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A few short months after Admiral Scott Swift, Commander of the US Navy’s Pacific Fleet, said he would obey a hypothetical order to launch a nuclear strike against China if the president chose to give it, Air Force Gen. John Hyten – America's top nuclear commander – said Saturday he would push back against President Trump if the president ordered a nuclear launch the general believed to be "illegal."

When an audience member asked Hyten, who was speaking at a national security conference in Halifax Canada, about the hypothetical scenario, he responded by assuring his interlocutor that military commanders “aren’t stupid.”

Here's CBS:

Air Force Gen. John Hyten, commander of the U.S. Strategic Command (STRATCOM), told an audience at the Halifax International Security Forum in Halifax, Nova Scotia, on Saturday that he has given a lot of thought to what he would say if Mr. Trump ordered a strike he considered unlawful.

 

"I think some people think we're stupid," Hyten said in response to a question about such a scenario. "We're not stupid people. We think about these things a lot. When you have this responsibility, how do you not think about it?"

 

Hyten explained the process that would follow such a command. As head of STRATCOM, Hyten is responsible for overseeing the U.S. nuclear arsenal.

 

"I provide advice to the president, he will tell me what to do," Hyten added. "And if it's illegal, guess what's going to happen? I'm going to say, 'Mr. President, that's illegal.' And guess what he's going to do? He's going to say, 'What would be legal?' And we'll come up with options, with a mix of capabilities to respond to whatever the situation is, and that's the way it works. It's not that complicated."

Hyten said he has been trained every year for decades in the law of armed conflict, which takes into account specific factors to determine legality – necessity, distinction, proportionality, unnecessary suffering and more. Running through scenarios of how to react in the event of an illegal order is standard practice, he said.

And Hyten is not the only one who’s been thinking about how they might react to a hypothetical order to launch a nuclear strike. A few months ago, Vanity Fair reported that Defense Secretary Mattis, Chief of Staff John Kelly and Secretary of State Rex Tillerson had discussed the issue, though it’s unclear, exactly, how they would respond.

Hyten apparently believes that an order from the president could be illegal, under certain unspecified circumstances. And if you execute an illegal order, he said, you could be prosecuted.

John Hyten

"If you execute an unlawful order, you will go to jail. You could go to jail for the rest of your life," Hyten said.

As CBS pointed out, Hyten’s comments come at a time when Congress is reexamining the authorization of the use of military force and power to launch a nuclear strike.

In a hearing earlier this week, Sen. Ed Markey, D-Massachusetts, said Mr. Trump "can launch nuclear codes just as easily as he can use his Twitter account."

Hyten said the military is always ready to respond to the threat of North Korea, even at that very moment. Trump has been embroiled in a war of words with North Korean leader Kim Jong Un since shortly after taking office, and has repeatedly threatened to respond with overwhelming force if he the North continues to threaten the US.

"And we are ready every minute of every day to respond to any event that comes out of North Korea. That's the element of deterrence that has to be clear, and it is clear," Hyten said.

But Hyten also said handling North Korea and its unpredictable leader Kim Jong Un has to be an international effort. Mr. Trump has continued to put pressure on China to help manage its tempestuous neighbor.

"President Trump by himself can't change the behavior of Kim Jong Un," Hyten said. "But President Trump can create the conditions that the international community can reach out in different ways where we can work with the Republic of Korea, where we can work with our neighbors in the region."

However, Admiral Swift, who has led the Pacific Fleet since 2015, has a very different view of the obligations that come with being a military commander in charge of the US’s nuclear arsenal.

“Every member of the US military has sworn an oath to defend the constitution of the United States against all enemies foreign and domestic and to obey the officers and the president of the United States as commander and chief appointed over us.”

When it comes to nuclear war, North Korea, for many, is the first adversary that comes to mind. But in the long run, China, which is reportedly developing hypersonic fighter jets that would be able to reach the Continental US within 14 minutes and has been slowly expanding its military footprint in the Pacific, may pose the bigger threat.

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Via Dana Lyons' Tumblr,

The past few days have seen a reversal from substantial net New lows to substantial net New highs – a condition that has preceded poor performance in the past.

