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A major international police operation to bust child predators involved police sharing child pornography with over a million unsuspecting online subscribers for a year after investigators took control of the dark web's largest child abuse forum. Though hundreds of pedophiles were arrested after the site was shut down, the police sting involved undercover officers sharing extremely disturbing content and encouraging followers to engage in sexual acts with children. But police say it was worth it.

A new report reveals that Australian police were running the largest pedophile and child pornography forum on the internet for a year as part of a joint initiative between Australian, European, and Canadian police as well as the US Department of Homeland Security to track down the site's administrators and child porn producers. Over the weekend the Norwegian newspaper VG published its bombshell investigation which confirmed that between October 2016 and September 2017 a special police task force based in Queensland, Australia was able to quietly hack the site "Childs Play" which had reached over a million registered accounts and had thousands of active users.

Queensland police at Taskforce Argos, including investigator Paul Griffiths (pictured). Image source: Kinsa.net

The task force was able to identify the site's top tier administrators, leading to hundreds of international arrests and criminal investigations, but not before crossing what critics see as a significant ethical line: to expose those behind the site, police themselves posted child pornography and facilitated what was essentially a pedophile online meet-up.

The site has existed since April 2016 on the dark web, which made it next to impossible to identify users and administrators as the dark web operates based on layers of encryption which ensures complete anonymity. Not only did the forum include over one hundred active producers of child pornography who would daily post videos and images, but even more disturbingly involved a smaller inner circle who shared child torture videos.

Among this inner circle were Childs Play administrators 'Warhead' and 'Crazymonk' – later revealed to be 26-year old Canadian Benjamin Faulkner and 27-year old Tennessee native Patrick Falte, according the VG report. Both had previously worked as internet security professionals and were active technical support providers for pedophilia related internet sites – the two had initially met, for example, through a website called the the “Pedo Support Community." The Australian child abuse task force had begun tracking the two by assembling profiles of their previous digital footprints in relation to child abuse related chat on the open web.

Source: Norway's VG

Faulkner (Warhead) for example, had in 2012 posted the following to a chat forum under his previous online identity, CuriousVendetta:

A little about myself to establish credibility here: My name is CuriousVendetta, and I work as a JR forensics consultant and penetration tester for an IT security firm. On the side, I do what I can to cause general mischief on the internet with a few friends of mine…

 

At the pool is where I am free, and where I can generate my fantasies. I have more girls in my 'fan club' than I can even count.

Faulkner was working as a youth swimming instructor in the small Canadian city of North Bay in Ontario and though it appears some parents had become suspicious of his proclivities, no police reports were ever filed. Patrick Falte had lived all his life with his parents a half an hour outside of Nashville and was the more advanced technical expert of the two. Both Warhead and Crazymonk as administrators of the Childs Play dark web forum had promised subscribers increased security measures. For example users knew that should Warhead, the site's leader, ever miss one of his routine postings to the community which involved a message stamped with a pornographic image, it would be a signal that the community had been infiltrated by police.

But police did infiltrate the community and took it over, partly due to mistakes made by the administrators. The forum transacted in Bitcoin – common for the dark web – but Crazymonk had his bitcoin wallet linked to his personal email address, making it easy for the US Department of Homeland Security to locate him. Other mistakes which helped police included both site leaders posting identifying information in various on the open web which helped investigators build profiles for the two. From there police not only began monitoring the pair – even installing tracking devices on their vehicles – but were also able to observe all communications and postings on the site through a backdoor. It was soon understood that the two would occasionally drive for over 10 hours to meet multiple times a year. After months of monitoring, the two met in person at a usual spot in Manassas, Virginia, where one of Childs Play's users had regularly offered the men his 4-year old daughter to rape while being video taped.

It was in Manassas that US federal agents finally made the arrest, but only after the 4-year old had already been raped in a Virginia home. Authorities told VG that they had no way of knowing of the rape beforehand, citing online messaging as not indicative of that information. The video tape would later be used to convict Faulkner and Falte, who were given life sentences for both the rape and running the site. After the arrests, the Australian task force, known as Argos, then moved in to assume the identities of the arrested site administrators. Investigators studied the pair's online language styles and characteristics, eventually posting an admin message so that users wouldn't get suspicious, which of course required the child pornography image stamp.

The site's server was located in Australia, which was important to the international investigation as Australian law gives police broad leeway to commit crimes in pursuit of investigations, especially in relation to catching child pornographers. Task force Argo's officers not only uploaded the image, thereby convincing subscribers that nothing was wrong, but according to VG issued the following message to the community:

"I hope that some of you were able to give a special present to the little ones in your lives, and spend some time with them. It's a great time of year to snuggle up near a fire, and make some memories."

Police, while running the site, also continued to share images and videos while undergoing their year-long investigation which identified numerous video producers as well as consumers of the content. For example the task force posted a video of an eight-year-old girl being raped only two weeks after taking over the forum, which was viewed 770,617 times, according to the report. Such extreme police tactics, which authorities argue was necessary to rescue victims and put predators behind bars, have outraged some of the victims' families.

VG reporters were able to speak to a mother of one the victims whose video was used by police as part of the operation: "My daughter should not be used as a bait… It is not right for the police to promote these images," she said. But police investigators told VG in response to criticism that, "There is definitely a balance between what we want to achieve and how we go about it." And added, "Eventually we get to the point where it isn’t worth running the forum any more. But as long as we’re identifying victims, producers and abusers, we will keep running it."

A similar investigation by the FBI in 2015 of a site significantly smaller than Child's Play's size made 870 arrests and rescued 259 children after agents kept it online for just two weeks. The FBI came under fire for actively sharing, promoting and facilitating the transfer of thousands of images and videos. But the Australian task force ran a site which was over five times the size and content volume for close to a year.

