Mish's Global Economic Trend Analysis

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China Contraction Unexpectedly Continues Third Month Posted: 31 Oct 2015 09:50 PM PDT Given that economists hardly expect anything bad ever, this headline is hardly shocking: China's Factory Activity Shrinks for an Unexpected Third Month. Activity in China's manufacturing sector unexpectedly shrank for a third straight month in October, an official survey showed on Sunday, fueling fears that the economy may be cooling further in the fourth quarter despite a raft of stimulus measures. The official Purchasing Managers' Index (PMI) was at 49.8 in October, the same pace as in previous month and lagging market expectations of 50.0. To shore up growth, the government has cut interest rates six times since November and lowered the amount of cash that banks must hold as reserves four times this year. The latest cut in interest rates and banks' reserve requirement came in late October. Beijing has also ramped up infrastructure spending and eased restrictions on home purchases to revive the flagging property market. Gee. Who Coulda Thunk? Mike "Mish" Shedlock 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.

€238 Billion Nonperforming Loans at Spanish Banks Despite ECB's Helping Hand Posted: 31 Oct 2015 09:08 AM PDT Via translation, El Confidential comments on the Banking Drag of €238 Billion Nonperforming Loans at Spanish Banks. The profitability of banks has plummeted. And only the loose monetary policy of the ECB has improved the results. That is underscored by a report on the performance of Spanish banks by International Financial Analyst (AFI). The report estimates the Spanish banking sector accumulated €238 Billion poor credit and foreclosed assets (8.8% of the balance), with coverage average of 44%. Only the ECB's monetary policy, its strategy of zero interest rates and asset purchase, keeps the banks alive. The ROE of the banking sector, has been reduced by 6.8 points, reaching levels of 5.3%, mainly due to higher capital requirements. As the report makes clear, higher capital requirements (to maintain solvency) are here to stay, so it is difficult for the results of the fixed income portfolios in recent years to be repeated in the short term. In fact, unrealized gains associated with these portfolios have declined more than 50% in 2015. This means that banks are eating the benefits associated with the decline in interest rates. In the words of AFI, ECB monetary policies have contained the fall in the profitability of the sector in recent years, and this has benefited "substantially" the peripheral countries including the Spanish banking system. Non-performing assets could be reducing the annual profitability of the sector up by 5.4 percentage points according to the report. With treasury yields low or negative in Eurozone countries, the recapitalization benefits of ECB policy (banks loading up on their own sovereign bonds) have run their course.  In case of another downturn, there will be little else the ECB can do.  . Mike "Mish" Shedlock 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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Personal Income, Consumer Spending Rise Less Than Expected; PCE Price Index Negative; 4th Quarter Acceleration Coming Up? Posted: 30 Oct 2015 11:21 AM PDT Personal Income, Consumer Spending Weaker Than Economists Expect Today's Personal Income and Outlays report came in below Consensus Estimates. Inflation is not building based on the Fed's favorite reading, the core PCE price index which inched a lower-than-expected 0.1 percent higher in September with the year-on-year rate steady and flat at only plus 1.3 percent. These results will not lift the odds for a December hike at the next FOMC. Income and spending data also came in below expectations, at plus 0.1 percent each vs expectations for plus 0.2 percent each. Income got no boost from wages & salaries in September which were unchanged following, however, strong gains of 0.5 percent in the two prior months that underscore this morning's employment cost index which shows pressure in the third quarter. Spending in September was pulled down by a 1.2 percent plunge in nondurable goods that likely reflects the low price of fuel. Spending on durable goods, driven by vehicles, rose a strong 0.8 percent with spending on services up a solid 0.4 percent. Other details include a 0.1 percent decline for the total PCE price index, again an effect likely based on fuel. Here the year-on-year rate is barely over zero at plus 0.2 percent. The savings rate continues to edge higher, up 1 tenth to 4.8 percent in a gain that hints at strength for future consumer spending. Third-quarter consumer activity slowed in September, pointing to lack of momentum for October consumer data. Still, the consumer is in charge in the U.S. economy and, given low unemployment, the outlooks for holiday spending and fourth-quarter acceleration are favorable. 4th Quarter Acceleration? Action in shippers except those most impacted by online shipping, store hiring plans, new home sales, and consumer spending expectations do not point to a robust acceleration in holiday spending. Housing I sometimes wonder if Bloomberg reads its own reports. Let's take a look at the new home sales numbers that came out on Monday as reported by Econoday. The housing outlook just received a jolt! New home sales fell to an annual rate of 468,000 in September which is 67,000 below Econoday's low-end estimate and the lowest rate since November last year. Making matters worse is a steep 33,000 downward revision to August. The drop in sales together with a rise in homes on the market made for a big surge in supply, to 5.8 months from 4.9 months in August and 5.5 months from September last year. This turns around what had been a market of very thin supply to one of nearly adequate supply, with 6.0 months considered the balancing point between supply and demand. Homes on the market rose 4.2 percent in the month to 225,000 units. New home sales contribute to sales. People buy furniture, appliances, etc., etc. Shipping Testosterone Pit reports And Now Trucking is Suddenly Slowing Down. September is the beginning of the holiday shipping season. Volume should be sharply higher. But it's not happening. US Freight Shipments Have Worst September since 2010. FedEx does expect increased volumes, but I would attribute that to online purchases. Increasing online purchases will not balance out weak in-store sales. Store Hiring Plans Perhaps stores are mistaken, but they are not ramping up for holiday sales according to  outplacement firm Challenger, Gray & Christmas is correct. For details, please see Weak Holiday Hiring Coming Up? Household Spending Estimates Every month, the Fed conducts a survey of consumer spending projections. Here are the results of the latest Fed Spending Survey. Something clearly happened to consumer spending expectations this year. Of course, consumers can spend away anyway. I don't know what they will do, nor does anyone else. Regardless, the signs seem to point to weaker or flat 4th quarter spending, not an acceleration. Mike "Mish" Shedlock 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.

