China Defense Minister In Moscow: “America Must Know How Close Chinese And Russian Armies Are”

This report was originally published by Tyler Durden at Zero Hedge

Nothing continues to scream bullishness – or, less sarcastically, volatility – like the world’s number two and number three superpowers aligning their armies and putting on a show of force to make a strong statement to the United States and fend off “Western Pressure”.

The prescription for volatility becomes even clear when we consider that the United States, Russia, and China are all in a precarious position with one another that has stemmed from, and has implications on, everything from trade to how to handle North Korea.

This military show of force and sign of unity between the two countries is exactly what has been reported by RT just today. Apparently, China and Russia are strengthening their ties in order to make a clear statement to the United States. To do that, Beijing sent a delegation to Russia to show Washington the unity of Russian and Chinese military forces and “support” Russia at the 7th Moscow Conference on International Security.

Chinese Defense Minister Wei Fenghe voiced strong support for Russia during the talks with his Russian counterpart, Sergey Shoigu. While stressing “the united position” on the international arena, the minister said that one of the main goals of the visit was to send a message to Western powers. 

“The Chinese side came to let the Americans know about the close ties between the Russian and Chinese armed forces,” Wei said. The RT article continues:

It is General Wei’s first foreign trip since he was appointed head of the Chinese Defense Ministry. The choice of the destination is not a coincidence, but underlines the “special character” of the bilateral partnership, according to Shoigu.

Prior to the visit, the Chinese state-run Global Times newspaper published an article titled “Western pressure brings China and Russia closer.” The report quotes analysts, who believe that the current international environment – including Western anti-Russia hysteria and the looming US-China trade war – will only strengthen the Sino-Russian alliance.

Both nations have been engaged in their own disputes with the West. The NATO military buildup on Russia’s doorstep has already “crossed the red line,” according to Russian envoy to NATO Aleksandr Grushko. At the same time, Russia is at loggerheads with the US and EU over the poisoning of ex-double agent Sergei Skripal and his daughter in the UK. The British blame-game over Russia’s alleged involvement in the incident sparked tit-for-tat expulsions of diplomats.

It is unclear which tension out of all of them involving these countries has pushed these two superpowers to not only move closer together, but to make it public to the United States. But, as the RT article notes, tensions not only surrounding North Korea, but also surrounding trade and the “Russian diplomat shuffle” that has taken place over the last couple weeks are starting to pin the two like-minded governments together.

In addition to this, and at the same time these two countries are getting cozy, China and Russia have also been notably increasing their gold reserves. This follows our coverage from February, where we pointed out that Russia’s gold purchases were surpassing that of China:

• Russian gold reserves are now the fifth largest in the world.


• Russia added 600,000 ounce of gold (18.66 tons) to reserves in January.


• Russia added a record 224 tons of gold to reserves in 2017.


• Since June 2015, the Central Bank of Russia has added over 576 tons of gold to reserves.


• Overall Russian reserves rose from $432.742 billion in December to $447.735 in January.


• Russian holdings of U.S. Treasuries top $100 billion for ninth in a row.


• Gold reserves worth $80.4 billion constitute 17.95% of overall Russian reserves.

As we wrote just two weeks ago, the “decision point” for gold could be forthcoming and the demise of the dollar could finally be on the horizon: Russia and China are increasing their gold reserves while last week China launched the Petroyuan, announcing it would start paying for oil in local currency, and not dollars.

As such, the joint Chinese and Russian show of force could not only be military, but also monetary, in the near future.

Regardless, this armed forces show of force is one notch higher in the tension pegboard for the global political and global economic climate. However, as has happened with volatility as it has increased over the last decade, we won’t be surprised when equity markets shrug off or ignore this news and continue to push stocks to record highs while hoarding today’s overpriced, oversubscribed and money losing Spotify IPO hand over fist.

The Fed Has Its Finger On The Button Of A Nuclear Debt Bomb

This article was originally published by Brandon Smith at Alt-Market.com

I hear a lot of talk lately in the alternative media (and even the mainstream media) of the potential for World War III. The general assumption when one hears that term is that “nuclear conflict” is imminent. But a world war does not necessarily have to be fought with nukes. For example, we are perhaps already witnessing the first shots fired in a global economic war as the Trump administration gets ready to implement far-reaching trade tariffs. This action might provide cover (or justification) for destructive attacks on the U.S. fiscal system by China, Japan, Russia, the EU, OPEC nations, etc. The ultimate attack being a dumping of their U.S. debt holdings and the death of the dollar’s world reserve status.

Of course, an economic “world war” between nations would in itself be a smokescreen for and an even more insidious internal war being waged against the global economy by central banks.

There is a longstanding misconception that central banks always manipulate economic conditions to make them appear “healthy” and that the main concern of central bankers is to “defend the golden goose.” This is false. According to the evidence at hand as well as open admissions by central bankers, these private institutions have throughout history also deliberately created financial crises and collapses.

The question I always get from people new to the field of alternative economics is — “Why would central bankers crash a system they benefit from?” This question is drawn from a flawed understanding of the situation.

First, there is the assumption that economic systems are static rather than fluid. In reality, vast sums of wealth can be transferred into and out of any notion on a whim and at the speed of light. The collapse of one economy or multiple economies does not necessarily include the destruction of banker wealth. Even if wealth was their top goal (which it is not), global banks and central banks do not see any particular economy as a “cash cow” or a “golden goose.” From their behavior and tactics in the past, it is more likely that they see national economies as mere storage containers.

Banks can pour their wealth, which they create from thin air, into one or more of these many available containers. They can circulate that wealth within the container for a time and then pour all their wealth out at a moment’s notice. One container is no more valuable to them than any other container, and sometimes sacrificing a container can be beneficial.

The perceived destruction of a national economy can often be exploited as a means to a greater end. Usually this “greater end” means exploiting the crisis to justify centralization of power or the transfer of power from the public into the hands of an elitist class.

I have outlined the history of such transfers on numerous occasions, including the liquidity crisis of 1914 (just after the establishment of the Federal Reserve) leading into World War I and the subsequent hoarding of financial power by banks as well as the creation of the League of Nations.

Or how about the artificial bubble in multiple asset classes created by the Federal Reserve in the 1920s through low interest rates? A bubble which was then burst through the aggressive raising of interest rates at the onset of the Great Depression. This crash coincided with other fabricated economic disasters in Europe and Asia, leading to social despair, the rise of communism and fascism and World War II. This crisis benefited the banking establishment greatly as thousands of smaller independent banks were crushed and a handful of major banks devoured all assets. And, let’s not forget that WWII led to the creation of globalist edifices like the United Nations, the IMF, World Bank, the beginning roots of the European Union, etc.

Every new economic calamity seems to consolidate property and bureaucratic control into the hands of the same class of technocrats. And each calamity is linked to a very important economic factor — massive debt dependency.

So, let’s fast forward to today’s era of burgeoning crisis and how central banks like the Fed are feeding the fire of disaster. I would like to focus most of all on our debt situation to illustrate how the Fed can and will trigger an explosion, a controlled demolition of our financial system. What is our debt situation in the U.S. today?

The Consumer Debt Bomb

Total American household debt skyrocketed beyond $13 trillion at the end of 2017, well beyond historic highs. This is the fifth consecutive year of household debt increases, including credit cards, auto loans, mortgages, student loans, etc. This trend suggests that the “economic recovery” so far has not actually been based on any legitimate wealth creation or resurgence, but an even greater dependence on the same debt that helped cause the crash of 2008. The Fed’s money printing did NOT trickle down to consumers as was originally promised.

While these sectors of consumer debt did not necessarily enjoy the same near-zero rates as banks and corporations did after the crash and the bailout bonanza, their rates are now rising along with the Fed’s rate increases. This is affecting numerous asset classes including housing markets and auto loans.

The cold hard reality is that as the Fed raises interest rates all other areas of the economy come under pressure. The average citizen, with his/her record debt levels, is now subject to the machinations of the central bank through the arbitrary shifting of a single data point like “inflation”.

The Corporate Debt Bomb

This debt bomb is possibly the most subversive and the least understood. I have been warning about how corporate debt and rising interest rates could cause a stock market crash for quite some time, but only recently have mainstream analysts caught up to this realization.

Today, institutions like S&P Global Ratings are showing that at least 37% of 13,000 corporations examined have a debt to earnings ratio of five times, making them “highly leveraged.” This debt level is also even higher than it was in 2007 just before the collapse of Lehman and the beginning of the credit crisis.

