When A Hedge Fund Tells A Restaurant Company How To Cook

Thanks to the Fed’s 6 years of ZIRP, activism, i.e., loud, brash billionaires who come in and tell a company’s management they need to use cheap debt to repurchase stock, engage in reckless M&A or spin off profitable units or they will become even louder and brasher has become one of the only profitable hedge fund strategies. Of course, this will cease the moments rates show even the smallest hint of rising but until then it is paradise for all activist hedge funds. In fact, the scramble for activist strategies is so big that WSJ reported earlier today that “funds under management by these activists and others grew by $9.4 billion in the first half of the year to $111 billion, gaining more in that period than in the previous two years combined, according to industry researcher HFR. Mr. Loeb and some other activists have described the current environment as the best they have seen for raising cash.” Thanks Fed.

But how do you know when hedge fund activism has gone too far? Well, a good example is the 300-slide presentation (because more slides is always better than less when pitching quantity over quality) which Starboard Fund filed yesterday as “advice” to the management of Darden Restaurants, owner of Oliver Garden, on how to boost shareholder value and also steps the hedge fund would take to generate returns if it wins control of the entire board. Because while in addition to comping up with fleeting and imaginary valuations based on EBITDA projections and multiples, this is the first time that a hedge fund actually tells a restaurant company how to, drumroll, cook.

As the WSJ reported earlier, among the moves Starboard detailed in its never-ending presentation, in addition to using salt when cooking pasta, and going easy on the breadsticks, Starboard also had suggestions how to improve “food quality and alcohol sales, introduce technology to reduce waiting times at restaurants and cut millions in costs. And Starboard is sticking with its suggestion, which Darden has rejected as value-destroying, of separating the company’s brands apart and putting its real estate into a third public company.”

Needless to say Darden wasn’t very impressed with this overture, and said it would review Starboard’s plan, but added after its initial review it believed many of the changes were already being made under management’s ongoing turnaround, which it says is working. “We remain open minded toward all ideas that support long-term value creation for our shareholders and improve the dining experience for our guests,” Gene Lee, the company’s chief operating officer, said in a statement.

So does cheap credit mean hedge funds know how to cook? Take a look at the following hilarious slide and decide:

Menu innovation is a top priority and is among our nominees’ biggest strengths


The entire experience of food, service, and environment must be authentic and provide a joyful and genuine Italian dining experience.

  • The food will be fresh whenever possible, with simple choices.
  • Menu items will be designed to help facilitate operational excellence and consistency by the restaurant staff.
  • We will embrace authenticity, especially as it pertains to the absence of preservatives, stabilizers, gums, additives, artificial colorings, and flavorings.
  • We will no longer disregard sound nutrition. Nutrition will not be the driving force, but it will now be carefully considered while greatly improving the taste and appeal of every dish.
  • Some parts of the menu can be flavor-forward with fresh ingredients: extra virgin olive oil. lemons, ripe tomatoes, an array of colorful vegetables, lean meats, and fresh fish.
  • Portion sizes may be gradually reduced, as guests will begin to equate Olive Garden’s value proposition more with quality and excellence at fair prices, than with massive quantities of barely edible fried items, excessive cheeses, and heavy cream sauces.
  • Olive Garden’s breadsticks are part of the brand equity, as they come to every table. The breadsticks need to be of the highest quality, with a better taste and a frimer texture, and each table must receive hot breadsticks.
  • The pasta at Olive Garden must be significantly improved. It must be prepared at the proper water temperature, boiled in salted water, precisely timed to not overcook, and tossed with sauces for each dish instead of the current practice of ladling sauce on top of heaps of coagulated pasta.
  • We must rethink the amount of items from the flyer. Most fried foods are not authentically Italian and it slows service.
  • We will explore a few gluten-free options, as many consumers prefer gluten-free dishes (1) Based on extensive research and discussions with culinary experts and suppliers, we believe we can accomplish these goals at Olive Garden’s current price points without hurting margins

Based on extensive research and discussions with culinary experts and suppliers, we believe we can  accomplish these goals at Olive Garden’s current price points without hurting margins


Source: Czar gluten free data.

(1) “Gluten” and “Gluten free” are now among the top searches related to Oliver Garden, per Czar Metrics

Bottom line: thanks Ben and Janet’s ruinous monetary policies we present unintended consequences number X+1: hedge funds, armed with cheap debt, tell a restaurant company how to cook. The New Normal truly never ceases to amaz…

Full presentation below:


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UK Suffers Biggest Capital Outflow Since Lehman As Scottish Vote Nears

Investors pulled $27 billion out of UK financial assets last month – the biggest capital outflow since the Lehman crisis in 2008 – as concern mounted about the economic and financial consequences if Scotland left the UK, according to Reuters. Furthermore, Morgan Stanley said daily equity flow data pointed to "some of the largest UK equity selling on record."


