Category: zerohedge

Submitted by Pater Tenebrarum via Acting-Man.com,

Insanity Rules

Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn’t matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more.

 

The perfect investment for modern times: interest-free risk!

 

A huge mountain of interest-free risk has accumulated in investor portfolios and on bank balance sheets. Globally, more than $13 trillion in sovereign bonds trade at negative yields to maturity. In spite of soaring defaults, junk bond yields have collapsed again as well. In short, insanity rules in the bond markets.

A recent article in the FT informs us of “a wave of foreign demand for US corporate debt”:

Record-low interest rates are no barrier for US companies finding buyers for their debt thanks to a relentless global quest for fixed returns that shows little sign of easing. The pace of US corporate debt sales — which has not been fast enough to quench investor demand — is expected to continue unabated driven by foreign buyers in a world where roughly $13tn of sovereign and corporate debt trades in negative territory.

 

“It is a low return world,” says Ed Campbell, a portfolio manager with asset manager QMA. “You don’t have a lot of asset classes that are attractive and there is a flight to quality where the US is outperforming.”

 

More than $2.3tn of dollar-denominated debt has been issued by companies and banks since the year began, including three of the ten largest corporate bond sales on record, Dealogic data show.

(emphasis added)

This not only shows that “investors” (we use the term loosely) are insane, it also happens to be a contrary indicator. Foreign buying of US assets very often  reaches record highs prior to major financial accidents. Is this really a “flight to quality?” Corporate defaults are currently at the highest level since 2009, with US defaults clearly leading the pack:

 

Corporate defaults by region. Foreign investors are rushing into US corporate debt because –  as one observer put it – “A yield of 2.83 per cent can fall a lot more than a [yield of] 0.71 per cent.” What more reason could one possibly need? – click to enlarge.

 

An Ominous Blurb

What prompted us to post this update on the situation was a little blurb that appeared in our email courtesy of Fitch:

U.S. HY TTM Default Rate Exceeds 5%; Energy YTD Defaults Tally $33 Billion

 

There was $5.2 billion of U.S. high yield bond default volume in July, pushing the TTM rate to 5.1% from 4.9% at the end of June

 

The market registered $39.9 billion of defaults over the past four months, with the energy sector comprising 67% of the total

 

The July energy TTM default rate reached 16% while the E&P sub-sector rate climbed to 31.2%

 

August already has $1.5 billion of probable defaults, including two more energy companies in their grace periods after missing interest payments

 

The high yield market saw solid activity, as there was $15.2 billion of July issuance, more than doubling the volume of the prior year

 

Energy accounts for $17 billion of the $78 billion of high yield debt maturing by December 2017

(emphasis added)

Naturally, the bulk of high yield defaults is still concentrated in the energy sector – but that hasn’t kept the energy sector from increasing its total debt load to a new record high. Apparently, investors haven’t received enough punishment yet… or maybe they are just masochists?

 

Cumulative debt defaults in the energy sector in 2015 (so far, the trend has continued in 2016). In spite of this, debt issuance by energy companies has just reached a new record high! – click to enlarge.

 

The FT inter alia quotes a number of market observers on the recent wave of foreign buying of US corporate debt. Note that not even the slightest trace of irony is detectable in these remarks, which is quite astonishing by itself:

“The reach for yield has morphed into a desperation for yield post the Brexit vote,” Nathaniel Rosenbaum, a credit strategist with Wells Fargo, says.

 

[…]

 

“You can feel this wall of money coming in,” says Stephen Kotsen, a portfolio manager with Nomura Corporate Research and Asset Management. “We are seeing flows from every region and every type of investor because of the central bank easing. That wall of money has to be put to work.” [TINA! TINA! TINA! ed.]

 

[…]

 

“What people are looking for is a little bit of yield [and] the chance of capital gains,” says Nick Gartside, JPMorgan Asset Management’s fixed income chief investment officer, pointing to the difference between yields on European and US company bonds. “A yield of 2.83 per cent can fall a lot more than a [yield of] 0.71 per cent.”

(emphasis added)

Ah yes… why worry about tens of billions in defaults, when you can get that juicy 2.83% annual yield! To be fair, one of the pundits quoted in the article does mention that this mad rush into bonds harbors the potential for big losses at some point down the road (but of course, not yet).

Ever since investors have become convinced that the Fed will remain on hold with respect to rate hikes and that even more central bank stimulus is on its way around the world, market distortions have intensified sginificantly. Consider for instance the divergence illustrated by the next chart:

 

The annual rate of change of the sum of commercial loan charge-offs and delinquencies (black line, lhs), US junk bond yields (blue line, rhs) and the FF rate (red line, rhs). Normally, junk bond yields and the rate of change of commercial loan charge-offs are very closely correlated. Most of the time junk bond yields are exhibiting a slight lag. An unusually large divergence is currently in evidence – click to enlarge.

 

As an aside to the above chart (which we have shown previously, excl. the comparison to junk bond yields), it has come to our attention that it has apparently been misinterpreted by some people. The black line shows merely a rate of change – it illustrates how quickly loan charge-offs and delinquencies are growing relative to their level of one year ago.  The fact that the pace of charge-offs has recently been even faster than in 2008/9 does not indicate that there are now more defaults than occurred at the time.

It is only telling us that loans are going sour very quickly, albeit from a very low base. Nevertheless, given the cumulative amounts of corporate defaults over the past 18 months (shown in the chart further above), the actual level of defaulting debt is slightly disconcerting as well by now.

 

Sovereign Bonds – Even Greater Risk?

