Poland Is Quietly Mobilizing Its Army Reservists

It seems the words of Polish Prime Minister Donald Tusk warning that “the world stands on the brink of conflict, the consequences of which are not foreseen… Not everyone in Europe is aware of this situation,” are a little more real than some (US equity buyers) might suspect. As The Week’s Crispin Black reports, at least 7,000 Polish workers in Europe have received call-up papers as army reservists in the last few weeks. Polish authorities dismiss it as “routine” but the men note this has never happened before.

 

As The Week’s Crispin Black goes on to note,

At least 7,000 reservists have been recalled to the colours for immediate exercises lasting between 10 and 30 days.

 

They’re told by the Polish authorities that the call-ups are “routine”: but the men say they haven’t been asked before and they’re well aware of the growing alarm in Warsaw at President Putin’s aggression.

 

Three weeks ago, their Prime Minister, Donald Tusk, called a press conference to warn that “the world stands on the brink of conflict, the consequences of which are not foreseen… Not everyone in Europe is aware of this situation.”

 

My own view is that Putin was initially more concerned with righting a specific historical wrong in Crimea than starting a new Cold War.  This is still probably the case despite the dawning truth that the EU/Nato Emperor really has no clothes at all. 

 

But in the worst case scenario of a truly revanchist Russia, Poland certainly has the borders from hell.  Starting from the top, it abuts Kaliningrad (the Russian exclave on the Baltic carved at the end of the war from East Prussia), Lithuania, Belarus and Ukraine.

 

None of these borders relies on any natural barriers like rivers or mountain ranges – they are just lines on a map drawn by Stalin in the full flush of victory.  No wonder the Poles are feeling vulnerable.

Read more here


    



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Tim Moen, Canadian Libertarian Politico, Defends Libertarian Political Action

You might remember Canada’s Tim Moen, who is running for a seat
in Parliament from Alberta, from
Nick Gillespie’s blogging about
his inspirational campaign
slogan “I want gay married couples to be able to protect their
marijuana plants with guns,” or from his appearance on Fox
Business’ The Independents (see clip at bottom of
post).

Like all libertarians of any stripe, Moen feels on occasion a
bit put upon by other libertarians telling him he’s doing it wrong.
He has
written an interesting defense
of being a libertarian and
seeking elective office from libertarians who find the state and
elections an inherently un-libertarian snare:

I have blogged at length, produced videos, talked with
people in my personal life, produced podcasts and engaged in online
debates to advance the message of liberty. I have never received a
whole lot of response or feedback from people outside the liberty
community itself.  I have been happy to contribute to thought
within this community and have felt it to be gratifying.

Preaching to the choir has been relatively safe. Stepping out on
this limb of political campaigning has been intensely scary.
Imagine standing alone in front of a church of devout christians
that you are about to try and disabuse of their faith…that is
what this feels like. As I’ve been delivering this message to the
faithful I have had an overwhelming response from many of the
members and it is giving me hope and evidence that I am doing
something that is far more effective than anything I’ve
done….

Moen then explains some of the things that would have to proven
to him to convince him that “what I’m doing [running for office] is
harmful to the liberty movement.”

Those include:

Show me that preaching to the converted is more effective than
reaching out to the “lost” in my particular circumstances.

Provide me with evidence that I could be doing something
more effective….ME, not you or someone else and not some Platonic
version of me thats in your head…..

Explain to me how someone who is committed to peace and
non-aggression taking a spot that would otherwise be occupied by a
politician interested in using the guns of government is not making
the world safer?

Moen then turns around the complaint that “libertarian
does something counterproductive for liberty” back on the
complainers:

Is criticizing me a good use of your time fellow activists? I
suppose it is if you have good reason to believe I’m going to harm
your mission and if you don’t have something more productive to be
doing then please continue fighting the good fight, present a
coherent argument that I’m causing harm. Is it possible that it is
simply easier and safer to criticize me than to try and enter into
hostile territory yourself? If evidence suggests that the amount of
delusion in the hearts and minds of men is falling at a more rapid
rate from the form of activism I’m taken than the form you are
taking will you consider a course correction in your own
activism?

It’s a grand thing to avoid or evade the state. But it’s there.
Is it a bad thing for liberty if people who understand libertarian
principles seek its office and deliver its message within one of
the few contexts in which most people are prepared to think about
political ideas–elections?

Moen wants his fellow libertarians to answer that question with
a “no.”

For example, it seems quite clear to me that any random person
on the Internet trying to spread Moen’s colorful slogan would get
zero attention. But when someone running for
office
 does, well, that’s news. And seems to me there is
nothing wrong with a libertarian taking advantage of that
dynamic.

