Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Fed’s substitution of debt for income has only doomed the nation to a deeper, more painful realignment of real income and expenses.

The economic “recovery” has been based on a simple premise: debt can be substituted for income with no ill effects. As real household incomes have declined, the legitimate foundation of additional spending–more income–has eroded for the bottom 90%.

Even the ephemeral foundation of additional debt-based spending–the Fed’s beloved wealth effect–has eroded for all but the thin layer at the very top of the wealth pyramid.

To replace this diminished income, the Status Quo has substituted debt as the source of additional spending: household debt, corporate debt and government debt.

But debt is not income. Rather, debt requires income to be diverted to pay interest and principal. So substituting debt for income ends up further depleting declining income.

This scheme of keeping a bloated, inefficient Status Quo afloat with debt is not a success–it’s a failure on an epic scale.

Let’s start by reviewing household income, which has declined in real (adjusted for inflation) terms. The drop in real income is across the board; those in the top rungs have experienced a smaller relative decline than their lower-income brethren, but they still has less purchasing power than they did six years ago.

Here’s another look at the same basic data:

Here’s real median household income:

Some apologists claim median income doesn’t reflect how well most households are doing in the New Normal. As researchers Piketty and Saez found, the gains in income have all accrued to the top 10%. So while this might be good news for Porsche dealerships in wealthy enclaves, it doesn’t follow that the economy is healthy because a relative handful of households are doing very well for themselves.

If we add up all debt–household, finance, corporate and government–we see debt has soared and growth has stagnated: this is a classic case of diminishing returns as more debt is required to add each additional increment of GDP.

At some point, additional debt is taken on to simply make interest payments; at that juncture, there is no consumption/buying taking place with the new debt: it’s simply keeping the borrower out of default.

The Fed has pulled out all the stops to reflate the housing and stock market bubbles, as a means of boosting the wealth effect, i.e. the belief that people who see their homes and 401K accounts rising will feel wealthier and therefore more likely to borrow and spend money on stuff they don’t need.

Housing has entered an echo-bubble:

But alas, these unprecedented Fed-inflated bubbles haven’t pushed household wealth up to previous levels. The power of the wealth effect is greatly diminished when wealth has yet to recover to previous levels.

source: Wealth Levels, Wealth Inequality And The Great Recession (PDF)

Even the top 10% have seen their real wealth decline sharply from the peak in 2007. So much for the wealth effect, which can only work on those with short memories.

The scheme of substituting debt for income to prop up a corrupt, bloated and ineffective Status Quo is a financial game with a predictable end: even with low interest rates, each additional unit of debt requires more future income be diverted to pay interest and principal. As income erodes due to Fed-induced inflation and other structural deformations, spending more of the diminishing income pie on servicing debt becomes increasingly destructive–especially to the core dynamic of our consumerist economy: taking on more debt to consume more stuff.

No wonder so many households are behind on their debt payments: Delinquent Debt in America (Urban Institute): An alarming 77 million Americans — 35 percent of adults with credit files — have debt in collections reported in their credit files, with an average debt amount of nearly $5,178.

Substituting debt for income can fill the widening gap between income and expenses for a few months. Beyond a few months, however, the household, company or nation that wants to avoid insolvency and default must align expenses with real income (as defined by purchasing power of the income).

Six years is not a few months. The Federal Reserve has gamed and manipulated the financial system to enable every person and entity in the U.S. to take on more debt at lower rates of interest. The past six years have been a grandiose gambit that additional debt-based spending would magically transform a financialized, debt-dependent, bloated and ineffective economy into a productive economy based on prudent risk management and investment of capital.

Sorry, members of the Fed–magical thinking doesn’t work in the real world. Your substitution of debt for income has only doomed the nation to a deeper, more painful realignment of real income and expenses, and a more devastating recognition of phantom assets and collateral.

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

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Fed’s substitution of debt for income has only doomed the nation to a deeper, more painful realignment of real income and expenses.

The economic “recovery” has been based on a simple premise: debt can be substituted for income with no ill effects. As real household incomes have declined, the legitimate foundation of additional spending–more income–has eroded for the bottom 90%.

Even the ephemeral foundation of additional debt-based spending–the Fed’s beloved wealth effect–has eroded for all but the thin layer at the very top of the wealth pyramid.

To replace this diminished income, the Status Quo has substituted debt as the source of additional spending: household debt, corporate debt and government debt.

But debt is not income. Rather, debt requires income to be diverted to pay interest and principal. So substituting debt for income ends up further depleting declining income.

This scheme of keeping a bloated, inefficient Status Quo afloat with debt is not a success–it’s a failure on an epic scale.

Let’s start by reviewing household income, which has declined in real (adjusted for inflation) terms. The drop in real income is across the board; those in the top rungs have experienced a smaller relative decline than their lower-income brethren, but they still has less purchasing power than they did six years ago.

Here’s another look at the same basic data:

Here’s real median household income:

Some apologists claim median income doesn’t reflect how well most households are doing in the New Normal. As researchers Piketty and Saez found, the gains in income have all accrued to the top 10%. So while this might be good news for Porsche dealerships in wealthy enclaves, it doesn’t follow that the economy is healthy because a relative handful of households are doing very well for themselves.

