Mish's Global Economic Trend Analysis

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• Reader Question on Banking System Insolvency, QE, and "Necessity"
• McCain Wants More Weapons Delivered to Al Qaeda Rebels; How Do Warmongers Get Elected?
• Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry
• Are You Minding the Curves? Sweet Spot is Likely Not Where You Think

Reader Question on Banking System Insolvency, QE, and "Necessity" Posted: 28 Mar 2014 08:26 PM PDT In response to Will Prices Rise Significantly When Velocity of Money Picks Up? reader Dave, a friend, noted that as the Fed jacked up its balance sheet, velocity has mirrored the curve to the downside. Dave asks "Can't an argument be made that since much of the banking system is really insolvent, that the Fed increasing its balance sheet is necessary?" "Necessity" This depends on what you mean by "necessary" and more importantly, who gets to decide. I am one of those who staunchly believes that banks should fail. More precisely: Banks did fail, but taxpayers bailed them out. Was the last bailout "necessary"? No - not to me. The world will not end if banks fail. Bondholders would have and should have paid the price. Who are the bondholders? In general, the wealthy own most of the assets, including bonds. However, if "necessary" means in the eyes of central bankers, then yes – it was deemed "necessary". It's all part of the moral hazard tactics of central banks that tells the "too big to fail banks" that no matter what they do, they will be bailed out, again and again and again. Privatize the Gains, Socialize the Losses  Last time, Tim Geithner preached to Congress that financial Armageddon was right around the corner if Congress failed to pass a resuce package. Congress did pass a packages on the second attempt. Then Geithner promptly changed the terms of it to do what he wanted with the money. Speaking before Congress, Bernanke said the collapse of Lehman was his biggest mistake. I suggest it was his only success. Over-leveraged financial institutions should pay the price for their folly, not overburdened taxpayers in general. The poor bailed out the wealthy. The poor continue to pay the price in two ways. Excessively low interest rates on deposits Fed actions to drive up inflation when real wages do not keep up Not only is that unnecessary, it's middle-class destructive. It's also conveniently disguised theft. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com  Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

McCain Wants More Weapons Delivered to Al Qaeda Rebels; How Do Warmongers Get Elected? Posted: 28 Mar 2014 10:53 AM PDT Lawmakers Bash Obama's Delusional Syria Policy In a recent post I noted Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting. As a followup, please see Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry. Meanwhile, back in the US Lawmakers Bash Obama's "Delusional" Syria Policy. U.S. lawmakers lashed out at the Obama administration's handling of Syria's civil war on Wednesday, demanding a stronger American response to the conflict and better communication from the White House about its plans. Senator Robert Menendez, chairman of the Senate Foreign Relations Committee, expressed deep frustration after Anne Patterson, the assistant secretary of state for Near Eastern affairs, declined to answer a question about strategy in a public setting. "I have a problem with a generic answer to a generic question that I can't believe is classified," Menendez, a New Jersey Democrat, said during a committee hearing. Members of the Foreign Relations panel in particular are frustrated by the administration's failure to do more in Syria, where 140,000 people have been killed, millions have become refugees and thousands of foreign militant fighters have been trained as rebels have fought to oust President Bashar al-Assad. Arizona Republican John McCain, a frequent critic of Obama's foreign policy, called U.S. Syria policy "a colossal failure." Secret Deals and the Failure to "Do More" Once again McCain proves he is little more than a war-mongering puppet for the military "offense" industry. "Defense" has nothing to do with involvement in Syria. Late January, Reuters reported Congress secretly approves U.S. weapons flow to 'moderate' Syrian rebels. It seems that was about as secret as Turkey's secret discussion on intervention in Syria. Rebel Infighting And what are the rebels doing with the weapons the US sent? Here is the answer: Syrian Rebels Fighting Each Other: Al Qaeda Clash with Rival Islamists. The Al Qaeda-affiliated Al Nusra Front have sent an ultimatum to the rival Islamic State of Iraq and Syria (ISIS) to cease killing fellow rebels or face "expulsion" from Syria. ISIS have waged a bloody campaign against fellow rebels, whom they regard as being insufficiently devout, and are widely suspected to be responsible