That Was Fast: Russia Swallows Crimea and Discovers That Empire is Expensive

Vladimir PutinCrimea isn’t exactly a massive conquest,
nor did it take much in the way of resources to pull the peninsula
back into the Russian orbit. But already, Russia is reporting the
economic indigestion that tends to follow an imperialist meal. The
expenses and uncertainties involved in biting off a piece of
another country rattled investors and sent money elsewhere. That
might not have mattered if Russia was a wealthy country that could
afford the luxury of bullying its neigbors. But it’s not, and so
Putin and company are discovering very quickly that belligerence
tends to come with sanctions more effective than the ones
politicians prattle about.

According to
Darya Korsunskaya at Reuters
:

In February Russia’s gross domestic product eked out growth of
just 0.3 percent year-on-year, down from 0.7 percent in January,
Russia’s Deputy Economy Minister Andrei Klepach said.

Last year the economy grew by just 1.3 percent, far below
initial forecasts, but there had been hopes that growth would
rebound this year. Instead Russia’s economic performance is
deteriorating further as the international tensions around Ukraine
lead capital to flee Russia. …

While Russia’s economic growth slows, inflation is shooting up.
The Economy Ministry expects inflation to reach 6.9-7.0 percent in
March, up from 6.2 percent in February.

The sharp rise illustrates how a slumping rouble is feeding into
higher import prices, as both Russians and foreigners scramble to
get out of rouble investments.

Note that this has little to do with formal sanctions, according
to reports. Bureaucratic penalties, to the extent they work at all,
don’t function with the speed of scared investors getting their
money the hell out.

Empire probably doesn’t have to be universally ruinous to the
conqueror. There may be a temporary upside if you’re Roman or
medieval Spanish about it and just suck the conquests dry while
worrying little about economic ties with people who see peaceful,
predictable environments as the best hosts for their business
efforts. That might work, for a bit.

But that’s not the modern world. In a
piece for The Atlantic
advocating for an American
Empire, Robert D, Kaplan concedes, “the real problem with
imperialism is not that it is evil, but rather that it is too
expensive and therefore a problematic grand strategy for a country
like the United States. Many an empire has collapsed because of the
burden of conquest.”

Russia won’t collapse over Crimea. But it will gag over the tab
for a while.

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New Home Sales Drop To Lowest Since October, Median Home Price Below Year Ago Levels

It was only a matter of time before, as we said last month, January’s reported surge in New Home Sales soared by 10% to 468K (well above the 400K then expected) would be revised lower. This just happened, when moments ago the Census Bureau lowered the January number from 468K to 455K. But what’s worse is that last month’s seasonally abnormal print was obviously an aberration due to the law of small numbers (explained here in detail), February’s print was even worse, printing at 440K, below the 445K expected, and the lowest monthly print since September. Then again looking at the chart below shows why 20K houses up or down is absolutely meaningless in the grand scheme of things, as New Home Sales is the one category that resolutely refuses to bounce from the Depression lows.

 

In terms of geographic breakdown, there were an actual (unadjusted, non-annualized) sales by region as follows:

  • Northeast: 2K
  • Midwest: 5K
  • South: 20K
  • West: 8K

Finally, the median home price, after rising aggressively in 2013, has continue to decline in recent months: just as one would expect when the fourth dead cat bounce in the post-depression housing market hits the zenith of its bounce.


    



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Consumer Confidence Jumps To 6-Year High (Led By Surge In Hope)

The ‘recovery’ has reached a new cyclical high in consumer confidence. Despite the economic growth sapping, recovery dampening, Fed tapering, consumers have not been more exuberant since January 2008. Of course, the jump to new highs is all about the future – the Present Situation index dropped while the “Expectations” index jumped 7 points to 83.5 – its highest in 6 months.

 

 

Charts: Bloomberg


    



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What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors

Curious what the sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.

Reuters explains:

Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday. The semi-official China News Service quoted the bank’s chairman, Zang Zhengzhi, as saying it would ensure payments to all the depositors. The report did not say how the rumour originated.

 

Chen Dequn, a resident in Yandong, just outside Yancheng, said she saw a crowd of about 70 to 80 people gathering in a branch of Sheyang Rural Commercial Bank in her town on Tuesday.

 

“At the moment there are about 70 or 80 people in there. Normally there’d only be about 10,” she told Reuters by telephone.

 

Officials at another small bank, Rural Commercial Bank of Huanghai, said they had faced similar rushes by depositors, triggered by rumours of insolvency at Sheyang. “We will be holding an emergency meeting tonight,” an official at the bank’s administration office told Reuters, but declined to comment further.

 

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure it keeps sufficient cash on hand to meet demand.

