Archives for May 2015

Mario Draghi’s Slippery Downward Slope

Courtesy of The Automatic Earth.


Harris&Ewing F.W. Grand store, Washington, DC 1925

Mario Draghi made another huge faux pas Thursday, but it looks like the entire world press has become immune to them, because it happens all the time, because they don’t realize what it means, and because they have a message if not a mission to sell. But still, none of these things makes it alright. Nor does Draghi’s denying it was a faux pas to begin with.

And while that’s very worrisome, ‘the public’ appear to be as numbed and dumbed down to this as the media themselves are -largely due to ’cause and effect’, no doubt-. We saw an account of a North Korean defector yesterday lamenting that her country doesn’t have a functioning press, and we thought: get in line.

It’s one thing for the Bank of England to research the effects of a Brexit. It’s even inevitable that a central bank should do this, but both the process and the outcome would always have to remain under wraps. Why it was ‘accidentally’ emailed to the Guardian is hard to gauge, but it’s not a big news event that such a study takes place. The contents may yet turn out to be, but that doesn’t look all that likely.

The reason the study should remain secret is, of course, that a Brexit is a political decision, and a country’s central bank can not be party to such decisions.

It’s therefore quite another thing for ECB head Mario Draghi to speak in public about reforms inside the eurozone. Draghi can perhaps vent his opinion behind closed doors, for instance in talks with politicians in European nations, but any and all eurozone reforms remain exclusively political decisions, even if they are economic reforms, and therefore Draghi must stay away from the topic, certainly in public. Far away.

There has to be a very clear line between central banks and governments. The latter should never be able to influence the former, because it would risk making economic policy serve only short term interests (until the next election). Likewise the former should stay out of the latter’s decisions, because that would tend to make political processes skewed disproportionally towards finance and the economy, at the potential cost of other interests in a society.

This may sound idealistic and out of sync with the present day reality, but if it does, that does not bode well. It’s dangerous to play fast and loose with the founding principles of individual countries, and perhaps even more with those of unions of sovereign nations.

Obviously, in the same vein it’s fully out of line for German FinMin Schäuble to express his opinion on whether or not Greece should hold a referendum on euro membership, or any referendum for that matter. Ye olde Wolfgang is tasked with Germany’s financial politics, not Greece’s, and being a minister for one of 28 EU members doesn’t give him the liberty to express such opinions. Because all EU nations are sovereign nations, and no foreign politicians have any say in other nations’ domestic politics.

It really is that simple, no matter how much of this brinkmanship has already passed under the bridge. Even Angela Merkel, though she’s Germany’s political leader, must refrain from comments on internal Greek political affairs. She must also, if members of her cabinet make comments like Schäuble’s, tell them to never do that again, or else. It’s simply the way the EU was constructed. There is no grey area there.

The way the eurozone is treating Greece has already shown that it’s highly improbable the union can and will last forever. Too many -sovereign- boundaries have been crossed. Draghi’s and Schäuble’s comments will speed up the process of disintegration. They will achieve the exact opposite of what they try to accomplish. The European Union will show itself to be a union of fairweather friends. In Greece, this is already being revealed.

The eurozone, or European monetary union, has now had as many years of economic turmoil as it’s had years of prosperity. And it’ll be all downhill from here on in, precisely because certain people think they can afford to meddle in the affairs of sovereign nations. The euro was launched on January 2002, and was in trouble as soon as the US was, even if this was not acknowledged right away. Since 2008, Europe has swung from crisis to crisis, and there’s no end in sight.

At the central bankers’ undoubtedly ultra luxurious love fest in Sintra, Portugal, where all protagonists largely agree with one another, Draghi on Friday held a speech. And right from the start, he started pushing reforms, and showing why he really shouldn’t. Because what he suggests is not politically -or economically- neutral, it’s driven by ideology.

He can’t claim that it’s all just economics. When you talk about opening markets, facilitating reallocation etc., you’re expressing a political opinion about how a society can and should be structured, not merely an economy.

Structural Reforms, Inflation And Monetary Policy (Mario Draghi)

Our strong focus on structural reforms is not because they have been ignored in recent years. On the contrary, a great deal has been achieved and we have praised progress where it has taken place, including here in Portugal. Rather, if we talk often about structural reforms it is because we know that our ability to bring about a lasting return of stability and prosperity does not rely only on cyclical policies – including monetary policy – but also on structural policies. The two are heavily interdependent.

So what I would like to do today in opening our annual discussions in Sintra is, first, to explain what we mean by structural reforms and why the central bank has a pressing and legitimate interest in their implementation. And second, to underline why being in the early phases of a cyclical recovery is not a reason to postpone structural reforms; it is in fact an opportunity to accelerate them.

Structural reforms are, in my view, best defined as policies that permanently and positively alter the supply-side of the economy. This means that they have two key effects. First, they lift the path of potential output, either by raising the inputs to production – the supply and quality of labour and the amount of capital per worker – or by ensuring that those inputs are used more efficiently, i.e. by raising total factor productivity (TFP).

And second, they make economies more resilient to economic shocks by facilitating price and wage flexibility and the swift reallocation of resources within and across sectors. These two effects are complementary. An economy that rebounds faster after a shock is an economy that grows more over time, as it suffers from lower hysteresis effects. And the same structural reforms will often increase both short-term flexibility and long-term growth.

And earlier in the -long- speech he said: “Our strong focus on structural reforms is not because they have been ignored in recent years. On the contrary, a great deal has been achieved and we have praised progress where it has taken place, including here in Portugal.

So Draghi states that reforms have already been successful. Wherever things seem to go right, he will claim that’s due to ‘his’ reforms. Wherever they don’t, that’s due to not enough reforms. His is a goalseeked view of the world.

He claims that the structural reforms he advocates will lead to more resilience and growth. But since these reforms are for the most part a simple rehash of longer running centralization efforts, we need only look at the latter’s effects on society to gauge the potential consequences of what Draghi suggests. And what we then find is that the entire package has led to growth almost exclusively for large corporations and financial institutions. And even that growth is now elusive.

Neither reforms nor stimulus have done much, if anything, to alleviate the misery in Greece or Spain or Italy, and Portugal is not doing much better, as the rise of the Socialist Party makes clear. The reforms that Draghi touts for Lisbon consist mainly of cuts to wages and pensions. How that is progress, or how it has made the Portuguese economy ‘more resilient’, is anybody’s guess.

Resilience cannot mean that a system makes it easier to force you to leave your home to find work, but that is exactly what Draghi advocates. Instead, resilience must mean that it is easier for you to find properly rewarded work right where you are, preferably producing your own society’s basic necessities. That is what would make your society more capable of withstanding economic shocks.

Still, it’s the direct opposite of what Draghi has in mind. Draghi states that [structural reforms] “.. make economies more resilient to economic shocks by facilitating price and wage flexibility and the swift reallocation of resources within and across sectors.”

That obviously and simply means that, if it pleases the economic elites who own a society’s assets, your wages can more easily be lowered, prices for basic necessities can be raised, and you yourself can be ‘swiftly reallocated’ far from where you live, and into industries you may not want to work in that don’t do anything to lift your society.

Whether such kinds of changes to your society’s framework are desirable is manifestly a political theme, and an ideological one. They may make it easier for corporations to raise their bottom line, but they come at a substantial cost for everyone else.

Draghi tries to push a neoliberal agenda even further, and that’s a decidedly political agenda, not an economic one.

There was a panel discussion on Saturday in which Draghi defended his forays into politics, and he was called on them:

Draghi and Fischer Reject Claim Central Banks Are Too Politicised

The ECB president on Saturday said his calls were appropriate in a monetary union where growth prospects had been badly damaged by governments’ resistance to economic reforms. Mr Draghi said it was the central bank’s responsibility to comment if governments’ inaction on structural reforms was creating divergence in growth and unemployment within the eurozone, which undermined the existence of the currency area. “In a monetary union you can’t afford to have large and increasing structural divergences,” the ECB president said. “They tend to become explosive.”

He even claims it’s his responsibility to make political remarks….

Mr Draghi’s defence of the central bank came after Paul De Grauwe, an academic at the London School of Economics, challenged his calls for structural reforms earlier in the week. Mr De Grauwe said central banks’ push for governments to take steps that removed people’s job protection would expose monetary policy makers to criticism over their independence to set interest rates.

The ECB president [..] said central banks had been wrong to keep quiet on the deregulation of the financial sector. “We all wish central bankers had spoken out more when regulation was dismantled before the crisis,” Mr Draghi said. A lack of structural reform was having much more of an impact on poor European growth than in the US, he added.

De Grauwe is half right in his criticism, but only half. It’s not just about the independence to set interest rates, it’s about independence, period. A central bank cannot promote a political ideology disguised as economic measures. It’s bad enough if political parties do this, or corporations, but for central banks it’s an absolute no-go area.

Pressure towards a closer economic and monetary union in Europe is doomed to fail because it cannot be done without a closer political union at the same time. They’re all the same thing. They’re all about giving up sovereignty, about giving away the power to decide about your own country, society, economy, your own life. And Greeks don’t want the same things as Germans, nor do Italians want to become Dutch.

Because of Greece, many EU nations are now increasingly waking up to what a ‘close monetary union’ would mean, namely that Germany would be increasingly calling the shots all over Europe. No matter how many technocrats Brussels manages to sneak into member countries, there’s no way all of them would agree, and it would have to be a unanimous decision.

Draghi’s remarks therefore precipitate the disintegration of Europe, and it would be good if more people would recognize and acknowledge that. Europe are a bunch of fairweather friends, and if everyone is not very careful, they’re not going to part ways in a peaceful manner. The danger that this would lead to the exact opposite of what the EU was meant to achieve, is clear and present.

Behind The Scenes In FX Trading: What Is Really Going On

Courtesy of ZeroHedge. View original post here.

Earlier this month we got confirmation of something we postulated back in April: that the primary source of revenue for Virtu (which, as a reminder, has had only one losing trading day in six years) is no longer equities but FX. Here’s what we said:

Today, Virtu released its first public financials since going public, and our speculation has been proven correct: FX is now the largest revenue generator for VIRT, amounting to 28.4% of revenues in the quarter ended March 31, at $42.2 million, well above the $29.1 million generated from trading  America Equities and the $34.7 million from global commodities.

In fact, as the chart below shows, on an LTM basis, FX is now not only the biggest revenue item for the world's dominant HFT firm at $131.1 million, but is also the fastest growing source of profit, rising 103% on a year over year basis!

Why the shift? Simple:

…with retail now forever done with rigged, manipulated capital markets (at least they get a free drink losing money in a casino) and even banks scrambling to find any volume be it in flow or prop, there is just one remaining "whale" source of dumb money to be front run: central banks. And as everyone knows, central banks trade mostly in the FX arena.

What are the implications? Again, simple:

…with Virtu, whose business model is geared to frontrunning whale orders in any market, irrelevant of their nature, now solely focused on clipping pennies ahead of central bank FX orders, it means that there is no longer any space for retail investors in yet one more market, where market wide stop hunts, squeezes and momentum ignition have become the norm, as the only "traders" left are a few central banks and every single algo that hasn't cannibalized itself yet.

And so, with the machines having firmly entrenched themselves in FX, and with the world’s central banks engaged in an epic global currency war in an increasingly futile and self-defeating attempt to create demand by printing fiat money, we can expect a wild ride in currency markets going forward or, as we put it more than a year ago, “the next time you feel like the USDJPY is trading as if it is in need of a software update, you will be right.”

Sure enough, we’re now seeing the same dearth of liquidity in FX that we would expect from a market that’s been cornered by central banks and manipulating algos, as liquidity dries up, bid-asks blow out, and volatility spikes. Here’s JP Morgan with more:

What about FX market liquidity? We can also construct a HH ratio for FX markets using FX futures. With the caveat that much of the volume in FX markets goes through OTC spot and forward markets, where volumes and turnover are less transparent, we construct a HH ratio for DM markets as a DXY-weighted ratio of FX futures for the euro, yen, sterling, Canadian dollar, Swiss franc and Swedish krona vs. US dollar, shown in Figure 10.

By "HH", JP Morgan means a Hui and Heubel Liquidity ratio which, put simply, tries to measure how much trading is going on behind observable price moves. Unsurprisingly given everything we've said above, liquidity as measured by JPM's FX HH ratio is declining fast:

And as for bid-asks… you guessed it:

This ratio has been declining from the second half of last year, driven mainly by EURUSD and GBPUSD futures which have the highest weights, and also to a lesser extent SEK which has seen more recent declines in the HH liquidity ratio. Do other measures of FX liquidity confirm this trend? We look at the 3-month moving average of the bid-ask spread for these currency crosses, also weighted by their weights in the DXY index (Figure 11). Indeed, the rise in the average bidask spreads appear to coincide with the decline in the HH ratio for DM FX in Figure 11. In addition, FX volatility, proxied in Figure 11 by the JPM VXY index of 3-month implied volatility on basket of G7 currencies, rose over the same period.

Rising volatility, wider bid-asks, and no liquidity.

Sounds a lot like the JGB, UST, and Bund markets to us and indeed every other 'market', which is why you can expect things like last October's algo-driven, Fed-assisted Treasury flash crash to become par for the course in FX markets as well, with harrowing USD, EUR, JPY, [fill in the blank] ramps and flash crashs becoming the norm and leaving panicked central bankers desperately trying to figure out what happened after the fact. 

And remember, this is all perfectly legal which is why when enough gut-wrenching examples of what happens when the markets are completely broken have unfolded for all to see, some inept regulatory agency will trot out a carbon-based fall guy or, as we put it three weeks ago, "oh, and when the USD flash crashes again, expect some trader in Thailand operating out of his parents' basement to once again be scapegoated for disrupting yet another market that now has zero liquidity thanks to HFTs."

“New Silk Road” Could Change Global Economics Forever, Part 1

Courtesy of Robert Berke of OilPrice.com

Part 1: The New Silk Road

Beginning with the marvelous tales of Marco Polo’s travels across Eurasia to China, the Silk Road has never ceased to entrance the world. Now, the ancient cities of Samarkand, Baku, Tashkent, and Bukhara are once again firing the world’s imagination.

China is building the world’s greatest economic development and construction project ever undertaken: The New Silk Road. The project aims at no less than a revolutionary change in the economic map of the world. It is also seen by many as the first shot in a battle between east and west for dominance in Eurasia.

The ambitious vision is to resurrect the ancient Silk Road as a modern transit, trade, and economic corridor that runs from Shanghai to Berlin. The 'Road' will traverse China, Mongolia, Russia, Belarus, Poland, and Germany, extending more than 8,000 miles, creating an economic zone that extends over one third the circumference of the earth.

The plan envisions building high-speed railroads, roads and highways, energy transmission and distributions networks, and fiber optic networks. Cities and ports along the route will be targeted for economic development.

An equally essential part of the plan is a sea-based “Maritime Silk Road” (MSR) component, as ambitious as its land-based project, linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean.

When completed, like the ancient Silk Road, it will connect three continents: Asia, Europe, and Africa. The chain of infrastructure projects will create the world's largest economic corridor, covering a population of 4.4 billion and an economic output of $21 trillion.

Politics and Finance:

The idea for reviving the New Silk Road was first announced in 2013 by the Chinese President, Xi Jinping. As part of the financing of the plan, in 2014, the Chinese leader also announced the launch of an Asian International Infrastructure Bank (AIIB), providing seed funding for the project, with an initial Chinese contribution of $47 billion.

China has invited the international community of nations to take a major role as bank charter members and partners in the project. Members will be expected to contribute, with additional funding by international funds, including the World Bank, investments from private and public companies, and local governments.

Some 58 nations have signed on to become charter bank members, including most of Western Europe, along with many Silk Road and Asian countries. There are 12 NATO countries among AIIB´s founding member states (UK, France, Netherlands, Germany, Italy, Luxembourg, Denmark, Iceland, Spain, Portugal, Poland and Norway), along with three of the main US military allies in Asia (Australia, S. Korea and New Zealand).

After failed attempts by the US to persuade allies against joining the bank, the US reversed course, and now says that it has always supported the project, a disingenuous position considering the fact that US opposition was hardly a secret. The Wall Street Journal reported in November 2014 that “the U.S. has also lobbied hard against Chinese plans for a new infrastructure development bank…including during teleconferences of the Group of Seven major industrial powers.

The Huffington Post’s Alastair Crooke had this to say on the matter: “For very different motives, the key pillars of the region (Iran, Turkey, Egypt and Pakistan) are re-orienting eastwards. It is not fully appreciated in the West how important China's "Belt and Road" initiative is to this move (and Russia, of course is fully integrated into the project). Regional states can see that China is very serious indeed about creating huge infrastructure projects from Asia to Europe. They can also see what occurred with the Asia Infrastructure Investment Bank (AIIB), as the world piled in (to America's very evident dismay). These states intend to be a part of it.”

Buttressing this effort, China plans on injecting at least $62 billion into three banks to support the New Silk Road. The China Development Bank (CDB) will receive $32 billion, the Export Import Bank of China (EXIM) will take on $30 billion, and the Chinese government will also pump additional capital into the Agricultural Development Bank of China (ADBC).

