Month: September 2014

Submitted by Peter St. Onge via the Ludwig von Mises Institute,

Back when Quebec was weighing secession from Canada, I was a lowly American undergrad living in Montreal. It was an exciting time, since in America we have our railroads torn up and population starved when we secede. Now that Scotland is going through the motions, I figured I’d stir the pot, economically.

The question in 1995 was whether Quebec should secede from the Canadian Confederation. Passions were high; one secessionist leader unwisely argued that a "Yes" win would lock voters into secession like "lobsters thrown into boiling water." Fueling the drum-beat were federalist of impending economic, political, and currency chaos. At the end, the vote was incredibly close: 49.4 percent voting for secession, 50.6 percent voting no.

As Scotland goes to the polls to decide on its own separation from the United Kingdom, the tone of the campaign is, again, high on passion and, again, secessionists are inching toward the magical 50 percent line. But don’t uncork the single malt quite yet: as of today (September 2, 2014), bookies in London still put the odds at 4-to-1 against the non-binding referendum. But it remains a real possibility. [Check the latest odds here.]

One core debate is whether Scotland is too small and too insignificant to go it alone. During the Quebec referendum there was a nearly-identical debate, with secessionists arguing that Quebec has more people than Switzerland and more land than France, while federalists preferred to compare Quebec to the US or the “rest-of-Canada” (ROC, in a term from the day).

In a curious coincidence, 2014 Scotland and 1994 Quebec have nearly the same population: about 5–6 million. About the same as Denmark or Norway, and half-a-million more than Ireland. Even on physical area Scotland’s no slouch: about the size of Holland or Ireland, and three times the size of Jamaica. The fact that Ireland, Norway, and Jamaica are all considered sustainably-sized countries argues for the separatists here.

So small is possible. But is it a good idea?

The answer, perhaps surprisingly, is resoundingly “Yes!” Statistically speaking, at least. Why? Because according to numbers from the World Bank Development Indicators, among the 45 sovereign countries in Europe, small countries are nearly twice as wealthy as large countries. The gap between biggest-10 and smallest-10 ranges between 84 percent (for all of Europe) to 79 percent (for only Western Europe).

This is a huge difference: To put it in perspective, even a 79 percent change in wealth is about the gap between Russia and Denmark. That’s massive considering the historical and cultural similarities especially within Western Europe.

Even among linguistic siblings the differences are stark: Germany is poorer than the small German-speaking states (Switzerland, Austria, Luxembourg, and Liechtenstein), France is poorer than the small French-speaking states (Belgium, Andorra, Luxembourg, and Switzerland again and, of course, Monaco). Even Ireland, for centuries ravaged by the warmongering English, is today richer than their former masters in the United Kingdom, a country 15 times larger.

Why would this be? There are two reasons.

First, smaller countries are often more responsive to their people. The smaller the country the stronger the policy feedback loop. Meaning truly awful ideas tend to get corrected earlier. Had Mao Tse Tung been working with an apartment complex instead of a country of nearly a billion-people, his wacky ideas wouldn’t have killed millions.

 

Second, small countries just don’t have the money to engage in truly crazy ideas. Like Wars on Terror or world-wide daisy-chains of military bases. An independent Scotland, or Vermont, is unlikely to invade Iraq. It takes a big country to do truly insane things.

Of course there are many short-term issues for the Scots to consider, from tax and subsidy splits, to defense contractors relocating to England. And, of course, the deep historico-cultural issues that an America of Franco-British descent should best sit out.

Still, as an economist, what we can say is that Scotland’s big enough to “survive” on its own, and indeed is very likely to become richer out of the secession. Nearer to the small-is-rich Ireland than the big-but-poor Britain left behind.

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

While a misnomer, if President Obama is to be believed, The Islamic State, according to The Institute for the Study of War, poses a grave danger to the United States and its allies in the Middle East and around the world. As they exclaim, reports that it is not currently planning an attack against the American homeland are little comfort. Its location, the resources it controls, the skill and determination of its leaders and fighters, and its demonstrated lethality distinguish it from other al-Qaeda-like groups…“It must be defeated,” they conclude… and here’s how.

