Today the Fed released the full set of transcripts from its eight 2011 meetings, a year which was particularly tumultuous due to the end of QE2, the downgrade of the US AAA rating by S&P, and the peak of the European debt crisis. It was also the first year in which the Fed's hope of hiking rates "soon" was crushed as global deflation returned, eventually forcing the Fed to launch Project Twist and QE3. As has become a tradition, instead of breaking down the specific transcripts - readers can do so at their leisure here - we summarize the prevailing mood at each meeting based on the number of instances of "laughter" revealed in the transcript. As shown in the chart below, 2011 was decidedly more funny than 2010, if only to the FOMC, which laughed on average 39.4 times every meeting, up 43% from the 27.4 times per meeting in 2010. Furthermore, as some have suggested, the Fed's forced laughter was an indication of underlying tension, which means that while August was the most uneventful meeting, the November meeting was by far the most tense, as FOMC members laughed at least 57 times, which would make intuitive sense: this is the meeting that preceded the global Fed bailout of the European financial system with the launch of trillions in currency swaps. Which is why we decided to focus particularly on this specific meeting, and while much of the discussion involved, as one would expect, the collapsing European financial situation and US monetary conditions - a rather interesting debate on the use of negative rates in the US can be found in the September transcript - what we found most interesting was the Fed's real-time analysis and "hot takes" of the MF Global bankruptcy which took place on October 31, 2011 and combined a variety of issues: from being a Primary Dealer, to its holdings of Italian bonds which plunged in value, to its flawed capital structure, to the "hubris" of its principals. The first mention of MF Global in the November 1-2 meeting, or just days after the bankruptcy took place, was in Brian Sack's summary of recent events, in which he explains how the Fed, despite having substantial exposure to the failed primary dealer, managed to avoid losses, as follows: As you know, MF Global experienced a rapid deterioration that led the firm, and the U.S. broker–dealer subsidiary that is a primary dealer, into bankruptcy. In short, investors became skeptical about the viability of the firm given the size of its exposures to European sovereign debt markets, its weak earnings for the third quarter, and the associated downgrades of the firm by several rating agencies. With these events, the firm found itself unable to sustain sufficient financing, even as it attempted to rapidly sell parts of its business and shed assets. The path of MF Global serves as an example of the vulnerability of firms that are heavily reliant on short-term wholesale funding. As shown in the bottom-right panel, the firm had a narrow equity buffer, and its liability structure was relatively unstable. Indeed, the firm had little longer-term unsecured debt and, since it was not a bank, no retail deposits. Instead, the firm had 61 percent of its liabilities in the form of repo transactions and other trading liabilities. This structure left the firm very susceptible to a liquidity run in response to any emerging questions about its capital adequacy. Of course, this is the same issue that I noted earlier in the discussion of investor concerns about Morgan Stanley and Goldman Sachs. However, as can be seen in the table, Morgan Stanley has a much larger share of long-term debt as well as some retail deposits. The table also shows the figures for JP Morgan to offer a comparison to an institution with a larger banking operation. The problems experienced by MF Global raised risks to the Federal Reserve through our counterparty relationship with the firm. Our potential exposures were associated with MF Global’s participation in our securities lending operations, in our operations in Treasury securities, and in our operations in agency mortgage-backed securities. The Desk began to exclude MF Global from some operations last Wednesday and from all operations last Thursday. Yesterday, the Federal Reserve Bank of New York announced that it had terminated its primary dealer relationship with MF Global. Heading into the market open yesterday, our only exposure to the firm was from seven unsettled MBS purchase transactions. These transactions, which totaled about $950 million, were due to settle as far out as mid-January. To limit the risk to the Federal Reserve from these transactions, on Friday we established a special arrangement for the firm to post collateral to us on a daily basis. Based on yesterday’s events, we exercised our legal authority to terminate the seven trades, and we conducted trades with other counterparties to reestablish the same positions, using the collateral that had been posted by MF Global to cover the additional expense of those replacement trades. Given these steps, we do not expect to realize any losses from our counterparty exposures to MF Global. This then led to an informal discussion between the FOMC members on MF Globa, starting with Richard Fisher, where the topic of customer account commingling and rehypothecation first emerges. As Brian Sack admits, "if there were problems in that regard, you could see a loss in confidence in other types of custodial arrangements or intermediaries." MR. FISHER. First, I want to congratulate you on handling MF Global the way you handled it. I have a question about that, and I have two other questions. But on this front, any other trip bars that might ensue from MF’s failure that you’re monitoring in terms of its impact on the system—not the Federal Reserve System, but on the fixed-income markets and on financial stability? MR. SACK. Yes, there are several areas we’re monitoring. MF Global, of course, had essentially a large brokerage unit into futures markets. One area we’re watching is whether their customers will experience any period of disruption and confusion about their ability to change positions. There could potentially be odd short-term dynamics for futures markets. The second area is questions about whether the customers’ assets are truly fully there at the institution, and if there were problems in that regard, you could see a loss in confidence in other types of custodial arrangements or intermediaries. And the third area is whether there would be any consequences for repo financing, not necessarily direct consequences associated with the unwinding of MF Global’s positions, but broader concerns about whether repo funding for less liquid assets is as stable as the market had assumed. I’m sure there are others, but those are three areas that we’re watching. Not having the benefit of seeing markets today, but through yesterday, it looked like the markets were not overly concerned with any of those systemic consequences, but that’s what we’ll continue to monitor Next, its was NY Fed president and former Goldmanite (and therefore subordinate of former Goldman head and then-MF Global CEO Jon Corzine) Bill Dudley's turn to chime in. VICE CHAIRMAN DUDLEY. Yes, just a few things. This is the first significantly sized FCM, futures commission merchant, that’s failed in a way that they didn’t actually port the customer accounts off smoothly to some other entity. There’s a little bit more uncertainty here because it has never happened like this before. In the past, there has always been a smooth transfer of accounts. The second thing I would say is that it underscores how fast liquidity can dry up for a firm. This is another firm that, while I wouldn’t say they were fine a week ago, they didn’t look like they were headed to collapse, and a week later they’re dead. That is going to reinforce people’s anxiety about firms that are wholesale funded without any obvious lender-of-last-resort support from the central bank. I think as long as other firms stay out of trouble, it’s not an issue, but if they get into trouble, people may actually pull back faster as a consequence. And the third thing, of course, is that this was triggered in part by, as Brian mentioned, European sovereign debt exposure. To the extent that things in Europe deteriorate, other firms are viewed as having exposure to Europe, and that’s another aspect of this. But so far we would say, and I think Brian and I would both agree, that the selloff in the market today really has very little to do with MF Global. Former FOMC staffer Elizabeth Duke then touched on the issue what would happen to MF Global's derivative counterparties: MS. DUKE. My question goes back to the impact on customers of MF Global, and this question may not make sense because I wasn’t sure I understood the article I read just before I came in here. But it was something about either clearinghouses or exchanges freezing customer transactions, customers of MF. And then, I was remembering how some of the people who came through here were really unhappy in the Lehman bankruptcy about their collateral getting tied up in pieces. Is there anything in moving derivatives to central counterparties that we should be aware of in connection with this? MR. SACK. That is related to one of the three broad concerns I talked about: Would there be uncertainty about the client’s ability to change positions? Would there be confusion about what the status of their assets was or not? And as Vice Chairman Dudley mentioned, without the quick transfer of the client accounts, it leaves this uncertainty. I don’t know enough about the legal arrangements to answer the questions you raise. But how long that will take and how transparent it will be in terms of when the customers will be able to reaccess their positions is one of the big areas of uncertainty here. Outgoing Fed president Dennis Lockhart then asked Brian Sack what the MF Global bankruptcy means for financial instability, in light of recent bank "runs" at Morgan Stanley and Goldman Sachs: MR. LOCKHART. Thank you, Mr. Chairman. Just to continue on the question of MF Global, a couple of weeks ago, as you see on chart 12, there was—and I hesitate to call it a “run” —but certainly a lot of pressure on Morgan Stanley and Goldman Sachs, which has eased. Then, we get the first casualty with MF Global. My broad question, Brian, is: Are you more or less concerned about financial instability now than two weeks ago? How is that trending? MR. SACK. At best slightly more comfortable, but actually probably about the same. As I noted, what happened a few weeks ago with Morgan Stanley and Goldman Sachs was the same dynamic. Taking Morgan Stanley as an example, based on their discussions about the firm’s exposures, I think market participants weren’t convinced that the firm actually had problematic exposures, but what they were convinced about was the fact that if the market got too concerned, they could put Morgan Stanley out of business because of their reliance on short-term funding markets. I think that contributed a lot to the jitters that emerged in early October, and it is the same dynamic that ultimately brought down MF Global. But I do want to emphasize that MF Global is a very different case than a Morgan Stanley, in terms of the aggressiveness—relative to its size—of how MF Global was positioned. Dudley then chimed in with am ominous warning: "The MF Global experience showed you that whatever liquidity cushion you have can run off a lot faster than you expect." VICE CHAIRMAN DUDLEY. Morgan Stanley, we believe, has a very large liquidity cushion. The MF Global experience showed you that whatever liquidity cushion you have can run off a lot faster than you expect. Morgan Stanley is starting with a much better balance sheet than MF Global was, and they have been actually earning money. One of the precipitating events for MF Global was that they took a very large loss in the most recent quarter. That was really what started this thing spinning last Tuesday. Lesson learned: never take large losses. That said, Lockhart had some follow up questions, namely whether MF Global was taken down by "predatory market players" to which the former head of the Fed's trading desk said "No." MR. LOCKHART. Do you see any dynamic of predatory market players essentially gaining any victory with this one and moving on to the next most vulnerable? MR. SACK. No. MR. LOCKHART. No, we don’t see anything like that? VICE CHAIRMAN DUDLEY. I don’t think this was about people shorting the CDS and driving down the stock price. This is all about the fundamentals of the company; that would be my opinion. Some, like Jim Bullard was confused why a primary dealer imploded in such spectacular fashion. The answer: "They passed the credit review. But that doesn’t guarantee that they can’t go downhill. As we see in the market price and everything, they went downhill very quickly and very unexpectedly." MR. BULLARD. Thank you, Mr. Chairman. On MF Global—it became a primary dealer this year, is that correct? bRight. MR. BULLARD. Are we happy with our expanded criteria for primary dealers? And does this give you any pause about that new, more expansive definition? MR. SACK. The new primary dealer policy just increases the transparency about the requirements. There was no reduction in the requirements to be a primary dealer. When we look at the primary dealers as candidates, there is an extensive review. It covers quality of management, the quality of their systems, their financial health, and so on. But we are at a disadvantage. We are not a supervisor of this firm. There is a credit review. They passed the credit review. But that doesn’t guarantee that they can’t go downhill. As we see in the market price and everything, they went downhill very quickly and very unexpectedly. Jeff Lacker also had a question whether and just MF GLobal was insolvent: MR. LACKER. Yes, a question about MF Global, and then I want to follow up on a question from President Fisher. MF Global is insolvent, I take it? Is that our best information? VICE CHAIRMAN DUDLEY. I don’t think we know whether they are insolvent or not. We know they can’t meet their obligations, but that doesn’t mean when they are all liquidated that the value of the assets couldn’t be a lot greater than the value of the liabilities. We don’t know that. The fact is that their long-term debt, which they have a small piece of, is trading at about, last time I saw, in the 35 to 45 percent per dollar range, which suggests that the market thinks that they are most likely to be insolvent. But we are not going to know for a while. MR. LACKER. Okay. Do you view how it has played out as inefficient ex post? VICE CHAIRMAN DUDLEY. It was inefficient in the sense that there was not an orderly bankruptcy process. It would be much better if there had been a way to move the customer accounts to new firms, so that they didn’t get trapped. It was messier than optimal. Is it systemic or not? Fingers crossed, we hope not. Yes, that's the Fed expressing hope that "fingers crossed" the "messier than optimal" collapse of MF Global is not systemic. Finally, we go back to Richard Fisher who chimed in, and slammed Dudley's former boss saying the MF Global "principals involved here were extremely arrogant, taking the positions that they had, and were imbalanced in terms of their judiciousness of risks, and I think the markets are well aware of that." MR. FISHER. I would add a fourth factor, which is humility versus arrogance and balanced risk. The principals involved here were extremely arrogant, taking the positions that they had, and were imbalanced in terms of their judiciousness of risks, and I think the markets are well aware of that. As to why Jon Corzine would be "extremely arrogant"? We have an idea... Source: Federal Reserve
There is a critical forgotten story, about psychology and risk management, behind the recent announcement of a $5 million fine that ex-MF Global CEO Jon Corzine will pay, for having led a firm that used over $1 billion of its customers’ money order to cover its own losses.
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The Denver-based company has tapped Deutsche Bank AG, JPMorgan Chase & Co and Evercore to manage the debut, the people said. http://nyti.ms/2iWHTto Canada THE GLOBE AND MAIL ** The crushing Alberta recession has wiped out more than C$4 billion ($3.02 billion) in value of downtown Calgary office properties, city assessors warned Thursday, with some suburban office landlords and retailers expected to see higher tax bills as a result. https://tgam.ca/2iiUbvC ** Penn West Petroleum Ltd said on Thursday it plans to spend C$180 million ($135.78 million) on operations this year, up from its previous estimate of C$150 million ($113.15 million), with the largest chunk earmarked for its Alberta Cardium operations. https://tgam.ca/2ij5kMM ** International Trade Minister Chrystia Freeland portrayed Canada on Thursday as a global bulwark against populism and protectionism. 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Three years ago, in February 2013, traders were outraged upon learning that the National Futures Association refused to ban former MF Global chief Jon Corzine from trading with other people’s money, rejecting a motion brought before that body’s board of directors to do so. The decision was a blow to a vocal group within the commodities trading world who - noting that Corzine has not been held accountable by the government for alleged crimes - wanted to see him publicly upbraided by his peers in the market. All that changed today when Corzine agreed to pay a $5 million civil fine to settle a lawsuit by the U.S. Commodity Futures Trading Commission over the 2011 collapse of the former New Jersey governor's brokerage, MF Global Holdings. More importantly, under the settlement disclosed on Thursday, Corzine also agreed to be barred for life and never again work for a futures commission merchant, or register with the CFTC in any capacity. Which means Corzine's dreams of running a hedge funds are now over. "I am pleased to have reached this settlement to resolve the CFTC’s claims," Corzine, 70, said in a statement. "As the CEO of MF Global in 2011, I have accepted responsibility for its failure, and I deeply regret the impact it had on customers, employees, shareholders and others.” The CFTC alleged Corzine failed to fix inadequate controls that led to $1 billion in missing customer funds and knew of the New York-based firm’s extreme cash shortage. The agency also said he didn’t ask questions about the origins of funds used to make transfers that he had ordered. Corzine previously said he never directed the misuse of customer funds to help his firm stay afloat as it dealt with margin calls on bad bets in 2011 as Bloomberg notes. He testified to Congress that he asked that overdrafts with JPMorgan Chase & Co. be corrected. In 2013, MF Global’s brokerage unit was fined $100 million by the CFTC and admitted regulatory failures. Edith O'Brien, MF Global's former assistant treasurer, agreed to pay a $500,000 civil fine and accept an 18-month ban to settle related claims. Thursday's settlement resolves the last piece of litigation against Corzine stemming from MF Global's Oct. 31, 2011 bankruptcy.
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Submitted by Howard Kunstler via Kunstler.com, By now, anyone in this country still of sound mind knows that Barack Obama presided through eight years of remarkable continuity - of changeless conditions that left a great many hopeless. As the days of his tenure dwindle, what do we make of the departing 44th president? He played the role with cool-headed decorum, but that raises the question: was he just playing a role? From the get-go, he made himself hostage to some of the most sinister puppeteers of the Deep State: Robert Rubin, Larry Summers, and Tim Geithner on the money side, and the Beltway Neocon war party infestation on the foreign affairs side. I’m convinced that the top dogs of both these gangs worked Obama over woodshed-style sometime after the 2008 election and told him to stick with the program, or else. What was the program? On the money side, it was to float the banks and the whole groaning daisy chain of their dependents in shadow finance, real estate, and insurance, at all costs. Hence, the extension of Bush Two’s bailout policy with the trillion-dollar “shovel-ready” stimulus, the rescue of the car-makers, and a much greater and surreptitious multi-trillion dollar hand-off from the Federal Reserve to backstop the European banks with counter-party obligations to US banks. In April of 2009, Obama’s new SEC appointees, strong-armed by bank lobbyists, pushed the Financial Accounting Standards Board (FASB) into suspending their crucial Rule 157, which had required publically-held companies to report their asset holdings based on standard market-based valuation procedures — called “mark-to-market.” After that, companies like Too-Big-Too-Fail banks could just make shit up. This opened the door to the pervasive accounting fraud that allowed the financial sector to pretend it was healthy for the eight years that followed. The net effect of their criminal fakery was to only make the financial sector artificially larger, more dangerously fragile, and more prone to cataclysmic collapse. Another feature of life on the money-side of the Obama presidency was that nobody paid a personal price for financial misconduct. This established the basic ethos of Obama-era finance: anything goes, and nothing matters. All the regulators looked the other way most of the time. And when forced to act by egregious behavior, they made deals that let banking executives off-the-hook while their companies shelled out fines that amounted to the mere cost of doing business. It happened again and again. The poster boy for this kind of “policy” — or just plain racketeering — was Jon Corzine, the head of the commodities brokerage MF Global, whose company looted “segregated” customer accounts to the tune of nearly a billion dollars in the fall of 2011. Corzine was never prosecuted and remains at large to this day. Another signal failure in the money realm was Obama’s response to the 2010 Citizen United Supreme Court decision, which declared that the alleged legal “personhood” of corporations entitled them to exercise “free speech” by giving as much money as they wanted to political candidates for election. Big business no longer had to just rent congressmen and senators, they could buy them outright with cash. A conservative Supreme Court made the call, but Obama could have acted forcefully in the face of it. The former constitutional law professor-turned-politician could have marshaled a response in his Democratic Party-controlled congress to draft legislation, or a constitutional amendment, that would properly redefine the personhood of corporations. It should be obvious, for instance, that corporations, unlike human citizens, do not have duties, obligations, and responsibilities to the public interest; by legal charter they have only to answer to their shareholders and boards of directors. How does this confer the kind of political free speech “rights” that the court allowed them to claim? And how did the Obama and his allies in the legislative branch roll over to allow this disgraceful affront to the constitution to stand? And how is that almost nobody in the mainstream press or academic law even pressed these issues? Thanks to all of them, we’ve set up the primary means for establishing a fascist Deep State: the official marriage of corporate money and politics. Anything goes and nothing matters. Finally, in foreign affairs, there is Obama’s mystifying campaign against the Russian Federation. The US had an agreement with Russia after the fall of the Soviet Union that we would not expand NATO if they gave us a quantity of nuclear material that was in danger of falling into questionable hands in the disorder that followed the collapse. Russia complied. What did we do? We expanded NATO to include most of the former eastern European countries (except the remnants of Yugoslavia), and then under Obama, NATO began holding war games on Russia’s border. For what reason? The fictitious notion that Russia wanted to “take back” these nations — as if they needed to adopt a host of dependents that had only recently bankrupted the Soviet state. Any reasonable analysis would call these war games naked aggression by the West. Then there was the 2014 US State Department-sponsored coup against Ukraine’s elected government and the ousting of President Viktor Yanukovych. Why? Because his government wanted to join the Russian-led Eurasian Customs Union instead of an association with European Union. We didn’t like that and we decided to oppose it by subverting the Ukrainian government. In the violence and disorder that ensued, Russia took back the Crimea — which had been gifted to the former Ukraine Soviet Socialist Republic (a province of Soviet Russia) one drunken night by the Ukraine-born Soviet leader Nikita Khrushchev. What did we expect after turning Ukraine into another failed state? The Crimean peninsula had been part of Russia for longer than the US had been a country. Its only warm water naval ports were located there. They held a referendum and the Crimean people voted overwhelmingly to return to Russia. So, President Obama decided to punish Russia with economic sanctions. Then there was Syria, a battleground between the different branches of Islam, their sponsors (Iran and Saudi Arabia), and their proxies, (Hezbollah and the various Salafist jihad armies). The US “solution” was to sponsor the downfall of the legitimate Syrian government under Bashar al-Assad. We apparently still favored foreign relations based on creating failed states — after our experience in Iraq, Somalia, Libya, and Ukraine. President Obama completely muffed his initial attempt at intervention — the “line-in-the-sand” moment — and then decided to send arms and money to the various Salafist jihadi groups fighting Assad, claiming that our bad guys were “moderates.” Meanwhile, Russia stepped in to prop up Assad’s government, apparently based on the idea that the Middle East didn’t need yet another failed state. We castigated Russia for that. The idiotic behavior of the US toward Russia in these matters led to the most dangerous state of relations between the two since the heart of the Cold War. It culminated in the ridiculous campaign this fall to blame Russia for the defeat of Hillary Clinton. And here we are. I didn’t vote for Hillary or Donald Trump (I wrote-in David Stockman). I’m not happy to see Donald Trump become president. But I’ve had enough of Mr. Obama. He put up a good front. He seemed congenial and intelligent. But in the end, he appears to be a kind of stooge for the darker forces in America’s overgrown bureaucratic Deep State racketeering operation. Washington truly is a swamp that needs to be drained. Barack Obama was not one of the alligators in it, but he was some kind of bird with elegant plumage that sang a song of greeting at every sunrise to the reptiles who stirred in the mud. And now he is flying away.
