Month: June 2018

Now that the Trump global trade war ceasefire is over, with both allies (Canada, EU, Mexico) and adversaries (China), the hot takes are coming in, and none more exhaustive than a note by Goldman Sachs released overnight, in which the economist Alec Phillips writes that less than two weeks after Steve Mnuchin declared that the “trade war is on hold,” a statement which China trade hawk Peter Navarro subsequently blasted as inaccurate, Trump’s policy has shifted substantially and “following trade announcements over the last few days, the trade war does not appear to be “on hold” but simply “on”, leaving even longtime observers of trade policy confused about the direction from here.”

So how should one try to make sense of Trump’s unique, confusing negotiating style? According to Goldman, at the start of the Trump Administration, “reciprocity” was the watchword guiding trade policy.

Since taking office the President has cited many examples of “unfair” trade policies where foreign tariffs are higher than US tariffs on the same product.

Trump made as much clear on Saturday when he tweeted that “The United States must, at long last, be treated fairly on Trade. If we charge a country ZERO to sell their goods, and they charge us 25, 50 or even 100 percent to sell ours, it is UNFAIR and can no longer be tolerated. That is not Free or Fair Trade, it is Stupid Trade!”

The United States must, at long last, be treated fairly on Trade. If we charge a country ZERO to sell their goods, and they charge us 25, 50 or even 100 percent to sell ours, it is UNFAIR and can no longer be tolerated. That is not Free or Fair Trade, it is Stupid Trade!

— Donald J. Trump (@realDonaldTrump) June 2, 2018

While the assumption of “reciprocity” may have been a useful concept in evaluating the Administration’s stance on various trade issues – indeed, Trump restated his reciprocal principle again June 1 – Goldman notes three other observations that help explain trade policy in the Trump Administration.

• First, the President has said in the past that, when it comes to foreign policy, “we have to be unpredictable.” Unpredictability is also likely to be a side-effect of an administration made up of officials with widely divergent views on trade policy. This could result in sudden changes in policy depending on who is leading negotiations, speaking to the media, or taking the lead in advising the President.
• Second, the Administration’s focus seems to be on bilateral trade deficits and heavy industry, particularly in areas where the two overlap. For example, while China’s intellectual property-related policies are of great concern to US multinationals, the President has often focused more specifically on heavy industry, like steel or the auto sector. This might explain why the President has recently focused on national security-related trade investigations on the EU and NAFTA countries, i.e., US allies that export substantial amounts of autos to the US, rather than China, a strategic  rival which exports a negligible amount of autos to the US.
• Third, the negotiation might be at least as important to the White House as the outcome. While we believe that the President ultimately is seeking “wins” on trade policy, like an eventual renegotiation of NAFTA or an agreement with China to reduce the trade deficit, we also believe that the White House places substantial political value in the negotiation itself. This keeps the issue in the headlines and, in theory, keeps voters engaged.

And while the three considerations above are useful in framing the Trump admin’s thought process in how it  go in and out of negotiations, Goldman makes another far more relevant point, at least as far as traders are concerned, namely that to maintain leverage in negotiations, the Administration must convince trading partners that the US intends to impose trade restrictions. However, and this is the key part, “it is unlikely that the White House can convince trading partners that tariff threats are credible without also convincing financial markets.“

In other words, for Trump’s trade negotiations to be successful, and for US trade partners to take a flip-flopping Trump credibly, the market has to crash. Incidentally, this makes sense when one considers that when Trump officially launched the trade war with China in early April, the president explicitly warned that stocks “may take a hit“, and told investors to prepare for “pain” in the market, a statement which promptly became a self-fulfilling prophecy and sent the market sharply lower.

The other consequence is that markets may tumble not as an effect, but as a cause of the trade war: after all Trump needs to be taken seriously, and that could mean another slide in the S&P. Goldman agrees as much:

… we do not expect trade policy risks to fade anytime soon. While we think that financial market sentiment around trade issues is unlikely to become as negative again as it was in early April, when the President floated the possibility of tariffs on another $100 billion in imports from China, we do not expect markets to become entirely comfortable with the outlook for trade policy, either.

The punchline: “The challenge that the White House faces is that, to maintain leverage in negotiations, trading partners must believe that the US intends to follow through with proposed actions like tariffs. However, repeated threats begin to lose credibility unless they are followed up with action.“

In short, just as China said earlier, the US can’t have its cake and eat it too: Trump can’t have trade war, or the threat thereof, and record high stocks:

It seems unlikely that the US Administration will be able to convince financial markets that the trade war is “on hold” while convincing trading partners that tariffs might be imposed. Assuming that the White House will try to maintain maximum leverage, markets are likely to assume that further trade restrictions are likely to be imposed.

The flipside is that the higher markets rise, the more diluted Trump’s threats and warnings will become, until the moment comes that Trump “snaps” and – not used to be ignored – does actually enact tariffs that have a dire impact on markets, at which point risk assets will have no choice but to crash.

The message to traders here is: keep a close eye on Trump’s twitter feed. If he repeats what he said two months ago, wwhen speaking on WABC Radio’s “Bernie & Sid in the Morning’’ program, Trump said “I’m not saying there won’t be a little pain so we might lose a little of it but we’re going to have a much stronger country when we’re finished, and that’s what I’m all about” it will again be time to move to cash.

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Moscow mules and all sorts of handcrafted spirits were heavily flowing at the Mile High Spirits Distillery and Tasting Bar in Denver, Colorado, on Saturday, when an off-duty FBI agent accidentally shot a bar patron.

Denver police responded to the bar in the Lower Downtown district of Denver for an accidental shooting at 12:45 a.m. on Saturday. Police said the FBI agent was dancing at the bar when his firearm dislodged from its waistband holster and dropped onto the floor.

When the agent picked up the gun, “an unintended discharge occurred,” striking a patron inside the club in the lower leg. “The victim was transported to the hospital with a good prognosis,” Denver police said.

A video clip obtained by Denver 7, shows the reckless agent busting out dance moves in front of a dozen or more bar goers. The agent then executed a backflip, however, during the bizarre dance move, his gun ejected out of the man’s holster onto the floor. Immediately the agent lunges forward to secure the weapon, but as he picks it up the gun went off.

