Not content with releasing one bearish note per day, Goldman has upped the ante to two (or more).
Following yesterday’s scathing attack on the ECB by Deutsche Bank, Goldman felt the urge to chime in as well parallel to the German bank’s accusations that Goldman’s former employee, Mario Draghi is set to destroy the Eurozone with his monetary lunacy, and in a note by Huw Pill, Goldman said that “as the ECB shifts from a passive, intermediation-driven form of balance sheet expansion towards a more pro-active QE-driven policy, concerns about the impact on financial stability will inevitably and rightly rise.“
Of course, Goldman couldn’t completely run over its former managing director – just imagine the Goldman-related “discovery” that a criminal probe would reveal – and so it tried to mitigate its sharp assessment, saying “yet the ultimate objective of these ‘active’ central bank balance sheet policies is to revive aggregate demand and boost nominal growth. If successful, the beneficial effects of the macroeconomic improvement on financial stability would more than outweigh the short-run and partial implications coming from incentivising greater risk-taking.”
Right. The only problem is that 8 years later, there has been no boost in aggregate demand, in fact just the opposite, not to mention a total collapse in DB stock as a result of NIRP crushing the NIM carry trade, which is why so many banks and pension funds are now furious at the ECB.
However, it wasn’t just the ECB that Goldman took issues with. In a separate note by Goldman’s HY analysts, the firm announced that it has boost its 2016 default forecast by nearly a quarter, from 17% to 21%, and now expects a substantially greater amount of debt – mostly high yield – to default this year.
Here is Goldman’s math:
After a quiet Jan/Feb, E&P bankruptcies picked up steam in late 1Q ahead of spring borrowing base redeterminations. By our math, about $30bn of par value debt has defaulted in the HY E&P space YTD, representing about a 17% default rate.
On the back of our bottom up analysis we are now raising our full year default forecast to 21% from 17% previously. Note that our numbers exclude many smaller producers without tradable debt. Including this cohort would boost total defaulted E&P debt in 2016 to about $35bn based on our analysis.
One driver of defaults exceeding our forecast in 2016 has been companies preemptively filing prior to a real liquidity crunch. As shown in the chart in the body of this report, a number of E&Ps have recently filed with substantial cash balances. Notably Linn Energy (NC) filed with $1,060mm of cash (11% of total debt balance), SandRidge with $694mm (19%) and Midstates Petroleum with $301mm (15%).
Normally, there would be a silver lining to all these bankruptcies – the one Saudi Arabia has been gunning for all along, namely the collapse in high-cost oil production. Only in this case, the wave of default, while substantial, will hardly put a dent on overall shale production, and as a result “the industry cannot bankrupt its way into a more balanced oil market.”
Despite the increase in bankruptcies, however, we continue to believe that the industry cannot bankrupt its way into a more balanced oil market. We estimate that production in the hands of bankrupt E&Ps is still just 762k boe/d, split 30%/60%/10% between oil (229k b/d)/natural gas (2.7 bcf/d)/NGLs (80k b/d). In short, we believe <3% of US oil production resides with bankrupt companies.
Furthermore, as we said several months ago, in addition to still being a relatively small quantity, production in the hands of distressed or bankrupt producers is not rolling over as quickly as some had predicted.
Using the Class of 2016 E&P bankruptcies as a proxy suggests that oil production in distressed/bankrupt E&Ps is rolling over by about 19% y/y. Extrapolating this math suggests that natural declines frombankrupt E&Ps (currently producing about 227k b/d of oil) will contribute only about an additional 43k of oil declines over the coming year to a market that we believe is oversupplied by about 1mm b/d globally. Finally, we note that natural gas production is rolling over more slowly, at a rate of about 4% y/y as of 1Q16.
The unspoken message here is that not only is Goldman now actively bearish on the stock market, and indirectly on monetary policy, it is starting to hint at rising weakness in the bond market, and reading between the lines of this report, we would not be surprised if Goldman’s commodity team were to come out in the next few weeks with a downgrade of crude, saying it has run up too far, too fast, and that the time has come to sell, especially since the ongoing default wave is doing very little to “rebalance” US shale production (i.e., put much more of it out of business), which in turn will force the Saudis to go back to square one and unleash another major oversupply impulse, sending the price of crude that much lower.
