Brickbat: Don’t Go to New Jersey

gunA Pennsylvania corrections officer has been suspended from his job and faces a minimum of more than three years in prison after being charged in New Jersey with carrying a gun without a state permit. Raymond Hughes, who does have a carry permit in Pennsylvania, was returning from a concert in Atlantic City when he was involved in an accident with a drunk driver. He told officers responding to the crash that his gun was under his seat. Days later, he found himself facing a felony charge.

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Dear Janet, Mario, & Haruhiko – It’s Time For The ‘C’ Word

As policy errors pile up – just as they did in 2007/8 – around the world, we thought the following three charts might warrant the use of the most important word in modern central banking… "Contained"

 

Haruhiko, You Are Here…

 

Mario, You Are Here…

 

And Janet, You Are Here…

It does make one wonder, with all this carnage and so little action, whether "coordinated" inaction is the post-Davos decision – Don't just do something, stand there and jawbone!!

With the goal being a big enough catastrophe to warrant unleashing the war on cash, then NIRP, then the unlimited money drop… because as we stand, no matter what crazy policy has been imagined by the Keynesian "seers" – inflationary (well deflationary now) expectations have collapsed.


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EIA Inventory Report Recap 2 24 2016 (Video)

By EconMatters

Some mixed components in this week`s EIA Inventory report. Oil builds are bearish due to storage concerns, but the gasoline demand numbers are robust, and U.S. Oil production is starting to roll over which is bullish.

 

© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle  


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A Warning To The Feds On Incremental Prosecutions Of The Liberty Movement

Submitted by Brandon Smith via Alt-Market.com,

At the very onset of what would become the Soviet Empire, Vladimir Lenin decreed the creation of a national internal army called the “Cheka.” The Cheka were handed very broad police powers and tasked with the disruption and elimination of any form of dissent within the communist system. Lenin launched what would later be known as the “Red Terror”, in which nearly every Russian population center had an established Cheka office of operations using surveillance, infiltration, nighttime raids, imprisonment, torture and execution to silence opposition to the authority of the state.

Some of these people were active rebels, some were outspoken political opponents and journalists, others were merely average citizens wrongly accused by neighbors or personal enemies. The Cheka created a society of fear and suspicion in which no one could be trusted and little criticism was spoken above a whisper anywhere, even in one’s own home.

It is important to note, however, that the dominance of the Cheka was established incrementally, not all at once.

Agents of the state began their “cleansing” of the Russian population by targeting specific groups at opportune times and worked their way through the citizenry at an exponential pace. The most intelligent, effective and dangerous activists and rebels were slated for destruction first, as they represented a kind of leadership mechanism by which the rest of the population might be mobilized or inspired. More innocuous organizations (like Christian churches and rural farmers) were persecuted as background noise while the political mop-up was underway.

Through this incrementalism, the communists were able to intern or eradicate vast numbers of potential opponents without the rest of Russians raising objections. The general populace was simply thankful that the eye of the Cheka had not been turned upon them, and as long as it was some other group of people unrelated to their daily life that disappeared in the night, they would keep their heads down and their mouths shut.

I would point out that the communists were very careful and deliberate in ensuring that the actions of the internal police were made valid through law and rationalized as a part of “class struggle.” Such laws were left so open to interpretation that literally any evil committed could later be vindicated. Man-made law is often a more powerful weapon than any gun, tank, plane or missile, because it triggers apathy within the masses. For some strange reason, when corrupt governments legalize their criminality through legislation or executive decree, the citizenry suddenly treats that criminality as legitimate and excusable.

Incremental prosecution and oppression is effective when the establishment wishes to avoid outright confrontation with a population. Attempt to snatch up a million people at one time, and you will have an immediate rebellion on your hands. Snatch up a million people one man at a time, or small groups at a time, and people do not know what to think or how to respond. They determine to hope that the authorities never get to them, that it will stop after a few initial arrests, or they hope that if they censor themselves completely, they will never be noticed.

In fact, corrupt governments issue warrants of arrest for a handful of dissenters and initiate imprisonment in a very public manner in the beginning with the express purpose of making examples and inspiring self censorship in the masses so that the authorities do not have to expend large amounts of resources to fight a more complex rebellion.

