Friday, October 31, 2014

US 3Q 3.5% GDP: Strong External Numbers, Fragile Internal Developments

To my valued email subscribers, only a max of 3 blog post a day is sent to you. I posted 5 today so the other 2 won’t get reflected on your mailbox. Nonetheless here they are

Back to the regular programming.

The Wall Street Journal reports
The economy grew at a solid pace during the third quarter, driven by an uptick in military spending and a drop in imports, showing the U.S. on relatively firm footing as worries mount about a global slowdown.

Gross domestic product, the broadest measure of goods and services produced across the economy, expanded at a 3.5% annual rate from July through September, the Commerce Department said Thursday.

The quarter showed broad-based improvement in the U.S. economy. Business investment grew steadily. Exports showed resilience against a backdrop of slowing global growth. Government outlays, which had dragged on growth for four years, enjoyed a large boost from military spending alongside a brightening budget picture in cities and states.


The table above from Bespoke invest exhibits the breakdown of the US GDP.

Notably there has been a broad based weakening of investments aside from signs of slack from consumers despite record stock markets.

What has really perked the advanced estimated 3Q numbers has been trade and government.

Additionally the marginal growth in imports, consumption slack and negative inventories hardly suggests of buoyant domestic activities. 

And if to reckon from the frame of Fixed Investments (FI) and consumer consumption (PCE), Alhambra Partner’s Jeffrey Snider at the David Stockman’s Contra Corner has equally been unimpressed.
In the latest quarter, PCE and FI accounted for only 1.96% growth, for an average of just 2.0% in 2014. Over those same three quarters, GDP has averaged just 2.34% meaning that the more volatile swings, especially from Q1 to Q2, have largely been meaningless. What is left is an economic foundation stuck somewhere between recession and growth, but never achieving fully either one or the other (yet).
This leaves exports as the bright spot. But with China-Europe-Japan and emerging markets struggling, it is doubtful for international trade to remain robust. Add to this the economic sanctions on Russia.
Aside from trade, defense spending has been the other major booster for US 3Q GDP.

According to (bold mine)
The 16% spike in defense spending was driven mainly by higher outlays on services to support military members instead of purchases of tanks, fighter jets and ships.

Outlays on services jumped nearly 17%, with most of the gains coming in a trio of categories known as personnel, weapons and installation support. The military also spent a bit more on ammo, missiles and oil.

Spending on major weapons actually fell slightly.

Although the third-quarter increase was unusually large, defense spending is notoriously volatile and often lumpy. And spending on military services appears to have a pronounced tendency to increase sharply in the July-to-September period.

Sometimes a big increase is merely catchup after several quarters of weak outlays. Military outlays, for instance, rose a meager 0.9% rate in the second quarter after falling by a 4% rate in the first quarter and dropping 11.4% in the 2013 fourth quarter.
So thanks to the war against ISIS US 3Q GDP growth has been ‘growing at a solid pace’. This also implies that the bureaucracy and military contractors had been the major beneficiaries of the supposed 'solid pace' of 3Q growth as most the economy struggled (add to this of course Wall Street).

But of course, government spending whose resources used or consumed comes at the expense of the productive agents of the economy either through coercive transfer and or through opportunity costs…means that the supposed ‘solid pace’ of statistical G-R-O-W-T-H won’t be sustainable if the private sector won’t pick up.

US 3Q GDP like the Philippine 2Q GDP are wonderful examples of the variances between statistical G-R-O-W-T-H and real economic growth (by real I mean private sector growth excluding government). 

Phisix: Month End Afternoon Delight Pump Helped by BoJ

As I have been saying here, unlike the bullmarket of 2013, massaging of the index has become a frequent, if not a regular feature.

Just yesterday, the PSE had another low volume fantastic index massaging episode, highlighted by a combo—a selective pump on 6 major market cap issues PLUS marking the close. Add this to Monday's last minute pump.

Essentially current dynamics has been unfolding exactly as I described of the recent price management operations
Nonetheless, the common trait in the massaging the index, either via intraday “pump” or “marking the close” have been to massively push up prices of at least 3 issues with combined market cap weighting of 15-20%. In panic buying episodes, (September 24 and October 16), the kernel of these activities transpire after lunch break.


The same modus has been at work today; an 'afternoon delight' ramp which culminated with a massive 'pump' at the last minute. 

Basically about 51% of the day’s .62% gains have been from the closing minute push.

