Week in Review

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Week in Review

06/18/2011

For the week 6/13-6/17

Wall Street, Washington and Europe

All this week commentators were saying something like the following when it came to the issue of Greece and Europe’s debt crisis. “We’ve been here before, like last year.” True, but how many a year ago were telling you what the future held as I did?

“The bottom line is the harsh austerity programs now being implemented are obviously not a recipe for growth, which also means that for a time, government revenues will shrink further and deficits increase until the likes of Greece hit bottom.”

“We have a long, long way to go before we’ll know if Europe can get its house in order. These are incredibly wrenching changes governments must implement and you’d have to be an idiot to think the people will just take it all lying down (even though that would be totally appropriate given the binge they’ve been on)…

“So you have a European continent that could be stuck in neutral, at best, for years, nay decades.”

“(This) week interest rates on Greek bonds soared amidst new concerns. The European Central Bank may be pleased with Greece’s austerity program, as the government cuts its budget deficit, but revenues are below projection, unemployment could soar (further) and just weeks after a resolution to the crisis here, whaddya know…there is more uncertainty again.

“It’s all so predictable, yet I’m amazed how many are missing it. These austerity programs are incredibly painful, though necessary. We’re talking lost jobs, cuts in public sector wages (if you didn’t lose your job), and cuts in benefits. It’s going to be one very depressed continent once this all settles in. Europe has been in a perpetual state of denial and it’s time to pay the piper (as it increasingly is in the United States…where it’s virtually 50 states in denial).

“You are nuts if you are bullish on Europe in the short-term.”

“I got a kick out of the happy talk from some European officials concerning the sovereign debt crisis that has been temporarily averted due to the joint IMF-EU bailout program for the likes of Greece. This week the IMF said default in Greece and Ireland was unlikely. Paulo Mauro, author of an IMF paper on the topic, said, ‘Markets are overestimating the risk of default.’

“To which I’d counter, not so fast, Paulo. 1.5% growth in the EU region is simply muddling through after the crash, and in all likelihood it means that Germany and France continue to carry the main share of the load while the others suffer. It also totally ignores that the austerity programs put in place by the governments haven’t begun to bite yet….So, Paulo, y’all ain’t out of the woods yet.”

“I found the head of the European Union’s financial stability apparatus’ (that which is responsible for propping up the likes of Greece) statement that the sovereign debt crisis is over remarkable for its infant-like quality.

“No doubt, Europe’s austerity programs are in place to engender confidence, but what does it say when just days after the fellow’s pronouncement, Ireland’s 10-year bond traded at its highest yield, compared to the German 10-year, ever; even as Ireland’s government said it would double its budget cuts over coming years.

“It is, it’s needed, but now it’s clear some governments, such as Ireland’s, and perhaps Spain’s and Greece, are going overboard and killing any hope of a recovery; recovery needed to increase revenues, for starters.”

“I believe the European debt crisis is with us well into 2012 and I can guarantee you that Ireland’s role is far from over; its bailout and recovery far from secure….

“I also believe that not enough has been said on the transparency issue and European banks’ lack of same.”

“It is now commonly accepted that Greece’s predicament is due to two inter-related problems: the economy is unable to grow, and the debt burden is enormous. Yet neither has influenced sufficiently the approach that has been adopted by the crisis management coalition, consisting of the Greek government, its European creditors (namely other eurozone governments, the European Commission and the European Central Bank), and the International Monetary Fund.

“Instead, the focus has been on dramatic austerity for Greece and massive loans from the official creditors. Not surprisingly, every economic, financial and social indicator for the Greek economy has deteriorated. This has happened both in absolute terms and, more alarmingly, relative to the coalition’s already grim expectations. Such failure naturally encourages a blame game, and sadly that is exactly what is now happening.

“Judging from other crisis management episodes around the world, it is normal for both the Greek government and its people to feel let down by European neighbors who they feel under-appreciate the sacrifices made by its population, especially since these same creditors refused to lower interest rates on new loans. Equally, it is normal for the creditors to complain that it is Greece that is not doing enough to counter what is, after all, a home grown problem….

“(Europe needs to recognize) it faces a moment of truth. The sooner this is recognized, the greater chance of shifting to a ‘plan b.’ If not the prospects are stark: the already-difficult outlook facing the three bailout countries (Greece, Ireland and Portugal) will surely be compounded by a decade of internal economic implosion. The task must now be to limit fundamental contagion to countries that are yet to be bailed out (notably Spain), and to maintain the integrity of the Euro. But the time for action is fast running out.”

And so this weekend it is expected that the new government that Greek Prime Minister Papadreou has put together will pass yet another round of spending cuts and other concessions in order to secure the release of emergency loans from the IMF (12 billion euros) so Greece can make interest payments on its debts and avoid a default no one on the continent, and here, wants to see.

As protests grew in Athens, all the talk was about a “credit event” and what would then be a cascading spiral of events into the depths of depression, because the global economy cannot afford another financial crisis a la 2008-09.   With the exposure that French and German banks have to Greece and the other sick puppies of the eurozone, you’d have a continent wide run on the bank, whether warranted or not.

The thing is, as I noted a few weeks ago, all the European Central Bank, EU and IMF are doing is perpetuating a Ponzi scheme. What the continent needs more than anything these days is growth and with few exceptions there is nowhere near enough of it to stanch the fear.

But at least France and Germany reached agreement on the issue of private investors being protected…for now…and so Greece could survive to live another day. Maybe four. But not much more than that.

I mean imagine. There was a time this week when the interest rate on a two-year Greek note was 30%. The benchmark 10-year had a yield close to 19% before ending the week around 18%.

So now we await further developments ahead of next week’s EU summit.

Turning to the United States, I got a kick out of some of President Barack Obama’s comments last Saturday in his weekly radio address.

“The truth is, we didn’t get into this mess overnight, and we won’t get out of it overnight. It’s going to take time.”