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With what The New York Times called "almost cathartic satisfaction," Senator Bob Corker took his feud with the president from Twitter to mainstream media, proclaiming during a 25-minute confessional that Trump was treating his office like “a reality show,” with reckless threats toward other countries that could set the nation “on the path to World War III.”

After a brief reposte following the day's Twitter-fight in which President Trump accused him of lacking "guts" and he compared the White House to an "adult day care center," Corker went running to the New York Times to spill his guts, saying that he believes Trump is out of control, and dangerous:

Trump is treating the presidency like “a reality show” and acts “like he’s doing ‘The Apprentice’ or something.”

 

“He concerns me.  He would have to concern anyone who cares about our nation.”

Then, desperate to refute Trump's claims that he had begged for an endorsement for 2018 and backed out when he didn't receive one, he claimed Trump actually pushed him to run, saying:

"I don't know why the president tweets out things that are not true. You know he does it, everyone knows he does it, but he does."

Corker had plenty more to spill (as Axios notes)…

On how fellow GOP senators feel: "Look, except for a few people, the vast majority of our caucus understands what we're dealing with here… of course they understand the volatility that we're dealing with and the tremendous amount of work that it takes by people around him to keep him in the middle of the road."

 

On Trump undermining Tillerson: "A lot of people think that there is some kind of 'good cop, bad cop' act underway, but that's just not true."

 

On Trump's tweets harming U.S. foreign policy: "I know he has hurt, in several instances, he's hurt us as it relates to negotiations that were underway by tweeting things out."

Interetingly The New York Times itself seemed unimpressed by Corker's rant, noting:

"In a 25-minute conversation, Mr. Corker, speaking carefully and purposefully, seemed to almost find cathartic satisfaction by portraying Mr. Trump in terms that most senior Republicans use only in private."

We suspect this is far from over – with or without Trump's kindergarten cop Kelly to manage him.

Perhaps most concerning (for markets as much as anything else) is that Corker has many friends in the Senate and we suspect this feud will do nothing to help Trump pass any reform.

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On Sunday night, the White House revealed that it is seeking more funds from Congress to fund Trump’s wall along the U.S.-Mexico border, more resources to hire thousands more immigration officers, cutting the number of new legal immigrants and generally demanding a steep price for legislation under consideration to help so-called Dreamers. According to the WSJ, “the White House documents, sent to congressional leaders in both parties on Sunday, amount to a lengthy wish list of longstanding conservative immigration goals.” While White House officials told reporters that they want these to be included in any immigration deal, they stopped short of saying the White House will insist on them.

As The Hill adds, Trump’s new “immigration principles and policies” call for a crackdown on border security, more resources to catch individuals residing in the country illegally, as well as a merit-based system that limits chain migration to spouses and children.

Claiming that in order to properly protect the nation’s borders, the White House said Congress must also approve of the construction of a border wall to deter human trafficking, drug trafficking and other cartels. “Success of border walls are undeniable from the perspective of their operators,” U.S. Customs and Border Protection Acting Deputy Commissioner Ronald Vitiello said Sunday. The plan also takes a hardline stance against unaccompanied minors who enter the country.

Trump also went after sanctuary cities, calling on Congress to cut funding from certain grants and agreements to punish the “states and localities that refuse to cooperate with Federal authorities.”   Additionally, the administration is advocating for a “refugee ceiling” that caps how many are let into the country to an unspecified “appropriate level.”

“[T]he refugee ceiling needs to be realigned with American priorities,” according to a press release that points to the nation’s historically high average of resettling refugees compared to “the rest of the world combined.”

The plan also suggests measures that allow for a swift deportation process once ICE or other authorities detect and catch those residing in the country illegally.

But the most notablr revision is the return of demands for a border wall. The Trump White House had previously called for border security measures as part of a Dreamer deal but had agreed to take the wall off the table. Now the administration is again insisting on it.

“These findings outline reforms that must be included as part of any legislation addressing the status of Deferred Action for Childhood Arrivals (DACA) recipients,” President Trump said in a statement following the announcement of the proposal on Sunday. “Without these reforms, illegal immigration and chain migration, which severely and unfairly burden American workers and taxpayers, will continue without end.”

The just released proposed plan is meant to guide the administration’s discussions with Congress to replace Deferred Action for Childhood Arrivals (DACA), an Obama-era program that shielded nearly 800,000 so-called “Dreamers” from deportation and also allowed them to secure work permits. The administration said many agencies weighed in to give policy recommendations in order to improve the immigration system including the Department of Justice, Department of Homeland Security, ICE, and U.S. Customs and Border Control.

The principles also lay out changes to the legal immigration system that Mr. Trump has already endorsed, including large cuts to green cards issued for family members and shifting existing employment-based green cards to a skills-based system.

It is no surprise that Democrats are opposed to most of these ideas outright and don’t support others unless they are part of a comprehensive package that includes a path to citizenship for almost all of the estimated 11 million people living in the U.S. illegally. They will certainly throw up Trump’s renewed attempt to push through “the wall.”

“The administration can’t be serious about compromise or helping the Dreamers if they begin with a list that is anathema to the Dreamers, to the immigrant community and to the vast majority of Americans,” Senate Minority Leader Chuck Schumer (D., N.Y.) and House Minority Leader Nancy Pelosi (D., Calif.) said in a joint statement Sunday.

This may be a problem because suddenly it appears that all the goodwill that Trump had built up with the Democrats last month, when in exchange for avoiding a government shutdown he caved on his DACA executive order, may have vaporized:

Last month, Mr. Trump met with the pair for dinner and, afterward, it seemed that a deal to legalize Dreamers might be at hand. All three of them suggested that they had agreed to pair protections for the young migrants with border security provisions that didn’t include the controversial proposal for a wall along the U.S. border with Mexico.

 

But immediately after that, many congressional Republicans said they would seek to extract more significant enforcement provisions as part of any deal. And on Sunday, a White House official said that the only agreement was that dealing with Dreamers was a priority and that they would try to come to a resolution as quickly as possible.

