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08/30/2014

For the week 8/25-8/29

[Posted 11:00 PM ET...Friday]

Edition 803

Washington and Wall Street

As the Washington Post’s David Ignatius put it, “It’s ‘back to school’ week for President Obama.” Personally, I used to hate my first day back, but by the end of it I was right back in the groove.

The president? He walked out on stage and promptly stumbled, in a big way, leaving his staff scrambling. To wit:

On Thursday, President Obama attempted to tamp down expectations the United States was preparing to launch airstrikes against the Islamic State (ISIS...or ISIL as the White House labels the terrorist behemoth), but in doing so he also said, “We don’t have a strategy yet.” 

Uh oh. He said what?

Meanwhile, Republican Senator John Barrasso (Wyo.) noted in an op-ed for the Wall Street Journal, Friday:

“Secretary of State John Kerry said during his January 2013 confirmation hearings that he would be a ‘passionate advocate’ on climate-change issues, and he’s living up to that promise. In a speech this month in Hawaii, Mr. Kerry called climate change ‘the biggest challenge of all that we face right now.’ Not 10, 20 or 100 years from now – right now.

“If only Mr. Kerry were right. Unfortunately, America faces much bigger immediate challenges and threats than climate change. Our enemies around the world are intent on harming us – right now. America’s secretary of state should worry more about them and less about the Earth’s temperature decades from now.

“Here’s a list of a few challenges, all of which pose a greater threat to the world than climate change. It might help the president and his colleagues understand why Mr. Obama’s foreign-policy approval rating is about 36%, according to an August poll by Gallup.

Iraq is a greater challenge than climate change....

Afghanistan....

Russia....

An Iranian nuclear weapon....

Syria....

North Korea....

[Ed. I would certainly add China to this list.]

“The White House has said its foreign policy rule is ‘don’t do stupid stuff,’ but putting climate change ahead of global threats fails that simple test. The United Nations will hold yet another conference on climate change next month, while the world burns.

“The greatest threat to Americans ‘right now’ is not climate change. The greatest threat is people with the intent and capacity to do us harm – and the president’s failure to lead the fight against them. Mr. Kerry’s fixation on climate change is one reason America’s friends no longer trust us and our enemies no longer fear us. The world is growing more dangerous as a result.”

By week’s end, British Prime Minister David Cameron was telling his people the terror threat level had been raised to “severe,” meaning an attack was likely, but not necessarily imminent.

It was about ISIS and the estimated 500 British citizens who have traveled to Iraq and Syria to gain their terror chops...with the threat they’d come home. 800 or more Frenchmen have supposedly done the same. I heard one analyst the other night speak of 500 Canadians, and as I discuss below, we’ve learned a long talked about threat from a Somali neighborhood in the Minneapolis-St. Paul area has produced three terrorists who thankfully died overseas, and not here while doing their work.

Does ISIS have the capacity to do anything here as yet? We don’t know. Tonight, there are published stories of Islamist cells in Mexico, near our southern border.

What we do know is that as I’ve been writing for months, European leaders are scared to death. There are so many soft targets and I’m going to throw one out there that, given the seeming sophistication of the leadership within ISIS, would do a number on sentiment at a crucial time of year.

Back in 2007, I did something I had always wanted to do...go to some of the Christmas markets in Germany. So I spent a week in Cologne and Berlin. Had a super time. But I’d be more than a little leery of visiting the same this coming holiday season. 

If you’re an Islamist terrorist it’s simply too easy, with all the symbolism attached. Keep your guard up, my European friends. Just as you do when you enter a theater and make yourself aware of the exits, do the same when you’re in those vast, easy to access festivals.

Sorry to be so stark, but I guarantee those in charge of security in London, Paris, Berlin, Nuremberg (which has a famous market), Munich, Salzburg, Vienna, Oslo....you get the picture.

And regarding Vladimir Putin, I keep forgetting to note a piece I’ve purposefully kept up on my “Hot Spots” link for a while, parts of which are excerpts from a recent essay by Russia expert Dimitri Simes. Take a few minutes to read his take on how things could escalate in the Baltics and focus on his mention of Russia’s 10-to-one advantage in tactical nuclear weapons.

Mr. Simes, I emphasize, does not, however, come out and say what I’m about to. But I think we are headed towards a day where Putin actually threatens the use of those very weapons. No one should be shocked by this. It will largely be bluster (at least that will be what we hope it is), but it will be enough for Putin to have his way, particularly if it’s in an attempt to retake the Baltics. We’ll likely flinch.

Putin certainly put on a display Friday. First, in a statement posted on the Kremlin Web site, he labeled the pro-Moscow separatists “insurgents.” Then, appearing at a youth forum, he compared the tactics of the Ukrainian army to those of Nazi forces that besieged Leningrad during World War II.

Putin also said, “We neither want, nor are we going to” get involved in a full-scale war, but that Russia plans to keep developing its nuclear and defense arsenal to “feel safe, but not to threaten anyone in particular.”

He then added, ominously, that Russia’s armed forces, backed by its nuclear arsenal, were ready to meet any aggression, saying that foreign states should understand: “It’s best not to mess with us. Thank God, I think no one is thinking of unleashing a large-scale conflict with Russia. I want to remind you that Russia is one of the leading nuclear powers.” [Reuters / Moscow Times]

Friday night, German Foreign Minister Frank-Walter Steinmeier said of the crisis in eastern Ukraine: “The border infringements have intensified, and raised concerns that the situation is slipping out of control.”

I discuss the upcoming NATO summit and President Obama’s trip to the Baltics down below. Both are critical. NATO and the U.S. will talk tough. But Baltic leaders, and those in Poland, need to demand immediate action to protect them. Understand it’s complicated. The U.S. and NATO would be violating existing agreements with Russia to just place 10,000 troops on the border permanently, for example – they need to be rotated in and out – but there are some very real deterrent steps that can, and must be taken, to send a clear message to Vlad the Impaler.

As I go to post, though, it would appear Britain and six other NATO states have created a new joint expeditionary force of at least 10,000 personnel, incorporating air and naval units as well as ground troops that will be led by British commanders. Countries involved at present include Denmark, Latvia, Estonia, Lithuania, Norway and the Netherlands. Canada has also expressed an interest in taking part. [Sam Jones / Financial Times]

A formal announcement of this will be made at the NATO summit in Wales, hosted by British Prime Minister Cameron. Just understand, it can take years to make such a force operational and there likely isn’t time to do so. More immediate measures will be required.

---

There was some economic news this last week of August. July new home sales were disappointing, an annualized pace of just 412,000, below expectations. But when you combine new home sales with the far larger, earlier announced, strong data on the existing home sales front, the combined total for July is still the fastest annual pace since October.

The S&P/Case-Shiller 20-city home price index for June rose 8.1%, year over year, the slowest rate of increase since 2012, which is actually not bad news. Think affordability.

The number on durable goods (big-ticket items) for July once again proved why it’s known as the most volatile series in the economists’ tool belt...up 22.6%! However, when you stripped out aircraft orders (such as Boeing’s record 324 signings of purchases), which vary drastically month to month, the durable goods figure fell 0.8%. That said, when you add a few recent data points together we’re fine with this barometer.

Thursday saw the second look at second-quarter GDP and it edged up to 4.2%, after it was expected to decline from 4.0% to 3.8%. Good.

But then Friday a reading on consumer spending for July fell 0.1% when a gain was forecast, the first decline in this metric in six months. Not good. [Personal income rose a modest 0.2% in the month, while inflation components were tame.]

We also had a big number for the Chicago purchasing managers survey for August, 64.3, a bounce back from the prior month’s 56.0.

Finally, the Congressional Budget Office updated its budget deficit forecast for the rest of the year and on into the future. The projected shortfall for the fiscal year ending Sept. 30 is now $506 billion compared to April’s prediction of $492 billion and a $680 billion gap posted last year. In 2015, the CBO projects the deficit to shrink a sixth straight year to $469 billion after the deficit peaked at $1.4 trillion in 2009.

Good news. But then in fiscal 2016 the deficits start rising again, though not in a big way until 2019 and beyond.

Remember, aside from ‘eventually’ soaring entitlements in the out years, you have the big issue of interest expense. Assuming rates normalize at some point it’s why you should care about the year-to-year deficit that is just added to the existing total. But more on this in a future “Wall Street History” piece, which I’ll alert you to.

Here’s what we should note today. You know all these geopolitical items we’re suddenly focused on? No one, at least among the scores of publications I read every day, is mentioning what would happen to our deficits if we have to increase defense spending in a sizable way. It’s more than a distinct possibility.

For example, mandatory (entitlement) spending is projected to rise from $2.3 trillion in F2015 to $3.6 trillion in F2024, under the CBO’s scenario, while discretionary spending (everything else, including defense), rises from $1.188 trillion to $1.377 trillion over the same period. Really? That’s all? I’m guessing not.

Lastly, of course the CBO projections are just that, projections, and so much can change. For one, the CBO forecasts economic growth of 1.5% in 2014, a major reduction from before, but it’s sticking to 3.4% for both 2015 and 2016. To be continued....

William A. Galston / Wall Street Journal

“The U.S. has an economic growth problem, and it started before the Great Recession. Between 1949 and 2000, Third Way’s Jim Kessler calculates, the annual rate of growth exceeded 3% a total of 34 times – two years out of every three. During the eight Clinton years, growth reached 4% five times and fell below 3% only twice. Since 2000 growth has reached 3% just two times and did not reach 4% at all, even during 2003-07, the peak years of the recovery from the 2001 recession. Since the beginning of the recovery from the Great Recession of 2008-09, annual growth has not yet reached 3%, and 2014 looks to be no exception.

“The big picture puts these details in sharp relief: Between 1949 and 2000, the economy grew on average 3.6% annually. Since then, growth has averaged only 1.8%.

“In the economic circumstances of recent decades, only a sustained period of robust growth has raised wages and household incomes. Unless the economy can resume the more robust growth of the second half of the 20th century, U.S. workers will be hard-pressed to regain the ground they have lost, let alone offer the prospects of something better for their children.”

Oops...one more item. It’s a little known fact Congress needs to pass new funding bills by September 30 to keep the government running, even though a deal last December set spending levels through 2015 to avoid another budget crisis. But the funding passed in January expires end of next month.

Ergo, there is some talk Republicans could be preparing to shoot themselves in the foot again. I’m assuming they can’t be so stupid. Then again, they’ve played the role of village idiots before.

Europe and Asia

Data this week confirmed the eurozone’s worst fears as a flash estimate on inflation for the month of August came in at an annualized rate of 0.3%, down from 0.4% in July; which is not only far below the European Central Bank’s target of 2.0%, but close to downright deflation. Spain, for one, saw consumer prices fall 0.5% in August from a year ago. Full data is slated to be released for the EA 18 Sept. 17.

Meanwhile, the euro area unemployment rate remained unchanged at 11.5% in July vs. June, but down slightly from the July 2013 mark of 11.9%, according to Eurostat, the statistical arm of the European Commission. [Eurostat also compiles the inflation data.]

Among some of the key players, the jobless rate was just 4.9% in Germany (the government calculates it at 6.7%), 10.3% in France (up a tick from June), 12.6% in Italy, 24.5% in Spain, and 27.2% in Greece (May 14).

Youth unemployment rates were 53.8% in Spain, 53.1% in Greece (May 14), 42.9% in Italy and 35.5% in Portugal.

So what will the ECB do when it meets next Thursday? Nothing, despite ECB President Mario Draghi’s talk of taking more aggressive action to combat tumbling inflation.

The ECB would “use all the available instruments needed to ensure price stability over the medium term,” he said in Jackson Hole, Wyoming a week ago.

But Draghi has yet to launch “quantitative easing,” or large-scale asset purchases that would pump more money into the economy.

Draghi and the ECB have disappointed markets before with their conservative approach and Draghi gave no timetable for his “aggressive” action.

The ECB president is concerned about high unemployment as well, and he wants to be more flexible on the austerity front, but the prime issue is how to get the banks to loosen up on the lending front and the plain fact is....nothing has worked! Why should anyone believe Draghi’s next moves will thus do the trick?

This is where the Russia/Ukraine situation is so critical. Western sanctions, and retaliation from Moscow, are doing a number on business confidence, particularly in the likes of Germany where a biz confidence index fell a fourth straight month. Electrical and electronic exports from Germany to Russia, for example, are down 19.8% in the first half of 2014. And there is zero reason for optimism that the situation in Ukraine will be resolved peacefully anytime soon. If anything, tensions may only ratchet up over the coming months across the region.

So the eurozone is one sick puppy...with extraordinarily record low 10-year bond yields.

Germany 0.89%
France 1.25%
Italy 2.43% [2.34% intraday]
Spain 2.22% [2.08% intraday]
Portugal 3.18% [though up Friday from an intraday low of 3.00% the previous day]

What you are going to increasingly see is a divergence, with some in the periphery, particularly Italy, I imagine, coming back to reality given its economy is back in recession, it has price deflation, and its debt-to-GDP ratio is over 130%. 2.34% on a 10-year piece of paper from this place? C’mon.

But trends can last a long time and the markets have been feeding on Draghi’s comments for over two years now, though, again, look at what that action has resulted in. Zippo. Nada. [Except rising asset prices that do the 23-year-old unemployed Italian zero good.]

Opinion....

Jonathan Davis / Financial Times

“(Market expectations) that the European Central Bank will (and should) come to the rescue with a program of quantitative easing seem premature and complacent. Some form of QE by the ECB will come in due course, but will it be enough to pull Europe out of the debt deflation nightmare that seems to be in the cards? There are reasons to have doubts.

“The most obvious one is that the ECB’s freedom to maneuver is much more limited than that of other central banks. Even in good times, it takes months to build a consensus for action among the key member states, and the issue of QE remains highly contentious, both as to its wisdom and its legality. Assuming that primary purchases of government bonds are ruled out, it is open to question whether there are sufficient assets that the ECB can legally buy to achieve the necessary market impact.

“Second, it is clear that the ECB needs (and wants) to get its stress tests of Europe’s banks out of the way before going much beyond the monetary policy measures announced last month. To be credible, publication of the results in October needs to be followed by a period of market review and demonstrable improvements in balance sheets. A QE program could create conflicts of interest with its bank supervisory role. That makes it virtually certain that, in the absence of some new market-driven crisis, the ECB will inevitably find itself ‘behind the curve’ in implementing a QE program.”

Then there’s France. What a mess. This week President Francois Hollande reshuffled his cabinet again, purging the Socialist government of three left wingers, including Finance Minister Arnaud Montebourg, who was vehemently opposed to austerity measures imposed (directed) by the European Union.

Montebourg led the revolt and after he quit blasted the “absurd” policies that had brought about “the most destructive crisis in Europe since 1929.”

Hollande’s approval rating is a staggeringly bad 17%, according to an Aug. 25 Ipsos survey. His once popular prime minister, Manuel Valls, who survived the reshuffling, is down to just 36% approval.

France reported zero growth in the first half and a manufacturing confidence index for August hit a 13-month low.

The thing is, Hollande is in office until 2017, but for now he needs a majority in parliament to pass his 2015 budget this fall. I don’t know enough about French politics, but picture how he just jettisoned members of his own party whose support is paramount to him gaining the majorities he needs to pass anything.

[Montebourg was replaced at Finance by 36-year-old Emmanuel Macron, a top aide to Hollande. Laurent Fabius and Jean-Yves Le Drian remained in their posts as Foreign and Defense ministers, respectively.]

Some eurozone / EU tidbits....

--Spain’s government statistics office confirmed the economy grew 0.6% in the second quarter from the first. This is good.

--Germany’s inflation rate for August came in at up 0.8%, in line with estimates. The government also announced a crackdown on abuse of its benefits system, or “benefit/welfare tourism” by migrants from places like Romania and Bulgaria.

As reported by BBC News, “Under the plan, EU migrants would no longer receive social welfare benefits after six months out of work. EU citizens convicted of benefits fraud could also face deportation.”

The proposals need parliamentary approval.

--Denmark’s economy unexpectedly declined in the second quarter, down 0.3%, after growing 0.6% in the first three months of the year, according to the statistics office. Analysts had expected growth of 0.3%. The Economy Ministry is still predicting growth for the year of 1.4%.

--Ulster Bank projects the Irish economy will grow by 3.1% in 2014 as the recovery on the Emerald Isle becomes “more broadly based.”

“(The bank) said that this year will mark the first since 2007 that exports, consumer spending, and investment will all be growing together.” [John Mulligan / Irish Independent]

Irish exports rose 6% in June compared to year earlier levels.

Turning to Asia, I missed last time the HSBC flash reading on manufacturing in China for the month of August, 50.3 vs. 51.7 in July, the latter having been an 18-month high.

This week the price of iron ore hit a two-year low worldwide, largely reflecting the slowdown in China’s property market.

The decline in housing prices is leading to a rapid rise in violent clashes. Understand that many of the developers’ are being forced to drop prices, say, 25%. I saw firsthand the “see-through” high rises when I was in Fujian last February. If you’re a developer you have to slash prices if you are going to have a shot at meeting your debt service.

But what if you just purchased a unit a few weeks before they cut the price 25%? I think you’d be a little torqued off.

In Japan, the government continues to claim a moderate recovery is intact but July industrial production rose less than expected, while household spending declined and inflation remained unchanged.