The most transparent administration ever sure has a funny way of showing it. The State Department in particular has had a run of, we'll call it "bad luck", a "glitch" in a video that edits out a key section on whether or not officials ever lie to the public, and then somehow being unable to locate a single email Hillary's IT guy sent or received in nearly four years.
The "glitch" was of course proven to be a lie, and we suspect that someday the inability to locate nearly four years worth of emails will be proven to be a lie as well, but until then we have another issue to focus on. The White House itself has now been caught editing out a damning bit of conversation that White House Press Secretary had with the White House press corps.
During a May 9th press briefing, Fox News reporter Kevin Corke asked Press Secretary Josh Earnest if he could state categorically that "no senior official in this administration has ever lied publicly about any aspect of the Iran nuclear deal." To which Earnest very clearly replies "No Kevin."
Here is a copy of the White House transcript of that briefing according to Breitbart – notice anything missing?
Of course as our readers would pick up on very quickly, the answer Earnest gave to the question was omitted. The White House told ABC News that the answer was "inaudible" so it was left out of the transcript. The press corps pushed Earnest on the issue during a briefing on June 6th, and Earnest responded that there was "crosstalk." The following day, when asked yet again about the scrub and whether or not the Press Secretary would look at reviewing the transcript and possibly amending it, Earnest gave a definitive "No."
This marks the second time that we're aware of recently that the government has admitted lying to the public, and it has been subsequently scrubbed from the records. And that, ladies in gentlemen, is how history is simply erased as though it never even existed.
Breitbart has a video that walks through all of the events quite nicely below
“Following the release of the employment data, and other rather dismal economic data, JP Morgan issued a note (courtesy of ZeroHedge)suggesting the probability of a recession beginning within 12 months has moved from 30% on May 5th, to 36% today.
‘Our preferred macroeconomic indicator of the probability that a recession begins within 12 months has moved up from 30% on May 5 to 34% last week to 36% today (Table 1, bottom row and Figure 1, blue line). This marks the second consecutive week that the tracker has reached a new high for the expansion.'”
But it is not just the employment data that is suggesting the risk of recession in the U.S. has risen markedly in recent months.
While many of the more mainstream economists were cheering the March and April bumps in the manufacturing data as a sign the manufacturing recession had come to an end, I warned you the extremely warm winter weather had skewed the seasonal adjustments and payback would come.
As shown in the chart below, that payback has now occurred. By comparing the Economic Output Cycle Index (EOCI) to both GDP and the Leading Economic Indicator Index, we see a clearer picture of what is currently happening in the economy. (The EOCI is comprised of the CFNAI, Chicago PMI, LEI, NFIB, ISM, and Fed regional surveys.)
With real economic activity still operating at levels normally associated with recessions, Central Bank interventions have been successful at dragging forward future consumption. Unfortunately, when you “drag forward” future consumption today, you leave a “void” in the future that must be filled. Eventually, you reach the point where that future “void” can not be filled.
It is at that point that recessions will eventually take hold. One of the clearest warning signs of that inevitability can be found in the productivity and capacity utilization reports. As shown below, the downturn in capacity utilization rates and weak productivity growth have historically only been witnessed during recessionary periods.
“But we clearly aren’t in a recession.”
True, but that is only because we have not yet gotten the annual revisions to the economic data. Given the weakness in profits and revenues, a reflection of real economic activity, those revisions will likely be negative.
GDP Nowcasts: NY vs. Atlanta
My friend and proud new father, Salil Mehta recently penned an interesting piece of analysis comparing the competing GDP NowCast measures of the New York and Atlanta Federal Reserve branches. To wit:
“As it turns out, the public benefits from seeing probability and uncertainty in action, as these two competing measures provide (sometimes uncontrollably) differing signals throughout a quarterly cycle. The New York statistical product is more nascent (only 8 irregular readings so far), but already we have some initial empirical insights into these products precision when the markets use them jointly.
