While it was already leaked in the past week that oil service giant Halliburton would seek to purchase Baker Hughes, or, if the smaller oilservice company did not accept the proposed terms, make a hostile run at its board of directors, it was unclear how the Houston company would respond. As the Houston Chronicle summarized, BHI had "to make a tough choice: surrender control on a rival's terms or face months of sunken oil prices and cost pressures alone....Halliburton's demands come as crude prices have fallen dramatically and as the U.S. oil industry looks to an uncertain future. Much is unclear: how much oil producers will rein in equipment and service spending, whether oil prices will sink or swim, and how much Baker Hughes would be worth in six months after what would likely be a bruising battle for control of its board." Moments ago we got the answer and Baker Hughes shareholders decided they have had enough of the volatile oil price and are happy to cash out at this point, in a $34.6 billion deal that values BHI shares at $78.62/share.

Then again, judging by the rather substantial M&A arb currently in the price, which was trading at $70.35 pre market, or a 10%+ discount to the proposed price, arbs seem to be a little sceptical if the $3.5 billion termination fee will not be put into play.

Also of note: $2 billion in "synergies" means a whole lot more BLS unemployment "seasonal adjustments" will be used in the coming months.

Full release below:

Halliburton and Baker Hughes Reach Agreement to Combine in Stock and Cash Transaction Valued at $34.6 Billion

• Baker Hughes Stockholders to Receive 1.12 Halliburton Shares Plus $19.00 in Cash for Each Share They Own
• Transaction Values Baker Hughes at $78.62 per Share as of November 12, 2014
• Highly Complementary Product Lines, Global Presence and Cutting-Edge Technologies Will enable Combined Company to Create Added Value for Customers
• Accretive to Halliburton Cash Flow by the End of Year One, with Nearly $2 Billion in Synergies and Significant Cash Flow to Support Future Returns of Capital to Stockholders

Halliburton Company (HAL) and Baker Hughes Incorporated (BHI) today announced a definitive agreement under which Halliburton will acquire all the outstanding shares of Baker Hughes in a stock and cash transaction. The transaction is valued at $78.62 per Baker Hughes share, representing an equity value of $34.6 billion and enterprise value of $38.0 billion, based on Halliburton’s closing price on November 12, 2014, the day prior to public confirmation by Baker Hughes that it was in talks with Halliburton regarding a transaction. Upon the completion of the transaction, Baker Hughes stockholders will own approximately 36 percent of the combined company. The agreement has been unanimously approved by both companies’ Boards of Directors.

 

The transaction combines two highly complementary suites of products and services into a comprehensive offering to oil and natural gas customers. On a pro-forma basis the combined company had 2013 revenues of $51.8 billion, more than 136,000 employees and operations in more than 80 countries around the world.

 

“We are pleased to announce this combination with Baker Hughes, which will create a bellwether global oilfield services company and offer compelling benefits for the stockholders, customers and other stakeholders of Baker Hughes and Halliburton,” said Dave Lesar, Chairman and Chief Executive Officer of Halliburton. “The transaction will combine the companies’ product and service capabilities to deliver an unsurpassed depth and breadth of solutions to our customers, creating a Houston-based global oilfield services champion, manufacturing and exporting technologies, and creating jobs and serving customers around the globe.”

 

Lesar continued, “The stockholders of Baker Hughes will immediately receive a substantial premium and have the opportunity to participate in the significant upside potential of the combined company. Our stockholders know our management team and know we live up to our commitments. We know how to create value, how to execute, and how to integrate in order to make this combination successful. We expect the combination to yield annual cost synergies of nearly $2 billion. As such, we expect that the acquisition will be accretive to Halliburton’s cash flow by the end of the first year after closing and to earnings per share by the end of the second year. We anticipate that the combined company will also generate significant free cash flow, allowing for the return of substantial capital to stockholders.”

 

Martin Craighead, Chairman and Chief Executive Officer of Baker Hughes said, “This brings our stockholders a significant premium and the opportunity to own a meaningful share in a larger, more competitive global company. By combining two great companies that have delivered cutting-edge solutions to customers in the worldwide oil and gas industry for more than a century, we will create a new world of opportunities to advance the development of technologies for our customers. We envision a combined company capable of achieving opportunities that neither company would have realized as well – or as quickly – on its own, all while creating exciting new opportunities for employees.”

 

Lesar concluded, “We believe that the expertise of both companies’ employees and leaders will be a competitive advantage for the combined company. Together with the people of Baker Hughes, we will establish a team to develop a detailed and thoughtful integration plan to make the post-closing transition as seamless, efficient and productive as possible. We look forward to welcoming the talented employees of Baker Hughes and are pleased they will be joining the Halliburton team.”

 

Transaction Terms and Approvals

 

Under the terms of the agreement, stockholders of Baker Hughes will receive, for each Baker Hughes share, a fixed exchange ratio of 1.12 Halliburton shares plus $19.00 in cash. The value of the merger consideration as of November 12, 2014 represents 8.1 times current consensus 2014 EBITDA estimates and 7.2 times current consensus 2015 EBITDA estimates. The transaction value represents a premium of 40.8 percent to the stock price of Baker Hughes on October 10, 2014, the day prior to Halliburton's initial offer to Baker Hughes. And over longer time periods, based on the consideration, this represents a one year, three year and five year premium of 36.3 percent, 34.5 percent, and 25.9 percent, respectively.

Halliburton intends to finance the cash portion of the acquisition through a combination of cash on hand and fully committed debt financing.

 

The transaction is subject to approvals from each company’s stockholders, regulatory approvals and customary closing conditions. Halliburton’s and Baker Hughes’ internationally recognized advisors have evaluated the likely actions needed to obtain regulatory approval, and Halliburton and Baker Hughes are committed to completing this combination. Halliburton has agreed to divest businesses that generate up to $7.5 billion in revenues, if required by regulators, although Halliburton believes that the divestitures required will be significantly less. Halliburton has agreed to pay a fee of $3.5 billion if the transaction terminates due to a failure to obtain required antitrust approvals. Halliburton is confident that a combination is achievable from a regulatory standpoint.

 

The transaction is expected to close in the second half of 2015.

Then again, in a time when busted M&A has caused even more pain for the hedge fund community (read Scuttled deals worth $580 billion put hedge funds on back foot: "Hedge fund manager John Paulson, who invested 1.44 billion pounds in Shire on Oct. 14, saw his Advantage fund lose 13.6 percent in October, according to an investor, while Elliott Associates said it may take legal action against AbbVie for scuttling the deal and losses"), the last thing the M&A arb community needs is yet another red herring deal, which may well be seeking to force shorts across the oilspace shorts to scramble to cover, to fall apart and lead to even more hedge fund pain with less than 2 months left until year end.

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Before I get into the meat of this post, I want to make it clear that the definition of oligarch, a term I use a lot, does not center solely around money.

Late last year, in the post Inside the Mind of an Oligarch – Sheldon Adelson Proclaims “I Don’t Like Journalism,” I attempted to frame the word oligarch as I use it. I wrote the following:

In a nutshell, while many oligarchs are extremely wealthy (or have access to extreme wealth), not all people with extreme wealth are oligarchs. The term oligarch is reserved for those with extreme wealth who also want to control the political process, policy levers and most other aspects of the lives of the citizenry in a top-down tyrannical and undemocratic manner. They think they know best about pretty much everything, and believe unelected technocrats who share their worldview should be empowered so that they can unilaterally make all of society’s important decisions. The unwashed masses (plebs) in their minds are unnecessary distractions who must to be told what to do. Useless eaters who need to be brainwashed into worshipping the oligarch mindset, or turned into apathetic automatons incapable or unwilling to engage in critical thought. Either outcome is equally acceptable and equally encouraged.

With that out of the way, Five-Thirty-Eight provided the following:

Four years earlier, 388 billionaires together held as much wealth as the poorest 50 percent of the world.

 

Thirty-five of the 80 richest people in the world are U.S. citizens, with combined wealth of $941 billion in 2014. Together in second place are Germany and Russia, with seven mega-rich individuals apiece. The entire list is dominated by one gender, though — 70 of the 80 richest people are men. And 68 of the people on the list are 50 or older.

 

Oxfam notes that global wealth inequality is increasing while the rich get richer. If trends continue, the organization projects that the richest 1 percent of people will have more wealth than the remaining 99 percent by 2016.

Now here’s the list:

I didn’t provide this list to say whether these people are good or bad. I provide it, because whenever 80 people own as much as the poorest 50% of the globe, we sure better know who they are. We should also be cognizant of the disproportionate influence any of them can have on public affairs should they want to.

Submitted by Jeffrey Snider via Alhambra Investment Partners,

A little over two years ago, in the middle of April 2013, there was a gold crash that came seemingly out of nowhere. Worse, for gold investors anyway, that crash was repeated just a few months later. Where gold had stood just shy of $1,800 an ounce at the start of QE3, those cascades had brought the metal price down to just $1,200. For many, especially 'so-called' orthodox economists, it heralded the end of the “fear trade” and meant, unambiguously, that the recovery had finally at long last arrived.

As Felix Salmon wrote at Reuters in an article titled, The Fear Bubble Bursts:

As a result, the falling price of gold is more important than simply being an opportunity for schadenfreude around the likes of Glenn Beck or John Paulson or Zero Hedge…

 

The biggest problem in the markets right now is that they’re still far too risk-averse. Fear-based assets like gold, Treasury bonds, and cash are in high demand, while there isn’t enough money flowing through greed-based assets like stocks and bank loans and into the economy as a whole. Even if the stock market is expensive, the number of primary and secondary offerings remains low; similarly, banks are not expanding their loan books nearly fast enough…

 

My hope is that the price of gold will continue to fall, that goldbugs will look increasingly silly, and that as a result Americans with savings will conclude that the best thing to do with those savings is to put them to work in a productive manner, rather than self-defeatingly trying to protect what they have.

Gold has not continued that wished-for collapse, but hasn’t risen much either. In fact, the price of gold remained above $1,300 for only short periods and hasn’t been near that level outside of the January 2015 “Swiss problem.” Most gold analysis views it in terms of not just the “fear bubble” but also a proxy for interest rates and monetary policy. There is already a problem with that latter interpretation, as the price of gold began to its decline almost the moment QE3 started. Economists think of gold investors in only these terms, as emotional and irrational Fed-haters.

In the broader economic context, then, the fact that gold was falling at the same time QE’s had commenced provided that hoped-for economic confirmation. Gold adherents were getting their “debasement” but that gold prices were sharply reacting in the “wrong” direction which could only mean, to the mainline economic view, that QE wasn’t just debasing the dollar it was actually working while doing so.

Writing just prior to the second gold “slam” in June 2013, Nouriel Roubini took his best shots at framing gold’s descent as a victory for Ben Bernanke:

Third, unlike other assets, gold does not provide any income. Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation. Now that the global economy is recovering, other assets—equities or even revived real estate—thus provide higher returns. Indeed, U.S. and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.

 

Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds are negative and falling. But the more positive outlook about the U.S. and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall. [emphasis added]

Roubini’s fourth point may be the most important, as it implies that there is a relationship between the Fed’s policies, especially QE’s, and the rate of inflation. However, recent history, especially in the two years since gold crashed, has proven that totally and fully incorrect. There has been no “inflation” much at all, and even to the point that the Fed’s preferred inflation target, the PCE deflator, has come in under the policy target of 2% for 35 straight months dating back to just before QE3 was rumored.

If QE3 and QE4 had any impact on “inflation” or recovery in the US it is not apparent. For a time in 2013, Roubini’s “rising real rate” scenario seemed to be somewhat plausible as the entire UST complex and yield curve shifted upward. While the PCE deflator did not much move, that temporary rise in nominal yields brought real rates up and appeared at first as if it might reflect at least the near-future possibility of the recovery and recovery financial dynamics.

But that all turned around in October and November 2013. In other words, anything resembling the recovery in these financial terms had a very short life. By November 2013, nominal yields had slowed their ascent and the overall UST yield curve turned durably bearish. Though real rates fell once more in the middle of 2014 as “inflation” ticked up slightly, since October 2014 “inflation” has declined far faster than nominal yields. So real interest rates have been rising, but not for the reasons outlined by Roubini and his orthodox notions of recovery.

Clearly, there is “something” missing here beyond just the recovery economists were so sure that gold’s crash was foretelling. Normalizing both economic and financial conditions would mean interest rates rising back toward where they were pre-crisis just as “inflation” picks up and remains at or slightly above 2%. Neither of those factors is evident anywhere at all in the two years since gold prices crashed.

The idea of gold prices behaving like a zero-coupon bond is in some ways relevant to this problem. Economists only think of the asset side of that paradigm while never moving beyond that into liabilities. A government bond is an asset, sure enough, but it can also be part of the liability structure in repo. Just as government bonds act as collateral, so too does gold. That has led to strict and lasting misinterpretation about the behavior of gold in 2008, which Roubini tried to incorporate within his anti-gold stance.

But, even in that dire scenario, gold might be a poor investment. Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls.

That isn’t what happened to gold, at all. You can disprove that theory rather easily, as I wrote contemporarily in April 2013 about the gold slam as it was occurring.

Gold prices crashed on three separate occasions in 2008, all of which were tied to problems in collateral chains and interbank financial irregularities. In the first episode, the price decline started when Bear Stearns failed and ended on May 2, 2008. That date stands out because that was the first time the Fed had expanded its list of acceptable and eligible collateral in its TSLF Schedule 2 to include non-GSE MBS paper as well as strictly non-mortgage ABS. In other words, the collateral implosion started by Bear Stearns “cold fusion” ended the moment the Fed debased not the currency or bank reserves but the list of “appropriate” interbank collateral.

