The Automatic Earth

Russell Lee Young flood refugee in schoolhouse, Sikeston, Missouri January 1937

Can you see what’s wrong with this picture? Over the weekend, the US released $572 million in ‘military aid’ to Egypt, at the same time that an Egyptian court confirmed the death sentences for 183 Muslim Brotherhood members/supporters, a Canadian and an Australian journalist were sentenced to 7-10 years maximum security prison for a conspiracy “to tarnish Egypt’s reputation and aiding the Muslim Brotherhood”, while 15 others, including two British and one Dutch journalists, got 10 years each in absentia on similar charges.

And “we” are handing them tanks and Apache helicopters? At the very moment journalists from fellow NATO member countries are being thrown in jail on opaque and convoluted charges? Excuse me? Ever heard of timing everything?

John Kerry Voices Strong Support for Egyptian President Sisi

Secretary of State John Kerry voiced strong U.S. support for Egypt’s new president and signaled that Washington will continue the flow of military aid in an American welcome of the post-coup government. Mr. Kerry is the most senior Obama administration official to meet Abdel Fattah Al Sisi, the former commander of the Egyptian armed forces, since his inauguration as president earlier this month. The American diplomat stressed that Washington was eager to kick-start its strategic relationship with Cairo anew. Mr. Kerry said that the U.S. had recently released $575 million in assistance for Egypt’s military and that he was confident 10 Apache helicopters would be delivered to Egypt soon. [..]

Note that Morsy (or Morsi, Mursi), about whom I have no opinion to express, was an elected president. “We” don’t seem to like those much lately, do we? Here’s some factoids, starting with the Wall Street Journal:

Egypt Court Upholds 183 Death Sentences

An Egyptian court upheld the death sentences against Muslim Brotherhood leader Mohamed Badie and 182 of the group’s supporters Saturday. They were among hundreds of people found guilty in April of taking part in a deadly attack on a police station last year. The incident occurred after sit-ins supporting deposed President Mohamed Morsy at squares in Cairo were broken up. “Of 683 defendants in the case, 183 were sentenced to death, four were sentenced to life imprisonment and 496 defendants were acquitted,” at Minya Criminal Court, state-run Ahram Online reported.

183 death sentences shirks eerily close to organized genocide. And I know the US is the only “civilized” nation that still has enthusiasm for executing its citizens, but 183 is a crazy number that reeks of political games far more than criminal activity. But of course we could claim that’s an internal Egyptian affair to decide. A claim we can’t make when it comes to our own journalists. Or are Australia, Canada, Britain and Holland perhaps not “our own” enough? Would Obama have refused the mass arms shipments to today’s flavor in power in Egypt if American journalists were involved?

Egypt Court Jails Al Jazeera Journalists For 7-10 Years

An Egyptian judge sentenced three Al Jazeera journalists on Monday to seven years in jail after finding them guilty on charges including helping a “terrorist organisation” by publishing lies. The three include Australian Peter Greste, Al Jazeera’s Kenya-based correspondent, and Canadian-Egyptian national Mohamed Fahmy, bureau chief of Al Jazeera English. A third defendant, Egyptian producer Baher Mohamed, received an additional three-year jail sentence on a separate charge involving possession of weapons. Another 11 defendants were sentenced in absentia to 10 years.

Canada’s Globe and Mail published this on the trial recently, before the sentences were delivered:

Footage Of Sheep, Australian Rock Song Part Of Prosecution’s Case Against Egyptian-Canadian Journalist

“They hand-picked only one side of the story,” Mr. Fahmy’s brother, Adel Fahmy, said in a telephone interview from Cairo after the Thursday hearing ended. The clips that were displayed to the judge, he said, were selected to include interviews with people who support the Muslim Brotherhood and footage of protests against former army chief Abdel Fattah el-Sisi, the front-runner in next week’s presidential election. But prosecutors left out interviews that the Al Jazeera team had conducted with people who are supportive of the existing regime, said Adel Fahmy.

