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Happy Birthday Karl: Top 10 Goals Of Marx’ Manifesto Accomplished In America

By Joe Jarvis Via The Daily Bell

Plenty of stupid ideas kill people. But one man’s stupid ideas have killed over a hundred million people.

Karl Marx was born 200 years ago today. And despite the utter failure of his communist philosophy in practice, the cult lives on. Still people want to try again… this time they will get it right.

Karl Marx and Friedrich Engels originally published The Communist Manifesto in 1848. It laid out the beliefs and action plan of the Communist Party. The goal was to get communists of every nationality to rise up and unite to overthrow their “capitalist oppressors.”

Little did they know their words would be used by the likes of Stalin and Mao as justification for over 100 million murders meant to supposedly move society forward.

In America, the goals of the communists have crept their way into society with little fanfare. Many people have no idea that public schools, the graduated income tax, and even a central state-controlled bank (like the Federal Reserve) were tenets of the Communist Manifesto.

The points are boiled down in one section of the manifesto to a list of ten main goals. These are the goals, in Marx and Engels’ own words, followed by an analysis of how deeply they have seeped into the United States governing structure.

“1. Abolition of all public land and application of all rents of land to public purposes.”

Also known as property taxes. Can you really say you own land if you must pay the government every year in order to keep it? Fail to pay your rent, and they will eventually confiscate “your” land. This money is then used for “public purposes” like public schools(just wait for #10) and police, who will remove you from the government’s land if you fail to pay your rent.

And if the local government can fine you for keeping a front yard garden, or backyard chickens, do you really own the land anyway? Sounds like the proletariat traded capitalist oppressors for government oppressors.

The federal government owns outright 28% of all land in the United States, 640 million acres. This includes the Bureau of Land Management’s 248 million acre turf used to control or oppress political dissidents like Cliven Bundy. “The BLM is also responsible for subsurface mineral resources in areas totaling 700 million acres.” That means they control almost three times as much land as they own.

Each state government owns an average of 8.7% of its state’s land. This source claims the feds own over 31% of the U.S. landmass, which brings the combined state and federal total ownership to almost 40% of all land in the USA.

And let’s not forget about eminent domain, where the government can just take your land for “public use” (or public benefit) with “just compensation.” If the compensation isn’t just, simply take the most powerful government on Earth to court–courts that they own. I’m sure you will be treated fairly.

“2. A heavy progressive or graduated income tax.”

Even after the latest tax cuts, the federal income tax rates range from 10% to 37%.

According to the Wall Street Journal, the top 20% of income earners in the U.S. will pay 87% of all income taxes this year. These people who earn $150,000 or more account for 52% of the income earned in the USA, but will pay almost all of the income taxes, 87%.

The top 1% of earners– the evil bourgeois making over $730,000 per year–will actually pay over 43% of all income taxes this year.

So 1% of earners who make 16% of the country’s total income will pay 43% of the total income tax.

Sounds like way more than their “fair share” to me, but the communists won’t be satisfied until everything is owned by the state.

“3. Abolition of all right of inheritance.”

They want to fleece the rich one more time when they die, even though all that wealth was taxed already as income or capital gains.

Estate Tax, or Death Tax, is one of the more egregious oppressions of the federal government.

There is a hefty exemption–the first $11 million is not taxed. While that means few typical people will be affected, it still fits with the communist strategy of demonizing the rich.

And every dollar over that exemption is taxed at 40%.

When you think about it, $11 million is not so much money when you are talking about a business, even relatively small family businesses that might be passed down through inheritance.

If a business is worth $15 million, the family of the deceased would owe $1.6 million. If they don’t have $1.6 million hanging around, they might have to dismantle the business in order to pay the taxes. That could mean a loss of good proletariat jobs and a hit to the economy.

The same could happen to a piece of land or estate that has been in the family for generations.

State level estate taxes add additional costs, sometimes with lower exemptions.

But the communists are smart, they demonize the people they rob. So no one feels bad for “the rich” because they will have plenty left over when the government is done with them. Although that too could change…

“4. Confiscation of the property of all emigrants and rebels.”

Let’s start with the Exit Tax.

Why don’t you just move out of America if you don’t like the taxes?

Well, America taxes it’s citizens worldwide, even if they do not live or work in the USA.

Why not renounce your citizenship then?

That is one option. But it’s actually not free. In fact, the U.S. confiscates a serious percentage of property from emigrants.

It is called the Exit Tax. It gets complicated, but basically, the government is going to tax you on your net worth, as if you just sold all your assets.

If you don’t have the liquid cash to cover that, you would actually have to start selling assets–property, stocks, etc.–in order to pay the Exit Tax. Of course, you would be taxed on the income or capital gains first, and then would have to pay the exit tax with what is left over… The good news (?) is you would have less overall net worth to be taxed upon your renunciation.

Okay, but again, a big part of being a communist is hating rich people. People with less than $700,000 of capital gains in their net worth are much less affected by the exit tax.

So let’s turn to confiscation of rebel’s property that affects the poorest proletariat… civil asset forfeiture.

This is often used again poor people who cannot afford to defend themselves in court. The police simply steal property or cash that they “suspect” was involved in some type of crime, without having to prove anything. You have to prove your innocence if you want your car, house, or cash back.

So if cops think a wad of cash came from selling drugs, it’s theirs. If they think your car was bought with the proceeds of drug sales, maybe because they found an ounce of weed and some baggies, they can take the car, without charging you with a drug dealing.

Police seized over $50,000 from a Christian Rock band that had collected donations for an orphanage. Between 2001 and 2016, “more than $2.5 billion in cash seizures had occurred on the nation’s highways without either a search warrant or an indictment.”

And that’s not even counting the more than $3.2 billion the DEA has seized since 2007without filing civil or criminal charges.

Just having cash is a pretty low bar to be considered a rebel. Then again, what should we expect from a communist doctrine?

“5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.”

I wonder if today’s communists are aware of this one. They can’t possibly think the Federal Reserve helps the proletariat, yet that is exactly what the manifesto describes.

Some people might disagree that the Federal Reserve is state owned. Technically it has a private board, although board members are appointed by politicians. I suppose in that sense you could call it more fascist than communist–the government doesn’t own the bank, the bank owns the government.

The Fed sets the interest rates, prints money, and finances much of the debt of the United States government. Without the Fed, it would be much harder for the government to control the people–the homes they buy, the loans they get, the interest on their savings, and even how much of that savings is robbed through inflation.

“6. Centralisation of the means of communication and transport in the hands of the State.”

FCC, FTC, DOT, FAA, TSA, CBP–oh it’s an alphabet soup of communications and transport regulators.

They regulate the phone lines, the roadways, air traffic, rails, mail and package delivery.

This is nothing new. Around the same time, Marx was writing the manifesto, Lysander Spooner was doing something productive with his time. Spooner started the American Letter Mail Company to compete with the U.S. Postal Service. He undercut their prices and provided better customer service, but was fined and cited for breaking laws which protected the government monopoly. He was forced out of business in 1851.