Bar patron Julie, who captured the shooting incident on her smartphone, told KDVR that she smelled gunpowder and saw a person bleeding: “Everyone was kind of shocked after it happened because [the agent] kind of put his gun back away and then he walked away,” Julie said.

Julie said the bar was in disarray when the weapon discharged.

“No one really knew what was going on,” Julie said. “I was shocked. I honestly just wanted to make sure that my friends… [that] I knew where they were.”

Denver Police transported the agent to headquarters where he was later released to a supervisor from the FBI.

“The incident is being investigated by the Denver Police Homicide Unit and charges will be determined by the Denver District Attorney’s Office,” a statement from the Denver Police read.

It was not immediately clear if the FBI agent was drunk at the time he was busting potentially lethal dance moves.

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In a scathing editorial warning Trump to back off on his latest tariff threat, on Sunday China said that any trade deals between the US and China, and any progress and commitments made so far in bilateral negotiations would be withdrawn if President Donald Trump follows through with this threat.

“If the U.S. rolls out trade measures including tariffs, all the agreements reached in the negotiations won’t take effect,” the state-run Xinhua News Agency reported this morning, citing a statement from the Chinese team that met with a U.S. delegation led by Commerce Secretary Wilbur Ross, which arrived in China overnight.

Separately, China has continued to express growing frustration with the tactics deployed by the White House, and an editorial in the nationalist, state-run tabloid Global Times said that “the U.S. can’t have its cake and eat it too,” adding that the U.S. “needs to choose between tariffs and exporting more to China.”

China’s anger is the result of Trump’s revival of the simmering trade war between the two superpowers after Trump last week unveiled a plan to slap tariffs on $50 billion of Chinese imports, casting into doubt ongoing trade discussion about how to reduce China’s $375 billion goods-trade surplus with the U.S.

As Bloomberg clarifies, the Xinhua report came out on Sunday after Ross met with Chinese Vice Premier Liu He for talks that Ross called “friendly and frank, and covered some useful topics about specific export items.” At the same time as negotiators focus on technical steps to reduce the U.S. deficit, Trump’s aggressive reversals have rattled Beijing as it raises concerns about the possibility that any agreement made could be simply torn up by the president.

“China is concerned over the U.S.’s unpredictability, especially after Trump turned an about-face on tariffs,” said Gai Xinzhe, an analyst at Bank of China’s finance institute in Beijing. “Trump needs to give out more goodwill in exchange for really productive negotiations. Bluff, threat, and willful moves might work in business bargaining, but they could backfire in talks among nations.”

Meanwhile, suggesting that all the progress achieved over the past two months in trade negotiations would be lost if Trump follows though with tariffs, a commentary by state-run China Radio International said that the government’s stance on canceling any agreements reached in the talks if Trump’s tariffs go into effect was a “red line.“

Meanwhile, the negotiations continue. According to Bloomberg, the Ross-led U.S. delegation, which was in Beijing for two days, included energy and agriculture experts, reflecting the U.S. desire to increase exports of natural gas and food.

On the Chinese side, officials including Commerce Minister Zhong Shan, Central Bank Governor Yi Gang, Vice Agricultural Minister Han Jun, and Li Fanrong, vice minister of national energy administration, accompanied Liu in the talks, according to a media pool report.

During his visit, Ross has been looking to build on a vague joint statement released May 19, after negotiations in Washington. China pledged then to take steps to “substantially” reduce the U.S. trade deficit, including by buying more American farm goods and energy, though it didn’t commit to a dollar amount. However it now appears there was again no formal conclusion or announcement of “success” following this latest 2-day blitz.

Ross, meanwhile, finds himself torn, and under pressure from U.S. lawmakers to stay tough on Chinese telecom-equipment maker ZTE Corp even as Trump has said he is willing to forego sanctions against the company in exchange for a large fine and management changes, as well as China’s greenlighting the NXP-Qualcomm deal. Republican Senator Marco Rubio and other lawmakers from both parties have questioned Trump’s leniency toward ZTE, arguing the company represents a security risk.

As Bloomberg adds, the stakes remain high for the global economy, and any collapse in trade talks could lead to a sharp slowdown in the global economy which is “cruising at its fastest pace of growth in seven years.” But the International Monetary Fund has warned that a trade war could threaten the recovery, and policy makers are contending with a growing list of geopolitical risks, from a political crisis in Italy to the rocky progress of peace talks with North Korea.

The best summary of recent negotiations, however, comes from Goldman’s chief economist Jan Hatzius who overnight writes that “less than two weeks after Trump Administration officials declared that the “trade war is on hold,” policy has shifted substantially. Following trade announcements over the last few days, the trade war does not appear to be “on hold” but simply “on.”

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A 20-page confidential letter from President Trump’s legal team leaked to the New York Times argues that President Trump could not have obstructed justice at any point during his presidency due to his Constitutional authority, and that he cannot be compelled to testify in front of Special Counsel Robert Mueller due to his Constitutional powers as President.

The letter, crafted by Trump’s legal team, reveals that the White House has been waging a quiet campaign for several months to prevent Mueller from trying to subpoena  the president – contending that because the Constitution empowers him to “if he wished, terminate the inquiry, or even exercise his power to pardon,” Trump could not have illegally obstucted any aspect of the investigation into potential collusion between his campaign and Russia during the 2016 US election. 

Mr. Trump’s defense is a wide-ranging interpretation of presidential power. In saying he has the authority to end a law enforcement inquiry or pardon people, his lawyers ambiguously left open the possibility that they were referring only to the investigation into his former national security adviser, Michael T. Flynn, which he is accused of pressuring the F.B.I. to drop — or perhaps the one Mr. Mueller is pursuing into Mr. Trump himself as well.

Mr. Dowd and Mr. Sekulow outlined 16 areas they said the special counsel was scrutinizing as part of the obstruction investigation, including the firings of Mr. Comey and of Mr. Flynn, and the president’s reaction to Attorney General Jeff Sessions’s recusal from the Russia investigation. -NYT

“It remains our position that the president’s actions here, by virtue of his position as the chief law enforcement officer, could neither constitutionally nor legally constitute obstruction because that would amount to him obstructing himself, and that he could, if he wished, terminate the inquiry, or even exercise his power to pardon if he so desired,” writes President Trump’s former attorney John Dowd, who left the team in March.