As the WSJ adds, many of the proposals outlined are included in legislation that has passed the GOP-controlled House but wasn’t considered in the Senate, in part because they likely don’t have support from the 60 senators that would be needed to pass them.

As for the Dreamers, there was some additional confusion, because a White House official said that the administration wasn’t interested in providing these people with a path to citizenship, as the Dream Act provides. But last week, two administration officials told a Senate committee young people should have the opportunity for citizenship.

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Via StockBoardAsset.com,

Back in June, President Trump used Twitter to officially announce America’s urban crisis.

He hit the ground running calling out the death and destruction in Chicago.

Trump made it clear that he was “sending in Federal help” to contain the dying city.

Crime and killings in Chicago have reached such epidemic proportions that I am sending in Federal help. 1714 shootings in Chicago this year!

— Donald J. Trump (@realDonaldTrump) June 30, 2017

Since then, Trump’s focus has transitioned on to an international stage with North Korea’s ‘rocket man’ in a war of words battle.

The geopolitical tensions on the Korean Peninsula and elsewhere have distracted this administration from conquering the real out of control war on city streets.

According to The Daily Caller, Baltimore‘s homicide rate is now doubled Chicago’s in 2017.

Essentially, residents in Baltimore are twice as likely to be shot than Chicagoans. As the battlefield continues to expand, President Trump has yet to mention the chaos in Baltimore just 38 miles North of the White House.

As The Daily Caller points out, the soaring violence in Baltimore is occurring in a much smaller city of 621,000, when compared to Chicago of 2,700,000.

The author made a very interesting point, both cities are “long-standing Democratic strongholds”. Not surprising, Baltimore hasn’t had a republican mayor since 1947 and or voted Republican in a presidential election since 1956. On top of failed liberal policies, de-industrialization has stripped the cities of productivity and forced an alarming inequality gap in education, jobs, health, and wealth of residents.

For example, Baltimore has a population of 621,000 and out of that 63% are African American. In highlights below, 1/3 of the African American population has a net worth of zero, which equates to 130,000 residents. Opportunity for most citizens in the city are limited giving way to violent crime and an explosion in homicides.

Ever since the increased scrutiny of police following the 2014 shooting of Michael Brown in Ferguson, Missouri has led to an increased crime rate in both Baltimore and Chicago. In particular, Baltimore’s police department is under heavy scrutiny for planting drugs at crime scenes.

As the social contract between residents and police crack, this gives way to the ‘Ferguson effect’ of increased turmoil in inner cities.

Shown by The Economist, the Ferguson effect demonstrates how homicides in Baltimore have surged…

Perhaps President Trump was on to something in June when he called out Chicago’s urban war zone. Unfortunately, geopolitical tensions on the Korean Peninsula is of a much higher priority to this administration, as the real battlefield on America’s city streets goes unnoticed.

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Elon Musk is having a rough week.

After confessing to investors and Tesla’s customers that the company had only managed to build 260 of the 1,500 Model 3 Sedans that it had promised to deliver by the end of the third quarter, the Wall Street Journal revealed that the Tesla had not yet finished building the Model 3 assembly line at its Fremont, Calif, factory. Instead, factory employees have been assembling cars by hand – a highly unusual method. As one source who spoke to WSJ confirmed: “that’s not how mass production vehicles are made.”

In a tweet published just before the storm, Musk said that the Tesla semi unveil had been pushed back until November as the company diverts resources to the Model 3 and to Puerto Rico, a transparent attempt to cover his flank should the company’s “production bottlenecks” persist for longer than anticipated.

Despite effectively being caught concealing material information from investors, Musk will in all likelihood soldier on from this latest scandal, bolstered by credulous investors (and generous government subsidies). Even if Tesla continues to miss increasingly ambitious production targets that have proven to be little more than a sop to investors, Musk – already one of Silicon Valley’s most durable figures – will continue to burnish his credibility as a “tech visionary” as he mesmerizes investors with his high-minded monologues about colonizing Mars.    

But you’ve got to give the man credit – he’s overcome a not-insignificant amount of adversity during his career. Like Travis Kalanick, he’s been fired as CEO of a company he founded. He’s also survived near fatal illnesses, and famously married – and divorced – the same woman twice.

In a colorful series of infographics, MarketWatch traces the tragedies and obstacles that have befallen Musk in career spanning more than two decades.

In 2000, Musk almost died after contracting malaria while traveling to Brazil and South Africa, prompting the famous quip “Vacation will kill you.”

He’s overseen not one, but three, failed rocket launches at SpaceX.

In December 2008, both Tesla and SpaceX were on the verge of bankruptcy.

Some other more recent setbacks for Musk have included an unexpected downgrade by Morgan Stanley, and Consumer Reports lowering its ratings on Tesla’s Model S and Model X.

Of course, Musk isn’t the only tech CEO who’s faced adversity. Steve Jobs was famously ousted from Apple in 1985 and later said of that time that he was a “very public failure.”

But even when his company caught up in another scandal, we imagine Elon – shielded by the fact that Tesla shares are trading north of $350 – has developed an appreciation for taking the long view.
 

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Submitted by Shant Movsesian and Rajan Dhall MSTA of fxdailyterminal.com

Coming off the back of a mixed payrolls report which saw the headline number recording a negative balance for the first time in 7 years, the USD initially gained on the rise in wage inflation which recorded a 0.5% increase in average hourly earnings.   Into the weekend, we saw these moves tamed to a modest, but varying degree(s), with the market still very much of the mind that this remains a USD correction at best.  We still feel this has more to run, but it will be anything but smooth as the larger fund managers are happy to stay short on the greenback for the longer term.  As such, no material sign of this positioning being lightened.  

