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Earlier today, we showed that on the 9th anniversary of the so-called “bull market”, central bank balance sheet accounted for over 40% of global GDP, amounting to no less than $21 trillion. That in itself, should explain why the “most hated bull market” of all time is not a bull market at all, but the world’s biggest experiment in central planning. 

Yet the time of this unprecedented monetary experiment is coming to an end as we are finally nearing the point where due to a growing shortage of eligible collateral, the central bank support wheels will soon come off (the ECB and BOJ are still buying massive amounts of bonds and equities each month), resulting in gravity finally regaining control over the market’s surreal trendline.

It’s not just central banks, however: also add the one nation which 5 years ago we first showed  has put the central bank complex to shame with the amount of debt it has injected in the global financial system: China.

Appropriately, this central bank handoff is also the topic of the latest presentation by Matt King, in which the Citi credit  strategist once again repeats that “it’s the flow, not the stock that matters“, a point we’ve made since 2012, and underscores it by warning – yet again – that “both the world’s leading marginal buyers are in retreat.” He is referring to central banks and China, the world’s two biggest market manipulators and sources of capital misallocations.

And yet, we all know this, and that’s precisely the problem, one which has served as a persistent source of confusion for one of Citigroup’s brightest minds in the past decade. And, as Matt King puts it in a slide titled announced ≠ discounted, “we know what central banks are doing, so why are we so slow to price it in” especially since the marginal buyer – central banks – sets the price, and the marginal buyer will be gone by this time next year?

Translation: we all know how this ends, so when will we finally admit it?

This is shown in the two charts below which suggest that both the global stock and bond markets are headed for a major crash as a result of the slowdown in central bank purchases.

King previously opined on this paradox last July, when he suggested that not only have markets lost their ability to discount future news, but that central banks – unable to grasp this – believe that in a perverse case of reflexivity, the market is actually giving the “all clear” to their actions, when it is their actions themselves that have broken the market, which effectively encourages central banks to break it even more. To wit:

central banks still cling to the textbook model in which the market discounts all available information ahead of time, meaning that by the time they actually come to do their reduction, provided they’ve telegraphed it beforehand, the effect is already priced in. Unfortunately they seem to have neglected the textbook footnote that states that markets function this way only when they are deep and liquid. That might have been a reasonable description of pre-crisis markets; it seems a deeply unreasonable assumption for post-crisis markets in which leverage is constrained and one set of buyers have come along and absorbed virtually all of the world’s net new issuance.

So where does that leave markets?

According to King there are 5 key lessons investors appear to have forgotten, so here is a reminder.

1. “Mind the flow, not the stock”, which of course refers to the ongoing slowdown in central bank purchases as shown in the charts above.

2. “Announced ≠ already discounted“, or why just because markets have had time to “price something in”, never means that they have priced it in. Also see: markets are deeply irrational (especially if you are trying to stay solvent as a bear).

* * *

King’s third “reminder” is to “think global not local.”

In a slide showing that “everything is interconnected”, he makes another point we frequently discuss, namely that when it comes to the global economy, it’s all about China, and specifically its credit impulse. Here King notes that whereas trailing growth numbers look great, their drivers likely lie elsewhere… like in China, for example…

… where the Li Keqiang index has posted a sharp drop in recent months, and could be the catalyst behind the recent topping in German manufacturing and export sentiment. Here’s Citi: “The latest decline in German manufacturing sentiment follows 6 months after the Li Keqiang (LKQ) index, which tracks Chinese growth, peaked last summer. Likewise, the previous surge in German industrial confidence began in spring 2016, 6 months after the LKQ troughed.”

Germany, China – Li Keqiang Index (YY %), Ifo Index (Index), 2011-2018

* * *

King’s 4th lesson is that “a diverse market is a resilient market”, pointing to the Italian BTP market specifically, where he urges investors to “beware markets with only one buyer”, in this case the ECB, something we also noted three months ago. Here, King also warns that volatility may have slumped in the past year as VIX crashed to all time lows before its recent vol flaring episode, risk remains as seen by the Skew between ATM and OTM volatility, and which is near all time highs.

Citi’s words of caution here: “herding begets fragility.“

This then takes us to the 5th and final lesson from the Citi strategist: “beware of circular logic”, in this case as referring to the US Dollar, because while $ weakness does make for a risk on environment, that trend is about to be challenged. Or said otherwise, enjoy the recent move while you can, because “self-reinforcing processes can run in both directions.“

This brings us to Matt King’s conclusion, which comes in three very simple parts:

• strong markets can make a strong economy…
• and bubbles bring in new buyers…
• what happens when the music stops?

As for King’s chilling assessment of how this all ends when central banks lose control and can no longer inflate another bubble to offset the bursting of the last one, namely that “markets need backstops, but are being given bubbles“, something tells us that just like Marko Kolanovic, King is a closet fan of both the “barbaric relic” and one or more cryptocurrencies.