If we add up all debt–household, finance, corporate and government–we see debt has soared and growth has stagnated: this is a classic case of diminishing returns as more debt is required to add each additional increment of GDP.

At some point, additional debt is taken on to simply make interest payments; at that juncture, there is no consumption/buying taking place with the new debt: it’s simply keeping the borrower out of default.

The Fed has pulled out all the stops to reflate the housing and stock market bubbles, as a means of boosting the wealth effect, i.e. the belief that people who see their homes and 401K accounts rising will feel wealthier and therefore more likely to borrow and spend money on stuff they don’t need.

Housing has entered an echo-bubble:

But alas, these unprecedented Fed-inflated bubbles haven’t pushed household wealth up to previous levels. The power of the wealth effect is greatly diminished when wealth has yet to recover to previous levels.

source: Wealth Levels, Wealth Inequality And The Great Recession (PDF)

Even the top 10% have seen their real wealth decline sharply from the peak in 2007. So much for the wealth effect, which can only work on those with short memories.

The scheme of substituting debt for income to prop up a corrupt, bloated and ineffective Status Quo is a financial game with a predictable end: even with low interest rates, each additional unit of debt requires more future income be diverted to pay interest and principal. As income erodes due to Fed-induced inflation and other structural deformations, spending more of the diminishing income pie on servicing debt becomes increasingly destructive–especially to the core dynamic of our consumerist economy: taking on more debt to consume more stuff.

No wonder so many households are behind on their debt payments: Delinquent Debt in America (Urban Institute): An alarming 77 million Americans — 35 percent of adults with credit files — have debt in collections reported in their credit files, with an average debt amount of nearly $5,178.

Substituting debt for income can fill the widening gap between income and expenses for a few months. Beyond a few months, however, the household, company or nation that wants to avoid insolvency and default must align expenses with real income (as defined by purchasing power of the income).

Six years is not a few months. The Federal Reserve has gamed and manipulated the financial system to enable every person and entity in the U.S. to take on more debt at lower rates of interest. The past six years have been a grandiose gambit that additional debt-based spending would magically transform a financialized, debt-dependent, bloated and ineffective economy into a productive economy based on prudent risk management and investment of capital.

Sorry, members of the Fed–magical thinking doesn’t work in the real world. Your substitution of debt for income has only doomed the nation to a deeper, more painful realignment of real income and expenses, and a more devastating recognition of phantom assets and collateral.

