Category: zerohedge

If you ever wanted to get a look inside the mind of Kyle Bass, founder and CIO of Hayman Capital Management, here is your chance. In a wide-ranging discussion with Grant Williams, author of Things that Make You Go Hmm and co-founder of Real Vision TV, he shared his thoughts on position-sizing, China, the appeal of holding gold, central banking, interest rates – and much, much more.

Predictably, the one topic that got the most attention was China, where as widely known Bass has made his next “career” wager, expecting a substantial devaluation of the currency, a process which had stalled out in recent months but has once again picked up speed.

Looking at recent data, and specifically something we pointed out two weeks ago, Bass said the country’s $3 trillion corporate bond market is “freezing up” amid rising defaults and canceled debt sales. “We’re starting to see the beginning of the Chinese machine literally break down.” 

Bass reiterated that China’s lending binge in recent years is unsustainable and it is only a matter of time before this bubble, bigger than the US bubble of 2005/2006 which brought Bass fame and fortune, bursts. He expects bank losses of $3 trillion to trigger a bailout, with the central bank slashing reserve requirements, cutting the deposit rate to zero and expanding its balance sheet – all of which will weigh on the yuan, and lead to a dramatic devaluation.

“They’re going to do everything the U.S. did in our crisis,” said Bass, who has gone public with his China views since at least October. “Every single thing the Chinese central bank and central planners have to do is currency negative for them.”  He added that the Chinese government wants a devaluation, but “they just want to do it on their terms.” By this he is of course referring to the vast exodus of domestic capital as the local population sees the endgame and is scrambling to park its funds offshore (mostly in UK, US and Canadian real estate as well as US M&A, and more recently, in bitcoin), something Beijing is terrified of and is doing all in its power to prevent.

An interesting theme here was Kyle Bass’s devaluation thesis as a contrast to Hugh Hendry‘s recent Chinese optimistic euphoria. This is what Bass told Williams:

Williams: China is something else that you’ve been very vocal about recently. You and this gang of nefarious Texas hedge fund managers who are trying to take down the People’s Bank of China. And again, it’s another, in my reckoning, very well argued case for the devaluation of the yuan. And Hugh Hendry was on talking to Raoul, said, “It’ll never happen. The world’s over if it happens.” And I can see where he’s coming from, but it seems to me that the people that debate on the “they won’t devalue” side are assuming it’s going to be a voluntary devaluation, something that they choose to do, rather than they have to do.

 

Kyle: That’s a perfect point, perfect point.

 

Grant: Because that seems to me, they’re going to have to do it to recap the banks. There’s going to be a reason for them to do it, not a choice.

 

Kyle: Well, it’s going to happen to them. And again, even in your soliloquy there, you say, “They’re going to have to do it.” They’re going to have to allow it to happen. It’s going to happen. I love Hugh, we’ve had a number of debates throughout history, and he’s a fantastic individual and a brilliant mind. But if the reason that it’s not going to happen is because “it can’t happen, because the rest of the world’s going to have so much trouble with it,” that doesn’t give me any solace whatsoever. In fact, you look back to the U.S. financial crisis when I would go meet with various heads of investment banks or investors, and I would say, “This is what’s going to happen, and this is why, and this is how the structures are structured.” And some would look at me and say, “Well, that means Fannie and Freddie will be out of business. And so therefore, the government will never let that happen.” I said, “Well, the government doesn’t have a choice here. It’s too late.” The credit excesses had already been built. And in China, the credit excesses are already built. They’ve got, we can go into numbers, but they have asset-liability mismatches in their system, in the wealth management products, that are more than 10% of their system. And our asset-liability mismatches were two and a half percent of our system, and you know what they did. So their excesses are already, they’re already so far ahead of the world’s excesses in prior crises that we’re facing the largest macro imbalance in world history. And to this day, I can’t figure out why people don’t see it for what it is.

At this point Bass proceeds to discuss some interesting behavioral bises inherent in investing:

Bass: I think the behavioral psychology plays a huge part. And you’ve hit it right on the head. I give you an interesting anecdote. Again, back to the U.S. subprime crisis, I went all over the country raising money for a subprime, two subprime funds and some advisor relationships. And what was absolutely hilarious to me, looking back at the meetings that we had, is we would go to Chicago, and we would say…we’d lay out the thesis, and they would say, “You’re exactly right, this is absolutely going to happen.” It’s not going to happen here in Chicago because of one, two, three and four these points. But that’s because they live there, the NIMBY, the not in my back yard scenario or psychological profile of events, was not going to happen. But it was going to happen to everyone else but them. And then I’d go to Seattle and I’d lay that thesis out and they’d say, “Oh, you’re absolutely right. Never going to happen here because Microsoft’s here and Amazon’s here, and but our houses are fine, but everybody else’s homes, they’re going to drop 35%, and we’re going to invest with you.” And then I’d go to Southern California and I’d go to Texas, and everywhere I went, not one organization or group of investors would agree that it would happen to them, but it was going to happen to everyone else. And that’s again, I think the beginning of what you and I were just discussing with regard to the psychological profile, or more importantly, the behavioral psychology that plays into one’s thought process. Because the first thing…I think the first inalienable right of human nature is self-preservation, and when you get into a thought of, okay, Hugh’s position, is if it…if this were to happen, it would be so globally terrible that therefore, they’re going to not let this happen. I understand that logic and I think you do too, but I believe it’s flawed. And the reason it’s flawed is again, it’s just this…It’s almost like the Kahneman’s availability heuristic, where you only have this certain data set, and you only look at history back…I think the brevity of financial memory is only about three years.