The leaked letter effectively reveals Trump’s trump card in the event Mueller proceeds with a subpoena.

“We are reminded of our duty to protect the president and his office,” wrote the lawyers, who stressed that “Ensuring that the office remains sacred and above the fray of shifting political winds and gamesmanship is of critical importance.“

Translation – this is a clown show, go pound sand. 

Mueller’s office has told Trump’s lawyers they need to speak with the president to determine whether he criminally obstructed any aspect of the Russia investigation. If Trump refuses to be questioned, Mueller will be forced to choose whether or not to try and subpoena him – which, as Trump’s lawyers have made abundantly clear, will result in a Constitutional crisis.

They argued that the president holds a special position in the government and is busy running the country, making it difficult for him to prepare and sit for an interview. They said that because of those demands on Mr. Trump’s time, the special counsel’s office should have to clear a higher bar to get him to talk. Mr. Mueller, the president’s attorneys argued, needs to prove that the president is the only person who can give him the information he seeks and that he has exhausted all other avenues for getting it. -NYT

“The president’s prime function as the chief executive ought not be hampered by requests for interview,” they wrote. “Having him testify demeans the office of the president before the world.”

Trump’s attorneys also argued that the president did nothing to technically violate obstruction-of-justice statutes. 

“Every action that the president took was taken with full constitutional authority pursuant to Article II of the United States Constitution,” they wrote of the part of the Constitution that created the executive branch. “As such, these actions cannot constitute obstruction, whether viewed separately or even as a totality.”

According to legal experts cited by the Times, the president wields broad authority to control the actions of the executive branch, which includes the Department of Justice and the FBI. The Supreme Court, however, has ruled that Congress can impose some restrictions on that power, including limiting a president’s ability to fire certain officials. 

“As a result, it is not clear whether statutes criminalizing obstruction of justice apply to the president and amount to another legal limit on how he may wield his powers,” notes the Times. 

About that Russia probe…

And while Trump’s team works to make the case against testifying, media reports and Congressional investigations have revealed what appears to be grave misconduct by the FBI and Department of Justice in order to prevent Trump from winning the 2016 US election, and then once he won – discredit him with a Russia allegations fabricated by US Intelligence agencies, UK intelligence assets – in collusion with the Clinton campaign and the Obama administration. 

We now know that Trump campaign aides were likely fed rumors that Russia had damaging information on Hillary Clinton, and then used as patsies by Clinton-linked operatives in what appears to have been a set-up, something Trump once again hinted in his latest tweet, in which he also asked if the Mueller team or the DOJ is leaking his lawyers’ letters to the “Fake News Media.”

There was No Collusion with Russia (except by the Democrats). When will this very expensive Witch Hunt Hoax ever end? So bad for our Country. Is the Special Counsel/Justice Department leaking my lawyers letters to the Fake News Media? Should be looking at Dems corruption instead?

— Donald J. Trump (@realDonaldTrump) June 2, 2018

Trump’s attorneys have also attacked the credibility of former FBI Director James Comey, while also contesting what they believe are Mueller’s version of significant facts.

Mr. Giuliani said in an interview that Mr. Trump is telling the truth but that investigators “have a false version of it, we believe, so you’re trapped.” And the stakes are too high to risk being interviewed under those circumstances, he added: “That becomes not just a prosecutable offense, but an impeachable offense.” -NYT

They argue that Trump couldn’t have intentionally obstructed justice anyway based on the fact that he did not know that Mike Flynn was under investigation when Trump spoke to Comey. 

“There could not possibly have been intent to obstruct an ‘investigation’ that had been neither confirmed nor denied to White House counsel,” the president’s lawyers wrote, adding that FBI investigations generally do not qualify as the type of “proceeding” covered by an obstruction-of-justice statute. 

“Of course, the president of the United States is not above the law, but just as obvious and equally as true is the fact that the president should not be subjected to strained readings and forced applications of clearly irrelevant statutes,” wrote Mr. Dowd and Mr. Sekulow. 

The Times, however, suggests that their argument may be outdated, as a 2002 law passed by Congress makes it a crime to obstruct proceedings that have not yet begun. 

But the lawyers based those arguments on an outdated statute, without mentioning that Congress passed a broader law in 2002 that makes it a crime to obstruct proceedings that have not yet started.

Samuel W. Buell, a Duke Law School professor and white-collar criminal law specialist who was a lead prosecutor for the Justice Department’s Enron task force, said the real issue was whether Mr. Trump obstructed a potential grand jury investigation or trial — which do count as proceedings — even if the F.B.I. investigation had not yet developed into one of those. He called it inexplicable why the president’s legal team was making arguments that were focused on the wrong obstruction-of-justice statute.

Regardless, it appears Trump’s team is going to tell Mueller to take a hike if he tries to subpoena the president, and that it will simply further embarrass the United States on the world stage.

“We write to address news reports, purportedly based on leaks, indicating that you may have begun a preliminary inquiry into whether the president’s termination of former FBI Director James Comey constituted obstruction of justice,” the June 2017 memo from Trump attorney Marc Kasowitz to Mueller reads – while a more recent memo outlines the 16 areas they believe Mueller is focusing on (via CBS News)

1. Former National Security Advisor Lt. Gen. Michael Flynn — information regarding his contacts with Ambassador Kislyak about sanctions during the transition process;
2. Lt. Gen. Flynn’s communications with Vice President Mike Pence regarding those contacts;
3. Lt. Gen. Flynn’s interview with the FBI regarding the same;
4. Then-Acting Attorney General Sally Yates coming to the White House to discuss same;
5. The president’s meeting on Feb. 14, 2017, with then-Director James Comey;
6. Any other relevant information regarding former National Security Advisor Michael Flynn;
7. The president’s awareness of and reaction to investigations by the FBI, the House and the Senate into possible collusion;
8. The president’s reaction to Attorney General Jeff Sessions’ recusal from the Russia investigation;
9. The president’s reaction to former FBI Director James Comey’s testimony on March 20, 2017, before the House Intelligence Committee;
10. Information related to conversations with intelligence officials generally regarding ongoing investigations;
11. Information regarding who the president had had conversations with concerning Mr. Comey’s performance;
12. Whether or not Mr. Comey’s May 3, 2017, testimony lead to his termination;
13. Information regarding communications with Ambassador Kislyak, Minister Lavrov, and Lester Holt;
14. The president’s reaction to the appointment of Robert Mueller as Special Counsel;
15. The president’s interaction with Attorney General Sessions as it relates to the appointment of Special Counsel; and,
16. The statement of July 8, 2017, concerning Donald Trump, Jr.’s meeting in Trump Tower.

