Two days after the latest provocative missile test by North Korea, in which it launched a " new type" of ballistic missile, one  which experts warned had  a substantially longer range than any existing rocket North Korea had fired, on Monday morning North Korea announced that it had successfully conducted a mid-to-long range missile test on Sunday supervised by leader Kim Jong Un which  was aimed at verifying the capability to carry a " large scale heavy nuclear warhead."



The country' s KCNA news agency further said that the Hwasong-12 missile was launched at the highest angle so as not to affect the security of neighboring countries and flew 787 kilometers reaching an altitude of 2,111.5 kilometers.



In an earlier article, we explained how and why the ballistic missile used may have been the most advanced one tested by North Korea yet.

For those who may have missed it, here it is again:  " North Korea' s Latest Ballistic Missile Was A " New Type" With Dramatically Longer Range"

After North Korea provoked both its neighbors and the US when on Sunday morning it fired off yet another ballistic missile from Kusong near the border with China  - one which this time did not explode upon launch  - just days after the election of a new South Korean president who ironically advocates more engagement with Pyongyang, experts said the missile appeared to be a new type of ballistic missile, and had a far greater range than any other weapon North Korea has successfully launched.



According to Japanese Defense Minister Tomomi Inada, the missile rose to a height of about 2,000 kilometers, a much steeper trajectory than usual for a North Korean missile test. She also confirmed that officials were looking into the possibility that it was a " new type of ballistic missile." Japan' s cabinet secretary, Yoshihide Suga, said the missile traveled for about 30 minutes and landed 700 kilometers east of the launch site. A spokesman for South Korea&rsquo s Joint Chiefs of Staff estimated the distance at 435 miles.

Cited  by the WSJ, independent experts said the missile, if fired at a conventional angle, could have flown 2,800 miles&mdash far enough to reach the U.S. military base in Guam.

That is a &ldquo considerably longer range than its current missiles,&rdquo said David Wright, co-director of the Global Security Program at the Union of Concerned Scientists, in an analysis of the launch.

 



As the Journal adds, while North Korea&rsquo s Taepodong-2 rocket has flown farther than Sunday&rsquo s missile, North Korea classifies it as a satellite launcher that isn&rsquo t designed to deliver a warhead back to earth. It is, however, banned by United Nations sanctions because similar technology could be used to make an intercontinental ballistic missile.

North Korea&rsquo s previous most recent launch from Kusong took place in February, during a summit meeting between Mr. Trump and Japanese Prime Minister Shinzo Abe. The February launch also featured a new type of missile for North Korea, one that uses a solid fuel-powered engine. The test involved an intermediate-range ballistic missile that was modified from a missile that North Korea launched from a submarine last year. It was later paraded through the streets of Pyongyang in April for a national holiday.

 

Just hours after the Fed' s March " dovish" rate hike, when stocks paradoxically surged to all time highs and yields tumbled,  Goldman found something strange: " surprisingly, financial markets took the meeting as a large dovish surprise&mdash the third-largest at an FOMC meeting since 2000 outside the financial crisis, based on the co-movement of different asset prices." Even more surprising is that according to Goldman, its financial conditions index, " eased sharply, by the equivalent of almost one full cut in the federal funds rate." In other words,  the Fed' s 0.25% rate hike had the same effect as a 0.25% race cut!

Goldman' s Jan Hatzius then went on to note that this was " almost certainly not" the desired outcome that Janet Yellen had been going after, and that markets had in fact misread the Fed' s tightening intentions. The Goldman chief economist then asked rhetorically " how will the committee respond to this potentially undesired move" and answered " at the margin, it will likely make them more inclined to tighten policy.  Using today&rsquo s estimated close, our FCI impulse model now implies a boost of about ½ pp to real GDP growth in 2017, from a starting point of roughly full employment and inflation close to the target. So further FCI easing implies at least some risk of economic overheating&mdash which in turn would increase the risk of recession further down the road. We expect the committee to lean against such an easing over time."

