Month: January 2017

“Russia is not the Soviet Union, this is not the Cold War, and Moscow is not looking for world domination.”

For the American press and many partisans, one of Donald Trump’s very gravest sins is his “bromance” with Russian leader Vladimir Putin. It’s a sure sign of The Donald’s stupidness, ignorance, naiveity, or flat-out lack of any moral seriousness that he seems to be OK with the Russians grabbing Crimea, edging its way into Ukraine, helping an even-bigger POS, Bashar al Assad, in Syria, and even “hacking” an election (or maybe not).

These are all serious actions and worthy of argument, analysis, and sharp disagreement. But the presumption of most of Trump’s critics (they exist on the right, too) when it comes to his Putinphilia is the unexamined equation of today’s Russia and the Soviet Union. Just like the Soviets, this unspoken argument goes, Russia is bent on world domination or, at the very least, regaining the contours of its former empire of Soviet republics and effective control of countries in the Baltics and Eastern Europe.

Against such a dire and unexamined starting point, Washington Post Moscow Bureau Chief David Filipov has written an important article worth reading. After recounting the very good year that Putin had in 2016 (brokering a cease-fire in Syria, winning praise from President-elect Trump, getting his “man” elected in the U.S., high-though-not-stellar approval ratings at home), he reminds us:

Russia is not the Soviet Union, this is not the Cold War, and Moscow is not looking for world domination. Putin’s goal is limited to reducing U.S. influence while ensuring Russia’s vital interests, and the power he can project is still limited by a weak economy and a global reach that pales in comparison to that of the United States.

He can’t act anywhere he wants, he can’t do it alone, and a lot still depends on whether and how far President-elect Donald Trump decides to go along with him.

Filipov notes that Russia’s economy is still in the shitter and highly dependent upon energy exports. Even though Putin has a personal rating in the 80s, only around half of the country thinks it is heading in the right direction and all sorts of structural reforms of the public sector and the economy have stalled or failed miserably. The typical Russian household is spending more than half its money on food and groceries for the first time in seven years and Russian GDP has declined from a peak of $2.2 trillion in 2013 to just $1.3 trillion, which works out to a second-world per-capita figure of $9,000. Putin recently refused a plan from his military to re-establish naval bases in Cuba and Vietnam, at least in part because of the cost.

Filipov concludes:

Putin has succeeded because he only picks fights with the United States when Russian vital interests are at stake and Russia has a reasonable chance of prevailing, said Simon Saradzhyan, founding director of the Russia Matters Project at Harvard’s Belfer Center for Science and International Affairs.

Saradzhyan argues that the primary consideration here is whether the United States is willing to commit its full might: In Ukraine, U.S. vital interests were not at stake, and ultimately, he said, the Obama administration decided they were not in Syria, either.

“Soviet leaders sought to counter the United States everywhere and anywhere,” Saradzhyan said. “Putin has a much more limited outlook shaped by capacities of his country’s economy, demographics and other components of national might.”…

Even as Putin steams into 2017 at the height of his power, the question is what happens to Russia’s standing the moment Trump takes control of the world’s most powerful nation. While Moscow is likely to continue to push to expand its influence where it can at the expense of the United States, co-opting the new administration — for example, in the fight against terrorism — wherever it is feasible, Putin is unlikely to act in a way that openly challenges the new U.S. president.

Read the whole thing.

This is, to be sure, a generous reading of Putin’s actions, but it’s also a fair one. Most important, it forces Americans to break with the Cold War lense through which we continue to view geo-politics. But we’re not in the Cold War anymore and we need to think very differently about foreign policy (first and foremost, we need to stop equating foreign policy with military interventionism). Filipov’s analysis helps to do that and it also implies that Donald Trump, for all of his doltishness, may well be more strategic than most of his critics (including GOP neoconservative types) give him credit for. After all, Europe can and should take of itself pretty well. It’s a rich, well-defended part of the world. When it comes to expanding its influence, China is much more of a rising power in military, economic, and scientific terms and however much it cuts against 70 years of anti-Soviet animus, it may make sense for the United States to build a stronger alliance with Russia as a way of helping to modulate China’s hard and soft powers (this is simply reversing one of the main goals of Nixon’s opening up China in the early 1970s).

I’m fond of saying that the 21st century has not yet quite begun yet, that we are essentially still stuck in a “long 20th century” and all that implies for politics (chief among the implications is dwindling enthusiasm for either major party, as they reflect fewer and fewer Americans’ dreams, hopes, and anxieties). Foreign policy and especially U.S. military interventions have been an almost unbroken string of unmitigated disasters since 9/11. We need to start thinking of different ways of approaching the world, including our longtime arch-nemesis Russia and exactly what America’s role in the world can and should be. It’s proving very hard for conventional right- and left-wingers to do so, partly because they use supposedly abstract principles mostly as a means only of securing short-term political advantage. Hence, conservatives were mostly aghast that President Obama dare relax restrictions against Cuba, as if our embargo would suddenly start working in its sixth decade. And liberals, who became increasingly antagonistic to George W. Bush’s war machine over time, are now vastly disturbed when the U.S. sits out Syria or Crimea and cheered the utterly indefensible intervention in Libya.

But if we believe that we should only intervene militarily when serious national interests are at risk, we’re going to be doing a whole lot less intervening with guns and tanks and soliders. And we’re going to be trading more in things like food, energy, and culture than in “arming” moderate rebels. These should not be seen as the signs of a “weak” country but of a self-secure one and if Donald Trump of all people turns out to be the vehicle by which the United States actually stops being the world’s policeman, we should at least have the gratitude to tip our hats to him.

