Ron Paul Asks “What Does The US Government Want in Ukraine?”

Submitted by Ron Paul via The Ron Paul Institute,

In several eastern Ukrainian towns over the past week, the military opened fire on its own citizens. Dozens may have been killed in the violence. Although the US government generally condemns a country’s use of military force against its own population, especially if they are unarmed protesters, this time the US administration blamed the victims. After as many as 20 unarmed protesters were killed on the May 9th holiday in Ukraine, the State Department spokesman said “we condemn the outbreak of violence caused by pro-Russia separatists.”

Why are people protesting in eastern Ukraine? Because they do not believe the government that came to power after the US-backed uprising in February is legitimate. They do not recognize the authority of an unelected president and prime minister. The US sees this as a Russian-sponsored destabilization effort, but is it so hard to understand that the people in Ukraine may be annoyed with the US and EU for their involvement in regime change in their country? Would we be so willing to accept an unelected government in Washington put in place with the backing of the Chinese and Iranians?
 
The US State Department provided much assistance earlier this year to those involved in the effort to overthrow the Ukrainian government. The US warned the Ukrainian government at the time not to take any action against those in the streets, even as they engaged in violence and occupied government buildings. But now that those former protesters have come to power, the US takes a different view of protest. Now they give full support to the bloody crackdown against protesters in the east. The State Department spokesperson said last week: “We continue to call for groups who have jeopardized public order by taking up arms and seizing public buildings in violation of Ukrainian law to disarm and leave the buildings they have seized.” This is the opposite of what they said in February. Do they think the rest of the world does not see this hypocrisy?
 
The residents of eastern Ukraine have long been closer to Russia than to the US and EU. In fact, that part of Ukraine had been a part of Russia. After February’s regime change, officials in the east announced that they would hold referenda to see whether the population wanted autonomy from the US-backed government in Kiev. The US demanded that Russian President Putin stop eastern Ukraine from voting on autonomy, and last week the Russian president did just that: he said that the vote should not be held as scheduled. The eastern Ukrainians ignored him and said they would hold the vote anyway. So much for the US claims that Russia controls the opposition in Ukraine.
 
Even though the Russian president followed US demands and urged the eastern Ukrainians to hold off on the vote, the US State Department announced that the US would apply additional sanctions on Russia if the vote is held! Does this make any sense?

 
The real question is why the US government is involved in Ukraine in the first place. We are broke. We cannot even afford to fix our own economy. Yet we want to run Ukraine? Does it really matter who Ukrainians elect to represent them? Is it really a national security matter worth risking a nuclear war with Russia whether Ukraine votes for more regional autonomy and a weaker central government? Isn’t that how the United States was originally conceived?
 
Has the arrogance of the US administration, thinking they should run the world, driven us to the brink of another major war in Europe? Let us hope they will stop this dangerous game and come to their senses. I say let’s have no war for Ukraine!




via Zero Hedge http://ift.tt/1lqApum Tyler Durden

China’s Oil Rig Gambit: South China Sea Game-Changer?

Submitted by Carl Thayer via The Diplomat,

China’s placement of the giant state-owned oil rig HD-981 in Block 143 inside Vietnam’s Exclusive Economic Zone (EEZ) on May 2 was unexpected, provocative and illegal.

This incident marks the first time China has placed one of its oil rigs in the EEZ of another state without prior permission. This was an unexpected move because China-Vietnam relations have been on an upward trajectory since the visit to Hanoi by Premier Li Keqiang in October. At that time, both sides indicated they had reached agreement to carry forward discussions on maritime issues. China’s move was also unexpected because Vietnam has not undertaken any discernible provocative action that would justify China’s unprecedented actions.

China’s deployment of the rig was provocative because the oil rig was accompanied by as many as 80 ships, including seven People’s Liberation Army Navy warships. When Vietnam dispatched Coast Guard vessels to defend its sovereign jurisdiction, China responded by ordering its ships to use water cannons and to deliberately ram the Vietnamese vessels. These actions were not only highly dangerous, but caused injuries to the Vietnamese crew.

China’s actions are illegal under international law. Chinese Foreign Ministry spokesperson Hua Chunying justified China’s actions by claiming the rig’s operations were in Chinese “territorial waters” and had nothing to do with Vietnam. In other words, China has adopted a position similar to Japan with regard to the Senkaku Islands by declaring there is no dispute with Vietnam.

China has placed itself in an inconsistent position. China has been provocative in using paramilitary ships and aircraft to challenge Japan’s assertion of administrative control over the Senkakus. China seeks to get Tokyo to admit that the Senkaku Islands are disputed. Yet Beijing has adopted Japan’s stance with respect to Block 143 by refusing to acknowledge that there is a legal dispute between China and Vietnam.

Chinese spokesperson  Hua Chunying only presented a general statement, not a detailed legal argument in support of China’s actions. Her claim that the oil rig is in Chinese “territorial waters” lacks any foundation because there is no Chinese land feature within twelve nautical miles of Block 143 on which to base this assertion. Chinese statements refer to the Paracel Islands – and not Hainan Island – as the basis for its claim.

China’s lack of clarity has led academic specialists and regional analysts to speculate about the possible legal basis of China’s claim. In 1996 China issued baselines around the Paracel Islands, including Triton Island. Specialists argue that China’s claim could be based on the proximity of Triton, and its entitlement to a continental shelf and EEZ.

