Pension Money Already Flowing In To Prop Up Japan’s Stocks

With almost metronomic regularity, Japan will gush forth a headline proclaiming the ever-closer time when all the nation's retirees savings will be greatly rotated to the stock market and away from the nation's largest bond market in the world. This week was no exception; however, as Nikkei Asian Review reports, it appears the "all-talk" has turned to action…The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected. It seems rotating away from government bonds (which the GPIF has been worried about since 2011) into junk bonds and junk stocks is a far better use of 'wealth' – we can only imagine the GPIF risk models just got switch to '11'. As we explained last year, Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

As Nikkei Asian Review reports,

The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected.


The pensions' net selling of JGBs and "zaito" bonds — the latter used to finance the government's fiscal investment and loan program — totaled 1.85 trillion yen, according to flow-of-funds statistics released Wednesday by the Bank of Japan. This marked the third consecutive quarter of net selling and the largest sum since the April-June quarter of 2012.


The GPIF is the world's largest pension fund, with roughly 130 trillion yen in invested assets, and is set to revise its portfolio by autumn. As part of its growth strategy, the government has been considering raising the proportion of domestic stocks in the fund to nearly 20% from the 17% at the end of 2013, as well as scaling back its bond allocation to less than half. Investors are paying close attention, since such a shift would send money streaming into the stock market.


"If the proportion of stocks goes up to 20%, roughly 4 trillion yen will flow from government bonds into stocks," says Keiichi Ito of SMBC Nikko Securities.


The rebalancing could also lead to sell-offs of the yen, which is seen as a safe asset, if rising share prices lure investors.


Some market watchers say pension fund money has already begun moving into equities. The Nikkei Stock Average hit a roughly four-and-a-half-month high Thursday. That share prices are rising even as the yen trades in a narrow band of around 102 against the dollar is spurring suspicions that GPIF money is flowing in.

Which is hardly surprising since Abe's popularity and approval rating appears directly linked to the level of the Nikkei 225 – Kuroda will do "whetever it takes" to keep the dream alive and as we noted previously, central banks are now among the biggest buyers of stocks in the world.

It seems once again – Meet the world's bubble-blowing bagholder – The Japanese Pensioner

But be careful what you wish for…

As we discussed previously, if indeed the GPIF does reallocate into equities (a very big if considering its multi-functional usage depending on the dry-powder threat need du jour), it will have to sell JGBs. Even more than it has sold so far. Which will then precipitate yet another rout in the JGB market, from where we go into such issues as the "VaR shock" we described two weeks ago (a topic the FT caught up with today), and all too real capital losses for Japanese banks who mark JGBs on a MTM basis.

Here is what HSBC had to say on this issue:

There is also an asymmetric risk to JGB yields in the very long term (ie beyond the next couple of years), making diversification compelling on a risk-adjusted basis. If official policies in Japan begin to bite and inflation rises on a more sustainable basis, this would place pressure on interest rates and materially reduce the value of JGBs held by banks. Yet, given the scale of such holdings, reducing exposure to JGBs would be difficult. Japanese financial institutions hold a substantial amount of JGBs. According to the BIS, Japanese banks hold 90% of their tier 1 capital in JGBs. Japan’s largest bank, Bank of Tokyo-Mitsubishi, has already acknowledged that reducing its USD485bn holdings of JGBs would be disruptive for the markets

Wait, what? Let's read more from the FT, shall we:

Nobuyuki Hirano, chief executive of Bank of Tokyo-Mitsubishi, admitted that the bank’s Y40tn ($485bn) holdings of Japanese government bonds were a major risk but said he was powerless to do much about it.…The risk facing Japanese banks from their vast holdings of government bonds has been underlined by the chief executive of the country’s largest bank who said it would struggle to reduce its exposure.

Well that's not good: if the largest Japanese bank can't handle what may soon be concerted selling by one of the largest single holders of JGBs, who can? And what can be done then?

Oh, that's right: this is where Kuroda's plea to please not sell bonds, just to buy stocks comes into play. The problem is only the BOJ can come up with money out of thin air, for everyone else buying something, means selling something else first. So unfortunately unless the BOJ wishes to further increase its QE, which will be needed to absorb all the selling without a surge in yields (something Kyle Bass warned about last week), a move which however would further break the connection between bonds and inflation expectations, and further destabilize the equity, FX and bond markets.

So in short: Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

Finally, for those who just can't get enough, we recommend the following piece by James Shinn for Institutional Investor which should explain all lingering questions about what really goes on at Japan's Plan B.


GPIF – Ant, Grasshopper and Widowmaker

via Zero Hedge Tyler Durden

The God-less-father: Pope Excommunicates All Mobsters From Catholic Church

After hundreds of years knowing that no matter how many ‘double-taps to the head’ or ‘sleeping with the fishes’ orders they give, a quick penance and the mafia is going to pass through the pearly gates; the Pope, having met the father of a 3-year-old boy slain in the region’s drug war, declared that all mobsters are automatically excommunicated from the Catholic Church. “Those who go down the evil path, as the Mafiosi do, are not in communion with God. They are excommunicated,” Pope Francis decreed during his one-day pilgrimage to the southern region of Calabria – the heart of Italy’s biggest crime syndicate. With the world already having a ChairSatan, is it now time for The SatanFather?


As CBS reports,

Pope Francis journeyed Saturday to the heart of Italy’s biggest crime syndicate, met the father of a 3-year-old boy slain in the region’s drug war, and declared that all mobsters are automatically excommunicated from the Catholic Church.


During his one-day pilgrimage to the southern region of Calabria, Francis comforted the imprisoned father of Nicola Campolongo in the courtyard of a prison in the town of Castrovillari.


In January the boy was shot, along with one of his grandfathers and the grandfather’s girlfriend, in an attack blamed on drug turf wars in the nearby town of Cassano all’Jonio. The attackers torched the car with all three victims inside.


Calabria is the power base of the ‘ndrangheta, a global drug trafficking syndicate that enriches itself by extorting businesses and infiltrating public works contracts in underdeveloped Calabria.


During his homily at an outdoor Mass, Francis denounced the ‘ndrangheta for what he called its “adoration of evil and contempt for the common good.”


“Those who go down the evil path, as the Mafiosi do, are not in communion with God. They are excommunicated,” he warned.


As much as the church has been a force against the mafia there have also been instances of priests colluding with them, CBS News correspondent Allen Pizzey reports from Rome. Francis’ visit and rhetoric could also be seen as a message that that won’t happen again.

The big question, of course, is if there is a ‘godthering’ clause that enable the Dons access to the after-life? How long before Francis gets an offer he can’t refuse?

via Zero Hedge Tyler Durden

Despite “Giving Americans A Blow Job”, Polish Foreign Minster Says “US Alliance Is Worthless”

Well this is awkward. A week after the Polish central bank was busted offering favors to the government (exposing its utter un-independence); the same Polish news magazine has obtained s ecret recording of Foreign Minister Radoslaw Sikorski saying that Poland’s relationship with the United States was worthless. The Wprost news magazine said the recording was of a private conversation between Sikorski and Jacek Rostowski (finance minister) with such headlines as “you know that the Polish-US alliance isn’t worth anything;” also describing Warsaw’s attitude towards the United States using the Polish word “murzynskosc” – roughly translated as a negro slave – “It is downright harmful, because it creates a false sense of security … Complete bullshit. We’ll get in conflict with the Germans, Russians and we’ll think that everything is super, because we gave the Americans a blow job. Losers. Complete losers.” USA – making friends wherever they go.


As The Guardian reports,

A Polish news magazine said on Sunday it had obtained a secret recording of Foreign Minister Radoslaw Sikorski, in contention for a senior European Union job, saying that Poland’s relationship with the United States was worthless.


The Wprost news magazine said the recording was of a private conversation earlier this year between Sikorski and Jacek Rostowski, a member of parliament with the ruling Civic Platform who until last year was finance minister.



Aides to Sikorski and Rostowski said they had no immediate comment. A government spokeswoman said it was hard to form a view based on a few excerpts of a conversation, but there might be a comment later.


