Category: zerohedge

“My people are destroyed for lack of knowledge: because thou hast rejected knowledge, I will also reject thee…” –  Hosea 4:6 (KJV)

In the time that I’ve been here in this physical dimension, I’ve noticed that most people don’t take the time to check things out for themselves.  A simple act of reading a few pages of letters can sometimes rather easily dispel dangerous rumors and myths.

One such myth is the much exalted and revered “vote”.  Sure, you, as citizens of the United States (by which I mean those with the same status of emancipated slaves circa 1863), have a right (actually a privilege) to “vote”, but what is it worth?

Since you are a United States citizen, the value of your vote can be readily determined by simply reading the Constitution.  Now, a lot of times you might hear someone admonishing you to “Read the Constitution!”  To which I say: horseshit.  The Constitution for/of the United States of America is a boring, dry document that basically just lays out the rules for how the government will operate.  The interesting/important parts are the preamble and amendments (especially the first ten, collectively known as the Bill of Rights).  If you know how to read arcane legal documents, the preamble will have clued you in to the true nature of the Constitution: it’s a trust indenture.  And more specifically, a trust indenture designed to operate a corporation in bankruptcy.  Though that’s well beyond the scope of my present screed, I will point you to resources you can consult to understand the true nature of the Constitution.  And if you have desire to read an important founding document, the Declaration of Independence is far more relevant, and an excellent read to boot.

Anyway, the pertinent part of the Constitution for the purposes of this enlightenment is the following, Article II, Section 1.  If you’re a typically lazy American, just read the bolded parts:

The executive Power shall be vested in a President of the United States of America. He shall hold his Office during the Term of four Years, and, together with the Vice President, chosen for the same Term, be elected, as follows:

 

Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole Number of Senators and Representatives to which the State may be entitled in the Congress: but no Senator or Representative, or Person holding an Office of Trust or Profit under the United States, shall be appointed an Elector.

 

The Electors shall meet in their respective States, and vote by Ballot for two Persons, of

whom one at least shall not be an Inhabitant of the same State with themselves. And they shall make a List of all the Persons voted for, and of the Number of Votes for each; which List they shall sign and certify, and transmit sealed to the Seat of the Government of the United States, directed to the President of the Senate. The President of the Senate shall, in the Presence of the Senate and House of Representatives, open all the Certificates, and the Votes shall then be counted. The Person having the greatest Number of Votes shall be the President, if such Number be a Majority of the whole Number of Electors appointed; and if there be more than one who have such Majority, and have an equal Number of Votes, then the House of Representatives shall immediately choose by Ballot one of them for President; and if no Person have a Majority, then from the five highest on the List the said House shall in like Manner choose the President. But in choosing the President, the Votes shall be taken by States, the Representatives from each State having one Vote; a quorum for this Purpose shall consist of a Member or Members from two thirds of the States, and a Majority of all the States shall be necessary to a Choice. In every Case, after the Choice of the President, the Person having the greatest Number of Votes of the Electors shall be the Vice President. But if there should remain two or more who have equal Votes, the Senate shall choose from them by Ballot the Vice-President.

There you go, in black & white “ink”.  And congratulations: you are now a Constitutional Scholar (arguably on at least the same level as Barack Obama ).  Having read that (even just the bolded parts) you now know more about how the president is selected than 99.99% of Americans.  According to the Constitution, there are currently 535 Electors.  These 535 people (allegedly*) select the President of the United States.  Look at all the millions of idiots that parade around protesting against Trump or Hillary or the avowed socialist Sanders, not to mention the buffoons that actually threw their support behind abject morons like Ted Cruz or Jeb Bush.  All these people have never actually read the controlling document of their nation and think their “vote” actually counts towards something.

And what is this mythical “vote”?  I would show you in the Constitution where it defines what your vote is worth, but it’s just not in there.  That’s right, there is no such thing as a “popular vote”.  The Constitution never once mention those words.  It’s a contrived ceremony over which apes may beat their chests, and no more.  My people suffer for lack of knowledge.  Stupid is as stupid does.

