RISK - Investors Never Listen NOR Learn

Stock Market Bubbles And Record Margin Debt: A (Repeating) History Of Ignoring All Warnings 08-09-13 Zero Hedge

It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles.

And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always.

As DB says, "we prepared a collection of press articles which were published around the key events during the past financial crises. Our key finding is straight forward. Irrespective of the publishing date, the articles read alike throughout the two major crisis periods, i.e. the “new technologies market equity bubble” (1999-00) and the “Great/Global Financial Crisis” (2007-08). Most interestingly, literally the same content can be found in todays’ press. Universal phrases include:

• “A rising stock market encouraged more investors to go into debt to buy stocks, sending margin debt levels past their all-time high”.
• “The National Association of Securities Dealers (NASD) has asked members to review their lending requirements in a sign of increasing concern that rising levels of margin debt could exacerbate a stock market plunch.”
• “The Fed is concerned about a sharp rise in margin debt but has been unwilling to attack stock market speculation as high levels of leverage do not necessarily translate into high risk. The last time the Fed adjusted the margin rules was in 1974, when when it reduced the down payment required for stocks to 50 percent of the purchase price, from 65 percent.” […] “The Fed should return to its pre- 1974 policy of actively changing margin requirements in response to stock market speculation”.
• “High margin debts show the effect of over-leveraging and mispricing of risk”.
• “The movements in stocks cause brokerages to stop allowing customers to buy some of the volatile stocks on margin or require clients to put up more cash.”
• “Either the market rises dramatically to make those loans good or in any down move there is tremendous selling pressure”.
• “Until recently, most investors ignored red flags raised by regulators”.

And more detail:

RISK - EU Worries Will Soon Emerge After the Election in Germany is Finalized

Buckle Up, the EU Crisis Will Be Back Soon 08-09-13 Graham Summers, Gains, Pains & Capital

The financial media continues to talk about how Europe is saved.

It’s odd that somehow everything is starting to look so much better now than Angela Merkel is up for re-election in Germany. Could it be coincidence that the worst Crisis in years suddenly went away right as the women with her finger on the “bailout” button needed to convince German voters that she’s doing a great job?

Remember, politics drive everything in Europe, including the markets (Spain’s political scandals had a bigger impact on the Spanish Ibex than a myriad of horrific economic data). Which is why everything is on hold until the German election ends next month.

Meanwhile, underneath this veneer of calm, things worsen. Recently...

• Italy’s non-performing bank loans rose 22% year over year in May (the most recent data)
• Spain’ real non-performing loans are at 17%.
• The IMF predicts Spain’s unemployment will be over 25% for five years.
• Total EU youth unemployment just hit a new all time high, almost 25%.
• Cyprus just OK’d the theft of 47.5% of all deposits over €100,000 at its troubled banks (yes, people just lost nearly half of their savings).

The European markets look equally ugly.

Spain’s Ibex has traded sideways since late 2012. It’s now coming up against major resistance. We’ll see how that turns out.

Germany’s Dax is forming a massive bearish rising wedge pattern.

This market needs to explode to the upside or we’re going to see a correction that erases all of the gains since mid-2011.

The same is true of France:

Again, we need a parabolic rise now or this is a false breakout and France’s shares are heading lower.

We’ve all seen how false hopes work out for the markets: BADLY. Given that Europe is beyond bankrupt at this point, I fully expect that that the EU Crisis will be back with a vengeance very shortly. When you consider that the entire EU banking system is leveraged at 26 to 1, it’s clear that there’s only one outcome possible here: implosion.

Folks, there is no other way to put this... the markets are in a massive bubble. And when it bursts, things will get ugly very FAST.

PATTERNS - Even Retail Investors Don't Believe this Rally

Did Retail Investors Just Fold? 08-09-13 TD Ameritradevia ZH

After BTFATH in June, and being rotated into by the professionals in early July, it would appear that the apparent 'greater fools' are heading for the exits now. As we noted here, the 'retail' buyer of what the institutions were selling suggested things were getting a little too exuberant but as TD Ameritrade's Investor Movement Index shows that the retail investor is now a net seller of equities.Their proprietary index is now at its lowest level for 2013 and the last few days in stocks suggest the institutional sellers have run out of willing 'at any cost' great rotating equity buying 'greater-fools' (despite the mainstream media's call for moar BTFATH). Between Monday's record-breaking 'quote spam' and the JPY carry unwind occurring, we await the next call for Mr. Bernanke (or Kuroda) to get back to work.

US ECONOMY - A Lack of Demand

Economic Recovery Suffering From Lack Of Demand 08-08-13 Comstock Partners

At current levels the market is not only overvalued, but is ignoring the sputtering U.S. economic recovery, the slowing of earnings growth, and the prospect of tapering QE in the second half, perhaps as early as September.  The additional prospect of a stalemate in Washington over the federal budget, the debt ceiling and the potential shutdown of the government is also being overlooked, not to mention the serious slowdown in global growth.

Despite unprecedented monetary ease, the economy has slogged along at an average 2% growth rate over the last three years and seems to be slowing down even more in 2013.  GDP grew at an annualized rate of only 1.1% in the 1st quarter and 1.7% in the 2nd with final demand even lower at 1.3% and 0.3% respectively.

The reasons for the lagging growth are not hard to find.  Simply put, there is not enough demand as consumers continue to deleverage the enormous amount of debt built up during the housing boom at the same time their incomes are barely rising.  For the last 60 years household debt, which averaged about 77% of real disposable income, soared to 129% at the peak in 2007.  While some progress has been made in reducing the ratio to 106%, it is still a far cry from the 60-year average.

At the same time consumers’ ability to spend is severely limited.  Real spending increased at a tepid 2% over the past year, and even this amount is unlikely to be maintained as real disposable income during the period rose only 0.6%.  With the household savings rate at a recovery low of only 4.4%, consumers are unlikely to reduce the rate even more in order to support spending.

The reported increase in payroll employment is not likely to change the bleak outlook for income and spending.  Monthly job increases have averaged 186,000 over the last two years, far below the amount recorded in prior recoveries.  In addition the rate of new jobs has not picked up recently as average employment rose by an average of only 175,000 over the last three months. 

Furthermore, an unusually high proportion of new jobs were part-time and in lower paying segments such as leisure and hospitality, where wages are only $13.48 per hour, compared to $24.37 per hour in manufacturing jobs, which have been going down.  And since hours worked per week are much lower in leisure and hospitality than in manufacturing, the gap in weekly wages between the two segments is even greater.  That is why consumer incomes are not keeping pace with the increase in jobs.

In sum, we believe that the economy is losing steam rather than picking up.  This is happening at the same time that the Fed seems intent on paring down QE, dysfunction is coming to a head in Washington, earnings increases are decelerating, and global economies are under pressure.  Under these circumstances the potential for a severe market decline should not be overlooked.  

EU RECESSION - Protraction Now Taking Global Demand with It

2008 Recession was 5 Quarters - 2011 Recssion is now in 7th Quarter

STATISM - The Latest In Government Oppression

Presenting The Latest In Government Oppression... 08-09-13 Simon Black via Sovereign Man blog, via ZH

Here on the European continent, the bureaucrats who run the EU have recently proven to the world how much a ‘government guarantee’ is really worth.

We’ve been discussing in this column lately how the modern banking system is a total fraud– that dictatorial control of 70% of the world’s money supply has been awarded to just four central bankers. And that the vast majority of banks, especially in the western world, are laughably illiquid… and very thinly capitalized.

But most people never really worry too much about their banks. We’re told, pratically since birth, that

1. banks are safe,
2. responsible,
3. conservative financial stewards.

This belief is universally held as truth across society.

And to cap it all off, we’re told that the government will step up to backstop any bank losses and ensure depositors don’t lose a single penny.

The numbers obviously tell a very different story. In the US, for example, many banks hold less than 3% of their customer deposits in cash, and they have to use clever accounting tricks and off-balance sheet vehicles to mask the true health of their balance sheets.

And the FDIC, which is supposed to bail out US depositors in the event of a crisis, has a mere 1.35% of total US deposits in cash. This isn’t safe. This isn’t conservative. It doesn’t even register as a drop in the bucket.

STEALTH CAPITAL CONTROLS

In Europe, though, they’ve just decided that they’re -not really- going to insure deposits at full value after all (see the article in its original German here)

Now, if a bank goes under, governments will make very, very basic payments to depositors, and restrict withdrawals to just 100-200 euros per day.

There’s a term for this. It’s called capital controls. And it’s something that almost every bankrupt government in history has resorted to using.

Capital controls are essentially a restriction on the free-flow of capital. It can take a number of different forms– gold criminalization, bank account confiscation, foreign exchange restrictions, etc.

But at the end of the day, the effect is the same - capital controls are just another way of transferring wealth from citizens to the government, like dairy cows to a farmer.

SECURE E-MAIL /PRIVACY OUTLAWED

Meanwhile, across the water, I am sad to report that a number of secure email platforms like Lavabit and Silent Circle, have now folded under intense pressure from the United States government.

Lavabit was an email service used by Edward Snowden. From the very cryptic message that CEO Ladar Levison left on his website, it appears that he has been approached by the NSA to turn over email records.

Rather than work with the NSA, Levison has shuttered his operations.

And to boot, Silent Circle CEO Mike Janke announced that his organization was pre-emptively discontinuing its email platform ‘Silent Mail’.

