Month: January 2018

Authored by Paul Craig Roberts,

Last year I was awarded Marquiss “Who’s Who In America’s Lifetime Achievement Award.“

This did not prevent a hidden organization, PropOrNot, from attempting to brand me and my website along with 200 others “Putin stooges or agents” for our refusal to lie for the corrupt, anti-American, anti-constitutional, anti-democratic, warmonger police state interests that rule the Western World.

The only honest, factual media that exists in the Western World today are the names on the PropOrNot list of “Putin agents.”

 

The purpose of PropOrNot is to convince Americans that freedom of speech must be halted by destroying fact-based Internet media, such as this website and 200 others that provide factual information at odds with Big Brother’s universal brainwashing as delivered by CNN, NPR, the New York Times, the Washington Post, and the rest of the utterly corrupt presstitute media, a collection of scum devoid of all integrity and all respect for truth.

https://www.zerohedge.com/sites/default/files/inline-images/20180128_tyranny3.jpg

A conspiracy of US government agencies, tax-exempt think tanks funded by the ruling interests, and media acting on behalf of a war and police state agenda work to shape perceived reality as it is described in George Orwell’s book, 1984, and in the film, The Matrix.

 

Controlled perception-based reality is only a Facebook “like” away from killing one person or one million or elevating a liar or the warmonger responsible for the killing to hero status or to the control of the CIA or FBI or the US presidency.

Here on OpEdNews is an article by George Eliason that reports on who exactly PropOrNot is and who is underwriting the disinformation that is PropOrNot.

A little over a year ago, the deep-state graced the world with Propornot . Thanks to them, 2017 became the year of fake news. Every news website and opinion column now had the potential to be linked to the Steele dossier and Trump collusion with Russia. Every journalist was either with us or against us. Every one that was against us became Russia’s trolls.

Fortunately for the free world, the anonymous group known as Propornot that tried to “out” every website as a potential Russian colluder, in the end only implicated themselves.

Turnabout is fair play and that’s always the fun part, isn’t it? With that in mind, I know the dogs are going to howl this evening over this one.

The damage Propornot did to scores of news and opinions websites in late 2016-2017 provides the basis of a massive civil suit. I mean huge, as in the potential is there for a tobacco company-sized class-action sized lawsuit. I can say that because I know a lot about a number of entities that are involved and the enormous amount of money behind them.

How serious is this? In 2016, a $10,000 reward was put out for the identities of Propornot players. No one has claimed it yet, and now, I guess no one will. There are times in your life that taking a stand has a cost. To make sure the story gets out and is taken seriously, this is one of those times.

If that’s what it takes for you to understand the danger Propornot and the groups around them pose to everyone you love, if you understand it, everything will have been well worth it.

In this article, you’ll meet some of the people staffing Propornot. You’ll meet the people and publications that provide their expenses and cover the logistics. You’ll meet a few of the deep-state players. We’ll deal with them very soon. They need to see this as the warning shot over the bow and start playing nice with regular people. After that, you’ll meet the NGOs that are funding and orchestrating all of it.

Eliason’s article is long and documented. It demonstrates the organized conspiracy against truth that exists in the Western World. Nothing stated in the Western presstitute media and no statement by any Western government or subservient vassal state can be trusted to comply with the facts.

Truth is the enemy of the state, and the state is eliminating the truth.

Peoples in the United States, Europe, Britain, Canada, Australia, New Zealand, and the various vassal states, such as Japan, all live day in, day out, an orchestrated lie that serves interests directly opposed to the interests of the peoples.

Governments that do not rest on truth rest on tyranny.

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After helping to blow the lid off “shitholegate” by dropping coy hints about Trump’s foul language during a meeting with a bipartisan group of senators, South Carolina Senator and perennial Trump frenemy Lindsey Graham appeared on the Sunday shows today to defend his erstwhile rival.

In an interview with ABC’s “This Week”, Graham asserted that President Trump’s presidency would end if he did indeed fire Special Counsel Robert Mueller, something the New York Times  reported earlier this week almost happened – but White House Counsel Don McGahn III allegedly stymied the president by threatening to resign.

Graham and fellow Republican “moderate” Senator Susan Collins also urged Congress should move forward on bipartisan legislation preventing a president from firing a special counsel.

Graham’s remarks – which are sure to once again alienate the diminutive senator from the president – show the senator has the “utmost confidence” in Mueller, basically repudiating evidence of Mueller’s conflicts and what some perceive to be suspicious overzealousness that was not applied to Trump’s former rival, Hillary Clint. Read the full transcript.

Oh, yeah, if he fired Mueller without cause — I mean, Mueller is doing a good job. I have confidence in him to get to the bottom of all things Russia. And Don McGahn, if the story is true in The New York Times, did the right thing, and good news is the president listened.

I don’t know if the story is true or not, but I know this Mueller should look at it. I have complete confidence in Mr. Mueller. When he found two FBI agents had a bias against President Trump, he fired them. So, all this stuff about the FBI and DOJ having a bias against Trump and for Clinton needs to be looked at. But I have never believed it affected Mr. Mueller.

So I will do whatever it takes to make sure that Mr. Mueller can do his job. We’re a rule of law nation before President Trump, we’re going to be a rule of law nation after President Trump. I have never any — I haven’t yet seen any evidence of collusion between President Trump and the Russians, but the investigation needs to go forward without political interference and I’m sure it will.

Furthermore, Graham said that the NYT story – which the White House has vociferously denied – is something that “Mueller should look at,” suggesting the special counsel will likely include the question of whether Trump intended to fire him as part of an investigation that has pivoted to focusing on obstruction of justice, not the collusion issue that was long ago proven to be an obvious dead-end.

I don’t know. I believe it’s something that Mueller should look at. We’re not just going to say it’s fake news and move on. Mueller is the best person to look at it, not me opine about something I don’t know. I’m sure that there will be an investigation around whether or not President Trump did try to fire Mr. Mueller. We know that he didn’t fire Mr. Mueller. We know that if he tried to, it would be the end of his presidency.

