Another “Convenient” Terror Attack

On October 16, press reports informed us that Canada was about to “update” its national security legislation to, you guessed it, better fight terrorism. Specifically, this new legislation is ostensibly designed to not only better counter actual terrorism, but “potential” terrorism:







“Canada’s Minister of Public Safety joined justice ministers from across the country in Banff on Thursday to unveil new measures to give CSIS agents more authority and better tools to track potential terrorist threats to Canada’s national security. Steven Blaney held a press conference from the Banff Centre and outlined the decision to join Canada’s global allies to fight the terrorist acts of ISIL.

“We are taking a clear stand against those who are committing atrocities against innocent civilians. We are also discussing how this action works in tandem with our efforts here in Canada under the Counterterrorism Strategy to address terrorist threats and to prevent Canadians from traveling to the Middle East, joining ISIL and other terrorist groups.” said Blaney.

Blaney says the government will take steps to thwart the radicalization of Canadians by terrorist groups.

“We are firmly committed to take strong action to address the threat of individuals who become radicalized to violence and the growing problem of extremist travellers. Canada like all nations has a responsibility to guard against its citizens travelling to areas of turmoil and participating in terrorist acts,” he said. Blaney says the CSIS Act, which was created in 1984, is now outdated and needs to be adapted to allow agents to better operate and investigate threats to our national security from abroad.


Blaney says the government will also take action to help agents protect the identity of sources, which is critical in the fight against home-grown terrorism.


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ECB’s Comprehensive Bank Assessment Finalized

A considerable level of apprehension was noticeable in the financial press in recent days, as the ECB just finished its “stress tests” and its comprehensive assessment of 130 systemically important banks in the euro are. This time, the stress tests are a bit more interesting than previous exercises of this sort were.

Contrary to the white-wash attempts that characterized the laughable stress tests performed during the euro area’s sovereign debt crisis by the EBA (European Banking Authority), the ECB is forced to walk a slightly finer line. The reason is that it will become the regulator of these 130 large banks and will therefore be held responsible if anything goes wrong. On the other hand, the ECB is also eager to avoid a panicky market reaction to the results, and will therefore presumably try not to be too harsh in its assessments. In fact, looking at press reports, it certainly appears as though the criteria have been watered down quite a bit. Some observers argue that the ECB is far too beholden to political and market expectations to make its assessment credible (see also further below).

To this it should be noted that no fractionally reserved bank can be regarded as truly solvent, for the simple reason that such banks cannot actually fulfill their payment obligations to holders of overnight deposits. It works only as long as only a small percentage of depositors attempt to withdraw the money that they have been promised to receive “on demand”. Under normal conditions, this doesn’t pose a big problem, as banks continually receive new deposits and most deposit money tends to stay inside the system. Up to a point, a bank threatened by a run on its deposits can also rely on the lender of last resort (i.e., the central bank) to supply it with liquidity by discounting its securities.

Since money is nowadays a mere token signifying nothing, there is also no limit on its production. The ECB seems quite confident with regard to this aspect of the banking system, as its minimum reserve requirement for demand deposits stands at a mere 1%. In theory, the European banking system could multiply every deposit a hundred-fold by creating additional fiduciary media on the back its existing deposit base. In practice, this is highly unlikely to happen, but it shows that it is nowadays not seen as necessary anymore to even pretend that deposits are sufficiently “backed” with standard money (in the fiat money system, standard money = currency and bank reserves with the central bank).

The banks themselves have already received the results of the ECB’s assessment yesterday, but they will only be made public on Sunday – apparently the intention is to avoid roiling the markets. European bank stocks have recently tested an important short term technical support level and rebounded from there over the past few days:


1-Euro-Stoxx Banks, STEuro-stoxx Bank Index, daily – click to enlarge.


