Economy News: June 2014

30.6.14

Mish's Global Economic Trend Analysis

French Bank BNP Paribas Pleads Guilty Criminal Conspiracy Charges, Fined Record $9 Billion; Anyone Headed to Prison?
Last Minute Concessions and Unreasonable Demands
Kurds Deputy PM Calls for Decentralized Iraq and Removal of Prime Minister Nouri al-Maliki

French Bank BNP Paribas Pleads Guilty Criminal Conspiracy Charges, Fined Record $9 Billion; Anyone Headed to Prison?

Posted: 30 Jun 2014 05:30 PM PDT

Today, French bank BNP Paribas plead guilty Monday to criminal money-laundering laws by helping clients dodge sanctions on Iran, Sudan and other countries.

As part of the settlement, BNP will pay a record penalty of close to $9 billion.

Former ECB president Jean-Claude Trichet said the fine was neither fair, just, nor proportionate and carries risks for the global financial system.

CCN Money has the synopsis in BNP Paribas to Pay Nearly $9 Billion Penalty.

On Monday in an agreement with the Manhattan District Attorney Cyrus Vance the bank pleaded guilty to falsifying business records and conspiracy in Manhattan Supreme Court. On Tuesday it is expected to plead guilty for violating money laundering laws in federal court with U.S. Attorney Preet Bharara.

The bank also agreed to a sanction by the New York department of financial services. It will suspend certain U.S. dollar clearing transaction services through its New York branch for one year.

About 30 employees will leave BNP Paribas as a result of the investigation, including several who have gone already, according to the U.S. official.

The fine dwarfs HSBC (HSBC)'s $1.9 billion penalty in 2012 for similar offenses, and the $2.6 billion Credit Suisse (CS) paid in May to settle tax evasion claims.

The Wall Street Journal said BNP Paribas would have to slash its dividend and raise billions of euros by issuing bonds.

Standard and Poor's has warned it could cut the bank's long term credit rating once it reviewed the size of the fine and the nature of any additional penalties.

Curious Thing

Curiously, no one goes to prison for money laundering, falsifying business records, or conspiracy charges.

But New York Times Deal Book reports Prosecutors Ask at Least 8 Years for Martoma in Insider Trading Case.

Federal prosecutors are recommending that Mathew Martoma, a former trader who worked for the billionaire investor Steven A. Cohen, be sentenced next month to at least eight years in prison for insider trading, if not significantly more.

That would be at the upper end of prison sentences for hedge fund traders convicted of insider trading in recent years, but by no means the stiffest punishment handed down during the long-running investigation.

In February, a federal jury in Manhattan convicted the former SAC portfolio manager of helping the hedge fund generate profits and avoid losses totaling $275 million in 2008.

To date, the 11 years given to Raj Rajaratnam, the co-founder of the Galleon Group hedge fund, is the longest sentence anyone in the investigation has received. Mr. Rajaratnam was convicted by a jury in May 2011 on 14 counts of insider trading — more than Mr. Martoma's three criminal charges. But the illicit trading by Mr. Rajartnam generated about $63 million, compared with the $275 million in illegal profits and avoided losses for Mr. Martoma.

Questions of the Day

Rajartnam was sentenced to prison for 11 years based on illicit profits of $63 million.

Here's the question of the day: Did BNP Paribas make more than $63 million in money laundering and other conspiracies?

Bonus question: Is insider trading worse than falsifying records?

Answer: Apparently, insider trading is worse than money laundering, falsifying business records, and various other conspiracies. Martha Stewart knows this as well, via obstruction of justice charges related to insider trading.

Addendum:

The CATO institute has the absurd details in Martha Stewart in Prison?

Meanwhile, insider trading by Congress is perfectly legal, even when Congressmen know who a big defense contract will be awarded to (and act on it in advance).

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

Last Minute Concessions and Unreasonable Demands

Posted: 30 Jun 2014 01:28 PM PDT

The EU threatens more sanctions on Russia unless Russia meets three verifiable demands. One of the demands is reasonable, the other two aren't.

For starters, the EU wants Russia to halt the flow of weapons into Eastern Ukraine, and it wants that process verified. That appears to be a reasonable demand.

Secondly, the EU demands pro-Russia militants return control of Izvarino, Dolzhanskiy and Krasnopartizansk (three border checkpoints) to Ukraine. The militants refuse to surrender, arguing that theirs is now a sovereign state.

Returning control of three Ukrainian checkpoints is an unreasonable, if not idiotic demand on Russia. Short of invading Ukraine and taking over the checkpoints, there is absolutely no way for Russia to comply with the resolution.

Finally, the EU demands "launch of substantial negotiations on the implementation of President Poroshenko's peace plan". Once again, Russia is not in control of militants who may or may not wish to negotiate anything.

Of the three demands, the Financial Times reports the first has been met as Moscow Makes Last-Minute Concession to Ukraine on Border Controls.

"President Vladimir Putin has proposed that Ukrainian border guards be granted access to those crossing points from the Russian side as observers for joint control of the border, and that observers from the [Organisation for Security and Co-operation in Europe] also be admitted to those crossing points from the Russian side," said Russian foreign minister Sergei Lavrov.

"We hope that this initiative of the Russian president will allow all responsible parties to take a decision to extend the ceasefire, to extend the truce," Mr Lavrov said.

Russia agreed to the first demand after "Vladimir Putin discussed the crisis by telephone with Germany's Chancellor Angela Merkel and President François Hollande of France and Petro Poroshenko, their Ukrainian counterpart."

At this point, there is little else Russia can do, and it would be very unreasonable to impose more sanctions on Russia for a situation in Ukraine that Russia has no fundamental control over.

Anyone but a bureaucrat under heavy influence of US meddling would rapidly come to that conclusion, but don't count on it.

In politics, stupidity frequently trumps common sense.

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

Kurds Deputy PM Calls for Decentralized Iraq and Removal of Prime Minister Nouri al-Maliki

Posted: 30 Jun 2014 12:22 PM PDT

The Kurds played their cards in the Iraqi mess exceptionally well. They never threatened independence until Baghdad was too unstable to do anything about it.

