Thursday, June 4, 2015

Today's Links

NOTE: My wife and I were in Europe for three weeks, which is why I haven't posted.

1--Epic Bond Rout, cnbc

The yield on the benchmark 10-year German Bund and U.S. Treasury rose to its highest levels for the year in early trade, while in Asia the 10-year Japanese government bond (JGB) yield hit a six-month high. Yields move inversely to prices. ....

"I think most central bankers are worried about the forces they have unleashed – it's a kind of Frankenstein's monster this quantitative easing," David Marsh, managing director and co-founder of the Official Monetary and Financial Institutions Forum, told "Squawk Box." "It has changed the whole way of looking at assets across the world."

2--Cold Won Ton War, Anyone?, Pepe Escobar

The stage is set for a tremendous high-stakes game. For Beijing, expansion between the Spratlys and the Paracels means breaking through the geographical limits of Southeast Asia as an anticipation to projecting power through the Indian Ocean all the way to Southwest Asia.

For Washington, it will be all about disturbing the Maritime Silk Road — which is the route through which Beijing imports — via the Strait of Malacca and then the South China Sea — no less than 82% of its oil and 30% of natural gas.
Expect plenty of high-handed homilies about Washington’s duty to protect “freedom of navigation” and endless condemnations of “Chinese aggression” — all counterpointed by the expansion of the New Silk Roads, the New Development Bank set up by the BRICs, and the China-led Asian Infrastructure Investment Bank boasting other BRICs members, plus Germany and assorted Europeans, on the board of directors; all vectors in a multiple strategy undermining U.S. dollar hegemony.

Gone are the early Obama days when Kissinger and Dr. Zbig “Grand Chessboard” Brzezinski suggested a “special relationship” of sorts between the U.S. and China; a sort of lop-sided G-2 de facto controlled by the exceptionalist hegemon. No wonder Beijing was wary. So now the Obama administration is back to default mode — as in containment. Ash Carter is just taking it one step beyond

3--Excellent interview on bond action: Will the Fed raise rates in 2015?, Santelli, Bianco, Gundlach
4--Russia Plans South China Sea Naval Exercise With China in 2016

A major point of agreement between China and Russia, per Antonov’s comments in Singapore, is that the United States is the primary destabilizing factor in the South China Sea. Antonov suggested that Russia and China were being singled out for criticism by the United States: ”We are concerned by U.S. policies in the region, especially since every day it becomes increasingly focused on a systemic containment of Russia and China.” Antonov’s remarks reflect the broader cooling of bilateral relations between the White House and the Kremlin since Russia’s invasion of Crimea and subsequent backing of anti-government rebels in Ukraine last year.

“Despite our concerns about the U.S. global missile defense architecture, they continue a policy of disrupting strategic stability, adding a regional segment of an anti-missile ‘shield’ in the Asia-Pacific,” he added.
Antonov went further and accused the United States of interfering in the international affairs of other states. “An epidemic of ‘color revolutions’ swept the Middle East and, like a hurricane, wiped out several states in the region. This disease went across several European countries, where events are freely controlled from the outside,” he remarked

Russia and China have been steadily increasing their bilateral maritime security cooperation, and the interoperability of their navies. The development is a result of several trends in China’s naval posture and overall ties with Russia. Over the past two years — since Chinese President Xi Jinping came to power — relations between Russia and China have grown closer and deepened strategically. Additionally, China’s military is in the process of readjusting the country’s historic military focus on land-based assets to its navy. As a result, China’s navy is looking toward global operations. As The Diplomat noted recently, Russia and China concluded a naval exercise in the Mediterranean just two weeks ago

5--US brinkmanship with China over South China Sea, wsws
Today's puzzler: "no military solution, so the US is building up military assets at unprecedented rate
An editorial in the Wall Street Journal entitled “Kaiser Xi’s Navy” ominously drew a parallel with the situation in Europe immediately prior to World War I, comparing China to Germany and Chinese President Xi Jinping to the German Kaiser

Malaysian Defence Minister Hishammuddin Hussein warned: “If we are not careful it would escalate into one of the deadliest conflicts of our time, if not our history.”

The Department is investing in the technologies that are most relevant to this complex security environment, such as new unmanned systems for the air and sea, a new long-range bomber, and other technologies like the electromagnetic railgun, lasers, and new systems for space and cyberspace, including a few surprising ones.”
Carter emphasised that the US would “bring the best platforms and people forward to the Asia-Pacific.” These include “the latest Virginia-class [nuclear] submarines, the Navy's P-8 Poseidon surveillance aircraft, the newest stealth destroyer, the Zumwalt, and brand-new carrier-based E-2D Hawkeye early-warning-and-control aircraft.”

