“Scientific Studies” Are Like Huge Fake Tits (pics inside)


Posted on 16th April 2014 by Stucky in Economy

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The title was crafted to determine if the word “tits” results in a large number of page clicks. Admin, please monitor the stats.

SSS, in a post – “Party On, Garth” – he authored is ecstatic that, “researchers at Northwestern University have analyzed the relationship between casual use of marijuana and brain changes”. This new scientific study, soon to be published in the Journal of Neuroscience will probably replace his Viagra prescription.  OK, the following two quotes are from the brilliant mind of SSS (emphasis, his)

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“I’m sick of hearing and reading this endless shit that smoking weed is harmless. It isn’t, particularly for young, developing minds.”

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SSS isn’t the only idiot to be duped into believing the latest and greatest scientific study.  A few months ago I went ape-shit when I read that Fish Oil actually CAUSES heart attacks …. until a poster pointed out the biased source of that study.

Even scientists fucken lie to us, are highly biased, and can be bought off for 30 shekels of silver (see anthropogenic climate change).  So, my eyes now glaze over and my brain shuts down when someone tries to sway me to their point of view by referencing a “scientific study”.  Don’t you feel the same way?

Also, it is often annoyingly used … as in SSS’s thread … as a way to shut down discussion, and thinking;  “Hey, I have a scientific study, so just shut your pie hole!!”  Then the other person posts their own scientific-study links — or, if your name is flash, you’ll copy and paste the whole damn thing.  Thus, it devolves quickly into a my-expert-has-a-bigger-dick-than-your-expert raging debate.  For example, experts have said the following;

—- “Eggs linked to diabetes”

—- “Eggs improve glucose control”

—- “Processed meats linked to cancer”

—- “Hot Dogs may prevent cancer”

It’s all point-counterpoint contradictory bullshit.

The video below is 46 minutes long, virtually guaranteeing that not one of your curs will watch it.  That’s too bad.  The guy is quite humorous. His presentation is very informative and presented in a most interesting manner. Give it a shot. Start at the 2 minute mark and watch a couple minutes … it might just “hook” you.  And, if you watch the whole thing you will know more about nutrition science and how studies work than 99% of people out there.

Here are the basics.


It is critical to recognize the difference between the two types of studies: observational studies and intervention studies.


In an observational study, there is no intervention or treatment. The researchers OBSERVE the subjects over a period of time and gather data about them. Observational studies use mathematical methods to crunch the data and find out whether a certain trait or behavior is associated with a particular outcome.  These studies can show, for example, that A (drinking) and B (depression) are associated, but they can NOT (!!!) prove that A caused B.


In clinical trials, there are two or more groups that receive a different type of treatment. Often there is a group that receives no treatment at all (called the control group). The gold standard of such studies is the Randomized Controlled Trial, which randomizes subjects into two or more groups where for example, one group eats a low-carb diet and the other a low-fat diet. These sorts of studies ARE capable of demonstrating causation, e.g. that A caused B. It is common that something that has been “proven” in an observational study turns out to be completely wrong when tested in a clinical trial. Clinical Trials are always better than  Observational Studies.


Clinical studies tend to be complex, lengthy, and expensive. Most headlines you see media whores “reporting”  are based on observational studies and the reporters make it seem like these studies prove something.

For example, the Nurses Health Study, one of the largest epidemiological studies ever conducted, showed that women who took hormones after menopause had a lower risk of heart disease. However, when randomized controlled trials were conducted, it turned out that the hormone drugs actually increased their risk of heart disease. So, how many women got heart attacks due to people buying into this observational study that turned out to be wrong?

Most everyone knows about the study which “proved” that saturated fat is associated with cardiovascular disease. That too, was an observational study. The accompanying false headlines gave rise to the incredibly damaging low-fat, high-carb, high-sugar dogma that probably played a significant  part in the ongoing obesity and diabetes epidemic.

Scientists like to fudge numbers. When absolute-change (subtraction) isn’t very impressive they will resort to relative-change (division).  Example.  Lipitor studies were done on men already at-risk for heart disease.  After TEN years 2 out of 100 men in the Lipitor group suffered a heart attack … the placebo group numbered 3.05 out of 100 men.  So, the absolute-change is just ONE heart attack for every hundred men.  That sounds pretty shitty!!  But, wait! Let’s apply the magic of division and calculate the relative change. For the math challenged ……. (smaller number / bigger number), then subtract that by 1 to get the relative-change as a decimal.  Soooo ….. (2 / 3.05 = 0.64) – 1 = .36


Are the results of the study a lie? Not necessarily. But, it does lead virtually everyone into believing that more than one-third of men taking Lipitor will reduce their chance of a heart attack …….. when the goddamn fact of the matter is that the REAL number is 1 in 100. Deceptive sons of bitches!!!

How many deaths have been caused by the failed nutritional policy of the last few decades based on observational studies AND misleading clinical studies that turned out to be wrong …. millions? And, still counting. 

 There’s actually a LOT more info in that video.  But, I’m not going to spoon feed you the whole thing.  Check it out yourself.



Emphasis are mine.

 1)-  The article says —— “For their most recent study, Breiter and his team analyzed a VERY SMALL SAMPLE of patients …”   A sample size that small is completely worthless bullshit. Even the gooberment knows this;

“A study on a small sample is quite tempting for obvious reasons, but it is a waste of time and money as the result will be invariably inconclusive.” ——– http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2993974/

 2)- The article says —– “This study is JUST A BEGINNING pilot study ….. brain changes ASSOCIATED WITH casual marijuana use in young adults …….. the interaction of marijuana with brain development COULD BE a significant problem ….. this study SUGGESTS that even light to moderate recreational marijuana use CAN CAUSE changes in brain anatomy” ———– Summary: They’re just getting started and they really can’t say jack-shit about anything whatsoever in a conclusive manner.  They use one weasel-word after another, something the video addresses.

3)-  Always a KEY question; WHO funded the research?  In this case it was funded by the National Institute on Drug Abuse, the Office of National Drug Control Policy, and the Counterdrug Technology Assessment Center.  Bwaahahaha!  In other words, the same type of quasi-governmental fuckwads who in the 1950’s made that hilarious move, “Reefer Madness”, which provided “proof” that teenagers who smoke marijuana will kill their parents with axes.

4)-  Lastly, the most damning evidence of all comes from Dr. Nora Volkow, director of the National Institute on Drug Abuse which helped fund the study! …. …. “Larger studies are needed to explore whether casual to moderate marijuana use really does cause anatomical brain changes, and IF so, whether that leads to any impairment. THE CURRENT WORK DOESN’T DETERMINE WHETHER CASUAL TO MODERATE MARIJUANA USE IS HARMFUL TO THE BRAIN.” LMFAO

I know you folks aren’t dummies, but let me emphasize the above quote. SSS comes here to gloat about a study that supposedly links marijuana use to brain damage …. but the Director of the organization who actually funded the study basically says the study proves ….. NOTHING!!  Game. Set. Match



When it comes to marijuana, SSS is full of shit.  He tries to feed you all shit-sandwiches. But, as you can clearly see, I have utterly destroyed both his argument and credibility.  You can thank me and/or adore me for setting the record straight as soon as you can.


For you A.D.D. types here are two shorter videos.  It is NOT directly related to the topic. It is related in that they are done by the same person, Tom Naughton. These are two short clips from a movie he produced, “Fat Head”.



Thank you for reading.


Oh … I don’t want to be accused of False Advertising.  So, for you perverts, here’s your Fake Titty picture;

Copfuk Story of the Day


Posted on 16th April 2014 by harry p. in Politics |Social Issues

I just read about this over on Eric Peters site.  I am just as disgusted with what must have been a clueless sackless jury.  In a fair world, piano wire would be in their future.

Know the enemy.

PA Hero Stomps Innocent Man’s Skull – And is “Cleared”

by • April 16, 2014

EXTON, PA — Police followed an innocent man into his home, believing that he was a fleeing suspect.  When the man protested being handcuffed on his own floor with strangers searched his home, an officer cussed at him and stomped on his head, causing multiple facial fractures and shattered teeth.  The scene was so gruesome that a cop testified against a fellow cop.   Yet instead of being fired, that stomping officer was later promoted, and now has been officially cleared of violating the victim’s civil rights.

Botched Drug Raid

Zachary Bare had his skull stomped by a PA State Trooper.  (Source: Facebook)


Zachary Bare had his skull stomped by a PA State Trooper. (Source: Facebook)

The incident dates back to August 19th, 2009, when a multi-agency drug task force performed a raid on a home on East Swedesford Road in Exton, Pennsylvania.  Officers from the West Whiteland Police Department joined forces with the Pennsylvania State Police “Clandestine Drug Lab Team.”  The group dressed in black masks and carried long guns into the targeted residence about 9:30 p.m. to stop the inhabitants from getting high.

Things did not go smoothly for the cops, as two of the suspects were able to escape through the back door.  Officers resorted to combing the neighborhood for individuals matching the suspects’ description.  A few blocks a way, officers came upon a young male wearing shorts and no shirt, entering a residence on nearby Heather Lane.

That man was actually 20-year-old Zachary W. Bare, who had just returned home from swimming in Brandywine Creek.  The residence he entered was his own home, where he lived with his disabled mother.

Officers suspected Mr. Bare of being involved with a plot to get high without government permission. They entered his home without permission and confronted him in his kitchen. Bare was ordered him to the floor and cuffed, so that officers could then perform a warrantless search on his house.

A Boot to the Skull

Mr. Bare was compliant but understandably upset, as armed paramilitary men had accosted him and invaded his domicile.  Another officer entered the home and approached Bare wearing a mask and carrying a shotgun.



Stock boot-to-head image

That officer was a veteran drug enforcer, later identified as Pennsylvania State Trooper Kelly Cruz. Cruz had been imprisoning people for getting high as long as Zachary Bare had been alive. The trooper, who lives in Oxford, is a “prolific and productive narcotics agent,” according to his own attorney, with multiple tours of combat experience in the Middle East.

Mr. Bare remained prone on his kitchen floor, face-down and handcuffed.  When he had the audacity to talk back to Trooper Cruz in his own home, the veteran officer told him to “shut the f*** up.”  Cruz then raised his jackboot above Bare’s head and stomped on his skull.

After being essentially curb-stomped, Bare’s head had been fractured in 2 places; his nose was broken; his upper teeth were driven upward into his gums and jaw.  He spit a mess of blood and teeth onto the floor.

Bare was determined to have not been involved with the supposed “meth lab” a few streets away and was never charged with any crime.

Eyewitness Testimony

The stomping incident was witnessed by West Whiteland Officer Glenn Cockerham, a 4th cop on the scene.  Cockerham had the integrity to report the actions of Trooper Cruz — described as an “an unknown Pennsylvania state trooper with a black mask over his face” — and later testified against him in court.  According to Officer Cockerham’s testimony:

“I observed Zachary Bare still lying face down on the kitchen floor. He was yelling something at the trooper that I could not hear clearly.  The trooper was standing over him, to the left of Bare’s prone body.

The trooper said ‘shut the **** up’ then suddenly stamped downward on the back of Bare’s head with his right foot, pushing Bare’s face into the kitchen floor.   I saw Bare lift his head and spit blood and teeth onto the kitchen floor.”

Officer Cockerham told investigators that the trooper’s use of force “was totally unnecessary.”  While being interviewed about the event, Cockerham added:  “It sounds like Zach insulted him [Cruz] in some manner and the trooper possibly lost his temper. If Zachary was kicking or pushing, I would tell you that. There was no reason for it. I really couldn’t believe he did it. It didn’t have to happen.”

Trooper Cruz never denied kicking Bare.  In fact, the incident was acknowledged the day of the attack, when Cruz approached Sgt. Joseph Catov, who was leading the raid, and told him:  “I’ve just got to let you know I had to go hands on with that guy.”  Apparently no further explanation was necessary and he walked away.

Reluctance to Prosecute

Trooper Cruz’s explanation of the event was that he was somehow oblivious to the fact that Mr. Bare was wearing handcuffs, and felt “afraid” of him as he lie on the ground, as if Bare was trying to roll over and bite his ankles.

Despite the brutalized victim and the cop who witnessed it, local prosecutors declined to charge Cruz with assault, and the trooper’s defense lawyers convinced a grand jury not to indict him.  More than 2 years had elapsed since the attack, and Cruz’s supporters claimed this was a “total vindication” of his actions.

Trooper Cruz was never fired, and actually received a promotion to the rank of Corporal in October 2012.

Later in 2012, Bare received a settlement of $125,000 from the Pennsylvania State Police.  His legal team pushed on for criminal charges against Cruz, who had yet to face any consequences for his actions.

Finally after nearly 4 years of pushing for justice, prosecutors in a federal court indicted Cruz for violations of Mr. Bare’s civil rights.  The charge could have resulted in 1-10 years of prison for Cruz.  The case went to trial in April of 2014.

