MACRO RISK - Changing Landscape

Even UBS itself admitted last week that a "dislocation" in the market (which is "underestimating Grexit Risks") is necessary in order to overcome the Greek impasses.

From UBS:

Question: What could go wrong?

As we have highlighted many times before, markets respond well to moderate growth, low inflation and supportive monetary conditions, as is now the case. But the global recovery also remains fragile and hence vulnerable to shocks. Here's what could go wrong:

Renewed political uncertainty. Fragile growth, particularly in the Eurozone, remains at risk to bouts of political uncertainty. Last year’s midyear slowdown mostly stemmed from unease over the growing conflict in the eastern Ukraine. With no solution to the latest re-escalation of the conflict in sight (at the time of writing) and with the impasse between Greece, the troika and virtually all other Eurozone member governments threatening to usher in a new chapter in the Eurozone crisis, Europe’s ‘green shoots’ of recovery could quickly wilt again. And note that, as Europe goes, so go global growth impulses. The Eurozone is the world's largest economic aggregation and biggest export destination for many emerging economies, which are increasingly reliant on (net) exports for growth.

Rapid and disruptive Fed tightening. As noted above, we expect a faster pace of Fed tightening than is now priced into markets. Typically, 'carry' positions are most vulnerable when the Fed initiates unexpected rate hikes. In macroeconomic and market terms, those most exposed to the unwinding of 'carry' include countries  financing external deficits via short-term portfolio inflows, such as Brazil, South Africa or Turkey. Credit fixed income markets are also potentially vulnerable,  particularly given their susceptibility to illiquid trading conditions.

Excessive dollar strength. Thus far, broad-based dollar appreciation has not been particularly problematic. But further gains might become disruptive. At some point, political pressure against dollar strength may build in Washington, particularly as the 2016 elections approach. But vulnerability to dollar strength is arguably greater outside the US, including in commodity-producing industries and countries, where a strong dollar tends to depress output prices. Countries and corporates reliant on dollar financing, but with revenues derived in weaker currencies (e.g., in many emerging economies) could also feel the pinch in a stronger US dollar environment.

And a bonus point from UBS on rates:

when looking further over the horizon and assuming that major policy, political and currency shocks can be avoided, investors may have to consider the next iteration of the 'new-normal'—low discount rates. One by-product of the ECB's QE is its impact on global bond yields, including US  Treasuries. If, as seems likely, the ECB pursues QE for longer, Fed rate hikes may not lift US and global yields by as much as in past such cycles. The by-product would be much flatter yield curves and lower long-term interest rates than in prior episodes of US full employment, non-inflationary growth. Accordingly, at some point style shifts could dominate equity returns, with investors taking advantage of unusually low discount rates to bid up the prices of assets with annuity-like and attractive long-term cash flows.

This supposedly excludes the #Ref! P/E Nasdaq, which is on pace to surpass its dot com 1.0 nominal record in a few weeks at most.

BOND BUBBLE - A Debt Based System

The End of the Global Debt System Approaches 02-16-15 Phoenix Capital Research

The 2008 Crisis was largely a banking crisis focused on securities. The REAL Crisis will hit when the bond bubble collapses.

The current global monetary system is based on debt. Governments issue sovereign bonds, which a select group of large banks and financial institutions (e.g. Primary Dealers in the US) buy/sell/ and control via auctions.

These financial institutions list the bonds on their balance sheets as “assets,” indeed, the senior-most assets that the banks own.

The banks then issue their own debt-based money via inter-bank loans, mortgages, credit cards, auto loans, and the like into the system. Thus, “money” enters the economy through loans or debt. In this sense, money is not actually capital but legal debt contracts.

Because of this, the system is inherently leveraged (uses borrowed money).

Consider the following:

1)   Total currency (actual cash in the form of bills and coins) in the US financial system is little over $1.2 trillion.

2)   If you want to include money sitting in short-term accounts and long-term accounts the amount of “Money” in the system is about $10 trillion.

3)   In contrast, the US bond market is well over $38 trillion.

4)   If you include derivatives based on these bonds, the financial system is north of $191 trillion.

Bear in mind, this is just for the US.

Globally the bond bubble is north of $100 trillion. And this $100 trillion has been used as collateral for a derivative market that is well north of $555 TRILLION.

