Simple Man's Macro View of the World

I received an interesting email the Wednesday before Thanksgiving from Steen Jakobsen, chief economist for Saxo bank, regarding his macro picture of the world.

I purposely delayed posting it until now so more would see it than during a holiday-truncated week.

From Steen ...

Simple Man's View

• One Trading View: Fixed income will outperform all assets. US 10-Year treasury yield will drop under 1.5% by 2015 Q3
• One Economic View: Disinflation/deflation will be catalyst for asset sell-off
• One Timing View: Q2/Q3-2015 low this cycle for all indicators
• One Guaranteed View: Volatility will go up significantly

Core Trading Views

10Y Bond yields(US) will continue lower into Q2-2015.  I see acceleration to down-side and mainly in the US where 10 Y could hit 2.00% and bottom out at 1.5% by Q2 as GDP comes off relative to “lift off” consensus.

European factors:  Lower than anticipated growth in Germany (China rebalancing, lower US current account deficit and EZ overall) – Impact from Russia crisis only beginning to impact real economy and of course the deflation which ECB promised us would never happen.

US factors:  Energy sector moving towards default and closing down capacity – subtracting 0.3-0.5% from GDP plus lackluster housing market despite record low mortgage rates plus contraction in monetary aggregates.

China: Despite Reserve Requirement Ratio (RRR) cut the economy is already at 5.0% in real terms and without reform in health care(why people save money), competition (anti-corruption) and deeper capital markets, the marginal change will continue to be negative.

Emerging Market: Strong US Dollar is the last thing the EM market needs. It’s a de facto tightening of monetary policy at a time where “export markets” continue to weaken.

The world is barely surviving at an average yield of 1.5/2.0%. We have two drivers of growth: US and Emerging markets (EM). EM is under pressure as we end 2014 forced into the defensive by lack of reforms, but also a much stronger US Dollar, which means the “mean-reversion” trade is for 2015 is for a weaker US dollar to rebalance towards EM growth as the path of least resistance.

I have no doubt EM becomes major buy sometimes in Q2 when world is off the concept of ever stronger US dollar based on a growth lift-off which is never coming.

US growth has been 2% plus or minus since the financial crisis started, this year it will be 2%- next year? 2% - nowhere close to the 3-4% expected by the markets  building on “surveys” and feel good factors. Trust me, as someone who spend too much time traveling this year, the world is worse off, not better.

I meet frustration, lack of access to credit and almost desperation when the question is on asset allocation, but 2015 looks like a year of change. FOMC will definitely continue to sell the “pipe dream” of normalization, BOJ is done and toast.

Why anyone believes printing money will leave Japan better off is a mystery to me.

In closing, I have very little positions – the stock market is on a mission to kill the shorts, which will probably succeed. The FX market believes in Santa Japan, and ECB continues to do nothing but talk, but for now it’s enough to sell the product which is risk on at all costs.

The correction will be deeper and deeper as market is dislocated through zero interest rates and an investor crowd which is rewarded for throwing all conservative risk rules overboard in a year where we again have double digit gains on low interest rates.

Let’s hope ECB plays ball for the market to buy some more time, for now we play musical chairs, and when the music stops more than one chair will be missing.

Positions

• 75% of risk is long Fixed Income (mainly US)
• 10% risk in equities, mainly mining plays (Alcoa & Fortescue) – looking to add VALE and others in sector on inflation expectations hitting rock bottom in Q1.
• 5% long Silver… bought on sell-off.
• 5% Natural Gas – preparing for long and cold winter.
• 5% Upside optionality in EUR calls, USD puts

How bad are things? Well, let me give you my starting slide from the presentations done in November:



Steen

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Podemos "Economic Manifesto" Calls for Debt Restructuring, Spain to Abandon the "Euro Trap"

The Podemos party, a far-left populist party in Spain led by Pablo Iglesias, has come from out of nowhere to lead the polls.

Podemos' economic manifesto includes debt restructuring, exiting the European Monetary Union, and a jobs program to end unemployment.

The plan was drawn up by Vincenç Navarro and Juan Torres, two Spanish economists.




Pablo Iglesias (party leader), Carolina Bescansa (party member) and economists Vincenç Navarro and Juan Torres, present Podemos' economic program.

Via translation from Libre Mercado, Podemos Admits Its Economic program Unfeasible Under Current Euro.

Globalization and National Sovereignty Incompatible

The document includes harsh criticism of globalization, stating  "democracy, national sovereignty and global economic integration are mutually incompatible."

Euro Trap

"Besides being quite integrated into the global economy, Spain is mostly integrated in the euro monetary union and this also represents a first order constraint when developing an economic program of government."

"Our membership of the single European currency means, as is well known, that do not have essential instruments of economic policy, as control over the amount of money or the external value of the currency. But not only that. It also means that other instruments which in principle could be at our disposal, such as fiscal policy and sectoral policies can only be used with great limitations and in some cases with hands completely tied."

"Spaniards should be aware that it is physically impossible that they can pursue policies that meet the national interest, within the euro as it is designed. Should know that the euro was conceived as a real trap, but nowhere is it written that people have to accept it without further."

Debt Restructuring

"Debt restructuring, especially the peripheral countries, is not a whimsical proposal but the result of a cooperative strategy which is much more favorable than that imposed so far and that can end a crisis far more serious and widespread. The only possible way out of this vicious circle is genuine restructuring of European and Spanish debt."

Job Creation Program

"Work towards full employment should be a priority of the government.  This can be achieved by stimulating the private sector, and where this is not enough, through job creation by the state to correct the huge deficit of social infrastructure including the expansion of public services of the welfare state, now clearly underfunded in Spain."

"If Spain had one person in five in public services, as did Sweden in 2010, there would be more than three million and additional jobs in our country."

Mish Comments

Other than to call for Spain to abandon the euro, Podemos' economic manifesto is economic nonsense. However, the manifesto is bound to have popular appeal.

Everyone likes to believe in the Keynesian free lunch concept. It's logical to expect some country in the eurozone is going to at some point be willing to try just that.

I keep repeating... "Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the bail out debt foisted on their country to be null and void. That person will be elected."

It's quite possible Pablo Iglesias is just that person.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Sanctions on Russia Bite Europe, China the Beneficiary

European sanctions on Russia have hurt the EU far more than Russia. Moreover, Europe has lost key machinery contracts to China, and those contracts will likely stay with China even after sanctions are lifted.

Please consider Europe Feels Sting in the Tail of Russia Sanctions.

At a technology fair in Moscow last month, European executives faced the new reality of doing business in Russia since the West imposed sanctions: the number of companies at the international showcase had shrunk by half from a year ago.

"The impact on business couldn't be clearer. Fewer stands, fewer companies," said Mark Bultinck, a sales executive for Belgian digital screen maker Barco, which had a booth at the annual expo for the audiovisual industry.

The impact of the sanctions was already clear to Barco.

The company lost Russia's biggest shipbuilder as a client when the United States and the European Union blacklisted United Shipbuilding Corporation in July, meaning Barco could no longer sell screens to the company for its vessel training simulators.

Barco's experience shows how sanctions are having a broad impact not just on Russian companies but on European ones too and at a time when Europe's weak economy can ill afford it.

companies are at risk of losing contracts to competitors from China and elsewhere, according to Frank Schauff, chief executive office at the Association of European Businesses in Russia.

"Countries that have not imposed sanctions are able to jump in where the EU has left a gap," said Schauff. "The economic position that the European Union has in Russia is at risk and it is very difficult to gain that back if it is lost."

Lost Business

• EU exports to Russia fell 19 percent to 7.9 billion euros ($9.91 billion) compared to July.
• EU exports down 18 percent compared to August 2013.
• Total EU exports fell 12 percent in the first eight months of this year compared to a year ago.
• EU exports of machinery and transport equipment such as cars and tractors fell 23 percent compared to July.
• Machinery and transport exports fell 21 percent from a year ago.
• Manufactured exports fell 16 percent across the 28-nation bloc in August.
• Italy's manufactured exports tumbled by almost half.

None of this should be surprising. It's exactly what one could have and should have expected at the outset. The only beneficiary of the inane sanctions has been China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Italy's Unemployment Rate Unexpectedly Hits Record High 13.2%

The string of unexpectedly bad news in the eurozone continues unabated as Italian Unemployment Rate Rises to Record, Above Forecasts.

The unemployment rate rose to 13.2 percent from a revised 12.9 percent the previous month, the Rome-based national statistics office Istat said in a preliminary report today. That’s the highest since the quarterly series began in 1977. The median estimate of seven economists surveyed by Bloomberg called for an unemployment rate of 12.6 percent in October.