Other specialists point out that the 1996 baselines do not conform to Article 8 of the United Nations Convention on the Law of the Sea and cannot be used to advance a legal claim over Block 143.

If the former line of argument is accepted, China’s hypothetical EEZ would overlap with the EEZ promulgated by Vietnam. This would constitute a legal dispute. International law requires the two parties to enter into provisional arrangement, refrain from the use of force or the threat of force, and take no action to upset the status quo. Clearly China’s placement of the oil rig and its 80 escorts in Block 143 constitutes a violation of international law.

Analysts are divided on the motivations and objectives of China’s current bout of aggressiveness. Three main interpretations have been put forth.

The first interpretation views the placement of the HD-981 rig in Block 143 as the inevitable response by China to Vietnam’s promulgation of the Law of the Sea in mid-2012. Prior to the adoption of this law by Vietnam’s National Assembly, China unsuccessfully brought intense diplomatic pressure on Hanoi not to proceed. Immediately after the law was adopted, the China National Offshore Oil Company (CNOOC) issued a tender for blocks in the South China Sea that overlapped with blocks issued by Vietnam within its EEZ.

According to this interpretation, the current controversy is the result of a decision by CNOOC to follow through and begin exploring these blocks. In CNOOC’s view, Block 143 fell within Chinese jurisdiction. In China’s view, commercial exploration activities in Block 143 would undercut Vietnam’s claims to sovereign jurisdiction.

The first interpretation is questionable given the sheer size and composition of the fleet of 80 ships and vessels that accompanied the oil rig. This was clearly no ordinary commercial venture but a pre-emptive move to prevent Vietnam from defending its EEZ.

Diplomatic sources in Beijing also report that CNOOC officials revealed they were ordered to place the rig in Block 143 despite their misgivings on commercial grounds. CNOOC officials pointed to the costs of keeping the rig on station until mid-August when oil exploration is scheduled to cease. Other observers point out that the prospects of finding commercial reserves of oil and gas in this area are quite low.

A second interpretation posits that China’s actions were in response to the operations by ExxonMobil in nearby blocks..

This interpretation seems unlikely. ExxonMobil has been operating in Block 119 from 2011. While China protested the award of an oil exploration contract to ExxonMobil, China has not stepped up its objections in recent months. It is also unclear how the placement of a Chinese oil rig in Block 143 would deter ExxonMobil from operating elsewhere.

Finally, China’s actions appear to be disproportional and very likely counterproductive. Block 143 does not directly affect U.S. interests. Chinese interference with ExxonMobil would be a direct challenge to the Obama administration’s statement that U.S. national interests included “unimpeded lawful commerce.”

The third interpretation, first publicized by The Nelson Report (May 6, 2014), argues that China’s actions were pre-planned in response to President Barack Obama’s recent visit to Japan, South Korea, Malaysia and the Philippines. During his visit, President Obama publicly opposed the settlement of territorial disputes by intimidation and coercion.

China was angered by the Obama administration’s prior criticism of China’s nine-dash line claim to the South China Sea and U.S. support for the Philippines’ decision to request international arbitration to settle its territorial dispute with China. In addition, China was outraged by President Obama’s public declaration of support of Japan and its administration of the Senkaku islands as well as President Obama’s declaration that U.S. alliance commitment to the Philippines were ironclad.

In sum, the third interpretation argues that China chose to directly confront the main premises of the Obama administration’s rebalance to Asia. China chose to expose the gap between Obama’s rhetoric and U.S. capability to respond to China’s assertion of its sovereignty claims.

Some analysts who support the third interpretation argue that China has taken heart from President Obama’s inability to respond effectively to the crises in Syria and the Ukraine. Therefore China manufactured the oil rig crisis to demonstrate to regional states that the United States is a “paper tiger.”

The third interpretation has plausibility. But it begs the question of why Vietnam was the focus for this crisis. Also, China’s actions could prove counter-productive, coming on the eve of a summit meeting in Myanmar of the heads of government of the ten states comprising the Association of Southeast Asian Nations (ASEAN).

On March 18, China and ASEAN held the tenth joint working group meeting on the Implementation of the Declaration on Conduct of Parties in the South China Sea (DOC) in Singapore. This was followed up by the seventh ASEAN-China Senior Officials’ Meeting on the Implementation of the DOC in Pattaya, Thailand on April 21. While progress has been slow, there were some encouraging signs that confidence building projects under the DOC might be developed. As one ASEAN diplomat put it to the author, “the journey [consultations with China] is more important than the destination [achieving a binding COC].”

China’s deployment of the oil rig and accompanying fleet ensured that the South China Sea would be a hot button issue at the ASEAN Summit. ASEAN Foreign Ministers issued a stand alone statement on May 10 expressing “their serious concerns over the on-gong developments in the South China Sea, which increased tensions in the area.” It is significant that a separate statement was issued on the South China Sea. This statement implicitly expresses support for Vietnam and lays the foundation for a similar statement by ASEAN heads of government/state.

The Foreign Ministers’ statement did not specifically mention China by name but it reiterated ASEAN standard policy on the South China Sea. The statement urged the parties concerned to act in accord with international law, including the United Nations Convention on the Law of the Sea, to exercise self-restraint, avoid actions that could undermine peace and stability, and to resolve disputes by peaceful means without resorting to the threat or use of force.

The ASEAN Foreign Ministers’ Statement called on all parties to fully and effectively implement the DOC. The Statement also called for the need for “expeditiously working towards an early conclusion of the Code of Conduct in the South China Sea.”