In the long run, investors in negative-yielding sovereign bonds may be incurring even greater risks. A reminder of the convexity effect at ultra-low and negative yields was provided by the JGB market two weeks ago, when yields moved from minus 29 bps to approx minus 5 bps intra-day in four trading days (current level approx. minus 11 bps):

 

JGB futures daily… yes, government bond prices can actually fall as well… – click to enlarge.

 

Anyone buying sovereign bonds at negative yields to maturity risks staggering losses should yields merely move back to the levels seen two or three years ago. Given that headline CPI is set to rise in the major currency areas on account of base effects alone (reflecting higher energy prices) we certainly wouldn’t rule out that something of the sort could actually happen.

Moreover, positioning in the bond market has reached an extreme. The net speculative long position in US treasury bond futures is currently at the highest level since the Russian crisis in 1998:

 

Net commercial hedger position in 30 yr. treasury bond futures (the inverse of the net speculative position). Speculators positively hated the long bond in early 2006, when it still offered a respectable yield – but they love it now, at record low yields. Go figure – click to enlarge.

 

As we often point out, a large speculative net long position in futures markets is not a bearish signal per se – but it does mean that the market concerned is vulnerable. It not only reflects very one-sided sentiment, but will tend to exacerbate downturns if/ when major technical levels are taken out in a decline, as futures traders tend to use fairly tight stops.

 

European Banks and LIBOR

We have not yet had the time to comment on the EBA bank stress test in Europe, but most of our readers are probably aware by now that the test once again mainly seemed to serve propaganda purposes. In short, it was mainly an attempt to shore up “confidence”.

A recent study by Germany’s ZEW Institute has concluded that if one were to subject euro area banks to a more demanding stress test – this is to say, one that actually simulates tail-risk type crisis conditions –  the big banks would have truly stunning capital shortfalls. This is a far cry from what the EBA reported (see also Mish’s discussion here).

We do have a few more things to add to the stress test results, but will do so in a separate post. For now let us just say that it had major flaws that to our mind basically invalidate its conclusions almost completely. This doesn’t mean that the data collected and published by the EBA are worthless – on the contrary, it is actually great to have them available. We are merely talking about the test as such, and the “everything is fine” message implied by its result.

Right after the publication of the test, European bank stocks went into free-fall again, but have slightly recovered since then. These stocks are very “oversold” in every conceivable time frame (e.g., Deutsche Bank was recently down 90% from its 2007 high, Commerzbank more than 98% and Italian zombie Monte dei Paschi more than 99%), so a bounce almost had to happen at some point.

We believe the long-term losses in market capitalization almost speak for themselves (for some nightmare-inducing color on European banks see also these previous missives: “Never-Ending Crisis”, “The Walking Dead” and “Drowning in Bad Loans”).

 

Euro Stoxx bank index – a small bounce over the past several days, but overall the chart still looks awful – click to enlarge.

 

One reason why we mention banks and bank stocks here is the fact that sovereign bond yields and bank stocks are in a kind of negative feedback loop at the moment. Every time yields rise, bank stocks are actually getting a boost, as the market apparently figures that this will be positive for their currently extremely depressed interest margins.

On the other hand, we believe sovereign bond yields are inter alia so low because large investors are worried about bank solvency and the possibility of getting “bailed in” if they hold large deposits. Effectively, sovereign bonds are now treated as a kind of “cash substitute”. A bond with a negative yield to maturity is certainly no longer comparable to a traditional bond investment.

Presumably large investors figure that in the event of a crisis, they are more likely to get their money back if they hold government bonds rather than holding electronic deposit money with banks. Deposit money is largely uncovered and could evaporate into thin air due to bail-ins once the next crisis hits – and we think it is an almost apodictic certainty that there will be another crisis in the not-too distant future.

In other words, negative yields probably don’t really reflect low “inflation expectations”, but are inter alia mainly a reflection of the risk premium component embedded in sovereign bond yields. It has become deeply negative, simply based on a comparison with the risk that large deposits held with banks entail (we will have more in this in an upcoming discussion of interest rate theory and “trust money”).

In the meantime fresh trouble has emerged for banks in need of dollar funding ue to upcoming changes in US money market fund regulations. US MM funds were hitherto the biggest buyers of USD commercial paper issued by European banks. They have essentially retreated from this market, and euro-land banks can no longer can rely on cheap funding from this source. As a result, LIBOR has exploded relative to other USD interest rates:

 

1 and 3 month LIBOR: interbank lending in USD in Europe is becoming prohibitively expensive compared to other USD rates – click to enlarge.

 

Euro basis swaps have plunged back into negative territory as well, and the TED spread also illustrates that this is becoming painful (always keeping in mind that we live essentially in a ZIRP world otherwise):

 

The TED spread has surged quite significantly – this is usually seen as a measure of funding stresses in the euro-dollar market, and the fact that it is allegedly “only” happening due to new MM fund regulations is surely cold comfort for the banks – click to enlarge.

 

Conclusion:

Distortions in financial markets keep growing, as central banks all over the world are desperately intensifying monetary pumping. What is currently happening in various bond markets as a result of this and other interventions is simply jaw-dropping insanity.

It is not so much that it defies rational explanation – in fact, all of these moves can be explained. What makes the situation so troubling is the fact that investors seem to be oblivious to the enormous risks they are taking.  They are sitting on a powder keg.

 

A powder keg full with debt…

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Soaring minimum wages in states like California have a disproportionate effect on businesses that employ low-skilled labor.  The farming industry is among the hardest hit with substantial labor inputs required to perform low-skilled tasks like harvesting, pruning and weeding.  The problem (or opportunity depending on your perspective), of course, is that higher labor costs make returns on capital projects that much more enticing.  