So what is voting?  I’m just cynical and jaded and have been around the Sun enough times to know that it’s just a way to fool Americans into thinking they are involved in the selection of their leader.  Iin actuality it’s just a way to psychological subdue those who choose to participate in the farce.  After all, if you vote, you are implicitly lending your approval to the contest.  And by the way, you are utilizing a privilege granted by someone else, in this case the United States.  It’s simply a government benefit to make trick you into feeling better about yourself, like free healthcare.  By voting, you are saying, “Whether I get my way or not, I approve of the outcome of this process by my act of participation.”  It’s a contract, and your vote is the evidence of it.

People, the Constitution is a corporate indenture.  Anything with a President, a Vice President and a Secretary is a corporation.  The United States is a corporation.  The Board of Directors selects the executive staff.  You, the common citizen, are not on the Board of Directors.  At best you’re one of the workers, so you get to bitch and complain to management (your representatives) and they bring it to the executives, and maybe the Board catches wind of your gripes, but by and large you really have no say in who runs the corporation.  You just get to voice a nice opinion which shall be promptly and judiciously ignored.

Now you know.  You are welcome.

Now, how many people, having read this–having read the words in the Constitution itself explaining the process by which the President is selected–and now knowing that it is all a sham, will still go out and cast a vote (and this notwithstanding all the evidence that the voting process itself is rigged by electronic voting systems)?

Seriously?

If even one person is educated by this and not only stops voting but actively de-registers, then my effort will have not been in vain.  Send this to all the dumb people you know who annoy you with talk about presidential candidates and think it’s worth losing friends over a bunch of narcissistic boobs who in the end will sell them out without a flinch of conscience.

I am Chumbawamba.

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Dear readers, the U.S Navy would like to introduce to you its most technologically sophisticated destroyer to date: The USS Zumwalt.

 

The USS Zumwalt (designed by Raytheon) is powered by electricity produced by turbines, has guns that can hit targets over 70 miles away, and has a sharp-angled geometric design that apparently makes the 610 foot long ship 50 times more difficult to detect on radar. It also has a state-of-the-art weapon launcher designed to fire missiles for sea, land, and air attacks. All of this for a taxpayer cost of a mere $4.4 billion.

During the testing phase for the ship, a lobsterman told the Associated Press that the vessel appeared to be a 50 to 60 foot fishing boat on his radar.

The ship is set to be formally commissioned in October in Baltimore, and will have a home port of San Diego.

 

Here is a time-lapse video posted by the Navy showing the ship’s initial launch in 2013

See, the defense budget needs to be as large as it is in order to build behemoth warships such as this. The good news is that it will only show up as small fishing boat when sent to the Fiery Cross Reef in order to agitate China.

The only question is how long before this ship also suffers a terminal failure. Recall that in December one of the Navy’s newest ships had to be towed more than 40 miles to port after it broke down Friday less than a month after it was commissioned into service. The littoral combat ship USS Milwaukee, which cost a far more modest $360 million, broke down just days after its was put into service.

For $4.4 billion, the Zumwalt’s failure should be truly breathtaking.

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No one knows if it's a hand grenade or a nuclear warhead…

The ramp up in Chinese debt accumulation has been a leading concern of investors for years. The average total debt of emerging market economies is 175% of GDP, and skyrocketing corporate non-financial debt has launched China far beyond that number.

The real question is: by how far?

The answer is disconcerting, as VisualCapitalist's Jeff Desjardins warns, because nobody really knows.

If the Chinese debt bomb is detonated, the impact on markets is anybody’s guess. Kyle Bass says the losses would be 5x that of the subprime mortgage crisis, while Moody’s says the bomb will be safely disarmed by authorities far before it goes off.

In today’s chart, we look at various estimates to the size of China’s debt bomb, its payload, and what might spark the fuse…

 

 

CHINA’S DEBT BOMB: THE PAYLOAD

Mckinsey came out with a widely-publicized estimate of China’s debt at the beginning of 2015. Using figures up to Q2 2014, they estimated that total Chinese debt was 282% of GDP, an increase from 158% in 2007.