Huh. My memory isn’t as good as it used to be, but I recall Mr. Obama took the oath of office in January 2009 and it’s now June 2011. No doubt, the president inherited a pile of merde, but by the spring of ’09, wasn’t he talking of a vastly improved economy by 2010? And aren’t we now midway through 2011? But why are some surprised? He wasn’t a job creator before he got into politics, he was a social worker, a community leader. I mean, c’mon.

But we’re a long ways from November 2012 and maybe after this “soft patch” economists say we’re in the midst of, things will improve in the fall and by a year from now, we’ll all be singing:

Zip-a-dee-doo-dah
Zip-a-dee-ay
My, oh my, what a wonderful day…

Then again, maybe not. Our president is flailing hopelessly these days, but to be fair, so are a lot of other world leaders.

Meanwhile, the IMF cut its forecast for U.S. growth this year to 2.5%, with 2012 looking only slightly better, 2.7%. 

“The global economy is being hobbled by a new generation of zombies – the economic walking dead. American consumers are in the early stages of an unprecedented retrenchment. In the 13 quarters since the beginning of 2008, inflation-adjusted annualized growth in consumption has averaged just 0.5%. Never before in the postwar era have U.S. consumers been this weak for this long.

“The zombie syndrome has an important antecedent. It was, in fact, a key symptom of the Japan disease, which led to the first of two lost decades for that country. Encouraged by the government, Japanese banks kept extending credit lines for a broad cross-section of insolvent companies – postponing restructuring and inevitable failure.

“Japanese productivity growth weakened dramatically as a result of the ensuing ‘zombie congestion.’ The lifeline of policy-driven bank lending allowed bankrupt companies to hang on to excess and redundant capacity. But that sapped post-bubble Japan of sorely needed vitality.

“It is comparable in post-bubble America. After a record buying binge that lasted a dozen years, U.S. consumers were stretched as never before. Consumption excesses were built on the precarious foundation of two bubbles – property and credit – which have now burst.

“It will take a long time for American consumers to recover from the ravages of this bubble-induced spending binge. Deleveraging, the paying down of excess debt, has barely begun. Yes, household sector debt came down to 115% of disposable personal income in early 2011. While that is 15 percentage points below the peak ratio of 130% hit in 2007, it remains well above the 75% average of the 1970 to 2000 period….

“Sadly, America’s zombie consumers could be more problematic for the U.S. than the zombie corporates were for the Japanese economy. At 70% of GDP, U.S. personal consumption is 3.5 times the peak share of Japan’s bubble-distorted business capital spending sector in the early 1990s. A failure to learn the lessons of Japan – especially that of post-bubble zombie congestion – leaves the U.S. and the global economy in a very tough place for years to come. Growth-hungry financial markets could be very disappointed.”

Meanwhile, talk continues between Republicans and Democrats on raising the debt ceiling as the Aug. 2 deadline approaches.   It’s a game of Russian roulette.

But there were some hints of good news this week. Really. Like the price of oil fell to $93, after finishing the prior five weeks at either $99 or $100, so consumers may catch a break.

And the Senate voted 73 to 27 to end tax credits and trade protection for the ethanol industry. I mean this was a very significant measure. As Sen. John McCain said, “It is time to say enough is enough. This industry has been collecting corporate welfare for far, far too long.”

Only one problem. The measure has little chance of becoming law because it is part of a larger bill that is likely to fail, but a marker has been set. Congress can do the right thing and ethanol’s future is now in major question.

Plus, in a separate agriculture spending bill, farm subsidies are slated to be cut to the tune of $2.7 billion. Great!

And then on Friday came word that the AARP is changing its long-held stance on Social Security. Now the organization of old people (hey, I’ve got my own card myself these days) is amenable to exploring benefit cuts for the first time, which is hugely significant given AARP’s lobbying power.

So maybe there is hope after all. Maybe our elected representatives finally get it. Just as importantly, will the American people truly get it as well?

Street Bytes

--The Dow Jones and S&P 500 broke their six-week losing streaks, barely, as the Dow gained 0.4% to 12004, while the S&P picked up a point, or less than 0.1% to 1271. Nasdaq, which was on a four-week losing streak, extended it to five in losing 1.0%.

--U.S. Treasury Yields

6-mo. 0.09% 2-yr. 0.37% 10-yr. 2.94% 30-yr. 4.20%

Consumer prices in May rose at a 3.6% rate, year over year, or the fastest pace since Oct. 2008. But bonds continued to be impacted more by signs of a global slowdown and the euro debt crisis. Concern over the looming debt ceiling deadline is non-existent.

--Concerns over China’s holdings of U.S. Treasury debt have long been overblown and we learned this week that its holdings of our paper rose in April for the first time in six months. China now holds a record $1.149 trillion in longer-term notes and bonds, while short-term bill holdings declined minimally. 

--China’s industrial production for May was up a solid 13.3%, thus allaying some slowdown fears.   But loan growth is stagnant and the inflation rate for May came in at 5.5%, with food prices up 11.7%, though now supplies are improving.

--In an indicator of a slowing Europe, Carrefour, the world’s second-largest retailer, said first-half results in France were below management’s expectations.

--The IMF raised Germany’s growth forecast to 3.2% for 2011, up from an earlier forecast of 2.5%. But, the IMF is calling for GDP to increase only 2% in 2012 for what is handily Europe’s best performer. In other words, the picture won’t be pretty elsewhere on the continent.

--U.K. retail sales fell 1.4% in May over April as the glow of the Royal Wedding wore off quickly.

And as Brits suffer through their government’s own austerity measures, which it is still fine-tuning so as not to hit the poor harder than they are already getting hit, the nation’s trade unions are gearing up for widespread “industrial actions” over the coming weeks and months.

--One offshoot of the European debt crisis that came to light this week is the fact that according to Fitch Ratings, 44% of assets at the 10 largest prime money market funds were invested in short-term loans to European banks, many of which could be hit hard in any Greek credit event.

--Strategist Doug Cliggott had a rather startling quote in Barron’s this week:

“It has taken $2.40 in fresh federal borrowing to generate $1.00 in U.S. GDP.”

[Over the past four quarters, U.S. nominal GDP was up $564 billion while federal debt rose $1.36 trillion.]