With just one of the bank’s current Q2 GDP nowcasts, we would have expected the 90% confidence interval of the relatively buoyant 2.45% nowcast to extend on the low-side to 1.0%. However when we combine the insights from both banks’ nowcasts (here 57 days prior to report release), this 90% confidence interval only extends on the low-side to 1.8%. This low-side on the confidence would have been even lower at 1.5%, if both nowcasts were perfectly identical, correlated random variables! Which they are not. At some point still, the accuracy of the unconventional analytical approach of these nowcasts will produce an error larger than would be expected generally between the advance estimate, and the “final” annual revision. And the Federal Reserve themselves do not consider the nowcasts to be by themselves a superior model most of the time.”
To start, see this graphic below which includes all of the paired nowcasts between the two banks, since April 8 (21 days prior). While Atlanta provides nowcasts daily, in the blue shaded region we see all 3 nowcasts paired between the two banks for Q1. We notice that the Atlanta nowcast increased through April 29 (0 days prior), while the New York nowcast dropped. Both converged to ~0.7%. This was higher than the 0.5% first (advance) reading shown as an “x“, and lower than the 0.8% preliminary (second) reading shown as a triangle. The typical initial error on the day or the advance GDP release is (given on the link above) a lot worse, at ~0.9%.”
“New York started providing nowcasts for Q2, on April 8 (113 days prior). Atlanta however didn’t join until April 29 (92 days prior). We see this data in the red shaded region, along with the 5 (8-3) later nowcasts from both banks. For April 29, there was a 1.0% difference between the 0.8% New York nowcast and the 1.8% Atlanta nowcast. By the most recent nowcast of June 3 (falling only slightly due to the May labor report disaster of 38k with 59k downward revisions to prior months), we see that both nowcasts are near 2.45%. Over Q2 this time, the New York nowcast has continuously increased. It is worth noting that on this day New York provided a Q3 “nowcast” as well. Doesn’t forecasting Q3, in Q2, violate the definition of a “now”cast?
Given that the time to Q2 release is still fairly high at 57 days, the joint-confidence interval tends to still be large (though a little smaller than at 92 days). Given only two quarters of joint nowcasts, it is difficult to gauge the shape of the confidence, yet it should (centered as shown below) around the most recent nowcasts.”
“We can imagine that as we progress, towards the Q2 release date, that the low-side of the 90% confidence would fall more along the New York nowcast versus the Atlanta nowcast. We can see something near 1.8% as this low-side of the growth nowcast, and a risk to market participants who might be expecting a >2% GDP growth. Which would be an achievement we have not had in a year.
And nonetheless, the typical revision from these advanced estimates to the final revision (the annual revisions) is more than 1%, implying just focusing on matching to the advance reading is partly a meaningless given that all the Big Data in the world, between two banks, still can’t provide a more accurate read on what is really happening.
And in fact even as they tinker and “evolve” the models it is certainly going to lead to a wild miss at some point.“
Long Time Since Last 1% Down Day
Since the bottom of the market in February, the markets have been lofted higher as the “yield chase” continues. However, there are a couple of issues that suggest the risk of a near term correction have risen markedly.
First, while asset prices have risen there has been a negative divergence in both relative strength and volume. Such negative divergences tend not to last long.
“It’s been a long time since we’ve seen a big down day. Like we discussed on Tuesday, the S&P hasn’t had many large up days during the past several months, but it hasn’t seen a single large down day for two months.
The past few days have been enough to push stocks far above trend. The S&P is now 2-standard deviations above its medium-term 50-day moving average, a signal commonly used as an overbought indication.”
“Like the lack of 1% down days, a push like this so far away from the trend has the potential to be a signal of buying exhaustion, increasing the potential to see a correction that pushes the market back toward its average.”
When combined with “dumb money” back at extremes, shown below, the potential for a correction is high particularly given the magnitude of the advance from the February lows. The market currently has many of the markings of a “melt-up phase” in stocks following a rough start to the year as prices have seemingly become detached from “reality.”
