Scary Time

Doug Nolan

Just another week of the “new normal”. Celebratory talk of “helicopter money,” a melt-up in stocks, another terrorist attack in France and a coup attempt in Turkey. Let’s start with Japan, with the preface that “Bubbles Go to Unimaginable Extremes – and Then Double!” and “Things Get Crazy Near the End – During ‘Terminal Phase’ Excesses.”

July 12 – Bloomberg (Emi Nobuhiro and Yoshiaki Nohara): “Japanese Prime Minister Shinzo Abe told former Federal Reserve Chairman Ben S. Bernanke at a meeting in Tokyo he wants to speed up the nation’s exit from deflation, underscoring his commitment to implementing fresh economic stimulus. ‘We are only halfway to the exit from deflation,’ Abe said at the start of the meeting… ‘We want to be steadfast in accelerating our breakaway from deflation.’ Abe’s remarks at the meeting, also attended by the Ministry of Finance’s top currency official Masatsugu Asakawa and adviser Koichi Hamada, came before he ordered Economy Minister Nobuteru Ishihara to compile stimulus measures this month.”
As global markets celebrate Japan’s reckless move to further ramp up fiscal and monetary stimulus, it’s important to place things into a little perspective. Japan has been sporadically ramping up stimulus for more than 25 years. Federal government debt to GDP was about 65% back when the Japanese Bubble burst in 1990. Massive fiscal stimulus saw debt to GDP surge to 140% by the end of the nineties. By 2009, ongoing aggressive deficit spending pushed the ratio through 200%.  It's now almost reached 250%.  Meanwhile, expanding $1.0 TN annually, the Bank of Japan’s (BOJ) balance sheet is rapidly approaching 100% of GDP. BOJ assets hovered between 30% and 40% of GDP in the ten-year period through 2012.

Prime Minister Abe must be an eternal optimist if he actually believes Japan is “halfway to the exit from deflation.” The Japanese government this week sharply lowered their fiscal 2017 CPI forecast to 0.4%. After three years of (egregious) “shock and awe” fiscal and monetary stimulus, CPI is now running below the 2013 level. And in the face of massive stimulus, the Japanese economy is forecast to expand less than 1% this year. It’s Scary Time.

Abe seeks “to be steadfast in accelerating our breakaway from deflation.” In reality, Japan is trapped in destructive runaway monetary inflation. And that’s the age old dilemma with inflation: once commenced it becomes almost impossible to rein in. Japan also highlights the problem of discretionary central banking: mistakes are invariably followed with only greater blunders. In Japan and throughout the world, there is today no turning back from the massive inflation in central bank Credit and government borrowings. It may be fallacious, ineffective and frighteningly self-destructive, but there’s no dissuading global central bankers from even more destabilizing monetary inflation and monetization.

Global markets were giddy with anticipation of additional Japanese stimulus. Ben Bernanke traveling to meetings in Japan surely signaled “helicopter money” in the offing. These days I often feel as if I’m living in a different world. I see Dr. Bernanke as the champion of deeply flawed – and failing – inflationist doctrine. It’s just hard to believe at this point that Japanese leadership doesn’t recognize that Bernanke’s experiment is failing and that they should seek guidance elsewhere. And, at this point, it’s remarkable that markets can get excited about yet another round of Japanese stimulus. Squeeze the shorts…

I guess there’s little mystery surrounding market complacency: QE liquefying securities markets indefinitely. To be sure, huge global fiscal deficits support corporate earnings and cash flow. Negative sovereign yields spur flows to risk assets, particularly corporate debt, while historically low corporate yields and ultra-loose Credit Availability stoke share repurchase financial engineering. Reduced debt service costs coupled with diminished share counts inflates earnings per share.

It’s worth nothing that first quarter U.S. stock buybacks jumped to $166.3 billion (from Factset), up 15.1% from Q1 2016. This was the second largest quarter of buybacks ever and the strongest since record Q3 2007 ($178.5bn). Forty-one S&P500 companies had repurchases exceeding $1.0 billion during the period. Stock buybacks have provided key market support in a backdrop of mutual fund outflows. That companies have a penchant for purchasing their shares when the markets come under pressure provides a critical backstop, both from liquidity and market psychology standpoints.

Returning to unfolding Asian train wrecks, Japan and China are increasingly open adversaries yet they do share a common hope for inflating out of debt problems. From financial, economic and geopolitical points of view, it’s alarming to watch both Chinese and Japanese finance in full self-destruction mode.

From Friday’s Wall Street Journal headline: “Massive Stimulus Keeps China GDP Steady in Second Quarter.” At 6.7% (beats estimates!), China’s economy appears relatively stable. 

Industrial production increased 6.8%. Retail sales were up 10.6% from a year ago. Government fixed asset investment rose 23.5% during the first half, largely offsetting the ongoing drop in private investment.

Chinese finance is anything but stable, with its unwieldy Credit boom running hot in June. 

Beating forecasts by about 60%, Total Social Financing expanded $244 billion for the month. 

This was up from May’s $102 billion to the strongest pace of system Credit expansion since a huge March ($370bn). A strong June put first-half Chinese Credit growth at about $1.5 TN, a sufficient sum to sustain the Bubble. Credit expanded at an almost 15% annualized rate during the first half, more than double the stated pace of economic expansion.

It’s worth noting that June’s big Credit push was primarily in bank lending. Bank loans surged $206 billion during the month, more than double May and almost equal to March’s lending bonanza. A resurgent real estate Bubble now drives bank lending. According to Bloomberg, June new home (apartment) sales were up 22% y-o-y to $150 billion. And from the WSJ: “Property sales in 2016 have jumped by up to 50% year on year in top markets.” “Terminal Phase”…

July 15 – Reuters: “Government spending in China jumped 19.9% in June from a year earlier, while revenue rose 1.7%, the Ministry of Finance said… Government spending in the first half of the year was up 15.1% from a year ago, while revenues rose 7.1%.”
Both Chinese and Japanese policymakers had intended to rein in financial excess. The Chinese government moved to (too cautiously) reign in Credit growth. The Japanese government had pronounced their plan to impose fiscal restrain in what was sold (in 2012/13) as a temporary boost in deficit spending. Both have inflated major Bubbles and both have now clearly capitulated: massive and persistent monetary inflation as far as the eye can see, and global securities markets are overjoyed.

That Abe and Kuroda essentially see no constraints on deficits and monetization hammered the Japanese currency. For the week, the yen dropped 4.3%, the “Biggest Weekly Drop Since 1999”. Stocks took flight. The Nikkei 225 index jumped 9.2%, amazing yet not even close to keeping up with the TOPIX Banks Index that surged a remarkable 17.7%.