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Indian Banks Slash Interest Rates As Cash Shortage Leads To Manufacturing Contraction, Economic Shockwaves

Over 50 days after Indian Prime Minister Narenda Modi stunned India’s population when he announced on November 8 he would unexpectedly eliminate 86% of the existing currency in circulation in what was supposed to be a crackdown on the shadow economy, but instead has resulted in a significant hit to the broader, cash-based economy, overnight we noted the first official confirmation of how substantial the impact of Modi’s demonetization has been, when the Nikkei India Manufacturing Purchasing Managers Index printed at 49.6 in December, the first contraction reading since December 2015, as the war on cash crippled demand.

According to the report, output and new orders fall for first time in one year; companies reduced buying levels and payroll numbers; Input cost inflation accelerated, while charges rose at softer rate.

Commenting on the report, IHS Markit economist Pollyanna De Lima said that “having held its ground in November following the unexpected withdrawal of 500 and 1,000 bank notes from circulation, India’s manufacturing industry slid into contraction at the end of 2016. Shortages of money in the economy steered output and new orders in the wrong direction, thereby interrupting a continuous sequence of growth that had been seen throughout 2016. Cash flow issues among firms also led to reductions in purchasing activity and employment.

Looking at the upcoming timeline of cash exchanges, she noted that “with the window for exchanging notes having closed at the end of December, January data will be key in showing whether the sector will see a quick rebound.”

As Bloomberg added, other recent data also mirror the stress. Motorcycle maker Bajaj Auto Ltd.’s total sales slipped 22 percent in December, the steepest fall in at least 21 months. Motorcycle sales, a key indicator of rural demand, declined 18%. India’s biggest automaker by volume, Maruti Suzuki Ltd., reported a 4.4 percent drop in domestic December sales, the first decline in six months, while overall sales fell 1 percent from a year earlier.

A continued slowdown will strip India of its position as one of the world’s fastest-growing big economies and risk a political backlash against Modi. On Wednesday another key economic report is due, when the Service PMI data is due before focus shifts to the government’s first official growth estimate for the year through March.

India’s economy, which until recently was expected to be the world’s fastest growing, large economy, outpacing China…

… is now expected to grow 6.9% in the year through March, according to a consensus estimate. That’s well below the 7.3% predicted by a survey in November and the previous year’s 7.6% actual expansion. At this rate of deterioration, China, and its “goalseeked” 6.5% annual growth rate may soon regain the top spot among world economies.

Meanwhile, in an attempt to offset the slowing economy as a result of the Prime Minister’s unprecedented demonetization gamble, overnight Indian banks, led by market leader State Bank of India, announced sharp cuts to their lending rates after the recent surge in deposits as ordinary Indians brought their cash to the bank for “safekeeping”, raising hopes that lower borrowing costs will help spark credit growth in Asia’s third-largest economy.

On Sunday, State Bank of India, India country’s biggest lender by assets, said it had cut its so-called marginal cost of funds-based lending rates (MCLR) by 90 bps, while unveiling new products for mortgage loans, one of the fastest-growing areas. Other lenders including Punjab National Bank, Union Bank of India, Kotak Mahindra Bank and Dena Bank followed suit and also cut their lending rates by 45-90 basis points across tenures. Analysts expect more lenders to follow suit.

Banks have received 14.9 trillion rupees ($219.30 billion) in old 500, and 1,000 rupees notes from depositors since Modi’s cash overhaul. That had raised expectations banks would have room to cut lending rates, which is seen as vital to increase credit growth and spark a revival in private investments.

Cited by Reuters, Arundhati Bhattacharya, chairman of SBI, said at a news briefing on Monday, the rate cuts were intended to “jump start” credit growth and could raise it by 100-200 bps in the year ending in March. Even if accurate, it remains to be seen if such credit growth will have an offsetting impact on economic growth.

SBI now expects credit growth for 2016/17 fiscal year to be 8-9%, Bhattacharya said, still lower than the lender’s previous formal guidance of 10-12% growth. Any signs of a revival in credit could ease some of the worries from Modi’s move, which has sparked a severe cash shortage that has paralyzed parts of the economy.

The rate cuts also come after Modi on Saturday warned banks to “keep the poor, the lower middle class, and the middle class at the focus of their activities,” and to act with the “public interest” in mind.

Modi’s comments were made in a special New Year’s eve speech in which he defended his ban on higher-value cash notes and announced a slew of incentives including channeling more credit to the poor and the middle class.

Some have expressed optimism that the combined impact of banks cutting lending rates and subvention provided by the government to small businesses is likely to help turn around growth faster than expected in the next fiscal year,” said Saugata Bhattacharya, chief economist at Axis Bank, the third-biggest Indian lender. Many others remain skeptical.

For now, however, the immediate impact was on Indian Bonds, which rose after SBI’s interest cutting announcement, pushing the yield on the sovereign note due September 2026 to 6.4% from 6.51%. If anything, this is the latest sign that in a world drowning in leverage, and whose economy is priced to perfection, any ongoing “tightness” and rising rates, will only lead to adverse consequences not only in Emerging Markets, but developed ones as well.

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Iron Ore Stocks At Chinese Ports Hit New Record Highs: Why This Is An “Ominous Sign” For Prices

As Axiom Capital’s Gordon Johnson points out, Iron Ore stocks at Chinese ports just hit a new record high in the last week of 2016, even as the spot price of iron ore staged a dramatic comeback over 2016, closing near the highs of the year. However, as Johnson notes, if history is any precedent, such record stocks “carry an ominous sign for iron ore prices.” Here’s why.

