Robert Farley writes:
Over the past two weeks, Indian media has reported several border incursions along the two states’ disputed Himalayan border . While the Indian government has downplayed the incidents, Indian strategic commentators have suggested that China is moving to leverage its logistical advantages in the region.
At nearly the same time, China has upped the ante with respect to the Senkaku/Diaoyus…..
Read more at Is China Carelessly Overextending Itself? | Flashpoints.
Dan Mitchell discusses a new National Bureau of Economic Research working paper entitled “Shrouded Costs of Government: The Political Economy of State and Local Public Pensions.”
….The politicians give the bureaucrats excessive compensation. But they make it difficult for taxpayers to figure out how they’re getting robbed by concentrating a big share of the excess in harder-to-measure fringe benefits.
Another advantage of that approach, by the way, is that the bill for all the retiree benefits doesn’t come due until some point in the future, by which time the politicians who put taxpayers on the hook often have retired or moved on to some other position.
Generous benefits for government employees are a neat way for politicians to avoid accountability. They do not appear in the budget and are a hidden liability of the government. For a start we need to prevent politicians from creating unfunded future liabilities not just for government employee benefits, but for Social Security, Medicare and Medicaid funding. At present these are a hidden iceberg as they do not appear on the government balance sheet. It is too easy for politicians to kick the can down the road, failing to address any future funding shortfall. These unfunded future liabilities should be reflected on the balance sheet in order to improve accountability. If the actual liability is uncertain, then actuarial estimates can be used — in much the same way as used by insurance companies.
Read more at How Bureaucrats and Politicians Conspire to Rip Off Taxpayers | International Liberty.
By Ian Simpson reports:
Honey bees, which play a key role in pollinating a wide variety of food crops, are in sharp decline in the United States, due to parasites, disease and pesticides, said a federal report released on Thursday……..
Honey bee colonies have been dying and the number of colonies has more than halved since 1947, said the report by the Environmental Protection Agency and the Agriculture Department.
Read more at As honey bee population dwindles, U.S. sees threat to food supply | Thomson Reuters Foundation.
Senator David Vitter (R-La) along with Senator Sherrod Brown (D-Ohio) is launching an effort to increase capital requirements for big banks and remove risk-weighting of assets as proposed under Basel III.
Sherrod Brown (D-Ohio), along with unlikely ally Sen. David Vitter (R-La.), is launching an effort to increase capital requirements for big banks and remove risk-weighting of assets as proposed under Basel III.
Gold is testing short-term support at $1450. Breach would be likely to penetrate the rising trendline, indicating another test of primary support at $1320. Reversal below $1400 would warn of a further down-swing. Breach of $1320 would confirm, with the next major support level at the 2008 high of $1000.
* Target calculation: 1550 – ( 1800 – 1550 ) = 1300
The Gold Bugs Index, representing un-hedged gold stocks, is falling rapidly. The index behaves like a leveraged gold instrument. Fixed costs of extraction make miners extremely sensitive to relatively small fluctuations in the gold price — which is why many miners hedge. The index is headed for a test of its 2008 low, which equated to a spot price of $700/ounce. I am not predicting that gold will fall below its cost of production, variously estimated at between $900 and $1150 per ounce, but expect further weakness.
My bullish outlook for gold is fading (into the future) as deflationary pressures faced by central banks grow.
Money continues to flow into bonds — reflecting a lower inflation outlook — and further outflows from gold are likely. Ten-year treasury yields broke support at 1.70% — prior to 2012 the lowest level in the 200 year history of the US Treasury — and a test of the all-time low at 1.40% is likely.
Brent Crude is headed for a re-test of its former support level at $106/barrel. Respect is likely and would offer a target of $92*. Nymex WTI recovered above $90/barrel, but further weakness is expected. Reversal below $90 would warn of a swing to the lower trend channel around $84 . Falling crude prices are a healthy long-term sign for the economy, but indicate falling demand and medium-term weakness.
* Target calculation: 99 – ( 106 – 99 ) = 92
Peter Glover and Michael Economides in The Coming Arab Winter write:
Within just a few years of it taking off, the US shale gas and oil industry is enabling America to become increasingly self-sufficient with imports from the Middle East greatly reduced. The US is closing in on eclipsing Saudi energy production capacity. The 2012 edition of the IEA’s World Energy Outlook says America will surpass Saudi as the world’s biggest oil producer by 2020; such is the rate of current US oil development it could well be before then.