Via The Institute for the Study of War,

The Islamic State is a clear and present danger to the security of the United States. It must be defeated.

 

Developing a strategy to accomplish that goal is daunting. The situation today is so bad and the momentum is so much in the wrong direction that it is impossible to articulate a direct path to an acceptable endstate in Iraq and Syria. American neglect of the deteriorating situations in both countries has deprived us of the understanding and even basic ground intelligence needed to build a strategy. We must therefore pursue an iterative approach that tests basic assumptions, develops our understanding, builds partnerships with willing parties on the ground, especially the Sunni Arabs in Iraq who will be essential to set conditions for more decisive operations to follow.

 

The core challenge facing the U.S. in Iraq and Syria is the problem of enabling the Sunni Arab community stretching from Baghdad to Damascus and Turkey to Jordan to defeat al-Qaeda affiliates and splinters, while these extreme groups deliberately concentrate in Sunni majority areas. Persuading those communities to rejoin reformed states in Iraq and Syria after long seasons of internal strife will be daunting. But their participation in state security solutions will be essential to keep al-Qaeda from returning. Many of these populations, especially Syrians, may be losing confidence in such a post-war vision.

 

The problem in Syria is relatively easy to state, but extremely difficult to solve. The Assad regime has lost control of the majority of the territory of the Syrian state. It has violated international law on many occasions and lost its legitimacy as a member of the international community. Assad himself is the icon of atrocities, regime brutality, and sectarianism to Sunni populations in Syria and throughout the region.  His actions have fueled the rise of violent Islamists, particularly ISIS and JN. U.S. strategy must ensure that none of these three actors control all or part of Syria while supporting the development of an alternative, inclusive Syrian state over time.

Full ISW ISIS Defeat Strategy document below:

 

Defeating ISIS

 

 

*  *  *

So that’s it – off we go to war again… as the conclude…

The strategy to defeat and destroy ISIS must instead be determined, deliberate, and phased, allowing for iterative decisions that adjust the plan in response to the actual realities on the ground. The U.S. is not positioned to estimate these ground conditions accurately without more direct engagement of the Sunni populations in Iraq and Syria. Developing this accurate intelligence picture, which should be accomplished in conjunction with military action to disrupt ISIS and end its current offensive, means that the first phase of the U.S. strategy should be a movement to contact. The operational risks of this phase outweigh the strategic risks of decided to destroy ISIS and then engaging insufficiently.

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

While the world was poring through the details of the latest round of preannounced western sanctions against Russia – a round which Russia commented would have virtually no actual impact – and just as excitedly awaiting the Kremlin’s retaliation which Putin warned is coming shortly, far from the glare of the center stage Europe quietly folded to a bigger Russian demand namely to delay the implementation of a Ukraine free trade deal by more than one year until the end of 2015 and likely beyond.

As AFP reported, EU Trade Commissioner Karel de Gucht said, after talks with Russian and Ukrainian ministers, that the free trade agreement which Ukraine and its imploding economy had hoped would be implemented in the immediate future, will instead be delayed. Perhaps the date of the provisional launch has something to do with it: EU sources said the trade deal was to have taken effect on November 14, i.e. in the middle of Europe’s cold, snowy, GDP-sapping winter. The European Council of 28 members states must now sign off on the delay.

De Gucht said that once Kiev ratifies the EU Association Accord, expected next week and which was negotiated at the same time as the Deep and Comprehensive Free Trade Agreement, then Brussels would offer “additional flexibility” in the hope of meeting Russian concerns that its economy would suffer if the DCFTA deal went ahead.

This would be done as part of efforts to “fully support the stabilisation of Ukraine,” he said after talks with Ukraine Foreign Minister Pavlo Klimkin and Russian Economy Minister Alexi Ulyukayev. “Such flexibilty will consist in the delay until 31 December 2015 of the provisional application of the DCFTA,” he said.

Additional flexibility? That sounds very close to what Obama promised Putin’s right hand guy, Dmitry Medvedev, nearly three years ago.

Sometimes glitches in the matrix such as this one make one wonder just how much of what is going on right now between the “west” and Russia has been long pre-agreed and pre-approved by the “feuding” sides, and what is really going on behind the scenes.