Again, debt is money. And at the top of the debt pyramid are sovereign bonds: US Treasuries, German Bunds, Japanese Government Bonds, etc. These are the senior most assets used as collateral for interbank loans and derivative trades. THEY ARE THE CRÈME DE LA CRÈME of our current financial system.

So, this time around, when the bubble bursts, it won’t simply affect a particular sector or asset class or country… it will affect the entire system.

The coming crisis will not be another 2008. It will be something much much worse. The 2008 Crisis was caused by an implosion of the Credit Default Swap market. At that time, the entire CDS market was roughly $50-60 trillion in size.

The interest rate based derivatives market is TEN TIMES larger in size: north of $555 trillion.

"There is no FREEDOM without NOISE -

and no STABILITY without VOLATILITY."

Excerpted from: Why I’m Not Breaking Up with America This Valentine’s Day By 02-09-15 John W. Whitehead

.... why would anyone put up with a government that brazenly steals, cheats, sneaks, spies and lies, not to mention alienates, antagonizes, criminalizes and terrorizes its own citizens and then justifies it in the name of safety, security and the greater good?

Why would anyone put up with militarized police officers who shoot first and ask questions later, act as if their word is law, and operate as if they are above the law?

Why would anyone put up with government officials, it doesn’t matter whether they’re elected or appointed, who live an elitist lifestyle while setting themselves apart from the populace, operate outside the rule of law, and act as if they’re beyond reproach and immune from being held accountable?

Unfortunately, not only do we put up with a laundry list of tyrannies that make King George III’s catalogue of abuses look like child’s play, but most actually persist in turning a blind eye to them, acting as if what they don’t see or acknowledge can’t hurt them.

The sad reality, as I make clear in my book A Government of Wolves: The Emerging American Police State, is that life in America is no bed of roses. Nor are there any signs that things will get better anytime soon, at least not for “we the people,” those of us who belong to the so-called “unwashed masses”—the working class stiffs, the hoi polloi, the plebeians, the rabble, the riffraff, the herd, the peons and the proletariats.

For instance, we’re still being spied on by our own government. Incredibly, while the British courts recognize that mass government surveillance of cellphone and online communications is not only illegal but violates human rights, the U.S. courts and politicians continue to pander to the government’s whims, whether or not they run afoul of the rule of law. Sen. Marco Rubio (R-Fla.) actually wants to make the NSA’s mass surveillance a permanent practice.

Not only is the government unapologetic about spying on its citizens, but government agencies are using their collective surveillance data to carry out Orwellian pre-crime programs that attempt to nab “criminals” before they ever commit a crime. To do so, they have to study our social media posts, our buying habits, and where we travel to and from, and on and on.

We’re still being treated like serfs working for an overlord, with little actual rights when it comes to our property, our bodies, our children or our welfare. It doesn’t really matter what the justifications are for such taxes, regulations, prohibitions and fines if they result in us having little-to-no control over how we live our lives. In Seattle, for example, even one’s trash is subject to government regulation. Residents who fail to separate out their food waste for composting are fined for each violation.

We’re still bartering our freedoms away for the phantom promise of security, and we’re no safer and much less freer than we were two decades ago. First, it was the Patriot Act, which continues to sanction all manner of government intrusions into our lives, from the government tracking what cold medicine we use and how we spend our money to what we read and with whom we communicate. Then it was whole-body scanners in the airports, which were expensive, invasive and ineffective. Most recently, we’ve been subjected to a song-and-dance number about the need for body cameras on police officers to rein in abusive cops, with little said about how these surveillance cameras will be used to identify and track those in their range, or how difficult the footage will be to acquire if needed for our own defense.

We’re still being fooled into thinking that politics matter and that there’s a difference between the Republicans and Democrats, when in fact, the two parties are exactly the same. As one commentator noted, both parties support endless war, engage in out-of-control spending, ignore the citizenry’s basic rights, have no respect for the rule of law, are bought and paid for by Big Business, care most about their own power, and have a long record of expanding government and shrinking liberty.

Our communities are still being held hostage by militarized police. Despite the fleeting attention paid to the transformation of community police into extensions of the military, the transfer of military equipment from the federal government to localities continues unabated, with more than $28 million worth of tactical equipment distributed in the last quarter of 2014. The federal government, in conjunction with local police, has created a standing army on American soil—something those who drafted our Constitution believed would devastate our freedoms.