Nevertheless, the Fed are signalling their intention to hike in Dec, and Fed chair Yellen continues to communicate this as subtly as she can.  The odds for adding another 25bps onto the Fed Funds rate have been over 70% for a few weeks now, and we expect the next significant USD push will come from solidifying expectations for 2-3 hikes next year – 2 is a safe based on the trajectory of data, with the ISM reads last week strong in both manufacturing and non manufacturing industry.  Little to get excited over until the end of  next week when we get the Sep inflation readings.  Many will be looking at the incremental changes with a certain sense of apathy.  Core CPI is expected to rise from 1.7% to 1.8% as the oil prices are expected to help lift the headline rate through 2.0%, but for the purposes of monetary policy, we expect current levels are strong enough to keep the Fed on their normalisation path.  Once again, equity markets need a reality check, and it will not come from the level of balance sheet reduction now under way.  

So where now for the lead USD pairings?. Going on the trade weighted index, EUR/USD is set to continue the fight to find a base and set off for the next trek higher.  This is what we saw when the pair dipped under 1.1700 again on Friday, with the retail market excited to see a test on 1.1660 and jumping in aggressively to buy the dip here for a return to 1.2000 and beyond. 

We can look at the German industrial production data on Monday, followed by trade stats on Tuesday. EU wide industrial production is due later on the week accompanied by French and German HICPs, but does any of this concern the market which has been fed by a constant stream of forecasts that the EUR is heading back to value levels at 1.2500?  I take issue with the fact that so many see value here, as PPP metrics are flawed in many ways given its rigidity against the ever changing dynamics of the global economic structure.  

Any aggressive move higher should be capped in the 1.2000-1.2100 in the lead EUR rate, and in that we factor in time-frame on the pace of gains seen.  Focus on the the political backdrop is starting to look like 'old news' already given the price action, with markets generally desensitised to risk themes that come and go with the familiar transitory shift into safe havens.  Consequently, EUR/CHF is also turning higher again, with the dip under 1.1400 here again all too brief.  However, Germany's undercurrent of unrest with immigration is just as unsettling as the fragmentation in Spain, and as many quickly forget, Italy's contentious elections next year will also jolt EUR gains ahead, but it is all about positioning for the ECB's unavoidable adjustment to monetary stimulus at present, and I for one am not going to get excited.  Range trading in the EUR for me. 

In the UK, it was only a matter of time before the Pound was going to come back off its lofty levels, which in the broader context are still pretty low historically.  However, at times, I get the sense that the market does not appreciate the full extent of this material sea change in the aftermath of Brexit, and calling for a Cable move to 1.4000 and 1.4500 at this stage is 'head in the sand' analysis at its best (worst).  We shifted our range from 1.2000-1.3000 to 1.2500-1.3500, and we are not ready to shift it again, well, not higher anyway.  

The BoE can call for the market to price in higher rates on the curve further out, but at this stage, I believe this is a policy mistake, just as it was to cut pre-emtively last Aug straight after the referendum.  Any move this year, to correct that, will be just that and that only, with uncertainty set to keep the MPC sitting on their hands until we get some sign of agreement at the UK-EU negotiating table in order to genuinely revive hopes of business investment here in the UK.  Progress we are told, has been nowhere near enough, so that is all we need say on Brexit at this stage.  On Theresa May, I echo the words of ex PM John Major who also calls for unity in the Tory party and her leadership, and calling her weak due to a mid speech coughing fit is ridiculous and unnecessary, not to say unsettling at a time when the UK needs some stability at its core.  GBP sales on the latter should have run its course, but over the longer term, developing rate spreads (with US Treasuries) are now more likely to pull Cable back towards 1.2500-1.2600.  

Expectations for EUR/GBP to parity over the longer term also remain a possibility, but I am a little more comfortable with 0.9500 over the longer term.  For now, we may struggle with 0.9000 due to European unrest.  UK industrial production is one for the algos, but of interest is the trade balance which should benefiting from broad based GBP weakness these days.  

In Canada, last week's data schedule reported its trade deficit widening, and with the contraction seen in the US balance, the natural shift higher took us above 1.2500, testing 1.2600 either side of the US and Canadian payrolls reports.  The latter came in pretty much as expected in the headline (gain of 10k), but the 'make up' was a complete turnaround of the Aug data which saw a wholesale shift from full to part time jobs.  We are not quite sure what to make of this reversal – perhaps a reporting or accounting error – but the subsequent CAD retrace reflected some of this change, but not too convincingly as yet.  Even so, short term metrics suggest we have pushed far enough for now, and circa 1.2500 looks about right until we get the next round of growth data in particular, after the flat reading we saw for Jul.  Nothing of note in the week ahead.  

It is equally barren on the Australian and NZ data schedule, not that it would matter much. Recent prints have had such a modest response from the respective currencies, which in all cases are trying to push lower against the USD, and coming up with dip buyers – much as they are in the EUR.  This is more so the case for AUD rather than NZD, where the leading National and Labour parties continue to fight it out for government after the former fell short of majority in the elections – votes all now in and finalised.  Business confidence is slipping, and on this development it is not hard to see why, but NZD/USD has retraced some way from 0.7500+, and now 0.7000 will likely attract the arbitrary test from intra day day traders.

For AUD, and with the CAD to a lesser degree, we watch the commodity markets, where industrial metals have adjusted lower.  Copper has dipped under $3.00, but has since stabilised, though we have China back this week which should liven up activity here to some degree.  Oil prices are now coming off their better levels, but as we have consistently said, this will not disturb the CAD unless we gather pace on the downside and/or WTI retests $45.0 a barrel.  

Still no breakout in NOK/SEK, but it looks as though we will continue to pressure the downside, as parity beckons here.  Inflation numbers in both Sweden and Norway out this week, and on current levels, SEK out-performance looks justified but for rate differentials and a Riksbank refusing to let go of its cautionary stance.  

