“The Coming War Will Solve Our Unemployment & Growth Problem”

Submitted by Carmen Elena Dorobat via The Mises Institute,

On the eve of World War II, Keynes delivered the following chilling address on the BBC, talking about the "grand experiment" of curing unemployment through war expenditure:

Two years later to the day, in a lecture delivered shortly after his arrival in the U.S., Mises described what the great experiment really looked like:

We are witnesses to the most frightful and phenomenal occurrence in human history: the decay of Western civilization.

 

London, one of the centers of this civilization… is almost completely destroyed. The buildings of the Parliament of Westminster are in ruins; the House of Commons holds its assemblies in the catacombs. […] 

 

The theater of war is spreading, and the day seems not distant when peace will have lost its last refuge. It is a moral and material collapse without precedent.

Are we really set to revisit this disgusting Keynesian Endgame once again?

A similar situation had occurred in the US in the 1930’s.

 

What solved the question? War! Because World War II had occurred during the 1940’s and that became the solution for the United States. So, let’s look at the entrepreneurs in Japan. They are stuck with the deflationary mindset.

 

They have to switch their mindset and should start making capital investments. We are looking for the trigger.


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The Battle for the Right to Challenge Environmental Edicts in Court Continues

This week, the Supreme Court heard a case involving property rights and the Clean Water Act that could affect landowners across the country.  

United States Army Corps of Engineers v. Hawkes Co., Inc. pits a family-owned business that harvests and processes peat for golf courses against the federal government. Hawkes Company was harvesting peat from a bog on privately owned property in Minnesota in compliance with state environmental laws when the U.S. Army Corps of Engineers put a halt to their operation, citing the Clean Water Act, which gives the federal government jurisdiction over all navigable waters in the United States. The Corps demand that the company submit to its permitting process before continuing.

The strange thing about this, and other similar cases involving the Clean Water Act, is that the Supreme Court will not rule on whether or not the U.S. Army Corps of Engineers is correct in deeming the property a wetland subject to federal regulation, but whether or not the property owners even have a right to challenge the environmental agency’s decree in court.

SCOTUS adjudicated a simliar dispute between landowners and the Environmental Protection Agency back in 2012 in Sackett v. EPA. Reason TV profiled the Sackett’s case in the video above. While the agency involved is different, the principle is the same: Do landowners have the right to challenge orders from environmental agencies in court, or is such behavior illegal defiance deserving of thousands of dollars in fines a day?

In the Sackett case, the Supreme Court decided 9-0 that EPA rulings could be appealed in court. Reuters reports that the most, but not all, of the justices appeared similarly sympathetic to the Hawkes Company:

Liberal and conservative justices alike expressed concern about the current arrangement’s burden on property owners.

Conservative Chief Justice John Roberts said applicants who disregard a government finding that they need a permit do so at “great practical risk.”

Liberal Ruth Bader Ginsburg called the process “very arduous and very expensive.” Liberal Stephen Breyer called the government decision that Hawkes needed a permit “perfectly suited for review in the courts.”

Only liberal Elena Kagan expressed support for the government, raising concerns about the impact a ruling favoring property owners would have on actions by other government agencies such as the Securities and Exchange Commission.

The court will likely make its ruling in late June.

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Chicago Disintegrates – Gun Shootings Soar An Unprecedented 89%: “It’s The Struggling Economy”

While the Obama administration has been vocal about its intentions to limit access to guns for Americans across the nation, in the process achieving the opposite and leading to record gun sales, FBI firearm background checks that just hit an all time high for the month of March…

… and record stock prices of US gun makers such as Smith and Wesson, perhaps it should focus on what has become the epicenter of ground zero for violence and gun homicides in the US: Obama’s “home town” of Chicago.

According to a CNN report, gun violence in the windy city is on track to post its worst year in the 21st century, the result of an unprecedented surge in gun deaths in the first three months of the year.  By March 31, 141 people had been killed, according to the Chicago Police Department. On Thursday, eight were shot and two of them died in one hour alone, Chicago Police said.

The 141 deaths in the first three months of the year mark a 71.9% jump from the same period in 2015, when 82 people were killed. It’s the worst start to a year since 1999, when 136 people died in the first three months the year, according to the Chicago Tribune.

At that pace – an average of three killings every two days – Chicago would have 564 homicides by the end of the year. That would eclipse the 468 killings recorded in 2015 and 416 in 2014.

 

Overall, shootings have also skyrocketed. According to data provided by Chicago police, the number of shootings in the first three months of the year jumped from 359 in 2015 to 677 in 2016 – an 88.5% increase.

 

The result are countless stores of personal tragedy. For example, eighty-year-old Betty Johnson has lived in Chicago’s Roseland neighborhood since 1968. She raised two children and several grandchildren on the city’s far south side, where she has lived her entire life.

After her granddaughter Sabrina was killed in a car accident in 2008, Johnson gained full custody of her great-grandson Andre Taylor.

She looked on proudly as he busied himself with swimming, football and karate. She knew the dangers someone his age faced if he spent too much time on the streets of Chicago.