Trump’s critics like to portray his sometimes boorish behavior as unprecedented in the history of the presidency. But in a thoughtful rebuttal, Graham pointed out that many previous American presidents – and not just Richard Nixon – have tried to discredit or silence their critics. Presidents including Bill Clinton.

GRAHAM: I think every president wants to get rid of critics. I mean, I remember the Ken Starr investigation, and Bill Clinton came out and said this guy spent millions of dollars and nothing to show for it.

Graham also said the American people are smart enough not to convict the president based on a news article, which…though that might be unreasonably optimistic.

GRAHAM: This is for Mr. Mueller to determine. We’re not going to stop looking at the president because he claims The New York Times’ was fake news. And we’re not going to convict him based on a news article. As a matter of fact, I think Mr. Mueller is the perfect guy to get to the bottom of all of this. And he will. And I think my job, among others, is to give him the space to do it. I intend to do that. I have got legislation protecting Mr. Mueller. And I’ll be glad to pass it tomorrow.

* * *

As is often the case given the administration’s preoccupation with television news, more than one Trump ally showed up this weekend to answer the networks’ most pressing questions.

Another one this week was White House Legislative Director Marc Short, who appeared on CBS’s “Face the Nation” to flat out dispute the NYT report, which dominated the political news cycle during a week that also saw Trump impress his fellow leaders with a widely praised speech in Davos.

White House Legislative Affairs Director Marc Short said the president never “intimate that” he intended to fire Mueller – not to Short, or any of Short’s colleagues.

President Trump ordered the firing of Special Counsel Robert Mueller last year, saying at no time did the president “intimate that” to Short or any of his colleagues, according to a transcript.

MARC SHORT: Well, Nancy, the president’s never intimated to me in any way the desire to fire Mueller. I think that there’s been a lot of sensational reporting on that. Let’s keep in mind a few things. That report dates to some June conversation allegedly. We’re now in January. Mueller’s still special counsel. Don McGahn is still running the White House Counsel’s Office. Millions of dollars- of taxpayer dollars have been wasted on an investigation that so far has proven no collusion with the Russians.

Short then set his sights on the investigation, accusing Mueller of deliberately dragging out the process, and criticizing the prosecutor for overreaching by straying so far from the investigation’s stated goal.

Of course it’s not because it’s continuing to drag on. And it’s dragged on for a long time at a great expense with yet no evidence of Russian collusion. And so the reality is that Mueller’s still special counsel. McGahn is still head of the White House Counsel’s Office. The president’s never intimated to me in any way a desire to fire Robert Mueller.

* * *

With Trump set to deliver his first State of the Union on Tuesday (last year’s speech to Congress wasn’t technically considered a “State of the Union ” address, just an address to a joint session of Congress, as is tradition for first-year presidents. So it’s likely that will dominate the Sunday shows next week, along with the political brinksmanship over the immigration-bill compromise that’s threatening to once again shutter the government.

With all this going on, can you believe it’s not even February yet?

 

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The US Ambassador to Russia urged the Kremlin to react “calmly” to the U.S. Treasury Department’s list of “corrupt oligarchs” due Monday. The list is designed to “name and shame” elite Russians into thinking twice before engaging in business with Putin’s government. It will be up to Congress to decide whether the list should be published.

“I urge to take this report, based on its real and not a contrived essence and without emotions, because relations between our countries are far from being exhausted by this one legal act, and I was reminded about it in Washington, where I was two weeks ago,” – US Ambassador John Huntsman via –newsru (translated)

Kremlin spokesman Dmitry Peskov told reporters two weeks ago that Russia will react to any punitive measures against its businessmen, stating “The principle of reciprocity remains,” suggesting that Putin would employ a commensurate response to a U.S. crackdown on oligarchs. 

As we previously reported, the list was created pursuant to an August, 2017 law requiring the Treasury and State Departments identify officials and oligarchs as determined by “their closeness to the Russian regime and their net worth” in order to penalize the Kremlin for its alleged meddling in the 2016 election.

The report is intended to “name and shame” Russia’s elite who prop up Putin, and to send a message “that Putin’s aggression in terms of Russian interference in our elections will be very costly to them,” said Daniel Fried, a former assistant secretary of State who led the State Department Russia sanctions office.

It is likely to signal to Russia’s political and business classes that they’d be better off maintaining a distance from the Putin government, and it could lead to further sanctions against individuals who participate in corruption, Fried said.

“The Russian elite reacted with something between anxiety and panic about the prospect of this list,” Fried said. “They focused on this immediately, and they’re very worried about it.” –USA Today

The list will include “indices of corruption with respect to those individuals,” along with any foreign assets they hold. According to Bloomberg, this sent Russian fat cats into a liquidation frenzy – with many scrambling to contact D.C. lobbyists in order to buy their way off the list. 

Some people who think they’re likely to land on the list have stress-tested the potential impact on their investments, two people with knowledge of the matter said. Others are liquidating holdings, according to their U.S. advisers.

Russian businessmen have approached former Treasury and State Department officials with experience in sanctions for help staying off the list, said Dan Fried, who previously worked at the State Department and said he turned down such offers. Some Russians sent proxies to Washington in an attempt to avoid lobbying disclosures, according to one person that was contacted. –Bloomberg

Corruption Index

The Treasury’s report must include “indices of corruption,” which will list any foreign assets next to an oligarch considered corrupt. “Because of the nervousness that the Russian business community is facing, a number of oligarchs are already beginning to wind back businesses, treating them as if they are already designated, to stay ahead of it,” said Daniel Tannebaum, head of PricewaterhouseCoopers LLP’s global financial sanctions unit. 

Russia’s well-connected billionaires have hired law firms to try to keep them off the list, said Ariel Cohen, a Russia analyst at the Atlantic Council think tank. Russians believe the list is a first step toward increasing the current 29 Russians under U.S. sanctions by adding 40 to 400 names, Cohen added. –USA Today

Vladimir Putin has warned wealthy nationals over worsening U.S. sanctions, and provided them with a capital amnesty program designed to allow oligarchs to repatriate some of their overseas assets. Meanwhile, Putin has issued special bonds which will allow the wealthy to hold assets outside of the reach of the U.S. Treasury. 