But back to what the data available for popular consumption: in effect while Russia and the West are engaging in populism-happy trade and capital flow wars what is taking place at a higher level is far more nuanced, and it is here that a far more pragmatic EU is certainly concerned about pushing Russia too far.

The reason why Moscow is against the Ukraine free trade agreement is because Russia sees it as bolstering Kiev and potentially harming its own economy by allowing an influx of cheaper/better EU goods into the country, an important Russian market. Equally damaging, Moscow said these goods could then be sold on into Russia itself, damaging domestic industry.

Of course, with Europe launch sanction after meaningless sanction, in a world that is all about leverage and optics, the last thing the EU could afford is to be perceived as folding to the Kremlin in a matter which could really hurt the Russian economy. So instead DeGucht presented the delay as win-win for all sides, saying the preferential tariffs addressed “the very difficult economic situation in Ukraine” while the delay in implementing the deal leaves “15 months for either party to make remarks, proposals.”

One can just imagine the remarks and proposals that Putin would have uttered had Europe not delayed the agreement.

What’s more interesting, Russia may just win another major round in the political war that is taking place just behind the surface: the preferential tariffs announced in March and due to expire in October offered Ukraine significant reductions in customs duties worth about 500 million euros per year, the commission said.

Still, had the free trade deal passed today, it would have allowed the economically devastated Ukraine, whose economy is rapidly imploding, to boost its exports to Europe by one billion euros per year, according to the commission.

In June, the EU and Ukraine signed the long-delayed Association Agreement, the very deal whose 11th-hour refusal last year by then president Viktor Yanukovich plunged the former Soviet country into chaos. It sparked a wave of pro-European protests that eventually toppled the Kremlin-backed Yanukovich in February and ushered in a pro-Western government that deeply angered Moscow.

What goes unsaid is that the signed agreement was merely yet another optical pseudo intervention: in reality is provided nothing to Ukraine but simply sent signals to the global community that the “west” had the upper hand when it comes down to Kiev realpolitik.

If only for now. 

But once the Ukraine people have been forced to go through a full winter with no benefit from the Russian bear, it remains to be seen just how enthusiastic they will be about the ongoing western-backed (and funded, and orchestrated) revolution.

As for Europe’s true “leverage” vis-a-vis Russia, the following quote from AFP encapsulates it best:

“If you want to solve a conflict, you have to be flexible,” a European source said when asked about the delay in the trade deal.

And speaking of memorable quotes, one my want to timestamp these:

In Kiev, Poroshenko thanked the EU for the new sanctions. “A friend in need is a friend indeed,” Poroshenko said.

 

“I feel a full part of the European Union family,” he added.

Let’s all check back on how Ukraine, and whoever is its president then, feels about being part of the European Union “family” in a year. Or less.

via Zero Hedge http://ift.tt/1D1qIvy Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

"It is a bad sign for the market when all the bears give up. If no-one is left to be converted, it usually means no-one is left to buy.” – Pater Tenebrarum

That quote got me thinking about the dearth of bearish views that are currently prevalent in the market. The chart below shows the monthly level of bearish outlooks according to the Investors Intelligence survey.

The extraordinarily low level of "bearish" outlooks combined with extreme levels of complacency within the financial markets has historically been a "poor cocktail" for future investment success. 

As Michael Sincere recently stated rather sarcastically:

"If you study history, you know that no one thought the price of tulips, houses, or stocks would ever go down. Even most bulls believe that 'one day' there will be a correction, but that day is far away. After all, the Fed has an unlimited supply of magical tools, and they are determined to keep the market from falling.

 

Unfortunately for soul-searching bears, the Fed trumps all. As long as new money flows into stocks, interest rates are low, and the market keeps going up, why worry?"

That is the focus of this weekend's list of "Things To Ponder."

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1) The Death Of Bears by Pater Tenebrarum via Acting Man Blog

“What prompts this missive is news that yet another prominent bear has apparently given up. The thing is, this bear – Wells Fargo analyst Gina Martin Adams – wasn’t even a bear, but merely a somewhat reluctant bull, whose targets got taken out a few times. It is interesting from a psychological perspective that a not overly foaming-at-the-mouth bull is considered a “bear” by the financial media, a “famous bear” even. She has now recanted, and has apparently been preceded by several others. An SPX target of 1850 points apparently made her the “most bearish strategist” on Wall Street!

