Five Years Later: 18 Dollars Of Debt For Every Dollar Of GDP; Total G7 Debt/GDP: 440% 09-12-13 Deutsche Bank via ZH

With everyone focused on the 5th anniversary of the Lehman failure, we are taking a quick look at how the world's developed (G7) nations have fared since 2008, and just what the cost to restore "stability" has been. In a nutshell: the G7 have added around $18tn of consolidated debt to a record $140 trillion, relative to only $1tn of nominal GDP activity and nearly $5tn of G7 central bank balance sheet expansion (Fed+BoJ+BoE+ECB). In other words, over the past five years in the developed world, it took $18 dollars of debt (of which 28% was provided by central banks) to generate $1 of growth. For all talk of "deleveraging" G7 consolidated debt has been at a record high 440% for the past four years. So in the G7, which is a good proxy for the developed world, debt continues to increase whilst nominal growth remains extremely low thus ensuring that the deleveraging process has yet to start. As Deutsche Bank states, "at best we’re stabilising the ratio at or around record highs."

As for the implications for interest rates, they are quite clear:

In an ultra low interest rate environment (short and long-term rates), it’s possible to carry this debt in a low growth environment but with little deleveraging taking place it creates a fragile environment that leaves these economies vulnerable to shocks and policy errors.

If rates were to rise notably from these ultra low levels, this could be just such a shock. This is why in spite of the recent sell-off, rates are likely to stay lower for  longer as the alternative could be highly destabilising given the extreme debt burden being carried across large parts of the world.

Or, said otherwise, once the 10Y drifts ever higher and breaches the proverbial 3.50% "Disorderly Rotation" level, that will be precisely the level at which Bernanke will have no choice, liquidity implications for the TSY and repo markets be damned, but to give up on forward guidance and step right back in. One wonders how long until bond traders realize just this and call his bluff.

VALUATIONS - Overvalued By Multi-Accepted Metrics

Q4 EARNINGS - Unrealistic

Earnings: the Stock Market's Achilles Heel 08- Sheraz Mian, Director of Research, Zacks Investment Research

Reasonable people can disagree over what forces have driven the stock market to all-time highs. But no one denies the centrality of earnings to stocks, and for good reason: the whole point of investing in stocks is to share in a stream of future earnings.

So, since stocks are doing great, earnings must be doing at least very well. Are they?

My answer is no. I think the market is pricing in an unrealistic forecast of future earnings that is unlikely to play out. This, in my judgment, is the weakest link in the current positive stock market narrative—the Fed's potential QE exit notwithstanding.

It might surprise you to learn that earnings growth has been essentially nonexistent over the last few quarters, including Q2. Despite that fact, consensus estimates predict earnings growth to resume later this year and accelerate into 2014.

I'm skeptical. To be clear, I'm not suggesting an earnings train wreck, nor am I telling you to sell all your stocks. What I am suggesting is that the broad market is vulnerable to negative earnings revisions, which could cause the stock market to give back some, if not all, of its recent gains.

Let's take a look at what the data are telling us, to glean whether it's time to reposition your portfolio for weakness ahead.

By most conventional measures, the Q2 earnings season was similar to that of Q1. You might describe both as "good enough" or "average."

But digging a bit deeper, we find that much of the respectability for Q2 earnings emanates from one sector alone—finance. If you strip out finance, the Q2 earnings season is decidedly below average.

494 S&P 500 companies have reported Q2 results as of Friday, August 29. Their earnings are up +2.5% since Q1, with 65.6% of companies beating their earnings expectations. Total revenues are up +1.9% over the same period, with 51.8% of companies beating revenue expectations.

The two side-by-side charts below compare Q2 earnings growth with that of Q1 and the four-quarter average. The left chart compares the results across all companies, and the right one compares the results across all companies excluding finance.

(Click on image to enlarge)

Note: The data compare the growth rates for the 494 S&P 500 companies that have reported results, as of Thursday, August 29.

As you can see, the finance sector's strong performance in Q2 masked an otherwise poor quarter for the rest of the S&P 500.

Importantly, finance is no small fry. The sector accounted for almost 21% of all S&P 500 earnings in Q2, the highest of all 16 Zacks sectors (technology accounted for 16.5% of total earnings in Q2).

But there's a big world outside of finance, and it's hard to be satisfied with nonfinancial companies' Q2 earnings performance.

Earnings expectations for the second half of the year have started to decline. Companies have been issuing lower guidance on Q2 calls, resulting in a particularly steep decline for Q3 estimates.

The chart below shows how estimates for Q3 have evolved over the past month:

What's troubling is that even with these downward adjustments to Q3 expectations factored in, estimates for the second half of the year still represent a material acceleration in growth from the first half, particularly for sectors other than finance.

You can see that the loftiest of expectations are for Q4 2013:

ENLARGE

To provide further context, the following charts illustrate quarterly earnings totals (and projected totals) instead of just the growth rates:

ENLARGE

As you can see, earnings are already at an all-time record level. But they are expected to go much higher in the last quarter of the year.

Further, 2014 isn't pictured, but those expectations are even loftier: consensus expectations are for earnings to grow +11.3% in 2014, and +11.9% for all sectors excluding finance in 2014.

I don't think these expectations will pan out. Here's why.

Earnings grow for only two reasons—revenue growth and/or margin expansion. Unfortunately, the outlook on both fronts is problematic.

Margins are already at cyclical peak levels—the best that can be expected on that front is for margins to remain stable.

That leaves revenue gains as the only driver for earnings growth. But you can't have significant revenue gains in the current environment of constrained economic growth. Revenue growth is a direct function of nominal GDP growth, and nominal GDP growth has been lukewarm at best.

The US economy is actually in better shape than most of its trading partners, particularly in the developed world, as the recent positive revision to second-quarter GDP confirms. But Q2's +2.5% GDP growth notwithstanding, the reality is that US economic growth has barely been above the +2% level for the past many years. And the situation abroad has been even weaker.

Bottom line: it's hard to envision companies, particularly outside of finance, growing their revenue significantly in the coming quarters amid tepid economic growth.

Not only are margins already at record levels, but corporate earnings as a share of GDP are also at multidecade highs. Just like trees don't grow to the skies, margins and the ratio of earnings to GDP don't expand forever.

What all of this boils down to is that current earnings estimates are high, and they need to come down—and come down quite a bit. I think the most likely outcome is for earnings growth to flatten out. Though even that scenario could prove too rosy—it's entirely possible that earnings growth could turn negative.

The way to invest in today's environment is to look for stocks whose prices don't reflect aggressive growth expectations, and that enjoy company-specific growth drivers not tied to broader macro trends. Companies that generate plenty of cash flows beyond their immediate capital needs and have track records of sharing excess cash with shareholders through dividends and buybacks are particularly well suited for a period of sub-par earnings growth. Bottom line, look for thematic stocks with strong defensive attributes.

US EMPLOYMENT - Going Nowhere Even With All Jobs Becoming Temporary Jobs and the Particpation Rate Plummeting

White House Issued Employment Chart 09-08-13 via BI

On Friday, the White House put out some charts seeking to put August's jobs report in context. Here's the key one.

When you look at non-farm payroll growth on a 12-month average basis, you lose the month-to-month noise, and you see that the job situation has been basically unchanged for the last 30 months: Adding jobs at a pace of about 2 million per year. August's disappointing report doesn't materially change that.

The problem with the August report isn't that it was bad; it's that it wasn't good. For the past few months, it had looked like the job situation was maybe getting better, with the pace of job growth speeding up to around 2.5 million a year. Now it's becoming clear that we haven't broken out of the funk.

The key question is, can we expect this pattern to change? Is there reason to expect the pace of job growth to improve soon, so that labor force participation can start increasing again?

