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Lira Crashes Through 7.00 As Erdogan Urges Turks “Not To Pull Money Out Of Banks”

Following emergency bank meetings and numerous pleas by Erdogan for Turks not to “pull FX out of their banks,” blaming the country’s current economic crisis on America, the Lira has opened massively weaker – crashing below 7.00 per dollar for the first time ever…

Recep Tayyip Erdogan accused other countries on Sunday of mounting an “operation” to bring down the Turkish economy, but gave no indication he would meet investors’ demands for an emergency plan to prop up the plunging lira.

“I’m calling out to industrialists, do not attack banks to buy FX,” said Turkish President Recep Tayyip Erdogan in a speech in Trabzon.

“It is industrialists’ duty too to keep this nation on its feet. Otherwise we will set into motion our plan B and C,” he added.

Sounds very scary – Plan B and C… we can guess that the ‘B’ stands for ‘Block’ capital outflows and ‘C’ stands for confiscation of gold and dollars.

Reuters reports a low level of 7.22 – all of which implies the Turkish banking system is done.

Goldman Sachs warns that further lira depreciation to 7.1 would erode all of Turkey’s banks’ excess capital.

Within the current backdrop, we view banks as being vulnerable to Turkish Lira depreciation given that it impacts:

(1) capital levels due to a meaningful portion of FC assets, which increase RWAs in local currency terms on Turkish Lira depreciation,

(2) asset quality and cost of risk, as Turkish Lira volatility can put stress on borrowers’ ability to repay as well as underlying collateral values. Moreover, Lira depreciation leads to higher provisioning requirements for FC NPLs, though banks are hedging this risk and can offset the impact through trading income.

The CET 1 ratio for Turkish banks under our coverage is around 13.2% on average on a bank-only basis and 12.2% on a consolidated basis, vs. 8%-9% fully-phased in requirement. We calculate that every 10% Lira depreciation impacts bank’s capital by c.50bp on average. Indeed, 14% Lira depreciation in 2Q18 took away around 80bp off bank’s CET 1 ratios. We estimate that the c.12% depreciation of the Turkish lira since June 30, 2018 would further reduce capital by c.60bp on average (pre internal capital generation and any management action).

We view Yapi Kredi as the weakest positioned on capital levels, with 2Q18 consolidated CET 1 of 10.7% vs. 8.5% fully phased-in minimum requirement. While the recent rights issue added 140bp to capital levels, Lira depreciation offset it by around 80bp.

 

We calculate that quarter to date 3Q18 Lira depreciation would offset the remaining c.60bp capital uplift from the rights issue, though this may be mitigated through internal capital generation and a potential transition to an IRB-based approach. As a result, incremental Lira depreciation could increase capital concerns for banks, especially for ones with lower capital levels.

We calculate that further Lira depreciation to around 7.1 vs. USD on average could largely erode banks’ excess capital

 

 

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Over 100 Newspapers Collude To Decry Trump’s “Dirty War On The Free Press”

Yesterday, we noted The Boston Globe’s ‘call to action’ for the nation’s newspapers to collude to fight back against what they called Trump’s “dirty war against the free press.”

“We propose to publish an editorial on August 16 on the dangers of the administration’s assault on the press and ask others to commit to publishing their own editorials on the same date,” The Globe said in its pitch to fellow papers.

Today we see the results.

As of today, CNN reports that Marjorie Pritchard, the Globe’s deputy editorial page editor, says “we have more than 100 publications signed up, and I expect that number to grow in the coming days.”

The American Society of News Editors, the New England Newspaper and Press Association and other groups have helped her spread the word.

“The response has been overwhelming,” Pritchard said. “We have some big newspapers, but the majority are from smaller markets, all enthusiastic about standing up to Trump’s assault on journalism.”

Instead of printing the exact same message, each publication will write its own editorial, Pritchard said. That was a key part of her pitch:

“The impact of Trump’s assault on journalism looks different in Boise than it does in Boston,” she wrote. “Our words will differ. But at least we can agree that such attacks are alarming.”

Pritchard said she expects differing views from the editorials, “but the same sentiment: The importance of a free and independent press.”

CNN proudly crows that the coordinated editorials may be another example of unity across the news business, or, as we noted previously, another example of supreme hypocrisy – as a ‘free and independent’ press being coerced to collude on the same story against their President.

Finally, the ‘media’ should be a little careful what they wish for, as Axios show below, the Trump news cycle is paying their bills handsomely.

The first half of 2018 has been extremely busy, as seen in Google News Lab’s data on the googling trends of the public. It shows when and how much people searched about 30 of the biggest news events.

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“A Bull Market Is Like Sex: It Feels Best Just Before It Ends…”

Via RealInvestmentAdvice.com,

The Run Ends At The Highs

It always fascinates me how technical analysis is, more often than not, confirmed by some event. As I noted in last week’s missive:

“Currently, the ‘bulls’ remain clearly in charge of the market…for now. While it seems as if much of the ‘tariff talk’ has been priced into stocks, what likely hasn’t, as of yet, is the rising evidence of weakening economic data (ISM, employment, etc.), weakening consumer demand, and the impact of higher rates.

While on an intermediate-term basis these macro issues will matter, it is primarily just sentiment that matters in the short-term. From that perspective, the market retested the previous breakout above the March highs last week (the Maginot line) which keeps Pathway #1 intact. It also suggests that next week will likely see a test of the January highs.”

“With moving averages rising, this shifts Pathway #2a and #2b further out into the August and September time frames. The potential for a correction back to support before a second attempt at all-time highs would align with normal seasonal weakness heading into the Fall.”

As shown in the updated “pathway chart” above, the market did indeed attempt to test all-time highs in the market. But, as I noted, the overbought condition provided the fuel for a correction given the right catalyst.

That catalyst appeared on Friday as the Lira plunged and Turkey edged closer to an economic crisis. As Daniel LaCalle noted:

“The Turkish Lira collapse should have surprised no one. Yet, in this bubble-justifying market, it did.”

“First and foremost, the lira decline has been ongoing for some time, and has nothing to do with the strength of the US dollar in 2018

The collapse of Turkey was an accident waiting to happen and is fully self-inflicted.”

We will come back to Turkey in a moment, but the important point here is with the market overbought, and extended following the recent run, we have been suggesting that holding onto cash in the short-term may be wise. As noted last week:

“With our portfolios nearly fully allocated, there are not a lot of actions we need to take currently as the markets continue to trend higher for now. We will continue to monitor our exposure and hedge risk accordingly, but with the weekly ‘buy signal’ registered, we are keeping our hedges limited and are widening our stops just a bit.