The government doesn’t quite have control over the internet, but they did create the conditions to allow a handful of companies control access to the internet.

The NSA monitors every communication, and the Department of Homeland Security commissioned a database to track all journalists and media influencers who mention the DHS. Customs and Border Protection performs unconstitutional searches at the border,whether you are an American or foreign.

And of course, you can’t go out in public without running the risk of being harassed by local, state, and federal police. You don’t have the right to travel without justifying every action to a police officer, while they often get off scot-free for murder.

“7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.”

The state has certainly dabbled in factory ownership, like the GM bailout. They control utilities like water and power. And they have certainly subsidized their fair share of business from oil and solar panels to sugar and corn.

We can refer back to #1 to see how much land the government controls, often under the auspices of improving soil and protecting wastelands.

Then there are plenty of government contractors which are basically the same thing as a government-owned company. If 100% of their revenue comes from the government, they are not a private company. This is especially prominent in the defense industry, which is where the term military-industrial-complex comes from. And then think about the roads the government contracts out to build.

The government spends about 34% of the GDP every year. That is a significant percentage of the economy which the government owns.

“8. Equal liability of all to labour. Establishment of industrial armies, especially for agriculture.”

Yes, the Communist Manifesto proposes enslaving all those unwilling to work.

Now, it might not seem like the U.S. government forces people to work. But you have to make money just to park your ass on a plot of land. Local governments want property taxes, which means you must make a certain amount of money just to have a place to live.

Otherwise, you could conceivably save up for a piece of land, and once you buy it outright, you would be done. But even renting has the built-in costs of property tax.

And the fact that the government claims the authority to tax you on everything you earn basically means you have a liability to labor for the government if you want to labor at all.

Most of us cannot go through life without earning something to pay for necessities. But we can’t just earn what we need, we must earn way more than we need because the government will take a huge chunk of our income.

We tend to think about taxes as a percentage of our income. But what about as a percentage of our time? The government forces you to work as its slave from about January through April every year. In a typical career, you will spend in total more than 14 full years working as a slave for the government.

“9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.”

The government helped create factory farming by regulating all the small-scale producers out of business.

Reason reports that USDA regulations have forced small slaughterhouses to close in favor of large factory-style slaughterhouses. This might sound like a good idea at first. But consider that when one infected animal makes its way to a slaughterhouse, it can contaminate so much meat.

Having many slaughterhouses distributed across the U.S. meant that any infections were localized, and affected far fewer people. Plus when the slaughterhouse is local, it is easier to know the owners and see the conditions for yourself. The animals are raised closer to home, also providing more opportunity for market oversight of the process. No hiding away from the consumers on a vast gated factory ranch.

The U.S. government has long subsidized large crop producers, which makes it that much harder for smaller farms to compete.

It started with the Farm Bill in 1933 and continues to this day.

What we get is cheap, but unhealthy products. And even though the products on the shelf look cheap, we already paid for them with our tax dollars.

The problem is, I don’t want to buy unhealthy things loaded with high fructose corn syrup. But my money will pay for that crap whether I like it or not. Then I have to spend my money on healthy items that are more expensive because they have to compete with subsidized products.

That’s where the government incentives for factory farming have got us.

“10. Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production.”

This may be tenth on the list, but it is number one in ensuring all the rest fall into place.

American communists got this goal in place just four years after the Communist Manifesto was published, with Massachusetts enacting the first compulsory public education law in 1852. After that, it was only a matter of time until the population was indoctrinated to believe whatever the government taught them.

The book Teen 2.0: Saving Our Children and Families from the Torment of Adolescence delves in depth into the history and injustice of compulsory schooling.

It was designed so that the state and corporations could work together to train an obedient workforce, with the public footing the bill.

The point was not open minds and a desire to learn. The aim of the education was setting students up for whatever mediocre to low paying jobs the industrialists wanted them to fill.

The communists succeeded in getting exactly what they wanted out of American schools. And today we see the growing gap between what people learn in school, and what skills they actually need for good jobs. The communists have got the American education system stuck in a stagnant philosophy of industrial labor.

Of course, they did it with supposedly the best intentions. Sounds like a good idea to save kids from dangerous work. But in the process, they also robbed children and young adults of their autonomy and choice. They forced kids against their will into a government institution and set the course for their entire lives.

And that is the most important lesson that the communists want to teach in schools. It is all about obedience to government.

Karl Marx is like the anti-Midas. Everything his philosophy touches turns to shit. Is it any wonder that America is stagnating? You cannot grow with a communist philosophy. It doesn’t take into account the beautiful creative independence of individuals. It treats people like cattle. It robs people of the rewards of their labor.

I rue this day, 200 years ago.

You don’t have to play by the rules of the corrupt politicians, manipulative media, and brainwashed peers.

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Russell Napier: The Rising Dollar Will Trigger The Next “Systemic Banking Crisis”

Fresh off his successful call earlier this year that the US dollar would strengthen in the coming months, macroeconomic strategist and market historian Russell Napier joined MacroVoices host Erik Townsend to discuss why he favors deflation and why he has such a bullish view on the US dollar.

Echoing David Tepper’s concerns that the equity highs for the year might already be in, and that a 10-year yield above 3.25% could lead to market chaos, Napier said he sees interest rates rising sharply in the coming months as the dollar strengthens – a phenomenon that will push the US back into deflation.

Napier’s thesis relies on one simple fact: With the Fed and foreign buyers pulling back, who will step into the breach and buy Treasurys?

The answer is – unfortunately for anybody who borrows in dollars – nobody. In fact, the Fed is expected to allow $228 billion in Treasury debt to roll off its balance sheet this year.

Fed

This “net sell” will inevitably lead to higher interest rates in the US, as well as a stronger dollar. And once the 10-year yield reaches the 4% area, signs of stress that could be a lead up to a global “credit crisis” could start to appear.

We know what the Federal Reserve plans to sell this calendar year, $228 billion. We know what the rise in global foreign reserves is, and about 64% of that will flow into the United States’ assets. Slightly less of that will flow into Treasuries. $228 billion, at the current rate at which foreign reserves are accumulating, we are not going to see foreign central bankers offsetting the sales from the Fed.

So that’s a net sell. We don’t know what that net sale will be, but it’s a net sale from central bankers at a time when the Congressional Budget Office forecasts a roughly $1 trillion fiscal deficit. This is the first time in my investment career that savers will have to fund the whole lot. And it’s perfectly normal that real rates of interest have to go higher to attract those savings.

$1 trillion is still a large amount of money. It can come from anywhere in the world. It can come from outside the United States. It can come from inside the United States. But it’s a liquidation of other assets or a rise in the savings rate, which is necessary to fund this. Either of these things is positive for the dollar.

And that’s a huge problem – not for the US so much as the rest of the world, where higher US interest rates could lead to a global credit crisis which Napier believes could begin in China or Turkey, then emanate out from there.