As Reuters notes,

Data compiled by London-based consultancy CrossBorder Capital said financial outflows from the UK totaled $27 billion in August, compared with inflows of $8.9 billion the same month last year.


That's the biggest monthly outflow since the white heat of the financial crisis in 2008, when giant U.S. bank Lehman Brothers went bust. It exceeded the selling of UK assets seen around the 2010 general election, when an inconclusive result led to several days of uncertainty.


"Sterling outflows have been an issue since the end of June, but they really gathered pace in August and now look like intensifying again with the possibility of Scottish independence coming to the front of investors' minds,", said Michael Howell, the managing director of CrossBorder Capital, which compiles the index.


The UK outflow was more than double the combined outflow from Germany and Australia. France, the United States, Canada and Japan all attracted net inflows.


Also on Friday, Morgan Stanley said daily equity flow data pointed to "some of the largest UK equity selling on record, demonstrating investor concerns ahead of the Scottish referendum next week."


Concern over the financial, economic and political effects if the UK breaks up has also weighed on sterling, triggering a surge in exchange rate volatility to its highest since the 2010 general election. In addition, selling pressure has mounted as speculation grew that the Bank of England would soon raise interest rates.



"The sterling index has effectively collapsed and the UK is second only to Japan in terms of financial market outflows," Howell said.


So far this year, there has been a net $206 billion outflow from the UK. Last year, there was a net annual inflow of $63 billion, Howell said.

While some respite in GBP-selling has occurred in thge last few days as boisy polls show a slight bias to a "no" vote, as we warned previously – With a “no” vote, the UK would still face rising political uncertainties.

The UK political landscape is in a state of extreme flux, with the enduring Scottish independence movement, the rise of UKIP as a political force and resultant change in UK party political dynamics, the moderate-to-high probability of a change of government in the 2015 elections and uncertainties over post-election fiscal policy, plus the non-negligible risk of a referendum on UK exit from the EU in 2017-18 or so. Even if the “no” camp prevails in September, we do not foresee a return to the pre-referendum political status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum, and we suspect these UK political risks are underpriced in markets.

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Washington’s Iraq-Syria Policy: Throwing the Ball to a Midget Surrounded by an Entire Team of 7-Foot Basketball Players

Lebanon’s Daily Star reports that so-called “moderate” Syrian rebels support ISIS terrorists:

We are collaborating with the Islamic State and the Nusra Front [another extremist and hard-line Islamic terrorist group] by attacking the Syrian Army’s gatherings in … Qalamoun,” said Bassel Idriss, the commander of an FSA-aligned rebel brigade.




A very large number of FSA members [in Arsal] have joined ISIS and Nusra,” Abu Fidaa [a retired Colonel in the Syrian army who is now the head of the Revolutionary Council in Qalamoun] said

The New York Times writes:

President Obama’s determination to train Syrian rebels to serve as ground troops against the Islamic State in Iraq and Syria leaves the United States dependent on a diverse group riven by infighting, with no shared leadership and with hard-line Islamists as its most effective fighters.


After more than three years of civil war, there are hundreds of militias fighting President Bashar al-Assad — and one another. Among them, even the more secular forces have turned to Islamists for support and weapons over the years, and the remaining moderate rebels often fight alongside extremists like the Nusra Front, Al Qaeda’s affiliate in Syria.




Analysts who track the rebel movement say that the concept of the Free Syrian Army as a unified force with an effective command structure is a myth.




The Syrian rebels are a scattered archipelago of mostly local forces with ideologies that range from nationalist to jihadist. Their rank-and-file fighters are largely from the rural underclass, with few having clear political visions beyond a general interest in greater rights or the dream of an Islamic state.




Some European allies remain skeptical about the efficacy of arming the Syrian rebels. Germany, for instance, has been arming and training Kurdish pesh merga forces in Iraq, but has resisted doing the same for any groups in Syria — partly out of fear that the weapons could end up in the hands of ISIS or other radical groups.


We can’t really control the final destination of these arms,” said Peter Wittig, the German ambassador to the United States.




The fluidity of battlefield alliances in Syria means that even mainline rebels often end up fighting alongside the Nusra Front, whose suicide bombers are relied on by other groups to soften up government targets.