As noted above, a short-term correction is needed before adding further equity exposure to portfolios.” 

Also, last Tuesday, I discussed the bond yields were potentially signaling a problem for the market.

“On a very short-term basis, the 10-year Treasury yield has started a potential-topping process. Given that ‘yield’ is the inverse of the ‘price’ of bonds, the ‘buy’ and “sell” signals are also reversed.

As shown below, the 10-year yield appears to be forming the ‘right shoulder’ of a ‘head and shoulder’ topping formation and is currently on a short-term ‘buy’ signal. Such would suggest lower yields over the next couple of months.”

“The two ‘bond buy; signals above aren’t a rarity. The chart below expands this view back to 1970. There have only been a few times historically that yields have been this overbought and trading at 3 to 4 standard deviations above their one-year average.”

“The outcome for investors was never ideal.”

Now, back to Turkey.

Over the last couple of weeks, I have been repeatedly discussing the importance of rising geopolitical stresses from Iran, to Russia, China, and now Turkey. The common thread to all of these can be traced back to the current Administration and the fiscal policies currently being implemented.

While “tariffs” and an ongoing “trade war” have been largely dismissed in recent weeks in the exuberance to push the financial markets to all-time highs, the economic realities of higher interest rates, rising input costs from tariffs, economic impacts from sanctions, and tighter global liquidity are not a healthy mix for the economy or the markets.

Turkey is a far more relevant risk to the global economy than Greece was. As Daniel notes:

“On one hand, the exposure of eurozone banks like BBVA, BNP, Unicredit to Turkey is very relevant.  Between 15% and 20% of all assets.

On the other hand, the rise in non-performing loans is evident.  Turkey’s loans in US dollars account for around 30% of GDP according to the Washington Post, but loans in euro could be as much as another 20%. Turkey’s lenders and governments made the same incorrect bet that Argentina or Brazil made. Betting on a constantly weakening US dollar and that the Federal Reserve would not raise rates as announced. They were -obviously wrong. But that erroneous bet only adds to the already existing monetary and fiscal imbalances.”

Not bailing out Turkey,on the other hand, would cause a  much larger crisis than Greece was.”

A Risk Without A Backstop.

While many will likely quickly compare the current “Turkey Tragedy” with “Greece” and deem it to be a “non-event,” there is one difference you may want to pay attention to.

During the entirety of the Greek, Ireland, and Cyprus economic disasters, not to mention Brexit, the Federal Reserve was hard at work suppressing interest rates and pushing an unprecedented amount of liquidity into the financial markets. Not only was the Fed fast at work, but was joined by the Central Banks of Europe, China, Japan, and England. The chart below shows the timeline of the Greek crisis as compared to the S&P 500 and the Fed’s balance sheet.

Not surprisingly, corrections in the market were quickly arrested as floods of liquidity, and assurances from the Fed of ongoing accommodative support, kept Wall Street in coordinated play.

Today, the world is vastly different. As Turkey hits center stage with its current economic and debt crisis, the Fed is hard at work reducing monetary accommodation and hiking interest rates. Japan, China, and the ECB have all signaled they too are beginning to slow monetary interventions.

Without a safety net this time, the current crisis in Turkey may well reveal the fragility of the global financial system once again.

A Quick Trip Through History

By Doug Kass

“A bull market is like sex. It feels best just before it ends.” – Warren Buffett

Today it can be argued that the stock market is as uncritically loved (with the S&P Index at an elevated 2850) as it was unreasonably loathed nearly nine and a half years ago (with the S&P Index at a horrifying 666)

Investors are prone to be bullish at the end of a Bull Market when prices are high and bearish at the bottom of a Bear Market when prices are low – as speculation is a social activity carried on by herds and what I like to call “Group Stink.’

Since the mass of people have most of the money, the crowd is more often than not on the winning team.

However, when the majority is confident in view, are all on the same side of the boat and have fully discounted a profitable future (“first level” v. “second level” thinking) — Mr. Market becomes vulnerable to a surprise as markets become exposed to the unexpected. We may imagine the financial future, but it can never be surely known.

We know the past and the present and, at times (and perhaps too often) we project the familiar out into the unknown. At inflection points, this act of projecting the familiar frequently produces unsatisfactory results.

History teaches us investment lessons but it doesn’t tell us which lessons to apply and when.

As Howard Marks writes,

“The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.”

I have observed that, at the end of every Bull Market, progress is blurred and becomes fantasy. A new Utopianism dominates financial thinking and the consensus is swayed towards the notion of a long and uninterrupted economic and profit boom – world without risk .

(Who can ever forget Peter Schwarz’s and Peter Leyden’s, Wired Magazine (1997) article, ” The Long Boom: A History of the Future, 1980-2020?)

Markets tend to make opinions. There is a strong inclination and nature to extrapolate as “group stink“ is the favorite market odor. Or as The Divine Ms M regularly writes,

“There is nothing like price to change sentiment.”

We are nearly a decade into an economic recovery and Bull Market. We must look for signposts – both fundamental (as I outline every morning in my Diary) and anecdotal.

Market tops come in all shapes and colors.

Perhaps the first stock market crash (Kipper und Wipper), occurred in 1623. It was caused by fraudulent foreign coins minted in the Holy Roman Empire for the purpose of raising funds at the start of the Thirty Years War.

Fourteen years later it was the Tulip Mania Bubble in the Netherlands during which contracts for bulbs of tulips reached extraordinarily high prices (which suddenly collapsed).

A century later, in The Mississippi Bubble, Banque Royale by John Law stopped payments of its note in exchange for specie and as a result caused an economic collapse in France.

The South Sea Bubble of 1720 affected early European stock markets during the early days of chartered joint stock companies.

Fast forward to The Panic of 1901 which lasted three years and was sparked by the assassination of President McKinley to be followed by a severe drought.

Six years later a panic followed President Roosevelt’s attack on the railroad monopolies (think Alphabet’s Google (GOOGL) and Amazon (AMZN) ).

Over history, and as we have moved towards an increasingly flat and interconnected world, the dominoes of currency have had broad economic and investment ramifications – becoming ever more influential contributors to possible stock market panic in a U.S. dollar debt-denominated world. (See the recent collapse of Russian and Turkish currencies, as an example, of modern day risks).