Separate sanctions handed down

As we reported earlier in the month, Treasury officials are concerned that people will confuse Monday’s list of corrupt oligarchs with separate sanctions handed down to Russians over the Ukraine crisis. 

On Friday, the Treausry Department added 11 individuals to a “blacklist” which now contains 21 Russian or Ukraainian nationals and nine companies – most of which are power or energy firms. The Treasury’s announcement reads in part: 

WASHINGTON –The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today designated 21 individuals and 9 entities under four Executive Orders (E.O.s) related to Russia and Ukraine, including three individuals and two entities related to Russia’s transfer of four turbines made by a Russian-German joint venture to Crimea.  Today’s action is part of Treasury’s continued commitment to maintain sanctions pressure on Russia until it fully implements its commitments under the Minsk agreements.  This action underscores the U.S. government’s opposition to Russia’s occupation of Crimea and firm refusal to recognize its attempted annexation of the peninsula.  These sanctions follow the European Union’s recent extension of sanctions and reinforce our continued unity in supporting Ukraine’s sovereignty and territorial integrity.

As a result of today’s action, any property or interests in property of the designated persons in the possession or control of U.S. persons or within the United States must be blocked.  Additionally, transactions by U.S. persons involving these persons are generally prohibited.

“The U.S. government is committed to maintaining the sovereignty and territorial integrity of Ukraine and to targeting those who attempt to undermine the Minsk agreements,” said Treasury Secretary Steven T. Mnuchin.  “Those who provide goods, services, or material support to individuals and entities sanctioned by the United States for their activities in Ukraine are engaging in behavior that could expose them to U.S. sanctions.”

Today, OFAC also identified 12 subsidiaries that are owned 50 percent or more by previously sanctioned Russian companies to provide additional information to assist the private sector with sanctions compliance.

Relations between Washington and Moscow have deteriorated since 2014, when Russia annexed Crimea, sparking the conflict in Ukraine. Diplomatic ties have worstened between the two nuclear superpowers, with Washington accusing Moscow of interfering in the 2016 US presidential election. 

In December 2016, President Obama closed two diplomatic compounds used by Russia in retaliation for “hacking the election,” expelling 35 diplomats amid fresh sanctions. Then in July 2017, the Senate voted to increase sanctions on Russia by a 98-2 margin, which Trump reluctantly signed off on  August 2 – stoking fears over a trade war after comments by Russian prime minister Dmitry Medvedev that the law had ended hope for improving US-Russia relations.

Days after the Senate vote, Russia responded by expelling 755 US diplomats – to which President Trump thanked Putin for having “cut our payroll.” 

“I greatly appreciate the fact that we’ve been able to cut our payroll of the United States,” Trump said, adding “we’re going to save a lot of money… there’s no real reason for them to go back.”

Q: Thoughts on Putin expelling US diplomats?

Trump: “I greatly appreciate the fact that they’ve been able to cut our payroll.” (via ABC) pic.twitter.com/iR5JbHLHZj

— Kyle Griffin (@kylegriffin1) August 10, 2017

Several weeks later in August 2017, the Trump administration “thanked” Russia again – giving them 72 hours to vacate three more diplomatic facilities in San Francisco, Washington DC, and New York City. 

Towards the end of 2017, Washington took a series of steps to further vilify Russia, branding the country a “rival power” and “revisionist power,” while imposing new sanctions on several individuals linked to the Kremlin. 

Trump’s Executive Order

Perhaps one of the main drivers behind Russian oligarchs shedding assets before the U.S. Treasury’s “indices of corruption” are released is an Executive Order signed quietly in Late December which freezes the U.S. housed assets of foreign government officials or executives of foreign corporations deemed to be corrupt. 

In fact, anyone in the world who has “materially assisted, sponsored, or provided financial, material or technological support for, or goods or services” to foreigners targeted by the Executive Order is subject to frozen assets. This would apply to D.C. lobbyists working for corrupt Russian oligarchs, or U.S. government officials who have, say, effectuated a uranium deal deemed corrupt.

As such, tomorrow’s release of “corrupt oligarchs” by the US Treasury Department may have serious consequences for the finances of Americans who have done any type of business with any Russians deemed corrupt by the United States. 

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In this week’s MacroVoices podcast, host Erik Townsend interviews Chris Cole of Artemis Capital Management, who famously earned a profile in the New York Times last year after publishing an influential paper about the looming surge in volatility that looks set to upend eight years of relatively sleepy prosperity in financial markets…

In his paper, Cole famously compared financial markets to the ouroboros – the Greek symbol depicting a snake eating itself, which Cole leverages as a metaphor for the contemporary state of financial markets…

As Cole explains, there’s a dangerous feedback loop involving ultra-low interest rates, data expansion, central bank stimulus, and asset volatility. This in turn feeds into a system where funds embracing “risk parity”, “vol rebalancing” and other trend-following strategies can create a vicious feedback loop where rising volatility begets rising volatility until it snowballs into a Black Monday-style 20% crash.

Volatility across asset classes is at multi-generational lows. But there is now a dangerous feedback loop that exists between ultra-low interest rates, data expansion, central bank stimulus, and asset volatility. And then financial engineering that’s allocating risk based on that Volatility.

This is leading into a self-reflexive loop where lower volatility feeds into lower vol. But, in the event that we have the wrong type of shock to the system, I believe this can reverse violently where higher volatility then reinforces higher vol.

This is a much bigger risk in today’s market environment, and it’s one that is not being correctly discounted.

As Cole told the New York Times back in September, he has calculated that, globally, there is some $2 trillion in short volatility trades.

As traders sell volatility, it creates a kind of short gamma effect, whereby other traders must sell even more to get the same bang for their buck.

A few weeks ago, Goldman derivatives strategist Rocky Fishman pointed out that net positioning of VIX ETPs had become short during the preceding weeks for only the second time in their eight year history, prompting Fishman to ask – rhetorically, of course – should we worry?

