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"I got interested in her in 2008," Kenyan Felix Kiprono tells The Nairobian newspaper, and now, in an official marriage request, the lawyer has offered US president Barack Obama 50 cows, 70 sheep, and 30 goats in exchange for his 16-year old daughter Malia's hand in marriage. As AFP reports, Kiprono dismissed the notion he might be a gold-digger, adding that he and the young Obama would lead "a simple life," and he will teach Malia how to milk a cow. This is not the first time a Kenyan has offered livestock in exchange for a President's daughter...


A Kenyan lawyer has offered US president Barack Obama 50 cows and other assorted livestock in exchange for his 16-year old daughter Malia's hand in marriage, a report said Tuesday. As AFP reports,

Felix Kiprono said he was willing to pay 50 cows, 70 sheep and 30 goats in order to fulfil his dream of marrying the first daughter.


"I got interested in her in 2008," Kiprono said, in an interview with The Nairobian newspaper.


At that time President Obama was running for office for the first time and Malia was a 10-year-old.


"As a matter of fact, I haven't dated anyone since and promise to be faithful to her. I have shared this with my family and they are willing to help me raise the bride price," he said.


Kiprono said he intended to put his offer of marriage to Obama and hopes the president will bring his daughter with him when he makes his first presidential visit to Kenya, the country where his father was born, in July.


Obama's Kenyan grandmother, who is in her early 90s, still lives in Kogelo, in western Kenya, home to a number of the president's relatives.


"I am currently drafting a letter to Obama asking him to please have Malia accompany him for this trip. I hope the embassy will pass the letter to him," he said.

Kiprono dismissed the notion he might be a gold-digger.

"People might say I am after the family's money, which is not the case. My love is real," he insisted.


The young lawyer, whose age was not revealed, said he had already planned his proposal, which would be made on a hill near his rural village, and the wedding at which champagne would be shunned in favour of a traditional sour milk called "mursik".


Kiprono said that as a couple he and the young Obama would lead "a simple life".


"I will teach Malia how to milk a cow, cook ugali (maize porridge) and prepare mursik like any other Kalenjin woman," he said.

And while the gesture seems very generous, we would note that this is not the first time a Kenyan has offered livestock in exchange for a President's daughter. In 2009, as CNN reports, Kenyan Godwin Kipkemoi Chepkurgor offered 40 goats and 20 cows for Chelsea Clinton's love...

The Kenyan man first offered the dowry nine years ago to then-President Bill Clinton in asking for the hand of his only child. He renewed it Thursday after Secretary of State Hillary Clinton was asked about the proposal at a Nairobi town hall session.

CNN's Fareed Zakaria, the session's moderator, commented that given the economic crisis at hand, Chepkurgor's dowry was "not a bad offer."

However, Clinton said her daughter was her own person.

"She's very independent," she said. "So I will convey this very kind offer."

*  *  *
So what have we learned: Malia Obama is worth dramatically more than Chelsea Clinton (even adjusting for inflation).

Yesterday, in a troubling oped posted in China's Global Times, a paper owned by the ruling Communist Party, China issued its loudest warning yet to the US to keep out of its affairs, in this case the various disputed territories in the South China Sea among them but not limited to China's artificial islands in the Spratly chain which have become a topic of contention between China and various US allies in the region, when it said that war was “inevitable” between China and the United States unless Washington stopped demanding Beijing halt the building of artificial islands in the disputed waterway.

“We do not want a military conflict with the United States, but if it were to come, we have to accept it,” said The Global Times, which is among China’s most nationalist newspapers.

But is a military conflict, let alone an actual war, realistic in a world in which all political and diplomatic disagreements are solved either in the back room or using the capital markets?

According to Michael Auslin, a resident scholar and the director of Japan Studies at the American Enterprise Institute (AEI), where he specializes in Asian regional security and political issues, the answer is yes. Auslin proposes that with Beijing and Washington both laying down "red lines" in the South China Sea, the two superpowers are maneuvering themselves into a potential conflict since neither would be willing to back down over fears of losing face or realpolitik clout.

Beijing has not yet declared a formal air defense identification zone (ADIZ) over the South China Sea, unlike the one it established over part of the East China Sea in 2013, nor could it today enforce such a zone effectively with its current fighters.


However, with its reclamation activities continuing, and the Obama Administration apparently having decided to challenge China’s claims, the US and China are now potentially closer to an armed encounter than at any time in the past 20 years.

In an article in The Commentator, he lays out the three real-world scenarios under which it could happen.

1) Accident: The US Navy is reportedly considering sending ships within 12 miles of the manmade islands, thereby entering into what China claims is now sovereign territory. With Chinese naval and maritime patrol vessels in the waters, intimidation or harassment of US ships could lead to a collision, with each side responding in turn.

This is what China has done to ships of other nations, and an accident could lead to a stand-off. In the air, the Spratlys lie about 800 miles from China’s shores, already within the combat radius of China’s most advanced fighter jet (though Beijing has yet to show that it can effectively oppose US air patrols).

More worrisome, China is building airstrips on its islands, and may soon be able to launch planes from them to patrol the skies. Similarly, once its aircraft carrier is operational with an air wing, it can easily patrol the area. Any of those developments would dramatically increase the chances of a mid-air collision, such as happened in 2001 between a Chinese fighter and a US Navy surveillance plane.

2) Premeditation: Beijing has staked its geopolitical reputation in Southeast Asia on its claims to the South China Sea and now the building of the islands, which already cover more than 2,000 acres. As I wrote in National Review last week, unless they decide to back down, and risk losing influence in Asia, China’s leaders may decide that stopping American incursion into their newly claimed waters early on is the best opportunity to make the risks to Washington seem too high.

Once Chinese airplanes are on the islands, then they may decide to shadow US planes and prevent them from flying in “restricted” skies, for the same reason, leaving the US to decide how far to respond. Thus, they may force a confrontation, to try and get the Obama Administration to back down from getting involved in another military situation while it is dealing with the Middle East and Ukraine.

3) Indirect Conflict: China may well judge that it is too risky to directly challenge US ships and planes, but that it can make the same point by intercepting those of other countries. Already, the Philippines has claimed that China warned off its surveillance planes, and China has had regular maritime run-ins with the Philippines and Vietnam.

It may decide to stop foreign ships from passing by its new islands, or it may soon try to escort less advanced foreign planes out the skies above its islands. A direct conflict between China and any of its neighbors would, at this point, have a good chance of bringing in the US, in order to credibly claim that it is upholding international law (and, in the case of the Philippines, coming to the aid of a treaty ally).

His conclusion:

Beijing and Washington are each laying down redlines in the South China Sea, making the upholding of their claims a priority. In this, they are maneuvering themselves into a potential conflict.


With no de-escalation mechanisms, and deep distrust on both sides, the more capable China becomes in defending its claimed territory, the more risks the US will face in challenging those claims.


That is why each is trying to define the boundaries and set the pattern of behavior before the other does. That may not ensure that there will be a military encounter, but it steadily raises the chances of one.

What Auslin ignored to note is that with the entire world gripped in secular stagnation, a "controlled" war may be just what the sputtering economic engines of the world's two largest economies need. The only question is how to assure any incipient conflict will remain "controlled."


Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

Neurosis is the inability to tolerate ambiguity.
Sigmund Freud (1886 – 1939)

To learn which questions are unanswerable, and not to answer them: this skill is most useful in times of stress and darkness.
Ursula K. Le Guin, “The Left Hand of Darkness” (1969)

Is everything connected, so that events create resonances like ripples across a net? Or do things merely co-occur and we give meaning to these co-occurrences based on our belief system? Lieh-tzu’s answer: it’s all in how you think.
“The Liezi”, ancient Taoist text attributed to Lie Yukou (c. 400 BC)



She’s a replicant, isn’t she?


I’m impressed. How many questions does it usually take to spot them?


I don’t get it, Tyrell.


How many questions?


Twenty, thirty, cross-referenced.


It took more than a hundred for Rachael, didn’t it?


[realizing Rachael believes she’s human] She doesn’t know.


She’s beginning to suspect, I think.


Suspect? How can it not know what it is?


"Bladerunner" (1982)

I remember when I was a very little girl, our house caught on fire.
I'll never forget the look on my father's face as he gathered me up

In his arms and raced through the burning building out to the pavement.
I stood there shivering in my pajamas and watched the whole world go up in flames.
And when it was all over I said to myself.
"Is that all there is to a fire?"

Jerry Lieber and Mike Stoller, "Is That All There Is?", as recorded by Peggy Lee (1969)

I call our world Flatland, not because we call it so, but to make its nature clearer to you, my happy readers, who are privileged to live in Space.
Edwin A. Abbott, “Flatland: A Romance of Many Dimensions” (1884)

Homey don't play that game.
– Damon Wayans, “In Living Color” (1992)


There’s only one question that matters today in markets: why is the government bond market going up and down like a yo-yo? How is it possible that the deepest and most important securities in the world are currently displaying all the trading stability of a biotech stock?

As with all market questions of singular importance and vast attention, these are questions of meaning. We seek the why and we seek the cause because we are desperate to understand what it means. We are – all of us – convinced that this market behavior must mean something profound. Surely this insane quivering within the bond market means that we are on the cusp of a quantum shift in the market landscape. Surely this is the rumbling of a deep tectonic plate that presages a massive earthquake. Surely, as more than one Master of the Universe proclaimed at SALT the other week, the long-awaited bear market in government debt is nigh.

Maybe. Or maybe all those Masters of the Universe are just talking their book. I know … shocking.

We are all market neurotics today, in the Freudian sense of the word, incapable of handling ambiguity in Narrative after 5+ years of global coordination and cooperation among The Monetary Powers That Be, 5+ years of being told by a monolithic Voice of Command how we should think about every single data point that crosses our Bloomberg screen. This is the most hated bull market in history, precisely because we all believe that it is a creature of policy and Narrative, and when the Voices are silent or they say conflicting things, we start to freak out. We run from pillar to post, getting whipsawed at every turn. Importantly, the whipsawing is occurring in the securities that are most closely linked to policy and Narrative – government bonds – and that’s why I believe that what we’re experiencing is more akin to neurosis than some shift in market fundamentals.

Here’s my point: volatility ≠ instability. Or more precisely, a system can be volatile or unstable in a local sense but highly stable in a global sense.

Unfortunately, however, because we live in the local rather than the global … because every bit of our modern financial services system, particularly financial media, is by business necessity focused on the local rather than the global … we are as unaware of our true positioning in the world as Rachael in “Bladerunner”. Or Deckard, who sure seems like a replicant to me. From a local perspective these bond market gyrations make it seem as if we are totally unmoored and markets are on the brink of some life-altering change. From a global perspective, however, this is a tempest in a teacup. Or to paraphrase the late, great Peggy Lee, is that all there is to a bond market fire?

Okay, Ben, that’s quite a mouthful: “unstable in a local sense but highly stable in a global sense”. Translation, please?

The Rosetta Stone here is Information Theory, and to introduce that it’s probably easiest if I quote directly and extensively from one of my very earliest Epsilon Theory notes, “Through the Looking Glass”. I wrote this almost exactly 2 years ago, back when I only had a few hundred readers, so it should be fresh for 99% of the audience. It’s a lot to digest, but I promise that you won’t see markets in the same way once you finish. Information Theory is, in fact, the beating heart of Epsilon Theory. That said, one of the beautiful things about releasing content into the wild is that readers can do with it what they will. For the TLDR / Short Attention Span Theatre crowd, click here to skip to the chase on page 10.