Having outlined this vast array of military might, Carter went on with a straight face to declare that the US opposed “any further militarisation of disputed features” in the South China Sea—a reference to two small mobile artillery guns that Washington claims China has placed on one of the islets.
While Carter declared that “there is no military solution to the South China Sea disputes,” the US has exploited these same disputes to secure new military basing and access arrangements with countries directly adjacent to its waters—the Philippines, Singapore and Vietnam.

6--Ashton Carter speech Shangri la dialogue

7--Philippine President Aquino compares China to Nazi Germany

8--"The Fed Has Been Horribly Wrong" Deutsche Bank Admits, Dares To Ask If Yellen Is Planning A Housing Market Crash

At issue is whether or not the Fed in particular but the market in general has properly understood the nature of the economic problem. The more we dig into this, the more we are afraid that they do not. So aside from a data revision tsunami, we would suggest that the Fed has the outlook not just horribly wrong, but completely misunderstood.

... the idea that the economy is “ready” for a removal of accommodation and that there is any sense in it from the perspective of rising inflation expectations and a stronger real growth outlook is nonsense...

The dilemma for the Fed is of course that it is precisely the decision not to crash the housing market by doing extraordinary stimulus in the first place that has led to the current outcome of weak ex housing demand and strong housing inflation. The decision is akin to embracing financial repression as an alternative to the uncertainty of asset price deflation and a debt default cycle. If we could reset house prices 30 percent lower and fast forward a few years, the economy would probably be meaningfully more dynamic but it is those few years that might be hairy and no one let alone the Fed would likely stomach the risks.

9--New Silk Road Could Change Global Economics Forever, oil price

10--New Silk Road Could Change Global Economics Forever

China is building the world’s greatest economic development and construction project ever undertaken: The New Silk Road. The project aims at no less than a revolutionary change in the economic map of the world. It is also seen by many as the first shot in a battle between east and west for dominance in Eurasia.
The ambitious vision is to resurrect the ancient Silk Road as a modern transit, trade, and economic corridor that runs from Shanghai to Berlin. The 'Road' will traverse China, Mongolia, Russia, Belarus, Poland, and Germany, extending more than 8,000 miles, creating an economic zone that extends over one third the circumference of the earth....

An equally essential part of the plan is a sea-based “Maritime Silk Road” (MSR) component, as ambitious as its land-based project, linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and the Indian Ocean.
When completed, like the ancient Silk Road, it will connect three continents: Asia, Europe, and Africa. The chain of infrastructure projects will create the world's largest economic corridor, covering a population of 4.4 billion and an economic output of $21 trillion.

 The Wall Street Journal reported in November 2014 that “the U.S. has also lobbied hard against Chinese plans for a new infrastructure development bank…including during teleconferences of the Group of Seven major industrial powers...

The first major economic development project will take place in Pakistan, where the Chinese have been working for years, building and financing a strategic deepwater port at Gwadar, on the Arabian Sea, that will be managed by China as the long-term leaseholder.
Gwadar will become the launching point for the much delayed Iran-Pakistan natural gas pipeline, which will ultimately be extended to China, with the Persian section already built and the Pakistan-Chinese section largely financed and constructed by the Chinese.
The pipeline is also set to traverse the country, following the Karakoram Mountain Highway towards Tibet, and cross the Chinese western border to Xinjang. The highway will also be widened and modernized, and a railroad built, connecting the highway to Gwadar
Not surprisingly, India, a US ally, countered China's initiative with one of its own, announcing a new agreement to build a port in Iran on the Arabian Sea, only a few hundred miles from Gwadar, bringing Iranian energy to India via Afghanistan, bypassing Pakistan....

Sanctions only work in a world united behind them. If a large part of the world chooses to ignore sanctions, they become unenforceable.
China and much of the world is intent on developing the largest economic development project in history, one that could have dramatic ripple effects throughout the world economy.
US President Barack Obama, who also senses the urgency. “If we don’t write the rules, China will write the rules out in that region,” he said in defense of the Trans-Pacific Partnership....

For the world at large, its decisions about the Road are nothing less than momentous. The massive project holds the potential for a new renaissance in commerce, industry, discovery, thought, invention, and culture that could well rival the original Silk Road. It is also becoming clearer by the day that geopolitical conflicts over the project could lead to a new cold war between East and West for dominance in Eurasia.
The outcome is far from certain.

