Wall Street and the Military are Draining Americans High and Dry

Submitted by Guest Contributor – William Edstrom

The United States (US) government often cites $18 trillion as the amount of money that they owe, but their actual debts are higher. Much higher.

The government in the USA owes $13.2 trillion in US Treasury Bonds, $5 trillion in money borrowed by the US Federal government from Federal government trust funds like the Social Security trust fund, $0.7 trillion for state bonds issued by the 50 states, $3.7 trillion for the municipal bond market (US towns, cities and counties), $1.97 trillion still owing by Freddie Mac and Fannie Mae, mostly for bad mortgages in years gone by, $6.23 trillion owed by US government authorities other than Fannie Mae and Freddie Mac, $1.04 trillion in loans taken out by the US Federal government (e.g. government credit card balances, short term loans) and $0.63 trillion in loans owed by government authorities (e.g. their government credit card balances, short term loans). As of April 1, 2015, according to the Federal Reserve Bank’s Financial Accounts of the US report, the government in the USA has $32.77 trillion in debt excluding unfunded government pension debts and unfunded government healthcare costs

Debt is money that has to be paid. The government in the USA also has to pay $6.62 trillion for unfunded pension liabilities, as of April 1, 2015. There are thousands of government pension plans in the USA (e.g. County, State, Teacher’s, Police). The Federal Employees Pension Plan is now short $1.9 trillion according to the Fed’s March 2015 statement plus $4.7 trillion in unfunded state and municipal pension liabilities according to State Budget Solutions which calculates on actual pension returns (approx. 2.5% per year from 2009 to 2014, instead of the fantasy ‘assumption’ of an 8% return used by the Fed to guesstimate pension fund money). The largest governmental pension fund in Puerto Rico ran out money (became insolvent) in 2012 and the government now has to pay $20.5 billion for that. Pension contributions into government pension plans have been less than what these pension plans pay out to retirees which is why the government was short by $6.62 trillion for government pensions as of April 1, 2015.

The DJIA has gone down 9.5% since the Spring. $6.3 trillion in governmental pension plan money was invested in wall street as of April 1^st. Additional government pension plan losses have been, so far this year, $0.6 trillion. As of August 29, 2015, the government in the US owes $7.2 trillion for pensions. Every additional 10% the DJIA drops is another $0.6 trillion in unfunded pension costs that the government has to pay.

The Federal government owed $1.95 trillion in unfunded entitlements for the Federal Employees Pension Fund as of April 1, 2015. Unfunded entitlements are health care benefits for retirees above and beyond Medicare benefits. States, municipalities and governmental authorities owe an additional $4.2 trillion for retiree health benefits. Medicare and Medicaid costs, about $0.83 trillion in 2014, escalate 6% a year and Obamacare adds $0.18 trillion a year in governmental health costs, mostly for subsidies. Medicare, Medicaid and Obamacare costs will escalate to $1.28 trillion in 2018.

Bottom line, as of August 29, 2015, the government in the USA owes $46.1 trillion (bonds, unfunded pension costs, unfunded healthcare costs, credit card balances and loans).

The Chinese Bubble

Submitted by Beppe Grillo  – The Beppe Grillo Blog

The devaluation of the currency decided by China’s Central Bank has surprised financial markets. After anchoring the yuan to the dollar within a minimum margin of oscillation, after the Lehman crisis, the Chinese authorities have progressively broadened the oscillation zone and in 2014, they altered it from 1% to 2%. The decision in August to disconnect the yuan from the dollar has made it possible for the market to stabilise fluctuations in the currency and China did not intervene to correct the oscillation in the value of the yuan and thus it allowed the currency to devalue. Why?