The ASEAN Foreign Ministers’ Statement did not mention China by name in deference to Beijing. But the Statement may be read as a shift in the views by individual members of ASEAN that territorial disputes involving the Paracel Islands and its surrounding waters are a bilateral matter between China and Vietnam.

An endorsement of the Statement by the Foreign Ministers on the South China Sea by the ASEAN Summit will provide political and diplomatic cover for the United States and other maritime nations to express their concern.

Japan’s Prime Minister Shinzo Abe has already come out in public in support of Vietnam. The U.S. State Department issued a statement characterizing Chinese actions “provocative.” More importantly, Assistant Secretary of State Danny Russel just visited Vietnam on a scheduled trip. He will be able to take his first-hand assessment back to Washington to shape the Obama Administration’s response.

Beneath the ASEAN diplomatic surface, however, China’s actions are likely to stoke anxieties already held by the Philippines, Vietnam, Malaysia, Singapore, and Indonesia. These states will seek to shore up their own maritime capabilities and to seek reassurance of support from the United States and other maritime powers such as Japan, Australia, and India.

Vietnam has reiterated its determination to respond to Chinese tactics of ramming its vessels. The current stand-off between Chinese and Vietnamese vessels in the waters around the CNOOC oil rig therefore holds the potential for an accident, a miscalculation, or the use of deadly force.

It is more likely that China and Vietnam will manage this affair by preventing matters from escalating to the extent that armed force is used. As of May 2, China and Vietnam have held six face-to-face diplomatic meetings in Beijing and three meetings in Hanoi between the Ministry of Foreign Affairs and Chinese Embassy officials.

Vietnam has requested that China receive a high-level special envoy. Diplomatic rumor has it that the special envoy will be a member of the Vietnam Communist Party (VCP) Politburo. Vietnam has resorted to sending special envoys to Beijing on two occasions in recent years and both visits resulted in a lowering of tension.

On May 8, the VCP Central Committee opened a long-planned executive session. This will provide Vietnam’s leaders with an opportunity to review the current crisis and to work out an effective political and diplomatic strategy to deal with China. Consensus on this issue will give the special envoy authority to speak on behalf of the Hanoi leadership.

When China first announced the deployment of its oil rig, it stated that its operations would terminate on August 15. This provides plenty of time for both sides to orchestrate and manage the confrontation in Block 143 and provide a face saving means for ending the confrontation.




via Zero Hedge http://ift.tt/1uX5kUb Tyler Durden

Europe’s Luxury Home Bubble: People Are Dying To Own Dracula’s Castle

With 560,000 visitors a year, Dracula's Castle may not be the ideal seclusion spot for the uber-wealthy European real estate magnate, but, as the realtor notes "n the right hands it has the potential to generate far more revenue than we could ever imagine," – we suspect followed by an echoing 'mwuahahahahaha'. Construction on Bran Castle (for it's not actually Vlad The Impaler's residence of old but he was imprisoned there briefly) began in 1377 and as HuffPo notes, the 57-room manor on 22 acres has been on the market several times in recent years, with investors at one point hoping to get $135 million. As the firm running the castle noted, “If someone comes in with a reasonable offer, we will seriously entertain the idea." We suspect people will be dying to buy this and with rates so low, it won't bleed you dry either...

 

But it doesn't look so scary…

 

Actually more bond villain than blood-sucker…

 

Not so sunny courtyard…

 

Inside is a little more spooky

 

Wardrobes are full…

 

And a spacious living room…

 

The property comes with a long list of previous owners: everyone from Saxons to Hungarians to Teutonic knights. And although the facilities may not be exactly state-of-the-art (the plumbing is reported to require some work), there's no questioning the detachedness of the property. It stands on top of a hill, and is most definitely not overlooked by neighbours.

And yes, we all know that the bloodsucking vampire Count Dracula was a purely fictional character, invented by the British writer Bram Stoker, and made famous in films starring sharp-fanged Christopher Lee. But the fearsome real-life Vlad "The Impaler" Tepes famously operated in this area in the 15th century. Indeed, he is said to have been imprisoned in Bran Castle for a couple of months. On top of which, Transylvanian legend and folklore are full of characters called strigoi. These ghostly beings leave their corporeal bodies when darkness falls and roam the surrounding valleys searching for sleeping villagers to terrify.

There's enough land to build a small hotel, he adds. "And we're also installing a glass elevator that will lead to a tunnel in the mountain, with a light show featuring Dracula and the whole history of the place.

"That's why we'd like whoever buys the castle to continue running it as a tourist destination. This isn't just a national monument, it's the largest and most significant attraction in Romania."




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Guest Post: Gun Control In Nazi Germany

Submitted by Audrey Kline via the Ludwig von Mises Institute,

There is no shortage of theories or writings related to the rise of the Third Reich and the subsequent Holocaust. Stephen Halbrook’s 2013 book, Gun Control in the Third Reich offers a compelling and important account of the role of gun prohibition in aiding Hitler’s goals of exterminating the Jews and other “enemies of the state.” While much of the early gun prohibition was created with supposedly good intent, Halbrook carefully and meticulously details how a change in political regime facilitated manipulating some well-intentioned gun registration laws and other gun prohibition to be used in inconceivable ways.

