Mish's Global Economic Trend Analysis

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• Bernanke Warns of "Rapid and Painful Response to a Looming Fiscal Crisis"
• Are Teachers "Special"? Is Anyone? Why?
• China's Borg Assimilation Strategy Part II: the "Honeytrap" the "Lamprey" and the "Mushroom Factory"; Seduced by China
• New York Mayor Seeks Pension Overhaul; New Jersey Governor Tells Unions "Sue Me" Over Pension Cuts

Bernanke Warns of "Rapid and Painful Response to a Looming Fiscal Crisis" Posted: 03 Feb 2011 03:36 PM PST Bernanke was yapping away with reporters today, bragging about the "expected" action in the stock market while dissing inflation concerns and ignoring Fed expectations that did not happen such as falling treasury yields or improvements in housing. Please consider Bernanke dismisses inflation concerns, says unemployment to take several years to get back on track The economy is poised to grow more rapidly this year, Federal Reserve Chairman Ben S. Bernanke said Thursday, dismissing fears that rising fuel prices will trigger broad-based inflation. But he stressed that it will still take several years before the unemployment rate comes down to normal levels. Speaking at the National Press Club just before a rare question-and-answer period with journalists, Bernanke gave a mixed assessment of the nation's economic prospects, according to a prepared text of his remarks. He made clear that the economy cannot get back on track until the job market improves. Bernanke maintained his view that the Fed's program of buying $600 billion in Treasurys to try to prop up growth, announced in November, is working: Stock prices have risen; the stock market has become less jumpy; companies are able to borrow money more cheaply; and inflation expectations have risen a bit. All were expected results, he said. While Bernanke repeated recent comments that he and his Fed colleagues will review the Treasury purchase program regularly and adjust it as needed, he gave no hint that the Fed would either stop the program before its scheduled June end date or expand it beyond that time. As he has in the past, the Fed chairman again warned that the United States is on an unsustainable fiscal course. Quoting the economist Herbert Stein that "if something cannot go on forever, it will stop," Bernanke said that the federal government must stabilize its budget. The question, he said, "is whether these adjustment will take place through a ... process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether [they] will be a rapid and painful response to a looming or actual fiscal crisis." Rapid and Painful Response to a Looming Fiscal Crisis I suggest Congress should listen to one of the few things Bernanke has ever said that made any sense. The correct Congressional response is to take Bernanke at his word and not raise the debt ceiling. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Are Teachers "Special"? Is Anyone? Why? Posted: 03 Feb 2011 12:23 PM PST In response to New York Mayor Seeks Pension Overhaul; New Jersey Governor Tells Unions "Sue Me" Over Pension Cuts I received yet another email stating a line I frequently hear, that some occupations are "special" and need protection. Here is the exact statement: "I think that teachers are special and must be separated out in this debate and protected." Ironically, if anyone is "special" in the student-teacher relationship, it is the students (and those who cannot protect themselves), not the teachers! With no disrespect to teachers or any other profession, no one is "more special" than anyone else. People who believe they are special are a huge part of the problem. Everyone wants their group protected at the expense of everyone else. Every group has their own excuse why they are special. It's one of the reasons we are in this mess. The person who emailed me has decidedly biased opinion (his wife is a teacher). I also hear it from police think they are special because their lives are on the line. However, stats show that agricultural work is far more dangerous than police work. Fishing and roofing are of the most dangerous professions of all. Should fisherman, roofers, and agricultural workers get "special" pension benefits? It is time to stop kidding ourselves and admit that no working class is more special than any other class. Correcting Outrageous Pensions Having laid sound rationale that no one is special, I recognize there are many teachers and others whose pensions are not that large. It is generally police, fire, administrators, and politicians whose pensions are most outrageous. I have already proposed a solution to that problem: Tax pension benefits above a certain level, take the money out upfront, and put it back into the pension plans to make them solvent. Many police, fire, school administrators, now collect $75,000 pensions and up. Worse yet, many retire at age 55. There are many who receive well in excess of $100,000 a year annually, then continue to work as contractors. This is preposterous. First, the retirement age needs to increase to some realistic level, preferably pegged to the same level as the SS retirement age, but certainly no sooner than age 62. Next, we should tax excessive pensions heavily. I do not know what the precise point, but it should be set at a level that will make the pension plans solvent in a reasonable period of time, say 10 years, with a reasonable discount rate of the lower of 5% or the long-bond yield. As a side note, from this starting point in Case-Shiller PE ratios, 5% is actually far too generous. Higher Taxes Will Not Fly The alternative to my proposal is bankruptcy or default. Higher taxes will not fly. People have had enough of higher taxes that go to ungrateful union members who think they are entitled to "special" benefits the average person can only dream about. It is very important for unions to see that. Bankruptcy vs. Default In bankruptcy, a judge may very well smack everyone equally. In a default, (Pritchard, Alabama is a good example) no one may get anything at all. In case you missed it, please consider Alabama Town Defaults on Pensions, Breaks State Law; Renewed Calls For San Diego Bankruptcy; "Prichard is the Future" The dubious honor of being the first city in the nation to completely default on pension obligations goes to Prichard, Alabama. The city has sought bankruptcy protection twice and is flat broke. It faces a choice of paying to keep city services like police and garbage running or pay pensions. It selected the former. Vallejo Wins Right to Unilaterally Change Contracts Vallejo, California went bankrupt and won the right to unilaterally change contracts. I discussed that situation in Vallejo Bankruptcy Plan Offers Unsecured Creditors 5-20%; JPMorgan CEO Forecasts More Municipal Bankruptcies; Bernanke Will Not Rescue Cities Benefit Haircuts Coming Here's the deal. Like it or not, benefit haircuts are coming in one of four ways. Haircuts can be realistically negotiated now Haircuts can be painfully renegotiated over time in multiple contentious negotiations Haircuts can be settled via default Haircuts can be settled in bankruptcy court. Those are the options. The status quo does not work. In terms of fairness, (assuming fairness is one of the goals), those with the most outrageous benefits should be the ones to bear the brunt of the reform. Think that will happen in bankruptcy court, when the judge has his benefits to protect? A properly set tax level on excessive benefits combined with changes in retirement age and contribution levels should be sufficient to protect the benefits of most of the members. If unions stopped insisting on what they cannot get and instead focused on something viable, union members should endorse the above proposals (alternatively, any other proposals that fix the problem with raising taxes or putting the public at risk). Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List 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.

China's Borg Assimilation Strategy Part II: the "Honeytrap" the "Lamprey" and the "Mushroom Factory"; Seduced by China Posted: 03 Feb 2011 09:41 AM PST As noted in China's "Borg Strategy" Seeks to Assimilate all Known Technology, China will stop at nothing to "assimilate and absorb" technology. China used those exact words in a lengthy document on procuring technology. China also uses the "Honeytrap" method, the "Lamprey" method, and the "Mushroom" method of acquiring technology. The "Honeytrap" method was featured in the James Bond film 'Quantum of Solace' with double agent Honeytrap. History of the Honey Trap In the History of the Honey Trap, Foreign Policy Magazine has five lessons for would-be James Bonds and Bond girls -- and the men and women who would resist them. In a 14-page document distributed last year to hundreds of British banks, businesses, and financial institutions, titled "The Threat from Chinese Espionage," the famed British security service described a wide-ranging Chinese effort to blackmail Western businesspeople over sexual relationships. The document, as the London Times reported in January, explicitly warns that Chinese intelligence services are trying to cultivate "long-term relationships" and have been known to "exploit vulnerabilities such as sexual relationships ... to pressurise individuals to co-operate with them." This latest report on Chinese corporate espionage tactics is only the most recent installment in a long and sordid history of spies and sex. For millennia, spymasters of all sorts have trained their spies to use the amorous arts to obtain secret information. The trade name for this type of spying is the "honey trap." And it