Even now, the Kurds offer one last olive branch of sorts, an offer for a "decentralized" Iraq as opposed to independent nations, but only on condition that Prime Minister Nouri al-Maliki steps down, and Sunnis get more control.

Please consider Kurds' Deputy PM Talabani Calls for Decentralized Iraq

Iraq and its foreign backers must abandon a centralised system of governance if the country is to survive, Iraqi Kurdistan's deputy prime minister has said, warning that his semi-autonomous region would gain de facto independence if the slide into chaos continues.

"We have to get our minds off of this notion that a strong central government can govern this country, because it can't," he [Qubad Talabani] told the Financial Times in an interview. "We're past that. We tried that. We had some competent Sunni ministers in the government . . . it didn't provide adequate representation to the people in those [Sunni] territories."

KRG president and head of the region's dominant Kurdistan Democratic party, Masoud Barzani, openly stated last week that Kirkuk would remain under Kurdish control and that independence could be near, hinting it may be time for a referendum on the issue.

Mr Talabani, who is from the rival Patriotic Union of Kurdistan party, was more circumspect, saying the Kurds still hoped to make a deal in Baghdad.

The two main parties in Kurdistan have a power-sharing agreement where they alternate between the premiership and deputy posts.

Kurds and Sunni are adamant that their participation depends on an end to Mr Maliki's eight-year rule, and the appointment of a new premier who will negotiate. It is not yet clear if majority Shia politicians will agree on an alternative candidate.

Even if Maliki goes along, Masoud Barzani, the Kurds president favors independence. Expect a referendum on independence soon if Maliki does not step down, and perhaps even if he does.

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

29.6.14

Mish's Global Economic Trend Analysis

How Much Gold Should Someone Own? Where and How To Own It?
What Would be the Effect of a Substantial Hike in the Minimum Wage?
Meet "Ray" Your Valet Parking Robot

How Much Gold Should Someone Own? Where and How To Own It?

Posted: 29 Jun 2014 10:48 PM PDT

Periodically I receive questions on gold ownership. How much should one own, and where?

Let's start with the first question:

How Much Gold Should Someone Own?

There is no fixed answer, but rather a general methodology that I like:

Do not invest outside your comfort zone.
Think in terms of percentages, not fixed amounts.
For some, 10% is too much, for others 30% is too little.
Some do not trust anything else and are willing to hold a huge percentage of their assets in gold
If a 30% decline in value would give you sleepless nights, then whatever percentage you have is too much.
If you dislike investments that do not yield a dividend, then gold probably should not be a significant portion of your portfolio.
Even if you dislike investments that do not pay a dividend, it may be wise to consider putting 5% of your assets in gold to protect against a crisis.

For those who understand the reasons to own gold and will not panic over fluctuations, in my assessment, 20% is a reasonable starting point.

Finally, for those with a lot of credit card debt or other high interest debt, I suggest paying off all that debt before making any investments.

As to the second question:

How To Own It?

There are numerous choices.

Gold Miners
Physical Gold
Gold ETFs
Gold Funds

Gold miners are a leveraged play, and in the case of junior miners, a speculative play on gold. The bulk of one's gold assets should not be in this class.

Physical gold, ETFs, and Funds can overlap in various ways.

Gold mutual funds are generally plays on miners but some may also contain physical gold.
ETFs may be plays on miners or plays on physical gold.
ETFs may or may not contain audited gold.
ETFs may or may not allow delivery of physical gold.
Physical gold can be in your possession in the form of gold, bullion, or coins.
Physical gold may be in external storage in the form of gold, bullion, or coins.
External storage may be in in your country or in a foreign location.

Some want gold in their possession. I hold none of mine that way. I prefer audited gold, in vaults, spread around for safety. I also prefer bars or bullion over coins that have a higher markup.

For others, seeing is believing.

For those who don't trust governments as well as those who live in unstable countries, holding gold outside the country they live in is a good idea.

Remember, if you do choose physical possession, you will need theft insurance or some other means of ensuring its safety. And if you have lots of physical gold, it's best not to tell anyone (for obvious reasons).

OUNZ Recommendation

Among the ETF choices, I highly recommend that investors consider the Merk GOLD TRUST, the deliverable GOLD ETF (OUNZ).

The Merk Gold Trust (the "Trust" or "OUNZ") provides investors with a convenient and cost-efficient way to buy and hold gold through an exchange traded product with the option to take physical delivery of gold.

The Trust's primary objective is to provide investors with an opportunity to invest in gold through the shares and be able to take delivery of physical gold bullion (physical gold) in exchange for their shares. The Trust's secondary objective is for the shares to reflect the performance of the price of gold less the expenses of the Trust's operations.

OUNZ may be a great choice for those ...

Who do not like dealing with wire transfers to buy or sell gold.
Who buy small quantities.
Who want to take physical delivery in the form of coins.
Who want an easy to understand ETF that contains audited gold.

Interested parties should download the Merk Gold Trust (OUNZ) Prospectus.

OUNZ is simply what it says it is: an investment in gold. You can buy/hold/sell on the NYSE, or you can take delivery of your gold. Its expense ratio is low (0.40%) and a share of OUNZ is approximately equal to 1/100 of a Fine Ounce of gold.

Taking possession in OUNZ does not trigger a tax event as you are simply taking possession of what you already own.

Unlike OUNZ, the Sprott Physical Gold Trust (PHYS) is a Canadian closed-end mutual fund that may trade above or below NAV.

Moreover, investors in PHYS may have to pay taxes when taking delivery; The prospectus states: "If any holder redeems his, her or its units for physical gold bullion …, the Trust will be treated as if it sold physical gold bullion for its fair market value in order to redeem the holder's units."

GoldMoney

Most readers know I have a relationship with GoldMoney and I still recommend that option as well. It is a great way to own gold.

GoldMoney contains audited, physical gold, in vaults in various countries. You can select the vault if you wish.

