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OIL WEAKNESS

FACTOIDS:

Oil Is Now Cheaper Than Coffee, Milk, & Water

  • OPEC is producing roughly 31.70 mbpd
  • up 1 percent from November, and more than 5 percent from a year ago.
  • Record volumes from Saudi Arabia and Iraq have buoyed production to date,
  • Iran’s oil industry is heating up as the country, and global investors, prepare for life after sanctions.
  • The cartel’s 2016 supply surplus could reach 860,000 bpd if current production rates hold.

Globally, signs of the glut are everywhere, and growing.

  • In the U.S., crude inventories are at their highest level in 80 years;
  • Stockpiles are at 97 percent of capacity in Western Europe;
  • OECD oil inventories are more than a quarter of a million barrels above their five-year average.
  • Onshore crude storage space may run out in the first quarter of 2016.

As a result, OPEC revenue is down some $500 billion a year, and counting.

..... and Energy spreads spike to recod highs...

As Energy Fwd P/Es begin to fall back to reality...

WATCH LIST - Shorts:

  1. Anglo American
  2. Freeport Mac (FCX)
  3. Kinder Morgan
  4. Glencore
12-26-15 SII

 

2016: Oil Limits & The End Of The Debt Supercycle

Submitted by Gail Tverberg via Our Finite World blog,

What is ahead for 2016? Most people don’t realize how tightly the following are linked:

  1. Growth in debt
  2. Growth in the economy
  3. Growth in cheap-to-extract energy supplies
  4. Inflation in the cost of producing commodities
  5. Growth in asset prices, such as the price of shares of stock and of farmland
  6. Growth in wages of non-elite workers
  7. Population growth

It looks to me as though this linkage is about to cause a very substantial disruption to the economy, as oil limits, as well as other energy limits, cause a rapid shift from the benevolent version of the economic supercycle to the portion of the economic supercycle reflecting contraction. Many people have talked about

... without realizing that the underlying problem is really the same–the fact the we are reaching the limits of a finite world.

There are actually a number of different kinds of limits to a finite world, all leading toward the rising cost of commodity production. I will discuss these in more detail later. In the past, the contraction phase of the supercycle seems to have been caused primarily by too high population relative to resources. This time, depleting fossil fuels–particularly oil–plays a major role. Other limits contributing to the end of the current debt supercycle include rising pollution and depletion of resources other than fossil fuels.

The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.

I expect that the particular problem we are likely to reach in 2016 is limits to oil storage. This may happen at different times for crude oil and the various types of refined products. As storage fills, prices can be expected to drop to a very low level–less than $10 per barrel for crude oil, and correspondingly low prices for the various types of oil products, such as gasoline, diesel, and asphalt. We can then expect to face a problem with debt defaults, failing banks, and failing governments (especially of oil exporters).

The idea of a bounce back to new higher oil prices seems exceedingly unlikely, in part because of the huge overhang of supply in storage, which owners will want to sell, keeping supply high for a long time. Furthermore, the underlying cause of the problem is the failure of wages of non-elite workers to rise rapidly enough to keep up with the rising cost of commodity production, particularly oil production. Because of falling inflation-adjusted wages, non-elite workers are becoming increasingly unable to afford the output of the economic system. As non-elite workers cut back on their purchases of goods, the economy tends to contract rather than expand. Efficiencies of scale are lost, and debt becomes increasingly difficult to repay with interest.  The whole system tends to collapse.

How the Economic Growth Supercycle Works, in an Ideal Situation

In an ideal situation, growth in debt tends to stimulate the economy. The availability of debt makes the purchase of high-priced goods such as factories, homes, cars, and trucks more affordable. All of these high-priced goods require the use of commodities, including energy products and metals. Thus, growing debt tends to add to the demand for commodities, and helps keep their prices higher than the cost of production, making it profitable to produce these commodities. The availability of profits encourages the extraction of an ever-greater quantity of energy supplies and other commodities.

The growing quantity of energy supplies made possible by this profitability can be used to leverage human labor to an ever-greater extent, so that workers become increasingly productive. For example, energy supplies help build roads, trucks, and machines used in factories, making workers more productive. As a result, wages tend to rise, reflecting the greater productivity of workers in the context of these new investments. Businesses find that demand for their goods and services grows because of the growing wages of workers, and governments find that they can collect increasing tax revenue. The arrangement of repaying debt with interest tends to work well in this situation. GDP grows sufficiently rapidly that the ratio of debt to GDP stays relatively flat.

Over time, the cost of commodity production tends to rise for several reasons:

  1. Population tends to grow over time, so the quantity of agricultural land available per person tends to fall. Higher-priced techniques (such as irrigation, better seeds, fertilizer, pesticides, herbicides) are required to increase production per acre. Similarly, rising population gives rise to a need to produce fresh water using increasingly high-priced techniques, such as desalination.
  2. Businesses tend to extract the least expensive fuels such as oil, coal, natural gas, and uranium first. They later move on to more expensive to extract fuels, when the less-expensive fuels are depleted. For example, Figure 1 shows the sharp increase in the cost of oil extraction that took place about 1999.
  1. Figure 1. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is 'Compound Annual Growth Rate.'

    Figure 1. Figure by Steve Kopits of Westwood Douglas showing the trend in per-barrel capital expenditures for oil exploration and production. CAGR is “Compound Annual Growth Rate.”

  2. Pollution tends to become an increasing problem because the least polluting commodity sources are used first. When mitigations such as substituting renewables for fossil fuels are used, they tend to be more expensive than the products they are replacing. The leads to the higher cost of final products.
  3. Overuse of resources other than fuels becomes a problem, leading to problems such as the higher cost of producing metals, deforestation, depleted fish stocks, and eroded topsoil. Some workarounds are available, but these tend to add costs as well.

As long as the cost of commodity production is rising only slowly, its increasing cost is benevolent. This increase in cost adds to inflation in the price of goods and helps inflate away prior debt, so that debt is easier to pay. It also leads to asset inflation, making the use of debt seem to be a worthwhile approach to finance future economic growth, including the growth of energy supplies. The whole system seems to work as an economic growth pump, with the rising wages of non-elite workers pushing the growth pump along.

The Big “Oops” Comes when the Price of Commodities Starts Rising Faster than Wages of Non-Elite Workers

Clearly the wages of non-elite workers need to be rising faster than commodity prices in order to push the economic growth pump along. The economic pump effect is lost when the wages of non-elite workers start falling, relative to the price of commodities. This tends to happen when the cost of commodity production begins rising rapidly, as it did for oil after 1999 (Figure 1).

The loss of the economic pump effect occurs because the rising cost of oil (or electricity, or food, or other energy products) forces workers to cut back on discretionary expenditures. This is what happened in the 2003 to 2008 period as oil prices spiked and other energy prices rose sharply. (See my article Oil Supply Limits and the Continuing Financial Crisis.) Non-elite workers found it increasingly difficult to afford expensive products such as homes, cars, and washing machines. Housing prices dropped. Debt growth slowed, leading to a sharp drop in oil prices and other commodity prices.

Figure 2. World oil supply and prices based on EIA data.

Figure 2. World oil supply and prices based on EIA data.

It was somewhat possible to “fix” low oil prices through the use of Quantitative Easing (QE) and the growth of debt at very low interest rates, after 2008. In fact, these very low interest rates are what encouraged the very rapid growth in the production of US crude oil, natural gas liquids, and biofuels.

Now, debt is reaching limits. Both the US and China have (in a sense) “taken their foot off the economic debt accelerator.” It doesn’t seem to make sense to encourage more use of debt, because recent very low interest rates have encouraged unwise investments. In China, more factories and homes have been built than the market can absorb. In the US, oil “liquids” production rose faster than it could be absorbed by the world market when prices were over $100 per barrel. This led to the big price drop. If it were possible to produce the additional oil for a very low price, say $20 per barrel, the world economy could probably absorb it. Such a low selling price doesn’t really “work” because of the high cost of production.

Debt is important because it can help an economy grow, as long as the total amount of debt does not become unmanageable. Thus, for a time, growing debt can offset the adverse impact of the rising cost of energy products. We know that oil prices began to rise sharply in the 1970s, and in fact other energy prices rose as well.