We’ve posted several pieces in the past regarding what we’ve termed “Junkie Markets” – junctures characterized by a substantial number of both New 52-Week Highs and New 52-Week Lows.

Such conditions represent a key component of various and notorious market warning signals, such as the Hindenburg Omen and others. As the ominous sounding names would imply, the historical stock market performance following such signals has been poor. We have found the same to be true with respect to our “Junkie Markets”. Today’s Chart Of The Day deals with a new variation of the Junkie Market.

Specifically, we have seen an unusual development over the past 2 days. On Wednesday, the number of net New Lows on the NYSE, i.e., New Lows minus New Highs, exceeded 2% of all exchange issues, a fairly large amount. The very next day, yesterday, conditions completely reversed as we saw net New NYSE Highs, i.e. New Highs minus New Lows, actually account for more than 2% of all issues. If you think that sounds strange, you’re correct. It is just the 15th such occurrence since the start of our data in 1970.

Here are the dates of these reversals:

3/25/1970
4/14/1972
7/11/1974
10/20/1977
1/2/2001
4/22/2004
5/11/2004
4/18/2006
6/28/2007
7/19/2007
9/19/2008
5/30/2013
10/10/2013
1/15/2015
11/16/2017

What would cause such a phenomenon? Well, the only thing we can offer is that a Junkie Market, i.e., one with lots of New Highs and Lows, is really the only type of market in which such a reversal is even possible. Thus, it should not be surprising that the S&P 500’s aggregate performance going forward following these precedents has been less than stellar (incidentally, aggregate performance is similar following the 19 occasions of the opposite reversals, i.e., >2% Net New Highs to >2% Net New Lows).

With median returns negative from 1 week to 6 months, this appears to be another version of the Junkie Market that, for whatever reason, has not been kind to stocks going forward. Obviously, the presence of signals near cyclical peaks in the early 1970’s as well as 2001 and 2007-2008 do not help the aggregate returns (average returns are even worse than median).

Now, not all signals have occurred at the beginning of cyclical bear markets. However, as the chart shows, one interesting observation is that all of the occurrences have occurred during secular bear markets (that is, of course, if one accepts that we are still within the confines of the post-2000 secular bear market, as is our view – that is a topic for another time, though). The point is that, if true, the ramifications may reinforce the negative tendencies associated with Junkie Markets.

The bottom line for now is that, while it is certainly possible that stocks can continue higher in the interim, this condition of elevated New Highs and New Lows is a potential unhealthy headwind in the longer-term.

*  *  *

If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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During a  long-ranging investigation, The New York Times interviewed more than 300 people and poured over thousands of documents to sketch out the history of neglect, abuse and mismanagement that fostered the New York City subway's current state of crisis in what's probably the most comprehensive explanation of the woes plaguing the MTA.

Century-old tunnels and track routes are crubling, but the Times found that the MTA’s budget for subway aintenance has barely grown, in inflation adjusted terms, since 1992.

Signal problems and equipment failures are occurring twice as frequently as they did a decade ago – a sign of just how rapidly the transit system is deteriorating.

What’s worse, is that hundreds of mechanic positions have been cut even as the century-old system groaned under the damage caused by Superstorm Sandy. Meanwhile, compensation for managers has ballooned to nearly $300,000 a year.

Daily ridership has doubled in the past decade to 5.7 million people. Yet, New York City is the only city in the world with fewer miles of track than it had during World War II.

Given the unconscionable state of neglect paid to its budget, it should come as no surprise that New York City’s subway system has the worst performance of any major urban transportation system in the world. Only 65% of weekday trains make it to their destination on time.

The Times claims that the deplorable state of the city’s transit system is the result of negligence by both Republican and Democratic politicians, including former Gov. George Pataki, former mayor Rudolph Giuliani, as well as Mayor Bill De Blasio and Gov. Andrew Cuomo.

Over the past two decades, politicians have diverted a whopping $1.5 billion in tax revenue from the MTA to other political priorities. Politicians are also largely responsible for pressing the agency to spend money on opulent station makeovers, like the new Fulton Street station, that do little to improve service. Politicians also locked the MTA into an unfavorable agreement with creditors that secured a needed short-term cash infusion but left it saddled with $5 billion in interest payments.

