The Russia “Sanction Spiral” Elegantly Spirals Out of Control

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Attorneys with the SEC’s Investment Management Division are exhorting managers of registered investment funds, such as your mutual fund, to disclose their holdings in Russia and warn of the risks associated with them, now that the Crimean debacle has turned into a magnificent sanction spiral. “Several people familiar with the matter” had been talking to Reuters. The SEC is apparently fretting that the funds aren’t truthful with investors and aren’t even thinking about how to respond to the possible outcomes of the crisis.

Investment Management Division Director Norm Champ, when contacted by Reuters, didn’t even deny it. “We want to be proactive,” he said.

The Division contacted asset managers on other occasions when civil unrest erupted or when things threatened to blow up; it wanted to make sure managers weren’t omitting or misrepresenting material information – for example, during the uprising in Egypt in 2011, when the Cairo stock market simply shut down. But this time it’s different: the lawyers at the Investment Management Division were joined by another group of SEC lawyers who focus on risk examinations.

Would the White House be trying behind the scenes to give investors second thoughts about plowing money into Russia? Would it be trying to demolish Russian stocks, bonds, and the ruble? Naw.

The efforts by the SEC, which started “over a week ago,” were accompanied by a White House announcement that 5 million barrels would be released from the Strategic Petroleum Reserve. WTI tanked. Russia, a huge energy exporter, depends on its oil and gas revenues, and knocking down the price of oil could wreak havoc on the Russian economy. It was a declaration that commodities would be used as a weapon against the Putin Regime. 

Then on Tuesday, White House spokesman Jay Carney launched another attack on the Russian markets at a press briefing. In light of the sanctions the US and the EU were slapping on Russia, its economy would pay the price, he said. “I wouldn’t, if I were you, invest in Russian equities right now, unless you’re going short.”

Shaken to its roots by these threats, Russia annexed the Crimea and picked a new target: Estonia. A Russian diplomat told the UN Human Rights Council in Geneva on Wednesday that Russia was “concerned” by the treatment of the ethnic Russian minority “in Estonia as well as in Ukraine” … even while Vice President Joe Biden was in Lithuania to calm tattered nerves in the Baltics and the EU.

On Thursday, German Chancellor Merkel announced in Parliament, shortly before the EU summit in Brussels, that the EU would come up with new sanctions, such as expanding the list of Russians subject to travel limitations and freezing assets. And if the situation escalates, there would be “without doubt” economic sanctions, she said. Russia was “largely isolated in all international organizations.” And the G-8, which includes Russia, and whose upcoming shindig has already been cancelled, “no longer exists.”

She was immediately attacked by the parliamentary leader of the opposition Left Party, Gregor Gysi, who accused the government of double standards; the separation of Kosovo from Serbia had been a breach of international law too, he said, but it had been supported by the German government at the time. The transitional Ukrainian government wasn’t legitimate, he said. “Fascists are part of this government, and we want to give them money?!” Under pressure from the US, Merkel was imposing sanctions on Russia to the detriment of Europe, he said. That’s “moral cowardice.”

The “Putin Doctrine” was what SPD parliamentary leader Thomas Oppermann, who is part of Germany’s governing Grand Coalition, was fretting about. Under that doctrine, Russia could intervene if ethnic Russians were perceived to be in danger outside Russia. It would give Russia an automatic right to intervene anywhere, he said. “Such a right does not exist, and such a right cannot exist.”

Hours later, President Obama announced he’d slapped new sanctions on a “number” of oligarchs, additional Russian government officials, and a bank that provides services to them. The White House was working “closely” with the EU “to develop more severe actions that could be taken if Russia continues to escalate the situation.” Then he urged US Lawmakers to approve the aid package for Ukraine and urged the IMF to put its aid package together pronto. Alas, read…. Aid for the Ukraine “Will Be Stolen” – Former Ukrainian Minister of Economy

As Obama’s words were still echoing around the world, the Russian Foreign Ministry shot back: nine US officials, including Speaker of the House John Boehner and Senate Majority Leader Harry Reid, would be barred from entering Russia. And it published the list on its website.

Delicious irony: that boring list with nine names on it, issued by a Russian ministry whose website rarely gets shared in the social media, lit up a mini-firestorm on VK.com, the second largest social network in Europe after Facebook, and one of the most popular sites in Russia. The list got, as I’m writing this, 538 VK “likes.” Not sure if Obama’s list got any Facebook likes.