--You know how 200,000 Citigroup credit card customers had their accounts hacked? This week we learned it was really 360,000. But no worries, Citi assures us. The hackers didn’t get social security numbers, dates of birth, card expiration dates or card security codes. But they did get everything else; names, addresses…that kind of stuff.

The real problem for Citi was how easily the hackers got their treasure trove by going in the front door, so to speak. Right through the home page of the Citi consumer site.

--The International Monetary Fund came clean to its staff and board the other day that it had been the victim of a serious and sophisticated cyberattack. One official told the New York Times, “This was a major breach.” Further details have not been forthcoming but obviously the IMF site contains market-moving information.

--Turkish police arrested 32 people tied to the international hackers’ group Anonymous, which has been attacking Turkish government sites ahead of a crackdown on certain Internet addresses the government doesn’t deem appropriate.

--Home sales in California fell 13.3% in May vs. a year ago when tax incentives were still in play. The median price of $249,000 was down 10.4% from May 2010 and unchanged from April, DataQuick said. But the $249,000 is actually 12.7% above the April 2009 bottom.

--Online music service Pandora Media debuted on the New York Stock Exchange on Wednesday, with the offering priced at $16 a share, or nearly double initial estimates of $7 to $9. The stock then soared to $26 before closing at $17.40 the first day. On Thursday, day two, it closed at $13.30, which is basically where it finished the week, a huge disappointment and an awful job by the underwriters.

--As the New York Post put it, “Research in Motion has gone from CrackBerry to CrackedBerry,” as RIM reported slumping profits after the close on Thursday, slashed its forecast for the second quarter, pushed back the launch of its next-generation phone, and announced it will begin a series of layoffs (though wouldn’t reveal the extent of them).  So the shares fell a whopping $7.60 on Friday to just $27.75. In February, the stock was at $70.

BlackBerry has fallen to third in the U.S. smartphone market, 25.7% of users to Apple’s 26% and Google Android’s 36.4%.

--Taiwanese PC maker Acer Inc., the world’s No. 2, lowered its full-year forecast for notebook and tablet PC shipments in the face of not just increased competition from Apple’s iPad, but also weak conditions in Europe.

--The Social Security Administration’s inspector general, Patrick P. O’Carroll Jr., said the SSA made $6.5 billion in overpayments to people not entitled to receive them in 2009. But O’Carroll added that throughout the federal government, improper payments totaled $125 billion last year, up from $110 billion in 2009, including through the Departments of Health and Human Services, and Labor. This is unfathomable.

--Inflation Watch: One-day passes for Disney theme parks in Anaheim increased 5.3%, from $76 to $80. A three-day pass jumped 8.7%.

--Figures from the Transportation Department reveal that the nation’s largest airlines collected $3.4 billion in fees charged to passengers for checking luggage last year, a 24% increase over 2009. The airlines also took in $2.3 billion in fees charged to passengers to change reservations, down about 3% from the previous year. Delta Air lines collected a whopping $952 million in baggage fees.

Ergo, if you think in your lifetime these charges will ever go away, think again. [But Go Southwest!]

--47% said their household couldn’t come up with $2,000 in 30 days without selling some possessions. [TIME / National Bureau of Economic Research]

--Capital One Financial Corp. is acquiring ING’s U.S. online banking unit for $9 billion in cash and stock. ING is the largest direct bank – a bank without a network of branches – in the country after being launched in 2000. Capital One, best known for credit cards, has 1,000 branches.

--Shares in J.C. Penney surged on word it had hired Apple retail head Ron Johnson as its chief executive. Johnson, a two-time Pro Bowler with the New York Giants, rushed for 1,000 yards in both 1970 and 1972. He played his collegiate ball at Michigan.

Oops…I was just informed this is a different Ron Johnson. Never mind…

“Back in 2009, when out-of-sight Wall Street bonuses became public enemy No. 1, bankers dealt with the problem in their own ingenious way: They significantly raised salaries and deferred bonus payouts.

“Those moves helped defuse (or, at least, confuse) the mob, but now they’re coming back to bite the banks. That’s because the salary increases have left the banks with elevated fixed costs at a time of stagnant revenues. The situation, JPMorgan Chase & Co. analyst Kian Abouhossein pointed out in a report Tuesday, is a formula for ‘material staff cuts.’ Credit Suisse and UBS appear to have the highest fixed compensation costs.” [81% at CS]

[Separately, a study by the Financial Times found that bank chiefs’ “average pay in the U.S. and Europe leapt 36% last year to $9.7 million…despite variable performance across the sector.” Of course this was off the ’09 lows…but still…]

--Goldman Sachs, JPMorgan Chase, and commodities titan Glencore International (the mysterious shop that recently went public), are being investigated by the London Metal Exchange after being accused by users like Coca-Cola of manipulating the market for products such as aluminum by restricting the amount of metal they release to customers, thus inflating prices, as reported by the Wall Street Journal. I’m shocked…shocked!

--From Mark Maremont and Tom McGinty / Wall Street Journal

“Computer-storage giant EMC Corp. has a fleet of five jets that it says uses for business travel across the globe. In addition, CEO Joseph Tucci is allowed ‘limited’ personal use of the aircraft.

“Federal Aviation Administration flight records for EMC’s planes suggest such personal trips may be more frequent. Over the four years ended last December, EMC jets landed a total of 393 times at three resort locations where Mr. Tucci has vacation homes: Cape Cod, Mass.; the New Jersey shore; and the Florida Keys….

“Fleet-wide, 31% of EMC flights were to or from resorts.”

A Journal review of the records of other publicly traded corporations found that the 30% figure, the percentage of flights that was deemed personal, was par for the course. Sometimes it was more than 50%. The real issue is how this all is being reported since there are strict IRS rules to follow.

--Charles Krauthammer / Washington Post…on the Boeing / NLRB debate.

“Boeing has just completed a production facility in South Carolina for its new 787 Dreamliner. The National Labor Relations Board, stacked with Democrats – including one former union lawyer considered so partisan that he required a recess appointment after the Senate refused to confirm him – is trying to get the plant declared illegal. Why? Because by choosing right-to-work South Carolina, Boeing is accused of retaliating against its unionized Washington state workers for previous strikes.

