Category: zerohedge

One week ago, in response to the recurring question whether the Fed’s latest direct intervention in capital markets is QE or is NOT QE, we answered by looking directly at how the market itself was responding to the Fed’s liquidity injections.

The answer was clear enough: just like during the POMO days of QE1, QE2, Operation Twist, and QE3, stocks have risen in every single week when the Fed’s balance sheet increased, following the three weeks of declines that led to the October 11 announcement. What about the one week when the Fed’s balance sheet shrank? That was the only week in the past two months since the launch of “NOT QE” when the S&P dropped.

And yet, some doubts still remains.

As Morgan Stanley’s Michal Wilson writes today in his Weekly Warm Up piece, “in recent marketing meetings, several clients have asked if we think theFed’s $60B/month balance sheet expansion is QE or not.” In response, Wilson gives the podium to MS interest rates strategist Matt Hornbach who says that it’s “Q” but not “QE.” In other words, “there is little debate that the Fed is increasing the quantity of money, or Q. However, they are not taking duration out of the market so the additional money lacks a direct transmission mechanism to the equity markets or other long duration risk assets.”

While semantically Wilson and Hornbach are correct, the outcome is obvious: whether it is Q, QE, or NOT QE, the money is clearly making its way to the market when the Fed’s balance sheet expands, and vice versa.

And quite a bit of money it is, because it’s not just the Fed.

As Wilson further elaborates, “we continue to see the 3 largest central banks in the world expand their balance sheets at the rate of $100B per month ($60B from the Fed, $25B from the ECB and $15B from the BOJ).” As a reminder, several years ago, Citi’s fixed income guru Matt King said that it takes $200 billion in quarterly liquidity injections across all central banks to prevent a market crash, and lo and behold we are now well above that bogey.

But wait, there’s more: in case $300 billion per quarter was not enough, last week there was also an announcement that Japan would enact a new fiscal stimulus of approximately $120 billion which could be as much as $230 billion when you include the private economy incentives. That, as Wilson puts it, “is a lot of money.” It’s also an issue for the traditionally bearish Wilson, who as a reminder in mid November got a tap on the shoulder and, kicking and screaming, was “urged” to raise his S&P bull case target to 3,250.

It could go even higher.

As Wilson notes on Monday, “as part of our year ahead outlook published a few weeks ago, we cited this excessive liquidity as a reason why we thought the S&P 500 could trade well above our bull case year end target of 3250 while this policy action persists. As of right now, it appears that the Fed, ECB and BOJ will continue at this pace through the first quarter of next year.”

But wait, didn’t Wilson just say moments earlier that the liquidity injection by central banks “lacks a direct transmission mechanism to the equity markets?”

Well, yes and no. Wilson connects the two, by explaining that in his view, “the central bank transmission mechanism is via suppressed volatility”, to wit:

The recent actions by the Fed were intended to reduce volatility in the repo market but it’s also had the effect of reducing the volatility in risk markets. Exhibit 1 and Exhibit 2 show 30 day realized volatility for the S&P 500 for two periods. The first period is the post crisis financial repression era, and the second is the longer term. As you can see, we recently reached one of the lowest readings of this era when we hit 5.7% at the end of last month after a brief spike in September when repo markets became disrupted.

To put this in context, this reading is in the first percentile of the past 7 years, a time when QE and financial repression has been very active…

… almost as if QE is active once more.

Now, the reason why the Fed is directly targeting volatility – assuming MS’ thesis is right – is that vol also happens to be the key signal for two of the dominant market investors active today: CTAs and vol-targeting strategies. As shown in Exhibit 3and Exhibit 4, one can see that the flow of funds from these strategies is quite volatile and rather significant in size.

Morgan Stanley’s Quantitative Derivative Strategies (QDS) team estimates that since September, inflows to global equities are close to $175B of which ⅔ ended up in the US. The charts also show the two major downdrafts last year around the volatility shock in January/February 2018 and then the end of the year liquidity squeeze from QT and economic growth deterioration. All that changed in 2019, and this year’s flows have been quite positive with over $300B into global equities cumulatively with a few shocks in May and August to the downside as market volatility increased around escalating trade tensions and then recession fears. With both of those concerns fading recently along with central bank balance sheet expansion those outflows have reversed sharply to inflows.

More importantly, since these two strategies are directly driven by vol, and specifically the lower the volatility, the greater the leveraging, the inflows and the bullish impact on stocks, the more the Fed depresses volatility, the higher stocks rise.

And so, with central banks remaining stimulative with aggressive balance sheet expansion, Wilson notes that vol should remain suppressed in the absence of a breakdown in trade negotiations or hard evidence that the economic cycle is turning down again. (of course we will know as soon as this Sunday if trade negotiations will indeed not suffer a breakdown).

The question then turns to how high Morgan Stanley can reasonably expect the S&P 500 to rise from here if these trends remain stable. The next chart shows how realized volatility is related to the equity risk premium (ERP). Unsurprisingly, the MS equity strategist finds a positive relationship between the two – i.e. falling/rising vol is relative to falling/rising ERP.

However, there have been some important divergences between the two over the past several years. First, in 2016, the ERP remained somewhat sticky to the upside despite very low realized volatility. This can be attributed to the high political uncertainty during that year due to the US Presidential election and Brexit. There was also a large gap in early 2018 when we experienced a sharp spike in realized vol but the ERP remained quite low. This divergence can be attributed to the observation that the vol shock was more technical in nature and not fundamentally induced. Therefore, the ERP remained low.