As I described it in April 2013:

That means in times of extreme stress, gold acts like a universal liquidity stopgap – when all else fails, repo gold. The operational reality of a gold repo is a gold lease, charged at the forward rate (GOFO). In terms of market mechanics, a dramatic increase in gold leasing is seen as a massive increase in supply on the paper markets.

 

For various reasons in the past five years, collateral chains and the available collateral pool has dwindled dramatically. That has left banks to scramble for operational bypasses, but it also has led to periods of very acute stress. [emphasis in original]

As a representation of the “dollar”, then, gold prices act as a partial proxy of actual “dollar” availability balanced against that or any desperate bid for safety – and having very little to do with interest rate differentials.

That makes the trend in gold since QE3 started all the more interesting if we take in the “correct” context of the global “dollar.” Clearly, we cannot take falling gold as indicating a recovery because one never came and it surely looks to be further away now than then, an interpretation consistent with financial measures, yields and prices. But we can look at gold over the past three years since QE3 and link its behavior to that of the “dollar.”

While economists might still see QE as contributing to global “liquidity”, which it seems like it should what with all those trillions in bank “reserves” created, there has been persistent criticism of it as nurturing instead the opposite condition. The major part of creating all those bank “reserves” is to remove collateral in the process – transforming a repo-based system back toward a more-traditional idea of how banking used to work. But the wholesale system since August 2007 has been moving away from unsecured lending interbank and otherwise to almost purely repo.

The Fed has been very aware of this problem especially when it nearly destroyed repo in April 2011 (and then a desperate “dollar” problem only two months later?) by stripping the system of almost all t-bills toward the end of QE2 (which was the reason for Operation Twist). When planning and extrapolating for QE3, those operational constraints were at best secondary to the psychological effects that were supposed to accompany Bernanke’s massive and “open ended” monetary program. Getting everyone to “feel” better that the Fed was doing something big was meant as a far greater economic stimulant than the negative liquidity of depriving usable collateral in terrible quantities. The recovery from the defeat of pessimism, in Felix Salmon’s terms, was thought to be so much more powerful than the status of actual “dollar” circulation ability.

So much happy emotion was never really much of a “stimulant”, of course, but the negative factors on “dollar” circulation were very real. In many ways, the collapse in gold presaged this latest stage or leg in the collapse of the global “dollar”, eurodollars in particular, which starts to account for the economic behavior these past few years as well. Gold, then, since early 2008 has been telling us a lot about the tendency of the eurodollar standard toward outright imbalance and dysfunction. That is a condition that is not in any way conducive for a global recovery, which is one big reason why, despite orthodox giddiness over gold prices, it never came.

It also suggests that QE has acted as a depressant upon the global economy, net, depriving significant circulation ability in eurodollar channels and beyond. This would include not just reduced levels of collateral flow, but also bank balance sheet capacity overall in the full 2013 aftermath of QE3 and QE4. It would have been nice if gold’s price collapse was a signal of actual success, but instead it appears to be just another form of structural financial decay and the economic malaise (at best) that attends it. In that view, it is somewhat amazing that gold prices haven’t suffered further lower lows, which suggests that there may actually have been a significant safety bid all along. The “fear” bubble did not end; it was overwhelmed by QE’s depressive constant and the related countdown to the end of the eurodollar standard.

Gold price activity since QE3 has been a warning, and a big one, not cause for victory celebrations.

Submitted by Daniel Drew via Dark-Bid.com,

Homeownership has been one of the most significant issues in recent financial history. It first came to the forefront in 2002, when President George W. Bush spoke about the importance of homeownership and the American Dream. He announced policies like the American Dream Downpayment Initiative, which would pay the down payment for poor people. The resulting surge in homeownership pushed housing prices to unsustainable levels, and then it all came crashing down in 2008 in one giant national margin call. When Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson gave Bush the tap on the shoulder, he wondered, "How did we get here?" Now, seven years later, first-time urban home buyers are asking the same question.

If you have ever looked at real estate prices in San Francisco, you probably wondered if there were some kind of typo in the listing price. The median sales price of a home in San Francisco is $1.1 million.

These aren't mansions either. The median price per square foot is $958, which means that $1.1 million will get you a place that's only 1,150 square feet. This particular home is 127 years old.

In the rest of the country, the median sales price is $208,000, and the median price per square foot is $125.

The median price per square foot in San Francisco is 7.6 times higher than the rest of the United States. As your real estate agent will tell you, it's all about location. But the last time I checked, the people in San Francisco aren't shitting gold, there's no fountain of youth in Golden Gate Park, and there are no Everlasting Gobstoppers downtown.

What could possibly make San Francisco 7.6 times more valuable than the rest of the country? While they are the location of the booming tech industry, that doesn't explain the prolonged housing shortage. In the "free market," if there is such a thing, shortages are corrected as suppliers respond to higher prices. However, as usual, the free market turns out to be nothing more than a fantasy. The best description of a free market was provided by Matthew McConaughey's character in The Wolf of Wall Street:

It's all a fugazi. Do you know what a fugazi is? Fugayzi, fugazi, it's a wazie, it's a woosie, it's...(whistles)... fairy dust. It doesn't exist. It's never landed. It is no matter. It's not on the elemental chart. It's not fuckin' real.

Take a look at San Francisco's zoning map, and ask yourself if that is what a free market looks like.

And if you were wondering what all those yellow squares were, this explains it:

As you can see, the entire city has been designated as a perpetual single-unit metropolis, and with water on three sides, the sprawl potential is limited. After seeing this, it's no surprise that houses from the 19th century cost $1 million.

The phenomenon of homeowners objecting to new development is called NIMBYism, which stands for "Not In My Back Yard." The premise behind this is that homeowners don't want to risk any changes that could adversely affect their living space or the value of their property. There seems to be a legitimate case for this. Professor William A. Fischel of Dartmouth College elaborates on this situation in his paper about NIMBYism. For the average American, a home is their most valuable asset, and they are usually highly leveraged in it with a long-term mortgage. Unlike billionaire hedge fund manager John Paulson, the average homeowner cannot short the ABX mortgage index to hedge the risk of their home value depreciating. Without any kind of price insurance, it's only natural they would fear a devaluation. Consequently, they will do anything they can to mitigate the risk, however small it may be.

However, it's easy to see another motive behind NIMBYism: greed. As an investor of a highly leveraged asset, the average homeowner has every reason to inflate the price of their home as much as they can. You may not care about environmentalism, the skyline, or urban planning, but if halting new development will limit the supply of homes and boost your property value, you will definitely attend the local city council meeting to "voice your concern." This is not any different than an activist hedge fund manager clamoring for board seats.

It's easy to dismiss this as a local issue, but a recent study by Chang-Tai Hsieh and Enrico Moretti showed that these kinds of housing restrictions in high productivity cities like New York, San Francisco, and San Jose are reducing GDP by 9.5%. To put that into perspective, consider that U.S. GDP is $17 trillion. That means eliminating NIMBYism would boost GDP by $1.6 trillion. That's more than the entire GDP of Spain.

NIMBYism also contributes to inequality. In response to Thomas Piketty's Capital in the Twenty-First Century, Matthew Rognlie, a 26-year-old graduate student at MIT, wrote a paper called "Deciphering the fall and rise in the net capital share." The Economist summarized the paper as follows:

Surging house prices are almost entirely responsible for growing returns on capital...Policy-makers should deal with the planning regulations and NIMBYism that inhibit housebuilding and which allow homeowners to capture super-normal returns on their investments.

NIMBYism perpetuates the two-class society that we see today. As Professor Fischel noted, "Most of the labor demand increase was manifested as higher nominal wages instead of higher employment." In other words, a San Francisco tech job is good work if you can get it, but most people can't. You are either one of the few highly-paid workers, or you're out of a job - possibly even homeless. Robert Aguirre, a 60-year-old electrical engineer, went from being the owner of a successful tech firm to living in a tent in "The Jungle," a homeless enclave in San Jose. The NIMBYs eventually shut down the encampment.

Finding a way to combat NIMBYism is not easy. I don't want to deny the importance of homeownership. However, inflating home values like the Federal Reserve inflates the stock market ruins people's lives. To help homeowners with legitimate fears about property depreciation, perhaps they should be given access to mortgage indices like the ABX, or an index tailored for their local area. It could just be one of those things people check off their list: liability insurance, fire insurance, and price insurance. This wouldn't solve the problem by itself. Legislation at a higher level than the municipal authority would be required. Undoubtedly, this would incite anger about government meddling, but I don't see any other option to stop the NIMBYs and their ridiculous objections to development. For now, millennials are renting at a higher rate than ever before, but if they ever start buying en masse, they could provide considerable political support for new anti-NIMBY legislation.

The NIMBYs are trying to corner the housing market, but all monopolies eventually end.

Submitted by Daniel Drew via Dark-Bid.com,

On Wall Street, a vital skill is the ability to sell something that you know is completely worthless. Goldman Sachs did it when it sold ABACUS 2007-AC1 to investors while hedge fund manager John Paulson was betting against it. Paulson paid Goldman $15 million to peddle this junk, which was a collateralized debt obligation that would make money when millions of people lost their homes. The SEC charged Goldman with fraud, and they eventually settled for $550 million. If you're an enterprising Wall Streeter who wants to make a name for himself without breaking the rules, you can operate a tantalizing scheme that investors can't resist. It's called Shubik's Dollar Auction.

The Dollar Auction was created in 1971 by Martin Shubik, a professor at Yale. Shubik was friends with the late game theorist John Nash, and in their spare time, they amused themselves by creating parlor games that were nothing less than diabolical. Wall Streeters are usually familiar with traditional risky games like No Limit Texas Hold'em and Liar's Poker. However, the Dollar Auction trumps all of those games by taking loss aversion to the next level.

The Dollar Auction works like any other auction except for one key rule: the second-highest bidder has to pay his bid in full and gets nothing in return. Experienced traders will immediately foresee how this will play out. Gather a large group of people in a room and start the bidding. Initially excited by the prospect of getting a dollar for pennies, people will start bidding. Even at 50 cents, they are still getting a bargain. No one worries about being the second-highest bidder because there are so many other people in the room.

As the bidding gets closer to $1, bids will start dying out. Eventually, someone will bid $1. At that point, there will be no new bidders, but someone is still stuck at 99 cents. That person is facing a guaranteed loss of 99 cents. If they bid $1.01 and win, they can get the dollar and only take a 1 cent loss. So they figure a 1 cent potential loss is better than a 99 cent guaranteed loss. However, the other remaining bidder is thinking the same thing. These two bidders will run up the price as high as necessary until one of them eventually decides he can't take it any longer. There is no limit to how high the insanity can go. Meanwhile, the auctioneer keeps both bids and only gives up one dollar. The Dollar Auction is the perfect metaphor for Wall Street. Both involve setting the clients against each other and taking fees for yourself.

The Dollar Auction mindset can also be seen in the post-crash bizarro bond markets. As a response to what seems like unlimited quantitative easing, bond investors have bid up the price of bonds to the point where they are actually locking in a loss on their investment right from the beginning. As Zero Hedge reported earlier this year, 16% of global government bonds have a negative yield; that's $3.6 trillion.

The logic behind this behavior is that yields will become even more negative or deflation will occur. Bond investors are scrambling to avoid becoming the second-highest bidder in the global bond market frenzy. However, with QE failing in Sweden, and with the CDS market collapsing, this will not end well.

When Shubik created the Dollar Auction over 40 years ago, I doubt he could have imagined that the madness of his diabolical parlor game would be playing out in the global bond markets.

Submitted by Daniel Drew via Dark-Bid.com,

The BLS continues to perpetuate the distraction officially known as the "unemployment rate" to hide the grim reality portrayed by the labor force participation rate, which shows the true decline of employment in America. The labor force participation rate of college graduates has never been lower. In the new normal, McDonald's has a lower acceptance rate than Ivy League schools. Just when you thought you had seen everything, a new story emerges: Alfred Postell has three degrees - accounting, economics, and law - but he is unemployed and homeless.

Postell graduated from Harvard Law School in 1979.

Here he is now.

Postell could possibly be the most educated homeless man in history, and his tragic downfall reflects a great failure of modern society. As The Washington Post reports, he used to work at Shaw Pittman Potts & Trowbridge. One day, Postell started talking about how the police were chasing him. The cops were not there. Then he went through a bad breakup with his girlfriend. Postell lost all sense of reality and spent the next 30 years drifting. Postell had schizophrenia.

Despite having a $35 billion endowment, Harvard has not taken any initiative to assist their former student. However, they gladly sought the attention of hedge fund manager John Paulson, who donated $400 million to the university last month. It seems like Harvard has developed a new theory of one-way reciprocation, a concept even the schizophrenic mind could not imagine.

Genius and schizophrenia have been linked before. The late game theorist John Nash is one example. Ironically, Nash made his greatest mathematical achievements at the height of his mental illness. Schizophrenia involves hyperactivity in the prefrontal cortex, a region of the brain that helps people make unusual connections between seemingly unrelated ideas. Perhaps Nash's condition was just an excessive manifestation of some kind of natural asset.

With the right assistance, the potential contributions people like Nash and Postell could make to society are enormous. When a Harvard graduate is on the streets, it's not a result of a schizophrenic mind; it's a symptom of a schizophrenic job market and a schizophrenic society that seeks short-term profit over long-term gain.

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

For those of you who have been reading my stuff since all the way back to my Wall Street years at Sanford Bernstein, thanks for staying along for the ride. I appreciate your support immensely considering that I essentially no longer write about financial markets at all, and for many of you, that remains your profession and primary area of interest.

