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How You Could Make 50 Times Your Money in the Coming Gold Mania

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By Doug Casey Regular readers know why I believe the gold price is poised to move from its current level of $1,250 per ounce to $1,500…$2,000…and eventually past $3,000. Right now, we are exiting the eye of the giant financial hurricane that we entered in 2007, and we’re going into its trailing edge. It’s going…

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Oregon Militia Showdown: The Truth About The Hammonds

I’m posting this for the historical records (source). I am in direct, daily contact with a close friend who has lived and worked in Burns his entire life – except for a short stint with the 101st. He has worked in the woods (timber faller) on ranches (cowboy), and as a gunsmith in a local…

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Misguided Plans to Fix the Fed Part 1: Bernie Sanders

Starting with a recent op-ed in the New York Times by Bernie Sanders, let’s take a look at various proposals floating around to fix the Fed and other central banks.

Bernie Sanders says To Rein In Wall Street, Fix the Fed

Sanders: Wall Street is still out of control. Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail. But almost every one is bigger today than it was before the bailout. If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

To rein in Wall Street, we should begin by reforming the Federal Reserve, which oversees financial institutions and which uses monetary policy to maintain price stability and full employment. Unfortunately, an institution that was created to serve all Americans has been hijacked by the very bankers it regulates.

Mish: That type of populist proposal will appeal to those who believe Wall Street is the problem. It will also appeal to those who understand the Fed is indeed in bed with Wall Street. But we must analyze Sanders’ specific recommendations one-by-one.

Sanders: The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort — not to fight phantom inflation.

Mish: Sanders ignores the dotcom bubble, the housing bubble, and the bubbles now in both stocks and bonds. Those bubbles all have their roots in a Fed that kept rates too low, too long. The idea that rates should be tied to a single measure like unemployment is ludicrous. And at 4% unemployment rates, the Fed would seldom if ever hiked. The Fed does not know where interest rates should be, and neither does Sanders. 

Sanders: What went wrong at the Fed? The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs. These are clear conflicts of interest, the kind that would not be allowed at other agencies. We would not tolerate the head of Exxon Mobil running the Environmental Protection Agency. We don’t allow the Federal Communications Commission to be dominated by Verizon executives. And we should not allow big bank executives to serve on the boards of the main agency in charge of regulating financial institutions.

Mish: The conflicts of interest are indeed obvious. The solution is to get rid of the Fed.

Sanders: The Fed must also make sure that financial institutions are investing in the productive economy by providing affordable loans to small businesses and consumers that create good jobs. How? First, we should prohibit commercial banks from gambling with the bank deposits of the American people. Second, the Fed must stop providing incentives for banks to keep money out of the economy. Since 2008, the Fed has been paying financial institutions interest on excess reserves parked at the central bank — reserves that have grown to an unprecedented $2.4 trillion. That is insane. Instead of paying banks interest on these reserves, the Fed should charge them a fee that would be used to provide direct loans to small businesses.

Mish: I agree the Fed should prohibit commercial banks from gambling with the bank deposits of the American people. The way to do that is end fractional reserve lending. Lending deposits that are supposed to be available on demand is fraudulent. Paying interest on excess reserves the Fed creates out of thin air is also fraudulent. However, the notion the Fed should charge interest on reserves to spur lending is ridiculous. Mathematically, every dollar the Fed prints has to be held by someone. When banks lend, the money eventually ends up as a deposit somewhere else. Moreover, efforts to force banks to make more loans will just encourage bad lending decisions and subsequent writeoffs.

Sanders: As a condition of receiving financial assistance from the Fed, large banks must commit to increasing lending to creditworthy small businesses and consumers, reducing credit card interest rates and fees, and providing help to underwater and struggling homeowners.

Mish: Banks should not be bailed out or given assistance ever. To do so creates a moral hazard.

Sanders: We also need transparency. Too much of the Fed’s business is conducted in secret, known only to the bankers on its various boards and committees. Full and unredacted transcripts of the Federal Open Market Committee must be released to the public within six months, not five years, which is the custom now. If we had made this reform in 2004, the American people would have learned about the housing bubble well in advance of the financial crisis.

Mish: The housing bubble was obvious to every thinking person. Yet, the idea minutes would prove the Fed knew are highly unlikely. The Fed has never spotted a bubble. And neither the Fed nor Sanders sees the bubbles we are in now. That said, I fully support transparency and the release of full and unredacted transcripts.