 

‘Gina Martin Adams of Wells Fargo has long been known as the most bearish strategist on Wall Street. After all, at 1,850, she had the lowest year-end S&P target among major strategists. But on Tuesday, she got rid of that year-end target and initiated at 12-month target of 2,100, reflecting a mildly bullish outlook.’

 

 

Given that no prominent bearish Wall Street strategists seem to be left now – not even those forecasting 5% dips or flat markets – we won’t be able to report on any additional conversions."

2) The Two Pillars Of Full-Cycle Investing by John Hussman via Hussman Funds

"As value investor Howard Marks observed last week:

 

'Today I feel it’s important to pay more attention to loss prevention than to the pursuit of gain. Although I have no idea what could make the day of reckoning come sooner rather than later, I don’t think it’s too early to take today’s carefree market conditions into consideration. What I do know is that those conditions are creating a degree of risk for which there is no commensurate risk premium.'

 

So while many observers pronounce victory at halftime, in the middle of a market cycle, at record highs and more extreme market valuations than at any point except the 2000 peak, remember the two pillars. First, the combination of high confidence, lopsided bullishness, overvaluation, and overbought multi-year advances has predictably been resolved by steep market losses, time and time again across history. Second, strong market return/risk profiles warranting constructive or leveraged investment positions emerge in every market cycle, generally following a material retreat in valuations, coupled with an early improvement in market action. We believe that one of these is descriptive of present market conditions, and the other is well worth our patience.

“History teaches clear lessons about how this episode will end – namely with a decline that wipes out years and years of prior market returns. The fact that few investors – in aggregate – will get out is simply a matter of arithmetic and equilibrium. The best that investors can hope for is that someone else will be found to hold the bag, but that requires success at what I’ll call the Exit Rule for Bubbles: you only get out if you panic before everyone else does. Look at it as a game of musical chairs with a progressively contracting number of greater fools.”

3) Eerie Parallels To 1937 by Dr. Robert Shiller via Project Syndicate

“The current world situation is not nearly so dire, but there are parallels, particularly to 1937. Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. And such fears can have severe consequences.”

Read Also: For 90% Of Americans There Has Been No Recovery

 

4) The Tailwind To Stocks Is Gone by GaveKal Capital Blog

“Generally as equity prices rise, commercial hedgers take on a greater short position, and when price fall they take on a greater long position.  When the position of commercial traders is significantly short, it suggests a large short position has been built up.  If commercial traders are short and get their directional bets wrong, it provides fuel for the market to propel higher as commercial traders have to cover their shorts by buying stock.  In turn, if commercial traders have closed out their short positions, this suggests there may be little fuel left for the upside in stocks.”

“This short covering induced buying has helped the equity markets attain all-time highs.  But, now the short covering has largely been completed and will no longer provide much of a tailwind for stocks.”

 

5) Tracking The Decline Of Risk Aversion by Scott Grannis via Calafia Beach Pundit

“For most of the past five years I've argued that one of the dominant features of this recovery was risk aversion. The Great Recession so scared and shocked the world that risk aversion became exceptionally high. I've also argued that the main purpose of the Fed's QE program was to supply a very risk averse world with safe securities, by essentially converting ("transmogrifying") notes and bonds into T-bill equivalents (aka bank reserves). The point of QE was not to stimulate the economy, as many have argued, but to accommodate the world's intense demand for safe assets.”

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Bonus Read: Profits Without Prosperity by William Lazonick via Harvard Business Review

Profits Without Prosperity

Have a great weekend.

Little-known fact: When the stock exchange closes, the guy who comes out on the balcony with that big hammer slams it on the head of the person who lost the most money that day…” – George Carlin

 

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

Because it’s Friday… “unrigged?”

Nothing says “aggressively sell VIX” into the weekend like the start of another war in Iraq…

Chart: Bloomberg

It seems even the VIX momentum-ignition tool can’t trump Fed hawkishness concerns… better luck next time Kevin.

via Zero Hedge http://ift.tt/1tJ3bci Tyler Durden