They Can See a ‘Stick of Butter from Space’ — The Billion Dollar Spy Agency You’ve Never Heard Of


Source: Claire Bernish

Re-posted From Black Listed News Published: March 25, 2017

While most Americans would consider the CIA, and perhaps the NSA, household names, one U.S. spy agency — whose headquarters surpasses the U.S. Capitol in size — has managed to keep to the shadows while possessing cutting edge tools of the surveillance trade.

Called the  National Geospatial-Intelligence Agency (NGA), even former President Barack Obama didn’t know of its existence when he first took officedespite that the agency employs some 15,400 people.

“So, what do you [do]?” Obama asked a customer at a Washington, D.C., Five Guys hamburgers in May 2009.

“I work at NGA, National Geospatial-Intelligence Agency,” he answered.

“Outstanding,” then-president Obama asserted. “How long have you been doing that?”

“Six years.”

“So, explain to me exactly what this National Geospatial …” Obama asked, unable to recall the agency’s full name.

Timidly, the man replied, “Uh, we work with, uh, satellite imagery.”

“Obama appeared dumbfounded,” Foreign Policy’s James Bamford reports. “Eight years after that videotape aired, the NGA remains by far the most shadowy member of the Big Five spy agencies, which include the CIA and the National Security Agency.”

The NGA’s secretive identity belies the agency’s massive physical size and the scope of its surveillance activities, as Bamford continues,

“Completed in 2011 at a cost of $1.4 billion, the main building measures four football fields long and covers as much ground as two aircraft carriers. In 2016, the agency purchased 99 acres in St. Louis to construct additional buildings at a cost of $1.75 billion to accommodate the growing workforce, with 3,000 employees already in the city.

“The NGA is to pictures what the NSA is to voices. Its principal function is to analyze the billions of images and miles of video captured by drones in the Middle East and spy satellites circling the globe. But because it has largely kept its ultra-high-resolution cameras pointed away from the United States, according to a variety of studies, the agency has never been involved in domestic spy scandals like its two far more famous siblings, the CIA and the NSA. However, there’s reason to believe that this will change under President Donald Trump.”

Originally tasked primarily with cartography — before a mammoth expansion, the spy arm had been called the National Imagery and Mapping Agency — until a name and mission switch in 2003 gave the National Geospatial-Intelligence Agency its name, with the hyphen allowing a three-letter acronym so enamored by the government.

President Dwight D. Eisenhower, whose fondness for imagery intelligence became known when he served as a general during World War II, created the National Photographic Interpretation Center shortly before leaving office — an agency also later absorbed by the NGA.

Now, the NGA works in conjunction with the U.S. Air Force to analyze the staggering amount of data collected through aerial surveillance abroad — mostly by unmanned aerial systems, such as drones with high-powered cameras.

According to at least one source, as of 2013, the NGA was integral in the analysis of surveillance data pertaining to Iran’s nuclear capabilities.

Revelations on the depth and breadth of the Central Intelligence Agency’s domestic capabilities, long believed out of its territory, was exposed by Wikileaks Vault 7 recently to be on par with National Security Agency programs — so much so, analysts say it constitutes a duplicate Big Brother.

Data provided to the NGA by military officials has assisted in various U.S. operations in the Middle East by tracking vehicles believed responsible for planting improvised explosive devices, or IEDs, and for monitoring hot spots for insurgent breakouts.

But the NGA hardly only keeps to support operations, as David Brown — author of the book, “Deep State: Inside the Government Secrecy Industry” — explained,

“Before the trigger was pulled on NEPTUNE’S SPEAR, the mission to kill Osama Bin Laden, SEAL Team Six had access to a perfect replica of the Abbottabad compound where the terrorist mastermind was hiding. The details for the replica were gathered by the NGA, which used laser radar and imagery to construct a 3D rendering of the compound. How precise were its measurements and analysis? The NGA figured out how many people lived at the compound, their gender, and even their heights. But the NGA didn’t stop there: Its calculations also helped the pilots of the stealth Black Hawks know precisely where to land.”

