What I Read: Week 47 | 2017

Posted on by gordonschuecker

Articles I found particularly interesting this week.

Geopolitics

Finance

Other

Ted Talks

And for more depth

Same links as above with key excerpts.

Geopolitics

Anti-slavery protests continued across various world capitals this week, especially in countries across Africa, after earlier protests in France got violent when police used tear gas and other riot control tactics on a crowed of more than one thousand outside of the Libyan embassy in Paris. The protests are in response to last week’s widespread reports of slave markets operating in various cities across Libya, and look to continue as according to Reuters a major rally is set to take place in London later this week.

Meanwhile France on Wednesday called an emergency meeting of the UN Security Council over the revelations, with President Macron referencing recent footage proving the existence of a slave trade network in Libya as “scandalous” and “unacceptable”.

[…]

Current headlines and stories highlighting the continued outrage of Libya’s slave auctions, however, neglect to mention that the country has been a “failed state” since its “liberation” through the US-led NATO campaign to topple Muammar Gaddafi. At the end of last summer, the United Nation’s World Food Program (WFP) found that 1.3 million people are in need of emergency aid due to perpetual “conflict, insecurity, political instability and a collapsing economy.”

Meanwhile, the fact that Libya has become a key European migration embarkation point for all of Africa coupled with its being a failed state and enduring war zone, ensures that the the humanitarian crisis will only continue to grow. Though global outrage over the latest revelations of slave markets and xenophobia in Libya continues, media coverage remains myopic in its assessment of the true depth of Libya’s problems and their causes.

Though CNN’s footage and accompanying report which lately sparked renewed public interest in Libya is shocking, such practices have been quietly documented for years, and clear warnings were issued starting in early 2011 that Libya’s black as well as migrant population would be the first to fall victim at the hands of the Islamist Libyan rebels that NATO’s war empowered. From the outset critics of Western intervention in Libya loudly sounded the alarm of a genocide against black Libyans in progress committed by the very rebels the US, UK, France, and Gulf allies were arming – a fact so well-known that then Secretary of State Hillary Clinton was personally briefed and warned on the matter.

Protests and diplomatic action is likely to merely take aim at the Western backed Libyan Government of National Accord (GNA) based in Tripoli, and not at the very authors of the “new” post-Gaddafi Libya who put the Tripoli government into power in the first place (France is among those responsible for creating Libya’s current chaos). And while Obama himself has actually voiced some minimal and too little too late “regret” over his decision to go bomb the Gaddafi government out of existence using the pretext of “humanitarian intervention” – calling it his “worst mistake” – Hillary has consistently defended her role as one of the architects of the war as Obama’s secretary of state.

Let’s Review:

  • Russian businessman Denis Katsyv was a key figure in an embezzlement and money laundering scheme involving New York real estate, uncovered by Russian lawyer and accountant Sergei Magnitsky. Magnitsky died in Moscow’s Butyrka prison after a year of inhumane treatment.
  • The embezzlement scheme uncovered by Magnitsky along with the circumstances behind his death resulted in the Magnitsky Act – a bipartisan bill signed in December 2012 by President Obama which imposed sanctions on Russia.
  • Katsyv settled with the U.S. Justice department in 2017, paying a paltry $5.9 million in 2017 to settle the case – less than 3% of the amount originally sought by federal prosecutors.
  • Katsyv’s attorney, Natalia Veselnitskaya, lobbied to remove the sanctions imposed by the Magnitsky Act.
  • Fusion GPS was paid $523,651 by Katsyv to investigate London Banker Bill Browder who pushed for the Magnitsky Act
  • Fusion GPS associate Rob Goldstone set up the infamous meeting at Trump Tower between Donald Trump Jr., Katsyv’s lawyer Natalia Veselnitskaya and various associates. The meeting was pitched to Trump Jr. as a “discussion on adoption” (not opposition research on Hillary Clinton) and was shut down by Trump after it became clear Veselnitskaya wanted to discuss the Magnitsky Act, which Don Jr. apparently didn’t realize was linked to the adoption issue. Others present at the meeting include Jared Kushner, Paul Manafort, and Goldstone.
  • Hours before the Trump Tower meeting, Fusion GPS founder Glenn Simpson met with Veselnitskaya.

Meanwhile…

  • Fusion GPS was paid $1,024,408 by a DNC law firm, funded in part by Hillary Clinton and the DNC, to create the salacious 34 page dossier.
  • Fusion paid former British spy Christopher Steele $168,000 to assemble the document (which had the cooperation of two senior Kremlin officials).
  • Clinton campaign manager John Podesta met with Fusion CEO Glenn Simpson the day after the 34 page dossier was made public.