We’re still exchanging one set of wars for another, to the delight and profit of the military industrial complex. We’ve gone from waging war against Iraq and Iran to sounding the war drums against North Korea, Syria and ISIS wherever it happens to rear its head.

Every once in a while, we get tossed a bone to satisfy that gnawing, nagging hunger for something that looks and tastes like freedom, democracy and free enterprise. Political elections, town-hall meetings, awards ceremonies, sports spectacles, high-dollar lotteries, reality TV shows, morning news programs and patriotic-themed blockbuster movies: these are all the trappings of a so-called free nation without the substance (what Shakespeare referred to as a “tale told by an idiot, full of sound and fury, signifying nothing”). Indeed, Big Business, in conjunction with Big Government, have become very adept at distracting the citizenry so that “we the people” often have no clue as to the real nature of the political game being played.

Temporarily assuaged, easily distracted and suffering from an appalling case of public amnesia, we fall right back into our complacency and compliance, content to turn a blind eye to blatant abuses, forgive past transgressions, and forget all of the reasons why we should be mad as hell about the state of our nation.

So why do I stay? Why do any of us continue to put up with the gut-wrenching, soul-sucking, misery-drenched, demoralizing existence that is America today?

Perhaps I stay because I was raised to believe that anything worth having is worth fighting for, and I believe with every fiber of my being that freedom matters. In fact, I come from a long line of Americans who understood that there is a price to be paid for freedom, whether that means standing up to the British military, sitting down in a bus seat reserved for “whites only,” or pushing back against corporations who pollute our waters and pillage our lands for profit.

Perhaps I soldier on because I remember what it was like to grow up at a time when the only surveillance I had to worry about were the neighbors who reported back to my mother whenever I did something wrong, and I desperately want my grandchildren to experience that kind of carefree existence. I want them to know that there’s more to life than metal detectors, lockdowns, random searches and pre-crime units trying to nab them for a crime if they dare step out of line.

Perhaps I persevere because I know that there are genuinely concerned Americans out there, including some good cops, honest politicians and pragmatic idealists, who want to pitch in and turn things around for the better. As long as there is this small but vocal minority who cares enough to stand up and speak out, then all is not completely lost.

Perhaps I stick it out because I know that surveillance, overcriminalization, militarized police, power-hungry politicians and greedy corporations are not exclusive to America, and there’s nowhere you can escape to where tyranny cannot follow. No matter what you think of Ronald Reagan and his politics, he was right when he warned that, “If we lose freedom here, there is no place to escape to. This is the last stand on earth.”

Most of all, perhaps I keep fighting on because I’m just not ready to give up on America. At least, not yet.

In the words of that revolutionary firebrand Patrick Henry:

Gentlemen may cry, peace, peace — but there is no peace. The war is actually begun! The next gale that sweeps from the north will bring to our ears the clash of resounding arms! Our brethren are already in the field! Why stand we here idle? What is it that gentlemen wish? What would they have? Is life so dear, or peace so sweet, as to be purchased at the price of chains and slavery? Forbid it, Almighty God! — I know not what course others may take; but as for me, give me liberty or give me death!

Obama will unleash his latest executive order, one which will set the stage for "information sharing and analysis organizations" (ISAOs) - or, in political jargon "hubs where companies share cyber threat data with each other and with the Department of Homeland Security."  In regular parlance, what Obama will do is merely codify the second coming of the Patriot Act, which as Reuters put it, is "legislation to require more information-sharing and limit any legal liability for companies that share too much." In other words, the Kiss You Privacy Forever order. But don't worry: it is for your own protection.

(By clicking on the play button you agree to have your information shared with not only the NSA but Apple, AT&T, Verizon, T-Mobile, Cisco, Google, and well... everyone else)

Patriot Act 2: Obama Executive Order Will Promote Sharing Of Confidential Information With Corporations 02-13-15 ZH

Here come the "information sharing and analysis organizations", or ISAOs.

* * *

In the aftermath of the Snowden whistleblowing scandal which has now all but been forgotten, there was a brief period when it seemed the growth of the US spying apparatus would be halted if not put into reverse. Those days are long forgotten and later today Obama is expected to to sign an executive order "that aims to make it easier for the government to share classified cyberthreat information with companies."