Not to be left out, Standard & Poor’s slammed Russia by lowering its outlook to Negative from Stable. “In our view, heightened geopolitical risk and the prospect of US and EU economic sanctions following Russia’s incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance.”

The Sanction Spiral works in a myriad ways and performs, as we can see every day, outright miracles. It spirals elegantly higher and higher and takes on grotesque forms. And by the looks of it, no one at the top has a clue how to back out of it. Yet stock and bond markets in the US and Europe, stuffed to the gills with central-bank liquidity and intoxicated by free money, the only thing that really matters anymore these crazy days of ours, are blissfully ignoring the entire drama, and what may eventually come of it.

The first official warning shot was fired. Not by a Putin advisor that can be brushed off, but by Alexey Ulyukaev, Russia’s Minister of Economy and former Deputy Chairman of the Central Bank. A major escalation. Read…. Kremlin: If The US Tries To Hurt Russia’s Economy, Russia Will Target The Dollar System


    



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S&P Tumbles, Gives Up All Post-Yellen Gains

Once European markets closed, US equity markets gave up any correlation with JPY crosses and began to fade. After bouncing off early Nasdaq-Biotech-driven lows, a ramp of AUDJPY saved the European close but that was it. There does not appear to be any news catalyst to drive this dump as Quad-witching pumps are unwound. The S&P 500 and Russell 2000 jooin the Trannies and Nasdaq in the red from the FOMC statement.

 

Stocks now red post -FOMC…

 

 

As The European close appears to have been the tipping point…

 

VIX is rolling back higher (inverted below) and catching up with stocks drop…

 

As the yield curve continues to collapse…


    



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Will the Feds Crack Down on Medical Marijuana in Washington?

My
latest Forbes column considers whether the failure of
medical marijuana legislation in Washington is apt to trigger a
federal crackdown. Here is how it starts:

Last week Washington‘s
legislature ended its
2014 session without approving new restrictions on medical
marijuana, a step that supporters portrayed as necessary to prevent
federal interference as the state begins allowing the sale of
cannabis for recreational use. After all, the Justice Department
indicated in an August
29 memo
that it would allow legalization to proceed in
Washington and Colorado only if both states created “strong and
effective regulatory and enforcement systems.” Washington’s medical
marijuana dispensaries, which are not licensed or regulated by the
state, seem inconsistent with that expectation.

Jenny Durkan, the U.S. attorney for the Western District of
Washington, said as much the very day the DOJ memo was released.
“The Department guidance is premised on the expectation that the
state will implement strong and effective regulatory and
enforcement systems,” she warned.
“The continued operation and proliferation of unregulated,
for-profit entities outside of the state’s regulatory and licensing
scheme is not tenable and violates both state and federal law.”

Now that it looks like these unregulated entities will continue
selling marijuana for another year or so at least, competing with
the state-licensed stores that are supposed to start opening this
summer, will Durkan feel compelled to crack down? Probably not,
judging from her past behavior and a close examination of her
public statements. Patience certainly seems like a more appropriate
response, especially since Durkan is largely responsible for
creating the situation that she now views as “not tenable.”


Read the whole thing
.

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Damon Root on Obamacare, Corporations, and Contraceptives

Do for-profit corporations get to enjoy the free
exercise of religion? That question lies at the heart of next
Tuesday’s Supreme Court battle over the so-called “contraceptive
mandate,” the provision of the Patient Protection and Affordable
Care Act requiring most employers to cover birth control in their
health care plans. Senior Editor Damon Root explains what’s at
stake in the March 25 oral argument in Sebelius v. Hobby Lobby
Stores Inc.

View this article.

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Feds Arrest Man Who Communicated With FBI’s Fake Terrorists

“I would love to join Allah’s
army, but I don’t even know how to start,” Nicholas Teausant, a
20-year-old community college student in California and
failed trainee in
the National Guard, purportedly wrote on Instragram around 10
months ago.

Unfortunately for Teausant, the FBI knew exactly where to start
and exactly how it’d end.

The story goes like this: Teausant started writing on the
Internet last year about his apparent interest in making
“terrorist” his next career move. This tipped off the feds, and the
FBI paid an informant to befriend him.