In contrast to yesterday, today’s volume modestly improved to Php  9.7 billion from yesterday’s 7.6 billion. So I wouldn’t call today a low volume index massaging day. charts from and

Given the BoJ’s shock and awe which has so far spurred an astounding meltup in European and US stocks (futures), I expected the pump to happen and but was unimpressed by the close. 

As a side note, the Japan's Nikkei skyrocketed by a phenomenal 4.83% today to a seven year high. This has not only due to the BoJ’s steroids but likewise from the reported doubling of allocation for Japanese stock by the world’s largest pension fund, Japan’s Government Pension Investment Fund GPIF. So Japanese stocks will be pushed by both the BoJ AND GPIF.


Returning to the Phisix, the Afternoon delight was pretty much broadbased, which is understandable, because these last minute punters may have believed that the BoJ’s magic could spillover to the Phisix at the early trading sessions in the coming week. They could be right.

Today’s biggest sectoral gainers had been the industrials and services.


The biggest closing push came from industrials (middle) but had also been supported by the financials (left) and holdings (right)


Naturally the favorite the property sector (left) can’t be left behind while curiously the mining index (right) joined the frenzy.

As one would note, these stock market operators appear to have been methodically attempting to establish foothold on specific price levels (by 50-100s) regardless of valuations or instability risks. 

No warnings from political authorities will hinder these determined manic forces from what they perceive as the path to utopia.

Just a reminder…

HOT: Bank of Japan EXPANDS Stimulus

Following the footsteps of the ECB and in the face of today's reported collapse in household spending, the BoJ expands stimulus to send the Nikkei flying by over 4% (as well as global stocks) as of this writing.

From the Financial Times:
Japan's central bank has given in to calls to crank up its monetary stimulus programme as the early gains from prime minister Shinzo Abe's economic revival campaign have faded.

The BoJ said in a statement that it would expand the country's monetary base to Y80t per year, from the Y60t-70t level it has targeted since last April in what was already an aggressive asset purchasing scheme.

Data released earlier on Friday showed the bank is far from achieving the 2 per cent inflation target it had set for next year.

The BoJ has pursued this goal as a means of dragging the nation out of the deflation that for decades had drained corporate confidence and prompted consumers to put off big purchases as a hangover from the late-1990s banking crisis.
Governments have become so desperate as to anchor on the monetary pixie dust for economic salvation.

Yet as I previously wrote
It’s a wonder how the Japanese economy can function normally when the government destabilizes money and consequently the pricing system, and equally undermines the economic calculation or the business climate with massive interventions such as 60% increase in sales tax from 5-8% (yes the government plans to double this by the end of the year to 10%), and never ending fiscal stimulus which again will extrapolate to higher taxes.
What all these does will be to extend and pretend in the hope that things will improve but in actuality would only accumulate more imbalances until the system snaps. The BoJ's actions signifies as doing things over and over again yet expecting different results.

Gold’s Store of Value Seen from Leonardo da Vinci’s Salary

Among the masterpieces of the Italian Renaissance, Leonardo da Vinci’s “La Scapigliata” stands out distinctly from the rest.

The unfinished painting is of a common woman with disheveled hair. It’s remarkable particularly for depicting not the exceptional, but the real.

Part of da Vinci’s genius was the way he was able to capture life—genuine, unaffected reality, often intense detail. His notebooks reflect the same.

Leonardo, in fact, passed on to posterity great details of his finances. We know, for example, that around the time he painted La Scapigliata in the early 1500s, the great master was living in Milan and earning a salary directly from the king.

Leonardo’s journals state that in a ten-month period, he was paid a total of 240 scudi and 200 florins from the king.

The Italian gold scodo at the time was 3.42 grams of gold, and the florin was 3.54 grams. As of today’s gold price, that adds up to an annualized salary of $72,153.24.

Bear in mind, this was Leonardo’s ‘take home pay’ as there was no income tax, meaning his gross salary in today’s world would be just over $100,000 to account for income tax and FICA.

If we were to extend this analogy even further, given that Leonardo was on the government payroll back then as an artist/engineer, we can look up the US government employee pay scale today.

Da Vinci was an accomplished professional to say the least. His age, experience, and job title in the early 1500s would make him the equivalent of a GS-13 rank today (based on current US government pay scale).

And today’s salary for a GS-13 government worker? You guessed it. Right around $100,000.

