en This Is How Much Of Your Life The US Has Spent At War <p>With the US <a href="">spiraling quickly</a> towards a maritime conflict with China over the latter’s “construction projects” in the disputed South China Sea and with NATO doing its best to match Moscow’s Eastern European sabre-rattling on the way to facilitating the most serious confrontation between Russia and the West in decades, we thought it as good a time as any to bring you the following graphic which shows the percentage of your life that the US has been at war.</p> <p>Simply put, if you were born before in 1992 or later, America has been at war for at least two-thirds of your life and if you were born after 2001, well... you have never known life in the US without war.</p> <div><a href=""><img src="" width="318" height="564" /></a></div> <div>More from The Washington Post:</div> <div> <blockquote> <div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <div><em>Using somewhat subjective definitions of "at war" -- Korea counts but Kosovo doesn't in our analysis, for example -- we endeavored to figure out how much of each person's life has been spent with America at war. We used whole years for both the age and the war, so the brief Gulf War is given a full year, and World War II includes 1941. These are estimates.</em></div> <div><span style="text-decoration: underline;"><strong><em>But the beginning of the conflict in Afghanistan in (late) 2001 means that anyone born in the past 13 years has never known an America that isn't at war. Anyone born after 1984 has likely seen America at war for at least half of his or her life. And that's a lot of Americans.</em></strong></span></div> </blockquote> <div>Given <a href="">recent events</a> in Iraq and Syria, this isn't likely to change anytime soon.</div> </div> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="227" height="117" alt="" src="" /> </div> </div> </div> Afghanistan China Iraq Wed, 27 May 2015 01:30:00 +0000 Tyler Durden 507074 at Gold Price Moves Since QE3 Have Been A Warning To Mainstream Economists, Not Cause For Celebrations <p><a href=""><em>Submitted by Jeffrey Snider via Alhambra Investment Partners</em></a>,</p> <p><strong>A little over two years ago, in the middle of April 2013, there was a gold crash that came seemingly out of nowhere.</strong> Worse, for gold investors anyway, that crash was repeated just a few months later. Where gold had stood just shy of $1,800 an ounce at the start of QE3, those cascades had brought the metal price down to just $1,200. <strong>For many, especially &#39;so-called&#39; orthodox economists, it heralded the end of the &ldquo;fear trade&rdquo; and meant, unambiguously, that the recovery had finally at long last arrived.</strong></p> <p>As Felix Salmon wrote <a href="" target="_blank">at Reuters</a>&nbsp;in an article titled, <em>The Fear Bubble Bursts</em>:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>As a result, the falling price of gold is more important than simply being an opportunity for schadenfreude around the likes of Glenn Beck or John Paulson or Zero Hedge&hellip;</p> <p>&nbsp;</p> <p>The biggest problem in the markets right now is that they&rsquo;re still far too risk-averse. Fear-based assets like gold, Treasury bonds, and cash are in high demand, while there isn&rsquo;t enough money flowing through greed-based assets like stocks and bank loans and into the economy as a whole. Even if the stock market is expensive, the number of primary and secondary offerings remains low; similarly, banks are not expanding their loan books nearly fast enough&hellip;</p> <p>&nbsp;</p> <p>My hope is that the price of gold will continue to fall, that goldbugs will look increasingly silly, and that as a result Americans with savings will conclude that the best thing to do with those savings is to put them to work in a productive manner, rather than self-defeatingly trying to protect what they have.</p> </blockquote> <p><strong>Gold has not continued that wished-for collapse, but hasn&rsquo;t risen much either.</strong> In fact, the price of gold remained above $1,300 for only short periods and hasn&rsquo;t been near that level outside of the January 2015 &ldquo;Swiss problem.&rdquo; Most gold analysis views it in terms of not just the &ldquo;fear bubble&rdquo; but also a proxy for interest rates and monetary policy. There is already a problem with that latter interpretation, as the price of gold began to its decline almost the moment QE3 started. <strong>Economists think of gold investors in only these terms, as emotional and irrational Fed-haters.</strong></p> <p><a href=""><img alt="ABOOK May 2015 Gold Dollar" class="aligncenter size-full wp-image-30396" height="341" src="" width="641" /></a></p> <p>In the broader economic context, then, the fact that gold was falling at the same time QE&rsquo;s had commenced provided that hoped-for economic confirmation. Gold adherents were getting their &ldquo;debasement&rdquo; but that gold prices were sharply reacting in the &ldquo;wrong&rdquo; direction which could only mean, to the mainline economic view, that QE wasn&rsquo;t just debasing the dollar it was actually working while doing so.</p> <p>Writing just prior to the second gold &ldquo;slam&rdquo; in June 2013, Nouriel Roubini took his best shots at framing gold&rsquo;s descent as a victory for Ben Bernanke:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Third, unlike other assets, gold does not provide any income. Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. <span style="text-decoration: underline;"><strong>Now that the global economy is recovering, other assets</strong></span>&mdash;equities or even revived real estate&mdash;thus provide higher returns. Indeed, U.S. and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.</p> <p>&nbsp;</p> <p>Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling. <span style="text-decoration: underline;"><strong>But the more positive outlook about the U.S. and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise</strong></span>, rather than fall. [emphasis added]</p> </blockquote> <p>Roubini&rsquo;s fourth point may be the most important, as it implies that there is a relationship between the Fed&rsquo;s policies, especially QE&rsquo;s, and the rate of inflation. However, recent history, especially in the two years since gold crashed, has proven that totally and fully incorrect. There has been no &ldquo;inflation&rdquo; much at all, and even to the point that the Fed&rsquo;s preferred inflation target, the PCE deflator, has come in under the policy target of 2% for<em> 35 straight months</em> dating back to just before QE3 was rumored.</p> <p><a href=""><img alt="ABOOK May 2015 Gold PCE Deflator" class="aligncenter size-full wp-image-30394" height="341" src="" width="606" /></a></p> <p><strong>If QE3 and QE4 had any impact on &ldquo;inflation&rdquo; or recovery in the US it is not apparent. </strong>For a time in 2013, Roubini&rsquo;s &ldquo;rising real rate&rdquo; scenario seemed to be somewhat plausible as the entire UST complex and yield curve shifted upward. While the PCE deflator did not much move, that temporary rise in nominal yields brought real rates up and appeared at first as if it might reflect at least the near-future possibility of the recovery and recovery financial dynamics.</p> <p>But that all turned around in October and November 2013. <strong>In other words, anything resembling the recovery in these financial terms had a very short life.</strong> By November 2013, nominal yields had slowed their ascent and the overall UST yield curve turned durably bearish. Though real rates fell once more in the middle of 2014 as &ldquo;inflation&rdquo; ticked up slightly, since October 2014 &ldquo;inflation&rdquo; has <em>declined</em> far faster than nominal yields. <strong>So real interest rates have been rising, but not for the reasons outlined by Roubini and his orthodox notions of recovery.</strong></p> <p><a href=""><img alt="ABOOK May 2015 Gold PCE Deflator Real Rates" class="aligncenter size-full wp-image-30393" height="562" src="" width="606" /></a></p> <p><strong>Clearly, there is &ldquo;something&rdquo; missing here beyond just the recovery economists were so sure that gold&rsquo;s crash was foretelling.</strong> Normalizing both economic and financial conditions would mean interest rates rising back toward where they were pre-crisis just as &ldquo;inflation&rdquo; picks up and remains at or slightly above 2%. Neither of those factors is evident anywhere at all in the two years since gold prices crashed.</p> <p>The idea of gold prices behaving like a zero-coupon bond is in some ways relevant to this problem. Economists only think of the asset side of that paradigm while never moving beyond that into liabilities. A government bond is an asset, sure enough, but it can also be part of the liability structure in repo. Just as government bonds act as collateral, so too does gold. <strong>That has led to strict and lasting misinterpretation about the behavior of gold in 2008, which Roubini tried to incorporate within his anti-gold stance.</strong></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>But, even in that dire scenario, gold might be a poor investment. Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls.</p> </blockquote> <p>That isn&rsquo;t what happened to gold, at all. You can disprove that theory rather easily, as I wrote <a href="" target="_blank">contemporarily in April 2013</a> about the gold slam as it was occurring.</p> <p><a href=""><img alt="ABOOK May 2015 Gold 2008" class="aligncenter size-full wp-image-30395" height="341" src="" width="577" /></a></p> <p><span style="text-decoration: underline;"><strong>Gold prices crashed on three separate occasions in 2008, all of which were tied to problems in collateral chains and interbank financial irregularities. </strong></span>In the first episode, the price decline started when Bear Stearns failed and ended on May 2, 2008. That date stands out because that was the first time the Fed had expanded its list of acceptable and eligible collateral in its TSLF Schedule 2 to include non-GSE MBS paper as well as strictly non-mortgage ABS. <em><strong>In other words, the collateral implosion started by Bear Stearns &ldquo;cold fusion&rdquo; ended the moment the Fed debased not the currency or bank reserves but the list of &ldquo;appropriate&rdquo; interbank collateral.</strong></em></p> <p>As I described it in April 2013:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>That means in times of extreme stress, gold acts like a universal liquidity stopgap &ndash; when all else fails, repo gold. The operational reality of a gold repo is a gold lease, charged at the forward rate (GOFO). In terms of market mechanics, a dramatic increase in gold leasing is seen as a massive increase in <span style="text-decoration: underline;"><strong>supply</strong></span> on the <span style="text-decoration: underline;"><strong>paper</strong></span> markets.</p> <p>&nbsp;</p> <p>For various reasons in the past five years, collateral chains and the available collateral pool has dwindled dramatically. That has left banks to scramble for operational bypasses, but it also has led to periods of very acute stress. [emphasis in original]</p> </blockquote> <p><span style="text-decoration: underline;"><strong>As a representation of the &ldquo;dollar&rdquo;, then, gold prices act as a partial proxy of actual &ldquo;dollar&rdquo; availability balanced against that or any desperate bid for safety &ndash; and having very little to do with interest rate differentials.</strong></span></p> <p>That makes the trend in gold since QE3 started all the more interesting if we take in the &ldquo;correct&rdquo; context of the global &ldquo;dollar.&rdquo; Clearly, we cannot take falling gold as indicating a recovery because one never came and it surely looks to be further away now than then, an interpretation consistent with financial measures, yields and prices. But we can look at gold over the past three years since QE3 and link its behavior to that of the &ldquo;dollar.&rdquo;</p> <p>While economists might still see QE as contributing to global &ldquo;liquidity&rdquo;, which it seems like it should what with all those trillions in bank &ldquo;reserves&rdquo; created, there has been persistent criticism of it as nurturing instead the opposite condition. <strong>The major part of creating all those bank &ldquo;reserves&rdquo; is to remove collateral in the process &ndash; transforming a repo-based system back toward a more-traditional idea of how banking used to work. But the wholesale system since August 2007 has been moving away from unsecured lending interbank and otherwise to almost purely repo.