Archives for July 2015

Rude awakening for those who ignored the energy markets’ warning signs


Rude awakening for those who ignored the energy markets' warning signs

Courtesy of Sober Look

Back in February (see post) numerous equity investors refused to believe that a crude oil recovery is likely to be unsustainable. Many viewed this as a buying opportunity – just as they did in 2011 when such "bottom fishing" strategy worked. "Look at the declines in oil rigs" many argued – US crude production is about to dive. Even some in the energy business were convinced that crude oil recovery is coming and we will be back at $70/bbl in no time. It was wishful thinking.

There is no question that North American production of crude oil is stalling. However for now it remains massively elevated relative to last year.

Source: EIA

More importantly, many fail to understand just how flexible US crude production has become – the time to bring capacity on/off-line has shrunk dramatically. Furthermore, a great deal of production in the US is now profitable at $60/bbl and even lower as rig efficiency rises. Many view this as unsustainable because new exploration is halted and existing wells are being reused. But there is enough staying power here to continue flooding the markets for some time to come.

Source: EIA

The ability to bring capacity back online quickly is the reason we saw US rig count unexpectedly increased last week. This creates a natural near-term cap on crude prices, above which production can rise quickly.

Source: Baker Hughes

To add to the market's woes, the Iran deal threatens to bring materially more crude into the market in 2016, while immediately releasing a great deal of stored crude the nation currently holds.

Source: WSJ

Moreover, the Saudis are ramping production to record levels, as the OPEC members are left to fend for themselves. The Saudis will attempt to recover some of the lost revenue with higher volumes.

Crude prices in the US fell below $50/bbl in response to some of these developments. So much for the "recovery".

Source: barchart

All of a sudden, as investors realize that crude oil price recovery could take years, energy firms, particularly those focused on exploration and production (upstream), don't look that attractive. The chart below shows the relative declines of the overall energy sector as well a the upstream companies' shares over the past year (down 29% and 51% respectively).

Source: Ycharts

And even those who were betting on the M&A activity providing support to share prices are having second thoughts, now that the Backer Hughes acquisition by Halliburton may face challenges.

Source: Bloomberg

To make matters worse, many energy firms continued to borrow as prices declined. With no recovery in sight, credit markets are becoming much less forgiving. In traded credit markets for example we see spreads widening out again – with oil services and equipment getting hit particularly hard.

Source: Credit Suisse

The US energy industry is undergoing its most challenging period in decades and for many firms the worst is yet to come.

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Key Sector Threatening Material Breakdown


Key Sector Threatening Material Breakdown

Courtesy of Dana Lyons



We take a break from the regularly scheduled poor breadth programming to bring you a chart of a sector…that just so happens to be one of the main contributors to the poor breadth phenomenon. After threatening for months last summer to break out above its all-time high set in 2008, the basic materials sector succumbed to the October weakness along with the rest of the market. However, unlike most of the market, the sector, as represented by the Dow Jones U.S. Basic Materials Index, never did make it back to its September highs as it was caught in the deflationary spiral in commodities at the time. It did begin the year in promising fashion, though. In February, we posted that the Equal-Weight Basic Materials ETF, RTM, actually hit an all-time high, as did the Materials SPDR, XLB, despite the commodities rout. That victory was short-lived, however, and there has been precious little to cheer about in the sector since.

Earlier this month, the DJ U.S. Basic Materials Index became the first sector to actually move to a 52-week low. This was a fairly extraordinary event considering the major averages were still near their 52-week highs. The fact that the sector accounts for only 3% of the S&P 500 helps explain that possibility. However, the sector’s collapse has certainly played a role in the severe weakening of the index’s internals. And currently, the sector finds itself teetering on a very key level of potential support.

We refer quite a bit to Fibonacci Retracement levels as they reflect the market’s tendency to “retrace” market moves in similar increments. We have also mentioned before that, in our view, the strongest Fibonacci signals come when there is a confluence of various such levels in the same vicinity. No chart illustrates this point better than the DJ U.S. Basic Materials Index.




Note how the 4 Fibonacci Retracements drawn from key lows in 2009, 2011, 2012 and 2013 to the 2014 highs, are aligned almost on top of one another. In fact, it makes it difficult to distinguish each of the lines. Here are the levels to which we are referring:

  • 23.6% Fibonacci Retracement of the 2009-2014 Rally  ~301
  • 38.2% Fibonacci Retracement of the 2011-2014 Rally  ~302
  • 50% Fibonacci Retracement of the 2012-2014 Rally  ~300
  • 61.8% Fibonacci Retracement of the 2013-2014 Rally  ~302
  • Additionally, the 1000-Day (or 200-Week) Simple Moving Average is right in the vicinity as well.

Again, a cluster like this increases the confidence in the validity of the level. It should support prices, at least temporarily. Also, considering this is the first touch of this major level, it should provide support , initially. Interestingly, the index blew through the level (around 300) earlier in the week before recovering it. One might consider this a false breakdown and a springboard to a significant rally. However, we’d simply view it as a test of the support level so far.

How far could the index bounce if this support holds? We are not big on setting targets, but the first level to test would certainly be near 315, which represents the breakdown point below the previous 52-week lows. That would be a 4-5% gain from here and would certainly set up a tough level of resistance for the index.

Should the Fibonacci Retracement cluster around 300 fail to hold the index up, here is the next set of Fibonacci levels that the index would be likely to test (near 266, or 11% lower):

  • 38.2% Fibonacci Retracement of the 2009-2014 Rally  ~265
  • 50% Fibonacci Retracement of the 2011-2014 Rally  ~268
  • 61.8% Fibonacci Retracement of the 2012-2014 Rally  ~266
  • 2013 Lows ~266
  • Additionally, the 500-Week Simple Moving Average is right in that vicinity as well.

One interesting observation regarding the early-year rally is that, as several readers pointed out, the falling fuel prices served as a tailwind for the chemical companies in the index as it lowered their input costs. That enabled the new highs in the Equal-Weight Index and the XLB. In the recent (or on-going) commodity slump, the basic materials sector has shown no such signs of a rally due to lower input costs. What that means, we are not sure. Perhaps the weakness in the sector’s underlying business is outweighing the benefits accrued via low energy costs. At least, that is how investors are voting.

As mentioned, considering the multiple Fibonacci lines in the area as well as this being the first touch of the area, it should hold, at least temporarily. However, if the level fails, the Dow Jones U.S. Basic Materials Index is likely to visit the next cluster of Fibonacci Retracement levels near 266. Would such a move be a byproduct of an acceleration of the global deflationary trend currently in place? Or would it be a catalyst for a broader market decline? That is yet to be determined. However, such a breakdown would not be welcomed news for a stock market that has already seen its share of bricks removed from the wall.


More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

Greek Stock Market Reopens (sort of); Math Perspective on the “Bailout”

Courtesy of Mish.

The Greek news of the day is Greek Stock Market to Reopen, With Restrictions.


  1. People cannot draw on their Greek bank accounts to buy shares
  2. People can only buy shares with existing brokerage account cash

I supposed people could transfer cash from elsewhere into stocks but no one in their right mind would do such a thing.

And what about taking cash out of brokerage accounts, wiring it elsewhere? The article did not say, but I suspect that has capital restrictions as well.

Will the market really reopen Monday?

I suggest not.

Reader "Bailout" Perspective

Reader "AC" occasionally pings me with some interesting comments and perspectives. Here's another one.

Ciao Mish,

I wanted just to share some elements to put in perspective things about Greek bailout.

Greece is a small country with small GDP, but please consider the ratio of the bailout and guarantee vs GDP….

Continue Here


Rabbit-Hole Math: Chicago Proposes Bonds that Make No Periodic Payments; When Does Stupidity Stop?

Courtesy of Mish.

Chicago Eyes Bonds that Delay Repayments

Chicago Mayor Rahm Emanuel has his eyes on raising money via Capital Appreciation Bonds.

CABs saddle taxpayers with higher costs because they delay interest and principle payments until a final lump-sum payment at the end.

CABs have fallen out of favor because of risk. Some cities and states have outlawed them.

Nonetheless, Chicago Mulls Borrowing That Puerto Rico Rejected as Too Risky.

Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term.

Chicago is struggling to plug its deficit and $20 billion of unfunded pension liabilities. Emanuel’s move would give the third-most-populous city a means of borrowing without having to face the costs right away.

Texas restricted the use of CABs in June and California has limited them since 2013. The Puerto Rico Electric Power Authority dismissed a bondholder plan last week to restructure its debt using capital appreciation bonds, citing the disproportionate risks.

Former California Treasurer William Lockyer called the debt “abusive” because it passes on large payments to future generations.

“They increase the total cost and lower flexibility going into the future,” said Steve Murray, a senior director at Fitch Ratings. “They can limit future borrowing ability.”

Emanuel also proposed selling $125 million of wastewater revenue bonds to fund swap termination payments, Poppe said. A separate ordinance would authorize $2 billion in bonds for O’Hare International Airport, including $1.7 billion of refunding for savings, and about $300 million of new money for capital projects and interest, according to Poppe.

Rabbit-Hole Math

Given Chicago's junk bond rating, no investor in their right mind would purchase Chicago CABs. Default risk is enormous….

Continue Here

Picture via Pixabay.


“There’s A Bubble In Pessimism Worldwide, Come On, You Read Zero Hedge!”

If you read Zero Hedge, there's your proof that there is a bubble in pessimism. And if that doesn't make sense to you, read the following article, but it probably won't help.

"There's A Bubble In Pessimism Worldwide, Come On, You Read Zero Hedge!"

Courtesy of ZeroHedge

GFI's John Spallanzani came on CNBC today and decided to make the case that there is a bubble. But not a bubble in stocks which are trading 1% off their all time highs, at a 20x real P/E multiple, and 1400 days without a 10% correction, mind you, but a bubble in pessimism.

Here is his "argument," deconstructed in its several key components.

  • "If there's a bubble in bonds, there has to be a bubble in pessimism."

Apparently, Mr. Spallanzani does not quite grasp that the only reason bond prices are as high as they are (to him, that means a bubble), is because the central banks are now buying more than 100% of all net issuance.

It also appears that the very logical conclusion that if there is a bubble in bonds, then there is clearly a bubble in stocks, because once the bond bubble bursts and interest rates soar, what happens to earnings? Or perhaps GFI employees just haven't covered yet the arcane linkage between the balance sheet and the income statement.

Ironically, in the very next sentence the CNBC guest says that "there is a shortage of quality assets in the world" (which actually is spot on as we showed in May of 2013), but apparently another class not discussed at GFI is that "quality assets" are bonds, not 100x (or Div/0) biotech stocks.