Reasons for pessimism:

1. The Fed. It's remarkable that we managed even tepid job growth since 2011, despite steep cuts in state and local government payrolls, flirtation with the debt ceiling, the end of the payroll tax cut, an increase in top income and capital gains tax rates, and sequestration. We owe a lot of thanks to the Federal Reserve, which has eased aggressively to offset fiscal tightening and dysfunction. The flip side is that, as things get better, the Fed is signalling that it will pull back. It seems as though Fed officials have decided that a job growth pace around 2 million is about right, and they will ease or tighten as necessary to maintain it. So, improvements on the above two dimensions may simply be offset by Fed action. Appointment of Larry Summers, a Quantitative Easing skeptic, will exacerbate this problem; as BNP Paribas economists noted last month, increasingly credible rumors of a Summers appointment caused a 0.30 point rise in 10-year Treasury bond rates, reflecting that the markets expect tighter money under a Summers Fed than a Yellen Fed.
2. The risk of more fiscal dysfunction. While we've probably come to the end of fiscal drag, there could be more in store if Republicans succeed in getting more austerity measures as part of agreements to keep the government open and raise the debt ceiling this fall.

So, that's depressing: The long jobs drought isn't ending and it's not clear that it's going to end anytime soon. But there is at least one thing the White House can do to quickly improve the outlook: nominate Janet Yellen to lead the Fed

RUSSIA BROKERS SYRIA GIVING UP CHEMICAL WEAPONS TO UN - US Ignores - Has Only One Purpose - Regime Change

Source: Analisis Militares

McCain Says Take The Deal; Assad Warns It's Obama's Problem: "We'll Do Anything To Prevent Another Crazy War" 09-09-13 Zero Hedge

The first clips from Charlie Rose's interview with Assad are being released and given the Russia-Syria discussions, Obama's skepticism, and now John McCain's 'dubious support' for "the US getting on board with Russia's proposal for Syria to hand over its chemical weapons," we thought this brief view of Assad's response was telling...

As RT reports,

Hardline Republican Senator John McCain said the US should get on board with Russia’s proposal for Syria to hand over control of its chemical weapons to the international community.

“If there is an international [agreement], if you have the guidelines, the requirements, the reporting, the dates— all of that guided by a very detailed resolution to the UN Security Council, I think that you can’t say no to it even though I’m very dubious that this is a real proposal,” McCain told Time magazine.

“I think it’s just a stalling tactic but to reject it out of hand is obviously not something that you can do.”

And Assad's response to requests for hism to hand over his (in his words, non-existent) chemical weapons...

Kerry Tells Lavrov Chemical Disarmament Demand Was "Rhetorical", Not Meant To Be Proposal 09-09-13 Zero Hedge

To paraphrase:

• Kerry to Syria: Turn over your chemical weapons!
• Syria to Kerry: Ok
• Kerry to Syria: I was being rhetorical. We will just bomb you anyway, as soon as we are done gassing you.

US Refuses To Admit Checkmate By Russia And Syria, Redirects Purpose Of Military Incursion: Admits Regime Change Intention 09-09-13 Zero Hedge

Less Than 10% Of The House Support Obama: Congressional Support Update 09-09-13

Hillary Speaks: "There Should Be A Response By The US" - Live Webcast

• Use of chemical weapons by Syria’s Assad “violates a universal norm,” warrants a “strong response from the international community led by the United States,” former Sec. of State Hillary Clinton says at White House event.
• Immediate surrender of Syria’s weapons “would be an important step,” Clinton says; Russian proposal on weapons “can’t be another excuse for delay, for obstruction”

Then again, what difference does it make, if the US will get the "support" for another war of aggression? The decision in Saudi Arabia has been made long ago. And what difference does it make if Hillary received hundreds of thousands worth of expensive Saudi jewerly. Seriously.

Syria Welcomes, Would Comply With Russian Chemical Weapon Disarmament Initiative 09-09-13 Zero Hedge

And just like that, with the new "appeasement" initiative proposed earlier today by Putin and which Syria has just fully complied with, the US strategy of "containing" Syrian chemical weapons has been difused. From Reuters:

Syria welcomes a Russian proposal to place the nation's chemical weapons under international control, Syrian Foreign Minister Walid al-Moualem said on Monday after talks in Moscow, praising the Kremlin for seeking to "prevent American aggression".

Moualem, who spoke to reporters through an interpreter after Russia expressed hope the proposal could avert military strikes against Syria, stopped short of saying explicitly that President Bashar al-Assad's government accepted it.

"I state that the Syrian Arab Republic welcomes the Russian initiative, motivated by the Syrian leadership's concern for the lives of our citizens and the security of our country, and also motivated by our confidence in the wisdom of the Russian leadership, which is attempting to prevent American aggression against our people," he said.

That this is virtually a checkmate by the non-Western coalition is confirmed by Cameron's flailing statement to parliament:

"If Syria were to put its chemical weapons beyond use under international supervision clearly that would be a big step forward," Cameron told parliament. "We have to be careful though to make sure this is not a distraction tactic to discuss something else rather than the problem on the table."

What angle will Kerry, and certainly Obama in his national address, use now to justify further military preparation, is largely unknown. Expect even bigger and more spectacular false flags in the coming days, all of which will be caught contemporaneously on Evidence A, a/k/a YouTube.

Russia Launches New Surprising Strategy: Appeasement 09-09-13 Zero Hedge

In a time when Obama is pitching his entire campaign around one core, if strawman, theme - preventing future chemical weapon attacks by the Assad regime, Putin once again shows why when playing geopolitical chess, it is safe to bet on the pesky Russian. Moments ago, Russia suggested that Syria skip straight to step 2 of the US military campaign, and hand over its chemical weapons to "international control" which would immediately obviate the US campaign completely, whose entire premise for public consumption is just that - to put Syrian chemical weapons under adult supervision and third party control.

• RUSSIA SAYS WILL URGE SYRIA TO PUT CHEMICAL WEAPONS UNDER INTERNATIONAL CONTROL IF THAT WILL AVERT MILITARY STRIKES
• SYRIA SHOULD GIVE UP WEAPONS IF IT WILL AVOID STRIKE: RUSSIA
• LAVROV SAYS SYRIA’S CHEMICAL WEAPONS COULD BE DESTROYED

More from RIA, google translated:

Moscow calls on Syria to transfer chemical weapons under international supervision if it is to avoid military attack by the United States, Russian Foreign Minister Sergei Lavrov.

"If the international control over chemical weapons in the country to avoid strikes, we are immediately involved in a job with Damascus" - Lavrov said.

"We call on the Syrian leadership not only agree on a statement of storage of chemical weapons under international supervision, but also the subsequent destruction, as well as about the full accession to the Organization for the Prohibition of Chemical Weapons," - said the Minister.

According to him, Russia has already submitted its proposal to the Minister of Foreign Affairs of Syria, who is currently in Moscow. "And look forward to a quick and hopefully for a positive response," - concluded Lavrov.

Earlier, the head of the U.S. Department of State, John Kerry said that Syrian President Bashar al-Assad can avoid foreign military intervention, if over the next week will give all chemical weapons the international community. At the same time the head of the State Department added that the Syrian president is not going to transfer chemical weapons and to ensure full accountability. Later in the words of the State Department Kerry called "rhetorical argument."

And now the ball is in Obama and Kerry's court following this surprising move of appeasement by Russia, and implicitly by Syria.

Because if the underlying motive behind the intervention is gone, then there is no need for an "Unbelievably Small" strike. Or any strike. In other words, should the US proceed with agitating for, and engaging in, war, it becomes very clear that the only goal behind US actions is not to contain Assad's weapons arsenal, but to destabilize the region, overthrow the Assad regime, escalate the conflict to involve Iran and Israel as final outcomes, boost the US deficit, facilitate the Untaper, and allow the trans-Syrian natgas pipeline originating in Qatar.

Finally, Putin also kills two birds with one stone, as any further and future chemical strike, in a case where there is supervision of the official arsenal, will automatically mean it was launched by the Qatari mercenaries with the intent of concocting yet another false flag.