 

On a Sunday night in March, her worst nightmare was realized. Andre, 16, was shot in the head and killed just a block from his home.

 

“It has gotten much worse out here,” Johnson says, standing outside her home and looking out onto the streets she knows so well.

There was gang violence when Johnson was growing up, “but you never heard anything like what’s going on today,” she says.

And it’s getting worse. Another example is 14 year old Tyjuan Poindexter.

Michael Gabb knows the pain Betty Johnson feels all too well. He helped raise his grandson Tyjuan Poindexter. The 14-year-old had never been in serious trouble, and Gabb was raising him in his home in the Kenwood neighborhood.

 

He believes Tyjuan was mistaken for a gang member when he was killed in a drive-by shooting just a few blocks from his home. Gabb told CNN six months ago he was hopeful police would find the people responsible. Mayor Rahm Emanuel even paid a visit to Gabb’s home to offer his condolences.

 

Almost six months later, Gabb is still hopeful his grandson’s killer will be found. But he thinks it may only happen if someone steps forward with information.

 

He hopes things can change so others don’t suffer the same fate as his grandson. But how that change will occur and what’s causing the violence is something difficult to narrow down to one definitive explanation.

 

Gabb, like many residents and advocates throughout the city, agree that there are several contributing factors; some old, some new.

What is perplexing is that even the ordinary people are getting it: “I think it’s got something to do with economics,” Gabb says of the continued shootings. As CNN adds, most residents say communities continue to suffer from an economy that is nowhere strong enough to keep at-risk youths from looking for financial support in the wrong places.

“There’s not enough money to sustain certain families and people go into drugs,” Gabb says.

However, and very sadly, it is none other than the president who insists that anyone suggesting the US economy is in dire shape is “peddling fiction.” In other words, classic denial of what is happening in his own back yard.

It’s hard for longtime community pastor Ira Acree to watch. He has been serving the Austin community on Chicago’s West Side for 26 years.

It’s horrifying,” he says. “It’s horrifying to look at the numbers from this winter, because if it’s that bad in the winter, we better brace for a long, hot summer.

And since it is indeed the economy’s fault, it is about to get much worse. Acree, like Gabb, believes the struggling economy in many communities is a big part of the problem.

“All of the violence is rooted in the illegal drug economy,” Acree says. “Many guys have allowed their economic desperation to cause them to resort to these measures. The economy is terrible, especially in African-American neighborhoods.”

Acree says the violence is the worst he’s seen since the 1990s, and he’d like to see a state of emergency declared for wide areas of the city by President Barack Obama, who called Chicago home for so many years.

The lament is one heard across most poor areas in the US: “I’m hoping that some money is invested in some job creation. We bailed out Wall Street, why not bail out Main Street? It would make a world of difference,” Acree says.

“If you really want to stop this epidemic of violence, the best way to stop a bullet is with a job.

Which is odd, because according to the BLS, jobs across the US are growing at a brisk pace of over 200K per month.

What is rarely mentioned, however, is the true state of affairs even for those with jobs, according to which the net income of virtually every social group of Americans has devolved dramatically in recent years. As a recent Pew survey showed, by 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained. 

 

But that will be ignored as the myth of a recovery has to be perpetuated at all costs.

Meanwhile Chicago is disintegrating and as long as the culture of denial persists, there is no hope. The local residents know it too.

Jahmal Cole, 32, grew up in the city of North Chicago, about 45 miles from Chicago’s South Side. But in 2007, he moved to the Chatham neighborhood on the South Side, one of the toughest, to help young kids most at risk of falling prey to gangs and drugs.

“I think that we’ve developed a mentality in Chicago — we see ourselves part of the North Side, South Side,” Cole says.

If they tried to learn from others, or immerse themselves in other opportunities, Cole believes lives could be changed. His nonprofit organization, My Block, My Hood, My City, is dedicated to providing young people with opportunities to see things they don’t even know exist.

“They don’t know what’s available,” he adds. “They don’t know the museum is open Tuesday nights. Many of these kids have never even seen the lakefront in their entire life.” Many will never see a lifestyle different from one where squad cars are part of the norm and the constant hovering of police helicopters is more known than a YMCA. It’s a way of life he views as “traumatizing” to the children and part of a cycle he is trying to break.

He knows there isn’t one easy fix: “I don’t think there’s a program a policy or a resolution that’s going to solve violence in Chicago,” Cole says. He believes many teens and residents suffer from what he calls “poverty of imagination.” Cole hopes to bring new experiences to one child at a time and hopes that will make a difference.

But for Betty Johnson, as she stands outside her longtime home, thinking about all of the years she’s lived in Chicago, there isn’t as much hope as there is sadness anymore.

“I feel sorry for all of these young kids coming up today,” she says. Johnson wishes she could do more to save her other grandkids from the streets of Chicago and from the same fate as her great-grandson Andre.

“If I wasn’t so old, I’d take the other grandkids that are living with me and go so far up in the country, it would take three hours to get to me,” she says. “It’s just so bad that this is the way we have to live.”

