Month: July 2014

If the specter of the second cold war descending into outright smoldering status doesn’t send the S&P promptly to all time highs, nothing will. Moments ago the White House accused Russia of violating the 1987 missile treaty, in response to a still unspecified ICBM launch, calling the “breach” a “very serious matter.”

From Reuters:

In another sign of deteriorating relations between the United States and Russia, the U.S. government said on Monday that Moscow had violated the Intermediate Range Nuclear Forces treaty, and urged immediate bilateral talks on the issue.

 

“This is a very serious matter which we have attempted to address with Russia for some time now,” an administration official said in a statement.

 

“The United States will, of course, consult with allies on this matter to take into account the impact of this Russian violation on our collective security if Russia does not return to compliance,” the official said. (Reporting

AP adds:

An administration official says the United States has notified Russia of its determination that it broke the agreement by testing a new ground-launched cruise missile. The official spoke on the condition of anonymity to discuss sensitive information.

 

The issue has simmered for a few years, but until Monday the United States had not made the accusation public. Russian officials say they have looked into the allegations and consider the matter closed.

And just so it is clear that the US is now picked the “escalation” of the prisoner’s dilemma,  also moments ago AGP reported that the US is now weighing the risks of aiding Ukraine militarily. Specifically, senior American military officers are discussing the possibility of “providing Ukraine with more precise intelligence that would allow it to target missiles held by pro-Russian forces, US officials said Monday.”

From AFP:

But no decision is imminent and some officials are concerned such a move could backfire by escalating the conflict between Ukraine and the rebels backed by Moscow.

 

“That’s part of the discussions,” said one defense official, who spoke on condition of anonymity, referring to the possible enhanced intelligence sharing.

 

“It’s all part of looking at how we can help the Ukrainians,” the official told AFP. But he added there were risks in providing Ukrainian forces with information that could help them strike at pro-Russian fighters in the country’s east.

 

The New York Times first reported that the Pentagon and spy agencies were looking at sharing more precise, real-time intelligence with Kiev to enable its military to go after surface-to-air missiles blamed for taking out several of its aircraft The White House has yet to hold a debate on the issue among high-level officials, the paper reported over the weekend.

 

A second Pentagon official downplayed the likelihood of the move and underlined the dangers involved. 

 

“There’s not enough military equipment that Washington could provide to counter Russian influence,” said the official, who spoke on condition of anonymity.

 

“There’s a risk that the more weapons we provide to the Ukrainians, the more Russians escalate and step up their role,” the official said.

 

For the moment, President Barack Obama’s administration has provided only limited intelligence to Ukraine and has avoiding supplying weapons to Kiev.

But the moment is about to end.

And now, sit back and enjoy as the wealth effect washes over you while halfway around the world the likelihood of war, as was hinted by a Putin advisor earlier, is looking increasingly realistic, conveniently on the 100th anniversary of the war to end all wars.

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Thanks to a 5-word text message to his father, a Bloomberg reporter was taken hostage by Ukrainian soldiers at a checkpoint near Donetsk. What ensued is both frightening and fascinating…

 

Authored by Stepan Kravchenko in Ivanovskoe, Russia (skravchenko@bloomberg.net),

In eastern Ukraine, one text message can turn you into an enemy. In my case, it was sent to my father. “Talked to Borodai at night,” it said about an interview I had with a rebel leader.

 

“So, you are Borodai’s little friend,” concluded the camouflaged man reading my Nokia. His comrade pointed a Kalashnikov at my stomach. “We’ve got a Russian warrior here saying he is a journalist,” he called to someone in Russian.

It was July 25, 3 p.m. I was heading home to Russia from Donetsk when a routine inspection at a Ukrainian army checkpoint near Starobesheve village went bad. They saw my Russian passport and press card, and told me to get out and hand over my belongings. I tried to hide my BlackBerry. Then they found videos of separatists’ press conferences on my iPad. My guilt, whatever it was, was proven.

I managed to whisper a Moscow contact to my driver before being blindfolded and walked five steps to a waiting Hyundai SUV I’d seen approaching with masked men inside.

“You’d better shut up and think about keeping your pants dry,” one of the masked men — I counted three voices — said as we were driving to an unknown location something like 40 minutes away, off a bumpy rural road.