It’s incredible how effective precious metals are as a long-term store of value. Even going back over 500 years, we can match up Leonardo da Vinci’s salary as being similar to what he might receive today.

Imagine for a moment that time travel were possible, and Leonardo could transport himself to today’s time—he would still be able to spend those coins. Or at least trade them for currency at the same purchasing power.

Now that is a store of a value. This is the real stuff.

Purchasing Power of the U.S. Dollar 1913 to 2013

The US dollar’s (inflation taxed) purchasing power since the FED’s inception (from

Global Shadow Banks Inflate to Over $75 Trillion in 2013 at pre-Crisis Levels!

As of 2012, I posted here  the global tally of Shadow Banks which have grown to 80% of GDP at $71 Trillion. 

At the end of 2013 global shadow banks has inflated to over $75 trillion or still about 80% of GDP to a pre-crisis high!

From the Bloomberg: (bold mine)
The shadow banking industry grew by $5 trillion to about $75 trillion worldwide last year, driven by lenders seeking to skirt regulations and investors searching for yield amid record low interest rates.

The size of the shadow banking system, which includes hedge funds, real estate investment trusts and off-balance sheet investment vehicles, is about 120 percent of global gross domestic product, or a quarter of total financial assets, according to a report published by the Financial Stability Board today.

Shadow banking “tends to take off when strict banking regulations are in place, when real interest rates and yield spreads are low and investors search for higher returns, and when there is a large institutional demand for assets,” according to the report. “The current environment in advanced economies seems conducive to further growth of shadow banking.”
Related to the the informal economy, shadow banks are essentially regulatory arbitrages where markets “skirt regulations” in order to conduct credit related activities. 

Record low interest rates only encourages the use of shadow banks when restrained in the formal banking system. As a reminder, because shadow banks are barely regulated, this implies statistical estimates may be prone to significant errors.

Here is a summary of findings from studies conducted by the  FSB’s Regional Consultative Groups (RCG), as per the Financial Stability Board (bold mine)
The main findings from the 2014 exercise are as follows:

-According to the MUNFI estimate, based on assets of Other Financial Intermediaries (OFIs), non-bank financial intermediation grew by $5 trillion in 2013 to reach $75 trillion.This provides a conservative proxy of the global shadow banking system, which can be further narrowed down.

- By absolute size, advanced economies remain the ones with the largest non-bank financial systems. Globally, MUNFI assets represent on average about 25% of total financial assets, roughly half of banking system assets, and 120% of GDP. These patterns have been relatively stable since 2008.

- Adjusted for exchange rate effects, MUNFI assets grew by +7% in 2013, driven in part by a general increase in valuation of global financial markets, while in contrast total bank assets were relatively stable. In the case of Investment Funds, adjusting for valuation effects reduced the 2013 FX-adjusted growth rate by about 10.3 percentage points (see Box 4-2). The global growth trend of MUNFI assets masks considerable differences across jurisdictions, with growth rates of OFIs ranging from -6% in Spain to +50% in Argentina.

- Emerging market jurisdictions showed the most rapid increases in OFIs. Nine emerging market jurisdictions had 2013 growth rates above 10%. However, this rapid growth is generally from a relatively small base. While the non-bank financial system may contribute to financial deepening in these jurisdictions, careful monitoring is still required to detect any increases in systemic risk factors (e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit provided by the non-bank sector.
My comment ‘small base’ doesn’t mean less risk. Risks are not a one size fits all phenomenon. The scale of credit risk depends on the distinctive character of the political economy of every nation to intermediate credit
- Among the MUNFI sub-sectors that showed the most rapid growth in 2013 are Trust Companies and Other Investment Funds. Trust Companies experienced the fastest 2013 growth rate of 42%, which is in line with the sector’s average growth over 2007-2012. Other Investment Funds, the largest MUNFI sub-sector, recorded 18% annual growth in 2013, which represents a sharp acceleration from the average growth rate in the preceding years. It should be noted that the Hedge Funds sub-sector remains significantly underestimated in the FSB’s exercise due to the fact that offshore financial centres, where most Hedge Funds are domiciled, are currently not within the scope of the exercise. More frequent updates of the IOSCO Hedge Fund Survey and further refinement of the data presented in the survey, including the availability of time series, could provide important additions to the Global Shadow Banking Monitoring Report.