Submitted by Dave Collum via PeakProsperity, A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. Background: The Author “The easiest thing to do on earth is not write.” ~William Goldman, novelist I never would have believed it—not in a million years—but it happened: the Cubs won the World Series, and The Donald is our new president. Every December, I write a Year in Review1 that’s first posted on Chris Martenson’s & Adam Taggart’s website Peak Prosperity2 and later at Zero Hedge.3 What started as a few thoughts posted to a handful of wingnuts on Doug Noland’s Prudent Bear message board has mutated into a detailed account of the year’s events. Why write this beast? For me, it puts the seemingly disconnected events that pass through my consciousness, soon to be lost forever, into a more organized and durable form. Somebody said I should write a book. I just did. In a nutshell, this is a story of human follies and bizarre events. There are always plenty of those. Let others tell the feel-good stories. Figure 1. Malcolm McDowell as Alex in A Clockwork Orange. I try to identify themes that evolve. This year’s theme was obviously defined by the election, which posed a real problem. I struggled to detect the signals through the noise. Many of my favorite analysts from whom I extract wisdom and pinch cool ideas spent the year trying to convince the world that one or more of the presidential candidates was an unspeakable wretch. I was groping for a metaphor to capture our shared experiences, rummaging through Quentin Tarantino scripts and Hieronymus Bosch landscapes for inspiration. “Rise of the Deplorables” was tempting. Then it clicked. The term “clockwork orange” is a Cockney phrase indicating a bizarre incident that appears normal on the surface. The phrase was commandeered as the title of a 1971 dystopian film in which Malcolm McDowell’s character Alex is brainwashed by being forced to watch the most grisly and horrifying of spectacles (Figure 1). For us, it was the 2016 presidential election, which created a global mind-purging brain enema. The horror! The horror! (Oops. Wrong movie.) I knew in January that by mid-November we would be unified by our collective distrust of the Leader of the Free World, who would be surrounded by a dozen chalk outlines corresponding to political corpses that nobody wished to resurrect. I have done my best to not marinate you—too much—in tales of sociopathic felons or stumpy-fingered, combed-over letches. I do, however, eventually enter the Swamp. By way of introduction, my lack of credentials—I am an organic chemist—has not precluded cameos in the Wall Street Journal,4 the Guardian,5 Russia Today,6,7,8 a plethora of podcasts,1 and even a couple investment conference talks. Casting any pretense of humble bragging aside, let’s just post this year’s elevator résumé and a few endorsements to talk my book. “We live in a world where some of the best commentary on the global financial markets comes from a frustrated chemistry professor.” ~Catherine Austin Fitts, former Assistant Secretary of Housing, former Dillon, Reed & Co., and current president of Solari9 One of the high-water marks was sharing the spotlight with Mark Cuban in a Wall Street Journal article by Ben Eisen on nouveau gold buggery:10 “Dave Collum . . . has been adding to his holdings of physical gold this month, citing, among his concerns, negative interest rates and the growing refugee crisis in Europe. ‘I’m getting apocalyptic,’ he said.” ~Ben Eisen, Wall Street Journal Podcasts in 2016 included Wall St. for Main St.,11 Macro Tourist Hour (BTFD.TV),12 The Kunstlercast,13 Five Good Questions,14 FXStreet,15 and, of course, Peak Prosperity.16 Dorsey Kindler, of a small-town newspaper, the Intelligencer (Doylestown, PA), interviewed me about college in an article titled, “The New McCarthyism” and, in an ironic twist, was soon thereafter fired and his content purged.1 An interview for the Cornell Review, a right-wing student newspaper considered a “rag” by the liberal elite, probed college life and the new activism.17 A cross-posting at Zero Hedge got the Review’s click counts soaring.18 Finally, I chatted on local radio about real estate, the bond market, Hillary, and other rapidly depreciating assets.19 “If you reflect on Prof. Collum’s annual [review], you will realize how far removed from the real world and markets you are. This is a huge deficiency that all of you must work on correcting.” ~Professor Steve Hanke, economist at Johns Hopkins University, in a letter to his students Contents Footnotes appear as superscripts with hyperlinks in the Links section. The whole beast can be downloaded as a single PDF xxhere or viewed in parts via the linked contents as follows: Part 1 Background: The Author Contents Sources On Conspiracy Theorizing Investing U.S. Economy Broken Markets Cash on the Sidelines Pharma Phuckups Gold Energy Real Estate Debt Pensions Inflation/Deflation The Bond Caldera ZIRP and NIRP War on Cash Banks and Bankers The Fed European Central Bankers Europe Brexit Refugee Crisis References Part 1 Part 2 Putin and Russia South America China Japan Middle East Government Folly Panamania Human Achievement Human Folly Civil Liberties Campus Politics Elections Rigged Primaries: RNC Division Rigged Primaries: DNC Division Bernie Hillary Clinton Trump Media Conclusion Books Acknowledgments References Part 2 For historical reasons, the review begins with a survey of my perennial efforts to fight the Fed. I am a fan of the Austrian business cycle theory and remain hunkered down in a cash-rich and hard-asset-laden Bunker of Doom (portfolio). The bulk of the review, however, is really not about bulls versus bears but rather human folly. The links are as comprehensive as time allows. Some are flagged as “must see,” which is true only for the most compulsive readers. The quote porn is voluminous: I like capturing people’s thoughts in their own voices while they do the intellectual heavy lifting. I try to avoid themes covered amply in previous reviews. Some topics resolve themselves. Actually, none ever do, but they do get boring after a while. Others reappear with little warning. Owing largely to central banking largesse, the system is so displaced from equilibrium that something simply has to give, but I say that every year. We seem to remain on the cusp of a recession and the third, and hopefully final, leg of a secular bear market that began in 2000. Overt interventions have kept the walking dead walking. The bulls call the bears Chicken Littles and remind us what didn’t happen. One of my favorite gurus reminds us of a subtle linguistic distinction: “Didn’t is not the same as hasn’t.” ~Grant Williams, RealVision and Vulpes Investment Management I finish with synopses of books I’ve read this year. They are not all great, but my limited bandwidth demands selectivity . They are all nonfiction (to varying degrees). I don’t have time to waste on 50 Shades of Garbage. Sources “As for the national press corps—the Fourth Estate—it has been compromised, its credibility crippled, as some of the greatest of the press institutions have nakedly shilled for the regime candidate, while others have been exposed as propagandists or corrupt collaborators posturing as objective reporters.” ~Pat Buchanan, syndicated columnist and senior advisor to presidents With some notable exceptions, the mainstream media has degenerated into a steaming heap of detritus that is so bad now that it gets its own section. A congenital infobesity has morphed into late-stage disinfobesity. Enter social media—the fever swamp—to fill the void. As we shall see, however, all is not well there either. I sift and pan, looking for shiny nuggets of content that reach the high standards of a rant. Shout-outs to bloggers would have to include Michael Krieger, Charles Hugh Smith, Peter Boockvar, Bill Fleckenstein, Doug Noland, Jesse Felder, Tony Greer, Mike Lebowitz, Mish Shedlock, Charles Hugh Smith, and Grant Williams. News consolidators and new-era media include Contra Corner,20 Real Vision,21 Heatstreet,22 and Automatic Earth.23 A carefully honed Twitter feed is a window to the world and the road to perdition. My actions speak to my enthusiasm for Chris Martenson and Adam Taggart at Peak Prosperity.24 However, if you gave me one lens through which to view the world, I would have to choose Zero Hedge (or maybe LadySonya.com). “You really should be keeping a journal because you are living through momentous times.” ~Chris Martenson, Peak Prosperity On Conspiracy Theorizing “I stopped believing in coincidences this year.” ~Scott Adams, creator of Dilbert Every year I shout out to conspiracy theorists around the world. I am not talking about abductions by almond-eyed aliens with weaponized anal probes (which really hurt, I hasten to add) but rather the simple notion that sociopathic men and women of wealth and power conspire. Folks who could get through 2016 without realizing this are imbeciles. I am talking totally blithering idiots. Markets are rigged. Government stats are cooked. Interest rates are set by fiat. Polls are skewed. E-mails are destroyed. Cover-ups abound. Everybody has an agenda. Watch this d-bag at one of the neocon think tanks—somehow so stupid as to not realize he’s being recorded—talk about how false-flag operations are commonplace.25 Meanwhile, the media conspires to convince us to the contrary. The folks who really piss me off, however, are the glib intellectuals—Nassim Taleb calls them “intellectuals yet idiots” (IYIs)—who suggest that conspiracy theorists are total ret*rds.26 (Saved by the asterisk, which baffles the sh*t outta me why that works.) Does it seem odd that the world’s most prominent detractor of conspiracy loons, Harvardian Cass Sunstein,27 is married to neocon Samantha Power,28 one of the great conspirers? It does to me, but I am susceptible to such dietrologie. “Popular opinions, on subjects not palpable to sense, are often true, but seldom or never the whole truth.” ~John Stuart Mill Many will try to shut down open discussions of ideas displaced from the norm by using the word “conspiracy” pejoratively. Their desire for the world to be normal is an oddly child-like cognitive dissonance. In that event, lean over and whisper in their ears, “Keep your cognitive dissonance to yourself, dickweed” while gently nudging them in the groin with your knee. Now, let’s pop a few Tic Tacs, grab a clowder, and get on with the plot, but first . . . *Trigger Warning* If this review is already too raw for your sensibilities, please stop reading. Nobody is making you squander your time on a socially marginal tome of questionable merit. Better yet, seek professional help. Investing “If you pay well above the historical mean for assets, you will get returns well below the historical mean.” ~Paraphrased John Hussman Read that over and over until you understand it. Changes in my 2016 portfolio were more abrupt than those from other years but still incremental. I resumed purchasing physical gold in 2015 after a decade-long hiatus. In 2016, I bought aggressively in January (the equivalent of half an annual salary) and continued incremental buying throughout the year (another half salary). My total tonnage (OK, poundage) increased by an additional 5% of my assets. My cash position shrunk by about 5% accordingly but remains my largest holding. I am in no rush to alter the cash position. For a dozen years, I have been splitting my retirement contributions into equal portions cash and natural gas equities. The latter keeps failing to attain an approximate percentage goal of 25–30% of my assets owing to market forces. My approximate positions are as follows: Precious metals etc.: 27% Energy: 12% Cash equivalent (short term): 53% Standard equities: 8% The S&P, despite a late year rally incorrectly attributed to the Trump victory, appears to be running on fumes or, as the big guns say, is topping. The smart guys (hedge fund managers) continue to underperform, which means the dumb money must be overachieving (blind nuts finding squirrels). This is never a good sign. “We should all own cash, because it is the most hated asset.” ~Jim Rogers, Rogers Holdings and Beeland Interests “The great financial success stories are people who had cash to buy at the bottom.” ~Russell Napier, author of Anatomy of the Great Bear (2007) “Cash combined with courage in a time of crisis is priceless.” ~Warren Buffett, Berkshire Hathaway Figure 2. Performances of GLD, SLV, XAU, XLE, XNG, and S&P. After a few years of underperformance resulting from the oil and gold drubbing, large gains in the gold equities (60%), gold (6%), silver (15%), generalized energy equities (10%), and natural gas equities (48%) shown in Figure 2 were attenuated by the huge cash position to produce a net overall gain in net worth of 9%. This compares to the S&P 500 (+10% thanks to a hellacious late year rally) and Berkshire Hathaway (25%, wow). (Before you start brain shaming me, that same cash buffer precluded serious percentage losses during the hard-asset beatings in the preceding years.) The most disappointing feature of the year was in the category of personal savings. I have managed net savings every year, including those that included paying for college educations. This year, however, began poorly when my gold dealer got robbed and lost my gold. My losses paled in comparison to his; he committed suicide. I discovered maintenance needs on my house that got really outta control, and a boomerang adult child ended up costing me a bit. All told, I forked over 50% of my annual salary to these unforseeables, which turned overall savings negative (–20% of my salary) and eroded a still-decent annual gain in net worth. Oh well, at least I have my health. Just kidding. I have a 4 centimeter aortic aneurysm, am pissing sand, and have mutated into Halfsquatch owing to congenital lymphedema (Figure 3). (I live-Tweeted a cystoscopy—likely a first for social media.) I have to keep moving here to finish before I pass my expiration date. Figure 3. Sand and Stump. In a longer-term view, large gains in total net worth (>300%) since January 1, 2000 are still fine. I remain a nervous secular precious metal bull and confident equity secular bear. I intend to put the cash to work when Tobin’s Q, price-to-GDP, price-to-book, and Shiller PE regress to and through the mean. When this will occur is anybody’s guess, especially with central bankers determined to make me pay for “fighting the Fed.” I will start buying after a 40% correction brings the S&P to fair value, keep buying as it drops below fair value, and wish I had saved my money by the secular bottom. We return to all this in Broken Markets. Here’s what my dad taught me: you need cash at the bottom to buy up cheap assets. Few will have cash because you have to go to cash at the top, and precious few have the capacity to shake recency bias and exit positions that have performed well. Just like a toaster, your sell order has only two settings: too soon and too late. My far greater concern is that bear markets are as much about time as they are about inflation-adjusted price. The Fed is determined to burn the clock. Nobody wins if we imitate Japan’s 25-year lost decade. “Time takes everybody out. It’s undefeated.” ~Rocky Balboa U.S. Economy “The word ‘maximum employment’ has this connotation that everything is good in the labor market, but everything is not great in the labor market.” ~Loretta Mester, president of the Cleveland Federal Reserve Unemployment is at 4.9%—what’s not to like? Economists have even claimed the “labor market is getting tight.” I scoff. The labor participation rate shows that 38% of working-age adults are not working (Figure 4). Apparently, 33% of working-age adults are neither employed nor unemployed. Hmmm . . . even that’s a little optimistic given that only 50% of adults are employed full-time. The millennials are getting whacked by the boomers who refuse to die (sorry, retire). Figure 4. Unemployment (left; official stats in red; Shadowstats in blue) and labor force participation rate (right). The wealth for middle-class households has dropped 30% since 2000;29 One in five kids lives in poverty,30 46 million folks are on food stamps;31 20% of the families have nobody employed32 (despite the 4.9% number); and almost 50% of all 25-year-olds are living with mom and dad unable to translate that self-exploration major into a job.33 Half of all American workers make less than $30,000 a year.34 The once-industrial-juggernaut Rochester of Kodak/Xerox fame has more than 30% of residents living in poverty and another 30% living with government assistance.35 Very Detroit-like but without the Aleppo motif. You can see it in the micro if you drill down. Deindustrialization has been occurring steadily since the late 90s.36 The mining industry lost more this year than it made in the last eight years.37 Sales of industrial-strength trucks have been “dropping precipitously.”38 Sales in general are looking very ’09-ish. Factory orders and freight shipping (Cass Freight Index) have been dropping for two years.39 Catherine Mann of the OECD says that “In terms of actual trade growth, it is extremely grim.” The CEO of Caterpillar finally cashed in his chips after 45 contiguous months of dropping sales.40 Commercial bankruptcies are up 38% year over year,41 whereas 62% of Americans have less than $1,000 in savings.42 It seems unlikely the consumer will be buying bulldozers and 18 wheelers in the near future. “This turns out to be the deepest and most protracted growth shortfall on record for the modern-day global economy.” ~Stephen Roach, Yale professor and former chairman and chief economist at Morgan Stanley The economy is in the weakest post-recession recovery in half a century despite protestations to the contrary by Team Obama.43 The 2%-ish growth rate since ‘09 feels like a recession, especially given specious inflation adjustments to get 2%. There isn’t a wave of job cuts yet, but some signs are worrisome. Cisco Systems laid off 20% of its workforce.44 GE cut 6,500 jobs.45 Despite gains in non-GAAP earnings, GE’s GAAP earnings—the non-fabricated earnings—plunged.46 Intel dumped 11% of its workforce but faked a win by dropping its assumed tax rate by 7%.47 This tactic smacks of the same old financial engineering, but maybe it is headed for nonprofit status. One bright spot: the $15 billion vibrator industry is set to grow to $50 billion,48 satisfying consumers in a manufacturing–service industry combo. Speaking of stimulus, what the hell went awry? The Feds drilled the rates to zero (creating a ginormous bond bubble; vide infra) to encourage consumers to do the one thing they cannot afford to do—consume. Global central bankers have cut rates every 3 days since 2008 according to Grant Williams.49 The central bankers dumped tens of trillions of dollars—trillions with a “t” that comes right before gazillions with a “g”—into the global economy. The answer is simple and foreshadowed above: once you blow up a credit bubble, you cannot force consumers to spend. Have ya heard people talking about pulling equity out of their houses lately? Didn’t think so. That numbnut idea proferred by the incoherent Alan Greenspan left consumers with the same houses and twice the debt while poverty-stricken old age looms large. “If a consumer buys a boat today with money made available through a low-interest loan, that’s a boat he won’t buy next year.” ~Howard Marks, Oaktree Capital and Three Comma Club (billionaire) “The decline of the middle class is causing even more economic damage than we realized.” ~Larry Summers, speaking for himself with the royal “we” How could the economists have been so wrong? I have a remarkably simple theory: their models are wrong. They suffer so badly from Friedrich Hayek’s “fatal conceit” that they have become functional nitwits. That’s the best I’ve got. One could argue we have a secular economic problem. As a nation, we exploited cheap labor overseas through immigration during the 16th–20th centuries. The immigrants worked like dogs, got paid squat, and saved so furiously that it became a lot more than squat. Thomas Sowell explains this brilliantly in his writings.50 For the last few decades, however, we exploited cheap overseas labor by exporting jobs. They too worked like dogs, got paid squat, and saved furiously. But that wealth is not here; it’s over there (pointing east). Will new and improved trade policies solve our (U.S.) problems? I don’t think so. As long as there are folks overseas willing to work harder for less, we have some correcting left to do. With that said, I am a free-trade guy and particularly like the trade agreement painstakingly crafted by Mish Shedlock: “Effective immediately, all tariffs and subsidies, on all goods and services, are removed.” ~Mish Shedlock (@MishGEA), blogger How about some more Keynesianism? Former economist Paul Krugman, whose op-eds read like episodes of Drunk History, would say we simply haven’t done enough. (Paul: you have done more than enough.) Modern-day Keynesianism has mutated way past Maynard’s original idea into an unrecognizable metaphysical glob of thinking that boils down to the notion that government knows how to spend better than the private sector does. Is this the same government that included Anthony Weiner, Rick Santorum, and Barbara Boxer? Here is Keynesianism I could live with. Government should spend as little as possible, but there are legitimate roles to be played. Imagine if governments at all levels would simply act like financially interested parties—as a collective, not as slovenly greedy, bribery-prone individuals—and buy necessary goods and services when they are cheap and stop buying when the private sector has bid them up. We would get maximum bang for the tax buck. It would also quite naturally achieve the much ballyhooed counter-cyclicality. But, alas, the moment they start talking “stimulus,” the pay-to-play crowd turns it into a fiasco. As my dad once said, “Never ask government to do anything they don’t have to do, because they will do a terrible job.” Words from the wise. Broken Markets “I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention.” ~Axel Weber, former head of the Bundesbank “My thesis now is that central banks believe they can prop up asset prices through a downturn in the business cycle.” [email protected] Whomever @TheEuchre is, I think that is a provocative alternative theory of Fed motivation. Moving along, we seemed to be on the cusp of a recession last year with a number of valuation indicators pointing to a +40% correction simply to regress to the mean. In the absence of such a correction (check) and the absence of explosive growth (check), we