Nearly two months later, with stocks at new all time highs, and financial conditions even easier than they were the first time Goldman warned that the market had misread the Fed' s intentions, Goldman goes back to this most sensitive of topics and writes that despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to ease over the past six months.

 

 

Despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to loosen in recent months. Our financial conditions index is now about 50bp below its November 2016 average and near the easiest levels of the past two years.

Hatzius then asks if - in not so many words - the Fed has lost control of the market, or if the Fed will simply have to punish the market with a " monetary policy shock" to make it clear that the Fed demands tighter conditions to delay the next recession. To wit:

 

 

Does this mean that 1) monetary policy has lost its ability to affect financial conditions or 2) Fed officials just need to deliver more rate hikes if they want to bring about an FCI tightening?

According to Hatzius, " the answer is 2)" and that the Fed has not lost control of the market just yet. Which brings up another question:

 

 

If the Fed retains its ability to steer financial conditions,  why have financial conditions eased recently despite ongoing hikes? The answer is that Fed policy&mdash especially Fed policy communicated around FOMC meetings&mdash only accounts for a relatively small part of the ups and downs of financial conditions. And other developments such as the sharp pickup in global growth have been helpful for US financial conditions by boosting risk assets while keeping the US dollar from appreciating sharply in response to higher short-term interest rates.  While it is difficult to say whether future non-monetary policy shocks will be positive or negative for US financial conditions, our finding that the impact of Fed policy on financial conditions remains (at least) similar to the longer-term average suggests that Fed officials should be able to achieve their goals for financial conditions by moving the funds rate if they try hard enough.

 

Fed Policy Retains Sizable Impact 

What Goldman really meant to say is that the Fed' s 50 bps in rate hikes since December have been drowned and offset by the trillions in new credit created out of China. That credit expansion is now ending however, and China' s credit impulse has tumbled into negative territory (but that' s a different topic).

Going back to Goldman, Hatzius adds that " we find that  the  sensitivity of financial conditions to monetary policy shocks has been quite high recently, at least when we identify these shocks using bond market moves around FOMC meetings. This suggests that the easing of financial conditions is due to other factors, most obviously the improved global environment, not reduced traction of monetary policy."

What form will this monetary tightening " shock" take place? "

 

 

Our best (though uncertain) answer is that the committee  will need to deliver 50-75bp more hikes per year than priced in the forwards to stabilize the economy at full employment. This is roughly consistent with our current funds rate call that we will see an average of 3-4 hikes per year through the end of 2019, compared with market pricing of just over 1 hike."

Of course, if Goldman is wrong and the Fed has no intention of sending risk assets into a tailspin with a monetary policy " shock" , then there is no saying just how much further the combined effort of China' s gargantuan, if cooling, credit expansion, coupled with the " dovishly" hiking Fed can take stocks. However, by now it is becoming clear to even the most resentful permabulls - and even Goldman  - that the longer the Fed delays the day of reckoning out of pure fear of the unknown, the greater the chaos and loss in asset values when the Fed no longer has the luxury of picking when to pull the switch.

 

 

Authored by Craig Wilson via The Daily Reckoning blog,



David Stockman  joined  Greg Hunter of USA Watchdog  to discuss what he views as a fiscal bloodbath and the biggest bond market bubble to ever hit the global economy.

To begin the discussion, the Washington insider was asked about the cash on hand in the United States federal budget and the fiscal conditions that Donald Trump faced where he unloaded,  &ldquo I think it is a total calamity. They capitulated entirely.&rdquo

While speaking on what cuts Trump proposed Stockman pressed,  &ldquo He wants to cut $18 billion in order to &lsquo balance it out&rsquo from domestic programs like the the National Institute of Health (NIH), Public Broadcasting Service (PBS) and a lot of things in between&hellip and  that&rsquo s just a down payment for the big reduction proposed for the full fiscal year that starts in October. That proposal is looking for $54 billion for defense and other domestic priorities, met with $54 billion of cuts on the domestic side&hellip   the problem is, Trump went to the Hill and they got totally fleeced.  They ended up with most of the increases they wanted because that is the way Washington works. More money for the defense and border pork barrel.&rdquo

 

