ITALY, HYPERINFLATION AND GOLD

The ECB (European Central Bank) just had its 20th birthday. But there is really nothing to celebrate. The EU is in a total mess and the Euro which was launched on January 1, 1999 is a failed currency. Every President of the ECB has had to deal with fires that had very little to do with price stability but were more a question of survival. Most of these fires were a lot more serious than the candles in the Euro cake on the left which Draghi is trying to blow out. During the French ECB Trichet's watch, he had even bigger fire to blow out which was the Great Financial Crisis that started in 2006.

ECB €4 TRILLION PRINTED – OUTSIDE MANDATE

The only mandate of the ECB is to maintain price stability. Well that clearly has been a very costly exercise. Between 2006 and 2011 the ECB balance sheet trebled form €1 trillion to €3 trillion. But the crisis didn't finish in 2011. After a brief reduction in debt, the balance sheet expanded fast from €2.3 trillion in 2014 to €4 trillion today. It is quite remarkable to watch the creation of a supranational bank which automatically creates a purpose for its own existence in the form of massive money printing. This is no better than burning money and serves no purpose whatsoever. And it is of course far distant from its purpose of price stability.

Money printing creates high inflation and eventually hyperinflation. The only reason why we haven't seen high conventional inflation in the EU is that all the printed money, just like in the US, has stayed with the banks. The result has been low inflation in consumer products but huge asset inflation. Thus, we have seen massive increases in stock, bond and property prices but not in consumer prices. So major money creation by the ECB and the Eurozone banks have so far had only minor inflationary impact. But as the velocity of money increases so will inflation. This moment is not far away. The same will happen in the US. As velocity of money accelerates US inflation will pick up rapidly.

ITALY ON THE ROAD TO PERDITION

The EU now has major economic and/or political problems in many countries. Italy's new coalition government is a protest against the EU and Euro. With debt to GDP already the highest in Europe, the new regime will exacerbate the problems. Lower taxes and higher spending will guarantee that. As the chart below shows, Italian debt to GDP is already 140%. By 2050 this is projected to grow to 210%. As interest rates go up, servicing the growing debt will soon absorb all tax revenue. Italy will be bankrupt long before 2050 and default on all its debt.

Between now and 2050, the Italian working age population is forecast to decline by 1/3 form 36 million to 24 million. There will be a lot less people to pay for a much higher debt.

The consequences of massive debt, economic stagnation and population decline will be a much lower GDP which is expected to go down by 35% by 2050.

If the above forecast of a major fall in the population and GDP as well as a substantial increase in debt is even vaguely accurate, Italy is on its way to the Dark Ages.

ITALY – A GLORIOUS COUNTRY THAT DESERVES A BETTER DESTINY

I must stress here that I find it so sad that this glorious country is suffering so much already and will suffer a lot more. Personally I love Italy, the people, the food, the architecture, the history and the Giola di Vivere (joie de vivre) of the Italians. It will be so tragic to see all of this disintegrate. Hopefully it will take a long time although sadly the crisis might actually be around the corner.

ITALY IS NOT ALONE

But Italy is just one of many countries which will collapse in coming years. Spain is in a similar situation and the prime minister has just been kicked out. Greece's problems have never been resolved and this fine country is sadly also bankrupt and so are the Greek banks. I could go on with Portugal, France, Ireland, the UK and many others. Most of these countries have insoluble problems. It is only a matter of degree and time when the EU/Eurozone house of cards comes down. The map below shows potential leaving countries and names.

SWITCH TO EURO HAS CONCEALED MAJOR INFLATION

Coming back to the ECB's main objective of price stability, that has failed totally too. The change from the local currencies of mark, franc, lira, pesetas etc has disguised what has really happened. Many countries like, Spain, Italy Portugal and Greece used to be very inexpensive when they had their own currency. That is no longer the case. The change to the Euro has hidden the real inflation that has taken place in these countries. No wonder the Germans called it the TEURO. Teuer in German means expensive.

ONE CURRENCY DOES NOT FIT ALL

The consequence of one currency fits all is a disaster for the weaker Eurozone countries like Italy, Greece, Spain, Portugal etc. The Euro is much too strong for these countries. This leads to weak exports as well as balance of payment and budget deficits. Countries like Germany on the other hand, benefit from a weak Euro which generates strong exports and surpluses. But the other side of the coin is that the ECB which means mainly Germany must finance the deficits of the weaker countries. And we all know that these debts will never be repaid. So whatever way you turn, the EU experiment will end in disaster. It is only a matter of how long it will take.

CURRENCY DEBASEMENT – CONTAGION WILL SPREAD FAST

If Italy, Greece or Spain had their own currencies, these would have weakened substantially already. Currency debasement is going to be the major contagious disease that the world must live with in coming years. It will happen to most currencies in the world and spread like wildfire. Like many diseases it normally starts in the periphery. Just take the examples of Turkey, Argentina and Venezuela. The currencies of these three countries have collapsed in this century and the fall is now accelerating.