are still looking over the precipice (check). Luminaries like Stanley Druckenmiller, George Soros, Sam Zell, and Bill Gross are calling for a zombie apocalypse at some unknowable future date. Paul Tudor Jones appears to be wrapping up in a way that smacks of Julian Robertson’s Tiger Management hedge fund liquidation in ’99. Harvard’s Martin Feldstein says asset prices are “dramatically out of line.” Credit Suisse sees analogies to the tech bubble, whereas Ned Davis Research suggests, “on a revenue basis, U.S. stocks are as expensive as they have ever been.” Chart guru Doug Short created a simple model that averages four common equity valuation techniques (Figure 5). Based on his analysis, the market is 76% overvalued compared with the average dating back to 1900. (Note: a 76% overvaluation is regressed to the mean by a 43% correction, which will be as pleasant as baptizing a cat.) Figure 5. Doug Short composite valuation model. At these valuations, a few shanks at the start of the year were scary, but soon the markets entered the tightest 40-day trading range (2.27%) in more than 100 years—the Horse Latitudes.51 There were a few goofy IPO crack-ups but they stayed subclinical. Even flash crashes raised only a few eyebrows. Knee-slappers elsewhere included a crash of the British pound in the forex markets in under a minute owing to Brexiteers52 (vide infra) and a 6.7% crash in China in less than a minute.53 The misnamed Trump rally—misnamed because it began three days before the election—left some serious skid marks, elevating the market 8% in only a few weeks. This was a short squeeze in conjunction with . . . I don’t really know. It is suggested that central banks and programmed investing have pushed a wall of money at the markets. This credit-based splooge corresponds to debts to be paid back later, but who cares? Over 10,000 mutual funds and exchange-traded funds (ETFs) are feeding off only 2,800 issues on the NYSE. There are now almost twice as many hedge funds as there are Taco Bells54 (which won’t be growing under a Trump presidency). I get a little confused as reported outflows in both equity funds and money market funds argue the contrary. (Even these claims are confusing given that buyers necessarily match sellers; vide infra.) “[I]t’s monetary policy we demonstrate is driving everything. And yet here too, there are worrying signs of what may become a breakdown.” ~Matt King, Citigroup Stock buybacks—in many cases leveraged stock buybacks—continue to levitate the markets. For those not paying attention, companies borrow money to buy back shares to prop up share prices, which serves the dual role of maximizing year-end bonuses and wards off balance sheet crises. Now my head hurts. Baker Hughes announced a $1.5 billion share buyback and $1 billion of debt issue. In the first half of 2016, S&P 500 companies “returned” 112% of their earnings through buybacks and dividends.55 Returned? There is some evidence that buybacks may be subsiding. When they stop buying shares at all-time highs—“buying high”—and their investment unwinds while crushing corporate debt persists, companies will be doing “dilutive share issuance” at fire sale prices—“selling low.” For now, corporate balance sheets hold the dumb money. “The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins and growing indebtedness.” ~Stanley Druckenmiller, former head of Duquesne Capital and rock star There are instances of generic idiocy emblematic of deep problems. Eighty-five percent of traders on Wall Street have less than 15 years of experience. Synthetic securitizations are returning.56 Are buyers being paid for the risk? Some have suggested that retail investors should stay away from these (and Fukushima). A managed futures fund was launched by a 17-year-old kid who may not have made it to third base yet.57 A 28-year-old Ukrainian hacker got caught making over $30 million on insider information.58 If he were a bank, he’d have been fined $100K. The “head” of the collapsed Visium Asset Management hedge fund killed himself by slicing his own neck.59 Right. Platinum Partners appears to have been running a Ponzi scheme.60 Vegan food start-up Hampton Creek used $90 million in “seed” money to buy its own products (probably seeds) to generate fake “organic growth.”61 Nintendo spiked on the release of Pokémon, which caused hoards of idiots to chase digital critters to stupid places.62 Even though Nintendo fessed up that their bottom line would not be improved by the craze, some of the gains have stuck as investors keep chasing those digital share prices to stupid places. “Markets don’t have a purpose any more—they just reflect whatever central planners want them to. Why wouldn’t it lead to the biggest collapse? My strategy doesn’t require that I’m right about the likelihood of that scenario. Logic dictates to me that it’s inevitable.” ~Mark Spitznagel, Universa Investments Cash on the Sidelines “Preliminary attempts to clean it up fail as they only transfer the mess elsewhere.” ~Wikipedia on the bathtub ring in The Cat in the Hat In 2011, I used that quote in a different context, but it is a great articulation of the Law of Conservation of Mass.63 There are a lot of memes in the investing community—pithy phrases and ideas for which tangible support is weak or nonexistent. One is the merits of “cash on the sidelines” and its kissing cousin, money “flowing” in and out of asset classes. In the late ‘90s, I tried to ascertain how much cash was generated in sell-offs and soon realized the answer was zero. Others such as Lance Roberts,64 John Hussman,65 Cliff Asness,66 and Mish Shedlock67 have dismembered putty-headed thinking underlying cash on the sidelines. However, there are pockets of holdouts (mostly on CNBC) who subscribe to the flow model. You can hear Maria saying it: “There is so much cash on the sidelines waiting to go into equities.” I am going to take one last crack at it with the aid of some graphical wizardry and grotesque oversimplification. “So if money is coming into the market, where is it going to find a home?…What’s going to get it into the market?” ~CNBC Fast Money Here is the problem with the meme in a nutshell: If I buy, somebody must sell. It’s the Law of Conservation of Cash. If I grab a stack of Tubmans ($20 bills) and buy NFLX, the former owner of NFLX now has the Tubmans, and I have the overpriced shares. Do that all day long, and the cash on the sidelines doesn’t change; it moves around like the bathtub ring. Mutual funds insert middlemen to skim cash, but still no money is destroyed or created. Breathless claims that money is flowing in or out of mutual funds sounds important, but where in this model is cash created or destroyed? The percentage of cash, however, is a huge issue. Let’s look at this graphically and restrict it to a simple binary model (Figure 6). Imagine there is $100 trillion in cash globally and $100 trillion of market cap in equities. Of course different investors have different allocations, but investors have collectively decided that they wish to own 50% cash and 50% equities (labeled 50:50). Figure 6. Equity-to-cash allocations in a non-inflationary world. In a non-inflationary banking system, the cash is static. Along comes legendary wise man John Bogle declaring equities reward risk taking, we should weight our portfolios 60:40, and the world agrees. Investors will bid up equities to higher valuations until, collectively, equities reach the 60:40 proportion for a satisfying 50% gain exclusively through expansion of the numerator. Legendary raging bull Laszlo Birinyi, guided by recency bias, convinces the world stocks are great investments and suggests 80:20 as the right allocation. Investors collectively agree, and they bid shares higher, which completes an overall 300% equity gain from the conservative days of 50:50 allocations. Now we’re rocking! We are just beginning to pull stupidity forward. Jeremy Siegel, self-appointed guru and demagogue, says you simply can’t lose, so you should be 90% stocks, and the world listens because this particular baitfish-smart analyst stays at Holiday Inns and is from Yale! The market has now lost all moorings, pushing the overall gains to 800%! Of course, now cash is trash and investors strive to be 100% in equities. Equity investors now “reach out and touch the face of God” because the prices are heading for infinity. Alas, The Bear appears before that can happen—it always does. It doesn’t have to be an axle-breaking speed bump. The proximate trigger is not important. Spooked investors drop their allocations back to 60:40 and, in the depths of despair, back to 50:50. You will then scoop up cheap equities with inverted baggies from disembowled, toe-tagged investors who need cash. We gave the gains all back . . . or did we? During this round trip, society collectively learned to make goods and provide services much more efficiently. The same amount of effort—the same amount of cash—corresponds to a much higher standard of living. This is good deflation, the kind that James Grant describes because he reads the dusty archives from bygone eras. Most economists nowadays endorse low inflation that roughly matches productivity growth, which causes both the cash and the market cap (equities) to drift gently upward in a feel-good money illusion.68 Don’t we need inflation for growth? Only if you believe the industrial revolution of the nineteenth and early twentieth century was disappointing. For the first half of the twentieth century, the DOW rose 1.3% nominally per annum. However, the modern banking system is most definitely inflationary. Money is created by increased leverage of all kinds—sovereign debt, consumer debt, quantitative easing (QE), and helicopter money all grow the money supply. They grow the denominator (cash) in Figure 6, which is inflation. The overarching model guiding the Fed’s policies seems to be that increasing the denominator will nonlinearly increase the numerator. As inflation lifts equities, animal spirits take hold (the Wealth Effect) and lift them even more. We will go through the four stages of bullishness: Bogle-Birinyi-Siegel-God. The gains will be illusory because real wealth is manufactured, farmed, mined, and maybe programmed. Central bankers will always do something; sitting on their hands (or thumbs) is unnatural. When the markets de-lever, however, cash leaves the system. Business and investing models demanding inflation begin to break. This is bad deflation. It is harsh, abrupt, and dreaded by central bankers, because it is largely their doing. Pharma Phuckups “If you think health care is expensive now, wait until you see what it costs when it’s free.” ~P. J. O’Rourke, conservative columnist There seemed to be an epidemic of flatliners in the pharmaceutical industry requiring quarantine (its own section). The big one was Theranos, a company based on miraculously effective lab tests that turned out not to really work.69 The company was quietly outsourcing to labs whose tests did work. When the scam was revealed, the wunderkind CEO, Elizabeth Holmes, watched her Forbes-estimated net worth drop from $4.5 billion in 2015 to “$0” in 2016.70 The corporate digital exam would be familiar to her distant relative John Holmes. Mylan suffered an optics problem when the disappearance of a key competitor allowed it to take a cue from pharma scoundrel Martin Shkreli71 and jack up its EpiPen price 500%,72 which smacked of price gouging. Mylan was protected by government intervention when Teva was denied rights to make a competing product.73 Such mischief in the generic drug market is real. The feds also mandated stocking EpiPens in all schools.73 A million bucks of lobbying money well spent.74 An ode to my new EpiPen It used to cost one, now it’s ten Our merchants of greed Are cheeky indeed These grifters are at it again [email protected] Valeant Pharmaceuticals also reported big losses following big gains. Criminal investigations into Valeant took it 90% off its recent highs (a “tenth bagger”).75 Meanwhile, drug giant Eli Lilly’s share price Felt the Bern in the fall when Bernie Sanders tweeted concerns about the price of insulin rising 700% in 20 years.76 The big-cap drug scoundrels have also been accused of fabricating an ADHD epidemic and causing a global prescription drug addiction. A drum beat to restrain pain meds is getting very loud. Chronic pain patients watch with angst. “Recovery is living long enough to die of something else.” ~Dr. Howard Wetsman (@addictiondocMD), chief medical officer, Townsend Addiction Treatment Centers Oh, those bastards, right? Well, maybe not. I’m gonna take a crack at defending the industry. Mylan has been dead money for 20 years—zero percent return ex-dividends and ex-inflation. The same is true for Merck, Pfizer, Eli Lilly . . . I could go on. Former antimicrobial juggernauts Eli Lilly and Bristol-Myers Squibb are exiting the antibiotic market because they can’t pay the utility bills with the proceeds. You should worry. “Drug corporations’ greed is unbelievable. Ariad has raised the price of a leukemia drug to almost $199,000 a year,” ~Bernie Sanders Tweet, dropping the shares 20% on the day Where are all the revenues going? Really expensive research and development. Better meds make the world a better place. The life expectancies of AIDS patients with treatment are now three years below those of their uninfected peers. Wow. New-era cancer cures are off-the-charts effective. Pharma creates wealth in the purest sense and employs millions of people. On my consulting gigs, I can see researchers diligently trying to cure major diseases. Operationally, however, big-cap pharmas have been not-for-profit organizations for investors for several decades. When you see the prices get jacked up, don’t mindlessly assume it’s to line the pockets of management or investors. It is claimed rather convincingly that the per-unit cost of health care has not risen, but the volume has soared. My stump/bladder sand /aneurysm mentioned above burned through a lot of health care. Why is health care so cheap elsewhere? My son broke his foot while in Vietnam weeks ago. X-rays, an MRI, surgery with titanium pins, and casting: $1,000. Three days in the hospital: $30 per day. Being invited to stay with the surgeon’s family for two weeks to convalesce: priceless. For a total of about $1,600, my son flew to Vietnam, got excellent surgery, and flew home. That is the essence of the rapidly growing medical tourism industry. How is that possible? The doctor in Vietnam is not wealthy and probably demands few material goods. Torte reform is not needed because caveat emptor reigns. There might even be some Gates Foundation money thrown in. Most important, the profoundly expensive research and development was all done in developed countries and paid for by large revenue streams. “It’s the craziest thing in the world.” ~Bill Clinton on Obamacare Gold “I am leaving the gold equity ‘buying opportunity of a lifetime’ . . . to others; my shrunken stash of equities is it for now. Maybe I just called the bottom.” ~David Collum, 2015 Year in Review Nailed it! That was the bottom. I expect some checks in the mail from nouveau riche gold bugs who got 60% on their XAU-tracking investments. Despite weakness of late, the case for gold is now in place: European and Chinese banking risks, negative interest rates, a war on cash, and omnipresent risks of a hot war in the borderlands of the Middle East and Europe. Estimates suggest 0.3% of investors’ assets are in gold.77 Traditional portfolio theory recommends 5%, offering a better than 15-fold relative performance en route. (Recall that discussion of “flow” from above.) Let’s check in on what some of the wingnuts on the fringe of society are chortling about now: “The world’s central bankers are completely focused on debasing their currencies. If investor’s confidence in central bankers’ judgment continues to weaken, the effect on gold could be very powerful.” ~Paul Singer, Elliott Management Corp Gillian Tett: “Do you think that gold is currently a good investment? Greenspan: “Yes. Economists are good at equivocating, and, in this case, I did not equivocate.” “I can understand why holding gold would seem to be a sensible part of a national portfolio. Because there is clearly a need to take some precautions against an unknowable future.” ~Mervyn King, former head of the Bank of England “I am not selling gold.” ~Jeff Gundlach, DoubleLine and the new “Bond King” “The case for gold is not as a hedge against monetary disorder, because we have monetary disorder, but rather an investment in monetary disorder.” ~James Grant, Founder of Grant’s Interest Rate Observer “Everyone should be in gold.” ~Jose Canseco, expert on performance enhancement James Grant also went on to say that “gold is like a monetary tonsil,” leading some to speculate that his son, Charley (WSJ), slipped him a pot brownie. Let’s see if we can get the goofs too. We’ll begin by blowing out a few ideas I do not subscribe to. I keep hearing from smart guys that gold is in short supply in the Comex or Shanghai gold exchange, you name it. These stories almost never play out. I am also a huge fan of Rickards and Maloney, but the saying “gold is money” and the notion that its price is actually the movement of the value of the dollar don’t work for me: prices of everything I buy follow the dollar, not gold, on the currency timescales. On long timescales, their assertion may be correct. Someday their assertion may even be correct on short timescales, but that isn’t right now. What a year: I got as many electoral delegates as the bottom ten republican candidates combined, ate python, and own as much gold as the Central Bank of Canada. Per the Bank of Canada, it finished selling off all of its gold,78 probably to ensure that the U.S. didn’t attack. You think I jest? A WikiLeaked e-mail by Sid Blumenthal to Hillary Clinton revealed that France whacked Libya to make sure North Africa distanced itself from a gold dinar currency.79,80 Germany supposedly has half of its requested gold repatriated from the U.S. and France,81 which could be bullish or bearish on the half-full/half-empty logic. Venezuela repatriated 100 tons of gold a few years ago and was squeezed to sell it all back in the heat of a currency crisis.82 The Dutch depatriated their gold this year after repatriating it not long ago.83 The reasons are unclear. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, assured us Russia will continue to buy gold (Figure 7), presumably as a defense against interventions from inside the beltway. Of course, the Fed is silent on the “metal whose name shall never be spoken.” Figure 7. Russian gold reserves. In a shockingly quiet year given how much gold moved to the upside before the post-election monkey hammering, we probably should finish with some generic goofiness. On a few occasions, gold took the beatings that are familiar—huge futures dumps in the illiquid wee hours of the morning when no price-sensitive investor would ever consider selling. It dropped $30 in seconds late on the day before Thanksgiving when nobody was paying much attention. Another hammering came from a $2.25 billion sale84 and another $1.5 billion sale,85 both of which occurred in under 1 minute. Nanex concluded that the algo “gold spoofer” was at play,86 but the 2016 poundings were transitory and toothless compared with their brethren in 2011–2015. Trouble in the ETF market was revealed when BlackRock was overwhelmed by GLD buying.87 It was forced to create more shares in February than it had in a decade. I retain previously stated convictions that GLD is a scam—fractional-reserve gold banking. Deutsche Bank was overwhelmed by requests for physical gold.88 It tried to shake the hook by demanding that such a request must be made at a participating bank.89 Deutsche Bank, the location of the request, is not a participating bank? I imagine it doesn’t have the gold, consistent with its troubles outlined below. A Swedish precious metal vault got its payment mechanism terminated without explanation.90 We can’t close without talking about gold’s kissing cousin—silver. The silver market gets its share of muggings and sustained bashings, at times spanning several weeks. The silver sellers didn’t get full traction either, however, bringing silver off a 50% gain but leaving it up 15% year to date. Silver market treachery got some attention. The London Silver Fix—truth in advertising—at times deviated markedly from the spot price,91 causing consternation among those attempting to fix the price. Deutsche Bank agreed to settle litigation over allegations it illegally conspired with Scotiabank and HSBC Holdings to fix silver prices at the expense of investors.92 A class action suit against Scotiabank suggested that the conspiracy spanned 15 years.93 JPM was cleared of silver manipulation in three lawsuits—all dismissed with prejudice, an altogether different form of “fix.”94 The only remaining question is why they are stockpiling huge stashes of physical silver.95 I’m as sanguine as ever holding large precious metal positions. Gold bugs are reminded, however, of what a big victory will feel like: “Our winnings will come . . . from the people who wake up one morning to find their savings have been devalued or bailed-in. . . . [I]t’s going to come from the pension funds of teachers and firefighters. The irony is that when gold finally pays off, it will not be a cause for celebration.” ~Brent Johnson, Santiago Capital Energy “Why Oil Prices Are About to Collapse” ~Headline from The Oil Drum in January, 2016 You could almost hear the bell ringing on that one. The price of oil promptly went on a 50% rip to the upside. Generally, however, energy was boring (to me) this year, but I keep investing in it. Of course, lower energy prices were hailed as great tax breaks for the consumer, ignoring those who say the economy drives commodity prices not vice versa. Like every other market, however, has been totally financialized. The supply/demand market got replaced with a casino-based futures market, and we know that casinos are trouble. Then there’s that whole petrodollar thingie wherein our alliances in the Middle East keep the dollar at reserve currency status and allow us to sell debt. It also seems to be the proximate cause for bombing vast numbers of Arab countries, but I’m ahead of myself. A few corporation-specific problems gurgled to the surface. Chesapeake Energy got indicted for energy market manipulation, prompting the CEO to off himself in a one-car accident.96 He probably never realized it was a self-driving car (wink). Petrobras canned 11,700 workers.97 Norway’s sovereign wealth fund started tapping principle