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With the People’s Bank of China cracking down on bitcoin miners, an unprecedented exodus out of the Chinese hinterlands – where subsidized energy made crypto mining an enormously profitable enterprise – has created opportunities for towns in Canada, and even parts of the US, where relatively cheap energy is the only marketing necessary.

And while some towns and cities have embraced these advantages and have actively sought to recruit enterprising crypto miners (Winnipeg City is one prominent example), some towns that have long played host to miners, even before bitcoin really took off, are struggling with some unanticipated drawbacks – like the enormous energy draw that is overwhelming their power infrastructure as miners suck up megawatts of power (as we’ve pointed out in the past, bitcoin mining globally already uses more energy on a daily basis than the Republic of Ireland, and many other countries, as depicted by the map below).

To wit, a recent Politico Magazine piece focuses on East Wenatchee, Washington, a town near the Columbia River, a region that boasts several hydroelectric power installations – making for extremely cheap power.

Miners discovered East Wenatchee, and towns across three counties in the Columbia river valley, during the early days of bitcoin, and began setting up mid-sized operations in old fruit warehouses and other abandoned buildings.

But today, as large miners crowd in, individual commercial miners can suck up as much as 30 megawatts a day – enough energy to power 13,000 homes.

As more miners pack into the river basin – which Politico says could account for up to 30% of the world’s total bitcoin mining capacity by the end of 2018 – disputes between the newcomers and locals are growing more common, and more outrageous.

The Mid-Columbia Basin isn’t the only location where the virtual realm of cryptocurrency is colliding with the real world of megawatts and real estate. In places like China, Venezuela and Iceland, cheap land and even cheaper electricity have resulted in bustling mining hubs. But the basin, by dint of its early start, has emerged as one of the biggest boomtowns. By the end of 2018, according to some estimates, miners here could account for anywhere from 15 to 30 percent of all bitcoin mining in the world, and impressive shares of other cryptocurrencies, such as Ethereum and Litecoin. And as with any boomtown, that success has created tensions. There have been disputes between miners and locals, bankruptcies and bribery attempts, lawsuits, even a kind of intensifying guerrilla warfare between local utility crews and a shadowy army of bootleg miners who set up their servers in basements and garages and max out the local electrical grids.

Speculators are arriving seemingly every day. Workers at one of the area dams even described to Politico an incident where a group of Asian investors flew in on a private jet to inspect real estate and tour the dams.

The leader of the group asked one of the workers if they could speak with the “dam master,” because they were interested in “buying some electricity.”

For years, few residents really grasped how appealing their region was to miners, who mainly did their esoteric calculations quietly tucked away in warehouses and basements. But those days are gone. Over the past two years, and especially during 2017, when the price of a single bitcoin jumped from $1,000 to more than $19,000, the region has taken on the vibe of a boomtown. Across the three rural counties of the Mid-Columbia Basin—Chelan, Douglas and Grant—orchards and farm fields now share the rolling landscape with mines of every size, from industrial-scale facilities to repurposed warehouses to cargo containers and even backyard sheds. Outsiders are so eager to turn the basin’s power into cryptocurrency that this winter, several would-be miners from Asia flew their private jet into the local airport, took a rental car to one of the local dams, and, according to a utility official, politely informed staff at the dam visitors center, “We want to see the dam master because we want to buy some electricity.”

But as residents watch in horror as bitcoin miners suck up an ever-growing share of their common resources, the bitcoin miners are convinced that they’re doing the area a service – after all, if the industry keeps growing the area around the Columbia River basin could one day become a vibrant tech hub to rival “knowledge hubs” like Seattle and San Francisco.

More broadly, the region is watching uneasily as one of its biggest natural resources—a gigantic surplus of hydroelectric power—is inhaled by a sector that barely existed five years ago and which is routinely derided as the next dot-com bust, or this century’s version of the Dutch tulip craze, or, as New York Times columnist Paul Krugman put it in January, a Ponzi scheme. Indeed, even as Miehe was demonstrating his prospecting chops, bitcoin’s price was already in a swoon that would touch $5,900 and rekindle widespread doubts about the future of virtual currencies.

For local cryptocurrency enthusiasts, these slings and arrows are all very much worth enduring. They believe not only that cryptocurrency will make them personally very wealthy, but also that this formerly out-of-the-way region has a real shot at becoming a center—and maybe the center—of a coming technology revolution, with the well-paid jobs and tech-fueled prosperity that usually flow only to gilded “knowledge” hubs like Seattle and San Francisco. Malachi Salcido, a Wenatchee building contractor who jumped into bitcoin in 2014 and is now one of the basin’s biggest players, puts it in sweeping terms. The basin, he tells me, is “building a platform that the entire world is going to use.”

And squarely between these two competing narratives are the communities of the Mid-Columbia Basin, which find themselves anxiously trying to answer a question that for most of the rest of us is merely an amusing abstraction: Is bitcoin for real?