Why the jitteriness? Because until now, bank failures in China have been unknown, as Chinese banks are considered to operate under an implicit guarantee from the government. That is changing. Which is why the rumor mill is on overdrive:

“It’s true that these rumours exist, but actually (the bank going bankrupt) is impossible. It’s a completely different situation from the problem with the cooperatives,” said Zhang Chaoyang, an official at the propaganda department of the Communist Party committee in Tinghu district, where the bank branch is located.

And Bear Stearns is fine…

Zhang was referring to an incident that rattled depositors in Yancheng in January, when some rural cooperatives — which are not subject to the supervision of the bank regulator — ran out of cash and locked their doors. Local officials say several co-op bosses fled after committing fraud.

 

China’s central bank governor said this month that deposit rates are likely to liberalised in one to two years – the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

 

It is widely expected to introduce a deposit insurance scheme before freeing up deposit rates, to protect savers in case a liberalised market puts major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually. Is China’s debt nightmare a province called Jiangsu?

Why are bank runs like these only set to accelerate? Simple – unlike the US China has zero deposit insurance. Reuters expplains:

The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

 

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.

In the meantime, there are always helpful investor relations people willing to explain calmly just what is going on:

When contacted by Reuters by phone on Tuesday, an official at the Jiangsu Sheyang Rural Commercial Bank branch hung up, saying she was busy.

Others were even more helpful:

An official at the administrative office at Jiangsu Sheyang Rural Commercial Bank said the bank would publish a statement shortly. On its website, the bank says it is capitalised at 525 million yuan and had total deposits of 12 billion yuan as of end-February,

 

Officials at the Jiangsu branch offices of the China Banking Regulatory Commission (CBRC) declined to comment. The Yancheng branch of CBRC and the propaganda offices in Yancheng city and Sheyang county did not answer calls seeking comment.

Busy or not, for now, the banks may have survived following yet more capital infusions from the local government, but what happens when the default wave that has claimed solar, coal, and real estate developers finally impacts a deposit-holding institution? How will China – which has far more total deposits within its banking system than in the US (since the US banks fund themselves mostly using ultra-short term, overnight shadow funding) – survive a nationwide bank run we wonder?


    



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Russian Spending In Britain Slumps 17% In Feb

February 2013 saw Russian visitors spend 16% more than in 2012 as “investor” visas flowed, property soared, and hot money slooshed into the UK recovery. However, as AFP reports, Russian spending in British shops fell by 17 percent last month compared to February 2013 as the “unstable situation in Russia has shown its effect on tourism spend this year,” already. Shoppers from the Middle East (up 31%) and China (up 23%) continue to represent the highest proportion of international sales in Britain, but it is clear, as The Economist points out, Russian wealth has permeated the upper reaches of society in Britain more completely than in any other Western country, with the health of “Londongrad” now at stake if sanctions are extended.

 

Via AFP,

Russian spending in British shops fell by 17 percent last month compared to February 2013, according to tax-free shopping statistics out Monday.

 

Visitors from Russia spent an average £669 ($1,103, 800 euros) per transaction, according to Global Blue, seeing them overtaken in third place by those from Nigeria compared to 12 months ago.

 

Spending by Russian visitors was up 16 percent for the year in 2013 but fell in February 2014.

 

“The unstable situation in Russia has shown its effect on tourism spend this year as the weakening economy leaves shoppers disinclined to travel,” said Gordon Clark, Global Blue’s UK country manager.

 

 

Shoppers from the Middle East (up 31 percent) and China (up 23 percent) continue to represent the highest proportion of international sales in Britain.

The problem of sanctioning Russia is a big one for the UK…(via The Economist)

Britain grants three-year “investor” visas to foreigners who invest £1m or more in government bonds. Two years later they can buy residency for £10m as long as they have held on to the bonds. Russians were granted 433 of these visas between the third quarters of 2008 and 2013, more than any other nationality. Only the Chinese came close, with 419.

 

 

Oligarchs are keen buyers of London mansions and penthouses. According to Savills, an estate agency, 4% of buyers in “prime central” areas, such as Chelsea and Westminster, are Russians, spending £6.3m on average. Interestingly, another estate agent says that he recently got a “peculiar” call from a Russian client eager to sell two large properties immediately, which might possibly be connected to the crisis.

 

 

The number of properties registered to Russians understates the true total by failing to capture offshore structures fronted by nominees, of which Russians are particularly fond. Britain’s offshore satellites, in particular the British Virgin Islands, known for their secretive shell companies, do well out of this. A leading BVI lawyer says that Russian clients make up 15-20% of his business. Only the Chinese are as active. The lawyer notes that business from Russians is up slightly in recent weeks.

 

London is the main foreign capital-raising venue for Russian firms, many of which crave a listing there to gain international financial respectability. Some 28 Russian firms, with a market value of £260 billion, are listed on London’s main exchange (compared with just two in New York). Another 15 Russian-focused firms are on the AIM market for growth stocks. Dozens more have depositary receipts (special overseas shares) that are traded in London. Some $46 billion of Russian stock has been sold in London IPOs since 1996, according to Dealogic.