Output rose just 0.2% over June, while consumer prices increased 2.3% from a year earlier (ex-fresh food and energy, their core reading). Household spending cratered 5.9% from a year earlier.

The economy continues to struggle after the 3% hike in the consumption tax in April, but industrial production is expected to gain 1.3% in August and another 3.5% in September.

Given that the government’s goal is inflation of 2%, the above numbers on the CPI may look good, but you have to add in the impact of the consumption tax hike, which sends it below 2.0%.

Street Bytes

--The major equity indexes rose a fourth straight week, with the Dow Jones up 0.6% to 17098, 40 points shy of its all-time high. But the S&P 500 hit a number of new highs this week and finished at 2003, up 0.8%, while Nasdaq added 0.9% to 4580. I suspect things will be different in next week’s holiday-shortened action.

--The value of global equities hit a record $66 trillion on Tuesday when the S&P hit 2000. The level was $25 trillion March 2009 at the market bottom; $63 trillion at the 2007 peak. [Bloomberg]

--When the S&P 500 closed at 2000.02 on Tuesday that marked 16 years to gain 1000 points since it broke through 1000 in 1998.

Going back to Dec. 31, 1997, the leading stock in the S&P index by market cap was General Electric at $240 billion. On Aug. 25, 2014, GE was at $263 billion. Yes, essentially the Jeff Immelt years, as in whoopty-damn-do.

Apple is now the largest company in the S&P at $640bn (8/25/14 vs. about a mere $2.3bn in 1997), followed by Exxon Mobil ($421bn vs. $151bn).   [S&P Dow Jones Indices / Wall Street Journal]

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.49% 10-yr. 2.34% 30-yr. 3.08%

--The World Health Organization is upping its estimates of the potential number of those who could become infected from Ebola to 20,000. The WHO said the number of cases could already be four times higher than the 3,000 currently reported. 1,550 were confirmed dead, last I saw.

So if we are already trying to deal with 12,000 cases, and you can see how the system is overwhelmed, with many of the healthcare workers themselves succumbing to the virus (at least 120, according to the Los Angeles Times), including leading doctors, the real emergency is in putting together facilities and health care professionals to combat it.

The WHO is calling on flight bans to be lifted and borders reopened, making it easier for health workers to access affected areas.

--U.S. authorities, including the FBI, are investigating a wave of new cyberattacks against U.S. financial institutions. JPMorgan Chase was the first to come forward, issuing a statement: “Companies of our size unfortunately experience cyberattacks nearly every day. We have multiple layers of defense to counteract any threats and constantly monitor fraud levels.”

Not exactly comforting...the “every day” angle. According to Bloomberg, sensitive data was lost in the hack attack, including account information.

So of course the initial suspect(s) are Russian hackers and/or the Russian government in retaliation for the sanctions levied against the Kremlin.

Thursday, more of the nation’s largest banks announced they had not seen unusual fraud activity from their customers’ accounts.

But Tom Kellermann, chief cybersecurity officer at Trend Micro Inc., told the Los Angeles Times:

“Geopolitics will serve as a harbinger of cyberattacks in today’s age. For all of these people in Washington – the FBI and Secret Service – to work this hard together ahead of a long weekend suggests something unprecedented is awry.”

--Russia continues to play games in response to western sanctions against its interests and individuals. Russian courts ordered four McDonald’s outlets closed in Moscow for 90 days, citing breaches of “numerous” sanitary laws. By week’s end the total had grown to 12. 100 more were being inspected.

McDonald’s said it was appealing. 

--Russia’s Economic Development Ministry estimates that natural gas export prices will fall by more than 25% over the next three years, which could cost Gazprom, Russia’s biggest gas exporter, $4 billion in lost revenues, according to the Moscow Times.

Conversely, Russian analysts expect oil prices to stay in the $100 range over the next three years.

--Burger King Worldwide Inc. announced it was acquiring Canada’s Tim Hortons Inc., with the combined entity then hoping to take on McDonald’s. The two would have more than 18,000 restaurants in 100 countries (vs. McDonald’s 35,000+ franchises).

But it was the deal’s so-called tax inversion aspect that drew a lot of attention, as the new company’s headquarters would be in Canada. Plus, Warren Buffett’s Berkshire Hathaway was expected to provide 25% of the financing.

Editorial / Wall Street Journal

“President Obama and Senate Democrats are going to need a new business front man. This week they’ve been officially abandoned by their erstwhile tax-policy patron saint Warren Buffett, who has joined up with what the President likes to call the ‘corporate deserters’ who locate their legal headquarters somewhere other than the United States.

“On Tuesday Burger King Worldwide confirmed that the Miami-based burger chain is buying Tim Hortons Inc., the Canadian purveyor of coffee and doughnuts, for roughly $11 billion. As part of the deal Burger King will move its legal headquarters north of the border. Mr. Buffett, who has been the President’s longtime partner in a campaign to raise taxes, will help finance the transaction. Mr. Buffett’s Berkshire Hathaway will invest $3 billion in preferred shares that will pay a handsome 9% coupon.

“Burger King says the deal isn’t about cutting its tax bill and that it will continue to pay taxes on all the money it earns in the U.S., like other companies that adopt foreign parents for their U.S. subsidiaries....

“No doubt that’s true but it overlooks that Canada has become a far more business-friendly tax jurisdiction than the U.S. ....

“The business case seems clear, but the politics can be difficult. Senate Democrats, desperate to avoid discussing Iraq or ObamaCare, are hoping to hold the Senate by running against ‘Benedict Arnold’ corporations instead of real-life Republican opponents. But it looks like Democrats will now have a harder time having it their way – unless they want to stage a political inversion and turn on their most famous benefactor and supposed tax expert.”

Buffett took to the Financial Times: “Tim Hortons earns more money than Burger King does. I just don’t know how the Canadians would feel about Tim Hortons moving to Florida. The main thing here is to make the Canadians happy.”

Charles Krauthammer / Washington Post

“The Obama administration is highly exercised about ‘inversion,’ the practice by which an American corporation acquires a foreign company and moves its headquarters out of the United States to benefit from lower tax rates abroad.

“Not fair, says Barack Obama. It’s taking advantage of an ‘unpatriotic tax loophole’ that hardworking American families have to make up for by the sweat of their brow. His treasury secretary calls such behavior a violation of ‘economic patriotism.’

“Nice touch. Democrats used to wax indignant about having one’s patriotism questioned. Now they throw around the charge with abandon, tossing it at corporations that refuse to do the economically patriotic thing of paying the highest corporate tax rate in the industrialized world....

“Moreover, corporations have an indisputable fiduciary responsibility to protect their shareholders’ interest....

“But the Democrats’ problem is deeper. Everyone knows why inversions are happening. America’s 35% corporate tax rate is absurdly uncompetitive. Companies are doing what they always do: try to legally lower their tax liabilities.

“What is maddening is that the problem is so easily solved: tax reform that lowers the accursed corporate rate....

“It’s also politically doable. Tax reform has unique bipartisan appeal.  Conservatives like it because lowering rates stimulates the economy and eliminating loopholes curbs tax-driven economic decisions that grossly misallocate capital.

“The appeal to liberals is economic fairness. By eliminating loopholes, tax reform levels the playing field....

“So why not attack the inversion problem with its obvious solution: Tax reform? Time is short, says Obama. He can’t wait. Instead, he wants legislation to outlaw inversions.

“No time? Where has he been? He does nothing about tax reform for six years (during two of which Democrats fully controlled Congress), then claims now to be too impatient to attempt the real solution. Instead he wants to hurry through a punitive anti-inversion law to counterbalance the effects of our already punitive tax rates....

“This is nuts....

“A real political leader would abandon this sideshow and actually address corporate tax reform with a serious revenue-neutral proposal to Congress. There would be hearings, debate, compromises. We might end up with something like the historic bipartisan tax reform of 1986 that helped launch two decades of nearly uninterrupted economic growth.

“But for that you need a president.”

N. Gregory Mankiw / The New York Times

“(Here’s) a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.

“Some may worry that a flat consumption tax is too easy on the rich or too hard on the poor. But there are ways to address these concerns. One possibility is to maintain a personal income tax for those with especially high incomes. Another is to use some revenue from the consumption tax to fund universal fixed rebates – sometimes called demogrants. Of course, the larger the rebate, the higher the tax rate would need to be....

“Corporate tax inversions aren’t the largest problem facing the nation, but they are a reminder that a better tax system is within reach, and that only politics stands in the way.”

--As it gears up for its IPO next month, Chinese e-commerce behemoth Alibaba reported revenue rose 46% to $2.54 billion for the second quarter, with profit of $2 billion. Its level of active buyers rose 51% in one year to 279 million.

Because Alibaba needs to have a two-week road show it would seem the IPO will be perhaps the fourth week of September (Sept. 22/23).

--Meanwhile, Microsoft is being targeted anew by Chinese officials, this time the antitrust regulator for not being fully transparent with how it bundles software such as Windows and Office. Microsoft thus joins a recent list of foreign firms being swept up in antitrust probes, including mobile chipset maker Qualcomm and Mercedes-Benz.

It’s all about Chinese protectionism.

--Canada’s GDP rose at an annualized pace of 3.1% in the second quarter, better than expected. Exports rose 17.8%, while household spending increased a solid 3.8%. Labatt’s for everyone!

--Growth in India’s economy was at its best pace since March 2012 for the second quarter, up an annualized 5.7%. Inflation, though, rose 8.0% in July from a year earlier, as India’s monsoon rainfall has been 18% below normal, which would be the driest year since 2009.

--Malaysia Airlines is slashing 6,000 jobs as a result of the twin disasters it faced this year, MH370 and MH17. In a restructuring the airline will become completely state owned (through the state investment company), with the recovery plan costing an estimated $1.9 billion.

Long haul routes will be reduced, with profitability not expected to return until 2018.

--The U.S. Department of Agriculture forecast farm incomes will fall 13.8% this year to the lowest level in four years owing to record harvests and falling prices for corn and soybeans, the two largest U.S. crops, both at or near four-year lows.

The USDA also predicted a 4% rise in expenses for farmers, “with increased costs for seeds, fertilizer and pesticides.” [Jesse Newman / Wall Street Journal]

--Directly related to the above, Deere & Co. said it was laying off 460 employees at its flagship farm tractor plant in Waterloo, Iowa, in response to falling demand. A week earlier the company said it would lay off 600 workers at other plants in the Midwest.

--With Bank of America agreeing to a $16.7 billion settlement with federal and state governments over its mortgage-backed securities mess from the financial crisis (most of which emanated at Countrywide and Merrill Lynch, which BofA acquired), bringing its total to $70 billion, that’s more than half of the roughly $128 billion collected from the six biggest banks, according to research firm SNL Financial and the New York Post.

--The credit card delinquency rate fell to the lowest level in at least seven years over the second quarter. [1.16% on payments at least 90 days overdue.]

--Fast-growing messaging app Snapchat has been accorded a valuation of about $10 billion owing to an investment by Kleiner Perkins Caulfield & Byers, one of the best-known Silicon Valley venture-capital firms. Kleiner committed to invest up to $20 million recently.

Snapchat has zero revenue and no business model, but 24-year-old co-founder and CEO, Evan Spiegel, turned down a $3 billion bid by Facebook last year and now it’s worth $10 billion.

It’s a great country, sports fans...or maybe not.

--Speaking of ‘not great’ countries, “More than 30,000 tons of chicken feet laced with hydrogen peroxide were seized by authorities in Zhejiang province – in the latest wide-reaching food scandal to emerge in mainland China.

“Police said 35 business operators had been selling the goods – found soaking in hydrogen peroxide to keep the chicken feet white and fresh-looking – to more than 10 provinces....

“Chicken feet are a delicacy in China and some parts of Asia.

“Hydrogen peroxide, a colorless liquid often used for disinfection and processing food, causes vomiting, mouth irritations as well as throat and stomach problems if consumed in unsafe amounts.” [Laura Zhou / South China Morning Post]

[Actually, the SCMP reports that authorities in Hainan earlier found chicken feet soaking in lye. As Charlie Brown would say, “Good grief.”]

--Uh oh...here’s another Asian food scare. Also from the South China Morning Post and the Associated Press:

“Instant noodles carry a broke-college-student aura in North America, but they are an essential, even passionate, part of life for many in South Korea, Hong Kong and across East Asia. A U.S. study on their health effects, though, has caused emotional heartburn among its loyal consumers.

“The Baylor Heart and Vascular Hospital study linking instant noodles consumption by South Koreans to some risks for heart disease has provoked feelings of wounded pride, guilt, stubborn resistance, even nationalism among South Koreans.

“Koreans eat more instant noodles per capita than anyone in the world.”

China is the world’s largest instant noodle market, but lags far behind South Korea in terms of per capita consumption.

--The Wall Street Journal had a story by Julie Jargon on how consumers in their 20s and 30s, ‘millennials,’ are abandoning McDonald’s. In the U.S., same-store sales at restaurants have been flat or falling the past year, but, distressingly for the company, “The percentage of people age 19 to 21 in the U.S. who visited McDonald’s monthly has fallen by 12.9 percentage points since the beginning of 2011, according to Technomic, while the percentage of customers age 22 to 37 visiting monthly during that period has been flat.”

So call it flat overall. This is vs. the percentage of millennials that are going to fast-casual, like Chipotle’s or Five Guys, which is up 5.2% over the same study period.

For millennials, it’s about the quality of the food.

Separately, I thought I’d try out McDonald’s new double jalapeno burger. It was OK, but I immediately thought ‘this one will have very limited appeal...so why bring it?’

--Apple’s big product introduction event is Sept. 9. Aside from unveiling the new iPhone 6, there are rumors it will also introduce an “iWatch” wrist-worn computer.

--Sony had a miserable weekend as a cyberattack took down its PlayStation Network, which coincided with a bomb scare  on an American Airlines flight carrying Sony Online Entertainment President John Smedley. None of the 53 million users’ information was accessed. The flight was diverted following a tweet that said, “I’m gonna send a bomb on your plane be ready for me tomorrow.”

--Speaking of video games, Amazon reached a deal to acquire Twitch, the most popular website for watching people play games, for $1.1 billion.

Twitch did not exist three years ago, yet it now has 55 million unique viewers a month globally. Amazon outbid Google, among others. CEO Jeff Bezos said:

“Broadcasting and watching gameplay is a global phenomenon, and Twitch has built a platform that brings together tens of millions of people who watch billions of minutes of games each month.”

Oh what the heck. Better than watching the Mets, I guess.

--Swiss pharmaceutical giant Roche is acquiring U.S. biotech firm InterMune, makers of lung disease therapies.

--Best Buy Co. warned it will be another rough holiday season, as it sees deep price cuts and thus lower sales.

In the recent quarter, Best Buy’s overall sales fell 4%, while profit fell to $146 million from $266 million a year ago, which was aided by a large legal settlement.

--Tiffany & Co., on the other hand, reported another knockout quarter with fiscal second-quarter profit jumping 16%, with the Asia-Pacific region leading the way, sales increasing 14%. [Sales in the Americas rose 9%.] Same-store sales rose 3%, with overall revenue up 7%. In addition, Tiffany upped its guidance for the full year.

--Cloud-based enterprise software rising star Workday solidly beat Wall Street’s expectation for its fiscal second quarter, with revenue rising 74% due to strong growth in subscriptions for its resources and financial management software, with the company raising full-year guidance.

But in a conference call with analysts and investors, the company repeated a pledge to spend to build its business, which also means investors shouldn’t expect profits, as commonly accounted for, by fiscal 2016.

This wasn’t a surprise, but it’s the Amazon syndrome to a certain extent. That said, Workday shares ended up on the week.

--South Korean automaker Kia Motors Corp. will open a $1 billion plant in northern Mexico, joining BMW, which revealed its own $1 billion plant plans there in July, following a joint announcement by Mercedes-Benz and Nissan to build a $1.4 billion plant in the country.

Add the above to existing production that makes Mexico already the eighth-largest producer of autos in the world. [Los Angeles Times]

--After this week’s California earthquake in the Napa region, the Los Angeles Times had an article that began:

“Three decades after some California cities began requiring old brick buildings to be seismically retrofitted, thousands across the state still have not been strengthened and are in danger of collapse during a major earthquake.

“Many are in some of California’s poorest cities, where officials have chosen not to require property owners to make the upgrades.

“Seismic experts are particularly worried about communities in western San Bernardino County, which are threatened by the San Andreas and San Jacinto faults.”

The city of San Bernardino has a large concentration of unreinforced brick buildings “that are at risk of particularly intense ground motion,” according to U.S. Geological Survey seismologist Lucy Jones.

San Bernardino is also bankrupt.

Napa, on the other hand, did have mandatory rules to reinforce buildings and despite some of the television pictures you saw, Napa did a good job in helping avoid more widespread destruction. 

--How not to win friends and rally the troops. Say your news organization had been asleep the past 15 years, as NBC News president Deborah Turness did.

“NBC News hadn’t kept up with the times in all sorts of ways, for maybe 15 years... I think the organization had gone to sleep.”

According to the New York Post, the likes of Tom Brokaw, managing editor and anchor of NBC Nightly News from 1982 until 2004, as well as successor Brian Williams, were livid.

Turness then apparently didn’t apologize.

--Finally, Chelsea Clinton is quitting her job as a reporter at NBC News, citing increased responsibilities at the Clinton Foundation and the imminent birth of her first child.