 

* * *

What’s fascinating to me, Grant, is outside of Hugh Hendry, behind the scenes, when you talk with some of the largest asset managers in the world and the largest investors in the world, and you lay out a hundred page PowerPoint of exactly how their banking system and credit system works, and how they are putting off the final day of just realizing a loss cycle. You mentioned Armageddon. It’s not Armageddon. They’re going to have a loss cycle. They’ll recap their banks, their currency will depreciate, pretty materially. It will export deflation to the world one last time. And if you have any money left, it will be the best time in the world to invest, and we both know this.

Bass also sees the humor in shorting China:

Bass: I know there are permabears on China. But from my perspective, it’s just a scenario that I see has come to a head. And one other point that you made…one of my good friends, Dan Loeb, says all the time to me that “there are no short sellers on the Forbes 400 list, so be careful.” And a friend I think told you, don’t invest in Armageddon, it only happens once in a blue moon. All of those things are absolutely true. But to check caution to the wind and hope the central banks get it right from here, I think is an outsized risky proposition.

Bass doesn’t just limit himself to China: he also touches on arguably the most controversial asset of all time – gold.

Williams: What’s your current thinking on gold? Because I know it’s something you’ve had thoughts in the past, but it’s not something I’ve heard you talk about for a while.

 

Bass: Yeah. I look at Global M2, being just under a hundred trillion. And the total amount of mined gold in world history is somewhere around seven trillion. And there’s about…and then gold that’s kind of in circulation in use. We studied…we did a deep dive on gold a few years ago. They call it the yellow metal that has no yield, but with the entire world going to negative rates, then on a relative basis, it’s probably one of the better currencies to own. I buy that wholeheartedly. And seeing which way the central banks are going, you’re going to have to own something.

He also touches on the future of interest rates:

Bass: The spreads between U.S. 30 year treasuries and 10 year treasuries, and Japanese 30 years and 10 years, and European 30 years and 10 years, is as wide as it’s ever been. And so what does that mean? That means that I think U.S. rates are coming down, regardless of what kind of inflationary pressures we have, which is something that we’ve never seen before. Again, a new paradigm given the global central banking conundrum. So when you ask me whether stocks have peaked or not in the U.S., look, if China has the comeuppance we think they’re going to have, soon, then that’s not going to be an equity positive environment.

Bass also discusses the recent collapse in central bank confidence:

Williams: When you talk about this handicapping the central banks, which we’ve all had to do, and it’s essentially impossible. How do a group of free market capitalists handicap a group of academics? We speak different languages. So as we watch this thing move forwards, the guys in the markets assume to a cliff somewhere out yonder in the fog. What do you think tips this thing on? Because to me, it’s purely confidence now. There’s nothing left but confidence in these guys that they can do this. And you bring up the reaction to Kuroda-San going negative in January. And I think the instant reaction of the markets, people are going to look back on that, when the Nikkei fell a thousand points and the yen strengthened by a full bip. That, to me, was the start of people going, “You know, maybe these guys are just throwing things at the wall.”

 

Kyle: You’re right. That was the first time I’ve seen investors show a disbelief in the markets, in central banks. And I agree with you. That was a watershed moment in our business, in attempting to see when there’s a tectonic shift in the belief systems, because we all know that that one of the central banks’ objectives is price stability, whatever that means. I think that means each relevant industry that they oversee trading higher and not lower, it equals price stability. And they didn’t get it, Kuroda-San didn’t get it then, and since then Japan struggled. And this concept of Ricardian equivalence, where you’re issuing debt to quantitatively ease on the monetary policy side, and maybe even allowing, right, the fiscal authorities to continue to spend, it comes into play where people just start saving more. And this idea of negative interest rates realize…it’s interesting, academically negative interest rates look like they work on paper. And in reality, what these central bank heads are realizing, whether you’re in Denmark or Japan or any of these economies, is savers think, “Well, I just need to save more if I’m not going to earn anything on my savings.”

 

* * *

 

We’re already crossing the Rubicon of the helicopter money. And Japan’s talking about a negative lending facility from the BOJ to the banks. So we’re starting to see…the academics will never turn and say, “We were wrong.” The academics will go “more,” and they’ll just go unsterilized. And in the end, we know where that gets all of us.

But the punchline is beyond gold, beyond China, beyond even investing, and has to do with something a central banker once told Bass in what the hedge fund manager describes as an “out of body” epiphany:

Grant: this idea of helicopter money, and the idea of banning cash, and all these things that, when you sit here in the cold like that, you can see exactly why they need to do these things. You watch the narrative unfold in the media, and then the trial balloons get floated. But you’re right, they have to go to helicopter money, they’re really not going to have a choice. And it seems to me that they are going to have to try to ban cash. Because, as you say, the U.S. savings rate has tripled since 2007, and that’s literally the last thing they want or need. So is there any way out for these guys? Because that’s the thesis that I keep checking. I can’t see a way out, absent cold fusion.

 

Kyle: Look, I had a fascinating out of body experience meeting with one of the world’s top central bankers in a private meeting about three years ago. And he said, “You know Kyle, quantitative easing only works when you’re the only country doing it.” He would never say that publicly. And I’ll protect his name, because it was a private meeting. But it was one of those moments where I…it was one of those epiphanies almost, where it’s something you and I knew, but hearing him say it, call it one of the four top central bankers in the world, it was a jarring experience for me, because when I look around the world  today, everyone’s in the same boat. So we’re all trying…we’re attempting through our treasury and our Fed to get the rest of the world to not devalue against us, while we quietly attempt to devalue ourselves against them, and it’s all this…it is the race to the bottom, it is the beggar thy neighbor policies that we all talk about. And I believe that there is no way out.