The spin, as proposed by the WSJ, is that "this will be effort designed to spur collaboration and deter hackers, the White House said." In reality what Obama's latest executive order will do, is expand the universe of entities that has access to the trove of private confidential data contained in the vast government spying apparatus, which as has been made all too clear now focuses as much on US citizens as it does on legitimate foreign threats, and further eviscerate the concept of individual privacy in the US.

From Reuters:

The order sets the stage for new private-sector led "information sharing and analysis organizations" (ISAOs) - hubs where companies share cyber threat data with each other and with the Department of Homeland Security.

It is one step in a long effort to make companies as well as privacy and consumer advocates more comfortable with proposed legislation that would offer participating companies liability protection, the White House said.

"We believe that by clearly defining what makes for a good ISAO, that will make tying liability protection to sectoral organizations easier and more accessible to the public and to privacy and civil liberties advocates," said Michael Daniel, Obama's cyber coordinator, in a conference call with reporters.

Obama will sign the order shortly during a conference on cybersecurity at Stanford University in the heart of Silicon Valley.

As the WSJ adds, "much could depend on whether intelligence agencies such as the National Security Agency and the Central Intelligence Agency participate in any arrangement that allows classified information to be shared with companies." Sadly, if history is any guide, the NSA, whose "safekeeping" of private US citizen data has a woeful track record, will be quite instrumental in spearheading an effort which many have dubbed the Patriot Act for the digital age.

Ironically, this latest move comes as as big Silicon Valley companies "prove hesitant to fully support more mandated cybersecurity information sharing without reforms to government surveillance practices exposed by former National Security Agency contractor Edward Snowden."

Cybersecurity industry veterans said Obama's anticipated order would be only a modest step in one of the president's major priorities - the defense of companies from attacks like those on Sony and Anthem Inc.

Obama has proposed legislation to require more information-sharing and limit any legal liability for companies that share too much. Only Congress can provide the liability protection through legislation.

The bottom line is that all Obama is really doing is not only promoting data sharing between the government and key private corporations - and one wonders just how reciprocal such sharing will be - but effectively indeminifes them from obtaining and processing such data. "Businesses are unlikely to share a lot of timely and "actionable" cyber intelligence without liability relief, said Mike Brown, a vice president with the RSA security division of EMC Corp."

"Until that gets resolved, probably through legislation, I'm not sure how effective continued information-sharing will be," said Brown, a retired Naval officer and former cyber official with the Department of Homeland Security.

Senator Tom Carper, the top Democrat on the Senate Homeland Security committee, introduced a bill this week that incorporates much of Obama's plan. But Republicans control Congress, and they have yet to sign on to the idea.

"This is an urgent matter and we are working with anyone that we can up on the Hill to make that happen," said Daniel, who had not yet reviewed Carper's bill.

Getting a bill through Congress will require at least the support of big Silicon Valley companies such as Google Inc and Facebook Inc.

Curiously one company which has no qualms about collaborating with the US government also happens to be the largest company in the world currently by market cap:

Obama also will meet privately with some executives on Friday. They are expected to press again for surveillance reform and support for strong encryption, which some in the administration have faulted recently on the grounds that it enables criminals and terrorists to hide their activity.

Google, Facebook and Yahoo are not sending their chief executives to the Stanford conference because of the rift, according to an executive at a major technology company. Apple Inc Chief Executive Tim Cook will give an address.

One wonder if perhaps recent leaked discoveries such as that "NSA Mocks Apple's "Zombie" Customers; Asks "Your Target Is Using A BlackBerry? Now What?" has anything do with with AAPL's willingness to engage in full-blown symbiosis with the US government. One also wonder what if anything would happen to AAPL's record sales if it were to just say no to Obama.

Many questions, but one thing is clear: America's relapse into the second coming of the Patriot Act is coming fast and furious, which as some also say is par for the course for the president who, just like Bush, has now been given a blank check to send US troops not only to Iraq but any place where "ISIS operates", if only at the discretion of the Pentagon.

So to summarize:

• the good news: no more North Korean "hacks" of Sony straight to YouTube comedy flops.
• the bad news: the trade off will be even less personal privacy for those who feel the urge to be constantly on their smartphones and otherwise connected to the grid.

Still confused? The NSA laid it out best: