Month: August 2014

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With the spigot of propaganda wide open and Washington appearing increasingly bent on instigating the next war, we thought lessons from past “wars” might help the people when thinking about what is spoon-fed to them each and every day. “To Sell A War” is a documentary that first aired in December 1992 exposing the Citizens for a Free Kuwait campaign as public relations spin to gain public opinion support for the Gulf War. Among other things, it reveals that Nurse Nayirah was in fact Nijirah al-Sabah, the daughter of Kuwait’s ambassador to the United States Saud Nasir Al-Sabah, coached by Hill & Knowlton to forge her infamous testimony about Iraqi soldiers removing babies from incubators, which was widely reported and repeated throughout the media.

 

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A stunning $5.3 trillion in goods cross South China Sea every year, and as we previously explained, 190 trillion cubic feet of gas reserves sit below the ocean floor – enough to replace China's natural gas imports for over a century – so it is hardly surprising that the world's largest importer of oil wants control of such a critical region.

 

As Bloomberg illustrates in these 10 incredible graphics, everyone has a claim on the same territory and tensions are rising. “The Chinese believe they have the right to be a great power,” said Richard Bitzinger, a senior fellow at the S. Rajaratnam School of International Studies in Singapore. “What we are seeing is a hardening of China’s stance about its place in the world.”

 

 

What's at stake…

 

The Claims…

 

The Chaos…

 

As Bloomberg concludes,

The ambitions of China’s leaders don’t stop at the nine-dash line.

 

“China’s ultimate long-term goal is to obtain parity with U.S. naval capacity in the Pacific,” said Willy Wo-Lap Lam, adjunct professor at the Centre for China Studies at the Chinese University of Hong Kong. “This is a long-term proposition. At this stage the Chinese understand they don’t have the capacity to take on the U.S. head-on.”

 

“China is testing the limits of America’s alliance relationships in Asia,” said Storey. “By pushing and probing and essentially showing that the U.S. isn’t willing to respond to these provocations, it is undermining those alliances and hence ultimately U.S. credibility and U.S. power over the long term.”

 

There are two schools of thought on the eventual outcome of China’s ascendancy, according to Rory Medcalf, director of the International Security Program at the Lowy Institute for International Policy in Sydney.

 

One argues that dominance of the South China Sea is an inevitable outcome of China’s economic and military expansion. The other says that China will have to curb its ambitions or risk provoking a conflict, even war, which could draw in the U.S.

 

It’s not possible to judge which scenario ends up proving right, said Medcalf. “The story is only beginning.”

via Zero Hedge http://ift.tt/1uV09qi Tyler Durden

Over the last 30 years, the US has built up record debts on a personal, state, and national level. Consumers thought they were financially stable so long as they could cover the interest payments on their credit cards, states created program after program few if any of which they could afford, and the Federal Government issued $30-50 trillion in debt and liabilities (counting Social Security and Medicare).

 

This all came to a screeching halt when the housing bubble (arguably the biggest debt bubble in history) imploded in 2007.  Since that time, stocks have staged one of their worst years on record (2008), one in five us mortgages has fallen underwater (meaning the mortgage loan is worth more than the home itself), and some trillions in US household wealth has evaporated.

 

These issues seem to be distinct, but in reality they all stem from a debt problem. And as you know, there is only one legitimate way to deal with a debt problem:

 

Pay it off.

 

However, instead of doing this, the Feds (the Federal Reserve, Treasury Dept, etc.) have been producing EVEN MORE DEBT. Here’s a brief recap of their moves thus far:

 

• The Federal Reserve cuts interest rates from 5.25-0.25% (Sept ’07-today)
• The Bear Stearns deal/ Fed buys $30 billion in junk mortgages (March ’08)
• The Fed opens various lending windows to investment banks (March ’08)
• The SEC proposes banning short-selling on financial stocks (July ’08)
• The Treasury buys Fannie/Freddie for $400 billion (Sept ’08)
• The Fed takes over AIG for $85 billion (Sept ’08)
• The Fed doles out $25 billion for the auto makers (Sept ’08)
• The Feds’ $700 billion Troubled Assets Relief Program (TARP) (Oct ’08)
• The Fed buys commercial paper (non-bank debt) from non-financials (Oct ’08)
• The Fed offers $540 billion to backstop money market funds (Oct ’08)
• The Feds backstops up to $280 billion of Citigroup’s liabilities (Oct ’08).
• Another $40 billion to AIG (Nov ’08)
• The Fed backstops up $140 billion of Bank of America’s liabilities (Jan ’09)
• Obama’s $787 Billion Stimulus (Jan ’09)
• The Fed’s $300 billion Quantitative Easing Program (Mar ’09)
• The Fed buying $1.25 trillion in agency mortgage backed securities (Mar ’09-’10)
• The Fed buying $200 billion in agency debt (Mar ’09-’10)
• QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
• QE 2 buys $600 billion in Treasuries (Nov ’10)
• Operation Twist reshuffles $400 billion of the Fed’s portfolio (Oct ’11)
• QE 3 buys $40 billion of Mortgage Backed Securities monthly (Sept ‘12)
• QE 4 buys $45 billion worth of Treasuries monthly (Dec ’12

 

And that’s a BRIEF recap (I’m sure I left something out).