I bring up the historic example of the Cheka and incrementalism because a trend is brewing within our current establishment by which I believe a similar (if not more sterilized) brand of oppressive action is being planned against the liberty movement.

After the debacle in Burns, Oregon during the refuge standoff, federal officials immediately began a subtle campaign in the media promoting internal police powers that when examined in an honest light, are truly anti-liberty.

It remains my personal position according to the evidence I have seen that the refuge standoff was likely influenced by at least one if not more federal provocateurs and that Ammon Bundy was “encouraged” in his choice of actions and location by this person or persons. The goal? I can only guess that the intent was to trap the liberty movement in a Catch-22 scenario; either we join the poorly planned and executed standoff on some of the worst defensive ground possible and risk everything on one centralized event, or, we refuse to participate in the strategy and watch helplessly as a group of people, many with good intentions but little tactical sense or training, are arrested or killed. Either we gamble everything on the worst possible terms, or, we avoid the gamble and watch as the entire movement is made to look weak or incompetent by association with a few.

The majority of the movement chose the latter action, rightly I feel. Burns was no Bundy Ranch — everything about it felt rigged. And though there were many angry anonymous voices calling us “sunshine patriots” and “keyboard warriors” because we would not participate, apparently none of those loud mouths ever showed up in Burns either, so I am assuming they finally saw the wisdom in our decision.

It would seem as though the feds did not get exactly what they wanted out of the refuge standoff, but they have decided to squeeze as much advantage out of the event as possible.

Cliven Bundy was arrested after arriving by plane in Portland, Oregon, not on any charges relating to the refuge and his son Ammon, but on charges stemming from the Bundy Ranch standoff of 2014.

These charges include a strange and very broad legal measure relating to “interference with the duties of federal officials.” This in particular should be disconcerting to all of us, for “interference” could be any number of activities.

Any duties of federal officials that are not moral or constitutional should be interfered with in a tactically intelligent manner whenever possible. Such charges are a deliberate anathema to civil disobedience designed to counter immoral actions by government authorities. For any opposition could be deemed “interference” given a twisting of precedence, and thus treated as illegal.

In my recent article “Liberty Activists And ISIS Will Soon Be Treated As Identical Threats,” I examined statements made by the Justice Department’s chief of national security, John Carlin, in an article published by Reuters. Carlin and the Justice Department have made it clear that they intend to apply rules of prosecution used for foreign terrorist organizations to “domestic extremists.” The Oregon standoff was specifically mentioned as an example of such extremism.

Carlin claimed that domestic extremists represent a “clear and present danger,” alluding to the “Clear And Present Danger Doctrine” allowing the government in “times of national crisis” to prosecute almost any citizen giving “material support” to enemies of the state. “Material support” in the past has even included verbal opposition to government policies. Meaning, Carlin is testing the waters of material support laws and such tests may target liberty movement speakers and journalists along with anyone involved in physical opposition. As with the Cheka, no one is really safe.

These charges are also being brought in a retroactive manner, long after the supposed crimes have been committed as we have seen with Cliven Bundy. Meaning, the feds plan to retain warrants and prolong charges, only arresting people later when they think they can get away with it. This is where the incrementalism comes in…

Rumors of further indictments have surfaced possibly including dozens of people involved in the Bundy Ranch standoff. And because of the nature of the incremental game the government is playing, verification is difficult until the arrests are activated.

It has come to my attention from personal sources that there may be a lot of truth to the rumors of pending or retroactive indictments, and that the FBI in particular may be biding its time and waiting to bring charges when particular people are at their most vulnerable and when the movement is less likely to react. These sources have indicated that the federal government is seeking to work around the public relations problems of standoff scenarios like Ruby Ridge, Waco, and Bundy Ranch. The feds may claim that they have “seen the light” in terms of avoiding outright mass murder, but I believe they have just found a better way to sneak past public opinion.

