China Is Now Conducting “Security Reviews” On Foreign Tech Products

In a speech last month, China’s president Xi Jinping had some telling comments around what technology companies can expect in the future as they try and sell into the Chinese market.

According to the New York Times, Xi’s outlined the direction in which he is planning to take China as it relates to technology and cyber security. “One viewpoint holds that we must close ourselves off, make a fresh start, thoroughly shake off reliance on foreign technology and rely on indigenous innovation to pursue development. Otherwise, we would always follow in the footsteps of others.” Xi said. Adding that China must find a middle ground and determine “which things can be imported but have to be secure and controllable; which things may be imported, digested and absorbed for re-innovation; which things can be developed in collaboration with others; and for which things we must rely on our own strength and indigenous innovation.”

Said otherwise, China is going to clamp down even more on tech imports, even admitting that the products will be reverse engineered and reproduced in China, very much as the country has done in its manufacturing sector.

Knowing that, it is not surprising that the Times is reporting that China is conducting security reviews on technology products sold in China by the likes of Apple and other companies. The reviews are alleged to even require employees of the tech companies to answer questions about the product in person.

Apple and other companies in recent months have been subjected to reviews that target encryption and the data storage of tech products, said people briefed on the reviews who spoke on the condition of anonymity. In the reviews, Chinese officials require executives or employees of the foreign tech companies to answer questions about the products in person, according to these people.

The reviews are run by a committee associated with the Cyberspace Administration of China, the country’s Internet control bureau, they said. The bureau includes experts and engineers with ties to the country’s military and security agencies.

While other countries, including the United States and Britain, conduct reviews of some tech products, they usually focus on products that will be used by the military or other parts of the government that are concerned with security, and not on products sold to the general public.

The Chinese reviews stand out because they are being applied more broadly, including to American consumer software and gadgets popular in China, the people briefed on the reviews said. And because Chinese officials have not disclosed the nature of the checks, both the United States government and American tech companies fear that the reviews could be used to extract tech knowledge as well as ensure that the United States was not using the products to spy.

Meanwhile, the lack of disclosure by China’s government around the topic has made it difficult for the US government to voice any objections, but during a congressional hearing last month, Apple’s general counsel Bruce Sewell said that the Chinese government had in fact asked the company to share source code in the last two years, but that Apple had refused.

According to some even more cynical than us, the recent purchase by Apple of a $1 billion equity stake in China’s Uber-equivalent Didi was nothing more than paying tribute to Beijing to be allowed to continue participating in Apple’s lucrative services market on the maindland. If true, expect Tim Cook to make many more such seemingly incongruous “investments” in Chinese companies in the coming months.

Chinese restrictions have been a diplomatic stumbling block the Obama administration has raised concerns about. China had written some rules to wean the country’s banking industry off foreign technology, as well as calling for foreign companies to hand over encryption keys – in both cases China backed down, for now.

While China may be applying its security reviews and control over products in such a manner that makes it difficult for foreign companies to sell into the market if they wish to keep trade secrets, not to mention stifles its citizens access to information (as evidenced by Chinese regulators recent decision to shut down iBooks and iTunes movies), let us not forget that the US government prodded Apple for precisely the same information that it accuses China of trying to obtain. To be sure, the US government’s motives in cases such as this one are always “pure.”

via Tyler Durden

Texas Begins Construction Of Gold Depository

Submitted by Ryan McMaken via The Mises Institute,

Last year, we covered a story coming out of Texas in which the state government was planning to institute a state-controlled "gold depository" that would allow individuals to store their gold in a presumably safe place outside the United States banking system.

This proposition was met with emotionally-charged denunciations from Americans in far away northeastern American states where it was claimed this measure was contrary to the "supremacy clause" and just a terrible idea in general because it undermined faith in the US's central government and the Federal Reserve System. 

Well, in spite of the disapproval of New Yorkers, the Texas legislature passed the bill, and the governor signed it into law last June

"With the passage of this bill, the Texas Bullion Depository will become the first state-level facility of its kind in the nation, increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for fees to store gold in facilities outside our state," Abbott said when he signed the bill.


The depository won’t just store state gold and other precious metals. The law requires that individual customers, and even school districts, be allowed to open accounts. Capriglione has described it as a bank that doesn’t do any lending. 

Originally, the bill appears to have envisioned Texas tax dollars being used to create the facility, but the bill only passed when it was modified to create what is seemingly a state-chartered gold depository that will be privately owned and paid for via fees for gold storage. 

Thus, not surprisingly, several private firms are now trying to become the creators of one of these depositories. The Ft. Worth Star-Telegram yesterday reported

Saab’s company, one of many interested in being involved with the state’s plan to create a depository, proposes building a potentially $20 million facility — with no Texas tax dollars — on 40 acres of land it has in Shiner, about 250 miles south of Fort Worth.

