Month: October 2018

Arrests Begin As Protesters Storm Capitol Steps; GOP Leader Declares “We Will Not Be Bullied”

After a weeks-long drama that gripped the nation and helped worsen partisan divisions ahead of the Nov. 6 midterm vote, the Senate is finally preparing to hold a confirmation vote for Brett Kavanaugh, President Trump’s nominee to replace the retiring Justice Anthony Kennedy. Undeterred by the GOP’s apparent success in securing the 51 votes it needs to place Kavanaugh on the nation’s highest court, protesters, including the paid activists who have spent the week haranguing Republican lawmakers in an effort to browbeat them into changing their votes, are once again swarming Capitol Hill and the Supreme Court, forcing local police to prepare for what will likely be hundreds of arrests.

Indeed, after Capitol police came with their zipties ready…

…arrests had already begun as of early Saturday afternoon.

Protesters that gathered on the east lawn of the Capitol have already broken through one barricade to occupy the east steps. These protesters were swiftly arrested by police. According to the Hill, protesters hoisted a rainbow of different colored signs and chanted “we don’t want no Kavanaugh” and “Hey, hey, ho, ho, Kavanaugh has got to go!”

Women

Police fenced off the plaza in front of the Capitol building to stop protesters from blocking senators arriving at the building to vote. A constant stream of people were spotted walking from Union Station to join the protest, including – according to the Hill – a woman dressed as Wonder Woman.

Meanwhile, it was quiet inside the building as Senators prepared to vote…

…And majority whip John Cornyn said on the Senate floor on Friday that the Senate “will be not be bullied” by “paid protesters” who many including the president have accused of being in the pocket of billionaire investor George Soros.

Indeed, several of the most high profile confrontations of senators – including the two “hero” survivors who confronted Jeff Flake after Kavanaugh’s testimony (something that is widely believed to have influenced his decision to call for a delay in the vote so the FBI could investigate further) have been staged by activists in the employ of a Soros-funded nonprofit.

“Our vote today was important not only because it will allow us to move forward and conclude this process. It was important because it showed that the U.S. Senate will not be intimidated.”

“We will not be bullied by the screams of paid protesters and name-calling by the mob.”

While protesters denouncing Kavanaugh and supporting sexual assault victims constituted the majority, small groups had gathered in support of the nominee (at grave risk of bodily harm and harassment), according to ABC.

Two

President Trump chimed in on Twitter to praise this small group, saying it was a “beautiful thing to see – and they are not paid professional protesters who are handed expensive signs.”

The mayhem on the Capitol spread as the vote – which is expected between 3 pm and 5 pm – neared.

 

Speaking with the Hill, Amanda Wise, a protester from Washington, DC, said she was “discouraged, but not surprised” that on-the-fence Republican moderates ultimately sided with Kavanaugh.

“I am a Yale [University] grad, I’m also a Yale Law grad, I also went to high school at the National Cathedral in the ’80s and this is all just so frustratingly, terrifyingly familiar,” she said. “And I just feel so impotent and outraged.”

Protesters at the Supreme Court also broke through barricades to take to the steps.

SupremeCourt

Law student protesters were out in force.

Law

Throughout Washington, scenes of protesters triggered by Kavanaugh’s nomination flooded social media.

Kav

Triggered

Triggered

Protesters

Protesters gathered in other cities as well, including outside Sen. Susan Collins’ office in Portland, Maine, to express their outrage over her decision to throw her support behind Kavanaugh. On Facebook, protests organized demonstrations on Saturday in at least 10 other cities including New York, Cleveland, New Orleans and Tucson, Arizona.

But the real mayhem will likely be reserved until after the vote, when scenes of sporadic violence will likely spread, leaving many injured and prompting even more arrests.

 

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The US Spent A Record $523 Billion On Debt Interest In Fiscal 2018

Earlier this week, when the US closed fiscal 2018 on September 30, we reported that US gross national debt jumped by $84 billion on September 28, the last business day of fiscal year 2018; with this last push higher, total gross national debt in fiscal 2018 rose by $1.271 trillion to an all time record of $21.52 trillion.

What is more stunning, is that only six months ago, on March 16, it had for the first time risen above the $21-trillion mark, while a year ago, at the end of September 2017, it was just $20.2 trillion.

The reason for the soaring debt total is, of course, the runaway US budget deficit, which while providing a temporary sugar rush to the US economy comes at a cost of explosive debt. As a reminder, one month ago, the CBO revised its forecast, and now expects the deficit will approach $1 trillion by the end of this fiscal year or one year sooner than disclosed in the CBO’s most recent forecast; in April the agency didn’t expect the deficit to reach $1 trillion until 2020.

Many have asked if any of this actually matters in the grand scheme of things. Last week Bloomberg published a piece titled “Skyrocketing Deficit? So What, Says New Washington Consensus” which explained  that neither Republicans nor Democrats are bothered by the devastating long-term trajectory of US debt, effectively making deficit hawks an extinct species:

In both parties, deficit spenders are gaining ground. That makes Year Two of the Trump administration look increasingly like end-times if you are, for example, the Committee for a Responsible Federal Budget.

“The tax cuts really set off a spiral of irresponsible justifications for not caring about fiscal responsibility,’’ says Maya MacGuineas, president of the CRFB. The group gets funding from the Peter G. Peterson Foundation, a project of the late Wall Street billionaire, who advocated slashing social programs to balance the budget.