</strong></p> <p>The Fed has been very aware of this problem especially when it nearly destroyed repo in April 2011 (and then a desperate &ldquo;dollar&rdquo; problem only two months later?) by stripping the system of almost all t-bills toward the end of QE2 (which was the reason for Operation Twist). When planning and extrapolating for QE3, those operational constraints were at best secondary to the psychological effects that were supposed to accompany Bernanke&rsquo;s massive and &ldquo;open ended&rdquo; monetary program. Getting everyone to &ldquo;feel&rdquo; better that the Fed was doing something big was meant as a far greater economic stimulant than the negative liquidity of depriving usable collateral in terrible quantities. <span style="text-decoration: underline;"><strong>The recovery from the defeat of pessimism, in Felix Salmon&rsquo;s terms, was thought to be so much more powerful than the status of actual &ldquo;dollar&rdquo; circulation ability.</strong></span></p> <p><a href=""><img alt="ABOOK May 2015 TIC 6mo Eurodollar" class="aligncenter size-full wp-image-30257" height="341" src="" width="641" /></a></p> <p>So much <a href="" target="_blank">happy emotion was never really</a> much of a &ldquo;stimulant&rdquo;, of course, but the negative factors on &ldquo;dollar&rdquo; circulation were very real. In many ways, <strong>the collapse in gold presaged this latest stage or leg in the collapse of the global &ldquo;dollar&rdquo;, eurodollars in particular, which starts to account for the economic behavior these past few years as well. </strong>Gold, then, since early 2008 has been telling us a lot about the tendency of the eurodollar standard toward outright imbalance and dysfunction. That is a condition that is not in any way conducive for a global recovery, which is one big reason why, despite orthodox giddiness over gold prices, it never came.</p> <p><strong>It also suggests that QE has acted as a <em>depressant</em> upon the global economy, net, depriving significant circulation ability in eurodollar channels and beyond.</strong> This would include not just reduced levels of collateral flow, but also bank balance sheet capacity overall in the <a href="" target="_blank">full 2013 aftermath</a> of QE3 and QE4. It would have been nice if gold&rsquo;s price collapse was a signal of actual success, but instead it appears to be just another form of structural financial decay and the economic malaise (at best) that attends it. In that view,<span style="text-decoration: underline;"><strong> it is somewhat amazing that gold prices haven&rsquo;t suffered further lower lows, which suggests that there may actually have been a significant safety bid all along. The &ldquo;fear&rdquo; bubble did not end; it was overwhelmed by QE&rsquo;s depressive constant and the related countdown to the end of the eurodollar standard.</strong></span></p> <p><a href=""><img alt="ABOOK May 2015 Gold Repo Fails" class="aligncenter size-full wp-image-30397" height="341" src="" width="618" /></a></p> <p>&nbsp;</p> <p><em><span style="text-decoration: underline;"><strong>Gold price activity since QE3 has been a warning, and a big one, not cause for victory celebrations.</strong></span></em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="600" height="321" alt="" src="" /> </div> </div> </div> Bear Stearns Ben Bernanke Ben Bernanke Bond Central Banks EuroDollar Federal Reserve Felix Salmon Glenn Beck Global Economy Goldbugs John Paulson Monetary Policy Nouriel Nouriel Roubini Quantitative Easing Real estate Real Interest Rates Reality recovery Reuters Yield Curve Wed, 27 May 2015 01:00:33 +0000 Tyler Durden 507077 at Hillary Clinton's State Department Approved $165 Billion In Arms Deals To Clinton Foundation Donors <p>Late last month <a href="">we outlined</a> an IBTimes report which showed that Goldman Sachs paid nearly a quarter of a million dollars to Bill Clinton for a speech before lobbying the State Department (then run by Hillary Clinton) on legislation tied to the Export-Import Bank which would eventually approved a loan to a Chinese company that subsequently placed a $75 million purchase order with a Goldman-owned aircraft manufacturer. The implication, of course, was that the speaking engagement fee ultimately influenced the State Department’s decision making, a suggestion Goldman called “preposterous.”&nbsp;</p> <p>The Clintons have also come under scrutiny for possible conflicts of interest arising from contributions to Clinton Foundation charities while Hillary Clinton served as the nation’s top diplomat. More specifically, a Reuters investigation revealed that the Foundation <a href="">failed to report</a> “tens of millions” of donations from foreign governments on three years’ worth of 990s, prompting the organization’s acting CEO Maura Pally to pen <a href="">a lengthy blog post</a> explaining the “mistake.” Shortly thereafter, Reuters found inaccuracies in Pally’s explanation, noting that in fact, Clinton <a href="">broke transparency promises</a> made to the Obama administration.&nbsp;</p> <p>Now, the IBTimes is out with a new investigative piece that looks at the relationship between foreign government and corporate donors to Clinton charities and weapons deals negotiated under Hillary Clinton’s State Department which, as it turns out, <strong>approved $165 billion in arms deals to nations who had previously given money to the Clinton Foundation.&nbsp;</strong></p> <p>Via <a href="">IBTimes</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>In the years before Hillary Clinton became secretary of state, the Kingdom of Saudi Arabia contributed at least $10 million to the Clinton Foundation, the philanthropic enterprise she has overseen with her husband, former president Bill Clinton. Just two months before the deal was finalized, Boeing -- the defense contractor that manufactures one of the fighter jets the Saudis were especially keen to acquire, the F-15 -- contributed $900,000 to the Clinton Foundation, according to a company press release.</em></p> <p>&nbsp;</p> <p><em>The Saudi deal was one of dozens of arms sales approved by Hillary Clinton’s State Department that placed weapons in the hands of governments that had also donated money to the Clinton family philanthropic empire, an International Business Times investigation has found.</em></p> <p>&nbsp;</p> <p><em><span style="text-decoration: underline;"><strong>Under Clinton's leadership, the State Department approved $165 billion worth of commercial arms sales to 20 nations whose governments have given money to the Clinton Foundation, according to an IBTimes analysis of State Department and foundation data. </strong></span>That figure -- derived from the three full fiscal years of Clinton’s term as Secretary of State (from October 2010 to September 2012) -- represented nearly double the value of American arms sales made to the those countries and approved by the State Department during the same period of President George W. Bush’s second term…</em></p> <p>&nbsp;</p> <p><em><strong>The Clinton-led State Department also authorized $151 billion of separate Pentagon-brokered deals for 16 of the countries that donated to the Clinton Foundation, resulting in a 143 percent increase in completed sales to those nations over the same time frame during the Bush administration. </strong>These extra sales were part of a broad increase in American military exports that accompanied Obama’s arrival in the White House.</em></p> </blockquote> <p>These deals benefited the usual Middle East suspects with whom the Obama administration is now coordinating for the ouster of Assad...</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>The State Department formally approved these arms sales even as many of the deals enhanced the military power of countries ruled by authoritarian regimes whose human rights abuses had been criticized by the department. <strong>Algeria, Saudi Arabia, Kuwait, the United Arab Emirates, Oman and Qatar all donated to the Clinton Foundation</strong> and also gained State Department clearance to buy caches of American-made weapons even as the department singled them out for a range of alleged ills, from corruption to restrictions on civil liberties to violent crackdowns against political opponents. &nbsp;</em></p> </blockquote> <p>...and were consummated even as Clinton herself acknowledged an explicit link between some beneficiaries and funding for the very same terrorists who are now set to become a scapegoat for the very same Assad ouster…</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>As secretary of state, Hillary Clinton also accused some of these countries of failing to marshal a serious and sustained campaign to confront terrorism. In a December 2009 State Department cable published by Wikileaks, Clinton complained of “an ongoing challenge to persuade Saudi officials to treat terrorist financing emanating from Saudi Arabia as a strategic priority.” <strong>She declared that “Qatar's overall level of CT cooperation with the U.S. is considered the worst in the region.”&nbsp;</strong></em></p> </blockquote> <p>... and in case there was any doubt about Clinton's ability to influence weapons sales to foreign governments…</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>Questions about the nexus of arms sales and Clinton Foundation donors stem from the State Department’s role in reviewing the export of American-made weapons. The agency is charged with both licensing direct commercial sales by U.S. defense contractors to foreign governments and alsoapproving Pentagon-brokered sales to those governments. Those powers are enshrined in a federal law that specifically designates the secretary of state as “responsible for the continuous supervision and general direction of sales” of arms, military hardware and services to foreign countries. <strong>In that role, Hillary Clinton was empowered to approve or reject deals for a broad range of reasons, from national security considerations to human rights concerns.</strong></em></p> </blockquote> <p>The report doesn’t stop there. There are also links between the Clintons and the military-industrial complex with the likes of Boeing, Lockheed Martin, and United Technologies all donating money to the Foundation before being listed as contractors on more than 100 arms deals.&nbsp;</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>That group of arms manufacturers -- along with Clinton Foundation donors Boeing, Honeywell, Hawker Beechcraft and their affiliates -- were together listed as contractors in 114 such deals while Clinton was secretary of state...</em></p> <p>&nbsp;</p> <p><em><strong>Boeing was one of three companies that helped deliver money personally to Bill Clinton while benefiting from weapons authorizations issued by Hillary Clinton’s State Department. </strong>The others were Lockheed and the financial giant Goldman Sachs.</em></p> </blockquote> <p>In the end, this serves as further evidence that the person who is viewed, at least for the time being, as the likely next US Commander in Chief, has in the past been&nbsp;susceptible to the influence of foreign governments whose cash contributions to Clinton charities may have served to shape US weapons deals with Washington's Middle Eastern allies. We'll close with the following from Harvard professor Stephen Walt:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><em>American foreign policy is better served if people responsible for it are not even remotely suspected of having these conflicts of interest.</em></p> </blockquote> <p>We wish you the best of luck with that Mr. Walt.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="239" height="167" alt="" src="" /> </div> </div> </div> Boeing Corruption Goldman Sachs goldman sachs Hawker Beechcraft Honeywell Kuwait Middle East national security Obama Administration Reuters Saudi Arabia Transparency White House Wed, 27 May 2015 00:30:00 +0000 Tyler Durden 507072 at Key Iraq War Architect: “Our Objective Should Be a New Sunni State Out of the Western Part Of Iraq, the Eastern Part of Syria” <p>We&rsquo;ve previously noted that the powers-that-be have been <a href="" title="planning for MANY DECADES ">planning for MANY DECADES </a>to break up Iraq into several countries.</p> <p>And the same has been true <a href="" title="for Syria">for Syria</a>.</p> <p>One of the <a href="" target="_blank" title="key architects">key architects</a> of the Iraq war &ndash; John Bolton &ndash; previously said that the Iraq war <a href="" title="was about oil">was about oil</a>, not protecting the United States from weapons of mass destruction. And see <a href="" title="this">this</a>.