Bloody Battle Breaks Out On Portland Streets As Antifa Clashes With “Patriot Prayer”

Hillary Clinton and Maxine Waters have called for incivility and confrontation, and Antifa is happy to oblige.

Street anarchy and mob violence on American streets is getting wilder by the day.

The following videos from Portland, Oregon show a confrontation between left-wing Antifa members and right-wing Proud Boys as scores of bystanders look-on. Things spiraled out of control quickly, prompting Portland police officers dressed in riot gear to open fire with less-lethal rounds.

As OregonLive.com reports, the demonstration billed as a march for “law and order” in the streets of Portland descended into chaos as rival political factions broke into bloody brawls downtown Saturday night.

Members of the right-wing group Patriot Prayer and their black-clad adversaries, known as antifa, used bear spray, bare fists and batons to thrash each other outside Kelly’s Olympian, a popular bar on Southwest Washington Street.

The melee ended when riot cops rushed in and fired pepper balls at the street fighters.

How It All Went Down:

Then Antifa started burning the American flag…

Antifa began pepper/bear-spraying the proud boys…

The Police finally moved in…

But not everyone managed to get their punch in…

As The American Mirror reports, Patriot Prayer is advocating for the removal of Mayor Tim Wheeler, who has defended the actions of his police department, which stood down as agitators blocked traffic and intimidated residents this week. Antifa, apparently, is backing the mayor.

The Washington Times reports that Wheeler stands by his decision to allow Antifa mob rule in his city by ordering the police to stand-down:

“I was appalled by what I saw in the video, but I support the Portland Police Bureau’s decision not to intervene,” he said at a Friday press conference. “This whole incident will be investigated.”

Even so, Mr. Wheeler insisted that “motorists should feel completely safe coming into downtown Portland.”

Mr. Wheeler, who also holds the title of police commissioner, took a swipe at recent unflattering news coverage, such as a Fox News story headlined, “Mob rule? Leftist protesters take over Portland street.”

“I’m willing to take criticism all day long from Fox News,” he said. “But I’m not willing to accept criticism from Fox News of the men and women of the Portland Police Bureau.”

The mayor argued that law enforcement is in a no-win situation.

“This is the story of Goldilocks and the two bears. The porridge is either too hot or it’s too cold,” Mr. Wheeler told reporters. “At any given moment in this city, the police are criticized for being heavy-handed and intervening too quickly, or they’re being criticized for being standoffish and not intervening quickly enough.”

Doing something to protect the tax-paying citizens who fund your entire career seems like a place to start, rather than worry about the political optics of any intervention.

We leave it to James Woods to sum things up: “THIS IS THE NEW AMERICA”:

 

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Last Week Was Just A Taste Of The Coming Gold Short Squeeze

Authored by John Rubino via DollarCollapse.com,

The gold and silver futures markets got even more unbalanced last week, with speculators (who are usually wrong at the extremes) going as short as they’ve ever been…

…and commercials going even more long.

Here’s the gold data in chart form:

These are historically huge imbalances that – if the action in the paper markets still has predictive value – point to a gold short squeeze in which the speculators who are now betting that precious metals will fall are forced to cover those positions by buying, in the process sending the price up dramatically.

On Thursday we got a sense of what that might look like. Stock markets around the world sold off, which sent capital scurrying for cover. Some of that capital flowed into gold, which chased futures speculators out of some of their shorts. The result was a nice pop in gold:

But this barely dented speculator short positions, as we’ll discover next Friday when the COT report covering Thursday’s action is released. So the real gold short squeeze is still to come.

Risk-Off, Everywhere

The other interesting thing about last week was that stocks, bonds and cryptos all fell while gold and silver were rising.

These aren’t especially notable moves, and can be reversed out in a single big “risk-on” trading day. But again, they’re a taste of what’s coming when it finally dawns on investors that every major asset but gold is overvalued and therefore prone to correct if not crash. Even instruments previously thought to be safe havens like government bonds and cryptocurrencies have become bubbles destined to pop.

Gold is the only thing that’s hasn’t been bid up to bubble territory in the past few years, which makes it cheap and therefore relatively safe. Combine this undervaluation with the even more important fact that precious metals have historically been THE safe haven in times of financial and geopolitical stress, and there’s a real possibility of global capital not just trickling but pouring into this tiny market. That gold short squeeze will be one for the history books.

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EU Leaders Planning Emergency ‘No Deal’ Summit As UK Conservatives Scuttle Draft Brexit Plan

If you didn’t already, developments related to the ongoing negotiations over a Brexit agreement outline – negotiations that, as far as we know, have been an unmitigated trainwreck – should almost engender pity for UK Prime Minister Theresa May and the impossible situation in which she now finds herself. Without a parliamentary majority to fall back on, May has been caught between the warring demands of a fractious conservative caucus and EU leaders who are seemingly unsympathetic to the UK’s plight.

Indeed, the poor girl – who for the past few months has been laboring under the threat of internal mutiny – never really had much of a chance to begin with, as the bewildering process of squaring the myriad opposing interests involved in the negotiations – from the pro-remain Labour MPs on whom she must ultimately depend for a modicum of support, to the Brexit hardliners who oppose anything suggesting that the will of the 17.4 million voters who supported leaving the EU could be ignored, to the EU leaders sensitive to “undermining the integrity of the single market” – could be compared favorably to being stretched across the rack.

Brexit

And in the latest development threatening to roil UK markets on Monday, as the possibility that negotiators will meet the self-imposed deadline for producing an elusive draft “political statement,” the Guardian reported on Sunday that EU leaders are prepared to abandon a November conference where the agreement (which will, in reality, likely take the form of a vague “political statement”) was supposed to receive the final signoffs from both sides before heading to a vote in the EU Parliament, UK and Dublin. In its place, EU leaders are considering holding a summit to hash out a plan for an extraordinary “no deal” Brexit. Reports about the possibility of an emergency summit followed another round of conflicting reports about the status of a deal – with reports that a draft agreement had been reached were once again immediately followed by anonymously sourced reports to the contrary on Sunday.