-Using more granular data reported by 23 jurisdictions, the broad MUNFI estimate of non-bank financial intermediation was narrowed down by some $27 trillion (see Section 5). The narrowing down items considered in this year’s report are comprised of assets related to self-securitisation, assets of OFIs prudentially consolidated into a banking group, and entities not directly involved in credit intermediation, including Equity Investment Funds, equity REITs, and OFIs which are part of a non-financial group and are created for the sole purpose of performing intra-group activities. This reduced total OFI assets for the 23 jurisdictions that reported granular data from $62  trillion to $35 trillion. Using the narrowed down estimate, the growth rate of shadow banking in 2013 was +2.4%, instead of +6.6% using the MUNFI. The FSB will  continue to refine the methodologies in narrowing down the estimate as well as  encourage its member jurisdictions to collect the relevant data.

-The measures of the level of interconnectedness between the banking and the non-bank financial system were improved in this year’s report by adjusting for bank’s assets and liabilities to OFIs that are prudentially consolidated into banking groups. Overall, the level of interconnectedness between the banking and the non-bank financial system declined in 2013. However, the relevance of the findings in this area is hampered by the absence of reporting of this data by a number of large jurisdictions.
As I said statistical numbers will be incomplete or inacurate, which implies these estimates may be underreporting of the real size of shadow banks.


Assets of Shadow banks are at pre-crisis high levels.


The National share of shadow banks


Sectoral composition of shadow banks


Annualized growth of shadow banks

The FSB elaborates on the potential transmission mechanism via the connection between the formal banking and shadow banks.
Systemic risks can spill over from shadow banking entities to the banking sector. This interconnectedness can take many forms, including direct and indirect linkages. For example, direct linkages are created when shadow banking entities form part of the bank credit intermediation chain, are directly owned by banks, or benefit directly from bank support, (either explicit or implicit). Funding interdependence is yet another form of direct linkage, as is the holding of each other’s assets such as debt securities. In addition, indirect linkages also exist through a market channel, as the two sectors may invest in similar assets, or be exposed to a number of common counterparties. These connections create a contagion channel through which stress in one sector can be transmitted to the other, and can be amplified back through feedback loops.

As one may realize zero bound regime has been inflating assets in both the formal and informal system. 

This implies of a great degree of fragility or a Black Swan risk.

Thursday, October 30, 2014

Phisix: Another Remarkable Low Volume Index Massaging Day

Last Sunday I wrote about how domestic stock market operators have been incessantly attempting to manage index levels
Moreover, the recent rebound amidst swooning volume comes in the visage of support from undefined or unidentified stock market operator/s. These faceless entities appear to have been responsible for most of the rallies over the past two consecutive weeks…

Nonetheless, the common trait in the massaging the index, either via intraday “pump” or “marking the close” have been to massively push up prices of at least 3 issues with combined market cap weighting of 15-20%. In panic buying episodes, (September 24 and October 16), the kernel of these activities transpire after lunch break.
Again I’ve got to hand it to the bulls for their tenacity for the reckless use of (whoever’s) money to "make" or "draw" the charts.

Today’s massaging of the Phisix has been an incredible combo of panic buying (on select issues) and ‘marking the close’.


The left window from exhibits the relatively low P 7.37 billion from today’s pump.  The official volume was at Php 7.62 billion inclusive of special block sales

The right window from colfinancial illustrates the after lunch break “pump” until the session end, which climaxed with the “marking the close”. The ‘marking the close’ gains contributed to about a substantial 35% of the session’s 1.1% gains.


From the surface, it has largely been a two sector pump due to the extraordinary gains, namely Holding firms  (+2.21%) and Property (1.77%) as shown by the table from the PSE


In reality, three sectors had been involved. The lesser visible of the two had been the industrials (right most window) which sprang back to the positive at the close from early losses.

Today’s combo package of ‘afternoon delight’ buying panic PLUS ‘marking the close’ that has pumped 3 sectors has mainly been channeled through a 6-company push.


From the Holding sector, JGS (+8.23%), AC (+1.27%), and SM (+1.49%).

While the 3 manifested the afternoon delight, JGS’ (left window) marking the close was the most pronounced.


The supporting sectors has been the property and industrials mainly through Ayala Land (+1.53%), SMPH (+3.15%) and JFC (+1.41%)

These 3 had a more elaborate exhibition of the afternoon pump that culminated with a dazzling marking the close. 