One symptom of the rising dollar, Napier says, is it could force China into a corner and finally help China bears like Kyle Bass who have countenanced brutal losses over the past couple years as the greenback as weakened. While Bass has cut back some of his positions, he says he remains committed long-term to his bearish thesis. 

So the strong dollar, if it continues and if it comes to pass, really could force China into a corner. That, combined with the trade tariff policies of the president, may be leading us to a more flexible exchange rate. Or at least what will be billed as a more flexible exchange rate but, for all intents and purposes, is likely to be a weaker Chinese exchange rate. So I was just going to read you the list of those emerging market economies where the debt-to- GDP ratio has been going so strongly that actually the BIS suggests there is a risk of a systemic banking crisis. China is top of the list; you’re absolutely right to point to China.

But China isn’t the only economy that could be facing a financial blowup driven by a stronger dollar…

I think there is definitely a role already being played by higher US rates. So if the dollar goes higher as well, it’s definitely playing a role in creating vulnerabilities. We’ve seen a couple of large Chinese companies unable to pay their US dollar credit. As I’ve mentioned, there’s a lot of Turkish companies that really can’t pay it. And that is already something to do with the rise in US yields. They’ve gone from incredibly low levels to low levels. But it’s enough at the margin when global debt to GDP is to shine the light on particularly vulnerable economies and particularly vulnerable companies.

A strong dollar should be negative for global equities, Napier said. But the outlook for European and EM equities would be far worse than the outlook for the dollar if US interest rates climb above 4%.

So all I would add – let’s say I’m wrong on US rates and these yields continue to rise, I think that’s particularly bearish for those outside of America who borrowed dollars, people we’ve already focused on. I think United States growth may be good. United States inflation may be rising.

I wouldn’t specifically see any particularly bad credit issues in America. I don’t see it being anything like we’ve seen in the past. But outside of America, I think there would be an awful lot of pain going on as interest rates go higher and higher and higher. Remembering that, roughly, the European banks – I should say non-US global banks – have got a loan book in dollars of about 4.5 trillion.

That’s a big loan book for people who don’t really take US dollar deposits. And the implications of higher US rates and a higher dollar mean that the pain may not be so America specific, but it could be very emerging market specific.

Listen to the rest of the interview below:

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Leaked Transcripts Reveal Courtroom Showdown Between Manafort Judge And Mueller Attorney

Yesterday we told you about an intense courtroom battle that played out on Friday between the judge in Paul Manafort’s case and an attorney for Special Counsel Robert Mueller, in which the judge said that Mueller shouldn’t have “unfettered power” to prosecute Manafort for charges that have nothing to do with collusion between the Trump campaign and the Russians.

Manafort’s lawyers had asked the judge in the Virginia case to dismiss an indictment filed against him in what was their third effort to beat back criminal charges by attacking Mueller’s authority. In addition to pushing back against the Special Counsel’s argument for why Manafort’s bank fraud charges are related to the Russia investigation, the judge also questioned why Manafort’s case could not be handled by the U.S. attorney’s office in Virginia, rather than the Special Counsel’s office, as it is not Russia-related. 

Today, a transcript of that hearing was leaked to Twitter user @Techno_Fog, a New York attorney who eloquently dissected the intense back-and-forth between Eastern District of Virginia Judge T.S. Ellis, a Reagan appointee, and Mueller attorney Michael Dreeben.

The transcript reveals an unimpressed Ellis repeatedly pushing back against Dreeben’s attempts to tie Manafort’s bank fraud case to Russia, while an arrogant Dreeben suggests that the power vested in Ellis is dwarfed by the Special Counsel’s omnipotence. 

Ellis then calls out the case as an attempt by Mueller to gain leverage over Manafort.

“You really care about what information Mr. Manafort can give you that would reflect on Mr. Trump or lead to his prosecution or impeachment or whatever. That’s what you’re really interested in.” –Judge Ellis

Ellis then points out to Dreeben that the Special Counsel’s indictment against Manafort doesn’t mention:

(1) Russian individuals
(2) Russian banks
(3) Russian money
(4) Russian payments to Manafort

To which Dreeben looped back to the argument that “the money that forms the basis for the criminal charges” comes from Manafort’s “Ukraine activities,” which is tied to Manafort’s Russia activities (which still doesn’t answer the Judge’s question).

Manafort’s attorney hit back, calling the Special Counsel’s arguments “absolutely erroneous.”

Ellis has given prosecutors two weeks to show what evidence they have that Manafort was complicit in colluding with the Russians. If they can’t come up with any, he may, presumably, dismiss the case.  Ellis also asked the special counsel’s office to share privately with him a copy of Deputy Attorney General Rod Rosentein’s August 2017 memo elaborating on the scope of Mueller’s Russia probe. He said the current version he has been heavily redacted.

Without further introduction, Techno_Fog’s breakdown of the transcripts (with full copy at bottom):

Read the entire exchange below:

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How China Became The World’s Number One International Financial Donor

Authored by Valentin Katasonov via The Strategic Culture Foundation,

At the spring meeting of the International Monetary Fund (IMF) and the World Bank (WB), the head of the US Treasury Department, Steven Mnuchin, touched upon a delicate subject: the financing of IMF and WB members by China and several other developing countries.

He called these countries “non-transparent creditors” that do not coordinate their operations with the IMF, thereby destabilising the international loan market. Mnuchin noted that this practice creates problems for the debtor countries when it comes to the debt restructuring process. 

These arguments are a cover for the US official’s barely disguised irritation at the fact that China is going against Washington’s usual way of doing things on the international loan market, where it has reigned supreme for many years and directed the market using the US-controlled International Monetary Fund.

Steven Mnuchin then implied that Washington expected Beijing to coordinate its loan decisions for certain countries with the IMF. 

Here are a few figures to give you some idea of just how worried Washington is by Beijing’s active involvement in the international arena as a financial donor.

The information is taken from a study by the AidData research lab at the College of William & Mary in America in conjunction with experts from Harvard University in the US and Heidelberg University in Germany. Data was gathered and analysed from a total of 4300 projects that received Chinese funding in 140 countries around the world. The time frame of the study is 2000­–2014 (fifteen years).

The total amount of funding these projects received from China during this time period was $350 billion, and the scale of the funding increased steadily over the fifteen years, from $2.6 billion in 2000 to $37.3 billion in 2014. The largest amount was $69.6 billion in 2009. 

The amount of funding given to foreign countries under various arrangements by the United States during the same period equalled $394.6 billion.

This figure is slightly higher than that of China, but one should keep in mind that the volume of US funding did not increase as sharply as China’s. In 2000, the US provided $13.4 billion in overseas loans, which increased to $29.4 billion by 2014. In the final four years (2011-2014), China was already consistently exceeding the US in terms of the amount of overseas funding.

There are qualitative differences between the international financing policies of China and the US.

First of all, China focuses on credits and loans (repayable funding), with financial aid (non-repayable or partially repayable funding) playing a lesser role.