Reasons for the devaluation

An initial response can be found in the 8% annual fall in Chinese exports reported in the month of July. Connecting the yuan to the dollar after the crisis in 2008, eliminated the exchange rate risk and it facilitated the flow of foreign investments but it also brought about a devaluation of the yuan that penalised the balance of trade. In fact the real Chinese exchange rate increased by 30% between 2008 and 2014, most of which was in that last year following on from expectations of the rise in USA interest rates and the relative increase in the value of the dollar. The result saw a decline in exports to such an extent that it now needs explaining – now at no more than 20% of China’s GDP as compared to 40% a few years ago. Devalue to maintain growth is thus the first and most obvious way of looking at this new mercantilist spirit on the part of the Chinese monetary authorities.

The Chinese property bubble

2008 was the start of the Chinese property bubble.

The de facto regime of fixed exchange rates with the dollar and the enormous reserves in foreign currencies have guaranteed the convertibility of the yuan and this has facilitated the flow of capital and the disproportionate expansion of credit to families. Since 2008, all the advanced economies have entered a phase of credit contraction (deleverage), whereas China has been moving in the opposite direction: from 2008 to 2014 private debt in China as a percentage of GDP, has gone from 100% to 180% (of this, corporate debt as a percentage of GDP has gone from 85% to 140% and for families it has gone up by a bit less than a multiple of three: – from 15% in 2008 to 40% today). This means that the ratio of private debt to GDP in China reached and went beyond the levels that Japan and the United States recorded in a 17 year period: from 1993 to 2010.

QE4 and Dow at 25,000

Submitted by William Bonner, Chairman – Bonner & Partners

Nuts to Lend at Zero

GUALFIN, Argentina – The Great Zombie War is proceeding as expected …

Cannons to the left. Cannons to the right. And a fool on every corner. It will become more and more dangerous, we predict. Then in a fiery ball of hyperinflation and bombastic imbecility, it will all be over …

Ready… aim… fire! These are the cannons of les invalides in Paris… we couldn’t find the cannons of les imbecilesin a hurry, but if we do, we’ll update the image.

Photo credit: Eric Gaba

If we’re lucky.

Then we will return to sanity – older, wiser… and much poorer. But that won’t happen in a day. Or a week. Or even a year.

On Monday, the stock market bounce that began at the end of last week reversed course. The Dow closed down 114 points. This left the U.S. stock market with its worst monthly performance in five years.

This alone is meaningless. Markets go up and down. Nothing new there. But this is a very special market. The very special policies of the Fed, and other major global central banks, have been made especially dangerous.

The DJIA yo-yo; going up and down a lot lately – click to enlarge.

Whoever heard of lending money for zero interest? Are they mad? Does capital have no value at all? Is there no longer any virtue in saving money?

Yes, it is nuts to lend at zero. But the Fed has been keeping its key lending rate near the zero bound for the past 80 months. And when you lend money for nothing, you have to expect that other things will become a little nutty too. And so they have!

As President Reagan’s budget adviser and outspoken Wall Street critic David Stockman points out, not a penny of this EZ money has gone to the real economy. Instead, it has all ended up encrusted to the bottom of Wall Street’s yachts.

Stocks Rejected at Initial Resistance

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Not Enough Rebound Oomph

Yesterday we wrote about the fact that last week’s rebound had brought the market (in the form of the S&P 500) back to a first zone of resistance (former support). We actually suspected the market may try for the second resistance level above, but it was not to be. Here is the situation at the time of writing (obviously, high intra-day volatility means that today’s candle can change relatively quickly):

The SPX rebound hasn’t managed to go beyond the initial lateral resistance level – click to enlarge.

Interestingly, this renewed decline isn’t really greeted with a lot of fear in the options markets as far as we can tell. The Chicago Board equity put-call volume ratio ended below the 70 level yesterday, and the VIX isn’t rising a whole lot either. We are not sure if this is a sign of complacency, but on the face of it, that is what it seems to be (quite often a failure of the VIX to rise much in a sell-off indicates that the market will soon reverse up again, so take this with a grain of salt):

The equity put-call volume ratio and the VIX – complacency? – click to enlarge.