Looking at how these 6 companies performed today, would give the impression that these issues are bound to SOAR by a huge margin tomorrow if not in the very immediate future. Why the pump?


Of the 6 issue pump only 4 made it to the top 20 most active.  Such implies that the invisible operators made headway with JFC and AC in a less conspicuous manner.

And the market combined weighting of the 6 issues was at 34% as of the session’s end.

Everything that I have described last Sunday had been showcased today.

These operators have hardly been concerned about valuations or instability risks but about maintaining threshold levels (for political symbolism?).


The index manipulations has also been evident last Monday, October 27th where about all 18-20 points of the day's losses had been wiped out by the same last minute scheme. Monday's session was closed unchanged.

Some bulls represented by the stealth stock market operators have become so desperate as to massage price index so frequently if not with wanton regularity.

Yet they fail to heed the BSP chief’s fresh warnings that “keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield” as well as “in a period of low volatility such as what we have been experiencing, practice the discipline of setting limits. This discipline will not only help you to avoid the pitfalls of “chasing the market”

And hardly has these entities come to realize that history’s lessons reveals that the obverse side of every mania (add to this market manipulation) is a crash.  

Geopolitical Risk Theater Links: More NATO-Russia Encounters, Military Balance in Asia, Blowback on Canada’s Interventions

Updates on the geopolitical risk theater:

An excerpt 
More than two dozen Russian military aircraft, including six nuclear bombers, have conducted “significant military manoeuvres” on the edges of Nato and European airspace in the past 24 hours, causing jets to be scrambled from eight countries as well as Nato’s own Baltic air policing force.

The incidents – three of which occurred on Wednesday and one on Tuesday – followed last week’s violation of Nato airspace by a Russian spy plane, the first since the end of the cold war. Taken together they constitute the most serious air provocation mounted by the Kremlin against the alliance this year, if not in more than a decade, according to Nato officials…

“These sizeable Russian flights represent an unusual level of air activity over European airspace,” Nato said in a detailed statement issued from its headquarters in Belgium…

The most significant intercept on Wednesday occurred in the North Sea. A force of eight Russian aircraft, including four Tu-95 long-range strategic nuclear bombers and four refuelling aircraft, were detected flying in formation at about 3am central European time flying from mainland Russia over the Norwegian Sea.

Six aircraft turned back, but two bombers continued southwards, close to the Norwegian coast and followed by F16s sent to intercept them by the Royal Norwegian air force. When the Russian aircraft then turned over the North Sea, RAF Typhoons were scrambled to intercept as they approached UK airspace. Portuguese fighters were later deployed as they came near the Iberian peninsula.
The aircraft did not file flight plans, had turned off their transponders and did not respond to any radio calls from civilian or military controllers.

3 Vietnamese government blows hot and cold on China

a. Wall Street Journal Frontiers, Vietnam and China Agree to Better Manage Sea Disputes October 28

Images from a video released by ISIS captured a fighter firing Chinese-made surface-to-air missile FN6 – and blowing an Iraqi army MI-35M during a battle in the oil-rich town of Baiji, north of Baghdad, according to the New York Times. Two crew members were reportedly killed as a result.

12 Thomson Reuter’s Knowledge Effect: Military Balance in Asia Oct 27


Given that Russia has reached out to many Chinese companies to help mitigate the pain caused by U.S. and EU sanctions, the United States would likely be risking dramatically more diplomatic tension with the Chinese by imposing such sanctions again. And that could complicate other issues in the U.S.–China relationship.

There’s another reason why potential new Russia sanctions that set East Asian banks and companies in U.S. sights might not be as effective as policymakers hope. Unlike Iran, Russia has a large, globally-integrated economy. It is more than five times the size of the Iranian economy and is an attractive investment opportunity. For many companies -- big banks in particular -- their business with Iran was not worth losing access to U.S. financial markets. However some firms, particularly in China, may conclude that their strategic interests and financial future lie with Russia. If they make this decision, there is very little the United States can do to get them to cooperate again
14 Laurence Vance The Newest Problem in the Military Lew Rockwell Blog October 28
Whether to call your commanding officer “sir” or “ma’am.” According to the William Institute, a think tank at UCLA that addresses lesbian, gay, bisexual and transgender issues: “About 15,500 transgender people are serving in the military.” Service members are not permitted to take hormones to change their gender, but some have done so anyway. Things are getting pretty comical right now, especially regarding the use of restrooms, as this article shows. Defense Secretary Chuck Hagel has indicated that he is open to studying the transgender ban in the military. I predict that the military will lift the ban and be flooded with people who want to change their genders—at taxpayer expense of course.