Moen on The Independents:

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Guest Post: The Fallacy Of Homeownership

Originally posted at Liberta blog,

Many people have a weird obsession with homeownership.

When it comes to buying a house, they are willing to overlook, or even completely throw out, a bunch of financial values and principles they claim to hold dear.

The unfortunate truth is, for many middle-class folks, buying a house is often a very silly financial decision, especially if they are young (in their 20s or early 30s), or have a low net worth.

A well diversified portfolio

The most mind-boggling thing I’ve come across is that most people who punt the importance and wisdom of home ownership, will also tell you they believe you should have a well diversified investment portfolio.

You know…

“Spread your investments over many asset classes.”

“Don’t put all your eggs in one basket.”

And so on.

Well, for the average middle-class-30-year-old Joe, buying a house is akin to gathering up all his eggs, borrowing another 9 times as many, and putting them all together into one basket.

Not only is the the average middle-class-30-year-old-home-owner Joe way over-invested in exactly one asset class (residential property), he is also completely undiversified within that asset class, since he owns exactly one property, in exactly one area, based in exactly one town, located in exactly one country.

In short, it’s just about the most undiversified investment portfolio a person could dream up and manage to get himself into.

Leverage

Leverage basically comes down to borrowing money to invest in something.

If you invest R1,000,000 in something, but you borrow R900,000 and only use R100,000 of your own money, then you have an investment in which you are leveraged 10:1.

That 10:1 is called the leverage ratio of your investment. And it is 10:1, since the thing you’re investing in is worth 10 times as much as the cash you put in.

Leverage is great if the thing you invested in grows a lot in value over a short period of time, because it allows you to make a lot of money by investing only a small portion of your own cash!

Unfortunately, the reverse is also true.

If the thing you invested in loses value, then it is very easy for you to lose a lot of money – even more than the initial amount you put in!

While Warren Buffet’s ethics may be a stinker, I do agree with his views on employing leverage:

If you’re smart, you don’t need leverage. If you’re dumb, you have no business using it.

Warren Buffet

Even though, over the long-term, returns made on equities outperformed returns made on property, by far, almost no sane person will leverage themselves 10:1 to invest in equities (i.e. shares).

For most people, this is way too nerve wrecking to even consider. If you suggest such a thing, you might be labelled a gambler, or worse, a madman.

And yet, everyday, average middle-class-30-year-old Joes all around me are buying properties in which they are leveraged 10:1 (and even more), without a second thought.

After spending many months thinking about this phenomenon I can only put it down to the fact that the truth doesn’t matter.

It’s just another asset class

In case you think I have a deluded and deep seated mistrust of property that most likely stems from a childhood nightmare of being swallowed by a house, let me just make my position official:

I have zero issues with investing in residential property.

Residential property is just another asset class.

I don’t currently, but I have in the past allocated a portion of my investment portfolio to residential property (both locally and abroad), by buying shares in publicly listed companies whose business it is to buy and rent out houses and flats.

I just don’t view residential property as a magic-unicorn-galloping-over-a-rainbow-of-profits type of investment with which “you can never go wrong”.

I’ve spent a significant portion of my adult life looking for investments like those, but unfortunately I haven’t found one yet.

Liability and Liquidity

If you are still adamant that you want to invest in residential property, then I have a great suggestion for you:

Why don’t you just buy some shares in publicly listed companies whose business it is to buy and rent out residential properties?

If you do some research and choose a good one, chances are that they are better than you at spotting and buying well-priced properties and collecting rent, because that is what the people who work for those companies do for a living.

There are also some other advantages about investing in residential property by buying shares in publicly listed companies.

You can have a more diversified investment portfolio: By only buying a few shares you are able to limit your exposure to residential property to a reasonable percentage of your net worth.

 

You have limited liability: If the company goes bust, you will not be liable for any losses. Comparatively, if you buy a property using debt and, for whatever reason, become bankrupt and can’t afford to make the bond payments, then you most likely have quite a few years of hell to look forward to.

 

Shares in publicly listed companies are liquid: If you ever need to do so in a hurry, it will only take you about 5 minutes and a few key-strokes to sell all the shares you hold in almost any publicly listed company. Selling a house, on the other hand, is a ludicrously expensive multi-month administrative nightmare.

Interest rates and timing your property purchase

Residential property is an asset class that is very directly influenced by the cost of borrowing money.

In our society, it is considered a perfectly normal and responsible thing for a person to finance the purchase of a house by getting a 20-year loan from a bank.

In fact, it is considered such a normal thing for the average middle-class-30-year-old Joe to be a debt slave for most of his life, that if you had to suggest to him that he should save up for a house and only purchase it once he had saved up enough money to buy it outright, using cash, he will probably think that you are crazy to even suggest such a thing.

But, I digress.