However, GoldMoney does require dealing with wire transfers, which adds expenses when dealing with small amounts. Some may dislike the paperwork when opening an account.

Other Options

There are numerous ways to invest in gold. I mentioned two that I specifically like and the reasons I like them. Other choices may or may not be for you, based on your individual needs and preferences.

There is no absolute right or wrong, just a set of choices, some better than others.

Disclosure

I have a relationship with Merk as well as Goldmoney. I choose my relationships carefully. However, you still need to conduct your own due diligence.

Disclaimer

The material must be preceded or accompanied by a prospectus. Before investing you should carefully consider the Merk Gold Trust's ("Trust") investment objectives, risks, charges and expenses. Investing involves risk, including possible loss of principal. The Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for the purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. Because shares of the Trust are intended to reflect the price of the gold held in the Trust, the market price of the shares is subject to fluctuations similar to those affecting gold prices. Additionally, shares of the Trust are bought and sold at market price, not at net asset value ("NAV"). Brokerage commissions will reduce returns.

The request for redemption of shares for gold is subject to a number of risks including but not limited to the potential for the price of gold to decline during the time between the submission of the request and delivery. Delivery may take a considerable amount of time depending on your location.

Commodities and commodity-index linked securities may be affected by changes in overall market movements and other factors such as weather, disease, embargoes or political and regulatory developments, as well as trading activity of speculators and arbitrageurs in the underlying commodities.

Trust shares trade like stocks, are subject to investment risk and will fluctuate in market value. The value of Trust shares relates directly to the value of the gold held by the Trust (less its expenses) and fluctuations in the price of gold could materially and adversely affect an investment in the shares. The price received upon the sale of the shares, which trade at market price, may be more or less than the value of the gold represented by them. The Trust does not generate any income and as the Trust regularly issues shares to pay for the Sponsor's ongoing expenses, the amount of gold represented by each Share will decline over time. Investing involves risk and you could lose money on an investment in the Trust. For a more complete discussion of the risk factors relative to the Trust, carefully read the prospectus.

The sponsor of the Trust is Merk Investments LLC (the "Sponsor"). Foreside Fund Services, LLC, provides marketing services to the Trust.

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

What Would be the Effect of a Substantial Hike in the Minimum Wage?

Posted: 29 Jun 2014 07:36 PM PDT

In response to 100% of U.S. Employment Growth Since 2000 Went to Immigrants, reader Mike wonders what effect a rise in minimum wage would have.

Mike Writes ...

Hi Mish.

Thanks for a very interesting post. I hope the mainstream media will pick up on this.

Here's a question for you: Do you think a rise in the minimum wage would bring more citizens into the workforce and and reduce the welfare rolls?

By the way, I am against laws that restrict the free will of consenting adults, employers and employees alike. But I am curious about the results of a substantial hike in the minimum wage.

Best,
Mike

Predicting the Results

It is not easy to predict the precise results. People on both sides of the debate cite studies that purportedly support their point of view.

Nonetheless we can say certain things, even if we do not know the final result.

A hike in the minimum wage would:

Encourage more people to seek work whether there is work or not. Thus, the participation rate would rise putting upward pressure on the unemployment rate.
Encourage businesses to outsource or seek other means of reducing head count such as employing software or hardware robots.
Encourage more immigration if businesses cannot find ways to reduce headcount.
Ultimately, businesses would have to hike prices, accept lower profit margins, or find other ways to reduce costs.
If businesses chose to hike prices it would put upward pressure on price inflation. In turn, unions would demand still more wage hikes.
If businesses chose to eat the costs, it would put negative pressures on the stock market.

With so many possibilities, some of them conflicting, it is impossible to predict the precise results. Regardless, interference in the free market is not a good thing. Thus, the overall result of a hike in minimum wage must be negative, regardless of what minimum wage advocates suggest.

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

Meet "Ray" Your Valet Parking Robot

Posted: 29 Jun 2014 11:16 AM PDT

US News has an interesting article on using robots to park cars at an airport in Duesseldorf, Germany.

You can schedule an appointment with "Ray", your parking robot, via smartphone or simply by leaving your car in a designated spot.

"Ray" Your Parking Robot

AP Photo/dpa, Federico Gambarini

US News comments on the "Uncanny Valet"

Ray can carry any standard car weighing up to 3 metric tons (3.31 tons)
249 parking spaces are reserved for robots
The service costs 29 euros a day and targets business travelers but is open to anyone

Ray's forklift method (with the car turned off) circumvents the need for an exchange of keys with a human attendant. I suspect this will quickly catch on at any airport or auto garage offering valet parking.

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

28.6.14

Mish's Global Economic Trend Analysis

100% of U.S. Employment Growth Since 2000 Went to Immigrants

Posted: 28 Jun 2014 01:06 PM PDT

The Center for Immigration Studies reports All Employment Growth Since 2000 Went to Immigrants.

Actually, greater than 100% of jobs went to immigrants because the number of non-immigrants holding a job is negative, and the total must equal 100%.

On a population adjusted basis, the numbers look horrific. Population-wise, native US citizens account for two-thirds of the working-age population growth, yet fewer work today.

Here's the harsh reality: 17 million working-age native US citizens were not working in the first quarter of 2014 than in 2000.

Let's dive into the interesting 29 page report by Steven A. Camarota and Karen Zeigler. Here are some items of interest from the report.