 

In a nutshell, The Feds have tried to combat a debt problem by ISSUING MORE DEBT. They’re pumping trillions of dollars into the financial system, trying to prop Wall Street and the stock market. They’ve managed to kick off a rally in stocks…

But they HAVE NOT ADDRESSED THE FUNDAMENTAL ISSUES PLAGUING THE FINANCIAL MARKET.

 

Stocks are headed for another Crash, possibly as bad as the one we saw in October-November 2008. As you know, that Crash wiped out $11 trillion in household wealth in a matter of weeks. There’s no telling the damage this Second Round will cause.

 

The Feds have thrown everything they’ve got (including the kitchen sink) at the financial crisis… and things are fundamentally no better than they were before: most major banks are insolvent, one in five US mortgages is underwater, and the stock market is being largely propped up by in-house trading from a few key players (Goldman Sachs, UBS, etc).

 

Regarding stock investing, it’s important to take a big picture of stocks as an asset class. The common consensus is that stocks return an average of 6% a year (at least going back to 1900).

 

However, a study by the London Business School recently revealed that when you remove dividends, stocks’ gains drop to a mere 1.7% a year (even lower than the return from long-term Treasury bonds over the same period).

 

Put another way, dividends account for 70% of the average US stock returns since 1900. When you remove dividends, stocks actually offer LESS reward and MORE risk than bonds. If you’d invested $1 in stocks in 1900, you’d have made $582 with reinvested dividends adjusted for inflation vs. a mere $6 from price appreciation.

 

So as much as the CNBC crowd would like to believe that the way to make money in stocks is buying low and selling high, the reality is that the vast majority of gains from stocks stem from dividends.

 

The remaining gains have come largely from inflation.

 

Bill King, Chief Market Strategist M. Ramsey King Securities recently published the following chart comparing REAL GDP (light blue), GDP when you account for inflation (dark blue), and the Dow Jones’ performance (black) over the last 30 years. What follows is a clear picture that since the mid-70s MOST of the perceived stock gains have come from inflation.

 

Which brings us to today. According to official data, the S&P 500 is currently trading at a CAPE ratio of 25 and yields 2.3%. In plain terms, stocks are expensive (historic average for CAPE is 15) and paying little.

 

In other words, there is little incentive, other than future inflation expectations, for owning stocks right now.

 

By most historic metrics, the market is showing signs of a significant top. Here are just a few key metrics:

 

1)   Investor sentiment is back to super bullish autumn 2007 levels.

2)   Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).

3)   Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).

4)   Mutual fund cash levels are at a historic low.

5)   Margin debt (money borrowed to buy stocks) is at a new record high.

 

This final point is key. Mutual funds are the “big boys” of the investment world. If they have become fully invested in the market, this means there are few buyers left to push stocks higher. This is evident in the fact that every time mutual fund cash levels dropped, stocks collapsed soon after.

 

In plain terms, the odds are high that a Top is forming in stocks. With that in mind,

if your portfolio is heavily invested in stocks, now is a time to be taking some profits. If you can, consider moving a sizable chunk into cash.

 

The market is extremely tired and the systemic risks underlying the Financial Crisis are in no way resolved. With investor complacency (as measured by the VIX) at record lows, the Fed withdrawing several of its more significant market props, and low participation coming from the larger institutions, this market is ripe for a serious correction.

 

Be prepared.

 

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 http://ift.tt/170oFLH.

 

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 http://ift.tt/1maqGXw Phoenix Capital Research

…but stocks are at record highs…

 

 

h/t @butifulabsurdt

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

“Where does [The Fed’s] confidence come from?” demanded Stanley Druckenmiller recently.

Grant Williams has an answer:

Their “confidence” comes from a series of academic models and a lifetime spent studying ntheoretical finance and then applying it to real-world situations, often with disastrous effect.

The day these people admit to themselves (let alone to the public) that what they have believed to be foolproof doesn’t actually work, is the day they render pointless their entire lives’ work.