If they can manipulate the liberty movement into participation in poorly planned standoffs like Burns, Oregon, they will. Such standoffs are doomed from their inception and can even be controlled from within by agents provocateur. They are not a real threat.

If a standoff occurs organically, as it did at Bundy Ranch in Nevada, and public support is on the side of the liberty movement, then the establishment will simply back off and pluck activists from their homes or at the airport months later.

It is incumbent upon me to offer a warning to federal agencies in the event that incremental prosecution of liberty activists is truly a strategy they are planning to carry out: It is the general consensus of many in the liberty movement that ANY further arrests predicated on activism at Bundy Ranch or similar opposition events in the past to Bureau Of Land Management abuses of power will result in further and expanded engagements by activists. That is to say, such arrests and indictments will not be allowed to continue.

This is not a threat, this is fair warning to government agencies that they are walking a razor’s edge. Incremental prosecutions and dismantling of the liberty movement will not be tolerated; they represent a non-negotiable line in the sand. The feds may or may not care what the consequences will be for crossing this line. They may even think they want such consequences. Regardless, consequences there will be.

While the refuge occupiers essentially handed their heads to the feds on a platter, and the movement was not able to salvage the situation in any viable manner, this does not mean that liberty activists will not take measures during future events depending on the circumstances. Federal agencies may be quick to forget the massive response at Bundy Ranch. This is a mistake. They should probably expect a similar response, if not a more aggressive one, if further arrests are undertaken.

With the ethereal nature of criminal charges like “material support” or “interference with federal officials,” due process becomes a bit of joke. You see, federal agents and agencies, you have to take into account the reality that the liberty movement is well aware of the government push to remove due process altogether. With the AUMF and the NDAA, among other executive actions, we realize that the friendly mask of due process is worn by government today, but not necessarily tomorrow.

If the movement gives ground and does nothing while dozens or more are retroactively imprisoned one case at a time for opposing federal abuse, then how long will it be before the rest of us are imprisoned on even broader charges? How long before the mask comes off and the rendition and indefinite detention provisions of the AUMF and the NDAA come into play? Do you really expect the movement to put faith in due process given the circumstances? Of course you do not.

I would venture to guess that the feds think that any opposition that does arise during the execution of warrants against liberty activists will be “easily managed.” This would be a mistake.

We have seen this all before in the passive sublimation of past societies. We recognize the signs of trespasses to come. And if such trespasses are brought upon the liberty movement or the population at large, then many of us will adopt the attitude that there is not much left to lose.

Personally, I do not look forward to this kind of fight, but I have no illusions that it can be avoided given the course our country has taken. Federal agencies have deemed it a matter of national security to watch us all very closely. They should keep in mind, though, that we are also watching them.


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In Biggest Victory For Saudi Arabia, North Dakota’s Largest Oil Producer Suspends All Fracking

Yesterday, during his speech at CERAWeek in Houston, Saudi oil minister Ali al-Naimi made it explicitly clear that Saudi Arabia would not cut production, instead saying that it is high-cost producers that would need to either “lower costs, borrow cash or liquidate” adding that there is “no need for cuts as marginal barrel will get out of the market.” He was right.

Today his wish is slowly coming true after news that North Dakota’s largest producer, Whiting Petroleum, would suspend all fracking, and that Continental Resources has effectively done the same after reporting that it no longer has any fracking crews working in the Bakken shale.

As Reuters reports, Whiting said it would “suspend all fracking and spend 80 percent less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices.”

It was also confirmation that the Saudi plan to put high-cost producers on ice is working, if only temporarily.

After sliding 5.6% to $3.72, Whiting stock jumped 8% to over $4 per share in after-hours trading as investors cheered the decision to preserve capital, even if it means generating far less revenue.

Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.

The Denver-based company said it would stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance.

Rival producers Hess Corp and Continental Resources Inc have also slashed their budgets for the year, though neither has cut as much as Whiting.

As noted above, during its earnings report, Continental said that in 2016, the Bakken drilling program will continue to focus on high rate-of-return areas in McKenzie and Mountrail counties, targeting wells with an average EUR of 900,000 Boe per well.  Based on the higher EUR and a lower targeted completed well cost of $6.7 million per well, the Company expects capital efficiency to increase 17% and finding cost to decrease 15% in 2016.