The Turkish lira has lost 97% against gold since January 2000 and the fall is now picking up speed. For anyone who has been protected in gold, the gold price has gone up 38x vs the lira in the last 18 years. (See chart below)

The problem is worse in Argentina. Argentina used to have a very strong economy 100 years ago but lately they have gone through one crisis after the next. The Argentine Peso has lost 99% against gold since 2000. This means that gold is up 119x vs the peso in this century.

Finally let us look at the perfect example of a disastrously managed socialist economy with the resulting hyperinflation. I am talking about Venezuela of course. The Venezuelan Bolivar has lost 99.999% against gold since January 2000. So the Bolivar is down 550,000x against gold in this century.

HYPERINFLATION

This all might sound unreal. These three currencies have lost between 97% and 99.999% in just 18 years. Well, it certainly isn't unreal to the people in the three countries who have to suffer these precipitous losses in the value of their money and disastrous falls in their standard of living.

And don't think for one second that their governments told them to protect themselves even when they knew they were going to print unlimited amounts. No, the people had no warning. It is the same in all Western countries today. Governments in Europe, the US and Japan, to mention a few, are already on the way to destroy their currencies in the 2000s. As the table shows, the Euro is down 75%, the Dollar 78% and the Yen 75% against gold since 2000.

So inflation, leading to hyperinflation is already on the way in the West. It always starts slowly, although the fall so far in the last 18 years is already significant. We will see it in the EU, we will see it in the US and we will see it in Japan.

ON THE ROAD TO HYPERINFLATION

But no government talks about how they are destroying their currency and no Western government tells their people to protect themselves by holding gold. They do the opposite. They manipulate the price of gold and see gold as a barbarous relic that has no place in a modern currency system. We know why they do this of course. Because gold can't be printed or debased. Also, the gold price reveals their deceitful actions in ruining the currency and the economy.

THE EAST BUYS THE TOTAL ANNUAL GOLD MINE PRODUCTION

Finally let's look at two countries which understand gold and where the people buy and hold gold in important quantities.

As the above chart shows, China and India have bought almost 25,000 tonnes since 2008. This means that on average they have annually bought the majority of the annual gold mine production, together with Russia and Turkey

DEBASEMENT OF WESTERN CURRENCIES WILL LEAD TO HYPERINFLATION

So my advice to investors is to learn from the recent economic problems/disasters in Turkey, Argentina and Venezuela. Any amount of personal gold, even very small, would have saved the holders in these countries from misery. It is also now critical to heed the strong warning signs of deep trouble coming in Europe, Japan and the USA. A 75-79% fall in the currencies of these countries is telling us that they will all go to their intrinsic value of ZERO in the next few years. This will lead eventually to the same hyperinflation as in Argentina and Venezuela.

And even more importantly:

IGNORE THE PROPAGANDA FROM WESTERN GOVERNMENTS AND BANKS WHO DON'T UNDERSTAND HISTORY OR GOLD. INSTEAD FOLLOW THE LEAD OF CHINA AND INDIA AND PROTECT YOURSELVES AGAINST THE COMING DESTRUCTION OF PAPER MONEY, WITH PHYSICAL GOLD AND SOME SILVER.

OPEC Warns Of Slowing Oil Demand Amid Growing Risks To Global Economy

Amid fears of global oil supply disruption and production curbs, in its latest monthly report, OPEC expects global oil supplies to remain stable, while cautioning that demand is becoming a growing concern.

In the latest report, OPEC said that preliminary data suggested that the global oil supply increased 490,000 barrels a day to average 98.9 mb/d in August, compared with the previous month.

OPEC projects that in 2018, non-OPEC oil supply will grow by 2.02 mmb/d despite making a downward revision of 64,000 b/d from its last report. In 2019, non-OPEC oil supply is expected to grow by another 2.15 mb/d, an upward revision of 17,000 b/d. Meanwhile, OPEC's supply is also rising.

According to secondary sources total crude oil production by OPEC members averaged 32.56 mb/d in August, an increase of 278,000 b/d over the previous month. As shown in the table below, oil output increased mostly in Libya, Iraq and Nigeria, while production declined in Iran, which is due to be hit with sanctions on its oil industry from November onwards, Venezuela, which is experiencing economic and political upheavals depressing production, and Algeria.

Meanwhile, oil production by OPEC's leader Saudi Arabia rose by 38kb/d to 10.4 million barrels daily, ticking up every months since May, when it and Russia signalled that they could increase output to fill any supply shortages due to incoming U.S. sanctions on Iran's oil industry.