The obvious answer is “of course we should” as such lopsided positioning means even a three-point jump in the VIX could trigger a cascading short squeeze, as these funds are forced to cover by piling into long-vol trades, potentially crashing the market.

As Cole explains:

This is all great as long as volatility is low or dropping, as long as markets are stable. But, in the event that we have a reversal in this, there’s two trillion dollars of equity exposure that self-reflexive-driving lower vol can reverse in a quite violent way. And this is just equity vol, mind you:

Moving on to another topic that Coletouched on in a paper he published entitled “Reflexivity in the Shadows of Black Monday 1987”Townsend asks him about corporate buybacks, and their presences as a type of “long-vol” influence on the market. As it happens, these buybacks are just one piece of a large, global “short vol” trade.

Townsend asks Cole to elaborate, and Cole explains that explicitly betting on short volatility by buying an inverse-VIX ETF, or directly shorting the underlying options yourself, is only one small component of the $2 trillion figure mentioned above.

The short-vol trade – if you look at short volatility and you think about what volatility really is – it’s a bet on stability. And when you’re betting on stability, that’s a myriad of different bets.

Part of that is the expectation that markets remain low volatility or low realized volatility. Part of that is short Gamma – so there is this implicit short Gamma exposure.

Part of that is a bet that correlations remain stable. Or that different market relationships remain anti-correlated with one another. Or that implied correlations are dropping. Or realized correlations are dropping.

And the other aspect of the short-volatility bet is that interest rates remain low or go lower.

So if we look at each of these different factors, these are the risk exposures that you will have when you own a portfolio of short options. And, if you own a portfolio of short options you are short Vega, you’re short Gamma, you’re short correlation, you’re short interest rates.

What we’ve seen now with this short-vol trade, explicitly and implicitly, is that various financial engineering strategies out there that have become dominant in the marketplace – we’re talking about the largest hedge funds in the world employ these strategies – that are just replicating the exposures of a short-options portfolio.

And of course the VIX trade gets a lot of attention, but it’s the smallest portion of the short-vol trade. This is what we call explicitly shorting volatility. This is where you’re literally going out and you’re shorting an option. Or you’re shorting a volatility future.

But in the VIX space, that’s only about $5 billion worth of short exposure. You have about $8 billion of vol-selling funds, according to Bloomberg. And then about $45 billion (estimated) in pension over-writing strategies, these short-port or short-call strategies the pensions are doing.

So, in total, there’s about $60 billion of explicit short volatility. Which is big. But that’s not the most concerning aspect.

The bigger aspect is this $1.4 trillion in implicit short volatility strategies. These are replicating the exposures of a portfolio of short options, even though they may not be directly selling derivatives or directly selling optionality.

Among these implicit strategies are the $600 billion worth invested in risk-parity strategies. $400 billion in volatility-control funds. And about $250 billion of risk premium strategies…

…and then there’s the equity exposure of the CTAs…

…Then, at the bottom of the short-vol pyramid, are corporate buybacks, which have helped prop up the market by BTFDing at every turn.

And it makes sense: How else can a CEO directly influence a company’s EPS? You can’t magically increase sales – there are too many factors that go into that.

But you can pick up the phone and call your broker.

But let’s think about what share buybacks do. If you’re a corporate CEO, you don’t have the ability to generate growth. You can’t generate sales. And you want to get your bonus. So if you can’t generate earnings, if you can’t help your top of the line, what you can do is reduce the number of shares. And this will artificially increase the EPS so you can hit your bonus target.

You go out and you issue debt and you buy back your shares. You’re leveraging the company up – which means that you’re exposed to interest rates, you’re exposed to market stability.

And then you’re buying back your shares, resulting in a price-insensitive buyer that is always underneath the market, resulting in this price-insensitive buyer always buying on market dips.

So, the result of this is that you’re artificially reducing realized volatility. The strategy is always to buy on dips. That is part of the replication strategy of the short-variance swap. Literally it’s
part of the replication of shorting vol.

When you add all of this exposure together, we have this self-reflexive short straddle of financially-engineered strategies in the market. And this really comes out to about $2 trillion worth of implicit and explicit short-volatility strategies. And then you can tack on the share buybacks. To some effect that is resulting in this.

Cole adds one more chilling fact:

Back in 1987, these strategies made up just 2% of the market.

Today, anywhere between 6% and 10% is held in these self-reflexive implicit and explicit short vol strategies.

Infer from that what you will…

Listen to the whole interview below:

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Authored by Tsvetana Paraskova via OilPrice.com,

Russian security services have arrested a local hacker who planted malware at gas stations across Russia’s southern regions that had been cheating drivers out of the gasoline that they pumped in their cars in a major fraud scheme that later resold the stolen fuel.

 

Russia’s Federal Security Service (FSB) have arrested the creator of the malware, Denis Zayev, who had gas stations employees working with him to trick the software systems to selling less fuel to the customers, while reselling the fuel that was stolen.

 

This fraud was one of the largest such scams uncovered by the Russian services, a source in law enforcement told news outlet Rosbalt. The scheme extended to almost all regions in the south of Russia, with dozens of gas stations infected with the malware.

Zayev has created a “perfect virus” that couldn’t be detected by either security controls that oil companies have used to remotely monitor gas stations, or by specialists at the Ministry of Internal Affairs, according to the police source who spoke to Rosbalt.

The virus planted in the systems allowed the hacker and his accomplices to steal up to 7 percent of the fuel.

Zayev acted not only as the “seller” of the malware at some stations, but also as co-owner of the channel to steal fuel, and received a cut from the proceeds from the re-sale of the stolen fuel.

Schemes by hackers targeting gas stations are not new. 

 

In early 2014, 13 people were indicted in the U.S. for allegedly using small Bluetooth-enabled skimmers to steal more than US$2 million from credit cards that customers used at gas stations in Texas, Georgia, and South Carolina in 2012 and 2013. According to the Manhattan District Attorney, the four main defendants had attached skimming devices at gas pumps at Raceway and RaceTrac to steal credit card information from customers. 

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Last week bond traders aged several years in just 5 days as they suffered through a hair-raising juggernaut of sharp daily moves and abrupt reversals…

… which sent the 10Y yield surging through a critical resistance level and beyond…

… even as the 2s30s yield curve continued to crater, tumbling to a level not seen since October 2007.