Given its plans to defer most Bakken completions in 2016, Continental expects to increase its Bakken DUC inventory to approximately 195 gross operated DUCs at year-end 2016. However, Continental also said that while the Company currently has four operated drilling rigs in the North Dakota Bakken and plans to maintain this level through year end, it noted that it currently has no fracking crews deployed in the Bakken, which led some, including Bloomberg to believe, that Continental too has halted Bakken shale fracking.

One thing is certain: the cuts will drag down production and likely reverberate in the economy of North Dakota, the second-largest U.S. oil producing state after Texas, which currently pumps 1.1 million barrels per day. It means that after the 250,000 oil workers already laid off (according to Credit Suisse estimates), tens of thousands of new pink slips to highly paid workers are about to be handed out.

And another thing: as of this moment, Saudi’s oil minister is taking a victory lap in his Lamborghini – after all his plan to push the price of oil so low that marginal oil producers have no choice but to mothball production is starting to bear fruit.

There is just one problem.  Whiting Chief Executive Officer Jim Volker said that “we believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices.”

In other words, the moment oil prices rebound even modestly, and according to many the new breakeven shale prices are as low at $40-$50/barrel, the Whitings and Continentals will immediately resume production, forcing Saudi Arabia to go back to square one, boosting supply even higher, and repeat the entire charade from scratch.

And so on.


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Jim Rogers Warns “Governments Plan Is To Destroy The People Who Save”

"Everybody should be worried.. and be prepared," warns legendary investor Jim Rogers, as he sees the market "facing a bigger collapse than in 2008," and the central banks will be unable to kick the can much longer. "This is the first time in recorded history where you have Central Banks & governments setting out to destroy the people who save & invest," Rogers exclaims and "the markets are telling us that something is wrong – we're getting close."

"The central bankers haven't given up yet… they think they are smarter than you and me and the market… they're not!"

Full interview with FutureMoneyTrends below…

Detailed breakdown

  • 1:20 Is this Market Crash Different?
  • 5:00 Cashless Society – it gives 'them' more control, it is bad for you and me. There is now way to exit from this.
  • 7:20 Crash will be Bigger – eventually the market is going to say "enough is enough"
  • 8:40 Gold – going much higher, may be opportunity to buy more lower first
  • 10:10 2016 Election, Donald Trump
  • 11:20 Where Jim is Investing – Short US equities, Short Junk bonds, Shorting Europe into rally
  • 12:30 China's Economy
  • 17:30 One investment over five years, sugar or rice or Russian Ruble


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When Currency Pegs Break, Global Dominoes Fall

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

When a currency peg breaks, it unleashes shock waves of uncertainty and repricing that hit the global financial system like a tsunami.

The U.S. dollar has risen by more than 35% against other major trading currencies since mid-2014:

If all currencies floated freely on the global foreign exchange (FX) market, this dramatic rise would have easily predictable consequences: everything other nations import that is priced in dollars (USD) costs 35% more, and everything the U.S. imports from other major trading nations costs 35% less.

But some currencies don't float freely on the global FX markets: they're pegged to the U.S. dollar by their central governments. When a currency is pegged, its value is arbitrarily set by the issuing government/central bank.

For example, in the mid-1990s, the government/central bank of Thailand pegged the Thai currency (the baht) to the USD at the rate of 25 baht to the dollar.

Pegs can be adjusted up or down, depending on a variety of forces. But the main point is the market is only an indirect influence on the peg, not the direct price-discovery mechanism as it is with free-floating currencies.

If central states/banks feel their currency is becoming too strong via a vis the USD, they can adjust the peg accordingly.

Why do states peg their currency to the U.S. dollar? There are several potential reasons, but the primary one is to piggyback on the stability of the dollar without having to convince the market independently of one's stability.

Another reason to peg one's currency to the USD is to keep your currency weaker than the market might allow. This weakness helps make your exports to the U.S. cheap/ competitive with other nations that have weak currencies.