turns out that both men and women are equally adept at setting one -- and equally vulnerable to tumbling in. Spies use sex, intelligence, and the thrill of a secret life as bait. Cleverness, training, character, and patriotism are often no defense against a well-set honey trap. And as in normal life, no planning can take into account that a romance begun in deceit might actually turn into a genuine, passionate affair. In fact, when an East German honey trap was exposed in 1997, one of the women involved refused to believe she had been deceived, even when presented with the evidence. "No, that's not true," she insisted. "He really loved me." Five Lessons Don't Follow That Girl Take Favors from No One Beware the Media The Deadliest of Honey Traps All the Single Ladies See the article for details. The Telegraph discusses the "Honeytrap" method, the "Lamprey" method, and the "Mushroom" method in Chinese use honeytraps to spy on French companies, intelligence report claims The use of honeytraps to extort information and the placement of spying interns are among the techniques employed by Chinese spies in their industrial espionage operations, according to leaked French intelligence files. Among the cases cited by the intelligence reports, is the predicament of a top researcher in a major French pharmaceutical company wined and dined by a Chinese girl who he ended up sleeping with. "When he was shown the recorded film of the previous night in his hotel room ... he proved highly co-operative," said an economic intelligence official. In another case, an unnamed French company realised too late that a sample of its patented liquid had left the building after the visit of a Chinese delegation. It turned out one of the visitors had dipped his tie into the liquid to take home a sample in order to copy it. Among the most frequent techniques cited by French intelligence was the so-called "lamprey technique", which usually takes the form of an international tender for business. "The aim of the project is to attract responses from developed countries," notes the report. When Western companies vie to respond, they are cajoled and "told to improve their technical offering". "Each (company) tries to outdo the other, once, twice, several times until the Chinese consider they've had enough." Once key information has been gathered, the competing bidders are summarily informed that the project has been shelved and the information used by the Chinese to develop its own products. A prime example of this technique was recent a multi-billion pound tender to build China's high-speed train, with France's TGV being a bidder. As part of the process, the French embassy in Beijing organised a six-month training course for Chinese engineers. A few months after the course, China brought out its own high-speed train remarkably similar to the TGV and Germany's ICE train. Another technique is the "mushroom factory", in which French industries create a joint venture with a local Chinese firm and transfer part of their technology. Soon afterwards, the French "discover that local rivals have emerged ... offer identical products and are run by the Chinese head of the company that initiated the joint venture." Danone, the French dairy and drinks group allegedly fell foul of this technique when it teamed up with the Chinese drinks giant, Wahaha. The Spy Who Loved Me In The Spy Who Said She Loved Me, Slate asks and answers the question: Are "honey traps" real? Are honey traps real, or are they found only in James Bond movies? Oh, they're real. Honey traps, also called "honey pots," have been a favorite spying tactic as long as sex and espionage have existed—in other words, forever. Perhaps the earliest honey trap on record was the betrayal of Samson by Delilah, who revealed Samson's weakness (his hair) to the Philistines in exchange for 1,100 pieces of silver, as described in the Book of Judges. The practice continued into the 20th century and became a staple of Cold War spy craft. Governments around the world set up honey traps to this day, but it's an especially common practice in Russia and China. The Central Intelligence Agency doesn't comment on whether its agents use their sexuality to obtain information, but current and former intelligence officials say it does happen occasionally. No one has perfected the honey trap quite like the Russians. One former KGB agent has said that the Soviet intelligence agency didn't ask Russian women to stand up for their country but "asked them to lay down." One of the biggest Cold War spy cases was that of Clayton Lonetree, a Marine Corps security guard entrapped by a female Soviet officer, then blackmailed into sharing documents. In 1987, he became the first Marine convicted of espionage. Russian spy craft didn't disappear with the Soviet Union. Russian political satirist Viktor