Operating as Trained

Cruz’s defense relied on emphasizing the fear he felt of Mr. Bare, who was prone on his kitchen floor, as well as undermining the witness.  Cruz claimed he saw Bare rocking on his shoulder in an attempt to get up.   The masked, shotgun-toting cop said that he felt threatened by it.

“That is when Cruz delivered the blow to the back of Bare’s shoulder, driving him back to the floor,” according to a generous description given by the trooper’s attorney.  Cruz later testified on his own behalf, explaining the stomp:

Trooper Kelly Cruz.  (Source: Linkin photo)


Trooper Kelly Cruz. (Source: Linkedin photo)

“I reacted to his actions. I was fixated on his rage, and I did not have the opportunity to do the scans I would do, with my training and expertise.

I am taking care of me… I am afraid. At that moment I did not know he was handcuffed. I responded the way I was trained to respond. I reacted to what I saw. If I fail, I don’t come home to my family.”

The prosecution was unconvinced of Cruz’s supposed fear.  Assistant U.S. Attorney Maureen McCartney told the jury:  “He [Bare] wanted the name of the trooper that kicked him in the head. Trooper Cruz just walked away, with his mask over his face and his shotgun in his hand.”

After a six-day trial, the jury sided with the stomping trooper.  Dozens of like-minded fellow officers cheered for joy.

“Nobody celebrates the fact someone was injured,” said Cruz’s defender Christian Hoey. “But he’s a heck of a law enforcement officer and an asset to the United States.”

Original HERE.

Total Eclipse of the Doom: Requiem for Mike Ruppert


Posted on 16th April 2014 by Reverse Engineer in Economy |Politics |Social Issues

Off the keyboard of RE

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Published on the Doomstead Diner on April 15. 2014

mike-ruppert-dogLast Sunday Night Mike Ruppert committed Suicide.

For those of you who don’t know who Mike Ruppert was, he was one of the first bloggers to investigate the ramifications of declining energy production, as well as someone who constantly questioned the narrative offered up in the MSM as explanation for things like the 9-11 destruction of the World Trade Center.  Some would call him a “Conspiracy Theorist”.  More like Conspiracy FACT, but that is a subject for another post.

Like many other bloggers and researchers looking at the problems we face now, Mike became increasingly upset and depressed over the progress and the lack of any real initiatives to try to deal with this stuff in a coherent manner.  This is evident in the progress of his writing over the last couple of years, and his demeanor in his podcasts on the Lifeboat Hour, his web based radio show.

Mike isn’t the first Blogger/Pundit to commit suicide in recent years, Matt Simmons also took his own life back in august of 2010.  Perhaps even more disturbing is the constant talk of Suicide and Hospicing on Nature Bats Last, Guy McPherson’s blog which concerns itself mainly with Climate Change and the hypothesis that we are on the cusp of Near Term Human Extinction, by mid-century if you accept the arguments made that this is an inevitable outcome.

Not unrelated to this outcome is the fact Carolyn Baker was the first Collapse Blogger to break the news of Mike’s suicide.  Carolyn posts regularly on Nature Bats Last, often these days with the explicit theme of Hospicing for people who have incurable illnesses and finding a comfortable way to walk into the Great Beyond.  The clear analogy being made here is that the entire Human Race is in need of Hospicing, as we are all condemned to imminent Death under the scenario of Near Term Human Extinction.  The difference of course is that while an individual can have a fairly certain diagnosis of Imminent Death in some circumstances, it is hardly a provable certainty that 100% of Homo Sapiens are destined for Death inside 30-40 years or so.  Really, even in the case of individuals diagnosed with various forms of inoperable and untreatable Cancers, rarely is there 100% certainty of Death.  “Miraculous” remissions do occur with virtually all forms of cancer, though granted at relatively small percentages of the afflicted people.

For the really depressed person though who sees NO ESCAPE from imminent Death and who becomes more focused on getting out of pain or avoiding future pain they are certain is coming down the pipe, the ideas of Hospicing and Suicide become attractive alternatives.  The idea here is to Accept Death and become OK with it, and pulling your own plug at a time of your own choosing is a kind of Empowerment for an an individual who feels disempowered by the seemingly hopeless situation they are immersed in.

Everybody should have the right to pull their own plug if they so choose, I have no problem with that idea.  What I do find to be worrisome is a developing zeitgeist which tacitly encourages suicide as an option, because people who sink into depression are very vulnerable and can and probably do latch onto this idea as rationale for the behavior.


There is little doubt that as a whole the World and the Human Race are in a World of Shit, and it is pretty easy these days to throw up your hands and say it is all utterly hopeless.  Climate Change, Fukushima, Global Wars over resources, Drought, Famine…all you gotta do is read the Newz on any given day and you can hear the Thunder of the Hoofbeats of the Four Horsemen of the Apocalypse.  Many times in my articles and comments in the Collapse Blogosphere I have used the iconic quote from The Sixth Sense, “I See Dead People”.


Today, Mike Ruppert is one of those Dead People.  While he was alive, Mike Ruppert made a difference, many people who otherwise would not be aware of the problems which face us now are aware of them because once there was Mike Ruppert walking the earth, passing on to others what he saw and what he learned.

For those of us not yet counted amongst the Dead People, we still have choices to make, and the biggest choice of all is whether you live to fight another day, or whether you give up the fight, hospice yourself and wait for death, or hurry it along with a Bullet meets Brain combination.

I won’t make a judgement here on Mike’s choice, but for me I don’t see hurrying the trip to the Great Beyond as near appropriate yet.  There is a good long ways to go here between now and Human Extinction, even under the most rapid of scenarios.  The End Game is NOT written in Stone, and each person can still make a Difference, if not for the World at large at least for the people they know, love and care for.  Mike had a clear voice, and it would have been nice if he could have found it within himself to speak a bit longer, but that is not the choice he made.

For those of us not yet Dead, we still have choices to make.




Posted on 14th April 2014 by Administrator in Economy |Politics |Social Issues

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The police surveillance state tightens the noose. Orwell couldn’t have dreamed of the stuff our authoritarian rulers now use to control us. Do you feel that boot on your face yet?

Via The Rutherford Institute

Police Bypass Fourth Amendment With License Plate Readers

By Kathryn Watson

From Watchdog

The Fourth Amendment prohibits “unreasonable” search and seizure, requiring a warrant. It’s the same argument used against the National Security Agency spy program.

“The Fourth Amendment is really clear that you’re supposed to have probable cause before you do that,” Whitehead said.

The Fourth Amendment isn’t the only amendment right that ALPRs threaten, Whitehead said. The technology might make people uncomfortable to exercise their First Amendment rights if license plate information is collected at political rallies, for example.

It doesn’t help quell fears the Virginia State Police captured license plate images of people at political events for Sarah Palin and President Barack Obama.

Such surveillance could trouble a private citizen who needs to see a psychiatrist, or a politician with an alcohol problem who wants to seek help, Whitehead said.

“It could be used against you later,” Whitehead said.

ALPR use stretches far beyond the Old Dominion’s borders. In a national survey by the Police Executive Research Forum, 71 percent of police agencies reported using license plate reader technology, while 85 percent said they planned to increase their usage of it.

Police argue ALPRs help solve crimes, and they have. Still, the percentage of serious crimes per scanned licenses is low. For every million licenses scanned in neighboring Maryland, only 47 were potentially associated with serious crimes, according to the American Civil Liberties Union.

“You’re doing surveillance of innocent citizens,” Whitehead said.

The use of ALPR technology is just one aspect of what Whitehead calls the “police state.” That’s what his new book — “A Government of Wolves: The Emerging American Police State” — is all about.

Changing the status quo requires a riled-up grassroots effort that starts at the local level, and expands to government at all levels, he said.

“Go to your local city council, argue for them to ask for a resolution asking their local congressman to get their act together and follow the Fourth Amendment,” Whitehead said.

Whitehead said state lawmakers can intervene in the surveillance system, and an appetite for data privacy seems to be growing within the General Assembly.



Posted on 14th April 2014 by Administrator in Economy |Politics |Social Issues


Submitted by David Stockman from Contra Corner

This Is Not A “Healthy Correction”: The Mother Of All Financial Bubbles Is Beginning To Crack

Wolf Richter is one of the most astute observers of our bubble-ridden/central bank perverted financial scene around. His blog called Testosterone Pit is a daily “must read” and more than that: its posts are succinct, spritely, fact-based, conclusionary and cover the global map with special insight on those debt ridden houses of cards on the other side of the Pacific—-Japan and China.

Wolf today issued a timely warning. Next week we will be told by Wall Street stock peddlers that what are just having a healthy correction and that it will soon be time to “buy the dip”. Don’t believe them. We are perched precariously at the top of one of the greatest financial bubbles ever because it is global—-the handiwork of world-wide central bank driven credit expansion and drastic interest rate repression.

Just recall some of the numbers. At the turn of the century, the US had about $25 trillion of credit market debt outstanding; now it is pushing $60 trillion. About 14 years ago, China had debt of $1 trillion; now its nearly $25 trillion. And similar credit explosions occurred in much of the rest of the world. It was all central bank enabled, and it caused world wide investment booms and asset inflations which defy every law of sound money and economics, and which cannot be sustained indefinitely.

The bottom line of those destructive policies is that “cap rates” are artificially low and so their reciprocal, asset values, are enormously inflated. Likewise, nearly zero money market interest rates in virtually every major economy of the world have fueled the most fantastic expansion of “carry trades” ever imagined.

As I have frequently pointed out, the short-term market for repo and other wholesale funding represents the cost of goods (COGS) for financial gamblers; its what they use to fund their speculations in higher yielding currencies, corporate debt, equities, and every manner of derivatives and OTC concoctions that Wall Street trading desks can engineer.

So when the central banks drive the money market rates to just 5-50 bps, they are offering ZERO-COGS to speculators. This is a massive incentive to bid up the price of anything that has a yield north of 50 basis points or a short-run appreciation prospect of the same—in order to capture the spread. This is what has turned the so-called capital markets of the world into dangerous casinos. This is what led speculators this week to gorge on $4 billion in Greek debt carrying the lunatic coupon of just 4.75%.

The latter is not even a remotely plausible pricing of the risk of a government with a 170% debt to GDP ratio—- sitting atop an eviscerated economy that has shrunk by more than 20% and has nothing much left except tourism, yogurt plants and a 27% unemployment rate. Instead, it evidences the fast money traders who swooped in to buy a 475 bp coupon funded by free money from the central banks, and who did so in the confidence that the ECB will do “whatever it takes” to prop up the price of member country sovereign debt.

Needless to say, the minute that the millions of gamblers who have been enabled by the ZERO-COGS gift of central banks loose confidence in their ability to prop up asset values, the panic will set in. Then a great dumping stampede will start. It will be the mother of all margin calls—-a repeat of the dumping panic on Wall Street that occurred in September 2008 when toxic mortgage securities which had been funded by overnight repo were forced into fire sales by wholesale lenders refusing to roll their repo.

Only this one will be much grander because the carry trades have gone more global then ever before. Even pig farmers in China have their sties loaded with copper because through a roundabout trade it can be repo’d for cash.

Indeed, the global financial system is land-mined with time-bombs–some hidden and others transparent. But what is certain is that when huge distortions like the newly booming market for dollar-denominated junk bonds being issued by EM companies increasingly parched for cash craters, there will be a ricocheting chain reaction that will spread far and wide.

As they might have said back in the day on Hill Street Blues “don’t go out there, its too dangerous”. Below, Wolf Richter reminds us of why.

By Wolf Richter At The Testosterone Pit

“Biotech Stocks’ Rout Perplexes Analysts” is how the Wall Street Journal headlined the phenomenon. The Nasdaq Biotech Index had plunged 21% from its intraday high six weeks ago, to which it had ascended in an ever steepening curve that culminated in a beautiful spike. I wrote about that craziness at the time. My impeccable timing was, unfortunately, sheer luck, but the Biotech bubble had become so glaring that even I could see it [NASDAQ 10,000 – Or Something]. So it’s perplexing that analysts would be perplexed.

To add some color, the WSJ quoted ISI Group analyst Mark Schoenebaum: “Horrible day in #biotech. I’m frankly at a loss for an explanation. And it’s my job to at least know why. Humbling day.”

He has been a stock analyst following the Biotech sector since 2000. If he’d started three years earlier, he would have seen the bubble build, pick up momentum, go crazy, and pop in early 2000. He would have seen Biogen dive so fast so far it would have knotted up his stomach. He would have experienced the implosion viscerally. And he might not have forgotten – though many analysts have. But not having been through this before, he was “at a loss.”

And something is cracking.

Of the 14 IPOs planned for this week – the busiest since 2007 at the eve of the last implosion – five were postponed, pending better weather. But Farmland Partners started trading on Friday, and got plowed under. An hour before the close, it was down over 10% from its offering price of $14 a share. A last-minute rally brought it up to $12.98, for a loss of 7.3%.

“People are pretty nervous,” explained CEO Paul Pittman. “This is about building long-term value in an asset class that for all kinds of macro reasons we believe is certainly going to keep appreciating.”