Sanders has some things right, but as many things wrong.

We should audit the Fed and end it, not attempt to fix it with absurd rules about where interest rates should be, coupled with preposterous efforts to force banks to lend.

Mike “Mish” Shedlock

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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Death Watch Illinois: Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up

Illinois Pension Problems Mount

Illinois’ unfunded liabilities have risen ten out of the last eleven years. The only exception was 2011. This was despite massive rallies in financial markets every year since 2009.

One out of every five tax dollars goes to pensions, but that’s nowhere close to enough to stem the tide.

Death Watch Illinois: Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up

Illinois has the worst funded pension plans in the nation. Those plans are a mere 42% funded in aggregate.

That bleak estimate understates the problem because it assumes 8% annualized returns going forward. Those returns are not going to happen.

I expect 0-2% returns at best, and most likely negative real returns for seven to ten years.

Still No Budget

In October, Moody’s cut Illinois debt to one step above junk, specifically citing pensions as the “greatest challenge”.  Lower ratings have driven up borrowing costs. In turn, rising borrowing costs mean less money to spend elsewhere.

The new year is less than a week away, but Illinois still does not have a budget.

Bloomberg reports Illinois Record Budget Impasse Makes It Worse for the State’s Pension Disaster.

As 2015 draws to a close, Illinois marks half a year without a budget. No spending plan has driven up borrowing costs, sunk its credit rating, and perhaps worst of all, exacerbated the state’s biggest problem: its underfunded pensions.

Home to the least-funded state retirement system in the nation, Illinois has $111 billion of pension debt, which breaks down to more than $8,000 per resident. Partisan gridlock has produced the longest budget impasse in Illinois history. The stalemate has not only weakened state finances, it has kept lawmakers from finding a fix for those mounting liabilities.

It’s been seven months since the Illinois Supreme Court rejected the state’s solution. Justices threw out the 2013 restructuring that took six attempts over 16 months to pass, despite one-party rule at the time. The measure was projected to save $145 billion over 30 years by limiting cost-of-living adjustments and raising the retirement age.

Illinois enters 2016 snarled in partisan bickering as Governor Bruce Rauner, the state’s first Republican chief executive in 12 years, and the Democrat-controlled legislature can’t agree on annual appropriations, much less an overhaul of a retirement system that must withstand an inevitable legal challenge. The state constitution bans reducing worker retirement benefits.

In July, Rauner laid out a plan to create a tiered system to cut retirement liabilities. At the time, he said it would save taxpayers billions of dollars. The proposal, which included a measure to allow municipalities to file for bankruptcy protection, was never introduced, according to Catherine Kelly, his spokeswoman.

Illinois hasn’t sold bonds since April 2014, a record borrowing drought. The spread on its existing debt has widened. Investors demand 1.8 percentage points of extra yield to own 30-year Illinois bonds, the most among the 20 states tracked by Bloomberg. When the spread climbs, that’s reflecting that investors think the problem is getting worse, said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services.

“What’s the root cause of why we’re in the problem we’re in?” Ciccarone said. “It’s down to the pensions.”

Illinois is like a patient in the emergency room, said Paul Mansour at Conning, which oversees $11 billion of munis, including Illinois securities.

Death Watch Illinois

Illinois is terminal. Pension cancer is too deep and has spread too far to save the patient. The state is bankrupt morally, politically, and monetarily.

However, there is no provision for state bankruptcy (something US Congress needs to address). Regardless, what cannot be paid won’t.

Illinois cancer is not just at the state level. The cancer permeates cities far and wide.

The Chicago Board of Education is already dead whether the coroner or Mayor Rahm Emmanuel makes the announcement or not.

Tax hikes won’t help the dead or dying. Instead they will cause the healthy and able to flee.

Many Illinois cities lie in a bankruptcy coffin, but the current law will not let the coroner make that announcement.

The best way to ease municipality pain is to pass a law allowing municipal bankruptcies. Such a bill would let terminal cities and taxing bodies move to hospice to die in peace. That’s something the Illinois legislature can and should address.

Illinois Republicans, I have a question: Where the heck is that bill?

Fresh Start

Corrupt politicians in bed with union officials have hollowed out the state beyond repair. Let’s not pretend otherwise.

