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09/15/2012

For the week 9/10-9/14

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

As I watched the heart-breaking ceremony on Friday for the return of the bodies of the four Americans from the terror attack in Libya, it was a stark reminder of how those who ignore foreign policy do so at their own peril.

This has of course been a long-running theme of this column, but I summed it up rather well on 8/18/12, four weeks ago.

“Finally, the world is at an incredibly dangerous moment in history right now. The Middle East is on the verge of blowing sky high into a far wider spasm of violence than we’ve been witnessing in the likes of Syria….

“Plus it’s clear the lack of leadership in America today, from both sides of the political aisle, is on the verge of dragging us into the sewer.”

I have also continually warned, as I did again last week, that “China could opt for military action in one of the South China/East China Sea disputes” and the other day China briefly invaded Japan’s waters as part of the Senkaku/Diaoyu island affair (see below).

Philip Stephens / Financial Times

“Geopolitics (is never simple). The latest attacks on U.S. missions are a reminder that the scope of U.S. interests will demand it remains present more often than it is absent. Even as it seeks to loosen entanglements in the Middle East, its alliance with Israel and Iran’s nuclear ambitions promise to pull it back….

“But a world in which the U.S. abandons the role of convener and guarantor of international order in favor of that of selective superpower will transfer to allies and potential rivals alike responsibilities that they are reluctant to shoulder. The flip side of more competition will be increased instability and insecurity. The Pax Americana had its flaws, but its critics may well be among those who lament its passing.”

---

The European Central Bank got what it wanted this week when Germany’s highest court approved the European Stability Mechanism (ESM), which is to be the permanent bailout fund, but the court did two things. It said Germany’s exposure could only be 190 billion euro of the 500 billion in total, adding the ESM couldn’t be expanded beyond that without the approval of the German parliament, thus keeping an effective veto on the fund, and with this move you’re left with an ESM that doesn’t have the resources to deal with the potential bailouts of Spain and Italy.

It also needs to be noted that Germany’s high court is still conducting a full review of both the ESM and the Fiscal Pact, the mechanism agreed to in June that allows for a greater say in eurozone members’ budgetary processes. Plus the court’s president, Andreas Vosskuhle, said the court hadn’t decided on whether sovereign bond purchases on the secondary market by the ECB would infringe on the ESM as written. So that’s for December.

Meanwhile, Spain’s Prime Minister Mariano Rajoy is stalling for time until after Oct. 21 regional elections before requesting a bailout.

“Let’s see how the risk premium and financing spreads evolve going forward,” he said. “I don’t know if it’s necessary for Spain to ask (for a bailout).”

The initial response to the ECB’s bond-buying program (announced Sept. 6) and the German court ruling helped lower the yield on the Spanish 10-year bond to 5.60%, after touching 7.75% last July before ECB President Mario Draghi said he would do everything it takes to save the eurozone and the likes of Spain and Italy.

Only one thing. The bond-buying, whether from the ECB or ESM is only permanently in effect when Spain, for example, requests help, at which point Madrid has to deal with conditionality and losing some sovereignty. [By Friday’s close, the 10-year was back to 5.86% due to renewed uncertainty.]

Italy also doesn’t see a reason to seek aid because their rates have come way down after the ECB’s announcement of the preceding week and they had a successful 3-year debt auction the other day with the lowest 3-year yield, 2.75%, in two years and well below the 4.65% from the last auction July 13. But these gains could be ephemeral. Both Spain and Italy, after all, remain in deepening recessions.

So what of the actual firepower if the ESM is limited to 500 billion euro and there is about 200 billion euro left over from the European Financial Stability Facility, the first bailout mechanism, knowing that 100 billion is supposed to go to a preapproved bailout of Spain’s banks?

Some say the ESM will be leveraged by the ECB. But as Gavyn Davies observes in the Financial Times:

“There are some ironies in all this. By setting limits on the size of the ESM well below the potential calls on its resources, the German government has in effect forced the ECB to use its balance sheet to make the cross-border transfers which the political process has balked at. Although the ECB claims that it is not bailing out governments through monetization, which was the reason it originally declared proposals to leverage the ESM to be against the treaties, it has ended up doing almost exactly the same thing. It will now increase its balance sheet to buy government bonds, alongside the ESM’s activities. What is the difference between this and a leveraged ESM? Not much.

“And why is (German Chancellor Angela) Merkel supportive of the current plan, while she was against the leveraging of the ESM? The answer is political saleability…As a result, Germany has ended up with a plan which seems to combine some of its worst nightmares, including the monetization of deficits and the underwriting of its share of some very large ECB support operations, over which it has little or no control.”

Gideon Rachman / Financial Times

“The European Central Bank has fired its magic bullet. By promising ‘unlimited’ purchases of sovereign bonds, Mario Draghi, the ECB’s president, may have kept his pledge to do ‘whatever it takes’ to save the euro. But in rescuing the currency, Mr. Draghi’s magic bullet has badly wounded something even more important – democracy in Europe.

“As a result of the ECB’s actions, voters from Germany to Spain will increasingly find that crucial decisions about national economic policy can no longer be changed at the ballot box. In Germany, in particular, there is a growing realization that the ECB, an unelected body that prides itself on its independence from government, has just taken a decision that has profound implications for German taxpayers – but one that they cannot challenge or change….

“It is not just Germans who have reason to feel nervous about the democratic implications of what the ECB has done. To access the ECB’s unlimited firepower, the Spanish or Italians would have to agree to ‘enter a program’ – which sounds unpleasantly like the kind of condition that is laid down for the wayward drug addict. In reality, Madrid or Rome would have to accept International Monetary Fund-style supervision of their national budgets, directed from Brussels and Frankfurt. Such a humiliating and overt loss of national sovereignty, combined with a deep recession, would be the perfect formula to drive voters to the political extremes, as Greece is demonstrating.

“Of course, European idealists would argue that talk of a loss of national sovereignty is outmoded. The euro is a pan-European currency so its fate should be decided by European voters and institutions – not by individual nations.

“In practice, however, the eurozone crisis is increasingly polarizing European politics along national lines. In Italy and Spain there is now something close to a national position – uniting leftist and rightwing parties – against what are regarded as arrogant and self-centered German policies. In Germany, however, there is a left-right consensus that austerity in southern Europe must be the price of bailouts.

