The US Military-Industrial Complex’s Worst Nightmare: The S-300 May Destroy & Expose The F-35

Authored by Federico Pieraccini via The Strategic Culture Foundation,

The tragic episode that caused the death of 15 Russian air force personnel has had immediate repercussions on the situation in Syria and the Middle East. On September 24, Russian Defense Minister Sergei Shoigu informed allies and opponents that the delivery of the S-300 air-defense systems to the Syrian Arab Republic had been approved by President Vladimir Putin. The delivery had been delayed and then suspended as a result of Israeli pressure back in 2013.

In one sense, the delivery of S-300 batteries to Syria is cause for concern more for Washington than for Tel Aviv. Israel has several F-35 and has claimed to have used them in Syria to strike alleged Iranian weapons transfers to Hezbollah. With the S-300 systems deployed in an updated version and incorporated into the Russian command, control and communications (C3) system, there is a serious risk (for Washington) that Israel, now incapable of changing the course of events in Syria, could attempt a desperate maneuver.

It is no secret that Greece purchased S-300s from Russia years ago, and that NATO and Israel have trained numerous times against the Russian air-defense system. Senior IDF officials have often insisted that they are capable taking out the S-300s, having apparently discovered their weaknesses.

Tel Aviv’s warning that it will attack and destroy the S-300 battery should not be taken as an idle threat. It is enough to look at the recent downing of Russia’s Il-20 surveillance aircraft to understand how reckless a desperate Israel is prepared to be. Moreover, more than one IDF commander has over the years reiterated that a Syrian S-300 would be considered a legitimate target if threatening Israeli aircraft.

At this point, it is necessary to add some additional information and clarify some points. Greece’s S-300s are old, out of maintenance, and have not had their electronics updated. Such modern and complex systems as the S-300s and S-400s require maintenance, upgrades, and often replacement of parts to improve hardware. All this is missing from the Greek batteries. Secondly, it is the operator who uses the system (using radar, targeting, aiming, locking and so forth) that often makes the difference in terms of overall effectiveness. Furthermore, the system is fully integrated into the Russian C3 system, something that renders useless any previous experience gleaned from wargaming the Greek S-300s. No Western country knows the real capabilities and capacity of Syrian air defense when augmented and integrated with Russian systems. This is a secret that Damascus and Moscow will continue to keep well guarded. Yet two years ago, during the operations to free Aleppo, a senior Russian military officer warned (presumably alluding to fifth-generation stealth aircraft like the F-35 and F-22) that the range and effectiveness of the Russian systems may come as a surprise.

The following are the words of Russian defense minister Sergei Shoigu concerning the deployment of the S-300 to Syria and its integration with other Russian systems:

“Russia will jam satellite navigation, onboard radars and communication systems of combat aircraft, which attack targets in the Syrian territory, in the Mediterranean Sea bordering with Syria. We are convinced that the implementation of these measures will cool hotheads and prevent ill-considered actions threatening our servicemen. Otherwise, we will respond in line with the current situation. Syrian troops and military air defense units will be equipped with automatic control systems, which have been supplied to the Russian Armed Forces. This will ensure the centralized management of the Syrian air defense forces and facilities, monitoring the situation in the airspace and prompt target designation. Most importantly, it will be used to identify the Russian aircraft by the Syrian air defense forces.”

If the Israelis will follow through with their reckless attempts to eliminate the S-300 (if they can find them in the first place, given that they are mobile), they will risk their F-35s being brought down. The US military-industrial complex would suffer irreparable damage. This would also explain why Israel (and probably the US) has for more than five years put enormous pressure on Moscow not to deliver the S-300 to Syria and Iran. The US State Department’s reaction over the future purchase by Turkey and India of the S-400 confirms the anxiety that US senior officials as well as generals are experiencing over the prospect of allies opting for the Russian systems. This would allow for a comparison with weapons these allies purchased from the US, leading to the discovery of vulnerabilities and the realization of the US weapons’ relative inferiority.

Given Tel Aviv’s tendency to place its own interests above all others, it would not be surprising to find them using the possibility of attacking the S-300 with their F-35s as a weapon to blackmail Washington into getting more involved in the conflict. For the United States, there are two scenarios to avoid.

The first is a direct involvement in the conflict with Russia in Syria, which is now unthinkable and impractical.

The second – much more worrying for military planners – concerns the possibility of the F-35’s capabilities and secrets being compromised or even being shown not to be a match against air-defense systems nearly half a century old.