Consider some other, more recent warning signs in history that produced market tops:

  • A failed leveraged buyout of (UAL) led to a stock market plunge in 1989 (undermined future leveraged deals).

  • The Russian Debt Crisis in 1998 happened when the ruble was devalued and Russia defaulted on its debt.

  • The ill fated Time Warner/AOL combination closed minutes before the Nasdaq top in 2000. (Ultimately the OTC market fell by -81% in the next few years).

  • Goldman Sachs’ 2007 Abacus CDO deal preceded the mortgage derivative fiasco that led to the Great Recession.

Maybe this market top, too, will be caused by the unexpected – choreographed by a modern day P. T. Barnum, an ostrobogulous Elon Musk and his sui generis automobile.

“There’s a sucker born every minute.”  – P.T. Barnum

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Guided Bomb Fragments At Site Of Yemen Bus Airstrike Trace Back To Lockheed Martin

A prominent Yemeni journalist who throughout the war has been instrumental in getting images and information out of the country ahead of Western journalists has photographed and examined fragments from one of the exploded missiles found at the site of the US-Saudi coalition airstrike on a school bus in Yemen, which left as many as 50 people dead and 63 injured — the vast majority of which were children. 

The image of the missile fragment, believed to be among those that scored a direct hit on the bus full of children traveling through Dahyan market in Saada province last Thursday, was uploaded by Sanaa-based Hussain Albukhaiti and quickly spread online over the weekend. It appears to be a US-made MK-82 guided bomb produced by Lockheed Martin.

Ben Norton, an American journalist among the first to track down publicly available government contract information showing the MK-82’s likely origins, said of the bomb fragment imagery: “Yemeni journalists found this fragment of the bomb Saudi Arabia dropped on a school bus full of children in Yemen. It’s a US-made MK-82 guided bomb, which has been used in previous attacks on Yemeni civilians. The cage code on the bomb is Lockheed Martin’s.“

Bomb fragment said to have been photographed at the scene of Thursday’s coalition strike on a school bus full of children. 

The MK-82 is a 500-pound air dropped guided bomb which US Air Force and military publications previously touted as “causing the least amount of collateral damage” — US defense contractors have over the past few years sold the MK-82 to Saudi Arabia under contracts worth tens of millions of dollars. 

The CAGE Code, or Commercial and Government Entity Code, is a number assigned to suppliers of various government or defense agencies which provides a standardize method to track military items to a given facility at a specific location. According to one defense contracting consultation site, The Department of Defense’s Defense Logistics Agency, (DLA) assigns the five-character ID and uses alpha numeric identifier is assigned to entities located in the United States and its’ territories.

Ben Norton says the Cage Code on the fragment reportedly found at the site traces to US government contractor Lockheed Martin.

The code on the panel fragment in the photograph reads: 94271.

Ben Norton further tracked down specific contracts through 2016 and 2017 showing that Lockheed Martin/General Dynamics is the key supplier of the MK-82 500-pound bombs to the Saudi military (in 1997 General Dynamics acquired Lockheed’s Armament Systems and Defense Systems productions divisions).

The separate contracts are collectively worth over $60 million and were approved by US Army Contracting Command. 

In 2016 the Saudi coalition, of which both the US and Britain play a lead role, used the US-made MK 82 guided bombs to attack a funeral in Sanaa, Yemen’s capital city, which killed over 140 and wounded at least 500 more. 

At that time The Intercept identified external bomb fragment markings found in the debris to track it to the United States. 

During the State Department’s daily press briefing at the end of last week, spokesperson Heather Nauert was asked point blank by Associated Press reporter Matt Lee, whether the US condemns the attack.

It resulted in a drawn out testy exchange, but Matt Lee laid out the case for direct US complicity in the attack on the bus packed with children: “The Saudis obviously are the ones who conducted this, but they do that with weapons supplied by the U.S., with training supplied by the U.S., and with targeting information, targeting data, supplied by the U.S. How can something like this happen?” he said.

Not only did Nauert refuse to say the US condemned the attack, but wouldn’t so much as agree to simply call for an independent investigation into the incident (she called only for a Saudi-led inquiry) which killed at least 29 children and has resulted in the United Nations launching an independent probe. 

Previously last week, just before the horrendous attack on the school bus, Nauert had unambiguously stated the Saudi coalition’s ongoing airstrikes on Yemen are legitimate and justified.

The Saudis for their part called the incident part of a “legitimate military operation” soon after it happened, ultimately blaming Shia Houthi rebels who control the region.

In April of 2016, Bruce Riedel, a 30-year CIA officer and senior fellow at the Brookings Institute, told a conference audience, “If the United States and the United Kingdom, tonight, told King Salman [of Saudi Arabia] ‘this war has to end,’ it would end tomorrow. The Royal Saudi Air Force cannot operate without American and British support.”

Last week’s coalition airstrike on the bus elicited rare bipartisan outrage among a handful of congress members, including from Senator Chris Murphy (D-Conn), who said in a statement, “The Saudi/UAE/U.S. bombing campaign is getting more reckless, killing more civilians, and strengthening terrorists inside Yemen. We need to end this – NOW.”

The Pentagon has long tried to present its role in the conflict as attempting to stave off humanitarian catastrophe in Yemen, yet as even NPR confirmed while reporting from inside the country earlier this year the US military “has provided targeting information, equipment and aircraft refueling to the Saudi air campaign, which has been widely criticized for being indiscriminate and killing civilians in places like hospitals, funerals and homes.”

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Going ‘Cold Turkey’ – Who’s Going To Be Buying Lira On Monday?

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

Recep Tayyip Erdogan became Prime Minister of Turkey in 2003. His AKP party had won a major election victory in 2002, but Erdogan was banned from political office until his predecessor Gül annulled the ban. Which he had gotten in 1997 for reciting an old poem to which he had added the lines “The mosques are our barracks, the domes our helmets, the minarets our bayonets and the faithful our soldiers….”

The Turkish courts of the time saw this as “an incitement to violence and religious or racial hatred..” and sentenced him to ten months in prison (of which he served four in 1999). The courts saw Erdogan as a threat to the secular Turkish state as defined by Kemal Ataturk, the founder of modern Turkey in the 1920’s. Erdogan is trying to both turn the nation towards Islam and at the same time not appearing to insult Ataturk.