After jumping by the biggest 1-wk increase since Oct. ’15, +2.7% w/w, iron ore inventories at Chinese ports reached a new record high of 114.0Mmt on 12/30.

Using implied consumption as a denominator (i.e., the latest data on daily pig iron output x 1.6), days of inventory for port stocks topped 38.6, the most in 2-yrs.

While inventory restocking at China’s ports likely helped support prices, w/ an intense destock likely in the offing, Johnon sees “downside risk to prices as imminent.”

How much? Well, using the last big peak-to-trough cycle as a guide, 7/4/14-6/26/15, port stocks & avg. wkly spot prices fell 30.2% & 35.5%, respectively. Further, since the 7/4/14 peak, stocks/prices shared a 65% correl. Assuming stocks fall just half as much as in the last down cycle, using a simple regression, we est., ceteris paribus, prices could quickly fall back to $61/mt (Ex. 3).

One of the reasons cited for the massive stockpiling of iron ore is that China is planning a vast expansion of its railway network to support growth, with new lines estd. to span >18K miles (link).

However, as Axiom boldly notes, “China’s Massive Railway Expansion Plan ? a Panacea for Iron Ore or Steel Demand.“

While this would surely benefit jobs, Axiom estimates with a few assumptions, that the incremental benefit to aggregate steel demand would be a mere 4.8Mmtpa, or just 59bps over 806.7Mmt of estd. ’16 production.

How does it get here? Using publicly available data from WAB (NC) as a blueprint (link), assuming avg. weights for: (1) rails are 128lbs./yd., (2) joint bars are 90lbs./pair, (3) track bolts are 80lbs./yd., & (4) spikes are 59lbs./yd., Johnson estimates avg. steel demand of 448mt/mile of track (Ex. 4).

The firm further, and rather aggressively, assumes this expansion is completed in just 3.5yrs & all rail lines are double-track. What’s more, w/ ~90% of steel made in blast furnaces, we est. this incremental steel demand would translate to 6.9Mmtpa of iron ore demand, or just 59bps against an estd. 1,165Mmt of gross ’16 supply (i.e., 141Mmt in domestic output + 1,024Mmt of imports [Ex. 5]).

Bottom line: according to Axiom, both China’s iron ore demand, and the recent price surge, have topped out, especially following recent Beijing summits in which the topic of deflating China’s various bubbles is once again front and center. Finally, the recent downturn in the Baltic Dry Index may suggest that the spot price correction is set to arrive sooner than many expected.

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A great story from when America was still the Land of Opportunity

Last week during a long overdue vacation, a close friend of mine recommended reading the autobiography of Rich DeVos called Simply Rich.

DeVos is a billionaire entrepreneur who started countless ventures during his nine decades on this earth.

Back in the 1946, for example, DeVos started an airline… virtually overnight.

He just bought an airplane and started flying people around. No rules. No regulations.

They didn’t even have an airport. The local airfield north of Grand Rapids, Michigan, where they were based, hadn’t been completed yet.

As DeVos recounts in his book, “We put pontoon floats on our plane and took off and landed on the Grand River, which ran along the airfield.”

His first office at the airfield was an old chicken coop that he found, washed in the river, and re-painted.

The following year he and his partner opened up one of Michigan’s first “Drive Through” restaurants at the airfield, catering to passengers, workers, flight students, and spectators who came by in the evenings just to marvel at the planes.

Again, no rules. No regulations.

They just saw an opportunity and went for it.

DeVos started another business selling ice cream; another offering fishing excursions on Lake Superior; and another delivering trucks cross-country.

The truck delivery business was one of the more interesting ones; it started when he was just a kid– someone asked him to drive two pickups from Grand Rapids to Bozeman, Montana.

There were no hotels or motels… or even interstates back then.

So DeVos and his friend had to zig-zag their way across corn fields to get there, sleeping on haystacks each night along the way.

The book is a hell of an adventure– a reminder of how free and unencumbered things used to be.

Back in America’s heyday, people succeeded based on their hard work, ingenuity, and willingness to take action.

They didn’t have to spend three years filling out paperwork so that some government bureaucracy could justify its existence.

It was an environment that created unparalleled opportunity and prosperity which, candidly, have long since faded.

Today there are rules for everything; in fact, just this morning, the US federal government published an astonishing 709 pages of new regulations.

And that’s just for today. They publish new regulations every single business day. So tomorrow there will be even more.

These rules make it more difficult to produce, to start a business, to sell a product or service to a willing consumer.

And these rules carry costs, whether it’s in paying a fee, filling out paperwork, etc.

So just imagine the effect that literally decades worth of rules and regulations has had on US productivity (which is now noticeably contracting, even according to government data.)

It’s also worth noting that roughly 30% of occupations in the Land of the Free now require some sort of government license.

In its study “License to Work”, the Institute for Justice reports that 45 out of 50 of the largest cities in the United States have put up substantial obstacles to prevent budding entrepreneurs from selling food from street carts.

A manicurist in Alabama requires 163 days of training, while a shampoo specialist at a Tennessee hair salon must undergo 70 days of training, take two exams, and pay $140 in fees to obtain a license.

Hawaii requires fire alarm installers to undergo a whopping four years of training, pass two exams, and pay $380 in fees to obtain a license.

And a tree trimmer in California must also undergo four years of training, pass two exams, and pay $851 in fees to obtain a license.

It’s absurd.

Nothing that Rich DeVos his partner accomplished in their teens and 20s is even legal anymore.

It makes me think about all the people today who will never have the chance to realize their full potential thanks to the mountain of regulations blocking their way.

This is an important point to understand.

Looking at the data– the incredible overregulation, $20 trillion in debt, insolvent pension funds, etc., it’s painfully obvious that the US is past its prime and holding back millions of people from achieving greater prosperity.