Fast forward to today, when we currently observe a third major divergence between the two – the ERP remains more elevated than one might expect based on its relationship with realized vol. So what’s going on now?

Here, Morgan Stanley thinks this makes sense given what is likely to be another heightened year of political uncertainty much like 2016. Trade tensions are also likely to remain even with a phase one deal getting signed. Finally, the bank’s core bearish view is that corporate margins/profitability will continue to be a drag on earnings growth even in the muddle through late cycle scenario our economists forecast for the US.

And yet, this is where the upside “risk” to Morgan Stanley’s bullish forecast lies, because the ERP could certainly fall further, which is why Wilson has been highlighting the near term upside risk for the S&P 500 to trade above his bull case target (3250) so long as the Fed and other central banks keep vol suppressed below “normal” levels. Looking at Exhibit 5, it’s fair to argue ERP could fall another 50bps toward 325-50bps if vol stays suppressed. Using the bank’s ERP/Rates framework in Exhibit 6 and assuming 10 year Treasury yields remain close to current levels, the forward P/E multiple could expand another couple of turns. Using the currently consensus forward EPS of $177.42 this means that the S&P 500 might be able to overshoot to the upside in this suppressed volatility environment.

Of course, all of the above was written by a Michael Wilson who is merely covering his (bearish) ass in case the S&P does hit 3,400 which as emerged earlier today, is JPMorgan’s as well as Goldman’s 2020 target. In an ideal world, where the Fed had not launched QE, Wilson’s tone would have been decidedly different. Which is also why he adds the footnote that “this is not our base case assumption, mainly because we think the ERP should remain at current levels, or higher, given the uncertainties around politics, policy and earnings growth for next year.”

A little more of Wilson’s bearishness shines through when he says that he is confident the current consensus forecasts for earnings next year remain 5-10 percent too high. However, he concedes that the market will use the consensus numbers as its best guess/most likely outcome at least until their are proven wrong. Here, just like this year, the reduction in forward EPS is bound to be slow as companies are loathe to reduce forecasts until they absolutely have to, and analysts rarely deviate far from company guidance.

Having offered the market his bull – and even mega-bull – case, Wilson is then allowed to revert back to his normal, bearish self, and pointing to last week’s jobs data and consumer confidence data which “were well received by equity investors,” he notes that “the action in the bond market and our cyclicals / defensives ratio left a lot to be desired.”

Specifically, the strategist notes that despite what has been a series of better data points on the economy and forward looking indicators, both the 10 year Treasury Yield and his cyclicals/defensives stock ratio remain well below key resistance levels. In fact, both are still close to their lows in 2016 and below levels reached last December!

This makes sense and in in fact confirms Wilson’s view that “downside risks to growth remain higher than upside risks”, especially since the S&P 500 is a very defensive equity market and could be viewed as its own asset class that received a unique allocation in passive portfolios. Meanwhile, the greatest risk in the equity market remains in growth stocks where expectations are too high and priced. From a sector standpoint, this is consumer discretionary broadly and expensive software and secular growth stocks. Since then, Wilson notes that these groups have underperformed and Morgan Stanley thinks that this will continues. Indeed, while consumer discretionary group had a decent day on Friday but its relative performance was still slightly negative remaining well below its 200 day moving average and appearing to be completely broken technically. Broadly, software had an even weaker day on Friday relative to the market capping a poor week and leaving its relative performance in a precarious position technically.

Looking at the chart above, one can argue that the consumer discretionary line – which is now far below its 200DMA -is now in a breakdown. Why is this notable? Because as Wilson concludes, “consumer discretionary is an early cycle sector and we are clearly late cycle.” While the stocks had a good 2018 and first half of 2019 because US consumers have benefited from the tax cuts and have been spending well above trend, “this above trend spend however is likely coming to an end.”  So, even though the consumer is healthy and likely to continue to spend, he is unlikely to spend at the pace of the past few years, Wilson concludes.

Which brings us to his bearish punchline (at least as much as he is allowed to be bearish), to wit: “stocks are now beginning to discount that slowdown and we think there is likely more downside given the early cycle properties of these stocks in what is a late cycle environment.”

Of course, the materialization of this worst-case scenario would just mean even more QE from the Fed, which would then bring up the last -for this cycle – scenario we discussed over the weekend in “When We Fall Back Into A Recession And Real QE Returns, Watch Out.“

Rep. Matt Gaetz (R-FL) took the Democrats’ ‘non-partisan’ impeachment attorney to task on Monday afternoon in a clip which quickly went viral.

Gaetz first asked GOP impeachment attorney Stephen Castor if he’d ever made political donations, to which he replied “I don’t remember any.”

The Florida Republican then asked Democratic attorney Daniel Goldman the same question, to which Goldman replied “I do sir.“

Gaetz took it from there – saying “matter of fact, you’ve given tens of thousands of dollars to Democrats, right?”

“Have you given over $100,000?” Gaetz asked. “Do you think if you’d given more money, you might have been able to ask questions – and answer them like Mr. Berke did?” referring to an incident earlier in the day in which House Judiciary Committee attorney Barry Berke was able to directly question Castor – despite him testifying just minutes earlier.