According to one recent report, the dramatic expansion of US production could push global spare oil capacity to exceed 8 million barrels per day. At that point OPEC could lose its ability to set or influence prices and global oil prices could drop sharply. While that would take a heavy toll on many Western energy producers, it would prove disastrous for OPEC’s member states.
The peak oil myth is discredited. Expect long-term weakness in crude prices as the US, China, Australia and elsewhere ratchet up shale gas production.
Commodity prices continue to diverge from stocks, with the Dow Jones – UBS Commodity Index headed for primary support at 125. Breach would warn of a decline to the 2008 low of 100. Declining 13-week Twiggs Momentum, below zero, warns of a down-trend; reversal below the 2012 low of -15% would strengthen the signal. Stock prices are precariously high in relation to commodities. Recovery of US housing is unlikely to drive a massive construction boom as there must still be significant over-supply of existing units.
Jesse Eisinger from ProPublica skewers big banks’ objections to increasing capital buffers as proposed by the bipartisan Brown-Vitter bill:
Goldman Sachs and S.& P. estimate the big banks might be forced to raise $1 trillion or more. That’s a lot, so much that the leviathans’ agents cry out that they couldn’t sell that much stock. But they don’t have to raise it all at once. And they can retain their earnings and stop paying dividends in addition to selling shares.
In putting that argument forward, they don’t realize they make Senator Brown’s and Senator Vitter’s case for them. If investors are so terrified of the big banks that they won’t buy their stock, that’s a terrific problem. Most of the big banks trade below their net worth, an indication that investors don’t trust them. Brown-Vitter might actually help banks by restoring that trust.
Read more at In Brown-Vitter Bill, a Banking Overhaul With Possible Teeth | Deal Book | NYTimes.com.
Recovery of the Dollar has been overrated. With restrictions on fiscal deficits, it will be difficult to contain deflationary pressures from the Great Credit Contraction which is likely to endure for at least a decade — following the Great Credit Bubble over the last 40 years. Fed quantitative easing is likely to endure for longer than many observers, myself included, initially expected. And inflation will remain low despite QE, which is offset by deflationary pressures from the Great Credit Contraction.
The lower inflation outlook is reflected by falling gold and rising bond prices.
There were two distinct credit bubbles in the last 50 years: the first in the 1980s, the second in the early 2000s. The chart comparing growth in Domestic Nonfinancial Credit (both Private and Government) to nominal GDP shows two clear episodes where credit growth outstripped GDP. Both resulted in significant falls in GDP from which the economy struggled to recover. The latter episode fed into the housing market, leading to the global financial crisis.
If we look at total Domestic Nonfinancial Credit, the rate of growth remained positive. So why call this a contraction? But the aggregate conceals a hidden danger: private household credit contracted, threatening a deflationary spiral similar to the 1930s — when GDP fell almost 50 percent.
Which is why the Federal Government frantically borrowed money for stimulus spending — to offset the effect of private credit contraction.
Government deficits have not solved the problem — they are merely kicking the can down the road. Household credit growth continues to lag GDP.
The Dollar has not benefited from the lower inflation outlook as interest rates are also likely to remain low. Primary advance of the Dollar Index ($DXY) seems to be losing steam, with a lower peak than mid-2012. Expect a test of primary support at 79. Penetration of the rising trendline would indicate trend weakness, while failure of support at 79 would signal a reversal. Twiggs Momentum is approaching the apex of a long-term triangle; reversal below zero and the rising trendline would also warn of a reversal.
Pedro da Costa and Alister Bull at Reuters write:
The Federal Reserve stuck to its plan to buy $85 billion in bonds each month to push down borrowing costs and prop up the economy, citing risks to growth from recent budget tightening in Washington.
Read more at Fed sticks to stimulus plan, worried about fiscal drag | Reuters.
John Garnaut writes:
[Capt. James Fanell], in comments that went largely unnoticed outside the small circle of China military specialists, spelled out in rare detail the reasons the United States is shifting 60 percent of its naval assets — including its most advanced capabilities — to the Pacific. He was blunt: The Chinese People’s Liberation Army (PLA) Navy is focused on war, and it is expanding into the “blue waters” explicitly to counter the U.S. Pacific Fleet. “I can tell you, as the fleet intelligence officer, the PLA Navy is going to sea to learn how to do naval warfare,” he said. “My assessment is the PLA Navy has become a very capable fighting force.”
Read more at Xi's War Drums – By John Garnaut | Foreign Policy.