More Pain Ahead For Brazil? Posted: 30 Oct 2015 10:06 AM PDT As a guest post, here is the opinion of IMD Professor Carlos A. Primo Braga on on the economic, political and psychological drivers of Brazil's currency slide. Real Depreciation in Brazil What a difference a year makes! For visitors to Brazil, a steak lunch in a top restaurant would have cost USD $120 per capita in October 2014 (not including caipirinhas or wine). Today the same meal costs roughly USD $65. The Brazilian real has experienced one of the most dramatic depreciations among currencies from emerging economies over the last 12 months. The good news is that this adjustment will help the tradable sector of the economy improve its international competitiveness. For an economy which is currently in free-fall (with an expected GDP contraction of roughly 3% in 2015), this is most welcome even though the low exposure of the Brazilian economy to international markets implies that this help will be at best moderate in terms of its macroeconomic impact. The bad news is that this will add to inflationary pressures and it will also impact the financial health of corporations that have borrowed abroad. International Depreciation Trends Over the last two years, many countries have experienced significant movements in the value of their currencies. As discussed in detail in the latest World Economic Outlook of the IMF (October 2015), these changes have often extrapolated the range of historical adjustments experienced by major currencies. Among industrialized countries the US dollar and the Swiss franc have appreciated more than 10%, while the Japanese yen has depreciated more than 30% in real terms (since mid-2012). Many emerging economies have also experienced significant depreciation of their currencies. The Brazilian real - which was identified by Morgan Stanley in 2013 as one of the so-called fragile five (a group that also included the Turkish lira, the Indian rupee, the South African rand, and the Indonesian rupiah) - has depreciated more than 35% in real terms since 2014 against a basket of relevant currencies of major trading partners. Actually, with the exception of the Indian rupee, the currencies of the other members of the "fragile five-club" have been among the worst performers among emerging economies currencies over the last two years. Currency War Irony It is ironic that Brazil, which as recently as 2010 had warned about the dangers of a "currency war" - reflecting concerns about interventions by major monetary authorities to limit upward pressures on their currencies in an effort to boost net exports - is now leading the "contest" in terms of global depreciation trends. First, the current political gridlock associated with the tug-of-war between the Executive branch and Congress, amid the reverberations of the Petrobras corruption scandal, does not help. There is not only a crisis of governance, but also a crisis of ethics. The logic of the mob seems to be leading the country to the lowest common denominator for ethical behavior in the absence of credible leadership. Needless to say, this creates a field day for speculation against the real. Second, the international environment does not help. This goes beyond the implications of the Chinese slow-down for Brazil. In reality, the current crisis provides another illustration of the behavior under stress of complex financial networks. The triggering event may be small in macroeconomic terms - e.g., the losses associated with the Petrobras scandal - but resulting collateral damage can be substantial, particularly, when the external environment suggests that in the near term additional headwinds will impact the country (for example, the expected increase of US interest rates). In short, markets tend to overshoot in their expectations about the future of a currency under stress.  There is, however, a silver lining. Economics does not stop operating below the Equator. As already mentioned, the depreciation of the real is impacting the tradable sector in a positive manner. Actually, the depreciation, combined with the slow-down of the economy, has translated into a substantial decrease in the Brazilian current account deficit (by roughly 30% compared with last year). Moreover, Brazilian assets are becoming increasingly attractive to foreign investors. In sum, no foreign exchange crisis is expected in the near future. But the economic crisis and the fate of the real will continue to be driven by the political imbroglio. In other words, more pain ahead. Carlos A. Primo Braga End Guest Post - Guest Post Guidelines This is actually the first unsolicited guest post I recall using. I receive at least one offer a week from people offering to write guest posts, then asking me what I want them to write. I typically do not respond to such offers. The above post is an example of what I want to see: A well thought out, already written article (not a proposal), that strongly pertains to the global economy, generally in-line with my own views, and offered with no strings attached, contains no overwhelmingly self-promotional links, and absolutely no product or service endorsements of any kind. If the author has a blog or website, I will link back to it, as I did at the top. If you care to submit articles with those guidelines, I will consider them.  To date, the only guest posts on my blog were those where I requested reprint rights, or those from readers like Tim Wallace who send me much-appreciated articles accompanied with charts without even vying for a "guest post". Mike "Mish" Shedlock 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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• Former Australia Prime Minister Chastises EU on Securing Borders, Economic Migration; Mish for President Review
• Dirty Secrets, Hush Money, Conviction of Former US House Speaker Dennis Hastert; Was Justice Served? Could Gold or Bitcoin Have Helped?
• Courage to Act; Reflections on Fed Hubris; What if Whatever it Takes is Not Enough? Fed Troika?
• 3rd Quarter Advance GDP Estimate +1.5%; December Hike Odds Up to 46.5%
• Final 3rd Quarter GDPNow Forecast vs. Consensus Estimates Ahead of 3rd Quarter GDP Release

Former Australia Prime Minister Chastises EU on Securing Borders, Economic Migration; Mish for President Review Posted: 29 Oct 2015 10:58 PM PDT In a speech I almost completely agree with, former Australia prime minister Tony Abbott chastised the EU in an address at the Second Annual Margaret Thatcher Lecture in London on October 27, 2015. Tony Abbott told the EU to shut its borders because "a country that cannot control its borders starts to lose control of itself". The Sydney Morning Herald has the Transcript of Tony Abbott's Controversial Speech at the Margaret Thatcher Lecture. Here are a few select passages, emphasis mine. All countries that say "anyone who gets here can stay here" are now in peril, given the scale of the population movements that are starting to be seen. There are tens – perhaps hundreds – of millions of people, living in poverty and danger who might readily seek to enter a Western country if the opportunity is there. Who could blame them? Yet no country or continent can open its borders to all comers without fundamentally weakening itself. This is the risk that the countries of Europe now run through misguided altruism. On a somewhat smaller scale, Australia has faced the same predicament and overcome it. The first wave of illegal arrivals to Australia peaked at 4000 people a year, back in 2001, before the Howard government first stopped the boats: by processing illegal arrivals offshore; by denying them permanent residency; and in a handful of cases, by turning illegal immigrant boats back to Indonesia. The second wave of illegal boat people was running at the rate of 50,000 a year – and rising fast – by July 2013, when the Rudd government belatedly reversed its opposition to offshore processing; and then my government started turning boats around, even using orange lifeboats when people smugglers deliberately scuttled their vessels. It's now 18 months since a single illegal boat has made it to Australia. The immigration detention centres have-all-but-closed; budget costs peaking at $4 billion a year have ended; and – best of all – there are no more deaths at sea. That's why stopping the boats and restoring border security is the only truly compassionate thing to do. Now, while prime minister, I was loath to give public advice to other countries whose situations are different; but because people smuggling is a global problem, and because Australia is the only country that has successfully defeated it – twice, under conservative governments – our experience should be studied. In Europe, as with Australia, people claiming asylum – invariably – have crossed not one border but many; and are no longer fleeing in fear but are contracting in hope with people smugglers. However desperate, almost by definition, they are economic migrants because they had already escaped persecution when they decided to move again. Our moral obligation is to receive people fleeing for their lives. It's not to provide permanent residency to anyone and everyone who would rather live in a prosperous Western country than their own. That's why the countries of Europe, while absolutely obliged to support the countries neighbouring the Syrian conflict, are more-than-entitled to control their borders against those who are no longer fleeing a conflict but seeking a better life. This means turning boats around, for people coming by sea. It means denying entry at the border, for people with no legal right to come; and it means establishing camps for people who currently have nowhere to go. It will require some force; it will require massive logistics and expense; it will gnaw at our consciences – yet it is the only way to prevent a tide of humanity surging through Europe and quite possibly changing it forever. We are rediscovering the hard way that justice tempered by mercy is an exacting ideal as too much mercy for some necessarily undermines justice for all. The Australian experience proves that the only way to dissuade people seeking to come from afar is not to let them in. Working with other countries and with international agencies is important but the only way to stop people trying to gain entry is firmly and unambiguously to deny it – out of the moral duty to protect one's own people and to stamp out people smuggling. Rock Solid Speech There are parts of Abbott's speech I disagree with, but everything above is rock solid. Mish Proposal The selected text of Abbott's speech is remarkably similar to my own proposal made on Wednesday in Austria Announces Fence With Slovenia; Irony of German Whine; Cascading Fences; Mish Proposed Strategy. Origin of the Crisis The origin of this mess is two-fold. The US overthrow of Saddam Hussein that directly led to the power vacuum and the creation of ISIS US support for Al Qaeda rebels in the Syrian civil war also destabilized Syria creating millions of refugees in the war-torn country. The free handouts from Germany, Sweden and others bought the crisis to where we are now. It would help if Syria was stable, even under a leader we do not like. But Obama will have no part of that. Mish Proposed Strategy Block the border between Greece and Turkey Stabilize Syria, even under Assad, but also seek promises of free Syrian elections Eliminate or greatly reduce the free handouts Return economic refugees to point of entry Give Turkey some aid for US/UK role in this mess US and EU bureaucrats have done none of the above. Abbot made his speech on October 27. I made my proposal on October 28, but I was not aware of the lecture or Abbott's speech when I wrote my proposal. Changes After hearing Abbott's speech would I change anything? Yes. I would change point 3 to "Eliminate the free handouts entirely." Unrelated to Abbott's speech is a point I intended to make, but didn't. I now offer point 6: Halt all US support for alleged "moderate" Al Qaeda rebels. Instead, arm the Kurds now fighting ISIS. The Kurds are the only ones doing a reasonable job against ISIS. US backed "moderates" have handed their weapons over to ISIS and in some cases joined ISIS outright. Point 6, in conjunction with point 2 will help stabilize both Iraq and Syria, and that is something that is desperately needed. Mish for President Review  With that six point foreign policy proposal, I once again throw my hat into the Republican debate. For the rest of my proposals, please see Mish for President: Officially Throwing My Hat Into the Ring; 11 Questions, 11 Answers. Mike "Mish" Shedlock 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.