That endlessly appreciating asset class is farmland. The company, which expects to get taxed as a REIT, doesn’t own or do much yet. But it’s gonna “acquire high-quality primary row crop farmland … throughout North America … upon completion of a series of formation transactions.” It’ll own 38 farms with 7,300 total acres, mostly in Illinois.

Farmland has been hot for long time.

Over the last 10 years, farmland prices in Iowa soared 282%, in Nebraska and South Dakota 326%. Over the last 6 months, prices still rose 7.2% in South Dakota, but in Nebraska they stalled, and in Iowa they started to fall, now down 2.8%.

Farmland has been through this before: in the 1980s, the bubble burst, and farmers who’d borrowed against their land at nosebleed valuations ran into trouble because crop prices couldn’t make the equation work, and they couldn’t service their debts and had to sell, which triggered more bouts of forced selling which drove prices down further and took rural lenders down with them. The scenario of any bubble that is unwinding. It wreaked havoc on rural America.

That Wall Street finally pushed a farmland REIT, willing to buy farmland at peak valuations, into the hands of retail investors, after a huge multi-year run-up in stocks and farmland, should send people scurrying out of the way.

“But it’s not a bubble.”

That’s what Savita Subramanian, Head of US Equity and Quantitative Strategy BofA Merrill Lynch Global Research, wrote on March 21. Then she went on to describe what exactly it was, namely a bubble:

We have witnessed a recent surge in media attention on the topic of equity bubbles, citing various signs of evidence: Biotech stocks have risen 300% over the past five years, and Internet stocks have returned more than 400% over the same period. And most IPOs this year have been for unprofitable companies trading at high valuations…. The recent sell-off in high-fliers has investors worried that the deflation of this “bubble” could take down the overall market, similar to what occurred in 2000.

But no. “We think not,” she wrote. BofA Merrill Lynch makes lots of moolah pushing overpriced stocks to exuberant retail investors who’ve been driven by the Fed’s interest rate repression into the razor-like claws of risk. And besides, “the frothy spots appear well contained,” she added in central-banker lingo. And then the old saw: “Equity bubbles rarely happen when everybody is talking about bubbles.”

In late 1999 and early 2000, just before the bubble imploded spectacularly, “bubble” was the only thing everyone was talking about. Everybody tried to ride it up all the way and then get out. With predictable results. Repeat in 2007 and 2008.

That’s what analysts are doing. They see the bubble, and they benchmark it against the bubbles that blew up in 2000 and 2007, and they pull rationalizations out of thin air why this time it’s d…. Oops, they’re not using the d-word, which would make them the laughing stock of TP readers. They’re using logical-sounding arguments that border on superstitions – “Equity bubbles rarely happen when everybody is talking about bubbles” – to explain why it’s different. Exuberant retail investors are expected to swallow it hook, line, and sinker.

Meanwhile, the Smart Money is selling.

This week, it was once again private-equity mastodon Blackstone Group which dumped one of its LBOs, hotel chain La Quinta, into the lap of mutual funds and retail investors via an IPO. Blackstone has been busy dumping its LBOs. Other PE firms have been busy too. Valuations are enormous, and PE firms need months, sometimes years, to get out from under their priced possessions. So they plan ahead. And they’ve been selling everything that isn’t nailed down for over a year.

And hedge funds are bailing out of equities. Still in an orderly manner.

“We saw net exposure come way down,” explained Jon Kinderlerer, managing director at Credit Suisse’s prime brokerage business that deals with hedge funds. Hedge fund exposure to stocks in the US is “actually at the lowest level since August 2012,” during the euro turmoil before ECB President Mario Draghi saved the day with his whatever-it-takes pledge. “Funds have trimmed exposure, and they’ve added hedges.” The sharpest cuts occurred over the past month, he said. Hedge funds are “battening down the hatches to weather the storm.”

Buried in the IMF’s Global Financial Stability Report is a doozie of a chart. It depicts the bubble in covenant-lite and second-lien loans, the same that helped blow up the banks in 2008. Only this time, they’re even worse. Read….. Biggest Credit Bubble in History Flashes Warning: ‘Seek Cover, Implosion In Sight’



This is a syndicated repost courtesy of Testosterone Pit. To view original, click here.

Obama On The Red Line And On The Rat Line


Posted on 13th April 2014 by Administrator in Economy |Politics |Social Issues


Submitted by David Stockman’s Contra Corner

Seymour Hersh’s Blockbuster: Obama On The Red Line And On The Rat Line

Read Seymour Hersh’s devastating account of Obama’s Red Lines and Rat Lines and weep for the Republic. It is no more.

For the first time in a half-century American voters actually elected the “peace candidate” in 2008 and sent Obama to the White House to end the interventionist foreign policy that had lead to disaster in Iraq, and, implicitly, to wind down the vast war machine that had been left over from the Cold War. The latter had  been converted  by the Bush’s and Clintons into an armada of invasion and occupation that had rained death and destruction from Bosnia to Baghdad to Kandahar for no reasonable or justifiable purpose of national security.  These aggressions were simply what a war machine does, making up rationalizations as it goes along.

But the Warfare State was not about to let peace happen. Soon Obama learned the Washington pivot, rehired the core of Bush’s War Cabinet and became enmeshed in the “national security” plots and schemes which were in the pipeline when he arrived at 1600 Pennsylvanian Avenue— much like JFK inherited the disastrous Bay Of Pigs invasion. Like the despicable Alan Dulles, he inherited ambitious scoundrels like so-called General David Petraeus, who soon had him convinced that the non-sensical and bloody “surge” in Anbar Province had been a roaring success, and that it should be exported to the quagmire in Afghanistan.

Indeed, after the Afghan surge was launched in 2009 there was no turning back. The peace candidate had already become co-opted—emerging as a pliant tool of America’s rogue Warfare State that functions almost entirely outside of the Constitution and often beyond statutory law, as well. Ironically, the former editor of the Harvard Law Journal and self-proclaimed constitutional expert apparently had no qualms whatsoever about any of this. The spy agencies were nourished with massive new resources and widened mandates; Rumsfeld’s disgraceful and illegal detention operation at Guantanamo Bay was not closed as he had promised; Bush’s cowardly and counter-productive drone wars were drastically escalated; and the defense budget grew by more than $100 billion from the already bloated levels he had inherited from the “decider”.

And this gets us to Hersh’s expose. By 2011 Obama had donned the full regalia of the imperial presidency. With not so much as even a casual nod to the War Powers Act—-the first piece of legislation I worked on 43 years ago as a young aide on Capitol Hill outraged by Johnson’s and Nixon’s immoral, illegal and genocidal war on Vietnam—-the peace candidate conducted an air war and subversion campaign in Libya because he could.

Upon the bloody end of the Gadhafi regime, Obama than turned to making war on the Assad regime in Syria—without a sliver of logic as to why intervention in an age old sectarian conflict between Sunnis and Alawites would make the citizens of Nebraska one wit safer. This time he did it through the establishment of a CIA annex in Benghazi to gather and accumulate the former Libyans dictator’s lethal arsenals for transfer to the Syrian rebels—many of whom where jihadists and terrorists of the type we were allegedly trying to erase from the earth.

Moreover, as Seymour Hersh explains, the Benghazi weapons were then transited by means of an illegal CIA “rat line” through Turkey to the rebels. And the rat line was absolutely illegal because all CIA covert operations since the 1970s have been required as a matter of law to be disclosed to the Congressional leadership—-for whatever that has become worth in the post Frank Church era where shaking down the military-industrial complex for campaign money, rather than thwarting its propensity for rogue operations, has become a bipartisan pursuit of choice.

But our constitutional scholar-in-chief apparently had no problem splitting hairs. The “rat line” was deemed a “liaison” operation with England’s MI6 and thereby exempt from reporting requirements. So when the rat line operation blew up in Benghazi during the middle of the Presidential campaign in September 2012 in the incident that lead to the death of Ambassador Chris Stevens, the Obama White House just lied. No, the consulate where the deadly attack occurred was not a CIA annex and weapons depot; and, no, we never supplied any weapons to any rebels in Syria. All a pack of lies.

But when you are knee deep in intrigue and covert operations and enmeshed in plots to overthrow governments with thugs like Prime Minister Erdogan of Turkey, one calamity soon leads to another. As Hersh explains, Barrack Obama in his usual manner had authorized an outright aggression, but than wimped out after the Benghazi fiasco and abruptly shutdown the rat line.

Needless to say, this left Prime Minister Erdogan and his chief of clandestine operations high and dry. By the fall of 2012, the latter were deeply committed to the overthrow of Assad and the establishment of a client regime in Damascus. But the tide of war had already turned—the squabbling gangs of rebels were in retreat, notwithstanding the substantial aid and support they had received from Saudi Arabia, Qatar,Turkey and the West. And from there emerges the main theme of Hersh’s expose.

Obama had foolishly drawn a “red line” on Syrian use of chemical weapons in a civil war which was already engulfed in bloody savagery from both sides.  So the Turks decided to call his bluff, and enable their main rebel ally, the jihadist al-Nusra Front, to stage a false flag attack with what was known to be the signature weapon in Assad’s Soviet supplied chemical weapons arsenal– the deadly sarin gas.

Seymour Hersh explains in chapter and verse, based on a DIA secret report among other high level sources, how this abomination unfolded, and became the horrific gas attack in Ghouta on August 21, 2013. But the gravamen of the piece is his description of how the Obama White House came within two days of launching a Bush style war on Syria after it had already been warned that the proof of Assad’s complicity was lacking; and that a weapons testing lab in England had already concluded that a sarin sample obtained on the scene was of a homemade variety and not of the military grade known to be in the Assad arsenal.

Despite all this, the White House apparatus pushed an increasingly resistant Joint Chiefs of Staff through more than 35 iterations of an attack plan that had nothing to do with spanking Assad for his alleged barbarity or surgically disabling his chemical weapons capacity. The attack was to involve an armada of British, French and American air strikes along with sea-based barrage of Tomahawk missiles to take out Assad’s entire military capacity.

In short, a power-drunk amateur in the White House came within two days of launching a massive military campaign to bring about regime change in Syria—-an action of stupendous folly which would have ignited  a cauldron of fire throughout the Middle East like never before:

In the aftermath of the 21 August attack Obama ordered the Pentagon to draw up targets for bombing. Early in the process, the former intelligence official said, ‘the White House rejected 35 target sets provided by the joint chiefs of staff as being insufficiently “painful” to the Assad regime.’ The original targets included only military sites and nothing by way of civilian infrastructure. Under White House pressure, the US attack plan evolved into ‘a monster strike’: two wings of B-52 bombers were shifted to airbases close to Syria, and navy submarines and ships equipped with Tomahawk missiles were deployed. ‘Every day the target list was getting longer,’ the former intelligence official told me. ‘The Pentagon planners said we can’t use only Tomahawks to strike at Syria’s missile sites because their warheads are buried too far below ground, so the two B-52 air wings with two-thousand pound bombs were assigned to the mission. Then we’ll need standby search-and-rescue teams to recover downed pilots and drones for target selection. It became huge.’ The new target list was meant to ‘completely eradicate any military capabilities Assad had’, the former intelligence official said. The core targets included electric power grids, oil and gas depots, all known logistic and weapons depots, all known command and control facilities, and all known military and intelligence buildings.


Britain and France were both to play a part. On 29 August, the day Parliament voted against Cameron’s bid to join the intervention, the Guardian reported that he had already ordered six RAF Typhoon fighter jets to be deployed to Cyprus, and had volunteered a submarine capable of launching Tomahawk missiles. The French air force – a crucial player in the 2011 strikes on Libya – was deeply committed, according to an account in Le Nouvel Observateur; François Hollande had ordered several Rafale fighter-bombers to join the American assault. Their targets were reported to be in western Syria.


By the last days of August the president had given the Joint Chiefs a fixed deadline for the launch. ‘H hour was to begin no later than Monday morning [2 September], a massive assault to neutralise Assad,’ the former intelligence official said.

At the eleventh hour Obama backed down when General Dempsey said flat out no—and then lied that he had changed his mind after a walk around the White House with his clueless chief of staff. The foolish incumbent in the White House and his clownish Secretary of State, the man with the big head of hair and self-evidently not much underneath, then had to suffer the indignity of being rescued from their disastrous schemes and misadventures by Vladimir Putin.

Does that not explain their subsequent insensible campaign to destabilize the Ukraine and then to provoke the current insane showdown with Russia that has resulted from the putsch against a legitimately elected government in Kiev? Does not Obama’s incredible follies and abuses of power here described provide a palpable warning that it is time to dismantle the Warfare State? That is, before still another election turns out to be a mere ratification of an American Imperium being conducted by a permanent rogue regime buried deep within the Warfare State that our national security no longer requires?

As I said, read Seymour Hersh’s devastating expose and think about it.