Figure 4. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Figure 3. Historical World Energy Price in 2014$, from BP Statistical Review of World History 2015.

Looking at debt growth, we find that it rose rapidly, starting about the time oil prices started spiking. Former Director of the Office of Management and Budget, David Stockman, talks about “The Distastrous 40-Year Debt Supercycle,” which he believes is now ending.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

In recent years, we have been reaching a situation where commodity prices have been rising faster than the wages of non-elite workers. Jobs that are available tend to be low-paid service jobs. Young people find it necessary to stay in school longer. They also find it necessary to delay marriage and postpone buying a car and home. All of these issues contribute to the falling wages of non-elite workers. Some of these individuals are, in fact, getting zero wages, because they are in school longer. Individuals who retire or voluntarily leave the work force further add to the problem of wages no longer rising sufficiently to afford the output of the system.

The US government has recently decided to raise interest rates. This further reduces the buying power of non-elite workers. We have a situation where the “economic growth pump,” created through the use of a rising quantity of cheap energy products plus rising debt, is disappearing. While homes, cars, and vacation travel are available, an increasing share of the population cannot afford them. This tends to lead to a situation where commodity prices fall below the cost of production for a wide range of types of commodities, making the production of commodities unprofitable. In such a situation, a person expects companies to cut back on production. Many defaults may occur.

China has acted as a major growth pump for the world for the last 15 years, since it joined the World Trade Organization in 2001. China’s growth is now slowing, and can be expected to slow further. Its growth was financed by a huge increase in debt. Paying back this debt is likely to be a problem.

Figure 5. Author's illustration of problem we are now encountering.

Figure 5. Author’s illustration of problem we are now encountering.

Thus, we seem to be coming to the contraction portion of the debt supercycle. This is frightening, because if debt is contracting, asset prices (such as stock prices and the price of land) are likely to fall. Banks are likely to fail, unless they can transfer their problems to others–owners of the bank or even those with bank deposits. Governments will be affected as well, because it will become more expensive to borrow money, and because it becomes more difficult to obtain revenue through taxation. Many governments may fail as well for that reason.

The U. S. Oil Storage Problem

Oil prices began falling in the middle of 2014, so we might expect oil storage problems to start about that time, but this is not exactly the case. Supplies of US crude oil in storage didn’t start rising until about the end of 2014.

Figure 6. US crude oil in storage, excluding SPR, based on EIA data.

Figure 6. US crude oil in storage, excluding Strategic Petroleum Reserve, based on EIA data.

Once crude oil supplies started rising rapidly, they increased by about 90 million barrels between December 2014 and April 2015. After April 2015, supplies dipped again, suggesting that there is some seasonality to the growing crude oil supply. The most “dangerous” time for rapidly rising amounts added to storage would seem to be between December 31 and April 30. According to the EIA, maximum crude oil storage is 551 million barrels of crude oil (considering all storage facilities). Adding another 90 million barrels of oil (similar to the run-up between Dec. 2014 and April 2015) would put the total over the 551 million barrel crude oil capacity.

Cushing, Oklahoma, is the largest storage area for crude oil. According to the EIA, maximum working storage for the facility is 73 million barrels. Oil storage at Cushing since oil prices started declining is shown in Figure 7.

Figure 7. Crude oil stored at Cushing between June 27, 2014, and June 1, 2016. based on EIA data.

Figure 7. Quantity of crude oil stored at Cushing between June 27, 2014, and June 1, 2016, based on EIA data.

Clearly the same kind of run up in oil storage that occurred between December and April one year ago cannot all be stored at Cushing, if maximum working capacity is only 73 million barrels, and the amount currently in storage is 64 million barrels.

Another way of storing oil is as finished products. Here, the run-up in storage began earlier (starting in mid-2014) and stabilized at about 65 million barrels per day above the prior year, by January 2015.  Clearly, if companies can do some pre-planning, they would prefer not to refine products for which there is little market. They would rather store unneeded oil as crude, rather than as refined products.

Figure 7. Total Oil Products in Storage, based on EIA data.

Figure 8. Total Oil Products in Storage, based on EIA data.

EIA indicates that the total capacity for oil products is 1,549 million barrels. Thus, in theory, the amount of oil products stored can be increased by as much as 700 million barrels, assuming that the products needing to be stored and the locations where storage are available match up exactly. In practice, the amount of additional storage available is probably quite a bit less than 700 million barrels because of mismatch problems.

In theory, if companies can be persuaded to refine more products than they can sell, the amount of products that can be stored can rise significantly. Even in this case, the amount of storage is not unlimited. Even if the full 700 million barrels of storage for crude oil products is available, this corresponds to less than one million barrels a day for two years, or two million barrels a day for one year. Thus, products storage could easily be filled as well, if demand remains low.

At this point, we don’t have the mismatch between oil production and consumption fixed. In fact, both Iraq and Iran would like to increase their production, adding to the production/consumption mismatch. China’s economy seems to be stalling, keeping its oil consumption from rising as quickly as in the past, and further adding to the supply/demand mismatch problem. Figure 9 shows an approximation to our mismatch problem. As far as I can tell, the problem is still getting worse, not better.

Figure 1. Total liquids oil production and consumption, based on a combination of BP and EIA data.

Figure 9. Total liquids oil production and consumption, based on a combination of BP and EIA data.

There has been a lot of talk about the United States reducing its production, but the impact so far has been small, based on data from EIA’s International Energy Statistics and its December 2015 Monthly Energy Review.

Figure 10. US quarterly oil liquids production data, based on EIA data.

Figure 10. US quarterly oil liquids production data, based on EIA’s International Energy Statistics and Monthly Energy Review.

Based on information through November from EIA’s Monthly Energy Review, total liquids production for the US for the year 2015 will be over 800,000 barrels per day higher than it was for 2014. This increase is likely greater than the increase in production by either Saudi Arabia or Iraq. Perhaps in 2016, oil production of the US will start decreasing, but so far, increases in biofuels and natural gas liquids are partly offsetting recent reductions in crude oil production. Also, even when companies are forced into bankruptcy, oil production does not necessarily stop because of the potential value of the oil to new owners.

Figure 11 shows that very high stocks of oil were a problem, way back in the 1920s. There were other similarities to today’s problems as well, including a deflating debt bubble and low commodity prices. Thus, we should not be too surprised by high oil stocks now, when oil prices are low.

Figure 2. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure produced by EIA. Figure by EIA.

Figure 11. US ending stock of crude oil, excluding the strategic petroleum reserve. Figure by EIA.

Many people overlook the problems today because the US economy tends to be doing better than that of the rest of the world. The oil storage problem is really a world problem, however, reflecting a combination of low demand growth (caused by low wage growth and lack of debt growth, as the world economy hits limits) continuing supply growth (related to very low interest rates making all kinds of investment appear profitable and new production from Iraq and, in the near future, Iran). Storage on ships is increasingly being filled up and storage in Western Europe is 97% filled. Thus, the US is quite likely to see a growing need for oil storage in the year ahead, partly because there are few other places to put the oil, and partly because the gap between supply and demand has not yet been fixed.

What is Ahead for 2016?