Syria Strike To Be "Unbelievably Small" Kerry Promises, Leaves Everyone Puzzled 09-09-13 Zero Hedge

The Secretary of State, his emotional appeal to populist empathy using hundreds of YouTube clips showing the alleged aftermath of a chemical attack but not one piece of evidence proving Assad launched said attack, falling on deaf ears and eyes, has revised his track for a Syrian intervention. The latest spin from John Kerry: the Syrian attack would be "unbelievably small" as he characterized it today at a London press conference. Or, in the parlance of our times, "just the tip."

"We’re not talking about war, we’re not going to war." He spoke of a “limited, very targeted, very short-term effort." This happened while Syria’s Foreign Minister Walid al-Muallem left for Moscow today, seeking a joint approach with Russia to defuse Western assertions that the Syrian regime is using chemical munitions against its own people." In other words: Gazpromia refuses to be denied the "most unfavoured nation" status when it comes to being the marginal supplier of natgas to Europe.

The answer is simple: the whole point of the "unbelievably small" provocation is to launch another (false flag) retaliation, ostensibly against Israel, which then results in a quite believably large escalation, that drags the entire region in the conflict, and results in hundreds of billions in budget busting, and Untaper unleashing, defense spending, not to mention the change of the Syrian regime with one willing to support any and all Qatari-gas pipeline plans.

It really is not that complicated.

As to whether Obama will proceed with a strike if he gets only Senate support, which is also questionable but far more likely than getting the House to back him, we will almost certainly know before the end of the week.

Putin To Meet Iran President Rouhani In The Coming Days 09-09-13 Zero Hedge

The immediate reason for such a meeting is clear: to provide Russian support to Iran ahead of what may be a conflict that "inadvertently" drags Iran into a confrontation with Israel. Both moral and military.

Complete Syrian Event Update 09-09-13 Zero Hedge

All the latest updates and developments in the lethal Syrian foreplay farce.

• Congress starts deliberations today on whether to allow U.S. President Obama to strike Syria.
• Obama to meet tomorrow with Senate Democrats, according to a Senate aide who requested anonymity; Senate expected to vote on resolution by end of week
• Senate’s top Republican, Kentucky’s Mitch McConnell, hasn’t said whether he will back military strike
• “I think it’s an uphill slog from here,” Representative Mike Rogers, a Michigan Republican who supports military action, said on CBS. “It’s very clear he’s lost support in the last week.”
• “It’s too early to come to any conclusion,” Obama’s chief of staff Denis McDonough said yesterday on Fox News
• House of Representatives takes proposal week of Sept. 16
• Syrian President al-Assad is disputing U.S. allegations he used chemical weapons against civilians, and said Obama administration hasn’t proved he did, according to CBS News correspondent Charlie Rose
• U.S. Secretary of State Kerry says Saudi Arabia supports taking action; other nations to voice support
• Syria may have used gas without Assad’s permission: Bild
• New Syria vote in U.K. possible if dramatic change: Hague
• Obama to give interviews with major TV networks today
• France slows march to confrontation by backing EU appeal to put off armed response until UN delivers report
• Le Figaro poll shows 2/3 French oppose military action: NYT

DODD FRANK - A Failure

Five years ago, the biggest U.S. banks were so terrifyingly big that they had to be bailed out by the U.S. government in order to survive a financial crisis, lest they obliterate the global financial system.

Today they are even bigger.

The four biggest U.S. banks -- JPMorgan Chase, Bank of America, Citigroup and Wells Fargo -- today have about $7.8 trillion in assets, or about 47 percent of U.S. gross domestic product, up from $6.4 trillion, or 43 percent of GDP, at the time of the crisis in 2008. The six biggest banks, a group that now includes Goldman Sachs and Morgan Stanley, now have $9.6 trillion in assets, or nearly 58 percent of GDP.

Of the Big Four, only Citigroup has spent the years since the crisis trimming assets -- which, in the world of bank accounting, are generally considered risks. The others have bulked up, partly because they absorbed other banks during the crisis.

Bank regulators have spent the interim trying to find ways to avoid having to bail out banks in the next crisis. Some even claim the mission has been accomplished. In their view, the Dodd-Frank financial-reform act created a way for regulators, known as "resolution authority," to safely wind down a big bank that gets into trouble.

But some critics say resolution authority is just a bailout by another name. And others, including even some bankers, worry that resolution authority still hasn't solved the problem of banks being too big to fail.

But however you feel about the big banks, there's no denying they're bigger than ever.

Update: Hamilton Place Strategies partner Tony Fratto, a former Treasury official and deputy press secretary under President George W. Bush, and an avowed lover of big banks, denies the big banks are bigger than ever, actually. He argues that smaller banks are growing more quickly than big banks. He also says that, as a percentage of GDP, the Big Four's assets are down from 2012. And indeed they are, by that measure, but just a tiny bit. And total assets for the biggest banks are at an all-time high. So these banks are still getting bigger, but at a slower pace. Adjust your comfort levels accordingly.

SENTIMENT - Small Business Is Going Nowhere

Small Business Is Going Nowhere 09-10-13 Lance Roberts of Street Talk Live blog, via ZH

Each month I continue to update our analysis of the small business survey when it is published by the National Federation of Independent Business (NFIB).  While this survey doesn't get a tremendous amount of press, as a small business owner myself, I find its results more aligned with what I am seeing in the "Main Street" economy versus what the government reported data suggests.

For example, last month's report entitled "Making Lemonade"  showed relatively little improvement in the economic outlook by small businesses.  Since that time the Institute of Supply Management's and Federal Reserve's surveys have showed sharp upticks while, at the same time, the Bureau of Economic Analysis revised GDP up from 1.7% to 2.5%.  Therefore, it should be expected that such improvement in the government related reporting should translate into a much more robust report from small businesses.  However, that was not the case as the NFIB reported:

"Small business optimism remained flat in August, dropping 0.1 points from July for a final reading of 94.0"

 "While the total reading showed essentially no change over the month prior, a look at the individual indicators reveals incongruent details."

One of those incongruences in particular was in job creation plans the jumped to a level not seen since before the last recession.  However, that increase is not supported by the dramatic deterioration in real sales. The chart below shows the very abnormal divergence between actual sales versus sales expectations. The problem is that real sales tends to lead expectations which would mean that we may have seen the peak of expectations currently.

The favorable employment plans also contrasted sharply with the increasingly negative expectations of future business conditions.  While there had been some recent improvement in recent months from historically low levels at the end of 2012 - outlooks remain at very recessionary levels.

The statement from the NFIB summed this up well stating:

"Overall, the Index of Optimism says the small business sector is going nowhere and that's what it feels like. Consumer sentiment is falling so there is no wind in the sails of the consumption barge. It floats, but no speed...Owners reported lousy performance in the past few months with employment cuts, falling sales and profits, no ability to raise prices, and weak sales the top business problem for 1 in 5 employers. In particular, spending on services (70 percent of consumption) is very sluggish, up 0.5% year over year and declining at a 1.5% annual rate in July. This is where jobs are generated. Disposable income is up only 0.8% year over year, so no support for spending there. The savings rate is very low again therefore not much room to support more spending with less saving. Durable goods spending has posted strong growth, but this are doesn't produce many new jobs."

Bright Spots

However, despite that there were some bright spots in the report.  First of all, as shown in the chart below, there was a massive jump in job creation plans for the next few months.  The spike is somewhat anomalus but not entirely unlike what was seen in 2003.  The issue, however, is that this may be more representative of two things:  1) labor hoarding has most likely run its course as employers have run out the ability to increase worker productivity much further leading to a need for hiring, and; 2) this may likely represent the peak of employment for the current cycle as it did in 2003.

It will be interesting to see if actual employment actually follows the current spike in intentions.

Capital expenditure plans also increased on the back of rising employment plans and the need to expand inventory holdings.  The sluggish demand from the beginning of the year has led to short term pent up demand and low levels of inventory which now need to be restocked.  The issue will be sustainability going forward if actual demand, in terms of sales which has been very poor, does not markedly improve.

"While more owners expect the economy to sink further over the next six months than improve, there was a surge in expectations for gains in real sales volumes at their own companies. This is paradoxical at the macro level, although with differing regional economies, possible."

