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Former Vice President Joe Biden just casually dropped a bombshell admission that he personally and directly intervened in Ukraine’s governance, boasting on stage during an event hosted by the US Council on Foreign Relations (CFR) that he got a high Kiev government official removed essentially at the snap of his fingers.

“I looked at them and said: ‘I’m leaving in six hours. If the prosecutor is not fired, you’re not getting the money,’” Biden said at the CFR talk on Tuesday, in what was a follow-up to prior admissions revealing that the United States actively asserted behind the scenes control of Ukraine’s post-Maidan government, to the point that US officials even dictated who would occupy high offices in the war-torn country.

Ukrainian President Petro Poroshenko and then Vice President Joe Biden in Kiev, Ukraine, January 16, 2017. Image source: Reuters via The Indian Express.

Biden confirmed what was only previously hinted at through an anonymous senior official who spoke to The New Yorker in 2016. It was revealed then that Ukraine’s Prosecutor General, which the equivalent office to the US Attorney General, was removed only after the Obama administration threatened to withhold 1$ billion in loan guarantees.

The prosecutor general at the time, Viktor Shokin, was previously supported by the US and much of the EU, but as The New Yorker described, “after initially supporting Shokin, U.S. and E.U. officials soured on him.” Washington suddenly viewed Shokin, who had served two decades within the Prosecutor General’s office as corrupt and unwilling to initiate crackdown in major financial scandal cases involving high profile figures.

Ukraine’s chief prosecutor serves a term of six years and can only be appointed and dismissed by the president with parliamentary consent; however in the case of Shokin, Joe Biden boasted before the CFR audience that he told Ukrainian President Petro Poroshenko and former Ukrainian prime minister Arseny Yatsenyuk sometime in late March 2016, “I’m telling you, you’re not getting the billion dollars,” unless they immediately sacked Shokin. To the glee of his CFR listeners who laughed audibly, Biden added, “Well, son of a bitch. He got fired!”

Indeed the threat of withholding what had been the third installment of a massive loan package desperately needed to help prop up the new pro-EU/US Kiev government resulted in Viktor Shokin being hastily removed from his post by Ukrainian parliament on March 29, 2016 – within the very month Biden made the ultimatum (Shokin had initially promised he would willingly resign in a February letter, but resumed his work through March). Poroshenko then officially and formally dismissed Shokin on April 3, 2016.

But it appears that it was somewhat of an open secret as Shokin became widely referred to among Ukrainians as “the billion-dollar man”. It was also a time in which Biden and other US officials were constantly in direct communication with President Poroshenko, talking foreign aid and loan packages, and presumably according to Biden’s latest admission, how he should run his government.

Biden had previously disclosed in his personal memoirs that he “had been on the phone with either Poroshenko or… Yatsenyuk, or both, almost every week” for months attempting to guide nearly every major decision of the Poroshenko administration after the overthrow of Viktor Yanukovych in the 2014 coup d’état which inaugurated the Ukraine crisis.

As a reminder, in 2014 – not long after Ukraine’s US-endorsed and facilitated presidential coup – Joe’s son Hunter joined the board of directors of Burisma Holdings, the largest private gas producers in Ukraine, incorporated in Cyprus, a European tax haven.

Elsewhere in Tuesday’s talk, Biden revealed that the Obama White House “spent so much time on the phone making sure that everyone from… [former French president Francois] Hollande to [former Italian prime minister Matteo] Renzi wouldn’t walk away” from anti-Russian sanctions.

We certainly hope that Biden continues to open his infamously big mouth as he will only further confirm (primarily through his penchant for boasting and self-congratulating) that the US version of events whether in Ukraine, Syria, or other parts of the world (spontaneous “democratic revolutions” championed by political figures who happen to take their dictates from Washington, etc…) is nowhere close to the reality.

* * *

Below is the full segment containing former VP Biden’s Ukraine confessions during Tuesday’s CFR speech:

Joe Biden: “Do I think they’re—I think the Donbas has potential to be able to be solved, but it takes two things. One of those things is missing now. And that is I’m desperately concerned about the backsliding on the part of Kiev in terms of corruption. They made—I mean, I’ll give you one concrete example. I was—not I, but it just happened to be that was the assignment I got. I got all the good ones. And so I got Ukraine. And I remember going over, convincing our team, our leaders to—convincing that we should be providing for loan guarantees. And I went over, I guess, the 12th, 13th time to Kiev. And I was supposed to announce that there was another billion-dollar loan guarantee. And I had gotten a commitment from Poroshenko and from Yatsenyuk that they would take action against the state prosecutor. And they didn’t.“

“So they said they had—they were walking out to a press conference. I said, nah, I’m not going to—or, we’re not going to give you the billion dollars. They said, you have no authority. You’re not the president. The president said—I said, call him.” (Laughter.)

“I said, I’m telling you, you’re not getting the billion dollars. I said, you’re not getting the billion. I’m going to be leaving here in, I think it was about six hours. I looked at them and said: I’m leaving in six hours. If the prosecutor is not fired, you’re not getting the money. Well, son of a bitch. (Laughter.) He got fired. And they put in place someone who was solid at the time.”

“Well, there’s still—so they made some genuine substantial changes institutionally and with people. But one of the three institutions, there’s now some backsliding.”

And a video of the full event:

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Authored by John Whitehead via The Rutherford Institute,

Here in Amerika, things are getting worse – not better – as the nation inches ever closer towards totalitarianism, that goose-stepping form of tyranny in which the government has all of the power and “we the people” have none.

Take what happened recently in Ft. Lauderdale, Florida.

On Friday, Jan. 19, 2018, immigration agents boarded a Greyhound bus heading to downtown Miami from Orlando and demanded that all passengers provide proof of residence or citizenship. One grandmother, traveling by bus to meet her granddaughter for the first time, was arrested and taken off the bus when she couldn’t provide proof of residency.

This isn’t is a new occurrence.