One reason why US legislators no longer care about either the deficit or US Federal Debt may be because deficits are supposed to trigger inflation and scare off bond investors. And while until recently, the latter have been all but missing, a sharp repricing took place last week when as we discussed previously, 10Y yields soared in the last three days of the past week amid a vicious repricing of inflationary expectations, which led to a near record bond market rout, a surge in bond market volatility and a sharp selloff in stocks.

As the market’s attention gradually turns to rising rates and interest expense, one number that will stick out is the following: in 2018 the amount spent on interest on US federal debt hit a record high of just over $523 billion.

Another problem is that this rate is artificially low as it reflects historical funding cost as the average 10Y yield for all of 2017 was close to 2.3%. Compare that to current yield of 3.23%, which is already 39% higher. With sharp rate moves higher across the curve, every incremental auction which will roll over debt into a much higher cash interest expense.

And that assumes no incremental supply, which of course is false: already the US Treasury plans to borrow $770 billion in the second half of 2018, a 60% increase from the same period last year.

The net impact, as IFR notes, is “dramatic”: BlackRock estimates that the net supply of Treasury securities will more than double this year, to over $900 billion, and rise to nearly $1.2 trillion in 2019. The market hasn’t had to digest that much government debt since 2010 when the Fed was monetizing the bulk of the US deficit; this time around it’s the opposite and starting this month, the US Central Bank increased the pace at which it shrinks its holdings of Treasury and federal agency bonds to $50 billion a month, adding to supply pressures.

The bottom line: now that the bond vigilantes appear to have woken up from the decade-long slumber, a pernicious positive feedback loop has emerged, one where higher rates lead to more focus on the surge in underlying debt, which in turn brings more attention to rising interest rates, which spooks buyers who demand even higher interest rates as the cycle restarts.

Where and when does it end? Instead of answering, below we show the CBO’s latest baseline case (the pessimistic one is far worse). It is self-explanatory.

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Michael Avenatti Turns Radioactive As Liberals Blame Porn Lawyer For Kavanaugh Nomination

Following Friday’s announcement by GOP swing voter Sen. Susan Collins (R-ME) that she would vote to confirm Brett Kavanaugh to the Supreme Court, the left flipped on one of its recent heroes; Michael Avenatti. 

In a fiery speech announcing her decision, Collins ripped unsupported claims by Avenatti’s client, Julie Swetnick, of that Kavanaugh facilitated a Cosby-esque “gang rape” operation while in high school. 

Some of the allegations levied against Judge Kavanaugh illustrate why the presumption of innocence is so important. I am thinking in particular not of the allegations raised by Professor Ford, but of the allegation that, when he was a teenager, Judge Kavanaugh drugged multiple girls and used their weakened state to facilitate gang rape.

This outlandish allegation was put forth without any credible supporting evidence and simply parroted public statements of others. That such an allegation can find its way into the Supreme Court confirmation process is a stark reminder about why the presumption of innocence is so ingrained in our American consciousness. -Sen. Susan Collins

As a result of Collins calling Swetnick’s claim, liberals began to pile onto Avenatti – blaming him for Kavanaugh’s impending Saturday confirmation, while conservative pundits poked fun. 

While Christine Blasey Ford’s groping allegation may have been believable – and enough to derail the nomination, subsequent claims against Kavanaugh likely derailed what little legitimacy Ford had. 

CNN’s breaking news editor, Kyle Feldscher, took a swing at Avenatti – blaming him for Kavanaugh’s confirmation in a tweet which reads: “Hard to state how much Avenatti’s entrance into this process hurt the Democratic effort to bring down Kavanaugh’s nomination.” (h/t Josh Caplan @ Breitbart) 

Avenatti responded: “You are right. I should have turned my back on my client. Told her to “shut up” and stay quiet because people like you apparently believe assault victims are to blame. This line of thinking is disgusting and offensive to all survivors. And it makes lawyers not want to help them.”

Feldscher replied: “Literally never suggested that, but have a good weekend sir.”

One can imagine that Avenatti vs. Trump in 2020 is no longer in the cards… 

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Think You’re Prepared For The Next Crisis? Think Again

Authored by Adam Taggart via PeakProsperity.com,

Even the best-laid preparations have failure points…

No plan of operations extends with any certainty beyond the first contact with the main hostile force.

~ Helmuth von Moltke the Elder

Everybody has a plan until they get punched in the mouth.

~ Mike Tyson

Scottish poet Robert Burns aptly penned the famous phrase: “The best laid schemes o’ mice an’ men/Gang aft a-gley.” (commonly adapted as “The best laid plans of mice and men often go awry.”)

How right he was.

History has shown time and time again that the only 100% predictable outcome to any given strategy is that, when implemented, things will not go 100% according to plan.

The Titanic’s maiden voyage. Napolean’s invasion of Russia. The Soviet’s 1980 Olympic hockey dream team. The list of unexpected outcomes is legion.

Dwight D. Eisenhower, the Supreme Commander of the Allied Expeditionary Forces in Europe during WW2, went as far as to say: “In preparing for battle, I’ve always found that plans are useless but planning is indispensable.”

This wisdom very much applies to anyone seeking safety from disaster. Whether preparing for a natural calamity, a financial market crash, an unexpected job loss, or the “long emergency” of resource depletion — you need to take prudent planful steps now, in advance of crisis; BUT you also need to be mentally prepared for some elements of your preparation to unexpectedly fail when you need them most.

Here are two recent events that drive that point home.

Lessons From Hurricane Florence

A family member of mine lives in Wilmington, NC, which received a direct hit last month from Hurricane Florence.

Being an avid “prepper” who has lived on the east coast all his life (i.e., well-experienced with the late summer/early autumn hurricane season), he was MUCH more geared up for this storm than his neighbors. He also had nearly a week’s advance notice to top off his preparations as the media tracked Florence’s trajectory following its formation off of the west coast of Africa.