Gaetz then trots out Castor’s anti-Trump tweets – asking him if he regrets tweeting “Nothing in the dossier has proved to be false (including your pee tape)” last August, then outlining all the things the dossier got wrong.

Castor was speechless – mostly because Gaetz wouldn’t let him get a word in edgewise.

Watch:

Rep. Matt Gaetz (R-FL) took the Democrats’ ‘non-partisan’ impeachment attorney to task on Monday afternoon in a clip which quickly went viral.

Gaetz first asked GOP impeachment attorney Stephen Castor if he’d ever made political donations, to which he replied “I don’t remember any.”

The Florida Republican then asked Democratic attorney Daniel Goldman the same question, to which Goldman replied “I do sir.“

Gaetz took it from there – saying “matter of fact, you’ve given tens of thousands of dollars to Democrats, right?”

“Have you given over $100,000?” Gaetz asked. “Do you think if you’d given more money, you might have been able to ask questions – and answer them like Mr. Berke did?” referring to an incident earlier in the day in which House Judiciary Committee attorney Barry Berke was able to directly question Castor – despite him testifying just minutes earlier.

Gaetz then trots out Castor’s anti-Trump tweets – asking him if he regrets tweeting “Nothing in the dossier has proved to be false (including your pee tape)” last August, then outlining all the things the dossier got wrong.

Castor was speechless – mostly because Gaetz wouldn’t let him get a word in edgewise.

Watch:

Authored by Kurt Schlichter, op-ed via Townhall.com,

As the undisputed star of the new film No Safe Spaces – the hit documentary on academia’s descent into Orwellian tyranny features a quick shot of a lawyer letter I wrote to some collegiate gulag apparatchiks – I wholeheartedly recommend that you go see it.

Adam Carolla and Dennis Prager take you on a guided tour of the insanity and evil that has gripped academia, and it’s utterly terrifying. You need to see it not merely to gape at the freak show but to learn what’s coming for society as a whole. The dreary conformity factories that pretend to be providing our next generation of leaders with a higher education have instead embarked on a campaign of indoctrination designed to manufacture a generation of goose-stepping creeps who use their bizarre collection of buzzwords and fetishes as weapons to suppress any kind of dissent.

And the problem is that this PC Nazism is not just limited to academia. Eventually, these daddy-issue cadres are going to get out into the world and contaminate all of our institutions even worse than they are contaminated now. We’ve seen weeks of pretentious ruling caste losers presuming to lecture us on how we should fix the messes they and their pals made. Imagine if they compounded their failure with the desire to burn you at the stake for refusing to concede that a dude can get pregnant.

A dude can’t get pregnant, not ever. And there’s a whole generation of future elitists who would want to cancel you permanently for daring to state this indisputable fact.

The key to understanding what is happening on campuses, and increasingly in society as a whole, is to discard your bourgeois notions of reason and the presumption of good faith. What’s kind of funny is to watch people shake their heads at the incoherence of the leftist lies – what these people say is manifestly false and usually both contradictory and hypocritical. They have no evidence to support their claims, and they ignore contrary evidence. This freaks out the squares because normal people approach disputes with the understanding that facts and evidence and arguments can change one’s positions. But with these people, that doesn’t happen. It can’t happen, because they are not engaged in argument. Rather, they simply assert whatever nonsense they believe will increase their own power.

That’s all it is. This PC leftist garbage is simply about power.

You can’t prove your innocence or change their minds because actual facts are beside the point. The point is to generate a narrative that results in you being deprived of the moral capacity to assert your own rights and interests. You are disenfranchised, totally, by the moral failure that is your race or your sex or your religion or your sexual preference or whatever has been designated as bad this week. That is why we get evil concepts like “white privilege,” “mansplaining” and “heteronormativity” tossed around as if they are conceptual trump cards that instantly silence you merely by being asserted.

Now, as someone of good faith who strives to operate in a universe that makes sense, you might observe that these kinds of prejudgments based on race and sex and so forth seem an awful lot like prejudice based on race and sex and so forth, and you would be right because that is exactly what they are. And you would scratch your head because aren’t these adolescent inquisitors supposedly really upset about prejudice based on race and sex and so forth?

Except they aren’t, because they don’t care about prejudice, except to the extent they can use it as a weapon to get what they want. The left is not against prejudice or bigotry. It is actively in favor of both. It’s just that the targets change and morph based on necessity. Go on social media, if you dare, and find a black conservative or a gay conservative or a conservative woman and see what crap they take from the loving left. The crude hatred would shock and appall even the Democrats who invented and filled the ranks of the KKK. The left is supposed to be in favor of black people and gay people and women people and it takes only a few seconds to realize that this is utterly false. They don’t care about bigotry or prejudice. They care about leftist power, and if bigotry and prejudice help them get more of it then the left is all in.

On the upside, they often turn on each other in internal power struggles where the radicals attempt to out-woke each other to become the king/queen/non-binary monarch of the hill. “You’re a person of color? I’ll see your race card and raise you the fact that I was born Dennis but now I’m Denise.”

Today on campus, these creeps have power because the administrators tend to be cowed by the left when not in active cahoots with it. The left can even LARP violent revolution because the schools hold back the cops who ought to be beating down and hooking up these black-masked punks. The scary thing is that someday, some of these quad gestapo types are going to be in real positions of power in real society, and they do not believe in rules and they do not believe in rights for anyone who opposes them. Their sole goal is their own power. And to increase their power, they need to take power from someone else. You are the someone else.