11--Russian Sanctions Might Be Obama’s Greatest Blunder
One of the greatest foreign policy blunders of the Obama Administration was the push by the U.S. for economic sanctions against Russia. That led to Russia fleeing into the arms of China for refuge. In response, Russia, Europe’s largest and most populated country, is now intent on moving its vast storehouse of resources eastward, strengthening America’s largest emerging rival.
Over the last two years, the two countries have completed a $700 billion agreement for Russia to deliver energy to China, amounting to about 17% of Chinese annual supply, for a period covering twenty years, with China financing much of the initial costs of pipeline construction.

Ukraine was the catalyst for sanctions against Russia. That was followed by what many believe to be a U.S./Saudi orchestrated plan to collapse oil prices, aimed directly at crushing the Russian economy.

13--Could The New Silk Road End Old Geopolitical Tensions?

The blossoming cooperation between Russia and China is not something to be ignored, according to former Indian diplomat M.K. Bhadrakumar:
“Clearly, the cold blast of western propaganda against the EAEU failed to impress China…China’s integration with the EAEU means in effect that a real engine of growth is being hooked to the Russian project. In reality, China is the key to the future of the EAEU. Significantly, Xi has combined his visit to Moscow with a tour of Belarus and Kazakhstan, the two other founder members of the EAEU….This is vital for the implementation of the Silk Routes via Russia and Central Asia.”

China has also proposed developing an economic corridor between Russia, Mongolia, and China, a plan likely to include the EAEU member states, the initial step in development of one of the major components of the Silk Road, the Eurasia Economic Corridor, a preferential trade zone stretching across the region....

The Deal to Get Out:
In the midst of all this, and after more than a two year absence from Russia, Kerry and his entourage requested an immediate urgent meeting with Putin and Lavrov that was granted by the Kremlin.

There is widespread speculation over what might have taken place in the Kremlin meeting on May 8th. Yet, the fact that the meeting took place at all may be more important than any agreements reached, because it clearly shows some form of thaw in a relationship that’s in process.

The rumor out of Russia is that Kerry requested Putin’s help in resolving the ME conflicts and closing the nuclear deal with Iran, with the Russian President agreeing. The quid pro quo for Russia was the US lowering tensions in Ukraine. The issue of Crimea was apparently not even raised, while the visit ended with Kerry’s unprecedented warning to Kiev to abide by the Minsk 2 agreement for a truce in Ukraine’s eastern provinces.
Much of the news media is speculating that the US is starting to remove the ‘crime scene tape’ around the Kremlin. Whether this is really a US offer of an olive branch to Russia is still pretty much guesswork, and even if it were, how far the US is willing to go in accommodating the Kremlin is largely unknown. Stratfor, the popular internet intelligence newsletter, speculates that the US is willing to start easing sanctions on Russia...

If India chooses to partner with China in the Silk Road, it could keep China building for the rest of the century, in a project that would combine the world’s most populous nations, with more than 2.6 billion people. With Russia already a partner, and Iran waiting in the wings to join, the project could add almost another quarter of a billion people, with a combined total of over one third the global population. A better fit would be hard to find.....

The rush of western allies, including India, to join China's sponsored Asian Infrastructure Bank speaks clearly to the fact that western business is eager to take part in the Road projects. There are probably few banks in the world that would hesitate to finance major components of the project. However, whether the recent sea change in the US/Russian dynamic is a prelude for US support of the Silk Road project remains an open question.

14--Secret Pentagon Report Reveals US "Created" ISIS As A "Tool" To Overthrow Syria's President Assad
Unpaid Productivity
Since 1979, hourly pay for the vast majority of American workers has not only lagged behind growth at the very top of the distribution and thus behind average wage growth, but has also diverged from economy-wide productivity, as shown in Figure M. This divergence is at the root of numerous American economic challenges (Bivens et al. 2014).