Chelsea as you know was paid $600,000 a year for about four puff pieces every 12 months. Alex Wallace, senior vice president at NBC News, said, “Chelsea’s storytelling inspired people across the country and showcased the real power we have as individuals to make a difference in our communities.” [Crain’s New York Business]

I can’t be the only one who is about to throw up.

Foreign Affairs

Ukraine: Fighting raged in eastern Ukraine after talks between Ukrainian President Petro Poroshenko and Russian President Vladimir Putin failed to produce a ceasefire. On Wednesday alone, military officials in Kiev claimed 225 rebel troops were killed, along with 13 government troops. New fronts were opened south of the rebel stronghold of Donetsk and Luhansk.

Russia continued to deny it has intervened militarily, despite strong evidence to the contrary, including NATO satellite imagery, while Russia has been massing troops in Crimea (which is getting lost in the discussion).

Russian Ambassador Vitaly Churkin called the Russian soldiers in Ukraine “volunteers.” Yet an organization called “Soldiers’ Mothers Committee” reports some 400 Russian soldiers have been killed or wounded in Ukraine so far during the Russian intervention. [Annie Gowen, Anne Gearan / Washington Post]

“There are Russian volunteers in eastern parts of Ukraine. No one is hiding that,” said Churkin, suggesting instead they were volunteering during their holidays.

Ukraine claimed Russian tanks, artillery and infantry invaded through an unbreached part of the east, while the New York Times reported seeing many Ukrainian troops in full retreat.   It would appear Russia hopes to take the key seaport of Mariupol, and then secure a road link to Crimea.

By Friday, the number of Russian troops in Ukraine was put at 5,000.

But the White House, and President Obama on Thursday, continue to refuse to use the word “invasion” to describe Russia’s actions.

“Russia is responsible for the violence in eastern Ukraine. Russia has deliberately and repeatedly violated the sovereignty and territorial integrity of Ukraine,” said Obama, but he then added, “A military solution to this problem is not going to be forthcoming.”

U.S. Ambassador to the U.N., Samantha Power, was harsher in saying Russia “has manipulated. It has obfuscated. It has outright lied.”

Yet Obama remains fixated on Putin acting rationally. Thursday he reiterated:

“President Putin and Russia have repeatedly passed by potential off-ramps to resolve this diplomatically. And so, in our consultations with (our) European allies and partners, my expectation is that we will take additional steps, primarily because we have not seen any meaningful action on the part of Russia to actually try to resolve this in diplomatic fashion.”

NATO leaders are holding a summit next week in Wales, after which Obama will be meeting with Baltic leaders in Estonia to show U.S. and NATO support.

This week, NATO Secretary-General Anders Fogh Rasmussen said in an interview with various European newspapers: “We have to face the reality that Russia does not consider NATO a partner. Russia is a nation that unfortunately for the first time since the Second World War has grabbed land by force. Obviously we have to adapt to that. 

“The bottom line is that you will in the future see a more visible NATO presence in the East.”

An EU summit is being held on Sunday to discuss the possibility of further sanctions.

For her part, German Chancellor Angela Merkel has had a peace plan on the table for months which offers Putin Crimea and some autonomy in the east, in exchange for demilitarization and a pledge that Ukraine would never join NATO. Giving up Crimea like that would be despicable, but we all know it’s a fait accompli. 

Some other tidbits:

--Finland said Russian aircraft have been repeatedly violating its airspace and that Finnish fighter jets were prepared to intercept them. The Finnish government said such moves on the part of Russia must be “taken very seriously.” Remember, Finland has the European Union’s longest border with Russia.

Finland and Sweden will sign an agreement with NATO making it easier for the bloc to put troops on their soil. Finland has been cooperating with NATO since 1994 as a member of the Partnership for Peace program. [Bloomberg]

--President Poroshenko has called snap parliamentary elections for October 26, an expected move as this was one of the demands of the protesters who toppled the pro-Moscow government of Viktor Yanukovych in February.

Opinion....

Editorial / Wall Street Journal

“The timing (of Russia’s latest moves) is notable, but not surprising, on the heels of the much-ballyhooed Tuesday meeting between Mr. Putin and Ukrainian President Petro Poroshenko. Western Europeans, in their desire to have this crisis go away, had hoped the meeting would yield progress toward a negotiating solution.

“But Mr. Poroshenko can’t concede territory to Russia without betraying his country, and Mr. Putin can’t be seen inside Russia to have abandoned his separatist proxies in Ukraine. When Mr. Poroshenko wouldn’t yield, Mr. Putin decided to improve his leverage by creating more military facts on the ground.

“The Russia advance is a particular humiliation to Mrs. Merkel, who more or less invited Mr. Putin to escalate. Last weekend she visited Kiev with a public message that there had to be a negotiated solution and Europe had no plans for further sanctions against Russia. That was ample incentive for the Russian to refuse any compromise. His latest grab for territory follows the familiar Putin pattern of responding to every concession with a new provocation.

“Mrs. Merkel is supposed to be a formidable statesman but she has been soft clay in Mr. Putin’s hands.”

Editorial / Washington Post

“If any international norm can still be called uncontroversial, it is the stricture against cross-border aggression by one sovereign state against another. Certainly any failure to enforce it in one place invites violations elsewhere. That is why Vladimir Putin’s decision to send Russian forces openly into Ukraine in the past 48 hours is a watershed, not a mere ‘continuation of what’s been taking place for months,’ as President Obama understated the case Thursday. If Mr. Putin does not pay a high price for this naked, if still cynically denied, attack on his neighbors, the precedent could sow instability far and wide – from the Baltic Sea, ringed by small, free states with large Russian minorities, to the South China Sea, dotted with islands that China covets but other countries claim....

“What is evident is that Mr. Putin cares little for diplomatic ‘off-ramps,’ as the West calls the various face-saving solutions it has dangled since Mr. Putin first began his squeeze on Crimea, and to which Mr. Obama alluded yet again Thursday. To the contrary: Sending his own regulars to seize Ukrainian territory suggests that he would rather risk further conflict with the West than see his minions go down to defeat in Donetsk, Luhansk and elsewhere....

“(Given) the global repercussions of this struggle, the United States and its allies cannot afford to let Mr. Putin break the rules. It is time to hit Russia with the full brunt of financial sanctions, to supply Ukraine with the arms and intelligence it needs to defend its territorial integrity (which Russia itself once pledged to respect), to halt all military sales to Russia by Western nations – and to bolster the neglected North Atlantic Treaty Organization. Mr. Obama made little effort Thursday to explain or defend the ‘broader principle’ that he said is at stake in Europe. Nations around the world that rely on U.S. leadership and its commitment to the rule of law can only hope that he brings more passion to the cause at what deserves to be a historic NATO summit in Wales next week.”

William J. Perry and George P. Shultz / Wall Street Journal

“The situation demands attention and action. There is no need for American ‘boots on the ground,’ because Ukraine has sizable ground forces, but we – NATO, or the U.S. if NATO is reluctant to act – need to help them with training and equipment that can improve their military performance and allow them to defend their country. Ukraine is a founding member of NATO’s Partnership for Peace, so NATO not only has some responsibility to act, but has actually trained together with Ukrainian military forces.”

Syria: In the latest U.N. report on the war, three million Syrians are now registered as refugees and the crisis is only getting worse. The U.N. High Commissioner for Refugees, Antonio Guterres, said Syria is now “the biggest humanitarian emergency of our era” with almost half of all Syrians forced to flee their homes.

1,175,504 are in Lebanon
832,508 in Turkey
613,252 in Jordan
215,369 in Iraq
139,090 in Egypt
6.5 million others are displaced within Syria.

Guterres added “the world is failing to meet the needs of refugees and the countries hosting them. The response to the Syrian crisis has been generous, but the bitter truth is that it falls far short of what’s needed.”

The official death toll is over 190,000, but as noted the other day, this is viewed by the U.N. as an “underestimate.”

Just look at those numbers in Lebanon and Jordan, in particular. It’s amazing those two countries are still standing. The United States, though, will not let Jordan fall. That is the real line in the sand the American people need to know about. [Obviously Israel would be another.]

Having said he didn’t have a strategy yet when it came to ISIS, President Obama remarked:

“Folks are getting a little further ahead of where we’re at. ....The suggestions seems to have been we’re about to go full-scale on some elaborate strategy for defeating ISIL and the suggestion has been we’ll start moving forward imminently and somehow with Congress still out of town, they’ll be left in the dark. That’s not going to happen.”

The president authorized U.S. surveillance flights over Syria to build up intelligence for a potential air campaign down the road, but Obama emphasized he wants a coalition, wondering aloud why Iraq and Syria’s neighbors aren’t stepping up to combat ISIS. On this he is right. But that doesn’t mean we should then totally step back and wait for everyone else to see the light. It will be too late...if it isn’t already.

Obama has ruled out coordinating any eventual strikes in Syria with President Bashar al-Assad’s government.

ISIS released a number of videos of unspeakable horror, including one where somewhere between 140 and 250 Syrian army soldiers were executed, and another where at least one of 15 captured Kurdish peshmerga fighters was beheaded in Mosul, Iraq’s second-largest city now under the control of the IS.

Earlier, ISIS took a Syrian airbase, near the northern city of Raqqa, an IS stronghold. The Syrian Observatory for Human Rights said 346 IS fighters and more than 170 members of the security forces died in fierce fighting that went on for weeks. The above mass execution was said to have been of Syrian troops captured in the taking of the base.

[Raqqa would likely be a focus of any U.S. air strikes.]

Former U.S. Ambassador to Iraq James Jeffrey said in an interview with Defense One, “Where were these ISIS guys three years ago? They were not part of Jihadi West Point cadres. They very quickly have been trained.”

This week you heard U.S. defense officials and intelligence analysts say of ISIS, they have “uncanny discipline” and they are “learning fast.”

Jeffrey says time is of the essence when it comes to fighting them, including in Syria. “You don’t want to wait, you have to use judgment, you don’t want to wait until it is incontrovertible that you are facing a huge threat. We should be arming and providing air support for and air cover for local people.”

Other items....

--Two Americans have been killed fighting alongside ISIS in Syria, both of whom are from the Minneapolis area. Earlier, a third from there was involved in a suicide truck bombing.

I have written countless times about the threat posed by the large Somali community in Minneapolis-St. Paul and the recruitment of terrorists for, then, Somalia and al-Shabaab, and what is increasingly today the likes of ISIS. On 3/12/2011, I wrote this:

“Heck, look at the situation in Minneapolis-St. Paul with the Somali community, many of whom are being recruited to return to Somalia for training and then come back to the United States to carry out their mission.”

--Related to the execution of James Foley, the mother of U.S. journalist Steven Sotloff issued an impassioned plea to ISIS to spare her son.

--Syrian rebel groups, including al-Qaeda affiliated Nusra Front, took control of a crossing between Syria and the Israeli-occupied Golan Heights. Fiji confirmed Friday that 43 of its soldiers, working as U.N. peacekeepers, were captured by the militants, but they are said to be unharmed.

--Russian Foreign Minister Sergei Lavrov urged Western and Arab governments to engage with Assad and work with him to fight ISIS.

--Infighting within the Obama administration on the issue of Syria is more and more breaking out into the open. In a piece for Defense One by Gayle Tzemach Lemmon, she notes “some within the administration say they feel ‘extreme frustration’ that their long-standing warnings have come true...

“ ‘Two years ago we told them if we did not train the moderates it would be the regime versus al-Qaeda and you would have transnational terrorist networks in Syria,’ says one administration official. ‘The real fear they always had was: arming the opposition means empowering the extremists. And now they say, ‘See? We told you,’ and we say, ‘No, you didn’t arm the moderates and you ended up with the extremists.’’”

Richard Haass / Financial Times

“The U.S. and much of the world have been rudely awakened to the fact that the group formerly known as Islamic State in Iraq and the Levant is both a dangerous terrorist organization, and considerably more than that. The deadly reality of its capabilities and ambitions is captured in the latest title by which ISIS styles itself: the Islamic State. It is a de facto government with evolving borders that seeks to impose its vision of society on the millions of people over whom it rules. And, as it has dramatically shown since the capture of the Iraqi city of Mosul in June, it seeks to expand its borders and the numbers subject to its control.

“The biggest question now facing western states is what to do about Syria. Iraq’s neighbor is where ISIS established itself and from where it directs its operations. The Fact is that the world cannot defeat ISIS in Iraq, or limit its potential elsewhere, if it continues to enjoy sanctuary in Syria....

“The first thing that needs to be done, despite White House reluctance, is to make good on what General Martin Dempsey, chairman of the U.S. Joint Chiefs of Staff, suggested last week. The U.S. should attack ISIS targets across the border from Iraq inside Syria. More could and should be done, too, to slow the flow of recruits, arms and dollars....

“(But) there are limits to what air power can achieve. What is needed are ground forces operating inside Syria. This is where things get complicated. Very complicated.”

Haass notes the introduction of U.S. and European ground forces, after the Iraq and Afghanistan wars, is a political non-starter.

A Pan-Arab force “would be extremely difficult.”

Building an internal Syrian opposition on what already exists would take too much time, “and it would be a tall order for any such force to contend successfully with both the Syrian government and ISIS.”

“The fourth option is to turn to the regime of Mr. Assad to take the lead in defeating ISIS. This would mean accepting for the foreseeable future a regime that has committed war crimes; that is supported by Iran and Russia, with which the west has considerable strategic differences; and that is opposed by countries, including Saudi Arabia, which the U.S. has more often than not cooperated.

“Such a policy change would be costly but not as costly as a scenario in which ISIS could use Syrian territory from which to mount attacks on the region and beyond. The Assad government may be evil – but it is a lesser evil than ISIS, and a local one.”

Editorial / Washington Post

“Earlier this year, Mr. Obama was dismissing al-Qaeda offshoots as the junior varsity of terrorism and promising Americans that the tide of war was receding. Now his secretary of state, John F. Kerry, calls the Islamic State an ‘evil’ that must ‘be destroyed.’ Defense Secretary Chuck Hagel says it is ‘as sophisticated and well-funded as any group that we have seen...beyond anything that we’ve seen.’ Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, says it ‘will eventually have to be defeated.’

“What would it take to defeat the Islamic State, which continues to rack up military victories in Iraq and Syria, including the capture of another air base Sunday? When Mr. Obama was urged to support the moderate opposition in Syria three years ago, one reason given was that a failure to do so would leave an opening for more radical factions that would eventually spill out of Syria and threaten the region. The longer the president waited, the more the need for action would become obvious – but the more unappetizing his options would be.

“Now the Islamic State is well-funded, with steady revenue from oil fields it has captured and, as we’ve learned recently, ransom payments; it is well-armed, including with captured U.S. weaponry; and it is highly ambitious.

“No serious approach to the group can focus only on Iraq, as the United States has done thus far. The extremists treat Iraq and Syria as one area of operations, and the United States must do the same.”

Iraq: On Thursday, President Obama reiterated his air campaign against ISIS in Iraq was limited, such as the effort to rescue the Yazidis on Mount Sinjar.

“It is not just part of my responsibility, but my sacred duty as commander in chief to protect the American people,” Obama said. “That requires me to act fast based on information I receive if embassies of ours or consulates of ours are being threatened. The decisions I made were based on very concrete assessments based on the possibility Irbil might be overrun. ...I can’t wait to make sure our people are protected...and the feedback I’ve gotten from Congress is that we’re doing the right thing.”

Thanks to ISIS, for the most part, over 1.2 million Iraqis are now displaced.

Israel: An extended ceasefire, with few details*, was agreed to between Israel and Hamas, though the Egyptian-brokered deal is no different from an original proposal made by Egypt at the beginning of the war, which Palestinian Authority President Mahmoud Abbas said was rejected by Hamas.

In an interview with Palestine TV, Abbas added that there was no difference “other than the losses and suffering we went through,” a significant statement coming from him, and an example of the wide gulf existing between the PA and Hamas. Recently Israel uncovered a plot whereby Hamas was going to launch a coup against Abbas and his government on the West Bank.

Abbas also said decisions of war and peace “should not remain in the hands of one faction,” another shot at Hamas. Abbas then said of Israel, it would not escape punishment for its “crimes and massacres” against the Palestinians in the Gaza Strip. [Jerusalem Post]

*It is reported that Hamas did not secure its demand for a full lifting of the seven-year-old Israeli blockade on Gaza, but Israel will ease some curbs on imports and open the borders to allow more humanitarian and reconstruction materials into the Strip. The two sides are to resume discussions on other issues, like the port, in about a month’s time, according to Egypt.

Meanwhile, Israeli Prime Minister Benjamin Netanyahu has been under fierce internal pressure for agreeing to the cease-fire without a vote in the cabinet.

According to MK Danny Danon (Likud), in the Middle East, restraint is seen as weakness.

“Despite the heavy price Hamas paid, we did not defeat Hamas,” he said. “Fifty days of fighting, 64 soldiers killed five (Ed. six) civilians killed, 82,000 reservists called up, and in the end we’re back to the agreement from Operation Pillar of Defense.”

Israeli opinion polls showed Netanyahu’s popularity plummeting. In a survey for Channel 10 television, 55% agreed with the prime minister’s policy on Gaza, down from 69% in a matter of weeks.

But answering critics, Netanyahu said in a press conference: “I don’t set unrealistic goals. We’re not dealing here with populism.”

Netanyahu said Hamas was “hit hard and got none of its demands.”