Stimulus developments in Japan and a sinking yen provided a powerful boost to global “risk on.” A worldwide short squeeze was especially conspicuous in Europe. Italian banks jumped 10.9%, while Europe’s STOXX 600 bank index surged 6.7%. Major equities indexes rallied 4.5% in Germany, 4.3% in France and 4.2% in Spain and Italy.

Rallying global equities stoked an already powerful short squeeze in the U.S. market. The banks (BKX) surged 4.3%, the broker/dealers (XBD) 4.0% and the Transports 3.9%. The S&P500 gained 1.5% to a new record high.

The currency market remains acutely unstable. The British pound rallied 1.8% this week. Most EM currencies posted gains, except for the late Friday sell-off that left the Turkish lira down 4.3% for the week.

Watching an unfolding coup and attendant chaos live on television is a writing distraction, to say the least. Turkey, a country of 80 million and NATO ally, is at the epicenter of geopolitical dynamite. At this writing, the coup appears to have failed. Yet Friday’s developments will surely exacerbate instability that has been festering badly for some time. The Erdogan government will turn only more autocratic, and a highly polarized society will become only more fractured. Coming just a few weeks after Brexit, mayhem in Turkey is yet another troubling reminder of the rapidity and extent of geopolitical deterioration on a global basis.

Turkey is also today emblematic of the wide chasm that has developed between inflating securities markets and deflating economic prospects. Turkish stocks have been among the top performing markets globally, ending the week with 15.5% y-t-d gains. Running large current account deficits (4.5% of GDP) and having accumulated significant international debt (much denominated in U.S. dollars), Turkey has been on my list of countries at high risk of financial and economic crisis. The country is now on the downside of what was a significant Credit boom, which surely helps explain at least of some of the increasingly problematic social tension and political instability.

The Latest COT Report And How The Turkish Coup Attempt Will Affect Gold

by: Hebba Investments

- Gold jumped Friday afternoon when the Turkish coup hit the news wires.

- While this short-term boost was good for gold longs, it looks like Erdogan regained control of Turkey.

- We expect Turkish political stability to be maintained moving forward and the Turkish Lira and stock market to recover its losses.

- Any risk premium for gold due to these events should be lost, and we worry about gold's short-term fundamentals as physical demand is really poor.

The late Friday Turkish coup attempt (which was conveniently after US markets closed) is probably the foremost thing on gold investors' minds so we will have to cover it in this analysis.

But first we will go over the latest Commitment of Traders report (COT), where we saw record-breaking gold positions drop for the first week in a month. Silver actually diverged a little from gold as speculators increased their own positions, which also probably was reflected in the prices as silver was much stronger for the week than gold.

We will get a little more into some of these details but before that let us give investors a quick overview into the COT report for those who are not familiar with it.

About the COT Report

 The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.

Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.

There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the exports on it.

What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.

This Week's Gold COT Report

This week's report showed speculative gold longs decreased their positions for the first time in more than a month, while shorts increased their own positions for the third week in a row.


As investors can see, after five weeks of speculative long position increases, we finally saw these longs take some profits their positions. That might have also encouraged shorts to increase their own positions by a mediocre 3,740 contracts.

Looking back at the last major gold peak in 2011, the actual peak in gold occurred around a month after the net speculative long peak occurred.


As shown in the table above, gold's previous cyclical speculative net long peak was hit on the week of 8/2/2011, when the net long position reached around 253,000 contracts and the gold price was $1637.75 per ounce. If you had used that data to wait for a pullback (or worse get short), you would have seen gold rise for another month to a high of $1895 per ounce - not a very fun position to be in.

Moving on, the net position of all gold traders can be seen below:

  Source: Sharelynx Gold Charts

The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, speculative traders have taken a break from their parabolic rise and sit at a net long position of 272,000 contracts.

As for silver, the action week's action looked like the following:

  Source: Sharelynx Gold Charts

The red line which represents the net speculative positions of money managers, increased by a little more than 2,000 contracts while shorts decreased by a similar 2,000 contracts. This is a bit of a divergence from gold as speculative silver positions increased compared to a decent decrease in gold speculators. This may tell us that investors are expecting the silver-gold ratio to decrease further and it certainly explains why silver outperformed gold on the week.

The Implications of the Failed Turkish Coup Attempt on Gold

It is time to deal with the biggest event of the week, the failed Turkish coup attempt. While this news is obviously live and could change in the next few days, it looks like for now the situation has calmed down a bit as Turkish President Erdogan returned to the country and declared the coup over.

Additionally, it looks like he has commenced the hunt for sympathetic elements of the military and judiciary - these folks probably will not be receiving much in the way of mercy from Mr. Erdogan.

While Erdogan has accused Fethullah Gullen, a US-based Turkish dissident cleric, of being involved in the coup (which he has denied), we haven't seen a lot of evidence of who was really involved. Regardless, we think as long as it is an internal Turkish dispute between these two parties and does not involve any other outside nations (which seems a bit clearer now), this dispute itself will not have much in the way of gold implications.

What we are watching in terms of consequences for the gold price are the following:
  1. The effect on the Turkish Lira
  2. Will Turkey's political stability be maintained

As soon as the coup made the news wires on Friday afternoon, the Turkish Lira plummeted into the markets close. Gold as a store of value would obviously benefit if the Lira collapsed further as the Turkish affinity for gold would only increase physical imports. While we expect Turkish gold imports to probably increase over the next few weeks or months, we don't expect a complete Turksih gold rush as the coup did not succeed or turn into a civil war and it looks like Erdogan is going to severely crackdown on dissidents and prevent any further chaos.

In terms of political stability, it looks like there was little in the way of public support for the coup attempt, and in fact, it looks like much of the Turkish public actually supported Erdogan and actively resisted the coup. Unlike the coup in Egypt, Erdogan seems to have much greater support from the public and this should give him reason to crack down further on Turkish dissidents. Ultimately, right or wrong, this will probably lead to a bit more stability in the country moving forward in a dictatorial fashion.

Thus we expect this to result in the Turkish Lira regaining a bit of what it lost on Friday afternoon.

Additionally, short-term traders may want to take a flier on some of the Turkish market ETF's if they show weakness on Monday as we expect things to return to relative normality.