Dirty Secrets, Hush Money, Conviction of Former US House Speaker Dennis Hastert; Was Justice Served? Could Gold or Bitcoin Have Helped? Posted: 29 Oct 2015 02:11 PM PDT Reuters reports Ex-House Speaker Hastert Pleads Guilty in Hush-Money Case. Former U.S. House Speaker Dennis Hastert pleaded guilty on Wednesday to a federal financial crime in a hush-money case stemming from allegations of sexual misconduct, marking the dramatic downfall of a once powerful politician. In exchange for the guilty plea, federal prosecutors recommended a sentence of zero to six months imprisonment, although the judge could sentence Hastert to up to five years in prison and fine him $250,000. Hastert, 73, pleaded guilty to one count of "structuring" - withdrawing funds from bank accounts in amounts below $10,000 to evade bank reporting rules on large cash movements. Those rules exist to detect money laundering. In the agreement, Hastert admitted to paying $1.7 million in cash to someone he had known for decades to buy that person's silence and compensate for past misconduct toward that individual. Prosecutors did not spell out what the misconduct was, but unnamed law enforcement officials have told media that it was sexual and involved someone Hastert knew when he was a high school teacher and coach in his hometown of Yorkville, Illinois in the 1960s and 1970s. In the plea agreement Hastert admitted that he reached an agreement in 2010 with the individual who was a victim of his misconduct, to pay a total of $3.5 million in hush money. From 2010-2012 Hastert made 15 withdrawals of $50,000 each from a number of banks, meeting with the individual every few months to pay the person an installment. In April 2012, bank employees asked Hastert for an explanation of the withdrawals and told him they had to report large transactions. After that, he started to withdraw in lower increments. From mid-2012 until late 2014 he made 106 withdrawals of amounts under $10,000 while he kept paying the unnamed individual every few months, according to the plea agreement. If there were any sex abuse it would not lead to criminal charges because the statute of limitations ran out long ago. "This is one more time where a person with power and authority gets to keep dirty secrets hidden," said Barbara Blaine, founder of SNAP, an advocacy group for survivors of clerical abuse. Hastert was the longest-serving Republican speaker in the history of the House. He left Congress in 2007 and became a lobbyist and consultant. Sleazebag Hypocrite Dennis Hastert is without a doubt a sleazebag of disgustingly high magnitude. He is also a flaming hypocrite. Hastert was among the Republican leaders who hounded Bill Clinton for his sexual misconduct in the White House. Hastert voted to impeach Clinton. It is very tough to defend sleazebag hypocrites, but one still must ask the key question: Was justice served? MarkeyWatch author Brett Arends offers this opinion: Why Dennis Hastert's Conviction is an Outrage. If you aren't outraged by what just happened to "disgraced" former House Speaker Dennis Hastert, you're not paying attention. No, it doesn't matter if you think he's a raging hypocrite. No, it doesn't matter even if you think he's a personal or political sleazebag. Dennis Hastert, now age 73, faces possible jail time after pleading guilty this week to making a series of illegal bank withdrawals and evading federal financial regulations. He denied a second charge of lying to federal investigators about it. His crime? Withdrawing $1.7 million of his own money from his own bank accounts. His own money. His own bank accounts. There are reports he was covering up an accusation of sexual misconduct with a former student dating from when he was a high school wrestling coach — about 30 years ago. The person demanding the payments may have been the student. The reports are unconfirmed and we don't have more details. Hastert is not facing jail time for the sexual conduct, if any. No charges have been brought or answered. He is facing jail because he took his own money out of his own bank accounts in order to pay what amounts to blackmail. When did we start supporting blackmailers in this country? When did that become OK? Did I miss the memo? Is it wrong for me to point out that so far not one Wall Street crook has faced a day of jail time for stealing the country's money, but someone faces jail time for handling his own cash? The $10,000 limit hasn't been changed in decades. Once it was a lot of money. Now it's not. Oh, and to make the law even more ridiculous, it's actually also illegal for you to get around it by acting legally. No, I'm not kidding. If you avoid the $10,000 limits by withdrawing, say, lots of $5,000 installments, they can still send you to jail. One of the ironies is that Hastert could have avoided all of this if he'd simply paid his blackmailer in gold coins instead of greenbacks. Gold is just as anonymous as cash. But it is essentially exempt from these financial regulations. Hastert could have called up any reputable gold dealer and purchased $50,000 worth of gold Eagles or Buffaloes or Krugerrands at a time, and no one would have asked any questions. All he then had to do was give the coins to his blackmailer, who could then call up a gold dealer and sell them. I'm highly skeptical of gold's merit as an investment or an inflation hedge, but as a mechanism for avoiding Big Brother, it is hard to beat. Speculation After all these years, someone would have to have mighty strong evidence to blackmail a person for $3.5 million. In my opinion, a blackmail of such magnitude would require written evidence (ex. signed love notes to a student), and possibly an out-of-wedlock child. That's just my speculation, albeit quite logical. But even if so, one can ask: Why are we going after people spending their own money, but not those engaged in illegal blackmail? Could Gold or Bitcoin Have Helped? Arends wrote "gold is essentially exempt from these financial regulations." Well, not really. Arends is wrong. There are gift laws and gift taxes. The IRS explains in Frequently Asked Questions on Gift Taxes. What is considered a gift? Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return. Pay particular attention to the the notion of getting "one's money's worth in return". The gift exclusion was $11,000 between 2002-2005, $12,000 between 2006-2008, $13,000 between 2009-2012, and $14,000 since 2013. Who pays the gift tax? The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Thus, even if those hush payments were considered a "gift", Hastert violated gift laws unless he could convince the court that by hushing someone up, he got his "money's worth". If Hastert did indeed get his "money's worth" then it is the recipient, not Hastert who violated tax laws.  There are a lot of questions here: Is blackmail a gift, or payment for services? Was justice served? If so, for the right reason? If blackmail is payment for services, why aren't they going after the recipient? Finally, gold could have helped, not in a legal sense, but rather in the sense it likely would not have been caught. Mike "Mish" Shedlock 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.