Even the groups that the U.S. has trained tend to show up in the same trenches as the Nusra Front eventually, because they need them and they are fighting the same battles,” Mr. Lund said.


Current and former American officials acknowledge the government’s lack of deep knowledge about the rebels. “We need to do everything we can to figure out who the non-ISIS opposition is,” said Ryan C. Crocker, a former United States ambassador to Iraq and Syria. “Frankly, we don’t have a clue.”

This is – of course – another example of the “facts being fixed around the policy”,  just as in Iraq. In Iraq, we wanted regime change, so we made up the “weapons of mass destruction” and “Saddam backed Al Qaeda” myths.

Similarly, Washington wants regime change in Syria, so it’s making up a myth of the “moderate Syrian rebel” who hates Assad and ISIS.   But they “don’t have a clue” as to such a mythical unicorn actually exists (spoiler alert: it doesn’t).

The New York Times reported over a year ago that virtually all of the rebel fighters in Syria are hardline Islamic terrorists.  Things have gotten much worse since then … as the few remaining moderates have been lured away by ISIS’ arms, cash and influence.

Saudi Arabia – one of the main sources of Islamic terrorism, and one of ISIS’ main backers – is also going to train “moderate” Syrian rebels.

Of course, arming the “moderate” Syrian rebels is what created ISIS – and was the source of their weapons – in the first place.  And our prior policy of arming “moderate Syrian rebels is what allowed ISIS to take over much of Iraq.

The U.S. and our closest allies in the region – like Jordan – have also been training Islamic jihadists in Syria for years. And see this, this, this and this.  (And – underneath the partisan hackery – arming the Syrian rebels is what Benghazi was really about.)

Brilliant …

Michael Shank – Adjunct Faculty and Board Member at George Mason University’s School for Conflict Analysis and Resolution, and director of foreign policy at the Friends Committee on National Legislation – warned a year ago:

The Senate and House Intelligence committees’ about-face decision last week to arm the rebels in Syria is dangerous and disconcerting. The weapons will assuredly end up in the wrong hands and will only escalate the slaughter in Syria. Regardless of the vetting procedures in place, the sheer factionalized nature of the opposition guarantees that the arms will end up in some unsavory hands. The same militant fighters who have committed gross atrocities are among the best-positioned of the rebel groups to seize the weapons that the United States sends to Syria.



Arming one side of Syria’s multi-sided and bloody civil war will come back to haunt us. Past decisions by the U.S. to arm

insurgencies in Libya, Angola, Central America and Afghanistan helped sustain brutal conflicts in those regions for decades. In the case of Afghanistan, arming the mujahideen in the 1980s created the instability that emboldened extreme militant groups and gave rise to the Taliban, which ultimately created an environment for al Qaeda to thrive.




Arming the enemies of our enemies hasn’t made the U.S. more friends; it has made the U.S. more enemies.




Some armed opposition factions, including powerful Islamist coalitions, reject negotiation altogether. Yet these are the same groups that will likely seize control of U.S.-supplied weapons, just as they’ve already seized control of the bulk of the rebels’ weaponry.




When you lift the curtain on the armed groups with the most formidable military presence on the ground in Syria, you find the Al Nusra Front and Al Farough Brigades. Both groups are closely aligned with Al Qaeda and have directly perpetrated barbaric atrocities. The Al Nusra Front has been charged with beheadings of civilians, while a commander from the Al Farough Brigades reportedly ate the heart of a pro-Assad soldier.

Shank’s warning was ignored, and his worst fears came to pass.  And since the Obama administration is doubling-down on the same moronic policy, it will happen again …

Obama’s policy is like throwing weapons into a crowd of enemies … and hoping some good comes out of it.

It’s like throwing the ball to a midget surrounded by an entire team of 7-foot basketball players.

Who do you think will end up with the ball?

via Zero Hedge http://ift.tt/YE28Bs George Washington

S&P Slips To 4-Week Lows, Russell Red For 2014 As Rate Hike Fears Trigger Selling

With BofAML, Goldman, and now JPMorgan all bringing forward their 'liftoff' expectations for rates, US equity and bond markets are starting to quake a little. The Russell 2000 is now back in the red for 2014 and all but Trannies are red for September. The S&P is back to Aug 20 levels as 10Y yields push 15bps higher on the week to 2-month highs over 2.60%.