The original sponsor of the bill, State Representative Giovanni Capriglione appears pleased with the progress being made:

“I am optimistic that the depository will be up and running at the end of this year or the beginning of next year,” Capriglione said. “The most important factor is making sure that the process is completed with considerable thought and care.”


At the depository, Texans will be able to open accounts similar to checking or savings accounts at traditional banks — and monitor them online.

The physical construction of the facility is very humdrum compared to the implications of the creation of a depository of this sort.

Laying the Ground Work for Electronic Gold-Based "Money" 

For one, many state politicians hope that the State of Texas will be able to relocate its own gold holdings into Texas from New York where it currently sits. The state spends a million dollars per year on its storage. 

Moreover, existence of the depository opens up the possibilities for users creating a new type of currency in which purchases are made electronically with the backing of the gold in the depository. In other words, one could potentially use the depository's infrastructure to make purchases using gold, and to have gold either directly deposited into another's account, or converted to US dollars and deposited in a conventional bank. Arguably, this is just an electronic version of gold-backed money. 

Ironically, Zero Interest Rate Policy Has Made Gold Depositories More Practical 

And now more than ever, the idea of paying fees on gold deposits has become relatively economical thanks to near-zero interest rates on ordinary bank accounts. In ages past when banks actually paid meaningful interest on deposits, one might wonder why anyone would pay a fee to store gold when one could collect interest on cash at a bank. 

Thanks to the central banks' commitment to near-zero or even negative interest rates, though, holding cash in a bank no longer brings any benefit in terms of investment earnings. That is, the opportunity cost of storing gold in a depository is getting lower and lower thanks to central bank policy.

via Tyler Durden

Marco Rubio vs. Rand Paul on Foreign Policy – and Fantasy vs. Reality

Sen. Bob Corker (R-Tenn.) recently called a Foreign Relations Committee to discuss “America’s Role in the World.” It’s pretty riveting stuff, especially coming after at least 15 years of utter incompetence on the part of the United States when it comes to diplomacy and war-making. Whatever else you can say about how George W. Bush and Barack Obama have mismanaged domestic concerns, you’ve got to admit that they handled foreign policy even more poorly.

Among the guests of honor at Corker’s hearings were former Secretary of State James Baker (under George H.W. Bush) and former National Security Advisor Thomas Donilon (under Barack Obama).

Corker, for what’s it worth, has expressed confidence in Donald Trump’s foreign policy as laid out in the billionaire’s recent “America First” speech. Baker, who also served in the Reagan administration and was involved in the managing America’s response to the end of the Soviet Union and the first Gulf War, has been widely portrayed as dismissing Trump’s foreign policy vision, which emphasizes getting allies to pay more of the costs associated with security (“burden-shifting”) and generally being less gung-ho in terms of military intervention.

In fact, Baker’s response was pretty mediated, as elements of Trump’s plan (such as it is) reflect Baker’s own ideas about “selective engagement,” which argues for a compelling American interest in all military interventions. Rubio got him to say that anything that reduced NATO’s presence in Europe would destabilize the world and Baker also smacked away Trump’s suggestion that letting South Korea and Japan gain nuclear weapons would be a good idea. By the same token, Baker embraced the idea that our allies, whether in Asia, the Middle East, or Europe should be footing more of the defense bill in terms of both dollars and bodies.

You can watch the full hearing here (thank you, C-SPAN!) but first check out these two short, incredible exchanges between Baker and Rubio and then Baker and Paul. Note: These clips are hosted on Rand Paul’s YouTube channel, which is worth keeping in mind while evaluating them.

Rubio wants to “revisit this Libya-Syria situation.” Don’t you see that it wasn’t the United States causing any sort of chaos in these countries, he says. It was the people rising up against tyrants. We just got involved because it was the right thing to do and because, says Rubio, otherwise the Qaddafi and Assad regimes would be toppled and a power vacuum would develop…and radical Islamists would rush in:

I think it’s important when we talk about [these interventions] to remind ourselves these were not efforts by the U.S. government to go in and overthrow dictators. It was the people of those countries…

In the case of Qaddafi, if he had gone into Benghazi and massacred all these people, what you would have seen emerge there would have been all these militias taking up arms, staying in perpuity, leading to the kind of instability we see now anyway….

It was in our national interest to ensure that whatever resistance there was to those dictators would be make up of people more stable and who we could work with, because in the absence of those sorts of developments, those vacuums would be filled by the radical elements that have now filled those vaccums in the absence of our leadership….[emphasis added]

This is where the hawks start chewing their own talons off: “There would have been all these militias taking up arms, staying in perpuity, leading to the kind of instability we see now anyway.”