For our political friends that focus more on the narrative of providing a “fair wage” and not so much on the math, please see below for a very simplified example of why minimum wage hikes ultimately just lead to the permanent unemployment of the people you’re trying to help.  In our simple example we assume that a $1mm capital investment, on the purchase of a couple of robots for example, can replace the work of 5 people.  Using California’s 50% increase in minimum wage (the “Fair Wage Act of 2016″…don’t you just love the branding) would drive the payback period of such an investment down from a “marginally attractive” 10 years to a “no-brainer” 6 years. 

And thus, 5 people find themselves out of a job.  But that’s ok, just more people to be dependent on the Nanny State who can easily be brainwashed into believing their plight is the direct result of “rich people” not “paying their fair share” rather than the misinformed policies of our math-challenged political elite.

With that said, we thought we would share with you a couple of companies looking to take advantage of the soaring costs of labor in states like California.  Business Insider recently highlighted 7 robots that are replacing farm workers around the world and below are just a couple.

First there is Wall-Ye, a robot developed in France that helps growers prune and harvest grape vineyards.

 

Then there is the BoniRob that can destroy weeds faster than any human or herbicide.

Of course farm workers aren’t the only ones being replaced by robots.  New technology is being developed to replace fast food workers (see “Robots Made Fast-Food Workers Obsolete: Now They Are Coming After These 791,200 Jobs“), construction workers (see “Is This How Trump Will Build The Wall Cost-Effectively?“) and a number of other low-skilled positions in a variety of industries. 

The question isn’t so much whether low-skilled positions will be replaced by new capital investment but rather how quickly the transition will occur.  Certainly, setting artificial floors on the cost of labor only serves to accelerate the technology development process.  Then the only remaining question is how societies around the world will cope with the mounting job losses.

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Submitted by David Stockman via Contra Corner blog,

Here follows a deconstruction of Rosy Scenario. It underscores why the nation’s entitlement based consumption spending will hit the shoals in the decade ahead.

In their most recent report, the so-called “trustees” of the social security system said that the trust fund’s near-term outlook had improved. So the stenographers of the financial press dutifully reported that the day of reckoning when the trust funds run dry has been put off another year—-until 2034.

The message was essentially take a breath and kick the can. That’s five Presidential elections away!

Except that is not what the report really says. On a cash basis, the OASDI (retirement and disability) funds spent $859 billion during 2014 but took in only $786 billion in tax revenues, thereby generating $73 billion in red ink.

By the trustees’ own reckoning, in fact, the OASDI funds will spew a cumulative cash deficit of $1.6 trillion during the 12-years covering 2015-2026.

So measured by the only thing that matters—-hard cash income and outgo—-the social security system has already gone bust. What’s more, even under the White House’s rosy scenario budget forecasts, general fund outlays will exceed general revenues (excluding payroll taxes) by $8 trillion over the next twelve years.

Needless to say, this means there will be no general fund surplus to pay the OASDI shortfall.

Uncle Sam will finance the entire $1.6 trillion cash deficit by adding to the public debt. That is, Washington plans to make social security ends meet by burying unborn taxpayers even deeper in public  debt in order to fund unaffordable entitlements for the current generation of retirees.

The question thus recurs. How did the “untrustworthies” led by Treasury Secretary Jacob Lew, who signed the 2015 report, manage to turn today’s river of red ink into another 20 years of respite for our cowardly beltway politicians?

They did it, in a word, by redeeming phony assets; booking phony interest income on those non-existent assets; and projecting implausible GDP growth and phantom payroll tax revenues.

And that’s only the half of it!

The fact is, the whole rigmarole of trust fund accounting enables these phony assumptions to compound one another, thereby obfuscating the fast approaching bankruptcy of the system. And, as will be demonstrated below, that’s what’s really happening—–even if you give credit to the $2.79 trillion of so-called “assets” which were in the OASDI funds at the end of 2014.

Stated differently, the OASDI trust funds could be empty as soon as 2026, thereby triggering a devastating 33% across the board cut in benefits to affluent duffers living on Florida golf courses and destitute widows alike.

Needless to say, the army of beneficiaries projected for the middle of the next decade—what will amount to the 8th largest nation on the planet—- would not take that lying down.

There would be blood in the streets in Washington and eventually staggering tax increases to fund the shortfall. Such desperate measures, of course, would sink once and for all whatever faint impulse of economic growth and job creation that remained alive in the US economy at the time.

In short, the latest untrustworthies report amounts to an accounting and forecasting house of cards that is camouflaging an impending social, political and economic crisis of a magnitude not seen since the Great Depression or even the Civil War.  So here follows an unpacking of the phony accounting edifice that obscures the imminent danger.

The place to start is with the one data series in the report that is rock solid. Namely, the projected cost of $15.5 trillion over the next 12 years to pay for retirement and disability benefits and the related (minor) administrative costs.

This staggering figure is derived from the fact that the number of beneficiaries will grow from 59 million to 79 million over the next twelve years. And each and every one of these citizens has a payroll record that entitles them to an exact monthly benefit as a matter of law.

Even the assumed COLA adjustment between 2-3% each year is pretty hard to argue with—-since it is nearly dead-on the actual CPI increase average since the year 2000.

Funny Money Accounting—–Trust Fund “Assets” Are Pure Confetti

By contrast, the funny money aspect comes in on the funding side. The latter starts with the $2.79 trillion of “assets” sitting in the OASDI trust funds at the end of 2014.

In truth, there is nothing there except government accounting confetti. This figure allegedly represents the accumulated excess of trust fund income over outgo historically, but every dime of that was spent long ago on aircraft carriers, cotton subsidies, green energy boondoggles, prison facilities for pot smokers, education grants, NSA’s cellphone snoops, space launches and the rest of Washington’s general government spending machine.