Much of the evidence presented was “ridiculous,” said Adel Fahmy. It included, without explanation, a grainy recording of the hit song Somebody That I Used to Know by the Australian musician Gotye, as well as audioclips of people telling jokes, videos of sheep, footage from other correspondents, and a documentary about football in Egypt that Mr. Greste told the judge demonstrates the journalists’ willingness to portray the country as being stable under the current military rulers. [..] U.S. President Barack Obama and other world leaders demanded the release of the journalists.

And it’s not as if the White House didn’t know. From the WSJ article quoted above:

On Saturday, an Egyptian court sentenced to death more than 180 members of the Brotherhood for allegedly attacking a police headquarters in southern Egypt and killing an officer and a civilian. The Egyptian government is also trying three journalists from the Qatar-based Al Jazeera television network and 17 co-defendants for allegedly conspiring with the Muslim Brotherhood to destabilize the Egyptian state. A verdict in the case is expected on Monday.

Mr. Kerry said that he raised these issues with Mr. Sisi during a nearly two-hour session in the presidential palace in Cairo. The U.S. diplomat stressed that Mr. Sisi needed more time to address U.S. and international concerns about these cases. “He gave me a very strong sense of his commitment to make certain that the process he has put in place, a re-evaluation of human-rights legislation, a re-evaluation of the judicial process, and other choices that are available are very much on his mind,” Mr. Kerry said.

That last paragraph is a great depiction of what “we” have become. The US doesn’t stand for anything anymore, including the protection of its own people (and I do count journalists from NATO countries as our own people). But it’s not just the US. This is from an AP piece after the journalists’ verdicts:

Western governments and rights groups have voiced concern over freedom of expression in Egypt since Mursi’s ouster and the crackdown has raised questions about Egypt’s democratic credentials three years after an uprising toppled Hosni Mubarak after 30 years in power and raised hopes of greater freedoms. “This is a deeply disappointing result. The Egyptian people have expressed over the past three years their wish for Egypt to be a democracy. Without freedom of the press there is no foundation for democracy” Britain’s ambassador to Egypt, James Watt, told Reuters after the verdict. Australia’s ambassador Ralph King also said his prime minister would make his disappointment clear after entreaties made by his government in recent days appeared to make little difference.

Instead of Britain and Australia expressing outrage over both the sentences AND Obama’s decision to hand $570 million worth of weapons to the regime that delivers the sentences, both say they’re “disappointed”. Woe be the Brits or Aussies who find themselves on the wrong side of a line their government arbitrarily draw at any given point in time that’s entirely at their discretion. You’re on your own, guys.

And I know that violent movements are once again rising in Iraq and elsewhere, and I’ve seen Obama and Kerry and Bush and Cheney and Blair’s inane claims that they never had nothing to do with none of the unrest. But even then, refusing to stand up for your own people crosses a line that frankly disgusts me.

How hard would it have been for Kerry to tell, what’s his face, Sisi, that he can can have his guns and helicopters, and support “our” cause, but only after he releases at least all westerners involved in that grotesque Al Jazeera court case? Not hard at all. So what’s going on? Does the White House maybe hate Al Jazeera as much as Egypt does? Or is this about all journalists in general who don’t toe the party line? And of course there’ll be voices who say that it’s all difficult, and diplomacy is hard etc., but it’s really not. All Obama needs to do is say give me my people back or I’ll take those $572 million worth of guns and point them at you.

We know that the truth vanished from Washington long ago. Now we find that the last scrap of morality did too.

Oh, and the world of finance today? Stocks are held up by behemoth buybacks in the US and Japan, while the latter also moves record amounts of pension funds into the stock market. The most striking line today came in a Bloomberg article on Yellen controlling bond markets, and said: “Bond Vigilantes Have All Been Quieted”. They won’t be quiet forever, promise, unless they keep being fed free money forever. Fed by the Fed.