S&P loses 2,000 and slides to 4-week lows…


Pushing all but Trannies red for September…


and Russell red for 2014


But bonds and stocks have a long way to go to converge…


Charts: Bloomberg

*  *  *

We already showed BofAML's warnings; here is JPMorgan's

Regarding our own Fed outlook, we now look for a first hike at the June meeting next year, which is both earlier, and more precise, than our prior call of Q3. As the timing of the first hike draws closer, it becomes appropriate to convey our outlook by meeting, rather than by quarter. The Fed has shown a propensity to make important decisions at meetings that are followed by press conferences. In next year's calendar such a meeting in Q3 does not occur until late September, which could be too late given the ongoing improvement in the labor market. (Of course, they could, and maybe should, switch to having press conferences at every meeting). Another factor motivating an earlier first move is the apparent revision to the exit principles. The old principles had halting reinvestments and large-scale reserve draining occurring prior to the first rate hike, both of which would have been "baby tightening steps." With those steps no longer likely to occur before the first rate hike, the timing of that hike should be pulled forward. Finally, Fed rhetoric has turned marginally more hawkish in recent months.


We see the first hike in June as a 25 basis point increase in the target funds rate corridor, to 25-50 basis points. We see subsequent moves in September and December bringing the corridor to 75-100 basis points by year-end. (Given the FOMC's convention of rounding the funds rate target up to the nearest quarter point, this would put our "shadow FOMC dot" at 100bp). Now that the public seems to be making its peace with the fact that rate hikes are coming, the question has increasingly become the pace of those hikes. We think the Fed can afford to stick with its plan the normalize rates gradually, at least initially. The first few hikes will involve some delicate issues for the plumbing of the interaction of the Fed balance sheet with the banking system, which should warrant caution. Moreover our economic forecast does not have enough inflation pressures next year to force them into a more aggressive tightening pace in 2015. We see a somewhat more aggressive pace in 2016, with the funds rate reaching 2.5% by year-end.

via Zero Hedge http://ift.tt/1sC6qEx Tyler Durden

The Game Of Thrones & The Game Of Markets

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

A few brief thoughts on an Epsilon Theory connection between modern capital markets and the NFL (and between Central Bankers and Roger Goodell). The connection is solipsism – a pathological egocentrism where reality is defined by an individual’s mental perceptions and constructs.

For individuals like Goodell and Yellen we’re talking about good old-fashioned individual solipsism. These are people who have never been proven wrong about anything in their professional lives. I know that sounds weird to professional investors and allocators, because we are demonstrably wrong about something every single freaking day, and it’s a hard concept to describe effectively to someone who’s never lived within a sheltered organization where empirical outcomes are either pre-ordained or immaterial. But both Goodell and Yellen have spent their entire professional careers as the modern equivalents of cloistered monks or nuns, the former within the Holy Order of the National Football League and the latter within the High Church of UC Berkeley.

It’s wonderfully pleasant to live within these worlds without external consequence, where your mental constructs and pronouncements receive constant positive reinforcement, but the inevitable result is that you begin to believe that your mental constructs ARE reality. Roger Goodell truly believes that everything he has done and announced, most recently his appointment of an “independent” investigator, is obviously the right and correct course of action, and he has no idea why these actions and announcements are being questioned. He has no idea why his world is crumbling. Similarly, Janet Yellen is not being disingenuous when she talks about her ability to control “macroprudential” outcomes. In her mind (and in the minds of everyone else in today’s academic Fed), these theories ARE reality. Drain the $5 trillion in banking system reserves without market consequence? Sure, we’ve got a theory for that. No problem. As Yul Brynner would have put it in Cecil B. DeMille’s “The Ten Commandments”: So let it be written. So let it be done.  

For social constructions like markets or professional sports leagues or any self-contained social world, we’re talking about a different version of solipsism – collective solipsism. I’ve written about this idea in the Epsilon Theory note “A Dogmatic Slumber”, so I won’t repeat all that here. Collective solipsism is what overwhelming Common Knowledge looks like. It’s the annihilation of an individual’s perception of reality in favor of a group perception of reality. It’s an entirely natural reaction of the human social animal to certain strategic interactions, i.e., games. It’s what I mean when I say that we are at an asymptotic peak in the social influence of the Narrative of Central Bank Omnipotence

When does collective solipsism fail? When does the story break? When it comes into conflict with a larger external social structure, with a larger strategic interaction. The collective solipsism of the NFL crumbles when it runs headlong into the larger political and social structure of the United States, which – amazingly enough – has 300+ million citizens who don’t play Fantasy Football, who have no idea who Ray Rice is, who listen to owners Bob Kraft or John Mara and think they’re from Mars, and who don’t hang on every word of THE Commissioner. But they’ve all seen or heard about the video. They all care about the larger issue of domestic violence. They all think they’re being lied to. And there are powerful political and economic interests in the larger game who see this conflict as working to their advantage. That’s when the story breaks.