because Statoil got crushed.98 Statoil says it will pay a dividend . . . by issuing new shares.99 Maybe it should hire more petroleum engineers and fewer financial engineers. The world’s biggest developer (SunEdison) of the world’s most expensive energy (clean energy) had accrued $12 billion in debt after a two-year asset-buying binge. Liquidation revealed a complex web of Ponzi financing.100 Here’s a funny little nugget for intellectually molesting people at cocktail parties: Edward Longshanks outlawed the burning of coal in 1306 because of pollution. Apparently, Hillary was not the first to try to put a few coal miners out of jobs. Coal is truly hated, and the industry is getting annihilated by the switch to natural gas, which is getting annihilated by fracking-based oversupply.101 The mega-miner Arch Coal got oxidized in the energy rout, ironically leaving little residue.102 It’s probably time to invest in coal miners once the market’s beta corrects. (That’s code for a market-wide sell-off.) All of my ideas are contingent on a prefacing market drop in the throes of a recession. One will come like night follows day, and then the merits of cash will be unambiguous. Energy companies getting whacked wouldn’t be so bad if it weren’t for the debt. Life insurers have huge energy-based junk bond exposure.103 Of course, the banks will allow them to hang on to greater risk by not calling in their chits rather than face reality. Zero Hedge reported that the Dallas Fed was telling banks not to push bankruptcy on energy companies.104 Denial by the Dallas Fed confirmed the story.105 (Thou doth protest too much.) Wells Fargo is committed to $72 billion if oil companies draw down their lines of credit,106 and that is just the beginning of its problems (vide infra). Wells Fargo, Bank of America, and JPM all have spiking numbers of bad energy-sector loans.107 I keep investing in energy, providing my own little Wall of Money to elevate the markets. In 20 years, I’ll know if it’s a smart move. A subset of this plan includes Russia, Iran, coal, and even uranium. Y’all can keep the new-fangled green energy; it’s too political for my tastes. “Fossil fuels have saved more lives than any progressive cause in the history of the universe.” ~Greg Gutfeld, Fox News Real Estate “7:00 PM Sinkhole forms in San Francisco 7:01 PM Thirty-five people on wait list to rent sinkhole” ~Daniel Lin (@DLin71) “House prices can’t be in a bubble because they are only 10% greater than the 2006 peak.” ~Seattle Realtor Thank God the real estate bust is over. That got outta hand fast, but we’ve learned our lesson (sigh.) Of course, it’s not over, and we learned nothing durably. Stupidity doesn’t just rhyme; it repeats. I must confess that I’m unsure how they cleaned up the ’09 bust. Where did the massive inventory go? Some did the full cycle (ashes to ashes). I suspect that many former foreclosures are rentals (Figure 8). Although single-family rentals are a lousy business and represent a dangerous shadow inventory, soaring rental rates may actually make them profitable in the medium term. The authorities also didn’t really clean up the financial mess. Fannie Mae and Freddie Mac—the two toxic government sponsored enterprises (GSEs) that nearly destroyed us in ’09—are being considered for bailouts again.108 What? Didn’t we drive wooden stakes through their hearts? No. They got placed in the government protection program under the pseudonym Karen Anne Quinlan living on Maiden Lane. Figure 8. Renter-occupied versus owned houses. Some bubbles didn’t even burst in ’09. Vancouver real estate went bonkers with the influx of Chinese money. The cost of a single-family home in Vancouver surged a record 39% to $1.2 million by midsummer. Mansions were being bought and abandoned (Figure 9). Shacks (tear downs) were selling for millions. Thomas Davidoff, erudite professor at the University of British Columbia, noted, “These prices are getting pretty freaking nuts.” Figure 9. Abandoned $17.5 mansion,109 $7.2 million mansion for sale,110 and $2.4 million starter home in Vancouver. People were getting rich buying Vancouver houses, but I’ve seen this plot before and know the ending. With everybody on the same side of the boat (boot), it would soon be listing starboard. Is that a blow-off top in Figure 10? Not really. The authorities aggressively scuttled it with a 15% housing tax111 to “cool off the market” (real estate’s version of the ice bucket challenge.) Sales dropped 96% year over year while prices dropped 20% in the blink of an eye.112 Where’d the buyers go? Toronto!113 I suspect Vancouver will retrace a decade (or more) of gains. Figure 10. Vancouver real estate prices 1977–2016. Blue is “detached” in so many ways. Legendary real estate analyst Mark Hanson sees a few frothy domestic markets, too (Figure 11).114 Bloomberg reports that $0 down, 30-year, adjustable-rate, jumbo mortgages are being given to youngsters in Silicon Valley, all backed by stock options.115 The San Francisco Federal Credit Union calls the program POPPY, or Proud Ownership Purchase Program for You because, as Zero Hedge notes, “Steaming Pile of Shit” lacks panache.116 Alan Cohen, former Ithacan and current Florida county planner, told me the Florida real estate bubble was back and bloated. A $95 million tear down in Palm Beach was the sound of a bell ringing.117 Prices of luxury condo sales in Miami have been cut in half.118 A busting golf course bubble is causing problems in Florida and other sand states because the courses are embedded in neighborhoods.119 Smacks of time-share-like legal problems. Some may also recall that a Florida real estate bust prefaced the ’29 collapse.120 Even in New York City the market is softening, as is its bedroom community, Greenwich, CT.117 And $100 million condos are showing evidence of being overpriced.118 Whocouldanode. Aspen witnessed the largest drop—a double-black diamond “freefall”—in years.119 You want some entertainment? Check out this critique of the architectural wizardry behind the ever-popular MacMansion.120 Figure 11. Domestic real estate markets. According to Christie’s International Real Estate, $100 million homes were piling up by mid-year.121 It appears that the UK market (especially London) may finally be softening or, as they say at Bloomberg, “tanking.”122 The largest property fund had to stop redemptions.123 Ironically, they’ll have to sell assets, which I’m sure won’t help the market as the virtuous cycle turns vicious. Prime properties have also dropped in Paris, Singapore, Moscow, and Dubai.124 Some say the global high-end market has completely stalled.125 Australia seems to remain in a bubble.126 You know the picnic is over for the commercial markets when the seven-story office building in Figure 12 gets stale on the market.127 The real estate bears have taken notice. (That was inexcusable.) Debt “Every cycle in human history has ultimately come to an end. Credit-enhanced cycles come to worse ends than the normal kind.” ~Tad Rivelle, chief investment officer of fixed income at TCW Group Federal debt has climbed 8% annually since 2000,128 but who cares because we have the reserve currency, can print the garbage at will, and are assured by the highest authorities that inflation is good and high inflation is even better. Meanwhile, friend and market maven Grant Williams has created a masterpiece of analysis of our debt problems.129 In the absence of a deflationary collapse, debt is reconciled to the downside at a geologic pace; it almost never happens. (Supposedly the Brits did it in the mid-nineteenth century.130) The problem is exacerbated by an inherently inflationary banking system that requires monotonically rising debt to survive. Where do you think the interest paid on savings comes from (when there is interest, that is)? Despite the current calm—possibly the eye of the storm—there are newsworthy events in the world of debt. The consumer is stretched by having no savings and gobs of debt—huge net debt (Figure 13). An estimated 35% of Americans have debt that is more than 180 days past due.131 They are now buying used cars with 125% loans,132 presumably to cover the negative equity from their previous loan and help pay for repairs. The used car market is priced poorly owing to the overdeveloped credit machine created to sell the trade-ins from rentals. Figure 13. Consumer debt (credit). One of the most oppressive of all debts, high-interest credit card debt, now exceeds $16,000 per household.133 The $2500 per annum interest payments are a death spiral for the average consumer earning less than $30,000 per year. The collective tab is nearing $1 trillion.134 Larry Summers blames the high debt-to-income ratio for the stagnant consumer.135 He may be missing the superimposed realization that they have no pension either (vide infra). “There’s a huge difference between having the money to buy something and being able to afford something.” [email protected] Non-dischargeable student loans continue to climb, now exceeding $1.3 trillion (Figure 14). Can anybody picture the millennials paying this off? A comprehensive White House report lays out the stark details.136 Student debt has grown linearly since ’09—suspiciously linearly. In fact, I don’t trust linearities like that: “A 45-degree angle in finance means one thing—fraud.” ~Harry Markopoulos, Madoff whistleblower I suspect that the federal government is using student loans as a monetary policy tool to methodically jam money into the system not unlike its bond-buying spree in which Andy Husar was instructed to buy $8 billion a day, every day, without fail. Curiously, the White House (metonymically speaking) thinks “student debt helps, not harms, the U.S. economy.” That idea reflects the IQ expected of a house. Figure 14. Just student loans or monetary policy? There are rumors of arrests of student debtors—Operation Anaconda.137 It sounds like Dickensian debtors’ prisons if true. I think it more likely that we are slowly heading toward some form of debt jubilee. It will be highly politicized and unfairly distributed. Hints of one come in the form of disability relief for almost 400,000 students who are said to be disabled but unable to prove it.138 If, however, ADHD or a damaged frontal cortex that allows one to spend $200,000 on an unmarketable education is a disability, 400,000 is an underestimate. Hillary publically promised to give free tuition to students while privately getting caught on a hot mic referring to the millennials’ hopes of free education as “delusional.”139 This point is now moot. “Even with borrowing costs at or near their lowest ever, companies are increasingly unable to pay their debts.” ~Mark Gilbert (@ScouseView), Bloomberg Corporate debt continues to give me fits as companies blow up their balance sheets to buy back shares and pay dividends. This is not self-extinguishing debt. You hear about corporate cash on balance sheets from the media. That cash is stored in metaphorical crocks, because the story is bogus. The top 1% of companies has 50% of the net cash on the balance sheets. (Kinda sounds like the wealth disparity pitch all over again, eh?) Apple, Microsoft, Google, Cisco, and Oracle account for 30% of it. The journalists squealing about “cash to be put to work” often fail to look at the net cash (cash minus debt). Total debt on the balance sheets doubled from $2.5 trillion in 2007 to over $5 trillion by early 2016 (Figure 15). That’s 7% per annum according to the 72 rule (interest rate x doubling time ? 72). Meanwhile the cash on the balance sheet rose by a paltry $600 billion. I get lost in the big numbers, but that is a $2 trillion rise in net debt. They’ve got to keep growing it, however, to buy back shares if they wish to prevent their share prices from collapsing. Figure 15. Corporate debt. Isn’t debt a zero-sum game? We owe it to ourselves? In a sense, yes. But when all this debt comes due, we will discover that our shiftless counterparty (us) doesn’t have any money. All that money you think you’ve saved is owed to the millions of people comprising “ourselves.” How much do we owe ourselves? Unfunded liabilities come to a total of $2 million per viable taxpayer ($200 trillion total). You know what you are owed, but do you know how much you owe to the rest of us? Got gold? Pensions “It’s existential. . . . You can pull different levers, but the decline in rates is an existential problem for the entire pension system.” ~Alasdair Macdonald, Willis Towers Watson, an actuarial consultancy Everybody passes pickles over the social security trust fund when, in fact, it doesn’t exist and never did. It is a mathematical certainty that we will default on our obligations, but it will occur in some way invisible to most people, probably via cost of living adjustments that fail to track inflation, means testing, and just printing money. I signed my wife up for social security early (62) on a bet that they would renege somehow. She didn’t earn much; I did. What started as a small payment turned miniscule. Here is her statement: Really? $411 per month was whittled down to $63 per month? The part I cut off was the final clause that said, “Don’t spend it all in one place, bitch.” The risk is in the substrata of the pension system in which bankruptcy and insolvency are smash-mouth realities. I didn’t mention state debt in the previous section because much of it is hiding as unfunded obligations to pensioners. Paying state and municipal employees with pension promises was such an easy way to compensate people without raising the money. Enter reality: public pensions are now $3 trillion in the hole.140 How long would it take to make up $3 trillion? Noooo problem! Simply pay off a million dollars a day for 8,200 years (assuming 0% interest.) Some examples are in order. Oregon’s public employee retirement system has a $21 billion unfunded liability (6 years of payouts), and it’s growing as returns of 2% somehow fall short of assumed returns of 7.7%.141 Those assumed 7–8% returns have never been accurate over the long term when adjusted for inflation, fees, and taxes. Connecticut, Kentucky, and Hawaii have similar problems.142 Illinois is the gold standard of insolvency. The Illinois Teachers Retirement System is only 40% funded and currently assumes annual returns of 7.5%.143 How did this happen? For starters, the employees are the best compensated in the Union, including free health care for life.144 Wrap your brain around that: they work for 20–30 years and get free health care for up to 50–60 more years? Meanwhile, state labor unions are asking for raises out of “fairness.” As you drill down, you find bloodbaths pretty much everywhere in municipalities. Chicago’s pensions in aggregate are 20–30% funded depending on whom you ask.145 Pending legislation, however, will allow the insolvent state of Illinois to bail out the insolvent city of Chicago.146 Isn’t there something you can do? Even if we get serious about savings among, say, the boomers, many are way past their fail-safe points. You can hear the barn door slam. At least those with defined benefit pensions are safe because they are protected by contractual obligations. Legal schmegal: there is no god-damned money! Pension cuts are just beginning but could accelerate. The Teamsters’ Central States Pension Fund is looking to cut 400,000 pensions by 55% or go flat broke—zero dollars—by 2026.147 Recent rulings preventing pension cuts are, in my opinion, the courts simply stating that it is illegal to avoid bankruptcy through selective nonpayments. Bankruptcy is about distributing remaining assets in a fair and equitable way to all creditors when there is not enough to go around. There is evidence of an old-school-style run on pensions: workers are retiring in serious numbers to remove their assets from faltering pension programs. I hear rumors of University of Illinois faculty moving to other institutions—five to Georgia Tech alone—to remove their pensions at full value from the Illinois system while it’s still possible. Dallas police and firefighters are leaving the job to grab their full pensions from a dwindling stash.148 It turns out there was also a bit of a Ponzi scheme going on, which caused the mayor to propose a 130% increase in property tax.149 I don’t see a reelection in your future, Mr. Mayor. As seasoned public servants, they might be able to move to Austin or Houston. There is now evidence the withdrawals in Dallas are being shut down.150 I could even imagine claw backs of the rolled-out funds. At the personal level, self-directed defined contribution plans paint a clockwork orange big time. Gundlach says the 40–50 crowd is “broke.” Well he exaggerated: the average American household has $2,500 saved, and the average couple consisting of two 45-year-olds has $5,000.151 Technically speaking, they are not broke, but they are totally screwed. Across all working-age families, more than 50% have no savings whatsoever,152 which is one way to render low returns moot. The 55- to 60-year-olds are positioned closer to the pearly gates but have median retirement nest eggs of $17,000.153 Assuming a couple eats six cans of dog food per day (2 × 3) and they have no other bills, the couple will run out of money in 11 years (which, on the bright side, will seem like eternity). The top 10% have less than $300K.154 The numbers could be skewed to the optimistic side: 20% of all eligible 401(k) participants have loans outstanding against their 401(k) accounts.155 This practice is so egregious that some companies are offering alternative payday loans to their employees, albeit with elevated interest rates, of course.156 I remember reading about company towns in West Virginia coal country paying their employees in company scrip. The practice was outlawed. Of course, I’ve just described a potpourri of anecdotes in the U.S. Maybe it’s better in other countries. Right off our coast we have the tropical paradise of Puerto Rico, which is so up to its ass in debt that creditors essentially own the island.157 “The ECB’s record low interest rates are causing ‘extraordinary problems’ for German banks and pensioners and risk undermining voters’ support for European integration.” ~Wolfgang Schäuble, German financial minister What about Europe? There’s where it gets fugly. The markets in pretty much everything that is bought and sold are at nosebleed valuations. There is little or no room left for gains through changes in valuation. Interest rates on bonds are miniscule, even negative (vide infra.) You won’t make anything on those bonds, but you could lose enormous principle when—not if—interest rates normalize after a 40-year downward march. There is some evidence that the reversal has now started. Equity markets also have a mean regression in their future despite what the proponents of the mathematically sophisticated Greater Fool Theory espouse. If the markets correct—they always do—you can adjust all those numbers I just cited by an arithmetically simple factor of 0.5. Could an industrial revolution save us? The most stupendous industrial revolution in history—the U.S. juggernaut in the twentieth century—returned an inflation-adjusted 4–5% including dividends using the Dow index as a proxy. Unfortunately, I do not believe those returns are corrected for management fees and taxes. I’m thinking 3% is optimistic. I’m thinking Illinois and the rest of the world are still toast. Inflation/Deflation “US deflation is largely a myth, like the Loch Ness monster or North Dakota.” [email protected], undefeated Twitter Snark Champion “The debasement of coinage . . . is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way. ~Copernicus The central bankers and macroeconomists all want inflation. There are media pundits who buy into this metaphysical notion that inflation is good (no offense to the metaphysicists). Dispelling the notion that this quest for inflation is just hyperbole calls for some quotes to capture pundit sentiment: “I think there is a loss of confidence in the ability of central banks in the long run to regenerate inflation.” ~Ken Rogoff, Harvard professor “Deflation . . . is bad news because it makes people less willing to borrow and spend—anticipating lower prices, consumers will put off spending—and could also lead to a fall in wages.” ~IMF economist, still waiting to buy an iPhone and flat-screen TV “All the G7 countries are suffering from a dearth of inflation.” ~Narayana Kocherlakota, former president of the Minneapolis Federal Reserve “I think they’re heading intentionally for a higher rate of inflation so that once they’ve gotten to, say, an inflation rate of 3 percent, 3.5 percent, that’s when they can jack up short-term rates.” ~Martin Feldstein, Harvard professor and former president of the National Bureau of Economic Research “Why You Should Hate Low Inflation” ~Time magazine headline “Welcome news for America’s renters could be unhelpful for the Federal Reserve. . . . Any cooling in the most pronounced driver of inflation means the Fed will have to wait even longer to reach their 2 percent price target.” ~Bloomberg “Inflation is not at our stated target, not near our stated target, and hasn’t been so in quite some time.” ~Daniel Tarullo, governor of the Federal Open Market Committee “[T]he ECB needs to signal that it is serious about pursuing its inflation mandate, including via a stepped-up pace of monthly QE purchases.” ~Robin Brooks, Goldman’s chief FX strategist “The elusive quest for higher inflation” ~Yasser Abdih, senior economist at the IMF They may believe that by generating small positive inflation levels that seem to accompany strong economic growth, they will somehow create that growth. More likely, they fear no inflation in an inherently inflationary credit-based banking system. If central bankers furiously debase their currencies with an inflationary tailwind and deflation appears nonetheless, then somebody screwed up (them). I buy this latter thesis. Of course, the measure of inflation has been debated ad nauseam in the context of stats rendered dubious by hedonic adjustments, substitutions, unvarnished fraud, and adjustments based on reading goat entrails. I discussed these frauds years ago.158 Inflation is certainly not 2% but some number much higher if one is measuring what Joe Six-pack is shelling out to exist.159 (Anticipating squeals about MIT’s Billion Price Project, I discussed it in last year’s review: I think it’s bogus.) “The grim reality is that real inflation is 7+% per year, and this reality must be hidden behind bogus official calculations of inflation, as this reality would collapse the entire status quo.” ~Charles Hugh Smith, Of Two Minds blog The fear of deflation is fear of asset