossible and duly constituted local authorities are unable to control the situation, to engage temporarily in activities that are necessary to quell large-scale, unexpected civil disturbance.

So should Obama resume his vacation even as things in Missouri escalate dramatically, and be "unreachable", it may well come to pass that Obama's opinion will be irrelevant not only whether the National Guard should be unleashed in Ferguson, but whether Posse Comitatus is suddenly null and void.

The good news: the use of lethal force is not the only option the US Army would have if and when it engages with the population. US citizens may simply  be herded into "temporary internment camps" for reindoctrination purposes under the supervision of PSYOP Officer (no really, they used that word), as follows from the Army's FM3-39.40 "Internment and Resettlment Operations" manual:

Internment and Resettlement (I/R) operations facilitate the ability to conduct rapid and decisive combat operations; deter, mitigate, and defeat threats to populations that may result in conflict; reverse conditions of human suffering; and build the capacity  of a foreign government to effectively care for and govern its population. This includes capabilities to conduct  shaping operations across the spectrum of military operations to mitigate and defeat the underlying conditions  for conflict and counter the core motivations that result in support to criminal, terrorist, insurgent, and other destabilizing groups. I/R operations also include the daily incarceration of U.S. military prisoners at facilities  throughout the world.

 

An adaptive enemy will manipulate populations that are hostile to U.S. intent by instigating mass civil disobedience, directing criminal activity, masking their operations in urban and other complex terrain, maintaining an indistinguishable presence through cultural anonymity, and actively seeking the traditional sanctuary of protected areas as defined by the rules of land warfare. Such actions will facilitate the dispersal of threat forces, negate technological overmatches, and degrade targeting opportunities. Commanders will use technology and conduct police intelligence operations to influence and control populations, evacuate detainees and, conclusively, transition rehabilitative and reconciliation operations to other functional agencies. The combat identification of friend, foe, or neutral is used to differentiate combatants from noncombatants and friendly forces from threat forces.

Presenting army camps, hopefully not in a city near you:

Detainee facilities, an important planning consideration, are treated in the same basic fashion as any base camps. The same basic planning considerations are taken into  account. Some detainee facilities will be subordinate to a larger base camp but they may also be at a separate location.

Of course, none of this will be needed if the Army's Psyops work as required:

The PSYOP officer in charge of supporting I/R operations serves as the special staff officer responsible for PSYOP. The PSYOP officer advises the military police commander on the psychological impact of military police or MI actions to prevent misunderstandings and disturbances by detainees and DCs. The supporting I/R PSYOP team has two missions that reduce the need to divert military police assets to maintain security in the I/R facility.  The team—

  • Assists the military police force in controlling detainees and DCs.
  • Introduces detainees or DCs to U.S. and multinational policy.
  • Develops PSYOP products that are designed to pacify and acclimate detainees or DCs to accept U.S. I/R facility authority and regulations.
  • Gains the cooperation of detainees or DCs to reduce the number of guards needed.
  • Identifies malcontents, trained agitators, and political leaders within the facility who may try to organize resistance or create disturbances.
  • Develops and executes indoctrination programs to reduce or remove antagonistic attitudes.
  • Identifies political activists.
  • Provides loudspeaker support (such as administrative announcements and facility instructions when necessary).
  • Helps the military police commander control detainee and DC populations during emergencies.
  • Plans and executes a PSYOP

In other words, if and when the time comes to "override" Posse Comitatus, random US citizens may have two options: i) end up in the US version of a Gulag or, worse, ii) be shot. For now, however, just keep an eye on the various drill videos to get a sense of the US army's preparedness in dealing with "civil disobedience."








Submitted by Pater Tenebrarum via Acting-Man blog,

One Bad Idea After Another

Ben Bernanke is frequently in the news these days. The latest occasion concerns his opinion on the Fed’s “inflation” target, i.e., the target for the speed at which money should be debased relative to consumer goods in order to finally attain centrally planned economic nirvana.

Price inflation is currently deemed to be “too low” by our bien pensants, in spite of the fact that the broad US money supply TMS-2 has more than doubled since 2008 (as of March, it is very close to $11 trillion, up from $5.3 trn. in early 2008). If recent CPI data are to be believed (which requires a bit of a leap of faith), consumers may actually get slightly more goods and services for their money henceforth. What an unimaginable horror!