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Authored by Sven Henrich via NorthmanTrader.com,

In the movie Flatliners aspiring medical doctors tried to unlock the mysteries of death by, well, killing themselves. It was meant to be a controlled death of course, to flat line on the heart rate monitor for a few minutes to find out what wonders where to be found “on the other side” only to then return safe & sound thanks to medical intervention. Well, they soon found out the other side wasn’t everything it was cracked up to be and the main character soon got regular beatings as the sins of his past came back to haunt him.

In my view markets find themselves in a very similar script. The promise of investor nirvana where the pains of real life no longer matter. If you only pay attention to the record highs headlines it all looks rather fantastical these days.

Prices only go up no matter what time frame you look at.

Annually:

Quarterly:

Monthly:

And still central bankers can’t find any evidence of inflation. Funny.

Indeed all risk has been flat-lined in this grand central bank experiment as the following chart of the $VIX shows:

Oh I’m kidding of course, but any trader staring at the tape knows that we find ourselves in the most compressed price environment in history.

This is not normal, there’s no heartbeat:

As I’m writing this I’m fully aware I may be viewed as the bear who cried wolf. After all I’ve been outlining structural risk factors for a while and markets have moved past my technical risk zones of 2450-2500 and most recently 2530. That’s what bubbles do. They blow past anyone’s expectations, they make believers of the unbelievers, make bears look like idiots and the most reckless look like geniuses.

But an extreme market that only becomes more extreme is not any less extreme, it is just more extreme. As no risk is apparent these extremes are then dismissed as the new normal.

Yet momentum driven price appreciation has absolutely zero predictive value of future price appreciation, it only appears as such at the time.

Here’s the $NDX leading up to the 2000 top:

It looked fantastic.

It meant absolutely nothing:

For traders of course the key is how to trade set-ups (I’ll post more on this in the near future, but I’ve talked a bit about it in The Relevance of Technical Charts) and for investors it is a matter of how to take advantage while at the same time know when things change.

At this time I want to document a bit of what I see here in markets and the structural world as I don’t want anyone to be surprised when the flat risk line we currently see brings about those nasty consequences.

Let’s be clear.

We find ourselves in a very unique point in history and in a world dominated by false narratives. It is a challenge to keep an analytical grip on reality, but I’ll try to tie a few threads together here to put everything in a macro context.

Firstly the underlying base reality: Free money, easy money, whatever you want to call it, permeates everything we see in financial markets. Indeed I would argue price appreciation has been paid for with unprecedented and, in my view, unsustainable volatility compression.

A couple of charts really highlight this.

Most clearly perhaps is the precise trend line tagging we can observe in the correlated picture of price appreciation and volatility compression since the February 2016 lows:

The $VIX’s corollary, the inverse $XIV, embarked on an explosive near one way journey since the US election coinciding with over $2 trillion central bank intervention in just the first 9 months of 2017:

And it has continued to this day and just made another all time high this past week on a massive negative divergence. It is the magnitude of this volatility compression that explains the current trading environment we find ourselves in.

Aside from the obvious artificial liquidity avalanche we’ve had speculated about the driver of all this and the answer may simply be the promise of even more free money, specifically tax cuts.

As some of you may recall from my analysis over the past year  I’ve been very clear that math ultimately will bring out truth in any narrative. In this case that notion that tax cuts pay for themselves is a fantasy. It always has been. Can it result in a short term bump in spending or even growth? Yes it is possible, especially if structured right. But any historical analysis will show you that tax cuts, especially already coming from a relatively low base, will just add to debt via larger deficits.

Recently the White House budget director finally acknowledged this very reality:

“a tax plan that doesn’t add to the deficit won’t spur growth”

My criticism has been that all this marketing talk is simply a lie and will structurally put the country further at risk of trillion dollar deficits and a massive debt explosion that is already baked in even without tax cuts.

Indeed the further one digs through the details the bigger the expense of these tax cuts become:

“We have a lot of businesses… I don’t think any of them are non-competitive in the world because of the corporate tax rate,” Buffett, the chairman and CEO of Berkshire Hathaway Inc told CNBC.

 

Fink said a corporate rate as high as 27 percent could satisfy U.S. businesses’ need for tax relief, while avoiding an increase in the federal deficit.

 

“What is being proposed is a pretty large expansion of our deficits,” Fink told Bloomberg TV. The plan contains up to $6 trillion in tax cuts, according to independent analysts.”

I bet you if you ran these tax cuts through a budget that accounts for a recession case somewhere in the future this entire budget would be an utter disaster and they could never sell it. And this is why you won’t see a stress tested scenario, all you will see is happy steady 2.9% growth projections in perpetuity. Nonsensical. Unrealistic. And frankly intellectually insulting to anyone that insists on any base line of intellectual veracity to any budget process.

Running the numbers it’s clear who actually benefits:

So I ask, how will any of this change this trend?

The answer is it won’t despite public narratives to the contrary. People will choose to believe what they want, but math is independent of beliefs and the math is very clear on this.

Put this proposal in context of standing trends:

Real disposable personable income growth remains meager at best:

Debt expansion at low rates continues to sustain the illusion of real prosperity for the 90%:

A meager set of rate hikes is already putting pressure on revolving credit obligations and personal interest payments:

Why does all this matter for us here?

Look no further than to the earlier quoted Warren Buffett who may have explained much of the reason we see no sellers in these markets currently:

“Buffett also said he would wait to see how the tax push played out before doing any significant selling of Berkshire Hathaway stock to avoid paying unnecessary taxes on his gains.

 

“I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” Buffett said.”

I get it, why sell anything if you can save on taxes and while central banks keep pushing markets higher with record liquidity? Steady as she goes after all.

And we have to acknowledge that the combined effect may be here to stay until clarity has emerged. If current legislative efficiency is any indicator then this may drag on for months with perhaps nothing accomplished.