Well, if last week was bad, it’s about to become a rollercoaster from duration hell, because as Bloomberg previews the week ahead, with yields threatening to leap higher, “bond traders will grapple this week with market-moving stimuli coming at breakneck speed.”

Following last week’s ECB and BOJ decisions, this week US events will take center stage, as traders focus on Janet Yellen’s final meeting as Fed chair, the Treasury’s plan to cover widening deficits, and, on Friday, the latest update on the U.S. job market.

The selloff in Treasuries less than a month into 2018 last week sparked the latest bear market call, this time from Ray Dalio, who joined Bill Gross and Jeff Gundlach, warning of massive losses should bond yields spike.

“It seems almost impossible how much is jammed into one week,” Michael Lorizio, a senior trader at Manulife told Bloomberg. “The more responsible shorter-term trading rationale is rather than making a major shift in your investments, being willing to miss the first few basis points to have your longer-term thesis proven or disproven by the new data and information.”

Besides an unexpected upside surprise to the January jobs number following a disappointing December report, this week could see yields spiking should the Fed surprise the market with a statement on Jan. 31 that comes off as “more hawkish” than last month’s, in part because of climbing inflation expectations. In terms of expectations, Fed funds futures are pricing in more than 2.5 rate hikes, close to the FOMC’s own forecast of three. At the end of last week, options activity indicated growing interest in hedging against an extended selloff.

Meanwhile, Bloomberg notes that the 10-year breakeven rate is the highest since 2014, as inflation protection demand surges (it wouldn’t be the first time we have seen a breakeven headfake, only to tumble back down).

But while bond traders have learned to navigate the BLS and the Fed, in a potential unexpected twist, the Treasury will likely unveil bigger note sales this week for the first time since 2009, pushing supply higher with yields expected to follow. In other words, more issuance just as the Fed is trimming its balance sheet. Two weeks ago Goldman warned about precisely this risk, when it calculated that in 2018 US marketable borrowings will more than double from below $500 billion in 2018 to over $1 trillion in 2019 as the US deficit-funding debt tsunami finally get going.

Of course, if the US consumer is getting weaker – and not stronger – as the popular narrative suggests, any yield spike will be very brief, as deflationary forces reestablish themselves. One such catalyst is the US personal savings rate, which as we showed most recently on Friday tumbled to a decade low and the third lowest on record (we will get an update on this rate tomorrow)…

… and the only thing that kept spending from crashing in Q4 was a record surge in credit card usage.

Dimitri Delis of Piper Jaffray also points to the deteriorating U.S. savings rate as a catalyst for future economic weakness.  “I don’t know what’s going to keep the consumer on the same pace as the last two years,” he said. “I can probably string together events that can get us to 3 percent on the 10-year, but once it gets there, are the fundamentals there to support that level? I don’t think so.”

Then again, as Bloomberg concludes, two months ago traders weren’t so sure that 10-year yields could break above 2.4% and they’ve stayed above that level for five weeks. The trend for months has been for yields to climb and consolidate, before breaking even higher. And now that some of the most important trendlines are in sight, should yields continue to climb, some big holders are due for a big shock: as a reminder, according to the OFR, the market value impact from a 100bps rate shock is some $1.2 trillion and rising by the day.

With all that in mind, here are the key things to watch in the coming rollercoaster week, courtesy of Bloomberg.

• President Donald Trump’s State of the Union address on Jan. 30 at 9 p.m. ET
• The Treasury announces quarterly refunding plans Jan. 31
• Jan. 31 is also when the FOMC releases its latest policy decision, in Yellen’s final meeting as chair before handing off to Jerome Powell
  • San Francisco Fed’s John Williams, who emerged this month as a candidate for Fed vice chair, is set to speak on Feb. 2
• A fresh read on the U.S. labor market and an update on the Fed’s preferred inflation gauge highlight economic indicators:
  • Jan. 29: Personal income and spending; PCE deflator and core PCE; Dallas Fed manufacturing activity
  • Jan. 30: S&P CoreLogic Case-Shiller home price indexes; Conference Board consumer confidence
  • Jan. 31: MBA mortgage applications; ADP employment change; employment cost index; MNI Chicago business barometer; pending home sales
  • Feb. 1: Challenger job cuts; nonfarm productivity; unit labor costs; initial jobless claims; continuing claims; Bloomberg consumer comfort; Markit U.S. manufacturing PMI; construction spending MoM; ISM manufacturing
  • Feb. 2: Change in nonfarm payrolls, unemployment rate and average hourly earnings; factory, durable goods and capital goods orders; University of Michigan survey data
  • Treasury bill auctions on Jan. 29 and Jan. 30

Finally, judging by the spike in 10Y on Sunday night, some are unwilling to wait and are already dumping.

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by Shant Movsesian and Rajan Dhall MSTA fxdailyterminal.com

It was an eventful week in the currency markets last week, with focus on an ever weakening USD, which is all the more eye-catching given the fundamental backdrop at the present time. Key in that is ‘present time’, as markets – certainly in FX – tend to get ahead of the curve, but in this case, a little too aggressively for comfort.  In our view, some of the reasoning behind the past week’s dramatic demise has been somewhat overstated in the comments from US Treasury Sec Mnuchin’s comments on the USD, which some how manifested itself into an endorsement of a softer USD policy! We did not see it that way, but the story fit the move and the meme spread like wildfire. 

The truth is that the USD has been weakening since the middle of Dec 2017, and momentum truly gathered pace when earlier this year, reports that China were considering trimming their Treasury buying, or perhaps halting it altogether.  In a round-about way, this was denied, but it certainly raised concerns over the impact this would have on the US economy, especially when the twin deficit is back under scrutiny as it periodically is over time. 