An illuminating example of how the United States operates its most advanced aircraft in the region was given in eastern Syria around Deir ez-Zor. In this part of Syria, there is no threat from any advanced air-defense systems, so the US is often free to employ its F-22 in certain circumstances. The Russian military has repeatedly shown radar evidence that unequivocally shows that when Russian Su-35s appear in the same skies as the F-22, the US Air Force simply avoids any confrontation and quickly withdraws such fifth-generation assets as the F-22. The F-35 is not even ready in its naval variant, and has yet to be deployed on a US aircraft carrier near the Middle Eastern theater or the Persian Gulf; nor is it present in any US military base in the region. The US simply does not even consider using the F-35 in Syria, nor would it risk its use against Russian air defenses. Israel is the only country that so far may have already used these aircraft in Syria; but this was before the S-300 came onto the scene.

The F-35 program has already cost hundreds of billions of dollars and will soon reach the exorbitant and surreal figure of over 1 trillion dollars. It has already been sold to dozens of countries bound by decades-long agreements. The F-35 has been developed as a multi-role fighter and is expected to be the future backbone of NATO and her allies. Its development began more than 10 years ago and, despite the countless problems that still exist, it is already airborne and combat-ready, as the Israelis insist. From the US point of view, its employment in operations is played down and otherwise concealed. The less data available to opponents, the better; though the real reason may lie in a strong fear of any revelation of potential weaknesses of the aircraft damaging future sales. At this time, the Pentagon’s marketing of the F-35 is based on the evaluations provided by Lockheed Martin, the manufacturer, and on the tests carried out by the military who commissioned it to Lockheed Martin. Obviously, both Lockheed Martin and the US Air Force have no interest in revealing any weaknesses or shortcomings, especially publicly. Corruption is a big thing in Washington, contrary to common assumptions.

The combination of Israel’s ego, its inability to change the course of events in Syria, coupled with the loss of its ability to fly throughout the Middle East with impunity due to Syria now being equipped with a superior air defense – all these factors could push Israel into acting desperately by using the F-35 to take out the S-300 battery. Washington finds itself in the unenviable position of probably having no leverage with Israel over the matter ever since losing any ability to steer events in Syria.

With the Russian air-defense systems potentially being spread out to the four corners of the world, including China, India, Saudi Arabia, Qatar, Saudi Arabia and who knows how many other countries waiting in the queue, Russia continues to increase its export capacity and military prestige as it demonstrates its control of most of the Syria’s skies. With the introduction of the the S-500 pending, one can imagine the sleepless nights being spent by those in the Pentagon and Lockheed Martin’s headquarters worrying about the possibility of an F-35 being taken down by an S-300 system manufactured in 1969.

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BofA’s “Best Leading Indicator For Global EPS” Just Crashed

After briefly turning negative in April of this year, South Korean export growth – described by BofA’s Josh Hartnett as “a notoriously good global cyclical indicator” – just collapsed, flashing bright red warning signals for global profit and economic growth.

In April Korean exports dipped modestly negative…

But tonight the September print came in at -8.2% YoY – dramatically worse than the 5.5% drop expected) with exports to US plunging:

  • Exports to China at $14.59b, +7.8% y/y

  • Exports to US at $5.82b, -11.8% y/y

  • Imports from China at $7.89b, -6.5% y/y

  • Imports from US at $4.31b, +5.8% y/y

And while Semiconductor exports soared, autos and ships/vessels plunged…

  • Semiconductor exports at $12.43b, +28.3% y/y

  • Steel exports -43.7% y/y

  • Automobiles exports at $2.97b, -22.4% y/y

  • Ship/Vessel exports at $1.39b, -55.5% y/y

And, as a further reminder, the last time South Korean export growth turned negative in the downward direction was just around the time of China’s devaluation in the summer of 2015, when global markets were on the verge of a 20% bear market, and only the Shanghai Accord of February 2016 prevented a free fall in risk assets.

If the South Korean “advance indicator” is as accurate as it has always been, forget about soaring earnings for the coming quarters: an earnings depression is just around the corner!

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Kavanaugh College Friend To Detail His “Violent, Drunken Behavior” To The FBI

With Washington in a frenzy over the FBI’s probe of Judge Kavanaugh, which according to Judiciary Committee Chairman Chuck Grassley would be no more than a week long and would be limited solely to “current credible allegations”, a new and potentially explosive allegation has emerged.