While the world is currently glued to the events surrounding Syria; the reality is that such an event has very little to do with the real economy.  The surges in expectations by business is very interesting given the actual demand that drives the real economy.  Real employment remains weak and corporate earnings are struggling given the diminishing returns of cost cutting.

The recent increases in interest rates also have a very important "tightening" effect on the "Main Street" economy which will also likely suppress consumption in coming months somewhat.  Also not likely factored in to current survey's is the upcoming debt ceiling debate and the onset of the Affordable Care Act (ACA).  The ACA is a de facto increase in taxes and there is a potential for further tax hikes coming from the budget debate. 

One of the more interesting points from the NFIB was their view on the upcoming Federal Reserve "taper."

"Federal Reserve 'tapering' [will not have] a noticeable impact on the real side. Financial markets (where trading, not investing, dominates) will see more volatility. If tapering occurs, it will fall on Treasury purchases, not MBS. The market is a bit short of Treasuries for doing business anyway, so any reduction in the $85 billion in purchases will fall on Treasury bonds.

The reality has been, and which is now being realized by the Federal Reserve, is that these ongoing interventions have done little to help the real economy but rather just inflated asset prices.  Therefore, the "taper" has more of an effect on Wall Street rather than Main Street.  

The current survey suggests that the economy is still stuck in "struggle mode" and an acceleration above 2% real economic growth is currently unlikely.  The divergence between expectations and real demand will likely converge in the next couple of months so we will see businesses follow through with their optimisitic outlooks. 

NFIB chief economist Bill Dunkelberg makes an excellent conclusion:

"But we saw some interesting things happening with the Index this month. The August reading provided us with a rather perplexing set of statistics; internally consistent on some dimensions, such as lower sales bringing lower profits, but contradictory in other ways, such as lower job openings but huge gains in hiring plans. We know that the upcoming implementation deadlines for the healthcare law are weighing on the minds of employers, and the current dim prospects for real tax reform must be, as well. The September survey will hopefully straighten things but with Syria on the horizon, the budget situation still up in the air, and Obamacare being rolled out, clarity over our economic direction is not likely to be the outcome." 

COMPLACENCY - Fed Financial Stress Index

Complacency Versus Wall of Worry 09-09-13 Barry Ritholtz

Are investors being too complacent?

That is the question that an be looked at in several different ways. Some folks rely on anecdotal evidence. Others use the VIX or the Put Call ratio.

The St. Louis Fed uses their own metric which they call the “Financial Stress Index” (STLFSI). It combines 18 different weekly data points. In this morning’s WSJ, Spencer Jakab discusses what this means for equities: A Stress Gauge Suggests Potential Upside for Stocks.  He notes that latest reading (August 30) was “well below the average since December 1993, that reading is less-stressed than four-fifths of all readings over that time.”

Given all of the negative headlines on Syria, and the Taper, plus the recent spike in yields, one would have expected markets to be quite skittish.

The key question is how skittish — how volatile, and how extreme are the reactions. Therein lay the tricky aspect of using sentiment: It only really indicates a potential market reversal when it hits an extreme level.

Jakab notes:

“The lowest readings in history came in the early weeks of 2007 when stocks were booming and the first signs of the subprime-mortgage crisis were about to appear. The highest 12 readings all came in late 2008 following the collapse of Lehman Brothers.”

As the chart below shows, we are not currently anywhere near the levels of mass complacency. This suggests that markets are still climbing “the wall of worry” — and could still have further to run. YMMV

St. Louis Fed Financial Stress Index (STLFSI)

Source: A Stress Gauge Suggests Potential Upside for Stocks Spencer Jakab WSJ, September 8, 2021 http://online.wsj.com/article/SB10001424127887323893004579059423599890740.html

EMERGING MARKETS - EU Major Contributor to EM Current Account Deficit Growth

Why Europe (Not The Fed) Is Crushing Emerging Market Economies 09-08-13 Daniel Gros, originally posted at Project Syndicate via ZH

Emerging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilize their countries’ financial markets. Who is to blame for this state of affairs?

A few years ago, when the US Federal Reserve embarked on yet another round of “quantitative easing,” some emerging-market leaders complained loudly. They viewed the Fed’s open-ended purchases of long-term securities as an attempt to engineer a competitive devaluation of the dollar and worried that ultra-easy monetary conditions in the United States would unleash a flood of “hot money” inflows, driving up their exchange rates. This, they feared, would not only diminish their export competitiveness and push their external accounts into deficit; it would also expose them to the harsh consequences of a sudden stop in capital inflows when US policymakers reversed course.

At first sight, these fears appear to have been well founded. As the title of a recent paper published by the International Monetary Fund succinctly puts it, “Capital Flows are Fickle: Anytime, Anywhere.” The mere announcement that the Fed might scale down its unconventional monetary-policy operations has led to today’s capital flight from emerging markets.

But this view misses the real reason why capital flowed into emerging markets over the last few years, and why the external accounts of so many of them have swung into deficit. The real culprit is the euro.

Quantitative easing in the US cannot have been behind these large swings in global current-account balances, because America’s external deficit has not changed significantly in recent years. This is also what one would expect from economic theory: in conditions approaching a liquidity trap, the impact of unconventional monetary policies on financial conditions and demand is likely to be modest.

Indeed, the available models tell us that, to the extent that an expansionary monetary policy actually does have an impact on the economy, its effect on the current account should not be large, because any positive effect on exports from a weaker exchange rate should be offset by larger imports due to the increase in domestic demand.

This is what has happened in the US, and its recent economic revival has been accompanied by an expansion of both exports and imports. The impact of the various rounds of quantitative easing on emerging markets (and on the rest of the world) has thus been approximately neutral.

But austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year. This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation.

This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a “competitive devaluation”; the euro has remained strong. So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%).

The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit).

Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. Fed Chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe.

The fickleness of capital markets poses once again the paradox of thrift. As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current-account surpluses, much like the eurozone periphery today. But who will then be able – and willing – to run deficits?

Two of the world’s three largest economies come to mind: China, given the strength of its balance sheet, and the eurozone, given the euro’s status as a reserve currency. But both appear committed to running large surpluses (indeed, the two largest in the world). This implies that, unless the US resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again. And any global recovery promises to be unbalanced – that is, if it materializes at all.

PENSION CONFISCATION - Coming to a Theater Near You

Poland Confiscates Half Of Private Pension Funds To "Cut" Sovereign Debt Load 09-06-13 Zero Hedge

While the world was glued to the developments in the Mediterranean in the past week, Poland took a page straight out of Rahm Emanuel's playbook and in order to not let a crisis go to waste, announced quietly that it would transfer to the state - i.e., confiscate - the bulk of assets owned by the country's private pension funds (many of them owned by such foreign firms as PIMCO parent Allianz, AXA, Generali, ING and Aviva), without offering any compensation. In effect, the state just nationalized roughly half of the private sector pension fund assets, although it had a more politically correct name for it: pension overhaul.

By way of background, Poland has a hybrid pension system: as Reuters explains, mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE. Bonds make up roughly half the private funds' portfolios, with the rest company stocks.

And while a change to state-pension funds was long awaited - an overhaul if you will - nobody expected that this would entail a literal pillage of private sector assets.

On Wednesday, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.  The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.

But why is Poland engaging in behavior that will ultimately be disastrous to future capital allocation in non-public pension funds (the type that can at least on paper generate some returns as opposed to "public" funds which are guaranteed to lose)? After all, this is a last ditch step which no rational person would engage in unless there were no other option. Simple: there were no other option, and the driver is the same reason the world everywhere else is broke too - too much debt.

By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend. Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of GDP. This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government's own calculations.