For America, however, financial aid dominates.

The authors of the study categorise as financial aid those agreements and projects in which the share of the grant exceeds 25 percent, while repayable funding includes those agreements and projects in which the share of the grant is less than 25 percent. The researchers have categorised the agreements and projects involving China where it has not been possible to determine the share of the grant as vague finance. The distribution of China’s international financing across the three categories for the entire period was (billions of dollars): financial aid – 81.1; repayable funding – 216.3; vague finance – 57.0. The structure of America’s international financing was (billions of dollars): financial aid – 366.4; repayable funding – 28.1. Thus financial aid accounted for 92.5 percent of America’s total international financing, but just 21 percent of China’s. 

So how is it that China has managed to focus on repayable funding, i.e. loans? At the beginning of the 21st century, the country discovered a huge niche that wasn’t being filled by the loans of America, other Western countries, the IMF or the WB. Many developing countries of Asia, Africa and Latin America were in dire need of overseas funding, but were unable or did not want to meet the stringent conditions of the “Washington Consensus”. Washington’s approach was politically motivated, while Beijing’s was commercial. Beijing declared a principle of non-intervention in the domestic affairs of the recipient countries, and it turned out to be more appealing than America’s so-called financial assistance that was like free cheese in a mousetrap. What’s more, in the 2000s China was issuing loans at 2.5 percent per annum (far more favourable terms than were being offered by the West). 

In its external financing policy, China focuses on those industries and economic sectors of the recipient countries that directly or indirectly boost the Chinese economy. So the distribution of China’s external financing according to industry and sector between 2000 and 2014 looks like this (billions of dollars): energy – 134.1; transport and logistics – 88.8; mining and manufacturing, construction – 30.3; agriculture and forestry – 10.0; and other industries – 74.3. 

The geography of China’s external financing is also interesting. The following countries were the main beneficiaries of financial aid (billions of dollars): Cuba – 6.7; Côte d’Ivoire – 4.0; Ethiopia – 3.7; Zimbabwe – 3.6; Cameroon – 3.4; Nigeria – 3.1; Tanzania – 3.0; Cambodia – 3.0; Sri Lanka – 2.8; and Ghana – 2.5. And here is the geographical distribution of China’s repayable funding (billions of dollars): Russia – 36.6; Pakistan – 16.3; Angola – 13.4; Laos – 11.0; Venezuela – 10.8; Turkmenistan – 10.1; Ecuador – 9.7; Brazil – 8.5; Sri Lanka – 8.2; and Kazakhstan – 6.7. As can be seen, Russia is the biggest recipient of Chinese money in the form of repayable loans (almost 17 percent of China’s total repayable funding). 

The main recipients of Chinese money include countries that Beijing is planning to make (or has already made) key players in the transcontinental “One Belt, One Road” project. China is too heavily dependent on its eastern seacoast and the narrow Strait of Malacca near Singapore through which most of its imports and exports pass. As an example, more than 80 percent of the oil purchased by China passes through this strait. The construction of trade routes through Pakistan and Central Asia increases China’s resilience to political and military pressure from Washington. The “Belt and Road” project will also allow Beijing to start using its enormous currency reserves (more than $3 trillion), provide Chinese businesses with orders, and support employment in the country. According to some estimates, more than $300 billion has already been spent on the project. And in the coming decades, China plans to spend a further $1 trillion on the “Belt and Road” project, creating an extensive transport and logistics infrastructure in Eurasia within the next decade. 

In recent years, the West has surrendered its position as a lender in many Asian, African and Latin American countries, which has weakened its political influence significantly. But most striking is the speed with which China has come to the forefront. At present, China is issuing more loans to developing countries than the World Bank, and yet in the 1980s and 1990s, China itself was the biggest recipient of loans from the World Bank and the Asian Development Bank. 

China is investing large amounts of money in countries that, by Western standards, are considered to be, if not “pariahs”, then “despotic”, “corrupt” and so on, countries like Zimbabwe, North Korea, Niger, Angola, and Burma. Ugandan President Yoweri Museveni has said he likes Chinese money because “the Chinese don’t ask too many questions and they come with big money, not small money”. In North Korea, meanwhile, only 17 Chinese projects were discovered over the entire period, for which the total amount of funding was just $210 million. This picture may be incomplete, however, since information is highly classified. 

In some countries there is intense competition for influence between the US and China. Pakistan is a prime example. In 2014, Pakistan was the third largest recipient of US money (after Iraq and Afghanistan). In the same year, Pakistan was the second largest recipient of Chinese money after Russia. 

In 2015, Beijing began to have an additional influence by way of the Asian Infrastructure Investment Bank (AIIB). The authorised capital of AIIB is $100 billion. China, India and Russia are the three biggest shareholders with 26.06, 7.5 and 5.92 percent of the voting power respectively. As can be seen, China’s position is much stronger than, say, America’s position in the IMF and the organisations that make up the World Bank Group (the International Bank for Reconstruction and Development, the International Finance Corporation, and the International Development Association). America’s stake in these is around the 16-17 percent mark. 

Beijing’s international finance activities should not be regarded as “anti-imperialist”, of course. In the countries that Beijing is starting to befriend, what is left of their local industry is crumbling under the pressure of cheap Chinese imports. The projects to develop deposits or build roads and other infrastructure facilities involve predominantly Chinese contractors and suppliers. As often as not, construction and other onsite work uses Chinese labour. 

Finally, China is slowly introducing tougher conditions for lending money to other countries. The interest rate has risen from 2.5 to 5 percent per annum and there is already a sense that many countries will not only be unable to repay, but also to service their Chinese loans. Beijing is not worried, however: the deposits, real estate, infrastructure facilities built using Chinese money, and businesses serve as collateral. So it will all belong to China in the end. Then the competitive struggle between Washington and Beijing will become fiercer than ever.

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“Money Is Gold… And Nothing Else”

Authored by James Rickards via The Daily Reckoning,

Following the Panic of 1907, John Pierpont Morgan was called to testify before Congress in 1912 on the subject of Wall Street manipulations and what was then called the “money trust” or banking monopoly of J. P. Morgan & Co.

In the course of his testimony, Morgan made one of the most profound and lasting remarks in the history of finance. In reply to questions from the congressional committee staff attorney, Samuel Untermyer, the following dialogue ensued as recorded in the Congressional Record:

Untermyer:I want to ask you a few questions bearing on the subject that you have touched upon this morning, as to the control of money. The control of credit involves a control of money, does it not?

Morgan:A control of credit? No.

Untermyer:But the basis of banking is credit, is it not?

Morgan:Not always. That is an evidence of banking, but it is not the money itself. Money is gold, and nothing else.

Morgan’s observation that “Money is gold, and nothing else,” was right in two respects. The first and most obvious is that gold is a form of money. The second and more subtle point, revealed in the phrase, “and nothing else,” was that other instruments purporting to be money were really forms of credit unless they were redeemable into physical gold.