The youth unemployment rate for those aged 15 to 24 rose to 43.3 percent last month from 42.7 percent in September, today’s report showed. 

Expectations vs. Reality

Economists expected a drop in unemployment of 0.3%. Instead unemployment rose 0.3%.

Italian Prime Minister Matteo Renzi blamed the rise on an increase in the participation rate, with more people looking for a job.

Similar to the setup in the US, those who want a job but do not look for one are not considered unemployed. Instead, they are considered "discouraged workers".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Conflicting Shopping Headlines: NY Times "Brisk Sales", Yahoo "Black Friday Shopping Crowds Thin"

Here's a pair of conflicting stories regarding Black Friday shopping.

Crowds Thin

Yahoo!Finance reports Black Friday Shopping Crowds Thin After Thanksgiving Rush.

Mall crowds were relatively thin early on Black Friday in a sign of what has become the new normal in U.S. holiday shopping: the mad rush is happening the night of Thanksgiving and more consumers are picking up deals online.

"It just looks like any other weekend," said Angela Olivera, a 32-year old housewife shopping for children's clothing at the Westfarms Mall near Hartford, Connecticut. "The kind of crowds we usually see are missing and this is one of the biggest malls here. I think people are just not spending a lot."

Brisk Sales

The New York Times reports Black Friday Sales Are Brisk, Retailers Say, Bolstered by Online Deals.

Parking lots at some shopping malls filled up around the country on Friday, as shoppers kept up the tradition of scouring stores for holiday deals even though some retailers had been open on Thanksgiving and even overnight.

Big retailers, many of whom kicked off sales Thursday evening, reported brisk traffic overnight. Walmart said that 22 million shoppers streamed through stores across the country on Thanksgiving Day, more than the number of people who visit Disney’s Magic Kingdom in an entire year, the retail giant pointed out.

Still, as retailers jump-start their deals earlier and more sales move online, Black Friday itself is starting to fade in importance.

Target said its best-selling goods in store were the Element 40” TV, the Xbox One, iPads and Nikon’s L330 camera. In the first hour of stores opening, Target sold 1,800 TVs per minute and 2,000 video games per minute, the retailer said in a release. Keurig’s K40 brewer and Dyson’s DC50 vacuum were other top sellers, Target said.

Economists are closely watching whether retailers can entice shoppers to spend during what retailers consider the biggest shopping weekend of the year, especially after a year of lackluster sales so far. A brightening economic outlook, and ever-cheaper gas prices, are starting to lift consumer confidence. But there are also signs of lingering wariness among consumers, after what has been an uneven economic recovery marked by anemic wage growth, especially for low-income households.

And online, which makes up a bigger share of holiday sales each year, retailers have been offering Black Friday deals for many days now, stretching what was once a one-day shopping frenzy into a week or more of sales.

Online retailers have also driven the heavier-than-ever discounting this year. Amazon has priced out many of the country’s biggest retailers in the big-ticket holiday items, offering a Samsung 55-inch 4K flat-screen television for $899. Dealnews.com, which closely tracks Black Friday deals, declared Amazon’s deal “without a doubt” the cheapest name-brand 4K television it had ever seen.

IBM Digital Analytics, which tracks online shopping transactions in the United States, said sales rose 12 percent between midnight and 6 p.m. Eastern time Thanksgiving Day.

Is traffic up or down? Perhaps it varies by region. Two safe bets: Online shopping is up, and Black Friday is losing importance as shopping is spread out over more days.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Japan Household Spending Down 4%, CPI Drops to 0.9%; Bankruptcies Soar in Yen Collapse

In spite of the Yen falling 35% since 2011, Japan once again borders on deflation. Please consider Japan’s CPI falls to 0.9%.

Japanese core inflation last month fell below 1 per cent to a 13 month low, just weeks before prime minister Shinzo Abe heads to the polls to garner fresh support to push back a scheduled rise in sales tax.

Core consumer prices, all prices excluding fresh food, slowed to an annual pace of 2.9 per cent growth year-on-year in October, in line with forecasts. Stripped of any impact of the sales tax rise in April, core prices are up 0.9 per cent.

Highlighting the scale of the challenges facing the Abe administration, data released on Friday also showed households further tightening their purse-strings.

Household spending fell 4 per cent year-on-year, the seventh consecutive decline since the national sales tax was raised from 5 to 8 per cent in April. Retail sales dropped 1.4 per cent, reversing two months of gains.

The drop in core inflation comes not even 10 days after Haruhiko Kuroda, Bank of Japan governor, warned that a fall below 1 per cent was “possible”, in a reversal of comments made just four months ago.

Bankruptcies Soar in Yen Collapse

Here's an interesting note regarding bankruptcies that I picked up from ZeroHedge: As Japanese Bankruptcies Soar, Goldman Warns "Further Yen Depreciation Could Be A Net Burden"

According to a recent bankruptcy survey by Tokyo Shoko Research, there were 214 bankruptcies due to the weak yen in January-September 2014, which is 2.4 times the 89 seen in January-September 2013. Far more of the bankruptcies were in the nonmanufacturing sector—81 in transport, 41 in wholesale trade, 19 in services, and 11 in retail—than in the manufacturing sector (44), which is consistent with our analysis based on the input/output tables.

Surprisingly, the number of bankruptcies since 2013 due to yen depreciation far surpasses the number of bankruptcies in 2009-2011 due to yen appreciation.

Bankruptcies Caused by Falling Yen



The Japanese consumer is faced with a falling yen, much higher taxes, and counting taxes prices much higher. The only saving grace for Japan has been falling energy prices.

Yet, prime minister Shinzo Abe Wants inflation and more of it. It's madness.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Crude Plunges Following OPEC Decision to Not Cut Production

For five consecutive months OPEC produced over its alleged quota. Nonetheless, and in spite of falling prices and pleas from Venezuela to restrict production, OPEC decided to take no action.

In the wake of the news, West Texas Intermediate plunged nearly 7% and Brent fell over 8%.

WTI Crude Futures



Brent Crude Futures



Please consider OPEC Fails to Take Action to Ease Glut as Crude Plunges.

OPEC took no action to ease a global oil-supply glut, resisting calls from Venezuela that the group needs to stem the rout in prices. Futures slumped the most in more than three years.

The group maintained its collective production ceiling of 30 million barrels a day, Ali Al-Naimi, Saudi Arabia’s oil minister, said yesterday after the 12 nations met in Vienna. Brent crude dropped as much as 8.4 percent in London, extending this year’s decline to 34 percent.

Canada’s producers big and small will have to tighten their belts to prepare for declining profits.

“This is a pretty big shock,” said Justin Bouchard, an analyst at Desjardins Securities Inc. in Calgary. “There’s no question there’s going to be a slowdown. Even the big guys will have to look at their capital spending plans.”

Western Canada Select, the Canadian benchmark, has lost more than a third of its value since June, in step with declines for West Texas Intermediate and the international gauge Brent. WCS traded yesterday at $55.94 a barrel, the lowest in the world.

Venezuela Burns Through Currency Reserves

Bloomberg reports Venezuela Burns Through Third of New Chinese Money in a Week

Venezuela’s international reserves declined $1.3 billion in the week after President Nicolas Maduro transfered $4 billion of Chinese loans to the central bank.

The country’s reserves dropped to $22.2 billion today, according to central bank data. A collapse in global oil prices pushed Venezuela’s foreign currency holdings to an 11-year low earlier this month.

Maduro on Nov. 18 ordered the Chinese loan proceeds to be moved from an off-budget fund, so that they would show up in reserves and help boost investor confidence in an economy beset by the world’s highest inflation and widest budget deficit. The following day, Venezuelan bonds rose the most in six years in intraday trading.

“If the plan was to calm the bondholders, then burning through a third of that money in five working days doesn’t do it in any way,” Henkel Garcia, director of Caracas-based consultancy Econometrica, said in a telephone interview.

Hyperinflation in Venezuela

Foreign reserves are the only reason why Venezuela's currency (the Bolívar) is not completely worthless. Nonetheless, inflation already exceeds 60% annually.

In September, Venezuela's Bolívar Hit Record Low on Black Market.

The plummeting Venezuelan currency breached a new, symbolic low of 100 bolívares per dollar on the black market Friday, according to market-tracking websites, in a sign of the worsening greenback shortage faced by President Nicolás Maduro's government.