Is this what it will take for Christians to end their love affair with the military? Too bad that the military bombing and killing people all over the world is not enough.
How the world has changed. Canada’s wise caution about military adventurism even at the height of the Cold War has given way to a Canada of the 21st century literally joined at Washington’s hip and eager to participate in any bombing mission initiated by the D.C. interventionists.

Considering Canada’s peaceful past, the interventionist Canada that has emerged at the end of the Cold War is a genuine disappointment. Who would doubt that today’s Canada would, should a draft be re-instated in the US, send each and every American resister back home to face prison and worse?

That is the danger of intervention in other people’s wars thousands of miles away. Those at the other end of foreign bombs – and their surviving family members or anyone who sympathizes with them – have great incentive to seek revenge. This feeling should not be that difficult to understand.

Seeking to understand the motivation of a criminal does not mean that the crime is justified, however. We can still condemn and be appalled by the attacks while realizing that we need to understand the causation and motivation. This is common sense in other criminal matters, but it seems to not apply to attacks such as we saw in Canada last week. Few dare to point out the obvious: Canada’s aggressive foreign policy is creating enemies abroad that are making the country more vulnerable to attack rather than safer.
My comments

Increasing tensions in the global military arena not only heightens risks of a world war, they also increase domestic societal frictions via the degradation of the community’s moral fiber. 

In the economic context, excessive military build up leads to the incremental impoverishment of the population as more resources are being diverted to non-productive and importantly towards socially destructive activities. Divisive geopolitics leads to protectionism which aggravates tensions.

In addition, military spending serves as an invisible transfer of wealth to the politically connected defense suppliers and contractors and affiliates and the bureaucracy.

In the political context, militarization leads to less civil liberties. Worst, deepening militarization has the tendency for society to evolve towards a police state.

Alan Greenspan: QE Failed the Real Economy, Unwinding will Unleash Market Volatility, Recommends Gold

As the US Federal Reserve officially “concluded” its QE 3.0 program this month, former Fed chief Alan Greenspan has been quoted by the Wall Street Journal as giving his assessment and predictions from such actions. (hat tip Zero Hedge)

Mr. Greenspan on the QE’s efficacy: (bold mine)
He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”
Mr. Greenspan fails to include the massive debt build up as part of the asset based 'success story'.

Yet it’s one thing to be an insider and it’s another thing to be outside the corridors of power; personal views radically changes. In the case of Mr. Greenspan he goes from defending incumbent policies (as insider) to critiquing them (as outsider). 

Ironically, Mr. Greenspan initiated today's de facto easy money “aggregate demand” policy-standard, which his successor Mr. Bernanke improvised.

On QE withdrawal:
He also said, “I don’t think it’s possible” for the Fed to end its easy-money policies in a trouble-free manner.

We’ve never had any experience with anything like this, so I’m not going to sit here and tell you exactly how it’s going to come out,” Mr. Greenspan said. But he noted that markets often react to changes in central bank policy unpredictably and not entirely rationally. Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets, so there is no reason to suspect that the actual process of boosting rates would be any different, Mr. Greenspan said.

He said the Fed may not even have that much power over the timing of interest-rate increases. The problem as he sees it is an interest rate the Fed pays on the money banks park at the central bank, called reserves. Fed officials plan to use this tool as their primary lever for raising interest rates when the time comes. If bankers decide to put this money to work, creating inflation risks, the Fed may be forced to raise rates, even if the economy isn't ready for it, he warned.

“I think that real pressure is going to occur not by the initiation by the Federal Reserve, but by the markets themselves,” Mr. Greenspan he said.

chart from zero hedge

With world debt levels going bonkers, the path to a relatively tighter money policy would naturally cause 'adjustment strains' which may be characterized as “significant volatility in markets”. 

Of course this won’t be limited to just the financial asset markets.

Finally. Mr. Greenspan seems to have reverted to his pristine position as 'gold bug'.
Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.
In 1966, the pre-Fed chair Mr. Greenspan penned this classic Gold and Economic Freedom article on the gold standard, here is an excerpt...
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
This just illustrates how power changes people. 

But I agree with the Maestro here, in today's massive manipulation of money and markets, gold is an insurance.