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Authored by Simon Constable via Middle East Eye,

Turkey’s economy has been in a tailspin with an inflationary currency, but the country is attempting to use something rare to help stabilise itself: gold.

In late 2011, Turkey started to allow commercial banks to use gold instead of the Turkish lira for their required deposits at the central bank. These deposits are known as reserve requirements and help ensure that the banks are capitalised.

Over the past six-or-so years, Turkey’s central bank has accumulated an additional 400 metric tonnes of gold. That’s a lot of yellow bricks – more than what Britain has – and the sizeable stash has the possibility to take the edge off the crisis.

To put the Turkish gold haul in perspective, there are 10 million ounces of gold – roughly 311 tonnes – at the Bank of England, according to the New York-based financial consulting firm CPM Group.

The burgeoning balance of bullion comes as the result of a change in banking rules made earlier this decade.

“I thought the Turkish thing was pure genius,” says Jeff Christian, founder of CPM Group.

“It was using gold in the way that you should use it.”

In the simplest terms, the tweak to the rules allows gold to be used as a financial asset by the banks. In addition, the new regulation helped flush out a lot of gold that was previously held privately.

“This change allowed the government to get hold of the under-the-mattress gold to help stabilise the banks and the underlying economy,” says Ivo Pezzuto, professor of global economics, entrepreneurship, and disruptive innovation at the International School of Management, Paris, France.

The result of the policy change has been that Turkey’s central bank has seen a huge jump in its apparent gold holdings.

There are now more than 18 million troy ounces of bullion deposited at Turkey’s central bank, up from less than four million before the rule change was introduced in 2011, according to the latest data from CPM Group. There are 32,150.7 troy ounces in a metric tonne.

Private gold deposits into Turkey’s central bank

Almost all of the increase came from commercial bank deposits of the metal at the central bank, rather than government purchases to bolster national reserves. 

The Turkish gold, which previously would have languished under the proverbial mattresses, or in private safety deposit boxes, now serves a more useful economic purpose in allowing the banks to make more lira-based loans.

It also helps the banks during times of high inflation.

With inflation running at a 40 percent annualised rate, the value of the gold grows as well when measured in terms of lira. In short, the commercial banks’ deposits of gold become worth more and more in terms of the local currency as inflation rages onward and upwards.

Although the purchasing power of the local currency dwindles with each passing day of double-digit inflation, the gold’s value does not. For instance, while one dollar fetched 4.10 lira a month ago, it will now buy 4.53 lira, meaning the lira has fallen in value. Whereas, gold prices in dollars have remained roughly static versus the beginning of the same period.

So what does this all mean? It means that managers at commercial banks don’t have to worry as much about continually sending more deposits to the central bank to maintain the required reserves.

The value of the gold naturally adjusts upwards, meaning if the bank is growing its loan book, it doesn’t need to worry as much about stashing more cash with the central bank. Put another way, it automatically can help stabilise the banks’ finances – at least in theory.

However, it is also worth remembering that the government does not own these additional gold reserves. They are the assets of the commercial banks and/or those of the investors who deposited their bullion with the financial institution.

That in turn means that private investors have the choice to get their gold returned to them. It’s basically the same as someone taking cash out of a deposit account. It is also true that everyone taking their cash out would likely cripple a bank.

Similarly, although not identical, it is true with the gold that the investors deposited. If everyone took out their gold then the banks would need to immediately send a slew of Turkish lira to the central bank, which is theoretically possible.

Turkey’s economic problems

However, Turkey’s implementation of gold deposits may not offset its economic problems in the long run.

Turkey has a credit problem, which Middle East Eye reported last September. The economy grew too rapidly and sparked high inflation.

Ballooning inflation has led to the dwindling value of the lira. One dollar would fetch 4.65 Turkish lira recently versus 3.52 lira on 1 June 2017, according to data from Bloomberg.

While the official rate of inflation was an annualised 10.85 percent in April, which seems relatively measured for the economy, it may not reflect reality.

A more realistic rate is likely 40 percent, according to estimates from Steve Hanke, professor of applied economics at Johns Hopkins University, and also an expert on inflation. He uses a technique known by economists as purchasing-power-parity, which looks at the actual cost of goods and services inside Turkey.

The plunging currency has come hand-in-glove with a scramble for the exits by investors who wish to save their capital from the wealth-withering surge in the cost of living. In other words, they have sold their lira-denominated investments in favour of US dollars and other major currencies that aren’t suffering from high inflation.

“Basically the problem is that inflation is very high and they don’t want to slow the economy in order to crush the inflation,” Pezzuto says.

Those two policies tend not to go hand in hand, so observers are anticipating more inflation for the time being.

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Four weeks into its eruption, Hawaii’s Kilauea volcano continues to spew molten lava across The Big Island’s East side – cutting off access to more neighborhoods and destroying 87 homes, ten of which happened in the last two days. 

#BREAKING: Civil Defense officials say the number of homes that have been destroyed in the Kilauea lava flow has grown to 87. https://t.co/3pHaoehidT pic.twitter.com/gysdnOVuet

— Hawaii News Now (@HawaiiNewsNow) June 2, 2018

Scientists are also baffled after aerial drone footage showed concerning changes within Kilauea’s main summit crater – including unexplained cracks at the bottom which are spewing hot steam. Concerns have been raised that an “expanding collapsed crater” and debris blocking the vent could trigger a massive new explosion. 