The collective solipsism of modern markets is a much bigger game still, and will require a much larger shock and external social structure to unwind the Common Knowledge structure at the heart of all this. I can’t tell you when any of this will happen, but there are only a few social structures large enough to fit the bill. There is no more important task for risk management than monitoring those structures, and that’s what I’m trying to do with Epsilon Theory.

*  *  *

An invitation to attend a Salient Webinar I’ll be presenting next Thursday, September 18th at 2pm ET, titled: “The Game of Thrones and the Game of Markets”. I’ll be tying together various threads from past Epsilon Theory notes, with the goal of showing how to listen to financial news and analysts to detect Narratives. Please note that the presentation is geared for financial advisors, brokers, and investment professionals, and it qualifies for one hour of CFP/CIMA®, CIMC®, or CPWA® CE credit if you care about such things. Invitation attached and registration link here.

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Harsh Austerity Sends Italian, Spanish Debt To Record Highs

Damn you debt-reducing austerity-that-is-blamed-for-everything-that-is-wrong-with-Europe’s-triple-dip-recessionary-economy-when-it-is-the-corrupt-socialist-incompetent-politicians’-fault. Damn you to hell! Oh wait a minute:

  • Italy’s government debt rose to a record €2.169 trillion in July from €2.168 trillion in June, the Bank of Italy says in its public-finances supplement.
  • Spain total govt debt amounted to a record € 1.01 trillion in 2Q, up from € 995.9b in 1Q, Bank of Spain says; 2Q Total Govt Debt Rises to 98.9% of GDP From 97.4% in 1Q

With austerity like this, who needs to spend like a drunken sailor?

Source: Bloomberg

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Panic On The Streets Of London … Can Scotland Ever Be The Same Again?

There is now less than one week of campaigning remaining before the Scottish Independence Referendum, which takes place next Thursday, September 18. 

The pro-union ‘no’ vote campaign is back in the lead this week after the latest opinion poll from pollsters YouGov put them at 52%, marginally ahead of the pro-independence ‘yes’ campaign.

The referendum question being asked is simply “Should Scotland be an independent country?”

After being ahead significantly since the outset of the independence campaign, the pro-union side was abruptly shocked last weekend when the pro-independence side took the lead based on an opinion poll result, also from YouGov, released on Saturday, September 6. 

This forced the pro-union campaign into panic mode this week with the UK witnessing an unprecedented coordinated campaign between all the main political parties. who are pro-union, and a number of major UK companies to try to convince the Scottish electorate to stay in the United Kingdom.

Scotland’s financial sector became one of the main battlegrounds this week, with many Scottish headquartered banks and financial services companies first threatening to relocate their headquarters to London and then actually announcing that they will move south if the referendum outcome results in a ‘yes’ majority. 

The HQ move threats and announcements appeared to be part of an orchestrated corporate campaign run by the UK’s Treasury department and the Treasury did not deny this.

According to the banks, they are seeking to move because an independent Scotland would create too much economic, regulatory and financial risk and uncertainty for their headquarters to remain there.

Amongst the banks, two of the UK’s biggest banking institutions, the Royal Bank of Scotland (RBS), and Lloyd’s led the charge. Crucially, since the RBS and Lloyds were both bailed out by the UK government during the financial crisis, the UK government is now a significant shareholder in both institutions, owning a whopping 80% of the RBS and 25% of Lloyds. 

RBS has been headquartered in Scotland since 1727 and employs 35,000 north of the border. Lloyds owns various institutions including Bank of Scotland (not to be confused with the Royal Bank of Scotland), Halifax and Scottish Widows, the pensions and life insurance group.

Scotland’s third biggest bank, Clydesdale, owned by the National Australia Bank (NAB) said it also planned to relocate its HQ to London, again citing the uncertainty that a yes result would generate. Other banks such as the TSB and Tesco Bank also followed suit and said they too would move.

Many of the banks’ and asset managers’ share prices had been hit on the London Stock Exchange this week due to the pro-independence movement’s lead including the share prices of RBS, Lloyds, Aberdeen Asset  Management and Standard Life.

Financial services giant Standard Life joined in, saying that it would relocate large parts of its operations such as pensions and investments out of Scotland if the country voted for independence. Dutch asset manager and insurer Aegon said it too would move operations to London.