Then there is a lot of even more confused words, followed by this pearl: "the only way the Fed is going to hike is basically the S&P going toward 2200. If we stay at 2100 or below, the Fed doesn't go in September."

Then comes even more confusion: "the only game in town right now are equities to drive the balance sheet of the individual investor and also the consumer."

Uh, what?

Unwilling to risk a subdural hematoma from trying to decipher what, if anything, that sentence even means, we trudge on:

"If you take energy out right… energy really cratered… the earnings are not that bad", and when someone interjects that revenues are bad, John's response is: "obviously we can debate that."

Actually, no we can't:

… and as Factset notes, "Revenue Growth Not Expected to Return Until 2016"

But ignore reality because John plows on: "the trajectory of earnings is up, we're not going into a recession, therefore all the liquidity that's sitting on a sideline has to go somewhere and that place that it's eventually going to is equities, that's what happens."

Uh, what… again? Some circular argument which is made whole not because of some cause-effect link but because "that's what happens"?

At this point we are getting concerned that Mr. Spallanzani has absolutely no idea what he is talking about.

For better or worse, his CNBC hosts did too, and the camel's back finally broke when asked if he has any clue about ETF flows (he does because  "I trade ETFs all day") he, surprisingly accurately, notes that  "flows are going into IWM, into biotechs and going into QQQs", which incidentally are only the story stocks, those trading in triple digit or higher PE, Spallanzani totally cracked, and having no response at all, came out with the following absolute stunner:

  • "There's a bubble in pessimism worldwide, come on you read Zero Hedge."

And cue laughter.

So there you have it: when you are fresh out of any legitimate arguments, what do you do? You name drop Zero Hedge and use its readership as a benchmark of rationality or, as the case may in this particular very, very confused case, hope it's sufficient to "prove" that there is a bubble in pessimism… or something. It wasn't exactly clear by this point in the interview what John's point was, or if he even had one.

And while we probably should be grateful for that assessment, because for whatever reason Zero Hedge traffic was indeed an all time high in July, the fact that it originates from someone as confused, albeit a religious reader of this website, as Spallanzani we'll just avoid commenting altogether.

QE Fails In Japan: Inflation Nonexistent, Consumer Spending Drops, More Ease Coming

Courtesy of John Rubino.

After nearly three decades of stagnation, Japan in 2013 went all-in, ordering its central bank, the Bank of Japan, to buy pretty much every bond on the market with newly-created yen. The BoJ’s balance sheet — a rough proxy for the amount of money it has created and dumped into the economy — soared at a rate that dwarfs, in relation to GDP, the US Fed’s QE programs.

Japan BOJ balance sheet

But it’s not working:

Japan’s Consumer Prices Rise Fractionally While Spending Drops

(Bloomberg) – Consumer price gains in Japan remained little more than zero in June while household spending dropped, challenging the central bank’s effort to spur inflation.

Consumer prices excluding fresh food rose 0.1 percent from a year earlier, fractionally better than economists estimated. The same measure for Tokyo showed a 0.1 percent decline.

JPMorgan Chase & Co. and Barclays Plc are among economists estimating a second-quarter contraction that could sap momentum in inflation that BOJ chairman Kuroda predicts will pick up later this year.

“I can’t see when the BOJ will be able reach the 2 percent inflation target at all,” Yasunari Ueno, chief market economist at Mizuho Securities Co., said before today’s data. “It appears to be a matter of time before the BOJ adds monetary stimulus.”

Oil has tumbled more than 50 percent from last year’s high, squelching early progress that the BOJ made with unprecedented monetary stimulus in reflating the economy. Consumer prices excluding food and energy increased just 0.6 percent in June from a year earlier.

Household spending, which dropped in 14 of the past 15 months, fell 2 percent in June from a year earlier. Retail sales data released earlier in the week showed a 0.8 percent drop from May while industrial production provided a bright spot, rebounding more than expected.

There isn’t enough momentum in Japan’s economy to drive up inflation, said Yoshiki Shinke, an economist at Dai-ichi Life Research. He sees a contraction as deep as 2.5 percent last quarter, driven by weaker exports and consumer spending.

Most economists see the BOJ failing to reach its goal in its timeframe, with 22 of 35 in a Bloomberg survey this month forecasting that the bank will eventually bolster stimulus.

Japan is bit of a special case because its population is aging faster than any other. The country’s stores now sell more adult diapers than baby diapers while its seniors commit more crimes (mostly shoplifting for necessities) than its teenagers. In that kind of environment it’s not clear that any amount of money creation will produce healthy growth.

But giving up isn’t an option because debt continues to soar. The following chart is a slow-motion train wreck:

Japan debt to gdp

So, as the above article notes, “It appears to be a matter of time before the BOJ adds monetary stimulus.”

Which means that Japan will be the first nation to test the modern limits of debt monetization. Specifically, what does a central bank do when it has bought all the bonds in its economy and the politicians demand even more? Does it become the country’s largest landlord by buying up office buildings and apartment complexes? Or the largest hedge fund by vacuuming up blue chip equities or small caps or derivatives?

Whatever the specifics, at a certain point (arguably already achieved by most of today’s major central banks) it damages the price signaling mechanism that defines free markets beyond repair.

Visit John's Dollar Collapse blog here.


Commodities Are Screaming Trouble But the Fed Isn’t Listening

Courtesy of Pam Martens.

SPDR S&P Metals & Mining Exchange Traded Fund (Red), Freeport-McMoRan (Blue), and BHP Billiton (Yellow) Charts for Past Year

SPDR S&P Metals & Mining Exchange Traded Fund (Red), Freeport-McMoRan (Blue), and BHP Billiton (Orange) Charts for Past Year


By Pam Martens and Russ Martens: July 31, 2015 

The commodities slump has accelerated this past month with gold now trading at five-year lows and the U.S. crude benchmark, West Texas Intermediate (WTI), down 19 percent in just the past month, 49 percent on the year, and 57 percent in the past two years. In early morning trade, WTI is at $47.82 versus $110 two years ago.

Minutes of the Federal Reserve’s Open Market Committee meeting on December 16 and 17 reveal that the Fed was expecting an upturn in oil prices this year, writing: “…inflation was projected to reach the Committee’s objective over time, with longer-run inflation expectations assumed to remain stable, prices of energy and non-oil imports forecast to begin rising next year, and slack in labor and product markets anticipated to diminish slowly.”

CNN Money is reporting this morning that major iron ore or metals exporting countries like Peru (copper), Chile (copper), South Africa (iron ore and gold), Australia (iron ore and gold), Brazil (iron ore), Zambia (copper), and Democratic Republic of the Congo (metals and crude oil) are experiencing a serious economic impact from the plunge in commodity prices over the past year.

Continue Here

IMF Reiterates Greece Disqualified for Bailout, Participation Depends on Debt Relief and Reforms

Courtesy of Mish.

Once again the IMF is back in the news in regards to Greece.

The IMF staff told the board of directors Greece Disqualified from New IMF Program.

Yet, Germany insists IMF be a part of the program. The reason for the latter is Germany will have to pony up lots more money if the IMF is not involved. The staff presented this message to the board this week, along with the message eurozone bailout lenders first need to agree on “debt relief”.

From the above link (Financial Times) …

The International Monetary Fund’s board has been told Athens’ high debt levels and poor record of implementing reforms disqualify Greece from a third IMF bailout of the country, raising new questions over whether the fund will join the EU’s latest financial rescue.

The determination, presented by IMF staff at a two-hour board meeting on Wednesday, means that while IMF staff will participate in bailout negotiations currently under way in Athens, the fund will not decide whether to agree a new programme for months — potentially into next year.

The IMF’s assessment adds another source of complexity, just as Athens and its bailout monitors begin discussions to try to conclude a deal before a tight August 20 deadline.

According to a four-page “strictly confidential” summary of Wednesday’s board meeting, IMF negotiators will take part in policy discussions to ensure the eurozone’s new bailout “is consistent with what the fund has in mind”.

But they “cannot reach staff-level agreement at this stage”. The fund will decide whether to take part only after Greece has “agreed on a comprehensive set of reforms” and, crucially, after eurozone bailout lenders have “agreed on debt relief”.

[Germany] now faces the prospect of trying to move an €86bn bailout through a sceptical Bundestag in a matter of weeks, without the IMF’s imprimatur.

Some Greek officials suspect the IMF and Wolfgang Schäuble, the hardline German finance minister, are determined to scupper a Greek rescue, despite the July agreement to move forward with a third bailout.

In a private teleconference made public this week, Yanis Varoufakis, the former Greek finance minister, said he feared that his government would pass new rounds of economic reforms only for the IMF to pull the plug on the programme later this year….

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What happens to stocks after nothing happens to stocks?

Joshua points out that S&P action this flat, as it's been from January through July, is actually quite rare. So what's next?

What happens to stocks after nothing happens to stocks? 

Courtesy of 

My latest piece for Fortune Magazine just went live today. In it, I look at the consequences for a stock market that’s gone nowhere halfway through the year, as is the case in 2015…

You might have looked at your last brokerage statement and wondered why you’re no longer seeing the asset balance increasing like it had been. You may have taken a glance at your 401(k) the other day and wondered why it’s barely budged since Thanksgiving, excluding the contributions you’ve been making every two weeks.

You’re not crazy. The U.S. stock market has essentially gone nowhere in over 120 days.

Keep reading:

The Thing About Flat Stock Markets (Fortune)


Fed To Markets: You’re STILL Too Easy To Fool!

Courtesy of John Rubino.

These days no matter what the Federal Reserve actually says, the markets respond like dogs sensing a piece of bacon coming their way. This is so for several reasons:

1) The world is vastly overleveraged, which terrifies investors and traders with even a modest historical perspective. The resulting insecurity makes them long for a higher power willing and able to keep the wolf of instability from the door.

2) The federal government understands that its ability to be all things to all constituents requires steadily increasing asset prices. To this end it has converted the financial markets from mechanisms for the efficient distribution of capital via accurate price discovery, into public policy tools for manipulating finance and politics. So the Fed’s job is no longer to maintain a stable playing field on which capitalism can work its magic, but to ensure rising asset prices forever.

To view the markets’ happy acceptance of this new reality, we need only look at what stock prices do when the Fed speaks. Here’s a CNBC report on the March 2015 Fed meeting:

Thank you, Janet Yellen! Stocks surge after Fed

The Federal Reserve has run out of patience. And Wall Street couldn’t be happier.