There are many reasons why I stopped commenting on markets, but the main reason is that I started to recognize I wasn’t getting it right. In fact, in some cases I was getting it spectacularly wrong. Whenever this happens, I try to isolate the problem and fix it. In this case there was no fix, because much of why I was no longer getting it right was rooted in the fact that my heart, soul and passion had moved onto other things. My interests had expanded, and I started a blog to express myself on myriad other matters I deemed important. Providing relevant market information needs intense focus, and my focus had shifted elsewhere. I recognized that I wasn’t intellectually interested enough in centrally planned markets to provide insightful analysis, and so I stopped.

This doesn’t mean I won’t start up again. When central planners do lose control, I may indeed become far more interested in opining on such matters. Time will tell. In the interim, financial markets do still play an important role in the bigger picture of social, political and economic trends I passionately care about. The stability and increase in financial assets (stocks and bonds) is of huge importance to the propaganda machine, in particular keeping the non-oligarchic, non-politically connected 1% in line and believing the hype (see: The Stock Market: Food Stamps for the 1%).

So while I won’t claim to know when the paradigm shift will begin in earnest, I do rely on people who have gotten macro forecasts right, and there is no one better than Martin Armstrong. Years ago, he was saying that nothing goes up in a straight line and that gold would experience a severe correction before beginning its real bull market. We are seeing his prediction unfold before our very eyes. What he also said is that as gold approached the $1,000 per/oz mark or even below, everyone would proclaim that “gold is dead” and start making comically bearish statements. In a nutshell, negative sentiment would plunge to levels not seen in years, if not more than a decade. We are starting to see this now.

Here are four mainstream media articles that provide some evidence we may be approaching a sentiment low. Some of them I’m sure you’ve seen, others perhaps not. What amazes me is how they’ve all come out within the last two weeks.

1) From the Wall Street Journal: Let’s Be Honest About Gold: It’s a Pet Rock 

Here are a few choice excerpts:

Gold is supposed to be a haven amid hard times and soft money. So why, even as Greece has defaulted, the euro has sunk against the dollar, and the Chinese stock market has stumbled, has gold been sitting there like a pet rock?

 

Many people may have bought gold for the wrong reasons: because of its glittering 18.7% average annual return between 2002 and 2011, because of its purportedly magical inflation-fighting properties, because it is supposed to shine in the darkest of days. But gold’s long-term returns are muted, it isn’t a panacea for inflation, and it does well in response to unexpected crises—but not long-simmering troubles like the Greek situation. And you will put lightning in a bottle before you figure out what gold is really worth.

 

With greenhorns in gold starting to figure all this out, the price has gotten tarnished. It is time to call owning gold what it is: an act of faith. As the Epistle to the Hebrews defined it forevermore, “Faith is the substance of things hoped for, the evidence of things not seen.” Own gold if you feel you must, but admit honestly that you are relying on hope and imagination.

 

Recognize, too, that gold bugs—the people who believe in owning the yellow metal no matter what—often resemble the subjects of a laboratory experiment on the psychology of cognitive dissonance.

 

So, if buying gold is an act of faith, how much money should you put on the line?

 

Anything much above that is more than an act of faith; it is a leap in the dark. Not even gold’s glitter can change that.

Think about some of the words and phrases used in this WSJ article:

“Pet rock.”

 

“Greenhorns in gold (greenhorn means a person who lacks experience and knowledge).”

 

“It is time to call owning gold what it is: an act of faith.”

 

“Gold bugs often resemble the subjects of a laboratory experiment on the psychology of cognitive dissonance (this is actually true in many ways).”

Condescending as the entire article is to gold owners, he even goes so far to quote the Hebrew Bible!

Moving on.

2) From the Washington Post: Gold is Doomed

When you think about it, a bet on gold is really a bet that the people in charge don’t know what they’re doing. Policymakers missed yesterday’s financial crisis, so maybe they’re missing tomorrow’s inflation, too. That, at least, is what a cavalcade of charlatans, cranks, and armchair economists have been shouting for years now, from the penny ads that run on the bottom of websites — did you know that the $5 bill proves the stock market is on the cusp of crashing? — to Glenn Beck infomercials and even hedge fund conferences. Indeed, John Paulson, who made more fortunes than you can count betting against subprime, has been piling into gold for six years now, because he thinks “the consequences of printing money over time will be inflation.” They all do. Goldbugs act like the Federal Reserve’s public balance sheet is a secret only they have discovered, and that it’s only a matter of time until prices explode like they did in the 1970s United States, if not 1920s Germany.

 

But economists do, for the most part, know what they’re doing. Sure, they missed the crash coming in 2008, but that wasn’t because they didn’t understand how bank runs work. It was because they didn’t understand that unregulated lenders had become vulnerable to runs. And the economists who haven’t forgotten their history knew that this inflation fear mongering was all wrong too. Specifically, there’s a difference between the central bank buying bonds, a.k.a. printing money, when interest rates are zero and when they’re not. In the first case, money and short-term bonds both pay the same amount of interest — none — so, as Paul Krugman has explained over and over again, printing one to buy the other won’t change anything. Banks won’t lend out any new money, and will just sit on it as a store of value instead. That’s what happened when interest rates fell to zero in 2000s Japan, and it’s what is happening now in the U.S., U.K., Japan, and Europe.

 

It almost makes you feel bad for the goldbugs, until you remember that some substantial number of them are just trying to scare seniors out of their money. But the ones who aren’t really thought the 1970s showed that gold went up when inflation did, so the fact that gold was going up now meant inflation couldn’t be far behind. They didn’t understand that the price of gold doesn’t depend on how much inflation there is, but rather on how much inflation there is relative to interest rates. So now that rates are rising, gold, as you can see below, is falling. Wait a minute, rates are rising? Well, yes. The Federal Reserve hasn’t actually raised rates yet, but it has talked about it enough that markets have reacted as if it already did. That’s been enough to make real rates positive again.

While I agree that many gold bugs do deserve the criticism they get, it’s interesting to see the way in which the Washington Post demonizes them as:

“Just trying to scare seniors out of their money.” 

But the purpose of the above article is less about demonizing gold bugs, and more about praising the existing system of crank central planners that no one other than starry eyed pundits and thieving oligarchs actually support (see: “Revolution is Coming” – The Top 20 Responses to Jon Hilsenrath’s Idiotic WSJ Article).

Here are some examples:

But economists do, for the most part, know what they’re doing.

 

Paul Krugman has explained over and over again, printing one to buy the other won’t change anything. 

This story is far from over, as the Fed has yet to raise interest rates. Talk to me about victory when rates normalize.

Moving along to the next article:

3) From Bloomberg: Gold Is Only Going to Get Worse

The problem for gold isn’t just that prices are dropping. For many, the metal also has lost its charisma.

 

Prices will drop to $984 an ounce before January, according to the average estimate in a Bloomberg News survey of 16 analysts and traders. That would be the lowest since 2009 and a 10 percent retreat from Tuesday’s settlement. Speculators are shorting the metal for the first time since U.S. government data began in 2006, and holders of exchange-traded products are selling at the fastest pace in two years.

 

“Gold is out of fashion like flared trousers: no one wants it,” said Robin Bhar, an analyst at Societe Generale SA in London. “It’s not going to collapse, but we think it is going to be at a lower level in the not-too-distant future.”

 

“Gold is a weird relic of antiquity,” said Brian Barish, who helps oversee about $12.5 billion at Denver-based Cambiar Investors LLC. “It’s not a commodity that has much fundamental demand. It’s pretty, so people use it for jewelry. But it’s unlike iron ore or oil, or copper, or corn. There’s not specific end-use for it. People just like it, so it becomes a discussion about fervor.”

Let’s once again highlight some of the terminology used.

The metal also has lost its charisma

So now it’s magically turned into a human being as opposed to a pet rock.

Speculators are shorting the metal for the first time since U.S. government data began in 2006

 

“Gold is out of fashion like flared trousers: no one wants it.

 

“Gold is a weird relic of antiquity.”

Finally, for the last article. This one takes on more of the tone from the WSJ article, basically just calling gold buyers imbeciles.

4) From Market Watch: Two Reasons Why Gold May Plunge to $350 an Ounce.

Some choice quotes to think about:

The gold community now needs to consider the distinct possibility that gold will trade for as low as $350 an ounce.

 

Erb uses the five well-know stages of grief to characterize where the gold market currently stands.

 

“So long as gold stays above $1,000 an ounce, I’ll go to church every Sunday.”

This is pretty much peak condescension, and once again, notice the religious imagery.

Gold won’t just drop below $1,000 an ounce but, eventually, to a far, far lower price as well.

I didn’t write this article to “call the bottom in gold” or anything like that. I merely want to flag these four articles due to the hyperbolic nature of some of the statements made (they are exhibiting pretty much exactly the same behavior as the gold bugs they mock do). I do think that something is happening on the sentiment front that warrants we are closer to the bottom that the mid-stages of a bear market.

While I certainly accept that gold prices could fall further from here, I don’t think they will go anywhere near $350/oz, or $500/oz. If Claude Erb cares to make a public bet with me on that, he can find me here.

Although hindsight is always 20/20, one could be forgiven for questioning the wisdom of making concentrated bullish bets on both Puerto Rico and the Greek banking sector, but that’s exactly what John Paulson did and needless to say, the results haven’t been favorable. 

As a matter of fact, Paulson’s bets on Puerto Rico and Greece mean the billionaire managed to get himself and his investors involved in two rather dubious "firsts": earlier this week, Puerto Rico became the first US commonwealth in history to default, and last month, Greece became the first developed country to default to the IMF. 

At this point, Bank of America has apparently seen enough because according to The New York Times, the bank’s wealth management arm is pulling clients’ money from one Paulson fund and putting another on "heightened review." Here’s more:

The wealth management arm of Bank of America Merrill Lynch is liquidating its clients’ money from one of Paulson & Company’s funds and has put another fund under “heightened review,” according to two people with knowledge of the hedge fund.

 

The bank told its financial advisers on Tuesday that it had submitted a full redemption request for client money in Paulson’s Advantage fund. The bank has also closed another Paulson fund, the Special Situations fund, to new client money and put it on “heightened review,” citing concerns “regarding significant concentration in illiquid investments, as well as heightened volatility and risk profile for the funds,” according to a document that was sent to advisers and seen by The New York Times.

 

Some of Mr. Paulson’s big bets this year have turned sour. He is one of a handful of bold hedge fund investors who poured hundreds of millions of dollars into Greece in a wager that the country’s economy would recover after years of economic crisis. 

 

Mr. Paulson is also one of Puerto Rico’s biggest hedge fund investors, betting that the commonwealth will emerge from its own debt crisis. Many analysts say that prognosis looks increasingly tenuous after the commonwealth’s first bond default in its history this week.

 

 

Investors in the special situations fund have seen particularly wide swings, in part because of its exposure to Greece. The fund, which was set up in 2008 to make bets on a recovery in the United States and is now focused on Europe, has lost investors 3.8 percent this year as of the end of June. The fund is the second biggest shareholder after the government in Greece’s largest bank, Bank of Piraeus. It also bought a 10 percent equity stake in the Athens water monopoly, Athens Water Supply & Sewage, in 2014 for $137 million. At the time, the company had little debt and investors expected it to be privatized. Today, the utility is unable to collect payments on its bills.

That’s right, Paulson not only bought a double-digit stake in a Greek public utility, but also made large wagers on Bank of Piraeus which has, along with the rest of the sector, traded limit-down all three days this week as every eurocrat in Brussels scrambles to determine how many tens of billions in recap funds the sector will need. 

"They have good management and we think the Greek economy is improving, which should benefit the banking sector," Paulson said in 2013, adding that Piraeus and Alpha Bank were "very well capitalised." As Bloomberg noted back in June, Paulson "disclosed a 6.6 percent stake in [the bank] in the second quarter of 2014, and [although] that stake was valued at about 655 million euros on the date that the investment was disclosed ... the same stake [is now] worth just 162 million euros." 

But even as investors demand their money back, Paulson can take solace in the fact that he is not alone. July was the worst month for David Einhorn's Greenlight Capital since 2008, (apparently it doesn't pay to be bearish on momo names in today's market). 

"The overall market environment has become acutely unfavorable for our investment strategy,"Einhorn said.

We imagine that sentiment goes double for Paulson. 

Earlier today, one of the most hyped M&A deals currently on the block was unexpectedly yanked, when seed giant Monsanto announced that it would drop its $46 billion takeover bid for Swiss pesticides firm Syngenta. While the deal was strongly resisted, it was largely expected it would pass as a result of the near-monopoly agri- biotech that would be formed as a result, and that MON would sweeten the offer enough until it got the target's approval. It did not and as a result, Syngenta stock crashed earlier today, tumbling as much as 20%.

As WSJ reminds us, Monsanto, the world’s largest seller of seeds, proposed in late April a deal that would have created a world leader in both seed and pesticide sales. The St. Louis-based company says the new entity would be better equipped to formulate new products and bring them quickly to farm fields.

On Aug. 18, Monsanto increased its takeover offer to a value of 470 Swiss francs a share in cash and stock, up from its original offer of 449 francs and making the deal worth about $46 billion. The proposal also increased the reverse breakup fee to $3 billion.

 

However, executives for Swiss-based Syngenta have repeatedly said they were committed to fending off the deal, claiming that it was “inadequate on so many perspectives” and too vulnerable to objections from antitrust regulators.

Which brings us to the question of the biggest losers: as the WSJ further writes, "some Syngenta shareholders had voiced discontent over the pesticide maker’s steadfast refusal over the past three months to enter negotiations with Monsanto, and over Syngenta’s communications with its own shareholders on the matter. "

One among them was the infamous John Paulson.  This is what Bloomberg reported one month ago:

Paulson & Co., the hedge fund of billionaire investor John Paulson, has taken a stake in Syngenta AG in a sign the firm backs a takeover attempt by Monsanto Co., people with knowledge of the matter said. Paulson & Co. has amassed a

 

large number of shares in the Swiss pesticide company that’s trying to fend off a $45 billion takeover offer from U.S. rival Monsanto Co. and is supportive of a deal between the two, said the people, who asked not to be identified discussing private information.