These reports closely followed an editorial published by Arlene Foster, the leader of Northern Ireland’s Democratic Unionist Party, claiming that her bloc would oppose any agreement leaving open the possibility that any substantive borders could arise between Northern Ireland and the rest of the UK, a possibility that Foster said would be tantamount to the “annexation” of Northern Ireland by the EU.

This development has apparently shattered EU negotiators’ willful illusion that May might be able to unite Parliament around an agreement that the Continent would also find palatable. What’s worse, these last-minute difficulties arose after both sides had leaked hat a draft agreement had nearly been reached.

In response to concerns over May’s ability to hold her government together and push through a deal, however, the EU is now planning an alternative use for the November summit should it be required.

The bloc’s deputy chief negotiator, Sabine Weyand, had told EU ambassadors gathering in Luxembourg on Friday that talks were progressing well, and that results might be made public as early as Monday. One senior EU diplomat said: “The wedding knot is tied.”

The two negotiating teams were due to make an assessment of the state of play on Sunday evening. A leaked EU planning document, obtained by the German newspaper Süddeutsche Zeitung, noted: “Deal made, nothing made public (in theory).”

May’s volatile domestic situation remains the greatest risk to a deal. Internal government emails leaked to the Observer revealed on Sunday that the DUP leader, Arlene Foster, had privately let it be known that following a “hostile and difficult” meeting with the EU’s chief negotiator, Michel Barnier, last week that she was now ready for a no-deal scenario. She said she regarded it as the “likeliest outcome”.

In a story published in Sunday’s Financial Times, the paper’s reporters offered a broad outline of the negotiations surrounding the Brexit withdrawal treaty and its controversial “backstop” plan (which has been revised again and again since the initial agreement-to-agree on a protocol for the Irish border was reached last December).

Mrs May has said that leaving the customs union is “non-negotiable” and the deal is expected to be premised on Britain ultimately pursuing an independent trade policy, with separate agreements from the EU around the world.

But any deal this week will turn on Britain being able to stay in a “temporary customs arrangement” with the EU while the Northern Irish border issue is solved — a period that will be finite but without an immovable end date.

Such an option will allow Mrs May will be able to say she has agreed terms to ensure Britain’s economic union with Northern Ireland will remain undivided, at least in terms of the UK’s customs territory.

But as a point of law, the withdrawal treaty will also make clear that regulatory and customs barriers could be erected across the Irish Sea as a last resort as part of a “backstop” plan specific to Northern Ireland.

It is for this reason that Mrs May’s partners the Democratic Unionist party are threatening to oppose the deal. Writing in the Belfast Telegraph this weekend, Arlene Foster, DUP leader, urged Mrs May “to stand by her principles and instincts rather than accepting a dodgy deal foisted on her by others”.

While EU officials reportedly insisted that these preparations represent a “parallel track” to negotiations over a deal, the preparations will include plans to avoid such practical concerns as how to avoid “long lines of lorries” arriving from the UK from piling up at customs.

The European commission’s secretary general, Martin Selmayr, told member states last month that their governments would need to decide how far it would be in the EU’s interest to mitigate some of the impacts of a scenario in which the UK leaves the bloc without a deal.

A senior EU diplomat said leaders at the November summit would also want to coordinate their responses in areas where national governments have competence, such as contingency measures to avoid long queues of lorries waiting at customs, or in aviation and haulage.

A senior EU diplomat said: “Preparations on contingency are really advancing in almost all member states. We’re in close contact with our neighbours and exchanging all these issues. The commission has beefed up its team working on contingency.”

“This is a parallel track. We’re going to do this anyhow whatever the outcome because even if there’s a positive outcome [this week] we’ll still need to continue preparedness and contingency because we can never exclude the possibility that negotiations will break down at a later stage”, the same source said.

“Unless we have a final deal agreed upon by the House of Commons and the British parliamentary system we’ll carry on with our preparedness and contingency. That’s normal work.”

As a reminder, here’s a timeline of important Brexit-related dates and a summary of four different possible outcomes once “Brexit Day” (set for March 29, the last business day of the first quarter) arrives (charts courtesy of ING and Statista):

Brexit

Two

It’s not surprising that the EU is moving ahead with this badly needed contingency planning. What is surprising, however, is that it took them this long – though we imagine they held off to avoid any damaging leaks that could have further destabilized May’s already tenuous grip on power. With nearly all of the difficulties over the negotiations arising from the UK’s side, it’s worth asking at what point will the UK’s Continental partners simply throw up their hands and walk away?

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Violence, Public Anger Erupts In China As Home Prices Slide

Last March, we discussed why few things are as important for China’s wealth effect and economy, as its housing bubble market. Specifically, as Deutsche Bank calculated at the time, “in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice their total disposable income of RMB12.9 trillion.” The German lender added that this (rather fleeting) wealth effect “may be helping to sustain consumption in China despite slowing income growth” warning that “a decline of property price would obviously have a large negative impact.”

Naturally, as long as the housing bubble keeps inflating and prices keep rising, there is nothing to worry about as the population will keep spending money buoyed by illusory wealth appreciation. It is when housing starts to drop that Beijing begins to panic.

Fast forward to today, when Beijing may be starting to sweat because whereas Chinese property developers usually count on September and October to be their “gold and silver” months for sales, this year has turned out to be different. As the SCMP reports, not only were sales figures grim for September, but the seven-day national holiday last week also brought at least two “fangnao” incidents – when angry, and often violent, homeowners protest against price cuts offered by developers to new buyers.

These protests are often directed at sales offices, with varying levels of intensity – from throwing rocks to holding banners and putting up funeral wreaths. The risk, of course, is that as what has gone up (wealth effect) will come down, and as home ownership has remained the most important channel of investment for urban households in China in the past decade, price cuts have become increasingly unacceptable and a cause for social unrest.

Just last week, angry homeowners who paid full price for units at the Xinzhou Mansion residential project in Shangrao attacked the Country Garden sales office in eastern Jiangxi province last week, after finding out it had offered discounts to new buyers of up to 30%.

A similar incident took place in suburban Shanghai, where the same developer slashed prices at another project called One Mansion by a quarter.