Stocks surged after the Fed’s latest statement was released Wednesday afternoon. The Dow was deep in loss territory and then jumped over 300 points in a matter of minutes. The index ended the day up 227 points and back above 18,000.

The S&P 500 and Nasdaq quickly popped as well. The Nasdaq even briefly surpassed 5,000 again and is not far from its all-time high from March 2000. Here’s why.

The Fed didn’t do anything unexpected. The market hates surprises.

What it means: But the central bank reassured the market that a rate increase was “unlikely” at its next meeting in April. That is not a surprise either. Wall Street has been betting on rates starting to go up in June or later.

The Fed also issued new forecasts. It lowered its 2015 and 2016 outlook for gross domestic product (GDP) slightly. It also cut its inflation forecasts and predicted that the unemployment rate will fall further than it thought a few months ago.

All this suggests the Fed will take a slow and steady approach to rate hikes. That should calm down investors who had been worrying the Fed would boost rates too quickly.

To summarize, the Fed didn’t actually do anything but did say some warm and fuzzy things implying that the financial crisis was still a ways off. The fact that Fed governors, based on their extensive paper trail, know little or nothing about the future is irrelevant next to the promise of a few more months of easy money.

Now fast forward to this week, when the Fed met and again said very little. It might bump up the Fed Funds rate by a tiny amount in September or it might not depending on the data generated by the economy in the meantime. In other words, the story is unchanged from the previous five or six statements.

The markets, however, loved the soothing, adult cadences. Note how the S&P 500 was falling hard until the Fed started meeting on the 28th, and then bounced nicely in anticipation of the accustomed reassurance.

Stock prices Fed meeting July 2015

So what does this mean? Mostly that in today’s decadent, leverage-saturated financial system, markets are now largely branches of government policy. Which history teaches is a very temporary situation that will be remedied when the laws of economics now being defied reassert themselves with a vengeance. When they do, the soothing words will be replaced by capital controls, bank bail-ins and devaluation, and the transition will be complete.

Visit John's Dollar Collapse blog here

Picture via Pixabay.

Which Will It Be: United States of Europe OR United States of Germany?

Courtesy of Mish.

Socialists Seek to Outvote Germany

In the wake of the near-Grexit, France and Italy seek more powers for the European Commission (EC).

And both countries want another parliament with more power. Their unstated goal is to create a United States of Europe where socialists would outvote the Germans.

Germany Seeks to Prevent Being Outvoted

German finance minister Wolfgang Schäuble has a completely different idea: Schäuble Outlines Plan to Limit European Commission Powers.

German finance minister Wolfgang Schäuble is proposing to strip the European Commission of some of its core oversight powers in an effort to avoid politicising EU decision-making at a time when the executive body has touted its new partisan role in Europe.

The European Commission has quasi-judicial authority over some of the most sensitive Europe-wide decision making, particularly in the area of merger approvals and antitrust monitoring, powers that could be moved to independent bodies under Mr Schäuble’s plan.

Berlin has also long called for the eurozone’s budget rules to be triggered automatically when a country breaches EU debt and deficit ceilings, and has complained bitterly that France has been given repeated waivers by the commission despite violating those limits for years — waivers some have viewed as politically motivated.

François Hollande, the French president, pressed for the eurozone overhaul almost immediately after the Greek deal was reached and, in a recent interview in the Financial Times, Italian finance minister Pier Carlo Padoan called for a rapid move to a full political union.

However, the new ideas being advanced have highlighted the differences between eurozone countries on the way forward, particularly between the French and Italian camp and Berlin.

Both Paris and Rome are emphasising a pooling of resources, either in the form of a eurozone budget or a common EU unemployment scheme, while Berlin is focusing on giving the eurozone’s rules more bite and less interference from political forces.

Battle Line

The battle lines are clear: Stricter Rules and Less EC vs. Fewer Rules and More Politics….

Continue Here

7 ‘Saves’ In 7 Months: A Market Going Nowhere Fast

Courtesy of Charles Hugh-Smith Of Two Minds

What do we make of a stock market that's been "saved" seven times in a mere seven months? Saved from what, you ask? Saved from rolling over, of course; after six years of upside, the current uptrend is getting long in tooth, and evidence of global recession is mounting.

What's "saved" the market seven times in seven months? The usual burps of hot air: the Federal Reserve issued more mewlings (zero rates forever), Greece was "saved" again, China's crumbling stock bubble was "saved" again, and so on.

The problem for bulls is they keep hitting their head on the ceiling after every "save": instead of running to new highs in an extension of the six-year uptrend, the S&P 500 reverses once it reaches the narrow band of recent highs.

As soon as the SPX hits this range, somebody starts selling. It's called distribution: the smart money sells to whomever is buying–bot, trader, hedge fund, it doesn't matter, as long as someone takes the shares off their hands.

This raises the question: how many more "saves" can there be? How many more times can Greece be "saved" so global markets rally? How many more times can China's imploding stock market be "saved," bailing out global markets again? How many more times can the Fed talk up zero interest rates and put off an eventual click up in rates?

Are there an unlimited number of "saves" in the system? Will we wake up one morning in July of 2016 to find the market has been "saved" a 17th time, or a 20th time? can markets bounce once a month on some absurd "save" of a broken system essentially forever?

History isn't especially kind to the faith that the market can be "saved" every month for years on end. China's authorities and stock market punters are learning this the hard way: when the sentiment has turned, every "save" gets sold by the smart money, and then by the "dumb" (i.e. margined) money as their hopes of new highs are shredded once again.

Can markets be saved an eighth time, a ninth time, a tenth time this year? How about next year? Another 12 months, another 12 saves? If the "saves" are going to run out, why wait to be the last sucker holding the bag when the Fed's fetid hot air fails to work its magic?

GDP Bounce: Disappointing Mixed Bag of Expectations and Revisions; Where to From Here?

Courtesy of Mish.

This morning, the BEA reported Second Quarter GDP was 2.3%.

2.3% was at the low end of the Consensus Range of 1.9% to 3.5%. On the plus side, first quarter was revised way higher.


  • First quarter 2015 revised up from -0.2% to +0.6%
  • 2013 GDP revised lower from 2.2% to 1.5%
  • 2012 GDP revised lower from 2.3% to 2.2%

Evolution of First Quarter 2015 GDP

  • +0.2% Initial
  • -0.7% Revised
  • -0.2% Revised
  • +0.6% Revised

GDP is the most lagging of all indicators. By the time all the revisions are in (years later), no one even cares.

I suspect after the “final” revision, first quarter 2015 GDP will be back in the negative column, with all of 2015 revised lower as well.

Don’t hold your breath waiting.

Weak First Half

Meanwhile, the first half of the year looks pretty weak.

Last year, a first quarter GDP of -0.9% was followed by a huge second quarter surge to +4.6%, sustained with a strong third quarter +4.3%.

Continue Here

Fed To Markets: You’re STILL Too Easy To Fool!

Courtesy of John Rubino.

These days no matter what the Federal Reserve actually says, the markets respond like dogs sensing a piece of bacon coming their way. This is so for several reasons:

1) The world is vastly overleveraged, which terrifies investors and traders with even a modest historical perspective. The resulting insecurity makes them long for a higher power willing and able to keep the wolf of instability from the door.

2) The federal government understands that its ability to be all things to all constituents requires steadily increasing asset prices. To this end it has converted the financial markets from mechanisms for the efficient distribution of capital via accurate price discovery, into public policy tools for manipulating finance and politics. So the Fed’s job is no longer to maintain a stable playing field on which capitalism can work its magic, but to ensure rising asset prices forever.

To view the markets’ happy acceptance of this new reality, we need only look at what stock prices do when the Fed speaks. Here’s a CNBC report on the March 2015 Fed meeting:

Thank you, Janet Yellen! Stocks surge after Fed

The Federal Reserve has run out of patience. And Wall Street couldn’t be happier.

Stocks surged after the Fed’s latest statement was released Wednesday afternoon. The Dow was deep in loss territory and then jumped over 300 points in a matter of minutes. The index ended the day up 227 points and back above 18,000.

The S&P 500 and Nasdaq quickly popped as well. The Nasdaq even briefly surpassed 5,000 again and is not far from its all-time high from March 2000. Here’s why.

The Fed didn’t do anything unexpected. The market hates surprises.

What it means: But the central bank reassured the market that a rate increase was “unlikely” at its next meeting in April. That is not a surprise either. Wall Street has been betting on rates starting to go up in June or later.

The Fed also issued new forecasts. It lowered its 2015 and 2016 outlook for gross domestic product (GDP) slightly. It also cut its inflation forecasts and predicted that the unemployment rate will fall further than it thought a few months ago.

All this suggests the Fed will take a slow and steady approach to rate hikes. That should calm down investors who had been worrying the Fed would boost rates too quickly.

To summarize, the Fed didn’t actually do anything but did say some warm and fuzzy things implying that the financial crisis was still a ways off. The fact that Fed governors, based on their extensive paper trail, know little or nothing about the future is irrelevant next to the promise of a few more months of easy money.

Now fast forward to this week, when the Fed met and again said very little. It might bump up the Fed Funds rate by a tiny amount in September or it might not depending on the data generated by the economy in the meantime. In other words, the story is unchanged from the previous five or six statements.

The markets, however, loved the soothing, adult cadences. Note how the S&P 500 was falling hard until the Fed started meeting on the 28th, and then bounced nicely in anticipation of the accustomed reassurance.

Stock prices Fed meeting July 2015

So what does this mean? Mostly that in today’s decadent, leverage-saturated financial system, markets are now largely branches of government policy. Which history teaches is a very temporary situation that will be remedied when the laws of economics now being defied reassert themselves with a vengeance. When they do, the soothing words will be replaced by capital controls, bank bail-ins and devaluation, and the transition will be complete.


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Financial Markets and Economy

Here's How Much the Strong Dollar Hurts American Companies (Bloomberg)

American companies had a rough start to 2015 as they watched profits from overseas subsidiaries slide. Exactly how much blame should we assign to the currency markets? Two economists at the Federal Reserve have an idea. 

U.S. corporate profits fell about 1.4 percent in the fourth quarter last year before plummeting 5.2 percent in the first quarter this year, partly driven by a plunge in the amount American companies' foreign affiliates earned. Of the decline in overseas subsidiary profits caused by the appreciating currency and cheaper oil imports, about a third probably came specifically from the greenback, Carol Bertaut and Nitish Sinha wrote in a post this month.