The US: Unlikely Partner on the Silk Road:

Will the US join the effort? If the new Trans-Pacific Partnership (that pointedly leaves out both Russia and China, two Pacific powers) is any indication, US participation seems unlikely and opposition all but certain.

But there's no good reason that America should sacrifice its own leadership role in the region to China. A project as vast and complicated as the Silk Road will need US technology, experience, and resources to lower risk, removing political barriers for other allied countries like Japan to join in, while maintaining US influence in Eurasia. The Silk Road could enhance US objectives, and US support could improve the outcome of the project.

An editorial in the Wall St. Journal argues that the US proposed trade agreement and China's sponsored Silk Road project are complimentary, with the trade agreement aimed at writing rules for international trade, while the Chinese aim at developing infrastructure is necessary for increased trade.

Initial Project:

A look at the first project, currently under development, provides a good example of how China plans to proceed.

The first major economic development project will take place in Pakistan, where the Chinese have been working for years, building and financing a strategic deepwater port at Gwadar, on the Arabian Sea, that will be managed by China as the long-term leaseholder.

Gwadar will become the launching point for the much delayed Iran-Pakistan natural gas pipeline, which will ultimately be extended to China, with the Persian section already built and the Pakistan-Chinese section largely financed and constructed by the Chinese.

The pipeline is also set to traverse the country, following the Karakoram Mountain Highway towards Tibet, and cross the Chinese western border to Xinjang. The highway will also be widened and modernized, and a railroad built, connecting the highway to Gwadar.

Originally, the plan was to extend the pipeline to India, with Qatar joining Iran as natural gas suppliers, forging what some considered a “peace pipeline” between India and Pakistan, but India withdrew, under pressure from the US along with its own concerns over having its energy supplies dependent upon its adversary, Pakistan.

India's Counter:

Not surprisingly, India, a US ally, countered China's initiative with one of its own, announcing a new agreement to build a port in Iran on the Arabian Sea, only a few hundred miles from Gwadar, bringing Iranian energy to India via Afghanistan, bypassing Pakistan.

Although it would offer an alternative to the Chinese-backed Gwadar initiative, the US warned India not to move ahead with the port project before a final nuclear agreement between Iran and the West is actually signed.

Both the Chinese and Indian projects are clearly in defiance of international sanctions on Iran, but both countries appear unconcerned. The Chinese could also be accused of a ‘double dip’ sanctions violation, given the immense and continuing trade deals it negotiated with Russia.

The rest of the business world is sure to follow, or risk losing out in what is certain to be a new “gold rush” towards Asia in a world still struggling with the lingering effects of the great recession. And New Delhi pointed out the harsh truth: American energy companies are also trying to negotiate deals with Iran. Following on the heels of the US visit, the German mission is due in Tehran soon, with the French beating everyone to the punch in an earlier visit.

What then of sanctions? Sanctions only work in a world united behind them. If a large part of the world chooses to ignore sanctions, they become unenforceable.

Conclusions:

China and much of the world is intent on developing the largest economic development project in history, one that could have dramatic ripple effects throughout the world economy.

The project is expected to take decades, with costs running into the hundreds of billions of dollars, if not trillions. What that will mean for the world economy and trade is almost inconceivable. Is it any wonder then, that the world’s largest hedge funds, like Goldman Sachs and Blackstone, are rushing to market new multi-billion dollar international infrastructure investment funds?

No doubt a project as large and complex as this is likely to have failures, and is certain to face many western geopolitical obstructions. Assuredly, the “great game” will continue. Look no further than US President Barack Obama, who also senses the urgency. “If we don’t write the rules, China will write the rules out in that region,” he said in defense of the Trans-Pacific Partnership.

In a world where economic growth is tepid, with Europe still struggling with the aftermath of the global recession, along with China's growth slowdown, where else could a project that promises so much opportunity be found?

It's a good bet that giant iron mining companies like Vale, that have seen their business fall to a thirteen-year low, are currently busy figuring how much steel goes into construction of a new, high speed 8,000 mile railroad. If the project is successful, it could very well spark a boom across the entire depressed international mining, commodities, and construction sectors.

Consider how many jobs could be created in a decades-long construction project that spans a huge region of the world. In practically every sector, the prospects are enormous for a revival of trade and commerce.

The ancient Silk Road increased trade across the known world, but the Road also offered far more than trade. One of its least anticipated benefits was the widespread exchange of knowledge, learning, discovery, and culture.

Beyond the riches of silks, spices, and jewelry, it could be argued that the most important thing that Marco Polo brought back from China was a famous nautical and world map that was the basis for one of the most famous maps published in Europe, one that helped spark the Age of Discovery. Christopher Columbus was guided by that map and was known to have a well-annotated copy of Marco Polo's travel tales with him on his voyage of discovery of a new route to India.

For the world at large, its decisions about the Road are nothing less than momentous. The massive project holds the potential for a new renaissance in commerce, industry, discovery, thought, invention, and culture that could well rival the original Silk Road. It is also becoming clearer by the day that geopolitical conflicts over the project could lead to a new cold war between East and West for dominance in Eurasia.

The outcome is far from certain.

Coming soon, Part 2: Cold War or Competition on the New Silk Road.

Project Bookend: BoE Emails Guardian Top Secret Documents on Brexit, Including PR Notes on How to Deny the Project

Courtesy of Mish.

Incompetence at Its Finest

Here's a major laugh for a long holiday weekend in the US: Secret Bank of England taskforce investigates financial fallout of Brexit

Bank of England officials are secretly researching the financial shocks that could hit Britain if there is a vote to leave the European Union in the forthcoming referendum.

The Bank blew its cover on Friday when it accidentally emailed details of the project – including how the bank intended to fend off any inquiries about its work – direct to the Guardian.

According to the confidential email, the press and most staff in Threadneedle Street must be kept in the dark about the work underway, which has been dubbed Project Bookend.

The revelation is likely to embarrass the bank governor, Mark Carney, who has overhauled the central bank’s operations and promised greater transparency over its decision-making.

MPs are now likely to ask whether the Bank intended to inform parliament that a major review of Britain’s prospects outside the EU was being undertaken by the institution that acts as the UK’s main financial regulator. Carney is also likely to come under pressure within the Bank to reveal whether there are other undercover projects underway.

Officials are likely to have kept the project under wraps to avoid entering the highly charged debate around the EU referendum, which has jumped to the top of the political agenda since the Conservatives secured an overall majority. Many business leaders and pro-EU campaigners have warned that “Brexit” would hit British exports and damage the standing of the City of London.

The email indicates that a small group of senior staff are to examine the effect of a Brexit under the authority of Sir Jon Cunliffe, who as deputy director for financial stability has responsibility for monitoring the risk of another market crash.

The email, from Cunliffe’s private secretary to four senior executives, was written on 21 May and forwarded by mistake to a Guardian editor by the Bank’s head of press, Jeremy Harrison.

Secret Agent Man

I offer the following musical tribute in "honor" of secret projects of the Bank of England.


Continue Here

 

Rand Paul: Unleashing the American Dream

Courtesy of Mish.

Those living in or near Chicago have the opportunity to hear Senator Rand Paul in a discussion about how to transform Chicago, the state of Illinois and the U.S. with liberty-based public policy solutions.

  • Date:  Wednesday, May 27, 2015 from 12:30 PM to 2:00 PM (CDT)
  • Location: The 1871 Center at the Merchandise Mart, 222 West Merchandise Mart Plaza Chicago, IL 60654.

Cost of the event is $10.

The topic is "Unequal economic opportunity, failing schools and a broken criminal-justice system," as opposed to the Chicago pension crisis that I have been talking about lately.

Senator Paul is reaching out to minorities in inner cities, and that is a good thing.

I am trying to see if they can arrange a live video feed, but the preliminary indication is no.

The Illinois Policy Institute is sponsoring the event. To purchase a ticket or for media queries, please contact Eventbrite at Unleashing the American Dream.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

 

How China’s (Formerly) Richest Man Destroyed His Own Fortune When He Tried To Sell A Stock

Courtesy of ZeroHedge. View original post here.

On Wednesday, we reported on what was certainly the biggest market news of the week when in under one second, Chinese solar company Hanergy Thin Film crashed by nearly 50% due to what are still unknown reasons. As a reminder, before its crash and indefinite trading suspension, Hanergy’s market value was higher than all other listed Chinese solar companies combined and six times the value of First Solar, the biggest producer of thin-film solar panels.

Aside from the dramatic move, the reason why the wipeout of this tightly held stock was particularly memorable is because it took with it some $14 billion or nearly half of majority owner Li Hejun's $30 billion fortune, who as we reported previously, is China's richest man, having recently overtaken Alibaba's Jack Ma. Or rather was.

A quick tangent into how Li built up his stratospheric paper wealth on very short notice.

As noted above, the bulk of Li's fortune comes from his 80.8% stake in Hanergy, whose market cap had topped at approximately $40 billion, or greater than the market cap Sony and Twitter. Even more notable, is that the bulk of the appreciation in the stock took was a result of what appears to have been an aggressive buying campaign by none other than Li himself, who as Bloomberg recounts, was the single biggest buyer in the name as it soared since the start of January, becoming "wealthier" (on paper) by buying ever more stock, thus pushing his own net worth every higher!

From April 30, three weeks before the crash:

Hanergy Thin Film Power Group Ltd.’s executive chairman raised his stake in the Chinese solar equipment maker this  month, buying 53.9 million shares as the company’s market value surged.

Li Hejun bought the shares in seven transactions at prices of HK$6.90 to about HK$6.95, with the latest purchase on April 23, according to transaction details filed in statements to the Hong Kong Stock Exchange. The company closed at a record HK$7.88 on April 23.

Hanergy has surged more than six-fold in the past year to a market value of about $39 billion amid questions about its valuation and revenue.

What is certainly peculiar is that even as Li was aggressively single-handedly pushing the price of the stock, thre were many questions about the company's operations. Of note, about 61% of the company’s revenue was sourced from sales it made to its own parent company Hanergy Group, and its affiliates.

The relationship was laid out by Bloomberg as follows: "The publicly traded entity makes factory equipment that produces thin-film solar panels. Closely held Hanergy Group makes the panels and installs them, though it has never disclosed its production output. Hanergy Thin Film also buys PV panels from its parent company to make into finished solar parks."

As the FT reported first 5 months ago, Hanergy "has been racking up enviable revenues largely through sales between its listed subsidiary, HTF, and itself." No wonder the company has been desperate to distract attention from its cooked books, and instead had focused on pure marketing, pitching itself as a company that promises to revolutionize solar power and to become the Apple of green energy.

Perversely, it was on January 28 when the Financial Times first raised questions about the incestuous relationship between the two entities: since then, the stock of Hanergy had risen 86%… until it crashed.

It wasn't just Apple: Hanergy needed more buzzwords and tried to be like that other famous "alternative energy" unicorn, Tesla: a whole lot of "story" fluff, much hype and no substance. Because lacking from its earnings report was an overall estimate for how much equipment it will ship or install this year, a figure that’s prominent in the reports of panel makers such as Trina Solar and Yingli Green Energy.

There were many other flashing red warnings: Hanergy Thin Film’s receivables surged 86 percent last year to HK$4.3 billion, with the parent company responsible for about half of the outstanding sum.

And another: a year ago, the Kowloon headquarters of Hanergy Thin Film housed a little-noticed subsidiary of Li’s Hanergy Holding, which initially was a hydroelectric-dam operator with more than 6 gigawatts of projects.

And another: not content with being a Tesla-clone, the company was also a Valeant-style "rollup": the company has been investing in thin-film technology since 2009. It’s bought four overseas companies since 2012 — the U.S. producers Global Solar Energy Inc., Miasole Inc. and Alta Devices and the Solibro unit of Germany’s Q-Cells.

And another: when the FT wrote another story on March 25 showing that Hanergy’s shares listed in Hong Kong tend to rise in the final 30 minutes of the trading day, the company issued a statement dismissing the story as “innuendo.”

Not everyone was fooled by the epic lie: as Bloomberg also reports, on February 27, analysts Charles Yonts and Johnny Lau at CLSA Asia-Pacific Markets in Hong Kong issued a report saying the stock was wildly inflated. Jenny Chase, lead solar industry analyst at Bloomberg New Energy Finance, published a note on March 6 saying Hanergy is working with “unproven” technology and that it hasn’t detailed a level of installations that would help justify its valuation.

Paradoxically, the more public caution about Hanergy's parabolic, circular surge there was, the higher the stock traded… until the morning of May 20, when Li's was suspiciously absent from the company's annual meeting.  

On that day, as the WSJ recalls, heavy trading in Hanergy’s stock began shortly before said annual general meeting began at 10 a.m. in Hong Kong on Wednesday. "At the time, trading in the stock was furious, with traders offering to buy and sell millions of shares at a time. Eventually, there were far more shares being offered for sale than there were buyers."

As the WSJ further reports, "at 10:17 a.m. and 23 seconds, a large 426,000 share sell order piled up at the current market price of HK$6.80. Two small trades were done at slightly lower prices, but then the price at which traders were willing to buy the shares fell to HK$3.45, 48% below the market’s price."

The instantaneous collapse at precisely 10:17:23 am in the Hanergy stock price can be seen on the following Nanex chart.

Such market microstructure airpockets are very familiar to frequent Zero Hedge readers, appearing periodically and unexpectedly in virtually all HFT-traded stocks, and occasionally, such as on May 6, 2010, in the entire market.

As Nanex' Eric Hunsader notes, "a large seller exhausted liquidity and tipped the market over.. boom."

WSJ's take:

This low bid showed that there weren't many buyers in the market, potentially setting the stage for a big share decline. Computer algorithms, which trade automatically based on current market data, likely detected the sudden shift and reacted by selling more or pulling out of the market altogether.

Nearly 16 hundredths of a second later, a series of smaller buy orders ranging from 8,000 to 30,000 shares trades were made at rapidly declining prices. The first buy order was priced at HK$6.69, and four tenths of a second later, a trade occurred at HK$6.10. Once that trade occurred, the next highest bid became HK$3.45 and over the next several hundredths of a second, the price that people were willing to sell shares fell to HK$4.50.

A trade occurred at HK$4.50, meaning the official market price had fallen by 26% in fractions of a second. Hanergy shares briefly recovered but then sold off again. They were trading at HK$3.91 when the shares were suspended at 10:40 after falling 47% and wiping out $20 billion worth of market value.

Cited by the WSJ, Hunsader said the collapse "could have been caused by high-speed traders pulling out of the market due to heavy selling by an investor looking to unload a large chunk of stock."

Bingo.

Because as it turns out, after accumulating a gargantuan position in the stock in order to diffuse speculation that his primary investment vehicles is a fraud, Mr. Li decided he had had enough. And decided to sell.

He did this at first by shorting several billions shares of the stock in which he had built up an 80% stake.

According to the WSJ, "on Friday in a filing with the Hong Kong Stock Exchange, Mr. Li disclosed he went short 759.7 million shares in Hanergy on Monday, two days before the annual meeting. This represented 1.9% of the company and about 5.3 times that day’s trading volume of Hanergy shares."

Bloomberg adds that Li "also increased his short position to 7.71 percent of Hanergy’s issued share capital from 5.81 percent on the same day."

The following Bloomberg screenshot reveals the original 5.81% short stake between China Geiko Investments and Hanergy Invest Ltd, both shell companies controlled by Li: an amount equal to about 2.4 billion shares.  The problem: at the same moment he was also long some 30.6 billion shares.

Yet something must have provoked Li to switch his posture from a chronic buyer to an acute shorter/seller.

That something was a very fundamental factor, the most fundamental of all – the company had run out of money.

As Caixin reported, "the solar panel manufacturer whose listed subsidiary has suffered a sell-off of shares in Hong Kong failed to repay bank loans, sources close to the parent company say."

Worse, the selling avalanche and the subsequent suspension of trading means that all hell may be about to break loose according to Caixin, Hanergy had "used shares in its listed unit to take out bank loans, but has been unable to repay some of them. The share sales escalated after debtors made little progress in negotiations with the company over the defaults, those sources said."

More:

Hanergy secured loans from Jinzhou Bank, in the northeastern province of Liaoning, in the second half of last year after the bank gave it an 8 billion yuan credit line, other people close to the firm said. In January last year, Hanergy reached a deal with China Minsheng Bank and a credit consortium the bank leads to provide the company with loans of no less than 20 billion yuan.

In other words, the stock price itself had become the collateral against which the company was borrowing cash. So once the long-overdue selling finally started, the margin calls become a self-sustaining feedback loop and would flood the company with demands for ever more cash, and lead to a prompt and painful collapse.

And nobody knew this better than the man who had orchestrated this entire Ponzi scheme: Mister Li himself.

In other words, having sunk billions in real cash to generate paper profits against which to take out loans, Li tried to cash out. The problem – and one which we warn day after day when we point out the ever declining volume of the market on the way up – is that while there was no shortage of willing sellers as the stock was rising, once he pushed the bid a little too aggressively to accelerate his exit, he found just one thing: a bidless vacuum.

