What Happens After Sunday’s Crimea Referendum Vote?

Given this morning's UN vote declaring the Crimea referendum invalid (and Russia's obvious veto – along with China's abstention), and on the heels of Lavrov's words Friday that Russia would decide how to respond to the Crimean vote after the referendum had been held, it is thought-provoking to consider Putin's options given the vote's outcome is a near-certainty voting in favor of accession to the Russian Federation (especially in light of this morning's images across Crimea). Europe's Council on Foreign Relations notes "not knowing Vladimir Putin’s strategy makes it hard for Europe and the West to come up with meaningful and workable responses. In a way, we are all speculating and trying to get a glimpse into Putin’s soul. The five points below attempt to reinforce or refute some aspects of the conventional wisdom that has emerged from all this speculation."

 

Via CEFR,

1. Has Putin always wanted to invade Crimea?  

Russian diplomats (who probably hate their jobs these days) have made elaborate attempts to demonstrate that no international law has been broken in Crimea. But the breach is blatant and the pretext used to justify invasion is thinner than thin – and Moscow knows it.  

It is true that some hawkish groups in Moscow probably could not care less about international law. They would approve of any means to reunify Slavic lands. However, the bulk of the establishment has in fact always maintained a different position. For example, the Russian foreign ministry has traditionally adhered to a rigidly legalistic view of world affairs: in effect, post-1945 international law, with its strict emphasis on state sovereignty, non-interference in the internal affairs of other countries, and the inviolability of borders. Newer and softer concepts, such as the responsibility to protect, are alien to them. 

Putin himself has always passionately belonged to that legalistic camp, as evidenced by his positions on Libya, on Syria, and on multiple other issues. Therefore, deciding to invade Crimea cannot have been easy for him. He must consider that something extremely important is at stake. The corollary is that in defending his conception of what is at stake, he may well be ready to go further than many of us assume. 

2. Is Putin out of touch with reality?

Angela Merkel’s statement that Putin is out of touch with reality, which was leaked to the New York Times, gave rise to a considerable amount of conjecture and comment. Some people concluded that Putin has gone mad. In fact, while he may be living in his own version of reality, it looks like Putin’s world has actually been around for a long time.  

Putin seems to sincerely believe that dangerous extremist groups have taken power in Kiev. He may genuinely not realise that the events in Kiev represented a classic popular revolution. As pointed out by Fiona Hill, it is possible that the whole concept of popular revolutions is alien to Putin. In the late 1980s and early 1990s, when Russia was having its own revolution, Putin was not there – he was serving the KGB in Dresden. He did not personally witness the fact that a massive number of people were involved in the overthrow of the Soviet Union. His being abroad for these pivotal events, as well as his KGB schooling and worldview, may have made it easy for him to see the collapse of the Soviet Union as the result of a conspiracy by a few combined with betrayal by others. 

Similarly, Putin may see current events in Ukraine as a conspiracy by the West, which was definitely his view of the Orange revolution of 2004. Or he may see the situation as the result of recklessness: actions along the same lines as Western involvement in Libya and Syria. As Putin sees it, in both places the West has supported marginal and extremist groups against legitimate leaders, in a naïve hope that democracy will somehow take root in the ruins of the old regimes. It may well be that he saw the West applying the same logic to Ukraine and decided that he could not allow anything of the kind to happen in Ukraine. 

Added to this, he likely feels a sense of betrayal over the West’s (as he sees it) geopolitical incursion into Ukraine, and over the West’s failure (as he sees it) to support Viktor Yanukovych after the agreement of February 21. All this comes together to form the reality in which Putin lives. 

This means that what we are seeing as Putin’s revisionism may still be inspired largely by his conservatism. Also, much of his reality is indeed based on false premises. But understanding this does not make it easier to set the record straight and make Putin see sense – as multiple Western interlocutors have by now discovered. 

3. Does Putin want to use Crimea as leverage over Ukraine? 

Some analysts assume that Russia will stop short of incorporating Crimea, but will instead keep it in a Transnistria-style legal limbo in order to use it as leverage over Kiev. It seems likely that obtaining leverage over all of Ukraine, as opposed to just Crimea, is Moscow’s real goal. But it is hard to predict exactly what Moscow will see as sufficient and reliable leverage. 

The government that came to power in Kiev in late February is weak. Contrary to Moscow’s claims, it is not illegitimate – it is as legitimate as it can be under the circumstances. However, it still does not represent the whole of society in the ways that a government should. In theory, it would have been easy for Moscow to gain leverage over the new government by using a mixture of legitimate and more shady means. But Moscow did not even make the attempt. 