According to a transcript of excerpts of the conversation that was published by Wprost on its Internet site, Sikorski told Rostowski: “You know that the Polish-US alliance isn’t worth anything.”


“It is downright harmful, because it creates a false sense of security … Complete bullshit. We’ll get in conflict with the Germans, Russians and we’ll think that everything is super, because we gave the Americans a blow job. Losers. Complete losers.”


According to the transcript, Sikorski described Warsaw’s attitude towards the United States using the Polish word “murzynskosc.”


That derives from the word “murzyn,” which denotes a dark-skinned person and someone who does the work for somebody else, according to the PWN Polish language dictionary.

Of course – there is no official response yet (but no denials either)…

Asked by Reuters to comment on the transcript of Sikorski’s conversation with Rostowski, foreign ministry spokesman Marcin Wojciechowski said: “We do not comment on media speculation … Possible comments will be published only after the whole magazine is published.”


Government spokeswoman Malgorzata Kidawa-Blonska said the government was waiting for publication of the full recordings before commenting.

We presume we will hear that these comments were taken out of context or some such excuse but we are not really sure what context they belong in that makes it all ‘acceptable’?

It appears no matter where you look; no matter how ‘allied’ a nation is, it is turning its back on the US…

The magazine did not say who recorded the conversation, or how it obtained the recording… which makes one wonder if the KGB had a hand in it? Alienating 2 key NATO players.

via Zero Hedge Tyler Durden

Networks vs. Hierarchies: Which Will Win? Niall Furguson Weighs In

Networks are not planned by a single authority; they are the main source of innovation but are relatively fragile. Hierarchies exist primarily because of economies of scale and scope, beginning with the imperative of self-defense. To that end, but for other reasons too, hierarchies seek to exploit the positive externalities of networks. States need networks, for no political hierarchy, no matter how powerful, can plan all the clever things that networks spontaneously generate. But if the hierarchy comes to control the networks so much as to compromise their benign self-organizing capacities, then innovation is bound to wane.

– From Niall Furguson’s recent article Networks and Hierarchies

I’m not always a huge fan of Niall Furguson, but his latest article in The American Interest, simply titled Networks and Hierarchies is worth reading. Readers of Liberty Blitzkrieg will be well aware that I believe the most significant battle of our era is between the forces of Decentralization vs. Centralization. Mr. Furguson takes that battle and looks at it from a historical perspective, describing it as Networks vs. Hierarchies, and posits that indeed much of our collective history has been characterized by the struggle between these two forces. In fact, he starts out the article with the following question:

“Has political hierarchy in the form of the state met its match in today’s networked world?”

Where Mr. Furguson and I agree is in the realization that modern technology has provided networks with the most powerful tool yet in their endless struggle against centralization and hierarchy. Where we disagree is the conclusion. Furguson takes a very unbiased view and essentially comes to the conclusion that he doesn’t know which of these forces will ultimately come out on top. He highlights the fact that many of our modern technological networks are owned by a very small group of people (Google, Facebook, Twitter, etc) and that the CEOs of these companies have proven themselves very willing to be complicit with NSA spying (the manifestation of pyramidical hierarchy).

While I acknowledge this truth and appreciate the threat, the fact Edward Snowden has revealed this to us has sparked a movement by some of the smartest technology minds on the planet to develop encrypted and secure systems. While we may not see all of the fruits of their labors for many years, see them we will, and I think they will help us transform human civilization in a monumental and extremely positive way.

What follows are some of my favorite excerpts from Niall’s piece. He starts off by comparing the U.S. and China:

Yet both states are republics, with roughly comparable vertical structures of administration and not wholly dissimilar concentrations of power in the hands of the central government. Economically, the two systems are certainly converging, with China looking ever more to market signals and incentives, while the United States keeps increasing the statutory and regulatory power of government over producers and consumers. And, to an extent that disturbs civil libertarians on both Left and Right, the U.S. government exerts control and practices surveillance over its citizens in ways that are functionally closer to contemporary China than to the America of the Founding Fathers. 

He goes on to discuss the threats new technologies pose to centralized hierarchies:

It was not immediately obvious how big a challenge all this posed to the established state. There was a great deal of cheerful talk about the ways in which the information technology revolution would promote “smart” or “joined-up” government, enhancing the state’s ability to interact with citizens. However, the efforts of Anonymous, Wikileaks and Edward Snowden to disrupt the system of official secrecy, directed mainly against the U.S. government, have changed everything. In particular, Snowden’s revelations have exposed the extent to which Washington was seeking to establish a parasitical relationship with the key firms that operate the various electronic networks, acquiring not only metadata but sometimes also the actual content of vast numbers of phone calls and messages. Techniques of big-data mining, developed initially for commercial purposes, have been adapted to the needs of the National Security Agency.

He rightly recognizes how important Bitcoin is in this monumental struggle:

The most recent, and perhaps most important, network challenge to hierarchy comes with the advent of virtual currencies and payment systems like Bitcoin. Since ancient times, states have reaped considerable benefits from monopolizing or at least regulating the money created within their borders. It remains to be seen how big a challenge Bitcoin poses to the system of national fiat currencies that has evolved since the 1970s and, in particular, how big a challenge it poses to the “exorbitant privilege” enjoyed by the United States as the issuer of the world’s dominant reserve (and transaction) currency. But it would be unwise to assume, as some do, that it poses no challenge at all.

Networks are the spontaneously self-organizing, horizontal structures we form, beginning with knowledge and the various “memes” and representations we use to communicate it. These include the patterns of migration and miscegenation that have distributed our species and its DNA across the world’s surface; the markets through which we exchange goods and services; the clubs we form, as well as the myriad cults, movements, and crazes we periodically produce with minimal premeditation and leadership. And the fourth is hierarchies, vertical organizations characterized by centralized and top-down command, control, and communication. These begin with family-based clans and tribes, out of which or against which more complex hierarchical institutions evolved. They include, too, tightly regulated urban polities reliant on commerce or bigger, mostly monarchical, states based on agriculture; the centrally run cults often referred to as churches; the armies and bureaucracies within states; the autonomous corporations that, from the early modern period, sought to exploit economies of scope and scale by internalizing certain market transactions; academic corporations like universities; political parties; and the supersized transnational states that used to be called empires.

Networks are not planned by a single authority; they are the main source of innovation but are relatively fragile. Hierarchies exist primarily because of economies of scale and scope, beginning with the imperative of self-defense. To that end, but for other reasons too, hierarchies seek to exploit the positive externalities of networks. States need networks, for no political hierarchy, no matter how powerful, can plan all the clever things that networks spontaneously generate. But if the hierarchy comes to control the networks so much as to compromise their benign self-organizing capacities, then innovation is bound to wane.

European history in the 17th, 18th, and 19th centuries was characterized by a succession of network-driven waves of innovation: the Scientific Revolution, the Enlightenment, and the Industrial Revolution. In each case, the sharing of novel ideas within networks of scholars and tinkerers produced powerful and mainly positive externalities, culminating in the decisive improvements in economic efficiency and then life expectancy experienced in the British Isles, Western Europe, and North America from the late 18th century. The network effects of trade and migration were especially powerful, as European merchants and settlers exploited falling transportation costs to export their ideas, as well as their techniques and goods, to the rest of the world. Thanks to those ideas, this was also an era of political revolutions. Ideas about liberty, equality, and fraternity crossed the Atlantic as rapidly as pirated technology from the cotton mills of Lancashire. Kings were toppled, aristocracies abolished, and churches dissolved or made to compete without the support of a state.

Yet the 19th century saw the triumph of hierarchies over the new networks. This was partly because hierarchical corporations—which began, let us remember, as state-sponsored monopolies like the East India Company—were as important in the spread of industrial capitalism as horizontally structured markets. Firms could reduce the transaction costs of the market as well as exploit economies of scale and scope. The railways, steamships, and telegraph cables that made possible the first age of globalization had owners.

