Category: zerohedge

In the aftermath of Trump’s withdrawal from the Iran nuclear deal, the emerging geopolitical axes – at least when it comes to the ongoing global proxy conflict involving Syria/Iran/Israel/Saudi Arabia, i.e. the Middle East – has made some notable changes.

On one hand, there is the core axis of the US, Israel, Saudi Arabia, the UAE and Qatar, all of which are jousting for dominance with Iran, are eager to see the Iranian government and economy crash and burn (in some cases, literally) and have and will vocally back any move out of Washington that is adverse to Iran/Syria.

On the other hand, there is Russia which has firmly backed both the Iran and Syrian regimes, while also providing weapons and supplies to the two financially-strapped governments.

In the middle is Europe: unwilling to side with Trump and abrogate the Iran nuclear deal – after all, Europe gets much of its oil imports courtesy of Tehran while many European countries are currently branching out in Iran in hopes of finding more marginal clients, yet also unwilling to formally back Rouhani/Assad whom Trump has branded “terrorist.”

But what about the biggest and arguably most important emerging superpower, China, which until recently had held a very low profile when it comes to Iran? Well, overnight, perhaps prompted by the ongoing trade war with the US, Beijing decided there is no longer a need to stay mute, and as Xinhua reported,  voiced regret over President Donald Trump’s decision to pull the United States out of the Iran nuclear deal and vowed to “safeguard” the agreement.

“China regrets this decision made by the US,” foreign ministry spokesman Geng Shuang said during a press briefing on Wednesday. Geng said China will maintain “normal economic and trade exchanges” with Iran despite Trump’s decision to withdraw from the 2015 accord and reimpose sanctions on Tehran.

“China will take an objective, fair and responsible attitude, maintain dialogues and consultations with all parties, and continue to work to maintain and implement the comprehensive agreement,” he said.

Then, adopting a more forceful tone, Geng said that “China calls on all relevant parties to assume a responsible attitude” in order “to return at an early date to the right track of implementing the deal,” and reiterated Beijing’s opposition to unilateral sanctions and “long-arm jurisdiction.”

Meanwhile, not directly linked to the Iran deal, China said that trade talks are continuing, and urged the U.S. to withdraw its trade threats as it confirmed that negotiators continue to talk before President Xi Jinping’s top economic adviser returns to Washington.

In short, while Europe still remains in no-man’s land – after all Putin still remains the biggest supplier of Europe’s energy needs, especially in the winter, Trump’s decision to withdraw from the Iran Deal has officially putted the US, Israel and Saudi Arabia against both Russia and now China.

We now look forward to China deploying troops and military equipment to Syria and Iran as the inevitable next step in this escalating global proxy war.

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What has already been a stressful week for Elon Musk – which started with his now legendary conference call meltdown and promptly deteriorated from there – is about to turn even less pleasant, because one day after two teens were killed in a “horrific” Model S crash in Ft. Lauderdale, when the two 18-year-olds died after being trapped in the burning vehicles, the NTSB is launching an investigation into this incident.

The probe which comes two months after Tesla and the U.S. National Transportation Safety Board had a fallout over the board’s investigation into a deadly, March 23 crash in Mountain View,  involving a Tesla vehicle on Autopilot, will be mainly focused on “the emergency response in relation to the electric vehicle battery fire” as Elektrek reports that batteries from the other crash under investigation reignited days after the accident.

The NTSB issued a statement announcing their investigation into the crash. NTSB Chairman Robert S. Sumwalt, on whom Elon Musk recently hung up, commented:

“NTSB has a long history of investigating emerging transportation technologies, such as lithium ion battery fires in commercial aviation, as well as a fire involving the lithium ion battery in a Chevrolet Volt in collaboration with the National Highway Traffic Safety Administration.  In addition, the NTSB is currently investigating a fire involving the transportation of hydrogen gas for fuel cell vehicles. The goal of these investigations is to understand the impact of these emerging transportation technologies when they are part of a transportation accident.”

The NTSB sent 4 investigators to Florida and will “primarily focus on emergency response in relation to the electric vehicle battery fire, including fire department activities and towing operations.”