To summarize:

1. Government has too much debt to issue more debt
2. Government nationalizes private pension funds making their debt holdings an "asset" and commingles with other public assets
3. New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio
4. Debt/GDP drops below threshold, government can issue more sovereign debt

And of course, once Poland borrows like a drunken sailor using the new window of opportunity, and maxes out its new and improved limits, it will have no choice but to confiscate more assets, and to make its balance sheet appear better, until one day, there is nothing left in the private sector to confiscate. At that point the limit itself will have to be legislated away, and Poland will simply continue borrowing until one day there are no foreign lenders willing to take the same risk as the nation's private pensioners. At that point, Poland, which is in the EU but still has the Zloty, can just go ahead and monetize its own debt by printing unlimited amounts of its currency.

Of course, we all know how that story ends.

The response to the confiscation was, naturally, one of shock:

The reform is "a decimation of the ...(private pension fund) system to open up fiscal space for an easier life now for the government," said Peter Attard Montalto of Nomura. "The government has an odd definition of private property given it claims this is not nationalisation."

"This is worse than many on the markets had feared," a manager at one of the leading pension funds, who asked not to be identified, told Reuters.

"The devil is in the detail and we don't yet know a lot about the mechanism of these changes, what benchmarks will be use to evaluate our performance... (It) looks like pension funds will lose a lot of flexibility in what they can invest."

Catastrophic consequences for fund flows aside, the Polish prime minister had a prompt canned response:

Tusk said people joining the pension system in the future would not be obliged to pay into the private part of the system. Depending on the finer points, this could mean still fewer assets in the private funds.

"The (current) system has turned out to be built in part on rising public debt and turned out to be a very costly system," Tusk told a news conference.

"We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer."

You see, he is from the government, and he is confiscating the pensions to make them safer. Confiscation is Safety and all that...

Polish officials have tried to reassure investors, saying the overhaul avoids the more radical options of taking both bond and equity assets away from the private funds outright.

They say the old system effectively made Polish public debt appear higher than it really is.

Well, once you nationalize private assets, the public debt will lindeed appear lower than it was before confiscation: we give them that much.

End result: "The Polish pension funds' organisation said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation.... This may lead to the private pension systems shutting down," said Rafal Benecki of ING Bank Slaski."

Unconstitutional? What's that. But whatever it is, it's ok - after all the public pension system is still around. At least until that too is plundered. But in the meantime, all such pensions will be "safer", guaranteed.

But best of all, in the aftermath of Cyprus, we now know what the two most recent European blueprints for preserving the myth of solvency are: bail-ins, which confiscate deposits, and pension fund "overhauls", which confiscate, well, pension funds.

And now, back to the global recovery soap opera.

RISK - Potential Head & Shoulders Pattern Appearing

The Problem With Bonds, Europe and China Phoenix Capital Research via ZH

The market is being ramped higher by traders who believe:

1)   The US’s delay in entering Syria is bullish

2)   That the PMI data out of Europe indicates all is well over there.

The primary concern with these beliefs is that they overlook at tremendous amount of problems brewing in the financial system.

1)   The 10-year bond is yielding 3%. Contrary to what a Central Banker will tell you, higher interest rates are not good for stocks, particularly in an over-leveraged financial system.

2)   The European Crisis is not over in any way. Things were swept under the rug for Merkel’s re-election, but Portugal, Greece, Ireland and even France are on the verge of economic implosion. And as Cyprus’s “bail-in” and Poland’s recent nationalization of pension funds indicate, the next time stuff hits the fan, citizens will be literally picking up the tab with their savings.

3)   The world continues to believe China has “rebalanced its economy” when in fact China is simply pumping massive liquidity into its shadow banking system. What could go wrong with this? After all, China put an amount of liquidity equal to over 20% of its economy into the shadow banking system from 4Q12-1Q13 and GDP slowed.

The markets seem to sense that all of this. In the US we’re putting in what looks like a lower high. The market appears to be forming a Head and Shoulders pattern.

VOLATILITY - Patterns in the VIX

Has The Selling Of VIX Come To An End? 09-11-13 Zero Hedge

Has the Selliing of the VIX Come to An End?

VIX futures positioning hit another all-time record short just two weeks ago after collapsing to 12-month high levels as "Taper" concerns increased. From the start of July to the 3rd week of August VIX futures were sold in epic proportions providing the fuel to lift a plateaued stock market from taper-anxiety to new all-time highs (as nothing changed). Over 100 million contracts were sold in the 7-week period - a totally unprecedented amount of complacency. However, in the past 3 weeks, there has been an inflection; is this the end of selling, or are we about to pull VIX even lower with a concerted reflexive selling of even more shorts? As SocGen warns, this historic level of non-commercial short positions (read speculative) implies any market correction - or VIX-related spike - would increase short-covering and exaggerate the fall dramatically.

Wednesday's (09-11-13) catch-up from Friday's closing hedge-fest...

... and ramp into the close has ignited further momentum after hours...

But VIX futures positioning hit an new all-time record low (short) 2 weeks ago...

As the post-Taper fears-driven hedging was unwound en masse...

...in the biggest 7-week shift in VIX shorts ever...

.... and with Implied correlation collapsing to the same level as right before Lehman and right before the US downgrade, it seems complacency over systemic risk is as high as it gets in the new normal...

In the new "Fed driven" normal, the base correlation between stocks is higher than before as the market now 'knows' there is an underlying factor (let's call it liquidity) that moves everything more in the same direction more of the time... ImpCorr's low levels here imply that any systemic risk threat (whereby correlations spike - which tends to accompany a rapid downturn) have been removed.

This can also be interpreted as VIX index selling is dramatically outweighing the selling of volatility in the S&P's component names...

With all that ammo - is it any surprise that stocks surged on algo-driven options market-making volumeless exuberance?

The question of course is - where next? Seems to us that the market just blew its wad on that VIX smash and is ripe for a squeeze?

Bear in mind that the period during which VIX was sold (bullish) also saw breadth in stock markets diverging (new lows outpacing new highs etc.) as stocks rose - was this unwinding hedges and underlying positions? That would explain the lack of volume..

PATTERNS - SPX Being Driven By 3 Trading Factors

1. Short Squeeze of Specific Stock Group

2. Yen Carry Trade

3. US$ Weakness

Largest short-squeeze in US markets in 15 months

• Stocks rallied on "growth" and "less war",
• Oil sold off on "less war" and no growth,
• Treasuries rallied on "moar war" and "less taper",
• Gold and Silver did nothing (so war premium and taper off still in there), and the
• USD dumped ("less war" and "taper on?

We couldn't make sense out of it! Can You? Riddle us that batman?

Dollar Drops Most In 2 Months As S&P Retakes 50DMA 09-09-13 Zero Hedge

The S&P just regained the mythical 50DMA (and the Dow 15,000) leaving stocks with the best 7-day run in 2 months

This week's equity market exuberance is being pitched as due to to Asian strength but the truth is the Nikkei 225 actually fell after Monday's GDP was released;

• JGBs rallied (well that doesn't fit with the meme of Japanese growth);
• Japanese GDP missed expectations (oops);
• Japanese trade balance was the 3rd worst on record;
• Chinese imports missed expectations (as copper demand fell since liquidity has eased and less need for cash-for-copper deals).

So what is the catalyst for Monday's S&P 500 rally... behold the EURJPY cross rate...

ADDITIONALLY:

Monday's best day in stocks in 2 months is driven not just by EURJPY carry-mongers, but by the largest short-squeeze in US markets in 15 months. Homebuilders are up a new normal 5% from Friday's open.

The 'worst' day for the shorts in 15 months...

as off the Friday lows, "most-shorted" namesare up 3.6%, while the broad index is up only 2%...

The shrt squeeze has continued through the Wednesday (09-11-13) close.

US$ WEAKNESS ALSO CONTRIBUTING TO SPX STRENGTH

The apathy is deafening...

Global macro data has surprised to the upside in recent weeks in general. For major economies the last 3 months has seen such an 'impressive' rise that it has reached a point at which (historically) market expectations have become relatively exuberant. As the chart below shows, not only is the macro surprise index near its normalized highs (suggesting there is not much room for further positive surprises here) but each time the pace of apparent improvement has been so fast, the US equity market has faded lower as "hard" data simply does not support the hope in the markets and "soft" data.