</p> <p>Last weekend, Bolton <a class="yiv7138789200" href="" id="yiv7138789200yui_3_16_0_1_1432673156160_1033" rel="nofollow" target="_blank" title="said:">said:</a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>The Arabs divided between Sunnis and Shias &ndash; I think the Sunni Arabs are never going to agree to be in a state where the Shia outnumber them 3-1. That&rsquo;s what ISIS has been able to take advantage of.</p> <p>&nbsp;</p> <p>I think <strong>our objective should be a new Sunni state out of the western part of Iraq, the eastern part of Syria</strong> run by moderates or at least authoritarians who are not radical Islamists. What&rsquo;s left of the state of Iraq, as of right now, is simply a satellite of the ayatollahs in Tehran. It&rsquo;s not anything we should try to aid.</p> </blockquote> <p>In other words, one of the key architects of the Iraq war has openly called for partition of Iraq and Syria into a number of different countries &hellip; as the Neocons have been planning for over 20 years.</p> <p>Postscript: The hawks are <a href="" title="not exactly sad">not exactly sad</a> about the rise of ISIS.</p> Iraq Neocons Wed, 27 May 2015 00:02:47 +0000 George Washington 507079 at "My Love Is Real" Kenyan Lawyer Offers Cows, Sheep, & Goats For Obama's Daughter <p><em><strong>"I got interested in her in 2008,"</strong></em> Kenyan Felix Kiprono tells The Nairobian newspaper, and now, in an official marriage request, the lawyer has <strong>offered US president Barack Obama 50 cows, 70 sheep, and 30 goats in exchange for his 16-year old daughter Malia's hand in marriage</strong>. <a href="">As AFP reports</a>, Kiprono dismissed the notion he might be a gold-digger, adding that he and the young Obama would lead "a simple life," and he will <strong>teach Malia how to milk a cow</strong>. <em>This is not the first time a Kenyan has offered livestock in exchange for a President's daughter...</em></p> <p>&nbsp;</p> <p>A Kenyan lawyer has offered US president Barack Obama 50 cows and other assorted livestock in exchange for his 16-year old daughter Malia's hand in marriage, a report said Tuesday. As AFP reports,</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Felix Kiprono said he was willing to pay 50 cows, 70 sheep and 30 goats in order to fulfil his dream of marrying the first daughter.</strong></p> <p>&nbsp;</p> <p>"I got interested in her in 2008," Kiprono said, in an interview with The Nairobian newspaper.</p> <p>&nbsp;</p> <p>At that time President Obama was running for office for the first time and Malia was a 10-year-old.</p> <p>&nbsp;</p> <p>"As a matter of fact,<strong> I haven't dated anyone since and promise to be faithful to her. </strong>I have shared this with my family and they are willing to help me raise the bride price," he said.</p> <p>&nbsp;</p> <p>Kiprono said he intended to put his offer of marriage to Obama and<strong> hopes the president will bring his daughter with him when he makes his first presidential visit to Kenya, the country where his father was born, in July.</strong></p> <p>&nbsp;</p> <p>Obama's Kenyan grandmother, who is in her early 90s, still lives in Kogelo, in western Kenya, home to a number of the president's relatives.</p> <p>&nbsp;</p> <p>"I am currently drafting a letter to Obama asking him to please have Malia accompany him for this trip. I hope the embassy will pass the letter to him," he said.</p> </blockquote> <p><strong>Kiprono dismissed the notion he might be a gold-digger.</strong></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>"People might say I am after the family's money, which is not the case. My love is real," he insisted.</p> <p>&nbsp;</p> <p>The young lawyer, whose age was not revealed, said he had already planned his proposal, which would be made on a hill near his rural village, and the wedding at which champagne would be shunned in favour of a traditional sour milk called "mursik".</p> <p>&nbsp;</p> <p>Kiprono said that as a couple he and<strong> the young Obama would lead "a simple life".</strong></p> <p>&nbsp;</p> <p><strong>"I will teach Malia how to milk a cow,</strong> cook ugali (maize porridge) and prepare mursik like any other Kalenjin woman," he said.</p> </blockquote> <p>And while the gesture seems very generous, we would note that this is not the first time a Kenyan has offered livestock in exchange for a President's daughter. <strong>In 2009, <a href="">as CNN reports,</a> Kenyan Godwin Kipkemoi Chepkurgor offered 40 goats and 20 cows for Chelsea Clinton's love...</strong></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>The Kenyan man first offered the dowry nine years ago to then-President Bill Clinton in asking for the hand of his only child.</strong> He renewed it Thursday after Secretary of State Hillary Clinton was asked about the proposal at a Nairobi town hall session.</p> <p>CNN's Fareed Zakaria, the session's moderator, commented that given the economic crisis at hand, <strong>Chepkurgor's dowry was "not a bad offer."</strong></p> <p>However, Clinton said her daughter was her own person.</p> <p>"She's very independent," she said.<strong> "So I will convey this very kind offer." </strong></p> </blockquote> <p>*&nbsp; *&nbsp; *<br />So what have we learned: <em><span style="text-decoration: underline;"><strong>Malia Obama is worth dramatically more than Chelsea Clinton (even adjusting for inflation).</strong></span></em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="437" height="186" alt="" src="" /> </div> </div> </div> Barack Obama Chelsea Clinton Newspaper President Obama Wed, 27 May 2015 00:00:25 +0000 Tyler Durden 507076 at Asia Scholar Lays Out "Three Ways China And The US Could Go To War" <p>Yesterday, in a troubling oped <a href="">posted in China's Global Times</a>, a paper owned by the ruling Communist Party, China issued its loudest warning yet to the US to keep out of its affairs, in this case the various disputed territories in the South China Sea among them but not limited to China's artificial islands in the Spratly chain which have become a topic of contention between China and various US allies in the region, when it said that war was “inevitable” between China and the United States unless Washington stopped demanding Beijing halt the building of artificial islands in the disputed waterway. </p> <p>“We do not want a military conflict with the United States, but if it were to come, we have to accept it,” said The Global Times, which is among China’s most nationalist newspapers.</p> <p>But is a military conflict, let alone an actual war, realistic in a world in which all political and diplomatic disagreements are solved either in the back room or using the capital markets? </p> <p>According to Michael Auslin, a resident scholar and the director of Japan Studies at the <a href="">American Enterprise Institute </a>(AEI), where he specializes in Asian regional security and political issues, the answer is yes. Auslin proposes that with Beijing and Washington both laying down "red lines" in the South China Sea, the two superpowers are maneuvering themselves into a potential conflict since neither would be willing to back down over fears of losing face or realpolitik clout. </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Beijing has not yet declared a formal air defense identification zone (ADIZ) over the South China Sea, unlike the one it established over part of the East China Sea in 2013, nor could it today enforce such a zone effectively with its current fighters.</p> <p>&nbsp;</p> <p>However, with its reclamation activities continuing, and the Obama Administration apparently having decided to challenge China’s claims, the US and China are now potentially closer to an armed encounter than at any time in the past 20 years.</p> </blockquote> <p>In an article in <a href="">The Commentator</a>, he lays out the three real-world scenarios under which it could happen.</p> <p><strong>1) Accident: </strong>The US Navy is reportedly considering sending ships within 12 miles of the manmade islands, thereby entering into what China claims is now sovereign territory. With Chinese naval and maritime patrol vessels in the waters, intimidation or harassment of US ships could lead to a collision, with each side responding in turn.</p> <p>This is what China has done to ships of other nations, and an accident could lead to a stand-off. In the air, the Spratlys lie about 800 miles from China’s shores, already within the combat radius of China’s most advanced fighter jet (though Beijing has yet to show that it can effectively oppose US air patrols).</p> <p>More worrisome, China is building airstrips on its islands, and may soon be able to launch planes from them to patrol the skies. Similarly, once its aircraft carrier is operational with an air wing, it can easily patrol the area. Any of those developments would dramatically increase the chances of a mid-air collision, such as happened in 2001 between a Chinese fighter and a US Navy surveillance plane.</p> <p><strong>2) Premeditation: </strong>Beijing has staked its geopolitical reputation in Southeast Asia on its claims to the South China Sea and now the building of the islands, which already cover more than 2,000 acres. As I wrote in National Review last week, unless they decide to back down, and risk losing influence in Asia, China’s leaders may decide that stopping American incursion into their newly claimed waters early on is the best opportunity to make the risks to Washington seem too high.</p> <p>Once Chinese airplanes are on the islands, then they may decide to shadow US planes and prevent them from flying in “restricted” skies, for the same reason, leaving the US to decide how far to respond. Thus, they may force a confrontation, to try and get the Obama Administration to back down from getting involved in another military situation while it is dealing with the Middle East and Ukraine.</p> <p><strong>3) Indirect Conflict:</strong> China may well judge that it is too risky to directly challenge US ships and planes, but that it can make the same point by intercepting those of other countries. Already, the Philippines has claimed that China warned off its surveillance planes, and China has had regular maritime run-ins with the Philippines and Vietnam.</p> <p>It may decide to stop foreign ships from passing by its new islands, or it may soon try to escort less advanced foreign planes out the skies above its islands. A direct conflict between China and any of its neighbors would, at this point, have a good chance of bringing in the US, in order to credibly claim that it is upholding international law (and, in the case of the Philippines, coming to the aid of a treaty ally).</p> <p>His conclusion:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Beijing and Washington are each laying down redlines in the South China Sea, making the upholding of their claims a priority. In this, they are maneuvering themselves into a potential conflict.</p> <p>&nbsp;</p> <p>With no de-escalation mechanisms, and deep distrust on both sides, the more capable China becomes in defending its claimed territory, the more risks the US will face in challenging those claims.</p> <p>&nbsp;</p> <p>That is why each is trying to define the boundaries and set the pattern of behavior before the other does. That may not ensure that there will be a military encounter, but it steadily raises the chances of one.</p> </blockquote> <p>What Auslin ignored to note is that with the entire world gripped in secular stagnation, a "controlled" war may be just what the sputtering economic engines of the world's two largest economies need. The only question is how to assure any incipient conflict will remain "controlled."</p> <p>&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="400" height="300" alt="" src="" /> </div> </div> </div> Capital Markets China Japan Middle East Obama Administration Ukraine Tue, 26 May 2015 23:29:41 +0000 Tyler Durden 507075 at The Only Question That Matters In Today's Markets <p><a href=""><em>Submitted by Ben Hunt via Salient Partners&#39; Epsilon Theory blog</em></a>,</p> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb; min-height: 310px;"> <p><strong><img class="alignnone size-full wp-image-1101" src="" style="display: block; margin-right: 20px; float: left;" />Neurosis is the inability to tolerate ambiguity.</strong><br />&ndash; <em>Sigmund Freud (1886 &ndash; 1939)</em></p> </div> <div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><strong>To learn which questions are unanswerable, <em>and not to answer them</em>: this skill is most useful in times of stress and darkness.