Labor productivity is a measure of the value of goods and services produced in the economy in an average hour of work. It rises steadily over time (except possibly during some recessionary years) as technology, capital intensity, and the educational attainment of the U.S. workforce increase. When labor markets are tight and/or policy provides bargaining power to workers through labor market institutions such as a protected right to unionize and robust minimum wages, productivity increases usually generate corresponding wage increases. From 1948 to 1979, this combination of healthy labor markets and institutional support of workers’ bargaining power was sufficient to keep wage growth for the majority of U.S. workers tracking productivity growth. Over this period, net productivity (productivity after accounting for depreciation of capital) grew by 108.1 percent, and the compensation of nonsupervisory production workers (who comprise roughly 80 percent of the private-sector workforce) grew by a comparable 93.4 percent. Thus, the typical worker shared in the economic spoils of increased productivity.
However, between 1979 and 2013, there was a marked decoupling of productivity and typical workers’ compensation. Over this span, productivity grew 63.5 percent, while hourly compensation of production and nonsupervisory workers grew just 7.7 percent. Productivity thus grew eight times faster than typical worker compensation, which means the prosperity created over this time period did not result in broad-based wage gains.

16--El-Erian: Markets underestimating liquidity risk

17--More on liquidity risk

"What most traders have said is that liquidity is awful. Big moves are possible on relatively low or average volumes." Reid said in a note on Tuesday morning.
"I can't help thinking that when the next downturn hits, the lack of liquidity in various markets is going to be chaotic. These increasingly regular liquidity issues we're seeing might be a mild dress rehearsal."
A lack of liquidity has many market participants fretting that they could easily get caught on the wrong side of a hefty move in a fixed income asset.

18--Japan wages fraud

That's the theory. The reality is far different because some two years after the start of Abenomics and the launch of Japan's QE, nominal wages are about where they were when Abenomics started, while indexed real wages have never been lower!

The paradox of Japan's lack of wage increases become particularly glaring when one considers that just like in the US, Japan recently reported a post-Lehman low unemployment rate of just 3.4%, in fact in Japan this was  the lowest print since 1997. As the following employment indicators suggest, the Japanese labor market should be tighter than at any point in the 21st century, suggesting wage inflation should be rampant:...
As the following chart shows, virtually all the job growth in Japan since the great financial crisis has been thanks to part-time jobs!

19--Housing by the numbers: Something is weird

20--The growing danger of a US war against China. wsws
21---The Recovery Itself Unravels; Consumer Recession

22--US ramps up anti-China “pivot to Asia
23---Confidential Document: Soros’s Plan for Ukraine
24---Iran, China work to resurrect Silk Road
Iran is participating in an ambitious Chinese plan to resurrect the Silk Road which aims to connect Asia to Europe and Africa through a network of roads, railways, ports and airports. 
Deputy Economy Minister Massoud Karbasian says Iran will turn to a transit route for more than 12 million tons of goods a year if the new Silk Road Economic Belt and the Maritime Silk Road is revived.
The initiative is the brainchild of Chinese President Xi Jinping who has hoped it would annually create more than $2.5 trillion of trade among the countries in a decade.
Beijing says it already has more than 50 countries on board to implement the project. It has opened an initial $40 billion fund with an additional gold-related kitty expected to raise $16 billion in investment for infrastructure

25--Russia's Alternative to SWIFT: A Challenge to the US?
As Russia invites its BRICS partners to join its alternative to SWIFT, US abuse of its control of the world financial system hastens the day that will end.

26--Lavrov: US Has Realized the 'Need for Normalcy' With Russia

27--The Current Overproduction Crisis And War, MoA

There are then two solutions to such an crisis.
One is to tackle the underconsumption side and to change the distribution of an economy's profits with a much larger share going to "workers" and a smaller share going to "owners". This could be achieved through higher taxes on "owners" and redistribution by the state but also through empowerment of labor unions and like means. But with governments all over the world more and more captured by the "owners" the chance that this solution will be chosen seem low.

The other solution for a capitalist society to a crisis of overproduction is the forced destruction of (global) production capabilities through a big war. War also helps to increase control over the people and to get rid of "surplus workers".
The U.S. was the big economic winner of World War I and II. Production capacities elsewhere got destroyed through the wars and a huge number of global "surplus workers" were killed. For the U.S. the wars were, overall, very profitable. Other countries have distinct different experiences with wars. In likely no other country than the U.S. would one find a major newspaper that arguing that wars make us safer and richer.

Vladimir Putin calls Ukraine fascist and country’s new law helps make his case Reuters

Economic recovery built on energy bubble. Fox Stephanie promboy
---Stephanie Pomboy: The Fed Will Have to Reverse Course

MacroMavens President Stephanie Pomboy sees a tough economic environment ahead that will force the central bank to reverse course.   Forbes no self sustaining recovery. Stocks driven by buybacks and zirp while economy which had been driven by credit expansion in oil is dead


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