Late on Sunday, Charles Ludington, a former varsity basketball player and friend of Kavanaugh’s at Yale, told the Washington Post that he plans to deliver a statement to the FBI field office in Raleigh on Monday detailing violent drunken behavior by Kavanaugh in college.

Ludington, an associate professor at North Carolina State University, provided a copy of the statement to The Post.

In it, Ludington says in one instance, Kavanaugh initiated a fight that led to the arrest of a mutual friend: “When Brett got drunk, he was often belligerent and aggressive. On one of the last occasions I purposely socialized with Brett, I witnessed him respond to a semi-hostile remark, not by defusing the situation, but by throwing his beer in the man’s face and starting a fight that ended with one of our mutual friends in jail.”

What prompted this latest last minute memory “recollection” by a peer of Kavanaugh’s? According to the report, Ludington was deeply troubled by Kavanaugh appearing to blatantly mischaracterize his drinking in Senate testimony.

“I do not believe that the heavy drinking or even loutish behavior of an 18 or even 21 year old should condemn a person for the rest of his life,” Ludington wrote. “However … if he lied about his past actions on national television, and more especially while speaking under oath in front of the United States Senate, I believe those lies should have consequences.”

The NYT also got an interview out of Ludington, and reported that Ludington said he frequently saw Judge Kavanaugh “staggering from alcohol consumption” during their student years. He said he planned to tell his story to the F.B.I. at its office in Raleigh, N.C., on Monday.

avanaugh told outside c ounsel Rachel Mitchell during the hearing that he has never “passed out” from drinking. “I’ve gone to sleep,” he said. “But I’ve never blacked out, that’s the allegation. And that’s, that’s wrong.”

During last Thursday’s hearing, Kavanaugh was agitated by questions from Democratic senators about his history with partying and drinking, at one point asking Sen. Amy Klobuchar (D-Minn.) if she has ever blacked out due to alcohol consumption.

“I like beer,” he said in response to one of Sen. Sheldon Whitehouse’s (D-R.I.) questions. “Do you like beer, senator? What do you like to drink?”

While this latest statement to the FBI does not corroborate the testimony of Ford, or the sexual assault allegations of several other women, Democrats have called for the FBI to take a broader look at “whether Kavanaugh may have misled senators by minimizing his carousing behavior in high school and college or by mischaracterizing entries in his high school yearbook that could indicate a penchant for drunken and misogynistic behavior.”

Sen. Amy Klobuchar (D-Minn.), speaking on CNN, said Kavanaugh’s claims that he had never blacked out or suffered any memory loss while drinking don’t “quite make sense to me” and said she hoped the FBI would interview friends to determine whether that was credible.

She added that the FBI could also interview high school friends of Kavanaugh’s to determine whether his innocent explanations for portions of his yearbook entry are accurate.

“I’ve never heard that the White House, either under this president or other presidents, is saying: ‘Well, you can’t interview this person; you can’t look at this time period; you can only look at these people from one side of the street,’” she said. “I mean, come on.”

It is unclear if his testimony will play a role in the weeklong FBI investigation into allegations of sexual assault against Kavanaugh, the Times reported.

Several other classmates in recent days have accused Kavanaugh of misleading Congress over his alcohol consumption. Former FBI Director James Comey in a Times op-ed published Sunday charged Kavanaugh with “lying” under oath.

And while it is too early to determine what, if any, impact this latest statement to the FBI will have on Kavanaugh’s candidacy, it would stand to reason that there is only so much opposition that the Supreme Court candidate can take before even he decides that the SCOTUS seat is just not worth the constant anguish and media spotlight. At least, that’s what democrats are hoping.

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Druckenmiller: We’re At The Point In The Rate-Hike Cyle Where ‘Bombs Are Going Off’

Despite the consensus view heading into 2018 that the Treasury yield curve would finally steepen as the Federal Reserve raised interest rates 4 times in 2018 (and possibly again in 2019), driving US stocks lower as higher interest rates brought  the post-crisis epoch of “accommodative” monetary policy to a decisive conclusion, the yield curve continues to flatten. But as US markets have mostly shrugged off this vanishing term premium, some of the country’s most respected hedge fund managers have been making the rounds in the financial press, warning that the next recession – if not a devastating debt crisis – is just around the corner.

