Archives for August 2014

Debt Rattle Aug 28 2014: EU Gas Supply Is In Real And Imminent Danger

Courtesy of The Automatic Earth.


NPC Robey Motor Co., 1429 L Street, Washington, DC 1926

More accusations fly across the media, like so many flocks of Canada geese, of direct Russian involvement in Ukraine. Much is made of an interview with Donetsk National Republic leader Alexander Zakharchenko, in which he “admits” there are Russian volunteers fighting on his side.

To the west, that’s all the proof they need. There are 1000 Russians in Ukraine, cries NATO. That doesn’t make them the Russian army though. If there are only 1000, that would be disappointing. These are people who are seeing their family just across the border shot to bits.

That Zakharchenko also said there were French and other nationals fighting on the same side is not deemed worth reporting. Just like not much has been made of the many thousands of German, British, French, Belgian, Dutch, Canadian and American nationals fighting in Syria and Iraq, mostly on the side of the IS. Other than the British guy in the beheading video, and the US citizen who got killed.

So the Commerce Department really just raised its Q2 US GDP estimate to 4.2%, one day after the CBO lowered its 2014 estimate to 1.5%? Oh my. What’s next?

I’m still thinking that even if Russia were involved in Ukraine, why would that make Putin a devil? After all, we know where the Ukraine army gets its financing from, and it too has many – foreign – mercenaries on its payroll.

Does anyone still think Putin is going to call uncle on this one? You should have been reading the Automatic Earth over the past year. He won’t, and he can’t.

Can we truly deny Russia, and Russian family members of east Ukrainian Russian-speaking people, the right to help out their people when they’re attacked by bombers and swastikas, while they have exactly zero planes themselevs? On what basis exactly? And what gives Kiev the right to bomb its own citizens?

But let’s not get into that again today. In the slipstream of the talks this weekend in Minsk between Putin and Poroshenko, a precious little detail seems to have escaped the western press entirely. But I think all our fine journalists will soon have to address it.

You may remember that in an earlier phase of the dispute between Ukraine and Russia (not to be confused with the Kiev vs rebels fight), no agreement was reached on the payment of a $4.5 billion gas bill that Russian Gazprom said was overdue from Ukraine’s Naftogaz. And Gazprom demanded pre-payment for any future gas deliveries to Ukraine.

Kiev, instead of paying the bill, claimed Russia had overcharged it for the already delivered gas, by $6 billion, going back to 2010. And brought its argument before the Arbitration Institute of the Stockholm Chamber of Commerce.

Now maybe, just maybe, someone in the Kiev camp should have paused right before that moment, and consulted with their western backers in Brussels and Washington. Perhaps not so much Washington, but Brussels for sure, and Berlin. And Athens. Rome. Prague. Warsaw.

You see, a pending case before the Arbitration Institute of the Stockholm Chamber of Commerce can apparently take 12-15 months to resolve. And perhaps Europe doesn’t have that much time. Which is what Putin hinted at at a press-op he did after the weekend Minsk talks. What it comes down is that even if Russia wanted to accommodate Ukraine, it can’t. On strictly legal terms, nothing political.

What’s more, Gazprom had already paid Naftogaz in advance for the use of Ukraine pipelines, but the payment was returned. And that can have grave consequences not just for Kiev, but for almost all of Europe. Lots of countries get their gas through these pipelines.

It looks like the EU, and especially Germany, has started to smell – potential – trouble:

EU Suggests Russia, Ukraine Sign Interim Gas Agreement

The E.U. has suggested an interim agreement on the gas supplies between Russia and Ukraine without waiting for a Stockholm arbitrary court decision, E.U. Energy Commissioner Gunther Oettinger said in a news conference following his meeting with Ukrainian President Petro Poroshenko late Tuesday Two cases are before the Stockholm court, but the hearings will take 12-15 months, which is too long, while Europe needs an interim solution for this winter, Oettinger said In June, Russian gas giant Gazprom switched Ukraine off gas over the unpaid debt and filed a $4.5 billion suit to the Stockholm arbitration court. Later, Kiev reciprocated by sending a suit to the court against Gazprom for making Ukraine overpay $6 billion for gas since 2010, setting too high prices in its contract.

The Russian Legal Information Agency has this:

Putin: Naftogaz Suit Against Gazprom Axes Discount For Ukraine

The fact that Ukraine’s Naftogaz has invoked arbitration proceedings against Gazprom prevents Russia from giving Ukraine a gas price discount, President Vladimir Putin said in Minsk where he met with Ukrainian President Petro Poroshenko. “We cannot even consider any preference solutions for Ukraine since it pursues arbitration,” Putin said. “Russia’s possible actions in this sphere could be used against it in the court. We couldn’t do it even if we wanted to.” After Gazprom switched to a prepayment system for gas deliveries to Ukraine on June 16, Naftogaz turned to the Arbitration Institute of the Stockholm Chamber of Commerce. Naftogaz wants Gazprom to cut the price for gas and to get back $6 billion that Ukraine has allegedly overpaid since 2010.

Gazprom in turn is seeking to recover Ukraine’s $4.5 billion debt for gas deliveries. Putin said Russia offered a compromise solution during the talks held before Gazprom switched to the prepayment scheme. “We reduced the price by $100,” Russian President said. Gas talks between Russia, Ukraine and the European Union went on from April to mid-June. Kiev said it would not repay its $4.5 billion debt unless Russia agreed to supply gas at a lower price. Russia offered a discount, but Ukraine turned down the offer. Russia then said it would only resume gas supply talks after Ukraine paid off its debt.

More signs of German nerves are here in a piece from the European Council on Foreign Relations – I kid you not, they exist -, along with a nice but curious admission:

Has Germany Sidelined Poland In Ukraine Crisis Negotiations?

As Germany takes over leadership of the European Union’s efforts to solve the Ukrainian crisis, Poland is questioning the motivations and strategies behind Berlin’s new diplomatic activism. The initiatives of German Foreign Minister Frank-Walter Steinmeier and Chancellor Angela Merkel are being followed closely in Warsaw – and often with mixed feelings. Is Berlin trying to mastermind a compromise with Russia on Moscow’s terms, ignoring Kyiv’s vital interests? And as Poland is increasingly edged out of the conflict resolution process, has Berlin-Warsaw co-operation on EU Ostpolitik broken down?

Poland was, along with France and Germany, one of the countries that orchestrated the political shift in Ukraine in February. Since then, Warsaw has played a central role in forging a bolder EU response to Russia’s aggression and in providing meaningful assistance to the Ukrainian government. However, as the conflict has worsened, Warsaw has become less visible as an actor in crisis diplomacy. Polish Foreign Minister Radek Sikorski was not invited to join his German, French, Russian, and Ukrainian counterparts in the negotiations on conflict resolution held in Berlin in early July and early August. Before Ukrainian President Petro Poroshenko and Russian President Vladimir Putin agreed to meet at the Customs Union summit in Minsk on 26 August, the idea had been floated of holding another high-level meeting in the “Normandy format” of France, Germany, Russia, and Ukraine.

Kiev is either so high on the EU, US and NATO support it was promised, or so desperate over its latest battlefield losses, that it goes for all on red, probably thinking, and probably rightly so, that the western press will swallow anything whole. Tyler Durden:

Ukraine Accuses Russia Of Imminent Gas Cut-Off, Russia Denies, Germans Anxious

So much for the Russia-Ukraine talks bringing the two sides together as even Germany’s Steinmeier could only say it’s “hard to say if breakthrough made.” Shortly after talks ended, Ukrainian Premier Yatsenyuk stated unequivocally that “we know about the plans of Russia to cut off transit even in European Union member countries,” followed by some notably heavy-on-the-war-rhetoric comments. The Russians were quick to respond, as the energy ministry was “surprised” by his statements on Ukraine gas transits and blasted that comments were an “attempt at EU disinformation.”

Here’s what Putin said at the press op after the talks:

Answers To Journalists’ Questions Following Working Visit To Belarus

Currently, we are in a deadlock on the gas issue. You see, this is very serious matter for us, for Ukraine and for our European partners. It is no big secret that Gazprom has advanced payment for the transit of our gas to Europe. Ukraine’s Naftogaz has returned that advance payment. The transit of our gas to European consumers was just about suspended. What will happen next? This is a question that awaits a painstaking investigation by our European and Ukrainian partners.

We are fulfilling all the terms of the contract in full. Right now, we cannot even accept any suggestions regarding preferential terms, given that Ukraine has appealed to the Arbitration Court. Any of our actions to provide preferential terms can be used in the court. We were deprived of this opportunity, even if we had wanted it, although we already tried to meet them halfway and reduced the price by $100.

The ball is squarely in the western court. Of course many will think and hope that Russia will give in because it needs the revenue, but the problem with that is it could cost the country too much (admittedly, that’s not the only problem). $6 billion to Ukraine for starters, then potentially many more billions on future deliveries to Kiev, and then there’s the rest of its contracts with two dozen or so European nations.

From a legal point of view, this may not be about what Moscow wants to do anymore, but about what it can. The Arbitration Court case may have tied its hands. And unless Europe wants a cold winter, it must seek a solution. Putin, who holds degrees in both judo AND law, understands this. But he didn’t set this up. Western and Kiev hubris did. Certain people got first too pleased with, and then ahead of, themselves.

So what now? There are several options. Ukraine can withdraw the case it has pending in Stockholm. A huge loss of face when you’re waging a war, even if it’s just against your own people. And it would still have to find money it doesn’t have, to pay its past and future gas bills. The fact that Naftogaz returned the Gazprom advance payment doesn’t bode well for that.

The west could end up – having to – withdraw its support for Kiev. But a lot of money has been poured into that support, NATO is erecting new bases on Russia’s borders, there is a war party sentiment, if not exuberance, building up.

There’s a lot of talk of Putin trying to save face, but I’m not so sure that comes from, let’s say, an ‘adequate’ understanding of what’s on the table. A more appropriate question might be: how does the Brussels bureaucracy save face? Angela Merkel may end up having to force them into humility, just so her people don’t freeze.

Or, of course, we could all go to war. Only, we wouldn’t even be able to figure out who’d be fighting whom, or for what reason. It would seriously risk repeating the very past the EU was designed to prevent.

Putin pointed to another rather difficult but highly interesting legal ‘technicality’ as well, which involves Ukraine moving closer to the EU economically:

We once again pointed out to our partners – both European and Ukrainian partners – that implementation of the association agreement between Ukraine and the EU carries significant risks for the Russian economy. We have shown this in the text of the agreement, directly pointing to specific articles in that agreement. Let me remind you that this concerns nullifying Ukraine’s customs tariffs, technical regulations, and phytosanitary standards.

The standards in Russia and Europe currently do not correspond. But, as you recall, the most classic example is the introduction of EU technical regulations in Ukraine. In that case, we would not be able to supply our goods to Ukraine at all. We have different technical standards. And according to the European Union’s standards, we will not be able to supply our machine-building products there, or any industrial goods. If that happens, we cannot accept Ukrainian agricultural production goods in our territory, because we have different approaches to phytosanitary standards. We feel that many problems would occur.

If we do not achieve any agreements and our concerns are not taken into account, then we will be forced to take measures to protect our economy. And we explained what those measures would be. So our partners must weigh everything and make corresponding decisions.

I think Ukraine, through Yatsenyuk and now Poroshenko, has grossly overplayed its hand. Encouraged by Brussels, which is also not nearly big enough for the chair it resides in, and Washington, which is partly simply clueless about the region and partly all too eager to engage in yet another campaign of “smart” bombing and regime change. And which, besides, stuck its neck so deep into the Middle East cesspool once again it has no chance of maintaining focus on an issue that mainly concerns Europe.

It is time for some cool heads to come to the fore, and for accusations and allegations and innuendo and spin to fade into the background, or this can get way out of hand.

European economies are easily doing bad enough for all efforts to be directed there, not to use this as an added motivation to incite trouble outside of EU borders.

If Kiev announces it’ll stop bombing its own citizens, and follows up on that, there’s no doubt the other side will calm down as well.

Ukraine and the west invited the lawyers in through the case they brought before the Stockholm court. Let’s leave it to the lawyers, and stop killing civilians while we do. Word.

The Cleveland Fed’s Puzzle on Future Economic Activity

Courtesy of Pam Martens.

Pam Martens and Russ Martens discuss The Cleveland Fed’s Puzzle on Future Economic Activity. The Fed is trying to predict where the economy is headed. With a weak labor force and flat wages, the Fed is aware of the danger of raising interest rates too quickly and triggering an economic downturn. But labor markets and wages are only one piece of a complicated picture. 