Not only did the period after 1918 witness the rise of the most centrally controlled states of all time (Stalin’s Soviet Union, Hitler’s Third Reich and Mao’s People’s Republic); it was also an era in which hierarchies flourished in the economic, social and cultural spheres. Central planners ruled, whether they worked for governments, armies or large corporations. In Aldous Huxley’s Brave New World (1932), the Fordist World State controls everything from eugenics to narcotics and euthanasia; the fate of the non-conformist Bernard Marx is banishment. In Orwell’s Nineteen Eighty-Four(1949) there is not the slightest chance that Winston Smith will be able to challenge Big Brother’s rule over Airstrip One; his fate is to be tortured and brainwashed. A remarkable number of the literary heroes of the high Cold War era were crushed by one system or the other: from Heller’s John Yossarian to le Carré’s Alec Leamas to Solzhenytsin’s Ivan Denisovich.Kraus was right: The information technology of mid-century overwhelmingly favored the hierarchies. Though the telegraph and telephone created vast new networks, they were relatively easy to cut, tap, or control. Newsprint, radio, cinema, and television were not true network technologies because they generally involved one-way communication from the content provider to the reader or viewer. During the Cold War the superpowers were mostly able to control information flows by manufacturing or sponsoring propaganda and classifying or censoring anything deemed harmful. Sensation surrounded every spy scandal and defection; yet in most cases all that happened was that classified information was passed from one national security state to the other. Only highly trained personnel in governmental, academic, or corporate research centers used computers, and those were anything but personal computers. Today, by contrast, the hierarchies seem to be in much more trouble. The most obvious challenge to established hierarchies is the flow of information unleashed by the advent of the personal computer, email, and the internet, which have allowed ordinary citizens to organize themselves into much larger and more dispersed networks than has ever been possible before. The PC has empowered the individual the way the book did after the 15th-century breakthrough in printing. Indeed, the trajectories for the production and price of PCs in the United States between 1977 and 2004 are remarkably similar to the trajectories for the production and price of printed books in England from 1490 to 1630. The differences are that our networking revolution is much faster and that it is global.

The challenge these new networks pose to established hierarchies is threefold. First, they vastly increase the volume of information to which citizens can have access, as well as the speed with which they can have access to it. Second, they empower individual citizens to publicize things that might otherwise remain secret or known only to a few. Edward Snowden and Daniel Ellsberg did the same thing by making public classified documents, but Snowden has already revealed much more than Ellsberg and to vastly more people, while Julian Assange, the founder of WikiLeaks, has far out-scooped Carl Bernstein and Bob Woodward (even if he has not yet helped to bring down an American President). Third, and perhaps most importantly, the networks expose by their very performance the inefficiency of hierarchical government.

 The shortcomings of the website in many ways epitomized the fundamental problem: In the age of Amazon, consumers expect basic functionality from websites.Daily Show host Jon Stewart spoke for hundreds of thousands of frustrated users when he taunted former Health and Human Services head Kathleen Sebelius: “I’m going to try and download every movie ever made, and you’re going to try to sign up for Obamacare, and we’ll see which happens first.”

Yet the trials and tribulations of “Obamacare” are merely a microcosm for a much more profound problem. The modern state, at least in its democratic variant, has evolved a familiar solution to the problem of increasing the provision of public goods without making proportionate increases to taxation, and that is to finance current government consumption through borrowing, while at the same time encouraging citizens to increase their own leverage by various fiscal incentives, such as the deductibility of mortgage interest payments. The vast increase of private debt that preceded the financial crisis of 2008 was succeeded by a comparably vast increase in public debt. At the same time, central banks took increasingly unorthodox steps to shore up tottering banks and plunging asset markets by purchases of securities in exchange for excess reserves. With short-term interest rates at zero, “quantitative easing” was designed to keep long-term interest rates low too. The financial world watches with bated breath to see how QE can be “tapered” and when short-term rates will be raised. Most economists nevertheless take for granted the U.S. government’s ability to print its own currency without limit. Many assume that this offers some relatively easy way out of trouble if rising interest rates threaten to make debt service intolerably burdensome. But this assumption may be wrong.

Since ancient times, states have exploited their ability to issue currency, whether coins stamped with the king’s likeness or electronic dollars on a screen. But if the new networks are in the process of creating an alternative form of money, such as Bitcoin purports to be, then perhaps the time-honored state privilege to debase the currency is at risk. Bitcoin offers many advantages over a fiat currency like the U.S. dollar. As a means of payment—especially for online transactions—it is faster, cheaper, and more secure than a credit card. As a store of value it has many of the key attributes of gold, notably finite supply. As a unit of account it is having teething troubles, but that is because it has become an attractive speculative object. It is too early to predict that Bitcoin will succeed as a parallel currency, but it is also too early to predict that it will fail. In any case, governments can fail, too.

Where governments fail most egregiously, new networks may well increase the probability of successful revolution. The revolutionary events that swept the Middle East and North Africa beginning in Tunisia in December 2010—the so-called Arab Spring—were certainly facilitated by various kinds of information technology, even if for most Arabs it was probably the television channel Al Jazeera more than Facebook or Twitter that spread the news of the revolution. Most recently, the revolutionaries in Kiev who overthrew Ukrainian President Viktor Yanukovych made effective use of social networks to organize their protests in the Maidan and to disseminate their critique of Yanukovych and his cronies.

The owners of the networks are also well aware that plotting jihad is not the principal use to which their technology is put, any more than plotting revolution is. They owe their security much more to network surfers’ apathy than to the NSA. Most people do not go online to participate in flash mobs. Most women seem to prefer shopping and gossiping; most men prefer sports and pornography. All those neural quirks produced by evolution make us complete suckers for the cascading stimuli of tweets, Instagrams, and Facebook pokes from members of our electronic kinship group. The networks cater to our solipsism (selfies), our short attention spans (140 characters), and our seemingly insatiable appetite for “news” about “celebrities.”

In the networked world, the danger is not popular insurrection but indifference; the political challenge is not to withstand popular anger but to transmit any kind of signal through the noise. What can focus us, albeit briefly, on the tiresome business of how we are governed or, at least, by whom? When we speak of “populism” today, we mean simply a politics that is audible as well as intelligible to the man in the street. Not that the man in the street is actually in the street. Far more likely, he is the man slumped on his sofa, his attention skipping fitfully from television to laptop to tablet to smartphone and back to television. And what gets his attention? The end of history? The clash of civilizations? The answer turns out to be the narcissism of small differences.

The above is the key problem we face at the moment. People are using these amazing technologies for stupidity. However, I strongly believe this will change as the living situation on the ground becomes harder and harder for a greater and greater percentage of humanity.

Yet our own time is profoundly different from the mid-20th century. The near-autarkic, commanding and controlling states that emerged from the Depression, World War II, and the early Cold War exist only as pale shadows of their former selves. Today, the combination of technological innovation and international economic integration has created entirely new forms of organization—vast, privately owned networks—that were scarcely dreamt of by Keynes and Kennan. We must ask ourselves: Are these new networks really emancipating us from the tyranny of the hierarchical empire-states? Or will the hierarchies ultimately take over the networks as they did a century ago, in 1914, successfully subordinating them to the priorities of the national security state?

Huge issue, but that is exactly why Edward Snowden felt compelled to whistle-blow. He understood what was at stake: Everything.

A libertarian utopia of free and equal netizens—all networked together, sharing all available data with maximum transparency and minimal privacy settings—has a certain appeal, especially to the young. It is romantic to picture these netizens, like the workers in Lang’s Metropolis, spontaneously rising up against the world’s corrupt hierarchies. Yet the suspicion cannot be dismissed that, despite all the hype of the Information Age and all the brouhaha about Messrs. Snowden and Assange, the old hierarchies and new networks are in the process of reaching a quiet accommodation with one another, much as thrones and telephones did a century ago. We shall all know what it means when (as begins to be imaginable) Sheryl Sandberg leans all the way into the White House. It will mean that Metropolis lives on.

It’s very interesting that he mentions Sheryl Sandberg at the very end.  She was the target of my harsh criticism earlier this year for starting a childish and idiotic campaign to ban the word “bossy.” Recall my post: The Chief Operating Officer of Facebook Wants to Ban the Word “Bossy.”