Health care? Still nothing has happened. And let’s be clear: Not a single health care proposal (and there have been multiple efforts) have had anything to do with health care. They have been proposals that would have knocked millions off health care coverage and financially benefitted the 1% in form of tax reversions. That’s the analytical reality.

I don’t know why anyone still believes this administration will implement anything substantive to help the middle class. Previous administrations (both Democrat & Republican) have failed miserably on the wealth inequality front. And this administration looks no different and perhaps only worse. Every proposal looks to disproportionally benefit the top 1% and this latest tax cut proposal is no exception. Every analysis I have seen shows disproportionate benefit going to the wealthy. And how will that stimulate growth for the middle class? Or the bottom 50%?

And don’t think I’m alone bemoaning wealth inequality & associated inbred dynastic economic structure as an increasing drag on society and its future prospects.

Here’s Buffett himself again:

Ironically it is those 400 that would benefit the most by getting rid of the estate tax that is currently proposed as part of the tax cut package.

Bottom-line, it’s all tied together in a package that promises more and more debt.

Central banks do whatever it takes to keep reality at bay:

And hence I’ve called this entire central bank talk of “normalization” a fantasy. They can’t do it, they’re trapped and even the quants at JPM are out in force warning of it:

As central banks begin shrinking their balance sheets, they risk triggering another financial crisis, something that may be sharpened by the shift away from active investing, JPMorgan’s top quant strategist has warned.

 

“Such outflows (or lack of new inflows) could lead to asset declines and liquidity disruptions, and potentially cause a financial crisis,” said Mr Kolanovic (who, it is worth noting, has issued such warnings before). “The timing will largely be determined by the pace of central bank normalisation, business cycle dynamics and various idiosyncratic events, and hence cannot be known accurately.” Mr Kolanovic pointed out that “this is similar to the 2008 [Great Financial Crisis], when those that accurately predicted the nature of the GFC started doing so around 2006.”

 

“The shift from active to passive assets, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns,” Mr Kolanovic said. He added that the move towards passive and momentum strategies, where traders chase market cues as opposed to company fundamentals, has “eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption.”

And this is precisely why we won’t see any real normalization ever again. Or perhaps only after a massive reset in the financial system.

This new administration wants massive tax cuts. This year the military budget was already increased by $80B to $700B. The costs of the recent hurricanes are providing the perfect excuse for running larger deficits and you can already see the narrative creeping in:

“I hate to tell you Puerto Rico, but you’ve thrown our budget a little out of whack,” said Trump as he introduced his budget director Mick Mulvaney.

Not the $80B increase in military spending of course.

Look, I can read between lines with the best of them and the message is clear.

Low rates are here to stay and the administration needs low rates to keep it all going and justify tax cuts.

The writing is on the wall, no, actually it is coming to you courtesy Jeffrey Gundlach:

“Bond King” Jeffrey Gundlach has an unusual pick for who President Donald Trump will choose to be the next Federal Reserve chief.

 

“I actually have a very non-consensus point of view. I think it’s going to be Neel Kashkari,” the the CEO of DoubleLine Capital told the Vanity Fair New Establishment Summit on Tuesday in Los Angeles. “He happens to be the most easy money guy that’s in the Federal Reserve system today and that’s why he may win.”

 

Kashkari is the president of the Minneapolis Fed and happened to say Monday that the central bank is making a mistake by continuing to raise rates, comments Gundlach referenced as helping him possibly get the job.

 

“I think there is no chance that she wants to be chairwoman, nor do I think the president wants her to be,” said the manager of $109 billion.

 

Gundlach said that Trump needs someone who will keep rates low in order to keep his populist reputation and help his base voters and that’s why he’ll pick Kashkari.

“A stronger dollar is not good for achieving that agenda,” he said.

And there you have it. We need an easy money guy. Now I don’t know if Kashkari will be it, but it’s pretty clear Yellen is toast and some version of an easy money guy is coming and the Fed’s balance sheet reduction plan may be out the window shortly after February.

But that’s the combined message, massively more debt is coming, normalization is at best a marketing ploy, and easy money will continue to be part of the equation with perhaps more coming in form of tax cuts.

So yes, I get and receive comments about how it’s different this time, how price discovery as we know it may be a thing of the past.

An asset price inflation world, without core inflation, where valuations don’t matter and debt flows continue unabated and consequence free…

…and market caps rise in asymptotic fashion every quarter, month and week:

The end result: The $SPX is now 18.8% above its annual 5 EMA:

As far as I can tell this is the largest, or one of the largest disconnects ever.

And I’ve shown the chart of $MSFT as an individual stock example of how historically extreme the current disconnect is:

$MSFT is now 35% above its annual 5 EMA. There’s been only 1 year prior to 2017 when it did not touch its 5 EMA: 1999. Did it have any predictive value of future price appreciation? Nope.

Speaking of 1999: Greed is back with a vengeance.

It is all around us:

Central bankers have flat lined risk and investors have crossed to the other side expecting nirvana & free money forever.

So far so good it seems. Just remember in Flatliners the allure of nirvana turned into a running nightmare:

What would be signs of nirvana turning into a nightmare?

Keep an eye on this thin red line:

It will get tested again. Currently the trend line is barely 2% below current prices and it is rising steeply.

When price breaks below this line it’s time to return to real life.

After all you do want a heart beat:

Don’t you? I know I do.

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Tomorrow’s Columbus Day celebrations could turn violent, as various “antifa” anarchist groups have announced a nationwide campaign to deface Christopher Columbus statues during Monday’s holiday.

According to PJ Media, at least five Christopher Columbus statues have already been vandalized in New York City in recent weeks, based on reports from Far Left Watch. In one case last month, vandals defaced a “larger-than-life” statue of Columbus in Central Park, leaving blood-red paint on his hands, and scrawled, “Hate will not be tolerated” and “#SomethingsComing” on its pedestal.

