Month: March 2014

The American press portrays Putin as being the bad guy and the aggressor in the Ukraine crisis.

Putin is certainly no saint. A former KGB agent, Putin's net worth is estimated at some $40 billion dollars … as he has squeezed money out of the Russian economy by treating the country as his own personal fiefdom. And all sides appear to have dirt on their hands in the Russia-Ukraine crisis.

But we can only see the bigger picture if we take a step back and gain a little understanding of the history underlying the current tensions.

Indeed, the fact that the U.S. has allegedly paid billions of dollars to anti-Russian forces in Ukraine – and even purportedly picked the Ukrainian president – has to be seen in context.

Veteran New York Times reporter Steven Kinzer notes at the Boston Globe:

From the moment the Soviet Union collapsed in 1991, the United States has relentlessly pursued a strategy of encircling Russia, just as it has with other perceived enemies like China and Iran. [Background here, here and here.] It has brought 12 countries in central Europe, all of them formerly allied with Moscow, into the NATO alliance. US military power is now directly on Russia’s borders.

 

“I think it is the beginning of a new cold war,” warned George Kennan, the renowned diplomat and Russia-watcher, as NATO began expanding eastward. “I think the Russians will gradually react quite adversely, and it will affect their policies.”

Stephen Cohen – professor emeritus at New York University and Princeton University who has long focused on Russia – explained this weekend on CNN:

We are witnessing as we talk the making possibly of the worst history of our lifetime. We are watching the descending of a new cold war divide between west and east, only this time, it is not in far away Berlin, it's right on Russia's borders through the historical civilization in Ukraine. It's a crisis of historic magnitude. If you ask how we got in it, how we got into the crisis, and how therefore do we get out, it is time to stop asking why Putin – why Putin is doing this or that, but ask about the American policy, and the European Union policy that led to this moment.

 

***

I don't know if you your listeners or views remember George Kennan. He was considered [a] great strategic thinker about Russia among American diplomats but he warned when we expanded NATO [under Bill Clinton], that this was the most fateful mistake of American foreign policy and that it would lead to a new Cold War. George lived to his hundreds, died a few years ago, but his truth goes marching on. The decision to move NATO beginning in the 90's continuing under Bush and continuing under Obama, is right now on Russia's borders.

 

And if you want to know for sure, and I have spent a lot of time in Moscow, if you want to know what the Russian power elite thinks Ukraine is about, it is about bringing it into NATO. One last point, that so-called economic partnership that Yanukovych, the elected president of Ukraine did not sign, and that set off the streets – the protests in the streets in November, which led to this violence in and confrontation today, that so-called economic agreement included military clauses which said that Ukraine by signing this so called civilization agreement had to abide by NATO military policy. This is what this is about from the Russian point of view, the ongoing western march towards post Soviet Russia.

Jonathan Steele writes at the Guardian

Both John Kerry's threats to expel Russia from the G8 and the Ukrainian government's plea for Nato aid mark a dangerous escalation of a crisis that can easily be contained if cool heads prevail. Hysteria seems to be the mood in Washington and Kiev, with the new Ukrainian prime minister claiming, "We are on the brink of disaster" as he calls up army reserves in response to Russian military movements in Crimea.

 

Were he talking about the country's economic plight he would have a point. Instead, along with much of the US and European media, he was over-dramatising developments in the east, where Russian speakers are understandably alarmed after the new Kiev authorities scrapped a law allowing Russian as an official language in their areas. They see it as proof that the anti-Russian ultra-nationalists from western Ukraine who were the dominant force in last month's insurrection still control it. Eastern Ukrainians fear similar tactics of storming public buildings could be used against their elected officials.

 

Kerry's rush to punish Russia and Nato's decision to respond to Kiev's call by holding a meeting of member states' ambassadors in Brussels today were mistakes. Ukraine is not part of the alliance, so none of the obligations of common defence come into play. Nato should refrain from interfering in Ukraine by word or deed. The fact that it insists on getting engaged reveals the elephant in the room: underlying the crisis in Crimea and Russia's fierce resistance to potential changes is Nato's undisguised ambition to continue two decades of expansion into what used to be called "post-Soviet space", led by Bill Clinton and taken up by successive administrations in Washington. At the back of Pentagon minds, no doubt, is the dream that a US navy will one day replace the Russian Black Sea fleet in the Crimean ports of Sevastopol and Balaclava.