Defining the strength of a signal as the degree to which it changes assessments of future states of the world dates back to Claude Shannon’s seminal work in 1948, and in a fundamental way back to the work of Thomas Bayes in the 1700’s.  Here’s the central insight of this work: information is measured by how much it changes your mind. In fact, if a signal doesn’t make you see the world differently, then it has zero information. As a corollary, the more confident you are in a certain view of the world, the more new information is required to make you have the opposite view of the world and the less information is required to confirm your initial view. There’s no inherent “truth” to any signal, no need to make a distinction between (or even think of) this signal as having true information and that signal as having false information. Information is neither true nor false. It is only more or less useful in our decision-making, and that’s a function of how much it makes us see the world differently. As a result, the informational strength of any signal is relative. The same signal may make a big difference in my assessment of the future but a tiny difference in yours. In that case, we are hearing the same message, but it has a lot of information to me and very little to you.

Let’s say that you are thinking about Apple stock but you are totally up in the air about whether the stock is going up or down over whatever your investment horizon might be, say 1 year. Your initial estimation of the future price of Apple stock is a coin toss … 50% likelihood to be higher a year from now, 50% likelihood to be lower a year from now. So you do nothing. But you start reading analyst reports about Apple or you build a cash-flow model … whatever it is that you typically do to gather information about a potential investment decision.

The graph below shows how Information Theory would represent the amount of signal information (generically represented as bits) required to change your initial assessment of a 50% likelihood of Apple stock going up over the next year to a post-signaling assessment of some new percentage likelihood. These are logarithmic curves, so even relatively small amounts of information (a small fraction of a generic bit) will change your mind about Apple pretty significantly, but more and more information is required to move your assessment closer and closer to certainty (either a 0% or a 100% perceived likelihood of the stock going up).


Of course, your assessment of Apple is not a single event and does not take place at a single point in time. As an investor you are constantly updating your opinion about every potential investment decision, and you are constantly taking in new signals. Each new update becomes the starting point for the next, ad infinitum, and as a result all of your prior assessments become part of the current assessment and influence the informational impact of any new signal.

Let’s say that your initial signals regarding Apple were mildly positive, enough to give you a new view that the likelihood of Apple stock going up in the next year is 60%. The graph below shows how Information Theory represents the amount of information required to change your mind from here. The curves are still logarithmic, but because your starting point is different it now only requires 80% of the information as before to get you to 100% certainty that Apple stock will go up in the next year (0.8 generic bits versus 1.0 generic bits with a 50% starting estimation). Conversely, it requires almost 140% of the same negative information as before to move you to certainty that Apple stock is going down.

What these graphs are showing is the information surface of your non-strategic (i.e., without consideration of others) decision-making regarding Apple stock at any given point in time.  Your current assessment is the lowest point on the curve, the bottom of the informational “trough”, and the height of each trough “wall” is proportional to the information required to move you to a new assessment of the future probabilities. The higher the wall, the more information required in any given signal to get you to change your mind in a big way about Apple.

Now let’s marry Information Theory with Game Theory. What does an information surface look like for strategic decision-making, where your estimations of the future state of the world are contingent on the decisions you think others will make, and where everyone knows that everyone is being strategic?

I’m assuming we’re all familiar with the basic play of the Prisoner’s Dilemma, and if you’re not just watch any episode of Law and Order. Two criminals are placed in separate rooms for questioning by the police, and while they are both better off if they both keep silent, each is individually much better off if he rats his partner out while the partner remains silent. Unfortunately, in this scenario the silent partner takes the fall all by himself, resulting in what is called the “sucker pay-off”. Because both players know that this pay-off structure exists (and are always told that it exists by the police), the logical behavior for each player is to rat out his buddy for fear of being the sucker.

Below on the left is a classic two-player Prisoner’s Dilemma game with cardinal expected utility pay-offs as per a customary 2x2 matrix representation. Both the Row player and the Column player have only two decision choices – Rat and Silence – with the joint pay-off structures shown as (Row , Column) and the equilibrium outcome (Rat , Rat) shaded in light blue.

The same equilibrium outcome is shown below on the right as an informational surface, where both the Row and the Column player face an expected utility hurdle of 5 units to move from a decision of Rat to a decision of Silence. For a move to occur, new information must change the current Rat pay-off and/or the potential Silence pay-off for either the Row or the Column player in order to eliminate or overcome the hurdle. The shape of the informational surface indicates the relative stability of the equilibrium as the depth of the equilibrium trough, or conversely the height of the informational walls that comprise the trough, is a direct representation of the informational content required to change the conditional pay-offs of the game and allow the ball (the initial decision point) to “roll” to a new equilibrium position. In this case we have a deep informational trough, reflecting the stability of the (Rat , Rat) equilibrium in a Prisoner’s Dilemma game.

Now let’s imagine that new information is presented to the Row player such that it improves the expected utility pay-off of a future (Silence, Rat) position from -10 to -6. Maybe he hears that prison isn’t all that bad so long as he’s not a Rat. As a result the informational hurdle required by the Row player to change decisions from Rat to Silence is reduced from +5 to +1.

The (Rat , Rat) outcome is still an equilibrium outcome because neither player believes that there is a higher pay-off associated with changing his mind, but this is a much less stable equilibrium from the Row player’s perspective (and thus for the overall game) than the original equilibrium.

With this less stable equilibrium framework, even relatively weak new information that changes the Row player’s assessment of the current position utility may be enough to move the decision outcome to a new equilibrium. Below, new information of 2 units changes the perceived utility of the current Rat decision for the Row player from -5 to -7. Maybe he hears from his lawyer that the Mob intends to break his legs if he stays a Rat. This is the equivalent of “pushing” the decision outcome over the +1 informational hurdle on the Row player’s side of the (Rat , Rat) trough, and it is reflected in both representations as a new equilibrium outcome of (Silence , Rat).


This new (Silence , Rat) outcome is an equilibrium because neither the Row player nor the Column player perceives a higher expected utility outcome by changing decisions. It is still a weak equilibrium because the informational hurdle to return to (Rat , Rat) is only 1 informational unit, but all the same it generates a new behavior by the Row player: instead of ratting out his partner, he now keeps his mouth shut.

The Column player never changed decisions, but moving from a (Rat , Rat) equilibrium to a (Silence , Rat) equilibrium in this two time-period example resulted in an increase of utility from -5 to +10 (and for the Row Player a decrease from -5 to -6). This change in utility pay-offs over time can be mapped as:

Replace the words “Column Utility” with “AAPL stock price” and you’ll see what I’m going for. The Column player bought the police interrogation at -5 and sold it at +10. By mapping horizontal movement on a game’s informational surface to utility outcomes over time we can link game theoretic market behavior to market price level changes.

Below are two generic examples of a symmetric informational structure for the S&P 500 and a new positive signal hitting the market. New signals will “push” any decision outcome in the direction of the new information. But only if the new signal is sufficiently large (whatever that means in the context of a specific game) will the decision outcome move to a new equilibrium and result in stable behavioral change. 

In the first structure, there is enough informational strength to the signal to overcome the upside informational wall and push the market to a higher and stable price equilibrium. In the second structure, while the signal moves the market price higher briefly, there is not enough strength to the signal to change the minds of market participants to a degree that a new stable equilibrium behavior emerges.

All market behaviors – from “Risk-On/Risk-Off” to “climbing a wall of worry” to “buying the effin’ dip” to “going up on bad news” – can be described with this informational structure methodology.

For example, here’s how “going up on bad news” works. First, the market receives a negative Event signal – a poor Manufacturing ISM report, for example – that is bad enough to move the market down but not so terrible as to change everyone’s mind about what everyone knows that everyone knows about the health of the US economy and thus move the market index to a new, lower equilibrium level.

Following this negative event, however, the market then receives a set of public media signals – a Narrative – asserting that in response to this bad ISM number the Fed is more likely to launch additional easing measures. This Narrative signal is repeated widely enough and credibly enough that it changes Common Knowledge about future Fed policy and moves the market to a new, higher, and stable level.

So what is the current informational structure for the S&P500? Well, it looks something like this:

The market equilibrium today is like a marble sitting on a glass table. It is an extremely unstable equilibrium because the informational barriers that keep the marble from rolling a long way in either direction are as low as they have been in the past five years. Even a very weak signal is enough to push the marble a long way in one direction, only to have another weak signal push it right back. This is how you get big price movements “for no apparent reason”.

Why are the informational barriers to equilibrium shifts so low today? Because levels of Common Knowledge regarding future central bank policy decisions are so low today. The Narratives on both sides of the collective decision to buy or sell this market are extremely weak. What does everyone know that everyone knows about Abenomics? Very little. What does everyone know that everyone knows about Fed tapering? Very little. What does everyone know that everyone knows about the current state of global growth? Very little. I’m not saying that there’s a lack of communication on these subjects or that there’s a lack of opinion about these subjects or that there’s a lack of knowledge about these subjects. I’m saying that there’s a lack of Common Knowledge on these subjects, and that’s what determines the informational structure of a market.


I wrote all that right before the Fed’s Taper Tantrum in the summer of 2013, which can be understood using this Information Theory framework as a massive public relations effort by Bernanke et al to create a new Common Knowledge structure that would shape the informational contours of the market. The immediate signal of this initial effort at “communication policy” was a big red arrow pointing left, and almost all asset classes everywhere around the world took a dive as the strong signal sent the equilibrium marble skittering to the downside across the largely flat informational surface. But the longer term effect of communication policy was just as Bernanke hoped (and as he spoke about extensively in his farewell address as Fed Chair): it built an enormous Common Knowledge “wall” off to the downside left of the market informational surface – a Fed put based not on continued asset purchases, but on continued words of Narrative influence.

Those words form the Narrative of Central Bank Omnipotence, the overwhelming belief by market participants that central bankers in general, and the Fed in particular, determine market outcomes, and for the past two years this has been the only thing that matters in markets. I’ve been tracking and studying political Narratives for my entire professional career, close to 30 years now, and I’ve never seen anything like this. It’s a heck of a trick that Bernanke started and Draghi perfected and Yellen continues, and it’s the key, I think, to seeing recent bond market turbulence in the most useful perspective.

Everything I wrote about the informational surface of the equity market in early summer 2013 is exactly applicable to the informational surface of the bond market in early summer 2015. The bond market today is like a marble sitting on a glass table. There are very few informational structures or barriers to keep the price of US bonds from skittering this way or that, within a price range as expressed in yield terms of, say, 2.25% and 1.85% on the 10-year bond. This is what always happens when the Fed comes out and says that it's increasingly "data dependent" ...our local equilibria become much less stable when the Fed says that it hasn't made up its collective mind about the pace or scale of monetary policy shifts.


With an informational structure like this, the 10-year bond could trade anywhere on this segment of the price line. Moreover, it takes a signal with precious little information to change people’s minds about whether the US 10-year should yield 1.90% today or 2.20% tomorrow. Precious little information means just that – precious little information – and it’s a classic mistake to infer grand theories or reach sweeping conclusions on the basis of precious little information. Don’t do that.  

Because here’s the thing: the informational surface is only flat in this immediate vicinity of current bond prices. There are enormous Common Knowledge walls just off to the left and just off to the right of the price line segment shown above, Common Knowledge structures created by the entirely successful efforts by central bankers to mold investor behaviors and by the entirely unsuccessful efforts by central bankers to fix the real economy.