What is coming appears to be a coordinated campaign to destroy or deface monuments across the country on Columbus Day.  The NYC-based antifa group Revolutionary Abolitionist Movement (RAM) made the announcement on Thursday, September 21, calling on antifa groups nationwide to “decorate” their neighborhoods.

According to Far Left Watch, RAM is “an extremely militant group that advocates for the violent redistribution of property” and for “the abolition of gender.”

The militant group recently hosted an “Our Enemies in Blue” anti-police workshop at its branch in Brooklyn, NY. RAM posted a video called “Against Columbus Day” on the antifa website It’s Going Down, showcasing destroyed monuments across the country and black-clad antifas pacing around menacingly to what appears to be 1980s German electropop.

Call to Action! Deface Columbus Day
Hashtags: #FuckColumbusDay #DestryColonialism
10/9/17https://t.co/JYYZRSvCQ9 http://pic.twitter.com/5Yy98gIci4

— RevAbolitionMov (@RevAbolitionist) September 21, 2017

“The battles lines have been drawn and white supremacists are on notice,” the RAM group wrote in a statement on the website. “White nationalist statues are crumbling all over the US as our collective revolutionary power is growing.”

While a recent poll showed that a majority of Americans support a holiday honoring Christopher Columbus, RAM called Columbus Day, October 9, “one of the most vile ‘holidays’ of the year.” The group called on supporters “to take action against this day and in support of indigenous people in the US and abroad who have been victims of colonialism and genocide.”

We are calling for groups to “decorate” their neighborhoods as they see fit: put up murals, wheatpaste posters, drop a banner, etc. On October 9th put a picture of your action on social media and use the hashtags below. With these actions multiplied around the country, we will make it unequivocally clear that revolutionaries will always stand with the indigenous!

Conveniently, the anarchist organization encouraged supporters to record and broadcast their crimes by using the hashtags #F*ckColumbusDay and #DestroyColonialism. By making it that much easier for the police to capture any potential lawbreakers tomorrow, we wonder how long before this “antifa” group is portrayed as yet another subversive infiltration organization used by Putin to sabotage and destroy the United States.

As far as the police is concerned, with antifa having given advance notice days in advance of its intended criminal acts, the arrests should be easy to make.

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One day after Harvey Weinstein lost his lead attorney, Lisa Bloom, who quit just two days after she said “I will continue to work with him personally for as long as it takes” (apparently all of 48 hours), moments ago news hit that the scandalous media mogul has been fired from the Hollywood company he created. In a late Sunday statement, the company’s directors announced that Weinstein’s employment with the Weinstein Company has been terminated, effective immediately as a result of the mushrooming sexual harassment scandal that has hobbled his status as a media mogul and left his future in Hollywood in jeopardy.

According to Variety, The Weinstein Company’s board of directors has voted to remove Weinstein from the studio, leaving control of the company in the hands of Weinstein’s brother, Bob Weinstein, and chief operating officer David Glasser, it was announced in a statement from the company Sunday.

“In light of new information about misconduct by Harvey Weinstein that has emerged in the past few days,  the directors of The Weinstein Company — Robert Weinstein, Lance Maerov, Richard Koenigsberg and Tarak Ben Ammar — have determined, and have informed Harvey Weinstein, that his employment with The Weinstein Company is terminated, effective immediately.”

Weinstein has been rocked by a devastating New York Times report documenting decades of legal settlements stemming from sexual harassment allegations leveled by former employees and associates, as well as accusations of improper sexual advances from actress Ashley Judd. The allegations extend back to Weinstein’s days running Miramax, an independent film studio that was then owned by the Walt Disney Co.

In addition to losing his attorney Bloom, and key advisor, Lanny Davis on Saturday, on Friday one third of the all-male board quit on Friday, including billionaire investors Marc Lasry and Dirk Ziff, and Technicolor executive Tim Sarnoff.

Weinstein was said to be furiously resisting efforts to force him out permanently, according to Variety. He has also struggled with forming a coherent response, veering from contrition to combativeness. An initial statement to the Times acknowledged past mistakes, while pledging to reform himself. Shortly after, Weinstein’s attorney Charles Harder said he was preparing to sue the paper, accusing it of making “false and defamatory statements.” Weinstein also said he was taking a leave of absence, only to continue appearing at work. The board later forced him to take an indefinite leave on Friday.

As Variety previously reported, Bob Weinstein and Glasser have been pushing for Weinstein to leave the company, believing he threatened the studio’s ability to continue to attract top talent and to release film and television shows. Weinstein has maintained that he can weather the crisis and re-emerge.

The good news for Weinstein, is that as some more humorous twitter elements have pointed out, his departure will mean he gets to spend much more time with this lawyers.

Weinstein to spend more time with his lawyers.

— Timothy Connolly CFA (@SconsetCapital) October 8, 2017

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President Trump is poised to announce over the coming days, that the landmark Iran nuclear agreement is no longer in the national interest of the United States. While the so-called “decertification” would not be the fatal blow to the Iran deal that Trump promised on the campaign trail, it would kick the issue back to Congress, which could potentially pull out of the deal entirely.

Supporters of the move say it could provide leverage to renegotiate the deal or have follow-on deals, and signal to Iran that the United States will not put up with other activities the United States sees as destabilizing but are not governed by the deal.  There is also a risk that such a move could backfire: Iran has already warned that more sanctions would be seen as a hostile aggression.

“The Americans should know that the Trump government’s stupid behavior with the nuclear deal will be used by the Islamic Republic as an opportunity to move ahead with its missile, regional and conventional defense program,” Guards’ commander Mohammad Ali Jafari said, quoted by Reuters. He then explicitly threatened US presence in the region, warning that “if America’s new law for sanctions is passed, this country will have to move their regional bases outside the 2,000 km range of Iran’s missiles.”