 

With contrarian style,  David Stockman  then pointed out, &ldquo He ended up with no cuts at all. He now has $30 billion in increases and a statement from Congress, that was on a bipartisan basis, allowed that we&rsquo re in control &ndash you can have your defense and other priorities but we&rsquo ll march the budget higher together. I think that&rsquo s the opening gambit for what&rsquo s going to happen in the full year as the Congress struggles to try to pass bills for fiscal year 2018. They&rsquo re going to raise defense and all the priorities, they&rsquo ll cut nothing domestically&hellip &rdquo

&ldquo The whole thing is headed for a real fiscal bloodbath sometime this summer or fall when they run out of debt ceiling (money) and can&rsquo t borrow any more to pay for all of this. When they use up the cash on the balance sheet right now&hellip we&rsquo re going to be in a huge shutdown mode.&rdquo

Greg Hunter inquired with Stockman over what budget deals he would feel Trump and GOP leadership could make that would signal serious change. The former Reagan Budget Director argued,  &ldquo First,  he would need to rethink making defense great again.  It is already far greater than we need. We don&rsquo t need that $54 billion for defense. Second, he promised he wouldn&rsquo t touch social security or medicare&hellip A lot of people need them, I recognize that, but there are millions of affluent retirees who never earned all of the benefits they&rsquo re getting.&rdquo

When asked what his view on a Congressional budget deal is and what it could mean for jobs and the economy Stockman relayed,  &ldquo There will be panic in the financial markets. This is not priced in. The market isn&rsquo t expecting anything. I think it will cause some very difficult times.&rdquo The interviewer then asked what his expectations on a government shutdown would look like with Trump.&rdquo

The author noted,  &ldquo I doubt he&rsquo ll go for a shutdown by choice. The leadership is not going to stand for it. They have a false idea that Republicans can govern by keeping the Washington Monument open even if we&rsquo re bankrupting the country by piling spending. I don&rsquo t think they&rsquo re going to elect to have a shutdown. What I think is going to happen instead is they&rsquo re going to run out of borrowing authority with the debt ceiling, it is now frozen on March 15. We&rsquo re locked in at $19.8 trillion so when they run out of cash in a few months, they&rsquo ll need a majority in both houses to vote through a multi-trillion bill in both houses. They won&rsquo t have the votes.&rdquo

Stockman sounded the alarm,  &ldquo This isn&rsquo t speculation, this is what is coming down the pipe. I don&rsquo t think it is even remotely anticipated by the markets. It is not priced in at all. That&rsquo s when you get huge disruptions in the financial markets. When they&rsquo re hit by surprise or black swans, that&rsquo s where we&rsquo re heading in a matter of few months.&rdquo

After the host pushed for clarity over his bubble forecast Stockman urged,  &ldquo The market is insanely valued right now.  They were trying to tag 2,400 points to close out last week. The point is, that represents about 25 times the trailing earnings for 2016 at a point where we&rsquo re already into a &ldquo recovery&rdquo that&rsquo s lasted 96 months. Almost the longest in history. What the market is saying is that we&rsquo ve reached a point of full employment, forever.  [They appear to be behaving] as though there will never be another recession or economic surprise.&rdquo

&ldquo The market is pricing itself for perfection for all of eternity.  This is crazy. We&rsquo ve got headwinds everywhere.  The auto industry is now starting to roll over. The red ponzi in China has only a matter of time before it explodes. We now have debt for the household sector above where it was for the 2008 crisis.  I think the market could easily drop to 1,300-1,600 by 30% or more once the fantasy ends. The government will show its true colors. We are headed for a fiscal bloodbath.&rdquo

Stockman voiced his concern for clarity remarking,  &ldquo This crazy notion that there is going to be a Trump tax cut and fiscal stimulus must be put to rest once and for all. It&rsquo s not going to happen.  They can&rsquo t pass a tax cut that big without a budget resolution that incorporates $10 or $15 trillion of debt over the next decade. Week by week, slowly the market is beginning to figure this out. What it means is, all of the corporate insiders are selling stock like there is no tomorrow&hellip where institutional sales of stock have been going up since the election and what we have is the usual end of the cycle.  This is the greatest suckers rally we&rsquo ve ever seen.&rdquo