I really can’t emphasize this point too strongly – monetary policy since March 2009 has created a phenomenally stable global equilibrium in both markets and the real economy, an equilibrium that since the summer of 2013 no longer depends on massive asset purchases by the Fed.

Does the stability of the global equilibrium require someone to be making asset purchases, if not the Fed then the ECB or BOJ? To some degree I’m sure it does. But then I remember that Draghi’s mere words and an OMT program constructed out of whole cloth were sufficient to save the Euro in the summer of 2012. My strong sense is that the launching of central bank asset purchase programs may move the entire informational structure farther along to the right of the price line (higher prices, lower yields), and vice versa leftwards along the price line if the programs stop, but they don’t diminish the Common Knowledge structures themselves. Maybe the locally unstable price range of the US 10-year as expressed in yield terms goes to 2.75% - 2.35% if the ECB were to summarily stop its asset purchase program, but I still think you have an extremely stable global informational structure on either side of that new range, whatever it is. Among market participants today there is almost unanimity of belief that central bankers Will. Not. Allow. a global recession to occur, much less a deflationary equilibrium. But at the same time there is also almost unanimity of belief that central bankers Can. Not. Create. a global recovery, much less an inflationary equilibrium. That unanimity of belief establishes a global informational equilibrium of unparalleled strength and stability, or at least unparalleled in my experience.

And that leads me to my other main point: a highly stable equilibrium cuts both ways, for good and for bad. Another way of saying that you’re in a highly stable equilibrium is to say that you’re well and truly stuck. Yes, there are HUGE informational barriers to prevent economic behaviors that would create a recession in the US or horribly crush any major market or asset class. But by the same token, there are also HUGE informational barriers to prevent economic behaviors that would spark robust growth in the US or wildly elevate any major market or asset class. I’m not saying that the doomsday or heavenly scenarios are impossible. I’m saying that it would take an almost unimaginably large amount of new information to change people’s minds about what everyone knows that everyone knows about markets today, for either scenario to occur. Could happen. But I really don’t think that’s how you want to place your bets. My money is on the long grey slog of the Entropic Ending.

I know it sounds weird for me to say that we’re living in a deep, deep valley with giant mountains on both sides of us when it feels like we’re a marble sitting on a glass table, but that’s exactly the mixed metaphor that I think accurately describes our lives as investors here in the Golden Age of the Central Banker.  I know it sounds weird to think that we could be living in that deep, deep valley and yet be completely oblivious to its existence, completely convinced that the narrow field of view foisted on us day in and day out by the business imperatives of the financial services industry, especially financial media, is the only possible field of view. But myopically focused on what we are told to focus on is exactly how we humans (and replicants, too, I suppose) tend to live out our lives. Shifting our perspective to take a more global view, whether that’s on the dimension of time or emotion or, yes, asset price levels, is probably the most difficult thing any of us can hope to achieve, and it will always be an imperfect shift at best. Yet it’s never been more important to make that effort, else we allow our innate search for meaning to be subverted by mass-mediated, faux-authentic signalers that profit from making us look over here rather than over there. And I’m not just talking about market signals. It’s EVERY expression of power in the modern age – financial, political, legal, medical, etc. – that suffers from this mass-mediated form of social control, this manipulation of the Common Knowledge game. The human animal is a social animal. We are biologically evolved over millions of years to infer meaning from social signals. We swim in a sea of socially constructed signals, and we can no more ignore the words of Yellen or CNBC or a Master of the Universe than an ant can ignore the pheromones of her queen. We can’t ignore the words. But we can recognize them for what they are. We can ask ourselves “Is that all there is?” and take a more global view.

Sometimes there’s significance in signs and portents. Sometimes there’s real meaning to be gleaned from careful study of localized phenomena, from the interpretation of immediate events to generate far-reaching conclusions. Then again, sometimes a cigar is just a cigar, and that’s how I’m thinking about recent gyrations in the bond market.

One final point, perhaps the most important one I’ve got, and it’s addressed to everyone who asks questions like “so, Ben, when do you think the Fed is going to raise rates?” or “so, Ben, where do you think the price of oil goes from here?” The answer: I don’t know and I don’t really care. Seriously. These are unanswerable, entirely over-determined-in-retrospect questions, and the worst possible thing you can do with an unanswerable, entirely over-determined-in-retrospect question is to try to answer it in deterministic fashion! The popular fetish with demanding an Answer with a capital A to this sort of question is a crystallization of the market neurosis that afflicts us in the Golden Age of the Central Banker, and it’s the quickest path I know to poor investing.

What I DO care about is Adaptive Investing. What I DO care about is understanding the informational structures of the market that determine the likely market price reaction to some new signal, whether that’s a Yellen speech, an earnings report, or technical trading data. Trying to predict what that signal is going to be or when that signal is going to come is a losing proposition. Sorry, but I don’t play that game. And neither should you. My god, we need more pundit predictions about the Fed or oil prices like we need an asteroid to crash into the Earth. What we need is an investment and allocation STRATEGY for whatever comes down the pike, whenever it occurs. That’s exactly what an Information Theory perspective on markets can provide. Take another look at this informational surface.

This graph says nothing about when and what the Fed will do. It says everything about how to THINK about the bond market in a dynamic, non-myopic way, about how to prepare for probabilistic waves of new signals and how to react once they hit. There’s an entire investment and asset allocation strategy embedded in this graph, and I think it’s the most useful contribution I can make with Epsilon Theory, far more than adding one more voice to the cacophony of Fed “predictions” that drive our collective market neurosis. We are slowly being driven nuts by the paradoxes and ambiguities of the Golden Age of the Central Banker, a maddening time in the truest sense of the word, and I don’t begrudge anyone’s coping mechanisms or business models for dealing with this clinically insane market environment. I submit, however, that our mental health and financial health are best served by taking a strategic view of markets, a view that engages with the game without succumbing blindly to it. That and a regular dose of Epsilon Theory.


Hot on the heels of George Soros' warnings that we stand on the verge of World War 3, demanding Washington back off its anti-Yuan pressure, it appears "the good guys" are fighting back with their own good-cop, bad-cop propaganda. As Sputnik News reports, General hans-Lothar Domrose, NATO Commander of the Brunssum Allied Joint Force Command, said in an interview with German magazine Focus Online that Russian President Vladimir Putin is a tough-minded, forward-thinking politician who is capable of foreseeing situations, but also regards him as a dangerous "gambler," who "is willing to use nuclear weapons against NATO troops."



Soros previously noted,

...unless the U.S. makes 'major concessions' and allows China's currency to join the IMF's basket of currencies, "there is a real danger China will align itself with Russia politically and militarily, and then the threat of world war becomes real."

And so NATO has decided to make it clear just who the bad gyuys are in any equation of global thermonuclear war (as Sputnik News reports),

General Hans-Lothar Domröse, Commander of Allied Joint Force Command Brunssum (The Netherlands) has revealed what NATO thinks of Russian President Putin.


In his interview with the German magazine Focus Online, Domröse called the Russian leader a tough-minded, forward-thinking politician who is capable of foreseeing the situation.


The general, however, added that Putin is a “gambler”, which might be dangerous. Unfortunately the general did not elaborate any further.


General Domröse also emphasized that neither NATO nor he personally consider Russia an enemy; at the worse, the country is seen as a potential threat. He stressed that no one in the alliance is interested in waging war; their purpose, rather, is to defend. He said that President Putin is aware of that, and that allows the general to sleep well.


The general is however concerned that President Putin might be willing to use nuclear weapons against NATO troops.

*  *  *

The full interview (via Focus Online - Google Translate) - NATO General Hans-Lothar Domröse on the new rapid reaction force, and the threat of Russia

General, we are not already at war with Russia - in a propaganda war?

The Russian propaganda machine is running and acts. We will reply to the west on the truth quickly, and we gloss over anything. It may there be exceptions, but it is the principle. However, it is an old Russian tradition, matters only not admit it then to comment in a different light, and finally to make a U-turn. Let's take the example of the Crimea. It was said at the beginning: We are not. Then it was: Yes, there are also Russian soldiers. But they're on vacation . Soldier on vacation with equipment so. The summit was then entering into argument of President Putin: I had to intervene there.

Should the West respond with counter-propaganda?

He must not be primarily be lulled. I can understand the concern of our Baltic friends who warn repeatedly: Warning, not fall for the Russian scam. We have to be straight and honest go our way. Let the differences quietly made: We stick to the truth.

How is the Russian military presence in and around the Ukrainian troubled region?

The Russian armed forces are permanently very active since the beginning of Ukraine crisis in the air. We have over 300 airspace violations or fast-injury. On Russian territory at a location nearby Ukraine regiments, classic combat units. We also have time with Special Forces dealing with jeans and sunglasses, the seep.

They currently rely on a highly mobile task force, which is to make the eastern flank of NATO safer. How far are you with it?

We are nearing the realization of our plans, including the necessary infrastructure. We know from the Russian military exercises that Russia can move 100 000. soldiers very quickly. We have responded and the NATO Response Force, so to speak, our firefighters, reinforced, 13 000 to 30 000 men. NATO has also decided to make these forces available more quickly, thus reducing the alarms. And we need a spearhead, a sort of scouts who can start immediately. This is on the order of a brigade, good 5,000 men, supported by ships and aircraft, which can be moved within a week to counter a possible attack. First, they should put off, in the hope that there will be no further.

How credible deterrence may in such outnumbered ever be?

That's a relatively small troupe 5000-7000 man, so much is true. But its essential value is that it represents more than half of all NATO members. So there are around 20 different countries always on site. And just in case, each nation would be affected. But let me emphasize that: No one in NATO wants to wage a war. But we will protect the population. I believe that President Putin knows it. That's why I still sleep well.

NATO has Putin challenged by being moved up to close to the Russian borders?

That, sir, is nonsense. NATO is a values-based defense alliance. It is in principle open to like-minded people. Nations seek its own initiative to take charge. The Alliance itself will not do so on fishing expeditions to get more members into the basket.

Former members of the Warsaw Pact now belong to NATO and are still equipped with Russian military technique. Delivering the Russians still spare parts?

Currently, they do not. I hear you supplied on the open market.

Putin would be willing to use nuclear weapons against NATO troops?

We consider this issue with great concern. The Russians maintain the tactical use of nuclear weapons in the battle for a possible form of warfare.

I think President Putin is a forward-thinker. But also a gambler. That can also be dangerous. You have to make the cost of the use of [nuclear weapons] so high that it seems too expensive to him for him. Since we are on track. But I want to emphasize that neither NATO nor Domröse consider Russia as an enemy. Very well, but as a threat.

*  *  *

Over one and a half years ago we put in perspective the amount of money creation by China compared to the the liquidity injection by the Big 3 "developed world" central banks. The result was stunning.

This was as of November 2013.

Since then both the Chinese money machine, as well as those of the central banks has kept on pumping in injecting liquidity (in the process withdrawing liquidity from markets as Citi's Matt King pointed out three weeks ago). A quick update comparing just China with the US shows that as of the most recent period, Chinese banks now have just shy of $30 trillion in assets, compared to almost 50% less for US banks.



To be sure, China's gargantuan, unprecedented debt-issuance spree is nothing new: we have covered it extensively over the years...

....noting all the way back in 2012 that "If one takes the chart above showing the absolute level in Corporate debt, and assumes this is a valid proxy for total leverage growth across all other sectors, one can say, with a straight face, that if all Chinese debt on and off the books, including shadow leverage, were to be pooled, it would make America's grand consolidated debt (excluding the $100 trillion in entitlements) of 345% appears quite modest."