Seymour M. Hersh on Obama, Erdo?an and the Syrian rebels

In 2011 Barack Obama led an allied military intervention in Libya without consulting the US Congress. Last August, after the sarin attack on the Damascus suburb of Ghouta, he was ready to launch an allied air strike, this time to punish the Syrian government for allegedly crossing the ‘red line’ he had set in 2012 on the use of chemical weapons.[*]?? Then with less than two days to go before the planned strike, he announced that he would seek congressional approval for the intervention. The strike was postponed as Congress prepared for hearings, and subsequently cancelled when Obama accepted Assad’s offer to relinquish his chemical arsenal in a deal brokered by Russia. Why did Obama delay and then relent on Syria when he was not shy about rushing into Libya? The answer lies in a clash between those in the administration who were committed to enforcing the red line, and military leaders who thought that going to war was both unjustified and potentially disastrous.


Obama’s change of mind had its origins at Porton Down, the defence laboratory in Wiltshire. British intelligence had obtained a sample of the sarin used in the 21 August attack and analysis demonstrated that the gas used didn’t match the batches known to exist in the Syrian army’s chemical weapons arsenal. The message that the case against Syria wouldn’t hold up was quickly relayed to the US joint chiefs of staff. The British report heightened doubts inside the Pentagon; the joint chiefs were already preparing to warn Obama that his plans for a far-reaching bomb and missile attack on Syria’s infrastructure could lead to a wider war in the Middle East. As a consequence the American officers delivered a last-minute caution to the president, which, in their view, eventually led to his cancelling the attack.


For months there had been acute concern among senior military leaders and the intelligence community about the role in the war of Syria’s neighbours, especially Turkey. Prime Minister Recep Erdo?an was known to be supporting the al-Nusra Front, a jihadist faction among the rebel opposition, as well as other Islamist rebel groups. ‘We knew there were some in the Turkish government,’ a former senior US intelligence official, who has access to current intelligence, told me, ‘who believed they could get Assad’s nuts in a vice by dabbling with a sarin attack inside Syria – and forcing Obama to make good


The joint chiefs also knew that the Obama administration’s public claims that only the Syrian army had access to sarin were wrong. The American and British intelligence communities had been aware since the spring of 2013 that some rebel units in Syria were developing chemical weapons. On 20 June analysts for the US Defense Intelligence Agency issued a highly classified five-page ‘talking points’ briefing for the DIA’s deputy director, David Shedd, which stated that al-Nusra maintained a sarin production cell: its programme, the paper said, was ‘the most advanced sarin plot since al-Qaida’s pre-9/11 effort’. (According to a Defense Department consultant, US intelligence has long known that al-Qaida experimented with chemical weapons, and has a video of one of its gas experiments with dogs.) The DIA paper went on: ‘Previous IC [intelligence community] focus had been almost entirely on Syrian CW [chemical weapons] stockpiles; now we see ANF attempting to make its own CW … Al-Nusrah Front’s relative freedom of operation within Syria leads us to assess the group’s CW aspirations will be difficult to disrupt in the future.’ The paper drew on classified intelligence from numerous agencies: ‘Turkey and Saudi-based chemical facilitators,’ it said, ‘were attempting to obtain sarin precursors in bulk, tens of kilograms, likely for the anticipated large scale production effort in Syria.’ (Asked about the DIA paper, a spokesperson for the director of national intelligence said: ‘No such paper was ever requested or produced by intelligence community analysts.’)


Last May, more than ten members of the al-Nusra Front were arrested in southern Turkey with what local police told the press were two kilograms of sarin. In a 130-page indictment the group was accused of attempting to purchase fuses, piping for the construction of mortars, and chemical precursors for sarin. Five of those arrested were freed after a brief detention. The others, including the ringleader, Haytham Qassab, for whom the prosecutor requested a prison sentence of 25 years, were released pending trial. In the meantime the Turkish press has been rife with speculation that the Erdo?an administration has been covering up the extent of its involvement with the rebels. In a news conference last summer, Aydin Sezgin, Turkey’s ambassador to Moscow, dismissed the arrests and claimed to reporters that the recovered ‘sarin’ was merely ‘anti-freeze’.


The DIA paper took the arrests as evidence that al-Nusra was expanding its access to chemical weapons. It said Qassab had ‘self-identified’ as a member of al-Nusra, and that he was directly connected to Abd-al-Ghani, the ‘ANF emir for military manufacturing’. Qassab and his associate Khalid Ousta worked with Halit Unalkaya, an employee of a Turkish firm called Zirve Export, who provided ‘price quotes for bulk quantities of sarin precursors’. Abd-al-Ghani’s plan was for two associates to ‘perfect a process for making sarin, then go to Syria to train others to begin large scale production at an unidentified lab in Syria’. The DIA paper said that one of his operatives had purchased a precursor on the ‘Baghdad chemical market’, which ‘has supported at least seven CW efforts since 2004’.


A series of chemical weapon attacks in March and April 2013 was investigated over the next few months by a special UN mission to Syria. A person with close knowledge of the UN’s activity in Syria told me that there was evidence linking the Syrian opposition to the first gas attack, on 19 March in Khan Al-Assal, a village near Aleppo. In its final report in December, the mission said that at least 19 civilians and one Syrian soldier were among the fatalities, along with scores of injured. It had no mandate to assign responsibility for the attack, but the person with knowledge of the UN’s activities said: ‘Investigators interviewed the people who were there, including the doctors who treated the victims. It was clear that the rebels used the gas


In the months before the attacks began, a former senior Defense Department official told me, the DIA was circulating a daily classified report known as SYRUP on all intelligence related to the Syrian conflict, including material on chemical weapons. But in the spring, distribution of the part of the report concerning chemical weapons was severely curtailed on the orders of Denis McDonough, the White House chief of staff. ‘Something was in there that triggered a shit fit by McDonough,’ the former Defense Department official said. ‘One day it was a huge deal, and then, after the March and April sarin attacks’ – he snapped his fingers – ‘it’s no longer there.’ The decision to restrict distribution was made as the joint chiefs ordered intensive contingency planning for a possible ground invasion of Syria whose primary objective would be the elimination of chemical weapons.


The former intelligence official said that many in the US national security establishment had long been troubled by the president’s red line: ‘The joint chiefs asked the White House, “What does red line mean? How does that translate into military orders? Troops on the ground? Massive strike? Limited strike?” They tasked military intelligence to study how we could carry out the threat. They learned nothing more about the president’s reasoning.’


In the aftermath of the 21 August attack Obama ordered the Pentagon to draw up targets for bombing. Early in the process, the former intelligence official said, ‘the White House rejected 35 target sets provided by the joint chiefs of staff as being insufficiently “painful” to the Assad regime.’ The original targets included only military sites and nothing by way of civilian infrastructure. Under White House pressure, the US attack plan evolved into ‘a monster strike’: two wings of B-52 bombers were shifted to airbases close to Syria, and navy submarines and ships equipped with Tomahawk missiles were deployed. ‘Every day the target list was getting longer,’ the former intelligence official told me. ‘The Pentagon planners said we can’t use only Tomahawks to strike at Syria’s missile sites because their warheads are buried too far below ground, so the two B-52 air wings with two-thousand pound bombs were assigned to the mission. Then we’ll need standby search-and-rescue teams to recover downed pilots and drones for target selection. It became huge.’ The new target list was meant to ‘completely eradicate any military capabilities Assad had’, the former intelligence official said. The core targets included electric power grids, oil and gas depots, all known logistic and weapons depots, all known command and control facilities, and all known military and intelligence buildings.


Britain and France were both to play a part. On 29 August, the day Parliament voted against Cameron’s bid to join the intervention, the Guardian reported that he had already ordered six RAF Typhoon fighter jets to be deployed to Cyprus, and had volunteered a submarine capable of launching Tomahawk missiles. The French air force – a crucial player in the 2011 strikes on Libya – was deeply committed, according to an account in Le Nouvel Observateur; François Hollande had ordered several Rafale fighter-bombers to join the American assault. Their targets were reported to be in western Syria.


By the last days of August the president had given the Joint Chiefs a fixed deadline for the launch. ‘H hour was to begin no later than Monday morning [2 September], a massive assault to neutralise Assad,’ the former intelligence official said. So it was a surprise to many when during a speech in the White House Rose Garden on 31 August Obama said that the attack would be put on hold, and he would turn to Congress and put it to a vote.

At this stage, Obama’s premise – that only the Syrian army was capable of deploying sarin – was unravelling. Within a few days of the 21 August attack, the former intelligence official told me, Russian military intelligence operatives had recovered samples of the chemical agent from Ghouta. They analysed it and passed it on to British military intelligence; this was the material sent to Porton Down. (A spokesperson for Porton Down said: ‘Many of the samples analysed in the UK tested positive for the nerve agent sarin.’ MI6 said that it doesn’t comment on intelligence matters.)


The former intelligence official said the Russian who delivered the sample to the UK was ‘a good source – someone with access, knowledge and a record of being trustworthy’. After the first reported uses of chemical weapons in Syria last year, American and allied intelligence agencies ‘made an effort to find the answer as to what if anything, was used – and its source’, the former intelligence official said. ‘We use data exchanged as part of the Chemical Weapons Convention. The DIA’s baseline consisted of knowing the composition of each batch of Soviet-manufactured chemical weapons. But we didn’t know which batches the Assad government currently had in its arsenal. Within days of the Damascus incident we asked a source in the Syrian government to give us a list of the batches the government currently had. This is why we could confirm the difference so quickly.’


The process hadn’t worked as smoothly in the spring, the former intelligence official said, because the studies done by Western intelligence ‘were inconclusive as to the type of gas it was. The word “sarin” didn’t come up. There was a great deal of discussion about this, but since no one could conclude what gas it was, you could not say that Assad had crossed the president’s red line.’ By 21 August, the former intelligence official went on, ‘the Syrian opposition clearly had learned from this and announced that “sarin” from the Syrian army had been used, before any analysis could be made, and the press and White House jumped at it. Since it now was sarin, “It had to be Assad.”’


The UK defence staff who relayed the Porton Down findings to the joint chiefs were sending the Americans a message, the former intelligence official said: ‘We’re being set up here.’ (This account made sense of a terse message a senior official in the CIA sent in late August: ‘It was not the result of the current regime. UK & US know this.’) By then the attack was a few days away and American, British and French planes, ships and submarines were at the ready.


The officer ultimately responsible for the planning and execution of the attack was General Martin Dempsey, chairman of the joint chiefs. From the beginning of the crisis, the former intelligence official said, the joint chiefs had been sceptical of the administration’s argument that it had the facts to back up its belief in Assad’s guilt. They pressed the DIA and other agencies for more substantial evidence. ‘There was no way they thought Syria would use nerve gas at that stage, because Assad was winning the war,’ the former intelligence official said. Dempsey had irritated many in the Obama administration by repeatedly warning Congress over the summer of the danger of American military involvement in Syria. Last April, after an optimistic assessment of rebel progress by the secretary of state, John Kerry, in front of the House Foreign Affairs Committee, Dempsey told the Senate Armed Services Committee that ‘there’s a risk that this conflict has become stalemated.’


Dempsey’s initial view after 21 August was that a US strike on Syria – under the assumption that the Assad government was responsible for the sarin attack – would be a military blunder, the former intelligence official said. The Porton Down report caused the joint chiefs to go to the president with a more serious worry: that the attack sought by the White House would be an unjustified act of aggression. It was the joint chiefs who led Obama to change course. The official White House explanation for the turnabout – the story the press corps told – was that the president, during a walk in the Rose Garden with Denis McDonough, his chief of staff, suddenly decided to seek approval for the strike from a bitterly divided Congress with which he’d been in conflict for years. The former Defense Department official told me that the White House provided a different explanation to members of the civilian leadership of the Pentagon: the bombing had been called off because there was intelligence ‘that the Middle East would go up in smoke’ if it was carried out.


The president’s decision to go to Congress was initially seen by senior aides in the White House, the former intelligence official said, as a replay of George W. Bush’s gambit in the autumn of 2002 before the invasion of Iraq: ‘When it became clear that there were no WMD in Iraq, Congress, which had endorsed the Iraqi war, and the White House both shared the blame and repeatedly cited faulty intelligence. If the current Congress were to vote to endorse the strike, the White House could again have it both ways – wallop Syria with a massive attack and validate the president’s red line commitment, while also being able to share the blame with Congress if it came out that the Syrian military wasn’t behind the attack.’ The turnabout came as a surprise even to the Democratic leadership in Congress. In September the Wall Street Journal reported that three days before his Rose Garden speech Obama had telephoned Nancy Pelosi, leader of the House Democrats, ‘to talk through the options’. She later told colleagues, according to the Journal, that she hadn’t asked the president to put the bombing to a congressional vote.