Conclusion

 In similar situations in the past, the market has usually at the very least retested the initial lows or even undercut them. Moreover, the market action leaves the possibility open that a crash wave is actually underway. Note that this actually wouldn’t change if the market recovered from a sharp intraday sell-off – such recoveries happen quite often during crashes.

All in all the action doesn’t look particularly good and largely seems to be driven by a global growth scare, as it becomes ever more obvious that economic growth is weakening in a number of regions (including the US). The only potentially positive sign we can detect at this stage is the relatively small move in the VIX, but as always, there is more than one way of interpreting it.

The Nightmare Scenario

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

It wouldn’t be a day ending in “y” without some funky news about what the PBOC is now doing. Today’s edition includes the unconfirmed rumors of forex deposits. Apparently the PBOC is going to require, starting October 15 (are they trying to force the bottleneck?), banks to reserve 20% of some figure which isn’t at all clear at the moment. The mainstream media is reporting “sales” as the whispered indication but that may mean netted sales or something else.

The People’s Bank of China will impose a reserve requirement on financial institutions trading in foreign-exchange forwards for clients, according to six people familiar with the matter. The change, which takes effect on Oct. 15, will mandate a deposit of 20 percent of sales to be held at zero interest for a year, said the people, who asked not to be identified because they aren’t authorized to speak on the issue.
“It’s a move to ease the reduction in foreign-exchange reserves,” said Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong Ltd. “It’s also meant to discourage speculation and ensures the yuan’s rates are reflecting genuine demand and supply. That includes cross-border yuan investment into fixed assets.”

While it is tempting, as always, to frame this as aimed against “undue” speculation, the wholesale reality of the “dollar” again rears its ugly and devastating head. To figure out exactly why, it is necessary to take a few steps back and rerun these escalating measures in the wider “dollar” context. Much of what is believed about the world of forex is taken from two positions; the first, as if “reserves” were themselves a meaningful idea and even the tabulations that are reported to various intra-national institutions like the IMF are solid rather than dynamically amorphous; second, that the current state of the global trade world is derived from lessons purportedly learned in 1997-98 – the Asian flu.

In the past few months, concerns about reserves have been expressed in an “unexpected” manner given what was taken as financial gospel even during the building “dollar” strain. The common refrain was something along the lines of the usual “central banks are better prepared” because of how they so disastrously failed before. In the case of forex, that meant some combination of floating currencies and huge “stockpiles” of “reserves.”

From Bloomberg June 2015:

Unlike the 1997-1998 Asia financial crisis governments in the region are now better prepared, having introduced free floating exchange rates and building up forex reserves. Although as the Fed taper tantrum showed, funds can still flow quickly out of Asia, punishing local currencies.

Even just last week, printed in the South China Morning Post, the idea was reworn as if it were a shield against what the author terms, “caught up in a tornado called ‘Fed policy.’”

The emerging countries in aggregate have done significantly better at macroeconomic management this time compared with the shocks of the past two decades. Many of these countries have floated their currencies, paid close attention to their current account deficits, become more fiscally responsible and have amassed a sizeable foreign exchange reserve position that together has left them better placed to deal with increased currency, bond and equity market volatility. Their banking systems are better capitalised, and a significant part of their incremental indebtedness is now denominated in local currency (rather than US dollars).

All of that is true, but I still don’t see how it adds up to whatever protective benefit is being ascribed to it all. Part of that stems, as always, from the under-appreciation (or just completely lack of awareness) of wholesale banking dynamics about the modern “dollar” under the eurodollar standard. It seems quite reasonable that with floating currencies and huge piles of particularly dollar reserves that any foreign central bank would be able to almost easily withstand “capital outflows.” But in the wholesale case, what is thought to be the primary positive countermeasure is actually a measure of vulnerability.

The Rise Of The Inhumanes

Submitted by Dr. Paul Craig Roberts – Institute for Public Economy

America’s descent into totalitarian violence is accelerating. Like the Bush regime, the Obama regime has a penchant for rewarding Justice (sic) Department officials who trample all over the US Constitution. Last year America’s First Black President nominated David Barron to be a judge on the First US Circuit Court of Appeals in Boston.