A year ago, passengers arriving in New York’s JFK Airport on a domestic flight from San Francisco were ordered to show their “documents” to border patrol agents in order to get off the plane.

With the government empowered to carry out transportation checks to question people about their immigration status within a 100-mile border zone that wraps around the country, you’re going to see a rise in these “show your papers” incidents.

That’s a problem, and I’ll tell you why.

We are not supposed to be living in a “show me your papers” society.

Despite this, the U.S. government has recently introduced measures allowing police and other law enforcement officials to stop individuals (citizens and noncitizens alike), demand they identify themselves, and subject them to patdowns, warrantless searches, and interrogations.

These actions fly in the face of longstanding constitutional safeguards forbidding such police state tactics.

Set aside the debate over illegal immigration for a moment and think long and hard about what it means when government agents start demanding that people show their papers on penalty of arrest.

The problem with allowing government agents to demand identification from anyone they suspect might be an illegal immigrant—the current scheme being employed by the Trump administration to ferret out and cleanse the country of illegal immigrants—is that it lays the groundwork for a society in which you are required to identify yourself to any government worker who demands it.

Such tactics quickly lead one down a slippery slope that ends with government agents empowered to subject anyone—citizen and noncitizen alike—to increasingly intrusive demands that they prove not only that they are legally in the country, but also that they are in compliance with every statute and regulation on the books.

This flies in the face of the provisions of the Fourth Amendment, which protects the American people from undue government interference with their movement and from baseless interrogation about their identities or activities. The Rutherford Institute has issued a Constitutional Q&A on “The Legality of Stop and ID Procedures” that provides some guidance on one’s rights if stopped and asked by police to show identification.

Unfortunately, even with legal protections on the books, it’s becoming increasingly difficult for the average American to avoid falling in line with a national identification system.

We’re almost at that point already.

Passed by Congress in 2005 and scheduled to take effect nationwide by October 2020, the Real ID Act, which imposes federal standards on identity documents such as state drivers’ licenses, is the prelude to this national identification system.

Fast forward to the Trump administration’s war on illegal immigration, and you have the perfect storm necessary for the adoption of a national ID card, the ultimate human tracking device, which would make the police state’s task of monitoring, tracking and singling out individual suspects—citizen and noncitizen alike—far simpler.

Americans have always resisted adopting a national ID card for good reason: it gives the government and its agents the ultimate power to target, track and terrorize the populace according to the government’s own nefarious purposes.

You see, it’s a short hop, skip and a jump from allowing government agents to stop and demand identification from someone suspected of being an illegal immigrant to empowering government agents to subject anyone—citizen and noncitizen alike—to increasingly intrusive demands that they prove not only that they are legally in the country, but that they are also lawful, in compliance with every statute and regulation on the books, and not suspected of having committed some crime or other.

It’s no longer a matter of if, but when.

You may be innocent of wrongdoing now, but when the standard for innocence is set by the government, no one is safe. Everyone is a suspect. And anyone can be a criminal when it’s the government determining what is a crime.

Remember, the police state does not discriminate.

At some point, it will not matter whether your skin is black or yellow or brown or white. It will not matter whether you’re an immigrant or a citizen. It will not matter whether you’re rich or poor. It won’t even matter whether you’re driving, flying or walking.

Eventually, when the police state has turned that final screw and slammed that final door, all that will matter is whether some government agent—poorly trained, utterly ignorant of the Constitution, way too hyped up on the power of their badges, and authorized to detain, search, interrogate, threaten and generally harass anyone they see fit—chooses to single you out for special treatment.

We’ve been having this same debate about the perils of government overreach for the past 50-plus years, and still we don’t seem to learn, or if we learn, we learn too late.

All of the excessive, abusive tactics employed by the government today—warrantless surveillance, stop and frisk searches, SWAT team raids, roadside strip searches, asset forfeiture schemes, private prisons, indefinite detention, militarized police, etc.—started out as a seemingly well-meaning plan to address some problem in society that needed a little extra help.

In the case of a national identification system, it might start off as a means of curtailing illegal immigration, but it will end up as a means of controlling the American people.

As I make clear in my book Battlefield America: The War on the American People, whatever dangerous practices you allow the government to carry out now—whether it’s in the name of national security or protecting America’s borders or making America great again—rest assured, these same practices can and will be used against you when the government decides to set its sights on you.

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Democrats on the House Intelligence Committee have drafted their own “counter-memo” to respond to the four-page memo created by GOP staffers and made available for House members to review. 

The GOP memo – which Republican lawmakers are pushing to make public, has been described as containing bombshell revelations of extensive abuse of the FISA surveillance court in a conspiracy involving the Obama administration, the DOJ, the FBI and the Clinton campaign. 

In an effort to counter the GOP memo’s imminent release, Rep. Adam Schiff (D-CA) announced that Democrats on the House Intelligence Committee would release their own memorandum “setting out the relevant facts and exposing the misleading character of the Republicans’ document so that members of the House are not left with an erroneous impression of the decidated professionals at the FBI and DOJ.” 

Schiff will move to make the “counter-memo” available to the full house. 

.@RepAdamSchiff announces House Intel Dems have written their own counter-memo; will seek to make public, too. pic.twitter.com/0pK3xulL8u

— Byron York (@ByronYork) January 24, 2018

At the end of the day, however, if the GOP memo reveals that the FBI applied for a FISA surveillance warrant or otherwise used an unverified “Trump-Russia dossier” created by opposition research firm Fusion GPS, or that the extent of the Obama administration’s “unmasking” of Trump officials was much more invasive than previously understood, it’s hard to imagine how Schiff’s “counter-memo” is going to be able to explain all of it away. 

This latest act of desperation as the noose tightens comes on the heels of an absurd letter written by Adam Schiff and Dianne Feinstein (D-CA) to Facebook and Twitter executives, calling for the Social Media giants to combat “Russian bots” which were promoting the hashtag #ReleaseTheMemo.