All of this means that any risk premium that was built into the gold price on Friday afternoon (gold surged $10 in a matter of minutes) is probably not justified, at least at this point. If there are no extraordinary events, we expect gold to give back those gains as trading started next week. Of course, that call would completely change if (1) a foreign sovereign nation is found to be involved (think Russia), or (2) if the coup or crackdown results in violent backlash that could possibly suggest a civil war. Ultimately it comes down to Turkish political stability, if that stability is not maintained, then there are significant implications to the region's stability, European stability (think what would happen to immigration if Turkey fell into chaos), and of course, the gold price will reflect that.

Our Take and What This Means For Investors

If the coup had succeeded or thrown the country into civil war, then we would be buying gold hand over fist as these implications would have much greater global consequences than a mere $10 rise in the gold price. But the coup failed rather quickly and it looks like it may result in further crack-downs on dissent in the country, so ultimately it shouldn't have a real effect on the gold price other than causing gold to give back some of its Friday after-hours gains.

In terms of the COT report, while gold speculators decreased their net long position, we are still at historical highs. Of course, highs can always become higher, to justify that we would need to see strong evidence that gold could be propelled further. While there are some major catalysts that can do that (this is why we believe in gold as a long-term investment), there are many short-term catalysts that should cause investors to think long and hard about increasing positions after gold's spectacular 2016 run.

Bron Suchecki of Monetary Metals did an excellent job outlining a few of them in his recent article Yin and Yang:
So how to navigate this new terrain? While one can never avoid subjective interpretation, we feel it helps to take one's bearings from the reality of market prices and in particular, spreads. Therefore it is with interest that I read the following from Reuters:
  • Dealers in India were offering a discount of up to $100 per ounce to the global spot benchmark
  • Prices in China were seen at a discount of $1-$2 per ounce
  • A discount of 50 cents to $1 was being offered in Japan
  • Hong Kong prices were at a discount of $1 this week
On the flow front, Platts reported Indian "gold bar imports at only around 215 mt so far this year, just under half the 2015 level, many are expecting a much lower total for full-year 2016" and SCMP noted that Chinese "sales of gold jewellery across the sector have slumped 20-40 per cent".

These are the things that worry us in the short-term as gold seems to be driven simply by Western investor ETF demand. This doesn't even include much of the traditional gold buying population as American Gold Eagle sales are down and bullion dealers seem to be well-stocked.

This is part of the reason why we believe that despite new historical gold speculator position highs, we haven't seen anything close to the highs gold reached in 2011 when it had both paper demand and physical demand working together to propel it higher.

We know we are going to sound like a broken record here, but we think the logical and disciplined thing for gold and silver investors to do here is take profits and wait for a better re-entry point. Thus investors should be lightening up on gold positions in the ETFs and miners such as the SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), and miners such as Randgold (GOLD) and Barrick Gold (NYSE:ABX).

While we think gold will rise much further in the coming years, now is not the best time to be establishing new positions in gold if you already own a satisfactory core gold portfolio position.

Italian banks: Essential repairs

Shares are down by a third, raising doubts over reform and pitting Rome against Brussels
In October 2008, in the days after the UK government took over Royal Bank of Scotland, a group of senior managers at Banca Monte dei Paschi stood in the office of David Rossi, then head of communications, and crowed.
The downfall of such an important institution would never happen in Italy, they said. Italian banks were prudent, more conservative than their Anglo-Saxon counterparts. They had avoided subprime mortgage lending and derivatives, the complex finance instruments that ravaged the balance sheets of US and UK lenders. Crucially, Italy’s banks remained rooted in their local communities, giving them balance and ballast. Italians were a population of savers.
The hubris of that peaceful autumn day in the Tuscan hills became clear within months. The events that had brought RBS to its knees soon started to roil Monte Paschi: the Siena bank had picked up an overpriced asset from the break-up of ABN Amro on the cusp of the financial crisis. Monte Paschi’s €9bn cash acquisition of Antonveneta without due diligence was a deal from which the 544-year-old bank never recovered.
But whereas RBS and other institutions have long since been cleaned up the conundrum of Monte Paschi is that its problems persist .
Until last month, that is, when the shock of the Brexit vote triggered a sell-off of Italy’s banks. Already vulnerable due to their vast pile of non-performing loans — at €360bn equivalent to a fifth of the country’s gross domestic product — bank shares have lost a third in the past two weeks.
For the government of Matteo Renzi, Italy’s reformist prime minister, it could not come at a worse time. Facing a constitutional referendum in October on which he has risked his political career, Italy’s bank crisis is inflaming popular anger at a sluggish economic recovery after Italy’s deep three-year recession
The effect threatens not only Mr Renzi but also the wider eurozone. Italy’s fight to save its banks — and Mr Renzi’s fight to save his job — has turned into the latest confrontation between Italy and the EU as the government seeks to avoid nascent bail-in rules which, they argue, would hit tens of thousands of Italian savers invested in the shares and bonds of its banks.
“This [Monte Paschi] was a distressed bank in 2011 [after] Antonveneta was bought at a nonsensical price,” says Francesco Daveri, an economist at the Catholic University of Piacenza. “Now we have a worse problem with the distressed loans having increased dramatically in the recession, and with EU regulations having changed we have fewer options to deal with it.”

Alarmingly, senior bankers and investors argue the sell-off in Monte Paschi is not just about bad loans. Its travails pose a broader question of how the Italian establishment has ducked the problem of its own banking system for so long.

“Brexit was the spark in a place full of gasoline,” says Luigi Zingales, professor of entrepreneurship and finance at Chicago Booth University School of Business. “The issue is not only non-performing loans. There is a lack of credibility . . . of the Italian banks vis-à-vis the market. You cannot minimise problems for years and then be believed.”
One of Italy’s most senior bankers is more blunt: “You think you are kicking the can down the road but suddenly the road turns uphill and the can comes back and hits you in the face,” he says.

Tackling vested interests

Ironically Mr Renzi has done more to try to reform Italy’s fragmented lenders than any other leader in the past 20 years. He has gone against vested interests to pass laws that converted mutual banks into joint stock companies, with the intention of forcing consolidation on a banking sector of 600 independent lenders. His government has also sought to tackle the judiciary and drive through laws to speed up civil bankruptcy procedures that have abetted the build-up in bad loans. It takes on average eight years for loans to be recovered.
Many in the banking industry fear that the Renzi measures are too little, too late. The system lacks capital partly because non-performing loans sit on Italian banks’ books at 40 cents but are valued on the market at only 20 cents. The Bank of Italy has no official data on the capital shortfall but Goldman Sachs analysts argue that, in their worst case scenario, Italian banks have a gross capital gap of €38bn.