Students of history as well as Second Amendment enthusiasts will find this a fascinating book and will find parallels between gun prohibition in pre-Nazi and Nazi Germany, and attempts to prohibit types of gun ownership and implement other forms of gun prohibition in the United States today. The current climate in the United States surrounding gun prohibition combined with a president who uses his office to impose executive order in ways not historically common gives many citizens pause, especially when looking at the era of the Third Reich. While certain states have imposed gun registration laws recently, enforcement of the laws remains unclear.

While Halbrook is careful to point out that a combination of factors led to the events of the Holocaust, there is no denying that many of the pre-war activities contributed to Hitler’s ability to disarm targeted groups, particularly the Jews. The rapid pace with which Hitler disarmed the populace in Germany is startling. Halbrook’s account is gripping, thorough, and full of legal documentation, leading the reader through the sometimes-daily changes in gun prohibitions that furthered Hitler’s agenda. Ultimately, the prohibitions enacted by the Nazi regime led to monopoly control of firearms by the Nazis and eliminated the ability of many groups in society to defend themselves. A similar progression in contemporary society related to government control of firearms and the firearms industry is a concern of many gun owners in the United States today.

In Part I of the book, a chaotic post-WWI Germany is the backdrop, a time when there were no established policies or laws pertaining to firearm ownership. Concern about firearms not being turned in after the war and conflict between extremist groups and the government led to the implementation of gun control laws. However, well-meaning clauses in the laws were subsequently used to provide the government with complete control over gun ownership, creating registries of gun and ammunition ownership, which ultimately fell into the hands of the Nazis. These lists were methodically used to disarm citizens. Through the first three chapters of the book, Halbrook does a masterful job of detailing the ever-changing gun control policies, ranging from the most extreme (execution on the spot) to the postured ‘relaxation’ of gun control laws that allowed possession of very expensive long arms that would not be affordable for the majority of the population.

Part II of the book opens with the naming of Hitler as chancellor of Germany at the end of January 1933, and the immediate utilization of the Weimar gun control policies to begin the Nazi campaign to seize arms and eradicate the so-called “enemies of the state” (all of whom were tagged as Communists). As a result, less than a month later, Hitler and Göring convinced President Hindenburg that an emergency decree was needed, which ultimately gave the Nazis the ability to eliminate constitutional assurances of liberty and free speech, a free press, the ability to assemble, and the right to privacy in personal communications. Furthermore, search and seizure of homes was authorized. This carte blanche for search and seizure essentially became the modus operandi of the Third Reich.

By the end of March, Hitler had succeeded in passing the “Enabling Law” which gave him the ability to create laws as he wished, with no requirement for consultation. Following this, the confiscation of weapons escalated. Municipal governments were informed that military weapons and ammunition had to be surrendered by the end of March. The Jews were targeted next, with a large raid in East Berlin on April 4, 1933. Jews were not forbidden to own firearms until 1938, but the raid led to confiscations and arrests. The 1928 Firearms Law was utilized to identify the so-called enemies of the state, locate them, interview them, and subsequently confiscate their weapons, thereby increasing Nazi control and eliminating private ownership of firearms from the majority of society.

Part III of the book details episodes of enforcement and expansion of gun prohibition by Hitler’s regime. To mark the one-year anniversary of Hitler’s power, the Law for the Reconstruction of the Reich was passed in January 1934, which centralized control over police and led to the replacement of the SA (Sturm Abteilung or Brownshirts) with the SS. Upon President Hindenburg’s death, Hitler assumed the presidency as well, allowing him the ability to rule by decree. Hitler could now declare laws at will and there was no right of appeal for those arrested. The military pledged allegiance to Hitler and the citizenry was instructed to follow Hitler’s decrees.

Confiscated firearms were redistributed to the police and concentration camp guards. The number of searches and arrests continued to escalate, and with the adoption of the Nürnberg Laws in September 1935, Germans or those with ‘kindred blood’ were decreed as citizens, leaving the Jews without citizenship and consequently, without civil rights. A new weapons law was drafted in November that would also forbid Jews from operating in the firearms industry. Though not yet enacted, the draft opened the door for the stealing of the gun manufacturing company, Simson & Co., by Hitler, who claimed that the Jewish owners were guilty of fraud. Additional accounts are given of exploitation of various incidents to further the Nazi campaign against the Jews.

Nazi Party control of the use and ownership of firearms was quickly implemented and far-reaching, with refinements to the Weapons Law continuing over the next few years. Eventually, in April 1938, Jews were required to register their personal assets if valued at over 5,000 marks. Just a few months later, Jews were required to register at local police stations to receive identification cards. Jews began to flee Berlin and other parts of Germany, as they were able.

In the concluding section of the book, Reichskristallnacht (Night of the Broken Glass) is detailed. Jews had been systematically disarmed, and their identity and locations were now on file with local police. It was simply a matter of time before the full shift into deportation and extermination of the Jews would begin. Records support that a campaign to arrest legally registered Jewish owners of firearms was now underway, along with the push by the Nazis to pressure Jews to flee Germany.

The complete confiscation of weapons held by Jews at this point was sparked by the November 7, 1938 assassination attempt of a German diplomat, supposedly by a Polish-Jewish teenager at the embassy in Paris. The Night of the Broken Glass came in the following few days. All Jewish weapons (including such things as letter openers) were confiscated, and all Jewish organizations were deemed illegal. With the Jews disarmed, Hitler’s plans could proceed with a defenseless populace. The majority of the non-Jewish German population was stunned by what had transpired but too afraid to protest. Isolated cases of resistance remained, such as the now well-known case of Oskar Schindler. When deportations commenced in October 1941, the possessions of the Jews were searched by the Gestapo for anything of value, and completed the disarming of the Jews. The dangers of silent witness are now well known.