Courage to Act; Reflections on Fed Hubris; What if Whatever it Takes is Not Enough? Fed Troika? Posted: 29 Oct 2015 11:49 AM PDT This past week, Ben Bernanke was in London promoting his book "Courage to Act". Today, Albert Edwards at Societe Generale pinged me with his thoughts. Edwards writes ... Ben Bernanke is in London to publicise his book 'The Courage to Act'. Although the various open events would have been fascinating, I thought it best not to attend. I would not have been able to control myself. In a repeat of the protest at the April ECB press conference I would have probably stormed the stage, thrown confetti money at him and been unceremoniously dragged out by security. But speaking to people who were there and reading the pre-vetted Q&A on the web, reminded me just how overconfident central bankers are to their very core – even after their actions are clearly ruinous. Bernanke again paraded his lack of insight of the Fed's leading role in causing the 2008 crisis. Indeed he was self-congratulatory about the Fed's success in averting another Great Depression, not accepting that they almost actually caused it! Central bankers are doomed to repeat the same mistake until they acknowledge their role in the last crisis and stop blaming everybody else. Unfortunately it now appears from recent comments that ECB President Mario Draghi is also demonstrating the same hubris. Indeed it is becoming clear that ECB QE is already failing. It should not be forgotten that after Draghi's 2012 whatever it takes comment, he also said in the next breath "and believe me, it will be enough" in another demonstration of central bank overconfidence. Regular readers will know I have long been an extreme critic of central bank policies, particularly of the Fed and the Bank of England with their negligent pursuit of ultra-loose money policy in the mid-noughties policies that ultimately proved ruinous in the 2008 Global Financial Crisis. I believe the Fed and BoE have learned practically nothing from their previous mistakes and we are heading down exactly the same road to catastrophe as the financial markets creak and groan under the strain of QE-inspired, excess valuations. I would definitely now also put the Draghi ECB firmly in that same camp. Contrary to the Pavlovian salivations of the markets, the evidence is mounting that "whatever it takes" is not going to be enough. Private Lending Edwards cites private sector lending as evidence of ECB failure. The goal of the ECB was to spur private lending and increase inflation. The ECB succeeded at neither, but it did create huge, destabilizing asset bubbles, as did the Fed. Reader Comments Reader Randy pinged me this morning with a question: "Have you read Bernanke's book yet? Seriously Mish, I've never witnessed someone willingly display such hubris in my life. And it's scary as hell." No, I haven't read the book and do not intend to. I do not want one dime going to Bernanke. Fed Troika In a blog response to Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself? Reader John, offered these comments. I watched Ben Bernanke today at the London Pimco Investment Summit. His comments were surprisingly frank: It takes ~80k jobs created a month to maintain unemployment, and if the two jobs reports between now and the December meeting are of the order of 150,000 or more the Fed should/will hike. Interestingly, he was also made a number of snide remarks about the Regional Fed presidents, with an implicit shot Minneapolis Fed president at Narayana Kocherlakota. Bernanke stated that market participants should only take notice of 'the Troika' (his term, not mine) of the Chair, Vice President and NY Fed President. In the event of another recession, Bernanke stated negative interest rates would be likely. Stanley Fischer Vice-Chairman Background With those comments (thanks John!), inquiring minds may be interested in the background of Stanley Fischer. On June 14, 2014 Forbes explained Why The Fed's New Vice Chairman Will Be A Disaster For the U.S. Economy. The U.S. Senate finally confirmed former Bank of Israel governor Stanley Fischer as vice chairman of the Federal Reserve on Thursday. As the second-most influential Fed board member, Fischer will play a key role in advising and assisting Fed chairwoman Janet Yellen. As the governor of the Bank of Israel from 2005 to 2013, Stanley Fischer earned praises for his management of Israel's economy during and after the Global Financial Crisis. In 2009, 2010, 2011 and 2012, Global Finance magazine's Central Banker Report Card gave Fischer an "A" rating. Bank of Israel was ranked the world's most efficiently functioning central bank under Fischer's leadership in 2010. Contrary to popular belief, Israel's so-called economic strength is the byproduct of a temporary economic bubble that Fischer helped to inflate rather than the result of sound and sustainable monetary policies. Stanley Fischer is a member of the New Keynesian school of – a group that is notorious for using incredibly stimulative monetary policies (to create artificial economic growth, while virtually ignoring the existence of obvious economic bubbles and the risks of monetary policy-induced inflation. During his tenure as governor of the Bank of Israel from 2005 to 2013, Stanley Fischer's New Keynesian policies caused the country's M1 money supply to surge by an astounding 250 percent: Israel's money supply growth during this period caused consumer prices to increase by approximately 25 percent according to the official CPI. The Israeli public wasn't fooled by these questionable inflation figures, however, when hundreds of thousands of people flooded the streets in 2011 and 2012 to protest the soaring cost of living. Israel experienced the largest property price increase of all OECD nations during Stanley Fischer's time as Bank of Israel governor, which has made the country's housing market more overvalued and less affordable than ever before. The fact that rapid increases of the money supply lead to inflation and bubbles is obvious to nearly everyone but heavily indoctrinated Keynesian and neoclassical economists like Stanley Fischer, who are greatly overrepresented on the boards of central banks, unfortunately. Austrian economist Murray Rothbard may as well have been describing Israel's current economy when he stated in 1962 that "Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of 'prosperity.'" The accolades that the international economics community have heaped on Stanley Fischer are the result of a temporary bubble-driven economic boom that will end in a crisis when it finally ends. Hubris Coupled with Stupidity Ben Bernanke is nothing but a self-promotional charlatan. Contrary to the title of his book, it did not take courage to act, it took courage to do nothing! It also takes courage to admit mistakes. Bernanke failed twice. Instead of letting excesses settle in a painful, but short-term fashion, wiping out excesses and clearing out the bank CEOs who contribute to the problem, Bernanke bailed out the banks and here we are back in an even bigger asset bubble than we had prior to the great recession. Fed sponsored boom-bust cycles clearly have increasing amplitudes and troughs.  Does that represent "courage" or "stupidity"? I strongly suggest the latter. Mike "Mish" Shedlock 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.

3rd Quarter Advance GDP Estimate +1.5%; December Hike Odds Up to 46.5% Posted: 29 Oct 2015 10:08 AM PDT The third quarter advance (initial) GDP estimate came in at 1.5% a bit under the Econoday Consensus of 1.7%, a bit over the Atlanta Fed GDPNow Forecast of 1.1%, and well below the Blue Chip consensus of 2.1%. Steady domestic spending helped to prop up GDP growth in the third-quarter which came in at an annualized 1.5 percent, just shy of expectations. Final sales rose a very respectable 3.0 percent in the quarter in a gain that points to underlying momentum for the fourth quarter. Both residential and nonresidential investment slowed in the third quarter with both net exports and especially inventories also pulling down GDP. The price index came in a little lower than expected at plus 1.2 percent. Personal consumption expenditures slowed 4 tenths but are still a major highlight at a plus 3.2 percent rate. Service spending, an area insulated from global factors, continues to show solid resilience. But it was spending on durables, including vehicles, that was the strongest consumer category in the quarter. Government purchases, another area of domestic-centered spending, also contributed to the quarter's growth. The quarter's 1.5 percent rate is only 2 tenths lower than the average growth of the prior four quarters and comes against a difficult 3.9 percent comparison in the second quarter. Not a great result but not bad either. Final GDPNow Forecast for 3rd Quarter December Hike Odds Up to 46.5%  This is a muddling along estimate, signifying nothing has changed. In light of the Fed's complete reversal yesterday, muddling through was enough to send the CME Fedwatch December rate hike odds to 46.5%. click on chart for sharper image For discussion of the Fed's complete reversal yesterday to a much more hawkish viewpoint, please see Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself? Mike "Mish" Shedlock 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.

Final 3rd Quarter GDPNow Forecast vs. Consensus Estimates Ahead of 3rd Quarter GDP Release Posted: 29 Oct 2015 12:23 AM PDT The initial 3rd Quarter GDP release is due at 8:30AM on Thursday. Inquiring minds may be interested in the GDPNow forecast vs. the Blue Chip estimates vs. the Bloomberg Consensus estimate. GDPNow vs. Blue Chip Consensus Bloomberg Econoday Consensus GDPNow: 1.1% Blue Chip: 2.1% Econoday: 1.7% If you are up in time, place your bets. Bear in mind, GDP is so heavily revised, we will not know the true winner for another two to three months at the earliest. The "preliminary" winner will be announced at 8:30 AM. Bets taken until 8:26:30. Mike "Mish" Shedlock 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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• Chicago's Sheep Dogs Approve Mayor's Tax on Sheep; Quote of the Day "It's Not a Piece of Art"
• Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself?
• Austria Announces Fence With Slovenia; Irony of German Whine; Cascading Fences; Mish Proposed Strategy
• Slovenia Calls on Army, Private Security Forces, Ponders Article 222 for EU Military Aid to Halt Flow of Migrants