Obama’s move for congressional approval quickly became a dead end. ‘Congress was not going to let this go by,’ the former intelligence official said. ‘Congress made it known that, unlike the authorisation for the Iraq war, there would be substantive hearings.’ At this point, there was a sense of desperation in the White House, the former intelligence official said. ‘And so out comes Plan B. Call off the bombing strike and Assad would agree to unilaterally sign the chemical warfare treaty and agree to the destruction of all of chemical weapons under UN supervision.’ At a press conference in London on 9 September, Kerry was still talking about intervention: ‘The risk of not acting is greater than the risk of acting.’ But when a reporter asked if there was anything Assad could do to stop the bombing, Kerry said: ‘Sure. He could turn over every single bit of his chemical weapons to the international community in the next week … But he isn’t about to do it, and it can’t be done, obviously.’ As the New York Times reported the next day, the Russian-brokered deal that emerged shortly afterwards had first been discussed by Obama and Putin in the summer of 2012. Although the strike plans were shelved, the administration didn’t change its public assessment of the justification for going to war. ‘There is zero tolerance at that level for the existence of error,’ the former intelligence official said of the senior officials in the White House. ‘They could not afford to say: “We were wrong.”’ (The DNI spokesperson said: ‘The Assad regime, and only the Assad regime, could have been responsible for the chemical weapons attack that took place on 21 August.’)




The full extent of US co-operation with Turkey, Saudi Arabia and Qatar in assisting the rebel opposition in Syria has yet to come to light. The Obama administration has never publicly admitted to its role in creating what the CIA calls a ‘rat line’, a back channel highway into Syria. The rat line, authorised in early 2012, was used to funnel weapons and ammunition from Libya via southern Turkey and across the Syrian border to the opposition. Many of those in Syria who ultimately received the weapons were jihadists, some of them affiliated with al-Qaida. (The DNI spokesperson said: ‘The idea that the United States was providing weapons from Libya to anyone is false.’)


In January, the Senate Intelligence Committee released a report on the assault by a local militia in September 2012 on the American consulate and a nearby undercover CIA facility in Benghazi, which resulted in the death of the US ambassador, Christopher Stevens, and three others. The report’s criticism of the State Department for not providing adequate security at the consulate, and of the intelligence community for not alerting the US military to the presence of a CIA outpost in the area, received front-page coverage and revived animosities in Washington, with Republicans accusing Obama and Hillary Clinton of a cover-up. A highly classified annex to the report, not made public, described a secret agreement reached in early 2012 between the Obama and Erdo?an administrations. It pertained to the rat line. By the terms of the agreement, funding came from Turkey, as well as Saudi Arabia and Qatar; the CIA, with the support of MI6, was responsible for getting arms from Gaddafi’s arsenals into Syria. A number of front companies were set up in Libya, some under the cover of Australian entities. Retired American soldiers, who didn’t always know who was really employing them, were hired to manage procurement and shipping. The operation was run by David Petraeus, the CIA director who would soon resign when it became known he was having an affair with his biographer. (A spokesperson for Petraeus denied the operation ever took place.)


The operation had not been disclosed at the time it was set up to the congressional intelligence committees and the congressional leadership, as required by law since the 1970s. The involvement of MI6 enabled the CIA to evade the law by classifying the mission as a liaison operation. The former intelligence official explained that for years there has been a recognised exception in the law that permits the CIA not to report liaison activity to Congress, which would otherwise be owed a finding. (All proposed CIA covert operations must be described in a written document, known as a ‘finding’, submitted to the senior leadership of Congress for approval.) Distribution of the annex was limited to the staff aides who wrote the report and to the eight ranking members of Congress – the Democratic and Republican leaders of the House and Senate, and the Democratic and Republicans leaders on the House and Senate intelligence committees. This hardly constituted a genuine attempt at oversight: the eight leaders are not known to gather together to raise questions or discuss the secret information they receive.


The annex didn’t tell the whole story of what happened in Benghazi before the attack, nor did it explain why the American consulate was attacked. ‘The consulate’s only mission was to provide cover for the moving of arms,’ the former intelligence official, who has read the annex, said. ‘It had no real political role.’


Washington abruptly ended the CIA’s role in the transfer of arms from Libya after the attack on the consulate, but the rat line kept going. ‘The United States was no longer in control of what the Turks were relaying to the jihadists,’ the former intelligence official said. Within weeks, as many as forty portable surface-to-air missile launchers, commonly known as manpads, were in the hands of Syrian rebels. On 28 November 2012, Joby Warrick of the Washington Post reported that the previous day rebels near Aleppo had used what was almost certainly a manpad to shoot down a Syrian transport helicopter. ‘The Obama administration,’ Warrick wrote, ‘has steadfastly opposed arming Syrian opposition forces with such missiles, warning that the weapons could fall into the hands of terrorists and be used to shoot down commercial aircraft.’ Two Middle Eastern intelligence officials fingered Qatar as the source, and a former US intelligence analyst speculated that the manpads could have been obtained from Syrian military outposts overrun by the rebels. There was no indication that the rebels’ possession of manpads was likely the unintended consequence of a covert US programme that was no longer under US control.


By the end of 2012, it was believed throughout the American intelligence community that the rebels were losing the war. ‘Erdo?an was pissed,’ the former intelligence official said, ‘and felt he was left hanging on the vine. It was his money and the cut-off was seen as a betrayal.’ In spring 2013 US intelligence learned that the Turkish government – through elements of the MIT, its national intelligence agency, and the Gendarmerie, a militarised law-enforcement organisation – was working directly with al-Nusra and its allies to develop a chemical warfare capability. ‘The MIT was running the political liaison with the rebels, and the Gendarmerie handled military logistics, on-the-scene advice and training – including training in chemical warfare,’ the former intelligence official said. ‘Stepping up Turkey’s role in spring 2013 was seen as the key to its problems there. Erdo?an knew that if he stopped his support of the jihadists it would be all over. The Saudis could not support the war because of logistics – the distances involved and the difficulty of moving weapons and supplies. Erdo?an’s hope was to instigate an event that would force the US to cross the red line. But Obama didn’t respond in March and April.’


There was no public sign of discord when Erdo?an and Obama met on 16 May 2013 at the White House. At a later press conference Obama said that they had agreed that Assad ‘needs to go’. Asked whether he thought Syria had crossed the red line, Obama acknowledged that there was evidence such weapons had been used, but added, ‘it is important for us to make sure that we’re able to get more specific information about what exactly is happening there.’ The red line was still intact.


An American foreign policy expert who speaks regularly with officials in Washington and Ankara told me about a working dinner Obama held for Erdo?an during his May visit. The meal was dominated by the Turks’ insistence that Syria had crossed the red line and their complaints that Obama was reluctant to do anything about it. Obama was accompanied by John Kerry and Tom Donilon, the national security adviser who would soon leave the job. Erdo?an was joined by Ahmet Davuto?lu, Turkey’s foreign minister, and Hakan Fidan, the head of the MIT. Fidan is known to be fiercely loyal to Erdo?an, and has been seen as a consistent backer of the radical rebel opposition in Syria.


The foreign policy expert told me that the account he heard originated with Donilon. (It was later corroborated by a former US official, who learned of it from a senior Turkish diplomat.) According to the expert, Erdo?an had sought the meeting to demonstrate to Obama that the red line had been crossed, and had brought Fidan along to state the case. When Erdo?an tried to draw Fidan into the conversation, and Fidan began speaking, Obama cut him off and said: ‘We know.’ Erdo?an tried to bring Fidan in a second time, and Obama again cut him off and said: ‘We know.’ At that point, an exasperated Erdo?an said, ‘But your red line has been crossed!’ and, the expert told me, ‘Donilon said Erdo?an “fucking waved his finger at the president inside the White House”.’ Obama then pointed at Fidan and said: ‘We know what you’re doing with the radicals in Syria.’ (Donilon, who joined the Council on Foreign Relations last July, didn’t respond to questions about this story. The Turkish Foreign Ministry didn’t respond to questions about the dinner. A spokesperson for the National Security Council confirmed that the dinner took place and provided a photograph showing Obama, Kerry, Donilon, Erdo?an, Fidan and Davuto?lu sitting at a table. ‘Beyond that,’ she said, ‘I’m not going to read out the details of their discussions.’)


But Erdo?an did not leave empty handed. Obama was still permitting Turkey to continue to exploit a loophole in a presidential executive order prohibiting the export of gold to Iran, part of the US sanctions regime against the country. In March 2012, responding to sanctions of Iranian banks by the EU, the SWIFT electronic payment system, which facilitates cross-border payments, expelled dozens of Iranian financial institutions, severely restricting the country’s ability to conduct international trade. The US followed with the executive order in July, but left what came to be known as a ‘golden loophole’: gold shipments to private Iranian entities could continue. Turkey is a major purchaser of Iranian oil and gas, and it took advantage of the loophole by depositing its energy payments in Turkish lira in an Iranian account in Turkey; these funds were then used to purchase Turkish gold for export to confederates in Iran. Gold to the value of $13 billion reportedly entered Iran in this way between March 2012 and July 2013.


The programme quickly became a cash cow for corrupt politicians and traders in Turkey, Iran and the United Arab Emirates. ‘The middlemen did what they always do,’ the former intelligence official said. ‘Take 15 per cent. The CIA had estimated that there was as much as two billion dollars in skim. Gold and Turkish lira were sticking to fingers.’ The illicit skimming flared into a public ‘gas for gold’ scandal in Turkey in December, and resulted in charges against two dozen people, including prominent businessmen and relatives of government officials, as well as the resignations of three ministers, one of whom called for Erdo?an to resign. The chief executive of a Turkish state-controlled bank that was in the middle of the scandal insisted that more than $4.5 million in cash found by police in shoeboxes during a search of his home was for charitable donations.


Late last year Jonathan Schanzer and Mark Dubowitz reported in Foreign Policy that the Obama administration closed the golden loophole in January 2013, but ‘lobbied to make sure the legislation … did not take effect for six months’. They speculated that the administration wanted to use the delay as an incentive to bring Iran to the bargaining table over its nuclear programme, or to placate its Turkish ally in the Syrian civil war. The delay permitted Iran to ‘accrue billions of dollars more in gold, further undermining the sanctions regime’.




The American decision to end CIA support of the weapons shipments into Syria left Erdo?an exposed politically and militarily. ‘One of the issues at that May summit was the fact that Turkey is the only avenue to supply the rebels in Syria,’ the former intelligence official said. ‘It can’t come through Jordan because the terrain in the south is wide open and the Syrians are all over it. And it can’t come through the valleys and hills of Lebanon – you can’t be sure who you’d meet on the other side.’ Without US military support for the rebels, the former intelligence official said, ‘Erdo?an’s dream of having a client state in Syria is evaporating and he thinks we’re the reason why. When Syria wins the war, he knows the rebels are just as likely to turn on him – where else can they go? So now he will have thousands of radicals in his backyard.’


A US intelligence consultant told me that a few weeks before 21 August he saw a highly classified briefing prepared for Dempsey and the defense secretary, Chuck Hagel, which described ‘the acute anxiety’ of the Erdo?an administration about the rebels’ dwindling prospects. The analysis warned that the Turkish leadership had expressed ‘the need to do something that would precipitate a US military response’. By late summer, the Syrian army still had the advantage over the rebels, the former intelligence official said, and only American air power could turn the tide. In the autumn, the former intelligence official went on, the US intelligence analysts who kept working on the events of 21 August ‘sensed that Syria had not done the gas attack. But the 500 pound gorilla was, how did it happen? The immediate suspect was the Turks, because they had all the pieces to make it happen.’


As intercepts and other data related to the 21 August attacks were gathered, the intelligence community saw evidence to support its suspicions. ‘We now know it was a covert action planned by Erdo?an’s people to push Obama over the red line,’ the former intelligence official said. ‘They had to escalate to a gas attack in or near Damascus when the UN inspectors’ – who arrived in Damascus on 18 August to investigate the earlier use of gas – ‘were there. The deal was to do something spectacular. Our senior military officers have been told by the DIA and other intelligence assets that the sarin was supplied through Turkey – that it could only have gotten there with Turkish support. The Turks also provided the training in producing the sarin and handling it.’ Much of the support for that assessment came from the Turks themselves, via intercepted conversations in the immediate aftermath of the attack. ‘Principal evidence came from the Turkish post-attack joy and back-slapping in numerous intercepts. Operations are always so super-secret in the planning but that all flies out the window when it comes to crowing afterwards. There is no greater vulnerability than in the perpetrators claiming credit for success.’ Erdo?an’s problems in Syria would soon be over: ‘Off goes the gas and Obama will say red line and America is going to attack Syria, or at least that was the idea. But it did not work out that way.’


The post-attack intelligence on Turkey did not make its way to the White House. ‘Nobody wants to talk about all this,’ the former intelligence official told me. ‘There is great reluctance to contradict the president, although no all-source intelligence community analysis supported his leap to convict. There has not been one single piece of additional evidence of Syrian involvement in the sarin attack produced by the White House since the bombing raid was called off. My government can’t say anything because we have acted so irresponsibly. And since we blamed Assad, we can’t go back and blame Erdo?an.’