* * *

A 5 minutes excerpt of the full interview can be watched below:

 

The full hour-long interview is available to Zero Hedge readers with a free 7-day trial subscription to Real Vision TV at the following page.

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If you collapse these extractive, debt-dependent crony-capitalist cartels, you collapse the entire status quo.

Thousands of commentaries have been issued about Brexit in the past week. I've written four myself. Most discuss Brexit as the result of immigration issues, class war, political theater, a reaction against the European Union's bureaucratic power, sovereignty, etc. Other essays focus on the potential upsides or downsides of Brexit.

What few if any commentators present is the idea that Brexit is a symptom of the Crisis of Capitalism.

The current global version of Capitalism is characterized by these overlapping dynamics:

1. Replacing stagnant real growth and income (and thus taxes) with debt.

 

2. Replacing investment in real-world productivity with speculation (i.e. financialization)

 

3. Replacing “everyone must have skin in the game” free-market capitalism with protected, privileged Elites crony capitalism in which the few benefit at the expense of the many.

 

4. Replacing local, decentralized democracy and ownership with central planning.

 

5. Using “extend and pretend” financial trickery to mask insolvency, impaired assets/ collateral and non-performing loans rather than address the debt overhang directly via write-downs and liquidations of impaired assets.

If real (adjusted for inflation) growth and wages were increasing organically (i.e. as the result of free-market dynamics rather than central-planning manipulation) there would be no need for financialization, “extend and pretend” or central planning.

These ills are the status quo's "fixes" to the Crisis of Capitalism, which arises from these causes:

1. It is no longer profitable to hire people to do an expanding range of work, from minding the jumble store on high street to writing software code that has been automated.

 

There is no fix for this. As I explain in my book A Radically Beneficial World, the idea that we can "tax the robots" to generate the $2.4 trillion we'd need to make a Universal Guaranteed Income a reality in the U.S. is pure fantasy, as profits collapse as the cost of those commoditized tools decline.

 

Paying people to do nothing looks like a grand benefit but it is actually terribly destructive because people need purposeful work and a sense of contributing to something meaningful. Paying the majority of people to do nothing is a destructive and financially impossible fantasy.

 

2. Consumer demand is not infinite, and modern production can over-supply the demand of an aging populace. The supply-demand curve has shifted for demographic and structural reasons. The idea that consumer demand can be endlessly goosed higher is false. As demand stagnates and the tools of production are commoditized, production increases (because the money needed to expand production is essentially free) and profits and wages both decline.

 

 

3. What cannot be over-produced burdens the system with a higher cost structure. The core fantasy of neoliberalism is that everything can be made abundant once it is commoditized on a global scale. But this is simply not true of resources such as potash, lithium or ocean fisheries.

 

As scarcities arise from the fact that the planet we inhabit is not infinite, these scarcities tend to drive innovation and a search for substitutes. But substitutes have limits, too. As costs rise, there is less disposable income to pay interest on rising debt or consume more. Spending and consumption stagnate, along with profits and wages.

 

4. The status quo is dominated by cartels and crony-state-capital arrangements that raise systemwide costs to benefit the few at the expense of the many. Healthcare (specifically, Obamacare) is a prime example: costs are soaring because the pool of taxpayer money that can be devoted to healthcare is assumed to be limitless.

 

College costs $150,000 for four years not because education "must cost" $150,000; it costs $150,000 because students can borrow $150,000 from the federal-higher-education cartel. the actual cost is unknown because the cartel has been able to impose staggering price increases for decades.

 

(I make the case that a four-year college degree should cost no more than a few thousand dollars in my book The Nearly Free University and the Emerging Economy.)

 

5. If you collapse these extractive, debt-dependent crony-capitalist cartels, you collapse the entire status quo. All the finance, debt-dependent production and consumption, pensions, insurance and tax revenues that the majority depend on for their income implode once you take away the cartel's monopoly pricing.

Reforming the system implodes the system. This is why Brexit has limited scope to fix the structural causes of Crisis of Capitalism.

*  *  *
A Radically Beneficial World: Automation, Technology and Creating Jobs for All is now available as an Audible audio book.

My new book is #14 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition) For more, please visit the book's website.

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By nearly all accounts, Obamacare has been a spectacular failure. Whether it's the fact that half of the cooperatives created by Obamacare had to shut down costing taxpayers roughly $1.2 billion, or that insurance premiums are exploding higher, or perhaps just having to find a new healthcare plan since the largest US health insurer decided to divorce itself from the Obamacare exchanges, it all points to disaster.

When it comes to the latest Obamacare enrollment figures, the story remains the same. As The Hill reports, Obamacare enrollment dropped to about 11.1 million people at the end of March, down from the 12.7 million who signed up for coverage before the January 31 deadline.

The Centers for Medicare and Medicaid Services (CMS) said that a dropoff was expected, and has occurred in previous years as well, given that some people who sign up do not pay their premiums – we wonder why that is. The administration says it projects that about 10 million people will remain signed up by the end of the year. Said otherwise, they government is planning on another 1.1 million dropping out of Obamacare before the end of the year.

Kevin Counihan, the CEO of the Obamacare marketplaces, said the fact that about a million more people are signed up than at a similar point last year (11.1 million compared to 10.2 million) is a sign of success. We suspect Kevin is conveniently forgetting the fact that the CBO had projected that 2016 enrollment would be as high as 21 million people – but perhaps missing projections by nearly half is a sign of success in the government's eyes.

Here is how Counihan is spinning the results:

"This increased level of enrollment demonstrates the strength of the Marketplace over time, as millions of Americans continue to have access to quality and affordable coverage when they need it. As of early this year, 20 million Americans had coverage thanks to provisions of the Affordable Care Act, and the Health Insurance Marketplace is an important contributor to that progress."