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QE3 Is Coming to an End

The Federal Reserve’s latest asset purchase program, QE3, is coming to an end.  What was once an $85 billion a month program, one in which at its peak had been goosing the financial markets and economy at an annual rate of $1.0 trillion – and over its 27 month life will have pumped $1.7 trillion of money into the economy – is going to zero. Given the outsized impact QE has had on the growth of U.S. money supply and thus the U.S. economy, we say investors take note, especially those furthest out on the risk curve, because what was once your primary tailwind could soon become your greatest headwind.

Here’s why…


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Inflation vs. Deflation

On October 1, the quarterly meeting of the Incrementum Fund’s advisory board took place. A new member has joined the board, well-known economist and outstanding Austrian scholar Dr. Frank Shostak, who has taken part in the quarterly conference for the first time (the transcript of the minutes can be downloaded below).

Incrementum’s proprietary inflation/deflation indicator has been extremely volatile so far in 2014, moving from negative to positive territory and vice versa several times. Consequently, developments on the monetary front and their likely effect on financial markets were once again a major topic of conversation.

The Federal Reserve is still in “QE tapering” mode, and the growth momentum of the US money supply has slowed considerably from its peak. A fact that is less often mentioned in the financial media is that money supply growth in China has slowed down even more. These developments indicate that the probability of a major financial accident is increasing by the day.


Incrementum inflation - deflation indicatorIncrementum’s proprietary ifnlation-deflation signal vs. the HUI gold mining index – click to enlarge.

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Overturned Beer Truck

There is nothing quite so satisfying as coming upon an overturned beer truck on a hot day.

In the same spirit, today we gawk at the wreck of the gold miners. They are 70% cheaper than they were three years ago. And they are 25% cheaper than they were just two months ago. What a delight!

On Wednesday, the Dow fell 153 points. Gold lost $9 and came to rest at $1,242 an ounce.

The yellow metal seems to have bottomed at about $1,200 an ounce. This is an important number. As Gold Stock Analyst’s John Doody told subscribers ofBonner & Partners Investor Network recently:


Below $1,200 there’s going to be mines that close because they can’t pay the ongoing cost to produce the gold.


Now, gold rises on hopes of more QE and sinks when it looks like QE might end on schedule – just like the stock market.


Fed assets

Consolidated assets of the Federal Reserve System – the growth rate is slowing down due to “tapering” of QE3, click to enlarge.


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Will They Ever Learn?

Europe’s economies are once again on the verge of a downturn, which in the euro area may as well mean “another crisis”. The establishment has lost the confidence of the voting public some time ago. The leader of France’s statist brain trust, Francois Hollande, enjoys the lowest approval rating of a French president ever, at 13%. If an election were held tomorrow, Marine Le Pen of the Front National would probably win it.

In that sense, Jean-Claude “we lie when occasion demands it” Juncker, the new EU commission president is not entirely wrong when he states that:


“Citizens are losing faith,” he said in remarks to an assembly to which many new Euroskeptic members were elected in May. “Extremists on the left and right are nipping at our heels. “We are last-chance Europe. Let’s seize this chance.”


So what does the grandiose plan to rescue Europe consist of? Simple: let’s throw money at the problem:


“Designated European Commission President Jean-Claude Juncker called on Tuesday for a 300 billion euro ($409 billion) public-private investment programme to revive the European economy, create jobs for the young and stimulate growth over the next three years.

The money should be mobilised from existing budget resources, the European Investment Bank and the private sector, without changing the bloc’s strict rules on budget deficits and debt reduction, he told the European Parliament during a debate on his confirmation to head the EU’s executive.

“We need a reindustrialization of Europe,” the former Luxembourg prime minister said, promising a work program in February 2015 for investments in energy, transport and broadband networks and industry clusters.”


(emphasis added)



(Cartoon via


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Nothing to Lose …

Europe’s all-too-predictable relapse into recession is gathering force, threatening not only the pipe dream of economic and political unity, but eroding grandiose illusions that have helped prop up the world’s financial house of cards. The unwillingness of France in particular to play by the EU’s — i.e.,  Germany’s — rules appears to have doomed the EU dream.