Chinese Stocks Tumble In Close Of Trading "Causing Panic", US GDP To Be Revised Higher On Seasonal Adjustments (Zero Hedge)

We start off the overnight wrap up with the usual place, China, where in a mirror image of Wednesday's action, stocks once again started off uneventful, then gradually rose in the afternoon session and meandered near unchanged territory until the last half hour, when out of the blue they tumbled to close near the day's low, some 2.2% below yesterday's closing level.

Dollar watching can’t stop as a big move looms (Market Watch)

Judging by dollar gains this morning, a September interest-rate hike has not been completely ruled out, even if the tea leaves of yesterday’s Fed statement didn’t offer any clear direction.

gold smelting moltenAlbert Edwards: Gold is a 'must-have' (Business Insider)

Societe Generale's Albert Edwards is a bit of a bear, to put it mildly. One asset he absolutely loves, all the time, is gold.

So you might think he'd be a little down, given the precious metal's recent tumble in value.

But Edwards is sticking firmly to his guns in his latest email— gold is a great investment for the coming crash (it's always just around the corner).

An employee holds a Samsung Galaxy S6 Edge smartphone at the company's showroom in Seoul, South Korea. Photographer: SeongJoon Cho/BloombergSamsung May Cut Galaxy S6 Price After Fifth Straight Profit Decline (Bloomberg)

Samsung Electronics Co. signaled price cuts for its high-end Galaxy S6 smartphones to combat a market slowdown and surging sales of Apple Inc.’s iPhones after posting a fifth straight profit decline. Shares fell.

The company will be “adjusting” prices for the S6 and for the curved-screen S6 Edge to maintain sales growth, Samsung said Thursday. Net income, excluding minority interests, fell to 5.63 trillion won ($4.9 billion) in the three months ended June, missing estimates and triggering the biggest decline in shares in four months.

Buying oil stocks at these prices is just spilling money (Market Watch)

About a month ago, some traders were trumpeting that the worst was over for oil. Prices normalized around $60 after a snap-back in spring, with energy seemingly on solid footing once more as we neared the end of the second quarter.

In July, though, all bets were off as crude tumbled sharply to near six-month lows, shedding about 20% in a matter of weeks. That once again puts oil prices within spitting distance of their 2009 lows.

4 Mainstream Media Articles Mocking Gold That Should Make You Think (Liberty Blitzkrieg)

For those of you who have been reading my stuff since all the way back to my Wall Street years at Sanford Bernstein, thanks for staying along for the ride. I appreciate your support immensely considering that I essentially no longer write about financial markets at all, and for many of you, that remains your profession and primary area of interest.

Chinese stocks were having an OK day … until the end of the day (Business Insider)

The comparative calm seen on China's stock market earlier on Thursday came to an abrupt end in the afternoon, with stocks tumbling into the close.

SSEC July 30

Repsol Profit Declines 20% as Crude Slump Counters Refining (Bloomberg)

Repsol SA, Spain’s largest oil company, reported a 20 percent drop in second-quarter earnings as lower crude prices outweighed higher refining margins and led to a loss at its upstream operations.

Adjusted net income fell to 312 million euros ($342 million) from 390 million euros a year earlier, the Madrid-based producer said Thursday in a statement. That matched the average estimate of 19 analysts surveyed by Bloomberg.

Oil price slump costs another 12,500 jobs (CNN)

Sinking oil prices have prompted another round of heavy job cuts.

Royal Dutch Shell (RDSB) will slash 6,500 jobs in 2015 as part of a cost cutting drive. Another British firm Centrica (CPYYF) will shed 6,000 jobs, partly due to a reduced focus on oil and gas production.

European stocks pare gains as earnings continue to roll in (Market Watch)

Stocks across Europe rose Thursday, but regional indexes were coming off stronger levels as investors continued to sift through a raft of corporate earnings reports.

The Stoxx Europe 600 SXXP, +0.54% was up 0.2% at 394.88, but had been up by as much as 0.7%. The energy, technology and industrial sectors held gains, but telecommunication, consumer goods and basic material issues struggled.

24-07-2015_1Bail-Ins at “Bad Bank” Unconstitutional Says Austrian Court (Gold Core)

An attempt by Austria to bail-in junior bondholders at the Heta “bad bank” has been overturned by the highest court in the country.

Last year Austria passed legislation which annulled guarantees previously given by the state of Carinthia to bondholders of Heta, effectively writing off €890 million.

Trade union members demonstrate in front of the headquarters of Brazil's Central Bank, in Sao Paulo, Brazil, on July 28, 2015 demanding a reduction of the basic interest rateBrazil raises a key interest rate as it teeters on the brink of recession (Business Insider)

Brazil's central bank raised its benchmark interest rate by half a point to 14.25 percent, seeking to fight inflation during a major slump in the local currency.

The bank's monetary policy committee COPOM decided in a unanimous vote to raise the Selic rate by 0.50 percentage points, the seventh consecutive raise. 

The eurozone's star performer is showing every other European economy how it's done (Business Insider)

Spain's economy had another solid quarter between April and June, with a 1% growth spurt, according to figures just released.

That's bang on what analysts were expecting, and it means the economy has grown 3.1% since the same period last year.

Spanish GDP growth

Royal Dutch Shell Profits Continue to Fall, Prompting 6,500 Layoffs (NY Times)

 Royal Dutch Shell said on Thursday that its profit fell sharply in the second quarter as a strong performance in marketing and refining failed to offset the brunt of lower oil and gas prices.

The oil giant also said it would cut its capital investment and eliminate 6,500 jobs as the drop in oil and gas prices squeezes its vast global exploration and production operations.

U.S. stock futures dip into the red ahead of GDP report (Market Watch)

Wall Street was set to open slightly lower on Thursday, with stock futures dipping into the red ahead of closely watched second-quarter growth data that could impact the timing of the first Federal Reserve rate hike.

Futures for the Dow Jones Industrial Average YMU5, -0.05%  slipped 33 points, or 0.2%, to 17,649, while those for the S&P 500 index ESU5, -0.07%  fell 4.50 points, or 0.2%, to 2,097. Futures for the Nasdaq 100 index NQU5, +0.08%  lost 4.25 points, or 0.1%, to 4,560.75.

Waiting for Fed Tempers Russian Rate Cuts as Easing Pause Nears (Bloomberg)

It may be all that the Bank of Russia can do this year before it runs out of ammunition to help the economy.

After suspending its foreign-currency purchases on Tuesday to take the pressure off the ruble, the central bank will deliver the smallest interest-rate cut of its seven-month easing cycle, lowering the benchmark by 50 basis points to 11 percent, according to 26 of 35 economists surveyed by Bloomberg. Policy makers will announce their decision Friday at about 1:30 p.m. in Moscow.

Janet Yellen Can't Pop The Biotech Bubble (But The SF Gate Can) (Dark-Bid)

Biotech has a special place in the heart of the gambler investor. In the modern market where the average investor doesn't stand a chance, some of them indulge their hope and turn to lottery tickets. If only they can get the next Gilead or the next Amgen, they will become the next wildly successful "maverick" investor. More lottery tickets seem to be flying around than usual lately, floating alongside the recent biotech bubble. Some have doubted if this is a bubble. Maybe it's different this time. The SF Gate pondered this exact same question 15 years ago, and the market promptly replied.

90s Biotech Bubble

A customer prepares to fill up his tank in a gasoline station in Nice December 5, 2014.  REUTERS/Eric Gaillard Oil climbs on big U.S. stock draw; strong dollar caps gains (Business Insider)

Oil prices extended gains in Asian trade on Thursday, after a larger than expected draw in U.S. crude and gasoline stocks strengthened the outlook for oil demand.

But gains were capped by a stronger dollar and despite the drop in oil stocks some commentators warn of a global supply glut, with OPEC members producing 3 million barrels per day more than demand in the second quarter.

Sizing Up Republic’s Recovery (24/7 Wall St)

Republic Airways Holdings Inc. (NASDAQ: RJET) saw a reversal of misfortune on Wednesday. This stock fell handily on Monday and Tuesday, falling from over $8.00 down to under $4.00. So, what are investors supposed to make of more than a 50% gain on Wednesday?

The driving force for this week’s drop was that the stock is under the gun of the U.S. Federal Aviation Administration (FAA). The organization has boosted the required flight experience for first officers by a multiple of six to a total of 1,500 hours. The FAA also set new limits on duty times, according to Republic Airways.

Gold futures drop, trade near 5½-year low (Market Watch)

Gold prices slipped early Thursday, trading near a five-and-a-half-year low as the dollar gained after the Federal Reserve left the door open for a September interest-rate hike.

August gold GCQ5, -0.64%  traded at $1,085 an ounce, down $7.60 or 0.7%. The contract has traded as low as $1,081 an ounce, according to FactSet data, meaning it’s continuing to wallow around levels that had last been seen in early 2010.

Dollar Enigma: Why Are Bulls Losing Confidence With Fed Looming? (Bloomberg)

Even as the Federal Reserve may be weeks away from raising interest rates for the first time in almost a decade, currency forecasters are ratcheting back expectations for gains in the dollar.

Back in April, analysts were calling for the ICE U.S. Dollar Index to reach a 12-year high of 100.70 at year-end. Now they see it finishing 2015 at 98.60, according to the median estimate in a Bloomberg survey.

People are reflected in a board showing market indices in Tokyo July 28, 2015.   REUTERS/Thomas Peter Asian shares, dollar up on Fed's economic optimism (Business Insider)

Asian shares were firm on Thursday after the U.S. Federal Reserve said it saw the economy and jobs continuing to strengthen, helping lift the dollar as traders bet that higher U.S. interest rates were around the corner.

Japan's Nikkei <.N225> rose 0.8 percent while Australian shares <.AXJO> tacked on 0.3 percent and South Korean shares <.KS11> gained 0.2 percent.

Let China’s bubble burst (Market Watch)

The problems with China’s economic-growth pattern have become well known in recent years, with the Chinese stock market’s recent free-fall bringing them into sharper focus.

These Are the Foreign Goods That Greeks Had to Ditch in the Crisis (Bloomberg)

Greece has become the latest textbook example of Engel's law: as income falls, proportionate spending on basic food shoots up. That is what German statistician Ernst Engel found when he studied 153 Belgian working-class homes in the mid-19th century.

Chinese stocks haven’t had this many bad days since 2008 (Quartz)

The Shanghai Stock Exchange Composite index fell 8.5% in Monday trading, the worst daily drop since Feb. 27, 2007.

children moneyHow to teach your kids about money (Business Insider)

Last month I opened things up to my email subscribers by asking for any suggestions for future writing topics that I’ve yet to cover here. By far the most popular and repeated question came from parents and grandparents who would like to know how to instill good financial habits into their children and grandchildren.