• US Stock Buybacks Near 2007 Peaks (TPit)

Buybacks peaked precisely at the top of the market in Q3 2007 then plunged over 80%. By Q2 2009, when stocks were cheapest, buybacks had nearly stopped. It seems like a clockwork of bad timing: buybacks soar when stocks go into bubble mode and collapse when stocks get cheap. But the relationship works the other way around. The purpose of buybacks is to use shareholder equity to manipulate up the stock price. It works in three ways: one, through the sheer buying pressure – especially easy during these times of super-low trading volume; two, through this form of financial engineering that boosts earnings per share by lowering the share count, though it does nothing for actual earnings; and three, through the hype surrounding the buyback announcements and even the whispers of them.

And it works even when, as for example in IBM’s case, revenues and actual earnings are crummy for two years in a row, and when the stock should be roasting in purgatory. At every earnings announcement, the stock plunges, but then over the next three months, mirabile dictu, the share price rises again, fired up by buybacks. The Wall Street hype machine uses them as bait. Investors swallow them hook, line, and sinker. But that’s all buybacks do. What they don’t do is generate future revenues and earnings, unlike R&D or capex or any of the other productive activities companies undertake. In this way, the moolah blown on buybacks simply disappears as a driving force from the economy – an issue that has been dogging the US for two decades, as the range-bound chart above shows.

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• Record Japan Buybacks Salvaging Stocks (Bloomberg)

Japanese businesses left behind this year as global equities rallied to a record found a winning strategy in buying back shares the rest of the world preferred to avoid. Companies in the Topix index are acquiring their own stock at the fastest pace ever, led by NTT Docomo and Toyota., with $25 billion of announced purchases so far this year, data compiled by Bloomberg show. The buybacks are limiting losses in the world’s worst-performing developed equity market: Companies using the strategy have gained even as the Topix slid. The combination of record cash, cheap shares and a government-led drive to buoy return on equity is making buybacks irresistible to Japanese executives at a time when the MSCI All-Country World Index is trading at unprecedented highs.

Mitsubishi Corp. rose 6.2% this year through last week, compared with the Topix’s 2.6% drop. Japan’s biggest trading company said on May 8 it would buy back as much as 60 billion yen ($589 million) of shares, the most in seven years. “It’s a pretty big sea change,” said Kieran Calder, head of equities for Asia at Coutts & Co., which manages about 28.5 billion pounds ($48.6 billion). “Corporate mindsets are definitely changing,” he said. “It makes Japan more of a normal market.” The Topix dropped as much as 13% this year amid growing doubt Prime Minister Shinzo Abe will make good on promises for reforms from loosening labor laws to reducing government support for farmers. The index is down this year after a world-beating 51% jump in 2013.

Foreign investors, which account for about 60% of market turnover, reduced holdings of Japanese shares in all but one month this year just as buybacks surged. Companies that announced purchases worth more than $100 million this year climbed an average 4.1% in 2014 through June 20. “Share buybacks have the effect of supporting the market when it’s weak,” Daiwa Securities Group Inc. quantitative analyst Masahiro Suzuki wrote in a report on June 10. “Return to shareholders is a big theme.”

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Bond. James Bond.

• Sovereign Debt The ‘Ultimate Bubble’ (CNBC)

A bubble currently brewing in sovereign debt will likely burst in the next couple of years, U.S. billionaire Wilbur Ross warned on Monday. “I’ve felt for some time that the ultimate bubble, when we look back a few years from now, is going to be sovereign debt, both U.S. and other, because it’s way below any sort of reversion to the mean of interest rates,” the distressed debt investor told CNBC. “If you look at where the U.S. 10-year had averaged over the 10 preceding years, it’s around 4 percent. If it reverts back to that level at some point there will be terrible losses in the long-term Treasury market and those will probably be accentuated in other areas of fixed income.”

Ross argued that slowing issuance of assets like mortgage-backed securities and long-term Treasurys post-credit crisis, had helped to insulate the market from the full impact of the Federal Reserve’s gradual slowdown of quantitative easing – a process known as tapering. Investors have to “build in refinancing risk” when buying assets at the moment, he said The amount of cheap money in the market, as a result of quantitative easing by both the Fed and its European counterpart the European Central Bank (ECB), has been credited with the resurgence in investment in assets like peripheral euro zone bonds.