USGS UAS mission on 5/31/18 films dramatic changes within Halemaʻumaʻu crater at Kīlauea’s summit; rubble-covered floor, cracks, faults, steaming, sulfur precipitate – all at this changing eruption site. https://t.co/C9nyOsnCM1 pic.twitter.com/lRYDMKkJmS

— USGS Volcanoes🌋 (@USGSVolcanoes) June 1, 2018

The Halema‘uma‘u crater has undergone a sudden transformation since the eruptions began in early May, including the surprising disappearance of a lava lake.

The drone footage from the US Geological Survey (USGS) shows “yellow sulfur substance on the rubble-covered floor and a scattering of large ballistic blocks around the crater rim”.

USGS officials revealed that the empty vent once housed a 12-acre lava lake up until a few weeks ago. –Express.co.uk

What happens next is unknown:

“It’s possible that new explosions will blast through the rubble at the bottom of the vent, and these may or may not be larger than previous explosions,” said USGS geophysicist Kyle Anderson. “It’s also possible that the vent could become permanently blocked, ending the explosions entirely.”

The steady collapse of the crater’s internal walls due to draining magma has also enlarged the mouth of the vent considerably – which has grown from 12 acres to 120 acres. The summit itself has also sunken at least five feet in elevation while magma levels continue to drop. 

Meanwhile, Hawaii’s Highway 137 has been blocked by lava, cutting off access to Kapoho, Vacationland, Hwy 132 and possibly the Puna Geothermal power plant. 

#BREAKING #LeilaniEstatesEruption #KilaueaVolcano UPDATE: @CivilDefenseHI confirms flow crossed Hwy137, south of Four Corners after crossing Hwy132 north of intersection last night; NO ACCESS to Kapoho, Vacationland, Hwy132 & Hwy137 https://t.co/SKpW7U3GoL @HawaiiNewsNow #HINews pic.twitter.com/Q0PgTxa66E

— Mileka Lincoln (@MilekaLincoln) June 2, 2018

#LeilaniEstatesEruption #KilaueaVolcano UPDATE: According to USGS, the large plume of white steam rising from Green Mountain is lake water boiling off from the heat of lava & could last hours given size of Green Lake https://t.co/dQBF4geJHH @HawaiiNewsNow #HINews (@ParadiseHeli) pic.twitter.com/ImhzkuP6MD

— Mileka Lincoln (@MilekaLincoln) June 3, 2018

Officials at the Puna Geothermal Ventrue (PVG) have confirmed that lava is covering the plant’s monitoring station, however the Department of Health is monitoring for unsafe levels of hydrogen sulfide with none detected thus far.

#LeilaniEstatesEruption #KilaueaVolcano UPDATE: Puna Geothermal Venture officials confirm lava has covered the plant’s monitoring station but says Dept. of Health is maintaining hydrogen sulfide checks & none has been detected so far https://t.co/GnLHIBrBkf @HawaiiNewsNow #HINews pic.twitter.com/1gidYh6B5I

— Mileka Lincoln (@MilekaLincoln) June 2, 2018

That said, plant employees may have just lost their access in and out of the facility, as a Friday Instagram update from PVG reads “if lava crosses Highway 137 then they could lose their only way in and out of the plant.“

Puna Geothermal Venture officials confirm lava from the fountaining fissure 8 in Leilani Estates continues to flow across the property — cutting across the main driveway to the plant facility. Mike Kaleikini, the company spokesperson, confirms a substation and a warehouse that stored a drilling rig have burned. He also says two wells have been covered on Well Pad E and a lava made contact with another, Well Pad A, but never passed across it. He says all 9 quenched wells and the two plugged wells are “holding up without any issues” — and confirms there has been no detected release of hydrogen sulfide.

According to Kaleikini, the monitoring station at PGV was covered by lava — so they are depending on the handheld machines their employees are using to check for hydrogen sulfide levels along with the monitors the Department of Health have installed around the area. Kaleikini says the plant is no longer being staffed 24/7, but personnel is on site every day. According to Kaleikini, even though the main driveway to the plant is blocked, there is still an alternate route available. However, if lava crosses Highway 137 (Government Beach Road) then they could lose their only way in and out of the plant. According to Ormat, which owns Puna Geothermal Venture, the company has insurance of up to $100 million in the case of eruptions and earthquakes — but it’s not clear if that will cover everything. Ormat says significant damage or an extended shut-down could have an adverse impact on business. Last year, Puna Geothermal brought in about $11 million in net income. –Instagram

What’s it like to monitor the ongoing events surrounding the Kilauea eruption? USGS Geologist Matt Patrick explains in this video worth watching fullscreen. 

Meanwhile, video has emerged of Hawaiian hothead John Hubard, 61, pulling a gun at 32-year-old neighbor Ethan Edwards on Tuesday, firing a shot at the sky on before aiming his gun at the man. Hubbard has been arrested. 

When the shot goes off, people can be heard yelling out and Edwards can be seen crouching and covering his head with his arms as Edwards aims the gun at him.

“Are you kidding me? Stop!” people can be heard yelling in the background.

Hubbard tells his neighbor to “Get the f–k out of here” as Edwards, who is walking away with his hands up, screams back “I live here!” repeatedly.

“Happy to be alive,” Edwards wrote in the video’s caption. “Be careful out there folks. This situation is really beginning to take its toll psychologically and the bad weather is contributing to emotional tensions. Folks are breaking down.” –NY Post

Many evacuees are now living in emergency tents as local residents provide food and supplies.

Big and small, #ChefsForHawaii is here to serve those in need! With lava destroying more homes, many are now living in these makeshift tents bringing whatever they could from with them… A hot meal is least we can do! pic.twitter.com/ELDjx5QKa3

— José Andrés (@chefjoseandres) June 2, 2018

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The Ukrainian government’s staged assassination of anti-Putin journalist Arkady Babachenko has taken an even stranger turn, as evidence has emerged that his would-be “Russia-ordered” assassin and the man who supposedly hired him, both say they worked for Ukrainian counterintelligence, casting serious doubt on the official story.

To review, Ukrainian authorities announced last Tuesday that Babachenko had been assassinated after returning home from the store. On Wednesday, Babachenko appeared at a press conference with Ukrainian authorities who said that the faked assassination was an elaborate sting to bust an actual hit planned by Russia. 