Economists say the bolívar is collapsing as Venezuelans clamor for dollars to protect themselves from an inflation rate topping 60%. But the government, which tightly restricts access to dollars, has cut the supply this year, prompting the value of the bolívar to plunge in unofficial street transactions.

The lack of dollars—evidenced by mounting debts with private companies such as airlines and importers that service the country—has sparked fears of a potential default, since the country has more than $6 billion in bond payments due over the next three months.

I suspect it will not be long before Venezuela is forced to halt bond payments. Should that happen, the Bolívar would likely collapse to zero in short order.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

"Neutrality" Gone Mad: Should GM Have to Promote Toyota?

The EU's attempt to breakup Google gets more absurd by the day. I wrote about this just yesterday in Google vs. Sun vs. France: Too Big, Too Powerful, Too Free.

I have a few more EU proposals regarding Google worth discussing, but first I have a few questions:

In the name of neutrality...

• Should GM have to promote Toyota?
• Should Target have to promote WalMart?
• Should Pepsi have to promote Coke?

The idea sounds blatantly absurd, because it is.

Yet EU nannycrats Demand Neutrality From Google.

Google was under fire on two fronts in Europe on Wednesday as privacy watchdogs told it to apply the “right to be forgotten” globally and German ministers pushed for laws to make its search engine a “neutral platform”.

The developments crown a difficult week for the US technology group, which has already seen Capitol Hill hit out at a European parliament resolution advocating Google’s possible break-up. The non-binding motion is expected to be passed on Thursday

The 11-page paper, whose lead signatory is the German economics minister Sigmar Gabriel, argues it may be necessary to introduce “platform neutrality” to tackle abuses of dominance, either through tough antitrust enforcement or new legislation.

There is mounting unease in Washington that Google is being targeted for political reasons, in part to protect Germany’s corporate champions in media and telecoms. A host of senior politicians – including the chairs of two House and one Senate committee – spoke out on Tuesday against the European parliament resolution and warned of negative consequences for trade and investment.

The broad-ranging German position paper – dated November 13 and co-signed by interior minister Thomas de Maizière, justice minister Heiko Maas and the minister for digital infrastructure, Alexander Dobrindt – underlines the extent to which Germany is driving Europe’s efforts to constrain Google’s power.

The German ministers urge Brussels to use the lure of Europe’s domestic market and its political power to “stand up to global actors”. The ministers write that a joint Franco-German working group has developed proposals aimed at regulating digital platforms that dominate the market.

These measures include a requirement to display commercial offers from competitors without charge, and a guarantee of access to content without discrimination.

Rotation Mechanism

Also consider this nonsensical Google Breakup Proposal from Spanish and German MPs.

German MEP Andreas Schwab and Spanish MEP Ramon Tremosa called for "a rotation mechanism, which displays Google’s commercial services and their competitors in the same location and with the same prominence on the search results page. This move, its proponents say, would be close to the choice of browsers offered to consumers following the Microsoft investigation."

This is the kind of nonsense we expect from France and Spain. But Germany?

Why Stop There?

Why stop with internet services?

In the name of "neutrality", why shouldn't Mercedes be forced to offer free advertising to Fiat and GM. On a "rotation mechanism", why shouldn't Tiger Woods have to change his hat from Nike to Callaway?

By the way, I have already been impacted by such nonsense. I wrote about it in 2012, in Country Specific Blog Censorship by Google; Twitter Employs Censorship as Well; Echo Comments Not Working on Redirects

I do not have just one blog. I have many mirror copies. In the US my blog is globaleconomicanalysis.blogspot.com. In New Zealand it's http://globaleconomicanalysis.blogspot.co.nz. Occasionally I get asked why comments do not always display in other countries. It has to do with weird suffixes. Readers in other countries can try surfing my original blog URL by appending /ncr (No Country Redirect) as follows: http://globaleconomicanalysis.blogspot.com/ncr

That Google has to do this is of course silly, but it has to do with country specific censorship. Hmm... are all my criticisms of France filtered out?

Neutrality Solution

The EU nannycrats have gone mad and I have just the solution.

The EU is too big, too powerful, and too unwieldy. Instead of breaking up Google, let's unbundle the EU.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Thanksgiving Travel Nightmare: Over 700 Flights Canceled, Major Storms; Black Friday Ice; Please Drive Safely

If you are traveling tonight or tomorrow, please take extra time.

If you are traveling by plane, please check your flight schedule. Hundreds of flights have been cancelled, thousands of other flights delayed.

Thanksgiving Travel Nightmare

Accuweather reports Snowstorm Creates Thanksgiving Travel Nightmare in East

A snowstorm pummeling the East has produced lengthy flight delays and treacherous travel on roadways Wednesday. As snow rapidly exits the Northeast into Thanksgiving Day, there will still be some travel trouble spots in the wake of the storm.

Aircraft displaced and delayed by the storm in the East may lead to additional flight delays and cancellations on Thanksgiving Day across the nation. Passengers may have to schedule a different flight on an alternate route to get to their destination.

In anticipation of delays or cancellations, several airlines, including US Airways, American and Delta, have announced they will waive change fees for passengers scheduled to fly into airports in the line of the storm.

Snowfall Wednesday-Thursday



Accuweather's Live Blog reports Accidents in Eastern Snowstorm Create a Maze for Thanksgiving Travelers

Over 700 Flights Cancelled

Flight Aware shows over 700 flights cancelled into or within the United States. There have been over 7,000 delays.

Flight Aware Misery Map



For an interactive map, click on Misery Map then click on a city to see the accompanying misery.

Black Ice on Black Friday

Finally Accweather predicts Patchy Ice, Snow May Slow Early-Morning Surge of Shoppers.

Please drive safely!
Have a safe and happy Thanksgiving.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Google vs. Sun vs. France: Too Big, Too Powerful, Too Free

I happen to like the sun. By definition, the earth would not even be a planet without the sun. No one on earth would be alive without free sunshine.

I happen to like Google. I could survive without Google, but like the sun, much of what Google provides is free.

Free Google Things

• Free internet services including the best search engine in the world
• Free Gmail
• Free research on self-driving cars
• Free research on other robotics
• Free blog software
• Free hosting and storage for blogs
• Free ads on my blog (and those ads make me money)

For a discussion of the implications of a self-driving car, please see Google Unveils Self-Driving Car, No Steering Wheel, No Accelerator, No Brake Pedal; Self-Driving Taxi Has Arrived. Who, other than city bureaucrats with their taxi licensing scheme will not want lower taxi fares?

For a discussion of other Google robotic research, please see More Robots: Google's "Atlas" Robot Mimics "Karate Kid"; Flying Defibrillator "Ambulance Drone" Unveiled; Fed Has No Answer.

Green Energy Handouts vs. Google

Unlike "green energy" parasites that could not exist without government subsidies (taxpayer dollars), Google, like the sun does what it does for free. Google does not ask for money from the government to promote autonomous cars, robots, or anything else.

Instead, Google research has created thousands of very high-paying jobs. Those job-holders pay taxes.

What's not to like?

Enter the French

France does not like Google. Yesterday, Yahoo! reported on France's Desperate Battle to Erase Google, Netflix and Uber from Existence.

Ever since Minitel bit dust, the continental power has been hopping mad about American domination of Internet services. And over the past weeks, attacks on U.S. giants have escalated from Paris to Lille.

Netflix is right now in the middle of an ambitious European expansion drive that started in Scandinavia and is fanning out south. Sure enough, France’s Association for the Protection of Consumers and Users has now sued Netflix for “malicious and illegal clauses.”

Uber’s French launch has been, if anything, more controversial than the Netflix debut. Infuriated taxi drivers in Lille have attacked a student for trying to enter an Uber car, first attempting to block her from opening the car door, then allegedly throwing a bottle at her head. The UberPOP service is about 20% cheaper than French taxis.

The French legal attacks on Google are too numerous to list here but the latest one actually has an entirely novel twist. France is now threatening Google with a hefty, €1,000 penalty for every defamatory link the company fails to remove from its global network of Google subsidiaries.

Google’s Tax Setup Faces French Challenge

Yahoo! noted numerous French attacks on Google.

Here is a key one as described by the Wall Street Journal: Google’s Tax Setup Faces French Challenge.

I have a simple remedy for this tax avoidance madness. Abolish corporate income taxes.

No country would have any tax advantage over any other country and all of the waste in time and effort and legal costs to maneuver taxes can be spent on research and more productive activities!

Right to Be Forgotten

Now the EU is in on the Google Attack. Please consider the New York Times article ‘Right to Be Forgotten’ Should Apply Worldwide, E.U. Panel Says.