Government data show that since 2000 all of the net gain in the number of working-age (16 to 65) people holding a job has gone to immigrants (legal and illegal). This is remarkable given that native-born Americans accounted for two-thirds of the growth in the total working-age population. Though there has been some recovery from the Great Recession, there were still fewer working-age natives holding a job in the first quarter of 2014 than in 2000, while the number of immigrants with a job was 5.7 million above the 2000 level.
With 58 million working-age natives not working, the Schumer-Rubio bill (S.744) and similar House measures that would substantially increase the number of foreign workers allowed in the country seem out of touch with the realities of the U.S. labor market.
The trends since 2000 challenge the argument that immigration on balance increases job opportunities for natives. Over 17 million immigrants arrived in the country in the last 14 years, yet native employment has deteriorated significantly.
The total number of working-age (16 to 65) immigrants (legal and illegal) holding a job increased 5.7 million from the first quarter of 2000 to the first quarter of 2014, while declining 127,000 for natives.
In the first quarter of 2000, there were 114.8 million working-age natives holding a job; in the first quarter of 2014 it was 114.7 million.
Because the native-born population grew significantly, but the number working actually fell, there were 17 million more working-age natives not working in the first quarter of 2014 than in 2000.
Immigrants have made gains across the labor market, including lower-skilled jobs such as maintenance, construction, and food service; middle-skilled jobs like office support and health care support; and higher-skilled jobs, including management, computers, and health care practitioners.
Immigration has fallen in recent years. But despite the economy, between 2008 and the start of 2014 6.5 million new immigrants (legal and illegal) settled in the country and three million got jobs. Over the same time, the number of working-age natives holding a job declined 3.4 million.
If the employment rate of working-age natives in the first quarter of this year were what it was in 2007, 7.9 million more natives would have a job. If the share working were what it was in the first quarter of 2000, 12.5 million more natives would have a job today.
The supply of potential workers is enormous: 8.7 million native college graduates are not working, as are 17 million with some college, and 25.3 million with no more than a high school education.

Select Charts

Conclusion (Excerpt From the Report)

Some may think that immigrants and natives never compete for jobs. But a majority of workers in virtually every occupation are native-born. Immigrants have made gains across the labor market in lower-, middle-, and higher-skilled jobs. Thus the idea that there are jobs Americans don't do is simply not supported by the data.

While the extent to which immigrants displace natives from the labor market is debated in the academic literature, there are several things we can say based on the last 14 years. More than one million new immigrants arrived in the country every year since 2000. The long-term decline in employment among natives is certainly supportive of the research showing that immigration reduces employment among the native-born. In contrast, the last 14 years challenge the argument that immigration on balance significantly increases job opportunities for natives. There is no question that immigration has not stimulated the economy enough to create job growth among working-age natives and prevent a dramatic decline in employment rates and labor force participation. There is certainly no question that high levels of immigration go hand in hand with a profound deterioration in native-born employment.

Even if one ignores the last 14 years and believes that immigration stimulates the economy to create a net increase in jobs for natives, then the same should be true when natives are added to the workforce by moving from not working to working. Some may respond that natives do not want to work. But the U-6 employment rate indicates that millions not working do, in fact, want to work. There is also anecdotal evidence that many natives simply have given up looking for work because the job market is so bad. When this happens, they cease to show up in the U-3 or even the U-6 unemployment rate. Moreover, many natives currently not working were doing so as recently as 2007. Given the abysmal employment and labor force participation rates, particularly of the native-born, it is difficult to take at face value assertions by employer groups that workers are in short supply or to justify the dramatic increase in immigration levels in the Schumer-Rubio bill (S.744).

Steven A. Camarota is the Director of Research and Karen Zeigler is a demographer at the Center for Immigration Studies.

It's a fascinating study that many will brand as inflammatory. Yet, the data speaks for itself.

Some will blame the immigrants. However, policies and are to blame, not the immigrants.

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

27.6.14

Mish's Global Economic Trend Analysis

Three More GM Recalls Today: When Will It End?
Another Ghost Town in China, This Time a Replica of Manhattan
Divided Iraq Inevitable; Isis Targets Baghdad Green Zone; Obama's Inane Weapons Proposal

Three More GM Recalls Today: When Will It End?

Posted: 27 Jun 2014 07:10 PM PDT

In a seemingly unending series of recalls, GM announce three more recalls today. This set involves pickup trucks, SUVs, Corvettes, and police cars.

With every announcement, I wonder "Is this the last?"

But here we go again.

The Wall Street Journal reports GM Discloses Yet Another Recall.

General Motors Co. disclosed three new recalls on Friday covering more than 473,600 vehicles, including some of its latest Corvette sports cars, amid stepped up safety reviews.

The nation's largest auto maker recalled 466,940 full-size pickup trucks and sport-utility vehicles to recalibrate software in the transfer case which may electronically switch to neutral without input from the driver. GM said it is not aware of any crashes or injuries related to the problem. The recall covers certain model years of the Chevrolet Silverado, GMC Sierra and SUVs including the Chevrolet Tahoe.

n a second recall, GM said its dealers will inspect, and replace if needed, the windshield wiper module assembly in about 4,800 of the 2013 and 2014 model year Chevrolet Caprice police cars and 2014 Chevrolet SS sport sedans. If the motor gear teeth become stripped, the wipers may not operate. GM said it isn't aware of any crashes or injuries related to this issue.

Lastly, dealers will replace the two rear shock absorbers in 1,939 of the 2014 model year Chevrolet Corvettes in the U.S. due to the potential cracking. GM said it is not aware of any crashes or injuries related to the problem.

20 Million Recalls and Counting

GM's recall total has now reached 20 million. Clearly GM wants to get every conceivable bit of bad news regarding recalls out of the way. Thus, I suspect the end of recalls is near.

Auto Bad News Over?

Is all the auto-related bad news out of the way?

Not quite.

Here are a few of my recent comments on autos from Consumer Spending Weaker Than Expected, Autos Still Holding Up; What About Housing?

Durable Goods and Autos

Purchases of durable goods increased 1.0 percent, in contrast to a decrease of 0.9 percent in April.
Purchases of motor vehicles and parts accounted for more than half of the [durable goods] increase in May, and more than accounted for the decrease in April.
Purchases of nondurable goods decreased 0.3 percent in May, compared with a decrease of 0.1 percent in April.
Purchases of services decreased 0.2 percent, compared with a decrease of 0.1 percent.

Services down two months in a row as are nondurable goods.
Was the weather bad in April and May too?

What little strength left in the economy is related to autos. Auto sales bounced back after a decline in April. How long can this last?

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

Another Ghost Town in China, This Time a Replica of Manhattan

Posted: 27 Jun 2014 12:55 PM PDT

Malinvestment in China proceeds at a staggering pace. Technically, this growth adds to GDP, but eventually it will be written off.

Ghost cities, ghost malls, and empty train stations in China have been in the news for years. The world's largest mall is unoccupied and entire cities sit vacant.

We can now add another ghost city to the list, a big one. Bloomberg reports China Builds Its Own Manhattan -- Except It's a Ghost Town.

China's project to build a replica Manhattan is taking shape against a backdrop of vacant office towers and unfinished hotels, underscoring the risks to a slowing economy from the nation's unprecedented investment boom.

The skyscraper-filled skyline of the Conch Bay district in the northern port city of Tianjin has none of a metropolis's bustle up close, with dirt-covered glass doors and construction on some edifices halted. The area's failure to attract tenants since the first building was finished in 2010 bodes ill across the Hai River for the separate Yujiapu development, which is modeled on New York's Manhattan and remains in progress.

The deserted area underscores the challenge facing China's leaders in dealing with the fallout from a record credit-fueled investment spree while sustaining growth and jobs in the world's second-biggest economy. A Tianjin local-government financing vehicle connected to the developments said revenue fell 68 percent in 2013 to an amount that's less than one-third of debt due this year.

"There will have to be a reckoning," said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong. Sales of bonds by local-government vehicles to repay bank loans are just "buying time," he said. "The people will pay" for it through bank bailouts, recapitalization with public money or inflation.

Conch Bay showed few signs of life during a June 19 visit by Bloomberg reporters. Work on Glorious Oriental, a two-tower residential and office complex, had stopped, and at the north end of Conch Bay, the main building of the Country Garden Phoenix Hotel, billed as Asia's largest hotel, was a deserted shell with no signs of any work under way.

Calls to Glorious Oriental's Beijing and Tianjin offices went unanswered.

Wang Wei, a 34-year-old Tianjin resident, was driving through the area to check out property prices, finding them six times higher than what he'd be willing to pay. "I've seen a lot of reports about the area, but apparently it's not a place fit for home -- at least for now," said Wang. "No shops, no schools, no hospitals and no neighbors."

Empty

Buildings stand in the Conch Bay district of Tianjin, China. Photographer: Steve Engle/Bloomberg

Stories like this show why it is extremely unlikely China will pass the US any time soon.

Chinese growth is enormously exaggerated, malinvestment abounds, prices are absurd, and shadow bank operations that funds these developments will eventually implode.

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

Divided Iraq Inevitable; Isis Targets Baghdad Green Zone; Obama's Inane Weapons Proposal

Posted: 27 Jun 2014 11:45 AM PDT

A breakup of Iraq is now inevitable, even as the US and Iran are ideologically aligned in preventing that outcome.

And while the US is still worried about potential problems a separate Kurdistan may cause, Turkey is Ready to Accept Kurdish State in Historic Shift.

"In the past an independent Kurdish state was a reason for war [for Turkey] but no one has the right to say this now," Huseyin Celik, spokesman for the ruling AK party, told the Financial Times.

"In Turkey, even the word 'Kurdistan' makes people nervous, but their name is Kurdistan," he added. "If Iraq is divided and it is inevitable, they are our brothers . . . Unfortunately, the situation in Iraq is not good and it looks like it is going to be divided."

This week, Avigdor Lieberman, Israel's foreign minister, also told John Kerry, the US secretary of state, that the creation of an independent Kurdish state was a foregone conclusion.

In strongly worded comments for a Nato member, Mr Celik blamed not just Nouri al-Maliki, the Iraqi prime minister, for Iraq's growing fragmentation, but also the US: "They didn't bring peace, stability, unity, they just left chaos, widows, orphans. They created a Shia bloc to the south of our country."

Mr. Celik's observation is correct but insufficient. At a cost of trillions of dollars to the US and even more to Iraq, the illegal and unwarranted US attack left Iraq in ruins and laid the grounds for an Isis uprising.

Isis Targets Baghdad Green Zone

Please consider City on Edge as Baghdad Residents Await Isis Attack

Isis, which along with allied Sunni armed groups seized Mosul and other cities this month, has made clear it is aiming to take Baghdad. An eerie calm has settled on the city. There have been few bombings or assassinations in the last two weeks convincing many that Isis is planning something big, perhaps to coincide with the start of the holy month of Ramadan next week.

"They will try to suffocate Baghdad economically," says Hisham Hashemi, a researcher and author of the forthcoming book, The World of Daish. "Isis considers the centre of Baghdad as a site for mischievous acts, where they intend to carry out bombings and killings."

How Big is Isis?

The US state department estimates Isis is about 3,000 strong. Other report put the number as high as 10,000. Regardless of size, Sophisticated Tactics Key to Isis Strength.

"They [Isis] are going against a supposedly professional military force with a speed and ferocity that has the Iraqis taking to their heels," says Patrick Skinner, a former counter-terrorism officer at the Central Intelligence Agency and now analyst at the Soufan Group. "The Iraqi Security Forces [ISF] are mind-crushingly inept."

Of immediate concern is the seizure by the jihadis of a range of high-grade military equipment. A force once lightly armed with an arsenal of shoulder-held missile launchers and anti-aircraft guns mounted on pick-up trucks, Isis is now far more comprehensively kitted out, thanks to its raids on the depots of the Iraqi army's second motorised division.

Identifying exactly what the jihadi group has in its armoury is complicated because it has been wildly embellishing its capabilities for effect on social media. But even a conservative list – corroborated by intelligence and military officials – is worrying enough. It includes unknown quantities of M114 Humvees, other armoured personnel carriers and Stinger missiles, as well as a huge cache of explosives and small arms and an unspecified number of M198 155m howitzer artillery pieces with a conventional range of 22km.

In July 2012, Isis – then still known as al-Qaeda in Iraq – began the first of two intensive insurgency campaigns that paved the way for its current fight.