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

View online      Forward Useful Idiots and the Something For Nothing Society – Part 2 of 4 July 31, 2014                             Send To A Friend | View Past Articles | Subscribe This is part II of IV of Useful Idiots and The Something for Nothing Society.  In part I, we covered the beginning of the evolution from a capitalist constitutional republic during Teddy Roosevelt’s presidency a century ago into the progressive socialist state we have become today.  This transformation has taken over a century and has been implemented in such an incremental manner as to be mostly imperceptible to the public at large.   It began with the creation of the Federal Reserve (privately owned central bank owned by multi–century banking families) and UNSOUND money (which transformed money from a place to store your savings and labor and a store of value which moved your savings into the future, into an instrument of confiscation, theft and exploitation of the public).  The other element of the road to serfdom was the personal income tax, also implemented at that time.  This series is a connect the dots exercise designed to allow you to see the enormity and inevitability of the societal collapse we find ourselves in.  Its causes, the system that is in place driving it forward and the reality of our situations, better allow you to see and prepare for its demise, hopefully benefitting from it.  It is the greatest opportunity in history but requires a keen understanding of history and Austrian economics which has predicted it all.  The history of this collapse of empires is being presented to you in this series. Inhabitants of the developed world have experienced an IRON curtain of government policies crushing their futures and prohibiting prosperity.  This plan has been in place and unfolding for over 100 years.  It is a plan and the playbook is easily found and understood on the internet.  It is central to creating USEFUL IDIOTS and a Something for Nothing Society. It is nothing less than the destruction of the American way, the taking of our freedoms, private property, future prosperity and destruction of any incentives to produce.  It is a process where the elites which control society transform the public into modern day serfs and transform the fruits of your labor to themselves in a myriad ways. It is the implementation of socialism, which is the consumption of wealth and the destruction of wealth creation as we outlined in part 1. The people who control the central government (bureaucracies) in Washington DC, are socialists who call themselves progressive democrats and republicans.  They believe in the ultimate power of leviathan government over the public rather than being servants to them.  Hillary Clinton and Barack Obama are a few of the disciples of Saul Alinsky, a radical community organizer who devised methods of destabilization and destruction of a capitalist economy making it ripe for the IMPOSITION of socialism.  We need look no further than his Rules for Radicals (published in 1971) to see the blueprints of what is transpiring today throughout the developed world: How To Create a Social State by Saul Alinsky There are 8 levels of control that must be obtained before you are able to create a social state. The first is the most important. 1) Healthcare – Control healthcare and you control the people 2) Poverty – Increase the Poverty level as high as possible, poor people are easier to control and will not fight back if you are providing everything for them to live. 3) Debt – Increase the debt to an unsustainable level. That way you are able to increase taxes, and this will produce more poverty. 4) Gun Control – Remove the ability to defend themselves from the Government. That way you are able to create a police state. 5) Welfare – Take control of every aspect of their lives (Food, Housing, and Income) 6) Education – Take control of what people read and listen to – take control of what children learn in school. 7) Religion – Remove the belief in God from the Government and schools 8) Class Warfare –Divide the people into the wealthy and the poor. This will cause more discontent and it will be easier to take (Tax) the wealthy with the support of the poor.   This process is firmly underway as anyone who is an careful observer of unfolding events can verify.  The only part that is missing from his plan is unsound money and the debauching of the currency which was firmly underway when he created this blueprint and we covered it in part one of this series. Every detail of this plan is at work and in FULL BLOOM in the developed world economies as we will illustrate in this series.  Driven by the Politicians who are socialists in various stages of disguise, many are on plain display in Europe and, in America, they are disguised as progressive Republicans and Democrats and call for democracy (democracy for them means socialism to the common man) playing word games in the tradition of George Orwell’s Animal Farm and 1984.  The main thrust of today’s missive will cover creating Useful Idiots and a Something for Nothing Society is  PUBLICLY CONTROLLED (centrally planned and directed) school system.  The schools are not creating independent productive citizens anymore, now their mission is to create just the opposite: ignorant, uneducated serfs for exploitation, created to live a life of misery and servitude. Children’s brainwashing and manipulation of their thoughts began upon entering the public school monopolies. When I was a child, schools where controlled by local and state governments in cooperation with local parents through the PTA (parent teachers association) and had been this way since the founding of America 200 years before.  If the children failed to be properly prepared to become self-sufficient, literate and responsible adults, the next PTA and SCHOOL board meeting would erupt in fireworks until the heat brought back the accountability to the system.  If the child failed their lessons, he or she was held back until proven proficient with no exceptions.  Today, these students are promoted in order to cement their ignorance in place. In my day, a school was VERY accountable to its students and curriculums devised by parents and teachers together to MAKE sure the fundamentals were thoroughly learned to PREPARE the children to be productive, self-sufficient independent citizens as they mature and learn from the lessons of history rather than repeat them.  Constitutionally, there is no basis or authority granted for the Department of Education. The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. – Tenth Amendment to the U.S. Constitution In 1979, the Department of Education was established to insure all students received a uniform quality of education and create federally controlled public school monopolies. The goal was not to improve education but to dilute it and control the curriculums to create a compliant, docile, uninformed useful idiot, ripe for manipulation and supporters of progressive socialism.   It has now  become an unaccountable (to parents and the children that are mentally crippled by it) MONOPOLY controlled by public sector education unions whose directions come from Washington DC (District of Corruption). Curriculums are designed to serve Washington DC’s goals of controlling the wealth and lives of the public by creating government dependence, the belief the government will provide for them if they fail to do so themselves, and voting majorities to serve themselves, crony capitalists, special interest supporters and their masters in the banking systems. We have moved away from the CLASSICAL curriculum developed over CENTURIES which had been provided by accountable local governments and parents since the founding of the UNITED STATES: Classical Conventional Curriculum of the baby boomers and previous generations: Self-reliance, Hard work, personal responsibility, perseverance The Constitution and Bill of Rights, the history and evolution of freedom such as the Magna Cart Ability to solve problems Logic, reason and critical thinking skills The importance of the right to keep and bear arms and know how to use them What is money? Prudent financial behavior, living within your means, saving, the dangers of indebtedness, the effects of compounding, Reading, writing and arithmetic (HIGH levels of PROFICIENCY) Ability to think for yourself and the essential of societal free speech The lessons of history (previous empires and their demise), Classical reading This once created a wealth of productivity, well-educated citizens, wealth, huge middle classes, personal responsibility, and a moral and just society. The more educated the public became the more prosperous, and wealth FLOWED to its citizens in sound money. Which then, when reinvested, created the next WAVE of WEALTH CREATION. The education of the public is essential to economic and personal success as outlined by Adam Smith in the classic book Wealth of Nations.  This system of an classically educated electorate created the greatest accumulation of wealth and broadest and most prosperous middle classes in history. Now, the objective of the educational system is just the opposite – to enhance the OPPORTUNITIES for GOVERNMENT and BANKSTERS to PREY, VICTIMIZE and MANIPULATE children into adulthood.  At which point, they become sheeple, ripe for fleecing for a lifetime.  It is now a politically correct system designed to create what Vladimir Lenin called USEFUL idiots (pawns of government, elites and banksters). Control the public schools and teach dependence on government TEACH childlike trust in government and that they will take care of you. That you are ENTITLED to something for nothing (healthcare, food, pensions, disability insurance, shelter) and someone else will pay for it Whether you earn it or not, they sell the impossible idea that you are entitled to live at the expense of others, rather than provide for yourself. Don’t teach history and lessons from the past Reading, writing and arithmetic deemphasized (more than 50% or more graduate high school graduate without being proficient in these areas) Create several generations who have no interests in current events or anything but personal amusement and comfort. This has transpired over a 35-year period since the Department of Education (centrally planned and progressively controlled) was created in WASHINGTON D.C. (District of Corruption). They have not been taught to be self-sufficient, productive and hard working ON PURPOSE: A latest assault on the quality of public education is in the making as you read this and it is called COMMON CORE. The Common Core is a common curriculum to create people UNABLE to solve problems or do simple math, bereft of history and its lessons, and prime candidates for manipulation by the main stream media and politicians.  