What happened next? This.

Don't expect the company to rebound promptly when it reopens for trading. If it ever reopens, as by then the banks will have sent some of their less reputable "collection agents" to make sure they "collect" the money owed them by Mister Li, especially since they can't sell a halted stock which serves as collateral for their loans.

As for Li, all of this could have been avoided: he merely had to keep bidding a worthless stock to infinity. Sadly for him, unlike central banks, he does not have access to infinite cash with which to do so.

Incidentally, all of this should remind regular readers of an almost identical example on this side of the Pacific.

Remember CYNK: the illiquid stock of a company which did not even exist, and yet whose market cap rose to several billion, before a bout of selling wiped out all the equity holders, and forced the regulators to halt it and delist it, in the process wiping out its entire "value" built up courtesy of gullible idiots believing in "get rich quick" Ponzi schemes.

This is what we wrote last July, in a post titled "How The Market Is Like CYNK." In retrospect, our prediction is becoming painfully accurate, if only to billionaires willing to monetize their "paper" profits.

For all the drama and comedy surrounding the epic idiocy in which a bunch of "investors" took the price of non-existent company CYNK from essentially zero to a market cap of over $5 billion in under a week, most people missed the key message here: the stock is a harbinger of what is happening to the entire market. Because while those defending what is clear irrational exuberance, scratch that, irrational idiocy are quick to point out that CYNK's epic surge took place on less than 0.1% of its outstanding shares, these are the same people to say precisely the opposite about the S&P 500. "Ignore the collapsing volumes sending the stock market to all time high – it's perfectly normal" is an often repeated refrain by the permabullish crowd. Just not when it involves case studies in market insanity like CYNK apparently.

Perhaps ironically, it was the concurrent most recent crisis in Europe, that involving Portugal's cryptic Espirito Santo group, whose top-most HoldCo is largely shrouded in secrecy yet which somehow is not a deterrent to the sellside community to issue one after another "all is clear; don't pull your deposits please" note, that confirmed not only that nobody has any idea what the real situation of European banks is, but how the entire capital market has now become nothing more than one glorified CYNK penny-stock turning into a mid-cap.

Deutsche Bank's Jim Reid explains:

Whatever one feels about financials and the wider financial system, credit markets did arguably get a small glimpse of what things will be like when this cycle does actually end as the structurally impaired liquidity that exists in credit caused a small amount of panic yesterday morning before markets recovered in the European afternoon session. Liquidity is really poor in credit these days which doesn't matter when markets are in buy only mode as they have been for many quarters now, but it does matter on the days when you get a negative story.

In other words, just like the CEO of CYNK who promptly "made" a few billion in paper profits, it feels great to "make" money on virtually no volume. The problem arises when one tries to cash out of paper and into all too real profits.

And here is what happens when one does finally try to book profits: moments ago the OTC BB just announced that, finally, CYNK was finally halted.

Increasingly we are witnessing how this "market", if this rigged, illiquid, central-bank manipulated cesspool can be called a market, is precisely like CYNK.

And as of this moment, Mister Li and Javier Romero, the President, CEO and secretary, in fact the only employee, of CYNK certainly have much in common: they see what happens when you levitate a company to mindblowing extremes on no volume and when you own the bulk of the float… and what happens when you try to offload it.

Sadly, this is a lesson which the entire market, and all those who are buying on the way up, and confusing paper profits with actual wealth, will also learn the hard way.

Because between CYNK and now Hanergy, we have had a very clear glimpse of the endgame: and as of this moment nobody can say they were not warned about how this most manipulated of asset bubbles ever, ends.

Dollar Bulls Regain the Whip Hand

Courtesy of Marc To Market

The US dollar had a good week. Indeed, the Dollar Index's 3.3% rise was its best weekly performance since last September. After looking rather bleak, the divergence theme struck back with a vengeance.  

ECB officials indicated that its sovereign bond buying program was turning more aggressive in the May-June period to get ahead of the summer markets. And not only did officials deny speculation that it could end its program early (before September 2016), but they reminded investors it could extend the program if needed. Remember every country that has adopted QE has had to do more than it initially anticipated. 

At the same time, research at two regional Federal Reserves (San Francisco and Philadelphia) emphasized the seasonal distortions that have depressed Q1 GDP, especially since the crisis. Although the  Board of Governor's economists has played it down, the Bureau of Economic Analysis will make some changes to better take into account "residual seasonality" when it reports Q2 GDP on July 30. 

The US economic data over the course of the week were mixed. For the first time in nearly two months, investors began rewarding the dollar for good economic data rather than punishing it for weaker data.  There were three data highlights.  First was the out-sized jump (20.2%) in housing starts. The second was the new cyclical low in the four-week moving average of weekly initial jobless claims. Third was the 0.3% rise in core CPI matches the August 2011 gain, which itself was the largest advance since January 2008. The year-over-year rate remained steady at 1.8% rather than slip lower as the consensus expected.  

Not only did the dollar gains against all the major and emerging market currencies, but it also finished near its session highs.   We caution against putting too much emphasis in the dollar's pre-weekend momentum.  The previous week (May 15) the dollar closed on its lows, which was not a helpful indicator of this week's direction, even at the start of the week.  Moreover, the US markets are closed Monday for Memorial Day.  Nevertheless, a technical case can be made that the dollar's roughly two-month downside correction has ended.  

The euro's technical tone has deteriorated sharply.  The five-day moving average moved below the 20-day average for the first time in a month.   Before the weekend, it recorded an outside down day by trading on both sides of the previous day's range and closing below the previous day's low.   The RSI and MACDs have turned lower.  The euro has retraced more than 38.2% of its two-month bounce. The 50% retracement is near $1.0960.  Below there support in seen in the $1.0840-80 area.  The $1.1060-80 may contain upticks if the euro bears are re-taking control.  

The dollar recorded an outside up day against the Japanese yen before the weekend.  The 5-day moving average crossed above the 20-day.  The dollar finished the week above JPY121.50 for the first time July 2007.  Both the RSI and MACDs are constructive.  Many participants are talking about a run at the year's high, a little above JPY122, and beyond there, JPY123.80.  Still, a word of caution is in order.  The dollar finished the week above the upper Bollinger Band (~JPY121.40), and on the rare occasions when this has happened over the past year, it has coincided with a dollar pullback. Initial support is seen in the JPY120.60-80 area.  

Sterling's 1.55% loss the week makes it the best performing major currency (followed by the yen's 1.9% decline).  The pre-weekend drop more than reversed the gains scored on response to the heady 1.2% rise in April retail sales.  Sterling posted its lowest close in two weeks.  The RSI is heavy, and the MACD's have crossed to the downside. It held just above the 20-day moving average (~$1.5455), which also corresponds to the 50% retracement of the election rally.  There is not much chart-based support ahead of the $1.5340-65 area, but we suspect there is near-term potential toward $1.5200.  

The Swiss franc is interesting from a technical perspective.  A double bottom appears to have been carved out for the dollar near CHF0.9050.  The neckline is near CHF0.9350 and projects toward CHF0.9650.  Also before the weekend, the dollar had moved within a few ticks of completing a 61.8% retracement of its two-month decline.  

There are two interesting and bearish technical patterns unfolding for the Canadian dollar.  First, the US dollar's downtrend line drawn off the March 31 high (~CAD1.2785) and the April 10 high (~CAD1.2665) came in near CAD1.2280, which was successfully breached on a closing basis before the weekend.   That area also corresponded to a 38.2% retracement of the greenback's decline from the year's high on March 18 (~CAD1.2835).  The CAD1.2380 area (Friday's high was ~CAD1.2320) corresponds to the 50% retracment.  

The second technical pattern that we are monitoring is what appears to be a triple bottom below CAD1.1950.  The neckline is around  CAD1.2200.  The pattern projects into the CAD1.2450-CAD1.2500 area.  This corresponds with a 61.8% retracement of the US dollar's two-month decline (~CAD1.2485).

The Australian dollar posted a large outside down day before the weekend.  It was trading above $0.8150 on May 14.  It hit a low just above $0.7800 ahead of the weekend.  The drop means the Aussie has retraced more than 50% of the gains it had recorded since April 12 low near $0.7535.  The 61.8% retracement is found near $0.7775 though chart-based support may be a cent lower still.  The five-day average has crossed below the 20-day average for the first time in a month.  The RSI is heavy, and the MACD's have crossed lower from elevated levels.  Initial resistance may be seen in the $0.7860-80 area.  

The July light sweet crude oil contract fell for the third week.  Still it remains broadly flat at the upper end of the recent range.  The technical indicators are not generating strong signals.  Although the daily correlations are not particularly robust, a bullish dollar view would generate a small bias to the downside for oil prices.  

The benchmark US 10-year Treasury yield slipped 2.5 bp last week, but the generic 10-year yield rose four bp. The generic yield tested the 20-day moving average for the first time since late-April and bounced off of it.  The pre-weekend yield low (~2.16%) also corresponds to the neckline of a potential head and shoulders top that bond bulls are touting.  If the neckline is violated, it warns of a scope for a move back to 2.0%.  Alternatively, the 10-year yield may be consolidating.  It has traded above 2.30% earlier this month but was unable to close above there.  The range seems 2.16%-2.30% until proven otherwise.  

The S&P 500 edged to new record highs but was still essentially flat on the week (+0.16%). The much-was confined to a narrow range of less than 1% for the week (2120-2135).  While valuations may be elevated, as Yellen has noted, selling has been limited, whereas many are looking for a dip to buy. The technical indicator offers very little insight at the present.  

Observations based on the speculative positioning in the futures market:  

1.  There were five significant gross position adjustments in the currency futures in the reporting period ending May 19.  The gross short euro position fell by 15.2k contracts to 207.1.  It had peaked in late March near 271k contracts.  The eight weeks of short covering left the gross short position at its smallest level since the start of the year.  Both the gross long and short yen positions rose sharply, which is something that goes unappreciated by the traditional approach of focusing on the net position (which was slightly changed) The gross long position rose by 25.6k contracts to 63.4k. These speculators were trying to pick a dollar top.  The gross short position rose by 24k contracts to 85.4k.  The yen bears are playing for a breakout. 

2.  The gross short Canadian dollar position was cut by more than a third to 20.8k contracts.  It was this reduction of short positions that swung the net position long (4.3k contracts) for the first time since September 2014. The gross longs were also pared (-3.9k contracts to 25.2k).  Lastly, gross long peso positions were chopped by 10.3k contracts to 23.7k.  

3.  As has been the case fairly consistently over the past two months, the general pattern continued to gross short currency futures to be pared.  The only exceptions in the past week were the yen and Australian dollar.  The fact that, for the most part, new longs were not established,  gives up confidence that the spot gains in the currencies was corrective in nature, and not the end of their bear markets.  

4.  Another shortcoming of the traditional focus on the net speculative position is that it misses the opportunity of looking at absolute levels.  What strikes us is the gross short Swiss franc position is extreme at only 2.7k contracts.  This is a four year low.  It dovetails nicely with the bearish technical view sketched out above.  

5.  The net short 10-year Treasury position was fell to 85.8k contracts, the smallest since February from 132k contracts.  However, very little short-covering took place.  The gross short position, in fact, hardly changed.  It fell by 2.2k contracts to 449.3k.  The change in the net position was a function of 44.4k new longs being established (to 363.4k).  After US yields rose, these new longs are picking a bottom to the prices (a top in yields).  

6.  The net long speculative sweet crude oil position increased by 23.2k contracts to 343.4k.  The increase was a function of shorts reducing positions faster than the longs.  The gross long position was trimmed by 7.8k contracts, leaving 504.6k.  The gross short position was reduced by 35k contracts, and 161.2k gross short contracts remain.    

Daily News

 

Financial Markets and Economy

JPMorgan: Something Has Gone Wrong With the Global Consumer (Bloomberg)

"It would be difficult to overstate the recent downside surprise in global consumer spending," writes JPMorgan Senior Global Economist Joseph Lupton.

Though retail sales in the U.S. have missed expectations for five consecutive months, disappointing consumer spending is far from just a made-in-the-USA story, he observes.

Japan Still Beating China on One Score: World’s Top Creditor (Bloomberg)

Japan’s foreign investments and assets climbed to a record in 2014, keeping it in front of China and Germany as the world’s top creditor nation.

The reading stretches Japan’s lead as No.1 creditor country to 24 years, with 71 percent more in net assets than China, even after its Asian neighbor surpassed it to become the world’s second-largest economy in 2010.

A Time Warner Cable office is pictured in San Diego, California October 15, 2014. REUTERS/Mike BlakeAltice seeks financing for Time Warner Cable bid: sources (Reuters)

French telecommunications group Altice SA is talking to several banks about raising debt for a potential bid for Time Warner Cable Inc, the second-largest U.S. cable operator, according to people familiar with the matter.

The talks are an important step for Altice in putting together a bid for Time Warner Cable, which is also being courted by Charter Communications Inc after Comcast Corp abandoned its $45.2 billion offer for Time Warner Cable last month over U.S. antitrust concerns.

Deutsche Lufthansa AircraftQE Great for Europe Stock Markets, Not So Much for Pension Funds (Bloomberg)

Deutsche Lufthansa AG scrapped its dividend this year partly because of charges tied to its pension fund. Investors have been shunning the shares — and those of peers that are likely to follow suit.

An unintended consequence of Mario Draghi’s bond-buying campaign has been an increase in the estimated cost of providing for retired workers. According to an index designed by Citigroup Inc., companies with the biggest pension deficits that have been forced to reduce profit forecasts are trailing the rest of the market by the most since 2013.

What happens to your bank accounts if you retire abroad? (Market Watch)

I spent many years as an expat, am currently working in the U.S., but plan to retire in Latin America. I have and hope to keep retirement accounts — taxable account, an IRA and a Roth IRA–at Merrill Lynch, Charles Schwab and Vanguard.

Oil’s Whodunit Moment Coming With Millions of Barrels to Vanish (Bloomberg)

Millions of barrels of untapped oil that U.S. shale drillers discovered during the boom years are about to disappear from their inventories.

Six years ago, the industry pushed the Securities and Exchange Commission to make it easier for companies to claim proved reserves for wells that wouldn’t be drilled for years. Some prospects considered sure-things when crude was $95 a barrel are money losers at today’s $60. When crude crashed in 2008, 44 U.S. companies wiped 630 million barrels from their books.

GRAPHIC: Untapped Inventories

German Investment Picks Up in Sign of Confidence (Bloomberg)

German investment and consumption rose last quarter in a sign of confidence in Europe’s largest economy.

Capital spending increased 1.5 percent and private consumption advanced 0.6 percent, while net trade was a drag on growth, the Federal Statistics Office in Wiesbaden said on Friday. Gross domestic product rose 0.3 percent in the first three months of the year after expanding 0.7 percent in the previous quarter, it said, confirming a May 13 estimate.

A Pivotal Year For ASEAN? (Value Walk)

The role of Asian markets in the global economy has grown significantly in recent years, and we expect this trend to continue in the future. Many of these countries have also made fundamental improvements to their economies, and we think these changes are here to stay.

ASEAN

Puerto Rico’s House Passes Bill Raising Sales Tax to 11.5% (Bloomberg)

Puerto Rico’s House of Representatives passed a bill that would raise the junk-rated island’s sales tax, a move that may help it sell debt and ease a cash crunch.

House members voted 26 to 24 to boost the levy to 11.5 percent from 7 percent through March, after which it will transition to a value-added tax. Lawmakers expect the measure will increase revenue and balance a proposed $9.8 billion budget for fiscal 2016, which begins July 1. The bill now heads to the Senate, which has a session scheduled for Friday.

Greece Submerges as Crisis Fallout Worse Than Emerging Markets (Bloomberg)

The Greek economy risks being more a submerging market than an emerging market.

As another round of aid talks between the Mediterranean nation and its creditors ends without a deal, its economy is faring even worse than a string of developing countries which suffered traumas in the last two decades. That leaves Commerzbank AG declaring the country is in little position to pare its debt and that default or a restructuring may loom.

Analyst: This Is the Chart That Keeps Me Up at Night (Bloomberg)

Reduced federal spending on research and development poses “the risk of a widening innovation deficit in America relative to the rest of the world,” according to Joseph Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management.

As the attached chart illustrates, R&D outlays peaked in fiscal 2011 at $140.9 billion, according to data compiled by the American Association for the Advancement of Science. This year’s projected spending of $131 billion represents 3.4 percent of the federal budget, which would be the fifth straight annual drop in percentage terms.

U.S. government R&D spending

Grand Central: Is the Fed’s 2% Inflation Target Too Low? (Wall Street Journal)

Central bankers around the developed world have agreed for much of the past two decades that 2% is a good objective for inflation. They want inflation to be low and stable, but they don’t want it too low. Interest rates move in line with inflation, and they don’t want inflation so low that interest rates are near zero. Then they would have no room to cut rates in a downturn to stimulate economic growth. Thus they have gravitated to 2%, a number born out of pragmatism more than any econometric model or proof.