My point is, the vast majority of residential properties are paid for using borrowed money.

Because of this, when interest rates go up, so do monthly bond payments. When bond payments go up, some people can’t afford to make their bond payments and they are forced to sell their homes, or default on their bond. A few actually do default, resulting in a seizure and forced sale of their properties by the bank.

To summarize: When interest rates go up, property prices fall (or increase very slowly, usually at a rate lower than inflation), because the available supply of residential properties increases, while at the same time the demand for residential properties decreases. Conversely, when interest rates go down, residential property prices usually go up quickly, because more people can afford to take out bigger loans!

The first rule of business is: buy low, sell high.

This is such an obvious concept and yet, in practice, it is very difficult to do, because it usually means doing the exact opposite to what everyone around you is doing.

If you are going to buy a property, for whatever reason, then at least buy it at the best possible time.

And when would that be?

Well, of course, a few months after interest rates hit their peak after having risen quickly for two or three years in a row.

Take a look at the graph below, which shows the [10Y Treasury rate in the US] over the last few decades.

…with interest rates near record lows and just entering an upward cycle.

In my opinion, the present is just about the worst possible time for anyone to be invested in residential property.

You will know it is the right time to buy your dream home by looking for a few of these signs:

  • Interest rates are starting to stabilize at a high rate, after rising steadily for two or three years in a row.
  • Many people are trying to sell their properties, some in a real panic, because they are struggling to make their monthly bond payments.
  • You hear many tales of properties being foreclosed on, also in neighbourhoods where people are considered to be wealthy.
  • People around you are generally feeling quite negative about owning property.

When the blood is in the streets, my friends, that is the ideal time to buy your dream home.

Paying rent is simply throwing away money every month

I often hear people making this argument. I’m sorry, but that is just a silly thing to say.

Upon purchasing the average middle-class-suburbia home, you’re not only paying a massive amount of TAX to the government, you’re also forking over a significant amount in fees for bond registration, deeds and a bunch of other stupid banalities. Never mind the commission that goes to the estate agent.

Property tax, commission and other fees can easily add up to over 15% of the purchase price of a house. This makes residential property one of the most expensive asset classes to invest in, at least as far as up-front costs are concerned.

Then, once your bond is registered and you are the proud owner of your new home, you’ll be paying interest to a bank, every month, until your bond is paid off.

And don’t forget about maintenance! You know… paint starts peeling, roof start leaking, toilet stops flushing, that type of thing.

Lastly, you’ll also be forking out on a monthly basis for rates & taxes. Which, as property owners in Greece found out just recently, can easily go up by sevenfold in two years, if your government is anything like most governments are.

Safe-haven investment my ass.

Except for squatting on someone else’s land, there’s no such thing as living for free.

So are you saying no one should ever own a house?

No, of course not.

I’m saying people should save up for their family homes and buy them cash.

The saving part should be done by building a well diversified investment porfolio and the home buying part should be treated as an expense, rather than the purchase of an asset.

I know… in the world we live in I’m very much on my own in suggesting such a boring and outdated thing.

But I’ve looked at the facts, and even though I’m well aware that the truth doesn’t matter, I also know that nothing matters to anybody until it matters to everybody – and by then it’s too late.


    



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Florida Man Arrested for Resisting Arrest, Suing Cop for Seizing His iPhone

the tapeAn
Orlando police officer seized a man’s iPhone for recording an
arrest and then arrested him for resisting arrest, according to a
lawsuit filed by the man, Alberto Troche, who prosecutors declined
to try on the charge of resisting arrest without violence. Troche
was recording a late night arrest he thought seemed excessive when
police asked bystanders to stop recording and give up their phones.
The Orlando Sun-Sentinel
reports
:

One woman complied, the suit alleges, but Troche kept
recording, he said.

The video he shot appears to show an officer walking up and pulling
it from his hand.

“They saw me recording,” Troche said. “He came and said, ‘Good.
I’ll be taking that,’ and took my cell phone. To me that didn’t
seem right.”

Troche was handcuffed and jailed for 15 hours, accused of resisting
arrest without violence.

Troche got his phone back three weeks later, with the footage
still on it. In his report, the arresting officer, Peter Delio,
accused Troche of shoving him. The officer said he needed the phone
because it had evidence of a crime, and insisted he didn’t seize it
until arresting Troche and putting him in a police car.

Troche’s attorney says the aim of the lawsuit is to “fix OPD and
train police,” and the lawsuit seeks unspecified damages for the
violation of Troche’s constitutional rights.

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Illinois Church Told by City Officials It Can No Longer Provide Homeless People Shelter

Throughout what has been one of the most brutal winters in recent memory, a small church in Rockford, Illinois decided to do the right thing and offer a warm, safe place to sleep for local homeless people. The church provided shelter to 30-50 people a night during the winter months, and probably even saved several lives as a result. For this horrific offense, city officials have zeroed in and told them they must stop this act of charity due to “zoning issues” and “safety hazards.”