The concern goes beyond debt holdings, though. Consider the fact that corporations have been exploiting low interest rates to borrow incredible sums of cash for the sole purpose of purchasing their OWN stocks. Stock buybacks are basically a legal form of market manipulation in which companies buy stocks back from the public and greatly reduce the number of existing stocks circulating in the market, thereby artificially increasing the value of each stock overall and keeping the Dow in the green.

Stock buybacks have been the primary fuel for the longest bull market in history, a bull market so fake that even the mainstream media has been questioning its validity lately. Stock buybacks are completely dependent on cheap debt, and cheap debt is disappearing as the Fed continues raising interest rates. The natural reaction by stock markets will be a crash.

Some people may question whether or not the Fed is actually doing this “deliberately,” or if they are simply ignorant. I would refer them to the recently released Fed minutes from 2012, in which Jerome Powell, now the chairman of the Federal Reserve, talked repeatedly of the negative reaction that would occur within markets once the Fed began cutting its balance sheet holdings and raising interest rates after addicting equities markets to the drug of easy profits.

Jerome Powell himself is recorded as knowing exactly what will happen as interest rates rise, and he is continuing to raise them anyway, while also cutting the Fed balance sheet far faster than was originally telegraphed to the public. How can anyone in their right mind argue that the Fed is not bringing the U.S. economy down deliberately?

The National Debt Bomb

This debt bomb has a much longer fuse that the other two, but in the wake of a potential global trade war (World War III), the question arises as to how long it will take before major U.S. treasury bond holders like China dump their holdings in retaliation.

With Trump refusing to take a stand against the continued raising of the national debt ceiling, and the addition of his $1.5 Trillion infrastructure spending plan, there is little doubt that our national debt will continue to rise. Therefore, foreign investment is essential.

It is important to remember that the Federal Reserve used to be the largest purchaser of U.S. debt or the “buyer of last resort.” Now, the Fed has ended quantitative easing and is cutting its balance sheet swiftly. So, the only buyers left are foreign central banks and investors. My prediction is that the Fed will not step in if a trade war escalates to a treasury bond dump. Or, that they will not step in until it is far too late to stall the resulting crisis.

In Barack Obama’s eight years as president the national debt was essentially doubled. This is a unsustainable rate of debt issuance, even for a nation with the world reserve currency. If we lose foreign investment and the world reserve currency then that debt accumulation will come back to haunt us.

It is important to remember that whatever happens within our economy and the global economy, central banks like the Fed have fully facilitated the bubbles produced as well as the inversions that result. The Fed knows exactly what it is doing. And all other factors, from the Trump trade wars to foreign dumping of U.S. treasuries and the dollar, will be a distraction from the banking elites truly culpable.

Economic warfare can in some cases be just as devastating as nuclear warfare.  It can wipe out entire populations, give rise to tyrants and enslave the minds of individuals through the weaponization of resource scarcity.  Such wars, though less psychologically immediate as our cinematic fears of atomic doom, should be taken very seriously, and the culprits behind them have to be dealt with harshly.

***

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You can contact Brandon Smith at: brandon@alt-market.com

After 8 long years of ultra-loose monetary policy from the Federal Reserve, it’s no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it’s critical to act now! That’s why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold.

The Pie Is Shrinking So Much The 99% Are Beginning To Starve

This report was originally published by Charles Hugh Smith at PeakProsperity

Social movements arise to solve problems of inequality, injustice, exploitation and oppression. In other words, they are solutions to society-wide problems plaguing the many but not the few (i.e. the elites at the top of the wealth-power pyramid).

The basic assumption of social movements is that Utopia is within reach, if only the sources of the problems can be identified and remedied.  Since inequality, injustice, exploitation and oppression arise from the asymmetry of power between the few (the financial and political elites) and the many, the solution is a reduction of the asymmetry; that is a tectonic realignment of the social structure that shifts some power—economic and/or political—from the few to the many.

In some instances, the power asymmetry is between ethnic or gender classes, or economic classes (for example, labor and the owners of capital).

Social movements are characterized by profound conflict because the beneficiaries of the power asymmetry resist the demands for a fairer share of the power and privileges, while those who’ve held the short end of the stick have tired of the asymmetry and refuse to back down.

Two dynamics assist a social, political and economic resolution that transfers power from those with too much power to those with too little power: 1) the engines of the economy have shifted productive capacity definitively in favor of those demanding their fair share of power, and 2) the elites recognize that their resistance to power-sharing invites a less predictable and thus far more dangerous open conflict with forces that have much less to lose and much more to gain.

In other words, ceding 40% of their wealth-power still conserves 60%, while stubborn resistance might trigger a revolution that takes 100% of their wealth-power.

History provides numerous examples of these dynamics.  Once the primary sources of wealth-generation shifted from elite feudal landowners to merchants and industrialists, the wealth (and thus the political power) of the landed elites declined. As the industrialists hired vast numbers of laborers drawn from small farms and workshops, this mass industrialized labor became the source of the wealth generation; after decades of conflict, this labor class gained a significant share of the wealth and political power.

The civil rights and women’s liberation movements realigned the political and economic power of minorities and females more in line with their productive output, reducing the asymmetries of ethnic and gender privileges.

In broad-brush, progressive social movements seek to broaden opportunities and level the playing field by reducing the asymmetric privileges of dominant classes defined by power and privilege.  The core mechanism of this transition is the recognition and granting of universal human rights: the right to vote, the right to equal opportunity, and rights to economic security, i.e. entitlements that are extended universally to all citizens for education, healthcare, old-age pensions and income security.

Again in broad-brush, these movements have largely been categorized as politically Left, though many institutions deemed conservative (for example, various churches) have often provided bedrock support for progressive movements.

Social movements which seek to limit the excesses of state power tend to be categorized as conservative or politically Right, as they seek to realign the asymmetry of power held by the state in favor of the individual, family and the traditional social order.

The Expanding Pie Fueled Expanding Entitlements

Writer Ugo Bardi recently drew another distinction between Left and Right social movements: “Traditionally, the Left has emphasized rights while the Right has emphasized duties.”

As rights manifested as economic entitlements rather than political (civil liberty) entitlements, rights accrue economic costs. As Bardi observes: “Having rights is nicer than having duties, but the problem is that human rights have a cost and that this cost was paid, so far, by fossil fuels. Now that fossil fuels are on their way out, who’s going to pay?”

I would argue that the cost was also paid by higher productivity enabled by the technological, financial and social innovations of the Third Industrial Revolution, roughly speaking the interconnected advances of the second half of the 20^th century.

These advances can be characterized as expanding the economic pie; that is, generating more energy, credit, technological tools, opportunities, security and capital (which includes financial, infrastructural, intellectual and social capital) for all to share in a socio-political-financial allocation broad enough to make everyone feel like they were making some forward progress.

This long-term, secular expansion of the pie naturally generated more demands for additional entitlements and rights, as the economy could clearly support the extra costs of allocating additional wealth and resources to the many.  From the point of view of the few (the elites), their own wealth continued expanding, so there was little resistance to expanding retirement, education and healthcare entitlements.

But in the 21^st century, the expansion of the pie stagnated, and for many, it reversed. Adjusted for real-world inflation many households have seen their net incomes and wealth decline in the past decade.

Despite the endless media rah-rah about “growth” and “recovery,” it is self-evident to anyone who bothers to look beneath the surface of this facile PR that the pie is now shrinking. This dynamic is increasing inequality rather than reducing it.

The Shrinking Pie And Stagnant Productivity

It is a truism of economics that widespread increases in productivity are required to generate equally widespread increases in income and capital, i.e. productive wealth. To the consternation of many, productivity has stagnated since 2010; no wonder household income for all but the upper crust has gone nowhere.

If we glance at a chart of productivity, we see a strong correlation with speculative investment bubbles (the dot-com and housing bubbles 1995-2005) and speculative spikes fueled by central bank monetary stimulus (2009-10).  Absent bubbles and monumental excesses of central bank stimulus, productivity quickly sinks to its secular trend line: downwards.

This next chart depicts the long-term trend line of productivity through all four industrial revolutions. Note the decline concurrent with the 4^th Industrial Revolution (mobile telephony, the Internet, AI, robotics, peer-to-peer networks, etc.) and the depletion of cheap-to-access-and-refine oil:

The unwelcome reality is that the economy is changing in fundamental ways that cannot be reversed with policy tweaks, protests or wishful thinking.

Consider the percentage of the gross domestic product (GDP) that goes to employee compensation (wages and salaried). Labor’s share of the GDP has been in a downtrend since 1970, which not coincidentally was the peak of secular productivity:

In this below chart of the distribution of wealth in the U.S., we find the same correlation to the downtrends in productivity and labor’s share of the economy.  The bottom 90% of households’ (the many) share of the wealth pie topped out in the early 1980s and has declined precipitously since, while the wealth of the top 0.1% (the few) has more than tripled since the late 1970s:

This next chart depicts the remarkable (and recent) spike income growth the few have recently enjoyed, at the expense of everyone else:

The increase in wealth and income inequality and the decline of productivity and labor’s share of GDP are the result of structural changes in the economy, changes with far-reaching consequences.