One curious divergence: according to secondary sources, Iran's oil supply production fell by 150,000 barrels a day from July to August to around 3.5 mb/d. But according to Iran's own reporting, production was stable and unchanged production figures for the last three months, however, of 3.8 mb/d.

But while OPEC sees supply as stable, some clouds emerged on the demands side, where OPEC expects that in 2018 global oil demand is expected to grow by 1.62 million barrels a day, a minor downward revision from last month's projection.

"World oil demand growth in 2018 was revised downward by around 20,000 b/d, primarily as a result of the slower-than-expected performance by non-OECD Latin America and the Middle East during the second quarter of 2018" OPEC said. "Hence, world oil demand growth is now pegged at 1.62 mb/d for 2018, with total global consumption at 98.82 mb/d."

OPEC revised world oil demand growth lower for 2019 as well.

"In 2019, world oil demand growth was revised slightly lower by 20,000 from the previous month's report, primarily as a result of economic revisions to Latin America and the Middle East. World oil demand growth is now anticipated at 1.41 mb/d and total global consumption at around 100.23 mb/d."

What is becoming a growing demand-side concern to the oil market are fears that punitive U.S. tariffs on Chinese imports could weaken demand the country's demand for oil. Looking at the global oil trade, OPEC noted that while China's crude oil imports dropped in July by 70,000 barrels a day from the previous month to average 8.62 mb/d, based on an annual comparison, China's crude imports were still higher by 420,000 b/d in August, or 5 percent higher from a year ago.

As a result, demand for oil from the 15-member producing group OPEC is expected to fall the rest of 2018 and into 2019, OPEC said. In 2018, demand for OPEC crude is expected at 32.9 million barrels a day (mb/d), which is 500,000 barrels a day lower than in the previous year, the organization said.

OPEC forecasts that demand for its crude at 32.1 mb/d in 2019, around 900,000 b/d lower than a year earlier. Yet, as CNBC notes, total world oil demand in 2019 is now projected to surpass 100 mb/d for the first time and reach 100.23 mb/d.

THE MISSING $21 TRILLION What Was It’s Source?

     Independent reviews of financial records for two departments of the U. S. government have reported finding $21 trillion for which neither the source nor the use of the funds can be identified. How can this be true, when $21 trillion far exceeds the entire budgets of both departments, which are the Department of Defense (DOD) and the Department of Housing and Urban Development (HUD)? The shocking answer is that it can be and is true, and implications for American self-government prove the necessity of revolutionary reform. 

How $21 Trillion Spending Was Found

     In February, 2018, The Solari Report published a paper by Dr. Terrence Leveck stating that, in 1999, DOD made an "undocumentable adjustment" of its financial records eight times the size of the DOD budget for that year, and one third greater than the total federal budget. By 2015, the DOD adjustments for the Army alone had increased to $6.5 trillion. Catherine Austin Fitts' own investigation found about $19 trillion in DOD and HUD spending combined for which adequate documentation was unavailable. This persuaded Dr. Mark Skidmore of Michigan State University to do his own examination of DOD and HUD records; he and his graduate assistants found $21 trillion in spending that could not pass an audit.

     This horrendous gap in financial accounting is not explained by sloppy bookkeeping, accounting ineptitude or operational complexity. The amount of spending left undocumented far exceeds all congressional appropriations to DOD and HUD for the periods involved. Clearly activities of this size and importance were entirely capable of being documented as to sources and uses of funds. The unmistakable implications are that those doing the spending deliberately chose to hide the spending from the public, and probably from Congress, too.

     But a general answer seems to be apparent for at least the source, if not the specific uses, of the unexplained $21 trillion. The answer is to be found partly in Project Insignia, discussed in a report by Classical Capital recently published here. 

The Source of Funds

     The Project Insignia data dump informed us that rogue, criminal elements within U. S. intelligence and military agencies gained possession of very valuable assets during and after World War II. The illicit parties organized to use these assets to finance criminal enterprises worldwide, particularly including production and trafficking of illegal drugs, humans, weapons and similar highly profitable ventures. Their activities evidently produced revenue streams which made federal taxes and fees look like pennies for paupers by comparison.

     The undocumented spending found in DOD and HUD indicates those inside these government agencies wanted in on the action of spending the stupendous amounts of rogue/criminal (now called Deep State) financing. Likewise, the Deep State operatives were pleased to have more power and influence within the halls of established institutions of government.

     This answers the fundamental question: Where did DOD and HUD get the $21 trillion spent for purposes unstated, when Congress did not appropriate the funds? Clearly the source of funds must have been the Five Star Trust or a similar cut-out organization formed by the Deep State to conduct such unlawful financial transactions. In the context of financial balances of the enormous size revealed by Project Insignia, $21 trillion in extra, off-the-record financing for DOD and HUD would be comparable to Depression-era bootlegger Al Capone peeling a few bills off a big roll that is then returned to his pocket.