 

The stake, which hasn’t been publicly disclosed, may put Paulson & Co. among the 20 largest shareholders in Syngenta, one person said. John Paulson has a reputation for using his hedge fund to take large positions in companies engaged in ongoing merger discussions and voicing his support for a transaction. It’s not clear if Paulson will go public with his stake and his support of a Monsanto-Syngenta merger.

It is now certain that he won't, the only question is how much did Paulson lose, especially if this wasn't a pure merger arb for Paulson with an offsetting position in Monsanto, which would have left the billionaire hedge funder completely exposed to an event like today's.

As Bloomberg noted, the size of Paulson's stake is unknown, however we do know that the top 20 shareholders top out at about $150 million in SYNN holdings. Assuming a $200 million Paulson stake, that means that Paulson's paper losses were likely $30-40 million today (depending on the price he build up his stake), losses which may have been booked if Paulson decided to cash out.

That of course, excludes the recent P&L of all his other pro-cyclical, and very much bullish, positions which have likely gotten shellacked in last week's correction.

By how much? We will have to wait until the next monthly report, or weekly HSBC update for the number, although just like in years past it may already be time to rename Advantage Plus to Disadvantage Minus.

It has been a while since Icahn, who is still looking for a $200+ print on AAPL stock courtesy of corporate buybacks, issued a "no brainer" investment alert. He did that moments ago, when he revealed a "large position" in AIG, whom he is now urging to follow John Paulson's advise in order to hit a $100/share price, by doing two things: "Pursue tax free separations of both its life and mortgage insurance subsidiaries to create three independent public companies" and to "embark on a much needed cost control program to close the gap with peers."

No matter what, expect a surge in stock buybacks from AIG in the coming weeks.

From Icahn's letter:

CARL ICAHN ISSUES OPEN LETTER TO PETER HANCOCK, CHIEF EXECUTIVE OFFICER OF AIG

Dear Peter:

It is my experience that in Corporate America, even when all available data points to the same undeniable conclusion and when all stakeholders desire the same mutually beneficial outcome, an external force is often still required to effect meaningful and positive change. This is the current situation in which AIG shareholders find themselves. The company continues to severely underperform its peers and is now facing an increasingly onerous regulatory burden which will only further erode its competitive position. Despite definitive action on the part of Congress and regulators to encourage this company to become smaller and simpler by splitting up, you have shown no sign of urgency and have chosen a “wait and see…for years” strategy void of decisive leadership. As a result AIG consistently trades at a substantial discount to book value.  It is a “no-brainer” that the simple act of splitting this company up will greatly enhance shareholder value.  AIG should immediately:

1. Pursue tax free separations of both its life and mortgage insurance subsidiaries to create three independent public companies. Each would be small enough to mitigate and avert the Systemically Important Financial Institution (“SIFI”) designation.
2. Embark on a much needed cost control program to close the gap with peers.

We believe there is no more need for procrastination, the time to act is now. I have already heard from several large shareholders who are frustrated with the lack of clear progress and are supportive of an AIG break up. I cannot fathom how you could ignore repeated requests from shareholders to execute a plan that would release billions of dollars of capital, free the company from onerous excess regulation, and leave shareholders owning stock in three separate, market leading insurance franchises.

“AIG is frankly overdue in following in the footsteps of all other major multi-lines in breaking up Life and P&C into separate companies.  By separating into three independent companies, reducing unnecessary corporate overhead, operating at average industry returns, and buying back stock, AIG can trade at over $100 per share – 66% above its current $60 price,” John Paulson, President, Paulson & Co. Inc.

Too Big to Succeed

“We’re beginning to see discussions that these capital charges are sufficiently large it’s causing those firms to think seriously about whether or not they should spin off some of the enterprises to reduce their systemic footprint, and frankly, that’s exactly what we want to see happen.”  Federal Reserve Chairman Janet Yellen, February 2014

Despite years of dismantling and selling non-core assets, AIG is still too large. The combination of life insurance and p&c insurance into a single entity offers no net benefit to shareholders (proven by industry low ROE), a fact that has driven other major multiline insurers to aggressively focus on a single line of business.  We believe you must acknowledge that the current multiline strategy is not generating competitive returns. Separate monoline companies will be more focused, more efficient, generate better returns and, as a result, command significantly higher market valuations.

Additionally, “Because of AIG’s size and interconnectedness” the Financial Stability Oversight Council (“FSOC”) has deemed AIG a non-bank SIFI, subjecting the company to Federal Reserve oversight and increased capital requirements. We believe you must acknowledge that enhanced regulation is intended to be a tax on size, designed to approximate the cost that large companies impose on the financial system. The regulators have made clear that the best outcome is for SIFI’s to shrink and “reduce their systemic footprint.” If nothing is done, returns and AIG’s competitive position will continue to suffer as the SIFI regulation, including its costs and capital requirements, is fully implemented.

“The other way it [the FSOC Designation Process] can make the system safer is by providing an incentive for designated companies to change their structure or operations so they can reduce the risk they pose and change their designation and the amount of oversight. In many ways [this] outcome is more desirable than the first because it would allow business to find the more efficient way to reduce the risk they pose to the economy.” Senator Elizabeth Warren at Secretary Lew’s testimony before the Senate Banking Committee,  March 2015

We believe you should immediately pursue, in the quickest and most efficient manner, a separation of both life and mortgage insurance from the core p&c insurance business. We believe all three companies would be small enough to avert the increased capital requirements and regulations associated with non-bank SIFI status. In the face of a changing and potentially punitive regulatory framework, you must realize that insurance businesses of AIG’s caliber are more valuable to shareholders if held directly than they are as part of a SIFI conglomerate.

Competitive Cost Structure

AIG’s ROE is below its peers not only because of size and capital constraints, but also because of lack of cost control. You have acknowledged that returns are below peers and must be improved, even going so far as to provide a long-term ROE goal of 10%, which is still below peers. At the same time you have suggested returns would not increase by more than 0.5% per year. Amazingly you have turned the quest for a 10% ROE into a half decade journey. The one thing we do agree on is AIG’s lack of competitiveness. Do you honestly think now is not the time for the inevitable AIG transformation?  You must be proactive and commit to closing 100% of the ROE gap between AIG and its peers.

It is now incumbent upon you to explain why, despite pressure from the stock price, regulators, and shareholders, the company should not take immediate and transformative action. Achieving these two goals in combination with continued share repurchases is the only realistic path to a healthy and competitive company and, more importantly, exceed the potential of any alternative plan. AIG has taken too long already and we hope you come to the same conclusion.  Time is of the essence.  We look forward to engaging with management, the Board, and shareholders.

Sincerely,

                                                                                                                                                                                                                      Carl C. Icahn

• Fed puts December rate hike firmly on the agenda (Reuters)
• Charting the Markets: A More Hawkish Fed Rattles Investors (BBG)
• China to modernize and improve fiscal and tax systems (Reuters)
• Deutsche Bank to Cut 35,000 Jobs in Overhaul (WSJ)
• Deutsche Bank Said to Near $200 Million Sanctions Settlement (BBG)
• Barclays profits drop as it abandons cost-cutting targets (FT)
• Noisy GOP Debate Leaves Republican Race Unsettled (WSJ)
• European stocks firm, dollar rises as Fed revives Dec hike talk (Reuters)
• Shell Has Biggest Loss in More Than a Decade on Price Slump (BBG)
• Republicans pick Ryan for speaker; House passes budget deal (Reuters)
• The Tiny Pharmacy at the Center of Valeant's Money Mystery (BBG)
• Pimco Loss Is Prudential Fund's Gain as Investors Add $7 Billion (BBG)
• London and Hong Kong Facing Housing Bubble Risk, UBS Says (BBG)
• China Signs $17 Billion Deal to Buy 130 Airbus Planes (BBG)
• U.S., Chinese navy chiefs to discuss South China Sea on Thursday (Reuters)
• Samsung Deploys Cash With $10 Billion Buyback, Capex Boost (BBG)

Overnight Media Digest

WSJ

- Drugmakers Pfizer Inc and Allergan Plc are considering combining, in what would be a blockbuster merger capping off a torrid stretch for health care and other takeovers. Pfizer recently approached Allergan about a deal, according to people familiar with the matter, with one of them adding that the process is early and may not yield an agreement. Other details of the talks are unclear. (http://on.wsj.com/1LD8eFO)

- Federal Reserve officials Wednesday kept short-term interest rates unchanged near zero, but opened the door more explicitly than they have before to raising rates at a final 2015 meeting in December. (http://on.wsj.com/1OZcJOK)

- Toshiba Corp said Wednesday it would sell its image-sensor unit to Sony Corp, as Toshiba presses to shed unprofitable businesses after an accounting scandal rocked the company earlier this year. (http://on.wsj.com/1Rfentr)

- Billionaire investors Carl Icahn and John Paulson are pressing American International Group Inc to split into three parts, the latest evidence of how new rules passed since the financial crisis are roiling the financial-services industry. (http://on.wsj.com/1MirVQy)

- Deutsche Bank AG will not pay shareholders a dividend this year or next, as the German lender tries to meet financial targets tied to a sweeping restructuring. (http://on.wsj.com/1WjLy09)

FT

Deutsche Bank AG said on Wednesday it is scrapping this year's and next year's dividends as new Chief Executive Officer John Cryan overhauls Germany's biggest bank to restore growth and strengthen the company's balance sheet.

Barclays Plc agreed on Wednesday to spin out its natural resource private equity investing arm to Global Natural Resource Investments in return for remaining as an investor in its existing portfolio.

GlaxoSmithKline Plc reported better-than-expected earnings on Wednesday, helped by growth in HIV drugs and vaccines, which offset a further slide in sales of respiratory medicine Advair that is facing mounting competition in the United States and Europe.

NYT

- Leaders of the United Automobile Workers approved a tentative four-year deal with General Motors that includes a more lucrative signing bonus than what Fiat Chrysler workers were given, and $1.9 billion in new investments that will retain or create 3,300 jobs at a dozen G.M. sites. (http://nyti.ms/1P6KdJF)

- Deutsche Bank AG, the German financial giant with a big presence on Wall Street, is close to settling one of the many government investigations it currently faces. In a deal that is expected to be announced as soon as next week, Deutsche Bank would pay at least $200 million to resolve investigations into its dealings with countries like Iran and Syria, according to officials briefed on the matter. (http://nyti.ms/1LYXCPm)

- The Federal Reserve said on Wednesday, after a two-day meeting of its policy-making committee, that it would keep rates near zero for now, as expected, but it added an unusually explicit statement that it would consider raising rates at its final meeting of the year in mid-December. (http://nyti.ms/1RCvGUX)

- European policy makers moved ahead on Wednesday with plans to begin subjecting cars to on-the-road testing of exhaust emissions, rather than rely solely on laboratory tests. (http://nyti.ms/1GxXUQJ)

- Hyatt Hotels Corp is in talks to acquire Starwood Hotels and Resorts Worldwide Inc, two people briefed on the matter said, a combination that would create one of the largest lodging chains in the world. Hyatt is preparing a cash-and-stock bid that could be announced within the next few weeks, said the people, who requested anonymity because the talks are private. The discussions may yet fall apart, they said. (http://nyti.ms/1jSQ3TA)

Canada

THE GLOBE AND MAIL

** The oil patch is cutting ever deeper to cope with the longest crude-price rout in more than 15 years. Royal Dutch Shell Plc took the drastic step of halting its multibillion-dollar Carmon Creek oil sands development in Alberta after it had already started construction. The oil major blamed weak crude markets and insufficient pipeline capacity to export the eventual production. (http://bit.ly/1MVUALT)

** Spending by Chinese travelers to Canada is up sharply, as China closes in on second place among the country's largest sources of foreign tourists. The most recent report on debit and credit card spending in Canada, released by payment processor Moneris Solutions Corp, shows that Chinese visitors increased their use of credit cards by 30.2 percent in the third quarter of 2015 compared with the year-earlier period. (http://bit.ly/1MVUmnQ)

** Under heavy fire and facing a possible audit, Premier Kathleen Wynne has pulled an abrupt U-turn, telling a surprised legislature she will force teachers' unions to provide receipts before they receive multi-million dollar payments to cover negotiating expenses. Education Minister Liz Sandals previously insisted no receipts from the unions were necessary. (http://bit.ly/1RBx0Yh)

NATIONAL POST

** Barrick Gold Corp delivered solid third-quarter earnings, generating positive cash flow for the second straight quarter after a long period of negative cash flow. The world's biggest gold producer also reduced its cost guidance and said it is close to meeting its $3 billion debt reduction target for 2015. (http://bit.ly/1GLRJs0)

** Alberta's NDP government is taking bold steps to reduce its reliance on oil, including borrowing heavily to boost infrastructure and sponsoring economic diversification. Alberta still needs an oil-price recovery to balance its books or it could end up in a risky spot. The likely unintended outcome would be higher the debt, the more Alberta will need oil and gas to be its reliable cash cow. (http://bit.ly/1kdgjHX)

China

SHANGHAI SECURITIES NEWS

- The finance ministry's supervision office said on Wednesday it would investigate local governments to see whether they had disclosed their final accounts, and would publish the results of the investigation.

CHINA SECURITIES JOURNAL

- China National Offshore Oil Corp (CNOOC) said unaudited oil and gas sales revenue fell 32.3 percent to 36.3 billion yuan ($5.71 billion) in the third quarter from the same period a year earlier.