NEW: Sen. Feinstein, Rep. Schiff urge Facebook and Twitter to investigate involvement of Russian bots in pushing “Release the Memo” campaign: “If these reports are accurate, we are witnessing an ongoing attack by the Russian government through Kremlin-linked social media actors.” pic.twitter.com/SkAci5NefK

— ABC News (@ABC) January 23, 2018

Unfortunately for Schiff and Feinstein’s straw-grabbing, the Daily Beast reported that internal Twitter sources confirm that the #ReleaseTheMemo hashtag has been pushed by actual Americans. 

a knowledgeable source says that Twitter’s internal analysis has thus far found that authentic American accounts, and not Russian imposters or automated bots, are driving #ReleaseTheMemo. There are no preliminary indications that the Twitter activity either driving the hashtag or engaging with it is either predominantly Russian.

In short, according to this source, who would not speak to The Daily Beast for attribution, the retweets are coming from inside the country.

Schiff and the Democrats are apparently so riled up by the GOP memo that now they’re telling people that the American public shouldn’t be allowed to see the document because we’re too stupid to understand its contents. In an interview with CNN, Schiff said the following: 

CABRERA: “Why not allow peel to look at it and let Americans make the decision for themselves about whether it’s useful information or not?”

SCHIFF: “Well, because the American people unfortunately don’t have the underlying materials and therefore they can’t see how distorted and misleading this document is. The Republicans are not saying make the underlying materials available to the public. They just want to make this spin available to the public. I think that spin, which is a attack on the FBI, is just designed to attack the FBI and Bob Mueller to circle the wagons for the White House. And that’s a terrible disservice to the people, hard working people at the bureau, but more than that, it’s a disservice to the country.”

So – Congressional Democrats have crafted a “counter-memo” to combat the GOP memo, Russian bots are pushing for the GOP memo’s release (along with over 60 Congressional Republicans), and the American public is too stupid to understand it. 

We are undoubtedly witnessing the Schiff hitting the fan. 

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

With all the talk about the bubble market, people are once again saying Donald Trump is a fool, he should never have taken credit for a Dow that’s about to collapse. In addition, how does he think he can get away with claiming we have a great economy made greater? He said in the election the economy was terrible and the Dow was a bubble, that’s why he won.

 

But hold on: you have to remember, they’re politicians; they may be dishonest but they’re not stupid.

Let’s try a scenario to see what they’re thinking:

We have a situation in the U.S. where 100 million people are out of the workforce, the real economy is on life-support, debt is crushing, and monetary velocity is at an all-time low. The Fed’s every effort at market-rigging, lowering rates and pumping in money, bailing out the banks and giving unearned interest for Fed deposits have run up both the housing market and the stock market, neither of which is their legal mandate. If either one goes higher, they’ll pop as workers, particularly millennials, have no income to buy houses, and stocks are levitating on just 5 insider-paid FAANG stocks.

It’s untenable. However, if either falls, the collateral that upholds the whole system will fail, margins will be called, the housing market will fall, and there will be an instant Depression… You know, more than the 100 million out of work Depression we already have. A Depression that makes Congressmen and government workers lose their profits and 401k’s instead of just turning students to open prostitution, and mass opioid death, and starving people in Oklahoma – you know, a Depression that finally hurts someone who matters.

Since this is self-evident and unsustainable, isn’t Trump just stepping in it by pushing all the same policies as Obama? Not necessarily. Look at what matters to him. A tax plan, and barely, not one he liked, but look at what he settled for: return of foreign profits abroad. Why? Large as it is – and it’s already creating long-withheld bonuses – that’s not enough to turn the dial. But that’s a card he wanted. Tax policy and a high stock market. What else?

Well, we have a crippling high debt, easily 100% even 200% of GDP. With that weight, nothing can move, no way to win. Pensions also are nearly dead, along with insurance companies; the high Dow is all that’s saving them from bankruptcy. What else? Well he was interested in health reform but was willing to let it remain for now. He wrote deferrals but not pardons for 5 banks showing he’d like to keep them functioning for the moment. He wanted to increase the military.

Certainly the only other promise was to create jobs and economies again, in a way saying the few protected industries: Finance, Health Care, and Military would have to become a smaller % of GDP, so those dollars could be returned back to Main Street. But we just said those three aren’t happening.

So. What if instead of pulling money from intractable lobbying groups he got new investment money from abroad? We saw this initially with Carrier and Ford and more recently with Japan. But it’s not enough and he knows all this; they all do. How do you solve the problem? How do you get more?

Calling all 1st year econ students: how do you attract capital to your country? With higher rates. As the US 10-year breaks out above 2.6% you’d have to think that’s attractive. Attractive investing in a bankrupt nation that’s barely moving? It does if you’re a company that must maintain legal investment ratios and you’re getting 0% in Japan, and negative rates in Europe, both with economies as bad or worse.

But aren’t rising rates bad? The Fed model raises rates to clamp down on the economy. Money will leave the stock market and go to bonds. Housing prices will fall as the monthly cost increases. Cats and Dogs living together….except it isn’t true.

Let’s go down the list:

1. Trump starts with plausible seed corn, a billboard sign: a tax cut and a few trillion overseas to start economic motion.

2. If the Fed raises rates, that will draw in trillions of world capital Trump wants, enough to turn the dial and really matter.

3. Enough money flowing into the U.S. will create demand for the US$, and the US$ will rise. This part has to work. Be flashy, attract attention. Go big or go home.

4. The US$ rising will attract foreign buyers into U.S. investment and together the stock market will counterintuitively rise.

5. The Fed will detect overheating and raise rates again and again in a reinforcing cycle, drawing capital to only the U.S. and suffocating the world.

6. The massive investment re-industrializes the U.S. to some extent while the high US$ gives some relief to Main Street.

7. Foreign buying, better jobs, and low exchange rates hold off the housing collapse, while all the mortgage bonds are also sold overseas.