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“All on red” doesn’t even begin to cover this wager.

• Pension Money Already Flowing In To Prop Up Japan’s Stocks (Zero Hedge)

With almost metronomic regularity, Japan will gush forth a headline proclaiming the ever-closer time when all the nation’s retirees savings will be greatly rotated to the stock market and away from the nation’s largest bond market in the world. This week was no exception; however, as Nikkei Asian Review reports, it appears the “all-talk” has turned to action…The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected. It seems rotating away from government bonds (which the GPIF has been worried about since 2011) into junk bonds and junk stocks is a far better use of ‘wealth’ – we can only imagine the GPIF risk models just got switch to ’11’. As we explained last year, Japan’s Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

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• Bond Vigilantes Have All Been Quieted (Bloomberg)

As the Federal Reserve works to extricate itself from the bond market, its influence over debt investors is only increasing and boosting the chance of a soft landing for Treasuries. While the Fed scales back the unprecedented stimulus that has inundated the world’s largest economy with more than $3 trillion of cheap cash, the differences between short- and long-term yields of U.S. government bonds indicate that investors are confident Fed Chair Janet Yellen can keep inflation in check as growth rebounds without having to ratchet up interest rates. The relative calm clashes with forecasters who say investors have grown too complacent over the direction of central bank policy with consumer prices climbing the most in more than a year and signs of labor-market strength.

Bond bulls are instead focusing on the Fed’s reduced estimate for how high rates ultimately need to rise and echoing the view of PIMCO’s Chief Economist Paul McCulley, who said this month the taming of inflation starting in the 1980s means there’s little risk in keeping borrowing costs low. “The market is giving the Fed the benefit of the doubt that Yellen and crew have everything under control,” Robert Tipp, the chief investment strategist at Prudential Financial Inc.’s fixed-income unit, which oversees about $335 billion, said in a June 19 telephone interview. “Inflation is not overheating even with job growth stable and the economy continuing to accelerate.” In the past 13 months, the gap between yields of two- and five-year Treasuries has doubled to 1.22 percentage points, according to data compiled by Bloomberg. At the same time, the difference between those of five- and 30-year securities has narrowed to the least since 2009 as the long bond rallied.

Because yields on longer-dated debt usually rise more than shorter-term notes when investors see faster inflation spurring rate increases, the moves suggest a more sanguine outlook, according to Priya Misra, the New York-based head of U.S. rates strategy at Bank of America, one of 22 primary dealers obligated to bid at U.S. debt auctions. Taken together, the relationship now implies that while investors anticipate the Fed will eventually lift its benchmark rate after holding it close to zero for six years, they don’t foresee the central bank’s stimulus measures creating the kind of inflationary pressures that would force its hand, she said. “The bond vigilantes have all been quieted,” Misra said by telephone on June 19. “The idea that just the act of printing money gets you inflation has been debunked.”

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Story for your grand kids: there once was a time when people borrowed all they wanted.

• Automakers Crowding Banks Out Of US Car Loan Market (Reuters)

U.S. banks looking to get in on a booming market for financing new-car sales have run into a formidable competitor: the auto manufacturers themselves. Financing arms of car companies, including Toyota, Honda, and Ford, made half of all new U.S. car loans in the first quarter, up from 37% a year earlier and the largest%age of the market in four years, according to credit data firm Experian. These companies also write the vast majority of leases, which contributed a record 26% of new car sales in the quarter, up from 23% last year and 20% in 2012. The financing arms are providing subsidies from the manufacturers, lowering monthly payments and extending loan terms to make it easier for buyers to drive away in a shiny, new vehicle. As a result, major banks are increasingly moving into riskier parts of the market to make loans.