For their efforts, Fusion GPS was paid over $1.5 million dollars between Hillary Clinton, the DNC, and the holding company owned by pro-Kremlin businessman Denis Katsyv.

Russian Ties Galore!

Looking at other Russian affiliations on the left – since that’s the entire impetus of the witch hunt against President Trump:

  • Russia gained control over 20% of United States uranium after the Clinton Foundation received $145 million from Uranium One affiliates and Russian oligarchs connected to the deal.
  • The Obama administration approved the transaction after the FBI knew of a Russian plot to corner the US Uranium market and a racketeering scheme involving a Kentucky trucking company. Over 5,000 documents and a video of Russians preparing a briefcase stuffed with bribe money for Obama administration officials were obtained by an FBI informant.
  • Bill Clinton met with Vladimir Putin at his house in Russia, the same day he collected $500,000 for a speech to a Russian bank which upgraded Uranium One stock. Clinton sought approval from Hillary Clinton’s State Department to meet with 15 Russians.
  •  Tony Podesta, brother of John Podesta, lobbied for Uranium One after Russia state-owned energy giant Rosatom owned the company outright.
  • Tony Podesta met regularly with Clinton Foundation and was considered “basically part” of the organization, according to a former long-time executive of the Podesta Group, who also said Podesta was “peddling Russian oligarchs” all over D.C.
  • Clinton campaign chief and longtime DNC operative John Podesta recommended that brother Tony hire Hillary Clinton’s chief legislative advisor at the State Department, David Adams, which allowed a direct link between the firm’s Russian clients and the Obama administration.
  • John Podesta sat on the board and owned shares in Joule Unlimited – a green-energy company which received $35 million from the Russian government while Hillary Clinton served as Secretary of State. In addition to Podesta, Joule’s board of directors included senior Russian official Anatoly Chubais and oligarch Reuben Vardanyan – a Putin appointee to the Russian economic modernization council. Podesta jettisoned his shares before the 2016 election, transferring them to his daughter via a shell corporation.

16-years after the Bush administration began military operations in Afghanistan, President Trump has just launched a military campaign of his own using high-tech stealth fighters to bomb drug labs in the country.

The Pentagon’s playbook of nation building in the Middle East has stretched, now, to three Presidents making it the longest war in U.S. history. Ever since the U.S. started occupying the country in the early 2000s, opium production soared. Afghan President Ashraf Ghani said without drugs, the war in Afghanistan “would have been long over.”

In 2017, Afghanistan’s opium crop and production both hit a record high, despite the increased efforts by government to stop the drug trade. For the Taliban and other criminal elements in the region, opium is an important revenue source to fund operations.

On Monday, the Defense Department said it unleashed F-22 Raptor stealth fighters to bomb narcotic production facilities in southern Afghanistan targeting the revenue streams of the Taliban. The air operation started on Sunday and continued through Monday. The F-22s were accompanied by B-52 bombers and Afghan A-29 Super Tucanos for additional support to expand the strike mission.

[…]

In the latest figures from the United Nations, “Afghanistan opium production jumps 87 per cent to record level”… Most of the increase has occurred under the United States occupation of the region.

[…]

Perhaps in a preview of things to come, Sunday through Monday’s U.S airstrikes in Afghanistan signal the war is about to intensify.

Stealth fighters and other support aircraft only managed to knockout 10 narcotic facilities and as the report states there are about another 400-500 to go.

The subtle art of “finding” the truth:

JFK Files Reveal Bobby Kennedy And CIA Plotted False Flag War With USSR

Days before the military coup d’état in Zimbabwe, one of Mugabe’s sons uploaded a snapchat displaying his £45,000 diamond watch with £200 champagne, according to Daily Mail. The story went viral fueling anger of Zimbabweans as the country suffers from an economic collapse with a 95% unemployment rate.

[…]
One of Mugabe’s sons bragged in another snapchat video ‘daddy run the whole country’, as we might add – not anymore…
 
[…]
 

Zimbabwe’s crippled economy was once a major economic driver in Africa–thanks to its abundant agricultural assets, but in more recent times the Mugabe family through corruption has collapsed the economy.

Last month Transparency International estimated the country lost $1 billion a year to corruption, which it seems the citizens and the military have finally had enough. Even worse, most citizens have had their savings wiped out thanks to hyperinflation. For sometime the lavish lifestyle of the Mugabe family was flaunted, but that has now come to an end.

The one question we ask: Did China influence Zimbabwe’s ouster of Mugabe? After all, China, the world’s second biggest economy, now accounts for nearly half of all foreign direct investments in Zimbabwe.