Seriously, AYFKM? Our actions have led to worst-case outcomes and yet that’s what exactly proves we did the right thing? Rubio, who still defends the Libya intervention and clearly wishes that Obama had followed through on his idiotic, improvised “red line” comments with massive firepower, is somehow claiming with a straight face that absent U.S. military actions…exactly what has come to pass might have come to pass?

Baker responds bluntly: “But that’s not what happened, Senator. We enabled it to happen by using our military.” In fact, Baker goes farther and says the same misguided interventionist impulse was at work in Iraq: “Same thing with Iraq…It’s a bipartisan problem. Look where we are now in all three of those places: Syria, Iraq, Libya.”

Then there’s exchange between Paul and Baker. Paul raises the possibilities that either our strategy was wrong in the first place—that our mideast interventions were misconceived at the conceptual level—or that they were simply mishandled. That is, with better planning and devoting more resources, we might have actually succeeded in toppling dictators and creating democracies. He clearly believes that the former scenario is more accurate. “We think we can just blow up Qaddafi and out of that, Thomas Jefferson will be elected,” he says. “I think it’s a naive notion.” Paul continues that in terms of “selective engagement” these were times when we should have passed on using military force. He also suggests that Russia, given its long-time presence in Syria, will need to be part of any endgame.

Baker agrees with all of that, stressing that when it comes to Syria, of course Russia and Iran will need to be part of any solution to the current situation. He also stresses that in the selective engagement paradigm, each specific situation needs to be looked at in terms of vital national interests and correspondence to American values. “You might decide to even go as far as [using] the military. If you don’t get to that point, you still have the tools of our political, economic, and diplomatic [resources].”

Rubio and Paul thus represent two very different paths forward for American foreign policy. For all sorts of reasons, I fall in line with Paul’s. But here is the question for those who, like Rubio (and Hillary Clinton, for that matter), remain unreconstructed interventionists: What will be different the next time? Under both Obama and Bush, you’ve gotten your way and you can’t pretend that American taxpayers and soldiers didn’t give all the money and flesh you needed to succeed in Afghanistan, Iraq, Libya, you name it.

Moving forward, the onus must be on the interventionists to explain why this time things will work out differently.

from Hit & Run

BofA: “If You Go Down To The Woods Today It Will Be Full Of Bears”

Just days after Bank of America’s equity team joined Goldman, JPM, Citi, UBS and pretty much every other bank (and Gartman) forecasting a market drop in the imminent future with a report laying out “Nine “Reasons To Worry” About A Big Market Drop“, BofA’s cross asset team led by chief investment strategist Michael Hartnett is out with some of his own words of “encouragement”, to wit.

If you go down to the woods today… it will be full of bears. Investors positioned for “summer of shocks”: FMS cash levels up from 5.4% to a high 5.5%; only 12% taking “higher-than-normal” risk; most crowded trade “long quality”. Based on FMS positions, contrarians should be moderately long risk via UK, Japan, tech & industrials, and take profits in EM, energy, discretionary.

What Hartnett is referring to is that according to BofA’s latest Fund Managers Survey, Investors are positioned for “summer of shocks” with
cash levels up to a high 5.5%, one of the highest prints since the Lehman failure. 


But what has professional investors so spooked?

For the answer we look at the monthly survey question what FMS respondents believe is the biggest tail risk. Here, surprisingly, we find that after two months of everyone fretting about “quantitative failure”, or the Fed losing control over markets more than anything, this is now only the third biggest concern and there is a new biggest “tail risk” – Brexit, followed in second place by “China devaluations/defaults”, a worry that did not appear on anyone’s radar one month ago.

Also curious: the spike in worries about “US politics” (which we are confident will only rise higher in the coming months) and the arrival of a brand new worry: stagflation. Why? Perhaps as we noted in our April 1 post “The Next Big Problem: “Stagflation Is Starting To Show Across The Economy.”

While we doubt a Brexit will play out (if there was a real threat of a Brexit, the population would not be allowed to vote in the first place), we are curious which concern will dominate in the coming months, especially if inflation, pardon stagflation, indeed continues to be an increasingly prevalent threat to the US economy.

Finally, for those curious how the history of “biggest tail risks” has changed since January, here is the visual summary.






via Tyler Durden

The Humungous Depression

Submitted by's Robert Gore via The Burning Platform blog,

Economic depressions unfold slowly, which obscures their analysis, although they are simple to understand. Governments and central banks turn recessions into depressions, which are preceded by unsustainable expansions of debt untethered from the real economy. The reduction and resolution of excess debt takes time, and governments and central banks usually act counterproductively, retarding necessary adjustments and lengthening the adjustment, and consequently, the depression.