In a society they control, you will have no rights, no voice, and no future. Leftism always ends in tyranny and murder, which is why we’re blessed to have the Second Amendment. And if you are ever disarmed and at the mercy of these aspiring monsters, the only safe space will be a mass grave.

*  *  *

The nightmarish end state the left seeks is on full display in Collapse, my hard-hitting yet hilarious sequel to People’s Republic, Indian Country and Wildfire. My novels have been hailed by Bill Kristol as “Appalling,” so that kind of vouches for them!

Kurt will be doing a live video chat tonight (Dec. 9) w/ PJ’s Stephen Kruiser at 8:15pm ET for VIP Gold members. Join quickly to be able to take part in the fun.

Following the highly anticipated release of the DOJ Inspector General’s so-called FISA report, Attorney General Bill Barr and his hand-picked US Attorney, John Durham, have issued statements disagreeing with the IG’s conclusions.

The report found that while the FBI made serious errors investigating the Trump campaign, and relied heavily on the discredited Steele dossier, that the agency was ultimately justified in launching a counterintelligence operation, dubbed Crossfire Hurricane.

“The Inspector General’s report now makes clear that the FBI launched an intrusive investigation of a U.S. presidential campaign on the thinnest of suspicions that, in my view, were insufficient to justify the steps taken,” Barr said in a statement released shortly after the FISA report.

“It is also clear that, from its inception, the evidence produced by the investigation was consistently exculpatory,” he continued. “Nevertheless, the investigation and surveillance was pushed forward for the duration of the campaign and deep into President Trump’s administration.”

Barr added that the FISA report reveals a “clear abuse” of the surveillance court.

“In the rush to obtain and maintain FISA surveillance of Trump campaign associates, FBI officials misled the FISA court, omitted critical exculpatory facts from their filings, and suppressed or ignored information negating the reliability of their principal source.”

“The Inspector General found the explanations given for these actions unsatisfactory. While most of the misconduct identified by the Inspector General was committed in 2016 and 2017 by a small group of now-former FBI officials, the malfeasance and misfeasance detailed in the Inspector General’s report reflects a clear abuse of the FISA process.”

Statement from U.S. Attorney General Bill Barr:

“The Inspector General’s report now makes clear that the FBI launched an intrusive investigation of a U.S. presidential campaign on the thinnest of suspicions that, in my view, were insufficient to justify the steps taken… pic.twitter.com/xVNfOJxzCP

— Trump War Room (Text TRUMP to 88022) (@TrumpWarRoom) December 9, 2019

Durham, meanwhile, said “Based on the evidence collected to date, and while our investigation is ongoing, last month we advised the Inspector General that we do not agree with some of the report’s conclusions as to predication and how the FBI case was opened.”

“I have the utmost respect for the mission of the Office of Inspector General and the comprehensive work that went into the report prepared by Mr. Horowitz and his staff,” Durham also said. “However, our investigation is not limited to developing information from within component parts of the Justice Department. Our investigation has included developing information from other persons and entities, both in the U.S. and outside of the U.S.“

Full Durham statement:

“I have the utmost respect for the mission of the Office of Inspector General and the comprehensive work that went into the report prepared by Mr. Horowitz and his staff.  However, our investigation is not limited to developing information from within component parts of the Justice Department.  Our investigation has included developing information from other persons and entities, both in the U.S. and outside of the U.S.  Based on the evidence collected to date, and while our investigation is ongoing, last month we advised the Inspector General that we do not agree with some of the report’s conclusions as to predication and how the FBI case was opened.”

Authored by Lance Roberts via RealInvestmentAdvice.com,

Tell me if you heard this one lately:

“There’s a trillion dollars in cash sitting on the sidelines just waiting to come into the market.” 

No.

Well, here it is directly from the Wall Street Journal:

“Assets in money-market funds have grown by $1 trillion over the last three years to their highest level in around a decade, according to Lipper data. A variety of factors are fueling the flows, from higher money-market rates to concerns over the health of the 10-year economic expansion and an aging bull market.

Yet some analysts say the heap of cash shows that investors haven’t grown excessively exuberant despite markets’ double-digit gains this year, and have plenty of money available to buy when lower prices prevail.”

See…there is just tons of “cash on the sidelines” waiting to flow into the market.

Except there isn’t.

The Myth Of Cash On The Sidelines

Despite 10-years of a bull market advance, one of the prevailing myths that seeming will not die is that of “cash on the sidelines.” To wit:

“’Cash always makes me feel good, both having it and seeing it on the sidelines,’ said Michael Farr, president of the money-management firm Farr, Miller & Washington.

Stop it.

This is the age-old excuse why the current “bull market” rally is set to continue into the indefinite future. The ongoing belief is that at any moment investors are suddenly going to empty bank accounts and pour it into the markets. However, the reality is if they haven’t done it by now, following 4-consecutive rounds of Q.E. in the U.S., a 330% advance in the markets, and ongoing global Q.E., exactly what is it going to take?

But here is the other problem.

For every buyer there MUST be someone willing to sell. As noted by Clifford Asness:

“There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.”