* * *

Then again, despite the incredible miss in enrollment compared to projections, and ignoring the fact that the enrollment level dropped once again, perhaps Obamacare did actually achieve its ultimate goal. As we reported earlier this week, Obamacare accounted for 58% of US growth in Q1.

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After a wild few weeks…

 

VIX dropped almost 42% this week – its biggest decline in history – as nerves settled over Brits' decision to "leave" the EU.

 

A bigger "relief" than the end of the Gulf War, than the post-Bear Stearns fund liquidations bounce as Central Banks saved the world, and than the last minute decision to not shut down the US government on Dec 31st 2012, "Bre-lief" is indeed the great dumping of protection in history…

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

Quite a week.

Last week, the markets rallied in anticipation Britain would “Remain” in the European Union which reversed the sell-off from the previous week. Despite a variety of polls and betting sites showing rising odds of Britain remaining in the EU, the “inconceivable” occurred last Thursday proving everyone wrong.

But this week, the markets proved everyone “wrong” again. I suggested on Tuesday that Central Banks would come to the rescue once again, that happened yesterday as both the BOE and ECB made announcements hinting at more QE this summer. To wit:

• BOE: SOME MONETARY POLICY EASING LIKELY OVER SUMMER
• BOE: MPC WILL DISCUSS FURTHER POLICY INSTRUMENTS IN AUG
• ECB: TO WEIGH LOOSER QE RULES AS BREXIT DEPLETES ASSET POOL
• ECB: OPTIONS TO INCLUDE MOVING AWAY FROM QE CAPITAL KEY
• ECB: CONCERNED ABOUT SHRINKING POOL OF ELIGIBLE DEBT

For those predicting financial market chaos and mayhem, Central Banks has successfully juiced asset prices erasing the majority of the previous losses.

It is for that reason I stated previously:

“There are times in portfolio management where ‘doing nothing’ is better than ‘doing something.’ This is one of those times.”

Any action taken over the last two weeks has likely turned out to be wrong. The problem for investors remains that markets have made “no progress” over the last 13-months. While volatility has increased, returns on assets remain muted which continues to frustrates individuals.

Fundamentally and economically there is little cheer about and on a longer-term basis, as shown below, the markets remain in what appears to be a broadening market topping process.

The question remains whether Central Banks can continue to keep asset prices aloft while the economy and markets go through a recessionary cycle? Historically, that has never been the case. But then again, we have never had the level of Central Bank interventions currently being witnessed today.

Here is your reading list for the weekend.

“It’s the height of your responsibility to not allow the EU to disintegrate without utilizing all its resources. Throughout history governments have issued bonds in response to national emergencies, When should the AAA credit of the EU be put to use if not at the moment when the European Union is in mortal danger” – George Soros

---

BREXIT – BRELIEF

• Soros: Brexit Has Unleashed Next Crisis by Tyler Durden via Zero Hedge
• The Italian Job by Danielle DiMartino-Booth via Money Strong
• Frightening US Parallels To Brexit by Liz Peek via Fiscal Times
• Bravo, Brexit! by David Stockman via Contra Corner
• Uncertainty Is New Normal by Conor Sen via Bloomberg
• 7 Things To Make You Feel Better by Paul Lim via Time/Money
• Brexit, A Rejection Of Globalism by Larry Elliott via The Guardian
• Brexit Fallout Not A Lehman Moment by Ben Marlow via The Telegraph
• Brexit REALLY IS A Big Deal by Rana Foroohar via Time
• Brexit Impact & Road Ahead by Mike Amey via Pimco
• How Smart Money Got Brexit Vote Wrong by Daniel Gross via S+B Blog
• Reaction To Brexit Is Why It Happened by Matt Taibbi via Rolling Stone
• Brexit: Giant Hoax Or Calm Before The Storm by Ambrose Evans-Pritchard via The Telegraph
• Brelief Rally! More About Yields Than Britain by Randall Forsyth via Barron’s
• Euro Is Most Serious Threat To EU by Timothy Lee via EconLog
• The Real Lesson From Brexit by Luigi Zingales via ProMarket

---

OTHER THINGS I’M READING

• Oil Still Headed To $10/Barrel by A Gary Shilling via Bloomberg
• Risk Profiles Have Changed by Macro Man
• TINA is BS by Doug Kass via Real Clear Markets
• 10-Point Guide For A Confusing Period by Julia LaRoche via Yahoo
• Forgotten or Irrelevant Fundamentals by Jennifer Thomson via GaveKal
• More Important Stuff Than Brexit by Joe Calhoun via Alhambra Partners
• 10M Americans About To Lose Pensions by Howard Penney via Hedgeye
• Fed Is In Epic Battle With Itself by Conor Sen via Bloomberg
• Why Public Ignores Economists by Mark Thoma via Fiscal Times
• Calculate The Odds Of Portfolio Disaster by William Baldwin via Forbes
• Warning In Interest Rate Fallacy by Jeffrey Snider via Alhambra Partners
• Is The Market In A Bubble Again by Paul La Monica via CNN Money
• Why You Shouldn’t Chase Rally by Michael Kahn via Barron’s
• 5-Keys To Trading by Shawn Langlois via Marketwatch
• Bubble In Search Of A Pin by John Hussman via Hussman Funds
• Fed Wrong About Natural Rates by Joseph Salerno via Mises
• Price/Sales Ratio: Another Nail In The Coffin by Michael Lebowitz via RIA 
• The Hindenberg Moment by Dana Lyons via Tumblr
• Talking Macro Risks W/ Investors Podcasts by Jesse Felder via The Felder Report

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“There is nothing riskier than the widespread perception that there is no risk.”  – Howard Marks

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By EconMatters

Always avoid the last 45 minutes of the “Pit Close” in the Oil Market, unless you have reached the Master`s skill level as a Oil Trader, and even then you better be on your A-Game as a Trader. Institutional Traders often close out or initiate new positions on the last 5-minute bar of the “Pit Trading Session” which often results in large relative volume to overall market liquidity dynamics and leads to explosive spikes in Oil at the close (1:30 CST).

© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle   

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We hope this helps…

 

Quite a week!!!

• S&P +3.3% – best week since Oct 2014 Bullard Bounce
• "Most Shorted" stocks =10.1% in last 4 days – biggest squeeze since May 2009
• Financials +3% – best week in 3 months
• 30Y Treasury yield to record low – best week in 3 months
• Silver +11.25% – best week since Aug 2013
• Gold up 5 weeks in a row
• Oil +3.2% – best week in six weeks
• Copper +5.5% – best week in 3 months

Since Brexit, bonds and bullion remain best and stocks tried their best to scramble back to unch…

 

The Dow has been the best post-Brexit performer… gettuing with 9 Dow points of the pre-Brexit close…

 

S&P at 2,100 and Dow at 18,000 were as crucial as getting green to Brexit…

TS S&P/DOW

 

On a yuuge short squeeze…(biggest weekly rise in "Most Shorted" in 4 months)

 

BUT the last 4 days' 10.1% surge is the biggest since May 2009!

 

On no volume…

 

It's been quite a few weeks for VIX… its biggest drop in history this week

 

While financials had a great week, they are still down over 2% from Brexit…

 

And the curve just keeps running away from them…

 

Treasury yields have tumbled since Brexit, reaccelerating lower today…

 

To record lows for 10Y and 30Y…

 

As 2s30s curve crahses to its lowest since Jan 2008 – when the last recession was underway…

 

FX markets were choppy but volatility dropped as The USD Index slid 4 days in row…

 

Commodities all rose on the week but Crude remain slower post-Brexit as Silver explodes…

 

Crude rallied thgrough the NYMEX close for the 10th day of the last 11 and extended on…

 

Silver is up 14% in the last 6 days post-Brexit… pushing for $20… the biggest surge since August 2013…

 

Charts: Bloomberg

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Submitted by Patrick Buchanan via Buchanan.org,

In Tuesday’s indictment of free trade as virtual economic treason, The Donald has really set the cat down among the pigeons.

For, in denouncing NAFTA, the WTO, MFN for China and the Trans-Pacific Partnership, all backed by Bush I and II, Mitt Romney and Paul Ryan, Trump is all but calling his own party leaders dunderheads and losers.

And he seems to be winning the argument.

As he calls for the repudiation of “globalism” and a return to “Americanism,” a Republican Congress renders itself mute on whether it will even vote on the TPP this year.

On trade, Bernie Sanders is closer to Trump. Even Hillary Clinton has begun to renounce a TPP she once called the “gold standard” of trade deals.

Where have all the troubadours of free trade gone? Why do economic patriots seem ascendant? Is this like the Cold War, where the other side gets up and goes home?

Answer. As Trump pointed out in Monessen in the Mon Valley of Pennsylvania, the returns from free trade are in, and the results are rotten.

Since Bush I, we have run $12 trillion in trade deficits, $4 trillion with China. Once a Maoist dump, China has become the greatest manufacturing power on earth. Meanwhile, the U.S. has lost 50,000 factories and a third of its manufacturing jobs.

Trump is going to start a “trade war,” wail the critics.

But the damage wreaked upon U.S. industry by free traders already rivals what Arthur “Bomber” Harris did for German industry in the Ruhr.

In recent decades, every major U.S. trade partner — China, Japan, Canada, Mexico, EU — has run annual trade surpluses at our expense. How do 40 years of trade deficits in goods, run by a nation that rarely ran one for a century before, make us stronger or wealthier?

Or is what is best for the world now more important than what is best for America?

And here we come to the heart of the argument.

Washington, Hamilton, and Henry Clay, father of the “American System,” and Lincoln and every Republican president up to Eisenhower, crafted trade policies to promote manufacturing to grow the wealth of the USA.

They were patriots not globalists.

They knew that America’s political independence required economic independence of all other nations. They wanted to build an economy where Americans would cut their bonds to foreign lands and come to rely upon one another for the needs and necessities of their national life. They sought to make us independent, so that we could not be dragged by economic ties into the inevitable wars of the Old World.

And they succeeded magnificently.

Britain, which embraced free trade in the 1840s, became so reliant on imports that a few dozen German submarines almost knocked her out of World War I. Protectionist America had to come pull her chestnuts out of the fire.

Free trade ideology is not America-made. It is an alien faith, a cargo cult, smuggled in from the old continent, the work of men Edmund Burke called “sophisters, economists, and calculators.”

David Ricardo, James and John Stuart Mill, Richard Cobden, all chatterers and scribblers, none of whom ever built a great nation, declared free trade to be the new New Testament, the salvation of mankind.

These men in whose souls the old faith was dying seized on a utopian belief that world government and free trade would be the salvation of mankind. The Economist magazine was founded to preach the heresy.

Before the modern era, Americans never bought into it. But now, our elites have. And, undeniably, there are beneficiaries to free trade.

There are first the owners, operators and shareholders of companies who, to be rid of high-wage American labor, moved production to China or Mexico or where the costs are lower and regulations near nonexistent.