At this point, some will argue over the net impact of the tax reforms at current levels of debt, and indeed the timing, and this was exacerbated by the recent shut down of the government as Congress failed to reach an agreement initially. Despite the eventual stop gap bill being passed, we are back to square one on 8 Feb.  This will likely to keep USD sentiment on the defensive, but we expect to see some moderation in the rampant flow seen in recent weeks, which was also set off by technical factors; namely the breach of the USD index of 91.0, last year’s base.  Listening to a number of asset/fund managers a few week’s back, this was seen to be a line in the sand and the rest has been history.  Since then, the USD has fallen into the mid 88.00’s (DXY), with the leading pairs all reaching some key levels, some of which were 2018 targets – now achieved in the first month of the year. 

Looking at what may turn the USD around, as we are clearly at oversold levels across the board, we look to the Core PCE data out on Monday and then the US payrolls report on Friday for some upside traction in wages and inflation.  This should start to see the market moving closer in line with the Fed dot plot, though curve flattening has also raised fears on longevity of the current level of the US economic cycle, with Europe and Japan looking at a sharper trajectory but for levels of inflation that we are currently faced with.

The Fed also meets this week, but we only have the rate announcement which will remain unchanged until March at the earliest, while the statement is unlikely to see much change, especially with some of the ‘average’ date readings of late.  Q4 GDP saw the first reading showing a healthy rise of 2.6%, and thankfully, despite falling short of expectations (3.0%), the market did not react as expected to any significant degree with durable goods orders, but also with strong consumer spending and a higher GDP price index which should feed into the inflation figures.  USD weakness will naturally feed into this also.  

EUR/USD has now reached 1.2500 as a result of the USD rout, and the ECB meeting and press conference last week were perhaps a little more restrained on the exchange rate (or more specifically the rate of appreciation) than some were hoping for, though in their own way they reflective this in their concerns over external factors and shocks to economic growth, of which excessive EUR strength is.  Inflation may not be to heavily impacted given strong gains in commodity prices, but in obsessing over reaching the 2.0% target, they are setting a rod for their own back, and this may delay any signal of an end to QE, even though we all know it is coming.  The ECB will expect to see US rates rising within this period, and this will hopefully take the sting out of the EUR, which has been moderating elsewhere, notably against GBP, but aggressively last week against the CHF and then late on Friday against the JPY also.

Normalisation in Japan has finally dawned on the (mass) market but is something we have been warning of over a number of weeks, and this looks like developing into the latest theme which may pick up in momentum.   We may have to look to the crosses for greater opportunities going forward, as the short term metrics suggest USD/JPY is stretched a little in the near term.  This is not to preclude a further extension to the downside which may dip under the lows from last September (107.30 or so), with 106.90-30 a potential zone were we may see covering ensue along with expected comments from the BoJ on monitoring FX moves.  We can discount any intervention unless the pace of JPY gains dictate, but up until now, the spot rate has been relatively measured in its path lower. 

EUR/JPY saw a sharp turn lower on Friday which took out support around the 13500 mark, but only a breach of 132.50 would signal a potential top in place despite continued expectations of a EUR/USD towards 1.3000.  However, it won’t be long before the market starts thinking about covering the risk over the Italian elections which are set for 04 March, and this may be a source of hindrance to the upside, with complacency taking over given the myopic view on all USD based pairs. 

Adding to near term risks on the EUR, we have the inflation data for Jan next week, which is expected to show the preliminary reading at 1.3% from 1.4%, but if the core picks up a little (1.0% from 0.9% forecast), then this may be overlooked.  Earlier in the week we get Q4 GDP which is expected to tick up from 2.6% to 2.7%, and would underpin any major sell off in the immediate future. Robust growth is widely acknowledged however and is more than priced in at this stage, so manufacturing PMIs (due later in the week) will be monitored for economic endurance from here on out.  

In Japan, we saw inflation last week moving in the right direction, reaching 1.0%, but all the while watching the various batches of second tier data which again offers some reassurance that this will continue all with the ultra accommodative BoJ policy in place. Household spending, industrial production, construction orders and housing starts are all Dec readings, while manufacturing PMIs at the end of the week cover Jan (currently in healthy expansionary mode at 54.4).  

In the UK, domestic data has been coming in better than expected, but in Friday’s GDP for Q4, we may have seen a 0.5% print drawing praise from Chancellor Hammond, but at an annualised rate of 1.5%, we hardly feel this is cause for joy, with the ONS suggesting the data masks growing concerns in the underlying performance ahead, notably in consumer spending which is one area of weakness we are anticipating in the year ahead – and already showing in the Dec retail sales figures. Nevertheless, we keep hearing that this is the year a Brexit deal is set to fall in place, and while we agree the wholesale panic which sent the traded weighted GBP index to sub 74.00 and Cable to sub 1.2000 levels was overdone, the pace of the recovery is a little premature to say the least, and EUR/GBP resilience into 0.8700 was highlighted late last week despite the GDP up-print. 

We need to hear of more positive developments in the Brexit negotiations to believe in this GBP rally, but in moves similar to that of the Oil price in mid 2016, investors and longer term traders took to believing in an eventual return to value, but this was from the 1.2500-1.3000 area.  We see little value in evaluating levels in Cable relative to those seen into the referendum vote due to USD distortions, but EUR/GBP offers a better perspective as we were trading just under 0.7600 ahead of the result, where polls were suggesting we were set to vote to remain in the EU.  The top was extended to the early 0.9200’s in Oct 2016 and just over 0.9300+ in Aug last year, so current levels reflect more tempered gains in the Pound.  The trade weighted index is now just above the 78.0 level in the meantime, vs a post Brexit high shy of 80.0, so this may prove more a signal to moderate gains near term, but under the current themes, more so against the EUR until the USD finds a base.  Little on the data schedule other than manufacturing and construction PMIs towards the end of the week. 

Canada is also in the midst of a renegotiation of trading terms, with the NAFTA accord holding up CAD out-performance given the BoC has started to raise rates.  Were it not for this uncertainty, we would have expected USD/CAD to have dropped under 1.2000 by now, but as long as there is little material progress in the talks, 1.2100-1.2200 will limit the downside for now. On Monday we will see how the sixth round of negotiations have fared, and sources claimed there was a little more compromise from Canada, but there is an abundance of here-say these days.  Nov GDP midweek offers the main data risk to contend with here. 