A fairly balanced article (though maybe not evident from the title) on the current situation in SA. ZH of course takes the gloomy side, but maybe there is some positive in all of this. One thing is sure, things are changing fast:

Finance

“Just as there are concerns about ‘fake news’ dominating social media, there is a risk of ‘fake’, or at least poor quality, statistics driving out better quality ones in public discourse,” Coeure said adding ominously that “actions by economic agents could become less anchored to actual activity and more prone to manias and panics, with obvious implications for economic and financial stability.”

Reading between the lines, Coeure is clearly preparing to blame “fake economic data” when the ECB next disappoints markets, and bond yields – propped up by the ECB’s CSPP program – finally crash.

In other words, the next crash will be blamed not on central banks blowing the biggest bubble in history but… drumroll… “fake data”!

Of course, the crash when it comes, will hardly be a surprise: recovering from the biggest recession in decades, the ECB has relied on a plethora of unconventional and still not fully understood tools to kick start growth, boost employment and raise inflation. Much of it has been based on a signalling and propaganda, including the constant refrain that things are getting much better.

Well, if they are so much better, why not stop QE and hike rates?

As Reuters adds, central banks also talk more since they rely on tools poorly understood by the public, so they also increasingly employ sophisticated computer technology to study whether their message reaches the right destination. But such feedback could also be misleading.

But the scariest thing is what he said next:

“We may one day be tempted to draft our monetary policy statements and speeches in the light of how they will be comprehended and interpreted by artificial intelligence algorithms,” Coeure said, adding that the consequences of such a mechanism has yet to be understood.

In other words, with human traders swept away from the market, in the ongoing passive revolution which has increasingly left algos and robots to make most capital allocation decisions. central banks are admitting that soon their statements will be written if not in binary code, then certainly designed to fool as many algos as possible into BTFD, since unfortunately the “keep the markets propped up” mandate has emerged over the past decade as the only one central banks truly care about. In light of this admission, the only “fake news” to be concerned about, is that created by central banks including “there is a global, coordinated recovery.” Well, yes, when you inject a record $2+ trillion annualized in liquidity in 2017 and when you monetize a third of global GDP since the Global Financial Crisis, you better have at least a short-term recovery to show for it…

Worth reading in its entirety:

(as is her book).

 

ZH is once again asking if this is the top?

In the run up to the ‘great recession’ of 2008/2009, it was unsuspecting European and Asian buyers that supplied the marginal capital required to turn America’s plain vanilla, fed-induced housing bubble into a turbo-charged, global financial time bomb by indiscriminately scooping up highly-levered structured mortgage products with absolutely no idea what was behind those products.

Now, it seems that China’s lust for levered returns in U.S. structured products has returned and is focused this time around on the CLO market.  Per Bloomberg:

 Now, a new set of buyers from China are hoping things turn out differently. Instead of snapping up packages of risky derivatives tied to U.S. home loans, they’re buying collateralized loan obligations that bundle together corporate loans to highly leveraged companies. And while such CLOs weathered the last crisis relatively well, there’s already concern that these investors are being tempted to deploy leverage to amplify their returns.

 

On a recent trip to China, potential new investors expressed interest in the idea of applying leverage for the purchase of CLOs, even at the riskier BB level, Chan said. He estimates levered returns for the BB-rated CLO slice may be almost 20 percent. Leverage is employed using the repo financing market, where short-term loans allow investors to borrow money by lending securities.

[…]

“They’ve really learned the product quickly and engage in extensive due diligence,” Popp said. “I expect to see them as steady and growing participants in the CLO market, not as tourists.”

[…]

Of course, not everyone is convinced that investing in 10x levered structured products is such a great idea with yields on highly-levered bank debt hovering around all-time lows…

 “It wouldn’t be wise for the Chinese to use leverage at this stage,”
said Asif Khan, head of CLO origination and distribution at MUFG. “It’s
dangerous territory. Leveraging BB-rated bonds – is that a good idea?
Any potential use of leverage by Chinese investors could pose potential
risk in case of severe volatility.”

…but what’s the worst that can happen?  It’s not as if Lehman Brothers can liquidate again…

One thing is sure: the longer we have to wait, the bigger the fireworks will soon be. How will everything start? Courtesy of Francesco Filia, it could be the following catalysts:

Having discussed the bubbles in equity and bond markets, Townsend proceeds to the next logical question. Now that we know we’re in a bubble, how can we tell if the bubble is going to burst? To his credit, Filia admitted he has no idea what the catalyst might be. Furthermore, there doesn’t necessarily need to be a catalyst for these bubbles to burst – but once their valuations have reached a kind of tipping point, they could implode on their own.

There can be a catalyst. Or there can be no catalyst. If you talk about catalysts, I could argue that can be inflation, for example. At the moment, we have seen that inflation resurfaced. We have seen some tightness in the job market. It has not translated yet into wages growth and therefore inflation. But we could just be about to see that. And, in that case, rates would rise and they would provoke as a catalyst the kind of downfall that we expect. Or the catalyst could be political. A lot of quantitative easing is being created and it is benefiting only the top 1% of the population. And it is resulting in this so-called income inequality concept.