deflation. With huge leverage in the system, a collapse in asset prices becomes insolvency and cardiac arrest. The problem is that the Fed’s inflation policies are the root cause of the deflationary risk. To me, the existential risk is hyperinflation, which is in full bloom in Venezuela160 and germinating in Nigeria.161 Closer to home (for Americans), rents have been soaring—13.2% per year in Boston since 2010, for example.162 Health plans are rising double digits per year, looking to jump more than 15% next year.163 College tuition is on a headline-making inflationary trajectory of 6% per annum above the rate of the admittedly dubious inflation rate. “The unproductive buildup of debt caused the Great Depression of the 1930s and the Great Recession of 2008.” ~Chetan Ahya, Morgan Stanley “If businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%.” ~Richard Koo, Nomura The Bond Caldera “The bond market’s 7.5% 40-year historical return is just that—history.” ~Bill Gross, Janus Sounds a little ominous. He also notes that “global yields are the lowest in 500 years of recorded history.” Alas, there are other bond doomsters. Paul Singer says “the bond market is broken . . . the biggest bubble in the world . . . never-before seen asymmetry between potential further reward and risk.” Former punk rocker and newly crowned Bond King Jeff Gundlach now moves the markets with his pronouncements. Jeff wails that the current market for 10-year treasuries is the worst opportunity in its long history. He calls it “mass psychosis . . . not guided by the markets.” With a little math wizardry that only a bond king could muster, Jeff says, “a 1% increase in the rates would result in up to $2.4 trillion of losses.”164 I’m not sure investors hiding in the safe haven of bonds are quite ready for those losses. They’re betting that rates will never rise 1%. As I type, that is proving to be wrong—possibly dead wrong. At some point, this party has (had) to end. In 2014, James Grant of the legendary Interest Rate Observer described three bond bulls in America during the past 150 years—“1865–1900, 1920–1946, and 1981 to the present.” The first two did indeed end, and probably unexpectedly given how long they lasted and investors’ willingness to extrapolate to infinity. The third will end too. The bond market is like the Atlantic conveyor that must keep moving currents around the Atlantic Ocean.165 When the conveyor sputters, we get an ice age. When the bond market sputters, we will get the credit market analogue of an ice age. What’s different this time—a dangerous choice of words—is that the highly financialized markets are not only huge but also highly correlated. The correlation reaches way beyond the conventional debt markets into the shadow debt markets and the $1 quadrillion derivatives market—a quadrillion dollars of the most screwed-up, leveraged investments based on blind faith and confidence the world has ever witnessed. No problemo, say the optimists. We will “net” those puppies. Netting is when you round up investments on each side of the bet and simply cancel them out (like from either side of an equal sign.)166 Ya gotta wonder which genius is going to net $1 quadrillion dollars of derivatives in the midst of a raging inferno. It didn’t work in ’09, and it won’t work the next time, especially in a market so large Avogadro might wince. “They have to normalize interest rates over a period of two, three, four years, or the domestic and global economy won’t function.” ~Bill Gross How crazy has the bond market become? The French sold 50-year bonds.167 Ireland sold its first so-called century bond less than three years after it exited an international bailout program.168 Spanish 10-year interest rates are below those of the U.S., prompting James Grant to suggest “a return to the glory of Rome.” The Eurowankers (European bankers) are monetizing debt by buying corporate bonds to jam money into (1) a system that doesn’t need any more, and (2) the pockets of cronies who always demand more. Shockingly, the cronies front-ran the purchase program by buying existing corporate debt169 and creating new types of corporate debt, all for a tidy profit . . . for now. Taking a cue from the U.S. postal service, Japan is offering “forever bonds”: you get interest—a low 1% interest at that—but you never get paid back your principle.170 The idea that inflation will never rear its ugly head seems presumptuous, even preposterous. It would be safer loaning money to your adult children, who will never pay you back either. You know to the penny your return on that investment. “Bonds are still offering positive yields.” ~CNBC headline Alas, as is often the case, CNBC isn’t even right on what would be a truism in any other era. I could go on talking about ridiculously low yields, but now we get “the rest of the story.” ZIRP and NIRP “It seemed like a good idea at the time: Cut interest rates below zero to revive growth.” ~Bloomberg On April 1, 2006, an article appeared endorsing zero-coupon perpetual bonds.171 You give somebody your money, and they pay you no interest and you don’t get your money back. Irate readers forced this hooligan to “politely point out to them the date of publication” (April 1st). Did you know the word gullible is not in the dictionary? Unbeknownst to the author, the article wasn’t satire; it was foreshadowing. There is no endeavor in which men and women of enormous intellectual power have shown total disregard for higher-order reasoning than monetary policy. We are talking “early onset” something. I am not an economist, but my pinhead meter is pegging the needle. Let’s hop right over ZIRP (zero interest rate policy) because it is so 2014 and head right into NIRP (negative interest rate policy). NIRP is where you pay people to lend them money. (Check the date: it’s December, not April.) You heard that right: you give them money, and they give you back less. “The arrogant, suspender-snapping, twenty-something financial geniuses are yapping in my face. . . . I still can’t fathom ‘negative’ interest rates. It seems the ultimate insanity to say a short sale of a sovereign bond becomes a ‘risk-free’ trade.” ~Mr. Skin, anonymous guru who writes for Bill Fleckenstein Capitalism progressed for 5,000 years without interest rates ever stumbling on the negative sign (which, by the way, was invented by the Arabs more than a millennium ago). You can no longer simply say that bonds are at multi-century highs; it is mathematically impossible to bid rates on normal bonds into negative territory. It takes a special kind of monetary fascism to create negative rates. Japan is at the vanguard. Eight days after Hiruhiko Kuroda, head of the Bank of Japan (BoJ), announced he was not considering negative interest rates, he jammed rates negative.172 That was like a knuckleball from the famous pitcher Hiroki Kuroda. Nearly 80% of Japanese and German government bonds are now offering negative yields (whatever “yield” now means).173 Fifty-year Swiss debt has gone negative.174 Early this year, negative yielding global sovereign debt surpassed $10 trillion “for the first time.”175 Really? For the first time? Sovereign debt first dipped below zero only two years ago. An estimated $16 trillion (30%) of sovereign debt is now under the auspices of NIRP (Figure 17).176 Over a half-trillion dollars of corporate debt is also at negative rates.177 Reaching for yield in corporate debt markets always seemed risky, but that’s nuts. By now it could be $1 trillion. I’ve lost track. NIRP has infected the consumer debt market: Denmark and Belgium are offering negative interest rate mortgages.178 (I just soiled my thong.) By the way, you folks with big credit card debt will likely have to wait for relief; your rates are pegged above 20%. Maybe you’ll get some helicopter money. Figure 17. Negative yielding debt with a subliminal flare. These Masters of the Universe, economists and bankers extraordinaire, and their enthusiastic supporters of modern-day monetary theory certainly didn’t leap into the NIRP abyss casually. Let’s listen to the justification in their own voices. While reading, rank their comments as (1) pragmatic resignation, (2) dubious, or (3) delusional rants of the clinically insane: “If current conditions in the advanced economies remain entrenched a decade from now, helicopter drops, debt monetization, and taxation of cash may turn out to be the new QE, CE, FG, ZIRP, and NIRP. Desperate times call for desperate measures.” ~Nouriel Roubini, professor at New York University “Well, let’s face it. They can do whatever they want now.” ~Ken Rogoff, dismissing the risk of government taxation by NIRP “The degree of negative rates introduced by ECB is bigger than Japan. Technically there definitely is room for a further cut.” ~Haruhiko Kuroda, head of the Bank of Japan “It appears to us there is a lot of room for central banks to probe how low rates can go. While there are substantial constraints on policymakers, we believe it would be a mistake to underestimate their capacity to act and innovate.” ~Malcolm Barr, David Mackie, and Bruce Kasman, economists at JPM “Negative Rates Are Better at QE Than Actual QE” ~Wall Street Journal headline “Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time and the idea is the lower the interest rate the better it is for investors.” ~Stanley Fischer, vice chairman of the Federal Reserve, based on two years of data on NIRP “The prospect of being charged, say, 6% a year just to hold cash could unsettle people. For such a policy to work as intended, officials would have to do a lot of explaining ahead of time . . . ensuring that the public understands the central bank’s goals and supports its methods of achieving them.” ~Narayana Kocherlakota, former president of the Minneapolis Federal Reserve, bankersplaining Jedi mind tricks So these paternalistic libertarians are doing it for the children. What’s the problem? Let’s start with savings. There is no income left in fixed income. All those unresilient consumers are getting zip on what money they have. The low rates are designed to get them to spend their paltry savings. Peachy. A USA Today headline read, “How to break Americans of shortsighted saving habits.” Let’s start by giving them a return on their savings, for Pete’s sake. Giving them negative returns, however, in a twisted way is forcing them to save like their parents. Maybe I’ve misunderstood the headline. Maybe it’s excoriating the public for their growing addiction to saving, causing the wholly ludicrous and intellectually impoverished Paradox of Thrift.179 This naturally leads back to the inflation/deflation debate. The inflation that the Fed desires comes, at least in part, from inherently inflationary fractional reserve banking in which interest rates demand net dollars to increase. Negative rates, by contrast, are inherently deflationary. Every year the banking system has less. This doesn’t seem that hard to grasp. “Negative interest rates are ridiculous, particularly in a fight against deflation. They ARE deflation. . . . You are necessitating savings.” ~Jeff Gundlach, DoubleLine Low and negative rates are destroying pension management, insurance, and even banking industries. When your business model is to take in money, make decent returns, pay out a little less, and skim off the difference, then negative, zero, or even low interest rates are deadly. The model fails. This doesn’t seem hard to grasp either. “All pension plans everywhere in the world are being destroyed. Trust funds, insurance companies, endowments—they are all being destroyed.” ~Jim Rogers on NIRP and central bank policies Finally, low interest rates actually hurt the economy by keeping the weak alive, preventing the much needed creative destruction. Unviable companies on the life support of loose credit cannibalize serious businesses measurably, sometimes even fatally. You must cull the herd of the sick and weak. “Insurers have long-term liabilities and base their death benefits, and even health benefits, on earning a certain rate of interest on their premium dollars. When that rate is zero or close to it, their model is destroyed.” ~Bill Gross The big credibility problem is that I’m just a chemist “identifying” as a pundit going toe-to-toe with some serious paid-to-play central bankers and their groupies. To rectify that, let’s listen to some critics of NIRP with gravitas in their own words: “Maybe Italian banks are telling us that central bankers and their negative interest rate policies are actually destroying the Japanese and European banking system. . . . Even if they put [short-term rates] back to zero, imagine the carnage, at least in the short-term bond markets.” ~Peter Boockvar, chief strategist of the Lindsey Group “The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters, and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.” ~Lord Jacob Rothschild, overpaid blogger “Negative interest rates are the dumbest idea ever. It’s horrible. Look at how badly it’s been working.” ~Jeff Gundlach, DoubleLine “Under a negative rate scenario, the only participant receiving more cash over time is the government. The private sector slowly collapses as we are seeing in Japan and Europe in real time.” ~Michael Green, Ice Farm Capital “If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC? . . . The Bank of England is doing things today that it has never done in its history, which is 300 plus years. . . . In finance, mostly nothing is ever new. . . . However, with respect to interest rates and monetary policy, we are truly breaking new ground.” ~The James Grant Anthology “What is currently happening in various bond markets as a result of this and other interventions is simply jaw-dropping insanity. . . . What makes the situation so troubling is the fact that investors seem to be oblivious to the enormous risks they are taking. They are sitting on a powder keg.” ~Pater Tenebrarum, independent market analyst “I think what they’ve done, particularly the unconventional stuff—and there has been so much of it—has led many people into looking upon all of this as experimental policies smacking of panic.” ~William White, senior advisor at the Organisation for Economic Co-operation and Development “Negative and low interest rates around the world are crushing savers, and those policies are going to become the biggest crisis globally. We have become too dependent on central bankers.” ~Larry Fink, chairman and CEO of BlackRock “Negative interest rates in Japan is blowing my mind.” ~Jose Canseco, designated pundit What’s the end game? My best guess is that the system blows up and a lot of bankers find themselves seriously upside down . . . like Mussolini. The silent bank run is already happening. In a free market, NIRP is precluded by cash and hard assets. NIRP in Japan caused a run on safes for hoarding cash.180 A headline announced, “German Savers Lose Faith in Banks, Stash Cash at Home.”181 I was told by a high-level source that one of the world’s largest insurers was renting vaults to store physical currencies. Commerzbank was considering hoarding billions to avoid European Central Bank (ECB) charges.182 Mark Gilbert of Bloomberg notes that storing $100 million as stacks of bills would basically take a vault the size of a large closet.183 See the theme? The financial intermediaries are storing hard cash. Alas, our central banker overlords won’t stand for it. War on Cash “There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes.” ~Mario Draghi You ever notice the War on Anything never works? Whether it be drugs, terror, poverty, Christmas, hunger, you name it, it becomes an interminable, profoundly costly adventure. Now we have the War on Cash. OK, millennials, listen up. You might like paying for everything with your Swiss Army phones. There are rumors you can even swipe G-strings on pole dancers with your phones, which means you’ve totally lost the plotline. If we go to cashless, you won’t have the scratch needed to buy a cell phone before long. These globalists wish to remove your right to an important civil liberty—to hold and spend wealth outside the view of the government and beyond the control of the banks. “A global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against ‘big money’ and for the interests of ordinary citizens.” ~Larry Summers, Harvard professor and former secretary of the treasury The global elite want to eliminate cash so that they can inflict monetary policy without restraint. As Rogoff says, cash gums up the system. When the former secretary of the treasury, Larry Summers, starts supporting the elimination of cash because it will “combat criminal activity . . . for the interests of ordinary citizens” you should sit up and pay attention. He says we “are essentially on a fairly dangerous battlefield with very little ammunition.” He is not talking about the War on Crime but rather efforts to fight the market forces attempting to curb the global banking cartel. Ex-Fedhead Kocherlakota tried to get coy using reverse psychology on free marketeers by arguing that “governments issuing cash . . . is hardly a free market.” As the story goes, the libertarians should support a cashless society by letting currencies compete in the marketplace.184 Very clever, Yankee dog! Of course, he forgot to mention that the government would then shut competitors down like they did to Bernard von NotHaus, who got his assets seized and went to prison for offering such competition. Satoshi Nakamoto, Bitcoin founder, is on the lam.185 Your arguments are specious, NK. “In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy. Unfortunately, the existence of cash gums up the works.” ~Ken Rogoff Ken Rogoff carried the standard in the War on Cash this year by hawking his new book, The Curse of Cash. He tirelessly tried to make the case for a cashless, bank-rich society, arguing that “paper currency facilitates racketeering, extortion, drug and human trafficking, the corruption of public officials not to mention terrorism.” He argues that “cash is not used in ordinary retail transactions.” Really? What do stores put in the cash registers, coupons (which are going digital)? To say he supports the termination of cash is not quite fair: he endorses using only low denominations such as $10 bills, which buy you a pack of cigarettes (maybe). Don’t spend it all in one place. On noticing that hundreds of commenters in a Wall Street Journal editorial186 showered him with suggestions on how to render him testicle free, I suggested in a brief e-mail that people are clearly stating that the idiosyncrasies of cash are a small price to pay for personal freedom. He, in turn, suggested I read his book. Not likely. There was pushback, however. Jim Grant used his sharp wit to get Ken halfway to eunuch status.187 When the globalists left Davos,188 the War on Cash seemed to accelerate almost overnight: Deutsche Bank CEO John Cryan predicted that cash won’t exist in 10 years. Norway’s biggest bank, DNB, called for an end to cash. Bloomberg published an article titled “Bring On the Cashless Future.” A Financial Times op-ed titled “The Benefits of Scrapping Cash” advocated the elimination of physical money. Harvardian and ex-Harvard president Peter Sands wrote a paper titled “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes” in which he waxed on about fighting wars—wars on crime, drugs, and terror. Mario Draghi, head of the ECB, phased out the €500 note—30% of the physical euro notes in circulation: “We want to make changes. But rest assured that we are determined not to make seigniorage a comfort for criminals.” The New York Times called for the termination of high-denomination notes. Again, all of this was within a month of the shrimpfest at Davos. You and your banking buddies are the criminals and seem quite uncomfortable with cash. If you really care about crime, shut down HSBC: With physical cash curtailed, JPM estimates the ECB could ultimately bring interest rates as low as negative 4.5%.189 (Two decimal point precision: nice.) Phasing out the $100 bill would eliminate 78% of all U.S. currency in circulation.189 Hasbro announced that the game Monopoly will replace cash with special bank cards (special drawing rights?) in which players buy and sell with handheld devices. More recently, Prime Minister Narendra Modi of India withdrew all high-denomination bills essentially overnight.190 The results were predictable for a society in which cash really is king: the system shut down. Nearly instantaneously, India’s trucking industry—millions of trucks—were parked on the roadside: out of cash means out of gas.191 As I type, the chaos continues. There are, thankfully, influential supporters of cash. Bundesbank board member Carl-Ludwig Thiele warned that the attempt to abolish and criminalize cash is out of line with freedom.192 Bundesbank president Jens Weidmann said it would be “disastrous” if people started to believe cash would be abolished: “We don’t want someone to be able to track digitally what we buy, eat and drink, what books we read and what movies we watch.”193 Austrian economist Frank Shostak, by no means influential because Austrians are considered to be insane, reminds us that “abolishing cash to permit the central banks to lower interest rates into deeper negative territory will lead to the destruction of the market economy and promote massive economic impoverishment.”194 Maximum mirth came when Jason Cummins, chief U.S. economist and head of research at hedge fund Brevan Howard, stood up at a meeting littered with devout globalists and denounced the War on Cash and quest for inflation as stemming from the “Frankenstein lab of monetary policy.”195 Jason went on a rant: “You are not going to have independent central bankers in the next 10 years if you keep on this path. The economy has rolled over and died in an environment when financial conditions have never been easier. . . . People aren’t consuming, businesses aren’t investing, they aren’t buying houses even with a 3.5% mortgage rate. . . . The maestro culture created by Greenspan has been one of the worst features of central banking. . . . My biggest worry is that the public will conclude that . . . capitalism is just socialism for the rich.” Oops. Too late, dude. Arguments about the insecurity of cash seem specious when you look at how the digital world has fared lately. The thriving sovereign state of Bangladesh was raided for a cool $100 million by a series of unauthorized withdrawals using the global SWIFT check-clearing system.196 One could imagine that third-world safeguards against such a heist might be lax, but the hackers removed the booty from the New York Federal Reserve. A Fed spokesperson offered the official response: “Sorry. Our bad.” Apparently, the Fed has been hacked more than 50 times since 2015. Gottfried Leibbrandt, the CEO of SWIFT, has expressed grave concern about the threat hackers pose to the banking system.197 Ya think? On a more micro scale, six of my colleagues got their paychecks phished. They were tricked into signing into their financial home page. With the passwords in hand, the Nigerian princes rerouted their direct-deposited paychecks. Food stamp computers went down for over a week in June.198 An Ecuadorean bank got clipped for $12 million, blaming Wells Fargo for not plugging a leak.199 It’s probably in the Clinton Foundation. The risks of cash in society seem to pale in comparison with the risks of digits in the banking system. The termination of cash is all some dystopian futuristic abstraction that won’t come to pass, right? No. Brits are complaining that they are being stopped from withdrawing amounts ranging from £5,000 to £10,000: “When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”200 The phrase, “give me my goddamned money before I jump the counter and beat the crap out of you” comes to mind. Better yet, say it’s for Zika medication and start coughing. The €500 note did indeed get abolished.201 Angela Merkel put caps on bank withdrawals. 