Still, the die-hards are undeterred. David Carlson, a pioneering miner who was one of the first to discover the region, refers to it as bitcoin’s “El Dorado”.

On paper, the Mid-Columbia Basin really did look like El Dorado for Carlson and the other miners who began to trickle in during the first years of the boom. The region’s five huge hydroelectric dams, all owned by public utility districts, generate nearly six times as much power as the region’s residents and businesses can use. Most of the surplus is exported, at high prices, to markets like Seattle or Los Angeles, which allows the utilities to sell power locally at well below its cost of production. Power is so cheap here that people heat their homes with electricity, despite bitterly cold winters, and farmers have been able to irrigate the semi-arid region into one of the world’s most productive agricultural areas. (The local newspaper proudly claims to be published in “the Apple Capital of the World and the Buckle on the Power Belt of the Great Northwest.”) And, importantly, it had already attracted several power-hungry industries, notably aluminum smelting and, starting in the mid-2000s, data centers for tech giants like Microsoft and Intuit.

* * *

With prices sliding since the beginning of the year, many miners are being forced to reevaluate their business plans. As JP Morgan points out in its “cryptocurrency bible”, 17 million of the total 21 million bitcoins that will eventually be released – as preordained by the bitcoin code – are already in circulation. As competition for the remaining coins grows increasingly fierce, at current prices, miners in the US have roughly a 60% margin at the current prices after energy costs are factored in. Still, equipment and housing fees will eat up most of what’s left.

But as real-estate and energy prices around the Columbia River continue to boom, it increases the possibility that all of the newcomers who have set up shop in the region could move on just as quickly…leaving the hollowed out husks of bitcoin mines, and thousands of displaced locals, in their wake.

 

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Authored by J.G.Martinez via The Organic Prepper blog,

As we begin to become more concerned about the possibility of our own economic collapse, it’s important to see what has happened in other countries. Today, Jose explains how the collapse of Venezuela was deliberately engineered to make the populace bend to the will of a dictatorship. It didn’t happen all at once and most people never saw it coming until it was too late, and they were starving, oppressed, and dying. ~ Daisy

The Collapse of Venezuela Was “a systematic destruction to seize our freedom”

In this article, I would like to expose how this government-induced collapse has affected the psychological health of the population. And I would like to make special emphasis on the word induced.  The nature of the corruption cases has been so large, and the damage to our economy has been so wide, with such devastating effects, that there is no any doubt that this could never have been generated by ignorance, lack of the needed aptitudes and skills, or plain and simple negligence, nor combination of all these factors.

This was a systematic destruction of our institutions, our government structure, and way of life, to allow the government, against the will of the people, to seize our freedom and our democratic system.

What is a crisis?

Let’s formally define what a crisis is.

A harmful, hazardous situation lived by a person or community as a consequence of an unexpected and sudden change in their living conditions. This situation is a threat to their welfare; physical integrity, social and economic stability, and the usual way to face adversity.

This can result that the person crashes down, or otherwise, gets their guts together to overcome whatever they have to face. As it can be supposed, the magnitude of the impact is proportional to the threat, to the personality and the previous mind and body health of the individuals, of the support they could have,  and most importantly…of the preparedness level the people had.

The impact has been divided by the experts into 3 stages:

Stage 1: The Warning. This exists just when there is a previous warning between the initial awareness and the occurrence of the event, such as a hurricane. In this stage, the individuals shall be able to foresee the real dimension of the hazard to be able to act accordingly to mitigate or minimize the damage.

In unprepared communities the impact is huge. In the case of Venezuela there were a lot of things people could have done, but in our society the concept of preparedness is almost unknown, and this can´t be addressed enough. Even those who were aware of the possible situations, like us, saw our preppings swept out in a few months. A dictatorship taking place with bloody and lethal force was something that, despite what some readers may say, was not present even in the worst nightmares of Venezuelans.

Stage 2: The impact phase itself. The gangs took control of the food supply system, under the government’s eye in broad daylight. The military was designated via a presidential bill to seize food companies (including Cargill, and lots of other basic staples producing enterprises). The rationing became more and more common in the entire territory. Then a huge black market appeared, and medications and food disappeared suddenly. The military controlled a large corporation, CASA, in charge of IMPORTING food, instead of producing.

Huge business and bribes are involved here, therefore this was, to my eyes, one of the main signs about what was going to come, and I was not wrong. But the reactions are as different as persons. My main reaction was to prepare a “vacation” trip overseas, as our preps were not going to be enough and my job was a waste of precious time. The salary wouldn’t buy two weeks worth of food (now it does not cover even a week). So I bought my ticket 5 months before the trip and dedicated my time to other online jobs paid in foreign currency, to survive a few weeks while I could settle down and get my family out. Still a work in progress, though.

Having one of my most desired possessions in this world, a motorhome in good shape, would have saved us a LOT of money and it would be right now a very valuable asset. Renting an empty lot in a subdivision to park the RV, would have provided us a more solid condition to migrate.