Unfortunately for Mr Renzi the time to take decisive action is running out. The Italian government could have carried out a major recapitalisation between 2008 and 2010, when other banks around Europe and the US were going through a similar process; it could have set up a bad bank in 2012 when the Spanish government did the same, and it had room for other forms of state intervention before the introduction of the EU bank resolution and recovery directive at the end of 2015.

The new measures, adopted at the behest of Berlin, severely constrain a eurozone government’s ability to rescue a struggling bank. Designed to prevent politically unpopular taxpayer-funded bailouts from being repeated, it now means no Italian bank can be recapitalised with public money without first forcing huge losses on investors — including, in many cases, retail depositors who were sold billions in questionable bank bond investments.

The exposure of retail investors to Italian banks represents a threat to Mr Renzi’s political survival. Between a half and a third of the €60bn of subordinated bonds issued by the banks are in the hands of 60,000 retail investors. They own €5bn of subordinated debt at Monte Paschi alone. Under the new EU banking rules, huge swaths of these investors would lose money — part of the bail-in process — before a single euro of public money could be used to rescue a teetering Italian bank.


Pier Carlo Padoan, the finance minister, insisted on Friday that Italy was “continuing to explore all ways to allow public intervention in the banks within state aid rules . . . to protect savings”.

In a country of savers he could say little else. There have already been at least two suicides of retail investors who lost savings. “If we bail in subordinated debt, people will not be able to live,” says a person close to the Renzi government.

It is not a view shared by European officials who argue that Mr Renzi’s predecessors signed up to the bail-in rules and failed to take advantage of creating a bad bank before state aid rules changed.

“There is a temptation to use poor grandpa and grandma as an excuse to bail out wealthy families and other creditors who don’t actually need protection,” says Nicolas Véron, of think-tank Bruegel.

“Given their slow reaction and anti-EU rhetoric, the Italian authorities should not expect huge special favours.”

Birth of the banks

Bankers argue that Italy’s inaction stems in part from the origins of the banks. The first in Italy was a charitable institution created by Franciscan monks when lending was prohibited by the Roman Catholic church. They were social and political, rather than economic, institutions, but have evolved into the country’s linchpin, which makes their failure unthinkable.

The most significant owners of Italian sovereign debt, the banks are also the main source of lending to the country’s small and midsized companies which make up 70 per cent of its economy. With their closeness to the community they have also ties with politicians, the Catholic church and the media. Monte Paschi was traditionally the bank of the centre-left Democrats, Mr Renzi’s political party, which has made restructuring it a political nightmare, say bankers.

Against this backdrop, talks between Italy and EU officials on a bailout for its weak banks, which passed without success more than a year ago, have stumbled. Bankers say the government is seeking to buy time, arguing that, despite the slide in share prices, the worst — for now — is over, while it continues to argue for invoking a loophole in EU rules to undertake a state-funded recapitalisation and find private funds to buy the worst bad loans.

That was not the case immediately after the Brexit vote, say people familiar with the government’s thinking. One senior banker says Mr Renzi was desperately seeking a white knight buyer for Monte Paschi in the immediate aftermath of the vote.
But the government’s reluctance to act has already alarmed analysts who worry about the effect on investment.
Alvaro Serrano and Antonio Reale, analysts at Morgan Stanley, say they are “concerned that a solution that uses public funds might drag on until after the [October] referendum, or even be taken off the table”, amid concerns about how sharing the burden could hit voters in Mr Renzi’s Tuscany.

Worse to come

Italy needs to recapitalise more than just Monte Paschi, say bankers. Analysts estimate UniCredit, Italy’s only globally important bank, requires as much as €10bn of capital. Small local banks Cesena and Rimini need hundreds of millions, and it is not clear whether Vicenza and Veneto Banca will need additional capital.
There are concerns that none of them, including UniCredit, will be able to raise those funds. In April Vicenza tried to raise €1.5bn in capital underwritten by UniCredit — and found no buyers.

The failure threatened not only Vicenza but also UniCredit itself, forcing Mr Renzi to sponsor a patchwork €4.25bn rescue fund, capitalised by Italy’s banks including Monte Paschi, to buy the Vicenza shares and provide UniCredit with a get-out.

Atlas, the rescue fund, has not just proven too small for the task, but many fear it has made matters worse, tying the fate of some of Italy’s healthier banks to that of the system’s weakest.
Mr Daveri argues that if the government “wants to preserve a fraction of the impetus it has for the reform process” it may be better to make “one bold move that can change the picture”. Calling on the help of the European Stability Mechanism may be a solution to recapitalise and restructure Italy’s banks in one fell swoop, he argues.

If Brexit caused a jolt, European officials say that July 29, when the European Banking Authority publishes its stress tests, will be even more tumultuous. It will be a “point of transparency”, says one European official, and the first major test since October 2014, when nine Italian banks failed.

Monte Paschi came bottom then and senior bankers in Milan expect the Italian groups to perform poorly again, revealing significant capital shortfalls. They fear the tests focus on a snapshot of time when Italy had seen the biggest GDP contraction of any major European country and the bank’s non-performing loans were at record highs. Morgan Stanley analysts think Monte Paschi could require €2bn to €6bn of additional capital.

Brussels has told Rome it can go ahead with a recap after the stress tests as long as it abides by state aid rules and enforces a minimal bail-in, where some junior creditors take a hit. This lighter model would see junior bonds converted to equity and retail investors compensated for mis-selling.

Spain took similar measures during its bank restructuring in 2012, generating €13.6bn in capital through a light bail-in. It came during financial conditions that Brussels regards as more unforgiving than those faced by Italy. Rome is still resisting, however, insisting any form of creditor “burden sharing” is too dangerous to risk.

Industry figures argue that the system still has a structural problem even if you take out Italy’s bad loans: it is overbanked and lacks profitability, not only because of the low interest rate environment.

The country has more bank branches than pizzerias, according to the Paris-based OECD, leaving them overburdened with costs as well as bad loans. In order to make the banking system fit for purpose, tens of thousands of jobs need to be cut and bank branches need to be closed.

“Any aid or injection of capital should come with a restructuring of the system,” says Alberto Gallo of Algebris Investments. Consolidation, he argues, would reduce bank costs and improve the credit channel.
“The countries that have escaped the crisis and restructured their balance sheets — the US, Ireland — have drawn a line between good and bad assets. Italy needs to follow them, rather than go the way of Japan and brush it under the carpet,” he says.

China GDP Sends Troubling Signal on Economic Reform

Slower growth rate would have indicated country was tackling excess industrial production, rising corporate debt

By Mark Magnier

BEIJING—China maintained its growth pace of 6.7% in the second quarter—a bad sign to those who were looking for indications of economic restructuring.