It reminded me, a 31-year-old Muscovite, of the many experiences I had with Russian police as a teenager. I was waiting for good cop-bad cop questioning, moderate use of force and a meticulous scan of my memories from rebel-controlled Donetsk.

I thought I’d still make my flight at 9:15 p.m. As I got to learn my captors better, I began to think I might be held for days, if only because chaos on the ground would keep me from being found.

Oligarch’s Officers

The three captors — Pavel, Ruslan and Dmitry, as I learned later — were military intelligence officers from the Dnepr battalion, sponsored by Dnipropetrovsk governor and billionaire Igor Kolomoisky. In this war, oligarchs train, equip and fund detachments, which are then under the control of the Ukranian army.

Dubbed “Kolomoisky castigators” and “fascists” by Russian media, my captors turned out to be the same kind of people I met when talking to separatists: bored Russian-speakers, the blood and muscle of a conflict where random hatred reigns on both sides.

“So, what do the rebels say?” was the first question after I was taken out of the car.

 

“What do you mean?” I asked.

 

“Well, what do they say, in general?” a gunman elaborated.

Punched Twice

I was still blindfolded, sitting on the grass in a place that sounded like a military camp. Soldiers were gathering around, joking and cursing at me. “You, Russians, are all pigs,” one said. “I’d love to shoot you down.”

This made me recall a salty Russian joke about World War II. I chuckled. He punched me twice in the head. It didn’t hurt much. I thought that was a good sign.

The questioning didn’t go as I expected. My captors were not asking about rebel positions, separatist leadership security or anything that military intelligence ought to be interested in.
They desperately expressed their own views, shutting me up when I argued. They asked me questions I couldn’t answer. How many Russians support the rebels? Why do they kill children? Why did the people on the Malaysian Airlines flight have to die? What does Vladimir Putin want? Do we really look like fascists?

It lasted for an hour or more. I was happy when they settled me back in the car. The driver explained that we were heading out to destroy a separatist truck-mounted Grad rocket launcher in a village nearby.

Grain Harvester

“You will now see how the Ukrainian army fights,” he said, and hit the throttle. The car bumped into a barrier, losing a fender guard, as I heard from their talks.

They stopped at another roadblock to get more weapons. We moved further in silence on a bumpy road. I started to fall asleep, wondering what message I would send to Polina and my son if I managed to get the phone back. A cursing voice woke me up.

The “Grad” turned out to be a grain harvester. The gunmen appeared to be relieved. They took my blindfold off and I saw a field of rye.

“Look how beautiful it is,” said Ruslan, a tall red-haired man in his 30s sitting next to me. He turned out to have a habit of pointing out picturesque landscapes. The three of them wore new combat vests and tactical sunglasses.

Small-Business Men

“You should be happy we got you and not the guys from the 39th unit,” Dmitry, the driver and the commander of the group, told me. “They are always drunk, so they would probably beat you to death first and then think.”

Dmitry, Ruslan and Pavel were small-business men before the conflict, they told me. Their companies had monthly sales of around 300,000 Hryvnia ($25,000) each. They used to travel together to Oktoberfest in Germany and organized weekend parties in country vacation houses. Dmitry turned out to be an expert in wind generators and dissuaded me from buying one for my dacha.
The three of them hated everything other than nature. They hated the Euromaidan protests for igniting the unrest, hated Americans and Europeans for supporting it, hated ousted Ukrainian President Viktor Yanukovich and, of course, hated Putin, journalists and Russians.

“Russians and Ukrainians are not brothers anymore ’til Putin dies,” Pavel, who looked older than his friends, said, as he played a disc of Russian rock pioneer Viktor Tsoi in the Hyundai.
They asked me if I had Ukrainian roots. I had to disappoint them.

Rye Fields

We were heading to Mariupol, a city to the south of Donetsk, where authorities moved when the rebels occupied the capital. Pavel was advising me how to behave during questioning by their “much tougher” colleagues at the base, Dmitry was having a phone conversation about rebels’ salaries and Ruslan was staring at another field.

“Did you know there are giant rye fields between Ukraine and Russia, fields that go across the border, where nothing indicates what country they belong to?” he asked pensively.
“I know a village where a house is on our side and its toilet is on the Russian side,” Pavel said.

It was growing dark when they blindfolded me again.

The base was at the airport, as I understood from their talks. “Password? Four. Password? Six,” they said at the entrance, stopped the car and left me alone. Other men took me out of the car and ordered me to put my hands on the wall.

‘Truth Room’

The pointless questioning repeated. “Do you know who Putin is?” a voice asked. “The president of Russia,” I said. “Incorrect. He is khuilo. Let me teach you a song,” he said about a soccer chant popular in Ukraine in which Putin is called that term, which translates to an unprintable reference to male anatomy.

“Bloomberg News? Are you sure? Maybe Life News,” another voice asked, referring to a Russian media outlet controlled by Putin allies. They told me they don’t care that I work for an international media and not for a Russian one.

“We got a truth room for s— like you,” somebody said. Then they all left, leaving a guard who kicked me in the leg when I made attempts to kill mosquitos.

I had no way of knowing at the time, but my driver had managed to get through the message to my father to call Bloomberg’s Moscow bureau, setting off frantic activity from there to New York.

My colleagues in Kiev reached out to every contact they had, calling the army, the defense ministry, the security services, the president’s office. They scurried to find copies of my passports and assemble a portfolio of my recent work to prove who I was. Eventually, they found the right person.

Right Connection

In an hour, a new man approached. They called him colonel. He had a soft voice and a small palm. “I am an ethnic Russian,” was the introduction. “Looks like you were telling the truth and I have only one question left before you go. What do you think about all of this happening here?”

I answered with a bad Russian word. He agreed.

My three captors returned and drove me out from the base. “He said we should ask you to excuse us,” Ruslan said, taking my blindfold off.

“Here, take these. It’s Ukrainian-made s— anyway,” Pavel said as he gave me his sunglasses. Ruslan showed pictures of corpses that he said belonged to Chechen mercenaries he’d killed in Ukraine. Dmitry said I can always join their raids when I come back.

Hanging Out

My captors took me to Novoazovsk, a border checkpoint I was planning to pass seven hours earlier. Ruslan took a call from his father.

“All fine, Dad.”

“No, doing nothing. Just met some friends and we plan to hang out a bit.”

They ordered the border guards to let me go through. They left their e-mail addresses, should I wish to keep in touch.

At the Russian side, the Federal Security Service questioned me for an hour. I told my story in brief and a young officer asked if they could inspect my belongings. He was surprised when I refused.

I left the checkpoint and saw a field of rye. It was too dark to see if it stretched across the border.

*  *  *
Sounds like we need John Kerry in there to sort all this out… and explain how they can all be friends.

via Zero Hedge http://ift.tt/1ArIE16 Tyler Durden

We discussed the major rotation, overvaluation, and underperformance of high-yield credit markets recently as relevering stock-buying-back firms find their source of funding starting to dry up. The question is – why now? Perhaps this chart of the wall of maturing corporate debt ($3.9 trillion by 2019 which will need massive liquidity to roll-over and will eat earnings thanks to higher coupons) is what triggered the anxiety as the end of QE and start of rate-hikes looms close…

 

With no QE and a Fed on the verge of raising rates, rolling over $3.9 trillion in corporate debt (at implicitly higher coupons) means trouble for balance sheets and end to easy cheap buyback-funding…

 

Source: @standardpoors

*  *  *

Remember all that bullshit about pristine corporate balance sheets and cash on the sidelines… well as a gentle reminder we only warned that it was a mirage twenty times as firms added debt while they could… instead of cleaning up, they levered up… debt was not delevered, it was rolled and raised…

Mark Spitznagel's words are clear – scale the cash on the balance sheet against debt and we are as bad as we were in 2008.

The fallacy of cash piles on the balance sheet meaning strong balance sheets…

 

 

US companies are carrying far more net debt than in 2007

 

Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.

 

In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.

*  *  *

As we noted previously, this is why 'equity' investors should care

The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering – for even the worst of the worst credit –  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

 

Simply put – equity prices cannot rally for long without the support of high-yield credit markets – never have, never will – as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking… but it only ends with equity and credit weakening together. That is the credit cycle… it cycles.