The reality is that many Turks today lean towards a religion-based society, and no longer understand why Ataturk insisted on a secular(ist) state. Which he did after many years of wars and conflicts as a result of religious -and other- struggles. Seeing how Turkey lies in the middle between Christian Europe and the Muslim world, it is not difficult to fathom why the ‘father’ of the country saw secularism as the best if not only option. But that was 90 years ago.

And it doesn’t serve Erdogan’s purposes. If he can appeal to the ‘silent’ religious crowd and gather their support, he has the power. To wit. In 2003, one of his first acts as prime minister was to have Turkey enter George W.’s coalition of the willing to invade Saddam Hussein’s Iraq. As a reward for that, negotiations for Turkey to join the EU started. These are officially still happening, but unofficially they’re dead.

In 2014 Erdogan finally got his dream job: president. Ironically, in order to get the job, Erdogan depended heavily on the movement of scholar and imam Fethullah Gülen, who, despite moving to Pennsylvania in 1999, still had (has?) considerable influence in Turkish society. Two years after becoming president, Erdogan accused Gülen of being the mastermind behind a ‘failed coup’ in 2016, after which tens of thousands of alleged Gülenists were arrested, fired, etc.

Fast forward to the past week. Donald Trump imposed tariffs on Turkey, ostensibly because Erdogan refuses to free an American pastor. The result was a god-almighty drop in the Turkish lira. Analysts at Goldman Sachs said if it reached 7:1 vs the USD, it would be game over for Turkish banks. It got to 6.8:1 before falling back to 6.4:1. And without support from China or the IMF, it would indeed appear the game’s up.

With a stronger dollar, investors’ urge to have their money in emerging markets fades away. And with Turkey being the ugliest horse in the EM glue factory (perhaps after Argentina, but that’s a whole different story), it’s only logical it would be the first emerging market to see foreign investment disappear. It’s the easiest thing in the world, and It looks something like this:

Here, Turkey’s the main outlier. Tyler Durden’s comment: “as JPMorgan showed 2 months ago, Turkey faces a secondary threat in addition to its gaping current account deficit: a massive and growing debt load. If foreign buyers of Turkish debt go on strike, or if Turkey is unable to rollover near-term maturities, watch how quickly the currency crisis transforms into a broad economic collapse.”

This next graph from the IIF shows how much debt Turkey has, and in which sectors. Not much household debt, which is positive, but a monster non-financial corporate debt, which is definitely not. NOTE: Hungary is no. 2 on this one, but look at the graph above, and you see that while Turkey has a current account DEFICIT and RISING external debt, Hungary has a current account SURPLUS and FALLING external debt. Don’t do the apples and oranges thing! Also note that Argentina’s debt is almost all government (bonds)

Along that same line, I saw Tom Luongo today compare Turkey now to Russia in 2014/15, but Moscow’s USD and EUR debt is about 25%, while Turkey’s is at 70%. it’s a very bad comparison. Russia has had sanctions for ages, and it’s had plenty of time to adapt its economy to them. They have to hold some USD and Treasury’s, but they’re largely fine. Turkey is not.

The third graph is useful because it depicts what currencies countries’ non-financial sectors have borrowed in. Again, Turkey is an outlier, this time in its USD exposure.

And unsurprisingly, we have EU banks exposed to Turkey. What’s wrong with BBVA? What’s wrong with Draghi?

But this is easy stuff. We know all this, or we could have. Turkey has been splurging on debt at least ever since Erdogan became PM 15 years ago. He bought his popularity to a large extent with large scale infrastructure projects, without letting on the country -and its corporate sector- were financing the projects with money borrowed from abroad (he built a $100 million, 1000-room palace for himself as well).

Where I think it gets really interesting, and I’ve been keeping away a bit from what others have written the past few days, is in what Erdogan knows about this, and how long he’s known how dire the situation is, and what he’s planning to do next. Because if he knows how bad things are, and he has it for a while, he may well have orchestrated the recent fall-out with Trump et al, to use it as a political tool.

What Erdogan needs is someone to blame for his collapsing economy. And also, if he can get it, a bail-out from somewhere anywhere. Problem with the bail-out thing is, no matter what option might be available, and it’s only might be, he will be forced to relinquish a lot of the central control he’s carefully built up through constitution amendments etc.

His -maybe- options are the IMF, Russia and China. The IMF equals America, and even if they feel a loan to Istanbul is better than an outright collapse, they will take his control over the central bank away, and probably much more – austerity on steroids.

Russia might want to assist, if only to get Turkey away from NATO, which Putin sees as a growing threat now it keeps approaching his borders ever more. Greece is presently in an angry spat with Moscow because the latter is trying to frustrate the Macedonia name deal that the US has been encouraging, which would lead to Macedonia NATO membership, and even more NATO troops right on Russian borders.

But Putin hasn’t forgotten Erdogan shooting down a Russian jet fighter in 2015, and you can bet he will avenge that ‘incident’. He’s at best ambivalent about supporting Erdogan, but he recognizes the potential advantages. Then again, he also recognizes the pluses of letting Turkey slide into a position where Erdogan will be forced out and the secular state reinstated. Russia doesn’t want more Muslim states on its borders anymore than it wants more NATO. Suffice it to say Putin’s watching closely. And he’s got his moves ready.

China sees things differently; it can of course appreciate the potential of Turkey as a strategic gem, if only for its Belt and Road Initiative, but Beijing can also see the potential problems. It’s easier -and much cheaper- to buy up Greek assets for that same purpose -and for pennies on the dollar- now that the EU and US have forced the country’s economy to slide into third world territory. Still if Erdogan gets desperate enough, Xi may yet jump in. But Erdogan will not be an independent actor anymore, in his own country. Xi does not dole out Christmas gifts.

On Saturday, Erdogan -again- summoned Turks to bring home their foreign funds and to change all dollars and euros and bonds for lira. That may seem strange -and it probably is- because the first reaction is for people to do the exact opposite as long as the lira is plunging. But it appeals to that same religious sentiment that he has founded his entire political power on. Without it, he’s done anyway.

His approach now is to blame someone else for Turkey’s economic problems. Which is nonsense for anyone who has the valid details, but remember, his gutting of the press after the alleged ‘coup’ two years ago has left precious little information available to the Turkish people.

Erdogan has said he will look for other friends than the US. As detailed above, that will not be easy unless he’s prepared to give up substantial amounts of his power. He’s not prepared for that. It’s much easier for him, let alone advantageous, to claim there’s an economic war against Turkey being leveled. And he wouldn’t even be 100% wrong.