Economists say a slower growth rate in the second quarter over the first quarter’s 6.7% pace would have sent a welcome signal that China was tackling excess industrial production, rising corporate debt and state-owned enterprise reform.

Instead, by ramping up government spending and opening the credit taps, Beijing is likely to fuel overcapacity and see private companies crowded out by risk-averse state banks and bloated state companies.

This comes despite repeated calls by Prime Minister Li Keqiang and other senior officials to foster innovation, entrepreneurship and structural reform in order to shift the economy from credit-fueled infrastructure to high-tech industry and services.

“It’s a pretty clear picture with the big, overcapacity state-owned enterprises getting credit and reform plans not getting support,” said IG Markets Ltd. analyst Angus Nicholson. “The government talks a good story about helping the private sector, pushing through supply-side reform and lowering investment to state companies, but you’re not actually seeing any of this in the statistics.”

The state’s heavy hand can be easily observed in the data, economists say. The first and second quarters both saw weak growth during their first two months followed by a rise in credit and spending in the final months of the quarter, which pushed up the growth figure. Total social financing, a broad measure of credit in the economy, more than doubled in June over May and tripled in March over February.

As credit has coursed through the economy, most of it has been tapped by the less productive state sector, real-estate speculators and struggling industries at the expense of the entrepreneurs and private companies that leaders have looked to for job creation.

While officials have repeatedly called on state banks to lend to promising startups and established private companies, banks tend to favor state-owned companies with their implicit guarantee that Beijing will bail them out if they stumble. “Banks should not discriminate when providing financial services to private companies,” China’s bank regulator said in a statement on its website Friday.

Approaching banks for a loan often means navigating much more intense scrutiny than state firms face over credit ratings, loan-guarantee conditions and asset-liability ratios, said Jackie Xiang, a director at International Engineering Group Co. in the city of Jiangyin in eastern China. “Country-financed projects really should be open to capable private companies, not just state-owned companies,” Ms. Xiang said.

Even as Beijing touts plans to cut excess steel capacity by around 10% in coming years—amid growing complaints by foreign trading partners that China is selling steel below its cost of production—daily crude-steel output in June set a record.

State-owned firms have seen their losses narrow significantly in the first half of this year, according to official data released Thursday, as government stimulus projects ramp up. And property sales in 2016 have jumped by up to 50% year on year in top markets, forcing authorities to impose buying restrictions, even as empty apartment towers ring smaller cities.

During the first five months of 2016, large steel mills posted a combined profit of 8.7 billion yuan ($1.3 billion) compared to a loss of 64.5 billion yuan for all of 2015, according to the China Iron & Steel Association.

Many economists, including those at the IMF and World Bank, have called on China to drop its obsession with growth targets in order to reduce the amount of artificial economic stimulation, and to focus on reforms toward more meaningful growth and a faster transition from traditional manufacturing and infrastructure.

“There’s less rebalancing towards the new economy as it’s propped up by very lax fiscal and, even more so, monetary policy,” said Alicia García-Herrero, leading to “good but cooked” growth figures, she added.

With an annual growth target of 6.5% to 7% on the line, Beijing raised its government deficit target to 3% of gross domestic product this year from 2.3% of GDP in 2015, a figure it is likely to overshoot when off-book government spending is included, economists say. Government spending in June rose nearly 20%, the Finance Ministry said Friday, a more than two-percentage-point rise over May levels.

While investment by state-owned companies expanded 23.5% year on year and state infrastructure investment jumped 20.9% in the first half of 2016—both a modest increase over first-quarter figures—private investment rose a paltry 2.8% in the first half, a decline from the first quarter’s 5.7% level.

“The private sector is really getting crowded out of investment,” IG’s Mr. Nicholson said. “You can’t in a command economy direct the private companies to invest the way you can with state companies.”

The Myth of Legal and Illegal Wars

George Friedman
Editor, This Week in Geopolitics

The Chilcot report, the product of a British inquiry into the Iraq war, was published last week. It harshly criticized Tony Blair and, by extension, George W. Bush and the United States. Many reading the report—and others before the report was published—concluded that the invasion of Iraq was illegal under international law.

I don’t intend to discuss Iraq here. Everyone knows now that we should either have not gone to war or gone with greater force. Most people today agree that the execution of the Iraq war was deeply flawed—even those who forgot to say so or endorsed it at the time.  

All wars are subject to withering scrutiny after the fact, and there is little I can add on that subject.
What the UN Charter Says about War

Rather than rehashing Iraq, I think it is more important to consider the notion of legal and illegal wars. The question of legality is based on the United Nations Charter, which all member nations have agreed to by treaty. That treaty is legally binding.

From the UN Charter:
Article 39 states: “The Security Council shall determine the existence of any threat to the peace, breach of the peace, or act of aggression and shall make recommendations, or decide what measures shall be taken… to maintain or restore international peace and security.”

Article 42 states: “Should the Security Council consider that measures provided for in Article 41 (sanctions) would be inadequate or prove to be inadequate, it may take such action by air, sea, or land forces as may be necessary to maintain or restore international peace and security. Such action will include demonstrations, blockade, and other operations by air, sea, or land forces of members of the United Nations.”

Article 46 states: “Plans for the application of armed force shall be made by the Security Council with the assistance of the Military Staff Committee.” 

Article 51 states: “Nothing in the present Charter shall impair the inherent right of individual or collective self-defense if an armed attack occurs against a Member of the United Nations, until the Security Council has taken measures necessary to maintain international peace and security.”

Articles 39, 42, 46, and 51 explain the way in which the Security Council decides whether war is legal or illegal. These clauses are important. (See sidebar.)

According to the charter, all war-making power (except the immediate defense of a country under attack) is in the hands of the UN Security Council. It must oversee pre-war negotiations, impose sanctions, or take military action, with the assistance of the Military Staff Committee.

This committee is made up of the chiefs of staff of the council’s permanent members: the US, the UK, France, Russia, and China.

From the US point of view, the constitution makes the president Commander in Chief of the armed forces. All constitutions make clear which office has control of military forces.

Under the UN Charter, since only the UN can authorize war, the US president’s constitutional power is subordinate to the Security Council and its Military Advisory Committee.

I will assume that this is constitutionally permissible since the US Supreme Court has not ruled otherwise. And I assume other countries are equally comfortable with the transfer of authority to the Security Council.

The permanent members of the Security Council are not answerable to the United Nations. They are the representatives of nation-states, and their obligation is to pursue their national interests through the Security Council.