BOJ Governor Haruhiko KurodaBOJ Refrains From Boosting Stimulus After Growth Picks Up (Bloomberg)

The Bank of Japan refrained from increasing monetary stimulus, as Governor Haruhiko Kuroda bets on stronger growth fueling inflation that is 1/10 the BOJ’s target.

The central bank will continue to boost the monetary base at an annual pace of 80 trillion yen ($662 billion), it said in a statement. All of 36 economists in a Bloomberg survey forecast the outcome.

50 stocks that ‘matter most’ to hedge-fund Masters of the Universe (Market Watch)

Analysts continue to sort, sift and break down the latest round of quarterly filings from some of the market’s most prominent investors that were due last week.

On Thursday, Goldman Sachs weighed with a note looking at the 50 stocks that they say “matter most” to hedge funds.

These are the stocks that fundamentally driven hedge funds have big positions. Specifically, Goldman’s criteria are the stocks that appear most frequently among the top 10 holdings of those funds.

ows still hereThere's only one thing keeping 5 of the world's biggest Wall Street banks in business (Business Insider)

On Wednesday, a handful of Wall Street banks pleaded guilty to criminal charges and agreed to pay a combined $5.8 billion in fines for their roles in the LIBOR interest rate and currency-rigging scandal.

The market barely reacted.

Jobless Claims Haven't Been Lower Since the Arab Oil Embargo (Bloomberg)

The premise of the 1979 movie "Mad Max" was a global oil shortage that created a street war for fuel. There was a reason the movie had a cult following: It had a hook. The Arab oil embargo that began in October 1973 pushed the U.S. into recession, the first indicator of which was a jump in firings and jobless claims.

The film's latest rendition, "Mad Max: Fury Road," is a reminder of how far the U.S. has come.

Stocks and Trading

Chinese Stock Bubble Frenzy Returns; US Futures Flat Ahead Of Today's Pre-Holiday Zero Volume Melt Up (Zero Hedge)

The highlight of the overnight newsflow may have been the BOJ's preannounced statement that it is keeping its QE unchanged (which comes as no surprise after a few weeks ago the BOJ adimirted it would be unable to keep inflation "stable" at the 2% in the required timeframe), but the highlight of overnight markets was certainly China, where the Banzai Buyers have reemerged, leading to another whopping +2.8% session for the Shanghai Composite which has now risen to a fresh 7 years high.

China stocks rally past seven-year high (Market Watch)

Shanghai stocks extended gains Friday morning, one day after hitting its best close since 2008, while Hong Kong markets also posted a solid rebound, bolstered by the mainland Chinese shares. The Shanghai Composite Index SHCOMP, +1.51% headed toward a fourth consecutive day of gains, up 1.7% toward a fresh seven-year high.

Everyone in China is on the same side of the market (Business Insider)

In recent months all the rage has been talk about the Chinese stock market and how aggressively it has rallied, but probably more concerning is how many “retail trading accounts” have been opened. Which to me, is probably the scariest part of the analysis that you will see below.

Shanghai Composite

Energy stocks’ key metric spikes this month (Market Watch)

A key metric for measuring the performance of publicly traded energy companies has spiked in recent days, racing ahead of the rest of the stock market just as a rebound in the price of oil is fizzling.

The trailing price-to-earnings ratio of energy stocks in the S&P 500 — major companies that include mammoths such as Exxon Mobil Corp. XOM, top refiners and shale-oil and gas producers — jumped in recent days to above 16.

Politics

Rand Paul Blocks Extension Of Patriot Act, Future Of Illegal NSA Spying On Americans In Limbo (Zero Hedge)

While an extension of the Patriot Act, that landmark bill which ushered in the America's Big Brother, "turnkey totalitarian state" (previewed here long before Edward Snowden's shocking revelations), is just a matter of time, supporters of the Fourth Amendment scored a brief victory last night when following yet another marathon 10 hour filibuster…

Defending ISIS Policy, Obama Acknowledges Flaws in Effort So Far (Bloomberg)

President Obama denied that the United States and its allies were losing the fight against Islamic State forces in the Middle East, but he acknowledged in an interview posted online on Thursday that more should be done to help Iraqis recapture lost territory.

While repeating his refusal to commit large-scale American forces to the region, the president said Sunni fighters in Iraq needed more commitment and training to take on fellow Sunnis aligned with the Islamic State. But he offered no regrets about his handling of the war and said in the end, it would be up to the Iraqis to increase their efforts.

The Slow-Mo Scandal That Could Crush Scott Walker's Presidential Hopes (Mother Jones)

In 2010, Scott Walker was the young, hyperambitious executive of Milwaukee County and one of three candidates angling for the Wisconsin Republican gubernatorial nomination. Part of his official duties included overseeing Operation Freedom, a charity event that raised money for veterans and their families. When Walker's chief of staff caught wind that $11,000 of the nonprofit's money had gone missing, Walker had his office ask the local district attorney to investigate. Now that he's seeking the Republican presidential nomination, he probably wishes it hadn't.

Obama Set to Strengthen Federal Role in Clean Water Regulation (NY Times)

The Obama administration is expected in the coming days to announce a major clean water regulation that would restore the federal government’s authority to limit pollution in the nation’s rivers, lakes, streams and wetlands.

Environmentalists have praised the new rule, calling it an important step that would lead to significantly cleaner natural bodies of water and healthier drinking water.

Junior United States Senator from Connecticut Chris Murphy addresses journalists in Budapest on Jan. 31, 2014.Senator Says Republican Plan If Obamacare Struck Down Is ¯_(?)_/¯ (Time)

A Democratic Senator used a popular Internet symbol on Thursday to describe what he says is the Republican plan should the Supreme Court strike down the Affordable Care Act.

Connecticut Senator Chris Murphy presented a poster with an enlarged image of the “shruggie”, or ¯_(?)_/¯, during his speech. Murphy said the image was a “pretty good summary of what the Republicans plan is to respond to King v. Burwell.”

US Retaliates At China Escalation, Warns Sea "Sandcastles" May "Lead To Conflict" (Zero Hedge)

On Wednesday we showed what happens when US spy planes carrying CNN reporters get too close to China’s land reclamation project in the South China Sea. In short, the Chinese Navy not-so-politely advises them to “Go now!” 

China is working diligently to construct man-made islands atop reefs in the Spratly archipelago where Beijing shares disputed waters with the Philippines, Vietnam, Malaysia, Brunei and Taiwan. For its part, Washington is none too pleased with the effort and in a fantastic example of ironic rhetoric and American hypocrisy, The White House is shouting about violations of territorial sovereignty and Chinese “bullying”.

 

Tunisian President Beji Caid Essebsi and US President Barack Obama shake hands after a bilateral meeting in the Oval Office at the White House in Washington on May 21, 2015.Obama Says Tunisia to Be Non-NATO Ally of U.S. (TIME)

President Barack Obama on Thursday elevated Tunisia to new allied status, promising financial and security assistance to ensure the North African country’s transition to democracy remains a success in a fragile region.

Obama announced in an Oval Office meeting with newly elected Tunisian President Beji Caid Essebsi that he intends to designate his country as a major non-NATO ally of the United States, a special status only a few countries have been granted. “The United States believes in Tunisia, is invested in its success and will work as a steady partner for years to come,” Obama said.

Technology

What’s in This Picture? AI Becomes as Smart as a Toddler (Bloomberg)

Artificial intelligence has graduated past the infancy stage of figuring out what's in an image. Computers have previously been capable of little more than a simple game of I Spy: Name a specific object or person, and they'll show you an image containing it. But thanks to new developments in AI research, machines can now answer more complex questions, like, “What is there on the grass, except the person?” (For the answer to that awkwardly worded enigma, take a look at the last image.)

Apple Unveils iPhone 6The Worst Thing About the iPhone Is About to Be Fixed (TIME)

Your iPhone is about to get way more useful for navigating around big cities.

Apple’s upcoming iOS 9 update will add public transportation data to the default Maps app, according to 9to5Mac. The company will reportedly unveil bus, subway and train directions within the app at the Worldwide Developers Conference in June.

Firefox For iOS Begins Its Beta Testing Program (Tech Crunch)

Mozilla’s Firefox browser for iOS is nearing public release, as the organization is now actively recruiting beta testers willing to try the app ahead of its App Store debut. A recent survey sent to potential testers is asking for details about which devices they own, and instructs them that the beta will require a version of iOS 8 or higher in order to work. It also reminds testers that the beta build will “have some bugs and break at times,” which is why Mozilla needs testing and feedback.

Health and Life Sciences

human neuronNeuron transplants could keep your brain young (Business Insider)

Researchers from the University of California, Irvine have developed a neuron transplant method they say can renew brain plasticity in adults.

Brain plasticity allows the brain to create new neural connections that help the organ develop. We have the most brain plasticity when we're younger, but as we grow, it diminishes.

4 out of 9 e-cigarettes sold in japan produce carcinogen in vapor (Japan Times)

A health ministry research group found Thursday that 4 of the 9 electronic cigarettes sold in Japan produce vapor with high levels of formaldehyde, a known carcinogen.

A panel of experts at the Health, Labor and Welfare Ministry who received a report on the findings said “negative health effects” cannot be ruled out from the use of e-cigarettes.

Bacteria cooperate to repair damaged siblings (Science Daily)

Daniel Wall, a UW associate professor in the Department of Molecular Biology, and others were able to show that damaged sustained by the outer membrane (OM) of a myxobacteria cell population was repaired by a healthy population using the process of OME. The research revealed that these social organisms benefit from group behavior that endows favorable fitness consequences among kin cells.

Life on the Home Planet

The calving front of a glacier on Livingstone Island located near the Antarctic Peninsula (photo Alba Martin-Español)Antarctic Peninsula in 'dramatic' ice loss (BBC)

Satellites have seen a sudden dramatic change in the behaviour of glaciers on the Antarctica Peninsula, according to a Bristol University-led study.

The ice streams were broadly stable up until 2009, since when they have been losing on the order of 56 billion tonnes of ice a year to the ocean.

Warm waters from the deep sea may be driving the changes, the UK-based team says.

Oil Again Fouling California Coast Near Site of Historic Spill (NY Times)

Refugio State Beach is one of the treasures of the California coast, a little-known curve of beach in the hills that on weekends like this one — Memorial Day — would be sprinkled with people who made their way up from Santa Barbara, about 20 miles down the Pacific Coast.

But not on Thursday. Refugio was filled not with vacationers, but with teams of workers in white coveralls and masks, scooping up sand fouled with oil that had washed in after a pipeline broke earlier this week. The smell of oil, not surf, was in the air as Coast Guard riggers off shore, using yellow buoys, tried to corral and clean up the oil before it reached the shore.

waiting roomCalifornia Wants To Stop Crisis Pregnancy Centers From Lying To Women (Think Progress)

Elected officials in California — including the attorney general — are urging the passage of a statewide measure that will help patients make fully informed decisionsabout their reproductive health care. The proposed legislation would specifically crack down on unlicensed “crisis pregnancy centers” (CPCs) that present misleading health information designed to dissuade women from choosing abortion.

North Korean military personnel watch a performance in Pyongyang in April 2012.Former North Korean operative reveals secret spy tactics (CNN)

Looking at the poison pens and torch guns, you would be forgiven for thinking you were on a James Bond set. But these weapons are real and are still part of the arsenal of North Korean spies.

Agents from the most isolated country on Earth are not a thing of the past, said one man who claims his job once was to infiltrate South Korea on missions for the Kim regime.

Home-brewed heroin may soon be in the works (Economist)

SHORTENING an industry’s supply chain is bound to affect the activities of its suppliers. That is as true of the recreational-drugs business as it is of any other. Some street pharmaceuticals, such as methamphetamine and cannabis, are already produced near their main consumer markets—whether cooked up in laboratories or grown under cover. But others, particularly cocaine and heroin, still have to be imported from far-flung places where the plants which produce them flourish in the open (think of poppies in Afghanistan).

A Vision of Monetary Hell Troubles Our Sleep…

Courtesy of Bill Bonner 

A vision of Hell troubles our sleep.

It is the vision of what the United States will be like when the authorities have obliterated almost three millennia of monetary progress and have their boots on our necks.

Here’s Peter Bofinger, a leading German Keynesian economist, in Der Spiegelmagazine:

With today’s technical possibilities, coins and notes are in fact an anachronism. They made payments incredibly difficult, with people wasting all sorts of time at the cashier as they wait for the person ahead of them to dig through their belongings to find some cash, and for the cashier to render change (rather than, for example, waiting for someone to find the right credit card, complete the transaction, and wait for approval)

[…]

But the additional time is not the largest benefit of the elimination of cash. It dries out the markets for moonlighting and drug trafficking. Almost a third of the euro cash in circulation consists of 500-euro notes. No one needs those for shopping; light-shy figures use them for their activities. [Also] it would be easier for central banks to impose their monetary policies. At this time, they cannot push interest rates appreciably below zero because the savers would hoard cash. If there is no cash, the zero bound is eliminated.

A Slide Back into Prehistory

It seems to be coming – a dreadful slide back beyond the darkest ages and into the mud and slime of prehistory. Back then, modern “money” had not been invented. Using rudimentary credit and barter systems, you could only trade with people you knew – and on a limited scale. Capitalism was impossible. Progress was unattainable. Wealth couldn’t be accumulated.

Then in India, in about the sixth century B.C., came silver coins – real cash. You didn’t need to know the person you were trading with. You didn’t know his family. Or his motives. Or his balance sheet.

And you didn’t have to keep track of who owed what to whom. You could just settle up – in specie. This made modern commerce and industry possible.

This new wealth also provided people with a new kind of liberty. They could travel – and pay for food and lodging with this new money. They could invest… and use this new, private wealth to create even more wealth.

They could even raise armies… build fortifications… and challenge the power of the ruling elites.

“Suspicious Activities”

But now, governments are trying to abolish cash.

Leading economists want it banned, too. Limits on cash use are already in place in many countries. In France, for instance, a law will come into force in September that will limit cash payments to €1,000 ($1,115). And in the U.S., having a large amount of cash is already considered “suspicious activity,” subject to forfeiture without due process. That’s right: Thanks to civil forfeiture laws, the feds can seize your property without having to convict you of a crime. As the Washington Post reported here last year, police made 61,998 cash seizures – totaling $2.5 billion since 9/11 – without search warrants or indictments.

Why do the feds want to eliminate cash? Isn’t it obvious? They want to control you and your money. Where did you get it? They’ll want to know. What will you do with it? They’ll want a say. Couldn’t you use it for something “bad”?

Heck, you might support “terrorists”… evade taxes… or buy a pack of cigarettes.

The possibilities are too rich to ignore. And the arguments are too persuasive to stop. Zero Hedge summarizes the “pros”:

•  Enhance the tax base, as most/all transactions in the economy could now be traced by the government
•  Substantially constrain the parallel economy, particularly in illicit activities
•  Force people to convert their savings into consumption and/or investment, thereby providing a boost to GDP and employment

Feeling the Feds’ Lash

The arguments are hollow… but they’ll probably be convincing. And for the first time in history, rulers will have a way of controlling people by cutting off their money. Electronic money, run through a government-controlled banking system, allows the feds to put us where they want us – with bars on our cages and whips on our backs. All transactions could be subject to approval. And every person would know that he could feel the feds’ lash at any time.

Under Argentina’s military dictatorship, about 13,000 people “disappeared.” That is, they were rounded up by government death squads, interrogated, murdered, and then thrown from planes into rivers.

How much easier it will be – and more humane – simply to cut off their money? With modern face-recognition technology, the feds could identify almost anyone in any setting – at a café, a public meeting, or an ATM. Then with a couple of strokes on a keyboard, the accounts could be frozen… or confiscated. The poor citizen would “disappear” in seconds – unable to participate in public life and forced to scrounge through trash cans to stay alive.

Who would dare to help him? Who would dare to support him? Who would dare to speak out against this new diabolical system? They, too, would be marked as undesirable… and disappeared.

Imagine the political candidate who suddenly discovers his backers have no money? Imagine the whistle-blower who suddenly has no whistle to blow?

A Warning from Argentina

Are we hallucinating? Are we worrying about nothing?

In Argentina, following a coup d’état in 1976, the military junta first targeted leftist revolutionaries – who may have posed some real threat to the nation. Then, in what became known as the “Dirty War,” the targets grew more diverse – with students, political adversaries, intellectuals, trade unionists, and anyone the junta wanted to get rid of caught in the net. This period of terror only came to a close in 1983, after the generals unwisely invaded the Falkland Islands and proclaimed Argentine sovereignty over a British overseas territory.

The plain people are easily led into war – no matter how moronic the pretense. As they had hoped, the Argentines rallied behind their soldiers. But the British, led by the “Iron Lady,” Margaret Thatcher, did not play the role the generals had expected. Rather than negotiate a settlement, they sent a task force to the South Atlantic, including a nuclear submarine, two aircraft carriers, 42 fighter jets, a brigade of Royal Marine commandos, and an infantry brigade. In a matter of weeks, the British submariners had sunk Argentina’s World War II-era cruiser the General Belgrano… as the Royal Marines, the soldiers of the 5th Infantry Brigade, and the RAF hammered away at the ill-prepared and ill-equipped Argentine troops shivering out in the South Atlantic.

This was too great a humiliation for the Argentines to take. The Union Jack went up once again over the Falklands, the military junta was thrown out of office, and the disappearances stopped.

Are Americans smarter than Argentines? Are their politicians more honest or more faithful to the rule of law? Does power corrupt less in the Northern Hemisphere than it does south of the equator?

We doubt it.

Picture via Pixabay. 

Yellen Yap: Point by Point Rebuttal

Courtesy of Mish

Inquiring minds are reading Fed Chair Janet Yellen's Outlook for the Economy speech, delivered today at the Providence, Rhode Island Chamber of Commerce.

Here are a few snips from what I believe to believe is a way over-optimistic assessment. I provide rebuttals following each statement.

Yellen: The U.S. economy seems well positioned for continued growth. Households are seeing the benefits of the improving jobs situation, and consumer confidence has been solid.

Mish: The economy is not positioned for much, if any, growth. Consumer confidence is not solid, and consumer spending plans have been sinking like a rock. See Consumer Confidence Plunges Below Any Economist's Estimate; Consumers Shock Economists.

Yellen: The drop in oil prices amounts to a sizable boost in household purchasing power. The annual savings in gasoline costs has been estimated at about $700 per household, on average, and savings on heating costs–especially here in the Northeast, where it was so cold this winter–are also large. Given these energy savings on top of the job gains, real disposable income has risen almost 4 percent nationally over the past four quarters. Households and businesses also are benefiting from favorable financial conditions. Borrowing costs are low, supported by the Fed's accommodative monetary policies. And credit availability to both households and small businesses has improved. 

Mish: Any savings on energy went up in smoke on rental increases and rising health care costs. See CPI Shows Sharply Rising Medical Costs; Huge Obamacare Hikes Planned.

Yellen: In recent months, as I noted earlier, there has been some softness in the economic data. Recent indicators of both household spending and business investment have slowed, and industrial output has declined. The Commerce Department's initial estimate was that real gross domestic product was nearly flat in the first quarter of 2015. If confirmed by further estimates, my guess is that this apparent slowdown was largely the result of a variety of transitory factors that occurred at the same time, including the unusually cold and snowy winter and the labor disputes at ports on the West Coast, both of which likely disrupted some economic activity. And some of this apparent weakness may just be statistical noise. I therefore expect the economic data to strengthen.

Mish: In a shock to economists, consumers are doing exactly what they said they would do, not what economist's models predicted consumers would do.

For what consumers said they would do, please see Household Spending Growth Expectations Plunge; Recession Already Started?

For what consumers actually did, please see Dismal Retail Sales Numbers Suggest Recession Likely Underway.

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Is Greece Still A Country If Someone Else Owns Its Assets?

Courtesy of John Rubino.

This story isn’t actually about Greece, but it begins there.

After the country went functionally bankrupt a few years ago, the solutions proposed by its creditors (mostly European banks and governments) included the impoverishment of its current citizens through cutbacks in wages and pensions, the impoverishment of its future citizens through the borrowing of even more money from the IMF and European Central Bank, and the sale of major state-owned assets to foreign companies to raise cash with which to make upcoming loan payments.

Greek voters, not surprisingly, responded by electing socialists who promised not to do any of those things. But apparently this didn’t work. Newsweek reports that the privatization program, after a brief pause, is back in high gear:

German, Russian and Chinese companies race to buy up Greek infrastructure

Foreign corporations from countries including Germany, China and Russia are lining up to buy Greek state assets as the country struggles to pay its European creditors.

The sell-off includes major parts of Greece’s infrastructure such as airports, ports, motorways and utilities., The website of the agency leading the government’s privatisation drive details a host of real estate ready to be sold off, with deals listed as either ‘in progress’, ‘rolling ahead’ or ‘completed’.

The move marks a U-turn from the ruling Left-wing Syriza party, who had previously resisted the privatisation programme imposed as part of the conditions attached to Greece’s €245bn bailout from the so-called troika of the IMF, European Central Bank (ECB) and European Commission.

Notable deals on the table as part of the privatisation drive include the purchase of 51% of Greece’s largest port to the China Ocean Shipping Company (COSCO) and a slew of airports popular with tourists to German transport company Fraport AG.

Other assets listed include the 670km Egnatia Motorway which crosses over Northern Greece, million dollar properties in New York, Washington and Belgrade, thermal springs, and and a former US Air Force base in Heraklion, Crete.

Another major sale which is pushing ahead is that 14 of Greece’s 37 regional airports which include those on popular holiday islands Kos, Mykonos and Corfu. Fraport AG, a German transport company have offered €1.2 billion for the airports’ lease and a sale is expected to go through by the end of this month. Fraport made the offer with Greek energy firm Copelouzos owned by entrepreneur Christos Copelouzos.

Another German company, Deutsche Invest Equity Partners, is in the final eight companies who have qualified for the next phase of the tender process for the acquisition of a 67% stake of Thessaloniki Port, the second largest in Greece. Taiped says that Germany, who are currently leading discussions with Greece for a new deal, are key investors. “With the airports, the most important thing after the price was having experience and Fraport had it,” she said.

Among the other seven companies also bidding for the Thessaloniki Port is the billion-dollar British P&O Steam Navigation Company, Russian train operator Russian Railways, and International Container Terminal Services, a port management company established by Filipino businessman Enrique K Razon who has a personal wealth of $5.2 billion.

Foreign investment is of course common around the world and is generally seen as a good thing. Americans mostly like it, for instance, when Japanese investors bid up shares of US companies or Chinese expats pay above asking price for Manhattan apartments. With only a few exceptions we take the money and don’t look back.

But there must be a limit, a point where foreign interests own so much of a country that they call the shots and the locals become in effect their serfs. Greece might be the test case that shows us where that point is, while helping to answer three other questions:

  • How much of what’s happening today is part of a larger process in which less-developed countries are in effect tricked into borrowing unmanageable amounts of money and then looted by their creditors?
  • Will Italy, Spain and Portugal suffer the same fate after Greece is fully looted?
  • Are middle-class US families becoming Greece in microcosm, tricked into borrowing for college tuition, cars and houses and then forever obligated to send huge chunks of future earnings to their creditors? That the same dynamic is operating on both national and individual scales — and that the beneficiaries in each case are the same big banks — is curious indeed.

Visit John's Dollar Collapse blog here.

 

CPI Shows Sharply Rising Medical Costs; Huge Obamacare Hikes Planned

Courtesy of Mish.

The CPI came in exactly in line with the Bloomberg Consensus option today.

It’s the details, not the overall number that is worrying. Medical care and rents have been rising rapidly.

The Fed likes to ignore food and energy costs. They have their chance to prove it.

From Bloomberg …

Pull forward that rate hike is what some of the hawks are thinking after reading today’s consumer price report where a benign looking headline, up only 0.1 percent in April, masks rising pressure through many components.

Excluding food and energy, core prices rose 0.3 percent which doesn’t seem that much but is outside Econoday’s high-end forecast for 0.2 percent. It is also the highest since January 2013. The year-on-year rate for the core is plus 1.8 percent which, after dipping to 1.6 percent earlier in the year, is closing in on the Fed’s general inflation target of 2.0 percent.

Readings showing pressure are outside energy including medical costs (up a very steep 0.7 percent in the month) and education costs (up 0.5 percent). Shelter costs, reflecting rising rents, came in at plus 0.3 percent for the 3rd time in 4 months which is the hottest streak for this reading since way back in late 2006 and early 2007. Also standing out are gains in furniture (up 1.3 percent) and used cars (up 0.6 percent).

Oil prices have been on the rise but not energy costs, at least in the April report which fell a heavy 1.3 percent. Gasoline fell 1.7 percent in the month. Two other readings also showed downward pressure: airfares (minus 1.3 percent) and apparel (minus 0.3 percent). Food costs were flat.

The headline CPI is down 0.2 percent year-on-year which looks downright deflationary. But the lack of pressure is due entirely to energy which is down a very deflationary 19.4 percent year-on-year. Energy prices are bound to firm given the recent move in oil from the high $40s for WTI to $60. That and emerging price pressures through the bulk of the consumer economy raise the risk that inflation may be brewing after all.

The CPI Seasonally Adjusted Numbers from the BLS look even worse.

Seasonally Adjusted

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7 ideas completely lost on people who are “fiscally conservative but socially liberal”

To be "fiscally conservative/socially liberal" means overlooking many of the facts that make it impossible to separate social and fiscal issues. The following article discusses why the social and fiscal aspects of any political theory are so tangled that one is often just an unfortunate side of the other and why the relatively innocuous "fiscally conservative/socially liberal" position is inconsistent — a mix of ideas that do not hold up well together. 

For a "top down" approach to sorting out the inconsistencies of your economic and political theories (forgetting the "liberal" and "conservative" labels for a moment), explore how the laws define our economic playing field. (E.g. read Stiglitz on Inequality, Wealth, and Growth: Why Capitalism is Failing.)

Thoughts? Please give us yours in the comment section. 

7 ideas completely lost on people who are “fiscally conservative but socially liberal”

It's a popular refrain among "centrists." The truth is that social and fiscal issues are inextricably bound

By Greta Christina, originally published at Alternet (via Salon) 

Well, I’m conservative — but I’m not one of those racist, homophobic, dripping-with-hate Tea Party bigots! I’m pro-choice! I’m pro-same-sex-marriage! I’m not a racist! I just want lower taxes, and smaller government, and less government regulation of business. I’m fiscally conservative, and socially liberal.”

How many liberals and progressives have heard this? It’s ridiculously common. Hell, even David Koch of the Koch Brothers has said, “I’m a conservative on economic matters and I’m a social liberal.”

And it’s wrong. W-R-O-N-G Wrong.

You can’t separate fiscal issues from social issues. They’re deeply intertwined. They affect each other. Economic issues often are social issues. And conservative fiscal policies do enormous social harm. That’s true even for the mildest, most generous version of “fiscal conservatism” — low taxes, small government, reduced regulation, a free market. These policies perpetuate human rights abuses. They make life harder for people who already have hard lives. Even if the people supporting these policies don’t intend this, the policies are racist, sexist, classist (obviously), ableist, homophobic, transphobic, and otherwise socially retrograde. In many ways, they do more harm than so-called “social policies” that are supposedly separate from economic ones. Here are seven reasons that “fiscally conservative, socially liberal” is nonsense.

1: Poverty, and the cycle of poverty. This is the big one. Poverty is a social issue. The cycle of poverty — the ways that poverty itself makes it harder to get out of poverty, the ways that poverty can be a permanent trap lasting for generations — is a social issue, and a human rights issue.

If you’re poor, there’s about a two in three chance that you’re going to stay poor for at least a year, about a two in three chance that if you do pull out of poverty you’ll be poor again within five years — and about a two in three chance that your children are going to be poor. Among other things: Being poor makes it much harder to get education or job training that would help you get higher-paying work. Even if you can afford job training or it’s available for free — if you have more than one job, or if your work is menial and exhausting, or if both of those are true (often the case if you’re poor), there’s a good chance you won’t have the time or energy to get that training, or to look for higher-paying work. Being poor typically means you can’t afford to lose your job — which means you can’t afford to unionize, or otherwise push back against your wages and working conditions. It means that a temporary crisis — sickness or injury, job loss, death in the family — can destroy your life: you have no cushion, nobody you know has a cushion, a month or two without income and you’re totally screwed. If you do lose your job, or if you’re disabled, the labyrinthine bureaucracy of unemployment and disability benefits is exhausting: if you do manage to navigate it, it can deplete your ability to do much of anything else to improve your life — and if you can’t navigate it, that’s very likely going to tank your life.

Also, ironically, being poor is expensive. You can’t buy high-quality items that last longer and are a bargain in the long run. You can’t buy in bulk. You sure as hell can’t buy a house: depending on where you live, monthly mortgage payments might be lower than the rent you’re paying, but you can’t afford a down payment, and chances are a bank won’t give you a mortgage anyway. You can’t afford the time or money to take care of your health — which means you’re more likely to get sick, which is expensive. If you don’t have a bank account (which many poor people don’t), you have to pay high fees at check-cashing joints. If you run into a temporary cash crisis, you have to borrow from price-gouging payday-advance joints. If your car breaks down and you can’t afford to repair or replace it, it can mean unemployment. If you can’t afford a car at all, you’re severely limited in what jobs you can take in the first place — a limitation that’s even more severe when public transportation is wildly inadequate. If you’re poor, you may have to move a lot — and that’s expensive. These aren’t universally true for all poor people — but way too many of them are true, for way too many people.

Second chances, once considered a hallmark of American culture and identity, have become a luxury. One small mistake — or no mistake at all, simply the mistake of being born poor — can trap you there forever.

Plus, being poor doesn’t just mean you’re likely to stay poor. It means that if you have children, they’re more likely to stay poor. It means you’re less able to give your children the things they need to flourish — both in easily-measurable tangibles like good nutrition, and less-easily-measurable qualities like a sense of stability. The effect of poverty on children – literally on their brains, on their ability to literally function – is not subtle, and it lasts into adulthood. Poverty’s effect on adults is appalling enough. Its effect on children is an outrage.

And in case you hadn't noticed, poverty — including the cycle of poverty and the effect of poverty on children — disproportionately affects African Americans, Hispanics, other people of color, women, trans people, disabled people, and other marginalized groups.

So what does this have to do with fiscal policy? Well, duh. Poverty is perpetuated or alleviated, worsened or improved, by fiscal policy. That's not the only thing affecting poverty, but it's one of the biggest things. To list just a few of the most obvious examples of very direct influence: Tax policy. Minimum wage. Funding of public schools and universities. Unionization rights. Banking and lending laws. Labor laws. Funding of public transportation. Public health care. Unemployment benefits. Disability benefits. Welfare policy. Public assistance that doesn't penalize people for having savings. Child care. Having a functioning infrastructure, having economic policies that support labor, having a tax system that doesn't steal from the poor to give to the rich, having a social safety net — a real safety net, not one that just barely keeps people from starving to death but one that actually lets people get on their feet and function — makes a difference. When these systems are working, and are working well, it's easier for people to get out of poverty. When they're not, it's difficult to impossible. And I haven't even gotten into the fiscal policy of so-called "free" trade, and all the ways it feeds poverty both in the U.S. and around the world. (I'll get to that in a bit.)

Fiscal policy affects poverty. And in the United States, "fiscally conservative" means supporting fiscal policies that perpetuate poverty. "Fiscally conservative" means slashing support systems that help the poor, lowering taxes for the rich, cutting corners for big business, and screwing labor — policies that both worsen poverty and make it even more of an inescapable trap.

2: Domestic violence, workplace harassment, and other abuse. See above, re: cycle of poverty.

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Time To Get Real About China

Courtesy of The Automatic Earth.


NPC Dedication of Francis Asbury statue, Washington, DC 1924

The present Chinese leadership appears to be trying to gain (regain?) more -if not full- control over the country’s economic system, while at the same time (re-)boosting the growth it has lost in recent years.

President Xi Jinping, prime minister Li Keqiang and all of their subservient leaders – there are 1000?s of those in a 1.4 million citizens country- apparently think this can be done. Yours truly doubts it.

As I’ve repeatedly said over the past years, I don’t think that they ever understood what would happen if they opened up the country to a more free-market, capitalist structure. That doing so would automatically reduce their political power, since a free market, in whatever shape and form, does not rhyme with the kind of control which the Communist Party has been used to for decades, and which the current leaders have grown up taking for granted.

I don’t think they’re fools or anything, just that their -preconceived- ideas of power don’t rhyme with the kind of economy Beijing, starting with Deng Xiao Ping, has created. In particular, they have allowed other segments of society to accumulate great wealth, and with wealth comes power.

And in fine Pandora’s Box fashion, it’s very hard, if not impossible, to reverse the process. This failure to grasp to what extent these ‘market liberation’ policies have had a Sorcerer’s Apprentice effect, may, if not must, lead to utter chaos and worse…

A closely related failure is that the rulers have allowed the shadow banking system to grow to ginormous proportions. Likely, in their eyes this ‘merely’ helped the economy grow at double digit speed for years, and they could stop it at will. But something else was growing along with it: the power of the shadow banks -and the people behind them-, both economic and political. Which is not acceptable in a one party rules all system.

And so there is a crackdown going on, presented as ‘reform’, and shadow bank loans have indeed diminished. But that is hurting the economy much more than it heals it. And so measures are reversed on the fly.

The official line is that China has to become a more consumer based economy, if only because exports are not what they used to be, due to lower living standards in the major customer economies in the western world.

The first part of the private citizens’ segment of this shift was the housing boom. Though the Chinese are traditionally strong savers, certainly compared to for instance Americans, they did borrow a lot, got into debt, to fund their real estate purchases. The first part of the problem is that not exactly all of that was borrowed from ‘official’ banks. The second is that home prices are now falling in most cities.