“In fact, Boeing has increased unionized employment by more than 2,000 at its Puget Sound plant. Moreover, the idea that a company in a unionized state can thus be prohibited from expanding into right-to-work states by a partisan regulatory body is quite insane. It violates the fundamental principle in a free-market economy that companies can move and build in response to market conditions, rather than administrative fiat. It jeopardizes the economic recovery, not only targeting America’s single largest exporter in its attempt to compete with Airbus for a huge global market, but also threatening any other company that might think of expanding in any way displeasing to unions and their NLRB patrons.

“Obama has been utterly silent in the Boeing affair.   Which is understood by all as tacit approval. He’s facing reelection next year. And Democrats need unions.”

--According to the London Times, and an Inside Facebook blog, “Facebook lost about 6 million users in the U.S. last month, falling from 155.2 million to 149.4 million. In Canada the drop was about 1.5 million users; and Britain, Russia and Norway all had declines of more than 100,000 users. The figures were obtained through an analysis of Facebook’s online advertising tools.”

But overall, Facebook is expanding, with strong growth in emerging markets such as Brazil, India and Mexico. Nonetheless the trend here is notable, particularly in light of the coming Facebook IPO.

--We note the passing of Alan Haberman, 81, the creator of the bar code. As reported by Margalit Fox of the New York Times:

“On a summer morning in 1974, a man in Ohio bought a package of chewing gum and the whole world changed.

“At 8:01 a.m. on June 26 of that year, a 10-pack of Wrigley’s Juicy Fruit gum slid down a conveyor belt and past an optical scanner. The scanner beeped, and the cash register understood, faithfully ringing up 67 cents.

“That purchase, at a Marsh Supermarket in Troy, Ohio, was the first anywhere to be rung up using a bar code.”

Haberman was the supermarket executive who led an industry committee that chose the bar code over other contenders. The technology was actually invented in the 1940s by two graduate students at Drexel in Philadelphia, Norman Joseph Woodland and Bernard Silver, but the scanning technology was too primitive. Once it caught up with the idea, though, it was Haberman who pushed it through to fruition.

Foreign Affairs

Libya: The White House and Congress are battling over the definition of the War Powers Act as it applies to the effort to remove Libyan leader Moammar Gaddafi. The Obama administration contends U.S. involvement is limited to a support role. Many in Congress, though, including some Democrats, have reminded the president that Sunday marks the 90th day of the military engagement, the absolute limit allowed without congressional approval under the 1973 law. Meanwhile, the conflict has cost $716 million thus far…and counting. Republican Sen. Bob Corker (R-Tenn.) said of the administration’s defense of its actions:

“What they’ve done is totally drain the reservoir of goodwill by virtue of the way they’re handling this.”

As for the diplomatic effort to force Gaddafi to leave, Russia’s special envoy was unsuccessful in getting the dictator to see the light, while rebels said they wouldn’t negotiate until Gaddafi leaves. Gaddafi himself says he’d cede all power, but only to his son.

Syria: At week’s end, the Syrian army was putting down the unrest in the north as a total of anywhere from 1,100 to 1,600 have died in the violence of the past three months. But as I go to post, protests are spreading again elsewhere.

In an attempt to placate the opposition, a close cousin of President Bashar al-Assad, Rami Makhlouf, announced he would give up his business interests and donate his profits to charity. He is said to be the most powerful businessman in Syria and has been the subject of corruption allegations, with protesters specifically targeting his interests. So it’s a sign the regime finds itself under increasing pressure.

Assad also has to deal with the fact that many in the military are defecting, and refusing to fire on the people. It’s gotten to the point where Assad’s goons are firing on the soldiers to force them to fire on demonstrators. Snipers have been positioned to shoot down on soldiers not following orders.

At least 10,000 Syrians have fled into Turkey, or in the border area, to escape the violence at Jisr-al Shughur, where a mutiny led to the reported deaths of 120 security forces.

Separately, Russia and China didn’t feel it necessary to show up at a UN Security Council session convened to draft a resolution condemning Syria’s crackdown on pro-democracy protesters. Said one diplomat, “It’s a pretty clear message.”

And the “Gay Girl in Damascus” blogger turned out to be an American student at the Univ. of Edinburgh, Tom MacMaster. MacMaster said he created the character of “Amina Arraf” following repeated failed attempts to write fiction.

Pakistan: Relations between Islamabad and Washington couldn’t be worse, witness the arrest of CIA informants who helped track down Osama bin Laden. Pakistani Army Chief of Staff Gen. Kayani is also under pressure from within over his cooperation with the U.S., which he has been trying to pull back from (per previous notes on my part) to save his skin.

Pakistan continues to suffer from humiliation over the bin Laden raid, both the military and the ISI, the intelligence service, and further fueling the distrust are the ongoing drone attacks that the government has said must stop. As for the U.S. Congress, some aid is being withheld.

“Recent extremist strikes on several armed forces sites in Pakistan indicate the nation might not be capable of protecting its nuclear weapons and related assets from a direct attack, a British analyst wrote in a journal article this month.

“ ‘A frontal assault on nuclear weapons storage facilities, which are the most robustly defended elements of Pakistan’s nuclear weapons cycle, is no longer an implausible event,” noted Shaun Gregory, director of the Pakistan Security Research Unit at the Univ. of Bradford in the U.K.

“As the number of nuclear weapons facilities grows, and the number of those with access to nuclear weapons or related components rises, the complex challenge of assuring the security of nuclear weapons and nuclear weapons components will become ever more difficult,” said Gregory.

With 70,000 individuals in Pakistan being either directly or indirectly involved in manufacturing, holding, sustaining or fielding the country’s nuclear weapons, “Some may be willing to collude in various ways with terrorists.” That’s a given.