Janke says he sees the writing on the wall and knows “USG [US government] would come after us.”

It’s incredible that two businesses essentially have to commit suicide in order to keep from violating their promises to their customers.

Just another week in the free world. Have you hit your breaking point yet?

CORRUPTION - Monetary Complicity & the Shell Game of "RISK FREE"

Credit Outbids Cash = Resource Wars 08-09-13 Charles Hugh-Smith of OfTwoMinds blog, via ZH

There are real-world consequences to over-issuing credit and currency.

Not only can trader 2 and 3 purchase more goods than trader 1. Trader 2 and 3 have no limit on what they can bid and therefore can price trader 1 out of the market completely. This can and does lead to economic warfare and control over states that have to import the majority of their food and/or energy.

COLLATERAL TRANSFORMATION - Quality Collateral Supply Is Determining "TAPER" Schedule

From Less Repo, To Less Collateral Transformation, To Less Quantiative Easing In One Shadowy Step 08-05-13 Zero Hedge

First it was the TBAC's May presentation "Availability of High Quality Collateral" piggybacking on reasoning presented previously by Credit Suisse. Then JPM's resident "flow and liquidity" expert Nikolaos Panigirtzoglou rang the bell on regulatory changes to shadow banking and how they would impact the repo market and collateral availability (and transformation) in an adverse fashion. Now, it is the turn of Barclays' own repo chief Joseph Abate to highlight a topic we have discussed since 2009: the ongoing contraction in quality collateral as a result of transformations in shadow banking and the Fed's extraction of quality collateral from traditional liquidity conduits (i.e., QE's monetization of bonds). To wit: "Several recent regulatory proposals will increase the pressure on banks to reduce assets that carry low risk weights. Repurchase agreements are a large source of banks’ low-risk assets, and we expect banks to reduce their matched book operations in response to these proposals."

Abate's highlights:

• Given inelastic demand for repo, we expect banks to increase margins to offset reduced volumes.
• The implications for market liquidity are potentially more severe, as banks and dealers may become less willing to facilitate short positions and warehouse risk.
• A reduction in repo activity will reduce the supply of investible assets for short-end investors, widen bid-ask spreads and could encourage the development of riskier substitutes for collateralized borrowing.
• Smaller securities inventories could reduce cash market liquidity. In the Treasury market, these banks may become less aggressive bidders at auctions.
• Likewise a reduction in repo balances will limit the market’s ability to transform weaker collateral into the high quality assets necessary to meet new margin requirements.

What this means explicitly for repo volumes is nothing new and has been covered here extensively in the past, and can be seen quite vividly in the periodic slide of OTR repo into "special" status, usually just ahead of Treasury auctions:

We expect repo volumes to fall for both U.S. and foreign banks. Repo in the U.S. has already fallen by 40% since its pre-crisis peak (Figure 1). We believe the U.S. repo market can reasonably be expected to decline 10% and possibly more across domestic and foreign banks as a result of these new rules and their proposed revisions. In fact, we believe this has already begun, although empirical evidence is difficult to find outside of discussions with money market funds regarding the decline in repo availability.

The most concrete evidence that the pressure on repo has already begun is the occurrence at quarter-end of plunging bank repo borrowings as primary dealers tighten their balance sheets ahead of end-of-period reporting. This is particularly acute for money market funds, whose repo balances from primary dealers typically fall 15% ($75bn) in the final day of a quarter, only to recover over the first two months of the following one. Money funds have attempted to replace some of these lost balances from non-primary dealers, but the credit ratings of these other institutions prevent much of this potential repo replacement. We estimate that nonprimary dealer collateral replaces only about $5bn of the $75bn lost on quarter-end from primary dealers. Unsurprisingly, since money fund balances generally have the same amount of cash to invest at quarter-end, the closing out of primary dealer repo positions results in a steep plunge in repo rates on the final day of the quarter.

The danger from the imposition of a "higher supplementary leverage ratio" is that while on the surface banks may demonstrate stronger balance sheets and less counterparty exposure, it will simply force them to seek "near-substitutes" that behave not exactly according to plan. See Lehman.

Lower repo and bill yields may seem like a small price to pay for stronger bank balance sheets, but there is a strain of research that argues that such scarcity encourages the creation of near-substitutes that may not behave quite like the original. Auction rate securities are an example of an imperfect substitute that under normal market conditions was a perfectly adequate liquidity investment, but ultimately became illiquid during the financial crisis.

Digging into the implications of "thinner dealer inventories" which is already a direct result of changes in the repo market:

In addition to maintaining inventories of securities for proprietary trading and their own portfolios, as significant capital market’s players, these banks hold stockpiles of Treasuries and other securities as part of their market making operations. Net positions in Treasuries across all the primary dealers totalled $80bn in mid-July. Market making – along with hedging inventories – are generally financed in the repo market so a reduction in repo balances will translate into thinner market-making inventories. Similarly, with less dedicated balance sheet, we expect banks to become less aggressive participants in the Treasury’s auctions. This could result in sloppier auctions with bigger tails and ultimately, higher borrowing costs for the Treasury.

A significant reduction in repo might reduce the ability of a dealer or other investors to short securities – without fear of delivery fails. In the Treasury market, a higher risk of failing and consequently incurring the 300bp fails charge, might influence how aggressively dealers participate in auctions and might affect actual auction pricing – even though fails are currently very low (Figure 2). Further, the possibility of increased fails could mean greater volatility in rates as dealers’ willingness to make markets and intermediate between buyers and sellers declines. To avoid the risk of fails, banks and dealers will spend more time searching for available supply to short. Higher search costs reduce the ability of the market to match buyers and sellers, further widening bid-ask spreads.

Repo also plays an important role in intermediating between buyers and sellers outside the Treasury market. Any activity in which banks act as securities “distributors” requires some amount of financing. Whether this financing is done via the repo market will depend on the asset’s underlying liquidity. By reducing balance sheet capacity, the leverage rules are likely to reduce market liquidity as banks ration their available inventory capacity. We expect this rationing will increase bid-ask spreads in any market where banks act as market makers between buyers and sellers.

Finally, and getting straight to the heart of the TBAC's May warning, we focus on the biggest issue of all: collateral transformation, or literally getting something from nothing (or absolute junk) courtesy of the murky, off-balance sheet transformations that take place in the shadow banking system:

In a typical transaction, the customer pledges weaker collateral to the bank in return for higher quality collateral, such as Treasuries or cash. These are then used to meet the customer’s margin requirements on derivatives trades. Since these trades are typically structured as repo transactions using the bank’s balance sheet, they are sensitive to the new supplementary leverage requirements, especially as other regulations are expected to increase the demand for this type of collateral transmutation significantly.

Dodd-Frank sections 731 and 764 change the margin rules for cleared (trades over an exchange) and un-cleared or bilateral derivatives transactions. These are expected to boost the demand for high-quality liquid assets over the next six years. According to estimates from the U.S. Treasury, the incremental demand for high-quality liquid assets to meet the new margin rules will be $1.6-3.2trn. These estimates grow considerably larger if, during the six-year interval estimated, there is a financial crisis or shock that results in a sudden, sharp increase in the demand for safe assets.

Although the supply of high quality collateral to meet this new demand source is likely to come from government issuance as deficits persist globally, we expect banks also to play a role via collateral transformation. After all, most of these derivatives customers are likely to be naturally long non-eligible collateral – such as equities or corporate bonds – but somewhat less so with respect to Treasuries and cash. As intermediaries, banks can use their balance sheets and repo transactions to “extend” the supply of eligible margin collateral for their customers – for a price. As noted above, this is the type of higher margin business for which banks might be willing to use their capacity constrained balance sheets, provided the spread between lower and higher risk collateral is sufficiently wide. To the extent that the supply of government collateral is insufficient to meet the new margin demand, transformation trades are an important safety valve if bank balance sheet capacity is available.

Note the highlighted, underlined text above, because it gets to the bottom of the tapering discussion: in a world in which "deficits persist", the Fed has all the liberty to do as much QE as needed, and absorb quality collateral as much as new gross collateral is injected via the Treasury (i.e., deficit funding). However, as deficits decline, as they have been in the US for the past few quarter (at least until the housing picture inevitably deteriorates again and the GSEs go from source of government funding back to use, and the demographic crunch hits in 2015 and deficits explode higher once again), ongoing monetization means collapsing the high quality collateral pool of assets far more than the TBAC advises. In fact, it is the TBAC that is pulling the strings on the Fed and making it clear, as it did in May, that the Fed has no choice but to taper as long as deficits don't return on their normal, upward trajectory (whether this means a war is inevitable to boost contracting defense spending remains to be decided).

However, it is this aspect of the Fed "cornering itself" that is the underlying driver of all behind the scenes tapering discussions, which have nothing to do with the economy. Because while all the rhetoric and regulatory discussion focuses on the economy, the open markets, and deficits - this is all for general popular consumption. What the Fed and the BIS are truly concerned about, and have been for the past four years, is ongoing instability in the repo world, and other aspects of shadow banking. The last thing the Fed, and Treasury, will want to do is override the TBAC on its advice to moderate collateral extraction and plough on with even more quality asset imbalances in shadow banking. And this is why, at least until the Treasury proceeds to spend itself back into "drunken sailor" mode, that all hopes that the Fed will monetize everything that is not nailed down, will have to be deferred indefinitely.