***

 

Vladimir Putin's troop movements in Crimea, which are supported by most Russians, are of questionable legality under the terms of the peace and friendship treaty that Russia signed with Ukraine in 1997. But their illegality is considerably less clear-cut than that of the US-led invasion of Iraq, or of Afghanistan, where the UN security council only authorised the intervention several weeks after it had happened. [Indeed, top American leaders admit that the Iraq war was for reasons different than publicly stated. And the U.S. military sticks its nose in other countries' business all over the world.  And see this.] And Russia's troop movements can be reversed if the crisis abates. That would require the restoration of the language law in eastern Ukraine and firm action to prevent armed groups of anti-Russian nationalists threatening public buildings there.

Again, we don't believe that there are angels on any side.  But we do believe that everyone has to take a step back, look at the bigger picture, calm down and reach a negotiated diplomatic resolution.

And see this, this, this and this (interview with a 27-year CIA veteran, who chaired National Intelligence Estimates and personally delivered intelligence briefings to Presidents Ronald Reagan and George H.W. Bush and the Joint Chiefs of Staff).

via Zero Hedge http://ift.tt/1hDEeLu George Washington

You hear that old saw that "the market is not the economy," a lot these days, and for good reason. As ConvergEx's Nick Colas notes, the S&P 500 breaks to record highs – but U.S. labor markets remain sluggish; investor portfolios do well – but over 47 million Americans (more than 15% of the population) are still in U.S. food stamp program – the same as August 2012. The important question now is: "Is the market TOO different from the economy?"

Record corporate profits – the reason for all-time highs in U.S. equities – come with little hiring or wage gains.  The hottest growth stories are business models with lots of customers but very few employees. The recently purchased WhatsApp – for $19 billion – has 55 employees. Investment payoffs – and increasingly social outcomes as well – are technology-enabled, asymmetric and sporadic. How soon before we reach a tipping point?

Via ConvergEx's Nick Colas,
 
Last week the local government of San Francisco announced that Google has promised to give $6.8 million over the next two year to pay for over 31,000 low-income young people to use the city’s mass transit system for free.  Mayor Edwin Lee applauded the company for helping ease San Francisco’s “Affordability crisis for lower and middle-income families”.  Without Google’s help, the successful pilot program would have run out of money in July of this year.
 
Google’s initiative seems to be a direct response to numerous local protests over its practice of providing free shuttle busses throughout the city for the sole benefit of its employees.  Local and often long-time residents, fed up with cost of living inflation from their new stock-option enriched neighbors, see the busses as a symbol of an out-of-touch elite and the companies they serve.  Some of the protests have turned violent.  Even Wired magazine, a widely read voice of the merits of technology, sees the problem.  In the most recent issue: an editorial entitled “Breaking Point: Silicon Valley Can’t Avoid the Haters”, and a back page questionnaire – “Am I a Silicon Valley Douchbag?”
 
There’s an old Wall Street aphorism that goes “The market is not the economy”, something akin to “A Google bus is not the San Francisco economy.”  In both cases, you’d think there were would some correlation.  A hugely profitable Silicon Valley should mean a broadly wealthy and generally content “City by the Bay”.  And a rocking stock market should indicate a U.S. economy solidly on the mend after the Financial Crisis and accelerating in 2014.  Neither seems to be true.
 
That old school maxim about the market and the economy used to be accurate for the following reasons:

The eyes of the equity market face forward, not to the sides.  Investors price assets based on future expectations of earnings and interest rates.  In the depths of a recession, stock markets tend to rise – think the early 1980s and 1990s – as they anticipate improvements in corporate earnings.  These moves may seem out of sync with current economic data at the time – high unemployment and low consumer confidence – but they eventually prove prescient as those indicators start to improve later in the cycle.

 

It takes time for the Wealth Effect of higher stock prices to translate into increased consumer spending.  Consumers who own investment portfolios need to see their net worth rise for some time before they act on their improved financial situation and spend some of their gains.  This feedback loop is important, for it ties the “Real world” economy – especially job growth – to the financial markets.

