Sep 032017
 
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Edward Hopper Sunday 1926

 

America’s Superstar Companies Are a Drag on Growth (BBG)
Forget Wall Street – Silicon Valley Is The New Political Power In DC (G.)
Google To Be Hit With Record EU Fine Over Claims Of Phone Software Abuse (T.)
North Korea Quake Seems Related To Nuclear Test (BBG)
Bitcoin Tumbles To Pre Korea-Missile-Launch Level After Topping $5000 (ZH)
China Sees New World Order With Oil Benchmark Backed By Gold (ANR)
Why Houston Doesn’t Need Federal Flood Relief (Mises)
Harvey Could Bankrupt The Federal Flood-Insurance Program (ZH)
Harvey Makes Landfall in Saudi Arabia (BBG)
Pesticides Linked To Birth Abnormalities In Major New Study (Ind.)
France Votes Against The Use Of Pesticide Glyphosate (FarmingUK)

 

 

The perfect recipe for strangling an economy: “..as a result of this increased market power, the big superstar companies have been raising their prices and cutting their wages. This has lifted profits and boosted the stock market, but it has also held down real wages, diverted more of the nation’s income to business owners, and increased inequality. It has also held back productivity, since raising prices restricts economic output.”

America’s Superstar Companies Are a Drag on Growth (BBG)

Here’s a story about the U.S. economy that more people are telling these days. Since the 1980s, antitrust enforcement has gotten weaker. As a result, a few big companies have managed to capture a much bigger share of the market in various industries. Technology may have helped too, by letting big companies spread their geographic reach, and by creating network effects that keep customers locked in to platforms like Facebook. Anyway, as a result of this increased market power, the big superstar companies have been raising their prices and cutting their wages. This has lifted profits and boosted the stock market, but it has also held down real wages, diverted more of the nation’s income to business owners, and increased inequality. It has also held back productivity, since raising prices restricts economic output.

Like all big, sweeping theses about the economy, this story can’t be proven or disproven with a single research paper, or even a dozen papers. But like detectives, economists can probe various pieces and see how each one checks out. In the past few years, researchers have found that industrial concentration – measured by the market share of the four biggest companies in an industry – has indeed been increasing in most parts of the U.S. economy. They’ve documented a correlation between industrial concentration and a decline in labor’s share of national income. They’ve confirmed that profits have risen substantially. They’ve documented a slackening in the enforcement of antitrust law. And they’ve found some evidence that after mergers, prices go up while productivity doesn’t improve.

Now, a series of new papers provides even more support for key aspects of the story. The first, a paper by economists Jan de Loecker and Jan Eeckhout, has caused quite a stir in the economics press and on the blogs. De Loecker and Eeckhout find that markups – the amount that companies charge over and above their costs – have been on the rise since about 1980. Back then, according to the authors’ estimates, the average company charged a price that was about 18% above costs – now, the number is 67%.

The authors then use some very simple econ models to link a rise in markups to declines in labor’s share of national income, low-skilled workers’ wages, reduced labor force participation and a slowdown in the broader economy. It all fits with basic economic theory – less competition leads to increased market power, leading in turn to all sorts of bad economic outcomes. The second paper, by German Gutierrez and Thomas Philippon, looks at declining levels of business investment. Basic theory suggests that when top companies get more market power, they invest less in their businesses as they restrict output and raise prices. Market power could therefore be one big reason for the decline in U.S. business investment:

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But these ‘superstar’ companies can do what they want; they have the power, both politically and economically.

Forget Wall Street – Silicon Valley Is The New Political Power In DC (G.)

Funding thinktanks is just one of the ways that America’s most powerful industries exert their influence over policymakers. Much of the work takes place a quarter of a mile from the White House, in a lesser-known political power base: Washington’s K Street corridor, the epicenter of the lobbying industry. In addition to thinktanks, K Street is packed with slick corporate representatives, hired guns, and advocacy groups. The lobbyists spend their days swarming over members of Congress to ensure their private interests are reflected in legislation and regulation. While the big banks and pharma giants have flexed their economic muscle in the country’s capital for decades, there’s one relative newcomer that has leapfrogged them all: Silicon Valley. Over the last 10 years, America’s five largest tech firms have flooded Washington with lobbying money to the point where they now outspend Wall Street two to one.

Google, Facebook, Microsoft, Apple and Amazon spent $49m on Washington lobbying last year, and there is a well-oiled revolving door of Silicon Valley executives to and from senior government positions. Tech companies weren’t always so cozy with Capitol Hill. During its 1990s heyday, Microsoft accumulated enormous wealth and market share. Despite being one of the world’s largest companies, the PC software pioneer mostly kept away from Washington, spending just $2m on lobbying in 1997. However, the company’s size and anticompetitive business practices attracted the scrutiny of regulators in Clinton’s administration, whipped up by the lobbying of disgruntled competitors including Sun Microsystems, IBM and a company called Novell. The following year, the Department of Justice sued Microsoft, accusing it of using a Windows operating system monopoly to push its Internet Explorer browser to the disadvantage of rivals.

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US ‘superstar’ companies’ power has not yet fully pervaded Europe. A matter of time?!.

Google To Be Hit With Record EU Fine Over Claims Of Phone Software Abuse (T.)

Google faces a multibillion-euro fine by the European Commission for using its Android smartphone software to stifle competition. The record-breaking penalty could be imposed as soon as this month, according to industry and legal sources in Brussels. Other insiders said the commission may wait until later in the year before sanctioning Google. Brussels has accused the world’s second-biggest company of breaking anti-trust laws by forcing mobile phone manufacturers to pre-load Google apps on their devices. The fine will escalate the company’s regulatory woes in Europe, where the commission has waged a long-running campaign to try to ensure competition flourishes in the digital economy. In June, the competition commissioner Margrethe Vestager fined Google €2.4bn (£2.2bn) for doctoring search results to favour its price-comparison shopping service.

Vestager also ordered the company to change how it presents search results. It has until the end of the month to comply with the demand, or face daily fines of 5% of its global turnover. Sources expect the Android fine to be substantially higher than the shopping penalty. The software is a central pillar of the $650bn (£502bn) empire of Alphabet, Google’s owner. It powers an estimated 80% of smartphones. About half of all internet traffic is through phones. Last year Vestager, 49, accused Google of using Android as a tool to “protect and expand its dominant position in internet search”. The company allows handset makers to use the software without paying a fee, but they must pre-install Google’s Chrome browser, search bar and other apps. This stipulation “harms consumers” and prevents digital rivals “from competing on their own merits”, according to Vestager.

In addition to fining Google, she is expected to demand a fundamental overhaul of its relationship with smartphone makers, such as Samsung. That could undermine the big profits Google earns through Android. It monetises the software platform by analysing the mountains of data generated by its apps and selling targeted adverts to clients. [..] the company has strenuously denied breaking competition laws. Last year it said giving away Android “keeps manufacturers’ costs low, while giving consumers unprecedented control of their mobile devices”.

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The pressure on Xi will rise a lot. And US should sit down with Putin. Urgently.

North Korea Quake Seems Related To Nuclear Test (BBG)

North Korea said it successfully tested a hydrogen bomb with “unprecedentedly big power” on Sunday that can be loaded onto an intercontinental ballistic missile, in its first nuclear test under U.S. President Donald Trump’s watch. The test, ordered by Kim Jong Un, was a “perfect success” and confirmed the precision and technology of the hydrogen bomb, according to the Korean Central News Agency. Kim’s regime has defied Trump’s warnings as it seeks the capability to strike America with an atomic weapon. “The creditability of the operation of the nuclear warhead is fully guaranteed,” KCNA said. South Korea’s weather agency said it detected a magnitude 5.7 earthquake around 12:29 p.m. local time near the Punggye-ri nuclear test site in northeast North Korea. Energy from Sunday’s explosion was about six times stronger in force than the nuclear test conducted by Pyongyang last September, the weather agency said.