But as ready as he thought he was, he still found he was vulnerable in places he hadn’t anticipated.

While he and his family made it through the storm all right in the end, he experienced numerous failures in his preps throughtout. Here are just a few:

  • Climate-related corrosion — despite careful efforts to store his emergency gear responsibly, he discovered the humid North Carolina climate had ruined several pieces of equipment. The alkaline batteries used in the emergency radios had exploded, corroding the terminals and rendering the devices useless. Similarly, the wick controls on several kersosene lanterns had rusted to the point of inoperability. The lesson here? If you live in an area that experiences excessive conditions (heat/cold/humidity/mold/etc) for even part of the year, you must check your gear regularly to ensure it’s still functional.

  • Incorrect assumptions — Several components did not work as expected when deployed. The “universal” gas line purchased in advance to connect his collection of camping stoves to a large propane tank simply didn’t fit. Similarly, his Gas Tapper siphon failed to work, which he was hoping could help neighbors refuel their generators by transferring gas from their cars. But in every case but one, it simply didn’t work. The takeway? If you haven’t tested a specific piece of gear in advance, under non-emergency conditions, assume it won’t work when you need it.

  • Random fate — Sometimes, as Burns said, plans just go awry. In this case, a diesel truck had been configured to act as a generator and provide electricity to key appliances (freezer, fridge, etc) should the power go out for a prolonged period — which it did. But as random fate would have it, the starter motor failed. The truck sat there like a big useless brick during the blackout. Fortunately, there was another vehicle in the garage set up similarly that did work. The lesson? Always, always have backups in place for any resources that perform an essential function.

Lessons From The Nevada Desert

The 30+ Peak Prosperity members who spent last week at a defensive firearm training program in the Nevada desert received a similar ‘reality check’.

Most who participated already owned firearms and had invested previous hours at their hometown ranges honing their shooting skills. Or so they thought.

What they quickly realized is that shooting at a stationary paper target under controlled conditions is easy. But maintaining the same accuracy and precision under stress is hard.

Simply adding time-pressure makes shooting well exponentially harder. From a distance as short as 5 yards, hitting the target center-mass repeatedly is an easy task when untimed. But put on a 1.5-second time limit to get your shots off — which leaves little time for aiming and spikes your adrenaline levels — and suddenly the misses multiply.

And of course, using a handgun in an acutal kinetic altercation is orders of magnitude more stressful than what we experienced. Low lighting, a moving target who may be armed and/or actively attacking, endangered loved ones, the threat of being seriously injured/killed — these factors will undoubtedly handicap your proficiency to a MUCH greater extent.

We did one simulation drill ‘clearing’ a home, opening doors that may or may not have bad guys behind them. The added uncertainty and awkward ‘real life’ obstacles resulted in a lot of misses and accidentally-killed bystanders. Thank god it was just a simulation.

The hard-hitting insight learned during this experience is: If you haven’t stress-tested your gear and your skills under the same conditions you plan to rely on them in, you’re woefully underprepared. And to think different is dangerously deluding yourself.

For those of you with preparations in place — in case of a home invasion, or a fire, or a week without access to the grocery store, or a grid-down event, etc — have you actually done a ‘dry run’ to explore how smoothly/poorly your plans work in practice?

How Ready Are You, Really, For A Financial Crisis?

Here at PeakProsperity.com, we’ve been vocally warning about the high risk of another global financial crisis on par with (or worse than) that seen in 2008.

Quite honestly, we’ve been warning about this for a long while, as markets have powered higher. While that’s been very frustrating to endure, we see the market’s manic melt-up as further reason to worry — as the fall from today’s over-extended heights will be that much more painful.

And we may finally be seeing the onset of a correction. Wall Street’s ‘Fear Gauge’ is suddenly spiking, signalling that traders expect increased volatility along with falling prices:

Echoes of February Collapse Reappear in Friday Fear Gauge Inversion (Bloomberg)

October 5, 2018, 9:53 AM PDT

The scariest Halloween costume imaginable pales in comparison to a Friday inversion of the VIX futures curve.

A severe sell-off in technology stocks has pushed the front-month VIX futures contract to a premium relative to the second-month contract.

VIX futures are based off the Cboe Volatility Index, a measure of 30-day implied volatility for the S&P 500 Index that’s often called the “fear gauge.”

Typically, the curve is in contango — that is, upward sloping — because the outlook for U.S. equities is more uncertain over longer time periods than shorter ones. The historical pattern of realized volatility shows it’s prone to outsized spikes but generally trades in a modest range.

A curve that’s in backwardation — the opposite of contango — indicates traders are acutely concerned with the near-term outlook for equities. This structure also provides a tailwind to investors looking to go long volatility through exchange-traded products.

The same situation happened on a pair of inauspicious Fridays. The VIX futures curve inverted on Aug. 21, 2015 and Feb. 2, 2018.

Given the spasm of instability that has rocked the bond and stock markets over the past 48 hours, Chris Martenson just issued a warning to Peak Prosperity’s enrolled subscribers, explaining why the recent activity is so concerning.

Here’s just a small part of what he had to say:

Joining the 10-year in breaking its long-term downtrend line are the 30-year and 5-year bond yields:

Dialing in a little closer, we see that the 30-year bond yield has more recently carved out a pretty convincing “head and shoulders” pattern which indicates a strong likelihood of heading higher:

Here’s the 5-year bond yield chart. It also looks like a breakout:

What’s fascinating is that as the stock market has only recently started to wobble a bit, the main US Treasurys have been declining in earnest since mid-August:

To recap: what we’re seeing now is very consistent with the end of a major credit-liquidity cycle.  Everything is being sold.  Stocks and bonds.