They have two responsibilities. First, to uphold the Charter of the United Nations. Second, to pursue their national interests, and use UN mechanisms to protect those interests. 
But What Does That Mean in Reality?

The national interests of the US, Russia, China, France, and Britain inevitably diverge. Since the founding of the UN, each nation has waged war, or supported other nations or non-state actors in waging war.

In most cases, the actions of the belligerent—directly or indirectly—were aimed at a permanent member of the Security Council. Since each permanent member has the right to veto any resolution, any one of these actors can block a resolution.

The creators of the UN assumed that the Security Council would be a collaborative body with common interests. It is not clear why this assumption was made. For example, the interests of the Soviet Union in 1945 worked directly against those of the other four members.

Armed with the veto, each Council nation could block any motion to take military action or to condemn its own military actions. It is hard to imagine that those who drafted the UN Charter didn’t understand this fully.

The UN was created after the League of Nations failed to prevent World War II. Franklin D. Roosevelt was particularly committed to creating a body that would function as a type of world congress, whose members were representatives of member states.

The right to wage war would be transferred to the Security Council members who would act jointly to authorize war. The only exception to this would be a country that was attacked. That country would have a right to defend itself pending action by the UN.

The UN itself cannot take direct action, however, because it has no military force. Article 43 obligates all UN members to provide forces if the UN requires. These forces would be under the operational command of the National Command Authority. Overall command would be in the hands of the Security Council and the Military Advisory Committee.
Lessons of WWII

How did FDR agree to this insanity?

I think the horrors of World War II convinced all participants that the primary national interest is to avoid war. He believed that this desire would override conventional concepts of national interest.

I don’t know whether he had nuclear weapons in mind, but when you add them to what World War II unleashed, it wasn’t an unreasonable concept. But war is not the greatest horror. Occupation by an enemy is.

For the Soviets and the French, the takeaway was not the horror of war, but the horror of occupation by the Germans. When the war ended, the Soviets feared the Americans would replicate what the Germans had done. The Americans and Europeans were afraid that the Soviets would move westward with the massive force they used to win the war. 

When these nations met in the Security Council, it was not as collaborators. They met as potential foes—each less afraid of war than of the other’s victory. This fear is frequently dismissed with a now cliché slogan: don’t give in to your fears, because if you do, the enemy has already won. 

It is one of the more absurd bromides of our time. Had France given in, rather than smugly brushing aside its fears, it might have averted six years of Nazi occupation. Fear of war competes with the fear of defeat, and each side emerged from World War II fearing defeat more than war. And that was FDR’s miscalculation. 

A Fear That Led to Irrelevance

The fear of defeat also gave birth to the veto. All the Security Council members chose to adopt the League of Nations’ veto structure. None of them wanted to give up control. 

As a result, while there are some rare times when the UN sanctions military actions, they are usually against minor nations with few major friends and are undertaken with insufficient forces.

The Korean War is one example of this. It broke out while the Soviet representative was boycotting the UN Security Council and missed the veto. Another was Desert Storm. The Soviets had backed Saddam Hussein, but they were too busy dealing with internal collapse and were not concerned.

In this context, whether or not a war is legal under the UN Charter is irrelevant. The organ created to define the circumstances of war doesn’t function. The lack of UN approval to go to war is a given.

The five permanent members of the Security Council contrived from the start to render this section of the charter meaningless. The Security Council cannot declare a war legal or illegal. The countries that can start the wars also sit on the Security Council and will veto as their national interests dictate. 

So, the question of the US Commander in Chief transferring his authority to the UN is therefore moot. The UN couldn’t accept this power even if he wanted to give it to them.

Building on Sand

Out of cash and out of options, America's cities need a new plan—and they might need Washington to design it.

By Gillian Tett

Building on Sand

When a debt crisis hits, it can cause ripples in all kinds of unexpected places. Even, it seems, on American beaches.

In decades past, the lifeguards who stood watch over the shores of Atlantic City, New Jersey’s iconic resort town, epitomized good-time summer living. And they did so during the heyday of good-time retirement perks: The former guards have been enjoying government pensions since 1928.

Alas, those prime Atlantic City times are long gone. Now drowning in as much as $550 million in debt, the town can no longer afford to pay the annual $1 million owed to these aged lifeguards. But a proposed state Senate bill might allow the city to cut the retirement benefit, leaving the once-bronzed lifesavers high and dry.

Viewed on its own, this particular pension plan is but a blip on the radar that registers America’s debt quagmire, yet it points to a more troubling, widespread trend. These days, numerous city and state governments face overwhelming debts, which they are unlikely to ever pay off. And they are responding in capricious and unpredictable ways that could make the problem even worse.

Of course, it goes without saying that the United States is a big borrower. While the federal debt is estimated at around $19 trillion, which is slightly bigger than the nation’s entire gross domestic product, city and state governments have issued about $3.7 trillion in bonds, more than triple their borrowing in 2000, in the so-called municipal bond market. On top of that, state governments have made unfunded pension promises that could total more than $3 trillion—a financial burden that looks completely unsustainable.

Those raw numbers are worrying. But what is truly frightening is that many city and state governments aren’t organizing this liability in a consolidated way. Instead, they are shuffling the debts around, rather than finding credible solutions.

To understand the scale of the situation, take a look at Puerto Rico. In recent years, this island has issued a dizzying array of public and quasi-public bonds, which now total about $70 billion (around 100 percent of its gross national product). In addition, the commonwealth is estimated to have an additional $45 billion in pension liabilities.

Since growth has collapsed, Puerto Rico seems unlikely to pay this bill, which suggests it urgently needs to devise a restructuring plan. But it can’t. That’s because the amount of official debt is divided into at least 14 categories of bonds, which have been sold by the local electricity company and the central government, among other entities. Only some bonds are “secured,” meaning that investors can seize assets if a default occurs; this also means each bond is unique in the event of default.

If Puerto Rico were a company, consolidation would be a fairly easy process: Debtors or creditors would file for Chapter 11 bankruptcy protection and a judge would help determine who got paid. If Puerto Rico were a sovereign nation, the International Monetary Fund might play this role. While officials at the U.S. Treasury are keen to find a solution, there is strong opposition in Congress to anything that would be perceived as a bailout.

This leaves the U.S. territory stuck in limbo. In May, the beleaguered island defaulted on one small(ish) $422 million bond. As of press time, Puerto Rico seemed headed toward defaulting in July on a $2 billion bond. But there is no resolution in sight, since different creditors and pension funds are fighting bitterly to protect their claims.