The second Tesla probe in two months comes shortly after the stunning news that the Mountain View Fire Department shared a report with other fire departments about the aftermath of the fatal Tesla Model X accident in Mountain View that is now also under NTSB investigation.

In the report (via KTVU), the fire department said that they monitored the battery pack and it reignited days after the March 23 accident, with Mountain View Fire Chief Juan Diaz commenting:

“In this particular case, six days later, the temperature inside those cells increased to the point of ignition. That’s why the car reignited. You have stored energy that is frankly unstable.”

Think of a nuclear meltdown in which the plutonium rods spontaneously combust over and over as there is no way to cool them sufficiently. It’s kinda like that.

Amusingly, Tesla recommends using “large amounts of water” to extinguish a battery fire in its vehicles and to use a thermal imaging camera to monitor the battery for at least one hour after it is found to be completely cooled:

“If the high voltage battery catches fire, is exposed to high heat, or is bent, twisted, cracked, or breached in any way, use large amounts of water to cool the battery. DO NOT extinguish with a small amount of water. Always establish or request an additional water supply.”

More appropriately, the company also offers online training for fire departments about how to handle its vehicles after a crash. In other words, if you are driving a Tesla, better pray that if you get in a crash, your fireman has taken his annual Tesla online remedial checkup.

As Elektrek adds, in the case of the March 23 accident, Tesla was able to send engineers to assist the firefighters in removing the vehicle and its battery pack from the scene since it was near its factory and headquarters (pictures via Dean C. Smith on Twitter).

We doubt Elon Musk will be cooperative with the NTSB this time considering the growing feud between the government regulators and the increasingly erratic electric car company CEO.

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“This is not a time to be rewarded for long market exposure…”

Those are the warning words from yet another billionaire hedge fund manager as expectations of further market disruptions loom.

A day after the largest hedge fund in the world shifts to a net short equities position, as Ray Dalio’s Bridgewater no longer “feels pretty stupid” about being out of US stocks; Dan Loeb’s Third Point puts his money where his mouth is and dramatically increases his short bets.

Billionaire Loeb  wrote in his letter to investors last week :

Market shifts are inherently difficult to anticipate and when they happen, they do not ring a bell but they do blow a dog whistle, as we have said in the past. Our job is to listen carefully and to take decisive action when we suspect change is afoot. We believe that the increase in our short book and our reduced net and gross reflect what we are hearing.

And this morning, on an earnings conference call for Third Point Re., where he oversees investments, Loeb told investors:

“It’s a good time to have more balance on the short side,”

…adding that he sees more opportunities to find companies that will “go down or materially underperform the rest of the portfolio.”

As Bloomberg reports, the hedge fund manager said investors have become increasingly concerned about stock multiples, since after years of low interest rates, there’s finally an alternative to equities in the form of “relatively riskless” two-year treasuries.

 

And while hedgies have been waiting for a return of volatility to exploit price movements after several years of crazy-calm markets, Loeb’s response has been to add to his hedge fund’s equity short portfolio, he said on the call.

“We intend to further increase short exposure to fundamental single names and quantitative derived baskets in 2018 and rely less on market hedges to dampen volatility and reduce net exposure,” he said.

So, like Dalio, Loeb is notably derisking his gross book overall and pushing his positioning to the short side (for stocks). Wonder what Warren Buffett thinks of that?

Finally, Loeb said his firm is watching to see if a recession, which it doesn’t think is near, might be closer that market believes – as he noted previously:

“as manufacturing indices (PMI’s) cool from elevated levels, there is a real question about just which inning of the late cycle we are in. While we don’t believe a recession is close, there is definitely a concern that it is getting closer.

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It has been more than a month since Republicans on the House Intel Committee officially ended the probe into alleged Russian interference in the 2016 election, and roughly a week since they released an unredacted version of their investigative report that revealed more lies told by top FBI officials.

So it’s understandable that Democrats on the Intel committee are chomping at the bit to revive the anti-Russia hysteria. And in their latest attempt, Democrats have finally released all of the more than 3,500 Russian-bought Facebook ads that purportedly swayed the 2016 vote in Trump’s favor. Of course, anti-Russia sentiment, which seemed ubiquitous just six short months ago, has more recently faded from view as the public has realized that there’s “no ‘there’ there,” as FBI special agent Peter Strzok said in a tweet to his mistress. 