Return To Constitutional Government

      The dilemma to be faced is this. Major institutions and officials of the U. S. government have departed very significantly from tenets of American constitutional government by which citizens of this nation are to have their rights and opinions respected. Crimes committed to steal and to accumulate the gargantuan sums presently managed by the Deep State have greatly injured the health, prosperity and well-being of Americans and others the world over – all without the knowledge or approval of legitimate American voters. 

      This must be stopped and rectified at the earliest possible time. No doubt these objectives are better known to President Trump, to those who found and revealed the Project Insignia data, and to many anonymous volunteers who work daily to understand and advance all aspects of the Plan to save the world often mentioned by Qanon. God bless them and us in our common purposes.

Did The ECB Just Say "Watch The U.S. Midterms"?

There was a very important story reported on Bloomberg this morning. And a distressing one, from a trading point of view. It suggested the likelihood that the ECB's economic forecasts have been downgraded and the new projections will be announced after Thursday's rate-setting meeting. It's a most interesting development. Not because it will upset expectations for the outcome of the meeting. Other than to perhaps dampen the excitement of those that have been warning us to buckle up because we could be in for a hawkish surprise. What intrigued me was the utterly muted reaction to the news. And this in a world where markets often overreact to spurious headlines and comments.

To be fair, there was some movement in the euro and bunds, but you would be hard pressed to notice it if you weren't watching the minute-by-minute charts. What struck me is that European equities didn't seem to take much joy from the news nor, more tellingly, did the dollar.

And this on a day when consumer confidence in Australia fell out of bed and no one is saying it's stronger than it looks. Not to mention that Chinese and South Korean numbers were noticeable misses sending the Shanghai Composite and the Hang Seng to new lows on the year.

Emerging market currencies seem to be the prime beneficiaries, but I can't help but wonder if this wasn't on a change in any European rate expectations but the fact that the dollar may not be the all-powerful king we've been making it out to be.

Everyone, including myself, has been factoring dollar strength into our ideas. It has been running roughshod over everything else. Right? Yet, even with today's meager range, we have seen these prices in the dollar index every day since the end of August. More significantly, the same can be said of the more inclusive Bloomberg Dollar Index.

The summer is over and it should be back to school for everyone, including capital markets. But I rarely talk to anyone outside the U.S. without being asked what is going on in America? And it's never broached with mere idle curiosity. It's more like a different spin on fear and greed.

Markets are global animals, even though we too often think otherwise. Everyone, and I mean everyone, outside the U.S., is consumed with interest in the midterm elections. I have this morbid fear, that, rightly or wrongly, we could sit very close to these levels until we find out the results. It also makes me convinced that to think the outcome won't potentially have profound effects on where we go between then and the end of the year would be a mistake.

I'd hate to think we will have to wait until then to see the volatility spike that could make things interesting.

Dow & Yields testing multi-decade breakout levels

This chart looks at the Dow Jones Industrials Average and the Yield on the 10-year note on a monthly basis for several decades.

The top chart looks at the Dow since 1927 and the bottom chart looks at yields since 1994.

The Dow has spent the majority of the past 65-years inside of rising channel (1) while yields have spent the majority of the past 18-years inside of falling channel (2).

The Dow and Yields are both testing breakout levels at the same time at each (3).

The last two times each faced channel breakouts at the same time was 2000 and 2007 at each (A), where each happened to peak.

Just Saying; Both are testing key breakout levels at the same time!!! Should breakouts take place, a strong bullish message to stocks and bearish for bonds!

Think That Governments Won’t Default? Think Again

The Congressional Budget Office (CBO) just reported that the U.S. budget deficit is widening in a 'big way'.

And what's even worse – last month the net interest on public debt jumped 25% compared to last August. . .

I wrote last January about the soaring cost of interest that the U.S. Treasury's paying on its outstanding debts (you can skim that here). And it looks like things keep getting out of control – especially as the Federal Reserve continues raising rates (which further increases borrowing costs).

Besides this very expensive 'interest' problem – the CBO reported that the U.S. budget deficit widened to its fifth highest ever.

And as Trump's tax cuts continue taking away from Federal revenue, while government spending – including interest payments – keeps growing, we need to ask ourselves some important questions. . .

The next time the U.S. slides into a recession – will they be able to continue borrowing such enormous amounts while maintaining their interest payments? Will they follow the same route that the Emerging Markets are headed today?

We see many talking heads on CNBC and other mainstream financial media tell us that there's virtually no risk of the U.S. defaulting. Same thing with any other major country.

Even worse, there's a growing point of view preaching to the masses that aslong as country has a central bank, they can issue all the debt they need without risk of default.

Why would anybody think that?

Because – for instance – if the U.S. didn't have enough cash flow (tax revenue) to pay creditors (buyers of U.S. bonds). And if they weren't able to borrow anymore to roll over debt – the Fed would simply print U.S. dollars instead.