for the killing of Suri. They have become known for the brutal enforcement of their extreme interpretation of Islamic law in the territory they control. While Julani admitted that some Syrian rebel groups were guilty of "takfir" (unbelief), he accused ISIS of indiscriminately killing rebels and labelling them all as takfir. Infighting between the Syrian rebel groups has intensified in recent months, with ISIS and Al Nusra severing links and fighting one another for territory. While Al Nusra have tried to build links with other rebel groups, including more secular ones, ISIS have focused on religious purity and stamping out more moderate voices. US Backing Al Qaeda "Moderates" That's right. McCain wants more US weapons for Syria, perhaps even a US invasion (when dealing with war-mongers it is usually correct to assume war is the real goal). Yet, those weapons either go straight into the hands of Al Qaeda or eventually end up in Al Qaeda hands anyway. This is precisely the idiocy of the policy "The enemy of my enemy is my friend". Supporting the overthrow of one corrupt regime for another corrupt regime typically makes matters worse. Clear Policy Statement The US needs a clear, consistent, easily explained policy on Syria. And I can sum it up in two words "stay out". If we supply arms and the Syrian government falls, the next government is likely to be run by Al Qaeda or militant extremists, and McCain and his ilk will be back at it, hoping to overthrow the next government, or worse yet, invade Syria to impose our will. Clearly, the only winning option is to not get involved. How Do Warmongers Get Elected? Given that it's crystal clear that involvement is a losing option, some might wonder: "How Do Warmongers Get Elected?" Here's the easy to understand explanation: The "offense" industry supports any and every candidate that supports war. If you are a candidate against war, the "offense" industry will label you "weak on defense", then toss massive amounts of campaign money at your opponent. Democrat-sponsored pro-union advocates get elected the same way. In fact, it is difficult to get elected if you do not take campaign bribes. This explains why those on the outside want campaign finance reform. But, once elected, bribes come in from every corner. The newly-elected want to stay in power so they too take bribes. Campaign finance reform dies in the process every time. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Outrageous but Highly Believable Rumor Involving Syria, Turkey, Kerry Posted: 28 Mar 2014 10:03 AM PDT Normally I stay far away from the rumor mill. Typically, most rumors turn out to be false. However, actions in Turkey suggest at least some substance to this rumor. Moreover, it's entirely believable. First let's tune in to what Bloomberg reports (which I also commented on yesterday). Please consider Turkey Blocks YouTube After Syria Incursion Plans Leaked Turkey defended its decision to block YouTube after a leaked recording of a meeting where top officials discussed a possible military incursion into Syria appeared on the site. Foreign Minister Ahmet Davutoglu today equated the leak to an "attack on Turkey's borders" in an interview with NTV television. Davutoglu said he had chaired the meeting with the head of national intelligence and other military and diplomatic officials to discuss how to respond to threats by Islamist militants against an enclave of Turkish territory inside Syria. Some sections of the tape were "doctored," the foreign ministry said in a statement yesterday. The leaked tape is the latest in a series of recordings posted anonymously on the Internet since December, some of them allegedly from a police investigation, which have embroiled Prime Minister Recep Tayyip Erdogan in a corruption scandal and led to the departure of four cabinet ministers. It comes before weekend local elections, where Erdogan is seeking a victory that he says will lay to rest the allegations of graft. Under fire since the corruption investigation burst into the open in December, he has purged dozens of prosecutors and thousands of police, as well as imposing media curbs. Yesterday's YouTube shutdown follows similar measures against Twitter last week. The government says some of the recordings were assembled by montage. What We Know The above is what is claimed by Erdogan and discussed by Bloomberg. We do know that Erdogan tried to shut down Twitter (but failed), and he did shut down YouTube. He also called the leak an act of treason and refused to let media even discuss the allegation. What follows is the rumor. Turkey Transcript Here is the alleged Turkey Transcript involving a plot to invade Syria. Select Quotes Hakan FİDAN: But hear me out, we know how to put two and to together. Now, we know that what happens there has no real strategic value for us, besides the political outward appearance and