As BofAML notes, while a bit more than half of the recent data have been weaker than expected, the manufacturing and services PMIs have been very strong and the consensus believes what it wants to believe, adding that it is important to understand how crude these surveys are. A popular view is that these surveys are better than hard data. In our view, however, these data get way too much air time. They give a timely, rough read on the economy, but should get little weight once hard data are released.

PATTERNS - Largest short-squeeze in US markets in 15 months

• Stocks rallied on "growth" and "less war",
• Oil sold off on "less war" and no growth,
• Treasuries rallied on "moar war" and "less taper",
• Gold and Silver did nothing (so war premium and taper off still in there), and the
• USD dumped ("less war" and "taper on?")

We couldn't make sense out of it! Can You? Riddle us that batman?

Dollar Drops Most In 2 Months As S&P Retakes 50DMA 09-09-13 Zero Hedge

The S&P just regained the mythical 50DMA (and the Dow 15,000) leaving stocks with the best 7-day run in 2 months

Monday's equity market exuberance is being pitched as due to to Asian strength but the truth is the Nikkei 225 actually fell after GDP was released;

• JGBs rallied (well that doesn't fit with the meme of Japanese growth);
• Japanese GDP missed expectations (oops);
• Japanese trade balance was the 3rd worst on record;
• Chinese imports missed expectations (as copper demand fell since liquidity has eased and less need for cash-for-copper deals).

So what is the catalyst for Monday's S&P 500 rally... behold the EURJPY cross rate...

ADDITIONALLY:

Monday's best day in stocks in 2 months is driven not just by EURJPY carry-mongers, but by the largest short-squeeze in US markets in 15 months. Homebuilders are up a new normal 5% from Friday's open.

The 'worst' day for the shorts in 15 months...

as off the Friday lows, "most-shorted" namesare up 3.6%, while the broad index is up only 2%...

The apathy is deafening...

Has a USD exodus begun?

Along with Friday's drop, this is the biggest plunge in the greenback in 2 months. This is not an exodus to JPY (for once JPY is very stable) but appears to be very much a European issue as EUR, SEK, and CHF are all surging against the USD

for the biggest 2-day drop in 2 months...

Hedgers were active as VIX underperformed....

PATTERNS - Surprise Index Says Its Normally Time For Central Bank Intervention

Is This As Good As It Gets? 09-08-13 BofAML via ZH

Global macro data has surprised to the upside in recent weeks in general. For major economies the last 3 months has seen such an 'impressive' rise that it has reached a point at which (historically) market expectations have become relatively exuberant. As the chart below shows, not only is the macro surprise index near its normalized highs (suggesting there is not much room for further positive surprises here) but each time the pace of apparent improvement has been so fast, the US equity market has faded lower as "hard" data simply does not support the hope in the markets and "soft" data.

As BofAML notes, while a bit more than half of the recent data have been weaker than expected, the manufacturing and services PMIs have been very strong and the consensus believes what it wants to believe, adding that it is important to understand how crude these surveys are. A popular view is that these surveys are better than hard data. In our view, however, these data get way too much air time. They give a timely, rough read on the economy, but should get little weight once hard data are released.

PRECIOUS METALS - Syrian War Factor on GOLD

Gold Price Action at Times of Conflict When the sound of gunfire can be heard or becomes imminent the gold market can be anticipated to generate an interim high as previously indecisive traders, sitting on the sidelines, impulsively jump into the market. With the buying power spent, the gold price tends to ease lower until a resolution in the conflict becomes apparent. As traders then exit their long positions the market typically becomes oversold and generates an important low. In most cases this low will generate an RSI(14) reading below 33. From the September 21st release of chemical weapons in Syria to the top in gold only took a week, reaching our targeted resistance of $1415 with an RSI of 70.

Wednesday’s announcement of a Russian proposal (with back room negotiations for a week) to secure the chemical weapons has taken the wind out of the gold and oil markets. Gold was down $23, holding at $1357, just above the 50% retracement level of the rally from the August low. The $1355 level has been viewed as a good support and under normal circumstances today’s RSI reading of 49, testing the rising 50-day average, would be enough to establish a sustainable low (coincidentally matching the similar price action we are monitoring from October 1977). For now we should look for a bounce and possible retest of this support in the coming weeks with an RSI in the 30’s. However, if prices close over $1420 we would view it as a catalyst for the move to the next upper target at $1488.

STATISM - No One Objects. Everyone Too Busy Trying to Survive!

How Has This Not Led To Outright Revolution Yet? 09-09-13 Simon Black via Sovereign Man blog via ZH

“Ladies and gentlemen. For the safety and security of all passengers, please remove your shoes as you enter the security checkpoint…”

How many times have we heard that?

Anyone who has traveled in, out, or through the Land of the Free, or airports just about anywhere in the world over the last few years, has heard this tired refrain over and over again: ‘Safety and security.’

These days, you could put ‘safety and security’ in front of just about anything and get people to readily comply.

“Ladies and gentlemen, for the safety and security of all passengers, please stand on your head and clap with your feet…”

Well, OK. After all, who is against ‘safety and security’? Only criminal terrorists, apparently.

This is now the easiest way for governments to exact their agendas... whether it’s invading new countries, monitoring all Internet activity worldwide, or bailing out the big banks at taxpayer expense.

Apparently the citizenry has become so scared that we collectively lay down and let governments walk all over us.

This NSA debacle, which is only getting worse and worse, shows beyond all doubt how brazen and unabashed their tactics will be.

They’ve been caught red-handed spying on the entire world. And not a single utterance of remorse or reform.

Instead, it’s been ‘talk to the hand’, and they’ve closed ranks around the spy agency which has stepped up its efforts even more.

How this has not led to outright revolution in the Land of the Free is beyond me.

At this point, the Founding Fathers’ list of grievances nearly pales in comparison to the indignities and injustices to liberty that people suffer today under their government.

Understandably, people are too busy keeping their heads above water to pay much attention… with 25%+ unemployment rates in Europe and pensioners in the US resorting to food pantries in order to eat.

It’s the new American dream– living out your Golden Years dining at a charity food pantry because Ben Bernanke and his monopolistic control of the money supply have stoked ever-higher food prices.

And speaking of pensioners, you’ve undoubtedly heard by now that Poland has ‘overhauled’ its pension system by making a grab for private pension fund assets.

In nationalizing pension funds, the government of Poland gets to count those assets on its balance sheet, thus ‘reducing’ net public debt by roughly 8% of GDP.

This is a criminal enterprise, plain and simple. And anyone else would get thrown in jail for such a move.

Of course, the government claims that it’s for everyone’s safety and security.

By nationalizing pension funds, the government plans to gradually ‘adjust’ people’s portfolios away from stocks and into… what else? Government bonds.

Naturally, this is for people’s benefit, since government bonds are so safe and secure.

Prime Minister Donald Tusk: “We believe that, apart from the positive consequence of this decision for public debt, pensions will also be safer.”

And there you have it– confiscation of private property = Safety.

We’ve been talking about this trend for four years now. This is no longer theory. It’s real. It’s happening. And it’s coming soon to a bankrupt, insolvent nation near you.

Have you hit your breaking point yet?

STATISM - Will Anything Stop Them?

Numerous Intelligence Officials Question US Claims on Syria 09-08-13 Washingtons Blog

High-Level U.S. Intelligence Officers: Syrian Government Didn’t Launch Chemical Weapons

Preface:   Without doubt, intelligence is being manipulated to justify war against Syria.  Here, here, here, here and here.

Without doubt, the Syrian rebels had access to chemical weapons … and have apparently used them in the recent past.

Associated Press reported last week:

An intercept of Syrian military officials discussing the strike was among low-level staff, with no direct evidence tying the attack back to an Assad insider or even a senior Syrian commander, the officials said.

So while Secretary of State John Kerry said Monday that links between the attack and the Assad government are “undeniable,” U.S. intelligence officials are not so certain that the suspected chemical attack was carried out on Assad’s orders, or even completely sure it was carried out by government forces, the officials said.