When asked what he would recommend to protect yourself he urged,  &ldquo The main thing is, get out of the markets. These markets are unstable. They&rsquo re rigged and unsustainable&hellip there is no reason to own stocks at this point in the game.  It is so overvalued that maybe you can get another two or three out but you&rsquo re facing a 30% or 40% down. The risk versus reward is horrible.  The bond market is one giant bubble because the central bank&rsquo s have been buying bonds worldwide.  They&rsquo re buying trillion and still buying a trillion or so on an annual basis. All of that is coming to a halt.&rdquo

In offering his bond market and central bank analysis he urged,  &ldquo The Fed has finally run out of dry powder. They&rsquo re out of the bond buying business and even talking about initiating shrinking of their balance sheets. The European Central Bank (ECB) is near the end of its money printing spree. Even in Japan, which has gone off the deep end with quantitative easing, is beginning to have second thoughts.&rdquo

&ldquo Everywhere in the world, the central banks are finally getting to the end of the road. There isn&rsquo t going to be anymore money printing.  That&rsquo s going to leave a giant mess on the doorstep of the fiscal authority.  It is going to make the bond market a particularly dangerous place. Bonds are totally mispriced. If the central banks had not bought $20 trillion worth of government bonds worldwide over the last two decades, the yield on debt everywhere would be much higher.&rdquo

Stockman warned on the bond market environment that,  &ldquo We have, what is roughly a $100 trillion global bond market (corporate and government) that is the biggest bubble ever seen.  The advice is, get out of the bond market and stock market. Buy gold. Not all at once. When the financial system finally unwinds and the monetary authorities are discredited the one hard asset in the world is going to have another day in the sun.&rdquo

He reminded viewers,  &ldquo The gold market is relatively small in comparison to the size of the equity market or bond markets. The gold markets are only a fraction of that. When the panic comes&hellip the price of gold will rise dramatically.&rdquo

 

 

The US and Jordanian military forces may be prepping a massive invasion of Syria, if intelligence reports gathered from  surveillance drones suggest.



Following reports today that President  Trump confirmed US will provide arms directly to The Kurds to fight ISIS,  AlMasdarNews.com reports,  Damascus is reportedly on high alert after some 400 American and Jordanian military vehicles were located at a Jordanian military base near the Syrian desert border earlier today.



More pictures of the drone surveillance here:



The tanks are supposedly Jordanian M60 types.

The photos validate  previous reports  by an Al-Masdar News military source suggesting a major Jordanian and US buildup at the Syrian border.  The military base is located east of Az-Zarqa, 43 km away from the Syrian border.

 

 

Authored by Nourial Roubini via MarketWatch.com,

With Emmanuel Macron&rsquo s defeat of the right-wing populist Marine Le Pen in the French presidential election, the European Union and the euro have dodged a bullet.  But geopolitical risks are continuing to proliferate.

The populist backlash against globalization in the West will not be stilled by Macron&rsquo s victory, and  could still lead to protectionism, trade wars, and sharp restrictions to migration. If the forces of disintegration take hold, the  United Kingdom&rsquo s withdrawal from the EU could eventually lead to a breakup of the EU  &mdash Macron or no Macron.

At the same time,  Russia has maintained its aggressive behavior  in the Baltics, the Balkans, Ukraine, and Syria.  The Middle East still contains multiple near-failed states,  such as Iraq, Yemen, Libya, and Lebanon. And the  Sunni-Shia proxy wars between Saudi Arabia and Iran show no sign of ending.

In Asia, U.S. or North Korean brinkmanship could precipitate a military conflict on the Korean Peninsula.  And China is continuing to engage in &mdash and in some cases escalating &mdash its territorial disputes with regional neighbors.



Despite these geopolitical risks, global financial markets have reached new heights. So it is worth asking if investors are underestimating the potential for one or more of these conflicts to trigger a more serious crisis, and  what it would take to shock them out of their complacency if they are.