Rich DeVos started so many businesses back in the 1940s because the government stayed out of the way and enabled hard-working risk takers to succeed.

Today the government spends $2 billion to build a website and churns out hundreds of pages of regulations each day.

And this trend gets worse each year.

Understanding this simple reality doesn’t mean that you’re pessimistic, unpatriotic, or expecting the end of the world.

It just makes you rational.

Things change. That’s the bottom line.

The US is still a fantastic place. But it’s no longer the same Land of Opportunity it was when Rich DeVos was getting started.

As I’ve summarized before, the US is a great place to consume… but an increasingly difficult place to PRODUCE.

That imbalance has serious long-term consequences, which we are only starting to experience.

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Trump to Continue “Freaking Mainstream Media Out”, Will “Boldly Use” Twitter For Policy Announcements

Having drawn the ire of the mainstream press for his extensive use of Twitter in announcing major developments and policy shifts, President-elect Donald Trump will not end the “onslaught” of posts on Twitter that fed his unconventional campaign, even after taking on the formalized duties of the Oval Office later this month, as Bloomberg notes following an announcement by incoming White House press secretary Sean Spicer who said he expects Trump “will boldly use” Twitter to make major policy announcements.

Shortly after his victory on November 8, Trump said in an interview on CBS’s “60 Minutes” that he was rethinking his use of social media: “I’m going to be very restrained, if I use it at all, I’m going to be very restrained,” Trump said. That, however, has not happened and since then, during the countdown to Inauguration Day on Jan. 20, he’s shown little sign that he intends to follow that pledge.

In fact, making news and issuing statements on social media sites that also include Facebook and Instagram will “absolutely” continue, despite any prior promises to the contrary, incoming White House press secretary Sean Spicer said Sunday on ABC’s “This Week.”

“You know what? The fact of the matter is that when he tweets, he gets results,” Spicer said.

“You know, with all due respect, I think it freaks the mainstream media out that he has this following of over 45 plus million people that follow him on social media, that he can have a direct conversation,” Spicer said. “He doesn’t have to have it funneled through the media.”

Indeed, he doesn’t, and the fact that the media suddenly finds itself locked out in this most important of information dissemination and filtration pathways, has unleashed the biggest period of soul-searching for the conventional press in decades.

In recent tweets, Trump has hinted he’d like to change decades of policy on nuclear weapons; praised Russian leader Vladimir Putin even after accusations by intelligence agencies that Russia attempted to tamper with U.S. elections; and said the United Nations is a “club for people to get together, talk and have a good time.”

As a result, Trump was scolded by foreign policy experts last month when he used Twitter as the venue to say that the U.S. should greatly strengthen and expand its nuclear capacity until such time as the world comes to its senses regarding nuclear weapons. For now, if anything, this outside criticism has only emboldened Trump to avoid conventional media outlets.

On Dec. 28, the incoming president tweeted that he was trying to disregard statements by President Barack Obama that he considered “inflammatory.” “Thought it was going to be a smooth transition – NOT!” Trump said in the post.

After Putin said on Dec. 30 that he wouldn’t respond in kind to an Obama administration order expelling 35 Russian diplomats in response to that government’s hacking of Democratic Party officials, Trump tweeted: “Great move on delay (by V. Putin) – I always knew he was very smart!”

A day after praising Putin, Trump raised eyebrows by wishing a “Happy New Year to all, including to my many enemies.” New Year’s Day brought a more conciliatory greeting ”to all Americans” that cast ahead to “a wonderful & prosperous 2017 as we work together.”

Trump’s tweets have also targeted specific companies, including Lockheed Martin Corp. for what the president-elect termed “out of control” costs for the F-35 fighter jet, and Boeing Co. for “ridiculous” costs to build a new 747 Air Force One for future presidents. “Cancel order!” Trump said in a Twitter post on Dec. 6, sending Boeing shares lower.

Trump currently has 18.3 million followers on Twitter, 16.8 million on Facebook and 4.5 million on Instagram. He has tweeted more than 34,000 times since joining the social media platform in 2009.

As Bloomberg adds, Spicer was asked on “This Week” about Trump’s Twitter statement on Dec. 22 that the U.S. “must greatly strengthen and expand its nuclear capacity until such time as the world comes to its senses regarding nukes.”

Surprisingly, despite having the president-elect as the brand’s most vocal and prominent ambassador in the world, Twitter continues to lose key personnel, most recently on December 30, when in a series of Tweets, Twitter’s Managing Director for Greater China Operations Kathy Chen says that as the Twitter APAC team is working directly with Chinese advertisers, it is the right time for her to leave the company. She joined Twitter less than 8 months ago, in April of 2016.

* * *

Aside from the topic of Trump’s tweeting, Spicer also said on Sunday that the White House may have disproportionately punished Russia by ordering the expulsion of 35 suspected Russian spies. Spicer said that Trump will be asking questions of U.S. intelligence agencies after President Barack Obama imposed sanctions last week on two Russian intelligence agencies over what he said was their involvement in hacking political groups in the 2016 U.S. presidential election. 

“One of the questions that we have is why the magnitude of this? I mean you look at 35 people being expelled, two sites being closed down, the question is, is that response in proportion to the actions taken? Maybe it was; maybe it wasn’t but you have to think about that,” Spicer said.

Trump is to have briefings with intelligence agencies this week after his return from vacation to New York on Sunday. On Saturday, Trump expressed continued skepticism over whether Russia was responsible for computer hacks of Democratic Party officials.