8. Emerging markets are hammered by the high US$ and fail, driving ever-more capital to safe havens like the US.

9. Ultimately, the U.S. does what all reserve currencies do and fails LAST.

See why they think they can get away with this? The U.S. can still ravage the world, and Trump can, in fact, call it his “success.” …Just like all the Presidents since Nixon.

But this is history, and it never ends there.

10. The whole world, strangled by the US and its dollar have no choice but to reject the US system entirely in private contracts and move to an alternative.

11. We now have at least three alternatives: the CIPS/Yuan banking bloc, gold, and cryptocurrencies. They aren’t exclusive: the most likely outcome is a gold-backed trading note priced in Yuan on a blockchain, perhaps in the Shanghai Exchange.

12. Being entirely too high the US$ ultimately cripples the U.S. as well, but the alternative currency the world creates becomes the lifeboat to escape. Let’s be simple and say it’s Bitcoin (it won’t be): Bitcoin hits John McAfee’s $1 million. What do you call it when a currency rapidly becomes worth 1/10th, 1/100th, 1/1,000,000th of the standard? Isn’t that hyperinflation?

13. The U.S., like every nation since Adam Smith, defaults on its $20T in $ debt – and all its internal consumer, corporate, and pension debt – using “hyperinflation” of the dollar. New twist is that, instead of gold, it hyperinflates vs. cryptos or the new world exchange standard as planned in 1971 and publicized in 1988.

14. The reset occurs, no one dies (in the U.S.), supply chains are maintained, oil flows, and the economy stops being a feral, diabolical means of theft and control and returns to being a fair, voluntary exchange. For now.

That’s not to say they’ll succeed, but this is why they think they can go this way and win at it.

What does the Trump world look like?

1. Stock market rose, like he said.

2. Manufacturing returns, reindustrializing a hollow nation and allowing the country to catch up to the stock prices, like he said.

3. Unemployment drops, like he said.

4. Crime is reduced and the cities are improved, like he said.

5. This helps win the black vote, snatching the rest of the Democratic base and locking them out for years, like Bannon said.

6. Economic growth normalizes the banking/medical oversize, like he wanted.

7. Free, untracked money for bribes and illegal cover end and law and order returns with fair exchange, like he said.

8. The U.S. is unwelcome overseas, and the breaking of bonds re-sets the multipolar world, where the U.S. is just one trading nation among many, like he said.

9. Without the money of empire the military returns home, like he said.

10. The world is pretty mad at us and that renewed military came in handy. That’s okay, they’ll be consoled that the economy now works and the U.S. can no longer start wars and act terribly.

What does the world look like after? A lot more like it was before 1945. You know, back when we were great and before we got terrible.

Again, not to say this WILL happen, but you can see that it CAN happen, and they are now in control of most of the levers required. From their rhetoric, you can see the glass darkly that this is what they find a priority, a possibility, and therefore a doorway out. In addition, downsizing and re-establishing honesty will not allow their opponents to wiggle out and reverse it.

Why wasn’t this done before? My guess is that a) previous planners thought with a little more effort they could take over the world, as seen in the Arab Spring plan that would culminate in the capture of Iran, the only remaining oilfields on the planet, and b) given the world’s first entirely fiat financial system, it was too complex and disruptive to return to a gold standard.

Without a lighting fast crypto base, banking and trade would fail and millions would die. Only when the one was burned out and the other made available could this move be attempted. Watch and see.

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For only the 4th time since 1999 (and for the first time since Lehman), South Korea’s economy unexpectedly shrank in Q4 (contracting 0.4% QoQ against expectations of 0.1% expansion), busting the global-synchronized-growth narrative.

Only two analysts forecast the possibility of a contraction…

Government spending rose 0.5% QoQ, and while private consumption rose 1.09% QoQ, construction investment tumbled 3.8% QoQ

Exports were the biggest driver – plunging 5.4% QoQ – the biggest drop since 1985…

As Goldman notes, Korea’s 2017 Q4 GDP contracted 0.2% quarter on quarter (seasonally adjusted), slowing sharply from 1.5% in Q3 and falling for the first time in nine years. The figure was well below consensus and as well as our expectations. Main points:

1. Korea’s 2017 Q4 GDP contracted 0.2% quarter on quarter (seasonally adjusted), slowing sharply from a high base of 1.5% in Q3 and recording the first sequential decline in nine years. The figure was well below expectations. In year-on-year terms, growth was lowered to 3.0% from 3.8% in Q3.

2. Domestic demand’s total contribution to sequential GDP growth moderated to 0.6pp, from 0.8pp in the previous quarter. By expenditure, final consumption (including both private and government) continued solid growth of 0.9% qoq sa, helped by a re-acceleration in private consumption to 1.0%. Fixed investment declined 2.0% qoq sa, the first decline in three years. Facilities investment fell 0.6% qoq sa, and the contraction was more pronounced in construction activities (-3.8% qoq sa). The drag from fixed capital formation offset the relative strength in final consumption. Inventories accumulation turned positive again, adding 0.6pp to headline growth.

3. Net exports’ contribution to sequential growth fell back to -0.8pp. Exports recorded a sequential contraction of -5.4% qoq sa, but slowing from a sharp growth of 6.1% in Q3. Imports also declined 4.1% due mostly to lower machinery imports according to the Bank of Korea press release.

4. By industry, manufacturing contracted 2.0% qoq sa, the weakest print since Q1 2009. While the detailed breakdown by sectors is not yet available, the BOK press release highlights that the weakness was concentrated in transport equipment production including autos. In contrast, services continued positive growth at 0.4%, although moderating from 1.1% in the previous quarter.

5. For the full year of 2017, Korea’s real GDP grew 3.1%, up from 2.8% growth during the previous two years (2015-2016). The weaker-than-expected Q4 GDP figure, however, mechanically lowers our 2018 growth estimate to 2.8%, somewhat below the central bank’s latest forecast of 3.0%. In our view, distortions from unusually long holidays in Q4 2017 may have accentuated the sequential volatility, but the underlying momentum in export volumes adjusted for the distortions remains solid. Latest 20 day exports figure for January supports our view, with daily ex-ships exports accelerating from December to 14.5% yoy.