Meanwhile, anyone who dares to expose the naked, if heavily armed emperor, will continue to be accused by those tasked with fixing the economy for all, not just for the 1%, as perpetuating the peddling of fiction. Sadly, it may be the ultimate disintegration of this city that forces the administration, either the current one or the next one, to wake from its stupor.

Until then, thousands more will die.


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A “Generational” Peak In Corporate Profit Margins

Submitted by Jesse Felder via TheFelderReport.com,

Over the past few years I’ve written a fair amount about the record-high levels of corporate profit margins. I’ve been focused on this topic because corporate earnings are one of the most popular ways to value equities thus the sustainability of record-high profit margins should be an issue of great concern to investors. If profit margins revert to historical averages, earnings-based valuation measures investors are using to justify investment in equities today could quickly go against them making stocks appear much more expensive than they do currently. And this process may now be underway.

fredgraph.jpg-2

To the point of mean reversion in profit margins, in the past I have referenced the words of a pair of investment legends. Jeremy Grantham has called profit margins, “the most mean-reverting series in finance.” And back in 1999, Warren Buffett explained why:

In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there’s a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn’t going to happen.

Both of these two gentlemen clearly believe, and very strongly, that corporate profit margins have an equilibrium. They can rise above or fall below that equilibrium but the very nature of capitalism, along with its social contract, will force an inevitable reversion to the mean.

I believe there are three major factors behind the recent bubble in corporate profit margins.

First, and most obvious, is the simple trend in interest rates over the past 35 years or so. As rates have fallen to lows not seen in many generations, debt has become much less costly, especially when you also consider that corporate spreads on top of these ultra-low rates have also fallen to ultra-low levels.

fredgraph.jpg-2

Second, corporate taxes as a percent of income have been falling for a long time, as well. Recently, this may be due in large part to the growth of tax avoidance strategies, mainly those involving relocating corporate headquarters to tax havens.

fredgraph.jpg-3

Third, labor costs have also been falling for quite some time. Much of this may be due to the trend toward automation and, perhaps far more so, the offshoring of labor over the past several decades. This falling corporate cost is very apparent in the labor share of income numbers that many have discussed recently, including Paul Tudor Jones.

fredgraph.jpg

These three secular trends have provided a tailwind for profit margins for a long time now. However, they may be reaching, or have already reached, their full potential and begun reverting. In terms of interest rates, the Fed Funds rate has essentially been stuck at zero for seven years now. Corporate spreads hit rock bottom almost two years ago and have been reversing course ever since. Furthermore, after a long period of deregulation in the banking industry that saw lending standards loosen considerably, it appears that regulation is making a sustained comeback and the effect will likely be just the opposite.

Politically, corporations are finding it increasingly difficult to defend their use of tax avoidance schemes. Politicians have been squawking about this for a long time but it now appears as if they are ready to actually do something about it. More and more companies are reporting growing political risk in this regard as new legislation is being introduced in a variety of countries to combat it.

Finally, the trend toward offshoring looks to be in the process of reversing as overseas labor costs rise and companies focus more and more on the potential quality and branding benefits of, “reshoring.” Google trends shows a surge in the popularity of this search term in recent years.

Screen Shot 2016-03-29 at 4.18.21 PM

So I agree with Grantham and Buffett that profit margins are very likely to continue to revert to their historical mean, driven by the natural forces of capitalism, and its social contract. And this will most likely be seen in either the rising cost of debt, taxes or labor, or perhaps all three.

In the short-term, history suggests the current profits recession very likely will lead to an economic recession accompanied by a bear market. In fact, profit margin peaks regularly lead major stock market peaks and profit margins peaked this cycle about four years ago already. In addition, the recent fall in earnings and profit margins is already beginning to damage those earnings-based valuation measures. The S&P 500 now trades at its highest price-to-earnings ratio since the bull market began even as the index remains well off its recent price highs. And profit margins still could have a long way to fall before even reaching their average level since 1950.

Longer-term, if these new secular trends working against profit margins are to remain in place, earnings growth will be much harder to come by for corporate America than it has been over the past few decades. And there are plenty of signs it is already becoming very difficult for them. Corporate cash flow has essentially been flat for the past five years. At the same time, more and more companies recently have resorted to financial engineering via buybacks, non-GAAP reporting and even outright fraud. My guess is this is all in an attempt to make up for broadly slowing organic profit growth due the these secular tailwinds shifting to headwinds.

Should these shifts actually turn out to be longer-term secular trends, they pose a great risk to equities in both the short-term and the long-term. Falling profit margins and rising valuations (as earnings fall) make for a pretty bearish one-two punch for the stock market. I can’t imagine investors being very eager to pay higher valuations for companies growing more slowly. That equation usually works in reverse. And there’s no reason I can see to expect these challenges to corporate profit margins to let up any time soon.


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“We Won The Votes, They’re Trying To Steal Them” Trump Urges Tennesseans To Crash Establishment Party

Building on the worst two week-period of his campaign, Donald Trump took to Twitter overnight to implore his Tennessean supporters to rise up, raging that the state’s Republican Party was "trying to steal" his delegates and urging them to crash a party meeting on Saturday morning to stop them – "We won the votes. They are trying to steal them. I can’t believe I am writing this. But the Tennessee Republican Party wants to steal your vote TOMORROW." As Politico reports Establishment leaders, alarmed by an intensifying backlash, have hired extra security for the event.