The goal of the government, Socialist progressives, Banksters, monopoly public schools, the department of education and the teachers' unions IS NOT to create a nation of self-sufficient intelligent citizens. It is to create dumbed-down citizens, unable to function, think clearly or provide for themselves, dependent on the socialist government system and easily manipulated by FEAR (false evidence appearing real). “Contrary to what the public is told, Common Core is not about standards. It’s about content — what pupils are taught. In the Social Studies Framework approved on April 29th by New York State’s education authorities (but not parents), American history is presented as four centuries of racism, economic oppression, and gender discrimination. Teachers are encouraged to help students identify their differences instead of their common American identity. Gone are heroes, founding fathers, ideals, and American exceptionalism.” …Common Core eliminates handwriting, the basis of communication for over two thousand years. Students learn to print in kindergarten and first grade, but then instruction shifts to keyboards…. But what’s most at stake is truth. Novelist George Orwell warned in “1984” how distorting history destroyed freedom: “The past was erased, the erasure was forgotten, and the lies became truth.” – Betsy McCaughey That is the definition of the school systems today, where mental crippling of many generations is the goal. The CONSTITUTION and Bill of RIGHTS protects you from tyrannical government and preserve and enshrine the RULE of LAW. These things ARE NOT taught to students today, they do not know WHAT THEY ARE, why they are important or why they must be upheld, fought for and protected to preserve our country and FREEDOMS that the founding fathers fought and died to create for us.  Previous generations were taught and fought for these things are now called terrorists and tea partiers.  Just as the founding fathers would be today. "The two enemies of the people are criminals and government, so let us tie the second down with the chains of the Constitution so the second will not become the legalized version of the first." – Thomas Jefferson “There will be, in the next generation or so, a method of making people love their servitude, and producing dictatorship without tears, so to speak, producing a kind of painless concentration camp for entire societies, so that people will in fact have their liberties taken away from them, but will rather enjoy it, because they will be distracted from any desire to rebel by propaganda or brainwashing, or brainwashing enhanced by pharmacological methods. And this seems to be the final revolution.” – Aldous Huxley Aldous did not live to see the internet, Facebook or smartphones but it is the bread and circus for useful idiots.  Now OUR CHILDREN are TAUGHT the SECOND BILL OF RIGHTS (designed to make the public DEPENDENT on Government) originally created By Franklin Delano Roosevelt (Obama worships this) during the great depression. The right to a useful and remunerative job in the industries or shops or farms or mines of the nation. Think unions, minimum wages for people that don’t produce. The right to earn enough to provide adequate food, shelter, clothing and recreation. Think Welfare, food stamps, disability, etc The right of every farmer to raise and sell his products at a return which will give him and his family a decent living. Think farm subsidies The right of every businessman, large and small, to trade in an atmosphere of freedom from UNFAIR COMPETITION and domination by monopolies at home or abroad. Think the façade of capitalism when crony capitalism is the goal accomplished through runaway government regulation The right of every family to a decent home. Think section 8 housing The right to adequate medical care and opportunity to achieve and enjoy good health. Think Medicare for the elderly, Medicaid for the poor, Obamacare for the middle class. The right to adequate protection from the economic fears of old age, accident and unemployment. Think Unemployment and disability benefits which never end. The right to a good education. Think how real charter schools are relentlessly attacked for being successful and creating people who can be independent thinkers, know history, and can read write and do arithmetic. Excellence in education is now the enemy. Something for Nothing Societies and USEFUL IDIOTS have been taught to believe these things and VOTE for it. To them it is the AMERICAN WAY!  The original Bill of Rights provides for NONE of this. It provides the basis to accomplish these things aka “equal opportunity” but not the guarantee of them. This is the thinking that has been taught to 3 to 4 generations of school children who have grown up and now VOTE. These people unknowingly are socialists and support socialism. It is why the Developed Nations are so fiercely divided at this time; the older generation went through the old classical school system and, the newer generation, the socialist/USEFUL Idiot model. It is the makers versus the takers, tea party versus millennials and Gen X.  In the real world, we used to be in this together. Dividing society is part of the game plan of socialist progressives.   Author’s Note: In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which are designed with the potential to thrive (up and down markets) regardless of what unfolds economically or politically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal consultation with me CLICK HERE! The millenial’s and Gen X are the patsies. They are the ones who are on the hook for the debt and the diminished futures caused by the policies of the socialists they support. When the president and democrats talk of the middle class, they are talking to the useful idiots who believe and have been taught that they are ENTITLED to prosperity, the fruits of others’ labors, and a middle class lifestyle by the simple fact of being AMERICAN.  This is the promise of government they have learned since entering the public school system. When he talks about boosting the middle class they are speaking about the next entitlement to TACK on the the second bill of rights.   In a number of states, those on welfare OUTNUMBER those with a job: If you work for a living and live in one of those states you may wish to consider voting with your feet as the confiscation of your labors and wealth are firmly on the BUFFET table. California and New York combined with Washington DC are taking over 60 to 70% of your wealth in one way or another… and their appetite is INSATIABLE.  This is the government redistributing wealth and implementing crippling policies on the grandest of scales.  These states are the tip of the spear of the entitlement nation that is unfolding, Europe is no exception and, in fact, leads the United States in every major issue covered today. In closing, the complete capturing of the educational system means the armies of the misinformed are only set to grow.  Until the RAT nest of socialists which control the PUBLIC school systems are dislodged and American values and classical educations are reintroduced to our children, the march toward socialist totalitarianism is UNSTOPPABLE.  Every year, new useful idiots and something for nothings roll off the assembly line known as the public schools.   They believe in the equality of results not the equality of opportunity.  Egalitarians by another word.  This entitlement mentality is very dangerous as they vote for people in government who misuse the power of government to loot those that do produce more than they consume and lead the prudent lifestyles they no longer teach to youngsters today. The school systems today create a moral insolvency which is virtually impossible to escape once inducted.   Self-awareness is virtually impossible to achieve where once it was common among the public.  You can see these people throughout the world today: they speak in talking points, cannot debate, form or dissect their own thoughts and opinions.  Only repeat what they have been told.  Much like Stepford wives.  They have no knowledge of history, the constitution, self-awareness or the basic skills of reading, writing, and  arithmetic or the ability to produce more than they consume.  Contrary to the citizens of yesteryear or Adam Smith’s Wealth of Nations they are a burden and detriment to society rather than its treasure.  The fabric of America, which used to be sturdy and highly diverse, is now becoming cheap linen. In the next issue of Useful Idiots and The Something for Nothing Society, we will be covering the other aspects which add up to the slowly unfolding societal and economic collapse throughout the developed world today.  Don’t miss it.  Subscriptions are free CLICK HERE! DISCLAIMER AND TERMS OF USE: While TedBits strives to present accurate and useful information, we make no guarantee of accuracy or completeness. All information and opinion expressed herein is subject to change without notice. Opinions and recommendations contained herein should not be construed as investment advice. Under no circumstances does the information in this column represent a recommendation to buy or sell any securities or commodities. Do not assume that any recommendations, insights, charts, theories or philosophies will ensure profitable investment. The information contained herein is for personal use only. Any redistribution of this information is strictly prohibited. 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Gold and silver backed and absolute return investments do not mean the investor will take actual physical possessions of any precious metal. Nor should any promise or guarantee be implied that such investments will perform better than any other investment in any possible future scenario described herein nor that such investments can or will preserve or protect in such possible future scenarios. TedBits may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness. Many of the statements and views made are the opinions of the author. Opinions expressed are subject to change without notice. This report is not a request to engage in any transaction involving the purchase or sale of futures contracts or options on futures. There is a substantial risk of loss associated with trading futures, foreign exchange and options on futures. 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via Zero Hedge http://ift.tt/1oREqLt tedbits