My readers know that I am a big proponent of gold. We should all be mindful of Morgan’s admonition, and not lose sight of the way in which real wealth is preserved through manias, panics and crashes.

Today I’ll provide an overview on why I recommend gold in every portfolio, and why gold may be the best performing asset class in the years ahead.

Specifically, my intermediate term forecast is that gold will reach $10,000 per ounce in the course of the current bull market that began in December 2015. I recommend that investors keep 10% of their investable assets in physical gold (with room left in the portfolio for “paper gold” in the form of ETFs and mining stocks).

Here’s the analysis:

We begin with the 10% allocation. The first step is to determine “investable assets.” This is not the same as net worth. You should exclude your home equity, business equity and any other illiquid or intangible assets that constitute your livelihood. Do not take portfolio market risk with your livelihood or the roof over your head. Once you’ve removed those assets, whatever is left are your “investable assets.” You should allocate 10% of that amount to physical gold.

This gold should not be kept in a bank safe deposit box or bank vault. There is a high correlation between the time you’ll want your gold the most and the time banks will be closed by government order. Keep your gold in safe, non-bank storage.

The next part of the analysis concerns my $10,000 per ounce forecast for the dollar price of gold. This is straightforward.

Excessive Federal Reserve money printing from 2008–2015 combined with projected U.S. government deficits over $1 trillion per year for the foreseeable future, and a U.S. debt-to-deficit ratio of 105% rising to over 110% in a few years, leave the U.S. dollar extremely vulnerable to a collapse of confidence on the part of foreign investors and U.S. citizens alike.

That collapse of confidence will not happen in a vacuum. It will coincide with a more general loss of confidence in all major central banks and reserve currencies. This loss of confidence will be exacerbated by malicious efforts on the part of Russia, China, Turkey, Iran and others to abandon dollars entirely and to bypass the U.S. dollar payments system.

The evolution of oil pricing from dollars to IMFs special drawing rights, SDRs, will be the last nail in the dollar’s coffin. All of these trends are well underway now, but could climax quickly into a general loss of confidence in the dollar.

At that point, either the U.S. acting on its own or a global conference resembling a new Bretton Woods will turn to gold to restore confidence. Once that route is chosen, the critical factor is to set a non-deflationary price for gold that restores confidence, but does not lead to a new depression.

Here’s the math on how to compute a non-deflationary price of gold using the latest available data:

The U.S., China, Japan and the Eurozone (countries using the euro), have a combined M1 money supply of $24 trillion. Those same countries have approximately 33,000 tons of official gold.

Historically, a successful gold standard requires 40% gold backing to maintain confidence. That was the experience of the United States from 1913 to 1965 when the 40% backing was removed.

Taking 40% of $24 trillion means that $9.6 trillion of gold is required.

Taking the available 33,000 tons of gold and dividing that into $9.6 trillion gives an implied gold price of just over $9,000 per ounce. Considering that global M1 money supply continues to grow faster than the quantity of official gold, this implied price will rise over time, so $10,000 per ounce seems like a reasonable estimate.

I believe this kind of monetary reset is just a matter of time. It could happen through a planned process such as a new Bretton Woods, or a chaotic process in response to lost confidence, heightened money velocity, and runaway inflation.

The portfolio recommendation is to put 10% of investable assets into physical gold as a diversifying asset allocation and as portfolio insurance. The following example demonstrates that insurance aspect.

For purposes of simplification, we’ll assume the overall portfolio contains 10% gold, 30% cash, and 60% equities. Obviously those percentages can vary and the equity portion can include private equity and other alternative investments.

Here’s how the 10% allocation to gold works to preserve wealth:

If gold declines 20%, unlikely in my view, the impact on your overall portfolio is a 2% decline (20% x 10%). That’s not highly damaging and will be made up as equity assets outperform.

Conversely, it gold goes to $10,000 per ounce, that’s a 650% gain from current levels, highly likely in my view. That price spike gives you a 65% gain on your overall portfolio (650% x 10%).

There is a conditional correlation between a state where gold goes up 650% and where stocks, bonds and other assets are declining. For this purpose, we’ll assume a scenario similar to the worst of the Great Depression from 1929 – 1932 where stocks fell 85%.

An 85% decline in stocks making up 60% of your portfolio produces an overall portfolio loss of just over 50%.

In this scenario, the gains on the gold (650% separately and 65% on your total portfolio) will more than preserve your wealth against an 85% decline in stocks comprising 60% of your portfolio (85% separately and 50% on your total portfolio). The 30% cash allocation holds constant.

So, if 60% of your portfolio drops 85% (about equal to the stock market drop in the Great Depression), and 10% of your portfolio goes up 650% (gold’s performance in a monetary reset) you lose 50% of your portfolio of stocks, but you make 65% on your portfolio on gold.

Your total wealth is preserved and even increased slightly. Total portfolio performance in this scenario is a gain of 15%. That’s the insurance aspect at work.

In summary:

1. Gold has asymmetric performance characteristics. It has limited downside (20%) but substantial upside (650%).

2. The gains on gold are likely to come at a time when stocks are crashing. That’s an example of conditional correlation.

3. In the scenario where gold rises 650% and stocks fall 85%, the gain on gold (10% allocation) exceeds the loss on stocks (60% allocation), so the overall portfolio is enhanced.

Investors without an allocation to gold will be wiped out. Those with a 10% allocation will have survived the storm with their wealth intact. That’s why I recommend gold.

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Poleaxed! Outraged Israeli Strippers Defend Right To Dance: “We’re Not Hookers”

An unusual protest will take place in Tel-Aviv this week, as Israeli strippers refuse to bow to a new draft law equating them to prostitutes. They are fervently defending their right to dance.

Inflamed by a new bill proposed by Meretz MK Michal Rozin that would make stripteasing a legal equal of prostitution, RT reports that some dancers decided to have their say and protest against it.

Despite the fact that prostitution is not illegal in Israel, all stripping and prostitution facilities would become illegal under the new legislation, which would also ban advertising and lobbying for stripping.

The strippers explained that dancing in strip clubs allowed them to earn good money and even set up their own businesses, which they wouldn’t have been able to do otherwise.

“The very question is infuriating: Why is it necessary to think that I’m being exploited by someone? I like my work and I’m proud of it,” one of the women told Haaretz.

Eden, Shelly and Amit pictured below (not their real names) are strippers. All have bachelor’s degrees and are in their late twenties. And, as Haaretz reports, they have never been interviewed before, and they live “double lives”: Their families don’t know about their work, but they don’t hide it from their close friends.

“No one sent us to protest or be interviewed…

I could work at a lot of other things, I’m thinking about getting a master’s degree. This is what suits me right now. Why is that so hard for people to understand?” says Eden, 29.  She has worked as a stripper for three years and comes from a traditionally religious family.

“When I was at university I met someone who was a stripper. I went to the club and expected to find all these dumb, drugged-out girls, but most of the people I met were very different than what I thought they’d be like. I love to dance, I’ve always liked male attention and I’ve always liked money.