I agree with Jason’s conclusion:
“There have been an abnormally large number of disagreements among the indicators and studies we look at. That has reduced any kind of edge in our niche, usually a good sign to reduce exposure and wait for a better setup. It’s hard to ignore some of the bullish factors outlined in reports over the past several months but when many of our indicators have been at an optimistic extreme and there is a wide spread between Smart and Dumb Confidence, it’s risky to add exposure. Bottom line, I’m sitting on my hands and risking a runaway breakout.”
Another day, another v-shaped recovery as the machines just had to get to Dow 18k…
Stocks still ended the day red (with only The Dow able to momentarily reach unch)…
Since payrolls, futures show yet another v-shaped recovery…
Since payrolls, stocks are on their own… (note gold, bonds, and jpy bid)…
Though today's meltup was all Kuroda… USDJPy 107.00 was all that mattered…
VIX pushed towards 15 from a 12 handle on Tuesday morning…
SKEW (measuring 'tail risk' relative to 'normal' risk) has moved back from 5 month highs in the last 3 days as VIX started to catch up the last few days…
Bonds continued to rally…
10Y closes 1bp above Feb flash-crash close…
The US Dollar index rose today by the most in over 3 weeks…
Crude and copper slumped, Gold and silver pumped despite USD strength…
Forget 'helicopter money', McDonalds appears to have found a way to turn $1 of customer money into $20 of free money… "I was like what is this? A $20 bill in my cheeseburger!"
Dave Cook said when he bit into his burger this morning at a Chesterfield County McDonald's location, he bit into a $20 bill.
Cook said he and his mom stopped at the fast food restaurant for a quick bite Tuesday morning.
Both were shocked when he pulled the $20 out from under the bun. It was sandwiched between two pieces of meat.
"I've heard of people finding strange things in their salad, but never finding something like this a cooked burger," he said. "I was in disbelief, I was like ‘is this for real?’"
Of course, if Cook was an economist he would have ignored it as if it was real someone else would have picked it up already.
Cook said he did not alert store management about his $20 discovery over fears someone would ask for the money back. He later said he would return the money to the restaurant if someone claimed it.
Moments ago TSLA shares slid following headlines from a Reuters report that the US Auto Safety Agency is probing an issue involving Tesla suspensions:
U.S. AUTO SAFETY AGENCY LOOKING AT TESLA MODEL S: REUTERS
TESLA MODEL S PROBE FOCUSED ON REPORTED SUSPENSION ISSUE: RTRS
What's going on here?
As it turns out, and as reported extensively on the Daily Kanban website overnight, not only has there been a chronic issue involving the safety Tesla Model S suspensions, but there are allegations that Elon Musk's company has been actively trying to cover these up.
As the website notes, "where Tesla crosses the line here is not the “crime” itself, but the coverup. If Tesla used a TSB rather than a recall to fix a safety problem, if it has an institutional bias against ordering recalls and if it uses NDAs as a matter of course to prevent owners from reporting defects, this could become the biggest auto safety scandal since the GM ignition switch affair. That’s a lot of “ifs,” but thus far the evidence indicates that these are very real possibilities. Watch this space for further developments in this troubling story."
Tesla Suspension Breakage: It’s Not The Crime, It’s The Coverup
For several months now, reports have circulated in comment sections and forum threads about a possible defect in Tesla’s vehicles that may cause suspension control arms to break. Many of those reports appeared to come from a single, highly-motivated and potentially unreliable source, a fact which led many to dismiss them as crankery. But as more reports of suspension failure in Teslas have come in, Daily Kanban has investigated the matter and can now report on this deeply troubling issue.
Our investigation began in earnest upon reading a thread titled “Suspension Problem on Model S” in the Tesla Motors Club forum. The original poster (OP) in that thread described the suspension in his 2013 Model S (with 70,000 miles) failing at relatively low speed, saying the “left front hub assembly separated from the upper control arm.” Images of the broken suspension components showed high levels of rust in the steel ball joint and the OP reported being told by Tesla service center employees that the “ball joint bolt was loose and caused the wear,” which was “not normal.” Because his Tesla was out of warranty, the repair was reportedly sent to Tesla management for consideration.
