Monday, February 3, 2014

Today's Links

1---Cashing In: Law Doesn’t End Revolving Door on Capitol Hill, NYT

“It is almost a meaningless ban,” said Craig Holman, who helped write the 2007 ethics law as a government ethics expert at the nonprofit group Public Citizen.....

When Congress updated the ethics rules in 2007 in the wake of the Jack Abramoff lobbying scandal, which included illegal influence peddling between a lawmaker and a former aide, it initially drafted tighter restrictions on the revolving door, arguing that a broader ban lasting two years might curb conflicts of interest in Washington. But with protests from some lawmakers — including
Representative John Conyers, Democrat of Michigan, and Representative Lamar Smith, Republican of Texas, then the top two members of the House Judiciary Committee — the proposal was watered down to remove the two-year “cooling off” period for the House and other restrictions.

The resulting widespread use of loopholes is disheartening to former lawmakers who tried, but failed, to enact more radical changes.

“Is it any wonder that the public holds such a low esteem for Congress?” said Joel M. Hefley, a Republican who served as chairman of the House Ethics Committee before he retired in 2007. “You can dance around these rules in so many ways it really does not accomplish much of anything.”

2---Abenomics economic party is over and hangover about to set in, Testosterone pit

In 2014, the hangover will be even worse than in 1997. Businesses and consumers are dodging a hike of three percentage points, not two percentage points. Hence, the motivation to front-load is even stronger, the payoff greater, and the subsequent falloff steeper. This, on top of the already toxic concoction of stagnant wages and rising prices. Oh, and the plight of the retirees, whose savings and income streams are gradually getting eaten up by inflation. The glories of Abenomics.
But there are beneficiaries. Japan Inc. benefits from lower cost of labor
purchases of durable goods have been soaring. Everyone is front-loading big ticket items ahead of April 1, when the very broad-based consumption tax will be hiked from 5% to 8%. Pulling major expenditures forward a few months or even a year or so is the equivalent of obtaining a guaranteed 3% tax-free return on investment. That's huge in a country where interest rates on CDs are so close to zero that you can’t tell the difference and where even crappy 10-year Japanese Government Bonds yield 0.62%. It’s a powerful motivation.

And it has turned into a frenzy. In December, households purchased 32.2% more in durable goods than the same month a year earlier, in November 25.2%, in October 40.4%. These front-loaded purchases have been goosing the economy in late 2013. But shortly before April 1, they will grind to a halt. The Japanese have been through this before.

In 1996, after the consumption tax hike from 3% to 5% was passed and scheduled to take effect on April 1, 1997, consumers and businesses went on a buying binge of big-ticket items to dodge the extra 2% in taxes. The economy boomed. But it ended in an enormous hangover. In the spring 1997, as the tax hike took effect, business and consumer spending ground to a halt, and the economy skittered into a nasty recession that lasted a year and a half!

First indications of a repeat performance are already visible. The Japan Automobile Manufacturers Association (JAMA) forecast last week that sales of automobiles, after an already lousy 2013, would plunge 9.8% this year to 4.85 million units, the lowest since 2011 when the earthquake and tsunami laid waste to car purchases.

3---Same old, same old: Norway's housing Bubble Bursts, Bloomberg

Norwegian house prices have dropped 5 percent since August as the market retreats from a half-decade-long real estate boom. The $500 billion economy is slowing as consumers service record debt burdens and as joblessness climbs. Though unemployment remains well below the euro zone’s 12.1 percent, Norway’s registered jobless rate rose to 3 percent in January, the highest since February 2011, the Norwegian Labor and Welfare Service reported today.

“There has been a tendency for an increase in the unemployment figures in Norway since August,” Solberg said. “We need to see what the reasons are for the unemployment figures before we can answer if we need any” changes in fiscal policy, she said. The government is due to publish a supplement to its budget proposal in May.

Before winning elections in September, Solberg said she would try to ease lending standards to help more first-time buyers access to the housing market.

4---Emerging-Market Rout Seen Enduring on Low Real Rates, Bloomberg

Now that the Fed is withdrawing the stimulus, the interest rates aren’t enough to compensate for the risk of putting money into emerging markets, according to Goldman Sachs. The U.S. central bank announced Jan. 29 plans to pare its bond purchases by another $10 billion to $65 billion.