Privacy watchdogs in the European Union issued guidelines on Wednesday calling on the company to apply the recent ruling on the so-called right to be forgotten to all Google search results.

The new guidelines, issued by a panel composed of privacy regulators from the bloc’s 28 member states, would require Google and other search engines in certain cases to take down links at the request of individuals in the companies’ search domains in Europe as well as outside the region.

The guidelines also raised questions about whether Europe’s data protection rules — which are some of the most stringent in the world — could be enforced beyond the 28-member bloc, and if American tech companies like Google and Microsoft would have to comply with the privacy ruling in their American operations.

“This is a line that U.S. companies will be very reluctant to cross,” said Ian Brown, a professor of information security and privacy at the University of Oxford, in discussing the potential global use of Europe’s privacy ruling. “It will come down to who blinks first. The companies or the privacy regulators.”

Guidelines Optional

Guidelines are not rules. It will be up to European Union member countries to decide how to apply them. Enter France once again.

France insists whatever it decides applies to the entire world.

For example, the Guardian reports Google’s French arm faces daily €1,000 fines over links to defamatory article.

Google’s French subsidiary has been ordered to pay daily fines of €1,000 unless links to a defamatory article are removed from the parent company’s entire global network.

The punitive judgment by the Paris Tribunal de Grande Instance, based on the controversial right to be forgotten online established by the European Court of Justice, breaks new ground in making the subsidiary liable for the activities of its parent company – in this case Google Inc.

The court handed down the ruling in September but it has barely been reported on outside France. At one level, the decision represents a pioneering attempt by a European court to enforce its order of justice on the internet worldwide.

Google has said it is considering its options and that it already removes links to defamatory online articles, fulfiling its legal obligations to French citizens. The French decision follows the May ruling by the European Court of Justice (ECJ) in the case of Mario Costeja González, a Spanish man who succeeded in ordering Google to remove links to an old article saying that his home was being repossessed to pay off debts.

His lawyers argued that it was a matter of his privacy and that Google had to delete “inadequate, irrelevant or no longer relevant” data from its search results – what has become known as the right to be forgotten.

Too Big, Too Powerful, Too Free

This is what it all boils down to. Google is too big, too, powerful, and above all, too free for the French.

France does not like anything cheaper, or better. Thus the attacks not only on Google, but on Amazon (for free shipping of books), on Facebook, on Netflix, on the Uber taxi service, on anything and everything cheaper.

Save the Bookstores

July 10, 2014: Amazon Charges Penny for Shipping Following France Ruling Shipping Cannot Be Free; "No Competition" Laws

October 03, 2013: France Vows to "Save the Bookstores", Fixes Price of Books

What's the Goal?

France's Cultural Minister called Amazon a “destroyer of bookshops”. But what's the goal? Is it to save the bookstores or to get people to read?

If the goal is to get people to read books, logic would dictate the cheaper the price the better. Kindle, Nook, and other eBook readers come to mind.

Petition of the Candle Makers

Ironically, French economist Frederic Bastiat lampooned protectionism back in 1845 when he penned 'Petition of the Candle Makers', mocking the sun's "unfair trade advantage" over candle-makers.

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.”

"No Competition" Laws

"Unfair competition" laws should be called what they really are: "No competition" laws, complete with higher prices, poor service, and higher unemployment.

France Cannot Compete

Government spending is already 56% of GDP. Hollande has threatened to take over steel, auto makers, and other industries to preserve jobs. Every month, France becomes less and less competitive.

People flee France because of excess taxes. French corporations are reluctant to expand because of preposterous work rules.

France forced inane agricultural tariffs on the rest of Europe to save inefficient French farms from "unfair competition".

The economic fools in France would tax the sun if they could. They can't, so they do the next closest thing: attack Google.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Merkel Will Blink First, Not Putin

The cold war took another twist last week when a Senior German Politician Endorsed Russian Takeover of Crimea.

Former state premier Matthias Platzeck, chairman of the German-Russian Forum business lobby and erstwhile Social Democrat (SPD) chief, is the first high-ranking German to say the West should endorse the annexation as a way to help resolve the Ukraine crisis.

Platzeck, 60, told the Passauer Neue Presse newspaper: "A wise man changes his mind - a fool never will... The annexation of Crimea must be retroactively arranged under international law so that it's acceptable for everyone."

Platzeck, Brandenburg's popular state premier from 2002 to 2013, struck a nerve in eastern Germany where there is far less support for sanctions against Russia than in the West.

"We have to find a resolution so that Putin won't walk off the field as the loser," said Platzeck, whose career was nurtured by ex-Chancellor Gerhard Schroeder - a friend of Putin. He said areas held by separatists will never be part of Ukraine.

Political Infighting

Platzeck's statement shocked a lot of people including German Foreign Minister Frank-Walter Steinmeier who stated Germany will Never Accept Crimea Annexation.

"We don't accept what has happened and we don't accept Europe's borders being changed again 70 years after the war," said Steinmeier.

Cracks Form

Der Spiegel reports Cracks Form in Berlin Over Russia Stance.

A political solution is more distant than ever in the Russia conflict, with the German government and EU having exhausted their diplomatic options. A rift may now be growing between Chancellor Merkel and her foreign minister over Berlin's tough stance against Moscow.

Dead End for Merkel

Today, Reuters reports Merkel Hits Diplomatic Dead-End With Putin.

Since February, when the pro-Russian president of Ukraine, Viktor Yanukovich, fled Kiev amid violent protests on the Maidan square, Germany has taken the lead in trying to convince Putin to engage with the West.

Merkel has spoken to him by phone three dozen times. Her Foreign Minister Frank-Walter Steinmeier, a member of the Social Democrats (SPD), traditionally a Russia-friendly party, has invested hundreds of hours trying to secure a negotiated solution to the conflict.

Now, German officials say, they have run out of ideas about how they might sway the Russian leader. The channels of communication with Putin will remain open, but Berlin is girding for a long standoff, akin to a second Cold War.

Explaining the Dead-End

Perhaps things are at a dead end precisely because of statements like "Germany will Never Accept Crimea Annexation" by Foreign Minister Steinmeier.

Does talking make any sense if that is the position of Germany?

Putin Peels Away at Sanction Support

Matthias Platzeck, a former leader of the SPD, broke ranks earlier this month and urged Germany to recognize Russia's annexation of Crimea.

This week, Russian Economy Minister Alexei Ulyukaev is being hosted by Russia-friendly businessmen in Stuttgart, the heart of German industry.

Russia also appears to be extending a hand to right-wing opposition parties in Europe. France's National Front confirmed at the weekend that it had secured a 9 million euro loan from a Moscow-based bank.

The first set of EU sanctions is due to expire in March and will need to be renewed. German officials say Italy, Hungary and Slovakia will be the most difficult countries to keep on board.

"Putin will be trying to peel countries away in the run-up to March," said one. Another described the battle to keep the EU united on Russia as a "Herculean task".

Slow Squeeze

Against the backdrop of this fragile EU consensus, ratcheting up economic sanctions further is seen as a "no go" in Berlin for now.

That would change, German officials say, if Russian-backed separatists carved out a corridor of control from eastern Ukraine to Crimea by taking the strategic city of Mariupol.

For Merkel however, the showdown seems to be evolving from a fast-moving tit-for-tat affair into a longer game in which the West slowly squeezes Russia's struggling economy in the hope that Putin eventually blinks.

Merkel Will Blink First

With support for sanctions eroding in several countries, with political infighting in Germany, and with German sentiment shifting more pro-Russia, the odds are that Merkel changes her tune first.

After all, she is the political chameleon, not Putin.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Rents Heading Up? Will the CPI Follow?

Rents are up 6.5% in San Francisco, and 4.5% in numerous other cities. Is this a leading indicator for a stronger inflation as measured by the CPI?

Please consider the Variant Perception article Higher Rents in the US are a Strong Support for CPI.

Despite the subdued nature of US CPI, some large components are turning up.  Owners’ equivalent rent and rent of primary residence, which together account almost of a third of the CPI basket, are turning up strongly. A low vacancy rate and a relatively resilient US economy is helping to drive rents higher, with San Francisco seeing the greatest rent increases, at 6.4% over the last year, and with many other cities, such as Nashville, Seattle, Denver and Houston, all seeing increases of over 4.5%

Furthermore, our leading indicator for US Shelter CPI, which includes apartment vacancy rates and the growth in the working-age population among its inputs, shows that the trend should continue. Higher rents are a strong support for headline CPI in the US.