US Bancorp, for example, for the first time ever decided to start financing used cars, an area of the market that the automakers’ finance companies have little interest in. It also started offering loans to less creditworthy borrowers. And Wells Fargo has been leveraging off a nationwide deal with General Motors to provide loans subsidized by the No. 1 U.S. automaker. Wells sees this as a way to gain more of the used car loan business at GM dealerships. The aggressive push by car companies is beginning to raise questions among industry analysts and consultants about whether it is sustainable. If interest rates rise, the automakers could find the incentives too costly unless they are prepared to take a hit to profits—with any pullback in the deals being offered customers running the risk of hurting demand. And, if used car prices weaken, the financing units could be hit with losses on vehicles coming back from leases and repossessions.

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And now Asia borrows too. Hey, their savings are gone, remember?

• Are Asian Households Over Their Head In Debt? (CNBC)

Household debt in Asia is growing quickly, spurring concerns that consumers may struggle to pay their bills as interest rates show signs of heading higher. “In the last several years, consumer debt has surged across the region, financing not only purchases of new, flashy condos, but also of cars, motorcycles, and everything else the heart desires,” Frederic Neumann, an economist at HSBC, said in a note Friday. Singapore and Thailand have seen credit growth exceeding that of the U.S. during its boom, while Malaysia, China, Hong Kong and Korea have seen a bigger increase than in the U.K. during the 2001-2007 runup to the financial crisis, he said, noting academic studies suggest the pace of increase matters more in generating financial risks than the absolute level.

In what may be a sign that Singapore’s credit surge is weighing on consumers, pawnshops are on the rise in the city-state. Pledges at Singapore’s pawnshops rose to 4 million in 2012 from 2.7 million in 2007, while loans surged around 344% over the same period to 7.1 billion Singapore dollars in 2012, according to a report last month from OSK-DMG. “The trend is likely to continue due to a few factors such as the availability of cheap credit fuelled by easy monetary policies from central bankers in advanced economies since the global financial crisis,” analysts Jarick Seet and Terence Wong said in the report, starting coverage of the pawnbroker sector at Overweight. While the 2010 opening of the city-state’s casinos is likely a key driver for pawnshops’ growth, Seet and Wong also believe that the government’s clampdown on unsecured lending and credit cards means more borrowers are facing difficulties with debt payments and are turning to their local pawnbrokers.

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• Chinese Switch From Cash To Credit To Buy Cars (CNBC)

In a country where owning a car has long been a symbol of luxury and success, around 85% of Chinese car buyers still buy cars with cash. But people like Chinese accountant Grace Mi and her peers in their 20s and 30s are changing the car financing game and are the ones catching the attention of global carmakers looking to boost revenue and defend margins in an increasingly competitive market. These young people are willing to buy big-ticket items like a car on credit – a behavior unheard of some 15 years ago in China – and have led carmakers to boost their financing units in the mainland. The push by automakers to steer more people to buy on credit comes as part of their broader efforts to make up for sliding margins on new-car sales in China where more companies are cutting prices to entice buyers.[..]

Around 70% of car buyers in the United States and other developed countries take out loans, according to a Deloitte report in 2012 and the reason global carmakers are trying to seize on the rise in auto financing in China is because the sector is highly profitable. The financing unit of Ford Motor contributed nearly a quarter of the Deerborn, Michigan-based company’s overall profit last year while rival GM saw 12% of its profit come from its finance unit. “China’s car market remains primarily a cash market, but it is starting to move to credit,” John Lawler, head of Ford’s operations in China, told Reuters in an interview. “It’s a demographic and generational phenomenon. Those people who finance cars are primarily younger buyers.”

China’s central bank gave the sector a boost in early June when it cut the amount of money auto financing firms need to set aside as reserves in a bid to stimulate the economy which is showing signs of slowing. Global carmakers have been funding their financial units’ expansion by selling off their loans in the form of asset-backed securities to beef up their operations in China. That frees up money they can use to lend to Chinese consumers. So far this year, the financing units of Ford, BMW, Volkswagen, Nissan and Toyota have each issued around 800 million yuan ($128.85 million) of asset-backed securities.

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Good counterweight to the happy happy China numbers coming out today.