Since then, various trusted organizations have come up with follow-up estimates.

On the low end, Goldman Sachs came out with an estimate in January 2016 of 216% total debt-to-GDP for 2015. (A few months later, they put out a separate report saying that total debt-to-GDP was estimated to be closer to 270% for 2016.)

On the high end, Macquarie analyst Viktor Shvets said that China’s debt was $35 trillion, or “nearly 350%” of GDP.

The truth is that it’s anybody’s guess. China’s official estimates are fairly useless, and the country has a massive and quickly evolving shadow banking sector that complicates these projections significantly.

 

EXPLOSIVE MATERIALS

Total debt is made up of various components, including government, corporate, banking, and household debts.

In the case of China, it is corporate debt that is particularly explosive. According to Mckinsey, the country’s corporate sector already has a higher debt-to-GDP than the United States, Canada, South Korea, or Germany, even while still being considered an “emerging market”.

S&P Global Ratings now figures that Chinese corporate debt is in the 160% range, up from 98% in 2008. The current number in the United States is a less ominous 70%.

China’s central bank is just as concerned as anyone else. Here’s what the Governor of the People’s Bank of China, Zhou Xiaochuan, had to say about a month ago:

Lending as a share of GDP, especially corporate lending as a share of GDP, is too high.

Xiaochuan also noted that a high leverage ratio is more prone to macroeconomic risk.

 

DEFUSING THE BOMB

If there’s something that can ignite the fuse of China’s debt bomb, it’s non-performing loans (NPLs).

An NPL is a sum of money borrowed upon which the debtor has not made scheduled payments. They are essentially loans that are either close to defaulting, or already in default territory.

China has an official estimate for this number, and it is a benign 1.7% of debt. Unfortunately, independent researchers peg it much higher.

Bullish analysts have the number pegged in the high single-digits, while bearish analysts put the range anywhere between 15% and 21%. Even the IMF says that loans “potentially at risk” would be equal to 15.5% of total commercial lending.

If there’s a place to start defusing the bomb, this is it.

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

He had made the drive enough times to already suspect what he might find. Stride Rite had left Huntington for Mexico at the tail end of the recession; Breyers Ice Cream had closed its doors after 100 years. In the weeks after each factory closing in his part of Indiana, Lewandowski had listened to politicians make promises about jobs — high-tech jobs, right-to-work jobs, clean-energy jobs — but instead Indiana had lost 60,000 middle-class jobs in the past decade and replaced them with a surge of low-paying work in health care, hospitality and fast food. Wages of male high school graduates had dropped 19 percent in the past two decades, and the wealth divide between the middle class and the upper class had quadrupled.

 

“These jobs aren’t the solution so much as they’re part of the problem,” Lewandowski said, and now the result of so much churn was becoming evident all across Indiana and lately in Huntington, too. Fast-food consumption was beginning to tick up. Poverty was up. Foreclosures were up. Meth usage up. Heroin up. Death rate up. In Dan Quayle’s Middle America, one of the biggest news stories of the year had been the case of a mother who had let her three-week-old child suck heroin off her finger.

 

“Despair is our business, and business is booming,” Lewandowski said…

 

“This is how it feels to be sold out by your country.”

 

“It’s pure greed.”

 

“They wanted to add another 6 feet to their yachts.”

 

“We’re becoming like a third-world country. We’re going to have nothing left but fast food.”

 

"Fast food and hedge funds. That’s where we’re going.”

 

– From the Washington Post article: From Belief to Outrage: The Decline of the Middle Class Reaches the Next American Town

Haunting and heartbreaking. What’s worse, it’s not just in the manufacturing heartland where the middle class is getting pummeled. In fact, the middle class is getting squeezed so badly, many cities now see a need to roll out public housing projects targeting this formerly independent and relatively prosperous demographic.

Although I previously reported on this as it pertained to the extremely affluent city of Palo Alto in the post, The New “Middle Class” – Making $250,000 a Year in Palo Alto Qualifies for Housing Subsidies, it appears this may be more of a trend than an anomaly.