But after seeing the ads, which are sorted by the time during which they ran, it’s impossible to believe the Russians didn’t have something to do with it. After all, instead of running ads that blatantly supported President Trump, most of the ads we found supported progressive causes like Black Lives Matter and gay rights – causes which President Trump unambiguously supports, right?

Here’s an ad expressing support for Russian President Vladimir Putin’s favorite athlete, Colin Kaepernick…

…and here’s another supporting a pair of YouTubers who had their Facebook account banned for reportedly being Russian propagandists. In one video, they told black viewers not to go out and vote, arguing that there was “no point.”

Meanwhile, another ad expressed support for gay rights.

After careful viewing, it should be obvious to all that these ads – many of which ran before or after the election, and only a small fraction of which expressed support for conservative causes – had a larger impact on the outcome of the election than the entire mainstream media, which pumped out anti-Trump coverage 24 hours a day for more than six months leading up to the vote.

Lol, so Kremlin ads were more effective at targeting and convincing American voters than the entire domestic mainstream media supporting Hillary Clinton https://t.co/PckLHpWfuV

— GreekFire23 (@GreekFire23) May 10, 2018

It’s a relief to finally get some confirmation that electing the most anti-establishment candidate in the history of American politics wasn’t the American people’s fault.

Find the rest of the ads here.

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Citing an unidentified D.C.-based person familiar with the arrangement, Korea’s Yonhap reports that the historic meeting of US President Trump and North Korean leader Kim Jong-Un will take place in Singapore on June 10th, shortly after the G-7 meetings in Canada.

Additionally, Yonhap notes that another diplomatic source said:

“At the G-7 summit, we will recognize the will of the world at large, that there will be no compensation, such as sanctions, until the full denuclearization is achieved. We will maximize the pressure level on the North and maximize the bargaining power. It can be a stone pavement to enter.

Regarding the location of the talks, Singapore has been considered as a preferred candidate from the beginning. Since the April 27 summit, President Donald Trump has leaned toward Panmunjom, where the dramatic effects such as historical symbolism can be raised the most.

Mr. Trump said in a ministerial meeting yesterday, “it is not the Demilitarized Zone (DMZ)” in relation to the place of the talks, and publicly confirmed that Panmunjeom is not the final choice.

Asia Unbound’s Scott Snyder explains what will happen when Trump meets Kim…

Historically, the American president has been the “closer” of such deals, but an early meeting between Trump and Kim would sacrifice that role in favor of a reshaping of the relationship with the North Korean leader by setting the tone surrounding the U.S.-North Korea relationship without an accompanying (decades-long) process and verification of North Korea’s implementation of denuclearization.

Past denuclearization efforts have foundered on a combination of failures to secure verification and North Korean subterfuge, but have never gone so far in giving the Kim family the prestige or treating North Korea with the strategic weight that it has sought for decades. Trump’s strongest argument for such an approach: everything else has failed, and a U.S.-North Korea summit has never been tried.

Oddly, Trump’s own threats to annihilate North Korea, while challenging North Korean assumptions about how the United States would respond to its nuclear advances, has generated political space for Trump: even a bad deal with Kim may be perceived as a better outcome than a catastrophic conflict with North Korea.

But why would Kim reach out now and offer a meeting with Trump? Speculation on the range of possible motives for Kim will range from desperation to uncanny strategic intuition. But the most interesting aspect of Kim’s outreach and its timing is that it combines a high personal propensity to take risk with a strong desire to actively manage uncertainties generated by the growing risks to North Korea’s regime survival.

Alongside the Kim family’s desire to assert independence and centrality as narratives that undergird and reinforce its control over the regime is a deep desire for external affirmation that can only come from improving North Korea’s relationship with the United States. That is why North Korea has consistently asserted that it would only abandon its nuclear program if the United States were to drop its “hostile policy”—normalization and acceptance of the regime by the United States as an alternative regime survival guarantee to that provided by nuclear weapons. In essence, the Kim family has always wanted Washington to impute to Pyongyang the same strategic weight that Richard Nixon gave to Beijing when he used the China card to balance the Soviet Union.

