joi, 24 iulie 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Obama Shenanigans on 'Factoryless' Exports, Taxes, Employment, Jobs

Posted: 24 Jul 2014 11:09 PM PDT

Corporate Deserters

Obama was beating the drums on Thursday in Los Angeles regarding corporate tax deserters, companies that move headquarters or tax shields to another country in order to escape high US tax rates.

The LA Times provides the details in President Obama Hits 'Corporate Deserters' in Populist L.A. Speech.
Tearing into companies he dubbed "corporate deserters," President Obama on Thursday launched an election-year push to make it harder for U.S. companies to avoid paying taxes.

Under a bright sun at a trade and technical college in Los Angeles, Obama issued a damning assessment of a "small but growing" group of companies taking advantage of a "loophole" in corporate tax law by reorganizing overseas, often in low-tax countries.

Obama accused the companies of "renouncing their U.S. citizenship" and "fleeing the country" while sticking U.S. taxpayers "with the tab."

"You shouldn't get to call yourself an American company only when you want a handout from the American taxpayer," Obama told a crowd gathered at the Los Angeles Trade-Technical College. The speech capped a three-day West Coast trip primarily focused on raising money for Democrats ahead of the midterm elections.

Obama's target on Thursday was so-called inversion transactions, a practice that allows U.S. companies to reincorporate overseas, either through a merger or purchase of a foreign entity, and thus avoid paying U.S. taxes on its foreign earnings.
Who Cares About Legalities?

The president acknowledged the practice is legal, but added "my attitude is, 'I don't care if it's legal -- it's wrong.'"

Well, who gives a damn about legalities anymore? Certainly not president Obama, as he has proven many times over.

Besides, as we all learned from President Nixon "When the president does it, it's not illegal".

And no president has been a finer student of Nixon philosophy than Obama.

People Freaking Out

Business Insider's "eye-popping" chart of the day on Why People Are Freaking Out About 'Tax Inversions' adds a big megaphone to Obama's tune.



'Factoryless' Exports

In addition to seeking higher taxes, Obama simultaneously proposes a rule change to classify "factoryless goods producers" as domestic manufacturers, even if the manufacturing jobs associated with those producers are offshore.

Obama's Manufacturing Jobs Proposal Slammed By Unions.
A decade ago, as the United States hemorrhaged manufacturing jobs, the federal government considered reclassifying fast food as a manufacturing industry. Sound ludicrous? Today, with the manufacturing sector still ailing, the federal government wants to take something called "factoryless goods" and categorize the firms that make them as manufacturers. As part of the plan, the government could also classify some foreign-manufactured goods as U.S. exports.

Now, as the White House seeks to portray its domestic manufacturing initiatives as successful, the administration has proposed a rule change to classify "factoryless goods producers" as domestic manufacturers, even if the manufacturing jobs associated with those producers are offshore. A 2013 Study by Dartmouth Business School researchers found that had that rule been in place, it would have officially increased U.S. manufacturing employment figures by 595,000 jobs in 2002 and 431,000 jobs in 2007.

In response, labor unions and consumer groups this week announced they organized more than 26,000 public comments against the proposed change. They charge that the reclassification could undermine the Buy America Act, which requires government purchasers to give preference to U.S.-made goods.  They also argue that such a reclassification would artificially and inaccurately inflate the number of domestic manufacturing jobs reported by the government and would hide the true economic cost of trade proposals, such as the pending Trans Pacific Partnership.

Though the proposed change could be politically useful for lawmakers and is a hot issue for labor advocates, some economists support the initiative on the grounds that it provides more precise data. As the Dartmouth researchers argue, such reclassification may be necessary because "factoryless goods" are "a new type of production function in the global economy."
Ultimate in "Factoryless Goods"

Do US dollars qualify as "factoryless" goods? If not, why not? Dollars can be manufactured at will, electronically, without a factory, and China gladly takes all of them we print.

China wants dollars and we want junk. That should make everyone happy.

The only problem is classification. All Obama has to do is count US dollars as a "new type of production" and the trade deficit magically goes away.

On a more serious note ...

I propose elimination of corporate income taxes entirely. 

I discussed a zero percent corporate tax rate  in response to a proposal by Barry Ritholtz on a "Fair Tax" structure.

For a detailed discussion, please see Reader Emails and Other Reflections On the "U.S. Corporate Tax Dodge".

The article covers numerous points. For those who want a quick synopsis, here goes:

"Ritholtz wants uniformity and fairness. I agree. Taxation at 0% would not only provide it, businesses would come to the US, instead of escape from the US. How bad would that be?"