And with Credit Suisse, the TBAC, JPM and Barclays all having now covered this issue, we look forward to that final "liquidity" guru, Citi's Matt King to chime in on precisely this topic, and make it clear just what the real considerations driving the Fed's tapering "logic" are at this moment.

JAPAN - Japanese Bonds Have Lost Their Ability To Price Risk

BNP Warns Japanese Bonds Have Lost Their Ability To Price Risk 08-08-13 BNP Paribas via ZH

The JGB market was completely unfazed by the news that the prime minister’s office was reconsidering the planned consumption tax hike. While the tax hike is unlikely to be changed; in BNP's view, the market’s lack of response to tail risk looks like proof that its function has been impaired by the BoJ’s massive buying. Even if the Abe regime is opting for financial repression to reduce the public debt, however, BNP warns that some degree of fiscal reform is needed to control the long-term interest rate. If the unfazed market is deemed to mean that fiscal reforms can be shelved without fear of a bond-yield spike as long as massive BoJ buying continues, serious problems could ensue.

Via BNP,

The JGB market was entirely unfazed by the news that the prime minister’s office was mulling a change in the timing and/or scale of the consumption tax hike (5% to 8%) slated for next April. To some, this lack of response reflects a dispassionate assessment of market participants that, despite all the talk about possible changes, the sales tax hike cannot be easily undone, having been enshrined in law. As the legislative process would have to start over to change it, we concur that it would be very difficult to devise a new plan. Still, just because the base-line scenario of most market players holds that the consumption tax hike will be implemented as planned, it does not follow that the probability distribution of the hike should be the same as it was. If rising tail risk is priced in, the long-term interest rate should pick up to some degree.

In our opinion, the JGB market has become unable to price in risk, because the Kuroda-led BoJ’s aggressive purchasing has greatly impaired the market’s function. Normally, the yield curve prices in factors such as inflation expectations, economic growth forecasts, the likely future path of overnight rates, fiscal risk premiums, etc. By discounting future changes in these economic fundamentals, financial markets perform the proper role of price discovery. However, owing to the BoJ’s overwhelming bond purchases, transactions among other market participants have essentially dried up. With the BoJ being party to most transactions, bond prices no longer reflect news on Japan’s economic fundamentals.
...

Questions, however, remain as to whether it is even possible for Japan to generate inflationary expectations. The traditional mechanism for transmitting monetary policy – rate cuts that stimulate demand, thereby causing improvements in the output gap, which stoke inflation – is currently not an option in Japan, as both the short-term and long-term interest rates are essentially at the zero bound. While the reflationists surrounding Prime Minister Shinzo Abe argue that inflationary expectations can be fostered by expanding the money supply, the theoretical rationale for this quantitative easing is the quantity theory of money, which does not hold when the nominal interest rate is zero.

...

Incidentally, theories on how the price level is determined fall into two broad categories, the quantity theory of money and the fiscal theory of the price level (FTPL). While the former holds that monetary policy determines the price level, the latter makes fiscal policy the main determinant. When the central bank succumbs to fiscal dominance, wherein monetary policy is dictated by fiscal affairs and not the economy and prices, the applicable model is the FTPL.

Under the FTPL model, fiscal policy can fall into two regimes:

(1) Ricardian, whereby governments demonstrate fiscal discipline by indicating that the public debt will be repaid with future tax increases, and

(2) non-Ricardian, whereby governments aim to settle the national debt via inflation, not tax increases. In the case of non-Ricardian fiscal regimes, the government relies on financing from the central bank to retire government bonds, so monetary policy is effectively called on to clean up after the government.

What happens if we apply this model to Japan? For starters, the absence of positive price growth is not because of insufficient monetary easing, but the widely held view that the government will ultimately come through on fiscal restructuring, including tax hikes. In other words, past Japanese governments were deemed to have Ricardian fiscal regimes, hence the lack of inflation.

But policy seems to have taken a non-Ricardian turn since the Abe administration took office.

First, the government has pressured the BoJ into adopting more aggressive easing, while also swiftly enacting an aggressive package of fiscal spending worth 2% of GDP. Together, it seems that the BoJ is financing the government’s spending spree (monetisation).

Second, the prime minister’s office is now wavering on the consumption tax hike. While this might just be a ploy to squeeze more spending from the hawkish MoF, all of the aforementioned actions could be construed as non-Ricardian. Even if the 2% inflation target in two years proves unattainable, the FTPL model suggests the probability of defeating deflation have greatly increased.

The thing that worries us most is how those surrounding the prime minister will react to a JGB market that does not price risk.

Matters could get very serious if they believe

(a) that the fiscal hawks were wrong about scrapping the sales-tax hike, triggering a fiscal crisis via a spike in bond yields, or

(b) that fiscal restructuring can be put off without provoking a spike in bond yields as long as the BoJ continues to aggressively buy long-term JGBs.

Even if the authorities are deliberately opting for financial repression to steadily inflate away the public debt by fostering negative real interest rates, some degree of fiscal restructuring is still needed to ensure stable control over the long-term interest rate.

Relying on seigniorage alone to repay the public debt could ultimately lead to double-digit inflation that would be socially unacceptable. Then again, surging term interest rates could make it impossible to rely on seigniorage. There is a good chance that financial repression will not succeed unless it is part of a package that includes credible fiscal restructuring comprising spending cuts and tax increases.

CHINA - Credit Bubble: 240% Of GDP And Soaring

The True Chinese Credit Bubble: 240% Of GDP And Soaring 04-11-13 Zero Hedge

Several months ago we pointed out something not fully grasped by the broader public: the Chinese corporate debt bubble is the largest of any developed and developing country, and at 151% of GDP (and rising rapidly) is the biggest in the world. What is better known is that corporate debt is just one part of the total debt picture, which also includes consumer loans, government debt and other "shadow debt" credit in the case of China. So how does China's true debt picture as a percentage of debt look? As the chart below from Goldman shows, in 2013 the total credit outstanding in China is expected to rise to a whopping 240% of GDP, and continue rising from there at an ever faster pace.

What is even more concerning is that in order to maintain its breakneck economic "growth" of ~8% per year, China has to continue injecting massive amounts of debt, the so called "credit impulse" or "flow" which according to assorted views, is what is the true driver of an economy, and where GDP growth is merely a reflection of how much credit is entering (or leaving) the system.

The chart below shows that total Chinese social financing flow just hit a record for the month of March.

Completing the picture is the estimated economic response to a surge in credit. As the last chart shows, in China the biggest benefit to a surge in flow is felt in the quarter immediately following the credit injection, as one would expect, with the effect tapering off and even going negative in future quarters, thus requiring even more debt creation to offset the adverse impacts of prior such injections.

What should become obvious is that in order to maintain its unprecedented (if declining) growth rate, China has to inject ever greater amounts of credit into its economy, amounts which will push its total credit pile ever higher into the stratosphere, until one day it pulls a Europe and finds itself in a situation where there are no further encumberable assets (for secured loans), and where ever-deteriorating cash flows are no longer sufficient to satisfy the interest payments on unsecured debt, leading to what the Chinese government has been desperate to avoid: mass corporate defaults.

At that point it will be up to the PBOC to do what the Fed, the ECB, the BOE and the BOJ have been doing: remove any pretense of money creation via the commercial bank complex (even if these are merely glorified government-controlled entities), and proceed to outright monetization of de novo created assets, thus flooding the system with as much money as is needed to preserve the illusion of growth. Naturally, with the Chinese stock market having proven itself to be a horrible inflation trap (and as a result the bulk of new levered money creation goes into real estate), the inflation explosion that would result would be epic.

At that point the chart of the price of gold (in any currency) due to on the ground demand for capital preservation will make the Bitcoin chart pre-bubble pop, seem outright flat.

CHINA - Sustainability Requires A Slowdown in Investment

China’s Sustainability Requires Slowdown in Investment 08-05-13 Mark Williams, Chief Asia economist at Capital Economics in London.

There has been a sea change recently in how investors view China’s economic prospects, with a growing belief that the slowdown reflects structural constraints rather than cyclical weakness. These constraints are often linked to demographic changes such as the fact that the working-age population last year declined for the first time in the modern era. However, population growth was never a big part of China’s growth story. Demographic changes this decade will account for only about 1 percentage point of the slowdown in economic growth.

The roots of the continuing slowdown lie elsewhere, mostly in investment spending.

Investment has increased to 46 percent of total spending from 36 percent in the last 10 years, well above the emergingworld average of 30 percent of GDP.

There are three reasons why such a high rate is a problem.

• First, it increases the vulnerability of the economy to shocks. Companies are far more likely to cut back on investment when conditions worsen than households are to reduce spending.
• Second, rapid investment growth also raises the risk of a financial crisis if it has been underpinned by a large increase in credit. Before 2008, credit in China was expanding at roughly the same rate as the economy. Since then, the country has depended on much faster credit increases to generate growth, with credit rising to 200 percent from 130 percent of GDP in just five years.
• Third, a high investment rate raises the chances investment is misallocated and resources wasted. This is particularly a problem for a country like China with an undeveloped financial system.

Evidence on how bad the problem of misallocation is in China is mixed. One way to think about this is to ask what the current return is on capital. If a lot of investment is going into areas where it is not used productively, then profits will be hurt.