• China Beige Book, Manufacturing PMI Paint Opposing Pictures Of Economy (ZH)

S&P 500 futures are jumping exuberantly as Japan and China PMIs print above expectations and back in expansion territory (Japan best in 3 months, China best in 7 months). This is China’s best 2-month PMI rise since Oct 2010 (which makes perfect sense amid the collapsing housing market and CCFD ponzi probe) – which provides the perfect propaganda meme that targeted RRR cuts workl. However, while stocks don;t care to scratch the surface, there are 2 glaring similarities that could become a problem. Both China and Japan saw employment drop (Japan’s first in 11 months) and furthermore both China and Japan saw input prices rise and output prices decline – not exactly the margin expansion dream everyone is hoping for… and all this as China’s Beige Book shows the slowdown deepening on weak investment.

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“The banks still haven’t looked under the hood.” Wow! They’ve been looking for weeks now, and they still haven’t found their stuff? That’s scary. Every bank involved has had their guys in Qingdao for a month. They can’t find a thing?

• Qingdao Fraud Probe Leaves China’s Warehouse Sector Under Scrutiny (Reuters)

Shaken by a fraud investigation into metal financing in the world’s seventh-busiest port, banks and trading houses have been made painfully aware of the risks they face storing commodities in China’s sprawling warehouse sector. The probe at Qingdao port centers around a private metals trading firm suspected of duplicating warehouse certificates in order to use a metal cargo multiple times to raise financing. Some banks have asked clients to shift metal, used as collateral for loans, to more regulated London Metal Exchange (LME) warehouses outside China or those owned and operated by a single warehouse firm to limit their exposure. “The banks still haven’t looked under the hood,” said an executive at a bank involved in commodity financing in China, referring to China’s warehousing sector.

At the heart of the issue is China’s roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels, stored in warehouses not always regulated to the same extent as elsewhere. Though many global firms are involved in the warehouse industry in China, there has been outsourcing to local firms to cut overheads and avoid dealing with complex local regulations. Using commodities as collateral in financing in China is common practice and not illegal, but issuing receipts to repeatedly mortgage an asset is fraud and could leave more than one creditor holding claims to the same collateral. Illustrating how difficult it may be to unravel competing claims, China’s CITIC Resources said that a court had been unable to secure more than 100,000 tonnes of alumina stored at Qingdao port. Traders said there was a risk the metal could have been already claimed before part of Qingdao Port was sealed off, adding that at least two trading houses had moved metal out as soon as news of the scandal broke.

In Qingdao, sources with knowledge of the probe said authorities were looking at whether the firm under focus, Decheng Mining, had secured multiple warehouse receipts because an affiliate managed logistics at the port’s Dagang bonded zone. “Warehouse receipts are not title documents, they are documents of entitlement. But they are being used as title documents for sales and purchase and transfer of ownership,” said a person at a warehouse company with operations in Qingdao. “Everywhere else outside of China, a warehouse receipt is cut for one party.” [..]A warehouse operator and a banker said agreements with clients meant there could be limited liability for a cargo, capping a payment at around $100,000, depending on specific terms and conditions. For example, a shipment of 10,000 tonnes of copper would be worth about $68 million at current prices.

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Hussman, always good for a solid perpective.

• This Time is Different, Yet with the Same Ending (Hussman)

There is one critical feature of the market advance of recent years that differs from prior bull market advances, and while it’s related to quantitative easing, the distinction is not quite as simple as that. In the market advances that culminated in the 1929, 1972, 1987, 2000 and 2007 pre-crash peaks, a combined syndrome of overvalued, overbought, overbullish conditions emerged in each instance. These syndromes can be defined in numerous and largely overlapping ways, but in general, once these syndromes appeared, steep market losses typically followed in fairly short order. In instances where they didn’t, the syndrome was usually a one-off outlier driven by a short spike in bullishness. Still, in no case did one observe repeated, increasingly severe overvalued, overbought, overbullish syndromes persisting entirely uncorrected and without consequence.