Edward S. Knotek II of the Cleveland Fed

Edward S. Knotek II of the Cleveland Fed

The Cleveland Fed’s Puzzle on Future Economic Activity

By Pam Martens and Russ Martens

Edward S. Knotek II and Saeed Zaman work for the Federal Reserve Bank of Cleveland. On August 19 they posted a paper at the Cleveland Fed’s web site that looked at causal relationships between wages, prices and future economic activity.

Knotek and Zaman have two Ph.D.s between them. Their paper arrives at this conclusion:

“…subdued wage growth is symptomatic of the existence of slack in the labor market. But given wages’ limited forecasting power, they are but one piece in a larger puzzle about where the economy and inflation are going.”

What Knotek and Zaman are pumping out as forecasting research at the Cleveland Fed is important because the President of the Cleveland Fed, Loretta J. Mester, is a voting member of the Federal Open Market Committee (FOMC) that sets monetary policy for the U.S. central bank. Mester will help decide when interest rates are hiked to help thwart future inflation.

If rates are hiked prematurely, the country could end up in the safety-net-enhanced version of the Great Depression (indeed, we already may be in just that) or in a Japan-esque multi-decade effort to climb out of the quicksand hell of deflation.

Saeed Zaman of the Cleveland Fed

 

Saeed Zaman of the Cleveland Fed

What Knotek and Zaman have done here is to make an omelet and forget the eggs. One can’t have a cogent discussion today about where the economy is going without including the perhaps uncomfortable but essential ingredient – unprecedented wealth and income inequality.

Here’s an alternative analysis that includes the eggs:

Yes, there is slack in the labor market. Yes, that induces fear among workers who resist asking for wage increases. The fact one’s neighbor lost his job and has been unemployed for more than a year adds to that fear. The fact that the bright college graduate down the block is working as a waiter also adds to that fear. The reality that unions can’t negotiate for higher wages across a broad swath of the labor force because their ranks have been decimated to just 6.7 percent of private sector workers adds further to the downward bias on wages.

Keep reading here >

 

Jane’s Defense Caught With Pants Down: Ukraine Admits Rebel Counteroffensive, Including March to the Sea

Courtesy of Mish.

Jane’s Defense vs. Colonel Cassad Take II

In response to Jane’s Defense vs. Colonel Cassad: Someone Seriously Wrong, a close friend wrote …

Jane’s has been in business giving good advice for a century and could only do so by giving good advice.  Everything I have read suggests that the rebels (who include a lot of Russian paramilitary) would have been about finished this past week, but for supplies coming in through Russian interference. The captured Russian soldiers two days ago day only make the interference look more like direct assault.  Colonel Cassad, on the other hand, appears to be a complete whack job who idolizes Joseph Stalin and thinks Putin is to weak.

My Response

The political views of Colonel Cassad, whether you like him or despise him are irrelevant. His military analysis, denied by Kiev for the past two weeks, took precisely one more day to prove correct.

March to the Sea

For several days, I have been commenting on a rebel “march to the sea”, and the meaning of that march. On Wednesday, mainstream news verified the accuracy of my reports.

For no other reason than Ukraine could no longer hide the truth, Ukraine finally admitted what it could have and should have admitted a week ago: Rebels extend fight against Kiev to Ukraine’s south coast

Pro-Russian rebels entered a new town in southeast Ukraine on Wednesday while Kiev accused Russia of sending more troops into its territory, dispelling hopes of political progress after talks between the two countries’ presidents.

Rebels entered Novoazovsk, a strategically important town on the Sea of Azov 10km from the Russian border, the town’s mayor announced. It is on the road linking Russia to Crimea, the peninsula Moscow annexed in March, and is some distance south of the existing rebel strongholds of Donetsk and Lugansk.

The fighting around Novoazovsk creates a de facto new front in the conflict, close to Mariupol. This coastal city has been used by Ukraine as a logistical base to support its campaign against the rebels further north in Donetsk and Lugansk.

It could also signal that Moscow is seeking to establish a direct land link under its control between Russia and the seized Crimean peninsula nearly 300km away.

“Our forces are currently engaged with Russian forces with tanks that are on the territory of Ukraine near . . . Novoazovsk,” said Oleksander Danylyuk, an adviser to Ukraine’s defence minister. “We are also increasingly facing genuine Russian soldiers in addition to mercenaries armed by Russia on the other fronts in the Donetsk and Lugansk regions.

Genuine Russian Soldiers?

Continue Here

Trapped in Venezuela: Looking to Get Out? Good Luck!

Courtesy of Mish.

Every day, the cost of a plane ticket out of Venezuela goes up. That assumes you can get a plane ticket, and you probably cannot, even if you booked three months ago.  Delta Air Lines, American Airlines, and Lufthansa cut the number of flights. Air Canada stopped all service.

Economy class tickets to New York city cost as much as $3,000, if you can get them. And you probably can’t. Instead, people take five-day rides to Lima, Peru as a means of escape. And that takes money as well.

The result is best described as Trapped in Venezuela

With the cash-strapped government holding back on releasing $3.8 billion in airline-ticket revenue because of strict currency controls, carriers have slashed service to Venezuela by half since January, adding another layer of frustration to daily life here.

The lack of flights is complicating family vacations, business trips and the evacuation plans of Venezuelans who want to leave the country, which is whipsawed by 60% inflation, crime, food shortages and diminishing job prospects. Steve H. Hanke, a Johns Hopkins University economics professor, says Venezuela tops his so-called “misery index,” which takes into account inflation, unemployment, economic stagnation and other factors in 89 countries.

“In Venezuela, you have the sensation that you can’t leave,” says Virginia Hernández, a Venezuelan who is studying orthodontics in Argentina. During a recent trip to see family in Caracas, she wound up marooned. The Venezuelan state-run carrier Conviasa had no plane available to fly its scheduled Caracas-to-Buenos Aires route, and other airlines servicing Argentina had sold out their flights.

The Caracas polling company Datanalisis found that one in 10 citizens—most of them middle- and upper-class Venezuelans between 18 and 35—are seeking to leave the country, more than double the number who sought to abandon it in 2002, which was marked by an unsuccessful coup attempt against then President Hugo Chavez and a paralyzing oil strike.

Travel agents are swamped with requests but turn customers away because there are no tickets to sell. Some travelers are left taking the bus, with trips to Lima, Peru, a five-day journey, now packed with middle-class Venezuelans who used to fly.

Many Venezuelans who want to leave the country simply can’t. Tickets for short flights to other transit hubs in the region, such as Panama City or Bogotá, are difficult to come by.

On top of that, stringent currency controls mean that Venezuelans have access to only $400 a year, making it nearly impossible to pay the high prices airlines demand for tickets on the Web.

“Just about all of my friends want to get out of here,” said Roberto Villarroel, a 19-year-old university student who wants to move to Argentina. “I’m still looking for a ticket, though. The prices go up every day.”

Some Venezuelans, particularly those who are affluent, are paying whatever price is required to leave….

Continue Here

Why Does The Economy Stink? Because America’s Owners Are Greedier Now Than Ever Before

Why Does The Economy Stink? Because America's Owners Are Greedier Now Than Ever Before

Courtesy of  at Business Insider

GDP Growth

Business Insider, St. Louis Fed, GDP growth.

The U.S. economy is still sputtering. (See GDP growth chart above.)

Why is growth so slow and weak?

One reason is that average American consumers, who account for the vast majority of the spending in the economy, are still strapped.

The reason average American consumers are still strapped, meanwhile, is that America's companies and company owners — the small group of Americans who own and control America's corporations — are hogging a record percentage of the country's wealth for themselves.

In the past five years, American corporations have boosted their profits and share prices by cutting costs (firing people) and buying back stock. As a result, unemployment remains high. And wage growth for the Americans who are lucky enough to be working has been pathetic — the slowest since World War II.

Meanwhile, America's corporations and their owners have never had it better. Corporate profits just hit another all-time high, both in absolute dollars and as a percent of the economy. And U.S. stocks are at record highs.

Scrooge

Even Scrooge would be appalled.

Many people seem confused by this juxtaposition. If corporations and shareholders are doing so well, why is the economy so crappy?

The answer is that one company's wages are other companies' revenues. Americans save almost nothing, so every dollar we earn in wages gets spent on products and services (including, in some cases, those of the companies we work for). The less that American companies pay their workers, the less American consumers have to spend. And the less American consumers have to spend, the slower the economy grows.

This isn't a complex concept. We're all in this together. People make it complicated by casting it as a political issue and inflaming partisan tensions. But it has nothing to do with politics.

Importantly, it doesn't have to be this way.

There's no "law of capitalism" that says that companies have to pay their employees as little as possible. There's no law of capitalism that says companies have to "maximize short-term profits." That's just a story that America's owners made up to justify taking as much of the company's wealth as possible for themselves.

Ironically, this short-term greed on the part of America's owners is most likely reducing their long-term wealth: Companies can't grow profits by cutting costs forever, because their profits can't grow higher than their revenues. At some point, revenue growth needs to accelerate. But that won't happen until companies start sharing more of the wealth they create with the folks who create it — their employees.

Let's go to the charts …

1) Corporate profit margins just hit another all-time high. Companies are making more per dollar of sales than they ever have before. (Some people are still blaming economic weakness on "too much regulation" and "too many taxes." That's crap. Maybe little companies are getting smothered by regulation and taxes, but big ones certainly aren't. What they're suffering from is a myopic obsession with short-term profits at the expense of long-term value creation.)

Corporate profits

Business Insider, St. Louis Fed, Profits as a percent of the economy.

2) Wages as a percent of the economy just hit another all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" represent spending power for consumers. And consumer spending is "revenue" for other companies. So the profit obsession is actually starving the rest of the economy of revenue growth.

Wages

Business Insider, St. Louis Fed, Wages as a percent of the economy.

In short, our obsession with "maximizing profits" is creating a country of a few million overlords and 300+ million serfs.

Don't believe it?

European Bond Market: Bubble of all Bubbles!

Courtesy of EconMatters

European Bond Rush

Right now investors in European Bonds are running over each other all in an effort to front run what the Big Banks have been begging the ECB to begin a bond buying program similar to the United States’ QE bond buying program.

Tourism has its Limitations

It is hilarious as European yields are already ridiculously low right now, how much lower do they think these yields can go, and if they could go measurably lower what difference would it make, obviously low yields and borrowing costs aren`t what troubles Europe right now. It is the fact that these countries have one business advantage on a global basis, tourism and that is it. These countries that make up the European Union are basically socialist stores of historical wealth, outside of Germany, they just aren`t competitive on many fronts compared with the United States, South Korea and China.

Big Banks Begging for more Central Bank Handouts!

But let’s be honest the ECB doesn`t need to buy any bonds, the banks are just begging for more handouts of cheap money, and more government programs that they can take advantage of like the primary dealers did with the Federal Reserve`s QE stimulus program. It is all about ‘gaming’ the system, especially when it is too hard to actually do some research – figure out markets, and strategically differentiate between good and bad stocks, asset classes, and investment themes. Just beg the Central Banks for more “stimulus” that they can front run, or game the financial system for risk free returns that takes no real market skill whatsoever. 

Big Banks Should Be Begging for Structural Reforms by Governments!

The big banks should be putting pressure on the governments to overhaul their noncompetitive business practices in these European Countries, they should be begging for structural reforms in these countries. However that would be much too hard, when these banks can just beg the ECB for more cheap stimulus programs, like that is going to help any more than the 15 basis point current borrowing costs in Europe! 

Mario Draghi even alluded to this in his Jackson Hole speech last week, that he can only do so much for what ails Europe, and the real solution for European growth must come in the form of structural reforms, and making these countries more competitive like South Korea, China and the United States on a global competiveness scale; shoot even Mexico is starting to get their act together compared to Europe.

Who is the Bond Sucker that the Big Banks are going to Sell to?

But like I always say ‘Any idiot can buy bonds with ridiculously low yields’ just who is the greater fool that you are going to sell these duration bonds to over the next five and ten years? Remember bond yields just two years ago before central banks started incentivizing this search for yield insanity? Do you think the Debt-to-GDP Ratios for the European countries have gotten measurably better? Without major structural reforms, and don`t hold your breath anytime soon bond investors, you just got suckered into buying European bonds because you were so freaking greedy, that you have pushed European Bonds into the bubble of all bubbles, for the same bonds that three years ago you wouldn`t touch with double and triple these yields! 