</strong><br />&ndash; <em>Ursula K. Le Guin, &ldquo;The Left Hand of Darkness&rdquo; (1969)</em></p> </div> </div> <div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><strong>Is everything connected, so that events create resonances like ripples across a net? Or do things merely co-occur and we give meaning to these co-occurrences based on our belief system? Lieh-tzu&rsquo;s answer: it&rsquo;s all in how you think.</strong><br />&ndash; <em>&ldquo;The Liezi&rdquo;, ancient Taoist text attributed to Lie Yukou (c. 400 BC)</em></p> </div> </div> <p>&nbsp;</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse;"> <tbody> <tr> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;"><strong>Deckard:</strong></p> </td> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;">She&rsquo;s a replicant, isn&rsquo;t she?</p> </td> </tr> <tr style="background-color: #e5e5e5;"> <td style="padding: 10px;" width="166"> <p><strong>Tyrell:</strong></p> </td> <td style="padding: 10px;" width="426"> <p style="padding: 0; margin: 0;">I&rsquo;m impressed. How many questions does it usually take to spot them?</p> </td> </tr> <tr> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;"><strong>Deckard:</strong></p> </td> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;">I don&rsquo;t get it, Tyrell.</p> </td> </tr> <tr style="background-color: #e5e5e5;"> <td style="padding: 10px;"> <p><strong>Tyrell:</strong></p> </td> <td style="padding: 10px;"> <p>How many questions?</p> </td> </tr> <tr> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;"><strong>Deckard:</strong></p> </td> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;">Twenty, thirty, cross-referenced.</p> </td> </tr> <tr style="background-color: #e5e5e5;"> <td style="padding: 10px;"> <p><strong>Tyrell:</strong></p> </td> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;">It took more than a hundred for Rachael, didn&rsquo;t it?</p> </td> </tr> <tr> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;"><strong>Deckard:</strong></p> </td> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;">[<em>realizing Rachael believes she&rsquo;s human</em>] She doesn&rsquo;t know.</p> </td> </tr> <tr style="background-color: #e5e5e5;"> <td style="padding: 10px;"> <p><strong>Tyrell:</strong></p> </td> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;">She&rsquo;s beginning to suspect, I think.</p> </td> </tr> <tr> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;"><strong>Deckard:</strong></p> </td> <td style="padding: 10px;"> <p style="padding: 0; margin: 0;">Suspect? How can it not know what it is?</p> </td> </tr> </tbody> </table> <p>&nbsp;</p> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb; min-height: 205px;"> <div style="float: left; width: 380px;"> <p>&ndash; <em>&quot;Bladerunner&quot; (1982)</em></p> </div> <div style="float: right;"><img class="alignnone size-full wp-image-1101" src="" style="display: block; margin-right: 20px; float: left;" /></div> </div> <div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><strong>I remember when I was a very little girl, our house caught on fire.<br />I&#39;ll never forget the look on my father&#39;s face as he gathered me up</strong><br /><strong>In his arms and raced through the burning building out to the pavement.<br />I stood there shivering in my pajamas and watched the whole world go up in flames.<br />And when it was all over I said to myself.<br />&quot;Is that all there is to a fire?&quot;</strong><br />&ndash; <em>Jerry Lieber and Mike Stoller, &quot;Is That All There Is?&quot;, as recorded by Peggy Lee (1969)</em></p> </div> <div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb;"> <p><strong>I call our world Flatland, not because we call it so, but to make its nature clearer to you, my happy readers, who are privileged to live in Space.</strong><br />&ndash; <em>Edwin A. Abbott, &ldquo;Flatland: A Romance of Many Dimensions&rdquo; (1884) </em></p> </div> </div> <div style="margin-bottom: 14px; border: dashed 1px #858585; padding: 20px 20px 5px 20px; background-color: #fbfbfb; min-height: 80px;"><strong><img class="alignnone size-full wp-image-1101" height="210" src="" style="display: block; margin-right: 20px; float: left;" width="199" /></strong><strong><strong><span>Homey don&#39;t play that game.</span></strong></strong><br /><em><span>&ndash; Damon Wayans, &ldquo;In Living Color&rdquo; (1992)</span></em> <p>&nbsp;</p></div> <p><span><strong>There&rsquo;s only one question that matters today in markets: why is the government bond market going up and down like a yo-yo?</strong> How is it possible that the deepest and most important securities in the world are currently displaying all the trading stability of a biotech stock?</span></p> <p>As with all market questions of singular importance and vast attention, these are questions of meaning. We seek the why and we seek the cause because we are desperate to understand what it <em>means</em>. We are &ndash; all of us &ndash; convinced that this market behavior must mean something profound. Surely this insane quivering within the bond market means that we are on the cusp of a quantum shift in the market landscape. Surely this is the rumbling of a deep tectonic plate that presages a massive earthquake. Surely, as more than one Master of the Universe proclaimed at SALT the other week, the long-awaited bear market in government debt is nigh.</p> <p>Maybe. Or maybe all those Masters of the Universe are just talking their book. I know &hellip; shocking.</p> <p>We are all market neurotics today, in the Freudian sense of the word, incapable of handling ambiguity in Narrative after 5+ years of global coordination and cooperation among The Monetary Powers That Be, 5+ years of being told by a monolithic Voice of Command <em>how we should think</em> about every single data point that crosses our Bloomberg screen. This is the most hated bull market in history, precisely because we all believe that it is a creature of policy and Narrative, and when the Voices are silent or they say conflicting things, we start to freak out. We run from pillar to post, getting whipsawed at every turn. Importantly, the whipsawing is occurring in the securities that are most closely linked to policy and Narrative &ndash; government bonds &ndash; and that&rsquo;s why I believe that what we&rsquo;re experiencing is more akin to neurosis than some shift in market fundamentals.</p> <p><strong>Here&rsquo;s my point: volatility &ne; instability.</strong> Or more precisely, a system can be volatile or unstable in a local sense but highly stable in a global sense.</p> <p>Unfortunately, however, because we live in the local rather than the global &hellip; because every bit of our modern financial services system, particularly financial media, is by <em>business necessity</em> focused on the local rather than the global &hellip; we are as unaware of our true positioning in the world as Rachael in &ldquo;Bladerunner&rdquo;. Or Deckard, who sure seems like a replicant to me. <strong>From a local perspective these bond market gyrations make it seem as if we are totally unmoored and markets are on the brink of some life-altering change. From a global perspective, however, this is a tempest in a teacup.</strong> Or to paraphrase the late, great Peggy Lee, is that all there is to a bond market fire?</p> <p>Okay, Ben, that&rsquo;s quite a mouthful: &ldquo;unstable in a local sense but highly stable in a global sense&rdquo;. Translation, please?</p> <p>The Rosetta Stone here is Information Theory, and to introduce that it&rsquo;s probably easiest if I quote directly and extensively from one of my very earliest Epsilon Theory notes, &ldquo;<a href="">Through the Looking Glass</a>&rdquo;. I wrote this almost exactly 2 years ago, back when I only had a few hundred readers, so it should be fresh for 99% of the audience. It&rsquo;s a lot to digest, but I promise that you won&rsquo;t see markets in the same way once you finish. Information Theory is, in fact, the beating heart of Epsilon Theory. That said, one of the beautiful things about releasing content into the wild is that readers can do with it what they will. For the TLDR / Short Attention Span Theatre crowd, <a href="">click here</a> to skip to the chase on page 10.</p> <div><span>***</span><br />&nbsp;</div> <p><span><em>Defining the strength of a signal as the degree to which it changes assessments of future states of the world dates back to Claude Shannon&rsquo;s seminal work in 1948, and in a fundamental way back to the work of Thomas Bayes in the 1700&rsquo;s.&nbsp; Here&rsquo;s the central insight of this work: <strong>information is measured by how much it changes your mind.</strong> In fact, if a signal doesn&rsquo;t make you see the world differently, then it has zero information. As a corollary, the more confident you are in a certain view of the world, the more new information is required to make you have the opposite view of the world and the less information is required to confirm your initial view. There&rsquo;s no inherent &ldquo;truth&rdquo; to any signal, no need to make a distinction between (or even think of) this signal as having true information and that signal as having false information. Information is neither true nor false. It is only more or less useful in our decision-making, and that&rsquo;s a function of how much it makes us see the world differently. As a result, the informational strength of any signal is relative. The same signal may make a big difference in my assessment of the future but a tiny difference in yours. In that case, we are hearing the same message, but it has a lot of information to me and very little to you.</em></span></p> <p><em>Let&rsquo;s say that you are thinking about Apple stock but you are totally up in the air about whether the stock is going up or down over whatever your investment horizon might be, say 1 year. Your initial estimation of the future price of Apple stock is a coin toss &hellip; 50% likelihood to be higher a year from now, 50% likelihood to be lower a year from now. So you do nothing. But you start reading analyst reports about Apple or you build a cash-flow model &hellip; whatever it is that you typically do to gather information about a potential investment decision.</em></p> <p>The graph below shows how Information Theory would represent the amount of signal information (generically represented as bits) required to change your initial assessment of a 50% likelihood of Apple stock going up over the next year to a post-signaling assessment of some new percentage likelihood. These are logarithmic curves, so even relatively small amounts of information (a small fraction of a generic bit) will change your mind about Apple pretty significantly, but more and more information is required to move your assessment closer and closer to certainty (either a 0% or a 100% perceived likelihood of the stock going up).</p> <div><span><img src="" style="height: 244px; width: 601px;" /></span><br />&nbsp;</div> <p><span><em>Of course, your assessment of Apple is not a single event and does not take place at a single point in time. As an investor you are constantly updating your opinion about every potential investment decision, and you are constantly taking in new signals. Each new update becomes the starting point for the next, ad infinitum, and as a result all of your prior assessments become part of the current assessment and influence the informational impact of any new signal.</em></span></p> <p>Let&rsquo;s say that your initial signals regarding Apple were mildly positive, enough to give you a new view that the likelihood of Apple stock going up in the next year is 60%. The graph below shows how Information Theory represents the amount of information required to change your mind from here. The curves are still logarithmic, but because your starting point is different it now only requires 80% of the information as before to get you to 100% certainty that Apple stock will go up in the next year (0.8 generic bits versus 1.0 generic bits with a 50% starting estimation). Conversely, it requires almost 140% of the same negative information as before to move you to certainty that Apple stock is going down.</p> <div><span><img src="" style="height: 326px; width: 600px;" /></span></div> <p><span><em>What these graphs are showing is the <strong>information surface</strong> of your non-strategic (i.e., without consideration of others) decision-making regarding Apple stock at any given point in time.