“All options are on the table,” Japanese Foreign Minister Taro Kono said on public broadcaster NHK. Prime Minister Shinzo Abe said a North Korea nuclear test would be “absolutely unacceptable and we must protest it strongly.” Pyongyang’s actions are set to further increase tensions in Northeast Asia, where concerns have grown this year that a war of words between Trump and Kim could set off a military conflict. It was the sixth nuclear test by Pyongyang since 2006 and the first since the U.S. and South Korea elected new leaders. Trump had no immediate response to the nuclear test, though he sent a tweet thanking relief workers after Hurricane Harvey devastated states in the southern U.S. He has repeatedly lashed out at North Korea since taking office, warning last month of “fire and fury” if Kim’s regime continues to threaten the U.S.

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“Chinese market regulators have begun cracking down on ICOs as “illegal fundraising vehicles” in disguise..“

Bitcoin Tumbles To Pre Korea-Missile-Launch Level After Topping $5000 (ZH)

Shortly after topping $5,000 (according to several exchanges), Bitcoin began to tumble dramatically – now down almost $500 – erasing all the post-North-Korea missile anxiety gains.

Ethereum has crashed even more.

Meanwhile, one of the world’s largest bitcoin exchange, Shanghai-based BTC China, announced it had suspended ICOCoin deposits as well as trading and withdrawals, starting 6pm on Sunday, while Caixin reports that authorities shut down a blockchain conference over the weekend on concerns unregulated Initial Coin Offerings were being used to raise funds illegally, adding that Chinese market regulators have begun cracking down on ICOs as “illegal fundraising vehicles” in disguise, and in taking a page out of the SEC playbook, will soon issue official rules on ICOs. As CoinTelegraph adds, the self-regulatory group National Internet Finance Association of China warned its members about the dangers in participating in initial coin offerings (ICO).

The group claimed that ICOs could be using misleading information as part of fundraising campaigns. In a statement in late August 2017, the online finance organization further warned its member companies to exercise extreme caution when dealing with the new fundraising mechanism. Part of the statement reads: “China Internet Finance Association members should take the initiative to strengthen self-discipline, to resist illegal financial behavior.” [..] an official for Russia’s national legislature said that new laws regulating the exchange of cryptocurrencies will be complete by the end of the fall. Anatoly Aksakov, who leads the State Duma’s financial markets committee, told Russian media this week that next steps involve the formation of a dedicated working group to address the issue.

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Sounds overcooked. But yes, US sanctions are not helping. Still, physical delivery in gold is not what anyone wants, far too clumsy for real trade. And who trusts paper gold? Even better: no-one trusts the yuan.

China Sees New World Order With Oil Benchmark Backed By Gold (ANR)

China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry. The contract could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars. China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong. “The rules of the global oil game may begin to change enormously,” said Luke Gromen, founder of U.S.-based macroeconomic research company FFTT.

The Shanghai International Energy Exchange has started to train potential users and is carrying out systems tests following substantial preparations in June and July. This will be China’s first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies. Most of China’s crude imports, which averaged around 7.6 million barrels a day in 2016, are bought on long-term contracts between China’s major oil companies and foreign national oil companies. Deals also take place between Chinese majors and independent Chinese refiners, and between foreign oil majors and global trading companies. Alan Bannister, Asia director of S&P Global Platts, an energy information provider, said that the active involvement of Chinese independent refiners over the last few years “has created a more diverse marketplace of participants domestically in China, creating an environment in which a crude futures contract is more likely to succeed.”

China has long wanted to reduce the dominance of the U.S. dollar in the commodities markets. Yuan-denominated gold futures have been traded on the Shanghai Gold Exchange since April 2016, and the exchange is planning to launch the product in Budapest later this year. Yuan-denominated gold contracts were also launched in Hong Kong in July – after two unsuccessful earlier attempts – as China seeks to internationalize its currency. The contracts have been moderately successful. The existence of yuan-backed oil and gold futures means that users will have the option of being paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto. “It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” Macleod said.

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The size of both Texas and Houston Metro GDP is quite something.

Why Houston Doesn’t Need Federal Flood Relief (Mises)

In his article today, Christopher Westley noted that Texas’s economy — when measured by GDP — is larger than Canada’s. In other words: If Texas were an independent country, it would be the world’s 10th largest economy (totaling $1.6 trillion), and its citizens would be more than capable of addressing natural disasters of the magnitude of a major flood. Texas’s economy is also larger than those of Russia and Australia. By why stop our analysis at the state of Texas? Indeed, if we look at the GDP of the Houston metropolitan area, we find it comes in at $503 billion. This total is similar to the GDPs of Poland, Belgium, and Austria. It’s significantly larger than the GDPs of Norway and Denmark. Nor is Texas’s GDP largely driven by federal spending — so we can’t say that Texas’s economy depends on federal spending to stay afloat.

When we look at federal spending in Texas compared to the federal taxes paid by Texans, we find it’s nearly a one-for-one relationship. So, if the Federal government stopped spending in Texas — but allowed Texans to keep their money, Texas would be fine. [..] Of course, we’ll be told that federal disaster relief programs are all about “sharing” and “cooperation” and “kindness.” In reality, it’s all just about forcing one group of people to hand over money to another group of people. There is no doubt that Texas and Houston now face significant challenges in rebuilding after the flood. But, when we demand that other regions and states pay for the rebuilding of Texas, we’re acting as if those other states and communities don’t have problems of their own. Needs related to poverty, infrastructure, and education in, say, Michigan did not magically disappear because Texas experienced a flood.

The only reason it now seems right to take money from people in Michigan, and hand it over to Houstonians, is because Houston’s problems are in the headlines, and Michigans mundane daily problems are not. The central planners have decided that Houstonians deserve Michigan’s money. But the rationale for this decision is purely political, and thus arbitrary. This isn’t to say real sharing and kindness are a bad thing. It’s excellent that private charities have already been hard at work helping with the cleanup in Houston. If one wants to insist that governments be involved, there’s nothing stopping other states from handing over funds to Texas directly. The federal government need not be involved at all.

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Which is why the possibility of a second hurricane hitting the US this year is intriguing.

Harvey Could Bankrupt The Federal Flood-Insurance Program (ZH)

Hurricane Harvey may solve the auto industry’s inventory problem. But right now, it’s about to create a giant headache for the federal government. Based on the latest estimates from Irvine, California-based CoreLogic, insured flood losses for homes in the affected areas of Texas and Louisiana could total between $6.5 billion to $9.5 billion. Since private insurers typically don’t provide personal flood insurance, all but $500 million of that will fall to the Federal Emergency Management Agency’s National Flood Insurance Program, or NFIP. According to the Street, if insured damages reach the high end of this range, it would totally deplete the $7.5 billion of cash and available credit available to the 49-year-old government program, which provides about 98% of residential flood insurance. The program is already about $25 billion in debt to the US Treasury Department and would need Congressional authorization for additional funding.

To be sure, final totals could be much, much higher given the severity of the the “1-in-1000-year” flood. The potential funding shortfall could create problems if Congress doesn’t act quickly this month to shore up the financially-troubled flood-insurance program. As we’ve reported, Congress already has a full agenda in September – a month where lawmakers must pass a funding bill to keep the government open, and another to raise the debt limit and stave off a technical default on US debt. Initially, President Trump said he would force a government shutdown if Congress didn’t approve funding for his border wall in its next budget. However, it appears that he has backed away from this, as the Washington Post reported today that the administration has quietly notified Congress that the $1.6 billion in wall funding would not need to be included in the September continuing resolution.

Furthermore, Congress must explicitly pass legislation to keep the NFIP intact. Without it, the entire program will lapse. To be sure, there are some signs that Republicans are taking steps to ensure that emergency disaster-relief funding is approved as quickly as possible. According to a report in the Wall Street Journal, some Republican lawmakers are raising the possibility that funding for the cleanup effort could be attached to the debt-ceiling bill, giving both measures a strong chance of passing. But it didn’t say if funding for the flood-insurance program would be included. Thanks, in part, to the hurricane, and the perceived political consequences of failing to aid the disaster victims (though Texas has proven to be a reliably red state), Goldman has cut its odds of a government shutdown to 15%.

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“..even as Saudi Arabia sees prices of the end products of its industry spiking, by and large it is not capturing that windfall for itself..”