There’s been no ‘Jell-O moving around the plate’ — which is the flight-to-safety effect where bonds do well on days stocks do poorly, and vice versa.  Both stocks and bonds are being sold off, and bonds have been going first.

As they say on Wall Street: Stocks are for show, but bonds are for dough. Meaning the smart money is in bonds, and they tend to tell the tale first.

So how ready are you, really, if we’re indeed headed into another 2008-style market crash?

One in which the major stock market indexes could drop 50% or more in a matter of just a few weeks? Where housing prices could drop by 30-40% (or more) and home buyers go on strike? Where bond prices relentlessly drop as interest rates march higher, freed from a decade-long suppression at historic lows? Where mass layoffs return, and hundreds of thousands of workers lose their jobs each month?

Things could get ugly. Really, really ugly. 

Are the steps you’ve put in place to-date sufficient? Have you simulated what’s most likely to happen to your portfolio, your job, and your living standards under a variety of scenarios?

I think for most reading this, the honest answer is “no”. No one is perfectly prepared. You can always do more.

For those feeling more vulnerable than they’d like, here are our recommendations for using the remaining time we have (which may not be much) wisely:

  1. Attend to any unfinished basics — Money is just one component of the true wealth you need to protect. Another Great Recession will have impact on your home, your relationships, your community, your mental state, etc. First, take our Self-Assessment (it’s free) to see where you’re currently most vulnerable. Then, review our guide for developing resilience (also free) for guidance on the specific steps to take to best protect yourself.

  2. Crash-test your portfolio with a professional financial advisor — How vulnerable are your current financial holdings to a major market disruption? If stock/bond/home prices suddenly drop from here, and/or you lose your job, what impact will that have on your lifestyle and your retirement plans? If asset prices fall and you have dry powder to put to use, what logic will dictate the investments you make at that time? These are all critical exercises to go through with your professional financial adviser before the next crash arrives. Contact your adviser to go through them soon — or, if you don’t have a good one, consider scheduling a crash-test consultation (it’s free) with the adviser Peak Prosperity endorses.

  3. Monitor carefully the key crash indicators — Watching the right indicators is the best way to avoid getting caught unawares by the next financial correction. This was a principal theme of our recent New York Summit featuring David Stockman, Chris Martenson and James Howard Kunstler. You can watch several short video clips from the event (again, for free) by clicking here.

And finally, read the report WARNING: The Markets Are Suddenly Looking Very Sick that Chris Martenson just released. It’s an excellent composition of the recent developments that point to a market breakdown in-progress.

Remember: the only valueable preparations are those put in place before crisis arrives.

Or to put it more simply: To fail to plan is to plan to fail.

So get going.

Click here to read Chris’ full report (free executive summary, enrollment required for full access)

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“F**king Historical” – Watch Banksy Painting Self-Destruct At Sotheby’s Auction 

A Banksy painting “self-destructed” Friday evening on the auction podium at Sotheby’s New Bond Street location in London after being sold for 1.04 million pounds.

The spray-painted canvas “Girl With Balloon” was subjected to furious bidding at the Contemporary Art Evening Sale with a winning bid by telephone, fetching more than three times its pre-sale estimate and a record price for the mysterious artist. Shortly after the auction was concluded, an alarm from within the painting sounded, with most of the artwork emerging from the bottom in strips. Hidden within the base of the frame was a shredder.

“We’ve just been Banksy’ed,” Alex Branczik, Sotheby’s European head of contemporary art, said at a press conference after the auction.

“We have not experienced this situation in the past . . . where a painting spontaneously shredded, upon achieving a [near-]record for the artist. We are busily figuring out what this means in an auction context,” he said.

Banksy, who remains one of the most mysterious artists of this era, began his career spray-painting buildings in England and has become a global figure. Some of his works include two policemen kissing, armed riot police with yellow smiley faces, and a chimpanzee with a sign displaying the words “Laugh now, but one day I’ll be in charge.”

A post on Banksy’s official Instagram page showed the moment when auction house officials and bidders were stunned when the artwork self-destructed. He titled the post “Going, going, gone…”

Social media immediately responded.

kimsingh, an Instagram user, said, “You have consistently shown the courage to thumb your nose at the commercialism of art. Bravo !!”

Another user asked, “Was it supposed to stop halfway or did it jam?”

evrthmover said, “Fucking historical.”

Banksy had made his feelings known about the commercial art world in a recent masterpiece titled “I Can’t Believe You Morons Actually Buy This Shit.”

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Are The Voices In Fed President Kashkari’s Head Lying?

Authored by Economic Prism’s MN Gordon, annotated by Acting-Man’s Pater Tenebrarum,

Orchestrated Larceny

The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.

Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]

Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much of it.  This fact accounts for the limited inkling the populace has for why there is a great prosperity imbalance between wage earners and the creams.

If there was a better understanding of the scope and scale of the orchestrated larceny being conducted, practitioners of mass money debasement would be tarred, feathered and paraded down Main Street.

This seems a small penalty for turning markets into casinos and debasing the rewards of an honest day’s work.  Instead, they preserve their misplaced stature through the backwards process of taking the absurdly simple and twisting it up into the inordinately complex.

Several months ago, roughly in mid-May, the yield on the 10-Year Treasury note briefly eclipsed 3 percent.  This prompted numerous articles – including one of our own – on the possible end of the great Treasury bond bubble.  But then, just as quickly as a pickpocket disappears into a crowded street, the yield on the 10-Year Treasury note slipped back below 3 percent.