And, so much, the central banks are pushing the wealth effect as they try to make people easier for them to spend more in the economy. But in reality what they are really triggering is income inequality. The consequence of income inequality is populism. Populism can provoke a regime change. Regime change can then affect quantitative easing if the result was not to help the real economy and the middle classes but only the top 1%.

So the catalyst could be political.

But I can also argue the catalyst could be China. China has a huge problem over indebtedness. It is said to be between 300% and 600% of GDP. GDP is $11 trillion. So it is a monumental credit bubble that could give troubles at any point. And if it gives troubles you can expect the whole world to listen carefully like it did in August of 2015 and January of 2016, and even more than that.

I think that it can be also no catalyst. And why is it no catalyst? Because at moments in which the market is overvalued you can never know for sure how much further the bubble can go. But at some point, it reaches a tipping point, a critical mass, where the probability is higher and higher for it to fall down.

At a certain point, swollen valuations reach a level where they no longer make sense, bids evaporate, and prices plunge. But it’s exceedingly difficult to pinpoint just when that point might be.

And the explosion in volatility will reinforce itself thanks to some fancy derivatives:

For a bigger dive into the volatility story, this recent paper by Artemis Capital’s Chris Cole is another must read. (See also the ZH’s analysis.)

The following, together with this article (or the ZH version) are the best two articles I’ve ever read about cryptos:

Another worrying issue with Bitcoin is the argumentation of its main supporters.

This ranges from the cognitively biased “you don’t know anything about the Bitcoin” to “Bitcoin is scarce & limited in supply” to “Bitcoin is a promise of liberating the masses from the oppression of the Central Bankers”.

The first sort of argument exhibits not just Jurassic ignorance of logic, but also a gargantuan dose of arrogance. Repeated sufficiently enough, it signifies the absurd degree of exuberance of investors’ expectations.

The second argument is patently false. Bitcoin has undergone splits, and engendered dozens of other cryptos, with unlimited supply of such into the future. Bitcoin itself is divisible ad infinitum and, with forks, its supply is potentially unlimited. Worse, Bitcoin rests on man-made mathematical foundations. Which means it has no physical bound or constraint. Anything man-made (and even more so, anything mathematically derived) is, by definition, fungible and axiomatic. Just because to-date no one cracked the code to alter Bitcoin mid-stream or drain blockchain-held information does not mean that in the future such a code cannot be written. So hold your horses: gold is physically limited in quantity (even though in the Universe, it is not as scarce as it is on Earth, which makes long term supply constraint on gold potentially non-binding). Bitcoin is limited by our capacity to alter the underlying code defining it. Anyone thinking of an algorithm as a ‘law’ needs to go back to Godel’s mathematics.

Finally, there is an argument of ‘liberation’. Bitcoin value is only sustained as long as it remains convertible into goods, services and other currencies. This means that Bitcoin cannot remain a government- regulation-free asset, as long as its popularity as a medium of exchange and a vehicle for store of value grows. Which means that in the medium terms (3 years or so?), Bitcoin will either cease to be, or cease to be anonymous. All protection from the dictate of the Central Bankers will be gone.  Benign tolerance of Bitcoin by some regulators can quickly turn into outright prohibition on trading – as current and past examples of China, Vietnam, Nigeria, Colombia, Taiwan, Ecuador, Bangladesh, Kyrgyzstan and Bolivia, Russia, and Thailand suggest. Evolution of cybersecurity measures and regulatory and supervisory tools, including their spread into cryptocurrencies domain will only increase effectiveness of such measures into the future. So, unless you are planning to live in a libertarian paradise, where legal norms of other states do not apply, good luck committing much of your wealth to Bitcoin as a safe haven for oppressive or coercive actions of the nation states.

And for a good overview of the “gold vs bitcoin” debate:

Other

Inflation – as with many economic terms – is actually quite difficult to define and many definitions exist. While for example the Fed mainly plays around with one “average basket” of goods to measure its inflation index (with many adjustments), not everyone buys the same things. So it may be interesting to consider an “inflation index for the poor” (or in the article below the bottom 95%). Additionally, the considerable increase in prices of some big items – for example education and healthcare in the US – can lead to further difficulties in the calculation of the index.

(See also this excellent article on inflation by the same author – Charles Hugh Smith)

While the world currently happily builds 60 more nuclear power plants, the safety of some of the existing ones are particularly concerning:

Luckily, conditions in neighbouring Ukraine are not much better…

Some more random news I found interesting:

Ted Talks

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