Perhaps most egregiously, Gov. Cuomo recently forced the MTA to send $5 million to three upstate ski resorts that were struggling with a warm winter.

The MTA has also suffered from high turnover in its senior ranks, as dozens of high-level officials have taken advantage of a lucrative revolving door whereby they leave jobs at the MTA for high-up jobs at contractors that do business with the MTA.

Seemingly at every turn, politicians have failed to act on a series of chances to turn things around. They ignored decades of warnings from state and city comptrollers about MTA funding. They failed to pass a congestion pricing plan in 2008. Thy chose not to give mass transit much of the proceeds from bank settlements after the financial crisis. And they brushed off findings from official commission reports pointing out the system’s defects.

All of this has amounted to a shocking development: The number of subway riders declined slightly last year, even as the population of NYC has continued to expand rapidly.

Problems worsened under Cuomo as the governor tried to micromanage decision making at the agency, a move that only worsened its problems. For example, a few months ago, the MTA cut $500 million from the signal-repair budget to fund other projects that are more important to Cuomo. For context, signal malfunctions are the biggest contributing factor in train delays.

But perhaps the most fundamental flaw in how the MTA is managed is the fact that many of its most high-level decisions are made by a committee of bureaucrats and politicians, the Times reported.

“A camel is a horse designed by committee, and the MTA is a train service run by committee,” a Cuomo spokeswoman said.
 

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Authored by James George Jatras via The Strategic Culture Foundation,

This week the US Department of Justice Criminal Division forced the Russian-funded television network RT (formerly Russia Today) to register as a “foreign agent” under the Foreign Agents Registration Act (FARA). Failure to comply would have risked arrest of RT’s management and seizure of its assets. The move comes on the heels of Senators’ recent demands that terrified tech giants Twitter, Facebook, and Google act as ideological filters.

With no discernable defenders among America’s media establishment, RT rightly denounced the selective FARA mandate as an attack on media freedom – which it is. But more ominous is what the move against RT says about America’s rulers’ further intention to limit the sources of information available to its subjects.

As Daniel McAdams of the Ron Paul Institute writes:

“RT America is a news organization operating in the United States that is funded at least partly by a foreign government. So is the BBC. So is Deutsche Welle, France24, Al-Jazeera, and numerous other foreign media organizations. It is assumed that they all to a degree reflect the editorial interests of those who pay the bills.

 

“The same is true with other, non-state funded media outlets, of course. It’s up to us to factor these things in when we consume media. That’s what it means to be a free people.

 

“A core value in a free society is that our own government has zero power over what we read, what we watch, how we think, how we come to interpret current events, the conclusions we draw based on these inputs, and so on. These are private matters over which any government that is not tyrannical should have no sway.

 

“The real insidiousness of tyrannical systems is that the government most lasciviously seeks control over most private spaces — including the most private space called our brain, our intellect, our conscience. We must be free to follow our interests down whatever path they may lead us so that we may reach our own conclusions and then perhaps test them ourselves in the marketplace of ideas.”

The attack on RT (and another Russian network, Sputnik, which evidently has not yet been given a deadline for registration) is a milestone in the degeneration of the American official (call them what you want – corporate, legacy, mainstream) media into PR agencies for the governing establishment and its ideological imperatives. We’ve been moving along this path for a while now, and it’s going to get worse.

Long gone are those halcyon days of yore when Americans could just sit back and watch CBS’s Walter Cronkite with total confidence they were getting the truth, the whole truth, and nothing but the truth. (For youngsters who have no idea who the hell Cronkite was, just Google “most trusted man in America.”) Back in the naïve infancy of the TV age, from about the 1950s until the beginning of the 1990s, there was a common national media culture that reflected the established, generally liberal, mainly Democratic tilt of the American inteligentsiya that was almost uniform among the (then only) three networks and a handful of major newspapers and magazines. To be sure, that was also a ruling class media of a sort, but it reflected a broad and deep social consensus.