While many were amused by this photo of Putin and Merkel during the world cup final showing Europe’s two most important leaders siding side by side, some were more curious by just what the two were scheming:

 

Thanks to the Independent, we may know the answer, and it is a doozy, because according to some it is nothing shy of a sequel to the Molotov-Ribbentrop pact: allegedly Germany and Russia have been working on a secret plan to broker a peaceful solution to end international tensions over the Ukraine, one which would negotiate to trade Crimea’s sovereignty for guarantees on energy security and trade. The Independent reveals that the peace plan, being worked on by both Angela Merkel and Vladimir Putin, “hinges on two main ambitions: stabilising the borders of Ukraine and providing the financially troubled country with a strong economic boost, particularly a new energy agreement ensuring security of gas supplies.”

Amusingly, this comes on the day when the WSJ leads with “On Hold: Merkel Gives Putin a Blunt Message. Germany’s Backing of Russia Sanctions Marks Breach in Pivotal European Relationship” in which we read that ” Angela Merkel spoke to Russian President Vladimir Putin for at least the 30th time since the Ukraine crisis erupted. She had a blunt message, according to people briefed on the phone conversation: Call me if you have progress to report in defusing the conflict. That was July 20. The two leaders haven’t spoken since.”

They may or may not have spoken since, but it is not because Putin has “no progress to report” – it’s because the two leaders have come to a secret agreement which will hardly make Ukraine, or most of Europe, not to mention the UN, happy as it requires that Crimea be permanently handed over to Russia in exchange for Russian gas, which has been cut off for a month now due to non-payment by Kiev.

Here is how the deal came to happen:

Sources close to the secret negotiations claim that the first part of the stabilisation plan requires Russia to withdraw its financial and military support for the various pro-separatist groups operating in eastern Ukraine. As part of any such agreement, the region would be allowed some devolved powers.

 

At the same time, the Ukrainian President would agree not to apply to join Nato. In return, President Putin would not seek to block or interfere with the Ukraine’s new trade relations with the European Union under a pact signed a few weeks ago.

 

Second, the Ukraine would be offered a new long-term agreement with Russia’s Gazprom, the giant gas supplier, for future gas supplies and pricing. At present, there is no gas deal in place; Ukraine’s gas supplies are running low and are likely to run out before this winter, which would spell economic and social ruin for the country.

 

As part of the deal, Russia would compensate Ukraine with a billion-dollar financial package for the loss of the rent it used to pay for stationing its fleets in the Crimea and at the port of Sevastopol on the Black Sea until Crimea voted for independence in March.