&nbsp; Your current assessment is the lowest point on the curve, the bottom of the informational &ldquo;trough&rdquo;, and the height of each trough &ldquo;wall&rdquo; is proportional to the information required to move you to a new assessment of the future probabilities. The higher the wall, the more information required in any given signal to get you to change your mind in a big way about Apple.</em></span></p> <p>Now let&rsquo;s marry Information Theory with Game Theory. What does an information surface look like for strategic decision-making, where your estimations of the future state of the world are contingent on the decisions you think others will make, and where everyone knows that everyone is being strategic?</p> <p>I&rsquo;m assuming we&rsquo;re all familiar with the basic play of the Prisoner&rsquo;s Dilemma, and if you&rsquo;re not just watch any episode of Law and Order. Two criminals are placed in separate rooms for questioning by the police, and while they are both better off if they both keep silent, each is individually much better off if he rats his partner out while the partner remains silent. Unfortunately, in this scenario the silent partner takes the fall all by himself, resulting in what is called the &ldquo;sucker pay-off&rdquo;. Because both players know that this pay-off structure exists (and are always told that it exists by the police), the logical behavior for each player is to rat out his buddy for fear of being the sucker.</p> <p>Below on the left is a classic two-player Prisoner&rsquo;s Dilemma game with cardinal expected utility pay-offs as per a customary 2x2 matrix representation. Both the Row player and the Column player have only two decision choices &ndash; Rat and Silence &ndash; with the joint pay-off structures shown as (Row , Column) and the equilibrium outcome (Rat , Rat) shaded in light blue.</p> <p>The same equilibrium outcome is shown below on the right as an informational surface, where both the Row and the Column player face an expected utility hurdle of 5 units to move from a decision of Rat to a decision of Silence. For a move to occur, new information must change the current Rat pay-off and/or the potential Silence pay-off for either the Row or the Column player in order to eliminate or overcome the hurdle. The shape of the informational surface indicates the relative stability of the equilibrium as the depth of the equilibrium trough, or conversely the height of the informational walls that comprise the trough, is a direct representation of the informational content required to change the conditional pay-offs of the game and allow the ball (the initial decision point) to &ldquo;roll&rdquo; to a new equilibrium position. In this case we have a deep informational trough, reflecting the stability of the (Rat , Rat) equilibrium in a Prisoner&rsquo;s Dilemma game.<br />&nbsp;&nbsp;&nbsp; <div><span><img src="" style="height: 188px; width: 600px;" /></span></div> </p><p><span><em>Now let&rsquo;s imagine that new information is presented to the Row player such that it improves the expected utility pay-off of a future (Silence, Rat) position from -10 to -6. Maybe he hears that prison isn&rsquo;t all that bad so long as he&rsquo;s not a Rat. As a result the informational hurdle required by the Row player to change decisions from Rat to Silence is reduced from +5 to +1. </em></span></p> <div><span><img src="" style="height: 210px; width: 599px;" /></span></div> <p><span><em>The (Rat , Rat) outcome is still an equilibrium outcome because neither player believes that there is a higher pay-off associated with changing his mind, but <strong>this is a much less stable equilibrium</strong> from the Row player&rsquo;s perspective (and thus for the overall game) than the original equilibrium.</em></span></p> <p>With this less stable equilibrium framework, even relatively weak new information that changes the Row player&rsquo;s assessment of the current position utility may be enough to move the decision outcome to a new equilibrium. Below, new information of 2 units changes the perceived utility of the current Rat decision for the Row player from -5 to -7. Maybe he hears from his lawyer that the Mob intends to break his legs if he stays a Rat. This is the equivalent of &ldquo;pushing&rdquo; the decision outcome over the +1 informational hurdle on the Row player&rsquo;s side of the (Rat , Rat) trough, and it is reflected in both representations as a new equilibrium outcome of (Silence , Rat). </p> <p>&nbsp;&nbsp;&nbsp; <div><span><img src="" style="height: 177px; width: 599px;" /></span></div> </p><p><span><em>This new (Silence , Rat) outcome is an equilibrium because neither the Row player nor the Column player perceives a higher expected utility outcome by changing decisions. It is still a weak equilibrium because the informational hurdle to return to (Rat , Rat) is only 1 informational unit, but all the same it generates a new behavior by the Row player: instead of ratting out his partner, he now keeps his mouth shut.</em></span></p> <p>The Column player never changed decisions, but moving from a (Rat , Rat) equilibrium to a (Silence , Rat) equilibrium in this two time-period example resulted in an increase of utility from -5 to +10 (and for the Row Player a decrease from -5 to -6). This change in utility pay-offs over time can be mapped as: </p> <div><span><img src="" style="height: 231px; width: 300px;" /></span></div> <p><span><em>Replace the words &ldquo;Column Utility&rdquo; with &ldquo;AAPL stock price&rdquo; and you&rsquo;ll see what I&rsquo;m going for. <strong>The Column player bought the police interrogation at -5 and sold it at +10.</strong> By mapping horizontal movement on a game&rsquo;s informational surface to utility outcomes over time we can link game theoretic market behavior to market price level changes.</em></span></p> <p>Below are two generic examples of a symmetric informational structure for the S&amp;P 500 and a new positive signal hitting the market. New signals will &ldquo;push&rdquo; any decision outcome in the direction of the new information. But only if the new signal is sufficiently large (whatever that means in the context of a specific game) will the decision outcome move to a new equilibrium and result in stable behavioral change.&nbsp; <div><span><img src="" style="height: 289px; width: 599px;" /></span></div> </p><p><span><em>In the first structure, there is enough informational strength to the signal to overcome the upside informational wall and push the market to a higher and stable price equilibrium. In the second structure, while the signal moves the market price higher briefly, there is not enough strength to the signal to change the minds of market participants to a degree that a new stable equilibrium behavior emerges.</em></span></p> <p><strong>All market behaviors &ndash; from &ldquo;Risk-On/Risk-Off&rdquo; to &ldquo;climbing a wall of worry&rdquo; to &ldquo;buying the effin&rsquo; dip&rdquo; to &ldquo;going up on bad news&rdquo; &ndash; can be described with this informational structure methodology. </strong></p> <p>For example, here&rsquo;s how &ldquo;going up on bad news&rdquo; works. First, the market receives a negative Event signal &ndash; a poor Manufacturing ISM report, for example &ndash; that is bad enough to move the market down but not so terrible as to change everyone&rsquo;s mind about what everyone knows that everyone knows about the health of the US economy and thus move the market index to a new, lower equilibrium level. </p> <div><span><img src="" style="height: 122px; width: 600px;" /></span></div> <p><span><em>Following this negative event, however, the market then receives a set of public media signals &ndash; a Narrative &ndash; asserting that in response to this bad ISM number the Fed is more likely to launch additional easing measures. This Narrative signal is repeated widely enough and credibly enough that it changes Common Knowledge about future Fed policy and moves the market to a new, higher, and stable level.</em></span> <div><span><img src="" style="height: 160px; width: 598px;" /></span></div> </p><p><span><em><strong>So what is the current informational structure for the S&amp;P500? Well, it looks something like this:</strong></em></span> <div><span><img src="" style="height: 108px; width: 598px;" /></span></div> </p><p><span><em>The market equilibrium today is like a marble sitting on a glass table. It is an extremely unstable equilibrium because the informational barriers that keep the marble from rolling a long way in either direction are as low as they have been in the past five years. Even a very weak signal is enough to push the marble a long way in one direction, only to have another weak signal push it right back. This is how you get big price movements &ldquo;for no apparent reason&rdquo;.</em></span></p> <p>Why are the informational barriers to equilibrium shifts so low today? Because levels of Common Knowledge regarding future central bank policy decisions are so low today. The Narratives on both sides of the collective decision to buy or sell this market are extremely weak. What does everyone know that everyone knows about Abenomics? Very little. What does everyone know that everyone knows about Fed tapering? Very little. What does everyone know that everyone knows about the current state of global growth? Very little. I&rsquo;m not saying that there&rsquo;s a lack of communication on these subjects or that there&rsquo;s a lack of opinion about these subjects or that there&rsquo;s a lack of knowledge about these subjects. I&rsquo;m saying that there&rsquo;s a lack of Common Knowledge on these subjects, and that&rsquo;s what determines the informational structure of a market.</p> <div><span>***</span><br />&nbsp;</div> <p><span>I wrote all that right before the Fed&rsquo;s Taper Tantrum in the summer of 2013, which can be understood using this Information Theory framework as a massive public relations effort by Bernanke et al to create a new<a href=""> Common Knowledge structure</a> that would shape the informational contours of the market. The immediate signal of this initial effort at &ldquo;communication policy&rdquo; was a big red arrow pointing left, and almost all asset classes everywhere around the world took a dive as the strong signal sent the equilibrium marble skittering to the downside across the largely flat informational surface. <strong>But the longer term effect of communication policy was just as Bernanke hoped (and as he spoke about extensively in <a href="">his farewell address as Fed Chair</a>): it built an enormous Common Knowledge &ldquo;wall&rdquo; off to the downside left of the market informational surface &ndash; <a href="">a Fed put based not on continued asset purchases, but on continued <em>words</em> <em>of Narrative influence</em></a>. </strong></span></p> <p>Those words form the <a href="">Narrative of Central Bank Omnipotence</a>, the overwhelming belief by market participants that central bankers in general, and the Fed in particular, determine market outcomes, and for the past two years this has been the only thing that matters in markets. I&rsquo;ve been tracking and studying political Narratives for my entire professional career, close to 30 years now, and I&rsquo;ve never seen anything like this. It&rsquo;s a heck of a trick that Bernanke started and Draghi perfected and Yellen continues, and it&rsquo;s the key, I think, to seeing recent bond market turbulence in the most useful perspective.</p> <p>Everything I wrote about the informational surface of the equity market in early summer 2013 is exactly applicable to the informational surface of the bond market in early summer 2015. The bond market today is like a marble sitting on a glass table. There are very few informational structures or barriers to keep the price of US bonds from skittering this way or that, within a price range as expressed in yield terms of, say, 2.25% and 1.85% on the 10-year bond. <strong>This is what always happens when the Fed comes out and says that it&#39;s increasingly &quot;data dependent&quot;</strong> ...our local equilibria become much less stable when the Fed says that it hasn&#39;t made up its collective mind about the pace or scale of monetary policy shifts.</p> <div><span><img src="" style="height: 98px; width: 602px;" /></span><br />&nbsp;</div> <p><span>With an informational structure like this, the 10-year bond could trade <em>anywhere</em> on this segment of the price line. Moreover, it takes a signal with precious little information to change people&rsquo;s minds about whether the US 10-year should yield 1.90% today or 2.20% tomorrow. Precious little information means just that &ndash; precious little information &ndash; and it&rsquo;s a classic mistake to infer grand theories or reach sweeping conclusions on the basis of precious little information. Don&rsquo;t do that.