If one dates the beginning of a depression from the beginning of the unsustainable expansion of debt that preceded it, then the current depression began in 1987. Newly installed chairman of the Federal Reserve Alan Greenspan quelled a stock market crash, flooding the financial system with fiat liquidity. It was a well from which he and his successors would draw repeatedly. Throughout the 1990s he would pump whenever it appeared the market and the US economy were about to dump. In 1999, he pumped because the Y2K computer transition might adversely affect the economy and financial system (it didn’t).

If one dates the beginning of a depression from the time when the benefits of debt are, in the aggregate, outweighed by its burdens, the depression began in 2000, with the implosion of the fiat-credit fueled, high-tech and Internet stock market bubble. Unsustainable debt and artificially low interest rates lower the rate of return on productive investment and saving, increasing the relative attractiveness of speculation. Central bankers and their minions refer to this as “forcing investors out on the risk curve,” crawling way out on a limb for fruitful returns. They have no term for when markets saw off the branch, as they did in 2000 and again in 2008.

Most people don’t see 2000 as the beginning of a depression, but Washington and Wall Street cloud their vision. Stock markets were once essential avenues for raising capital and valuing corporations. Since central bankers’ remit was broadened to their care and feeding, stock markets have become engines of obfuscation. The “wealth effect” supposedly justified solicitude for markets: a rising stock market would increase wealth, spending, and economic growth. For seven years a rising market has coexisted with an anemic rebound and one hears little about the wealth effect anymore. The stock market is the preeminent symbol of economic health, so keeping it afloat has become a political exercise. Sure, central bankers and governments know what they’re doing, just look at those stock indices.

Let’s look at those stock indices. They are measured in fiat debt units, the entirely elastic quantity of which is in the hands of governments and central banks. What if stock indices are valued in a less ephemeral currency, say gold, aka “real money”? By that measure, the DJIA divided by the price of an ounce of gold reached its all-time high of about 41 ounces in May 1999, or just before the depression began. That ratio collapsed to under 7 ounces in September 2011, and currently stands at about 14. If you paid for the Dow in 1999 with gold, you’ve lost 65 percent on your original investment.


There is a general awareness that real family incomes have gone nowhere since the turn of the century; it’s often offered as a reason for the Trump and Sanders ascendancies. Other, less well-known indicators have also deteriorated or declined. What David Stockman defines as “breadwinner” jobs in construction, manufacturing, white-collar professions, governments, and full-time private services, which on average pay more than $50,000 per year, peaked in January 2001 and are still about 3 percent below that peak. The growth in employment since 2001 has been in lower paying part-time jobs, restaurants, retail, medical services, and education, which explains the stagnation in incomes. Two other important measures—labor hour inputs and real net investment—have gone nowhere since 2001. An economy in which hours worked and real investment are not growing is an economy that is not growing.

The US economy has been losing altitude for sixteen years. While debt monetization and interest rate suppression have fueled housing and equity booms, they can’t mask the underlying deterioration. President Obama will be the first president to have presided over an economy that never achieves 3 percent annual growth. That’s by government figures, which must be taken with a shaker of salt. Employment statistics are especially dubious. To the public, they are right behind the stock market as an economic indicator. They are subject to a variety of pertinent criticisms, including their seasonal adjustments and the birth-death model of new business formation, which continues to add to employment although, sadly, more businesses are currently dying than are being born. The government also has a vested interest in understating inflation. Many of the benefits it pays are indexed to inflation, and interest rates on government debt incorporate an inflation premium. Understating inflation overstates the growth of real GDP, probably third on the list of statistics to which the public pays attention.

The Great Depression was not a straight downhill run. There were multiple, widely hailed “recoveries” and stock market rallies, but in 1938 the economy was in worse shape than when Franklin Roosevelt was elected in 1932, and the government was bigger, more intrusive, and more in debt (the same can be said about the government since 2000).



Depressing it is to contemplate how government turning a recession into the Great Depression, but consideration of what Japan has done since its stock market topped out in 1989 can leave one pondering the choice of pills, noose, or handgun.

The Japanese have copied every page of the Keynesian and monetarist playbooks: government debt, public works spending, and regulatory expansion, and central bank monetization of assets and interest rate suppression. Multiple recoveries have been punctuated by multiple contractions. Capitalism has remarkable recuperative powers, but screw with an economy long enough and you not only prevent recuperation, you do lasting damage. Japan and Europe—also beset by persistent economic idiocy—have shown little growth or innovation for decades, leaving the economic idiots responsible muttering about supposed, self-exculpatory, secular stagnation. As the US economy glide paths into zero-and-below-land, Washington, Wall Street, and the Ivy League’s best are muttering the same thing.