So when the untrustworthies claim that that social security is “solvent” until 2034 the only thing they are really saying is that this $2.79 trillion accounting artifact has not yet been liquidated according to the rules of trust fund arithmetic. And under those “rules” it’s pretty hard to actually accomplish that—-not the least due to the compounding of phantom interest on these phantom assets.

To wit, the 2015 report says that the OASDI funds will earn $1.2 trillion of interest income during the next twelve years. To be sure, the nation’s retirees and savers might well ask how Washington’s bookkeepers could manage to get the assumed 3.5% interest rate on the government’s assets compared to the 0.3% ordinary citizens earn on a bank account or even 1.4% on a 10-year treasury bond.

But that’s not the real scam. The skunk in the woodpile is actually an utterly arbitrary and unjustifiable assumption about the rate of nominal GDP growth and therefore the associated gain in projected payroll tax revenues coming into the trust fund.

What the untrustworthies have done here is indulge in the perfidious game of goal-seeked forecasting. That is, they have backed into a GDP growth rate sufficient to keep payroll tax revenues close to the level of benefit payouts, thereby minimizing the annual cash deficit.

This, in turn, ensures that the trust fund asset balance stays close to its current $2.7 trillion level in the years just ahead, and, mirabile dictu, permits it to earn upwards of $100 billion of “interest” each year.

Too be sure, beneficiaries could not actually pay for their groceries and rent with this sort of trust fund “income”, but it does keep the asset balance high and the solvency can bouncing down the road a few more years.

But here’s the thing. Plug in a realistic figure for GDP growth and payroll tax revenue increases and the whole trust fund accounting scheme collapses; the bouncing can runs smack dab into a wall of trust fund insolvency.

To wit, the untrustworthies who wrote the report assumed that nominal GDP would grow at a 5.1% annual rate for the next 12 years. Yet the actual growth rate has never come close to that during the entire 21st century to date. At best these people are dreaming, but the truth is they are either lying or stupid.

Given the self-evident headwinds everywhere in the world, and year after year of failed “escape velocity” at home, no one paying a modicum of attention would expect US GDP to suddenly get up on its hind legs and race forward as far as the eye can see.

Yet that’s exactly what the social security untrustworthies have done by assuming nominal GDP growth 35% higher than the actual 3.8% compound growth rate since the year 2000.

But it’s actually worse. Since reaching peak debt just prior to the financial crisis, the US rate of GDP growth has decelerated even more.

And going forward, there is no meaningful prospect of recovery in the face of the growing deflationary tide in the global economy and the unavoidable necessity for the Fed and other central banks to normalize interest rates in the decade ahead. Failing that they will literally blow-up the world’s monetary system in a devastating currency race to the bottom.

Thus, during Q1 2008, which marked the end of the domestic credit binge, nominal GDP posted at $14.67 trillion, and during the most recent quarter it came in at $18.44 trillion. That amounts to a seven-year gain of just $3 trillion and an annual growth rate of 2.8%.

Now surely there will be another recession before 2026. If not, we will end up with 200 straight quarters of business cycle expansion—-a preposterous prospect never remotely experienced previously.

Indeed, in our modern central bank driven world, where both recessions this century have resulted from the bursting of financial bubbles, the proposition is even starker. Namely, the Washington untrustworthies are assuming no bursting bubbles or market crashes for 18 years!

Not a chance!

The historical business cycle expansions depicted below make clear that there will be another business cycle downturn. After all, contrary to the untrustworthies assumption that the current business cycle will last forever, and, in the analysis at hand for 200 months through the end of 2026, the average expansion since 1950 has lasted just 61 months and the longest ever was only 119 months.

During the last business cycle contraction, in fact, nominal GDP declined by 3.4% between Q3 2008 and Q2 2009. And when you average that in with the 3.3% nominal GDP growth rate which we have had during the so-called recovery of the last four years, you not only get the aforementioned 2.8% trend rate of nominal GDP growth, but you are also hard-pressed to say how it can be bested in the years ahead.

 

Indeed, there is a now an unprecedented deflationary tide rolling through the world economy owing to the last 15 years of rampant money printing and financial repression by the central banks. By collectively monetizing upwards of $20 trillion of public debt and other existing securities and driving interest rates toward the zero bound in nominal terms and deep into negative territory in real terms, they have generated two massive, deflationary distortions that have now sunk deep roots in the world economy.

First, as we demonstrated earlier worldwide credit market debt outstanding has soared from $40 trillion to $220 trillion during the last two decades. This means future economic growth practically everywhere on the planet will be freighted-down by unprecedented, debilitating debt service costs.

At the same time, massive overinvestment in mining, energy, shipping and manufacturing spurred by central bank enabled cheap capital has generated a huge overhang of excess capacity. This is already fueling a downward spiral of commodity and industrial prices and profit margins, and there is no end in sight.

Iron ore prices which peaked at $200 per ton a few years back, for example, are now under $50 and heading for $30. Likewise, met coal prices which peaked at $400 per ton are heading under $100, while crude oil is heading for a retest of the $35 level hit during the financial crisis, and copper is on track to plunge from its recent peak of $4 per pound toward $1.

These deflationary currents will suppress nominal income growth for a decade or longer owing to a now commencing counter-trend of low capital investment, shrinking industrial profits, tepid wage growth and falling prices for tradable goods and services.

Accordingly, even maintaining the average nominal GDP growth rate of 2.8% realized over the last seven years will be a tall order for the US economy.

Needless to say, the law of compound arithmetic can be a brutal thing if you start with a delusional hockey stick and seek to bend it back to earth.

In this case, the trustees report’s 5.1% GDP growth rate assumption results in $31 trillion of GDP by 2026. Stated differently, compared to only $3 trillion of nominal GDP growth in the last 7 years we are purportedly going to get $14 trillion in the next 12 years.

But let’s see. If we stay on the current 2.8% growth track, then GDP will come in at $24 trillion in 2026. Since OASDI payroll taxes amount to about 4.5% of GDP, it doesn’t take a lot of figuring to see that trust fund income would be dramatically lower in a $7 trillion smaller economy.

To be exact, the untrustworthies have goal-seeked their report to generate $1.425 trillion of payroll tax revenue 12-years from now. Yet based on a simple continuation of the deeply embedded GDP growth trend of the last seven years, payroll revenue would come in at only $1.1 trillion in 2026 or $325 billion lower in that year alone.

And here’s where the self-feeding illusion of trust fund accounting rears its ugly head. What counts is not simply the end-year delta, but the entire area of difference under the curve. That’s because every cumulative dollar of payroll tax shortfall not only reduces the reserve asset balance, but also the phantom interest income earned on it.

So what happens under a scenario of lower payroll tax revenues is that the $2.7 trillion of current trust fund “assets” begins circling the  accounting drain with increasing velocity as time passes. In effect, the permission granted to Washington to kick the can by this year’s untrustworthies report gets revoked, and right fast.

To wit, instead of a cumulative total of $13.2 trillion of payroll tax revenue over the next 12 years, the actual, demonstrated GDP growth path of the present era would generate only $11.2 trillion during that period. That $2 trillion revenue difference not only ionizes most of the so-called trust fund assets, but also reduces the ending balance so rapidly that by the final year interest income computes to only $25 billion, not $100 billion as under the current report.

In short, by 2026 trust fund revenue would be $400 billion per year lower owing to lower taxes and less phantom interest. Accordingly, the current modest projected trust fund deficit of $150 billion would explode to upwards of $600 billion after the last of the phony interest income was booked.

Needless to say, that massive shortfall would amount to nearly 33% of the projected OASDI outgo of $1.8 trillion for 2026. More importantly, instead of a healthy cushion of $2.4 trillion of assets (or two year’s outgo) as the untrustworthies projected last year, the fund balance would be down to just $80 billion at year-end 2026.

Now that’s about 15 days of the next year’s OASDI outlays. The system would go tilt. Benefits would be automatically cut back to the level of tax revenue or by 33%. The greatest social crisis of the century would be storming out of every hill and dale in the land.

Yes, Jacob Lew is a Washington-Wall Street apparatchik who wouldn’t grasp the self-destructing flaws of trust fund accounting if they smacked him in the forehead. And the same is apparently true for the other trustees.

But here’s where the venality comes in. In order to goal-seek to 5% nominal GDP growth, the trustees report assumes that real GDP will average 3.1% per year through the year 2020.

Now, c’mon. Since the pre-crisis peak in late 2007, real GDP growth has averaged only 1.2% annually, and only 1.8% per year during the entire 16-years of this century.

Anybody who signed up for 3.1% real growth through 2020——that is, for scorching growth during month 67 through month 140 of a tepid business cycle expansion which is already long-in-the-tooth by historical standards—-is flat-out irresponsible and dishonest.

Calling their mendacious handiwork the “untrustworthies report” is actually more flattering than they deserve.

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Revolution is closer than you think…

Following Angela Merkel's earlier calls for German CEOs to hire refugees, and as Martin Armstrong notes, Germany has raided its healthcare funds to support the refugee crisis…

The government passed a law that allows them to take 1.5 billion euros from the liquidity reserve of the public health care fund (10 billion euros in total, paid by all members and additionally by the taxpayer) and to give that money to refugees / asylum seekers.

 

What would you call this? Insane?

We thought a reminder of the tensions that are bubbling under the surface in Germany.  

As VoxDay noted appropriately, Germany's elite is going to get a well-deserved one soon as German President Joachim Gauck was booed and attacked in the streets of Sebnitz, Saxony after he blurted out the following unbelievbable statement:

“The elites are not the problem, the people are the problem.”

Official German State TV and State Radio reported that "a handful of right wing extremists" have attacked the president and disturbed the otherwise peaceful and welcoming reception of the President. This is simply not the case, as seen in the video…

The people repeatedly shouted "Traitor!", "Get out!", "We don't want STASI Pigs" and "We are the people!".

One man, carrying his young son on his shoulders, appears to have spit on him whilst exclaiming insults. Other citizens were heard saying "You killed our children" and "What have you done to us?". They were blocked by police in riot gear, to whom they said "You are protecting warmongers, shame on you!"

The situation escalated and the riot police was forced to use pepper spray.

Heiko Maas, the German Justice Minister, called the attackers "cowards who insult the president because of their personal frustration". He himself was booed off the stage as a traitor by hundreds of Germans at the annual Labor Day celebration on the 1st of May. He said that they will be persecuted immediately, as "it cannot be allowed that such a tiny minority has influence on the political climate in Germany".

Writing in The Wall Street Journal, Peggy Noonan explained perfectly…

The larger point is that this is something we are seeing all over, the top detaching itself from the bottom, feeling little loyalty to it or affiliation with it.

 

It is a theme I see working its way throughout the West’s power centers.

 

At its heart it is not only a detachment from, but a lack of interest in, the lives of your countrymen, of those who are not at the table, and who understand that they’ve been abandoned by their leaders’ selfishness and mad virtue-signalling.

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Submitted by MN Gordon via Acting-Man.com,

Short Circuited Feedback Loops

Finding and filling gaps in the market is one avenue for entrepreneurial success.  Obviously, the first to tap into an unmet consumer demand can unlock massive profits.  But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven.

 

Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic progress; this price decline has benefited consumers immensely and vastly enriched their lives. This makes it all the more baffling that central bankers insist we absolutely need price inflation in order to have economic growth (in fact, it actually demonstrates what dangerous lunatics they are). – click to enlarge.

 

Unfortunately, finding and filling gaps in the market is much easier said than done.  Even the most successful serial entrepreneurs fail more often than they succeed.  What’s more, success in one endeavor doesn’t guarantee success in another.

Anyone who has ever developed and marketed a new product from concept through sale knows how difficult it is to achieve profitability.  For every good idea there must be a hundred bad ones.  Yet the only way to really know the difference between a profit generating idea and a cash hemorrhaging fiasco is through trial and error.

Success and failure provide real feedback.  They deliver information – at a profit or loss – to businessmen and investors.  What’s working?  What isn’t?  What adjustments can be made to help eke out a profit?  These are the types of information that only the market can provide.

But what happens when the feedback loop is short circuited and a potential gap in the market is not really a gap after all?  What if fraud and folderol turns a desert wasteland into a tropical oasis mirage?  What happens is that otherwise intelligent investors are duped into throwing good money after bad.

 

Swindle and Speculation

In his perennial classic Manias, Panics and Crashes, author Charles Kindleberger includes an entire chapter on the Emergence of Swindles.  One of Kindleberger’s insights is that speculative booms, often resulting from the cheap credit provided by loose monetary policy, sow seeds of white collar crime and subsequent financial distress.  Here we turn to Kindleberger for edification:

“Commercial and financial crises are intimately bound up with transactions that overstep the confines of law and morality, shadowy those confines may be.  The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom.  Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves.  And the signal for panic is often the revelation of some swindle, theft, embezzlement, or fraud.”

 

Charles Kindleberger’s famous tome on manias and crashes. The phenomenon that manias are as a rule accompanied by massive fraudulent activity that is only uncovered after their demise could be observed again and again, throughout history.

 

No doubt, sleight of hand, smoke and mirrors, trick plays, and the like, add a certain lighthearted delight to life.  The fumblerooski.  The melon drop.  The kid that throws mud at your car half a block before his brother’s car wash.

Cons and scams like these sharpen our wits.  They prepare us for people and situations that aren’t quite as upright as they first appear.  Specifically, they help protect our pocketbook from encounters with mutual fund brokers, Dan Rather, and charity fundraisers.

Of course, large scale operations to separate fools from their money are no joke.  The consequences can be ruinous.  Victims may never recover.

 

The Great Stock Market Swindle

Last week, a Bloomberg report (via  Zerohedge) crossed our desk which exquisitely captures the symbiotic disharmony of swindle and speculation described by Kindleberger.  Here’s a partial extract:

“Call it the perfect pyramid scheme for the ‘new normal.’

 

“In the latest example of the venture capital euphoria that has dominated the US in recent years, not to mention potential fraud, Bloomberg reports that vegan food start-up Hampton Creek, had a novel idea of how to spend the venture funding it had raised: by buying up its own product.  To wit:

 

‘“In late 2014, fledgling entrepreneur Josh Tetrick persuaded investors to plow $90 million into his vegan food startup Hampton Creek Inc.  Tetrick had impressed leading Silicon Valley venture capital firms by getting his eggless Just Mayo product into Walmart, Kroger, Safeway, and other top U.S. supermarkets within about three years of starting his company.

 

‘“What Tetrick and his team neglected to mention is that the startup undertook a large-scale operation to buy back its own mayo, which made the product appear more popular than it really was.  At least eight months before the funding round closed, Hampton Creek executives quietly launched a campaign to purchase mass quantities of Just Mayo from stores, according to five former workers and more than 250 receipts, expense reports, cash advances and e-mails reviewed by Bloomberg….’

 

“Wait is that legal?  Well, technically it is not illegal, although it is extremely unethical (imagine if, gasp, Facebook was using click-farms to fabricate users – it’s the same concept) however it underscores the money printing culture permeating the VC community, which through its generosity may be implicitly enabling fraud.  Case in point: Theranos, and now Hampton Creek.”

 

Bloomberg video on the (allleged) Hampton Creek mayo buy-up scam

 

Indeed, one of the reigning hallmarks of our time is the abundance of deceptions that presently pass for standard practice.  For example, not long ago, dividend recapitalization – using debt to pay stock dividends – was the sort of dubious practice reserved for private equity firms.

These days, thanks to the incentive of the Fed’s ultra-low interest rates, using borrowed money to buy back shares or pay stock dividends is a practice commonly executed by many S&P 500 companies.

Perhaps this is one reason why stock prices have gone up in the face of 15 months of declining earnings.  Make of it what you will.  From our vantage point it appears the entire stock market has turned into a great swindle.

Caveat emptor – let the buyer beware.

 

Sometimes they don’t come back: A few famous market manias and crashes – only one of them (the DJIA) actually recovered from its losses, but it took 25 years and only one or two of the components of the average at the time of the crash are still part of it today. Many investors never lived to see the day when they would have theoretically reached breakeven in nominal terms – and very few of them saw the day when it finally recovered in real terms sometime in the mid 1980s.

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Raleigh police were working to secure Crabtree Valley Mall Saturday afternoon after gunshots were fired inside. According to NRAL, as of 3 p.m., police said no one was being allowed in or out of the mall. No suspects have been arrested.

Raleigh police were called to the mall at about 2:45 p.m. Glenwood Avenue was shut down near the mall as a result of the shooting. Drivers should avoid the area. 

Video from the scene posted on social media showed people running from a store.