"These were intelligent campaigns in design: well-resourced, prepared, executed and adapted," says Jessica Lewis, a veteran US army intelligence officer who served in Iraq and is now research director at the Institute for the Study of War. "These are not things I might associate with a terrorist organisation. These are things I associate with an army."

All of which raises questions about just how big Isis is. US intelligence officials posit a central fighting force of 3,000. Military and intelligence analysts put the minimum size of Isis's larger force at 7,000 to 10,000.

"They are not spreading themselves too thinly," says Ms Lewis. "They have matched personnel to their objectives carefully."

As to what those objectives are, Isis's attack pattern now seems to point squarely in one direction.

"Isis has uncommitted forces proximate to Baghdad," says Ms Lewis. "They always meant to establish control. They always meant to break the state. They want Baghdad." And specifically, she adds, the government-protected Green Zone.

Awkward Allies

The Financial Time highlights something I commented on several days ago: Iraq Makes Awkward Allies of US Enemies.

Barack Obama has called for the removal of Bashar al-Assad for nearly three years over his brutal suppression of domestic dissent and on Thursday proposed $500m in funding for moderate rebels fighting his regime. Washington directly blames Syria for fomenting the rise of Isis, which is rooted in al-Qaeda-linked jihadi groups that received sustenance from Damascus for years. Some have also accused the regime in Tehran, Mr Assad's primary patron, of enabling Isis' rise.

Curiously, US support for alleged "moderate rebels" constitutes direct support for Isis who also wants to overthrow Assad.

And as a result "Mr Obama finds himself inadvertently allied with Mr Assad, who under pressure from Iraq has belatedly begun to use the air power that he has mostly directed against Syrian civilians and moderate rebel groups against Isis."

Tangled Mess

I spoke about the "tangled mess" in Absurdities, Blatant Lies, Chutzpah, Political Expediency, Odd Couples.

Absurd and Conflicting Realities

The US wants to overthrow Syrian president Bashar al-Assad.
US ally, Saudi Arabia, also wants to overthrow the Syrian president.
The rebels fighting Assad are primarily Al Qaeda and Isis. Thus the US is in alignment with Al Qaeda and Isis.
The US and Iran want Isis out of Iraq.
The US refuses help from Iran out of fear of making Iran and Iraq allies.
Iran supports Syrian president Bashar al-Assad.
Saudi Arabia is ruled by Sunnis.
Isis consists primarily of extreme Sunnis.
Iran is ruled by Shias.
The US overthrew Saddam Hussein, a secular ruler whose party was dominated by Sunnis.
The US helped install Nouri al-Maliki, who is a Shia, even though the US is at severe odds with Iran.
Maliki is politically aligned with Iran.
Under Maliki's regime, extreme Sunnis got fed up with political oppression, giving rise to Isis.
Maliki accuses Saudi Arabia of sponsoring Isis and genocide.
According to The Guardian, Lina Khatib of the Carnegie Foundation says "There is Saudi money flowing into Isis but it is not from the Saudi state. Maliki is trying to shift blame from himself and is echoing Iranian propaganda.".

It is impossible to untangle that mess.

Moreover, arms given to Syrian rebels eventually make their way into the hands of Isis and Iraq.

Nonetheless, many Republicans and some democrats accused Obama of not providing enough assistance to Syrian rebels, most of which are Al Qaeda or Isis connected.

Obama Proposes $500 Million Aid for Syrian Rebels

Yesterday, the Wall Street Journal reported Obama Proposes $500 Million to Aid Syrian Rebels.

The White House on Thursday proposed a major program to train and arm moderate Syrian rebels, in a significant expansion of the U.S. role in a civil war that officials fear is bleeding into Iraq and across the region.

The Obama administration requested $500 million—a larger amount than expected—to aid the Syrian opposition, reflecting growing U.S. alarm at the expanding strength of Islamist forces in Syria, who in recent weeks have asserted control of large parts of neighboring Iraq and now pose threats to U.S. allies in the region.

Coming on the heels of a decision to send 300 military advisers to Iraq, the Syrian rebel training elevates the U.S. role in the Middle East.

Inane Proposal

President Obama now sides with John McCain and Dick Cheney in wanting to send arms to Syrian "moderate" rebels (as if we can correctly determine who is moderate and who isn't).

Even if we could make such a determination, the likelihood weapons eventually end up somewhere else is overwhelming.

Assad is fighting Isis (a far bigger threat than Assad), yet we are hell-bent on removing Assad. If Assad falls, it will be to Isis or Al Qaeda.

The stupidity of this setup is staggering.

I repeat what I said on Tuesday in Kerry's New Definition of "Intervention"

Contrary to Obama administration beliefs, the splitting up of Iraq is likely the best outcome now. The sooner this all happens the better.

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

26.6.14

Mish's Global Economic Trend Analysis

Bitcoins to Become Legal Currency in California; Bill Awaits Signing by Gov. Brown; Commodities vs. Currencies

Posted: 26 Jun 2014 01:05 PM PDT

California Bill AB-129 Lawful Money passed the California Senate on June 19, and the Assembly on June 23. The bill now awaits signing by Governor Jerry Brown.

Existing law prohibits a corporation, flexible purpose corporation, association, or individual from issuing or putting in circulation, as money, anything but the lawful money of the United States. AB-129 would repeal that provision.

Coindesk reports California's Bill to Make Bitcoin 'Lawful Money' Heads to Governor.

AB-129, authored by Assembly Member Roger Dickinson, would recognize digital currencies – along with a host of other commonly-issued forms of value including points and coupons – as lawful alternatives to the US dollar. The state-backed currency would still have legal superiority, as Californian residents are not required to accept forms of lawful money.

Dickinson recently commented that the law is primarily designed to allow California consumers the ability to continue using a variety of common payment methods, and to remove penalties currently on the books for their usage.

Comments from Bill Author

Let's tune in to what Roger Dickinson has to say in his Bitcoin Press Release.