Harvey Makes Landfall in Saudi Arabia (BBG)

Hurricane Harvey has devastated the Gulf Coast, and its impact is now spreading out to the rest of the U.S., chiefly at gas pumps. But America’s resurgent role in the global energy trade means the ripples extend far beyond its own shores. One place they are lapping onto is Saudi Arabia.In theory, the de-facto leader of efforts by OPEC, Russia and other members of the so-called Vienna Group stands to gain from disruption at the nerve center of the shale boom that has helped to suppress oil prices. In practice, things are a bit more complicated.

The shale boom has moved a lot of U.S. oil production inland and contributed to a glut of barrels building up in storage. So Harvey’s biggest impact on the region’s energy industry has been the closure of ports, refineries and pipelines – and keeping many drivers off highways that have turned into lakes and streams.The net result is depressed demand for crude oil due to absent refiners and panic buying of refined products such as gasoline for the same reason. So even as Saudi Arabia sees prices of the end products of its industry spiking, by and large it is not capturing that windfall for itself:

The disruption should cause U.S. inventories of refined products to fall as they are used to cover shortages and stocks of crude oil and products to drop elsewhere as, for example, European refiners run flat-out to send fuel to the U.S. to capture higher prices. This ultimately helps Saudi Arabia.Again, though, there’s a complicating factor.Saudi Arabia has explicitly targeted the U.S. in its strategy to drain the glut; shipments of its oil to America have dropped noticeably this summer:

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Will we ever stop poisoning ourselves? No high hopes here.

Pesticides Linked To Birth Abnormalities In Major New Study (Ind.)

High exposure to pesticides as a result of living near farmers’ fields appears to increase the risk of giving birth to a baby with “abnormalities” by about 9%, according to new research. Researchers from the University of California, Santa Barbara, compared 500,000 birth records for people born in the San Joaquin Valley between 1997 and 2011 and levels of pesticides used in the area. The average use of pesticides over that period was about 975kg for each 2.6sq km area per year. But, for pregnant women in areas where 4,000kg of pesticides was used, the chance of giving birth prematurely rose by about 8% and the chance of having a birth abnormality by about 9%. Writing in the journal Nature Communications, the researchers compared this to the 5 to 10% increase adverse birth outcomes that can result from air pollution or extreme heat events.

“Concerns about the effects of harmful environmental exposure on birth outcomes have existed for decades,” they wrote. “Great advances have been made in understanding the effects of smoking and air pollution, among others, yet research on the effects of pesticides has remained inconclusive. “While environmental contaminants generally share the ethical and legal problems of evaluating the health consequences of exposure in a controlled setting and the difficulties associated with rare outcomes, pesticides present an additional challenge. “Unlike smoking, which is observable, or even air pollution, for which there exists a robust network of monitors, publicly available pesticide use data are lacking for most of the world.”

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Addicted farmers: “More than half of British farmers say they are concerned that a ban could cost them more than £10,000 every year.”

France Votes Against The Use Of Pesticide Glyphosate (FarmingUK)

The French government has voted against the renewal of an EU Commission license for the pesticide glyphosate. The decision by the French government comes as evidence emerges of the risk of birth defects caused by exposure to pesticides. Monsanto is the major supplier of products containing glyphosate, with ‘Roundup’ being the best-known product. The product is widely used by farmers, gardeners and local authorities to control weeds. In 2015 the World Health Organisation’s (WHO) classified glyphosate as a probable carcinogen. But in March, the EU’s chemicals agency said glyphosate should not be classed as a carcinogen. And a survey has shown that a ban on glyphosate in the UK could force one in five wheat farms into ‘serious financial difficulty’. More than half of British farmers say they are concerned that a ban could cost them more than £10,000 every year.

Speaking at Cereals 2017, NFU Vice President Guy Smith said: “This year looks like being a watershed year for classical chemistry for arable farms with these three decisions on the horizon from Europe. “A poor decision on endocrine disruptor definition could see an end to the availability of around 26 active ingredients; the European Commission is proposing a ban on the use of neonicotinoids on all outdoor crops; and a decision on the reauthorisation of glyphosate is due by the end of the year. “The NFU will continue to make the case for evidence-based decisions to be made in all three of these areas, and we will continue to work with our members to help them make the case to politicians and other decision makers about the importance of these products and to demonstrate the damage that bad decisions will have on farming and our food supply.”

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Aug 152017
 
 August 15, 2017  Posted by at 8:42 am Finance Tagged with: , , , , , , , , , ,  3 Responses »
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Stanley Kubrick Walking the streets of New York 1946

 

Prepare For Negative Interest Rates In The Next Recession – Rogoff (Tel.)
We’re Still Not Ready for the Next Banking Crisis (BBG)
World’s Biggest Banks Face £264 Billion Bill For Poor Conduct (G.)
US Stock Buybacks Are Plunging (BBG)
Consumer Spending Expectations Down Again (Mish)
Dow 30,000, Not If Demographics Have Anything To Say (SA)
Ten Years After The Crash, There’s Barely Suppressed Civil War In Britain (G.)
Broadening Internal Dispersion (Hussman)
Trump Orders Probe Of China’s Intellectual Property Practices (R.)
China Imposes Ban on Imports From North Korea, Yields to Trump’s Calls (Sp.)
North Korea Leader Holds Off On Guam Plan (R.)
Australia’s Central Bank Renews Alert on Mounting Household Debt (G.)
Australia Says New Zealand Opposition Trying To Bring Down Government (G.)
Greek Population Set To Shrink Up To 18% By 2050 (K.)
Sharp Fall In Number Of Refugees, Migrants Arriving In Italy (AFP)

 

 

Feels like we’re being prepared, or maybe set up is a better way to put it. They’re going to take over everything, criminalize anything they can’t control. All for your own good. Rogoff is one scary dude.

Prepare For Negative Interest Rates In The Next Recession – Rogoff (Tel.)

Negative interest rates will be needed in the next major recession or financial crisis, and central banks should do more to prepare the ground for such policies, according to leading economist Kenneth Rogoff. Quantitative easing is not as effective a tonic as cutting rates to below zero, he believes. Central banks around the world turned to money creation in the credit crunch to stimulate the economy when interest rates were already at rock bottom. In a new paper published in the Journal of Economic Perspectives the professor of economics at Harvard University argues that central banks should start preparing now to find ways to cut rates to below zero so they are not caught out when the next recession strikes. Traditionally economists have assumed that cutting rates into negative territory would risk pushing savers to take their money out of banks and stuff the cash – metaphorically or possibly literally – under their mattress.

As electronic transfers become the standard way of paying for purchases, Mr Rogoff believes this is a diminishing risk. “It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes time”, he said. The growth of electronic payment systems and the increasing marginalisation of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago. Countries can scrap larger denomination notes to reduce the likelihood of cash being held in substantial quantities, he suggests. This is also a potentially practical idea because cash tends now to be used largely for only small transactions. Law enforcement officials may also back the idea to cut down on money laundering and tax evasion.

The key consequence from an economic point of view is that forcing savers to keep cash in an electronic format would make it easier to levy a negative interest rate. “With today’s ultra-low policy interest rates – inching up in the United States and still slightly negative in the eurozone and Japan – it is sobering to ask what major central banks will do should another major prolonged global recession come any time soon,” he said, noting that the Fed cut rates by an average of 5.5 percentage points in the nine recessions since the mid-1950s, something which is impossible at the current low rate of interest, unless negative rates become an option. That would be substantially better than trying to use QE or forward guidance as central bankers have attempted in recent years.

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If we don’t take away political power from banks and central banks, we’re doomed.