At the same time, Kim’s move smacks of both desperation and an astute recognition that international economic pressure, political isolation, and the threat of military conflict could eventually checkmate the regime. Instead of furthering regime survival, North Korea’s pursuit of the capability to strike the United States with nuclear weapons raised the risks of accidental conflict and preventive war.

For Kim, the prospect of an early summit with Trump provides the best prospect of removing international sanctions pressure while giving Kim room for maneuver to possibly keep his nuclear deterrent in place. Moreover, a prospective nuclear deal with Trump provides Kim with an opportunity to secure external symbols of regime legitimacy without having to address North Korea’s atrocious human rights record. (After all, only Trump can offer a Trump-branded hotel in Pyongyang, payable in fissile material.)

Given the stakes, risks, and blowback that inevitably will accompany a Trump-Kim hamburger summit, a safer course, if indeed a summit is inevitable, would be to retain South Korean involvement by securing an invitation for Trump to join the inter-Korean summit already announced for the end of April at Panmunjom.

South Korea shares with the United States an existential interest in denuclearization, but only the United States has the standing in North Korean eyes as a counterpart in that discussion. But South Korean involvement would help address American staffing deficiencies while keeping denuclearization front and center, all the while blunting North Korean efforts to drive a wedge in the U.S.-South Korea alliance.

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While Iran maintains that last night’s skirmish between the Israeli Defense Force and Syrian Army forces was a false flag, and that the IDF struck first (continuing its pattern of airstrikes and other military assaults in Syria), the IDF boasted Thursday morning that Tehran “will need a lot of time to recover” from the most extensive Israeli attack in Syria since 1974.

An Iranian lawmakers said Thursday that Iran had no role in the attack, and that it doesn’t operate any bases in Syria.

Mohammad Javad Jamali Nobandegani, a member of the Iranian Parliament’s national security and foreign policy committee, said Israel’s claim was “a lie,” adding that Israel’s history of carrying out unprovoked attacks in Syria has been well-documented.

“Iran does not have military base in Syria,” Nobandegani added.

Meanwhile, Israel said Iran paid a “heavy price” for its (nonexistent) aggression following multiple Israeli airstrikes against what Tel Aviv said were targets belonging to the Iranian Revolutionary Guard Corp’s Quds Force.

 

Unsurprisingly, the alleged Iranian attack resulted in no casualties or damage to Israeli infrastructure, with no rockets hitting Israeli-held territory (the Golan Heights border region is considered Syrian territory occupied by Israel).

“Iran will need a lot of time and resources to rehabilitate its operational, military and intelligence infrastructures we hit tonight,” an IDF spokesman said. The spokesman warned that “any other attempt” to hurt Israel will “pay even more.”

A map of the military targets published by the IDF shows multiple sites near Damascus and also near the Syria-Israel border.

Israeli Defense Minister Avigdor Lieberman claims “all the Iranian infrastructure” in the Arab republic was hit.

The IDF has struck dozens of Iranian military targets in Syria in response to the Iranian rocket attack against Israel. Quds force is behind attack and has played the initial price. IDF remains ready for various scenarios but does not seek to escalate the situation. pic.twitter.com/4rC8gHK2LG

— Jonathan Conricus (@LTCJonathan) May 10, 2018

During the attack, Israeli jets struck intelligence sites and arms depots, among other military targets allegedly operated by the Iranian forces. Syria’s SANA state news channel said earlier that a Syrian radar installation was hit in the attack while “tens” of missiles were intercepted.

Though the IDF says it’s not seeking “further escalation,” the IDF says that “the Syrian regime will be held accountable for everything happening in its territory,” and has warned against any retaliatory attack.

“They must understand that if it rains here, it will pour there,” said Israeli Defense Minister Avigdor Lieberman, who spoke at the Herzliya security conference near Tel Aviv several hours after the skirmish began.

Lieberman added that Israeli forces remain on high alert, but said he hopes this “chapter” is finished.

Of course, Western media like the New York Times – which has repeatedly demonstrated a fervent pro-Israeli bias – opted to take the IDF at its word – a move that drew consternation from independent Syrian journalists.