Three years later, McKinsey agreed:

And here also, three years later, is Goldman admitting that China's "Credit-led growth has created one of the biggest debt build-ups in recent years." This is how Goldman explains what happened in China to launch this massive debt-funded growth:

... after the onset of the global financial crisis and the collapse in world demand, exports collapsed. The Chinese government’s response involved large infrastructure outlays via bank financing. This led to a notable increase in China’s credit intensity, as investment growth is a more credit-intensive than exports and consumption, with heavy borrowing requirements and long payback periods.


This can be seen from the growth in China’s nominal GDP and in total social financing (TSF), which is an aggregation of credit in both the banking and non-banking sectors. As shown in Exhibit 1, nominal GDP fell sharply in 2008, but rebounded strongly in 2009 following the sizeable increase in TSF. We then saw TSF growth slowing in 2010/11, although nominal growth held up as exports rebounded sharply. As export growth fell in 2012 and TSF growth slowed, nominal GDP dipped in 2011/12. We then saw TSF growth reaccelerate in 2012H2 to support growth. Since early 2013, TSF growth has decelerated again, as has nominal growth. This deceleration has continued in 2015, accompanied by additional loosening measures.


Then something changed: China realized that alongside record debt comes record bad debt.


We noted as much in the summer of 2013 when we reported that as China scrambled to intercept the relentless surge in non-performling loans, it would moderate its hollow, debt-funded growth. This was part of the new Politburo's stated directive of reorienting the Chinese economy away from being entirely reliant on debt issuance to depend on more conventional growth catalysts; it also explains why China's growth rate has plunged in the past 2 years and has officially dropped to a level just around 7% ... 

... and unofficially to just above 1%.

China did this almost entirely by choking off the growth of its most opaque funding sector residing within China's "shadow banking" system: trust issuance, non-discounted bills and local government debt. These are the highlights we noted in November in "China's Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade"

[W]hat is the main culprit for the contraction in China's all important credit formation? In two words: shadow banking...  as China finally reveals little by little the true extent of its gargantuan bad debt problem, it is also slamming the breaks on the shadow banking system that for years what the sector where marginal credit creation, and thus growth as well as bad debt formation, was rampant.


If the shadow banking collapse virus has finally jumped to China, there is no saying just how far Chinese GDP can drop if it is now constrained on the top side by surge in bad debt. One thing is certain: Japan's paltry, in the grand scheme of things, expansion in its own QE will barely be felt if the record Chinese credit creation dynamo is indeed slamming shut.

Six months later, others caught on: first it was RBS, whose Andrew Roberts recently said China accounted for 85% of all global growth in 2012, 54% in 2013, and 30% in 2014. This is likely to fall to 24% this year. “If there is only one statistic that you need to know in the world right now, this is it."

In other words, without China's rampant credit creation, without an out of control shadow banking sector, not only is China's growth doomed to a long period "secular stagnation", to use a popular term these days, but so is the entire world.

Goldman agrees:

China’s policy response to the global financial crisis created one of the largest debt buildups as a share of GDP seen anywhere in the world over the past 50 years. Cognizant of the risks of such a large credit buildup, since early 2013 (when the current Chinese leadership took over), we have seen a notable shift by policymakers to make credit provision more transparent and productive. As discussed above, there was a notable rebound in TSF in 2012/2013 as GDP slowed. That TSF growth was, to a large extent, driven by the growth in trust financings, an area we have highlighted as one of the riskiest segments within China’s credit market. To control risks, policymakers made several attempts at curbing the growth in trust financings. In June 2013, 7-day repo rates spiked to as high as 28% intraday, as interbank rates were pushed up in an attempt to reduce the funding to the trust sector; and in mid-2014, the Chinese banking regulator adopted a number of measures, including restrictions on the informal securitisation of certain credit products and reiterating prudent risk management requirements. These measures successfully reduced the growth in trust financings, with net new trust financings (i.e., new issuance less redemptions) hovering around zero over the past ten months (Exhibit 2).


China succeeded in crushing its shadow banking sector, but at the expense of growth:

The administrative measures discussed above have been successful in controlling the riskiest elements within China’s credit markets, as both trust financing and LGFV financings have been contained. However, they have also had the effect of reducing the overall growth of TSF. In our view, these risk control measures have had the impact of not only controlling credit supply, but have also compounded the effect of weak growth in dampening credit demand.

We are confused why Goldman is confused by this: if rampant, out of control credit creation led to a burst of economic growth (built on hollow, non-performing loan foundations), it is only logical that as the flow from the shadow banking conduit is eliminated, so is a major portion of China's GDP.

Sure enough:

Risk control measures and weak credit demand have dampened credit growth since the beginning of 2013, leading to a slowdown in GDP growth. To revive GDP growth, policymakers have undertaken a broad range of monetary easing measures, including lower interest rates, a reduction in the RRR, and other types of liquidity injections into the banking system, such as open market operations.

Here, however, China encounters a unique problem: unlike other central banks who will gladly crush their currency to boost exports and to stimulate corporate profits of multinationals, in China outright currency devaluation has been largely taboo for one main reason: the PBOC is terrified of capital outflows. In fact, as we showed recently when charting the combined Treasury holdings of China and "Belgium", China appears to have been selling USD-denominated paper to fund the tens of billions in recent reserve outflows.

Note: the above capital flight has taken place even as the PBOC has kept the value of the Renminbi roughly flat, and in fact the CNY has appreciated drastically in recent months after declining in the early part of the year. One wonders how this chart would look like, and what would happen to US bond yields, if Chinese outflows accelerated in earnest, and China's selling of US paper followed suit.

And since China is also contemplating whether to join the IMF's Special Drawing Rights basket, which would require a stable currency, China has found it is next to impossible to devalue its way to growth: unlike the BOJ, the PBOC and the Fed in the past 7 years where currency debasement has been the only source of "growth", albeit fading judging by the accelerating plunge in global trade volume (we ultimately believe that China will find it has no other option than to engage in Western-style QE before too late).

But while in addition to currency devaluation QE far more importantly also leads to soaring stock markets, also known as the "wealth effect" transmission channel, China can bypass all the unpleasantness of capital flight and currency devaluation and skip straight to the desert: a massive stock market surge, built on absolutely nothing but hopes of even more central bank interventions: a surge so big in fact China's Shenzhen market is up 100% in 2015. Which is precisely what happened overnight.

But wait, that would mean that for China reflating the stock market bubble, which is far more shallow and penetrated by the domestic population than its comparable in the US or any other western nation, has become a policy mandate, same as in the US and every other western nation.


Goldman explains:

The equity market now plays an important role in terms of both the short-term policy objective (i.e., delivering this year’s growth target) and structural reform ambitions. Policy makers appear to have taken a largely benign view of the equity market rally, which, if sustained, can boost GDP by 0.5pp on our estimates through trading-related financial activities, and could add another 0.2pp or so through a rise in consumption from market wealth generation. We also see further potential benefits from  ‘equitisation’ as it helps to replace debt with equity financing.

Wait a minute: isn't it rising GDP that boosts stocks, not the other way around? Or did Goldman just invent the world's first financial perpetual engine? Does that also mean that should the S&P crash back to its ex-$22 trillion in central bank liquidity fair value of ~400 that US GDP will be some 20, 30 or more percentage points lower (on any seasonally adjusted basis)?

Rational thought aside, what Goldman just confirmed is the following:

  1. China's credit growth in the Lehman aftermath was the dynamo that kept the world afloat from 2009 until 2012/13
  2. Starting in 2013 China realized it has a big problem due to its nearly 300% in debt/GDP, and a soaring bad debt problem which threatens to metastasize into a default domino wave.
  3. In mid-2014, Chinese shadow banking effectively ground to a halt, leading to a sharp contraction in both Chinese and global GDP (this explains the collapse in US Q1 GDP, just don't tell anyone at the Fed which is too busy fabricating seasonal adjustment factor to account for all of the above).
  4. Also in mid-2014 the Chinese relentless stock market rally started, which rose by 50% in 2014 and is up another 50% since then.

In other words, as China's shadow banking bubble burst, China's stock market bubble was given the Politburo's official blessing.

This explains why despite what is quite clearly the world's biggest and most visible asset price bubble since Nasdaq in the year 2000, China will do everything in its power to keep the bubble growing, massive - and pervasive - stock frauds such as Hanergy notwithstanding.

Which is fine, however now the fate of not only millions of Chinese habitual gamblers... 

... but suddenly the fate of China's economic prosperity, and that of the entire world, is in the hands of the Shanghai Composite, which needs to keep growing at about 2-3% each and every day just to keep the illusion of China's growth, and preserve the illusion of global economic expansion.

It also means that now the credibility of each and every single banks will depend on maintaining the world's biggest coordinated stock market blow off top: should the pace of expansion slow down, it would mean loss of faith and confidence in central planning, and thus in the very foundation on which the "recovery" of the past 7 years, both in capital markets and the underlying (or is that overlying) economy rests.

Said otherwise, when the Chinese stock bubble bursts, the shockwave will be heard around the globe, but at least it will unleash even more comedy from America's weathermen-cum-economists, such as triple- and quadruple-seasonally adjusted data. Because even though the answer for the global slowdown is staring everyone in the face...

... one must always fabricate stories to "explain" why the world's biggest experiment in central planning, where now even China is all in, is failing one limit up stock at a time.

Containers holding contaminated water at the crippled Fukushima nuclear power plant are at risk of hydrogen explosions, The Telegraph reports, with 10% of them found to be leaking. The discovery was reported to the Nuclear Regulation Authority (NRA), which raised concerns surrounding the potential hazards of accumulated hydrogen building up in the containers warning that "a spark caused by static electricity could cause a container to explode." TEPCO officials reassuringly note that they "think the possibility of an occurrence of hydrogen explosion from these storage facilities is extremely low, since there is no fire origin, or anything that generates static electricity nearby," but this is the same company that a recent IAEA report blasted for "failing to implement adequate safeguards at Fukushima – despite being aware of the tsunami risk."



Leaking containers at Japan’s embattled Fukushima nuclear power plant are at risk of possible hydrogen explosions, experts have claimed. As The Telegraph reports,

Almost 10 per cent of recently inspected containers holding contaminated water at the nuclear plant in northeast Japan were found to be leaking radioactive water.


The leakages, discovered during inspections by Tokyo Electric Power Co (Tepco), the operators of the plant, were thought to be caused by a build-up of hydrogen and other gases due to radiation contamination.


The discovery was reported to the Nuclear Regulation Authority (NRA), which raised concerns surrounding the potential hazards of accumulated hydrogen building up in the containers.


“If the concentration level is high, a spark caused by static electricity could cause a container to explode,” one NRA official told the Asahi Shimbun.


Tepco officials made the discovery while inspecting 278 of the plant’s 1,307 containers and found that 26 – close to ten per cent - had a leakage or overspill from their lids.


It is believed that gases had accumulated in the sediment at the base of the containers, prompting the volume of the liquid to expand and resulting in the overflow.

However, officials at Tepco stated that the risk of an explosion was believed to be minimal, with a series of measures being undertaken as a matter of urgency to resolve the faulty storage containers.

The operators also emphasised that there was no sign of radioactive water escaping beyond the confines of the concrete structures that encase the leaking containers.


“We think the possibility of an occurrence of hydrogen explosion from these storage facilities is extremely low, since there is no fire origin, or anything that generates static electricity nearby,” Mayumi Yoshida, a spokeswoman for Tepco, told the Telegraph.