Talk about greed getting in the way of rational investing, it is the trick that Grifters use to scam marks; appeal to their greed motive, and then watch as the fools step all over themselves giving their hard earn money to the Grifters! So unless there is miraculously some kind of structural reform nirvana in Europe all the cheap money isn`t going to solve the lack of competitiveness of these countries in Europe on a global basis, weakening the Euro by another 10% isn`t going to cure why no European country can compete with South Korea, China, or the United States. Furthermore, the Debt-to-GDP Ratios are only going to grow much higher than they were when investors thought the European Union was going to collapse and these same bonds that they are currently jumping over themselves to buy were absolutely worthless! [So which story are you going to stick with Bond Investor, were these same bonds mispriced then, or are they mispriced now?]

Rinse, Repeat…then Beg for Bailouts once again!

Anybody buying European Bonds, (I guess all the big banks think they will be bailed out once again when all these European bonds are completely worthless), when European yields quadruple from current yield levels, and all these worthless bonds on the banks books make the subprime mortgage write-downs look like child's play in comparison. Talk about central banks setting up for the next financial crisis where the big banks all become insolvent again with more worthless assets on their books, all these European bonds at current yield levels are so mispriced that the losses for those that hold these on the books for five and ten years’ time is going to be staggering!

Insolvency Risk Greater than Ever!

Portugal 10-Year Bond Yield

For example, Portugal has a Debt-to-GDP Ratio of 129.00 with a 10-year bond yield in the 3% range; it was 16% in 2012 with a lower Debt-to-GDP Ratio. Italy has a Debt-to-GDP Ratio of 132.60 with a 10-year bond yield in the 2.4% range; it was 7% in 2012 with a lower Debt-to-GDP Ratio. France has a Debt-to-GDP Ratio of 91.80 with a 10-year bond yield in the 1.25% range; it was 3.5% in 2012 with a lower Debt-to-GDP Ratio. How about Greece, it has a Debt-to-GDP Ratio of 175.10 with a 10-year bond yield in the 5.6% range, it was over 40% in 2012 with a lower Debt-to-GDP Ratio. Spain has a Debt-to-GDP Ratio of 93.90 with a 10-year bond yield in the 2.14% range; it was over 7% in 2012 with a lower Debt-to-GDP Ratio. I could literally do this all day across the European Union, one gets for the most part the same results with lower Debt-to-GDP Ratios or slightly smaller with 10-year bond yields which just two years ago were three and four times higher, and the European Union no more competitive on a global basis then they were during the ‘Insolvency Crisis.’ 

Italy 10-Year Bond Yield

Rising Debt-to GDP Ratios & Bubbly Yields Failing to Properly Price ‘Haircut Risk’! 

France 10-Year Bond Yield

The point is nothing has changed idiot bond investors, are you really this stupidly oblivious to risk because the ‘Yield Trade’ is really in fashion right now in financial markets? Where do you think these same bond yields will be in ten years? Do they think that Europe will get its financial house in order? Do they really think half of these bonds are even worth anything in 10 years? Just two years ago, which by my math, there are a lot of two year time periods in a 10-year bond duration, the entire European Union with better overall Debt-to-GDP Ratios compared to present was on the verge of collapse, what has changed besides Central Banks incentivizing you to chase Yield? 

Greece 10-Year Bond Yield

Going to need ‘a lot’ of Greater Fools to offload this European Bond Garbage 

Spain 10-Year Bond Yield

Yield is supposed to represent the risks associated with investors getting paid back in full on the debt. Do you really think the current yield is representative of the ‘haircut’ you will be forced to take on these bonds if the European Union implodes or dissolves? You'll have to find a ‘greater Fool’ to buy these Grifter Bonds off of you Big Banks. I guess in a couple of years we will be back to 15 Billion Dollar Write-off Quarters like 2008, and more Bank Bailouts for Stupid Investment Decisions or should I say Stupid Risk Taking! 

Not Exactly ‘Rocket Scientists’!

Bond Investors are some of the stupidest people in financial markets, this is going to be hilarious watching this all explode in their faces once again! You would think that after the financial crisis which when you break it all down came down to loading up chasing levered yield plays, just ask Merrill Lynch about falling in love with Yield, that investors would be better able to calculate risk in trade configurations. But just as JP Morgan illustrated in the ‘Whale Fiasco,’ excessive Greed gets the Big Banks every time! Have fun picking up those Yield Nickels in front of the Bond Reset Steamroller when the European Bond Bubble Bursts.

Employers Aren’t Just Whining: The “Skills Gap” Is Real

 

Outside the Box: Employers Aren’t Just Whining: The “Skills Gap” Is Real

By John Mauldin

Paul Krugman and other notables dismiss the notion of a skills gap, though employers continue to claim they’re having trouble finding workers with the skills they need. And if you look at the evidence one way, Krugman et al. are right. But this week an interesting post on the Harvard Business Review Blog Network by guest columnist James Bessen suggests that employers may not just be whining, they may really have a problem filling some kinds of jobs.

Unsurprisingly, the problem is with new technology and the seeming requirement that workers learn new skills on the job – you know, like when the student pilot has to take the helm of a 747 in a disaster movie. Perhaps there’s not quite the same pressure in the office or on the factory floor, but the challenges can be almost as complex. Most of us have had the experience of needing to learn completely new ways of doing things, sometimes over and over again as the technology for whatever we’re doing keeps changing.

The proverb about old dogs and new tricks is being reversed, as old dogs are required to learn new tricks to keep up with the rest of the old dogs, not to mention the new pups. It’s either that or go sit on the porch. What follows is not a very long Outside the Box, but it’s thought-provoking.

There hasn’t been much happening in Uptown Dallas chez Mauldin. Lots of reading, routine workouts, long phone conversations with friends, and the occasional appearance of offspring. The amount of material hitting my inbox has slowed down considerably as well, although I know that will change in a week as everyone comes back from holidays. And even if we’re not on vacation, there is a certain slack we seem to cut ourselves in late summer.

Growing up, Labor Day marked the beginning of a brand new school year. Even though many school districts have pushed the start time back a few weeks, Labor Day seems to be a sort of national mental reset button that tells us we must refocus our attention on the tasks in front of us.

So, even with a somewhat reduced schedule, deadlines loom, and I have to do research on secular stagnation. It’s an interesting topic, but the stuff I’m reading about it reminds me to wonder why economists and investment writers feel they have to write in a way that is utterly stultifying and bone-sapping. A course or two in creative writing, with a focus on the creation of a narrative and some attention paid to the concept of a slippery slope ought to be requirements for an economics degree. Not that I have one – and maybe that’s my advantage.

Have a great week, and remember that robots need jobs too.

Your wanting more automation in his life analyst,

John Mauldin, Editor
Outside the Box 

Employers Aren’t Just Whining – the “Skills Gap” Is Real

By James Bessen   |   10:00 AM August 25, 2014
Harvard Business Review HBR Blog Network

Every year, the Manpower Group, a human resources consultancy, conducts a worldwide “Talent Shortage Survey.” Last year, 35% of 38,000 employers reported difficulty filling jobs due to lack of available talent; in the U.S., 39% of employers did. But the idea of a “skills gap” as identified in this and other surveys has been widely criticized. Peter Cappelli asks whether these studies are just a sign of “employer whining;” Paul Krugman calls the skills gap a “zombie idea” that “that should have been killed by evidence, but refuses to die.” The New York Times asserts that it is “mostly a corporate fiction, based in part on self-interest and a misreading of government data.” According to the Times, the survey responses are an effort by executives to get “the government to take on more of the costs of training workers.”

Really? A worldwide scheme by thousands of business managers to manipulate public opinion seems far-fetched. Perhaps the simpler explanation is the better one: many employers might actually have difficulty hiring skilled workers. The critics cite economic evidence to argue that there are no major shortages of skilled workers. But a closer look shows that their evidence is mostly irrelevant. The issue is confusing because the skills required to work with new technologies are hard to measure. They are even harder to manage. Understanding this controversy sheds some light on what employers and government need to do to deal with a very real problem.

This issue has become controversial because people mean different things by “skills gap.” Some public officials have sought to blame persistent unemployment on skill shortages. I am not suggesting any major link between the supply of skilled workers and today’s unemployment; there is little evidence to support such an interpretation. Indeed, employers reported difficulty hiring skilled workers before the recession. This illustrates one source of confusion in the debate over the existence of a skills gap: distinguishing between the short and long term. Today’s unemployment is largely a cyclical matter, caused by the recession and best addressed by macroeconomic policy. Yet although skills are not a major contributor to today’s unemployment, the longer-term issue of worker skills is important both for managers and for policy.

Nor is the skills gap primarily a problem of schooling. Peter Cappelli reviews the evidence to conclude that there are not major shortages of workers with basic reading and math skills or of workers with engineering and technical training; if anything, too many workers may be overeducated. Nevertheless, employers still have real difficulties hiring workers with the skills to deal with new technologies.

Why are skills sometimes hard to measure and to manage? Because new technologies frequently require specific new skills that schools don’t teach and that labor markets don’t supply. Since information technologies have radically changed much work over the last couple of decades, employers have had persistent difficulty finding workers who can make the most of these new technologies.

Consider, for example, graphic designers. Until recently, almost all graphic designers designed for print. Then came the Internet and demand grew for web designers. Then came smartphones and demand grew for mobile designers. Designers had to keep up with new technologies and new standards that are still changing rapidly. A few years ago they needed to know Flash; now they need to know HTML5 instead. New specialties emerged such as user-interaction specialists and information architects. At the same time, business models in publishing have changed rapidly.

Graphic arts schools have had difficulty keeping up. Much of what they teach becomes obsolete quickly and most are still oriented to print design in any case. Instead, designers have to learn on the job, so experience matters. But employers can’t easily evaluate prospective new hires just based on years of experience. Not every designer can learn well on the job and often what they learn might be specific to their particular employer.

The labor market for web and mobile designers faces a kind of Catch-22: without certified standard skills, learning on the job matters but employers have a hard time knowing whom to hire and whose experience is valuable; and employees have limited incentives to put time and effort into learning on the job if they are uncertain about the future prospects of the particular version of technology their employer uses. Workers will more likely invest when standardized skills promise them a secure career path with reliably good wages in the future.

Under these conditions, employers do, have a hard time finding workers with the latest design skills. When new technologies come into play, simple textbook notions about skills can be misleading for both managers and economists.

For one thing, education does not measure technical skills. A graphic designer with a bachelor’s degree does not necessarily have the skills to work on a web development team. Some economists argue that there is no shortage of employees with the basic skills in reading, writing and math to meet the requirements of today’s jobs. But those aren’t the skills in short supply.

Other critics look at wages for evidence. Times editors tell us “If a business really needed workers, it would pay up.” Gary Burtless at the Brookings Institution puts it more bluntly: “Unless managers have forgotten everything they learned in Econ 101, they should recognize that one way to fill a vacancy is to offer qualified job seekers a compelling reason to take the job” by offering better pay or benefits. Since Burtless finds that the median wage is not increasing, he concludes that there is no shortage of skilled workers.

But that’s not quite right. The wages of the median worker tell us only that the skills of the median worker aren’t in short supply; other workers could still have skills in high demand. Technology doesn’t make all workers’ skills more valuable; some skills become valuable, but others go obsolete. Wages should only go up for those particular groups of workers who have highly demanded skills. Some economists observe wages in major occupational groups or by state or metropolitan area to conclude that there are no major skill shortages. But these broad categories don’t correspond to worker skills either, so this evidence is also not compelling.

To the contrary, there is evidence that select groups of workers have been had sustained wage growth, implying persistent skill shortages. Some specific occupations such as nursing do show sustained wage growth and employment growth over a couple decades. And there is more general evidence of rising pay for skills within many occupations. Because many new skills are learned on the job, not all workers within an occupation acquire them. For example, the average designer, who typically does print design, does not have good web and mobile platform skills. Not surprisingly, the wages of the average designer have not gone up. However, those designers who have acquired the critical skills, often by teaching themselves on the job, command six figure salaries or $90 to $100 per hour rates as freelancers. The wages of the top 10% of designers have risen strongly; the wages of the average designer have not. There is a shortage of skilled designers but it can only be seen in the wages of those designers who have managed to master new technologies.