As the Wall Street Journal reports in the piece, Rising U.S. Rents Squeeze the Middle Class:

Rising rents in cities across the nation are hurting the poorest residents, but those who are higher on the income ladder might be bearing the brunt of the pain.

 

A  study set to be released on Monday shows that a far bigger proportion of middle-class renters in New York were squeezed by rising rents than were the lowest-income renters.

 

The study by New York University’s Furman Center examined rapidly gentrifying neighborhoods such as Brooklyn’s Williamsburg section and Harlem, where rents jumped 80% and 53%, respectively, between 1990 and 2014. While the share of the poorest families struggling to afford rent in those sections increased by 7.6 percentage points from 2000 to 2014, the share of middle-income households struggling to afford rent jumped 18 percentage points.

 

In Boston, median asking rents have increased at an annual rate of 13.2% since 2010, far outstripping the 2.4% average annual increase in income. Mayor Marty Walsh has pledged to build 20,000 units of middle-income housing through a mix of initiatives such as rezoning neighborhoods further from the city center and offering tax breaks to developers who build more moderately priced housing.

 

“We really do spend the vast majority of our resources on low-income families but we know we need to serve the middle income,” said Sheila Dillon, Boston’s chief of housing.

 

Even in Atlanta, historically one of the most affordable cities for middle-class families, a rapid rise in rents has taken its toll on those families. The city last week passed a new ordinance requiring developers who receive tax breaks to set aside a portion of units aimed at lower-income earners. It is also considering requiring developers to include units targeted at slightly more affluent families, such as teachers and police officers.

 

New York City has pledged to build or preserve 44,000 units for middle-income families over the next decade. Low-income households “have been straining to pay their rents in these neighborhoods for years, and, as rents continue to rise, households in higher-income tiers are having the same experience,” said a spokeswoman for New York City’s Housing Preservation and Development Department.

I don’t know about you, but this isn’t the kind of country I want to live in.

via http://ift.tt/1XkQV2H Tyler Durden

In a speech last month, China’s president Xi Jinping had some telling comments around what technology companies can expect in the future as they try and sell into the Chinese market.

According to the New York Times, Xi’s outlined the direction in which he is planning to take China as it relates to technology and cyber security. “One viewpoint holds that we must close ourselves off, make a fresh start, thoroughly shake off reliance on foreign technology and rely on indigenous innovation to pursue development. Otherwise, we would always follow in the footsteps of others.” Xi said. Adding that China must find a middle ground and determine “which things can be imported but have to be secure and controllable; which things may be imported, digested and absorbed for re-innovation; which things can be developed in collaboration with others; and for which things we must rely on our own strength and indigenous innovation.”

Said otherwise, China is going to clamp down even more on tech imports, even admitting that the products will be reverse engineered and reproduced in China, very much as the country has done in its manufacturing sector.

Knowing that, it is not surprising that the Times is reporting that China is conducting security reviews on technology products sold in China by the likes of Apple and other companies. The reviews are alleged to even require employees of the tech companies to answer questions about the product in person.

Apple and other companies in recent months have been subjected to reviews that target encryption and the data storage of tech products, said people briefed on the reviews who spoke on the condition of anonymity. In the reviews, Chinese officials require executives or employees of the foreign tech companies to answer questions about the products in person, according to these people.

The reviews are run by a committee associated with the Cyberspace Administration of China, the country’s Internet control bureau, they said. The bureau includes experts and engineers with ties to the country’s military and security agencies.

While other countries, including the United States and Britain, conduct reviews of some tech products, they usually focus on products that will be used by the military or other parts of the government that are concerned with security, and not on products sold to the general public.

The Chinese reviews stand out because they are being applied more broadly, including to American consumer software and gadgets popular in China, the people briefed on the reviews said. And because Chinese officials have not disclosed the nature of the checks, both the United States government and American tech companies fear that the reviews could be used to extract tech knowledge as well as ensure that the United States was not using the products to spy.