 

“I think it’s unfair if we don’t know. It could be somebody else. I also know things that other people don’t know so we cannot be sure,” Trump said. He said he would disclose some information on the issue on Tuesday or Wednesday, without elaborating. It is unclear if, upon taking office on Jan. 20, he would seek to roll back Obama’s actions, which mark a post-Cold War low in U.S.-Russian ties.

Spicer said that after China in 2015 seized records of U.S. government employees “no action publicly was taken. Nothing, nothing was taken when millions of people had their private information, including information on security clearances that was shared. Not one thing happened.” “So there is a question about whether there’s a political retribution here versus a diplomatic response,” he added.

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What a Growing Economy Does to Jobs: New at Reason

Model TIn South Africa, people who speak Afrikaans use the word “robot” to mean the same thing it means in English. But it is also the word for “traffic light.” Why? Before automated signals, motorists on busy streets were directed by police officers standing on platforms. Those cops were automated out of a job.

This bit of trivia comes from the dazzling new book Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World, by University of Illinois at Chicago economist and historian Deirdre McCloskey. She points out that automation and robots are nothing new, that they are crucial to raising living standards and that the jobs they destroy are always replaced by better ones.

Today, cars are built partly by robots, which reduce the need for human workers. Notes McCloskey, “Compared with horses, cars themselves are ‘robots.’ Yet the advent of cars did not produce mass unemployment because of insufficient demand for the output of blacksmiths and horse traders.” Steve Chapman explains more.

View this article.

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Bitcoin Surges Above $1,000 As China Unveils New Capital Controls

As noted yesterday, for the first time in three years, and only the second time in history, bitcoin rose above $1,000 in Yuan-denominated Chinese trading, however it was limited to the lower side of this “round number” psychological barrier in US trading, as BTC flirted with $999.99 for most of the day on the popular Coinbase exchange, without crossing it.

Overnight, however, Chinese demand proved too great and US markets had no choice but to arb the difference. So with Bitcoin trading in China at an implied price of over $1,050 at this moment, bitcoin finally soared above $1,000 in the US as well, trading just around $1,024 on Coinbase as of this moment.

 

Various catalysts for the recent surge have been cited, chief among which is the ongoing crackdown against cash in India providing a new source of demand for bitcoin. However, the most immediate driver of the recent burst in Chinese demand originates, not unexpectedly, from China where Beijing over the weekend implemented even more of what we have said since September 2015 will keep pushing bitcoin relentlessly higher: capital controls.

Recall that as we noted over the weekend, in order to further curb capital outflows, Chinese banks will be required to report all yuan-denominated cash transactions exceeding 50,000 yuan (around 7,100 US dollars) to the People’s Bank of China (PBOC), down from the current level of 200,000 yuan, according to a PBOC document released on Friday. Cross-border transfers more than 200,000 yuan by individuals will also be subject to the report process. In terms of foreign currencies, the report threshold remains at the equivalent of 10,000 US dollars for both cash transactions and overseas transfers.

How do we know that this latest PBOC intervention in capital markets was merely the latest form of capital controls? Because the PBOC immediately said it wasn’t.

As Xinhua reported overnight, “the policy stoked worries that the government is trying to impose capital control in a disguised form.”

“It is not capital control at all,” central bank economist Ma Jun said.

Actually, imposing limits on capital movement, i.e. controls, is by definition just that.

Logic, however, did not prevent Ma from continuing on a tangent, and he “explained” that the responsibility of report will be assumed by financial institutions, and there will be neither extra documentation nor official approval procedures for businesses and individuals. “They will not feel any change,” Ma added. He also noted that each person’s current annual foreign exchange purchase quota of 50,000 US dollars is unchanged, and normal activities, ranging from business investment and operation abroad to individuals’ overseas trips and study, will not be affected, Ma said.

The PBOC has said the move aims to improve monitoring of money laundering, financing for terrorists, graft and tax fraud, instead of targeting common business activities. Appealing to the Chinese savers not to withdraw their money out of fears of even more capital controls, Ma said that the world’s major countries also have similar rules, citing that transactions worth 10,000 US dollars or more are subject to reporting in the United States, Canada and Australia.  Regulators in those countries can even adopt stricter rules if necessary after obtaining legal authorization, Ma said.

Judging by the move in Bitcoin since the announcement, nobody believes Mr. Jun.

And yet, what is surprising is that if China indeed wishes to limit capital flight by bitcoin it could easily do so with the flip of a switch, sending the price plunging. As we noted recently, according to Bloomberg sources, Chinese officials have been considering policies including restricting domestic bitcoin exchanges from moving the cryptocurrency to platforms outside the nation and imposing quotas on the amount of bitcoins that can be sent abroad. Further indicating that Chinese regulators were “just a little behind the curve”, they allegedly noticed only recently that some investors bought bitcoins on local exchanges and sold them offshore, evading rules on foreign exchange and cross-border fund flows, the report further reveals.

A quick look at the uncanny correlation between the decline in the Yuan and the rise in the bitcoin, confirms that the digital currency has indeed been largely used to evade capital controls. 

Based on this chart alone, the recent surge in Bitcoin would imply that a substantial devaluation of the yuan is looming. That, or even more aggressive capital controls.

As for those buying into bitcoin here on the momentum, most of which originates in China, we urge readers to be cautious as by now the PBOC has certainly noticed that the digital currency remains one of the final, and most successful, means of bypassing capital controls in China. Should Beijing mandate that bitcoin no longer be a means to illegally transfer capital offshore, there is risk of a dramatic, and sharp, drop in its price.


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The New York Times Gets Everything Wrong in This Article That Falsely Claims Economists Don’t Like School Choice

KidA recent New York Times story that slams the free market approach to education policy is rife with inaccuracies. Amazingly, the author of the piece misrepresents the very data she is using to build her erroneous case against school choice.