The Chinese are not only known as savers, they’re also notorious gamblers. That accounts for a substantial part of the housing boom, but it accounts even more for what came when that boom started fainting: stock market insanity. A craze that was fully encouraged by Beijing. As Bloomberg put it the other day:

[..] government officials and state media have encouraged the rally. China’s official Xinhua News Agency reported last week that the advance in stocks has further to go, while the China Securities Regulatory Commission has said that market gains reflect support for the economy.

Private investors, grandmas and teenage granddaughters, still believe Beijing controls the whole game. They undoubtedly must also think Xi and Li will make the housing sector rise from its ashes. This is a huge risk for the Communist Party. But they must have the illusion that they got it down. Government and citizens all believe.

The past few days have seen 2 notable companies, Hanergy Thin Film Solar and real estate/electronics conglomerate Goldin Group, lose about half their market cap within a day, for a total loss of some $50 billion. In Hanergy’s case, it reportedly took less than half an hour. And yesterday, Joyou, a Chinese branch of German bathroom giant Grohe, went straight from $400 million to just about zero.

It looks like all Beijing has left in its arsenal is extend and pretend. The question is, does it have the gunpowder to do that? While tons of people habitually point to Beijing’s $4 trillion stock of US treasuries, they may not be a cure-all.

The same people might want to consider to what extent the Chinese growth ‘miracle’ has been funded by debt. By the printing press. And while they’re at it, they may want to ponder what’s going to happen to that debt, now growth has started sputtering.

There seems to be a consensus that Chinese debt is somewhere in the range of $28 trillion, which is almost twice US GDP, and almost three times Chinese GDP. And for all we know the debt may be much higher still. All we really have is official numbers, plus a few ‘indirect’ data. One thing we do know is that Beijing will always make everything look better than it is. Every politician does.

And we know that they have a substantial series of issues to deal with. In fact, there are so many it’s impossible to catch them all in one comprehensive essay. China’s not nearly as simple as Greece. Let’s try a few:

• China’s housing boom is deflating, with prices down up to 6% YoY in many places, though of course for now less severe in major cities like Beijing and Shanghai. As one comment said recently, paraphrased: ‘there are no more buyers, everyone around here already owns property.’

• China is in the grip of a stock mania, with millions who are losing out on their apartment investments trying to make up for their losses with stocks. Many borrow heavily for their ‘profits’ (and not always from official banks). The stock mania is already popping as well. It will probably rise a bit more at times and at places, but exchanges that skyrocket when economies flatline or worse, will be smacked down by fundamentals at some point. That is true on Wall Street and in Europe, and it’s also true in Hong Kong, Shanghai and Shenzhen.

IPO’s are falling out of the deep blue skies like so many frogs, and people seem to think there’s all this pent-up demand for them, but the Hanergy and Goldin examples should serve as huge red lights flashing. And besides: what does pent-up demand mean when people borrow substantial parts of credit used for stock purchases?

When you read that at the Shenzhen exchange, rallies of more than 500% aren’t unusual, and the 103 stocks listed trade at an average 375 times reported earnings, you should know you’re looking at an ordinary slot machine, not an exchange that reflects any underlying real economy.

• Local governments are heavily in debt to the shadow banking system. Their liabilities may well exceed $6 trillion The crack down on the latter does not change that. Beijing has introduced a swap system, where paper can be swapped for bonds of much longer maturity at lower rates, but that leaves the question of who’s going to pay the debt to the shadow system.

Do local governments now need to borrow more from state banks just to pay off their loans to the shadow banking system? Or are the state banks themselves going to pay the debt after the swap? Or is perhaps the PBoC itself going to pay off the shadow banks directly? It looks as if the swap measures, which are pretty absurd in themselves since they encourage more borrowing, do not -or hardly at all- involve the ‘shadow debt’.

• Chinese factory activity is contracting. This is not growth slowing down, this is negative growth. Chinese consumers don’t help to avoid this, because they’re not consuming. They are doing one of three things: pay off housing -margin- debt as prices are falling, go nuts for stocks, or they are saving. No consumer based society is in sight.

• Capital outflow was $159 billion in Q1. This should be a major worry for Beijing. It hurts China’s international financial position. The country’s also stuck in its US dollar peg, and it dare not risk get out because of the potential losses on its Treasurys holdings. It’s all nice and stuff that the IMF considers including the yuan into its SDR basket, but it’s not a one way street to glory, or to the demise of the USD as some would have you think, for that matter.

Meanwhile, China keeps investing billions abroad. Untold billions in Africa. $50 billion in Brazil to damage the Amazon even more, $60 billion in the new Silk Road project.

But where does that money come from? Why is there so little scrutiny of that? Why do we all allow the Chinese to purchase our homes and our land and our industries, and make them all more expensive for ourselves?

Given that $28 trillion debt load, how is this not monopoly money, and why couldn’t we just as easily print that ourselves?

Is this a sign of how great the Chinese economy is, or is it perhaps a sign of how awful our own economies are really doing, and how indebted we are compared to Beijing? Is it because they caused our manufacturing sectors to all but vanish? How and why can a country blow a $28 trillion+ debt bubble in a decade and proceed to use that debt to buy the world? What does that say about that world?

As for China itself, and the losses on homes and stocks that are in the offing, I’ve long been on record stating I can’t see how it will not descent into civil war, and I still don’t. As I said above, Beijing never understood what forces it unleashed when it started ‘freeing’ its market, and from what I can see, it still doesn’t.

Or maybe it has, and got too scared to call a halt to what’s happening. That recent sudden permission for all 1.4 billion Chinese to open 20 stock trading accounts may be an act of desperation, as it came when real estate prices started tanking. But Xi and Li still must know, and fear, what awaits them if and when those stocks and apartments start their descent into hell.

DOJ Calls Out UBS Rap Sheet; Ignores Homegrown Citigroup’s Rap Sheet

Courtesy of Pam Martens.

Assistant Attorney General, Leslie Caldwell, Speaking at Press Conference May 20, 2015

Assistant Attorney General, Leslie Caldwell, Speaking at Press Conference May 20, 2015

When the U.S. Department of Justice held its press conference on Wednesday to announce that five mega banks were each pleading guilty to a felony charge, paying big fines and being put on probation for three years, Assistant U.S. Attorney General Leslie Caldwell specifically took a battering ram to the reputation of Swiss bank, UBS.

Four banks — Citicorp, a unit of Citigroup, JPMorgan Chase & Co., Royal Bank of Scotland and Barclays — pleaded guilty to an antitrust charge of conspiring to rig foreign currency trading while UBS pleaded guilty to one count of wire fraud for its earlier involvement in rigging the interest rate benchmark, Libor.

In explaining why the Justice Department was ripping up the non-prosecution agreement it had negotiated with UBS in December 2012 over its involvement in the Libor fraud and now charging it with a felony, Caldwell delivered a scathing attack on UBS, stating:

“Perhaps most significantly, UBS has a ‘rap sheet’ that cannot be ignored. Within the past six years, the department has resolved criminal investigations of UBS three times, resulting in non-prosecution or deferred prosecution agreements. UBS also has entered into civil and regulatory settlements on multiple occasions within the past few years.  Enough is enough.”

Enough is apparently not enough, however, when it comes to serial banking tyrants based in the U.S. Not only does Citigroup have a monster rap sheet that keeps growing, but it’s the bank that contributed significantly to the U.S. financial collapse in 2008 and received the largest taxpayer bailout in U.S. history: $45 billion in equity infusions, over $300 billion in asset guarantees, and over $2 trillion in low-cost loans from the Federal Reserve.

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Two Ominous Stock Market Charts

Courtesy of Pater Tenebrarum via Acting-Man.com

A Big Dow Theory Divergence

We briefly want to show a few charts that have caught our eye recently. This is by no means a comprehensive market update (we plan to provide one soon). Here is something though one doesn’t see all too often: the Dow Industrials and Transportation averages have diverged from each other for about six months running. To be sure, no valid Dow theory sell signal has been given yet. For that to happen both averages need to break their previous reaction lows in concert. However, divergences at peaks are a “heads up” signal. Charles Dow would probably at least raise one eyebrow and frown a little.

IA_0314_ETFAdvisor_MI600

 

1-Industrials and transports-ann

Transportation stocks have turned from leaders into laggards, in the process diverging ever more from the Industrials average – click to enlarge.

The NYA, Then and Now

The next two charts were sent to us by a friend who manages a fund and often passes on his technical observations to us. The first chart shows the broad-based NYSE Stock Exchange Index (NYA) as it looked in the final years of the tech mania that fizzled out in the spring of 2000. The second chart shows the NYA as it looks today. 

2-NYA at the peak of the tech bubble

The NYA from 1996 to 2000 – click to enlarge.

3-NYA today

The NYA today – click to enlarge.

The similarity between these two charts is quite baffling. However, we hasten to add that we have seen many such pattern comparisons over the past few decades, and they often turn out to be meaningless. Incidentally though, Paul Tudor Jones’ career really took off when he traded the 1980s market based on the pattern of the 1920s market, and the pattern actually did repeat, including the infamous crash (the action obviously began to diverge after the crash, but the patterns eerily shadowed one another for a number of years). So at times, a pattern comparison can actually turn out to be helpful.

The wedge-like formation at the end of the respective moves in the NYA highlighted above with blue trend lines does look like it could be a so-called “ending diagonal” pattern. It certainly was one in 2000, whether the recent wedge will also turn out to be one remains to be seen of course. However, with sentiment and positioning data as well as valuations extremely stretched and US money supply growth rates slowing down, a similar outcome certainly shouldn’t be ruled out a priori.

Conclusion

The divergence between industrial and transportation stocks is probably the more meaningful of these charts, as there is a logical explanation as to why its occurrence is worrisome. Specifically, Dow argued that when business was good for industrial companies, it had to be good for transportation companies as well, and vice versa. Any divergences in the assessment of these businesses by stock market participants should therefore be seen as a warning sign.

****

Editor's note: Also see the Reformed Broker's post "The New NEW Divergence "suggesting that our economy has changed and now the divergence between Dow Transports and the Dow Industrials may not be as meaningful as it used to be. It may not be sign of weakness to come in the overall market. Joshua Brown writes,

This week it’s the fact that the Dow Transports are setting multi-week lows while the Dow Industrials flirt with an all-time record breakout. Maybe this “non-confirmation” will matter. Hasn’t mattered about a hundred times before as this sort of divergence has resolved itself to the upside – crisis averted. But this time, maybe. Once upon a time, it was a major sign of a top – at the peak of the dot com boom, the trannies were getting crushed and never confirmed. In hindsight, “that was the tell! Classic!”

And then like every single time afterward it simply didn’t matter at all.

Another US Foreign Policy Success: Isis Controls Half of Syria after Palmyra Seizure

Courtesy of Mish.

Congratulations are in order for team Bush and team Obama for another stunning US foreign policy success: Isis Controls Half of Syria after Palmyra Seizure.

Fighters from the Islamic State of Iraq and the Levant (Isis) have seized the Syrian city of Palmyra, home to a Unesco world heritage site, putting nearly half of Syrian territory in the jihadi group’s hands and sparking fears that treasured antiquities may be destroyed.

Isis announced it had “complete control” of the city on Thursday, and state television said President Bashar al-Assad’s forces had withdrawn from the city, which is known to most Syrians by its Arabic name Tadmur.

Ancient Palmyra is known to the world for its iconic avenue of Roman columns, and was a cultural crossroad of the ancient world. The city dates back to the 1st century, when it was an oasis on a trade route linking eastern civilisations with the Roman empire. Its ruins lie to the southwest of modern Tadmur.

“Palmyra is an extraordinary World Heritage site in the desert and any destruction to Palmyra [would be] not just a war crime but . . . an enormous loss to humanity,” Unesco head Irina Bokova said in a video.

Isis has developed a reputation for destroying or selling cultural treasures. Earlier this year it filmed its fighters smashing Assyrian artefacts at sites in northwestern Iraq.

Moderate Rebels Defect

In case you are wondering how this happened, please consider this IBTimes report from March 7, 2015: US-Backed Moderate Syrian Rebels In North Defect; Obama Strategy Set Back.

It was supposed to be a crucial instrument of the Obama administration's aims in Syria, an ostensibly moderate rebel fighting force that would keep the pressure on the authoritarian regime in Damascus without aiding the ruthless jihadist forces that have captured much of the country. But the soldiers of Harakat Hazzm — the first Syrian rebel group to receive arms from the CIA — disbanded this week.

As a result, much of northern Syria is in the hands of the extremists, and the United States is left with no palatable ally in the area in the midst of a regional conflict that continues to spiral out of control.

Hillary Backs Moderates

Please recall that Hillary was in favor of backing "moderate" rebels.

But it is not just Democrats who want to back "moderates". Chief warmonger, Republican Senator John McCain, does as well.

Has anyone bothered to question if we are even backing the right person?

Iran is actually our ally here. Iran wants to help the US fight ISIS. The only problem is Iran backs Syrian president Assad, while the goal of the US is to overthrow Assad to alleged "moderates".


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Superpower

 

Michael Santoli Interviews Ian Bremmer on Yahoo Finance.

Outside the Box: Superpower

By John Mauldin

Ian Bremmer’s new book on the future of the US and geopolitics, Superpower, just hit the streets yesterday, and it’s already creating quite a buzz. It draws on Bremmer’s remarkable understanding of politics, America, and the world. I first ran into Ian at a conference about four years ago, where he was the after-dinner keynote speaker. It was one of those dinners where I had to go (I had spoken earlier), and I had no knowledge of Ian other than his official bio. A professor of geopolitics. From New Yawk. So this Texas boy settled in while Ian walked on stage … and in three seconds I realized that this was an uber-nerd. Total geek. Seriously, when Hollywood wants to type cast a brilliant super-nerd, they should use Ian as the model. He hit all my stereotype buttons, and I of all people should know better.

Within five minutes, this nebbish professor was blowing me away. I was totally captivated. He took me on a trip through the geopolitical landscape as profound as any I had ever been on.  

Ian gave one of the most compelling presentations at our most recent Strategic Investment Conference. No fancy Powerpoint, just one machine-gun idea after another, strung together in what I now realize is his own carefully crafted style.

As I shared with you in Thoughts from the Frontline last week, Ian’s summary of the geopolitical situation and America’s role in managing it can be expressed in two words: it’s bad.

The US is not in decline, he asserts in today’s Outside the Box, citing “the strength of the dollar, US equity markets, employment levels and the economic rebound, the energy and food revolutions, and generation after generation of technological innovation.” But America’s foreign policy and international influence are most certainly in decline. Nevertheless, no other country can even come close to claiming superpower status, so the role the US chooses to play in the world remains of paramount importance.

For the past quarter-century, says Ian, our leaders have just been winging it:

From the fall of the Wall and Soviet collapse, US presidents of both parties have defined America’s mission in terms of tactics. US foreign policy has been reactive and improvisational for 25 years. And we can no longer identify a Democratic or Republican approach to foreign policy.

That’s where we, the American public, come in. We will have a national election in a year and a half, and our foreign policy needs to be front and center in the national conversation until then. To help us think about how we want to be in the world, in Superpower Ian offers three dramatically different foreign policy alternatives, which he outlines in today’s OTB. As I read Ian’s book, there was, I confess, an attraction to each elemental strategy.

I remember being at the Naval War College a few years ago, where Andrew Marshall of the Office of Net Assessment (the premier Defense Department think tank) assigned one group to split up intro three and adopt radically different views of what US strategy should be vis-à-vis China. These were serious thinkers from a wide variety of fields, and they spent over a week developing their arguments. Andy was kind enough to let me sit in on the final presentations and discussion at the end of the week. I found myself nodding as each presentation was rolled out, but at the conclusion I noticed that what I had thought was the most illogical position at the beginning (a nearly total military disengagement from Asia and a renewed focus on our borders and defense) made a great deal of sense. It gave me a great deal to think about.

That is the same feeling I had when I read Ian’s book. Each strategy will have its proponents, and all have their own logic; but that is why we need to have this national discussion. Rather than responding to events tactically, we need to have a national strategy. What is in the real interest of the world’s dominant power? Most of us can agree that the last 20 years has seen a mishmash of US actions that in hindsight we might want to change.

Which path forward does Ian prefer? He’s not going to tell us until the final chapter of the book, he says, but he makes as forceful a case as he can for each of the three choices, and he believes that each is viable. He adds, “I hope this book will help set the stage for a serious-minded, constructive debate among the candidates in 2016.”

Now, you can actually see this policy debate taking shape as the various candidates (on both sides) lay out their views of the future role of the US in the world.

I seriously urge you to get this book. Just like Ian’s speaking style, it is easy and mesmerizing. It is the opposite of nerdy. There is a reason that the company he founded, the Eurasia Group, is perhaps the largest geopolitical strategy think tank in the world and that his rather pricey service is subscribed to by Fortune 1000 companies and global funds. Ian is one of the most insider-connected guys I know. He literally got up from a dinner one night a few years ago with “the guys” in NYC, apologizing that he had to leave because Japanese President Abe was in town and wanted to see him. I am going to get together with him in a few weeks when I’m in NYC. I think I’ll ask who’s on his speed dial.