To be sure, in the aftermath of the MH-17 shooting, which in light of this revelation would clearly not benefit Russia, negotiations have stalled they are expected to restart once the investigation has taken place. “It is in everyone’s interests to do a deal. Hopefully, talks will be revived if a satisfactory outcome can be reached to investigations now taking place as to the causes of the MH17 catastrophe.“

But while Germany can’t wait to put the Ukraine conflict behind it and restore normal Russian relations (see Adidas’ record plunge earlier today, blamed on the Ukraine conflict) others are far more eager to stir the pot some more: “A spokesman for the Foreign and Commonwealth Office said they had no knowledge of such negotiations taking place. However, the spokesman said he thought it highly unlikely that either the US or UK would agree to recognising Russian control over Crimea. There was no one available at the German embassy’s press office yesterday.”

Which, of course, goes back to the fundamental question behind the Eurozone experiment: just who calls the shots. And despite what the UK (and certainly France) believe, that one person was and continues to be Merkel.  And at the end of the day, pragmatic Germany knows that for all the posturing and rhetoric, the biggest loser from a western embargo of Russia (which is now actively shifting its attention to China and now India) would be Germany itself.

[S]trong trade ties between the two countries have also served to strengthen Ms Merkel’s hand and the Russian speaker has emerged as the leading advocate of closer relations between the EU and Russia. “This is Merkel’s deal. She has been dealing direct with President Putin on this. She needs to solve the dispute because it’s in no one’s interest to have tension in the Ukraine or to have Russia out in the cold. No one wants another Cold War,” said one insider close to the negotiations.

 

Some of Germany’s biggest companies have big operations in Russia, which is now one of Europe’s biggest car markets, while many of its small to medium companies are also expanding into the country. Although Russia now provides EU countries with a third of their gas supplies through pipelines crossing the Ukraine, Germany has its own bilateral gas pipeline direct to Russia making it less vulnerable than other European countries.

 

However, Russia is still the EU’s third-biggest trading partner with cross-border trade of $460bn (£272bn) last year, and the latest sanctions being introduced by the EU towards Russian individuals and banks will hurt European countries more than any other – particularly Germany, but also the City of London.

Curiously, if there is one entity that could scuttle the deal it is, no surprise there, the US.

Central to the negotiations over any new gas deal with Gazprom is understood to be one of Ukraine’s wealthiest businessmen, the gas broker, Dmitry Firtash. Mr Firtash – who negotiated the first big gas deal between the Ukraine and Russia between 2006 and 2009 – is now living in Vienna fighting extradition charges from the Americans. But he has close relations with the Russian and Ukrainian leaders – he supported Mr Poroschenko – and has been acting as a go-between behind the scenes at the highest levels.

Incidentally, the same Americans which over the past 2 years has been desperate to start a regional war in any one part of the globe in order to break some more windows and boost GDP courtesy of the tried and true “Military Industrial Complex” GDP boost. Which is why if indeed the Ukraine peace process is in the arms of the US, then perhaps Putin’s advisor was spot on when he said that “There is a war coming in Europe.” Compliments of the United States?

Finally, for those wondering how much of the Independent’s story is a fabrication, here is Germany denying it all:

• GERMANY: REPORT OF SECRET DEAL ON UKRAINE `TOTALLY UNFOUNDED’

Which, if Jean-Claude Juncker is any indication, seals it.

via Zero Hedge http://ift.tt/1s7TbdW Tyler Durden

While many were amused by this photo of Putin and Merkel during the world cup final showing Europe’s two most important leaders siding side by side, some were more curious by just what the two were scheming:

 

Thanks to the Independent, we may know the answer, and it is a doozy, because according to some it is nothing shy of a sequel to the Molotov-Ribbentrop pact: allegedly Germany and Russia have been working on a secret plan to broker a peaceful solution to end international tensions over the Ukraine, one which would negotiate to trade Crimea’s sovereignty for guarantees on energy security and trade. The Independent reveals that the peace plan, being worked on by both Angela Merkel and Vladimir Putin, “hinges on two main ambitions: stabilising the borders of Ukraine and providing the financially troubled country with a strong economic boost, particularly a new energy agreement ensuring security of gas supplies.”

Amusingly, this comes on the day when the WSJ leads with “On Hold: Merkel Gives Putin a Blunt Message. Germany’s Backing of Russia Sanctions Marks Breach in Pivotal European Relationship” in which we read that ” Angela Merkel spoke to Russian President Vladimir Putin for at least the 30th time since the Ukraine crisis erupted. She had a blunt message, according to people briefed on the phone conversation: Call me if you have progress to report in defusing the conflict. That was July 20. The two leaders haven’t spoken since.”

They may or may not have spoken since, but it is not because Putin has “no progress to report” – it’s because the two leaders have come to a secret agreement which will hardly make Ukraine, or most of Europe, not to mention the UN, happy as it requires that Crimea be permanently handed over to Russia in exchange for Russian gas, which has been cut off for a month now due to non-payment by Kiev.

Here is how the deal came to happen:

Sources close to the secret negotiations claim that the first part of the stabilisation plan requires Russia to withdraw its financial and military support for the various pro-separatist groups operating in eastern Ukraine. As part of any such agreement, the region would be allowed some devolved powers.

 

At the same time, the Ukrainian President would agree not to apply to join Nato. In return, President Putin would not seek to block or interfere with the Ukraine’s new trade relations with the European Union under a pact signed a few weeks ago.