Nations defend their peg by selling dollars and buying their own currency. The way to understand this is supply and demand: if nobody wants the currency, the demand is low and the price falls. If there is strong demand for a currency, it rises in purchasing power if the supply is limited.

By selling USD and buying their own currency, nations put downward pressure on the dollar and put a floor under their own currency.

The problem is you need a big stash of dollars to sell when you want to defend your peg. If you run out of dollars (usually held in U.S. Treasury bonds), you can't defend your peg, and the peg breaks.

This is why China amassed a $4 trillion stash of U.S. Treasuries. Now that the USD has soared, China's yuan (RMB) has also soared against other currencies because it's pegged to the USD. This has made Chinese goods more expensive in other currencies.

Currently, the government/central bank of China is attempting to adjust its currency peg to weaken the yuan vis a vis the dollar. To avoid showing signs of losing control, China is attempting to defend the yuan against a break in the peg, and it has burned over $700 billion of its stash of USD in the past few months defending the yuan peg.

Here is a chart of the yuan in USD. Note that China moved the peg from 8.3 to 6.8 to the dollar to strengthen the yuan when the U.S. complained that it was undervalued. The yuan rose to 6 to 1 USD in early 2014, and has since started to weaken as the dollar has soared.

The problem with currency pegs is they have a nasty habit of breaking. The Seneca Cliff offers a model for the way pegs appear stable for a long time and then collapse:

Why the Chinese Yuan Will Lose 30% of its Value

When a currency peg breaks, it unleashes shock waves of uncertainty and repricing that hit the global financial system like a tsunami. When Thailand's 25-to-1 peg to the USD broke in 1997, it triggered the Asian Contagion that nearly pushed the world economy into recession.

Now that China's peg to the dollar is under assault, what happens to the global economy when a weakening China finds it can't stop a rapid devaluation of its currency?

Gordon Long and discuss this and other critically important aspects of currency pegs in THE U.S. DOLLAR & THE GLOBAL "PEG PAIN TRADE" (28:36 min.)


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“Credit Risk Is Growing,” FDIC Warns As Loss Provisions Jump $3.8 Billion In 3 Months

On Tuesday, we got the answer (or at least a partial answer) to the question we posed last month when we asked the following: “How long before the impairments and charges currently targeting smaller firms finally shift to the bigger ones? And how underreserved is JPMorgan for that eventuality?

We were of course referring to JPMorgan’s exposure to America’s dying oil patch where a rash of defaults and bankruptcies are just around the corner once the bevy of cash flow negative producers see their credit facilities cut by 10-20% when RBL is reevaluated in April.

What prompted us to ask specifically about JPMorgan’s exposure was the fact that in Q4, the bank did something it hasn’t done in 22 quarters: it increased loan loss provisions.

That very likely had to do with the worsening prospects for its energy book where O&G exposure is a whopping $44 billion against which the bank said yesterday it will now provision an exra $500 million in Q1 of 2016. That brings total provisions against JPMorgan’s energy exposure to $1.3 billion, or around 3%. Of the total $44 billion in energy exposure, $19 billion is HY or, junk.

Of course that’s just one bank. What we don’t know is what the breakdown looks like for other large, systemically important institutions, nor do we have any idea what the granular data is for the banking sector is as a whole. 

What we do know, however, is that when you look out across 6,182 FDIC-insured institutions, provisions have been on the rise for six consecutive quarters and they jumped sharply in Q4, rising $3.8 billion in total.

“Some of the increase in loss provisions is attributable to stress in the energy sector,” the FDIC said, adding that “there are signs of growing credit risk, particularly among loans related to energy and agriculture.”

Yes, “particularly” there. Given the fact that banks habitually put off setting aside adequate reserves in order to “smooth” out earnings, one wonders what the Q4 numbers would have looked like had provisions been appropriately large. And that raises the next question: what will Wall Street’s earnings look like when postponing the inevitable is no longer possible?