Afghanistan: Peggy Noonan / Wall Street Journal

“A flurry of polls this week show the public is on the side of the new sobriety. CNN had 62% now opposing the war in Afghanistan, just 36% in favor. CBS News found 64% want the number of U.S. troops decreased, and 51% said the U.S. shouldn’t be in Afghanistan at all. A Washington Post/ABC News poll said 54% of respondents feel the war has not been worth fighting, and 73% said the U.S. should withdraw combat forces this summer. A Rasmussen survey found a combined 56% who said the U.S. should withdraw from Afghanistan immediately or on a firm timetable, up four points since March.

“What has been behind the decline in support for the war? The obvious. It has gone on almost 10 years. It is America’s longest war. We have been there longer than the Soviets were. No one in a position of authority credibly or coherently explains the path to victory, or even what victory would look like. Are we losing young men so that a year from now we can commence 10 years of peace talks with the Taliban? Toward what end? What will we be asking for, that they be nice?

“America is now full of veterans of Afghanistan, and while many will agree with the original mission, or the current mission as they understand it, it is certain that at the American dinner table the cost, complexity and confusion of the effort are now being discussed….

“But there’s something else, probably the most important fact of all.

“We are as a nation, on paper, almost bankrupt. Or bankrupt, depending on how you judge. Among the Republican candidates for president, there is a growing awareness that America does not have a foreign policy unless we have the money to pay for it. We do not have an army unless we can fund it. We do not have diplomacy and a diplomatic structure without money….We do not go forward and impress the nations with our values, might and leadership without money.

“We cannot lead, or even be an example, without money. And we are out of it….If we want to be safe in the world, we must be sturdy at home.

“That is why those inclined to take an unfriendly or competitive view toward us increasingly see us as a paper tiger. Because they hold our paper.

“The problem with Afghanistan, and Iraq for that matter, is not only that after 10 years our efforts have turned out to be – polite word – inconclusive. We are spending money we don’t have for aims we cannot even articulate.”

And on the ground the United States is increasingly dealing with a huge danger, that being the infiltration of Afghan troops, mostly by the Taliban; what the Pentagon is calling a “rapidly growing systemic threat” that undermines the war effort. A classified study says there is a “crisis of trust” between Afghan forces and American soldiers.

Afghan troops have killed at least 57 coalition troops since 2007. [Wall Street Journal]

The U.S. has a concerted counterintelligence effort underway to identify the infiltrators but this seems like a virtually impossible task.

As to the battle between the Pentagon and the White House on the size of any troop withdrawals, the White House wanting a significant one, the Pentagon wanting to hold off until the end of the year (or well into 2012), President Obama will make his decision shortly.

Lebanon: Prime Minister Najib Mikati finally formed a new government Monday dominated by the Hizbullah-led March 8 alliance, thus ending a five month deadlock. But now Hizbullah and its allies have 18 of the 30 Cabinet seats, though Mikati assured anyone who would listen that this “does not mean that the country will join the radical camp in terms of its relations with the international community.” For its part, Washington said “We’ll judge it by its actions,” as a State Department spokesman put it.

Of course the other big issue remains the Special Tribunal for Lebanon that with the formation of a government is now finally expected to announce indictments in the 2005 assassination of Rafik Hariri. It is widely assumed members of Hizbullah will be accused. The March 14 coalition, led by Rafik’s son, Saad, the former prime minister, strongly supports the STL, while Hizbullah has called it nothing more than “an American-Israeli project.” Hizbullah has called on an ending to funding of the tribunal.

But as Michael Young notes in the Daily Star, it doesn’t help matters today that Saad Hariri has been absent for weeks (“reportedly because of death threats”). Saad, in Young’s eyes, should have been part of a government of national unity, that, “no matter how mediocre, would have been better in carrying Lebanon through this period of transformation in Syria, and in managing the aftermath. We missed that opportunity and now we have a government that is infinitely worse, one that may not vanish as soon as we think.”

Israel: Jordan’s King Abdullah II was in Washington this week and once again sounded his customary doom and gloom, not that he is wrong, when it comes to the Israeli-Palestinian peace process. The Arab Spring presented a window of opportunity for a deal, but the window will soon close, he warned. For its part, the White House and EU will be pressing Israel to restart negotiations quickly over fear of the consequences of the Palestinians announcing their statehood before the U.N. General Assembly in New York in September (an event I’ve warned could be explosive, literally).

But then Hamas didn’t help its cause when it rejected rival Fatah’s nominee for prime minister in the new caretaker government, Salam Fayyad, who has long been viewed as a relative “moderate.”

[Back to King Abdullah II, he bowed to demands for elected Cabinets in Jordan but gave no timetable, saying sudden change could lead to “chaos and unrest.” Today, Abdullah has the power to appoint all prime ministers and Cabinets. Earlier, Abdullah had lifted all restrictions on public assembly, allowing protesters to demonstrate freely.]

Iran: Suzanne Maloney and Ray Takeyh had the following commentary in an op-ed in the New York Times:

“The Iranian president, Mahmoud Ahmadinejad, is being sidelined by religious fundamentalists, and it’s bad news for American officials seeking to halt Iran’s nuclear program.

“The same Iranian leader who dabbled in Holocaust denial and messianic fantasies was, paradoxically, also the theocracy’s most ardent advocate of direct nuclear negotiations with Washington. As Mr. Ahmadinejad falls out of favor with Iran’s hard-line religious leaders, the prospect of a nuclear deal between Tehran and Washington is diminishing.

“Once the darling of clerical conservatives, who only two years ago rigged the system to ensure his re-election, Mr. Ahmadinejad is now clinging to his post amid furious recriminations from his erstwhile allies. His fall from grace has been fierce and fast.”

Meanwhile, in an encouraging sign out of Egypt, Foreign Minister Nabil Elaraby told Iran not to meddle in the internal affairs of Gulf Arab states, saying that Cairo considers the security of fellow Arab countries “a red line,” or no-go area, as reported by the Jerusalem Post.

“Egypt does not accept the intervention by any state in the internal affairs of another,” Elaraby said.

The Sunday Times of London also reported that Israeli Prime Minister Benjamin Netanyahu was ready to strike Iran’s nuclear facilities last year but he “met robust opposition from the army and from Mossad…which warned that it could lead to an all-out Middle East war.”