Chicago's Sheep Dogs Approve Mayor's Tax on Sheep; Quote of the Day "It's Not a Piece of Art" Posted: 28 Oct 2015 08:43 PM PDT "It's Not a Piece of Art" Mayor Rahm Emanuel, Chicago's master shepherd, along with his pack of aldermatic sheep dogs, successfully rounded up, then slaughtered the very Chicago taxpayers they were supposed to watch over. After slaughtering Chicago's sheep with the largest tax hike in history, Emanuel commented "It's Not a Piece of Art". Amen to that. Slaughters generally aren't a piece of art. Aldermatic Sheep Approve Emanuel's Tax Hike Crain's Chicago Business reports Emanuel Gets His Huge Property Tax Hike. The City Council has approved Mayor Emanuel's bad-news city budget, including plans for a record $543 million city property tax hike over the next four years. The action came on a voice vote after a relatively tepid two-hour debate. But aldermen did take a roll-call vote on the related appropriation of funds for 2016, and it was approved 36-14. "No, it's not a piece of art," Emanuel told the council. "But are we better off? Yes." Question of the Day Who is better off? The sheep dogs, those in bed with the mayor, the public unions, or the slaughtered sheep? Expect More Torture Those who survive the slaughter can expect still more torture. Moody's says the budget is helpful, but the budget "assumes certain actions from the State of Illinois and Illinois Supreme Court that directly impact the city's statutory pension funding requirements. Should these decisions not match the city's assumptions, new operating pressures could materialize in the immediate- and longer-term." The S&P says "Despite Chicago's efforts to address its longer-term structural issues (starting with the approval of the 2016 budget), we still consider the city's financial problems substantial, particularly because we anticipate that the city's required pension contributions will continue to increase and place pressure on the city's budget—one of the primary drivers of our rating. In our view, the extent of the city's structural imbalance, when factoring in required pension contributions, will take multiple years to rectify." Crain's Chicago business writer Greg Hinz says "Hold the champagne, mayor!" Hold the Champagne?! Is it city taxpayers, the unions, or the alderman and their pensions who are supposed to hold the champagne? In 2012 the Chicago Tribune listed Pensions of 21 Retired Aldermen while noting: "In 1991, Chicago aldermen became eligible for a pension based on up to 80 percent of their salary, with maximum benefits awarded after 20 years of service. It's a more generous plan than other city employees receive, even though membership in City Council is a part-time job. The costs are just now beginning to kick in as salaries increase and long-serving aldermen retire." Given the tax hike did nothing more than pad pockets of public unions and the alderman's own pockets, it appears to me champagne with caviar is the call of the day ... at least for the dogs. It's like taking a vote between anteaters and ants as to what's for dinner, but only counting the votes of the anteaters. Mike "Mish" Shedlock 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.

Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself? Posted: 28 Oct 2015 01:06 PM PDT In its Press Release following today's FOMC meeting, the Fed dropped all the references made last month about the softening global economy. Who's the Fed Fooling? Has the global economy stabilized in the last month? Of course not. Have the risks receded? Of course not. Last month China was a concern now it isn't. Is China any better? Of course not. Moreover, the economic reports from all Fed regions are in contraction, the soaring dollar will further dampen US exports, and the refugee crisis is making an enormous mess in Europe. Nonetheless, the Fed is back to statements similar to those it has made for much of the year. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. Rate Hike Odds Jump But Still Below 50% Yesterday the odds of a December hike were 33.2%. Today they are 42.6%. That's a decent jump but still below 50%. Those odds imply a jump from 0-.25% to .25-.50%. I still maintain the Fed might choose baby step 8th of a point hikes or quarter point ranges where the first step is an eighth of a point. Thus, the Fed might easily hike to a range .125-.375%. Of course, if the next two jobs reports are weak, or even if the December jobs report is weak, a hike is off the table. Mike "Mish" Shedlock 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.

Austria Announces Fence With Slovenia; Irony of German Whine; Cascading Fences; Mish Proposed Strategy Posted: 28 Oct 2015 10:44 AM PDT Two months ago, Austria's chancellor Werner Faymann criticized Hungary for building a fence along its border. Faymann proclaimed "To think that you can solve something with a fence, I believe this is wrong." Today, Austria Announces Fence on Slovenia Border to Slow Refugee Flows. Europe's migration crisis escalated on Wednesday after Austria said it would build a fence on its border with Slovenia in a bid to create an "orderly" inflow of refugees and migrants into the country. The move marks potentially the most serious fracture in the EU's response to the crisis, which has seen nearly 700,000 people enter Europe since the start of the year, as it would mark the first time a physical barrier is built between two members of the continent's passport-free Schengen zone. Johanna Mikl-Leitner, interior minister, insisted that Austria would not totally shut its border with Slovenia. Instead, the plan involved "fixed facilities in the area of border crossings", she said. "It's not just about a fence . . . it is about all technical possibilities to ensure a controlled, orderly influx into our country," she told Ö1, Austria's national broadcaster, adding that the plan was not "at all" an attempt to close the border. Despite repeated meetings, leaders have so far failed to come up with a unified response. While some national capitals have introduced strict border controls, others have opted to let migrants and refugees straight through, despite EU rules dictating that they should be processed when they arrive. The crisis has strained relations Germany and Austria which burst into the open on Wednesday. In a significant toughening of German rhetoric towards the crisis, Thomas de Maizière, interior minister, on Wednesday blamed Austria for accelerating the movement of refugees and putting the German authorities under extreme pressure. "Austria's behaviour in all this in the last few days has not been in order," said Mr de Maizière, immediately after a cabinet meeting in Berlin chaired by Chancellor Angela Merkel. He added: "We have had to complain that the refugees have been taken to specific places without any warning and after dusk and from there they have come to the German border with preparation and without any warning." The comments from Mr de Maizière follow criticism from Horst Seehofer, the head of the Bavarian sister party of Germany's ruling Christian Democrats, who on Tuesday lambasted Austria's handling of the wave of refugees, saying that a "lack of co-ordination" on the border between Bavaria and Austria meant that refugees were entering Germany unchecked. Austria's decision to erect a fence also triggered concern in Italy, which fears that migrants travelling along the Balkan route may be diverted from Slovenia to its northeastern border area, near the cities of Gorizia and Trieste. "It is worrying," said one senior Italian official. "It sends a strong signal." However the official cautioned that building a fence to slow the migrant flow was not the same as shutting the border. Cascade of Fences Various German officials are blaming Austria, who in turn is blaming Slovenia, who in turn blames Greece. And now Italy is concerned that Austria's fence with Slovenia will cause the flow to turn to Italy. Irony of German Whine The Irony of Germany's whine is intense. Chancellor Merkel and EU head Jean-Claude Juncker should have thought about the cascade effect when they welcomed these refugees with open arms. As I said months ago, there is an unlimited demand for free services. And Germany was not only handing out free services but free cash. So of course the migrants wanted to flood into Germany. One cannot blame Slovenia for this. Nor should anyone blame former scapegoat Hungary. No Cash Just Vouchers - Hah! In a futile effort to appease the German public and halt the flow of refugees into Germany, Peter Altmaier, Chancellor Angela Merkel's chief of staff announced "officials will also start replacing cash handouts for refugees in reception centres with vouchers for food and essential purchases. The move will make would-be refugees think twice before trying to seek asylum in Germany." I openly mocked that ridiculous notion in Sweden's Migration Projection Doubles in Three Months (And It Won't Stop There); No Cash, Just Vouchers (Hah!) When you have no food and no shelter, it is virtually guaranteed that money would be spent on food and shelter. So in essence, vouchers are nearly as good as cash, just a bit less flexible. Sweden is another country complaining. "It's as if we have a land border with Turkey," said Anders Danielsson, head of the Sweden's Migration Board. Of course it's as if Sweden and Germany have borders with Turkey. Sweden and Germany offer the most free services. These refugees aren't stupid. They go to the countries with the biggest handouts. Rules? Who Cares About Rules? EU rules require countries who first receive the refugees to register them. That too is a seriously misguided policy. The key entry point is Greece. But what the hell is cash-strapped Greece supposed to do with hundreds of thousands of refugees other than to let them move on to Slovenia? Slovenia Math I did the Slovenia math this morning in Slovenia Calls on Army, Private Security Forces, Ponders Article 222 for EU Military Aid to Halt Flow of Migrants. 84,000 migrants flooded Slovenia, a country of 2 million, in less than two weeks. Let's do the math on that population inflow: 84,000 / 2,000,000 is a population growth of 4.2% in 10 days. Were the US population to grow at the same rate, the US population would grow by over 13 million, 13,393,800 to be precise. What would happen if 13.4 million migrants flooded entry points of San Diego California, El Paso Texas, and Miami Florida in the same 10 days? Partially Blocked After criticizing Hungary for building a fence, Austria, is now building a fence that will effectively trap the migrants in Slovenia, unless the flow turns to Italy instead. So now Italy is worried, and rightfully so. Where Wall Really Needed Months ago I proposed a wall between Greece and Turkey because the vast majority of the migrants enter the EU from that route. I also proposed limiting free food, free shelter, and free services. Instead, Chancellor Merkel made a bargain with Turkey, offering the Turks 3 billion euros to pen the migrants. Even worse, Germany shelved a report highly critical of Turkey's free speech record to make the deal. I discussed the foolishness of that idea in Bargaining With the Devil: Germany Bribes Turkey With Aid Package, EU Sidelines Highly Critical Report on Turkey's Free Speech Record. Concentration Camp for Migrants One of Turkey's demands was visa-free access for 75 million Turks to the Schengen border-free area from as soon as 2016! Merkel had clearly lost her mind to agree to that. Fortunately for the EU, the deal fell through when Turkey decided one day later €3 Billion Not Enough, coupled with a vow to not become a 'concentration camp for migrants'. Winter Scramble So here we are, in a Winter Scramble with Juncker Warning "Refugees Will Freeze to Death" coupled with an an apology from Tony Blair for the creation of ISIS. Has any refugee crisis in history ever been handled worse? Origin of the Crisis The origin of this mess is two-fold. The US overthrow of Saddam Hussein  that directly led to the power vacuum and the creation of ISIS US support for Al Qaeda rebels in the Syrian civil war also destabilized Syria creating millions of refugees in the war-torn country. The free handouts from Germany, Sweden and others bought the crisis to where we are now. It would help if Syria was stable, even under a leader we do not like. But Obama will have no part of that. Mish Proposed Strategy Block the border between Greece and Turkey Stabilize Syria, even under Assad, but also seek promises of free Syrian elections Eliminate or greatly reduce the free handouts Return economic refugees to point of entry Give Turkey some aid for US/UK role in this mess US and EU bureaucrats have done none of the above. Mike "Mish" Shedlock 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.

Slovenia Calls on Army, Private Security Forces, Ponders Article 222 for EU Military Aid to Halt Flow of Migrants Posted: 28 Oct 2015 12:07 AM PDT Slovenia has a population of 2 million people. But in the last 10 days alone, 84,000 migrants have flooded the country. In response, Slovenia has called out the Army and private security forces to help maintain order. That did not stem the tide, so Slovenia Considers Calling for EU Military Aid. Slovenia, the tiny Balkan state struggling to cope with the migration crisis, has raised the idea of invoking a never-before-used "solidarity clause" in the EU treaties to formally request European aid and military support. Ljubljana [Slovenia's capital] recently floated the option of triggering Article 222, which enables military aid to EU nations overwhelmed by disasters, according to two officials familiar with the talks. It indicates the drastic steps under consideration to deal with a tide of asylum seekers arriving in Europe. One Slovenian government official said invoking Article 222 was a "viable option" as a last resort. Alarmed by the potential for Slovenia pulling the bloc's emergency cord, EU officials have sought to head off a request, in part by arranging for EU countries to provide 400 police to help Ljubljana manage the crisis. Miro Cerar, Slovenia's prime minister, had warned the EU would "fall apart" unless the "unbearable" pressure was not eased promptly. His foreign minister Karl Erjavec hinted at the potential for a fence, saying "impediments" could be considered to stem the cross-border flows. The solidarity clause states that EU member states "shall mobilise all the instruments at its disposal, including the military resources" in the event the requesting country is subject to a terrorist attack or is the victim or a man-made or natural disaster. It has never been invoked. Some EU officials are keen for the principle not to be tested. Barbed exchanges between the leaders of Croatia, Serbia and Slovenia have raised concerns in Brussels that tensions could open old wounds from the bloody break-up of Yugoslavia and rekindle various territorial disputes. Slideshow Jean-Claude Juncker, European Commission president, described the worst finger-pointing as "the politics of panic". Politics of Panic In actuality, Slovenia should have panicked long ago. The EU is offering 400 police officers. Lovely. As noted earlier, 84,000 migrants flooded Slovenia, a country of 2 million, in less than two weeks. Let's do the math on that population inflow: 84,000 / 2,000,000 is a population growth of 4.2% in 10 days. Were the US population to grow at the same rate, the US population would grow by over 13 million, 13,393,800 to be precise. Imagine what would happen if 13.4 million migrants flooded entry points of San Diego California, El Paso Texas, and Miami Florida in the same 10 days. Do you think there would be panic? I sure as hell do. By the way, there are another 2 million refugees in Turkey,  many of them making their way towards the border with Greece, Peak Merkel This crisis will be the undoing of German Chancellor Angela Merkel. I labeled the process "Peak Merkel". Joining me in similar analysis, Financial Times writer Gideon Rachman says The End of the Merkel Era is Within Sight. Rachman is a lot more forgiving of her errors than I am, but his central idea is correct. I beat him to the punch by eight days with Swamped By Stupidity; Peak Merkel. Finally, Juncker himself might be in for a bit of panic given this warning shot: Poland Elects Rightwing Eurosceptic, Anti-Immigration Government. Mike "Mish" Shedlock 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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• EU Rules Bitcoin is a Currency, US Says Bitcoin is a Commodity; Which Side is Correct? What About Gold and BitGold?
• Regional Fed Reports Five for Five in Contraction; Texas Region Worsening, Richmond Negative Again
• Cracks in the Economy Widen as Durable Goods Orders Sink
• Keen vs. Keen: Will the Real Steve Keen Please Stand Up?