Outlining measures to fix the problem, she added: “For temporary measures, we have been removing the leaked water, installing absorption materials, monitoring by patrol, keeping water level inside those facilities lower than set and keeping equipment which may generate fire away.


“In the long term, we’re going to lower the water level of current facilities so as to prevent further leakages.”

But this reassurance rings a little hollow given the recent report finding TEPCO at fault (as RT reports)...

The International Atomic Energy Agency (IAEA) said in a report that TEPCO failed to implement adequate safeguards at Fukushima – despite being aware of the tsunami risk. The document was obtained by Kyodo news agency on Monday.


According to the 240-page report, several analyses carried out between 2007 and 2009 predicted the possibility of an 8.3-magnitude earthquake on the coast of Fukushima, which could result in the plant being hit by a tsunami of around 15 meters.


However, TEPCO and Japanese authorities delayed responding to the predictions, feeling that "further studies and investigations were needed.”


"TEPCO did not take interim compensatory measures in response to these increased estimates of tsunami height, nor did NISA require TEPCO to act promptly on these results," reads the text.


The report, prepared by 180 experts from 42 countries, will be presented at the annual IAEA meeting in September, if approved by its board of directors in June.

*  *  *

Will the truth ever get out?

Submitted by Simon Black via Sovereign Man blog,

Of all the peculiarities about human nature, one of the most interesting in my opinion is that we’re so resistant to change.

Humans simply don’t deal with it well. We tend to root. We find comfort in familiarity.

And, even when the familiar becomes unpleasant, we still put up with it. We prefer to suffer through something that we know rather than change things and risk the unknown.

This is why people stay in bad relationships. Or why they continue working for bosses they dislike at jobs they despise. It’s the fear of change.

But everyone… absolutely everyone… has a breaking point. It’s a point where the status quo becomes so uncomfortable, so painful, that we snap. And walk away.

It’s the same in finance. People stick with what they know, even if they have to endure a little pain and suffering.

Today’s current banking environment is the perfect example. In the US, interest rates for most bank accounts are so low that they fail to keep up with inflation.

You are doing very well if you can generate a whopping 0.5% interest. In Canada rates can be a bit higher.

But when you compare these rates to even the official rates of inflation, it’s clear that savers are guaranteed to lose money.

In Europe it’s even worse. Interest rates at many banks are negative… so savers are actually paying the banks.

In theory there’s nothing wrong with paying your banker, presuming that they’re providing a real service.

Traditionally, banks were no different than a secure storage facility: depositors would pay a fee in exchange for the bank safeguarding their savings.

These days a lot of people might pay 50 bucks a month at a U-Store-It place to store $10,000 worth of junk. So why not pay a small fee for a banker to store $10,000 worth of cash?

The reason is that banks don’t operate like a storage facility.

It’s not like the proprietor of the U-Store-It is loaning out your sofa to make a few bucks on the side. If he were, it would be called fraud, and he’d go to jail for it.

Banks, on the other hand, are actually ENCOURAGED to take your hard earned savings and make a few extra bucks on the side.

In fact they have a history of making often absurd loans and wild, overleveraged bets using your money. Not theirs.

So just consider how insulting this is to actually to pay them interest; paying for the privilege of them gambling with your savings. It’s obscene.

But like I said, we all have a breaking point. And there will reach a level where rates get so low (or negative) that no rational person would continue holding money at a bank.

Why bother? You could just withdraw most of your balance, then pay a small fee for a safety deposit box that you stuff full of cash. Cheaper. Easier. Better.

Cash in your hand might pay 0% interest… but at least it doesn’t cost you.

But there’s a huge problem with this approach: there’s very little physical cash in the system.

According to the Federal Reserve, the amount of physical US currency in circulation is about $1.3 trillion. Yet the amount of “M2” money supply is nearly ten times that amount.

So just imagine if even 10% of people hit their breaking points and withdrew their money in cash– there wouldn’t be enough cash in the system to support this demand. And the banks would subsequently collapse.

If governments have proven anything to us over the last seven years, it is that they will do anything to keep the banks from going down.

This is a major reason why they’re trying to get rid of cash, and in some cases even criminalize it under the ridiculous auspices of the war on terror.

In the US, some of the more prevalent names in finance have started calling for an outright ban of cash, including a prominent economist from Citigroup.

(This is a rather convenient position for Citigroup.)

Greece is another great example– they’ve already implemented a tax on cash withdrawals and wire transfers. And further restrictions will inevitably follow.

These measures are all different forms of capital controls, designed to prevent you from taking your money away from such a destructive system.

In fact, I expect the next round of capital controls will be designed to protect the banks… from you.

When a government is bankrupt, the central bank is nearly insolvent, the banking system is illiquid, and an entire population suffers from interest rates that are either negative or below the rate of inflation, capital controls are a foregone conclusion.

They’ll hit just as soon as enough people reach their breaking points… when they say ‘enough is enough’ and they take their money out of the banking system.

Governments have done it before: they’ll declare a ‘bank holiday’ and then impose some sort of freeze on withdrawals. Just like we saw in Cyprus in 2013. Or the US in 1933.

The data and history are very clear on what will likely happen. We just can’t pinpoint the date.

Very few people will guess correctly and withdraw their cash the day before capital controls are imposed.

That’s why it makes sense to take certain steps now.

Consider holding some physical cash, including some healthier currencies like the Swiss franc or Singapore dollar, as well as precious metals.

More importantly, consider moving a portion of your savings to a rainy day fund at a well-capitalized bank overseas in a jurisdiction that isn’t bankrupt.

After all, it’s hard to imagine that you’ll be worse off for having some savings at a strong, healthy bank that actually pays a reasonable rate of return.

Last week we brought you the US government’s official message to heavily-indebted students.

In short, the Department of Education is promoting so-called “Income Based Repayment” which allows borrowers to make monthly payments based on their disposable income. In the event a borrower cannot afford to service his or her debt — which is exceedingly likely in an economy characterized by what Moody’s calls “high unemployment rates for recent graduates” — some debtors will be allowed to count payments of $0 towards the 300 “eligible payments” necessary to have the balance of their debt forgiven. In other words, if you don’t make enough money and are willing to wait 25 years, your student loans will be written off at the expense of the US taxpayer. 

So that’s one option available to 2015’s graduating college seniors who, as we reported earlier this month, are the most indebted college class in the history of US higher education. There are other options available as well including (gasp), repaying your loan in full and on time, but as the following graphic from the government shows, offloading some of the burden is always a possibility:

Do you have student loans? Calculate what your monthly payments will be: http://t.co/5y2HRfqkfl pic.twitter.com/3AMLzjzmy9

— Federal Student Aid (@FAFSA) May 24, 2015

See the fine print on the graphic shown above. This repayment schedule assumes a "family of 1" in Alabama and a loan balance of $26,900.

The first thing to note about those assumptions is that when it comes to rentals, Alabama ranks fairly low on the list in terms of how expensive it is to pay rent and as we've seen, America is increasingly a nation of renters.

Second, the average amount of student debt for a senior graduating in 2015 is more than $35,000, some 30% above the amount factored into the government's equation shown above. 

So if you happen to live in a state where housing is far more affordable than it is in most other states and if your loan balance happens to be 30% below the national average, you can pay off your student debt under an IBR plan in only 240 months with a cost to the US taxpayer of only $2,355. 

Now let's look at what the cost to the US taxpayer under IBR would be if you lived in say, Illinois (which is by no means the most expensive place to rent in America) and had a family of three including two parents, each of which carrying the average loan balance of $35,000 and whose combined earnings match the national median household income of $51,000 (in other words, a far more realistic scenario than the hypothetical single guy in Alabama):

Suddenly the cost to taxpayers over the life of the loans jumps by 650% when the assumptions are adjusted to reflect the 'American dream' of a nuclear family, a more realistic figure for the cost of housing, and the actual national average for graduate debt. 

Consider that, and consider that if the unemployment rate edges up over the coming years, the US will be looking at some $3.3 trillion in student loans.

Draw your own conclusions.

Its Merger Monday again on this holiday adjusted Tuesday. So the announcement of another humungous debt-fueled M&A deal is right on schedule. This time it involves the utterly pointless combination of two giant, quasi-monopoly cable companies—–Time-Warner Cable (TWC) and Charter (CHTR)—– that are already on their homeward journey to Joseph Schumpeter’s Walhalla of creative destruction. But not before da boyz in the casino have one last…

Submitted by Martin Armstrong via ArmstrongEconomics.com,


I have been warning for some time that government was eyeing up pensions.The amount in private pension funds is about $19.4 trillion. The question that has been debated in secret behind the curtain is how to justify to the people taking that over. I have been warning that if this is seized by government, it will come after 2015.75. Just how that is to be accomplished was finally settled by the Supreme Court without any justification constitutionally.

The US Supreme Court ruled last week in the unanimous, 8-page decision in Tibble v. Edison holding that employers have a duty to protect workers in their 401(k) plans from mutual funds that are too expensive or perform poorly. That is simply astonishing since there is no constitutional requirement for even government to provide social benefits. The Supreme court held in HARRIS v. McRAE, 448 U.S. 297 (1980) it was explained that the constitution is negative not positive. There is no duty imposed upon the state to provide a program for that would convert the constitution from a negative restrain upon government to a positive obligation to provide for everyone.

If we take the fact that the constitution is NEGATIVE and was a restrain upon government, then this latest ruling is completely unfounded. Monday’s unanimous ruling sends a warning to employers that they now must improve their plans and it is now an obligation to project employees. This comes just in time for then the next step is government to seize private funds and prosecute employers who choose badly a fund manager. This fits perfectly just in time for the Obama administration’s next assault as they prepare a landmark change of its own by issuing rules requiring that financial advisers put the interest of customers ahead of their own. This creates a very gray area wide enough to justify public seizure of pension funds under management.

This ruling will have a dramatic impact upon investment management and we have already received calls asking about using our model for management purposes since it has one of the longest track records that can be verified in the industry. What this ruling imposes is a tremendous duty upon the plan fiduciary who must now back up his decision with proof. This may also have the impact of foreclosing new fund managers from entering the business since they will lack the track record.

Yet this decision is even deeper. It sets the stage to JUSTIFY government seizure of private pension funds to protect pensioners. When the economy turns down and things get messy, they are placing measures in place to eliminate money in and physical dimension, closing all tax loopholes, shutting down the world economy with FATCA, and preparing for the final straw of Economic Totalitarianism with the Supreme Court reversing its entire construction of the Constitution to impose a duty upon employers to ensure the 401K plans perform in a world where interest rates are going negative. You really cannot make up this level of insanity.

The message here is not that all 401(k)s are bad or too expensive. In fact, costs have fallen 30 percent over the past decade as more plan sponsors turn to low-cost passive investing options. But this can be highly dangerous for to lower costs they turn to government debt where there is no need for fund management decisions. Yes, when I did hedge fund management, the cost was 5% annually plus 20% performance. That cost went to staff around the world that had to monitor positions and the world economy on a 24 hours basis. You paid also NOT to trade for most losses took place when traders were bored are would trade to try to make money when there was nothing to be done. Our track record was the best ever in the industry with the lowest drawn down perhaps in fund management. But that risk reduction cost money.

Today, costs vary widely. Plans with more than $100 million in assets usually have total annual costs below 1% whereas the biggest plans usually are below 0.50%. In small plans, the costs can be as high as 2% today. The focus is now on cost – not performance.