“So why has Mr. Draghi done it? The answer is that he faced a truly hideous dilemma. It was clear that the hundreds of billions of euros committed to European bailout funds have not been enough to ward off the threat of collapsing banks and sovereign defaults across the eurozone. A financial calamity could lead to another Depression, followed by political radicalization – and a threat to democracy that is much more direct and unsubtle than the menace posed by the ECB.

“By contrast, if Spanish and Italian borrowing costs come back under control – and their governments are prodded into making important structural economic reforms – then the ECB’s actions last week could yet be vindicated. Mr. Draghi would not only have saved the euro – he would have bought Europe the time it needs to return to growth.

“However, a great many things now have to go right simultaneously for Mr. Draghi’s plan to work. It is rather more likely that political and economic unhappiness will grow in Europe over the next year – as Germany slips into recession and Italy and Spain (not to speak of Greece) struggle with ever deeper austerity. If the euro were ever to break up, the direct financial cost to Germany and other creditor nations – and the resulting backlash – could also be much higher, because of the ECB’s bond-buying program. Certainly, for anyone with a sense of history, the sight of the German representative on the ECB being isolated and outvoted should be chilling. Since 1945, the central idea of the European project was never again to leave a powerful and aggrieved Germany isolated at the center of Europe. We are now dangerously close to that point.”

Financier George Soros told Germany it must lead the eurozone out of crisis or leave altogether.

“The ECB’s bond-buying program may save the euro, but it is also a step towards the permanent division of Europe into debtors and creditors. The fact that the debtor countries will have to submit to supervision by the troika [ECB, IMF and EU] but the creditors will not is in effect an asymmetric surrender of sovereignty; and the divergence in economic performance will be reinforced.”

Soros says the only solution is the pooling of eurozone debt. Failing that, the only thing to do would be for Germany and possibly other creditor nations to leave the euro, so that the remaining “countries’ real debt could devalue and their exports become more affordable.”

‘Whether Germany decides to lead or leave, either alternative would be better than to persist on the current course,” Soros said.

“When the European Union was created, it was the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the EU into something fundamentally different. The member countries are divided into two classes: creditors and debtors, with the creditors in charge. As the strongest creditor country, Germany is emerging as the hegemon.” [David Charter / London Times]

At the same time, a topic I have continually raised, the situation in Eastern Europe, has only worsened , with the new head of the European Bank for Reconstruction and Development calling for coordinated intervention in the region because the euro crisis was having a “frightening” impact on growth.

As reported by the London Times’ Sam Fleming:

“Sir Suma Chakrabarti…said that the region was being neglected in discussions over the euro crisis and that international financial institutions needed to develop an action plan to prevent flows of credit from drying up.”

Slovenia, for one, is close to seeking a bailout. 

Separately, you also have the issue of the single supervisor for the eurozone’s banks, part of the Fiscal Pact agreement reached in June. The proposal requires the approval of the European Union’s 27 member nations and would give the ECB power to withdraw banking licenses and require all 6,000 eurozone banks to join the system by Jan. 1, 2014, though the European Commission says it will seek approval for the mechanism by next January, a seemingly impossible timetable, especially given one important fact.

Germany will not allow the single supervisor to oversee all its banks. Instead, Germany wants the existing national supervisory system to remain in place and the new central banking regular would only be responsible for the 20 to 25 largest banks that Germany believes create the true systemic risk. Chancellor Merkel has made clear her country’s concern that it was unrealistic to expect the new central bank to be able to oversee all 6,000 banks effectively, as the plan proposes. “It is about quality and not quantity,” she says.

As for Greece, the troika reports Oct. 8 on whether it is doing everything necessary to warrant the next tranche of aid, 31.5 billion euro, from Greek Bailout II. Prime Minister Samaras has a very fragile coalition and the troika wants more civil service jobs eliminated. Samaras can only push so far. Strikes and demonstrations are to follow.

Lastly, Dutch voters voted in surprisingly large numbers for the two leading centrist parties in Wednesday’s parliamentary election, with current Liberal Prime Minister Mark Rutte’s party winning 41 seats in the 150-seat assembly and the center-left Labor Party picking up 39 seats. The far-right Freedom Party of Geert Wilders lost almost half of its seats, leaving it with just 13, while fellow euro-skeptic, Emile Roemer of the Socialist Party, saw his party’s support remain unchanged at 15.

Prime Minister Rutte has been a supporter of Angela Merkel in demanding Southern European countries implement austerity measures in return for bailout aid.

On to Washington and Wall Street

1/16/09…before the Obama inauguration…9/14/12 closing prices

Dow Jones…8281 (then)…13593 (now)… +64%
S&P 500…850…1465… +72%
Nasdaq…1529…3183… +108%
Oil…$35.94…$99.01… +175%
Gold…$843…$1772… +110%

Mr. Obama thus thanks the Fed for this gift, at least regarding the first three.

The Federal Reserve’s Open Market Committee met on Wednesday and Thursday and released some of the following after suggesting that “economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated.”

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.”

So….

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” [federalreserve.gov]

The Fed also said it would keep interest rates “exceptionally low” through mid-2015, extending its forecast from 2014.

Yippee! Kind of like those bank robbers in L.A. this week, who in their infinite wisdom thought tossing their newly gained loot out the window as they were pursued by 12 squad cars was a good thing.

Only this time the ones who continue to be held up are America’s savers, particularly the elderly, as well as those for whom filling up the gas tank is going to continue to be a huge financial burden, while the loot is being tossed to Wall Street and commodities traders.

The Fed and Chairman Ben Bernanke have thus launched an unprecedented, open-ended effort to spark a lasting and deeper recovery and for the first time are tying policy to developments in the economy; specifically Bernanke said the central bank wanted to see “ongoing sustained improvement in the labor market” before halting its asset purchases. “There is not a specific number we have in mind. But what we’ve seen in the last six months isn’t it.”

Bernanke spoke passionately about unemployment, currently at 8.1% officially, but more like 15% or 17% depending on your benchmark.

“The weak job market should concern every American,” he said. “High unemployment imposes hardship on millions of people and it entails a tremendous waste of human skills and talents.”