While it’s appealing to identify policies endorsed by self-serving insiders and elites as the source of these changes, that is far from the whole story. Much of this growing asymmetry stems from profound changes in the global economy that depreciate labor (as conventional labor is no longer scarce) and increase the gains of the top few in a “winner take most” allocation that benefits speculation, leverage and new ways of organizing labor and capital that reward the organizers far more than the users/participants.

In this new era of a steadily shrinking pie, the sources of inequality and related social problems have also shifted.  As a result, the social movements that were effective in the past are no longer effective today. Attempts to address rising inequality with the old tools are fueling frustration rather than actual solutions.

In Part 2 — Social Unrest: The Boiling-Over Point, we examine why our existing models for social change have slipped into ineffectual symbolic gestures that fuel fragmentation and frustration — and why that will lead to a dangerous boiling over of the 99% against the elites controlling the system.

When that happens (and it seems inevitable at our current trajectory), the rending of our social fabric will happen stunningly fast. The ensuing social disunity and disruption will be of the sort many alive today have never seen.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

Global Crisis Events: The Weird Keeps Getting Weirder

This report was originally published by Brandon Smith at Alt-Market.com

While the mainstream media and general public tend to assume that every new day is bringing us closer to a better future, many alternative analysts focus on the underlying weirdness of our world and all of the crisis factors that average people don’t want to think about. I have to say, in my view the “weirdness” has been escalating rather swiftly lately, and I don’t think that very many analysts, alternative or mainstream, appreciate the potential consequences.

The most important issue of course has always been the global economy. With nearly every sector of our system resting on massively inflated financial bubbles driven by central bank fiat printing and artificially low interest rates, there is only one question that really needs to be asked: How long before a geopolitical or economic shock event takes down the entire house of cards?

The mainstream philosophy seems to be that the economy is now impervious to such events. As the media now argues often, stock markets in particular do not appear to care whenever international threats present themselves. I would argue that this is because nothing substantial has actually happened quite yet. We have had a steady build-up of domestic and global political tensions, but the markets have so far been presented with a world that is comfortably predictable. It is a dangerous world with numerous potential pitfalls, but still predictable nonetheless.

And this is the very odd position we find ourselves in. A system which grows progressively more unstable year by year, and a society that has grown ignorantly used to it. To wake people up to the threats ahead would require a surprise, a slap to the face, something entirely unexpected. Here are a few developing powder kegs around the world that may present such a shock.

U.S. Debt Ceiling And The Government Shutdown Battle

I think a lot of people are missing some major points on the government shutdown situation. First, consider this — every new deal to keep the federal government funded offers a shorter stopgap than the last. The latest deal would only keep funding in place for three more weeks, then the same conflict over budget and spending initiatives happens all over again. It is not outlandish to expect that one day soon we will be faced with weekly or bi-weekly funding battles in D.C., while the greater problem of the U.S. debt ceiling is generally ignored.

You see, the “fight” within the federal government is not so much over whether or not more debt is a “bad thing.” In fact, both sides support more debt and bigger government. Instead, the fight is over the allocation of funds (debt) to certain projects and away from others. Who gets the money? And how can a government shutdown be used as leverage to gain the upper hand politically?

The thing is, this is all theater. There are no “sides” to the debate in Washington, and there is no battle. This is all designed to condition the American public into believing that the two parties are separate and opposed when they are in fact not. Beyond that, the shutdown battle also achieves a certain stress factor for the economy that many people are not aware of.

Among alternative analysts, cynicism runs rampant over a government shutdown. “Who cares?!” many of them will say, “Let it shut down!” But there are some concerns here, primarily the concern of full faith in U.S. debt issuance.

While I am all for the notion of the federal government going the way of the Dodo bird, I do not think many alternative analysts are considering the trade-off required when the system does in fact “reset.” For example, while the U.S. Treasury is supposed to remain functional during a government shutdown and certainly remains functional during stop gaps and debates over funding, this internal conflict though theatrical in nature can still produce a lack of faith in Treasury bonds and the dollar internationally. And frankly, faith is all that our economy has left to sustain itself.

If the funding battle continues with ever shorter stop gaps or with an extended period of government shutdown, there is a possibility that the largest foreign investors in U.S. debt and the dollar will begin dumping their holdings. When this is done, it will be done quietly and will be fully denied if questions arise. If China, for example, begins decoupling from U.S. debt, we will not find out until it is far too late. The Chinese would seek to be the first to dump their holding in order to avoid a vast international rush for the exits. They would want to be the first to sell, not the last.

Again, if the funding fight continues to become more aggressive and more absurd, eventually we will see a foreign dump of U.S. debt, and with it an unprecedented crisis. Whether or not this “needs” to happen is not what I am debating here, only that when it does happen, there will be consequences for us all, and being prepared for them is essential.

Syria Back On The Table

So, if you thought the Syrian situation could not get any weirder, the past week might have been a surprise.

The last major development was Vladimir Putin’s orders to pull a large percentage of standing Russian troops from the region, leaving the Assad government particularly vulnerable. This move did not surprise me in the least. In fact, I predicted that Russia would step aside in Syria in interviews last year. I also wrote about the possible problems this would cause in my article ‘A Review Of The Most Disturbing Events Of 2017’. One of these problems would be Putin leaving the door wide open for a foreign force to invade Syria, drawing in other nations like Iran or Lebanon into the fight and expanding the war tenfold.

What did surprise me, though, was the brazen launch of forces into the region by Turkey in particular. Erdogen has been pecking away at Kurdish tribes in Syria for quite some time, but his latest measures are something entirely new. Keep in mind that Turkey is still technically a NATO member and an ally of the U.S., despite Erdogen’s anti-NATO rhetoric and threats to leave the multi-nation defense pact. Also keep in mind that the U.S. government is giving monetary and weapons support to the Kurds. So, to clarify, a U.S. ally is ignoring the tense situation in Syria and the possibility of triggering a wider regional war to hunt and destroy another U.S. ally, all while Saudi Arabia, Iran, Israel, Lebanon, Russia, etc., hover on the periphery waiting to jump into the fray.

This is not a recipe for diplomatic discourse. This is a recipe for disaster. Will Syria lead to WWIII as some people suggest? Probably not in the way most of them imagine. War takes many forms, including sporadic region by region conflicts, as well as economic conflicts. Global nuclear war is unlikely considering such an event would virtually vaporize decades of investment by the elitist establishment in control grids around the world. But, constant regional combat and financial disasters? THAT is a strategy that benefits them greatly.

North Korea And The Olympic-Sized Target

First let me say that the very fact that South Korea and the Olympic committee feels compelled to continue the games in the region at a time of such heightened tensions is extremely odd to me. The notion may simply be that the games will “heal” divisions in the Korean peninsula. I am not so sure about that…

I recently wrote about the North Korean war scenario and the potential false flag event during the Olympics in my article ‘Olympic Games In South Korea – Perfect Opportunity For A False Flag Attack?’. I would add to my analysis another interesting development; the negative response by South Koreans to the North’s participation in the Olympic games.

I have continually had to remind people that a war in North Korea would be the most effective trigger event for economic downturn and global distraction, though some skeptics seem to think the situation is going nowhere. Yet, all the elements are now present, including an array of naval forces ready for kinetic response, the escalation of North Korea’s missile technology to include ICBMs capable of striking the U.S. mainland, the war rhetoric grows on both sides, with the Department of Defense being the most aggressive, and now even the South Korean citizenry seems to be shunning diplomacy as they burn photos of Kim Jong Un during Olympic processions and demand a stop to cooperation with the North during the games.

This is a rather sharp break from the mainstream narrative in the U.S., which has told us that South Koreans are seeking generally passive and diplomatic relations with the North, and that the US involvement is universally unwanted. That is to say, the desire for conflict is not limited to U.S. warhawks and North Korean “fanatics,” it is also a large portion of the South Korean population that appears to prefer less-than peaceful solutions.

Add to this the latest CIA claims that North Korea’s nuclear weapons technology will be a full threat to the U.S. in a matter of months, and the news that North Korea’s armies are confiscating food stores from the citizenry at a greater rate than usual, and anyone with any sense can see what is developing here. CIA director Mike Pompeo has asserted that the Trump Administration will act to prevent North Korea from developing an arsenal of ICBMs capable of striking the U.S.