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We Just Found Out The Real Reason The FBI Wants A Backdoor Into The iPhone

Submitted by Jake Anderson via TheAntiMedia.org,

The FBI versus Apple Inc. An unstoppable force meets an immovable object the feverish momentum of American technocracy accelerating into the cavernous Orwellian entrenchment of the surveillance state. You thought the patent wars were intense? The ‘Battle of the Backdoor’ pits one of America’s most monolithic tech conglomerates against the Department of Justice and, ultimately, the interests of the national security state. And this case is likely only the opening salvo in what will be a decades-long ideological war between tech privacy advocates and the federal government.

On its face, the case boils down to a single locked and encrypted iPhone 5S, used by radical jihadist Syed Rizwan Farook before he and his wide Tashfeen Malik killed 14 people in San Bernardino on December 2nd. The DOJ wants Apple to build a backdoor into the device so that it can bypass the company’s state of the art encryption apparatus and access information and evidence related to the case.

At least, that’s the premise presented to the public. As we are learning, the FBI and the federal government have a far more comprehensive end-game in mind than merely bolstering the prosecution of this one case.

Whistleblower Edward Snowden tweeted last week that “crucial details [of the case] are being obscured by officials.” Specifically, he made the following trenchant points:

 

Now, the Wall Street Journal has confirmed that there are actually 12 other iPhones the FBI wants to access in cases that have nothing to do with terrorism. According to an Apple lawyer, these cases are spread all across the country:Four in Illinois, three in New York, two in California, two in Ohio, and one in Massachusetts.”

With each of these cases, the FBI’s lawyers cite an 18th-century law called All Writs Act, which they say is the jurisprudence needed to force Apple to comply and bypass their built-in proprietary encryption methods. Is it any wonder the only case the public hears about is the one that involves terrorism?

While law enforcement authorities claim these 12 additional cases are evidence that encryption has become a major hindrance to investigations across the country, privacy advocates say it is, conversely, evidence that national security is not the only factor at play in the government’s desire to circumvent encryption. This is further evidenced by the fact that the government has been pressuring Apple to create iPhone backdoors since long before the San Bernardino attack.

Rather, information privacy advocates like the Electronic Frontier Foundation (EFF) say the push for bypassing encryption specifically, compelling Apple to build a backdoor operating system involves a large-scale campaign to use the threat of terror to overreach their legal authority, breaching civil liberties in the process. We saw this in the wake of 9/11, when NSA’s PRISM program conscripted Google, Microsoft, and Facebook in a covert data mining campaign to collect metadata from American citizens.

The EFF says the Apple case is part of an ongoing pattern of the state using the threat of terrorism as a Trojan horse to get backdoor access to citizens’ smartphones:

“The power to force a company to undermine security protections for its customers may seem compelling in a particular case, but this week’s order has very significant implications both for technology and the law. Not only would it require a company to create a new vulnerability potentially affecting millions of device users, the order would also create a dangerous legal precedent. The next time an intelligence agency tries to undermine consumer device security by forcing a company to develop new flaws in its own security protocols, the government will find a supportive case to cite where before there were none.”

The DOJ deployed talking heads to all the media outlets to make the specious argument that what they’re asking for doesn’t really constitute a backdoor. The fact of the matter is, they are asking for a court to mandate that Apple work for the government (which, some have argued, creates a 13th amendment violation as well as privacy concerns) in weakening their own security and creating access to a locked, encrypted device. This is a backdoor, and virtually all tech experts agree that they are dangerous.

Nate Cardozo explained on the PBS NewsHour:

“Authoritarian regimes around the world are salivating at the prospect of the FBI winning this order. If Apple creates the master key that the FBI has demanded that they create, governments around the world are going to be demanding the same access.”

Computer programming expert and Libertarian Party presidential candidate John McAfee tried to call the FBI’s bluff last week by offering to take apart the San Bernardino iPhone and help the government extract the data they want without building a backdoor. He made the rounds on major media outlets as well, warning of the dangers of complying with the Justice Department.

McAfee says the FBI is “asking every owner of an iPhone to make their phone susceptible to bad hackers and more importantly foreign enemies of the United States like China.”

Meanwhile, this week, Facebook founder Mark Zuckerberg offered intellectual solidarity with Apple’s CEO Tim Cook, while Bill Gates took a more moderate stance on the issue, suggesting privacy advocates were overreacting. Gates later backslid from this position and lent his support to Apple.