The Fed then will transfer the printed money to the Treasury – and they will use that to pay back their debts.

So, looking at it this way – no country with a sovereign currency and central bank could default since they can always print money to pay their creditors.

Sounds nice right?

The problem – for starters – is it doesn't hold up historically. . .

David Beer at the Bank of Canada shows us that between 1960 to 2016, there have been 27 countries that have had local currency defaults.

As David Beer's writes: "A long-held view by some investors is that governments rarely default on local or domestic currency sovereign debt. After all, they say, governments can service these obligations by printing money, which in turn can reduce the real burden of debt through inflation and dramatically so in cases like Germany in the 1923 and Yugoslavia in 1993-94. Of course, it's true that high inflation can be a form of de facto default on local currency debt. Still, contractual defaults and restructurings occur and are more common than is often supposed."

Hundreds of Billions of investor capital is lost when these nations default. And the trickle-down effects of this greatly damage the economy.

Today we see many fragile Emerging Markets – like Argentina and Turkey and Ukraine – nearing default. And their answer has been to print money.

But even if the central bank begins monetizing their debts – a fancy way of saying printing money to pay for borrowing – it will cause serious inflation (which is currently plaguing those countries).

As David Beers wrote – this type of printing-to-repay is a form of de' facto default.

Once the creditors get the printed money back, it will be worth much less – if not completely worthless.

And – again – historically this has happened much more often than the mainstream lets on.

Daniel Lacalle – PhD economist and author – wrote via The Mises Institute (the top Austrian Economic hub) that there's been 152 currencies that have failed because of inflation.

"There are 152 fiat currencies that have failed due to excess inflation. Their average lifespan was 24.6 years and the median lifespan was 7 years. In fact, 82 of these currencies lasted less than a decade. And 15 of them lasted less than 1 year." – Daniel Lacalle

This is important to review. Not because I think the U.S. is headed for a default anytime soon. But at what point does the camel's back break?

We're already watching the Emerging Markets near default – and it will eventually spill over onto the Developed Markets shores.

An example I use is the Chinese bamboo tree. . .

Once you plant the bamboo seeds, nothing will sprout for the first five years. Most will forget it's even there. Then suddenly – at the beginning of the sixth year – a small sprout will pop out of the ground. And within just the next five-to-six weeks, that sprout will grow over 90 feet in height.

This type of time asymmetry (slow build up – fast finish) is an example of 'Critical Mass'. . .

Now think of this concept in terms of companies – remember Long Term Capital management (LTCM)? What about Lehman Brothers Bank? Even most recently Toys R' Us?

They all had slow build ups where everything was fine for years – even many decades. They were able to borrow and roll-over existing debts. Until suddenly – within a short period of time – they couldn't and quickly imploded.

The point I'm stressing here is that when a nation does default, it happens after a very slow build up – and then falls apart fast – especially when many don't expect it.

After reading the new book by Ray Dalio – head of Bridgewater Capital – I've become further convinced at how unsustainable things are. The over indulgence of debt during the low interest rate years post-2008 is now becoming dangerous. Especially as the Central Banks – led by the Fed – continue to raise rates and tighten. 

It's just a matter of time until defaults again make headlines. 

"Not Grounded In Reality": BlackRock Angry At Alarm Over ETF Induced Market Fragility

The threat of concentrated ETF holdings in single name stocks is hardly new. Back in April 2017, One River CIO Eric Peters warned about the dangers lying in wait for capital markets in a world dominated by passive investing.

Each day since the election $1bln has moved from active to passive management. When you buy the S&P 500, you pay the prevailing price for every one of those stocks. There is no such thing as price discovery in index investing. And there will be no price discovery on the downside either. The stocks that have been blindly bought on the way up will be blindly sold. When these markets do finally have a correction there will be no bid for many of these stocks.  

I don't know when the next major crisis will hit, no one does. But I do know that even in the next normal correction, the market's losses will be amplified enormously by this move away from active management. $500bln has shifted to index investments, distorting the way equities are valued and the historical relationship between short sellers and buyers. This flow creates artificial demand for poor-quality securities that have few natural buyers. And now even Warren Buffett is telling investors to shift to passive.

Shortly thereafter, Horseman Global's Russell Clark pitched a new bear thesis: go short all the names that have an disproportionately heavy ETF ownership. Citing the transition from active to passive as a catalyst that makes markets even more inefficient, Clark repeated a lament made by many short sellers, stating that there "are complaints from some quarters about it being harder to short sell as flows of money push up stocks."

But it was the downside that he was focused on:

The long bull market in passive investment has made them wilfully blind to the liquidity risk that they are running. Passive investments are concentrated in the US market...