To address the trade deficit completely and easily, also see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

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.

The Piece Fits; Debunking Revisited

Posted: 24 Jul 2014 05:31 PM PDT

It Fits 

Reader Eric comments "It is amazing what internet, twitter, etc. has done for the pursuit of truth.  Here is an individual who shows where the piece fits on the plane."

From @ErzaBraam



The Piece



For a report on the piece, please see Photo of MH17 Wreckage Proves Missile Attack

Contrary to popular belief this does not prove MH17 was brought down by a Buk. Rather, the image is consistent with a missile explosion from outside the plane, not a crash, and not a bomb exploding inside.

The damage could be from a Buk, and is likely a Buk, but my understanding is that it could also be an air-to-air missile of a similar nature. If a military expert can state 100% otherwise, I would be happy to reconsider.

Debunking the Debunk of the Debunk

Several people sent me an email that allegedly debunks my debunk of a Reuters story regarding rebel admission of Buk possession. For background, please see Reuters Debunked: Khodakovsky Denies Interview Aspects.

The alleged debunk of my debunk is a Radio Free Europe Clip.

The audio clip is not embeddable,  so click on the preceding link to play.

Reader Ilya commented "Show this to your Russian speaking propaganda zombie." That ridiculous comment was in regards to Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian, and whose analysis I sometimes use.

I did show it to Dreizin and we both laughed out loud. This is my response ...

Believe a short clip by Radio Free Europe, a US propaganda site? When some of  the clip is barely audible,  and sounds like it was spliced together out of context?

Please be serious.

But hey, I am a fair guy. If Reuters wants to publish the entire interview, so we can hear the pauses, the context, and all other aspects, I would be happy to reconsider.

Meanwhile, let me repeat: In the original interview, Reuters author Anton Zverev posted quotes that are not consistent with the headline story. No amount of tampering, editing or innuendo can change that simple fact.

Once again, I quote - directly from Reuters  (who directly quoted Khodakovsky as follows) ... "What resources our partners have, we cannot be entirely certain. Was there (a BUK)? Wasn't there? If there was proof that there was, then there can be no question."

In 100% certain terms, and clearly in context, Khodakovsky stated he did not know if other rebel units had Buks, while a previous quote shows his unit did not.

There is absolutely no reasonable way for the Reuters headline to read (as it did) "Exclusive: Ukraine rebel commander acknowledges fighters had BUK missile."

Blame whoever you want: Blame the editor, blame the author, or blame Reuters, but you cannot reasonably blame anyone who points out such an obvious discrepancy.

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.

Junk Bond Indigestion; Musical Chairs; Take Chips Off the Table?

Posted: 24 Jul 2014 01:41 PM PDT

The first half of 2014 sported record junk bond purchases by investors thirsty for yield, no matter how absurd the bond covenants or how risky the investment.

Things may have changed in July as the following chart shows, using JNK (the Barclays High Yield ETF) as a proxy for junk bonds.

JNK Daily



click on either chart for sharper image

On a weekly chart, however, the dip doesn't even register.

JNK Weekly



So while this could be the start of a decline, it might also be nothing.

With that backdrop, please consider Bloomberg's report Junk-Bond Indigestion Burns Buyers Gorged on Record Sales.
Junk-bond buyers are showing signs of indigestion after snapping up a record $361 billion of the debt at the lowest yields on record.

Speculative-grade bonds from the U.S. to Europe and Asia are set to post losses this month for the first time since last August after high-yield debt funds suffered the biggest weekly withdrawal of 2014. Winoa SA, the French producer of abrasives for metalworking, scrapped a bond offering in Europe yesterday amid the turmoil.

"People who were complacent before are going to have their finger on the sell button pretty quickly if some of these situations escalate," Marc Gross, a money manager at RS Investments in New York, which oversees $5.8 billion in fixed-income assets, said in a telephone interview.

There is "a whiff of 'flight-to-quality' in the market, though we are far short of panic," analysts led by Michael Contopoulos at Bank of America wrote in a report yesterday. The $2.7 billion of withdrawals from junk debt was led by U.S. funds that reported outflows of $1.8 billion, with exchange-traded funds accounting for more than 60 percent of that, according to the report.

"There has been a noticeable shift in sentiment as investors evaluate whether flows are a short-term blip or the beginning of a broader trend," Michael Sohr, a New York-based money manager at AllianceBernstein, said in a telephone interview. "We've got increased geopolitical risks. Perhaps some investors believe it is a good time to take some chips off the table." 
Take Chips Off the Table?

The preceding three paragraphs from Bloomberg are rather amusing. Specifically I am referring to these phrases:

  • Flight-to-Quality
  • Finger on the sell button
  • Good time to take some chips off the table

While it's certainly possible for an individual investor to have a "finger on the sell button" or to "take chips off the table" it is impossible for investors in aggregate to take any chips off the table.

Someone must own every bond ever sold, 100% of the time, until the bonds mature or they are called. Mathematically, 100% of the chips must be on the table 100% of the time.

Secondly, there is no such thing as a "flight-to-quality".

Rather, what happens is a major repricing event: Investors demand more yield from junk bonds as perceived risk increases. Investors demand less interest from treasuries in times of turmoil.

In a repricing event of that nature, one asset price rises, the other sinks. It's important to understand this can happen even if no shares trade!

Here's an easy-to-understand example of a no-trade repricing: Suppose the city approves a landfill at the end of your block. Without any homes being sold, the value of every home on the block would immediately decline.

Sentiment can and does change overnight (and pricing along with it) whether shares of stocks, bonds, homes, or other assets trade or not.

Every Friday the market closes for the weekend. Prices can be very different at the open on Monday, and dramatically different in a week's time. Individual issues can change even faster than indices.

Musical Chairs ThreePeat

Just like Chuck Prince, former Citigroup CEO in 2007, everyone believes they can dance while the music plays, and safely head for the door when the music stops. For an amusing recount, please see Music Stops for Chuck Prince.

Investors are fooling themselves, for the third time. It's impossible now, just as it was in 2007 and 2000, for investors to exit at the right time.

All the remains is the answer to the question: "How much more insane does it get before the junk bond bubble bursts?"  When it does burst, it's near-certain equities will go along for the ride.

And It's Gone

A reader reminded me of this South Park clip that explains everything you need to know about risky investments.



Link if video does not play: And It's Gone

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 Government Breaks Up: Prime Minister Resigns Over "Vital Laws on Energy and Army Financing"; Follow the Money

Posted: 24 Jul 2014 11:54 AM PDT

Some interesting happenings in Ukraine today, in Kiev rather than the war zone. Issues concern unpaid soldiers, pro-Russian MPs, and various oil schemes to finance the war.

Let's take a look starting with Kiev Government Breaks Up as EU Mulls Fresh Russia Sanctions
Ukraine's premier Arseniy Yatseniuk tendered his resignation on Thursday, clearing the way for early elections aimed at producing a more reform-minded parliament in Kiev but also risking a short-term political vacuum.

Two parties quit the country's governing coalition earlier in the day and President Petro Poroshenko backed the idea of an early parliamentary poll. New elections would be likely to reduce the number of pro-Russian MPs and supporters of ousted president Viktor Yanukovich.

Mr Yatseniuk rebuked the existing parliament for putting Ukraine's future at risk and betraying the ideals of the protests that toppled Mr Yanukovich in February, by failing to pass vital laws on energy and army financing.

The Ukrainian government break-up came as EU ambassadors in Brussels met behind closed doors for more than eight hours debating whether to take the first step towards sweeping sanctions against the Kremlin over its support for pro-Russian separatists in Ukraine. These would target entire sectors of the Russian economy.

"History will not forgive us," Mr Yatseniuk told the parliament, after it failed to pass a law to liberalise control of Ukraine's natural gas pipelines system. "Millions of people made this revolution," he said, referring to the winter protests in Kiev.
Soldiers Not Paid

Also from the Financial Times, here are a few snips from Ukraine's Prime Minister Quits.
Arseniy Yatseniuk, Ukraine's prime minister, resigned on Thursday after two parties quit the ruling coalition government in a move designed to trigger early elections.

"The fact that the coalition has fallen apart, that laws haven't been voted on, that soldiers can't be paid, that there is no money to buy rifles, that there is no possibility to fill gas storages. What options do we have now?" Mr Yatseniuk said in address to parliament.
Vital Laws on Energy and Army Financing

Inquiring minds may be asking "What Might Those Vital Laws Be?"

That's a very good question that the Financial Times does not properly explain. RIA does explain its take Ukrainian Prime Minister Yatsenyuk Announces Resignation.
"If no new coalition is formed and the existing coalition in a parliamentary-presidential republic had collapsed, the government and the prime minister have to resign. I announce my resignation because of the coalition's collapse," he said.

Yatsenyuk also expressed disappointment with Ukrainian parliament's decision to reject a bill that allows the government to hand over up to 49 percent of the country's gas transport system to investors from the European Union and the United States.
Follow the Money Step by Step

  1. Prime minister Yatseniuk resigned
  2. This will lead to early elections in which pro-Russian members will be ousted from Parliament
  3. Parliament will pass a law selling 49% of Ukraine's gas and transportation systems to US and European investors.
  4. Ukraine needs the money to pay soldiers to fight an inane war.

Far be it from me to propose state ownership of energy pipelines. Yet, here's the vital question: Think Kiev is going to get full value, in the midst of a war, when it desperately needs money to pay unpaid soldiers?

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.

Internet Free Speech Vanishes in Spain; Most Infamous Law in Internet History; Brussels and Spain Target Google

Posted: 24 Jul 2014 11:05 AM PDT

90% Customer Satisfaction Too Much for Brussels

Brussels and Spain both stepped up attacks on Google over the past few days. Let's dive into the insanity with a Mish-translated report from Les Echos: Brussels Ready to Revive Showdown with Google
Pressure from Brussels increases on Google. The European Commission demands further concessions and seeks to end anti-competitive practices of which Google is accused. This could happen as soon as September.

Google is accused of enjoying ultra-dominant (market share of over 90% in research) in so-called "specialized research" - to purchase a product or for travel, a map search, for example.

Currently, a user who wants to buy coffee through Google is systematically given Google Shopping links in addition to "natural link results" at the expense of competitors such as Kelkoo Twenga. This constitutes "preferential treatment".

In response, Google has proposed that Google Shopping services of its competitors - chosen after auctioning three places available - would be placed side by side at the top, with pictures. These proposals were considered insufficient by Google competitors.
Mercy

Heaven forbid 90% of consumers be satisfied with the way something works.

If consumers weren't satisfied or if they thought some other search mechanism was better, they would use it. But Brussels steps in and demands Google change its ways.

Google offered to do so, but was turned down. Competitors want more free money at the expense of Google.

Satisfied customers be damned.

Most Infamous Law in Internet History

As ridiculous as that sounds, Spain went a huge step forward. Huky Guru explains in his post The Most Infamous Law in Internet History
Today, July 22, the Committee on Culture of Congress passed with 22 votes in favor and 20 against the draft text to amend the Copyright Act, probably the most infamous law of history of the Internet in Spain.

Congress today approved the so-called AEDE canon (Association of Spanish Newspaper Publishers) also known as the Google rate: A rate at which an inalienable right to periodically update any website automatically generates a right to collect on any other website is created that link collection right to be raised by a body which SGAE and distributed among its members. [short description: If you link to someone, you have to pay a  pay a fee].

As provided for by law, Google News, Meneame, Zite, Flipboad, Facebook, RSS readers, and Twitter will have to pay fees for any web link to a Spanish newspaper.

Moreover, in theory, if any website links to us or uses any other blog they are also likely to be assessed  a fee, but we have put our content under Creative Commons licensing.
Internet Free Speech Vanishes in Spain

In Spain, the right to quote or comment on an article, an essence of free speech, just vanished out the door.

Reader Bran, who lives in Spain, offers these thoughts:

  • The law penalizes, almost criminalizes internet links. 
  • AEDE reckons it will raise 80 million from the tax. 
  • Huky says the 80 million figure is imaginary because the only site that is truly taxable for profit is Google news. Yet, Google news is profitless in Spain so Google could simply close it down. 

Guru hits the nail squarely on the head in several of the points he makes, paraphrased as follows:
Google, Twitter, Meneame, Facebook and other social networks are today the biggest source of traffic to the websites of newspapers. People are not on the website of El Pais, El Mundo, in La Razon, or Gurusblog. People on the internet are in social networks or search engines that provide the news content or links to news content they seek. Killing links puts a huge barrier on entry. Links allows you to discover things, new pages, new media.

What now?

Well frankly right now I'm not optimistic. The consequences will be devastating and will come back strongly against those who promoted the idea unless the EU kills the setup.
Avoidance

Guru proposed incorporating in a foreign country such as Belize to escape the fees.

As a US citizen, living in the US, I can easily say "F* the EU" let them try and collect, just as I did with an absurd fine from France that I refuse to pay. (For details, please see Lawyer Advises Me "Don't Go to France")

Could the same absurd thing happen here?

Before answering, here's a thought that just popped into my head: "Stupidity propagates far faster than common sense."

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.

Reuters Debunked: Khodakovsky Denies Interview Aspects

Posted: 24 Jul 2014 02:18 AM PDT

As I suspected would happen, the exclusive Reuters interview in which "Commander Alexander Khodakovsky acknowledges rebel fighters had BUK missiles" has been challenged.

In my analysis of the Reuters article (see Ukraine Rebel Commander Admits Having BUK Missiles; Damning Contradictions?),  I point out considerable discrepancies in what Reuters author Anton Zverev wrote and actual quotes Reuters presented.

The discrepancies were so big I stated "It appears to me Reuters may have stretched this interview quite a bit."

Thus I am not surprised to discover Khodakovsky challenged huge aspects of that interview, in terms of things he stated, did not state, and even timing of events.

Reader Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian provides this translation from the Ria.Ru post "Khodakovsky Denies Talking About Buks"

"Мы рассуждали о версиях <…> но через все это красной линией проходила одна простая фраза, что я не располагаю сведениями о наличии у ополченцев подобного рода оружия", — заявил Александр Ходаковский в интервью телеканалу Russia Today.

"We discussed versions [different possibilities]... But through all of that, there ran a red line with one simple phrase:  That I don't have information on the presence of that type of weapon amongst the militia" declared Aleksandr Khodakovsky in an interview with the TV channel Russia Today.

Кроме того, он заявил телеканалу RT, что у него есть видеозапись интервью, которую он со своей стороны может предоставить, чтобы доказать, что не говорил агентству о наличии ЗРК у ополчения.

Additionally, he told the TV channel RT that he has a video recording of the interview which he can present from his end, in order to prove that he did not speak to the agency [Reuters] about the presence of air defense systems amongst the militia.

Что касается выложенных в интернет записей, где ополченцы якобы обсуждают наличие у них "Бука", то "эти записи датируются днем ранее до трагедии".

As far as the recordings presented on the internet, in which the militiamen supposedly discuss their possession of a "Buk", "These recordings are dated one day prior to the tragedy."

Пересказав обвинения Киева в адрес ополченцев, что у них есть "Буки", Ходаковский не подтверждает и не опровергает их. Он лишь отмечает, что если до катастрофы Киев знал, что у ополчения ДНР якобы есть "Буки", то власти Украины должны были запретить полеты над юго-востоком страны гражданских самолетов. Никаких других заявлений, сходных с тезисами материала агентства "Рейтер", Ходаковский не делал. "Странно было бы думать, что всего за сутки Ходаковский изменил свою позицию", — заметил источник в его окружении.

Recounting the charges the rebels have Buks, Khodakovsky neither confirms nor denies them. He [Khodakovsky] only adds that, if prior to the catastrophe, Kiev knew that the DNR [Donetsk Peoples' Republic] militia had a "Buk", then the Ukraine authorities should have prohibited civilian aircraft flights over the southeast of the country.  Khodakovsky made no other statements comparable to the points in the material presented by the Reuters agency. "It would be strange to think that Khodakovsky changed his position in just one day," - said a source close to him.

In a second Ria.Ru article "Subordinates doubt Khodakovsky Gave an Interview Regarding "Beech""

There is not much to the second article other than background information on the crash and a questioning of the Khodakovsky interview authenticity.

I asked Dreizin about the word "beech". The answer is Russia names military equipment after plants and trees. Buk is a beech tree.

Damning Contradictions

Khodakovsky neither admitted nor denied the rebels had Buks. Once again, here is the damning contradiction as I presented earlier.
"Khodakovsky said his unit had never possessed BUKs, but they may have been used by rebels from other units."

Now look back at the opening Reuters lead-in: "Alexander Khodakovsky, commander of the Vostok Battalion, acknowledged ... the rebels did possess the BUK missile system and said it could have been sent back subsequently to remove proof of its presence."

Here is the major contradiction: "What resources our partners have, we cannot be entirely certain. Was there (a BUK)? Wasn't there? If there was proof that there was, then there can be no question."

Khodakovsky never saw a Buk. Here is the precise statement as reported by Reuters: "That BUK I know about. I heard about it."
This could be a translation issue by one side or another, accidentally, or on purpose.

My best guess is the Reuters quotes are reasonably accurate (except perhaps the last one, specifically the word "know"), and that Khodakovsky's denial now about not discussing Buks at all is a translation issue.

Regardless, it's pretty clear that writer Anton Zverev seriously overplayed the interview, stating something that Khodakovsky never admitted "the rebels did possess the BUK missile system".

As the interview quote shows, Khodakovsky doesn't know what equipment other units have. That message is consistent with his denial on RT.

Thus, we are still precisely where we started: Did the rebels have Buks?

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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