As has been well documented, Jews were methodically attacked, their homes, businesses, and synagogues ransacked and burned. Upward of 30,000 Jews were arrested. Any Jews resisting arrest were ordered shot on the spot. Attacks on the Jews were to be carried out by the SA, with no interference by police. Jews arrested were to be sent to concentration camps for up to 20 years. The pogrom was so thorough that nearly all age appropriate, Jewish adult males in Stuttgart had been arrested. With the population afraid and disarmed, Hitler could proceed with little worry about resistance. The Court reinforced that there was no judicial review needed for activities of the Gestapo.

Halbrook concludes by noting that less government regulation and a tradition of rejecting tyranny could have led to a different outcome in Germany. Instead, systematic creation and manipulation of firearms registration and regulations, coupled with the decimation of individual citizen’s rights, enabled Hitler’s dictatorship and the slaughter of millions of innocent Jews and citizens of Nazi-occupied countries, as well as tens of thousands of Germans. It remains for all of us to wonder what might have been had people refused to register their firearms. Indeed, we should all take note and never forget.




via Zero Hedge http://ift.tt/1uWVbqP Tyler Durden

Adapting To The Coming Change In The New Normal

The CEO of Benzinga has a post up full of some solid charts. 

Via Jason Raznick’s Tumblr:

Last week I touched on the housing market, the yield curve and the Federal Reserve’s expected continued taper action.  Cruising through earnings, it is now time to revisit certain indicators that speak to the underlying health of the economy and that of the US equity and Treasury bond market.  The Federal Reserve’s QE policy has punished savers in terms of real rates of return in an effort to spur spending to drive a recovery.  Looking at the difference between the 10 Year Treasury Note and the annual change in the CPI, otherwise known as the Real Rate, the pressure from the Fed on savers to spend is evident:


 

The spread on the US Treasury 10-Year Note and its 3-Month Bill shows how large an impact the Fed’s buying program has had on the fixed income market.  Their purchase of MBS securities and Treasury paper has dropped long-term yields in an effort to spur the housing market with cheaper rates.

 

 

The knock-on effect of the Fed QE policy has driven up the Equity Risk Premium as money flows into the equity market.  Now as participants prepare for the Fed to cease QE, the ERP has dropped dramatically since 2012 relative to its past 30 years.

 

Click here to read the rest of the post




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The Writing Is On The Wall… And We Should All Read It

The "Shiller P/E" is much in the news of late, and, as ConvergEx's Nick Colas suggests, with good reason. It shows that U.S. equity valuations are pushing towards crash-worthy levels. This measure of long term earnings power to current price is currently at 25.3x, or close to 2 standard deviations away from its long run median of 15.9x. As Colas concludes, the writing is on the wall and we must all read it. Future returns are likely going to be lower. Competition for investor capital will get even tougher. That’s what the Shiller P/E says, and it is worth listening.

Via ConvergEx's Nick Colas,

With all the investor attention on this measure, you don’t hear much about how it should inform corporate capital allocation and investor relations. Since stock prices are essentially a conversation between the owners and managers of capital, the Shiller P/E should have a place in the boardroom as well. 

For example, should companies engaged in buybacks be more careful at these levels, and how do they explain that caution?  And what about managing investor expectations for future returns on the business, and therefore its underlying equity?  After all, the higher the Shiller P/E, the more likely that future returns will run below historical averages.  In short, this is not just a useful tool for investors – it should also inform corporate capital planning and communication.

On the table in my den I have a plaque with Mercedes-Benz and Chrysler hood ornaments glued to the top.  It is a deal toy – those commemorations that investment banks give out to the people who work on a specific transaction.  You see them littering the officers of corporate treasurers and chief financial officers, bankers, and private equity professionals.  The more toys, in theory, the more experience the person has. And the more elaborate the toy, the more creative the 28 year old investment banking associate who really did all the work getting that deal across the finish line.

You could tell that the merger of Daimler and Chrysler was going to fail by just looking at those hood ornaments on the deal toy.  Daimler-Benz mounts its famous three pointed star (for land, sea and air transport) on a spring, so that in the case of an inadvertent knock it pops back up unharmed.  The corporate name and laurel wreath on the base is done in a lovely blue lacquer worthy of a piece of jewelry.  In contrast, the Chrysler hood ornament feels flimsier, has no spring mount and no lettering.  One sharp blow and you just know the thing would snap two.  And there’s really nothing wrong with either engineering ethos – they are just different approaches for different markets.  But culturally, they are like oil and water.

Of course, it didn’t help matter that the merger occurred in 1998, right at the peak of the North American auto profit cycle.  Chrysler got over $40 billion for the company in Daimler stock.  Nine years and one forced CEO (the architect of the deal) departure later, Daimler sold Chrysler to private equity firm Cerberus for $6 billion.  And two years after that the company filed bankruptcy.  You could, in essence, time the tops of every market for the last two decades on when Chrysler changed hands.