While the protests have been isolated so far, the risk is that the greater the slide in property prices, the more widespread popular anger will become:

“Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities.

Or fall at all, for that matter.

While China’s stock market has had its ups and down, along the way accompanied by various “rolling” bubbles affecting assored Chinese assets, China’s property market has soared since the 2000s making home ownership the quickest way to gain wealth. In Beijing, homes that went for an average of around 4,000 yuan (US$580) per square metre in 2003 are now above 60,000 yuan (US$8,600) a square metre, according to property price data provider creprice.cn.

And, in a page right out of Ben Bernanke’s playbook, who in 2005 claimed that “we’ve never had a decline in housing prices on a nationwide basis” and as a result never would, what is now taking place in China is nothing short of a shock to the general population: “People are so used to rising prices that it never occurred to them that they can fall too. We shouldn’t add to this illusion,” Shao said.

Meanwhile, dreading that this moment would eventually come, the government has been working on measures to cool property prices for years, calling residential real estate not only an economic issue but also “an important issue for people’s livelihoods that influences social stability”, in a directive back in 2010.

And while the industry remained strong in the first eight months of the year it started slowing last month, according to data provider China Real Estate Information Corp. Official statistics showed that in Shangrao, where the violent protest occurred, transactions of homes last month fell by 22% from August and 18% from the same month last year. In Shanghai, sales in the past five weeks have risen slightly from the same period last year, but average prices dropped in September by over 3% from August and 1.4% from the same period last year.

Quoted by SCMP, Zhang Dawei, chief analyst at Centaline Property, warned that not only were the overall sales dropping, but poor construction quality could also be a cause for more violence. “Try not to buy homes built in 2018, because while the developers were short of money, the same is the case with contractors,” he said, and had an even more ominous warning about what’s coming: “The fourth quarter would be a peak time for residential project completion. Issues which used to be papered over by rising prices could erupt in this period… so we should look out for a sudden surge [public violence] in the coming months.”

Ultimately, it’s all a question of public expectations: expectations that have been number following years of government bailouts and bubble reflating, making sure that every single drop in housing was promptly offset.  Hu Xingdou, a Beijing-based economist, said despite China’s market-oriented reforms 40 years ago, investors still lacked respect for market and social rules.

“They don’t have the spirit of contract, and they always think they can fight against the rules,” he said. “As a commodity, the value of homes can both rise and fall. Investors should obey this fundamental rule.”

But why should they if until recently, policymakers did everything in their power to avoid them this simplest of lessons.

To be sure, public anger at falling prices is hardly new. Rampaging against price cuts was first seen in 2011, when homebuyers of a residential project named Oriental Rose in Beijing’s Tongzhou district mobbed a Huaye sales office after the firm cut prices by a tenth.

Similar incidents have erupted whenever investors have found their property value depreciating. And, in a country where there are relatively fewer investment channels and an unpredictable stock market, such protests are always couched as a struggle to protect individual rights. In many such cases, protesters demand compensation or cancellation of their purchase, and in order to prevent further social disorder, developers often accept their demands.

In other words, moral hazard in China is so pervasive, it threatens the very fabric of society.

Wang Cailiang, director of the Beijing Cailiang Law Firm, said although fangnao was against the law, the government had tolerated such protests because it was ultimately responsible for the surging prices; and it is better to punt to the real estate company than being forced to directly bailout consumers.

“It was the government that pushed up the prices by profiting from selling land to developers in the past two decades,” he said. “Now public anger over home prices has become a major social issue.”

At a meeting of the Communist Party’s Politburo in late July, top officials reiterated that “containing home price gains” would be a priority in the second half of the year. Of course, if home price losses accelerate to the downside, Beijing will have no choice but to scramble and reflate another bubble, even as the Trump administration scrutinizes every monetary and fiscal decision by Beijing with a fine toothed comb.

Meanwhile, anger is only set to grow, the only question is whether it will be a slow boil or a violent eruption. Economist Shao expected average home prices to drop slightly in the coming months as the government continued efforts to control them.  In the first two weeks of September, growth was close to stagnating in 40 major cities across the mainland with the total number of new home sales up by just 1% from the previous month, according to China Real Estate Information Corp data.

Should this slowdown accelerate significantly to the downside, then the “working class insurrection” that China has been preparing for since 2014…

… will finally materialize with dire consequences for the entire world.

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CSU Suffers Stunning Defeat In Bavaria: Loses Absolute Majority In Worst Result Since 1950

Voters in Germany’s economically dominant southern state of Bavaria delivered a stunning rebuke to the ruling Christian Social Union, in an election that underscored the evaporation of support for the parties in Angela Merkel’s grand coalition in Berlin.

With all eyes on Sunday’s Bavaria election, moments ago the first exit polls were published and showed a historic collapse for the ruling CSU party, which has ruled Bavaria continuously since 1957, and which saw its share of the vote collapse from 47.7$ in the 2013 election to just 35.5%, losing its absolute majority and suffering its worst result since 1950, as voters defected in their droves to the Greens and the far-right Alternative for Germany.

The CSU was followed by the Greens which soared in the election, more than doubling to 18.5% from 8.6% in 2013, the FW also rose to 11% from 9.0%, in 2013, while the nationalist AfD was set to enter the Bavarian regional assembly for the first time with 11% of the vote. Meanwhile, the other establishment party, the SPD also saw its support collapse from 20.6% in 2013 to just 10% today.

The full initial results from an ARD exit poll are as follows:

  • CSU: 35.5 %
  • Grüne: 18.5 %
  • FW: 11.5 %
  • AfD: 11.0 %
  • SPD: 10.0 %
  • FDP: 5.0 %
  • Linke: 3.5 %
  • Sonstige: 5.0 %

Visually:

This was the lowest result for the CSU since 1950.