“Free Market for Education? Economists Generally Don’t Buy It,” claims Susan Dynarski, a professor of education, public policy, and economics at the University of Michigan, in The Times. This is a betrayal of expectations, according to Dynarski, because economists generally understand that free markets produce better outcomes than central planners (much to the chagrin of education professors). Economists are usually the ones calling for less regulation and more unrestricted capitalism; if they’re super conflicted about markets in education, that would be a serious indictment of the school choice approach. Dynarski writes:

You might think that most economists agree with this overall approach, because economists generally like free markets. For example, over 90 percent of the members of the University of Chicago’s panel of leading economists thought that ride-hailing services like Uber and Lyft made consumers better off by providing competition for the highly regulated taxi industry.

But economists are far less optimistic about what an unfettered market can achieve in education. Only a third of economists on the Chicago panel agreed that students would be better off if they all had access to vouchers to use at any private (or public) school of their choice.

That does sound bad for school choice—it suggests that two-thirds of surveyed economists disagree that students with vouchers would be better off.

But Dynarski is applying spin. Here is the survey:

IGM Chicago

A chunk of economists—37 percent—couldn’t say for sure whether vouches would improve educational outcomes. That’s not so surprising: education reform is a complicated issue and economists are thorough, cautious people. Moreover, it’s true that vouchers don’t always make things better for every kid—providing more choices is not the same thing as magically reversing decades of poverty, racial inequality, and bad incentives.

But, among economists who did take a position on the issue, school vouchers were a big winner. As Slate Star Codex explains:

36% of economists agree that vouchers would improve education, compared to 19% who disagree. The rest are unsure or didn’t answer the question. The picture looks about the same when weighted by the economists’ confidence.

A more accurate way to summarize this graph is “About twice as many economists believe a voucher system would improve education as believe that it wouldn’t.”

By leaving it at “only a third of economists support vouchers”, the article implies that there is an economic consensus against the policy. Heck, it more than implies it – its title is “Free Market For Education: Economists Generally Don’t Buy It”. But its own source suggests that, of economists who have an opinion, a large majority are pro-voucher.

(note also that the options are only “agree that vouchers will improve education” and “disagree that vouchers will improve education”, so that it’s unclear from the data if any dissenting economists agree with the Times’ position that vouchers will make things worse. They might just think that things would stay the same.)

I think this is really poor journalistic practice and implies the opinion of the nation’s economists to be the opposite of what it really is. I hope the Times prints a correction.

I would also note that I read through most of the surveyed economists’ comments, and it seems pretty clear that those who were “uncertain” did think school vouchers would improve outcomes for a lot of kids, they just thought it was hard to quantify the overall effect. “I think the majority of public school students would be better off, but certainly not all,” wrote one economist. “The question is ambiguous about the percent.” You can judge for yourself whether the responses should be further weighted toward the pro-voucher position.

But that’s not even everything that’s wrong with the article. Having smeared school choice as something the Trump administration will push despite the learned skepticism of “economists generally,” Dynarski then goes on to point out a number other policy issues where the consensus is against the free market:

While economists are trained about the value of free markets, they are also trained to spot when markets can’t work alone and government intervention is required.That’s not even everything that’s wrong with the article. Having smeared school choice as something the Trump administration will push despite the learned skepticism of “economists generally,” Dynarski then goes on to point out a number other policy issues where the consensus is against the free market.

A classic example is pollution. Factories and cars that spew toxins ruin the air for everyone. Pollution is what economists call a “negative externality”: Drivers get the benefits of the gas they burn when they drive to work, but everyone else gets the bad emissions. Economists recommend governments use taxes and regulations to minimize this negative externality.

At this point I’m not sure readers should trust Dynarski’s impression of what economists think—and in fact, there are plenty of economists who say markets and property rights would reduce all sorts of environmental problems—but let’s assume she’s right: economists agree that there are some things the free market just can’t handle on its own:

In most markets, in fact, economists advocate striking a balance between free competition and regulation. While they vary considerably in where they would strike that balance, it’s unusual for an economist to claim that private markets can serve every need without any government intervention at all.

Earlier, Dynarski associated the free market position with school vouchers. Now she is saying that the free market position is “private markets can serve every need without any government intervention at all.” That’s an incredible contradiction. Dynarski, I suppose, wants her readers to believe that school vouchers are an anarcho-capitalist delusion that would gut public education and leave children to become feral and illiterate. In reality, school vouchers represent exactly the sort of “balance between free market competition and regulation” that economists support. Under a voucher system, education is still publicly funded. Many schools are still run by the government. Those that are not explicitly run by the government are still subjected to considerable regulation.

Dynarski is making the case that smart, reasonable people support market competition as long as it’s accompanied by significant government intervention. Dynarski is also, for some reason, making the case against school vouchers—even though vouchers are the perfect example of the kind of thing she claims is smart and reasonable.

Supporters of school choice are not extremists. They do not want to destroy public funding for education, or leave children to fend for themselves. They have merely observed that a specific model—forcing kids to attend a specific school that comports with the zip code assigned to them at birth—is inefficient, immoral, and prone to abuse. There has been too much top-down government management, and not enough competition, in the American education system. Reforms, like the voucher system, are a necessary corrective. They provide balance between government and privatization.

If you’re against this kind of thing, it’s your own views that are squarely at odds with most economists.