As I mentioned at the beginning, I think this war will be decisively won by the forces of decentralization, but of course, it won’t be a walk in the park. I agree very much with the message in the following video which concludes that “Bitcoin will Save Capitalism.” Enjoy.

Full article here.

In Liberty,
Michael Krieger

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Networks vs. Hierarchies: Which Will Win? Niall Furguson Weighs In originally appeared on Liberty Blitzkrieg on June 22, 2014.

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from Liberty Blitzkrieg

This Time Is Different,; But The Ending Will Be The Same

Via John Hussman's Weekly Market Comment,

There is one critical feature of the market advance of recent years that differs from prior bull market advances, and while it’s related to quantitative easing, the distinction is not quite as simple as that. In the market advances that culminated in the 1929, 1972, 1987, 2000 and 2007 pre-crash peaks, a combined syndrome of overvalued, overbought, overbullish conditions emerged in each instance. These syndromes can be defined in numerous and largely overlapping ways (see our October 2007 comment Warning: Examine All Risk Exposures for an example), but in general, once these syndromes appeared, steep market losses typically followed in fairly short order. In instances where they didn’t, the syndrome was usually a one-off outlier driven by a short spike in bullishness. Still, in no case did one observe repeated, increasingly severe overvalued, overbought, overbullish syndromes persisting entirely uncorrected and without consequence.

The fact that there have been no historical exceptions to this pattern prior to the recent half-cycle has posed quite a challenge for us in recent years. As I detailed in Formula for Market Extremes, it forced us to adapt by imposing restrictions (based on factors such as market action across a range of risk-sensitive instruments) to mute our defensiveness even in conditions where historically-informed measures of prospective market return/risk are blazing red. We don’t get to re-live the recent cycle in a way that shows the effectiveness of any of that, but I expect it to be evident enough over the completion of the present cycle and the ones that follow, even in the event quantitative easing becomes a more frequent policy (though the unwinding challenges appear likely to make the whole episode regrettable).

The Federal Reserve’s policy of quantitative easing has produced a historically prolonged period of speculative yield-seeking by investors starved for safe return. The problem with simply concluding that quantitative easing can do this forever is that even speculative assets have to compete with zero. When a safe zero return is above the medium or long-term return that one can estimate for a very risky asset, the rationale for continuing to hold the risky asset becomes purely dependent on expectations of immediate short-term price gains. If speculative momentum starts to break, participants often try to get out the door simultaneously – especially if there is some material event that increases general aversion to risk. That’s the dynamic that produces market crashes.

I’m not saying a market crash is imminent, but it is a risk because very reliable valuation methods (that have remained reliable even in the recurring bubbles since the late-1990’s) presently estimate negative prospective nominal total returns for the S&P 500 on every horizon of 7 years or less, and an annual total return of about 1.9% over the coming decade. On the other hand, these same methods projected negative 10-year prospective returns – even on optimistic assumptions – at the 2000 peak (see the August 2000 Hussman Investment Research & Insight). While those projections turned out to be perfectly accurate (indeed, the 10-year total return of the S&P 500 was still negative even after the index had nearly doubled from its 2009 low), it also means that the overvaluation of the S&P 500 Index in 2000 was even greater than it is today. As I’ve noted before, the median S&P 500 component is more overvalued today than in 2000, and the average component is similarly overvalued. It’s only the capitalization-weighted valuation that was higher in 2000, primarily because of eye-popping valuations of large technology companies.

In any event, it’s fair to say that valuations could go higher still, and we can’t rule that out. Historically, the emergence of similarly extreme overvalued, overbought, overbullish syndromes (as we also observed in 1929, 1972, 1987, 2000 and 2007) would suggest that the possibility is negligible – but we’ve been punished for our knowledge of history in this cycle. Overvalued, overbought, overbullish syndromes have now been extended without consequence for a much longer period than at any prior speculative extreme. Once you’ve seen a single flying pig, you’re forced to conclude that it’s at least possible for a pig to fly – even if you’re fairly sure it’s only been shot out of cannon.

The best we can do here is to choose one of two courses:

a) speculate that valuations will move still higher, waiting not only for 7-year but 10-year prospective returns to go negative, understanding that those dismal long-term returns will still emerge, but hoping that we can eke out some gains before the well runs dry and we’re forced to beat millions of other speculators to the door, or


b) maintain a defensive stance, recognize that equity risk taken at present levels is likely to produce negative returns on horizons of 7 years and less, and that a 10-year expected annual nominal total return of 1.9% for the S&P 500 is not worth the commensurate risk, but adapt to a world of flying pigs by allowing them to float a bit more freely without raising the safety nets further.

Our choice would be b).

So yes, this time is different. It is different because the Federal Reserve’s zero-interest rate policy has starved investors of all sources of safe return, forcing them to accept risk at increasingly higher prices and progressively dismal long-term prospective returns. More importantly, this time is different because warning signs that appeared at every major pre-crash market peak have persisted and escalated, without resolution, far longer than they have done so historically. Reckless? Shortsighted? Probably. But like dot-com speculation, flipping overpriced houses, and getting a “yield pickup” by holding subprime mortgage debt on margin, reckless and shortsighted speculation always looks like enlightened investment genius until the hammer drops.

Unfortunately, what is not different is that rich valuations are predictably followed by dismal long-term returns, even if short-term consequences are held in suspended animation for a period of time. What is not different is that compressed risk-premiums have a tendency to surge abruptly on events that are either entirely unexpected or, more often, that stem from recognized sources of risk that produce outcomes decidedly more negative than investors had assumed. What is not different is the habit at market extremes for investors to assign elevated price/earnings multiples to earnings that are themselves elevated and unrepresentative of the long-term stream of cash flows their investments will deliver (see Margins, Multiples, and the Iron Law of Valuation). We made these same observations (and debated them with many of the same analysts who deny them today) at the 2000 and 2007 pre-crash peaks, just before the market lost half its value.

With the most reliable valuation measures more than 110% above their historical norms, on average (and allowing that numerous historically unreliable measures look just fine, as Janet Yellen will attest), we remain concerned that equities are no longer competitive even with a very long period of zero risk-free returns. Again, our broad measures of valuation imply a 10-year S&P 500 nominal total return averaging just 1.9% annually, and negative total returns on horizons of 7 years and less. Certain measures imply even worse, including the ratio of market capitalization to GDP, which Warren Buffett observed in a 2001 Fortune interview is “probably the best single measure of where valuations stand at any given moment.” The chart below shows that measure (left scale, log, inverted) against actual subsequent 10-year S&P 500 total returns (right scale).



For greater detail on this and other measures, see my Wine Country Conference presentation “Very Mean Reversion” – and of course, a donation in any amount to the Autism Society of America, the beneficiary of that Conference, would be greatly appreciated.

via Zero Hedge Tyler Durden

The Surveillance/Police State – Assisting the Dismantling of Inalienable Rights

The Surveillance/Police State

Assisting the Dismantling of Inalienable Rights


Cognitive Dissonance




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As I am prone to say, locks are there to keep the honest people honest. And of equal importance, locks are there to maintain the illusion you and your possessions are ‘safe’ because the locks will keep the dishonest out. Since perception and proximity play major roles in whether or not we presently ‘feel’ safe, the lock companies and central governments go to great lengths to create the idyllic illusion of total security while simultaneously promoting dangers that threaten your security in order to compel your purchase of their consumer products or government policy. But as anyone knows who has been on either side of a Breaking and Entering (B&E), your locks are but a minor inconvenience to those determined to separate you from your stuff……or your life.

In keeping with the predominate theme of the last 30 years or so of mindless consumerism, where one should be engaged just enough to know what you ‘need’, but not aware enough to question the difference between needs and ‘wants’, the comforting illusion of locked down security with just the twist of a latch or passage of a law helps propel us into our own self obsessed oblivion. We are what we keep, and what we keep are false official promises and grand self delusions of security via the surveillance police state.