Owners' Equivalent Rent



Owners Equivalent Rent vs. CPI Shifted 18 Months




The red line in the above chart is not the CPI, but rather a "leading indicator for US Shelter CPI, which includes apartment vacancy rates"

I took the above chart, clipped out the red CPI line, made a layer out of it in Photoshop, and then shifted the line back 18 months with reduced opacity so you can see both lines. Here is my result.

Owners Equivalent Rent vs. CPI Shifted 18 Months and Not Shifted




Straight up (no shift) caught most of the action correctly, except for years 2005-2006, right at the peak of the housing bubble. Also recall the energy spike in 2007.

Perhaps a shift forward some smaller number of months other than 18 would fit better. Let's dive into the CPI data to see what if anything a bump in OER might mean.

CPI Housing Component

Here's the Housing Component of the CPI straight from the October 2014 BLS CPI Report.

 

The last column above is the year-over-year increase in various housing components. Numbers are national. On average, if the largest cities are up 4.5% or so (excluding San Francisco), the national average of 2.7% for OER and 3.3% for rent seems reasonable enough.

CPI-U Consumer Price Index for All Urban Consumers is up 1.7% year-over-year even though housing is up 2.7%. So other things had to go down. Price for energy did just that.

Nonetheless, CPI will tend to move with OER simply because OER is the single largest component.

If rents continue to rise, CPI will likely go along for the ride, but I fail to see any leading direction in the OER itself (first chart) unless one can accurately project "planned rent hikes".

With that thought in mind, let's return once again to the claim "Our leading indicator for US Shelter CPI, which includes apartment vacancy rates and the growth in the working-age population among its inputs, shows that the trend should continue."

If vacancy rates are a leading indicator of planned rents hikes (a reasonable presumption), then the statement made by Variant Perception is likely an accurate one.

Yet, the overall impact on the CPI will at best be subdued, especially if wages do not follow. If more money goes for rent and Obamacare, less money will go elsewhere.

Consumers feeling the squeeze? You bet!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

War on Terror: Drones Target 41 but Kill 1,147 Mostly Innocent men, Women, and Children

The US calls it a war on terror. In reality it's a war of terror. And for every innocent person killed, hundreds of friends and family members hold it against the US.

The Guardian reports 41 Men Targeted but 1,147 People Killed in US Drone Strikes.

New analysis of data conducted by human rights group Reprieve shared with the Guardian, raises questions about accuracy of intelligence guiding ‘precise’ strikes.

The drones came for Ayman Zawahiri on 13 January 2006, hovering over a village in Pakistan called Damadola. Ten months later, they came again for the man who would become al-Qaida’s leader, this time in Bajaur.

Eight years later, Zawahiri is still alive. Seventy-six children and 29 adults, according to reports after the two strikes, are not.

However many Americans know who Zawahiri is, far fewer are familiar with Qari Hussain. Drones first came for Hussain years before, on 29 January 2008. Then they came on 23 June 2009, 15 January 2010, 2 October 2010 and 7 October 2010. Finally, on 15 October 2010, Hellfire missiles fired from a Predator or Reaper drone killed Hussain, the Pakistani Taliban later confirmed. For the death of a man whom practically no American can name, the US killed 128 people, 13 of them children, none of whom it meant to harm.

The human-rights group Reprieve, indicates that even when operators target specific individuals – the most focused effort of what Barack Obama calls “targeted killing” – they kill vastly more people than their targets, often needing to strike multiple times. Attempts to kill 41 men resulted in the deaths of an estimated 1,147 people, as of 24 November.

Some 24 men specifically targeted in Pakistan resulted in the death of 874 people. All were reported in the press as “killed” on multiple occasions, meaning that numerous strikes were aimed at each of them. The vast majority of those strikes were unsuccessful. An estimated 142 children were killed in the course of pursuing those 24 men, only six of whom died in the course of drone strikes that killed their intended targets.

There is nothing precise about intelligence that results in the deaths of 28 unknown people, including women and children, for every ‘bad guy’ the US goes after,” said Reprieve’s Jennifer Gibson, who spearheaded the group’s study.

In Yemen, 17 named men were targeted multiple times. Strikes on them killed 273 people, at least seven of them children. At least four of the targets are still alive.

Available data for the 41 men targeted for drone strikes across both countries indicate that each of them was reported killed multiple times.

An analytically conservative Council on Foreign Relations tally assesses that 500 drone strikes outside of Iraq and Afghanistan have killed 3,674 people.

We don’t just fire a drone at somebody and think they’re a terrorist,” the secretary of state, John Kerry, said at a BBC forum in 2013.

“President Obama needs to be straight with the American people about the human cost of this programme. If even his government doesn’t know who is filling the body bags every time a strike goes wrong, his claims that this is a precise programme look like nonsense, and the risk that it is in fact making us less safe looks all too real,” Gibson said.

Why Do You Kill My Family?



Does US Drone Policy Make Any Sense?

We have not killed the 41 we are after, but we have made thousands, if not tens-of-thousands of new enemies in the process.

Does this make any sense?

You know the unfortunate answer. For those who want perpetual war, the policy is a blazing success.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Fed "Mystified" Why Millennials Still Live at Home; My Answer May Surprise You (It Isn't Jobs, Student Debt, or Housing)

A New York Fed research paper wonders What’s Keeping Millennials at Home? Is it Debt, Jobs, or Housing?

The paper says "it's a mystery" why the housing recovery did not have a bigger impact on millennials living at home.

The research paper, written by Zachary Bleemer, Meta Brown, Donghoon Lee, and Wilbert van der Klaauw notes correlations to debt, jobs and housing.

Yet, "student debt only explains about 10% of the increase in parental coresidence since 2004, with another 10% being explained by house prices during the mid-2000s".

I have the answer below, but first a few charts and notes on the charts.

Notes:

• CCP is the Federal Reserve Bank of New York’s Equifax-Sourced Consumer Credit Panel
• CPS is the Current Population Survey, a joint effort between the Bureau of Labor Statistics and the Census Bureau

Coresidence 25-30 Year-Olds 1999-2013



Coresidence 25 Year-Olds 1999-2013 Census Corrected



Coresidence 30 Year-Olds 1999-2013 Census Corrected



Residence Arrangements 1999-2013



Student Debt Prevalence



Residence Choices and Economic Conditions



Fed Mystified, Puzzled

Trends towards increasing coresidence started well before the housing boom, and well before the great recession. Most student loan debt has been in the past few years, after the recovery began.

Student debt only explains 10% of the shift with another 10% attributable to housing prices. Here are a few paragraphs from the study that shows the puzzlement. Emphasis Mine.

Homeownership in the CCP declines from 2005 forward for 25 year olds, and from 2007 forward for 30 year olds, following steady or modestly increasing youth homeownership rates during the housing boom. Unlike the aggregate parental coresidence series, these homeownership trends suggest that early homeownership responded strongly to the events of the Great Recession. From this perspective, the decision to stay home with parents appears to be more closely tied to the student borrowing phenomenon, while housing choices (when not living with parents) appear to be more closely tied to economic conditions. The failure of young homeownership to track the housing market recovery, however, remains a puzzle.

The upward trend in coresidence with parents appears steady, and suggests little direct relationship to broad economic indicators such as unemployment measures and the house price index. This would seem to suggest that the decision to stay home with parents, or to move back in, relates more closely to the recent changes in the debt burden of higher education than to swings in youth labor markets and the cost of housing.

However, the analysis presented in Figure 7 is unsophisticated, and, as such, poses more questions than it resolves. In terms of the aggregate trends, the steady increase in coresidence with parents may reflect not a failure to respond to aggregate conditions, but offsetting effects of, for example, job and housing markets on residence decisions among the young. The failure of all youth residence decisions to reflect the recent recovery in employment and house prices remains a mystery.

What Did the Study Include?

I had to laugh when I saw pages of text and discussion that looked like this.



X_ilt represents a vector of individual i , location l , period t characteristics the levels which may influence the residence choice of individual i at t+1. ... The vector Z_c(i)l represents characteristics of individual i's cohort, c(i), and location l that do not vary by t ... The vector of state fixed effects is denoted σ_s(l). Idiosyncratic error ε_ilt is clustered at the state level. ...

I cannot understand that, nor can anyone but 0.1% of true mathematical geeks. But I am quite certain the formula is mathematically sound.

Yet, at the same time, it is complete nonsense. The results actually speak for themselves. Such formulas only explain 20-40% of what is happening.

The model is clearly broken. Why?

Attitudes

The Fed believes all they have to do is push a button, and people will respond the way they want. The Fed got housing prices up, but only 10% of the response they expected.

Attitudes explain why. The Fed can and did make money available, but it cannot dictate where people spend it, or even if people spend it.

Here is a link to all the articles where I mentioned Attitudes. There are pages of references. It would behoove the Fed to read a few of them.

Clash of Generations

Unlike boomers and gen-Xers whose primary focus was on money and "getting ahead" lifestyles, millennials have more of a depression-era survival mentality coupled with a completely different set of values.

I have been writing about the implications of changing attitudes since at least 2008. 

I wrote about the Clash of Generations in May 2014 in Boomers vs. Millennials: Attitude Change Will Disrupt Wall Street and Corporate America.

Major Attitude Shift

Flashback June 25, 2008: This is what I said about attitude changes in Peak Credit

Secular Attitude Change Underway

There is a secular attitude change happening right now. Boomers close to retirement are now (finally) scared to death as the equity in their houses has been vaporized. School age children are seeing homes foreclosed, and families destroyed over debt. The American consumer, who nearly everyone thinks will be back as soon as the economy picks up are mistaken.

Secular shifts like these come once in a lifetime. Sadly it's too late for many cash strapped boomers counting on equity in their houses for retirement.

Lessons Of The Great Depression Forgotten

The lessons of their great grandfathers who lived in the great depression era were forgotten. Over time, everyone learned to ignore the dangers of debt, risk, and leverage. Belief in the Fed and the government to bail out any problem are ingrained. Bank failures are distant memories.

Anyone and everyone who wanted credit got it, and on the easiest of terms: subprime, pay option arms, reckless leverage, and covenant lite debt and toggle bonds that allowed debt to be paid back with more debt. That's what it takes to hit a peak.

Peak Credit

Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none.

Children whose parents are being destroyed by debt now, will keep those memories for a long time.

Social and Stock Market Impacts

I was wrong about peak credit but everything else I stated was pretty much spot on, including price inflation.

Although peak credit has been surpassed, a substantial portion of the rise in credit is in the form of student loans that cannot and will not be paid back without bailouts.

Importantly, millennial attitudes towards cars and other material goods is not the same as their parents.

As boomers retire, they will need to draw down on both their stock market portfolios and their savings (assuming they have either).

Millennials will assist aging boomers via taxation and by overpaying for Obamacare. Higher taxes coupled with increasing time commitments to help care for aging parents will take a toll. And because boomers live longer than ever, the economic drain and time commitment from millennials will increase every year.

This has downward implications on the economy and the markets, especially in light of millennial-mistrust in stocks and the massive amount of student debt many of them carry.

What Did the Study Include vs. What it Didn't

The study looked at debt, jobs, and housing.

"Student debt only explains about 10% of the increase in parental coresidence since 2004, with another 10% being explained by house prices during the mid-2000s".

The Study missed changing social attitudes and the demographics of aging parents! Attitudes and demographics explains the 80% miss.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Juncker's €315bn EU Slush Fund is €299bn Sleight of Hand Magic

Last week France asked for a "New Deal" with "Real Money" not fake EU promises.

France was a bit wary (and rightly so) over sleight of hand math from Jean-Claude Juncker, the new head of the European Commission.

Today we have the facts.

Juncker's €315bn EU Slush Fund looks like this.

95% Leveraged Magic, 5% Fund

• €16bn from the EU budget
• €5bn in guarantees from the European Investment Bank (EIB)
• €299bn is magic.

Supposedly, private money will come up with €299bn based on €5bn in guarantees.

Of course someone has to administer this action plan. So Juncker unveiled a new “investment advisory hub” run by "financial professionals" with direction from the European Commission and EIB.

After padding their own pockets, the group will decide which projects to undertake, no doubt based on kickbacks, bribes, and political favoritism to friends.

To make the deal even sweeter for their political cronies, the EU will offer a “first-loss” guarantee, where the EU money would absorb any initial investment losses in an effort to “crowd in” private investors looking for more secure upside.

Given that it's all funny money anyway, I have a question: Why not provide €50bn in guarantees raising €2.99 trillion in the process?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

"Regin" World's Most Advanced Cyber Snoop Hits Russia, 4 Other Countries; Western Intelligence Agency Likely Responsible

Telecom companies in Russia and Saudi Arabia have been hit by the world's most sophisticated hacking software to date.

Symantec believes a Western intelligence agency is responsible.

Please consider World’s Most Advanced Hacking Spyware Let Loose

A cyber snooping operation reminiscent of the Stuxnet worm and billed as the world’s most sophisticated computer malware is targeting Russian and Saudi Arabian telecoms companies.

Cyber security company Symantec said the malware, called “Regin”, is probably run by a western intelligence agency and in some respects is more advanced in engineering terms than Stuxnet, which was developed by US and Israel government hackers in 2010 to target the Iranian nuclear programme.

The discovery of the latest hacking software comes as the head of Kaspersky Labs, the Russian company that helped uncover Stuxnet, told the Financial Times that criminals are now also hacking industrial control systems for financial gain.

“Nothing else comes close to this . . . nothing else we look at compares,” said Orla Cox, director of security response at Symantec, who described Regin as one of the most “extraordinary” pieces of hacking software developed, and probably “months or years in the making”.

Symantec said it was not yet clear how Regin infected systems but it had been deployed against internet service providers and telecoms companies mainly in Russia and Saudi Arabia as well as Mexico, Ireland and Iran.

The security software group said Regin could be customised to target different organisations and had hacked Microsoft email exchange servers and mobile phone conversations on major international networks.

“We are probably looking at some sort of western agency,” Ms Cox said. “Sometimes there is virtually nothing left behind – no clues. Sometimes an infection can disappear completely almost as soon as you start looking at it, it’s gone. That shows you what you are dealing with.”

Do Dirty Work Then Leave

The software somehow attaches itself, does the dirty work of stealing files or whatever, then vanishes without much of a trace, apparently deleting its presence.

It's unknown who did this but I side with Symantec, more specifically willing to suggest the NSA.

Whether or not my suspicions are correct, it's no wonder people want encryption that no one can beat.

Regardless who is responsible, I cheer developments like this development courtesy of Harvard and MIT students: Easy to Use Email So Secure NSA Cannot Break It; What About NSA Other Attacks?

This is what it had to come down to. Government nonsensically spying on everyone led to a more-secure service that freedom lovers and criminals alike will embrace.

By the way, the encryption might be secure, but that will not stop the NSA from hijacking entire computers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Wrong Three Ways: Europe Not at Risk of Full-Blown Deflation Says ECB Vice President

Statements from various high-ranking central bank officials prove they are totally clueless.

For example, please consider an announcement today by European Central Bank (ECB) Vice President Vitor Constancio: Europe not at risk of full-blown deflation.

During a debate in central Italy, Constancio said he did not think "that in Europe there is the risk of falling into full deflation" because nominal salaries would have to fall in all member countries "and this cannot happen".

Cannot Happen?!

One really has to wonder about what is in these central bankers' heads. Constancio is wrong at least three ways.

Wrong Three Ways

1. Even if nominal wages and salaries rise, consumers can choose to deleverage, paying down debt, rather than spend.
2. It is not impossible for aggregate wages and salaries to drop in all or nearly all member countries, and indeed I expect just that when the European recession hits Germany. 
3. Advantage of inflation grossly misstated.

1. Can consumers choose to deleverage rather than spend? Sure, why not? Demographically speaking, Europe is in such bad shape, one might even expect just that.

2. Europe is clearly flirting with recession (see France Private Sector Output Drops 7th Consecutive Month, Orders Stagnate in Germany, Eurozone Flirts With Contraction).

And in a European recession, one would normally expect aggregate wages and salaries to drop in all (or nearly all) member countries. Parts of Europe are already in deflation and recession. All it takes is Germany to join the party and it will be deflation across the board.

3. Inflation isn't all that it's cracked up to be.

Consider Nominal Wages vs. Real Wages Japanese Style as depicted by Japan's Ministry of Health, Labour and Welfare.

.

Is it possible for prices to rise more than wages? Certainly. Especially if the ECB gets it inane wish of trashing the euro to create inflation.

Bear in mind that "real" does not include the effect of tax hikes. If Europe embarks on a plan to hike taxes, one might expect similar results as recently happened in Japan (See Abe Makes "Grave Grave" Decision to Delay Tax Hike, Gambles on Snap Elections, Seeks "Better Ideas")

Japan is out of deflation, but consumers are far worse off. All Japan has to show for its decades-long effort is debt approaching 250% of GDP.

The statement by Constancio was so superficial and so wrong, in so many ways, one might wonder if it was purposeful misguidance or if he is really that much of a blockhead.

I suggest the latter.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

"Eagle Cam": Aerial View of London via Video Camera Attached to an Eagle

An eagle got an impressive birds-eye-view of London this week, flying over the city's most iconic landmarks using a Sony HDR-AZ1VR Action Cam attached to its back.



Link if video does not play: Action Cam Footage Shows Eagle Flying Over City of London

The BBC reports Eagle With Camera Flies Over London

An eagle with a camera attached has flown across London and offered a new perspective on some of the capital's best-known landmarks.

The footage was recorded over a week by an Imperial Eagle called Darchan.

The animal has been brought to London from the French Alps by The Freedom Project to mark the 50th anniversary of the International Union for Conservation of Nature (IUCN) Red List.

The Red List compiles the world's most threatened species.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

UKIP Picks Up Second Seat Following Tory Defection, Two More Coming Up?

The first one or two people doing something can hardly be called a trend. Yet, all trends start with a movement of One.

UKIP gained a second seat in British parliament as a result of a special election following a Tory defection to UKIP. The first UKIP seat also came from a special election following a Tory defection. Two other Tories are allegedly considering switching parties to UKIP.

Prime minister David Cameron's Tories are clearly under pressure.

Please consider UKIP Gains Second Commons Seat With Victory in Rochester.

The U.K. Independence Party dealt a new blow to Prime Minister David Cameron as it won a second seat in Parliament from his Conservatives in six weeks.

Mark Reckless, who defected to UKIP from the Tories in September and then forced a special election in his seat of Rochester & Strood, 30 miles (50 kilometers) southeast of London, was returned to the House of Commons with 16,867 votes. Conservative candidate Kelly Tolhurst came second with 13,947 votes.

The victory, following that of Reckless’s friend and fellow defector, Douglas Carswell, on 0ct. 9, may prompt further Tories hostile to Britain’s membership of the European Union to follow suit. The rise of UKIP, which seeks withdrawal from the EU and curbs on immigration, has already led Cameron to promise a referendum on leaving the bloc and to hint he’ll seek an end to the free movement of Europeans into Britain.

Fractured Politics

The result also underlines the way Britain’s political landscape has fractured in the run-up to May’s general election, making the outcome increasingly difficult to call. All three main parties lost votes, with the Tories down 14.5 percent on their 2010 result, Labour dropping 11.8 percent and the Liberal Democrats down 15.4 percent, according to data compiled by YouGov.

“This throws British politics up in the air,” UKIP leader Nigel Farage said in an interview with Bloomberg Television. “If anyone gives you a prediction for the next general election, they’re whistling in the wind. Nobody has got a clue.”

UKIP has the backing of about 15 percent of respondents in national opinion polls, taking support from the Tories in particular. The main opposition Labour Party and Cameron’s coalition partners, the Liberal Democrats, have been losing support to the Greens and the Scottish National Party. The Greens gained about 3 percent in Rochester.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Bloomberg Sensationalism and Inaccuracies Regarding "Forced Nationalization of Crimea"

A few days ago a friend emailed the Bloomberg article Russia Delivers a New Shock to Crimean Business: Forced Nationalization.

I replied something along the lines of "interesting, but I am going to bounce this off Jacob Dreizin", a US citizen who provides frequent updates to me regarding Ukraine.

I also bounced the article off Pater Tenebrarum at the Acting Man blog. Pater commented ...

Russian oligarchs stealing stuff back from Ukrainian oligarchs would be my guess. I should add, the arbitrariness of this process is of course quite disturbing (regardless of the fact that Ukraine's oligarchs are a bunch of corrupt thieves). But this strikes me mainly as a case of politically motivated payback. The oligarchs all aligned themselves with Kiev as soon as it was clear that Yanukovich had lost power (many/most were aligned with Yanukovich as long as he ruled the roost). The separatists mainly lost Mariupol because Ukraine's richest oligarch ordered the 7,000 workers of his steel works to oust them. There have been horror stories from Mariupol about the treatment of ethnic Russians there, although it is difficult to know what is and what isn't true (independent information is spotty). But we know since Odessa that the right-wing goons in Kiev's employment are not to be trifled with (the videos of the event speak for themselves).

Reader Jacob Dreizin commented

Hello Mish

First off, that was some really sloppy reporting or editing by Bloomberg. "Crimean prime minister Kolomoyskiy" should actually be written as "Dnepropetrovsk governor Kolomoiskii."

But there's a lot more to it than that. You see, the Ukrainian economic model is a post-Soviet feudal model. Thus, most Crimean business (like most Ukrainian business) belongs either to one of about 8 or 10 leading oligarchs, or to various corrupt officials or former officials or their relatives or thugs or scam artists of various stripes, all of whom either bought it for pennies on the dollar from the state, or seized it from someone who bought it for pennies on the dollar from the state.

For example, the "Krymkhleb" bakery concern mentioned at the beginning of the article was ultimately controlled by a one-time politician from overthrown president Yanukovich's now-defunct party who went from being a young machinist in a coal mine in 1989 to owning or controlling tens of food processing plants and other concerns, mostly in the Donbass, by around 1999.

I'm not saying that his holding company's 2012 purchase of Krymkhleb was necessarily illegitimate; what I'm saying is that the story of his rise is common to post-Soviet robber barons, who would bribe officials to let them buy state-owned factories and other concerns for a few thousand bucks. In my view, taking from these dirtbags and giving back to "da people" is not such a bad thing, though in practice, it usually goes to some other dirtbag. In short, you can't compare these people to real American businessmen and value-creators like Steve Jobs. It's a different planet.

Also, the Yanukovich clan was heavily involved in Crimea. Yanukovich is said to have used the national customs authority as his own personal bank account. And Yanukovich's son, one of Ukraine's 10 or so richest men thanks to his dad's political connections, was involved in Crimean real estate among many other things. So there are plenty of deserving targets for nationalization.

Also, the new crowd in Kiev may not be any better. Parliament recently passed a law that would require state-owned enterprises to hold large accounts at a bank controlled by a childhood friend of Prime Minister Yatseniuk. And former oligarch and prime minister Yulia Timoshenko, a one-time darling of our neocons and leader of the U.S.-funded "Orange Revolution" in 2004, was named by U.S. Federal prosecutors as an unindicted co-conspirator in a huge money laundering conspiracy involving former Ukrainian prime minister Pavel Lazarenko, who ultimately spent 6 years in U.S. Federal prison. See "Tymoshenko implicated in crimes by USA Federal Prosecutor".

As for Kolomoiskii the governor of Dnepropetrovsk, he is one of three shareholders of what is probably Ukraine's largest business conglomerate, and has been funding paramilitary militias to fight for Kiev in the Donbass.  More to the point, "Privatbank", Ukraine's largest bank which falls within his group's portfolio, left Russia holding the bag for hundreds of millions of dollars worth of deposits after the Crimea takeover. So you can be sure the Russians will be seizing anything they can of Kolomoiskii's, including four hotel complexes that were just now taken from him in Crimea.

What will ultimately happen is that once the Russian half of Ukraine fully breaks off, any large concern that was owned by any pro-Kiev oligarch, or by anyone who has fallen out of Moscow's favor or has been deemed too corrupt, will be seized and either transferred to someone more favorable, or will be sold off to Russian or other foreign interests.

The bottom line here is that when you have hundreds of millions or even billions of dollars in real assets--entire factories, gas lines, TV stations, and so forth--that are majority- or wholly-owned by just one man, it is very easy to "change ownership." You just seize that one man's shares and transfer them to someone else's holding company, or to the state. This is not a new story, nor is it specific to Russia. This is how they roll in Ukraine, Kazakhstan, Georgia, Azerbaijan, etc.

The successor to communism is feudalism.
Jacob

Pot Calls Kettle Black

Neither Pater, nor Jacob, nor myself likes this enterprise model, but Bloomberg made it appear as if this is somehow a new thing in Crimea following the Russian takeover.

In fact, the same corrupt model exists in Ukraine. Is either set of thieves better than the other?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More

Reply From Pettis on Spain; Prisoner's Dilemma in Reverse; EMU End Game

In response to Spain Needs to Debate Leaving the Euro; Tooth Fairy Economics I received a nice email from Michael Pettis confirming my translation was correct. He also attached the original article in English.

Michael Writes ...

Thank's Mish.

I am attaching the original, but the translations you got were basically right and covered the main points, which you understand anyway.

1. Excessive debt impedes growth, and very few sovereign debt crises in history have been resolved by growth
2. The only other way to "resolve" a debt crisis is to assign the losses to one group or another
3. It is usually workers through unemployment and middle class savers through hidden or explicit taxes who end up paying
4. It may or may not be worthwhile to save the banks at the expense of the middle and working classes, but at the very least we should discuss it openly and make sure that this is what we have really decided is in the best interests of the country.

Michael

Original Text in English

Spanish Government Debt is not Sustainable

Within four years of the 1837 crisis, before it was truly a united country under a central government, two-thirds of American states, including several of the richest, defaulted on their foreign debt. The US survived. If the European Union is to survive, European debt must be resolved. The longer we wait, the more likely a permanent breakup of the euro and the European Union.

Depending more on faith than on economics or history, Madrid assures us that with the right reforms Spain will eventually grow out of its debt. Every country facing a debt crisis has made the same promise, but has nearly always failed. Excess debt itself prevents growth, and even without the straightjacket of the euro Spain probably cannot grow out of its debt.

Even those who reject debt forgiveness admit that only Germany’s guarantee, hidden behind the ECB, prevented Spain from defaulting. Because the German banking system could not survive a default even in one country, they point out, Berlin has no choice but to guarantee Spanish debt forever.

They are terribly wrong. In spite of their hateful policies right-wing extremists throughout Europe have succeeded mainly because protecting the euro and the European banks creates tremendous costs for the working and middle classes. By attacking Europe, these extremists exploit the refusal of Europe’s leaders to acknowledge their mistakes. The longer the economic crisis continues, the greater their prospect for winning, and the greater the likelihood of national defaults and an end to Europe.

But even without the extremists, Spanish debt cannot be sustained. Only the promise by the ECB in July 2012 to do “whatever it takes” to protect the euro prevented Spain and other countries from defaulting. But as debt continues to grow faster than GDP throughout Europe, the ECB’s burden increases inexorably month by month. At some point growing debt and more weakness in the German economy will threaten the credibility of the ECB guarantee, which will become worthless – slowly at first, and then very suddenly. Spain’s default would follow within months.

What is more, Germany’s willingness to support European debt is not permanent. In order to protect its banks Berlin is playing the same game that Washington played with Latin America in the 1980s. While debt is continuously rolled over, German banks are rebuilding capital to protect themselves from the default many in Berlin believe will come. Saving the banks implicitly means transferring wealth from German and European households, either openly through taxes or, which is politically easier, in a hidden way by manipulating interest rates.

This is what happened during the Latin American crisis. American banks aggressively rebuilt their capital mainly at the hidden expense of ordinary American households while insisting that Latin American countries didn’t need debt forgiveness, just more reform. But the many reforms led anyway to terribly high unemployment and brutal social instability throughout the region.

By 1987-88, when American banks finally had sufficient capital, Washington finally admitted that full debt repayment was impossible, and in 1990 American banks forgave 35 percent of the external debt of Mexico, followed by that of nearly every other country over the next few years. As happens throughout history, it was only then that Latin American finally started to grow.

The same must happen in Spain. German and other European banks must rebuild their capital, but it will take many more years before they are successful. Only then, after Spain suffers meaningless unemployment and tremendous social harm, will Berlin “discover” that Europe requires debt forgiveness.

Even if saving the banks is worth the pain, the choice does not fully belong to Spain. The defaults by the tiny economies of Cyprus and Greece nearly brought down the system. If Portugal, France, Italy, or any third country decides it will not pay, the resulting panic would force Spain into crisis anyway. Every country in Europe must be willing to pay the cost of protecting the banks, or they will all fail together.

History clearly tells us that the cost of repaying the debt will be terribly high and that the debt crisis will probably happen anyway. This means that ordinary people must pay twice, once in the form of hidden transfers that recapitalize the banks, and once in the form of high unemployment and social erosion, and in most cases they get none of the advantages because the crisis occurs anyway.

To avoid repeating this tragic history Spain must debate the debt openly and honestly, and it must decide democratically, if protecting European banks is worth many more years of pain. Perhaps it is indeed worth the cost to avoid default, but we should know that history suggests that no matter how hard we struggle the crisis will probably happen anyway.

The United States made many mistakes, including civil war, before it became a single country with a single currency, against the opposition of many who opposed union, but the genius of its system allowed it to acknowledge mistakes and adjust. There is no reason why Europe cannot recognize that it imposed the euro in an unsustainable way, and adjust. If it doesn’t, the most likely winners are the extremist parties who want to destroy the European Union forever.

Thanks Michael!

I side with Pettis on all four points above. In general we agree on things but there are a couple of things on which we disagree. I expect to write about one of them pretty soon.

Cascade of Discussion

I agree with point four that discussion is needed. But actually, I would go so far as to say it's not worth saving the banks and the bondholders - the wealthy - at the expense of everyone else, offering Greece,  Spain, and Cyprus as proof.

The problem with such a discussion is the cascade effect. If Spain has an open honest discussion, then so must Italy, Portugal, France, Germany and every country in the EU.

The reason has to do with contingent liabilities.

Under the euro monetary union, each country has a percentage responsibility to pick up the tab if another country defaults.

The table below shows the current maximum level of guarantees for capital given by the Eurozone countries. The amounts are based on the European Central Bank capital key weightings.

Country	Guarantee Commitments (EUR) Millions	Percentage
Austria	€ 21,639.19	2.78%
Belgium	€ 27,031.99	3.47%
Cyprus	€ 1,525.68	0.20%
Estonia	€ 1,994.86	0.26%
Finland	€ 13,974.03	1.79%
France	€ 158,487.53	20.32%
Germany	€ 211,045.90	27.06%
Greece	€ 21,897.74	2.81%
Ireland	€ 12,378.15	1.59%
Italy	€ 139,267.81	17.86%
Luxembourg	€ 1,946.94	0.25%
Malta	€ 704.33	0.09%
Netherlands	€ 44,446.32	5.70%
Portugal	€ 19,507.26	2.50%
Slovakia	€ 7,727.57	0.99%
Slovenia	€ 3,664.30	0.47%
Spain	€ 92,543.56	11.87%
Eurozone 17	€ 779,783.14	100%

There is not a single country in the European Monetary Union (EMU) that could afford to pick up its percentage of responsibility should another country fail.

No One Wants Honest Discussion

With that cascade setup, the ECB certainly does not want an honest discussion.  German Chancellor Angela Merkel does not want an honest discussion. No one in favor of the euro project wants an honest discussion.

So there will not be an honest discussion. Instead there will be mass denial by everyone except from the fringe groups: Beppe Grillo's M5S in Italy, Marine Le Pen's Front National Party in France (extreme right), Alexis Tsipras' Syriza party in Greece (radical left), and the newly formed Podemos party (radical left), in Spain.

For discussion of the latter, please see Spanish Reader on Rise of "Podemos" a New Far-Left Political Party in Spain.

Prisoner's Dilemma in Reverse

In the standard Prisoner's Dilemma setup, two prisoners are better off if they do not talk, but they talk out of fear the other prisoner will talk.

In this case, it is in the best interest of the people to have a discussion, but the act of discussion immediately sets in motion a guaranteed breakup of the eurozone for reasons shown above.

History Lesson 

History suggests, as Pettis states: "ordinary people must pay twice, once in the form of hidden transfers that recapitalize the banks, and once in the form of high unemployment and social erosion, and in most cases they get none of the advantages because the crisis occurs anyway."

History also suggests no monetary union without a fiscal union has ever survived. 

Different Kind of Honest Discussion

The discussion that really needs to take place isn't whether Spain should leave, Greece should leave, or Italy should leave (because as soon as one does a cascade of uncontrolled exits will occur).

Rather, the discussion that needs to happen is for Merkel to get everyone together and work out a plan for a clean breakup. Arguably the best thing would be for Germany to exit first.

But no one wants that discussion either.

EMU End Game

Since no one can or will discuss anything (until one of the radical parties wins an election outright), here are the possibilities

1. An uncontrolled messy breakup of the EMU
2. Mass printing by the ECB to cover all foreign debt
3. Extreme suffering and pain  in peripheral Europe for another decade or so

Note that options two and three still leave intact all of the structural problems of the euro.

The most likely course is extreme suffering and pain until a radical party wins somewhere and then declares the European Monetary Union (EMU) null and void and all debt associated with it null and void as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read More