Nothing is more telling than birthrates, and in Europe, Japan, and the US, birthrates are below the replacement rate of 2.1 births per couple. When planned, having babies expresses confidence in the future. The Japanese buy more adult than baby diapers, illustrating the demographic crunch and falling dependency ratios (the ratio of able-bodied and employed workers to the population requiring outside support), which understandably increases pessimism and further decreases birth rates among the young.

They see a bleak future and they’re not wrong. The global economy hit stall speed with the commodities crash in 2014 and another rendezvous with terra firma looms. Never has the world been more in debt. True recovery won’t happen until most of it has been repudiated and written off. The current depression is already longer than the Great Depression. By the time it’s over, economic historians will be calling it the Humongous Depression.

via Tyler Durden

Was Yesterday’s SCOTUS Decision in Zubik a Win for Religious Liberty? You Bet It Was

The Little Sisters of the Poor at the U.S. Supreme Court

Yesterday the Supreme Court shocked most everyone by handing down a decision in Zubik v. Burwell (better known as the Little Sisters of the Poor case). This was unexpected because hot-button rulings often come late in the Court’s term—Hobby Lobby v. Burwell, which decided a similar question two years ago, was announced on June 30 even though it, like this one, was argued in March.

The justices’ decision here was also surprising for its unanimity. The more liberal wing was widely expected to side with the Obama administration in affirming the Health and Human Services (HHS) contraception mandate as not violating the Religious Freedom Restoration Act (RFRA). In the absence of a full bench, a 4–4 split would have upheld the four lower courts’ rulings against the Catholic nuns who have become the face of this controversy and the other six petitioners (including Pittsburgh Bishop David Zubik). This was what people overwhelmingly predicted would happen after the conservative Justice Antonin Scalia passed away in February.

But the Supreme Court didn’t split 4–4; instead, the eight justices all agreed to vacate the lower courts’ ruling, remanding the case back down to be heard again in light of the “clarification and refinement in the positions of the parties” that have emerged.

This has been widely described as “punting” on the question at hand. And in a sense that’s right—the justices explicitly said they were declining “to decide whether petitioners’ religious exercise has been substantially burdened, whether the Government has a compelling interest, or whether the current regulations are the least restrictive means of serving that interest.”

But really that’s a lot of hogwash. As David French wrote at National Review, “Speaking as a person who’s argued a few cases in courts of appeal — when the court vacates the ruling you’re challenging, that’s a win.”

Whether the justices want you to see it this way or not, their decision amounts to a ruling against the government, which argued that (a) the HHS “accommodation” offered to the Little Sisters and the other religious nonprofits doesn’t substantially burden their religious exercise; and (b) even if it does, it’s the least restrictive means of furthering a compelling government interest of providing free and seamless contraception coverage to the employees of religious nonprofits.

How do I know the Court believes there are less burdensome ways to achieve that end? Because it already proposed one and got both sides to agree to it.

In the days following oral arguments, the justices took the unusual step of asking the parties to the suit to provide “supplemental briefs” specifically addressing whether the outcome the administration wants could be accomplished without any involvement from the religious employers. Both the petitioners and the government answered that an arrangement whereby the insurance company, and not the employer, is responsible for making the coverage available through a separate plan would be acceptable.

This is the “new development” the Court is using to justify returning the case to the lower courts. In essence, it got the administration to formally concede there are less restrictive ways to make sure women have seamless access to free birth control (which it reluctantly acknowledged despite the solicitor general having spent his oral argument time rigidly insisting that there could be no possible other method of achieving the government’s end).

In challenging the “accommodation,” the petitioners were saying they could not in good conscience take the affirmative step of notifying the government about their refusal to provide contraception coverage, because they knew that doing so would trigger the government to force their insurance providers to offer the coverage anyway. This would make them complicit in a sinful act. The result of this ruling is that they almost certainly won’t have to do the thing to which they were strongly on moral grounds opposed.

That the administration has spent the last four years threatening these seven religious nonprofits with millions of dollars in punitive fines when it now admits the groups’ involvement in providing this coverage isn’t even necessary is at best an indictment of the judgment of the left—and at worst an indictment of its motives.

from Hit & Run

Someone Really Wants This Market To Crash

Over the past month, the topic of “someone” or “someones” rushing to allocate capital toward expectations of a future volatility surge using such volatility derivatives as VXX, has surfaced on several occasions. The first time was three weeks ago when Tom McClellan pointed out that “VIX futures ETF extremely popular now. Can this possibly end well“…


… when he pointed out something that on the surface was counterintuitive, using his post from February 18 when the market has just reached its most recent selloff bottom:

If VXX worked like other ETFs, then as the SP500 falls and the VIX rises, more investors would chase after it and drive up the total number of shares outstanding in VXX.  But instead we see the opposite behavior in the chart above.  Right now, VXX shares outstanding are at one of the lowest readings of the past couple of years [ZH: this was written on February 18], and such low readings are reliably associated with meaningful price bottoms for the SP500.  So rather than seeing the “hot money” piling into VXX as the VIX rises, its shares outstanding data acts more like a depiction of the “smart money”.