Barron is responsible for the Justice (sic) Department memo that gave the legal OK for Obama to murder a US citizen with a missile fired from a drone. The execution took place without charges presented to a court, trial, and conviction. The target was a religious man whose sermons were believed by the paranoid Obama regime to encourage jihadism. Apparently, it never occurred to Obama or the Justice (sic) Department that Washington’s mass murder and displacement of millions of Muslims in seven countries was all that was needed to encourage jihadism. Sermons would be redundant and would comprise little else but moral outrage after years of mass murder by Washington in pursuit of hegemony in the Middle East.

Barron’s confirmation ran into opposition from some Republicans, some Democrats, and the American Civil Liberties Union, but the US Senate confirmed Barron by a vote of 53-45 in May 2014. Just think, you could be judged in “freedom and democracy America” by a fiend who legalized extra-judicial murder.

While awaiting his reward, Barron had a post on the faculty of the Harvard Law School, which tells you all you need to know about law schools. His wife ran for governor of Massachusetts. Elites are busy at work replacing law with power.

Gold Coin Sales Surge 306% YoY In August, Silver Sales More Than Double

Submitted by Mark O’Byrne  –  GoldCore

DAILY PRICES
Today’s Gold Prices: USD 1140.00, EUR 1010.73 and GBP 746.46 per ounce.
Yesterday’s Gold Prices: USD 1141.90, EUR 1012.23 and GBP 744.10 per ounce.
(LBMA AM)

Gold was marginally higher yesterday and closed at $1139.80 per ounce, up $4.30. Silver was 0.1% lower and closed at $14.60 per ounce.

Silver in USD – 5 Years

Stocks in the U.S., Asia and this morning in Europe had seen a renewed rout as concerns about China’s slowing economy and the global economy badly impacts financial markets.

The Standard & Poor’s 500 Index began September badly with its third-biggest loss of 2015 as the sharp falls that erased $5.7 trillion from the value of shares globally in August continued.

Oil tumbled the most in two months after a 27% gain in the previous three days. Emerging assets plunged and a measure of the risk premium on high-yield debt jumped.

Demand for safe haven assets such as Treasuries, gold and silver remerged. Despite a month over month decline in coin sales amid volatility in the metals market, the U.S. Mint posted solid coin sales in August.

According to the latest data on the US Mint’s website, sales of the American Eagle Bullion gold coin amounted to 101,500 ounces last month, down 40% from the 170,000 ounces sold in July. However, year-over-year, coin sales rose 306% when compared to the 25,000 ounces sold in August 2014 – see the full article in Commentary here.

IMPORTANT NEWS

Gold extends rally, Chinese frailty sinks equities – The Bullion Desk
US Mint’s American Eagle Bullion Sales Rally in August – CoinNews.net
Gold at One-Week High on Weaker Equities and Dollar’s Retreat – The Wall Street Journal
After a 39% Rout, China Stocks Are Still Double Hong Kong Prices – Bloomberg
Asian shares fall for third day on global growth concerns – Reuters

IMPORTANT COMMENTARY

Gold Coin Sales Surge 306% YoY In August, Silver Sales More Than Doubled – Gold-Eagle
U.S. Gold Production Finally Hit Hard Due To Low Price – GoldSeek
Keiser Report: Stop What’s That Sound? Falling Markets! – Max Keiser
Money—How to Get It and Keep It – Casey Research
‘Death cross’ patterns spread to all corners of the stock market – MarketWatch

The Best Insurance Policy Ever Written………Bar None (pardon the pun)

By Bruno de Landevoisin

Stop getting your rocks off making fun of the gold bugs.  Get the hard asset now while it’s undervalued my friends.  Hold your nose, dive in and simply consider it heavily discounted long term insurance, as you would any required insurance policy.   After all, wouldn’t you buy the best long standing health insurance policy ever written, if it were offered at the same low price it was over 5 years ago?