It's been a tough couple of weeks for Trump, as The Establishment's full court press has narrowed his lead over Cruz…

 

And now he is fighting back as Politico reports, Tennesse GOP establishmentarians prepare to assign delegates for a state he won strongly,

Morris urged supporters to crash the party's 10 a.m. Saturday executive committee meeting by arriving a half-hour in advance. “There is a small group of Tennessee establishment insiders pulling a fast one. DON’T LET THIS HAPPEN,” he wrote.

Party leaders, alarmed by an intensifying backlash throughout the night, have hired extra security for the event — which party chairman Ryan Haynes noted had been scheduled to take place in a small, unsecured conference room — and they're considering canceling the event altogether.

"We've seen what's happened at other events around the country," Haynes said, referencing spurts of violence at some Trump campaign rallies. "The last thing we'd want to see is something get disorderly.”

 

Added Haynes, "We've been in contact with individuals in law enforcement here in Tennessee.”

The skirmish is the latest in the increasingly fierce battle for delegates to the Republican National Convention in Cleveland.

At issue are the state’s 14 at-large delegates that were not assigned in the March 1 primary but are set to be selected by the party’s executive committee. Trump won the Tennessee primary and many of the delegates were directly elected at that time. Morris wrote that Trump’s campaign had struck a deal with party leaders on Wednesday to fill the remaining at-large slots with Trump’s share of the vote.

 

Haynes said Morris exploded earlier in the week when the party informed the campaign they'd only get six of their seven delegate choices at Saturday's meeting. Tennessee's GOP rules give the party the ultimate authority to name delegates, though it usually accepts input from the campaigns.

 

"They informed us that they did not care about party procedures. They don't care about the Republican Party," Haynes said.

 

Haynes added that on Friday, the list of delegates changed again and only four of Trump's original seven requests were included, prompting Morris' scathing call to supporters.

 

“The State Party Chairman, Ryan Haynes, agreed to that ON WEDNESDAY,” Morris wrote. “Those pulling his puppet strings changed his mind and now apparently he wants to appoint delegates representing candidates who don’t support Donald Trump and WHO DID NOT RECEIVE ANY ALLOCATED DELEGATES on March 1.”

One state executive committee member, Scott Smith, rebutted the Trump campaign's allegations in an email, saying that the root of the conflict is the fact that some of Trump's Tennessee supporters "depend on threats, manipulation, outlandish accusations and behavior."


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U.S. Oil Production to Drop to 5 Million Barrels Per Day over Next 12 Months (Video)

By EconMatters

With the amazing drop in Oil Rigs just over the last two months, the pain for U.S. Oil Producers is just getting started, expect U.S. Oil Production to start dropping off a cliff. We delve into the Oil Data metrics as to why April, May and June are strong months to be invested from the long side in the Oil Market – the seasonally strong part of the market from a demand perspective.

 

 

 

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Greece Demands Explanation From IMF Over Leaked Transcript

Greek politicians wasted no time in seeking a response from the IMF over the leaked transcript released earlier today by Wikileaks suggesting the IMF may threaten to pull out of the country’s bailout as a tactic to force European lenders to more offer debt relief, and which according to the Greek government was “interpreted as revealing an IMF effort to blackmail Athens with a possible credit event to force it to give in on pension cuts which it has rejected.”

According to Reuters, “Greece demanded an explanation from the International Monetary Fund on Saturday after an apparent leaked transcript suggested the IMF may threaten to pull out of the country’s bailout as a tactic to force European lenders to more offer debt relief.”

The officials were quoted as discussing a threat that the fund might not participate in Greece’s third bailout program as a way to force EU creditors, especially Germany, to reach a deal on debt relief before Britain’s June referendum on whether to stay in the European Union.

 

“The Greek Government asks the IMF for explanations whether pursuing the creation of bankruptcy conditions in Greece, just before the British referendum, is the Fund’s official position,” government spokeswoman Olga Gerovasili told state TV.

 

An IMF spokesman in Washington said the Fund did not comment on “leaks or supposed reports of internal discussions” but added that the IMF had made its position known in public.

 

“We have stated clearly what we think is needed for a durable solution to the economic challenges facing Greece – one that puts Greece on a path of sustainable growth supported by a credible set of reforms matched by debt relief from its European partners,” the spokesman said.

 

“The needed reforms and targets need to be based on credible assumptions. As we have said, there is a trade off between what is feasible on reforms and the amount of debt relief needed.”

Reuters adds that EU/IMF lenders will resume talks in Athens on Grece’s fiscal and reform progress next week aiming to conclude a bailout review that will unlock further loans and pave the way for negotiations on long-desired debt restructuring. The review has been adjourned twice since January due to a rift among the lenders over the estimated size of Greece’s fiscal gap by 2018, as well as disagreements with Athens on pension reforms and the management of bad loans.

Greece hopes for a compromise before April 22, when euro zone finance ministers are to assess its progress.