Those days are no more. Perhaps the unraveling of media trust and social consensus alike started in earnest with Vietnam. But still, for decades afterwards there still seemed to be plenty of empty cranial receptacles for government and corporate propaganda of the first Gulf War under Bush 41, Bill Clinton’s phony humanitarian wars in the Balkans, Bush 43’s Iraq War, and Obama’s Libyan and Syrian imbroglios. Sadly, there are many such cranial receptacles even today.

By its attack on RT, the US government is officially telling us that only the mainstream media (MSM) can be regarded as are purveyors of Truth (with a capital T) and that anybody not on the approved list is fake. How do we know? Why, the MSM themselves tell us! The Washington Post’s “Democracy Dies in Darkness.” CNN’s “Facts First.” The New York Times’ “The Truth is Hard.” (The fact that certifiably authoritative and truthful media are militantly hostile to Russia, not to mention to Donald Trump, is purely coincidental.)

A lot of Americans don’t buy it anymore, though. Some of the skepticism falls along purely partisan lines reflecting increasing moral and political polarization: our media (which I exclusively consult) tells the truth, but your media (which I don’t consult) are liars. About one-third of Americans get their talking points from, say, Michael Moore, and from Rachel Maddow on MSNBC, with their related internet echoes, while another third gets theirs from Rush Limbaugh, and from Sean Hannity on Fox News, and their internet echo chambers. Increasingly, there is nothing like a national dialogue on anything, but rather two entirely separate, diametrically opposed ideological cultures – and alternate realities – each demonizing “them.” This is why when after Barack Obama’s election the Tea Party appeared, the GOP fell over itself trying to co-opt them, while the Democrats denounced them as a mob of racists and subversives. When later the “Occupy” and Black Lives Matter movements broke out on the Left, the Democrats tried to figure out how to channel it while top Republicans denounced it as gang of commie anarchists and losers.

With the election of Donald Trump the divide intensified further to one of latent civil war.

At some point the false picture of pseudo-reality (as Alain Besançon called it in the late Soviet propaganda context) diverges so far from real reality that the official media narrative becomes useless and even counterproductive. While a majority of Americans probably are still glued to the partisan outlets of “their” side of the political divide, there is a growing sense across the spectrum that not only the MSM but even partisan media like Fox News and MSNBC are untrustworthy.

In the past, notably in the totalitarian societies of the 20^th century, maintaining the credibility of official media required the physical repression of alternatives. Today, such a crude approach is unnecessary and almost technologically unfeasible, even for such undemocratic countries as Iran, Cuba, and Saudi Arabia (though North Korea may be successful through the sheer unavailability of modern communications technology to most of the population). Instead of suppressing dissent, is it sufficient to maintain major media’s role as gatekeeper and certifier of reliability.

Which brings us back to the impact of foreign media like RT, Sputnik, Strategic Culture Foundation, Al-Jazeera, CGTN, Press TV, often in parallel with alternative media like Zero Hedge, Lew Rockwell, Antiwar.com, Ron Paul Institute, and others, to break through the information firewall but arguably then being influenced by the agenda of the sponsoring foreign governments. In any case, a growing segment of the American public is discovering a skill once well-honed by the citizens of the former communist countries: reading between the lines of the official media (which is assumed to be full of lies) and making informed comparisons to samizdat alternative media, foreign sources, and the rumor-mill to guess what the truth might be.

Make no mistake – what has started with RT won’t end with RT. Our betters have decided they need to protect our minds from “propaganda” penetration that might cause us to doubt the truth of what CNN and the Washington Post tell us.

Citizens! Be grateful for such wise leaders and dedicated information workers! Smash the enemy voices that seek to undermine our democracy as we march boldly into the radiant future!

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It's not easy being "the world's most bearish hedge fund", a description we first conceived nearly three years ago, and one look at Horseman Capital's returns over the past three years confirms it: after generating market-beating returns for much of its existence, things went bad in 2015, and much worse in 2016…

… when the Fund had a record net short equity position of over -100%, just as the market ripped higher after the Trump election.

That said, 2017 has been much better for Horseman and its CIO Russell Clark, who correctly timed the year's two big short trades so far: the mall REIT and the shale shorts.