#BREAKING
Shoppers take shelter inside a store in Crabtree Valley Mall in #Raleigh,#NorthCarolina http://pic.twitter.com/WGDHQ8a5ie

— Cloud News (@cloudnews7) August 13, 2016

Someone just got shot at Crabtree and it was so scary me and Olivia are crying oh my god live footage !!!! http://pic.twitter.com/IAymO1xo8C

— LB ? (@Laurrrenbaker) August 13, 2016

@Laurrrenbaker http://pic.twitter.com/bISllP97ZW

— LB ? (@Laurrrenbaker) August 13, 2016

THERE IS A SHOOTER IN CRABTREE VALLEY MALL. I AM CURRENTLY LOCKED INSIDE AMERICAN EAGLE. PLEASE SEND PRAYERS

— saleena wilson (@saleenur) August 13, 2016

Currently at Crabtree. Hope everyone’s okay ???? http://pic.twitter.com/nxT4XQjv7V

— Hasmin Gale (@GaleHasmin) August 13, 2016

A look at Crabtree Valley Mall … Heavy police presence. Part of mall evacuated. Working to learn more.@WNCN http://pic.twitter.com/GoiEqo56I5

— Amy Cutler (@AmyCutlerNews) August 13, 2016

Wake County EMS scanner traffic just said “get vests on” re: Crabtree. Chilling.

— Brant Wilkerson-New (@BrantGNR) August 13, 2016

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In what may be some of the best, and most lucid, writing on everyone’s favorite topic, namely “what happens next” in the evolution of the financial system, Deutsche Bank’s Dominic Konstam, takes a look at the current dead-end monetary situation, and concludes that in order for the system to transition from the current state of financial repression, which has made a mockery of all asset values due to central bank intervention, to a semi-credible system driven by fiscal stimulus, there will have to be a crash, one which jolts policymakers out of their stupor that all is well simply because stocks are at all time highs.

And since a legitimate fiscal stimulus is what is needed to re-ignite the economy, US and global GDP will continue declining, even as stocks keep rising to new all time highs, not on fundamentals (which are all pointing in the opposite direction), but due to even more central bank intervention and financial repression, thus a Catch 22, which ultimately – according to DB – ends in the only possible way: with a major crash. 

As Konstam puts it, “the status quo could continue for several years yet – if nothing “breaks” in the system” but “without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations.”

As for the conclusion, or why a financial shock is long overdue, KOnstam says that “ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus. “

This is critical – and inevitable – as only a shock can lead to an “unwind of the falling yield/rising equity market where all financial assets trade badly.”

In other words the end of financial repression will see price levels fall so that yields once again look attractive, or said otherwise, there will be a demand for Treasuries, even without the perpetual implicit backstop of central bank purchases.

For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.

Which brings us full circle: recall that over the past few months virtually every prominent investment bank, from JPMorgan to Goldman Sachs have warned clients that a selloff is coming. Now, Deutsche Bank has taken it to a whole new level, explaining why a financial crash has to happen to purge the system from the toxic aftereffects of 7 years of financial repression, and to kickstart a fiscal stimulus that will not happen unless markets tumble in the first place.

And while Konstam’s line of reasoning is absolutely correct, we doubt just how his employer would look upon a market plunge that wipes out 30%, 40%, or even 50% of asset values: will Deutsche Bank even survive such a crash? As such we doubt that the strategist’s analysis, and forecast, will be endorsed by his employer, even if by now it is clear to all that only a major crash, i.e. a global reset, can kick start the world out of its zombie-like, centrally-planned existence, into the long overdue phase of whatever it is that comes next.

* * *

Below is Konstam’s full must read analysis:

Stocks must fall for yields to rise – but unlikely to happen anytime soon

It is pretty much understood that we are in full on financial repression mode, as witnessed by super benign core yields lead by lower real yields with more recently the further downward drift in euro peripheral yields, including the UK. The new high in equities is consistent with our view of financial repression that necessarily has yield returns on all assets being incrementally replaced by price returns – stretched relative valuations follow already increasingly stretched absolute valuations. The last round of economic data does little to suggest any change in this dynamic. As we highlighted last week the conundrum for the US is how an overly strong labor market without meaningful wage inflation resolves itself against markedly weak productivity data with a GDP cake that if anything seems to be stagnating.

With the current status quo, it is clear to us that US yields if anything are still too high – we think they are near the upper bound of a range that pivots closer to 1.25 percent with real yields in particular too high. This probably still reflects a reluctance of investors to get meaningfully long the market although much of the short base has been covered and this in turn reflects a still fairly strong consensus on the economics front that the labor market strength can still resolve itself through higher wages and a virtuous circle of rising demand and productivity – a scenario we would not rule out but not our central view.

More importantly however are what prospects there may be to jolt us out of this financial repression and to what extent regardless of proactive policy, is there a natural end to financial repression – at some point does something have to break in the system. On the former the most likely candidate is obviously some form of global fiscal stimulus. Despite optimism around this in early July we have not exactly had the green light on either helicopter money in Japan or Italian bank bailout. It is still too early to call the US election and stimulus prospects here but the general sense is that it is still difficult to sense the urgency when equities make new highs. Policymakers aren’t used to dealing with financial repression and that unfortunately is one of the defining characteristics of stagnation.

We suspect the fall will be defined by markets looking for dramatic policy news that somehow “responds” to super low bond yields and underwrites rising risk asset prices but only to be disappointed precisely because policymakers don’t bide the urgency. The result is that yields can fall still further even with risk assets still trading well – hanging onto their relative valuation rationale.