First it was Jeffrey Gundlach, then Ray Dalio (who even devoted a free e-book to the subject comparing the modern economy to that of the late 1930s) and Ken Griffin. Now Stanley Druckenmiller has joined the party with an interview with Kiril Sokoloff, chairman of 13D Global Strategy & Research, published by RealVision. During the interview, which was taped earlier this month, Druckenmiller warned that the US’s “massive debt problem” would eventually lead to another financial crisis. “We tripled down on what caused the crisis. And we tripled down on it globally.”


But while President Trump’s decision to blow out the federal budget deficit at a time of 4.2% US GDP growth certainly won’t help, Druck blames the Federal Reserve for waiting so long to raise interest rates, allowing cheap debt to proliferate and encouraging the formation of asset bubbles in both the US and emerging markets, where the strengthening dollar has allowed fears of a possible contagion to fester.

“I would raise rates every meeting as long as I could. And the minute you got substantial disruption, I would back off. And the sad thing is, since I made that statement, oh, my god, we’ve had these just rip roaring markets. And what I was saying is, just sneak one in every time you can. Just sneak one in. And they’ve passed up on so many golden opportunities. But the problem now – and you articulated it beautifully – is, now, the debt is so much higher, particularly in emerging markets, than it was five years ago. You’re not going to be able to raise that much more, and we’re already starting to see the consequences.”

And the longer it takes the Fed to normalize interest rates, the more devastating the eventual crash will be.

The reason the debt has exploded – again, there’s no hurdle rate for investment. And when you can borrow money at zero, of course, debt is going to explode.

So you’re exactly right. We have this massive debt problem. If we don’t normalize, it’s going to accelerate and cause a bigger problem down the road.

That doesn’t mean US markets won’t see further upside in the coming months. Indeed, as US rates rise, Druckenmiller believes it’s entirely possible that money invested in emerging markets will flow back into the US, driving US equities even higher. At the same time, this will add unneeded stress to the already precarious situation in emerging markets, increasing the risk of another debt crisis. And once these “bombs start to go off” in the EM world, contagion could quickly spread to the US. Oblivious to these risks, the Fed will continue to tighten, heaping more suffering in the EM world, until the pressure spreads to the US – at which point policymakers will scramble to slash rates and move back to an “accommodative” stance. 

On a practitioner’s basis, we have a lottery ticket in Brazil and in South Africa, because, as we’ve seen, back in the ’90s and again now, these things can move 50%, 60%, and your risk is probably not much more than the carry. I don’t know whether I’m going to get paid, but with the monetary tightening, we’re kind of at that stage of the cycle where bombs are going off. And until the bombs go off in the developed markets, you would think the tightening will continue.
And if the tightening continues, the bombs will keep going off…”

Moving on from the subject of monetary policy, Druckenmiller shared his thoughts about the future of Alphabet stock, which, like Facebook, Twitter and a handful of other massive tech firms, has been embroiled in controversies over how it collects and monetizes personal user data, as well as whether Alphabet constitutes a monopoly. To the latter point, Druckenmiller brushed off the concerns of Margrethe Vestager, the EU’s competition commissioner, who levied billions of dollars in fines against Google and Alphabet over alleged anti-trust violations. If Vestager – whom Druckenmiller derisively refers to as “that woman from Denmark” – is so concerned about a Google being a monopoly, she should try using another search engine for a year. As Druckenmiller argues, “they’re only a click away.”

And to hear the woman from Denmark say that the proof that Google is a monopoly and that iPhones don’t compete with Android is that everyone uses the Google search engine is just nonsense. You’re one click away from any other search engine. I just I wish that woman would have to use a non-Google search engine for a year– just, OK, fine, you hate Google? Don’t use their product, because it’s a wonderful product.

That doesn’t mean there shouldn’t be some regulation, of course, Druckenmiller concedes. Still, he believes his Alphabet shares are worth holding on to.

But clearly, they are monopolies. Clearly, there should be some regulation. But at 20 times earnings and a lot of bright prospects, I can’t make myself sell them yet.

Asked to comment on the theory that most big-name investors earn the bulk of their returns off two or three trading ideas, Druckenmiller said that, during his career, he preferred to place big bets in bond and currency markets that trade 24 hours…that way he can close out some or all his position at any time, thus making it easier to “change his mind.”

If an investor is going to make a play like this in the equity markets, they “have to be right.”

As the disclaimer, if you’re going to make a bet like that, it has to be in a very liquid market, even better if it’s a liquid market that trades 24 hours a day. So most of those bets, for me, invariably would end up being in the bond and currency markets because I could change my mind. But I’ve seen guys like Buffett and Carl Icahn do it in the equity markets. I’ve just never had the trust in my own analytical ability to go in an illiquid instrument, which in equity is if you’re going to bet that kind of size on– you just have to be right.