The U.S. stock market has its own “Chrysler Indicator” in the form of the Shiller Price/Earnings ratio.  First developed by Nobel Prize winner Robert Shiller for his book “Irrational Exuberance” in 2000, it measures the current price of the S&P 500 as a multiple of 10 year average corporate earnings.  It is essentially what old-school analysts would call an earnings power ratio, since it incorporates good and bad years into one across-the-cycle measurement.  A few points here:

The current reading on the Shiller P/E is 25.4x.  Looking at a time series back to 1880 (available here: http://ift.tt/16rolhY) this is quite expensive.  The mean observation is 16.5x, and the median is 15.9x.  The cheapest-ever U.S. stock market was in December 1920 at 4.8x, and the most expensive was in December 1999 at 44.2x.

 

 

For you bell-curve fans out there, the standard deviation of the 1,600 monthly observations back to 1880 for the Shiller P/E is 6.6.  That puts 95% of the distribution between 3.3x and 29.7x.  In other words, at the current reading of 25.4x we are knocking on that upper bound.  Put another way, levels above 25 only occurred once before the mid 1990s, and that was going into Black Tuesday 1929.  And the Black Monday 1987 crash happened with a Shiller P/E south of 20.

 

Now, a few words of “Maybe this time is actually different” caution.  First, stock valuations and interest rates are lashed together like unwilling participants in a three legged race at a corporate retreat.  Long term rates are still near historic lows, so stock valuations do have the oxygen to survive at these elevated levels.  Second, accounting standards change like the wind, so comparing reported earnings in 1914 to 2014 is always going to be difficult.  Thirdly, the S&P 500 posted its one and only quarterly loss in 2009, so perhaps that 10 year earnings record is too pessimistic.  Lastly – and giving the bearish case a little room to run here – Federal Reserve policy in the form of bond-buying does prime the market’s liquidity pump in a unique and unpredictable way.  This has been positive for stocks, but the story isn’t over yet.

 

Even with those caveats, the Shiller P/E is a clear voice in the wilderness calling for investor caution.  History may not repeat itself, as the old saw goes, but it often rhymes.

Turning back to the Chrysler example for a moment, what if corporate managers paid as much attention to the Shiller P/E as investors should and increasing actually do?  Are there points in the cycle where the smart corporate money just waits out the froth? Some thoughts on this question:

At the heart of the question is the concept of expected future returns.  The real reason that investors value the Shiller P/E is because it is a reliable forecasting tool for what the market will do over the next few years.  At current levels, for example, average real 3 year future returns are only 5% or so (see the sources at the end of this note for the graph).

 

The analog in the boardroom (rather that the trading room) is the Equity Risk Premium (ERP).  This calculation has its own guru, NYU Finance Professor Aswath Damodaran.  His calculations show something similar to the Shiller P/E: companies should assume that investors require a higher rate of return during periods of crisis than during times of exuberant confidence.  Interestingly, he comes to observation through a very different set of exercises ranging from stock versus bond return data to surveys of investors and corporate managers to expected future cash flows and assumed discount rates.

 

For the most recent month, Damodaran pegs the U.S. Equity Risk Premium at 5.1% based on trailing earnings, which puts the expected rate of return on the U.S. stock market at 7.7% with the current 10 year Treasury yield of 2.61%.  That’s based on your friendly neighborhood Capital Asset Pricing model with a beta of one, a.k.a. the market beta.

 

There’s a large gap between what the Shiller P/E tells us to expect – sub 5% returns – and the 8% (rounded up) on the corporate side.  Essentially, the expected future return of stocks used in the boardroom to plan capital projects is about double what an investor using the Shiller P/E has any logical right to expect.

If that sounds like a lot of inside baseball/jargony hogwash, rest assured that there are real world applications that make this conversation highly relevant today.  For example:

Mergers and Acquisition Analysis.  Simply put, it is a good time to be a seller if you are a public company listed on a U.S. exchange.  You won’t find that observation in your internally-created discounted cash flow analysis, because it likely uses a standard cost of capital number such as the ones Damodaran calculates.  More realist expected returns – such as those that correlate to Shiller P/E measures – mean that any significant future gain will be much harder to achieve.

 

The corollary is that buyers of public companies should use their own stock as a major source of capital in any transaction.  Yes, M&A has a spotty record of creating shareholder value, but don’t compound that challenge with financial leverage at this point in the cycle.  Use stock.  Notably, the tech sector has clearly gotten this memo.

 

Stock buybacks.  This one is tricky, because there is so much misinformation about what stock buybacks are supposed to accomplish.  The clear-eyed view is simple: companies buy back their stock when they have excess cash flow that cannot be effectively reinvested in the business.  Also, this extra capital is generally cyclical in nature, so managers don’t want to create or up a dividend just to cut it back with the economy weakens.

 

This puts many companies in a tough spot, however, because cyclical cash flows tend to occur (spoiler alert) when things are good and the stock is strong.  Buying the stock back at these points in the cycle may lead to some embarrassing moments on future quarterly financial calls if it declines precipitously from an economic slowdown or (worse yet) shock to the system.

 

The Shiller P/E is flashing a modestly cautious yellow hue to buyback programs at the moment.  At the same time, activist investors everywhere are also on the lookout for cash-rich companies to engage, and buybacks are often the first page in their shareholder value playbook.  In the end, companies are a bit between a rock and a hard place at the moment.  Strong free cash flow plus activist investors equals the need to keep buying back stock even at lofty levels.  Let’s just be careful out there.