Stage 3: The aftermath. The common feeling among my former coworkers who are in the middle of the collapse who did not prepare (basically all of them) are now struggling, and I mean, REALLY having a hard time. Their salary is not enough even for food. The benefits, like a full coverage medical insurance that was once the envy of the rest of the working class, are now useless. Doctors have migrated, there are no medications in the private hospitals either, and the coverage is not enough because of the high inflation rates. Those who worked 11 hours a day without developing a plan B, relying just on the company work, are getting their backsides kicked, and I am not lying: they STARVE.

Even with both of the adult members of the family working, their joint salary, benefits and special savings assignations the company provided (12,5% of the salary was additionally paid so the employees could have a savings ability) is not enough. A former coworker, engineer, and his wife, an engineer as well, told me via social networking that his family had been eating just white rice three days in a row. If this is not under your definition of collapse, then please let me know.

The rationing that should be once a week is not arriving to them but once every month and a half of the previous amount if they’re lucky. People want to get out and can’t. They need to buy food and can’t. They need medical care and can’t get it. They need to fix their cars and can’t afford the parts, not even an oil change. Crime is rampant. Kids have been kidnapped at gunpoint from the doors of their schools.

To me, this is the collapse. There was NOT any possible way to prepare for this, I think, other one than but bugging out  outside of the borders of that politically-induced mess until the dust settles down.

The reactions of the rest of the expat communities all over South America, the receivers of most of the Venezuelans who could leave, have been, in my opinion, appropriate. There have been blossoming NGOs to assist those who had to stay and those who are migrating in desperation.

There have been people who fell into such deep depression that they have commited suicide. Every week the news reports one or two self-inflicted deaths. Official media is under heavy censorship. This is not something that you are going to see in the world media.

In the hospitals, the children dying from malnutrition are registered with some other cause of death. Those pictures we used to see from Ethiopia, now we see it in the main social networks, but the children are white, with straight hair and clear brown or green eyes this time. But they are indeed starving, just like the Ethiopian people.

What could be done?

I am not the kind of person who stays sitting for too much time. I look for solutions to problems. It’s in my blood.

I am going to be creative now, and you will have to allow it to me so we, as a prepping community perhaps could submit some solutions. (I am already working in a project with nutrition specialists, agronomical engineers, and some other people with more experience in this stuff than I have.)

1. Everyone with a small plot should start to grow assorted vegetables and fruit, under expert advising, focusing on a short crop cycle.

2. The same should be done with those with land suited to have some cattle, mainly goats and pork, as these are short cycled and abundant.

3. People in the cities, living in the barrios who are still working for a so-called salary should pack up their families and bug out, heading to the fields and rural communities. Crime, crowding-induced diseases, lack of water, and the general environment of desperation are taking their toll on the adults’ and children’s psyches. It is better to get to some friends’ farm or cottage and help as much as possible to feed the family than to stay in a barrio under gang control. There have been shadowy reports about the gangs getting stronger, to the point they have actually taken young woman as sex slaves.

4. The communities should organize themselves to avoid robbery of their production. This is now a more and more common situation. If someone grows anything in their backyard, neighbors will trespass in the middle of the night once the crop is ripe to feed their own starving children. This happened several times to one of my plumbing freelancers. He packed, sold the house in that crappy barrio, and went back to his original mountain place where he had a small plot on the property of his family, all of them farming people. Now they can feed their wonderful kids, they are healthy, and in a less populated, closer-knit community in their small original rural town. This was my advice to him, and it was great to see them leave and improve their life conditions.

5. A local exchange trading system should be stablished in the communities, as the currency has no value. This is as old as humanity itself, I know. But now we have one advantage: we may stabilize and set up fair trades because we have access to information from other countries and their economies. In a town close to a river with pleny of fish, it should be cheaper than another one with lots of green hills for keeping goats. With a little research, a fair price for basic staples could be achieved.

6. And last but not least, alternative energy production systems should be installed, the better systems with renewable sources that one can afford. I am a huge fan of closed cycle steam turbines. They can be fed with vegetable debris product of the cleaning and grooming of orchids and crop plots, and their output power rate is decent. Combine these with home made wind systems or small water steam turbines, and there is a lot of potential. And they can be made up with readily available parts: bike gears, 200-liter barrels, and old car alternators, farm equipment, old batteries, you get the picture. Someone close enough to your place needing light for the house, at night, could provide you with eggs for the week, and you provide power enough for a TV or a small fridge. Why this? Because our power grid is going to fail anytime soon. There is a union secretary in jail because he transmitted the warning. The government called him a traitor, accused him, and he is in the can now. Go figure.

That is what preppers do, after all, don’t we?

 In our Venezuelan example, with a worthless currency these solutions could be life-saving.

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In the not-too-distant future, law enforcement will be able to easily track our movements thanks to microchips, which some workers – as we’ve previously reported.