Jeff Gundlach was right.

*  *  *

Of course we have explained this won't end well…

US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.

 

Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.

* * *

For those who suggest "running for the hills' is a little strong, yes we know a 35bps correction is 'not much' but from a sub-300bps HY spread perspective it is the biggest 3 week swing in 13 months (since the Taper tantrum) and outflows are the biggest in years…

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Against an forecast drop to 3.5% joblessness, Japan’s unemployment rate missed expectations by the most in 10 months and surged to 3.7% (its highest since Dec 2013). That likely explains why household spending dropped for the 3rd month in a row… (and why Abe’s approval rating just broke back under 50%).

 

Unemployment jumps to 2014 highs…

 

and Household spending tumbled once again…

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Submitted by Michael Snyder of The American Dream blog,

Nobody in the world loves locking people behind bars as much as Americans do.  We have more people in prison than any other nation on the planet.  We also have a higher percentage of our population locked up than anyone else does by a very large margin.  But has all of this imprisonment actually made us safer?  Well, the last time I checked, crime was still wildly out of control in America and for the most recent year that we have numbers for violent crime was up 15 percent.  The number of people that we have locked up has quadrupled since 1980, but this is not solving any of our problems.  Clearly, what we are doing is not working.

Nobody wants more crime.  And it seems logical that locking more people up and keeping them in prison for longer terms would “clean up our streets” and make our communities safer.  But instead, we have spawned a “prison industrial complex” that costs taxpayers more than 60 billion dollars a year but that does very little to turn the lives of the men and women inside around.  The chart posted below is a bit old, but it shows that we have a massive problem with recidivism in this country…

So what should we do?

To keep people from committing the same crimes should we just lock them up even longer?

Should we penalize a young kid for the rest of his life for a non-violent mistake that he made when he was 19 years old?

Should we continue to tear apart families and communities just so that we can have the illusion of feeling a little bit safer?

Or could it be possible that there is a better way to deal with all of this crime?

The following are 21 amazing facts about America’s obsession with prison…

#1 There are more than 2.4 million people behind bars in America as you read this article.

#2 Since 1980, the number of people incarcerated in U.S. prisons has quadrupled.

#3 The incarceration rate in the United States is more than 4 times higher than the incarceration rate in the UK and more than 6 times higher than the incarceration rate in Canada.

#4 Approximately 12 million people cycle through local jails in the U.S. each and every year.

#5 Overall, the United States has the largest prison population and the highest incarceration rate in the entire world.

#6 Approximately one out of every four prisoners on the entire planet are in U.S. prisons, but the United States only accounts for about five percent of the total global population.

#7 The state of Maryland (total population 5.9 million) has more people in prison than Iraq (total population 31.9 million).

#8 The state of Ohio (total population 11.6 million) has more people in prison than Pakistan (total population 192.1 million).

#9 Incredibly, 41 percent of all young people in America have been arrested by the time they turn 23.

#10 Between 1990 and 2009 the number of Americans in private prisons increased by about 1600 percent.

#11 At this point, private prison companies operate more than 50 percent of all “youth correctional facilities” in this nation.

#12 There are more African-Americans under “correctional supervision” right now than were in slavery in the United States in 1850.

#13 Approximately 90 percent of those being held in prisons in the United States are men.

#14 The incarceration rate for African-American men is more than 6 times higher than it is for white men.

#15 An astounding 37.2 percent of African-American men from age 20 to age 34 with less than a high school education were incarcerated in 2008.

#16 Police in New York City conducted nearly 700,000 “stop-and-frisk searches” in 2011 alone.

#17 The “SWATification” of America has gotten completely and totally out of control.  Back in 1980, there were only about 3,000 SWAT raids in the United States for the entire year.  Today, there are more than 80,000 SWAT raids in the United States every single year.

#18 Illegal immigrants make up approximately 30 percent of the total population in our federal, state and local prisons.

#19 The average “minimum security” inmate in federal prison costs U.S. taxpayers $21,000 a year.

#20 The average “maximum security” inmate in federal prison costs U.S. taxpayers $33,000 a year.