Tuesday, October 28, 2014

Geopolitical Risk Theater Watch: Article Links October 28

From now on, I will be occasionally posting links on articles covering geopolitical risk theater. This should give us an idea of the evolving risks developments. I'll start with 12 articles

A quote:
During the 2012 ASEAN summit in Phnom Penh, four member nations – Malaysia, Vietnam, the Philippines, and Brunei – all declared there were conflicting territorial claims with China in the South China Sea. This did not include ongoing disputes with Taiwan, whose claims are generally excluded from ASEAN dialogue. Yet, the ASEAN states were unable to agree on an appropriate response. Internal squabbling reached new heights when, for the first time in the group’s 45-year history, they were not even able to agree on a language for the summit’s concluding communiqué.

Aside from creating antagonism internally, ASEAN’s response – or lack thereof – clearly signaled to China the alliance’s key shortcoming: the incompatibility of individual interests with regional loyalty. Indeed, in addition to diluting US influence, China’s insistence on bilateral resolution of the South China Sea disputes deliberately takes advantage of this vulnerability.

An excerpt
On China’s strategic nuclear buildup, the report identifies China’s large-scale buildup of both conventional and nuclear-armed missiles as a serious threat.

China’s has as many as 1,895 ballistic and cruise missiles, including up to 1,200 short-range missiles, up to 100 medium-range missiles, up to 20 intermediate-range missiles, up to 75 intercontinental missiles, and up to 500 ground-launched land attack cruise missiles.

The Pentagon after 2010 halted releasing annual assessments of Chinese missile forces that one expert said undercuts the Obama administration’s policy of seeking a more open Chinese military by “indirectly assisting Chinese secrecy.”

For short-range missiles, China currently is developing five new systems with ranges between 94 and 174 miles. The new missiles will have greater accuracy and lethality.

For targeting US forces in Japan and South Korea, China has deployed DF-21C theater-range missiles with ranges of about 1,240 miles and appears to have developed a second system, the DF-16.

Its new intermediate-range missile, to be deployed in the next five years, will be able to hit US forces on Guam, Northern Australia, Alaska, and US forces in the Middle East and Indian Ocean.

A variant of the DF-21D is a unique anti-ship ballistic missile that has been deployed in two brigades in southeastern and northeast China.

China’s nuclear strike forces remain couched in secrecy, the report said. “China’s official statements about its nuclear forces and nuclear capabilities are rare and vague in order to maintain ‘strategic ambiguity,’” the report says.

Fighters scrambled to intercept a Russian spy plane in Estonia’s airspace and escort it back to Russia in what’s being considered the most serious violation of NATO airspace since the Cold War…

For the year 2014, the deployment of NATO fighters for interceptions like this one are up by around 300 percent from 2013. It’s not clear if there will be any lasting consequence for the Russian spy plane, except one: Baltic states will continue to be worried.

Russian jets flying perilously close to Japan airspace forced Japanese fighters to take to the skies 533 times over the past six months — a number up from 308 in the same time period a year earlier. Now Japan is trying to figure out why the Russian military jets have made Japan a target

The P-8s’ operations can bring them into confrontation with Chinese forces. In August, the Pentagon said a Chinese jet fighter had flown dangerously close to a U.S. P-8 during an interception near Hainan island, site of one of China’s submarine bases. China’s defense ministry publicly said its pilot flew safely and demanded that the U.S. cease surveillance operations near its base.

The message was clear: China had fulfilled its four-decade quest to join the elite club of countries with nuclear subs that can ply the high seas. The defense ministry summoned attachés again to disclose another Chinese deployment to the Indian Ocean in September—this time a diesel-powered sub, which stopped off in Sri Lanka…

China’s nuclear attack subs, in particular, are integral to what Washington sees as an emerging strategy to prevent the U.S. from intervening in a conflict over Taiwan, or with Japan and the Philippines—both U.S. allies locked in territorial disputes with Beijing…

China's nuclear-sub deployments, some naval experts say, may become the opening gambits of an undersea contest in Asia that echoes the cat-and-mouse game between U.S. and Soviet subs during the Cold War—a history popularized by Tom Clancy's 1984 novel "The Hunt for Red October."