Illinois needs a fresh start:

  1. Bankruptcies at the municipal level
  2. A new constitution that allows pension cuts at the state level
  3. Right to work laws
  4. End of collective bargaining of government employees
  5. End of prevailing wage laws
  6. Tax reform, especially property tax reform
  7. Workers’ compensation reform
  8. Unemployment insurance reform

Until we see those changes, the state will lay on the death-bed slowly bleeding workers and businesses in a fate worse than death by bankruptcy or default.

Sobering Pension Assessment

As noted above Illinois pension plans are 42% funded, and that’s with projected returns of 8%. If returns average 2% or even 5%, liabilities and under-fundings will soar.

Unfortunately, history suggests 0% is more likely. Here’s further discussion of what to expect and why.

  1. Stocks More Overvalued Now Than 2000 and 2007 No Matter How You Look at Things
  2. Bubble Debate; Equity Allocations vs. Shiller PE; Simple World
  3. Apocalypse Illinois: IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities

Mike “Mish” Shedlock

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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Economic Illusions vs. Reality; Helicopter Drop, What Else?

Without providing a link, ZeroHedge posted some comments today regarding “Helicopter Drop Theory” by Willem Buiter, Citibank’s Chief Economist.

Willem Buiter on Failure of Monetary Policy

We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC.

The wealth effect of higher stock prices appears to do little to boost private consumer expenditure.

To the extent that monetary policy has had an effect on real activity, and will have some incremental effect on activity, it may not be entirely sustainable. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction. That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.

Economic Illusions vs. Reality

I wholeheartedly agree with every point made above by Buiter. Actually, things are far worse than he stated. The problem is not just in Europe, but everywhere.

With their deflation-fighting tactics, central banks have accomplished five things, none of them any good.

  1. Brought demand forward at the expense of future GDP
  2. Encouraged more leverage
  3. Increased speculation in financial assets
  4. Created bubbles in equities and bonds
  5. Mistook economic activity for what much of it really is: malinvestment

The solution is not more craziness, but rather an admission that central banks are themselves the source of the problem.

Of course Keynesian fools would never admit such a thing. Instead they promote more and more of what common sense and history proves cannot work.

Willem Buiter Proposes Helicopter Drop

“Helicopter money drops (what else?)”

Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.

This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.

The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with “emergency” levels of asset purchases and interest rates becoming the norm.

If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a ‘backdoor’ helicopter money drop –something long overdue.

Myth of the Deflation Monster 

Buiter wants to slay an imaginary monster, deflation.

He moans “Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990.”

Other than the absolute mess Japan has gotten into as a direct result of decades of deflation fighting madness, what problem has a lack of sustained positive rate of inflation caused Japan?

The answer is: None.

The bank of Japan is now the entire market for Japanese debt. What positive result stems from that?

The answer once again is: None.

Nonetheless Buiter wants the ECB to pursue the same inane path.

There will be no benefit. Leverage will rise, not sink. And to top it off, debt purchases of the nature he wants are likely illegal under the Maastricht treaty.

Buiter has learned nothing from history. He ought to look in a mirror, admit he sees failure, and resign.

But economic illiterates don’t resign, they just keep promoting policies that both common sense and history show can never work.

Challenge to Keynesians

The simple fact of the matter is “Inflation Benefits the Wealthy” (At the Expense of Everyone Else) .

If Buiter disagrees, he can respond to my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit”

Mike “Mish” Shedlock

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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Fed a Creature of Financial Markets; The Draghi PUT; Global Crisis Coming Up

Creature of Financial Markets

Stephen Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, blasts the Greenspan Fed, the Bernanke Fed, and the Yellen Fed in his latest post The Perils of Fed Gradualism.

After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization. It has now taken the first step toward returning its benchmark policy interest rate – the federal funds rate – to a level that imparts neither stimulus nor restraint to the US economy.

A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake. The Fed is borrowing a page from the script of its last normalization campaign – the incremental rate hikes of 2004-2006 that followed the extraordinary accommodation of 2001-2003. Just as that earlier gradualism set the stage for a devastating financial crisis and a horrific recession in 2008-2009, there is mounting risk of yet another accident on what promises to be an even longer road to normalization.

The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy. This transformation has been under way since the late 1980s, when monetary discipline broke the back of inflation and the Fed was faced with new challenges.