Turkey’s willingness to manipulate events in Syria to its own purposes seemed to be demonstrated late last month, a few days before a round of local elections, when a recording, allegedly of a government national security meeting, was posted to YouTube. It included discussion of a false-flag operation that would justify an incursion by the Turkish military in Syria. The operation centred on the tomb of Suleyman Shah, the grandfather of the revered Osman I, founder of the Ottoman Empire, which is near Aleppo and was ceded to Turkey in 1921, when Syria was under French rule. One of the Islamist rebel factions was threatening to destroy the tomb as a site of idolatry, and the Erdo?an administration was publicly threatening retaliation if harm came to it. According to a Reuters report of the leaked conversation, a voice alleged to be Fidan’s spoke of creating a provocation: ‘Now look, my commander, if there is to be justification, the justification is I send four men to the other side. I get them to fire eight missiles into empty land [in the vicinity of the tomb]. That’s not a problem. Justification can be created.’ The Turkish government acknowledged that there had been a national security meeting about threats emanating from Syria, but said the recording had been manipulated. The government subsequently blocked public access to YouTube.


Barring a major change in policy by Obama, Turkey’s meddling in the Syrian civil war is likely to go on. ‘I asked my colleagues if there was any way to stop Erdo?an’s continued support for the rebels, especially now that it’s going so wrong,’ the former intelligence official told me. ‘The answer was: “We’re screwed.” We could go public if it was somebody other than Erdo?an, but Turkey is a special case. They’re a Nato ally. The Turks don’t trust the West. They can’t live with us if we take any active role against Turkish interests. If we went public with what we know about Erdo?an’s role with the gas, it’d be disastrous. The Turks would say: “We hate you for telling us what we can and can’t do.”’




4 April

Real Americans Are Ready To Snap


Posted on 11th April 2014 by Administrator in Economy |Politics |Social Issues


Guest Post by Brandon Smith

Despite popular belief, every culture of every nation draws a line in the sand against government tyranny. The problem is, many draw this line so close to total defeat that it rarely matters. For the Jews of the Warsaw Ghetto, for instance, it wasn’t until the Germans had already herded millions onto railroad cars destined for death camps and cornered the rest into dilapidated central housing that the ZOB resistance was formed, only to be wiped out a month later. Perhaps hindsight is 20/20, but clearly too many freedom movements throughout history waited too long to respond to the trespasses of oligarchs.

The Founding Fathers frequently struggled with the proper measure of resistance. Many colonials wanted vengeance on the British after the Boston Massacre in March of 1770, but patriots knew that the timing was not right. The battle to rally citizens to the cause and to educate the masses as much as possible on the facts took precedence over the desire to enter conflict. The Founders endured five more years of British government criminality until nearly 80 farmers and militiamen stood outnumbered on Lexington Green on April 19th, 1775 to confront an army of 700 British regulars on a mission to capture rebel leaders and destroy weapons caches. No one knew at the time that the war would be sparked that day, but everyone knew that a fight was inevitable and near.

I believe the same feeling hangs in the air of modern America for REAL Americans, and by “real”, I mean those who actually support and defend the constitutional values and principles that lay at the foundation of our society. We sense that something is coming; a great change, or an unstoppable reckoning.

The question of when to strike back is pivotal to any resistance movement. Turn to violence too soon or without proper cause in the eyes of the public, and the rebellion may lose the moral high ground and the support of the populace. Wait too long, and the totalitarian hordes may be too far entrenched, forcing the rebellion to fight from a position of strategic weakness.

There are those who might argue that America crossed the “red line” long ago and now our society is simply rearranging the deck chairs on the Titanic while arguing over futile semantics. In certain respects, I can see their point. The U.S. political system is utterly lost. Anyone who still has faith in the Left/Right paradigm after two terms of George W. Bush and nearly two terms of Barack Obama is either insane, or mentally challenged. It should be obvious to Republicans and Democrats alike that our government does NOT represent the average man, and our election process is a sham. Democrats in particular should be equally furious and ashamed as the candidate they blindly worshiped to the point of cultism has now forsaken every value they thought he represented.

The legal apparatus of the U.S. is also beyond repair. Those in the mainstream who argue that grievances with government should be addressed by the courts instead of independent action obviously have not considered that the courts continuously uphold and defend legislation like that contained within the NDAA, which allows for rendition, torture, and even assassination of American citizens without trial or due process. And where are the prosecutions of Constitutional violations by the NSA? Why aren’t men like James Clapper in prison for lying directly to Congress. Why hasn’t Eric Holder been slapped in irons for his involvement with “Fast and Furious”? And what about the international financiers who back these politicians? How many of them have been prosecuted for their involvement in the toxic derivatives scandals that are destroying our economy to this day?

No, we lost the courts a long time ago. They will do nothing to save this country. But is the fight already over? I think not.

Nihilism is tempting for those people who are lazy and frightened and looking for a philosophical excuse to run away from making a stand. Claiming the fight is lost before it has truly begun is a longstanding tradition amongst millions upon millions of cowards through history. Every freedom fighter in every great revolution for liberty has heard the same arguments that we hear today – “It’s too late to change things. The enemy is too powerful and you will be crushed. The nail that sticks up will eventually be hammered down. Your movement is a minority on the fringe and no one will support you. None of you have the guts to really follow through…”

While there is certainly much to despair in the state of our nation, I find the notion that Americans will do nothing in response misplaced and ignorant. From what I have observed, it is not a question of “if” citizens snap, but when.

With objective eyes one could easily see it during the last attempts by the federal government to pass anti-gun legislation that would have led to confiscation. Pro-2nd Amendment protests erupted all over the country (though the MSM mostly ignored them) with participants far outnumbering the miniscule groups in support of gun control. The sentiment amongst millions of gun owners and millions of Liberty Movement proponents was that we were not going to allow government enforcement of new gun laws. Period. If that meant we had to start using those same guns to put an end to government, then that was exactly what we would do. The feds, of course, buckled.

Rather than take the more dangerous and unifying direct route of federal legislation, gun grabbers have shifted strategies, isolating and targeting specific states they believe will be more pliable and easier to conquer. Connecticut and parts of New York, however, have shown that even people in the most socialist of states have no intention of complying with gun registration or confiscation. In Connecticut, only 38,000 high capacity magazines were registered according to the new gun laws, while approximately 2.4 million purchased through retail remain unaccounted for. Only 50,000 “assault weapons” were registered, while at least 300,000 remain unaccounted for. A sizable number of police are also refusing to enforce registration measures (some out of constitutional loyalty, and some out of a desire for self preservation), causing the state of Connecticut to back off of its hard line rhetoric.

I can say with full confidence that the conditions within Connecticut alone would lead to an open shooting war if officials actually attempt to enforce registration and confiscation. If Safe Act-style legislation or executive orders are ever enforced at a national level, I have no doubt revolution would follow.

The latest hotbed I have witnessed is the Bureau of Land Management attack on a cattle farm in Clark County, Nevada owned by Cliven Bundy. The BLM has so far stolen over 500 cattle from Bundy on the grounds that the federal government owns the land his family has been using for grazing pasture for generations. The confiscation was implemented under the auspices of “protection for endangered species”. The species in this instance being a desert tortoise.

The methods used by the BLM resemble a militant raid, with hundreds of agents, helicopters, and even snipers at their disposal. Adding insult to injury and making the issue a national concern, the feds have also staged “First Amendment Zones” miles away from their activities to keep protestors out.


This may seem like a minor event, a tiff over cattle grazing or possibly property rights, but there is much more going on here.

Tyranny leaves lasting scars, and each tyrannical act results in an accumulation of wounds on the public psyche that do not heal. In the end, a single event can become a trigger to unleash a torrent of rage pent up in a population for years or decades. The fight for Cliven Bundy’s farm has the potential to become such a trigger.

So far, federal abuses have been primarily toward Bundy’s cattle, with confiscation ongoing and suspicions that a number of the cows are being killed. Here, protestors try to stop a truck from leaving the area which they believed might be carrying dead animals. Agents respond with dogs and tasers.


However, I believe that if this situation escalates into a Waco or Ruby Ridge brand of event, not only Liberty Movement residents of Nevada, but Liberty Movement champions across the nation will indeed finally throw down the gauntlet. What does that mean? It means they are going to start shooting. Opposing groups can debate whether this is a good thing or a bad thing, but the reality is that one way or another, it is going to happen.

Discussions within the movement are far from apathetic. Hundreds of thousands if not millions of eyes are watching every move of the BLM right now, and they should be taking this fact very seriously.

The naysayers will claim that we don’t have the will to take action. They are welcome to think whatever they like. But mark my words, Constitutionally minded Americans are not going to stand by and watch another massacre, nor a loss of gun rights, nor will we be entertaining violations of our freedoms for much longer. This society is on the edge of something. It’s kinetic, or electric. It is not yet quite visible but it is there, reverberating in the atmosphere. My suggestion to our federal bureaucracy would be to do what they did during the gun debate, and quickly back away.

Of course, we all know they won’t.

Do the elites want to stir up insurgency in order to give pretense for a larger crackdown? They very well might. But it is transparent in the way they try to mitigate dissent and offer placation that they do not want a rebellion larger than they can manage. I think it is far too late for that. I think they’ve pissed off too many people, instead of just enough people. I think that though most pretend-Americans will do nothing but watch in horror or hide in their hovels, the size of resistance to the tides of despotism is growing far beyond common realizations. And, when this resistance erupts, it will shock even those who fully expect it.

You can contact Brandon Smith at: brandon@alt-market.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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Outside the Box: Risk On, Regardless

1 comment

Posted on 10th April 2014 by Administrator in Economy |Politics |Social Issues

Outside the Box: Risk On, Regardless

By John Mauldin


When Gary Shilling was with us here last fall, he and I were feeling considerably more sanguine about the near-term propects for the US and global economies. In fact, I said about Gary that “that old confirmed bear is waxing positively bullish about the future prospects of the US. In doing so he mirrors my own views.”

In today’s excerpt from Gary’s quarterly INSIGHT letter, he tackles head-on the shift in sentiment and economic performance that has ensued since then. He steps us through the ebullient headlines and forecasts that dominated at year-end, and then remarks,

It’s as if an iron curtain came down between the last trading day of 2013 and January 2014. A headline in the Feb. 5, 2014 Wall Street Journal screamed, “Turnabout on Global Outlook Darkens Mood.”

Don’t get me (and Gary) wrong: many of the positive factors that he and I identified last fall are still in play; but they are longer-term, secular factors such as technological transformation and a tectonic shift in the energy landscape rather than the cyclical factors that will dominate for most of the rest of this decade.

In today’s OTB, Gary does an excellent job of summarizing and analyzing those cyclical factors. In this extended excerpt from INSIGHT, you’ll be treated to sections on investor and consumer behavior, deleveraging, housing, income polarization, unemployment, Obamacare and medical costs, the prospects for inflation, the Fed, emerging markets, and much more.

Be sure to see the close of the letter for Gary’s special offer to OTB readers.

I find myself in the lovely tropical city of Durban, South Africa. The hotel where I’m staying, The Oyster Box, is a lovely old throwback properly set on the Indian Ocean, where you can see the continual shipping traffic queuing up to get into the port, which is the largest in Africa. The hotel reminds me of the Raffles in Singapore, with a better view and somewhat more Old World charm. Or at least what I romanticize as Old World charm from movies I saw as a kid (though some of my younger readers are probably sure I lived in that era!).

I sleep now, then get up in less than five hours to catch a plane to Johannesburg, where I will spend the next three days doing more of the speeches and interviews that I’ve been doing for the last two, for my host Glacier by Sanlam. Anton Raath, the CEO, has that quintessential ability to make everyone feel welcome and keep them on goal. I am continually impressed with the quality of South African management, whether here or among the South African diaspora. If the government here could ever figure out how to get out of their way… I wrote a Thoughts from the Frontline almost exactly seven years ago that I called “Out Of Africa.” It was a very bullish take on a country that I could see had wonderful prospects. And indeed investing in South Africa would have been a good move at the time – a solid double in seven years.

But this trip I’ve seen things and talked to people that don’t give me the same feeling. We’ll talk about it this weekend, after I have more meetings with both stakeholders and analysts of the local economy. South Africa seems to me to face many of the same problems that have beset Brazil, Turkey, and others in the Fragile Six. Why is this? Why should a country with this many resources, both physical and human, be falling behind? I think some of you can guess the answer, but I will wait to tell the rest of you in this week’s letter.

Once again, for the fourth time in my life, my hot air balloon trip was canceled! Sigh. I am not sure what the travel gods are trying to tell me, but I will not give up, and one day I expect to soar above the earth on something other than my own hot air.

Have a great week.

Your wanting to come back to this hotel and pretend to be genteel for a few days analyst,

John Mauldin, Editor
Outside the Box

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Risk On, Regardless

(Excerpted from the March 2014 edition of A. Gary Shilling’s INSIGHT)

U.S. stocks leaped 30% last year, continuing the rally that commenced in March 2009 and elevated the S&P 500 index 173% from its recessionary low (Chart 1). By late 2013, many investors were in a state of euphoria, even irrationally exuberant about prospects for more of the same this year and seized on any data that suggested that robust economic growth here and abroad would underpin more of the same equity performance.