Watch the full interview below:

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“Historic Judgment” As India’s Nationwide Biometric ID Database Ruled Constitutional

Authored by Nicholas West via,

As the march toward a cashless (and privacy-less) society accelerates forward, a new high watermark has been reached…

India first introduced its concept for a nationwide biometric ID database more than 7 years ago, which they touted as a necessary “social welfare” program to assist the millions of India’s unbanked, streamline welfare distribution and reduce corruption. At the time, Brandon Turbeville reported on the plan for Activist Post.

Yet, although the justification for the billion person database is the increased ability to accurately disperse social welfare benefits, it will not be just the Indian government’s social welfare programs that have access to and utilize the UIDAI. Indeed, even before the program has been completed, major banks, state/local governments, and other institutions are planning to use the UIDAI for identification verification purposes and, of course, payment and accessibility.

As Aaron Saenz of the Singularity Hub writes:

Yet the UID is going to be used for much more than social welfare programs. The UIDAI is in discussion with many institutions (banks, local/state governments, etc.) to allow them to use the UID as a means of identity verification. These institutions will pay the UIDAI some fee to cover costs and generate revenue. There seems to be little doubt that once it is established, the UID will become a preferred method (if not the preferred method) of identification in India.

Saenz also sees the eventuality of the UIDAI program becoming a means of payment and accessibility. He continues:

Ultimately, I wouldn’t be surprised if the UID, with its biometric data, could be used as a means of payment (when linked to a bank account), or as an access key to homes and cars. Purchase a meal with your fingerprint and unlock your door with the twinkle in your eye. Similar results could be expected in other nations that adopted biometric identification systems.

This appears to be exactly the path the country is on now that more than 1 billion people are signed up. According to a new article in The Wall Street Journal, India’s top court addressed the constitutionality of the program as well as deeper concerns about ongoing privacy violations.

The country’s controversial Aadhaar program uses photos, finger and eye scans and has already signed up more than 1 billion people. It has sparked an intense global debate over how far a democracy should be able to go in collecting the personal data of its citizens and how that data can be used, shared and protected.

Wednesday’s Supreme Court ruling was a response to multiple challenges to the system.

A five-judge panel ruled in a 4-1 decision that the program is constitutional and helps the poor by streamlining disbursement of welfare benefits. Being in the database, however, shouldn’t be required for using mobile phones, opening bank accounts or for school admissions, according to the 1,448-page document outlining the court’s decision. It had been unclear for some time whether such organizations could compel people to supply Aadhaar numbers.

“It’s a historic judgment,” Finance Minister Arun Jaitley said. “Everyone must realize, including critics of Aadhaar, that you can’t defy technology or ignore it.” (N.W. emphasis added)

In case it’s not ultra clear, that last statement is as close to an admission of technocratic policy as you’re likely to get coming from a supposed democracy. Or if you prefer the Star Trek version: Resistance is Futile … as you give up your freedom and are assimilated into the Borg.

To WSJ‘s credit, they do address some of the practical problems that people are already facing with the arrival of “the machines.”

Time and again, we have seen countries both democratic and autocratic serve as blueprints for others to follow. Given the surge in the use of biometrics for airline travel and other forms of “elective” identification in the United States, is it really unreasonable to assume that if a country of more than 1 billion people can implement this, the U.S. population of 350 million will be protected by its own Constitution?

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Canada PM Trudeau Calls 10PM Cabinet Meeting With Nafta Deal Announcement Imminent

As previewed yesterday, ahead of tonight’s midnight deadline for a Nafta deal between the US and Canada, it appears that a deal has been agreed upon according to unconfirmed reports, with the only outstanding items being approval from Trudeau and Trump.

To that end, moments ago Canada’s CTV reported that Canada Prime Minister Justin Trudeau has called a cabinet meeting for tonight at 10pm, “as senior Canadian officials appear to be close to a NAFTA deal.” Trudeau arrived at his office around 7 p.m., where high-level staff and Foreign Affairs Minister Chrystia Freeland have been working since early Sunday morning to secure a NAFTA deal.

He took no questions from reporters who have gathered there to monitor the latest developments as the intense last-minute push before the U.S.-imposed midnight Sunday deadline inches closer.