EU Rules Bitcoin is a Currency, US Says Bitcoin is a Commodity; Which Side is Correct? What About Gold and BitGold? Posted: 27 Oct 2015 11:46 AM PDT European Court of Justice Rules Bitcoin is a Currency Last week, the European Court of Justice ruled Bitcoin is a Currency and Exchanges are VAT-exempt. The European Court of Justice (ECJ) has ruled that bitcoin exchange transactions should be exempt from VAT. The ECJ ruling stated that bitcoin transactions "are exempt from VAT under the provision concerning transactions relating to currency, bank notes and coins used as legal tender." The case involved a request regarding the tax status on exchange commissions and margins which came from a Swede called David Hedqvist who was looking to set up a one-man bitcoin exchange. He had approached Swedish tax authorities for an advanced decision on whether or not the exchange of bitcoin into Swedish Krona and vice versa should be considered as a VAT taxable or VAT exempt activity. The tax authorities said Bitcoin trading should be subject to VAT, but Hedqvist thought the answer should be no, and he took it to court and eventually it reached the appeal court in Sweden. Since all VAT law flows from Europe, the appeal court passed the case on to the ECJ to decide. There have been some limited decisions in the US involving criminal cases where bitcoin was viewed as money, for the purposes of money laundering offence. Meanwhile, the US Commodity Futures Trading Commission (CFTC) last month deemed bitcoin to be a commodity and closed down trading platform Coinflip in the process. Commenting on the ruling, Sarah Buxton, a tax lawyer at the global law firm Bryan Cave LLP said: "The European Court of Justice, Europe's highest court, has ruled that exchanges of Bitcoin into fiat currency should be exempt from VAT under Article 135(1)(e) of the VAT Directive concerning transactions relating to currency, bank notes and coins used as legal tender. Jens Bader, chief commercial officer of Secure Trading said the ruling had far reaching implications for Bitcoin and other cryptocurrencies, as all EU states will now have to comply with the VAT ruling. Bader said: "Many with a vested interest in cryptocurrencies will be overjoyed by the ruling. It is easy to see why an un-regulated currency not subject to sovereign states taxes is an enticing prospect. However, it is a shame to see the ECJ cave in on this issue, and for Bitcoin not to be held to universal VAT standards. "The question of whether or not Bitcoin should be subject to VAT is a simple one – if it is considered a currency it shouldn't be subject to VAT and if it is considered a product it should be. In my mind, Bitcoin is not a currency. It is an exchangeable product – but a product none-the-less – and for that reason I am surprised by the ECJ's ruling. "The distinction lies in the fact that Bitcoin exchanges, and cryptocurrency exchanges like it, are not regulated and licensed financial services. While we call it a 'currency', in fact Bitcoin is a tradable commodity, like gold and silver. US Says Bitcoin is a Commodity In the US, the Commodity Futures Trading Commission (CFTC), ruled on September 17 that Bitcoin Is a Commodity. Virtual money is officially a commodity, just like crude oil or wheat. So says the Commodity Futures Trading Commission (CFTC), which on Thursday announced it had filed and settled charges against a Bitcoin exchange for facilitating the trading of option contracts on its platform. "In this order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities," according to the press release. By this action, the CFTC asserts its authority to provide oversight of the trading of cryptocurrency futures and options, which will now be subject to the agency's regulations. In the event of wrongdoing, such as futures manipulation, the CFTC will be able to bring charges against bad actors. CFTC Targets Bitcoin Options Site On the day of the ruling the CFTC Targeted Coinflip with a cease and desist letter due to its trading of option on the commodity known as bitcoin. On Thursday, the CFTC announced that it had issued an order against and settled charges with Coinflip, operating under the name Derivabit. The company allowed Bitcoin users to engage in options and futures trading. Most of the site was disabled in July 2014, with all customer money refunded, before the CFTC contacted the site. It was fully closed in January 2015. "For these contracts, Coinflip listed Bitcoin as the asset underlying the option and denominated the strike and delivery prices in US Dollars," the CFTC wrote in its order. Bitcoin Money Laundering When it suits the bureaucrat's purpose, rulings can also go the other way. Please consider the March 30, New York Times report Inquiry of Silk Road Website Spurred Agents' Own Illegal Acts, Officials Say. On Monday, the government charged that in the shadows of an undercover investigation of Silk Road, a notorious black-market site, two federal agents sought to enrich themselves by exploiting the very secrecy that made the site so difficult for law enforcement officials to penetrate. The agents, Carl Mark Force IV, who worked for the Drug Enforcement Administration, and Shaun W. Bridges, who worked for the Secret Service, had resigned amid growing scrutiny, and on Monday they were charged with money laundering and wire fraud. Mr. Force was also charged with theft of government property and conflict of interest. A criminal complaint unsealed on Monday in federal court in San Francisco outlined the allegations against the two former agents. While investigating Silk Road, Mr. Force "stole and converted to his own personal use a sizable amount of Bitcoins," the digital currency that was used by buyers and sellers on the website and which he obtained in his undercover capacity, the complaint said. "Rather than turning those Bitcoin over to the government, Force deposited them into his own personal accounts," it added. Is Bitcoin Money or a Commodity? If theft of bitcoin constitutes "money laundering", does that make bitcoin money, a currency, or a commodity? More simply, is bitcoin money or a commodity? The answer is yes to both. Money laundering charges have nothing to do with it. What is Money? To understand why bitcoin is both money and a commodity, we must first answer the question: What is Money? To that, let's turn to Murray Rothbard's classic: What Has Government Done to Our Money? Here are seven pertinent Rothbard quotes with thanks to Wikiquote. Pay particular attention to number 2. The cumulative development of a medium of exchange on the free market — is the only way money can become established. … government is powerless to create money for the economy; it can only be developed by the processes of the free market. Money is a commodity … not a useless token only good for exchanging; … It differs from other commodities in being demanded mainly as a medium of exchange. It doesn't matter what the supply of money is. Inflation may be defined as any increase in the economy's supply of money not consisting of an increase in the stock of the money metal. Money … is the nerve center of the economic system. If, therefore, the state is able to gain unquestioned control over the unit of all accounts, the state will then be in a position to dominate the entire economic system, and the whole society. Inflation, being a fraudulent invasion of property, could not take place on the free market. Freedom can run a monetary system as superbly as it runs the rest of the economy. Contrary to many writers, there is nothing special about money that requires extensive governmental dictation. Money is a Commodity For those who have not done so, I highly recommend downloading and reading the Rothbard's eBook What Has Government Done to Our Money? The key point is number two: "Money is a commodity. It differs from other commodities in being demanded mainly as a medium of exchange." Bitcoin is clearly a commodity whose primary purpose is a medium of exchange. Bitcoin depends on a blockchain ledger to validate all transactions. Bitcoin Wiki has a nice description of the BlockChain Technology. What About Gold and BitGold? BitGold has nothing to do with Bitcoin. The names just happen to be similar. Bitcoin is a digital currency, backed by nothing, whereas BitGold is 100% backed with audited, real physical gold. BitGold does not depend on blockchain. Instead, BitGold users can tie their account to a debit card and purchase nearly anything, anywhere, as long as the merchant accepts a debit card. Given that gold can once again easily be used to purchase nearly anything, it is difficult if not impossible to say that gold is no longer a "medium of exchange". And if BitGold is money, there is no longer any basis for the often heard phrase "gold is not money". Some believe gold to ceased to be money following President Nixon's Closing of the Gold Window (See Nixon Shock). The only possible debate about whether or not gold is money pertains to the phrase "demanded mainly as a medium of exchange". BitGold, GoldMoney For those who are fed up with currencies backed by nothing, as well as those who want to avoid huge markups on gold coins and gold bullion purchased in small quantities elsewhere, I highly recommend opening up BitGold or GoldMoney accounts. Disclosure As I have noted before, I have a relationship with both GoldMoney and BitGold. Storage fees at GoldMoney are the lowest in the industry. I get a tiny percent of the tiny storage fees collected. There is no difference to the account holder. At BitGold, I get a small signup fee, and again that comes out of BitGold's pocket, not the account holder. I do not enter relationships to collect fees. I turn down such offers all the time. Related Articles BitGold Now Available in US! Why BitGold? Reader Q&A On Bitgold Want out of the competitive debasement fiat currency QE and negative interest rate trap? Then Sign Up for your BitGold Account today if you have not already done so. Mike "Mish" Shedlock 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.