Unfortunately, his other positions stood in the way, and as of the end of October (a good month with 2.04% in P&L), the fund is just 0.25% up on the year. Worse, after a period of calm, steady, upward grinding monthly performance for much of the previous several years, Horseman's sharpe ratio has cratered, as the monthly return variance surged, with a -6% month following two +7% months as a result of gross leverage that has never been higher, even if the net equity position – while still largely short – is far more manageable than it was in 2016.

Still, having been well ahead of the pack on the two big shorts of 2017, most money managers are always curious what if anything Clark – and Horseman – are shorting next. Well, they are in luck, because in his latest letter, he unveils the answer: according to Clark, the next major source of alpha will be shorting fallen angel bonds.

In his November letter to clients, Clark explains why he is hunting for soon to be "fallen angels", and where he got the idea from. And after more fund managers read the following excerpt, we have a feeling that the next big leg lower in not only junk, but also crossover credit, is imminent:

Mifid II will come into force soon, and a lot of research that used to be free, will need to be paid for. This has been a reason to ask ourselves some serious questions, namely what research do I read, and what has made me the most money. Strangely the research that has been most profitable for me, will remain free even post Mifid II as it is publicly available. The International Monetary Fund produces Global Financial Stability Reports. The stand out report for me was the April 2008 report that highlighted Eastern European banks vulnerability to wholesale funding. I shorted many of the banks named in the report. Most fell 70% to 90% subsequently.

 

What does the most recent issue of the Global Financial Stability Report have to say? It notes that BBB bonds now make up nearly 50% of the index of investment grade bonds, an all time high. BBB bonds are only one notch above high yield, and are at the greatest risk of becoming fallen angels, that is bonds that were investment grade when issued, but subsequently get downgraded to below investment grade, or what is known these days as high yield. It then points out that investors have never been more at risk of capital loss if yields were to rise. In addition, it notes volatility targeting investors will mechanically increase leverage as volatility drops, with variable annuities investors having little flexibility to deviate from target volatility. Another interesting point was that mutual fund share of the high yield market in the US have risen from 17% in 2008 to 30% today, and notes that investors outflows have become much more sensitive to losses than they used to be.

 

So my favourite research (love the price!) is telling me that US investment grade debt is very low quality, and could produce some large fallen angels. It then goes on to tell me that mutual funds are much larger in the high yield market than they used to be. It also tells me low rates means the capital losses are much higher than they used to be. And that investors in high yield mutual funds are much flightier than they used to be! Essentially the IMF are telling me that if you get a large enough fallen angel, the high yield market will freak out, and volatility will spike causing volatility targeting investors to dump leveraged positions. Sounds good to me – but with growth so good and the market so strong, how on earth would we get a fallen angel?

 

To find a potential fallen angel, I looked through the holdings of investment grade bond ETFs to find large BBB bond issuers. The biggest of the BBB issuers happened to be the large telecommunication companies. The sector has over USD300bn of BBB rated debt compared to a high-yield market of USD 1tn. I am not a debt specialist, but I have noticed that falling share prices tend to be good lead indicators on debt downgrades, and the US telecommunication sector has not been participating in the market rally this year. The story looks good to me, and it comes via my favourite research source. US debt markets look in trouble to me, whether that has any effect on broader equity markets remains to be seen.

Aside from this rather original idea, some other notable changes in Horseman's industry exposure are noted: while both the retail and E&P shorts are still there, they have been notably tamed, and of note are two other major shorts (both in the US): one in real estate (we assume this is a play on the adverse impact of rising rates on real estate valuations), and the healthcare sector, a short whose thesis is quite interesting and we will reveal tomorrow.

For those wondering, the top 10 positions by % of NAV are the following:

Needless to say, we wish Horseman much success with a prompt realization of his BBB-short, especially since it appears that his LPs are starting to get cold feet, and the fund's AUM has shrunk by half from $2.8 BN  one year ago…

… to less than half, or $1.2BN currently.