The end of day deadline is to work out a trilateral renegotiated text that can be presented to the U.S. Congress and can be signed off by the outgoing Mexican president before his term runs out on November 30, otherwise the U.S. and Mexico intend to go ahead without Canada.

According to a Bloomberg report, the two sides were discussing the last sticking points, including greater market access for U.S. supplies into Canada’s dairy market, in exchange for concessions from the Trump administration which was reportedly ready to agree with Canada’s wish to keep Chapter 19′s dispute-settlement mechanism.

Earlier on Sunday, Canada’s ambassador to Washington, David MacNaughton, said that talks are moving forward but not yet completed. “Lots of progress but we’re not there yet,” MacNaughton told reporters in Ottawa, where the Canadian team is gathered. He said he didn’t know if a deal would be reached Sunday, although an announcement now appears imminent.

Reaching a pact with Canada allows the 24-year-old pact to remain trilateral and for the U.S. to check another box for its legislative process in the lead up to a congressional vote.

As reported yesterday, last minute progress on negotiations was made thanks to Trump senior adviser Jared Kushner for helping smooth the path toward a deal.

When it looked like negotiations had stalled or broken down due to friction between the U.S. and Canadian sides, Kushner kept talks going with aides close to Prime Minister Justin Trudeau, including Gerald Butts and Katie Telford, three people said.

Meanwhile, the Canadian dollar was rallying on anticipation of a deal, strengthening 0.5 percent, while the Mexican peso gained abut 0.2 percent. S&P futures rose 10 points ahead of the announcement.


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In Troubling Sign For The US, Reserve Managers Plow Into Chinese Yuan, Dump Dollars

The IMF released the Currency Composition of Official Foreign Exchange Reserves (COFER) data for Q2 2018 on Friday. The total of reserves that are broken down by currency went up by $123BN, and unallocated reserves fell by $243BN. The most notably observation in the COFER report is that reserve managers actively decreased their allocation to USD – more than offsetting the effect of dollar appreciation – while at the same time adding significantly to non-USD allocations and especially to Chinese Yuan reserves.

Commenting on the report, Steven Englander from Standard Chartered notes that there are two possible big pieces of news in the Q2 COFER data, but only one that is likely to be meaningful.

The meaningful news is the continued run-up in CNY in reserves portfolios, even in a quarter when CNY depreciated sharply. This suggests increasing demand among reserves managers for CNY in their portfolios. Most likely this reflects the importance of CNY in trade and initiatives taken by the Chinese government to internationalize CNY. This buying is probably long-term in nature, as CNY is not yet sufficiently liquid in all time zone and EM selling of CNY when EM is under pressure could backfire.

At the same time, the drop in the USD share of allocated reserves is likely to be the less meaningful development. It could be interpreted as diversification away from USD but this conclusion is premature. The currency allocation of the China reserves portfolio is still being added piece by piece, and the USD share is uncertain. In addition, some EM countries were very likely intervening to stabilize their currencies to prevent a sharp drop. This intervention was likely USD selling and buying of local currencies as the USD is the most liquid part of their portfolios.

Putting the data together, Englander finds some unambiguous inferences. The major one is that Q2 non-China reserve manager holdings of CNY went up from USD 146bn to USD 193bn, despite a 5.2% depreciation that would normally have reduced the value of CNY reserves in USD terms.

This suggests that:

  1. global reserve managers have a strong appetite for CNY;
  2. market participants excluding non-China reserve managers were big sellers, offsetting reserve manager buying and forcing the CNY down by 5.2%;
  3. CNY in reserves is now roughly at the levels of AUD and CAD, and about 40% of GBP and JPY holdings, so there is room for a lot more buying.

Meanwhile, of the USD 123bn increase in allocated reserves, the USD went up by USD 53bn, well below its 62.5% share in allocated reserves in Q1. Most likely there was some intervention by EM reserve managers whose currencies were under pressure, with USD sold as the most liquid holding. On the other hand, reserve managers appear to have actively purchased EUR to lean against the effects of EUR depreciation.

However, as noted above, what was most notable was the rapid allocation to China by reserve managers.

The chunk of China’s reserve portfolio that was integrated may have had a small USD share, but it would have had to be unusually small to generate the small USD increment. The selling of USD in intervention was more important; the reverse of the USD buying that occurred when the USD was under pressure. It is also possible that reserve managers were diversifying out of the USD, either for portfolio reasons or because of political differences with the US. That said,  at just 1.8%, the CNY weight remains relatively limited, but we think this can slowly rise over the next few years.