21ST CENTURY BUSINESS HERALD

- An investigation of 96 domestic tourism routes found "serious problems" in nearly three-quarters of them, according to a report by China Consumer Association released on Wednesday without giving details.

PEOPLE'S DAILY

- China does not stir up trouble but it is also not timid and the Chinese people will not stand for anyone violating China's sovereignty, said an editorial that called on the United States to stop harming peace and stability in the South China Sea.

Britain

The Times

Dyson has been accused by the maker of Bosch and Siemens AG vacuum cleaners of falsely alleging that it cheated energy efficiency tests in a manner similar to the Volkswagen AG emissions scandal. (http://thetim.es/1LCVnUa)

One of Britain's biggest housing associations plans to cut the number of affordable homes it builds each year and double the amount of properties it will sell after George Osborne said he would cut social rents. (http://thetim.es/1Wivh0D)

The Guardian

David Cameron refused six times under questioning from the Labour leader, Jeremy Corbyn, to say whether people would be left worse off by cuts to tax credits after the Treasury revises the proposals. (http://bit.ly/1RBJ0ZS)

BT Gorup Plc's proposed 12.5 billion stg takeover of EE, the UK's largest mobile phone operator, has been given provisional clearance by the competition watchdog after it said the deal was unlikely to damage consumers. (http://bit.ly/1RBJ0ZS)

The Telegraph

The Football Association was consulting its lawyers on Wednesday night following Sepp Blatter's stunning disclosure that Fifa had decided to give the 2018 World Cup finals tournament to Russia before the vote even took place. (http://bit.ly/1ihsqlU)

Sky News

State-backed Lloyds Banking Group has set aside an additional 500 million stg to cover the payment protection insurance (PPI) mis-selling scandal, taking its total provision so far to 13.9 billion stg. (http://bit.ly/1MUT0JX)

The Independent

The UK has come in at number six in the World Bank rankings of the best places to do business, its highest ranking since 2011. (http://ind.pn/1Hb3dAg)

If you think you're having a bad day (amid the post-payrolls turmoil), consider "America's richest woman" Christy Walton - the widow of Wal-Mart's John Walton. According to newly-released documents, her $32 billion wealth is actually around $5bn (as the assumption that John passed on the bulk of his wealth to his wife was wrong) plunging from 18th richest person in the world to just 280th. However, today biggest winner is her son, Lukas Walton who vaults to 103rd richest in the world as his fortune is revealed at $11 billion. Now those are first-world problems...

As Bloomberg details, ever since Wal-Mart heir John T. Walton died 10 years ago in a plane crash, it’s been widely assumed that he passed the bulk of his vast estate to his widow, Christy.

Turns out that was very wrong.

In what’s been a closely guarded family secret, Walton gave half of his then-$17 billion estimated fortune to charitable trusts and a third to their only child, Lukas Walton, now 29, an analysis of court documents reveals. Christy got the rest.

 

The filings, unsealed by a Wyoming court at Bloomberg News’s request, mean that Christy’s fortune as previously calculated has taken a big hit -- from $32 billion before the court records were unsealed to about $5 billion now. She’s unlikely to ever again reach her former designation as America’s richest woman, which she held until last month.

 

But her loss is Lukas’s gain. Though little-known outside of a few scattered social media posts, he becomes the 103rd-richest person in the world, with about $11 billion, according to the Bloomberg Billionaires Index.

 

That makes the grandson of Wal-Mart founder Sam Walton $5.5 billion richer than his 66-year-old mother, and wealthier than Eric Schmidt and John Paulson.

*  *  *

His father’s will directed that Lukas be given the right to vote the estate’s general and limited partner units in Walton Enterprises. That could make him one of the first of the family’s third generation to be a voting shareholder in the controlling entity, if he decides to exercise his voting power.

That structure is in keeping with Sam Walton’s vision to minimize estate taxes while keeping the family’s control of the company unified. In 1953, he put his stock in a trust that gave each of his children a 20 percent stake in the business, leaving the remainder for himself and his wife.

“The principle behind this is simple: the best way to reduce paying estate taxes is to give your assets away before they appreciate,” Sam Walton explained in his autobiography.

*  *  *

When John married Christy Tallant, he had a net worth of about $195 million, according to a 1982 premarital agreement that was unsealed this month by the Wyoming court.

So being 'left' with just $5.2bn (and 280th richest person in the world) is not so bad...

It has not been a good year for former Bear trader "right person at the right time" with his subprime short, John Paulson who after getting slammed on Valeant, if not quite as badly as Ackman, moments ago saw a quarter of his investment in Mallinckrodt - where he is a top3 holder - wiped out, when Citron tweeted that "MNK has significantly more downside than Valeant" and is a far worse offender of the reimbursement system.

At these prices $MNK has signif more downside than $VRX-- far worse offender of the reimb sys - more to follow. VRX can't live in a vacuum

— Citron Research (@CitronResearch) November 9, 2015

MNK stock immediately plunged nearly 25% following just this one tweet, with "more to follow"...

Dragging the stock to its lowest since 2014...

Pualson (and his 6.6 million shares of stock) may be hurting, but so are all these other top holders, many of whom will be quite angry with Andrew Left at this moment, who seems to have more sway with one tweet than people worth tens of billions with their meticulously structured investments.

Submitted by Doug Casey via InternationalMan.com,

A meme is now circulating that gold is the investment equivalent of a pet rock, and that the smart investor should sell gold, and buy stocks. That’s a ridiculous notion. In fact, if you believe in buying low and selling high, this is the time to buy gold, and sell stocks.

It pays to remain as objective as you can be when analyzing any investment. People have a tendency to fall in love with an asset class, usually because it’s treated them so well. We saw that happen most recently with Internet stocks in the late ’90s and with houses up to 2007. Investment bubbles are driven primarily by emotion, although there’s always some rationale for the emotion to latch on to. Perversely, when it comes to investing, reason is recruited mainly to provide cover for passion and preconception.

In the same way, people tend to hate certain investments unreasonably, usually at the bottom of a bear market, after they’ve lost a lot of money; even thinking about the asset means reliving the pain and loss. Love-and-hate cycles occur for all investment classes.

But there’s only one investment I can think of that many people either love or hate reflexively, almost without regard to market performance: gold. And, to a lesser degree, silver. It’s strange that these two metals provoke such powerful psychological reactions - especially among people who dislike them. Nobody has an instinctive hatred of iron, copper, aluminum, or cobalt. The reason, of course, is that the main use of gold has always been as money. And people have strong feelings about money. Let’s spend a moment looking at how gold’s fundamentals fit in with the psychology of the current market.

What Gold Is - and Why It’s Hated

Let me first disclose that I’ve always been favorably inclined toward gold, simply because I think money is a good thing. Not everyone feels that way, however. Some, with a Platonic view, think that money and commercial activity in general are degrading and beneath the “better” sort of people - although they’re a little hazy about how mankind rose above the level of living hand-to-mouth, grubbing for roots and berries. Some think it’s “the root of all evil,” a view that reflects a certain attitude toward the material world in general. Some better-informed people (who have actually read Paul of Tarsus) think it’s just the love of money that’s the root of all evil. Some others see the utility of money, but think it should be controlled somehow - as if only the proper authorities know how to manage the dangerous substance.

From an economic viewpoint, however, money is just a medium of exchange and a store of value. Efforts to turn it into a political football invariably are signs of a hidden agenda, or perhaps a psychological aberration.

But, that said, money does have a moral as well as an economic significance. And it’s important to get that out in the open and have it understood. My view is that money is a high moral good. It represents all the good things you hope to have, do, and provide in the future. In a manner of speaking, it’s distilled life. That’s why it’s important to have a sound money, one that isn’t subject to political manipulation.

Over the centuries, many things have been used as money, prominently including cows, salt, and seashells. Aristotle thought about this in the 4th century BCE and arrived at the five characteristics of a good money:

• It should be durable (which is why, say, wheat isn’t a good money - it rots).

• It should be divisible (which is why artwork isn’t a good money - you can’t cut up the Mona Lisa for change).

• It should be convenient (which is why lead isn’t a good money - it just takes too much to be of value).

• It should be consistent (which is one reason why land can’t be money - each piece is different).

• And it should have value in itself (which is why paper money leads to trouble).

Of the 92 naturally occurring elements, gold has proved the best money (silver is second). It’s not magic or superstition any more than it is for iron to be best for building bridges and aluminum for building airplanes.

Of course, we do use paper as money today, but only because it recently served as a receipt for actual money. Paper money (currency) historically has a half-life that depends on a number of factors. But it rarely lasts longer than the government that issues it. Gold is the best money because it doesn’t need to be “faith based” or rely on a government.

There’s much more that can be said on this topic, and it’s important to grasp the essentials in order to understand the controversy about whether now is a good time to buy. But this isn’t the place for an extended explanation.

Keep these things in mind, though, as you listen to the current blather from talking heads about where gold is going. Most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF, or a similar institution with an interest in the status quo of the last few generations. You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.

So, let’s take some recent statements, assertions, and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.

Misinformation and Disinformation

Let’s examine some memes floating around.

“Gold is expensive.”

This objection is worth considering - for any asset. In fact, it’s critical. We can determine the price of almost anything; that’s easy. The hard part is figuring out its value. From the founding of the U.S. until 1933, the dollar was defined as 1/20th of an ounce of gold. From 1933 to 1971, it was redefined as 1/35th of an ounce. After the 1971 dollar devaluation, the official price of the metal was raised to $42.22 - but that official number is meaningless, since nobody buys or sells the metal at that price. More importantly, people have gotten into the habit of giving the price of gold in dollars, rather than the value of the dollar in gold. But that’s another subject.

Here’s the crux of the argument. Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt for the deposit of one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold. Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be shazammed into existence.

It’s hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.

“The smart money is long gone from gold.”

This is an interesting assertion that I find is based on nothing at all. Who really is the “smart money”? How do you really know that? And how do you know exactly what they own (except for, usually, many months after the fact) or what they plan on buying or selling? The fact is that very few billionaires (John Paulson perhaps being the best known of them) have declared a major position in the metal. Gold is only a tiny proportion of the financial world’s assets, both absolutely or relative to where it has been in the past:

“Gold is risky.”

Risk is largely a function of price. And, as a general rule, the higher the price, the higher the risk, simply because supply is likely to go up and demand down - leading to a lower price. So, yes, gold is riskier at $1,100 than it was at $700 or at $200. But even when it was at $35, there was a well-known financial commentator named Eliot Janeway (I always thought he was a fool and a blowhard) who was crowing that if the U.S. government didn’t support it at $35, it would fall to $8.

In any event, risk is relative. Stocks are very risky today. Bonds are ultrarisky. Real estate, at least in many major cities, is in a near mania. And the dollar, although it’s cyclically popular, is on its way to reaching its intrinsic value. In fact, stock, bonds, property, and the dollar are all in bubble territory.

Yes, gold is risky now. But it is actually much less risky than most alternatives.

“Gold pays no interest.”

This is kind of true. But only in the sense that a $100 bill pays no interest. You can get interest from anything that functions as money if it is lent out. Interest is the time premium of money. You will not get interest from either your $100 or your gold unless you lend them to someone. But both the dollars and the gold will earn interest if you lend them out. The problem is that once you make a loan (even to a bank, in the form of a savings account), you may not even get your principal back, much less the interest. And, of course, many banks around the world now pay negative interest for loaning them money - an absurd inversion of reality.

“Gold pays no dividends.”

Of course it doesn’t. It also doesn’t yield chocolate syrup. It’s a ridiculous objection, because only corporations pay dividends. It’s like expecting your Toyota in the driveway to pay a dividend, when only the corporation in Japan can do so. But if you want dividends related to gold, you can buy a successful gold mining stock.

“Gold costs you insurance and storage.”

This is arguably true. But it’s really a sophistic misdirection to which many people uncritically nod in agreement. You may very well want to insure and professionally store your gold. Just as you might your jewelry, your artwork, and most valuable things you own. It’s even true of the share certificates for stocks you may own. It’s true of the assets in your mutual fund (where you pay for custody, plus a management fee).

You can avoid the cost of insurance and storage by burying gold in a safe place - something that’s not a practical option with most other valuable assets. But maybe you really don’t want to store and insure your gold, because the government may prove a greater threat than any common thief. And if you pay storage and insurance, they’ll definitely know how much you have and where it is.

“Gold has no real use.”

This assertion stems from a lack of knowledge of basic chemistry as well as economics. Yes, of course people have always liked gold for jewelry, and that’s a genuine use. It’s also good for dentistry and micro-circuitry. Owners of paper money, however, have found the stuff to be absolutely worthless hundreds of times in scores of countries.

In point of fact, gold is useful because it is the most malleable, the most ductile, and the most corrosion resistant of all metals. That means we’re finding new uses for it literally every day. It’s also the second-most conductive of heat and electricity, and the second-most reflective (after silver). Gold is a hi-tech metal for these reasons. It can do things no other substance can and is part of the reason your computer works so well.

But all these reasons are strictly secondary, because gold’s main use has always been (and I’ll wager will be again) as money. Money is its highest and best use, and it’s an extremely important one.

“The U.S. can, or will, sell its gold to pay its debt, depressing the market.”

I find this assertion completely unrealistic. The U.S. government reports that it owns 265 million ounces of gold. Let’s say that’s worth about $300 billion right now. I’m afraid that’s chicken feed in today’s world. It’s only half of this year’s federal deficit alone. It’s only half of one year’s trade deficit. It represents perhaps only 2% of the dollars outside the U.S. The U.S. government may be the largest holder of gold in the world, but it owns less than 5% of the approximately 6 billion ounces above ground.

From the ’60s until about 2000, most Western governments were selling gold from their treasuries, working on the belief it was a “barbarous relic.” Since then, governments in the advancing world - China, India, Russia, and many other ex-socialist states - have been buying massive quantities.