Egypt: The Muslim Brotherhood announced it would unite with the oldest liberal party, Wafd, to run on one candidate list in the upcoming September parliamentary elections. The two have had a longstanding rivalry but everyone agrees the new coalition will dominate the vote and ensure the Brotherhood gets at least a one-third share of the seats.

Turkey: Prime Minister Recep Tayyip Erdogan’s Justice and Development Party, or AKP, won 50% of the vote, and 325 seats in the 550-member parliament, thus leaving him five short of the 330 needed to call a referendum on a new constitution that Erdogan says is his top post-election priority as he settles in for a third term.

“We’ll go to the opposition and we’ll seek consultation and consensus” to draft a constitution that will satisfy all sections of the population, Erdogan said in his victory speech. “We will bring democracy to an advanced level, widening rights and freedoms.”

But critics fear Erdogan will instead use his victory to cement power and limit freedoms. Opponents are concerned he is imposing a conservative social agenda.

“Mr. Erdogan wants a French-style republic with a strong presidency and himself as the president. But his often divisive rhetoric and his attacks on the media and opponents had stoked fears of creeping authoritarianism….

“Turkey needs a legitimate overhaul of its political system to become a true liberal democracy. Its judiciary and military are still holding too much power themselves, and minority rights and checks and balances are missing in a flawed structure that dates to modern Turkey’s founding in 1923. But any reform needs to be implemented with a national consensus, with clear checks on the power of any one man, party or institution.

“The AKP’s capable stewardship of Turkey’s economy explains its run of electoral success…If Mr. Erdogan stays true to his word last night and smoothes his intolerant edges, Turkey could become a true model for liberty in the Middle East.”

Somalia: I never thought I’d say this, but congratulations to the Somalis for killing al Qaeda’s leader in East Africa and the mastermind of the American Embassy bombings in Kenya and Tanzania, Fazul Abdullah Mohammed, who was blown away in a shootout at a security checkpoint in Mogadishu. It appears Mohammed unintentionally stumbled upon it and it was sayonara, dirtball.

Mohammed had a $5 million bounty on his head from the U.S. government so there should be some very happy Somali soldiers sharing in the cash. Don’t spend it all at once, guys! [Financial advice for Somali soldiers…another free feature of StocksandNews.]

If nothing else, this should be a huge shot of confidence for the Good Guys in Somalia. I’d say Mohammed was more important to his cause in East Africa than bin Laden was in his final days.

Yemen: Al Qaeda-linked militants have been attacking various towns and villages, while Yemeni tribes seek to fill the power vacuum elsewhere in the country. From my readings, al Qaeda has a foothold, at least, in three towns/cities. Not good, sports fans. Where the above-noted killing of Mohammed comes into play here is the U.S. was always concerned al Qaeda would hook up with his al-Shabab terror network in Somalia, the two nations being a little boat ride away.

Iraq: Remember this place? Iraq’s citizens are reportedly stockpiling weapons, many of them AK-47s, as they await the aftermath of the withdrawal of U.S. forces, whose stated December departure is still up in the air as parliament won’t decide on whether to request some troops stay until probably the fall. [Extensive summer vacations, you see.] The Sunnis are worried about the return of Moqtada al-Sadr and the reemergence of his Mahdi Army, while the Shia are concerned about the potential return of some of the Baathists.

Meanwhile, as Paul Richter of the Los Angeles Times reports, “(Despite) years of audit and investigations (into the whereabouts of some $12 billion in cash that the U.S. flooded Iraq with in those first post-invasion days), U.S. Defense officials still cannot say what happened to $6.6 billion of it.”

“Theft of such a staggering sum might seem unlikely, but U.S. officials aren’t ruling it out. Some U.S. contractors were accused of siphoning off tens of millions in kickbacks and graft during the post-invasion period, especially in its chaotic early days. But Iraqi officials were viewed as prime offenders.”

China: A lot is going on here, but the most significant event, longer term, was totally unintentional; the inadvertent release of a People’s Bank of China report that was mistakenly uploaded to an official website after winning a prize for its quality of research.

And what did it contain? The story that more than 10,000 corrupt Chinese officials may have embezzled well in excess of $100 billion over a 15-year period. The citizenry has always from time to time protested local corruption, but this is of a massive scale and the report finds its way into the public domain ahead of the Communist Party’s 90th anniversary on July 1.

The encouraging part is that the report was even done by the central bank’s money-laundering analysts.

As to the current protests in the country, it’s easy for outsiders to exaggerate the scope, but most of the time these demonstrations should be placed in their proper context; as in China is a big place. It would be like a night of disturbances in Cincinnati or Oakland. The rest of the U.S. would hardly quiver at such an event.

However, I think I have a good handle on the place and if I start to get concerned, you’ll know. It’s also why I believe the corruption report is important. It supplies some with more ammunition.

--China staged three days of military drills in the heavily disputed South China Sea. The waters are being argued over by Taiwan, the Philippines, and Vietnam. Vietnam held a live-fire drill off its central coast, which is believed to be a first for them. And Philippine President Benigno Aquino said he would rename the South China Sea the “West Philippine Sea” as tensions between these two ratcheted up. Though I would respectfully suggest the Philippines cool it. You’d be crushed, my friends.

--Yes, the drought is history in the Yangtze River basin as the rainy season has gotten off to a terrific start, unless your entire village is being washed away and you’re clinging to a tree for dear life. The government raised its disaster alert to the highest level in seven provinces (though not Fujian, he wrote, selfishly, given his considerable holding there).

--An indication of the inflation issue faced in China is pork, prices of which have risen 90% in one year.

North Korea: South Korea’s defense minister asserted on Monday that the North likely has the ability to build a compact nuclear warhead, suggesting it could place the weapon on a missile. While Kim Kwan-jin offered no specifics, he contended Pyongyang has had adequate time to master the technology. Pyongyang is suspected to be readying a third nuclear test. Kim added that “The possibility of a surprise provocation with various means and methods is steadily increasing while (the North is) pressuring us with rhetorical threats.”