It’s also worth pointing out that the FBI’s own mistakes during the investigation of the San Bernardino shooting may the reason they now need Apple’s help. According to Truthdig,

“The FBI reportedly asked San Bernardino County officials to tamper with the iCloud account of one of the suspected shooters in last December’s attack, in an effort that ultimately failed — making it impossible to know if there were other ways of recovering encrypted information without taking Apple to court.”

Apple’s brand is on the line, too. Previously hailed as a data security juggernaut among smartphone manufacturers, a judicial order to build a backdoor would compromise their status in a market in which uncompromised encryption is becoming rarer by the day.

The stakes couldn’t be higher. As noted by The Pontiac Tribune, if the FBI prevails in this case, the ramifications won’t be limited to smartphones. It will set a precedent for the government legally conscripting any and every entity they desire for the purposes of citizen surveillance and metadata collection.

* * *

After the bell we hear news from The New York Times that:

  • APPLE SAID TO BE WORKING ON IPHONE THAT IT CAN'T EVEN HACK

That should solve problem… who will The FBI force to un-encrypt now?


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Canary, Meet Coal Mine: These Are The Tranches Where The CLO 2.0 Meltdown Begins

It was just three days ago when we brought you what we called “the next shoe to drop:” CLOs.

The market for collateralized loan obligations dried up completely in the wake of the crisis, as just about the last thing anyone wanted anything at all to do with was paper “secured” by leveraged loans.

But Wall Street (not to mention investors) never learn and supply came storming back in 2012. Within two years, issuance was running at a $124 billion per year clip. For reference, that’s about the same amount of supply that came to market last year in the auto loan-backed ABS space.

Issuance slipped in 2015 and in Q1 2016, it’s fallen off the map.

Why? Simple: the collateral pools are littered with the kind of “assets” you might not want in the current environment. Like exposure to US energy companies whose prospects are increasingly bleak. According to S&P, the credit ratings of some 1.4% of assets held by US CLOs have been downgraded or placed on credit watch negative this year. Similarly, Moody’s notes that 12.6% of CLO assets carry a negative outlook – that’s up 2.2% in just three months

As we noted on Sunday, performace is suffering mightily – especially in certain buckets. “Based on our sample, we estimate that the median total return for US CLO 2.0 (2014-15 vintage) BBs is -9.2%, and for single-Bs is -20.9%,” Morgan Stanley wrote, in a recent report.Investment-grade US CLO tranches performed better but still within negative total return territory, except for AAAs.”

Performance woes are compounding the problem for a space that was already facing a looming regulatory headache in the form of the 5% risk retention rule which, in an effort to ensure managers have “skin in the game” so to speak, will effectively cause a third of CLO managers to either attempt to consolidate with bigger players with deeper pockets, or else curb issuance. The is made all the worse by the fact that compelling managers to take a 5% stake in the first loss tranche effectively forces them to have more than 5% skin in the game. After all, it’s the first loss tranche.

And all of that is on top of soaring funding costs:

Just hours after our “next shoe to drop” warning, Moody’s followed in S&P’s footsteps and delivered their first downgrade of post-crisis US CLOs. In the crosshairs: Silvermine Capital or, more specifically, Silvermore CLO and Silver Spring CLO where exposure to junk debt and the increasingly toxic O&G space is worryingly high.

“In two of the three deals, the exposure has even increased somewhat from the initial portfolio,” Deutsche Bank notes.

Here’s the tranche-by-tranche breakdown:

“In market value terms they have lost a lot of value but the actual test par erosion is still very limited, so there is a large amount of implied losses but still some runway to go before payments to equity get cut off,” Deutsche cheerfully notes.

We’re reminded of what Morgan Stanley said last week: “… we reiterate our view that the levels of distress in the US market may create “option-like” payoffs in CLO equity in the secondary market, especially in deals by managers who are better ‘credit pickers.'”

So who’s a buyer?

*  *  *

Bonus chart: monthly US CLO issuance


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