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— Уголок циника (@cynicarea) May 29, 2018

Only now we find that the hitman, Oleksiy Tsimbalyuk, is an outspoken critic of Russia who says he worked for Ukrainian counterintelligence – a claim Ukraine initially denied but later admitted to be true. Meanwhile the guy who supposedly hired Tsimbalyuk, Boris L. German, 50, also says he worked for Ukrainian counter-intelligence, a claim Ukraine denies as its immediately destroys the carefully scripted, if rapidly imploding, Ukrainian narrative meant to scapegoat Russia for what has been a “fake news” story of epic proportions, emerging from the one nation that not only was the biggest foreign donor to the Clinton foundation, but has made fake news propaganda into an art form.

 

The New York Times reports that Tsimbalyuk – a former Russia-hating priest was featured in a 10-minute documentary in January 2017 in which “he called killing members of the Russian-backed militias in eastern Ukraine “an act of mercy”, further calling into question why Russia would hire him for the supposed assassination in the first place. 

Facebook pictures also reveal Tsimbalyuk wearing a Ukrainian ultranationalist uniform from “Right Sector,” a group deemed to be neo-Nazis.

As even the Russophobic NY Times puts it: 

Given such strong and publicly avowed enmity toward Russia, it is odd to say the least that Mr. Tsimbalyuk would be selected to carry out the contract killing of a prominent Kremlin critic.

German claims he took orders from Moscow businessman Vyacheslav Pivovarnik – who he says works for one of Putin’s personal foundations. 

Ukrainian officials also claim that German has a list of another 30 targets which Moscow wants to wipe out – something he claims he has since passed onto Kyiv.

Prosecutors claimed German had been given a down payment of $15,000, half what he was promised for carrying out the hit.

German said: ‘I got a call from a longtime acquaintance who lives in Moscow, and in the process of communicating with him it turned out that he works for a Putin foundation precisely to orchestrate destabilization in Ukraine.’ –Daily Mail

“Six months ago, my old acquaintance contacted me, an ex-citizen of Ukraine, now living in Moscow,” German told a Ukrainian court, adding “He works in a personal foundation of Putin’s – and is in charge of organizing riots in Ukraine and planned acts of terror at the next presidential elections. He is called Vyacheslav Pivovarnik. This is not a fairy tale, there’s nothing mystical here, everything has been proved.”

German’s lawyer Eugene Solodko wrote on Facebook that his client was an executive director of Ukrainian-German firm Schmeisser – the only non-state owned arms producer in the country. 

Russia has denied German’s claim, with a Putin spokesman saying “No such foundation exists in Russia. Any allegations about Russia’s possible complicity in this staging is just mudslinging. They do not correspond to reality.”

Meanwhile, senior Ukraine officials have been on the defensive since Wednesday, when the head of security services announced they had staged the death of Babchenko so they could track his would-be killers to Russian intelligence, a story the International Federation of Journalists slammed as idiotic, nonsensical and completely undermining Ukraine’s credibility.

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Trump managed to do what no other US president has ever achieve, in getting North Korea’s president Kim Jong Un to sit down and negotiate the country’s denuclearization. And now comes the hard part: paying for Kim Jong Un’s hotel in Singapore, the location of the historic June 12 summit.

Because while US event planners are working day and night with their North Korean counterparts to set up a summit designed to bring an end to Pyongyang’s nuclear weapons program at an island resort off the coast of Singapore, a rather “awkward” logistical issue has emerged: who’s going to pay for Kim Jong Un’s hotel stay?

As the Washington Post reports, the “prideful but cash-poor pariah state” has demanded that a foreign country foot the bill at its preferred lodging: the Fullerton, “a magnificent neoclassical hotel near the mouth of the Singapore River, where just one presidential suite costs more than $6,000 per night.”

While it’s not just the bill… 

The mundane but diplomatically fraught billing issue is just one of numerous logistical concerns being hammered out between two teams led by White House Deputy Chief of Staff Joe Hagin and Kim’s de facto chief of staff, Kim Chang Son, as they strive toward a June 12 meeting.

… who pays the room and board has emerged as the biggest point of contention ahead of the June 12 summit.

In other words, North Korean dictators beggars can be choosers, and the one who is set to quietly foot the North Korean’s hotel bill is none other than the real estate mogul himself: Donald Trump.

But it may not be so simple, as potential diplomatic complications have emerged associated with paying for Kim’s hotel room, and as the WaPo adds when it comes to paying for lodging at North Korea’s preferred five-star luxury hotel, the United States is open to covering the costs, but it’s mindful that Pyongyang may view a U.S. payment as insulting.

So, in order to avoid offending the rotund dictator, U.S. organizers are considering asking Singapore, the host country, to pay for the North Korean delegation’s bill.

“It is an ironic and telling deviation from North Korea’s insistence on being treated on an ‘equal footing,’ ” said Scott Snyder, a Korea expert at the Council on Foreign Relations.

“These norms were laid in the early 2000s, when Seoul’s so-called sunshine policy took off,” said Sung-Yoon Lee, an expert on Korea at Tufts University, referring to a policy of rapprochement associated with former South Korean president Kim Dae-jung. “North Korea can build nukes and ICBMs, but claim they are too poor to pay for foreign travel costs.”

This is not the first time the poor communist nation has made bold monetary demands: In 2014, when then-U. S. Director of National Intelligence James R. Clapper Jr. visited North Korea to retrieve two prisoners, his North Korean hosts served him an “elaborate 12-course Korean meal,” the veteran intelligence official said, but then insisted that he pay for it.

Meanwhile, if the US ends up paying the bill it will only add to Trump’s already long list of questionably fund flows as any payment for North Korean’s accommodations would run afoul of Treasury Department sanctions, accoridng to Elizabeth Rosenberg, a former Treasury official. The transaction would require the Office of Foreign Assets Control to “temporarily suspend the applicability of sanctions” through a waiver, she told the WaPo.

“There are legitimate mechanisms built in for exemptions depending on the circumstance, but this could run into public and political criticism and send the wrong message to North Korea,” said Duyeon Kim, a visiting fellow at the Korean Peninsula Future Forum, a nonpartisan think tank in Seoul.

In the worst case, there is always reimbursement by bitcoin: after all this is precisely the contingency for which the cryptocurrency was created.

