Archive - Aug 2014 - Story

New normal diplomacy...

The world is no safer than it was when the War on Terror began. Some of the Middle East’s most brutal dictators were removed from power, but radical jihadists have filled the vacuum of authority. Men and women are still coming home in caskets draped with Old Glory, or they come home mentally and physically debilitated. And for what exactly? If Smedley Butler was correct, and war is a racket, then there was another measure of success at work. And it sure wasn’t the promotion of universal democratic values. If empire can’t bring that, then there isn’t much of a point outside of domination. In other words, somebody benefits from imperium, and it’s not the average voter. Sooner or later the jig is up.

Low volatility is being driven, in BofAML's view, by both fundamental and technical factors. Fundamentally, the volatility of real economic activity and inflation has fallen to near 20 year lows in what some are calling the Great Moderation 2.0. However, the recent further collapse in volatility is also explained by a feedback loop fueled by low conviction, low liquidity, low yields and low fear. Central bank policy has been the largest explanatory factor of both the fundamentals and technicals... and that has BofAML concerned about the risks of short-term volatility spikes exacerbated by market illiquidity.

Islamic State fighters seized control of Iraq's biggest dam, an oilfield and two more towns on Sunday after inflicting their first major defeat on Kurdish forces since sweeping through the region in June. Local officials said militants with the extremist group Islamic State took control of the towns of Zumar and Sinjar near the city of Mosul on Sunday, waging fierce clashes with Kurdish forces. The French news agency AFP quoted a United Nations spokesman saying 200,000 people have fled Sinjar and said there are grave concerns for their safety.

With China's Manufacturing PMI at cycle highs and Services PMI comfortably in expansion, everything must be ponies and unicorns among the world's most mal-invested credit-bubble-fueled populace. However, as we have pointed out, discrepancies abound in the data and now desperately sad anecdotal picture of a wretched working class in China are starting to emerge. As WantChinaTimes reports, 55-year-old Zhao Guangsheng poured flammable liquids on his body before lighting himself on fire and running into Xingtan city government's office lobby (in Hunan province). Poverty appears to be the reason for his self-immolation, aside from mental instability, as Zhao was unable to pay utility bills after being moved due to forced land acquisitions by the government.

Historically-informed investors are being given a hint of advance warning here, in the form of a strenuously overvalued market that now demonstrates a clear breakdown in internals. We observe these breakdowns in the form of surging credit spreads (junk bond yields versus Treasury yields of similar maturity), weakness in small capitalization stocks, and other measures. These divergences have actually been building for months, but rather quietly.

As John Kenneth Galbraith famously stated, "The process by which money is created is so simple the mind is repelled." As Peak Prosperity's Chris Martenson explains (as part of his excellent Crash Course), essentially, money is lent into existence though fractional reserve banking. The dollars you deposit at the bank? They turn into nearly 10x that amount as your bank subsequently makes loans using that money as collateral. As simple as the process is, nearly every American remains ignorant of it and its massive implications. At the heart of the matter is this: our money supply and its related debt obligations MUST continue expanding (thereby devaluing the purchasing power of each dollar ad infinitum) -- forever -- or the entire system collapses upon itself. Prepare to be repelled...

Despite the recent significant weakness in the broader European and US equity indices, European bank stocks are only just beginning to resume their larger downtrend (as the hopes of a Draghi put remained firm until the last few days of BES debacle). As such, BofA's Macenil Curry believes, they are likely to be the catalyst for the next leg of "risk off" and in that environment EURUSD should continue to suffer.

In recent weeks France has defied US demands not to build Mistrals for Russia, has questioned dollar imperialism and the Petrodollar, and has blasted the US banking regulator's fines as "accelerating the decline of the dollar." So it is likely not a huge surprise that ahead of the G-20 meeting of world leaders later in the year, The FT reports, France has gathered support to challenge US regulators imposing heavy penalties on foreign banks. Berlin, London and Rome have backed Paris in its push to have its concerns about so-called US extraterritoriality discussed when leaders of the world’s top 20 economies meet hoping to bring "more proportionality" to bank fines. With allies like this...

A day after Malaysian Airlines MH-17 was shot down on July 17 over east Ukraine (still to be determined by who thanks to epic amounts of fact-free propaganda) the new cold war between Russia and the US nearly heated up quite substantially, after a U.S. Air Force spy plane closely evaded an encounter with the Russian military on July 18 in what may potentially have escalated into a live fire tragedy that could have unleashed something far worse. According to CNN, the U.S. plane had been flying in international airspace, conducting an electronic eavesdropping mission on the Russian military, when the Russians took the unusual action of beginning to track it with land-based radar.  The Russians then sent at least one fighter jet into the sky to intercept the aircraft, the U.S. official said Saturday.

With regard this week’s market debacle, the question, of course, is whether this was simply a blip – yet another one-day BTFD opportunity – or the start of something bigger and worse. The answer, we think, depends on how the media Narrative surrounding the week takes shape over the next several days. Right now the media Narrative about the week is in complete disarray, because there was no obvious “reason” for the sell-off. Or rather, there were too many possible reasons, from bad earnings reports to the Argentina default to worries about a strong jobs number to Espirito Santo cracking up to new Russian sanctions to just a generic “we were overdue for this”. From a game theory perspective, this sort of seemingly out-of-the-blue sharp move had very little to do with anything that happened this week, but is a natural by-product of the Common Knowledge Game in action.

• Portugal may use the Resolution Fund to recapitalize Banco Espirito Santo, Diario Economico reports, citing unidentified people linked to the process.
• Resolution Fund may inject more than €3 billion
• A “bad bank” may be created for the toxic assets of the credit portfolio
• Solution aims to rescue Banco Espirito Santo without spending taxpayers’ money, and is being prepared by the government and the Bank of Portugal
• From Aug. 4, Banco Espirito Santo will leave the stock market and will be 100% owned by the Resolution Fund, an entity created in 2012 and financed by Portuguese banks and by revenue from the special contribution that the banking sector pays the Portuguese state

When it comes to diplomacy, John Kerry may have rapidly become the biggest laughing joke in US State Department history, but that doesn't mean his exchanges weren't valuable to others. Others such as Israel, whose relations with the US have gone from worse to atrocious in recent months, and which as Spiegel just revealed, had eavesdropped on John Kerry on at least one occasion, during Mid-East peace negotiations. Israel would then use the information obtained from the calls during its own negotiations in the Mideast conflict. Further, Spiegel reports that at least one other intelligence service also listened in as Kerry mediated last year between Israel, the Palestinians and the Arab states. The German publications adds wryly that "revelations of the eavesdropping could further damage already tense relations between the US government and Israel" although with Netanyahu openly refusing Obama's demands about a Gaza ceasefire, one wonders just how much worse things between the two "allies" could get.

"Obama should just resign. He is outrageous. He supported the NSA and has claimed the CIA does not spy on Congress. Well, the Inspector General has released his report and oops – yes the CIA spies on Congress. Obama has used the NSA, IRS, and the CIA to attack everyone. These people behind the curtain are the unelected. Obama is either a stooge or part of the real danger to the survivability of our nation long-term."