The alternative to grappling with hard realities — in this case to continue waltzing down the path of Keynesian folly — is, sadly, far more palatable. Eventually, though, the markets have a habit of demonstrating, beyond any reasonable doubt, that natural forces are far more powerful than the whims of a few academics. And that is, I fear, what we are setting ourselves up for.

Elk Theories — observations which are not, actually, theories but rather simply minimal accounts — are commonplace amongst today’s breed of central bankers, and for the time being there are no obvious signs of their legitimacy being challenged.

But that could change in a heartbeat. Should all the Elk Theories currently being espoused (yes, Messrs. Carney & Kuroda, I left you out of this week’s edition, but I haven’t forgotten you) be simultaneously recognized for what they are, then we will see some fireworks.

If Yellen would stop clearing HER throat long enough, her own Elk theory would, I strongly suspect, sound like this:

This theory, which belongs to me, is as follows… (more throat clearing) This is how it goes… (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

 

We are absolutely convinced beyond any doubt whatsoever that we can, through the manipulation of interest rates and the theft of savings, extricate the world from its growth-free, post-2008 malaise and at the same time extricate ourselves from our $3.5 trillion dollar balance-sheet expansion.

 

We are quite certain that we can manipulate headline inflation to exactly where we need it to be and that any aberration can be blamed on the weather without so much as a whimper from the investing public.

 

We believe that bubbles are impossible to see until they burst, and we believe that we have played no part in generating the bubbles which have periodically plagued the world over the last several decades.

 

We know beyond question that holding interest rates at artificially and ridiculously low levels for several years will have no ill effects on the economy whatsoever; and we can assure you, with the utmost conviction, that we will be able to complete the taper without any damage being done to the equity markets.

 

That is my theory and what it is too.

Like those of Draghi, Yellen’s theories are nothing more than minimal observations which hardly stand up to scrutiny but for the fact that she has stated something which IS true currently.

 

Full Grant Williams letter below…

TTMYGH_Jul_28_2014

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

“Where does [The Fed’s] confidence come from?” demanded Stanley Druckenmiller recently.

Grant Williams has an answer:

Their “confidence” comes from a series of academic models and a lifetime spent studying ntheoretical finance and then applying it to real-world situations, often with disastrous effect.

The day these people admit to themselves (let alone to the public) that what they have believed to be foolproof doesn’t actually work, is the day they render pointless their entire lives’ work.

The alternative to grappling with hard realities — in this case to continue waltzing down the path of Keynesian folly — is, sadly, far more palatable. Eventually, though, the markets have a habit of demonstrating, beyond any reasonable doubt, that natural forces are far more powerful than the whims of a few academics. And that is, I fear, what we are setting ourselves up for.

Elk Theories — observations which are not, actually, theories but rather simply minimal accounts — are commonplace amongst today’s breed of central bankers, and for the time being there are no obvious signs of their legitimacy being challenged.

But that could change in a heartbeat. Should all the Elk Theories currently being espoused (yes, Messrs. Carney & Kuroda, I left you out of this week’s edition, but I haven’t forgotten you) be simultaneously recognized for what they are, then we will see some fireworks.

If Yellen would stop clearing HER throat long enough, her own Elk theory would, I strongly suspect, sound like this:

This theory, which belongs to me, is as follows… (more throat clearing) This is how it goes… (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

 

We are absolutely convinced beyond any doubt whatsoever that we can, through the manipulation of interest rates and the theft of savings, extricate the world from its growth-free, post-2008 malaise and at the same time extricate ourselves from our $3.5 trillion dollar balance-sheet expansion.

 

We are quite certain that we can manipulate headline inflation to exactly where we need it to be and that any aberration can be blamed on the weather without so much as a whimper from the investing public.

 

We believe that bubbles are impossible to see until they burst, and we believe that we have played no part in generating the bubbles which have periodically plagued the world over the last several decades.

 

We know beyond question that holding interest rates at artificially and ridiculously low levels for several years will have no ill effects on the economy whatsoever; and we can assure you, with the utmost conviction, that we will be able to complete the taper without any damage being done to the equity markets.

 

That is my theory and what it is too.

Like those of Draghi, Yellen’s theories are nothing more than minimal observations which hardly stand up to scrutiny but for the fact that she has stated something which IS true currently.

 

Full Grant Williams letter below…

TTMYGH_Jul_28_2014

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

The conflict in Ukraine and the related imposition of sanctions against Russia signal an escalation of geopolitical tensions that is already being felt in the Russian (and increasingly world) financial markets.