The challenges of the post-inflation era came to a head during Alan Greenspan’s 18-and-a-half-year tenure as Fed Chair. The stock-market crash of October 19, 1987 – occurring only 69 days after Greenspan had been sworn in – provided a hint of what was to come. In response to a one-day 23% plunge in US equity prices, the Fed moved aggressively to support the brokerage system and purchase government securities.

In retrospect, this was the template for what became known as the “Greenspan put” – massive Fed liquidity injections aimed at stemming financial-market disruptions in the aftermath of a crisis. As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed’s market-driven tactics.

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy.

Largely for that reason, and fearful of “Japan Syndrome” in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period.

Over time, the Fed’s dilemma has become increasingly intractable. The crisis and recession of 2008-2009 was far worse than its predecessors, and the aftershocks were far more wrenching. Yet, because the US central bank had repeatedly upped the ante in providing support to the Asset Economy, taking its policy rate to zero, it had run out of traditional ammunition.

Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy. In carefully crafted, highly conditional language, it is signaling much greater gradualism relative to its normalization strategy of a decade ago. The debate in the markets is whether there will be two or three rate hikes of 25 basis points per year – suggesting that it could take as long as four years to return the federal funds rate to a 3% norm.

But, as the experience of 2004-2007 revealed, the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents. With prospects for a much longer normalization, those risks are all the more worrisome.

Only by shortening the normalization timeline can the Fed hope to reduce the build-up of systemic risks. The sooner the Fed takes on the markets, the less likely the markets will be to take on the economy. Yes, a steeper normalization path would produce an outcry. But that would be far preferable to another devastating crisis.

Beholden to Financial Markets

Roach provides a nice historical perspective but he misses the boat in regards to risks.

Not only is the Fed a creature of the Financial markets, it is beholden to the markets. For some treasury durations, the Fed became the market.

Unfortunately, it’s not just the Fed.

Global Crisis Coming Up

Global imbalances have never been worse.

The Bank of Japan is the only market for Japanese government debt. And in Europe, government debt trades at preposterously low and sometimes negative yields. The “Draghi PUT” is at least as big as any PUT by Greenspan.

The risk is not that the Fed (central banks in general) will spawn more asset bubbles. It’s far too late to raise that concern. Massive bubbles in equities and bonds have already been blown.

Banks that were “too big to fail” are far bigger now than ever before.

Beggar-thy-neighbor competitive currency debasement is the order of the day in China, Europe, and Japan.

Let’s not pretend we have a choice that will prevent another devastating financial crisis. We don’t. Only the timing is in question.

Mike “Mish” Shedlock

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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Merkel-Enhanced Migration Problem: Million Refugees Hit Europe, 80% Through Greece by Boat; Turkish Mafia, Banks Pave the Way

Over a million refugees have made their way to Europe this year. Every country is complaining now, even Germany. So why isn’t anything concrete being done?

Why the Problem Is Not Fixed

If Turkey, Greece, or Germany really wanted to solve the migration problem, the problem would be solved.

However, there’s too much ignorance in Germany and too much graft money in Turkey. Greece does not have the resources or the willpower to do the right thing: send them back.

Million Refugees Hit Europe, Primarily Through Greece by Boat

The Financial Times reports More than 1 Million Refugees Arrive in Europe.

The International Organisation for Migration reported on Tuesday that the number of migrants had hit 1,005,504. That is almost five times greater than the total last year, and was the highest migration flow since the second world war.

The vast majority of the migrants — 821,008 — arrived in Greece. Almost all of them came by boat, according to the IOM, a Geneva-based intergovernmental organization.

Italy received the second biggest total: 150,317. Bulgaria was third, with 29,959 arrivals.

Merkel-Made Migration Problem

German Chancellor Angela Merkel is too damn stupid or too damn arrogant to do anything about the problem.

Besides, there’s simply too much money to be made by the Turkish mafia and Turkish banks for anyone in Turkey too give a hoot.

Turkish Mafia, Banks Pave the Way

As is typically the case, when there’s money to be made, heads look the other way. Such is the case right now with Turkish profits fueling the “Merkel-made” problem.

In a scathing explanation (that Merkel will ignore and Western media won’t report on), please consider How the Turkish mafia organizes the trafficking of refugees .