Since then many more pundits joined the chorus of warnings against ETFs, and the danger their "blind flows" pose to stocks, if not on the upside then certainly on the way down. And yet, so far it has been largely so good, with only an occasional hiccup in what has otherwise been an increasingly ETF dominated marketplace.

So fast forward to today, when SocGen became the latest to ring the alarm bells on the perils associated with ETF investing and warn on the brewing liquidity risks... provoking a sharp rebuke from the world's largest asset - and ETF - manager.

One week ago, SocGen analyst Sebastien Lemaire stress-tested the fragility of 16,000 stocks, and concluded that small caps, dividend shares and gold miners are all especially vulnerable in market drop as a result of outsized ownership among passive/ETF investors. In turn, those positions could prove more difficult, and certainly costly, to exit. Furthermore, given the BOJ's massive purchases - which now owns nearly 80% of all Japanese ETF holdings, the Nikkei 225 Index is also especially fragile to a reversal of the constant passive buying.

"Crowdedness exists but is limited to a few stocks and strategies," Lemaire warned, and while his warning wasn't nearly as dire as that of Warren Buffett or Howard Marks, both of whom have similarly cautioned about the liquidity shortage that ETFs have inspired, SocGen did caution that small caps would be whipsawed by this dynamic - since the same stocks in the sector make an appearance in multiple indexes tracked by ETFs, according to the report.

And, as Bloomberg noted, the conclusion provides more ammo for regulators and ETF detractors on Wall Street, who charge the post-crisis flood of passive money has led to an investing-herd mentality and even more crowding risk (something hedge funds felt acutely in July when Facebook tumbled).

That's probably also why the world's largest issuer of ETFs - BlackRock - felt compelled to respond, dismissing the warnings.

"This research is underpinned by two assumptions that don't reflect the historic behavior of investors or ETFs," the firm said in an emailed statement.

"To assume that all investors behave the same way in times of market stress is not grounded in reality. Additionally, we have repeatedly seen ETF volumes grow dramatically during times of stress as investors utilize them as a tool for price discovery."

Actually, it is somewhat safe to say that as traditional, carbon-based traders have been replaced by algos and computers, most investors behave in precisely the same way. It also explains why for the past decade virtually every single dip has been collectively bought, as there is no longer any adverse response to behaving just as the herd has behaved on so many prior occasions.

Meanwhile, SocGen's theory is that a tumbling market, secondary liquidity in the ETF would likely evaporate, forcing traders to shift to the primary venue, with the liquidity of assets underlying the passive instrument subject to increased selling pressure. This is precisely what happened in August 2015 when ETFs traded with massive disconnects to the underlying during a marketwide cross-asset decoupling, allowing many quick traders to arb the divergence and make substantial profits. 

Furthermore, as Bloomberg notes, "weighting dynamics also increase crowding risks in dividend equities, with a clutch of gauges boosting exposures to shares with modest market capitalizations given their high yields." That, in turn, has led to heavy holdings by ETFs of stocks like Tanger Factory Outlet Centers Inc. and Meredith Corp. Gold miners stocks are also at risk, due to their large ownership by the likes of VanEck. The ownership creep eventually led the VanEck Vectors Junior Gold Miners ETF, to change its index last year after ownership stakes in some companies rose above 10 percent.

It wasn't all bad news: according to the French bank, a whopping 90% of global equities are not subject to heightened risk of a liquidity squeeze because they're owned 10% or less by ETFs.

Meanwhile, recent market volatility suggests that the "tipping point" for ETF risk has not yet been hit, after passive funds passed what Bloomberg calls the year's stress test:

BlackRock points to action in its iShares MSCI Turkey ETF, ticker TUR, last month when the country's assets were roiled by increasing tensions with the U.S. The ETF's underlying index plummeted 16 percent on Aug. 10, but trading in the fund remained orderly, with no discernible impact on the underlying shares.

"TUR saw its highest amount of daily trading volume ever, with 13.3 million shares exchanging hands that day, compared to its previous average daily volume of 500K shares," according to the statement.

Which is good news for retail investors - the biggest users of ETFs - but the observation merely indicates that the pain threshold of ETFs has not yet been hit, the way it was in August 2015.

At the same time, regulators continue to warn of liquidity challenges spurred by the ETF revolution. The latest was the European Systemic Risk Board. In a report this month, it warned that market stress could "create first-mover advantages if, for instance, primary markets offer stale prices, while the underlying markets are turning illiquid."

The result? The report concluded that "Investors may expect there to be greater liquidity than that available during times of stress." We are confident that BlackRock would dispute that as well, and retail investors will be happy to believe it, at least until all the ETF liquidity warnings come are validated once again.

Economic Contagion? Central Banks Are The Real Culprit

The mainstream news has been awash lately in talk over the danger of economic "contagion," primarily due to lack of dollar liquidity in emerging markets. This lack of liquidity is being pegged as a trigger for instability in stocks, bonds and forex markets around the world, and this time around it is the nation of Turkey that is being called a potential trigger for a fiscal domino effect spreading through multiple countries.