Thing is, to prevent the latest escalation, all he would have had to do was to release an American pastor. The fact that he didn’t is perhaps more telling than anything in all this. He’s looking for someone, come country, some organization perhaps, to present as an enemy to the Turkish people.

Since I’ve spent a lot of time in Athens in the past few years, I wouldn’t be surprised if Turkey, whose jetfighters’ violations of Greek air space have become so routine not even the Greek press tries to keep track, would invade, and claim ownership of, some Greek islands in the Aegean Sea, even if they’re just some uninhabited rocks, to whip up nationalist sentiment back home.

Recep Tayyip has long seen this coming. His economy is collapsing, his currency is collapsing, so he’ll focus on what’s left: Turkey’s strategic position on the map, its NATO membership, the negotiations for EU membership, and most of all the support of the Muslim contingent in Turkey that solidifies his power.

I don’t really want to make any historical comparisons, they appear obvious enough. Suffice it to say this ain’t over by a long shot, and it could lead to big trouble.

And don’t let’s forget that Turkey presently hosts millions of Syrian refugees. Erdogan can just buy a bunch of dinghies (he can still afford that) and cause absolute chaos in Greece and the EU.

Who’s going to be buying lira’s on Monday?

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President Trump: Planned Boycott By Harley-Davidson Owners Is “Great!”

President Trump on Sunday morning tweeted that a planned boycott by some Harley-Davidson motorcycle owners is “Great!”

“Many @harleydavidson owners plan to boycott the company if manufacturing moves overseas,” he said.

“Great!” he added.

“Most other companies are coming in our direction, including Harley competitors. A really bad move! U.S. will soon have a level playing field, or better.”

In other words, President Trump is now calling for the boycott of an iconic American company, suggesting that citizens should support “Harley competitors.”

At a recent rally in South Dakota, numerous Harley-Davidson owners told The New York Times that they will abandon the century-old Wisconsin company if it shifts manufacturing facilities overseas.

The company’s decision, announced in late June, said it would shift some US production plants overseas to avoid tariffs spurred by President Trump’s trade war. Harley was one of the first US manufacturers to scale down domestic production in response to the increased taxes, which were slapped on American products as retaliation for US steel and aluminum duties.

“I’m riding my last Harley,” 67-year-old biker Gary Rathbun told the Times. “It was American made, and that’s why we stood behind them.”

Gary Panapinto,an engineer from Illinois, said that Harley-Davidson should keep its manufacturing facilities entirely U.S.-based if it plans to sell in a U.S. market.

“They need to keep them here in the United States, especially if they’re going to sell them here,” Panapinto said. “I think Trump is just trying to protect jobs in the U.S.”

Harley-Davidson stated that its domestic production facilities which cater

Harley said it will only move production of bikes sold outside the U.S. to Europe, indicating surging prices from European Union tariffs on its products.

Some bikers even told the Times that company was simply using Trump’s tariffs as an excuse to outsource production.

“They’re always advertising that they’re made in America, so I don’t think they should do it,” said one biker, Oliver Lapointe, who said he rides Japanese bikes. “They’re greedy.”

Trump warned Harley last month: “Harley must know that they won’t be able to sell back into U.S. without paying a big tax!”

Meanwhile, Trump on Saturday afternoon invited around 100 members of a “Bikers for Trump” group to Trump National Golf Club, Bedminster, a private golf club in the eastern United States, located in Bedminster, New Jersey, as part of damage control — due to the Harley-Davidson fallout.

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Charles Gave: The Recession Of 2019

“While the Trump administration may crow endlessly about how swell the economy performed last quarter, that 4.1% GDP print will quickly become a wistful memory.”

-BERNARD BAUMOHL, Economist at the Economic Outlook Group

Authored by Charles Gave via EverGreen Gavekal blog,

Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of “black swans.” And, since the end of March, the WMB has again been in negative territory in year-on-year terms. As a result, and as I shall explain, there is a significant risk of a recession next year.

The World Monetary Base (WMB)

Before I launch into a detailed examination of my reasoning, I should perhaps recap what the WMB is and why it is so important. It starts with the US Federal Reserve, which, because it controls the dominant reserve currency, acts as de facto central bank to the world. By purchasing government bonds from domestic banks, so flooding them with reserves, the Fed can engineer an increase in the US monetary base.

The Fed also provides “reserves” to other central banks. Typically, this happens when the US dollar is overvalued and/or when the US economy grows faster than the rest of the world. This combination leads to a deterioration in the US current account deficit, which means that the US starts to pump more money abroad. These excess dollars appear first in the hands of foreign private sector companies. But if they earn more than they need for working capital, they sell the excess to their local central banks in exchange for local currency.

As a result, local monetary bases rise, and the surplus US dollars get parked in central bank foreign reserves, where they show up as a line item of the Fed’s balance sheet called “assets held at the Federal Reserve Bank for the account of foreign central banks”. Increases in this item must have as their counterpart increases in the monetary bases of non-US economies (unless foreign central banks sterilize their purchases of US dollars).

So, if I take the US monetary base, and add to it the reserves deposited by foreign central banks at the Fed, I get my figure for the World Monetary Base. From this aggregate, I can get a rough idea of the pace of base money creation around the world, either through direct intervention by the Fed in the US banking system, or indirectly through US dollar accumulation by foreign central banks. When the WMB is growing, I can be relatively confident about the future nominal growth of the global economy. And when it’s contracting, it makes very good sense to worry about a recession.

As the chart above shows, it is contracting now. So, based on the experience of the past 45 years, it seems likely that the world is entering its seventh international dollar liquidity crisis since 1973.

  • Already the usual suspects—Argentina, Brazil, Turkey, South Africa—are having a tough time. And the times are likely to get even tougher for those countries which have external debts in US dollars coupled with a current account deficit.

  • Already, the US stock market is outperforming all other major stock markets (most of which are actually going down)—a sure sign that the world is starting to suffer from a shortage of US dollars.

  • Already the spreads between the US bond market and a number of government bond markets outside the US have started to widen. This is a sign that countries outside the US have started to raise interest rates in an attempt to stabilize their exchange rates. Unfortunately, the attempt is destined to fail, if, as I believe, the problem is not an overabundance of local currencies but a shortage of US dollars.

So, as the chart above suggests, there are reasons to be alarmed. But this chart merely offers an observation, not an explanation. For the prospect of a recession in 2019 to be taken seriously, I will have to outline the sequence of events which will result in recession.