 

Recessions in the U.S. don’t tend to last very long, so the workforce in place at the end of the last expansion is still largely relevant and employable at the beginning of the next recovery.  Of the 11 recessions since the end of World War II, 8 of them lasted less than a year.  Workers who got a pink slip during a slowdown had some confidence that their next job would be available soon enough.  This confidence limited the impact of a downturn on consumer confidence, spending, and even social policy.

At least by these factors, the current equity market’s link to the real economy is obviously different; “The market REALLY isn’t the economy” this time around.  A few points here:

U.S. stocks are at record highs largely because public company profits are strong as well.  There may not be much revenue growth, true.  But that’s not exactly a secret.  Interest rates remain low, providing support for stock market valuations.

 

Five years into the current economic “Expansion”, however, and the “Real world” remains sluggish.  The U.S. Supplemental Nutrition Assistance Program (SNAP, more commonly known as Food Stamps) still serves over 47 million Americans on a monthly basis.  That is 15% of the population, and this ratio is essentially unchanged since 2012.  Unemployment may be down to 6.7%, but even the Federal Reserve acknowledges that this number is suspect for both demographic issues and unforeseen shifts in how many people want to work.

 

If you follow the “Smart money”, you’ll see more of a flashing yellow light than a verdant green one.  Mergers and acquisitions, famously cyclical and tied to CEO confidence, are far from boom levels.  Bet the corporate ranch on a big deal?  “No, thank you” say most CEOs to their bankers.  Low risk bolt-on purchases rule the day.  Conversely, the pipeline for Initial Public Offerings, where private investors sell to the public, is very robust so far in 2014.  “Good market to be a seller”, this patch of smart money seems to say.

Most commentary on this front tends to focus on income inequality, but this narrative may well miss the real point.  Markets price securities based on whatever society deems most valuable.  Earnings and cash flow are two indicators of value, to be sure, and historically the growth of a business was an alchemy of allocating human and physical capital to maximize the growth of the bottom line.
 
Now, the priorities seem different.  Incremental improvement is out; disruption is very much the word of the day.  Consider the following:

Facebook recently paid $19 billion for WhatsApp, a company with 55 employees.  That’s the monetary equivalent of hiring 19,000 people and paying them $100,000 for ten years.  Facebook itself only has about 5,800 employees, according to Bloomberg, and a market cap of $174 billion.

 

Other highly valued tech companies also sport relatively low total headcounts.  Google, after the sale of its handset business, should have about 40,000 employees for its $408 billion market value.   Relative newcomer Snapchat has 30 employees and turned down a $3 billion bid last year.  Yep, from Facebook.  We’re clearly not in Kansas any more.

 

Market commentators from Mohamed El-Arian to Larry Summers are warning that this trend has meaningful implications for capital markets and interest rate policy.  El-Arian wonders if corporate America’s reluctance to invest in capital and people is tied to the risks of getting it wrong.  If a new mobile app can disrupt a large company like Facebook, is anyone safe from innovation?  And Summers points to the problem of piles of corporate cash with nowhere to go keeping interest rates lower than historical norms.

In the end, everything from Google’s busses to El-Arian’s conundrum and even equity prices reflect an increasingly “Winner take all” society.  Again, that’s not an indictment but rather an observation.  The Great Recession and its aftermath align precisely with an explosion in technological innovation. In a slow growth economy, public market investors see growth, rather than just capital, as the true scarce social commodity.  Thanks to technology, growth no longer means incremental employment.  In fact, recent transactions like WhatsApp seem to point to the opposite.
 
This trajectory seems unsustainable, but the answer does not need to be nihilistic.  Markets, investors, and societies tend to self-correct with time.  We do seem to be a point where the problems – slow growth and still-high unemployment – are obvious, while the answers are not.

via Zero Hedge http://ift.tt/NpfzPV Tyler Durden

Presented with little comment.. Compare this:

• *U.S. ECONOMIC GROWTH IS GATHERING SPEED, IMF’S LIPTON SAYS

To the following chart…

 

It appears the “big lie” remains well and truly in place… Just keep repeating it…

 

Oh and as a follow-up, Lipton nails it on Mexico…

• *MEXICO’S 2013 SLOWDOWN DUE TO TRANSITORY REASONS, LIPTON SAYS
• *IMF EXPECTS `MUCH FASTER’ MEXICAN GROWTH IN 2014, LIPTON SAYS

and then there’s this…

 

Chart: Bloomberg

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Submitted by Chris Andrew and Mustafa Zaidi of Clarmond House

List Interest…

The developed world is not currently in the grip of a major World War, however, the debt burden has increased as if it is. The general population may not be ready to suffer the further sacrifices that this massive deficit increase will lead to, and may unwillingly be becoming the ‘lost interest generation’.