Optimistic Forecasts

Many forecasts from credible sources accommodated them. The Organization for Economic Cooperation and Development in January said the leading indicators for its 34 members rose to 109.9 in November from 100.7 in October, foretelling faster economic growth in the first half of 2014 for the U.S., U.K., Japan and the eurozone.

The International Monetary Fund in mid-January raised its global growth forecast for 2014 real GDP from its October estimate by 0.1 percentage points to 3.7%, with the U.S. (up 0.2 points to 2.2%), Japan (up 0.4 to 1.7%), the U.K. (up 0.6 to 2.4%), the eurozone (up 0.1 to 1.0%) and China (up 0.3 to 7.5%) leading the way.

Outgoing Fed Chairman Ben Bernanke on January 3 said that the fiscal drag from federal and state fiscal policies that restrained growth in recent years was likely to ease in 2014 and 2015. Other deterrents such as the European debt crisis, tighter bank lending standards and U.S. household debt reductions were easing, he said. “The combination of financial healing, greater balance in the housing market, less fiscal restraint and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters.”

A Wall Street Journal poll of economists found an average forecast of 2.7% growth in 2014, up from 1.9% in 2013 and the official forecast of the perennially-optimistic Fed, made before Christmas, called for 2.8% to 3.2% real GDP growth this year. Also, chronically-optimistic Barron’s, in its Feb. 17, 2014 edition, headlined its cover story, “Good News. The U.S. Economy Could Grow This Year At A Surprisingly Robust 4%. Forget The Snow. Consumers And Businesses Are Ready To Spend.” Many investors also believed that the U.S. economy was about to break out of the 2% real GDP rises that have ruled since 2010.

Sentiment Shift

It’s interesting that Barron’s ran this headline after investor sentiment shifted dramatically. It’s as if an iron curtain came down between the last trading day of 2013 and January 2014. A headline in the Feb. 5, 2014 Wall Street Journal screamed, “Turnabout on Global Outlook Darkens Mood.” As stocks flattened and then fell, people started to realize that economic growth last year was weak, rising only 1.9% from 2012 as measured by real GDP.

The fourth quarter annual rate was chopped from the 3.2% “advance estimate” by the Commerce Department to 2.4%, and one percentage point of the 2.4% was due to the jump in net exports as imports fell due to domestic shale oil and natural gas replacing imported energy. Nevertheless, exports remain vulnerable to ongoing weakness in American trading partners. Also in the third quarter of 2013, 1.7 percentage points of the 4.1% growth was due to inventories. Given the disappointing Christmas sales, these were probably undesired additions to stocks and will retard growth this year as they are liquidated.

Even the stated GDP numbers show this to be the slowest recovery in post-World War II history (Chart 2). And real median income has atypically dropped in this recovery, largely due to the slashing of labor costs by American business.

Pending home sales, which are contracts signed for future closings, peaked last May and had dropped considerably before cold weather set in this past winter while housing starts fell for a third straight month in February.

Wary Investors

While stocks soared in 2013, investors didn’t dig too deeply into corporate earnings reports, but now they are. As we’ve discussed in many past Insights, with limited sales volume increases in this recovery and virtually no pricing power, businesses have promoted profits by cutting costs, resulting in all-time highs for profit margins. Many investors are now joining us in believing that the leap in profit margins, which has stalled for eight quarters, may be vulnerable.

They’re also paying more attention to the outlook for future profits and cash-generation as foretold by acquisitions and spending on R&D. Shareholders favor those companies that invest while penalizing companies that fall short. Per-share profits gains due to share buybacks are no longer viewed favorably. Furthermore, investors are aware that two-thirds of the 30% rise in the S&P 500 index last year was due to the rising P/E, with only a third resulting from earnings improvement.

In mid-February, the S&P 500 stocks were trading at 14.6 times the next 12 months earnings, higher than the 10-year average of 13.9. As Insight readers may recall, we take a dim view of this measure since it amounts to a double discount of both future stock performance and analysts’ perennially-optimistic estimates of earnings. In December, Wall Street seers, on average, forecast a 10% rise in stocks for 2014, the average of the last 10 years. But the average forecasting error over the past decade was 12% with a 50% overestimate in 2008. That 12% error was larger than the average gain of 10%.

Besides cost-cutting, the leap in profit margins has been supported by declining borrowing costs spawned by record-low interest rates. Low rates have also made equities attractive relative to plenty of liquidity supplied by the Fed and Chinese banks and shadow banks.

Last May and June, stocks, bonds and other securities were shaken by the Fed’s talk of tapering its then-$85 billion per month worth of security purchases, in part because many assumed that also meant hikes in the central bank’s federal funds rate. But then the Fed then went on an aggressive offensive to convince investors that raising rates would be much later than tapering, and investors have largely shrugged off the credit authorities’ decision in December to cut its monthly purchases from $85 billion to $75 billion in January and by another $10 billion in February.

The Fed’s decision in January came despite the recent signs of weak U.S. economic activity, weather-related or not, and indications of trouble abroad. Furthermore, although the Fed is still adding fuel to the fire under equities, it is adding less and less, and is on schedule to end its quantitative easing later this year.

The Age of Deleveraging

So the zeal for equities persists but we remain cautious about the spread between that enthusiasm and the sluggish growth of economies around the globe. As in every year of this recovery, the early-in-the-year hope for economic acceleration that would justify soaring equities may again be disappointed, and real GDP is likely to continue to rise at about a 2% annual rate.

Deleveraging after a major bout of borrowing and the inevitable crisis that follows normally takes a decade. The process of working down excess debt and retrenching, especially by U.S. consumers and financial institutions globally, is six years old, so history suggests another four years of deleveraging and slow growth. And, as we’ve noted many times in the past, the immense power of deleveraging is shown by the reality that slow growth persists despite the massive fiscal and monetary stimulus of recent years. Furthermore, although the Fed hasn’t started to sell off its immense holdings of securities, as it will need to in order to eliminate excess bank reserves, it is reducing the additions to that pile by tapering its new purchases.

Consumers Retrench

In the U.S., some have made a big deal over the uptick in domestic borrowing in the fourth quarter of 2013. Auto loans have risen, the result of strong replacement sales of aged vehicles, but sales are now falling. Student debt and delinquencies continue to leap (Chart 3). The decline in credit borrowing may be leveling, but what’s gotten the most attention was the rise in mortgage debt.

Since housing activity is falling, the mortgage borrowing uptick is due to fewer foreclosures and mortgage writeoffs as well as easier lending standards by some banks. They are under continuing regulatory pressure to increase their capital and slash their exposure to highly-profitable activities like derivatives origination and trading, off-balance sheet vehicles and proprietary trading, so banks are eager for other loans. Furthermore, the jump in mortgage rates touched off by the Fed’s taper talk has slaughtered the profitable business of refinancing mortgages as applications collapsed.

Household debt remains elevated even though, as a percentage of disposable personal income, it has fallen from a peak of 130% in 2007 to 104% in the third quarter, the latest data (Chart 4). It still is well above the 65% earlier norm, and we’re strong believers in reversion to well-established norms. Even more so considering the memories many households still have of the horrors of excess debt and the losses they suffered in recent years.

Furthermore, given the lack of real wage gains and real total income growth, the only way that consumers can increase the inflation-adjusted purchases of goods and services is to reduce their still-low saving rate or increase their still-high debts. Furthermore, consumer confidence has stabilized after its recessionary nosedive but remains well below the pre-recession peak.

So, in rational fashion, consumers are retrenching, with retail sales declines in December and January and slightly up in February. That’s much to the dismay of retailers who appear to be stuck with excess merchandise, as reflected in their rising inventory-sales ratio. And recall that retailers slashed prices on Christmas goods right before the holidays to avoid being burdened with unwanted inventories. Of course, there’s the usual argument that cold winter weather kept shoppers at home. But that’s where they could order online, yet non-store retail sales—largely online purchases—actually fell 0.6% in January in contrast to the early double-digit year-over-year gains.

We’re not forecasting a recession this year but rather a continuation of slow growth of about 2% at annual rates. But with slow growth, it doesn’t take much of a hiccup to drive the economy into negative territory. And indicators of future activity are ominous. The index of leading indicators is still rising, but a more consistent forecaster—the ratio of coincident to lagging indicators—is falling after an initial post-recession revival.


Housing activity is retrenching, with pending sales, housing starts and mortgage applications for refinancing all declining. Also, as we’ve discussed repeatedly in past Insights, the housing recovery has never been the on the solid backs of new homeowners who buy the starter houses that allow their sellers to move up to the next rung on the housing ladder, etc. Mortgage applications for house purchases, principally by new homeowners, never recovered from their recessionary collapse. Multi-family housing starts, mostly rental apartments), recovered to the 300,000 annual rate of the last decade but single-family starts, now about 600,000, remain about half the pre-collapse 1.1 million average.

Many potential homeowners, especially young people, don’t have the 20% required downpayments, are unemployed or worry about their job security, don’t have high enough credit scores to qualify for mortgages, and realize that for the first time since the 1930s, house prices nationwide have fallen—and might again. Prices have recovered some of their earlier losses (Chart 5), but in part because lenders have cleaned up inventories of foreclosed and other distressed houses they sold at low prices. In any event, prices weakened slightly late last year.

Some realtors complain that existing home sales are being depressed by the lack of for-sale inventory. Nevertheless, inventories of existing houses rose from December to January by 2.2%. Fannie Mae reported that its inventories of foreclosed properties rose for the second time in the last three months of 2013 as sales fell and prices dropped for the first time in three years. Also, with the percentage of underwater home mortgage loans dropping—to 11.4% in October from 19% at the start of 2013—potential sellers may emerge now that their houses are worth more than their mortgages.

Income Polarization

Rising equity prices persist not only in the face of a weak economic recovery, including a faltering housing sector, but also a recovery that has been benefiting relatively few. The winners are found in the financial sector and those with brains and skills to succeed in today’s globalized economy that put the low-skilled in direct competition with lower-paid workers in developing lands. The ongoing polarization of incomes illustrates this reality eloquently.

Chart 6 shows that the only share of income that continues to increase is the top quintile. All of the four lower quintiles continue to lose shares. Income polarization is very real in the minds of many. It probably doesn’t bother people too much as long as their real incomes are rising. Sure, their shares of the total may be falling but their purchasing power is going up. But now both the shares and real incomes of most people are falling.

Resentment is being augmented by huge pay packages of the CEOs of big banks that were bailed out by the federal government. The number of billionaires in the world, most of them in the U.S., rose from 1,426 in 2012 to 1,645 last year, far surpassing the 1,125 in 2008.

The leaders of financial institutions and other businesses appear to be setting themselves up as easy targets for President Obama, who is fanning the flames of income inequality with some rather pointed rhetoric. Last year, he said, “Ordinary folks can’t write massive campaign checks or hire high-priced lobbyists and lawyers to secure policies that tilt the playing field in their favor at everyone else’s expense. And so people get the bad taste that the system is rigged, and that increases cynicism and polarization, and it decreases the political participation that is a requisite part of our system of self-government.”

Minimum Wages

Nevertheless, pressure to reduce income inequality remains strong and the Administration’s attempts to raise minimum wages are an obvious manipulation of its efforts in this area. The President issued an executive order raising minimum wages on new federal contracts and in his State of the Union address called for an increase in the federal minimum wage from $7.25 per hour to $10.10 in 2016.

The effects of the minimum wage have been hotly debated for years, no doubt since it was first introduced in 1938, and during each of the nearly 30 times it’s been raised since then, the latest in 2009. Liberals argue that it increases incomes and purchasing power and lifts people out of poverty. Conservatives believe that higher labor costs reduce labor demand, encourage automation, the hiring of fewer high-skilled people and result in more jobs being exported to cheaper areas abroad. A new study by the bipartisan Congressional Budget office found that both arguments are true.

The report predicts that 16.5 million workers would benefit from the President’s proposal and lift 900,000 out of poverty from the 45 million projected to be in it in 2016. Earnings of low-paid workers would rise $31 billion. Since low-income people tend to spend most of their paychecks, higher consumer outlays would result.

But the CBO also predicts that the proposed rise in minimum wages would eliminate 500,000 jobs and because of their income losses, the overall effect on wages would be an increase of only $2 billion, not $31 billion. Also, 30% of the higher pay would go to families that earn three times the poverty level since many minimum wage workers are second earners and teenagers in middle- and upper-income households. And higher labor costs would retard profits and result in price increases, muting the effects of more spending power by higher minimum wage recipients.

In any event, it appears that the proposed jump in the minimum wage from $7.25 to $10.10 would cause a lot of distortions and no doubt unintended consequences for a net gain in low-wage earnings of just $2 billion. That’s less than a rounding error in the $17 trillion economy and would do almost nothing to narrow income inequality. Regardless of the merits, the evidence suggests that higher federal minimum wages are probably in the cards.