But wait: there’s more. Dynarski doesn’t stop there—the rest of the article stakes out a ludicrous position on the college loan crisis:

Excessive faith in the power of free markets can lead to infeasible policy proposals. The Republican platform recommends expanding the role of private banks in student loans, with the goal of enhancing financing choices for students. But making student loans a competitive, private-sector market is an unattainable goal. In economics textbooks, student loans are the example used to show there are some products that markets will never provide on their own.

In a classic business deal, an entrepreneur puts up collateral to get a loan for a potentially profitable investment. But a teenager can’t walk into a private bank and receive a loan for tens of thousands of dollars based solely on her academic promise, even though a college education is (on average) an extremely lucrative investment.

This is a capital-market failure: Private lenders won’t provide liquidity for profitable investments. Because of this failure of private markets, across the world it is governments that provide student loans.

That’s right: the government provides student loans. How’s that working out for everybody? Oh, I forgot.

Lest we forget, government subsidization of student loans is a direct cause of skyrocketing tuition rates, for reasons even a professor of education could understand. If the government promises to help students pay the cost on the front end—no matter how extravagant it is—colleges have every incentive to jack up the price: the government has already guaranteed that the money will be paid.

Dynarski may be correct that the private market will never supply workable college loans. If that’s the case, I tend to suspect it’s because college is over-valued and discerning investors don’t see it as such a smart bet. Too many students would take the money, enroll in college, and then decide to become an education professors—misrepresenting statistics for The New York Times for a living.

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Islamic State Claims Responsibility For Istanbul Nightclub Attack As Manhunt For Gunman Continues

One week after a video emerged of the Berlin Christmas market truck killer, Anis Amri, pledging allegiance to ISIS, on Monday the Islamic State claimed responsibility for the deadly New Year’s Day terrorist attack in Istanbul that killed at least 39 people and wounded dozens more, claiming the operation had targeted Turkey in revenge for Turkish military operations against the organization in Syria, a similar justification used by the Turkish offduty policemen to assassinate the Russian ambassador in Turkey in December.

The statement was distributed by Nashir News, a channel that publishes Islamic State propaganda, and which had called for followers of the extremist group to target holiday celebrations days before the attack the WSJ reported. In the statement, the Islamic State described the Reina nightclub, where many foreigners as well as Turks were killed, as a gathering point for Christians celebrating their “apostate holiday”.

“The apostate Turkish government should know that the blood of Muslims shed with airplanes and artillery fire will, with God’s permission, ignite a fire in their own land,” the Islamic State declaration said. There was no immediate comment from Turkish officials according to Reuters.

The jihadist group has been blamed for at least half a dozen attacks on civilian targets in Turkey over the past 18 months but, other than targeted assassinations, this is the first time it has directly claimed any of them. It made the statement on one of its Telegram channels, a method used after attacks elsewhere. Islamic State most recently killing more than 50 people in August at a wedding in Gaziantep by the Syrian border. Within days of that bombing, Turkey launched its operation inside Syria. Previously, the extremist organization struck Istanbul’s biggest airport, killing more than 40 people in June during an attack waged with bombs and firearms.

Attacks in Turkey have accelerated in recent weeks: on Dec. 10, two bombs claimed by Kurdish militants exploded outside a soccer stadium in Istanbul, killing 44 people. A security guard who survived that attack was killed at Reina. A car bomb killed at least 13 soldiers and wounded 56 when it ripped through a bus carrying off-duty military personnel in the central city of Kayseri a week later, an attack Erdogan also blamed on Kurdish militants. Islamic State’s Amaq website said the group was behind a car bomb attack that killed 11 people and wounded 100 in the city of Diyarbakir in November, but Turkish authorities denied this and said Kurdish militants carried out the attack. The Russian ambassador to Turkey was shot dead as he gave a speech in Ankara on Dec. 19 by an off-duty police officer who shouted “Don’t forget Aleppo” and “Allahu Akbar.”

* * *

Meanwhile, on Monday the Turkish police continued the manhunt for the suspected gunman behind the Istanbul nightclub shooting. The lone attacker sprayed bullets into a crowd of revelers who had come from across the Middle East and elsewhere to celebrate at the Reina, a cosmopolitan party spot overlooking the Bosporus.

The attacker was believed to have taken a taxi from the southern Zeytinburnu district of Istanbul and, because of the busy traffic, got out and walked the last four minutes to the entrance of the nightclub, newspaper Haberturk said. He pulled his Kalashnikov rifle from a suitcase at the side of the road, opened fire on those at the door, then threw two hand grenades after entering, Turkey’s Haberturk said. It said six empty magazines were found at the scene and that he was estimated to have fired at least 180 bullets.

On Sunday afternoon, surveillance footage appeared to show the suspect behind Sunday’s attack on an Istanbul nightclub opening fire at the entrance.

Security services had been on alert across Europe for new year celebrations following an attack on a Christmas market in Berlin that killed 12 people. Only days ago, an online message from a pro-Islamic State group called for attacks by “lone wolves” on “celebrations, gatherings and clubs”.

In a statement hours after the shooting, President Tayyip Erdogan said such attacks aimed to create chaos and destabilize the country. Additionally, the government, in what has become an increasingly routine step, has imposed a media ban on coverage of the attack, prohibiting reporting of information other than what is released by authorities.

In Syria, rebels backed by Turkey’s armed forces have been taking over territory previously held by Islamic State, helping Ankara with its goal of establishing a safe zone for opposition forces while also clearing the porous Turkish border of extremist militants.

In its statement, disseminated in Arabic and Turkish, Islamic State said “let the apostate government of Turkey know that the blood of Muslims being shed through the shelling of its warplanes and artillery will inflame a fire in the middle of [Turkey] God willing.”

Moments ago, the Turkish polish said that its has detained eight people in connection with the istanbul attack however the gunman is said not to be among those in custody.