The fact that there have been no historical exceptions to this pattern prior to the recent half-cycle has posed quite a challenge for us in recent years. It forced us to adapt by imposing restrictions (based on factors such as market action across a range of risk-sensitive instruments) to mute our defensiveness even in conditions where historically-informed measures of prospective market return/risk are blazing red. We don’t get to re-live the recent cycle in a way that shows the effectiveness of any of that, but I expect it to be evident enough over the completion of the present cycle and the ones that follow, even in the event quantitative easing becomes a more frequent policy (though the unwinding challenges appear likely to make the whole episode regrettable).

The Federal Reserve’s policy of quantitative easing has produced a historically prolonged period of speculative yield-seeking by investors starved for safe return. The problem with simply concluding that quantitative easing can do this forever is that even speculative assets have to compete with zero. When a safe zero return is above the medium or long-term return that one can estimate for a very risky asset, the rationale for continuing to hold the risky asset becomes purely dependent on expectations of immediate short-term price gains. If speculative momentum starts to break, participants often try to get out the door simultaneously – especially if there is some material event that increases general aversion to risk. That’s the dynamic that produces market crashes.

I’m not saying a market crash is imminent, but it is a risk because very reliable valuation methods (that have remained reliable even in the recurring bubbles since the late-1990’s) presently estimate negative prospective nominal total returns for the S&P 500 on every horizon of 7 years or less, and an annual total return of about 1.9% over the coming decade.

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France is the new Greece.

• French Manufacturing, Services Reveal Risk for Europe’s Recovery (Bloomberg)

French manufacturing and services contracted for a second month in June, highlighting the euro area’s struggle to sustain its economic recovery. A Purchasing Managers Index for both industries in the region’s second-largest economy decreased to 48.0 from 49.3 in May, Markit Economics said today in London. Economists had forecast an unchanged reading, according to a Bloomberg News survey. A reading of 50 or higher signals expansion. The French economy has fared worse than that of the euro area for the past three quarters and added to concern of policy makers at the European Central Bank, who unveiled unprecedented stimulus earlier this month to rekindle growth and boost prices in the 18-nation region.

The International Monetary Fund gave a bleak assessment of the euro economy last week, noting that output is still below pre-crisis levels, unemployment “unacceptably high” and inflation “worryingly low.” “There remained little sign of any turnaround in the performance of France’s economy at the end of the second quarter,” said Paul Smith, senior economist at Markit. “On these trends, the economic underperformance of France seems set to persist well into” the second half of the year, he said.

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The Chinese buy up America with freshly printed Monopoly money. What’s not to like about that?

• Ni Hao, Y’all: US Hinterlands Woo Chinese Firms (AP)

Burdened with Alabama’s highest unemployment rate, long abandoned by textile mills and furniture plants, Wilcox County desperately needs jobs. They’re coming, and from a most unlikely place: Henan Province, China, 7,600 miles away. Henan’s Golden Dragon Precise Copper Tube Group opened a plant here last month. It will employ more than 300 in a county known less for job opportunities than for lakes filled with bass, pine forests rich with wild turkey and boar and muddy roads best negotiated in four-wheel-drive trucks. “Jobs that pay $15 an hour are few and far between,” says Dottie Gaston, an official in nearby Thomasville.

What’s happening in Pine Hill is starting to happen across America. After decades of siphoning jobs from the United States, China is creating some. Chinese companies invested a record $14 billion in the United States last year, according to the Rhodium Group research firm. Collectively, they employ more than 70,000 Americans, up from virtually none a decade ago. Powerful forces — narrowing wage gaps, tumbling U.S. energy prices, the vagaries of currency markets — are pulling Chinese companies across the Pacific. Mayors and economic development officials have lined up to welcome Chinese investors. Southern states, touting low labor and land costs, have been especially aggressive. In the case of the Pine Hill plant, tax breaks, some Southern hospitality and a tray of homemade banana pudding helped, too. “Get off the plane and the mayor is waiting for you,” says Hong Kong billionaire Ronnie Chan.