Editorial / Washington Post

“As so often in the past, our reaction to Mr. Bernanke is ‘yes, but.’ Yes: The economy is far from full employment and inflation is near the Fed’s 2 percent target. And yes: The Fed’s response blunted the Great Recession, so more easing might help more. But: Mortgage rates are already at all-time lows, so it’s unclear how much more home-buying and refinancing the Fed can stimulate; the longer zero-interest rates persist, the more it becomes apparent that they operate as a stealth tax on savers; the bigger the Fed’s balance sheet, the costlier it may be to reduce it when robust economic growth resumes.

“Finally, the biggest ‘but’ of all: In response to concerns about the impact of his policy on savers, Mr. Bernanke explained that ‘while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.’ His trade-off is defensible – but also an example of implicit value judgments, which an unelected Fed chairman is not necessarily better suited than anyone else to make….

“In short, Mr. Bernanke is buying time for the United States to restructure its finances, private and public, under relatively benign conditions. It’s up to Congress and the president to use that time wisely, despite the temptation to procrastinate. If they don’t, they may well be forced to deal with the budget in even tougher economic circumstances than they face now.”

Editorial / Wall Street Journal

“The irony is that, with this historic and open-ended easing, Mr. Bernanke is also tacitly admitting how lousy the Obama-Bernanke economy really is. For all the back-slapping by the Fed and the White House about how they’ve saved us from a Great Depression, four years later the Fed is acknowledging that the recovery is rotten, that job creation stinks, and that their policies haven’t helped the middle class. But, hey, it’s great for Wall Street.”

Early in the week, Moody’s Investors Service warned the issue of the fiscal cliff and budget negotiations during the 2013 congressional legislative session “will likely determine the direction of the U.S. government’s Aaa rating,” adding it must see stabilization followed by a downtrend in the ratio of federal debt. Moody’s also noted the debt limit is likely to be reached by the end of the year.

Editorial / Washington Post

“At their respective conventions over the past fortnight, warring Democrats and Republicans agreed on their determination to administer bitter medicine to the American people. ‘The work ahead will be hard,’ vowed Rep. Paul Ryan, the Republican vice-presidential nominee.  ‘I won’t pretend the path I’m offering is quick or easy,’ Mr. Obama chimed in.

“But as the dust settled over Tampa and Charlotte and we tried in vain to recall a single hard truth any of the candidates had told us, it occurred to us that maybe they were stressing their supposed courage to distract us from their true point of convergence: their mutual, utter and utterly depressing failure to grapple honestly with the nation’s biggest problem.

“That problem is the nation’s debt. We say so not because we think budgets matter more than anything else but because nothing else – nothing that really matters to people – will be unaffected if the nation does not get its long-term finances in order….

“It’s heartening, on one hand, to realize how fixable the problem is. Modest tax increases and challenging but manageable adjustments to Social Security and Medicare could buy a lot of time. Confidence would return, and along with it economic growth, which is what the country needs most of all. The United States is in a better position to handle the challenge than most developed countries. But that advantage will dissipate if the political system does not rise to the task.

“Mr. Romney professes to care deeply about the debt. But his tax cuts would cause more of it. He promises to counter them by limiting deductions and loopholes, but which ones and by how much? Mortgage interest? Charitable giving? He won’t say….

“Mr. Obama says that he cares, too. He will take ‘responsible steps to strengthen’ Social Security. Which steps? Raising the retirement age? Slowing cost-of-living adjustments? He doesn’t say.  He will save Medicare by controlling health-care costs. How, since he ruled out Mr. Ryan’s competition-driven plan? He won’t say….

“With less than two months before the election, is there any hope of hearing fiscal truth from either candidate? Can reporters press harder for answers, or can debate questioners? Given their shared reticence, Mr. Obama and Mr. Romney may have an inclination not to press each other for honest answers about their plans. Maybe such fudging is tactically sound.   The country, though, deserves better.”

And a few words on China. I address the political issues down below, but the government released a slew of economic data for August and much of it was not good, with industrial production up just 8.9%, a 3-year low, exports up only 2.9% from a year earlier (they had been running at up 24.5% as recently as August 2011), with exports to the EU falling 12.7%, while imports were surprisingly down 2.6%, power output up only 2.7%, and auto sales up a disappointing 11%.

There were a few positives, however, with retail sales up 13.2%, matching estimates, while new loan lending was at its highest level ever for an August, and the inflation number, up 2% on consumer prices (3.4% on food), while above July’s 1.8% is not worrisome compared to the 5.5% figures of last year.

Add it all up and most analysts have lowered their third-quarter GDP target to the 7.0-7.5% range vs. the second quarter’s 7.6%.

Premier Wen Jiabao, though, speaking at a World Economic Forum meeting, was confident China would deliver on the full-year target of 7.5% growth.

“China’s economic development trend is good, economic growth still remains within the target range set at the beginning of the year and the economy is stabilizing.”

But speaking at an Asia-Pacific Economic Cooperation summit, Chinese President Hu Jintao said, “Economic growth is facing notable downward pressure, some small and medium enterprises are facing a hard time and exporters are facing more difficulties. We have an arduous task of creating jobs for new entrants to the labor force.”

Back to Wen, his appearance was his final swansong on the international stage after a decade in power (along with President Hu) and Wen highlighted some of the milestones, including the creation of 100 million jobs and an increase in per capita GDP from about $1,000 to $5,432.

How much credit does he deserve? One academic adviser to the government told the Financial Times:

“His has been basically a caretaker government that was just lucky to inherit the best growth period in modern Chinese history but their stimulus package spent too much money on all the wrong things and the next government will probably face the consequences of their mistakes in the form of an economic crisis and large-scale social unrest.”

Good thing this adviser sought anonymity.

Street Bytes

--The Dow Jones and S&P 500 closed the week at their highest levels since December 2007, with the Dow up 2.1% to 13593 and the S&P up 1.9%. Nasdaq is at its highest levels since 2000, up another 1.5% to 3183 and up 22.2% for the year.

On Sept. 24, UnitedHealth Group is replacing Kraft Foods in the Dow Jones Industrial Average; Kraft spinning off its North American grocery business and thus becoming too small for the Dow 30.