 

CPI

CPI dips ever so slightly into negative territory year-on-year – the nightmare of central planners around the world – click to enlarge.

Bloomberg reports that Ben Bernanke has an idea how to combat this terrifying development. Obviously, with the CPI’s rate of change dipping a few basis points into negative territory, the end of the world is practically at hand, so something needs to be done pronto.

Bernanke delivered his remarks at a conference sponsored by another economic central planning institution, the IMF. The people running this surplus to requirement bureaucratic vampire den are dreaming of the day when the IMF will become the global central bank, in line with Keynes’ “Bancor” idea. This would allow fiat money inflation on a nigh unprecedented scale, as currencies would no longer compete and be comparable. However, we digress.

Here is Bernanke:

“Former Federal Reserve Chairman Ben S. Bernanke suggested that he would be open to an increase in the central bank’s 2 percent inflation target.

 

“I don’t see anything magical about targeting 2 percent inflation,” he told a conference in Washington sponsored by the International Monetary Fund. His comments come as the Fed and other major central banks are struggling to prevent their economies from falling into a disinflationary trap of diminished expectations. IMF officials have proposed that the monetary authorities raise their inflation goals to help limit the danger of future deflation.

 

Fed Vice Chairman Stanley Fischer and European Central Bank Executive Board member Peter Praet are slated to discuss the issue Thursday at George Washington University in a session titled “The Elusive Pursuit of Inflation.” The session is being held in conjunction with the spring meetings of the fund and the World Bank.

 

The U.S. central bank adopted its 2 percent goal in January 2012 when Bernanke was chairman. It has fallen short of meeting that objective for 34 straight months. In February, inflation, as measured by the personal consumption expenditure price index, the Fed’s preferred gauge, was 0.3 percent.

 

Some economists, such as professor Laurence Ball of Johns Hopkins University in Baltimore, have called on the Fed to raise its target to 4 percent. Others, such as Scott Sumner of Bentley University in Waltham, Massachusetts, argue that the Fed should adopt a goal for the growth of nominal gross domestic product, rather than focusing on a price index.”

(emphasis added)

In other words, Bernanke has adopted the atrocious ideas already voiced by a bunch of other economists. The notion that central banks should “make up” for the price inflation that was “lost” during the period of sub 2% CPI readings isn’t really new. Assorted Keynesians and monetarists have proposed it long ago, inter alia Olivier Blanchard, the IMF’s own chief economist and Kenneth Rogoff, an armchair central planner whose kooky notions on inflationary policy we have already discussed in these pages (see “Parade of the Inflationists” for details).

 

Respectable Monetary Cranks

As Bloomberg reported at the time regarding Rogoff’s views:

“The economist whose research foreshadowed the unusually long slog back from the 2008 financial crash is calling for the unlikeliest kind of central banker to lead the Federal Reserve: one who welcomes some inflation.

 

Harvard University Professor Kenneth Rogoff, whose influential 1985 paper endorsed central bankers focused more on securing low inflation than on spurring employment, is highlighting the benefits of a Fed led by either Janet Yellen or Lawrence Summers precisely because they fail his old litmus test. President Barack Obama said Aug. 9 that they are “outstanding” and “highly qualified” candidates to replace Ben S. Bernanke, whose term as chairman runs out in January.

 

What qualifies them in Rogoff’s view is their dovishness, a refusal to place too much weight on stable inflation at a time when unemployment is far above its longer-run level. Rogoff is espousing aggressive monetary stimulus, even at the cost of moderate price increases. At a time of weak global inflation, higher prices may even help the U.S. economy by lowering real interest rates and reducing debt burdens, he said.

 

“In more normal times, you’re looking for the central banker to be an anchor against high inflation expectations and to assure investors that inflation will stay low and stable to keep interest rates down,” Rogoff, co-author with Carmen Reinhart of the 2009 book “This Time Is Different: Eight Centuries of Financial Folly,” said in an interview. Now “we’re in this situation where many of the central banks of the world need to convince the public of their tolerance for inflation, not their intolerance.”

(emphasis added)

Well, what can one say…welcome to monetary crankdom, Mr. Rogoff! The idea is based on the long-discredited Keynesian misinterpretation of the Phillips curve, which posits that there is a “trade-off” between inflation and employment. Of course, what Phillips actually measured was the historical relationship between employment rates and wages.