I’ve said it before and I’ll say it again: This is going to end in war. There is no way around it.

The U.S. Dollar Continues Its Rapid Decline

I outlined this interesting development a couple weeks ago in my article ‘The Strange Case Of The Falling Dollar – And What It Means For Gold’, and so far it seems that the downward spiral of the dollar is continuing, now falling at a speed not seen since 2003.

This trend is very strange for a number of reasons – the most prominent being the fact that the dollar index is ignoring policy moves by the Federal Reserve to hike interest rates and reduce its balance sheet. Under normal economic conditions, this should trigger a dollar spike, not a dollar collapse. I predict that the Fed, under “new leadership” through Jerome Powell, will pursue highly aggressive fiscal tightening measures in 2018, including expanded interest rate hikes in the name of tempering the dollar’s decline.

If this takes place, the insane stock market bubble now in full steroid mode will feel a sudden swift kick to the nether regions. However, such a move may still not stop the dollar’s decline. This could be the first stage of the stagflationary crisis I and a few other alternative analysts have been warning about for years.

Growing Accustomed To The Weird

I think if you asked most people if they would have believed the developments of today were possible five to 10 years ago, they would say no. The danger is that when a society becomes too accustomed to instability and conflict, they become complacent in terms of their own security and their own freedoms. They might not even notice until it is too late that both necessities have been stolen away from them.

That great global slap in the face is coming, make no mistake, but the question is, can we prepare enough people for it in time to make a difference in the outcome? Reporting on these issues is often compared to “doom and gloom,” but really, it is an act of optimism. I and many other analysts are operating on the assumption that we can tip the balance by informing the public and creating a shield against calamity. Maybe this is a foolish assumption, maybe not. We shall see in due course.

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If you would like to support the publishing of articles like the one you have just read, visit our donations page here. We greatly appreciate your patronage.

You can contact Brandon Smith at: brandon@alt-market.com

After 8 long years of ultra-loose monetary policy from the Federal Reserve, it’s no secret that inflation is primed to soar. If your IRA or 401(k) is exposed to this threat, it’s critical to act now! That’s why thousands of Americans are moving their retirement into a Gold IRA. Learn how you can too with a free info kit on gold from Birch Gold Group. It reveals the little-known IRS Tax Law to move your IRA or 401(k) into gold. Click here to get your free Info Kit on Gold.

China Beige Book Warns Economic Slowdown Has Begun

When it comes to the global economy, few things matter as much as China, the trajectory of its economy and especially the pace and impulse of its credit creation, which is ironic because virtually all data coming out of China is fabricated and manipulated, and thoroughly untrustworthy, either on purpose or "by accident."

The latest example of the former was highlighted over the weekend, when we discussed that a nationwide Chinese audit found some local governments inflated revenue levels and raised debt illegally, once again making a mockery of China"s credibility on the global stage. As Bloomberg reported ten cities, counties or districts in the Yunnan, Hunan and Jilin provinces, as well as the southwestern city of Chongqing, inflated fiscal revenues by 1.55 billion yuan, the National Audit Office said in a statement on its website dated Dec. 8.

An even more blatant example of the former was highlighted in October ahead of China"s Communist Party Congress, when the local securities watchdog literally "advised" some loss-making companies to avoid publishing quarterly results ahead of the Congress as authorities sought to ensure stock-market stability during the critical gathering of China"s political elite.  As a result, at least 17 Shenzhen-listed companies announced delays to their earnings reports from Oct. 20 to Oct. 24, up from three during the same period last year.

However, now that the Party Congress is long over, China"s recent economic data offer a "warning for 2018" now that Beijing"s leaders are less motivated to prop up fake "growth" for purely optical purposes. That is the opinion of China Beige Book, and its president Leland Miller who said that "Incentives to ensure the economy was growing smartly at the time of the Communist Party Congress do not apply as next year wears on," CBB president Leland Miller and chief economist Derek Scissors said in a report released on Wednesday.

According to a private survey by CBB International, which collects anecdotal accounts similar to those in the Federal Reserve’s Beige Book, Q4 results already show some signs of a transition to slower growth,  The most recent sampling of 3,300 Chinese businesses showed:

• Hiring stopped accelerating due to a strong base of comparison


• Manufacturing orders also stopped accelerating 


• Inventory accumulation "is too fast for comfort"


• Sales-price inflation is weaker than in the second quarter


• Wage gains have stopped accelerating

Come to think of it, the CBB data is not that different from the official Chinese data which showed continued slowdown across most economic verticals:

 

"None of these is genuinely alarming yet, and none would be out of place in a typical quarter," the CBB"s Miller wrote. "But the first results after a CPC are not a typical quarter. If you expect a noticeable slowdown in 2018, the first post-Congress returns support those expectations."

To be sure, even here there is confusion: while at the 19th Party Congress, which marked the start of President Xi Jinping’s second five-year term, top leaders signaled less emphasis on pursuing economic growth at all costs, and greater dedication to deleveraging, during the main economic planning conclave in December which set priorities for 2018, they pledged to focus on "critical battles" against financial risk, pollution and poverty in coming years. Meanwhile, deleveraging - Xi Jinping"s endless crusade - was strangely forgotten. Indeed, as Goldman observed last week, "there was no explicit mention of deleveraging" as "recent policy statements increasingly use the phrase "control of leverage", in our view likely a reflection of increasing realism in policy making." This significant policy reversal prompted the WSJ last week to report that Beijing has effectively given up on its deleveraging pledge.

Leverage or not, the table below - courtesy of Bloomberg - shows CBB’s breakdown of how support for the expansion may erode:

Furthermore, evidence from the retail sector doesn’t support the government’s claims of a consumption boom, CBB said. While some large firms have strong sales and profitability improved this quarter, retail revenue growth finished last among major sectors, Miller and Scissors wrote.

"Retail’s performance is decidedly uninspiring. Revenue, capex, and hiring are inferior to manufacturing, while inventory growth is much higher."

The good news: overall hiring has held up and was generally in line with the prior quarter, with 48% of firms staffing up and 3% cutting workers. "Job growth remained stronger at state firms than private, regardless of company size," CBB’s survey found, although as we will show in a subsequent post, while hiring may remain strong, wages are tumbling in a troubling indication that China"s middle class is set for imminent disappointment and anger.

Meanwhile, inflation in wages, prices, and input costs were also roughly the same as in the prior quarter, and were moderately faster than last year, the report said. Profit growth improved.

That said, despite predictions of gloom as we enter 2018, the world’s second-largest economy proved bears fully wrong this year, exceeding analyst estimates in the first and second quarters, and is now on pace for the first full-year acceleration in growth since 2010, with GDP seen growing at 6.8% this year and 6.5% in 2018. There is a problem: this growth was on the back of a near record credit impulse since the February 2016 Shanghai accord, an impulse which is now over.

Which means that all else equal, and absent another gargantuan credit injection in the coming months, China"s bears are about to have their day in the sun all over again.

No Peace In Our Times: The Inevitability Of War

Via GEFIRA,

“While people are saying, peace and safety, destruction will come on them suddenly, as labor pains on a pregnant woman, and they will not escape.”

Are you, man or woman of Christian and European heritage, aware of this prophecy or do you prefer to live in a fancy world of happy-clappy wishful thinking that the brotherhood of men is about to put an end to human conflict once and for all? Though Christmastide is a time of merrymaking, it may also be a period of reflection. The Birth that we celebrate on Christmas Day was perceived by some as such a threat as to justify the Massacre of the Innocents. Peace and good will were closely intertwined with discord and hostility. Do you think we are living in better times? Do you think we are living in Fukuyama’s end of history?

War has persisted throughout history ever since the dawn of mankind. That’s probably the best indicator that it will persist for all eternity. Why should it cease? War for the purposes of this text is not merely the outright hostilities, the firing guns and resounding battle cries. It is a constant strife that is being played out on a day-to-day basis which now and again erupts into its dramatic form of the opposing armies acting on the theatre of war. Why do we broaden the definition of war? If only because casualties – and we mean loss of lives – are not necessarily the highest during the time of the roaring guns. Those sustained during the periods of peace may be just as high or even higher. Case in point: the Yeltsin era in Russia lasting for roughly ten years. Within that decade, life expectancy plummeted from 70 down to 60, which means that the country’s loss of lives amounted to the magnitude comparable to that during any war, which is millions. This loss of life was brought about by social and economic reforms i.e. steps taken supposedly to make the living standards better and these were demanded or suggested or advised by the powers outside Russia. The result? Closed down factories, laid off employees, poverty and the attendant disease and demise of many. Were these not regular hostilities?