So Q4 2017 saw the worst economic environment since Q4 2008…

But stocks were soaring…

And PMIs said “everything was awesome”…

 

 

Perhaps most worrisome is that South Korea is often termed ‘the canary in the world trade coalmine’ and this downside surprise will do nothing to confirm the ‘globally synchronized growth’ narrative.

With The Won soaring to four-year highs…

 

How long before South Korea rejoins the currency wars?

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Bitcoin’s tepid performance since the beginning of the year – it has largely consolidated around $10,000, down 50% from its all-time peak – has left cryptocurrency evangelists with egg on their face.

But who exactly owns bitcoin? While nearly 60% of Americans say they’ve heard of it, only 5% of people own bitcoin, according to Bloomberg.

At least that’s what a joint study by SurveyMonkey and Global Blockchain Business Council determined…

And within that group, demographics are fairly consistent. An overwhelming 71% of them are male. The majority – 58% – are young, between the ages of 18 and 34 years old. And unlike the broader US population, nearly half of them are minorities.

 

When asked why they bought the crypto asset, investors answered that a combination of a lack of trust and an opportunity for return are at play. About one-third of Bitcoin owners said it was a means to avoid government regulation – 24% also said they trust Bitcoin more than the US government in a separate question – and about two in 10 saw it as a hedge against crashes in traditional assets. More than 60% also said that buying the digital coin was seen as a growth investment.

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Authored by Kevin Muir via The Macro Tourist blog,

Today’s topic will once again involve swap spreads. I am admitting this fact up front in the hopes of convincing you to read on. I know many readers find this obscure part of the institutional fixed income market complicated, and more often than not, boring. I get it. It’s not nearly as exciting as reading about strapping on some S&P 500 risk, or selling VIX, or god-help-you, buying the latest ICO offering. But I firmly believe that negative swap spreads were an anomaly from the 2008 Great Financial Crisis, and monitoring their return to “normal” levels offers some important clues as to the development of the economic recovery. It is an important indicator that many strategists are missing.

I have long been banging on the table that shorting swaps was a better way to position a portfolio for rising long term yields – A Better Way to Short the Bond Market? I don’t want to repeat the same argument again, but let’s have a quick recap. When the Great Financial Crisis hit, most market participants would have assumed that swap spreads would have exploded higher, much like they did during the Long-Term-Capital-Crisis. In the past, worries about credit risk from the banks that issue swaps meant that investors bid up the price of risk-free US Treasuries, sending the spread soaring higher.

In the initial days of the Great Financial Crisis, US swap spreads did in fact start to widen. But then, much to almost everyone’s surprise, swap spreads collapsed below zero. It made no sense. Why would investors ever enter into a swap arrangement with a bank that has credit risk instead of just buying US Treasuries? Especially in those days when no one trusted the financial soundness of banks.

Well, the answer was that it had more to do with financial system’s plumbing than a logical decision by markets. And the next time some newly-graduated-business-school-keener lectures you about Professor Malkiel’s market efficiency theories, just show them the chart of the US 30-year swap spreads and ask them to explain it.

Swap spreads dove because the supply of bank balance sheet was dramatically curtailed. Basically, banks, faced with more regulations and increased capital requirements, withdrew their participation in the swap market. The demand for swaps fell but not as quickly as the supply. The end result was that this mismatch of demand-supply meant that the previously unthinkable occurred, and swap spreads went negative. What would have usually been arbitraged away by proprietary trading desks at banks and other financial institutions was left to persist for years.

And this strange condition was symptomatic of a bigger problem. After witnessing some truly asinine moves by the likes of Dick Fuld’s Lehman or the myriad of other banksters, governments and regulators were eager to make sure it did not happen again on their watch. So they clamped down on both credit and leverage.

Therefore it is no surprise that banks withdrew from extending their balance sheet for swap trading. With higher capital requirements and more scrutiny from regulators, most banks made the decision it wasn’t worth it.

This might have been fine if it was only swaps that banks abandoned. However, the sad truth was that this phenomenon occurred over many different business lines.

Which brings me to my theory as to how swap spreads are a great indicator as to banks’ willingness to expand the money supply through private sector credit creation. And although many market participants focus on quantitative easing and other high powered money supply levels to measure potential inflation, the truth of the matter is that private sector money creation is much more important. Monetary velocity change can often overwhelm monetary policy effectiveness.

Since the GFC, all of that monetary velocity change has been to the downside. Liquidity has been stuffed into the system, and instead of it being taken up and lent into the real economy, it has either sat inert on banks’ balance sheets or been used for financial engineering. This is why both velocity and swap spreads have plunged together.

Don’t look now, but with both the passage of time, which helps erase the GFC nightmares, along with Trump’s deregulation and pro-business push, swap spreads have been rallying hard.

We are now only 14 basis points from zero at the long end of the curve. Since Trump’s election, we have rallied 40 basis points.

Private sector credit creation is headed higher. Swap spreads are screaming that reality loud and clear. And most likely monetary velocity will be right behind.

All of this means that interest rates are probably also headed higher. Don’t forget that much of the economic bears’ arguments centers around the belief that over-indebtedness will cause private sector credit demand to roll over earlier than would otherwise be the case. They are convinced that the private sector will not be able to expand credit. They argue Central Banks are pushing on a string.

Well, they might be right, but I don’t know how anyone can forecast how much debt is too much. Many of these arguments were made at 50% of GDP. Then at 60%. Again at 70%, etc… Over the decades, their arguments haven’t changed. Sure you might argue that from a societal point of view we have hit the point of debt being a serious long-term problem. But that’s a qualitative decision of what should be instead of an actual acceptance of what is.

Have a look at this chart of the Total Credit to Private Non-Financial Sector as a percent of GDP:

It’s easy to see the reduction in credit from 2009 to 2011. But as much as everyone is bemoaning the increase in total credit during the past decade, non-financial private sector credit growth has been limited. We are nowhere near the levels of 2008.