It seems obvious that if the labor market becomes tight, some upward pressure on wages should be expected. There was no need to mine historical data to “prove” this. It is a big leap though to conclude from this that an increase in price inflation rates through central bank manipulation of interest rates and the money supply will magically improve employment. Henry Hazlitt showed in the late 1970s that the supposed relationship between inflation and unemployment existed exactly half of the time between 1947 and 1976. In other words, one might as well flip a coin.

 

US tms-2

US money TMS-2 is up more than 100% since early 2008 and some 262% since early 2000 (i.e., it has more than tripled since then). Obviously, more inflation is urgently needed – click to enlarge.

 

However, there is actually no need to look at empirical data – economic theory cannot be proved or disproved with slices of empirical data, given the unique contingent circumstances of every historical period. What can be said unequivocally though is that the idea that the central bank should target an even higher rate of consumer price inflation is completely crazy.

The price effects of the Fed’s inflationary policy are already clearly visible in the prices of stocks, bonds, real estate, works of art, fine wines and other collectibles, and so forth. As we have previously argued, cash is treated as a “hot potato” by those who have first dibs on newly created money. Or to put it differently: in spite of low CPI rates of change, price inflation is already raging.

The monetary inflation of recent years is benefiting anyone but the so-called “middle class” and the poor. With CPI dipping slightly into negative territory, consumers can at least hope to see some tiny benefit from the price distortions central banks have wrought. We wonder by what method Mr. Bernanke thinks they can be deprived of this benefit? The only thing the central bank can possibly do is to inflate the money supply even further and at an even faster pace. Surely this has to be one of the worst ideas ever.

 

Conclusion

The science of economics has taken a decidedly wrong turn sometime in the 1930s. In the field of monetary science specifically, sober analysis has given way to broad-based support of central economic planning, with both policy makers and their advisors seemingly trying to trump each other with ever more lunatic proposals.

Mr. Bernanke is obviously a charter member of the modern society of monetary cranks, and in his time as Fed chairman has actively undermined the economy by introducing a zero interest policy and printing wagon-loads of money in a very short time. We are well aware that he is credited with having “averted a repetition of the Great Depression”. Since one cannot go back in time to see what would have occurred had he not acted the way he did, it isn’t possible to prove or disprove this assertion empirically, but we believe it is hokum.

We think he should rather be credited with having created one of the greatest bubbles in history, and having caused malinvestment and consumption of scarce capital on a staggeringly vast scale. And yet, he keeps coming out in support of ideas that could prove even more dangerous to economic prosperity. Hasn’t the man done enough damage already?

 

Kenneth+Rogoff+Ben+Bernanke+IMF+Research+Conference+Pum0xjaYsrJl

Members of the association of monetary cranks. From left to right: Larry Summers, Olivier Blanchard, Kenneth Rogoff, Stanley Fischer and Ben Bernanke at an economic forum on “Policy Responses to Crises” at the International Monetary Fund headquarters on November 8, 2013 in Washington, DC.








Presented with no comment...

 

 

Source: FOX Business








Over the past several months, we’ve argued that between the collapse of petrodollar mercantilism and the rise of a China-led, yuan-influenced multinational development bank, the days of dollar hegemony are likely numbered. The implications of the shift away from a global economic order that has prevailed since the end of WWII are far reaching and may include the demise of what has largely been a unilateral political and economic order characterized by the dominance of US foreign policy and Western notions of politics and capitalism. Now, it appears as though de-dollarization and the end of US hegemony may have gone viral. As The NY Times reports, a US “retreat” from the world order it has largely shaped was the unspoken topic de jour at this year’s spring meeting of the IMF and World Bank in Washington. 

Via NY Times:

The spring meetings of the International Monetary Fund and World Bank have filled Washington with motorcades and traffic jams and loaded the schedules of President Obama and Treasury Secretary Jacob J. Lew. But they have also highlighted what some in Washington and around the world see as a United States government so bitterly divided that it is on the verge of ceding the global economic stage it built at the end of World War II and has largely directed ever since.

 

“It’s almost handing over legitimacy to the rising powers,” Arvind Subramanian, the chief economic adviser to the government of India, said of the United States in an interview on Friday. “People can’t be too public about these things, but I would argue this is the single most important issue of these spring meetings.”