According to a subsequent post by the OP, Tesla management refused to repair the broken suspension under warranty despite the “not normal” levels of wear reported by the service techs. Then, just days later, the OP reported that Tesla had offered to pay 50% of the $3,100 repair bill in exchange for his signature on a “Goodwill Agreement” which he subsequently posted here (a scan of the stock agreement can be found here). That agreement included the following passage:
The Goodwill is being provided to you without any admission of liability or wrongdoing or acceptance of any facts by Tesla, and shall not be treated as or considered evidence of Tesla’s liability with respect to any claim or incidents. You agree to keep confidential our provision of the Goodwill, the terms of this agreement and the incidents or claims leading or related to our provision of the Goodwill. In accepting the Goodwill, you hereby release and discharge Tesla and related persons or entities from any and all claims or damages arising out of or in any way connected with any claims or incidents leading or related to our provision of the Goodwill. You further agree that you will not commence, participate or voluntarily aid in any action at law or in equity or any legal proceeding against Tesla or related persons or entities based upon facts related to the claims or incidents leading to or related to this Goodwill. [Emphasis added]
This offer, to repair a defective part in exchange for a non-disclosure agreement, is unheard of in the auto industry. More troublingly, it represents a potential assault by Tesla Motors on the right of vehicle owners to report defects to the National Highway Traffic Safety Administration’s complaint database, the auto safety regulators sole means of discovering defects independent of the automakers they regulate.
The OP subsequently posted that “Tesla and I have come to terms,” and later wrote “I can not speak as to the agreement that Tesla and I signed. I can only say that this incident was reported to NHTSA and there is an ongoing investigation.” This week the OP confirmed that NHTSA is indeed investigating the defect and that
They said that the were of poor quality and failed prematurely. They are looking for other examples or samples to test, to see if it is a bad batch at the production level or a bad design.
He later posted an email he received from a NHTSA investigator in reply to his question about whether the suspension joints had been tested, which states
Yes, the joints were not good and we are looking for more examples to test.. We are in contact with Tesla requesting more information on these parts and others in the suspension. I will keep you updated …
Daily Kanban has contacted NHTSA asking for confirmation that it is indeed investigating a defect in Tesla’s suspensions and we will post the agency’s response as soon as it arrives. In the meantime, we can not speculate about the nature of this defect beyond pointing out that Tesla itself issued a Technical Service Bulletin (TSB) in March of 2015, which indicates that a “known non-safety-related condition” applied to the front lower control arm of the Tesla Model S. That TSB indicates that “greater free play than expected” can develop in the suspension’s steel ball joints, which can damage the aluminum control arm.
If the issue described in the TSB is what caused the suspension failure described above, it would be a major problem for Tesla Motors. The OP’s excessive ball joint wear should have been a known issue from the TSB issued over a year before. Moreover, if the issue described in the TSB can cause suspension failure, Tesla’s use of a TSB rather than a recall –the legally mandated technique for repairing defects that could affect vehicle safety– was deeply problematic. This is precisely the behavior that GM was discovered to have engaged in during the 2014 ignition switch recall scandal, and in the words of former NHTSA Administrator Joan Claybrook
“Technical-service bulletins have been recall-avoidance devices — there’s no question about that.”
We won’t know whether this is in fact the case until NHTSA makes a statement about the situation, but another troubling detail indicates that Tesla may have consciously evaded a recall during and after the GM ignition scandal. A tweet by Tesla Motors CEO Elon Musk on January 14, 2014 states
“The word ‘recall’ needs to be recalled.”
Musk’s tweet was subsequently deleted, but reference to it lives on at this Bloomberg story by Musk’s authorized biographer Ashlee Vance.
Until NHTSA publicizes the findings of its investigation, the sheer scope of Tesla’s apparent suspension defect won’t be clear. But other reports of suspension breakage are not hard to find, both in the “Suspension Problem on Model S” thread at TMC, elsewhere on that forum or around the internet. A gallery of photos apparently assembled by the hard-working Cassandra in this story shows a disturbing number of wrecked vehicles with broken suspensions. But these photos, like the tworeports of Teslas driving off cliffs and other reports of inexplicable crashes, are circumstantial evidence at best. Until experienced investigators perform forensic analyses that can confirm whether suspension failure occurred before any of these crashes, these examples serve only to show the worst case scenario for Tesla.