Russia: President Dmitry Medvedev warned on Friday that Russia faces a period of stagnation and must avoid one-man rule in a speech that appears to have been a direct shot at Vladimir Putin. Medvedev also reiterated his stance that state officials should leave the boards of state companies by the fall, and that Russia must reduce its reliance on high energy prices. He added that current privatization plans are far too modest.

And in the case of former Yukos tycoon Mikhail Khodorkovsky, currently serving a 13-year sentence on bogus charges, the rift between Medvedev and Putin continues to grow. Medvedev believes Khodorkovsky poses no threat, while Putin wants to see him continue to rot in jail, at least until the next election is over.

But then this week, Khodorkovsky was suddenly moved from a Moscow prison to somewhere near the Finnish border, which is hardly a good sign.

Canada: I have praised this nation to no end over the years, but to state the obvious, the riot in Vancouver following the home team Canucks’ loss to the Boston Bruins in Game 7 of the Stanley Cup Finals (Boston’s first title since 1972), was both a travesty and embarrassing. Those rampaging kids should be fed to a pod of killer whales, not to be too insensitive about it.

Ian Mulgrew, a columnist for the Vancouver Sun, wrote: “We were supposed to wake today hung over from a Stanley Cup victory. Instead the city opens its bloodshot eyes to the much sadder reality of a tarnished reputation.”

Damage was in the $millions. This was also the face of the new anarchism that can easily infect others should another Greece-initiated global meltdown occur.

Mexico: This would get more play in a normal week but with far bigger stories out there it is easy to ignore the fact that 33 people were killed in the span of 24 hours as a result of gang warfare in Mexico’s industrial capital, Monterrey. Two of the victims were bodyguards of the governor of the state of Nuevo Leon (where Monterrey is located), with a threatening note found next to the bodies.

The significance is that U.S. and other international corporations have been fleeing Monterrey. There was a time when everyone had a plant there. Today, you’d have to be nuts to consider locating your facilities in this rapidly developing hellhole. The workers didn’t ask for this, but now they themselves are increasingly attacked as they go to and from work.

Random Musings

--Ayman al-Zawahiri assumed the controls of Al Qaeda Inc. It took six weeks to elevate the long-time No. 2 because communicating from caves, especially when you’re a terrorist on the Most Wanted List, isn’t real easy, assuming Zawahiri and the other al Qaeda lieutenants aren’t living in the relative comfort that bin Laden was. Hopefully the guy is taken out in short order, but I’m a little uncomfortable with those who are discounting him.

--In a poll by Fox News, when asked which they would rather cut to balance the federal budget – Social Security and Medicare, or national security and defense – more Americans said they would cut defense…54% to 22%.

--Republican Gov. Chris Christie and New Jersey Democratic state legislators announced an agreement to roll back pension and health benefits for public employees. Incredibly, for this kind of thing, both the Democratic Senate President and Assembly Speaker backed Christie and bucked their own party, angering public employee unions. This is huge…not just for the state but for Christie’s future as well. [But he should not run for president in 2012.] The reform plan still has to be voted on by both houses, controlled by Democrats.

The legislation would force public employees to pay more for their pensions and health benefits and push back their retirement age. Of course the teachers’ union isn’t pleased, among others. Union president Barbara Keshishian said the following after launching an attack ad.

“If the legislation is approved by the committee, it will be proof positive that the interests of the party bosses are more important to this legislature than the interests of the state’s taxpayers.”

An incredibly stupid statement, most of you will agree. We can’t afford some of your benefits, Barbara!

“The NJEA is fiddling with our teachers’ money while Rome burns. This $1 million attack ad won’t do a thing to save the pensions of hundreds of thousands of teachers and retirees from collapse, or give property taxpayers any relief from the ever-increasing weight of health benefits that hangs around their necks.” [Star-Ledger]

“No sooner did New Jersey Gov. Chris Christie and Democratic legislative leaders sign a landmark pension-reform deal than unionized government employees took to the streets of Trenton yesterday to block traffic.

“Communications Workers Vice President Christopher Shelton* huffed: ‘We have Adolf Christie…trying to make New Jersey Nazi Germany.’

“No wonder government-sector unions are losing the battle for public opinion.”

*Courtesy of the Star-Ledger, here are Shelton’s fuller remarks.

“Welcome to Nazi Germany. The first thing that the Nazis and Adolf Hitler did was go after the unions.”

Referring to Democratic leaders Stephen Sweeney and Assembly Speaker Sheila Oliver, Shelton called them “Adolf Christie’s generals.”

“Any politician who stands up against collective bargaining, in this state or any other, is not a Democrat. They’re Nazis, goddamn it.”

At the rally, Democratic State Sen. Ray Lesniak (who belongs to my golf club, though we don’t really know each other), took to the microphone immediately after Shelton.

“I’m here to support the workers,” Lesniak said. “I’m also here to denounce the comparisons between Governor Christie and Adolf Hitler, and Steve Sweeney and the Nazis.”

--New York Democratic Congressman Anthony Weiner was forced to resign amidst his sexting scandal. As the late Howard Cosell would have proclaimed, “Down Goes Weiner! Down Goes Weiner!” And that’s all I have to say on this topic, except that with New York State slated to lose two House seats as a result of the 2010 census, most believe Weiner’s district is toast and will be rejiggered to benefit Democratic incumbents in adjoining districts.

--I did not watch a second of Monday’s Republican debate since the Mets were on.   I’ll get more than my fill of Republican politics out in Iowa in August and I’m sure I’ll run into pollster Frank Luntz at the hotel bar one evening, as I did four years ago. He’s a chatty sort.

But now with Michelle Bachmann entering the race, I’m kind of fired up to catch one of her appearances when I’m in the state. That’s what going to Iowa, or New Hampshire (as I did before the 2004 Democratic primary) is all about.   Seeing our “leaders” (cough cough) up close and personal in small settings. I saw Joe Biden in Iowa four years ago, just about 20 of us at the State Fair, and I’m not embarrassed to say I thought he was terrific. [At least the presentation was…and it was focused on protecting our troops in Iraq and Afghanistan so not polarizing.]