 

Second, the Ukraine would be offered a new long-term agreement with Russia’s Gazprom, the giant gas supplier, for future gas supplies and pricing. At present, there is no gas deal in place; Ukraine’s gas supplies are running low and are likely to run out before this winter, which would spell economic and social ruin for the country.

 

As part of the deal, Russia would compensate Ukraine with a billion-dollar financial package for the loss of the rent it used to pay for stationing its fleets in the Crimea and at the port of Sevastopol on the Black Sea until Crimea voted for independence in March.

To be sure, in the aftermath of the MH-17 shooting, which in light of this revelation would clearly not benefit Russia, negotiations have stalled they are expected to restart once the investigation has taken place. “It is in everyone’s interests to do a deal. Hopefully, talks will be revived if a satisfactory outcome can be reached to investigations now taking place as to the causes of the MH17 catastrophe.“

But while Germany can’t wait to put the Ukraine conflict behind it and restore normal Russian relations (see Adidas’ record plunge earlier today, blamed on the Ukraine conflict) others are far more eager to stir the pot some more: “A spokesman for the Foreign and Commonwealth Office said they had no knowledge of such negotiations taking place. However, the spokesman said he thought it highly unlikely that either the US or UK would agree to recognising Russian control over Crimea. There was no one available at the German embassy’s press office yesterday.”

Which, of course, goes back to the fundamental question behind the Eurozone experiment: just who calls the shots. And despite what the UK (and certainly France) believe, that one person was and continues to be Merkel.  And at the end of the day, pragmatic Germany knows that for all the posturing and rhetoric, the biggest loser from a western embargo of Russia (which is now actively shifting its attention to China and now India) would be Germany itself.

[S]trong trade ties between the two countries have also served to strengthen Ms Merkel’s hand and the Russian speaker has emerged as the leading advocate of closer relations between the EU and Russia. “This is Merkel’s deal. She has been dealing direct with President Putin on this. She needs to solve the dispute because it’s in no one’s interest to have tension in the Ukraine or to have Russia out in the cold. No one wants another Cold War,” said one insider close to the negotiations.

 

Some of Germany’s biggest companies have big operations in Russia, which is now one of Europe’s biggest car markets, while many of its small to medium companies are also expanding into the country. Although Russia now provides EU countries with a third of their gas supplies through pipelines crossing the Ukraine, Germany has its own bilateral gas pipeline direct to Russia making it less vulnerable than other European countries.

 

However, Russia is still the EU’s third-biggest trading partner with cross-border trade of $460bn (£272bn) last year, and the latest sanctions being introduced by the EU towards Russian individuals and banks will hurt European countries more than any other – particularly Germany, but also the City of London.

Curiously, if there is one entity that could scuttle the deal it is, no surprise there, the US.

Central to the negotiations over any new gas deal with Gazprom is understood to be one of Ukraine’s wealthiest businessmen, the gas broker, Dmitry Firtash. Mr Firtash – who negotiated the first big gas deal between the Ukraine and Russia between 2006 and 2009 – is now living in Vienna fighting extradition charges from the Americans. But he has close relations with the Russian and Ukrainian leaders – he supported Mr Poroschenko – and has been acting as a go-between behind the scenes at the highest levels.

Incidentally, the same Americans which over the past 2 years has been desperate to start a regional war in any one part of the globe in order to break some more windows and boost GDP courtesy of the tried and true “Military Industrial Complex” GDP boost. Which is why if indeed the Ukraine peace process is in the arms of the US, then perhaps Putin’s advisor was spot on when he said that “There is a war coming in Europe.” Compliments of the United States?

Finally, for those wondering how much of the Independent’s story is a fabrication, here is Germany denying it all:

• GERMANY: REPORT OF SECRET DEAL ON UKRAINE `TOTALLY UNFOUNDED’

Which, if Jean-Claude Juncker is any indication, seals it.

via Zero Hedge http://ift.tt/1s7TbdW Tyler Durden

We already know that all is not well in US-Israeli relations (despite the ongoing funding) and John Kerry is not helping, but this morning’s comments from the White House and Pentagon are concerning. As The BBC reports, the US Defense Dept says civilian casualties in Gaza are “too high” and Israel needs to do more to protect civilian life. Then White House spokesman John Earnest added, “the shelling of a UN facility that is housing innocent civilians who are fleeing violence is totally unacceptable and totally indefensible.” Time to rethink the $576 mllion tripling of Israeli aid?

Since Israel began its offensive in Gaza on 8 July, 1,400 Palestinians have been killed, most of them civilians, according to the Gaza Health Ministry.

 

It said 173 people had been killed within the past 24 hours.

• *EARNEST REITERATES CALL FOR IMMEDIATE CEASE-FIRE IN GAZA
• *ISRAEL MUST DO MORE TO PREVENT CIVILIAN DEATHS, EARNEST SAYS
• *EARNEST SAYS UN FACILITY ATTACK `TOTALLY UNACCEPTABLE’
• *EARNEST SAYS SHELLING OF UN SHELTERS `TOTALLY INDEFENSIBLE’

The BBC reports,

“The Israelis need to do more to live up to their very high standards… for protecting civilian life,” a Pentagon spokesman said.

 

The UN has also criticised Israel over the worsening situation in Gaza, saying people there are “facing a precipice”.