But Foreign Minister Avigdor Liberman said, “It is impossible and forbidden to trust lowly murderers. Therefore, we are against a cease-fire that allows Hamas to rearm and wage another battle against Israel whenever it finds it comfortable.”

Liberman maintains the tunnel and rocket threat would remain as long as the rule of Hamas was not overthrown.

Iran: Meanwhile, you just know the Obama administration is anxious to cut a long-term deal with Iran on its nuclear program, but the new deadline was extended to beyond the mid-term elections. No recent developments of note on this front, which only means Iran has had more time to conceal and deceive.

Or as the Washington Post’s Zachary A. Goldfarb wrote:

“In the end, Obama’s legacy might be defined by an issue that has lost attention as new crises have emerged: preventing Iran from obtaining nuclear weapons.”

I hope that looks familiar. That’s how I’ve viewed things. Add in North Korea on the legacy front.

Lebanon: ISIS beheaded at least one of 11 Lebanese soldiers it captured earlier this month following clashes in the northeastern town of Arsal. The Lebanese Army continues to battle with al-Qaeda-affiliated and ISIS terrorists inside the border.

Libya: Significant developments here the past week as an alliance of Islamist militias took control of Tripoli’s international airport after weeks of fighting that had caused a mass exodus of foreigners. There is no real government in Libya these days. The original established parliament had disbanded but is looking to resurrect itself, while a new parliament is operating in the eastern part of the country.

Oh yeah, “rival legislatures.” That’s a recipe for stability.

And then, out of nowhere, the United Arab Emirates and Egypt carried out a series of airstrikes in Tripoli on Monday, marking a major escalation.

To show you just how low U.S. influence has sunk, the White House was not apprised ahead of time. [The White House also had nothing to do with the ceasefire brokered by Egypt between Israel and Hamas.]

Both the UAE and Egypt were attempting to put a dent in the rise of the Islamist militias in Libya.

The U.S. has been worried Libya would become a proxy war for those seeking to aid secular forces there, vs. the likes of Qatar which has financed Islamist forces.

The UAE had aided in the toppling of Moammar Gaddafi in 2011.

The U.S., France, Germany, Italy and Britain said in a joint statement: We believe outside interference in Libya exacerbates current divisions and undermines Libya’s democratic transition.”

Well that’s a crock. Democratic transition?! Good for Egypt and the UAE.

But what the world should continue to be most concerned with is the whereabouts of the hundreds, if not thousands, of shoulder-fired missiles that were taken from Libyan Army stockpiles following Gaddafi’s fall; the very weapons destined for use against commercial airliners.

China: The Defense Ministry called U.S. criticism of an encounter between a U.S. Navy surveillance plane and a Chinese fighter jet “totally groundless.” 

Earlier the U.S. labeled the actions of the Chinese pilot, coming to within 30 feet of the spy plane, “aggressive and unprofessional.”

The two sides met at the Pentagon a few days later in regularly scheduled talks and Beijing told Washington that foreign military planes flying within its economic zone, or within 200 nautical miles off the coast of China, would be deemed as putting national security at risk.

On a different topic, the South China Morning Post was the first to report China has moved a step closer to producing a supersonic submarine that could travel from Shanghai to San Francisco in less than two hours.

It’s highly complex but I’ll just quote these two passages from a story by Stephen Chen:

“Water produces more friction, or drag, on an object than air, which means conventional submarines cannot travel as fast as an aircraft.

“However, during the Cold War, the Soviet military developed a technology called supercavitation, which involves enveloping a submerged vessel inside an air bubble to avoid problems caused by water drag.”

But the sub needs to be launched at high speeds “to generate and maintain the air bubble” and, second, it is extremely difficult “to steer the vessel using conventional mechanisms, such as a rudder.”

Nonetheless, Professor Li Fengchen at Harbin Institute of Technology’s Complex Flow and Heat Transfer Lab says his team can now create the air bubble required.

Just another reason to sleep with one eye open, as we do here nightly at StocksandNews.

Pakistan: India and Pakistan exchanged heavy fire across their border in the Jammu region with civilian deaths on both sides, while Pakistani Prime Minister Nawaz Sharif is apparently close to ceding control of security affairs and strategic foreign policy to the military as he attempts to survive amid growing opposition to his leadership.

Sharif had attempted to assert civilian control of the army and any deal he cuts will largely make him a ceremonial leader.

The Pakistani military has run things for half of Pakistan’s 67 year history.

France: Max Fisher of Vox.com had a piece on two separate polls on the issue of ISIS, both asking the question: how many people support the terror group?

The first by ICM Research asked people in Germany, France and the U.K. whether they had a favorable or unfavorable view of ISIS. The second, by the Palestinian Center for Public Opinion, asked Gazans whether they support or oppose ISIS.

The findings and Mr. Fisher’s accompanying piece received considerable attention for what it revealed about France. 16% in the country support ISIS. Compare that to ‘only’ 13% in Gaza, 7% in the U.K. and 2% in Germany. [Mr. Fisher acknowledges that while the polls are similar, they are not identical and the polling agencies used different methods. But, “In any case, the big, scary, surprising, number here is France.”]

What makes the French figure worse is a full 27% of those 18-24 support ISIS.

“This is alarming,” writes Fisher, “in part because a growing number of Europeans, often from predominantly Muslim immigrant communities, are not just expressing their support for ISIS in polls: they are traveling to Syria and Iraq to join up.”

And Fisher addresses a topic near and dear to my heart for years in this space, the rise of the far-right in Western Europe, “which includes a growing willingness to embrace extremism and greater intolerance of all kinds.”

Of course this includes a rise in hatred towards Jews in Europe, as well as Muslims.

Mr. Fisher doesn’t address the topic of Marine Le Pen, specifically, but it’s inferred. This week French screen legend Brigitte Bardot praised Le Pen in an interview with Paris Match magazine to mark her 80th birthday. Bardot says Le Pen is the one person who could “save” France.

“I am a native Frenchwoman and proud of it. I mourn the fact that my beautiful country has deteriorated in every way. It’s criminal to submit to these depths.”

Bardot has long supported the far-right in France and while she is also half-wacko, it’s a sentiment that is increasingly mainstream and will be only helped by polling data showing where Muslim sentiments are trending.

So you can see the increasing divisions in France, growing exponentially it seems. You are going to have a clash of civilizations here...soon. 

Brazil: Out of nowhere, Marina Silva, an environmental activist and the Socialist Party candidate who replaced Eduardo Campos when he died in a plane crash earlier in the month, has pulled ahead of incumbent Dilma Rousseff, 45% to 36%, in a likely runoff, according to the latest survey by Ibope. The first round of balloting is slated for Oct. 5, which has Rousseff at 34% to 29% for Silva, but then since neither is going to get 50%, when the two square off later, Silva prevails.

Silva is apparently tapping into deep resentment towards traditional politics and the parties that have governed Brazil for the past two decades.

Granted, Silva hasn’t really expressed any kind of economic agenda, but she performed well in the first televised debate between the candidates.

Get this. The debate was three hours (and included the third major candidate, Aecio Neves).

One other important item. It was announced on Friday that Brazil’s economy tipped into recession for the first time in five years. GDP shrank 0.6% in the second quarter after a revised 0.2% contraction in the first. Not good for Rousseff.

*As I go to post, a new poll has been just released. Silva is now tied with Rousseff at 34% in the first round. Her lead then expands to 10 points in the projected runoff.

Scotland: I’ve been putting it off due to time constraints, but next week I’ll tackle the Sept. 18 vote here for independence and why it’s important in terms of Britain’s national security.

Random Musings

--American journalist Peter Theo Curtis, who had been detained by al-Qaeda-affiliated Jabhat al-Nusra for two years, was freed on Sunday, apparently with the help of Qatar. Curtis was not part of a group of Americans being held by ISIS, including Steven Sotloff, whose mother pleaded for his release in a video to IS leader Baghdadi this week.

--The New York Times reported that President Obama is preparing to issue an executive order compelling nations to cut fossil fuel emissions without seeking Congressional approval first.

The climate change agreement is expected to be signed at a United Nations summit in Paris next year.

Normally, the president would need a 2/3s majority in the Senate to enter into a binding treaty, but the White House doesn’t believe it could get 67 votes.

In a statement, Republican Senate leader Mitch McConnell said: “Unfortunately, this would be just another of many examples of the Obama administration’s tendency to abide by laws that it likes and to disregard laws it doesn’t like – and to ignore the elected representatives of the people when they don’t agree.”

--Chris Cillizza / Washington Post

“President Obama (returned) to Washington after a two-week vacation that was neither restful nor productive.

“From the unrest in Ferguson, Mo., to the airstrikes in Iraq, the ongoing tensions in Ukraine and the Middle East, and the execution of American journalist James Foley, it’s been a tough few weeks for the country – and for its leader.

“Obama drew criticism from the left for not being forceful enough in speaking out on the fatal shooting of unarmed teenager Michael Brown in Ferguson and from the right over the death of Foley and the rise of the militant Islamic State. Then there was the golf; nine rounds during his 16 days on Martha’s Vineyard, including a trip to the links immediately after his condemnation of Foley’s killers.

“That series of events left the impression of a disconnected president, frustrated with both the expectations and the limitations inherent in being the nation’s leader at this moment in history.

“It also led to worries – expressed privately – among Democratic party strategists that Obama’s seemingly long-view approach to international and domestic conflicts could spell doom for the party’s chances in the midterm elections, which are only about 10 weeks away.”

--David P. passed along a piece by Martin F. Nolan in the Boston Globe on the president, now friendless.

“It was a sad day for Massachusetts, for the Democratic Party, for civility in Washington, D.C., and, most of all, a sad day for Barack Obama and his administration.

“Ted Kennedy, who died on Aug. 25 five years ago, was the last politician Obama respected or admired. The president may utter niceties about Nancy Pelosi and Harry Reid, but little evidence suggests that he heeds their advice. Nor has he much time for members of Congress from either party....

“Had Kennedy lived, he would have insisted that being a salesman, party leader, and morale officer are all part of the president’s job description. ‘But you can have fun doing it. Go to Wall Street!’ he might counsel. ‘They trash you every day there while the stock market keeps going higher. Mimic Stephen Colbert! Say, ‘I accept your apology.’’

“Kennedy treated Republicans with respect, even sympathy. Gee, your job is tough, he might have said to John Boehner, then make the speaker smile by comparing Tea Party dissidents to ‘a dog who chases a car, then catches the car!’ One can almost hear the senator’s roaring laughter.

“The lion of Massachusetts was famously bipartisan, but also partisan and honored for it. ‘Ted Kennedy never moved away from party rivalry. He was a fierce partisan to the end,’ Senate Republican leader Mitch McConnell said in his eulogy. ‘But over the years he reminded the world of the great potential of this institution, and even came to embody it. ...How many times did we spot him coming through a doorway or onto an elevator, his hair white as the surf, and think: ‘Here comes history itself?’’ McConnell’s first reaction to Kennedy’s death was, like that of most senators, genuine and heartfelt: ‘He was fun to be around.’

“McConnell and Obama have a mutual friend, who has too many buddies, mates, pals, and chums to count. His name is Joe Biden.

“Biden would be happy as Obama’s life coach. So you don’t like politicians? No problem. Just talk, but mostly listen. They might think you’re faking, but they do it, too. It’s worth a try.”

--David Ignatius / Washington Post

“The truth about the disengaged Obama is that he has probably stopped caring what most critics say about his performance. A few months ago, during his Asia trip, he mused aloud during a news conference about complaints that his foreign policy was weak, asking critics such as Sen. John McCain and hawkish editorial writers: What do you want me to do? Repeat the mistakes of the past?

“Obama today seems to ignore what his detractors think. Part of his detached style comes from the fact that he’s stubborn. He doesn’t like to be jammed, as Israeli Prime Minister Benjamin Netanyahu learned when he tried to push Obama on Iran policy during a vulnerable period in September 2012, shortly before the presidential election. Obama listens to criticism and then, at a certain point, the switch flips off. He stops shadowboxing with critics.

“Obama appears to have reached this tipping point of disinterest in his dealings with Congress. He’s sick of their whining and feuding. As the New York Times reported, Senate Majority Leader Harry Reid (D-Nev.) pleaded in June for help in clearing ambassadorial nominations. Obama reportedly dumped the problem back in the lap of Reid and his Republican counterpart, Sen. Mitch McConnell, saying: ‘You and Mitch work it out.’

“I suspect Obama is so sick of congressional inaction – and of the bad blood between Reid and McConnell that helped cripple his legislative agenda – that he wants to wash his hands of the mess. Unfortunately, that isn’t really an option for his remaining two years in office: Disdain isn’t a governing strategy.”

--According to a USA TODAY/Suffolk poll of Republicans in Iowa, Mike Huckabee leads with 13%, followed by Chris Christie at 11%, Rick Perry, 8%, and Rand Paul just 7%. As the Washington Post’s Jennifer Rubin wrote of Paul, his slide is “perhaps due to an atrocious recent visit to the state or to his fringe national security views.”

The above, notes Rubin, also goes against the conventional wisdom that “for some time has been that Christie is dead in the water, Paul is the leader and Perry is going nowhere. But what if no polls bear this out?”

Huckabee? He’s won in Iowa before (2008).

--New York City Mayor Bill de Blasio has a 50% job approval rating in the latest Quinnipiac University poll, basically unchanged since the June survey. 65% of African-Americans and 55% of Hispanics approve of his performance thus far, while only 36% of whites do.

Police Commissioner Bill Bratton’s approval rating, however, has fallen from 57% last June to 48%.

Rev. Al Sharpton has a 49% approval rating of his own.

--In a USA TODAY/Pew Research Center poll, 46% of African Americans say they have “very little” confidence in the police to treat blacks and whites equally. Only 12% of whites feel that way.

The 46% figure is up from 31% seven years ago.

64% of African Americans think blacks and whites get along “very well” or “pretty well” – down from 76% five years ago.

Obama’s approval rating when it comes to handling race relations is not good: 48% approve, 42% disapprove, significantly lower than George W. Bush and Bill Clinton during their tenure.

But, no doubt these figures were influenced by events in Ferguson, Mo.

--Maureen Dowd / New York Times, on how President Obama has “deputized Al Sharpton, detaching himself at the very moment when he could have helped move the country forward on an issue close to his heart,” race relations.

“As a White House official told Politico’s Glenn Thrush, who wrote on the 59-year-old provocateur’s consultation with Valerie Jarrett on Ferguson: ‘There’s a trust factor with The Rev from the Oval Office on down. He gets it, and he’s got credibility in the community that nobody else has got.’

“Sharpton has also been such a force with New York’s mayor, Bill de Blasio, in the furor over the chokehold death of a black Staten Island man that the New York Post declared The Rev the de facto police commissioner. The White House and City Hall do not seem concerned about his $4.7 million in outstanding debt and liens in federal and state tax records, reported by The Post. Once civil rights leaders drew their power from their unimpeachable moral authority. Now, being a civil rights leader can be just another career move, a good brand.

“Thrush noted that Sharpton...has evolved from agitator to insider since his demagoguing days when he falsely accused a white New York prosecutor and others of gang-raping a black teenager, Tawana Brawley, and sponsored protests against a clothing store owned by a white man in Harlem, after a black subtenant who sold records was threatened with eviction. A deranged gunman burned down the store, leaving eight people dead.

“Sharpton also whipped up anti-Semitic feelings during the Crown Heights riots in 1991, denouncing Jewish ‘diamond dealers’ importing gems from South Africa after a Hasidic Jew ran a red light and killed a 7-year-old black child. Amid rioting, with some young black men shouting ‘Heil Hitler,’ a 29-year-old Hasidic Jew from Australia was stabbed to death by a black teenager.

“Now, Sharpton tells Thrush: ‘I’ve grown to appreciate different roles and different people, and I weigh words a little more now. I’ve learned how to measure what I say.’

“Obama has muzzled himself on race and made Sharpton his chosen instrument – two men joined in pragmatism at a moment when idealism is needed.

“We can’t expect the president to do everything. But we can expect him to do something.”

--According to the Department of Education’s National Center for Education Statistics, enrollments for the 2014-15 school year will mark the first time ethnic minorities become the majority, a shift driven by rising numbers of Hispanic students.

The number of white pupils will be marginally below 50%, with Hispanics at 26% and blacks at 15%. The rest are Asian pupils, Native Americans and Pacific Islanders, with fewer than 3% identifying themselves as mixed race. [BBC]

--The story of the nine-year-old New Jersey girl, on holiday in Arizona with her family, who accidentally killed an Arizona shooting instructor who was showing her how to use an Uzi, was a tragedy on so many levels. I agree with those who say you don’t need new laws to prevent such an incident in the future, but rather use some common sense.

---

Pray for the men and women of our armed forces...and all the fallen.

God bless America.

---

Gold closed at $1287
Oil $95.96

Returns for the week 8/25-8/29

Dow Jones +0.6% [17098]
S&P 500 +0.8% [2003]
S&P MidCap +0.9%
Russell 2000 +1.2%
Nasdaq +0.9% [4580]

Returns for the period 1/1/14-8/29/14

Dow Jones +3.2%
S&P 500 +8.4%
S&P MidCap +7.1%
Russell 2000 +0.9%
Nasdaq +9.7%

Bulls 52.5
Bears 15.1 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore



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-08/30/2014-      
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Week in Review

08/30/2014

For the week 8/25-8/29

[Posted 11:00 PM ET...Friday]

Edition 803

Washington and Wall Street

As the Washington Post’s David Ignatius put it, “It’s ‘back to school’ week for President Obama.” Personally, I used to hate my first day back, but by the end of it I was right back in the groove.