The first effect to watch out for is a contraction in international trade as a consequence of the US dollar shortage. Every time in the past that there has been a contraction in the WMB, six or so months later there has been a steep decline in the volume of world trade (at least since 1994—I only have the data back that far). These declines have almost always led to a recession, either in the OECD, or outside the OECD, as in the case of the Asian crisis. I see no reason why the same should not happen again this time around, especially as I am starting to detect a range of other signs that typically accompany the march towards a recession.

For example, if a recession is coming, it is natural to expect commodities prices to roll over. And as the chart below shows, that is what is happening.

When the volume of trade goes down, together with the prices of commodities, commodity-producers (essentially the emerging markets outside Asia) usually see their stock markets tank. And ex-Asian emerging markets have certainly taken a beating recently.

Needless to say, if these countries are having a hard time today because they have borrowed too freely in US dollars in the past, then it stands to reason that whoever lent them those dollars must be feeling the heat too. And sure enough, bank shares have cratered lately.

And, to add insult to injury, the US dollar is going up, as it tends to do every time world trade slows down or contracts.

Conclusion

A world-wide recession is looking more and more probable. And if the time lag is similar to those in the past, it could hit by March 2019. Indeed, looking at the performance of markets over the last six months, it looks as if a bear market may have already started everywhere but in the US. As I have written repeatedly in recent months, bears are sneaky animals. Their victims seldom see them coming.

As usual, little is certain. But at this point, there are a number of things that I can say with confidence.

  1. Gavekal’s statistical system to assist decision making, TrackMacro, is now registering risk-off for almost every stock market in the world. It has seven components, two of which are the WMB and world trade.

  2. The eurozone economies in general, and Italy and France in particular, are not in a position to navigate another recession.

  3. China has foreseen the danger of a US dollar shortage, and has tried to arrange things in Asia to allow the region to ride out a dollar squeeze. As a result, Asia is likely to be a zone of relative stability in the coming turmoil.

  4. For the first time in almost 20 years, cash is an alternative to risk assets. The yen is probably the cheapest currency there is today. Cash should be held in yen.

  5. Investors should hedge the equity risk in their portfolios with US long bonds and Chinese long bonds.

  6. Investors should avoid financials everywhere, as I have repeated until I am blue in the face.

  7. Investors should sell the shares of companies with negative cash flow, especially if they are short US dollars.

  8. The big risk is an uncontrollable rise in the US dollar if Europe’s fixed exchange rate system falls apart, much as earlier US dollar liquidity crises led to the collapse of fixed exchange rate systems in Latin America and Asia. Buy calls on the US dollar against the euro.

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Washington D.C., Charlottesville Brace For Violence At White Supremacist Anniversary Rally

Washington D.C. is bracing for violence at today’s “Unite the Right II” rally marking the one-year anniversary of last year’s deadly event in Charlottesville, VA.

Around 400 white nationalists are expected in D.C.’s Lafayette Square based on the event’s permit, however far fewer are actually expected to show up. Meanwhile, around 1,500 counter-protesters will be staging themselves at various downtown locations, including the same park as the white nationalists. 

Police are enforcing a complete ban on firearms in and around the demonstration areas on Sunday, reports Fortune, including anyone with a concealed carry permit, said Washington Metro Police chief Peter Newsham.

“Every police action that you will see on Sunday will be done with the ultimate goal of ensuring the safety of everyone that attends,” said the chief.  

In anticipation of violence, Virginia Governor Ralph Northam declared a state of emergency, stating “I am urging Virginians to make alternative plans” to avoid the event- while the Alt-Right Exposed blog noted that a left-wing “Resist” group called Shut It Down is planning to confront attendees. 

Meanwhile, protesters gathered a little over 100 miles away in Charlottesville, VA to mark the anniversary of last year’s deadly event which resulted in the death of 32-year-old counter-protester Heather Heyer after a white nationalist drove his car into a crowd she was in.

With no white nationalists around to protest, participants have turned it into an anti-police event. 

“Last year I was terrified of violence from the Nazis, and this year I’m terrified of violence from the police,” Black Lives Matter organizer Lisa Woolford, an English professor at the University of Virginia told the Daily Progress.

“Why are you in riot gear? We don’t see no riot here,” activists in Charlottesville chanted Saturday evening, while also becoming aggressive with a local news crew covering the protests. 

Shortly before a pre-planned evening rally to mark the anniversary of a campus confrontation between torch-carrying white nationalists and counterprotesters, activists unfurled a banner that said, “Last year they came w/ torches. This year they come w/ badges.” –AP

Authorities have banned skateboards, paintball guns, bats, sticks, clubs, bear spray and flying drones from Charlottesville this weekend. That said, there’s nothing stopping anyone from open-carrying an AR-15. 

‘Under Virginia law we cannot regulate firearms,’ city spokesman Brian Wheeler told DailyMail.com.

Charlottesville city elders issued a list of items that will be banned from an 18-block area in the city center all weekend just as hundreds of state police officers descended on the university town, determined to prevent a repeat of last year’s violence. –DailyMail.com

“Lengths of lumber or wood” are included on the banned list. “Metal beverage or food cans or containers’ are also forbidden, as are glass bottles.”

The full list of prohibited items: “BB guns, pellet guns, air rifles or pistols, paintball guns, nunchucks, tasers, stun guns, heavy gauge metal chains, lengths of lumber or wood, poles, bricks, rocks, metal beverage or food cans or containers, glass bottles, axes, axe handles, hatchets, ice picks, acidic or caustic materials, hazardous or flammable or combustible liquids, skateboards, swords, knives, daggers, razor blades or other sharp items, metal pipes, pepper or bear spray, mace, aerosol sprays, catapults, wrist rockets, bats, sticks, clubs, drones, explosives, fireworks, open fire or open flames, and any other item considered an “implement of riot.””

Unite the Right organizer Jason Kessler, 34, is holding the event at D.C.’s Lafayette Square after being denied a permit in Charlottesville. Kessler, a recent leftist “Occupy” activist who had a Jewish girlfriend and two African roommates, has been accused of being an opportunist. In advance of Sunday’s event, Kessler called into Stormfront Action – a white-nationalist online radio show that apparently doesn’t mind Kessler’s race-mixing past. 

During the hour-long interview last month, he unloaded a litany of hate-fueled grievances: The police in Charlottesville, he said, “screwed” him and other white nationalists last year. The media have turned him into “Damian, the son of Lucifer.” White people are “up against a wall.” Jews, he charged, “control the currency,” and are “over-represented in Congress and the Supreme Court.”