This trend is more general. We see it in the high pay that software developers in Silicon Valley receive for their specialized skills. And we see it throughout the workforce. Research shows that since the 1980s, the wages of the top 10% of workers has risen sharply relative to the median wage earner after controlling for observable characteristics such as education and experience. Some workers have indeed benefited from skills that are apparently in short supply; it’s just that these skills are not captured by the crude statistical categories that economists have at hand.

And these skills appear to be related to new technology, in particular, to information technologies. The chart shows how the wages of the 90th percentile increased relative to the wages of the 50th percentile in different groups of occupations. The occupational groups are organized in order of declining computer use and the changes are measured from 1982 to 2012. Occupations affected by office computing and the Internet (69% of these workers use computers) and healthcare (55% of these workers use computers) show the greatest relative wage growth for the 90th percentile. Millions of workers within these occupations appear to have valuable specialized skills that are in short supply and have seen their wages grow dramatically.

This evidence shows that we should not be too quick to discard employer claims about hiring skilled talent. Most managers don’t need remedial Econ 101; the overly simple models of Econ 101 just don’t tell us much about real world skills and technology. The evidence highlights instead just how difficult it is to measure worker skills, especially those relating to new technology.

What is hard to measure is often hard to manage. Employers using new technologies need to base hiring decisions not just on education, but also on the non-cognitive skills that allow some people to excel at learning on the job; they need to design pay structures to retain workers who do learn, yet not to encumber employee mobility and knowledge sharing, which are often key to informal learning; and they need to design business models that enable workers to learn effectively on the job (see this example). Policy makers also need to think differently about skills, encouraging, for example, industry certification programs for new skills and partnerships between community colleges and local employers.

Although it is difficult for workers and employers to develop these new skills, this difficulty creates opportunity. Those workers who acquire the latest skills earn good pay; those employers who hire the right workers and train them well can realize the competitive advantages that come with new technologies.

More blog posts by James Bessen

More on: Economy, Hiring

James Bessen

James Bessen, an economist at Boston University School of Law, is currently writing a book about technology and jobs. Follow him on Twitter.

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Important Disclosures

An Interview With Alasdair Macleod

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Yesterday it was Ambrose Evans Pritchard, today, in this 2nd of a series of London interviews that Lars Schall conducted for Matterhorn Asset Management this summer, Lars has a City of London streetside conversation with Alasdair Macleod right outside the Dutch reform Church in Austin Friars near the Bank of England. Together they talked about, inter alia: the challenges for The London Bullion Market Association (LBMA); China’s appetite for gold; the Shanghai Cooperation Organization as THE future player in the gold market; and the problems related to Germany’s gold at the New York Fed.

Dimes On Black And Dynamite On Red

Dimes On Black And Dynamite On Red

By John Hussman writing at Casey Research

The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle.

At the same time, we have very little view with regard to short-term market action. If one reviews market action surrounding major pre-crash peaks such as 1929, 1972, 1987, 2000, and 2007, you’ll observe a sort of “resilience” in the major indices on a day-to-day and week-to-week basis even after market internals had already corroded. In 1987, for example, the break following the August bull market peak was largely recovered over the course of several weeks before failing rapidly in October. In 2000, the market actually experienced a series of 10-12% corrections and recoveries before a final high in September that was followed by a loss of half the market’s value. In 2007, the initial break in mid-summer was fully recovered, with the market registering a fresh nominal high in early October that marked the end of the bull market and the start of a 55% market collapse.

As economic historian J.K. Galbraith wrote about the advance leading up to the 1929 crash, the market’s gains “had an aspect of great reliability… Indeed the temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But it has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently, discredited.”

None of this implies that the market will or must collapse in short order. Stocks remain strenuously overvalued, overbought, and overbullish, but those conditions have persisted uncorrected much longer in the present instance than they have historically. That doesn’t encourage us to abandon our concerns, but it does make us less aggressive about investment stances that rely on any immediate unwinding of what we continue to view, along with 1929 and 2000, as one of the three most reckless equity bubbles in the historical record.

Our perspective is straightforward: on the basis of measures that have been reliably correlated with actual subsequent market returns in market cycles across a century of data, we estimate that the S&P 500 Index will be no higher a decade from now than it is today. On the basis of nominal total returns (including dividends), we estimate zero or negative returns for the S&P 500 on every horizon shorter than about eight years. See Ockham’s Razor and the Market Cycle for a review of the total return arithmetic behind these estimates, and Yes, This Is an Equity Bubble for additional background on our present concerns.

At the same time, we don’t have strong views about immediate market prospects. Still, even a run-of-the-mill completion to the present market cycle would wipe out more than half of the market’s gains since the 2009 low, so whatever gains the market experiences in the interim are likely to be transitory, and few investors will retain them by exiting anywhere near the top. Frankly, we doubt that the present cycle will be completed with the S&P 500 even above 1,000 (a level that we would associate with historically normal subsequent total returns of roughly 10% annually). We readily accept that 3-4 more years of zero interest-rate policy would justify market valuations 12-16% above what would otherwise be “fair value” (see Optimism vs. Arithmetic to see why), but we also recognize that the vast majority of bear markets have overshot to the downside. In short, an informed view of market history easily admits the likelihood that the S&P 500 will lose half of its value over the completion of the present cycle.

We could certainly observe very constructive or even aggressive opportunities without that outcome. Those opportunities are most likely to coincide with a material, if less extreme, retreat in valuations, coupled with an early improvement in market internals. But here and now, we don’t observe any investment merit in equities, and with market internals deteriorating, any remaining speculative merit has also receded quickly.

As I emphasized last week, “While we’re already observing cracks in market internals in the form of breakdowns in small-cap stocks, high yield bond prices, market breadth, and other areas, it’s not clear yet whether the risk preferences of investors have shifted durably. As we saw in multiple early selloffs and recoveries near the 2007, 2000, and 1929 bull market peaks (the only peaks that rival the present one), the ‘buy the dip’ mentality can introduce periodic recovery attempts even in markets that are quite precarious from a full cycle perspective. Still, it’s helpful to be aware of how compressed risk premiums unwind. They rarely do so in one fell swoop, but they also rarely do so gradually and diagonally. Compressed risk premiums normalize in spikes.”

Those spikes will make it quite difficult to exit in the nice, orderly manner that speculators seem to imagine will be possible. Nor are readily observable warnings (beyond those we already observe) likely to provide a clear exit signal. Galbraith reminds us that the 1929 market crash did not have observable catalysts. Rather, his description is very much in line with the view that the market crashed first, and the underlying economic strains emerged later: “the crash did not come—as some have suggested—because the market suddenly became aware that a serious depression was in the offing. A depression, serious or otherwise, could not be foreseen when the market fell. There is still the possibility that the downturn in the indexes frightened the speculators, led them to unload their stocks, and so punctured a bubble that had in any case to be punctured one day. This is more plausible.

“Some people who were watching the indexes may have been persuaded by this intelligence to sell, and others may have been encouraged to follow. This is not very important, for it is in the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks.”

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Y is for Yawn Effect

Y is for Yawn Effect

Courtesy of Tim Richards of the Psy-Fi Blog

The Yawn Effect occurs when you yawn in response to someone else yawning. In fact you can even get your dog to do it (or get coerced into yawning by your pooch). Yawning is contagious, and contagion is an inevitable unconscious consequence of people interacting with each other – and, as usual, when we behave automatically as investors it doesn't make for a good financial outcome.

Example

The Yawn effect is so powerful it's used as a simple test for autism. If a child is suspected of being autistic one check is to yawn at it. If the child yawns back they're not affected. Beware, though, not yawning doesn't mean they are autistic. The best guess is that yawning is a proxy for empathy, although the jury's still out on that one: certainly unconscious mimicry is part of our standard repertoire, and emotional contagion is inferred from this.

This seemingly seamless behavior is replicated in investing where social biases trigger contagious reactions. Herding is the best known of these – the tendency of investors or analysts or forecasters to group together and to behave in a similar fashion. It's certainly not just private investors who do this –investment analysis ran about like simpleminded sheep in the wake of BP's Deepwater Horizon fiasco in the Gulf of Mexico.

What's odd is the way that this behavior seems to be synchronized – frequently herding seems to arise simultaneously across a specific cohort, rather than being transmitted from person to person. It seems that people react in a coordinated fashion to specific types of signal – so just as one person yawning can trigger a whole room of people to act all sleepy, so specific types of trigger can fire off herding.

Causes

Herding is sometimes triggered by social contagion, via self-enhancing transmission bias, but also seems to arise spontaneously, coordinated by a range of behavioral issues – a lack of attention to detail, the disposition effect and also the representative heuristic. In the latter case, for instance, similar beliefs are generated by extrapolation of past performance of attention grabbing stocks.

Also, in the lead up to market crashes herding behavior tends to increase – investors increasingly synchronize their behavior, following each others' trades rather than thinking for themselves. The behavior is self-organized, and is probably triggered by the rise in uncertainty that occurs around these events – we herd together because we're affected by the situation and don't know what to do – so we copy other people. The point being that this is entirely unconscious – someone yawns and we all follow suit, under the right circumstances.

Mitigation

It's difficult to stop yourself yawning if you're one of the people for whom yawning is contagious. I suspect that exactly the same is true of herding and panicking under conditions of uncertainty. However, if you're self-aware you can (just about) stop yourself yawning – and you don't have to follow the herd when the markets get tough. But to manage this you need an investing process and, just as importantly, the willpower to stick to it.

And also: Idiot Noise Traders
Read more: A Liberal Arts Investor's Reading List

The A to Z of Behavioral Bias

 

IMF Chief Under Investigation in French Fraud Case; Meet David Lipton (an Obama Clone), Lagarde’s Possible Replacement

Courtesy of Mish.

IMF chief Christine Lagarde Under Formal Investigation in French fraud case.

IMF chief Christine Lagarde has been put under formal investigation by French magistrates for alleged negligence in a political fraud affair dating from 2008 when she was finance minister.

Lagarde was questioned by magistrates in Paris this week for a fourth time under her existing status as a witness in the long-running saga over allegations that tycoon Bernard Tapie won a large arbitration payout due to his political connections.

Under French law, magistrates place a person under formal investigation when they believe there are indications of wrongdoing, but that does not always lead to a trial.

Lagarde's lawyer, Yves Repiquet, told Reuters he would personally appeal the magistrates' decision. That means Lagarde would not have to return to Paris in the meantime, allowing her to continue her duties as managing director of the International Monetary Fund uninterrupted.

The inquiry relates to allegations that Tapie, a supporter of conservative former President Nicolas Sarkozy, was improperly awarded 403 million euros ($531 million) in an arbitration to settle a dispute with now defunct state-owned bank Credit Lyonnais.

The inquiry has already embroiled several of Sarkozy's cabinet members and France Telecom's chief executive, Stephane Richard, who was an aide to Lagarde when she was Sarkozy's finance minister.

In previous rounds of questioning, Lagarde has not recognized as her own the pre-printed signature to sign off on a document facilitating the payment, Repiquet told Reuters by telephone.

What's This Really About?

Politics. If Nicholas Sarkozy won the last presidential election instead of Francois Hollande, there would be no investigation.

Is Lagarde guilty of anything?

Not knowing the peculiarities of French laws (other than to know full well from personal experience, French laws are damn peculiar), it's had to say. For my experience, please see Mish Fined 8,000 Euros for Quoting French Blog.

In the US, it's safe to conclude that anyone who funneled funds for political purposes would be considered a hero by one side, with the other side demanding "justice"….

Continue Here

 

Debt Rattle Aug 27 2014: The Right To Live Free And In Peace

Courtesy of The Automatic Earth.


Esther Bubley Greyhound garage, Pittsburgh, PA Sep 1943

Our Canadian friend Marina, who has Russian roots, sent me this video today. Marina has also translated several Automatic Earth articles into Russian (I’ll put up a link in a sidebar), see here. This is a taped August 24 international press conference with Alexander Zakharchenko, Chairman of The Council of Ministers of The Donetsk National Republic (DNR), and Vladimir Kononov, Defense Minister of DNR.

Since we in the west don’t often get to see the point of view of East Ukrainians, I thought it would be good to post it here. What is likely to be new to most is that the Donetsk leaders have not only recently actively started the formation of a state, they have to that end already established an army; and are therefore no longer – part of – militias.

Before I get accused of being partial once again – I get my fair share of that lately when I for instance ask for evidence of what either Russia or the (by now former) militias are accused of in the west -, I’ll just let it stand as is, and add parts of the transcript. At the very least you may find this informative. I did. And if at the end you think these guys are terrorists who don’t have the right to live free and in peace, so be it. But at least you’ll have seen their side of the story.