His name is Osman. Or, that’s how he introduced himself. He is one of the top members of the Turkish mafia doing business upon migrants and refugees in Turkey. He is not hiding … “If the Turkish government didn’t want us to do the job we do, we couldn’t pass to Greece not even a fly” says disarmingly.

Stratis Balaskas for the Athens News Agency

He has a store in İzmir selling food stuff. It is a big store in Basmane, the district of Greeks and Jews before 1922, which was saved from the fire. The Turks in the district call him “Damascus”. As they say “there are more Syrians here than in Syria”. However, the picture of the area is not as it was last summer. There are no Syrians in the streets. The municipality authorities re-planted the grass in parks, there is not even a single Syrian.

Yet … there are!

Osman explains to us that now “they stay in houses which have been rented especially for this purpose. They cannot move freely, their transportation is done through private cars which take them from their houses and leave them on starting points. From there they are being transferred to the departure spots.”

They are being transferred through many ways that show the size and the ruthlessness of the network.

So, migrants and refugees have been transported by Osman in areas at the Turkish side, located across Lesvos and Chios, through buses carried by trucks for roadside assistance. Through school buses during the hours that are not being used for the transportation of the kids. Through convoys of private vehicles, which means that even if a car would be stopped by the police, the others could continue to their destination. But there is also … VIP transportation, like of rich Arabs with Russian escorts, even through … hearses! The latest, as Osman says, are expensive services and being paid nearly as much as the trip to islands.

But let’s go back to İzmir where we find the base of the network. Under the fear of the measures that allegedly will be taken by the Turkish authorities, after the European pressure, the network has the following plan schedule.

On the top stand the members of the mafia. Most of them do this job for more than 20 years. The old times were doing it for a nice daily wage. Now, and especially the latest year, there is too much money in the business and it is worth someone to risk.

On the other side of the network stand some locals. They possess some spaces from where the boats can start their journey safely. They are responsible to keep the passage safe and clean. They are also responsible for the training of someone among the passengers on how should handle the boat. Or, they should pay someone, say 100 euros each time, to transfer the boat with the passengers to the islands and return to the base.

In the middle of these groups, there are mainly two categories of people involved. The “dealers”, which are those who find “customers” and pass them to the top members of the mafia. They are doing it through Facebook pages, or, phone numbers that are distributed among the “customers”. They “fill” the boat with passengers every time that the top members have one ready for departure.

Close to them stand the “bankers” of the network who are responsible for receiving the payments. Anyone who wants to be transported pays them through any way he/she can. With money or services. Jewelry, valuable stones, or even archaeological pieces! From the moment of the payment, he/she has three days to pass to Europe. After the end of the journey, every migrant and refugee calls a phone number and gives a code number which has been provided when he/she paid. Then, the payments are “released” and the “banker” has to pay everyone involved. About 15-20% is being paid to all who are involved to the transportation and the rest goes to the top member of the network, in our case, Osman.

“Why do you take most of the money?”, we ask him. He explains that he has too much expenses. He pays for the plastic boats which, depending on their size and the quality of the engine, cost between 800 and 20,000 euro! These are being bought legally. Therefore, the police can’t do anything, even if they stop him while carrying the boats.

He also pays the “bankers”. They take between 20 and 100 euro for every payment. They also keep all the money from those who do not call to confirm that they arrived at the destination, either because they have been drowned, or have been arrested by the coast guard and have been sent back to camps in South-East Turkey.

“I don’t want blood money” [!], Osman says with audacity. But frequently claims that there are “rules of morality” in his job. Because, as he says, the top members “are moral”! They do not let people pass under stormy sea. They do not fill with more than 50 people every big boat, or 20, every small one. They transport people only in plastic boats. Other locals and Arabs are responsible for the wooden boats. Those Arabs “we had as mediators because of the language, but they opened their own businesses and sent people to be drowned. These are usually being caught by the Turkish coast guard, or they risk transporting people with big boats resulting in accidents like the one that happened in Lesvos in 28th October.”

Osman is completely informed about the situation in Lesvos. He knows about the accidents, the dead people, the hot spots, and all the problems in the islands. He knows of course very well what happens also in Turkey. For example, he said that during a weekend last month, no one passed to Lesvos because of the presence of Erdogan in the area for the celebration of olive collection. “We should not provoke” says laughing.

He says goodbye “because he has work to do”. We ask him if he worries for telling these things to us. He’s not afraid. “I told you again” he says. “If the Turkish government didn’t want us to do the job we do, we couldn’t pass to Greece not even a fly”! Besides, he made a lot of money. “I don’t have to work. Neither my children and my grandchildren. Today, if someone tells me to stop, I’ll do it. But no one tells me …” he says as we leave!

A tip of the hat to “The Failed Revolution” for the above translation from the original Greek article that Google translates as Greek Refugee Trafficker Confesses.

Amazingly, Merkel’s solution was to get in bed with Turkish prime minister Recep Tayyip Erdoğan, offering Erdoğan three billion euros to stem the tide.

Her proposed “solution” is absurd enough, but Merkel also held out a carrot to speed the way in granting 75 million Turks passport-free access to the EU.

Even if Turkey does temporarily pen in the refugees, they will be released in a massive flood once Turkey is a member of the passport-free Schengen zone.

Mike “Mish” Shedlock

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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Existing Home Sales Plunge 10.5%, NAR Blames “Know Before You Owe”; What’s the Excuse for Last Month?

Existing homes sales plunged 10.5% this month which the NAR attributes to an initiative called “Know Before You Owe“.

Economists, apparently unaware of “Know Before You Owe”, came up with a consensus estimate of 5.320 million sales, SAAR ( seasonally adjusted annualized rate), the same as last month.

New closing rules appear to have depressed sales of existing homes in November which fell 10.5 percent to a much lower-than-expected annualized rate of 4.760 million. The year-on-year rate, for the first time since September last year, is suddenly in the negative column, at minus 3.8 percent. The National Association of Realtors, which compiles the report, attributes the weakness to the “Know Before You Owe” initiative which is lengthening closing times and which likely makes November an outlier. The NAR suspects that the sales delays in November are likely to give a boost to December’s totals.

Weakness in the month is centered in single-family sales, down 12.1 percent to a 4.150 million rate. Condos rose 1.7 percent to a 610,000 rate.

All regions show declines for total sales with the Northeast, at a modest plus 1.5 percent, the only one to show a year-on-year gain.

Low supply is a problem in the market, at 2.040 million vs 2.110 million in October. Relative to sales, supply is at 5.1 months which, because of November’s sales weakness, is up slightly from prior months. For a balanced market, supply is generally pegged at 6.0 months.

Price data are positive, showing some traction with the median up 0.5 percent in the month to $220,300. Year-on-year, the median is up 6.3 percent which is right in line with the trends in this morning’s FHFA report.

For volatility, this report is usually tame compared to the new home sales report. Judging strength right now is difficult but a fair judgment is that growth in the housing sector is probably moderate and a plus for the economy. New homes sales are out tomorrow and are expected to show a gain.

What’s the Excuse for Last Month?

Interestingly, “Know Before You Owe” came into play in October 3.

Why did the NAR pass up a golden opportunity to use that excuse last month when existing home sales dipped?

Disturbing Last Month

From Bloomberg last month: The number of homes on the market, at 2.14 million, is actually below the 2.24 million this time last year, an unwanted surprise that the National Association of Realtors, which compiles the existing home sales report, calls “disturbing”.

No Longer Disturbing This Month

Now that the plunge has deepened, it’s no longer disturbing, it’s because of “Know Before You Owe”.

I have a simple question: If “Know Before You Owe” took place effective October 3, and that’s really what’s to blame, then, why wasn’t there a huge plunge last month instead of a “disturbing” surprise?

New Rules

Since not even the NAR seems to understand the implications, let’s take a step back with a peek at Know Before You Owe Mortgages as seen by PBS.

There are two big changes. One, the forms you get right after you make a mortgage application and the form you get right before closing is going to be simplified.

The terms are supposed to be easier to understand. You’re supposed to understand if you have an adjustable rate, and the rate will go higher after a certain number of years.

You’re not supposed to be surprised if, you know, 10 years from now you have some sort of balloon payment on a mortgage or anything like that. So, that’s the first change.

The second change is before – before closing, you’re supposed to get these documents at least three business days before closing.

And that’s designed so you have time to understand what you’re getting into before you sign on the dotted line.