The idea of a border-less Europe bound by a common currency and a shared desire to forever banish war from the Continent was a lofty one, but it was mired from the start in deeply rooted political animosities, grass-roots skepticism and bureaucratic overreach. Now these problems, along with a great many others, have turned the EU project into a Tower of Babel. A million pages of meticulously codified EU rules might as well have been written in cuneiform, so inscrutable and arcane have they become.

And useless as well. France’s prolonged economic death rattle has been made possible by running annual deficits larger by half than the 3% “allowed” by Brussels. And now, channeling  de Gaulle for what could turn out to be France’s last hurrah, the French have flouted Merckel’s authority, and common sense itself, by proposing to remedy the problem by hiring more government workers and expanding tax breaks.

Portugal, Greece, Spain and the other deadbeat rabble have been cheering them on, and why not? They think they have nothing to lose — that Germany is the only country with any skin in the game. Their folly is about to be laid bare, however, unless Germany gives in and allows Europe’s Central Bank to monetize the collective debts of Europe Fed-style.


france-government-debt-to-gdpFrance’s public debt to GDP ratio. Flaunting Maastricht since forever and a day – click to enlarge..


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Turning Japanese


You’ve got me turning up and turning down

and turning in and turning ’round

I’m turning Japanese

I think I’m turning Japanese


– The Vapors


Are we all turning Japanese? For longtime Diary sufferers it’s a familiar question…

We’ve been asking for almost 15 years – ever since we saw the US following in those Japanese footsteps, running from a big boom… to a big bust.

It all started for us when we were driving out to the country one evening many years ago. To keep the children occupied – there were five of them with us at the time – we asked them what they wanted to be when they grew up. Imagine our surprise. Among the fighter pilots and TV stars was one little boy who replied, “I want to be Japanese.”

Manga cartoons were popular at the time. So were Japanese video games. Japanese stocks, on the other hand, were not. After hitting 38,000 points in 1989, Japan’s Nikkei stock market index (the equivalent of the Dow) fell to 7,000 in April of 2000.

Meanwhile, every smokestack in Nippon seemed to take a breather, every working man got 10 years older and every financial journalist wondered what was wrong with a people who had been so dynamic just a few years before.

We foresaw the same for US stocks and the US economy. Maybe we were just 14 years – and counting – too early. Maybe we were just wrong.


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A Fount of Originality and Contrarian Thinking …

Just pulling your leg, dear reader. The Barron’s big money poll contains about as much originality and contrarian thinking as you can find on CNBC … slightly less, actually.

So what are the big money’s big ideas this time around? They continue exhibit a huge bearish consensus on bonds, which we have in the past flagged as a big contrary indicator (you will notice that we also pointed out their bearish consensus on the Nikkei in this past article – the Nikkei promptly had an explosive rally right after the survey was published). Otherwise they are still “investing by ruler” – in other words, they are simply extrapolating what has happened in the recent past into the future, which is precisely what most Wall Street strategists and most mainstream economists do as well. Not one of these groups will ever identify a turning point in a timely manner.

The biggest bullish consensus is on US large cap stocks with 84% bulls, the biggest bearish consensus (certain to be wrong for the umpteenth year in a row) is on US treasury bonds with 91% bears (!).

Gold aficionados will be pleased to learn that there is a 76% bearish consensus on gold, which provides a nice contrast to the 69% bullish consensus that pertained in October of 2012, just as gold was getting ready to tank big.


1-big money poll, BarronsA good road map of what to do and what not to do – avoid the areas with the biggest bullish consensus, instead buy whatever they hate with a passion – click to enlarge.


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An Age of Wonders

That we live in an age of man-made wonders is beyond dispute. Painless root canals. Tinder. Central bank price controls.

We were traveling hard over the last couple weeks. Somewhere along the way we picked up a cold, which dogged us from Vermont to Maryland’s Eastern Shore. But the security X-ray at Nashville International Airport seemed to finally knock it out.