And I’ll add Putin’s speech yesterday at the Customs Union, where he met Poroshenko, for even more information from ‘the other side of the fence’. If only because whether we like it or not, the Ukraine ‘situation’ is very far from being solved, or over. And if you ask me, far too many people have died in the conflict already.

Our western leaders insist that the resolution is in the hands of Russia, or even Putin alone, but I think we need to ask ourselves if that is really the truth and nothing but the truth.

A World Without Fractional Reserve Banks and Central Planning

Courtesy of John Rubino.

Excerpted From The Money Bubble: What To Do Before It Pops by James Turk and John Rubino:

In a very real sense, it is fractional reserve banking and not money itself that is the root of so many of today’s evils. Whenever fractional reserves are permitted, the banking system – including the one that exists today throughout the world – comes to resemble a classic Ponzi scheme which can only function as long as most people don’t try to get at their money.

A Better System
Now, is this critique of the current monetary system just impotent ideological whining over something that, like the weather, can’t be changed? Or could fractional reserve banking and the resulting need for economic central planning actually be replaced by something better? Specifically, how could a banking system without fractional reserve lending accommodate depositors’ demand that their money be there when they want it and borrowers’ desire for 30-year mortgages which would tie up those deposits for decades? And could this market operate without the need for government oversight and management?

The answer to that last question is yes. A better financial system is possible, and here’s how it would work:

First, today’s commercial banks would split into two types. “Banks of commerce” would take deposits and keep them safe for a fee, like the goldsmiths of old. “Banks of credit” would pay interest on deposits and lend out depositor money, but would have to match the duration of deposits with the duration of loans. Deposits that can be withdrawn anytime (a checking account for instance) could only be used to fund a loan which the bank can “call” on demand, while longer-term deposits (say a 5-year CD) would be matched to longer-term loans like a business term loan or 5-year mortgage. Really long-term loans like 30-year mortgages would be funded with deposits for which the bank would have to pay up in order to convince a depositor to part with his or her money for such a long time.

The resulting mortgage would carry a high enough rate to provide the bank with a small profit, which would make 30-year mortgages both expensive and hard to get. But the case can be made that they should be hard to get. Buying a house – or anything else that requires capital for extremely long periods – should require a hefty down payment, other liquid assets as collateral and a solid income stream. This coverage would give the bank the ability to foreclose and realize more than the value of the loan, which would protect its ability to repay its depositors, thus making depositors more willing to tie up their money for long periods.

Such a society would be a lot less prone to excessive debt accumulation and inflation, bank runs would be far less frequent and government deposit insurance would be much less necessary. It would, in short, be a saner world in which individuals managed their own finances, saved with confidence and borrowed only for highly-productive uses, while two sharply-differentiated types of banks facilitated wealth protection and real wealth creation rather than paper trading.

Today’s investment banks and hedge funds, meanwhile, would be set free to speculate with their investors’ money to their hearts’ content, making fortunes when they succeed and collapsing when they fail, with no public stake in either outcome. They would be seen as high risk/high reward propositions and their customers and investors would participate with eyes wide open. No entity would be “too big to fail” because the banking system would be insulated from the vicissitudes of more volatile investment markets.

Central banks in such a 100-percent reserve world would either be completely unnecessary or serve a sharply-defined, very limited function of issuing paper currency 100-percent backed by gold/silver reserves and standing ready to exchange one for the other upon request. No need to be a lender of last resort because the banking system is sound and stable. No need to intervene in currency markets to fool citizens into treating valueless paper as a savings vehicle because paper, as a warehouse receipt for real assets, will have intrinsic value. Booms and busts would be fewer and less devastating, reducing the need for government programs in response. Debt levels would be miniscule by today’s standards, and therefore easily serviced from profitable activities. This hypothetical world, in short, is more modest and far more sustainable. All in all, it’s an attractive, completely feasible vision.

TheMoneyBubble - 600x150 (1)

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US 10-Year Treasury Cheapest in G7, Yield Spread Near Record High

Courtesy of Mish.

Saxo Bank chief economist Steen Jakobsen point out US 10-Year treasury is the cheapest in G7 with the spread near a record high.

Spread of US 10-Year Note Yield vs. G7 Average Yield

click on chart for sharper image

Via email Steen says …

US 10 Year cheapest in G-7! This is one of the reasons for my change to US fixed income and short US Dollar.

US 10 Year spread vs. G-7 equivalent now at 79 bps – close to all time high. As the chart indicates there is considerable mean-reversion in this data series.

The market is long, very long the US dollar into ECB and FOMC meetings where consensus quietly is looking for 10 bps cut by the ECB, maybe even announcement of “private” ABS [Asset Backed Securities]. In the US the regional banks want the discount rate normalized, but reality is close by.

I remain long US fixed income – and will add on any sell off. Long investors could use IEF.

IEF

IEF is the Barclays 7-10 Year Duration Bond Fund.

$TNX

Continue Here

An Interview With Ambrose Evans-Pritchard

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

In this first of a series of London interviews that Lars Schall conducted for Matterhorn Asset Management this summer, Lars met up with the Telegraph's Ambrose Evans-Pritchard to discuss geopolitical tensions in the world, China's challenges, threats to the global economy and the expectations for gold.

Ambrose Evans-Pritchard, is the international business editor of the British newspaper The Telegraph. He was the Telegraph’s Washington bureau chief in the 1990s. While he hardly needs an introduction to regular Zero Hedge readers, his recent statement encapsulating the global economy, from July 25, is as follows: "In the 30 years or so that I have been writing about world affairs and the international economy, I have never seen a more dangerous confluence of circumstances, or more remarkable complacency."

The Real Force Behind US Economic “Growth” Is Not The Fed

Courtesy of Lee Adler of the Wall Street Examiner

Industrial Production - Click to enlarge

Industrial Production – Click to enlarge

As the stock market has scooted off into Fed driven bubble territory over the past year, industrial production, on the surface at least, appears to be expanding quite nicely. After briefly going negative in mid 2013, the annual growth rate turned upward and has been accelerating, reaching 4.3% in July. This measure is by units of production, therefore no inflation adjustment is required. It’s a pretty impressive performance for the nation’s factories, mines, and utilities.  Can the Fed take credit for that growth, or was there something else that drove it?

The answer is that Fed is not only not responsible for that growth, it is responsible for once again putting us in grave danger. The financial engineering bubble the Fed has enabled does not create real wealth, it only transfers it from one class of economic actors to another. In this case, it has gone from a dwindling middle class to the bankers and corporate plutocrats who control the levers of power. That’s a story which I have covered in these pages for years. You know the details.

The industrial production data provides some real insight into the drivers of real growth in the US economy, such that it exists.

Media pundits and the Wall Street establishment like to back out defense and aviation to arrive at a core figure for industrial production, but as Alan Tonelson pointed out, while extremely volatile, their contributions to the total index are relatively small and have little impact on the trend over time. I like to deconstruct the index differently to get a better idea of how the US economy is really doing.

In fact, take away energy and the rest of the US economy isn’t doing that well. In some ways, it’s not growing at all. What growth there is appears entirely due to the energy boom and its ripple effects. Thank goodness for that boom and the technological changes that led to it. Environmentalists may feel differently, but without that growth in energy the US economy would be in even deeper trouble than it is.

The energy boom deserves far more credit for what growth there is in the US than does the Fed, but you will never hear the Fed’s cheerleaders acknowledge that. It’s also the most likely reason that the US is doing better economically than Europe and Japan. Both the BoJ and ECB have tried massively stimulative monetary policies over the past 5 years with little impact. Europe and Japan have been swinging between no growth and contraction for the entire time since 2009 while the US has seen modest expansion.

Here are a few charts that shed some light on the facts. First, manufacturing, now growing at a rate in excess of 4% has finally crawled back to the peak levels of 2007, just before the US economy collapsed. However, the June seasonal peak was below the level of 2007′s peak. While manufacturing is back to where it was in 2007, it’s no stronger, and the US and the rest of the world are a lot bigger now than they were 7 years ago. Relative to population growth, US manufacturing and the jobs that go with it, are still lagging.

Manufacturing Production Index- Click to enlarge

Manufacturing Production Index- Click to enlarge

Electric Power generation is necessary not only for industrial and commercial activities, but for our regular needs and wants of daily living. There are few things which we do at work or at home for which electricity does not play a role. Consequently, electric power generation had been in a secular growth trend from the inception of the measure in 1974 until 2008. But then that all come to a standstill. We use no more electric power today than we did in 2008, in spite of the US population being about 6% greater now than then. The question is whether the flattening of this trend is a matter of greater technological energy efficiency, or forced conservation and reduced demand due to the pressure on real household incomes. It’s probably a little of both, but the trend suggests that across the entire wealth spectrum the experience of economic growth has been extremely limited. We have seen lots of income data supporting that conclusion. Only those near the top of the curve have experienced “growth.”

Electric Power Generation- Click to enlarge

Electric Power Generation- Click to enlarge

The real driver of whatever growth we have seen in the US in the past 6 years has been in getting oil and gas out of the ground and into the economic stream. Since 2009, energy production has risen by over 50%. Oil and gas extraction has been growing so fast that its share of industrial production has risen from 26% in 2006 to nearly 30% today.

Oil and Gas Production Index- Click to enlarge

Oil and Gas Production Index- Click to enlarge

At some point this trend will begin to slow. I don’t pretend to know when that will be, but when it does, the US economy is likely to look a lot less rosy than it appears today. Non Energy industrial production is just about back to 2007 levels after a strong growth spurt in the last 12 months. Even though direct energy production is removed from the index shown below, it’s likely that the ripple effects of the energy production boom played a role in this growth.

Non Energy Industrial Production- Click to enlarge

Non Energy Industrial Production- Click to enlarge

Does this lack of growth since 2007 justify the stock market being 28% higher today than it was in 2007. When the Fed and its partner major central banks, the BoJ and ECB finally pull the punchbowl will prices come back to earth with a thud? I think the answer to that is “yes,” but for those of us in the markets, timing is the issue, which I cover in the Professional Edition.

What about the growth in energy capacity, that is, the construction of all those oil and gas wells that are required to produce that energy? What impact has that had since 2007?

Immense.

Capacity has grown by 50% since 2008. It looks like this.

Industrial Capacity- Oil and Gas Production - Click to enlarge

Industrial Capacity- Oil and Gas Production – Click to enlarge

Ask yourself where the US economy would be without this enormous investment and without the tremendous annual increases in actual production.

While the Fed is behind the enormous ramp in stock prices since 2008, the Fed’s cheerleaders give it far more credit than is deserved for the economic “recovery” that has left too many Americans behind. That “recovery,” like so many booms in history, is largely due to an accident of technology, an innovation so great that it has driven economic growth in the US for the past 5 years. We know this because growth in those parts of the world lacking in oil and gas reserves, or where for other reasons this technology has not been widely adopted, have not grown, while the US has. Likewise, in those areas of the US where there are oil and gas resources, growth has been far faster than in areas where there is not. A prime example… without oil and gas, there would be no low tax economic miracle in Texas.

This lucky accident of technological history is completely independent of the Fed’s policies of QE and ZIRP. Those policies were not necessary for this boom in energy. It was going to happen regardless of the level of interest rates or the mountains of cash the Fed pumped through Primary Dealer trading accounts. Historically normal interest rates and money creation would not have slowed this boom one iota.

Conversely, had the Fed never instituted ZIRP and QE, the massive financial engineering asset bubble currently putting the world at renewed risk never would have happened. With the boom in energy rippling out into the US economy, this bubble and its high frequency trading, stock option buybacks, and the immoral crushing of the nesteggs of America’s elderly, was wholly unnecessary. The dislocations that will result when the world’s central banks finally relent from these policies will extract another terrible price, a price that did not need to be paid. It is only a matter of time.

We can already guess the excuse which the Fed’s cheerleaders and apologists will have then. It will be that the Fed did not do enough.

These policy makers, these economists, these media pundits, simply refuse to consider the facts. They dare not question their models and their false heroes. They are incapable of admitting error. They are incapable of embarrassment. They have no conscience and no shame. These are the qualities of our economic policy makers and those in the self congratulatory media echo chamber who aspire to be like them. It is why we will simply go on careening from one crisis to the next from generation to generation.

As individuals and money managers with consciences all we can do is protect ourselves from those crises as best we can. We must arm ourselves with the facts and act upon them when the times require.

Get regular updates on the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. 