Financial service companies can charge a range of management, administrative, marketing, distribution and record-keeping fees for 401(k) plans. Plan sponsors can assume the costs, but employees are paying at least 85% of all fees typically. It is true that most workers do not know they pay the bulk of the share of costs. A 2011 AARP survey found that 71% of retirement savers do not think they pay any investment fees at all. It is true that the fees make a huge difference in returns over time. However, this drive to lower costs has also lowered the quality of funds management.

The U.S. Department of Labor estimates that a 1% point difference on a current account balance of $25,000 will reduce total accumulations by 28% over 35 years, assuming average returns of 7% and no further contributions. The focus is all on these management fees without any consideration of the problem. Trying to manage money varies according to the size of the fund. The more you gather, often the lower the performance because the markets are not unlimited. You can pick up the phone and say “sell at the market” when you have a $100 million fund, you cannot do that with a $100 billion fund. So the management fee was also a means to reduce the number of clients and it was never a question of unlimited capacity to trade. The numbers on performance would decline with greater amounts of money under management for the manager lost flexibility.

The Supreme Court case clearly shows that lack of understanding of the industry yet the battle centered on the 401(k) plan’s use of retail-class mutual funds when less-expensive institutional shares were available. The difference between those classes typically is 25 basis points. This will now  put pressure on large plans to cut costs further but will not have much impact on smaller plans. That is because big plans have the buying power to negotiate better deals but at the same time they are the easy target for lawyers making them much more attractive targets for litigation.

Cutting management fees to the bone may in fact set the stage for massive losses for many of the older better traders are now just resigning. The quality of the funds management is more likely than not going to decline noticeably.

Between the court ruling and the Obama administration’s push for stronger fiduciary rules send a strong message that government can much easier seize the pension fund management industry of course to “protect the consumer”.

In an unprecedented move against a government agency, which we are just waiting to hear blamed on Russia, The IRS has admitted that its data has ben compromised...



As AP reports,

Thieves used an online service provided by the IRS to gain access to information from more than 100,000 taxpayers, the agency said Tuesday.


The information included tax returns and other tax information on file with the IRS.


The IRS said the thieves accessed a system called "Get Transcript." In order to access the information, the thieves cleared a security screen that required knowledge about the taxpayer, including Social Security number, date of birth, tax filing status and street address.


"The IRS notes this issue does not involve its main computer system that handles tax filing submission; that system remains secure," the agency said in a statement.


The IRS said thieves targeted the system from February to mid-May. The service has been temporarily shut down.


"In all, about 200,000 attempts were made from questionable email domains, with more than 100,000 of those attempts successfully clearing authentication hurdles," the agency said. "During this filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts."


Tax returns can include a host of personal information that can help someone steal an identity, including Social Security numbers and birthdates of dependents and spouses. However, the IRS said the thieves appeared to already have a lot of personal information about the victims.


The IRS said it is notifying taxpayers whose information was accessed.

* * *
One wonders if they found Lois Lerner's emails while they were in there?




Today will be 2nd or 3rd most active day in May for eMini's.. $ES_F That's high for day after Memorial Day Weekend

— Eric Scott Hunsader (@nanexllc) May 26, 2015



Can you spot the selloff day by looking at the lower pane?


Charts: Bloomberg

“Things always become obvious after the fact” – Nassim Nicholas Taleb “Facts do not cease to exist because they are ignored.”  – Aldous Huxley The S&P 500 currently stands at 2,126, fractionally below its all-time high. It is now 300% above the 2009 low and 34% above the 2008 and 2001 previous highs. Most people…

Jubilant Chinese investors did not help as good news is terrible news it would seem... despite Stan Fischer's confidence-inspiring message that "just the tip" of interest rate hikes won't hurt... *FISCHER IS RIGHT; MARKETS OVER FOCUS ON 1ST HIKE, EL-ERIAN SAYS


After an 'odd' day yesterday with BTFDing machines rescuing stocks, US equity markets reopening saw some selling overnight and then a deluge during the day session... (weak data early and 1230ET Fischer)



Since Friday, the cash indices are all notably red... Trannies NOT off their lows...


The Dow traded back below its 50DMA (18,010) briefly...


And Trannies "Death Crossed"


Today was the biggest VIX (percentage) jump in 2015...


US equities roundtripped from the May 14th melt-up pre-OPEX spike...


And has almost erased all its May gains...


Trannies are a disaster year-to-date still...


Away from the stock market vol, there was turmoil everywhere else...

Treasury yields plunged...


The Dollar surged... now up 6 of the last 7 days...


This is the best 7-day run in the dollar since Lehman...


And Commodities cratered...


Led by Crude Carnage-ing back to one-month lows...


Charts: Bloomberg

Bonus Chart: Apple On Fire (literally)

Because "normal people" just do not think like this...



And bad news is good news...


h/t @RudyHavenstein

Check out the full recap of this week's ...

Full story available on Benzinga.com

Earlier this month, Lone Star state residents breathed a heavy sigh of relief after Chuck Norris promised that in the event a US Spec Ops training exercise inexplicably morphs into a second (and thereby completely redundant) annexation of Texas, Walker Texas Ranger will personally defend the state against a Navy SEAL incursion. 

As a reminder, the government is set to conduct a series of training exercises in several Western states including Texas beginning on July 15. The operation, dubbed “Jade Helm 15”, has sparked quite a spirited debate, especially among Texans, some of whom believe the drills are a prelude to martial law. Suspicions have by no means been confined to conspiracy theorists with the Governor himself calling on the Texas Guard to monitor the operation, a move which at least one former Texas Republican lawmaker has called “embarrassing.” Indeed, even former Governor Rick Perry has now weighed in, noting that even though he questions the government “on a regular basis”, a Texas invasion likely isn’t in the cards: 

“I think it’s OK to question your government — I do it on a pretty regular basis. The military's something else. You know, I think our military is quite trustworthy. Civilian leadership – you can always question that, but not the men and women in uniform.”

Nevertheless, some Texans still aren’t buying it including Chuck Norris who, while conceding that Washington may not be planning an imminent Texas invasion, still contends that the government is likely up to something: 

Here’s Norris, with more:

Speaking of government overreach and security, I must clarify a note regarding my column on Jade Helm 15 a few weeks ago, which went viral and was misquoted by some in the mainstream media. I never ever said that that seven-state U.S. military operation intended to take over Texas, as some implied like ABC News, which reported, “Even actor Chuck Norris jumping in the fray.” However, I did in fact mention that Jade Helm 15 is likely more than a military exercise. I do believe, in addition to the largest domestic military training, it is also a display of power (near the southern border) intended for deterrence of enemies like ISIS and other terrorists, who the FBI have already said are present in all 50 states.


Finally, let me also reiterate on this Memorial Day weekend something most Americans already know about me: I am a patriot in every sense of the term and a staunch super-supporter of those who serve our country in all four branches of our U.S. military. My comments about Jade Helm 15 are directed at its Washington leaders, not our courageous men and women in uniform.

That’s all fair enough, but we would note that “misquoting” someone who writes a blog post is quite difficult and can only occur in the event of a copy and paste error which we’re quite sure we did not make when we quoted Norris as saying the following earlier this month:

I’m glad Texas Sen. Ted Cruz is asking the tough questions of the Pentagon about Jade Helm 15, particularly because its “exercises” come too near to my ranch’s backdoor as well, at least according to the map. It’s pretty sad and bad when major military ops are ordered in a large, fiery state like Texas and not even the governor or its senators know the specifics.


It’s neither over-reactionary nor conspiratorial to call into question or ask for transparency about Jade Helm 15 or any other government activity. To those who merely think we should check our brains at the door of the White House and trust what the government does, I would reiterate to you the words of one of our government’s primary founders, Benjamin Franklin, who said, “Distrust and caution are the parents of security.” Again, he also said, “Security without liberty is called prison.” But then again, I’m sure some today would accuse Franklin of being conspiratorial, too!

Then again, if there's anyone who can legitimately claim to have been misquoted on something he himself wrote it's Chuck Norris, and in the end it doesn't matter because the overall message is the same: "Don't mess with Texas."

And I will reiterate again that the White House and the Pentagon could have easily avoided any controversy about Jade Helm 15 if its primary Washington leaders would have called for a confidential informative meeting with the respected governors of the seven states in which it is being held this summer. They also would have been very wise not to place on Jade Helm’s official operation map that Texas and Utah were “hostile states.” When will they learn? Don’t mess with Texas!

As part of the US shale miracle, a far less pleasant, and talked about side-effect are the millions of gallons of wastewater: that key component of the new drilling technology that allows previously inaccessible deposits to be extracted. And, as increasingly more states are finding out, the problem isn’t pumping the water out, but finding a place to put it, no places more so than Oklahoma.

To be sure, Oklahoma benefited hugely from the shale revolution: the state’s oil production has doubled in the past five years. And now, as the Piper has finally come to collect his due, the ground is literally shaking under the feet of Oklahoma's residents as the aftermath of the fracking "boom" has unleashed an unprecedented series of earthquakes.

The reason: instead of disposing wastewater in some regulated manner, in Oklahoma it gets injected back underground. And as wastewater disposal rates have doubled, seismic activity has exploded across Oklahoma. After averaging 1.6 earthquakes per year of magnitude 3.0 or higher, the state experienced 64 in 2011, including its largest in recorded history—a 5.7-magnitude temblor on Nov. 6, 2011, centered in Prague, 50 miles east of Oklahoma City, that buckled a highway, destroyed 14 homes, and injured two people.

Last year, Bloomberg reports, the number soared to 585 quakes, making Oklahoma the most seismically active state in the continental U.S.; it’s on pace for 900 quakes in 2015 a number one would expect from a place such as Japan, located on a continental fault line or even California (whose San Andreas faultline is about to make another B-grade movie appearance) and certainly not in America's heartland. Swarms of quakes have rattled other states with oil and gas operations, including Arkansas, Colorado, Kansas, New Mexico, Ohio, and Texas.

Here are the facts: between 1974 and 2009 there were 62 magnitude 3.0 or stronger earthquakes in Oklahoma. In the past five years there have been 1,070 M3.0+ quakes. Since 2013, there have been more quakes in Oklahoma each year than in California. The chart of Oklahoma's quake surge correlates perfectly with the amount of wastewater injected into the state.

As noted here previously, seismologists who study the phenomenon of man-made quakes - which they call “induced seismicity”- ascribe them to the massive amounts of oil and gas wastewater being injected deep underground near fault lines. Over time, geologists say, the disposal water changes underground pore pressures, in essence lubricating the fissures between tectonic plates and causing them to slip. “Wastewater injection,” says Bill Ellsworth, a seismologist at the U.S. Geological Survey, “is undoubtedly responsible for the majority of these earthquakes.” On April 21, the state-run Oklahoma Geological Survey (OGS) issued a statement declaring that the oil and gas industry is “very likely” contributing to the huge rise in earthquakes in Oklahoma.



When it comes to Oklahoma's "induced seismicity" there is nobody more responsible for either Oklahoma's "shale miracle" or the resultant earthquake epidemic than David Chernicky, CEO of Tulsa-based New Dominion.

This is his story, as recounted by Bloomberg:

By the late 1960s the Oklahoma City oil field was largely spent. As crude was sucked out, it gradually flooded with vast amounts of salt water, the remnants of an ancient ocean that once covered the Midwest. The pockets of oil and gas that remained in the reservoir were trapped deep inside rocks. The only way to get at them was to “dewater” the field—which meant pumping out hundreds of millions of barrels of salty, often toxic wastewater, then disposing of it.