Now, as the days grow shorter, the yield on the 10-Year Treasury note is again pushing above 3 percent, at roughly 3.22 percent.  The yield on the 30-Year Treasury note – the long bond – is about 16 basis points higher.

10-year yields are trying to get above the 3% level again – and this time it looks like they may actually mean it. [PT]

Both are trending up, though generally at a slower incline than the Fed’s technocratic increases to the federal funds rate.

 

Hearing Voices

No doubt, it is discrepancies like these that compel central bankers to seek metaphysical guidance.  On Monday, for example, Minneapolis Fed President Neel Kashkari did something uncommon.

The man with the crazy eyes – and even crazier ideas – went derelict from his duty of staring at daily Treasury yield  curves.  Instead, with focus and intensity, he directed his full energy into the ether.

Neil Kashkari – it is not too hard to believe that he hears voices. The main question is really: who let him out?  [PT]

From the soft banks along the upper reaches of the Mississippi River, in a moment of weighty meditation, he closed his eyes and opened his ears.  Between slow, deep breaths Kashkari heard first a whisper.  Then soon a murmur.  Before he knew it, he heard voices.  The voices of interest rates.  They were speaking to him.  Here, Kashkari shares what the voices said:

“The bond market is saying, ‘hey we’re not so sure that the U.S. economic growth is going to be very strong in future years.’”

Apparently, these divine words from the bond market, though counter to the Fed’s dot plot, have convinced Kashkari there is no need for further increases to the federal funds rate. Kashkari, without question, is an extreme economic interventionist.  He is also a crackpot.  Though he wears his burdens on his sleeve.

If you recall, as federal bailout chief, he functioned as the highly visible hand of the market.  When the sky was falling in early 2009, Kashkari awoke each morning, put on his pants, drank his coffee, and rapidly dispersed Hank Paulson’s $700 billion of TARP funds to the government’s preferred financial institutions.

Incidentally, the experience had an ill effect on Kashkari’s mental health.  Soon after, he became a hermit, took to a cabin in the Sierra Nevada Mountains – near Donner Pass – and pursued his life’s new purpose of chopping wood.  We thought we had seen the last of him.

These people were ruling the roost in early 2009 – Hank the Hunk and Neil the wood-chopper. One couldn’t have asked for a more sane couple to stuff $700 billion in taxpayer moolah down the banks’ throats. [PT]

But alas, it is impossible for true believers to amiably exit the trappings of public life for good.  After a failed California gubernatorial campaign in 2014, losing to retread Governor Jerry Moonbeam Brown, Kashkari resurfaced as Minneapolis Fed President in 2016.

We suppose this position was his reward for the abuse heaped upon him from grandstanding Senators while handing out vast sums of taxpayer dollars – your dollars – to Wall Street banks.

Are the Voices in Fed President Kashkari’s Head Speaking Lies?

Still, Kashkari’s current employment is not without merits.  He brings an odd mix of madness and clarity to the position.  In particular, he makes no bones about just what it is the Fed is doing.

Kashkari, taken at his word, is all for the perpetual bubbles that result from endless Fed induced credit creation.  This, based on his vision of monetary policy, is how to improve economic output, create jobs, and deliver a world of full employment.  Quite frankly, it is nonsense.  But at least he is open about it.

Others at the Fed make occasional ventures towards tighter monetary policy so as to later have more wiggle room to cut rates.  On Wednesday, in a Q&A with Judy Woodruff of PBS, Fed Chair Jerome Powell delivered contrary guidance from Kashkari’s.  According to Powell:

“The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore.  They’re not appropriate anymore.

“Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral.  We may go past neutral, but we’re a long way from neutral at this point, probably.”

The liquidity-sucking vampire Jerome Powell, shortly after rising from his coffin at dusk. Upon hearing what he recently said about the economy, we thought he may have uttered what is colloquially known as “famous last words” – but obviously, there is no such thing as “last words” for the undead. [PT]

Following Powell’s remarks, the yield on the 10-Year Treasury note jumped 15 basis points.  This notable spike brings with it several questions…

Are the voices in Kashkari’s head speaking lies?  Could a long run secular rising interest rate cycle, where the price of credit becomes more and more expensive, be upon us?

How all of this plays out is anyone’s guess.  The current American experience of debt servitude establishes that the transition to a cycle of rising interest rates will be accompanied by mass defaults.  Moreover, there is a massive 80 year buildup of public, private, and corporate debt to be purged from the financial system.

We suspect the reckoning will be extraordinarily disruptive.

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Interpol Begs Beijing For Information On Europe’s Top Cop

Following reports that Interpol chief Meng Hongwei, 64, had been “taken away for questioning” by Chinese disciplinary authorities almost immediately after arriving in China last week, Bloomberg reported that the supranational law-enforcement agency had formally asked Beijing for “a clarification” about Meng’s status.

Meng, who is also a deputy minister for public safety in China though he had been living with his family in Lyon, France, where Interpol’s headquarters is based, was reported missing  by his wife earlier this week, prompting prosecutors in France to open an investigation. That investigation is continuing despite confirmation that Meng is being held by the Chinese government.

“Interpol has requested through official law enforcement channels clarification from China’s authorities on the status of Interpol President Meng Hongwei,” Juergen Stock, secretary general of the organization based in Lyon, France, said in a statement. “Interpol’s general secretariat looks forward to an official response from China’s authorities to address concerns over the president’s well-being.”