This story is just another tale in a recent disturbing crackdown by local municipalities against private citizens and institutions trying to make life a little less painful for homeless people. Recall my very popular post from a month ago titled: South Carolina City Implements Law that Requires a $120 Permit to Feed Homeless People.

Now from WIFR 23News:

ROCKFORD (WIFR) — Leaders at a Rockford church say they have been told by the city that they can no longer act as a warming center and temporary homeless shelter because of zoning issues and apparent safety hazards.

Apostolic Pentecostals of Rockford church tells 23 News they were told Wednesday by the city that their facility doesn’t have adequate fire safety equipment and also isn’t zoned to serve the community as a warming center or shelter.

continue reading

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In A World Artificially Priced To Perfection, The Imperfections Appear

From Guy Haselmann of ScotiaBank

Mini-Contagion

The US economy has shown some hints of improvement, but overall it is plodding along at a pace that is neither strong nor awful. Most economists expect momentum to improve slowly to a 3% GDP growth pace in 2014, and something slightly above that in 2015. These forecasts are probably the best-case scenario. Therefore, they have asymmetrical skew to the down side. Due to crowded positions, valuations priced to perfection, and a confluence of global economic headwinds, the riskiest financial assets also have downside distribution skews of potential outcomes.

The most visible worry for investors is coming out of China, as Beijing and the PBoC attempt to tame growing imbalances and a dangerous credit boom. Recent defaults and sharp drops in many industrial commodity prices are not random events, but rather intricately connected to official plans for economic transformation. Premier Li said people should be prepared for bond and financial product defaults. In addition, PBoC announced plans for full interest rate liberalization by 2016. These changes are necessary in order for the Chinese government to pursue its ultimate goal of the Renminbi someday becoming a reserve currency.

Beijing maintains tight capital account controls. In recent months, the PBoC has expressed concerns about ‘hot money’ inflow. Total fund inflows amounted to approximately $500 billion in 2013. Officials who are trying to liberalize markets have not liked the perceived one-way bet on the Renminbi. One of the most popular (levered) trades has been to borrow in Yen and invest the proceeds in Renminbi. The trade made  sense, because the investor earned the large interest rate differential, while also benefiting from what had appeared to be the governmentally-controlled direction of each currency (Yuan stronger, Yen weaker).

One factor that may have prompted Beijing’s forceful currency move was anger at the Japanese who have driven their currency down 25% on a trade weighted basis. Their angst has likely been heightened by the fact that the US has refrained from any criticism of Japan’s policy. Recently, elevated geo-political uncertainties with Russia and EM, means that the Yen’s status as a safe haven has been putting upward pressure on the Yen. Thus, both currencies are moving the wrong way, further decimating investor yen-carry trades.

The changes being implemented to China’s economic development model are changing the behavior of State Owned Enterprises and local banks. Fewer loans are available, and loan refinancings, if available, require worse terms. Chronic overcapacity is now combining with slowing economic growth to increase debt servicing problems. Cross-guarantees risk a series of chain defaults which could then hit key supply chains.

Overcapacity is partially being blamed for plunging prices in copper, iron, cement, aluminum, solar panels and coal. Real asset collateral for trade finance arrangements ‘gone bad’ have resulted in further downward price pressures.

Lower prices and the drop in demand for key commodities products have proven to be disruptive not just for speculators, but for emerging markets in particular. The mini-contagion already appears to be leaving its mark on financial markets and the global economy.

In the past, during signs of economic weakness, the Chinese government was quick to authorize new large infrastructure projects or encourage new credit creation, but this time, those options are not desirable by officials as they are much riskier options at this point.

China, Japan and the US are the three largest economies in the world. Each country is currently in the midst of highly-significant policy maneuvers. The Fed is bringing QE to an end. China is dealing with the credit bubble issues outlined above. Japan is lifting its consumption tax from 5% to 8%. Japan’s hike in 1997 from 3% to 5% pushed the economy into a recession. In addition, Russian sanctions could magnify and potentially take a large bite out of global economic growth.

Portfolios will need to adapt to this changing environment. Just about everyone is anticipating higher Treasury yields. Most PM’s are short duration. However, the term premium is falling quickly. The technical chart looks outstanding on the long end. Macro factors are also beginning to align. I believe the next 50bps in the 30year (yield) is shaping up to be a move toward lower (not higher) yields. Portfolios are ill-prepared.