We have heard talk of "contagion" before. Not long ago, Italy's political shift toward a supposedly populist government led to fears of debt contagion within the European Union; this is still a valid concern, just not for the reasons the mainstream financial media usually presents.

The issue of contagion must be examined through a different set of parameters besides those shoved in our faces by the financial media. In their world, everything is a matter of unpredictable cause and effect; everything is random and coincidental. Everything is chaos waiting to happen, and when crisis does strike, all can be blamed on a set of unrelated but interconnected scapegoats.

They will claim it was the "populists," conservatives, conservative philosophy or the notion of national sovereignty. Or they will blame it on even more abstract concepts of "human greed" and "individual selfishness."

These excuses for unstable systems and disasters stem from a propaganda ploy developed by DARPA called "Linchpin Theory." It is the widely promoted idea that human systems collapse "naturally" when they become "too complex," and all it takes to start this collapse in motion is a single well placed "linchpin" pulled at the right moment. In other words, DARPA wants you to believe that there is no such thing as organized conspiracy and that all disasters are caused by chance.

Of course, the linchpin idea and the notion that overcomplexity is to blame for all the world's ills helps globalists greatly. For if human systems need to be streamlined or "simplified", what better way to do this than to get rid of sovereign nation states, governments and economies and centralize everything down into a one world economy, a one world government, a new world order?

What linchpin theory ignores is the careful strategic planning required to position all the geopolitical dominoes in a perfect chain so that they can be knocked over by that one person, country or event.

Human systems actually tend to lean toward redundancy when we are left to build these systems ourselves — meaning, humans prefer to decentralize to a point. We do not like having ALL decisions bottlenecked through a single dictatorship. We do not like having all our resources controlled by a single source. We do not like having all trade and commerce and communication dominated by monopolies. We do not like our safety determined by a single watchman. We often end up rebelling against centralization because it is actually centralization that breeds weakness in systems, not complexity, which gives us checks and balances.

The protection of complexity is created through decentralization.

When we look at the true causes of numerous economic and political crises around the world, we usually find globalists and their agent institutions right at the center. Foremost of these institutions are central banks.

In the past, people was warned of several trends which would likely lead to economic instability. One of these trends was the possible breakup of NATO starting with Turkey. Turkey's leadership under Recep Erdogen has been increasingly erratic and violent, most notably after the highly suspicious and likely fake military coup attempt in 2016. The coup gave Erdogen a perfect rationale for his consolidation of power, all while his political opponents could be systematically rounded up and imprisoned.

The "thwarted coup" narrative has been popular lately. First in Turkey and then in Saudi Arabia under Mohammad Bin Salman — two nations that are quickly plunging into even more aggressive dictatorship and that are vital to the United States strategically and economically. Over the past two years, both countries have become more distant as allies. Saudi Arabia has consistently discussed moving away from its arrangements to continue holding U.S. treasury debt and using the dollar as the petro-currency. Turkey has consistently discussed breaking from NATO and ending its arrangement to allow U.S. military assets to stage within its borders.

Another narrative that has been popular lately has been the idea that the global trade war will be the cause of all our economic displacement for years to come. The trade war is a perfect distraction, providing the chaos fuel necessary to allow central banks to pull the plug on economic support and then blame the resulting crisis on various random "linchpins." This is exactly what they have been doing.

In terms of stock markets, I think it has now been clearly established that the Federal Reserve's balance sheet cuts and interest rate hikes are the main cause (if not the only cause) of stock rallies and declines. Almost every major decline in equities takes place within 7-10 days after the Fed dumps assets from its balance sheet. One can study the Fed's progressive cuts over the year on their own website and compare them to the moves in the Dow or S&P.

In July, for example, I told my readers to expect a recovery in stocks due to the Fed freezing balance sheet cuts during that month. The Fed held the balance sheet steady for most of July, only cutting a mere $12 billion at the end of the month.  As a result stocks rallied.  In August, the Fed has already cut over $20 billion and will probably cut more in the next two weeks, which would indicate an aggressive fall in stocks this month into September. The Fed controls when and how stock markets crash… at least for now.

This correlation and obvious causation are rarely if ever mentioned in the mainstream. Instead, we get talk of "contagion" caused by Turkey and the trade war.

The Fed's balance sheet cuts do not only cause havoc in stock markets. Emerging market economies have grown increasingly dependent on the flow of cheap dollars and financial assets precipitated by the Fed's stimulus measures over the past decade. If you were wondering where most of that bailout money and quantitative easing money were going over the years and you did not study the audit of TARP, then you might be surprised to find out that trillions in no interest overnight loans were going to foreign banks and corporations rather than U.S. banks. This included emerging market nations.