whatever. Now, if we are going to enter a war, let us plan this beforehand and do it. Now, I.. Yaşar GÜLER: That's what we've been saying since the beginning. THE FIFTH SCREEN Hakan FİDAN: Now, what I can't accept is this: we are accepting the risk of using weapons for the sake of the Tomb of Suleiman Shah. It's 10 acres of our country's land and we are accepting to risk a war for it, for the *thing* of our 22-28 soldiers over there, for God's sake, how many kilometers of this country's land lie on the Syrian border? And we don't risk a war for for thousands of kilometers of land and the lives of millions of people? That's not logical! If we are going to use weapons, let's do it from the beginning. If these guys pose a threat.. THE SIXTH SCREEN Ahmet DAVUTOĞLU: Keep this between us, but the Prime Minister told me on the phone that in this conjuncture, we count this (the proposed false flag attack on the Tomb of Suleiman Shah) amongst our options. Hakan FİDAN: Commander, if we really need a reason, I'll send 4 guys to the other side, I'll get them to launch 8 rockets at empty places. That's no problem! If we need a reason, we can produce it. The thing is to show a mutual will for that. We are exerting a will for war here, and nevertheless we are making the same mistake as we always do, the mistake of not being able to think properly. Feridun SİNİRLİOĞLU: I'll tell you this, it's 10 acres of land. 10 acres of land is a very strong casus belli in the international jurisprudence, also for justification if we do this operation against the ISIL, we'll have the entire world behind us. Have no worries about that. THE SEVENTH SCREEN Feridun SİNİRLİOĞLU: We need justification, justification. Hakan FİDAN: I told you, I can produce justification if need be. Justification is no problem. THE EIGHTH SCREEN Ahmet DAVUTOĞLU: Many a times I've had amicable conversations with Kerry, he asked me precisely about whether we've agreed on a final decision on this strike.. .... This is translated by Doğukan Piyale. I am probably putting my life at risk, but the State never runs out of assassins, so if I'm going to die, I'm going to die anyway. I just wanted to serve the international community and my people by letting everyone know about these warmongering bastards. Entirely Believable I do not know whether that is an accurate translation of a real tape or not. But the fact is, it is entirely believable. Moreover, shutting down YouTube, and then banning media discussion of the tape, while calling its release an act of treason, lends further credence to the rumor. True or not, that something of this nature could be so easily believable says a ton about the corrupt state of global politics. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Are You Minding the Curves? Sweet Spot is Likely Not Where You Think Posted: 28 Mar 2014 12:16 AM PDT Curve Watcher's Anonymous has its eye on the yield curve again. Over the course of the last year, and except for the close front-end, US treasury yields have risen across the board, and in some cases dramatically. This is what one would expect from a tapering Fed that is also discussing rate hikes. However, the action in the last three months is not what one would expect. click on any chart for sharper image In the past year, 5-year treasuries have been hit the hardest (sharpest yield increase). That is not what one might expect from a strong recovery. And certainly a drop in the 30-year long bond is not what one would typically expect either. Typically, when the Fed starts hiking or announces intention to hike, the long end of the curve changes the most. It did, until the beginning of the year. The following charts will help put things in perspective. Yield Curve as of 2014-03-28 Monthly The above chart shows monthly "closes" where the yield was at the end of the month. The current month shows the present value. Yield Curve as of 2014-03-28 Weekly The above chart shows weekly "closes" where the yield was at the end of each week. The current week shows the present value. Symbols $TYX: 30-Year Green $TNX: 10-Year Orange $FVX: 05-Year Blue $IEX: 03-Month Brown Since the beginning of the year, the middle and long portion of the yield curve has flattened dramatically. The "sweet spot" for investors has been the long end of the curve. Those hiding in 5-year treasuries have been hit the hardest. Given the Fed is holding the low end of the curve near zero, the typical inversion one sees in the yield curve preceding a recession is not going to happen. We could see the 5-10 spread invert but that would take some doing. Regardless, this flattening of the curve is certainly not a sign of a strong recovery. Given blatant Fed yield curve manipulation, this may be as close to a recession warning that we get. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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