 

 

As The IMF describes in this chartapalooza, a deterioration in the conflict, with or even without a further escalation of sanctions and counter-sanctions, could have a substantial adverse impact on the Russian economy through direct and indirect (confidence) channels. But, perhaps more importantly to the West-sponsored IMF, what would be the repercussions for the rest of Europe if there were to be disruptions in trade or financial flows with Russia, or if economic growth in Russia were to take a sharp downturn?

 

Via The IMF (authored by Aasim M. Husain, Anna Ilyina and Li Zeng),

To understand which countries in Europe might be most affected, we looked at the broad channels by which they are connected to Russia—their trade, energy, investment, and financial ties.

 

We find that Eastern European countries have the closest links with Russia and some of them could be seriously affected by a sharp slowdown of the Russian economy or a ratcheting up of sanctions and countersanctions. Western European countries are relatively less linked but some could also see significant effects. These conclusions, of course, are based broadly on the potential channels rather than a quantification of the potential impact, which anyway could be dominated by confidence effects from geopolitical tensions.

Trade links  

For most European countries, Russia is not a major export market (Chart 2). Therefore, slower growth in Russia would probably not hurt them too much. However, for many of Russia’s immediate neighbors such as Belarus, Ukraine, Moldova, and the Baltics, whose exports to Russia exceed 5 percent of their respective GDP, the impact could be substantial.

Chart 2

But European countries depend more on Russia on the import side—particularly gas and oil (Chart 3). Moreover, in some countries certain industries—such as chemicals and minerals, metals, and manufacturing equipment—rely heavily on inputs from Russia. These industries stand to face a disproportionate impact if there are trade disruptions or price increases on energy imports from Russia.

Chart 3

 

Energy supply

Europe relies on Russian gas, importing over one third of its natural gas from Russia through several major pipelines (the dotted line on the map is the planned South Stream gas pipeline). Russian gas accounts for over 50 percent of total gas consumption in virtually all countries in Eastern Europe and several advanced economies in Europe as well (Chart 4). However, as a share of total energy—rather than gas—consumption, Russian gas is somewhat less critical but still very important for several countries and especially so for Belarus and Moldova (Chart 5).

In the event of a price increase or disruption in gas supplies from Russia, countries’ ability to access alternative suppliers or energy sources will vary. For some countries, particularly those whose energy infrastructure is less nimble and whose gas inventories are relatively low, the transition could take longer and be more consequential. For example, the pipeline via Ukraine has the largest capacity and transports almost half of Europe’s gas imports from Russia, and so any disruption in the flow through that particular pipeline would have potentially serious effects on countries whose energy infrastructure relies heavily on it. Many European countries also depend heavily on oil imports from Russia, but those are easier to substitute from other suppliers than gas imports.

Chart 4

Chart 5 

 

Investment flows

Foreign direct investment (FDI) from Russia, in industries such as banking, energy, and metal and mining, exceeds 5 percent of GDP for Belarus, Bulgaria, Moldova, and Montenegro (Chart 6). 

Chart 6 

 

A number of advanced economies, notably Netherlands and Ireland, have significant FDI in Russia as well (Chart 7). Financial centers, such as Cyprus, Luxembourg, also report high two-way FDI flows.

Chart 7

 

Financial links

Many Western banks have sizable exposures to Russia. Notably Austrian, Hungarian, French, and Italian banks have subsidiaries in Russia and also lend directly to customers in Russia from their branches outside Russia (Chart 8). For some of these banks, their Russian operations have accounted for a large share—in some cases over one third—of their profits in the last few years. 

Chart 8

The same Western banks also lend to other countries in Central, Eastern and Southeastern Europe (CESEE). In Chart 9, the outer ring shows the largest common creditor countries (and their major financial institutions) which account for 60 percent of the total cross-border lending to the CESEE region. In the middle are the recipients, with Russia accounting for about one third of the region’s total borrowing from these creditors. Hence, if a large shock to Russia triggers a reassessment of regional risks by common creditors, it could result in a broad pullback in lending to other countries too.

Chart 9

Foreign portfolio investments to Russia are also sizable, given that Russian ass
ets account for 6–12 percent of emerging market benchmark indices. But there has been little sign of contagion to other Eastern European markets so far,even as Russia’s spreads widened sharply following developments in Ukraine, spreads of most other CESEE sovereigns drifted lower (see Chart 1).

The color-coded maps above can be summarized as follows:

 

*  *  *

Two words – blowback… and boomerang… come to mind.

 

Source: The IMF

via Zero Hedge http://ift.tt/1xQNv7S Tyler Durden

The conflict in Ukraine and the related imposition of sanctions against Russia signal an escalation of geopolitical tensions that is already being felt in the Russian (and increasingly world) financial markets.