By the same token, XIV’s share price has fallen in 2016 as the VIX has risen, and investors have responded by pouring more money into XIV and thus driving up is number of shares outstanding:

Effectively McCleland used the collapse in VIX shares outstanding in the February rout as an indicator that the seling had exhausted itself. He was right. Two months later, it was the surge in VXX shares that caused concern for McClellan.

He was not alone.

At virtually the same time, none other than Goldman, which incidentally was urging clients to sell volatility, made the same disturbing observation saying that “Our view that the VIX may remain low in the near term is at odds with the VIX ETP market, as investors seem to be pouring money into levered long VIX ETPs.

Goldman made several more notable observations:

As the VIX has declined, the demand for VIX ETPs that benefit from a rise in market volatility remains strong, in particular double-levered VIX ETPs such as UVXY and TVIX

Yet oddly enough, the price for ETPs such as the VIX remained disconnected from the demand, leading to a record surge in shares outstanding and thus market cap. Goldman observed that as well, adding that vega exposure had also shot up to never before seen levels:

In April 2016, the market cap of the UVXY topped $1bn for the first time and vega exposure on the UVXY remains near an all-time high at around 120 million (Exhibit 1). The markets two most popular double levered longs are the UVXY and the TVIX. Their combined vega exposure recently stood at around 190 million vega, about twice the vega in single-levered long products such as VXX and VIXY.

Providing some more color on vega, Goldman added that  Vega exposure on longs has tripled since February 11: The total amount of vega exposure across four popular long VIX ETPs (VXX, VIXY, UVXY, TVIX) has tripled since February 11 and recently stood at ~290 million, a record high.

Goldman summarized its finding saying that while “long ETP exposure has been growing, the appetite for inverse VIX ETPs, which benefit from declines in volatility such as the XIV and SVXY, has been muted, with vega exposure remaining range-bound in recent weeks. That’s surprising, since the benchmark index which these underliers track (SPVXSPI) is up 73% since the market low on February 11 and investors often follow performance!”

Only in this case investors were not only not chasing performance, as they traditionally do, they have been betting on a reversal in the market’s upward direction and thus, an explosion in volatility. And they have been doing so in massive – relative to the recent past – amounts.

* * *

This was three weeks ago. Today we decided to update on the number of shares outstanding, and thus both the capital inflow into and the vega, of the two most popular inverse volatility derivative products, the S&P 500 VIX Short-term Futures ETN (VXX) and Ultra VIX Short-Term Futures (UVXY). This is what we found.


We are confident that if Goldman was surprised how many investors in the VIX ETP market disagreed with Goldman’s ‘low vol’ call three weeks ago, it will be absolutely shocked now. Because what the charts show is that someone really wants this market to crash, and is putting their money where their mouth is.

Ironically, that is precisely what Goldman – until recently very bullish on stocks – warned just this weekend may very well happen.

via Tyler Durden

Trumped! Washington’s Fiscal Hypocrisy Is Too Rich For Words

Submitted by David Stockman via Contra Corner blog,

You have to love it when one of Donald Trump’s wild pitches sends the beltway hypocrites into high dudgeon. But his rumination about negotiating a discount on the Federal debt was priceless.

No sooner did the 'unschooled' Trump mention out loud what is already the official policy of the US government than a beltway chorus of fiscal house wreckers commenced screaming like banshees about the sanctity of Uncle Sam’s credit promises.

Let’s see. For 89 months now the Federal Reserve has pounded interest rates to the zero bound because come hell or high water the US economy must have 2% inflation in order to grow and prosper. Other than a handful of rubes from the Congressional hinterlands, there is nary a Washington operative from either party who has questioned the appropriateness or effectiveness, let alone the sanity, of Bernanke-Yellen’s 2% inflation totem.

That means, of course, exactly 30 years from today investors would get back 54.5 cents in inflation-adjusted money per dollar of principal on 30-year treasury bonds if the Fed hits its sacred targets.

If that’s not default, it is surely a deeper “discount” than even the Donald had in mind while jabbering to CNBC about his years as the King of Debt.

Oh, yes, the monetary geniuses who peddle the 2% inflation gospel claim we are all in it together. That is, prices, wages, profits, rents and even indexed social benefits allegedly all march upwards at 2% per year, and, save for minor leads and lags in timing, no one is financially worse for the wear.