David Chernicky saw an opportunity. A trained geologist turned wildcatter, he’s devoted most of his 35 years in the oilpatch to perfecting the business of reviving oil fields instead of exploring for new ones. “I try to pick the ugly girl at the dance,” he says. Chernicky spent years studying the Oklahoma City field, poring through stacks of geological studies and surveys, some of which went back 65 or 70 years. He figured it still held about 50 million recoverable barrels of oil. “That 2-foot-thick file of data on Oklahoma City says there’s a ton of oil still there, but you have to think outside the box to get it,” he says.


... In 2003 New Dominion, began work on a new breed of injection well, a type that could take down tens of millions of barrels a year and bury it deep underground. Chernicky, who has a bawdy streak, named the first one Deep Throat.

Behold: Deep Throat.

According to Bloomberg, few companies have more at stake than New Dominion. "A July 2014 study published in Science found that four high-volume disposal wells owned by New Dominion on the outskirts of Oklahoma City may have accounted for 20 percent of all seismic activity in the central U.S. from 2008 to 2013. Two victims of the 5.7 quake from 2011 have sued New Dominion for damages; the state Supreme Court has agreed to hear the case of Sandra Ladra, a 64-year-old resident of Prague, who sued after her stone chimney crumbled during the quake, sending rocks crashing down on her legs. Should the court establish a precedent where New Dominion and companies like it can be held liable for earthquake damage, the fallout could be severe. “If wastewater wells come under heavy fire from lawsuits and regulations, it could change the entire economics of the oil industry in this state,” says Kim Hatfield, chairman of the regulatory committee at the Oklahoma Independent Petroleum Association.

Perhaps instead of competing with US shale on the global marketplace in a race who can cut prices the most and stay in business, the Saudis should be more interested in sponsoring Ladra's legal case against New Dominion:because as Steve Everley of Energy In Depth, an industry-backed research group, says, “If you shut down [wastewater] disposal, you’re effectively shutting down production."

You also kill the US shale miracle without selling a single barrel of oil below cost.

That, or just bribe Chernicky to admit his process will lead to ever stronger and more destructive erathquakes. For now, however, the legendary wildcatter is sticking to his guns.

The fourth of 10 children, Chernicky learned to work hard early. His father, Thomas, was a first-generation American whose parents emigrated from Ukraine. After serving in World War II, Thomas worked at Tinker Air Force Base near Oklahoma City, helping retrofit B-52s. The Chernicky children didn’t get any allowance and were all expected to earn their own keep. “Dave was probably the most industrious of the kids,” says his older brother Wayne. “Of all the 10 kids, Dave saw the opportunities to make money the earliest.” David took on four or five paper routes. When he turned 14, he realized he could make $1.10 an hour at McDonald’s, where he’d sometimes work more than 80 hours per week.


After a stint in the Air Force, Chernicky earned a degree in exploration geophysics from the University of Oklahoma. He went to work in Wyoming and the Rocky Mountains for Marathon Oil and Amoco before striking out on his own as an independent petroleum geologist. He quickly gained a reputation for his unconventional methods of finding oil. “I’ve never found an appreciable drop of oil through textbook geology,” he says. When oil prices tanked in the mid-1980s, things got tight. “At that time, working at McDonald’s probably paid better than being a self-employed geologist in Oklahoma,” says Wayne. To get by, David drove a truck for Wayne’s office supply business in Tulsa. “I’ve seen him come through good times and bad times,” says Wayne. “Each time, I see him come out stronger.”


By the mid-1990s, Chernicky had established himself as a technical master of dewatering, putting his consulting company, Chernico Exploration, in high demand. His first big success was dewatering an old oil field called the Red Fork, lowering large, submersible pumps into the wells to suck out massive quantities of water. The more water that was drained, the more oil and gas seeped out of the sandstone. A successfully dewatered field quickly shrinks the ratio of water to oil. In one of its earliest wells, New Dominion initially pulled up 160 barrels of water for each barrel of oil. Over 16 months, that improved to 7.5 to 1. “It was a very smart idea,” says Kurt Rottmann, a petroleum geologist who has worked on Oklahoma oil fields for four decades. “David Chernicky recognized the potential of this very early on.”


Chernicky, however, was growing impatient with consulting and watching other companies botch his handiwork. Dewatering was a precise science, and he felt he could make it work better by controlling every facet of the operation. “Oil companies kept f---ing up my oil fields, so I figured I was ready to try it on my own,” he says. He started New Dominion with two other partners in 1998. By the early 2000s the company was operating more than 100 wells, producing a total of 4,000 to 5,000 barrels of oil a day, plus millions of cubic feet of gas.

And so Chernicky started the trend of reinjecting wastewater right back into the ground from which oil was pumped, replacing one natural resource, oil, with the potential of a natural disaster, earthquake.

This is hardly new: Dan Boyd, a petroleum geologist at the OGS, was well aware of previous instances where injecting fluid deep underground caused earthquakes. In 1961 the U.S. Army drilled a 12,000-foot disposal well in the Rocky Mountains to get rid of millions of gallons of toxic waste from napalm production and other sources. Shortly after injection began, quakes began rattling the nearby Denver area, including a 5.3-magnitude temblor in 1967. A year after injection stopped, the seismic activity faded. Boyd believed the wastewater pouring out of Chernicky’s disposal wells might trigger similar activity in Oklahoma. “I’d never seen a well that could put away as much water as Deep Throat,” he says.

He was right:

On the night of Dec. 20, 2006, Boyd’s fears were realized. A few minutes after 8 p.m., residents on the southeast edge of Oklahoma City heard a loud boom, followed by a sharp jolt that shook people’s houses. Four hours later, just after midnight, it happened again. Calls flooded into police and fire emergency lines. The initial fear was that something had happened at nearby Tinker Air Force Base—an explosion, an attack—but by the next morning, scientists at the OGS determined the area had been struck by two earthquakes. “It was an epiphany,” says Boyd.


In January 2007, New Dominion opened a second disposal well near Oklahoma City called Sweetheart. A month later, a small swarm of quakes struck nearby. In March, Boyd and three other scientists at the OGS drove to Tulsa for a four-hour meeting with New Dominion. The meeting was hosted by Steve Chernicky, New Dominion’s director of field operations and David’s brother. David also showed up, Boyd recalls, wearing a golf shirt and Bermuda shorts. He placed three or four mobile phones in front of him on the conference room table and excused himself from the meeting each time one rang. While nobody accused New Dominion of causing the earthquakes, there was a “tacit understanding that the well had something to do with this,” says Boyd. “Everybody in the room was thinking about earthquakes. The correlation was obvious.”

But, just like Wall Street's now confirmed criminal banks, Chernicky covered up the potentially disastrous aftermath of his actions in the future by generously bribing the people here and now. Or, as it is known in financial parlance, lobbying.

As Chernicky looked for other dewatering opportunities, he found a lot of rundown communities whose oil had run out decades earlier and needed some help. In Carney, he gave $10,000 to finish a high school. In Prague, he donated $1 million for a city water expansion project and $50,000 to help build a new library. In January 2006, after a busy wildfire season, he donated $15,000 to local fire departments. He also started throwing an annual party in Prague called New Dominion Dayz to raise scholarship money for local students. Kids played on inflatable bouncing slides. Riding lawn mowers were given out as raffle prizes. A highlight was Chernicky in the dunk tank. In news articles, Prague’s city manager called Chernicky the “T. Boone Pickens of Prague.”


Chernicky’s largesse has helped to deflect attention from the role New Dominion may be playing in the crescendo of earthquakes across Oklahoma. The record 5.7 quake that hit Prague in November 2011 was the second of a trio that rumbled through over a four-day period, all measuring 5 or higher on the Richter scale. An air-conditioning duct fell through the ceiling of the Prague library Chernicky had helped build. Library Director Pam Batson got some cracks in her home, though she says she’s grateful for the donations from companies such as New Dominion. “It’s sort of like a double-edged sword,” she says

And so, as long as the bribes, pardon handouts, keep flowing (as does the oil) everyone can stick their head in the sand to what is painfully obvious. Sure enough, "for the moment, there’s little political pressure on Oklahoma’s oil and gas industry to change the way it operates. Republican Governor Mary Fallin has long claimed there isn’t enough information to determine what’s causing the quakes. She describes the OGS’s new position statement as “significant.” But when asked if the governor agrees that the industry is likely responsible for the quakes, her spokesman, Alex Weintz, didn’t respond."

Local politicians know that doing the right thing means putting their own career in jeopardy as it may lead to thousands of layoffs, not to mention an end to the bribers, pardon, lobbying:

At the Statehouse, the only two lawmakers willing to talk openly about the issue are Democrat Cory Williams and Republican Jason Murphey, who represent districts that have been shaken by quakes. Last fall they teamed up on a bill to study the quakes in greater depth, but so far nothing’s come of it. “It’s ridiculous,” says Williams, who’s pushing a moratorium on wastewater injection in 16 Oklahoma counties. “The oil industry threatens us by saying if you touch seismicity issues we’ll start laying down rigs and laying people off. This is the problem of having industry so intertwined with government. We know what’s causing it, and we are doing absolutely nothing to stop it and barely anything to regulate it.”

That may soon change however, thanks to an unexpected outside influence: the Saudi's pounce on US shale as the global "marginal" producer, which in turn is crushing the price of oil, and making shale increasingly unprofitable.

These are challenging days for New Dominion. Dewatering is among the most expensive ways to produce oil, and with crude trading at around $50 a barrel, down from $100 last summer, New Dominion’s fields likely aren’t as profitable as they once were. “This is the first time in over 20 years that I haven’t had a single drilling rig working for me,” Chernicky says. The company won’t hold its New Dominion Dayz festival this year. In January, Chernicky sued several former business partners, alleging they unduly paid themselves millions in bonuses before the partnership unraveled, a claim the former business partners dispute.

Of course, the price of oil may fall and it may rise, and if it rises enough New Dominion will be right back in the business of injecting millions of gallons of wastewater right into the same ground from whence the oil came, in the process leading to ever more and ever stronger earthquakes.

For now, however, New Dominion is adamant: "it's not our fault."

At New Dominion headquarters, the company promotes its own theories for the astronomic rise in Oklahoma quakes. Jean Antonides, the company’s craggy-faced vice president for exploration, produces a 2-inch-thick cardboard folder stuffed with maps, presentations, and papers—evidence, he says, that the quakes are the result of rapid changes in water levels of underground aquifers caused by drought and heavy rain.


Chernicky, for his part, dismisses the research linking earthquakes to wastewater disposal wells. “The meager amount of science put forward is so flawed, it can’t even be considered science,” he says. “It is emotion.” He contends that the Oklahoma quakes are “the result of tectonic activity happening all over the world.” In a year or two, he predicts, the flurry of quakes bedeviling Oklahoma will migrate north into the seismically sleepy states of Iowa and Nebraska, vindicating the oil industry. The vast majority of earthquake scientists disagree. “Pure b.s.,” says Martin Chapman, a geophysics professor at Virginia Tech University. “They just don’t want to admit they’re causing earthquakes.”


Chernicky is unswayed. He insists nature’s on his side. If humans can cause an earthquake, then they “can probably fart and shift the orbit of the planet, too.” He adds: “Man does not cause tsunamis in Japan. Man did not cause the volcanic blast at Krakatoa. And man does not cause earthquakes.”