But the most troubling aspect of this affair is not the defect itself, or even Tesla’s possible use of a TSB instead of a recall. Defects happen to every automaker, and the line between a safety-related and non-safety-related defect can be subtle. The aspect of this story that demands explanation is not the crime, but the cover-up: why did Tesla demand an NDA from an owner in exchange for repairs to a defective vehicle? Even if there is a legitimate reason for such an agreement, Tesla should have made it explicitly clear that the agreement in no way infringes on an owners right to report defects to NHTSA.
Daily Kanban has subsequently found two other examples of Tesla demanding an NDA from owners in exchange for satisfaction regarding its vehicle defects. One involves another OP from the Tesla Motors Club forum, who started a thread called “Out of warranty concerns about Tesla” describing Tesla’s out-of-warranty repair of a variety of problems with his vehicle including “the loss of control and abs, steering, traction etc.” After directly emailing Jerome Guillen, Tesla’s Vice President of worldwide service and deliveries (currently on leave from the company), the OP quickly heard back from Tesla and later reported that extensive repairs had been made in exchange for an NDA. Unlike the OP from the “Suspension Problem” thread, the OP from “Out of warranty concerns” appears to have kept to the terms of the agreement. In any case, the defects he describes certainly seem capable of posing a threat to safety and probably should have been reported to NHTSA’s complaint database.
The third example of this practice comes from a (since-resolved) Better Business Bureau complaint against Tesla (dated 5/20/16), which alleges that the automaker demanded an owner sign an NDA in exchange for repossession of his or her defective Tesla Model X. To wit:
Tesla refuses to make me whole on its repossession of the defective vehicle sold me unless I sign a hush up agreement with $150,000 penalty violation. Tesla sold me a defective Model X. Tesla then took back possession of the vehicle and cancelled its registration without my knowledge. Tesla is now refusing to make me whole on the monies I am out unless I sign an agreement where I can not report the defects to agencies or others or the repurchase terms. If I violate Tesla says I am liable for $150,000. Tesla now has possession of the Model X and I am not being made whole for what I am out. Vehicle was riddled with defects.
Since Tesla’s NDA forbids disclosure of the agreement itself, it’s entirely possible that there are considerably more than three instances of Tesla using NDAs to prevent the reporting of vehicle defects. In fact, given Tesla’s generally rabid fanbase it’s almost surprising that these three incidents have even come to light on the internet.
If it is indeed Tesla’s policy to demand an NDA for any goodwill out-of-warranty work, or in exchange for making a dissatisfied owner whole, there can be little doubt but that this practice chills defect reporting to NHTSA’s database. Based on this 2015 Inspector General report on NHTSA’s “inadequate data and analysis,” it’s clear that the auto safety regulator relies heavily on owner reporting as a source of data not controlled by automakers themselves. Given these circumstances, any attempt by any automaker to compromise the flow of defect reports represents a serious attack on the agency’s ability to independently regulate auto safety. Daily Kanban has requested comment from NHTSA on Tesla Motors’ apparent use of NDA’s to prevent defect disclosures, and will publish the agency’s statement as soon as we receive it.
A suspension that physically snaps while on the road is a troubling problem for any automaker to face, especially one that has touted its car as the safest ever built (although the 2013 Tesla press release touting this claim appears to have been deleted from the company’s website sometime between December 28 2014 and January 13 2015). But unless NHTSA or other investigators are able to conclusively tie a known defect to driver fatality or injury, the mere existence of a defect makes Tesla no different than any other automaker.
Where Tesla crosses the line here is not the “crime” itself, but the coverup. If Tesla used a TSB rather than a recall to fix a safety problem, if it has an institutional bias against ordering recalls and if it uses NDAs as a matter of course to prevent owners from reporting defects, this could become the biggest auto safety scandal since the GM ignition switch affair. That’s a lot of “ifs,” but thus far the evidence indicates that these are very real possibilities. Watch this space for further developments in this troubling story.