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Authored by Brian McNicoll via The Daily Caller,

Jeff Bezos spends a lot of time directing the newspaper he owns, The Washington Post, to criticize President Donald Trump in every way imaginable. But for some reason, the federal government cannot stop giving Amazon — the retail empire Bezos also owns — a slew of taxpayer-subsidized subsidies. Now, Congress is considering a new federal purchasing plan that could result in Amazon’s most lucrative government handout yet.

The technology giant is no stranger to sweetheart deals that line its pockets at taxpayer expense. The U.S. Postal Service, for instance — which has lost $60 billion since 2007 — handles last-mile shipping for two-thirds of Amazon’s deliveries. This means overtime for workers and a good incoming revenue number on the USPS’s balance sheet, but it’s a financial bonanza for Amazon.

According to media reports, USPS delivers Amazon packages for $2 per package — even though it costs USPS $3.46 per package to make these deliveries. And that’s before you get into the $200 million three years ago for 270,000 handheld scanners to process the packages or the $5 billion or more to replace USPS vehicles with ones better suited to carry Amazon’s packages.

But even this cozy arrangement pales in comparison to the deal Amazon is now trying to push through Congress.

Buried deep in this year’s defense spending bill is a provision that would move Defense Department purchases of commercial off-the-shelf products to online marketplaces.

A summary of the proposal, which was inserted into the legislation by House Armed Services Committee Chairman Mac Thornberry, argues it is needed to save money over the burdensome and expensive current system.

It pointed to a report from the Inspector General of the Government Services Administration that found some IT equipment could be purchased more cheaply on the open market than through the GSA’s “schedules.”

In response, the plan calls for developing an online marketplace platform through which federal agencies can buy products such as paper clips, bottled water, computers, office furniture and more — just as any business would do.

But it also calls for this platform to be designed to “enable government-wide use of such marketplaces.” This means the government is looking only for a procurement and supply management firm big enough to offer multiple suppliers for the same product with constantly changing selection and prices and serve the entire U.S. government.

That leaves just one likely possibility  – Amazon Business – for basically monopoly control of $53 billion in federal purchasing, much of the supplies for which comes from no-bid contracts.

Amazon provides a platform for e-companies to sell through to their own customers. It receives 15 percent to 20 percent of the proceeds from such sales, which means a huge revenue stream for Amazon for doing basically nothing while vendors are forced to cough up as much as half their margin.

A government deal with Amazon sets up opportunities for abuse, not to mention control over suppliers. Amazon would get to collect an enormous amount of data on agencies, which could be used to identify top competitors and drive them out of the federal marketplace with increased fees or other rules changes.

And it means any discounts that can be negotiated for the bulk rates of purchasing the federal government does would flow not to the government and taxpayers — but instead into Amazon’s pocket.

Amazon Business, which only started in 2015, already has 1 million customers and $1 billion in sales, and its revenues grew 34 percent in the last year. Adding federal procurement would effectively drive out all competitors for its business service.

It already is moving into position to do this at the local level. In January, Amazon signed a contract with U.S. Communities, a coalition of 90,000 local governments, to provide them with an online marketplace for office supplies and other goods.

The fate of the proposal is unknown. It is in the House version of the defense spending bill but not that of the Senate. This will be resolved in a conference committee, and one solution is to try it as a pilot project before committing the entire government to it.

There certainly ought to be a breathing period before yet another government agency signs yet another deal to use tax dollars to further enrich one of the richest men on the planet.

It’s beginning to get suspicious.

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Turkish President Recep Tayyip Erdogan is refusing to let NATO off the hook for an inadvertent yet insulting gesture that prompted him to remove 40 Turkish troops from a joint military exercise in Norway.

Russia Today reports that Erdogan has rebuffed a NATO apology for what he called “impudence” after his name was included on an “enemies chart” shared with military officials participating in the exercises. Erdogan’s name was reportedly included alongside a photo of Turkish founding father Mustafa Kemal Ataturk.

Following the scandal, both NATO and Norway offered their apologies for the incident, saying that the message did not reflect their views. But Erdogan, who has grown increasingly critical of NATO in recent years following clashes with German Leader Angela Merkel, is apparently using the incident as an excuse to widen the rift between Turkey and Brussels.

In late June, Germany was forced to move its troops from Turkey’s Incirlik Air Base to Jordan, as Ankara had barred German lawmakers from visiting the site, where some 270 troops participating in the US-led campaign against Islamic State were stationed. In one of the recent schisms in the bilateral relations, Germany put on hold “all big requests” for arms exports from Turkey, leading Turkey to accuse Germany of weakening the former’s fight against terrorism.

“There can be no alliance like that," Erdogan said on Friday, adding that even the removal of those names would not change the decision. On Saturday, despite the officials’ apologies and affirmations, the insulted leader refused to be placated, saying he wouldn’t let NATO off the hook that easily.

"Yesterday, you have witnessed the impudence at NATO exercises in Norway. There are some mistakes that cannot be committed by fools but only by vile people,” Erdogan said in a televised speech. He added that the incident shows “a reflection of a distorted point of view that we have observed in NATO for a while."

"This matter cannot be covered over with a simple apology," Erdogan added.

Of course, despite a brief escalation in tensions over last year over purported violations of Turkey’s airspace, the NATO member has been deepening its ties with Russia, recently completing a purchase of S-400 anti-aircraft systems, which has unnerved Washington and other NATO powers. One top NATO general, Petr Pavel, told reporters last month that Turkey would likely be punished by the alliance for not buying American. Turkey reportedly chose the Russian systems because they were cheaper.

Tensions eased a little in October, when NATO Secretary General Jens Stoltenberg said Ankara’s decision to purchase the S-400 did not harm the alliance’s interests. While the final details of the deal are being settled, a top US Air Force official warned that it could affect Ankara's planned purchase of 100 F-35 jets.

The decision caused an angry reaction from Ankara, which said the decision weakens its fight against terrorism and jeopardizes European security.

And let’s not forget, perhaps Turkey’s biggest gripe with a fellow NATO member is the US’s refusal to extradite Turkish cleric Fehtullah Gulen, who has been living in Pennsylvania for years after being effectively exiled from Turkey following a falling out with Erdogan.

Given all of the back-and-forth sniping between the US and Turkey in recent months, we doubt Erdogan will let this insult go.
 

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Authored by Raul Ilargi Meijer via The Automatic Earth blog,

John Rubino recently posted a graph from Bob Prechter’s Elliot Wave that points to some ominous signs. It depicts the S&P 500, combined with consumer confidence and savings rate. As the accompanying video at Elliott Wave, What “Too Confident to Save” Means for Stocks, shows, when the gap between high confidence and low savings is at its widest, a market crash -often- follows.

In 2000, the subsequent crash was 39%, in 2007 it was 54%. We are now again witnessing just such a gap, with the S&P 500 at record levels. Here’s the graph, with John’s comments:

Consumers Are Both Confident And Broke

Elliott Wave International recently put together a chart that illustrates a recurring theme of financial bubbles: When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof. They stop saving, for instance, because they’ll always have their job and their stocks will always go up. Then comes the inevitable bust. On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day). The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.

John is mostly right. But not entirely. Not that I don’t think he knows, he simply forgets to mention it. What I mean is his suggestion that people stop saving because they’re confident, bullish. To understand where and why he slightly misses, let’s turn to Lance Roberts. Before we get to the savings, Lance explains why the difference between the Producer Price Index (PPI) and Consumer Price Index (CPI) is important to note.

Summarized, producer prices are rising, but consumer prices are not.

You Have Been Warned

There is an important picture that is currently developing which, if it continues, will impact earnings and ultimately the stock market. Let’s take a look at some interesting economic numbers out this past week. On Tuesday, we saw the release of the Producer Price Index (PPI) which ROSE 0.4% for the month following a similar rise of 0.4% last month. This surge in prices was NOT surprising given the recent devastation from 3-hurricanes and massive wildfires in California which led to a temporary surge in demand for products and services.

 

Then on Wednesday, the Consumer Price Index (CPI) was released which showed only a small 0.1% increase falling sharply from the 0.5% increase last month.