***

Another possibility that officials would hope to rule out: that stocks had fallen out of the government’s control and were deployed by rebels in a callous and calculated attempt to draw the West into the war.

Reuters notes today:

With the United States threatening to attack Syria, U.S. and allied intelligence services are still trying to work out who ordered the poison gas attack on rebel-held neighborhoods near Damascus.

No direct link to President Bashar al-Assad or his inner circle has been publicly demonstrated, and some U.S. sources say intelligence experts are not sure whether the Syrian leader knew of the attack before it was launched or was only informed about it afterward.

Indeed, numerous intelligence officers say that the rebels likely carried out the August 21st attack.

For example, the Daily Caller reports:

The Obama administration has selectively used intelligence to justify military strikes on Syria, former military officers with access to the original intelligence reports say, in a manner that goes far beyond what critics charged the Bush administration of doing in the run-up to the 2003 Iraq war.

According to these officers, who served in top positions in the United States, Britain, France, Israel, and Jordan, a Syrian military communication intercepted by Israel’s famed Unit 8200 electronic intelligence outfit has been doctored so that it leads a reader to just the opposite conclusion reached by the original report.

***

The doctored report was picked up on Israel’s Channel 2 TV  on Aug. 24, then by Focus magazine in Germany, the Times of Israel, and eventually by The Cable  in Washington, DC.

According to the doctored report, the chemical attack was carried out by the 155th Brigade of the 4th Armored Division of the Syrian Army, an elite unit commanded by Maher al-Assad, the president’s brother.

However, the original communication intercepted by Unit 8200 between a major in command of the rocket troops assigned to the 155th Brigade of the 4th Armored Division, and the general staff, shows just the opposite.

The general staff officer asked the major if he was responsible for the chemical weapons attack. From the tone of the conversation, it was clear that “the Syrian general staff were out of their minds with panic that an unauthorized strike had been launched by the 155th Brigade in express defiance of their instructions,” the former officers say.

According to the transcript of the original Unit 8200 report, the major “hotly denied firing any of his missiles” and invited the general staff to come and verify that all his weapons were present.

The report contains a note at the end that the major was interrogated by Syrian intelligence for three days, then returned to command of his unit. “All of his weapons were accounted for,” the report stated.

***

An Egyptian intelligence report describes a meeting in Turkey between military intelligence officials from Turkey and Qatar and Syrian rebels. One of the participants states, “there will be a game changing event on August 21st” that will “bring the U.S. into a bombing campaign” against the Syrian regime.

The chemical weapons strike on Moudhamiya, an area under rebel control, took place on August 21. “Egyptian military intelligence insists it was a combined Turkish/Qatar/rebel  false flag operation,” said a source familiar with the report.

[A "false flag" is a ploy for starting war which has been used by governments around the world for thousands of years.]

Agents provacateurs are as old as warfare itself. What better than a false flag attack, staged by al Qaeda and its al Nusra front allies in Syria, to drag the United States into a war?

And 12 very high-level former intelligence officials wrote the following memorandum to Obama today:

We regret to inform you that some of our former co-workers are telling us, categorically, that contrary to the claims of your administration, the most reliable intelligence shows that Bashar al-Assad was NOT responsible for the chemical incident that killed and injured Syrian civilians on August 21, and that British intelligence officials also know this. In writing this brief report, we choose to assume that you have not been fully informed because your advisers decided to afford you the opportunity for what is commonly known as “plausible denial.”

***

There is a growing body of evidence from numerous sources in the Middle East — mostly affiliated with the Syrian opposition and its supporters — providing a strong circumstantial case that the August 21 chemical incident was a pre-planned provocation by the Syrian opposition and its Saudi and Turkish supporters. The aim is reported to have been to create the kind of incident that would bring the United States into the war.

According to some reports, canisters containing chemical agent were brought into a suburb of Damascus, where they were then opened. Some people in the immediate vicinity died; others were injured.

We are unaware of any reliable evidence that a Syrian military rocket capable of carrying a chemical agent was fired into the area. In fact, we are aware of no reliable physical evidence to support the claim that this was a result of a strike by a Syrian military unit with expertise in chemical weapons.

In addition, we have learned that on August 13-14, 2013, Western-sponsored opposition forces in Turkey started advance preparations for a major, irregular military surge. Initial meetings between senior opposition military commanders and Qatari, Turkish and U.S. intelligence officials took place at the converted Turkish military garrison in Antakya, Hatay Province, now used as the command center and headquarters of the Free Syrian Army (FSA) and their foreign sponsors.

Senior opposition commanders who came from Istanbul pre-briefed the regional commanders on an imminent escalation in the fighting due to “a war-changing development,” which, in turn, would lead to a U.S.-led bombing of Syria.

At operations coordinating meetings at Antakya, attended by senior Turkish, Qatari and U.S. intelligence officials as well as senior commanders of the Syrian opposition, the Syrians were told that the bombing would start in a few days. Opposition leaders were ordered to prepare their forces quickly to exploit the U.S. bombing, march into Damascus, and remove the Bashar al-Assad government

The Qatari and Turkish intelligence officials assured the Syrian regional commanders that they would be provided with plenty of weapons for the coming offensive. And they were. A weapons distribution operation unprecedented in scope began in all opposition camps on August 21-23. The weapons were distributed from storehouses controlled by Qatari and Turkish intelligence under the tight supervision of U.S. intelligence officers.

12 U.S. Intelligence Officials Tell Obama It Wasn’t Assad

Cross-Posted from WarIsACrime.org ; originally posted at Consortiumnews.com

By Ray McGovern, a 27-year CIA veteran, who chaired National Intelligence Estimates and personally delivered intelligence briefings to Presidents Ronald Reagan and George H.W. Bush, their Vice Presidents, Secretaries of State, the Joint Chiefs of Staff, and many other senior government officials

Editor Note: Despite the Obama administration’s supposedly “high confidence” regarding Syrian government guilt over the Aug. 21 chemical attack near Damascus, a dozen former U.S. military and intelligence officials are telling President Obama that they are picking up information that undercuts the Official Story.

MEMORANDUM FOR: The President

FROM: Veteran Intelligence Professionals for Sanity (VIPS)

SUBJECT: Is Syria a Trap?

Precedence: IMMEDIATE

We regret to inform you that some of our former co-workers are telling us, categorically, that contrary to the claims of your administration, the most reliable intelligence shows that Bashar al-Assad was NOT responsible for the chemical incident that killed and injured Syrian civilians on August 21, and that British intelligence officials also know this. In writing this brief report, we choose to assume that you have not been fully informed because your advisers decided to afford you the opportunity for what is commonly known as “plausible denial.”

We have been down this road before – with President George W. Bush, to whom we addressed our first VIPS memorandum immediately after Colin Powell’s Feb. 5, 2003 U.N. speech, in which he peddled fraudulent “intelligence” to support attacking Iraq. Then, also, we chose to give President Bush the benefit of the doubt, thinking he was being misled – or, at the least, very poorly advised.

Secretary of State John Kerry departs for a Sept. 6 trip to Europe where he plans to meet with officials to discuss the Syrian crisis and other issues. (State Department photo)

The fraudulent nature of Powell’s speech was a no-brainer. And so, that very afternoon we strongly urged your predecessor to “widen the discussion beyond …  the circle of those advisers clearly bent on a war for which we see no compelling reason and from which we believe the unintended consequences are likely to be catastrophic.” We offer you the same advice today.

Our sources confirm that a chemical incident of some sort did cause fatalities and injuries on August 21 in a suburb of Damascus. They insist, however, that the incident was not the result of an attack by the Syrian Army using military-grade chemical weapons from its arsenal. That is the most salient fact, according to CIA officers working on the Syria issue. They tell us that CIA Director John Brennan is perpetrating a pre-Iraq-War-type fraud on members of Congress, the media, the public – and perhaps even you.

We have observed John Brennan closely over recent years and, sadly, we find what our former colleagues are now telling us easy to believe. Sadder still, this goes in spades for those of us who have worked with him personally; we give him zero credence. And that goes, as well, for his titular boss, Director of National Intelligence James Clapper, who has admitted he gave “clearly erroneous” sworn testimony to Congress denying NSA eavesdropping on Americans.

Intelligence Summary or Political Ploy?

That Secretary of State John Kerry would invoke Clapper’s name this week in Congressional testimony, in an apparent attempt to enhance the credibility of the four-page “Government Assessment” strikes us as odd. The more so, since it was, for some unexplained reason, not Clapper but the White House that released the “assessment.”

This is not a fine point. We know how these things are done. Although the “Government Assessment” is being sold to the media as an “intelligence summary,” it is a political, not an intelligence document. The drafters, massagers, and fixers avoided presenting essential detail. Moreover, they conceded upfront that, though they pinned “high confidence” on the assessment, it still fell “short of confirmation.”

Déjà Fraud: This brings a flashback to the famous Downing Street Minutes of July 23, 2002, on Iraq, The minutes record the Richard Dearlove, then head of British intelligence, reporting to Prime Minister Tony Blair and other senior officials that President Bush had decided to remove Saddam Hussein through military action that would be “justified by the conjunction of terrorism and WMD.” Dearlove had gotten the word from then-CIA Director George Tenet whom he visited at CIA headquarters on July 20.

The discussion that followed centered on the ephemeral nature of the evidence, prompting Dearlove to explain: “But the intelligence and facts were being fixed around the policy.” We are concerned that this is precisely what has happened with the “intelligence” on Syria.

The Intelligence

There is a growing body of evidence from numerous sources in the Middle East — mostly affiliated with the Syrian opposition and its supporters — providing a strong circumstantial case that the August 21 chemical incident was a pre-planned provocation by the Syrian opposition and its Saudi and Turkish supporters. The aim is reported to have been to create the kind of incident that would bring the United States into the war.

According to some reports, canisters containing chemical agent were brought into a suburb of Damascus, where they were then opened. Some people in the immediate vicinity died; others were injured.

We are unaware of any reliable evidence that a Syrian military rocket capable of carrying a chemical agent was fired into the area. In fact, we are aware of no reliable physical evidence to support the claim that this was a result of a strike by a Syrian military unit with expertise in chemical weapons.

In addition, we have learned that on August 13-14, 2013, Western-sponsored opposition forces in Turkey started advance preparations for a major, irregular military surge. Initial meetings between senior opposition military commanders and Qatari, Turkish and U.S. intelligence officials took place at the converted Turkish military garrison in Antakya, Hatay Province, now used as the command center and headquarters of the Free Syrian Army (FSA) and their foreign sponsors.

Senior opposition commanders who came from Istanbul pre-briefed the regional commanders on an imminent escalation in the fighting due to “a war-changing development,” which, in turn, would lead to a U.S.-led bombing of Syria.

At operations coordinating meetings at Antakya, attended by senior Turkish, Qatari and U.S. intelligence officials as well as senior commanders of the Syrian opposition, the Syrians were told that the bombing would start in a few days. Opposition leaders were ordered to prepare their forces quickly to exploit the U.S. bombing, march into Damascus, and remove the Bashar al-Assad government

The Qatari and Turkish intelligence officials assured the Syrian regional commanders that they would be provided with plenty of weapons for the coming offensive. And they were. A weapons distribution operation unprecedented in scope began in all opposition camps on August 21-23. The weapons were distributed from storehouses controlled by Qatari and Turkish intelligence under the tight supervision of U.S. intelligence officers.

Cui bono?

That the various groups trying to overthrow Syrian President Bashar al-Assad have ample incentive to get the U.S. more deeply involved in support of that effort is clear. Until now, it has not been quite as clear that the Netanyahu government in Israel has equally powerful incentive to get Washington more deeply engaged in yet another war in the area. But with outspoken urging coming from Israel and those Americans who lobby for Israeli interests, this priority Israeli objective is becoming crystal clear.

Reporter Judi Rudoren, writing from Jerusalem in an important article in Friday’s New York Times addresses Israeli motivation in an uncommonly candid way. Her article, titled “Israel Backs Limited Strike Against Syria,” notes that the Israelis have argued, quietly, that the best outcome for Syria’s two-and-a-half-year-old civil war, at least for the moment, is no outcome. Rudoren continues:

“For Jerusalem, the status quo, horrific as it may be from a humanitarian perspective, seems preferable to either a victory by Mr. Assad’s government and his Iranian backers or a strengthening of rebel groups, increasingly dominated by Sunni jihadis.

“‘This is a playoff situation in which you need both teams to lose, but at least you don’t want one to win — we’ll settle for a tie,’ said Alon Pinkas, a former Israeli consul general in New York. ‘Let them both bleed, hemorrhage to death: that’s the strategic thinking here. As long as this lingers, there’s no real threat from Syria.’”

We think this is the way Israel’s current leaders look at the situation in Syria, and that deeper U.S. involvement – albeit, initially, by “limited” military strikes – is likely to ensure that there is no early resolution of the conflict in Syria. The longer Sunni and Shia are at each other’s throats in Syria and in the wider region, the safer Israel calculates that it is.

That Syria’s main ally is Iran, with whom it has a mutual defense treaty, also plays a role in Israeli calculations. Iran’s leaders are not likely to be able to have much military impact in Syria, and Israel can highlight that as an embarrassment for Tehran.

Iran’s Role

Iran can readily be blamed by association and charged with all manner of provocation, real and imagined. Some have seen Israel’s hand in the provenance of the most damaging charges against Assad regarding chemical weapons and our experience suggests to us that such is supremely possible.

Possible also is a false-flag attack by an interested party resulting in the sinking or damaging, say, of one of the five U.S. destroyers now on patrol just west of Syria. Our mainstream media could be counted on to milk that for all it’s worth, and you would find yourself under still more pressure to widen U.S. military involvement in Syria – and perhaps beyond, against Iran.

Iran has joined those who blame the Syrian rebels for the August 21 chemical incident, and has been quick to warn the U.S. not to get more deeply involved. According to the Iranian English-channel Press TV, Iranian Foreign Minister Mohammad Javid Zarif has claimed: “The Syria crisis is a trap set by Zionist pressure groups for [the United States].”

Actually, he may be not far off the mark. But we think your advisers may be chary of entertaining this notion. Thus, we see as our continuing responsibility to try to get word to you so as to ensure that you and other decision makers are given the full picture.

Inevitable Retaliation

We hope your advisers have warned you that retaliation for attacks on Syrian are not a matter of IF, but rather WHERE and WHEN. Retaliation is inevitable. For example, terrorist strikes on U.S. embassies and other installations are likely to make what happened to the U.S. “Mission” in Benghazi on Sept. 11, 2012, look like a minor dust-up by comparison. One of us addressed this key consideration directly a week ago in an article titled “Possible Consequences of a U.S. Military Attack on Syria – Remembering the U.S. Marine Barracks Destruction in Beirut, 1983.”

For the Steering Group, Veteran Intelligence Professionals for Sanity

Thomas Drake, Senior Executive, NSA (former)

Philip Giraldi, CIA, Operations Officer (ret.)

Matthew Hoh, former Capt., USMC, Iraq & Foreign Service Officer, Afghanistan

Larry Johnson, CIA & State Department (ret.)

W. Patrick Lang, Senior Executive and Defense Intelligence Officer, DIA (ret.)

David MacMichael, National Intelligence Council (ret.)

Ray McGovern, former US Army infantry/intelligence officer & CIA analyst (ret.)

Elizabeth Murray, Deputy National Intelligence Officer for Middle East (ret.)

Todd Pierce, US Army Judge Advocate General (ret.)

Sam Provance, former Sgt., US Army, Iraq

Coleen Rowley, Division Council & Special Agent, FBI (ret.)

Ann Wright, Col., US Army (ret); Foreign Service Officer (ret.)