Meanwhile, the lack of disclosure by China’s government around the topic has made it difficult for the US government to voice any objections, but during a congressional hearing last month, Apple’s general counsel Bruce Sewell said that the Chinese government had in fact asked the company to share source code in the last two years, but that Apple had refused.

According to some even more cynical than us, the recent purchase by Apple of a $1 billion equity stake in China’s Uber-equivalent Didi was nothing more than paying tribute to Beijing to be allowed to continue participating in Apple’s lucrative services market on the maindland. If true, expect Tim Cook to make many more such seemingly incongruous “investments” in Chinese companies in the coming months.

Chinese restrictions have been a diplomatic stumbling block the Obama administration has raised concerns about. China had written some rules to wean the country’s banking industry off foreign technology, as well as calling for foreign companies to hand over encryption keys – in both cases China backed down, for now.

While China may be applying its security reviews and control over products in such a manner that makes it difficult for foreign companies to sell into the market if they wish to keep trade secrets, not to mention stifles its citizens access to information (as evidenced by Chinese regulators recent decision to shut down iBooks and iTunes movies), let us not forget that the US government prodded Apple for precisely the same information that it accuses China of trying to obtain. To be sure, the US government’s motives in cases such as this one are always “pure.”

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Submitted by Ryan McMaken via The Mises Institute,

Last year, we covered a story coming out of Texas in which the state government was planning to institute a state-controlled "gold depository" that would allow individuals to store their gold in a presumably safe place outside the United States banking system.

This proposition was met with emotionally-charged denunciations from Americans in far away northeastern American states where it was claimed this measure was contrary to the "supremacy clause" and just a terrible idea in general because it undermined faith in the US's central government and the Federal Reserve System. 

Well, in spite of the disapproval of New Yorkers, the Texas legislature passed the bill, and the governor signed it into law last June. 

"With the passage of this bill, the Texas Bullion Depository will become the first state-level facility of its kind in the nation, increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for fees to store gold in facilities outside our state," Abbott said when he signed the bill.

 

The depository won’t just store state gold and other precious metals. The law requires that individual customers, and even school districts, be allowed to open accounts. Capriglione has described it as a bank that doesn’t do any lending. 

Originally, the bill appears to have envisioned Texas tax dollars being used to create the facility, but the bill only passed when it was modified to create what is seemingly a state-chartered gold depository that will be privately owned and paid for via fees for gold storage. 

Thus, not surprisingly, several private firms are now trying to become the creators of one of these depositories. The Ft. Worth Star-Telegram yesterday reported: 

Saab’s company, one of many interested in being involved with the state’s plan to create a depository, proposes building a potentially $20 million facility — with no Texas tax dollars — on 40 acres of land it has in Shiner, about 250 miles south of Fort Worth.

The original sponsor of the bill, State Representative Giovanni Capriglione appears pleased with the progress being made:

“I am optimistic that the depository will be up and running at the end of this year or the beginning of next year,” Capriglione said. “The most important factor is making sure that the process is completed with considerable thought and care.”

 

At the depository, Texans will be able to open accounts similar to checking or savings accounts at traditional banks — and monitor them online.

The physical construction of the facility is very humdrum compared to the implications of the creation of a depository of this sort.

Laying the Ground Work for Electronic Gold-Based "Money" 

For one, many state politicians hope that the State of Texas will be able to relocate its own gold holdings into Texas from New York where it currently sits. The state spends a million dollars per year on its storage. 

Moreover, existence of the depository opens up the possibilities for users creating a new type of currency in which purchases are made electronically with the backing of the gold in the depository. In other words, one could potentially use the depository's infrastructure to make purchases using gold, and to have gold either directly deposited into another's account, or converted to US dollars and deposited in a conventional bank. Arguably, this is just an electronic version of gold-backed money. 

Ironically, Zero Interest Rate Policy Has Made Gold Depositories More Practical 

And now more than ever, the idea of paying fees on gold deposits has become relatively economical thanks to near-zero interest rates on ordinary bank accounts. In ages past when banks actually paid meaningful interest on deposits, one might wonder why anyone would pay a fee to store gold when one could collect interest on cash at a bank. 