Instead of trying to decide when we will hit the debt saturation point, I am instead going to look at the change in swap rates for clues as to the private sector’s willingness to create credit. And it’s continuing to give a clear signal. The private sector has begun to re-lever, and unless you see signs of that changing, there is little reason to expect this trend to stop.

What does that mean for financial markets? Well, more credit creation means more US dollars. Big time. If this trend continues, it will mean an even lower US dollar and bond market.

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In a new mind-numbing report from Reuters, Mexico’s drug cartels are increasingly diversifying beyond narcotics and have recently entered into the petroleum business.

Cartels have jumped into the fuel theft game stealing billions of dollars worth of oil from pipelines controlled by the state oil company Pemex, which at current rates could paralyze the country’s top refineries.

 

Organized crime gangs are taking advantage of Mexico’s deteriorating oil infrastructure that is suffering from years of underinvestment and declining production by tapping into pipelines to steal tremendous amounts of crude products. If that fails, cartel members resort to bribing and or threatening Pemex employees for critical information about operations. Some Pemex employees have fled the country following unbearable death threats, while others have been found mutilated for not complying.

While President Enrique Peña Nieto has been unable to govern the country amid the out of control cartel violence, fuel theft is turning into a national security threat draining revenue from the federal government. Reuters reports that fuel thefts have cut more than $1 billion in annual revenue from state coffers, along with creating an unfriendly environment that is deterring foreign investment to revamp the aging refineries. Its been reported that the federal government generates about one-fifth of its income from Pemex. Serious issues are emerging as the declining oil revenue could lead to funding concerns for the government, therefore jeopardizing the fight against cartels.

The Federal Police, under the authority of the Secretariat of the Interior, recently launched offensives across the country that toppled drug kingpins turning 16% of the states into a Level-4 classification via the U.S. State Department, meaning that the areas are on par with a war-zone in the Middle East. Cartels have been fractured but are still cash-strapped as their decision to enter the petroleum business is cheap and it implies less risk than drug trafficking.

“The business is more profitable than drug trafficking because it implies less risk,” said Georgina Trujillo, a ruling party congresswoman who heads the lower house energy commission.

“You don’t have to risk crossing the border to look for a market,” she added. “We all consume gasoline. We don’t all consume drugs.”

Pemex did not respond to detailed questions from Reuters about the cartels and fuel theft. Among other questions, Reuters asked about the cartels’ impact on the refineries, Pemex’s security measures and how the company responds to extortion and violence against its employees. One senior Pemex refining executive, who asked not to be identified, said, “We worry about the influence of organized crime,” but would not discuss the issue further.

Fuel theft is not new or unique to Mexico. But cartels are taking it to calamitous new dimensions and, in the process, bolstering their bottom line.

“Fuel theft just makes these groups more powerful,” according to one senior official from the U.S. Drug Enforcement Administration, who asked not to be identified.

By targeting refineries, already suffering from a lack of investment, Mexico’s most notorious criminals gain access to nerve centers for much of the country’s fuel supply. That threatens an oil industry that accounts for about 8 percent of Mexico’s economy and creates yet more uncertainty for a country already reeling from U.S. threats to dismantle the North American Free Trade Agreement.

“It hurts the national coffers, weakens national security and hinders the reform and development of Mexico’s energy market,” said Gustavo Mohar, a former Mexican energy and intelligence official.

Between 2011 and 2016, the number of unauthorized taps discovered on Mexico’s fuel lines nearly quintupled, according to a recent report by the federal auditor. Repair costs surged almost tenfold, to 1.77 billion pesos ($95 million).

A May 2017 study, commissioned by the national energy regulator and obtained by Reuters via a freedom of information request, found that thieves, between 2009 and 2016, had tapped pipelines roughly every 1.4 kms (0.86 mi) along Pemex’s approximately 14,000 km pipeline network.

After decades of poor upkeep, the refineries are bleeding money as well as fuel. In addition to unscheduled outages, which cause big operational losses, maintenance problems have led to fatal accidents, including fires and explosions.

Together, the refineries have accumulated annual operating losses of about $5 billion in recent years. Production of refined products, meanwhile, fell to just over 700,000 barrels per day in 2017. That’s about half the production levels at the refineries’ peak in 1994.

As Reuters details, Mexico’s cartels have dived into fuel theft, lured by high prices, rampant graft and the lure of easy money. In their wake, the gangs have left a trail of dead bodies in towns like Salamanca in the state of Guanajuato. Additionally, Mexico’s aging refineries are suffering from years of underinvestment and declining output, and have become targets for gangs who terrorize Pemex workers with offers of “plata or plomo” – silver or lead. 

 

On August 11, 2014, President Peña Nieto approved the energy reform initiative. It ended political gridlock and decades of a monopoly controlled oil sector. According to Reuters, it phased out subsidies that kept retail fuel cheap, sending prices at the pump soaring by 25 percent since 2014, despite a haircut in crude prices on the CME exchange. With elevated oil prices, cartels, who are well versed in extorting other sectors including agriculture, transport and mining, were then able to use the same practices and target refineries.

 

Using the habitual narco offer of “plata or plomo,” or “silver or lead,” gangs extort refinery workers into providing crucial information. Their tactics, coupled with fighting between groups jockeying for access to the racket, have led to a surge of violence in cities like Salamanca, home to a third of the fuel taps discovered in Mexico in 2016.

Mutilated corpses of refinery workers, police and suspected fuel thieves increasingly appear around the city, terrifying its 260,000 residents. Cartels routinely festoon Salamanca with “narcomantas,” banners that mark territory or spell out grisly threats to rivals.

In Guanajuato, the surrounding state, investigators opened 1096 murder cases last year, 14 percent more than in 2016. That is a 71 percent increase over 2013, Peña Nieto’s first full year in office.