I haven’t had any traumatic experiences and the dancing and stripping doesn’t feel like exploitation to me. I choose the customer and I can get a customer thrown out if he tries to touch me or do something I don’t want him to do. It’s the stigma about stripping that hurts me, not the customers.”

Haaretz notes that twenty-nine members of parliament, from both the opposition and coalition, including some from Habayit Hayehudi, Kulanu and Likud, have signed the bill and it will likely be brought to a vote soon.

“I won’t deny that there is some paternalism towards women in prostitution,” says MK Rozin.

“We can cite all the studies and proof about exploitation and harm, but if women come to me and say, ‘I’m not being sexually exploited, I don’t do drugs and alcohol,’ I’m not going to argue with them. But as someone who’s looking at the status of women across society, I’m still going to work to reduce prostitution in all its forms.

Just as we as a society don’t agree that people should be able to sell themselves into slavery, even if someone were to come and say that he wishes to be a slave. Or like we don’t let people sell their kidneys for money. As a society, we say no to that, we don’t think it’s moral for a person to sell their organs.

I think it’s not moral for women and men to sell their sexuality and their body for money.

Ultimately, it’s not just the individual that pays the price, but the society as a whole.

As long as prostitution is legitimate and permitted, we all have the potential to become prostitutes. I know that sounds extreme, but if we continue to allow prostitution, we’ll continue to educate men in a rape culture in which women are objects that can be bought and exploited.

To my mind, there’s no difference between stripping and prostitution.”

On ther words, ladies… “it’s for your own good… and as far as what you do with your body, that’s the government’s business – not yours!”

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The Beginner’s Guide To American Political Ironies

Authored by ‘Dr.D’ via Raul Ilargi Meijer’s Automatic Earth blog,

“It’s hard enough to find a candidate that will even promise to do something right so it doesn’t help that they do the opposite 90% of the time.”

Who wrote “We hold these Truths to be self-evident, that all Men are created equal”? Jefferson, a slave owner.

Who was one of the most ardent Abolitionists? Alexander Hamilton.

Was he a slave owner? Yes.

Who won the election of 1824? No one, it was decided by the House of Representatives.

So which party lost? None: all four candidates were Democratic-Republicans.

In response, Andrew Jackson, a slave owner, created the Democratic Party.

Jackson created the Democratic Party as an anti-bank, anti-oligarch, states-rights platform the Tea Party would recognize.

Martin Van Buren, a Democrat, created the first concentration camp for Cherokee Indians in 1838.

Those 17,000 Cherokees owned 2,000 slaves.

Did Lincoln create the Republican Party? No, it was an amalgamation of failed parties: Lincoln was their 1st candidate.

What was the Lincoln campaign of 1860? Non-interference in state slavery.

Why? The decision of Dred Scott in 1857, a slave owned by abolitionists in a state he did not reside. Overturning 250 years of history, the case determined that no slave could ever become a citizen, i.e. freed.

Who was the best known Confederate General? Stonewall Jackson.

What did he do when he sided with the Southern cause? Freed his slaves.

Who else was a top Confederate General? William Mahone.

What did he do? He was the creator of the most successful interracial alliance in the post-war South. His name was purged first by Southern Democrats (for integration), then by modern Democrats (for being a Confederate).

Woodrow Wilson (D) ran an anti-collectivism, limited government, anti-monopoly, anti-bank campaign in 1912. He created the Federal Reserve and is known for founding the modern welfare state.

Wilson was re-elected on the slogan “He Kept Us Out of War.” He immediately forced the reluctant nation into WWI.

Herbert Hoover, as Secretary of Commerce under Calvin Coolidge during the Crash of ’21, demanded economic aid and bailouts, but Coolidge, “the great refrainer,” refused. The market immediately recovered.

Hoover was President during the Crash of ’29. He gave unprecedented bailouts to help the economy recover. It never did.

Roosevelt campaigned against Hoover for being “ the greatest spending Administration in peacetime in all our history.” He outspent Hoover tenfold.

Did Roosevelt’s “New Deal,” the greatest stimulus and spending program up to that time, end the Great Depression? No. It was going strong in 1939.

What did Roosevelt campaign on? He promised to keep us out of war in Europe.

Who was Time’s Man of the Year in 1938? Adolf Hitler.

Who was Man of the Year in 1939? Joseph Stalin.

1942? Joseph Stalin.

Wars under “anti-war” Democratic Party: 93 years, 46.5%. 625K deaths since 1864.

Wars under “pro-war” “Republican” Party: 107 Years 53.5%. 12K deaths since 1864.

Who voted for the 1964 Civil Rights Act? Republicans 80% vs. Democrats 69%.

Who filibustered it? Southern Democrat Strom Thurmond.

Who signed it? Lyndon Johnson, a southern Democrat.

Where did Thurmond go? The GOP, who had voted against him and against southern segregation.

What did Richard Nixon campaign on? “Law and Order” and a “secret plan” to exit Vietnam. He immediately bombed Cambodia and was later impeached for a burglary.

Who said “the soundest way to raise revenues in the long run is to cut rates now” and “Every dollar released from taxation that is spent or invested will help create a new job and a new salary” ? John F. Kennedy.

Who gave the greatest modern tax cut? John F. Kennedy (income and capital gains, signed by Johnson).

Who most increased the postwar Federal deficit? Ronald Reagan 186%.

Who most increased taxes? Ronald Reagan, 1982 (as % of GDP, excluding Obamacare and Johnson’s one-year tax).

Who called young blacks “Superpredators”? Hillary Clinton, 1996.

Who put the most black men in jail? Bill Clinton, under the 1994 Violent Crime Control Act.

Who cut welfare most? Bill Clinton, 1996 Personal Responsibility and Work Act.

Who was called the first “Black President”? Bill Clinton (“white skin notwithstanding, this is our first black President. Blacker than any actual black person who could ever be elected in our children’s lifetime.” –Toni Morrison, 1998. I swear this is true).

What was George W. Bush’s platform? Smaller, less-invasive government, lower taxes, and no foreign wars.

Who are the Neoconservatives? “Liberal hawks who became disenchanted with the pacifist foreign policy of the Democratic Party”.

Where did these Liberal Democrats finally prosper? Under G.W. Bush and on Fox News, e.g. Bill Kristol.

Which President won the Nobel Peace Prize? Barack Obama. (As did Theodore Roosevelt, Woodrow Wilson and Jimmy Carter)

What was his legacy? War every day of all eight years, with +50,000 official strikes in Afghanistan, Pakistan, Libya, Yemen, Somalia, Iraq, and Syria and unofficial attacks in Ukraine, Sudan, Niger, Cameroon, Uganda, and elsewhere, as well as 3,000 drone deaths.

Wow, anything else? Due to his intervention, Obama, the first black president, caused the creation of an open-air black slave market in Libya.