Sadly, this is not a unique tale. Chicago’s debt, for example, is astronomical. In addition to accumulating $9.8 billion in outstanding bonds between 2000 and 2012, the city is estimated to face at least $20 billion in future pension claims. Paying this off is likely to be so difficult that the rating agencies downgraded Chicago’s debt to a notch above “junk” last year, and the city’s bonds are trading at a steep discount. Chicago recently sold new bonds that trade at 84 percent of their face value, implying that investors expect future losses.

Like Puerto Rico, Chicago can find no simple solution to its debt crisis. The city’s pension liabilities, for instance, are divvied among four main programs. Mayor Rahm Emanuel has tried to persuade various groups to cut the pension commitments, arguing that this approach—along with tax hikes—would help make the system sustainable again. Nevertheless, coordination in Chicago is almost impossible, as the state’s legal system makes it difficult to unite pensioners, creditors, and unions.

To be sure, easy solutions don’t exist. But Chicago, Puerto Rico, and even Atlantic City could take a page from Rhode Island’s playbook. Until the start of this decade, when Gina Raimondo became state treasurer, Rhode Island was facing an unsustainable pension bill. Raimondo, a former private equity executive, embarked on a campaign to inform citizens about the extent of the state’s debt, as well as of her plan to fix it. The public outrage helped force the unions to the table. And while this was controversial (some unions sued), it was eventually accepted.

One American city has also been able to restructure its debt successfully. When Detroit, weighed down by $18 billion, declared bankruptcy in 2013, its debts were eventually consolidated. Since then, city authorities have pledged to make finances more transparent. This enabled Kevyn Orr, the emergency manager who oversaw the bankruptcy, to win voter and union support for a restructuring plan.

Most cities cannot copy Detroit. Illinois law, for example, protects pension rights at almost all costs.

Thus, without the shock of a bankruptcy court—or the frenetic work of one pioneering local official—change is unlikely in Chicago.

Left with no options, the time has come for Washington to act. This isn’t to say that financial support should be pushed to cash-strapped cities; clearly, an ever-rising federal debt makes that an impossible scenario. But Washington should introduce legislation that forces the nation’s cities and state governments to audit their debts and make them accessible. In addition, Washington should create a process that would enable municipal debtors and creditors to find a collective solution, rather than a piecemeal approach.

Such accountability won’t be painless for anyone. If nothing is done, however, the alternative—a cloud of uncertainty hanging over many American cities and states—could be debilitating. At a time when the nation badly needs to create a climate for growth, Washington cannot afford that possibility.

Gillian Tett is U.S. managing editor of the Financial Times and author of The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers.  
A version of this article originally appeared in the July/August issue of  FP magazine.

The Taming of the Shrew

by: Captain Hook

The Taming of the Shrew is perhaps the most well known comedy ever penned by William Shakespeare, adapted time and again over the years due to the many plot twists and turns that appeal to an increasing sophisticated and demanding audience. So here's another, Janet Yellen, the present personification of the Federal Reserve, and the protagonist, has tricked the American (and global) population (the Shrew) into believing that they are 'important', which is why they go to such great lengths and theatre to do so; when all the while what they are really doing is imposing psychological torments until compliance and obedience become mandatory (financial repression) - the 'taming' of the debt serfs if you will. It's been a long road from Jekyll Island to negative interest rates (NIRP) (it's coming), however the story remains the same, at least for now.

As process unfolds however, the negative impact(s) of NIRP continue to ripple through economy(s), setting the stage for what will likely be looked back on by historians as the ultimate irony of this comedy - that in fact the Fed is the 'unwitting shrew', and tamed by its' protagonist - Mother Nature.

Because at some point, earthly constraints associated with the perversely profound impact of negative rates will become germane on a systemic basis, bring down pension funds and insurance companies alike, and then the larger financialized economy. Thing is, if NIRP is not enough to satisfy the protagonist, not matter who, then what's going to happen to the de-industrialized West when the decentralization process accelerates, the dollar($) (all fiat currencies) begin to fall on a real basis (against commodities - especially precious metals), and interest rates need to rise?

The answer to this question is - nothing good - if you are a 'status quo' beneficiary - right from the oligarchs to the bureaucrats - up and down the line. What's worse, once the market(s) realize the Fed is actually impotent, with all credibility finally lost (the signal hyperinflation is on the way - think Venezuela), all hell could (should) break loose, with outsized moves in rates (bonds), $, and equities.

Of course this does not mean stocks would go down - no - no - no. On the contrary, and if history is a good guide, they will go up - way up. And this is especially true of precious metal shares - and anything else with the word gold in its name. Because hyperinflation is just 'hidden collapse', where the price of everything goes through the roof - but everybody is priced out of existence.

Shakespeare was a romantic at heart. Thing is, he wasn't just another lost hedonist submerged in self-seeking enrichment, but a romantic with a conscious and a friend of the average man never the less. You can of course see this in his writing, where the most common theme running through his work is ruthless ambition (and cruelty) leads to its own destruction, because this tendency is man's downfall - and should be recognized, corrected, and avoided if possible. Unfortunately, evidenced in our increasingly neo-fascist world today, such thinking has proven wrongheaded folly, because on a base level most people are lost hedonists submerged in self-seeking enrichment - hell bent on self destruction in an effort to remain distracted. (i.e. from an increasingly dreary future.)

So you might as well have a laugh along the way, and keep the distraction factor high, which brings us back to why, in his genius, we have gems like The Taming of the Shrew. In order to remain distracted however, and on a more practical level, we need money to do this, which compels one to 'play the game'. In order to play (the game) effectively (profitably), one had better have an appropriate understanding of the game; along with a plan on how to deal with the competition because it's high, educated, ruthless, and corrupt. As alluded to above, your primary source of competition for scarce resources today is an embedded bureaucracy that runs right from the oligarchs; to the bureaucrats they have bought off; to their dogs (military, police, etc.). So again, one must know how to play the game if you are to prosper. You need to tame that shrew.

How do we, as investors 'tame' the complexity of this modern day shrew - a shrew that the users and abusers in 'high places' would have you believe is 'different' this time? The answer to this daunting task is found in the question, as assuredly some have already realized, that being 'keep it simple stupid'. Within such 'game theory', the only possible long-term counter strategy to successfully battle complexity is to employ a simplistic approach that looks down on the failings of the thinking, 'technology' will continue to bail out the human juggernaut - because it won't. Just look at the 'technology picture' today. We have the entire un-capitalized world on Facebook keeping them distracted, while the capitalized world is talking about driverless cars and any other form of technology to that puts these people out of work - because it's good for capitalism.