C’mon. That’s rank poppycock. The truth is, savers get killed and borrowers get windfalls; the wages of upper-end workers keep-up, while the purchasing power of paychecks lower down the ladder shrinks continuously; social security recipients get recompense, private pensioners get shafted. Yada, yada.

Moreover, the biggest windfall harvesters of the Fed’s deliberate debt default policy are the leveraged gamblers of Wall Street and the clueless debt-addicted politicians of Washington.

Even if you grant that the latter have no inkling that the savings function is the key to capitalist prosperity, they do spend a goodly amounted of time waxing about their endless affection for America’s working people. Why, Governor Kasich never finished a single GOP primary debate without claiming he understood how to improve the US economy because his father was a mailman.

So take a look at the graph below on real wages since the Fed went full tilt with the printing press in 2007. This is not a picture of 2% lockstep.

Less educated and lower wage workers have experienced shrinking real wages and for a self-evident reason. On the margin, they are more exposed to the lower nominal wages of foreign goods and services competitors than are workers on the upper end of the jobs and income ladder.

Indeed, the 2% inflation campaign in the real world is the very opposite of the Keynesian lockstep claim. Its incidence among economic agents and classes is actually capricious and inequitable in the extreme.

In fact, it is a grand policy scheme of random monetary default. But since the Donald had the temerity to broach the topic—whether by inadvertence or by purpose—–the spendthrifts of the Imperial City are now scrambling to smother us in a verbal blanket of phony fiscal rectitude.

education wages

In that regard, there are few more noxious precincts of statist fiscal hypocrisy than that occupied by the ranks of scribblers and bloviators at Politico.

By the lights of these folks, everything that has been done in the Imperial City these last several decades should have been done. Certainly, there is no fiscal crisis that might warrant radical ideas like those proffered by Trump.

Why Obama, the Fed and the Congress actually saved the country from Great Depression 2.0 in 2008-2009. Since then, in fact, we have been marching resolutely toward economic recovery and fiscal stabilization.

No, not even close. There has been no meaningful economic recovery and the fiscal condition of the nation is frightful.

As to the former, there are still fewer full-time, full pay “breadwinner” jobs than before the crisis. Likewise, the median household’s real income is still far lower than when the previous Clinton was shuffling out of the White House In January 2001.

But among all of the beltway cant, nothing is more grating than the economic policy architects of the Obama White House taking to the pages of Politico to scold Trump about fiscal responsibility.

These people have no shame. And among them, there are few Washington apparatchiks more culpable than Gene Sperling, who headed Obama’s economic policy council.

To wit, between December 2008 and the present, the public debt exploded from $10.7 trillion to $19.4 trillion. That means that on Obama’s watch, and with Sperling’s presumptive advice, new public debt was issued equal to 80% of the total debt created during the entire prior 220 years of the republic and the tenure of 43 Presidents!

That’s right. The Obama White House has indulged in fiscal profligacy like never before, yet this cat has the audacity to unload a self-righteous sermon on the sanctity of Washington’s credit:

“……(Trump has no) sense of the economic and historical importance of America maintaining an iron-clad commitment to stand by its word on our national debt……… U.S. Treasury obligations are the least risky financial asset on the planet and the benchmark against which the price of all other financial assets is set……(not).even the slightest awareness from Trump that he that he might be playing with economic fire because if Treasuries were seen as no longer risk-free that would shake to its very foundations literally the core assumption of global financial markets, meaning that the interest rate on every other financial asset—mortgages, car loans, credit for businesses large and small—could go up perhaps by a lot.

Well now. Has Sperling and his ilk ever considered how high interest rates might actually be—-save for the massive bond market fraud carried out by the Fed and the rest of the world’s central banks?

Even the supposedly economically benighted types among us, apparently Donald Trump included, know that neither Washington, the IMF or the G-20 has repealed the law of supply and demand. Nor has the CIA yet classified as a state secret the amount of sovereign debt and other financial assets that the central banks of the world have vacuumed-up in the name of monetary “stimulus” over the past two decades.

The fact is, about $19 trillion—–including more than half of the publicly traded US Treasury securities—– has been sequestered in central bank vaults since the mid-1990s. All of that debt would have otherwise massively burdened the world’s limited supply of real savings from income, thereby causing interest rates to soar. Instead, it was made to disappear from the market circulation by monetary authorities hitting the “buy” key on their digital printing presses.