It’s an interesting topic for me to ponder because it’s something I’m trying to figure out on my own, as well. 

Smoking is not cool. But cigarette stocks are hot. (CNN)

Cigarettes are bad for you. We all know that by now. But don't tell that to Wall Street.

Marlboro maker Altria (MO) reported solid sales and earnings growth on Wednesday. The stock slipped a bit after the report, but shares are still up more than 10% so far this year and over 30% over the past 12 months. That's much better than the broader market.

RBS, Shell Gains on Earnings Push U.K. Stocks Up for Third Day (Bloomberg)

A flurry of earnings reports and deals announcements sent U.K. stocks higher for a third day.

Royal Dutch Shell Plc gained 3.6 percent after saying it will cut jobs and reduce capital investment, while quarterly profit topped estimates. The company also agreed to sell a 33.24 percent stake in a Japanese refiner. BG Group Plc, which Shell is buying, advanced 3.3 percent. AstraZeneca Plc rose 2.3 percent after reporting core operating profit that beat analysts’ estimates.

A man walks past a logo of Toshiba Corp  at an electronics store in Tokyo July 21, 2015.   REUTERS/Thomas Peter Toshiba scandal puts focus on Japan's cut-price company audits (Business Insider)

Toshiba Corp's years-long practice of inflating its profits has raised questions among accounting experts about whether low fees paid by Japan-listed companies to their auditors mean they do not spend enough time scrutinizing company accounts.

Toshiba chief executive Hisao Tanaka and a string of other senior officials resigned last week after an independent inquiry found the company had padded its profits by $1.2 billion over several years, in one of Japan's biggest corporate scandals in years.

Gilts in Crosshairs as Shrinking Reserves Risk Investor Exodus (Bloomberg)

The U.K. government may be the latest victim of the slide in global foreign-exchange reserves.

$40 Oil May Force Russia Into an Emergency Rate Hike, Economists Say (Bloomberg)

If oil hits $40, Russia is in trouble.

Already faced with recession and sanctions, a further drop in crude might force the country's central bank into an emergency rate hike — after four cuts already this year —  according to 65 percent of economists surveyed by Bloomberg from July 24-29. Thirty-nine percent of analysts said the government might impose Greek-like capital controls and 22 percent predicted a takeover of at least some of the country's banks.

Japanese Output Beats Forecast in Bright Spot for Ailing Economy (Bloomberg)

Japan’s industrial production increased more than forecast in June, aiding an economy that struggled last quarter with weakness in retail sales and exports.

Output rose 0.8 percent from May, when it fell 2.1 percent, the trade ministry said on Thursday. While production was stronger than the median forecast for a 0.3 percent gain, economists continue to debate whether the Japanese economy expanded or contracted last quarter.


Hillary’s bizarre Keystone dodge: Once again, she plays into Sanders’ hands (Salon)

One attribute shared by Ronald Reagan and Barack Obama is the ability to communicate a message. While their messages differ politically, the speeches of both two-term presidents seem to hit the core of what voters were looking for during their respective eras. When a person is straightforward and forthright in their words, even a xenophobic and nativist New York billionaire can reach the hearts and minds of his constituency. After so long of being forced to hear vapid talking points and carefully crafted political rhetoric, Americans yearn for honesty and clarity in leadership.

U.S. Speaker of the House John Boehner listens as President Barack Obama hosts a bipartisan meeting of Congressional leaders in the Cabinet Room of the White House in Washington, January 13, 2015.     REUTERS/Larry DowningThere's a new debt-ceiling deadline on the horizon… (Business Insider)

Congress will likely need to raise the nation's borrowing limit — or debt ceiling — by sometime this fall, Treasury Secretary Jack Lew told congressional leaders on Wednesday.

The government's borrowing cap had been suspended through mid-March. Currently, the Treasury Department is deploying so-called "extraordinary measures" to keep the country paying its bills. Lew said those extraordinary measures would not be exhausted before late October, but added that the department couldn't predict with certainty how long the measures would last.

Jeb gets Trumped in his own state: New poll shows Bush losing Florida to The Donald (Salon)

Headlines exploded earlier this month after a poll found that Donald Trump had "vaulted into a virtual dead heat with Jeb Bush" nationally. Well, after Trump complained about being even tied with Bush, he's quickly moved into the lead nationally and now it looks as though megalomaniac is even beating the former governor of Florida in the Sunshine State.

A newly released poll shows that Donald Trump is the top choice for Florida Republicans, beating out both Bush and Florida Sen. Marco Rubio. Trump beats Bush by six points, garnering the support of 26 percent of respondents to Bush's 20 percent, while Rubio only grabs the support of less than 10% of Floridians for fourth place behind Scott Walker. The web-based poll of 1,902 likely Republican primary voters has a 2.2 percent margin of error.


Why We Should Welcome ‘Killer Robots’—Not Ban ThemWhy We Should Welcome ‘Killer Robots’—Not Ban Them (Gizmodo)

The open letter signed by more than 12,000 prominent people calling for a ban on artificially intelligent killer robots, connected to arguments for a UN ban on the same, is misguided and perhaps even reckless.

Wait, misguided? Reckless? Let me offer some context. I am a robotics researcher and have spent much of my career reading and writing about military robots, fuelling the very scare campaign that I now vehemently oppose.

Healing Injuries Could Be Better Thanks To This 3-D Printed Cast (Fast Company)

When Scott Summit tore a ligament in his arm he knew there was a better way to heal than spending six months trapped in a fiberglass cast from his biceps to his knuckles. The senior director of functional design at 3D Systems—a 3-D printing behemoth—and founder of Bespoke, a company that developed prosthetics and braces, Summit naturally turned to technology to find a better way.

This ultra-advanced luxury car feature is on affordable cars now (The Verge)

Dynamic cruise control is one of those opulent car options that sound a little ridiculous until you actually try it, and then you can't really imagine using a car without it. It isawesome. The concept is simple: instead of operating at a constant, set speed, your car continuously monitors for traffic ahead of you and adjusts your speed to maintain a minimum set distance, along with a maximum speed. For highway goers, it can mean traveling for hours at a time without ever touching a pedal. (As you might imagine, it's also an important precursor to autonomous driving.)

Health and Life Sciences

Insulin Resistance Linked to Memory Decline? (Phych Central)

A new study adds to the growing evidence that insulin resistance, a common occurrence among people who are obese, pre-diabetic, or have type II diabetes, may lead to memory loss and even Alzheimer’s disease.

Iowa State University researchers believe the word should go out that obesity not only increases the risk of cardiovascular disease and some cancers, but also influences memory loss.

Prostate cancer: Five types 'found' (BBC)

Scientists have identified five types of prostate cancer, each with a distinct genetic signature.

And by comparing 250 samples removed in surgery with the patients' subsequent progress, they have identified some types that are more likely to recur.

Until now, there has been no reliable way to know which patients have the more aggressive cancers requiring the most urgent and intensive therapy.

Life on the Home Planet

Disaster-Prone Philippines Braces for Potential Monster Quake (Bloomberg)

Esmeralda Ronquillo sleeps lightly at night, fearing she won’t be quick enough to protect her daughter when an earthquake that experts say could kill tens of thousands hits the Philippine capital.

“I’m terrified just thinking about it,” Ronquillo, 47, said inside her home in a two-story residential building in Manila’s Santa Cruz district that has fallen into disrepair. “Nobody knows when the quake will hit, so I just pray that God will keep us safe.”

Clgpq1eucaad0eoActivists are dangling off a bridge in Oregon to protest Shell oil-drilling (Mashable)

How do you block a ship? Dangle yourself in front of it

That's what members of Greenpeace, a group of activists in Portland, Oregon are doing to protest Shell Oil's icebreaker vessel named Fennica, that's in town for repairs before Shell Oil is able to use the ship for oil-drilling in the Arctic later this summer.

Another Northern White Rhino Dies–and Then There Were 4 (Scientific American)

For years now, “Extinction Countdown” readers have followed the slow slide toward extinction of the northern white rhino (Ceratotherium simum cottoni). In 2014 we lost two members of the species, bringing the world population down to five. Now word comes that one more has died, leaving only four.

Police State “Ministry of Truth” Hits Spain; Man Fined for Calling Police “Slackers” on Facebook

Courtesy of Mish.

On July 1, the Spanish Government went to "Full Police State", with enactment of law forbidding dissent and unauthorized photos of law enforcement.

Spain's officially a police state now. On July 1st, its much-protested "gag" law went into effect, instantly making criminals of those protesting the new law. Among the many new repressive stipulations is a €30,000-€600,000 fine for "unauthorized protests," which can be combined for maximum effect with a €600-€300,000 fine for "disrupting public events."

This horrible set of statutes has arisen from Spain's position as a flashpoint for anti-austerity protests, the European precursor to the Occupy Wall Street movement. Fines, fines and more fines await anyone who refuses to treat authority with the respect it's forcibly requiring citizens to show it.

The law also extends its anti-protest punishments to social media, where users can face similar fines for doing nothing more than encouraging or organizing a protest. Failing to present ID when commanded is another fine. And then there's this:

Showing a "lack of respect" to those in uniform or failing to assist security forces in the prevention of public disturbances could result in an individual fine of between €600 and €30,000.

A clause in the wide-ranging legislation that critics have dubbed the "gag law" provides for fines of up to 30,000 euros ($33,000) for "unauthorized use" of images of working police that could identify them, endanger their security or hinder them from doing their jobs.

Man Fined for Calling Police "Slackers"

We now have our fist test case of this inane law.

The Independent reports Spanish man fined up to €600 under new gag laws for calling police 'slackers' in Facebook post.

A young man in Spain has been fined for calling the police lazy in a Facebook post – becoming the first citizen to fall foul of a series of controversial new “gag” laws.

The 27-year-old man, identified only as Eduardo D in national media reports, described the local police force as a “class of slackers” in a series of online posts which he described as humorous.

According to the Spanish daily El Pais, Eduardo made three comments on Facebook criticising the money spent on police facilities in his town of Güímar, Tenerife.

He also accused local authorities of misappropriating a public building, and in a third post suggested local police were so lazy they might as well have “a hammock and a swimming pool” at each station.

Continue Here

[Picture from the video on TechDirt.]