We’re Still Not Ready for the Next Banking Crisis (BBG)

The 10th anniversary of the financial crisis has prompted a lot of analysis about what we’ve learned and whether we’re ready for the next one. Pretty much everything you need to know, though, can be found in one chart: the capital ratios of the largest U.S. banks. Capital, also known as equity, is the money that banks get from shareholders and retained earnings. Unlike debt, it has the advantage of absorbing losses, a feature that makes individual banks and the whole system more resilient. Bank executives typically prefer to use less equity and more debt – that is, more leverage – because this magnifies returns in good times. Hence, capital levels can serve as an indicator of the balance of power between bankers and regulators concerned about financial stability. Here’s a chart showing tangible common equity, as a percentage of tangible assets, at the six largest U.S. banks from December 2001 to June 2017:

The downward slope in the first several years demonstrates the extent to which leverage got out of hand before the crisis. As late as 2008, when the financial sector was already in distress, the Federal Reserve was still allowing banks to pay out capital in the form of dividends, even though some had equity of less than 3% of assets. That proved to be a fatal miscalculation: By 2009, forecasts of total losses on loans and securities reached 10% of assets. A crippled banking system tanked the economy and had to be rescued at taxpayer expense. After the crisis, regulators pushed banks to get stronger. The biggest U.S. institutions more than doubled their tangible common equity ratios – to an average of about 8% of assets (or, by international accounting standards, closer to 6% of assets). That’s an achievement, and better than in Europe, but the starting point was so low that they still fall short of what’s needed. Researchers at the Minneapolis Fed, for example, estimate that capital would have to more than double again to bring the risk of bailouts down to an acceptable level.

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How crime got re-defined. Poor conduct. Orwell.

World’s Biggest Banks Face £264 Billion Bill For Poor Conduct (G.)

Fines, legal bills and the cost of compensating mistreated customers reached £264bn for 20 of the world’s biggest banks over the five years to 2016, according to new research that raises doubts about efforts by the major financial services players to restore trust in the sector. This figure is higher than in the previous five-year period – when the costs amounted to £252bn – and is up 32% on the period 2008-12, the first time the data was collated by the CCP Research Foundation, one of the few bodies that analyses the “conduct costs” of banks. The report said the data showed that 10 years on from the onset of the financial crisis, the consequences of misconduct continue to hang over the banking sector. The latest analysis shows that in 2016 the total amount put aside by the banks surveyed rose to more than £28.6bn – higher than in the previous year when there had been a fall from a peak of £63bn in 2014.

Chris Stears, research director of the foundation, writes in the latest report: “Trust in, and the trustworthiness of, the banks must surely correlate to, and be conditional on, banks’ conduct costs. And persistent level of conduct cost provisioning is worrying. “It remains to be seen whether or not the provisions will crystallise in 2017 [or later] and what effect this will have on the aggregated level of conduct costs.” Two UK high street banks – Royal Bank of Scotland and Lloyds Banking Group – are in the top five of banks with the biggest conduct costs. RBS set aside extra provisions for fines and legal costs largely related to a forthcoming penalty from the US Department of Justice for mis-selling toxic bonds in the run-up to the financial crisis. That residential mortgage bond securitisation mis-selling scandal is responsible for £66bn of the costs incurred during the five-year period and the single largest factor, according to the foundation.

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The only thing that propped up stocks is vaporizing.

US Stock Buybacks Are Plunging (BBG)

U.S. stocks have been able to hit fresh highs this year despite a dearth of demand from a key source of buying. Share repurchases by American companies this year are down 20% from this time a year ago, according to Societe Generale global head of quantitative strategy Andrew Lapthorne. Ultra-low borrowing costs had encouraged large firms to issue debt to buy back their own stock, thereby providing a tailwind to earnings-per-share growth. “Perhaps over-leveraged U.S. companies have finally reached a limit on being able to borrow simply to support their own shares,” writes Lapthorne. Repurchase programs account for the lion’s share of net inflows into U.S. equities during this bull market. Heading into 2017, equity strategists anticipated that the buyback bonanza would continue in earnest, fueled in part by an expected tax reform plan that would provide companies with repatriated cash to invest.

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Deflation.

Consumer Spending Expectations Down Again (Mish)

Fed Chair Janet Yellen keeps citing consumer confidence and jobs as reasons consumer spending and inflation will pick up. Curiously, the New York Fed Survey on Consumer Spending Expectations keeps trending lower and lower, despite survey-high expectations for wage growth. The report for July 2017 was released today. I downloaded the survey results and produced the following charts.

Household Spending Projections

 

Household Income Projections

 

Income projections are volatile but at least they are trending higher across the board. Spending projections are less volatile and trending lower at every level. At the 25th%ile level, a group that no doubt spends every cent they make, spending expectations are zero. Those projections were in negative territory in April. Fed Chair Janet Yellen does not believe the Fed’s own reports. Instead, she relies on consumer confidence numbers that tend to track the stock market or gasoline prices more than anything else. Perhaps New York Fed President William Dudley does believe in the report.

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If you weren’t scared yet…

Dow 30,000, Not If Demographics Have Anything To Say (SA)

Nowadays, it is easy to get caught up in the day to day of markets with main stream media pumping the hot stock or warning of market crashes that rarely come. Focusing on the longer term cycles is how you stay with the trend, reduce portfolio churn and costs. I am not advocating for a purely passive strategy as I think the current state of passive investing is contributing to over-valuation and a lack of pricing discovery, which is another topic I won’t get into in this piece. Longer term cycles are largely influenced by demographics. Boomers were entering the workforce in the 1970s and started having children (Millennials) in the early 1980s. The surge in home purchases, appliances, and the multitude of things you buy for kids helped drive the economy for 30 years. The giant buildup in credit that I have covered in a previous article is another reason for a 35-year bull market.

The potential problem now is Boomers are hitting retirement, and roughly 10,000 Boomers retire each day. The above chart is the age distribution of the U.S. population by age. You can see the cliff of Boomers that are turning 70 this year. There are a couple ramifications of Boomers retiring. First is the moment they quit their job or sell their business, they are on a finite budget from there on out. Second, fewer people will be available for work down the road leaving less tax payers contributing to already stressed government budgets. Lastly, Boomers are incentivized to retire at 70.5 due to social security rules and will also start drawing on pensions. What makes matters worse is the majority of Boomers have less than $200k saved for retirement and a large portion have less than $50k saved per PWC’s Annual survey. This means that Boomers are heavily relying on Social Security or they have to work longer, which is currently evidenced by the following chart from the BLS.

Boomers have essentially garnered the majority of wage gains and now are working longer either out of necessity or preference. You might be thinking the surge in Millennials entering the work force will save the day, but due to the above facts, younger generations have to wait longer to move up the corporate ladder or have to attain levels of higher education to receive an adequate salary. As a result, student debt has risen exponentially in the U.S. jeopardizing the future of many starting their professional lives.

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“Debt racked up through the greed of financiers being dumped on the poor, the young and people with disabilities in what must rank as the biggest bait and switch in postwar Britain.”

Ten Years After The Crash, There’s Barely Suppressed Civil War In Britain (G.)

All history now, isn’t it? The credit crisis that began in August 2007, the ensuing banking crash and global recession. One bumper episode from the long-ago past, when the iPhone was a newborn and Amy Winehouse still made records. Now done, dusted, reformed and resolved. Or so one assumes, from the official self-congratulation. The European commission marks the 10th anniversary of the credit crisis by trumpeting: “Back to recovery thanks to decisive EU action.” Yes, the same clapped-out European establishment that has spent the last decade kicking a can down the road. The head of the derivatives industry body, ISDA, admits: “We sometimes forget to articulate the social value of what we do.” Indeed so: before the crash, bankers emailed each other about how the derivatives that they were paid so much to flog were “crap” and “vomit”.

Everyone knows history is written by the victors, but this is something else: bullshit recounted by the bullshitters. Even the banks are back to bragging how many billions they generously chip in to Her Majesty’s Exchequer, presumably hoping no one will point out that they took £1.3tn from taxpayers in just a few months in 2008. Let’s get three things straight. First, it was working- and middle-class Britons who paid for the mess, who are still paying for it now and who will keep paying for it decades from now. Second, the crash has prompted almost no fundamental reckoning or reform. And, most importantly, the combination of those first two factors means the crash that began in 2007 cannot be consigned to the past. Today’s politics – from Brexit to Trump and the collapse of centrism – is just one of its products.

For politicians and financiers to treat the crash as history brings to mind Stephen Dedalus in Ulysses: “History is a nightmare from which I am trying to awake.” Here’s the stuff of historical bad dreams: at the height of the banking crisis in 2008, every man, woman and child in Britain handed over £19,721 each to bankers. The economy tanked, Gordon Brown got booted out – and David Cameron pretended a private banking catastrophe was a crisis of a supposedly profligate public sector. You know what happened next: first the kids’ Sure Start centre closed, then the library; your mum waited ages to get her hip replacement; the working poor had their social security stolen, and the local comp began sending begging letters. Debt racked up through the greed of financiers being dumped on the poor, the young and people with disabilities in what must rank as the biggest bait and switch in postwar Britain.