Interviews with Pemex and Mexican security officials, authorities in Guanajuato and locals affected by fuel theft describe an increasingly desperate situation for the industry and the regional economy. Interviews with Arredondo, the former pump technician, and Juan, a cartel member and admitted killer turned federal informant, show the heavy toll inflicted on people on both sides of the theft.

Reuters describes the current situation at the Salamanca refinery, the second-oldest Mexican refinery in operation.

It was part of a nationalistic push by Mexico, 12 years after the government expropriated foreign oil assets and created Pemex, to assert economic and industrial might. Located in Guanajuato because of the state’s central geography, with easy access to Mexico City and far-flung corners alike, the refinery became a symbol of progress. It put Salamanca, previously a farming town in a sea of sorghum fields, on the map.

Quickly, though, Salamanca and the refinery would also come to be associated with some of the deadly risks of the oil business. José Alfredo Jiménez, a legendary singer of Mexico’s traditional ranchera music, penned a still-famous song after a brother died after getting sick at the refinery in 1953.

“Guanajuato Road,” as the song is titled, leads to places where “life has no value,” he sang. “Don’t pass through Salamanca,” he continued, “the memory pains me there.”

The refinery grew to dominate the local economy, its fortunes rising and falling along with those of the Mexican oil industry. Although thieves targeted the pipelines leading to and from the facility, they rarely caused significant loss.

Efforts to lure in private energy investment into Mexico has been lackluster, due to the oil thefts and out of control violence.

Last month, Pemex reached a preliminary deal with Japan’s Mitsui & Co Ltd to complete a $2.6 billion coking plant at its refinery in Tula de Allende, north of Mexico City, according to two people familiar with the decision.

But Pemex officials last year sought separate refinery funding from companies including Valero Energy Corp and Tesoro Corp, according to two people familiar with those efforts. Neither company was interested.

Mitsui, Valero and Tesoro, which last year changed its name to Andeavor, declined to comment.

“There is no incentive to invest in the Mexican refining system,” said John Auers, executive vice-president of Turner, Mason & Company, a global refining consultancy, citing “organized crime and corruption.”

The report commissioned by Mexico’s energy regulator assigns blame inside and outside the sector. “The problem is corruption, not just in security and judicial services, but also inside Pemex,” it read.

In a public statement, Pemex promised to crack down on the oil thefts, as the company continues to hemorrhage crude products from its facilities to drug cartels. In an attempt to curb the soaring threat, the company said in October that it had fired employees at Salamanca’s storage and distribution center, who provided insider information about Pemex’s operations to cartels.

“What we’re starting to see is that we’re approaching the end,” Pemex Chief Executive José Antonio González Anaya told lawmakers recently, referring to what he described as gains against fuel thieves. In late November, Peña Nieto named González Anaya finance minister and announced a new Pemex chief.

While the government has had mild success in fracturing the drug cartels into smaller units, organized crime has shifted from drugs into the oil industry. Cartels are now stealing billions of dollars in oil from Pemex, which decreases revenue for the federal government. If revenue declines, the government will have trouble funding programs designated to fight cartels. The situation has become critical in Mexico, as the country’s largest refinery is a “shithole.”

 

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Authored by Jeffrey Snider via Alhambra Investment Partners,

As most people know, the Kansas City Fed has been holding its annual symposium in Jackson, WY, for a very long time. Supposedly a draw for Paul Volcker’s fly fishing hobby when he was Chairman, the conference came to include heavyweights on a regular basis. Most of them, especially those in the early years, however, were duds.

It wasn’t until 1985 that there was anything of real substance discussed, the topic finally the dollar six years after its great crisis had concluded. The most notable contribution to that one came from Paul Krugman who started his presentation noting that he was for five years by then confused and befuddled by its movements. Some things, it seems, never change (including those who refused to listen to Robert Solomon, also there in ’85).

One of the more interesting gatherings took place in 1999. The year and the reasons need no introduction. What most people remember about 1999 can be summed up by the acronym NASDAQ. Try as they might, even central bankers and economists were feeling some desire, maybe need, to address the situation.

The line up was a who’s who of top tier Economists: Alan Greenspan giving the introduction, Allan Meltzer talking zero inflation, Martin Feldstein fretting about currency, and Stanley Fischer actually recalling, “Well, everybody has his or her own view of what it is that Adam and Eve did in the Garden of Eden. Mundell’s version is that the original sin was that Eve told Adam about central banking, about the notion that you can create value with a stroke of the pen.” On top of all that there was the obligatory paper from Ben Bernanke (co-author with Mark Gertler).

While not all talked about or focused on the dot-com bubble, the topic in general could not be avoided. Bernanke’s position was easily summed up:

The principal conclusion of this paper has been stated several times. In brief, it is that flexible inflation-targeting provides an effective, unified framework for achieving both general macroeconomic stability and financial stability. Given a strong commitment to stabilizing expected inflation, it is neither necessary nor desirable for monetary policy to respond to changes in asset prices, except to the extent that they help forecast inflationary or deflationary pressures.

It was, as you may recognize, typical Bernanke arrogance. In plain language he was saying “don’t worry, the Fed will easily fix whatever damage might result from a bubble with the flick of its federal funds target wand.” For him, there is never an upper limit for central banking.

Greenspan, however, was more practical in his approach. He knew what it was that was always behind asset bubbles. It’s the same stuff that has worried central bankers from the very start:

Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.

Who are we to argue with market prices? Well, history suggests there are times when we must.

The issue isn’t really about confidence, rather it’s about what it is that so many people become confident about. Between the Asian flu low in early October 1998 and the 1999 Jackson Hole conference held at the end of that August, the NASDAQ rose 90%. From October 1999 to March 2000, it rose by another 85%. The former took about eleven months to achieve, the latter a mere five.

In hindsight, it was clearly a blow-off top. There were many reasons for it, of course, as nothing is ever so simple, but in a lot of ways they all traced back to a similar idea. The no-profit startups represented in the NASDAQ were given value based on, as Greenspan said earlier in his presentation, discounted future cash flows. They had negative cash flows at the time, so everyone believed that positive value was derived more exclusively by what was sure to come further in the future.