Why? Because their main monetary asset is U.S. dollars, and they have come to realize those dollars are the unbacked liability of a bankrupt government. They’re becoming hot potatoes, Old Maid cards. But the dollars can be replaced with what? Sovereign wealth funds are using them to buy resources and industries, but those things aren’t money. And in the hands of bureaucrats, they’re guaranteed to be mismanaged. I expect a great deal of gold buying from governments around the world over the next few years. And it will be at much higher dollar prices.

“High gold prices will bring on huge new production, which will depress its price.”

This assertion shows a complete misunderstanding of the nature of the gold market. Gold production is now about 90 million ounces per year and is trending down. That’s partly because, at high prices, miners tend to mine lower-grade ore. And partly because the world has been extensively explored, and most large, high-grade, easily exploited resources have already been put into production. And partly because most production is now unprofitable. Miners aren’t putting any new mines into production.

But new production is trivial relative to the 6 billion ounces now above ground, which only increases by about 1.3% annually. Gold isn’t consumed like wheat or even copper; its supply keeps slowly rising, like wealth in general. What really controls gold’s price is the desire of people to hold it, or hold other things - new production is a trivial influence.

That’s not to say things can’t change. The asteroids have lots of heavy metals, including gold; space exploration will make them available. Gigantic amounts of gold are dissolved in seawater and will perhaps someday be economically recoverable with biotech. It’s now possible to transmute metals, fulfilling the alchemists’ dream; perhaps someday this will be economic for gold. And nanotech may soon allow ultralow-grade deposits of gold (and every other element) to be recovered profitably. But these things need not concern us as practical matters for years to come.

“You should have only a small amount of gold, for insurance.”

This argument is made by those who think gold is only going to be useful if civilization breaks down, when it could be an asset of last resort. In the meantime, they say, do something productive with your money…

This is poor speculative theory. The intelligent investor allocates his funds where it’s likely they’ll provide the best return, consistent with the risk, liquidity, and volatility profile he wants to maintain. There are times when you should be greatly overweight in a single asset class - sometimes stocks, sometimes bonds, sometimes real estate, sometimes what-have-you. From 1971 to 1980 and 2001 to 2011, it was wise to be hugely overweight gold. From 1981 to 2000 and 2011 to the present, it was wise to only keep an insurance position. Right now, you again want an overweight position. The idea of keeping a constant, but insignificant, percentage in gold impresses me as poorly thought out.

“Interest rates are near zero; gold will fall as they rise.”

In principle, as interest rates rise, people tend to prefer holding currency deposits. So they tend to sell other assets, including gold, to own interest-earning cash. But there are other factors at work. What if the nominal interest rate is 20%, but the rate of currency depreciation is 40%? Then the real interest rate is minus 20%. This is more or less what happened in the late ’70s, when both nominal rates and gold went up together. Right now governments all over the world are suppressing rates even while they’re greatly increasing the amount of money outstanding; this will eventually (read: soon) result in both much higher rates and a much higher general price level. At some point, high real rates will be a factor in ending the gold bull market, but that time is many months or years in the future.

“Gold sentiment is dead.”

That’s quite true. Gold sentiment is not just quite subdued among the public; most of them barely know the metal even exists.

You’ll know sentiment is at a high when major brokerage firms are hyping newly minted gold products, and Slime Magazine (if it still exists) has a cover showing a golden bull tearing apart the New York Stock Exchange. We’re a long way from that point. When it arrives, I hope to sell my gold and buy the NYSE.

“Mining stocks are risky.”

This is absolutely true. In general, mining is a horrible business. It requires gigantic fixed capital expense to build a mine, but only after numerous, expensive, and unpredictable permitting issues are handled. Then, the operation is immovable and subject to every political risk imaginable, not infrequently including nationalization. Add in continual and formidable technical issues of every description, compounded by unpredictable fluctuations in the price of the end product. Mining is a horrible business, and you’ll never find Graham-Dodd investors buying mining stocks.

All these problems (and many more that aren’t germane to this brief article), however, make mining stocks excellent speculative vehicles from time to time. Like right now.

“Mineral exploration stocks are very, very risky.”

This is very, very true. There are thousands of little public companies, and some are just a couple steps up from a prospector wandering around with a mule. Others are fairly sophisticated, hi-tech operations. Exploration companies are often classed with mining companies, but they are actually very different animals. They aren’t so much running a business as engaging in a very expensive and long-odds treasure hunt.

That’s the bad news. The good news is that they are not only risky but extraordinarily volatile. The most you can lose is 100%, but the market cyclically goes up 10 to 1, with some stocks moving 1,000 to 1. That kind of volatility can be your best friend. Speculating in these issues, however, requires both expertise and a good sense of market timing. But they’re likely to be at the epicenter of the gold bubble when it arrives - even though few actually have any gold, except in their names.

“Warren Buffett is a huge gold bear.”

This is true, but irrelevant - entirely apart from suffering from the logical fallacy called “argument from authority.” Nonetheless, when the world’s most successful investor speaks, it’s worth listening. Here’s what Buffett said about gold in an interview with Ben Stein, another goldphobe:

You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all - not some, all - of the farmland in the United States. Plus, you could buy 10 ExxonMobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

I’ve long considered Buffett an idiot savant - a genius at buying stocks but at nothing else. His statement is accurate, but completely meaningless. The same could be said of the U.S. dollar money supply - or even of the world inventory of steel and copper. These things represent potential, but are not businesses or productive assets in themselves. Buffett is certainly not stupid, but he’s a shameless and intellectually dishonest sophist, despite his disarming and avuncular demeanor. And although a great investor, he’s neither an economist nor someone who believes in free markets.

“Gold is a religious statement.”

Actually, since most religions have an otherworldly orientation, they’re at least subtly (and often stridently) anti-gold. But it is true that some promoters of gold seem to have an Elmer Gantry-like style. That, however, can be said of True Believers in anything, whether or not the belief itself has merit. In point of fact, I think it’s more true to say goldphobes suffer from a kind of religious hysteria, fervently believing in collectivism in general and the state in particular, with no regard to counterarguments. Someone who understands why gold is money and why it is currently a good speculative vehicle is hardly making a religious statement. More likely, he’s taking a scientific approach to economics and thinking for himself.

So Where Are We?

So, these are some of the more egregious arguments against gold that are being brought forward today. Most of them are propounded by knaves, fools, or the uninformed.

My own view should be clear from the responses I’ve given above. But let me clarify it a bit further. Historically - actually just up until the decades after World War I, when world governments started issuing paper currency with no relation to gold - the metal was cash, and it was used as money everywhere, on a daily basis. I believe that will again be the case in the fairly near future.

The question is: At what price will that occur, relative to other things? It’s not just a question of picking a dollar price, because the relative value of many things - houses, food, commodities, labor - has been distorted by a very long period of currency inflation, increased taxation, and very burdensome regulation that started at the beginning of the last depression. Especially with the fantastic leaps in technology now being made and breathtaking advances that will soon occur, it’s hard to be sure exactly how values will realign after the Greater Depression ends. And we can’t know the exact manner in which it will end. Especially when you factor in the rise of China and India.

A guess? I’ll say the equivalent of about $5,000 an ounce of today’s dollars. And I feel pretty good about that number, considering how shaky the world financial situation is, and that we are - I believe - about to enter another gold bull market. Classic bull markets have three stages. We’re still in the “Stealth” stage - when few people even remember gold exists, and those who do mock the idea of owning it. Next, we’ll enter the “Wall of Worry” stage, when people notice it and the bulls and bears battle back and forth. At some point, we’ll enter the “Mania” stage - when everybody, including governments, is buying gold, out of greed and fear. But also out of prudence.

The policies of Bernanke, Yellen, and Obama - and also of almost every other central bank and government in the world - are not just wrong. These people are, perversely, doing just the opposite of what should be done to cure the problems that have built up over decades. One consequence of their actions will be to ignite numerous other bubbles in various markets and countries. I expect the biggest bubble will be in gold, and the wildest one in mining and exploration stocks.

When will I sell out of gold and gold stocks? Of course, they don’t ring a bell at either the top or the bottom of the market. But I expect to be a seller when there really is a bubble, a mania, in all things gold related. There’s a good chance that will coincide to some degree with a real bottom in conventional stocks. I don’t know what level that might be on the DJIA, but I think its average dividend yield might then be in the 6% to 8% area.

The bottom line is that gold and its friends are again cheap, and they have a long way - in both time and price - to run. Until they’re done, I suggest you be right and sit tight.

Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

 

***

 

Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

 

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

 

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

Research Team at TDS suggests that the euro area looks set to endure five consecutive months of deflation, starting in February.

 

***

 

“The further collapse in oil prices and what is likely spillover into core prices means the ECB’s 2016 inflation tracking is likely to be almost a full percentage point below their forecast of just six weeks ago.”

(Indeed, many say that Europe is stuck in a depression.)

The U.S. might seem better, but a top analyst said last year: “Core inflation in the US would be just as low as in the Eurozone if measured on the same basis”.

The National Center for Policy Analysis reported last week:

Medical prices grew 0.1 percent, versus a decrease of 0.1 percent for all other items, in December’s Consumer Price Index.

In addition:

Trucking freight in the U.S. is in steep decline, with freight companies pointing to a “glut in inventories” and a fall in demand as the culprit.

 

Morgan Stanley’s freight transportation update indicates a collapse in freight demand worse than that seen during 2009.

 

The Baltic Dry Index, a measure of global freight rates and thus a measure of global demand for shipping of raw materials, has collapsed to even more dismal historic lows. Hucksters in the mainstream continue to push the lie that the fall in the BDI is due to an “overabundance of new ships.” However, the CEO of A.P. Moeller-Maersk, the world’s largest shipping line, put that nonsense to rest when he admitted in November that “global growth is slowing down” and “[t]rade is currently significantly weaker than it normally would be under the growth forecasts we see.”

Indeed, shipping seems to have totally collapsed, and Bloomberg notes that “hiring a 1,100-foot merchant vessel would set you back less than the price of renting a Ferrari for a day.”

And the velocity of money has crashed far worse than during the Great Depression.

And see this.

Why Didn’t the Central Banks’ Pumping Trillions Into the Economy Prevent Deflation?

But how could deflation be threatening the globe when the central banks have pumped many trillions into the world economy?

Initially, quantitative easing (QE) – instituted by most central banks worldwide – actually causes DEFLATION.

In addition, governments on both sides of the Atlantic have encouraged bank manipulation and fraud to try to paper over their problems.

Why’s this a problem?

Because fraud was one of the main causes of the Great Depression and the Great Recession, but nothing has been done to rein in fraud today. And governments have virtually made it official policy not to prosecute fraud.

Fraud is an economy-killer, and trying to prevent deflation while allowing a breakdown in the rule of law is like pumping blood into a patient without suturing his gaping wounds.

The government also chose to artificially prop up asset prices … while letting the Main Street economy tank.

Governments also pretended that massive amounts of public and private debt are healthy and sustainable … but theyarenot.

And the trillions in central bank money never really made into the real economy, but were handed under the table to the fatcats. For example:

• The Fed threw money at “several billionaires and tens of multi-millionaires”, including billionaire businessman H. Wayne Huizenga, billionaire Michael Dell of Dell computer, billionaire hedge fund manager John Paulson, billionaire private equity honcho J. Christopher Flowers, and the wife of Morgan Stanley CEO John Mack

• The Fed also bailed out wealthy corporations, including hedge funds, McDonald’s and Harley-Davidson

• The Fed has been bailing out foreign banks … more than Main Street or the American people.  The foreign banks bailed out by the Fed include Gaddafi’s Libyan bank, the Arab Banking Corp. of Bahrain, and the Banks of Bavaria, Korea and Mexico

•  The Fed has intentionally discouraged banks from lending to Main Street, in a misguided attempt to curb inflation

By choosing the big banks over the little guy, the government has doomed BOTH.

In addition, bad government policy has created the worst inequality on record… and inequality is an economy-killer.

What Do the Economists Say?

We asked three outstanding economists why central banks pumping trillions into the world economy hasn’t worked to prevent deflation.

Professor Michael Hudson– Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and economic advisor to governments worldwide – told Washington’s Blog:

The debts were left in place in 2008 instead of being written down. So the economy is now in a classic debt deflation. QE seeks to inflate asset markets, not the real economy. The choice in 2008 was whether to bail out the banks or the economy — and the former were bailed out — the political Donor Class.

Economics professor Steve Keen– the  Head Of School Of Economics, History & Politics at Kingston University in London – has previously agreed, saying:  we’ll have “a never-ending depression unless we repudiate the debt, which never should have been extended in the first place”.

Professor Keen tells Washington’s Blog:

The simple reason is that, with the possible exception of the Bank of England, none of the Central Banks (and very few of the private banks themselves) understand how money is created. To create money, you have to put money into bank deposit accounts–thus increasing bank liabilities–at the same time as you expand the assets of the banks. [Background.]

 

QE hasn’t done that.

 

In the USA, they’ve simply bought privately created bonds–normally MBSs–off the banks. This shuffles the asset side of the banks’s ledgers (by exchanging government-created money for overvalued private bonds) but doesn’t change the liability side directly–so no money is necessarily created.

 

In the UK, the CB buys those bonds off pension and insurance funds, which does create money–but it creates it in the deposit accounts of companies who are legally obliged to buy assets with that money (shares and other bonds) rather than goods and services produced by the real economy.

 

So QE as practised has been irrelevant to the real economy, leaving the deflationary forces created by the huge private debt bubble to rage on free.