War has persisted throughout history in one form or another, though we are only made aware of it acutely when we can smell gunpowder, see ruined buildings and maimed bodies. Yet war is the pith and core of existence. We live by it, we draw from it, and, on a more positive note, it tests our character. The Iliad, Beowulf, Chanson de Roland, Das Nibelungenlied, Jerusalem Delivered, El Cid, the Battle of Kosovo epic circle, and, and, and, to mention only European literary monuments, they are all about adversity, combat, heroic deeds or cowardly misconduct. Why haven’t our poets and bards composed works of goodness, peace and harmony? Being ones of us, they knew the human psyche and they knew that we wouldn’t feel attracted to stories of goodness and love and charity; they knew that if we had paradise on earth, peaceful coexistence and tolerance of everything, we would have nothing to write about or, to put it in modern terms, nothing to make films about.

Think about it. All literary and religious stuff is about conflict, serious and bitter conflict. Our play and entertainment are all about conflict. Look at the popularity of computer war games, at the popularity of sports which are but epitomes of battles and rivalries; look at the popularity of crime stories, at the popularity of – mind you – Star Wars movie series, as if world wars did not fully satisfy our militant fantasizing! We are hardwired for experiencing conflict in one way or another, much though nowadays we are trying to convince ourselves that the opposite is true. Medieval Christian chroniclers, who most often were Christian priests, i.e. preachers of love and charity, rebuked princes for idly staying at home rather than leading their warriors and knights on conquests. Islam was no better in this respect. The first two or so centuries from its inception were characterized by militant conquests: there were no apostles of Good News but rather mounted warriors wielding curved swords. It is only now that we are squeamish about armed conflicts and frown upon crusades or the conquest of the Americas. And yet we do it in a hypocritical way: we have removed words like war, military campaign or intervention from our polite vocabulary and we call these phenomena spreading or saving democracy, preventing humanitarian disasters, defending prosecuted minorities and what not. Nonetheless, by whatever name a rose is known, it is still a rose.

War runs in our blood. We are biologically designed for conflict, for struggle, for overcoming adversity. No globalization, no unification of nations, no removal of class, religious, racial, economic differences will ever do away with war. Conflict in general and war in particular is a result of (i) biology which manifests itself in (ii) economy and (iii) ideology.

(i) The otherwise scientifically-minded Western Man knows it very well as he firmly believes in the evolutionary mechanism i.e. the differentiation of species and struggle for existence. The animal world – and we are part of it, just an extension – is all about fight for survival, competing for females, guarding one’s breeding and hunting grounds. Genetically related individuals (individuals related by blood, as men of old would have said) form in-groups (families, clans, tribes, nations), where loyalty to its members has a top survival value. Heroic literature exploits the motif of loyalty and its moral counterpart, which is treason, to the full. That is how the biological mechanism of in-group loyalty and out-group exclusion has sublimated into ideas, and these have found reflection in works of art and, broadly, ideology, and in all this which is generally referred to as culture. Nations are a biological phenomenon. Ethnicity, not only race, can be determined by looking into genes! No wonder then that ethnic differences are the main fault lines along which conflicts arise. True, different human groups may from time to time exist as neighbours, never really merging with each other, but inevitably their coexistence must end in an eruption of hostilities.

A note here. Some say humans behave according to the dictates of the culture they live in or are born into, hence a change of cultural surroundings will result in the change of the individual’s behaviour, as if man were a piece of malleable stuff to be shaped at will. Wrong. Culture in its broadest sense is the sublimation of biology, not the other way round. Man creates culture; culture does not create man. Islam practised by white Europeans would look entirely different than Islam practised by Arabs and, similarly, Christianity practised by Arabs would not resemble that practised by Europeans.

(ii) In their daily struggle for survival human groups compete for the scarcity of resources and land. This economic competition is yet another powerful source of conflict and, eventually, war. Economy, i.e. the struggle to survive on a daily basis, brings into conflict also the interests of the members of the in-group. Some are employers, others are employees: some make a living from capital, others from labour. There arises a clash between the haves and the have-nots, ending up in violent revolutions. The dispossessed or simply less affluent members of society attempt to rid the well-to-do of their property, the latter defend themselves. A dream of a peaceful coexistence dictated creating a classless society where everybody’s income had to be levelled. That led to civil wars and ultimate impoverishment of whole nations, from Cuba to North Korea. The French revolutionaries, once they launched guillotining people, including their co-revolutionists, just could not stop doing it. Much the same was true of the Russian Bolsheviks: on one hand they started murdering themselves (Comrade Stalin had Comrade Trotsky killed in the far-flung Mexico where the latter had spent years in exile) and purging the party ranks, on the other they starved their own people, peasants and workers, on whose behalf they began the revolution in the first place. The “achievements” of the medieval notorious inquisition pale in comparison to the millions butchered, tortured and imprisoned in concentration camps in Soviet Russia. Think of it: all that was done for the happiness of future generations of a classless and nationless society.

(iii) Ideology, as said above, is the expression of biological instincts. If it takes the form of a religion, it becomes a weapon by means of which a nation’s dominance, conquest, or privileged position is most powerfully explained by the will of a god or gods. To a believer this religious reality is stronger than the physical one. Consider Muslim suicidal attacks or Christian executions of physicians in front of American abortionist clinics. The survival value of a religion may raise one race above others to the status of a chosen people with all attendant consequences; it may create social strata like a caste system in India which, as it has a blessing from a godhead, it is unthinkable to change; it can fossilize the relationship of dominance and subservience. The Western Man tends to disregard religions as superstition so much that he does not accept the facts that believers of whatever faith are ready to sacrifice their life for a cause.

Some of the systems have been advanced for the sole purpose of blessing the whole of humanity with a pretense of introducing an age of eternal peace and brotherhood. Recall the French and Bolshevik revolutions, globalism or economic and political unions of all types. They are all doomed to fail as they run counter to biological reality, which is constant differentiation and the resulting strife. A new ideology (religion) must first overcome the resistance of the followers of the old one(s), and then or even while ousting the old beliefs, it itself splits into new sub-movements of the first original one. Consider Christianity with its many denominations and the socialist or communist movements, Christianity’s archenemy, which ended up with as many heresies. The movement of whatever kind begins with conflict with ideological out-groups and ends up as a house divided against itself. And then, again, the biologically-conditioned in-group loyalty and out-group exclusion prevail: Catholic, Muslim or communist nations are very often bitter enemies. The shared faith or ideology lose to blood ties.

Is there a solution to wars? Everlasting peace? None, really.

Consider uniting the peoples of the earth in one “nation” (globalization) in the hope of achieving everlasting peace. Quite apart from the feasibility of such an idea and the fact that there will be resistance to it, one nation is no guarantee of a life without conflicts. After all, all homogeneous nations have experienced civil wars. Just one example. The English people were torn by the War of the Roses, then the Cromwellian revolution, then a part of the nation settled down in North America and rebelled against their brothers on the old continent only to wage a fratricidal war of secession among themselves. Much the same story can be told about all other nations around the globe. So, if a nation’s life is rife with conflict, how much more the life of an artificial one, like the Soviet or European Union?

Consider uniting the peoples of the earth by imposing on them one religion, ideology, or a universal lack thereof or indifference (which nowadays goes by the name of tolerance) to all beliefs. Again, we know from history such an attempt is doomed to fail. Remember the initially universal Christianity: one did not have to wait long till it produced Arianism and other heresies, then it split into Orthodox and Western branches; the Western branch gave rise to a number of heresies and split into Catholics and Protestants, who in turn gave rise to numerous denominations thereof. Much the same held good for political ideologies (a form of lay religion) where the socialist or communist movement kept dividing itself into opposing and hostile factions, like national or international socialism, communism, Marxism, Leninism, Trotskyism, Maoism, Eurocommunism (Gramscians), liberation theology (social Christianity)… Russian Communists used military intervention to quell the aspirations of Czechoslovak communists; Comrade Tito was hated by Stalinists, and Chairman Mao was insulted by Stalin for a purpose. Any global ideology with all-encompassing tolerance is sure to follow that way. No doubt about it.

Man thought that religion would overcome national sentiment. Man thought lay ideologies would overcome national sentiment. Both failed miserably. Supposedly suppressed or eradicated national feelings all of a sudden revive as was the case at the outset of the First World War, when socialist parties previously renouncing nationalism turned out to be patriotic; when international soviet communism adopted national colouring during the Great Patriotic War and so on.