Now, it seems to make sense, but if you make any changes within that three-day window – so if you decide you want to switch, say, a fixed-rate mortgage to an adjustable-rate mortgage, that resets the three days.

As for people who are trying to, you know, closely time home closings, resetting that three-day window can lead to some headaches.

So what’s going to happen over the next few months is we’ll see whether or not home closings are happening on time or whether, you know, some of these mortgage lenders or real estate agents weren’t actually ready and we see a lot of closing delays.

Before vs. After

The forms are simpler and easier to understand. Those wishing to compare the before and after forms can do so at the Consumer Finance Protection Bureau.

If there were first month glitches, why didn’t they turn up a month ago?

What I Said Last Month

Let’s turn to my report from a month ago for more details about recent trends.

Please consider Existing Home Sales Decline, NAR Calls Report “Disturbing”; First Time Buyers Decline Third Year; Housing Clearly Weakening.

If there was an “outlier“, perhaps it was the September gain, not the August and October declines.

And even though September sales data bounced, prices didn’t. The median price declined 2.9% in September.

Bloomberg concluded “This report, which wraps up a busy and mostly positive week for housing data, is a big plus for the housing outlook, suggesting that demand for existing homes may be catching up with demand for new homes.

I responded: “That last statement by Econoday is amusing. For starters, new home sales are not all that strong, and it is new home sales that contribute most to GDP and family formations.

As a followup, please note my November 18 article Housing Starts Plunge 11% to 7-Month Low: Single-Family Down 2.4%, Multi-Family Down 25%

October wiped away all of September’s good news and then some. 1.060 million starts was far below Econoday Consensus Estimate of 1.162 million SAAR and also well below the lowest estimate of 1.125 million.

Bloomberg pointed out hidden strength including “important good news” on October permits.

Spotlight on Permits

  • September month permits were down 5%
  • October permits rose only 4.1%.
  • September starts were revised lower from 1.206 million to 1.191 million (a 15,000 -1.24% negative revision).

In aggregate, that hardly looks like “important good news“.

First Time Buyers Decline Third Year

The National Association of Realtors (NAR) notes First-time Buyers Fall Again in NAR Annual Buyer and Seller Survey.

The share of first–time buyers declined for the third consecutive year and remained at its lowest point in nearly three decades as the overall strengthening pace of home sales over the past year was driven more by repeat buyers with dual incomes.

Housing Clearly Weakening

On average, starts are weakening, permits are weakening, new home sales are weakening, price data is weakening, and existing home sales are weakening.

First time buyers, a strong indication of family formation, is at a three-decades low, and the NAR is “disturbed” about trends.

Simply put, housing is weakening, albeit in a volatile way, making it a bit harder to spot the change in underlying trends.

Synopsis

The disclosure forms are easier. They are also down in number, from four to two.  The rule change took place on October 3.

Somehow that rule change had a huge impact in November but only a small (and not even mentioned) impact in October. That’s possible, but color me skeptical.

By November, one would have thought lenders would be bright enough to go over the rules with borrowers in advance to avoid closing delays.

Next month could be telling, one way or another.

Mike “Mish” Shedlock

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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Reshoring Myth Explodes: Offshoring Outpaces Onshoring Every Year Since 2004 Except 2011

Reshoring Over Before It Ever Got Going

Recall the hype over reshoring? Manufacturing jobs supposedly were returning to the US in droves from Asia.

My view was that although some manufacturing processes returned, not many jobs came back thanks to robots and software automation. That view was far too optimistic.

Reshoring Myth and Reality

The second annual A.T. Kearney U.S. Reshoring Index shows that for the fourth consecutive year, reshoring of manufacturing operations to the United States has once again failed to keep up with offshoring.

Supply Chain reports 2015 U.S. Reshoring Index Indicates Manufacturing Reshoring Trend Has Subsided.

In 2015 the A.T. Kearney U.S. Reshoring Index dropped to -115, down from -30 in 2014, and represents the largest year-over-year decrease in the last 10 years.

Even if the effect of raw material price declines is discounted by, conservatively, holding manufacturing input values constant relative to 2014 while ignoring that same effect on the value of offshore manufactured goods, the U.S. Reshoring Index would drop to -26, still supportive of the view that the widely predicted reshoring trend seems to be over before it started.