[I am not ignoring my 2012 market prediction that the major averages would decline 10% and that there would be a Crash somewhere over the course of the year. I admit I’m going to be wrong on the former, though I still believe we’ll see the latter.]

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.25% 10-yr. 1.87% 30-yr. 3.09%

So much for keeping interest rates low, Chairman Bernanke. Yeah, short rates were unchanged, but the yield on the 10-year was up 20 basis points and the 30-year rise of 27 bps from the prior week was the biggest surge since Aug. 2009. Why? Inflation concerns, because of the Fed’s even easier monetary policy.

Producer prices for August were up a whopping 1.7%, but up just 0.2% ex-food and energy. Year over year the figures are 2.0% and 2.5% on core. Consumer prices in the month rose a solid 0.6%, but up just 0.1% core, while for the past 12 months the numbers are 1.7% and 1.9%, ex-food and energy.

PIMCO’s Bill Gross predicted long-term bond yields will rise and the yield curve will be “very steep” for “a very long time” with a period of reflation now underway. Investors should “continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.” [Gross has been recommending gold. I held onto my signet ring.]

--The Fed lowered its GDP forecast for 2012 from a June projection of 1.9 to 2.4% to 1.7 to 2.0%. It also said unemployment in 2013 would be in the 7.6 to 7.9% range.

--Industrial production in the U.S. for the month of August was down 1.2%, worse than expected, but a September reading on consumer sentiment came in far higher than projected. Retail sales for August were also up, 0.9%, but much of this increase was due to the amount spent on rising gasoline.

--The Pentagon did a first-ever study of China’s holdings of U.S. debt, some $1.164 trillion as of June, and concluded the prospect that it might “suddenly and significantly” withdraw funds doesn’t pose a national security threat.

According to the report obtained by Bloomberg News, “China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities.”

I agree that China wouldn’t do anything today, especially with its economy so weak, but in different circumstances it could, like when it needs to play the nationalism card to appease the masses.

--Japan said its economy expanded at an annualized rate of only 0.7% in the second quarter, or half the initial estimate. Separately, the Japanese government is going to phase out nuclear power by 2040. Before last year’s disaster at Fukushima, the country derived about 30% of its electricity from this source and previously the government said it would halve it by 2030.

So Japan is saying it will be able to replace nuclear with renewable and increased imports of natural gas and other fuels. Business groups, on the other hand, say electricity will become less reliable and more expensive.

--Brazil cut its growth forecast for this year to 2%, down from its previous forecast of 3%. As recently as 2010, Brazil was growing at a 7.5% clip. It grew 2.7% last year.

--Nestle, the world’s largest food company, projects China sales will grow 20% this year due to rising wages and the government’s efforts to boost local consumption.

--In a huge deal, European defense industry giants BAE Systems and EADS are in discussions to merge in which the UK’s BAE would be the junior party. Both companies are touting potential cost savings from procurement and sourcing efficiencies. BAE is looking to reduce its dependence on the U.S. defense market, with BAE currently generating 45% of its revenue here, while EADS gets only 12% of its revenue from North America. EADS might gain a more receptive market for its Airbus aircraft.

In a combined company, BAE would account for a third of the sales and its shareholders would control 40%; this as defense spending slides in much of the world, save for some Middle Eastern countries.

But BAE is insisting it will walk away from talks unless the combined venture can operate without political interference. It’s about London vs. Paris and Berlin, the latter two each effectively controlling 22.5% of EADS. [The British government has no direct stake in London-based BAE.]

Investors, though, took down both companies’ shares as many were left scratching their heads why managements thought this was a good idea.

--French President Hollande is backtracking on his campaign promise to impose a 75% supertax on millionaires after facing pressure from some of the country’s wealthiest potential victims, such as Bernard Arnault, owner of the fashion house Dior and the LVMH group. He’s the country’s richest man and most highly paid boss, and now, after Arnault had a meeting with Prime Minister Jean-Marc Ayrault, there is talk Hollande is scaling back his 75% rate to 67% and only salaries would be taxed. Sports stars would also be exempt.

--Sign of the times. In Ireland, a thousand jobseekers went after just 20 jobs being provided by a pharmaceutical company, BioMarin, which had acquired a former Pfizer plant. A further 80 jobs may be available over the next two years.

But at the same time, the IT industry there said it had 1,500 vacancies that could not be filled.

--Australia cut its forecast for wheat production in the current year by 7% due to dry weather. Australia had a record 29.5 million ton wheat harvest last year but now it is calling for 22.5 million.

--India’s industrial production in July was flat, while the inflation rate accelerated in August to 7.55% from a year earlier vs. July’s increase of 6.87%. The reading was far higher than expected and hamstrings the central bank, which is forced to maintain a tight monetary stance even as the economy slows.

--Southern California’s housing market finished the month of August at a four-year high on the median home price with sales for the month at their best level in six years. Sales of foreclosed homes continued to fall in the region. The median home price hit $309,000 last month, up 10.8% from a year earlier.

--FedEx Corp. and United Parcel Service Inc. gained approval to start domestic courier businesses in some Chinese cities, with FedEx getting approval in eight cities and UPS, five, including Shanghai and Shenzhen for both; an encouraging sign.

--The U.S. Treasury has sold most of its remaining stake in AIG, earning the government some $12 billion after reducing Treasury’s stake from 53.4% to 21.5%. But now instead of being a majority owner, the government (read Federal Reserve) becomes its primary regulator. Treasury deserves credit in AIG’s restructuring of what used to be the world’s largest insurance group.

--Apple unveiled the iPhone 5. It becomes available in the U.S. Sept. 21 and, yes, it has an impact on the overall economy.  Some estimate sales will be over 46,000 an hour, or 770 handsets a minute, with perhaps ten million being sold in the last nine days of the quarter. Within hours Apple had to shut down preorders…sold out.

Shares in Apple hit another all-time high on Friday, $697, before closing at $692.

--Mark Zuckerberg finally spoke at a techie convention in San Francisco and admitted Facebook’s performance following its IPO “has obviously been disappointing.” His comments were well-received as he spoke of “A bunch of people” being guilty of underestimating the world’s largest social network. He also talked of building “a system that is deeply integrated in every major device,” adding that in decades to come he wants to connect “everyone in the world.” And he said Facebook handles a billion search inquiries a day “and we’re not even trying,” so search represents “a big opportunity – we need to go do that.” Whatever.