In Australia, the market looks to the Q4 inflation data for fresh direction on the AUD, but we sense there may be a little disappointment if the reaction to the equivalent NZ stats were anything to go by.  We saw the latter reading drop from 1.9% to 1.6%, but by the end of the week, the impact on the spot rate was net unchanged.  AUD/NZD was and remain higher though, pushing above the 1.1000 mark, so if Australia’s CPI number returns to 2.0% (from 1.8%), then we could see a further push higher in the cross rate. Industrial metals prices have been showing some exhaustion on the upside however, so along with the technical resistance into the mid 0.8100’s, we should at the very least see some momentum fading in AUD/USD, which would mean NZD/USD follows in kind.  In both cases, both the RBA and RBNZ will have something to say if we extend higher against the USD, so limited scope for differentiation away from the USD in the current climate.

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While the State of the Union address is rarely if ever an FX market-moving event, in light of recent comments by both President Trump and Treasury Secretary Mnuchin and with global trade suddenly on everyone’s radar, if there is one market-sensitive topic that may get a kick start on January 31, it is US trade relations with China.

 

For readers who want to get a head start on the topic, Deutsche Bank’s Alan Ruskin suggests reading the United States Trade Representative 161 page primer on the “Report to Congress on China’s WTO compliance”, (it can be found here). According to the DB FX strategist, “the report is extraordinary, and at a minimum page 2 to 25 of the report deserve a read to understand the extent to which the US believes they have valid grievances on an array of perceived China WTO transgressions.”

In fact, he claims that this is a story that extends way beyond the recent headlines discussed in the press on steel, aluminium and intellectual property. The topic headlines to the summary, highlight the breadth of issues and a panoply of perceived legal violations including as they relate to:

• China’s Industrial policies;
• technology transfer;
• Investment restrictions;
• subsidies;
• excess capacity;
• reexport restraints;
• Import bans on remanufactured products;
• import ban of recoverable products;
• government procurement;
• Intellectual property rights, trade secrets;
• bad faith trademark registration;
• pharmaceuticals;
• online infringements;
• counterfeit goods;
• electronic payment services;
• theatrical films; banking services;
• insurance services;
• securities and asset management services;
• telecom services;
• internet services;
• audio visual services;
• legal services;
• beef, pork and poultry;
• biotechnology;
• agricultural support;
• publication of trade law transparency;
• administrative licensing;
• and competition policy

And below, DB notes, is the “it will not be business as usual” conclusion from the USTR report:

“For more than 15 years, the United States has relied on cooperative highlevel dialogues to effect meaningful and fundamental changes in China’s stateled, mercantilist trade regime. These efforts have largely failed. Accordingly, the United States intends to focus its efforts on enforcement going forward. These efforts will include not only use of the WTO’s dispute settlement mechanism to hold China strictly accountable for adherence to its WTO obligations, but also other needed mechanisms, including mechanisms available under U.S. trade laws. The United States is determined to use every tool available to address harmful Chinese policies and practices, regardless of whether they are directly disciplined by WTO rules or the additional commitments that China made in its Protocol of Accession to the WTO. The United States will not accept any Chinese policies or practices that are unfair, discriminatory or mercantilist and harm U.S. manufacturers, farmers, services suppliers, innovators, workers or consumers. Americans have waited long enough. The time has come for China to stop its market-distorting policies and practices and finally become a responsible member of the WTO.”

What does this mean for traders? Well, those who have been begging for FX vol (a precursor to all other volatility) will soon get their wish, because according to Ruskin, the likely upcoming US attack on China trade policies is apt to have broader bipartsian support than many other US trade measures.

Whether or not it will transition into a full-blown trade war remains to be seen, but in the immediate future a trade dispute with China has the capacity to impact markets through a variety of channels that includes:

• i) choking global supply channels;
• ii) inflating prices;
• iii) influencing China’s global asset allocation, that could impact all of US bonds, equities and the USD negatively.

Of course, China knows all of this and explains the recent trial balloons by China and Bloomberg that Beijing may slow down, or even reverse, its purchases of US Treasurys.

What could stop a collapse in trade relations? Why, a market crash of course: as Deutsche predicts, a sharp uptick in US equity volatility is one of the few factors that could put a brake on this US push forward to change trade relations with China, and the above fits with a world of greater equity vol.

Focusing only on the currency side, the USTR report’s recommendations have the capacity to go way beyond calling China a currency manipulator. While in the initial instance, US attacking China’s WTO transgressions could be seen as encouraging of more CNY appreciation, in the longer-term this could prove both CNY negative and negative for most Asia EM FX. Short CNY/JPY would work under a risk-off environment, and has the added bonus that it offers some protection against a China official exodus from US bonds (if the politics turns unexpectedly ugly), with the yen one alternative reserve asset destination.

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In a stunning – if accurate – report published Sunday night, Axios claims that White House national security officials are considering an unprecedented federal takeover of a portion of the nation’s mobile spectrum/network to protect against Chinese attacks, in what may well be a pre-emptive shot, hinting at upcoming trade wars between the two superpowers.

Axios got its hands on PowerPoint deck and a memo, both of which were purportedly produced by a senior National Security Council official, which were presented to other senior officials at other agencies during a recent meeting.  The documents argue that America needs a centralized nationwide 5G network within three years. There’ll be a fierce debate inside the Trump administration, and an outcry from the industry over the next 6-8 months over how such a network is going to be built and paid for.

For those unfamiliar with 5G, Quora has a useful discussion on “How is 5G different from 4G and when will it be launched?”

The document’s author presents two options:

• The U.S. government pays for and builds the single network — which would be an unprecedented nationalization of a historically private infrastructure.
• An alternative plan where wireless providers build their own 5G networks that compete with one another — though the document says the downside is it could take longer and cost more. It argues that one of the “pros” of that plan is that it would cause “less commercial disruption” to the wireless industry than the government building a network.

Another expert who discussed the plan with Axios said the second option isn’t really feasible because a single, centralized network is what is needed to protect against cyberattacks from the Chinese or other foreign powers.