Peter Van Buren, Washington and Tehran Come in From the Cold


Tomgram: Peter Van Buren, Washington and Tehran Come in From the Cold

Intro by Tom at TomDispatch

Every election needs an organizing catchphrase and that goes doubly for the Republican presidential race, with 16 candidates having entered the fray and more on the way. I think I have the perfect one for the moment: “You’ve been Trumped!” After all, one striking thing about the Republicans, now that they’ve morphed into the party of war, is that any new candidate is obligated to out-militarize his opponents, no matter what they've claimed they’d do. This has given the old World War I trench-warfare phrase going “over the top” (that is, over the parapet to attack) new meaning.

Take for example Donald Trump. On entering the race, he promptly Trumped his competitors by claiming that he was nothing short of a military genius and swearing that, for our present war in the Middle East, he would instantly find a “General Patton” or a “General MacArthur,” that is, a leader capable of finally putting our military in the win column. But for him generals were a secondary concern because Commander-in-Chief Trump has his own unstoppable plan for destroying the Islamic State. Here’s how he put it: “Take back the oil. Once you go over and take back that oil, they have nothing. You bomb the hell out of them, and then you encircle it, and then you go in. And you let Mobil go in, and you let our great oil companies go in. Once you take that oil, they have nothing left." Encircle it, yes!

And the ante’s only going up. By now, saying that, on your first day in the Oval Office, you’ll tear up the Iran nuclear accord (should it pass Congressional scrutiny in the first place) is chump (or possibly Trump) change — and so is the idea that American ground troops must be sent into Iraq War 3.0. Candidate Rick Santorum made headlines by calling for 10,000 of them to be dispatched to Iraq and was promptly Trumped by Senator Lindsey Graham, who saw his 10,000 in Iraq and raised him 10,000 more in Syria, and they both were Trumped by Senator Marco Rubio who threatened to deploy “devastating” American air power while riffing off a bloodcurdling line from the action movie Taken: “We will look for you, we will find you, and we will kill you.” (Duck, ISIS!)

Former New York Governor George Pataki (“[S]end in troops, destroy their training centers, destroy their recruitment centers, destroy the area where they are looking to plan to attack us here, and then get out.") essentially Trumped himself by merely calling for American ground troops to head for ISIS's territory, as did Ohio Governor John Kasich speaking with New Hampshire voters a day after entering the race as number 16. (“Let’s just do it!”) But give credit where its due, Wisconsin Governor Scott Walker (number 15), who once compared fighting ISIS to fighting labor unions in his state, Trumped them all by insisting that he would not only tear up the Iranian nuclear accord on day one of his presidency, but that, between his swearing in and the inaugural ball that night, he might well launch military action, assumedly against Iran. To the rest of the Republican field: You’ve been Trumped!

And you know how it is once things get rolling, so sit back and wait for the next Trump card to be played in the theater of the absurd that is now “mainstream” Republican thinking about American-style war. It’s over the top for us all, it seems. In that context consider State Department whistleblower and TomDispatch regular Peter Van Buren’s take on what, amid all the sound and fury, the bottom line really is on the nuclear accord with Iran. Tom

The Balance of Power in the Middle East Just Changed
U.S.-Iranian Relations Emerge from a 30-Year Cold War

By Peter Van Buren

Don't sweat the details of the July nuclear accord between the United States and Iran. What matters is that the calculus of power in the Middle East just changed in significant ways.

Washington and Tehran announced their nuclear agreement on July 14th and yes, some of the details are still classified. Of course the Obama administration negotiated alongside China, Russia, Great Britain, France, and Germany, which means Iran and five other governments must approve the detailed 159-page “Joint Comprehensive Plan of Action.” The U.N., which also had to sign off on the deal, has already agreed to measures to end its sanctions against Iran.

If we’re not all yet insta-experts on centrifuges and enrichment ratios, the media will ensure that in the next two months — during which Congress will debate and weigh approving the agreement — we’ll become so. Verification strategies will be debated. The Israelis will claim that the apocalypse is nigh. And everyone who is anyone will swear to the skies that the devil is in the details. On Sunday talk shows, war hawks will fuss endlessly about the nightmare to come, as well as the weak-kneedness of the president and his “delusional” secretary of state, John Kerry. (No one of note, however, will ask why the president’s past decisions to launch or continue wars in the Middle East were not greeted with at least the same sort of skepticism as his present efforts to forestall one.)

There are two crucial points to take away from all the angry chatter to come: first, none of this matters and second, the devil is not in the details, though he may indeed appear on those Sunday talk shows.

Here’s what actually matters most: at a crucial moment and without a shot being fired, the United States and Iran have come to a turning point away from an era of outright hostility. The nuclear accord binds the two nations to years of engagement and leaves the door open to a far fuller relationship. Understanding how significant that is requires a look backward.

A Very Quick History of U.S.-Iranian Relations

The short version: relations have been terrible for almost four decades. A slightly longer version would, however, begin in 1953 when the CIA helped orchestrate a coup to oust Iran's democratically elected prime minister, Mohammad Mosaddegh. A secular leader — just the sort of guy U.S. officials have dreamed about ever since the ayatollahs took power in 1979 — Mosaddegh sought to nationalize Iran's oil industry. That, at the time, was a total no-no for Washington and London. Hence, he had to go.

In his place, Washington installed a puppet leader worthy of the sleaziest of banana republics, Shah Mohammad Reza Pahlavi. The U.S. assisted him in maintaining a particularly grim secret police force, the Savak, which he aimed directly at his political opponents, democratic and otherwise, including the ones who espoused a brand of Islamic fundamentalism unfamiliar to the West at the time. Washington lapped up the Shah's oil and, in return, sold him the modern weapons he fetishized. Through the 1970s, the U.S. also supplied nuclear fuel and reactor technology to Iran to build on President Dwight Eisenhower’s “Atoms for Peace” initiative, which had kicked off Iran's nuclear program in 1957.

In 1979, following months of demonstrations and seeing his fate in the streets of Tehran, the Shah fled. Religious leader Ayatollah Khomeini returned from exile to take control of the nation in what became known as the Islamic Revolution. Iranian “students” channeled decades of anti-American rage over the Shah and his secret police into a takeover of the American Embassy in Tehran. In an event that few Americans of a certain age are likely to forget, 52 American staffers were held hostage there for some 15 months.

In retaliation, the U.S. would, among other things, assist Iraqi autocrat Saddam Hussein (remember him?) in his war with Iran in the 1980s, and in 1988, an American guided missile cruiser in the Persian Gulf would shoot down a civilian Iran Air flight, killing all 290 people on board. (Washington claimed it was an accident.) In 2003, when Iran reached out to Washington, following American military successes in Afghanistan, President George W. Bush declared that country part of the “Axis of Evil.”

Iran later funded, trained, and helped lead a Shiite insurgency against the United States in Iraq. In tit-for-tat fashion, U.S. forces raided an Iranian diplomatic office there and arrested several staffers. As Washington slowly withdrew its military from that country, Iran increased its support for pro-Tehran leaders in Baghdad. When Iran's nuclear program grew, the U.S. attacked its computers with malware, launching what was in effect the first cyberwar in history. At the same time, Washington imposed economic sanctions on the country and its crucial energy production sector.

In short, for the last 36 years, the U.S.-Iranian relationship has been hostile, antagonistic, unproductive, and often just plain mean. Neither country seems to have benefited, even as both remained committed to the fight.

Iran Ascendant

Despite the best efforts of the United States, Iran is now the co-dominant power in the Middle East. And rising. (Washington remains the other half of that “co.”)

Another quick plunge into largely forgotten history: the U.S. stumbled into the post-9/11 era with two invasions that neatly eliminated Iran’s key enemies on its eastern and western borders — Saddam Hussein in Iraq and the Taliban in Afghanistan. (The former is, of course, gone for good; the latter is doing better these days, though unlikely to threaten Iran for some time.) As those wars bled on without the promised victories, America's military weariness sapped the desire in the Bush administration for military strikes against Iran. Jump almost a decade ahead and Washington now quietly supports at least some of that country’s military efforts in Iraq against the insurgent Islamic State. The Obama administration is seemingly at least half-resigned to looking the other way while Tehran ensures that it will have a puppet regime in Baghdad. In its serially failing strategies in Yemen, Lebanon, and Syria, Washington has all but begged the Iranians to assume a leading role in those places. They have.

And that only scratches the surface of the new Iranian ascendancy in the region. Despite the damage done by U.S.-led economic sanctions, Iran's real strength lies at home. It is probably the most stable Muslim nation in the Middle East. It has existed more or less within its current borders for thousands of years. It is almost completely ethnically, religiously, culturally, and linguistically homogeneous, with its minorities comparatively under control. While still governed in large part by its clerics, the country has nonetheless experienced a series of increasingly democratic electoral transitions since the 1979 revolution. Most significantly, unlike nearly every other nation in the Middle East, Iran's leaders do not rule in fear of an Islamic revolution. They already had one.

Why Iran Won't Have Nuclear Weapons

Now, about those nukes. It would take a blind man in the dark not to notice one obvious fact about the Greater Middle East: regimes the U.S. opposes tend to find themselves blasted into chaos once they lose their nuclear programs. The Israelis destroyed Saddam's program, as they did Syria's, from the air. Muammar Qaddafi's Libya went down the drain thanks to American/NATO-inspired regime change after he voluntarily gave up his nuclear ambitions. At the same time, no one in Tehran could miss how North Korea's membership in the regime-change club wasn't renewed once that country went nuclear. Consider those pretty good reasons for Iran to develop a robust nuclear weapons program — and not give it up entirely.

While, since 2002, Washington hasn’t taken a day off in its saber-rattling toward Iran, it isn’t the only country the clerics fear. They are quite convinced that Israel, with its unacknowledged but all too real nuclear arsenal, is capable and might someday be willing to deliver a strike via missile, aircraft, or submarine.

Now, here’s the added irony: American sabers and Israeli nukes also explain why Iran will always remain a nuclear threshold state — one that holds most or all of the technology and materials needed to make such a weapon, but chooses not to take the final steps. Just exactly how close a country is at any given moment to having a working nuclear weapon is called “breakout time.” If Iran were to get too close, with too short a breakout time, or actually went nuclear, a devastating attack by Israel and/or the United States would be a near inevitability. Iran is not a third world society. Its urban areas and infrastructure are exactly the kinds of things bombing campaigns are designed to blow away. So call Iran's nuclear program a game of chicken, but one in which all the players involved always knew who would blink first.

The U.S.-Iran Nuclear Accord

So if Iran was never going to be a true nuclear power and if the world has lived with Iran as a threshold state for some time now, does the July accord matter?

There are two answers to that question: it doesn't and it does.