• In the steel industry, for example, 40 percent of domestic producers are running at a loss.
• Construction equipment and shipbuilding are other sectors currently under pressure.
• The sector where oversupply threatens to have the largest economic impact is housing. In value-added terms, real estate construction accounts for 9 percent of economic output. Once the indirect links to durable goods production and infrastructure construction are factored in, real estate’s role in the economy is even larger. There are plenty of reasons to be concerned at this. Housing completions have doubled in six years. If real estate investment continues to grow at the recent rate, they will double again by the end of the decade, leading to massive oversupply.

PESSIMISM OF OVERCAPACITY: Against the backdrop of increasing pessimism, such evidence of overcapacity is fueling talk of an imminent crisis. Even so, the troubles of individual sectors do not tell the story of the whole economy.

Stepping back to look at industry overall, profit margins continue to hold up relatively well. There has been no repeat of the margin compression of 2009, let alone a return to the despair of the late 1990s, when overcapacity and investment misallocation in state-owned industry forced a wholesale restructuring.

Similarly, there has been only a small decline recently in the returns firms generate on capital. And, unlike in previous downturns, there has been no industry-wide spike in inventories. Indeed, there are a couple of reasons to believe growth may stabilize or even pick up a little in the short term.

Credit is still expanding at a 20 percent annual rate and there are tentative signs this is finally feeding into stronger activity.

Meanwhile, the government has signaled it intends to keep growth above 7 percent and has announced some targeted measures to boost spending.

We expect policy makers to do more over coming months and years to steer the economy onto a new path. While this will be a healthy development, it almost certainly means that the pace of growth will slow further. One important feature of the slowdown so far is that, although it has been led by weakening investment, this has still not been enough to pull down investment’s share of GDP.

As long as investment remains the main driver of growth, the risks will loom large.

SOUTH KOREA - Korean Peninsula a Black Swan Possibility

A Korean Black Swan? 08-04-13 John Mauldin

Last week I was in Newport, Rhode Island, at the Naval War College, where I participated in a summer study group focused on possible futures and how they might affect the strategy of the US Defense Department. The discussions were wide-ranging and mind-expanding, at least for me. As readers know, I believe that Japan has begun a long-term process of continually devaluing its currency. For reasons I have written about at length in previous letters, I think the yen could go to 200 to the dollar in the next five years. I don’t see a precipitous move, simply a steady erosion as Japan tries to bring back inflation and export its deflation.

While the yen at its current valuation is not a particular problem for the rest of the world, when it
hits 120 we will start to see raised eyebrows and political speeches from the countries most
affected. At 140 we could start to see serious reactions.

One of the countries that I think is put into a most difficult situation is South Korea. Their options
for responding to a weakening yen are quite limited. If they respond by printing more of their own
currency, they are likely to engender a debilitating inflation, which is of course not a good thing.

Protectionism will have little real effect vis-à-vis Japan. Remember that the Japanese yen was 357
to the dollar about 40 years ago. The Japanese watched their currency rise by almost 400% in the
decades since. The only real response available to them was to simply become more competitive
and more productive as their currency got stronger, and to their great credit they did.

Honing their competitive edge may also be the only real option for South Korea. But it is not an
easy one, of course, and you will hear lots of complaints from Korean politicians and businessmen.
Not an easy environment, to be sure.

Now let’s shift our focus to North Korea. Everyone (including your humble analyst) is worried
about the isolationist regime in North Korea having access to nuclear weapons and the ability to
deliver them on missiles. But a few conversations I had this past week led me to think there is
another scenario we should consider.

A side conversation at the study group began with an observation by a senior officer about the
ability of the North Korean military to actually project power. As this information is nothing more
than what you can find in the newspapers, I feel comfortable discussing it here. Everyone knows
that North Koreans have been malnourished for multiple decades. Studies suggest that North
Koreans may be up to three inches shorter than South Koreans and have diminished IQs because of
malnourishment as children. The latter is a known effect on human beings anywhere who are
subjected to a starvation diet. The North Korean population has suffered from severe diet
restriction for decades.

How capable is the North Korean military of actually mounting an offensive when their soldiers are
simply not physically able to withstand the pressures of combat? I was also able last week to visit
with one of the great geopolitical strategists of our time, Professor Ian Bremmer of Columbia, who
is the president and founder of Eurasia Group, with some 100 geopolitical analysts working for
him. I shared with him my concerns about the Korean peninsula. He immediately said that he was
more worried about the Korean peninsula than any other part of the world, including the Middle
East. One of the interesting things that he shared is that an increasing number of cell phones are
being smuggled into North Korea from China and that the North Koreans are beginning to get the
real story about the world rather than just the propaganda fed to them by their government.

While there is little ability for the North Korean population to actually stage a revolution, as they
do not have the weapons and hungry people really have difficulty mounting military operations,
there is the possibility of the country becoming increasingly difficult to manage. Combine that with
the potential for a disastrous food-production year, and the potential for the collapse of the
government is not all that far-fetched.

There were not many people forecasting the collapse of the USSR in 1987. Yet as we look back, the confluence of causes that resulted in its collapse seems rather obvious. Probably, the current
dictatorship will maintain its stranglehold on North Korea. That is the tendency with repression and
tyranny – witness Cuba and any number of other countries. But one cannot dismiss the possibility
of a collapse of the North Korean state.

If that were to happen it would be a humanitarian disaster. In the long run it might be better for the
North Korean people, but in the short run it would be catastrophic. It is not unreasonable to expect
that South Korea would have to do the bulk of the heavy lifting, especially after the first year or so.
And should the world no longer have to focus on the ability of North Korea to create mischief with
nuclear weapons, North Korea could soon become page 16 news.

No matter how positively you would want to view Korean unification, the process would be
enormously expensive for South Korea. Assimilating a population long challenged by hardship into
a new reality, not to mention incorporating it into a modern economic model, is a daunting
challenge. I think the task would be more difficult and more expensive on a per-capita basis than
the unification of Germany.

And this could happen while the attention of South Korea is focused on dealing with the
devaluation of the yen and the need to become progressively more competitive to maintain its
export and business model. There is also the possibility of massive refugee movements into China.
That is a significantly different issue than worrying about a million-man army crossing the DMZ
into South Korea.

I’m not saying this will happen, but it is a possibility we need to keep an eye on.

US BUDGET - Everyone Hates Sequestration, But Few Can Agree On What to Cut

The GOP's Entire Budget Strategy Collapsed Yesterday, And Almost No One Noticed 08-01-13 BI

House Republicans' latest fiasco confirms the suspicion: The GOP loves the Paul Ryan budget in theory, but even Republicans can't get it to work in practice.

That was the result of a seemingly nonchalant debate over a bill to fund the Departments of Transportation, and Housing and Urban Development, which blew up in House Republicans' faces on Wednesday.

The THUD bill was, well, a thud, and it was pulled from the House floor amid the realization that it did not have close to the 218 votes of GOP support it needed. Republicans couldn't garner the votes while abiding by their standards — billions in cuts on top of the levels of spending under sequestration.

House Majority Leader Eric Cantor said that the House will return to appropriating the bill after Congress' August recess. But a furious House Appropriations Committee Chairman Hal Rogers said that was "bleak at best," and other GOP sources said there's little chance of that, as well.

What happened here? This bill to fund the THUD served as Republicans' starting point in negotiations with Democrats. The GOP used the Ryan budget — which it passed more than four months ago — as a blueprint for the cuts they would need to make.

But the problem with Ryan's budget is that it works in abstractions, and is never binding. And Republicans learned that, for the sake of saving face while going back to their districts, the heavy cuts projected in the Ryan budget just weren't workable.

In a scathing statement, the normally measured Rogers blasted his colleagues.

"With this action, the House has declined to proceed on the implementation of the very budget it adopted just three months ago," Rogers said. "Thus, I believe that the House has made its choice: sequestration – and its unrealistic and ill-conceived discretionary cuts – must be brought to an end."

That last sentence is what Democrats have been saying since sequestration took effect in March. Predictably, House Democrats seized on the news, with Budget Committee ranking member Chris Van Hollen using Rogers' statement as proof of validation for Democrats.

Talking Points Memo's Brian Beutler explains how this latest failure could affect the coming battle over the fight to fund the government with a complete continuing-resolution bill:

If House Republicans can’t establish a position of their own, then the Senate will drive the whole process (its Transportation/HUD bill will probably pass on a bipartisan basis this week) and appropriations will be extended past September one way or another on the strength of Democratic votes.

It also suggests that the GOP’s preference for permanent sequestration-level spending, particularly relative to increasing taxes, is not politically viable. If they want to lift the defense cuts, they’re going to have to either return to budget negotiations with Democrats, or agree to rescind sequestration altogether.

Republicans passed the unspecific outlines of the Ryan budget earlier this year, because they look good in abstraction. But when it comes to specifics, the knife cuts too deep. Meanwhile, the Senate will move Thursday to the next step in its version of the THUD bill.

OBAMACARE - A Flawed Public Policy Implmentation

America: Where Hard Working, Productive Members Of Society Pay For The Health Care Of Everyone Else 08-04-13 Michael Snyder of The Economic Collapse blog via ZH

Everybody in America wants health care - but most Americans seem to want someone else to pay for it.  In the United States today, the way that our system works is that the hard working, productive members of society pay for the health care of everyone else.  At least under socialism everyone gets the same benefits.  Our system of health care is a very twisted version of socialism where millions upon millions of very hard working people are forced to pay for the health care of others, but often can't afford to purchase decent health insurance for themselves. 