Global stocks have lost more than $3 trillion of their value so far this month. But the authorities rushed to the rescue like a surgeon taking out a ruptured gallbladder. As St. Louis Fed president James Bullard told Bloomberg TV (reprinted from yesterday’s Diary):


“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.

And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December. So … continue with QE at a very low level as we have it right now. And then assess our options going forward.”


Perhaps some future generation of philosophers will understand it better. To us, it resides among the great mysteries… along with the virgin birth and Hillary’s front-runner status.


Hillary ClintonThe Lord only knows what they see in this war-mongering harpy …

(Photo via

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A Sclerotic Economy, Missed Deficit Targets, and now A Wave of Clown Threats to Boot …

France is evidently dogged by bad luck these days. After having elected a completely clueless socialist welfare statist as president, who has done his level best to run the economy into the ground, the country is now facing a sudden infestation by evil clowns. In fact, there seems to be a “wave of clown threats”. Luckily the forces of law and order are on the case:


“The party is over for a fake clown who received a six-month suspended jail term Monday for threatening passers-by while in full circus garb, a disturbing trend terrifying towns in northern France.

Whether brandishing a rubber chicken at a children’s party or starring as the evil protagonist in a horror film, clowns have long had both the ability to entertain and terrify.

This fear of clowns, dubbed coulrophobia, has swept small towns in Pas-de-Calais in northern France where police report a wave of complaints over people dressed up as the tricksters and threatening passers-by.

A 19-year-old young man was arrested on Friday after waving a stick resembling a long knife while chasing a group of teenagers, who had to seek refuge in a chip stand. He was also sentenced to 105 hours of community service and banned from carrying a weapon for five years. After receiving some 20 calls on Friday, police took to social networks to warn citizens to be aware of the trend.

Using fake weapons these “clowns” have been “mostly spotted outside schools, but also on public roads, in bushes, in a square. Their targets are often young children or teenagers, but also adults,” a police source told AFP. “They take their inspiration from American horror movies,” the source said, adding that the trend appeared to have started from a Facebook challenge.

The wave of clown threats even prompted the region’s local government representative Denis Robin to take to his official Facebook page to condemn “these misdemeanours”.

“It is absolutely unacceptable that children are held hostage by such acts,” he said, warning that those guilty of using weapons could face three years in jail and a fine of 45,000 euros.”


(emphasis added)

Clearly, this unconscionable brandishing of rubber chickens at children’s parties needs to be stopped ASAP. Adding to the dangers France is facing by allowing evil clowns to go on the rampage is definitely one bridge too far.


rubber-chicken-1This rubber-chicken brandishing apparition may well appear harmless at first glance …

(Youtube screenshot))

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US Airdrops Ensure that ISIS Remains Well Supplied …

The US air force recently engaged in an air drop of various supplies in Kobani, including high quality weapons and ammunition, which were intended to aid the remaining Kurdish fighters still holed up in the town. ISIS will probably soon send a “thank you” telegram to Mr. Obama. They have every reason to. According to Reuters:


“A Pentagon spokesman says a U.S. airdrop over the Syrian border with Turkey “did not make it into the right hands.”

Rear Admiral John Kirby told reporters on Tuesday, “that we are very confident that the vast majority of the bundles did end up in the right hands. In fact we’re only aware of one bundle that did not.”

The Pentagon is working to determine the authenticity of the amateur video posted online on Tuesday appearing to show a U.S. air drop containing military supplies, intended for Kurdish fighters in Kobani, in the hands of Islamic State fighters.

The U.S. military said it conducted six air strikes on Islamic State militants near Kobani on Sunday and Monday. It said one of the strikes destroyed a stray bundle of supplies from a U.S. air drop in order to prevent them from falling into enemy hands. The video was posted on a social media website and Reuters is unable to independently verify the location, the date and whether it was the consignment that the U.S. said it had bombed. It bears a logo which commonly features on Islamic State videos. The video shows what appears to be an airdrop of several boxes and containers with an attached parachute lying on the ground. A man wearing a black balaclava and combat fatigues opens boxes in the video, revealing packaged grenades and what appear to be rocket propelled grenades (RPGs).