By now, it is unclear just how much the “Transnistrianisation” of Crimea would add to Moscow’s leverage. Kiev is now considerably less amenable to making a deal with Moscow than it would have been less than a month ago. Many in the nationalist camp may be secretly relieved to see Crimea go, taking with it its two million Russian voters and Russian base. 

As recently as a week or so ago, Russia could probably have counted on the West to put pressure on Kiev. The West is terrified by what Moscow is doing and it does not know how to respond. So, many would have been relieved if, instead of annexing Crimea, Russia stopped at “Transnistrianisation”. The West would have been ready to put pressure on Kiev to accept Moscow’s conditions – thereby, of course, contributing to prolonged bad governance in Ukraine and, consequently, to more trouble down the road. But Moscow did not try to use the West either – and now it could be too late for that as well. The build-up of Russian troops at Ukraine’s borders has probably made the West more determined to counter Russia and less likely to go for unholy compromises. And, likewise, the massing of troops could indicate that Moscow is not interested in making use of Western pressure. The sort of control over Kiev that the Kremlin has in mind may be of a much harder sort than mere co-option and coercion.    

4. Is Putin acting only in response to domestic pressures?

Some analysts claim that the whole Crimea affair was begun in order to impress the domestic public, who have increasingly fallen out of love with Putin. Others, even those who do not share that interpretation, claim that Putin cannot back down because of domestic pressures. It is true that the invasion has boosted Putin’s ratings. And the domestic media-propaganda machine has created a powerful momentum for annexation, which has the support of many in Russian society. But it is still hard to believe that any of this constitutes serious limitations of action for Putin, especially given that he does not have to face the ballot box any time soon.   

Russian society has no capacity for an informed and critical discussion about foreign policy. The state-controlled media is masterful in justifying the regime’s actions, whatever they may be. Portraying a climb-down as a victory would be easy. (This kind of method is described well in an old Soviet joke about a 100-metre race between Ronald Reagan and Leonid Brezhnev: after Reagan’s win, the Soviet news agency reported that “in yesterday’s race between the heads of state the General Secretary of the Communist Party of the USSR achieved a precious second place. The president of the Imperialist United States finished second-last.”)

In short, for the moment at least, Putin is in no way hostage to his domestic constituency. But that does not mean that he will want to de-escalate or back down.  

5. Will sanctions stop Putin?

Different people see different logic behind Western sanctions on Russia. Some hope that sanctions, or the threat of them, will force Moscow to back down. Others hope that sanctions will alienate Russian elites from Putin and leave him with little domestic support. Others simply believe that people who were instrumental in acting against sovereignty and territorial integrity deserve to be punished. And some look at the situation from a long-term perspective and think that sanctions should be applied to erode the economic foundations of an increasingly aggressive regime. 

Much of this reasoning seems accurate and justified. But even so, the calculation that sanctions will make Putin reverse course does not ring true. Ever since the domestic protests of 2011-2012, Putin has lost trust in the members of his elite who keep their money in the West and so are vulnerable to Western pressures. Losing their support, therefore, does not really matter to him. They have no leverage over him. In any case, “repatriating money” has been an unofficial policy for quite a while.  

Sanctions, as well as Putin’s growing alienation from Russian elites, may well have effects in the medium term. But they will not stop Putin on Sunday or in the days ahead. Even so, this does not mean that sanctions are futile or unnecessary – especially because it seems more and more likely that we are now facing a longer-term battle between Russia and the West. 


    



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Japan Launches “Yakuza-Like” TacticsTo Name (And Shame) Firms Not Raising Wages

With the Japanese stock market fading fast and macro-economic data showing anything but the kinds of inspiring recovery that Abenomics promised, the leaders in Japan have turned to a new inflation-inspiring meme – that the economy will be fixed when companies start raising their wages. Day after day the mantra is repeated in the hopes that repetition will make it come true and every company that raises wages (by an average of 4 Big Macs per month) is heralded as heroic.

But, as The Japan Times reports, the government (in all its newly socialist bravado) has threatened to take the unprecedented step of shaming big "uncooperative" companies that do not raise wages during the annual spring labor talks. Forget minimum wage adjustments, this is pay-by-mandate Maduro-style; we just wonder how Abe will cope when a nation used to 'full' employment sees joblessness surge.

 

So far Abe's demand are not being met…

Case in point, last night the Japan labor ministry reported that monthly wages excluding overtime and bonus payments fell 0.2 percent in December from a year earlier to 241,525 yen on average per worker, a series of declines which has now stretched to 19 consecutive months.