In a reversal of “Maslow’s Hierarchy of Needs”, where after basic physiological and safety needs are met the individual moves up the pyramid towards esteem and self-actualization, society in general appears to be caught in the black hole of self-centeredness and narcissism and is rapidly regressing. This degrading state of mind requires even bigger illusionary locks to be applied so that the herd may peacefully graze while the individuals naval gaze.

And what might that collective lock box contain? Why the nearly perfected illusion of God given inalienable rights codified and quantified by The Constitution and The Bill of Rights, skillfully combined with the outright lie that a so called ‘Fourth Estate, the supposedly curious and ever questioning ‘free’ press, is watching over the lock box while we ‘free range’ citizens fatten up and wile away our consuming days. That is, of course, after off to work we go because we owe……and owe…….and owe.

The fact that your home has never been robbed in the past is not a glowing testimonial to the quality of your locks or to the ineptitude of any potential burglars. Rather it is a tribute to blind luck, a good neighborhood or possibly even that you own really lousy stuff no fence would pay a plumb nickel for. One of the best defenses is a strong offense, or in this case to own what no one else wishes to possess. If after leaving the keys and a hundred dollar bill on the dash of your unlocked vehicle, only to return the next morning to find both cash and car intact, you know for certain your vehicle is truly yours.

On the other hand, if you do the same with your ‘inalienable rights’ and find each morning another piece has been stolen, maybe it isn’t the thief so much to blame as the idiots who continue to leave them unattended at the curb stamped with an open invitation to ‘steal these rights’. Or is one of our inalienable rights the ‘right’ to be as inattentive and stupid as possible and still have the ‘right’ to retain our ‘rights’? It certainly seems to be that way.

Back in the day when I was on the wrong side of people’s ‘rights’ I always marveled how easy it was to be a thief, to practice my wicked ways and B&E with thee. In a particularly nasty streak of egotistic self importance I would leave the homes alone that remained unlocked, preferring to leave the slumbering dumb in peace. Even the bad ass knows well enough not to steal candy from the kids. Besides, it just ain’t sporting and seriously degrades your self esteem. Where is the fun in taking what is unprotected when the real challenge is lifting those inalienable rights when they are highly regarded and heavily guarded? Even the lowly thief has his or her minimum standards.

Where fun, and exceptional profit, could be found was in the abodes of those who felt they possessed steal-able stuff and were diligent in locking both their front and back doors to keep me out and their possessions securely in. But these people always seemed to enjoy the deep sleep of the blind and oblivious, secure in the false knowledge that all through the house not a creature stirred, except for this nefarious mouse.


Not so safe, are we?


When I was bored or found the prey way too easy, especially when I discovered the usual unlocked window or basement door to gain access to the citizen king’s fortified castle, I would up the ante and leave my calling card while taking nothing except the exhilaration of knowing this Tom was creeping while the house was sleeping. It was good to be bad, or so I thought. It didn’t matter though for I was deep into my own version of blindly oblivious, a story for another day and time.

Within a week or two I would be back to see if the King and Queen had heeded my call and secured their sovereign borders. Fiat dollars to donuts, in most cases they had not. So like Sherman’s March to the Sea I cleaned house and left heartbreak and destruction in my wake. It was almost as if they were consenting to my violation of their lives and living arrangements, for all it took was the click of a lock and a check of all the windows and doors to keep me at bay and out of their lives.

It was, and remains, profoundly curious that the so called ‘victim’ would deliberately ignore my posted warning and continue down the road to living ‘victim-hood’. This passive inaction sounds strangely familiar, very similar in fact to our modern day predicament and maybe just a little too close to home for comfort. The parallels between the constant posted warnings by various powers-that-be that another inalienable right will be wronged and surgically removed as unnecessary and even bothersome is not lost on me.

And yet there is nary a peep from the ‘free will’ chickens scratching about in the dirt, hunting for their next cheap consumer thrill. It seems to me this lack of alarm is a bit more complicated that simply fat and happy citizen poultry sated from their latest fiat feeding with not a care in the world, the fox safely at bay and the roost securely locked behind impenetrable coop doors.

Questioned individually each hen and rooster is sure in their knowledge that while the coop may be in danger great or small, they are not nearly as much for they claim greater awareness than their neighbors and clearly saw the posted warning. However when this observer inspects the door he finds it rotted and worn, barely able to support its own weight let alone the determined efforts of the fox outside the henhouse. And yet there for all to see, in particular the inhabitants of the house of citizen chickens, is that shiny new door lock, gleaming in the afternoon sun while securing the hens from the old grey fox.

Or so the promoted fable declares for the fox knows differently. He understands perfectly well that the lock is easily circumvented, allowing the predator easy access to pluck a fresh meal whenever he cares to. Knowing that the lock on the decrepit door is what keeps the coop contents conveniently contained and contented, the fox makes sure to vigorously polish the lock while dramatically bemoaning his unfortunate luck that such a fine and sturdy lock stands between him and his inalienable lunch. 

But clearly the coop’s occupants will eventually notice the thinning of the flock, with Henrietta the Hen no longer around to cluck her disapproval of all the unattended texting chicks spoiling her comfy feathered nest. There might even be a few hens and roosters sounding the alarm, asserting that Henrietta didn’t just disappear into thin air without a trace. Theories of all kinds will be put forth for the mysterious disappearances, from space aliens to trap doors to inside job conspiracies; all centered on the sly grey fox hanging ‘round the front door. Who, I might add, doesn’t seem the least bit thinner despite his cries about having no dinner.


The Sly Fox Outside the Hen House


So what is going on here? Why did my B&E ‘victims’ and the citizen chickens mostly ignore the warnings and continue on with life as if nothing was seriously wrong with their prized possessions and their inalienable rights? While it is safe to say there are as many different answers as there are victims and chickens, it is equally safe to say that bargaining and rationalization, key components of denial at both the group and individual level, is obviously at play. 

Similar to the situation where it is almost impossible to get a person to believe “A” if they are paid to believe “B”, those individuals and groups who have rejected their personal sovereignty and outsourced their emotional and physical security to questionable individuals, groups and nations, now find themselves increasingly in danger from their very own protectors.

Irrevocably compromised on a moral, emotional and spiritual level and now physically threatened, suddenly their needs and wants merge into one compelling force. They must now ignore or greatly diminish evidence contrary to what they both need and want; to believe they are safe and those entrusted with their safe keeping will in fact honor the unilateral bargain previously struck. When the devil is in the details, ignore or outright reject the details and trust the devil you believe you know.

Once this recognition is thoroughly embodied, often only on the subconscious level with stray threads leaking over to the conscious mind, the primary mission of the individual and the group is to support and adhere to that which is now controlling us, the desire to ‘believe’ we are safe in the face of contrary information. At this point the information illustrating “We the People” are not safe (especially from our protectors) becomes more dangerous to ‘us’ than the protectors themselves.

This is where both the individual and collective ego kicks in to leverage our fears against us in order to ‘protect’ ourselves from us……or more accurately from an increased self awareness which the ego sees as threatening to ‘us’. For those who don’t understand the power we afford our ego over ourselves, and it is our own innate power that we cede, this explanation seems nonsensical, even ridiculous. But of all the manipulators in our lives, both securely hidden or out in the open, our own ego is by far the most powerful because ‘it’ knows us much better than we know ourselves and isn’t afraid to use that knowledge to control and manipulate……for the greater good of ‘us’ of course.

What most of us do not thoroughly understand (mostly because we reject the notion that our ego is much more powerful and controlling than we care to admit because this self awareness threatens our ego, thereby ‘us’) is that our external human tormentors, everyone from the hidden hand behind the scenes to the obviously manipulative politician or corporate boss, use our own ego against us. Even those among us who better understand our egoic vulnerability still miss the impact the collective or group ego has upon us personally. Or to be more accurate, the endless number of collective egos large and small whose influences over us rise and fall within the larger group dynamics and our personal world view.

That little voice in your head is not ‘you’, but more likely your ego. The greatest trick the ego ever pulled was convincing you that your ego is actually ‘you’ and not a malicious intruder/manipulator. Oftentimes our own ego takes a subservient role to the collective while still maintaining overall manipulative control over us. The more time we spend in the past or the future, rather than in the here and now, the more likely it is that our ego is front and center carefully disguised as ‘us’. Fear is the ultimate motivator and the ego leverages our fears, real and imagined, expertly.