 

Other officials attending the meetings this week, speaking on the condition of anonymity, agreed that the role of the United States around the world was at the top of their concerns.

There’s no question that The White House has had a difficult time projecting a unified front of late. Between Israel’s attempt to foment discord in Congress amid nuclear talks between US and Iranian officials and Washington’s abject failure to convince its allies to refrain from joining the newly formed Asian Infrastructure Investment Bank, it certainly appears as though the US government faces a fractious relationship not only between its two dominant political parties, but between itself and its external allies as well, and this is serving to undercut its ability to preserve America’s traditionally dominant position on the world stage. There’s perhaps no better example of this than the failure to make changes to the structure of the IMF, an institution which will now face a Chinese rival in the AIIB that could, given enough time, rise to become one of the world’s foremost multinational institutions:

Washington’s retreat is not so much by intent, Mr. Subramanian said, but a result of dysfunction and a lack of resources to project economic power the way it once did. Because of tight budgets and competing financial demands, the United States is less able to maintain its economic power, and because of political infighting, it has been unable to formally share it either.

 

Experts say that is giving rise to a more chaotic global shift, especially toward China, which even Obama administration officials worry is extending its economic influence in Asia and elsewhere without following the higher standards for environmental protection, worker rights and business transparency that have become the norms among Western institutions…

 

An overhaul of the I.M.F.’s governance structure, negotiated five years ago in large part by President Obama to give China and other emerging powers more authority commensurate with their growing economic strength, has languished in Congress. That, in part, propelled China to create its own multilateral lending institution in direct competition with the behemoths in Washington.

 

And as we’ve argued exhaustively, the AIIB represents far more than a competing infrastructure lender. It represents the ascendancy of Chinese foreign policy and also ushers in a new era wherein the yuan charts a gradual course towards reserve currency status.

 

For much of Washington and the world’s economic leaders, China’s creation of the Asian Infrastructure Investment Bank crystallized the choice policy makers face. Earlier this month, Lawrence Summers, who was a top economic adviser for both President Bill Clinton and Mr. Obama, declared that China’s establishment of a new economic institution and Washington’s failure to keep its allies from joining it signaled “the moment the United States lost its role as the underwriter of the global economic system.”

 

For years, China had threatened to establish institutions to rival those dominated by the West, like the I.M.F., World Bank and Asian Development Bank — or even to establish its currency, the renminbi, as a reserve currency to rival the dollar.

But even as the some observers describe the situation as a “withdrawal” by the US from the world stage, it may indeed be that Washington has simply lost its legitimacy after years of foreign policy “missteps” that have now culminated in multiple proxy wars across the Middle East and after mishandling China’s rise to superpower status by painting Beijing as a quasi-threat rather than adapting to a changing world order in a way that secured US interests while demonstrating an ability to respond appropriately to a changing geopolitical landscape.

Whatever the case, the effect has been to undercut Washington’s traditionally dominant role in the financial and political affairs of the world and has, for better or worse, opened the door for other powerful actors to try their hand at shaping the course of history unencumbered by the weight of an overbearing Western hegemon. We're seeing this play out both in Europe — where Russia's Vladimir Putin is not only looking to reshape borders but also to serve as a lender of last resort to Greece — and also in Asia — where, even amid decelerating economic output, Beijing has been agressive in projecting both economic and military prowess over the past several months. Meanwhile, the consequences of US foreign policy continue to materialize in the form of failed or nearly-failed states, and so at the end of the day we'll leave it to readers to decide if the new world order is preferable to its predecessor. 








Submitted by John Rubino via Dollar Collapse blog,

There’s a journalistic sub-genre that might be called “The Highest/Lowest Since XXX,” in which a reporter takes a current statistic and illustrates (often with snazzy charts) how it hasn’t been this high or low since some date in the distant past. This is a compelling theme, implying as it does that the connection between now and then makes the current situation more important or meaningful while providing context with which to judge current trends.

Unfortunately, these articles often miss the point of the whole context thing by not exploring what subsequently happened last time the stat in question hit that level. Here’s a good recent example from Bloomberg:

For the First Time Since 2007, Most Americans Feel Good About Money

For the first time since 2007, more than half of Americans, 52 percent, say their financial situation is “getting better,” a new Gallup poll shows. That’s up from a low of 29 percent three years ago.