But even if no hostile actions follow, a major risk is that – as we wrote explained in November of 2016 in “Will Trump Send The Price Of Oil Soaring?” – as a result of the fallout from the Iran’s decertification, the return of sanctions could have a vast impact on the Iranian, and global, oil market. As Goldman’s Damien Couravlin writes, a decertification by Trump would put at risk the lifting of Western sanctions that have allowed 1 mb/d of Iranian oil to return to the market. Sitll, other signatories of the deal have however continued to voice their support of the deal (Reuters), with Iran further stating today that it was open to talks about its ballistic missile arsenal, seeking to reduce tension over the disputed program (Reuters).

In other words, the question over Iran’s crude oil output – should full sanctions return – is whether Europe would follow the US in resuming the embargo on Iranian oil exports, and whether Iran can find enough Asian market to offset the drop in European demand. Here is Goldman’s Damien Courvalin with the full explanation:

Iran back in the forefront of oil geopolitical risks

 

Beyond the uncertainty of what the US administration will announce, we believe the lack of international support for renewed sanctions exacerbates the uncertainty on any potential impact on oil exports. European buyers, which account for 25% of Iran’s 2.2 mb/d crude exports, could potentially stop their purchases to avoid falling foul of US secondary sanctions if those sanctions are unilaterally reimposed. We believe the key to the global oil market is whether these flows will be curtailed rather than simply redirected to Asia with the potential impact of eventual US sanctions on international insurance and shipping key to this outcome. 

 

Exhibit 1: The key to future Iranian production will be the ability to redirect flows to Asia if US secondary sanctions get reintroduced  

 

Net, we would expect that if US secondary sanctions are renewed, they would initially put at risk a few hundred thousand barrels of Iranian exports. Without the support of other countries, however, it is highly unlikely though that production would fall back to its pre-deal levels or that a drop in export is imminent.

 

The Trump administration has to certify to Congress on October 15 that Iran is compliant with the nuclear deal reached in 2015. The US president has been a vocal opponent of the agreement and the Washington Post reported yesterday that President Trump would announce soon that he will decertify the international deal to curb Iran’s nuclear program. While we take no view on the President’s decision, a decertification would put at risk the lifting of Western sanctions that have allowed 1 mb/d of Iranian oil to return to the market. The other signatories of the deal have however continued to voice their support of the deal (Reuters), with Iran further stating today that it was open to talks about its ballistic missile arsenal, seeking to reduce tension over the disputed program (Reuters).

 

There remains high uncertainty on what President Trump will announce. The Defense Secretary this week instead stated that it was in America’s interest to stick to the deal (Reuters). Further, the administration certified compliance in both May and in July. If President Trump refuses to certify compliance, the US Congress would have 60 days to consider options including re-imposing secondary sanctions on Iran and could decide not to act although a president executive order could bypass such an obstacle. National security waivers were used to suspend US secondary sanctions on Iranian oil exports, and President Trump could potentially cancel these waivers, which would lead to a ‘snap-back’ of the prior sanctions into place, without any requirement for Congress involvement.

 

Beyond the uncertainty on what the US administration will do, we believe the response by the other signatories (Britain, France, Germany, Russia, China, the EU) will be key to any potential oil impact. International comments from other major participants in the JCPOA (Joint Comprehensive Plan of Action) have been supportive of the agreement in its current form (Reuters). Today (10/6) alone a European commission spokeswoman commented that the deal was working, that it could not be renegotiated and that it was a ‘durable, long-term solution to the Iranian nuclear issue’ (Bloomberg). This has been backed up by a German Foreign Ministry spokesman suggesting that the Iranian nuclear deal was ‘important’ and worth keeping (Reuters), whilst the Russian Foreign Minister suggested that it was ‘very important to preserve it in its current form and of course the participation of the United States will be a very significant factor in this regard’ (Reuters).

 

Since the lifting of sanctions, production in Iran has increased by c.1mnb/d, with crude exports of 2.2 mb/d and around 0.5 mb/d of condensate. Around 60% of the export volume goes to Asia, with China (600kb/d), India (c.450kb/d), South Korea (c.300kb/d) and Japan (c.100kb/d) being the largest buyers. Since the lifting of international sanctions, European buyers have again started to take Iranian volumes, with around 25% now going to Europe[2]. From an oil market perspective, the risk is that even if other signatories continue to support the deal, European buyers could potentially stop their purchases to avoid falling foul of US secondary sanctions if those sanctions are unilaterally reimposed. This would leave Iran having to find alternative buyers, which would likely be in Asia where it sold its crude during the prior sanctions. It remains unclear whether US sanctions alone would impact the ability of international insurance and shipping companies to support this trade which was key to reducing overall Iranian flows in 2012-2015. Absent such a shipping constraint, the production impact should remain limited by the ability of Asia refiners to absorb displaced European volumes. As a result, while highly uncertain, we would expect renewed US secondary sanctions to initially put at risk a few hundred thousand barrels of Iranian exports.

 

Iran is seeking help to invest in major new field developments to boost production following the lifting of international sanctions. There have been several MOUs (Memorandum of understanding) signed to explore projects under the new Iranian Petroleum Contract, for example several international oil companies are set to present technical and commercial development plans for the Azadegan field (including Shell, Total, Inpex and Rosneft), but few firm commitments have been made for now. If US sanctions were re-imposed, western international oil companies would find it difficult to operate in Iran in our view, leaving a much smaller group of companies willing and able to invest, which might impact future production growth plans. One deal has gone through, with a 20 year agreement signed in July to develop South Pars phase 11 with Total (50.1%) and China National Petroleum Corp (19.9%, with Petropars owning 30%). If US secondary sanctions were re-imposed on Iran and should Total pull out of the deal, other partners could potentially take control of the project and move forward with the development alone.

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