“The only thing I knew how to do was to keep on keeping on.” – Bob Dylan


    



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China Contracts

Spending just $3.33 on US-produced goods every year by every person in the USA would create 10,000 jobs. We obviously don’t have that much money to spend or we don’t care. Or, we don’t produce it in the USA these days. Spending that little amount of money would be easy. But, why don’t we do it? Instead we worry over the fact that China might be doing this or cutting that. We ponder the effects of the Purchasing Manager’s Index and the Gross Domestic Product of another country rather than looking at our own labor market.

The USA doesn’t produce all of its own flags (the US imports $3.2-million worth of them from China). There are no televisions that are manufactured in the USA (since 2004 when Five Rivers Electronic Innovations went bust). Levi’s Jeans are manufactured (except for one single line of jeans) outside of the USA. Even the USA’s 2012 Olympic uniforms were made in China.

According to a survey carried out in the USA a few years ago about American sentiment regarding Made in the USA, respondents stated that 99% of them would buy American if they could and 42% said they would do so even if it were more expensive!

So, what do we do? We rely on other countries because we can’t purchase what we want at home. That means every time China starts moving up or down, we in the USA get the jitters and see our investments disappearing.

China contracted in the first quarter of 2014 according to data that is released today from a preliminary Purchasing Managers’ Index survey by Markit/HSBC. Although it is not the official PMI released by China onApril 1st, it provides a good gauge that China is not doing as well as they/we might like. The Markit/HSBC PMI takes into consideration private companies that are smaller than those that are in the official PMI for China.

The Markit/HSBC figure stands at 48.1 for March and that’s an all-time low for the past eight months.February’s figure was 48.5, which means that the Chinese are well below the level of 50 and they have been ever since the start of this year.

The world has been questioning the economic activity of China for over a year now and it seems that these concerns will be reinforced when the official figures are released. China is indeed slowing down. It can be expected that China too will now take the long road of stimulus to boost its economy. This may include:

• Lowering entry barriers for private investment.
• Spending to target public housing
• Spending on air-pollution
• Loosening monetary policy so that the economy will continue to grow at 7.5%.
• Reducing lending rates.

Already last year the Chinese economy officially grew by 7.7%, which is the same figure as for 2012. Deceleration is suspected to continue well into the second quarter of this year.

The Vice Finance Minister Zhu Guangyao stated in an interview that they would not be making the same mistakes as in the past by over-stimulating the Chinese economy.

However, the Finance Minister Lou Jiwei stated that it was the labor market that was more important than the economy and reaching healthy levels for workers was essential, even more so than getting 7.5% in economic growth. If Beijing wishes to improve consumption in the country, then the question is whether or not they will be willing to forego economic growth in the meantime while they bring that about. Secondly, how much will they be prepared to sacrifice? The Chinese economy is slowing down and some believe it will weaken even more so in the coming months. Growth is expected to fall to about 7% in 2015 and 2016.

Economists believe that this contracting is the sign of last summer’s interbank rate soaring to over 10% amid concerns that there was a credit squeeze and a shortage of liquidity in Chinese banks.

It would seem that it’s domestic demand that is proving to be the problem at the moment for China. March is expected to see a rebounding PMI in normal times, because the Chinese New Year is over and there should be a return to orders and activity. However, this is not the case. Output and new orders have been weakened according to the figures; although new exports grew.

Who will benefit from China’s contracting? Some now believe that just because China will be slowing down it doesn’t mean that the world is going to nose-dive into chaos and economic slump. The world may actually benefit from balanced growth (although commodities will certainly come in for a rough ride). But, isn’t it the Chinese state that has engineered their own economic slow-down? So, in theory if it fell too much, they would be in a position to counter-act that; or at least control means avoiding a crash-landing. If they tripped up, however, they would make the rest of us fall too. The commodity-based economies would have a knock-on effect on the rest of the world. However, it might also open up new opportunities.

If only China could get contracts rather than contracting. If only the USA had more home-made products that would mean the Americans could comfortably buy from home rather than importing and worrying about Chinese PMI.

If only pigs could fly…

Originally posted: China Contracts

 


    



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Students For Liberty Against Ron Paul on Crimean Crisis

Former Congressman Ron Paul (R-TX) has been
outspoken about his views on the crisis in Crimea, where a recent
referendum transferred the peninsula from Ukrainian to Russian
control. Paul, known for not holding back
when he believes in something, is undoubtedly used to being

criticized
. This time the backlash might hit a little closer to
home, though: Students For Liberty (SFL) has come out against Paul
for his views on Crimea.

Alexander McCobin, an SFL co-founder, issued a
statement
warning that Paul should not be seen as “wholly
representative of the libertarian movement” and that he “gets it
wrong when he speaks of Crimea’s right to secede.”