I say that, but we have only had seven years of austerity. If Philip Hammond stays in No 11 and sticks to plan (one must hope he does neither), the cuts will continue until the middle of the next decade. After 2025, who knows what will remain of our councils, our welfare state and our public realm. One truism of this era is that the average British worker earns less after inflation than they did when RBS nearly died. Most of us have seen not a recovery, but a ripping up of our social contract – so that over 7 million Britons are now in precarious employment. But the highest earners are way ahead of where they were in 2008. Finance-sector bonuses are as generous as they were during the boom, while a bad year for the average FTSE boss is one in which he or she pulls in a mere £4.53m.

And so we remain reliant on debt – aptly termed “the raw material for bubbles and crashes” by Daniel Mügge at the University of Amsterdam. According to the Bank for International Settlements, the UK is far deeper in the red now than it was when Northern Rock collapsed. Government debt has shot up under the Conservatives, but so too has household borrowing. Were the UK to crash again, its government no longer has the political capital nor the fiscal headroom to save the financial system.

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“The deterioration and widening dispersion in market internals is no longer subtle.”

Broadening Internal Dispersion (Hussman)

It’s important to observe that if short-term interest rates were still at zero and market internals were favorable, even the most extreme overvalued, overbought, overbullish syndromes we identify would not be enough to push us to a hard-negative market outlook. That, in a nutshell, is the central lesson from quantitative easing, and is one that could alone have dramatically altered our own challenging experience in the recent speculative half-cycle. At present, however, we observe not only the most obscene level of valuation in history aside from the single week of the March 24, 2000 market peak; not only the most extreme median valuations across individual S&P 500 component stocks in history; not only the most extreme overvalued, overbought, overbullish syndromes we define; but also interest rates that are off the zero-bound, and a key feature that has historically been the hinge between overvalued markets that continue higher and overvalued markets that collapse: widening divergences in internal market action across a broad range of stocks and security types, signaling growing risk-aversion among investors, at valuation levels that provide no cushion against severe losses.

[..] Again, the principal lesson of the recent half-cycle was that in the face of zero interest rates, even the most extreme “overvalued, overbought, overbullish” syndromes were not enough to anticipate steep market losses (as they typically were in prior market cycles). Instead, investors were driven to believe that they had no other alternative but to continue their yield-seeking speculation. In the face of zero interest rates, one had to wait for market internals to deteriorate before adopting a hard negative market outlook. At present, we observe neither zero interest rates, nor uniformly favorable market internals. In the current environment, we expect that obscene valuations and severe “overvalued, overbought, overbullish” syndromes are likely to be followed by the same outcomes that have attended similar conditions across history. The chart below shows the percentage of U.S. stocks above their respective 200-day moving averages, along with the S&P 500 Index. The deterioration and widening dispersion in market internals is no longer subtle.

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It’s about Apple and Google.

Trump Orders Probe Of China’s Intellectual Property Practices (R.)

President Donald Trump on Monday authorized an inquiry into China’s alleged theft of intellectual property in the first direct trade measure by his administration against Beijing, but one that is unlikely to prompt near-term change. Trump broke from his 17-day vacation in New Jersey to sign the memo in the White House at a time of heightened tensions between Washington and Beijing over North Korea’s nuclear ambitions. The investigation is likely to cast a shadow over relations with China, the largest U.S. trading partner, just as Trump is asking Beijing to step up pressure against Pyongyang. U.S. Trade Representative Robert Lighthizer will have a year to look into whether to launch a formal investigation of China’s trade policies on intellectual property, which the White House and U.S. industry lobby groups say are harming U.S. businesses and jobs.

Trump called the inquiry “a very big move.” Trump administration officials have estimated that theft of intellectual property by China could be as high as $600 billion. Experts on China trade policy said the long lead time could allow Beijing to discuss some of the issues raised by Washington without being seen to cave to pressure under the threat of reprisals. Although Trump repeatedly criticized China’s trade practices on the campaign trail, his administration has not taken any significant action. Despite threats to do so, it has declined to name China a currency manipulator and delayed broader national security probes into imports of foreign steel and aluminum that could indirectly affect China.

[..] The Information Technology Industry Council, the main trade group for U.S. technology giants, such as Microsoft, Apple and Google, said it hoped China would take the administration’s announcement seriously. “Both the United States and China should use the coming months to address the issues causing friction in the bilateral trade relationship before Presidents Trump and Xi have their anticipated meeting ahead of the November APEC leaders meeting,” ITI President Dean Garfield said in a statement.

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“On August 15, a full ban on imports of coal, iron, iron ore, lead, lead ore, seafood from North Korea is introduced..”

China Imposes Ban on Imports From North Korea, Yields to Trump’s Calls (Sp.)

China is introducing a ban on imports of some goods from North Korea in line with a UN Security Council resolution, the Chinese Commerce Ministry said Monday. US President Donald Trump has repeatedly called on Beijing to increase economic pressure on North Korea as China is Pyongyang’s biggest trade partner. “On August 15, a full ban on imports of coal, iron, iron ore, lead, lead ore, seafood from North Korea is introduced,” the ministry said in a statement. According to the statement, North Korean products arrived at Chinese ports before the ban would be allowed to enter the country. Import applications of products from North Korea will be halted from September 5. Meanwhile, Chinese companies are still allowed to import coal from third countries via the North Korean port of Rason. However, Chinese importers need to apply for approval from a UN committee set up under the UN Security Council resolution 1718.

Interestingly, Beijing’s move came amid media speculations that Trump is mulling a trade crackdown on China. China is by far the largest trading partner of North Korea. In April, the Chinese General Administration of Customs said trade between the two countries in the first quarter increased 37.4% year-over-year, even despite the UN sanctions on North Korean supplies of coal, the country’s top export earner. The tensions around North Korea have been high over the recent months and they have escalated further after the tightening of economic sanctions against North Korea by the United Nations Security Council (UNSC) last week in response to July’s launches of ballistic missiles by Pyongyang. On August 5, new UNSC sanctions against North Korea could cut the nation’s annual export revenue by $1 billion.

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Saving face.

Kim Jong-un Holds Off On Guam Plan (R.)

North Korea’s leader received a report from his army on its plans to fire missiles toward Guam and said he will watch the actions of the United States for a while longer before making a decision, the North’s official news agency said on Tuesday. North Korea said last week it was finalizing plans to launch four missiles into the waters near the U.S. Pacific territory of Guam, and its army would report the strike plan to leader Kim Jong Un and wait for his order. Kim, who inspected the command of the North’s army on Monday, examined the plan for a long time and discussed it with army officers, the official KCNA said in a report. “He said that if the Yankees persist in their extremely dangerous reckless actions on the Korean peninsula and in its vicinity, testing the self-restraint of the DPRK, the latter will make an important decision as it already declared,” the report said.

The DPRK stands for North Korea’s official name, the Democratic People’s Republic of Korea. Pyongyang’s detailed plans for the strike near Guam prompted a surge in tensions in the region last week, with U.S. President Donald Trump warning he would unleash “fire and fury” on North Korea if it threatened the Unite States. South Korean and U.S. officials have since sought to play down the risks of an imminent conflict, helping soothe global concerns somewhat on Monday. Kim said the United States should make the right choice “in order to defuse the tensions and prevent the dangerous military conflict on the Korean peninsula,” the KCNA report said.

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Oh, get real: “..poised to benefit from the tailwind of a much improved global backdrop.”

Australia’s Central Bank Renews Alert on Mounting Household Debt (G.)

Australia’s central bank renewed its focus on mounting household debt, even as the outlook for the nation’s economy improved, according to the minutes of this month’s policy decision where interest rates were left unchanged. RBA noted “need to balance the risks associated with high household debt in a low-inflation environment” in its decision to stand pat on policy. Better hiring this year meant “forecasts for the labor market were starting from a stronger position”. The bank reiterated GDP growth was expected to rise to around 3% in 2018 and 2019, supported by low rates; faster growth in non-mining business investment is expected. The main change is one of emphasis after the Reserve Bank of Australia removed the labor market and added household balance sheets – where debt is currently at a record 190% of income – to its key areas of concern alongside the residential property market.

