Mish's Global Economic Trend Analysis

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• Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting
• Ukraine "On Verge of Financial Bankruptcy" Reaches $27 Billion "Kamikaze" Deal With IMF
• Recommendation on Bitcoin
• Can Inflation be Too Low?

Turkey Plans Military Intervention in Syria, Bans YouTube for Leaked Reporting Posted: 27 Mar 2014 04:34 PM PDT Turkey is threatening military intervention in Syria. A leaked recording proves it. In response, an angry Turkish Government Banned YouTube. The Foreign Ministry called the leak a "despicable attack" on national security, in a statement e-mailed from Ankara yesterday. It said the meeting, attended by Foreign Minister Ahmet Davutoglu, the head of national intelligence and other military and diplomatic officials, was held to discuss how to respond to threats by Islamist militants against an enclave of Turkish territory inside Syria. Some sections of the tape were "doctored," the ministry said. Turkey's telecommunications authority said it has blocked access to YouTube, where the recording was posted. The government imposed a temporary ban on news about the recording, according to Turkey's broadcasting watchdog. The recording included Davutoglu discussing an attack against Islamist militants who have threatened the tomb of Suleyman Shah, a monument that's on Turkish territory inside Syria under international agreements. It comes three days before local elections, where Prime Minister Recep Tayyip Erdogan is seeking a victory that he says will lay to rest allegations of corruption that surfaced in earlier Internet leaks. Erdogan attacked the leak of the recording at an election rally in Diyarbakir, calling it "unethical, sordid and contemptible." He vowed to bring the perpetrators to justice, saying: "We'll go after them in their lairs." The leaked tape is the latest in a slew of recordings posted anonymously on the Internet since December, some of them allegedly from a police investigation, which have embroiled Erdogan in a corruption scandal and led to the departure of four cabinet ministers. First Twitter, Now YouTube The ineptitude, cowardice, corruption, and foolishness of Prime Minister Recep Tayyip Erdogan is stunning. Last week Erdogan banned Twitter, proclaiming "The international community can say this or that – I don't care. They will see the power of the Turkish Republic." The next day a "digital coup" occurred and Twitter Use in Turkey Jumped to New High. In response, I proposed the Law of Social Media. Law of Social Media: Arrogant fools who think they can control social media quickly discover social media controls them. Today's YouTube episode is yet another lesson for Erdogan. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Ukraine "On Verge of Financial Bankruptcy" Reaches $27 Billion "Kamikaze" Deal With IMF Posted: 27 Mar 2014 12:41 PM PDT Ukraine and the IMF have agreed to an aid package that will no doubt prove to be as beneficial to Ukraine as the Troika bailout (plunder) of Greece. Bloomberg reports Ukraine Unlocks $27 Billion International Aid Deal. Ukraine reached a preliminary deal with the International Monetary Fund to unlock $27 billion in international aid as U.S. lawmakers passed bills imposing more sanctions on Russians linked to Crimea's annexation. The government in Kiev reached a staff-level accord with the IMF for a two-year loan of $14 billion to $18 billion, the lender said today in an e-mailed statement. The IMF's board must still sign off on the package, Ukraine's third since 2008, and the cabinet must complete "prior actions" to receive the first installment as early as April. Ukraine's government, which came to power after an uprising ousted President Viktor Yanukovych last month, is grappling with an economy threatening to slide into a third recession in six years, dwindling reserves and a weakening currency. Ukrainian asset prices have also suffered as Russia's takeover of the Black Sea Crimean peninsula sparked European and U.S. sanctions and rekindled memories of the Cold War. "The IMF package should be sufficient to prevent the country falling into a full-blown balance-of-payments crisis," London-based Capital Economics Ltd. said in an e-mailed note. "But the volatile political situation and Ukraine's poor track record in implementing reforms demanded by the fund mean that there will still be many doubts about whether politicians will be able to push substantial changes through."  As part of the IMF agreement, Ukraine agreed to narrow the budget deficit to 2.5 percent of gross domestic product by 2016 and to raise retail energy tariffs toward their full cost, according to the Washington-based lender. The central bank will shift to a flexible exchange rate and inflation targeting, while the nation will tackle bad debts at banks, it said. Lawmakers in Kiev approved budget changes and a tax bill today needed for the IMF loan deal. 'Very Unpopular' "The country is on the edge of economic and financial bankruptcy," Prime Minister Arseniy Yatsenyuk said today in Kiev. "This package of laws is very unpopular, very difficult, very tough. Reforms that should have been done in the past 20 years." After being voted in by lawmakers last month, Yatsenyuk described his task as a "kamikaze" mission, saying Ukraine is in a "great mess" with an empty treasury and foreign-currency reserves that have been "robbed." GDP will shrink 3 percent in 2014 and inflation may be as high as 14 percent, he said today. "Kamikaze" Mission Kamikaze mission is an apt description. As with Greece, this bailout deal will not help Ukraine much. Of course, the goal is not really to help the country receiving the alleged "aid", but rather to help creditors get their money back, regardless of how much the aid recipient suffers in the process. Hryvnia vs. US Dollar It will be interesting to see what happens to the Ukrainian hryvnia, once again nearing a record low. The hryvnia fell from 8.2 to the dollar, to 11.2 to the dollar. That's a decline of 26.8% this year. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Recommendation on Bitcoin Posted: 27 Mar 2014 11:39 AM PDT I have a recommendation to make on bitcoin but it's not to buy or sell or even to hold bitcoins. Before I get to my recommendation, I have to admit that I am quite surprised that bitcoins surged from less than a cent to over $1000 (now around $520). Treasury, Wall Street Embrace of Bitcoin Early on, I wondered if bitcoin would even survive. But it's pretty clear now that bitcoin will survive. I arrived at that conclusion when Wall Street embraced bitcoins (see High Frequency Bitcoin Trading Coming Your Way). In response, I stated "bitcoin is here to stay". On March 18, I reported Treasury Department Places "Real Value" on Digital Currencies, Sees No Widespread Criminal Bitcoin Use; Virtual Currency Rules Coming Later This Year. To me, that Treasury discussion was further evidence bitcoin is here to stay. I strongly suspect the Treasury wants to study digital currencies, possibly in advance of making the US dollar digital, and in the process making every cent traceable to someone at all times. Unfortunately, I believe such controls are coming. Money is Made by Being Early Bitcoin is front-page news. But money is not made when things hit the front page of the Wall Street Journal. Money is to be made in items on the 20th page of the Wall Street Journal, if not before that. In 2009, $1,000 invested in bitcoins would be worth a staggering $50,000,000 today. That is the effect of investing in something that goes from one cent to $500. I missed it, so did nearly everyone else I know. Recommendation So, where are bitcoins headed next? If I knew that, I would have bought in 2009. I do not know, nor does anyone else. Yet, I do have a recommendation. In light of bitcoin theft at Mt. Gox, at Flexcoin, and at Poloniex (see Two More Exchanges Hacked: "Flexcoin" Robbed of All Online Coins; "Poloniex" Missing 12.3% of Assets), for those who hold bitcoins, please hold bitcoins at a secure site. Specifically, I recommend Netagio. Why Netagio? Simple. I trust their digital currency safety, just as I trust the safety of my holdings at Goldmoney. Goldmoney and Netagio are related (See GoldMoney group launches new Bitcoin­‐focused company in the UK). This of course makes me biased. I have a relationship with Goldmoney and by association with Netagio. Thus I struggled writing this post. I do not make such recommendations lightly. I do now, not because of any current benefit (I have none), nor because of any expected future benefit (which there might be), but rather, because of multiple instances of fraud, at multiple places, people holding bitcoins need to hold them in a secure place. Fees Netagio currently has no storage fees. Some places like Xapo.com charge for bitcoin storage, whereas others like Coinbase.com do not. I expect storage costs and/or transactions costs will eventually be the norm everywhere. I have no information regarding timeframe. I can say, metal storage costs at Goldmoney are among the lowest in the industry for precious metal storage. If and when Netagio does charge storage fees, I would expect them to be among the lowest in the industry. Financial Reporting Given the IRS Clarifies Bitcoin as Property Not a Currency I asked Netagio if they handled financial transaction reporting and received this answer: "We provide the same type of information like we currently do now in GoldMoney. We give a currency value to any Bitcoins on the date they were received. For those who buy and sell Bitcoins through our platform, we'll be able to map the value of them at the time of the trade execution." Supported Currencies Netagio supports bitcoin trading in US dollars, Euros, and British Pounds. I suspect, but cannot guarantee other currencies will be added. Currently, most bitcoin exchanges support one or two currencies, but that may easily change as well. Gold to Digital Transactions Coming My opinion is that once a wider population of people are comfortable transacting with Bitcoin online, transferring gold to bitcoins is not far off. Indeed, a quick check of Netagio shows You can Buy and Sell Gold with Bitcoins. That is something other bitcoin exchanges do not offer. Personally, I do not want my predominant store of wealth sitting in bitcoin. I prefer gold. Others might prefer bitcoin. For those who do prefer bitcoin, my suggestion is to question the security procedures at your current site, and if at all in doubt, move some or all of that storage somewhere else. Specifically, look for a site where security is rock solid, where there is financial transaction accounting, and where multiple currencies are supported. There may be other similar services elsewhere. As always, please do your own due diligence. This is similar to my recommendation to not hold money in excess of the FDIC deposit insurance at any one bank. In this case, there is no deposit insurance anywhere in the Bitcoin world, so that makes it all the more important that you pick a site you can trust, with financial accounting, and with other services. Again, this is not a recommendation to buy, hold, or trade bitcoins. Rather, if you do, please pick a site you can trust. Netagio is one such place, for all the reasons given above. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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.

Can Inflation be Too Low? Posted: 27 Mar 2014 03:03 AM PDT On Tuesday, Bundesbank chief Jens Weidmann opened the door to QE and negative interest rates. European Central Bank governing council member and Bundesbank chief Jens Weidmann said negative interest rates would be more appropriate to use to counter a higher exchange rate. Weidmann also added that it was not 'out of the question' for the ECB to buy bank assets to fight deflation, in a softening of the German central bank's strict stance on the issue. Monks Recant The above announcement had the monetarists led by Ambrose Evan-Pritchard preaching "Monks recant: Bundesbank opens the door to QE blitz". Policy Shift or Just Extreme Verbal Intervention? Others are scratching their heads. Is this a bluff of some sort or is it the real deal? Comments yesterday and today on Eurointelligence are quite interesting. Eurointelligence Today Nobody we have talked to has the slightest clue what the ECB is doing right now. In one of the press conferences Mario Draghi is dovish, the next one he is hawkish. One day, Jens Weidmann says the QE is not right for the ECB, then he can live with it in principle. One day, they warned that negative interest rates would produce all sorts of distortions and risks, and now we are told that they have long ceased to be a subject of dispute. In the meantime, nothing happens. We have reached a point where nobody listens to verbal intervention any more. A Reuters news analysis by Eva Taylor observes: "While some economists said the Bundesbank president 'left the door open, although only slightly' for asset purchases, others saw it merely as a more precise statement of its position and an attempt to talk down the euro exchange rate." Eurointelligence Yesterday Substantively, what happened yesterday is that some central bankers acknowledge a risk we have known all along, that inflation can be too low, and that the ECB has policy tools at its disposal to fight this. None of this should be news. The most interesting bits were Liikanen's and Weidmann's statement about negative deposit rates - a route the ECB now appears less reluctant to take. It would address the dual problem of the overshooting exchange rate and the fall in excess liquidity. We find it harder to figure out Weidmann's much reported statement on QE. It seems to us that he is merely signalling that he opposes it for different reasons than usually stated - not out of a fundamental belief but because he does not think it to be appropriate now. So this seems just another form of verbal intervention? We thought his qualifier was more important, which suggests that if QE ever were to happen, it will probably occur on an insufficient scale. In our own analysis, inflation expectations have already decoupled in recently month, caused by ECB policy errors. The governing council has been persistently complacent and some of the members are now beginning to panic. We do not think that a further rate cut, a half-hearted QE programme, let alone verbal intervention, will be sufficient to re-anchor inflation expectations. Can Inflation be Too Low? There is nothing quite like making an economically illiterate statement backed up only by the supposition that another clueless party agrees. Let's play a thought game. Here is the question at hand: What if the price of everything fell to zero? Certainly no one would go hungry. But it goes far beyond that. Everyone would have their own private jet, the biggest house that they could imagine, etc. From a practical standpoint, nirvana cannot happen of course, but here are three points to consider. Falling prices mean goods and services are more readily available and more affordable Falling prices increase standards of living Falling prices reduce wealth inequality (With everything priced at zero, income is irrelevant). In light of the above, the notion that "inflation can be too low" is patently absurd. Ironically, the myth we need inflation is widely held, even though the Fed's inflationary policies are the biggest cause of rising wealth inequality. For further discussion, please see Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another As to whether or not the announcement is a Bluff or Insanity, I suspect both. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 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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