The Media-Opoly: Cancelled, From Saturday Night, It's Conspiracy Theory Rock!

A day after we ran “Meet Your “Independent” Media, America“, in which we showed how prime time entertainment like 60 Minutes is strategically and voluntarily “planted” with propaganda trolls and “concerns” thus crushing any “unbiased” credibility mainstream US media may have, we dug into the archives to bring you “Conspiracy Theory Rock.”

This cartoon created by SNL cartoonist Robert Smigel in 1998 ran once in a “TV Funhouse” segment, and has been since removed from all subsequent airings of the Saturday Night Live episodes. As a reminder, 90% of US media is currently controlled by 6 corporations: General Electric, News Corp., Disney, Viacom, Time Warner and CBS…

… whose shareholders vastly overlap.

Michaels claimed the edit was done because it “wasn’t funny.”

Well, it’s funny now because for once the propaganda facade of the mainstream media cracked from within, and the result was this critique of corporate media ownership, including then NBC’s ownership by General Electric/Westinghouse, and how only the stuff the owners deem appropriate is distributed for general consumption.

We doubt the current parent of NBC (and CNBC), Comcast, would play it either.

Inside A Mid-East Coup: A Closer Look At The Russia-Iran Power Play

Earlier today, we ventured to characterize the breakdown of Washington’s strategy in Syria as the worst US foreign policy blunder since Vietnam. 

To be sure, that’s a bold claim, but it’s supported by the sheer number of missteps, bad outcomes, and outright absurdities that have developed in the Mid-East as a result of the effort to oust Bashar al-Assad. 

At the most basic level, the support provided by Washington, Riyadh, and Doha for the various Sunni extremist groups battling for control of Syria has created a humanitarian crisis of epic proportions. Hundreds of thousands of people are dead and millions are displaced. As tragic as the situation already is, the conditions are ripe for it to get even worse if the move by Brussels to force recalcitrant EU countries into accepting a migrant quota system they are opposed to ends up triggering a dangerous bout of xenophobia in the Balkans.

Washington’s move to train and arm the Syrian opposition has of course also led directly to the creation of a group of black flag-waving jihadists that have taken the term “extremists” to a whole new level on the way to producing a series of slickly-produced videos depicting the murder of Westerners. This same group is now stomping around between Syria and Iraq wreaking havoc on civilians and committing acts so heinous that even al-Qaeda has condemned them.

Of course the outright chaos the West has managed to create in Syria has now come full circle, providing Iran and Russia with a unique opportunity to tip the scales and seize power in the Mid-East. 

What’s important to understand here, is that this isn’t confined to Syria.

That is, Iran isn’t content to preserve its supply line with Hezbollah and Russia isn’t content to play spoiler to the US by propping up Assad. There’s something far more meaningful going on here and it can be readily observed in Iraq.

For years, Iran exercised its influence in Iraq via various Shiite militias controlled by Quds commander Qasem Soleimani. Now, it looks as though the deal struck between Tehran and Moscow in July included a power play designed to gradually muscle the US out of the way in Baghdad. The first concrete evidence of this came late last month when Iraq announced an intelligence sharing agreement with Russia and Syria but the story goes far deeper than that. Consider the following from The Washington Institute:

On September 21, the Wall Street Journal reported that forces under the command of Iran, Russia, and Bashar al-Assad were coordinating efforts to secure the Syrian regime. As Moscow sends advanced aircraft, armored vehicles, and more, Iran’s Iraqi Shiite proxies have simultaneously stepped up their recruitment and deployment for the Syria war. Since July, their Syria-focused online campaigns have jumped significantly (see chart), morphing from infrequent mentions in late 2014/early 2015 to a full-fledged recruitment program involving a number of newer Iranian-backed groups. These Shiite fighters are now spread across Syria, primarily in the western part of the country, launching operations from the suburbs of Damascus to Idlib.



Following the June 2014 seizure of Mosul and much of northern Iraq by the so-called Islamic State/ISIS, a group called Kataib al-Imam Ali (KIA) announced its creation. Formed by Iranian-controlled splinter elements from Muqtada al-Sadr’s Mahdi Army, KIA is probably best known for its fierce battlefield reputation and particularly gory videos featuring severed heads and men being cooked above open flames.


When compared to other organizations, KIA’s Syria-focused recruitment and propaganda campaign has been the largest. Using messages issued via its offices, billboards, and social media, the group has actively recruited new members, especially around Najaf, Iraq. These efforts began with online imagery connecting its fighters with Sayyeda Zainab, an important Shiite shrine near Damascus. Other posts have announced that Jaafar al-Bindawi, the militia’s former head of training and logistics, would be leading the deployment in Syria, while Ali Nizam would serve as the new logistical director for Syrian affairs.


While this effort marks the group’s first publicized deployments to Syria, KIA is no newcomer to the war. Prior to its formal creation, and with Iranian assistance, elements of the militia were very active in Syria beginning in 2013. Alaa Hilayl, one of the group’s heavily glorified “martyrs” and leader of its submilitia Kataib Malik al-Ashtar, was one of the first Shiite commanders to publicly announce combat operations in the Aleppo area in spring 2013.


Meanwhile, Harakat Hezbollah al-Nujaba (HHN, a.k.a. “The Hezbollah Movement of the Outstanding,” or simply Harakat al-Nujaba) has been the other main Iraqi Shiite player in Syria recruitment, and its background is similar to KIA’s. HHN emerged from Iranian-controlled Sadrist splinter group Asaib Ahl al-Haq (AAH) in 2013 and is led by that group’s cofounder, Sheikh Akram Kaabi.


Internet-based propaganda and recruitment materials (mainly through social media) often serve as harbingers of larger moves by Iran’s Iraqi Shiite proxies. This summer, these groups began to disseminate a collection of professionally produced imagery in a highly organized manner, all aimed at raising awareness of the Syria fight and calling for new recruits.


Previously, in fall 2014, the Iranian-backed Iraqi Shiite group Kataib Sayyid al-Shuhada (KSS) instituted a sporadic Internet recruitment program. The group’s fighters were primarily deployed for a failed campaign on Syria’s southern front that lasted into early 2015. Meanwhile, HHN initiated its own limited recruitment program from December to April. Both programs demonstrated that Iraqi Shiites would once again play a major role in Syria (see PolicyWatch 2430, “Iraqi Shiite Foreign Fighters on the Rise Again in Syria”). Yet these moves were only the tip of the iceberg.


While May and June were relatively quiet on this front, Iraqi Shiite recruitment for Syria quickly began to rise in July and spiked in August. September saw slightly decreased recruitment and propaganda posts online, but the traffic was still sizable enough to be regarded as a continuation of the Syria program.


According to fighters who promoted recruitment material or were sent to Syria in late July, training for the deployment often lasted around thirty days and took place in Lebanon or Iran. Considering that most training regimens for Shiite fighters heading to Syria have lasted between two and six weeks (depending on specialization), Iran likely timed the uptick in deployments to best demonstrate unity of arms with Russia and Assad. Specifically, the main spike in recruitment activity began in earnest on July 3, the first reports of experienced KIA fighters deploying to Syria emerged on July 20, and Qasem Soleimani — commander of Iran’s elite Qods Force — met with Russian officials on July 24.

And here’s a map from ISW which “depicts confirmed locations of Iranian Revolutionary Guard Corps (IRGC) commanders in Iraq between October 2014 and October 2015.” ISW continues: “orange markers indicate where IRGC personnel were spotted in an area witnessing active military operations [and] asterisks indicate a Soleimani sighting”:

In short, what’s happened here is that once Tehran secured the support of the Russian air force juggernaut, the IRGC diverted its Iraqi militias to Syria, where they will now join Hezbollah and ensure that Putin’s airstrikes are bolstered when needed by effective ground support. 

The announcement this week by Baghdad that Iraq would welcome Russian airstrikes against ISIS indicates that once Moscow and Tehran have restored Assad and stabilized Syria, the joint air and ground campaign will move to Iraq, a strategic shift that will complete what we have characterized as an outright Mid-East coup

If this thesis materializes, it will mean that the West’s attempt to destabilize the Assad regime has not only failed, but has in fact opened the door for Iran to seize control of the Mid-East and for Russia to reestablish itself as a global superpower capable of bringing its influence to bear on any nation at any time. 

It’s your move Washington, and the stakes couldn’t possibly be higher…

Will The Failure Of Central Banking Lead To Global Bloodshed: The French Revolution Case Study

Submitted by Michael Lebowitz of 720 Global

Shorting the Federal Reserve – Part Deux

The sequence of events leading up the French Revolution are likely unfamiliar to most. Yet money printing and a debauched French currency played no small part in those events. As a sequel to “Shorting the Federal Reserve”, 720 Global aims to provide an historical example of excessive money printing which lead to financial crisis, and ultimately the revolution of a major sovereign nation. More than a history lesson, this article effectively illustrates the road on which the U.S. and many other nations currently travel. The story relayed in this article is not a forecast for what may happen but a simple reminder of what has repeatedly happened in the past.

As you read, notice the story lines the French politicians used to persuade the opposition and justify money printing. Note the similarities to the rationales used by central bankers and neo?Keynesians today. Then, as now, it is promoted as a cure for economic ills with manageable consequences and where failure to generate a sustainable recovery are thought to be a failure of not having acted boldly enough.

Our gratitude to the late Andrew D. White, on whose work we relied heavily. The exquisite account of France circa the 1780?1790’s was well documented in his paper entitled “Fiat Money Inflation in France” published in?1896. Any unattributed quotes were taken from his paper.

Before The Presses Rolled

During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands. For example, in 1776 newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes as his recently fired predecessor argued. Necker was ultimately replaced 7 years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back.

By the late 1780’s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective but the deficit was very slow to decrease. The problem, however, was the citizens were tired of the economic stagnation that resulted from belt tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:

“Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self?denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few”.

By 1789, commoners, politicians and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned).

This was a stark departure from the silver and gold backed Livre, the currency of France at the time. Assembly debate was lively, with strong opinions on both sides of the issue. Those against it understood that printing fiat money failed miserably many times in the past. In fact, the John Law/Mississippi bubble crisis of 1720 was caused by an over issue of paper money. That crisis caused, in White’s words, “the most frightful catastrophe France had then experienced”. History was on the side of those opposed to the new plan.

Those in favor looked beyond history and believed this time would be different. They believed the amount of money printed could be controlled and ultimately pulled back if necessary. It was also argued new money would encourage people to spend and economic activity would surely pick up. Another popular argument was France would benefit by selling the confiscated lands to its people and these funds would help pay off its debts. In addition, land ownership by the masses strengthened French patriotism.

The debate was won by those in favor of printing. As we have seen many times before and after this event, hope and greed won out over logic, common sense and most importantly, history. Per White?But the current toward paper money had become irresistible. It was constantly urged, and with a great show of force, that if any nation could safely issue it, France was now that nation; that she was fully warned by her severe experience under John Law; that she was now a constitutional government, controlled by an enlightened, patriotic people,??not, as in the days of the former issues of paper money, an absolute monarchy controlled by politicians and adventurers; that she was able to secure every livre of her paper money by a virtual mortgage on a landed domain vastly greater in value than the entire issue; that, with men like Bailly, Mirabeau and Necker at her head, she could not commit the financial mistakes and crimes from which France had suffered under John Law, the Regent Duke of Orleans and Cardinal Dubois”. This time was different in their collective minds!

April 1790

The final decree was passed and 400 million Assignats, backed by confiscated church property, were issued. The notes were quickly put into circulation and “engraved in the best style of the art”, as shown below.

As one might suspect the church decried the action, but the large majority of French were in favor. The press and assemblymen extolled the virtues of this new money. They spoke and wrote of future prosperity and an end to the economic oppression. They thought they found a cure for their economic ills.

Upon the issuance of the new money, economic activity picked up almost immediately. As expected, the money allowed for a portion of the national debt to be paid off as well. Confidence and trade expanded. The summer of 1790 proved to be an economic boom time for France.

Fall 1790

The good times were limited. By October, economic activity was back in decline and with it came a renewed call for more money printing. Per White? “The old remedy immediately and naturally recurred to the minds of men. Throughout the country began a cry for another issue of paper”. The deliberations regarding money printing were rekindled with many of the same arguments on both sides of the debate re?hashed. A new argument for those in favor of printing was simply that the original 400 million Assignats was not enough.

While those favoring money printing acknowledged the dangers of their actions, they were also dismissive about them at the same time. These Assemblymen believed if a little medicine appeared to work with no side effects why not take more. Debate this time around was easier for the pro?printing consortium. Of note was a well?respected elder statesman of the Assembly and national hero named Gabriel Riqueti, Comte de Mirabeau (Mirabeau). During the first round of debates, Mirabeau was strongly against the issuance of the new currency. In fact he said the following: “A nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium” in regards to paper money. He even called the issuance of money “a loan to an armed robber”.

While Mirabeau clearly understood the effects of printing money, he was now swayed by the arguments of a stronger economy. He also appreciated the benefits of making a large class of landholders for the first time. Mirabeau reversed his opinion and joined the ranks of those believing France could control the inflationary side effects. He now argued for one more issue of Assignats. As a precautionary measure he insisted that as soon as paper became abundant, self?governing laws of economics would ensure the money was retired. Mirabeau went as far  as recommending the new amount of printed money should be enough to pay down the entire debt of France ? 2,400 million!

The naysayers warned of the ills of the proposed second printing. Of note was Necker. If you recall he was partially responsible for the debt buildup that led to France’s problems. Necker “predicted terrible evils” and offered other means to accomplish economic growth. His opinions were not popular and Necker was “spurned as a man of the past” by the Assembly and ultimately left France forever. A powerful pamphlet, written by Du Pont de Nemours was popular amongst the nays and was read to the Assembly. It declared that doubling the money supply would “simply increase prices, disturb values, alarm capital, diminish legitimate enterprise, and so decreases the demand for both products and for labor. The only persons to be helped by it are the rich who have large debts to pay”.

The arguments of Neckar and Du Pont de Nemours fell on deaf ears. Those in favor rebutted with comments that printing more money was “the only means to insure happiness, glory and liberty to the French nation”. They took the prior debate a step further and now theorized that the gold and silver Livres would be undesirable as Assignats would be the only currency people demanded.

On the 29th of September 1790, a bill authorizing the issuance of 800 million Assignats was passed. The bill also decreed that when Assignats were paid back to the government for land they should be burned. This added measure was thought of as a way to ensure the newly printed money was not inflationary.

White commented: “France was now fully committed to a policy of inflation; and, if there had been any question of this before, all doubts were removed” he went on discussing how “exceedingly difficult it is stopping a nation once in the full tide of a depreciating currency”.

It turns out the money returned to the government wasn’t burned but was re?issued in smaller denominations. Within a short period 160 million was paid to the government for lands and was reissued “under the pleas of necessity”.

June 1791

Nine months after the second issue of 800 million Assignats, and another cycle of good economic activity followed by bad, pressure grew for more money printing. With little fanfare or debate, a new issue of 600 million was issued. With it, once again came “solemn pledges to keep down the amount in circulation”.

This experience, like the previous two, was followed by a brief period of optimism that quickly faded. With each successive printing came currency depreciation and higher prices. Despite the beliefs of those in favor of printing, hoarding of gold and silver backed coins was occurring. The French people were watching their paper money lose value and becoming more interested in preserving their wealth. The coins were in limited supply while paper money was being printed with increasing frequency. In their minds, gold and silver offered the stability that  paper money was rapidly losing.

“Still another troublesome fact began to now appear. Though paper money had increased in amount, prosperity had steadily diminished. In spite of all the paper issues, commercial activity grew more and more spasmodic. Enterprise was chilled and business became more and more  stagnant”.

With each new issue came increased trade and a stronger economy. The problem was the activity wasn’t based on anything but new money. As such, it had very little staying power and the positive benefits quickly eroded. Businesses were handcuffed. They found it hard to make any decisions in fear the currency would continue to drop in value. Prices continued to rise. Speculation and hoarding were becoming the primary drivers of the economy. “Commerce was dead; betting took its place”. With higher prices, employees were laid off as merchants struggled to cover increasing costs.