But the minutes convey rising confidence that Australia’s economy will strengthen and is poised to benefit from the tailwind of a much improved global backdrop. Yet areas of substantial uncertainty remain: how China manages the trade-off between growth and the build-up of leverage; the fact the forecasts for the domestic economy are based on no change in the exchange rate in the period through 2019; and whether better employment would lead to higher household income and increased consumption, or whether ongoing weak wage growth and high household debt would cut into consumption.

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Neither country seems to know how one gets a passport down under. Curious.

Australia Says New Zealand Opposition Trying To Bring Down Government (G.)

Australia and New Zealand have become embroiled in an extraordinary diplomatic spat over claims the New Zealand opposition colluded with the Australian Labor party (ALP) in an attempt “to try and bring down the government”. During a febrile day of politics in both countries, Australia’s foreign affairs minister, Julie Bishop, said New Zealand’s opposition party was threatening the stability of a usually robust partnership between the two nations. She said she would find it “very hard to build trust” if New Zealand’s opposition Labour party were to win the general election in September. Her comments came only 24 hours after it was revealed that Australia’s deputy prime minister, Barnaby Joyce, held New Zealand citizenship and may be ineligible to sit in parliament under the Australian constitution, which disqualifies dual nationals.

Malcolm Turnbull’s government currently commands a majority of one seat in the House of Representatives. But Australia’s ruling coalition has now accused the opposition Labor party of planting a question in the New Zealand parliament in order to extract the information about Joyce’s nationality. Australian government minister Christopher Pyne accused the ALP of being part of a conspiracy to bring down the government. “Clearly the Labor party are involved in a conspiracy using a foreign government, in this case New Zealand, to try and bring down the Australian government,” he said. “How many other foreign governments, or foreign political parties in other countries, has the Labor party been colluding with to try to undermine the Australian government? “Has he been talking to the people in Indonesia, or China, or the Labour party in the UK?”

Joyce made the admission after media inquiries on the subject, but it subsequently also emerged that on 9 August the New Zealand Labour MP Chris Hipkins submitted two written questions to the internal affairs minister, Peter Dunne, in parliament, both of an unusual nature. “Are children born in Australia to parents who are New Zealand citizens automatically citizens of New Zealand; if not, what process do they need to follow in order to become New Zealand citizens?” Hipkins asked. He also asked: “Would a child born in Australia to a New Zealand father automatically have New Zealand citizenship?”

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What austerity also does.

Greek Population Set To Shrink Up To 18% By 2050 (K.)

A new study released by the Berlin Institute for Population and Development suggests that Greece is set to lose up to 18% of its population by the middle of the century. The deep economic crisis – which has hit young people especially hard and is identified as a key reason behind the country now having one of the lowest birth rates in the world – is cited as the primary cause of this decline, which has accelerated in recent years. According to the study, Greece had already lost nearly 3% of its population between 2011 and 2016. In 2016, Greece’s population stood at 10.8 million. That is expected to drop to 9.9 million by 2030 and 8.9 million by 2050. That is a nearly 18% decline in the country’s population over the next 33 years. Greece also has a rapidly aging population, with 21% already over the age of 65 and fewer than 100,000 babies being born each year. This percentage is currently the second highest in Europe, after Italy. Greece will have the highest ratio of pensioners to workers in Europe by 2050.

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They’re stuck in hell.

Sharp Fall In Number Of Refugees, Migrants Arriving In Italy (AFP)

Italy has seen a sharp fall in the number of migrants arriving on its shores, a decline that has left experts scrambling for an explanation. Summer is traditionally the peak season for migrants attempting the hazardous crossing of the Mediterranean from North Africa to Europe. But, to much surprise, only 13,500 have arrived in Italy since July 1, compared to 30,500 over the same period in 2016 – a year-on-year fall of more than 55%. Many migrants are from poor sub-Saharan Africa, fleeing violence in their home country or desperate for a better life in prosperous Europe. “It’s still too early to talk of a real trend,” cautions Barbara Molinario, a spokeswoman for the UN High Commissioner for Refugees (UNHCR).

One mooted reason for the fall is tougher action by the Libyan coastguard. The force which has been strengthened by help from the European Union (EU), which trained about 100 personnel over the winter, while Italy has provided patrol vessels, recently supported by Italian warships in Libyan waters. But according to figures from UN’s International Office of Migration (IOM), the Libyan coastguard have intercepted fewer than 2,000 migrants since early July, compared to more than 4,000 in May. Another reason put forward to explain the decline is tougher action by NGOs who have been accused by critics of colluding with smugglers to pick up migrants at sea to prevent them from drowning. But these organisations have been involved in only a fraction of migrant rescues – and three NGO vessels are still operating in the hope of picking up those in need.

[..] Since 2014, 600,000 migrants have landed in Italy, but more than 14,000 have died. Italian newspapers which, just a few weeks ago, were accusing NGOs of abetting an influx that seemed uncontrollable have now switched to reports on the terrifying conditions faced by migrants in Libya. “Sending them back to Libya right now means sending than back to Hell,” the deputy foreign minister, Mario Giro, said earlier this month.

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Apr 072017
 
 April 7, 2017  Posted by at 8:35 am Finance Tagged with: , , , , , , , ,  7 Responses »
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I don’t know anything more than anyone else does, outside of the decision makers’ circle, about the reasoning behind the Tomahawk missile attack on a Syrian airport. Have the US neocon warmongers won over Trump and the White House, as I see suggested? Have the Goldmanites? Is that the same group of people? If Trump has conceded to the warmongers, will Putin be next in line? Should Russia have pushed through when it had the upper hand in Syria, and ‘finished’ the job?

All these things, and many more, are possible. What’s certain is that Trump’s popularity will surge in America. Nothing unites like a Tomahawk, it seems. Plus ça change… But what has really happened? ABC reports that the Syrian army appears to have been warned in advance of the attack, and pulled out its people and as much of its material as it could.

That means either the Americans have warned them, or more likely the Russians have, as the US knew they would when it told Moscow about the impending ‘operation’ before it took place. And that makes it largely symbolic then, doesn’t it, as former National Security Adviser Richard Clarke suggests to ABC. Of course that would change if there are additional, and more deadly attacks, and that could happen any moment now. For now it’s more or less plausible though.

 

But why launch a symbolic attack on Assad? Why not go ‘bigly’ if you really want him gone? It’s not exactly a first warning. Is it perhaps a symbol meant for Putin to understand? Does the US tell Moscow that it should better control Assad? Doesn’t sound convincing. But it still sounds better than Trump putting on a show for domestic consumption only. It may make him more popular, but he can do without the protests.

There’s another element in all this that deserves more scrutiny. Sort of linked to the Putin-Assad connection. That is, why was the attack launched at the very moment that Xi Jinping was sitting down for dinner at Mar-a-Lago? Trump had reason to show the world that he’s willing to use his strength. You can question the whole thing, but it makes sense, from a military point of view, in more than one way.

And the biggest threat to the US, and perhaps the world, is not Assad. It’s North Korea. The US had to tell China that its protégé is getting out of hand. That has been going on for a while of course, but Kim fired a bunch of rockets recently, and one of these days that could lead to a -nuclear?- ‘accident’. Countries like South Korea and Japan are getting very nervous, and the US has vowed to protect them. As Xi is well aware.

 

So the symbolism here may be directed, in a pretty direct way, at Xi Jinping. Get your boy under control or we soon will have no choice but to do it for you. And we don’t want to do that, because you will lose face if we do, and if that happens the two of us may get into a conflict, on opposite sides. Which neither of us should want. It would be bad for business. And while you’re here to discuss business, let’s get this out of the way first.

As I said, I could be wrong in much of this, but I don’t believe for a second that the attack taking place while Xi is at the ‘Winter White House’, is a coincidence. That, too, is a symbol. And it’s not about starting a war, the US has been active in Syria all along, albeit more secretly. That would suggest it’s useful to wonder why this attack was executed the way it was, and why there is so much fanfare surrounding it, why this specific one had to make all the headlines.