And Bloomberg adds,

“The shelling of a UN facility that is housing innocent civilians who are fleeing violence is totally unacceptable and totally indefensible,” White House spokesman Josh Earnest says at daily briefing.

 

…

 

Says there’s little doubt about whose artillery was involved, pointing to statements by UN, Israel, even though incident still requires full investigation

*  *  *
Israel says it will not stop its operation in Gaza until all the tunnels – which militants use to infiltrate Israeli territory – have been destroyed. Of course, as we noted previously, this is likely all theatrics as the money and arms are still flowing.

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

We already know that all is not well in US-Israeli relations (despite the ongoing funding) and John Kerry is not helping, but this morning’s comments from the White House and Pentagon are concerning. As The BBC reports, the US Defense Dept says civilian casualties in Gaza are “too high” and Israel needs to do more to protect civilian life. Then White House spokesman John Earnest added, “the shelling of a UN facility that is housing innocent civilians who are fleeing violence is totally unacceptable and totally indefensible.” Time to rethink the $576 mllion tripling of Israeli aid?

Since Israel began its offensive in Gaza on 8 July, 1,400 Palestinians have been killed, most of them civilians, according to the Gaza Health Ministry.

 

It said 173 people had been killed within the past 24 hours.

• *EARNEST REITERATES CALL FOR IMMEDIATE CEASE-FIRE IN GAZA
• *ISRAEL MUST DO MORE TO PREVENT CIVILIAN DEATHS, EARNEST SAYS
• *EARNEST SAYS UN FACILITY ATTACK `TOTALLY UNACCEPTABLE’
• *EARNEST SAYS SHELLING OF UN SHELTERS `TOTALLY INDEFENSIBLE’

The BBC reports,

“The Israelis need to do more to live up to their very high standards… for protecting civilian life,” a Pentagon spokesman said.

 

The UN has also criticised Israel over the worsening situation in Gaza, saying people there are “facing a precipice”.

And Bloomberg adds,

“The shelling of a UN facility that is housing innocent civilians who are fleeing violence is totally unacceptable and totally indefensible,” White House spokesman Josh Earnest says at daily briefing.

 

…

 

Says there’s little doubt about whose artillery was involved, pointing to statements by UN, Israel, even though incident still requires full investigation

*  *  *
Israel says it will not stop its operation in Gaza until all the tunnels – which militants use to infiltrate Israeli territory – have been destroyed. Of course, as we noted previously, this is likely all theatrics as the money and arms are still flowing.

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

As every ‘real’ corporate bond manager knows (as opposed to playing one on television), forecasting from historical defaults is a fool’s errand as the process is entirely cyclical and non-stationary.

 

The fact that default rates have been low for 4 years (thanks to an overwhelming flood of liquidity-driven demand for yield) is of absolutely no use when pricing discounted cashflows into the future. However, as Fitch warns, a jump in US high-yield default rates looms. There have been 10 LBO related bond defaults thus far in 2014, compared with nine for all of 2013. While most sectors remain relatively clam, the utilities and chemicals sectors are seeing huge spikes in defaults.

 

 

Fitch Warns: Another Jump in US HY Default Rate Looms

A potential bankruptcy filing from another struggling giant, Caesars Entertainment Operating Co., would propel the trailing 12-month US high yield default rate to 3.4% from its June perch of 2.7%, according to Fitch Ratings. With its $12.9 billion in bonds in Fitch’s default index, the gaming company’s impact on the default rate is pronounced – similar to Energy Future Holdings’ (EFH) April bankruptcy. Caesars also adds to notable trends of busted LBOs and the exclusive camp of serial defaulters.

 

There have been 10 LBO related bond defaults thus far in 2014, compared with nine for all of 2013. The failed LBOs affected $21.8 billion in bonds this year and 26% of all bond defaults since 2008. Caesars would bring the latter tally to 29%. In addition, a Caesars filing would follow two prior restructurings via distressed debt exchanges (DDEs). Since 2008, 24% of issuers engaged in DDEs have subsequently filed for bankruptcy.

 

June defaults included Affinion Group, Allen Systems Group, MIG LLC, and Altegrity Inc., bringing the year-to-date high yield default tally to 20 issuers of $23.7 billion in bonds versus an issuer count of 19 and dollar value of $8.4 billion in first-half 2013. July defaults have so far included Essar Steel Algoma and Windsor Petroleum Transport.

 

…

 

At midmonth, approximately $33 billion in high yield bonds were trading at 90% of par or less – a relatively modest 2.9% of the $1.1 trillion in bonds with price data.

*  *  *

Which explains why, as we noted poreviously, High Yield credit is flashing bright red…

 

As Barclays Phil Solarz warns,

One of the things that sticks in my mind from 2007 (and I am NOT suggesting a 2007/2008 repeat here) is the fact that the credit markets moved before equity markets….and not just once, but three or four times through 2007 and 2008.

 

I recall looking at charts like the attached and thinking “why has this correlation broken down?”

 

Inevitably, the credit markets would be right, and the equity market would eventually catch up and re-establish the correlation.

 

The chart above shows (the inverse of) the junk-less-10 year spread vs the S&P. The tight correlation of the past 12 months (and actually, the last 3 years) has broken down this month., as we noted previously,

Which in the past has led to equity weakness…

via Zero Hedge http://ift.tt/1oRny7y Tyler Durden