&nbsp;&nbsp;</span></p> <p>Because here&rsquo;s the thing: the informational surface is only flat in this immediate vicinity of current bond prices. <strong>There are enormous Common Knowledge walls just off to the left and just off to the right of the price line segment shown above, Common Knowledge structures created by</strong> <a href="">the entirely successful efforts by central bankers to mold investor behaviors and by the entirely <em>unsuccessful</em> efforts by central bankers to fix the real economy</a>.</p> <div><span><img src="" style="width: 600px; height: 214px;" /></span><br />&nbsp;</div> <p><span><strong>I really can&rsquo;t emphasize this point too strongly &ndash; monetary policy since March 2009 has created a phenomenally stable global equilibrium in both markets and the real economy, <em>an equilibrium that since the summer of 2013 no longer depends on massive asset purchases by the Fed.</em> </strong></span></p> <p>Does the stability of the global equilibrium require <em>someone</em> to be making asset purchases, if not the Fed then the ECB or BOJ? To some degree I&rsquo;m sure it does. But then I remember that Draghi&rsquo;s mere words and an OMT program constructed out of whole cloth were sufficient to save the Euro in the summer of 2012. My strong sense is that the launching of central bank asset purchase programs may move the entire informational structure farther along to the right of the price line (higher prices, lower yields), and vice versa leftwards along the price line if the programs stop, but they don&rsquo;t diminish the Common Knowledge structures themselves. Maybe the locally unstable price range of the US 10-year as expressed in yield terms goes to 2.75% - 2.35% if the ECB were to summarily stop its asset purchase program, but I still think you have an extremely stable global informational structure on either side of that new range, whatever it is. Among market participants today there is almost unanimity of belief that central bankers Will. Not. Allow. a global recession to occur, much less a deflationary equilibrium. But at the same time there is also almost unanimity of belief that central bankers Can. Not. Create. a global recovery, much less an inflationary equilibrium. <a href="">That unanimity of belief establishes a global informational equilibrium of unparalleled strength and stability</a>, or at least unparalleled in my experience.</p> <p>And that leads me to my other main point: a highly stable equilibrium cuts both ways, for good and for bad. <strong>Another way of saying that you&rsquo;re in a highly stable equilibrium is to say that you&rsquo;re well and truly <em>stuck</em>.</strong> Yes, there are HUGE informational barriers to prevent economic behaviors that would create a recession in the US or horribly crush any major market or asset class. But by the same token, <a href="">there are also HUGE informational barriers to prevent economic behaviors that would spark robust growth in the US or wildly elevate any major market or asset class</a>. I&rsquo;m not saying that the doomsday or heavenly scenarios are impossible. I&rsquo;m saying that it would take an almost unimaginably large amount of new information to change people&rsquo;s minds about what everyone knows that everyone knows about markets today, for <em>either</em> scenario to occur. Could happen. But I really don&rsquo;t think that&rsquo;s how you want to place your bets. <a href="">My money is on the long grey slog of the Entropic Ending</a>.</p> <p>I know it sounds weird for me to say that we&rsquo;re living in a deep, deep valley with giant mountains on both sides of us when it <em>feels</em> like we&rsquo;re a marble sitting on a glass table, but that&rsquo;s exactly the mixed metaphor that I think accurately describes our lives as investors here in the Golden Age of the Central Banker.&nbsp; I know it sounds weird to think that we could be living in that deep, deep valley and yet be completely oblivious to its existence, completely convinced that the narrow field of view foisted on us day in and day out by the <em>business imperatives</em> of the financial services industry, especially financial media, is the only possible field of view. But myopically focused on what we are told to focus on is exactly how we humans (and replicants, too, I suppose) tend to live out our lives. Shifting our perspective to take a more global view, whether that&rsquo;s on the dimension of time or emotion or, yes, asset price levels, is probably the most difficult thing any of us can hope to achieve, and it will always be an imperfect shift at best. Yet it&rsquo;s never been more important to make that effort, else we allow our innate search for meaning to be subverted by<a href=""> mass-mediated, faux-authentic signalers</a> that profit from making us look over here rather than over there. And I&rsquo;m not just talking about market signals. It&rsquo;s EVERY expression of power in the modern age &ndash; financial, political, legal, medical, etc. &ndash; that suffers from this mass-mediated form of social control, this manipulation of the Common Knowledge game. The human animal is a social animal. We are biologically evolved over millions of years to infer meaning from social signals. We swim in a sea of socially constructed signals, and we can no more ignore the words of Yellen or CNBC or a Master of the Universe than an ant can ignore the pheromones of her queen. We can&rsquo;t ignore the words. But we can recognize them for what they are. We can ask ourselves &ldquo;Is that all there is?&rdquo; and take a more global view.</p> <p>Sometimes there&rsquo;s significance in signs and portents. Sometimes there&rsquo;s real meaning to be gleaned from careful study of localized phenomena, from the interpretation of immediate events to generate far-reaching conclusions. <strong>Then again, sometimes a cigar is just a cigar, and that&rsquo;s how I&rsquo;m thinking about recent gyrations in the bond market.</strong></p> <p>One final point, perhaps the most important one I&rsquo;ve got, and it&rsquo;s addressed to everyone who asks questions like &ldquo;so, Ben, when do you think the Fed is going to raise rates?&rdquo; or &ldquo;so, Ben, where do you think the price of oil goes from here?&rdquo; The answer: I don&rsquo;t know and I don&rsquo;t really care. Seriously. These are unanswerable, entirely over-determined-in-retrospect questions, and the worst possible thing you can do with an unanswerable, entirely over-determined-in-retrospect question is to try to answer it in deterministic fashion! <strong>The popular fetish with demanding an Answer with a capital A to this sort of question is a crystallization of the market neurosis that afflicts us in the Golden Age of the Central Banker, and it&rsquo;s the quickest path I know to poor investing. </strong></p> <p>What I DO care about is Adaptive Investing. What I DO care about is understanding the informational structures of the market that determine the likely market price <em>reaction</em> to some new signal, whether that&rsquo;s a Yellen speech, an earnings report, or technical trading data. Trying to predict what that signal is going to be or when that signal is going to come is a losing proposition. Sorry, but I don&rsquo;t play that game. And neither should you. My god, we need more pundit predictions about the Fed or oil prices like we need an asteroid to crash into the Earth. <strong>What we need is an investment and allocation <em>STRATEGY</em> for whatever comes down the pike, whenever it occurs. </strong>That&rsquo;s exactly what an Information Theory perspective on markets can provide. Take another look at this informational surface. </p> <div><a href=""><img alt="" src="" style="width: 600px; height: 230px;" /></a></div> <p><span>This graph says nothing about when and what the Fed will do. It says everything about how to THINK about the bond market in a dynamic, non-myopic way, about how to prepare for probabilistic waves of new signals and how to react once they hit. <strong>There&rsquo;s an entire investment and asset allocation strategy embedded in this graph, and I think it&rsquo;s the most useful contribution I can make with Epsilon Theory, far more than adding one more voice to the cacophony of Fed &ldquo;predictions&rdquo; that drive our collective market neurosis. </strong>We are slowly being driven nuts by the paradoxes and ambiguities of the Golden Age of the Central Banker, a maddening time in the truest sense of the word, and I don&rsquo;t begrudge anyone&rsquo;s coping mechanisms or business models for dealing with this clinically insane market environment. I submit, however, that our mental health and financial health are best served by taking a strategic view of markets, a view that engages with the game without succumbing blindly to it. That and a regular dose of Epsilon Theory.</span></p></div> <p>&nbsp;</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="194" height="172" alt="" src="" /> </div> </div> </div> Abenomics Apple Bear Market Bond Epsilon ETC Monetary Policy Recession recovery Volatility Wall of Worry Tue, 26 May 2015 23:00:17 +0000 Tyler Durden 507053 at NATO General Warns, Putin Is A "Dangerous Gambler... Willing To Use Nuclear Weapons" <p><a href="">Hot on the heels of George Soros&#39; warnings that we stand on the verge of World War 3</a>, demanding Washington back off its anti-Yuan pressure, it appears &quot;the good guys&quot; are fighting back with their own good-cop, bad-cop propaganda. <a href="">As Sputnik News reports</a>, General hans-Lothar Domrose, NATO Commander of the Brunssum Allied Joint Force Command, said in an interview with <a href="">German magazine Focus Online</a> that Russian President Vladimir <strong>Putin is a tough-minded, forward-thinking politician who is capable of foreseeing situations, but also regards him as a dangerous &quot;gambler,&quot; who &quot;is willing to use nuclear weapons against NATO troops.&quot;</strong></p> <p>&nbsp;</p> <p><a href=""><img height="399" src="" width="472" /></a></p> <p>&nbsp;</p> <p><a href=""><em>Soros previously noted,</em></a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><em>...unless the U.S. makes &#39;major concessions&#39; and allows China&#39;s currency to join the IMF&#39;s basket of currencies,</em><strong><em> &quot;there is a real danger China will align itself with Russia politically and militarily, and then the threat of world war becomes real.&quot;</em></strong></p> </blockquote> <p>And so NATO has decided to make it clear just who the bad gyuys are in any equation of global thermonuclear war (as <a href="">Sputnik News reports</a>),</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>General Hans-Lothar Domröse, Commander of Allied Joint Force Command Brunssum (The Netherlands) has<strong> revealed what NATO thinks of Russian President Putin.</strong></p> <p>&nbsp;</p> <p>In his interview with the German magazine Focus Online, Domröse called the Russian leader <strong>a tough-minded, forward-thinking politician who is capable of foreseeing the situation.</strong></p> <p>&nbsp;</p> <p>The general, however, added that <strong>Putin is a &ldquo;gambler&rdquo;, which might be dangerous</strong>. Unfortunately the general did not elaborate any further.</p> <p>&nbsp;</p> <p>General Domröse also emphasized that neither NATO nor he personally consider Russia an enemy; at the worse, <strong>the country is seen as a potential threat.</strong> He stressed that no one in the alliance is interested in waging war; their purpose, rather, is to defend. He said that President Putin is aware of that, and that allows the general to sleep well.</p> <p>&nbsp;</p> <p><strong>The general is however concerned that President Putin might be willing to use nuclear weapons against NATO troops.</strong></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p><a href=""><em><strong>The full interview (via Focus Online - Google Translate)</strong></em></a> - <span style="text-decoration: underline;"><strong>NATO General Hans-Lothar Domröse on the new rapid reaction force, and the threat of Russia</strong></span></p> <p><span style="text-decoration: underline;"><strong>General, we are not already at war with Russia - in a propaganda war?</strong></span></p> <p><strong>The Russian propaganda machine is running and acts.</strong> We will reply to the west on the truth quickly, and we gloss over anything. It may there be exceptions, but it is the principle. However, it is an old Russian tradition, matters only not admit it then to comment in a different light, and finally to make a U-turn. Let&#39;s take the example of the Crimea. It was said at the beginning: We are not. Then it was: Yes, there are also Russian soldiers. But they&#39;re on vacation . Soldier on vacation with equipment so. The summit was then entering into argument of President Putin: I had to intervene there.