Get Superpower and read it. Click on the link if you are an online guy, or get to your bookstore. It will be there.

I am on yet another plane, flying from Raleigh to Atlanta to attend a board meeting for Galection Therapeutics (GALT) for the next day and a half before I head back to Dallas. I guess it’s geopolitical week for me, as my old friends George and Meredith Friedman will be over for dinner Friday night. George delivered his own power speech at my conference. I look forward to being able to get both George and Ian’s speeches up on the web for you as soon as possible.

I have spent four fabulous nights at the Umstead Hotel just outside of Raleigh. It’s one of the finest hotels I have been in anywhere. And even better was being with a group of friends and getting to have long serious conversations with Mark Yusko, Raoul Pal, and Kyle Bass and catching up with Dennis Gartman. Long days but really good ones.

And as I hit the send button – just so you’ll know that I don’t think being a nerd is a problem – let’s remember the answer to the old question: “What do you call a nerd after five years on the job?”

“Boss.”

And now, let’s enjoy Ian’s intro to his book that he sent to his clients this week.

Your proud of being a geek analyst,

John Mauldin, Editor
Outside the Box 
subscribers@mauldineconomics.com

Superpower

By Ian Bremmer

President Obama hosts a Gulf security summit, and most Arab leaders decide not to attend. Israeli Prime Minister Netanyahu comes to Washington to address Congress on Iran over protests from the President. Britain ignores pleas from the United States and becomes a founding member of the China-led Asian Infrastructure Investment Bank, a potential competitor for the World Bank. The Obama administration gripes that the Brits are pandering to the Chinese. Russia’s Putin, like Syria’s Assad, strides across American redlines with little consequence. Beijing and Moscow announce joint military exercises… in the Mediterranean. NATO ally Turkey turns to China for new defense equipment. The Dutch go to Huawei for internet security.

These are not random events. What’s going on?

America is not in decline. Look to the strength of the dollar, US equity markets, employment levels and the economic rebound, the energy and food revolutions, and generation after generation of technological innovation. But America’s foreign policy and its international influence most certainly is in decline. Superpower or not, too many countries now have the power and self-confidence to say no to US plans.

Globalization and an Americanization of the world once moved in lockstep. No longer. Globalization is accelerating; ideas, information, people, money, goods, and services cross borders at an unprecedented pace, but the Americanization of values, standards, political and economic systems, and international architecture is eroding.

I take this as the starting point for my new book (out tomorrow!). It’s called “Superpower: Three choices for America’s role in the world.” For this week’s update, I’d like to outline my key arguments for you.

Superpower

I called the book “Superpower” because, despite all the challenges facing American foreign policy—geopolitical creative destruction and the g-zero world—the United States  remains the world’s only superpower and will for the foreseeable future. That means that America is the only country with the political, economic, and military muscle to persuade governments in every region of the world to take actions they wouldn’t otherwise take. That’s a working definition for the global projection of power. Over the next decade, the absolute size of China’s economy will probably surpass America’s, but militarily, technologically, diplomatically, and culturally, China cannot compete with the Americans. No other country comes close.

But most Americans don’t want their government to project power as it has in past decades. A $3 trillion price tag for ill-conceived wars and occupations in Iraq and Afghanistan hasn’t helped. Revolutions in energy and food production ease both US dependence on imports and Washington’s need to partner with potentially unstable countries in unstable parts of the world. A hollowing out of the American middle class has helped persuade a growing contingent of Americans that their country doesn’t benefit from globalization. New tools of coercive diplomacy—cyber-surveillance and attack, drones, and the weaponization of finance—relieve US dependence on partnerships and alliances. US allies are losing leverage in their respective regions, and their governments are preoccupied on domestic challenges. America needs Europe less, most of Europe  feels the same about America, and the transatlantic relationship, the bedrock of the post-war order, is weaker than at any time in decades.

And so America faces an identity crisis. Americans—voters and leaders alike—know what they don’t want: they don’t want America to play global policeman; they don’t want to try to rebuild the Middle East; they don’t want to sacrifice troops and taxpayer dollars to make the world safe for democracy. But what do they want? What does America stand for? What’s all that superpower for? Americans don’t know. US allies and enemies don’t either. This has become the world’s biggest geopolitical question mark.

* * *

Enter the candidates. As the 2016 presidential election takes shape, foreign policy has re-entered the national conversation. The US economy is growing, sidelining a central political issue. Most Americans are tired of partisan hand-to-hand combat over healthcare. President Obama’s approval ratings are weakest on foreign policy. Hillary Clinton, the prohibitive favorite to win the Democratic nomination, is Obama’s former secretary of state. For both these reasons, republicans see Obama foreign policy as a promising political target. GOP candidates, from Jeb Bush to Marco Rubio and Chris Christie to Rand Paul—have lined up for a turn at bat.

But the lack of a coherent US foreign policy strategy didn’t begin with Barack Obama—though his second term struggles have made the problem more painfully obvious. From the fall of the Wall and Soviet collapse, US presidents of both parties have defined America’s mission in terms of tactics. US foreign policy has been reactive and improvisational for 25 years. And we can no longer identify a Democratic or Republican approach to foreign policy. There are now hawks, doves, and civil libertarians within both parties. Those hoping to understand their own policy preferences by falling back on party loyalty have some thinking to do.

In short, it’s high time to reconsider America’s role in the world. In “superpower,” I offer three dramatically different alternatives. And though I have a preference, which I argue for in the conclusion, I believe each is a conceivable option. What’s not workable is continuing to blunder forward reactively without a strategy. That’s the fourth option, and it’s by far the worst.

It’s foolish to think that the world’s only superpower has only one viable path forward. I’ve made as forceful a case as I can for each of the three choices to challenge the reader to decide, and I hope this book will help set the stage for a serious-minded, constructive debate among the candidates in 2016.

Here are the three choices. Each gets its own book chapter:

Indispensable America

This one will be the most familiar to readers. We live in a profoundly interconnected world. No, America shouldn’t play the global cop, but if America doesn’t lead, nobody else will either. International wildfires will burn out of control. More Middle East states will fail, and terrorism will metastasize. Russian revisionism will threaten Europe and beyond. China will use its growing economic influence to expand its political leverage, undermining structures and standards created by advanced industrial democracies to strengthen individual liberty and free market capitalism.

These values, which have benefitted both developed and developing nations, are increasingly under threat. The United States must actively defend and promote those values. That means using every available tool of American power to bolster alliances with capable and like-minded partners. It means buttressing weakened international institutions. It means that in our interconnected world, America must develop and maintain a coherent and comprehensive global foreign policy strategy.

We can have no illusions that indispensable America will deliver quick and easy wins, that enemies will cower before American determination, or that longstanding allies will always follow America’s lead. Washington can’t topple every tyrant. But that’s all the more reason to take a stand. It’s not enough to undermine Syria’s Assad; America must help empower Syria’s citizens to build a stable and prosperous country. Answer Russian aggression and support Ukraine’s sovereignty to ensure that the Kremlin has no illusions that it can move onto NATO allies. Stand by traditional allies in the Middle East—Israel and the Gulf states—and don’t make any deal with Iran that depends on the honesty and good will of its leaders. Engage China, but contain its expansionist ambitions, including in the South China Sea. And do everything possible to empower China’s people to build irresistible momentum for political change inside their country.

If Americans learned nothing else from 9/11, it’s that Washington can’t afford to ignore emerging threats in faraway places. The world has become an increasingly dangerous place. There is important work to be done, and no one, not even the sole superpower can do it alone. But a volatile world needs leadership. For all its faults, who but America can lead?

Moneyball America

I take the idea of Moneyball America from Michael Lewis’s groundbreaking book on Oakland A’s general manager Billy Beane, who revolutionized the way in which winning baseball franchises are built. Without sentiment, he swept away old rules and conventional wisdom to focus on relentlessly rational results-oriented management. The A’s didn’t have the money of those damn Yankees, but by spending scarce capital only where it offered the most promising return, they found they didn’t need it. A champion of Moneyball America is less interested in promoting America’s values than in enhancing America’s value. Don’t waste money and lives to sell ideas that leaders in China, Russia, and the Middle East are easily able to ignore.

The pivot to Asia—a true pivot, where turning to Asia means turning away from something else—offers a prime example of shrewd moneyball thinking. Build commercial and security ties in the heart of the world’s most economically dynamic region. Spend no time or political capital on selling a peace plan that Israelis and Palestinians don’t want, and balance traditional ties with Gulf Arabs with a more pragmatic relationship with Iran, a country and market that offer America future opportunities that others in the region can’t match. Share technology and information with allies, but let them assume greater responsibility for their own security. Never fight a war to defend a principle. Where terrorism directly threatens American lives, fight to win.

The world is becoming a more challenging and competitive place. All the more reason to invest our human and material capital wisely. With a clear head and a sharp pencil, moneyball offers a path forward that all Americans can profit from.

Independent America

American values matter only if Americans live up to them at home. Washington can’t bribe, bully, or blackmail China (or other authoritarian states) into an embrace of liberal free-market democracy. Americans don’t have that kind of power. US allies and enemies know this, and both are banking on a more multipolar world—and a more balanced global economy. Many Americans now accept that a stronger will, deeper insight, and deeper pockets will not help Washington reshape the world as it would like. No nation, not even the sole superpower, can consistently get what it wants in a world where so many other governments can shrug off US pressure.

Those who advocate independent America recognize that all those global challenges are far more dangerous and damaging for other countries than they are at home. Terrorism is a much greater threat for the Middle East, Europe , and Russia than for the United States . The conflict in Ukraine has little bearing on US security or prosperity. Instability in energy-producing countries is less relevant for increasingly energy-rich America than at any time since the 1960s. China’s expansion matters far more for China’s neighbors than for the United States. In fact, a more volatile world highlights the strength, stability, and resilience of US markets.

America must lead, but mainly by example. Its tremendous resource, demographic, and technological advantages—and the advantage of its position between Mexico, Canada, and two vast oceans—will be enhanced by committed investment in the nation’s crumbling infrastructure: bridges, railways (clearly), highways, ports, and schools. Leading by example also means open borders, welcoming more of the world’s growing number of refugees, and more trade.

An America that declares its independence from the responsibility to solve other people’s problems must ask allies to do more in exchange for continued US investment in global public goods. NATO can survive only if other members bear more of its costs and risks. Let Europe  manage relations with Russia as it chooses. Cut a deal with Iran that reduces US involvement in the region’s conflicts. Recognize that decisions made in Beijing, not in Washington, will determine whether China sinks or swims. Most importantly, invest the savings to build a secure, dynamic, and prosperous America that others want to emulate.

2016

The 2016 presidential season offers a crucial opportunity to force this debate. Candidates are beginning to test these issues. Far from the 2012 Obama-Romney foreign policy debate, which spent way too much time on the Benghazi scandal and not nearly enough on anything else, we can hope for a more serious exchange this time around. No more bromides about how America must lead without explaining why, how, and to where—with attention to the all-important details.

As secretary of state, Hillary Clinton seemed to embrace the moneyball approach. Think of the Asia pivot, “economic statecraft,” support for the transpacific partnership, an end to war in Iraq and Afghanistan, and a reset with Russia—all while avoiding intractable issues like the Israeli-Palestinian peace process. These choices demonstrated a willingness to prioritize low-risk, high-reward projects over those that came with high costs, high risks, or the near-certainty of wasted time and political capital. But as a presidential candidate, her rhetoric has veered toward the more familiar campaign terrain of indispensable America. She has downplayed the Russia reset and distanced herself from the Iran deal and President Obama’s non-intervention in Syria. She’s also incorporated an element of populism that leads to foreign policy incoherence, by refusing to take sides on TPP [Trans-Pacific Partnership].

On the other side of the spectrum, Senator Rand Paul has been the most overt advocate for independent America. His adamant opposition to the use of drones and cyber-surveillance, and his consistent rejection of costly military engagement in most places sets him apart in a crowded Republican field. But, hedging his bets, even Paul has, in recent speeches, been drifting toward moneyball.

Jeb Bush has been opaque, and he’s never held a national office that would give him a foreign policy voting record. He’s hit a few moneyball notes, but his determination to defend his brother’s foreign policy—and the decision to engage many of his brother’s advisors—clouds the issue. Marco Rubio has been the most thoughtful and articulate advocate for indispensable America. Chris Christie is also working to align with that position. Scott Walker doesn’t yet have a foreign policy, he acknowledges his lack of experience on these issues and the need to do some homework. That’s surely the case for others as well.

America needs this debate. Without a coherent foreign policy strategy, the next botched response to a bolt-from-the-blue crisis—a next generation 9/11, a cyber fight with Russia, or an economic flareup with the Chinese—will prove much more costly, for Americans and for others. The terrorist attacks on 9/11 came when American foreign policy influence was at its height; the next geopolitical convulsion will come in a dramatically different context.

***

That’s the argument in a nutshell. Which choice comes closest to my own view? I won’t tip my hand here, but I hope you’ll do some serious thinking about which one you would choose. After all, I wrote the book to challenge readers to reach their own conclusions. My goal is not to persuade you that my opinion is right but to provoke a debate that can benefit all of us—Americans and everyone else. I honestly didn’t know which option I would favor until I’d finished writing all three. It’s a tough decision, and one that I think everyone should consider with an open mind.

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Important Disclosures

The article Outside the Box: Superpower was originally published at mauldineconomics.com.

Money picture via Pixabay. 

Why Bonds Are No Longer a “Safe Haven”

 

Why Bonds Are No Longer a “Safe Haven”

Courtesy of 

Bonds: A Crowded Trade

In the financial markets, we have been waiting for a crash of U.S. stock prices. And waiting. And waiting. It still hasn’t come.

Last week the spectacular bull market in U.S. stocks that began in March 2009 continued with even more gains. On Friday, the S&P 500 hit another all-time high.

But the real action was in the bond market. Over the last three weeks, about half a trillion dollars has been wiped off the value of global bonds … despite lower than normal trading volumes.

According to Citigroup strategist Mark Schofield, the sell-off is a “stark reminder of just how congested a lot of market positioning has become.” This makes it “increasingly difficult for investors to exit those positions when the time comes to do so.”

 

piggy bank

As Bloomberg reports:

“That means that it will be increasingly difficult for central banks to start backing away from their unprecedented stimulus efforts as growth takes hold – no matter how much they may want to – without causing a massive traffic jam of investors all trying to sell at once.”

Uh … yes.

10 year ITA

Italy’s 10 year government bond yield – an example of recent bond market indigestion – click to enlarge.

A Modern-Day John Law

Nobody knows whether the recent correction in bond prices (and the accompanying rise in yields) will continue or not.

It is almost too classic to believe. Serious economists – and anyone with any common sense – have realized for centuries that you can’t increase the quantity of debt without also decreasing its quality. The more you owe, the less likely you are to pay.

But central banks have been encouraging businesses, households, and governments all over the planet to take on more debt. They claim this will “stimulate” the economy… and that the resulting “growth” will make it easy to repay the debt.

Mario Draghi, the John Law of modern central banking, told us that the European Central Bank would persist in its delusions. (Law was a Scottish economist and gambler. In 1716, he set up the world’s first central bank in France and was responsible for the Mississippi Company bubble – a precursor to other paper-money-induced bubbles.)

 

NPG D12272; John Law by Leonard Schenk, after  Unknown artist

John Law, gambler, monetary charlatan and comptroller-general of finances of France, in full regalia. Engraving by Leonard Schenk, 1720

Draghi has made it clear he’s determined to implement the ECB’s €1.1 trillion ($1.2 trillion) QE plan “in full.” As he put it in a recent speech in Washington, his policy moves “have proven so far to be potent, more so than many observers anticipated.”

And although Draghi admitted that low interest rates would “inevitably result in some local misallocation of resources,” he rejected claims that they threaten “overall financial stability.”

 

draghi_3060573b

Mario Draghi, a scholar of the John Law School of Economics, wearing the uniform of the modern-day “technocrat”. He offers the same hoary inflationism as an economic cure. The uniforms may look different, the quackery is exactly the same. Photo credit: AP

A Vulnerable Market

Why would bonds fall at the very moment when the biggest buyer in the world is promising to load up with more? Ah… that is what is so classic. While the ECB pledges to throw good money after bad, banks, hedge funds, and pension funds are beginning to see high-priced, low-yielding debt as a leaky boat.

They’ve made a lot of money buying in anticipation of QE; they don’t want to lose their gains when the bond market sinks… as it inevitably will. The claims made on behalf of QE have never had any sensible basis in theory… and have once again proved ineffective in practice.

The Fed has increased the U.S. monetary base by more money than ever before in history. But this “recovery” is the weakest one since the end of World War II. It is so weak that it is a stretch to call it a recovery at all. The most notable recovery has been in the prices of financial assets. And that is more a function of central bank manipulation than renewed economic growth.

What’s more, financial asset prices can correct at a moment’s notice. And will! Asset prices pushed up by central bank stimulus are fundamentally phony. Because there is no real wealth creation behind them. The higher they go, the more they become detached from reality… and the more vulnerable they become. That is true for stocks and bonds.

 

public debt

Selected government debt ratios – click to enlarge.