Assembly member Roger Dickinson's (D-Sacramento) bill AB 129 addressing alternative currencies passed the Assembly. Modern methods of payment have expanded beyond cash or credit card. AB 129 repeals an outdated restriction on the use of "anything but the lawful money of the United States." The literal meaning of the restriction indicates that anyone using alternative currency is in violation of the law. However, people commonly use digital currency, community currency, and reward points without penalty.

"In an era of evolving payment methods, from Amazon Coins to Starbucks Stars, it is impractical to ignore the growing use of cash alternatives," Dickinson said. "This bill is intended to fine-tune current law to address Californians' payment habits in the mobile and digital fields."

Bitcoin, a growing digital currency, has gained recent media attention as businesses have expanded to accept Bitcoins for payment. Long before the introduction of digital currencies, various businesses created point models that allow consumers to use points to pay for goods or services. Many communities have created "community currencies" that are created by members of a community and the merchants who agree to accept the alternative currency. These "community currencies" are created for a variety of reasons, some of which include encouraging consumers to shop at small businesses within the community or increasing neighborhood cohesiveness.

Commodity vs. Currency

Three cheers to Dickinson. At the federal level, we need a more commonsense ruling that bitcoin is a currency, not an ordinary commodity like copper.

By the way, money is a commodity as well as a currency.

In Man, Economy, and State, Murray Rothbard explains "Money is a commodity that serves as a general medium of exchange."

What About Oil?

Some believe oil should be money. The idea is silly. Oil is not easy to store, not easy to transport, not easily divisible, and most of all, oil is used up.

What About Gold?

In contrast to oil, bitcoin has no commodity use other than to facilitate trade. Similarly, gold has very little industrial use. But unlike bitcoin, gold cannot be manufactured out of nothing.

Gold's overwhelming role is still as a currency even though it is not in general use as money. After all, central banks still cling to it. They don't cling to copper, oil or even silver.

Many think gold cannot be money again "because there isn't enough of it". Others believe "the production of gold does not expand fast enough for the economy".

Both statements are easily proven false.

On page 29 of What Has Government Done With Our Money, Rothbard explains: "An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines."

I strongly recommend people read the above link from start to end. It is easy read, easy to understand, and does not contain any mathematical equation gibberish.

In case you missed it, please also see Truly Inane Bloomberg Analysis On Gold.

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

Consumer Spending Weaker Than Expected, Autos Still Holding Up; What About Housing?

Posted: 26 Jun 2014 12:21 PM PDT

Curve Watcher's Anonymous has its eye on the yield curve following a disappointing (to those who believe consumption drives the economy) consumer spending report.

Let's start with a look at the department of commerce spending report on Personal Income and Outlays.

Personal income increased $58.8 billion, 0.4 percent in May.
In April, personal income increased $49.9 billion, or 0.3 percent.
Real DPI increased 0.2 percent in May, the same increase as in April.
Disposable personal income (DPI) increased $55.6 billion, 0.4 percent, in May.
Personal consumption expenditures (PCE) increased $18.3 billion, 0.2 percent in May.
DPI increased $50.8 billion, or 0.4 percent.
PCE increased $2.3 billion, or less than 0.1 percent, based on revised estimates.
Real PCE - adjusted to remove price changes - decreased 0.1 percent in May, compared with a decrease of 0.2 percent in April.

Durable Goods and Autos

Purchases of durable goods increased 1.0 percent, in contrast to a decrease of 0.9 percent in April.
Purchases of motor vehicles and parts accounted for more than half of the [durable goods] increase in May, and more than accounted for the decrease in April.
Purchases of nondurable goods decreased 0.3 percent in May, compared with a decrease of 0.1 percent in April.
Purchases of services decreased 0.2 percent, compared with a decrease of 0.1 percent.

Services down two months in a row as are nondurable goods.
Was the weather bad in April and May too?

What little strength left in the economy is related to autos. Auto sales bounced back after a decline in April. How long can this last?

$TNX

Yield on the 10-Year treasury is above where it was a year ago, below where it was 2 years ago.

If the yield is here in July, there will have been no change from July of 2013 or July of 2011, but significantly higher than July of 2012.

Housing

It was the increase from 1.394% in July of 2012 (or 1.614% in April of 2013) that helped put the damper on housing.

Housing affordability is down for two reasons:

Interest rates are higher
Prices are higher

If wages stay down or interest rates high, housing is not going anywhere. There was a nice discussion along these lines on the Daily Ticker with Fannie Mae Chief Economist Doug Duncan.

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

25.6.14

Mish's Global Economic Trend Analysis

Truly Inane Bloomberg Analysis On Gold
"Three Es Suggest Massive Change is Upon Us" Chris Martenson's Accelerated Crash Course
Diving Into the GDP Report of -2.9% Growth

Truly Inane Bloomberg Analysis On Gold

Posted: 25 Jun 2014 01:41 PM PDT

Bad economic analysis abounds. Some of it is so bad you wonder if the authors understand how any markets work, not just the topic of discussion.

For example, please consider Gold Euphoria Won't Last With Yellen's Rally Fading, a truly remarkable exercise because it took three Bloomberg writers to produce.

Here are some snips, followed by my comments.

After the biggest gold slump in three decades left investors heartbroken, they're following Taylor Swift's advice and never, ever getting back together.

Janet Yellen, the one person able to make the lovers reconcile, did her best. Prices surged the most since September the day after the Fed chair signaled last week that low interest rates are here to stay. Traders and analysts surveyed by Bloomberg News aren't expecting the euphoria to last.

For starters, there is no euphoria in gold. Arguably, one of the best measures of sentiment on gold is articles like the one above.

Here is a look at Yellen's "Fading Rally".

Yellen's Rally Fading

Supposedly it makes sense to discuss "gold's fading rally" but not countless other "fading rallies" some of which are actually fading.

Apple's Fading Rally

Let's march on.

Prices will average $1,250 an ounce next quarter, about 5 percent less than now, according to the median of 15 estimates. The analysts were surveyed before and after the Fed's June 18 outlook, and the forecast was unchanged. Even after a 28 percent plunge in 2013, the bears are emboldened by this year's records in equity markets, and gold assets in exchange-traded products have shrunk to the smallest since 2009.