Personally, I don't have a big employer paying for my health care so I have to buy it myself, and I just got a letter from my health insurance company telling me that I have another massive rate increase coming up.  Have you gotten a similar letter?  Health insurance premiums are going up all over America, and this is just the beginning.  In fact, the CEO of Aetna says that health insurance rates for many Americans will double when the major provisions of Obamacare kick in next year.

It would be bad enough if hard working Americans just had to pay for their own health insurance.  But no, they are also expected to pay for the health care of members of Congress, employees of the IRS and other federal agencies, state and local government employees, their adult kids (because they can't afford health insurance), the elderly, the poor, and now under Obamacare they will also be expected to subsidize the health plans of tens of millions of other Americans that are not poor enough to qualify for Medicaid.

When you add it all up, the hard working, productive members of society are at least partially subsidizing the health care of well over half of all Americans while having to pay for their own health care at the same time.

Needless to say, it isn't too hard to see who is getting the raw end of the deal.

Members of Congress certainly don't want to pay for their own health care.  There was panic in the halls of Congress recently when they started realizing that due to certain provisions in Obamacare they may soon be forced to pay for their own health insurance plans.  There was widespread moaning and complaining about how they would be facing "thousands of dollars in additional premium payments" every year.

Things got so bad that Barack Obama got personally involved in the effort to find a solution.  Thankfully, members of Congress can relax because a ruling is being issued that will allow the federal government to continue to subsidize 75 percent of the cost of their health plans...

Lawmakers and staff can breathe easy — their health care tab is not going to soar next year.

The Office of Personnel Management, under heavy pressure from Capitol Hill, will issue a ruling that says the government can continue to make a contribution to the health care premiums of members of Congress and their aides, according to several Hill sources.

A White House official confirmed the deal and said the proposed regulations will be issued next week.

And the IRS, which has been put in charge of imposing the rules of Obamacare on all the rest of us, is freaking out about the fact that some members of Congress would like to force them to personally participate in Obamacare...

The union that represents IRS employees is urging its members to write to their congressmen to help get the union out of Obamacare.

The following are some excerpts from a letter that the union that represents IRS employees sent to members of Congress...

“H.R. 1780 would put federal employees in a special class where they would be prohibited from receiving health insurance through their employer. It would treat federal employees differently from state and local government employees and most employees of large private sector companies who receive health insurance benefits through their employer. The primary purpose of the Affordable Care Act was to provide a marketplace for the sale and purchase of health insurance for those who do not have such coverage – not to take coverage away from employees who already receive it through their employers,” the letter reads.

“I work hard and am proud of the services that I provide to your constituents every day. One of the main benefits I receive as a federal employee is the ability to purchase health insurance coverage through the FEHBP with an employer contribution towards those benefits. Please let me know your views on this legislation. I look forward to hearing back from you,” the letter concludes.

This is just shameful.  If the IRS is going to impose Obamacare on the rest of America, then it should be good enough for them too.

Just check out acting IRS chief Danny Werfel begging for employees of his agency not to have to go on Obamacare...

But we have always had to at least partially subsidize the health plans of federal, state and local government workers.

The big change under Obamacare is that we will soon be subsidizing the health plans of tens of millions of our fellow Americans.

CNN says that 26 million Americans will be eligible for health insurance subsidies, but others believe that the true number is far, far higher than that.

For example, according to CNBC, a family of three in New York that earns $78,120 a year would be eligible for a subsidy of more than five thousand dollars...

In New York, a family of three whose annual income totals $78,120, would pay $12,784 for the second-lower-priced silver plan on that state's insurance exchange. After getting a $5,363 tax credit, the family's net cost for the insurance would be $7,421.

So who pays for that?

You and I do through our tax dollars.

And if you can believe it, Obamacare actually provides an incentive to not work too hard, because if you make too much money you could lose your health insurance subsidy...

Working more could ultimately mean thousands of dollars less for you under a quirk in the new health-care law going into effect this fall. This could prompt some people to cut back on their hours to avoid losing money.

"Working more can actually leave you worse off," the price-comparison site ValuePenguin.com notes in a new analysis.

"It's sort of an absurd scenario," said Jonathan Wu, ValuePenguin.com's co-founder. "It's something for people to be aware of."

In that scenario, an individual or family whose annual income surpasses maximums set by the federal government—if only by $1—will totally lose subsidies available to buy health insurance under the Affordable Care Act.

What a perverse system.

And of course Obamacare will allow young adults to stay on the health insurance policies of their parents until they reach 26 years of age.  As I mentioned the other day, 36 percent of all young adults in the 18 to 31 age bracket are currently living with their folks.  In most of those cases, the parents have to end up footing the bill for health care because the kids simply cannot afford it.

Medicaid continues to expand as well.  Certainly helping the poor is a very good thing, but unfortunately the number of poor just continues to explode.

Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, one out of every 6 Americans is on Medicaid, and things are about to get a whole lot worse.

Right now, there are more than 56 million Americans on Medicaid, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

It is going to take a whole lot of money to support 72 million Medicaid patients.

And then of course there is Medicare.

When Medicare was first established, we were told that it would cost about $12 billion a year by the time 1990 rolled around.

Instead, it actually cost the federal government $110 billion in 1990, and it will cost the federal government close to $600 billion this year.

But if you think this is bad, just wait until all of the Baby Boomers retire.  It is being projected that the number of Americans on Medicare will grow from a little bit more than 50 million today to 73.2 million in 2025.  By then, we would be spending well over a trillion dollars a year on Medicare.

As you can see, under Obamacare the vast majority of all Americans will have their health care at least partially subsidized.

And it expected that our tax dollars will somehow be enough to pay for all of this.

The truth is that we have a deeply broken system.  Costs are spiraling out of control and nobody is quite sure how to fix things.  The following statistics come from one of my previous articles entitled "50 Signs That The U.S. Health Care System Is A Gigantic Money Making Scam"...

-This year the American people will spend approximately 2.8 trillion dollars on health care, and it is being projected that Americans will spend 4.5 trillion dollars on health care in 2019.

-The United States spends more on health care than Japan, Germany, France, China, the U.K., Italy, Canada, Brazil, Spain and Australia combined.

-If the U.S. health care system was a country, it would be the 6th largest economy on the entire planet.

-Back in 1960, an average of $147 was spent per person on health care in the United States. By 2009, that number had skyrocketed to $8,086.

The sad thing is that many hard working Americans in the private sector are being forced to subsidize the health care of others, but they can't even afford decent health care for themselves.

For example, I know of one hard working couple that has a health plan that has a $1,000 deductible.  Even with that deductible, their health insurance premiums are absolutely ridiculous.  Their health care strategy is simply to avoid going to the hospital or visiting a doctor as much as possible.

And of course health insurance companies make money by providing as little health care as possible.  Many Americans have discovered that when you need them the most, some health insurance companies will try to get out of covering you any way that they possibly can.

The reality is that just because you have health insurance that does not mean that you are "covered".

According to a study that was published in The American Journal of Medicine, medical bills are a major factor in more than 60 percent of all personal bankruptcies in the United States.  Of those bankruptcies that were caused by medical bills, approximately 75 percent of them involved people that actually did have health insurance.

So what is the bottom line?

The bottom line is the system stinks, and Obamacare is going to make things a whole lot worse.

HOUSING - Household Formation Drives Residential Real Estate

Record 21 Million 'Young Adults' Now Live With Their Parents 08-02-13 PEW Research via ZH

Just about a year ago we questioned the "demographic demand" thesis for why the US housing 'recovery' would become self-sustaining and lead to yet another fiscal and monetary 'nirvana'. However, while the 'household formation' meme remains front-and-center among bloviating Fed apologists; the sad facts are that not only is household formation actually still falling but, as a recent Pew Research study finds, a record 21 million young adults are now living at home with their parents.

Since 2007, young adults have grown increasingly likely to live at home. This is a new trend with a stunning 45-year high 36% (21 million) of 18-31 year-olds back with mom-and-pop. By way of corollary, with one-third of all Italian adults living at home (and 61% of young-adults), it would seem arguing that a housing renaissance in the US is around the corner on the basis of demographics is risible at best.

Household formation is falling among the young adults (a new trend)...

as 18-31 year olds continue to be forced to move back in with their parents...

But as we warned 10 months ago, there is massively more room for this to increase...

as we see in Italy, it can get considerably worse...

According to a report published on Wednesday, almost a third of Italian adults (31%) live with their parents.

The highest proportion was among 18- to 29-year-olds, for whom unemployment is particularly high, with 60.7% reported living at home.

So with mortgage rates up, household formation down, and the rotation from full-time to part-time jobs, we suspect the exuberance priced into a 'housing recovery'-based growth renaissance is as unlikely as Ron Paul becoming the next Fed Head.

CREDIT - A Loan Distribution Bubble

Another Looming Credit Crunch? 08-05-13 Morgan Stanley via ZH

Thanks to an over-flowing cup of Fed liquidity, corporate debt maturities have not only been pushed out in time but have risen in their nominal outstandings as cheap financing was too good to ignore (especially for those firms on the bubble of failure). The problem these firms face now is, with the Fed set to Taper (and indeed tighten on rates in the next few years); the outlook of much higher bond yields will have a major impact on firms that levered up and used this period to 'survive'.