American's finances

 

A third of Americans still say their finances are getting worse, Gallup says. But that’s a big improvement from the poll’s 2008 peak, when 49 percent of respondents said things were going south.

 

Millennials are the most optimistic of any group in the survey. Seventy percent of 18-to-29-year-olds say their financial picture is improving, up from 60 percent last year. Meanwhile, just 33 percent of those 65-plus are feeling better.

 

Not surprisingly, the wealthier you are, the better you feel. Of those making $75,000 or more, 65 percent say they’re doing better. For those earning less than $20,000, the number is 36 percent, though that’s up 7 points from last year.

 

The reasons for the improving mood include a rising stock market, falling debt levels, and a better job market.

What’s amazing about this article from an analytical standpoint is that while mentions in passing that the 2007 high in good feelings was followed by a low in 2008, it doesn’t connect the two numbers. This, it would seem, is the key piece of the puzzle: if the stat matters enough to be article-worthy, then a discussion of why it matters should be mandatory. And if its previous high was followed by a catastrophic low, the reason for this reversal should be the story’s narrative center.

So here’s what it means: Extreme optimism — whether in the form of stock valuations, consumer spending, or happiness surveys like the one mentioned here — tend to be followed by corrections because to get to an extreme point in a data series, extreme behavior is usually required. That is, a lot of really optimistic investment decisions have to be made to push financial markets to cyclical highs, and these kinds of moves tend to exhaust themselves and produce big moves in the other direction. Hence the 2008 low following the 2007 high.

If reporters got this, and asked the two obvious questions “what happened next and why did it happen?” these articles would contain a lot more useful information. But of course they also wouldn’t lead readers to borrow, spend and speculate, which seems to be the overall goal.

And while we’re on the subject of reporters not getting life’s cyclicality, check this out:

Wall Street’s 2007 Heroes Ascendant as Goldman, Blackstone Surge

 

Goldman Sachs Group Inc. and Blackstone Group LP were the toast of Wall Street in 2007 as they raised record-setting funds and earned returns of more than 30 percent. Eight years later, they captured some of that dominance again in the first quarter.

 

Goldman Sachs rode a rare increase in trading and more than $1 billion of gains from equity investments made with its balance sheet to post the highest earnings per share in five years. Blackstone, the largest alternative-asset manager, doubled first-quarter profit to a record.

 

Commercial banks’ margins remained squeezed by interest rates near record lows, leading to Wells Fargo & Co.’s first profit drop since the global credit crunch of 2008. Goldman Sachs’s return on equity, boosted by its highest post-crisis merger advisory revenue, topped Wells Fargo’s for the second time in the last four years.

 

“This quarter, they got some cyclical strength,” said Alison Williams, senior financials analyst with Bloomberg Intelligence. “The pick-up shows the opportunity still in these businesses, and supports the view that at the depths of last year, at least some of the weakness was cyclical.”

 

After posting losses in multiple years in the wake of the financial crisis, Blackstone has made steady progress culminating in last quarter’s record profit. It has benefited from the increased regulation on banks, entering new businesses and buying assets from financial firms.

 

Blackstone also gained from the rebound in the U.S. property market, as the real estate group reported a 99 percent jump in profit from a year earlier. Its real estate unit, already the biggest of its kind, has raised almost $15 billion in just four months for a new fund.

 

“All signs point to 2015 being a very big year for us and our shareholders,” CEO Steve Schwarzman, 68, told analysts and investors on a conference call Thursday. “I do not believe Blackstone is in any way at a long-term peak.

*  *  *








Hillary Clinton ran onto the playing field this week, Rock and Roll Part 2 blaring in the background, and started lying within minutes of announcing her entry into the presidential election campaign.

We have never, ever, seen the long- and short-end of the Treasury yield curve so anti-correlated.

 

The 2Y and 10Y yields have never been anti-correlated (on a 2-year rolling window) and now are strongly anti-correlated.

Day after day we are told that a recession cannot be near since the yield curve is not inverted (a meme we previously destroyed here and here) and while the current 2s10s curve is near 7-year flats/lows; with ZIRP the yield curve's signaling ability has been diminished greatly.

The apparent collapse of the yield curve's internal relationship seems predicated on the myth of a 'strong US economy' driving up short-term rates on every jawbone by The Fed, and the reality of global deflation, liquidity squeezes, and debt saturation that is weighing on economic growth prospects, structurally weighing on long-term rates.