Consider uniting the peoples of the earth economically. That, too, will inevitably lead to differentiation in the level of affluence and the resulting tensions between the top and the bottom dogs, sparking social unrest, violent clashes and then revolutions. And we should not forget that also here we may have a hard time deciding whether we develop our global economy according to free market ideas of Austrian school, Keynesian economics, socialist welfare and, and, and…

Eternal peace is not only impossible but also undesirable. Eternal peace and brotherhood of men would mean stagnation, lack of development, death. Yes, there is life because there is death.

All these factors – biological, ideological and economic – are prime movers behind conflict and war. Nations or social classes, ideologies or economic interests, they all exist, keep splitting and competing with each other. When present-day democracies come to blows with regimes as they call them, they only prove that war is inevitable and do not even see that those ‘regimes’ fight against democracies with precisely the same amount of conviction of waging the righteous, if not holy, war.

The modern Western man may laugh at the medieval methods of suppressing dissent or at the fatwas issued by ayatollahs, thinking himself above such measures, but he is none wiser. He moves in the same biological treadmill of eternal – internal, ethnic, sectarian, political, religious, social and even marital! – strife. The enemy is called names – heretic, fascist, racist, imperialist, colonizer, dictator – is burnt at the stake, excluded from polite society, judged by a court or becomes anathema. His right to free speech is denied by the Index Librorum Prohibitorum or political correctness or you name it. War rather than brotherhood. To feel good we all need the bad guys somewhere around. To combat the bad guys gives us a purpose in life. To think of it, only very few of us realise that we ourselves are the bad guys (kafirs, infidels, aggressors) for those whom we regard as bad guys. In a noble attempt to impose our righteous ways on others we meet with resistance. Resistance means conflict and conflict ultimately results in war. That’s the eternal circle of life and death described in The Iliad, Beowulf, Chanson de Roland, Das Nibelungenlied, Jerusalem Delivered, El Cid, the Battle of Kosovo epic circle. We have not been born for a life in liberty, equality and brotherhood. These words only reflect sentimental fantasizing enshrined in the wishful thinking of human rights, but have nothing to do with reality.

To forestall Christian believers’ opposition to the observations described above, let us remind them of Christ’s words, which read: “You will hear of wars and rumors of wars, but see to it that you are not alarmed. Such things must happen.” If they are true believers, they had better repeat after the psalmist: “Praise be to the Lord, my Rock, who trains my hands for war, my fingers for battle.” The realist atheists and agnostics as scientifically-minded people should not stand in need of being convinced that war is part and parcel of our earthly existence.

Uninvestable Tesla

Tesla is an uninvestable stock for me, not just because of its high valuation but also because it fails our fairly basic quality test, which I shamelessly borrowed from Warren Buffett: Would I still buy this stock if right after the purchase the stock market were to close for ten years? If you are a big Tesla car and stock fan, before you start throwing rocks at me, pause and wait till you finish this article – the rocks and I will still be there.

Think about the next ten years. But before you start mentally drawing upward-sloping lines from the current environment into the next decade and drooling over the rosy vision of Tesla’s future that Elon Musk has painted – produce half a million model 3s and bunches of semis and roadsters, and then send a roadster to Mars (I kid you not; that is in his 2018 plan – I’d like you to think about another version of the next ten years: higher (maybe much higher) interest rates, a recession in the US and around the globe, and a less promiscuous bond market where Tesla would have pay a substantial premium to US Treasuries (as would any other company that loses over a billion dollars a year in a highly cyclical industry). And now answer this question: Would Tesla survive this change in economic weather if it happened next year or even three years out? And the answer is … a weak “maybe” at best, and “unlikely” at worst.

The counterargument I’d get: Yes, but we are not going into a recession. Actually, we are. I (and nobody else, for that matter) just don’t know when. After nine years of appreciating stock markets and tepid economic growth, we tend to forget that recessions are a regular  economic fact of life, usually arriving every four to five years (so we are overdue for one). Most Millennials have yet to experience adulthood (have a job and a family) through a recession. They have also never had to borrow at high interest rates – but that is liable to happen, too.

Recessions are usually caused by expansions. Recessions are like the hangover that comes after the wild college party (economic expansion). It’s hard to have a good, fun college party with lots of booze and then not experience a hangover. (I am not speaking from recent personal experience but rather am trying to communicate in language to which Millennials can relate). During the expansion party, companies may build up too much inventory or erect too many factories, and consumers may overconsume.

If you own high-quality companies, ones that meet Buffett’s “ten-year stock market closed rule” (as we do), you don’t have to spend a lot of time and energy thinking about when the recession will hit (we don’t). However, if you own Tesla you’d better have a very clear, shiny crystal ball that will reveal lots of detail about the direction of interest rates and the global economy.

Recessions are tough for deeply cyclical companies: The bulk of their costs are fixed, and thus lower sales usually result in significant declines in net income and often lead to losses. This is why car companies and their deeply cyclical brethren don’t trade at high price-to-earnings levels when the economy is doing well. That is when their earnings are high. The market doesn’t usually take these high earnings at face value, knowing full well that there are lower earnings (or losses) around the corner when recession comes. Tesla, however, doesn’t have to worry about this low price-to-earnings problem, because in spite of its $50 billion market valuation, it has no earnings, just losses. It trades at whatever price-to-future Elon Musk tells you it does.

If you own Tesla stock and you only see one rosy (Musk) version of the future, you are ignoring the very real risk that the benign economic environment of today will not persist indefinitely into the future . Good luck – you’ll need plenty.

One additional but very important point. In the past I was dismissive of traditional automakers’ ability to compete with Tesla. I felt their hundred-year past of producing internal combustion engine (ICE) cars was going to hold them back, the same way Nokia’s dumb-phone past prevented it from effectively competing against Apple’s iPhone. Nokia tried to take the dumb-phone operating system Symbian and turn it into a smartphone operating system. It had a lot of engineers who knew the Symbian operating system, and thus it seemed a logical path at the time. The right approach would have been the more difficult one: Hire new engineers and create a brand new operating system. There was absolutely no reason why Nokia could not have developed its own Android-like OS, even if doing so would have required either retraining or, more likely, laying off Symbian engineers.

For a while it looked like I was right about cars, as the Big Three took a hybrid (Symbian-like) approach to electric cars – they were having a hard time saying goodbye to ICE. However, as we look at the future lines of electric cars coming from  US and German automakers, we now see them severing the connection to their ICE past and embracing electric.

Disclosure: I am an unsecured lender to Tesla through my $1,000 deposit on a Model 3. 

So, how does one invest in this overvalued stock market? Our strategy is spelled out in this fairly lengthy article.

Vitaliy Katsenelson is chief investment officer at  Investment Management Associates  in Denver, Colo. He is the author of “Active Value Investing” (Wiley) and “The Little Book of Sideways Markets” (Wiley). Read more on Katsenelson’s  Contrarian Edge  blog.

Bank Of America: "This Is A Sign Of Irrational Exuberance"

Two weeks ago, when discussing a recent Albert Edwards piece, we said that the word that has come to define the new normal better than all others, is "paradox", as in nothing makes sense, or rather everything makes sense if one only flips logic and reason 180 degrees. A "paradox" was on full display in the latest Bank of America Fund Managers Survey which found that once again, the percentage of respondents saying equities are overvalued hit a new record high of 45%; and yet the average cash levels continue to fall as one professional after another - whose year end bonus depends on whether they outperform the market - rush to allocate funds to equities, which most now agree are an asset bubble.

And while we call this "paradox", Bank of America has another, more familiar name for the phenomenon: "this is a sign of "irrational exuberance"."

Yet while breakneck allocation to stocks continues apace, there has been notable rotation within the sector, and as the next chart shows,  the November rotation shows buying of cyclicals and value, and selling of 2017 winners such as EM, Japan, Tech. It is unclear what is going on in December when everything appears to be bought.

Also of note: the tech sector allocation appears to be rapidly declining, and in December fell to 24% overweight, "the long-term average and the lowest z-score for tech in 3½ years."

But while the "growth" narrative may be fading for now, Goldilocks remains the consensus view for the global economy, with 54% of investors surveyed expecting above-trend growth and below-trend inflation in the next 12 months, just 2% lower than last month’s record high. As BofA adds, "Goldilocks is now the consensus view for the global economic outlook" while the "below-trend growth/ inflation" outlook rose 2ppt to 27%, close to May"11 lows & a total reversal from Jun"16.

Meanwhile, the yield curve reaches its flattest levels since the GFC as net 0% investors say they don"t need fiscal stimulus, the highest since 2011.