Shares in Facebook finished the week at $22.00, a nice improvement from the recent low of $17.55. [The IPO was at $38.]

--Income for the top fifth of American households rose by 1.6% last year, while the middle class saw a decline and those at the very bottom stagnated.

Median household income after inflation fell to $50,054…8% lower than in 2007, according to the Census Bureau. [4.1% below when Obama took office in 2009.]

--According to the Kaiser Family Foundation and the Health Research & Educational Trust, the price of health insurance provided by employers rose a moderate 4% this year (after a 9% increase in 2011), but rates are expected to climb next year. Since 2002, U.S. health premiums have shot up 97%, three times as fast as wages and inflation nationwide, the survey found. Looking ahead to 2013, employers are reporting a 7% premium increase, on average. [Los Angeles Times]

--Hewlett-Packard announced it will slash 2,000 more jobs on top of the 27,000 previously announced. The cuts are to take place by October 2014. At the same time the company announced it is rolling out four new computers.

--Dutch giant Royal Philips Electronics announced it would cut another 2,200 jobs globally. Last year it announced plans to cut 4,500.

--Eastman Kodak Co. is cutting another 1,000 positions as it attempts to emerge from bankruptcy protection. The patent auction isn’t raising nearly as much money as the company had hoped for. Kodak previously announced 2,700 job cuts thus far in 2012. 13,400 employees will remain at a company that once employed 145,000.

--The IRS is awarding an ex-banker with $104 million in the largest amount ever paid to a whistleblower. Former Swiss banker Bradley Birkenfeld is credited with exposing widespread tax evasion at UBS.   Birkenfeld himself served 2 ½ years in prison related to the case, with UBS being fined $780 million. The IRS says it has recovered about $5 billion in taxes after UBS was forced to turn over thousands of names of suspected American tax dodgers.

--Morgan Stanley is buying the rest of Smith Barney from Citigroup, ending their joint venture by June 2015. After months of wrangling over the valuation, an independent advisor came up with $13.5 billion. Morgan Stanley will pay for the remaining 49% in three installments over the next three years.

--Manhattan’s apartment vacancy rate, while just 1.2%, has been rising amid record-setting rents, which averaged $3,460 in August. Two-bedroom units are now $4,030 on average.

--McDonald’s is going to begin showing calorie counts. A Big Mac weighs in at 550 calories, while the Big Breakfast with hotcakes and large biscuit is 1,150. My Stouffer’s lasagna dinner tonight was 650.

--Ferrari reported record sales and profits. The supercar manufacturer delivered 3,664 cars in the first six months of 2012 and profits of $128 million, up 10% on year ago levels. In 2011, Ferrari sold 7,195 cars, up 9.5% when compared with 2010. 7% of the sales are in Italy, 93% around the world.

Foreign Affairs

Libya: U.S. Ambassador Christopher Stevens and three other Americans were killed in what appears to have been a coordinated attack by an ultraconservative Salafist group, Ansar al-Sharia, which overwhelmed Libyan security guards outside the U.S. consulate in Benghazi on Tuesday night. A second attack took place at a safe house that Ansar al-Sharia and/or others had been tipped off to.

Islamists holding demonstrations throughout the region blamed an obscure video produced in the U.S. that blasted the prophet Muhammad, but it was far more than this.

While the Libyan government immediately condemned the attack, in Egypt, where a mob stormed the U.S. embassy in Cairo, though with no American casualties, it took Egyptian President Mohammed Morsi over a day to denounce the violence.

The embassy attack in Egypt comes at a time when the White House is looking to forgive $1 billion in debt owed it by the Egyptian government while continuing to supply at least $1.3 billion in military aid (part of up to $2 billion Egypt receives from the U.S. annually, second most next to Israel).

In an interview, President Obama said of Washington’s relationship with Cairo, “I don’t think that we would consider them an ally, but we don’t consider them an enemy. I think it’s still a work in progress, but certainly in this situation, what we’re going to expect is that they are responsive to our insistence that our embassy is protected, our personnel is protected.” 

Later, a State Department spokesman attempted to dial this back, saying Egypt remained “a major non-NATO ally.” Sen. John McCain jumped on the statement, saying it was an example of Obama’s “feckless foreign policy” and had undermined America’s global influence.

Robert Kagan / Washington Post

“As with many nascent democracies around the world, Islamic and non-Islamic, the transition in Egypt is incomplete. Some signs give reason for hope, but there are also signs of undemocratic tendencies. The Morsi government has been censoring media and hounding political opponents. Coptic Christians are justifiably scared. Women have reason to worry about whether their rights will be respected.

“The United States needs to strike an intelligent balance. If Egypt’s economy crumbles, is the nation going to become less radical? Is it more likely to uphold the peace treaty with Israel? Is it more likely to be a force for moderation in the greater Middle East?

“The United States and its friends in the region have a vital stake in the success of Egypt’s transition. U.S. policies should aim to support the forces in Egypt – and there are many – that want a democratic system and a healthy economy. That means providing aid, ideally even more aid than is planned. But it also means making clear to Egyptians what that aid is for. U.S. support should be conditioned on the Egyptian government’s behavior, both internationally and domestically. The Morsi government needs to understand that it will not get U.S. assistance, or much help from the rest of the international community, if it clamps down on freedoms at home, persecutes religious minorities such as the Copts or fails to meet its basic international obligations….

“Meanwhile, politicians and commentators would be wise to tone down the apocalyptic rhetoric. This is an election year, and there is much to criticize in the way the administration has handled events in the Middle East. But a toxic mix is brewing between the natural impulses of political warfare and a tendency, perhaps still on the fringes, to tar all Islamic governments with the same brush and tell them all to go to hell. Sorry, we can’t afford to.”

Jeffrey Goldberg / Bloomberg Businessweek…from an editorial posted days before the trouble in Libya and Egypt.

“The primary foreign policy task of an American president in the post-Sept. 11 era is to prevent jihadist organizations from obtaining weapons of mass destruction. It’s therefore impossible to ignore a region in which this acquisition would most likely take place.