If that doesn’t convince you “sophisticated” cock-sure modern investors to hold a nominal percentage of your financial assets in precious metals, strictly for wealth preservation purposes, perhaps the simple facts below will resoundly resonate with you sharp shooters.

What is it that you don’t understand about the New Monetized Millennium? 

• The best performing asset class of this millennium is gold, by a country mile………

• 2000-2016 Gold up 500%        vs.      2000-2016 S&P up 5%

• Near zero% interest rates / ZIRP / QE / NIRP, as far as the eye can see…..

You can be the first to call me when any of that fundamentally changes.  In the mean time, bug off!

The vast majority of investors today generally invests in the standard asset classes, namely stocks & bonds, which the established financial industry presents to them as the most desirable and constructive financial instrument to hold, so as to increase savings.   Stock brokers, registered investment advisers, asset managers and the like, actively offer these issued contractual obligations to the typical, garden variety, middle class investor who inherently trust their advisers to manage their financial wealth in a responsible manner.   Counting on them to fashion balanced portfolios with assets which will both protect and increase their investment holdings over time.   On this basis, it’s fair to say that the entrenched financial industry distribution channels rely almost exclusively on stocks and bonds, derivatives there of, such as ETFs, as well as mutual funds representing a selective combination of these standard asset classes.

Furthermore, these very same financial advisers repeatedly and ardently recommend a balanced approach to investing, incessantly touting the crucial importance of diversified holdings in one’s portfolio.   There in lies the rub.  How can anything be considered truly diversified if it is made up of the very same general investment classes.  Wouldn’t the term diversification suggest a collection of uncorrelated asset classes?

A legitimately balanced portfolio, in the true sense of the word, should not only hold a variety of staple equity and credit financial instruments, but also, to actually be diversified, should certainly include other entirely uncorrelated asset classes.  The bottom line, how can these qualified asset management advisers relentlessly advocate for balanced diversification, and yet not remotely offer it?

The US Economy Is Not Awesome And It’s Not Decoupled

Submitted by David Stockman – The Contra Corner Blog

When the bubble vision stock peddlers get desperate, they talk decoupling. So by the end of today’s bloodbath you would have thought China was on another planet, and that “commodities” were some trinket-like collectibles gathered by people who don’t wear long pants, drink coca cola or jabber on their cell phones.

On these fine shores, of course, its all awesome from sea to shinning sea. So don’t be troubled. Buy the dip.

Never mind that we are in month 74 of this so-called recovery and that after year upon year of promised “escape velocity” the reliable signs of said event are still few and far between. But the recovery narrative stays alive because there is always some stray factoids of seasonally maladjusted, yet-to-be-revised “incoming data” that can excite the MSM headline writers and bubble vision talking heads.

Today the data on construction spending and housing took their turn in the awesome circle. Thank heavens that the headline writing software used by the financial press doesn’t yet read graphical data. Otherwise they might have reported that private residential construction soared in July—–well, all the way back to January 2002 levels!

And those are the nominal dollars that the Fed has done its level best to depreciate in the 13 years since then. In fact, on an inflation-adjusted basis the housing construction spend is still at 1992 levels.

What had the headline software giddy, of course, was the year over year comps, which were in double digits. Yet did the talking heads bother to note the deep hook in last summer’s data?

No they didn’t. Otherwise they might have seen that the two-year stack in July came in at a hardly fulsome 3.7% annual rate and that nominal private housing spending is still 7% below December 2007 and 43% below the early 2006 peak.

More importantly, they might have noticed that this is no longer your grandfather’s housing market. The US housing stock got way over-built during the Greenspan bubble and the incoming generation of home-buyers has gotten buried in $1.2 trillion of student debt.