 

 

The broken record "common knowledge" meme Japan is trying to force feed (just a few headlines from Japan in the last week):

  • *ABE: WILL WORK SO SMALL, MEDIUM COMPANIES ALSO RAISE WAGES
  • *AICHI: HOPE FOR WAGES RISES IN NON-REGULAR LABOR
  • *AICHI: RISING WAGES IN JAPAN GOOD SIGN OF VIRTUOUS CYCLE
  • *JR CENTRAL TO RAISE WAGES BY 1,500 YEN, YOMIURI SAYS ($12!!! per month)
  • *AMARI: FEEL WAGES ARE RISING UNLIKE THEY HAVE IN RECENT YEARS
  • *LAWSON TO RASE WAGES FOR 1ST TIME SINCE 2002, NIKKEI SAYS

 

And so, as The Japan Times reports, forget currency devaluation (that didn't create the energetic J-Curve everyone expected) and the fall in the stock market is removing that confidence-inspiring pillar – so now Abe and his apparently socialist cronies are mandating wage rises…

The government threatened Thursday to take the unprecedented step of shaming big companies that do not raise wages during the annual spring labor talks, despite calls by the nation’s inflation-stoking prime minister to boost pay.

 

The surprising threat to disclose companies’ names comes days after Akira Amari, state minister in charge of economic and fiscal policy, raised the stakes in the sensitive pay negotiations with an apparent threat to take action against “uncooperative” firms.

 

 

The government “will react in some way” against firms that are “uncooperative with our policy of creating a virtuous economic cycle,” Amari told reporters on Tuesday, referring to the “Abenomics” strategy of Prime Minister Shinzo Abe.

 

Tabloid Nikkan Gendai compared Amari’s comments to the aggressive tactics used by the notorious yakuza.

The question, of course, is if you force firms to raise wages (when their raw material costs are already surging thanks to a devlauing JPY) just what do you think will happen to the workforce? For Japan, that is used to jobs-for-life and full-employment, a sudden rise in unemployment levels (though the employed would be paid more) would be catastrophic from a social strat perspective.

 


    



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Here’s What The Richest Man In The World Thinks About Snowden And NSA Surveillance

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

So Bill Gates recently gave an interview to Rolling Stone magazine. The vast majority of the interview focused on his philanthropic efforts, with a particular focus on poverty and climate change. However, several questions were brought up on illegal NSA surveillance in general, and Edward Snowden in particular.

His answers reveal one of the biggest problems facing America today, which is the fact that the billionaire class as a whole does not question or rock the boat whatsoever. They criticize only when it is convenient or easy to do so, never putting themselves at risk for the sake of civil liberties and the Constitution.

In mosts cases, this is due to the fact that they themselves are the characters pulling the strings of the political class in Washington D.C. So when it comes down to it, their policies ultimately become our policies.

It is also important to note that Microsoft was a particularly eager participant in NSA spying from the very beginning. For example, according to the following PRISM slide provided by Edward Snowden, we see that Gates’ company was the first to become involved. In fact, they were participating a full six months before Yahoo!, while Apple didn’t join until a year after Steve Jobs died.

 

What a tangled web we have weaved. Now from Rolling Stone:

Question: When people think about the cloud, it’s not only the accessibility of information and their documents that comes to mind, but also their privacy – or lack of it.

 

Gates: Should there be cameras everywhere in outdoor streets? My personal view is having cameras in inner cities is a very good thing. In the case of London, petty crime has gone down. They catch terrorists because of it. And if something really bad happens, most of the time you can figure out who did it. There’s a general view there that it’s not used to invade privacy in some way. Yet in an American city, in order to take advantage of that in the same way, you have to trust what this information is going to be used for.

Do they really catch terrorists because of it in London? Because in the U.S., the NSA chief already admitted that the entire spy program has stopped essentially zero terrorist attacks. It certainly didn’t stop the Boston bombings. So what are we giving up our privacy for exactly?

Question: Thanks to Edward Snowden, who has leaked tens of thousands of NSA documents, we are. Do you consider him a hero or a traitor?

 

Gates: I think he broke the law, so I certainly wouldn’t characterize him as a hero. If he wanted to raise the issues and stay in the country and engage in civil disobedience or something of that kind, or if he had been careful in terms of what he had released, then it would fit more of the model of “OK, I’m really trying to improve things.” You won’t find much admiration from me.

Sorry Billy boy, but we have had many whistleblowers in the past who went through the system and they ended up in jail or their lives were ruined. For example, the only person imprisoned for torture in the USA is the guy who exposed the torture program, John Kiriakou.

Question: Even so, do you think it’s better now that we know what we know about government surveillance?

 

Gates: The government has such ability to do these things. There has to be a debate. But the specific techniques they use become unavailable if they’re discussed in detail. So the debate needs to be about the general notion of under what circumstances should they be allowed to do things.