“THE SINEWS OF WAR ARE INFINITE MONEY”.

Thus observed Cicero on the dual monopolies of the State, money and warfare. But how does the State amass this limitless largesse? It does so in three simple ways: taxation; debt issuance; and currency debasement.

When there is a war, the State issues debt to fund the conflict; citizens purchase this debt and await a future rise in taxation, a currency devaluation and a significant increase in the national debt. The contract between State and citizen is clear; in times of war, sacrifices are required, not only on battlefields but also in bond yields.

This can be seen time and time again, from the Prestiti, issued by Venice in the 1100’s, to the National Savings Movement in the British Empire for both world wars of the twentieth century. Indeed the slogans such as ‘Lend to Defend’ and ‘War Savings are Warships’ connected the population to the war and the national debt.

Disconnect

Over the last seven years citizens have lived through a wartime-like increase in national debt, but with no war to explain it. The population has been detached from this peacetime debt explosion, the purpose of which has been to maintain consumption, collateral and capital. These three C’s lack the somber seriousness of war. The citizen is justifiably confused, asked as they now are to bear the increased debt burden, paltry interest rates and possibly currency debasement.

Given the rise in global debt burdens, governments now rely upon low interest rates to keep the cost of interest payments to a minimum. Sorry citizens, the State has redefined the contract.

A tax by any other name

The sovereign debt of the developed world has risen from approximately 80% of GDP to 110%, an additional $12 trillion of debt, while interest rates have fallen to nothing. A ‘normal’ short term interest rate is one that is in line with inflation, which has been an average of 2% for the period 2007-2013. Therefore we can roughly calculate that ‘citizen-savers’ of the world have lost $1.75 trillion in unreceived interest. This is nothing short of being an undeclared tax levied by the State.

Modern day example

Has this ever happened before? Yes, in modern day Japan interest rates have been zero for 19 years. However, the important difference is that there has been deflation in Japan during this entire period, so the savers of Japan have kept purchasing power. Rather than trample the savers it was the asset markets that suffered, with the stock market and property prices taking the brunt of zero rates and credit contraction.

As commented on in an earlier piece (‘Golden Calf to Raging Bull’ – May 2013) Central Banks have placed the economic world on an ‘asset-price’ standard. Asset prices have become the collateral upon which credit is issued and therefore must be protected, even if this means sacrificing savers on the altar of zero interest rates. The chances of central banks allowing interest rates to be higher than inflation is remote.

A Forlorn Hope?

As the quantum of debt has increased, a rise in interest rates would bring hefty costs to the State; currently, interest outlay in the USA alone, at 2.5%, is $400 billion  per annum. Any sustained interest rate rise with the continued level of deficit is not manageable without growth being greater than the yields paid. Simply put, interest rates cannot rise without high growth, therefore a ‘lost interest generation’ is unfolding.

The only growth lever left for the State is currency devaluation. As Ben Franklin stated “wars are not paid for in wartime, the bill comes later.” The State’s peacetime but warlike increase in debt awaits its tab.

Bill Please.

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Earlier today we pointed out a curious divergence: while owner equivalent rent, the measurement of imputed costs of renting, has risen to the highest since the Lehman failure, total non-shelter core CPI continues to decline. What is notable is that OER amounts to 23.9% of the CPI basket – as such it is the single largest determinant of inflation as measured by the BLS. And yet everything else, hedonically adjusted of course, keeps falling. By how much? And do you agree with the BLS’ estimates of inflation? To answer these not so important questions, here is the full CPI basket, broken down by weighings, and by annual change.

At first blush, a lot of the “inflationary” assumptions shown below make little if any sense, but then again who are we to argue with the Arima-X-1 seasonal adjustment juggernaut of a few good Econ PhDs.