The president? He walked out on stage and promptly stumbled, in a big way, leaving his staff scrambling. To wit:

On Thursday, President Obama attempted to tamp down expectations the United States was preparing to launch airstrikes against the Islamic State (ISIS...or ISIL as the White House labels the terrorist behemoth), but in doing so he also said, “We don’t have a strategy yet.” 

Uh oh. He said what?

Meanwhile, Republican Senator John Barrasso (Wyo.) noted in an op-ed for the Wall Street Journal, Friday:

“Secretary of State John Kerry said during his January 2013 confirmation hearings that he would be a ‘passionate advocate’ on climate-change issues, and he’s living up to that promise. In a speech this month in Hawaii, Mr. Kerry called climate change ‘the biggest challenge of all that we face right now.’ Not 10, 20 or 100 years from now – right now.

“If only Mr. Kerry were right. Unfortunately, America faces much bigger immediate challenges and threats than climate change. Our enemies around the world are intent on harming us – right now. America’s secretary of state should worry more about them and less about the Earth’s temperature decades from now.

“Here’s a list of a few challenges, all of which pose a greater threat to the world than climate change. It might help the president and his colleagues understand why Mr. Obama’s foreign-policy approval rating is about 36%, according to an August poll by Gallup.

Iraq is a greater challenge than climate change....

Afghanistan....

Russia....

An Iranian nuclear weapon....

Syria....

North Korea....

[Ed. I would certainly add China to this list.]

“The White House has said its foreign policy rule is ‘don’t do stupid stuff,’ but putting climate change ahead of global threats fails that simple test. The United Nations will hold yet another conference on climate change next month, while the world burns.

“The greatest threat to Americans ‘right now’ is not climate change. The greatest threat is people with the intent and capacity to do us harm – and the president’s failure to lead the fight against them. Mr. Kerry’s fixation on climate change is one reason America’s friends no longer trust us and our enemies no longer fear us. The world is growing more dangerous as a result.”

By week’s end, British Prime Minister David Cameron was telling his people the terror threat level had been raised to “severe,” meaning an attack was likely, but not necessarily imminent.

It was about ISIS and the estimated 500 British citizens who have traveled to Iraq and Syria to gain their terror chops...with the threat they’d come home. 800 or more Frenchmen have supposedly done the same. I heard one analyst the other night speak of 500 Canadians, and as I discuss below, we’ve learned a long talked about threat from a Somali neighborhood in the Minneapolis-St. Paul area has produced three terrorists who thankfully died overseas, and not here while doing their work.

Does ISIS have the capacity to do anything here as yet? We don’t know. Tonight, there are published stories of Islamist cells in Mexico, near our southern border.

What we do know is that as I’ve been writing for months, European leaders are scared to death. There are so many soft targets and I’m going to throw one out there that, given the seeming sophistication of the leadership within ISIS, would do a number on sentiment at a crucial time of year.

Back in 2007, I did something I had always wanted to do...go to some of the Christmas markets in Germany. So I spent a week in Cologne and Berlin. Had a super time. But I’d be more than a little leery of visiting the same this coming holiday season. 

If you’re an Islamist terrorist it’s simply too easy, with all the symbolism attached. Keep your guard up, my European friends. Just as you do when you enter a theater and make yourself aware of the exits, do the same when you’re in those vast, easy to access festivals.

Sorry to be so stark, but I guarantee those in charge of security in London, Paris, Berlin, Nuremberg (which has a famous market), Munich, Salzburg, Vienna, Oslo....you get the picture.

And regarding Vladimir Putin, I keep forgetting to note a piece I’ve purposefully kept up on my “Hot Spots” link for a while, parts of which are excerpts from a recent essay by Russia expert Dimitri Simes. Take a few minutes to read his take on how things could escalate in the Baltics and focus on his mention of Russia’s 10-to-one advantage in tactical nuclear weapons.

Mr. Simes, I emphasize, does not, however, come out and say what I’m about to. But I think we are headed towards a day where Putin actually threatens the use of those very weapons. No one should be shocked by this. It will largely be bluster (at least that will be what we hope it is), but it will be enough for Putin to have his way, particularly if it’s in an attempt to retake the Baltics. We’ll likely flinch.

Putin certainly put on a display Friday. First, in a statement posted on the Kremlin Web site, he labeled the pro-Moscow separatists “insurgents.” Then, appearing at a youth forum, he compared the tactics of the Ukrainian army to those of Nazi forces that besieged Leningrad during World War II.

Putin also said, “We neither want, nor are we going to” get involved in a full-scale war, but that Russia plans to keep developing its nuclear and defense arsenal to “feel safe, but not to threaten anyone in particular.”

He then added, ominously, that Russia’s armed forces, backed by its nuclear arsenal, were ready to meet any aggression, saying that foreign states should understand: “It’s best not to mess with us. Thank God, I think no one is thinking of unleashing a large-scale conflict with Russia. I want to remind you that Russia is one of the leading nuclear powers.” [Reuters / Moscow Times]

Friday night, German Foreign Minister Frank-Walter Steinmeier said of the crisis in eastern Ukraine: “The border infringements have intensified, and raised concerns that the situation is slipping out of control.”

I discuss the upcoming NATO summit and President Obama’s trip to the Baltics down below. Both are critical. NATO and the U.S. will talk tough. But Baltic leaders, and those in Poland, need to demand immediate action to protect them. Understand it’s complicated. The U.S. and NATO would be violating existing agreements with Russia to just place 10,000 troops on the border permanently, for example – they need to be rotated in and out – but there are some very real deterrent steps that can, and must be taken, to send a clear message to Vlad the Impaler.

As I go to post, though, it would appear Britain and six other NATO states have created a new joint expeditionary force of at least 10,000 personnel, incorporating air and naval units as well as ground troops that will be led by British commanders. Countries involved at present include Denmark, Latvia, Estonia, Lithuania, Norway and the Netherlands. Canada has also expressed an interest in taking part. [Sam Jones / Financial Times]

A formal announcement of this will be made at the NATO summit in Wales, hosted by British Prime Minister Cameron. Just understand, it can take years to make such a force operational and there likely isn’t time to do so. More immediate measures will be required.

---

There was some economic news this last week of August. July new home sales were disappointing, an annualized pace of just 412,000, below expectations. But when you combine new home sales with the far larger, earlier announced, strong data on the existing home sales front, the combined total for July is still the fastest annual pace since October.

The S&P/Case-Shiller 20-city home price index for June rose 8.1%, year over year, the slowest rate of increase since 2012, which is actually not bad news. Think affordability.

The number on durable goods (big-ticket items) for July once again proved why it’s known as the most volatile series in the economists’ tool belt...up 22.6%! However, when you stripped out aircraft orders (such as Boeing’s record 324 signings of purchases), which vary drastically month to month, the durable goods figure fell 0.8%. That said, when you add a few recent data points together we’re fine with this barometer.

Thursday saw the second look at second-quarter GDP and it edged up to 4.2%, after it was expected to decline from 4.0% to 3.8%. Good.

But then Friday a reading on consumer spending for July fell 0.1% when a gain was forecast, the first decline in this metric in six months. Not good. [Personal income rose a modest 0.2% in the month, while inflation components were tame.]

We also had a big number for the Chicago purchasing managers survey for August, 64.3, a bounce back from the prior month’s 56.0.

Finally, the Congressional Budget Office updated its budget deficit forecast for the rest of the year and on into the future. The projected shortfall for the fiscal year ending Sept. 30 is now $506 billion compared to April’s prediction of $492 billion and a $680 billion gap posted last year. In 2015, the CBO projects the deficit to shrink a sixth straight year to $469 billion after the deficit peaked at $1.4 trillion in 2009.

Good news. But then in fiscal 2016 the deficits start rising again, though not in a big way until 2019 and beyond.

Remember, aside from ‘eventually’ soaring entitlements in the out years, you have the big issue of interest expense. Assuming rates normalize at some point it’s why you should care about the year-to-year deficit that is just added to the existing total. But more on this in a future “Wall Street History” piece, which I’ll alert you to.

Here’s what we should note today. You know all these geopolitical items we’re suddenly focused on? No one, at least among the scores of publications I read every day, is mentioning what would happen to our deficits if we have to increase defense spending in a sizable way. It’s more than a distinct possibility.

For example, mandatory (entitlement) spending is projected to rise from $2.3 trillion in F2015 to $3.6 trillion in F2024, under the CBO’s scenario, while discretionary spending (everything else, including defense), rises from $1.188 trillion to $1.377 trillion over the same period. Really? That’s all? I’m guessing not.

Lastly, of course the CBO projections are just that, projections, and so much can change. For one, the CBO forecasts economic growth of 1.5% in 2014, a major reduction from before, but it’s sticking to 3.4% for both 2015 and 2016. To be continued....

William A. Galston / Wall Street Journal

“The U.S. has an economic growth problem, and it started before the Great Recession. Between 1949 and 2000, Third Way’s Jim Kessler calculates, the annual rate of growth exceeded 3% a total of 34 times – two years out of every three. During the eight Clinton years, growth reached 4% five times and fell below 3% only twice. Since 2000 growth has reached 3% just two times and did not reach 4% at all, even during 2003-07, the peak years of the recovery from the 2001 recession. Since the beginning of the recovery from the Great Recession of 2008-09, annual growth has not yet reached 3%, and 2014 looks to be no exception.

“The big picture puts these details in sharp relief: Between 1949 and 2000, the economy grew on average 3.6% annually. Since then, growth has averaged only 1.8%.

“In the economic circumstances of recent decades, only a sustained period of robust growth has raised wages and household incomes. Unless the economy can resume the more robust growth of the second half of the 20th century, U.S. workers will be hard-pressed to regain the ground they have lost, let alone offer the prospects of something better for their children.”

Oops...one more item. It’s a little known fact Congress needs to pass new funding bills by September 30 to keep the government running, even though a deal last December set spending levels through 2015 to avoid another budget crisis. But the funding passed in January expires end of next month.

Ergo, there is some talk Republicans could be preparing to shoot themselves in the foot again. I’m assuming they can’t be so stupid. Then again, they’ve played the role of village idiots before.

Europe and Asia

Data this week confirmed the eurozone’s worst fears as a flash estimate on inflation for the month of August came in at an annualized rate of 0.3%, down from 0.4% in July; which is not only far below the European Central Bank’s target of 2.0%, but close to downright deflation. Spain, for one, saw consumer prices fall 0.5% in August from a year ago. Full data is slated to be released for the EA 18 Sept. 17.

Meanwhile, the euro area unemployment rate remained unchanged at 11.5% in July vs. June, but down slightly from the July 2013 mark of 11.9%, according to Eurostat, the statistical arm of the European Commission. [Eurostat also compiles the inflation data.]

Among some of the key players, the jobless rate was just 4.9% in Germany (the government calculates it at 6.7%), 10.3% in France (up a tick from June), 12.6% in Italy, 24.5% in Spain, and 27.2% in Greece (May 14).

Youth unemployment rates were 53.8% in Spain, 53.1% in Greece (May 14), 42.9% in Italy and 35.5% in Portugal.

So what will the ECB do when it meets next Thursday? Nothing, despite ECB President Mario Draghi’s talk of taking more aggressive action to combat tumbling inflation.

The ECB would “use all the available instruments needed to ensure price stability over the medium term,” he said in Jackson Hole, Wyoming a week ago.

But Draghi has yet to launch “quantitative easing,” or large-scale asset purchases that would pump more money into the economy.

Draghi and the ECB have disappointed markets before with their conservative approach and Draghi gave no timetable for his “aggressive” action.

The ECB president is concerned about high unemployment as well, and he wants to be more flexible on the austerity front, but the prime issue is how to get the banks to loosen up on the lending front and the plain fact is....nothing has worked! Why should anyone believe Draghi’s next moves will thus do the trick?

This is where the Russia/Ukraine situation is so critical. Western sanctions, and retaliation from Moscow, are doing a number on business confidence, particularly in the likes of Germany where a biz confidence index fell a fourth straight month. Electrical and electronic exports from Germany to Russia, for example, are down 19.8% in the first half of 2014. And there is zero reason for optimism that the situation in Ukraine will be resolved peacefully anytime soon. If anything, tensions may only ratchet up over the coming months across the region.

So the eurozone is one sick puppy...with extraordinarily record low 10-year bond yields.

Germany 0.89%
France 1.25%
Italy 2.43% [2.34% intraday]
Spain 2.22% [2.08% intraday]
Portugal 3.18% [though up Friday from an intraday low of 3.00% the previous day]

What you are going to increasingly see is a divergence, with some in the periphery, particularly Italy, I imagine, coming back to reality given its economy is back in recession, it has price deflation, and its debt-to-GDP ratio is over 130%. 2.34% on a 10-year piece of paper from this place? C’mon.

But trends can last a long time and the markets have been feeding on Draghi’s comments for over two years now, though, again, look at what that action has resulted in. Zippo. Nada. [Except rising asset prices that do the 23-year-old unemployed Italian zero good.]

Opinion....

Jonathan Davis / Financial Times

“(Market expectations) that the European Central Bank will (and should) come to the rescue with a program of quantitative easing seem premature and complacent. Some form of QE by the ECB will come in due course, but will it be enough to pull Europe out of the debt deflation nightmare that seems to be in the cards? There are reasons to have doubts.

“The most obvious one is that the ECB’s freedom to maneuver is much more limited than that of other central banks. Even in good times, it takes months to build a consensus for action among the key member states, and the issue of QE remains highly contentious, both as to its wisdom and its legality. Assuming that primary purchases of government bonds are ruled out, it is open to question whether there are sufficient assets that the ECB can legally buy to achieve the necessary market impact.

“Second, it is clear that the ECB needs (and wants) to get its stress tests of Europe’s banks out of the way before going much beyond the monetary policy measures announced last month. To be credible, publication of the results in October needs to be followed by a period of market review and demonstrable improvements in balance sheets. A QE program could create conflicts of interest with its bank supervisory role. That makes it virtually certain that, in the absence of some new market-driven crisis, the ECB will inevitably find itself ‘behind the curve’ in implementing a QE program.”

Then there’s France. What a mess. This week President Francois Hollande reshuffled his cabinet again, purging the Socialist government of three left wingers, including Finance Minister Arnaud Montebourg, who was vehemently opposed to austerity measures imposed (directed) by the European Union.

Montebourg led the revolt and after he quit blasted the “absurd” policies that had brought about “the most destructive crisis in Europe since 1929.”

Hollande’s approval rating is a staggeringly bad 17%, according to an Aug. 25 Ipsos survey. His once popular prime minister, Manuel Valls, who survived the reshuffling, is down to just 36% approval.

France reported zero growth in the first half and a manufacturing confidence index for August hit a 13-month low.

The thing is, Hollande is in office until 2017, but for now he needs a majority in parliament to pass his 2015 budget this fall. I don’t know enough about French politics, but picture how he just jettisoned members of his own party whose support is paramount to him gaining the majorities he needs to pass anything.

[Montebourg was replaced at Finance by 36-year-old Emmanuel Macron, a top aide to Hollande. Laurent Fabius and Jean-Yves Le Drian remained in their posts as Foreign and Defense ministers, respectively.]

Some eurozone / EU tidbits....

--Spain’s government statistics office confirmed the economy grew 0.6% in the second quarter from the first. This is good.

--Germany’s inflation rate for August came in at up 0.8%, in line with estimates. The government also announced a crackdown on abuse of its benefits system, or “benefit/welfare tourism” by migrants from places like Romania and Bulgaria.

As reported by BBC News, “Under the plan, EU migrants would no longer receive social welfare benefits after six months out of work. EU citizens convicted of benefits fraud could also face deportation.”

The proposals need parliamentary approval.

--Denmark’s economy unexpectedly declined in the second quarter, down 0.3%, after growing 0.6% in the first three months of the year, according to the statistics office. Analysts had expected growth of 0.3%. The Economy Ministry is still predicting growth for the year of 1.4%.

--Ulster Bank projects the Irish economy will grow by 3.1% in 2014 as the recovery on the Emerald Isle becomes “more broadly based.”

“(The bank) said that this year will mark the first since 2007 that exports, consumer spending, and investment will all be growing together.” [John Mulligan / Irish Independent]

Irish exports rose 6% in June compared to year earlier levels.

Turning to Asia, I missed last time the HSBC flash reading on manufacturing in China for the month of August, 50.3 vs. 51.7 in July, the latter having been an 18-month high.

This week the price of iron ore hit a two-year low worldwide, largely reflecting the slowdown in China’s property market.

The decline in housing prices is leading to a rapid rise in violent clashes. Understand that many of the developers’ are being forced to drop prices, say, 25%. I saw firsthand the “see-through” high rises when I was in Fujian last February. If you’re a developer you have to slash prices if you are going to have a shot at meeting your debt service.

But what if you just purchased a unit a few weeks before they cut the price 25%? I think you’d be a little torqued off.

In Japan, the government continues to claim a moderate recovery is intact but July industrial production rose less than expected, while household spending declined and inflation remained unchanged.