Indeed, some people are happily lining up to be microchipped – even throwing parties to celebrate their coworkers embracing the microchipping phenomenon, without any regard to how this technology could be used to further totalitarian aims.

As technology that tracks our movements becomes more widespread, an unassuming article in a trade journal about RFID technology – which uses radio signals to track movements of people or products – highlights a portentous development: Honduras, the Philippines and the Cayman Islands are deploying license plates with RFID technology to help track their citizens’ movements on highways and other roads.

The specific technology being used by these three countries are called the IDePlate and IDeSTIX. The former is implanted in license plates while the latter is in innocuously attached to a car’s windshield. Together, they allow authorities to track their citizens, while also providing a fallback in case a license plate is stolen.

The RFID technology, developed by the Dutch firm Tonnjes E.A.S.T, uses cryptography to verify the owner of a car, which can then be ascertained by the operator of a scanner similar to the license plate scanners that are already in wide use by police in the US (which, as we pointed out several years ago, will soon be operated by drones).

Tonnjes offers governments the hardware needed to fabricate and install the tags, while also providing the software to program them.

The RFID-enabled plate is designed to be forgery-proof, says Jochen Betz, Tönnjes’ managing director. The UCODE DNA IC uses cryptographic authentication based on the Advanced Encryption Standard (AES). Each time a tag is interrogated, it generates a new AES calculation based on its unique crypto key, which the reader receives and is programmed to verify. That ID number can then be linked to data about the vehicle and registration in a database.

By using both the IDePlate and IDeStix, the system enables users to identify any misuse of license plates. The problem with plate identification alone, the company explains, is that it cannot detect if the wrong plate is attached to a car. “Plate theft is very difficult to avoid,” Betz states, so the IDeStix provides a level of redundancy. The IDeStix is a hologram-printed windshield sticker that is placed on the window’s interior.

The RFID-enabled sticker can be interrogated simultaneously with the plate tag, and can then respond with its own encrypted code that is linked to the vehicle’s information. Tönnjes sells the RFID-enabled blank or finished plates to government agencies and offers equipment to emboss a plate number. They can then use their own software to link each tag’s encoded RFID number with the plate ID.

While governments are just beginning to roll out these systems, RFID Journal notes that one potential complication in rolling out the windshield-sticker tags (which, again, are necessary to compensate for license-plate theft) is the number of tags already attached to vehicles, mostly by their manufacturers, to track their movements.

When it comes to the capturing and filtering of data, Betz notes, one software-based challenge for a system like this is the large number of RFID tags already attached to parts of most modern vehicles. In fact, he estimates, there can be 15 or more RFID tags on a single car, most attached to parts that were being tracked by the manufacturer prior to the car’s sale. “We don’t want to talk to 17 tags [on a single car],” he states. Therefore, the system is designed to screen out all tag reads that are not recognized as part of the IDePlate system.

In the Cayman Islands, the RFID-tagging system was adopted last year, with the island’s government installing checkpoint readers (also created by Tonnjes) to capture vehicles’ information.

In the Cayman Islands, the system was taken live in 2017, with approximately 50,000 vehicles now equipped with the RFID-enabled plates and windshield stickers. Between five and 10 checkpoint readers provided by Tönnjes are scheduled to be installed around the county. The company supplies the middleware and software that captures the tag ID reader data and feeds that information, linked to the vehicle IDs, to the Cayman Island government’s vehicle database. The reader installation is posing a unique challenge, Betz says, since the devices had to be mounted on hurricane-proof gantries. The Cayland Islands government needs to ensure that the gantries would be able to sustain high winds.

The Philippines has ordered millions of plates to begin rolling out its own system…

In addition, the Land Transportation Office (LTO), a department of the Philippine Ministry of Transport, has hired Tönnjes to deliver 3.25 million of its license plates for cars and motorcycles. The government is also purchasing IDeSTIX windscreen labels for 775,000 cars, and IDeSTIX Headlamp Tags for 1.7 million motorcycles.

And Turkey is also piloting the technology…

Turkey has also piloted the technology with vehicles on a testing course of the country’s traffic police, while a trial in Russia tracked the movements of public buses throughout the city of Kazan. In addition, Tönnjes and Kirpestein are in discussions with the government of the Netherlands to conduct an open-road pilot, and is also in talks with vehicle authorities in that country regarding further pilots of the technology.

…Which means it’s only a matter of time before it arrives in the US…

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A New Zealand businessman is said to be the frontrunner to replace Gary Cohn as Donald Trump’s top economic adviser. According to the New York Times, the President is “strongly considering” Christopher P. Liddell, who works as an assistant to Trump and director of strategic initiatives, for Gary Cohn’s now vacant job.

According to the NYT’s two sources, while Trump has not yet made a firm decision, Liddell was the “front-runner” to become the White House’s top economist.