Maybe don’t let the Israelis dictate headlines pic.twitter.com/XCMywDP1AH

— Rania Khalek (@RaniaKhalek) May 9, 2018

But why even bother to verify Iran’s claims when it’s easier to just quote the IDF spokesman?

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Authored by Virginia Fidler via The Gold Telegraph,

You love your credit cards, right? Handy and easy, you just whip it out and purchase whatever you want. No cash; no hassle. And everyone makes it so easy for you

Before you bask in all this convenience, consider just who is gaining from this war on cash.

The banks, of course, are charging as many fees as they can think of. More importantly, your cash card leaves a wide data trail detailing your buying preferences, used by merchants and advertisers to entice you into more buying. How convenient. These thoughtful companies even offer reward points every time you use the card. Cash offers the ultimate in privacy. Your cash card might as well be a walking billboard.

The government, of course, is extremely interested in your spending habits. The taxing authorities use an electronic money trail to monitor your spending and ensure against tax evasion. In addition, cards save the government the cost and trouble of printing and storing additional currency.

Your electronic purchase trail is nirvana to large corporations. Knowing your spending habits allows them to customize their ads to an ever-larger consumer base. They know what you need before you do and are ready to entice you with specials, sales and “act now” deals.

Monitoring against illegal habits, tax evasion, and money laundering may be considered a positive move. Increased spending can give the economy a boost (even as it depletes your bank account). No one, however, discusses the insidious dangers inherent in the move toward a cashless society.

One of the largest perils is that it all but eliminates financial prudence. You’re not handing over cash, but a mere card. The psychological difference is enormous. Cash forces you to consider your purchases as your wallet is depleted. Will there be enough green to purchase dinner? A cash card handily removes that mental obstacle and skews your perception of precisely how much of your hard-earned money is leaving your possession. Bank statements and easy credit terms are far off, so they don’t merit a great deal of consideration.

Millennials, who have embraced card purchases with considerable enthusiasm, can also be lacking in financial knowledge. They are the major group being targeted by lending institutions, and almost half of them don’t know what their interest rates are or about late fees. Easy spending without adequate financial acumen can be a dangerous combination. Greater financial education would be a positive move toward wiser spending and saving habits. However, retailers have much to gain by keeping consumers in the dark as they continue to entice with “special offers” and one-click online shopping.

Cash transactions are declining globally, and the poorest members of society are feeling the backlash.Approximately 7 percent of Americans do not have bank accounts, and the number of homeless has increased for the first time since 2010. The lack of cash has marginalized those who are most vulnerable.

One country that is making strides toward a cashless society in India. To crack down on the country’s huge black-market trade, Prime Minister Narendra Modi is attempting to lure consumers with no bank accounts into the formal economy. That is approximately 40 percent of people in India, who are without access to banking services. The first step, in November 2016, was to withdraw the 500 and 1,000 denominations of rupee notes from general circulation. This accounts for 86 percent of India’s cash. The move has hurt Indian’s poor, some of whom are unable to buy simple fruits and vegetables. Small businesses have reduced their staff by 35 percent. While India’s economy is thriving, the elimination of cash is expected to hurt its future GDP.

Big ticket items have suffered in India, as many consumers remain wary of cash transactions. As Indians are depositing more money into banks, it is banks that are profiting from Modi’s efforts. Major lending institutions have been hiring wealth managers to handle this new influx. It is expected that the number of money managers will double within three years. At the same time, the poor, who have limited access to the new banknotes, have no mean of buying needed food. This is a genuine problem for rural Indians, who have no nearby bank and need the liquidity of cash to survive. They are paying a high price for the government’s efforts to eliminate tax evaders.

India is only one of the countries moving toward a cashless society, with many emerging African and Asian markets developing apps for even the smallest payments. Australia and Scandinavia are also encouraging cashless transactions by making them easier and more convenient. Globally, our every purchase of an ice cream cone is being watched and recorded.

Cash in hand has always represented freedom, and that is now being eroded at an alarming rate. Private, legal transactions will become illegal or impossible in a cashless society when every financial transaction is being monitored and scrutinized.

Without cash, people become purely dependent on big banks. What happens when the banks fail? During times of crisis, banks could shut their doors and prevent depositors from accessing their money. The lack of genuine cash shifts the power from the individual to corporations and government authorities.