 

Investor relations.  This most underappreciated corporate function is where the rubber hits the road on the topic of Shiller P/Es versus standard cost of capital calculations.  In a nutshell, it has never been more important to underpromise and overdeliver results.  Not since 2007, anyway.  Remember that future returns are more likely to be less-than-5% rather than the 8% you see in internal corporate presentations.  The rising tide of the last five years is unlikely to continue, so every public company will be in fiercer competition for investor capital as future returns drop.

In summary, the times change and everything from capital allocation to investor relations have to change with them.  That is potentially a tough lesson for many companies to embrace, since a consistent approach to capital planning and communication is comforting to many managers.  Still, the writing is on the wall and we must all read it.  Future returns are likely going to be lower.  Competition for investor capital will get even tougher.  That’s what the Shiller P/E says, and it is worth listening.

You don’t want to go the way of rich Corinthian leather.  Do you?




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GaveKal On The Recent Emerging Market Surge: “Little To Suggest Any Sustainable Economic Healing”

One of the biggest casualties of the taper tantrum in mid-2013 and early 2014 were the stock indices of Emerging Markets. Of course, both drawdowns were followed by prompt buying as for all concerns about fund flows, the carry trade proved to be alive and well, whether due to ongoing QE by the Fed (and the broken market’s inability to price in tapering by the same Fed which has manipulated it to all time highs) or rumors that either a European QE or a boost to the Japanese QE are just around the corner.

But is there anything fundamental to explain why the equity indices of the “Fragile Five” countries, Brazil, South Africa, Indonesia, India and Turkey, have regained their recent highs? According to GaveKal the answer is a resounding no: “As investors, we like equity rallies to be propelled by fundamental factors, like earnings re-ratings or growth surprises. But there is little behind this rally to suggest any sustainable economic healing.” So what is pushing this particular subset of risk higher? Why the global liquidity tsunami of course.

From Evergreeen GaveKal

Emerging Markets Carry Trade Looks Vulnerable

Over the last two months, emerging markets have delivered a handsome rally, with the MSCI emerging markets index recording a 7% return in US dollar terms, compared with just 1% for the developed markets. The trouble is that this rally has been driven primarily by investors’ growing enthusiasm for carry trades in an environment of declining global volatility. Experience teaches this is an engine which can all too suddenly be thrown into reverse.

The defining feature of the current run-up in emerging markets is that the greater the sell-off a country suffered last year, the stronger the rally it has enjoyed this year. As a result, the so-called “fragile five”—Brazil, India, Indonesia, Turkey, and South Africa— the markets most reliant on foreign capital and so most vulnerable during last year’s taper tantrum, are no longer looking quite so fragile. Since their lows in January, the Turkish lira has surged 13%, the Brazilian real 10%, the South African rand 8% and the Indonesian rupiah and Indian rupee 6% each.

It hasn’t taken long for the rebound to flow through to stock markets. In local currency terms, an investor with an equally-weighted allocation to each of the fragile five’s equity markets will already have seen his portfolio regain its previous high reached in May 2013.

As investors, we like equity rallies to be propelled by fundamental factors, like earnings re-ratings or growth surprises. But there is little behind this rally to suggest any sustainable economic healing. Sure, there are pockets of earnings re-ratings because of last year’s currency depreciation, but we see little in terms of broad-based economic surprises. According to the Citi Eco Surprise Index, economic data in the emerging market has largely surprised on the downside so far this year. Most forward-looking indicators, especially in Asia, are signaling no prospect of any decisive upturn in the growth outlook. What’s more, the prevailing direction of economic and monetary policies is hardly investor-friendly. Credit moderation remains the order of the day in China, while policy settings have been on hold among many of the other major emerging markets in the run-up to national elections. And with food prices turning up, monetary easing is now off the table for emerging market central bankers.

That leaves the search for carry as the principal engine of the current rally. The markets which sold off most violently last year, and which have rebounded most strongly over the last couple of months, are those offering the most attractive yields. As volatility in global financial markets fell this year, and lingering fears of emerging market (EM) contagion evaporated, the lack of yield on cash prompted investors to turn once again to the high yielding emerging market currencies and fixed income markets which took such a beating last year.

The widespread return of calm which has underpinned the revival of the EM carry trade is marked, and even ominous. Unless you are trading the renminbi or the Russian market, volatility levels in major equity markets, currency pairs, Credit Default Swap (CDS) spreads and basis swaps are once again approaching, if not already below, the lows seen last April. Even Chinese CDSs are at year-to-date lows, despite the worries over China’s growth trajectory, while volatility in the Brent crude market has fallen even as geopolitical uncertainty has mounted. While low volatility is nothing new in the era of financial repression, it still signals a remarkable rebound in confidence given expectations that the Fed will halt its balance sheet expansion within a few months.

On this premise, the moment that volatility returns, the EMs will be extremely vulnerable to investor repositioning. Quite what the trigger might be is impossible to say. But history teaches us that volatility rarely stays this low for long.

* * *

History, also teaches us the central planning on such a grand, global scale always ends in tears too, but for now the music is playing and the dancing, on “other people’s tab” must go on.




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US Holds Massive Nuclear Weapons Drill “To Deter And Detect Strategic Attacks” Days After Russian Nuclear Attack Exercise

Late last week, in what should not have been a surprise to anyone (because supposedly it was announced “far in advance”) but was a major shock due to its intensity and expansiveness, Russia held a massive “simulated massive nuclear attack” drill, coming at a time just ahead of the Donetsk referendum, which may have been pre-scheduled and for foreign policy reasons was failed as a “non-event” but judging by the amount of production that went into the accompanying video clip, this particular drill was dripping with symbolism aimed squarely at NATO and the US.