What happens next? Well, now that we know that the “unexpected comeback” scenario is off, here is what the “historic defeat” would mean for Germany in the coming days, as noted earlier by ING:

Historic defeat: The CSU would probably still lead the next Bavarian government with one or two coalition partners. There would be no significant shift in the federal upper house. Instead, Chancellor Merkel would emerge as the real winner of the election. The CSU would need some time to digest such an election defeat, focusing on inner-party issues and wasting less energy on conflicts with Merkel. As a result, the coalition in Berlin could again focus on implementing the substance of its coalition agreement. At the same time, however, a historic CSU defeat could be a worrying sign for Merkel, marking a new chapter in the deterioration of the conservative bloc. A significant loss would simultaneously fuel the AfD’s position as a strong opposition party, illustrating the increasing frustration of some voters with established parties, a trend which would definitely complicate coalition-building at the next federal election.

It could be worse: as Deutsche Welle noted earlier, the CSU collapse could lead to Seehofer’s resignation from Merkel’s government, and conceivably Söder’s exit from the Bavarian state premiership, which would remove two of the chancellor’s most outspoken critics from power, and give her room to govern in the calmer, crisis-free manner she is accustomed to.

Furthermore, the heavy loss and potentially big resignations in the CSU might push a desperate party in a more volatile, abrasive direction at the national level. That would further antagonize the SPD, the center-left junior partners in Merkel’s coalition, themselves desperate for a new direction and already impatient with Seehofer’s destabilizing antics, and precipitate a break-up of the age-old CDU/CSU alliance, and therefore a break-up of Merkel’s grand coalition. In short: Anything could happen after Sunday, up to and including Merkel’s fall.

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New Highs Or Bust

Authored by Sven Henrich via NorthmanTrader.com,

Long term market trends remain intact, yet charts indicate a market on a knife’s edge as significant technical damage has been inflicted. Markets are deeply oversold and the nature of the next rally will be determine whether this bull market can survive or if a larger bear market may begin to unfold. The larger message: New highs or bust.

In this week’s update I’ll give you both some of the bullish and bearish perspectives focusing mainly on technical considerations.

Before I dive into some of the arguments first some context and perspective on this correction because it is so critical to understanding the big picture and why this correction may be different.

In early September in “Lying Highs” I outlined the following:

“A key test may come for markets in the September/October time frame. If prices can sustain above January highs the 3042 technical zone may well be reached in 2018.

If not, the risk dynamic may shift dramatically especially if volatility is breaking out of its wedge pattern”:

Here’s the updated chart:

$SPX fell right into the risk zone tagging the weekly 50MA while volatility broke out of its wedge pattern. In process the 2016 trend line is currently being tested.

Why is this chart so important? Because it ticked off a key element missing in the check list of big market topping patterns: New highs on large negative divergences.

In April I wrote a piece called “The Big Market Tops”. If you haven’t read it I encourage you to have a look as it outlines some of the key elements common to larger market tops.

In that piece I concluded:

“The current market action is exhibiting elements of a market having entered a potential topping process yet several historical elements are still missing to confirm a top being in place, hence staying open minded and flexible may not be the worst course of action”.

Tops are generally processes that advertise trouble in advance in the form of negative divergences as they indicate weakness underneath the exuberant price action. Those are currently not in place.”

Now they are.

Indeed the lead up to this latest correction advertised the weakness underneath and negative divergences well in advance and the consequences are now obvious. A couple of quick, but important examples:

On the day of new all time highs on the $DJIA I highlighted the negative picture in new highs/new lows:

It indeed signaled what was to come:

Another key signal was equal weight diverging negatively:

That lower high on $XVG as $SPX made a new high was a key signal:

And we saw warning signs in the individual stock and index charts. Example here is the $NDX:

And we just saw the results:

As I said on the outset: The technical damage inflicted is severe as markets printed rising wedge breaks and a rejection of new highs.

Examples:

$WLSH:

$TRAN:

$NYSE is just a broken chart:

$SPX:

This is just technically plain ugly as trend line after trend line keeps breaking to the downside.

Indeed the damage is so severe that 3.5 months of relentless summer buying was wiped out in a matter of days:

The main point here: Negative divergences and weakness underneath on new highs produced a major breakdown from new market highs.

And by doing so markets are following a historic script of eventually far reaching consequences:

The most recent bull market tops came on multi year channels and/or rising wedges that eventually broke their trend support on negative divergences. This current wedge is extremely steep and narrow. The 2009 support trend line has not broken yet, but got awfully close last week.

And let’s be clear: If this support line sees a sustained break the bull market is over.

Note the key previous trend line saves came in context of record global central bank intervention in 2016 and 2017 and the blow-off push over the 1987 trend line in January came on the heels of US tax cuts. The most recent highs again pushed against the trend line and failed again on a negative divergence.

The context of rising yields here is critical as yields are threatening to see a sustained break above the long term $TNX trend line, the most recent trend lines tags coinciding with the end of the previous bull markets.

In February in “The Ultimate Bear Chart“, I highlighted a potential key ratio relationship between bonds and stocks.

I said at the time:

 “I’m not calling for an immediate collapse here, but I’m pointing to a possibly huge structural relationship between bonds and stocks, one that will likely take years to play out. But the signs of trouble are already in this chart.”

Here’s is the updated chart:

Back below the 2012 and 2013 highs, just falling out of a bear flag as $SPX is testing its 2009 trend line and $TNX is breaking above the 2013 highs.

Put this all together and you have this macro context:

The main message for markets: It’s a key time here because the potential consequences of a technical breakdown are severe and let me give you one chart to highlight this, the larger market index, the $VTI:

Like many of the index charts it made new highs on a negative divergence. This most recent correction has reconnected with its long standing support moving average the weekly 50MA. And this support tag is highly suggestive of a coming rally and I’ll discuss this further below, but note that the recent highs created a major technical confluence aligning the .382 and .50 fibs with the key price pivots of 2014-2017.  This is suggestive that a confirmed break of the bull market would invite a technical price retests to at least the .382 fib initially, implying that the entire market rally since the US election will be retraced at some stage.

But we do not have a confirmed break and hence I want take some time and focus on the bullish view which is the common perspective here, the one says none of the above matters.

After all every single correction since the 2009 lows has been a buying opportunity during this age of permanent intervention and artificial stimulus.