And Professor Bill Black – Professor of Economics and Law at the University of Missouri,  America’s top expert on white collar fraud, and the senior S&L prosecutor who put more than 1,000 top executives in jail for fraud – tells Washington’s Blog:

Everything that criminology and economics teaches is that if financial elites are allowed to cheat with impunity they will make themselves rich at the people’s expense and corrupt democratic government.

Black previously explained that we’ve known for “hundreds of years” that failure to punish white collar criminals creates incentives for more economic crimes and further destruction of the economy in the future.

Back in August we noted that John Paulson managed to get himself and his investors involved in two rather dubious "firsts" in 2015: Puerto Rico became the first US commonwealth in history to default, and Greece became the first developed country to default to the IMF.

“[Paulson] is one of a handful of bold hedge fund investors who poured hundreds of millions of dollars into Greece in a wager that the country’s economy would recover after years of economic crisis,” the New York Times wrote late last summer, on the way to explaining why the wealth management arm of Bank of America Merrill Lynch was liquidating its clients’ money from one of Paulson & Company’s funds. “Mr. Paulson is also one of Puerto Rico’s biggest hedge fund investors, betting that the commonwealth will emerge from its own debt crisis,” The Times continued.

Besides Greece and Puerto Rico, Paulson also managed to tie up money in Mallinckrodt, which is down sharply since last summer.

Now, amid a client exodus, the billionaire is putting up his own holdings to secure a longstanding line of credit with HSBC. “The billionaire pledged his personal investments in four of his firm’s hedge funds as additional collateral for a credit line Paulson & Co. has had with HSBC Bank USA for at least five years,” Bloomberg reports, adding that “Paulson is using his wealth to back the firm’s borrowings after investment losses and client defections cut assets by more than half from their peak.”

Essentially, Paulson secured the line of credit with management fees as collateral, but with AUM having fallen by a whopping $18 billion over the last five or so years, HSBC apparently wanted some reassurance. Here's a bit more from Bloomberg: 

Filings show Paulson & Co. secured its December 2010 credit line with annual management fees from five of its hedge funds, a common form of collateral in the industry. The firm’s funds charge outside clients a standard annual management fee equaling 1 percent to 2 percent of assets and a performance fee totaling 20 percent of profits, according to its latest investment-adviser registration.

 

The collateral may be down in value since Paulson & Co. entered into the agreement. The firm’s assets under management, which generate the fees, have fallen about 50 percent to $18 billion since Paulson & Co. received the credit line. Of the money that remains, more than half belongs to Paulson and other insiders at the firm who have been exempt from paying fees.

 

As of the end 2014, about 57 percent of the firm’s capital belonged to Paulson and others who don’t pay management and performance fees, according to a filing.

Paulson also secured a personal line of credit with HSBC. Some speculate the billionaire is shoring up the fund's finances to ensure it can retain "top talent" in a downturn. "You run the risk of losing key people if you don’t provide a market level of compensation," Jeff Levi, a partner at Casey Quirk said.

Of course it could just be that HSBC wants to cover its bases now that volatile, increasingly correlated markets have dealt blow after vicious blow to a 2 and 20 crowd that looks increasingly inept in a world where investors actually need hedge funds to live up to their billing and do what they're supposed to do: namely provide some semblance of stability and return in turbulent times. 

Losing 36% in a year as Paulson Advantage did in 2014 doesn't exactly inspire much confidence and at this juncture we think it's safe to say that Mr. Paulson may indeed have been a one hit wonder.

A Nobel prize winning economist, former chief economist and senior vice president of the World Bank, and chairman of the President’s council of economic advisers (Joseph Stiglitz) says that the International Monetary Fund and World Bank loan money to third world countries as a way to force them to open up their markets and resources for looting by the West.

Do central banks do something similar?

Economics professor Richard Werner – who created the concept of quantitative easing – has documented that central banks intentionally impoverish their host countries to justify economic and legal changes which allow looting by foreign interests.

He focuses mainly on the Bank of Japan, which induced a huge bubble and then deflated it – crushing Japan’s economy in the process – as a way to promote and justify structural “reforms”.

The Bank of Japan has used a heavy hand on Japanese economy for many decades, but Japan is stuck in a horrible slump.

But Werner says the same thing about the European Central Bank (ECB).  The ECB has used loans and liquidity as a weapon to loot European nations.

Indeed, Greece (more), Italy, Ireland (and here) and other European countries have all lost their national sovereignty to the ECB and the other members of the Troika.

ECB head Mario Draghi said in 2012:

The EU should have the power to police and interfere in member states’ national budgets.

 

***

 

“I am certain, if we want to restore confidence in the eurozone, countries will have to transfer part of their sovereignty to the European level.”

 

***

 

“Several governments have not yet understood that they lost their national sovereignty long ago. Because they ran up huge debts in the past, they are now dependent on the goodwill of the financial markets.”

And yet Europe has been stuck in a depression worse than the Great Depression, largely due to the ECB’s actions.

What about America’s central bank … the Federal Reserve?

Initially – contrary to what many Americans believe – the Federal Reserve had admitted that it is not really federal (more).

But – even if it’s not part of the government – hasn’t the Fed acted in America’s interest?

Let’s have a look …

The Fed:

• Bailed out foreign banks … more than Main Street or the American people.  The foreign banks bailed out by the Fed include Gaddafi’s Libyan bank, the Arab Banking Corp. of Bahrain, and the Banks of Bavaria and Korea

• Offered to bail out Mexico, if it would agree to join the North American Free Trade Agreement (NAFTA)

• Threw money at “several billionaires and tens of multi-millionaires”, including billionaire businessman H. Wayne Huizenga, billionaire Michael Dell of Dell computer, billionaire hedge fund manager John Paulson, billionaire private equity honcho J. Christopher Flowers, and the wife of Morgan Stanley CEO John Mack

• Bailed out wealthy corporations, including hedge funds, McDonald’s and Harley-Davidson

• Artificially “front-loaded an enormous [stock] market rally”.  Professor G. William Domhoff demonstrated that the richest 10% own 81% of all stocks and mutual funds (the top 1% own 35%).  The great majority of Americans – the bottom 90%– own less than 20% of all stocks and mutual funds. So the Fed’s effort overwhelmingly benefits the wealthiest Americans … and wealthy foreign investors

• Is largely responsible for creating the worst inequality in world history

• Turned its cheek and allowed massive fraud (which is destroying the economy). Fed chair Greenspan took the position that fraud could never happen.   Fed chair Bernanke also falsely stated that the big banks receiving Tarp money were healthy when they were not

• Acted as cheerleader in chief for unregulated use of derivatives at least as far back as 1999 (see this and this), and is now backstopping derivatives loss

• And for subprime loans

• Allowed the giant banks to grow into mega-banks, even though most independent economists and financial experts say that the economy will not recover until the giant banks are broken up. For example, Citigroup’s former chief executive says that when Citigroup was formed in 1998 out of the merger of banking and insurance giants, Greenspan told him, “I have nothing against size. It doesn’t bother me at all”

• Argued that economists had conquered the business cycle, and that modern, technologically advanced financial markets are best left to police themselves

• Preached that a new bubble be blown every time the last one bursts

• Had a hand in Watergate and arming Saddam Hussein, according to an economist with the U.S. House of Representatives Financial Services Committee for eleven years, assisting with oversight of the Federal Reserve, and subsequently Professor of Public Affairs at the University of Texas at Austin.  See this and this

• Intentionally discouraged banks from lending to Main Street, which has increased unemployment and stalled out the economy

Moreover, the Fed’s main program for dealing with the financial crisis – quantitative easing – benefits the rich and hurts the little guy, as confirmed by former high-level Fed officials, the architect of Japan’s quantitative easing program and several academic economists.  Indeed, a high-level Federal Reserve official says quantitative easing is “the greatest backdoor Wall Street bailout of all time”.  And see this.

Some economists called the bank bailouts which the Fed helped engineer the greatest redistribution of wealth in history.

Tim Geithner – as head of the Federal Reserve Bank of New York – was complicit in Lehman’s accounting fraud, (and see this), and pushed to pay AIG’s CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval. William Black points out: “Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth”

Indeed, the non-partisan Government Accountability Office calls the Fedcorrupt and riddled with conflicts of interest. Nobel prize-winning economist Joe Stiglitz says the World Bank would view any country which had a banking structure like the Fed as being corrupt and untrustworthy. The former vice president at the Federal Reserve Bank of Dallas said said he worried that the failure of the government to provide more information about its rescue spending could signal corruption. “Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.

But aren’t the Fed and other central banks crucial to stabilize the economy?

Not necessarily … the Fed caused the Great Depression and the current economic crisis, and many economists– including several Nobel prize winning economists – say that we should end the Fed in its current form.

They also say that the Fed does not help stabilize the economy. For example:

Thomas Sargent, the New York University professor who was announced Monday as a winner of the Nobel in economics … cites Walter Bagehot, who “said that what he called a ‘natural’ competitive banking system without a ‘central’ bank would be better…. ‘nothing can be more surely established by a larger experience than that a Government which interferes with any trade injures that trade. The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.’”

Earlier U.S. central banks caused mischief, as well.  For example,  Austrian economist Murray Rothbard wrote:

The panics of 1837 and 1839 … were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States.

Indeed, the Revolutionary War was largely due to the actions of the world’s first central bank, the Bank of England.   Specifically, when Benjamin Franklin went to London in 1764, this is what he observed:

When he arrived, he was surprised to find rampant unemployment and poverty among the British working classes… Franklin was then asked how the American colonies managed to collect enough money to support their poor houses. He reportedly replied:

 

“We have no poor houses in the Colonies; and if we had some, there would be nobody to put in them, since there is, in the Colonies, not a single unemployed person, neither beggars nor tramps.”

 

In 1764, the Bank of England used its influence on Parliament to get a Currency Act passed that made it illegal for any of the colonies to print their own money. The colonists were forced to pay all future taxes to Britain in silver or gold. Anyone lacking in those precious metals had to borrow them at interest from the banks.

 

Only a year later, Franklin said, the streets of the colonies were filled with unemployed beggars, just as they were in England. The money supply had suddenly been reduced by half, leaving insufficient funds to pay for the goods and services these workers could have provided. He maintained that it was “the poverty caused by the bad influence of the English bankers on the Parliament which has caused in the colonies hatred of the English and . . . the Revolutionary War.” This, he said, was the real reason for the Revolution: “the colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction.”

(for more on the Currency Act, see this.)

And things are getting worse ... rather than better.  As Professor Werner tells Washington's Blog:

Central banks have legally become more and more powerful in the past 30 years across the globe, yet they have become de facto less and less accountable. In fact, as I warned in my book New Paradigm in Macroeconomics in 2005, after each of the 'recurring banking crises', central banks are usually handed even more powers. This also happened after the 2008 crisis. [Background here and here.] So it is clear we have a regulatory moral hazard problem: central banks seem to benefit from crises. No wonder the rise of central banks to ever larger legal powers has been accompanied not by fewer and smaller business cycles and crises, but more crises and of larger amplitude.

Georgetown University historian Professor Carroll Quigley argued that the aim of the powers-that-be is “nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.” This system is to be controlled “in a feudalist fashion by the central banks of the world acting in concert by secret agreements,” central banks that “were themselves private corporations.”

Given the facts set forth above, this may be yet another conspiracy theory confirmed as conspiracy fact.

• Yellen's dilemma: A downturn with no easy response (Reuters)
• Clinton, Sanders clash over Obama as they vie for minority votes (Reuters)
• Risk Grows of Markets Sparking Recession (WSJ)
• Global Stock Rout Eases Amid Oil Advance as German Bonds Decline (BBG)
• U.S. Benchmark Yield Will Be at Record Low in March at This Rate (BBG)
• Oil Prices Rally on Hopes of Production Cuts (WSJ)
• More Cuts Loom as Oil Nears $25 (WSJ)
• Euro-Area Maintains Momentum as Turmoil Threatens Outlook (BBG)
• Major powers agree to plan for 'cessation of hostilities' in Syria (Reuters)
• Dimon Just Spent a Year's Pay on JPMorgan Stock After Bank Rout (BBG)
• Market Meltdown Threatens Japan’s Economic-Revival Plan (WSJ)
• Five-Decade Market Pro Who Called Bond Rally Sees 1% U.S. Yields (BBG)
• Facebook Steps Up Efforts Against Terrorism (WSJ)
• Oregon occupiers warn authorities of booby traps at refuge (Reuters)
• South Africa’s Zuma Faces Gravest Challenge Yet (WSJ)
• Have Millennials Made Quitting More Common? (BBG)
• Elon Musk's vision is not for the faint of heart (Reuters)

Overnight Media Digest

WSJ

- World powers agreed early Friday to reach a cease-fire in Syria in one week, allowing aid in but giving Russia and the Assad regime time to press an offensive that has expanded the Kremlin's clout in the region.(http://on.wsj.com/1SjRj0o)

- In a Democratic presidential debate on Thursday, Hillary Clinton pressed Bernie Sanders on the viability of his proposals for free health care and college tuition, and the latter didn't hesitate to stand by his proposal to impose new taxes on the wealthy and Wall Street to provide those new services. (http://on.wsj.com/1QvnHY0)

- As crude prices slide toward $25 a barrel, many oil companies have little choice but to start making the steep cost cuts they have avoided up until now, jettisoning every well that can't break even or isn't needed to keep the lights on.(http://on.wsj.com/1TbKgpF)

- South Africa's unraveling economy and a string of corruption scandals are coalescing into the gravest challenge for President Jacob Zuma in seven years in office.(http://on.wsj.com/1TV9ol9)

- As government pressure mounts, Facebook is speeding its process to remove and investigate terrorist content. It has assembled a team focused on terrorist content and is helping promote posts that aim to discredit militant groups like Islamic State. (http://on.wsj.com/1TVJNse)

FT

* Ministers have not yet claimed millions of pounds in EU compensation for UK's devastating December floods, which was followed by many other storms. Time is running out and there is confusion over which department should submit the request.