Peak-a-boo I see you


But of even greater importance, at least with respect to this discussion, is that the big voice in the collective head is often not the group consciousness, but rather the collective/group ego…….and presently the loudest, most dominant group ego is the surveillance police state meme, something that must be in place before the actual physical surveillance state itself can manifest. Physical reality is created only after it has been created in the mind, either personally or collectively. That was, and is, the genesis and genius of the 9/11 false flag operation, to set the stage for the ever present boogieman fear meme that pervades and propels the surveillance police state forward. We are, or become, what we fear most.

The alternative blogosphere is filled with people wondering how it is that something few profess to actually want (such as the surveillance state and its police state apparatus) still seems to exist, even thrive, despite the apparent lack of public support. The misguided belief that government imposed public policy follows, rather than leads, publicly expressed opinion and belief persists because few truly understand the dynamics of the human psyche.

This gap in self awareness and understanding is deliberately fostered and encouraged by ‘us’ because ultimately we do not wish to know ourselves. For if this was so we would then be compelled to assume responsibility for ourselves. Personal sovereignty is all about self actualization and acceptance of personal responsibility, not about ‘freedom’ to feed on the fiat ‘free’ from disruption and consequences.

Since ‘we’ as individuals consistently deny ‘we’ are a part of ‘they’ or ‘them’, but instead are uniquely not a part of the herd, in effect we are distancing ourselves from our own contribution to the collective actions and therefore the responsibility for the actions of the group. This alone is sufficient to propel the group ego forward, and more importantly the manifestations of the group ego such as the surveillance police state despite each individual’s protestations that the group’s neurosis and insanity is misguided and unwelcome.

“In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.” – Friedrich Nietzsche

While there are a million and one tiny details that influence this phenomenon, which is precisely what we use to justify and rationalize the belief in our non or insignificant involvement in the group dynamic, it is the very denial of our participation that is the energy source and engine that is driving the group ego, and all its ugly physical manifestations, forward.

Even those who agree in principal that there should be surveillance of troublesome groups are in denial regarding the greater surveillance police state. For example, those with this mindset often feel they personally should not be subjected to surveillance because………wait for it………’they’ are not part of ‘them’, meaning the group or groups which in their mind’s eye should be the ones who are monitored. Of course the surveillance police state is not used to control the individual, but rather the herd which in turn controls the non sovereign individual.

Ultimately if our own personal ego serves a purpose (regardless of how misguided that purpose may be) by feeding us what we want to hear, think and believe as opposed to what we need to hear, think and believe, then by extension the manifestation of the group ego, the surveillance police state, also serves a purpose, providing the group with what it wants rather than what it needs. Meaning even though we claim to dislike the government snooping in all our affairs, deep down inside (often on a subconscious level) we accept it as needed and possibly even desirable for any of a million different reasons.


We the People


If we accept the idea that while the conscious mind is full of blind spots, blurred awareness and extremely narrow vision, the subconscious mind is always aware and forever acquiring knowledge, a giant vacuum sucking up all information that passes through the five senses, then the subconscious mind is fully aware of the political, social and economic charade currently playing out both in public and in private.

While many of ‘us’ give passing lip service to the slowly growing awareness that our entire consumer culture is based upon access to unlimited resources derived from an entirely limited world, the subconscious mind fully understands there will be winners and losers in this global game of resource chicken. Since survival of the individual is often dependent upon the survival of the group it belongs to, particularly when it comes to increasingly scarce resources being apportioned amongst “We the People”, it stands to reason that greater control of the individual must be exercised in order for the group, and thus the individual, to survive.

Essentially “We the People” have not revolted against the increasingly tyrannical (US) government precisely because deep down inside we understand this very same tyrannical government is our last best chance to survive the coming resource wars and dollar debasement. Since we long ago abdicated our own personal sovereignty and responsibility for our own welfare, we must dance with the government we brought to the party or attempt to go it alone and take our chances, an entirely unsatisfactory alternative in a cradle to grave caretaker world.

I am certain many reading these last few sentences will strenuously object to the premise put forth. But just remember that ‘we’ as individuals and ‘we’ as a group are not the same entities and rarely are either of ‘us’ acting sans ego influence and manipulation. And very often we subvert our own personal goals, aspiration and ego to the larger group, even if only on a subconscious level, in order to receive the benefits derived from acting as a group.

While our ego loves to promote the idea that we are ‘free’ men and women who make personal decisions based upon our own self interest while still balancing moral and social responsibilities, this utopian view has been officially promoted and widely accepted during a period of time lasting half a dozen decades when the milk and honey flowed freely and there appeared to be plenty to go around.

However this excess was a temporary illusion based upon ‘us’ taking more than our fair share for decades, combined with steadily increasing leverage which resulted in an economic system that is now beginning to show serious signs of strain and stress. “We the People” know intuitively that the resource party is nearly over and the punch bowl will soon be rationed at best and removed under the worst circumstances. Seen from the point of view and mindset of the slumbering masses now is not the time to abandon the herd and go it alone, thus the surveillance police state provides the last best chance of survival sans personal revival and rehabilitation.

Even those of us, Mrs. Cog and I included, who do not wish to witness a systemic collapse, but rather a sane transition to a more sustainable and mutually beneficial, non vampiric, economic model know full well that society is fully engulfed in its own egoic insanity and its self destructive lust will not be sated until the group’s egoic energy has finally been dissipated and the dust has settled. Knowing what is coming, who among us wishes total chaos and disorder to rule the roost and for each rooster and chicken to finally recognize the hopelessness of the situation and turn savage and territorial?

Regardless of which little corner of the Petri dish we may have provisioned for survival and hardened against attack, we all understand on a subconscious level there is no place to run and no place to hide when peak insanity runs riot. While we may be prepared to defend and sustain ourselves with no wish for outside help or hindrance, the thought of hundreds of thousands of people displaced (millions if things really get bad) is difficult to emotionally endure, particularly when many if not all of our loved ones will be caught up in the rampage.

Thus many of us would also prefer some law and order to remain intact, if for no other reason than to protect the blindly oblivious from their egoic selves. While this in no way, shape or form translates into the desire to support the oppressive surveillance police state, neither does it directly oppose it. When the madness of crowds finally infects this nation and world, your local Barney Fife police force will not be able to stop it, let alone police it. So just how much police state is enough when the end game finally begins?


Love Your Abuser


Our subconscious awareness may have differing views on what is inevitable and how to survive the inevitable as opposed to the group ego’s manifestation in the form of you and me. As self aware and tuned in as many of ‘us’ claim to be, very few individuals, including myself, can escape the influences of our ego for long, especially when the social systems begin to seriously degrade and the fecal matter hits the fan.

This means that while conditions are calm we confidently state we will do this and not do that. But my limited experience with mob psychology indicates that when the insanity rages the force will be with you even from afar, a different form of spooky action at a distance. This means tiny threads of madness will seek us out to infiltrate and infect, often through the glowing boob tube and those websites we trust.

Knowing this I will not declare with any degree of confidence what I will or will not do when under internal and external stress. To do otherwise is to embrace a comforting delusion promoted by our ego in order to feel better about our present state and future uncertainty.

Regardless of your ultimate view of the surveillance police state, the ‘evil’ forces behind it and the direction the country and world is headed, the fact remains it would not exist without support from the average Jane and Joe, even if that support expresses in the form of enthusiastic cheerleading, begrudging acceptance, passive obedience, anxious trepidation, angry denunciations or fierce resistance. This is true in all cases unless you ‘believe’ that people, places and things ‘make’ you do things, therefore you and those around you are powerless victims and essentially slaves to the machine.

As comforting as it may be to view ourselves as victims of the powers that be (but most certainly not slaves since we are free range chickens) if this were true then why the preoccupation by those in charge with acquiring our consent, whether directly expressed or passively/reluctantly given? Even as the surveillance state ratchets up several notches each year, not to mention draconian laws that foretell of a dramatic escalation in the Fascist police state tactics, the general meme still put forth is to cajole, convince or confiscate our free will through our willing, often passive, consent. 