Some background: Liddell rose up the ranks to become chief executive of New Zealand company Carter Holt Harvey in the 1990s, before he relocated to the United States. In 2005 he was appointed chief financial officer of Microsoft, then shifted to General Motors where he helped the company recover after the global financial crisis.

At the start of this year he was named Trump’s White House director of strategic initiatives – a job placing the New Zealander at the head of a group dubbed “the White House think tank”.

Liddell had joined Trump’s administration in early 2017 and had worked closely with Jared Kushner, the president’s son-in-law and senior advisor, since his appointment. His role included assessing the way the Government bought technology, and the services it offered people online. With a lineup of high-powered jobs within big global corporates, Liddell had the sort of experience that would fulfil Trump’s hopes for someone to fill the role, insiders have said.

In a television interview late last year, Liddell said he expected people would see a more moderate Donald Trump presidency “than the one seen on the campaign trail.”

“People focus on the President, as they should, because the President’s the single most important person,” he had told TVNZ.

“But the President works through these huge numbers of other people running various departments and so forth, so who he starts to surround himself, how he manages those people, will define his success.”

The NYT’s report suggests that Gary Cohn’s own wishes may be ignored: as noted yesterday, the former Goldman COO’s had picked Shahira Knight — a former Hill staffer, ex-lobbyist and the NEC’s resident tax expert  — as his replacement as National Economic Council director. However, as the NYT adds, Knight, who prefers a lower profile, was uninterested in the opportunity.

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Authored by Mark Spitznagel via Pensions & Investments,

A common refrain among pundits today, in response to the more volatile markets recently and the potential for even more to come, is to point to the historical average annual return of stocks – for example, the S&P 500 total return over the past decade of 10.4%. That’s been better than pretty much anything else. While this is true – and even if you were unfazed by the unsettling prospect of likely far less central bank accommodation ahead – this buy-and-hold strategy ignores an important, although perhaps subtle, part of the story.

When it comes to investing in hopes of capturing the market’s long-run average returns, you can’t always get what you want.

The average market return is an elusive thing. It doesn’t even really exist, in practice. A decade ago, if you had possessed a crystal ball informing you about that nice 10.4% average annual return to come, you would have likely mentally compounded a nest egg of, for instance, $1,000 invested in the S&P 500 into an expectation of roughly $2,690 in capital 10 years later, as of the end of last year. This is just from the simple math of compounding:

(1+.104)10 =2.690

This would have been a good textbook mathematical expectation of your geometric growth in capital. But your expectation would have been quite wrong.

Turns out, when compounding market returns over time, the average that you get isn’t always what you want. It is highly “non-ergodic”— the “time average” compound rate just isn’t computable based on the expectation of that average (the “ensemble” average). Sadly, your perfectly forecast average wouldn’t have translated into value at the end, and your expectation was entirely inaccessible. Why? The very thing that seems to be on everyone’s minds today: Volatility.

Volatility is destructive. It eats away at the rate at which capital compounds in a portfolio over time. We know how this works intuitively: Lose 50% one year, make 100% the next, and you’ve experienced an impressive average return of 25%, yet you just barely made it back to even.

By the same compounding consequences, that $1,000 back in 2008 actually would have become only $2,261 today, an average annual return of about 8.5% — far less than your assumed 10.4%. There was a “volatility tax,” as I call it, amounting to about $429 (or about 16%) imposed on your capital. (That’s an even higher tax than they pay in New York City!) The S&P 500’s volatility wrought havoc on the compounding of that $1,000.

In quantitative finance parlance, we can see how this works by considering that the compound (or geometric) average return is mathematically just the average of the logarithms of the arithmetic price changes. Because the logarithm is a concave function (it curves down), it increasingly penalizes negative arithmetic returns the more negative they are, and thus the more negative they are, the more they lower the compound average relative to the arithmetic average — and raise the volatility tax.

(While this logarithmic effect is quite independent of the particular return distribution of those arithmetic returns, it so happens that the S&P 500’s 19.3% volatility over the past decade imposed the very same volatility tax that we would have calculated assuming the flawed “lognormal” assumption of arithmetic returns, namely .104 – .1932/2 = .085).

What can we do about this non-ergodicity problem, which causes us to so miss our expectations? We need to find a way to narrow the gap between our ensemble and time averages. (In the gambling literature there is a useful solution called the “Kelly criterion”— and in fact much of this, and my investing, is but an interpretation of that). The good news is the entire hedge fund industry basically exists to help with this — to help save on volatility taxes paid by portfolios. The bad news is they haven’t done that, not at all. Any amount of that $1,000 invested in, say, the HFRI Fund Weighted Composite index in 2008 would have added even more to your cost over the next decade ($100, or 10%, allocated to the HFRI hedge fund index, rebalanced annually, would have cost you $96). Ditto bonds ($400 allocated to the Barclays U.S. Aggregate Bond index, rebalanced annually — as in the traditional 60/40 stocks-bonds allocation — would have cost you $247). Even today’s celebrated “long volatility” strategies would have barely added value ($100 allocated to the Cboe Eurekahedge Long Volatility index, rebalanced annually, would have added just $38). Most “risk mitigation” strategies simply haven’t deserved the moniker.