Meng is also China’s deputy minister of public security and has 40 years of experience in policing and public safety. His experience includes stints working on narcotics enforcement and counter-terrorism, according to Interpol’s website. While many at Interpol feared Meng would abuse his position to encourage foreign governments to extradite Chinese dissidents living abroad, instead, he appears to have taken an interest in cybercrime enforcement since his election in November 2016. His term is set to expire in 2020.

China

Meng’s family hasn’t received any information about his status since he left France on Sept. 29. Nobody from the French of Chinese governments returned Bloomberg’s request for comment.

While the exact justification surrounding Meng’s capture remains murky, the South China Morning Post reported that Meng may be the latest target of the Chinese government’s anti-corruption campaign.

If true, this is clearly bad news for Meng and his family, and brings to mind the fate of another prominent Communist Party official, Bo Xilai, a former municipal party chief known for his crackdown on organized crime and corruption. Bo was stripped of his status and eventually sentenced to life in prison. Others who have been prosecuted under Chinese President Xi Jinping’s anti-corruption crackdown have suffered an even worse fate.

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Is Brazilian Democracy On The Brink?

It seems the Brazilian Deep State is starting to panic…

Authored by Robert Muggah via Project Syndicate,

After years of corruption scandals, economic malaise, and deepening political polarization, Brazilians have lost faith in the promise of democracy, and could soon elect a dangerous authoritarian to the presidency. Before going to the polls on October 7, Brazilians should understand exactly what a vote for Jair Bolsonaro would mean for the future of their country.

With Brazil’s presidential and state elections just days away, the country’s citizens are frustrated, disillusioned, and angry. Many are taking to the streets, disgusted by years of cynical politics, breathtaking corruption, economic stagnation, and obscene levels of crime. Although roughly 85% of Brazil’s 147 million voters agree that the country is heading in the wrong direction, they are more polarized than ever, both online and offline. These deepening divisions threaten to squeeze the life out of democracy in South America’s largest country.

Not since the restoration of democracy in 1985 has a Brazilian election been so contentious and unpredictable. At stake is the presidency, but also positions for 27 state governors, 54 senators and nearly 1,600 elected officials. Although 69% of Brazilians have faith in democracy, more than half admit they would “go along” with a non-democratic government so long as it “solved problems.” Despite efforts by a new generation of young leaders working to restore faith in democracy, Brazilians are ranked as the least trusting and most pessimistic people in Latin America today. And now, the rise of digital propaganda and fake news is making a bad situation much worse.

Still, the suffocation of Brazilian democracy is not inevitable. While hard to imagine at the moment, its revival will require a combination of foresight, self-awareness, humility, and the courage to confront seemingly insurmountable class and racial divisions, and even rifts within families.

Among the crop of presidential candidates in this cycle, a few thrive on division, while most – including Marina Silva, the only woman in the race – advocate a middle ground. Unfortunately, the populists are ascendant, and the pragmatists have struggled to break through. Opinion polls suggest that the election will most likely come down to a second-round contest between the ultra-right-wing populist Jair Bolsonaro and the left-wing Workers’ Party candidate Fernando Haddad, a former São Paulo mayor.

Despite spending 27 years in government, Bolsonaro is campaigning as a “drain the swamp” outsider. With the blessing of former President Luiz Inácio Lula da Silva, the jailed ex-leader of the Workers’ Party, Haddad is promising to restore economic prosperity. Although at least a third of Brazilians appear to be rallying around Bolsonaro, an even greater share of the electorate, including a growing coalition of women, adamantly opposes him.

Bolsonaro has gained a surprisingly wide, and in some cases fanatical, following. Some of his base – 60% of whom are men aged 16-34 – share his worldview. Many Brazilians, including women, also like his “tough on crime” message. And many of the country’s business elite see Bolsonaro – along with his running-mate, the retired army general Hamilton Mourão, and his Chicago School financial adviser, Paulo Guedes – as a bulwark against the return of the Workers’ Party.

It would be naive to dismiss Bolsonaro as a “useful idiot” for the conservative establishment. His turn to economic liberalism flies in the face of a long record of support for state-driven development. And, like US President Donald Trump, Turkish President Recep Tayyip Erdoğan, Philippine President Rodrigo Duterte, and Hungarian Prime Minister Viktor Orbán, Bolsonaro is an expert at sowing division. Following the populist playbook, he portrays Brazilian society as comprising two homogeneous and antagonistic groups: the “real people” and the “elites.” As Steven Levitsky and Daniel Ziblatt of Harvard University have shown, this attack on “mutual toleration” strikes at the foundation of democracy.

Brazil’s three major political parties also share blame for the country’s deepening divisions. Faced with mounting corruption scandals, both Lula and former President Dilma Rousseff, also of the Workers’ Party, routinely invoked us-versus-them rhetoric. They dismissed damning evidence unearthed during the “Operation Car Wash” investigations as an elitist conspiracy against a popularly elected government. The country’s other two main parties, meanwhile, confirmed Workers’ Party supporters’ fears when they voted to impeach Rousseff in August 2016. What Workers’ Party loyalists described as an illegal coup reinforced Brazil’s divisions. The new government was itself soon ensnared in corruption scandals, and its popularity plummeted.

For almost three decades, first as a city councilor and then as a congressman, Bolsonaro waited in the wings for precisely this moment. Promising “clean government” and “law and order,” and casting himself as the champion of the military and police, he has the credentials to lead an authoritarian backlash. Bolsonaro has repeatedly supported the military dictatorship that reigned from 1964 to 1985, when the government tortured and murdered its opponents. As far back as 1999, he called for the National Congress to be shuttered, and lamented that the dictatorship had not killed 30,000 more people, starting with former Brazilian President Fernando Henrique Cardoso.