And speaking of the yield curve, net 8% of investors surveyed expect the U.S. yield curve to flatten in 2018, the highest level in 18 months

Separately, as reported earlier, "Long Bitcoin" is again considered the most crowded trade (32%) for the second time this year, followed by Long FAANG+BAT (29%) and Short volatility (14%)

As also noted, a central bank error, i.e. "policy mistake" by the Fed/ECB continues to be the top tail risk cited by investors (23%); the top three are rounded out by a crash in global bond markets (15%) and a Chinese debt crisis (14%)

When asked about the consequences of the GOP tax bill, a whopping two-thirds of respondents, a stunning consensus for this survey, expect tax reform to result in higher bond yields and higher stocks, while only 3% think tax reform will lead to lower yields and lower stocks.

 

Also, just 7% of investors say global interest rates will be lower in the next 12 months; 77% say interest rates will rise.

Translation: one year from now stocks and yields will be far lower.

Also, in December global investors favored banks, technology, industrials, insurance and discretionary while avoiding staples, telecoms and utilities. Which means the contrarians should do the opposite.

Here is how Michael Hartnett summarizes the big picture themes from the December FMS:

• Golditrumps: consensus still smitten by Goldilocks...54% expect "high growth, low inflation" in 2018. Almost 2/3 investors believe US tax reform will induce higher stocks & rates, but fiscal stimulus has coincided with lower, not higher profit expectations, and that will need to change given EPS leads relative performance of cyclicals by 3 months (Exhibit 10).


• Pro-cyclical Consensus: Investors are long macro "boom", short "bust"; long stocks, EU/Japan/EM stocks, financials (2nd largest ever), materials (highest since 2/2012) vs short government bonds, US stocks, healthcare & utilities. Pro-cyclical consensus entrenched by US tax reform across asset classes, bar, intriguingly, leading tech sector where allocations dropped to lowest since June 2014.


• FMS Crowded Trades: ...#1 long Bitcoin (32%), #2 long FAANG+BAT (29%), #3 short volatility (14%), while expectations for a "flatter yield curve" surged (highest in 18 months), all trades vulnerable to higher inflation & aggressive ECB/BoJ Quantitative Tightening in 2018.


• Contrarian Recession Trades: ...a recessionary bust even more contrarian than inflationary boom, lower rates more contrarian than higher rates, making short equities-long bonds, short banks-long utilities, short EAFE-long US stocks the most contrarian trades of all heading into the new year.

Finally, when asked when this bubble finally ends, investors were split on the expected timing of equity markets peaking in 2018: 25% see a peak in Q1, 30% in Q2, and 28% in the second half of the year

WTF Chart Of The Week

Authored by Jeffrey Snider via Alhambra Investment Partners,

Back in early October, I noted that repo fails had jumped above $250 billion (combined “to receive” and “to deliver”) for three weeks straight. That wasn’t an auspicious result, as sustained collateral problems like that don’t correlate to happy things. It all began the week of September 5, in what seemed like a minor one-day nuisance over the 4-week bill yield.

October was something of lull in repo and other things, too. Nothing ever goes in a straight line, of course, so it wasn’t surprising to find by mid-November a resumption of concerns based so much in repo. The week of Thanksgiving, fails totaled again more than $400 billion, similar in scale to that week of September 5. Then they spiked by 50% more to $600 billion the week after.

FRBNY records $523 billion in repo fails now for the first week of December. That’s three straight more than $400 billion, two in a row better than half a trillion.

The 8-week average is even just shy of $350 billion. You can get rich being a collateral owner under these terms, raising the question where are they all?

While these are good charts, important charts, neither is our Chart of the Week. What we are looking for in this context of really another burgeoning “dollar shortage” episode is, as always, escalation.

I’m going to go out on a limb and claim there is something seriously wrong in repo.

 

All jokes aside, I know it sounds like a broken record but the dimension that matters is not intermittent collateral problems so much as the greater intensity to them and in a condensing timeframe. Escalation is a description you really don’t want to fit the circumstances.

Just as raging wildfires have a horrific tendency to jump fire-lines and even whole valleys given enough energy, funding issues can jump markets. The global “dollar” market is not a monolithic whole and never has been. It may be (very likely is) more fragmented today than at any point in the past owing to persistent balance sheet capacity problems (therefore the breakdown of covered interest parity that used to keep various funding markets working together in what sure seemed like a seamless whole). It would be a clear point of magnification, then, to find serious problems in one part of the eurodollar system spilling over into another one.

Leading us to our Chart of the Week:

The 3-month €/$ cross currency basis swap has plunged this week, a descent that really started the week after Thanksgiving. It has reached a level today last seen during the 2011 crisis. And this latest detour clearly marks its inflection where else but the week of September 5. In other words, you rarely find an exact match like the one we have here repo to €/$ swaps.

This particular instrument isn’t alone among XCurrBasisSwaps, either, it is merely the tenor and counterpart currency that right now is at the most extreme.

Because these are two very different funding mechanisms, repo and FX (Footnote dollars), there can be little doubt what is really at issue – “dollar” shortage as a matter of supply and therefore balance sheet capacity.

That’s the one common element linking collateral flow with the severe unwillingness (broken covered interest parity) to make a killing lending FX dollars to euro counterparties.

 

This doesn’t mean there is a crash right ahead. It does, however, suggest coming difficulties in various markets and more than that the global economy.

You can blame regulations all you want, as the mainstream has already rushed to do, being forced by such a huge move in €/$ cross to at least report on it, but there is no way this comes out as anything other than an escalating warning.

As a reminder, what negative premiums on XCurrBasisSwaps mean:

The cross currency basis swap is somewhat unique in that by fixing exchange values at both the outset and back end, it reveals purely financial perceptions in its values and changing values about the differences in interest payments. For example, in the 1990’s the basis swap for Japanese banks (again, not companies) was structurally negative, meaning that they had to pay a premium to swap into dollar funding because of negative perceptions of creditworthiness. This is the legacy of the downside of the “global dollar short”, as Japanese banks had accumulated large dollar asset positions (long US$ assets, short US$ funding) leaving them susceptible to such vagaries in dollar funding, whether repo or basis swaps or anything else someone on Wall Street or in London might dream up that wasn’t gold or actual cash…

 

The negative yen basis swap acts like leverage where even yields on the interim “investment” are negative. Any speculator or bank with spare “dollars” could lend them in a yen basis swap meaning an exchange into yen. Because you end up with yen you are forced into some really bad investment choices such as slightly negative 5-year government bonds, but that is just part of the cost of keeping risk on your yen side low. Instead, the real money is made in the basis swap itself since it now trades so highly negative. The very fact of that basis swap spread means a huge premium on spare dollars; which is another way of saying there is a “dollar” shortage.

 

Because of the shortage and its premium, you can swap into yen and invest in negative yielding JGB’s in size and still make out handsomely. There has been, in fact, a rush of foreign “money” into Japan to take advantage of this dollar shortage; the fact that there has been such enthusiasm and it still has not alleviated the imbalance proves scale and intractability.

Brandon Smith Warns "The Virtual Economy" Is The End Of Freedom

Authored by Brandon Smith via Alt-Market.com,

There is one simple rule to follow when understanding the tragic history of economies: Never put blind faith in a system built on an establishment-created foundation. You would think this would not be a difficult concept to grasp being that we have so many examples of controlled economies and collapse to reference over the centuries, but in our era more than ever the allure of a virtual world with promises of endless wealth and ease is overwhelming.

Yes, I am referring primarily to cyptocurrency "tulip-mania" (sorry bitcoiners, the description is too fitting, it isn"t going away), but not this issue alone. I am also referring to a far-reaching problem of which cryptocurrencies are a mere reflection.

Namely, the fact that humanity is swiftly losing sight of what a true economy is and what it is supposed to accomplish. It is because of this reality that crypto is thriving.

First, let"s be clear, fiat currencies are one of the first machinations of the virtual economy. Once paper currencies printed from thin air by central bankers were separated from tangible backing and accepted by the masses as "valuable" and worth trading labor for, the seed of financial cancer was planted. Today, there is one final step needed for the establishment to accomplish complete tyranny in global trade and that is to disconnect the masses fully from private transactions. In other words, we must be tricked into going digital, where privacy is an absurd memory.

Virtual economics is appealing for several reasons, most of them bad.

Americans and much of the west in particular are increasingly uncomfortable with the idea of real production. The latest generation coming into political and social influence, the millenials, is a perfect example. Surveys show American millenials more than any other generation lack basic workplace competency skills, including scoring low on arithmetic and reading comprehension. Often portrayed as "tech savvy" in popular culture and the media, millenials are quite inept when it comes to core skills that fuel strong business and trade, which is part of the reason why the U.S. is falling into the shadow of foreign workforces.