#21 Overall, it costs more than 60 billion dollars a year to keep all of these people locked up.

And it certainly does not help that we treat ex-cons as pariahs once they leave prison.

Most people will not hire them, and in many cases public assistance is not available to them.  Often their wives and families have abandoned them, and they have no roots in their communities after being away for so long.  Without any options, it is really easy for many of them to fall back into crime.  And that is the last thing that we should want to see happen.

It is almost as if we give up on someone once that person is convicted of a felony.  We want criminals locked up for as long as possible, and then once they get out we make it extremely difficult for them to reintegrate into society.

Without a doubt, there are a lot of really bad people locked up in our prisons.  And criminals should be punished for their crimes.  But there are also a whole lot of people that made one stupid mistake when they were young, and there are also a whole lot of people that do not deserve to be there at all.

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While Malaysian Airlines may have still been flying over warzones, it appears things have become so unstable and dangerous in Iraq that none other than Emirates Airlines has chosen to “re-route’ around the troubled nation:

• *EMIRATES TAKING PRECAUTIONARY MEASURES TO AVOID IRAQ AIR SPACE

The re-routing is expected to take a few days according to an emailed statement as Emirates joins numerous other airlines in avoiding playing ‘missile launcher roulette’ with their passenger’s lives to save a few bucks on gas.

Of course, with the world increasingly at war, airspace (and energy) needs may soon be at a premium once again.

 

As The BBC reports,

Emirates’ president Sir Tim Clark told The Times MH17 “changed everything” and it was “very nearly in European airspace”.

 

The airline told the BBC it was taking “precautionary measures” and “working on alternative routing plans for flights using Iraqi airspace

 

“We are closely monitoring the situation along with international agencies, and will never compromise the safety of our customers and crew,” said Emirates.

 

Sir Tim said he thought other airlines would follow.

 

Emirates’ president told The Times greater intelligence from the government about the safety of airspace would be welcome.

via Zero Hedge http://ift.tt/1lPaZ7J Tyler Durden

While Malaysian Airlines may have still been flying over warzones, it appears things have become so unstable and dangerous in Iraq that none other than Emirates Airlines has chosen to “re-route’ around the troubled nation:

• *EMIRATES TAKING PRECAUTIONARY MEASURES TO AVOID IRAQ AIR SPACE

The re-routing is expected to take a few days according to an emailed statement as Emirates joins numerous other airlines in avoiding playing ‘missile launcher roulette’ with their passenger’s lives to save a few bucks on gas.

Of course, with the world increasingly at war, airspace (and energy) needs may soon be at a premium once again.

 

As The BBC reports,

Emirates’ president Sir Tim Clark told The Times MH17 “changed everything” and it was “very nearly in European airspace”.

 

The airline told the BBC it was taking “precautionary measures” and “working on alternative routing plans for flights using Iraqi airspace

 

“We are closely monitoring the situation along with international agencies, and will never compromise the safety of our customers and crew,” said Emirates.

 

Sir Tim said he thought other airlines would follow.

 

Emirates’ president told The Times greater intelligence from the government about the safety of airspace would be welcome.

via Zero Hedge http://ift.tt/1lPaZ7J Tyler Durden

A month ago we explained why ordinary margin debt (such as that tracked by the NYSE) is largely irrelevant as it completely ignores the leverage of the largest investor class (aside from the Primary Dealers who use Fed reserves as collateral against which to purchase equity index futures), namely hedge funds and whose leverage blows out ordinary retail investors out of the water. Nonetheless, NYSE margin debt is still useful as an indicator of prevailing retail and less than sophisticated investor leverage, and thus euphoria, in the market.

It is from this perspective that we observe how after dropping modestly from all time highs hit in February, NYSE margin debt has recouped virtually all its losses and is now essentially back to all time highs. And as a parallel to that, investor net worth, defined as total Free Credit Cash and Credit Balances in Margin accounts less Margin Debt, has once again dropped to all time lows.

And while it may represent a mere subset of overall market leverage, it is perhaps worth rereading Deutsche Bank’s warning on the topic from a year ago, in which the German bank, embroiled in the latest financial reporting credibility scandal, hopes that “not all margin calls come at one in case of a sell-off.”

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