“What’s happening to us is unjust right now,” Kessler told Stormfront Action listeners. “That’s why I don’t want to back down.” –The Daily Progress

Kessler has lost support from prominent white nationalists such as Richard Spencer, while friends have also severed ties – saying they don’t recognize the activist they once knew as an Obama supporter. 

His father, in his first interview, told The Washington Post that he vehemently disapproves of Kessler’s actions and has tried to persuade him to stop. –The Daily Progress

President Trump condemned racism in a Saturday tweet which read: “The riots in Charlottesville a year ago resulted in senseless death and division. We must come together as a nation. I condemn all types of racism and acts of violence. Peace to ALL Americans!” 

After last year’s deadly rally in Charlottesville, Trump drew condemnation after he said “I think there is blame on both sides.”

Conservatives have similarly pushed back against white nationalism. Dinesh D’Souza, for example, told C-Span on August 3rd that the Charlottesville event does not represent the right. 

“This is really, I would say, the trump card, and I use that terminology in the movie, because, I have uncovered an aspect of Charlottesville, that is not in the public debate, and that is… the whole point of Charlottesville, there was a tragedy in Charlottesville, and that won’t change. Somebody was run over and killed, and so it was a tragic event in that sense.”

“What I am contesting is the meaning of that event. Because, from the left’s point of view this was right wing white supremacy, and that was the whole point for Trump to condemn it. I deny that. I deny that, and I deny it, based on a close analysis of who was there and who these white supremacists are, and in this book, “Death of a Nation,  I go through the list.”

“Jason Kessler, the organizer of Charlottesville, turns out to be an Obama activist, and an Occupy Wall Street guy.”  –Alt Right Exposed

“Think about this. Does it make sense, someone who is an Obama voter and supporter becomes a white supremacist? That makes no sense to me. You think the media would be, like ‘Let’s check this guy out.’ , but there was a Charlottesville paper that did. It looked into his background, and it turns out he has a long left-wing history. They interviewed his girlfriend, and she goes ‘he broke up with me because I am too conservative.’ This guy, Jason Kessler.”

And as the Gateway Pundit‘s Cassandra Fairbanks reports, “supporters of President Donald Trump are taking a firm stance against it and urging people on the right to donate to the Heather Heyer Foundation as a show of goodwill.”

As the next event looms, and people in the media — and even rally attendees — attempt to blur the line between the people who would attend such an event and your every day Trump voter, many on the right wanted to strongly come out against what Unite the Right represents

The large group of outspoken Trump supporters banded together and decided that the purest way to condemn the event would be to ask followers to donate at least $8.12, representing August 12, the day she died, to the scholarship fund in Heyer’s name. –The Gateway Pundit

Also noted by Fairbanks was author and journalist Mike Cernovich’s opposition to the event, who said of Jason Kessler: 

“Jason Kessler is a toad. He looks like the kind of creepy person that you could imagine staring into someone’s bedroom late at night. We of course want nothing to do with him and recognize that he is so desperate for attention that he will use the death of a woman — and step over her body — as a way to get it. That is disgusting and he’s a loser,” Cernovich said.

Also voicing his opposition is conservative film director and producer Robby Starbuck, who urged people not to give the rally any attention. 

“The Republican Party has a proud history of anti-racist activism and progress. That’s why what we’re seeing happen with White Supremacists marching in D.C. is so distressing. It reminds me of the pain Heather Heyer’s mom must be feeling. I believe in advancing progress and extinguishing hate so I’ve decided the best way forward is to remove the outrage and instead take action. I believe in taking action by ignoring these hateful racists. Turn your backs on them. Let them be the sad splinter group that they are. Let’s remove what they crave the most: Attention,” Starbuck said. “Instead I choose to honor a wonderful young woman who lost her life senselessly just one year ago. I urge everyone who can to take part and donate $8.12 to Heather Heyer’s scholarship fund, together we can counteract the evil that seeks to divide us. Together we are a force for change, do not let hateful people divide us. We can disagree but at the end of the day we are all Americans.” -Via The Gateway Pundit

With that, the day is young in both Charlottesville and D.C. With any luck, they’ll be non-events. 

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In Furious Rant Erdogan Lashes Out At Trump: “We See The Game You’re Playing, We Dare You”

In the wake of the U.S. doubling tariffs on Turkish steel and aluminum on Friday which sent the Turkish lira and capital markets into free fall, Erdogan wrote a Friday New York Times op-ed cataloging his grievances and threatening to walk away from the decades-old alliance. “Failure to reverse this trend of unilateralism and disrespect will require us to start looking for new friends and allies,” he wrote. Meanwhile, while announcing the new sanctions aimed at Turkey, Trump tweeted his “analysis” of the situation: “Our relations with Turkey are not good at this time!”

The escalating war of words continued on Saturday, when speaking at a rally in the Black Sea town of Unye, Erdogan said that “it is wrong to dare bring Turkey to its knees through threats over a pastor,” and blasted “shame on you, shame on you. You are exchanging your strategic partner in NATO for a priest.” At the same time, Ibrahim Kalin, Erdogan’s spokesman, said that the U.S. is “facing the risk of completely losing Turkey.”

And if anyone was hoping that Erdogan’s temper would have cooled one day later with just hours left before FX markets reopen, they were sorely disappointed on Sunday when in his latest public address in the town of Trabzon, Erdogan doubled down on his belligerent rhetoric against the US once again, via Bloomberg:

  • ERDOGAN: WE SEE THE GAME YOU’RE PLAYING; WE DARE YOU
  • ERDOGAN: THEY’RE TRYING W/ MONEY WHAT THEY COULDN’T DO IN COUP

Here one assumes that by “they” Erdogan was referring to the US, even though the Turkish’s president official line all along was that the culprit behind the “failed coup” was the exiled cleric Fethulah Gullen who has been accused by Erodgan of being behind the country’s imaginary “shadow state” for years, and which gave Erdogan a green light to crackdown on any potential opponents, leading to an unprecedented purge of people in public positions, with tens of thousands of government workers either ending up in prison or unemployed.

Erdogan then continued by calling for all Turks to convert their foreign currency holdings, i.e. mostly dollars, to liras, and warning that “economic attacks will only increase Turkey’s unity.”