Transnational companies, their K Street lobbyists, and media that survive on their advertising dollars, are the biggest boosters of free trade, as they are the biggest beneficiaries.

Consumers, too, at least initially, see more products down at the mall, selling at lower prices. Cheap consumer goods are the bribes free traders proffer to patriots to sell out their country and countrymen to capitalists who have no country.

But we are not simply consumers. We are Americans. We are fellow citizens. We are neighbors. We have duties to one another.

When a factory shuts down and a town begins to die, workers are laid off. The local tax base shrinks, education and social services are cut. Folks go on unemployment and food stamps. We all pay for that.

Wives go to work and kids come home from school to empty houses, and families break up, and move away. Social disintegration follows.

“Creative destruction” is the antiseptic term free traders use to describe what they have done and are doing to the America we grew up in.

Southeast of the old Steel City, in the Mon Valley of Pennsylvania, where my mother and her six brothers and her sister grew up, folks describe what happened more poignantly and graphically.

via http://ift.tt/29yTaMb Tyler Durden

Following Tuesday’s horrific attack at Istanbul’s Ataturk airport which resulted in 44 death at the hands of 3 suicide bombers, Turkey was quick to blame the Islamic State for the terrorist act. And while that may be accurate, something surprising has emerged about the alleged ringleader of the group of three men who have been since identified as Russian, Uzbek and Kyrgyz nationals. As Russia’s Kommersant and Turkish media report, a Chechen national suspected of being the mastermind behind the deadly Istanbul airport terrorist attack, had previously received refugee status in Austria, which helped him to repeatedly avoid extradition to Russia on terror charges.

Ahmed Chataev

As the complete picture of the latest terrorist attack in Turkey comes together, it has emerged that the attack was allegedly organized by Ahmed Chataev, a Russian citizen of Chechen origin, who joined the Islamic State in 2015 and now fights in Syria, Turkish media report, citing police sources.

Chataev was assigned a leading role in training extremists that would then commit terrorist attacks in both Russia and Western Europe, the Deputy Chairman of the Russian Investigative Committee Andrey Przhezdomsky said, adding that, in Syria, Chataev also commands a unit consisting “primarily of immigrants from the North Caucasus.”

It has been also revealed that Chataev was long wanted by the Russian authorities for terrorism-related offenses but he fled to Europe, where he was granted asylum, and successfully managed to escape extradition to Russia. The alleged mastermind joined Islamist secessionist militants that fought against Russia in the Second Chechen War between 1999 and 2000, where he lost an arm. Later, he was considered to be a representative of Dokka Umarov, once a “terrorist ?1” in Russia, in the Western Europe.

The attack coordinator was on a wanted list in Russia since 2003 for sponsoring terrorism, recruiting extremists and membership in a terrorist group, Russian media report. However, in the same year, he received asylum in Austria. Chataev reportedly claimed that he lost his arm as he was severely tortured in Russian prison adding that he is being persecuted by Russian authorities.

He lost his arm in Russia in the early 2000s, though there are conflicting reports
as to how he lost the limb

In 2008, he was detained with some other Chechen nationals in the Swedish town of Trelleborg as police found Kalashnikov assault rifles, explosives and ammunition in his car. As a result, he spent more than a year in Swedish prison.

In 2010, Chataev was arrested in Ukraine with his mobile phone files containing a demolition technique instruction and photos of people killed in a blast. Russia requested his extradition on terrorism-related charges but the European Court for Human Rights ordered Ukraine not to hand him over to Russia with Amnesty International also urging Ukrainian authorities to halt extradition as Chataev “could face an unfair trial and would be at risk of torture and other ill-treatment.”

Below is the actual statement filed by Amnesty International titled “Ukraine: Chechen risks torture if returned to Russia“

Ahmed Chataev, an ethnic Chechen man, is threatened with imminent forcible return from Ukraine to Russia. If he is returned, he could face an unfair trial and would be at risk of torture and other ill-treatment in order to extract “confessions” from him. Ahmed Chataev has been granted refugee status in Austria and was visiting Ukraine with a valid visa. Ukraine is a state party to the Refugee Convention and the UN Convention against Torture, which prohibit the return of anyone to a situation where they would be at risk of torture.

 

One year later, he was again detained as he was crossing the border between Turkey and Bulgaria but he again avoided extradition because of the interference of human rights organizations that stressed Chataev had a refugee status in Austria and thus cannot be sent to Russia, Kommersant reported. Between 2012 and 2015, Chataev reportedly lived in Georgia, where he also joined some terrorist groups and served a prison sentence on terrorism-related charges.

In February 2015, he left Georgia for Syria, where he joined IS militants and soon took a high position in the Islamic State hierarchy.

Finally, in October 2015, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury added Chataev to its terrorist list because of his alleged involvement into recruitment of extremists.

 

And just like that, in the span of 5 years, a person whose extradition to Russia was prevented by Europe and Amnesty ended up a formally recognized terrorist by the US, and ultimately his actions resulted in the death of 44 people. If only there was less political bickering between Russia and Europe, more than 40 innocent lives could have been spared.

Finally, in light of these revelations, one wonders precisely what is the function of the ubiquitous NSA in today’s world?

via http://ift.tt/29yPoT0 Tyler Durden

Submitted by David Stockman via Contra Corner blog,

That was quick. With practically of the Brexit loss recovered in four days and the market now up for the quarter and the year, what’s not to like?

After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted,

Markets were boosted by reports indicating the European Central Bank is weighing changes to its bond-buying program, while “the Bank of England also said they are all in,” said Joe Saluzzi, co-head of equity trading at Themis Trading.

The European Central Bank is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from Bank of England Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat

Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will “run out of securities to buy”.

Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s “buy” button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be more than enough to go around.

It turns out, however, that the operative phrase is “under current stipulations”. In a fit of apparent prudence, the ECB determined that in buying $90 billion of government bonds and other securities per month, it would only purchase securities with a yield higher than its negative 0.4% deposit rate.

That’s right. Stumbling around in their monetary puzzle palace, the geniuses at the ECB determined that subzero rates are just fine with one condition. Namely, so long as they don’t have to pay more to own German bonds, for example, than German banks are paying to deposit excess funds at the ECB.

Stated differently, the ECB apparently determined it will not go broke in subzero land even if it is driving insurance companies, pension funds, banks and plain old savers in exactly that direction.

But then comes the catch-22. The more bonds Draghi promises to buy, the more the casino front-runners scarf-up those same bonds on 95% repo leverage—-knowing that Mario will gift them with a big fat gain on their tiny sliver of capital at risk.

That drives bond prices ever higher and yields lower, of course. At length, the stampede to buy today what Mario is buying tomorrow has driven yields below the negative 0.4% cutoff point for an increasing share of the German yield curve.

The Brexit event only compounded the absurdity. As shown below, it caused another $1.3 trillion of worldwide sovereign bonds to enter the subzero zone. This brought the global total to $11.7 trillion or 26% of all government debt outstanding on the planet, including more than $1 trillion each of German and French government debt and nearly $8 trillion of Japanese government debt.

Especially notable in the above chart is the swelling amount of longer-term debt now trading at negative yields. This means that the ECB’s insensible “scarcity” problem just got worse.

In part, that’s because the ECB’s money printing rules require its bond purchases to be allocated on roughly a pro rata basis among its member countries.

So the punters who piled into bunds in response to the Brexit event, drove even more of the German yield curve below the ECB’s negative 0.4% cut-off points. There is now a “no buy zone” out to 8-years on the German government yield curve.

Nor is that the extent of the subzero lunacy. As also indicated in the chart, the Swiss yield curve is negative all the way out to 48 years, where the bond actually traded at -0.0082%, and the JGB 40-year bond yields a scant 6 basis points.

Yes, by 2056 Japan’s retirement colony will be bigger than its labor force, and its fiscal and monetary system will have crashed long before. But no matter. Before it self-destructs, the BOJ will buy all the Japanese government debt, anyway. It already owns 426 trillion yen worth—an amount that equals fully 85% of GDP.

When it comes to government debt, therefore, it can be well and truly said that “price discovery” is dead and gone. Japan is only the leading edge, but the trend is absolutely clear. The price of  sovereign debt is where central banks peg it, not where real money savers and investors will buy it.

Needless to say, this is something new under the sun, and not in a good way. While the casino’s day traders may not have noticed that NIRP has not always been with us, this graph shows how rapidly the contagion is spreading. In less than 2-years, one-quarter of the world’s sovereign debt has slid into the nether region of NIRP.

Paying governments to borrow money makes carrying coals to Newcastle sound like a vast understatement. But in today’s unhinged casinos the gamblers care not a wit.

The culture of stimulus entitlement has become so embedded that the age-old truth that governments are inherently dangerous fiscal miscreants has been completely lost. The only thing the “market” looks at is how soon the next dollop of stimulus will be coming down the pike.

But the destruction of price discovery in the sovereign debt market is not simply an academic curiosity to be jawed about by the few remaining fiscal scolds in the world. To the contrary, it is already having massive toxic consequences in the arenas of fiscal governance and capital markets alike.

As to the former, consider the case of France and its $1 trillion of negatively yielding government debt. That amounts to nearly one-half of its relentlessly rising total, which has grown by nearly 50% just in the last nine years, and now amounts to 85% of GDP.

The fact is, France is a socialist basket case in which the state is steadily and surely devouring the entire private economy. The state share is now pushing 57% of GDP, and it has not stopped climbing toward the upper right of the graph for nearly four decades.

Yet France is now being paid to spend and borrow even more, thereby begging a self-evident question. What happens when France’s tax and dirigisme impaired economy sinks into permanent decline (its almost there now) and the ECB is finally forced to shut down its printing press?

Nor is the eventual collapse of France $2.4 trillion sovereign bond bubble necessarily a matter for the distant by-and-by.

The populist candidacy of Marine Le Pen was already well in the lead for France’s 2017 presidential election. Brexit has now given dramatic new impetus and credibility to her anti-EU platform.

Even the possibility of a Frexit win next year would trigger a relentless wave of selling by the Draghi front-runners who were today buying the 10-year bond of this terminal-ill state at a mere 7 basis point yield.

Stated differently, in theory the clueless Draghi is pegging French bond rates in the subzero zone in order to jump start inflation. In practice, he is setting up a monumental FED (financial explosive device) that could erupt at any moment owing to Frexit risk, European recession, a German revolt at the ECB or numerous other potential catalysts.

The hair-trigger risk embedded in the financial insanity of sovereign ZIRP was neatly illustrated by Wolf Richter in a recent post on this topic. What he pointed out in the case of the German bund is applicable to the entire $11.7 trillion of subzero debt outstanding.

To wit, the front-runners and bond market speculators are sitting on giant capital gains that were caused by the systematic falsification of bond prices by the central banks. You don’t have to be a bond quant to understand that any serious break in confidence will cause these punters to grab their gains and dump there bonds:

What does this mean for investors that bought bonds with long maturities years ago? For example the German 4.75% Bund, issued in 2008 and due in July 2040 trades at 202.3 cents on the euro, having doubled its value over the past eight years. The sellers of those bonds are the true beneficiaries of Draghi’s monetary policies, and they can sell them right to the ECB.