According to the Reuters read of the transcript, the IMF staffers “discussed whether Greece could apply more austerity as a condition for receiving more aid ahead of big debt repayments in July and voiced frustration at the European Commission’s reluctance to side with IMF pressure on Athens. They also suggest that Brussels is sticking to unrealistic assumptions about Greece’s budget shortfall to minimize the need for debt relief, which is unpopular with Germany and other northern euro zone hawks. If concluded the review will unlock a fresh tranche of about 5 billion euros, which Greece needs to pay off state arrears and ECB and IMF maturing debt. Greece has no major debt redemptions due until July.”

None of this is new, and the incremental data was the peculiar read of the “event” mentioned in our previous post. Reuters tries to tone this down by suggesting that the transcript, if genuine, “appeared to suggest that Thomsen saw more prospect of the IMF applying pressure on German Chancellor Angela Merkel to concede debt relief to keep the fund involved in the bailout and secure Greek cooperation in managing Europe’s pressing refugee crisis.”

However as previously noted, “the Greek government interpreted the leak as revealing an IMF effort to blackmail Athens with a possible credit event to force it to give in on pension cuts which it has rejected.

As of now it appears unlikely that the IMF will provide further information on what was explicitly stated in the leak, or what may have been implied regarding a potential plan to force Greece into another credit event.


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What SocGen Thinks Happens Next: “The Longer The Fed Feeds This Game, The Bigger The Mess Will Be”

As the market has swung from despair in the first half of Q1 to sheer, central-bank driven euphoria, here are some words of cautin from SocGen’s Andrew Lapthorne.

From sanguine-to-bearish-to-complacent – What next?

So far 2016 has been quite an emotional roller coaster, with equity markets having gone from sanguine-to-bearish-to-complacent in the space of just 64 trading days. At one point having been down almost 12% YTD, MSCI World has finished the quarter almost flat. Emerging Markets are now up 5.4% YTD, believe it or not. Equity volatility, as measured by VIX, having jumped from 18 to 28 by mid-quarter now finds itself sub 14 – its lowest level since August last year, prior to the devaluation of the Yuan, and a level normally associated with the good times.

However the outlook remains shaky, with the first quarter seeing substantial downward revisions to global GDP and global profit expectations. The consensus is now pencilling in very low single digit EPS growth in most regions in 2016, which given the current pace of downgrades is likely to run negative within the next few months. Even trailing US S&P 500 pro-forma EPS growth (i.e., excluding all the bad stuff) has turned negative during the last few weeks – a feat never seen outside of a US recession.

These cyclical concerns are reflected in the strong outperformance of bonds during the quarter, with most 10 year sovereign bonds delivering around 4-5% and the more defensive equity styles clearly positive in Q1, with the likes of our SGQI index up 5.5% YTD, whilst our more cyclical and Japan exposed SGVB index is off 3.8%. Japan had a dire quarter, with a disastrous foray into negative rates (depriving the market of a much desired increase in QE), along with a sharp rally in the Yen leading to a slump in the Nikkei 225, which remains down 12.8% year-to-date. Yet surprisingly the Japan smallcaps Mothers index is up 12.9%.

The Fed is increasingly worried about these ever-weaker fundamentals, yet asset markets seem more preoccupied with the omnipresence of the Fed put than downside cyclical risk. This then perhaps points to the bigger underlying concern for investors, the overwhelming build-up of leverage in the system. For in the absence of sensible drivers of returns (i.e. sensible interest rates, EPS growth etc.), investors and corporates resort to leverage. Without earnings growth, corporates have been bringing on debt to buy back shares. With miserly rates of return on offer in fixed income markets, investors are leveraging up. The longer the Fed feeds this game, the bigger the mess when the inevitable downswing comes along.


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How To Hack A Presidential Election

There is a growing recognition of the increasing tail wagging the dog nature of the internet's control over election outcomes. We recently detailed "the hidden persuaders" at work showing how the internet has spawned subtle forms of influence that can flip elections and manipulate everything we say, think and do. Confirming all of this to be chillingly true is Andrés Sepúlveda, who rigged elections throughout Latin America for almost a decade. On the question of whether the U.S. presidential campaign is being tampered with, he is unequivocal – "I'm 100 percent sure it is."

Liberty Blitzkrieg's Mike Krieger excerpts a must-read Bloomberg article,

In July 2015, Sepúlveda sat in the small courtyard of the Bunker, poured himself a cup of coffee from a thermos, and took out a pack of Marlboro cigarettes. He says he wants to tell his story because the public doesn’t grasp the power hackers exert over modern elections or the specialized skills needed to stop them. “I worked with presidents, public figures with great power, and did many things with absolutely no regrets because I did it with full conviction and under a clear objective, to end dictatorship and socialist governments in Latin America,” he says. “I have always said that there are two types of politics—what people see and what really makes things happen. I worked in politics that are not seen.”