While there are various nuances to the data, the accelerating rotation out of USD reserves and into Chinese reserves is a trend that is worth watching, especially if it indeed represents a “diversification away from USD” as a result of political disagreements with the US, a sign that de-dollarization is starting to affect capital allocation decisions at the institutional level among global central banks.

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“It’s The Economy, Stupid”: What Really Drives US Sanctions Against Russia

Authored by Arkady Savitsky via The Strategic Culture Foundation,

The US Department of Commerce has imposed restrictions on 12 Russian corporations that are “acting contrary to the national security or foreign policy interests of the US.” The notice has been published in the Federal Register. US corporations are banned from exporting dual-use goods to the sanctioned companies.

A closer look at the list makes one wonder. The companies under fire have no relation to defense production and have no ties at all with the Russian Ministry of Defense. None of them have signed any contracts with the military. AeroComposite, part of Russia’s state-run United Aircraft Corporation, produces wings for the civilian MC-21 airliner, Aviadvigatel produces engines for military aviation, it has neither technology nor experience to get involved in defense projects, Divetechnoservice is a civilian diving equipment producer, Nilco Group deals in grain, oil products, steel, wood, port services, paper, electronic parts and cement.

It’s not the military the US aims at this time. The real target is Russian civil aviation, which is on the rise. It’s enough to remember that as soon as Aeroflot Company announced its plans to acquire 100 Superjet SSJ-100 airliners instead of American Boeings, the US Treasury said it was considering the possibility of introducing sanctions against the Russian company Sukhoi, allegedly because its combat planes may have been used in Syrian chemical attacks. 

A closer look at the blacklist shows the US has sanctioned those who are involved in the production of civilian airliner Irkut MC-21. Aviadvigatel is to supply PD-14 and PD-35 engines, which cannot power combat planes. AeroComposite, a producer of composites, is responsible for the development and creation of the composite wing for the aircraft. The MC-21 will be the world’s first airliner with a capacity of more than 130 passengers to have composite-based wings. The estimated share of composites in the overall design is 40%. So far, the company has produced composite parts only for MC-21 and no other aircraft.

True, the share of Russia-produced components is growing. Russia belongs to the club of the chosen. There are few aviation engines and composite wings producers in the world. The US wants no competitors. The way to deal with the problem is a sanctions war waged under the pretext of fending off imaginary threats to national security instead of fair competition.

The US aims to strike the soft underbelly. Russia does buy some components for the MC-21’s black wing abroad. Black wing is specific revolutionary knowhow to radically enhance the aircraft’s performance and make the new plane attractive for foreign customers. The vacuum infusion technology used for mass production is a breakthrough achievement. The Irkut is the only aircraft in the world to combine a composite wing with a narrow-body. Today, only wide-body aircraft boast composite wings.

Russia-produced composite materials make the aircraft lighter and consequently cheaper. Carbon fiber and binders may be a problem if sanctions are in place. The US Commerce Department knows where to hit.

Engines are also a problem. Until now MC-21s have been powered by Pratt & Whitney engines. The PD-14 – the first new engine built in Russia since the Soviet Union’s break-up ­– is ready to take their place. It is 100 percent Russia-made. The PD-14 is going through tests with serial production expected to start this year. With PD-14 operational, MC-21 will have an advantage over the competitors – A320 and Boeing-737.

Avionics is where Russia is lagging behind. Progress is there but it’s still a weak point. The aircraft’s production depends on Rockwell Collins. Honeywell, UTC Aerospace Systems, Goodrich Corporation, Hamilton Sundstrand, Eaton, French Thales, British Meggitt, Swedish CTT System and Israeli Elbit – each of them exports components for the new Russian airliner.

It’s impossible to substitute all the imported parts in one fell swoop. The production of all the needed equipment in Russia will take time and effort. At the same time it would greatly spur the Russian airspace industry. Some components could be purchased in other countries, such as China, to give the industry time to meet the challenge. The worst outcome is a two-year delay in mass production of MC-21. It’s sad but Russia can live with that.

The other consequence – the US sanctions in place can scare customers away. That’s the main goal the US is pursuing. The message is “Don’t buy Russian even if it’s civilian products, be on the safe side.” With no demand on the world market, the project may not survive. This is the way to nip the Russian competitor in the bud.