Output rose just 0.2% over June, while consumer prices increased 2.3% from a year earlier (ex-fresh food and energy, their core reading). Household spending cratered 5.9% from a year earlier.

The economy continues to struggle after the 3% hike in the consumption tax in April, but industrial production is expected to gain 1.3% in August and another 3.5% in September.

Given that the government’s goal is inflation of 2%, the above numbers on the CPI may look good, but you have to add in the impact of the consumption tax hike, which sends it below 2.0%.

Street Bytes

--The major equity indexes rose a fourth straight week, with the Dow Jones up 0.6% to 17098, 40 points shy of its all-time high. But the S&P 500 hit a number of new highs this week and finished at 2003, up 0.8%, while Nasdaq added 0.9% to 4580. I suspect things will be different in next week’s holiday-shortened action.

--The value of global equities hit a record $66 trillion on Tuesday when the S&P hit 2000. The level was $25 trillion March 2009 at the market bottom; $63 trillion at the 2007 peak. [Bloomberg]

--When the S&P 500 closed at 2000.02 on Tuesday that marked 16 years to gain 1000 points since it broke through 1000 in 1998.

Going back to Dec. 31, 1997, the leading stock in the S&P index by market cap was General Electric at $240 billion. On Aug. 25, 2014, GE was at $263 billion. Yes, essentially the Jeff Immelt years, as in whoopty-damn-do.

Apple is now the largest company in the S&P at $640bn (8/25/14 vs. about a mere $2.3bn in 1997), followed by Exxon Mobil ($421bn vs. $151bn).   [S&P Dow Jones Indices / Wall Street Journal]

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.49% 10-yr. 2.34% 30-yr. 3.08%

--The World Health Organization is upping its estimates of the potential number of those who could become infected from Ebola to 20,000. The WHO said the number of cases could already be four times higher than the 3,000 currently reported. 1,550 were confirmed dead, last I saw.

So if we are already trying to deal with 12,000 cases, and you can see how the system is overwhelmed, with many of the healthcare workers themselves succumbing to the virus (at least 120, according to the Los Angeles Times), including leading doctors, the real emergency is in putting together facilities and health care professionals to combat it.

The WHO is calling on flight bans to be lifted and borders reopened, making it easier for health workers to access affected areas.

--U.S. authorities, including the FBI, are investigating a wave of new cyberattacks against U.S. financial institutions. JPMorgan Chase was the first to come forward, issuing a statement: “Companies of our size unfortunately experience cyberattacks nearly every day. We have multiple layers of defense to counteract any threats and constantly monitor fraud levels.”

Not exactly comforting...the “every day” angle. According to Bloomberg, sensitive data was lost in the hack attack, including account information.

So of course the initial suspect(s) are Russian hackers and/or the Russian government in retaliation for the sanctions levied against the Kremlin.

Thursday, more of the nation’s largest banks announced they had not seen unusual fraud activity from their customers’ accounts.

But Tom Kellermann, chief cybersecurity officer at Trend Micro Inc., told the Los Angeles Times:

“Geopolitics will serve as a harbinger of cyberattacks in today’s age. For all of these people in Washington – the FBI and Secret Service – to work this hard together ahead of a long weekend suggests something unprecedented is awry.”

--Russia continues to play games in response to western sanctions against its interests and individuals. Russian courts ordered four McDonald’s outlets closed in Moscow for 90 days, citing breaches of “numerous” sanitary laws. By week’s end the total had grown to 12. 100 more were being inspected.

McDonald’s said it was appealing. 

--Russia’s Economic Development Ministry estimates that natural gas export prices will fall by more than 25% over the next three years, which could cost Gazprom, Russia’s biggest gas exporter, $4 billion in lost revenues, according to the Moscow Times.

Conversely, Russian analysts expect oil prices to stay in the $100 range over the next three years.

--Burger King Worldwide Inc. announced it was acquiring Canada’s Tim Hortons Inc., with the combined entity then hoping to take on McDonald’s. The two would have more than 18,000 restaurants in 100 countries (vs. McDonald’s 35,000+ franchises).

But it was the deal’s so-called tax inversion aspect that drew a lot of attention, as the new company’s headquarters would be in Canada. Plus, Warren Buffett’s Berkshire Hathaway was expected to provide 25% of the financing.

Editorial / Wall Street Journal

“President Obama and Senate Democrats are going to need a new business front man. This week they’ve been officially abandoned by their erstwhile tax-policy patron saint Warren Buffett, who has joined up with what the President likes to call the ‘corporate deserters’ who locate their legal headquarters somewhere other than the United States.

“On Tuesday Burger King Worldwide confirmed that the Miami-based burger chain is buying Tim Hortons Inc., the Canadian purveyor of coffee and doughnuts, for roughly $11 billion. As part of the deal Burger King will move its legal headquarters north of the border. Mr. Buffett, who has been the President’s longtime partner in a campaign to raise taxes, will help finance the transaction. Mr. Buffett’s Berkshire Hathaway will invest $3 billion in preferred shares that will pay a handsome 9% coupon.

“Burger King says the deal isn’t about cutting its tax bill and that it will continue to pay taxes on all the money it earns in the U.S., like other companies that adopt foreign parents for their U.S. subsidiaries....

“No doubt that’s true but it overlooks that Canada has become a far more business-friendly tax jurisdiction than the U.S. ....

“The business case seems clear, but the politics can be difficult. Senate Democrats, desperate to avoid discussing Iraq or ObamaCare, are hoping to hold the Senate by running against ‘Benedict Arnold’ corporations instead of real-life Republican opponents. But it looks like Democrats will now have a harder time having it their way – unless they want to stage a political inversion and turn on their most famous benefactor and supposed tax expert.”

Buffett took to the Financial Times: “Tim Hortons earns more money than Burger King does. I just don’t know how the Canadians would feel about Tim Hortons moving to Florida. The main thing here is to make the Canadians happy.”

Charles Krauthammer / Washington Post

“The Obama administration is highly exercised about ‘inversion,’ the practice by which an American corporation acquires a foreign company and moves its headquarters out of the United States to benefit from lower tax rates abroad.

“Not fair, says Barack Obama. It’s taking advantage of an ‘unpatriotic tax loophole’ that hardworking American families have to make up for by the sweat of their brow. His treasury secretary calls such behavior a violation of ‘economic patriotism.’

“Nice touch. Democrats used to wax indignant about having one’s patriotism questioned. Now they throw around the charge with abandon, tossing it at corporations that refuse to do the economically patriotic thing of paying the highest corporate tax rate in the industrialized world....

“Moreover, corporations have an indisputable fiduciary responsibility to protect their shareholders’ interest....

“But the Democrats’ problem is deeper. Everyone knows why inversions are happening. America’s 35% corporate tax rate is absurdly uncompetitive. Companies are doing what they always do: try to legally lower their tax liabilities.

“What is maddening is that the problem is so easily solved: tax reform that lowers the accursed corporate rate....

“It’s also politically doable. Tax reform has unique bipartisan appeal.  Conservatives like it because lowering rates stimulates the economy and eliminating loopholes curbs tax-driven economic decisions that grossly misallocate capital.

“The appeal to liberals is economic fairness. By eliminating loopholes, tax reform levels the playing field....

“So why not attack the inversion problem with its obvious solution: Tax reform? Time is short, says Obama. He can’t wait. Instead, he wants legislation to outlaw inversions.

“No time? Where has he been? He does nothing about tax reform for six years (during two of which Democrats fully controlled Congress), then claims now to be too impatient to attempt the real solution. Instead he wants to hurry through a punitive anti-inversion law to counterbalance the effects of our already punitive tax rates....

“This is nuts....

“A real political leader would abandon this sideshow and actually address corporate tax reform with a serious revenue-neutral proposal to Congress. There would be hearings, debate, compromises. We might end up with something like the historic bipartisan tax reform of 1986 that helped launch two decades of nearly uninterrupted economic growth.

“But for that you need a president.”

N. Gregory Mankiw / The New York Times

“(Here’s) a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.

“Some may worry that a flat consumption tax is too easy on the rich or too hard on the poor. But there are ways to address these concerns. One possibility is to maintain a personal income tax for those with especially high incomes. Another is to use some revenue from the consumption tax to fund universal fixed rebates – sometimes called demogrants. Of course, the larger the rebate, the higher the tax rate would need to be....

“Corporate tax inversions aren’t the largest problem facing the nation, but they are a reminder that a better tax system is within reach, and that only politics stands in the way.”

--As it gears up for its IPO next month, Chinese e-commerce behemoth Alibaba reported revenue rose 46% to $2.54 billion for the second quarter, with profit of $2 billion. Its level of active buyers rose 51% in one year to 279 million.

Because Alibaba needs to have a two-week road show it would seem the IPO will be perhaps the fourth week of September (Sept. 22/23).

--Meanwhile, Microsoft is being targeted anew by Chinese officials, this time the antitrust regulator for not being fully transparent with how it bundles software such as Windows and Office. Microsoft thus joins a recent list of foreign firms being swept up in antitrust probes, including mobile chipset maker Qualcomm and Mercedes-Benz.

It’s all about Chinese protectionism.

--Canada’s GDP rose at an annualized pace of 3.1% in the second quarter, better than expected. Exports rose 17.8%, while household spending increased a solid 3.8%. Labatt’s for everyone!

--Growth in India’s economy was at its best pace since March 2012 for the second quarter, up an annualized 5.7%. Inflation, though, rose 8.0% in July from a year earlier, as India’s monsoon rainfall has been 18% below normal, which would be the driest year since 2009.

--Malaysia Airlines is slashing 6,000 jobs as a result of the twin disasters it faced this year, MH370 and MH17. In a restructuring the airline will become completely state owned (through the state investment company), with the recovery plan costing an estimated $1.9 billion.

Long haul routes will be reduced, with profitability not expected to return until 2018.

--The U.S. Department of Agriculture forecast farm incomes will fall 13.8% this year to the lowest level in four years owing to record harvests and falling prices for corn and soybeans, the two largest U.S. crops, both at or near four-year lows.

The USDA also predicted a 4% rise in expenses for farmers, “with increased costs for seeds, fertilizer and pesticides.” [Jesse Newman / Wall Street Journal]

--Directly related to the above, Deere & Co. said it was laying off 460 employees at its flagship farm tractor plant in Waterloo, Iowa, in response to falling demand. A week earlier the company said it would lay off 600 workers at other plants in the Midwest.

--With Bank of America agreeing to a $16.7 billion settlement with federal and state governments over its mortgage-backed securities mess from the financial crisis (most of which emanated at Countrywide and Merrill Lynch, which BofA acquired), bringing its total to $70 billion, that’s more than half of the roughly $128 billion collected from the six biggest banks, according to research firm SNL Financial and the New York Post.

--The credit card delinquency rate fell to the lowest level in at least seven years over the second quarter. [1.16% on payments at least 90 days overdue.]

--Fast-growing messaging app Snapchat has been accorded a valuation of about $10 billion owing to an investment by Kleiner Perkins Caulfield & Byers, one of the best-known Silicon Valley venture-capital firms. Kleiner committed to invest up to $20 million recently.

Snapchat has zero revenue and no business model, but 24-year-old co-founder and CEO, Evan Spiegel, turned down a $3 billion bid by Facebook last year and now it’s worth $10 billion.

It’s a great country, sports fans...or maybe not.

--Speaking of ‘not great’ countries, “More than 30,000 tons of chicken feet laced with hydrogen peroxide were seized by authorities in Zhejiang province – in the latest wide-reaching food scandal to emerge in mainland China.

“Police said 35 business operators had been selling the goods – found soaking in hydrogen peroxide to keep the chicken feet white and fresh-looking – to more than 10 provinces....

“Chicken feet are a delicacy in China and some parts of Asia.

“Hydrogen peroxide, a colorless liquid often used for disinfection and processing food, causes vomiting, mouth irritations as well as throat and stomach problems if consumed in unsafe amounts.” [Laura Zhou / South China Morning Post]

[Actually, the SCMP reports that authorities in Hainan earlier found chicken feet soaking in lye. As Charlie Brown would say, “Good grief.”]

--Uh oh...here’s another Asian food scare. Also from the South China Morning Post and the Associated Press:

“Instant noodles carry a broke-college-student aura in North America, but they are an essential, even passionate, part of life for many in South Korea, Hong Kong and across East Asia. A U.S. study on their health effects, though, has caused emotional heartburn among its loyal consumers.

“The Baylor Heart and Vascular Hospital study linking instant noodles consumption by South Koreans to some risks for heart disease has provoked feelings of wounded pride, guilt, stubborn resistance, even nationalism among South Koreans.

“Koreans eat more instant noodles per capita than anyone in the world.”

China is the world’s largest instant noodle market, but lags far behind South Korea in terms of per capita consumption.

--The Wall Street Journal had a story by Julie Jargon on how consumers in their 20s and 30s, ‘millennials,’ are abandoning McDonald’s. In the U.S., same-store sales at restaurants have been flat or falling the past year, but, distressingly for the company, “The percentage of people age 19 to 21 in the U.S. who visited McDonald’s monthly has fallen by 12.9 percentage points since the beginning of 2011, according to Technomic, while the percentage of customers age 22 to 37 visiting monthly during that period has been flat.”

So call it flat overall. This is vs. the percentage of millennials that are going to fast-casual, like Chipotle’s or Five Guys, which is up 5.2% over the same study period.

For millennials, it’s about the quality of the food.

Separately, I thought I’d try out McDonald’s new double jalapeno burger. It was OK, but I immediately thought ‘this one will have very limited appeal...so why bring it?’

--Apple’s big product introduction event is Sept. 9. Aside from unveiling the new iPhone 6, there are rumors it will also introduce an “iWatch” wrist-worn computer.

--Sony had a miserable weekend as a cyberattack took down its PlayStation Network, which coincided with a bomb scare  on an American Airlines flight carrying Sony Online Entertainment President John Smedley. None of the 53 million users’ information was accessed. The flight was diverted following a tweet that said, “I’m gonna send a bomb on your plane be ready for me tomorrow.”

--Speaking of video games, Amazon reached a deal to acquire Twitch, the most popular website for watching people play games, for $1.1 billion.

Twitch did not exist three years ago, yet it now has 55 million unique viewers a month globally. Amazon outbid Google, among others. CEO Jeff Bezos said:

“Broadcasting and watching gameplay is a global phenomenon, and Twitch has built a platform that brings together tens of millions of people who watch billions of minutes of games each month.”

Oh what the heck. Better than watching the Mets, I guess.

--Swiss pharmaceutical giant Roche is acquiring U.S. biotech firm InterMune, makers of lung disease therapies.

--Best Buy Co. warned it will be another rough holiday season, as it sees deep price cuts and thus lower sales.

In the recent quarter, Best Buy’s overall sales fell 4%, while profit fell to $146 million from $266 million a year ago, which was aided by a large legal settlement.

--Tiffany & Co., on the other hand, reported another knockout quarter with fiscal second-quarter profit jumping 16%, with the Asia-Pacific region leading the way, sales increasing 14%. [Sales in the Americas rose 9%.] Same-store sales rose 3%, with overall revenue up 7%. In addition, Tiffany upped its guidance for the full year.

--Cloud-based enterprise software rising star Workday solidly beat Wall Street’s expectation for its fiscal second quarter, with revenue rising 74% due to strong growth in subscriptions for its resources and financial management software, with the company raising full-year guidance.

But in a conference call with analysts and investors, the company repeated a pledge to spend to build its business, which also means investors shouldn’t expect profits, as commonly accounted for, by fiscal 2016.

This wasn’t a surprise, but it’s the Amazon syndrome to a certain extent. That said, Workday shares ended up on the week.

--South Korean automaker Kia Motors Corp. will open a $1 billion plant in northern Mexico, joining BMW, which revealed its own $1 billion plant plans there in July, following a joint announcement by Mercedes-Benz and Nissan to build a $1.4 billion plant in the country.

Add the above to existing production that makes Mexico already the eighth-largest producer of autos in the world. [Los Angeles Times]

--After this week’s California earthquake in the Napa region, the Los Angeles Times had an article that began:

“Three decades after some California cities began requiring old brick buildings to be seismically retrofitted, thousands across the state still have not been strengthened and are in danger of collapse during a major earthquake.

“Many are in some of California’s poorest cities, where officials have chosen not to require property owners to make the upgrades.

“Seismic experts are particularly worried about communities in western San Bernardino County, which are threatened by the San Andreas and San Jacinto faults.”

The city of San Bernardino has a large concentration of unreinforced brick buildings “that are at risk of particularly intense ground motion,” according to U.S. Geological Survey seismologist Lucy Jones.

San Bernardino is also bankrupt.

Napa, on the other hand, did have mandatory rules to reinforce buildings and despite some of the television pictures you saw, Napa did a good job in helping avoid more widespread destruction. 

--How not to win friends and rally the troops. Say your news organization had been asleep the past 15 years, as NBC News president Deborah Turness did.

“NBC News hadn’t kept up with the times in all sorts of ways, for maybe 15 years... I think the organization had gone to sleep.”

According to the New York Post, the likes of Tom Brokaw, managing editor and anchor of NBC Nightly News from 1982 until 2004, as well as successor Brian Williams, were livid.

Turness then apparently didn’t apologize.

--Finally, Chelsea Clinton is quitting her job as a reporter at NBC News, citing increased responsibilities at the Clinton Foundation and the imminent birth of her first child.