There are many explanations for why markets may be ignoring geopolitical risks.

For starters, even with much of the Middle East burning,  there have been no oil-supply shocks or embargoes,  and the shale-gas revolution in the United States has increased the supply of low-cost energy. During previous Middle East conflicts &mdash such as the 1973 Yom Kippur War, Iran&rsquo s Islamic Revolution in 1979, and Iraq&rsquo s invasion of Kuwait in 1990 &mdash oil-supply shocks caused global stagflation and sharp stock-market corrections.

A second explanation  is that  investors are extrapolating from previous shocks,  such as the attacks of Sept. 11, 2001, when policy makers saved the day by backstopping the economy and financial markets with strong monetary and fiscal policy easing. These policies turned post-shock market corrections into buying opportunities, because the fall in asset prices was reversed in a matter of days or weeks.

Third, the countries that actually have experienced localized asset-market shocks &mdash such as Russia and Ukraine after Russia&rsquo s annexation of Crimea and incursion into Eastern Ukraine in 2014 &mdash are  not large enough economically to affect U.S. or global financial markets.

Similarly, even as the U.K. pursues a  &ldquo hard Brexit,&rdquo it still only accounts for around 2% of global GDP.

A fourth explanation is that  the world has so far been spared from the tail risks associated with today&rsquo s geopolitical conflagrations.  There has not yet been a direct military conflict between any major powers, nor have the EU or eurozone collapsed. President Donald Trump&rsquo s more radical, populist policies have been partly contained. And China&rsquo s economy has not yet suffered from a hard landing, which would create sociopolitical instability.

Moreover, markets have trouble pricing such black-swan events: &ldquo unknown unknowns&rdquo that are unlikely, but extremely costly.  For example, the market couldn&rsquo t have predicted 9/11. And even if investors think that another major terrorist attack will come, they cannot know when.

A confrontation between the U.S. and North Korea could also turn into a black swan event, but this is a possibility that markets have happily ignored. One reason is that, notwithstanding Trump&rsquo s bluster, the U.S. has very few realistic military options: North Korea could use conventional weapons to wipe out Seoul and its surroundings, where almost half of South Korea&rsquo s population lives, were the U.S. to strike.

Investors may be assuming that even if a limited military exchange occurred, it would not escalate into a full-fledged war, and policy loosening could soften the blow on the economy and financial markets.  In this scenario, as with 9/11, the initial market correction would end up being a buying opportunity.

But there are other possible scenarios, some of which could turn out to be black swans.  Given the risks associated with direct military action, the U.S. is now alleged to be using cyber weapons to eliminate the North Korean nuclear threat against the U.S. mainland. This may explain why so many of North Korea&rsquo s missile tests have failed in recent months. But how will North Korea react to being militarily decapitated?

One answer is that it could launch a cyber attack of its own. North Korea&rsquo s cyber-warfare capabilities are considered to be just a notch below those of Russia and China, and the world got an early glimpse of them in 2014 when it hacked into Sony Pictures. A major North Korean cyber attack could disable or destroy parts of the U.S.&rsquo s critical infrastructure, and cause massive economic and financial damage.

That remains a risk even if the U.S. can sabotage North Korea&rsquo s entire industrial system and infrastructure.

Or, faced with disruption of its missile program and regime, North Korea could go low-tech, by sending a ship with a dirty bomb into the ports of Los Angeles or New York. An attack of this kind would most likely be very hard to monitor or stop.

So, while investors may be right to discount the risk of a conventional military conflict between the U.S. and North Korea, they also may be underestimating the threat of a true black-swan event, such as a disruptive cyberwar between the two countries or a dirty bomb attack against the U.S.

Would an escalation on the Korean Peninsula be an opportunity to &ldquo buy the dip,&rdquo or would it mark the beginning of a massive market meltdown?  It is well known that markets can price the &ldquo risks&rdquo associated with a normal distribution of events that can be statistically estimated and measured.

But they have more trouble grappling with  &ldquo Knightian uncertainty&rdquo : risk that cannot be calculated in probabilistic terms.