The bullish argument: Hey, we just tagged the 200 day moving average and look how magically we closed Friday again above it:

A quick look at the larger picture of 200MA corrections lends credence to this perspective:

And note how oversold we are now. This most recent RSI dip is actually quite historic. Just take a look at the $RUT to get the perspective:

It’s the most oversold reading since the 2011 correction. But that may actually be a bad sign, and I’ll address this further below.

Look at $NYMO, it almost hit -100 last week, key reading suggestive of a bounce to come:

At the same time note the key trend line “saves” we witnessed last week besides the 200MA on $SPX.

Examples:

Here’s the $DJIA:

Here are transports:

Here’s $JNK:

Here’s $TLT:

Here’s the $NDX:

All saved. For now.

And note how last week’s correction served to reconnect with key moving averages as support.

Examples:

$NDX tagged its weekly 50MA:

At the same time it reconnected with its quarterly 5EMA which was overdue:

In short: One can make a solid case here as to why we should see a sizable rally off of these trend line saves and MA reconnects in context of the deep oversold readings either from last week’s lows or any new lows.

In fact the bullish view would suggest that this correction is simply another quick washout before year end positive seasonality and as record corporate buybacks will return following their recent blackout period.

After all, the CPI chart shows no breakdown yet (lagging data):

And I would support this view as long as the 2009 trend line does not break and new highs can be made which then leave the technical 3042/43 target zone intact:

But be clear: The road to new highs is paved with brutal resistance:

The January highs are resistance. The broken 50MA is resistance, as are the fib levels above and the chart shows a clear potential double top. The technical damage is so vast that it won’t be easily repaired.

Bottomline: Bulls have a lot to prove here.

I’ve said on previous occasions that there is no evidence that suggests that markets can make and sustain new highs without renewed central bank intervention and/or stimulus in some form. We simply have not seen markets operate without any of these in play in some form or another since 2009 and now, for the first time, there is no clear visible path of new intervention being on the immediate horizon.

As we see markets work off oversold conditions I’ll leave you with 2 charts to consider as well.

Volatility has broken out hard:

$VIX RSI is currently overbought, but note we now have seen 2 major wedge breaks to the upside. The 2017 wedge broke to the upside in February, has since build another, higher wedge, and this has now broken to the upside as well. The message: Volatility, in the big picture, is increasing to the upside and low volume summer conditions simply masked that trend.

One other chart that should raise some eyebrows. Yes we are massively oversold, but are we too oversold perhaps indicating this sell off was different and a bearer of things to come? Sounds counterintuitive, until you look at this chart:

Last week’s decline was so outsized on the oversold front that it printed the largest oversold RSI reading on cumulative $NYAD since 2008.

That print back then, was not a bullish print. It worked off oversold conditions and the rally it produced failed.

If this next rally fails, the 2009 trend line may end up broken and with it the bull market.

New highs or bust.

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Trump: Mattis Is “Sort Of A Democrat” Who “May Leave” The Administration

President Trump told CBS‘s 60 Minutes that Defense Secretary James Mattis might be one of the next officials to depart his Cabinet.

Asked by Leslie Stahl if the Trump administration was in chaos – citing the high turnover, Trump said It’s wrong, it’s so false… It’s fake news.” 

“I have people now on standby that will be phenomenal,” he continued. “I think I have a great Cabinet. There are some people that I’m not happy with. I have some people that I’m not thrilled with, and there are some people that I’m beyond thrilled with.”

Stahl then asked specifically about Mattis, whose departure has been rumored for weeks, to which Trump replied: “I had lunch with him two days ago, I have a very good relationship with him. It could be that he is [leaving],” adding “I think he’s sort of a Democrat if you want to know the truth. But General Mattis is a good guy. We get along very well. He may leave at some point. I mean, at some point, everybody leaves. People leave, that’s Washington.”

Watch: 

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Oil’s $133 Billion Black Market

Authored by Yale Global via OilPrice.com,

Oil is still the world’s leading energy source, with growing demand, a fluctuating pricing system, and much of its production in volatile regions. The oil market’s value is larger than the world’s valuable raw metal markets combined, with an annual production valued at US$1.7 trillion. A flourishing black market is no surprise, with about US$133 billion worth of fuels stolen or adulterated every year. These practices fund dangerous non-state actors such as the Islamic State, Mexican drug cartels, Italian Mafia, Eastern European criminal groups, Libyan militias, Nigerian rebels and more – and are a major global security concern.

The top five countries accused of oil trafficking – Nigeria, Mexico, Iraq, Russia, and Indonesia – are also producers. It is estimated that Nigeria alone loses US$1.5 billion a month due to pipeline tapping, illegal production and other sophisticated schemes. In Southeast Asia, about 3 percent of the fuel consumed is sourced from the black market, estimated to be worth up to US$10 billion a year. In Mexico, drug cartels launder drug revenues through the oil trade

Other countries are not immune. Turkey is not an oil producer yet serves as a major transit route for hydrocarbons flowing to Europe from OPEC countries like Iraq and Iran. As an energy hub, Turkey is strategically situated for the illegal trade and lost an estimated US$5 billion in tax revenue in 2017. An uptick in smuggling oil and other refined products began 2014, when ISIS took control of major Syrian and Iraqi oil fields.

As with most commodities, the volume of oil smuggling is primarily linked to fluctuating prices. With climbing oil prices, illicit trade is expected to increase. The European Union is a prime example on how price disparities of fuel within its own member state countries tend to incentivize illegal trade producing counterintuitive routes. Lower oil prices in Eastern Europe have created maritime smuggling routes to the United Kingdom and Ireland. Ireland estimates it loses up to $200 million annually with fuel fraud, while up to 20 percent of fuel sold in regular gas stations in Greece is illegal.

The legal complexities and ambiguities of the global oil and gas trade often create an opening for illegal activity.

In some cases, subnational actors openly export oil despite official prohibition by central governments. The Kurdistan Regional Government in Iraq maintains it is their region’s constitutional right to export oil independently, in defiance of the central government. With Baghdad withholding the region’s 17 percent of budget share, the regional government sought economic independence through hydrocarbons and found a degree of international sympathy, given its role in combatting ISIS and hosting 1.9 million refugees and internally displaced people. The unrefined product was sent via pipeline through Turkey’s Ceyhan port, loaded by various Greek shipping companies on tankers, then stored in Malta or Israel until buyers were found. Shifting routes of Kurdish oil tankers can be observed on sites like tankertrackers.com.