Anyway, the latest NBC/Wall Street Journal poll of Republican voters has Mitt Romney at 30%, up from 21% last month. No one else is close, though I would suspect Bachmann moves up nicely with the next survey that didn’t include the impact of her solid performance on Monday night. The big loser this past week was Tim Pawlenty. Bachmann will outshine him in Iowa and Pawlenty needs to win the state to continue on. I suspect he will drop out before the primary. His chances won’t be helped when Jon Huntsman and Rick Perry enter the race, as now seems a certainty.

As for President Obama, he leads Romney 49-43 in the NBC/Journal poll, and tops Pawlenty 50-37. Obama’s overall approval rating is at a putrid 49%.

--TIME’s political director Mark Halperin on “What phrase best describes Mitt Romney’s strategy?”

“Playing possum. Overexposure is the normal mode for someone who wants to beat an incumbent President, but Romney has lain low for months. Behind the scenes, he has traveled widely, meeting with potential supporters, collecting campaign cash and only rarely appearing before cameras. Romney’s aides believe that keeping him out of the line of fire from the left and right will allow him to enter 2012 as he entered 2011 – as the unquestioned front runner for the nomination.”

--I am patting myself on the back over the Sarah Palin e-mails. Notice how last time I didn’t bring the topic up. That’s because earlier I gave my word that I wouldn’t because I thought the manner in which they were released was wrong. As it turns out there was nothing there. But if you think I now would change my opinion about Palin, sorry. First and foremost, if you wanted to forgive her for her unbelievable gaffes, so be it. But the real reason for dismissing the woman is that she quit as governor! Quit!!! Case closed.

--I recognize many of you hard core Republicans (most of the time I’m soft core, always yearning for a viable third party) are fans of anti-tax guru Grover Norquist. I personally can’t stand the guy. Norquist, for those of you not familiar with this ideologue, considers the elimination of a tax break as a tax increase. Ergo, eliminating the ethanol tax credit is a tax hike. Oklahoma Republican Senator Tom Coburn, hard core and one of the few senators worthy of respect, is fighting Norquist on this. To be continued.

--In the latest National Assessment of Educational Progress, called the Nation’s Report Card, when it comes to American history, just 13% of high school seniors showed a solid grasp of it. [Only 22% of fourth-grade students and 18% of eighth-graders demonstrated proficiency.]

Some education experts say an emphasis on reading and math as a result of the federal No Child Left Behind law is leading to the lousy performance in history and science.

During the Korean War, United Nations forces made up largely of troops from the United States and South Korea fought against troops from North Korea and:

A. the Soviet Union
B. Japan
C. China
D. Vietnam

--TIME magazine interviewed author/historian David McCullough.

Q: We often can’t understand how people in the past could have owned slaves or not educated girls. What do you think people will wonder about us?

McCullough: How we could have spent so much time watching TV.

--StocksandNews Director of Sunspots, Mark R., first warned me about a topic that hit the press this week around the world in various publications. I’ll pick one…a story by Stephen Adams in the Irish Independent.

“The Earth could enter a new ‘Little Ice Age’ in the coming years due to low solar activity, astronomers believe.

“Sunspot activity, which follows an 11-year cycle, is due to peak in 2013 after which it will start to wane slightly.

“But astronomers think the next upswing will be less intensive than normal, or could fail to happen at all.

“That could affect weather on Earth because low solar activity has been linked to low global temperatures in the past.

“Between 1645 and 1715 almost no sunspots were observed, a solar period which came to be called the Maunder Minimum.”

“During those decades Europe suffered frequent unusually harsh winters, and the time was later termed the Little Ice Age.”

We are so doomed. I’m going to head out right after I post this column and start buying up all the salt for de-icing…try and pull a Hunt Brothers and corner the salt market.

--Water, water everywhere. The spring snowpack in the Sierras was the fifth-largest in the last 60 years and, as reported by the Los Angeles Times, California’s two largest reservoirs are nearly full: Lake Shasta and Lake Oroville. Three years ago, in the midst of a drought, Oroville was half empty.

--Lastly, recently the White House announced that on July 12, the second living Medal of Honor for service in the wars in Iraq and Afghanistan will be handed to Army Ranger Sgt. 1st Class Leroy Arthur Petry. He joins the other living recipient, Staff Sgt. Salvatore Giunta.

It’s important to know these names, especially in light of the above story on how our kids don’t know American history. So many of the heroes of World War II, for example, became household names and this was for the good of all…reminders of the human spirit, love of your fellow man, and, lastly, love of country.

So I’m going to do my part to keep the names from Iraq and Afghanistan out front. Every American student should know them.

The seven Medals of Honor that were awarded posthumously:

Spc. Ross McGinnis (Iraq)
Sgt. 1st Class Paul Smith (Iraq)
Navy Petty Officer 2nd Class Michael Monsoor (Iraq)
Marine Cpl. Jason Dunham (Iraq)
Staff Sgt. Robert Miller (Afghanistan)
Sgt. 1st Class Jared Monti (Afghanistan)
Navy Lt. Michael Murphy (Afghanistan)

I know I’m now quite familiar with their names and I believe I have written something on each of them either in this space or another column I do.

We honor them all…and pray for their families that they find peace and understand that their nation loves them.

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

Gold closed at $1539
Oil, $93.01

Returns for the week 6/13-6/17

Dow Jones +0.4% [12004]
S&P 500 +0.0% [1271]
S&P MidCap +0.1%
Russell 2000 +0.3%
Nasdaq -1.0% [2616]

Returns for the period 1/1/11-6/17/11

Dow Jones +3.7%
S&P 500 +1.1%
S&P MidCap +2.8%
Russell 2000 -0.2%
Nasdaq -1.4%

Bulls 37.0
Bears 26.0 [Source: Chartcraft / Investors Intelligence…readings rapidly becoming bullish if you’re a contrarian…which is how this is read. But it is just one of many indicators to look at, kids.]

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