Thanks to the central banks' commitment to near-zero or even negative interest rates, though, holding cash in a bank no longer brings any benefit in terms of investment earnings. That is, the opportunity cost of storing gold in a depository is getting lower and lower thanks to central bank policy.

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Just days after Bank of America’s equity team joined Goldman, JPM, Citi, UBS and pretty much every other bank (and Gartman) forecasting a market drop in the imminent future with a report laying out “Nine “Reasons To Worry” About A Big Market Drop“, BofA’s cross asset team led by chief investment strategist Michael Hartnett is out with some of his own words of “encouragement”, to wit.

If you go down to the woods today… it will be full of bears. Investors positioned for “summer of shocks”: FMS cash levels up from 5.4% to a high 5.5%; only 12% taking “higher-than-normal” risk; most crowded trade “long quality”. Based on FMS positions, contrarians should be moderately long risk via UK, Japan, tech & industrials, and take profits in EM, energy, discretionary.

What Hartnett is referring to is that according to BofA’s latest Fund Managers Survey, Investors are positioned for “summer of shocks” with
cash levels up to a high 5.5%, one of the highest prints since the Lehman failure. 

 

But what has professional investors so spooked?

For the answer we look at the monthly survey question what FMS respondents believe is the biggest tail risk. Here, surprisingly, we find that after two months of everyone fretting about “quantitative failure”, or the Fed losing control over markets more than anything, this is now only the third biggest concern and there is a new biggest “tail risk” – Brexit, followed in second place by “China devaluations/defaults”, a worry that did not appear on anyone’s radar one month ago.

Also curious: the spike in worries about “US politics” (which we are confident will only rise higher in the coming months) and the arrival of a brand new worry: stagflation. Why? Perhaps as we noted in our April 1 post “The Next Big Problem: “Stagflation Is Starting To Show Across The Economy.”

While we doubt a Brexit will play out (if there was a real threat of a Brexit, the population would not be allowed to vote in the first place), we are curious which concern will dominate in the coming months, especially if inflation, pardon stagflation, indeed continues to be an increasingly prevalent threat to the US economy.

Finally, for those curious how the history of “biggest tail risks” has changed since January, here is the visual summary.

January

February

March

April

 

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Submitted by StraightLineLogic.com's Robert Gore via The Burning Platform blog,

Economic depressions unfold slowly, which obscures their analysis, although they are simple to understand. Governments and central banks turn recessions into depressions, which are preceded by unsustainable expansions of debt untethered from the real economy. The reduction and resolution of excess debt takes time, and governments and central banks usually act counterproductively, retarding necessary adjustments and lengthening the adjustment, and consequently, the depression.

If one dates the beginning of a depression from the beginning of the unsustainable expansion of debt that preceded it, then the current depression began in 1987. Newly installed chairman of the Federal Reserve Alan Greenspan quelled a stock market crash, flooding the financial system with fiat liquidity. It was a well from which he and his successors would draw repeatedly. Throughout the 1990s he would pump whenever it appeared the market and the US economy were about to dump. In 1999, he pumped because the Y2K computer transition might adversely affect the economy and financial system (it didn’t).

If one dates the beginning of a depression from the time when the benefits of debt are, in the aggregate, outweighed by its burdens, the depression began in 2000, with the implosion of the fiat-credit fueled, high-tech and Internet stock market bubble. Unsustainable debt and artificially low interest rates lower the rate of return on productive investment and saving, increasing the relative attractiveness of speculation. Central bankers and their minions refer to this as “forcing investors out on the risk curve,” crawling way out on a limb for fruitful returns. They have no term for when markets saw off the branch, as they did in 2000 and again in 2008.