It doesn’t really matter because the deal changes so little on the ground. If the provisions of the accord are implemented as best we currently understand them, with no cheating, then Iran will slowly move from its current two- to three-month breakout time to a year or more. Iran doesn't have nukes now, it would not have nukes if there were no accord, and it won’t have nukes with the accord. In other words, the Vienna agreement successfully eliminated weapons of mass destruction that never existed.

It does really matter because, for the first time in decades, the two major powers in the Middle East have opened the door to relations. Without the political cover of the accord, the White House could never envisage taking a second step forward.

It’s a breakthrough because through it the U.S. and Iran acknowledge shared interests for the first time, even as they recognize their ongoing conflicts in Syria, Yemen, and elsewhere. That's how adversaries work together: you don't have to make deals like the July accord with your friends. Indeed, President Obama's description of how the deal will be implemented — based on verification, not trust — represents a precise choice of words. The reference is to President Ronald Reagan, who used the phrase “trust but verify” in 1987 when signing the Intermediate-Range Nuclear Forces Treaty with the Russians.

The agreement was reached the old-school way, by sitting down at a table over many months and negotiating. Diplomats consulted experts. Men and women in suits, not in uniform, did most of the talking. The process, perhaps unfamiliar to a post-9/11 generation raised on the machismo of “you're either with us or against us,” is called compromise. It’s an essential part of a skill that is increasingly unfamiliar to Americans: diplomacy. The goal is not to defeat an enemy, find quick fixes, solve every bilateral issue, or even gain the release of the four Americans held in Iran. The goal is to achieve a mutually agreeable resolution to a specific problem. Such deft statecraft demonstrates the sort of foreign policy dexterity American voters have seldom seen exercised since Barack Obama was awarded the 2009 Nobel Peace Prize (Cuba being the sole exception).

It's All About the Money

While diplomacy brought the United States and Iran to this point, cash is what will expand and sustain the relationship.

Iran, with the fourth-largest proven crude oil reserves and the second-largest natural gas reserves on the planet, is ready to start selling on world markets as soon as sanctions lift. Its young people reportedly yearn for greater engagement with the West. The lifting of sanctions will allow Iranian businesses access to global capital and outside businesses access to starved Iranian commercial markets.

Since November 2014, the Chinese, for example, have already doubled their investment in Iran. European companies, including Shell and Peugeot, are now holding talks with Iranian officials. Apple is contacting Iranian distributors. Germany sent a trade delegation to Tehran. Ads for European cars and luxury goods are starting to reappear in the Iranian capital. Hundreds of billions of dollars worth of foreign technology and expertise will need to be acquired if the country is to update its frayed oil and natural gas infrastructure. Many of its airliners are decades old and need replacement. Airlines in Dubai are fast adding new Iran routes to meet growing demand. The money will flow. After that, it will be very hard for the war hawks in Washington, Tel Aviv, or Riyadh to put the toothpaste back in the tube, which is why you hear such screaming and grinding of teeth now.

The Real Fears of the Israelis and the Saudis

Neither Israel nor the Saudis ever really expected to trade missile volleys with a nuclear-armed Iran, nor do their other primary objections to the accord hold much water. Critics have said the deal will only last 10 years. (The key provisions scale in over 10 years, then taper off.) Leaving aside that a decade is a lifetime in politics, this line of thinking also presumes that, as the calendar rolls over to 10 years and a day, Iran will bolt from the deal and go rogue. It’s a curious argument to make.

Similarly, any talk of the accord touching off a nuclear arms race in the Middle East is long out of date. Israel has long had the bomb, with no arms race triggered. Latent fears that Iran will create “the Islamic Bomb” ignore the fact that Pakistan, with own hands dirty from abetting terror and plenty of Islamic extremists on hand, has been a nuclear power since at least 1998.

No, what fundamentally worries the Israelis and the Saudis is that Iran will rejoin the community of nations as a diplomatic and trading partner of the United States, Asia, and Europe. Embarking on a diplomatic offensive in the wake of its nuclear deal, Iranian officials assured fellow Muslim countries in the region that they hoped the accord would pave the way for greater cooperation. American policy in the Persian Gulf, once reliably focused only on its own security and energy needs, may (finally) start to line up with an increasingly multifaceted Eurasian reality. A powerful Iran is indeed a threat to the status quo — hence the upset in Tel Aviv and Riyadh — just not a military one. Real power in the twenty-first century, short of total war, rests with money.

The July accord acknowledges the real-world power map of the Middle East. It does not make Iran and the United States friends. It does, however, open the door for the two biggest regional players to talk to each other and develop the kinds of financial and trade ties that will make conflict more impractical. After more than three decades of U.S.-Iranian hostility in the world's most volatile region, that is no small accomplishment.

Peter Van Buren blew the whistle on State Department waste and mismanagement during the Iraqi reconstruction in We Meant Well: How I Helped Lose the Battle for the Hearts and Minds of the Iraqi People (American Empire Project)

As TomDispatch regular, Peter writes about current events at We Meant Well. His latest book is Ghosts of Tom Joad: A Story of the #99Percent. His next work will be a novel, Hooper's War.

Follow TomDispatch on Twitter and join us on Facebook. Check out the newest Dispatch Book, Nick Turse’s Tomorrow’s Battlefield: U.S. Proxy Wars and Secret Ops in Africa, and Tom Engelhardt's latest book, Shadow Government: Surveillance, Secret Wars, and a Global Security State in a Single-Superpower World.

Copyright 2015 Peter Van Buren

[Picture credit: Candidates: Flickr, Iran Deal Value Walk]

Mark Ames Interviews Yves Smith about Greece

This article will only be available to non-Pando subscribers for 48 hours.

Mark Ames of Pando Interviews Your Humble Blogger on Greece

I hope you’ll enjoy this interview with Mark Ames: Naked Capitalism: “We are in the business of making trouble.”

It’s unlocked only for the next 48 hours, so please check it out soon!

Also, there’s one small correction that didn’t get into the version that Mark put up. Hopefully it will be revised soon, but in case you see the article before Mark makes the update, I make a statement about “negative interest rates” that should read “negative real interest rates”.



This year’s political drama in Greece stands out as perhaps the least-understood, worst-reported major story of 2015.

Greece is mired in debt, and locked into the Euro monetary system, which means Greece’s political destiny is in the hands of the European Central Bank, the IMF and the powerful nations that dominate the Eurozone, Germany and France —and not in the hands of Greece’s “demos,” its voting public.

The implications of Greece’s political-financial struggles are huge—we could be seeing the beginning of the end of not only the Euro monetary union, but also the half-baked EU political union as well. We could also see a more globalized unraveling, but thanks to the financial world’s intentionally shady machinations, we won’t know until we know. Greece is also a major ideological battleground between a re-emerging and more radicalized western Left—Syriza—and entrenched neoliberalism, which has dominated the political ecosystem for the past few decades. The outcome could affect the fate of a lot of fledgling neo-leftist politics across the globe, and in the West in particular.

Finance stories are always complicated and by design murky—add in the layers of EU politics, and you have a story that can only be told by someone with deep finance knowledge, a grasp of the larger political and cultural inputs, and the rare ability to translate it all into vivid, sharp-tongued, and aggressively readable prose.

Which is why you should be following Yves Smith great finance blog, Yves Smith is the nom de plume of Susan Webber, a 35-year veteran of the financial world at firms ranging from McKinsey and Goldman Sachs to Sumitomo Bank. Her blog has been highly regarded from its inception in late 2006, earning Top 25 ranking in Time magazine and CNBC and plaudits from Wired; regular appearances on the Bill Moyers Show and Harry Shearer’s Le Show, and praise from the likes of economist Nouriel Roubini. Yves Smith is the author of ECONned, a merciless takedown of the economics profession and its relevance to finance, and is a Harvard grad who spent her formative years in quite a few American small towns as a “paper mill brat.”




“Selfie” Fashion Trends: Cheap Dresses and “Rentabag”; Mish Handbag Tips

Courtesy of Mish.

Impact of the "Selfie"

Are you into Facebook, Instagrams, and "Selfies" (taking lots of pictures of yourself and sharing them instantly)?

I'm not but, but in my travels I see lots of it. The popularity of sending "selfies" has even influenced retail sales and women's fashion. After all, one cannot be seen in the same outfit too often!

Here's an amusing video that discusses the impact of the "selfie".

In the above video, FT’s Andrea Felsted visits online fashion retailer Asos to see how it is adapting its business model in the era of the selfie.

Link if video does not play: How the Selfie Is Shaking Up Retail.

Cheap Dresses and Rentabag

Allegedly it's a faux pas to be seen too often with the same bag. So enter the "rentabag". I had to look this up. There's a huge selection of choices.

  • Bagborroworsteal: Rent Luxury Bags Online – Huge Selection of Designer Bags‎ – Get A New Bag Every Month
  • Supursestyle: Rent designer handbags at affordable prices
  • Bagdujour: Handbags for rent – Wear a Beautiful Designer Bag Today Authentic, Affordable & Convenient
  • Renttherunaway: Fashion accessories, jewelry, handbags, and wraps for women
  • Armgen: The Netflix of handbags. We rent trendy designer handbags at a fraction of the cost!
  • Rentmeahandbag: Rene Caovilla Shoes Sandals
  • Lovemeandleaveme: Buy designer bags outright, hire bags or use payment plan options
  • Bagtropolis: Buy, layaway and rent borrow luxury pre-owned authentic designer handbags, bags, purses, pocketbooks at affordable prices, including Balenciaga, Celine
  • Luxurylana: Rent from your favorite designer handbag online
  • Monluxe: MonLuxe the european bag and jewelry rental company. Delivery in 24 hours in France, Benelux, Germany Italy, Spain, Portugal


There's even a site promoting Make Extra Money Renting Handbags and Purses.

Really Expensive Bags

$100,000 for a bag? That is the full price though, not a rental. Phew!

For comparison purposes, who wouldn't want this "beautiful" Valentino Leopard Calf Hair Rockstud Trapeze Bag, bargain-basement priced at $3,995?


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The World Gets Serious About Climate Change

Courtesy of 

Jeremy Grantham’s latest note for GMO tackles some of his pet issues – from commodity demand to climate change – and the conclusions he reaches are both dour and slightly hopeful at the same time. For the uninitiated, Grantham is the real deal on these topics, having gotten himself arrested at a Keystone XL pipeline protest a couple of years back.