Shenderovich was recently filmed cheating on his wife with a young woman named Katya, who had also seduced a half dozen other Kremlin critics. A similar trap appeared to catch an American diplomat in Moscow in 2009, but the State Department said the evidence was fabricated as part of a smear campaign. China, too, seems to employ honey traps regularly. When former Deputy Mayor of London Ian Clement was seduced and drugged in his Beijing hotel room in 2009 only to find his BlackBerry stolen the next day, he admitted that he "fell for the oldest trick in the book." Seduced by China Every company in the world has visions of grandeur when it comes to China. They all think they will be the one to make hundreds-of-billions of dollars marketing their product to the roughly 1,331,460,000 Chinese (2009 World Bank estimate). A few companies will have success for a few years, but probably not in any revolutionary technologies. For example, GM gets set to roll out China brand GM, Honda and Nissan Motor Co. are creating unique brands for the world's biggest car market as they try to boost sales in China's interior, where incomes rose almost 11 percent last year. The cheaper nameplates will help them compete on price against local manufacturers without diluting their cache among Chinese buyers, said John Zeng, an industry analyst at J.D. Power & Associates in Shanghai. "It's a win-win situation," Zeng said. "Consumers pay a lower price for foreign-brand technology, and the foreign makers benefit from an increase in sales volume without hurting their brand image." These "low-budget cars" will use older model platforms and have few extra features, said Leah Jiang, an analyst with Macquarie Research Ltd. in Shanghai. Anti-lock brakes, automatic air-conditioning and reclining seats may be excluded to keep prices as low as 50,000 yuan, said Koji Endo, an auto analyst at Advanced Research Japan in Tokyo. That market segment is dominated by domestic automakers BYD Co., Geely Automobile Holdings and Chery Automobile Co. Local brands sold three of every four cars priced below 50,000 yuan, and more than half of those costing between 50,000 and 80,000 yuan, according to Jiang. "I'm not worried about these new brands at all," said Jin Yibo, assistant general manager for Wuhu-based Chery, whose sales increased 36 percent last year. "Chinese cars offer better value for money, and we understand the local market and consumer very well." Please forgive my skepticism, but it will be interesting to see how long this remains a "win-win" situation. Then again (also forgive my cynicism), given those are low-budget, low-technology cars, perhaps the setup lasts for a while, if for no other reason than to allow China to tout such "win-win" successes. Here's the question on my mind: For every "win-win" success, how many companies will end up victims of the "Honeytrap", the "Lamprey" or the "Mushroom" as China marches down its stated path to assimilate all worthwhile technology? Addendum: I made a blatant typo that spellcheck did not catch in one of the subtitles in my last post on Pension Overhaul. It was a context I do not use or condone and has been corrected. Apologies offered to anyone offended. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List 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.

New York Mayor Seeks Pension Overhaul; New Jersey Governor Tells Unions "Sue Me" Over Pension Cuts Posted: 03 Feb 2011 03:17 AM PST New York Mayor Michael Bloomberg is in a bed of his own making. When he took office in 2002 pension costs took 1 out of 28 revenue dollars. Today the cost is 1 out of eight dollars. This is what happens when you buy union votes to get elected. Now Bloomberg is scrambling to undo the damage he caused, and the unions are not happy about it at all. Please consider Bloomberg Seeks a Sweeping Overhaul of City's Pensions Mayor Michael R. Bloomberg proposed sweeping changes on Wednesday to New York's costly pension system, seeking to save billions of dollars by fundamentally altering long-established rules that have awarded generous retirement benefits to municipal workers and have deepened the city's financial hole. The mayor wants to require most new municipal workers to work at least 10 years, or double the current amount, to qualify for a pension, and bar them from receiving pension checks until age 65. Now most nonuniformed workers, including teachers, can get pension checks at age 57, and some police officers and firefighters can receive full pension checks after working 20 years, no matter their age. New employees would also need to contribute more of their own money to their retirement accounts, according to the plan. And Mr. Bloomberg would forbid all new employees to benefit from a time-honored practice: adding hundreds of hours of overtime at the end of their careers to