First of all, without the Snowden revelations, there would be no “debate.” As it stands, the intelligence complex and Obama don’t seem to have much interest in changing a single thing anyway.

Before Snowden proved us right, those who accurately claimed the NSA was doing all of these things were labeled paranoid conspiracy theorists. Moreover, how can anyone seriously defend these “techniques” in light of the recent revelations that show activities so egregious that security experts think they threaten the infrastructure of the entire internet?

Gates goes on to ponder…

Should surveillance be usable for petty crimes like jaywalking or minor drug possession? Or is there a higher threshold for certain information?Those aren’t easy questions.

How are those not easy questions? They are exceedingly easy questions for a civilized society. The answer is no. Unless you want to toss even more citizens in jail for non-violent offenses, because having 25% of the world’s prison population and only 5% of its population is not inhumane enough.

More from Gates…

The U.S. government in general is one of the better governments in the world. It’s the best in many, many respects. Lack of corruption, for instance, and a reasonable justice system.

Seriously, what country is Gates living in? I suppose when you are the richest man in the world it’s pretty easy to live in a bubble. He is so obsessed with the problems of the outside world and the fact that they are more corrupt than we are, that he is completely blind to the very dangerous trends happening in America.

What a joke.

The entire interview can be read here.


    



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Russia Vetoes, China Abstains From UN Security Council Resolution On Ukraine

In a rather concerning (though not entirely surprising) turn of events, the United Nations (which may well need to be renamed after this) is making headlines:

  • *RUSSIA REJECTS U.S. DRAFT RESOLUTION ON UKRAINE, CHURKING SAYS
  • *U.S. DRAFT DOES NOT DIRECTLY BLAME RUSSIA FOR CRISIS IN UKRAINE
  • *RUSSIA VETOES UN SECURITY COUNCIL RESOLUTION ON UKRAINE CRISIS
  • *CHINA ABSTAINS ON UN RESOLUTION ON UKRAINE

And then the US comes over the top:

  • *POWER SAYS UN VOTE SHOWS RUSSIA ‘ISOLATED, ALONE, WRONG’

Well “isolated and alone” with China?


    



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Ukraine Says It Has Repelled A Russian Army Attempt To Enter Region Adjacent To Crimea

With a day left until the critical, if widely expected, results from the Crimean referendum are revealed, it is worth recalling the main footnote in last night’s State Department travel alert for Russia: “all U.S. citizens located in or considering travel to the border region, specifically the regions bordering Ukraine in Bryansk, Kursk, Belgorod, Voronezh, and Rostov Oblasts and Krasnodar Krai, should be aware of the potential for escalation of tensions, military clashes (either accidental or intentional).” See, for the purpose of a military provocation, “accidental” will do. It is therefore not surprising to see that moments ago all major news wires blasted the following headline, quoting the Ukraine ministry of defense:

  • UKRAINIAN MILITARY REPELS ATTEMPT BY RUSSIAN FORCES TO ENTER REGION ADJACENT TO CRIMEA-UKRAINE’S DEFENCE MINISTRY

The incursion allegedly took place in the Ukraine region of Kherson, neighboring the Crimea.

Here is the full google translated statement from the Ministry website:

Another provocation on the part of members of the Armed Forces of the Russian Federation has failed.

 

Today, 15 March 2014, forces of the Armed Forces of Ukraine halted the penetration of the Armed Forces of the Russian Federation on the territory of Kherson Oblast from the “Arabatka.” Response was made immediately.

So the official line is that the Ukraine repelled a Russian “military force” in a region inside east Ukraine and out of Crimea the day after Russia’s foreign minister Lavrov said Russia has no plans to Invade Ukraine? Call us cynical, but something tells us if Russians wanted to “penetrate” east Ukraine, the would have done so without “being repelled.”

Either way, here is Reuters’ take:

Ukraine’s military scrambled aircraft and paratroops on Saturday to repel an attempt by Russian forces to enter a long spit of land belonging to a region adjacent to Crimea, Ukraine’s defence ministry said.

 

“Units of Ukraine’s armed forces today…repelled an attempt by servicemen of the armed forces of the Russian Federation to enter the territory of Kherson region on Arbatskaya Strelka,” a ministry statement said. “This was repelled immediately.”

 

It said the Ukrainian military used aircraft, ground forces and its aeromobile battalion in the operation. The territory in question is a long spit of land running parallel to the east of Ukraine’s Crimea peninsula, now controlled by Russian forces.