Stop Investing in Leveraged ETFs

Stop Investing in Leveraged ETFs

By Andrey Dashkov, Casey Research

Bigger, faster, better. That’s the turbocharged investment we all want. Miller’s Money Forever subscribers who pay close attention to our portfolio, though, will notice that we don’t hold leveraged ETFs—those with “2x” or “inverse” or “ultra” in their names, which some investors mistake for “better.”

Exchange-traded funds (ETFs) are a great tool for many portfolios. They allow investors to profit from movements in a huge variety of assets grouped by industry, geography, presence in a certain index, or other criteria. You can find ETFs tracking automobile producers, cotton futures, or cows.

For our purposes, ETFs make it easier to diversify within a certain group of companies—easier because you don’t have to buy them individually. You buy the ETF and leave it to its managers to balance the portfolio when needed.

We have several ETFs in the Money Forever portfolio, and they have served us well so far. They expose us to several universes, such as international stocks, foreign dividend-paying companies, convertible securities, and others.

Why Turbocharged Isn’t Always Better

So, if we think the underlying index or asset class will move in our favor, why wouldn’t we opt for the turbocharged version—the versions that use leverage (credit) to achieve gains two times higher?

First, because we’re very cautious about volatility, and leveraged ETFs are designed to be less stable than the underlying assets. Second, there is a trick to leveraged ETFs that can make your investment in them stink even if the underlying index or asset does well.

Before we get to the details, let me pose two questions:

  • If the S&P 500 goes up by 5% over several days, how much would a 2x leveraged ETF based on the index earn?
  • If the S&P 500 goes up and down, then rises, and after a while ends up flat, will our ETF end up flat too?

If you answer 10% to the first question, you may be correct, and that’s the caveat: you won’t be correct 100% of the time. You can’t just multiply an index’s total gain by the ETF’s factor to gauge how much you’ll earn, because leveraged ETFs track daily gains, not total ones.

To show how that works, here’s a brief example that will also answer question number two.

Day # Index Price Daily Return ETF Price
Index ETF
  1,900     $100.00
1 1,800 -5.26% -10.53% $89.47
2 1,870 3.89% 7.78% $96.43
3 2,000 6.95% 13.90% $109.84
4 1,900 -5.00% -10.00% $98.86
         
Total return 0.0%     -1.1%
Source: TheTradeSurfer

About are results from a hypothetical index with a value of 1,900 at the beginning of our period. It goes up and down for four days, and then is back to 1,900 by the end of day 4. There is also an ETF that starts with a price of $100 and doubles the daily gains of the index.

On the first day, the index goes down to 1,800 for a daily loss of 5.26%. This forces the daily loss of the ETF to be 10.53% (including rounding error), and the resulting price of the ETF is $89.47. The next day the index is up 3.89%, forcing the ETF to grow by 7.78%, to $96.43, and so on.

We designed this table to show that even though the underlying index is back to 1,900 in five days, returning 0% in total gain, the ETF is down 1.1% by the end of day 4.

It works like this because ETFs are designed to track daily returns, not mirror longer-term performance of the underlying index, and because of how cumulative returns work. If one share of the ETF costs $100 at the beginning of the period and the market dropped 5%, we should expect double the drop. Our share would now be worth $90. If the next day it reverses and goes up 5%, we should expect double the increase. We would be right in doing so, but our share would be worth $99 now, not $100—because it increased 10% above the $90 closing price the day before.

Leveraged ETFs Are for Traders, Not Investors

If a trader is smart and lucky, she or he would buy the ETF at the beginning of day 3 at $96.43, sell at $109.84, and realize a gain of 14%. But if one bought at day 0 and held until the end of our period, one would lose money even though the underlying index ended up flat.

In general, no one can predict where an ETF will end up because it’s impossible to tell in advance what pattern the underlying index will follow. In practice, it means that an ETF only partially tracks the underlying index; its performance also depends on its own past results.

The ideal case for investing in an ETF (we assume it’s long the market) would be to buy it at the beginning of a multi-day, uninterrupted uptrend. In that case, it would come very close to doubling the market’s performance. But such winning streaks are impossible to forecast, and short-term trading like this is not our focus.

We don’t recommend leveraged ETFs in our portfolio because they’re geared for traders, and we take a longer-term perspective. We are investors.

The additional potential reward from a turbocharged ETF doesn’t warrant the additional risk, particularly when you’re investing retirement money. There are safer ways to maximize your retirement income. Learn more about our strategies for doing just that by signing up for Miller’s Money Weekly, our free weekly e-letter that educates conservative investors about timely investment strategies. You’ll receive ahead-of-the-curve financial insight and commentary right in your inbox every Thursday. Start building a rich retirement by signing up today.

The article Stop Investing in Leveraged ETFs was originally published at millersmoney.com.

Microsoft’s Mobile Comeback: Fantasy or Possibility?

Microsoft’s Mobile Comeback: Fantasy or Possibility?

[The Technology Investor]

Courtesy of Adam J. Crawford at Casey Research

It was one of worst predictions in recent memory. In a 2007 interview, former Microsoft CEO Steve Ballmer said, “There’s no chance that the iPhone is going to get any significant market share. No chance.”

It reminds us of when Sir William Preece, an official with the British Post Office, weighed in on an earlier incarnation designed by Mr. Bell, not Mr. Jobs: “The Americans have need of the telephone,” said Sir William, “but we do not. We have plenty of messenger boys.”

To make matters worse, Ballmer predicted that Android would also fail, since Google wasn’t charging a licensing fee to its OEMs. Of course, he was talking his own book. But it still stands out as intensely blind to what customers really wanted.

However, today Microsoft has thrown everything the company has at mobile. It’s dropped the pen and embraced touch in every version of Windows (poorly, many have said). It’s spending millions advertising its phones, and billions to acquire the only notable company still making them. Is it all too late? Or can Microsoft rise from the ashes and find another multibillion-dollar business to add to its stable?

A Two-Man Race

A look at the market-share numbers illustrates just how spectacularly wrong Ballmer was about the iPhone and its operating system (iOS) and Android.

As you can see, Android and iOS currently control over 90% of the US and global markets, forming a true duopoly, with both systems having a meaningful share.

With global share of less than 8% in 2010 and deteriorating to less than 4% in 2013, Microsoft is currently irrelevant in the smartphone market. Is this because the company was late to the party?

Not really. Microsoft actually got a head start in the market, launching its first smartphone (the Pocket PC 2002) in 2001. New models under a new name (Windows Mobile) were launched annually in four of the following five years and, incredible as it might now seem, the company actually became a market leader in those halcyon days. By Q1 2004, Windows Mobile had captured 23% of worldwide smartphone sales; and in 2007, US market share peaked at 42%.

However, shortly thereafter, the wheels started to come off. In 2008, US and global share fell to 27% and 14% respectively. By 2010, Windows Mobile was a bit player with US share of 7% and global share of 5%.

What Happened?

So how did Microsoft lose its place in one of the biggest and most explosive markets in history? It wasn’t because of timing: the company was a smartphone pioneer. It wasn’t because of a lack of resources: when Windows Mobile’s share peaked in 2007, Microsoft had $21 billion in cash and equivalents, free cash flow of $15 billion, and an R&D spend of $9 billion… surely enough financial wherewithal to at least maintain, if not gain, share.

“They had everything they needed to execute,” said tech analyst Raven Zachary in a Wired article. “It was theirs to lose and they lost it.” Well, something was lacking—what was it? In a word, vision.

While Apple was designing a consumer-centric product that would redefine the utility of the mobile phone from a mere communication device to a lifestyle product, Microsoft remained PC- and enterprise-centric in its development of smartphones. This tunnel vision was on full display when in 2007, Ballmer based his prediction of failure for the iPhone on the fact that it lacked a physical keyboard. And it caused Microsoft’s product developers to miss the importance of mobility, touchscreens, and an extensive apps ecosystem. By the time the company realized its error, it was way behind the competition.

A Lost Cause?

Should Microsoft just give up on the devices market altogether? Yes, say some industry analysts, including Chetan Sharma. “(T)here is little appetite or need for another platform”, says Sharma. “Microsoft might be better off giving up on its device dream and just focus on services on top of the platforms that dominate.”

It could be that Microsoft will do just that. Abandonment of, or perhaps apathy toward, the developed markets, particularly the US, appears especially sensible. In those maturing markets, brand loyalty among users is highly developed, users are “locked in” to platform ecosystems, and carrier (e.g., Verizon) support is firmly established. Since these factors are self-reinforcing, the incumbent systems (i.e., Android and iOS) aren’t apt to be seriously challenged in the foreseeable future. Persuading significant numbers of users to switch to a smartphone with a Microsoft platform (now called Windows Phone) would be a tall and expensive order. With Microsoft’s flagship Office programs now arriving for iPhone and iPad alike, there are signs the company may be admitting it has lost the battle for the OS, and relegating itself to app provider alone.

But all may not be lost in the OS war, either, which would be good news for the Windows Phone and any other platform provider that missed out on the developed markets. There’s a next wave of smartphone uptake that will be coming from emerging markets over the next three to five years. Stoked by growing economies and increases in real income, there will be mass migration from feature phones to smartphones in these markets. And the numbers will dwarf anything we’ve seen before.

It’s a second chance for Microsoft in the platform business, and if it can execute, the impact on the company’s revenues could be significant. For example, if Windows Phone can capture share of 15% in emerging markets by 2017, with an average sales price of $150 per device, the resulting revenue would be well over $20 billion. That’s almost 25% of fiscal year 2014’s total revenue of $87 billion.

But is there any reason to believe Microsoft will succeed this time? Some people think so, and here’s why:

  • Nobody is entrenched: Smartphone uptake is still in the early stages in the emerging markets, so brand loyalty and the app lock-in phenomenon have not yet taken hold. This means no platform providers are yet entrenched (such as Android and iOS are in the developed markets) and that challengers have a window of opportunity in these emerging markets.
  • The Nokia factor: In April of this year, Microsoft closed the deal on its $7.2 billion purchase of Nokia’s phone and tablet business. Strategically, the purchase was a move by Microsoft to expand its presence in emerging markets, for while there’s little recognition of the Microsoft brand in these markets, the Nokia brand is well known and established. Microsoft will be attempting to leverage the Nokia brand to attract users of competitive phones as well as to move, over time, Nokia’s feature phone user base to the higher-end Windows Phone. Nokia possesses other capabilities that will be useful in establishing Windows Phone in emerging markets—capabilities that were previously missing at Microsoft. They include: relationships with carriers; a distribution network; manufacturing capacity and know-how; and a staff of talented hardware engineers.

In the February 2014 report titled Mobile Platform Wars, GSMA Intelligence analysts state their belief that a duopoly, or perhaps an oligopoly, of smartphone platform providers will form in the emerging markets, much as has happened in the developed markets. And they believe this will happen in short order: “[A]ny challengers would need to establish a minimum share (5%) in the next 1-2 years to have a chance of being a long-term competitor.” So the bar is set. We’ll be watching. If Microsoft starts to make progress in the mobile space, it could be a worthwhile investment. In the meantime, we’re looking elsewhere.

Thankfully for Microsoft, the onslaught of the tablet—another market in which the company fell woefully behind despite being first to market by many years—has subsided. Desktop PC sales have leveled off, and should end 2014 up for the first time in three years, as businesses give up on the tablet as a productivity device (try typing out a three-page memo on an iPad, and it’s obvious why) and refresh their aging PCs. The end of support for Windows XP this year should help that upgrade cycle. That’s good news for Microsoft shareholders, and buys the company a lot of cash to continue its seemingly Sisyphean push up the mobile market share hill.

In the next issue of BIG TECH, due out September 2, we’re recommending a stock we believe is undervalued and poised to rise over 30% in the next 12 months or so, thanks in part to that PC sales rebound. For access to this recommendation, simply sign up for a risk-free trial, and you’ll be the first to hear about it. If you decide to keep your subscription, it will cost a mere $99. If for any reason you’re unsatisfied, simply cancel to receive a prompt, courteous, and complete refund of the entire subscription price. You have 3 full months to make up your mind.

Argentina – Sliding Down A Slippery Slope

Argentina – Sliding Down A Slippery Slope

Courtesy of Pater Tenebrarum of Acting Man

Planned Bond Exchange Declared Illegal

You bet it is illegal – in its continued attempt to welsh on its creditors, Argentina's  government has attempted to move its debt out of the reach of US courts by swapping its debt for new debt issued under local law. The problem is of course that “local law” can be made up to the government's liking. Simply put, investors would never have lent the government money in the first place if these bonds had not been issued under US law. By entering clauses that determined that New York would be the relevant jurisdiction, Argentina's government enticed investors to lend a lot of money to it at what were then quite favorable terms.