The sanctions will also negatively impact the plans to build a Russia-Chinese wide-body airliner. Aviadvigatel is developing new engine specifically for this plane. Its PD-35 will have no analogues in the world. The project is the first and only challenge to the monopoly of Boeing and Airbus. Russia is the only competitor with experience of its own. The Soviet Union has built the Il-96, a four-engined long-haul wide-body airliner designed by Ilyushin. That’s why China joined Russia in the effort – it needs its expertise. The last thing the US wants is to see this project come into life. It praises free market until its monopoly is preserved. The emergence of competitors makes America forget its principles and shift to protectionist policy. International agreements and the rules of WTO become immediately forgotten. The Russia’s technological progress is met with punitive measures.

Forget about Crimea, Ukraine, Syria, the Skripal poisoning story and other things not even mentioned by President Trump in his address to the UN Security Council on September 27. The US uses pressure to eliminate competitors and do away with any hope for fair competition. Washington protects Boeing by resorting to the policy of twisting arms. On September 24, the EU, Russia, China and Iran met on the sidelines of the UN General Assembly to agree on introducing a special purpose vehicle (SPV) to counter US sanctions against Iran. That’s the first and a very significant step to repel the US attacks. The EU, Russia, China and other nations face a common threat. They can unite and on their own rules while creating their own markets protected from American pressure with fair competition as the basic principle. If the US wants to be isolated, let it. It’s free to choose its fate but so are others. The time has come to teach the bully a lesson.

via RSS Tyler Durden

NC GOP Chief: Kavanaugh ‘Gang-Rape’ Accuser Is A “Criminal” Who Should “Go To Jail, Period”

Following reports this weekend that Senate Judiciary Chairman Chuck Grassley had referred a man who had accused Judge Brett Kavanaugh of raping one of his friends to the DOJ for a possible criminal prosecution, the leader of North Carolina’s Republican Party tweeted that another Kavanaugh accuser, Julie Swetnick – who gave a taped interview to Show Time’s “The Circus” which is expected to air Sunday night – “should go to prison.”

In a series of tweets, Dallas Woodhouse, the executive director of the NC GOP, said Swetnick – whose claim that Brett Kavanaugh participated in “gang rape” parties with members of his high school social circle has been widely dismissed as “not credible” and even “ridiculous” – is “a criminal” who may have “participated in a conspiracy to facilitate child rape” as an adult, and that “she should go to prison, period.” He also claimed that she is guilty of lying to Congress with the explicit knowledge of her lawyer Michael Avenatti, who is seeking to make a name for himself before declaring a bid for the 2020 Democratic Party nomination.


Woodhouse’s claim about Swetnick participating in a “child rape” facility refers to the fact that Swetnick was a college student when she allegedly attended these “gang rape” parties.

When questioned on twitter about his stance regarding the prosecution of sex crimes, Woodhouse replied that rape “is a crime and should be treated as such.”

In his final tweet on the subject, he urged Kavanaugh to sue Swetnick and Avenatti in civil court.

Grassley and Woodhouse aren’t alone in questioning Swetnick’s story. After a thorough investigation, the Wall Street Journal found that her account could not be substantiated after contacting “dozens” of her longtime peers.

Meanwhile, Politico reported that one of Swetnick’s ex-boyfriends had a restraining order against her, and that she has been involved in numerous other legal disputes, including being sued by a former employer.


Still, Avenatti has complained about the FBI’s decision to exclude his client from their background probe into claims of sexual misconduct against Kavanaugh.

Woodhouse doubled down on his claims in an interview with the Charlotte Observer, saying “We stand with sex assault victims 100 percent.” And on Twitter Sunday afternoon, he wrote that he commended Mecklenburg County’s GOP Vice Chair Sarah Reidy-Jones, who last week said she is a survivor of sexual assault, according to WBTV.

“However, this woman and her attorney are doing no favors to assault victims,” he said in an interview Sunday with The N&O. “To believe that a college adult would continue to go to child rape parties with minors and not do something about it would be a crime, and for hundreds of people to never talk about it would require an ongoing criminal conspiracy to keep it quiet.”

“These things not only did not happen, they are impossible. So she needs to be prosecuted as a co-conspirator to child rape or for lying to Congress. Her attorney should also be held to account. Outrageous, impossible allegations greatly harm real victims who we stand with.”

As the backlash against his client grows, perhaps Avenatti should reconsider his view that he’s under “no obligation” to produce evidence that would substantiate his client’s claims.

via RSS Tyler Durden