But just so Russia isn’t accused of being inert, moments ago it too re-escalate the war of words and provocations, either accidental or intentional, and stated that:

  • RUSSIA’S FOREIGN MINISTRY SAYS REQUESTS FOR DEFENCE OF PEACEFUL CITIZENS IN UKRAINE WILL BE CONSIDERED

Specifically, the Russian Foreign Ministry says in website statement that it will examine Ukrainians’ requests. Armed radicals are heading to eastern Ukrainian cities of Donetsk, Lugansk. Radicals provoked 2 deaths at pro-Russian rally in Kharkiv. The full statement is below:

On March 14 in Kharkov Ukraininan elements including the “Right Sector” arranged provocation against peaceful demonstrators who came to express their attitude to the so-called new government. As a result, the militants opened fire, killing two people, some were injured.

 

Of disturbing information that from Kharkov Donetsk and Lugansk left column with armed mercenaries “right sector” , whose leaders have announced the opening of the “Eastern Front” , and on one of the garment factories in Russia urgently sew uniforms.

 

At the risk of making the Verkhovna Rada of legitimizing the “right sector ” and other radicals by converting them into system power structures like the National Guard

paid attention Secretary of State John Kerry Russian Foreign Minister Sergey Lavrov during their meeting in London on 14 March . of While Lavrov urged John Kerry to use Washington’s influence on Kiev to curb rampant ultra- nationalists.

 

Russia To receive many calls asking to protect civilians. These applications will be considered.

Meanwhile in Crimea, the Russian flag is already flying above the Crimean Supreme Council:

And finally, just in case things weren’t exciting enough, the US appears to finally be flexing its muscles too.

  • U.S. WARSHIP TRUXTUN TO CARRY OUT FURTHER EXERCISES WITH ALLIES IN BLACK SEA-COMMANDER

From Reuters:

The USS Truxtun, a U.S. guided-missile destroyer, will carry out more exercises with allied ships in the Black Sea, its commander said on Saturday, in a further sign of the international response to Russia’s actions in Ukraine. Commander Andrew Biehn was briefing reporters aboard the 300-crew destroyer as it lay docked in a Bulgarian port.

 

The USS Truxtun last week took part in drills with Romanian and Bulgarian ships a few hundred miles from Russian forces that entered Ukraine’s Russian-majority of Crimea after mass protests toppled the country’s pro-Moscow president.

If all this has happened while it is still light in Ukraine and before the Crimean referendum, we can’t wait until darkness falls on Sunday night.


    



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China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike

In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.

The PBOC’s overnight release:

The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:

 

Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.

 

People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.

Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.

Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”

The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:

the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.

 

The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.

 

A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.

 

The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.

For some even the doubling in the rate band is not enough:

Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.

But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.

Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.

 

That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.

 

As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.

 

“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.

One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.

* * *

Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.

UBS

 

  • The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
  • Action doesn’t have direct implications for direction of CNY against USD
  • UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
  • Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang

Morgan Stanley

  • “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
  • Wider yuan band will help deter “carry trade speculators” as volatility increases
  • Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
  • Recent CNY depreciation created precondition for band widening

Commonwealth Bank of Australia

  • With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
  • Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
  • Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years

BEA

  • PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
  • Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
  • Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization

Bank of America

  • Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
  • PBOC wants to widen band when market view is more balanced
  • Not very surprising in terms of band-widening timing
  • Another band widening this year is unlikely
  • Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
  • Long-dated NDFs could weaken further, though not necessarily the daily official fixings
  • Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation

ANZ

  • With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
  • Yuan band widening didn’t come as a surprise
  • Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
  • Another widening won’t come so soon given the last move was 2 yrs ago in 2012


    



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Weekly Outlook: Euro Resilience is Remarkable

Our technical note a week ago expected the dollar, yen and Swiss franc to outperform and for global equity markets to retreat.  However, the euro’s resilience continues to frustrate the otherwise respectable market calls.

 

The yen was the easily the strongest of the major currencies, gaining almost 2% against the dollar. The Swiss franc (0.6%) would have been the second strongest, but the hawkishness of the Reserve Bank of New Zealand helped push the Kiwi ahead of it (0.8%). Our technical work had identified the Australian dollar as particular vulnerable. It and sterling were the two weakest currencies last week.  Both lost about 0.5%  

 

Global equity markets sold off, as we anticipated. Japan’s Nikkei led with a 6.2% decline, and more than half was registered just before the weekend. Many of the major European bourses were off around 3%. The Dow Jones Stoxx 600 was off about 3.3% to five week lows.  The S&P 500 and the NASDAQ lost about two-thirds as much as Europe. Core bond yields fell, led by a 13 bp decline in the US and UK and 8 bp in German bunds. Spain, Italy, Portugal and Greece saw higher yields.

 

The euro’s resilience is remarkable. It broke above the 5-month 5-cent trading range ($1.33-$1.38) in response to the ECB’s decision not to adjust policy at the beginning of the month. However, as Draghi and other ECB officials hinted, the strength of the euro is becoming a more important factor in setting policy because it heightens the risk of deflation and acts as a headwind against growth.