The bad news is that we’re breaking records for climate-related abnormalities around the world. The good news, he notes, is that there has been a real evolution in terms of the way world leaders are looking at the issue…

Both the actual climate and the associated politics seem to be changing more rapidly these days, with the seriousness of the situation becoming better appreciated. Visible changes in the climate have also been accelerating, with many more records than normal of droughts, floods, and, most particularly, heat. Last year was the hottest year ever recorded, and this year, helped by an El Niño, has gotten off to a dreadful start. January was the second hottest January ever. February and March were outright records. April was in third place, but both May and June were back in first place. This consistency with volatile climate is unusual and ominous. If kept up, 2015 will be the hottest by a lot. Angela Merkel, a chemist by University training, arm-twisted the G7 countries, especially Japan and the recently rogue Canada, into a statement committing their countries to decarbonizing their economies completely by 2100 and making some increased effort by 2050, a respectable improvement but still very insufficient for the long term. It was probably the first time for several decades, by the way, that it was reasonably clear that someone other than a U.S. President was the natural leader: at least on some issues.

Pope Francis weighed in with a brave encyclical, which was bound to cause trouble with his flock, making the clear case that it is a Catholic’s duty to help protect our home planet and that manmade climate change from excessive burning of CO2-producing fossil fuels is an urgent problem. He was advised by the Pontifical Academy of Sciences, which includes several Catholic, as well as non-Catholic, Nobel Prize winners and several of the world’s leading scientific authorities on climate change. How did he arrange this? If only our politicians had such advisors and availed themselves.


Ten Topics to Ruin Your Summer (GMO)

[Pictures via Pixabay.]

Currency Devaluation: The Crushing Vice Of Price

Courtesy of Charles Hugh-Smith of Of Two Minds

When stagnation grabs exporting nations by the throat, the universal solution offered is devalue your currency to boost exports. As a currency loses purchasing power relative to the currencies of trading partners, exported goods and services become cheaper to those buying the products with competing currencies.

For example, a few years ago, before Japanese authorities moved to devalue the yen, the U.S. dollar bought 78 yen. Now it buys 123 yen–an astonishing 57% increase.

Devaluation is a bonanza for exporters' bottom lines. Back in late 2012, when a Japanese corporation sold a product in the U.S. for $1, the company received 78 yen when the sale was reported in yen.

Now the same sale of $1 reaps 123 yen. Same product, same price in dollars, but a 57% increase in revenues when stated in yen.

No wonder depreciation is widely viewed as the magic panacea for stagnant revenues and profits. There's just one tiny little problem with devaluation, which we'll cover in a moment.

One exporter's depreciation becomes an immediate problem for other exporters: when Japan devalued its currency, the yen, its products became cheaper to those buying Japanese goods with U.S. dollars, Chinese yuan, euros, etc.

That negatively impacts other exporters selling into the same markets–for example, South Korea.

To remain competitive, South Korea would have to devalue its currency, the won. This is known as competitive devaluation, a.k.a. currency war. As a result of currency wars, the advantages of devaluation are often temporary.

But as correspondent Mark G. recently observed, devaluation has a negative consequence few mention: the cost of imports skyrockets. When imports are essential, such as energy and food, the benefits of devaluation (boosting exports) may well be considerably less than the pain caused by rising import costs.

Japan is a case in point. The massive devaluation of the yen was designed to boost Japan's exports and rocket-launch corporate profits, which was then supposed to drive a virtuous cycle of higher wages and increased employment.

But the benefits of the massive devaluation have been underwhelming. Some exporters have seen profits soar, helping to push Japan's stock market to post-1990 highs, but the effect is not universally positive.

Consider the plight of companies that must buy soybeans from the U.S. to make their food products. The cost of their raw materials just increased 50%, as a $1 of soybeans now costs 123 yen rather than 78 yen.

Given that major exporters of goods and services like China and Japan are importers of oil and food, devaluation is a ticking time bomb in terms of the cost of liquid fuels and food. The looming global recession and overinvestment in commodity production–driven by the zero-interest rate policies of the central banks–has created a temporary glut in oil and other commodities.

But as marginal producers are driven into bankruptcy or cut production, supply and demand will realign at some point. Somewhere not that far down the line, exporting nations that devalued their currency for the crack-cocaine hit of soaring revenues and profits in their home currencies will find the cost of essential imports will skyrocket while the benefits of their devaluation fade in the currency wars they instigated.

Authorities pushing currency devaluation as a cure for their stagnating economies might want to study Frederic Bastiat's insight into the eventual cost and consequences: "For it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.”

Fed Sheds No Light, Plays Charades with Media; Tiptoe Balancing Act

Courtesy of Mish.

Fed Says Little, Sheds No Light

If the Fed had a clue as to what it will do in September, it likely would have said so. Instead, it reiterated the same hash we have been hearing for years.

Here is the complete text of today's FOMC Press Release.

Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey?based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.


I suspect the Fed is concerned about retail sales, sentiment, housing, China, Greece, oil, Canada, the US dollar, and a host of other things.

At this stage in the charade game, the Fed cannot possibly come out and say any of that. Nor can the Fed hint at a September hike, even though it wants to, because retail sales may continue to slump and auto sales could easily collapse.

The Fed expects "further improvements" in the labor market, but what if all these inane minimum wages hikes kill jobs….

Continue Here

[Picture via Pixabay.]


Meryl Witmer, Michael Mauboussin, Bruce Greenwald: What Makes Stocks Rise

By Jacob Wolinsky at ValueWalk.

6 Great Investors Explain What Makes Stocks Rise via Barron's

Michael Mauboussin, Managing director, Global Financial Strategies, Credit Suisse Group AG (ADR) (NYSE:CS): Capital allocation is especially relevant today, said Mauboussin, because “return on invested capital is high, growth is modest, and corporate balance sheets in the U.S. have substantial cash.” Yet, very few CEOs are trained in what is senior management’s most fundamental responsibility.


The proclivity to return cash to shareholders hasn’t changed over the decades, Mauboussin said, although the means have shifted to favor buybacks over dividends. But price and value ought to be the determinants of any capital-allocation decision. A dividend treats all shareholders alike, he observed, whereas management that buys back overvalued stock benefits only the sellers.

Bruce Greenwald, Professor at Columbia Business School and academic director of Columbia’s Robert Heilbrunn Center for Graham & Dodd Investing: Greenwald noted that human-resources management too often is given short shrift by companies, and ought to be included in the capital-allocation mix. In particular, he singled out succession planning as “something done badly,” even by good managers. “Without good succession planning, the only place your [price/earnings] multiple has to go is down,” he said.

Meryl Witmer, General partner, Eagle Capital Partners: Witmer, also a Roundtable member, called out those who are “pro-buyback at any price” on the logic that reduced share count boosts earnings per share. “I view that as returning capital to ex-shareholders,” she said. “Paying too much to buy back shares isn’t helpful to the overall enterprise or the remaining shareholders.”

Witmer often invests in new spinoffs, whose value hasn’t yet been recognized by the market. “A spinoff is a great opportunity to educate a new CEO about the importance of capital allocation,” she said.

Full article here 

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

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Top Factors Undermining Any Oil Price Recovery

Courtesy of Alexis Arthur of

Global oil prices have returned to a state of flux. This is hardly news to any who follow the oil markets closely and yet prices continue to drive international headlines.

While oil prices are notoriously difficult to predict, it has failed to deter the speculators. There are those warning that the latest dip is a precursor for $40 a barrel, a catastrophe for oil markets in some minds. On the other end of the spectrum are the optimists betting on a return to $100 by 2020. The World Bank has taken a typically middle-of-the-road approach, with forecasts of $57 a barrel in 2015.

That said, given Iran’s potential revitalization, Russia’s murky outlook, and U.S. shale supply limits uncertain, prices will be responsive to supply and demand trends; at least in the short to medium term.

The Iran deal could be a game changer for global oil supply. Lifting oil sanctions could pave the way for foreign capital to return to the country, contributing to a resurgent Iranian oil industry.

The Iranian oil ministry is optimistic about the nation’s recovery, predicting 400,000 barrels per day of exports almost immediately and an additional 600,000 barrels per day over six months.

Such a swift return is unlikely.

Iran was once the second largest oil producer in OPEC before Europe banned purchases of its crude in 2012. Since then, oil production has declined from around 3.6 million barrels per day in 2011to just 2.85 million barrels today.

The nation is still OPEC’s fourth largest producer but its output is far closer to Mexico’s than Saudi Arabia’s. Oil exports have declined by 1 million barrels per day during this time.

Iran has significant onshore and offshore reserves but has lacked the technical capacity and capital to develop them in line with its ambitions.

Executives from Shell have reportedly met with Iranian officials to express their interest in re-entering Iran. U.S. companies, meanwhile, risk losing out unless Congress decides to lift its own decades-old restrictions on dealing with Tehran.

In an era of low oil prices, Iran has among the cheapest oil to produce at an estimated cost of $5 – $10 per barrel. The nation’s strategic geographic position between European and Asian markets is also attractive. European and Asian companies – unfettered by the limits on their U.S. competitors – will no doubt take advantage of this high-risk but high-reward opportunity.

Still, a return to 2011 production levels will take time, as will its impact on global oil supply and prices.

That Russia’s economy is struggling is no secret. But in spite of severe economic and political crises, Russia’s crude output has continued to grow. Earlier this year, Lukoil Vice President Leonid Fedun warned that Russia’s output could fall by 800,000 barrels per day. A lack of investment may indeed eventually catch up with Russian production but in the meantime, like the U.S., oil supplies will continue to rise.

U.S. oil producers have also defied expectations as shale oil production continues apace. Efficiency gains and cost savings have allowed innovative producers to elude assumptions about the price floor for shale, for the moment at least.

Of course, all is not rosy for shale producers. Tens of thousands of oil workers have lost their jobs, companies have lost value, and some have gone bust. And the question remains how low they can really go and how long they can last – particularly those already incurring losses but holding out in the hope of a price recovery.

Still one would be foolish to dismiss shale producers’ resilience and without a doubt the U.S. will remain a key player in the global oil supply outlook.

In the longer term, another factor too often left out of the debate is the knock-on effect of slashed exploration budgets across the oil majors and national oil companies. Projects have been suspended, and companies are demonstrating increased caution in frontier – high risk – areas. This is a trend already apparent in the Western Hemisphere as Brazil, Mexico, Argentina, and others jockey for a smaller pool of exploration funds.

But this is just the supply-side of the equation. On the demand side, the International Energy Agency’s latest oil market report shows demand slowing in 2016. This would indicate a continued resistance to oil prices returning to anything resembling the pre-2014 fall.

Overall, the trends may be clear but the prices are not. For planning purposes alone, the only thing worse than low oil prices is market volatility and uncertainty will continue to rule in the short to medium term. In the meantime, oil price speculation – while entertaining – is a poor reflection of market reality.