Other industry leaders also sided with the pro-union alignment with the CEO of the UK’s largest oil company British Petroleum (BP) saying that the company and the economy was “best served by maintaining the existing capacity and integrity of the United Kingdom”.

Scottish first minister and pro-independence leader Alex Salmond said that the corporate announcements had been orchestrated by the prime minister’s office in Downing Street in London, and that Treasury had been ‘caught red-handed in a campaign of scaremongering”.

According to the FT, a Treasury official admitted that “Danny Alexander and George Osborne have been making calls.” George Osborne is the Chancellor of the Exchequer and Danny Alexander is his assistant at the Treasury. The calls to RBS would have been quite easy to make given the government’s 80% shareholding. Likewise with Lloyds.

As RBS and Lloyds are already essentially run from London, the HQ move announcements do appear to have been more politically motivated than anything. HM Treasury does appear to have been bullying and pulling strings behind the scenes. On one hand it says plans by companies to move were ‘understandable’, while on the other hand it has been making phone calls encouraging companies to move.

Elsewhere, Mark Carney, the Governor of the Bank of England, became involved in the debate which is slightly surprising given that the Bank of England is supposedly neutral of political interference. Carney said this week that a currency union between Scotland and the rest of the UK  is incompatible with an independent Scotland. 

Media mogul Rupert Murdoch chimed in, hinting that he was on the side of pro-independence, most likely because of his current coolness towards the Westminster leaders,  while financier George Soros weighed in on the pro-union side.

There is much to lose for the City of London’s financial sector due to the economic uncertainty and sterling currency risk of an independent Scotland and the loss of financial power, international standing and resources that a smaller UK would represent.

The International Monetary Fund (IMF) also became involved this week warning that “the main immediate effect is likely to be uncertainty over the transition to a potentially new and different monetary, financial and fiscal framework in Scotland.”

The pound sterling has fallen and risen this week based on the prevailing sentiment expressed in the various independence polls. Sterling strengthened today following the latest poll but had touched an 11 month low earlier this week against the dollar.

In terms of sterling, the gold price has not really moved significantly over the last month, remaining in a £20 trading range between £780 and £760, although the price did fall from the £780 range on Monday down to £760 today, slightly more than the US dollar denominated price move in gold, but in  in general sentiment to the weakness in the US dollar gold price.

Scotland’s bid for independence has also crystallised nationalist aspirations in other countries, most notably in Catalonia which is on the brink of its own unofficial referendum to try to break away from Spain. Yesterday was National Catalan Day and millions protested across the region most notably in  Barcelona.

There has been much speculation this week about how the UK’s gold reserves would be affected if an independence result emerges. The UK Treasury said that all Treasury reserve assets would be up for negotiation. Since this is a very general statement it does not provide much clarity as to whether an independent Scotland would be able to take any of the UK ‘s gold reserves, but this did stop various media outlets from appearing to think that Scotland would get its share of the UK gold

At this stage it is best to adopt a wait and see attitude since there are too many unknowns for any factual conclusions to be reached on the future of the UK, let alone future UK fiscal plans.

Whatever the outcome of next week’s independence referendum in Scotland, it has illustrated that the UK is a economic entity which is in some parts held together by groupings that do not have the same outlook. The closeness of the results for the two campaigns suggests that if the pro-union campaign wins, they will still have to address the concerns of the large Scottish independence movement, and calls for a future referendum on the subject may not go away. 

Economic uncertainty in the UK will remain in the near term and it is hard to see the UK economic landscape ever being quite the same again after the heated campaigning on both sides of the independence issue.

Today’s AM fix was USD 1,237.25, EUR 957.11 and GBP 760.87 per ounce.
Yesterday’s AM fix was USD 1,247.00, EUR 964.20  and GBP 767.53 per ounce.

Gold fell $7.90 or 0.63% to $1,242.10 per ounce and silver slipped $0.27 or 1.42% to $18.71 per ounce yesterday. For the week, gold is down 2.27% while silver is 2.56% lower. 

Gold in US Dollars – 2 Years (Thomson Reuters)

The gold price closed New York trading yesterday at $1,240.10 and fell to a January low of $1,232 in Hong Kong overnight. Gold in Singapore recovered to test the $1,240 level but was turned back at $1,240 prior to going in to London trading where gold is flat.

Palladium fell 2.24% today to $829, and is down 6.53% for the week on profit taking after reaching a multi-year high the previous week. Platinum is trading at $1,364 and is down 0.94% since yesterday and down 2.98% on the week.