Paul has expressed support for the secession,
arguing
in an op-ed last week that the Crimean push was all
about “self-determination.” He brushed aside the Russian military
presence as insignificant enough to warrant scare quotes when
describing the “occupation.”

McCobin doesn’t buy that. He writes:

Make no mistake about it, Crimea was annexed by Russian military
force at gunpoint and its supposedly democratic “referendum” was a
farce. Besides a suspiciously high voter turnout with legitimate
international observers, the referendum gave Crimeans only two
choices — join Russia now or later.

He also describes Paul’s stance as “too simplistic” and
“fail[ing] to see the larger picture” of Russia’s significant human
rights violations. McCobin ended by expressing support for Paul’s
son, Sen. Rand Paul (R-KY), who has taken a more critical stance on
Russia.

A different SFL representative
assured
 Buzzfeed that none of this is to say
that the organization supports American military intervention in
the situation.

Although Paul is not directly affiliated with SFL, the group has
in the past
expressed
warm feelings for and worked to advance ideas
proposed by the libertarian movement’s most recognizable voice.

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Market based approach to Russia

Let’s examine what happened from the beginning.  An extreme right wing group, with US and NATO support (according to released internal transcripts), overthrew the legitimate Ukrainian government (illegally) via violent coup.  The fact that this group had western support is not important really, but should be noted.  So according to ‘international law’ – this ‘country’ is NOT Ukraine.  Ukraine cease to exist when this happened.  The new ‘government’ – not popularly elected, seized control by force.  If anything we could call this country (still yet to be defined) the “New Ukraine” – of course if the current ‘government’ suggested this it would diminish their power; it serves them to mislead the world (those who are uninformed) that this is in fact the Ukraine, the same country that existed before.  Once the legal process breaks down, there’s no going back.  

Now, the smoking gun:

 

Why is this important?

When Russia went into Crimea, they claimed that they were protecting Russian citizens (who are the overwhelming majority there), which at the time sounded as an excuse for ‘annexation’ of Crimea (although Crimea was always part of Russia and mostly Russians are living there).  Is it possible that Russian intelligence received such real threats to Russians in Crimea?  Also to note the vehement anti-Russian stance of Western Ukrainians, at least those in power.  

RT commentators saying this recording is right out of “Dr. Strangelove” – only problem, Ukraine doesn’t have nuclear weapons.  Is she referring to her western friends?  If they hate Russians so much, why not leave Crimea to them?

Where US interest lies

The US has few economic or political ties to Ukraine, other than the NATO agenda to expand further into Europe and Eurasia (Grand Chessboard).  But the US has very strong economic ties with Russia.  Russia is a huge consumer of USD, invests in the US, and has provided transportation and other logistic services to US forces in Afghanistan.  Not to mention US corporations now doing business in Russia:

U.S. companies have also made sizable wagers in Russia. In 2010, PepsiCo agreed to buy Russian dairy and juice manufacturer Wimm-Bill-Dann Foods for over $5 billion, or about 16 times earnings before interest, taxes, depreciation and amoritization. The deal was seen as a way to boost the company’s revenue growth, which had slowed as PepsiCo’s mainstay U.S. market matured.

..

Today, Russia accounts for about 7 percent of PepsiCo’s total revenue. PepsiCo declined to comment.

Ford has two plants in Russia, as does General Motors. Meanwhile,Renault/Nissan and Hyundai also have large operations in Russia.

Russians have also been gobbling up US real estate at an increasing pace, even financing new developments:

Russian Deputy Economy Minister Andrei Klepach recently said that he expects Russians to invest $80 billion outside of Russia over the next few months, up from the $65 billion that he predicted originally.

Until now, investment in the U.S. only accounted for a small fraction of that number. But that may be changing. Mermelstein expects Russian real estate investment in the U.S., both commercial and residential, to double from its current share of 5 percent of Russian investment abroad to 10 percent in 2012.

Not to mention other sectors, such as the Steel industry

Russian steelmaker OAO Severstal yesterday said it is buying a Western Pennsylvania coal company for $1.3 billion in cash, adding to the surge of Russian money into the United States.

Russia holds $136 Billion of US Government Debt.  Ukraine on the other hand, holds so little they are categorized under ‘other’ (according to data from the US Treasury).

What happened to ‘the customer is always right?’

Russia is certainly not the largest customer of the US.  But they are a significant one.  And with US companies in Russia, trade has been two way.

Part of the motivation of dismantling the Soviet Union was to create a capitalist ‘open market’ system, that the US could do business with Russia.  They have done that.  Their economy has grown, and they’ve learned from the American system, adopting many US-led economic practices.  They have even replicated the ‘open markets’ model creating a commodity and derivatives exchange:

In February 2011 JSC “Saint-Petersburg exchange” and JSC “RTS Stock Exchange” carried out a joint project on organization of trading of commodities futures. In this project organizer of trading is JSC “Saint-Petersburg exchange”, clearing organization is CJSC “CC RTS”, settlement organization is “Settlement Chamber RTS”. Trading is carried out on the basis of trade system and risk-management system of FORTS derivatives market. It ensures the principle of single money position in all markets for the participants of trading.