Who campaigned advocating a Syrian no-fly zone expected to cause WWIII with Russia? Hillary Clinton (D).

Who campaigned for peace talks and de-escalation with Russia? Donald Trump (R).

Who sent 164 missiles into Russian ally Syria? Donald Trump (R).

Who advocated against the recent attacks? “Far-right” speakers Rand Paul and Tucker Carlson of Fox News.

Who advocated for the attacks? “Left” speakers Fareed Zakaria, and Rachel Maddow with left media Slate and Mother Jones.

What was the actual breakdown? 22% of GOP supported Syrian airstrikes in 2013 vs 86% for the same strikes in 2017.

And on and on. Got it? Know which side you’re on? History, party platforms, personal beliefs, economy, all clear?

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

P.S. Mark Twain never said this.

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US Navy Laser Cannons Could Replace Gatling Guns, Missiles On Warships

Back in March, we explained how the High Energy Laser and Integrated Optical-dazzler with Surveillance (HELIOS) system would be one of the first Department of Defense (DoD) contracts to mount an integrated laser cannon onto the U.S. Navy’s destroyers. We also noted, the DoD awarded Lockheed Martin a $150 million contract, with options for an additional $942.8 million, to manufacture multiple HELIOS units with a completion date of 2020.

According to new information obtained by We Are The Mighty from the Lockheed exhibit at the 2018 SeaAirSpace expo in National Harbor, Maryland, this sea-based 150 kilowatts laser cannon would be the most powerful directed energy weapon system to ever  be installed on a warship. In contrast, the 30 kilowatts Laser Weapon System (LaWS) was installed on USS Ponce for field testing in 2014. It has since proven to be effective against UAVs (Unmanned Aerial Vehicles) and small boat threats.

We Are The Mighty, also obtained knowledge that HELIOS is a prime candidate to replace the MK-15 Phalanx Close-in Weapons System (CIWS) and the RIM-116 missile system on warships.

The Mk15 Phalanx carries more ammo than the launchers for the RIM-116, but has a much shorter range. (U.S. Navy photo by Mass Communication Specialist 3rd Class William Weinert)

The Phalanx MK-15 weapon system is a radar-guided 20 mm Vulcan cannon providing “inner layer point defense capability against anti-ship missiles, aircraft and littoral warfare threats,” according to a US Navy fact file. “Phalanx automatically detects, evaluates, tracks, engages and performs kill assessment against ASM and high-speed aircraft threats.”   

Citing the materials from Lockheed, We Are The Mighty explained how the HELIOS also has the potential to replace the RIM-116 Rolling Airframe Missile (RAM), small, lightweight, infrared homing surface-to-air missile in use on combat ships.

The RIM-116 Rolling Airframe Missile has a range of five nautical miles, but the launcher can only hold so many rounds. (U.S. Navy photo by Mass Communication Specialist 2nd Class Gary Granger Jr.)

Mark Gunzinger of the Center for Strategic & Budgetary Assessments, a longtime supporter of lasers, said, “it is clear evidence of the progress that has been made over the last several years on maturing solid-state lasers.  We are talking about lasers that now have the power and beam quality needed to defend against UAVs (Unmanned Aerial Vehicles), small boat threats, and possibly some weapons (e.g. incoming missiles) over short ranges.”

“It also highlights how serious the Navy is about fielding non-kinetic defenses with deep ‘electric’ magazines,” Gunzinger said. Unlike guns and missiles, a laser doesn’t run out of ammunition as long as it has electrical power.  

Watch the US Navy’s field test the LaWS laser system

The HELIOS has a comparable range to the RIM-116 (about five nautical miles), while the missile system holds 11 or 21 missiles, the laser cannon has an unlimited amount of ammo — dependent on an adequate supply of electricity.

As fears of World War III have migrated from the Korean peninsula to the Middle East, it is becoming increasingly evident that the Pentagon is expected to unleash an array of revolutionary weaponry against its next adversary. War with Iran is nearing…

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Yes, The US Government Can Still Confiscate Gold

Authored by Tom Lewis via The GoldTelegraph,

People around the world love gold. It has always been the most reliable hedge against economic uncertainty. Yet few people consider that the government (who is usually responsible for the turndown in the first place), has the authority to seize your gold.

Historically, the government will seize gold when it’s the most valuable, during times when its fiat currency has become utterly devalued. When President Roosevelt made ownership of gold bullions illegal in 1933, the move was preceded by the boom of the Roaring Twenties, then the crash of 1929. Although Roosevelt didn’t call it gold confiscation; he preferred the term “gold hoarding.”

By the 1930s, the US government was facing its most severe financial crisis, and it needed gold (something of value), to stimulate the economy that was running on the fumes of fiat currency. So, it took people’s gold. It was as simple as that. Non-compliance was threatened with severe punishment.

We may be facing another financial crisis, and it might be best to avoid the role of fugitive “gold hoarder.” At this point, it doesn’t make sense for the government to confiscate private gold, as a cashless society will indirectly control peoples finances.

Why would the government seize gold? In 1933, under the 1913 Federal Reserve Act, the dollar had to be backed by 40 percent gold. This would give the Federal Reserve room to print new money when needed. What’s a government to do when it needs to print money, but doesn’t have the gold reserves needed to back it up? It passes an Executive Order making gold ownership illegal but buys up the illegal gold itself. That’s what Roosevelt did. When the government continued to print more money, it declared ownership of silver illegal a year later.

Soon after the government confiscated all gold, the price rose by 40 percent. As if by magic, the US government had a lot more funds than it had before. What happens is that the government buys your gold with cash, then devalues the cash and raises the value of the gold. It wins, you lose.

While the government attributes artificial value to money, it can do and does the same to the value of gold. The government currently holds 261 million ounces of gold in reserve at marked on its book at $42.22 per ounce. That’s a total value of $11 billion. Or is it? The fair market value of gold today is around $1,300 per ounce. As Jim Rickards pointed out in the New Case For Gold, gold is actually what kept the Federal Reserve solvent in 2008.

It is important to know, that under extreme circumstances, the U.S government can still keep you from “hoarding” gold if it wishes to do so.

Many countries recently have repatriated their gold reserves to keep the precious metal closer to home. Germany is just one of the countries that have called back all its gold. When this happens, countries are often preparing for geopolitical and financial events. People buy gold for the same reason.

Since the US dollar is no longer backed by any amount of gold, why would the government want to confiscate it these days? The government is keeping afloat by printing as much fiat currency as it can. The more it prints, the less valuable the dollar becomes, while gold concurrently rises in value. A desperate government might very well begin to eye private gold as the solution to its problems.

It is unlikely that the government will confiscate your gold in the short term. But the whole purpose of keeping gold is long-term, so it’s a good idea to be prepared. Keeping some physical gold tucked safely away is always a good idea.

Investors wanting a hedge against inflation should be aware that old and rare gold coins retain their value without falling under the definition of gold that can be seized by the government. Once you get over the hefty premium, rare gold coins can be had and kept even when it has been declared illegal. Currently, many rare coins are still exempt from seizure.