  1. Problems with a slowing world economy are likely to become more pronounced, as China’s growth problems continue, and as other commodity-producing countries such as Brazil, South Africa, and Australia experience recession. There may be rapid shifts in currencies, as countries attempt to devalue their currencies, to try to gain an advantage in world markets. Saudi Arabia may decide to devalue its currency, to get more benefit from the oil it sells.
  2. Oil storage seems likely to become a problem sometime in 2016. In fact, if the run-up in oil supply is heavily front-ended to the December to April period, similar to what happened a year ago, lack of crude oil storage space could become a problem within the next three months. Oil prices could fall to $10 or below. We know that for natural gas and electricity, prices often fall below zero when the ability of the system to absorb more supply disappears. It is not clear the oil prices can fall below zero, but they can certainly fall very low. Even if we can somehow manage to escape the problem of running out of crude oil storage capacity in 2016, we could encounter storage problems of some type in 2017 or 2018.
  3. Falling oil prices are likely to cause numerous problems. One is debt defaults, both for oil companies and for companies making products used by the oil industry. Another is layoffs in the oil industry. Another problem is negative inflation rates, making debt harder to repay. Still another issue is falling asset prices, such as stock prices and prices of land used to produce commodities. Part of the reason for the fall in price has to do with the falling price of the commodities produced. Also, sovereign wealth funds will need to sell securities, to have money to keep their economies going. The sale of these securities will put downward pressure on stock and bond prices.
  4. Debt defaults are likely to cause major problems in 2016. As noted in the introduction, we seem to be approaching the unwinding of a debt supercycle. We can expect one company after another to fail because of low commodity prices. The problems of these failing companies can be expected to spread to the economy as a whole. Failing companies will lay off workers, reducing the quantity of wages available to buy goods made with commodities. Debt will not be fully repaid, causing problems for banks, insurance companies, and pension funds. Even electricity companies may be affected, if their suppliers go bankrupt and their customers become less able to pay their bills.
  5. Governments of some oil exporters may collapse or be overthrown, if prices fall to a low level. The resulting disruption of oil exports may be welcomed, if storage is becoming an increased problem.
  6. It is not clear that the complete unwind will take place in 2016, but a major piece of this unwind could take place in 2016, especially if crude oil storage fills up, pushing oil prices to less than $10 per barrel.
  7. Whether or not oil storage fills up, oil prices are likely to remain very low, as the result of rising supply, barely rising demand, and no one willing to take steps to try to fix the problem. Everyone seems to think that someone else (Saudi Arabia?) can or should fix the problem. In fact, the problem is too large for Saudi Arabia to fix. The United States could in theory fix the current oil supply problem by taxing its own oil production at a confiscatory tax rate, but this seems exceedingly unlikely. Closing existing oil production before it is forced to close would guarantee future dependency on oil imports. A more likely approach would be to tax imported oil, to keep the amount imported down to a manageable level. This approach would likely cause the ire of oil exporters.
  8. The many problems of 2016 (including rapid moves in currencies, falling commodity prices, and loan defaults) are likely to cause large payouts of derivatives, potentially leading to the bankruptcies of financial institutions, as they did in 2008. To prevent such bankruptcies, most governments plan to move as much of the losses related to derivatives and debt defaults to private parties as possible. It is possible that this approach will lead to depositors losing what appear to be insured bank deposits. At first, any such losses will likely be limited to amounts in excess of FDIC insurance limits. As the crisis spreads, losses could spread to other deposits. Deposits of employers may be affected as well, leading to difficulty in paying employees.
  9. All in all, 2016 looks likely to be a much worse year than 2008 from a financial perspective. The problems will look similar to those that might have happened in 2008, but didn’t thanks to government intervention. This time, governments appear to be mostly out of approaches to fix the problems.
  10. Two years ago, I put together the chart shown as Figure 12. It shows the production of all energy products declining rapidly after 2015. I see no reason why this forecast should be changed. Once the debt supercycle starts its contraction phase, we can expect a major reduction in both the demand and supply of all kinds of energy products.
Figure 4. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 12. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Conclusion

We are certainly entering a worrying period. We have not really understood how the economy works, so we have tended to assume we could fix one or another part of the problem. The underlying problem seems to be a problem of physics. The economy is a dissipative structure, a type of self-organizing system that forms in thermodynamically open systems. As such, it requires energy to grow. Ultimately, diminishing returns with respect to human labor–what some of us would call falling inflation-adjusted wages of non-elite workers–tends to bring economies down. Thus all economies have finite lifetimes, just as humans, animals, plants, and hurricanes do. We are in the unfortunate position of observing the end of our economy’s lifetime.

Most energy research to date has focused on the Second Law of Thermodynamics. While this is a contributing problem, this is really not the proximate cause of the impending collapse. The Second Law of Thermodynamics operates in thermodynamically closed systems, which is not precisely the issue here.

We know that historically collapses have tended to take many years. This collapse may take place more rapidly because today’s economy is dependent on international supply chains, electricity, and liquid fuels–things that previous economies were not dependent on.

 

TIPPING POINTS, STUDIES, THESIS, THEMES & SII

COVERAGE THIS WEEK PREVIOUSLY POSTED - (BELOW)

 

MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Jan 3rd, 2016 - Jan 9th, 2016      
TIPPING POINTS - This Week - Normally a Tuesday Focus
BOND BUBBLE     1
RISK REVERSAL - WOULD BE MARKED BY: Slowing Momentum, Weakening Earnings, Falling Estimates     2
GEO-POLITICAL EVENT     3
CHINA BUBBLE     4
JAPAN - DEBT DEFLATION     5

EU BANKING CRISIS

   

6

2- RISK REVERSAL

HAPPY NEW YEAR

What a Start!


Byron Wien's Predictions: Expects Stocks To Decline In 2016

Submitted by Tyler Durden on 01/04/2016 - 12:53

"The United States equity market has a down year. Stocks suffer from weak earnings, margin pressure (higher wages and no pricing power) and a price- earnings ratio contraction. Investors keeping large cash balances because of global instability is another reason for the disappointing performance."

European Stocks Suffer Worst Start To Year EVER!

Submitted by Tyler Durden on 01/04/2016 - 12:17

Led by a 4.3% collapse in Germany's DAX index, European Stocks plunged 2.5% today which is the worst start to a year ever. European credit markets spiked higher in risk. 10Y bund yields tumbled over 6bps and peripheral sovereign risk spreads jumped 10-15bps. Not a good start for Draghi and his pals...

Market On Track For Worst Opening Day Loss In 84 Years

Submitted by Tyler Durden on 01/04/2016 - 10:59

If the market closes here, that would make it a worse first day of trading than in such "dramatic" years as 2008 and 1933. But wait, there's more, because unless the S&P somehow manages to stage a rebound and closes above the current levels, it would suffer the worst opening day loss in the past century except for the historic -8.1% collapse it suffered on January 4 of 1932

 

JPMorgan Crushes The BTFDers: "Sell Any Rallies"

Submitted by Tyler Durden on 01/04/2016 - 07:56

It didn't take long for the momentum-chasing fundamental strategists to readjust their immediate stock price targets on the heels of the i) failure of the Santa Rally and ii) the worst start to the year in Chinese stock market history.  Case in point, moments ago JPM's equity strategy team released its first note for the year in which it says that "we take the view that equities are unlikely to perform well on a 12-24 month horizon" adding that "the regime of buying the dips might be over and selling any rallies might be the new one."


As S&P Flirts With 2000, Here Are The S&P Support Levels

Submitted by Tyler Durden on 01/04/2016 - 09:54

The S&P 500 is down over 2% at the cash open - with FANTAsy stocks collapsing 5-8% - flirting with the crucial 2,000 "mission accomplished" level. Here are the short-term support levels..


01-15-16   2- Risk Reversal

 

Three Reasons Stocks Will Crater in 2016

 Phoenix Capital Research on 01/04/2016 

Last year (2015) likely will represent the top for the bull market that began in 2009. Stocks finished the year down, representing the first down year since the March 2009 bottom.

Many analysts will point to the August sell-off as the reason stocks performed so badly, however, looking at the chart, stocks struggled throughout the year, long before the August sell-off. Indeed, at best the S&P 500 was up 3% for the year!

Things are only going to worsen from here.

FIRST REASON - Fed Tightening

  • Firstly, the US Federal Reserve is now tightening.
  • From 2009-2015, the Fed was always implementing loose monetary policies whether it by through QE, Operation Twist, or simply juicing the markets during options expiration weeks. No longer.
  • The Fed is now raising rates. This will be a major issue for stocks going forward.

SECOND REASON - US Recession

  • Secondly, the US economy is back in recession.
  • I don’t care what the Mainstream media says, based on the cold hard data points stripped of accounting gimmicks, the US entered a recession last year. This is backed up by:

    1)   The High Yield Bond market is pricing in a recession.

    2)   The Credit Markets are pricing in a recession.

    3)   US inventories hit levels associated with recessions.

    4)   The ISM manufacturing index is at recession levels.

With the Fed tightening, the recessionary drop is only going to accelerate.

THIRD REASON - Profits Relative to GDP Rolling Over

Finally, corporate profits relative to GDP are at their record high and rolling over.

Corporate growth can be generated via three ways:

1)   Economic Growth

2)   Financial Engineering (stock buybacks and other profit boosting gimmicks)

3)   Increased productivity

With the US back in recession and the Fed tightening, both #s 1 and 2 are over. This leaves #3. And while productivity did increase marginally in first half of 2015, it’s now rolling over again towards 0%.

In short, the sources of growth for US corporates have all dried up.

Stocks have yet to adjust to this, but when they do it’s going to be an all out collapse.

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MACRO News Items of Importance - This Week

GLOBAL MACRO REPORTS & ANALYSIS

     

US ECONOMIC REPORTS & ANALYSIS

     
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES      
     
Market Analytics - WEDNESDAY STUDIES
STUDIES - MACRO pdf      

TECHNICALS & MARKET ANALYTICS

 Once again, the S&P 500 catches down to The Fed's balance sheet...

 

01-06-1

STUDY  

 

First $1.5 Billion Hedge Fund Casualty Of 2016

Blames HFTs For Making A Mockery Of Investing

Bloomberg reports, Nevsky Capital’s $1.5 billion hedge fund is shutting down and returning money to investors. The reason: 

the emergence of computer-driven trading strategies and index funds diminish money-making opportunities.

What again is surprising about this latest hedge fund liquidation, is that the fund was not a significant underperformer, in fact according to BBG it was up 0.9% in 2015, outperforming the majority of the "smartest money" out there:

The London-based firm managed by Martin Taylor and Nick Barnes makes bets on rising and falling share prices in developed and emerging markets. The fund returned 18.1 percent in 2013 before losing 1.4 percent the following year. In the first 11 months of 2015, the fund was up 0.9 percent, according to data compiled by Bloomberg.

Even so, the founders have had enough with a centrally-planned, HFT manipulated "market" which is that only in name.

We have come regretfully to the conclusion that the current algorithmically driven market environment is one which is increasingly...

incompatible with our fundamental, research orientated, investment process,"

Taylor, the firm’s chief investment officer, said in a statement.

As a reminder, Nevsky is the latest in a long, and getting longer by the day, list of funds joins hedge-fund firms such as

  • billionaire Michael Platt’s BlueCrest Capital Management,
  • Doug Hirsch’s Seneca Capital, and
  • Scott Bommer’s SAB Capital Management

... who are returning money to clients and adding to an accelerating pace of hedge funds shutting down globally.

More from Bloomberg:

Taylor started the current version of the fund in 2011 and aimed to manage no more than $800 million after deciding to step away from the “intensity” of running the original $3.3 billion hedge fund that was started in 2000. The fund returned 14.6 percent in 2012.

Nevsky expects to liquidate the portfolio and move into cash by the end of January. The fund’s 18.4 percent annual gain since 2000 is nearly 10 times more than returns generated by average peers as measured by the HFRX Index, Nevsky said in the statement. Taylor and Barnes started the original fund while working for London-based Thames River Capital. Both previously worked at Baring Asset Management.

To be sure, there are many more hedge fund liquidations to come, especially if Nevsky's ominous parting warning comes true:

"The bear market in emerging market equities, which began in 2011, may eventually engulf developed markets too."

 

 
COMMODITY CORNER - AGRI-COMPLEX      
     
THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur
2015 - FIDUCIARY FAILURE 2015 THESIS 2015
2014 - GLOBALIZATION TRAP 2014

2013 - STATISM

2013-1H

2013-2H

2012 - FINANCIAL REPRESSION

2012

2013

2014

01-04-16  

FINANCIAL REPRESSION

 

A “WITCH’S BREW” BUBBLING IN BOND ETFs

We believe the Credit Cycle has turned and with it will come some massive unexpected shocks. One of these will be the fall out in the Bond Market, centered around the dramatic growth explosion in Bond ETFs coupled with the post financial crisis regulatory changes that effectively removed banks from making markets in corporate bonds.  It is a ‘Witch’s Brew’ with a flattening yield curve bringing it to a boil.

2000 – Flat to Inverted Yield Curve

2007 – Flat Yield Curve

TODAY – Signalling a Flattening at Seriously Lower Bound!

PRESSURES FLATTENING THE YIELD CURVE

In the last six weeks, the spread between the Ten Year and the Two year treasuries has flattened exactly 25 basis points, which is EXACTLY the same amount that the Fed just moved the Fed Funds target rate this past Wednesday. With investors starved for yield many are being forced further out on the yield curve taking rates down further and pushing prices up.

Dan Norcini at http://traderdan.com lays it out pretty clearly:

This horrific predicament, compliments of our masters at the Central Banks, is forcing money to chase yield meaning that it is going further out along the curve to the long end. The more money that enters any bond market, the LOWER yields go since bond prices move inversely to the yield. When demand for anything increases, its price rises. Bonds, bills, notes, are no exception. As the money flows increase into the long end of the curve, at a faster rate than the money flows might be increasing into the shorter end of the curve, the price of the longer dated bonds rises faster than the price of the shorter dated bonds ( bills, notes,. etc). That means a flattening curve.

Secondly, and something that is extremely relevant to what is going on here – FOREIGN INVESTORS are sending monies overseas to chase yield as well. Think of where interest rates are in both Japan and in the Eurozone compared to comparable dated government debt here in the US. Those foreign flows do two things. They boost the price of the longer dated Treasuries as well as boosting demand for US Dollars.

This phenomenon tends to support both the Dollar’s value on the foreign exchange markets as well as keeping prices for those longer dated Treasuries well supported. Again, bond prices move inversely to yields thus the more money flows into the longer dated treasuries, the more those yields tend to move lower.

Look at what the result of both of these above factors have done to the yield on the Ten Year Treasury. Its yield was 2.170% on the last day of 2014. Today, its yield is 2.19%. We are only a short two weeks away from ending this year and we are basically back to where we started this year. We have essentially gone nowhere on yields.

What is perhaps even more alarming is that the curve is flattening further. The low point on this spread occurred in early February of this year when it reached 1.19%. Today, it closed at 1.22%. We are talking about a mere 3 basis points from the curve having flattened to a 2015 low!

Clearly, this is NOT A VOTE FOR STRONG ECONOMIC GROWTH laying ahead.

Perhaps this is the reason that the equity markets are beginning to show signs of wobbling.

What some analysts have been saying is that once the Fed started to raise rates, the stock market would come under pressure because the move would be a signal that the Fed has begun the process to slowly drain the liquidity that has fueled its monster seven year rally. I personally take issue with that in the sense that the Fed has not made any move towards actually reducing liquidity that I am aware of. After all, while they did increase the short term target rate by 1/4%, one can hardly say that the interest rate environment is not accommodative. Furthermore, the size of its balance sheet remains the same as it has been in some time nor have I seen any talk coming from the Fed that it intends to reduce that balance sheet.

Here is a chart of the Fed Balance Sheet beginning in October of 2013 ( I chose this month at random). Notice how constant the line has remained over the last year. As you can see, there has been no shrinking of the Balance sheet.

What I think appears to be causing concerns in the stock market is the fact that the yield curve is signaling that economic growth is not going to be increasing. That has gotten some stock investors nervous that perhaps stocks are overvalued. After all, it is hard to make the case that the equity markets should be hitting new lifetime highs when the yield curve is collapsing.

THE “WITCH’S BREW”

Many Including Morningstar Have Hyped “The Great New Yield Opportunity”

Thanks yet again to innovation in the realm of exchange-traded funds, the walls have come down and individual investors now have efficient access to tools that enable them to implement a strategy that only the big boys on the block could implement. Without the benefit of such scale and low relative trading costs, the cost hurdle was far too high for most individual investors and advisors trying to implement this strategy using individual bonds.

Then came along a new breed of fixed-income fund that combines the diversification and accessibility of an ETF with the precision of an individual bond. While an index, for example, typically maintains a fairly stable maturity range, these ETFs have specified maturity dates upon which cash is distributed back to investors. That means, just like an individual bond, the duration of these ETFs will steadily decrease as it approaches maturity.

…..

These ETFs are typically pitched as a way to build bond ladders in order to match cash flows with future liabilities. But thanks to their precise exposure and individual bondlike characteristics, defined-maturity ETFs–which are relatively cheap to trade–are also great tools for executing customized “roll down” strategies to enhance fixed-income total returns.

Even for relatively large investors, the wide bid-ask spreads and dealer mark-ups or commissions incurred when buying and selling individual bonds present a high hurdle. Moreover, the minimum investment that would be required could be another barrier to entry. Often, investors will be dealing in “odd lots,” which typically trade at wider spreads, as they are considered less liquid.

One of the attractive traits of an individual bond is the visibility of its cash flows and knowing exactly how much principal is due to you at maturity. Contrast that against a bond index, which does not mature and will see slight variations in its cash flows as it rebalances or reconstitutes over time. In the case of an actively managed portfolio, the payout will fluctuate as the portfolio manager buys and sells bonds. While there are several ETFs that target a relatively narrow portion of the yield curve, they still lack the precision and flexibility of defined-maturity bond ETFs.

This is another example of ETFs democratizing the investment landscape. Armed with these innovative solutions, investors have yet another arrow in their quivers to manage their fixed-income allocation amid a low-interest-rate environment. Be sure to monitor the steepness of the yield curve when executing the strategy, and keep in mind that the “roll down” strategy will lose a lot of steam if the yield curve flattens more than expected. As great as it sounds on paper, this strategy is still not a free lunch. The buy-and-hold investor sees price volatility steadily decease as his bond nears maturity. However, the price volatility in the “roll down” strategy stays relatively high, given that it reinvests in longer maturities, which tend to experience larger price fluctuations. The premium earned via the strategy can be considered compensation for assuming slightly longer duration and higher levels of volatility.

What has been sold to many investors, speculators and even desperate Fund Managers is using Bond ETFs to play the old “Roll Down the Yield Curve” Strategy. Here is how it works in case you are not familiar with the strategy.

ROLLING DOWN THE YIELD CURVE

The strategy of “rolling down the yield curve” targets investing in bonds at the steepest part of the curve. After a year or two, the bond is sold and the proceeds are reinvested back up the curve into higher-yielding, longer-maturity bonds. By selling the position well ahead of the actual maturity date, the strategy aims to capture the price increase that results when a bond’s yield drops as it “rolls down” the curve (that is, it moves closer to maturity). From there, the process repeats.

To illustrate, we can look at an example based on the yield curve in Exhibit 1. Consider an investor who buys a five-year Treasury paying a 1.5% coupon rate at par value. Fast forward two years, and that original five-year Treasury still yields 1.5%, but at that point it would have three years left to maturity. As can be seen in the yield-curve chart, the Treasury yield at a three-year maturity is 1.05%. Therefore, the price of the originally purchased five-year Treasury (which now also has a maturity of three years) would increase in order to ensure that its yield to maturity aligns with the current yield curve. (Note that, for the sake of simplicity, this example assumes that the yield curve remains stable over the observation period.)

If the Treasury paid a 1.5% coupon at a face value of $100, then after two years the price would have actually risen to $101.35 so that its yield to maturity matches the prevailing market. Recall that the three-year Treasury has a coupon yield of 1.05%. The original five-year Treasury in this example maintains its annual coupon yield of 1.5%, but then faces annual price declines of about $0.45 over the remaining three years until it matures. The yield to maturity balances out to 1.05% after factoring in those future price declines, which of course is equivalent to the yield to maturity that an investor could earn at that time from buying a newly issued three-year Treasury at par.

A buy-and-hold investor who bought at $100 would collect 1.5% per year in coupon payments and receive $100 at maturity. That comes out to a total of $7.50 in interest payments. The “roll down” strategy described in our example, on the other hand, could generate $10.90 in total returns during the same period thanks to locking in price gains and reinvesting into higher-yielding bonds.

YRA HARRIS WARNS “ALL HELL MAY BREAK LOOSE!”

Legendary trader Yra Harris who we recently interviewed at the Financial Repression Authority has been pounding the table for some time but just issued this warning:

The flattening of the yield curves in 2016 may lead to all hell breaking loose. WHAT DID I MEAN BY THIS? Grab a glass of scotch or Chuckie B., or some medicinal California and think about what I am going to say. (And, to paraphrase Danny Devito in the War of the Roses, when a person who charges $5,000 an hour offers free advice you might want to listen [humor intended].) In July 2012–the 24th to be exact–the U.S. 2/10 curve was flattening when it appeared that Europe was in a deep crisis. The two-year yields on EU sovereign debt were rapidly rising as the market feared about the viability of the EU and the EURO currency.

The European 2/10 curves were also flattening and when ECB President Mario Draghi issued his famous, NO TABOOS AND WE WILL DO WHATEVER IT TAKES to preserve the EU and the euro, the two-year yields began dropping and the 2/10 curves reversed course and began to steepen. The July 24 low was 117.25 positive slope. This was also the low made in January 2015 when the ECB and the SNB were busy revealing their plans about the EUR/CHF peg and the ECB‘s new QE policy (again, 117.25). As the year comes to an end, the flattening of the U.S. 2/10 curve continues and today we made an intraday low of 119.80. Now I will warn again that because of the lack of liquidity the last few weeks of the year prices can be easily manipulated and/or distorted.

BUT IF THE MARKETS RESUME FLATTENING IN RESPONSE TO GLOBAL ECONOMIC WEAKNESS AMID CHINESE SLOWING OR SOME GEO-POLITICAL EVENT ALL HELL WILL BREAK LOOSE. WHY? Last time the yield curves dramatically flattened in 2007 or 2012 in Europe the central banks, like John Mayall, HAD ROOM TO MOVE. When the U.S. curve inverted in early 2007, the rate was at 5.25% so the FED could swiftly cut rates in response to an incipient crisis. In Europe,the yields on the two-year notes of the so-called PIIGS were more than 7.0% and thus a dramatic drop in rates could be a positive signal to the markets.

WITH INTEREST RATES AT ZERO IN ALL THE DEVELOPED ECONOMIES WHAT WILL THE KEY POLICY MAKERS DO?A FLATTENING CURVE AT THIS JUNCTURE WOULD PUSH THE FED INTO NEW TERRITORY AND PUT FEAR INTO THE MARKETS.Thus, “ALL HELL WILL BREAK LOOSE” is an inference that the flattening of the curve at the zero  bound will signal that the central banks have lost “control.” Will it be on the first close below 117.25? Most probably not but it is certainly an area for investors and traders to be very aware of. That was my point and it needed explanation beyond the allotted time of the Santelli spot. I await any questions or responses.

CONCLUSION

What Yra doesn’t say is we now have $2.2 Trillion of troubled High Yield bonds peddled to yield starved investors since the financial crisis, which matches 2/3’s of the $3.5 Trillion increase in the Federal Reserves balance sheet during the same period. Additionally, there are well north of $60 Trillion of Bond ETFs out there with anyone guess on how many fast money speculators are playing the “Rolling Down the Yield Curve” Strategy now up against the warning Morningstar so clearly disclaimed: “the roll down strategy will lose a lot of steam if the yield curve flattens more than expected.”

With serious liquidity issues clearly evident it should be interesting as a potential positioning scramble ensues. It somewhat reminds me of someone potentially shouting “FIRE” in a theater, except this times the theater doors will be barred and the only way out will be to have someone outside take your seat inside! ETF holders may find it easier to sell that old bridge over the East River in Brooklyn than get their money out of their ETFs.

Maybe what we will actually soon hear is someone shouting “CUSTODIAL RISK!

 

 

2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS

2011

2012

2013

2014

2010 - EXTEND & PRETEND

   
THEMES - Normally a Thursday "Themes" Post & a Friday "Flows" Post
I - POLITICAL
     

CENTRAL PLANNING - SHIFTING ECONOMIC POWER - STATISM

MACRO MAP - EVOLVING ERA OF CENTRAL PLANNING

 

G THEME  
- - CRISIS OF TRUST - Era of Uncertainty G THEME  

CORRUPTION & MALFEASANCE - MORAL DECAY - DESPERATION - RESENTMENT.

US THEME PAGE
Submitted by Tyler Durden on 01/06/2016

Gallup Explains Trump:

"A Staggering 75% Of Americans Believe In Widespread Government Corruption"

Back in July, when the HuffPo was covering Donald Trump's campaign in its "Entertainment Section" (they are not laughing now), and when not a single political pundit thought Trump had any chance of winning the GOP primary (now most of them do), we said that "Donald Trump's Soaring Popularity "Is The Country's Collective Middle Finger To Washington."

Here is what we said:

Donald Trump’s ascendance as the early GOP front-runner is symbolic of a greater global trend: growing pushback against institutional political and economic power.

To many centrist politicians and mainstream political observers, Donald Trump is a

  • Boastful,
  • Insensitive,
  • Egomaniac,
  • Spouting populist rhetoric

Whether such a characterization is true is not worthy of debate, which may explain why the rantings of enraged career political pundits have no impact on Mr. Trump’s popularity among Republican voters in Iowa, New Hampshire, and across America. It seems no amount of ink or air time spent tarring and feathering Trump’s reputation sticks; in fact it seems to help Teflon Don in the polls, where he leads a crowded field of career politicians.

Donald Trump is a threat not only to the nattering nabobs in the press corps and the Republican Party. His day in the sun may be symbolic of a broader dynamic:

The declining power held by historically powerful institutions.

Ask yourself if Trump’s campaign is making a mockery of the political process or exposing the mockery that the political process has become. A not-insignificant percentage of Americans away from the coasts, are looking past his utter lack of decorum and political savvy to hitch their wagons to his outrage.

Six months later, virtually everyone recognizes and admits that this is the case: a vote for Trump is not "a vote for Trump", 

It is a vote against the broken, corrupt, crony-capitalist model.

Which explains why increasingly more are terrified he just may win.

But what explains America's revulsion with the existing system? The answer comes from the latest Gallup article: "Explaining Trump: Widespread Government Corruption" in which it finds that once the silent majority of the population can identify the object of their distrust and anger - in this case Congress and the political status quo - and once they can subsequently identify an object that represents its opposite, the latter object's distance to the Oval Office becomes considerably shorter.

From Gallup:

Explaining Trump: Widespread Government Corruption

It's been fashionable to make jokes about Congress' historically low approval ratings, unbelievable incompetence in the government and now, unfortunately, the perception of widespread government corruption. Pundits and talk-radio hosts have a field day with this. So do late-night comics.

It's not funny anymore.

A staggering 75% of the American public believe corruption is "widespread" in the U.S. government. Not incompetence, but corruption. This alarming figure has held steady since 2010, up from 66% in 2009.

This sense of corruption probably contributes to much of the extreme anxiety and unrest we see today - including protests, lower voter turnout and increased interest in guns.

Guns -- a symbol of freedom from government tyranny to many people -- are now a key voting issue. A quarter of U.S. voters say the presidential candidate they vote for must share their view on guns.

Protests are growing in cities and campuses all around the country. Students and citizens generally have lost faith in their national institutions -- the biggest and most powerful of which is, of course, the federal government.

The last presidential election had

  • an estimated 5 million fewer voters than turned out in 2008, and
  • the 2014 midterm elections saw the lowest turnout in 72 years (36.3%).
  • At alarming levels, citizens -- when invited to participate directly in their own democracy -- are taking a pass and staying home. Or taking their frustrations to the streets.

The perception that there's widespread corruption in the national government could be a symptom of citizen disengagement and anger. Or it could be a cause -- we don't know. But it's very possible this is a big, dark cloud that hangs over this country's progress. And it might be fueling the rise of an unlikely, non-traditional leading Republican candidate for the presidency, Donald Trump.

To make matters worse, that dark cloud appears to be hanging over the growth of small business, which is where virtually all new GDP growth and good jobs originate. Simply put, startups and shootups (small businesses that grow larger) have been in a death spiral. The U.S. Census Bureau reported that the total number of business startups and business closures per year crossed for the first time in 2008.

And the economy isn't growing nearly fast enough -- it's been running at an average rate of 2% since the 2008 financial collapse and the Great Recession. Just to compare, following the recession of 1981-1982, GDP grew for six years at 4.5% -- one of our greatest economic eras in history.

Jobs haven't come back. According to the U.S. Bureau of Labor Statistics, the percentage of the total adult population that has a full-time job has been hovering around 48% since 2010 -- the lowest full-time employment level since 1983. This is why the middle class has been dangerously shrinking.

You don't have to connect too many dots to conclude that if a government has an alarmingly high appearance of widespread corruption -- and that same government creates regulations that businesses cite as a leading barrier to growth -- then entrepreneurs might be reluctant to stick their necks out to start a business. Or to boom the businesses they already have.

Why would they start or boom a business if they think a corrupt government is creating rules and regulations that don't serve their interests -- but rather rules that serve the interests of

  • Corrupt officials,
  • Corrupt politicians,
  • Corrupt insiders and
  • Corrupt special interest groups?

Any wonder why so many Americans want a candidate who's outside of that system?

Submitted by George Washington on 01/06/2016

How Corrupt Is the American Government

Government corruption has become rampant:

  • The government-sponsored rating agencies committed massive fraud (and see this)
  • The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted
  • The government knew about mortgage fraud a long time ago. For example, the FBI warned of an “epidemic” of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud (a whistleblower also “gift-wrapped and delivered” the Madoff scandal to the SEC, but they refused to take action). Indeed, Alan Greenspan took the position that fraud could never happen
  • Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy when they were not. The Treasury Secretary also falsely told Congress that the bailouts would be used to dispose of toxic assets … but then used the money for something else entirely
  • The American government’s top official in charge of the bank bailouts wrote, “Americans should lose faith in their government. They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable. The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.”
  • Congress has exempted itself from the healthcare rules it insists everyone else follow
  • Law enforcement also grabs massive amounts of people’s cash, cars and property … even when people aren’t CHARGED with – let alone convicted of – any crime
  • Private prisons are huge profit-making centers for giant companies, and private prison corporations obtain quotas from the government, where the government guarantees a certain number of prisoners at any given time
  • The government covered up the health risks to New Orleans residents associated with polluted water from hurricane Katrina, and FEMA covered up the cancer risk from the toxic trailers which it provided to refugees of the hurricane. The Centers for Disease Control – the lead agency tasked with addressing disease in America –covered up lead poisoning in children in the Washington, D.C. area (the Centers for Disease Control has also been outed as receiving industry funding)
  • In response to new studies showing the substantial dangers of genetically modified foods, the government passed legislation more or less PUSHING IT onto our plates
  • Government scientists originally pushed fluoridation of water as “safe and effective” because fluoride is amajor byproduct of making nuclear weapons … and the government ordered them to downplay the risks of fluoride exposure in order to prevent massive lawsuits by those suffering injury from poisoning
  • In an effort to protect Bank of America from the threatened Wikileaks expose of wrongdoing – theDepartment of Justice told Bank of America to a hire a specific hardball-playing law firm to assemble a team to take down WikiLeaks (and see this)
  • The Bush White House worked hard to smear CIA officersbloggers and anyone else who criticized the Iraq war
  • The FBI smeared top scientists who pointed out the numerous holes in its anthrax case. Indeed, the head of the FBI’s investigation agrees that corruption was rampant
  • Warmongers in the U.S. government knowingly and intentionally lied us into a war of aggression in Iraq. The former head of the Joint Chiefs of Staff – the highest ranking military officer in the United States – said that the Iraq war was “based on a series of lies”. The same is true in LibyaSyria and other wars. Indeed, the U.S. has often launched or proposed launching wars based upon FALSE PREMISES
  • When the American government got caught assassinating innocent civilians, it changed its definition of “enemy combatants” to include all young men – between the ages of say 15 and 35 – who happen to be in battle zones. When it got busted killing kids with drones, it changed the definition again to include kids as “enemy combatants”
  • The government treats journalists who report on government corruption as CRIMINALS OR TERRORISTS. And it goes to great lengths to smear them. For example, when USA Today reporters busted the Pentagon for illegally targeting Americans with propaganda, the Pentagon launched a SMEAR CAMPAIGN against the reporters. But  journalists who act as mere cheerleaders for the government who never criticize are protected and rewarded
  • Senior SEC employees spent up to 8 hours a day surfing porn sites instead of cracking down on financial crimes
  • NSA spies pass around homemade sexual videos and pictures they’ve collected from spying on the American people
  • Investigators from the Treasury’s Office of the Inspector General found that some of the regulator’s employeessurfed erotic websites, hired prostitutes and accepted gifts from bank executives … instead of actually working to help the economy
  • The Minerals Management Service – the regulator charged with overseeing BP and other oil companies to ensure that oil spills don’t occur – was riddled with “a culture of substance abuse and promiscuity”, which included “sex with industry contacts
  • Agents for the Drug Enforcement Agency had dozens of sex parties with prostitutes hired by the drug cartels they were supposed to stop (they also received moneygifts and weapons from drug cartel members)

The biggest companies own the D.C. politicians. Indeed, the head of the economics department at George Mason University has pointed out that it is unfair to call politicians “prostitutes”. They are in fact pimps … selling out the American people for a price.