“Diversification”— modern portfolio theory’s answer to this vexing non-ergodicity, volatility tax problem — hasn’t really worked, at least not without ironically utilizing leverage. (This begs the question: What was diversification even good for?) So much for modern portfolio theory.

The moral of the story: Let’s not rely on the market’s historical average return to buy-and-hold ourselves to presumed safety. Buy-and-hold is not an effective risk mitigation strategy (and neither is diversification, for that matter). It’s more like a hope and a prayer for low volatility.

Yes, the market’s historical average return has been pretty good up until now (thanks, in large part, to the Federal Reserve keeping interest rates low for an extended period). But, even if that average persists, you can’t always get it. In fact, thanks to market volatility, you likely never will.

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A week after initial excerpts of Megan Kelly’s interview Russian President Vladimir Putin were released, the Russian presidential office published a transcript of the full interview on its official website on Saturday morning, specifying the conversation took place in two seatings, in the Kremlin on March 1 and in Kaliningrad on March 2.

As we noted last week from the initial excerpts, despite Mueller’s 37-page indictment, Putin said he has seen no evidence thus far that the alleged meddling broke any laws.

“We in Russia cannot prosecute anyone as long as they have not violated Russian law… At least send us a piece of paper… Give us a document. Give us an official request. And we’ll take a look at it.”

…

“Could anyone really believe that Russia, thousands of miles away… influenced the outcome of the election? Doesn’t that sound ridiculous even to you?” Putin asked…

…

“It’s not our goal to interfere. We do not see what goal we would accomplish by interfering. There’s no goal,” Putin said.

But, in perhaps the most aggressive and controversial section of the entire, often-combative, 90-minute interview with NBC television, Putin suggested that we do not know if these people were Russians, they may have been jews… and this may have been a false flag…

“Why have you decided the Russian authorities, myself included, gave anybody permission to do this?” Putin asked

“So what if they’re Russians?” Putin said of the allegations.

“No, this is not true. If they violated Russian law, we will prosecute them. If they did not, there is nothing to prosecute them for in Russia. But after all, you must understand that people in Russia do not live under US law but under Russian law. This is how it is. If you want to reach an agreement with us, let us negotiate, choose the subject, make an agreement and sign it. But you refuse to do this. “

“I am telling you for the third time: we have proposed working together on cyberspace issues. But the US refuses to work like this and instead throws 13 Russians to the media.”

“Maybe they are not even Russians, but Ukrainians, Tatars or Jews, but with Russian citizenship, which should also be checked: maybe they have dual citizenship or a Green Card; maybe, the US paid them for this.

How can you know that? I do not know either.  “

Additionally, Putin said “So What?” nine times throughout the interview, all in relation to the allegations.

Full Interview below (ensure to select English Subtitles). The “jews” comment begins around 48:00…

*  *  *

Full Transcript can found here…

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Back in late 2016, we showed the unprecedented domination of capital markets by central banks using a chart from Citi, which had put together a fascinating slideshow asking simply “Where is the utility in marginal QE” and specifically pointing out that the longer unconventional monetary policy such as QE continues, the bigger its marginal cost, until eventually QE becomes a detriment.

A broad criticism of monetary policy, the presentation carried an amusing footnote: “This presentation does not change any of Citi’s existing, published views on the actual future path of monetary policy. It is merely intended as a contribution to the ongoing debate about the efficacy of available policy tools” –  after all, the last thing the market wanted is the realization that even banks no longer have faith in the central planners.

Incidentally, Citi’s broad critique of global QE took place when central banks owned just over $18 trillion in assets.

Fast forward to today when in its latest update of central bank holdings, Citi shows that as of this moment not only has the total increased by another $3 trillion to a grand total of $21 trillion and rising, but that the big six central banks now own over 40% of global GDP, more than double the 17% they held before the financial crisis less than a decade ago.

Which is remarkable in a world where there is still some confusion about what is behind the “global coordinated recovery”, and where there are deluded people who claim that central banks are now out of the picture.

It is also remarkable because now that central banks are gradually phasing out QE, it is the central bankers themselves who are terrified of what happens when the market starts selling; terrified that they have lost control. Recall that following stunning admission from Citi’s Hans Lorenzen last November:

In the context of a self-reinforcing, herding market, the pivot point where the marginal investor is indifferent between putting more money back into risk assets and holding cash instead is fluid. But when the herd suddenly changes direction, the result is a sharp non-linear shift in asset prices. That is a problem not only for us  trying to call the market, but also for central bankers trying to remove policy accommodation at the right pace without setting off a chain reaction – especially because the longer current market dynamics run, the more energy will eventually be released.

That seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines…. Our guess is that sooner or later in the process of retrenchment they will end up going too far – though that will only be obvious with hindsight.

For now, however, the ongoing LBO of the world’s assets continues, and until it actually halts and goes into reverse, it is all just speculation. Finally, as we have observed on so many prior occasions, the volatile market response to a halt in QE tends to bring central bankers right out of hibernation, and right back on the S&P500 bid. 

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The US State Department is spending millions of dollars spreading its own disinformation and propping up NGOs to destroy any individual or organization that does not toe the official US government line on the US global military empire.

Through its “Global Engagement Center,” the State Department establishes in fact – in the open – what it accuses the Russian government of doing without any evidence.

Social media companies are colluding with the US government to make organizations who oppose the US global military empire disappear.

RPI’s Daniel McAdams joins the Corbett Report to discuss the neocon/Washington war on dissent in America:

Source: The Ron Paul Institute for Peace & Prosperity

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President Trump is said to be cleaning house, according to Vanity Fair‘s Gabriel Sherman who writes on Friday that  “Trump Is Going for a Clean Reset”: Fuming in the West Wing, Trump Prepares to Defenestrate Cuck Allies and Go Full MAGA. According to a “Republican in frequent contact with the White House,” Trump is “tired of being reined in,” and is ready to clean the slate in the West Wing to his liking.

With the departures of Hope Hicks and Gary Cohn, the Trump presidency is entering a new phase—one in which Trump is feeling liberated to act on his impulses. “Trump is in command. He’s been in the job more than a year now. He knows how the levers of power work. He doesn’t give a fuck,” the Republican said. Trump’s decision to circumvent the policy process and impose tariffs on imported steel and aluminum reflects his emboldened desire to follow his impulses and defy his advisers. “It was like a fuck-you to Kelly,” a Trump friend said. “Trump is red-hot about Kelly trying to control him.”

The solution, according to “five Republicans close to the White House,” is a total changing of the guard: “Trump is going for a clean reset, but he needs to do it in a way that’s systemic so it doesn’t look like it’s chaos.”

The first to go, according to the sources, will be Chief of Staff John Kelly followed by National Security Adviser H.R. McMaster – who Trump has been at odds with for nearly his entire presidency according to reports. 

In late February, both CNN and Reuters reported that Kelly and McMaster were reportedly close to quitting or being fired over various issues, including Jared Kushner’s security clearance which was downgraded last week. 

“There have been running battles between Trump and his generals,” said one of the officials, speaking on the condition of anonymity. Kelly is a retired Marine general and McMaster an Army lieutenant general.

“But the clearance business is personal, and if Trump sets special rules for family members, I‘m not sure if Kelly and McMaster would salute,” the official said. –Reuters

Then on March 1, NBC reported that HR McMaster is on the verge of being pushed out – with Kelly and Defense Secretary James Mattis reportedly having orchestrated McMaster’s ouster, even going so far as to select a leading candidate for the job. 

That might all be out the window says Gabriel Sherman – as Trump is said to be meeting next weekend at Mar-a-Lago with potential candidates for both McMaster and Kelly’s positions. On Tuesday, Trump met with John Bolton, former US Ambassador to the United Nations.

Trump is expected to interview more candidates for both positions, according to two sources. “He’s going for a clean slate,” one source said. Cohn had been lobbying to replace Kelly as chief, two sources said, and quit when he didn’t get the job. “Trump laughed at Gary when he brought it up,” one outside adviser to the White House said. (The White House declined to comment.) –VF

Bye Jared and Ivanka

Next on the list are reportedly Jared Kushner and Ivanka Trump. While Trump remains loyal to his family, Kushner has been attracting an increasing amount of negative press, and is reportedly a central focus of Special Counsel Robert Mueller’s probe into Russian meddling in the 2016 election. The president’s son-in-law is in a weakened position, which Trump may feel will be a detriment going forward. 

One scenario being discussed is that Kushner would return to New York to oversee Trump’s 2020 re-election campaign with his ally Brad Parscale, who was hand-selected by the Trump family. One Trump friend referred to it as a “soft landing.” Ivanka will likely stay on longer, perhaps through the summer, before decamping home to New York to enroll the children in a Manhattan private school. Both are presumed to remain in close contact with Trump, who often places significant value on the opinions expressed outside his administration, anyway. –VF

Sherman’s sources claim the couple will try to hang on as long as possible to avoid the impression that they were driven out by Kelly, while both Ivanka and Jared have been furious at the Chief of Staff.  

“Why do you have to embarrass Jared like that?” Ivanka complained to a friend recently. Kushner is doing everything he can to appear engaged despite his lack of a security clearance. “He is looking at everything he can do that doesn’t require a clearance,” a former White House official said. Another source added, “The White House is trying to fluff him up again.”

With the seemingly ongoing game of musical chairs once again in play while Trump removes the chairs, one wonders just who will be staffing the West Wing for the rest of the Trump presidency. 

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