balloon their final year's pay and their pensions. The mayor did not spare current retirees, vowing to eliminate a $12,000 annual stipend that retired police officers and firefighters get on top of their regular pension benefits. The official, Harry Nespoli, chairman of the Municipal Labor Committee, an umbrella group of unions, said that Mr. Bloomberg had become "a dictator" and that "the mayor has set back labor relations 40 years." Not long ago, Mr. Bloomberg was viewed as a reliable ally of labor. He offered generous salary increases in contract negotiations, and spoke with pride about the city's municipal work force, which is now about 300,000. In 2008, as part of a merit-pay agreement with the teachers' union, the Bloomberg administration shepherded a pension package through Albany that allowed teachers to retire five years earlier than before, but with full pension benefits. And in late 2008, just as the financial crisis began to explode, Mr. Bloomberg granted 4 percent raises for two consecutive years to the city's largest municipal workers' union, District Council 37, without extracting support for pension givebacks. Mr. Bloomberg's assiduous courting of labor paid political dividends: after getting virtually no labor support in his first campaign in 2001, he picked up dozens of union endorsements in his third-term victory in 2009. Cheer the Ideas, Not the Man Typically, politicians only do the right thing by accident or when the public (or necessity) finally demands it. In this case, necessity finally knocked some common sense into the mayor. While I can cheer Bloomberg's proposals, it is much tougher to cheer the man. He helped make this mess and is only reacting now because he has to. As recently as a year ago, he was still singing the wrong tune, making untenable deals that could not be honored. Nonetheless, at long last, Bloomberg is on track with many of those ideas. Yet, for all the whining the unions are going to do, there is not a single thing in Bloomberg's proposal that can be considered hardball. Hardball From New Jersey Governor Chris Christie Those looking for hardball can find it here: Christie Says 'Sue Me' as Pensioners Challenge Cuts New Jersey Governor Chris Christie said he doesn't mind breaking promises to pensioners to close a $10.5 billion budget deficit -- even if they sue. "I have bigger issues than who sues me," said Christie, 48, a Republican and former federal prosecutor who wants to end cost-of-living increases for retirees. "Get in line." Public workers in Colorado, South Dakota and Minnesota are already suing their states, which are among 18 that want to pare pension costs by increasing employee contributions, raising the retirement age or curbing cost-of-living increases. "We believe it's unconstitutional," said Gary Justus, 63, a retired mathematics teacher in the Denver public schools who's a plaintiff in the Colorado suit. "These are contracts that I and 100,000 other retirees worked for." Fraudulent Contracts I back proposed legislation in Congress to allow states to go bankrupt. Such legislation will not happen until after the next presidential election, but it is the right approach. If you don't have the money you can't pay it. It's as simple as that. Moreover, unions better get used to that idea, especially at the city or county level. Otherwise many of these cases will end up in bankruptcy court for sure. There are a couple of issues people keep throwing my way. The first is "fairness". Excuse me but what exactly is moral or fair about hiking taxes on those barely scraping by to give unjust rewards to someone else. Moreover, there is nothing fair about dumping this problem on generation X or Y either, many deep in debt, fresh out of college, with no job and no benefits at all. Besides, there is no blood to give. Companies go bankrupt all the time. Ask GM or United Airlines what happened to them. They had a contract too. Fairness aside, I consider the contracts to be fraudulent. Public unions coerced, bribed, and threatened Armageddon if they did not get their way. They also bought the votes of corrupt politicians. To top it off, the unions got into bed with administrators working out raises that often went up for each of them, usually in sync. No one was ever looking out for the taxpayer. Thus, it is hard for me to feel sorry for, or beholden to those screaming about fairness or contractual obligations. Indeed the fair thing, is to default and work it all out in bankruptcy court just as United and Delta did. Addendum: I made a blatant typo in one of my subtitles above It was a context I do not use or condone and has been corrected Apologies offered to anyone offended Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List 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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