“As for terrorism, the threat to the U.S. posed by the central al-Qaeda organization (currently headquartered in territory controlled by our ostensible ally, Pakistan) is dramatically lower than it was 11 years ago. Yet contrary to what Ron Paul might claim, no counterterrorism expert believes that a comprehensive American withdrawal from the Mideast would bring about an end to anti-American jihadist terrorism. There will be no ground invasions of Muslim countries in the near future; Iraq and Afghanistan have immunized the U.S. – its people and its government – against that level of interventionism. Yet it’s naïve to think that abandoning American responsibilities in the region would lead to anything but the further empowerment of radical ideologues.

“The Middle East is a continual source of woe. There is something seductive about the notion of pivoting away from it toward…well, anything, really. Yet it will be a terrible mistake for the U.S. to avert its eyes simply because what it sees constitutes nothing but trouble.”

Israel/Iran: By week’s end, Israeli Prime Minister Netanyahu was forced to deny accusations he was interfering in the U.S. presidential election after his fierce criticism of Washington earlier in the week.

“That’s nonsense,” he told one Israeli newspaper, “because what’s guiding me is not the election in the United States but the centrifuges in Iran….

“If the Iranians…had stopped enriching material and preparing a bomb until the U.S. election was over, I would have been able to wait.”

There is no love lost between the prime minister and President Obama, and the press in Israel is quick to point out close ties with the likes of casino kingpin Sheldon Adelson, one of Mitt Romney’s most generous financial backers who also bankrolls a right-wing Israeli daily.

So it was that last Sunday, Sec. of State Hillary Clinton said, “We’re not setting deadlines (with the Iranians)” when asked about the establishment of “red lines.”

Netanyahu then replied, “Now if Iran knows that there is no red line, if Iran knows that there is no deadline, what will it do? Exactly what it’s doing. It’s continuing, without any interference, toward obtaining nuclear weapons capability and from there, nuclear bombs.”

He later went on in a separate venue:

“The world tells Israel: ‘Wait. There’s still time.’ And I say, ‘Wait for what? Wait until when?’ Those in the international community who refuse to put red lines before Iran don’t have a moral right to place a red light before Israel.”

And there was the disagreement over the coming UN General Assembly and Netanyahu’s request for a meeting with Obama in New York later this month.

The Israeli Embassy in Washington said, “The White House informed Jerusalem that the meeting….wouldn’t be possible due to the president’s agenda.”

The White House said the two wouldn’t be in New York at the same time, with Obama departing New York immediately after his Sept. 25 address to the General Assembly and Netanyahu not arriving until Sept. 27 when he delivers his speech. The White House, in attempting to defuse the tension, said Obama and Netanyahu had spoken by phone for an hour Tuesday night.

Wednesday, Netanyahu said:

“As prime minister of Israel, it is my duty to uphold the vital interests of the State of Israel, to ensure its security and its future. I uphold these interests, not that it’s easy, because leadership is tested in upholding them even if there are disagreements with friends, even the best of friends.”

Charles Krauthammer / Washington Post

“There are two positions one can take regarding the Iranian nuclear program: (a) it doesn’t matter, we can deter them; or (b) it does matter, we must stop them.

“In my view, the first position – that we can contain Iran as we did the Soviet Union – is totally wrong, a product of wishful thinking and misread history. But at least it’s internally coherent.

“What is incoherent is President Obama’s position. He declares the Iranian program intolerable – ‘I do not have a policy of containment; I have a policy to prevent Iran from obtaining a nuclear weapon’ – yet stands by as Iran rapidly approaches nuclearization.

“A policy so incoherent, so knowingly and obviously contradictory, is a declaration of weakness and passivity. And this, as Anthony Cordesman, James Phillips and others have argued, can increase the chance of war. It creates, writes Cordesman, ‘the same conditions that helped trigger World War II – years of negotiations and threats, where the threats failed to be taken seriously until war became all too real.’…

“The Obama policy is in shambles….

“(Made) all the more shocking (by) Secretary of State Hillary Clinton’s dismissal last Sunday of the very notion of any U.S. red lines. No deadlines. No bright-line action beyond which Iran must not go. The sleeping giant continues to slumber. And to wait – as the administration likes to put it, ‘for Iran to live up to its international obligations.’

“This is beyond feckless.   The Obama policy is a double-game: a rhetorical commitment to stopping Iran, yet real-life actions that everyone understands will allow Iran to go nuclear.

“Yet at the same time that it does nothing, the administration warns Israel sternly, repeatedly, publicly, even threateningly not to strike the Iranian nuclear program. With zero prospect of his policy succeeding, Obama insists on Israeli inaction, even as Iran races to close the window of opportunity for any successful attack.

“Not since its birth six decades ago has Israel been so cast adrift by its closest ally.”

And one side note on tensions in the West Bank.   Mass demonstrations have been held protesting the Palestinian Authority’s leadership, as the economy collapses amid a cash crisis due to a shortfall in donor contributions, particularly from Arab states. Civil service employees aren’t going to receive their full salaries this month. Unemployment is 57%. The UN estimates one in two Palestinians live in poverty. The government had reached its credit limits as well.

Syria: The UN’s official refugee figure is now over 253,000, but the unofficial toll is far higher. Actress Angelina Jolie, a special UN ambassador, gave an impassioned plea for the world community to do something in this crisis after she visited a camp in Jordan, but global support has been minimal, especially from the United States.

The Times of London reported a massive shipment of arms, some 400 tons worth (including a bit of humanitarian aid) made its way from Benghazi, Libya, to Turkey, and then into Syria where surface-to-air missiles and rocket-propelled grenades are now being fought over by the various rebel factions, as well as the Muslim Brotherhood, which took control of the shipment when it arrived in Turkey. The Brotherhood is trying to play a larger role in Syria and knew the weapons would help their cause.

Lebanon: Pope Benedict XVI arrived on Friday amid neighboring Syria’s civil war and the week’s events in Libya, Egypt and elsewhere. Saturday has been declared a national holiday in honor of the Pope’s visit, with tens of thousands being given the day off to greet him. 

Pope Benedict will be addressing the plight of Christians in the Middle East, though is likely to meet supporters of Hizbullah, and he may also meet with Syrian refugees. The main public event is Mass on Sunday on the Beirut waterfront.