Every transaction in the market requires both a buyer and a seller with the only differentiating factor being at what PRICE the transaction occurs. Since this is required for there to be equilibrium in the markets, there can be no “sidelines.” 

Think of this dynamic like a football game. Each team must field 11 players despite having over 50 players on the team. If a player comes off the sidelines to replace a player on the field, the player being replaced will join the ranks of the 40 or so other players on the sidelines. At all times there will only be 11 players per team on the field. This holds equally true if teams expand to 100 or even 1000 players.

Furthermore, despite this very salient point, a look at the stock-to-cash ratios (cash as a percentage of investment portfolios) also suggest there is very little available buying power for investors currently. As we noted just recently with charts from Sentiment Trader:

“As asset prices have escalated, so have individual’s appetite to chase risk. The herding into equities suggests that investors have thrown caution to the wind.

With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it suggests investors are now functionally “all in.” 

With net exposure to equity risk by individuals at historically high levels, it suggests two things:

1. There is little buying left from individuals to push markets marginally higher, and;

2. The stock/cash ratio, shown below, is at levels normally coincident with more important market peaks.

But it isn’t just individual investors that are “all in,” but professionals as well.

Importantly, while investors are holding very little ‘cash,’ they have taken on a tremendous amount of ‘risk’ to chase the market. It is worth noting the current levels versus previous market peaks.”

Even Ned Davis noted that investors remain more invested in riskier assets than has historically been the case.

“Cash is low, meaning households are fairly fully invested.” 

So, Where Is All This Cash Then?

The Wall Street Journal was correct in their statement that money market cash levels have indeed been climbing. The chart from the Office Of Financial Research shows this:

There are a few things we need to consider about money market funds.

1. Just because I have money in a money market account, doesn’t mean I am saving it for investing purposes. It could be an emergency savings account, a down payment for a house, or a vacation fund on which I want to earn a higher rate of interest. 

2. Also, money markets are used by corporations to store cash for payroll, capital expenditures, operations, and a variety of other uses not related to investing in the stock market. 

3. Foreign entities also store cash in the U.S. for transactions processed in the United States which they may not want to immediately repatriate back into their country of origin.

The list goes on, but you get the idea.

If you take a look at the chart above, you will notice that the bulk of the money is in Government Money Market funds. These particular types of money market funds generally have much higher account minimums (from $100,000 to $1 million) which suggests that these funds are predominately not retail investors. (Those would be the smaller balances of prime retail funds.)

So, where is all that cash likely coming from?

Hoarding Cash

You are already most likely aware that Warren Buffett is hoarding $128 billion in cash, and that Apple is sitting on a cash trove of $100 billion, with Microsoft holding $136.6 billion, and Alphabet amassing $121 billion.

Yes, some of that cash has been used for share buybacks, but much of it is sitting there waiting for acquisitions, R&D, capital expenditures, etc. However, that cash is primarily sitting in short-term and longer-term dated treasuries, AND, you guessed it, money market funds.

However, as noted above, there is also a flood of money coming into U.S. Dollar denominated assets for better yield and safety than what is available elsewhere in the world.  

At RIAPRO.NET we regularly track the U.S. Dollar for our subscribers. (You can access these reports with a FREE 30-day Trial.)

• Despite much of the rhetoric to the contrary, the dollar remains in a strongly rising uptrend. Given a “strong dollar” erodes corporate profits on exports (which makes up 40% of corporate profits overall) a strong dollar combined with tariffs isn’t great for corporate bottom lines. Watch earnings carefully during this quarter.

• Furthermore, the dollar bounced off support of the 200-dma and the bottom of the uptrend. If the dollar rallies back to the top of its trend, which is likely, this will take the wind out of the emerging market, international, and oil plays.

• The “sell” signal is also turning up. If it triggers a “buy” the dollar will likely accelerate pretty quickly.

Much of the bulls rallying cry has been based on the dollar weakening with the onset of QE, but as shown above, that has yet to be the case. However, US Dollar positioning has been surging as of late as money has been flowing into US Dollar denominated assets. Importantly, it is worth watching positioning in the dollar as a reversal of dollar-longs are usually reflective of short- to intermediate-term market peaks.

As shown above, and below, such net-long positions have generally marked both a short to intermediate-term peak in the dollar. The bad news is that a stronger dollar will trip up the bulls, and commodities, sooner rather than later.

However, as it relates to foreign positioning, it is worth noting that EURO-DOLLAR positioning has been surging over the last 2-years. This surge corresponds with the surge in dollar-denominated money market assets.

What are Euro-dollars? The term Eurodollar refers to U.S. dollar-denominated deposits at foreign banks, or at the overseas branches, of American banks. Net-long Eurodollar positioning is at an all-time record as foreign banks are cramming money into dollar-denominated assets to get away from negative interest rates abroad.

Importantly, when positioning in the Eurodollar becomes NET-LONG, as it is currently, such has been associated with short- to intermediate corrections in the markets, including outright bear markets. 

What could cause such a reversal? A pick up of economic growth, a reversal of negative rates, a realization of over-valuation in domestic markets, which starts the decline in asset prices. Then, the virtual spiral begins of assets flowing out, lowers asset prices, leading to more asset outflows.

While the bulls are certainly hoping the “cash hoard” will flow into U.S. equities, the reality may be quite different.

That’s how the bear markets begin.