Chelsea as you know was paid $600,000 a year for about four puff pieces every 12 months. Alex Wallace, senior vice president at NBC News, said, “Chelsea’s storytelling inspired people across the country and showcased the real power we have as individuals to make a difference in our communities.” [Crain’s New York Business]

I can’t be the only one who is about to throw up.

Foreign Affairs

Ukraine: Fighting raged in eastern Ukraine after talks between Ukrainian President Petro Poroshenko and Russian President Vladimir Putin failed to produce a ceasefire. On Wednesday alone, military officials in Kiev claimed 225 rebel troops were killed, along with 13 government troops. New fronts were opened south of the rebel stronghold of Donetsk and Luhansk.

Russia continued to deny it has intervened militarily, despite strong evidence to the contrary, including NATO satellite imagery, while Russia has been massing troops in Crimea (which is getting lost in the discussion).

Russian Ambassador Vitaly Churkin called the Russian soldiers in Ukraine “volunteers.” Yet an organization called “Soldiers’ Mothers Committee” reports some 400 Russian soldiers have been killed or wounded in Ukraine so far during the Russian intervention. [Annie Gowen, Anne Gearan / Washington Post]

“There are Russian volunteers in eastern parts of Ukraine. No one is hiding that,” said Churkin, suggesting instead they were volunteering during their holidays.

Ukraine claimed Russian tanks, artillery and infantry invaded through an unbreached part of the east, while the New York Times reported seeing many Ukrainian troops in full retreat.   It would appear Russia hopes to take the key seaport of Mariupol, and then secure a road link to Crimea.

By Friday, the number of Russian troops in Ukraine was put at 5,000.

But the White House, and President Obama on Thursday, continue to refuse to use the word “invasion” to describe Russia’s actions.

“Russia is responsible for the violence in eastern Ukraine. Russia has deliberately and repeatedly violated the sovereignty and territorial integrity of Ukraine,” said Obama, but he then added, “A military solution to this problem is not going to be forthcoming.”

U.S. Ambassador to the U.N., Samantha Power, was harsher in saying Russia “has manipulated. It has obfuscated. It has outright lied.”

Yet Obama remains fixated on Putin acting rationally. Thursday he reiterated:

“President Putin and Russia have repeatedly passed by potential off-ramps to resolve this diplomatically. And so, in our consultations with (our) European allies and partners, my expectation is that we will take additional steps, primarily because we have not seen any meaningful action on the part of Russia to actually try to resolve this in diplomatic fashion.”

NATO leaders are holding a summit next week in Wales, after which Obama will be meeting with Baltic leaders in Estonia to show U.S. and NATO support.

This week, NATO Secretary-General Anders Fogh Rasmussen said in an interview with various European newspapers: “We have to face the reality that Russia does not consider NATO a partner. Russia is a nation that unfortunately for the first time since the Second World War has grabbed land by force. Obviously we have to adapt to that. 

“The bottom line is that you will in the future see a more visible NATO presence in the East.”

An EU summit is being held on Sunday to discuss the possibility of further sanctions.

For her part, German Chancellor Angela Merkel has had a peace plan on the table for months which offers Putin Crimea and some autonomy in the east, in exchange for demilitarization and a pledge that Ukraine would never join NATO. Giving up Crimea like that would be despicable, but we all know it’s a fait accompli. 

Some other tidbits:

--Finland said Russian aircraft have been repeatedly violating its airspace and that Finnish fighter jets were prepared to intercept them. The Finnish government said such moves on the part of Russia must be “taken very seriously.” Remember, Finland has the European Union’s longest border with Russia.

Finland and Sweden will sign an agreement with NATO making it easier for the bloc to put troops on their soil. Finland has been cooperating with NATO since 1994 as a member of the Partnership for Peace program. [Bloomberg]

--President Poroshenko has called snap parliamentary elections for October 26, an expected move as this was one of the demands of the protesters who toppled the pro-Moscow government of Viktor Yanukovych in February.

Opinion....

Editorial / Wall Street Journal

“The timing (of Russia’s latest moves) is notable, but not surprising, on the heels of the much-ballyhooed Tuesday meeting between Mr. Putin and Ukrainian President Petro Poroshenko. Western Europeans, in their desire to have this crisis go away, had hoped the meeting would yield progress toward a negotiating solution.

“But Mr. Poroshenko can’t concede territory to Russia without betraying his country, and Mr. Putin can’t be seen inside Russia to have abandoned his separatist proxies in Ukraine. When Mr. Poroshenko wouldn’t yield, Mr. Putin decided to improve his leverage by creating more military facts on the ground.

“The Russia advance is a particular humiliation to Mrs. Merkel, who more or less invited Mr. Putin to escalate. Last weekend she visited Kiev with a public message that there had to be a negotiated solution and Europe had no plans for further sanctions against Russia. That was ample incentive for the Russian to refuse any compromise. His latest grab for territory follows the familiar Putin pattern of responding to every concession with a new provocation.

“Mrs. Merkel is supposed to be a formidable statesman but she has been soft clay in Mr. Putin’s hands.”

Editorial / Washington Post

“If any international norm can still be called uncontroversial, it is the stricture against cross-border aggression by one sovereign state against another. Certainly any failure to enforce it in one place invites violations elsewhere. That is why Vladimir Putin’s decision to send Russian forces openly into Ukraine in the past 48 hours is a watershed, not a mere ‘continuation of what’s been taking place for months,’ as President Obama understated the case Thursday. If Mr. Putin does not pay a high price for this naked, if still cynically denied, attack on his neighbors, the precedent could sow instability far and wide – from the Baltic Sea, ringed by small, free states with large Russian minorities, to the South China Sea, dotted with islands that China covets but other countries claim....

“What is evident is that Mr. Putin cares little for diplomatic ‘off-ramps,’ as the West calls the various face-saving solutions it has dangled since Mr. Putin first began his squeeze on Crimea, and to which Mr. Obama alluded yet again Thursday. To the contrary: Sending his own regulars to seize Ukrainian territory suggests that he would rather risk further conflict with the West than see his minions go down to defeat in Donetsk, Luhansk and elsewhere....

“(Given) the global repercussions of this struggle, the United States and its allies cannot afford to let Mr. Putin break the rules. It is time to hit Russia with the full brunt of financial sanctions, to supply Ukraine with the arms and intelligence it needs to defend its territorial integrity (which Russia itself once pledged to respect), to halt all military sales to Russia by Western nations – and to bolster the neglected North Atlantic Treaty Organization. Mr. Obama made little effort Thursday to explain or defend the ‘broader principle’ that he said is at stake in Europe. Nations around the world that rely on U.S. leadership and its commitment to the rule of law can only hope that he brings more passion to the cause at what deserves to be a historic NATO summit in Wales next week.”

William J. Perry and George P. Shultz / Wall Street Journal

“The situation demands attention and action. There is no need for American ‘boots on the ground,’ because Ukraine has sizable ground forces, but we – NATO, or the U.S. if NATO is reluctant to act – need to help them with training and equipment that can improve their military performance and allow them to defend their country. Ukraine is a founding member of NATO’s Partnership for Peace, so NATO not only has some responsibility to act, but has actually trained together with Ukrainian military forces.”

Syria: In the latest U.N. report on the war, three million Syrians are now registered as refugees and the crisis is only getting worse. The U.N. High Commissioner for Refugees, Antonio Guterres, said Syria is now “the biggest humanitarian emergency of our era” with almost half of all Syrians forced to flee their homes.

1,175,504 are in Lebanon
832,508 in Turkey
613,252 in Jordan
215,369 in Iraq
139,090 in Egypt
6.5 million others are displaced within Syria.

Guterres added “the world is failing to meet the needs of refugees and the countries hosting them. The response to the Syrian crisis has been generous, but the bitter truth is that it falls far short of what’s needed.”

The official death toll is over 190,000, but as noted the other day, this is viewed by the U.N. as an “underestimate.”

Just look at those numbers in Lebanon and Jordan, in particular. It’s amazing those two countries are still standing. The United States, though, will not let Jordan fall. That is the real line in the sand the American people need to know about. [Obviously Israel would be another.]

Having said he didn’t have a strategy yet when it came to ISIS, President Obama remarked:

“Folks are getting a little further ahead of where we’re at. ....The suggestions seems to have been we’re about to go full-scale on some elaborate strategy for defeating ISIL and the suggestion has been we’ll start moving forward imminently and somehow with Congress still out of town, they’ll be left in the dark. That’s not going to happen.”

The president authorized U.S. surveillance flights over Syria to build up intelligence for a potential air campaign down the road, but Obama emphasized he wants a coalition, wondering aloud why Iraq and Syria’s neighbors aren’t stepping up to combat ISIS. On this he is right. But that doesn’t mean we should then totally step back and wait for everyone else to see the light. It will be too late...if it isn’t already.

Obama has ruled out coordinating any eventual strikes in Syria with President Bashar al-Assad’s government.

ISIS released a number of videos of unspeakable horror, including one where somewhere between 140 and 250 Syrian army soldiers were executed, and another where at least one of 15 captured Kurdish peshmerga fighters was beheaded in Mosul, Iraq’s second-largest city now under the control of the IS.

Earlier, ISIS took a Syrian airbase, near the northern city of Raqqa, an IS stronghold. The Syrian Observatory for Human Rights said 346 IS fighters and more than 170 members of the security forces died in fierce fighting that went on for weeks. The above mass execution was said to have been of Syrian troops captured in the taking of the base.

[Raqqa would likely be a focus of any U.S. air strikes.]

Former U.S. Ambassador to Iraq James Jeffrey said in an interview with Defense One, “Where were these ISIS guys three years ago? They were not part of Jihadi West Point cadres. They very quickly have been trained.”

This week you heard U.S. defense officials and intelligence analysts say of ISIS, they have “uncanny discipline” and they are “learning fast.”

Jeffrey says time is of the essence when it comes to fighting them, including in Syria. “You don’t want to wait, you have to use judgment, you don’t want to wait until it is incontrovertible that you are facing a huge threat. We should be arming and providing air support for and air cover for local people.”

Other items....

--Two Americans have been killed fighting alongside ISIS in Syria, both of whom are from the Minneapolis area. Earlier, a third from there was involved in a suicide truck bombing.

I have written countless times about the threat posed by the large Somali community in Minneapolis-St. Paul and the recruitment of terrorists for, then, Somalia and al-Shabaab, and what is increasingly today the likes of ISIS. On 3/12/2011, I wrote this:

“Heck, look at the situation in Minneapolis-St. Paul with the Somali community, many of whom are being recruited to return to Somalia for training and then come back to the United States to carry out their mission.”

--Related to the execution of James Foley, the mother of U.S. journalist Steven Sotloff issued an impassioned plea to ISIS to spare her son.

--Syrian rebel groups, including al-Qaeda affiliated Nusra Front, took control of a crossing between Syria and the Israeli-occupied Golan Heights. Fiji confirmed Friday that 43 of its soldiers, working as U.N. peacekeepers, were captured by the militants, but they are said to be unharmed.

--Russian Foreign Minister Sergei Lavrov urged Western and Arab governments to engage with Assad and work with him to fight ISIS.

--Infighting within the Obama administration on the issue of Syria is more and more breaking out into the open. In a piece for Defense One by Gayle Tzemach Lemmon, she notes “some within the administration say they feel ‘extreme frustration’ that their long-standing warnings have come true...

“ ‘Two years ago we told them if we did not train the moderates it would be the regime versus al-Qaeda and you would have transnational terrorist networks in Syria,’ says one administration official. ‘The real fear they always had was: arming the opposition means empowering the extremists. And now they say, ‘See? We told you,’ and we say, ‘No, you didn’t arm the moderates and you ended up with the extremists.’’”

Richard Haass / Financial Times

“The U.S. and much of the world have been rudely awakened to the fact that the group formerly known as Islamic State in Iraq and the Levant is both a dangerous terrorist organization, and considerably more than that. The deadly reality of its capabilities and ambitions is captured in the latest title by which ISIS styles itself: the Islamic State. It is a de facto government with evolving borders that seeks to impose its vision of society on the millions of people over whom it rules. And, as it has dramatically shown since the capture of the Iraqi city of Mosul in June, it seeks to expand its borders and the numbers subject to its control.

“The biggest question now facing western states is what to do about Syria. Iraq’s neighbor is where ISIS established itself and from where it directs its operations. The Fact is that the world cannot defeat ISIS in Iraq, or limit its potential elsewhere, if it continues to enjoy sanctuary in Syria....

“The first thing that needs to be done, despite White House reluctance, is to make good on what General Martin Dempsey, chairman of the U.S. Joint Chiefs of Staff, suggested last week. The U.S. should attack ISIS targets across the border from Iraq inside Syria. More could and should be done, too, to slow the flow of recruits, arms and dollars....

“(But) there are limits to what air power can achieve. What is needed are ground forces operating inside Syria. This is where things get complicated. Very complicated.”

Haass notes the introduction of U.S. and European ground forces, after the Iraq and Afghanistan wars, is a political non-starter.

A Pan-Arab force “would be extremely difficult.”

Building an internal Syrian opposition on what already exists would take too much time, “and it would be a tall order for any such force to contend successfully with both the Syrian government and ISIS.”

“The fourth option is to turn to the regime of Mr. Assad to take the lead in defeating ISIS. This would mean accepting for the foreseeable future a regime that has committed war crimes; that is supported by Iran and Russia, with which the west has considerable strategic differences; and that is opposed by countries, including Saudi Arabia, which the U.S. has more often than not cooperated.

“Such a policy change would be costly but not as costly as a scenario in which ISIS could use Syrian territory from which to mount attacks on the region and beyond. The Assad government may be evil – but it is a lesser evil than ISIS, and a local one.”

Editorial / Washington Post

“Earlier this year, Mr. Obama was dismissing al-Qaeda offshoots as the junior varsity of terrorism and promising Americans that the tide of war was receding. Now his secretary of state, John F. Kerry, calls the Islamic State an ‘evil’ that must ‘be destroyed.’ Defense Secretary Chuck Hagel says it is ‘as sophisticated and well-funded as any group that we have seen...beyond anything that we’ve seen.’ Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, says it ‘will eventually have to be defeated.’

“What would it take to defeat the Islamic State, which continues to rack up military victories in Iraq and Syria, including the capture of another air base Sunday? When Mr. Obama was urged to support the moderate opposition in Syria three years ago, one reason given was that a failure to do so would leave an opening for more radical factions that would eventually spill out of Syria and threaten the region. The longer the president waited, the more the need for action would become obvious – but the more unappetizing his options would be.

“Now the Islamic State is well-funded, with steady revenue from oil fields it has captured and, as we’ve learned recently, ransom payments; it is well-armed, including with captured U.S. weaponry; and it is highly ambitious.

“No serious approach to the group can focus only on Iraq, as the United States has done thus far. The extremists treat Iraq and Syria as one area of operations, and the United States must do the same.”

Iraq: On Thursday, President Obama reiterated his air campaign against ISIS in Iraq was limited, such as the effort to rescue the Yazidis on Mount Sinjar.

“It is not just part of my responsibility, but my sacred duty as commander in chief to protect the American people,” Obama said. “That requires me to act fast based on information I receive if embassies of ours or consulates of ours are being threatened. The decisions I made were based on very concrete assessments based on the possibility Irbil might be overrun. ...I can’t wait to make sure our people are protected...and the feedback I’ve gotten from Congress is that we’re doing the right thing.”

Thanks to ISIS, for the most part, over 1.2 million Iraqis are now displaced.

Israel: An extended ceasefire, with few details*, was agreed to between Israel and Hamas, though the Egyptian-brokered deal is no different from an original proposal made by Egypt at the beginning of the war, which Palestinian Authority President Mahmoud Abbas said was rejected by Hamas.

In an interview with Palestine TV, Abbas added that there was no difference “other than the losses and suffering we went through,” a significant statement coming from him, and an example of the wide gulf existing between the PA and Hamas. Recently Israel uncovered a plot whereby Hamas was going to launch a coup against Abbas and his government on the West Bank.

Abbas also said decisions of war and peace “should not remain in the hands of one faction,” another shot at Hamas. Abbas then said of Israel, it would not escape punishment for its “crimes and massacres” against the Palestinians in the Gaza Strip. [Jerusalem Post]

*It is reported that Hamas did not secure its demand for a full lifting of the seven-year-old Israeli blockade on Gaza, but Israel will ease some curbs on imports and open the borders to allow more humanitarian and reconstruction materials into the Strip. The two sides are to resume discussions on other issues, like the port, in about a month’s time, according to Egypt.

Meanwhile, Israeli Prime Minister Benjamin Netanyahu has been under fierce internal pressure for agreeing to the cease-fire without a vote in the cabinet.

According to MK Danny Danon (Likud), in the Middle East, restraint is seen as weakness.

“Despite the heavy price Hamas paid, we did not defeat Hamas,” he said. “Fifty days of fighting, 64 soldiers killed five (Ed. six) civilians killed, 82,000 reservists called up, and in the end we’re back to the agreement from Operation Pillar of Defense.”

Israeli opinion polls showed Netanyahu’s popularity plummeting. In a survey for Channel 10 television, 55% agreed with the prime minister’s policy on Gaza, down from 69% in a matter of weeks.

But answering critics, Netanyahu said in a press conference: “I don’t set unrealistic goals. We’re not dealing here with populism.”