Tesla Motors has not returned requests for comment on this story as of the time of publication.
One month after Goldman strategists downgraded equities to neutral on growth and valuation concerns, the firm has turned up the heat on the bearish case with a report by Christian Mueller-Glissmann in which he says that equity drawdown risk “appears elevated” with S&P 500 trading near record high, valuations stretched, lackluster economic growth and yield investors being “forced up the risk curve to equities."
As Goldman notes,
"one large drawdown can quickly erase returns that were accumulated over several years."
Adding that
"since the 1950s most equity markets had several large drawdowns of more than 20%, which have taken several years to recover from. For example in the 1970s the FTSE All-Share had an 80% drawdown in real terms and the DAX declined 69% during the Tech Bubble. One of the largest equity drawdowns across markets was during the GFC, when most global equity markets lost around half their value. And not to forget, the TOPIX has still not recovered from the large drawdowns of the late1980s/early 1990s."
Goldman also points out that large drawdowns are not only relatively frequent, but becoming more global in nature.
Goldman offers several ways to manage through the looming drawdown, but of course, with the heavy hand of suppression on the throat of volatility, who knows if a decline of any sort will ever be allowed again, as Charles Hugh-Smith noted when you strip out volatility and game the system: the system loses all natural resiliency and becomes increasingly brittle and fragile. The only way to make sure it doesn't tremble and shatter into pieces is to guarantee that no decline will be allowed.
Of course then you don't have a market–you have a simulacrum market, a phony fragile shell propped up for PR purposes.
It’s the story of how Eritrea, a tiny, mostly unheard-of country in East Africa, and the United States, do the same awful thing.
Extortion and Threats of Violence
Nearly every country in the world bases its tax system on residency rather than citizenship. If you’re an Italian citizen, and you leave Italy to live and work in Dubai, you don’t have to pay taxes on the income you earn abroad to the Italian government.
But Eritrea levies a 2% flat tax on its citizens who live abroad. If you’re an Eritrean citizen, you have to pay taxes to the Eritrean government, no matter where you live and work.
The media has condemned this as “extortion” and a “repressive” measure by an “authoritarian” government.
The UN has even weighed in. In Resolution 2023, the UN Security Council condemned Eritrea for “using extortion, threats of violence, fraud and other illicit means to collect taxes outside of Eritrea from its nationals.”
You might be wondering, “What’s the controversy? Eritrea is getting criticized, and rightly so.”
That brings us to the only other country on the planet with a similar tax system… the United States.
Eritrea’s Expat Tax on Steroids
The U.S. also taxes its nonresident citizens, no matter where they live or work. This is the exact same thing Eritrea does, except the U.S. does it on a much bigger scale and with absolutely draconian penalties.
Eritrea’s paltry 2% tax is a mere fraction of the top 39.6% federal tax rate that expat Americans have to pay—even if they earn that income abroad and never set foot in the U.S. (The U.S. does exempt a limited amount of foreign earned income if you meet strict requirements.)
Also, Eritrea is a poor country with a very limited ability to actually enforce its 2% expat tax. Many Eritreans who live abroad have never even heard of it. Few are frightened by it.
The U.S., on the other hand, can enforce its byzantine tax system literally anywhere in the world. When you consider its global reach and the penalties—which can only be described as cruel and unusual—it’s no surprise U.S. expats are terrified. And they should be… or they aren’t paying attention.
The U.S. government threatens American expats with prison and outlandish fines merely for not filing a litany of complex forms correctly—even if no taxes are due in the first place.
When you consider all this, it’s not actually fair to compare poor little Eritrea and its relatively modest expat tax to the monstrous U.S. system.
Eritrea is hounded, ostracized, and sanctioned for using—according to the UN—“threats, harassment and intimidation” to “extort” taxes out of its citizens living abroad. You’d think someone would offer at least a peep of criticism for the only other country doing the same thing. But, if you listen for it, you’ll only hear the crickets chirping.
Even though it’s clearly a double standard, it’s easy to understand why it exists.
As the world’s sole superpower and issuer of the premier reserve currency, the U.S. is not accountable to anyone. It’s a heck of a lot easier to push around some small, impoverished African country than it is to stand up to the U.S. juggernaut.