This observation puts the lie to a related Wall Street delusion. The crowd which insists there is no bond bubble—– notwithstanding that fully $25 trillion of government debt is yielding 1% or less—–says its just Mr. Market discounting a weak, deflationary economy in the period ahead.

No it’s not. It’s the law of supply and demand at work.

Between the $21 trillion of debt already owned by the central banks, and the trillions more held by front-running speculators who expect them to buy more, there is a big fat thumb on the scale; and, as a consequence, there are hideously large and unearned windfalls being captured by these same speculators.

Ironically enough, when the bond bubble eventually blows, ground zero for the meltdown is likely to be among Italy’s $2.4 trillion of outstandings—–some part of which was issued during Mario Draghi’s days at the Italian treasury.

The notion that today’s yield of 1.15% on the Italian 10-year bond even remotely compensates for the risk embedded in Italy’s fiscal and economic chamber of horrors is just plain laughable. And that’s to say nothing of the risk the Brexit is just stage one, and that the EU itself will ultimately succumb to a wave of populist insurgency, including a Five Star led move to take Italy out of the euro.

Indeed, Italy is truly a case of the blind leading the blind. Its giant, bloated banking system is essentially insolvent with nearly $400 billion in NPLs (non-performing loans), but Italy’s languishing economy would be toast if it’s banks are not propped up by the state or an EU bailout.

That’s because the footings of Italy’s banking system exceed $4.4 trillion or more than 2X the size of its GDP. On a comparable scale basis, current US aggregate banking balance sheets of $15 trillion would be upwards of $40 trillion. That is to say, Italy’s massive banking sector suffuses every nook and cranny of its $2 trillion economy.

As shown below, footings have nearly tripled during the past 16 years, even as Italy’s economy remains smaller in real terms than it was in 2007.

And that’s not the half of it. In addition to the massive trove of bad loans to the private sector, embedded in the total footings shown below are nearly $400 billion of Italian government bonds.

Needless to say, these securities are vastly over-valued owing to the Draghi bond-buying spree, and they would plummet in price were the speculators who have been front-running Draghi’s QE campaign ever to loose confidence in the ECB or the ability and willingness of an Italian government to continue the giant fiscal charade now in place.

As it happens, that existential challenge is materializing right now. Italy’s major banks are bleeding losses, and have been subject to a massive sell-off in the stock market. Share prices are down 50% to 75% since the beginning of the year alone.

So the Renzi government has been desperately attempting to organize a bailout, but has run smack into the kind of catch-22 that’s buried everywhere in the jerry-built EU bailout regime. To wit, under the new EU banking rules which became effective in 2016, Italy cannot inject government funds into its banking system until it has first forced a trauma-inducing “bail-in” at any bank getting aid.

That not only would mean massive losses for depositors and bank debt-holders, but also the instant collapse of the Renzi government. Italy’s third largest and most insolvent bank, in fact, is virtually an auxiliary of his social democratic party.

Accordingly, Renzi attempted to get a waiver of the new rules on the grounds that the Italian banking crisis has been dramatically intensified by the Brexit shock. But Merkel shot that down at yesterday’s EU leaders meeting faster than it could be translated into German for a powerfully self-evident reason. Namely, that the new bail-in rules are designed to prevent new fiscal crisis in member states and the need for more German funded bailouts.

Now Italy faces the real possibility of a depositor run on its banks, and a  devastating liquidity crisis in its $4.4 trillion banking sector. Accordingly, it has apparently been authorized by the EU to establish a back-up liquidity line of up to $150 billion, but under EU rules it can only be used for solvent banks——of which Italy doesn’t have many.

Needless to say, that won’t solve the problem, but could force the kind of showdown with Brussels and Berlin that is the very reason why the EU’s days are numbered. As Zero Hedge observed,

Brexit will be just the scapegoat used by Renzi and Italy to circumvent any specific eurozone prohibitions. And if it fails, all Renzi has to do is hint at a referendum of his own. Then watch as Merkel scrambles to allow Italy to do whatever it wants, just to avoid the humiliation of a potential “Italeave.”

In short, either the EU opens up the floodgates to a renewed round of bailouts, which would likely result in the collapse of Merkel’s government, or it authorizes Italy to spend upwards of $50 billion to recapitalize its banks and keep the $400 billion of government debt they hold safely in their vaults.

Then again, with public debt already at 133% of GDP, why would anyone except Mario Draghi’s printing press be buying 10-year bonds at a 1.15% yield?

Once upon a time, price discovery by the bond vigilantes kept governments quasi-sober and functionally solvent. No more.

The Italian Job now underway is just the opening round in a world of failed states and broken markets.

Needless to say, the vast falsification of sovereign debt prices has not happened in a vacuum. It has caused a massive scramble for yield among bond managers and homegamers alike, which, in turn, has distorted and deformed the corporate debt markets like never before.

The $400 billion or high yield bonds and loans now being gutted and liquidated in the shale patch are but one example. The record level of money flows into newly minted subprime auto lenders and CLO funds are another.

In the US alone, corporate bonds outstanding have risen from $3 trillion on the eve of the financial crisis to upwards of $7 trillion today. Overwhelmingly, that massive gain in outstandings have been cycled back into the casino to fund financial engineering schemes, most especially share buybacks.

In a word, without honest price discovery the debt markets of the world have been transformed into a massive doomsday machine. They are paying governments to bankrupt themselves in the subzero zone, while incentivizing the C-suite to strip-mine their balance sheets in order to goose their stock prices today, even as they fatally impair their capacity to compete and grow in the future.

As we said – price discovery, R.I. P.

 

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