 

Such differences have real life consequences. In Lance’s words:

This deflationary pressure further showed up on Thursday with a -0.3% decline in Export prices. (Exports make up about 40% of corporate profits) For all of you that continue to insist this is an “earnings-driven market,” you should pay very close attention to those three data points above. When companies have higher input costs in their production they have two choices: 1) “pass along” those price increase to their customers; or 2) absorb those costs internally.

 

If a company opts to “pass along” those costs then we should have seen CPI rise more strongly. Since that didn’t happen, it suggests companies are unable to “pass along” those costs which means a reduction in earnings. The other BIG report released on Wednesday tells you WHY companies have been unable to “pass along” those increased costs.

 

The “retail sales” report came in at just a 0.1% increase for the month. After a large jump in retail sales last month, as was expected following the hurricanes, there should have been some subsequent follow through last month. There simply wasn’t. More importantly, despite annual hopes by the National Retail Federation of surging holiday spending which is consistently over-estimated, the recent surge in consumer debt without a subsequent increase in consumer spending shows the financial distress faced by a vast majority of consumers.

That already hints at what I said above about savings. But it’s Lance’s next graph, versions of which he uses regularly, that makes it even more obvious. (NOTE: I think he means to say 2009, not 2000 below)

The first chart below shows a record gap between the standard cost of living and the debt required to finance that cost of living. Prior to 2000(?!), debt was able to support a rising standard of living, which is no longer the case currently.

The cut-off point is 2009, unless I miss something in Lance’s comment. Before that, borrowing could create the illusion of a rising standard of living. Those days are gone.

And it’s very hard to see, when you take a good look, what could make them come back.

Not only are savings not down because people are too confident to save, they are down because people simply don’t have anything left to save. The American consumer is sliding ever deeper into debt. And as for the Holiday Season, we can confidently -there’s that word again- predict that spending will be disappointing, and that much of what is still spent will add to increasing Consumer Credit Per Capita, as well as the Gap Between Real Disposable Income (DPI) And Cost Of Living.

The last graph, which shows Control Purchases, i.e. what people buy most, a large part of which will be basic needs, makes this even more clear.

With a current shortfall of $18,176 between the standard of living and real disposable incomes, debt is only able to cover about 2/3rds of the difference with a net shortfall of $6,605. This explains the reason why “control purchases” by individuals (those items individuals buy most often) is running at levels more normally consistent with recessions rather than economic expansions.

If companies are unable to pass along rising production costs to consumers, export prices are falling and consumer demand remains weak, be warned of continued weakness in earnings reports in the months ahead. As I stated earlier this year, the recovery in earnings this year was solely a function of the recovering energy sector due to higher oil prices. With that tailwind now firmly behind us, the risk to earnings in the year ahead is dangerous to a market basing its current “overvaluation” on the “strong earnings” story.

“Prior to 2009, debt was able to support a rising standard of living..” Less than a decade later, it can’t even maintain the status quo. That’s what you call a breaking point.

To put that in numbers, there’s a current shortfall of $18,176 between the standard of living and real disposable incomes. In other words, no matter how much people are borrowing, their standard of living is in decline.

Something else we can glean from the graphs is that after the Great Recession (or GFC) of 2008-9, the economy never recovered. The S&P may have, and the banks are back to profitable ways and big bonuses, but that has nothing to do with real Americans in their own real economy. 2009 was a turning point and the crisis never looked back.

Are the American people actually paying for the so-called recovery? One might be inclined to say so. There is no recovery, there’s whatever the opposite of that is, terminal decline?!. It’s just, where does that consumer confidence level come from? Is that the media? Is The Conference Board pulling our leg? Is it that people think things cannot possibly get worse?

What is by now crystal clear is that Americans don’t choose to not save, they have nothing left to save. And that will have its own nasty consequences down the road. Let’s raise some rates, shall we? And see what happens?!

One consolation: Europe, Japan, China are in the same debt-driven decline that Americans are. We’re all going down together. Or rather, the question is who’s going to go first. That is the only hard call left. America’s a prime candidate.

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Over the summer there were two accidental collisions involving the 7th fleet, and a total of 4 similar incidents this year… until today as yet another US Navy warship collided with a Japanese tug boat during exercises.

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