If we are relinquishing freedom and power for the convenience of cashless transactions, perhaps we need to consider who is on the receiving end. Banks and governments are amassing the ultimate power by gradually removing the last vestige of freedom – cash. Those who are ready to give up their cash will surely pay the price.

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Chaos has returned to Italy and, appropriately, it has once again started with the bad boy of Italian politics, Sylvio Berlusconi, the same flamboyant playboy-cum-former prime minister who back in 2011 nearly withdrew Italy from the Eurozone and only a flagrant political intervention by the ECB prevented the collapse of the European experiment.

As we reported yesterday, in a statement published late on Wednesday night in Italy, Berlusconi changed his long-standing position, and said he’d be open to an agreement between the League and the Five-Star Movement (otherwise known as M5S) to form a ruling coalition that wouldn’t include his center-right party, Forza Italia. And so, with his blessing, on Thursday the anti-establishment Five Star Movement and the far-right League were on the verge of forming a Eurosceptic government in which Europe’s third largest economy would be the latest to succumb to the populist wave unleashed by a decade of central bank errors and record income and wealth disparity.

The two leaders wasted no time, and Luigi Di Maio, the Five Star leader, and Matteo Salvini, the League leader, promptly met to try to iron out details of a potential agreement, including who would secure the job of prime minister. Key cabinet positions, including the finance ministry and foreign ministry, were also being discussed.

As the FT reports, in a joint statement after meeting on Thursday Mr Di Maio and Mr Salvini described a “positive climate to define the government’s agenda and priorities” and said “technical” meetings among staff would begin in the afternoon. “In terms of the composition of the executive, and the premier, significant steps forward were taken amid constructive collaboration on all sides, with the aim of quickly giving an answer and a political government to the country,” they said.

To be sure, the two had held infrequent talks for the past few weeks, with no concrete outcomes decided, however with the Berlusconi blessing, the probability of a government becomes a virtual certainty. The reason: the 81-year-old Berlusconi had previously ruled out offering his support to a Five Star-League government unless his party was fully represented in the executive. At the same time, Five Star had vowed not to govern with Mr Berlusconi’s Forza Italia party, seeing it as part of the traditional political class it has been trying to unseat. This changed on Wednesday night when as we reported, the octogenrian playboy gave an green light to a deal, saying that while Forza Italia would vote against a Five Star-League government in parliament, this would not jeopardise his alliance with Mr Salvini on a local and regional level, where they rely on each other in many municipal and regional councils.

“If a centre-right political force takes on the responsibility of creating a government with Five Star we note that with respect,” Mr Berlusconi said in a tweet. “We will evaluate the government that is created, supporting any measures that are useful for Italians.”

Meanwhile, as we have previously reported, an alliance between Five Star and the League has long been considered the most destabilising outcome of the election because both parties have attacked EU fiscal rules, banking regulations, trade deals and sanctions against Russia. The parties were the winners of the March poll but their gains were not decisive enough to allow either to govern single-handedly, however combined they garnered more than half of the vote as Italy’s legacy political power, the Democratic Party suffered a spectacular collapse.

Of course, nothing is certain, and should talks between Five Star and the League fail to reach an agreement by Sunday, Italy’s president Mattarella is expected to proceed to nominating a technicratic caretaker administration, replacing the incumbent centre-left government led by Paolo Gentiloni, until the next elections are held.

As the FT adds, in a speech at the European University Institute in Florence on Thursday, Mattarella issued a thinly veiled warning to Five Star and the League not to tear up Rome’s longstanding and deep ties with the EU, which have frayed amid discontent with Brussels over economic policies and migration in recent years.

“To believe one can go it alone is pure illusion, or even worse, a wilful hoax against public opinion,” Mr Mattarella said. “Everyone knows that none of the great challenges facing our continent can be tackled by any single member state, on its own.”

To be sure, markets reflected this new risk and on Thursday, Italy’s 10Y bond yield jumped as much as 1.95% before retracing modestly.

Italian stocks likewise sank on the news, with Italy’s FTSE MIB the worst performing market in Europe today.

On Thursday morning Goldman also noticed, and in a note by the firm’s European analyst Sylvia Ardagna, Goldman writes that “Italy’s political risk increases, and yet the markets remain complacent”

The market reaction has remained remarkably muted. We think the market is complacent in pricing political risk in Italy. In our opinion, a Five Star – Lega government remains the outcome that would likely be viewed as the most negative by the market.

Goldman adds that if the Five Star – Lega attempt to form a government succeeds, “this coalition will have been the least expected outcome going into the the elections. But, in our opinion, this was and remains the outcome that would likely be viewed as the most negative by the market.“

The paradox here, at least according to Goldman, is that markets continue to remain complacent even as the worst case outcome is now a virtual certainty: 

Since the general election took place on March 4, news around political developments have been incrementally negative, but the market has remained complacent in pricing political risk in Italy. So far, the market reaction has remained remarkably muted even though the prospect of a Five Star – Lega government has increased. As our strategists have pointed out, carry considerations are being balanced against political risk.

From an economic perspective, however, if the political manifestos of the two parties are any guide to the policies that a Five Star – Lega government would pursue, the upcoming budget law for 2019 would consist of lax fiscal policies that would (i) lead to the deterioration of the public finance outlook and prevent a decline of the stock of public debt, and (ii) increase the probability of ratings downgrades.

Moreover, if lax fiscal policies were to be pursued, leading Italy to breach the 3% deficit rule, these policies would create tensions with the European Union and be a source of disagreement with the European Commission. Even if Five Star and Lega have toned down their anti-European rhetoric, tensions between Italy and European partners would also certainly complicate the efforts at the EU level to make further progress on EMU integration.

There is a much simpler reason for the “market complacency” – as we first explained in December, while the broader market has been dumping Italian bonds, the ECB has been buying them up. Non-stop.

As we showed late last year, just about every other major investor type has  become a net seller (to the ECB) or a non-buyer of BTPs over the last couple of years. Said differently, for well over a year, the only marginal buyer of Italian bonds has been the ECB!

As Citi said at the time looking at the future of Italian bonds, it is “pretty likely that there will need to be an adjustment in prices” once the the ECB’s purchases of Italian bonds start to fade. Here Citi provided one suggestion how it may counteract an explosive selloff: 

As our rates strategists have pointed out, the ECB could counteract this through an “Italian Operation Twist” (lengthening the maturity of their BTP holdings), but such a response might not come immediately, given the ECB’s reluctance to favour individual countries, unless associated with the conditionality that comes with an economic adjustment programme.

Meanwhile, the risks are rising exponentially. Quote Citi:

To our minds, this remains one of the most significant political risks to € credit in 2018. Most likely the spillover on credit would be concentrated on Italian and other periphery names, banks in particular. The scenario of a full-on  funding crisis is a much lower probability in our view, but would obviously have more systemic implications across the € credit market.

And a governing coalition between the Five Star and the League is all that would take to launch the first steps of this funding crisis. The only question is when will the market react accordintly.

 

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Authored by Simon Black via SovereignMan.com,

In 1923, a young Jewish immigrant from a small town in modern-day Ukraine founded a candy company in Brooklyn, New York that he called “Just Born”.

His name was Samuel Bernstein. And if you enjoy chocolate sprinkles or the hard, chocolate coating around ice cream bars, you can thank Bernstein– he invented them.

Nearly 100 years later, the company is still a family-owned business, producing some well-known brands like Peeps and Hot Tamales.

But business conditions in the Land of the Free have changed quite dramatically since Samuel Bernstein founded the company in 1923.

The costs to manufacture in the United States are substantial. And business regulations can be outright debilitating.

One of the major challenges facing Just Born these days is its gargantuan, underfunded pension fund.

Like a lot of large businesses, Just Born contributes to a pension fund that pays retirement benefits to its employees.

And in 2015, Just Born’s pension fund was deemed to be in “critical status”, prompting management to negotiate a solution with the employee union.

The union simply demanded that Just Born plug the funding gap, as if the company could merely write a check and make the problem go away.

Management pushed back, explaining that the pension gap could bankrupt the company.

And as an alternative, the company proposed to keep all existing retirees and current employees in the old pension plan, while putting all new employees into a different retirement plan.