Netanyahu said Hamas was “hit hard and got none of its demands.”

But Foreign Minister Avigdor Liberman said, “It is impossible and forbidden to trust lowly murderers. Therefore, we are against a cease-fire that allows Hamas to rearm and wage another battle against Israel whenever it finds it comfortable.”

Liberman maintains the tunnel and rocket threat would remain as long as the rule of Hamas was not overthrown.

Iran: Meanwhile, you just know the Obama administration is anxious to cut a long-term deal with Iran on its nuclear program, but the new deadline was extended to beyond the mid-term elections. No recent developments of note on this front, which only means Iran has had more time to conceal and deceive.

Or as the Washington Post’s Zachary A. Goldfarb wrote:

“In the end, Obama’s legacy might be defined by an issue that has lost attention as new crises have emerged: preventing Iran from obtaining nuclear weapons.”

I hope that looks familiar. That’s how I’ve viewed things. Add in North Korea on the legacy front.

Lebanon: ISIS beheaded at least one of 11 Lebanese soldiers it captured earlier this month following clashes in the northeastern town of Arsal. The Lebanese Army continues to battle with al-Qaeda-affiliated and ISIS terrorists inside the border.

Libya: Significant developments here the past week as an alliance of Islamist militias took control of Tripoli’s international airport after weeks of fighting that had caused a mass exodus of foreigners. There is no real government in Libya these days. The original established parliament had disbanded but is looking to resurrect itself, while a new parliament is operating in the eastern part of the country.

Oh yeah, “rival legislatures.” That’s a recipe for stability.

And then, out of nowhere, the United Arab Emirates and Egypt carried out a series of airstrikes in Tripoli on Monday, marking a major escalation.

To show you just how low U.S. influence has sunk, the White House was not apprised ahead of time. [The White House also had nothing to do with the ceasefire brokered by Egypt between Israel and Hamas.]

Both the UAE and Egypt were attempting to put a dent in the rise of the Islamist militias in Libya.

The U.S. has been worried Libya would become a proxy war for those seeking to aid secular forces there, vs. the likes of Qatar which has financed Islamist forces.

The UAE had aided in the toppling of Moammar Gaddafi in 2011.

The U.S., France, Germany, Italy and Britain said in a joint statement: We believe outside interference in Libya exacerbates current divisions and undermines Libya’s democratic transition.”

Well that’s a crock. Democratic transition?! Good for Egypt and the UAE.

But what the world should continue to be most concerned with is the whereabouts of the hundreds, if not thousands, of shoulder-fired missiles that were taken from Libyan Army stockpiles following Gaddafi’s fall; the very weapons destined for use against commercial airliners.

China: The Defense Ministry called U.S. criticism of an encounter between a U.S. Navy surveillance plane and a Chinese fighter jet “totally groundless.” 

Earlier the U.S. labeled the actions of the Chinese pilot, coming to within 30 feet of the spy plane, “aggressive and unprofessional.”

The two sides met at the Pentagon a few days later in regularly scheduled talks and Beijing told Washington that foreign military planes flying within its economic zone, or within 200 nautical miles off the coast of China, would be deemed as putting national security at risk.

On a different topic, the South China Morning Post was the first to report China has moved a step closer to producing a supersonic submarine that could travel from Shanghai to San Francisco in less than two hours.

It’s highly complex but I’ll just quote these two passages from a story by Stephen Chen:

“Water produces more friction, or drag, on an object than air, which means conventional submarines cannot travel as fast as an aircraft.

“However, during the Cold War, the Soviet military developed a technology called supercavitation, which involves enveloping a submerged vessel inside an air bubble to avoid problems caused by water drag.”

But the sub needs to be launched at high speeds “to generate and maintain the air bubble” and, second, it is extremely difficult “to steer the vessel using conventional mechanisms, such as a rudder.”

Nonetheless, Professor Li Fengchen at Harbin Institute of Technology’s Complex Flow and Heat Transfer Lab says his team can now create the air bubble required.

Just another reason to sleep with one eye open, as we do here nightly at StocksandNews.

Pakistan: India and Pakistan exchanged heavy fire across their border in the Jammu region with civilian deaths on both sides, while Pakistani Prime Minister Nawaz Sharif is apparently close to ceding control of security affairs and strategic foreign policy to the military as he attempts to survive amid growing opposition to his leadership.

Sharif had attempted to assert civilian control of the army and any deal he cuts will largely make him a ceremonial leader.

The Pakistani military has run things for half of Pakistan’s 67 year history.

France: Max Fisher of Vox.com had a piece on two separate polls on the issue of ISIS, both asking the question: how many people support the terror group?

The first by ICM Research asked people in Germany, France and the U.K. whether they had a favorable or unfavorable view of ISIS. The second, by the Palestinian Center for Public Opinion, asked Gazans whether they support or oppose ISIS.

The findings and Mr. Fisher’s accompanying piece received considerable attention for what it revealed about France. 16% in the country support ISIS. Compare that to ‘only’ 13% in Gaza, 7% in the U.K. and 2% in Germany. [Mr. Fisher acknowledges that while the polls are similar, they are not identical and the polling agencies used different methods. But, “In any case, the big, scary, surprising, number here is France.”]

What makes the French figure worse is a full 27% of those 18-24 support ISIS.

“This is alarming,” writes Fisher, “in part because a growing number of Europeans, often from predominantly Muslim immigrant communities, are not just expressing their support for ISIS in polls: they are traveling to Syria and Iraq to join up.”

And Fisher addresses a topic near and dear to my heart for years in this space, the rise of the far-right in Western Europe, “which includes a growing willingness to embrace extremism and greater intolerance of all kinds.”

Of course this includes a rise in hatred towards Jews in Europe, as well as Muslims.

Mr. Fisher doesn’t address the topic of Marine Le Pen, specifically, but it’s inferred. This week French screen legend Brigitte Bardot praised Le Pen in an interview with Paris Match magazine to mark her 80th birthday. Bardot says Le Pen is the one person who could “save” France.

“I am a native Frenchwoman and proud of it. I mourn the fact that my beautiful country has deteriorated in every way. It’s criminal to submit to these depths.”

Bardot has long supported the far-right in France and while she is also half-wacko, it’s a sentiment that is increasingly mainstream and will be only helped by polling data showing where Muslim sentiments are trending.

So you can see the increasing divisions in France, growing exponentially it seems. You are going to have a clash of civilizations here...soon. 

Brazil: Out of nowhere, Marina Silva, an environmental activist and the Socialist Party candidate who replaced Eduardo Campos when he died in a plane crash earlier in the month, has pulled ahead of incumbent Dilma Rousseff, 45% to 36%, in a likely runoff, according to the latest survey by Ibope. The first round of balloting is slated for Oct. 5, which has Rousseff at 34% to 29% for Silva, but then since neither is going to get 50%, when the two square off later, Silva prevails.

Silva is apparently tapping into deep resentment towards traditional politics and the parties that have governed Brazil for the past two decades.

Granted, Silva hasn’t really expressed any kind of economic agenda, but she performed well in the first televised debate between the candidates.

Get this. The debate was three hours (and included the third major candidate, Aecio Neves).

One other important item. It was announced on Friday that Brazil’s economy tipped into recession for the first time in five years. GDP shrank 0.6% in the second quarter after a revised 0.2% contraction in the first. Not good for Rousseff.

*As I go to post, a new poll has been just released. Silva is now tied with Rousseff at 34% in the first round. Her lead then expands to 10 points in the projected runoff.

Scotland: I’ve been putting it off due to time constraints, but next week I’ll tackle the Sept. 18 vote here for independence and why it’s important in terms of Britain’s national security.

Random Musings

--American journalist Peter Theo Curtis, who had been detained by al-Qaeda-affiliated Jabhat al-Nusra for two years, was freed on Sunday, apparently with the help of Qatar. Curtis was not part of a group of Americans being held by ISIS, including Steven Sotloff, whose mother pleaded for his release in a video to IS leader Baghdadi this week.

--The New York Times reported that President Obama is preparing to issue an executive order compelling nations to cut fossil fuel emissions without seeking Congressional approval first.

The climate change agreement is expected to be signed at a United Nations summit in Paris next year.

Normally, the president would need a 2/3s majority in the Senate to enter into a binding treaty, but the White House doesn’t believe it could get 67 votes.

In a statement, Republican Senate leader Mitch McConnell said: “Unfortunately, this would be just another of many examples of the Obama administration’s tendency to abide by laws that it likes and to disregard laws it doesn’t like – and to ignore the elected representatives of the people when they don’t agree.”

--Chris Cillizza / Washington Post

“President Obama (returned) to Washington after a two-week vacation that was neither restful nor productive.

“From the unrest in Ferguson, Mo., to the airstrikes in Iraq, the ongoing tensions in Ukraine and the Middle East, and the execution of American journalist James Foley, it’s been a tough few weeks for the country – and for its leader.

“Obama drew criticism from the left for not being forceful enough in speaking out on the fatal shooting of unarmed teenager Michael Brown in Ferguson and from the right over the death of Foley and the rise of the militant Islamic State. Then there was the golf; nine rounds during his 16 days on Martha’s Vineyard, including a trip to the links immediately after his condemnation of Foley’s killers.

“That series of events left the impression of a disconnected president, frustrated with both the expectations and the limitations inherent in being the nation’s leader at this moment in history.

“It also led to worries – expressed privately – among Democratic party strategists that Obama’s seemingly long-view approach to international and domestic conflicts could spell doom for the party’s chances in the midterm elections, which are only about 10 weeks away.”

--David P. passed along a piece by Martin F. Nolan in the Boston Globe on the president, now friendless.

“It was a sad day for Massachusetts, for the Democratic Party, for civility in Washington, D.C., and, most of all, a sad day for Barack Obama and his administration.

“Ted Kennedy, who died on Aug. 25 five years ago, was the last politician Obama respected or admired. The president may utter niceties about Nancy Pelosi and Harry Reid, but little evidence suggests that he heeds their advice. Nor has he much time for members of Congress from either party....

“Had Kennedy lived, he would have insisted that being a salesman, party leader, and morale officer are all part of the president’s job description. ‘But you can have fun doing it. Go to Wall Street!’ he might counsel. ‘They trash you every day there while the stock market keeps going higher. Mimic Stephen Colbert! Say, ‘I accept your apology.’’

“Kennedy treated Republicans with respect, even sympathy. Gee, your job is tough, he might have said to John Boehner, then make the speaker smile by comparing Tea Party dissidents to ‘a dog who chases a car, then catches the car!’ One can almost hear the senator’s roaring laughter.

“The lion of Massachusetts was famously bipartisan, but also partisan and honored for it. ‘Ted Kennedy never moved away from party rivalry. He was a fierce partisan to the end,’ Senate Republican leader Mitch McConnell said in his eulogy. ‘But over the years he reminded the world of the great potential of this institution, and even came to embody it. ...How many times did we spot him coming through a doorway or onto an elevator, his hair white as the surf, and think: ‘Here comes history itself?’’ McConnell’s first reaction to Kennedy’s death was, like that of most senators, genuine and heartfelt: ‘He was fun to be around.’

“McConnell and Obama have a mutual friend, who has too many buddies, mates, pals, and chums to count. His name is Joe Biden.

“Biden would be happy as Obama’s life coach. So you don’t like politicians? No problem. Just talk, but mostly listen. They might think you’re faking, but they do it, too. It’s worth a try.”

--David Ignatius / Washington Post

“The truth about the disengaged Obama is that he has probably stopped caring what most critics say about his performance. A few months ago, during his Asia trip, he mused aloud during a news conference about complaints that his foreign policy was weak, asking critics such as Sen. John McCain and hawkish editorial writers: What do you want me to do? Repeat the mistakes of the past?

“Obama today seems to ignore what his detractors think. Part of his detached style comes from the fact that he’s stubborn. He doesn’t like to be jammed, as Israeli Prime Minister Benjamin Netanyahu learned when he tried to push Obama on Iran policy during a vulnerable period in September 2012, shortly before the presidential election. Obama listens to criticism and then, at a certain point, the switch flips off. He stops shadowboxing with critics.

“Obama appears to have reached this tipping point of disinterest in his dealings with Congress. He’s sick of their whining and feuding. As the New York Times reported, Senate Majority Leader Harry Reid (D-Nev.) pleaded in June for help in clearing ambassadorial nominations. Obama reportedly dumped the problem back in the lap of Reid and his Republican counterpart, Sen. Mitch McConnell, saying: ‘You and Mitch work it out.’

“I suspect Obama is so sick of congressional inaction – and of the bad blood between Reid and McConnell that helped cripple his legislative agenda – that he wants to wash his hands of the mess. Unfortunately, that isn’t really an option for his remaining two years in office: Disdain isn’t a governing strategy.”

--According to a USA TODAY/Suffolk poll of Republicans in Iowa, Mike Huckabee leads with 13%, followed by Chris Christie at 11%, Rick Perry, 8%, and Rand Paul just 7%. As the Washington Post’s Jennifer Rubin wrote of Paul, his slide is “perhaps due to an atrocious recent visit to the state or to his fringe national security views.”

The above, notes Rubin, also goes against the conventional wisdom that “for some time has been that Christie is dead in the water, Paul is the leader and Perry is going nowhere. But what if no polls bear this out?”

Huckabee? He’s won in Iowa before (2008).

--New York City Mayor Bill de Blasio has a 50% job approval rating in the latest Quinnipiac University poll, basically unchanged since the June survey. 65% of African-Americans and 55% of Hispanics approve of his performance thus far, while only 36% of whites do.

Police Commissioner Bill Bratton’s approval rating, however, has fallen from 57% last June to 48%.

Rev. Al Sharpton has a 49% approval rating of his own.

--In a USA TODAY/Pew Research Center poll, 46% of African Americans say they have “very little” confidence in the police to treat blacks and whites equally. Only 12% of whites feel that way.

The 46% figure is up from 31% seven years ago.

64% of African Americans think blacks and whites get along “very well” or “pretty well” – down from 76% five years ago.

Obama’s approval rating when it comes to handling race relations is not good: 48% approve, 42% disapprove, significantly lower than George W. Bush and Bill Clinton during their tenure.

But, no doubt these figures were influenced by events in Ferguson, Mo.

--Maureen Dowd / New York Times, on how President Obama has “deputized Al Sharpton, detaching himself at the very moment when he could have helped move the country forward on an issue close to his heart,” race relations.

“As a White House official told Politico’s Glenn Thrush, who wrote on the 59-year-old provocateur’s consultation with Valerie Jarrett on Ferguson: ‘There’s a trust factor with The Rev from the Oval Office on down. He gets it, and he’s got credibility in the community that nobody else has got.’

“Sharpton has also been such a force with New York’s mayor, Bill de Blasio, in the furor over the chokehold death of a black Staten Island man that the New York Post declared The Rev the de facto police commissioner. The White House and City Hall do not seem concerned about his $4.7 million in outstanding debt and liens in federal and state tax records, reported by The Post. Once civil rights leaders drew their power from their unimpeachable moral authority. Now, being a civil rights leader can be just another career move, a good brand.

“Thrush noted that Sharpton...has evolved from agitator to insider since his demagoguing days when he falsely accused a white New York prosecutor and others of gang-raping a black teenager, Tawana Brawley, and sponsored protests against a clothing store owned by a white man in Harlem, after a black subtenant who sold records was threatened with eviction. A deranged gunman burned down the store, leaving eight people dead.

“Sharpton also whipped up anti-Semitic feelings during the Crown Heights riots in 1991, denouncing Jewish ‘diamond dealers’ importing gems from South Africa after a Hasidic Jew ran a red light and killed a 7-year-old black child. Amid rioting, with some young black men shouting ‘Heil Hitler,’ a 29-year-old Hasidic Jew from Australia was stabbed to death by a black teenager.

“Now, Sharpton tells Thrush: ‘I’ve grown to appreciate different roles and different people, and I weigh words a little more now. I’ve learned how to measure what I say.’

“Obama has muzzled himself on race and made Sharpton his chosen instrument – two men joined in pragmatism at a moment when idealism is needed.

“We can’t expect the president to do everything. But we can expect him to do something.”

--According to the Department of Education’s National Center for Education Statistics, enrollments for the 2014-15 school year will mark the first time ethnic minorities become the majority, a shift driven by rising numbers of Hispanic students.

The number of white pupils will be marginally below 50%, with Hispanics at 26% and blacks at 15%. The rest are Asian pupils, Native Americans and Pacific Islanders, with fewer than 3% identifying themselves as mixed race. [BBC]

--The story of the nine-year-old New Jersey girl, on holiday in Arizona with her family, who accidentally killed an Arizona shooting instructor who was showing her how to use an Uzi, was a tragedy on so many levels. I agree with those who say you don’t need new laws to prevent such an incident in the future, but rather use some common sense.

---

Pray for the men and women of our armed forces...and all the fallen.

God bless America.

---

Gold closed at $1287
Oil $95.96

Returns for the week 8/25-8/29

Dow Jones +0.6% [17098]
S&P 500 +0.8% [2003]
S&P MidCap +0.9%
Russell 2000 +1.2%
Nasdaq +0.9% [4580]

Returns for the period 1/1/14-8/29/14

Dow Jones +3.2%
S&P 500 +8.4%
S&P MidCap +7.1%
Russell 2000 +0.9%
Nasdaq +9.7%

Bulls 52.5
Bears 15.1 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore