Month: June 2016

   “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

Rahm Emanuel prophetic words were quickly put to use by Italy on Monday morning, which barely waited one full day before using Brexit as the scapegoat excuse to warn that a €40 billion bailout of Italian banks is coming. 

As a reminder, on Monday morning the local media reported that Renzi’s
government was pursuing a six-month waiver of EU state-aid rules,
allowing it to shore up banks without forcing investors to share losses. Two days ago, when we first reported of Italy’s proposed bank rescue plan, we said that the chairman of Lower House’s Finance Commission, Maurizio Bernardo, confirmed that the government is studying options to support the banking sector, including a capital injection, and said a law decree “with measures going in that direction” could be approved by the end of this week. 

We pointed out that how such an intervention would be implemented was unclear; it was is also unclear how such a direct state recapitalization of Italian banks using public funds would be permitted by current EU and ECB regulations, which prohibit state bailouts of insolvent banks, although Europe has a long and illustrious history of finding massive loopholes to that particular prohibition. “Last but not least it is unclear how existing stakeholders, shareholders, bondholders and uninsured depositors, would be impaired under such a bailout.”

Well, they wouldn’t, despite Europe’s recent implementation of bail-in rules. That was the whole point.

However, while Italy was hoping it would get a “pass” on using public funding, mostly Eurozone generated and thus courtesy of Germany, this appears to have hit a dead end moments ago, when Bloomberg reported that Germany opposes any attempt to shield private bank investors from losses if Italy pushes ahead with plans to recapitalize lenders. Chancellor Angela Merkel’s government says that European Union rules on handling struggling banks should apply in any rescue effort, including forcing losses on shareholders and some creditors before public money can be injected, the person said, declining to be identified because the deliberations are private.

And just like that Renzi’s entire recapitalization plan has gone up in smoke, because if there is one person in Europe who can veto an Italian bailout, it’s Merkel, which is precisely what she has done.

As Bloomberg adds, any waiver of the rules would be complicated, as Germany insists that the EU’s Bank Recovery and Resolution Directive be applied. That will mean Italy must first avoid triggering a wind-down procedure. The assumption in BRRD is that the need for “extraordinary public financial support” for a bank indicates that a bank is “failing or is likely to fail, and therefore triggers the need for resolution,” according to the European Banking Authority.

Also according to the source, Germany isn’t pushing for banks to be wound down, according to the person. The government does, however, want to ensure that private investors are tapped before any public money is put into the banks. EU state-aid rules normally require shareholders and junior creditors to share losses.

That, as we noted on Monday, is a dead end: currently, it is practically impossible for Italian banks to raise capital. “They are caught in a pincer as the ECB simultaneously demands compliance with tougher capital adequacy buffers, in some case demanding fresh infusions of capital three or four times.  The banking squeeze has become politically explosive in Italy after thousands of small depositors were wiped out at four regional banks late last year. They were classified as junior bondholders, even though most of them were just ordinary savers who did not realize what was being done with their money.”

But worst of all for Renzi, Merkel’s government in Berlin rejects the argument that the U.K. vote to leave the EU constitutes an “exceptional circumstance” which, under EU basic law, can allow a national government to grant aid to a company outside of the state-aid rules. 

Which simply means that Europe will need a bigger crisis, something which can be easily arranged, because recall as we concluded last time that the biggest winner from an Italian bank bailout would be none other than the ECB’s Mario Draghi under whose tenure as governor at the Bank of Italy from 2005 until 2011 is when Italy’s banks loaded up on all those €360 billion in bad and non-performing loans which Italy is now desperate to eliminate or at least offset. The last thing Draghi would want is for his legacy to one remember for the collapse of the Eurozone’s most insolvent banking system.

via http://ift.tt/298E4AG Tyler Durden

• Global stocks gain as Brexit nerves settle (Reuters)
• Draghi Wishes for a World Order Populists Will Love to Hate (BBG)
• Merkel Says No Way Back From Brexit as Cameron Regrets Loss (BBG)
• EU leaders meet without UK to plot Brexit response (FT)
• Division, confusion as EU rethinks future without Britain (AP)
• Goldman denies plans for Frankfurt office switch after Brexit (Reuters)
• Brexit Vote Roils Real-Estate Markets (WSJ)
• Will Brexit Actually Happen? (BBG)
• Donald Trump Lays Out Protectionist Views in Trade Speech (WSJ)
• Islamic State prime suspect after suicide bombers kill 41 at Istanbul airport (Reuters)
• Istanbul Airport Reopens Even as Attack Death Toll Rises (WSJ)
• European Banks Spend Billions to Get U.S. Units Fit for the Fed (BBG)
• Syria rebels battle IS at Iraqi border, aim to cut ‘caliphate’ in two (Reuters)
• 5 Things to Watch in the Fed’s Stress Test Results (WSJ)
• Brexit Economic Fallout Worries Americans in Bloomberg Poll (BBG)
• Teachers Union and Hedge Funds War Over Pension Billions (WSJ)
• UK consumer borrowing growth hit 10-year high before Brexit storm (Reuters)
• Every Banker in the World Is Chasing the Saudi Aramco Deal (BBG)
• Energy Transfer Equity Calls Off Williams Merger (WSJ)

 

Overnight Media Digest

WSJ

– British Prime Minister David Cameron began the tortuous process of extricating his country from the European Union at his last summit with leaders of the other 27 EU states, who told him there would be no special deals for ex-members of the bloc. http://on.wsj.com/293LlhS

– A federal judge has ordered Texas entrepreneur Sam Wyly to pay $1.1 billion in taxes and penalties for committing tax fraud using offshore accounts, even though the former billionaire’s net worth has fallen to a fraction of that amount. http://on.wsj.com/293LgL5

– Federal officials made clear Tuesday that Volkswagen AG’s deal to pay up to $14.7 billion to settle emissions-cheating claims with U.S. consumers and regulators won’t end the auto giant’s woes-nor stop scrutiny of other car makers. http://on.wsj.com/293Lp1b

– IKEA has agreed to recall 29 million chests and dressers in the U.S. following a raft of injuries and the deaths of six toddlers caused by the furniture tipping over. http://on.wsj.com/293Lv99

– Turkey’s busiest airport, Istanbul Atatürk Airport, was struck by suicide bombers late Tuesday, who killed at least 36 people and injured scores, on the eve of a major holiday, the deadliest in a string of attacks in Istanbul this year. http://on.wsj.com/293LuBU

 

FT

Jeremy Corbyn refused to step down as leader of the labour party despite a vote of no confidence and resignations from his front bench.

U.S. prosecutors said Volkswagen AG and its suppliers still face a criminal investigation for their role in the diesel emissions scandal, even as the company agreed to pay up to $15.3 billion in fines.

U.S. online lender LendingClub Corp will cut about 12 percent of its workforce as it attempts to deal with a scandal that led to the departure of its founder.

Apartment-sharing startup Airbnb is in talks for a new round of funding that would give it a valuation of $30 billion.

 

NYT

– Airbnb has charmed and strong-armed lawmakers around the world to allow it to operate in their communities. But two cities, Airbnb’s hometown, San Francisco, and New York, the service’s largest United States market, have not been so compliant. http://nyti.ms/292X4Qn

– Donald Trump vowed on Tuesday to rip up international trade deals and start an unrelenting offensive against Chinese economic practices, framing his contest with Hillary Clinton as a choice between hard-edge nationalism and the policies of “a leadership class that worships globalism.” http://nyti.ms/292vfEz

– Volkswagen AG solved one big problem stemming from its diesel emissions deception, agreeing on Tuesday to pay up to $14.7 billion to settle claims in the United States. But the final financial toll, once the company deals with a long list of fines, lawsuits and criminal investigations around the world, may well be far higher. http://nyti.ms/290i7P7

– In a deal with federal regulators, Ikea announced Tuesday that it would recall 29 million chests and dressers in the United States after at least six toddlers were crushed to death in tip-over accidents. http://nyti.ms/2992vwH

– The federal government has proposed adding a line to forms filled out by visitors to the United States that would ask them to voluntarily disclose their social media accounts, a step that it said would help in screening for ties to terrorism. http://nyti.ms/299xngv

 

Canada

THE GLOBE AND MAIL

** Canada ranks second in the world when it comes to turning economic prosperity into social progress, according to a report by Social Progress Imperative. (http://bit.ly/292lxpm)

** Empire Co Ltd, the parent of grocer Sobeys Inc, posted a loss of $942.6 million as its problems deepened in its Western Canadian business in its fourth quarter and Chief Executive Marc Poulin warned of signs that Sobeys’ sluggish sales are spreading to other regions of the country. (http://bit.ly/294uwY9)

** BuzzFeed Canada is cutting its political reporting staff more than a year after its official launch, suggesting there are cracks in the social news company’s plan to expand its reporting capabilities outside the United States. (http://bit.ly/292cXns)

NATIONAL POST

** Canada has lodged a formal complaint with the Palestinian Authority over what it says were “baseless” accusations against Israel by President Mahmoud Abbas. The move came after Abbas alleged in a speech to the European Parliament in Brussels last week that Israeli rabbis had plotted to murder Palestinians by poisoning their wells – a claim that was quickly proven false. (http://bit.ly/297cjqn)

** Last minute negotiations are underway to extend the closing date for Superior Plus Corp’s acquisition of Canexus Corp after U.S. antitrust authorities launched a legal challenge that could quash the deal. Calgary-based Canexus announced Tuesday that it is still in talks to extend the closing date of the deal, which is set to expire Wednesday. (http://bit.ly/292ceBe)

 

Britain

The Times

The co-chief executive of Goldman Sachs International Richard Gnodde has warned that some of the bank’s 6,500 staff in the UK may be moved to Europe following the referendum result.(http://bit.ly/293r8wP)

Aston Martin is to stick to its plan to build a carmaking plant in south Wales, even arguing that the vote for Brexit has made the project more viable. (http://bit.ly/292LQsQ)

The Guardian

Vodafone, one of Britain’s biggest companies, has warned that it could relocate its head office outside the UK if the negotiations for a post-Brexit Britain do not give it freedom of movement across the EU for people, capital and goods.(http://bit.ly/29mijd4)

Virgin billionaire, Richard Branson, says Chinese business partners are already pulling investment from the UK in the light of the EU referendum vote, and warned that “thousands of jobs will be lost”. (http://bit.ly/291qh9Y)

The Telegraph

The British Government is “committed” to expanding airport capacity in the south east, despite the political turmoil caused by Brexit, the transport secretary Patrick McLoughlin has said, signalling a decision on a controversial £17.6 billion ($23.49 billion) third runway at Heathrow could still be on the cards. (http://bit.ly/292O3of)

Lloyds Banking Group’s boss has bought another 100,000 shares in the bank in a show of confidence that the lender’s share price tumble is a short-term hit rather than a sign of long-term problems. (http://bit.ly/294jQHh)

Sky News

Hundreds of British-based jobs at the credit card giant Visa could be forced to relocate to the Continent in the wake of last week’s EU referendum. (http://bit.ly/29232xB)

Tax rises and spending cuts will be needed within months to deal with economic challenges following the British vote to leave the EU, Chancellor of the Exchequer George Osborne has warned. (http://bit.ly/298ZHzK)

The Independent

Fitch has downgraded the UK’s credit rating to AA negative, after similar moves by Moody’s and S&P, following Britain’s vote to leave the EU. (http://ind.pn/28YYG9E)

The Bank of England has injected £3.1 billion ($4.14 billion) into the UK banking system. The amount released on Tuesday was the last of the extra auctions announced by the Bank of England in March this year. (http://ind.pn/293EhnG)

via http://ift.tt/298CfUs Tyler Durden

No idea how to trade Brexit, and simply following the momentum-driven crowd which in turn is trading on hopes of central bank intervention? Don’t worry, you are not alone. As Citi admits “No one knows how to price the Brexit scenario going forward.”

Here is Citi’s William Lee “clarifying” the prevailing market cluelessness:

The UK vote to leave the EU surprised almost everyone, especially market participants. It left unprecedented uncertainty about future economic and political relations between the UK and the EU.

From the US perspective, the market selloff has been large but orderly. Indeed, global markets began to stabilize today, after two days of probing for equilibrium prices and their implied trajectories going forward.

Whereas spot prices have stabilized, there appears to be little conviction among traders and other financial market participants about the course of exchange rates and asset prices going forward.

• Market sentiment remains tentative; small catalysts can be very disruptive.
• A common trading floor comment is: “No one knows how to price the Brexit scenario going forward.”

Our past research has shown that uncertainty is pernicious: it can induce a significant drag on economic growth. The Brexit vote amplifies uncertainty with unprecedented economic and political considerations whose impact on global economic activity is difficult to discern. Fed policy remains sensitive to market sentiment, and the FOMC likely would not do anything that could be disruptive.

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Now that a second UK referendum appears to be out of the question and as a result there is no need to further punish UK risk assets in hopes of “changing people’s minds”, the risk on rally (especially with quarter end looming) can return, and so it has, with global stocks and US equity futures staging another surge overnight led by Japan (+1.6%) and China (+0.7%), and certainly Europe where moments ago the Stoxx 600 and Dax hit session highs, rising 2.6% and 1.9% respectively. The move has sent US futures higher by another 14 points, or +0.7%, to 2043, now up 44 points from Monday’s lows.

Best, however, is that the FTSE is now back to its post-Brexit highs, rising 2.5% so far today to just shy of 6,300. A few more hours of this ramp and UK stocks will recover all Brexit losses. At that point the scaremongering campaign can officially be called off.

This despite a warning from Credit Suisse that “the U.K. domestic sectors do not look cheap enough yet, with the exception of retailing. The trade and legal picture is very murky. The real hit to European growth if it there is another referendum (unlikely). The key is to watch PMI new orders to gauge the impact on corporate confidence”

Why the ongoing rally? A squeeze, sure, and also month-end fund flows. But the fundamental driver remains one and the same, and we quote Bloomberg: “the relief rally endures as Asian and European stocks rally with crude oil amid speculation policy makers will use stimulus to blunt the impact of the U.K.’s decision to leave the European Union, including a pause in the Federal Reserve’s tightening cycle. Investors are looking to policy makers for support.”

And confirming that it is all a bet on more easing, even gold was up today, while Japanese bond yields hit fresh record lows on expectations of more BOJ intervention. So once again, back to the old same old: hope that central banks will step in and once again expand multiples now that global earnings are set to decline once more courtesy of Brexit.

Not everyone is buying it of course: “While central banks assuring investors they’re ready to support the markets helps sentiment, it may be too early to turn optimistic,” said James Woods, a strategist at Rivkin Securities in Sydney. “We’ll probably continue to see heavy volatility. We’ll have to see what unfolds in the U.K. with the political situation after Brexit,” but for now the path of least resistance, not to mention short covering, is up and may well continue until the monthly window dressing process is concluded.

What else: the MSCI All-Country World Index headed for its highest level since before the Brexit vote and U.S. equity-index futures advanced as odds indicated the Fed is more likely to cut rates than raise them over the rest of the year. Sterling erased earlier losses, having rebounded in the last session from near a 31-year low. Oil climbed above $48 a barrel and gold approached a two-year high, while the dollar retreated against most of its major peers. Emerging-market stocks and currencies climbed for a second day. Bond yields in Portugal and Italy slipped, while those on Japanese debt fell to a record low.

The Stoxx Europe 600 Index climbed 1.9 percent, with banks and miners among the best performers. The equity gauge has recovered 4.6 percent after tumbling 11 percent over two days following the shock result of the U.K. referendum. It is still heading for a second quarterly decline. The FTSE 100 Index added 2.1 percent on Wednesday and is within 1.1 percent of its pre-Brexit close. Futures on the S&P 500 Index rose 0.7 percent after the U.S. benchmark jumped 1.8 percent in the last session, its best performance in almost four months. Nike Inc. slid 3.6 percent in early New York trading after its future orders missed estimates, renewing concerns that the world’s largest sports brand has entered a period of slowing growth.

EU leaders gather in Brussels on Wednesday for the second day of a two-day European Council summit to discuss Britain’s withdrawal from the bloc. They have already said that there can be no turning back for the U.K. and warned Cameron that delaying the period before formally activating the EU exit mechanism will prevent the start of negotiations over any future relationship. 

Also on today’s docket, we get the May personal income and spending reports, as well as the PCE core and deflator readings (the latter two are both expected to have risen +0.2% mom). Also due out today in the US is the May pending home sales report. Elsewhere, a number of ECB speakers are due to speak at the ECB forum in Portugal again today, while the Fed is also due to release results from the second part of its bank stress tests this evening.

Market Snapshot

• S&P 500 futures up 0.7% to 2043
• Stoxx 600 up 2.6% to 324
• FTSE 100 up 2.5% to 6296
• DAX up 2.0% to 9635
• S&P GSCI Index up 0.8% to 375
• MSCI Asia Pacific up 1.7% to 128
• Nikkei 225 up 1.6% to 15567
• Hang Seng up 1.3% to 20436
• Shanghai Composite up 0.7% to 2932
• S&P/ASX 200 up 0.8% to 5142
• US 10-yr yield down less than 1bp to 1.46%
• German 10Yr yield down less than 1bp to -0.11%
• Italian 10Yr yield down 2bps to 1.38%
• Spanish 10Yr yield down less than 1bp to 1.31%
• Dollar Index down 0.22% to 96.04
• WTI Crude futures up 1.3% to $48.49
• Brent Futures up 1.2% to $49.16
• Gold spot up 0.6% to $1,320
• Silver spot up 2.4% to $18.25

Top Global News

• Islamic State Blamed for Turkey Airport Attacks, 40 Killed: suicide bombers blew themselves up after police spotted them
• Cameron Makes Emotional Adieu as Sun Sets on U.K. EU Membership: British premier ‘genuinely sorry’ to bear Brexit news to EU
• Merkel Says No Way Back From Brexit as Cameron Regrets Loss: France says U.K. will have to ‘face consequences’ of exit
• Hollande Says Brexit to Hurt City of London in Clearing Warning: French Premier says City won’t be able to run euro clearing
• Fed’s Powell Says Brexit Shifts Global Risks Further to Downside: Powell says it’s far too early to judge effects of U.K. vote
• Victims of Brexit’s Real-Time Recession Already Feeling the Pain: hiring, expansion, investments all on hold after vote
• Who’ll Inherit Brexit? Tory Leader Candidates Break Cover: nominations to replace Cameron as premier open Wednesday
• Pound Records First Post-Brexit Gain as Historic Selloff Abates: sterling gets ‘brief reprieve,’ TD Bank’s McCormick says
• Editorial: British Parties Need to Move Faster to Choose Leaders
• Allergan Seeks Smaller M&A for Growth After Pfizer Breakup: CEO Brent Saunders spoke in Bloomberg TV interview

Looking at regional markets, Asia equity markets traded positive, following the US rebound in which the S&P 500 saw its largest intraday gain since March as energy was also bolstered. Nikkei 225 (+1.4%) shrugged off JPY strength and weak retail trade figures to outperform, while ASX 200 (+0.6%) was supported by gains in financials and after WTI climbed above USD 48/bbl. Elsewhere, Chinese markets complete the positive picture in Asia with the Hang Seng (+0.7%) conforming to the upbeat tone, while the Shanghai Comp (+0.3%) benefitted from another significant PBoC liquidity injection. Finally, 10yr JGBs traded relatively flat despite the heightened appetite for riskier assets in Japan, as the BoJ were in the market to acquire JPY 1.15trl in government debt.

Top Asian News

• Nomura Joins Yen Capitulators as Forecast Raised 17% Post- Brexit: Japan’s biggest brokerage now sees 104 per dollar at year-end
• Offshore Yuan Surges on Bets Central Bank Supporting Currency: Nation will take steps to ensure market stability, Premier Li says
• Ex-Lehman Quant Wins Big on Bad China Loans That Scare Soros: Distressed debt investors buy as NPLs climb to 11- year high
• Hong Kong’s ‘Superman’ Li: My Empire Will Be Fine Without Me: Billionaire Li Ka-shing talks about not slowing down
• Wanda Property Deal Faces Hurdles as APG Balks Over Price: $460b Dutch fund manager says Wang’s offer is too low

European equities trade higher for a second day, with notable upside in material and financial names, allied with this, equities are likely to benefit from month-end rebalancing, according to Goldman Sachs . Additionally, peripheral banks continue to outperform in a similar fashion to yesterday relative to the heavy losses seen on Friday and Monday post the Brexit vote. Elsewhere, credit markets have been somewhat tame this morning as the German 10-yr benchmark trades in tight range with yields across the curve relatively unchanged, while peripheral yields continue to tighten amid the risk on sentiment.

Top European News:

• Vodafone Weighs Post-Brexit Move as CEOs Seek Europe Access: ‘not yet possible to draw any firm conclusions’ on HQ location
• Ikea Recalls 29 Million Dressers After Six Children’s Deaths: 82 incidents are also linked to tip-over risk with furniture
• Homeserve Confirms it Continues to Trade in Line With Guidance: maintains long term expectation of achieving a 20% margin in U.S. business
• McCarthy & Stone Says Brexit Vote Has Introduced Uncertainty: may hit timing, cost of conversion of orders into completions
• Swiss Re Sees Life Premium Growth in ’16, Slowdown in Em. Mkts: sees continuing pressure on non-life

In FX, the Bloomberg Dollar Spot Index slid 0.1% following a 0.5 percent loss in the last session, amid speculation about the path of Fed interest rates. Sterling advanced for a second day against the dollar as investors await Britain’s plan for its extrication from the 28-nations bloc. “Markets have calmed down somewhat,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “We may see some short term continuation of the recovery in the pound if there is an increased chance of a new prime minister who can secure the access of the U.K. to the single market. But uncertainty is still high and market participants are jittery.” The yen rose 0.1 percent following a 0.7 percent decline on Tuesday. Nomura Holdings Inc. became the latest brokerage to raise its year-end forecast for the currency and now expects a 17 percent increase after the U.K.’s decision to leave the EU spurred a rush for it as a haven. The MSCI Emerging Markets Currency Index added 0.5 percent. South Africa’s rand led the advance, rising 1.1 percent, followed by a 1 percent gain in South Korea’s won. Indonesia’s rupiah added 0.1 percent, extending this week’s increase to 1.6 percent and heading for the highest close in two months. The central bank said it will intervene in the foreign-exchange market to prevent the rupiah from gaining too much from a possible increase in inflows following a recently passed tax amnesty law. The offshore yuan strengthened for the first time in five days, gaining 0.3 percent in just over an hour. Chinese authorities intervened via banks to support the offshore yuan in morning trading, according to people with knowledge of the matter. The People’s Bank of China didn’t immediately respond to questions sent by fax from Bloomberg.

In commodities, the Bloomberg Commodity Index extended Tuesday’s 1.9 percent rally with a 0.3 percent advance. Gold recovered most of the previous session’s losses, adding 0.5 percent to $1,318.62 an ounce on speculation that the Fed’s interest rate policy will boost the precious metal’s allure. West Texas Intermediate crude climbed 1 percent to $48.35 a barrel, building on last session’s 3.3 percent jump. U.S. oil inventories fell by 3.86 million barrels last week, the American Petroleum Institute was said to have reported, ahead of government data due on Wednesday. Cotton futures for December delivery rose 0.4 percent to 66.1 cents a pound on ICE Futures U.S. in New York. Prices extended Tuesday’s 2.3 percent rally and are trading near the highest since August 2015. U.S. farmers probably planted fewer acres than previously expected, after rain disrupted fieldwork in some areas, according to a Bloomberg survey before the U.S. Department of Agriculture updates its estimate on Thursday.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities enter the North American crossover in positive territory with energy names leading the way higher following last night’s API draw
• Following on from the calm seen on Tuesday, FX markets have again displayed a propensity towards steady risk sentiment, with the commodity currencies faring well in particular
• Looking ahead, highlights include US Pending home sales, PCE’s and DOE’s, ECB’s Draghi (Dove)
• Treasuries mixed in overnight trading with long-end outperforming as global equities and gold rally on potential for monetary stimulus.
• European Union leaders said there could be no turning back for the U.K. after Prime Minister David Cameron used his last EU summit to express disappointment at his failure to win the referendum he called on Britain’s membership
• Brexit has thrust Scotland’s independence back into play just two years after the nationalists suffered defeat in a referendum to leave the U.K.
• The City of London is facing the first direct threat to its role as Europe’s dominant financial center as French President Francois Hollande takes aim at a key pillar of the U.K. industry
• France’s 2017 presidential election may hinge on a debate about the European Union membership in the aftermath of the U.K. vote to leave the bloc, President Francois Hollande said
• By voting to leave the European Union, Britons have delivered a potential windfall to tourists eager to snatch up Burberry trenchcoats, Harrods Stilton and Liberty scarves on the cheap
• Gold’s investment case has been strengthened by the U.K.’s vote to quit the European Union as the fallout may spur the world’s central banks to step up easing, hurting currencies and favoring bullion, according to Marc Faber
• Circle Jan. 31, 2018, on the calendar. That’s the soonest the Federal Reserve hikes next. At least if money market derivatives are to be believed.
• The number of Chinese bond defaults so far this year already is triple the figure for all of 2015. The number of downgrades has also tripled
• The PBOC intervened via banks to support the offshore yuan in morning trading as authorities wants to maintain stability in the currency, according to people with knowledge of the matter
• Puerto Rico and its agencies are facing $2 billion of bond payments due Friday, and Governor Alejandro Garcia Padilla has said the U.S. territory simply doesn’t have the money

US Event Calendar

• 7am: MBA Mortgage Applications, June 24 (prior 2.9%)
• 8:30am: Personal Income, May, est. 0.3% (prior 0.4%)
• 8:30am: Personal Spending, May, est. 0.4% (prior 1%)
• 9:30am: Fed’s Yellen, ECB’s Draghi speak in Sintra, Portugal
• 10am: Pending Home Sales m/m, May, est. -1.1% (prior 5.1%)
• 10:30am: DOE Energy Inventories

DB’s Jim Reid concludes the overnight wrap

Markets yesterday were certainly in a much improved mood as a tentative rally swept through risk assets following two days of heavy losses. Look no further than the Pound which closed up +0.90% versus the US Dollar at 1.3344, although it did actually tip above 1.340 in the early afternoon before paring gains again into the evening. Equity markets emerged from the abyss meanwhile. The FTSE 100 (+2.64%), Stoxx 600 (+2.57%), DAX (+1.93%), IBEX (+2.48%) and FTSE MIB (+3.30%) all closed up as beaten down banks staged a recovery. Indeed UK financials had a much better day although that was before Moody’s made the move to revise lower its outlook on 12 British banks and lenders, as well as cutting the outlook for the UK banking system to negative from stable.

Across the pond the S&P 500 closed up +1.78% which was actually the most since March 1st. Credit markets were in a similar vein of form with CDX IG rallying 6.5bps. Interestingly primary markets appeared to get the green light for the door to open again. Molson Coors was out with a four-tranche $5.3bn deal which is said to be the first US IG deal since the referendum last week. Notably the deal was said to be 6x oversubscribed so a good sign that appetite is still clearly strong for those with cash ready to be put to work.

The other news to report this morning is the tragic event which unfolded in Turkey last night where a suicide attack at Istanbul’s main international airport has resulted in the death of at least 32 people, with a further 60 people said to be injured according to the BBC. Details are still sketchy but we’d expect further information to be released in due course.
That news emerged towards the US close last night and markets wise we’ve not seen too much of a reaction in Asia this morning. The bulk of bourses are instead following the lead from the European and US sessions yesterday. Leading the way is the Nikkei which is currently up +1.44%, while the Kospi (+1.39%) is closely following. The Hang Seng (+0.69%), Shanghai Comp (+0.45%) and ASX (+0.92%) are also up while credit markets are generally 2-3bps tighter. FTSE 100 futures are currently up over 1% too while Sterling is -0.20% weaker as we type.

Yesterday’s economic dataflow didn’t add too much to the debate. In the US the third reading for Q1 GDP was revised up to +1.1 qoq from +0.8% which is a touch better than expected helped by stronger net exports, although consumption did disappoint a little. The upward revision to corporate profits caught our eye however, with profits revised up to +1.8% qoq from the previously reported +0.3% qoq gain. Meanwhile, also better than expected was the June consumer confidence index reading which printed at 98.0, a rise of 5.6pts from May after expectations had been for just a 1pt rise. That reading is actually the highest level since October last year although clearly it’s worth taking with a pinch of salt given the cut-off data for the survey was June 16th and a week prior to the UK referendum. Elsewhere, the Richmond Fed manufacturing PMI was disappointing at -7 (vs. +3 expected), a fall of 6pts. Lastly the S&P/Case-Shiller house price index in April rose slightly less than expected during the month at +0.45% mom (vs. +0.58% expected).

Looking at the day ahead, we’d imagine that much of the focus will again be at the EU Leaders summit in Brussels which continues for a second day. Datawise we’ve actually got a fair bit to get through. This morning in Europe we’ll get the latest consumer confidence report for Germany, as well as house price data in the UK. Later on we then get the money and credit aggregates numbers in the UK before the June confidence indicators for the Euro area are released. This afternoon we’ll firstly get the June CPI report in Germany, before attention turns across the pond where we will get the May personal income and spending reports, as well as the PCE core and deflator readings (the latter two are both expected to have risen +0.2% mom). Also due out today in the US is the May pending home sales report. Elsewhere, a number of ECB speakers are due to speak at the ECB forum in Portugal again today, while the Fed is also due to release results from the second part of its bank stress tests this evening.

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Submitted by Olav Dirkmaat via UFM Market Trends,

The delinquency rate on loans is key in understanding banking. It answers one question: what percentage of loans is overdue for payment? The delinquency rate is by far the most useful indicator for “credit stress.” It seems, however, as if delinquency no longer counts. Few are paying attention to the quick and sudden rise of the delinquency rate. What does it tell us and is a new banking crisis imminent?

This Is What Happened after Janet Yellen Hiked the Fed Funds Rate in December

I have said it many times over and I will repeat it here: the last time around, it took Fed-chairman Alan Greenspan over two years and seventeen rate hikes to bring the Fed funds rate from a then all-time-low of 1% to 5.25%, before the U.S. economy suffered the worst recession since the 1930s. We are not so lucky this time.

Greenspan’s rate hikes didn’t affect delinquency rates straight away. Credit stress was subdued until a year after Greenspan’s last hike. Only in the first quarter of 2007, delinquency rates began to move higher. The reason is as clear as the water surrounding the Bahamas: in the years preceding the Great Recession credit growth was mainly focused on the U.S. housing market.

Credit growth was mostly driven by mortgage lending. Mortgages were generously provided by banks, but increasingly to subprime borrowers (subprime referring to their poor credit). Yet these subprime borrowers didn’t pay higher interest rates on their mortgages the moment Alan Greenspan began hiking rates. But as soon as their (promotional) teaser rates resetted, they started “feeling the Alan.” Delinquency rates went through the roof and the U.S. economy into recession.

Teaser rates, the low initial interest rate a borrower pays for the first few years, were responsible for the lag between Greenspan’s rate hikes and the 2008 recession.

More Fragile

Today, the Federal Reserve is ignoring a very inconvenient truth: the global economy is much more fragile than the last time around. And we have no teaser rates in today’s subprime credit (unless we of course consider oil producers that hedged oil prices by buying futures as something akin to “teaser rates”).

This time around, we will certainly not need seventeen rate hikes or three years before pushing the economy into recession.

In fact, we now know what happened after Janet Yellen increased the Fed funds rate with a mere quarter-percentage point: the delinquency rate on commercial and industrial loans increased 50%. That is right. In a single quarter delinquency rates in the U.S. banking sector exploded from 1% to 1.5%. The cycle has turned.

This Is Why Nobody Is Paying Attention

Why is nobody paying attention to this seemingly undeniable shift in the credit cycle? Why does the Federal Open Market Committee (FOMC) not even mention it? Why are the alarm bells not ringing in both Fed board rooms and the financial press?

The only answer to these questions is that the Fed is committing a capital sin. The headline number, the delinquency rate on all loans, decreased in the first quarter of 2016 from 2.20% to 2.17%. That ignores, however, the underlying pressures building up inside banks’ balance sheets. Fed-officials seem to focus on the headline number, while ignoring the deteriorating fundamentals.

With rising home prices, a vibrant housing market, increasing employment and interest rates at the lowest levels in world history, defaults on mortgage and credit card debt are reaching all-time lows. Yet delinquency on mortgages and credit cards tend to lag the business cycle. Typically, they only rise when we already are in recession, just as unemployment tends to be a lagging indicator.

 

^{The headline number is fooling Fed-officials; delinquency rates are still declining. But the delinquency rate on all bank loans (the headline number) has no predictive power; it just follows a random pattern. Source: St Louis Fed}

 

Even if we are on the verge of a new banking crisis, the headline number will never tell us so.

Which Loans Are Increasingly Overdue?

If delinquency rates on consumer credit (mortgages and credit card debt) will not help us in estimating how probable a new banking crisis is, then which delinquency rates do matter? And why did I call them “shocking”?

Let’s first break down a bank portfolio. Bank loans can we divided into three groups:

• Consumers
• Businesses
• Real estate (both commercial and residential)

(Just for the sake of comparison, U.S. banks currently hold $1,300 billion in consumer debt, $1,810 billion in commercial and industrial debt, and over $3,000 billion in real estate debt.)

Banks lend money to consumers for buying homes (mortgages) or consumer goods (credit card debt). We concluded that delinquency rates on those loans tend to lag the business cycle.

What’s left?

Loans to businesses, in whatever form or shape they come. Most of these loans are pegged to an interest rate benchmark, for instance the LIBOR. After the Fed’s first rate hike in December, the U.S. dollar 12-month LIBOR went up from approximately 0.8% to 1.3%. Marginal borrowers are slowly getting pushed into bankruptcy.

December’s rate hike clearly resulted in a change of tides: delinquency rates have bottomed and are on their way up. And do not forget the following: the fact that delinquency rates no longer decrease but began to increase, has always been a clear warning signal for a recession — at least during the past twenty years. And over that same period, this indicator never gave a “false positive,” in contrast to many other (recession) indicators.

 

^{A clear danger sign: delinquency rates on commercial and industrial loans are creeping up. Source: St Louis Fed}

 

^{In dollar terms the shift is even more pronounced. This is of course the result of our staggering debt levels, which are not apparent in the relative numbers. Source: St Louis Fed}

 

^{In line with increasing loan delinquencies, charge-off rates on commercial and industrial loans are picking up as well (charge-off rates tend to lag somewhat). Source: St Louis Fed}

 

Delinquency Rates in Europe

The delinquency rate in Europe is also on the rise. Yet, we do have to single out the countries that skew this eurozone average. Italian banks in particular are suffering from an unbelievably high delinquency rate. The delinquency rate in Italy is at such extreme levels that the country might turn the euro crisis in front page news again (if for once Greece remains on the sidelines).

 

^{The delinquency rate on bank loans in Europe is also on the rise; here too, at least in the periphery countries, it appears the credit cycle has turned. Source: European Central Bank (CBD2, ‘gross non-performing debt instruments’)}

 

Keep a Close Eye on Delinquency

What is next? We will have to wait and see to find out what delinquency rates have done in the second quarter. However, it is clear that the tide has turned. It is irrelevant whether the Federal Reserve will hike rates in July or September. Consensus currently says we should expect two more rate hikes this year. If that is true, we can expect delinquency rates to move up further in the coming quarters.

In 2006 it was exactly twelve months after delinquency rates bottomed that the recession began. If the same period applies, we are due for a recession. In the first quarter of the Great Recession in 2008, delinquency rates were only 1.45%. We are already above that level. On the flipside, however, we should not ignore that it took three years of rising delinquency rates before the economy entered into recession in 2001. Credit cycles are not an exact science. Yet the trend is clear and Fed chair Janet Yellen should be terrified about this disturbing development.

The fact that increasing loan delinquency coincides with mountains of debt maturing in 2016 and 2017 is a topic for next time.

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New research out by the Pew Research Center shows an interesting development in the United States. Using Census Bureau information released with 2014 population estimates, Pew found that the US is becoming ever more diverse, at the local level as well as nationally.

In 2014, 364 counties, independent cities and other county-level equivalents did not have non-Hispanic white majorities, the most in modern history, and more than twice the level in 1980.

The increase in the number of counties that did not have a non-Hispanic white majority was due in large part to the growth of the Hispanic population.

From Pew Research

That year – the first decennial enumeration in which the nation’s Hispanic population was comprehensively counted – non-Hispanic whites were majorities in all but 171 out of 3,141 counties (5.4%), according to our analysis. The 1990 census was the first to break out non-Hispanic whites as a separate category; that year, they made up the majority in all but 186 counties, or 5.9% of the total. (The Census Bureau considers Hispanic to be an ethnicity rather than a race; accordingly, Hispanics can be of any race.)

 

Since then, the nation’s Hispanic population has more than doubled, from 22.4 million to 55.4 million, powering the increase in majority-minority counties. Last year, 94 counties had Hispanic majorities – just over twice the number of majority-Hispanic counties in 1990 (45), and one more than the number of counties last year with non-Hispanic black majorities

Overall, non-Hispanic whites are less than a majority in four states, and in a further indication of just how diverse the US is becoming, in none of those states does a single racial or ethnic group have a majority.

All in all, non-Hispanic whites are less than a majority in four states – California, Texas, New Mexico and Hawaii – as well as the District of Columbia. In fact, in none of those places does a single racial or ethnic group have a majority: California has almost equal shares of Hispanics (38.6%) and non-Hispanic whites (38.5%); non-Hispanic whites are the plurality in Texas (43.5%); Hispanics in New Mexico (47.7%); blacks in D.C. (47.4%); and Asians in Hawaii (36.4%).

* * *

This is an important development to pay attention to because as the US becomes more diverse, everything from the economy (consumer preferences, etc) to the political landscape can be significantly impacted… for instance, election advertising spend and wall-building jobs.

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Submitted by Doug Bandow via NationalInterest.org,

Watching the Brexit campaign generated mixed feelings: it was a little like the man who saw his mother-in-law drive his new Mercedes off a cliff. In the United Kingdom, some people who hated free trade, immigration and market innovation challenged the officious, wannabe superstate headquartered in Brussels. Who to cheer for?

We should cheer for the Brexiteers, who deserve at least a couple of hurrahs. The European Union created a common market throughout the continent, an undoubted good, but since then has focused on becoming a meddling Leviathan like Washington, DC. For Britain, the virtues of remaining appeared to pale in comparison to the likely costs of continued subservience to Brussels. In a variety of imperfect ways, Brexit promoted liberty, community, democracy and the rule of law. In short, the good guys won.

Here are sixteen reasons why the United Kingdom was better off Brexiting:

1. Average folks took on the commanding heights of politics, business, journalism and academia and triumphed. Obviously, the “little guy” isn’t always right, but the fact he can win demonstrates that a system whose pathways remain open to those the Bible refer to as “the least of these.” The wealthiest, best-organized and most publicized factions don’t always win.

 

2. Told to choose between economic bounty and self-governance, a majority of Britons chose the latter. It’s a false choice in this case, but people recognized that the sum of human existence is not material. The problem is not just the decisions previously taken away from those elected to govern the UK; it’s also the decisions that would have been taken away in the future had “Remain” won.

 

3. Those governed decided that they should make fundamental decisions about who would rule over them. The Eurocrats, a gaggle of politicians, bureaucrats, journalists, academics, lobbyists and businessmen were determined to achieve their ends no matter what the European people thought. A constitution rejected? Use a treaty. A treaty rejected? Vote again. A busted monetary union? Force a political union. And never, ever consult the public. No longer, said the British.

 

4. The rule of law will be respected—or at least not flagrantly flouted. Those signing up as EU members did not realize that the EU would be a transfer union. At least some countries likely would not have ratified the Lisbon Treaty, expanding Brussels’ writ, had they realized that explicit strictures against bailouts would be ostentatiously ignored. No doubt the usual suspects believed they were doing the Lord’s work by violating legal guarantees. But today no one living under the EU has any assurance that laws made, rules issued and promises offered would be kept.

 

5. Routine incantations of the need for “more Europe” and importance of “European solidarity” no longer will be confused with arguments. Those in charge always want more—more money to distribute, publicity to satisfy, rules to enforce and power to wield. Their vision of “more Europe” is Europe giving them more. “European solidarity” means others caring for them after they have wasted everything under their control.

 

6. Democracy will have triumphed over bureaucratic inertia. The EU is known for its “democratic deficit”, a Hydra-headed, unelected executive and a parliament chosen by people usually voting on domestic issues, using the polls for the European Parliament to punish errant governments at home. The Brussels bureaucracy has become the perfect means to impose policies that lack political support among member governments and peoples.

 

7. The pretensions of the EU as Weltmacht never looked so silly. There is a flag that no one salutes, and an anthem no one sings. There are multiple presidents: three, four or five? There is enervating duplication, including an EU foreign minister and diplomatic service along with those representing twenty-eight individual member states. Constant talk of creating a continental military while countries steadily shrink military outlays. Insistence that all which is good and decent comes from the EU as ever more people organize and vote against it.

 

8. The great satisfaction of watching smug smiles disappear from the faces of Eurocrats on both sides of the English Channel. The Brexit battle never was supposed to be a fair contest. It was intended to solve a Tory political problem, allowing the irreconcilables to make fools of themselves while the best and brightest led voters to the light. But it didn’t work out that way.

 

9. Demonstrating that other EU members can throw off the cloak of, if not tyranny, bureaucratic obsession. Most previous continental episodes of unplanned independent thinking were crushed—the French and Dutch votes against the constitution, the Irish vote against the Treaty of Lisbon, opposition to bailouts and European Central Bank abuses. The Eurocrats always seemed to win. Until now.

 

10. The recognition that most human decisions are not wrong but different, and need not be uniform across a continent, especially one made up of such diverse peoples. Common economic regulations, currencies, employment policies, weights and measures, farm programs and legal rights are convenient. However, convenience is not the highest good. People often value different approaches and standards and are entitled to live their lives as they wish, even if inconsistent with the continent’s most progressive thinking.

 

11. England, which pays most of the bills, ignored political blackmail from Scotland, which threatened to hold another independence referendum. It’s not clear why the Scots didn’t choose to leave in 2014. One suspects too many of them were hooked on subsidies from London, which raised the question why the English were so determined for the Scots to stay. Anyway, in the EU poll the English felt as free as the Scots to vote as they wished.

 

12. The Brits ignored silly scaremongering about how Europe and, indeed, Western civilization, would be threatened if the UK left the EU. Britain would still be a member of NATO—just as Turkey belongs to the military alliance but not the EU. The latter is irrelevant to security: Proposals for an EU military have gone nowhere, in part due to steadfast British opposition. At the margin a more hawkish London might push the EU in a slightly more hawkish direction in the few cases, like Russia, when the continent moved together. But if Vladimir Putin really were the next Hitler, slightly less anemic sanctions wouldn’t stop him. World peace does not depend on Britain in or out of the EU.

 

13. Schadenfreude is a terrible thing, but almost all of us glory in the misfortune of at least some others. The recriminations among the Remain camp in Britain are terrible to behold. Labour Party tribunes blame their leader Jeremy Corbyn, whose Euroskeptic past created suspicions inflamed by his criticisms of the EU while nominally praising it. His supporters blame the Scottish nationalists for not turning out their voters. Former Liberal-Democrat Party leader and deputy Prime Minister Nick Clegg trashed Cameron and Chancellor of the Exchequer George Osborne for seeking political advantage by holding the referendum. The Scots are mad at the English. Irish “republicans” in Northern Ireland also are denouncing the English, while their longtime unionist rivals are trashing the republicans. The young are blaming the old for ruining their futures. Apparently, America isn’t the only home for myopic bickering.

 

14. Sometimes the advocate of a lost cause triumphs. Nigel Farage has been campaigning against the EU forever, it seems. Yet every advance appeared to trigger a retreat. His United Kingdom Independence Party picked up support, but then had to shed some of those whose views really were beyond the pale. UKIP was able to break into the European Parliament, which it hated, but won only one seat at Westminster, despite receiving 3.9 million votes, or 12.6 percent of the total, in last year’s election. One reason was that Cameron and the Tories stole his issue, promising a referendum on the EU—in which they then opposed separation. Election night he admitted that it looked like the UK would choose to remain. Except the British people ended up taking his advice.

 

15. A bracing reminder that people want to believe that their views matter, that what they do actually makes a difference and those claiming to represent them actually listen. Today’s political consensus, in which certain concerns are treated as inappropriate for polite company, drive otherwise normal decent folk to the fringes to find political champions willing to speak for them. Debating such ideas might threaten values and policies held by those steeped in modernity and liberalism, including people like me. But otherwise frustration will boil over in far more dangerous ways.

 

16. The pleasure of disrupting a choreographed ending amid much crying and gnashing of teeth. Election night began with the comfortable assumption among those at the top of the social pyramid that the forces of tolerance, diversity and rationality had carried the day. Then came the shock of watching Brexit improbably take the lead in early returns. Remain “victory” parties emptied and politicians who orchestrated the Remain campaign contemplated the ruin of their careers. Those at the top suddenly found themselves in the political queue well behind their rural and working class compatriots.

Could Brexit turn out to be a mistake? Yes. Unfortunately, we live in an uncertain world with imperfect knowledge. We can only guess at the future. Both the UK and EU must handle separation with maturity unusual for politicians, especially those in Brussels. Europeans should apply the important lessons learned in changing EU policy and operations. The Brits must unilaterally follow an outward economic and political policy. None of these will be easy and much could go wrong.

However, Britain has been capably governing itself for hundreds if not thousands of years. In that light, Brexit appears likely promote the right people and ends. At its best, Britain’s departure will revive the UK’s most basic principles of self-governance and spur EU members to rethink the “European Project’s” attempt to create a superstate by stealth. Those wouldn’t be bad results for a measure that was never supposed to have much chance of passing.

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Submitted by John Whitehead via The Rutherford Institute,

“Our carceral state banishes American citizens to a gray wasteland far beyond the promises and protections the government grants its other citizens… When the doors finally close and one finds oneself facing banishment to the carceral state—the years, the walls, the rules, the guards, the inmates…the incarcerated begins to adjust to the fact that he or she is, indeed, a prisoner. New social ties are cultivated. New rules must be understood.”

– Ta-Nehisi Coates, The Atlantic

In a carceral state – a.k.a. a prison state or a police state – there is no Fourth Amendment to protect you from the overreaches, abuses, searches and probing eyes of government overlords.

In a carceral state, there is no difference between the treatment meted out to a law-abiding citizen and a convicted felon: both are equally suspect and treated as criminals, without any of the special rights and privileges reserved for the governing elite.

In a carceral state, there are only two kinds of people: the prisoners and the prison guards.

With every new law enacted by federal and state legislatures, every new ruling handed down by government courts, and every new military weapon, invasive tactic and egregious protocol employed by government agents, “we the people”—the prisoners of the American police state—are being pushed that much further into a corner, our backs against the prison wall.

This concept of a carceral state in which we possess no rights except for that which the government grants on an as-needed basis is the only way I can begin to comprehend, let alone articulate, the irrational, surreal, topsy-turvy, through-the-looking-glass state of affairs that is being imposed upon us in America today.

As I point out in my book Battlefield America: The War on the American People, we who pretend we are free are no different from those who spend their lives behind bars.

Indeed, we are experiencing much the same phenomenon that journalist Ta-Nehisi Coates ascribes to those who are banished to a “gray wasteland far beyond the promises and protections the government grants its other citizens” : a sickening feeling, a desire to sleep, hopelessness, shame, rage, disbelief, clinginess to the past and that which is familiar, and then eventually resignation and acceptance of our new “normal.”

All that we are experiencing—the sense of dread at what is coming down the pike, the desperation, the apathy about government corruption, the deeply divided partisanship, the carnivalesque political spectacles, the public displays of violence, the nostalgia for the past—are part of the dying refrain of an America that is fading fast.

No longer must the government obey the law.

Likewise, “we the people” are no longer shielded by the rule of law.

While the First Amendment—which gives us a voice—is being muzzled, the Fourth Amendment—which protects us from being bullied, badgered, beaten, broken and spied on by government agents—is being disemboweled.

For instance, in a recent 5-3 ruling in Utah v. Strieff, the U.S. Supreme Court opened the door for police to stop, arrest and search citizens without reasonable suspicion or probable cause, effectively giving police a green light to embark on a fishing expedition of one’s person and property, rendering Americans completely vulnerable to the whims of any cop on the beat.

In a blistering dissent, Justice Sonia Sotomayor blasted the court: “This case allows the police to stop you on the street, demand your identification, and check it for outstanding traffic warrants—even if you are doing nothing wrong… So long as the target is one of the many millions of people in this country with an outstanding arrest warrant, anything the officer finds in a search is fair game for use in a criminal prosecution. The officer’s incentive to violate the Constitution thus increases…”

Just consider some of the many other ways in which the Fourth Amendment—which ensures that the government can’t harass you, let alone even investigate you, without probable cause—has been weakened and undermined by the courts, the legislatures and various government agencies and operatives.

Americans have no protection against mandatory breathalyzer tests at a police checkpoint, although mandatory blood draws violate the Fourth Amendment.

 

Ignorance of the law is defensible if you work for the government.

 

Police officers can use lethal force in car chases without fear of lawsuits.

 

Police can perform a “no-knock” raid as long as they have a reasonable suspicion that knocking and announcing their presence would be dangerous or futile.

 

Police can carry out warrantless searches on homes, cars, persons and property based on a “reasonable” concern that a suspect (or occupant) might be attempting to flee or destroy evidence.

 

Police can forcibly take your DNA, whether or not you’ve been convicted of a crime.

 

Police can subject Americans to virtual strip searches, no matter the “offense.”

 

Police have free reign to use drug-sniffing dogs as “search warrants on leashes.”

 

Police can conduct sobriety and “information-seeking” checkpoints.

 

Police officers are free to board a bus, question passengers, and ask for consent to search without notifying them of their right to refuse.

 

Police can arrest you for minor criminal offenses, such as a misdemeanor seatbelt violation, punishable only by a fine.

 

Refusing to answer when a policeman asks “What’s your name?” can rightfully be considered a crime. No longer do Americans, even those not charged with any crime, have the right to remain altogether silent when stopped and questioned by a police officer.

 

Police may stop any vehicle as long as they have reasonable cause to believe that a traffic violation occurred. A vehicle can be stopped even if the driver has not committed a traffic offense.

 

Police officers can stop cars based only on “anonymous” tips. Police can also pull you over if you are driving too carefully, with a rigid posture, taking a scenic route, and have acne.

What many Americans fail to understand is the devastating amount of damage that can be done to one’s freedoms long before a case ever makes its way to court by government agents who are violating the Fourth Amendment at every turn. This is how freedoms, long undermined, can give way to tyranny through constant erosion and become part of the fabric of the police state through constant use.

Phone and email surveillance, databases for dissidents, threat assessments, terror watch lists, militarized police, SWAT team raids, security checkpoints, lockdowns, roadside strip searches: there was a time when any one of these encroachments on our Fourth Amendment rights would have roused the public to outrage. Today, such violations are shrugged off matter-of-factly by Americans who have been assiduously groomed to accept the intrusions of the police state into their private lives.

So when you hear about the FBI hacking into Americans’ computers without a warrant with the blessing of the courts, or states assembling and making public terror watch lists containing the names of those who are merely deemed suspicious, or the police knocking on the doors of activists in advance of political gatherings to ascertain their plans for future protests, or administrative government agencies (such as the FDA, Small Business Administration, Smithsonian, Social Security, National Oceanic and Atmospheric Administration, U.S. Mint, and Department of Education) spending millions on guns and ammunition, don’t just matter-of-factly file it away in that part of your brain reserved for things you may not like but over which you have no control.

It’s true that there may be little the average person can do to push back against the police state on a national level, but there remains some hope at the local level as long as we recognize that the only way the police state can truly acquire and retain power is if we relinquish it through our negligence, complacence and ignorance.

Unfortunately, we have been utterly brainwashed into believing the government’s propaganda and lies. Americans actually celebrate with perfect sincerity the anniversary of our independence from Great Britain without ever owning up to the fact that we are as oppressed now—more so, perhaps, thanks to advances in technology—than we ever were when Redcoats stormed through doorways and subjected colonists to the vagaries of a police state.

You see, by gradually whittling away at our freedoms—free speech, assembly, due process, privacy, etc.—the government has, in effect, liberated itself from its contractual agreement to respect our constitutional rights while resetting the calendar back to a time when we had no Bill of Rights to protect us from the long arm of the government.

Aided and abetted by the legislatures, the courts and Corporate America, the government has been busily rewriting the contract (a.k.a. the Constitution) that establishes the citizenry as the masters and agents of the government as the servants. We are now only as good as we are useful, and our usefulness is calculated on an economic scale by how much we are worth – in terms of profit and resale value – to our “owners.”

Under the new terms of this one-sided agreement, the government and its many operatives have all the privileges and rights and “we the prisoners” have none.

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