It seemed like a reasonable solution that would maintain all the benefits that had been promised to existing employees, while still fixing the company’s long-term financial problem.

But the union refused, and the case went to court.

Two weeks ago the judges ruled… and the union won. Just Born would have no choice but to maintain a pension plan that puts the company at serious risk.

It’s literally textbook insanity. The court (and the union) both want to continue the same pension plan and the same terms… but they expect different results.

It’s as if they think the entire situation will somehow magically fix itself.

Those of us living on Planet Earth can probably figure out what’s coming next.

In a few years the fund will be completely insolvent.

And this company, which employs hundreds upon hundreds of well-paid factory workers in the United States, will probably have to start manufacturing overseas in order to save costs.

Honestly it’s some kind of miracle that Just Born is still producing in the US. The owners could have relocated overseas years ago and pocketed tens of millions of dollars in labor and tax savings.

But they didn’t. You’d think the union would have acknowledged that, and tried to find a way to work WITH the company to benefit everyone in the long-term.

Yet thanks to their idiotic union, these workers are stuck with an insolvent pension fund and zero job security.

Now, here’s the really bizarre part: Just Born contributes to something called a “Multi-Employer Pension Fund”.

In other words, it’s not Just Born’s pension fund. They don’t own it. They don’t manage it. And they’re just one of the several large companies (typically within the candy industry) who contribute to it.

So this raises an important question: WHO manages the pension fund?

Why… the UNION, of course.

The multi-employer pension fund that Just Born contributes to is called the Bakery and Confectionery Union and Industry International Pension Fund.

This is a UNION pension fund. It was founded by the Union. And the President of the Union even serves as chairman of the fund.

This is truly incredible.

So basically the union mismanaged its own pension fund, and then legally forced the company into an unsustainable financial position that could cost all the employees their jobs. It’s genius!

Just Born, of course, is just one of countless other businesses that faces a looming pension shortfall.

General Electric has a pension fund that’s underfunded by a whopping $31 billion.

Bloomberg reported last summer that the biggest corporations in the United States collectively have a $382 billion pension shortfall.

Not to worry, though. The federal government long ago set up an agency called the Pension Benefit Guarantee Corporation to bail out insolvent pension funds.

(It’s sort of like an FDIC for pension funds.)

Problem is– the Pension Benefit Guarantee Corporation is itself insolvent and in need of a bailout.

According to the PBGC’s own financial statements, they have a “net financial position” of MINUS $75 billion, and they lost $1.3 billion last year alone.

The federal government isn’t really in a position to help; according to the Treasury Department’s financial statements, Social Security and Medicare have a combined shortfall exceeding $40 TRILLION.

And public pension funds across the 50 states have an estimated combined shortfall of $1.4 TRILLION, according to a 2016 report by the Pew Charitable Trusts.

It doesn’t take a rocket scientist to see what’s coming.

Solvent, well-funded pensions and state/national retirement programs are as rare as mythical unicorns.

Nearly all of them have terminal problems and will likely become insolvent (if they’re not already).

The unions are driving their own pensions into the ground; and the government has ZERO bandwidth to bail anyone out, least of all itself.

So if you’re still more than two decades out from retirement, you can forget about any of these programs being there for you as advertised.

But there is a silver lining here:

The government can’t fix this. The union can’t fix this. But YOU can.

YOU have the ability to take matters into your own hands and establish a robust, well-funded, tax-advantaged retirement plan.

One example is a “solo 401(k)”, an extremely cost-effective and flexible planthat allows you to squirrel away tens of thousands of dollars each year and invest in a wide range of potentially more lucrative asset classes, from private equity to cryptocurrency.

There’s a multitude of other options out there.

Fixing this problem merely requires a little bit of education, and the will to take action.

And to continue learning how to ensure you thrive no matter what happens next in the world, I encourage you to download our free Perfect Plan B Guide.

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Despite the world’s elites decrying President Trump’s decision to withdraw from the Iran nuclear deal – fearful of the kind of Middle East instability already witnessed last night between Israel and Iran (and Syria) – it appears investors don’t have a care in the world.

For the first time since mid-January, VIX is back below its 200-day moving-average, trading with a 13 handle…

What, me worry?

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