If any government were to confiscate gold, it would be to enable governments, instead of free trade, to control the economy. The more power the government claims, the less power lies within the hands of its citizens.

Gold has been the most reliable form of money by being a trusted store of value. Its physical properties is the reason gold has remained a coveted asset for over five thousand years.

With the “everything bubble” only getting bigger and bigger, will the U.S government want gold to be under its control or under the control of its citizens?

Time will tell… 

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One Bank’s “Ominous” Warning: “The Buying Of Risk Assets Has Ground To A Halt”

Traders, analysts and strategists have been stumped by a market paradox in recent weeks: despite earnings that have been off the charts, rising 24% Y/Y (the most since 2010, if largely thanks to Trump’s tax reform), the S&P is still down for the year, after experiencing two brief 10% corrections just the past 4 months after a torrid, melt-up start to 2018. 

How come? While many have offered explanations why the market refuses to break out higher, one of the most convincing observations comes from Matt King, who in his latest note points out that it is all about rates, both nominal and real, and how they influence risk assets. That particular interplay is especially notable because as the Citi strategist writes, whereas straight market correlations between both nominal and real yields and risk assets tend to prove unstable, “they can be thought of as following a regular cycle.”

The cycle in question, which is shown below…

… boils down to one thing: competition for investment flows.

King suggests thinking of the 5 steps as follows:

  1. while risk assets like credit tend to respond positively to early signs of inflation and growth…
  2. once these give way to a recognition that central banks will have to withdraw stimulus and raise rates …
  3. manifested in rising real yields, at which point risk-on turns to risk-off…
  4. This continues until real eventually central banks are forced back into easing…
  5. Lowering real yields, prompting investment flows to return to risk assets, and eventually completing the cycle by helping to drive optimism about growth again.

Note the critical role central banks play in this cycle: they are the de facto catalyst, whose monetary policy intervention serves to mark the trough in the cycle once risk assets hit the so-called “Fed Put”, whose new strike price under Jay Powell was quantified last week by Deutsche Bank at roughly 2,300-2,400 in the S&P500.

While King admits that the “Real Yield Cycle” is merely a simplification, it does seem to fit relatively well with both credit and equity moves over recent decades, and “would suggest that risk assets will continue to be vulnerable – and that even if yields start falling again, it may well be as part of a flight to quality.”

But whereas the real yield cycle may provide a shorthand approximation of where in the cycle we should be, another paradox emerges when looking at where we are in terms of risk flows.

This is where it gets interesting.

It is no secret that Matt King (and not only) has been increasingly bearish for the past few years, predicated by the threat that is the tapering and eventual reversal in central bank assets. Here, unlike most of the peanut gallery, King who has repeatedly proven that he is one of the best credit strategists on Wall Street, admits that just as central banks were the driver for risk assets to hit all time highs, so their reversal will unleash the next correction/bear market/crash.

And yet, despite repeated warnings, despite the Fed’s balance sheet having shrunk by $100 billion recently, despite a mature credit, business and “real yield” cycle, despite a bevy of geopolitical risks, stocks – both in the US and globally – remain just shy of all time highs.

But maybe not for long.

Going back to the chart of the Real Yield cycle, King plays devil’s advocate, and notes that “it may be argued that we are not yet properly in phase 3, that risk assets are going sideways rather than selling off, and that this phase could persist for a while yet – the standard “late-cycle, not end-cycle” argument.” But, the Citi strategist warns again, “we have argued against this previously, and think subsequent market developments this year have become more, rather than less, ominous.“

Why? A very simple reason.

“Inflows to risk assets have basically stopped.”

As we first pointed out several weeks ago, Citi notes first that foreign buying of US credit – for long a mainstay of market demand – fell to zero in November and has not revived significantly since, either in official numbers or on Citi’s own flows (Figure 5). While there has been some rotation towards Europe in Japanese buying, this has not been nearly enough to offset the reduction in the US; furthermore hopes that this is simply a seasonal lull will dwindle further if there is not a big uptick following Japanese Golden Week.

One simple reason for this, as we explained 2 months ago, is that net of surging dollar funding costs, US Treasuries hedged for the dollar mean that the effective yield on US paper is now lower than both JGBs and Bunds, crippling foreign demand.

In other words, as long as the Fed’s tightening cycle keeps overnight funding costs high (note the failure of Libor-OIS to drop as so many so-called experts predicted would happen), demand for US paper will continue to wane.

But it’s not just flows into credit that have suddenly halted: the same has happened to mutual fund flows.

While the weekly numbers have been volatile, and fixed income has held up better than equities, it looks distinctly as though net buying of risk assets has ground to a halt (bottom left chart). Moreover, the flow across asset classes and geographies has been very consistent with the abovementioned late cycle dynamics: a short-term cycle driven by trailing total returns (bottom right chart), and a longer-term cycle driven by deposit rates. As Citi warns, “both of these are sending increasingly negative signals – all the more so now the YTD return on $ IG has hit -3.5%”, an observation which BofA’s Michael Hartnett noted yesterday to warn that the ECB is now on the verge of quantitative failure.

What is King’s conclusion? Simple (no really): just follow central bank liquidity (all the way down), to wit:

The broader point in all this is that – despite the markets’ confusing gyrations and counter-gyrations in response to the latest earnings beat or Trump tweet – there is a pattern. The enormous influx of central bank liquidity in recent years may not have produced nearly as much inflation as expected in the real economy, but it did produce an abundance of asset price inflation – over and above what should have been expected on the grounds of economic fundamentals alone.

The chart he is referring to is, of course, this one:

… and in just a few months, it will turn negative for the first time since the financial crisis. Hence, point #2:

More than that, to quote Jeremy Stein, it got into “all the cracks”, flowing freely from one asset class to another and one geography to another. Now that the flow of central bank purchases is in decline, and especially that the Fed’s central bank balance sheet is contracting, the risk is that this process runs in reverse, leaving asset prices unsupported and exposing surprising vulnerabilities as money comes back out from different asset classes and  geographies.

… while brings us to – what else – another gloomy outlook from the man whose clear, simple explanation of why Lehman should fail one week ahead of the Lehman failure in September 2008 , many say became a self-fulfilling prophecy and indeed led to Lehman’s failure.

So far the shift in this direction has been modest. The ECB and BoJ have still been putting chairs into the game even as the Fed has begun taking them out, and there are times when the music is playing that it’s tempting to overlook the markets’ vulnerabilities. But investors prefer $ chairs to € and ¥ chairs, and even they are accumulating at a slower rate. The signs are there, for those who choose to see them – in rising real yields, in falling inflows, in pockets of stress in global money markets, and in the continuing correlation between market moves and global central bank liquidity.

As more chairs are withdrawn, expect more consensus trades suddenly to come under pressure – and don’t be surprised if more than a few investors find themselves left standing awkwardly as a result.

 

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