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

Submitted by Anatole Kaletsky via Evergreen-Gavekal,

Oscar Wilde described marriage as the triumph of imagination over intelligence and second marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope and realism over wishful thinking. A grim case in point is the Russian incursion into Ukraine. What makes this confrontation so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope that Vladimir Putin will “see sense,” or at least be deterred by the threat of US and EU sanctions to Russia’s economic interests and the personal wealth of his oligarch friends. Wishful thinking about “democracy and freedom” overcoming dictatorship and military bullying.

Financial markets cannot afford to be so sentimental. While we should always recall at a time like this the famous advice from Nathan Rothschild to “buy at the sound of gunfire,” the drastically risk-off response to weekend events in Ukraine makes perfect sense because Russia’s annexation of Crimea is the most dangerous geopolitical event of the post-Cold War era, and perhaps since the Cuban Missile crisis. It can result in only two possible outcomes, either of which will be damaging to European stability in the long-term. Either Russia will quickly prevail and thereby win the right to redraw borders and exercise veto powers over the governments of its neighbouring countries. Or the Western-backed Ukrainian government will fight back and Europe’s second-largest country by area will descend into a Yugoslav-style civil war that will ultimately draw in Poland, NATO and therefore the US.

No other outcome is possible because it is literally inconceivable that Putin will ever withdraw from Crimea. To give up Crimea now would mean the end of Putin’s presidency, since the Russian public, not to mention the military and security apparatus, believe almost unanimously that Crimea still belongs to Russia, since it was only administratively transferred to Ukraine, almost by accident, in 1954. In fact, many Russians believe, rightly or wrongly, that most of Ukraine “belongs” to them. (The very name of the country in Russian means “at the border” and certainly not “beyond the border”). Under these circumstances, the idea that Putin would respond to Western diplomatic or economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking.

Putin’s decision to back himself into this corner has been derided by the Western media as a strategic blunder but it is actually a textbook example of realpolitik. Putin has created a situation where the West’s only alternative to acquiescing in the Russian takeover of Crimea is all-out war. And since a NATO military attack on Russian forces is even more inconceivable than Putin’s withdrawal, it seems that Russia has won this round of the confrontation. The only question now is whether the new Ukrainian government will accept the loss of Crimea quietly or try to retaliate against Russian speakers in Ukraine—offering Putin a pretext for invasion, and thereby precipitating an all-out civil war.

That is the key question investors must consider in deciding whether the Ukraine crisis is a Rothschild-style buying opportunity, or a last chance to bail out of risk-assets before it is too late. The balance of probabilities in such situations is usually tilted towards a peaceful solution—in this case, Western acquiescence in the Russian annexation of Crimea and the creation of a new national unity government in Kiev acceptable to Putin. The trouble is that the alternative of a full-scale war, while far less probable, would have much greater impact—on the European and global economies, on energy prices and on the prices of equities and other riskassets that are already quite highly valued. At present, therefore, it makes sense to stand back and prepare for either outcome by maintaining balanced portfolios of the kind recommended by Charles, with equal weightings of equities and very long-duration US bonds.

Looking back through history at comparable episodes of severe geopolitical confrontation, investors have usually done well to wait for the confrontation to reach some kind of climax before putting on more risk.

In the 1962 Cuban Missile Crisis, the S&P 500 fell -6.5% between October 16, when the confrontation started, and October 23, the worst day of the crisis, when President Kennedy issued his nuclear ultimatum to Nikita Khrushchev. The market steadied then, but did not rebound in earnest until four days later, when it became clear that Khrushchev would back down; it went on to gain 30% in the next six months.

Similarly in the 1991 Gulf War, it was not until the bombing of Baghdad actually started and a quick US victory looked certain, that equities bounced back, gaining 25% by the summer. Thus investors did well to buy at the sound of gunfire, but lost nothing by waiting six months after Saddam Hussein’s initial invasion of Kuwait in August, 1990.

Even in the worst-case scenario to which the invasion of Crimea has been compared over the weekend—the German annexation of Sudetenland in June 1938—Wall Street only rebounded in earnest, gaining 24% within one month, on September 29, 1938. That was the day before Neville Chamberlain returned from Munich, brandishing his infamous note from Hitler and declaring “peace in our time.” The ultimate triumph of hope over experience.

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