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• The US Healthcare System: Most Expensive Yet Worst In The Developed World (ZH)

One month ago we showed that when it comes to the cost of basic (and not so basic) health insurance, the US is by far the most expensive country in the world and certainly among its “wealthy-nation”peers (in a world in which indebtedness is somehow equivalent to wealth), which in the context of the irreversible socialization of American healthcare, was in line with expectations. It would be logical then to think that as a result of this premium – the biggest in the world – the quality of the healthcare offered in the US among the best, if not the best, in the world. Unfortunately, that would be wrong and, in fact, the reality is the complete opposite: as a recent study by the Commonweath Fund, looking at how the US healthcare system compares internationally, finds, “the U.S. fails to achieve better health outcomes than the other countries, and as shown in the earlier editions, the U.S. is last or near last on dimensions of access, efficiency, and equity.” In other words: most expensive, yet worst in the developed world.

From the report: “The United States health care system is the most expensive in the world, but this report and prior editions consistently show the U.S. underperforms relative to other countries on most dimensions of performance. Among the 11 nations studied in this report—Australia, Canada, France, Germany, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States—the U.S. ranks last, as it did in the 2010, 2007, 2006, and 2004 editions of Mirror, Mirror. Most troubling, the U.S. fails to achieve better health outcomes than the other countries, and as shown in the earlier editions, the U.S. is last or near last on dimensions of access, efficiency, and equity. In this edition of Mirror, Mirror, the United Kingdom ranks first, followed closely by Switzerland.”

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Anyone surprised?

• Poverty Hits Twice As Many British Households As 30 Years Ago (Guardian)

The number of British households falling below minimum living standards has more than doubled in the past 30 years, despite the size of the economy increasing twofold, a study on poverty and deprivation in the UK claims . According to the study, 33% of households endure below-par living standards – defined as going without three or more “basic necessities of life”, such as being able to adequately feed and clothe themselves and their children, and to heat and insure their homes. In the early 1980s, the comparable figure was 14%.

The research, billed as the most detailed study ever of poverty in the UK, claims that almost 18 million Britons live in inadequate housing conditions and that 12 million are too poor to take part in all the basic social activities – such as entertaining friends or attending all the family occasions they would wish to. It suggests that one in three people cannot afford to heat their homes properly, while 4 million adults and children are not able to eat healthily. Having someone in the household in work does not prevent British families from facing tough living conditions, according to the research, undertaken by the Poverty and Social Exclusion project (PSE). It found that many households that were struggling had at least one adult in work. Experts who produced the research, which will be discussed at a conference in London on Thursday, are calling on the government to take action to counter the problems they have pinpointed.

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Scary as all hell.

• Out Of Control Ebola Outbreak Just ‘Tip Of The Iceberg’ (NBC)

An “out of control” outbreak of Ebola in West Africa that’s being called the deadliest ever is far from over and it’s likely to get worse before it gets better, experts predict. And health workers who have been fighting the outbreak, which spans three countries and has killed more than 300 people, say they are certain many cases are going unreported as they see gruesome infections, dangerous myths and people fleeing the virus, potentially spreading it further. “This is the tip of the iceberg,” said Robert Garry, a microbiology professor at the Tulane University School of Medicine who’s been leading relief and investigation efforts in Sierra Leone for the Viral Hemorraghic Fever Consortium. Dr. Mwayabo Kazadi, from the health unit for Catholic Relief Services, agreed that many cases could go uncounted and undiagnosed in the region, where Guinea, Sierra Leone and Liberia come together. “When you don’t have a proper health system in place, it is pretty difficult,” Kazadi said.

Garry says team members arrived in at least one village to find it deserted, and the body of an Ebola victim left unattended in a house. It’s not hard to imagine what happened, but it makes it impossible to track down people who might have been infected and get them to hospitals for what care can be provided, and to prevent them from infecting others. A Doctors Without Borders official said Friday that the outbreak was out of control. And the numbers make it clear this is the biggest outbreak yet of Ebola since the virus was first identified in 1976. The virus, which causes a particularly nasty form of hemorrhagic fever, has killed 337 people out of 528 infected. “This is the biggest outbreak we have ever actually seen of Ebola,” Kazadi said. “It’s the biggest both in numbers and in terms of geography,” Garry agreed.

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