* * *

But wait, there’s more. It turns out that figuring out how to pay Pyongyang’s hotel tab could be just the beginning in dealing with the poor country’s logistical problems. Another problem is that the country’s outdated and underused Soviet-era aircraft could require a landing in China because of concerns it won’t make the 3,000-mile trip, “a visit that would probably require a plausible cover story to avoid embarrassment.”

As for Trump’s own plans, he is expected to stay at the Shangri-La, a 747-room hotel that is accustomed to high-security events, and which hosts the annual Shangri-La Dialogue, a security conference that attracts dozens of ministers of defense and state.

Finally, there is the question of what will actually be said at the summit itself.

What we do know, is that the two sides have settled on the venue for the June 12 meeting: the Capella hotel on the resort island of Sentosa, is situated off Singapore’s southeast coast; it boasts a mix of colonial-style buildings and curvy modern edifices.

What is less known is what will actually take place at said summit: White House and State Department officials repeatedly declined to comment on the advance team planning, keeping those discussions more opaque than the substance of the negotiations.

Rexon Ryu, a former White House official who dealt with the North Korea nuclear issue, said the North Korean side in particular has an interest in keeping those discussions quiet.

“These talks go to the question of security, and if anything, that’s probably most immediately paramount to Kim,” he said. “I think for many folks on the North Korean side, this is more important than the content of the negotiations.”

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With Europe having a near heart attack last week, as Italian bond yields exploded amid deja vu fears that the new populist government would press the “Quitaly” button and threaten the EU with exiting the Eurozone in order to get budget spending concessions from Brussels, the discussion about Europe’s record Target2 imbalances quietly resurfaced after years of dormancy. And with €426BN, Italy has the highest Target2 deficit with the Eurosystem (Spain is a close second with €377BN) any discussion about an Italian euro exit raises concerns about costs.

After all, as JPMorgan reminds us, it was only a year ago, in January 2017,  that in a letter to European Parliament MPs, ECB President Draghi made the stunning admission that a country can leave the Eurozone but only if it settles its bill first,  or as Draghi said “if a country were to leave the Eurosystem, its national central bank’s claims on  or liabilities to the ECB would need to be settled in full.”

By linking the Eurozone exit cost to Target2 balances, where Germany is on the other end with a receivable balance of nearly €1 trillion, Draghi “reminded” populist politicians in Europe that a euro exit or divorce would be difficult and even more costly relative to the past because of the continued rise in Target2 balances following the ECB’s QE program.

As the chart below shows, and as we and the BIS have discussed previously, due to QE induced cross border flows since 2015, Target2 balances have exploded since the launch of the ECB’s QE (and third Greek bailout in 2015), and surpassed the previous extremes from the depths of the euro debt crisis in the summer of 2012.

Here, it is worth noting that as the BIS explained last year, the Target2 balance deterioration since 2015 is different in nature than that seen during 2010-2012, it is not a merely technical consequence of QE but a reflection of investors’ preferences. At the time, during the 2010-2012 euro debt crisis period, the Target2 balance deterioration was driven by a loss of access to funding markets, inducing banks in peripheral countries to replace private sources of funding with central bank liquidity. However, since 2015 the rise in Target2 balances is more the result of the cross-border flows induced by investors’ response to QE. As JPM explains, “for example when the Bank of Italy, via its QE program, buys bonds from a German bank or a UK bank with an account in Germany, this flow causes a rise in Bank of Italy’s Target2 deficit and an increase in Bundesbank’s surplus. Or when the Bank of Italy buys bonds from a domestic investor but this domestic investor uses the proceeds to buy a foreign asset, then the Bank of Italy also builds up its liability with the Eurosystem. In both cases, the liquidity created by the Bank of Italy’s QE program does not stay within Italy, but leaks out to Germany or other jurisdictions.“

Additionally, according to the ECB, the vast majority of bonds purchased by national central banks under the QE were sold by counterparties that are not resident in the same country as the purchasing national central bank, and roughly half of the purchases were from counterparties located outside the euro area, most of which mainly access the Target2 payments system via the Deutsche Bundesbank. In other words, due to investors’ preferences, the excess liquidity created by the ECB’s QE program since 2015 did not stay in peripheral countries, but leaked out to creditor nations such as Germany, which got flooded with even more liquidity.

Incidentally, this is precisely the opposite of what Mario Draghi described to policymakers and the general public was the stated intention of the ECB’s QE, which was meant to boost the periphery, not the core, as it was already benefiting thanks to the Euro’s fixed rate, effectively subsidizing core European exporters at the expense of peripheral nations desperate for external, or currency, devaluation.

In any case, the different nature of the Target2 balance deterioration since 2015 does not change that the fact that Target2 liabilities still represent a cost for a country exiting the euro, assuming of course that country intends to satisfy its unwritten contractual obligations.

In other words, Target 2 balances represent national central banks’ claims on or liabilities to the ECB that, according to Draghi, would need to be settled in full, and thus represented leverage that the Eurozone had over any potential quitters.

But, as JPM notes, this is where the controversy arises, because what if a departing country – most likely about to default on its external liabilities and already set to redenominate its currency – reneges on its Target2 liability? After all, not only are those intra-Eurosystem Target2 claims and liabilities uncollateralized, but any exiting country would have little to lose by burning all bridges with Europe when it gives up on using the “common currency.”

In this case, a euro exit by a debtor country would represent more of a cost to creditor countries such as Germany rather than to the exiting country itself. And, as shown in the chart above, Germany sure has a lot of implicit accumulated costs, roughly €1 trillion to be precise, as a result of preserving a currency union that allowed German exporters to benefit from a euro dragged lower by the periphery, relative to where the Deutsche Mark would be trading today.

But here the analysis gets slightly more complex, as Target2 does not provide the full picture of potential costs (or benefits, assuming a scorched earth approach).

As JPMorgan writes, the Target2 liabilities of a debtor country give only a partial picture of the cost to creditor  nations from that debtor country exiting. This is because Target2 balances represent only one component of the Net International Investment Position of a country, i.e. the difference between a country’s total external financial assets vs. liabilities.  The broader metric that one must use, is of the Net International Investment Position for euro area countries and is shown in the chart below. It shows that contrary to the Target2 imbalance, Italy leaving the euro would inflict a lot less damage to creditor nations than Spain leaving the euro.