Russia is depicted in the media as a wasteland.  Moscow has built a downtown filled with skyscrapers comparable to many international business districts.  A growing middle and upper class in Russia puts in on par if not more advanced than Western economies:

Stable gross domestic product growth, declining inflation and a record-low unemployment rate are pointing to positive consumer purchasing power in Russia. The Russian middle class, which stands at 104 million strong, is fueling that power. This segment of the population is projected to rise 16 percent between now and 2020, at which point it will represent 86 percent of the population and amount to $1.3 trillion in spending—up 40 percent from 2010, based on a global study of the emerging middle class and related databases by Dr. Homi Kharas of the Brookings Institution.

“There is an equal share of money at the top and in the middle,” said Dr. Venkatesh Bala, chief economist, The Cambridge Group, a part of Nielsen. “Russia’s middle class today has the same share of income as the upper class and has remained an untapped opportunity by many international corporations.”

While the top 20 percent of income earners in Russia represent 47 percent of the country’s total income, the middle 60 percent accounts for 48 percent, according to federal statistics from the Bank of Russia (2012). The bottom 20 percent comprise the remaining five percent of income.

Ukraine on the other hand, has done none of this.  Many of the media depictions of Russia are more applicable to Ukraine.  

Finally, since this issue has become polarized, just to compare the 2 choices.  Is it better to support a coup government that seized power by force, with few economic and political ties (Ukraine); or Russia, a legitimate country, world power, with many economic ties, who has proven in the past 10 years that it has accepted the suggested economic reforms?

Supposedly as traders we look at economic data and make economic decisions.  Following the ‘sanctions’ logic to the end, we have much more to lose by supporting ‘Ukraine’ than Russia.  Taking what they have learned from the West, it would not be difficult for Russia to internally reorganize their economy, and make new partnerships that have already been in the making for years (such as with China, India, and others).  Russia also sits on vast natural resources, which could be used internally or sold to China.

Irony of fallacious policy

Hundreds of billions of dollars were spent on propoganda, intelligence, and other means, during the Cold War, trying to convince the Russians to go capitalist.  Open their markets.  Finally it suceeded, and they have developed a sophistocated, capitalist market system.  All of those efforts are now in jeopardy. 

Now, for reasons unknown, the West is sending the opposite message.  Through the use of account freezing, trade sanctions, and other economic tactics, the West is doing exactly what the West tried to convince the Russians not to do for decades.  

No matter the outcome, the West (US and Europe) has much more to lose in any scenario.  

Market approach

Traders should only be concerned about the message being sent to the markets.  Markets operate based on a series of rules.  The market opens at a certain time, closes at a certain time.  Contracts are defined in quality and quantity.  Although traders may be emotional and irrational, they cannot operate outside of market rules (for example, if you are not happy with the outcome of a trade, you cannot just delete it from your account).  A violation of market rules opens a pandora’s box.  

What’s next? Politicians will decide that in order to support the US market (because it’s now suffering due to billions flowing out because of sanctions, or assets are frozen) that now to support our efforts overseas, we can only buy (not sell)?  Or that IRAs are converted to tbills to ‘save Ukraine’?  Since when did any Westerner care about Ukrainian politics?

..44 percent weren’t sure about the name of the former Ukrainian president with close ties to Russia who was recently removed from office. Only 40 percent correctly chose Viktor Yanukovych from the list. Sixteen percent selected an incorrect answer.

 

A relative lack of knowledge, however, doesn’t stop some from giving their opinion on various policy questions. The poll found that 24 percent of Americans were willing to express an opinion on whether the nonexistent Ukraine Administrative Adjustment Act should be repealed in light of the conflict. Respondents who gave an answer were divided evenly, with 12 percent backing repeal and 12 percent opposed.

With the economy faltering as it is, a market based approach to the current situation would have given a boost to the economy, instead of putting further negative pressure.  

Looking economically, any trader should agree that if you can lose 100 and gain possibly  another 20 or more through solidifying the relationship (Russia) and lose a few; OR (Ukraine) gain a few, but in the process lose 100, it’s a no brainer trade.  That is the economic magnitude difference between Russia and Ukraine, based on above referenced economic data.  

The reason Nixon opened up China, was to further the US economy, not to meddle in Chinese politics.  Even recently, we’ve overlooked China’s domestic problems, such as human rights, the seizing of Tibet, rampant pollution, and other issues not acceptable by Western standards, in the interest of furthering trade.  And over a period of decades, with US cooperation, China has built itself into an industrial powerhouse, and supplies goods in almost every economic sector, and is the US biggest customer.   

Some important facts to note about Russia:


    



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Message To The Fed: Here Are A Few Things That You Can’t Do

Submitted by F.F. Wiley of Cyniconomics blog,

[A]sset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
-March 19 FOMC statement

The excerpt above or some variation has appeared in every one of the Fed’s post-FOMC meeting statements since the beginning of QE3 in September 2012.

Unfortunately, it doesn’t give us much comfort. We don’t see evidence of the Fed’s economists accurately gauging QE’s “efficacy and costs,” notwithstanding its oh-so-slow wind down. On the contrary, history shows that these economists have an inflated view of what they can achieve with monetary policy.

Take the link between QE and jobs, for example. We were struck by the following question, asked recently by commenter “liongterm investor”:

How does a dollar (or trillion dollars) added to the Fed balance sheet create a job? This is a serious question; I am not trying to bait someone into an argument …  What I do understand about QE is how money the ends up [in] excess reserves earning interest from the Fed larger than what my deposits or short term treasuries earn. I also understand how the money can end up driving up equity prices. But job creation??

We don’t doubt that “liongterm investor” is aware of “wealth effects” – the idea that a booming stock market encourages happy investors to buy an extra luxury item or two, and this might eventually create a few positions at, say, Tiffany. But it’s not a very powerful effect, is it? Nor can we be sure that it won’t come back to bite us, for reasons we’ve written about in the past (see here, here, here or here).

What’s more, questions of what the Fed can and can’t achieve go beyond QE. We touched on the limitations of monetary intervention in recent research on where the economy stands today:

We’ll build on that research below with a handful of charts showing that there are many things the Fed can’t do when it comes to manipulating the economy.

Household borrowing and spending: What the Fed can’t do

In a debt-saturated household sector, the Fed can’t prevent mortgage demand from stagnating:

things fed cant do 1

Based on 40 years of history (and the fact that banks need to cover their costs), the Fed can’t shrink the spread between mortgage and deposit rates much further than it did in 2012:

things fed cant do 2

Consequently, the Fed can’t push debt service costs much below current levels:

things fed cant do 3

Nor can lower debt payments provide much of a subsidy in the first place, since falling debt service is matched by declining interest income:

things fed cant do 4

More broadly, there’s a downwards trend in income after tax and financial obligations, and the Fed can do little about this:

things fed cant do 5

Business borrowing and spending: What the Fed can’t do

The Fed can’t convince businesses to revert right away to the borrowing habits of recent bubbles:

things fed cant do 6

Especially as net business debt is already at an all-time high:

things fed cant do 7

And while the Fed can affect the amount of cash deposits, it can’t force businesses to make spending decisions based on those cash balances:

things fed cant do 8

Consequently, business spending growth has slowed alongside consumer spending, and the Fed can do little about either of these developments:

things fed cant do 9

Housing: What the Fed can’t do

The Fed can’t undo past overbuilding, and therefore, it can’t conjure up another residential construction boom (for awhile, at least):

things fed cant do 10

What the Fed can do

On the other hand, here are a few developments that our central bank can accurately claim to have achieved:

  1. Lifting prices on stocks, houses and other risky assets, which creates a wealth effect and boost for high-end consumption.
  2. Creating windfall profits for financial firms aiming to exploit the bubble, then bust and then bubble again pattern in the housing market.
  3. Creating windfall profits for primary dealers through the Fed’s Treasury and mortgage purchases (even as central bankers may occasionally discipline traders who aren’t careful).
  4. Preserving the “heads I win, tails you (the taxpayer) lose” mentality in the financial sector that leads to reckless risk-taking.

What the Fed shouldn’t do

Another way to look at the data and observations above is to ask why the Fed’s achievements have been so limited (and of dubious value). It’s evident that the economy isn’t growing strongly because of conditions that central bankers themselves created, by encouraging excessive borrowing and disregarding moral hazard.

In other words, the problem isn’t so much that the Fed can’t deliver another debt-fueled boom, but that it shouldn’t be trying to cure a credit bust with more borrowing in the first place.

Sadly, though, this idea falls in the same category as the notion that the Fed’s balance sheet isn’t the right tool for job creation. It’s too damning a thought to be accepted by central bankers who’ve shackled themselves to a philosophy of ceaseless intervention. It’s also too basic for economists who prefer abstract theories and mathematical models over reality-based thinking.

Such straightforward concepts as not fighting a debt hangover with more debt just don’t enter into the Fed’s calculus about “efficacy and costs,” even as they make perfect sense to so many of the rest of us.


    



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