Authorities who benefit from the trade often stymie efforts to combat illegal trafficking, as seen in countries like Iraq or North Korea, with terrible consequences for citizens. Conflict and illicit trading near the Niger River Delta reduced overall foreign direct investment in recent decades.

With 90 percent of the world’s goods, 30 percent of which are total hydrocarbons, traded by sea, much of the illegal fuel trade is conducted on water. Two thirds of global daily oil exports are transported by sea, reports the UN Conference on Trade and Development, and a staggering 64 percent of international waters are areas beyond any national jurisdiction. Non-state actors offshore West Africa, Bangladesh or Indonesia take advantage of loopholes created by international law and the law of the sea. Transfer of illegal fuel is often done ship to ship on neutral waters – with one ship commercially legal, recognized as carrying legitimate imports at the final port of destination. Thus, illegal crude from countries such as Libya or Syria finds its way to EU markets. Recently Russian ships have been found involved in smuggling oil products to North Korea through ship to ship transfers.

Armed theft and piracy also occur. Hijackings off the coast of Somalia resumed in 2017, the first since 2012, after the international community reduced enforcement. Beyond jurisdictional issues, many governments are overwhelmed by other maritime security threats and cannot prioritize the illegal trade. In fact, fuel traders have reported that the problem is so pervasive that many companies calculate in advance for losses up to 0.4 percent of any ordered cargo volumes.

The industry runs on high risk tolerance.

Transparency International estimates that over the next 20 years, around 90 percent of oil and gas production will come from developing countries. The relatively low average salaries of state employees relative to the private sector in developing countries encourage the temptation to look for other income sources.

Consider Mozambique, where immense offshore natural gas reserves have been discovered. Emerging from decades of civil war, the country has a diverse wasta system – an Arabic term for bribing and asking for favours – along with strong political allegiances and state structures that struggle to withstand internal and external pressures. Estimates suggest that 54 percent of all cargo movements in the capital city, Maputo, involve bribes, and Mozambique risks following the path of Nigeria, a country in need of socioeconomic development despite vast oil and gas reserves under development since 1958. The country is reported to have already lost around US$400 billion since its independence in 1960 due to theft or mismanagement in its oil sector.

The Organization of Economic Co-operation and Development suggests that the impacts of the illegal oil trade go underestimated, and the affected countries suffer from the deteriorating rule of law, loss of biodiversity, pollution, degradation of critical farmland, increasing health problems and armed conflicts. Other opportunity costs include increased financial risk premiums for investors with billions of dollars lost annually due to illegal bunkering, pipeline tapping, ship-to-ship transfers, armed theft, adulteration of fuel and bribery. Illicit trade allows authoritarian states to maintain revenue flows for years despite international sanctions designed to weaken their rule. In the 11th year of UN oil sanctions, Iraq’s dictator Saddam Hussein had managed to become one of the world’s richest men, with an estimated US$3 billion in wealth

Some governments condone the illicit trade. An intertwining of regime structures and corruption – often supported by governments and corporations – is a major stumbling block for the international community’s attempts to contain illegal trading. So far, governmental and industry efforts to halt the practice have been ineffective – and it could be that the illegal oil trade offers enough benefits to consumers, producers and government officials to disincentivize investigation. Some officials suggest that condoning trade in illicit oil and petroleum products helps keep regional and local security intact.

The first global conference on fuel theft, held in Geneva in April, may be a watershed moment. The conference aimed at encouraging discourse among stakeholders within the hydrocarbons industry on how to tackle the scale of this global crime and was based on the work of Ian Ralby, I.R. Consilium and the Atlantic Council’s Global Energy Center, which produced Downstream Oil Theft: Global Modalities, Trends, and Remedies, the most extensive examination of illicit downstream hydrocarbons activity published to date.

Courtesy of: Visual Capitalist

Similar challenges confront the rapidly growing liquefied natural gas market. Strong international cooperation is required, or detrimental effects for global security, the environment and economic prosperity will continue. Unless monitored and addressed by robust policy and regulation, the illegal oil activities will remain a key funding source for terrorism, organized crime, authoritarian states and violent non-state actors.

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Yes, Something Just Broke

Authored by Lance Roberts via RealInvestmentAdvice.com,

Yes, Something Broke

In this missive, we are just going to focus on the “WTF!” moment of this past week. In order to do this properly, I need to start with last week’s missive where we asked the question “Did Something Just Break?” In that article we addressed very specific concerns about interest rates and the problem they were going to cause.

“Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.”

Chart updated through Friday.

“If you note in the chart above, a short-term ‘warning signal’ has been triggered which suggests that if rates remain above 3%, stocks are going to continue to struggle. The last time this occurred was in May when rates popped above 3%, stocks struggled and bonds outperformed.”

We also updated the pathway analysis for the highest probability outcomes over the next couple of months.

Chart updated through Friday – pathways remain unchanged

While the majority of the pathway’s accounted for a continued corrective, consolidation, process through the end of the year. It was Pathway #3 which came to fruition.

“Pathway #3: The issue of rising interest combines with a break in the economic data, or another credit-related event, and sends the market heading back to test supports at 2800 and 2750. This would likely coincide with a more severe contraction in the economic data which is not an immediate threat. Nonetheless, we should always consider the risk of an unexpected, exogenous, event. (10%)”

The recent sell-off coincides with the rising concerns of higher rates coupled with deterioration in economic growth heading into 2019. To wit:

“As such, our best initial take is that yesterday’s repricing of US growth was an overdue gut-check following last week’s monetary and oil supply shocks.”