This is because Spain’s net international investment liabilities stood at close to €1tr as of the end of last year, almost three times as large as its Target2 liabilities. In contrast Italy’s net international investment liabilities were much smaller and stood at only €115bn at the end of last year, around a quarter of its €426bn Target2 liabilities. This, as JPM explains, is because Italy has accumulated over the years more external assets than Spain and should thus be overall more able to repay its external liabilities.

In other words, while gross external liabilities are similar in Italy and Spain, from a net external liability point of view, an Italian euro exit should be a lot less threatening to creditor nations than a Spanish euro exit. That said, the assets and liabilities are not necessarily owned and owed by the same parties, meaning that one cannot ignore the nearly €3tr of gross liabilities of Italian residents to foreign residents.

Ironically, the surprisingly low net international investment liabilities of Italy are the result of the persistent current account surpluses the country has been running since the euro debt crisis of 2012, and smaller current account deficits compared to Spain before the crisis. The flipside is that the current account surplus – in theory – also makes it easier for a country like Italy to exit the euro relative to a current account deficit country. This is because the higher the current account deficit of a debtor country, the higher the cost of an exit for this country as the current account deficit would have to be closed abruptly following an exit. Similarly, the higher the current account surplus of a creditor country, the higher the cost of an exit, due to a potentially higher currency appreciation. On this metric Italy sits roughly in the middle as shown below.

Most importantly, this means that as a result of Italy’s decent current account surplus, from a narrow current account adjustment point of view, its own cost of a euro exit should be relatively small.

And it’s not only Italy. What is remarkable in the chart above is that, with the exception of Greece, all peripheral countries were running current account balances last year, a huge change from the large current account deficits of 2009-2010 before the emergence of the euro debt crisis. This is also shown in the next chart, which depicts this significant adjustment in the savings position of peripheral countries which effectively converged to that of core countries.

Besides Target2 and the current account, another important reflection of the improvement in the savings position of peripheral countries has been what JPMorgan calls the “domestication” of their government debt. On one hand, this represented by the sharp decline in foreign banks’ exposure to Italian debt.

The offset, of course, is that as foreign banks dumped their Italian exposure, one particular hedge fund stepped up and bought it all: the European Central Bank, and in doing so, it presented Rome with even more leverage over the ECB, which ironically is headed by an Italian.

Furthermore, the next chart shows that the domestication of Euro area government bond markets has been even more acute for peripheral banks, whose share of non-domestic non-MFI bonds has been hovering close to 15% in recent years vs. a peak of close to 40% in 2006.

Here, JPMorgan points out one curious implication from these government bond market ownership trends, which is often overlooked: debt relief via Private Sector Involvement (PSI) becomes a less attractive option for an indebted peripheral country when most of the bonds are held domestically.  In other words, it is less practical to default on your sovereign debt if you are screwing far fewer foreign creditors, and most impairing your own population.

As JPMorgan puts it, “this narrows the options that a country has in terms of adjusting its economy within a monetary union.“

Here some big picture observations: within a monetary union, where currency depreciation and debt monetization are not possible – unless of course, there is divorce with said union – a country has effectively two options: default and internal devaluation.

Greece, for example,  has tried both: default via the Private Sector Involvement of 2012 and internal devaluation – i.e., collapsing wages, rising current account – via the Troika’s ongoing adjustment program.

And here things get interesting, because according to JPM calculations, the various Greek defaults, also known technically as Private Sector Involvements, provided a net debt relief to Greece of around €67bn or 33% of GDP (even though Greek debt/GDP still remains stratospheric and, as the IMF will remind on regular occasions, is unsustainable.

Applying the same haircut and PSI assumptions (i.e. only general government bonds are subjected to haircuts), the net debt relief to Italy from haircuts on non-domestic holders would be only €267bn or 15% of GDP. In other words, such a cost/benefit analysis of an effective default debt haircut suggests that a Greek-style PSI would be rather unattractive for Italy. Of course, one could imagine a wider restructuring than the Greek PSI, e.g. by including loans and regional or local government debt, but surely such an option would be more difficult to negotiate or keep voluntary and would present greater legal challenges. There are, of course, other far more structural challenges, namely that it is virtually impossible that what worked for Greece, will never work for Italy, where the associated numbers are orders of magnitude higher.

So with little to gain from a default, as indicated in the above analysis, Italy is left with just one adjustment option: internal devaluation. Unfortunately, as JPM calculates, this internal devaluation is not tracking well in the case of Italy. This can be seen in the chart below, which shows the changes in unit labor costs, current account balances
and unemployment rates since 2009.

It also shows that Greece and Ireland have made the biggest adjustment so far, i.e. biggest decline in unit labour costs and current account deficits, while Italy has instead seen a rise in unit labour costs since 2009. In other words, ten years since the Lehman crisis and six years since the euro debt crisis and Italy’s labour cost adjustment has not even begun, and if it does, it is safe to say that Rome faces a political crisis the likes of which it has not seen in a long time.

Putting this all together, the lack of any internal devaluation so far and the unattractiveness of a Greek style PSI leave limited options to Italy to adjust within the monetary union.

This, coupled with Italy’s massive Target2 imbalance which becomes an instant asset the moment the country decides to exit the Eurozone and never repay it much to the chagrin of Mario Draghi, together with a decent current account surplus – one which would only soar should Italy revert to the lira supercharging the country’s exports, which as explained above reduces the own cost of exiting the euro from a narrow current account adjustment point of view, will likely continue to make the country vulnerable to populist pressures to exit the monetary union.

That is the gloomy, if stunning, JPMorgan conclusion, although as a hedge, the bank also notes that the road to Quitaly, as the Greek fiasco in 2015 showed all too clearly, would be anything but easy and neither Brussles nor the ECB would go down without a fight. JPMorgan also notes that the above take also ignores other potential costs from an exit highlighted by the market reaction this week, such as the possibility that it could trigger a broader crisis and, if the Greek script is repeated, capital controls.

Then again, if Italy ever got to the point where lines of panicked depositors form outside Italian banks a la Greek summer of 2015, one can wave goodbye to the euro and the European experiment.

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