202 I heard from a friend that Wells Fargo was obstinate about a large money transfer. (We return to Wells Fargo’s disasters in the banking section.) Some restaurants are refusing cash.203 What does “all debts public and private” mean? Nightmare scenarios in a cashless society include: (1) negative interest rates of any magnitude; (2) civil asset forfeiture (but I repeat myself); (3) bank bail-ins; (4) getting booted from or locked out of the system—by mistake or otherwise; (5) sovereigns getting booted from the SWIFT check-clearing system (just ask Pootin); (6) outlawing gold (again); and (6) hackers! We could see a black market based on S&H Green Stamps. Banks and Bankers “The unpalatable truth is that the banking model is broken. The days of generating gobs of cash from “socially useless” financial engineering . . . are over.” ~Mark Gilbert, Bloomberg “It’s the big banks that continue to prefer being highly leveraged. And too many policymakers are deferring to them. Like it or not, that means we are in line for another stomach-turning round on the global economy’s wild ride.” ~Simon Johnson, MIT professor and former IMF chief economist The banking system was not fixed in ‘09. The putrid wound was stitched up without disinfectant by a cabal of bankers and regulators, all agreeing that the system had to retain its current form. The assets of the 10 largest banks—greater than $20 trillion—grew 13% per year in the last 10 years. This is not my idea of mitigating systemic risk. Now we are near the top of an aging business cycle where bad loans start unwinding and bad ideas begin to die. Gangrene is beginning to show. Collateralized debt is picking up because the uncollateralized refuse starts piling up like during a NYC garbage strike.204 Collateralized loan obligations—the dreaded CLOs—are starting to liquidate.205 Banks are rebuilding teams for debt restructurings.206 As noted above, the Dallas Fed is attempting to extend and pretend energy loans.207 Does this kind of crackpottery ever work? Citigroup failed—as in big fat F-like failed—its stress tests.208 Those were the Kaplan practice tests. Many banks will fail when the real stress test arrives. Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, thinks we will unwind banks in an orderly process.209 Of course he does, and of course I don’t. “I don’t trust Deutsche Bank. I don’t trust what they’re saying.” ~David Stockman, former Reagan economic advisor and former Blackstone group partner Although huge problems could be triggered by a default almost anywhere in the system—an internal hedge fund or even an unusual presidential election—the disaster will be global. The first raging inferno is most likely to burn in Europe and will undoubtedly include Deutsche Bank (DB). DB was the most putrid of the ’09 wounds; it never really healed. In 2014, it was forced to raise additional capital by selling stock at a 30% discount. But why?210 This year DB sold $1.5 billion in debt at junk rates (admittedly a paltry 4.25% in this era).211 German Finance Minist
On Tuesday, the SEC announced that Morgan Stanley will be fined $7.5 million to settle civil charges that it violated customer protection rules, when it used trades involving customer cash to lower its borrowing costs. The SEC said MS will settle the case without admitting or denying the charges, effectively letting slide a violation which, in an exaggerated format, was exposed as a quasi-criminal offense engaged in by Jon Corzine's now defunct MF Global. Ok so, Morgan Stanley engaged in some creative "commingling" - what's the big deal, most banks do it. What makes this particular case curious is the basis of the commingling: it involves some of the more interesting, and abstract, concepts of modern finance, including Morgan Stanley's "Delta One" trading desk, as well as the rehypothecation of collateral, all of which participated in a complicated violation of customer protection. While we present more details below, here is a quick primer on the Customer Protection Rule: "it is intended to safeguard customers’ cash and securities so that they can be promptly returned should the broker-dealer fail. The SEC order finds that from March 2013 to May 2015, Morgan Stanley’s U.S. broker-dealer used transactions with an affiliate to reduce the amount it was required to deposit in its customer reserve account." According to the SEC order, Morgan Stanley's transactions violated the Customer Protection Rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements. In the SEC’s order, the regulator says that Morgan Stanley had its affiliate, Morgan Stanley Equity Financing Ltd., serve as a customer of its U.S. broker-dealer, a relationship that allowed the affiliate to use margin loans from the U.S. broker-dealer to finance the costs of hedging swap trades with customers. The margin loans lowered the borrowing costs incurred to hedge these swap trades and reduced the U.S. broker-dealer’s customer reserve account deposit requirements by tens to hundreds of millions of dollars per day. The SEC found that Morgan Stanley’s affiliated transactions violated the Customer Protection Rule and that as a result of inaccurately calculating its customer reserve account requirements, it submitted inaccurate reports to the SEC. Morgan Stanley provided substantial cooperation during the SEC’s investigation and has agreed to review its compliance with the Customer Protection Rule and to take remedial steps to improve its calculation processes. Morgan Stanley also significantly increased the amount of excess funds it maintains in its customer reserve account. Without admitting or denying the findings, Morgan Stanley agreed to pay a $7.5 million civil penalty, to cease and desist from committing or causing any similar violations in the future, and to be censured. So how did MS' Delta One desk and rehypothecated customer collateral get involved? Here is the answer, in all its excruciating detail: The Issue: Financing Firm Hedges of Customer Swaps Within MS, there are several subsidiary broker-dealers. Among them are MS&Co, which is a U.S. broker-dealer subsidiary of MS, and MSIP, which is a U.K. broker-dealer subsidiary. Across these broker-dealers, MS offers its customers a prime brokerage platform, including access to Delta One Structured Products (“DSP”) desks that offer customers synthetic exposure to specific securities through derivatives. For example, to meet customer demand for synthetic exposure to equity securities—i.e., exposure to price changes in an equity security without owning that equity security itself—a DSP desk will enter into an equity swap with a customer. A customer entering into an equity swap with a DSP desk can take a long or short position vis-à-vis the underlying equity. If the customer goes long, then it is exposed to the same performance as if it owned the equity. Conversely, if the customer short sells the underlying equity through an equity swap, it obtains short exposure to that equity. When entering into an equity swap with a customer, the DSP desk seeks to remain as neutral as possible in terms of its own market exposure. To hedge its exposure to the equity swap customer, the DSP desk generally would purchase the underlying equity for an equity swap where the customer had long exposure and would short sell the underlying equity where the customer had short exposure (“DSP Hedge”). MS imposed a cost on trading desks for using firm capital to purchase their positions, including DSP Hedges. MS makes capital available to its trading desks but charges an interest rate on this capital, known as a proxy rate, that typically is higher than the interest that external third parties charge for collateralized loans. To avoid being assessed this more expensive internal financing rate, MS can finance its positions externally through a securities lending agreement. For example, MS&Co often rehypothecates customer margin securities in order to generate financing for customer margin loans. In connection with the Prime Broker’s international synthetics business in particular, a portion of the DSP Hedges were less liquid, emerging markets equities (“EM DSP Hedges”), and as a result, they were more difficult to finance externally. Although a broker-dealer may rehypothecate liquid securities and use the funds obtained to finance less liquid positions, the equity swaps traded in connection with the international synthetics business were largely booked in MSIP which held only a limited amount of liquid securities. Because the EM DSP Hedges exceeded MSIP’s liquid securities available for rehypothecation, the DSP desks were required to pay MS’s proxy rate to finance the EM DSP Hedges. MS&Co held a substantial amount of liquid customer margin securities that were eligible for rehypothecation under Rule 15c3-3. Recognizing that MS&Co had a surplus of liquid customer margin securities and MSIP had a deficit for rehypothecation purposes, Prime Broker personnel began to explore whether DSP desks could access external financing that MS&Co could generate through rehypothecation in order to more cheaply finance the EM DSP Hedges. Within certain limits, the Customer Protection Rule allows a broker-dealer to finance one customer’s margin activity with another customer’s assets, but does not allow one broker-dealer’s customer activity to finance another broker-dealer’s activities. As described below, the Prime Broker conceived of an affiliate that would transact with MS&Co, on one hand, and the DSP desks, on the other hand, for the purpose of providing financing for the EM DSP Hedges that was below the proxy rate. The Proposed Solution: Affiliated Entity MSEFL In early 2012, senior personnel from the Prime Broker developed a transaction structure centered on the use of an affiliate of MS&Co to hold the EM DSP Hedges, which it would purchase with funds obtained from margin loans extended by MS&Co. Following some initial meetings with relevant stakeholders regarding the broad contours of this idea, a New Product Approval (“NPA”) process was initiated in April 2012. The affiliate—which eventually became MSEFL—would be a prime brokerage customer of MS&Co. Through this relationship, MSEFL would receive margin loans from MS&Co. MS&Co would fund these margin loans through the rehypothecation of its other customers’ liquid margin securities. The EM DSP Hedges would trade in an MS account for global DSP desks, but would settle in MSEFL’s prime brokerage account. Therefore, the funds from the margin loans from MS&Co would be used to purchase or to borrow the EM DSP Hedges. In addition, the DSP desks would transfer the economics of the relevant, underlying equity swaps to MSEFL via a total return swap. The mechanics of the proposed transaction structure were as follows. The Prime Broker estimated that, by avoiding MS’s proxy rate, MSEFL could achieve cost savings of up to $34 million per year. The Prime Broker’s use of MSEFL was ultimately more limited, and the Prime Broker thus did not realize this amount of savings. From April to August 2012, the NPA was reviewed by stakeholders, including the Legal and Compliance Division and the Financial Control Group, which is responsible for ensuring MS&Co maintains sufficient funds to safeguard customer cash under Rule 15c3-3. The Problem with the Proposed Solution: The Customer Protection Rule Rule 15c3-3 imposes restrictions and responsibilities on a broker-dealer that are designed to safeguard its customers’ cash and securities so that these assets can be promptly returned if the broker-dealer fails. As to customer cash, Rule 15c3-3 requires a broker-dealer to maintain a reserve of funds and/or certain qualified securities in its Reserve Account that is at least equal in value to the net cash owed to customers. 17 CFR 240.15c3-3(e). The amount required to be maintained in the Reserve Account is based upon a computation typically performed on a weekly basis, which is calculated pursuant to a formula contained in Exhibit A to Rule 15c3-3 (“Reserve Formula”).6 See id. 240.15c3-3a. Subject to some adjustments, Rule 15c3-3 requires that a broker-dealer hold an amount equal to at least the excess of “credits” over “debits” in its Reserve Account. Id. 240.15c3-3(e). The term “credits” refers to the amount of cash the broker-dealer owes its customers or cash derived from the use of customer securities, while “debits” refers to amounts the customers owe the broker-dealer, for example due to margin loans extended to customers. See id. 240.15c3-3a. The proposed transaction structure involving MSEFL was problematic for two reasons. First, the stated intent and objective of Rule 15c3-3 is to “eliminat[e] . . . the use by broker-dealers of customer funds and securities to finance firm overhead and such firm activities as trading and underwriting through the separation of customer related activities from other broker-dealer operations.” Exch. Act Rel. No. 9775, 1972 WL 125434, at *1 (Sept. 14, 1972).7 The EM DSP Hedges were used to hedge the Prime Broker’s risk arising out of equity swaps with the Prime Broker’s customers, which was transferred to MSEFL, an affiliate of MS&Co. As a result, the financing of the EM DSP Hedges was inconsistent with Rule 15c3-3. Second, as described below, the transaction structure allowed for the impermissible reduction of the Reserve Account through the debits of an affiliate. The margin loans from MS&Co to MSEFL established a potential debit that MS&Co intended to use to reduce its Reserve Account by the same amount as the margin loans. In mid-August 2012, however, Prime Broker personnel identified a problem with the inclusion of this debit in the Reserve Formula. Because broker-dealers could potentially seek to reduce their Reserve Account requirement through affiliates, Rule 15c3-3 also limits a broker-dealer’s ability to include debits generated by the activity of affiliates. Note E(4) of the Reserve Formula (“Note E(4)”) provides that the debits of affiliates should be excluded “unless the broker or dealer can demonstrate that such debit balances are directly related to credit items in the formula.” In other words, debits attributable to an affiliate’s positions can be included in a broker-dealer’s Reserve Formula only to the extent that there are directly related credits attributable to those positions. This limitation imposed by Note E(4) is designed to ensure that debits related to affiliate activity, on a net basis, will not reduce a broker-dealer’s Reserve Account requirement. The debit resulting from the margin loans to MSEFL had no directly related credit and thus would have improperly reduced MS&Co’s Reserve Account. Initially, MS&Co believed that the credits resulting from the rehypothecation of MS&Co’s other customers’ liquid margin securities could be considered directly related. But, as the Financial Control Group advised, “the credit must arise from the rehypothecating of the affiliates [sic] own collateral to be deemed directly related.” As such, the Prime Broker concluded that it could not achieve the desired cost savings because of the absence of a directly related credit and considered further options to determine whether it could operationalize MSEFL. The Proposed Fix: Transferring Short Sale Proceeds to MSEFL In an effort to keep the debit that would be generated by MS&Co’s margin loan to MSEFL in the Reserve Formula, the Prime Broker explored whether they could identify directly related credits to add to the transaction structure. In or about early September 2012, the Prime Broker considered whether the problem might be resolved by having the DSP desk transfer separate short sale positions—the proceeds of which are credits in the Reserve Formula—to MSEFL. As mentioned above, the DSP desks could trade equity swaps that offered customers either long or short synthetic exposure to underlying equities. When a DSP desk offered short exposure through an equity swap, the DSP desk would establish the DSP Hedge by shorting the underlying equity and, in doing so, receive short sale proceeds. To implement this updated transaction structure, MSEFL would sell short to the DSP desk the underlying equities that the DSP desk had shorted to establish the DSP Hedge. The DSP desk would use the proceeds from its own short sales to pay MSEFL for these equities. MS&Co would then borrow the underlying equities and deliver them to the DSP desk to cover MSEFL’s short sales, and MS&Co would credit MSEFL with short sale proceeds. The DSP desk, in turn, could then close out its short sales. The revised transaction structure included the following additional elements: The Problem with the Proposed Fix: The Customer Protection Rule Prior to its approval and implementation, MS&Co did not realize that this updated transaction structure achieved a result contrary to Rule 15c3-3 generally and the purpose of Note E(4). MS&Co intended for MSEFL’s short sale proceeds to serve as the directly related credit for purposes of the debit resulting from the margin loans to MSEFL. Therefore, MS&Co believed that it could now offset that debit in its Reserve Formula. When MS&Co borrowed the underlying equities to execute the short sale, however, that borrow was included as a debit in its Reserve Formula. Therefore, MS&Co was claiming that a credit (the short sale proceeds) was directly related to MSEFL’s debit (the margin loan from MS&Co) even though that same credit already generated a separate, offsetting debit (the stock borrow). MS&Co was improperly using the same credit to offset two different debits— specifically, relying on a credit that already offset another debit in order to serve as the directly related credit for purposes of the separate affiliate debit. Further, MS&Co did not comply with Note E(4), which is designed to ensure that net affiliate activity does not decrease a broker-dealer’s Reserve Account requirement. FINRA’s Interpretations of Financial and Operational Rules includes guidance reflecting advice from Commission staff that specifically speaks to this point: “A short sale credit balance . . . may not be used for netting purposes with a debit balance with the same customer in arriving at the excludable debit balance portion from the reserve formula pursuant to Note E(4) . . . .” FINRA Interpretations of Financial and Operational Rules, Rule 15c3-3(Exhibit A – Note E(6))/011 (NYSE Interpretation Memo No. 04-3 (June 2004)) (describing advice from SEC Staff). Although they consulted with an external subject matter expert, MS&Co personnel did not appreciate that the updated transaction structure ran contrary to Note E(4). The Financial Control Group ultimately concluded during the NPA process that “including shorts was ‘benign’ and wouldn’t require additional explanation or ‘proving.’” Consequently, on September 17, 2012, the Prime Broker “mov[ed] forward with expanding the structure to include shorts equal to the debit.” MS&Co Used MSEFL to Finance Firm Hedges for Over Two Years The NPA received final approval on March 6, 2013, and MSEFL financed EM DSP Hedges until May 2015, when Commission staff contacted MS&Co regarding its use of MSEFL. MS&Co had controls in place intended to ensure that affiliate debits would be excluded from the Reserve Formula. Because MS&Co’s practice was first to net all account debits against credits and then to exclude any affiliate net debit balance, however, MS&Co’s controls did not exclude the affiliate debits offset by credits arising from short sale proceeds in MSEFL’s account. Consequently, MS&Co reduced the amount that it calculated it was required to deposit in its Reserve Account through its use of MSEFL by over $305 million on average and as much as approximately $752 million on a single day. Because MS&Co’s improper use of credits to offset affiliate debits was not limited to MSEFL, MS&Co further reduced the amount it calculated it was required to deposit in the Reserve Account by nearly $78 million on average and as much as about $417 million on a single day. MS&Co Incorrectly Calculated and Reported Reserve Formula MS&Co is required to submit monthly reports, known as Financial and Operational Combined Uniform Single (“FOCUS”) Reports, and annual audited financial statements. These FOCUS Reports and annual audited financial statements include, among other things, a broker-dealer’s Reserve Formula calculation. By improperly including debits from affiliates, MS&Co’s Reserve Formula calculations were inaccurate until it corrected this error in May 2015. Consequently, information in MS&Co’s FOCUS Reports and annual audited financial statements on its Reserve Formula calculations was inaccurate. * * * What makes this particular instance of commingling especially notable, aside from the in depth look from a regulatory standpoint inside the real "plumbing" of Delta One desks, is that virtually every other broker dealer has engaged in a similar if not identical operation, hoping that under the guise of extensively rehypothecated collateral, both clients and regulators would be oblivious to what is happening. Surprisingly, on this one occasions the SEC wised up. We wonder if it will follow suit with other similar transgressions, which however are far less troubling than the fundamental concept of using and resuing collateral with virtually no supervision, something a very critical Jeff Snider touched upon last night. For those interest, the full SEC order and explanation is below.