 

The euro’s strength comes amid heighten tensions with Russia over its actions in Crimea, which are seen as the highest since the end of the Cold War.  Europe and the US are preparing additional sanctions early next week, and there is fear Russia may enter into eastern Ukraine as part of its response.  

 

Technically, the euro continues to bump along the top of its Bollinger Band (~$1.3930), set 2 standard deviations above the 20-day moving average. Neither the RSI nor MACDs indicates that a top is in place. A move above $1.40 is likely to trigger buy stops. On the downside, the euro has built a shelf in the $1.3830-40 area, but it will take a break of $1.38 to signify anything important.

 

The dollar weakened against the yen every day last week for the first time in ten months.  A break of JPY101.20 would send the greenback to the year’s low set in early February near JPY100.75 and possibly to JPY100.20, which corresponds to the 61.8% retracement of the rally from last October’s dip below JPY97 to the early January high near JPY105.45.

 

Sterling has under-performed.  It lost ground against most of the major currencies, in recent days. The five-day average crossed below the 20-day average in the middle of last week for the first time in a month. However, there is a lack of momentum even sterling fell below support near $1.6600. A push higher may run into offers in the $1.6685-$1.6700 band. On the downside, a close below $1.6570 maybe helped, but it will take a move below $1.6530 to signal a move toward $1.6400.

 

We had expected the Australian dollar to be one of the worst performers this past week, and it did sell-off in the first three sessions from about $0.9070 to roughly $0.8925. However, with the help of strong employment report, even if skewed by a methodological adjusted, which follows a large trade surplus and a strong retail sales report, the Aussie staged a rebound. The pendulum of market sentiment has swung away from a rate cut and toward a hike.

 

The weekly close above $0.9000 puts it in a reasonable technical position to move higher, though the indicators we look at are not generating strong signals. The initial upside target is just above $0.9100, last week’s high and then $0.9140, the high from the previous week. While a move below $0.9000 would weaken the tone, it may require a break of $0.8925-50 to raise confidence that a new leg down has begun.

 

The US dollar appears to be carving out a wedge or triangle pattern against the Canadian dollar. The bottom of it comes in near CAD1.0960 and rising. The top comes in near CAD1.1150 and falling. The technical signals are not strong as the Canadian dollar has been moving within the range established with the February 19 low ahead of CAD1.19 and the February 21 high near CAD1.12. The low implied volatility recognizes this.

 

The dollar is on the verge of breaking down through the bottom end of its recent range against the Mexican peso, which comes in near MXN13.20.  It has not sustained a break below since it moved above that level in mid-January.  The fact that it has been moving broadly sideways is illustrated by the convergence at MXN13.25-MXN13.26 of the 5, 20, and 50 day moving averages.   There doesn’t appear to be an attractive short-term opportunity at the moment. 

 

Observations from the speculative positioning in the CME currency futures:

 

1.  As was the case during the previous reporting period, there was only one gross speculative position adjustment of more than 10k contracts.  Then it was about long euro positions being increased.  This time it is the yen.  Short yen positions rose 15k to 115.1k contracts. This is a two-month high.  The yen strengthened after the reporting period and while some talked about it as safe haven buying, we suspect it was more about short-covering.

 

2.  During the previous reporting period, outside of the euro, no other gross positions were adjust by more than 6k contracts.  In the most recent reporting period, there were five gross adjustments more than 6k contracts.  The euro longs added 6.2k contracts to 110k, while shorts cut 6.7k contracts to 73.7k.  Long sterling positions were reduced by 6.5k contracts to 64.6k.  The short Canadian dollar position was pared by 7k contracts to 77.4k.  There were 8k short Mexican peso futures contracts were covered, leaving 21k contracts.  

 

3. The 110k gross long euro contracts is the highest since last October when they reached about 137k contracts.  This in turn was about 10k contracts below the record set in May 2007.  

 

4.  Looking at net positions, the euro and Swiss franc long positions were extended.  The short yen position grew.  The net short Canadian dollar, Australian dollar and Mexican peso positions were reduced, while the net long sterling position was cut.  


    



via Zero Hedge http://ift.tt/1oWOAa1 Marc To Market

No, Millions of Americans Have NOT Dropped Out of the Labor Force Just Because They’re Retiring Baby Boomers

Zero Hedge notes that the number of Americans in the labor force has dropped to 1978 levels:

The civilian labor force … dropped from 155.3 million to 154.9 million, which means the labor participation rate just dropped to a fresh 35 year low, hitting levels not seen since 1978, at 62.8% down from 63.0%.

 

 

And the piece de resistance: Americans not in the labor force exploded higher by 535,000 to a new all time high 91.8 million.

Charles Hugh Smith shows the disturbing trend line:

The mainstream media portrays the cause of this crash as simply being retiring baby boomers, as shown by the following screenshots from a Google search:

But a February 26 report from the nonpartisan Economic Policy Institute shows this is false:

Since the start of the Great Recession over six years ago, labor force participation has dropped significantly. Most of the drop—roughly three-quarters—was due to the lack of job opportunities in the Great Recession and its aftermath.   There are now 5.8 million workers who are not in the labor force but who would be if job opportunities were strong.

 

***

 

More than 70 percent of the 5.8 million missing workers are under age 55. These missing workers under age 55—4.2 million of them—are extremely unlikely to have retired and are therefore likely to enter or reenter the labor force when job opportunities substantially improve.

 

***

The Washington Post noted in January:

The participation rate for workers between ages 25 and 54 fell sharply during the recession and still hasn’t recovered.

 

Obviously, retirements can’t explain this:

Credit: Calculated RiskCredit: Calculated Risk

So, what’s going on? One theory is that the weak job market is causing people to simply give up looking for work — they’re crumpling up their résumés and going home. An recent study from the Boston Fed suggested that these “non-inevitable dropouts” might even account for most of the decrease. Among other things, the authors noted that the labor-force decline has been far sharper for all age groups than simple demographics would predict.

 

***

 

So, why does the size of the labor force matter? If people are leaving the labor force for economic reasons (and they’re not going back to school), it would mean that the economy is in much worse shape than the official unemployment rate suggests. The jobless rate is officially 6.7 percent, but that only counts people who are actively seeking work — not labor-force dropouts. [Remember, you have to include labor-force dropouts in order to arrive at a useful unemployment number.]

In other words, the conventional explanation holds no water.

Despite all happy talk to the contrary, we have a “jobless recovery” – a permanent destruction of jobs – which is a redistribution of wealth from the little guy to the big boys. (And see this.)

No wonder Americans aren’t feeling the love.

And everything the government has been doing since 2008 has made unemployment much worse. And  here and here.


    



via Zero Hedge http://ift.tt/1m5PZ0Q George Washington

Blackstone’s Home Buying Binge Drops 70% From Its Peak Last Year

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

The whole story about how private equity firms and hedge funds have steamrolled into the residential home market to become this decade’s slumlords is a story covered on this blog before mainstream media even knew it was happening. I first identified the trend in January of last year in one of my most popular posts of 2013: America Meet Your New Slumlord: Wall Street.

Since the, I’ve done my best to cover the various twists and turns in this fascinating and disturbing saga. Some of my follow up pieces can be read below:

March 2013: Is the “Buy to Rent” Party Over?
May 2013: Carrington Bails: More Smart Money Leaves the “Buy to Rent” Game
July 2013: The Las Vegas Housing Market has Gone Full Chinese
August 2013: Welcome to the Housing Recovery: Rents are Rising, Incomes are Falling
October 2013: A Closer Look at the Decrepit World of Wall Street Rental Homes
February 2014: Is “Buy to Rent” Dead? – Rents on Blackstone Housing Bonds Plunge 7.6%

With all that in mind, let’s now take a look at the latest article from Bloomberg, which points out that Blackstone’s home purchases have plunged 70% from their peak last year. Perhaps they overestimated the rental cash flow potential of indebted youth living in their parents’ basements?

From Bloomberg:

Blackstone Group LP is slowing its purchases of houses to rent amid soaring prices after a buying binge made it the biggest U.S. single-family home landlord.

 

Blackstone’s acquisition pace has declined 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm. After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando and Tampa.

 

President Barack Obama credited the investors for helping put a floor under the plunging housing market and consumer advocates such as the National Community Reinvestment Coalition later blamed them for soaring prices in some cities.

 

While institutional purchases nationwide fell to a 22-month low in January, corporate investors were more active in the Atlanta region, buying 25 percent of homes sold, according to data firm RealtyTrac. That helped drive up Atlanta prices 37 percent since the March 2012 trough.

Now read this fantastic article from real estate analyst Mark Hanson, who points out that homes are much less affordable now that they were at the peak of the most recent housing bubble.

Never fear serfs, now that homes have once again become unaffordable, the banks are bringing back subrpime loans so that Blackstone can sell back to the muppets.

Ah, crony capitalism at its finest.

Full article here.


    



via Zero Hedge http://ift.tt/1m5yu0K Tyler Durden

19 Signs That The U.S. Consumer Is Tapped Out

Submitted by Michael Snyder of The Economic Collapse blog,

You can't get blood out of a rock.  Traditionally the United States has had a consumer-driven economy, but now years of declining incomes and rising debts are really starting to catch up with us.  In order to have an economy that is dependent on consumer spending, you need to have a large middle class.  Unfortunately, the U.S. middle class is steadily shrinking, and unless that trend is reversed we are going to see massive economic changes in this country. 

For example, in poor neighborhoods all over America we are seeing bank branches, car dealerships and retail stores close down at an alarming rate.  If you didn't know better, you might be tempted to think that "Space Available" was the hottest new retailer in some areas of the nation.  On the other hand, if you live in San Francisco, New York City or Washington D.C., things are pretty good for the moment.  But as a whole, the condition of the U.S. consumer continues to decline.  Incomes are going down, the cost of living is going up, and debts are skyrocketing.  The following are 19 signs that the U.S. consumer is tapped out…

#1 Real disposable income per capita continues to fall.  In the fourth quarter of 2012, it was sitting at $37,265.  By the time that the fourth quarter of 2013 had come around, it had dropped to $36,941.  That means that average Americans have less money to go shopping with than they did previously.

#2 In January, real disposable income in the U.S. experienced the largest year over year decline that we have seen since 1974.

#3 As disposable income decreases, major retailers are closing thousands of stores all over the country.  Some are even calling this "a retail apocalypse".

#4 From September 2013 to January 2014, the personal saving rate in the United States dropped by a staggering 16 percent.

#5 During the fourth quarter of 2013, we witnessed the largest increase in consumer debt in this country that we have seen since 2007.

#6 Fewer Americans are applying for mortgages these days.  In fact, the MBA Purchase Applications Index is now the lowest that it has been since 1995.

#7 Overall, the rate of homeownership in the United States has fallen for eight years in a row.

#8 Many Americans are finding it increasingly difficult to afford a new car or truck.  The following comes from a recent CNBC article

A new study shows the average household in 24 of America's 25 largest metropolitan areas cannot afford to pay for the average priced new car or truck.

"Just because you can manage the monthly payment doesn't mean you should let a $30,000 or $40,000 ride gobble up such a huge share of your paycheck," said Mike Sante, managing editor of Interest.com. "Many people are spending money on a car payment that they could be saving."

#9 Incredibly, 56 percent of all Americans now have "subprime credit" at this point.

#10 Total consumer credit has risen by a whopping 22 percent over the past three years.

#11 In the third quarter of 2007, the student loan delinquency rate was 7.6 percent.  Today, it is up to 11.5 percent.

#12 Overall, U.S. consumers are $11,360,000,000,000 in debt.

#13 While Barack Obama has been in the White House, median household income in the United States has fallen for five years in a row.

#14 U.S. workers are taking home the smallest share of the income pie that has ever been recorded.

#15 One recent study found that about 60 percent of the jobs that have been "created" since the end of the last recession pay $13.83 or less an hour.

#16 Middle-wage jobs accounted for 60 percent of the jobs lost during the last recession, but they have accounted for only 22 percent of the jobs created since then.

#17 According to one recent survey, only 35 percent of all Americans say that they are better off financially than they were a year ago.

#18 In 2008, 25 percent of all Americans in the 18 to 29-year-old age bracket considered themselves to be "lower class".  In 2014, an astounding 49 percent of them do.

#19 The poverty rate in America has been at 15 percent or above for 3 consecutive years.  That is the first time that has happened since 1965.

Despite what the mainstream media keeps telling them, most Americans know on a gut level that there is something fundamentally wrong with our economy.

According to Gallup, "Unemployment/Jobs" is the number one issue that Americans care about these days and the "Economy in general" is the number three issue that Americans care about these days.

Most people just want to work hard, make a decent living and take care of their families.

Sadly, that is becoming increasingly difficult to do.

And the numbers that I have shared above only tell part of the story.  For a more personal side to all of this, I encourage you to read my previous article entitled "10 Stories From The Cold, Hard Streets Of America That Will Break Your Heart" if you have not done so already.

The really bad news is that this is about as good as things are going to get for the U.S. economy.  The long-term trends that are eating away at our economy like cancer are intensifying, and our "leaders" just continue to act as if "business as usual" will somehow get the job done.

Most of them don't even realize that time is running out.

As I discussed yesterday, there is a lot of evidence that the massive financial bubble that the Federal Reserve has inflated is getting ready to burst.

When the next great financial crisis does strike, it is going to be absolutely disastrous.  We are in far worse financial shape than we were back then, and this next round of financial trauma could truly be the "knockout blow" for the U.S. economy.

Let us hope for the best, but let us also prepare for the worst.


    

via Zero Hedge http://ift.tt/1o4cW2Y Tyler Durden