A Word on Crude Oil

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Sometimes Things Work as They “Should”

Hopefully readers were able to take advantage from what turned out to be two extremely well-timed recent posts on the upside potential for crude oil (admittedly the timing was just a case of luck). We recommend checking them out again if you missed them, as they are laying out the “very lonely” bullish case in detail (see: “Is Crude Oil Close to a Low?”, and “More on Crude Oil and Industrial Commodities”).

Now that crude oil has provided us with something more than just tentative signs of life (it has rallied by approx. 25% in just three trading days), we want to briefly comment on the recent action. First of all, after such a huge advance in a mere three trading days, one should expect some backing and filling, so there is probably no hurry to jump aboard the train if one has missed the recent move.

The most important thing is however the information the recent move has conveyed:

WTI crude, daily – click to enlarge.

Lingering

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

With stocks selling off at least in morning trading, everyone is back asking “is it over” after last week supposedly quelled so much surface disquiet. The rebound in oil prices has been robust and a broad survey of “dollar” proxies indicated that the hugely negative run from August has relented. The notable exception to that trend has been Brazil and the real, which may seem like its own set of problems but as noted yesterday and before it is truly the “price” of eurodollar decay. With that in mind, it’s difficult to believe that the “dollar” is done even in the short run as the collapse there is a powerful reminder about vastly mispriced risk beyond even wholesale finance.

Yesterday being a month end, we got the now-familiar surge in repo rates which is itself indicative of continued funding problems (and bottlenecks). For a few years, repo rates were immune to even the quarter-end jump but that not only returned after the nasty funding environment in December it has pushed into each calendar month starting with April. The August end repo rates were sharp in all three classes, with MBS repo at 30.4 bps. Going simply by the history of month-end repo, you can easily observe the “dollar’s” recent history toward turmoil.

The end of July saw 36.9 bps for MBS and nearly 32 bps for UST so maybe that counts as an improvement, but I don’t think we are so lucky. To my view, the end of August rates are still in the same “zone” of desperation so I don’t think it all that much different in terms of general condition even if it might suggest something better about immediacy.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Global Stock Markets Begin September With More Losses (Guardian)
• Central Banks To Dump $1.5 Trillion FX Reserves By End 2016 -Deutsche (Reuters)
• Investors Wake Up To Emerging Market Currency Risk (FT)
• IMF’s Lagarde Sees Weaker Than Expected Global Economic Growth (Reuters)
• 2015: The Year China Goes Broke? (Gordon G. Chang)
• China Risks An Economic Discontinuity (Martin Wolf)
• Alibaba Is the Canary in China’s Coal Mine (Pesek)
• China Turns Up Heat On Market Participants (FT)
• Huge Purchases By Chinese Oil Trader Raise Prices, Confusion (WSJ)
• A Corner of the Oil Market Shows Why It’s So Tough to Read China (Bloomberg)
• Hit By Cheap Oil, Canada’s Economy Falls Into Recession (Reuters)
• Alberta Issues Bleak Economic Report (Globe and Mail)
• Say Goodbye to Normal (Jim Kunstler)
• France ‘Intimidated’ By Germany On Economic Policy: Stiglitz (AFP)
• Grexit May Be Better For Greece: Euro Architect (CNBC)
• Democratizing the Eurozone (Yanis Varoufakis)
• Inability To Unite On Major Challenges May Pull The EU Apart (EurActiv)
• Bid For United EU Response Fraying Over Refugee Quota Demands (Guardian)
• Hungarian TV ‘Told Not To Broadcast Images Of Refugee Children’ (Guardian)
• Greece’s Ionian Islands To Hold Plebiscite Over Airport Privatization (Kath.)
• The Price of European Indifference (Bernard-Henri Lévy)
• This Is What Greece’s Refugee Crisis Really Looks Like (Nation)
• Greek Island Lesvos Registers 17,500 Refugees Just Over The Past Week (Kath.)
• Orwell Rules: EU Task Force To Take On Russian Propaganda (New Europe)
• Is The World Running Out Of Space? (BBC)

Read much more here: Debt Rattle September 2 2015 – TheAutomaticEarth.com