Just ask Canada.
Canadian Confusion
A few years ago, the Canadian government took the drastic step of expelling the head of the Eritrean consulate in Toronto because he’d been involved in levying the 2% expat tax on Eritreans living in Canada.
It seems Canada doesn’t like foreign governments shaking down Canadian residents. That is, unless the foreign government is the United States.
Somehow I don’t expect the Canadian government to give any U.S. officials the boot… even though they regularly shake down far more Canadian residents for much more money.
Curiously, Canada’s reaction to the U.S. expat tax is the exact opposite of its reaction to Eritrea’s. Rather than taking action to prevent the U.S. government from harassing U.S. persons living in Canada, the Canadian government facilitates it by complying with the odious FATCA law—even though it contradicts Canadian law.
The Uncomfortable Truth
It’s always better to face reality than to ignore ugly truths. And the story of Eritrea’s expat tax highlights a big one: Americans live under one of the worst tax systems in the entire world.
The government treats its citizens like milk cows… to be milked until the last drop to pay for welfare, warfare, and other untold waste.
For Americans, there’s almost no escaping the tax farm. I call it the “new feudalism.”
It’s ironic, when you look at U.S. history. In not much time, Americans went from revolting over a comparatively small tax on tea to thoughtlessly submitting to an ever-growing tax monster.
Still, don’t hold your breath for positive change. As long as the U.S. dollar remains the world’s premier reserve currency, no other country will stand up to the U.S. forcing its abhorrent tax policies on the rest of the world.
Positive change through the U.S. political system is just as unlikely. Most Americans passively accept the current tax system as “normal.” And, insofar as they want change, many Americans want more people to “pay their fair share.”
Bottom line: it’s simply not possible to stop this tsunami. You can only build your house on higher ground.
As reported previously, starting today politicians, bankers, influential leaders, chiefs of major global businesses, even actors and pundits will meet at the 64th Bilderberg meeting, set to take place over the next three days at the Taschenbergpalais Hotel in Dresden, Germany, where the official agenda will be quite different from what will really be discussed (read this for a full breakdown).
Former US Secretary of State Henry Kissinger is set to rub shoulders with disgraced ex-CIA (and current KKR director) Director David H. Petraeus, Philip M. Breedlove, former Supreme Allied Commander Europe, Dutch Prime Minister Mark Rutte, Belgian Prime Minister Charles Michel, ex-British MI6 chief John Sawers and IMF boss Christine Lagarde at the
The conference, surrounded by tight hundreds of heavily armed guards and concrete blocks, is notoriously secretive in its discussions which take place under Chatham House rules (nothing can be revealed), and regularly attracts demonstrations against what critics describe as a global meeting of western capitalists, politicians and academics who wield great power behind the scenes.
No journalists are allowed to report on proceedings, however it will be attended by Richard Engel, chief Foreign Correspondent, NBC News, John Micklethwait, Editor-in-Chief, Bloomberg LP and Zanny Minton Beddoes, Editor-in-Chief of The Economist, which is owned by Rothschild, a name which figures intimately in all Bilderberg events.
Other visitors are certainly not welcome at the premises:
Daniel Estulin, author of “The True Story of the Bilderberg Group” describes the meetings as “a shadow world government…. [threatening] to take away our right to direct our own destinies (by creating) a disturbing reality. “Imagine a private club where presidents, prime ministers, international bankers and generals rub shoulders, where gracious royal chaperones ensure everyone gets along, and where the people running the wars, markets, and Europe (and America) say what they never dare say in public.”
As reported yesterday, among the dozens of guests included this year are Eric Schmidt, Executive Chairman, Alphabet Inc., which owns Google; Michael O’Leary, CEO, Ryanair; Thomas de Maizière, German Minister of the Interior; Col. Chris Hadfield, Astronaut; and Thomas Enders, CEO, Airbus Group.
And while there is no way to report from inside the hotel, courtesy of social media we at least managed to get a glimpse of the world’s richest and most powerful people as they made their way to the inner sanctum.