Hmm... As another measure of alleged euphoria, please note "gold assets in exchange-traded products have shrunk to the smallest since 2009".

Also note that the median forecast is for another plunge, on top of the reported 28% plunge in 2013!

Is that euphoria or extreme pessimism?

By the way, since when are median expectations of analysts anything to believe?

"The surge in gold can't sustain itself," Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York, said June 20. "It was a temporary spike because of a confluence of events: Iraq and Yellen. People will be looking at other areas for excitement. Holdings are down, so people are leaving gold in search of something better."

How Markets Work

Curiously, Selkin helps manage $3 billion but does not seem to understand how markets work.

People are not "leaving gold".

It is in fact impossible to leave gold, or any other asset for that matter, short of dumping it in the ocean.

With any financial asset, someone always has to hold it. If I sell gold, someone else has to buy it. If I sell shares of Microsoft, someone else has to buy them. The same is true with cash. Every cent the Fed prints has to be held by someone.

Selkin does not understand the driving force for gold, the reasons to own it, and apparently how markets work in general.

American buying is slowing. Sales of American Eagle gold coins by the U.S. Mint totaled 252,500 ounces this year, 60 percent less than in the first six months of last year and the lowest for the period since 2008, data on its website show.

Hedge funds are holding a net-long position of 66,572 futures and options contracts, U.S. government data show. That's down 52 percent since this year's peak in March.

Mint sales are down 60% and hedge funds holding futures holdings are down 52%.

Euphoria or pessimism? You make the call.

What the Future Hold

I do not know the future price of gold, nor does anyone else. But I do know the fundamental drivers as well as the reasons to hold gold. And neither of those has changed.

I also know truly inane economic reporting when I see it, and the Bloomberg article quoted above is a perfect example.

For further discussion, please see Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?

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

"Three Es Suggest Massive Change is Upon Us" Chris Martenson's Accelerated Crash Course

Posted: 25 Jun 2014 12:38 PM PDT

Chris Martenson at Peak Prosperity put together a condensed version of his 4.5-hour long Crash Course Video Series.

The condensed version is just under an hour long, and it's well worth your time to play it.

The video is not about an "economic crash" per se, although Chris and I both think one is highly likely.

Rather, Chris analyzes "The Three Es" (Economy, Energy, and Environment) to highlight serious problems in assumed Exponential Growth, an "E" that neither of us believes likely.

Here is a link to the Accelerated Crash Course Transcript.

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

Diving Into the GDP Report of -2.9% Growth

Posted: 25 Jun 2014 11:22 AM PDT

The first quarter GDP initial projection was 0.1%. The second estimate came in at -1.0%. Today the third estimate came in at -2.9%.

Gosh, first quarter weather was far worse than anyone realized.

Let's dive into the First Quarter 2014 Third Estimate from the BEA for some weather-details.

Real GDP declined 2.9 percent in the first quarter, after increasing 2.6 percent in the fourth. The downturn reflected a downturn in exports, a larger decrease in private inventory investment, a deceleration in PCE, and downturns in nonresidential fixed investment and in state and local government spending, partly offset by an upturn in federal government spending.

Prices

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the first quarter, the same increase as in the second estimate; this index increased 1.5 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent in the first quarter, compared with an increase of 1.8 percent in the fourth.

Components

Real personal consumption expenditures increased 1.0 percent in the first quarter, compared with an increase of 3.3 percent in the fourth.
Durable goods increased 1.2 per cent, compared with an increase of 2.8 percent.
Nondurable goods decreased 0.3 percent, in contrast to an increase of 2.9 percent. Services increased 1.5 percent, compared with an increase of 3.5 percent.
Real nonresidential fixed investment decreased 1.2 percent in the first quarter, in contrast to an increase of 5.7 percent in the fourth. Nonresidential structures decreased 7.7 percent, compared with a decrease of 1.8 percent. Equipment decreased 2.8 percent, in contrast to an increase of 10.9 percent.
Intellectual property products increased 6.3 percent, compared with an increase of 4.0 percent.
Real residential fixed investment decreased 4.2 percent, compared with a decrease of 7.9 percent.
Real exports of goods and services decreased 8.9 percent in the first quarter, in contrast to an increase of 9.5 percent in the fourth.
Real imports of goods and services increased 1.8 percent, compared with an increase of 1.5 percent.
Real federal government consumption expenditures and gross investment increased 0.6 percent in the first quarter, in contrast to a decrease of 12.8 percent in the fourth. National defense decreased 2.5 percent, compared with a decrease of 14.4 percent. Nondefense increased 5.9 percent, in contrast to a decrease of 10.0 percent.
Real state and local government consumption expenditures and gross investment decreased 1.7 percent; it was unchanged in the fourth quarter.
The change in real private inventories subtracted 1.70 percentage points from the first-quarter change in real GDP , after subtracting 0.02 percentage point from the fourth-quarter change.
Private businesses increased inventories $45.9 billion in the first quarter, following increases of $111.7 billion in the fourth quarter and $115.7 billion in the third. Real final sales of domestic product -- GDP less change in private inventories -- decreased 1.3 percent in the first quarter, in contrast to an increase of 2.7 percent in the fourth.

Income

Real gross domestic income (GDI), which measures the output of the economy as the costs incurred and the incomes earned in the production of GDP, decreased 2.6 percent in the first quarter, in contrast to an increase of 2.6 percent in the fourth . For a given quarter, the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data. However, over longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change.

Key Item Synopsis

Exports (which add to GDP) were down 8.9%.
Imports (which subtract from GDP) were up 1.8%.
Durable goods were up 1.2%
Nonresidential fixed investment decreased 1.2%
Consumer prices rose 1.3%.
Federal spending was up 0.6%
Personal spending was up 1.0%.

GDP and GDI match over time. GDP was down 2.9% while GDI was down 2.6%. Take your choice. The numbers are awful.

Clearly the weather was far worse than anyone imagined.

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