MFS Global Equity A (MWEFX) a Zacks Rank #3 (Hold) was incepted in December 1986 and is managed by Massachusetts Financial Services Company.
Submitted by Wayne Madsen via Strategic-Culture.org, Whether the information originated from hacked e-mails and computer files or Freedom of Information Act requests, the revelations about the political and business activities of Hillary and Bill Clinton and their cronies hearken back to another era, the Great Depression of the 1930s and the crime spree of another unscrupulous couple: bank robbery desperados Bonnie and Clyde. Aside from Hillary Clinton running her own lucrative «off-the-books» foreign policy via her private email servers and e-mail chain of associates and flunkies, it was her and her husband’s joint Clinton Foundation and Teneo Capital operations that scream out the word «corruption.» The servers were merely a mechanism by which the Clintons ran their own «pay-to-play» racketeering operation, something that would have been the envy of a contemporary of Bonnie and Clyde, Chicago crime boss Al Capone. Teneo, which runs a hedge fund operation and a «private intelligence» service jam-packed with former Central Intelligence Agency operatives, is where Mrs. Clinton’s «gal pal» and aide Huma Abedin worked simultaneously to her government employment with the State Department. The Federal Bureau of Investigation’s probe of 650,000 emails found on the laptop computer of disgraced former New York Democratic Representative Anthony Weiner, the estranged husband of Abedin, is but the proverbial tip of the iceberg. While FBI agents pore through Abedin’s emails that were discovered on the laptop and looking Mrs. Clinton’s emails that were either not destroyed by her aides or which were never accounted for, the real story is the FBI’s investigation of the Clinton Foundation and Teneo. Five FBI field offices are investigating the racketeering of the foundation and the foreign connections of Teneo. The offices include New York; Los Angeles; Washington, D.C.; Little Rock, Arkansas; and Miami. Little Rock is the home of the Clinton Foundation, while New York is the home base of Teneo. The addition of the Miami field office to the Clinton probe is significant. One of Teneo Intelligence’s many global offices is located in Bogota, Colombia. A secretive Colombian private equity fund, «Fondo Acceso», financed by Mexican mega-billionaire Carlos Slim and Canadian mining magnate Frank Giustra, is run out of the Clinton Foundation’s Bogota office. Tracking the money being fed into the Clinton Foundation may include proceeds from the illegal narcotics traffic in Colombia and other nearby countries. The Bogota activities of the Clinton Foundation, «Fondo Acceso», which ironically means «Access Fund», and Teneo appear to be concentrated in the Chico Business Park in the Colombian capital. Therefore, the involvement of the Miami office, in investigating Clinton Foundation funding, including the major donations from Slim and Giustra, makes a world of sense. Teneo was co-founded by longtime Bill Clinton associate Doug Band, who served in Clinton’s White House Counsel’s Office and later as Clinton’s chief aide in the Clinton Foundation and its associated Clinton Global Initiative. Band’s brother is Bill Clinton’s medical doctor who accompanies the ex-president on foreign trips. Doug Band was the point person who lobbied the incoming Barack Obama administration in 2008 to appoint Hillary Clinton as Secretary of State. Mrs. Clinton’s tenure at State ensured that there was little separation between her department, the Clinton Foundation and Global Initiative, and Teneo. Abedin served as Mrs. Clinton’s «transition team» leader as the Secretary of State left the department to launch her presidential candidacy after the November 2012 election. From that time on, Mrs. Clinton, Abedin, Doug Band, Clinton’s campaign chief John Podesta, and others engaged in an email flurry to 1) ensure that the files in the private servers were either scrubbed or sanitized; 2) to officially sever all links between them and the Clinton Foundation and Teneo; and 3) to paint a picture for the public that all was well and legal with Mrs. Clinton’s term as America’s chief foreign policy executive. Unfortunately, the entire Clinton team has been exposed with the publication of emails from Mrs. Clinton’s swearing in as Secretary of State in 2009 to after she launched her campaign for the White House in 2013. The picture painted by the emails is one of modern-day gangsters milking everything they possibly could out of supposed public service. The FBI’s New York field office is also likely looking at Teneo’s dealings with other Clinton allies. It was Teneo that advised former New Jersey Democratic Governor Jon Corzine's MF Global investment firm as it was collapsing amid charges of major fraud by Corzine, a Clinton loyalist. It is also known as Mrs. Clinton communicated with President Obama over her private server and that Obama used a pseudonym. Obama lied to the American people when he stated that he first learned of the existence of Mrs. Clinton’s server from news media reports. There is little wonder why Obama has refused to condemn FBI director James Comey for re-launching his probe of the Clinton emails, based on the discovery of the additional traffic on Weiner’s laptop. Presidents who dug themselves deep into scandals by lying about «what they knew and when they knew it» helped sink the administration of Richard Nixon and almost cost Ronald Reagan and Bill Clinton their presidencies. Obama was wise not to interfere in the FBI’s many criminal cases now building up like a tidal wave against Mrs. Clinton. The many Clinton scandals also involve the illegal shipment of U.S.- and foreign-manufactured weapons to jihadist rebels in Libya and Syria against U.S. law. When Clinton and Abedin oversaw the jihadist rebellions in both countries, the U.S. was subject to imposing a United Nations arms embargo directed against both civil war theaters. The sudden decision on October 5, 2016, by the Justice Department to drop all charges against the State Department-licensed Turi Defense Group of Arizona and its owner, Marc Turi, for violating U.S. law by shipping unregistered weapons to Libyan rebels, some of which were transferred to Syrian rebels by the CIA station in Benghazi, indicates that Attorney General Loretta Lynch wanted the Turi case to disappear before the November 8th election. The federal trial of Turi and his company was due to begin on November 8th. The indictment of Turi was brought in the U.S. Court for the District of Arizona in Phoenix. Phoenix's Sky Harbor International Airport was the scene of an impromptu and highly-questionable tarmac meeting between Bill Clinton and Attorney General Lynch on June 27, 2016. Turi claims that approval for the secret weapons shipments to Libya and onward to Syria were personally approved by Mrs. Clinton and had a green light from the CIA. Any new email or other evidence that Mrs. Clinton authorized illegal weapons shipments to jihadist terrorists would have required the FBI to broaden its investigation of both Hillary and Bill Clinton, as well as Lynch. Mrs. Clinton may have violated federal law by permitting the shipment of weapons to belligerent parties in Libya and Syria; Mr. Clinton may have obstructed justice in talking to the Attorney General; and Lynch may have violated her oath of office in misusing her position as the nation’s chief law enforcement officer in furtherance of a criminal conspiracy to obstruct justice. The Clinton scandal, in many ways, resembles the Iran-Contra episode more than it does Watergate. In Watergate, the cover-up by Nixon and his cronies, in many respects, was worse than the original crimes. In Iran-Contra, the arms and drugs smuggling crimes were equal to the cover-up, including the criminal role of then-Vice President George H. W. Bush in the entire affair. With the Clintons’ «E-mailgate», shipping U.S. weapons to terrorists and accepting foreign campaign donations from dodgy regimes in Saudi Arabia, Morocco, and Qatar are every bit as bad as the obvious ensuing cover-up by Hillary Clinton and her and her husband's cronies. If these many cases are what the FBI and its offices in Washington, New York, Little Rock, Los Angeles, Miami, and possibly Phoenix, are now looking at, the FBI director had every right and a constitutional responsibility to inform Congress and the voting public. And FBI director Comey has every right not to tip off to the Clinton gang what he and the bureau may have on them, evidence demanded now by Mrs. Clinton and her supporters. This evidence may become material to the impeachment of Mrs. Clinton from the office of president of the United States should she be elected on November 8th.
The latest WikiLeaks dump from this morning includes a very detailed list of 2012/2013 donors to the Clinton Global Initiative. Like the donors to the Clinton Foundation (which we reviewed here), the list is a who's who of wall street banks, giant energy corporations, chemical conglomerates and multi-national pharmas...you know, all the "shady" corporations that you've been told were in bed with the Republicans. Of course, we're sure that Pfizer will be interested to learn of the following email from Neera Tanden in which she and John Podesta plot over how to attack the "drug companies" in order to rally enthusiasm among Hillary's base....such a noble cause. According to Neera, Hillary "hates (or at least used to hate) the drug companies." Of course, we sympathize with Neera, it is difficult to keep up with Hillary's constantly changing views on public policy (aka: her donor list). Of course, as we learned previously, Dow Chemical was also "spreading their wealth around" to all of the Clinton organizations. For those not as familiar with the history between Dow Chemical and the Clintons, here is a refresher from our previous post: The donations from Dow Chemical are particularly notable for several reasons. First, because of other emails revealed by WikiLeaks and other FOIA requests, we now know that Dow Chemical CEO, Andrew Liveris, was granted special access to then Secretary Clinton back in July 2009 at the same time he was embroiled in ongoing litigation with another Clinton Foundation donor, Kuwait, over a failed joint-venture that would have netted Dow $9BN in cash. As Band notes in his memo, 1 month after being granted special access to Secretary Clinton, Liveris invited President Clinton and Band out for a day of golf. Moreover, shortly after his meeting with Secretary Clinton and golf outing with President Clinton, Liveris decided to donate $500,000 to the Clinton Global Initiative...very convenient timing for all involved. In August of 2009, Mr. Kelly invited Mr. Liveris to play golf with President Clinton and me. Mr. Kelly subsequently asked Dow to become a CGI sponsor at the $500,000 level, which they did, as well as making a $150,000 donation to the Foundation for President Clinton to attend a Dow dinner in Davos. The story gets even more bizarre when Band reveals in the following footnote that Liveris provided the Dow Chemical plane to fly President Clinton and his staff from New York to California and then California to North Korea for their golf outing. We would assume this is a simple typo by Band and/or he's just geographically challenged...if not, this certainly raises a whole other set of questions for Bill. Mr. Liveris provided the Dow plane to fly President Clinton and his staff to and from California for our trip to, and from, North Korea. As a private trip, the Foundation had to pay the costs of airfare; Mr. Liveris’ in kind contribution saved the Foundation in excess of $100,000. According to the Dialy Caller, Dow Chemical paid Teneo $2.8 million in 2011 and $16 million in 2012 for a variety of "consultancy services". Of course, Bill Clinton was an honorary chairman of Teneo and, as such, was set to be paid $3.5 million for that position even though he ultimately only kept $100,000 because of the scandals that erupted around the firm, including their advisory relationship with MF Global. And a little extra money for CGI University as well. And that's how "public servants" get wealthy off their $150,000 salaries.