There was even by 1999 little evidence to support the idea. In fact, as far as earnings were concerned, there wasn’t any. Instead, it seems, people got the idea that the “new economy” was close at hand simply because it had been so long to that point without its appearance. Time worked in the bubble’s favor, which seems counterintuitive.

If something doesn’t happen for a long enough period of time, it would be rational to conclude that it is has become more likely that isn’t going to. In the stock market, indeed all history’s asset bubbles, the common element is that the premise is always fixed, and therefore it gets amplified in the course of time. What I mean by that is people really believed the “new economy” of the computer/internet/telecom revolution just had to pay off, big time. There was no wiggle room on that assumption.

The longer it went on without the payoff, indeed the more contrary evidence started to build up against it, the more (not less) certain people became that it was even closer to reality. If you believe wholeheartedly (emotionally) that it shouldn’t take more than five years for what you expect to occur, and it gets to the start of Year 5 without it having occurred, in this perverse sense you become even more confident that it’s right there in front of you (this thing is about to take off!!). Not only do you hold your bets that you made in the past, you might even add significantly to them at just insane valuations. After all, the thing survived through Year 4, so there is no way it could fail now.

 

Asset bubbles are inefficient markets and in one sense these modern versions have turned the premise of efficient markets on its ear. As large and as deep as markets have become, they have also exhibited a startling tendency toward this kind of herding. And it’s no wonder, starting with the “maestro” himself.

What was, after all, the Greenspan put? It wasn’t ever a real thing (dot-com bust and 2008 panic proved that conclusively), but it did reveal what was in the context of asset bubbles an irrational commonality. In other words, efficient markets as Greenspan described them in Wyoming in 1999 are predicated on millions upon millions of people reacting very differently to diverse and even conflicting data, and then bringing market prices to reflect a very broad consensus decision.

What if, instead, a huge proportion of the market all starts believing in the same myth at the same time? And it didn’t have to be the Greenspan put, either. In a very important way, that was the least of it. By the late nineties in particular, economic forecasting had become more and more centralized. What was going on in the economy was described by the Federal Reserve first and foremost (how did markets react to the Chairman’s optimism, or really perceived optimism at any given event?). If stock investors were extremely confident about the “new economy” and all its massive benefits, where might they all have gotten that idea?

 

Thus, if people were so sure the awesome potential was a real thing and that it had a chalk probability of lasting, the idea if it didn’t come directly from the Economists it was at least given an official seal of approval that at that time carried far more weight than was really rational.

Just like the dot-com’s “new economy”, this current “boom” or “globally synchronized growth” doesn’t actually exist right now; it’s for tomorrow and people are absolutely certain that has to be the case in full part because Economists keep claiming with 100% certainty that very thing.

 

Starting with central bankers, the characterization of every economic situation filters downhill from there. The economic malaise has gone on so long that there is zero chance it can go any longer, right? There is a pervasive top-down belief that the aftereffects of the Great “Recession” can only last until Year 10 (for instance), at most, and here we are starting Year 10. The big payoff must be tomorrow, or the next day.

I can’t help but wonder if we aren’t just repeating the same process, only replacing “new economy” with “minimally functioning economy” this time around. It sure looks like a blow-off top to my eye, but as Keynes once said, paraphrasing, your clients will literally kill you before you find out for sure. As noted previously, though, at some point the boom will have to boom. But what if it doesn’t?

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We’re three weeks into the year and the first of what are expected to be dozens of retail bankruptcies has arrived: Nine West.

But it’s hardly the first piece of bad news for the embattled retail sector: Wal-Mart Stores abruptly closed more than 60 of its popular “Sam’s Club” locations. Macy’s has announced job cuts and added seven stores to a list of more than 100 expected closures.

Citing anonymous sources with knowledge of the situation, Bloomberg reports that Nine West Holdings Inc. and its creditors are nearing a deal to restructure almost $1.5 billion of debt. The plan will involve filing for bankruptcy.

And that’s not all: Two weeks ago, Sears revealed that it’s struggling to renegotiate some $1 billion of “non-first lien debt.” – a sign that the one-time giant is on its last legs, and that the long-anticipated bankruptcy of a former icon of American capitalism could unfold before the end of the year.

Circling back to Nine West, Bloomberg said parts of the firm will be sold to pay down some debt, while Nine West seeks Chapter 11 protection. A restructuring plan has been agreed upon in advance by the company and its creditors, said the people. It’s hoping to file before a March 15 interest payment comes due.

First-lien lenders would likely be repaid in full, with second-lien lenders getting the majority of the equity in the reorganized company, according to one of the people. A small portion of the equity would go to holders of the retailer’s bonds, the person said.

Nine West’s 8.255% notes due 2019 traded Monday at 11 cents on the dollar, according to Trace bond-price reporting data.

 

Sycamore bought Nine West as part of its $2.2 billion acquisition of Jones Group Inc. in 2014. This isn’t Sycamore’s first retail bankruptcy: Since its founding in 2011, the New York-based private equity firm has snapped up, financed or invested in struggling retailers such as Staples, the Belk department-store chain and Talbots. Sycamore-owned Coldwater Creek liquidated after filing for bankruptcy in 2014, and in 2016 Aeropostale sued the firm, accusing Sycamore of pushing it into bankruptcy.

It’s widely believed that 2017 was the worst year for retail bankruptcies in modern US history, and 2018 is expected to be as bad, or worse.

Last year, 8,000 retail stores closed as their parent companies either declared bankruptcy or scaled back…

 

…And employment in the retail industry has lagged the broader recovery.

 

Retailers, of course, can thank Amazon founder Jeff Bezos for their troubles. The rise of e-commerce and a period of overexpansion during the 2000s, have decimated the industry. The impact has been felt in the commercial real-estate market as one-third of American shopping malls are expected to close during the coming years, crushing REITs tied to these properties.

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