As is clear from the chart above, debt maturities will once again surge in 2-3 years; and given credit markets now focused on fundamentals (future cashflows) as opposed to merely technicals (fed liquidity flows), the wall of maturities just as rates are rising (and liquidity being withdrawn) will make high-yield investors increasingly nervous (and feedback into lower valuations for stocks, no matter how exuberant a rotation retail investors expect). The message once again appears to be - there's no free lunch as the Fed has merely dragged forward exuberance at the expense of dystopia in the not so distant future.

The bottom-line is that the credit-cycle cannot be hidden forever - unless we can rest assured that even if the Fed does 'Taper' it will rapidly 'un-Taper' soon after as the gross misallocations of capital (rise in liabilities - which will not drop - against an artificial rise in assets - which will fall)...

Chart: Morgan Stanley

RECESSION - More and More Signals Flashing

Real Personal Income Points To Recession Charles Hugh-Smith of OfTwoMinds blog,via ZH

Every time real personal income goes negative, a recession occurs. Now that personal income is falling, a recession is baked in.

Frequent contributor B.C. recently submitted a long-term chart of real personal income that highlights a strong correlation between falling real income and recession. This makes sense: if real (that is, adjusted for loss of purchasing power a.k.a. inflation) income is declining, households have less income to spend and less income to leverage more debt.

Note that real personal income is per capita (per person) and that government transfer payments (checks from social programs such as welfare, Social Security, etc.) are excluded.

There are two noteworthy points in this chart.

One is that real personal income has been negative for the past five years, with one tax-related spike in late 2012 as those who could do so reported income in 2012 rather than 2013 to take advantage of the lower tax rates that expired in 2012.

The second point is that every time the black line (the 6-month annualized rate of change) of real personal income fell below 0% (that is, went negative), a recession occurred:

Here are B.C.'s explanatory comments:

An important caveat: the weak 6-month annualized comparison is against the spike in income at the end of '12.

Still, the year-over-year and smoothed 6-month annualized rates were already falling below the historical recession threshold in late summer '12 and again in winter-spring this year.

A similar pattern trajectory occurred after recessions had begun (as per the National Bureau of Economic Research NBER):

• Aug.-Sept. '08
• June-July '01
• Oct.-Nov. '90
• Feb.-Mar. '82, Apr.-May '80, and Sept.-Oct. '79
• Mar.-Apr. '74
• Nov.-Dec. '70
• Nov.-Dec. '60

Of course, the recessionary implications are bullish for war and for more TBTF bank printing for their balance sheets and offshore equity index futures accounts.

Thank you, B.C. The Big Lie of the "recovery" is that it is self-sustaining. Minus government transfers, the reality that the Fed and Federal government are simply enriching the top 1/10th of 1% with access to unlimited credit at zero interest is revealed.

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists." Ernest Hemingway, The Next War

EMPLOYMENT - Low-Wage Jobs Bias Continues to Hamper U.S. Recovery

Low-Wage Jobs Bias Continues to Hamper U.S. Recovery 08-05-13 Bloomberg Brief

Economic data last week revealed the economy is plodding along at sub-par pace, incapable of engendering a solid pace of living-wage job creation.

The Bureau of Economic Analysis estimates the U.S. economy advanced an annualized 1.7 percent in the second quarter, or a lowly 1.4 percent over the last year.

This has traditionally raised recession alarms; since 1948, anytime the year-over-year pace has fallen this low, the economy has entered recession within three quarters.

Low wages and incomes will probably continue to stymie household spending and business investment, and impede the recovery efforts.

The economy’s weak path is consistent with findings in the Bloomberg Orange Book and its associated Orange Book Sentiment Index, which was at 49.26 during the week ended August 2 — the twenty-fifth consecutive sub-50 reading for this indicator.

The economy added 162,000 jobs in July while the unemployment rate slipped a tenth of a percentage point to 7.1 percent. While these numbers were considered favorable by some pundits,

• The current pace of new jobs is only half the gain registered in February (332,000), and
• The number of persons at work part time because of economic reasons increased 19,000 to 8.245 million workers — the same level as in June 2012.
• As long as the trend rate of economic output softens the labor market will remain weak.

Even with the seemingly improved headline figures, the underlying jobs trends remain disheartening:

• The number of people no longer counted in the labor force climbed by 240,000 in July to 89.957 million — the second-highest reading of all time.
• The labor force participation rate slumped to 63.4 percent, a step away from equaling the three-decade low of 63.3 percent posted in March and April, and
• the growth rate of real incomes remains stagnant.
• Of the 162,00 jobs added last month, 92,900 (or 57 percent) were in the low wage industries of retail (46,800), food & drinking establishments (38,400), and temporary workers (7,700).
• This isn’t surprising since the level of average hourly earnings fell 0.1 percent in July. It’s only 1.9 percent higher than year-ago levels. Incomes and wages facilitate spending, which is the fuel for economic growth, and the engine is running on empty.
• Real disposable personal incomes — adjusted for taxes and inflation — fell 0.1 percent in June, and are a mere 0.6 percent higher than in June 2012.
• The primary issue running through the economy today is that most Americans lack a sufficient wage capable of boosting spending and getting the economy operating at a desirable pace.
• Real consumer spending is clinging to the critical 2 percent pace over the last 12 months. A sub-2 percent pace is typically associated with recession.

The risks to economic expansion are definitively to the downside since the slightest blow to the consumer or business sector would push growth rates of real GDP, incomes, and spending even lower, thus ensuring recession.

TAPER - Political "Push BacK" by the Fed

The Case For Fed Tapering Sooner Rather Than Later 08-06-13 Charles Hugh-Smith of OfTwoMinds blog, via ZH

Better to engineer a mini-crisis while you're still in control than let a crisis you can't control run away from you.

TAPER - Ending QE Will Pressure Fiscal Policy

Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot" 08-25-13 Dallas Fed via ZH

VALUATIONS- PE Multiple Expansion Is Not Sustainable

Multiple Expansion Is Not Sustainable; Guggenheim Warns "Take Profits" 08-08-13 Guggenheim Partnersvia ZH

While remaining unapologetically bullish US equities long-term, Guggenheim's Scott Minerd warns that

• historically, markets that have rallied as aggressively as U.S. equities since November 2012 (an increase of 25 percent), pause or correct to digest their advances.
• Also, earnings among U.S. companies have flattened and could turn negative within two to three quarters, meaning further upside can only come from multiple expansion.
• Of the 19 percent rise in stocks year-to-date, 16 percent has already come from multiple expansion.
• Finally, it appears GDP growth could be entering a soft patch as we work through a number of short-term issues such as
  • the headwinds in housing,
  • reduced growth in China,
  • the full impact of the sequester, and the budget and
  • debt ceiling debates that will take place in Washington in the third quarter

– all of which will put downward pressure on stock prices. The near-term outlook for equities makes now a good time to consider the old Wall Street adage,

"Nobody ever lost money by taking a profit."

Multiple Expansion Driving the Rally in U.S. Equities

The P/E multiple, defined as the ratio of price to trailing 12-month earnings, has been the main driver of the rally in U.S. equities over the past two years.

The S&P 500 index has increased by over 34 percent since the beginning of 2011, of which 28 percent has come from multiple expansion.

During the same period, growth in corporate earnings has slowed.

The trailing 12-month earnings for S&P 500 companies rose 2.4 percent in 2012 and another 2.5 percent for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998.

Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may be not sustainable.

GLOBAL GROWTH - Fighting Triffin's Paradox

Why the Shrinking Trade Deficit Will Choke U.S. Corporate Profits 08-09-13 Charles Hugh-Smith of OfTwoMinds blog, via ZH

All those counting on a weaker dollar and rising U.S. corporate profits will be doubly surprised.

RISK - Money Going to Cash But Equity Inflows Still Suggest Corrective Correlation

July Records Biggest Inflows... Into Cash? 08-06-13 Lance Roberts of Street Talk Live, via ZH

With the Federal Reserve's:

• bond-buying,
• liquidity-injecting,
• market-inflating,
• volatility-suppressing,
• confidence-inspiring,
• economic-supporting,
• media-headline-generating,

... program currently in full swing; one would assume that the daily pushes to new market highs are driven by massive inflows of cash into the equity markets.   Well, that assumption would be partially correct.

According to Trim Tabs:

"Fund flows in the past two months were by far the most volatile we have ever measured. After ignoring equities and dumping bonds at a record pace in June, fund investors poured record sums into U.S. equities and continued to sell bonds in July."

Of course, this is clear evidence that the "Great Rotation" by investors, from bonds into equities, is upon us which will cause yields to rise as investors bet on a recovering U.S. economy.  Right?  Maybe not.

First of all there is scant evidence that the economy is entering into a growth mode.   Even after the recent data manipulations by the Bureau of Economic Analysis (BEA) to artificially inflate the economic data by $500 billion through

1. the addition of pension deficits and
2. R&D expenses

... the annual growth rate of the economy remained below 2% for the third straight quarter.  

Historically, such events have only been witnessed prior to the onset of economic recessions - not expansions.

Yet, the markets have continued to rise setting daily records with each minor uptick.  This incredible advance has come despite weak economic, and corporate, fundamentals.  The rush to plow money into equities since the end of 2012 has been quite astonishing as investors continue to show a complete lack of "fear" as evidenced by extremely low levels in volatility measures and record levels of leverage. 

Historically, such combinations of complacency, exuberance and leverage have ended very poorly.

However, currently, there is no denying that the old Wall Street axiom of "Don't Fight The Fed" has been taken to heart.  The belief, by investors, is that as long as the Federal Reserve is intervening the "stocks" are the only game in town.  I recently showed the correlation between the stock market and the Fed's balance sheet expansions.