In other words, as we have been repeatedly stating, the underlying economic growth story, outside of one-time events and natural disasters isn’t nearly as strong as reported. My friend, Danielle DiMartino-Booth, concurs with my assessment:

” Against that backdrop, it’s becoming clear that many companies are rushing to secure products and materials before prices rise regardless of current demand. You could say they are in panic-buying mode. The upside is that this behavior bolsters economic growth in the short term. The downside is that there is likely to be a nasty hangover. The noise in the economic data will be amplified by the rebuilding from Hurricane Florence. The estimates of the storm’s damage span from $20 billion to $50 billion.”

Of course, you can now add Hurricane Michael to the list. But don’t forget the current spat of economic growth this year was from the 3-massive Hurricanes in 2017.

But here is her conclusion:

“In the event you’re hoping the virtuosity of panic buying can become a permanent prop to the economy, you might want to rethink your thesis. 

Rather, artificial, tariff-driven panic buying pumps up GDP growth in the short term but ensures it will disappoint in the future. Look for fourth quarter estimates to be revised upwards and then look out below into the first of the year. And no, the first-quarter disappointment will not be the seasonal anomaly many economists typically ascribe to economic growth in the first three months of the year. In other words, it could be that much worse.”

More Than Just Rates

But it isn’t just the rise in interest rates, and the threat of slowing economic growth, that is most concerning for the outlook of investors going forward. Both of those issues also translate into weaker earnings growth as well.

“As stated, the risk to current estimates remains higher rates, tighter monetary accommodation, and trade wars. More importantly, year over year comparisons is going to become markedly more troublesome even as expectations for the S&P 500 index continues to rise.”

“With the number of S&P 500 companies issuing negative EPS guidance is now the highest since 2016, it is only a function of time until we see forward estimates into 2019 begin to revised substantially lower.”

The issue of earnings, combined with higher rates, tariffs, and valuations, will likely continue to way on asset prices as we move into 2019.

The one bright spot going into the end of this year is that corporations have been in a “blackout” period for buying back their own shares heading into Q3-earnings reporting period. 

“Given a large bulk of the surge in earnings was due to the “one-time” repatriation of overseas profits of $300 billion which flowed directly into share buybacks.” 

By the beginning of November, that restriction will be lifted and the markets will likely get some support from an acceleration of buybacks headed into year end. However, as stated, that growth will become much more muted.

This Time IS Different

With the understanding the economic and fundamental background may not be supportive for higher asset prices heading into 2019, the market is also sending a very different technical signal as well. As I showed on Thursday, this is the FIRST time the market has broken the bullish trend line that began in 2016.

As shown below, that break of the bullish trend pulls in a new dynamic of potential market action over the next several months which is more akin to a market topping process than the continuation of the previous bullish trend. 

“Given the short-term OVERSOLD condition of the market, we want to use rallies to rebalance risks in portfolios.

#1 – A rally back to the bullish trend line will be used to reduce risk (ie. raise cash) in portfolios by selling lagging positions and rebalancing risk in winning positions. Rule: sell losers and let winners run. 

We fully expect an initial rally to fail as investors caught in the sell-off will be looking for an opportunity to sell. However, if that sell-off fails to hold support at the recent lows it will suggest a bigger corrective action is in process. We will be looking to reduce equity risk further, raise cash, evaluate portfolio allocation models. 

#2– If the sell-off following a failed rally holds support at the recent lows, and turns up, such will suggest a rally back to either the January highs or all-time highs. NOTE: A rally back to all-time highs following a corrective pullback will again retest the underside of the bullish trend line from the 2016 lows. Such remains a ‘bearish’ backdrop from equity risk going into 2019 where economic and earnings data is expected to slow further. We will use any rally back to those levels to reduce risk as noted in #1.

#3– If the rally from the recent lows fails at the January highs we will again use that opportunity to reduce equity risk and rebalance portfolio allocations.”

Back in April of this year, I wrote 10-Reasons The Bull Market Ended In 2018. Primarily, that analysis was built around fundamental issues that would potentially plague markets going forward. With the failure of the markets this past week, along with the break of the bull trend, the bull market still has not yet resumed. More importantly, the current actions are consistent with both previous major market peaks as shown below. (Nominal new highs, declining momentum, and weekly MACD sell signal)

What To Expect Next Week

As shown in the chart below, the market was more than 4-standard deviations below its 50-dma on Friday. This is a very rare event and is an extreme oversold condition. However, along with the evidence above, also suggests the recent bull market trend is finished for the time being. Portfolio management processes should be switched from “buying dips” to “selling rallies” until the technical backdrop changes.

Next week, I would expect to see a rally from the short-term oversold conditions. The good news is that the market WAS ABLE TO CLOSE ABOVE THE 200-DMA on Friday which will keep buyers (algos) in play into next week. However, it will be the breadth and strength of that rally that will be important to watch.

If it is a weak, narrow bounce with little conviction, use the rally to lift positions, trim losers, raise cash and potentially look at initiating some hedges.

As I wrote last week:

“Our bigger concern remains interest rates simply for one reason – you can NOT have higher stock prices AND higher interest rates. Period. One or the other will have to give.”

We now know that was indeed the case.

Checklist Summary Of Actions To Take

As stated, it is highly unlikely the bull market will quickly resume without a further shakeout first. This doesn’t mean we can’t have some hellacious rallies in the meantime. However, the entire supportive structure of the market has now changed which suggests a very different set of actions need to be taken on rallies over the next several months.

Here is what we will specifically be doing on subsequent rallies.

  1. Re-evaluating overall portfolio exposures. It is highly likely that equity allocations have gotten out of tolerance from the original allocation models. We will also look to reduce overall allocation models from 60/40 to 50/50 or less.

  2. Look to add bond exposure to mitigate volatility risk. (Read:  The Upcoming Bond Bull Market)

  3. Use rallies to raise cash as needed. (Cash is a risk-free portfolio hedge)

  4. Review all positions (Sell losers/trim winners)

  5. Look for opportunities in other markets (Gold may finally shine)

  6. Add hedges to portfolios (If the market begins to show a negative trend we will add short positions)

  7. Trade opportunistically (There are always rotations that can be taken advantage of)

  8. Drastically tighten up stop losses. (We  had previously given stop losses a bit of leeway as long as the bull market trend was intact. Such is no longer the case.)