Separately, a former General Security head, Jamil al-Sayyed, was caught on tape saying Druze leader Walid Jumblatt “must be killed,” part of the probe into former MP Michel Samaha, a close ally of Syrian President Bashar Assad who was charged in August with plotting to carry out terrorist attacks in Lebanon. The recordings were taken from Samaha’s car.

While in Paris, former Prime Minister Saad Hariri met with French President Hollande, with Hariri saying Hizbullah is sending arms and fighters to Syria and that while they are “free to take a political position…killing the Syrian people is a crime.”

Citing recent assassination attempts against various politicians in Lebanon, Hariri reiterated he was out of the country for security reasons but would take part in the 2013 parliamentary elections. “I will participate…and I will win them, if the elections are not rigged. All those who bet on the end of my political career are wrong.”

Return home, Saad. You can just as easily be killed in Paris.

Iraq: Insurgents killed at least 109 across the country in a wave of attacks on Sunday, mostly against security forces. Also that day, a court sentenced to death the most senior Sunni Arab politician, Tariq al-Hashemi, for organizing terror attacks. Hashemi fled earlier in the year to Turkey when the charges were first announced hours after the final withdrawal of U.S. troops. Hashemi, in a press conference, said the death sentence passed on him in absentia was “politically motivated.” It’s all the work of our good friend, Prime Minister Maliki.

We won the war and lost the peace. Thank you, Barack.

Afghanistan:  Regarding the attacks on U.S. interests in Libya and Egypt, President Hamid Karzai condemned the video but not the killings. He’s another real winner.

James Carafano of the Heritage Foundation told Army Times that troop reductions in Iraq and Afghanistan do not necessarily equate to success.

Iraq “still looks unstable, making it, at best, a shaky ally for America. Since the U.S. goal was to leave the Middle East less, not more, dangerous, this is nothing to boast about,” he said.

“As for Afghanistan, Mr. Obama gave the commanders on the ground half the troops and half the time they needed to do the job right. There is a real prospect that, in a few years, the country will look a lot like it did on Sept. 10, 2001.”

[It already does in some parts.]

Also, Osama bin Laden’s death “was an incontrovertible act of justice,” Carafano said, “but one that had little impact on al-Qaeda’s operational capabilities.”

Meanwhile, 51 Afghans were killed in a collision between a bus and truck in the eastern part of the country on Friday.

Two U.S. soldiers were killed at the same base where Prince Harry is stationed as the Taliban launched a large-scale attack. Captain Wales was in no danger.

Pakistan: The death toll from two devastating factory fires in Pakistan’s two biggest cities soared to at least 314, as many of the victims were trapped in buildings lacking emergency exits, alarms and sprinklers. The toll from a garment factory in Karachi hit 289, a place with no fire exits, while workers on upper floors struggled to make it out windows with metal bars.

Yemen: Security forces here, and/or a U.S. drone, were responsible for the death of Said al-Shihri, the second-in-command of al-Qaeda in the Arabian Peninsula (AQAP), the group having been labeled by the U.S. as the most dangerous offshoot of al-Qaeda.

China: China claims nearly all the South China Sea; and East China Sea as well. But on Tuesday, Japan announced it had nationalized three of the islands known as Senkaku in Japan and Diaoyu in China, buying them from their private owner. Communist Party mouthpiece The People’s Daily called Tokyo’s actions a violation of China’s territorial sovereignty and an affront to its citizens.

“Is Japan prepared to pay the price for its vicious actions? They will be regarded as an invasion of China’s inherent territory and thus China will resolutely strike back.”

Premier Wen Jiabao said Beijing would “never yield an inch” in its territorial dispute with Japan.   The Foreign Ministry office said “This is a serious infringement of China’s sovereignty and has seriously hurt the feelings of 1.3 billion Chinese.”

So on Friday, six Chinese maritime patrol ships entered Japanese waters. Japan asked them to leave. China said they had a right to be there. Eventually, the ships left.

Japan summoned the Chinese ambassador to protest and Prime Minister Noda met with a crisis team at his office. A government spokesman said this latest episode represented an “unprecedented scale of invasion into Japanese contiguous waters.”

Trade between the two nations is already suffering, China being Japan’s largest trading partner, some $345 billion worth in 2011.  Chinese visitors to Japan may decline as much as 20%, according to the Japan National Tourism Organization; a significant figure given Japan is still looking to recover from the tsunami and nuclear-power crises.

The Japanese foreign ministry has warned its nationals to be aware of anti-Japanese demonstrations on the mainland and to avoid drawing attention to themselves. At least six “serious” cases of assault or harassment are being cited by Japanese diplomats as of Friday. In Shanghai, where 60,000 Japanese live, a group of Japanese diners was attacked though no one was seriously injured.

China’s foreign ministry was also forced to respond to the Philippines renaming waters off its coast the West Philippine Sea.

“South China Sea is a name that has all along been accepted by countries across the world as well as by the United Nations and other international organizations,” said a spokesman.

Philippine President Benigno Aquino said he had approved the name change “to clarify which of the areas we are claiming.”

As for the mystery surrounding the whereabouts of Chinese president-in-waiting Xi Jinping, he has suddenly reappeared after an absence of 12 days, with no explanation given. 

Russia: Prime Minister Medvedev said Wednesday he believed the three members of punk rock group Pussy Riot had been held long enough. 

“What has already happened – that this well-known group of girls have been in prison quite a long time – is a very serious punishment for everything they did, regardless of the sentence. …So prolonging their time in conditions of imprisonment seems not to be productive.”

And on Friday, a leading opponent of Vladimir Putin, Gennady Gudkov, was thrown out of the Duma; the first member of parliament to be stripped of his seat in 17 years. The vote was 293 to 150.

Gudkov is a former KGB colonel who has been one of Putin’s fiercest critics and a prominent figure in street protests. The expulsion was orchestrated by the pro-Kremlin United Russia party. Gudkov called his removal a “political vendetta and extrajudicial repression.” Later he said, “Everything happening here is a lawless show trial.” Others warned of the start of a witchhunt.

Gudkov could be arrested as he is now stripped of his immunity from prosecution.

Needless to say, with protests scheduled today in Moscow and elsewhere, reaction to this latest incident bears watching.