But, is it really the "Great Rotation?"  Have investors finally come to an agreement that the worst is behind us and a new secular economic and market cycle is just ahead?  While this idea is what we have been led to believe by countless pieces of hope filled  commentary - the real question is what are investors are really doing?

"According to Trim Tabs' research it appears that something quite different is actually occurring...more of the money that has come out of bonds is being held in cash rather than invested in the equity market.

In the eight weeks ended July 22, $110.9 billion went into savings deposits, while $32.5 billion entered into retail money market funds.

The combined inflow of $143.4 billion is almost triple the $54.1 billion that flowed into equity mutual funds and ETFs in June and July."

Trim Tabs goes on to state that:

"There is definitely a 'rotation' underway in the investment world, but it is premature to call it 'great,' and the 'rotation' is funneling more money into cash than equities.

Given the lofty valuation of the U.S. stock market, we cannot blame investors - particularly those with a long-term outlook - for favoring cash over stock. From a contrarian perspective, it is extremely bearish that so much money is pouring into U.S. equity ETFs,"

As I discussed recently in "Is It 'The Great Rotation' or 'Bad Behavior'":

"[Josh Brown] My argument was a very simple one...Capital does not chase value, it follows performance, and stocks had been winning for too long to continue to escape notice. Once the bonds started looking shaky, it had become a fait accompli...It's a shame they're coming in so late, but this is the nature of the beast."

"The reality, unfortunately for most investors, is summed up best by the last part of Josh's statement.  It is much more likely that the current 'rotation' of money from stocks into bonds is more likely a continuation of the bad investment behavior by retail investors rather than a secular shift in sentiment.

Retail investor's actions are driven by emotion rather than logic.  The chart above shows the investor psychology cycle of investment behavior overlaid against the S&P 500 index.  The bar graph in the chart is the 3-month average of net monthly inflows by retail investors into equity based mutual funds.  Not surprisingly, net equity inflows have turned positive at the peak of the market in 2011, just prior to the debt ceiling debate debacle, and the current QE driven asset inflation."

While investors are indeed most likely chasing performance of the market - they are also appear to being more "afraid" of the rally, that what we have seen historically, by storing more money in cash. 

As article after article has been written chastising investors for not "jumping into the market" - the reality is that investor "trust" has been broken.  They still remember being told that "this time was different" at the peak of the markets in 2000 and 2008.  It wasn't.

They also remember being told to "buy" and "hold on" all the way down during both market corrections that cost them 50%, or more, of their portfolios.

Now that individuals have finally gotten back to even, for the second time in the past decade - they are indeed taking rotating money in the markets - it just happens to be to cash.  But then again, after being lied to, abused, manipulated and defrauded by Wall Street - who can really blame them.

RISK - "Blue-Sky" Index Is Flashing Red

"Blue-Sky" Index Is Flashing Red 08-05-13 Sean Corrigan (Diapason Commodities) via ZH

Nobody may wish to believe it, but, Diapason Commodities' Sean Corrigan warns, it just might be that the US economy has seen its best for this phase of the cycle. Where does that leave assets? Arguably overpriced and overbought, he believes. The VIX has swooped to a low only once briefly undercut since before the last New Era started to lose its luster in early 2007. As a result, Corrigan's "Blue Sky" index - the OEX divided by the VIX, being an inverse representation of what people perceive to be the worth of buying price protection - has jumped to the upper third of the ninety?ninth percentile of the past quarter-century's distribution; an anoxia?inducing plane only briefly exceeded just as the first rumblings of the forthcoming doom started to afflict the Boom in the March of 2007.

PATTERNS - Equity Fund Flows

Three Years Of Domestic Equity Fund Flows In One Chart 08-06-13 Zero Hedge

There has been much discussion about fund flows into domestic mutual funds in the past few weeks for one simple reason: there have been inflows into domestic mutual funds (as tracked by ICI). For some reason, pundits correlate this inflow with the move higher in stocks. What remains unsaid is why there was little to no discussion of fund flows into domestic stock funds for about 90% of the time in the past three years. The reason is just as simple: there were no inflows, as can be seen on the chart below. There were, however, other "exogenous" events during this time: such as QE2, LTRO 1 + 2, Draghi's whatever it takes language and Operation Twist of course, and then QE3 which will likely continue indefinitely and be replace by QE4 the second it is fully "tapered." So what is relevant: inflows (or, gasp, outflows) or whatever central banks do? You decide.

VALUATIONS - Shiller PE of 24X Historically Signals An Approaching Top

Can It Get Any Better Than This? 08-04-13 John Mauldin

To many investors:

• Developed markets appear healthier and stronger than they have in years.
• Major equity markets are rallying to record highs;
• Corporate credit spreads are tight versus US Treasuries and getting tighter; and
• Broad measures of volatility continue to fall to their lowest levels since 2007.

This kind of news would normally point to prosperity across the real economy and call for a celebration – but prices do not always reflect reality. Moreover, the combination of high and rising valuations, low volatility, and a weakening trend in real earnings growth is a proven recipe for poor long-term returns and market instability.

Let’s take the S&P 500 as an example. It returned roughly 42% from September 1, 2011, through August 1, 2013, as the VIX Index fell to its lowest levels since the global financial crisis. Over that time frame, real earnings declined slightly (down about 2% through Q1 2013 earnings season), while the trailing 12-month price-to-earnings (P/E) ratio jumped 44%, from 13.5x to 19.5x. That means the majority of the recent gains in US equity markets were driven by multiple expansion in spite of negative real earnings growth.

This is a clear sign that sentiment, rather than fundamentals, is driving the markets higher.

Of course, the simple trailing 12-month P/E ratio can be misleading at critical turning points if you are trying to handicap the potential for long-term returns. For example, the collapse in real earnings during the global financial crisis sent the S&P 500’s trailing P/E multiple through the roof by March 2009. So, while trailing P/E is a useful tool for understanding what has already happened in the market, the “Shiller P/E” is far more useful for calculating a reasonable range of expected returns going forward.

This approach won’t help you much with short-term market timing, but current valuations have historically proven extremely useful in forecasting long-term returns.

In his book Irrational Exuberance (2005), Robert Shiller of Yale University shows how this approach “confirms that long-term investors – investors who commit their money to an investment for ten full years – did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well-advised, individually, to lower their exposure to the stock market when it is high … and to get into the market when it is low.”

As you can see in Figure 6, compared to the more common trailing 12-month P/E ratio in Figure 5, the Shiller P/E metric essentially smooths out the series and helps us avoid false signals by dividing the market’s current price by the average inflation-adjusted earnings of the past ten years. \

Historically, this range has peaked and given way to major market declines at around 29x on average (or 26x excluding the dot-com bubble), and it has bottomed in the mid-single digits. Not only does today’s Shiller P/E of 24x suggest a seriously overvalued market, but the rapid multiple expansion of the last two years in the absence of earnings growth suggests that this market is also seriously overbought.

John Hussman helps us keep current valuations in historical perspective:

The Shiller P/E is now 24.4, about the same level as August 1929, higher than December 1972, higher than August 1987, but less extreme than the level of 43 that was reached in March 2000 (a level that has been followed by more than 13 years of market returns within a fraction of a percent of the return on Treasury bills – and even then only by revisiting significantly overvalued levels today). The Shiller P/E is presently moderately below the level of 27 at the October 2007 market peak. It’s worth noting that the 2000-2001 recession is already out of the Shiller calculation. Moreover, looking closely at the data, the implied profit margin embedded in today’s Shiller P/E is 6.3%, compared with a historical average of only about 5.3%. At normal profit margins, the current Shiller P/E would be 29.

While it may be impossible to accurately predict when this policy-driven market will break, history suggests it would be very reasonable for the secular bear to eventually bottom at a P/E multiple between 5x and 10x, opening up one of the rare wealth-creation opportunities to deploy capital at truly cheap prices.

Some of these technical details are rather dry, but I hope you'll focus on the main idea: We are not talking about the potential for a modest 20% to 30% drawdown in the S&P 500. If history is any indication, we are talking about the potential for a 50%+ peak-to-trough drawdown and ten-year average annual returns as bad as -4.4%, according to the chart above from Cliff Asness at AQR. Such a result would fall in line with somewhat similar deleveraging periods such as the United States experienced in the 1930s and Japan has experienced since 1989. There is no way to sugarcoat it: too much equity risk can be unproductive and even destructive in this kind of economic environment.

PROFIT MARGINS - Revenue Recession and Eroding Operating Profits

S&P 500 Profit Margins Plunge To Three Year Lows 08-03-13 Zero Hedge

That S&P500 revenues are contracting for the second quarter in a row (i.e. a revenue recession) is by now well-known even to CNBC. This is just as we predicted in June of last year, because in a world devoid of growth capital expenditures (and judging by the amount of train, plane and other crashes lately, maintenance capex as well), there can be no organic growth.

What, however, may come as a surprise to the market cheerleaders (who unknowingly, or knowingly, are merely cheering Ben Bernanke's magic bubble blowing machine, see final chart) is that that other key component of bottom line improvement, profit margins, are not only not at record highs contrary to what conventional wisdom may incorrectly believe, but have been consistently sliding for three years now, and while earnings margins are 'only' back to June 2011 levels at 8.7%, it is the far more critical Operating Margin which has tumbled in the past two years after peaking in Q3 2011 and is now back down to 8.4%, a level not seen since mid-2010.