So now it is America’s turn to retaliate. As the U.S. Strategic Command reported earlier, the US will conduct Exercise Global Lightning 14 from May 12-16 in coordination with other combatant commands, services, and appropriate U.S. government agencies “to deter and detect strategic attacks against the U.S. and its allies.

Stratcom was quick to point out that Exercise Global Lightning 14 has been planned for more than a year and is based on a notional scenario.  It also added that the “timing of the exercise is unrelated to real-world events” but only those who believed that Russia massive nuclear drill was also unrelated to world will fall for this particular embellishment. As Defense One observes, according to Mark Schneider, a former U.S. Defense Department nuclear strategy official, told the Washington Free Beacon that Russia’s drill last week seemed aimed at sending a message of “nuclear intimidation” to the United States and NATO over Ukraine. He noted that Moscow typically stages its atomic exercises in the fall.

Meanwhile, Romania on Saturday sought clarification from Russia on its official policy following a tweet from a high-profile Russian minister that warned he might try to enter Romanian air space in a heavy bomber, Reuters reported.

 

After a plane he was a traveling in was blocked from entering Romanian air space, Russian Deputy Prime Minister  Dmitry Rogozin sent out a tweet that stated, “Upon U.S. request, Romania has closed its air space for my plane. Ukraine doesn’t allow me to pass through again. Next time I’ll fly on board Tu-160.” Rogozin, who supervises his country’s large weapons industry, is under U.S. and European Union sanctions.

 

The Romanian foreign ministry requested that Russia specify whether the deputy prime minister’s tweet represented “the Russian Federation’s official position.”

 

Romania “believes the threat of using a Russian strategic bomber plane by a Russian deputy prime minister is a very grave statement under the current regional context,” the ministry said

However, Russia was last week – now it’s America’s turn: the units included in the US exercise are bomber wings that will fly approximately 10 B-52 Stratofortresses and up to six B-2 Spirit bombers to demonstrate flexibility and responsiveness in the training scenarios throughout the continental U.S.”

So if you see a massive nuclear bomber flying overhead with a full nuclear armament, don’t panic – tis but a drill.

“This exercise provides unique training opportunities to incorporate the most current technology and techniques in support of our mission.  Continued focus and investment in our strategic capabilities allow USSTRATCOM to deter, dissuade, and defeat current and future threats to the U.S. and our allies,” said Adm. Cecil Haney, commander, U.S. Strategic Command.

Those curious can find more information at USSTRATCOM Public Affairs, (402) 294-4130, or via email: pa@stratcom.mil.

We, on the other hand, will await the YouTube clip that goes with Global Lightning 14 and grade it on content, difficulty, and artistic creativity. After all we already have the Russians as a benchmark.




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Is The Political Fight Over Keystone XL Over?

Submitted by Daniel Graeber via OilPrice.com,

A bill passed in a House energy committee aims to amend the rules for cross-border energy projects, suggesting the political fight over Keystone XL is over.

Source:Cagle

 

The House Energy and Commerce Committee approved resolution 3301, the so-called North American Energy Infrastructure Act. Authored by Reps. Fred Upton, R-Mich., and Gene Green, D-Texas, the bill aims to do away with the current processes for approving electrical, gas and oil infrastructure that would cross the U.S. border with Mexico or Canada.

"No one can rightfully argue that the current presidential permit process is not broken," Upton said in a May 8 statement.

A presidential permit is needed for cross-border projects and it's been more than five years since pipeline company TransCanada submitted its application for the Keystone XL pipeline. Since then, the company constructed and started service at its 485-mile Gulf Coast pipeline from Cushing, Okla., considered the U.S. leg of the pipeline.

Keystone XL itself would extend more than 1,100 miles from Alberta to Nebraska before it connected to existing links to Cushing. Designed to deliver oil sands, the pipeline has become the scapegoat not only for environmentalists, but for policymakers on both sides of the U.S. energy debate.

U.S. Sens. Mary Landrieu, chairwoman of the Senate Energy Committee, drafted a bill with Sen. John Hoeven, R-N.D., that would advance Keystone XL. Landrieu said May 1 it's time to stop debating the project and move ahead with construction.

"This pipeline is clearly in our national interest, and I urge all senators to join Sen. Hoeven and me to support this bill," she said.

Bipartisan bickering over procedural voting issues, however, left the bill dead on the Senate floor.

In April, the U.S. State Department said the federal agencies in charge of the permitting process needed more time because of legal issues related to the route through Nebraska. A state court is hearing challenges to legislation that gave Gov. Dave Heineman authority over the route and, while the consultation process isn't starting over, the State Department said route uncertainty was slowing federal decisions.

Upton said the legislation he helped write with his counterpart Green would get around such delays.  With North American energy production on the rise, U.S. policymakers can make it easier to take full advantage of the boom by building more cross-border projects.

"This approach is a sincere effort to focus on a targeted solution to the lessons learned from the Keystone pipeline," he said.

The lesson learned after five years of waiting may be that the fight, at least in political terms, is over for Keystone XL.




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Another Snapshot Of The European Recovery

What can one say… Europe’s stock markets are booming, bond yields (and spreads) are tumbling… and earnings growth expectations are – collapsing…

What a difference 2 months make… from expectations of over 9% growth to a dismal 2% growth (and falling)…

 

h/t @Not_Jim_Cramer




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