The source said the internal White House debate will be over whether the U.S. government owns and builds the network or whether the carriers bind together in a consortium to build the network, an idea that would require them to put aside their business models to serve the country’s greater good.

Option 1 would lead to federal control of a part of the economy that today is largely controlled by private wireless providers; here it is worth noting that Telecom companies are among some of the most hated US corporations because they benefit from the current oligopoly enshrined by the status quo. Furthermore, if Verizon and its competitors introduce new tiered plans in violation of net neutrality, this dissatisfaction will only worsen, making a government nationalization feasible.

In the memo, the Trump administration likens it to “the 21st century equivalent of the Eisenhower National Highway System” and says it would create a “new paradigm” for the wireless industry by the end of Trump’s current term.

Aside from its various other staggering implications, 5G nationalization would still leave many other elements of the market free to private competition. 

According to the presentation, the US must build superfast 5G wireless technology quickly because “China has achieved a dominant position in the manufacture and operation of network infrastructure,” and “China is the dominant malicious actor in the Information Domain.”

To illustrate the current state of U.S. wireless networks – perhaps as an aid to the attention-deficient administration- the PowerPoint uses a picture of a medieval walled city, compared to a future represented by a photo of lower Manhattan.

According to the leaked memo, the best way for the government to achieve its goal, is to build a network itself. It would then rent access to carriers like AT&T, Verizon and T-Mobile. (A source familiar with the document’s drafting told Axios this is an “old” draft and a newer version is neutral about whether the U.S. government should build and own it.)

This would be preferable for two reasons:

It’s a marked shift from the current system where those companies each build their own systems with their own equipment, and with airwaves leased from the federal government.

Nationwide standard: the federal government would also, according to the memo, be able to use the banner of national security to create a federal process for installing the wireless equipment, preventing states and cities from having their own rules for where the equipment could go.

The memo argues that a strong 5G network is needed in order to create a secure pathway for emerging technologies like self-driving cars and virtual reality — and to combat Chinese threats to America’s economic and cyber security. A PowerPoint slide says the play is the digital counter to China’s One Belt One Road Initiative meant to spread its influence beyond its borders. The documents also fret about China’s dominance of Artificial Intelligence, and use that as part of the rationale for this unprecedented proposal.

There’s even a suggestion that America’s work on a secure 5G network could be exported to emerging markets to protect democratic allies against China.

“Eventually,” the memo says, “this effort could help inoculate developing countries against Chinese neo-colonial behavior.”

US Telecoms are already working on building 5G networks, with AT&T, Verizon and T-Mobile, for example, investing heavily in this area. The process for setting 5G standards is well underway. Korea has been at the forefront of testing, as have Japan and others. It’s not clear a national strategy would yield a 5G network faster or by the memo’s 3-year goal.

The memo says China is slowly winning the AI “algorithm battles,” and that “not building the network puts us at a permanent disadvantage to China in the information domain.” There is a real debate to be had over China and AI, but it’s unclear what at all that has to do with a mobile network.

5G is expected to run at 10-20 gigabytes per second, which, as ForexLive points out, is blazing fast, further making the argument that nationalizing it would be a necessity to secure self-driving cars from being hacked.

5G is expected to run at 10-20 GB per second. That’s insanely fast. There’s an argument it needs to be secure because of self-driving cars. pic.twitter.com/e7OqGdiRz2

— ForexLive (@ForexLive) January 28, 2018

Full document below (pdf source).

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The Mexican National Security Commission reports that federal police discovered a multi-drug international shipment that included 914 pounds of crystal meth, 100 pounds of fentanyl, 88 pounds of cocaine, and 18 pounds of heroin, in a vehicle headed to the California border.

 

According to the Oxford Treatment Center,

The lethal dose for fentanyl is generally stated to be 2 milligrams. Again, this lethal dose considers that the individual has not developed significant tolerance; however, even in individuals with significant tolerance, the lethal dose of fentanyl is extremely small compared to the potential lethal doses of many other opiate drugs.

That means the 100 pounds of fentanyl (45.5 kilograms) is enough to kill millions of Americans.

Federal police regularly conduct security and surveillance tasks along the highway that connects Ensenada with the town of Lazaro Cardenas. Ensenada is a coastal city in Mexico, the third largest in Baja California and located about 77 miles south of San Diego. Federal police closely monitor the highways in Baja, because the network of roads in the area are some of the top preferred methods of hauling drugs into the United States via drug cartels.

 

On Thursday, federal police noticed an SUV traveling without license plates towards the United States border. After pulling over the vehicle, the driver agreed to a physical inspection of the SUV, and that is where officers found “10 sacks, three suitcases, 18 packages made with adhesive tape and 18 plastic containers,” said Gob.MX.

 

“In total, 620 packages and containers were inside the vehicle, with 532 of crystal, 43 of fentanyl, 73 of cocaine and 8 of heroin, which yielded an approximate weight of 508.4 kilograms.,” Gob.Mx adds. The driver was arrested and now faces serious drug charges. Interesting enough, Mexican investigators were able to confirm the vehicle is registered in California.

In December 2017, we noted that drug cartel violence penetrated the tourist areas of Baja California Sur, home to Cabo and La Paz, which is just south to where the 100 pounds of fentanyl was found. In 2017, there were 62 homicides per 100,000 residents in Baja California Sur, as the country suffers from an out of control drug cartel war.

 

Earlier this month,  Mexico was assigned the Level 2 rating, as U.S. citizens and U.S. government employees are urged to “exercise increased caution” and “be aware of heightened risks to safety and security.” Increased violence in the region has been fueled by U.S. demand for opioids coupled with a power struggle between Mexican drug cartels. In the first 11 months of 2017, there were 22,409 deaths across Mexico–making it one of deadliest years ever.

 

It appears the 100 pounds of fentanyl that could have led to millions of overdoses across the United States was en route from the Tijuana cartel controlled area of Baja California.  The vast networks of cartel territories and drug routes are astonishing throughout Mexico.

 

Perhaps it’s not supply that’s the problem? America has a drug problem and its demand is fueling it.

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