Most people don’t see 2000 as the beginning of a depression, but Washington and Wall Street cloud their vision. Stock markets were once essential avenues for raising capital and valuing corporations. Since central bankers’ remit was broadened to their care and feeding, stock markets have become engines of obfuscation. The “wealth effect” supposedly justified solicitude for markets: a rising stock market would increase wealth, spending, and economic growth. For seven years a rising market has coexisted with an anemic rebound and one hears little about the wealth effect anymore. The stock market is the preeminent symbol of economic health, so keeping it afloat has become a political exercise. Sure, central bankers and governments know what they’re doing, just look at those stock indices.

Let’s look at those stock indices. They are measured in fiat debt units, the entirely elastic quantity of which is in the hands of governments and central banks. What if stock indices are valued in a less ephemeral currency, say gold, aka “real money”? By that measure, the DJIA divided by the price of an ounce of gold reached its all-time high of about 41 ounces in May 1999, or just before the depression began. That ratio collapsed to under 7 ounces in September 2011, and currently stands at about 14. If you paid for the Dow in 1999 with gold, you’ve lost 65 percent on your original investment.

 

There is a general awareness that real family incomes have gone nowhere since the turn of the century; it’s often offered as a reason for the Trump and Sanders ascendancies. Other, less well-known indicators have also deteriorated or declined. What David Stockman defines as “breadwinner” jobs in construction, manufacturing, white-collar professions, governments, and full-time private services, which on average pay more than $50,000 per year, peaked in January 2001 and are still about 3 percent below that peak. The growth in employment since 2001 has been in lower paying part-time jobs, restaurants, retail, medical services, and education, which explains the stagnation in incomes. Two other important measures—labor hour inputs and real net investment—have gone nowhere since 2001. An economy in which hours worked and real investment are not growing is an economy that is not growing.

The US economy has been losing altitude for sixteen years. While debt monetization and interest rate suppression have fueled housing and equity booms, they can’t mask the underlying deterioration. President Obama will be the first president to have presided over an economy that never achieves 3 percent annual growth. That’s by government figures, which must be taken with a shaker of salt. Employment statistics are especially dubious. To the public, they are right behind the stock market as an economic indicator. They are subject to a variety of pertinent criticisms, including their seasonal adjustments and the birth-death model of new business formation, which continues to add to employment although, sadly, more businesses are currently dying than are being born. The government also has a vested interest in understating inflation. Many of the benefits it pays are indexed to inflation, and interest rates on government debt incorporate an inflation premium. Understating inflation overstates the growth of real GDP, probably third on the list of statistics to which the public pays attention.

The Great Depression was not a straight downhill run. There were multiple, widely hailed “recoveries” and stock market rallies, but in 1938 the economy was in worse shape than when Franklin Roosevelt was elected in 1932, and the government was bigger, more intrusive, and more in debt (the same can be said about the government since 2000).

 

 

Depressing it is to contemplate how government turning a recession into the Great Depression, but consideration of what Japan has done since its stock market topped out in 1989 can leave one pondering the choice of pills, noose, or handgun.

The Japanese have copied every page of the Keynesian and monetarist playbooks: government debt, public works spending, and regulatory expansion, and central bank monetization of assets and interest rate suppression. Multiple recoveries have been punctuated by multiple contractions. Capitalism has remarkable recuperative powers, but screw with an economy long enough and you not only prevent recuperation, you do lasting damage. Japan and Europe—also beset by persistent economic idiocy—have shown little growth or innovation for decades, leaving the economic idiots responsible muttering about supposed, self-exculpatory, secular stagnation. As the US economy glide paths into zero-and-below-land, Washington, Wall Street, and the Ivy League’s best are muttering the same thing.

Nothing is more telling than birthrates, and in Europe, Japan, and the US, birthrates are below the replacement rate of 2.1 births per couple. When planned, having babies expresses confidence in the future. The Japanese buy more adult than baby diapers, illustrating the demographic crunch and falling dependency ratios (the ratio of able-bodied and employed workers to the population requiring outside support), which understandably increases pessimism and further decreases birth rates among the young.