 

Rendón, says Sepúlveda, saw that hackers could be completely integrated into a modern political operation, running attack ads, researching the opposition, and finding ways to suppress a foe’s turnout. As for Sepúlveda, his insight was to understand that voters trusted what they thought were spontaneous expressions of real people on social media more than they did experts on television and in newspapers. He knew that accounts could be faked and social media trends fabricated, all relatively cheaply. He wrote a software program, now called Social Media Predator, to manage and direct a virtual army of fake Twitter accounts. The software let him quickly change names, profile pictures, and biographies to fit any need. Eventually, he discovered, he could manipulate the public debate as easily as moving pieces on a chessboard—or, as he puts it, “When I realized that people believe what the Internet says more than reality, I discovered that I had the power to make people believe almost anything.”

 

Sepúlveda says he was offered several political jobs in Spain, which he says he turned down because he was too busy. On the question of whether the U.S. presidential campaign is being tampered with, he is unequivocal. “I’m 100 percent sure it is,” he says.

 

– From the excellent Bloomberg article: How to Hack an Election

Yesterday, Bloomberg published one of the most fascinating articles I’ve read all year. Below are some choice excerpts from the piece, which I encourage you to read in full.

It was just before midnight when Enrique Peña Nieto declared victory as the newly elected president of Mexico. Peña Nieto was a lawyer and a millionaire, from a family of mayors and governors. His wife was a telenovela star. He beamed as he was showered with red, green, and white confetti at the Mexico City headquarters of the Institutional Revolutionary Party, or PRI, which had ruled for more than 70 years before being forced out in 2000. Returning the party to power on that night in July 2012, Peña Nieto vowed to tame drug violence, fight corruption, and open a more transparent era in Mexican politics.

 

Two thousand miles away, in an apartment in Bogotá’s upscale Chicó Navarra neighborhood, Andrés Sepúlveda sat before six computer screens. Sepúlveda is Colombian, bricklike, with a shaved head, goatee, and a tattoo of a QR code containing an encryption key on the back of his head. On his nape are the words “</head>” and “<body>” stacked atop each other, dark riffs on coding. He was watching a live feed of Peña Nieto’s victory party, waiting for an official declaration of the results.

 

When Peña Nieto won, Sepúlveda began destroying evidence. He drilled holes in flash drives, hard drives, and cell phones, fried their circuits in a microwave, then broke them to shards with a hammer. He shredded documents and flushed them down the toilet and erased servers in Russia and Ukraine rented anonymously with Bitcoins. He was dismantling what he says was a secret history of one of the dirtiest Latin American campaigns in recent memory.

 

For eight years, Sepúlveda, now 31, says he traveled the continent rigging major political campaigns. With a budget of $600,000, the Peña Nieto job was by far his most complex. He led a team of hackers that stole campaign strategies, manipulated social media to create false waves of enthusiasm and derision, and installed spyware in opposition offices, all to help Peña Nieto, a right-of-center candidate, eke out a victory. On that July night, he cracked bottle after bottle of Colón Negra beer in celebration. As usual on election night, he was alone.

 

His teams worked on presidential elections in Nicaragua, Panama, Honduras, El Salvador, Colombia, Mexico, Costa Rica, Guatemala, and Venezuela. Campaigns mentioned in this story were contacted through former and current spokespeople; none but Mexico’s PRI and the campaign of Guatemala’s National Advancement Party would comment.

 

Usually, he says, he was on the payroll of Juan José Rendón, a Miami-based political consultant who’s been called the Karl Rove of Latin America. Rendón denies using Sepúlveda for anything illegal, and categorically disputes the account Sepúlveda gave Bloomberg Businessweek of their relationship, but admits knowing him and using him to do website design. “If I talked to him maybe once or twice, it was in a group session about that, about the Web,” he says. “I don’t do illegal stuff at all. There is negative campaigning. They don’t like it—OK. But if it’s legal, I’m gonna do it. I’m not a saint, but I’m not a criminal.” While Sepúlveda’s policy was to destroy all data at the completion of a job, he left some documents with members of his hacking teams and other trusted third parties as a secret “insurance policy.”

 

Sepúlveda provided Bloomberg Businessweek with what he says are e-mails showing conversations between him, Rendón, and Rendón’s consulting firm concerning hacking and the progress of campaign-related cyber attacks. Rendón says the e-mails are fake. An analysis by an independent computer security firm said a sample of the e-mails they examined appeared authentic. Some of Sepúlveda’s descriptions of his actions match published accounts of events during various election campaigns, but other details couldn’t be independently verified. One person working on the campaign in Mexico, who asked not to be identified out of fear for his safety, substantially confirmed Sepúlveda’s accounts of his and Rendón’s roles in that election.

 

Sepúlveda says he was offered several political jobs in Spain, which he says he turned down because he was too busy. On the question of whether the U.S. presidential campaign is being tampered with, he is unequivocal. “I’m 100 percent sure it is,” he says.

 

Rendón, says Sepúlveda, saw that hackers could be completely integrated into a modern political operation, running attack ads, researching the opposition, and finding ways to suppress a foe’s turnout. As for Sepúlveda, his insight was to understand that voters trusted what they thought were spontaneous expressions of real people on social media more than they did experts on television and in newspapers. He knew that accounts could be faked and social media trends fabricated, all relatively cheaply. He wrote a software program, now called Social Media Predator, to manage and direct a virtual army of fake Twitter accounts. The software let him quickly change names, profile pictures, and biographies to fit any need. Eventually, he discovered, he could manipulate the public debate as easily as moving pieces on a chessboard—or, as he puts it, “When I realized that people believe what the Internet says more than reality, I discovered that I had the power to make people believe almost anything.”