Slowly at first. Then all of a sudden.

Headlines are suggesting it’s a “now or never” opportunity to bring the five-year long war in eastern Ukraine to an end, and to initiate a lasting peace. The meeting dubbed the “Normandy Four” summit kicked off in Paris Monday, crucially including Russian President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelensky, and German Chancellor Angela Merkel and France’s Emmanuel Macron playing host for the talks.

It marked the first face to face meeting ever between Putin and Ukraine’s leader, who assumed office in May of this year, after an unlikely landslide victory based largely on promising to end the war in Donbass and improve relations with Russia. 

The Minsk agreements brokered with the help of Germany and France have been largely a stalled disappointment in terms of solving the stalemate. 

Though the conflict has been in and out of the headlines, a shocking 13,000 people have died since 2014, including civilians and militants on both sides, according to UN estimates. A further nearly four million people have been displaced by fighting, and a fragile ceasefire is currently in effect in the region.

Zelensky has lately come under fire especially from Ukrainian nationalists over his controversially agreeing to major concessions based on a road map to peace, including holding elections in the Russian-speaking war-torn region; however, he’s said “there won’t be any elections under the barrel of a gun,” meaning pro-Russian separatist militants and their backers would have to lay down their arms for it to work.

The summit kicked off with a few awkward moments Monday, with Putin appearing to give some cues to the lesser experienced Zelensky:

Путин подсказал Зеленскому, что нужно развернуться для совместного фото pic.twitter.com/Q88g9GMQjf

— Кремлевский пул РИА (@Kremlinpool_RIA) December 9, 2019

There have been few significant statements given to the press, as the schedule appears to have shifted, and no ‘breakthroughs’ on the Ukraine crisis are expected, but it’s hoped that the meeting will reinvigorate negotiations potentially leading to a permanent ceasefire. 

But at home Zelensky is facing threats that civil unrest could break out if he says anything seen as giving Putin too much.

Protest underway against tomorrow’s talks between Zelensky and Putin in Paris. Crowd probably over 4,000 but not as big or as energized as October demonstrations. Most flags are Ukrainian and the nationalist Svoboda party, which lost in parliamentary elections. pic.twitter.com/yLRvGWUdPw

— Christopher Miller (@ChristopherJM) December 8, 2019

The iconic Maidan square has since filled with thousands of demonstrators Sunday into Monday, with one prominent speaker addressing the crowd with a warning for Zelensky himself: “Your flight will be not from Paris to Kiev, but from Paris to Rostov[-on-Don]. If it won’t be tomorrow then it’ll be a bit later,” prominent news host Vitaly Gaidukevich warned, referencing the southern Russian port city as a potential place of exile. 

Hardline nationalists have promised to effectively overthrow the young Ukrainian leader should he cross ‘red lines’ in Paris. 

This also as the Russian and Ukrainian leaders are expected to engage in an unprecedented one-on-one meeting later in the summit :

A special bilateral meeting of the presidents of Russia and Ukraine – Vladimir Putin and Vladimir Zelensky – is scheduled for Monday at the Elysee Palace after the completion of the negotiations between the leaders of the “Normandy format” (Germany, Russia, France, Ukraine). This was announced by a source close to the organization of the summit in Paris.

The protesters, in a reminiscent scene to 2014, have demanded that Zelensky not cave to a “peace at any cost” program, including holding the line of ‘no compromise’ when it comes to “de-occupation” and return of Crimea.

Authored by Charles Hugh Smith via OfTwoMinds blog,

The higher up the wealth-power pyramid the observer is, the more prone they are to a magical-thinking belief that the empire is forever, even as it is crumbling around them.

How great nations and empires arise, mature, decay and collapse has long been of interest for a self-evident reason: if we can discern a template or process, we can predict when the great nations and empires of today will slide into the dustbin of history.

One of the justly famous attempts to lay out the stages of expansion, zenith, decline and collapse is Sir John Glubb’s 1978 The Fate of Empires. Succinct and deeply informed, Glubb’s essay lists these stages:

• The Age of Pioneers (outburst or Boost Phase)

• The Age of Conquests

• The Age of Commerce

• The Age of Affluence

• The Age of Intellect

• The Age of Decadence

The slippery slope to collapse – decadence – is characterized by greed, corruption, irreconcilable internal political rifts, moral decay, frivolity, materialism – hmm, sound familiar?

All of this fits the S-Curve model which I’ve described here many times, for example:

But what triggers the collapse of a weakening but still functioning empire? For that, I propose a taxonomy of collapse. A taxonomy is a system of classification that groups organisms or types that share characteristics and origins.

What taxonomy of collapse does history suggest? I would start with:

1. Bolt from the blue: a fast-moving, unexpected crisis that overwhelms the usual defenses and responses of the empire. An invasion by previously unknown forces with superior technology and/or organization fits the bill: the Mongols in Eurasia, the Spanish in the New World, etc.

Extremely contagious and previously unknown infectious diseases like plague and smallpox are also bolts from the blue, devastating populations with no immunity. It is estimated that 80% or more of the population of North America died from exposure to smallpox and other European diseases, in many cases long before the victims had ever seen a European, as the diseases spread much faster than the invaders themselves.

A drought that never ends is another unexpected catastrophe that quickly depletes food stores.