Obviously, for the government to attempt to alter these clauses retroactively by means of a swap makes a complete mockery of these contractual agreements. Hence, judge Griesa's determination that such action would be illegal is perfectly justified and correct (for details on the legal backdrop, we refer you to our previous article  “Argentina – Deadbeat State Goes on the Attack”). In the interest of achieving a settlement, the judge wisely refrained from issuing a contempt of court finding (he can't very well throw Argentina into jail anyway). It is obvious that judge Griesa just wishes the issue would go away, but to his credit, he continues to stand firm on the law.

According to a recent Bloomberg report:

“Argentina’s plan to pay its restructured debt beyond the reach of U.S. courts is illegal, said the judge overseeing litigation stemming from the nation’s 2001 default, while declining to hold the country in contempt.

U.S. District Judge Thomas Griesa said in Manhattan federal court today that the proposal, announced Aug. 19 by Argentina President Cristina Fernandez de Kirchner, is “invalid, illegal and in violation of current court orders and injunctions.”

Griesa declined a request by lawyers representing investors holding Argentina’s defaulted bonds that he find the nation in contempt of court. The judge told lawyers for both sides that a contempt finding wouldn’t add to the prospects of a settlement between Argentina and its creditors.

“The thing that is of paramount necessity is to have a settlement,” Griesa said. “There must be a settlement.”

We must once again emphasize here that it does not matter that many of the current owners of Argentine debt that comprise the so-called “hold-outs” are denounced as “vulture funds” because they have bought the defaulted debt cheaply. It is completely immaterial to the legal questions at hand whether some of the original creditors have capitulated and sold their claims in the secondary market. Anyone who becomes a bondholder inherits all the rights connected with the bonds.

We must stress once again that we are a bit torn on the issue for the reason that we believe that lending money to governments is somewhat dubious per se. After all, those who lend to governments do so in the knowledge that the State is the only entity in the market economy that legally obtains its income by coercion. Certainly investors would benefit from being taught the lesson that lending to governments is not as risk-free an activity as is widely assumed. The fact that Argentina's tax payers will pay the price for their government's folly is undoubtedly deplorable.

On the other hand, we are talking about a government here that has just raised its spending by 56% in a single year, is hell-bent on destroying the country's economy and is abridging the economic liberty of its citizens ever more. As a result, there may actually be unexpected benefits for Argentina's citizens from the action of the hold-outs as well, as it is likely to restrict the government's room to maneuver.

Next “Official” Peso Devaluation Imminent

The renewed default is actually a sideshow to the ongoing economic catastrophe induced by the government's policies in Argentina. Its economy minister is a declared central planner, who actually believes markets to be surplus to requirements. As Nicolas Cachanosky writes:

“Argentina’s economic minister, Axel Kicillof, has become famous for his assertion that it is possible to centrally manage the economy now because we have spreadsheets such as Microsoft Excel. This assertion comes from the mistaken view that the cost of production determines final prices, and it reveals a profound misunderstanding of the market process.

This issue, however, is not new. The first half of the twentieth century witnessed the debate over economic calculation under socialism. Apparently, Argentine officials have much to learn from this old debate. The problem is not whether or not we have powerful spreadsheets at our disposal; the problem is the impossibility of successfully creating a centrally-planned market.”

CFK and Kicillof

Argentina's president Christina Fernadez-Kirchner and her economy minister Axel Kicillof. (Photo credit: DyN)

Indeed, Mises showed already in his 1920 monograph “Economic Calculation in the Socialist Commonwealth” that there was a fundamental problem all central planners were confronted with that could not possibly be overcome. Without markets and market-determined prices, economic calculation becomes impossible – therefore no rational economic choices are possible either. As the debate between Marxists, Mises and Hayek in the decades following the publication of Mises' article showed, none of the attempts to rescue central economic planning from this fundamental challenge were successful. In fact, it often seemed that Mises' and Hayek's opponents did not even fully grasp what the nature of the problem was. How powerful one's computers are is for instance completely irrelevant to the issue. As Mises noted later in Human Action:

The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark.

There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”

All socialist economic planning schemes presuppose the existence of the fictional state of equilibrium (which is merely a mental tool, but has no counterpart in reality) and a static, unchanging economy, which is just as unrealistic. Even if one were to simply attempt to preserve all existing economic processes and end all economic and technological progress, change would still occur (population numbers will change, the weather will be different from year to year, mineral deposits will run out, etc.). Almost needless to say, even if such a fictional “equilibrium economy” were attainable, it wouldn't be worth having. It would be completely contrary to the human spirit.

Argentina's “economy minister” has something in common with France's Arnaud Montebourg – he is economically illiterate, to put it bluntly. In fact, the entire Argentinian government is apparently laboring under the misconception that it can successfully “plan” the economy.

For instance, deputy economy minister Emanuel Alvarez Agis believes he knows what the “correct” exchange rate for the Argentine peso is (note that the currency has lost as much of its value in the past ten years as the US dollar in an entire century). As rumors about an imminent devaluation begin to circulate – which is undoubtedly unavoidable, not only due to the renewed default, but simply due to the combination of enormous government spending and unbridled money printing that characterizes Argentina's economic policy – Agis asserts that this is “not the plan”. Of course his vehement denial essentially cinches it, based on the “never believe anything until it is officially denied” principle.

“Argentina’s deputy economy minister, Emanuel Alvarez Agis, rejected the idea that the country is heading for another devaluation.

“We won’t apply that program,” Alvarez Agis said in an interview with Radio Del Plata yesterday. “The exchange rate has to be competitive enough to benefit regional economies, but not so high that it makes imports too expensive.”

Economy Ministry spokeswoman Jesica Rey didn’t respond to an e-mail and telephone call seeking comment about another possible devaluation this year.

Argentina’s central bank controls the peso rate by buying and selling dollars in the spot and futures markets almost daily, as well as limiting foreign exchange purchases. Yesterday the bank sold $10 million, according to preliminary data.

The peso is poised for further declines, Alan Ruskin, the global head of Deutsche Bank AG’s Group of 10 foreign exchange in New York, said in an interview on “Bloomberg Surveillance.”

“Guys like ourselves are saying the currency could still lose something like 25 percent,” Ruskin said. “It still is one of the big shorts on the currency side.”

Argentina's citizens meanwhile are buying as many dollars as is legally possible for them. Citizens may exchange up to 20% of their salary or income into dollars, provided they leave the dollars on deposit with a bank for a minimum of one year. Otherwise, a 20% tax is imposed on the purchase (i.e., if the dollars are taken out in the form of cash currency). Dollars that are kept on deposit remain of course easily accessible for the government, which is not exactly a paragon of regime certainty, to put it mildly. Argentinians have lost their savings more times than we care to count, whether by inflation or by confiscatory deflation. They evidently know what is coming next:

“People have seen this before and they know there will be fewer and fewer dollars, while more pesos flow into the economy as the government increases spending,” Buscaglia said in an interview from Buenos Aires. “The natural reaction is to buy more dollars.” Government spending surged 56.5 percent in June from a year earlier.

Peso forwards showing trader expectations for the currency in three months declined 2.2 percent this week to 9.3 pesos per dollar.

The perception that Fernandez is radicalizing her policies is also driving investors to the dollar on concern she’ll tighten existing currency controls, according to Olaiz.

ARG peso-ann

The official (green line) and black market (blue line) peso rates, via dolarblu.net. The gap between the two continues to widen, a sure sign that the official rate will soon “catch up” a bit – click to enlarge.

The Argentine government meanwhile once again demonstrated its contempt for property rights by suing the subsidiary of a US company for daring to declare bankruptcy after having been ruined by the government's very own policies. The government is using an “anti-terrorism law” to attempt to reverse the bankruptcy. What is there to reverse one wonders? The company is insolvent. As an aside to this, it seems that the government also wants to introduce price controls and begin to “regulate profit margins” on a broad basis:

“Since defaulting, Fernandez has said she will use an anti-terrorism law to file a legal case against the local unit of Chicago-based RR Donnelley & Sons Co. (RRD) for “upsetting economic and financial order” after the printing company filed for bankruptcy and wrote off its assets in Argentina.

RR Donnelley said in a statement on Aug. 16 distributed by Globe Newswire that its Argentine unit wasn’t solvent and faced rising labor costs, inflation, materials price increases, devaluation, inability to pay debts and other issues that led to its decision to file for bankruptcy.

After Fernandez’s speech, securities regulator Alejandro Vanoli later said Argentina would seek to reverse the bankruptcy using a law against economic crimes.

Fernandez is also attempting to change a supply law that would seek to regulate prices and profit margins of goods.

In short, Argentina now has all the hallmarks of a full-blown Zwangswirtschaft based on the fascist model. Private property still exists on paper, but what may be done with it is decided by government bureaucrats. Ms. Kirchner's economic policy ideas obviously still had some room to get even worse than they already were. 

Conclusion:

It is actually quite sad to watch the continued downfall of Argentina's economy under the inept ministrations of its government. The only good thing that can possibly come from this is that it will set yet another example for others so they may avoid making similar mistakes. Unfortunately the example is being set on the backs of the country's citizens, who are seemingly forced to live from crisis to crisis. Politicians rarely pay the price for their atrocious policies, and we are quite sure Ms. Kirchner and her cronies have feathered their nests in ways the average citizen cannot even dream of (most recently, corruption allegations have caught up with Ms. Kirchner's vice president. Rampant government corruption has long been a hot topic in Argentina under Ms. Kirchner's rule). It is not as though Argentina didn't have great potential. If only politicians would leave its economy alone and stopped inflating the currency into oblivion, the country could easily and quickly regain its former prosperity.

 

The Unprecedented Failure to Regulate Citigroup Continues

Courtesy of Pam Martens.

Yesterday, Wall Street’s self-regulator, the Financial Industry Regulatory Authority (FINRA), charged Citigroup with cheating its customers out of fair prices on preferred stock trades — 22,000 times. Citigroup was fined a meager $1.85 million, ordered to pay $638,000 in restitution, allowed to neither deny or admit the charges, and sent on its merry way to loot the next unwary investor.

Why do we believe there will be more charges of malfeasance in Citigroup’s future? Because it is an unrepentant recidivist. Yesterday’s FINRA fine was the 408th fine that FINRA has levied against Citigroup Global Markets or its predecessor, Smith Barney, for trading violations, market manipulations or failure to supervise its traders or brokers.

And that’s just FINRA – the light-handed disciplinarian with industry ties. Citigroup has kept other Federal regulators, including the U.S. Justice Department, very busy as well.

It is now six years since Citigroup’s serial history of rogue conduct rendered it insolvent. Under the law, the U.S. government is not allowed to prop up insolvent banks with taxpayer money. But from 2007 to 2010, in the largest bank bailout in history, over $2.3 trillion was lavished on the serial recidivist Citigroup.

Citigroup received $25 billion in Troubled Asset Relief Program (TARP) funds on October 28, 2008. Less than a month later, Citigroup had blown through those bailout funds and required another $20 billion TARP infusion. But its situation was so wobbly that the government had to simultaneously provide another $306 billion in asset guarantees.

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The DSKing Of Christine Lagarde: IMF Head Formally Charged In Fraud Probe

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Ah, the perils of European power politics.

A day after France revealed its new government, the person who eagerly stepped in after DSK's infamous and choreographed fall from grace and the IMF presidency (not to mention his derailed French presidential ambitions, greenlighting Hollande as what would become the worst French president ever), Christine Lagarde is about to be DSKed herself after "someone" clearly has set their sights on the former French finance minister.

Several hours ago the news hit that a French court has put Christine Lagarde, head of the International Monetary Fund, under a formal probe for negligence in a corruption investigation dating back to her days as finance minister. To be sure, this development is hardly a shock. Recall that it was over a year ago when "IMF's Lagarde Flat Raided Over French 'Payout' Probe" with her ascent to the head of the IMF also riddled with numerous allegations of impropriety involving the Tapie matter. However, until now, such outside interventions were below the radar, and certainly never escalated to anything formal or official. Alas, it now appears that Madame's time has come, even if Lagarde hasn't grasped it just yet.

From the WSJ:

Ms. Lagarde confirmed the decision in a statement but said it was "without basis," adding she would challenge it with a higher court. She said she was heading back to Washington Wednesday and would brief the IMF board about the latest development.