“For many EMs, moving to a sustainable pace of growth and reducing external imbalances requires a combination of weaker currencies and higher rates,” Goldman Sachs strategists led by Kamakshya Trivedi wrote in a Jan. 30 report titled “It ain’t over ’til it’s over.” “In most places, real rates are only just normalizing from extremely low levels.” ...

(Global slowdown?) Chinese Demand

A decline in U.S. Treasury yields last month provided little relief for emerging market currencies as China’s $4.8 trillion of shadow banking debt raised concern about the growth outlook for a country that buys everything from Chile’s copper to Brazil’s iron ore. Exports from developing countries will grow 5.8 percent this year, compared with an average 7.3 percent over the decade through 2013, according to the IMF forecast.

The lack of export growth means raising interest rates to cut consumption and imports is the only way for countries such as Turkey and South Africa to reduce their trade deficits, according to David Lubin, the head of emerging-markets economics at Citigroup.

Higher interest rates, in turn, will erode corporate earnings and slow economic growth, dimming the allure of their currencies, said Lubin...

Turkey’s central bank raised the benchmark one-week repurchase rate to 10 percent from 4.5 percent at an emergency meeting on Jan. 28, a day after the lira fell to a record 2.39 per dollar. While the decision has helped the currency rally to 2.2638 as of 10 a.m. London time, it’s still down 5 percent since Dec. 31, the worst start to a year since 2009.....

Sudden Stop’

“If policy makers don’t respond appropriately to signals from the market, and very few in EM have done so convincingly so far, then asset prices continue to pressure the economy directly,” Manoj Pradhan and Patryk Drozdzik, London-based economists at Morgan Stanley, said in a client report on Jan 27. “At extreme times, this results in a sudden stop” in capital flows, they wrote.
The interest-rate increases are a reversal of the trend over the past five years, when the Fed’s monetary stimulus boosted investment around the world and allowed central banks in developing countries to cut borrowing costs. Cheap money encouraged consumption, widening trade deficits and fueling inflation.

Turkey’s shortfall in the current account, the broadest measure of trade and services, amounts to more than 7 percent of its gross domestic product, making the nation more reliant on foreign capital

5---EMs have a choice to make: Face a firing squad or have their heads chopped off (Thanks to the Fed's Taper) naked capitalism

...the stress is unlikely to abate any time soon. Despite South Africa, Argentina, and Turkey having moved up interest rates to defend their currencies, theirs and other emerging markets still have their interest rates now looking too low in real terms. That puts the leaders of these countries in a no-win situation: let their currencies fall sharply, precipitating self-reinforcing capital flight, draining FX reserves, and stoking domestic inflation (worst, in food and fuel, which hit the poor and low income the hardest, increasing the risk of revolt) or raising interest rates, which is likely to trigger a slowdown, likely a full-blown recession...

And Munchau thinks the EM crisis could push the Eurozone, which is on the verge of debt deflation,....

Belgian economist Paul de Grauwe recently noted, debt deflation can occur even when official inflation rates are positive. It happens when expectations of future inflation rates are lower than they were when the debt contracts were made.
This is clearly not an intuitive result. It means that when inflation expectations fall permanently, the value of existing debt rises – even if no new debt is incurred. We do not have to get to zero inflation to find ourselves in trouble
Now some analysts, like Gavyn Davies, remain relatively sanguine, pointing out the the emerging markets crisis of the later 1990s produced only short-term disruption in advanced economies. That considerably underplays the dodged bullet of the LTCM bailout. But more important, as reader Scott has stressed, emerging markets were just over 30% of global GDP then versus roughly 50% now. It’s hard to imagine that if half of the world’s economies are in mild to severe distress that the rest of the world will get off scot free.

6---Businesses plan for the death of the middle class, NYT

In 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption, up from 28 percent in 1995, the researchers found.

Even more striking, the current recovery has been driven almost entirely by the upper crust, according to Mr. Fazzari and Mr. Cynamon. Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.