Government regulators have become so corrupted and “captured” by those they regulate that Americans know that the cop is on the take. Institutional corruption is killing people’s trust in our government and our institutions.

Neither the Democratic or Republican parties represent the interests of the American people. Elections have become nothing but scripted beauty contests, with both parties ignoring the desires of their own bases.

Indeed, America is no longer a democracy or republic … it’s officially an oligarchy. And the allowance of unlimited campaign spending allows the oligarchs to purchase politicians more directly than ever.

No wonder polls show that the American people say that the system is so thoroughly corrupt that government corruption is now Americans’ number one fear.

And politicians from both sides of the aisle say that corruption has destroyed America. And see this.

Moreover, there are two systems of justice in America … one for the big banks and other fatcats … and one for everyone else. Indeed, Americans have .

Big Corporations Are Also Thoroughly Corrupt

But the private sector is no better … for example, the big banks have literally turned into criminal syndicates engaged in systemic fraud.

Wall Street and giant corporations are literally manipulating every single market.

And the big corporations are cutting corners to make an extra penny … wreaking havoc with their carelessness. For example:

  • U.S. military contractors have pocketed huge sums of money earmarked for humanitarian and reconstruction aid. And see this (whistleblowers alerted the government about the looting of Iraq reconstruction funds, but nothing was done)
  • There is systemic corruption among drug companies, scientific journals, university medical departments, and medical groups which set the criteria for diagnosis and treatment

(Further examples herehereherehere and here.)

We’ve Forgotten the Lessons of History

The real problem is that we need to learn a little history:

  • We’ve known for thousands of years that – when criminals are not punished – crime spreads
  • We’ve known for centuries that powerful people – unless held to account – will get together and steal from everyone else

Beyond Partisan Politics

Conservatives and liberals tend to blame our country’s problems on different factors … but they are all connected.

The real problem is the malignant, symbiotic relationship between big corporations and big government.

 

Authored by Paul Craig Roberts,

The Rule Of Law No Longer Exists In Western Civilization

My work documenting how the law was lost began about a quarter of a century ago. A close friend and distinguished attorney, Dean Booth, first brought to my attention the erosion of the legal principles on which rests the rule of law in the United States. My columns on the subject got the attention of an educational institution that invited me to give a lecture on the subject. Subsequently, I was invited to give a lecture on “How The Law Was Lost” at the Benjamin Cardozo School of Law in New York City.

The work coalesced into a book, The Tyranny Of Good Intentions, coauthored with my research associate, Lawrence M. Stratton, published in 2000, with an expanded edition published in 2008. We were able to demonstrate that Sir Thomas More’s warning about prosecutors and courts disregarding law in order to more easily convict undesirables and criminals has had the result of

turning law away from being a shield of the people and making it into a weapon in the hands of government. 

That is what we witness in the saga of the Hammonds, long-time ranchers in the Harney Basin of Oregon.

With the intervention of Ammon Bundy, another rancher who suffered illegal persecution by the Bureau of Land Management but stood them off with help from armed militia, and his supporters, the BLM’s decades long persecution of the innocent Hammonds might have come to a crisis before you read this.

Bundy and militiamen, whose count varies from 15 to 150 in the presstitute media, have seized an Oregon office of the BLM as American liberty’s protest against the frame-up of the Hammonds on false charges. As I write the Oregon National Guard and FBI are on the way.

The militiamen have said that they are prepared to die for principles, and the rule of law is one of them.Of course, the presstitute media is making the militiamen into the lawbreakers—and even calling them terrorists—and not the federal government’s illegal prosecution of the Hammonds, whose crime was their refusal to sell their ranch to the government to be included in the Masher National Wildlife Refuge.

If there are only 15 militiamen, there is a good chance that they will all be killed, but if there are 150 armed militiamen prepared for a shootout, the outcome could be different.

I cannot attest to the accuracy of this report of the situation (the resources required to verify the information in this account of how the government escalated a “crisis” out of the refusal of a family to bend is beyond the resources of this website) - However, the story fits perfectly with everything Lawrence Stratton and I learned over the years that we prepared our book on how the law was lost. This account of the persecution of the Hammonds is the way government behaves when government has broken free of the rule of law.

I can attest with full confidence that the United States no longer has a rule of law. The USA is a lawless country. By that I do not mean what conservative Republicans mean, which is, if I understand them, that racial minorities violate law with something close to impunity.

What I mean is that only the mega-banks and the One Percent have legal protection, and that is because these people control the government. For everyone else law is a weapon in the hands of the government to be used against the American people.

The fact that the shield of law no longer exists for American citizens is why, according to US Department of Justice statistics, only 4 percent of federal felonies ever go to trial. Almost the entirety of federal felonies are settled by coerced plea bargains that force defendants to admit to crimes that they did not commit in order to avoid “expanded indictments” that, if presented to the typical stupid, trusting, gullible American “jury of their peers,” would lock them away for hundreds of years.

American justice is a joke. It does not exist. You can see this in the American prison population. “Freedom and Democracy” America not only has the largest percentage of its population in prison than any country on the planet, but also the largest number of prisoners.

If you consider that “authoritarian” China has four times the population of the United States but fewer prisoners, you understand that “authoritarian” China has a more protective rule of law than the United States.

Compared to “freedom and democracy America,” Russia has hardly anyone in prison. Yet, Washington and its media whores have defined the President of Russia as “the new Hitler.”

The only thing we can conclude from the facts is that the United States Government and those ignorant fools who worship it are evil incarnate.

Out of evil comes dictatorship. The White House Fool, at best a two-bit punk, has decided that he doesn’t like the Second Amendment to the US Constitution any more than he likes any of the other constitutional protections of US citizens. He is looking for dictatorial methods, that is, unlegislated executive orders, to overturn the Second Amendment. He has the corrupt US Department of Justice, a criminal organization, looking for ways for the dictator to overturn both Congressional legislation and Supreme Court rulings.

The media whores have fallen in line with the would-be dictator. All we hear is “gun violence.” If only Karl Marx were still with us. He would ridicule those who turn inanimate objects into purposeful actors. It is extraordinary that the American left-wing thinks that guns, not people, kill people.

The position of the “progressive left-wing” in the United States is perplexing. Here are Americans, immersed into a police state, as are the Hammonds, and the progressive left-wing wants to disarm the population.

Whatever this “progressive left-wing opposition” is, it has nothing in common with revolutionaries. The American left-wing is totally irrevelant, a defeated force that sold out and no longer represents the people or the truth.

Even more astonishing, judging by comments on RT’s report on the situation and the readers comments, all RT and American blacks want to know is where is the National Guard in Oregon? Why isn’t it called out against the White militia protests as it was called out against the Black Ferguson protests?

If protesting the murder of a young black American by Ferguson police is not legitimate and the protesters are “terrorists,” why aren’t the Oregon protestors terrorists for trying to protect jailbirds from their “lawful sentence”? This is the wrong question.

It really is discouraging that the American black community is unable to understand that if any American can be dispossessed, all Americans can be dispossessed.

It is also discouraging that RT decided to play the race card instead of comprehending that law is no longer a shield of the American people but is a weapon in the hands of Washington.

Why doesn’t RT at least listen to the President of Russia, who states repeatedly that America and the West are lawless.

Putin is correct. America and its vassals are lawless. No one is safe from the government.