Millenials in the West also exhibit abysmal technical skills in international testing and lag far behind foreign peers. This has come as a surprise to many mainstream economists and social analysts, primarily because millenials are also considered the "most educated" generation ever. But, of course, we have not only been given a virtual economy in recent decades, but also a virtual educational system. A majority of millenials are lacking when it comes to key production skills and entrepreneurship methods because they have been trained to dismiss such skills as negligible. In other words, millenials have been conditioned to be academic idiots.

Why go through the struggle and hardship required to become an effective producer of tangible necessities when it is far easier to join a collectivist drive for socialism and a structure in which little to no work is required to obtain such necessities? Why not steal from a productive minority and spread it thinly enough to keep the unskilled majority fed? It is only within this kind of culture that virtual production, a virtual society and virtual "money" is seen as an ideal solution.

The notion is becoming more and more prevalent in our popular media, and I believe this is rather symbolic (or ironic) of our conundrum.

For example, consider the book Ready Player One, a pop-culture craze and archetypal zeitgeist for millenials soon to be released as an intended Hollywood blockbuster directed by Steven Spielberg. The novel depicts the world of 2045, a world in which fossil fuel depletion and "global warming" have triggered economic and social decline (Remember in the 1980s when they used to tell us that global warming was going to melt the polar icecaps and we would be under water by the year 2000?). A totalitarian governing body controlled by corporate behemoths rules over the dystopian sprawl.

In response to an ever painful existence in the real world, the masses have sought to escape to a virtual world called "the Oasis," created by a programming genius. The Oasis becomes a nexus for the global economy and a virtual society.

This sounds like a rousing background for a story of rebellion, and it is about that... sort of. Unfortunately, here is where the disturbing ties between our world and the fictional world of Ready Player One meet. The "rebellion" is for all intents and purposes also virtual, and for millenial audiences in particular, this is supposed to be inspiring.

Perhaps this is why cryptocurrencies are so appealing to the millenial crowd in particular. Think about it — the dismal economic doldrums of Ready Player One exist NOW; we don"t have to wait until 2045. Millenials are already feeling disaffected, indebted and disenfranchised, and most of them are also skill-less. Self reliance to them is an idea so alien it rarely if ever crosses their minds. So, how do they fight back? Or, how are they tricked into thinking they can fight back against a virtual system that has left them in the gutter? Why, with a virtual community and a virtual currency, of course.

Millenials and others think that they are going to rebel and "take down the banking oligarchs" with nothing more than digital markers representing "coins" tracked on a digital ledger created by an anonymous genius programmer/programmers. Delusional? Yes. But like I said earlier, it is an appealing notion.

Here is the issue, though; true money requires intrinsic value. Cryptocurrencies have no intrinsic value. They are conjured from nothing by programmers, they are "mined" in a virtual mine created from nothing, and they have no unique aspects that make them rare or tangibly useful. They are an easily replicated digital product. Anyone can create a cryptocurrency. And for those that argue that "math gives crypto intrinsic value," I"m sorry to break it to them, but the math is free.

In fact, for those that are not already aware, Bitcoin uses the SHA-256 hash function, created by none other than the National Security Agency (NSA) and published by the National Institute for Standards and Technology (NIST).

Yes, that"s right, Bitcoin would not exist without the foundation built by the NSA. Not only this, but the entire concept for a system remarkably similar to bitcoin was published by the NSA way back in 1996 in a paper called "How To Make A Mint: The Cryptography Of Anonymous Electronic Cash."

The origins of bitcoin and thus the origins of crytpocurrencies and the blockchain ledger suggest anything other than a legitimate rebellion against the establishment framework and international financiers. I often cite this same problem when people come to me with arguments that the internet has set the stage for the collapse of the globalist information filter and the mainstream media. The truth is, the internet is also an establishment creation developed by DARPA, and as Edward Snowden exposed in his data dumps, the NSA has total information awareness and backdoor control over every aspect of web data.

Many people believe the free flow of information on the internet is a weapon in favor of the liberty movement, but it is also a weapon in favor of the establishment. With a macro overview of data flows, entities like Google can even predict future social trends and instabilities, not to mention peek into every personal detail of an individual"s life and past.

To summarize, cryptocurrencies are built upon an establishment designed framework, and they are entirely dependent on an establishment created and controlled vehicle (the internet) in order to function and perpetuate trade.  How exactly is this "decentralization", again?

TOTAL information awareness is the goal here; and blockchain technology helps the powers-that-be remove one of the last obstacles: private personal trade transactions. Years ago, a common argument presented in favor of bitcoin was that it was "completely anonymous."  Today, this is being proven more and more a lie. Even now, in the wake of open admissions by major bitcoin proponents that the system is NOTanonymous, people still claim anonymity is possible through various measures, but this has not proven to sway the FBI or IRS which have for years now been using resources such as Chainanalysis to track bitcoin users when they feel like doing so, including those users that have taken stringent measures to hide themselves.

Bitcoin proponents will argue that "new developments" and even new cryptocurrencies are solving this problem. Yet, this was the mantra back when bitcoin was first hitting the alternative media. It wasn"t a trustworthy assumption back then, so why would it be a trustworthy assumption now? The only proper assumption to make is that nothing digital is anonymous. Period.

With the ludicrous spike in bitcoin prices, champions of the virtual economy are unlikely to listen to any questions or criticisms. I have never argued one way or the other in terms of bitcoin"s potential "market value," because it does not really matter. I have only ever argued that cryptocurrencies like bitcoin are in no way a solution to combating the international and central banks.  In fact, cyrptocurrencies only seem to be expediting their plan for full spectrum digitization and the issuance of a global currency system.

Bitcoin could easily hit $100,000, but its "value" is truly irrelevant and consistently hyped as if it makes bitcoin self evident as a solution to globalism. The higher the bitcoin price goes, the more the bitcoin cult claims victory, yet the lack of intrinsic value never seems to cross their minds. They have Scrooge McDuck-like visions of swimming in a vault of virtual millions. They"ll only accuse you of being an "old fogey" that "does not understanding what the blockchain is."

The fact is, they are the one"s that do not really understand what the blockchain is — a framework for a completely cashless society in which trade anonymity is dead and economic freedom is destroyed.

Ask yourself this: Why is it that central banks around the world (including the BIS and IMF) are investing in Bitcoin and other crytpocurrencies while developing their own crypto systems based on a similar framework? Could it be that THIS infusion of capital and infrastructure from major banks is the most likely explanation for the incredible spike in the bitcoin market?  Why is it that globalist banking conglomerates like Goldman Sachs lavish blockchain technology with praise in their white papers? And, why are central bankers like Ben Bernanke speaking in favor of crypto at major cryptocurrency conferences if crypto is such a threat to central bank control?

Answer — because it is not a threat. 

They benefit from a cashless system, and liberty champions are helping to give it to them.

Above all else, the virtual economy breeds weakness in society. It encourages a lack of tangible production. Instead of true producers, entrepreneurs and inventors, we have people scrambling to sell real world property in order to buy computing rigs capable of "mining" coins that do not really exist. That is to say, we may one day soon be faced with millions of citizens expending their labor and energy in order to obtain digital nothings programmed into existence and given artificial scarcity (for now).

It also encourages false rebellion. Real change requires actions in the real world. Removing banking elitists and their structures by force if necessary (and this will probably be necessary). Instead, freedom activists are being convinced that they will never have to lift a finger to beat the bankers. All they have to do is buy and mine crypto. The day will come in the near future when the folks that embrace this nonsense will wake up and realize they have wasted their energies chasing a unicorn and are ill prepared to weather the economic reset that continues to evolve.

To maintain a real economy in which people are self reliant and safe from fiscal shock, you need three things: tangible localized and decentralized production, independent and decentralized trade networks that are not structured around an establishment controlled system (like the internet is controlled), and the will to apply force to protect and preserve that production and those networks. If you cannot manufacture a useful thing, repair a useful thing or teach a useful skill, then you are essentially useless in a real economy. If you do not have localized trade, you have nothing.  If you do not have the mindset and the community of independent people required to protect your local production, then you will not be able to keep the economy you have built.

This is the cold hard truth that crypto proponents do not want to discuss, and will dismiss outright as "archaic" or "not obtainable." The virtual economy is so much easier, so much more enticing, so much more comfortable. Why risk anything or everything in a real world effort to build a concrete trade network in your own neighborhood or town? Why risk everything by promoting true decentralization through localized commodity-backed money and barter systems? Why risk everything by defending those systems when the establishment seeks to crush them? Why do this, when you can pretend you are a virtual hero wielding virtual weapons in a no risk rebellion in a world of electronic ones and zeros?

In truth, the virtual economy is not legitimate decentralization, it is a weapon of mass distraction engineered to kill legitimate decentralization.