While the surface explanation for the mining of willing consent is that it is easier to convince someone to walk over there than it is to force someone to walk over there, there appears there is more going on under the surface which is much harder to grasp primarily because its premise is so foreign to us. And for those individuals who are resolute in their belief in their absolute control over their ‘self’, the suggestion that there are hidden mind memes and psychological levers that are constantly being manipulated in order to manage the human livestock is so outrageously contrary to their world view that it is immediately put out with the trash for disposal.

“None are more hopelessly enslaved than those who falsely believe they are free.” – Johann Wolfgang von Goethe

Once again, for those who do not understand this component of the human psyche or simply wish to believe they are not a participant in order to shield themselves from the responsibility for their actions and involvement, this explanation will be dismissed as poppycock and balderdash. But exploring this rabbit hole, while extremely discomforting and full of unpleasant self discovery, is the process one must follow if we are ever to be much more than free range chickens to be served up when the fox is hungry.

Now…let us all bow our heads and say a pray for the beloved and still missing Henrietta.



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via Zero Hedge Cognitive Dissonance

BofA Blasts Sell Bonds, Sell Gold, Buy Dollars

"After several weeks, Gold is setting up for a sell, US Treasuries are set to resume their bear trend, and the USD is set to resume its bull trend. Get ready…" is the ominous warning BofAML's Macneil Curry sets forth in his technical treatise this weekend. Despite the plethora reasons for rates to go lower for longer (and treacherous market conditions expected ahead) and the various fundamental and technical drivers of recent precious metals strength, Curry says it's time.


Via BofAML's Macneil Curry,

Over the course of the past several weeks, some of our core views and themes have fallen into short term corrective mode. Specifically, we are referring to our bearish US Treasury view and our bullish US $ view (most notably against €, CHF and many EMFX, as well as gold and silver). In the week ahead, we look for these trends to re-emerge and do so in a manner that should provide some excellent low risk, high reward trade setups. Beginning with US Treasuries, we likely look to sell 10yr notes into the 2.53%/2.49% zone for the Apr-04 highs at 2.82% and beyond. In FX, we will likely look to re-initiate €/$ shorts into the 1.3676/3735 zone for a resumption of its medium, potentially long term bear trend and in $/ZAR we will likely look to re-buy near the 50d (10.5357) for a resumption of its long term bull trend and new 2014 highs (now 11.3915). Finally, gold is fast approaching the 1334/72 topping zone from which we look for significant weakness to and through 2013 lows at 1180.

Chart of the week: US 10yr Treasury yields to resume higher

In our view, the bear trend is about to resume. Intra-day charts say the 2wk consolidation is in its final stages. We will likely look to sell one last push lower, ideally to 2.53%/2.49%, for a resumption of the larger bull trend to 2.82% & beyond. 

Get ready to sell EURUSD…

The choppy range of the past several weeks has been frustrating, but now evidence says the medium, if not long term bear trend is about to resume. We will likely look to go short on one last squeeze to 1.3676/1.3735 for a resumption of the larger downtrend to 1.3104 and below. NOTE: we may also look to buy $/CHF

…and buy USDZAR

The impulsive advance (seen clearly on intra-day charts) following the test and hold of the 50wk avg/3yr t/line (10.3867/10.3778) says that $/ZAR has resumed its l/term uptrend. We will look to re-enter longs into the 50d (10.5337) for new 2014 highs

Setting up for a sell in gold

In last week’s KrystalBull we wrote that “the medium term trend has turned higher” for gold but that “gold bulls should not get too enthusiastic. AT BEST, we think it can reach the 1334/1374 area (measured move and yearlong contracting range highs) before topping and substantial weakness”. The strength of last week’s move caught us off guard and says that the 1334/1374 topping zone could be reached much more quickly than anticipated. We will look to go short into this zone. As can be seen from the chart below, gold is close to resuming its almost 3yr downtrend after a year of consolidation, with targets seen for a test and break of the 2013 lows at 1180.


*  *  *

Trade accordingly…

via Zero Hedge Tyler Durden

The Cold Hard Truth Facing Investors Today

The biggest problem facing investors today is that “the rules” of the game change almost every year.


What I mean is that any basic rule investors previously took for granted can and often is thrown out the window by the regulators when they deem it prescient. Indeed, in the last five years we’ve seen:


1)   Accounting standards at financial institutions suspended.

2)   Capital requirements for banks (Basel III) postponed multiple times.

3)   Rampant fraud go unpunished.

4)   Obvious insider trading amongst political officials and banking insiders.

5)   Central bankers openly admit that they lie to investors.


Why are so many laws and rules being thrown out?


The Powers That Be are committed to propping the system up by any means possible.


Consider Spain.


Spain’s banking system, by any reasonable analysis, is totally bankrupt.


The reason for this is that Spanish banks are all packed to the brim with garbage assets (mortgage loans and Spanish Government bonds… both of which aren’t worth the paper they’re printed on).


Consider the story of Bankia.


Bankia was formed by merging seven bankrupt regional Spanish banks in 2010.


The new bank was funded by Spain’s Government rescue fund… which received “preference shares” in return for over €4 billion in funding for the bank (all provided by taxpayers of course).


These preference shares were shares that A) yielded 7.75% and B) would get paid before ordinary investors if Bankia failed again. So right away, the Spanish Government was taking taxpayer money to give itself preferential treatment over ordinary investors (including said taxpayers).


Indeed, those investors who owned shares in the seven banks that merged to form Bankia lost their shirts. They were wiped out and lost everything when the new bank was created.


Bankia was taken public in 2011. Spanish investment bankers convinced the Spanish public that the bank was a fantastic investment. Over 98% of the shares were sold to Spanish investors.


One year later, Bankia was bankrupt again, and required the single largest bailout in Spain’s history: €19 billion. Spain took over the bank (again) and Bankia shares were frozen on the market (meaning you couldn’t sell them if you wanted to).


When the bailout took place, Bankia shareholders were all but wiped out and forced to take huge losses as part of the deal. The vast majority of these were individual investors, NOT Wall Street or its European equivalent (Bankia currently faces a lawsuit for over 140,000 claims of mis-selling shares).


So that’s two wipeouts in as many years.


The bank was taken public a second time in May 2013. Once again Bankia shares promptly collapsed, losing 80% of their value in a matter of days. And once again, it was ordinary investors who got destroyed.


Indeed, things were so awful that a police officer stabbed a Bankia banker who sold him over €300,000 worth of shares (the banker had convinced him it was a great investment).


Which brings us to today.


Bankia remains completely bankrupt. But its executives and the Spanish Government continue to claim that things are improving and that the bank is on the up and up. Indeed, just a few weeks ago, the Wall Street Journal wrote an article titled “Investors Show Interest in Bankia.”


The story featured a quote from Spain’s Finance Minister that, “… it is logical. The perception of Spain has improved and Banki has improved a lot.”


Bear in mind, this is a bank that has wiped out investors THREE times in the last THREE YEARS. So that’s three different rounds of individual investors being told that Bankia was a great investment and losing everything.


Every single one of these wipeouts was preceded by both bankers and Spanish Government officials claiming that “everything had been fixed” and that Bankia was a success story.


And now the Spanish Government is trying to convince them to line up for a fourth round.


This kind of fraud and lawlessness is unbelievable to me. But it is how the world works today. Those who have power will do anything they can to retain it. This includes, lying, cheating, and stealing.


And while certain items relating to this story are unique, the morals to Bankia’s tale can be broadly applied across the board to the economy/ financial today.


Those morals are:


1)   Those in charge of regulating the system will lie, cheat and steal rather than be honest to those who they are meant to protect (individual investors and the public)

2)   Any financial problem that surfaces will be dealt with via fraud or lies rather simply allowing those who screwed up to be fired or go to jail.

3)   When the inevitable collapse finally does hit, it will be individual investors and the general public who get screwed (not bank executives or politicians).