The informant claims that Teausant told him that once, on a
camping trip, he came up with a plot to bomb the Los Angeles subway
system. However, “investigators never corroborated that such a
camping trip actually occurred,”
according
to the Associated Press (AP). The 20-year-old talked
about other plots as well and the idea of fighting Syrian dictator
Bashar al Assad, according to a court complaint. The AP
reports:

The informant put Teausant in contact with a “mentor” — in
reality, an undercover federal agent — who could purportedly
approve his efforts to join the extremists. Early this month, the
“mentor” blessed Teausant’s travels, and he boarded a train for
Seattle on Sunday night

[…]

When the bus arrived in Blaine, just south of Vancouver, B.C.,
U.S. Customs and Border Protection stopped it and questioned
Teausant about where he was headed. He responded that he was
traveling to Vancouver and was arrested

On Monday, he was charged in federal court with a single count
of attempting to provide material support to a foreign terrorist
organization. He faces up to 15 years in prison and a $250,000
fine.

Although it’s alarming that Teausant may have wanted to harm
Americans or conduct terrorist activities abroad, the Digital
Fourth rights-advocacy group highlights the
fact that he never “provided any help whatsoever to terrorists, or
that he was in contact, ever, with any actual terrorists.”

This wouldn’t be the first time members of the FBI posed as
terrorists. Last year, they reeled in a
teenager
from Chicago. In 2012, members of the Occupy movement
in Cleveland
claimed
the FBI pressured them into trying to blow up a bridge.
Last year, Reason reviewed
a book with details on the pervasive practice within the FBI of
manufacturing “terrorists” like these.

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The Stunning History Of “All Cash” Home Purchases In The US

Yesterday’s news from the NAR that in February all cash transactions accounted for 35% of all existing home purchases, up from 33% in January, not to mention that 73% of speculators paid “all cash“, caught some by surprise. But what this data ignores are new home purchases, where while single-family sales have been muted as expected considering the plunge in mortgage applications, multi-family unit growth – where investors hope to play the tail end of the popping rental bubble – has been stunning, and where multi-fam permits have soared to the highest since 2008. So how does the history of “all cash” home purchases in the US look before and after the arrival of the 2008 post-Lehman “New Normal.” The answer is shown in the chart below.

This should not come as a surprise to regular readers, who saw this chart, along with our analysis of it last August, as well as the correct forecast that mortgage origination is slamming shut for virtually all financial firms. For those who missed it, here it is again.

* * *

Remember when housing was the primary aspirational asset for a still existent US middle class, to be purchased with some equity down by your average 30 year-old hoping to start a family in his or her brand new home, and, as the name implies, aspire to reach the American dream? Those days are long gone. Back in those days the interest rate on the 10 Year bond mattered as it determined the prevailing marginal affordability of leveraged real estate. That is no longer the case, at least not for about 90% of Americans, because as Goldman shows, while before the great crisis only 20% of home purchases were “all cash”, since then the number has soared threefold, and currently the estimated percentage of cash transactions (by count and amount) has hit a record 60%. In other words, less than half of all home purchases are debt-funded, and thus less than half of all home purchases are actually representative of what middle-class America is doing.

Goldman’s take:

Exhibit 4 shows the estimated cash transactions as percent of total home sales both by transaction count and by transaction dollar amount. Relative to the pre-crisis years, percent cash transactions has risen by about 30 percentage points. This change is broadly in  line with the increases suggested by DataQuick data. The 30 percentage point increase in percent cash transactions explains almost the entire decline in the “mortgage per dollar transaction” series (with the remainder explained by small changes in average LTV ratios per mortgage). We do not have data to assess who these all-cash homebuyers are, but presumably investors who have been purchasing distressed properties and turning them into rental units have played an important role.

The WSJ has a few thoughts to add:

The surprisingly large cash-share of purchases helps to explain why home sales have jumped over the past two years despite more muted increases in broad measures of new mortgage activity, such as the MBA’s mortgage application index.

 

There’s no exact way to know who is responsible for all of these cash purchases, though they are likely to include some combination of investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale. Mortgage lending standards have sharply tightened up since the housing bubble, with banks scrutinizing borrowers’ tax returns and bank statements to verify their incomes and the source of their down payment.

Our personal thoughts: just like the stock market has been levitating on zero volume and virtually no broad distribution, so the entire housing market appears to have morphed into a “flip that house” investment vehicle used by the usual suspects (wealthy foreign oligarchs abusing the NAR’s anti-money laundering exemption to park their stolen funds in the US, government sponsored firms such as BlackStone using near zero cost REO-to-Rent subsidies, and other 0.01%-ers) who piggyback on cash flows deriving from alternative cheap credit-funded investments and translate their profits into real-estate investments.

It also means that if nobody used leverage (i.e., mortgages) to buy houses before, they certainly won’t do it now, all the more so with interest rates soaring and purchase affordability imploding in front of everybody’s eyes.

Finally, due to the very thin marginal source of bidside interest (flipper flipping to flipper and so on), it means that most of America has not participated in this mirage “recovery”, and all it will take to send the buoyant housing market crashing is for the one marginal buyer to become a seller. What they will next find, is that when dealing with a bidside orderbook that has zero depth, one indeed takes the escalator down from where the lofty heights achieved courtesy of Fed-funded stairs.

* * *

What is the implication of all the above? Simple: anyone hoping that bank profitability will surge on a steepening of the yield curve due to the imputed positive impact to Net Interest Margin will be disappointed for the simple reason that Americans increasingly refuse to borrow, either due to affordability of availability of credit constraints, and thus the borrow credit cheap, lend expensive arb trade for the banks will simply not work. Incidentally we wrote this in August of last year – since then banks have fired tens, if not hundreds of thousands of mortgage originators having arrived at precisely the same conclusion.

Which also means that the only core driver of revenue, in addition to IPO and M&A fees now that bank fixed income and commodity, not to mention FX, flow trading revenues are crashing, was and remains prop trading, courtesy of the $2.7 trillion in excess reserves parked on bank trading books, which continue to be used as generously levered (think 20 times and above) initial margin with which to keep chasing risk higher.


    



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Young Bronie Gets to Keep His School Bag

If you look for more images, for heaven's sake, turn "safe search" on. Some people.What do we do about a boy who
likes pretty pastel ponies? Well, what do we do about the thousands
of boys (and men!) who like pretty pastel ponies?

It’s time to talk about bronies! For those who don’t know who
they are, bronies are male fans of the show My Little
Pony: Friendship is Magic,
a reboot launched in 2010 of the
popular cartoon/toy from the 1980s. Despite ostensibly being
girl-centric, the show has garnered a significant cult following
among guys—not just boys but men. There’s even a documentary about them, and they
have their own conventions.

Bronies ended up in the news this week as 9-year-old Grayson
Bruce found himself bullied for carrying his backpack emblazoned
with flying pony Rainbow Dash at his elementary school in Buncombe
County, N.C. The school initially responded to the bullying by
banning
the kid from carrying the bag, saying it “triggered” bullying,
granting his schoolmates a heckler’s veto rather than dealing with
inappropriate behavior. His mother responded by yanking Grayson out
of school and homeschooling him.

The school got a lot of negative publicity over the decision and
now
they’re backing off
. According to USA Today, the
school will let Grayson bring his bag to school and work on
initiatives to address bullying.

So why are bronies, anyway? When the phenomenon
developed, I hunted down the first two episodes of My Little
Pony: Friendship is Magic
 on YouTube. I didn’t find the
show compelling enough to start watching but it definitely had
decent depth, characterization, and humor. If there’s one thing I’m
envious of millennials (and the generation after them) for it’s how
much better cartoons have gotten, starting around the mid-1990s. My
god, cartoons during the Gen X-era were so awful. I think the
current animation renaissance is in part created by Gen-Xers who
didn’t want their kids to have to sit through the same mindless
crap.

But that doesn’t really answer the bronie question, does it? I
think bronies are a reflection of a show that acknowledges that
girls like girly things and objects (like ponies) but that doesn’t
mean girls aren’t interested in interesting stories, adventure,
danger, and fun. I recall watching a number of girl-oriented
cartoons and found them to be dreadful, unfunny affairs. They all
felt like they were being written by Marge
Simpson
. My Little Pony: Friendship Is Magic presents
the idea of a show targeting girls that can also be funny, zany,
and adventurous.

The press coverage of bronies seems to suggest a generation of

young men who are just more sensitive
and care more and face
criticism for it. While that may be true, I think such an argument
downplays the idea that perhaps entertainment that targets girls is
improving, and because the show treats girls like they also enjoy
adventures and fun, it’s naturally going to start drawing in guys
as well. It’s probably an important lesson for everybody working in
entertainment.

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Affirmative Action and Diversity Don’t Mix

California Democrats are in a state of shock that that Asian
Americans – who voted for Obama at rates comparable to those of
blacks – handed a resounding defeat to the proposal to reinstate
racial preferences in California universities. The state Senate had
approved 27-9 a measure to scrap Prop 209 for the November ballot.
But Asian Americans, who apparently didn’t get the party memo that
they should abandon their spots in top universities to further
liberal diversity goals, went into high-gear to oppose the measure,
causing the Assembly to scuttle it and three state senators to
withdraw their support.

But this is only the taste of things to come for affirmative
action Democrats, I note in my Washington Examiner column this
morning:

Trying to perform a racial balancing act in a country that was
neatly divided into two groups — the white discriminators and
the black discriminated — was one thing. But pulling it off in a
diverse country with diverse groups with diverse histories and
diverse interests is quite another. Foisting preferences on a
diverse America will pit various groups against each other — as
well as against Democrats, as the fight in California amply
demonstrates. Diversity
and racial preferences are directly antithetical — contrary to
liberal orthodoxy.

Diversity and racial preferences don’t mix.

Go
here
to read the whole thing.

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Hawaii Cops Demand the Right to Have Sex With Hookers

Hawaii’s
prostitution law
 includes an exemption for “any member of
a police department, a sheriff, or a law enforcement officer acting
in the course and scope of duties.” A
bill
that the state legislature is considering originally
would have limited
that exemption to exclude “sexual penetration or sadomasochistic
abuse.” In response to police objections, that qualification was
eliminated; the current
version
of the bill, which was unanimously approved by the
state House of Representatives earlier this month and is now before
the state Senate, leaves the exemption as it is.

That’s right: Cops insisted that they must be free not just to
receive blowjobs and handjobs from prostitutes but also to engage
in vaginal and anal intercourse with them. Evidently the police
also need permission to engage in “flagellation or torture by or
upon a person as an act of sexual stimulation or gratification”
(Hawaii’s definition
of “sadomasochistic abuse”). Just in case. Since an entire chamber
of the state legislature agreed to this request, the cops must have
had a pretty persuasive argument. Here it is, as
summed up
by Jason Kawabata, captain of the Honolulu Police
Department’s Narcotics/Vice Division:

As written, this bill would nullify the exemption if the officer
agrees to pay a fee for sexual penetration or sadomasochistic
abuse. This would limit the type of violations law enforcement
officers are able to enforce. Even if the intent of the amendment
is merely to limit actual conduct by the officer, we must oppose
it. Codifying the limitations on an officer‘s conduct would greatly
assist pimps and prostitutes in their efforts to avoid
prosecution.

In other words, if it were generally known that police are not
allowed to engage in sexual penetration or sadomasochistic abuse
with prostitutes, suspicious hookers might insist that undercover
officers do so to show they are not cops. When those officers
balked, their status as agents of law enforcement would be
revealed. That scenario seems rather implausible, since a person
commits the
offense
of prostitution as soon as she “agrees or offers to
engage in sexual conduct with another person for a fee.” For
Kawabata’s fear to be realized, a prostitute would need to have sex
first to make sure her customer was not a cop, then negotiate
payment afterward, which does not seem like a very good business
strategy.

Critics of the exemption
argue
 that it is unnecessary, that it invites abuse, and
that it could inflict additional trauma on women coerced into
prostitution. More fundamentally, the double standard demanded by
police highlights the utter absurdity of prostitution laws. Police
do not commit murder to catch killers or knock over banks to catch
robbers. Yet here they are insisting that they need the leeway to
have sex with prostitutes in order to stop people from having sex
with prostitutes. Even if cops never take advantage of that
freedom, they routinely commit the
crime
of agreeing to pay for sex, except that in their case it
is not treated as a crime. That exemption is considered acceptable
only because exchanging money for sex, unlike murder and robbery,
does not violate anyone’s rights. But if so, why not broaden the
exemption to cover everyone?

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