The investigation is part of a complex, drawn-out probe into the alleged misuse of state funds. The case stems from a decision in the 2008 to use arbitration to settle a dispute with business tycoon Bernard Tapie. The arbitration panel awarded €420 million to Mr. Tapie.

"The magistrates of the court of justice of the Republic have decided to place me under formal investigation," Ms. Lagarde said in statement. "After three years of procedure, the sole surviving allegation is that through inadvertence or inattention I may have failed to intervene to block the arbitration that brought to an end the longstanding Tapie litigation," she added.

Bloomberg adds:

IMF issues statement after Managing Director Christine Lagarde put under formal investigation for her role in an arbitration case during her time as French finance minister.

IMF spokesman Gerry Rice: “She is now on her way back to Washington and will, of course, brief the board as soon as possible. Until then, we have no further comment”

Regardless of the spin, at this point it's all over for the first female president of the IMF, whose departure has come with the same facility as her ascent.

The only question is who and why was angered by her policies over the past three years, and who will be her replacement. And most importantly, is the imminent shift at the top of the IMF indicative of what the CFR pitched yesterday when it proposed that the time has come for Bernanke's money paradrop. After all, one would need an even more obedient puppet at the head of the monetary fund if such an idiotic plan is to even be able to take off the ground, so to speak.

As for Lagarde, we are confident she and Angelo Mozillo will have enough fake tanning tips to exchange during their long and worry-free retirement.

And with that, Bill was finally Killed.

Ukraine Seeks Ceasefire Following ‘Very Tough and Complex” Talks With Putin

Courtesy of Mish.

On August 10, Ukraine said No Cease-Fire Until Rebels Surrender.

Things changed.

This just in … On August 26, Reuters reported Poroshenko Seeks Ceasefire After ‘Very Tough’ Talks With Putin.

Ukrainian President Petro Poroshenko promised after late-night talks with Russia’s Vladimir Putin to work on an urgent ceasefire plan to defuse the separatist conflict in the east of his former Soviet republic.

The first negotiations between the two leaders since June were described by Putin as positive, but he said it was not for Russia to get into the details of truce terms between the Kiev government and two rebel eastern regions.

“We didn’t substantively discuss that, and we, Russia, can’t substantively discuss conditions of a ceasefire, of agreements between Kiev, Donetsk and Luhansk. That’s not our business, it’s up to Ukraine itself,” he told reporters early on Wednesday.

Poroshenko, after two hours of one-to-one talks which he described as “very tough and complex”, told reporters: “A roadmap will be prepared in order to achieve as soon as possible a ceasefire regime which absolutely must be bilateral in character.”

Despite the positive tone, it remained unclear how the rebels would respond to the idea of a ceasefire, how soon it could be agreed and how long it might stick.

And with Putin insisting the details were an internal matter for Kiev, there was no sign of progress on a fundamental point of disagreement: Ukraine’s charges that Moscow is sending arms and fighters to help the rebels, and Russia’s adamant denials.

The leaders shook hands at the start of their meeting in the Belarussian capital Minsk just hours after Kiev said it had captured Russian soldiers on a “special mission” on Ukrainian territory.

In a televised statement at the start of the talks, Putin urged Poroshenko not to step up his offensive against the pro-Moscow rebels, and threatened to slap economic penalties on Kiev for signing a trade accord with the European Union that he said would squeeze Russian goods out of its market.

Poroshenko replied by demanding a halt to arms shipments from Russia to the separatist fighters….

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Jane’s Defense vs. Colonel Cassad: Someone Seriously Wrong

Courtesy of Mish.

Given misinformation and outright lies by all involved, it’s important to consider the both sides of the story.

Military Endgame?

Jane’s Defense claims Ukrainian Military Moves to Endgame.

Ukrainian troops have continued their offensive aimed at clearing pro-Russian rebels from the Donetsk and Lugansk regions despite strong resistance.

Both the Ukrainian and rebel forces are using tracked armour, heavy artillery, and rockets in the heaviest fighting seen in Europe since the Balkan conflicts of the 1990s.

The operation by Ukrainian troops, underway for more than a month, has pushed deep into rebel-held regions, with fighting now reported in the suburbs of the cities of Donetsk and Lugansk for several days. Reports on 20 August indicated that in Lugansk, Ukrainian troops had recaptured a central city police station.

Ukrainian forces appear to be trying to cut rebel forces in the two cities off from each other, as well as severing land routes to the Russian border to block supplies and reinforcements from reaching them.

The rebel setbacks of the past weeks have prompted three prominent rebel leaders – including their military commander, Igor Girkin, known as Strelkov; the political leader in Donetsk, Alexander Borodai; and the rebel head in Lugansk, Valery Bolotov – to step down. 

ANALYSIS

The continued determination of the Kiev government to prosecute its offensive into eastern Ukraine appears to be bearing fruit, although at a heavy cost in human life and damage to civilian property.

Ukrainian army and national guard units appear to be better trained and motivated than the units that first engaged the rebels in the early days of the crisis back in April.

The Ukrainian Interior Ministry has reported that about 25 battalions of national guard volunteers were fighting on the Donbas front and appear to be performing better than expected, considering they were only formed a few months ago. However, the OSCE reports a number of these units have been implicated in the abuse of civilians.

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A Nation of Shopkeepers

Thoughts from the Frontline: A Nation of Shopkeepers

By John Mauldin

“To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.”

– Adam Smith, The Wealth of Nations

One of the great pleasures of writing this letter is the fascinating correspondence and the relationships that develop along the way. The internet has allowed me to meet a wide range of people all over the world – something that never happened to me pre-1999. Not only do I get to meet a wide variety of people, I also come into contact with an even wider range of knowledge and ideas, much of which comes my way from readers who send me work they think I’ll have an interest in. I have a bountiful, never-ending source of thoughtful material, thanks to you.

This week’s letter emanates from a rather provocative email I received from David Brin. Science-fiction aficionados will immediately recognize him as the many-time winner of every major sci-fi writing award and an inductee into the Science Fiction Hall of Fame. Non-SF junkies might remember the movie The Postman (with Kevin Costner). Brin’s 2002 book Kiln People is one of my favorites, and I think it’s one of the more important books for trying to understand the impact of technology in our future. Will the science he describes be available? Probably not. But different technological variations on it will be, I think. And the book has a great plot. (David is also something of an expert on the role of and loss of privacy, which is a central theme of the book.)

David is something of a polymath. His degrees are in astrophysics and space science (Caltech and UCSD), but like many science fiction writers he is interested in almost everything. He frequently takes me to task, always constructively, sometimes publicly, about my writing. He is also a bit of an Adam Smith junkie.

I am going to use his latest complaint as a launching point for today’s letter. He was responding to last week’s Outside the Box, about the future of robotics and automation, which I introduced with a shot off the bow at the reigning Keynesian paradigm. He objects.

Today’s letter will be more philosophical in nature than most – we won’t be looking for technical signals; but it’s August – half the trading world is on vacation (except for the unsleeping computers run by high-frequency traders, which create the bulk of the volume these days), and so any technical signal we picked out this week would be suspect. Yes, August is a great time to think philosophical thoughts about the political economy. So, without further ado, let’s see what has my close friend Dr. Brin so upset.

Supply-Side (Voodoo) Economics?

John, excellent missive on automation.  I share your overall optimism.

Still… although Keynesianism deserves lots of criticism for the 30% of the time that it has proved wrong… and Hayek had a lot of good and important things to say… it remains disappointing that you do not use your influence to help hammer nails into the coffin of the Rentier Caste's catechism… Supply Side (Voodoo) Economics (SSVE), which is not just 30% wrong. It has proved to be almost 100% diametrically opposite to right, with every forecast that SSVE ever made having proved to be calamitously wrong.

Adam Smith might have had some problems with Keynes… and some with Hayek. But Smith warned us incessantly about the horrific economic effects of favoring monopolistic-collusive rent-seeking oligarchs, who destroyed freedom and markets in 99% of human cultures. When the Olde Enemie – who wrecked freedom and markets across 6000 years… the enemy Smith warned against and the US Founders rebelled against… comes roaring back… aren't you behooved to help raise the hue and cry?

Some Thoughts on Adam Smith

David,

You will perhaps forgive me if I use you as a straw man to draw out a few principles for my readers. And I’m sure you’ll have an eloquent answer posted within a few hours. (Interested readers will be able to find that at http://davidbrin.blogspot.com/ along with fascinating commentary on all matters technological and philosophical. David relishes his role as self-appointed uber-contrarian.)

Your comments on Keynesianism and supply-side economics are so wrong that I think I will hold my tongue and save my criticisms of them for next week. You are expressing a common meme that totally buys into the reigning economic nonsense that passes for thinking about economic theory – a sin you’re usually not guilty of. But I’m not about to respond to you (not anymore!) with an off-the-top-of-my-head analysis, so I will spend the bulk of my week thinking about secular stagnation and the causes of growth, and then respond.

Neither is what follows totally off the top of my head; there was some work involved. What I would like to take up is Adam Smith views on the rentier class, which, for me at least, is a far more intellectually interesting topic than Keynesianism versus… SSVE. You keep quoting Adam Smith at me as if somehow Adam Smith’s is a gospel that must be adhered to. And I admit to being a serious Adam Smith enthusiast. Smith demonstrates an amazing amount of intellectual prowess. I stand in awe. His insight seems even more profound when you put the man in the context of his times.

And Smith was totally a man of his times. He was making observations about the changing nature of the economy and wealth in mid-18th-century Scotland and England, and his thoughts were disturbing to many of his associates at the top – the 1%, in modern parlance. He described a political economy in such stunning detail that it has influenced minds for almost 250 years. Yet, he was an early explorer in a land (that of the political economic landscape) that was not yet much trodden. He did however come along at a time when people were trying hard to understand the changes erupting around them. England especially and Scotland to some extent were transforming from a feudal agrarian society (which Smith clearly did not like) to one that was more commercial, as the Industrial Revolution took root and began to send forth green shoots.

Smith welcomed change, but with some reservations that are not often talked about. We’ll look at some of them today. As we will see, Smith was a complicated person. But he is best understood if we put him back into his times and recognize that he is not penning his observations on the “wealth of nations” to deal with our situation today, though many of his insights are timeless.

Over the last 200 years, the ways scholars have looked at Adam Smith have changed. There have been Adam Smith fads. While the fact is not much discussed in modern-day polite society, Smith was a clear influence on Hegel, who of course informed Marx. As hard as it is to understand today, there were those along the way who thought Smith was foundational to Marxism. In the 19th century, socialists and neoliberals of all stripes approvingly cited Smith’s Wealth of Nations.

Smith was not held in much favor by classical economists, though that has changed. Who can forget Margaret Thatcher moaning that she could not win the hearts and minds of Scotland, “‘home of the very same Scottish Enlightenment which produced Adam Smith, the greatest exponent of free enterprise economics till Hayek and Friedman.” Yet only a few years later Gordon Brown (a Scot and English Prime Minister) offered up a speech in which he claimed that Adam Smith (who lived in the region Brown represented in Parliament) would in fact be center-left, were he on the scene today.

You, David, are seemingly part of a coterie described by Neil Davidson in “The Battle for Adam Smith” in the Scottish Review of Books. (Note: Davidson makes some points I categorically disagree with, but I think he has an excellent handle on the history.)

Finally, there have been attempts, perhaps surprisingly from the radical left, to discern in Smith’s work a model of a ‘real free market’ which has been violated by ‘the global corporate system’. As John McMurty writes, ‘every one of Smith’s classical principles of the free market has been turned into its effective opposite’. This is an attractively counter-intuitive idea, which challenges the neoliberals on their own terms. Other writers, like the late Giovanni Arrighi have gone further and argued, not only that the market system envisaged by Smith can be distinguished from capitalism, but that ‘market-based growth’ distinct from ‘capitalist growth’ is now embedded in Chinese or perhaps East Asian development more generally.

[Sidebar: American readers may be puzzled to learn that neoliberalism is a label for “economic liberalism which advocates under classical economic theory support for economic liberalization, privatization, free-trade trauma, open markets, deregulation, and reductions in government spending in order to enhance the role of the private sector of the economy.” Who knew that the large fraction of my readers who consider themselves conservative thinkers are actually neoliberals? Sadly, the word is now generally used pejoratively by the left. Personally, I think it is more fun to think of oneself as a neoliberal than as an Austrian.]

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

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