 

The fate of offerings in the pipeline—including a bank and two retailers—is now uncertain, more because of market conditions than from a fear that listings might be blocked. Underwriters sneaked in an offering by Lenta, a supermarket chain, days before the crisis erupted. Its share price subsequently tumbled by 15%.

So, just like Germany’s Russian envoy is playing down sanctions as a downward spiral, we suspect the UK will be quick to push back on any pressure from the US to want further economic constraints on Putin.


    



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Case Shiller Home Price Index Declines For Third Month A Row: Longest Negative Stretch Since March 2012

Another month, another sequential drop in the Case Shiller NSA index – the one the index creators themselves say should be used, not the Seasonally Adjusted data used by most commentators eager to find the best data. At a sequential decline of -0.08% in January, this was the third drop in a row – the longest consecutive period of sequential declines since March 2012  – and post a year over year increase of 13.24%, down from 13.38% in December, and the lowest since September 2013. Clearly, the pricing gains across the country are slowing.

 

Amusingly, not even the Seasonally Adjusted data showed the complete “weather-free” data many were hoping for, because while sequentially the 20 City Composite Index beat on a sequential basis at 0.85%, above expectations of 0.6%, the Year over Year increase of 13.24% missed expectations of 13.42% and was down from 13.38% last month.


    



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Case Shiller Home Price Index Declines For Third Month A Row: Longest Negative Stretch Since March 2012

Another month, another sequential drop in the Case Shiller NSA index – the one the index creators themselves say should be used, not the Seasonally Adjusted data used by most commentators eager to find the best data. At a sequential decline of -0.08% in January, this was the third drop in a row – the longest consecutive period of sequential declines since March 2012  – and post a year over year increase of 13.24%, down from 13.38% in December, and the lowest since September 2013. Clearly, the pricing gains across the country are slowing.

 

Amusingly, not even the Seasonally Adjusted data showed the complete “weather-free” data many were hoping for, because while sequentially the 20 City Composite Index beat on a squential basis at 0.85%, above expectations of 0.6%, the Year over Year increase of 13.24% missed expectations of 13.42% and was down from 13.38% last month.


    



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Shikha Dalmia on GM’s Get-Out-of-Jail Card on the Cobalt Crashes

GM

The GM bailout is the gift that keeps on giving to the auto
giant. It has already cost Americans more than $10 billion. Even
worse, it might have cost them their legal rights too.

That’s because GM obtained a liability shield that takes it off
the hook for any pre-structuring incidents involving its defective
cars. This means that victims of the 1.6 million Cobalt and other
vehicles that GM was forced to recently recall because of a faulty
ignition switch might have a very hard time obtaining just
compensation, explains Reason Foundation Senior Analyst Shikha
Dalmia.

View this article.

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A.M. Links: Obama to Recommend NSA Reforms, Ukrainian Defense Minister Dismissed, NASA Wants Vote on Space Suit

  • my votePresident
    Obama is expected to introduce legislation
    to reform the National Security Agency (NSA), including ending some
    bulk data collections.
  • Ukraine’s defense minister has been dismissed
    a day after ordering Ukrainian troops out of Crimea.
  • Following the missing flight, Chinese tourists are looking

    away
    from Malaysia as a destination.
  • A bomb went off, and the Taliban engaged in a
    firefight
    , near the home of one of Afghanistan’s presidential
    candidates.
  • The eyewear maker Luxottica Group, which owns the brands
    Ray-Ban and Oakley, will be redesigning
    Google Glass.
  • The National Aeronautics and Space Administration (NASA) wants
    the public to
    vote
    on its final spacesuit design.

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Cato Panel on Federalizing America’s Immigration System Featuring Reason’s Shikha Dalmia

The immigration reform debate is increasingly polarized and has
policymakers looking for new and innovative reform options. One
such option is state- or regionally managed guest-worker visa
programs, in addition to federal visas. Under such a system,
individual states could manage and experiment with different
guest-worker visa systems designed to suit their particular
economic circumstances.

Canada and Australia have regional visa programs that have
worked well, aided economic growth, and slowed population decline.
Their approaches could be adapted to the United States.

Reason Foundation Shikha Dalmia wrote about Canada’s program

here
.

She’ll join the panel featuring Brandon Fuller, Deputy Director
and Research Scholar, NYU Stern Urbanization Project; Reihan Salam,
columnist and National Review Institute policy fellow; and
moderated by Alex Nowrasteh, Immigration Policy Analyst, Cato
Institute to discuss the potential economic, political, and legal
issues that come with regionally managed visas.

Come one, come all at the Cato building at 1000 Massachusetts
Avenue at noon. Please register
here
. Or, if you can’t come, watch it live at www.cato.org/live

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