In the case of bonds, it is… as we said… classic. You can’t improve your creditworthiness by borrowing more. It is inherently absurd for sovereign debt to go up in price as the borrowers sink further underwater … dragging investors with them.

Sooner or later they’ll all have to come up for air.

Charts by: BigCharts, Bloomberg Brief

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

Today’s News

Courtesy of Phil’s Stock World

Click on this link to try Phil’s Stock World FREE! 

Financial Markets and Economy

Banks Will Keep Doing FX Stuff That Got Them in Trouble (Bloomberg)

Here they’re doing that grumbling in letters to clients the day after their guilty pleas. There is no promise of reform here: The Justice Department caught the banks doing things that it didn’t like and fined them billions of dollars, but won’t stop them from doing most of those things. As long as there are no more ambiguities or misunderstandings about what they are. It’s a weird stalemate. The Justice Department doesn’t like these practices, the banks like them fine, and they’ve agreed to disagree. These practices have been singled out, in the context of criminal plea agreements (a bad context!), as things that happened. But not quite as crimes. And the banks are careful to make clear: They’re going to keep happening.

The Senate Has a $66 Billion Gift for U.S. Banks (Bloomberg)

A U.S. Senate proposal to raise the level at which banks are deemed systemically important could help free up as much as $66 billion in capital at 11 lenders and allow for increased shareholder payouts.

Dodd-Frank Overhaul: Raising the SIFI Threshold

There may be a simple, overlooked reason for the EU bond meltdown (Market Watch)

A recent meltdown in the eurozone’s bond market caught global markets by surprise, spreading fears of a repeat of the 2013 taper tantrum.

The jitters were so intense that it took a clear message from European Central Bank policy makers that the central bank stands firmly behind its aggressive stimulus program, for the market to calm and resume some bullish momentum.

Self-Driving Trucks Are Going to Kill Jobs, and Not Just for DriversSelf-Driving Trucks Are Going to Kill Jobs, and Not Just for Drivers (Gizmodo)

The first road-legal autonomous truck made a splashy debut earlier this month. The Freightliner Inspiration Truck is shiny and new, but it will not be good for everyone. Autonomous trucks will destroy jobs, Scott Santens points out at Medium, killing the truck stop as we know it.

Even if you reserve no particular nostalgia for truck stops, the effects will be devastating for local economics. Autonomous trucks will obviously replace drivers, an estimated 3.5 million of them, but they will make the business that cater to drivers obsolete, too.

The Dark Side of Japan’s First-Quarter Growth Drivers (Wall Street Journal)

A buildup in inventories and higher exports helped Japan record stronger-than expected growth in the first quarter, but those engines may cool in the second quarter.

Real gross domestic product grew 0.6% quarter-on-quarter, or an annualized rate of 2.4%. Of that, private-sector inventory investment contributed 0.5 percentage point. In other words, growth would have been close to zero if inventories hadn’t expanded.

Despite Weaker-Than-Expected PMI, Chinese Stocks Stumble (Zero Hedge)

Chinese Manufacturing PMI missed expectations, printing a contractrionary 49.1 (against 49.3 expectatons) for the 3rd month in a row. While this was a small pick up from last month’s 48.9 print, it hardly signals ‘success’ for the various easing efforts unleashed upon an all-knowing investing public. After yesterday’s weakness in Chinese stocks, one would think a disappointing PMI was just the ticket to send investors wild with buying in anticipation of more easing, but now, Chinese stocks have erased early modest gains and are fading back…

Workers in the on-demand economy make an average of $18 an hour (Market Watch)

The average hourly wage in the on-demand economy is $18 an hour, with drivers in the ride-sharing economy and Airbnb hosts making the most at $25 an hour, according to a new study.

The study, conducted by Stanford University graduate students and a Y Combinator alumnus, offers a peek into the sharing economy, showing that its workers generally have multiple jobs and are under the age of 34.

The United States Federal Reserve Board building is shown behind security barriers in Washington October 28, 2014. REUTERS/Gary CameronFed officials see June rate hike as unlikely: minutes (Reuters)

Federal Reserve officials believed it would be premature to hike interest rates in June even though most felt the U.S. economy was set to rebound from a dismal start to the year, according to minutes from their April policy meeting released on Wednesday.

The central bank debated whether a slew of disappointing data, including weak consumer spending, signaled a temporary slump or evidence of a longer-lasting slowdown, with most participants agreeing economic growth would climb to a healthier pace and the labor market would strengthen.

ClockJUNE IS OFF THE TABLE (Business Insider)

June is probably off the table.

The Federal Reserve just released the Minutes from its April 28-29 Federal Open Market Committee meeting, which indicated that the Fed is unlikely to raise interest rates in June.

China data damps gains in Asian shares (Market Watch)

Japan’s stocks traded at a 15-year high Thursday while Australia also rose, although weaker-than-expected Chinese manufacturing data kept a cap on gains in the region.

The Nikkei Stock Average NIK, +0.46%  extended gains for a fifth-straight day, rising 0.4% to 20,275.24. Australia’s S&P/ASX 200 XJO, +0.75%  was up 0.8% at 5,655.30, after its currency continued to weaken.

Stocks and Trading

Chris Davis On Growth Stocks In Disguise (Value Walk)

Chris Davis is the current CEO of Davis Advisors, the investment manager founded by the Davis family that follows the principles of legendary value investor Shelby Cullom Davis. The manager’s flagship New York Venture Fund has earned over its 46-year history a net annualized 11.8%, vs. 10.0% for the S&P 500.

Chris Davis revealed how he set about looking for opportunities April’s issue of Value Investor Insight.

Chris Davis New York returns

Politics

Obama: Climate Deniers in Congress Are Undermining Our Troops (Mother Jones)

Speaking to graduating cadets at the US Coast Guard Academy Wednesday, President Obama once again outlined his administration’s case for ambitious climate action. At the heart of today’s speech: the president’s contention that global warming constitutes an immediate threat to America’s national security and will cost the country hundreds of billions of dollars if left unchecked. [Picture to the right by Banksy.]

Rubio’s Gambian Human Rights Fiasco Gets Worse (Think Progress)

On Tuesday, ThinkProgress reported that Jennifer Lukawski, one of the hosts of a Marco Rubio campaign fundraiser scheduled for Wednesday, recently served as a registered foreign agent for a western African regime known for its human rights abuses — including repeated threats to behead gay people. In response, Pasamba Jow, spokesman for the Democratic Union of Gambian Activists, has called for Rubio to remove her from the host committee for the event.

Technology

The new Spotify appSpotify adds podcasts and video clips (BBC)

Spotify has announced it is adding more non-music content to its app.

The new offerings include news bulletins from National Public Radio, the BBC and others as well as longer video and audio podcasts and clips.

Spotify has more than 60 million regular users across 58 countries. It says about 20% pay for its premium ad-free subscription services.

US-IT-INTERNET-SOFTWARE-MICROSOFTMicrosoft Wants to Change Everything You Know About Email (Time)

Microsoft is reportedly working on a next generation email app that will strip away subject lines, greetings and signatures, and display only the text users need for a rapid fire conversation.

Microsoft has not formally introduced the new messaging app, though an announcement labeled “Microsoft Confidential” did briefly crop up on its public website, which was spotted by Twitter user @h0x0d on Tuesday. A Microsoft spokesperson declined to comment on app.

Health and Life Sciences

High salt intake may delay puberty (Science Daily)

Researchers from University of Wyoming, USA led by Ms Dori Pitynski are investigating the effect of varying levels of dietary salt on the onset of puberty in rats. They found that rats fed a high salt diet (equivalent to 3 or 4 times the recommended daily allowance for humans) had a significant delay in reaching puberty compared to those fed a normal (low) salt diet. Interestingly, rats that had salt completely excluded from their diet also had delayed puberty.

Life on the Home Planet

Fried Food Is About to Get More Expensive (Bloomberg)

Lovers of deep-fried food, be warned. An oilseed crop that helps deliver the crispy and golden quality to french fries, potato chips and chicken is in trouble.

More than anywhere else in the world, Canada’s Prairie provinces yield canola seeds that are crushed to make vegetable oil used by McDonald’s, KFC, Taco Bell and Frito-Lay. This year, a dry spell has left the soil more like concrete, making it tougher for farmers to plant and threatening to cut production for a second straight year.

“We’ve just been missing every rain,” grower Eric McPeek, 30, said by telephone from his 4,100-acre farm in Coronach, Saskatchewan. McPeek sowed canola, durum wheat, chickpeas and lentils in ground he said was the hardest since 2010.

Existing Home Sales Lower Than Any Economist’s Estimate; Rising Supply a Good Thing?

Courtesy of Mish.

Existing Home Sales Disappoint

Economists overestimated existing home sales today, rounding out another impressive day of overoptimism.

New home sales came in at a seasonally adjusted 5.04 million annualized rate.

The Bloomberg Consensus Estimate was 5.22 million. 5.04 million was below the lower end of the consensus range of 5.10 M to 5.32 M.

Existing homes sales are not living up to springtime expectations, down 3.3 percent in April to a 5.04 million annual rate which is just below the low-end Econoday forecast. Three of 4 regions show contraction in April with the sharpest decline, minus 6.8 percent, in the South, which is by far the largest housing region. Year-on-year, total sales are still up a respectable 6.1 percent.

Another positive is a rise in supply with 2.21 million used homes on the market vs 2.01 million in March. This rise, together with the drop in sales, raises supply relative to sales to 5.3 months from 4.6 months. And another positive is a 4.1 percent rise in the median price to $219,400 which is up 8.9 percent year-on-year.

But this report in sum is a disappointment, failing to point to any building momentum. Strength in the housing sector may be switching, from existing home sales to new home sales at least based on this report compared to the historic surge earlier this week in housing starts & permits. But housing data month-to-month are always volatile and, on net, it’s too soon to decipher how strong the spring housing season is right now.

Existing Home Sales

Existing Home Sales Month’s Supply

Rising Supply a Good Thing?

Bloomberg says “Another positive is a rise in supply with 2.21 million used homes on the market vs 2.01 million in March. This rise, together with the drop in sales, raises supply relative to sales to 5.3 months from 4.6 months.“…

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Philly Fed Region “Weak but Stable”; Kansas City Region “Declines More Sharply”

Courtesy of Mish.

More weak economic reports came out today. Let’s take a look at two regional manufacturing reports.

Philly Fed Region “Weak but Stable”

The Bloomberg Economic Consensus for the Philadelphia Fed Business Outlook Survey was 8.0. Economists got the leading sign correct, but the consensus estimate was a tad high with the index posting 6.7.

Activity in the Mid-Atlantic manufacturing sector is slow but stabilizing, based on the Philly Fed’s general conditions index which came in at 6.7 for May, down slightly from 7.5 in April and against Econoday expectations for 8.0.

The best news in the report is a slight uptick in new orders, to 4.0 from 0.7. This isn’t searing but is at least in the plus column as are shipments, at 1.0 from minus 1.8. Employment, at 6.7, is also in the plus column.

Manufacturers in the region are reporting significant price contraction, especially in costs which is a surprise given the rise underway in oil prices. Manufacturers are also reporting declining prices for finished goods as well. These inflation readings, if repeated in subsequent reports, will give the edge to the doves at the Federal Reserve.

A plus in the report is a healthy reading of 33.9 for the 6-month outlook, down only slightly from April’s 35.5 and up from 32.0 in March. The manufacturing sector, hit by weak exports and trouble in the energy sector, has yet to find its footing this year but this report, which is very closely watched, points to stability that in turn hints at a rebound in the months ahead.

Weak Demand

In light of rising energy prices, price contraction especially in finished goods tells the real story: very weak demand.

The six-month outlook is meaningless. Such readings are perpetually overoptimistic except at the bottom of recessions.

Industrial production will go nowhere with readings like these. I suggest things appear to be “stabilizing” before the next decline.

Philly Fed vs. Industrial Production

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Public Confused Why World’s Biggest Banks Admitting Criminal Fraud, Leads To Public Yawns

 

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

It was about two years ago when we summarized all the known and confirmed rigged markets.

  • Libor – interest rates (link)
  • ISDAfix – swaps (link)
  • Platts – oil prices (link)
  • WM/Reuters – FX (link)
  • High-Frequency Trading – equities (link)

Since then things have gone from bad to worse for believers in fair and efficient markets, with not only countless more banks now admitting they rigged Libor and FX, not to mention gold (yes gold too was manipulated as impossible as it sounds) and even the CFTC finally figured out just how spoofers manipulate the price of both stock indices and gold, but that biggest master manipulator of all, the world's central banks, unleashed a record liquidity blitz into world markets with 2015 set to be the year in which CBs are set to monetize all net issuance.

It all culminated with yesterday's settlement in which five of the world's biggest banks, including JPM, Citi and Barclays, agreed to plead guilty in a currency-rigging probe.

And, to Bloomberg's dismay, the public yawned.

Bloomberg's amazement continues:

Barely more than a year ago, criminal charges against major U.S. banks were considered unthinkable, with lawyers and analysts viewing felony convictions as a death sentence and a threat to the financial system. Now, by granting waivers allowing lenders to keep operating even after a felony plea, the government has managed to punish firms while protecting them from fatal consequences.

Others, including those who work in the industry, are just as amazed:

This is the first time you had Citigroup, JPMorgan or any U.S. bank plead guilty essentially to criminal conduct — this is a bad day for American finance,” Mike Mayo, an analyst at CLSA Ltd., said in a televised interview with Bloomberg. “Having said that, this is more backward-looking than forward-looking.”

The market, however, was delighted with the stocks of Barclays, UBS and RBS rising.

“It’s a bit weird, isn’t it?” Christopher Wheeler, a London-based analyst at Atlantic Equities LLP, said in a telephone interview. “$5.8 billion and yet everybody is shrugging their shoulders.”

And while it is now official that stocks are rewarded for crimes, why is it that even the public no longer cares?

For all the muted response to Wednesday’s news, Donaldson Capital Management LLC’s Greg Donaldson expressed concern that criminal charges may now become routine. “Once you cross that line and admit you’ve done something bad, you open up Pandora’s box,” said Donaldson, chairman of the Evansville, Indiana-based firm that manages about $1.1 billion. “This settlement just moved the goal post.”

If convictions become too commonplace, the government may have to pursue even tougher penalties.

Which is the punchline: the government will not pursue anything that truly hurts banks. Ever again.

Because in an age of deferred prosecutions and "probations" for criminal conduct even for recidivist banks such as UBS, what the public has realized is that in his desperate scramble to appear tough on banks and to prosecute them "criminally", the president has come to a back room arrangement with the banks in which they agree to pay slightly greater fines under an umbrella of criminal conduct, which thanks to SEC waivers to conduct "business as usual", achieves absolutely nothing.

Oops, did we say the banks pay fines? We meant their shareholders.

As for how serious the "criminal" charges are, we are delighted to summarize just how many bankers are being arrested, handcuffed and carted to prison.

0.

And with that we hope to have explained why not even the public is dumb enough any more to fall for the whole "criminal punishment for the banks" bullshit.

Because by now everyone knows who really calls the shots in the US government.

 

JPMorgan’s Jamie Dimon Deals With His Bank’s Felony Charge – Badly

Courtesy of Pam Martens.

JPMorgan Tries to Claim It's a Felon Because of  One Bad Apple

JPMorgan Tries to Claim It’s a Felon Because of One Bad Apple

After more than 200 years of operation, yesterday JPMorgan Chase became an admitted felon. That action for foreign currency rigging came less than two years after the bank was charged with two felony counts and given a deferred prosecution agreement for aiding and abetting Bernie Madoff in the largest Ponzi fraud in history. The felony counts came amid three years of non-stop charges against JPMorgan Chase for unthinkable frauds: from rigging electric markets to ripping off veterans to charging credit card customers for fictitious credit monitoring and manipulating the Libor interest rate benchmark.

Against this backdrop of a serial crime spree on the part of employees on multiple continents and coast to coast in the United States, JPMorgan released a statement yesterday regarding the bank pleading guilty to a felony charge for engaging in the rigging of foreign currency trading, calling it “principally attributable to a single trader.” In the statement, Dimon says the bank has a “historically strong culture.”

Dimon is, if nothing else, a master of the grand illusion.

In 2012, when Dimon was asked about reports in the press that one of his London traders was making massive bets in derivatives, he called the matter a “tempest in a teapot.” That tempest, dubbed the London Whale scandal, cost JPMorgan Chase at least $6.2 billion in losses, over $1 billion in fines, and a scathing 306-page report from the U.S. Senate’s Permanent Subcommittee on Investigations. Senator Carl Levin, Chair of the Subcommittee at the time, said JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.”

Attempting to foster the illusion that there was simply one bad apple behind JPMorgan having to finally plead guilty to a felony is not only an insult to the public, it flies in the face of five regulators’ findings in the matter. JPMorgan’s involvement in the rigging of foreign currency has now been looked at by the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC), the U.S. Justice Department, the Federal Reserve, and the U.K.’s Financial Conduct Authority. Not one of these regulators alluded to the problem as being one bad apple.

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