By his promotion of an increase in the minimum wage, the President reveals his preference for higher pay for those with jobs over the creation of additional employment. This seems strange politically in an era when unemployment remains very high, especially when corrected for the fall in the labor participation rate (Chart 7).

As also noted earlier, the cutting of costs, especially labor costs, has been the route to the leap in profit margins to record levels and the related strength in corporate earnings in an era when slow economic growth has curtailed sales volume gains, the absence of inflation has virtually eliminated pricing power and the strengthening dollar is creating currency translation losses for foreign and export revenues.


One reason for the Administration’s emphasis on income inequality and raising the minimum wage may be to divert attention from the troubled rollout of Obamacare. True, big new government programs always have bugs but the Administration’s overconfidence in initiating Obamacare and the lack of testing of its website is notable. Also, Obama promised that “if you like your plan, you can keep it,” but many, in effect, are being forced into high-cost but more comprehensive policies. To reduce the flack it is receiving, the Administration plans for a second time to allow insurers to sell policies that don’t comply with the new federal law for at least 12 more months.

Another problem for the Administration is that Obamacare will reduce working hours by the equivalent of 2.5 million jobs by 2024, according to the CBO. People will work less in order to have low enough incomes to qualify for Obamacare health insurance subsidies. Also, older workers who previously planned to keep their jobs until they could qualify for Medicare will cut back their hours or leave the workforce entirely in order to qualify for Medicare, the federal-state programs for low-income folks that are being expanded under Obamacare.

Hospitals may benefit from Obamacare. Under a 1970s-era law, they must shoulder the emergency room costs of the uninsured, but those risks are being shifted to insurers and taxpayers. Taxpayers will also pay more since 25 states have refused to expand Medicaid, leaving the federal government to set up and run the enhanced programs.

More Medical Costs

Not only is Obamacare proving unaffordable for many but also promises huge additional costs for the government. Healthcare outlays have been leaping and were already scheduled to continue skyrocketing under previous laws as the postwar babies retire and draw Medicare benefits while Medicare costs leap. The original projected jump in insured people under Obamacare was not projected by the Administration to increase the government’s health care costs appreciably from what they otherwise would have been. You might recall, however, that when Obamacare was enacted, we noted in Insight that after Medicare was introduced in 1967, the House Ways and Means Committee forecast its cost at $12 billion in 1990. It turned out to be $110 billion—nine times as much. Obamacare is no doubt destined for the same cost overruns.

Acting in what they perceive to be their best economic interest, elderly people and those in poor health—but not healthy folks—have persevered through the government website labyrinth to sign up for healthcare exchanges. They’re taking advantage of the law’s ban on discrimination based on health conditions and age-related premiums. Many healthy people, on the other hand, don’t want to pay higher premiums than on their existing policies, and many of those who are uninsured want to remain so.

So, to make insurance plans economically viable, in the absence of younger, healthy participants to pay for the ill ones, insurers will need to be subsidized by the government or premiums will need to be much higher and therefore much less attractive to all but the chronically ill. This self-reinforcing upward spiral in health care insurance premiums would no doubt also require substantial government subsidies. Aetna expects to lose money this year on its health care exchanges due to enrollment that is skewed more than expected to older people.

Many of the young, healthy people needed to make Obamacare function as a valid insurance fund would rather pay the penalty, which begins at $95 for this year, and continue to use the emergency room instead for medical treatment. Even the escalation of the penalty from $150 in 2014 for a single person earning $25,000 to $325 in 2015 and $695 in 2016 may not spur sign-ups. In total, there are 11.6 million people ages 18 to 34 who are uninsured, a big share of the 32 million Obamacare is intending to insure.

Some employers, especially smaller outfits, plan to encourage employees to sign up for exchanges and drop company plans. The government could push up the now-low penalties for not signing up to force participation, but we doubt that the Administration would risk the ire of an already-unhappy public in pursuing this approach. On balance, the taxpayer cost of Obamacare seems destined to exceed vastly the $2 billion originally projected gap.

The Fed

The Fed is on course to continue reducing its monthly purchases of securities and at the current rate, would cut them from $65 billion at present to zero late this year. The minutes of the Fed’s January policy meeting indicate that it would take a distinct weakening of the economy to curtail another $10 billion cut in security purchases in March.

The tapering of the Fed’s monthly security purchases only reduced the ongoing additions to the staggering pile of $2.5 trillion in excess reserves. That’s the difference between the total reserves of member banks at the Fed, created when the central bank buys securities, and the reserves required by the bank’s deposit base. Normally, banks lend and re-lend those reserves and each dollar of them turns into $70 of M2 money. But with banks reluctant to lend and regulators urging them to be cautious while creditworthy borrowers are swimming in cash, each dollar of reserves has only generated $1.4 in M2 since the Fed’s big asset purchase commenced in August 2008.

At present, those excess reserves amount to no more than entries on the banks’ and the Fed’s balance sheets. But when the Age of Deleveraging ends in another four years or so and real GDP growth almost doubles from the current 2% annual rate, those excess reserves will be lent, the money supply will leap and the economy could be driven by excess credit through full employment and into serious inflation. So as the Fed is well aware, its challenge is, first, to end additions to those excess reserves through quantitative easing and then eliminate them by selling off its huge securities portfolio. This will be Yellen’s major job, assuming she’s still chairwoman in coming years.

Raise Rates?

Last spring, when the Fed began to talk of tapering its monthly security purchases, investors assumed that to mean simultaneous increases in interest rates, so Treasury notes and bonds sold off as interest rates jumped. In the course of 2013, however, the Fed’s concerted jawboning campaign convinced markets that the two were separate policy decisions and that rate-raising was distant. Still, as in almost every year since the great rally in Treasury bonds began in 1981 (Chart 8), the chorus of forecasters at the end of 2013 predicted higher yields in 2014.

“Treasury Yields Set To Resume Climb,” read a January 2 Wall Street Journal headline. It cited a number of bond dealers and investors who expected the yield on 10-year Treasury notes to rise from 3% at the end of 2013 to 3.5% a year later or even 3.75%. They cited a strengthening economy, Fed tapering and higher inflation. Many investors rushed into the Treasury’s brand new floating rate 2-year notes when they were issued in January in anticipation of higher rates. About $300 billion in floating-rate securities already existed, issued by Fannie Mae and Freddie Mac as well as the U.K. and Italian governments.

Nevertheless, Treasurys have rallied so far this year as the 10-year note yield dropped to 2.6% on March 3 from 3.0% at the end of 2013. U.S. economic statistics so far this year are predominantly weak, as noted earlier. Emerging markets are in turmoil. China’s growth is slowing.


Besides concerns over the sluggish economic recovery and chronic employment problems, the Fed worries about too-low inflation, which remains well below its 2% target, and over the threat of deflation.

As discussed in our January 2014 Insight, there are many ongoing deflationary forces in the world, including falling commodity prices, aging and declining populations globally, economic output well below potential, globalization of production and the resulting excess supply, developing-country emphasis on exports and saving to the detriment of consumption, growing worldwide protectionism including competitive devaluation in Japan, declining real incomes, income polarization, declining union memberships, high unemployment and downward pressure on federal and state and local government spending.

Very low inflation is found throughout developed countries (Chart 9). It ran 0.8% in the eurozone in January year over year, well below the target of just under 2%. In Germany, where employment is high, inflation was 1.2% but lower in the southern weak countries with 0.6% in Italy, 0.3% in Spain and a deflationary minus-1.4% in Greece in January from a year earlier. In the U.K., inflation in January at 1.9% was just below the Bank of England’s 2% target.

Chronic Deflation Delayed

We’ve noted in past Insights that aggressive monetary and fiscal stimuli probably have delayed but not prevented chronic deflation in producer and consumer prices (see “What’s Preventing Deflation?,” Feb. 2013 Insight). Still, this year may see the onset of chronic global deflation. And it will probably be a combination of the good deflation of new technology- and globalization-driven excess supply with the bad deflation of deficient demand.

Why do the Fed and other central banks clearly fear deflation and fight so hard to stave it off? There are a number of reasons. Steadily declining prices can induce buyers to wait for still-lower prices. So, excess capacity and inventories result and force prices lower. That confirms suspicions and encourages buyers to wait even further. Those deflationary expectations are partly responsible for the slow economic growth in Japan for two decades.

Central banks also worry that with deflation, it can’t create negative interest rates that encourage borrowers to borrow since, then, in real terms, they’re being paid to take the filthy lucre away. Since central bank target rates can’t go below zero, real rates are always positive when price indices are falling. This has been a problem in Japan many times in the last two decades (Chart 10). Furthermore, credit authorities fret that if chronic deflation sets in, it can’t very well raise interest rates. That means it would have no room to cut them as it would prefer when the next bout of economic weakness threatens.

Central banks also are concerned that deflation raises the real value of debts and could produce considerable financial strains in today’s debt-laden economies. In deflation, debt remains unchanged nominally, but as prices fall, it rises in real terms. Since the incomes and cash flows of debtors no doubt fall in nominal terms, their ability to service their debts is questionable. This makes banks reluctant to lend. Governments also worry about the rising real cost of their debts in deflation, especially when slow growth makes it difficult to reduce even nominal debts in relation to GDP. This is the dilemma among the Club Med eurozone countries. Deflationary cuts in wages and prices make them more competitive but raises real debt burdens.

Emerging Markets: Sheep and Goats

As noted earlier, the agonizing reappraisal of emerging economies by investors commenced with the Fed’s taper talk last May and June. Investors have been forced to separate well-managed emerging economies, the good guys, or the Sheep that, in the Bible, Christ separated from the bad guys, the Goats with poorly-run economies.

Our list of Sheep—South Korea, Malaysia, Taiwan and the Philippines—have current account surpluses, which measure the excess of domestic saving over domestic investment. So they are exporting that difference, which gives them the wherewithal to fund any outflows of hot money. The Sheep also have stable currencies against the U.S. dollar, moderate inflation and fairly flat stock markets over the last decade. Also, with their current account surpluses, the Sheep haven’t been forced to raise interest rates in order to retain hot money.

In contrast, the Goats have negative and growing current account deficits. These countries include the “fragile five”—Brazil, India, Indonesia, South Africa and Turkey—with basket case Argentina thrown in for good measure. They also have weak currencies, serious inflation and falling stock markets on balance. These Goats rely on foreign money inflows to fill their current account deficits, so when it leaves, they’re in deep trouble with no good choices. They’ve raised interest rates to try to retain and attract foreign funds. Higher rates may curb inflation and support their currencies but they depress already-weak economies while any strength in currencies is negative for exports.

The alternative is exchange controls, utilized by Argentina as well as Venezuela. That’s why Argentina hasn’t bothered to increase its central bank rate. But these policies devastate already-screwed up economies. In Argentina, artificially-low interest rates and soaring inflation encourage Argentinians to spend, not save. Inflation is probably rising at about a 40% annual rate this year, up from 28% in 2013 but officially 11%. Purchasers are frustrated because retailers don’t want to sell their goods, knowing they’ll have to replace inventories at higher prices—if they can obtain them.

Who Gives? Who Gets?

In some ways, even the Goats among emerging economies are better off than they were in the late 1990s. Back then, many had fixed exchange rates and borrowed in dollars and other hard foreign currencies. So they didn’t want to devalue because that would increase the local currency cost of their foreign debts. Consequently, they all were vulnerable and fell like dominoes when Thailand ran out of foreign currency reserves in 1997. That touched off the 1997-1998 Asian crisis that ultimately spread to Russia, Brazil and Argentina.

Today, less foreign borrowing, more debts in local currencies and flexible exchange rates make adjustments easier. Still, as discussed earlier, the sharp currency drops that are seen promote inflation, but raising interest rates to protect currencies depresses economic growth. Either way, it’s no-win in Goatland.

Furthermore, as our friends at GaveKal research point out, current account balances globally are a zero sum game, so if the Goats’ current account deficits decline, other countries’ balances must weaken. This is difficult in an era of slow growth in global trade. Which countries will volunteer to help out the Goats? Not likely the Sheep. Not the U.S. As noted earlier, the Fed has said clearly that the emerging countries are on their own. China isn’t likely as overall growth slows and both import and export order indices in China’s Purchasing Managers Index have dropped below 50, indicating contraction. Furthermore, China maintains her mercantilist bias and isn’t overjoyed with her much diminished recent current account and trade balances.

A collapse in oil prices would transfer export earnings from OPEC to energy-importing Goats but oil shocks as a result of a Middle East crisis or an economic collapse and revolution in Venezuela seem more likely. Japan is going the other way, with the Abe government’s trashing of the yen designed to spike exports, reverse the negative trade balance and the soon-to-go-negative current account. The eurozone is also unlikely to help the Goats due to its slow growth and attempts by the Club Med South, mentioned earlier, to become more competitive and improve their trade balances.




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