(emphasis added)

So now the US air force is busy bombing its own “stray weapons” again…it seems much of the Pentagon’s work is based on the broken window fallacy. Order new weapons, drop them somewhere, and then destroy them. This will surely please US weapons manufacturers and we’re just waiting for Paul Krugman to explain what a great boon to the US economy these activities are.

The Reuters video the transcript above refers to can be viewed here.

Here is the video posted by an ISIS related account on You-tube about the incident (note that we cannot be sure for how long it will remain accessible, as You-tube often erases IS-sourced content):


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The Unleashing of Madness


In the mouth-2b


A number of articles have recently discussed the ECB’s quantitative easing program, which entails inter alia the buying of covered bonds. Here is a quote from an article in the Financial Times:


The European Central Bank has started to buy covered bonds, in its latest attempt to to revive lending in the euro zone and stave off a vicious bout of economic stagnation.


It would be more correct to write: “ECB tries its best to revive the credit bubble that thankfully expired in 2008”. This one sentence from the FT above encapsulates already almost everything that is wrong about these currency debasement programs. It is presented as a “given” that central bank meddling with money and credit is necessary to revive, or as it is often put, “jump-start” the economy, which is held to be mired in stagnation for generally mysterious reasons.

And yet, his comment by the FT makes as much sense as the policy, namely zero (a big, fat zero). The ECB will effectively print money, or rather, create digital money ex nihilo, to pay for these purchases. The underlying assumption that creating additional amounts of money can “stave off economic stagnation” is 180 degrees wrong. It will achieve the exact opposite, namely a structural weakening of the economy – even if, or rather, especially if, economic activity as measured by aggregated data seems to “revive” as a result.

Those who have first access to the newly created money can exercise a demand for real goods without first having contributed anything to the economy’s pool of real funding. This makes it more difficult for those people who actually do make such contributions by their productive efforts to create wealth – as they are forced to compete for a shrinking pool of real resources. As Frank Shostak explains in recent article, what happens is that “exchanges of nothing for something” result from the creation of additional money:


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False Assumptions and Wrong Predictions

An interesting article on MarketWatch today caught my attention. The subhead is the money quote, “Back in April every economist in a survey thought yields would rise. Guess what they did next.”

Every? The article refers to 67 economists polled by Bloomberg, all of whom would seem to believe in the quantity theory of money. This means they believe a rising money supply causes rising prices. That means they think the bond market expects inflation. Which means they expect the interest rate to rise, because investors will somehow demand more.

It didn’t happen because every assumption in that chain is false.

Many people also expect interest rates to rise after the Fed’s bond buying program—quantitative easing—ends. Let’s take a look at the yield on the 10-year US Treasury bond from 1981 through today. This graph is courtesy of Yahoo Finance, though I have labeled it as carefully as I could for the three rounds of QE so far.


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Creating Enemies Everywhere

Over the weekend, we were down in Nashville at the Stansberry Conference Series event, along with Ron Paul, Porter Stansberry, Jim Rickards and others. The question on the table: What’s ahead for the US?

Ron Paul took up the question from a geopolitical angle. He told the crowd that the military-security industry had Congress in its pocket.

As a result, we can expect more borrowing, more spending and more pointless and futile wars. They may be bad for the country and its citizens, says Paul, but they are good for the people who make fighter jets and combat fatigues.

“We’ve been at war in the Middle East for decades,” he said. “We supported Osama bin Laden against the Soviets in Afghanistan… and the result of that was the creation of al-Qaeda.

“Then we supported Saddam Hussein against Iran. Saddam and bin Laden hated each other. But after 9/11 we attacked Saddam, using a bunch of lies to justify it. We sent over military equipment worth hundreds of billions of dollars. This equipment is now in the hands of ISIS – another enemy we created… and a far more dangerous one.”


isis-hummerISIS fighters proudly parading their new Hummer courtesy of US tax cows …

(Photo credit: REUTERS/Stringer)


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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future