Police distributed a hazy black-and-white photo of the alleged gunman taken from security footage.He is described as having “wide eyes and wide cheekbones” which dominate his face.

The authorities believe the attacker may be from a Central Asian nation and suspect he had links to Islamic State, the Hurriyet newspaper said. It said he may be from the same cell responsible for a gun-and-bomb attack on Istanbul’s main airport in June, in which 45 people were killed and hundreds wounded.

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European Stocks Greet The New Year By Rising To One Year Highs; Euro Slides

While most of the world is enjoying it last day off from the 2017 holiday transition, with Asia’s major markets closed for the New Year holiday, along with Britain and Switzerland in Europe and the US and Canada across the Atlantic, European stocks climbed to their highest levels in over a year on Monday after the Markit PMI survey showed manufacturing production in the Eurozone rose to the highest level since April 2011.

“Euro-zone manufacturers are entering 2017 on a strong footing, having ended 2016 with a surge in production,” said Chris Williamson, chief business economist at IHS Markit. “Policy makers will be doubly-pleased to see the manufacturing sector’s improved outlook being accompanied by rising price pressures.”

Some details from today’s PMI report:

The eurozone manufacturing sector ended 2016 on a high note. At 54.9 in December, up from 53.7 in November, the final Markit Eurozone Manufacturing PMI® posted its best reading since April 2011 and was unchanged from the earlier flash estimate. The average for the final quarter (54.0) was solidly above that for the third quarter (52.1) and signalled the fastest growth since the second quarter of 2011. Moreover, the average PMI reading over 2016 as a whole (52.5) was the highest annual average since 2010.

 

National data pointed to a broad-based improvement in operating conditions, with headline PMI readings rising in all seven* of the countries covered by the survey. Growth was strongest in the Netherlands and Austria, with rates of expansion hitting levels last achieved over five-and-a-half years ago. PMI indices hit a near three-year high in Germany, an 11-month peak in Spain and a 67-month record in France. Italy, in sixth position overall, also saw its pace of growth improve, while the rate of contraction in Greece eased to the weakest during the current four-month sequence of decline.

 

Underlying the improved performance of the eurozone manufacturing sector was faster growth of production and new orders. Rates of expansion in both were either at, or close to, the steepest since early-2011. Six out of the seven* nations covered by the survey saw faster increases in output and new business. The exception was Greece which recorded weaker rates of contraction.

Perhaps as a result of another rogue algo operating in thin markets, today it was the Euro’s turn to tumble, and instead of rejoicing at this manufacturing strength, the European currency took no comfort from the figures, and suddenly dipped by 40 pips, sliding 0.3% back below $1.05 after climbing to as high as $1.07 during a flash surge in low trading volumes in Asia on Friday.

The weakness in the currency, however, was ignored by stocks and in early trading the euro zone’s blue-chip Euro STOXX 50 index as well as the broader STOXX 600 rose by 0.5% to its highest since December 2015 after the purchasing managers’ index (PMI) for factories in the currency bloc came in at 54.9 – well above the 50 mark that separates growth from contraction.

Italy’s stock index hit its highest level since January last year, outperforming other major European stock indexes, with a rally in its banks and a strong manufacturing report improving sentiment. Italy’s FTSE MIB index was up 1.3% by 1000 GMT after rising to its highest since January 15 of 2016. Germany’s DAX was up 0.9% at its highest in nearly 17 months, while France’s CAC was up 0.3 percent after hitting a 13-month peak earlier in the day.

Meanwhile, as European stocks climbed, a full blown rally across all assets also pushed down the yields on lower-rated government bonds in the euro zone to multi-week lows. Italian, Spanish and Portuguese 10-year bond yields were down roughly 8 basis points each on the day. It wasn’t just lower rated bonds, as yields on 10Y Bunds dropped to 0.157%, the lowest since the Trump election, and suggesting that the Trumpflation rally, at least in Europe, has largely fizzled at least based on long-end inflation expectations in Europe’s benchmark bond security.

The dollar index, which flash crashed on the last trading session of 2016 during thin, illiquid conditions in Asia, climbed 0.4 percent, and traded at 102.36 as of this posting. The Japanese yen – traditionally used as a safe haven – falling 0.3 against the dollar, close to an 11-month low.

“In the last days of 2016 we saw the dollar retreat somewhat, and there might be some sense of a correction from Europe this morning. I don’t see any fundamental drivers for the moves,” said Commerzbank currency strategist Esther Reichelt, in Frankfurt.

Despite yet another terrorist shooting in Turkey, one which the Islamic State took responsibility for the murder of 39 people in an Istanbul nightclub, most markets remained unfazed by ongoing political disturbances. “After all the big political shocks last year and muted market reaction, it is tempting to argue that the markets are very resilient,” said Finland-based Nordea chief market strategist Jan Von Gerich. “I would say this is too optimistic an assumption and I think we will see more volatility this year.”

“The problem is that this once again stresses the increasing instability and the security issues, and we’re seeing tourist numbers going down, which will have a lasting negative impact on the Turkish economy…and that’s Turkish lira-negative,” said Commerzbank’s Reichelt.

The Turkish lira slipped 0.4 percent after the attack to 3.5384 per dollar, close to a record low of 3.5840 lira touched in December.

Data released over the weekend showed China’s manufacturing sector expanded for a fifth month in December, though growth slowed a touch more than expected in a sign that government measures to rein in soaring asset prices are starting to have a knock-on effect on the broader economy. The Chinese yuan suffered its biggest annual loss in more than 20 years in 2016, with an almost 7 percent fall making it the worst-performing currency in Asia.

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