 

Submitted by Tyler Durden on 01/06/2016

"We The People Are Pissed"

New Poll Finds Whites And Republicans Are Angriest Americans

 

If Donald Trump’s poll numbers tell us anything, it’s that Americans are angry.

Angry with what they perceive to be government ineptitude, angry with the economy, angry with US foreign policy, angry with just about everything.

The palpable sense of rage has manifested itself in support for dark horse presidential candidates like Donald Trump and Bernie Sanders and is also apparent in “incidents” like that which occurred on Saturday when armed militiamen seized a remote government building in Oregon.

Just how mad are Americans? Very, according to a new poll conducted by Esquire, SurveyMonkey, and NBC News. Here’s the preface from Esquire:

WE THE PEOPLE ARE PISSED. THE BODY POLITIC IS BURNING UP. AND THE ANGER THAT COURSES THROUGH OUR HEADLINES AND NEWS FEEDS—ABOUT INJUSTICE AND INEQUALITY, ABOUT MARGINALIZATION AND DISENFRANCHISEMENT, ABOUT WHAT THEY ARE DOING TO US—SHOWS NO SIGN OF ABATING. ESQUIRE TEAMED UP WITH NBC NEWS TO SURVEY 3,000 AMERICANS ABOUT WHO'S ANGRIEST, WHAT'S MAKING THEM ANGRY, AND WHO'S TO BLAME.


LET'S BEGIN WITH THE BIG REVEALS: Half of all Americans are angrier today than they were a year ago. White Americans are the angriest of all. And black Americans are more optimistic about the future of the country and the existence of the American dream. There are depths and dimensions, dark corners and subtle contours to our national mood, and setting aside the issue of who actually has a right to be angry and about what—these pages are neutral territory; everyone is allowed their beef—we found three main factors shaping American rage: expectations, empathy, and experience.

Below, find some of the highlights which include the fact that when it comes to being "pissed", no one is angrier than white people and Republicans. "Overall, 49 percent of Americans said they find themselves feeling angrier now about current events than they were one year ago," NBC writes. "Whites are the angriest, with 54 percent saying they have grown more outraged over the past year [while] sixty-one percent of Republicans say current events irk them more today than a year ago, compared to 42 percent of Democrats."

Full Poll

 

- - SECURITY-SURVEILLANCE COMPLEX - STATISM G THEME  
- - CATALYSTS - FEAR (POLITICALLY) & GREED (FINANCIALLY) G THEME  
II-ECONOMIC
     
GLOBAL RISK      
- GLOBAL FINANCIAL IMBALANCE - FRAGILITY, COMPLEXITY & INSTABILITY G THEME  
- - SOCIAL UNREST - INEQUALITY & A BROKEN SOCIAL CONTRACT US THEME  
- - ECHO BOOM - PERIPHERAL PROBLEM M THEME  
- -GLOBAL GROWTH & JOBS CRISIS      
- - - PRODUCTIVITY PARADOX - NATURE OF WORK   THEME

MA w/ CHS

  01-08-16 THEME

MA w/ CHS

“The American Dream May Be Dying

But It Can Be Revived!”

GORDON T LONG & CHARLES HUGH SMITH - Discuss CHS' new book

DECLINING LABOR PERTICIPATION RATE - Status quo has no solution!

  • Declining work force will be unable to pay for the “pay as you go” social programs such as Social Security, Medicare and Medicaid.
  • Declining labor force will also be unable to support more borrowing—and the system requires more borrowing just to keep afloat.
  • Decline of labor is the inevitable result of automation, which has only started eroding white-collar and managerial jobs.

New tech creates far fewer jobs than it replaces/destroys

http://www.fastcoexist.com/3054604/todays-tech-giants-are-creating-loads-of-wealth-but-pitifully-few-jobs

Today's Tech Giants Are Creating Loads Of Wealth But Pitifully Few Jobs

PUBLIC NARRATIVE

The conventional wisdom is that a guaranteed free-money check from the central state is the solution.

A Redistribution Scheme: A new form of Subsistence Serfdom

"A Solution to Automation—Universal Basic Income for all"

Charles Hugh Smith says:

Why Basic Income is not realistic or positive: http://www.oftwominds.com/blogdec15/basic-income12-15.html

1) Financially unsustainable,

2) A disaster for those getting the welfare check. They are essentially serfs, with no incentives or pathways to build capital.

For the Wealthiest - A Private Tax System That Saves Them Billions

-- ultimately, proponents of basic guaranteed income are relying on borrowing additional trillions of dollars to pay for the scheme. Not only is this financially unsustainable, it is immoral to load debt on future generations to pay for today’s spending.

Why Firms Are Fleeing

-- as for expecting corporations to tax trillions more in higher taxes—they’re fleeing US taxes, and they are also buying political favors to avoid higher taxes. http://www.newyorker.com/magazine/2016/01/11/why-firms-are-fleeing

Gordon T Long says:

1) There is a human need for work and having skin in the game.

2) People thirst for opportunities to excel (Lessons of Why we particpate in and follow Sports)

3) When you stop Growing You Start Dying (Lessons of Retirement)

.....not just survive on the dole.

UNIVERSAL BASIC INCOME => THE DOLE

Different Paths, Same Destination: CHS Grew Up In Hawaii - GTL Grew Up In Canada

Where Both Experiences Come Together

The "Kibbutz" Example

  • The hard-working people are resentful, and so are the dependents/unproductive.
  • It’s a loser—yet that is the system of Universal Basic Income

We need new ways of understanding our systemic problems and new solutions. Going back to 1930 and super-welfare schemes are not real solutions.

 

CHS' solution is to build a community-based economy that provides funding, mentoring and ample opportunities to build capital and wealth.

What we need (and what CHS book is about)

  • Being in a group where everyone gets to share in the yield of working hard,
  • Each member has an opportunity to build capital and get ahead in life.

Blog essay does the heavy lifting on the financial analysis— but its really the social-economic differences between:

  1. The failed model of WELFARE-FOR-ALL - communal poverty
    • the central-state welfare model
    • top-down, encouraging dependency and helplessness—and resentment
  2. The model of SHARED BENEFITS flowing from working productively together
    • the community economy
    • bottom-up, encouraging accumulation of capital, skills, etc.
    • Creating the goods and services that are scarce and needed within local communities requires new ways of thinking and organizing work
SUBSISTENCE SERFDOM
  • Giving people money without getting any productive work is destructive to participants,
  • Those who have to pay for the free-riders (the community) loses the labor of its residents.
  • Our goal should be to provide meaningful work to people in their own communities, not give them subsistence welfare,
  • Guaranteed income for all is just a new form of subsistence serfdom.
  • Those looking to central state “solutions” such as basic guaranteed income are out of touch with the reality that real solutions come from below, in the entrepreneurial Main Street economy, not from above (central banks, politicians enacting new social programs, etc.)

THE KEYNESIAN IDEOLOGY

  • Rests on the notion that giving people money will boost “aggregate demand” and that will restart growth.
  • Just giving people “free money” will not restore what’s broken.
  • Keynesians fail to distinguish between productive investment and mal-investment, and between useless make-work and productive work.

New crypto-currencies offer a way to escape the financial repression of central bank-issued money, which flows to banks and financiers, not the real economy.

- - - STANDARD OF LIVING - EMPLOYMENT CRISIS, SUB-PRIME ECONOMY US THEME
MA w/ CHS
III-FINANCIAL
     

FLOWS -FRIDAY FLOWS

FLOWS - Liqudity, Credit & Debt

LIQUIDITY: Central Bank Liquidity Increases has slowed or Stopped

>> CREDIT: Cycle has turned

DEBT: Defaults/ Bankruptcies Will Emerge

 

MATA

RISK ON-OFF

THEME

w/ R Duncan

CRACKUP BOOM - ASSET BUBBLE 12-31-15 THEME  
 
SHADOW BANKING - LIQUIDITY / CREDIT ENGINE M THEME  
GENERAL INTEREST

 

   
STRATEGIC INVESTMENT INSIGHTS - Weekend Coverage
     

 

RETAIL - CRE

 

 

  SII

 

US DOLLAR

 

 

  SII

 

YEN WEAKNESS

 

 

  SII

 

OIL WEAKNESS

 

 

  SII
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