 

For most jobs, Sepúlveda assembled a crew and operated out of rental homes and apartments in Bogotá. He had a rotating group of 7 to 15 hackers brought in from across Latin America, drawing on the various regions’ specialties. Brazilians, in his view, develop the best malware. Venezuelans and Ecuadoreans are superb at scanning systems and software for vulnerabilities. Argentines are mobile intercept artists. Mexicans are masterly hackers in general but talk too much. Sepúlveda used them only in emergencies.

 

Chávez won but died five months later of cancer, triggering an emergency election, won by Nicolás Maduro. The day before Maduro claimed victory, Sepúlveda hacked his Twitter account and posted allegations of election fraud. Blaming “conspiracy hackings from abroad,” the government of Venezuela disabled the Internet across the entire country for 20 minutes.

 

Sepúlveda didn’t like the idea of working in Mexico, a dangerous country for involvement in public life. But Rendón persuaded him to travel there for short trips, starting in 2008, often flying him in on his private jet. Working at one point in Tabasco, on the sweltering Gulf of Mexico, Sepúlveda hacked a political boss who turned out to have connections to a drug cartel. After Rendón’s security team learned of a plan to kill Sepúlveda, he spent a night in an armored Chevy Suburban before returning to Mexico City.

 

Early polls showed Peña Nieto 20 points ahead, but his supporters weren’t taking chances. Sepúlveda’s team installed malware in routers in the headquarters of the PRD candidate, which let him tap the phones and computers of anyone using the network, including the candidate. He took similar steps against PAN’s Vázquez Mota. When the candidates’ teams prepared policy speeches, Sepúlveda had the details as soon as a speechwriter’s fingers hit the keyboard. Sepúlveda saw the opponents’ upcoming meetings and campaign schedules before their own teams did.

 

Money was no problem. At one point, Sepúlveda spent $50,000 on high-end Russian software that made quick work of tapping Apple, BlackBerry, and Android phones. He also splurged on the very best fake Twitter profiles; they’d been maintained for at least a year, giving them a patina of believability.

 

Just about anything the digital dark arts could offer to Peña Nieto’s campaign or important local allies, Sepúlveda and his team provided. On election night, he had computers call tens of thousands of voters with prerecorded phone messages at 3 a.m. in the critical swing state of Jalisco. The calls appeared to come from the campaign of popular left-wing gubernatorial candidate Enrique Alfaro Ramírez. That angered voters—that was the point—and Alfaro lost by a slim margin. In another governor’s race, in Tabasco, Sepúlveda set up fake Facebook accounts of gay men claiming to back a conservative Catholic candidate representing the PAN, a stunt designed to alienate his base. “I always suspected something was off,” the candidate, Gerardo Priego, said recently when told how Sepúlveda’s team manipulated social media in the campaign.

 

In 2012, Colombian President Juan Manuel Santos, Uribe’s successor, unexpectedly restarted peace talks with the FARC, hoping to end a 50-year war. Furious, Uribe, whose father was killed by FARC guerrillas, created a party and backed an alternative candidate, Oscar Iván Zuluaga, who opposed the talks.

 

Rendón, who was working for Santos, wanted Sepúlveda to join his team, but Sepúlveda turned him down. He considered Rendón’s willingness to work for a candidate supporting peace with the FARC a betrayal and suspected the consultant was going soft, choosing money over principles. Sepúlveda says he was motivated by ideology first and money second, and that if he wanted to get rich he could have made a lot more hacking financial systems than elections. For the first time, he decided to oppose his mentor.

 

Sepúlveda went to work for the opposition, reporting directly to Zuluaga’s campaign manager, Luis Alfonso Hoyos. (Zuluaga denies any knowledge of hacking; Hoyos couldn’t be reached for comment.) Together, Sepúlveda says, they came up with a plan to discredit the president by showing that the guerrillas continued to traffic in drugs and violence even as they talked about peace. Within months, Sepúlveda hacked the phones and e-mail accounts of more than 100 militants, including the FARC’s leader, Rodrigo Londoño, also known as Timochenko. After assembling a thick file on the FARC, including evidence of the group’s suppression of peasant votes in the countryside, Sepúlveda agreed to accompany Hoyos to the offices of a Bogotá TV news program and present the evidence.

 

It may not have been wise to work so doggedly and publicly against a party in power. A month later, Sepúlveda was smoking on the terrace of his Bogotá office when he saw a caravan of police vehicles pull up. Forty black-clad commandos raided the office to arrest him. Sepúlveda blamed his carelessness at the TV station for the arrest. He believes someone there turned him in. In court, he wore a bulletproof vest and sat surrounded by guards with bomb shields. In the back of the courtroom, men held up pictures of his family, making a slashing gesture across their throats or holding a hand over their mouths—stay silent or else. Abandoned by former allies, he eventually pleaded guilty to espionage, hacking, and other crimes in exchange for a 10-year sentence.