They see a bleak future and they’re not wrong. The global economy hit stall speed with the commodities crash in 2014 and another rendezvous with terra firma looms. Never has the world been more in debt. True recovery won’t happen until most of it has been repudiated and written off. The current depression is already longer than the Great Depression. By the time it’s over, economic historians will be calling it the Humongous Depression.

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Over the past month, the topic of “someone” or “someones” rushing to allocate capital toward expectations of a future volatility surge using such volatility derivatives as VXX, has surfaced on several occasions. The first time was three weeks ago when Tom McClellan pointed out that “VIX futures ETF extremely popular now. Can this possibly end well“…

 

… when he pointed out something that on the surface was counterintuitive, using his post from February 18 when the market has just reached its most recent selloff bottom:

If VXX worked like other ETFs, then as the SP500 falls and the VIX rises, more investors would chase after it and drive up the total number of shares outstanding in VXX.  But instead we see the opposite behavior in the chart above.  Right now, VXX shares outstanding are at one of the lowest readings of the past couple of years [ZH: this was written on February 18], and such low readings are reliably associated with meaningful price bottoms for the SP500.  So rather than seeing the “hot money” piling into VXX as the VIX rises, its shares outstanding data acts more like a depiction of the “smart money”.

 

By the same token, XIV’s share price has fallen in 2016 as the VIX has risen, and investors have responded by pouring more money into XIV and thus driving up is number of shares outstanding:

Effectively McCleland used the collapse in VIX shares outstanding in the February rout as an indicator that the seling had exhausted itself. He was right. Two months later, it was the surge in VXX shares that caused concern for McClellan.

He was not alone.

At virtually the same time, none other than Goldman, which incidentally was urging clients to sell volatility, made the same disturbing observation saying that “Our view that the VIX may remain low in the near term is at odds with the VIX ETP market, as investors seem to be pouring money into levered long VIX ETPs.“

Goldman made several more notable observations:

As the VIX has declined, the demand for VIX ETPs that benefit from a rise in market volatility remains strong, in particular double-levered VIX ETPs such as UVXY and TVIX

Yet oddly enough, the price for ETPs such as the VIX remained disconnected from the demand, leading to a record surge in shares outstanding and thus market cap. Goldman observed that as well, adding that vega exposure had also shot up to never before seen levels:

In April 2016, the market cap of the UVXY topped $1bn for the first time and vega exposure on the UVXY remains near an all-time high at around 120 million (Exhibit 1). The markets two most popular double levered longs are the UVXY and the TVIX. Their combined vega exposure recently stood at around 190 million vega, about twice the vega in single-levered long products such as VXX and VIXY.

Providing some more color on vega, Goldman added that  Vega exposure on longs has tripled since February 11: The total amount of vega exposure across four popular long VIX ETPs (VXX, VIXY, UVXY, TVIX) has tripled since February 11 and recently stood at ~290 million, a record high.

Goldman summarized its finding saying that while “long ETP exposure has been growing, the appetite for inverse VIX ETPs, which benefit from declines in volatility such as the XIV and SVXY, has been muted, with vega exposure remaining range-bound in recent weeks. That’s surprising, since the benchmark index which these underliers track (SPVXSPI) is up 73% since the market low on February 11 and investors often follow performance!”

Only in this case investors were not only not chasing performance, as they traditionally do, they have been betting on a reversal in the market’s upward direction and thus, an explosion in volatility. And they have been doing so in massive – relative to the recent past – amounts.

* * *

This was three weeks ago. Today we decided to update on the number of shares outstanding, and thus both the capital inflow into and the vega, of the two most popular inverse volatility derivative products, the S&P 500 VIX Short-term Futures ETN (VXX) and Ultra VIX Short-Term Futures (UVXY). This is what we found.

 

We are confident that if Goldman was surprised how many investors in the VIX ETP market disagreed with Goldman’s ‘low vol’ call three weeks ago, it will be absolutely shocked now. Because what the charts show is that someone really wants this market to crash, and is putting their money where their mouth is.

Ironically, that is precisely what Goldman – until recently very bullish on stocks – warned just this weekend may very well happen.

via http://ift.tt/24Y0gQt Tyler Durden