 

 

As The IMF describes in this chartapalooza, a deterioration in the conflict, with or even without a further escalation of sanctions and counter-sanctions, could have a substantial adverse impact on the Russian economy through direct and indirect (confidence) channels. But, perhaps more importantly to the West-sponsored IMF, what would be the repercussions for the rest of Europe if there were to be disruptions in trade or financial flows with Russia, or if economic growth in Russia were to take a sharp downturn?

 

Via The IMF (authored by Aasim M. Husain, Anna Ilyina and Li Zeng),

To understand which countries in Europe might be most affected, we looked at the broad channels by which they are connected to Russia—their trade, energy, investment, and financial ties.

 

We find that Eastern European countries have the closest links with Russia and some of them could be seriously affected by a sharp slowdown of the Russian economy or a ratcheting up of sanctions and countersanctions. Western European countries are relatively less linked but some could also see significant effects. These conclusions, of course, are based broadly on the potential channels rather than a quantification of the potential impact, which anyway could be dominated by confidence effects from geopolitical tensions.

Trade links  

For most European countries, Russia is not a major export market (Chart 2). Therefore, slower growth in Russia would probably not hurt them too much. However, for many of Russia’s immediate neighbors such as Belarus, Ukraine, Moldova, and the Baltics, whose exports to Russia exceed 5 percent of their respective GDP, the impact could be substantial.

Chart 2

But European countries depend more on Russia on the import side—particularly gas and oil (Chart 3). Moreover, in some countries certain industries—such as chemicals and minerals, metals, and manufacturing equipment—rely heavily on inputs from Russia. These industries stand to face a disproportionate impact if there are trade disruptions or price increases on energy imports from Russia.

Chart 3

 

Energy supply

Europe relies on Russian gas, importing over one third of its natural gas from Russia through several major pipelines (the dotted line on the map is the planned South Stream gas pipeline). Russian gas accounts for over 50 percent of total gas consumption in virtually all countries in Eastern Europe and several advanced economies in Europe as well (Chart 4). However, as a share of total energy—rather than gas—consumption, Russian gas is somewhat less critical but still very important for several countries and especially so for Belarus and Moldova (Chart 5).

In the event of a price increase or disruption in gas supplies from Russia, countries’ ability to access alternative suppliers or energy sources will vary. For some countries, particularly those whose energy infrastructure is less nimble and whose gas inventories are relatively low, the transition could take longer and be more consequential. For example, the pipeline via Ukraine has the largest capacity and transports almost half of Europe’s gas imports from Russia, and so any disruption in the flow through that particular pipeline would have potentially serious effects on countries whose energy infrastructure relies heavily on it. Many European countries also depend heavily on oil imports from Russia, but those are easier to substitute from other suppliers than gas imports.

Chart 4

Chart 5 

 

Investment flows

Foreign direct investment (FDI) from Russia, in industries such as banking, energy, and metal and mining, exceeds 5 percent of GDP for Belarus, Bulgaria, Moldova, and Montenegro (Chart 6). 

Chart 6 

 

A number of advanced economies, notably Netherlands and Ireland, have significant FDI in Russia as well (Chart 7). Financial centers, such as Cyprus, Luxembourg, also report high two-way FDI flows.

Chart 7

 

Financial links

Many Western banks have sizable exposures to Russia. Notably Austrian, Hungarian, French, and Italian banks have subsidiaries in Russia and also lend directly to customers in Russia from their branches outside Russia (Chart 8). For some of these banks, their Russian operations have accounted for a large share—in some cases over one third—of their profits in the last few years. 

Chart 8

The same Western banks also lend to other countries in Central, Eastern and Southeastern Europe (CESEE). In Chart 9, the outer ring shows the largest common creditor countries (and their major financial institutions) which account for 60 percent of the total cross-border lending to the CESEE region. In the middle are the recipients, with Russia accounting for about one third of the region’s total borrowing from these creditors. Hence, if a large shock to Russia triggers a reassessment of regional risks by common creditors, it could result in a broad pullback in lending to other countries too.

Chart 9

Foreign portfolio investments to Russia are also sizable, given that Russian assets account for 6–12 percent of emerging market benchmark indices. But there has been little sign of contagion to other Eastern European markets so far,even as Russia’s spreads widened sharply following developments in Ukraine, spreads of most other CESEE sovereigns drifted lower (see Chart 1).

The color-coded maps above can be summarized as follows:

 

*  *  *

Two words – blowback… and boomerang… come to mind.

 

Source: The IMF

via Zero Hedge http://ift.tt/1xQNv7S Tyler Durden