* Water companies are persuading the government to exempt them from stricter tax rules on interest costs which is likely to be announced in next month's Budget. The utilities, mostly debt-laden, say that proposed changes threaten to push up customers' bills.

* UK is being pressurised to clarify how and when the police and spies are given access to private communications. As militant threats from ISIS intensifies, it is only important that any new law grants the UK authorities the powers they need to keep the country safe.

* Ministers have less than two months to bring out a new system for financing cancer drugs in the NHS as a 340 million pound-a-year fund set up by David Cameron to plug gaps in treatment, is set to expire.

NYT

- The Swedish central bank's decision on Thursday to lower its short-term rate to minus 0.50 percent from minus 0.35 percent, has heightened fears that brazen actions by central bankers are now making things worse, not better.(http://nyti.ms/1QvcKG2)

- Though the investors are fearing a global downturn and betting for no hike before 2017, the Fed expects the domestic economy to keep chugging along and says it's thinking about raising its benchmark interest rate again as soon as March.(http://nyti.ms/1o4Sbcw)

- Billionaire investors Carl Icahn and John Paulson, who have been agitating for the breakup of American International Group, have reached an agreement to join the insurer's board. (http://nyti.ms/20YKXFh)

- Internet radio service Pandora Media has held discussions about selling the company, and is working with Morgan Stanley to meet with potential buyers, according to people briefed on the talks. (http://nyti.ms/1SLayR3)

Canada

THE GLOBE AND MAIL

** The Ontario government will unveil a strategy in June to combat human trafficking, and while it will not focus solely on indigenous women, the province acknowledges that the exploitation "overwhelmingly" affects indigenous women. (http://bit.ly/1V8iY2z)

** Voters in an Ontario by-election have meted out a harsh blow to Premier Kathleen Wynne's Liberals, handing a 24-point victory to the Progressive Conservatives in Whitby-Oshawa. (http://bit.ly/1owJiZL)

** Big Plastic is laying down the legal gauntlet against a Montreal suburb that is looking at banning plastic bags later this year. The Canadian Plastic Bag Association served the City of Brossard with a legal letter on Thursday demanding it back off on its proposed shopping-bag bylaw. Officials in the town are expected to pass a bylaw next Tuesday that would see a ban come into effect by September. (http://bit.ly/1V8n2je)

NATIONAL POST

** The multi-billion dollar sole source deal to build a new fleet of warships for the Royal Canadian Navy is being reviewed by a newly-formed Cabinet committee set up to take a closer look at controversial defence procurement contracts. (http://bit.ly/1Rvz9I9)

** Canada could be among a handful of countries to adopt negative interest rates in the next two years as the European policy experiment gains popularity, says a new report from Citigroup. (http://bit.ly/1QvUqN2)

** TransCanada Corp said Thursday more layoffs are expected as the energy sector grapples with plunging oil prices, after confirming it let go 10 percent of workforce in the fourth quarter. (http://bit.ly/1ovNDME)

Britain

The Times

Shire Plc has called time on its $50 billion acquisition spree as it attempts to digest its biggest deal yet. The FTSE 100 pharmaceuticals group expects its $32 billion acquisition of Baxalta Inc to close this year and said it would concentrate on integrating the American business before embarking on any other deals. (http://thetim.es/1PGqCgI)

Sweden added to the turmoil in financial markets yesterday by cutting its main interest rate deeper into negative territory in an effort to boost the economy and stave off the threat of deflation. (http://thetim.es/1PGqH46)

The Guardian

The Dublin-based banana company Fyffes Plc has been accused by the GMB trade union of having "no respect" for workers' rights, amid allegations that staff on Central American fruit plantations are being serially mistreated. (http://bit.ly/1PGqUnK)

Justin King, the former boss of J Sainsbury Plc, has waded into the row over the tax paid by multinationals such as Amazon and eBay, saying it was unfair that traditional retailers must pay huge rates bills for services such as roads and waste collection, while their online rivals paid little but received the same benefits. (http://bit.ly/1PGramO)

The Telegraph

Staff at Guardian Media Group are bracing for further job cuts as the company looks to slash costs by 20 percent in the face of widening losses. (http://bit.ly/1PGrgef)

SuperGroup Plc founder Julian Dunkerton is selling a 4.9 percent stake worth 53 million pounds ($76.69 million) in his first share sale since the fashion retailer listed on the stock market six years ago. It is understood that Dunkerton is selling 4 million shares to fund a recent divorce settlement. (http://bit.ly/1PGrli3)

Sky News

PricewaterhouseCoopers has become one of the UK's biggest private sector employers so far to engage staff on the merits of Britain's membership in the European Union. Sky News understands that the 'big four' accountancy firm last week held an event for more than 100 UK partners to discuss the implications of Brexit. (http://bit.ly/1PGrqlY)

The Independent

Matt Brittin, president of Google's European, Middle Eastern and African arm, told the Public Accounts Committee that he was not sure what his basic salary was. The Public Accounts Committee is currently conducting an inquiry into a tax settlement announced between Google and HMRC. (http://ind.pn/1PGrsdy)

J Sainsbury Plc has said it will be the first UK retailer to call time on multi-buy and buy-one-get-one-free promotions. The supermarket operator said that by August, customers will no longer see the deals across brand products and its own-brand soft drinks, confectionary, biscuits and crisps. (http://ind.pn/1PGrxxG)

Long before "The Big Short's" Michael Burry was a household name for his insight into the upcoming subprime crisis of 2006-2007, there were many others among them John Paulson, Kyle Bass, and Corriente Advisors' Mark Hart. Just like Bass, Mark is another Texas-based hedge fund manager who correctly predicted, and profited from, the subprime crisis. He is also an expert on China, and in fact, just last month in the aftermath of the recent Chinese devaluation which roiled markets, he said that "China should weaken its currency by more than 50 percent this year."

In fact, it was Hart who (alongside ex-PBOC advisor Yi Yongding) first proposed the idea of the one-off devaluation that promptly afterwards become the conventional expectation for this weekend's G-20 summit in Shangai. To wit:

Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

 

Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

According to Hart, while a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

As we said one month ago, "Hart is correct, and China will have to pick one option: either a sharp devaluation, or failing that, debt defaults: the current course of gradual CNY debasement will only results in an acceleration in capital outflows until ultimately China's $3 trillion rainy day fund is whittled away to nothing (and as a reminder, according to some estimate just a little over $1 trillion in it is actually liquid assets)."

And while we explained that Hart's "devaluation" trade consists of buying Yuan puts, according to a recent interview he gave to Raoul Pal RealVision, he has also put another trade on alongside his FX deval: buying bitcoin.

Why bitcoin?

The same reason we gave back on September 2, 2015 when Bitcoin was trading at $215 in a post titled "China Scrambles To Enforce Capital Controls (Which Is Great News For Bitcoin)" and long before the topic of China's capital controls, and their circumvention, became a routine topic of conversation. As we explained simply, with Chinese capital controls increasingly more strict, the local population, which was nearly $25 trillion in deposits in local banks, will rush to transfer these massive amount of savings offshore, and will end up using bitcoin to do it. This is specifically what we said:

... while China is doing everything in its power to not give the impression that it is panicking, the truth is that it is one viral capital outflow report away from an outright scramble to enforce the most draconian capital controls in its history, which - as every Cypriot and Greek knows by now - is a self-defeating exercise and assures an ever accelerating decline in the currency, which authorities are trying to both keep stable while also devaluing at a pace of their choosing. Said pace never quite works out.

 

So what happens then: well, China's propensity for gold is well-known. We would not be surprised to see a surge of gold imports into China, only instead of going to the traditional Commodity Financing Deals we have written extensively about before, where gold is merely a commodity used to fund domestic carry trades, it ends up in domestic households. However, while gold has historically been the best store of value in history and has outlasted every currency known to man, it is problematic when it comes to transferring funds in and out of a nation - it tends to show up quite distinctly on X-rays.

 

Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented "forking" with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

 

Yes, bitcoin may be slowly but surely leaving the domain of the libertarian fringe, but in exchange it is about to be embraced as the most lucrative and commercial "blockchained" way to capitalize on what may soon become the largest capital outflow in history...

Two months later the value of bitcoin rose by more than 100%, but what was delightfully amusing to us was attempts by the self-appointed guardians of monetary wisdom to explain the move not as one of Chinese capital flight but because of some tiny, alleged Chinese Ponzi scheme. Apparently in the mainstream media if one can't predict what happens, one tries to explain why something happened... and gets that wrong too. Because if bitcoin's surge was only due to some two-bit Russian scammer exposed four months ago, it would be back at $215 if not lower, instead of trading at $432 as of this moment. 

What really happened is what we said happened, and here is Mark Hart confirming precisely that. Here is the excerpt from an interview he gave to Raoul Pal's RealVision:

Bitcoin is interesting to me as a route for capital flight. I am not opining on the long-term viability of bitcoin - I do think there is something there - but I am long bitcoin specifically to capture capital flight from China.

Sounds quite identical to what said 6 months ago. Full clip below:

But this is where it gets really interesting: if one wants to bet on a massive Chinese devaluation (which is coming, the only question is when) one can simply short the Yuan as so many hedge funds have done in the past 2 months only to find that by "fighting the PBOC" they are gambling not only with their AUM, but their professional careers due to not only the unlimited downside of their trades, but to the substantial leverage involved in such FX trades.

Furthermore, relentless interventions by a belligerent Chinese central bank in recent weeks have shown that even as the Yuan will ultimately devalue, and dramatically at that, the PBOC will do everything in its power to crush the "hated" speculators, among whom such brand names as George Soros, along the way by inspiring sudden, violent and massive surges in the currency, in the vein of the Bank of Japan circa 2011.

So what is one trade that can be put on to bet on further Chinese devaluation (or outright economic collapse) with limited downside, with unlimited upside, and one which is guaranteed to be profitable if and when the local Chinese depositor herd gets out of Yuan en masse after the next 10%, 20%, 50% or more devaluation and rushes into bitcoin? Simple: do precisely what we said in September, and precisely what Corriente's Mark Hart is saying now: buy bitcoin, because once the Chinese buying frenzy is unleashed, and $25 trillion in deposits scramble to be packed into a product with a $6.5 billion current market cap (but only when the price of a bitcoin is $430; the market cap does rise to $25 trillion if every bitcoin is worth $1.6 million) one thing will happen: the price of bitcoin will soar exponentially.

Donald Trump “has a good brain and he’s said a lot of things,” which is why he often “speaks with himself” when he needs advice.

Be that as it may, Trump has apparently chosen to give his “good brain” a well deserved break when it comes to investing the portion of his net worth that isn’t tied up real estate because according to FEC filings, he has some $121 million stashed away in nearly two dozen funds run by a variety of asset managers including John Paulson and BlackRock.

The problem: they’re performing horribly.

“Eighteen out of 21 hedge funds and mutual funds in Trump's portfolio lost money in 2015, and 17 of them are down so far this year,” Reuters reports. “The funds managed by Paulson & Co, BlackRock Inc, Baron Capital and others lost an average of 8.5 percent last year and are down another 2.9 percent so far this year.”

“By the looks of it, Mr. Trump's investing prowess is very pedestrian," Brian Shapiro, chief executive of Simplify LLC, which tracks and analyses alternative investments like hedge funds told Reuters.

"For someone who prides himself on being surrounded by the best talent, I'm surprised to see so few winners," added Brad Alford, an investment advisor and CEO of Alpha Capital Management.

Now wait just a minute Brad. Did you just suggest that Donald Trump is a “loser?”

What say you, Trump?

"You can't measure it in a short time. I'm way up with BlackRock. I'm way up with Obsidian," the billionaire responded.

Trump is referring to a BlackRock fund that was hit by plunging commodity prices. He also ran into trouble investing with John Paulson, who hasn’t been able to get out of his own way for years and at this point is pretty much relying for survival on people remembering that once upon a time he called the housing market crash.

“The three Paulson funds used by Trump all fell [and] one of the funds, the Paulson Advantage Plus fund, had declined an average of about 22 percent every year over the last five years,” Reuters continues.

One can’t help but recall the following tweet that emanated from the official account of Massachusetts Senator Elizabeth Warren, who earlier this week suddenly blew a gasket and launched into a Kanye West-style Twitter tirade aimed at the GOP frontrunner:

Listen to experts who say @realDonaldTrump might have more money today if he’d put his inheritance in an index fund & left it alone.

— Elizabeth Warren (@elizabethforma) March 21, 2016

If you’re like us, you’re confused at this point. How could it be that a man who has never lost at anything could possibly be down in 18 out of 21 of the investment vehicles he presumably chose?

And then, we got our answer. "I put some money with people that are friends,” Trump explains. “I have no idea if they are up or down.”

There you go. Trump didn’t choose the funds. If he had, he’d have gone with something that can’t possibly lose. Like say an offering from the Fed’s leveraged PPT squad. Here’s Reuters again: “Some investing experts who looked at Trump's portfolio and Reuters' compilation of their performance were not impressed, saying he could have earned better returns by investing in other hedge funds. For instance, Citadel gained 14.3 percent in its main multi-strategy hedge funds.”

But at the end of the day, Trump doesn’t need vacuum tubes, or quants, or the 2 and 20 crowd to invest his money for him. Why? Because when he does choose individual stocks, his record is flawless. Just ask him about a series of sales he made two Januarys ago for some $27 million.

"I bought them low and I sold them high. It was very good timing. I hit the market exactly perfectly."

We’d expect nothing less.

*  *  *

Trump disclosures

272297762 Donald Trump s Financial Disclosures