FOMC ‘Jawboning’ Next Wednesday
A dilemma awaits the US Fed governors at the two day FOMC meeting next week (16-17 Sept) and at the end of meeting press conference, the FOMC members will have to decide whether to amend their interest rate forward guidance language which currently states that Fed funds rates will be kept near zero for a ‘considerable period’.

Gold in Sterling – 2 Years (Thomson Reuters)

Although there are now a number of Fed governors on the hawkish side, such as the Philadelphia and Cleveland governors, will this be enough to sway a consensus towards amending the language, and would the phrase just be dropped or would there be conditionality added such as interest rates will remain as is until unemployment or inflation data justifies adjusting the current outlook?

There is a market expectation that some sort of fine tuning of the language will occur next week. The Fed will probably subtly amend the language while trying to keep their options open. If this happens it would cause a short term dollar rally since the market would then expect interest rates to rise at an earlier stage in 2015 than previously expected. And rising interest rates mean higher nominal returns for dollar denominated assets. In this scenario, the gold price would come under pressure due to a stronger dollar.

With the recent non-farm payrolls growth data coming out as weak, can the indebted US consumer and economy absorb an interest rate increase? When interest rates begin to rise its usually part of a rising trend, not just a one off rate rise. Are the Fed prepared to follow through with a change of course at this early stage? These are just some of the questions that may be answered by the FOMC press conference next Wednesday.

In our view, the Fed will probably adjust the ‘considerable period’ language at the FOMC meeting next week by adding conditionality to the language linked to an improvement of economic performance such as unemployment data.

If this occurs, the US dollar could have a short term rally on the back of the FOMC announcement since this is not yet fully priced in to the US dollar. This then is a real risk for gold because the gold price would most likely come under pressure as the US dollar strengthens.

Any US dollar rally would in our view be short-lived, since the Fed is not fully committed to increasing rates and is to an extent just engaged in the management of perceptions.

Therefore, any dollar rally would probably fizzle out shortly after it had begun. The fundamental reasons to own allocated and segregated gold remain intact.

via Zero Hedge http://ift.tt/1qskO2s GoldCore

Where ISIS Makes Its Money

President Obama’s 4-pronged strategy to ‘degrade and destroy’ ISIS includes a ‘financial attack’ (according to the Treasury) as they recognize, as The Daily Signal notes, one major hurdle in the way of the ‘strategy’ is the brutal organization’s control of oil fields in Iraq and Syria; which ISIS uses that oil wealth to help finance its terror operations. Here’s how they do it…



As The Daily Signal’s Kelsey Harkness ( @kelseyjharkness ) notes,

According to the Iraq Energy Institute, an independent, nonprofit policy organization focused on Iraq’s energy sector, the army of radical Islamists controls production of 30,000 barrels of oil a day in Iraq and 50,000 barrels in Syria.


By selling the oil on the black market at a discounted price of $40 per barrel (compared to about $93 per barrel in the free market), ISIS takes in $3.2 million a day.


James Phillips, veteran expert in Middle Eastern affairs at The Heritage Foundation, told The Daily Signal that the revenue gives ISIS a “solid economic base that sustains its continued expansion.”


The oil revenue, which amounts to nearly $100 million each month, allows ISIS to fund its military and terrorist attacks — and to attract more recruits from around the world, including America.


To be successful in counterterrorism efforts, Phillips said,  the U.S. and its allies must “push the Islamic State out of the oil fields it has captured and disrupt its ability to smuggle the oil to foreign markets.”

Here’s how Phillips said the ISIS oil operation works:

ISIS sells oil to consumers in territory it controls, roughly the size of Maryland, inside Syria and Iraq. The terrorist group also sells oil to a network of smugglers that developed in the 1990s during Iraqi dictator Saddam Hussein’s rule; that network smuggled oil out of Iraq into Turkey to avoid sanctions imposed by the United Nations.

ISIS also reportedly sells oil, through middlemen, to the Assad regime in Syria that is trying to quell rebellion there. When it comes to making a fast buck, the Middle East has no shortage of “strange bedfellows” willing to do business with each other.

via Zero Hedge http://ift.tt/1AGHyfd Tyler Durden

How the Government Deceives us on Inflation, as Rents and Housing Costs Soar

Wolf Richter   www.wolfstreet.com   http://ift.tt/Wz5XCn

It’s hard these days to worry about inflation amidst a maelstrom of voices claiming that there isn’t enough inflation to begin with, and that the world will end if prices stop rising even for a moment. Whatever inflation we may encounter in daily life, whether for healthcare, tuition, beef, gas, or cars, we’re told not to worry about it because the higher prices are either annulled by an elegant scheme called hedonic regression, or they’re only temporary, or the amounts are too small to impact the overall budget.

But when it comes to housing, which now accounts for 33.6% of what Americans spend [What’s Draining American Wallets? Interactive Chart], none of these excuses fly. Because inflation in housing has been red-hot.

Actually, it hasn’t been red-hot, the way the Bureau of Labor Statistics measures it. Its Consumer Price Index contains two housing components: “Owners’ equivalent rent of primary residence” (OER) and “Rent of primary residence” (Rent). They purport to measure the cost of “shelter,” which is the “consumption item” that a home provides and is thus included in the CPI. The cost of the home itself and any improvements to the home are considered an “investment,” not consumption, and therefore not part of the CPI.

Owners’ equivalent rent accounts for 23.83% of the CPI and rent for 5.93%, for a combined weight in the CPI of about 30%. It is by far the largest and most important component.

Inflation in these two categories was contained, as they say at the Fed. In July, owners’ equivalent rent rose 2.7% and rent rose a minuscule 1.0%.

And in reality?

Home prices rose 8.2% over the 12 months through June 2014 and 12% for the prior 12-month period, according to the Case Shiller 20-City Index. A far cry from the government-sanctioned owners’ equivalent increase of 2.7%.

And rents? They rose on average 6.3% in August from a year earlier, according to Trulia, with double-digit gains in five of the 25 largest rental markets: in Sacramento, rents soared 14.9%. In San Francisco, where the median rent for a 2-bedroom apartment is now $3,500, they jumped 14.5%. That $3,000 apartment a year ago would now cost an additional $435 a month, or an additional $5,220 a year! No inflation, no problem. In Oakland, rents jumped 14.4%; in Denver, 13.1%; in Miami 11.3%. In the 25 largest rental markets, rents soared on average 10%.

How can our trusty government be so far off the mark?

The data are obtained by survey. For “owners’ equivalent rent,” owners are asked what they think they would have to pay if they were renting the home. Hence a measure of implicit rent. For the “rent” component, renters are asked what they’re currently paying in rent. Even if they’ve lived in a rent-controlled apartment for 20 years and pay a ludicrously low rent, it becomes part of the statistics, and not the rent that a new renter would have to pay.

Surveys are easy to manipulate, in numerous subtle ways, and that’s why they’re used to determine shelter costs. The BLS could instead use market rents, which is a common measure of actual rents negotiated between renters and landlords at the signing of the lease. Each time a new lease is signed, it impacts market rent. But that would, like Trulia’s measure, indicate just how fast rents are rising. So, no way.

How large is the deceit? Over time, it adds up. From 2011 to 2014, market rent rose by 12.1% while owners’ equivalent rent inched up only 4.7%. OER understated actual rent inflation that people felt in their bank accounts by 61% in a little over three years.

Housing accounts for 30% of CPI, and understating inflation in housing will cut overall CPI by a big chunk. Actual inflation in housing costs is still there, but you can’t see it in the official numbers, on the government principle that hidden inflation is the best inflation.

It eats up your bank deposits and your wages and the value of your Treasuries and everything else you own. It pushes you into higher tax brackets though tax brackets are indexed to CPI – the hidden bracket creep.

Any government or corporate programs, pensions, and benefits that are indexed to CPI will gradually become less costly to the government or the corporation, and less valuable to you. The savings to them over time are huge. And best of all, understating inflation overstates “real” economic growth as measured by inflation-adjusted GDP. It’s the perfect solution for economies that are mired down.

Consumers, workers, and taxpayers are getting shafted without knowing about it. And the Fed doesn’t use CPI as inflation gauge for its purposes. It uses PCE, which understates inflation even more (chart). And so it can carry on its scorched-earth monetary policy while loudly proclaiming that inflation is below “target.” Hidden inflation is simply perfect.

Nevertheless, the Fed has embarked on a rate-hike cacophony. But ebullient markets are in no mood to listen and are pricing in “a later liftoff date” for the federal funds rate and a slower pace of tightening than FOMC participants themselves, the Fed finds. And it frets that the disconnect could cause financial instability. Read…   To Avert Sudden Market Collapse, the Fed Tries to Spook Utterly Unspookable Markets

via Zero Hedge http://ift.tt/1qKehiE testosteronepit