Regional Fed Reports Five for Five in Contraction; Texas Region Worsening, Richmond Negative Again Posted: 27 Oct 2015 09:44 AM PDT Dallas Regional Activity Dives Deeper Into Contraction Yesterday the Dallas Fed general activity index slipped further into contraction to -12.7, well below the Bloomberg Consensus Estimate of -6.0, and also lower than the lowest guess of -7.0. Look no farther than to the Dallas Fed manufacturing survey for evidence on how severely low oil prices are affecting the energy sector. Contraction for the general activity index deepened to minus 12.7 in the October report from September's minus 9.5. This is the 10th negative reading in a row. New orders are now negative for a 12th month in a row, at minus 7.6, while unfilled orders are on a similar streak, at minus 3.1. Production is positive for a second straight month, at plus 4.8 in a reading that, however, is very likely to return to the negative column given how low orders are. Hiring is flat with price readings, especially for finished goods, in contraction. This report joins those from Empire State, Philly Fed, and Kansas City which are all pointing to another month of contraction underway for the nation's factory sector. Richmond Makes it Five for Five Today's Richmond Fed report makes it five for five in contraction, albeit just barely, at -1. Bloomberg Econoday reports ... The Richmond Fed makes it five for five, that is five regional Fed reports all showing negative headlines for October. The Richmond Fed index did improve, however, to minus 1 from September's minus 5. New orders came in at zero following the prior month's steep contraction of minus 12. But backlog orders, at minus 7, are down for a third month which is not a plus for future shipments or employment. Shipments in October fell to minus 4 from minus 3 which is also a third month of contraction. Hiring is still positive, unchanged at plus 3, but continued growth here is uncertain. Price data are mute with prices received showing slight contraction as they are in other reports. This morning's report on durable goods orders showed another month of broad weakness in September and this report, together with the other regional reports, point to another weak month for the factory sector in October. Durable Goods Weaker Than Expected Rounding out the manufacturing weakness, earlier today I reported Cracks in the Economy Widen as Durable Goods Orders Sink. Here are some additional charts. Durable Goods New Orders Durable Goods New Orders Excluding Transportation Transportation, especially large aircraft orders can skew the numbers. The above chart separates out those orders, providing a different perspective. Mike "Mish" Shedlock 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.

Cracks in the Economy Widen as Durable Goods Orders Sink Posted: 27 Oct 2015 08:56 AM PDT The word of the day is "awful". That's the best description of today's durable goods report. Durable goods orders came in at -1.2% lower than the Bloomberg Consensus Estimate of 1.0%. And last month's numbers were revised lower across the board. There is no way put lipstick on that pig. Durable Goods Lowlights The factory sector is showing cracks with orders contracting slightly more than expected, down 1.2 percent in September with August's contraction revised lower to minus 3.0 percent. Other readings are likewise weak with ex-transportation down 0.4 percent following a downward revised 0.9 percent decline in August and with core capital goods orders down 0.3 percent after falling a downward revised 1.6 percent in August. Other readings include a second straight and sharp 0.6 percent decline in unfilled orders and a third straight decline in inventories, down 0.3 percent which is the sharpest decline since May 2013. The decline in unfilled orders suggests that factories, lacking new orders, are working down backlogs while the decline in inventories points to growing caution in the business outlook. But factories are keeping up shipments which is good for GDP, up 0.2 percent after August's 0.5 percent decline with core capital goods shipments up 0.5 percent after a 0.8 percent decline. Motor vehicles are a positive in the report, showing a 1.8 percent gain in new orders and a 1.6 percent gain in shipments with both reversing similar sized declines in August. Also positive are electrical equipment and fabricated metals, with both perhaps getting a boost from construction, along with defense aircraft and defense capital goods. Industries showing declines in new orders include primary metals, machinery, and computers & electronics. Orders for civilian aircraft fell 62 percent in September following a 23 percent decline in August. This report falls in line with industrial production data where manufacturing in September slipped for the fourth time in five months. Weakness in exports is the balancing factor tipping the factory sector away from growth. Durable Goods Month-Over-Month and Year-Over-Year Year-over-year, durable goods orders are down for the eighth consecutive month, and tenth out of the last eleven. Manufacturing is clearly in recession. Mike "Mish" Shedlock 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.

Keen vs. Keen: Will the Real Steve Keen Please Stand Up? Posted: 27 Oct 2015 01:31 AM PDT Economists Prove That Capitalism Is Unnecessary Several readers sent me a link to Economists Prove That Capitalism Is Unnecessary. The title was hardly surprising, given that is what many economic illiterates think. However, I was startled to find out it was written by Steve Keen, one of my favorite economists. Did Steve Keen really propose such a thing?  Thankfully, he didn't. The first sentence of his article reads "Actually they've done no such thing. But they do effectively assume that it's unnecessary all the time. ... I've read this sort of nonsense in dozens of mainstream academic papers over the years, and railed against it in an academic sort of way." With that, I was more than a bit relieved. And in regards to central planning and ability of bureaucrats to spot bubbles, bad planning, and instability, Keen says ... "And how would economic agents notice this instability? They would realize that a pattern of relative prices that had occurred once before in the past happened again. Hmmm. O.K.A.Y." Getting to the heart of the matter, Keen praises Hayek ... "The strength of a market economy was how it let people combine fragmented and incomplete knowledge in a way that no centralized system could do. Hayek's main target here were socialists who believed that a complex economy could be centrally planned—thus doing away with markets institutionally." Keen vs. Keen In his Debtwatch Manifesto Keen proposes three mechanisms for dealing with the debt crisis. The first is a debt jubilee. The second is a mechanism that would act to restrict share prices. In his third proposal, Keen states "Lenders would only be able to lend up to a fixed multiple of the income-earning capacity of the property being purchased—regardless of the income of the borrower. A useful multiple would be 10, so that if a property rented for $30,000 p.a., the maximum amount of money that could be borrowed to purchase it would be $300,000." Hmm. How can Keen, me, or anyone else discern the correct "useful multiple"? Shouldn't this be left to the free market?  Keen also discusses full reserve proposals, one by Irving Fisher, the other HR2990 a bill Proposed by Congressman Dennis Kucinich in 2011. Keen: Technically, both these [full reserve] proposals would work. I won't go into great detail on them here, other than to note my reservation about them, which is that I don't see the banking system's capacity to create money as the causa causans of crises, so much as the uses to which that money is put. The problem comes when that money is created instead for Ponzi Finance reasons, and inflates asset prices rather than enabling the creation of new assets. Mish: I propose, the system's capacity to create money at will is the very problem. The fact of the matter is central banks can create money but not dictate where it goes. Curiously, Keen is willing to let bureaucrats decide what constitutes Ponzi financing, even though history shows government bodies and central banks have a 100% failure rate at identifying bubbles. Keen is concerned about "where the money goes", yet is willing to trust bureaucrats more than the free market. To quote Keen directly ... "And how would economic agents notice this instability? They would realize that a pattern of relative prices that had occurred once before in the past happened again. Hmmm. O.K.A.Y." Keen: Though I am a proponent of government counter-cyclical spending, I am skeptical about the capacity of government agencies to get the creation of money right at all times. Mish: Keen is a proponent of government counter-cyclical spending, but what government? A socialist one? A communist one? Republican? Democrat? Keenian? Mishian? Who decides what is cyclical and what is counter-cyclical? Keen? Bernanke? Hillary? Me? Given central banks and government bodies have a 0% success of spotting bubbles, Keen's statement about inability of government agencies to get the creation of money right at all times is more than a bit curious. The simple fact of the matter is that no one needs to sit back and declare what is money and what isn't. No one needs to decide the correct money supply. Free Market is the Solution The free market, left on its own accord will decide nicely. The problem is not lack of regulation, the problem is regulation. The Fed is part of the problem. Bureaucrats wasting money is part of the problem. Corporate cronyism is part of the problem. Free markets, not bureaucratic intervention is the solution. Those who believe differently need to explain debt bubble boom and busts of ever increasing amplitude. One either has faith in free markets, or one doesn't! So, why should government, any government decide what is money and what isn't? Why should any government or any bureaucratic body like the Fed have such powers? Will the Real Steve Keen Please Stand Up? In his Forbes article, Keen mostly argues in favor of capitalism and free markets. In his Debt Manifesto, Keen argues for central planning and controls. I am a big fan of Steve Keen. He has taught me much about debt deflation. Our differences primarily lay in what to do about things. Free markets are often criticized for causing problems, but can someone, anyone, tell me when they have ever been tried?  In his latest Forbes article Keen nearly gets things correct. He is wrong about the "system's capacity to create money at will" not being the essential problem, yet he hints at it. That is a start. Now, Keen needs to go through his Debt Manifesto one more time to figure out what is and what is not "central planning" and eliminate everything that isn't. Steve, what's left? Mike "Mish" Shedlock 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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