These bolts from the blue can strike at the same time: one reason why the small-in-number Spanish forces conquered vast empires in the New World was the empires had already been fatally weakened by diseases introduced by Columbus decades earlier.

2. Irreplaceable declines in essential resources. Food tops the list, as a decline in calories leads to weakened immune systems and heightened odds of pandemics spreading and a subsequent drop in the number of workers needed to support the empire’s vast infrastructure.

The book The Fate of Rome: Climate, Disease, and the End of an Empire makes a compelling case that the Western Roman Empire centered around the Mediterranean suffered from a slow environmental transition from an unusually wet era that enabled grain to be grown in previously marginal areas to a drier era that no longer supported the immense grain harvests needed to feed the empire.

Other forms of depletion can also sap the empire of essentials: forests are cut down, silver mines are tapped out, nearby sources of slaves (labor) are no longer available, and so on.

The imperial machinery that is accustomed to there’s always more somewhere refuses to trim its expenses, elites refuse to lessen their skim, and since the fat of elite excess is retained, eventually the muscle of military power and trade decay, leaving a hollowed out empire on the edge of a precipice awaiting one final kick into the abyss.

3. Reversal of fortune. Military misadventures top the list, as invasions of nearby competing powers are in effect last-ditch gambles to acquire desperately needed wealth and resources to prop up the status quo. When the imperial army is defeated and destroyed, there are no longer sufficient resources and recruits to rebuild the army.

4. Internal civil conflict: civil wars and political conflicts that break out into society and the economy end up consuming the last of the empire’s seed corn, just like an invasion of a bordering empire that fails. Once the conflict is resolved, there are no longer enough resources left to support the imperial infrastructure.

Like Nature, History offers a near-infinite variety, but just as Nature fits into taxonomies of organisms, history can be shuffled into its own taxonomy, however messy and imperfect it might be.

These triggers of collapse can overlap, of course, accelerating the final decline. All complex hierarchical systems are intrinsically fragile and prone to disruption; we don’t see the fragility or vulnerabilities until the decline has reached the terminal phase. The higher up the wealth-power pyramid the observer is, the more prone they are to a magical-thinking belief that the empire is forever, even as it is crumbling around them.

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Days after top US defense officials warned they had credible intelligence of a major Iran threat against American troops and interests in the region (though as usual the anonymously sourced ‘evidence’ was not forthcoming), a top Israeli military leader has put the region on notice, suggesting the possibility of yet more ‘preemptive strikes’ on Syria, Iraq, Lebanon, and even possibly Iran itself.

Israel’s ultra-hawkish defense minister Naftali Bennett has warned the IDF is ready to give Iran its own ‘Vietnam’ in new remarks vowing the Islamic Republic will never get a firm foothold there. 

Addressing an Israeli conference on Sunday, Bennett further stated “it is no secret that Iran is trying to establish a ring of fire around our country, it is already based in Lebanon and is trying to establish itself in Syria, Gaza and more.”

“If we are determined, we can take Iran’s aggression forces out of Syria. They have nothing to look for on the borders of the State of Israel. We say to Iran: Syria will become your Vietnam. If you do not come out, you will bleed because we will work tirelessly until you take the forces of aggression out of Syria,” he stated.

Israel a mere weeks ago conducted what was said to be one of the largest single missile and air attacks against ‘Iranian targets’ in and around Damascus throughout the entirety of the war. And in a worrisome prospect for a continued broader war, the Israeli defense minister urged, “We need to move from containment to attack.”

As Tehran continues to blow through uranium enrichment caps agreed to as part of the increasingly defunct 2015 JCPOA (despite recent European efforts to save it through INSTEX and other sanctions-circumventing trade alternatives), the Israeli defense chief is warning that Tel Aviv may be left with no choice but to take action.

However, Naftali Bennett has also reportedly created deep tensions within the defense ministry and among the military command based on his near daily boasting about “killing Iranians,” which some generals fear is unnecessarily stoking tensions and security concerns.

When asked late last week about the alarming scenario of a major Israeli preemptive direct attack on Iran, Israeli Foreign Minister Yisrael Katz also echoed Bennett’s consistent confrontational tone.

“It’s an option. We will not allow Iran to produce or obtain nuclear weapons. If the only option left to us is the military option, we’ll act militarily,” Katz told Italy’s Corriere Della Sera daily.

At the very least this likely means we will soon witness heightened Israeli engagement in Syria; however, it remains unclear what the Russians have stated behind the scenes in terms of ‘red lines’ imposed on Tel Aviv. Moscow has repeatedly warned Syria could once again turn into a major international military showdown through irresponsible offensive actions by Israel. 

Authored by John Solomon via John Solomon Reports

Justice Department Inspector General Michael Horowitz identified 17 serious omissions, inaccuracies and failures involving the FBI’s conduct in the Russia collusion investigation and its pursuit of a Foreign Intelligence Surveillance Act warrant targeting the Trump campaign.

The significant failings are laid bare in a report made public Monday that showed the FBI withheld from the FISA court misgivings about its star informant Christopher Steele, as well as evidence of innocence against targets like former Trump campaign advisers Carter Page and George Papadopoulos.

Here is the list of the 17 flagged failures in the FBI’s handling of FISA warrants in 2016 and 2017, as described in Horowitz’s own words.

***

1. Omitted information the FBI had obtained from another U.S. government agency detailing its prior relationship with Page, including that Page had been approved as an “operational contact” for the other agency from 2008 to 2013, and that Page had provided information to the other agency concerning his prior contacts with certain Russian intelligence officers, one of which overlapped with facts asserted in the FISA application;

2. Included a source characterization statement asserting that Steele’s prior reporting had been “corroborated and used in criminal proceedings,” which overstated the significance of Steele’s past reporting and was not approved by Steele’s handling agent, as required by the Woods Procedures;

3. Omitted information relevant to the reliability of Person 1, a key Steele sub-source (who was attributed with providing the information in Report 95 and some of the information in Reports 80 and 102 relied upon in the application), namely that (1) Steele himself told members of the Crossfire Hurricane team that Person 1 was a “boaster” and an “egoist” and “may engage in some embellishment” and (2) INFORMATION REDACTED

4. Asserted that the FBI had assessed that Steele did not directly provide to the press information in the September 23 Yahoo News article based on the premise that Steele had told the FBI that he only shared his election-related research with the FBI and Fusion GPS, his client; this premise was incorrect and contradicted by documentation in the Woods File- Steele had told the FBI that he also gave his information to the State Department;

5. Omitted Papadopoulos’s consensually monitored statements to an FBI CHS in September 2016 denying that anyone associated with the Trump campaign was collaborating with Russia or with outside groups like Wikileaks in the release of emails;

6. Omitted Page’s consensually monitored statements to an FBI CHS in August 2016 that Page had “literally never met” or “said one word to” Paul Manafort and that Manafort had not responded to any of Page’s emails; if true, those statements were in tension with claims in Report 95 that Page was participating in a conspiracy with Russia by acting as an intermediary for Manafort on behalf of the Trump campaign; and

7. Included Page’s consensually monitored statements to an FBI CHS in October 2016 that the FBI believed supported its theory that Page was an agent of Russia but omitted other statements Page made that were inconsistent with its theory, including denying having met with Sechin and Divyekin, or even knowing who Divyekin was; if true, those statements contradicted the claims in Report 94 that Page had met secretly with Sechin and Divyekin about future cooperation with Russia and shared derogatory information about candidate Clinton.

8. Omitted the fact that Steele’s Primary Sub-source, who the FBI found credible, had made statements in January 2017 raising significant questions about the reliability of allegations included in the FISA applications, including, for example, that he/she had no discussion with Person 1 concerning WikiLeaks and there was “nothing bad” about the communications between the Kremlin and the Trump team, and that he/she did not report to Steele in July 2016 that Page had met with Sechin;

9. Omitted Page’s prior relationship with another U.S. government agency, despite being reminded by the other agency in June 2017, prior to the filing of the final renewal application, about Page’s past status with that other agency; instead of including this information in the final renewal application, the OGC Attorney altered an email from the other agency so that the email stated that Page was “not a source” for the other agency, which the FBI affiant relied upon in signing the final renewal application;

10. Omitted information from persons who previously had professional contacts with Steele or had direct knowledge of his work-related performance, including statements that Steele had no history of reporting in bad faith but “[d]emonstrates lack of self-awareness, poor judgment,” “pursued people with political risk but no intelligence value,” “didn’t always exercise great judgment,” and it was “not clear what he would have done to validate” his reporting;

11. Omitted information obtained from Ohr about Steele and his election reporting, including that (1) Steele’s reporting was going to Clinton’s presidential campaign and others, (2) Simpson was paying Steele to discuss his reporting with the media, and (3) Steele was “desperate that Donald Trump not get elected and was passionate about him not being the U.S. President”;

12. Failed to update the description of Steele after information became known to the Crossfire Hurricane team, from Ohr and others, that provided greater clarity on the political origins and connections of Steele’s reporting, including that Simpson was hired by someone associated with the Democratic Party and/or the DNC;

13. Failed to correct the assertion in the first FISA application that the FBI did not believe that Steele directly provided information to the reporter who wrote the September 23 Yahoo News article, even though there was no information in the Woods File to support this claim and even after certain Crossfire Hurricane officials learned in 2017, before the third renewal application, of an admission that Steele made in a court filing about his interactions with the news media in the late summer and early fall of 2016;

14. Omitted the finding from a FBI source validation report that Steele was suitable for continued operation but that his past contributions to the FBI’s criminal program had been ” minimally corroborated,” and instead continued to assert in the source characterization statement that Steele’s prior reporting had been “corroborated and used in criminal proceedings”;

15. Omitted Papadopoulos’s statements to an FBI CHS in late October 2016 denying that the Trump campaign was involved in the circumstances of the DNC email hack;

16. Omitted Joseph Mifsud’s denials to the FBI that he supplied Papadopoulos with the information Papadopoulos shared with the FFG (suggesting that the campaign received an offer or suggestion of assistance from Russia); and

17. Omitted information indicating that Page played no role in the Republican platform change on Russia’s annexation of Ukraine as alleged in the Report 95, which was inconsistent with a factual assertion relied upon to support probable cause in all four FISA applications.

***

Comey, meanwhile, has a thing or two to say about the report.

So it was all lies. No treason. No spying on the campaign. No tapping Trumps wires. It was just good people trying to protect America. https://t.co/9nurCaIBq2

— James Comey (@Comey) December 9, 2019

Dear Mr. Comey, see above…