More broadly, about 90 percent of the overall increase in inflation-adjusted consumption between 2009 and 2012 was generated by the top 20 percent of households in terms of income, according to the study, which was sponsored by the Institute for New Economic Thinking, a research group in New York.
The effects of this phenomenon are now rippling through one sector after another in the American economy, from retailers and restaurants to hotels, casinos and even appliance makers.
As politicians and pundits in Washington continue to spar over whether economic inequality is in fact deepening, in corporate America there really is no debate at all. The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away....

“Those consumers who have capital like real estate and stocks and are in the top 20 percent are feeling pretty good,” said John G. Maxwell, head of the global retail and consumer practice at PricewaterhouseCoopers.
In response to the upward shift in spending, PricewaterhouseCoopers clients like big stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers.
“As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Mr. Maxwell said. “You don’t want to be stuck in the middle.”...

Sears and J. C. Penney, retailers whose wares are aimed squarely at middle-class Americans, are both in dire straits. ....

And while the superrich garner much of the attention, most companies are building their business strategies around a broader slice of affluent consumers.
At G.E. Appliances, for example, the fastest-growing brand is the Café line, which is aimed at the top quarter of the market, with refrigerators typically retailing for $1,700 to $3,000

7---Deutsche Bank: "We've Created A Global Debt Monster", zero hedge

From all the stories that broke while I was away the most fascinating surely revolves around the Chinese Trust product that in the end wasn't allowed to be at the mercy of market forces. For me it’s a microcosm of the fragility still present in global financial markets that a $9.0 trillion dollar economy - that will be the biggest in the world within the time frame of most of our careers - struggles to allow a $500 million investment product to default without there being market fears of it igniting panic in financial markets. This has now been a theme for the best part of 10-15 years in global financial markets particularly in the developed world but more recently the EM world since the GFC. We've created a global debt monster that's now so big and so crucial to the workings of the financial system and economy that defaults have been increasingly minimised by uber aggressive policy responses. It’s arguably too late to change course now without huge consequences. . This cycle perhaps started with very easy policy after the 97/98 EM crises thus kick starting the exponential rise in leverage across the globe. Since then we saw big corporates saved in the early 00s, financials towards the end of the decade and most recently Sovereigns bailed out. It’s been many, many years since free markets decided the fate of debt markets and bail-outs have generally had to get bigger and bigger.

This sounds negative but the reality is that for us it means that central banks have little option but to keep high levels of support for markets for as far as the eye can see and defaults will stay artificially low. As such we remain bullish for 2014. However it’s largely because we think the authorities are trapped for now rather than because the global financial system is healing rapidly. So as well as EM being very important for 2014, we continue to think the Fed taper pace is also very important. If the US economy was the only one in the world then maybe they could slowly taper without major consequences. However the world is fixated with US monetary policy and huge flows have traded off the back of QE and ZIRP so it does matter. We have suspicions that the Fed may have to be appreciative of the global beast they've helped create as the year progresses.


The ruling class has a thorough understanding of Edward Bernays’ propaganda techniques.
“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. …We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of.”  

Real household income continues to fall and nearly 25% of all households with a mortgage are still underwater. Young people are saddled with $1 trillion of government peddled student loan debt and will not be buying homes in the foreseeable future. Dodd-Frank rules will result in fewer people qualifying for mortgages. Mortgage insurance is increasing. Obamacare premium increases are sucking the life out of potential middle class home buyers. Retailers have begun firing thousands. The financial class had a good run. They were able to re-inflate the bubble for two years, but the third year won’t be a charm. In a normal housing market 85% of home sales would be between individuals using a mortgage, 10% would be all cash transactions, less than 5% of sales would be distressed, and 40% would be first time buyers. In this warped market only 40% of home sales are between individuals using a mortgage, 42% are all cash transactions, 16% are distressed sales, 5% are flipped, and only 27% are first time buyers. The return to normalcy will be painful for shysters, gamblers, believers, paid off economists, Larry Yun, and CNBC bimbos.