In other words, absent aggressive levered stock buybacks (which are virtually over with rates rising once again), the S&P500 EPS would now be in free fall.

Don't worry though, just like in 2010, 2011, and 2012, there is a hockeystick for that. As the Goldman chart below shows, one just needs to believe in unicorns and that maybe, finally, this time things will simply surge higher just because the Fed wishes them to.

What is even more disturbing is that a few more quarters of contraction and margins will slide right back to the levels last seen during the past peak of 2006-2007, when companies still had millions of full-time workers they could fire or simply replace with part-time equivalents. This time around, they don't have that gross profit-boosting luxury. And with interest rates once again rising, the benefits from refinancing corporate capital structures at ever lower rates are now forever gone.

Of course, the charts above are completely irrelevant, as is all fundamental information in a centrally-planned world, as long as the one all important chart remains. The one shown below.

Manipulating Bad Financial Data

Bad government policy has created a years-long unemployment problem. But instead of fixing the problem, the government is trying to paper over it. We’ve known for a long time that the Bureau of Labor Statistics fudges the numbers to make unemployment look lower than it is really is. BLS itself has admitted that its “adjustments” skew unemployment data during recessions. Indeed, the former head of the BLS recently said BLS statistics are B.S. … and that unemployment is much higher than the government is letting on.

The Bureau of Economic Analysis is revising 84 years of economic history … which will make the economy magically look better.

The U.S. and British governments encouraged interest rate manipulation. And central banks have been directly manipulating interest rates for hundreds of years.

Government agencies have helped banks manipulate commodities prices for decades.

The government twisted statistics and intentionally lied when it pretended that the banks it was bailing out were solvent

The government has long ignored energy and food prices when reporting on inflation.

Fraud is Wall Street’s business model, which is – unfortunately – being supported by the government.

The government helped cover up the crimes of the big banks, used claims of national security to keep everything in the dark, and changed basic rules and definitions to allow the game to continue. See this, this, this and this.

It is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud.Here are just a few of many potential examples:

• The SEC has shredded financial documents for decades, to help cover up financial shenanigans

• The government-sponsored rating agencies committed massive fraud (and see this)

• The Treasury department allowed banks to “cook their books”

• Business Week wrote on May 23, 2006:

“President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations.”

• Regulators knew of and allowed the use of debt-hiding accounting tricks by the big banks

• Tim Geithner was complicit in Lehman’s accounting fraud, (and see this), and pushed to pay AIG’s CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval. William Black points out: “Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth”

• The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted

• Freddie and Fannie helped to create the epidemic of mortgage fraud

• The government knew about mortgage fraud a long time ago. For example, the FBI warned of an “epidemic” of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud. Indeed, Alan Greenspan took the position that fraud could never happen

• Bernanke might have broken the law by letting unemployment rise in order to keep inflation low

• Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not

• Arguably, both the Bush and Obama administrations broke the law by refusing to close insolvent banks

• Congress may have covered up illegal tax breaks for the big banks

• Of course, deregulation by Larry Summers, Robert Rubin, Phil Gramm and many other high-level politicians and regulators also helped to grease the skids for fraud

Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:

The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….

This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.

***

The government that permits this to happen is complicit in a vast crime.

Manipulating Bad Nuclear Facts

When the Fukushima nuclear plant melted down, the government didn’t announce that these antiquated nuclear designs which were common throughout the United States were dangerous and needed to be scrapped. Instead, American (and Canadian) authorities virtually stopped monitoring airborn radiation, and are not testing fish for radiation.

The U.S. government increased allowable radiation levels so that we could be exposed to radiation.

The U.S. government pressured the Japanese government to re-start its nuclear program, and is allowing Fukushima seafood to be sold in the U.S.

And U.S. nuclear regulators actually weakened safety standards for U.S. nuclear reactors after the Fukushima disaster.

And the U.S. government has been covering up nuclear meltdowns for 50 years.

Manipulating Oil Spill Info

When BP – through criminal negligence – blew out the Deepwater Horizon oil well, the government helped cover it up (and here).

As just one example, the government approved the massive use of a highly-toxic dispersant to temporarily hide the oil.

The government also changed the testing standards for seafood to pretend that higher levels of toxic PAHs in our food was business-as-usual.

Manipulating Data on Other Environmental Issues

The Bush administration covered up the health risks to New Orleans residents associated with polluted water from hurricane Katrina, and FEMA covered up the cancer risk from the toxic trailers which it provided to refugees of the hurricane.

The Centers for Disease Control – the lead agency tasked with addressing disease in America – covered up lead poisoning in children in the Washington, D.C. area.

The government also underplayed the huge Tennessee coal ash spill. As the New York Times noted in 2008:

A coal ash spill in eastern Tennessee that experts were already calling the largest environmental disaster of its kind in the United States is more than three times as large as initially estimated, according to an updated survey by the Tennessee Valley Authority.***

The amount now said to have been spilled is larger than the amount the authority initially said was in the pond, 2.6 million cubic yards.

(The former head of the National Mine Health and Safety Academy says that the government whitewashed the whole coal ash investigation.)

And the government allegedly ordered Manhattan Project scientists to whitewash the toxicity of flouride (flouride is a byproduct in the production of weapons-grade plutonium and uranium). As Project Censored noted in 1999:

Recently declassified government documents have shed new light on the decades-old debate over the fluoridation of drinking water, and have added to a growing body of scientific evidence concerning the health effects of fluoride. Much of the original evidence about fluoride, which suggested it was safe for human consumption in low doses, was actually generated by “Manhattan Project” scientists in the 1940s. As it turns out, these officials were ordered by government powers to provide information that would be “useful in litigation” and that would obfuscate its improper handling and disposal. The once top-secret documents, say the authors, reveal that vast quantities of fluoride, one of the most toxic substances known, were required for the production of weapons-grade plutonium and uranium. As a result, fluoride soon became the leading health hazard to bomb program workers and surrounding communities.

Studies commissioned after chemical mishaps by the medical division of the “Manhattan Project” document highly controversial findings. For instance, toxic accidents in the vicinity of fluoride-producing facilities like the one near Lower Penns Neck, New Jersey, left crops poisoned or blighted, and humans and livestock sick. Symptoms noted in the findings included extreme joint stiffness, uncontrollable vomiting and diarrhea, severe headaches, and death. These and other facts from the secret documents directly contradict the findings concurrently published in scientific journals which praised the positive effects of fluoride.

Regional environmental fluoride releases in the northeast United States also resulted in several legal suits against the government by farmers after the end of World War II, according to Griffiths and Bryson. Military and public health officials feared legal victories would snowball, opening the door to further suits which might have kept the bomb program from continuing to use fluoride. With the Cold War underway, the New Jersey lawsuits proved to be a roadblock to America’s already full-scale production of atomic weapons. Officials were subsequently ordered to protect the interests of the government.

After the war, … the dissemination of misinformation continued.

Manipulating Food Safety Data

The government’s response to the outbreak of mad cow disease was simple: it stopped testing for mad cow, and prevented cattle ranchers and meat processors from voluntarily testing their own cows (and see this and this)

The EPA just raised the allowable amount of a dangerous pesticide by 3,000% … pretending that it won’t have adverse health effects.

In response to new studies showing the substantial dangers of genetically modified foods, the government passed legislation more or less pushing it onto our plates.

Manipulating Health Safety Data

When one of the most respected radiologists in America – the former head of the radiology department at Yale University – attempted to blow the whistle on the fact that the FDA had approved a medical device manufactured by General Electric because it put out massive amounts of radiation, the FDA installed spyware to record his private emails and surfing activities (including installing cameras to snap pictures of his screen), and then used the information to smear him and other whistleblowers.

After drug companies were busted for using fraudulent data for drug approval, the FDA allowed the potentially dangerous drugs to stay on the market.

Manipulating Metrics for War

The U.S. has drastically underestimated the amount of innocent civilians killed by drone, and repeatedly announces that it has just killed some terrorist that it had previously reported killing.

When USA Today reporters busted the Pentagon for illegally targeting Americans with propaganda, the Pentagon launched a smear campaign against the reporters.

When the American government got caught assassinating innocent civilians, it changed its definition of “enemy combatants” to include all young men – between the ages of say 15 and 35 - who happen to be in battle zones.

When it got busted killing kids with drones, it changed the definition again to include kids as “enemy combatants”.

After the U.S. congratulated the government of Yemen for killing Al Qaeda terrorists within its country – but a Yemeni journalist photographed the scene, discovering that the U.S. had fired a cruise missile to make the kill, and that children and other shepards will killed, instead of Al Qaeda – president Obama insisted that the journalist be indefinitely detained to shut him up (he was also tortured).

Al Qaeda was labeled as the main enemy in the War on Terror. But now Al Qaeda and other terrorist groups have somehow become our close allies. They have somehow become the “good terrorists” which we are using to fight our enemies.

Indeed, groups are listed as official “terrorist” organizations and then de-listed to suit the convenience and ambitions of particular U.S. political leaders.

Indeed, the U.S. literally labels others as terrorists when they do exactly what we do (although no one does it to the extent we do).

The Core Problem

Corruption at the top leads to lawlessness by the people.

But – while conservatives blame the government for our problems, and liberals blame big corporations – the core problem is the malignant, synergistic intertwining between the two.