And, as long as everyone - from bribed politicians, to poor citizens demanding the company's "largesse", to bankers funding New Dominion any time's its cash drops dangerously low - is aligned with the company and its business model, nothing will halt the trend of increasingly more frequent and stronger quakes shaking Oklahoma. Until, just like on Wall Street, one day the "big one" - the one that nobody could have possibly predicted - strikes and the sequel to the San Andreas movie is filmed among the ruins where the city of Tulsa once stood.

Submitted by Christoph Gisiger via Finanz und Wirtschaft,

Charles Biderman, founder of the research firm TrimTabs spots a warning sign in the drop of the commodity prices and mistrusts the paper money of the centrals banks.

In every market supply and demand are determining the price. Charles Biderman uses this simple logic as the foundation for his investment philosophy. The outspoken founder of the research firm TrimTabs is convinced that stock prices are a function of liquidity—the amount of shares available to buy and the amount of money available to buy them—rather than fundamental value. Therefore, he carefully tracks the announced actions of companies. In his view they are among the biggest players in the stock market and the driving force behind today’s bull market. For now, Biderman thinks that this trend will push stock prices even higher. For the medium term though, he cautions that the financial markets are poised for a severe crash. He spots the first signs of a global recession in the drop of the commodity prices and warns of the moment when people don’t trust the paper money of the central banks anymore.

*  *  *

Mr. Biderman, once again the economy is not doing well. Nevertheless, the stock market in the United States seems to be in record setting mood. What’s behind the rally?

What’s present in the stock market in the moment are companies, their transactions, buyers and sellers of stock. That’s all what happens in the market. So if you count the number of shares available and how much money is available you might get a sense of what’s going to happen. Since 2011, the amount of shares in the market has been declining every year. Even though individuals are taking money out of the market, companies have spent around $1.6 Trillion in cash on takeovers and stock buybacks.

And what does that mean for stock prices?

The efficient-market hypothesis states that all information about the market is already reflected in today’s share prices. Therefore, the only way you can invest successfully is to broadly diversify at very low cost. But one important fact is being overlooked: In every market the house has an edge or else the market wouldn’t exist. In the stock market the house is the public companies which have an undeclared edge. Top insiders at a firm know more about its fundamentals than the general public, and these insiders can influence the price of their employer’s shares by timing equity issuance and stock buybacks to their advantage. So what we have discovered quantitatively is that when companies, in aggregate or individually, are reducing their share count and there is more money chasing fewer shares, prices must go up.

Is that the only indicator you pay attention to? What about standard instruments for valuing stocks like the P/E ratio? Don’t they matter in your view?

Most fundamental investment approaches, such as the discounted cash flow method, attempt to calculate a company’s intrinsic value. That may work when you compare two companies with each other. But it’s irrelevant for the market as a whole, since earnings have never predicted future market prices for the market as a whole. Therefore, instead of guessing about intrinsic value, I contend that in the short term the prices of stocks, like the prices of other tradable goods, are set by the underlying conditions of supply and demand. And that’s what we track. The fact that the P/E ratio might be high or low is more a function of supply and demand than a determining indicator on its own.

Thus fundamentals aren’t important at all?

Some people say in the long term it’s all about earnings. But in the long term we’re all dead. So even if you’re right you could go broke by the time the long term happens.

So when should investors be careful?

During the few times when the supply of shares was greater than demand the market usually went down. But there was an exception in 2009 when all the money form the government started going into the market. So despite that companies were huge sellers of stock and the supply of stocks rose, prices went up. I had a very bad year in 2009 because I didn’t see that the first time ever in the history of the markets the government made the difference. I was among the first to say publicly on TV that the Federal Reserve was the reason the market was going up. But at that time it was shrugged off as conspiracy theory.

Today, investors are obsessed with monetary policy. How do you cope with that?

Historically, the money in the market has come from income. But today, companies are not growing very fast and we’ve had low income growth since 2011. However, the market has tripled. The only reason for that is that companies are taking excess cash which is earning zero interest and reducing share count instead of spending it to build capacity for future demand growth. So it could keep going like that for another few years. That’s why in the short term I’m bullish.

But what will happen if the Federal Reserve is going to raise interest rates later this year?

Everybody looks at what the Fed says, what the ECB says, and what the IMF says. But if you go back the last four years they’ve said over and over that the economy is going to be growing sustainably soon. They say that year in year out. Also, all the economists have said they expect interest rates to raise because the economy is going to be growing. And they’ve all been wrong. But nobody ever points to that. As long as the stock market keeps going up it doesn’t matter that they’re wrong.

When do you think the Fed will raise interest rates?

Based upon the current economic data they’re not going to raise interest rates anytime soon. They might decide to raise rates just to see what happens. But if the Fed is data dependent, as Chair Yellen says, I can’t see them raising rates anytime soon.

On the other hand, Fed chief Yellen affirmed that she still expects to raise interest rates this year.

Our macroeconomic indicators basically suggest that growth has been flat for the last six months, sequentially. So I just don’t see where the growth would come from. For instance, autos are one of the sectors doing best in the US economy. But the growth there is coming from the amount of junk auto loans that have been issued. They’re leveraging up auto buyers. And you know what’s going to happen. We saw that movie before with the subprime crisis in the housing market. And then there is a $100 Billion. of additional student loans every year which people are living on. There’s no way that those loans are going to be repaid.

At least, the labor market seem to be doing better. Since the beginning of 2014 there are 240,000 new jobs every month on average.

But that’s the only good number. So instead of questioning all the other numbers why don’t we question that number?  It’s a bad number and you have to understand where it comes from: The government surveys around 160,000 employers including all government agencies and a lot of big business. They claim that they also track smaller companies. But in reality that’s very difficult. So they get maybe a 100,000 responses and that’s just a survey of a small minority of all the millions of employers in the United States. What’s amazing to me is that everybody reports that number as a fact and nobody looks at how they come up with it. Every other number is bad. But no one seems to care.

So how bad does it really look like?

I think a global recession is inevitable. How do you know we’re going into a global recession? The first sign is a collapse in commodity prices. The initial drop in interest rates and China deciding that they want to build millions of homes that no one is going to live in have created a pickup in economic activity. And because there was a pickup in demand oil prices went over $100 a barrel and iron ore and all kinds of commodities went up in price. Subsequently, the supply of all commodities grew because it didn’t cost anything to build new plants, new mines or new oil wells. But now that demand doesn’t grow we have excess capacity.

What are the ramifications of that?

Right now, we’re living in a make believe world. Debt can’t be the main source of growth. Without a pick-up in final demand a lot of bad debts are out there. As long as you have excess capacity in the commodity production you have bad loans throughout the system. That means you have governments who can’t repay their debt without selling new loans and all their bad loans are funded by the central banks. For example, if you look at all the money that Chinese banks have invested in real estate, there’s no way that they are going to be repaid. China is bankrupt.

But after all, in Europe things are starting to look somewhat better, since the ECB launched its stimulus program.

Sure, we have a little bit of activity in Europe. But where would Europe be if it wasn’t for lower oil prices and the lower Euro? You just can’t devalue your way to prosperity.

Is there no way out of this dilemma?

Almost all governments are bankrupt. Supposedly, with the economic contraction we had you would think the world would deleverage. But there’s a lot more debt globally now than even at the peak of 2007. In the United States for example, the present value of all future liabilities is something like $70 Trillion. if you add up all the future payments to Medicare, Medicaid, Social security and government pensions. That’s more than the net worth of the United States. So there’s no way that money can get repaid. You would need something like  10% growth in income every year. And that’s just not going to happen. That’s why we are going to have a bad time when we realize that the emperor is naked: All the money that the central banks have created is worth nothing.

When do you think that’s going to happen?

Nobody knows until afterwards. And then, of course, after it happens everybody will know why it should have happened. But it’s all hindsight. As long as the number of shares keeps declining, stock prices are going to go up and nobody cares. That’s why I’m saying in the short term I’m bullish even though in the long term there has to be a major correction.

*  *  *

"We got hammered," Houston's emergency management coordinator Rick Flanagan told CNN, and as the following stunning images show, that is an understatement. "We've seen flooding before, but not nearly to this extreme," said one resident, adding "It rains and it rains and it rains, and there's really nowhere for the water to go... It's ridiculous." Perhaps even more stunningly, as Mashable's Andrew Freeman notes, the floods have been a remarkable turn of events for a region that was still mired in drought as of three weeks ago. That drought, which had affected Texas since 2010, is now effectively over in most areas, as is a long-running drought in Oklahoma. Authorities are still searching for 12 members of two families who went missing over the weekend.

As Reuters reports,

Texas Governor Greg Abbott on Monday described the flash flooding that had killed at least three people in his state as "a relentless wall of water that mowed down huge trees like they were grass."


Abbott declared states of disaster in 24 counties and flew over the area south of Austin to assess the damage caused by tornadoes, heavy rainfall, thunderstorms and flooding that forced evacuations and rooftop rescues and left thousands of residents without electrical power.


"This is the biggest flood this area of Texas has ever seen," Abbott said.


"It is absolutely massive - the relentless tsunami-type power of this wave of water," the governor said.


He described homes that were "completely wiped off the map" by the dangerous weather system that struck Texas and Oklahoma.


Widespread severe thunderstorms were forecast to continue on Monday in north-central and northeast Texas and southern Oklahoma, likely bringing destructive winds, tornadoes and hail, the National Weather Service said.

*  *  *


530 AM: Here's a look at where some of the heaviest rain fell overnight for Southeast TX: #txwx #houwx #bcswx pic.twitter.com/r6TMJuaDRu

— NWSHouston (@NWSHouston) May 26, 2015



As the following images from Mashable show, they did indeed "Get hammered."


Memorial Drive in Houston is flooded after storms flooded the area, Tuesday, May 26, 2015. Overnight heavy rains caused flooding closing some portions of major highways in the Houston area.

Image: Cody Duty/Houston Chronicle/Associated Press


People look at flooding in Houston, Texas.



People look at the rising waters in Houston, Texas from atop a building.



Motorists are stranded along I-45 along North Main in Houston after storms flooded the area.

Image: Cody Duty/Houston Chronicle


A little girl looks at a flooded car downtown in Houston, Texas.



Cars remain stranded along a flooded section of Interstate 45 after heavy rains overnight in Houston.

Image: David J. Phillip/Associated Press


Robert Briscoe checks the damage to his flooded car along Interstate 45 in Houston.

Image: David J. Phillip/Associated Press


Flooding in downtown Houston, Texas climbs toward a highway's overpass.



People on an overpass look down at the vehicles left stranded on a flooded Interstate 45 in Houston,.

Image: Aaron M. Sprecher/AFP/Getty Images


A car sits in flooded waters in Houston, Texas.



The streets of Houston were flooded during the early hours of Tuesday, May 26.



Stranded motorists wait for floodwaters to recede on Interstate 45 after heavy rains overnight in Houston.

Image: David J. Phillip/Associated Press


A vehicle left stranded on a flooded Interstate 45 in Houston, Texas.

Image: Aaron M. Sprecher/AFP/Getty Images


A tree branch floats down a flooded road in Houston.

*  *  *

Finally this seemed to sum it all up nicely...

It's like a scene from a post apocalyptic Mad Maxx Beyond The Thunderdome. #houstonflood #KHOU pic.twitter.com/xT5EVL1cTz

— Shern-Min Chow (@ShernMinKHOU) May 26, 2015


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