With a combined budget request for 2017 of $70.3 billion, the National and Military Intelligence Programs — NGA falls under the latter — have seen a quickening of support from the authoritarian-leaning, pro-military Trump administration. This and additional factors — such as the astonishingly sophisticated equipment at the agency’s disposal — have ignited fears the NGA could be granted authority to bring its expert microscope into focus against the American people.

“While most of the technological capacities are classified, an anonymous NGA analyst told media the agency can determine the structure of buildings and objects from a distance, has some of the most sophisticated facial recognition software on the planet and uses sensors on satellites and drones that can see through thick clouds for ‘all-weather’ imagery analysis,” reports news.com.au.

Efforts to bolster NGA’s innovate staff pool ratcheted up on Thursday, as Business Wire reported,

“From navigating a U.S. aircraft to making national policy decisions, to responding to natural disasters: today’s U.S. armed forces rely on Geospatial Intelligence (GEOINT) to meet mission requirements. As the nation’s primary source of GEOINT for the Department of Defense and the U.S. Intelligence Community, the National Geospatial-Intelligence Agency (NGA) depends on the National Geospatial-Intelligence College (NGC) to produce top-tier talent to deliver intelligence with a decisive advantage. Today, Booz Allen Hamilton (BAH) announced that it has been awarded a five-year, $86 million contract by NGA-NGC to lead the Learning Management and Advancement Program (LMAP) that will provide high-quality learning solutions to equip a diverse workforce with the knowledge and skills necessary to meet current and future GEOINT mission requirements.”

Bamford points out for Foreign Policy the Trump administration intimated a significant expansion of spying on mosques and Islamic centers, while others admonish said surveillance could put Black Lives Matter and other protest groups in the NGA’s silent crosshairs.

Of distinct concern for privacy advocates are drones with uncanny zooming capabilities — features used against U.S. citizens before. Bamford continues,

“In 2016, unbeknownst to many city officials, police in Baltimore began conducting persistent aerial surveillance using a system developed for military use in Iraq. Few civilians have any idea how advanced these military eye-in-the-sky drones have become. Among them is ARGUS-IS, the world’s highest-resolution camera with 1.8 billion pixels. Invisible from the ground at nearly four miles in the air, it uses a technology known as ‘persistent stare’ — the equivalent of 100 Predator drones peering down at a medium-size city at once — to track everything that moves.

“With the capability to watch an area of 10 or even 15 square miles at a time, it would take just two drones hovering over Manhattan to continuously observe and follow all outdoor human activity, night and day. It can zoom in on an object as small as a stick of butter on a plate and store up to 1 million terabytes of data a day. That capacity would allow analysts to look back in time over days, weeks, or months. Technology is in the works to enable drones to remain aloft for years at a time.”

With cutting edge technology, a rapid enlargement underway, and billions in budgetary funds at the ready, the National Geospatial-Intelligence Agency is the cloaked, mute sibling of the nefarious Intelligence Community — but it’s time to pull the protective shell off this potential ticking time bomb before reining it in becomes an impossibility.

Trump Creates New Office For Son-In-Law Kushner To Overhaul Government


Tyler Durden's picture

President Trump is reportedly creating a new position for his son-in-law and senior adviser Jared Kushner.

The newly formed White House Office of American Innovation will leverage business ideas and potentially privatize some government functions, according to Reuters, as Kushner says:

“The government should be run like a great American company. Our hope is that we can achieve successes and efficiencies for our customers, who are the citizens,”

In a statement to the Post, Trump said:

“I promised the American people I would produce results, and apply my ‘ahead of schedule, under budget’ mentality to the government.”

Some of the areas he will focus on are veterans’ care, opioid addiction, technology and data infrastructure, workforce training and infrastructure, according to the report.

Kushner has been a regular presence at his father-in-law’s side and was earlier cleared by the Justice Department to serve as a White House senior adviser even as Democrats raised concerns about his potential conflicts of interest.

Kushner’s move comes one week after Ivanka Trump received her own office in the White House along with access to classified information and a government-issued phone after aides earlier said she would not take on a role in her father’s White House.

While we are sure Mr Kushner is eminently qualified for this role, we can’t help but feel a tinge of ‘keep it in the family’ angst as nepotism continues to rear its ugly head. However, what is more fascinating is that this new role was assigned just as Kushner faces questions over his Russian dealings(as Axios summarizes)

The NYTimes has a story this morning on Jared Kushner being summoned before the Senate Intelligence Committee to answer questions on his meetings with Russian officials and Kremlin-linked businessmen. Key highlights:

  • The White House got a heads up earlier this month on potential questions about Kushner’s meetings with Russian Ambassador Sergey Kislyak.
  • Kushner also apparently met with Sergey Gorkov, who heads up Obama-sanctioned Vnesheconombank.
  • WH spokeswoman Hope Hicks confirmed these meetings, but said Kusher “isn’t trying to hide anything.”
  • Questions for Kushner include whether he discussed personal business deals (included an over-leveraged Manhattan building), per the N

Key Events In The Coming Week


Tyler Durden's picture

The key economic releases this week are the consumer confidence report on Tuesday, the third estimate of Q4 GDP on Thursday, and the PCE report as well as Personal Income & Spending data on Friday. In addition, there are several scheduled speaking engagements by Fed officials this week.

Elsewhere, on Wednesday, the UK is expected to trigger Article 50 starting the European Union exit process. In EM we have monetary policy meetings in Czech Republic, Egypt, Hungary, Mexico and South Africa. Banxico to hike by 25bp.

Recap of key global events:

Article 50 to be triggered on Wednesday

  • The hawkish BoE and the short market position support GBP, but analysts see negative risks in the months ahead and expect a very slow start of the negotiations after the UK government activates Article 50 next week. Europe will be busy with the elections in France and Germany, while their immediate Brexit focus will be on the UK’s EU budget contributions. Markets may have to wait until the end of this year, or even early next year, to have a better view on the negotiations and the chances of a transition period.

US data and European CPI & conf. indicators dominate

  • US: Expect a slight upward revision of 4Q GDP (final) to 2.0% from 1.9% previously. On Friday, we also look for personal spending growth of 0.2% m/m for February, unchanged from growth in January (just +0.1% in real terms). BofA looks for personal income growth of 0.4% mom, also unchanged from growth in the prior month.
  • EA: Markets We expect March inflation at 1.7% driven by developments in Spanish electricity prices and liquid fuel prices in the Euro area. On PMIs we continue to interpret them carefully given the disconnect between ‘soft’ survey data and ‘hard’ activity data. We have argued before that when this is the case, other soft data (like national sentiment indicators) and hard data are usually more reliable for economic forecasting.

The week ahead in Emerging Markets

  • There will be monetary policy meetings in Czech Republic, Egypt, Hungary, Mexico and South Africa. We forecast Banxico hiking 25bp. Rating reviews in Russia and Bahrain.

* * *

A breakdown of daily key events in the coming week courtesy of Deutsche Bank:

  • We’re kicking off things this morning in Europe with Germany where the March IFO survey is due out. The latest M3 money supply reading for the Euro area is also due this morning. Over in the US this afternoon the sole release is the Dallas Fed’s manufacturing survey for March.
  • With little to highlight in Europe tomorrow, the focus will be on the US where we get the advance goods trade balance for February, wholesale inventories for February, consumer confidence for March, S&P/Case-Shiller house price index for January and Richmond Fed manufacturing survey for March are due.
  • Wednesday kicks off in Japan where retail sales and small business confidence data is due. Over in Europe the focus will be on the UK with the February money and credit aggregates data. In the US on Wednesday the only data due out is pending home sales.
  • Turning to Thursday, during the European session the most notable data is due out of Germany where the first estimate of CPI in March is due. Also due out are various March confidence indicators for the Euro area. In the US on Thursday the early data is the third estimate of Q4 GDP and Core PCE, while initial jobless claims data is also due.
  • The busiest day looks set to be reserved for Friday. In Japan we will get February CPI, industrial production and employment data, while in China the official manufacturing and non-manufacturing PMI’s for March are due. In Europe we’ll get CPI reports for France and the Euro area along with Q4 GDP in the UK and unemployment in Germany. In the US data due includes February personal income and spending reports, PCE core and deflator readings, the Chicago PMI for March and the final University of Michigan consumer sentiment reading revision.
  • Away from the data the Fedspeak diary this week is packed. Today we see Evans and Kaplan speak, tomorrow we have George, Kaplan and Powell speaking along with Fed Chair Yellen (albeit at a conference which doesn’t suggest a focus on the economy or monetary policy), Wednesday see’s Evans, Rosengren and Williams speak, Thursday has Mester, Williams and Kaplan scheduled and Friday finishes with Kashkari. Away from that other important events this week include the BoE bank stress test scenarios today, a Scottish Parliament debate

* * *

Finally, focusing on the US events with consensus estimates, courtesy of Goldman

Monday, March 27

  • 10:30 AM Dallas Fed manufacturing index, March (consensus +22.0, last +24.5)
  • 01:15 PM Chicago Fed President Evans (FOMC voter) speaks: Chicago Fed President Charles Evans will participate in a panel discussion on “Monetary Policy in a New Economic Environment” at the Global Interdependence Center’s Central Banking conference in Madrid.
  • 06:30 PM Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Fed President Robert Kaplan will participate in a panel on economic conditions and the role of monetary policy hosted by the Mosbacher Institute for Trade, Economics, and Public Policy at the Texas A&M University in College Station, Texas. Audience and media Q&A is expected.

Tuesday, March 28

  • 08:30 AM U.S. Census Bureau Report on Advance Economic Indicators; Advance goods trade balance, February preliminary (GS -$64.5bn, consensus -$66.6bn, last -$68.8bn): We estimate the goods trade deficit narrowed $4.3bn to $64.5bn in February, following last month’s $4.4bn widening that we believe reflected a pronounced impact from the relatively early Chinese New Year, which likely shifted the timing of imports from February to January. Available port statistics in February suggest a sharp pullback in inbound container traffic, further evidence of the Chinese New Year shift; Wholesale inventories, February preliminary (consensus +0.2%, last -0.2%)
  • 09:00 AM S&P/Case-Shiller 20-city home price index, January (GS +0.7%, consensus +0.7%, last +0.9%): We expect the S&P/Case-Shiller 20-city home price index to rise 0.7% in the January report following a 0.9% increase in the prior month. The measure still appears to be influenced by seasonal adjustment challenges, and we place more weight on the year-over-year increase, which rose to 5.6% from 5.2% in December.
  • 10:00 AM Conference Board consumer confidence, March (GS 115.0, consensus 114.0, last 114.8): We forecast that consumer confidence edged up to 115 following last month’s 3.2pt rise to a new cycle high. Our forecast reflects encouraging consumer sentiment data in February as well as recent stock market strength during most of the survey period.
  • 10:00 AM Richmond Fed manufacturing index, March (consensus +15, last +17)
  • 12:45 PM Kansas City Fed President George (FOMC non-voter) speaks: Kansas City Fed President Esther George will give the keynote speech on the U.S. economy and monetary policy at a forum on “Banking and the Economy: A Forum for Women in Banking” in Midwest City, Oklahoma. Audience Q&A is expected.
  • 12:50 PM Fed Chair Yellen (FOMC voter) speaks: Federal Reserve Chair Janet Yellen will give a speech titled “Addressing Workforce Development Challenges in Low-Income Communities” at the National Community Reinvestment Coalition’s annual conference in Washington D.C. No Q&A is expected.
  • 01:00 PM Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Fed President Robert Kaplan will participate in a moderated discussion at an event hosted by the Dallas Committee on Foreign Relations in Dallas, Texas. Audience Q&A is expected.
  • 04:30 PM Fed Governor Powell (FOMC voter) speaks: Federal Reserve Governor Jerome Powell will give a speech on the history and structure of the Federal Reserve as a part of the West Virginia University College of Business Economics’ Distinguished Speaker Series. Audience Q&A is expected.

Wednesday, March 29

  • 09:20 AM Chicago Fed President Evans (FOMC voter) speaks: Chicago Fed President Charles Evans will give a lecture on current economic conditions and monetary policy as a part of the DZ Bank’s International Capital Market’s Conference in Frankfurt, Germany. Audience and media Q&A is expected.
  • 10:00 AM Pending home sales, February (GS +4.0%, consensus +2.1%, last -2.8%): Regional housing data released so far suggest a fairly strong rebound in contract signings for existing homes in February, possibly reflecting the unseasonably warm temperatures and limited snowfall during the month. We expect a 4.0% increase in the pending homes sales index that would fully reverse January’s 2.8% pullback. An increase of that magnitude would be particularly encouraging in the context of higher mortgage rates. We have found pending home sales to be a useful leading indicator of existing home sales with a one- to two-month lag.
  • 11:30 AM Boston Fed President Rosengren (FOMC non-voter) speaks: Boston Fed President Eric Rosengren will discuss the economic outlook at a Boston Economic Club luncheon.
  • 01:15 AM San Francisco Fed President Williams (FOMC non-voter) speaks: San Francisco Fed President John Williams will give a presentation titled “From Sustained Recovery to Sustainable Growth; What a Different Four Years Makes” to the Forecasters Club of New York. Audience and media Q&A is expected.

Thursday, March 30

  • 08:30 AM GDP (third), Q4 (GS +1.9%, consensus +2.0%, last +1.9%); Personal consumption, Q4 (GS +3.0%, consensus +3.0%, last +3.0%): We do not expect a revision on an unrounded basis in the third estimate of Q4 GDP, where growth is currently reported at a 1.9% pace (qoq ar). While our base case entails an unchanged reading for headline GDP, we believe there is some risk of an upward revision to the personal consumption and business fixed investment components.
  • 08:30 AM Initial jobless claims, week ended March 25 (GS 240k, consensus 247k, last 261k): Continuing jobless claims, week ended March 18 (consensus 2,037k, last 1,990k): We expect initial jobless claims to decline sharply to 240k, reversing last week’s sharp rise that we believe largely reflected the impact of Winter Storm Stella. State-level details suggest an impact from the storm on the order of 15k during the week. Continuing claims – the number of persons receiving benefits through standard programs – have continued to trend down in recent weeks, suggestive of additional labor market improvement that we expect to continue.
  • 09:45 AM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Fed President Loretta Mester will give a speech on payment system improvement at the 10th Annual Risk Conference, hosted jointly by the Federal Reserve Bank of Chicago and DePaul University’s Center for Financial Services in Chicago.
  • 11:15 AM San Francisco Fed President Williams (FOMC non-voter) speaks: San Francisco Fed President John Williams will give a speech at the launch and learning community event for the Strong, Prosperous and Resilient Communities Challenge in New York.
  • 03:00 PM Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Fed President Robert Kaplan will take part in a moderated Q&A on economic conditions and the role of monetary policy at the U.S. Chamber of Commerce’s Capital Markets Summit in Washington D.C.
  • 04:30 PM New York Fed President Dudley (FOMC voter) speaks: New York Fed President William Dudley will give a speech on “The Importance of Financial Conditions in the Conduct of Monetary Policy” at a Financial Literacy Day & Laboratory Dedication event at the University of South Florida Sarasota-Manatee. Audience Q&A is expected.

Friday, March 31

  • 8:30 AM Personal income, February (GS +0.5%, consensus +0.4%, last +0.4%); Personal spending, February (GS +0.3%, consensus +0.2%, last +0.2%); PCE price index, February (GS +0.12%, consensus +0.1%, last +0.4%); Core PCE price index, February (GS +0.17%, consensus +0.2%, last +0.3%); PCE price index (yoy), February (GS +2.1%, consensus +2.1%, last +1.9%); Core PCE price index (yoy), February (GS +1.7%, consensus +1.7%, last +1.7%): Based on details in the PPI and CPI reports, we forecast that the core PCE price index rose 0.17% month-over-month in February, or 1.7% from a year ago. Additionally, we expect that the headline PCE price index increased 0.12% in February, or 2.1% from a year earlier. We expect a 0.5% increase in February personal income and a 0.3% rise in personal spending.
  • 09:45 AM Chicago PMI, March (GS 56.0, consensus 56.9, last 57.4): We expect the Chicago PMI to edge down to 56.0 in March, following a sharp 7.1pt increase in February. The index is likely to remain at a level consistent with solid manufacturing growth, in line with incoming reports from other regional manufacturing surveys.
  • 10:00 AM University of Michigan consumer sentiment, March preliminary (GS 97.8 consensus 97.6, last 97.6): We expect the University of Michigan consumer sentiment index to edge up an additional 0.2pt to 97.8 in the March final estimate, reflecting some further improvement among more timely measures of consumer confidence. The preliminary report’s measure of 5- to 10-year ahead inflation expectations declined three tenths to 2.2%, a new record low. However, median 5-year gas price expectations also dropped to a 12-year low, and in past research we’ve found a short-term relationship between these two measures that often results in a reversal in subsequent months. While we cannot rule out the possibility of a step-down in underlying views about the long-term inflation outlook, we see this as a tentative reason to expect a rebound over the next couple months.
  • 10:00 AM Minneapolis Fed President Kashkari (FOMC voter) speaks: Minneapolis Fed President Neel Kashkari will take part in a moderated discussion on the economy and the Federal Reserve system at the Annual Banking Law Institute seminar in Minneapolis. Audience Q&A is expected.
  • 10:30 AM St. Louis Fed President Bullard (FOMC non-voter) speaks: St. Louis Fed President Bullard will participate in an interview on the U.S. economy and monetary policy at a Quinnipiac Global Asset Management Education forum in New York. No media Q&A is expected.

Source: Goldman, Bofa,

KOMMONSENTSJANE – Et tu, Gateway Pundit? Report on yesterday’s Pizzagate March on D.C. disappeared into the memory hole — Fellowship of the Minds


I wish the Demorats would disappear!

kommonsentsjane's avatarkommonsentsjane

Memory Hole (definition): A mechanism for the alteration or disappearance of inconvenient or embarrassing documents, photographs, transcripts, or other records, such as from a website or other archive, particularly as part of an attempt to give the impression that something never happened. The concept was first popularized by George Orwell’s dystopian novel Nineteen Eighty-Four, where […]

via Et tu, Gateway Pundit? Report on yesterday’s Pizzagate March on D.C. disappeared into the memory hole — Fellowship of the Minds

GOOGLE IS INTERFERING WITH MY BLOG!

Reblogged on kommonsentsjane/blogkommonsents.

For your information.

kommonsentsjane

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Dems Move to Block Supreme Court Nominee


The Demorats are not all that smart and will try to block Gorsuch no matter what!

What Happens If They Kill Donald Trump?


Published on Mar 25, 2017

Alex Jones breaks down the repeal of Obamacare and the latest attacks on Trump.

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Sunday Talks – Trey Gowdy -vs- CBS John Dickerson


Source: Sunday Talks – Trey Gowdy -vs- CBS John Dickerson

Watch These Geopolitical Flashpoints Carefully


One thing for sure is the Obama left us in a mess!

KOMMONSENTSJANE – DID RACHEL MADDOW GET PUNK’D BY HER OWN COHORTS? DID THE CHICKEN EVER CROSS THE ROAD?


Maddow makes a fool of herself more often than naught.

kommonsentsjane's avatarkommonsentsjane

~ Conservative Zone
Trump’s Tax Return Wasn’t the Scoop Rachel Maddow Hoped It Would Be

For nearly two years now, MSNBC’s Rachel Maddow has been itching to tar and feather Donald Trump with damaging information or expository gossip that would embarrass our country’s new president or at least make him unpalatable to the nation’s voters. On Tuesday, March 14, Maddow appeared to have just such a scoop, as she teased on Twitter to draw in ratings.
The only problem? The story was less of a scoop and more simply a piece of virtual non-news because the big piece of information she had — two leaked pages of Trump’s 2005 tax return — contained no “smoking gun” bombshells.
In fact, for all practical purposes, it made Trump look like a law-abiding citizen compared to other high-profile personalities such as ex-President Obama, Democratic candidate Bernie Sanders and wealthy investor Warren Buffett, who…

View original post 842 more words

“Don’t Say You Haven’t Been Warned”


Tyler Durden's picture

Authored by Jeffrey Miller via Miller’s Market Musings,

So after a long period of basically no volatility, we finally got some – in a hurry.  In case you were out, the S&P 500 (SPX) finally had a down day of more than 1%.  But that’s not the real story.  Look in bankland, where we have been cautious ever since the rip higher on the Trump Trade (lower taxes, higher rates, lower regulations).  The KRX (KBW Regional Bank Index) fell over 5% on Tuesday – yes, the bank index took a dive of 5% in one day.  And it didn’t bounce.  The SPY was up a bit on Wednesday, but marginally, while the dollar continued to weaken versus the Yen and Euro.  The big questions being asked all revolve around whether the dip in the 10-year bond yield to under 2.40% is reflecting a weaker outlook for the Trump Trade, or, if it’s just an unwind of a massive 10-year bond short after the Fed hike last week was perceived as dovish.

Picture

All Calvin and Hobbes comics courtesy of Bill Watterson and Go Comics.

The mini-rally in the 10-year bond could be the proximate cause of the banks selling off, but that is a little too old school – that implies that what is driving these stocks right now is a focus on fundamentals.  But as long-time readers know, fundamentals only matter in the very long term – in the short term, positioning, especially among the CTA/trend following/risk parity crowd, can become very important at inflection points.  These funds all tend to been leaning in the same direction at the same time, in size, and are designed to pull down risk and then flip the other way quickly on a steep decline.  In short, they are the embodiment of feedback loops that drove the big sell off in August 2015 and in early 2016.  But…this time I think we could be in for a bigger shock.  Just because the market didn’t follow through to the downside after Tuesday doesn’t mean we’re done.  Instead, this may be a preview of coming attractions, as the KRX falling 5% in a day is a warning sign, not an all clear sign.  Because these funds can be easily spooked – especially on a hike.

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The issue isn’t that there are funds that trend-surf.  The issue is that there are now a lot of them, and there has been a recent push into using these funds to “hedge” risk.  The idea is that any downturn will evolve slowly enough for these funds to sell into it – which has happened in the past.  But that was when the group was a lot smaller.  A recent Financial Times article detailed how pervasive this has become. According to the article, clients of Pension Consulting Alliance (PCA) typically allocate 10-20% of their assets to a “CRO program.” What is a CRO program?  “Crisis Risk Offset.” PCA apparently coined the term.  Now, full disclosure: I know a few people who work at PCA and they are all great folks (and neighbors).  This isn’t about them. It’s about allocating to momentum strategies in a size that may be too big to execute properly.  Portfolio insurance anyone?  If you recall, that didn’t work out well (see October 19th, 1987).  Will that (down over 20% in a single day) happen again?  Unlikely.  But we could easily get a situation where a garden-variety 5% pullback in the SPX quickly morphs into a fast 10-15% decline, as funds de-lever their equity longs or flip short.  See these charts of where we are in terms of equity exposure in various trend-following systems, and the size of these funds today.

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The problem with everyone leaning in one direction is that they scare easily.  When realized volatility has been near all-time lows, as it has been in recent months, the simpler versions of these strategies view assets as less risky, so they lever them up.  What the models fail to capture is the speed with which volatility can return.  If volatility slowly creeps back up, then the models work fine.  But if it suddenly spikes higher, the models fall apart, other investors quickly de-risk, and everyone is up all night looking for ghosts.  Don’t say you haven’t been warned.

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This was one of the weirder weeks I’ve seen in awhile. Various proxies for U.S. interest rates were bouncing around based on each tweet and missive from D.C. about whether or not the new healthcare bill would pass.  When the bill was first pulled on Thursday, U.S. stocks fell, and rate proxies reacted as if all of the Trump agenda was in trouble (Trump policies are viewed as inflationary, so rates move up when he’s doing well and down when he’s not).  Look at the Yen this week – every time the Trump agenda looked vulnerable, it rallied.  And then that relationship quickly fell apart at the end of the day on Friday.  When the healthcare bill got pulled for good Friday, it took about 5 minutes for the narrative to shift from Trump failed to now tax cuts can happen sooner rather than later, and so the Yen fell sharply.  This is the world we live in today – traders are making up new and different reasons to scare themselves daily.  Should we care?  I’d say no, except we’re in unstable times (see the 5% selloff in the KRX on Tuesday for proof), and with lots of money in passive funds, ETFs and trend-following strategies, it won’t take a lot to get the markets heading down fast.

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So what will be the catalyst to cause more than a 1% sell-off in the SPX?  While everyone is fixated with the non-bill in D.C., I think they are missing the big risk in the market, which is only getting bigger by the day.  Long-time readers can guess where this is going.  That’s right – China.  While we’ve been distracted in the U.S., China has been raising its equivalent of the Fed Funds rate and trying to stem a credit bubble there from ballooning out of control, while at the same time trying to make sure that if they do succeed in popping the bubble, it deflates slowly.  Good luck with that.  I’m not saying they won’t be able to do it.  I’m just saying that no country has ever pulled it off before.  The borrowing rates for their non-bank financial institutions (NBFIs) are rocketing higher (see the chart below) as they scramble for funds.  Evidently, the popular thing for these NBFIs to do is lend very long-term into risky ventures in order to generate higher yields, but borrow very short-term (under a year) because the funding is cheaper.  If this sounds just like our S&L crisis, version 2.0, you’d be correct.  I would have thought there are some things the Chinese may have wanted to avoid copying from the U.S., but apparently they’ll have to learn that lesson for themselves.

Take a look at the charts below.  You’re actually seeing defaults in China occur, and at an increasing rate (albeit from zero, as extend and pretend is the national motto in China, where everything is always awesome – it is always awesome, right?).  Remember, you’re also seeing short-term repo rates spiking.  A sign of renewed growth and inflation fears?   Ah, no.  It’s a sign of stress in the funding markets and increasing counterparty risks.  Put another way, credit is starting to fray in China right after the biggest increase in debt in the history of the world.

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How will it end? I think Calvin has it pretty well figured out in the below comic strip.

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?So to recap: the question investors need to ask themselves is what will happen if China’s issues start to manifest themselves in global markets (remember August 2015?  Me too.  We’re all in this together). The combination of large risk-parity funds and CTAs being quite long equities at the exact moment that China’s credit bubble is starting to show signs of stress could end quite badly.  The pension funds that have hired CTAs to sell into the next selloff will exacerbate what would have in the past been a normal correction.  And when retail investors who have been relentlessly told to invest their money in long-only index funds or ETFs wake up to a market that is down 10%, 15%, or 20% fast, are they going to hold on, or even buy more, or are they going to realize that their ship is just a plank, and decide to swim for shore while they can?  If history is a guide, we’re going to see lots of investors making a swim for it.

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