If I were to be blunt, the investment world has gone insane. If one were rational, one would think that the entire Bankia episode would have resulted in investors fleeing Spain en masse.


It hasn’t. In fact, Spain’s bonds now have lower yields than Treasuries indicating that Spain is fiscally in a better position than the US and less likely to default (incredible given that Spain cannot print money to repay bondholders while the US can).


This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at


This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research


via Zero Hedge Phoenix Capital Research

Iraq Update: Air Force Runs Out Of Missiles, ISIS Controls The Border; Shiite Clerics Threaten US Troops

Now that the Iraq proxy war scene is set, and as we reported on Friday, Prime Minister Maliki has become a pawn in yet another middle-east war between the west and the petrodollar (with both Saudi Arabia and the US making it clear Maliki has to go) and Russia (with Putin expressing his full support for the prime minister), events will likely unfold at an even faster pace. Sure enough, even this otherwise quiet weekend, in which the world is supposed to put wars on the backburner and focus on the world cup, is chock-full of Iraq news upates.

Let’s begin.

Perhaps the leading update out of the civil war-torn country is that ISIS militants, whose ultimate goal is to create a caliphate that encompasses Syria, Jordan and Iraq are well on their way to achieving what in Europe would be called a “customs union”, after they captured two border crossings, one with Jordan and another with Syria, as they press on with their offensive -largely unobstructed – in one of Iraq’s most restive regions.

The officials said the militants on Sunday captured the Turaibil crossing with Jordan and the al-Walid crossing with Syria after government forces there pulled out.


The officials spoke on condition of anonymity because they were not authorized to speak to the media.


The capture of the two follows the fall since Friday of the towns of Qaim, Rawah, Anah and Rutba, all of which are in the Sunni Anbar province where militants of the Islamic State of Iraq and the Levant have since January controlled the city of Fallujah and parts of the provincial capital Ramadi.

As AP notes, with the capture of another town in Iraq’s western Anbar province, the fourth to fall in two days, it appears that the ISIS Baghdad offensive has for now been put on hold, and instead the jihadists are focusing their efforts on a major offensive in the western provinces to cement their control and seamless crossing to and from Syria and Jordan.

The following latest maps from the Institute for the Study of War map out the most recent clashes.


This follows the deployment on Friday of volunteer fighters, a mix of new recruits and Shi’a militias, to multiple locations including Tal Afar and Taji. Asa  reminder the cities of Tal Afar and Muqdadiyah, as well as the Baiji refinery town, remain the key front lines against the advance of ISIS from the north. As of late Friday, the ISF had not launched a counter-offensive against ISIS.


But why is Iraq not taking advantage of the slowdown in the ISIS offensive and seeking halt the military momentum? Simple: its army is running out of supplies!

As ABC reports, the Iraqi military ran out of Hellfire missiles six days ago, and though the U.S. is rushing more missiles into the country, Iraq has only two modified Cessna aircraft to launch them in their battle against the radical Islamic militia ISIS.

ISIS has damaged 28 tanks and shot down three helicopters, a significant percentage of the government force, and the militia killed an entire Iraqi Security Force brigade in the last couple of days at the border with Syria, which ISIS now controls.

The losses have left the Iraqi military with no offensive capability, and no real air force.

Perhaps this is why, in order to avoid a loss of confidence in the country’s offensive (and defensive) weaponry, the Iraq government released the following video footage on Sunday, which reportedly shows the bombing of suspected ISIS miitant hideouts. In a world in which YouTube has become the biggest propaganda tool, we wouldn’t be too surprised if this footage was doctored by the NSA or merely taken from the archives.

Meanwhile, ISIS is taking advantage of its involuntary restocking by the US army, after its plunder of an unknown number of US Black Hawk helicopters and Humvees (the topic of choice in ISIS’ trolling of Michelle Obama as reported yesterday) during its Mosul offensive several weeks ago.

That wraps up the military deployments (or lack thereof) in the past 48 hours.

Parallel with the fighting, perhaps an even more important development were the statements by the regional religious leaders, those of both Iran and Iraq.

First, it was in Iraq where a Shiite Muslim cleric threatened to attack U.S. military advisers when they arrive in the country to help Iraq’s government fight Sunni extremists.

As The Hill reported, in a sermon on Friday, Nassir al-Saedi, a loyalist to Shiite leader Muqtada al-Sadr, warned of an attack against the U.S., whom he called “the occupier,” Sky News reported.

We will be ready for you if you are back,” said al-Saedi.

The warning comes days after President Obama announced he was sending 300 U.S. military advisers to Iraq to bolster government security forces and help combat Sunni militant members of the Islamic State in Iraq and Syria (ISIS).

The British Telegraph also reported that tens of thousands of heavily armed fighters from al-Sadr’s militia, the Mahdi army, paraded through the streets of Baghdad Saturday.

The Shiite militia said it does not need or want help from the U.S.

So much for a friendly third welcome of the US “liberators.”

If the Americans are thinking about coming back here, all of we Iraqis will become time bombs – we will eat them alive,” said Adel Jabr Albawi, who marched in Saturday’s parade, according to the Telegraph. “We can deal with Isis ourselves.”

The threats from al-Sadr supporters could potentially open a second front for U.S. forces heading to Iraq.

But it was not just Iraq clerics who raged against a return of the US. Also joining the anti-US chorus was – perhaps surprisingy all things considered- Iran‘s own top leader Ayatollah Ali Khamenei who has vocally come out against US intervention in neighboring Iraq, where Islamic extremists and Sunni militants opposed to Tehran have seized a number of towns and cities.

“We strongly oppose the intervention of the U.S. and others in the domestic affairs of Iraq,” Khamenei was quoted as saying by the IRNA state news agency on Sunday, in his first reaction to the crisis.

The main dispute in Iraq is between those who want Iraq to join the U.S. camp and those who seek an independent Iraq,” said Khamenei, who has the final say over government policies. “The U.S. aims to bring its own blind followers to power.”

Well, he is right after all.

As a reminder, Shiite Iran supports the Shiite-led government in Baghdad, and has said it would consider any request for military aid.

Which covers the religious influence of both Iran and Iraq. But what about that other staple in everything “middle-east”- Israel? Well, they too made an appearance this weekend when it was revealed that the surprise winner from the ISIS surge, the Kurdish Regional Government, which suddenly finds itself as a major oil producer and exporter, has found its first buyer of oil. None other than Israel.

According to the WSJ, oil piped from Iraqi Kurdistan has been successfully delivered directly by the region’s semiautonomous government for the first time, despite opposition from the U.S. and the Iraqi central government. The oil comes from a new pipeline built to bypass Baghdad’s pipeline, which will help maintain Iraqi Kurdistan’s financial independence.

The Kurdish Regional Government said late Friday that one million barrels of its oil piped through the Turkish port of Ceyhan “was safely delivered to the buyers.” The KRG declined to say who the buyers were.

It didn’t take long to discover just who the buyers were thought: “The oil is currently being unloaded at an Israeli port, according to officials at the terminal.”

The U.S. State Department confirmed the delivery, criticizing the semiautonomous region’s unilateral sale without Baghdad’s approval and warning buyers of its oil. “The export or sale of oil absent the appropriate approval of the federal Iraqi government exposes those involved to potentially serious legal risks,” a State Department official told The Wall Street Journal.

But while the US boycotted the Kurdish sale of oil, it had surprisinglylittle to say about the Israel purchase of said product.

Iraq already boycotts Israel, and won’t sell oil to the Jewish state, so Israel is not overly concerned with Iraqi threats of sanctions, unlike other countries who have oil contracts with Iraq.

* * *

Finally, president Obama, in an interview with CBS’ “Face the Nation” airing Sunday, warned that the al-Qaida-inspired militants in Iraq could grow in power and destabilize the region. He said Washington must remain “vigilant” but would not “play whack-a-mole and send US troops occupying various countries wherever these organizations pop up.” Why not, one wonders? What has changed from US’ “whack-a-mole” policies, all “beyond successful” to date?

And that concludes the weekend Iraq event roundup.

via Zero Hedge Tyler Durden