Moreover, in a country with the world’s highest number of police killings, Bolsonaro has openly supported expanding official impunity, saying that police who kill “bandits” should be awarded medals, not penalized. Despite soaring gun violence and 45,000 firearm-related homicides in 2018, he objects to all gun regulation and is the only candidate calling for repeal of the country’s Disarmament Statute, which is credited with saving more than 160,000 lives. And in a country that already has more than 725,000 people in jail, he wants to reduce the age of criminal liability from 18 to 16 – or even 14 – and, not surprisingly, wants to restore the death penalty.

Having secured support from several influential evangelical leaders, Bolsonaro also supports religious interference in public life. Last year, Bolsonaro declared that Brazil is a Christian country; that there is no such thing as a secular state; and that those who disagree should leave or bow to the majority. He also adamantly opposes gay marriage, condones hate speech against LGBTQ people, and has been sanctioned no fewer than 30 times since 1991 by the Brazilian Bar Association for racism, xenophobia, and homophobia. In 2011, he said that he would rather have a dead son than a gay one.

Bolsonaro also routinely taunts women about rape and expresses misogynist views. He once told a female fellow legislator, “I wouldn’t rape you because you don’t deserve it,” and he is on record calling a female journalist a “whore.” Furthermore, Bolsonaro is openly hostile toward Afro-Brazilian communities, indigenous populations, and members of landless movements, whom he has described as terrorists.

Lastly, Bolsonaro fundamentally rejects climate science and favors Brazil’s withdrawal from the 2015 Paris climate agreement, claiming that climate change is a “fable” and nothing more than a “globalist conspiracy.” Brazil’s Congress, unlike the US Senate, actually ratified the Paris agreement, making withdrawal less likely. Even so, Bolsonaro and his three eldest sons – all of them elected officials – regularly describe global warming as a fraud.

Bolsonaro is frequently characterized as a comical character or a “Tropical Trump.” But if one takes his record at face value, it should be clear that his candidacy is no laughing matter. Like Trump, he is more a symptom of division than a cause. Like Trump, he has said he will reject the election’s outcome if he does not win. But he is also potentially more destructive than Trump, and Brazil’s democracy is much younger and more fragile than that of the United States. He was not considered a serious contender until quite recently – just as few saw Trump coming until it was too late.

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Scared yet?

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Robert Muggah is the co-founder and research director of Instituto Igarapé and a co-founder and principal of the SecDev Group.

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End Of An Era: Swiss Banks Now Exposing Tax Cheats

It’s the end of an era for Switzerland’s notorious secret bank accounts, as the world’s historical haven for managing offshore wealth began automatically sharing client data with tax authorities in dozens of other countries, according to Reuters. 

The Federal Tax Administration (FTA) said on Friday it had for the first time exchanged financial account data at the end of September under global standards that aim to crack down on tax cheats.

Bank secrecy still exists in some areas — Swiss authorities cannot automatically see what citizens have in their domestic bank accounts, for example — but gone are the days when well-paid European professionals could stash wealth across the border and beyond the prying eyes of their tax man. –Reuters

The information exchange was originally slated for EU countries plus nine other jurisdictions: Australia, Canada, Guernsey, Iceland, Isle of Man, Japan, Jersey, Norway and South Korea, however “Cyprus and Romania are currently excluded as they do not yet meet the international requirements on confidentiality and data security,” according to the FTA. 

Data transfer to Australia and France has been delayed “as these states could not yet deliver to the FTA due to technical reasons,” said the agency, adding that it was still lacking information from Estonia, Poland and Croatia. 

About 7,000 banks, trusts, insurers and other financial institutions registered with the FTA collect data on millions of accounts and send them on the Swiss tax agency. The FTA in turn sent information on around two million accounts to partner states. It put no value on the accounts in question. –Reuters

Information exchanged includes account owner names, addresses, country of residence and tax identification information – as well as the account balance, reporting institution and capital income. This allows authorities to investigate whether taxpayers have declared their foreign financial holdings. 

The annual data exchange will expand next year to around 80 partner states – as long as they meet requirements on confidentiality and data security. Suitability for inclusion is determined by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. 

Switzerland’s notorious banking secrecy has been eroding for years under international pressure, which has largely cut off the ability for wealthy individuals and families to hide assets in the Alpine safe-haven. As Reuters notes, this puts Switzerland in “fierce competition” with faster-growing financial centers such as Singapore and Hong Kong. 

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The “VaR Shock” Is Back: Global Bonds Lose $880 Billion In One Week

Markets were in turmoil, S&P futures were locked limit down as traders panicked, the establishment political system was in chaos and global bond portfolios were about to suffer a near record $1.2 trillion in losses in just a few days.

All this took place in the hours and days following Donald Trump’s November 8, 2016 election as a Value at Risk (or VaR) shockwave spread around the globe over fears Trump would ignite an inflationary conflagration that would undo years of unorthodox monetary policy, sending interest rates soaring and crashing stock  markets.

In retrospect it didn’t happen, and as the initial shock from the political revolution in the US fizzled, bond buying resumed and the VaR shock of 2016 faded as an unpleasant memory.

Or rather, it didn’t happen then, because fast forward a little under two years, when the realization that something may is profoundly changing with the US economy has unleashed the latest global bond market Value at Risk, or VaR shock, when in just the span of three days as interest rates blew out both in the US and across the world…

… some $876 billion in aggregate bond market value was lost, the biggest weekly drop since the Trump election VaR shock, and wiping out one year’s worth of mark to market profits as the aggregate value of global bonds tumbled to $48.9 trillion, the lowest going back to October 2017.