Among the other notable highlights, Erdogan said that Turkey can responds to the US by “gravitating to new alliances“, i.e. China and Russia (which earlier today said it was considering dropping the US dollar altogether in oil trade), and warned that “it is foolish to think that Turkey can be thrown off by FX” although with inflation set to explode as the currency collapses, the local population may have a different view of this. 

Finally, anyone wondering which way the Lira will open later today, Erdogan did his best to make the ongoing collapse accelerate, stating that “those calling for IMF want us to give up independence”, thus eliminating the possibility of an IMF bailout which together with capital controls were the only two options Turkey had left to arrest the lira’s plunge.

As for higher interest rates, a critical requirement to at least slow down the country’s economic descent, Erdogan had some words as well:

  • ERDOGAN: AS LONG AS I’M ALIVE, WE WON’T FALL FOR INTEREST TRAP
  • ERDOGAN: INTEREST RATES MAKE THE RICH RICHER, POOR POORER

And the punchline:

  • ERDOGAN SAYS READY TO RESPOND W NEW FINANCIAL TOOLS VS DOLLAR

It was not clear what those tools would be, but they certainly would not be welcome by the market. After all, as Bloomberg reported overnight, investors believe that Turkey’s central bank will have to flout Erdogan’s desires and announce a significant increase to its benchmark 17.75 percent benchmark rate just to stop the currency’s free-fall as it touches levels that had been unimaginable even a month ago.

“Seems like a complete crash, so they need to act now,” said Morten Lund, a strategist at Nordea Bank AB in Copenhagen. “The lira will keep falling if they don’t hike rates.”

And after Erdogan’s latest rant – which clearly crushed any speculation of either more rate hikes or an IMF bail out – foreign investors may have no choice but to pull their capital out of Turkey, transforming what was already an acute currency crisis into a full blown financial panic.

Which leaves capital controls as Erdogan’s last option. The problem, as we reported yesterday, is that while the Turkish crisis was relatively contained in the context of emerging markets due to the nation’s unique capital account funding needs…

… if there was one thing that could force the Turkish collapse to escalate and result in global contagion, it is the fear of capital controls. This is how Robert Marchini, a political strategist at Zenith Asset Management laid out to Bloomberg how he see the “worst case scenario” for Turkey:

Regarding Turkey as a potential ‘Black Swan’-level event, I’m skeptical the collapse of the currency per se would be enough of an incident. The market has known for a while Erdogan was leading the country in an economically reckless direction. The real question was when it all would blow up (although I don’t think anyone thought it would go down this quickly.) More specifically, I think that the [EU] banks’ exposures to both external debt and local operations, while significant, are not at a crisis level.

Where the real risk lies, and one that I think has not been adequately considered, is the markets’ reaction to [potential] capital controls. Should Erdogan impose capital controls, in addition to banks’ writedowns on [now-toxic] Turkish assets, investors’ reaction is likely to be panic and to yank capital out of other EMs before either A. That EM’s currency falls further and/or B. That EM’s government gets the same idea as Turkey.

This becomes somewhat of a self-fulfilling prophecy, and in my opinion is where the real possibility for contagion lies.

In other words, having done nothing while the Turkish financial crisis spiraled out of control first slowly and then blazing fast, Erdogan now finds himself facing a most unpleasant dilemma: damned if he does, and damned if he doesn’t.

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Bloomberg Refutes Reuters, Says Saudis “In Talks” To Invest In Tesla Buyout

What a difference 24 hours makes: just yesterday, Reuters reported citing “two sources familiar with the matter”, that Saudi Arabia’s Sovereign Wealth Fund, the Public Investment Fund (PIF) which recently acquired a stake just shy of 5% in Tesla in the open market, “has shown no interest so far in financing Tesla CEO Elon Musk’s proposed $72 billion deal to take the U.S. electric car maker private, despite acquiring a minority stake in the company this year.” Reuters also added that the PIF “was not currently getting involved in any funding process for Tesla’s take-private deal.” Separately, “a second source close to the situation said PIF was not taking part in any such plan at this stage.”

Less than a day later, in what many have suggested may be damage control to avoid a gap lower in Monday trading, Bloomberg reports precisely the opposite and citing another “person with direct knowledge of the fund’s plans” that Saudi Arabia’s sovereign wealth fund “is in talks that could see it becoming a significant investor in Tesla as part of Elon Musk’s plan to take the electric car maker private.“

According to the Bloomberg source, the PIF is exploring “how it can be involved in the potential deal” and adds that discussions began before the controversial Aug. 7 tweet by Musk saying he was weighing a plan to take the company private.

Which is notable because that is the opposite of what Reuters reported.

The reasoning is somewhat bizarre: according to the report, the Saudis – whose sovereign wealth fund has been especially cash strapped in recent months as a result of the collapse of the Aramco IPO – see the investment in Tesla “as a strategic way for the world’s biggest crude producer to hedge against oil.“

And while the Saudi fund hasn’t made any firm decisions on whether to increase its stake, or by how much, the anonymous source said that “talks are ongoing” and it wasn’t immediately clear how much the fund would invest in Tesla.

The immediate answer here would be, “not much”, because as the FT reported last week, the sovereign wealth fund is lacking in the one key variable needs to make a deal, any deal happen: money, to wit:

“Riyadh is now taking radical steps to boost the fund’s coffers. The Royal Court instructed Saudi Aramco to acquire the fund’s 70 per cent stake in Saudi petrochemicals maker Sabic, potentially raising $70bn for the PIF, three people familiar with the matter said.”

Then again, all is fair in keeping up the narrative, even if it means even greater scrutiny of every public statement thrown out there by the press in support of Musk’s MBO proposal, especially now that the SEC is sniffing around and lawsuits are flying.

The U.S. Securities and Exchange Commission, which has been gathering information about Tesla’s public pronouncements on manufacturing goals and sales targets, is intensifying its scrutiny of the company’s public statements in the wake of Musk’s tweet, people familiar with the matter have said.

The Bloomberg rebuttal of the Reuters story also comes just days after 2 class action lawsuits were filed against Tesla and Elon Musk for fraud and market manipulation. And with the Bloomberg story now out, those two cases effectively fall apart as there is a public record, even though after the fact, that Musk was telling the truth.

And since it is impossible to deny the Bloomberg report, even if it conflicts completely with what Reuters reported, for now Tesla appears to be safe.

As to who is telling the truth, and who is lying – because both the Reuters and Bloomberg reports “citing anonymous sources” can not be correct at the same time – it will ultimately be up to regulators to untangle what is becoming one of the biggest and most controversial financial stories of this generation.

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