Patrick Van den Bossche, A.T. Kearney partner and co-author of the study, stated, “The U.S. Reshoring phenomenon, once viewed by many as the leading edge of a decisive shift in global manufacturing, may actually have been just a one-off aberration. The 2015 data confirms that offshoring seems only to be gathering steam, while the U.S. reshoring train that so many predicted has yet to leave the station.”

Reshoring Myth Explodes: Offshoring Outpaces Onshoring Every Year Since 2004 Except 2011

Industries vulnerable to rising labor costs in China have been successfully relocating to other Asian countries, rather than returning to the United States. They have done so without incurring significantly higher supply chain costs, despite the weaker infrastructure and supporting ecosystems of these new low-labor-cost destinations. Vietnam has absorbed the lion’s share of China’s manufacturing outflow, especially in apparel. U.S. imports of manufactured goods from Vietnam in 2015 will be nearly triple the level of imports in 2010.

Study Findings

The A.T. Kearney U.S. Reshoring Index and the U.S. Reshoring Database provide a number of insights on the factors driving imports of offshore manufactured goods and manufacturing reshoring. Many of the report insights run counter to the points of view and “hype” regarding reshoring of manufacturing to the United States.

  • Surprisingly, some of the top sectors for reshoring from 2011 to 2015 are also sectors that have led the pack in further offshoring over that same period.
  • The recent increase of nearshoring to Mexico also seems to indicate that, even if U.S. companies consider leaving Asia, they may choose to stop south of the border.
  • The forecast strengthening of the dollar, the oil price slide, the tightening U.S. labor market in manufacturing and the Trans-Pacific Partnership (TPP), if ratified by the U.S. Congress, will likely further weaken the case for reshoring in 2016.
  • Although reshoring of manufacturing by U.S. companies is on the decline, non-U.S. companies, including Chinese companies, increasingly invest in establishing or expanding their manufacturing footprint in the United States. The insatiable U.S. consumer market, the stable political and economic environment, and the benefit of tapping into America engineering skills and manufacturing know-how are main draws.

America’s Manufacturing Renaissance Myth

Also consider The Myth of America’s Manufacturing Renaissance

For the casual observer, it is easy to get the impression that American manufacturing has entered a new and exciting period of revival.

Many in the media, along with consulting firms, think tanks, and economists, now proclaim the emergence of a U.S. “manufacturing renaissance,” marked by the “reshoring” of production and the growing competitiveness challenges of many foreign nations vis-à-vis the United States. If only this were true.

The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing, a new report by the Information Technology and Innovation Foundation (ITIF), assesses the true status of the American manufacturing economy and argues pundits have overestimated the impact of isolated incidents of reshored production and misread or ignored the data.

If there were a true renaissance, we’d expect to see growth in inflation-adjusted manufacturing value added. But in fact 2013 manufacturing value added is 3.2 percent below 2007 levels, with non-durable goods value-added (which includes chemicals and oil and gas) down almost 12 percent. U.S. manufacturers employ over a million fewer workers and there are 15,000 fewer manufacturing establishments since the beginning of the Great Recession. Moreover, America ran a $458 billion trade deficit in manufacturing goods in 2013. Hardly evidence of a renaissance.

And most of the recovery that has occurred has been cyclical in nature. In fact, 122 percent of manufacturing output growth between 2010 and 2013 was in the auto sector, whose growth is due almost solely to a rebound in U.S. consumer demand, rather than reshoring of automobile production.

“Most of the claims for a structural rebirth of U.S. manufacturing are unfortunately based on myths and anecdotes,” states Robert Atkinson, President of ITIF and co-author of the report. “Instead, any assessment of U.S. manufacturing should be based on rigorous analysis and review of the official data.”

Prevailing Wisdom 

The first article, released December 21, 2015 is far more damning than the second, released January 14.

Check out the prevailing wisdom in January:

One thing is clear – optimism about the future of U.S. manufacturing is relatively buoyant, as 68% of the executives surveyed agreed that U.S. manufacturing will experience accelerated growth in the next five years.

A manufacturing recession has been upon us for six months. 

Mike “Mish” Shedlock

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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Poland, Free Markets, and the Eurozone

Mateusz Machaj is a former Mises Fellow, the founder of Mises Institute Poland, and is assistant professor at the Institute of Economic Sciences at the University of Wroclaw in Wroclaw, Poland. He spoke with us recently about his work at the Mises Inst…

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