Before dinner, Trump reportedly said he had already struck a friendship with Xi, and “I have gotten nothing, absolutely nothing.” Jovial banter between two men, and their delegations, who are extremely wary of each other. So much so that direct open serious talk is difficult, that is done on the sidelines and in backrooms by assistants. It’s the kind of situation in which people talk, communicate, in symbols.

 

Dec 312014
 
 December 31, 2014  Posted by at 8:24 pm Finance Tagged with: , , , , , , ,  19 Responses »
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John Vachon Auto of migrant fruit worker at gas station, Sturgeon Bay, Wisconsin Jul 1940

Let’s see, how do we close this year in a proper manner? I already wrote that 2014 for me has been The Year Propaganda Came Of Age. Likewise, looking forward, I said that The Biggest Economic Story Going Into 2015 Is Not Oil. Moreover, I talked about things that need to be done next year in Things To Do In 2015 When You’re Not Yet Dead.

So what else is left? I thought I’d make a list of narratives that painted the past year, and look at what’s real about them versus what we’re being told they are about. Nothing comprehensive about them, mind you, just train of thought.


Ukraine/Crimea/Putin

The Crimeans voted to join Russia: not an option. Everybody but the Crimeans and Russians declared the vote illegal. East Ukraine held a referendum: not an option. Everybody but the East Ukrainians and Russians declared the vote illegal. The ‘logic’ is the only people who can hold a legal referendum in East Ukraine are the very ones who send in their armies to kill them.

But the US/EU-led ouster of an elected president, and the replacement of his government with one led by a US handpicked PM, narrowly voted in by a parliament at the time replete with guns and at best shady elements, that’s democracy, AD 2014. Throw in a billionaire Willy Wonka who, true, did get elected as president, though the legal status of that election should be under scrutiny given that East Ukraine did not, could not, participate in electing its own leader.

One of the very first things Willy Wonkoshenko did was order his Swastika-toting storm troops to go and kill more East Ukrainians, whose ‘official’ president he had just become (and they did). This all happened under US/EU command (Ukraine itself couldn’t fund a brassband, let alone an army).

Which makes me think, that’s not that far removed from for instance imagining that Washington sends its army into Texas or West Virginia with a licence to kill. But who over there have stood up for East Ukraine? None that I’m aware of. Other than Ron Paul, a proud Texan himself. You guys could have really gotten under Obama’s skin on that, but you never did. What a missed chance, right wing America! Too far away? Too close? Here you got these people whose only goal it is not to be subdued by Washington, and who get shot to bits because of it, and you don’t recognize yourselves in that image?

The west didn’t leave Putin any other option than to assimilate Crimea – and he did it through elections! -; it was clear all along to all involved that Russia would never let go of its only warm water port. It had nothing to do at any point with anything close to a majority of Ukrainians wanting to be ‘free’, but with the west – NATO – wanting to encroach on Russia’s borders, despite specific agreements stemming from the early 1990s not to do that. Putin is not the aggressor in this narrative, we are.


EU

2014 was almost quiet in Europe, apart from the Ukraine narrative, compared to the last few years. Well, that’s not going to last. We’re going to have a Greek election January 25, and an epic three weeks of mud-slinging and fear-mongering prior to that date. It’ll be something to behold, at least from a safe distance. For the Greek people, it won’t feel like much fun.

The European Union consists of democracies – however flawed and corrupt they may be -, but it is not itself a democracy. And that increasingly reflects back – in a very negative way – on the original democracies that founded the doomed edifice in the first place. Everyone gets infected by the virus eventually.

The EU, and the eurozone, will fail and fall apart at some point. The longer it takes, the worse it will be for the people. The EU deserves to fail for the same reasons other supra-national organizations do, like NATO, World Bank, IMF etc.: they’re all inherently undemocratic. They have no reason to listen to what people want. The same can by now well be said for the US, by the way.

The reason these organizations will start to fail now is that economies have begun to fail. It’s as simple as that. I first quoted Yeats years ago on this, but it’s still as fitting as can be: The Centre Cannot Hold. Not when the economy falls to bits. All the smart boys will call it protectionism, in very derogatory tones, but that’s what happens when economies and empires fail: people must manage to take care of themselves in smaller units.

The good thing is, people are very good at that. The bad thing, is emperors and other power hungry ‘leaders’ don’t take kindly to being made redundant. But it has to be done regardless. So let Greece lead the way. It wouldn’t be the first time. Brussels has been nothing but disaster to southern Europe. The European Union is dead and must be dissolved, and its place be taken by a form of cooperation that doesn’t suffocate entire nations. There’s no simpler or clearer way of putting it.


OPEC and oil prices

I know where it’s coming from, but I still look with a childish kind of amazement at all the pundits who declare OPEC, and Saudi Arabia first, responsible for what happens to oil prices. If only OPEC would cut production … what? like they did 30-40 years ago?! It’s a different world, kiddos. Why not demand the US cut production, or Canada? The rationale behind that is energy independence and all that, isn’t it?

But the reality behind that, in turn, is that global oil demand is dropping much faster than producers anticipated, while supply – temporarily – outpaces expectations because of unconventional oil. But, you know, if you fill your media to the brim with false reports about US growth and China growth day after day, what can you expect? The recent sudden drop in oil prices was a long time coming, and only held back by the QE related global central bank money drops.

We’ve seen lipsticked pigs for years now, and we think they’re born that way. They’re not, But it’s still very blind to say OPEC caused the drop in prices. I found a nice take on this at RT, where they interview Margaret Bogenrief at ACM partners, who says:

I think what is most interesting, and you are seeing this really with a lot of countries throughout the Middle East, is the genie has kind of been let out of the bottle. I mean, in Saudi Arabia its oil prices, in other countries like Iraq it’s the dissolution of the previous government. I don’t know if there is a lot that Saudi Arabia can do in 2015 to really take care of its citizenry and to prevent the unrest that you see is growing there. If you look at its population, it’s predominantly male, young and unemployed.

And I don’t know if there is a lot that they can do to keep that under control. [..] I think social unrest in Saudi Arabia is going to be a significant issue in 2015 and beyond. What I think is most interesting is that if you look at the 2014 economic numbers, oil accounted for something like 89% of the country’s revenue. That’s a very singular economy. And if you look at this economic disparity combined with that so focused on that resource, you are going to see some significant issues in 2015 and beyond.

[..] the US has really worked under the Bush and Obama Administrations to increase domestic oil production. That has sent a signal to the world market that the US is really looking not to be as competitive as Saudi Arabia, but certainly to be involved and try to control that a little bit more. Secondly, it’s also just a demographic issue. Saudi Arabia is facing a demographic reality that it has not had to face for decades. The combination of those two things along with the US fracking and trying to get more involved in the energy sector, that’s really combining to costs and issues.

If you look at fracking, I actually think that fracking is not as significant when it comes to actual oil production. I think it’s a better message tool than it’s an actual production tool. What Saudi Arabia is realizing, you certainly saw it in the budget, is that suddenly it doesn’t have complete control over the pricing and manufacturing of oil. That’s really causing some issues. In the budget for 2015 oil was priced to be $80 a barrel. Honestly, that’s wishful thinking.

If you look at Saudi Arabia it’s going to impact Saudi Arabia far more than other Middle Eastern countries. I know Iran is facing some potential sanction issues in 2015; the US is debating whether or not to lift sanctions. That’s not necessarily energy related but I do think you are going to see some significant changes there too.

Not like it’s a brilliant take, but it’s much better than just about any I’ve seen. The Saudis don’t control the price of oil anymore, and they know it – ahead of anyone else, it seems – . They’ve been running budget deficits for a while, and they’ve just seen their revenues halved. And then some 10,000 dimwit western journalists write that they should cut production, while shale oil in the US must keep growing. And then today the Saudi King was hospitalized today as well?

The House of Fahd is not having an easy time of it. They’re all on quaaludes by now. And then Bloomberg reports about a maze in the export ban laws that allow for more US light crude exports. What a brilliant idea. Export into an overloaded market, and let your own actions behead your own industry.