 

Three days after arriving at Bogotá’s La Picota prison, he went to the dentist and was ambushed by men with knives and razors, but was saved by guards. A week later, guards woke him and rushed him from his cell, saying they had heard about a plot to shoot him with a silenced pistol as he slept. After national police intercepted phone calls revealing yet another plot, he’s now in solitary confinement at a maximum-security facility in a rundown area of central Bogotá. He sleeps with a bulletproof blanket and vest at his bedside, behind bombproof doors. Guards check on him every hour. As part of his plea deal, he says, he’s turned government witness, helping investigators assess possible cases against the former candidate, Zuluaga, and his strategist, Hoyos. Authorities issued an indictment for the arrest of Hoyts  but according to Colombian press reports he’s fled to Miami.

 

In July 2015, Sepúlveda sat in the small courtyard of the Bunker, poured himself a cup of coffee from a thermos, and took out a pack of Marlboro cigarettes. He says he wants to tell his story because the public doesn’t grasp the power hackers exert over modern elections or the specialized skills needed to stop them. “I worked with presidents, public figures with great power, and did many things with absolutely no regrets because I did it with full conviction and under a clear objective, to end dictatorship and socialist governments in Latin America,” he says. “I have always said that there are two types of politics—what people see and what really makes things happen. I worked in politics that are not seen.”

 

Last year, based on anonymous sources, the Colombian media reported that Rendón was working for Donald Trump’s presidential campaign. Rendón calls the reports untrue. The campaign did approach him, he says, but he turned them down because he dislikes Trump. “To my knowledge we are not familiar with this individual,” says Trump’s spokeswoman, Hope Hicks. “I have never heard of him, and the same goes for other senior staff members.” But Rendón says he’s in talks with another leading U.S. presidential campaign—he wouldn’t say which—to begin working for it once the primaries wrap up and the general election begins.

Now I wonder…who might that be?

Screen Shot 2016-04-01 at 3.34.42 PM

 

As we concluded prevously, we are living in a world in which a handful of high-tech companies, sometimes working hand-in-hand with governments, are not only monitoring much of our activity, but are also invisibly controlling more and more of what we think, feel, do and say. The technology that now surrounds us is not just a harmless toy; it has also made possible undetectable and untraceable manipulations of entire populations – manipulations that have no precedent in human history and that are currently well beyond the scope of existing regulations and laws. The new hidden persuaders are bigger, bolder and badder than anything Vance Packard ever envisioned. If we choose to ignore this, we do so at our peril


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Danish Central Bank Warns Of “Risk Illusion”, Fears “Fire Sale” Plunge In Asset Prices

Having slashed rates below zero and unleashed various rounds of asset-purchases, the Riksbank (Denmark's central bank) recently warned the rest of the world that "we have reached the limits of monetary policy." Now, however, Denmark's Systemic Risk Council has raised the financial system warning level to DEFCON1, warning that low levels of interest rates have led to excessive risk-taking and risk illusion among borrowers and credit institutions… and low market liquidity combijed with sudden shifts in risk perceptions may still lead to significant falls in asset prices and fire sales.

 

With so many of the world's nations going NIRP…

 

At least one of the world's central banks is worried about it…

The Systemic Risk Council has held its thirteenth meeting.

 

Sudden changes in risk perception in the financial markets combined with low market liquidity may still lead to significant falls in asset prices and fire sales. Due caution should be exerted in relation to the low level of interest rates, which may lead to excessive risk-taking and risk illusion among borrowers and credit institutions.

 

There may be systemic risks associated with a sudden change in risk perception in the financial markets combined with low market liquidity

 

Recent months have seen a partial materialisation of the risk of a rapid and marked fall in asset prices in some of the global financial markets. The large fluctuations in the financial markets in early 2016 have not had systemic consequences in Denmark. Sudden changes in the perception of risk in the financial markets combined with low market liquidity may still lead to significant falls in asset prices and fire sales. The Council's observation of 30 September 2014 regarding low interest rates and build-up of systemic risks still applies.

 

Due caution should still be exercised in relation to the low level of interest rates

 

Seasonally adjusted prices in the housing market continued to rise in the 2nd half of 2015 – albeit at a more moderate pace than in the 1st half for single family houses. Expectations of future price developments remain high. While growth in housing loans in Copenhagen and Aarhus has subsided, market expectations of low interest rates several years ahead may still lead to excessive risk-taking and risk illusion among borrowers and credit institutions. That may be the case if the risks of higher interest rates and a reversal in house prices are not taken into account to a sufficient degree. Council's observation of 27 March 2015 regarding low interest rates and build-up of systemic risks still applies.

Still – as long as Janet says everything is fine (or terrible), then all thgat excessive risk taking is fine.

And for those demanding moar, we remind raeders of Denmark’s central bank governor, Lars Rohde comments that monetary policy has reached its limit. "We have reached a point where monetary policy no longer has a big overall impact,’’ he said on Monday. "[It's] overstreched [and] there’s a limit to what more one can do’."


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