</p> <p><span style="text-decoration: underline;"><strong>Should the West respond with counter-propaganda?</strong></span></p> <p>He must not be primarily be lulled.<strong> I can understand the concern of our Baltic friends who warn repeatedly: Warning, not fall for the Russian scam. </strong>We have to be straight and honest go our way. Let the differences quietly made: We stick to the truth.</p> <p><span style="text-decoration: underline;"><strong>How is the Russian military presence in and around the Ukrainian troubled region?</strong></span></p> <p>The Russian armed forces are permanently very active since the beginning of Ukraine crisis in the air. <strong>We have over 300 airspace violations </strong>or fast-injury. On Russian territory at a location nearby Ukraine regiments, classic combat units. We also have time with Special Forces dealing with jeans and sunglasses, the seep.</p> <p><span style="text-decoration: underline;"><strong>They currently rely on a highly mobile task force, which is to make the eastern flank of NATO safer. How far are you with it?</strong></span></p> <p>We are nearing the realization of our plans, including the necessary infrastructure. We know from the Russian military exercises that Russia can move 100 000. soldiers very quickly. We have responded and the NATO Response Force, so to speak, our firefighters, reinforced, 13 000 to 30 000 men. NATO has also decided to make these forces available more quickly, thus reducing the alarms. And we need a spearhead, a sort of scouts who can start immediately. This is on the order of a brigade, good 5,000 men, supported by ships and aircraft, which can be moved within a week to counter a possible attack. First, they should put off, in the hope that there will be no further.</p> <p><span style="text-decoration: underline;"><strong>How credible deterrence may in such outnumbered ever be?</strong></span></p> <p>That&#39;s a relatively small troupe 5000-7000 man, so much is true. But its essential value is that it represents more than half of all NATO members. So there are around 20 different countries always on site. And just in case, each nation would be affected. <strong>But let me emphasize that: No one in NATO wants to wage a war. But we will protect the population. I believe that President Putin knows it. That&#39;s why I still sleep well.</strong></p> <p><span style="text-decoration: underline;"><strong>NATO has Putin challenged by being moved up to close to the Russian borders?</strong></span></p> <p><strong>That, sir, is nonsense. NATO is a values-based defense alliance.</strong> It is in principle open to like-minded people. Nations seek its own initiative to take charge. The Alliance itself will not do so on fishing expeditions to get more members into the basket.</p> <p><span style="text-decoration: underline;"><strong>Former members of the Warsaw Pact now belong to NATO and are still equipped with Russian military technique. Delivering the Russians still spare parts?</strong></span></p> <p>Currently, they do not. I hear you supplied on the open market.</p> <p><span style="text-decoration: underline;"><strong>Putin would be willing to use nuclear weapons against NATO troops?</strong></span></p> <p><strong>We consider this issue with great concern. The Russians maintain the tactical use of nuclear weapons in the battle for a possible form of warfare.</strong></p> <p>I think President Putin is a forward-thinker. But also a gambler. That can also be dangerous. You have to make the cost of the use of [nuclear weapons] so high that it seems too expensive to him for him. Since we are on track. <strong>But I want to emphasize that neither NATO nor Domröse consider Russia as an enemy. Very well, but as a threat.</strong></p> <p>*&nbsp; *&nbsp; *</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="472" height="399" alt="" src="" /> </div> </div> </div> China George Soros Google Netherlands Ukraine Vladimir Putin Tue, 26 May 2015 22:30:36 +0000 Tyler Durden 506973 at Why China Is So Desperate To Blow The Most Epic Stock Bubble <p>Over one and a half years ago <a href="">we put in perspective </a>the amount of money creation by China compared to the the liquidity injection by the Big 3 "developed world" central banks. The result was stunning. </p> <p><a href=""><img src="" width="600" height="973" /></a></p> <p>This was as of <a href="">November 2013</a>. </p> <p>Since then both the Chinese money machine, as well as those of the central banks has kept on pumping in injecting liquidity (in the process withdrawing liquidity from markets as Citi's Matt King pointed out <a href="">three weeks ago</a>). A quick update comparing just China with the US shows that as of the most recent period, Chinese banks now have just shy of $30 trillion in assets, compared to almost 50% less for US banks.</p> <p>&nbsp;</p> <p><img src="" width="600" height="313" /></p> <p>&nbsp;</p> <p>To be sure, China's gargantuan, unprecedented debt-issuance spree is nothing new: we have covered it extensively over the years...</p> <p><img src="" width="591" height="583" /></p> <p> ....noting <a href="">all the way back in 2012 </a>that "If one takes the chart above showing the absolute level in Corporate debt, and assumes this is a valid proxy for total leverage growth across all other sectors, one can say, with a straight face, that if all Chinese debt on and off the books, including shadow leverage, were to be pooled, it would make America's grand consolidated debt (excluding the $100 trillion in entitlements) of 345% appears quite modest."</p> <p>Three years later, <a href="">McKinsey agreed</a>:</p> <p><a href=""><img src="" width="600" height="566" /></a></p> <p>And here also, three years later, is Goldman admitting that China's "<strong>Credit-led growth has created one of the biggest debt build-ups in recent years." </strong>This is how Goldman explains what happened in China to launch this massive debt-funded growth:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>... after the onset of the global financial crisis and the collapse in world demand, exports collapsed. <strong>The Chinese government’s response involved large infrastructure outlays via bank financing. </strong>This led to a notable increase in China’s credit intensity, as investment growth is a more credit-intensive than exports and consumption, with heavy borrowing requirements and long payback periods. </p> <p>&nbsp;</p> <p>This can be seen from the growth in China’s nominal GDP and in total social financing (TSF), which is an aggregation of credit in both the banking and non-banking sectors. As shown in Exhibit 1, nominal GDP fell sharply in 2008, but rebounded strongly in 2009 following the sizeable increase in TSF. We then saw TSF growth slowing in 2010/11, although nominal growth held up as exports rebounded sharply. As export growth fell in 2012 and TSF growth slowed, nominal GDP dipped in 2011/12. We then saw TSF growth reaccelerate in 2012H2 to support growth. Since early 2013, TSF growth has decelerated again, as has nominal growth. This deceleration has continued in 2015, accompanied by additional loosening measures. </p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="388" /></a></p> </blockquote> <p>Then something changed: China realized that alongside record debt <a href="">comes record <em><strong>bad </strong></em>debt</a>. </p> <p><a href=""><img src="" width="600" height="268" /></a></p> <p>&nbsp;</p> <p>We noted as much in the <a href="">summer of 2013 </a>when we reported that as China scrambled to intercept the relentless surge in non-performling loans, it would moderate its hollow, debt-funded growth. This was part of the new Politburo's stated directive of reorienting the Chinese economy away from being entirely reliant on debt issuance to depend on more conventional growth catalysts; it also explains why China's growth rate has plunged in the past 2 years and has officially dropped to a level just around 7% ...&nbsp;</p> <p><a href=""><img src="" style="width: 600px; height: 315px;" /></a></p> <p>... and unofficially to just above 1%.</p> <p>China did this almost entirely by choking off the growth of its most opaque funding sector residing within China's "shadow banking" system: trust issuance, non-discounted bills and local government debt. These are the highlights we noted in November in "<a href="">China's Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade</a>"</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>[W]hat is the main culprit for the contraction in China's all important credit formation? In two words: shadow banking...&nbsp; as China finally reveals little by little the true extent of its gargantuan bad debt problem, <strong>it is also slamming the breaks on the shadow banking system that for years what the sector where marginal credit creation, and thus growth as well as bad debt formation, was rampant. </strong></p> <p>&nbsp;</p> <p>If the shadow banking collapse virus has finally jumped to China, <strong>there is no saying just how far Chinese GDP can drop if it is now constrained on the top side by surge in bad debt</strong>. One thing is certain: Japan's paltry, in the grand scheme of things, expansion in its own QE will barely be felt if the record Chinese credit creation dynamo is indeed slamming shut.</p> </blockquote> <p>Six months later, others caught on: first it was RBS, whose Andrew Roberts recently said <strong>China accounted for 85% of all global growth in 2012, 54% in 2013, and 30% in 2014. This is likely to fall to 24% this year</strong>. “If there is only one statistic that you need to know in the world right now, this is it." </p> <p><a href=""><img src="" width="600" height="364" /></a></p> <p>In other words, without China's rampant credit creation, without an out of control shadow banking sector, not only is China's growth doomed to a long period "secular stagnation", to use a popular term these days, but so is the entire world.</p> <p>Goldman agrees: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>China’s policy response to the global financial crisis created one of the largest debt buildups as a share of GDP seen anywhere in the world over the past 50 years. Cognizant of the risks of such a large credit buildup, since early 2013 (when the current Chinese leadership took over), we have seen a notable shift by policymakers to make credit provision more transparent and productive. As discussed above, there was a notable rebound in TSF in 2012/2013 as GDP slowed. That TSF growth was, to a large extent, driven by the growth in trust financings, an area we have highlighted as one of the riskiest segments within China’s credit market. <strong>To control risks, policymakers made several attempts at curbing the growth in trust financings. In June 2013, 7-day repo rates spiked to as high as 28% intraday, </strong>as interbank rates were pushed up in an attempt to reduce the funding to the trust sector; and in mid-2014, the Chinese banking regulator adopted a number of measures, including restrictions on the informal securitisation of certain credit products and reiterating prudent risk management requirements. <strong>These measures successfully reduced the growth in trust financings, with net new trust financings (i.e., new issuance less redemptions) hovering around zero over the past ten months</strong> (Exhibit 2).</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="371" /></a></p> </blockquote> <p>China succeeded in crushing its shadow banking sector, but at the expense of growth:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The administrative measures discussed above have been successful in controlling the riskiest elements within China’s credit markets, as both trust financing and LGFV financings have been contained. However, they have also had the effect of reducing the overall growth of TSF. In our view, these risk control measures have had the impact of not only controlling credit supply, <strong>but have also compounded the effect of weak growth in dampening credit demand</strong>.</p> </blockquote> <p>We are confused why Goldman is confused by this: if rampant, out of control credit creation led to a burst of economic growth (built on hollow, non-performing loan foundations), it is only logical that as the flow from the shadow banking conduit is eliminated, so is a major portion of China's GDP.