Chinese officials say their subs don’t threaten other countries and are part of a program to protect China’s territory and expanding global interests. Chinese defense officials told foreign attachés that the subs entering the Indian Ocean would assist antipiracy patrols off Somalia, say people briefed on the meetings.
12 Paul Craig Roberts: Vladimir Putin Is The Leader Of the Moral World October 27, 2014

Excerpts from Mr. Putin's speech:

On Western Foreign policies:
A unilateral diktat and imposing one’s own models produces the opposite result. Instead of settling conflicts it leads to their escalation, instead of sovereign and stable states we see the growing spread of chaos, and instead of democracy there is support for a very dubious public ranging from open neo-fascists to Islamic radicals…
On brinkmanship politics:
Joint economic projects and mutual investment objectively bring countries closer together and help to smooth out current problems in relations between states. But today, the global business community faces unprecedented pressure from Western governments. What business, economic expediency and pragmatism can we speak of when we hear slogans such as “the homeland is in danger”, “the free world is under threat”, and “democracy is in jeopardy”? And so everyone needs to mobilise. That is what a real mobilisation policy looks like.

Sanctions are already undermining the foundations of world trade, the WTO rules and the principle of inviolability of private property. They are dealing a blow to liberal model of globalisation based on markets, freedom and competition, which, let me note, is a model that has primarily benefited precisely the Western countries. And now they risk losing trust as the leaders of globalisation. We have to ask ourselves, why was this necessary? After all, the United States’ prosperity rests in large part on the trust of investors and foreign holders of dollars and US securities. This trust is clearly being undermined and signs of disappointment in the fruits of globalisation are visible now in many countries.   The well-known Cyprus precedent and the politically motivated sanctions have only strengthened the trend towards seeking to bolster economic and financial sovereignty and countries’ or their regional groups’ desire to find ways of protecting themselves from the risks of outside pressure. We already see that more and more countries are looking for ways to become less dependent on the dollar and are setting up alternative financial and payments systems and reserve currencies. I think that our American friends are quite simply cutting the branch they are sitting on. You cannot mix politics and the economy, but this is what is happening now. I have always thought and still think today that politically motivated sanctions were a mistake that will harm everyone, but I am sure that we will come back to this subject later.

We know how these decisions were taken and who was applying the pressure. But let me stress that Russia is not going to get all worked up, get offended or come begging at anyone’s door. Russia is a self-sufficient country. We will work within the foreign economic environment that has taken shape, develop domestic production and technology and act more decisively to carry out transformation. Pressure from outside, as has been the case on past occasions, will only consolidate our society, keep us alert and make us concentrate on our main development goals.

Of course the sanctions are a hindrance. They are trying to hurt us through these sanctions, block our development and push us into political, economic and cultural isolation, force us into backwardness in other words. But let me say yet again that the world is a very different place today. We have no intention of shutting ourselves off from anyone and choosing some kind of closed development road, trying to live in autarky. We are always open to dialogue, including on normalising our economic and political relations. We are counting here on the pragmatic approach and position of business communities in the leading countries…
On the growing risks of nuclear war:
From here emanates the next real threat of destroying the current system of arms control agreements. And this dangerous process was launched by the United States of America when it unilaterally withdrew from the Anti-Ballistic Missile Treaty in 2002, and then set about and continues today to actively pursue the creation of its global missile defence system.

Colleagues, friends, I want to point out that we did not start this. Once again, we are sliding into the times when, instead of the balance of interests and mutual guarantees, it is fear and the balance of mutual destruction that prevent nations from engaging in direct conflict. In absence of legal and political instruments, arms are once again becoming the focal point of the global agenda; they are used wherever and however, without any UN Security Council sanctions. And if the Security Council refuses to produce such decisions, then it is immediately declared to be an outdated and ineffective instrument.

Many states do not see any other ways of ensuring their sovereignty but to obtain their own bombs. This is extremely dangerous. We insist on continuing talks; we are not only in favour of talks, but insist on continuing talks to reduce nuclear arsenals. The less nuclear weapons we have in the world, the better. And we are ready for the most serious, concrete discussions on nuclear disarmament – but only serious discussions without any double standards.

What do I mean? Today, many types of high-precision weaponry are already close to mass-destruction weapons in terms of their capabilities, and in the event of full renunciation of nuclear weapons or radical reduction of nuclear potential, nations that are leaders in creating and producing high-precision systems will have a clear military advantage. Strategic parity will be disrupted, and this is likely to bring destabilization. The use of a so-called first global pre-emptive strike may become tempting. In short, the risks do not decrease, but intensify.
Have a nice day.