Countries like China, India, Brazil and even Turkey all used easy cash flow from central banks like the Fed to prop up their bond markets, and manipulate their currencies as well as their equities. India, for example, openly complained about the Fed's move to raise interest rates and cut the balance sheet, warning that it would cause instability in global markets dependent on dollar circulation.

The Fed's unwind of QE is hitting emerging markets first and mostly in terms of currency values.  The stronger dollar (relative to forex trading) is causing extensive havoc in forex trading and other sectors as investors pull funds from emerging markets due to a less favorable exchange rate.  But this does not necessarily mean that US based assets will benefit.

The U.S. economy is next on the chopping block as corporate debt now sits near historic highs. The only other safety net for U.S. stocks the past few years has been corporate stock buybacks, which corporations have been funding with no-interest loans from the Fed and other banks. As the Fed continues to raise interest rates, corporate debt costs will skyrocket and these stock buybacks will shrivel. After this happens, each new cut of the Fed's balance sheet will result in an even more dramatic fall in the Dow.

Ultimately, emerging markets are going to look for alternatives to the dollar as the world reserve if they don't get a supply of the fiscal stimulus drug they have become so addicted to. This is already happening in China and Russia as they dump U.S. Treasurys and de-dollarize in favor of other assets like gold.

So, we have international markets suffering from liquidity withdrawals due to the Federal Reserve, we have U.S. stock markets under threat of reversal due to Fed interest rate hikes and balance sheet dumps, and we have the dollar's world reserve currency status under threat as multiple nations seek out alternatives after feeling jilted by the Fed taking away the punch bowl.  Multiple tentacles are wrapped around the global economy and all of them attached to the same source.

It would appear that the only "contagion" is that of central banks; most of all the Federal Reserve. Yet, all we hear about in the mainstream is talk on the trade war and linchpins like Turkey. The public is being regaled with lies, conditioned to accept false explanations about the true cause of a crisis that is about to occur; a crisis which central bankers are deliberately engineering so that they can later promote the philosophy of "simplification" and one-world centralization as a cure-all.

Stocks Pop As Beijing Backs Off, But Hindenburg Cluster Hovers

Another day of this.

China was weak overnight after the World Trade Organization said China would ask for permission to retaliate against the U.S. due to its failure to modify anti-dumping methodologies.

 

Europe was mixed to lower across all the majors...

US Futures were weighed down by that until WSJ reported that Beijing was backing off on the tough talk and wooing US firms' investment dollars, sending stocks soaring... with Nasdaq best...

 

However, gains for the day were pretty much capped at around the European close...

 

Tech stocks outperformed financials for the second day in a row...

 

But that is not helping the big banks as Goldman is now down 10 days in a row - the longest losing streak since the company's IPO...

 

Treasuries sold off across the curve as U.S. equities rebounded from early lows. The belly led losses in the run-up to Treasury's $35b auction of 3-year notes, which tailed slightly.

 

Benchmark 10-year yields rose to within a hair of 2.98%, touching the highest level in a month.

 

Meanwhile, traders are shifting to a more hawkish stance as the market's expectations for rate-hikes in 2019 are now at cycle highs (+42bps) but still well short of The Fed's +75bps dot plot expectation...

 

The Dollar Index ended the day practically unchanged after testing down to pre-payrolls lows intraday and bouncing...

 

Cryptos were broadly lower with Bitcoin managing to drop the least...

 

Spot the odd one out in commodity-land...

 

Crude rose the most in a week as Hurricane Florence threatened U.S. East Coast gasoline markets and sanctions began crimping Iranian oil exports. East Coast motorists may see "dramatic" spikes in gasoline prices, according to AAA, as mass evacuations stretch supplies and Florence's heavy rains imperil major fuel pipelines.

 

Perhaps of most note in the commodity space is the divergence between copper and crude... both telling quite different stories about global growth...

Gold futures broke back below $1200 briefly but bounced...

 

But the biggest divergence of all is Gold/Silver which just reached its highest ratio since March 1995 (NOTE  - we appear to be at a historical resistance level)...

 

Finally, we note that the S&P 500 Index is on the verge of setting a new high for overvaluation. Its trailing 12-month price-to-sales ratio surged to 2.25 on Monday, the highest since the dot-com era. If you think it's just the tech giants skewing the number, think again: The median PSR for index members is more than twice the level of the late 1990s.

And the end of last week showed a new cluster of Hindenburg Omens forming...

Probably nothing.

All it will take to topple this house of cards is a little tap on the brakes from an exogenous factor...

BreakingNNow@BreakingNNow

#BREAKING: Marinelli Snipers Team have cancelled the contract with rider Romano Fenati after grabbing a rival's brake while travelling at 132mph during the San Marino Moto2.

(Video: @MotoGP)

4:14 PM - Sep 10, 2018

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