If I am right, the conservative stance and hedges in portfolios will protect capital in the short-term. The reduced volatility allows for a logical approach to further adjustments as the correction becomes more apparent. (The goal is not to be forced into a “panic selling” situation.)

If I am wrong, and the bull market resumes, we simply remove hedges, and reallocate equity exposure.

“There is little risk, in managing risk.” 

The end of bull markets can only be verified well after the fact, but therein lies the biggest problem. Waiting for verification requires a greater destruction of capital than we are willing to endure.

“It’s probably wiser to assume [that God] exists because infinite damnation is much worse than a finite cost.” – Blaise Pascal

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Sunday’s Bavaria Elections: Political Landslide Ahead

A state election is taking place in Bavaria today which should be a key test for Chancellor Merkel’s political future, and could result in a political landslide in the state that holds 16% of the total German population and is responsible for more than 18% of German GDP.

Polls indicate that both the CSU (the sister party to Merkel’s CDU) and the center-left SPD will both lose votes, though most analysts expect the CSU to be able to form a government with other smaller parties (either the FDP and the Free Voters, or the Greens), which should give Merkel more breathing room in Berlin. She might be able to oust the more combative elements within her government, and could therefore gain leeway over asylum and European policy.

That said, as ING warns (full preview below), regardless of the outcome of Sunday’s elections, be prepared for a political landslide with a long-term impact on German national politics: a dramatic defeat of the CSU would first lead to an earthquake in Bavaria, foreshadowing future political developments and structural shifts at the national level; an unexpected comeback of the CSU would probably prompt a political landslide in Berlin.

Below we publish a complete preview of what to expect, courtesy of ING Economics’ Carsten Brzeski, who notes that Sunday’s regional elections in Bavaria could become an important milestone, either imminently or in the future, and that the result will be a “political landslide – one way or the other.”

Germany: Warning – political landslide in Bavaria ahead

Since the start of the new government in March this year, German politics have been hijacked by the forthcoming regional elections in Bavaria. In a bid to defend its absolute majority in Bavaria, the CSU (the sister party and coalition partner of Angela Merkel’s CDU) has been openly criticizing Merkel, starting several inner-coalition conflicts which almost led to a collapse of the government. In June, the CSU and CDU clashed bitterly over the issue of whether or not German police should be allowed to turn back refugees at the German-Austrian border, even forcing Chancellor Merkel to convene a special European Summit. For much of September, both parties were in an almost permanent fight over the fate of the head of the domestic intelligence service.

When Bavarians go to the polls this Sunday, many observers hope that political tensions in Berlin will ease. They could be wrong.

National politics are often hijacked by regional elections

Regional elections in Germany often leave a mark on national and international politics. Just think of the election in North-Rhine Westphalia back in 2010, which led to a rule-changing delay of the very first Greek bailout package or the series of SPD defeats at the start of last year, which turned Merkel contender Martin Schulz from party savior to disappointing failure within only a couple of weeks. Regional elections can always be a kind of confidence vote on national politics, a vote on pure regional issues, parties and the main actors or a combination of both. Very often the interpretation of what drove the election results only comes after Election Day.

CSU tried to score by being trouble-maker at federal level

In the case of the coming elections in Bavaria, however, the question of what drove the election result seems to have been answered already. While the CSU tried to make the election a kind of referendum on Merkel’s stance on refugees, the continuous nagging and trouble-seeking in Berlin, initiated by the CSU, has completely turned this around. According to the trend of latest opinion polls, the CSU’s strategy to distance itself from Merkel in order to prevent a rise of the AfD in Bavaria seems to have been a double failure. With less than 40% of the votes, the CSU is on track to come in with the worst result since 1954. The AfD is currently polling at 10%, as are the Free Voters, an EU-sceptical group that wants to return political power to local authorities. The Greens could come in a surprisingly strong second, currently polling at 18%, while the SPD stands at 12% and the liberal FDP at 5%.

Impact on national politics

Bavaria matters. The Bavarian elections are not only important due to the sheer size of the state, with some 16% of the total German population and more than 18% of German GDP. They also matter because the CSU’s dominance – 12 absolute majorities in the last 13 elections – has been an integral part of the success of the CDU/CSU bloc in federal elections. Currently, some 20% of the CDU/CSU seats on German parliament come from Bavaria.

Looking ahead, the most important aspect for national politics will be the CSU’s performance in Sunday’s elections. In this regard, two scenarios look plausible: current polls are right and the CSU suffers a historic defeat, garnering less than 40% of the votes, or it sees an unexpected comeback, with the party coming close to or even above the absolute majority of seats in Bavarian parliament.

  • Historic defeat: The CSU would probably still lead the next Bavarian government with one or two coalition partners. There would be no significant shift in the federal upper house. Instead, Chancellor Merkel would emerge as the real winner of the election. The CSU would need some time to digest such an election defeat, focusing on inner-party issues and wasting less energy on conflicts with Merkel. As a result, the coalition in Berlin could again focus on implementing the substance of its coalition agreement. At the same time, however, a historic CSU defeat could be a worrying sign for Merkel, marking a new chapter in the deterioration of the conservative bloc. A significant loss would simultaneously fuel the AfD’s position as a strong opposition party, illustrating the increasing frustration of some voters with established parties, a trend which would definitely complicate coalition-building at the next federal election.
  • Unexpected comeback: In this scenario, expect many CSU politicians to experience a testosterone boost. The CSU would be emboldened in its criticism of Merkel, continuing to be a permanent thorn in her side and pushing the federal government coalition closer to the edge of the cliff. As the SPD is also in a kind of existential crisis, the chances of the federal government coalition collapsing before the 2021 elections would clearly increase. In this scenario, any bigger and far-reaching European or international projects will probably be further hampered by German national politics.

Political landslide – one way or the other

Regardless of the outcome of Sunday’s elections in Bavaria, be prepared for a political landslide with a long-term impact on German national politics. A dramatic defeat of the CSU would first lead to an earthquake in Bavaria, foreshadowing future political developments and structural shifts at the national level. An unexpected comeback of the CSU would probably prompt a political landslide in Berlin. German politics continue to be anything but boring.

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