 

Chart: Bloomberg

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See Exhibit 1 here















Submitted by Rebecca Miller via The National Interest,

The conservative German daily Die Welt, well-known for its unflinching support for Israel, recently published an article stating “with near certainty” that the Federal Republic of Germany, or West Germany, helped finance Israel’s nuclear program in the 1960s.

According to the Welt report, in 1961 West Germany agreed to loan $500 million to Israel over ten years. Although the official purpose of this funding was said to be the development of the Negev Desert— where Israel’s Dimona nuclear reactor is located— it is widely suspected that the money was actually meant to finance Israel’s nuclear weapons program.

This agreement was reportedly hatched during a 1960 meeting between then-Israeli Prime Minister David Ben-Gurion and German Chancellor Konrad Adenauer at the Waldorf Astoria hotel in New York City. Franz Josef Strauss, a former West German defense minister, previously claimed Ben Gurion and Adenauer discussed Israel’s nuclear weapons program during a meeting in Paris in 1961.

This top secret initiative was reportedly named “Aktion Geschäftsfreund,” which translates as “Operation Business Partner.” It bypassed both the Israeli cabinet and the German parliament, with the money being funneled through Kreditanstalt für Wiederaufbau, a West German-government owned development bank.

The Welt report comes after former Israeli President Shimon Peres (who was the head of Israel’s nuclear-weapons program at the time of its inception in the 1950s) denied that funding for Israel’s nukes came from Germany earlier this month.

The Welt article dismissed this denial, however, arguing that when it comes to German-Israeli cooperation on nuclear weapons, secret-keeping is part of the game. (Indeed, the practice—or art, rather—of secret-keeping with regards to sensitive matters of defense should be expected of any regime, nuclear or otherwise.)

Israel first began constructing a nuclear reactor in the Negev Desert near a town called Dimona in the 1950s. U.S. intel revealed the existence of the Dimona reactor in 1960 (although the U.S. knew of the reactor much sooner, new archival releases show). This prompted a statement by Prime Minister Ben Gurion that the reactor was purely for non-military purposes. Hardly anyone in the international community believed this was its true function.

Peres has stated that $40 million of Israeli government funding was going toward the Dimona reactor, but that this was only half of the amount necessary to complete the project. This prompted questions about where the other half of the money was coming from. Peres’ statement, according to Welt, is the only one that indicated that international donors contributed funds to the program (although it has since been revealed that some private American citizens helped fund the program).

The suspicion that West Germany was involved in financing Dimona first emerged when Ben Gurion made a background comment to an Israeli newspaper that a confrontation with Adenauer’s government would disrupt the development of Israel’s nuclear deterrent, which was integral to Israel’s security and the prevention of future wars. 

Still, whatever the West German involvement was in Israel’s nuclear weapons acquisition, it is undeniable that France played the largest role of any foreign power. In 1957, following the Suez Crisis, Peres and representatives from France signed three confidential contracts that allowed France to establish a 24-megawatt heavy-water reactor in Israel, loan it 385 tonnes of natural uranium, work together with Israel on nuclear-weapons research and production and back the building of a processing plant for plutonium extraction. This came a year after Peres asked French defense minister Maurice Bourges-Maunoury: “What would you think if Israel were to establish its own potential for retaliation?”

Norway also provided Israel with 20 tons of heavy water, which was actually delivered by the United Kingdom.








Like any model, the Atlanta Fed GDPNow model is an estimate. Whether Q1 US real GDP comes in near zero growth remains to be seen, but the message is clear: there is downward pressure on US economic growth singularly. This is set against a backdrop of already-documented slowing in the non-US global economy.

It appears the re-election of Rahm Emanuel as Chicago Mayor has done nothing to assuage concerns about the city's insolvency. As Emanuel's victory became more assured, credit risk (measured by the spread between Chicago Muni yields and Treasury yields) has soared from 180bps to over 240bps.

 

Chart: Bloomberg

Furthermore, it has accelerated even more since the April 7th election. Recent statements by S&P that if the city fails to articulate & implement a plan by the end of 1015 to sustainably fund pension contributions, or if it substantially draws down reserves to fund contributions, they will likely lower the rating; has not helped (given that Moody's already have Chicago at Baa2 - just 2 notches above junk).

Chart: The Economist








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