</p> <p>Sure enough:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Risk control measures and weak credit demand have dampened credit growth since the beginning of 2013, leading to a slowdown in GDP growth. </strong>To revive GDP growth, policymakers have undertaken a broad range of monetary easing measures, including lower interest rates, a reduction in the RRR, and other types of liquidity injections into the banking system, such as open market operations.</p> </blockquote> <p>Here, however, China encounters a unique problem: unlike other central banks who will gladly crush their currency to boost exports and to stimulate corporate profits of multinationals, in China outright currency devaluation has been largely taboo for one main reason: the PBOC is terrified of capital outflows. In fact, as we <a href="">showed recently </a>when charting the combined Treasury holdings of China and "Belgium", China appears to have been selling USD-denominated paper to fund the tens of billions in recent reserve outflows.</p> <p><a href=""><img src="" width="600" height="427" /></a></p> <p>Note: the above capital flight has taken place even as the PBOC has kept the value of the Renminbi roughly flat, and in fact the CNY has appreciated drastically in recent months after declining in the early part of the year. One wonders how this chart would look like, and what would happen to US bond yields, if Chinese outflows accelerated in earnest, and China's selling of US paper followed suit. </p> <p>And since China is also contemplating whether to join the IMF's Special Drawing Rights basket, which would require a stable currency, China has found it is next to impossible to devalue its way to growth: unlike the BOJ, the PBOC and the Fed in the past 7 years where currency debasement has been the only source of "growth", albeit fading judging by the <a href="">accelerating plunge in global trade volume</a> (we <a href="">ultimately believe </a>that China will find it has no other option than to engage in Western-style QE before too late).</p> <p>But while in addition to currency devaluation QE far more importantly also leads to soaring stock markets, also known as the "wealth effect" transmission channel, China can bypass all the unpleasantness of capital flight and currency devaluation and skip straight to the desert: a massive stock market surge, built on absolutely nothing but hopes of even more central bank interventions: a surge so big in fact China's Shenzhen market is up 100% in 2015. Which is <a href="">precisely what happened overnight</a>. </p> <p>But wait, that would mean that for China reflating the stock market bubble, which is far more shallow and penetrated by the domestic population than its comparable in the US or any other western nation, has become a policy mandate, same as in the US and every other western nation. </p> <p><em><strong>Bingo. </strong></em></p> <p>Goldman explains:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>The equity market now plays an important role in terms of both the short-term policy objective (i.e., delivering this year’s growth target) and structural reform ambitions</strong>. Policy makers appear to have taken a largely benign view of the equity market rally, which, if sustained, can boost GDP by 0.5pp on our estimates through trading-related financial activities, and could add another 0.2pp or so through a rise in consumption from market wealth generation. W<strong>e also see further potential benefits from&nbsp; ‘equitisation’ as it helps to replace debt with equity financing.</strong></p> </blockquote> <p>Wait a minute: isn't it rising GDP that boosts stocks, not the other way around? Or did Goldman just invent the world's first financial perpetual engine? Does that also mean that should the S&amp;P crash back to its ex-$22 trillion in central bank liquidity fair value of ~400 that US GDP will be some 20, 30 or more percentage points lower (on any seasonally adjusted basis)?</p> <p>Rational thought aside, what Goldman just confirmed is the following:</p> <ol> <li>China's credit growth in the Lehman aftermath was the dynamo that kept the world afloat from 2009 until 2012/13</li> <li>Starting in 2013 China realized it has a big problem due to its nearly 300% in debt/GDP, and a soaring bad debt problem which threatens to metastasize into a default domino wave.</li> <li>In mid-2014, Chinese shadow banking effectively ground to a halt, leading to a sharp contraction in both Chinese and global GDP (this explains the collapse in US Q1 GDP, just don't tell anyone at the Fed which is too busy fabricating seasonal adjustment factor to account for all of the above).</li> <li>Also in mid-2014 the Chinese relentless stock market rally started, which rose by 50% in 2014 and is up another 50% since then.</li> </ol> <p>In other words, as China's shadow banking bubble burst, China's stock market bubble was given the Politburo's official blessing. </p> <p>This explains why despite what is quite clearly the world's biggest and most visible asset price bubble since Nasdaq in the year 2000, China will do everything in its power to keep the bubble growing, massive - and pervasive - <a href="">stock frauds such as Hanergy</a> notwithstanding. </p> <p>Which is fine, however now the fate of not only <a href="">millions of Chinese habitual gamblers</a>...&nbsp;</p> <p><a href=""><img src="" width="600" height="315" /></a></p> <p>... but suddenly the fate of China's economic prosperity, and that of the entire world, is in the hands of the Shanghai Composite, which needs to keep growing at about 2-3% each and every day just to keep the illusion of China's growth, and preserve the illusion of global economic expansion. </p> <p>It also means that now the credibility of each and every single banks will depend on maintaining the world's biggest coordinated stock market blow off top: should the pace of expansion slow down, it would mean loss of faith and confidence in central planning, and thus in the very foundation on which the "recovery" of the past 7 years, both in capital markets and the underlying (or is that overlying) economy rests.</p> <p>Said otherwise, when the Chinese stock bubble bursts, the shockwave will be heard around the globe, but at least it will unleash even more comedy from America's weathermen-cum-economists, such as triple- and quadruple-seasonally adjusted data. Because even though the answer for the global slowdown is staring <em>everyone </em>in the face... </p> <p><a href=""><img src="" width="600" height="498" /></a></p> <p>... one must always fabricate stories to "explain" why the world's biggest experiment in central planning, where now even China is all in, is failing one limit up stock at a time.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="959" height="504" alt="" src="" /> </div> </div> </div> Belgium Bond Capital Markets Central Banks China default Lehman McKinsey NASDAQ Nominal GDP Open Market Operations RBS recovery Renminbi Risk Management Shadow Banking Shenzhen Tue, 26 May 2015 22:14:16 +0000 Tyler Durden 507066 at Fukushima May Be At Risk Of Imminent "Hydrogen Explosion" <p><strong>Containers holding contaminated water at the crippled Fukushima nuclear power plant are at risk of hydrogen explosions</strong>, <a href="">The Telegraph reports</a>, with 10% of them found to be leaking. The discovery was reported to the Nuclear Regulation Authority (NRA), which raised concerns surrounding the potential hazards of accumulated hydrogen building up in the containers warning that <strong><em>&quot;a spark caused by static electricity could cause a container to explode.&quot;</em></strong> TEPCO officials reassuringly note that they &quot;think the possibility of an occurrence of hydrogen explosion from these storage facilities is extremely low, since there is no fire origin, or anything that generates static electricity nearby,&quot; but this is the same company that a recent <strong>IAEA report blasted for <em>&quot;failing to implement adequate safeguards at Fukushima &ndash; despite being aware of the tsunami risk.&quot;</em></strong></p> <p>&nbsp;</p> <p><a href=""><img height="337" src="" width="600" /></a></p> <p>&nbsp;</p> <p><strong>Leaking containers at Japan&rsquo;s embattled Fukushima nuclear power plant are at risk of possible hydrogen explosions,</strong> experts have claimed. <a href=""><em>As The Telegraph reports</em></a>,</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>Almost 10 per cent of recently inspected containers holding contaminated water at the nuclear plant in northeast Japan were found to be leaking radioactive water.</strong></p> <p>&nbsp;</p> <p>The leakages, discovered during inspections by Tokyo Electric Power Co (Tepco), the operators of the plant, were thought to be caused by a build-up of hydrogen and other gases due to radiation contamination.</p> <p>&nbsp;</p> <p>The discovery was reported to the Nuclear Regulation Authority (NRA), which raised concerns surrounding the potential hazards of accumulated hydrogen building up in the containers.</p> <p>&nbsp;</p> <p><span style="text-decoration: underline;"><strong>&ldquo;If the concentration level is high, a spark caused by static electricity could cause a container to explode,&rdquo;</strong></span> one NRA official told the Asahi Shimbun.</p> <p>&nbsp;</p> <p>Tepco officials made the discovery while inspecting 278 of the plant&rsquo;s 1,307 containers and<span style="text-decoration: underline;"><strong> found that 26 &ndash; close to ten per cent - had a leakage or overspill from their lids.</strong></span></p> <p>&nbsp;</p> <p>It is believed that<strong> gases had accumulated in the sediment at the base of the containers</strong>, prompting the volume of the liquid to expand and resulting in the overflow.</p> </blockquote> <p><strong>However, officials at Tepco stated that the risk of an explosion was believed to be minimal,</strong> with a series of measures being undertaken as a matter of urgency to resolve the faulty storage containers.</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>The operators also emphasised that there was no sign of radioactive water escaping beyond the confines of the concrete structures that encase the leaking containers.</p> <p>&nbsp;</p> <p><strong>&ldquo;We think the possibility of an occurrence of hydrogen explosion from these storage facilities is extremely low, since there is no fire origin, or anything that generates static electricity nearby,&rdquo; </strong>Mayumi Yoshida, a spokeswoman for Tepco, told the Telegraph.</p> <p>&nbsp;</p> <p>Outlining measures to fix the problem, she added: &ldquo;For temporary measures, <strong>we have been removing the leaked water, installing absorption materials, monitoring by patrol,</strong> keeping water level inside those facilities lower than set and keeping equipment which may generate fire away.</p> <p>&nbsp;</p> <p>&ldquo;In the long term, we&rsquo;re going to lower the water level of current facilities so as to prevent further leakages.&rdquo;</p> </blockquote> <p><strong>But this reassurance rings a little hollow</strong> given the recent report finding TEPCO at fault <a href=""><em>(as RT reports)...</em></a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>The International Atomic Energy Agency (IAEA) said in a report that TEPCO failed to implement adequate safeguards at Fukushima &ndash; despite being aware of the tsunami risk.</strong> The document was obtained by Kyodo news agency on Monday.</p> <p>&nbsp;</p> <p>According to the 240-page report, several analyses carried out between 2007 and 2009 predicted the possibility of an 8.3-magnitude earthquake on the coast of Fukushima, which could result in the plant being hit by a tsunami of around 15 meters.</p> <p>&nbsp;</p> <p>However,<span style="text-decoration: underline;"><strong> TEPCO and Japanese authorities delayed responding to the predictions, feeling that &quot;further studies and investigations were needed.&rdquo;</strong></span></p> <p>&nbsp;</p> <p><span style="text-decoration: underline;"><strong>&quot;TEPCO did not take interim compensatory measures in response to these increased estimates of tsunami height, nor did NISA require TEPCO to act promptly on these results,&quot;</strong></span> reads the text.</p> <p>&nbsp;</p> <p>The report, prepared by 180 experts from 42 countries, will be presented at the annual IAEA meeting in September, if approved by its board of directors in June.</p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>Will the truth ever get out?</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="690" height="388" alt="" src="" /> </div> </div> </div> Japan NRA Nuclear Power Tue, 26 May 2015 22:00:18 +0000 Tyler Durden 507057 at