The only ones truly benefiting were manufacturers producing goods for foreign countries and the stock brokers. The rapidly declining value of their currency attracted orders from other countries that were now able to purchase French goods very cheaply. Those businesses and consumers that relied on goods from outside the country were battered by higher prices. With the increased money supply and economic uncertainty the “ordinary motives for savings and care diminished”. Speculation increased significantly. While some stock investors in the urban regions were exploiting the condition, the onus fell on the working man. Inflation, weakening currency and lack of jobs was damaging to a large majority of Frenchmen.

The economic conditions also brought on more crime and increased instances of bribery of government officials. Conditions were described by White as “the decay of a true sense of national pride”.

December 1791

A new issue of 300 million more Assignats was ordered to be printed. With that decree it was also ordered that a previous limit on the total amount to be printed be repudiated. By this point it was estimated the value of their currency was cut in half and inflation was rampant.

April?July 1792

Another 600 million Assignats were printed. The presses rolled on and after a few more printings it was estimated a total of 3,500 million Assignats now existed. The issuances continued through 1792 and 1793.

“The consequences of these over issues now began to be more painfully evident to the people at large. Articles of common consumption became enormously dear and prices were constantly rising. Orators in the Legislative Assembly, clubs, local meetings and elsewhere now endeavored to enlighten people by assigning every reason for this depreciation save the true one. They declaimed against the corruption of the ministry, the want of patriotism among the Moderates, the intrigues of the emigrant nobles, the hard?heartedness of the rich, the monopolizing  spirit of the merchants, the perversity of the shopkeepers, ???each and all of these as causes of the difficulty”.

French Revolution

Throughout 1792 and 1793 there were instances of mobs demanding basic necessities such as bread, sugar and coffee. Peaceful demonstrations turned violent and plundering of the local shops was commonplace. The French Revolution was born.

Money printing was not the sole cause of the revolution, but it certainly helped light the fuse. In all fairness, the French people were demanding the same liberties they helped America fight for. The idea of a Monarchy was fading and those supporting democratic principles were leading the charge. In hindsight, money printing was a last ditch effort to create prosperity and keep the Revolution at bay. Poverty and despair spread through France. Malnutrition and hunger due to lost employment and inflation fed the Revolution. In 1792 a republic was proclaimed and in the following year King Louis XVI was sent to the guillotines. 


The story retold in this article echoes that of other nations before and after it. The language, promises, and ultimately the excuses used by the politicians are a familiar refrain. There is nothing new with money printing or “quantitative easing” as modern day central bankers call it. Despite the passing of over 200 years and substantial development in the world, plus ça change (the more that changes, the more it is the same thing).

As stressed in part 1 of this series “Shorting the Federal Reserve”, gold has a long history serving as a tool of wealth preservation. After numerous financial crises caused by the debasement of currencies have modern day economists and central bankers finally figured out how to print money with no consequences? Despite our wishes to the contrary, every action still has an equal and opposite reaction (consequence). The investment pundits who see nothing wrong with the actions of the world central banks regard holding gold as ridiculous. We consider an allocation to gold as a matter of prudence given what we have seen and expect to see from central bankers desperate to maintain status quo.

Hopefully after reading this and “Shorting the Federal Reserve” you will understand a little protection may go a long way in what may not be as clear cut an economic future as some would lead us to believe.

Global Dollar Funding Shortage Intesifies To Worst Level Since 2012

The last time we observed one of our long-standing favorite topics (first discussed in early 2009), namely the global USD-shortage which manifests itself in times of stress when the USD surges against all foreign currencies and forces even the BIS and IMF to notice, was in March of this year, when we explained that “unlike the last time, when the global USD funding shortage was entirely the doing of commercial banks, this time it is the central banks’ own actions that have led to this global currency funding mismatch – a mismatch that unlike 2008, and 2011, can not be simply resolved by further central bank intervention which happen to be precisely the reason for the mismatch in the first place.”

Furthermore JPM conveniently noted that “given the absence of a banking crisis currently, what is causing negative basis? The answer is monetary policy divergence. The ECB’s and BoJ’s QE coupled with a chorus of rate cuts across DM and EM central banks has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections and rate cuts raising the supply of euro and other currency funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis.”

To which we rhetorically added: “who would have ever thought that a stingy Fed could be sowing the seeds of the next financial crisis (don’t answer that rhetorical question).”

All this was happening when the market was relentlessly soaring to all time highs, completely oblivious of this dramatic dollar shortage, which just a few months later would manifest itself quite violently first in the Chinese devaluation and sale of Treasurys, and then in the unprecedented capital outflow from emerging markets as the great petrodollar trade – just as we warned in November of 2014 – went into reverse. In fact, there are very few now who do not admit the Fed is responsible for both the current cycle of soaring volatility, or what may be a market crash (as DB just warned) should the Fed not take measures to stimulate “inflation expectations” (read: more easing).

In any event, since March we have received numerous requests for follow-up of where said funding shortage is now. So here are the latest observations on the current level of the global dollar funding shortage as measured by the Dollar fx basis, courtesy of JPM:

The dollar fx basis declined further over the past two months. The 5-year dollar fx basis weighted across six DM currencies declined to a new  low for the year and the lowest level since the summer of 2012 during the euro debt crisis.

In other words: the USD funding shortage is even worse than it was when we looked at it in March, it still is a function of conflicting central bank liquidity flows, and while not as bad as it was at its all time worst levels in late 2011, it is slowly but surely getting there with every passing week that the Fed does not ease monetary conditions. 

A brief history of the three key periods of global USD-funding shortfalls:

  • The first episode immediately after the Lehman bankruptcy coincided with a US banking crisis that quickly became a global banking crisis via cross border linkages. Financial globalization meant that Japanese banks had accumulated a large amount of dollar assets during the 1980s and 1990s. Similarly European banks accumulating a large amount of dollar assets during 2000s created structural US dollar funding needs. The Lehman crisis made both European and Japanese banks less creditworthy in dollar funding markets and they had to pay a premium to convert euro or yen funding into dollar funding as they were unable to access dollar funding markets directly.
  • The second episode of very negative dollar basis took place during the Euro debt crisis. The sovereign crisis created a banking crisis making Euro area banks less worthy from a counterparty/credit risk point of view in dollar funding markets. As dollar funding markets including fx swap markets dried up, these funding needs took the form of an acute dollar shortage. European banks and companies that had dollar assets to fund had to pay a hefty premium in fx swap markets to convert their euro funding into dollar funding. Those European banks and companies that were unable to do so, were forced to liquidate dollar assets such as dollar denominated bonds and loans to reduce their need for dollar funding
  • The third phase of very negative dollar basis started at the end of last year. Monetary policy divergence has for sure played a role during the end of 2014 and the beginning of this year. The ECB’s and BoJ’s QE has created an imbalance between supply and demand across funding markets. Funding conditions have become a lot easier outside the US with QE-driven liquidity injections raising the supply of euro and yen funding vs. dollar funding. This divergence manifested itself as one-sided order flow in cross currency swap markets causing a decline in the basis. And we did see these funding imbalances in cross border corporate issuance.

More from JPM:

Similar to the beginning of this year, the decline in the dollar fx basis is raising questions regarding shortage in dollar funding. This is because the fx basis reflects the relative supply and demand for dollar vs. foreign currency funds and an even more negative basis currently points to more intense shortage of USD funding relative to the beginning of the year.


Figure 5 shows that the current negativity of the dollar fx basis represents the third major episode since the Lehman crisis. Before the Lehman crisis the fx basis was remarkably stable hovering around zero as funding markets were well balanced. After the Lehman crisis, funding markets experienced persistent imbalances with an almost structural shortage of dollar funding.

The conclusion:

In all, continued monetary policy divergence between the US and the rest of the world as well as retrenchment of EM corporates from dollar funding markets are sustaining an imbalance in funding markets making it likely that the current episode of dollar funding shortage will persist.

What does this mean in simple terms? Think back to what David Tepper said several weeks ago on CNBC when, contrary to popular opinion, he admitted he was bearish on risk assets mostly as a result of the “reserve streams” going in two different ways. This is precisely what the dollar shortage as quantified by the negative dollar basis is telling us: the policy divergence between the “tight” Fed and the ultra loose ECB and BOJ is starting to reach extreme levels, and will likely continue until the basis blows out to its theoretical limit of -50bps as set by the Fed-ECB swap line.

At that point either the Fed will be forced to admit it was beaten by the market, and either cut rates (to negative) while perhaps unleashing even more QE to offset the monetary imbalance with the rest of the world, or it will once again engage in even more swap lines with foreign central banks as the dollar funding shortage moves beyond simply synthetic and into an actual shortage of USD “bills” all in electronic credit format of course, because as we further explained last week, it is simply impossible to satisfy all global USD-denominated claims.

Manifesto – The Values of Value Investing

I rarely share letters we write to IMA’s clients, but I decided to share this “Value Investor’s Manifesto” I wrote for our clients in July. It should be a helpful tool to frame recent volatility in an appropriate perspective. It’s just eight pages long, but it’s probably one of the most important pieces of writing I have done in a long, long time. Here is the first part, the introduction.


By Vitaliy Katsenelson, CFA

Part One: Introduction

The relationship between a client and a money manager is like a marriage: even if you’re married to the right person, it’s just a matter of time before your relationship will hit hard times that test the strength of your marriage. After all, life is not linear, it’s full of ups and downs. The downs will ultimately test a couple’s commitment to one another.

Just like life, stock returns are anything but linear. Over the last one hundred-plus years, stocks returned about 11% a year on average. But if you were to look at stock market returns on an annual basis, they were usually anything but 11%. This 11% average is the culmination of a very combustible mixture of numbers that individually bear very little resemblance to the average they result in.

Side effects of nonlinearity of stock behavior clearly show up in investor returns. The financial services market research firm DALBAR studied historical returns of mutual funds and actual (realized) returns of investors who invested in those mutual funds. DALBAR’s findings were stunning. For decades fund investors had significantly underperformed the mutual funds they invested in, not by a percent or two but by a mile, capturing only a small fraction of the returns of those mutual funds.

For a civilian (nonprofessional) investor, understanding the investment process of a fund manager is usually difficult. Often, performance is the only thing investors can judge objectively, so recent performance overshadows all other metrics. Investors compare the most recent returns of their favorite new mutual fund versus the returns of the one they’re holding. If the new mutual fund has done better recently, they’ll sell the old one and buy the new one. This often results in buying high and selling low.

Any money manager, whether he is managing separate accounts or a mutual fund, will go through stretches where he looks smarter or dumber than he really is, though his IQ hasn’t actually changed.

When we look smarter than we are, we’re not worried about what clients think of us (though we try to temper their expectations of our future brilliance). At that point our biggest concern is our own self-perception: we don’t want success to go to our heads and result in overconfidence.

On the flip side, it’s just a matter of time before we look dumber than we are, and that’s when our relationship with a client gets tested. Especially if it’s a very new relationship and the client hasn’t had a chance to experience our brilliance.

Historically, value investing (owning undervalued companies) has done significantly better than other strategies. Paradoxically, the reason it has done well in the long run is because it did not work consistently in the short run. If something works consistently (key word), everybody piles into it and it stops working.

These aforementioned cycles of temporary brilliance and dumbness are not just common to us mere mortals. Even Warren Buffett’s Berkshire Hathaway goes through them. As just one example, in 1999, when the stock market went up 21% Berkshire Hathawaystock declined 19%. In 1999 the financial press was writing obituaries for Buffett’s investment prowess.

Suddenly, in 1999 Buffett’s IQ was lagging the market by 40%. At the time investors were infatuated with internet stocks that were not making money but that were supposed to have a bright future. Investors were selling unsexy “old economy” stocks that Buffett owned to buy the “new economy” ones.

If at the end of 1999, you were to sell Berkshire Hathaway and buy the S&P 500 instead, you would have done the easy thing, but it would have been a large (though very common) mistake. Over the next three years Berkshire Hathaway gained over 30% while the S&P declined over 40%. During the year 1999 Buffett’s IQ did not change much; in fact the (book) value of businesses Berkshire Hathaway owned went up by 0.5% that year. But in 1999 the market’s attention was somewhere else and it chose to price Berkshire Hathaway 19% lower.

Where are we going with this? We look at the relationship with our clients as a partnership. For this partnership to work we need to communicate on the same wavelength. In this letter we would like to establish this common wavelength.

Part Two: The Values of Value Investing 

To read part TWO of this manifesto, titled the “Values of Value Investing” follow this link or this http://ima?

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books have been translated into eight languages.  Forbes called him – the new Benjamin Graham.   

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