The immediate catalysts have been extensively discussed here in recent days: a record non-manufacturing ISM, a surprisingly hawkish speech by Fed Chair Powell in which he warned that rates “may go past neutral” and, topping it off, another strong nonfarm payrolls report. Meanwhile, European bonds have tumbled on renewed fears about Italian politics while Emerging Markets have been routed as a result of the strong dollar which in turn has squashed local bonds.

But besides the economic and political catalysts, a bigger threat is the soaring US budget deficit: with tax cuts by Trump’s administration putting the U.S. budget deficit on track to hit $1 trillion next year, Steven Mnuchin’s Treasury plans to borrow $770 billion in the second half of 2018, a more than 60% increase from the same period last year; and with the Fed actively reducing its own portfolio now at a $50 billion/month pace amid a sharp drop in pension fund and foreign investor buying, interest rates have nowhere else to go but up to attract buyers.

The net impact is dramatic. BlackRock estimates that the net supply of Treasury securities will more than double this year, to over $900 billion, and rise to nearly $1.2 trillion in 2019. The market hasn’t had to digest that much government debt since 2010 when the Fed was monetizing a substantial portion of this deficit with QE1 and QE2.

Amid all this, it should probably hardly come as a surprise that the yield on 10-year debt has not only hit a seven-year high, but did so at a speed that equaled the January selloff which triggered a 10% correction in the S&P.

And while stocks just suffered their worst two-day drop since May, it could get much worse: perhaps the only thing preventing it is that while bond market volatility exploded from a record low this week, it still has a way to go to catch up to the dramatic move observed in January.

That may still happen, because now that reality has once again crept back into the bond market with a bang, not a whimper, we are reminded of what Ray Dalio said back in January, when just before the January vol surge, Bridgewater’s billionaire founder told Bloomberg  TV that the bond market has “slipped into a bear phase” and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.

“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,” Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.

Readers may recall that when addressing the NY Fed in October 2016, Dalio made virtually the same prediction when he commented on the bond market’s DV01:

… it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.

Dalio was referring to the record DV01 in the bond market, which according to the latest OFR report released in December, has risen to $1.2 trillion: that’s the P&L loss from a 100bps rise in rates.

The watchdog found that “valuations are also elevated” in bond markets. Of particular interest is the OFR’s discussion on duration. Picking up where we left off in June 2016, and calculates that “at current duration levels, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index.”

And visually:

However, as we explained last December, this is a low-ball estimate which “understates the potential losses” as it “does not include high-yield bonds, fixed-rate mortgages, and fixed-income derivatives”, which would suggest that the real number is likely more than double the estimated when taking into account all duration products. As a reminder, Goldman calculated the entire duration universe at $40 trillion as of the summer of 2016, resulting in $2.4 trillion in losses for a 1% move. By now the number is far, far greater.

And sure enough, with US rates rising by roughly a quarter of a percent in the past week, the result has been over $800 billion in MTM losses, better known to bond traders as a “VaR shock.“

In another moment of foresight, during this year’s Davos, Dalio also predicted that the Federal Reserve will tighten monetary policy more than they have signaled, and said that “economic growth is in the late stage of the cycle but could continue to improve for another two years.” Again, it was Powell’s explicit warning that the Fed will hike beyond the neutral rate that prompted stocks, which had until then largely ignored the selloff on bonds, to pay attention and to plunge.

Why? Because as we showed earlier this week courtesy of the following chart from Stifel, every time this has happened, a bear market has inevitably followed.

This is bad news for Trump: not only has Powell hinted that he will keep hiking rates for the foreseeable future, but in doing so the Fed will be the catalyst the ultimately crashes the market, something we discussed previously  when we laid out the conditions under which the Fed would keep hiking, and warned that every Fed tightening cycle ends with a crisis.

Here is how Deutsche Bank’s macro strategist Alan Ruskin explained this sequence of events back in May:

  • Every Fed tightening cycle creates a meaningful crisis somewhere, often external but usually with some domestic (US) fall out. Fed tightening can be likened to the monetary authorities shaking a tree with some overripe fruit. It is usually not totally obvious what will fall out, but that there is ‘fall out’ should be no surprise.
  • Going back in history, the 2004-6 Fed tightening looked benign but the US housing collapse set off contagion and a near collapse of the global financial system dwarfing all post-war crises.
  • The late 1990s Fed stop start tightening included the Asia crisis, LTCM and Russia collapse, and when tightening resumed, the pop of the equity bubble.
  • The early 1993-4 tightening phase included bond market turmoil and the Mexican crisis.
  • The late 1980s tightening ushered along the S&L crisis.
  • Greenspan’s first fumbled tightening in 1987 helped trigger Black Monday, before the Fed eased and ‘the Greenspan put’ took off in earnest.
  • The early 80s included the LDC/Latam debt crisis and Conti Illinois collapse.

Going back to the beginning, the problem with VaR shocks is that they are, by definition, unexpected and unlike traditional corrections when buyers eventually step in at “value” levels, a VaR shock is a positive feedback loop of liquidation, when as a result of the surging negative convexity from the rapid value loss of underwater positions, traders are forced to sell even more, accelerating the downward move.

That may be why the 10Y bond rates closed near session highs on Friday even as dip buyers emerged in the last hour of trading in the S&P500. Their optimism may be premature: after all, as Bloomberg correctly wrote late on Friday, “All the Nightmares for Stock Investors Start in the Bond Market.” And if the global bond rout accelerates next week when China returns form week-long holiday, the nightmare will have only just begun.

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