North Korea

Yeah, that daft film that now allegedly stands for freedom, artistic or otherwise, and that Obama apparently had to lean into. Chances that North Korea was involved into hacking the Japanese firm that financed it and sort of released it are by now slim to none, no matter what the FBI said. This is what America stands for these days. A mere narrative. Next up: the rape and murder of Obama’s daughters, Prince George and Vladimir Putin. All very funny and artistically free.


The US dollar and global currencies, stocks and bonds

As we speak, the euro has passed the $1.21 barrier. When the new year starts, it will sink below that, unless crazy measures are taken by someone, anyone. And stock markets are not going to remain anywhere near their present highs with commodities falling the way they are; too much ‘money’ is being lost along the way. It’s known as debt deflation.

Yes, the greenback had a good run in 2014:

But there’s much more to come. And not because ‘investors like the US’ so much, or because the American economy actually grows at a 5% clip. The real reason is, as I explained in The Biggest Economic Story Going Into 2015 Is Not Oil, that emerging economies are being pulled through a wringer, and all the cheaply borrowed dollars they kept appearances up with are dripping right back into the mothership, i.e. the US.

How happy should this make us? Well, how happy should we be about poverty in Greece, Spain, Brazil and all these other nations to begin with? Do you feel it’s a good idea for us to get richer off of the backs and the misery of other people? If you say yes, it’s clean sailing for a while longer. If you don’t, what are you going to do about it?

If you live in a western country, no matter which one, that’s how your political candidates can promise to keep you rich for a bit. By making people elsewhere poorer, and by making your own children even worse off. There are no other ways left to keep up the facade we live in today. There’s no economic growth, there are no new energy sources, the only thing left to do is borrow from the future. And yeah, I know that seems to work up to the present.

But the price of oil should be a warning sign to you. If oil falls the way it does over a significant amount of time, and other commodities do too, it’s just a matter of time until stocks and bonds start bombing merrily along. And that’s even before the Fed raises its key rates, ‘guided’ by numbers like that 5% US GDP growth in Q3.

This is going to be a crazy year. We’ve said it many times before, but here you go again: volatility will reign the day, in ways we haven’t seen in many years. And the volatility will drive us downward. Not up. Nerves will guide decisions. And losses. Losses that will pressure economies, first of all Japan and Europe, into ever deeper deflationary territory. The central bank fairy tale will not last another 12 months. But the US dollar will be fine. Because it’ll be ‘nurtured’ by the demise of emerging markets.

What we, fortunate citizens of this earth, in the twilight of our civilization, should do in my humble view, is not to enrich ourselves as much as we can, but to ‘minimize the suffering of the herd’, as any shepherd should. I saw this Telegraph headline today, “Goodbye To One Of The Best Years In History”, and I thought, if that’s what you see when you look around, if you’re in Britain and you don’t see that fast and vast increase in poverty on your own doorstep, then what can I say? Hats off? Or heads off?

See ya in da New Year!

Dec 212014
 
 December 21, 2014  Posted by at 10:56 pm Finance Tagged with: , , , , , ,  21 Responses »
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Edwin Rosskam Provincetown, Massachusetts 1937

Michael Moore once famously – though by no means famously enough yet, because he was so dead-on – said that ‘you can’t declare war on a noun’. If only Americans had paid better attention. That would have shone a whole different light on, if not outright prevented, insane, expensive and terribly deadly concepts such as the ‘war on drugs’ and the ‘war on terrorism’. Now it looks as if John McCain is fishing for a fresh noun to declare war on.

Talking about Seth Rogen, Evan Goldberg and James Franco’s ‘The Interview’ movie, and the hackers known as ‘Guardians of the Peace’ who made Sony Pictures pull the movie’s Christmas release, McCain told CNN’s State of the Union that “It’s more than vandalism. It’s a new form of warfare that we’re involved in and we need to react, and react vigorously.” President Obama earlier said the opposite, that it’s not war, but vandalism.

I’d say it’s neither, it’s a bunch of hackers who penetrated Sony’s digital systems quite deeply, encouraged by the apparent lack of true security used to protect the systems. In essence, I don’t understand what either Obama or McCain are doing talking about the issue in the first place. The FBI claims they are certain the hackers are North Korean, but they have provided no proof of that claim. We have to trust them on their beautiful blue eyes.

I think if anything defines 2014 for me, it’s the advent of incessant claims for which no proof – apparently – needs to be provided. Everything related to Ukraine over the past year carries that trait. The year of ‘beautiful blue eyes’, in other words. Never no proof, you just have to believe what your government says.

But so, maybe they were/are North Korean hackers. And then? Is it such a bad thing that a group of people show us that the US is not the world’s sole master of technology, that there’s a certain degree of democracy, or of equality if you will, when it comes to computers and high tech? Doesn’t seem all that bad to me. It would seem much scarier if one party controls it all.

It might be worse of those same people hack the Pentagon, or the control of nuclear weapon systems, but I’m thinking it wouldn’t be a huge stretch to assume those systems are better secured than Sony’s movie-related files. If not, you can’t really blame the hackers for that.

And I know, maybe I should shut up about the whole thing, it’s not really my field, is it, but then, shutting up is not one of my strong points. You see, there are a few things about the whole ‘The Interview’ issue that I simply don’t understand.

I have no idea why the American President goes on TV to simultaneously protect and chide a Japanese company. It just seems weird. Or why, now that Vladimir Putin, and Russia as a whole, have been declared such awful people and such terrible enemies of the US that they need to take the place of Cuba as the worst possible adversaries of the American Dream and suffer blinding sanctions, Obama still reaches out to Russia for help against North Korea and its alleged team of hackers.

I’m trying to find the logic in all this, and I fail. I also don’t understand why the board at Sony pictures agree to spend who knows how many millions of dollars to produce a movie that evolves around the assassination of a head of state. I mean, I’ll be the first one to agree that the Kim Yung-Il and Kim Yong-Un dynasty looks strange to our western eyes and standards, but still, we’re talking about heads of state.

So me, I start wondering what other people’s ‘funny’ assassinations Sony would have agreed to finance a movie about, and whose deaths Rogen and Franco would have found sufficiently amusing to make that movie.

I’m guessing, albeit with with a certain degree of confidence, that attacks on the Japanese royal family would not have been on the list, given Sony’s origins. I also very much doubt the movie would have been made if the Pope had been the ‘comedic target’, though that would also have been redundant, since The Godfather 3 already features the murder of a Pope.

Perhaps my questions are better explained by using as potential victims of a CIA murder plot examples such as Queen Elizabeth, or her adorable little great-grandson prince George, William and Kate’s firstborn and future king of England if that is God’s will. I think in those potential cases, and I could name many more, Obama himself is an obvious one, the humor factor would be way less than now that Kim Jong-Un is the – fantasy – victim.

And if such a movie would have been made not by Rogen and Franco, but by people from North Korea, or perhaps, ISIS, or Venezuela, or Russia or East Ukraine, I’m thinking ‘WE’ would not be amused at all, and John McCain would be on Sunday morning talk shows spewing his convictions that said movie was an act of war against the US, and/or the free world as a whole, whichever comes first, and ‘we need to react vigorously.’

I sort of understand why Rogen/Franco figured it was a funny topic, but I don’t understand why they thought so for more than two seconds, and I certainly don’t see why Sony gave the project the go-ahead. It all doesn’t look terribly smart to me, none of it.

America creates its own enemies out of thin air, because that keeps the empire going and the people obediently following that empire, I get that. But don’t get started about -artistic – freedom of expression, because if you want to play that card, let’s all laugh our socks off about little baby Prince George or his great-grandmother being killed. Or Malala, not a bad example either. That would make Seth and James real men.

Now, they merely look pretty dumb. But I know, that’s just in my eyes, and for many other people it will be different. But people laugh to a large extent because their ideas have been shaped by the images, ideas and pictures the media feed them, whether it’s about Kim Jong-Un, Obama, Malala or little Prince George.

Murdering people is hardly ever a reason to laugh, and murdering heads of state, no matter what you, or your media, may think about them, is even a little bit less so. It has a lot to do with respect. So if you try anyway, don’t be surprised if there’s a bit of a backlash.

One last thought: if The Interview had not been about a head of state, but about an ‘ordinary citizen’, what do you think the odds would have been of the US head of state getting involved in the whole mess? Maybe there is some respect after all… And now we return to our regular scheduled programming…