Leaked Memo Exposes Shady Dealings Between Clinton Foundation Donors And Bill's "For-Profit" Activities
We have written frequently in recent weeks about a feud that erupted between Chelsea Clinton and Doug Band back in 2011 after Chelsea raised concerns about potential conflicts of interest between Band's firm, Teneo, the Clinton Foundation and the State Department (see here, here, here and here). The feud ultimately resulted in Band being forced to draft a memo spelling out, in vivid detail, the many entangled relationships between himself, Teneo, the Clinton Foundation and the State Department. Fortunately, today's Wikileaks dump included that memo which reveals, for the first time, the precise financial flows between the Clinton Foundation, Band’s firm Teneo Consulting, and the Clinton family’s private business endeavors. The memo starts with a brief background on Teneo, which was created in June 2011, shortly after Declan Kelly resigned from his position as "United States Economic Envoy to Northern Ireland," a position to which he was appointed by Secretary Clinton. In June 2009, DK Consulting was founded by Declan Kelley. Mr. Kelly served as COO of FTI Consulting until June 2009, when he stepped down and established DK Consulting. At that time, he also became the United States Economic Envoy to Northern Ireland. Pursuant to the terms of his exit agreement with FTI and consistent with the ethics agreement of his uncompensated special government employee appointment at the State Department, Mr. Kelly retained and continued to provide services to three paying clients (Coke, Dow, and UBS) and one pro bono client (Allstate). In late 2009, Declan retained me as a consultant to DK Consulting to help support the needs of these clients. In May 2011, Mr. Kelly resigned his Envoy position at the State Department. In June 2011, Mr. Kelly and I founded Teneo Strategies; simultaneously, Mr. Kelly closed DK Consulting and shifted its clients to Teneo. Throughout the past almost 11 years since President Clinton left office, I have sought to leverage my activities, including my partner role at Teneo, to support and to raise funds for the Foundation. This memorandum strives to set forth how I have endeavored to support the Clinton Foundation and President Clinton personally. In a subsequent section of the memo entitled "Leveraging Teneo For The Foundation," Band spells all of the donations he solicited from Teneo "clients" for the Clinton Foundation. In all, there are roughly $14mm of donations listed with the largest contributors being Coca-Cola, Barclays, The Rockefeller Foundation and Laureate International Universities. The donations from Dow Chemical are particularly notable for several reasons. First, because of other emails revealed by WikiLeaks and other FOIA requests, we now know that Dow Chemical CEO, Andrew Liveris, was granted special access to then Secretary Clinton back in July 2009 at the same time he was embroiled in ongoing litigation with another Clinton Foundation donor, Kuwait, over a failed joint-venture that would have netted Dow $9BN in cash. As Band notes in his memo, 1 month after being granted special access to Secretary Clinton, Liveris invited President Clinton and Band out for a day of golf. Moreover, shortly after his meeting with Secretary Clinton and golf outing with President Clinton, Liveris decided to donate $500,000 to the Clinton Global Initiative...very convenient timing for all involved. In August of 2009, Mr. Kelly invited Mr. Liveris to play golf with President Clinton and me. Mr. Kelly subsequently asked Dow to become a CGI sponsor at the $500,000 level, which they did, as well as making a $150,000 donation to the Foundation for President Clinton to attend a Dow dinner in Davos. The story gets even more bizarre when Band reveals in the following footnote that Liveris provided the Dow Chemical plane to fly President Clinton and his staff from New York to California and then California to North Korea for their golf outing. We would assume this is a simple typo by Band and/or he's just geographically challenged...if not, this certainly raises a whole other set of questions for Bill. Mr. Liveris provided the Dow plane to fly President Clinton and his staff to and from California for our trip to, and from, North Korea. As a private trip, the Foundation had to pay the costs of airfare; Mr. Liveris’ in kind contribution saved the Foundation in excess of $100,000. According to the Dialy Caller, Dow Chemical paid Teneo $2.8 million in 2011 and $16 million in 2012 for a variety of "consultancy services". Of course, Bill Clinton was an honorary chairman of Teneo and, as such, was set to be paid $3.5 million for that position even though he ultimately only kept $100,000 because of the scandals that erupted around the firm, including their advisory relationship with MF Global. Finally, Band also offers the following commentary on the "$50 million in for-profit activity" he was able to secure for Bill Clinton (as of November 2011) as well as the "$66 million in future contracts, should he choose to continue with those engagements." Independent of our fundraising and decision-making activities on behalf of the Foundation, we have dedicated ourselves to helping the President secure and engage in for-profit activities – including speeches, books, and advisory service engagements. In that context, we have in effect served as agents, lawyers, managers and implementers to secure speaking, business and advisory service deals. In support of the President’s for-profit activity, we also have solicited and obtained, as appropriate, in-kind services for the President and his family – for personal travel, hospitality, vacation and the like. Neither Justin nor I are separately compensated for these activities (e.g., we do not receive a fee for, or percentage of, the more than $50 million in for-profit activity we have personally helped to secure for President Clinton to date or the $66 million in future contracts, should he choose to continue with those engagements). With respect to business deals for his advisory services, Justin and I found, developed and brought to President Clinton multiple arrangements for him to accept or reject. Of his current 4 arrangements, we secured all of them; and, we have helped manage and maintain all of his for-profit business relationships. Since 2001, President Clinton’s business arrangements have yielded more than $30 million for him personally, with $66 million to be paid out over the next nine years should he choose to continue with the current engagements. A big part of those "for-profit" activities was a $3.5mm annual payment from Laureate... ...and millions in speaking fees arranged by Band. Confused? Here is a simpler recap from the NYT's Nick Confessore: This Doug Band memo, in the latest Podesta dump, is the Rosetta stone of the Teneo-Clinton Foundation complex. https://t.co/a1g3nSoGPM — Nick Halloween (@nickconfessore) October 26, 2016 Band's argument: I am not get fully compensated for all of the stuff I do for Clintonworld, so you should let me do Teneo. Everyone wins. — Nick Halloween (@nickconfessore) October 26, 2016 Now, you could argue: So what? If Band gets his clients to pop over money to a charity, why is that bad? — Nick Halloween (@nickconfessore) October 26, 2016 But consider that Band was selling his clients on idea that giving to foundation was, in essence, a way to bolster their influence. — Nick Halloween (@nickconfessore) October 26, 2016 Clinton & Band built a platform for executives to bolster their companies' images, bathe in BC's praise, and do some good, while... — Nick Halloween (@nickconfessore) October 26, 2016 ...Teneo extracted earnings for Band and, depending on what you see in these e-mails, Clinton himself. Teneo paid Clinton until late '11. — Nick Halloween (@nickconfessore) October 26, 2016 I guess you can wave it all off as a nothingburger. But Chelsea Clinton and some of Clinton's other aides were clearly freaking out. — Nick Halloween (@nickconfessore) October 26, 2016 Generally, the emails show Clinton's *own closest aides* troubled or horrified by things that her surrogates have spent years waving off. — Nick Halloween (@nickconfessore) October 26, 2016 With that, we look forward to Donna Brazile's explanation of how this is all just an attempt to "criminalize behavior that is normal." The full memo can be viewed here:
Each new WikiLeaks dump of Podesta emails includes at least one gem from Clinton aide Doug Band who seemingly came under internal attack at the Clinton Foundation for his "conflicts of interest." The constant attacks, initiated by Chelsea Clinton, clearly put him on the defensive which caused him to lash out on numerous occasions, over email, like a cornered pitbull. Fortunately, today's WikiLeaks release was no exception and includes the following email in which Band laments about having to sign a "conflict of interest" agreement while Bill Clinton, despite his many conflicts, did not. Oddly, wjc does not have to sign such a document even though he is personally paid by 3 cgi sponsors, gets many expensive gifts from them, some that are at home etc I could add 500 different examples of things like this and while I removed lasry bc they are all on the offense, I get the sense that they are trying to put some sort of wrong doing on me after the audit as a crutch to change things and if I don't mention things like lasry where they all have issues, I may regret it Of course, this is the just the latest email in a series of gems authored by Doug Band which started when Chelsea raised concerns over potential conflicts of interest related to Band's firm, Teneo, which she thought had sought favors from the State Department on behalf of clients, including MF Global. Below is a recap of some of the past exchanges. * * * With each new WikiLeaks dump, the rabbit hole in the feud between Chelsea Clinton and Doug Band seems to grow a little deeper. The most recent disclosures included a November 11, 2011 email from Chelsea to John Podesta, Cheryl Mills and the Clinton Foundation lawyers at Simpson Thacher in which Chelsea clearly lists out her issues with Clinton aides Doug Band, Justin Cooper and someone referred to only as "Hannah," which is presumably Hannah Deletto, Director of Membership at the Clinton Foundation. Among other things, the email alleges that Justin Cooper installed spyware on Bill Clinton's computer in order to monitor his email traffic, that both Justin Cooper and Hannah Deletto stole "significant sums of money" from the Clintons and that Doug Band / Teneo "hustled business at CGI." Chelsea's list of complaints from her email: - today that Doug reached out to someone at Harry Walker (who represents my father on all speaking arrangements), to ask for a full list of all his speeches, how much he was paid for each speech, and told the contact person at Harry Walker that all speeches should now go through him, not Terry Krinivic (the scheduler) - that Ilya physically saw/caught Justin a couple of days ago reading his bberry and loading the same spyware onto his computer that he loaded onto Bari's computer - a secret service agent told Marc (my husband) that Justin had asked another secret service agent to lie about the parking pass absurdity [we can talk about this really ridiculous anecdote offline] - multiple people shared with me how upset they were at hearing how Justin referred to my father in the last week - in very derogatory ways widely sadly - Oscar told my father he knows Justin reads his emails - my father was told today of explicit examples at CGI of Doug/ Teneo pushing for - and receiving - free memberships - and of multiple examples of Teneo 'hustling' business at CGI - and of people now having quit at CGI - that Doug told Jon Davidson he was never going to forgive him for not reporting that Dad met with John (ie you John) on Sunday and that how could Jon forget who he really worked for - Doug told Terry Krinivic she would never work again in this town if she didn't back him up on everything - Ilya believes Hannah and Justin have taken significant sums of money from my parents personally - some in expenses - cars, etc. - and others directly * * * As we pointed out yesterday, long-time Clinton aide Doug Band had a bad habit of being brutally honest over email...particularly when it came to his feelings regarding "spoiled brat" Chelsea Clinton. The following example comes from January 2012 when Band forwards a complimentary email from Chelsea (aka "Diane Reynolds") essentially calling her a two-faced backstabber. She sends me one of these types of emails every few days/week As they say, the apple doesn't fall far A kiss on the cheek while she is sticking a knife in the back, and front While it's unclear exactly which parent Band is referencing with his "the apple doesn't fall far" reference, we have our suspicions. Of course, this wasn't the first time Band intimated his true feelings about Chelsea to Podesta. Just a couple of months earlier, in November 2011, Band sent the following email after Chelsea expressed her views that Band's firm, Teneo, created potential conflicts of interest in going to State Department officials to seek assistance for clients, including MF Global. "She is acting like a spoiled brat kid who has nothing else to do but create issues to justify what she's doing because she, as she has said, hasn't found her way and has a lack of focus in her life. I realize she will be off of this soon but if it doesn't come soon enough...." After that, the situation escalated to the point that Band sent the following email two days later saying that Chelsea had pushed Clinton Foundation COO, Laura Graham, to the brink of suicide. Within the email Band describes an encounter in which he received a "late night" call from Graham who was: "...on staten island in her car parked a few feet from the waters edge with her foot on the gas pedal and the car in park. She called me to tell me the stress of all of this office crap with wjc and cvc as well as that of her family had driven her to the edge and she couldn't take it anymore." Seems the real life Clinton drama is every bit as entertaining as their hit HBO series "House of Cards."
For several days now we have been posting about the tensions between Doug Band and Chelsea Clinton (see here, here and here). The whole dispute between the two seemingly started when Chelsea raised concerns over potential conflicts of interest related to Band's firm, Teneo, which she thought had sought favors from the State Department on behalf of clients, including MF Global. But, in the latest batch of WikiLeaks emails, Band escalates the situation to a whole new level by rattling off a litany of other Clinton Foundation conflicts including with Bill Clinton who he says is "far more conflicted every single day in what he does" than Teneo. Justin Cooper then decides to pile on by also highlighting Bill's many conflicts. Per the email below, Cooper expresses frustration that nothing in the proposed conflicts resolution memo addresses "how wjc's activities interface with each other or how this structure resolves his own conflicts." Meanwhile, in another email sent just a few days later, Band points out that he negotiated a speaking deal with UBS in which Bill Clinton was paid $150,000 for 6 speeches to be given between 2011 and 2012. The more interesting part though is that Band says he "could care less if he does them or not"...of course not, because the speeches aren't really the point now are they? The next exchange between Robby Mook, John Podesta and Huma Abedin shows just how much disconnect there is between campaign trail rhetoric and real life. The emails below, highlight just how far Hillary is willing to go to cater to her large wall street donors while pretending to be fighting for "main street." The exchange starts when Clinton campaign manager, Robby Mook, highlights that Bill's March 15, 2015 speech to Morgan Stanley may be delayed...a delay that Mook would prefer because it corresponds with Hillary's first day of campaigning in Iowa which Mook argues is just "begging for a bad rollout." But apparently Hillary was more in favor of collecting the speaking fees, as Huma shoots back that "HRC very strongly did not want him to cancel that particular speech." The chain continues on as "HRC reiterates her original position" that Bill should move forward with the Morgan Stanley speech despite the potential political consequences in Iowa. We guess that clears up any doubts on where her true loyalties lie. Finally, if there was any doubt left in your mind that the Clinton's are fighting for the little guy, then it will be promptly eliminated after reading this next email exchange in which two Clinton staffers ponder why Bill refuses to have dinner with small donors. As Teddy Geoff points out: "i don't understand why the optics of hobnobbing with the rich and powerful are somehow better than the optics of sitting down with a few $5 donors. it seems like the latter is what we ought to be emphasizing, not running away from." But, as pointed out below, the Clinton Foundation has "always been careful about protecting his brand." We guess they're concerned about speaking fees dropping to $45,000 per hour vs. $50,000 per hour if Bill happens to be seen in public with a minimum wage worker?
Clinton Foundation's "Backstabbing, Spoiled Brat" Chelsea Lists Her Grievances Against Doug Band And Justin Cooper
With each new WikiLeaks dump, the rabbit hole in the feud between Chelsea Clinton and Doug Band seems to grow a little deeper. The most recent disclosures included a November 11, 2011 email from Chelsea to John Podesta, Cheryl Mills and the Clinton Foundation lawyers at Simpson Thacher in which Chelsea clearly lists out her issues with Clinton aides Doug Band, Justin Cooper and someone referred to only as "Hannah," which is presumably Hannah Deletto, Director of Membership at the Clinton Foundation. Among other things, the email alleges that Justin Cooper installed spyware on Bill Clinton's computer in order to monitor his email traffic, that both Justin Cooper and Hannah Deletto stole "significant sums of money" from the Clintons and that Doug Band / Teneo "hustled business at CGI." Chelsea's list of complaints from her email: - today that Doug reached out to someone at Harry Walker (who represents my father on all speaking arrangements), to ask for a full list of all his speeches, how much he was paid for each speech, and told the contact person at Harry Walker that all speeches should now go through him, not Terry Krinivic (the scheduler) - that Ilya physically saw/caught Justin a couple of days ago reading his bberry and loading the same spyware onto his computer that he loaded onto Bari's computer - a secret service agent told Marc (my husband) that Justin had asked another secret service agent to lie about the parking pass absurdity [we can talk about this really ridiculous anecdote offline] - multiple people shared with me how upset they were at hearing how Justin referred to my father in the last week - in very derogatory ways widely sadly - Oscar told my father he knows Justin reads his emails - my father was told today of explicit examples at CGI of Doug/ Teneo pushing for - and receiving - free memberships - and of multiple examples of Teneo 'hustling' business at CGI - and of people now having quit at CGI - that Doug told Jon Davidson he was never going to forgive him for not reporting that Dad met with John (ie you John) on Sunday and that how could Jon forget who he really worked for - Doug told Terry Krinivic she would never work again in this town if she didn't back him up on everything - Ilya believes Hannah and Justin have taken significant sums of money from my parents personally - some in expenses - cars, etc. - and others directly * * * As we pointed out yesterday, long-time Clinton aide Doug Band had a bad habit of being brutally honest over email...particularly when it came to his feelings regarding "spoiled brat" Chelsea Clinton. The following example comes from January 2012 when Band forwards a complimentary email from Chelsea (aka "Diane Reynolds") essentially calling her a two-faced backstabber. She sends me one of these types of emails every few days/week As they say, the apple doesn't fall far A kiss on the cheek while she is sticking a knife in the back, and front While it's unclear exactly which parent Band is referencing with his "the apple doesn't fall far" reference, we have our suspicions. Of course, this wasn't the first time Band intimated his true feelings about Chelsea to Podesta. Just a couple of months earlier, in November 2011, Band sent the following email after Chelsea expressed her views that Band's firm, Teneo, created potential conflicts of interest in going to State Department officials to seek assistance for clients, including MF Global. "She is acting like a spoiled brat kid who has nothing else to do but create issues to justify what she's doing because she, as she has said, hasn't found her way and has a lack of focus in her life. I realize she will be off of this soon but if it doesn't come soon enough...." After that, the situation escalated to the point that Band sent the following email two days later saying that Chelsea had pushed Clinton Foundation COO, Laura Graham, to the brink of suicide. Within the email Band describes an encounter in which he received a "late night" call from Graham who was: "...on staten island in her car parked a few feet from the waters edge with her foot on the gas pedal and the car in park. She called me to tell me the stress of all of this office crap with wjc and cvc as well as that of her family had driven her to the edge and she couldn't take it anymore." Seems the real life Clinton drama is every bit as entertaining as their hit HBO series "House of Cards."
As we pointed out last week, long-time Clinton aide Doug Band had a bad habit of being brutally honest over email...particularly when it came to his feelings regarding "spoiled brat" Chelsea Clinton. The following example comes from January 2012 when Band forwards a complimentary email from Chelsea (aka "Diane Reynolds") essentially calling her a two-faced backstabber. She sends me one of these types of emails every few days/week As they say, the apple doesn't fall far A kiss on the cheek while she is sticking a knife in the back, and front While it's unclear exactly which parent Band is referencing with his "the apple doesn't fall far" reference, we have our suspicions. Of course, this wasn't the first time Band intimated his true feelings about Chelsea to Podesta. Just a couple of months earlier, in November 2011, Band sent the following email after Chelsea expressed her views that Band's firm, Teneo, created potential conflicts of interest in going to State Department officials to seek assistance for clients, including MF Global. "She is acting like a spoiled brat kid who has nothing else to do but create issues to justify what she's doing because she, as she has said, hasn't found her way and has a lack of focus in her life. I realize she will be off of this soon but if it doesn't come soon enough...." After that, the situation escalated to the point that Band sent the following email two days later saying that Chelsea had pushed Clinton Foundation COO, Laura Graham, to the brink of suicide. Within the email Band describes an encounter in which he received a "late night" call from Graham who was: "...on staten island in her car parked a few feet from the waters edge with her foot on the gas pedal and the car in park. She called me to tell me the stress of all of this office crap with wjc and cvc as well as that of her family had driven her to the edge and she couldn't take it anymore." If he hasn't already, now might be a really good time for Doug Band to disappear into a remote village deep in the Amazon for a while.
Hacked emails reveal bitter infighting about how to deal with a Clinton-linked consulting firm's business.
Newly released "Podesta Emails" published by WikiLeaks reveal that Chelsea Clinton was extremely worried about potential conflicts of interest between the Clinton Foundation, State Department and Teneo, a consulting firm that was founded by former aides to Bill and Hillary Clinton. Per The Washington Examiner, Teneo, founded by Doug Band and Declan Kelly, drew a lot of scrutiny for its decision to employ Huma Abedin during the final months of Hillary Clinton's State Department tenure. Chelsea apparently thought the firm created potential conflicts of interest when Abedin and Band went to State Department officials to seek assistance for Teneo's clients, including MF Global. The situation escalated to the point that Doug Band sent the following email to John Podesta in November 2011 as he was "worried that if this story gets out, we are screwed." Among other things, Band had the following to say about Chelsea: "She is acting like a spoiled brat kid who has nothing else to do but create issues to justify what she's doing because she, as she has said, hasn't found her way and has a lack of focus in her life. I realize she will be off of this soon but if it doesn't come soon enough...." Less than a month later, Chelsea wrote to Podesta raising concerns over Teneo leveraging their relationship with Bill Clinton to pull strings on behalf of their client, Dow Chemical, run by CEO Andrew Liveris. Interestingly, this is the same Andrew Liveris that Bill Clinton pushed Hillary to meet with back in 2009 just as Dow was engaged in a legal battle with Kuwait over a failed joint venture (see "Did Foundation Donor Dow Chemical Seek Hillary "Favor" To Settle $9 Billion Lawsuit With Kuwait?" and "New Hillary Emails Expose Bill Pushing Meetings With Foundation Donors, Requests For 'Diplomatic Passports'"). After that, the situation escalated to the point that Band sent the following email two days later saying that Chelsea had pushed Clinton Foundation COO, Laura Graham, to the brink of suicide. Within the email Band describes an encounter in which he received a "late night" call from Graham who was: "...on staten island in her car parked a few feet from the waters edge with her foot on the gas pedal and the car in park. She called me to tell me the stress of all of this office crap with wjc and cvc as well as that of her family had driven her to the edge and she couldn't take it anymore." Luckily Graham was able to avoid Vince Foster's fate...though just narrowly it seems.