Fact of the matter is this little of the technological innovation 'the takers' hold so dear today will better the human condition like 'the wheel', never mind increase survival prospects of seven plus billion people facing a failing ecology (natural and manmade) - so systemic failure is the only possible outcome. And checking your Facebook messages ten times a day will not help this condition - but again, it keeps people distracted by scratching the compulsion itch.

Unfortunately, it's this 'itch', this 'ticky behavior', that also controls many people's trading patterns, a result of the influence of technology - trading against the emotionless, binary, and fast machines. So its no wonder traders are going a little nutty - many now fallen by the wayside. Is that supposed to be a 'good result' of technology? It has been for the parasites (top 1%), but this will cost everybody big in the end.

In the meantime however, and in the spirit of a good hedonist, one must adopt the motto 'if you can't beat'em - join'em' right - which is why the hedge fund industry has been booming. This fallacy is finally being debunked however, where simply holding an index fund has been proven to be far better than giving the vast majority of these clowns your money - even the big successful ones. And again, as pointed out above, this realization is finally starting to negatively effect participation rates in actively managed (mutual and hedge) funds. It's not going to help investors with official intervention (prop desks, money printing, etc.) and high frequency trading (HFT), which is why indexers continue to outperform; however, it does signal a growing stress in the markets, financial industry, and scheming parasites - which is what we need to see if a failure of the present 'moog fest' is ever to become a reality. (See Figure 1)

Figure 1
SPX Weekly Chart

Technical note: The single most important observation one can make regarding the above weekly S&P 500 (SPX) plot is how prices have been rising divergently against falling volumes, a product of increasingly manipulated markets. This is not natural, and will need to be reflected in prices at some point, just when people can afford it least. In the meantime, it's off we go to SPX 2200 minimum, maybe 2300 plus to test the long-term channel bottom again. If the neo-liberals and Hillary are too maintain power this fall, a whole lot of tape painting will be necessary now the Brexit volatility.

Because I want my gold to go up one day with all this money printing - not being held prisoner by a bunch of clever paper pushers centered out of New York that continue to pander their stock market. I'm a hedonist too - as you are - it's natural. Thing is though, you don't have to be a corrupt and self-serving scoundrel, raping 'the system' on a daily basis, in order to exercise this tendency because it's unfair (not that 'fairness' ever matters) - and will eventually need to be corrected. And while a captive and dumbed-down Western population will have the damdest time actually doing something about it, this is not the case for the Chinese and Russians, who know our vulnerabilities, and are fully prepared to exploit them with the right provocation.

Please, give me more gold because eventually the crazies in Washington will step over the line and all hell will break loose. (See Figure 2)

Figure 2
INDU;Gold Monthly Chart

That's the big message in the Dow / Gold Ratio (DGR). It's telling you that while nominal stock market prices continue to rise, giving the impression the status quo is still in charge, real terms (against gold) tell us a different story, that the dead cat bounce since 2009 is almost over, and new lows in the DGR are on the way soon. You will remember we have gold going up into a Fibonacci 21-year cycle high in 2021 coming off the year 2000 bottom. That's the plan Stan, based on the belief the illusion that has now become America will be exposed for what it is over the next five-years, a fraud, and more earthly concerns (survival) grip the macro going into what will sure to be a time of increasingly dangerous wars no matter who gets into the White House. It's the survival of the fittest you see - in a world of now rapidly dwindling natural resources - absolutely necessary for our collective survival. (See Figure 3)

Figure 3
Silver:SPX Monthly Chart

So make no mistake about it, eventually the American Empire will be tamed one day too - sooner rather than later if the Brexit vote last week is any indication (see below). This is when the material world will begin to matter in the financial markets once again, there and in the real world too. All the fairy tales coming out of mainstream media (MSM), the Hollywood propaganda machine, and officialdom, just won't matter so much anymore - so all you overpaid celebrities and other various other well-heeled scammers, carpetbaggers, and scalawags (confidence people) - look out. This is when silver, the status quo's 'whipping boy', will take off like a bat out of hell against stocks and never look back (see Figure 3), because you can't eat your shares, and you can disinfect things with shares either, however silver, which is both real money (to buy food) and a natural antibiotic, has many uses in addition to its function as money and jewelry, which is not how most view it. (i.e. they view silver as a source of cheap jewelry and something to make eating utensils.) And these uses will become increasingly important as time marches on because shrinking economy will erode affordability of all the luxuries technology now provides.

And then we have a pleasant surprise in Britain last week with the Brexit vote. Apparently the Scots are the only 'conquered people' on the Island today - no Bravehearts here. What does this mean? It means the decentralization process we have been talking about for so long now is on - in spades. It means Globalism as we know it is dead - evidenced by the excitement in other countries about similar prospects. If we get a similar result in Spain this weekend, very strong signals will have been triggered in that the eventual demise of the EU/euro will be visible - the demise of the Brussels connection (American sponsored unelected bureaucrats pirating Europe's wealth), corporatism, and the American Empire - and the rebirth of 'nationalism movements' world wide, now being modeled by Russia. It's important to understand all this doesn't mean trade between will crease, in spite of temper tantrums out of Brussels. In fact, inter-eurozone trade in the future will evolve and likely flourish in a more natural and common sense path with decreased influence from aggressive American interests - with only one thing on their mind(s) - Empire. The risk now is war with Russia as the power structure (neocons) States side attempt to hold onto their power.

What's more, the bureaucrats from Brussels back to Britain still have a few arrows in their quivers.

While Cameron is stepping down, hopefully needing to find a real job, it should be understood that any Brexit (or the like in other countries) could be held up by his corrupt ilk in Parliament for up to 10 years (right now the talk is two-years minimum), so don't get too excited about all this just yet.

Again, and in relation to the discussion above, we need to see silver set free to know things have changed for real - that the status quo is done. With silver unable to crack $18 last week in the face of all that's going on is the signal to the status quo legions not to worry - they are idiots - all is in hand - you will see - so keep selling it and buying stocks. It's encouraging seeing the markets reacting the way they are, and the talk coming from nationalism movements world wide, however the status quo is embedded, and will remain that way until something a kin to a 'Mad Max' event sends humanity into a real tailspin, so don't think these characters will disappear. They will simply move from the forefront until such a time the megalomaniacs of the world will be allowed to fully exercise their insanities once again. And again, this could come sooner rather than later with a gift from the neocons via World War III.

Wish I had better news, but that's the reality of the situation.

Because of this, good investing is definitely possible in precious metals.