9---Abenomics (Ridiculous claims by an ex-world banker), wonkish and boring.  macro mania

Abenomics at Crossroads

February 3, 2014

Needless to say, it is the Abenomics that drastically changed the economic policy regime in Japan for the better, and brought about the surge in Tokyo stock market in 2013, being accompanied by the Japanese currency’s rapid depreciation against the US dollar and the other major currencies. With close to 60% annual gain in price appreciation in the past year, the Tokyo stock market was clearly one of the best performers in the global equity markets. The yen/dollar rate now stands more or less in line with the PPP, the long run fundamental value. (See my book entitled by Japan’s Great Comeback with Abenomics (February 2013))

Unfortunately, the Abenomics is now at great risk, however. The government’s fourth arrow of large fiscal consolidation program starting from April 2014, contradicts the expansionary fiscal policy, the second arrow of the Abenomics.

In fact, 10 trillion yen (2.1% of the GDP) fiscal expansion mainly through public works under the supplemental budget in FY2013 has been playing the major role in boosting the economic recovery under the Abenomics. By contrast, it is difficult to assess how much the BOJ’s doubling the size of the monetary base itself has been contributing to the strong recovery of employment and the robust economic growth in general, although it has been successful for addressing the currency misalignments since 2008, and for boosting corporate earnings mostly for the major exporters.

In particular, the sales tax hike to 8% as of April 2014 is highly likely to bring Japan back to the secular stagnation and deflation, as forcefully advocated by Mr. Summers in the IMF seminar last November. The depressed private consumption due to the tax increase is highly likely to contract the Japan’s aggregate demand by about 8 trillion yen (1.8% of the GDP).

In order to offset such economic contraction, the government has proposed 5 trillion yen (1.2% of the GDP) supplementary budget including public works. Nevertheless, it would fall short of the size of the public expenditure in the previous supplemental budget by about 5 trillion yen. In other words, in FY2014, the government expenditures will decline by the same magnitude.

Clearly, the Japanese economy is highly unlikely to be able to ward off such large negative fiscal shocks due to both large tax hike and significant reduction of the government expenditure. Given such large negative fiscal disturbances, the BOJ’s quantitative monetary easing will become ineffective.

Moreover, unlike the US Fed now in the process of tapering the QE3, the BOJ would continue to commit itself to increase its monetary base. It seems to be self-evident under the Japanese government’s policy mix of large fiscal contraction and aggressive monetary expansion that the yen is going to further depreciate sharply, which could trigger the repeat of vicious cycle between Japan’s sales tax hike and the Asian currency crisis in 1997.


Tomo Nakamaru
An Ex-World Banker

10---Hackers sue Merkel and entire German government over NSA spying, RT

We accuse US, British and German secret agents, their supervisors, the German Minister of the Interior as well as the German Chancellor of illegal and prohibited covert intelligence activities, of aiding and abetting of those activities, of violation of the right to privacy and obstruction of justice in office by bearing and cooperating with the electronic surveillance of German citizens by NSA and GCHQ, ” the group said in a statement on its website

11---New York’s “progressive” mayor de Blasio continues right-wing policies, wsws

12--"Why is al-Qaeda as much a threat as it was ten years ago? Perhaps it is that we continue to fight the wrong war in the wrong manner." Ron Paul

....emphasizing the continued high threat level from terrorists overseas is a good way to frighten citizens away from their increasing outrage over reports of massive domestic spying by the NSA. Unfortunately Americans may still be more willing to give up their liberties if they are told that the threats to their security remain as high as ever.

What if Clapper is telling us the truth, however? What would this revelation mean if that is the case?
For one, it means that we have gotten very little for the tremendous amount of spending on the war on terrorism and the lives lost. We are told that the military and intelligence community can protect us if they are given the tools they need, but it appears they have not done a very good job by their own admission.

More likely, it may mean that the US government’s policies are causing more al-Qaeda groups to arise and take the place of those who have been defeated by US drone and military attacks. Clapper does mention that there are so many different al-Qaeda franchises popping up it is difficult to keep track of them all, much less defeat them. But why is that? A former State Department official stated last year that every new drone strike in Yemen that kills innocent people results in the creation of 40-60 new enemies. Likewise, the young girl from Pakistan who had been brutally shot by the Taliban for her desire to go to school told President Obama during a White House meeting that “drone attacks are fueling terrorism. Innocent victims are killed in these acts, and they lead to resentment among the Pakistani people.”

Are there more al-Qaeda groups out there because our policies keep creating new ones?

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