The failure of a policy response allows for more financial repression. We are anyway already beyond the point of preemptive policy since preemption is supposed to recognize and avoid looming problems beforehand. It is clear that the nature of those problems are already material including squeezed interest margins for banks, insurance solvency issues etc. But to be fair, the lack of a fiscal response itself bears witness to the perceived fiscal stress during the 2008 crisis and the need to insulate taxpayers. Additional fiscal burdens can be thought of as a variant of financial repression where future inflation and negative real rates do the redistribution as opposed to the structure of the fiscal regime. Helicopter money fuses financial repression from the money side with the fiscal response in a potentially dramatic way whereby the would be spenders get to spend a lot more directly at the expense of the ongoing savers. And while it may have its own political hurdles that ultimately are insurmountable, it offers a perfectly reasonable alternative equilibrium option where the goal is to raise the price level as well as improve the real growth outlook by overcoming excess savings. The fusion of fiscal with monetary policy can also be appreciated in the context of the fiscal theory of price where monetary policy can offer infinite paths for money growth and potential nominal growth but fiscal policy effectively selects which path is realized based on an equilibrium condition that the NPV of all future budget deficits needs to sum to zero.

* * *

The status quo could continue for several years yet – if nothing “breaks” in the system. There are ways of course for either avoiding breaks or at least patching them – mitigating the impact of negative rates on banks is now in vogue with subsidized bank loans for on lending. And we may yet see soft forms of bank bailout still being allowed. This is similar to the use of alternative yield curves for discounting insurance liabilities.

The conclusion is that without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations. Ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus.

The logic would also fit with the same correlation structure for financial assets – an unwind of the falling yield/rising equity market where all financial assets trade badly. In other words the end of financial repression will see price levels fall so that yields once again look attractive. For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.

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Submitted by Tho Bishop via The Mises Institute,

 

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In yet another unprecedented move for a US election, Donald Trump has stepped up his "rigged election" rhetoric today,as his campaign seeks to recruit "election observers," telling a large crowd in Pennsylvania last nigth that "the only way they can beat [me] in my opinion, and I mean this 100 percent, if in certain sections of the state they cheat."

As a reminder, Donald Trump, speaking last week in Columbus, Ohio, raised the concern of a rigged election directly… "Bernie shouldn't have made a deal but he lost [because] it's rigged… and I am afraid the [national] election is going to be rigged."

 

"I think my side was rigged. If I didn't win by massive landslides, think about what we won in New York, Indiana, California, 78 percent, that's with other people in the race."

Trump made similar complaints about a “rigged” process during the Republican primaries. As Roger Stone concluded,

"If you can’t have an honest election, nothing else counts,"

Warning that…

"I think he’s gotta put them on notice that their inauguration will be rhetorical, and when I mean civil disobedience, not violence, but it will be a bloodbath. The government will be shut down if they attempt to steal this and swear Hillary in. No, we will not stand for it. We will not stand for it."

And it appears Trump's campaign are trying to pre-empt some of that possible shenanigans. As Politico reports,

In a move that's unprecedented in a presidential election, the campaign late this week launched a page on its website proclaiming, "Help Me Stop Crooked Hillary From Rigging This Election! Please fill out this form to receive more information about becoming a volunteer Trump Election Observer."

 

Those who wish to be a Trump "observer" are asked to fill out information on the website that should match their voter registration. Once submitted, voters are directed to a donation page.

 

 

Hours before the site gained traction Friday night, Trump said at a rally in Altoona, Pennsylvania, that the only way he would lose in Pennsylvania is "if cheating goes on."

 

“She can’t beat what’s happening here. The only way they can beat it in my opinion, and I mean this 100 percent, if in certain sections of the state they cheat,” Trump said of Clinton campaign in Pennsylvania.

Although laws vary from state to state, campaigning by political parties is typically banned at polling sites under voter intimidation laws; and so, we suspect, this won't end well as BlackLivesMatter activists will surely be motivated to do the same… to ensure no 'intimidation' takes place.

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Submitted by Josie Wales via TheAntiMedia.org,

The U.S. government just threw another log on the fire, adding to the blaze of paranoia it’s been generating around the nation’s newest threat — foreign cyber attacks. In a memo sent out July 19, Pentagon employees were told to keep Pokemon Go off their phones to prevent spying by foreign countries.

According the The Washington Times, an anonymous source told Inside the Ring the memorandum “warned all officials and defense contractors that playing Pokemon Go, the hugely popular Japanese video game, poses a potential a security risk to secure and sensitive facilities.”

The hugely popular augmented reality game, an app downloaded and played on smartphones, took the world by storm in the beginning of July as millions scrambled to capture little digital creatures within days of its launch. According to the Pentagon’s source, security concerns quickly arose:

“Pokemon Go uses the Global Positioning System satellite network for maps of areas around the handheld mobile devices that utilize the application. Pentagon security officials are concerned the data obtained playing the game could provide pinpoint accuracy on the locations of rooms and other sensitive facilities where secrets are stored.

 

The game also could provide personal data on Pentagon officials with access to secrets, information that could be used in cyber attacks or spying recruitment attempts. Pokemon Go employs Google Maps to place users within a real-world city location and then shows a figure of the game player on the map.”

Ironically, smartphone apps like Google Maps, Facebook, Gmail, Twitter, and others have not been banned despite the treasure trove of personal information and location-tracking data the platforms collect. The Pentagon even bragged to the press when Secretary of Defense Ashton Carter joined Facebook last year.

The Pokemon Go ban adds to the years-long fear-mongering the government has rolled out following high-profile cyber attacks. Cyber surveillance bills like CISPA (2.0, 3.0) and SOPA have been sold to the public as reactionary solutions to those problems.

It is obvious that the government and its agencies will look for every opportunity to scare the American people into begging for protection from any boogeyman they can piece together.

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