Global Central Bank Balance Sheet Explosion

And the Bushbama enablement of this giant backdoor form of default on honest debt via the appointment of avowed Keynesian money printers to the Fed isn’t the half of it. Whenever a corporal’s guard of Capitol Hill fiscal antediluvians has tried to stop the government spending machine by refusing to raise the Federal debt ceiling, their beltway bettors have cried “full faith and credit”, knowing that the Fed and its front-running Wall Street punters would buy-up the flood of new treasury paper.

In this vein, Sperling recommended that Trump get himself educated by attending “Hamilton” next time he visits Broadway and remonstrating pedantically about how “generations of Americans have benefited from a historical commitment started by Alexander Hamilton to ensure the full faith and credit of the U.S. is rock solid”.

He then lobbed-in a self-justifying stink bomb by suggesting Trump is utterly bereft of the wisdom and courage displayed by the Obama White House when it starred down the 2011 debt ceiling challenge of GOP backbenchers. Said Obama’s former chief fiscal strategist,

Imagine if we were in the middle of another debt limit stalemate like we had in 2011 (when I was watching from the White House, as director of the National Economic Council) and a President Trump told the world—or repeated to the world—that since the budget turmoil might be making U.S. debt looked shaky, he was open to buying back debt at a discount and was instructing his secretary of the Treasury to consider such options? What if he then went on for days confusing markets as to his true intentions while dropping lines about being the “King of Debt,” “playing poker” or “printing money?” Does anyone doubt that even without any congressional action such Trumpisms could lead to a global panic with unknown economic harm to the global economy and the long-term economic reputation of the United States?

Well, here’s what really happened. Roughly 80% of Federal spending consists of transfer payments, debt service and other essentially locked-in commitments under law. The debt ceiling is the only frail reed by which the inexorable expansion of this fiscal doomsday machine can be arrested.

So when the “full faith and credit” chest-thumpers on both ends of Pennsylvania Avenue quashed the backbench uprising in August 2011, they insured that Washington’s actual march toward default would continue unabated.

In fact, total government transfer benefits have grown from $1 trillion per year at the turn of the century to $2.7 trillion at present. Even then, the baby boom bulge driving this budget breakout is just getting up its demographic head of steam. During the next 15 years the entitlement tsunami will truly become a fiscal doomsday machine.

Indeed, while the Sperlings of the beltway have been harrumphing about full faith and credit and the sanctity of the humongous debts that they are piling on to generations born and unborn, the  doomsday equation shown in the graph below has been permitted to run its course unmolested by Washington’s supposed fiscal watchmen.

To wit, since the turn of the century government transfer payments have been growing at approximately 2X the rate of wage and salary growth. Just how long do this geniuses think this trend can be maintained?

Government Transfer Payments Have Grown 2X Wages

But not to worry. We will grow our way out of it. As we indicated last week, Imperial Washington’s official fiscal scorekeeper, the Congressional Budget Office (CBO), has deemed in its Keynesian wisdom that the business cycle has officially been vanquished and that the US economy will enter the nirvana of Full-Employment at Potential GDP some time next year.

Not only that. It will remain there for time ever more, world without end. By the time we get to 2026 we will have had 207 straight months without a recession according to the CBO.

Business Cycle Recoveries Length- Click to enlarge

Yes, that’s what the full faith and credit brigade swears by.  Even then, however, the budget deficit will hit $1.3 trillion and 5% of GDP by 2026 under current policy.

Imagine what will happen in the real world when the Red Ponzi finally crumbles in China and the global economy plunges into a prolonged deflationary recession?

Needless to say, Sperling has left the White House and is now out humping for Hillary, who promises to lower the Medicare age to 50 years and distribute a goodly amount of other free stuff from Bernie’s playbook.

Alas, the fiscal menace at loose in the land long pre-dated Donald Trump.

In fact, it’s precisely apparatchiks like Sperling and pols like Hillary whose policies have paved the way for his improbable rise. And just in the nick of time.

via Tyler Durden

Crude Slides After Oil Inventories Drawdown Less Than Expected

Following last week’s chaotic Genscape build (and warning), API build, but DOE draw, and subsequent face-ripping rally, tonight’s API data signaled a lower than expected draw and sparked further chaos in prices as they jerked higher (“it’s a draw”) only to slide on missed expectations. Having reached 7-month highs during the day session, the 1.1mm barrel drawdown missed expectations of a 3.5mm draw dramatically and sparked selling pressure. However, a smaller than expected build at Cushing stalled the weakness along with notably large drawdowns in Gasoline and Distillates.


  • Crude -1.1m (-3.5mm exp, last week -3.4mm)
  • Cushing +508k (+1.1m exp)
  • Gasoline -1.9mm (-1m exp)
  • Distillates -2m (-1m exp)



Which, after last week’s chaos…


Kneejerked crude higher before it dropped on the miss…


Charts: Bloomberg

via Tyler Durden