Mexico: The Mexican Navy claimed to have arrested the top leader of the Gulf Cartel, Jorge Eduardo Costilla Sanchez, or El Coss, who was paraded in front of cameras on Thursday; a huge coup (though sometimes these guys turn out not to be who we were first told). President Felipe Calderon’s six-year term ends in December and security forces are trying to deliver Joaquin Guzman, El Chapo, the most wanted drug lord of them all as well.

Random Musings

--Some post Democratic National Convention polls (daily tracking polls from early in the week where applicable).

Reuters/Ipsos…Obama ahead of Romney, 47-43
Gallup…Obama leading Romney, 49-44
Rasmussen…Obama leading Romney, 46-44
CNN/ORC…Obama leading Romney, 52-46
New York Times/CBS News…Obama leading Romney, 49-46 [Obama winning over women by 12 points; Romney leading among men by 8 points.]
Washington Post/ABC News…Obama leading Romney, 49-48, among likely voters. [Among “registered voters” the margin is 50-44, Obama.]

The Post/ABC survey shows Obama leading Romney by 21 points in addressing women’s issues; by 15 points in advancing the interests of the middle class; and social issues such as abortion and same-sex marriage, 11 points.

Obama’s overall approval rating in the above poll, however, is still just 48 percent.  [In the New York Times/CBS poll, Obama’s approval rating climbed to 51%.]

--In an NBC/Wall Street Journal survey of key battleground states…Obama leads Romney in all three.

Virginia 49-44
Florida 49-44
Ohio 50-43

[The polls were conducted Sept. 9-11.]

--And in the key question, “Are you better off than four years ago?” a CNN/ORC survey revealed that among registered voters, 37% said they were better off, 44% worse off, and 19% the same.

Among Democrats, though, it’s 55-20, better off/worse off, while with Republicans it’s 16-70. Importantly, among independents it’s 33% better off, 49% worse off.

In the same survey, despite the above, by a 50-49 margin people feel President Obama would do a better job handling the economy.

--Obama outraised Romney in August, $114 million to $111 million. Obama had raised $75 million in July, which was the third straight month he trailed Romney in monthly fundraising.

--I have argued since the campaign began in earnest that Mitt Romney’s foreign policy message has been a mess. He is also clearly getting awful advice. So the other day the Washington Post’s Jennifer Rubin, who is rapidly becoming my favorite political reporter, had her take on Romney’s speech on 9/11 to the National Guard Association conference, which ended with an account by Romney of how on Memorial Day, 2006, after visiting Iraq and Afghanistan along with two other governors, he made some phone calls to Guardsmen’s spouses. He was proud he “made 63 calls on Memorial Day.”

Rubin:

“And that was about it.

“Sorry, that is a weak and defensive response to criticism that he didn’t say the word ‘Afghanistan’ in his convention speech. It’s worse than that, actually. It suggests that he thinks writing letters [or making calls] to soldiers’ families is preparation for being commander-in-chief.

“This was a wasted opportunity when he could have shown some mettle. His foreign policy message, not unlike his domestic policy message, is getting put through the Boston blender, it seems, coming out mush. That would be mush with no flavor.

“Romney wants to rise above the fray, which might work if he had a hatchet man at the ready. But so far he’s not unleashed VP nominee Rep. Paul Ryan to hit Obama where he is most vulnerable. [Ed. Rubin wrote this before Friday, when Ryan went after Obama on foreign policy.]

“What can Romney say on foreign policy? To begin with he might quote a Democratic insider. ‘Judgment will trump experience.’ That would be David Axelrod in the 2008 campaign. And that it seems is where Romney could do some real damage. Obama showed poor judgment in missing many of his national security briefings where he might have heard candidly from his advisers. He showed poor judgment in trying to offload our Syria policy to the United Nations and releasing aid without strings attached to the Muslim Brotherhood government of Egypt. Time and again – assessing Russian ‘reset’ a success or being mute during Iran’s Green Revolution, to name two more – he has made the wrong call and misjudged the situation, our foes and the influence of the United States.

“It’s also about time to take the president to task for being a rotten steward of a first rate military and top notch military intelligence apparatus that could find and kill Osama bin Laden, win in Iraq and complete every mission asked of them in Afghanistan. What is Obama leaving to his successor, who will have his own challenges? A hollowed out military (which he cut, cut some more and then put on the chopping block in sequestration) and a culture of rampant leaking. Other presidents have done heavy lifting on national security, often overriding showboaters (who opposed the surge, for example) to look out for the long-term interests of the U.S. regardless of the political circumstances. I can’t think of a single instance in which Obama has sacrificed his political popularity or trimmed his grandiose domestic ambitions to do the work of maintaining the U.S. as a superpower.

“And finally, Romney should come out and say it: Obama has failed in the most critical foreign policy challenge we face, foreclosing the potential of a nuclear-armed Iran….Sanctions haven’t slowed progress on a nuclear weapon. And Israel feels so imperiled it may have to act on its own.”

--Senator John McCain expressed my feelings exactly on the topic of foreign policy, a few days before the incidents in Libya, Egypt and Yemen. In an interview with the Associated Press, McCain said some of the following.

On the issue of Iran and its nuclear efforts: “In a way it’s almost like watching a train wreck.”

On the issue of the lack of discussion on foreign policy at the Republican National Convention: “Yup, it was” absent. “The election is about jobs and the economy, but a failed…national security policy over time is going to lead to significant domestic problems.

“It’s the job of presidents and candidates to lead and articulate their vision for America’s role in the world. The world is a more dangerous place than it’s been since the end of the Cold War, and so I think candidates for the presidency should lead and talk about it, and I’m disappointed that there hasn’t been more.”

--So back to Mitt Romney, he caught some heat, and deservedly so, for the timing of comments such as the following:

“I think it’s a terrible course for America to stand in apology for our values. When our grounds are being attacked and being breached, the first response of the United States must be outrage at the breach of the sovereignty of our nation. And apology for America’s values is never the right course.”

The thing is, this statement was made in response to the initial statement issued by the Embassy in Cairo on Tuesday evening, denouncing the makers of the stupid movie:

“The Embassy of the United States in Cairo condemns the continuing efforts by misguided individuals to hurt the religious feelings of Muslims, as we condemn efforts to offend believers of all religions.”

But the White House quickly disavowed the embassy statement and made it clear it did not reflect the views of the United States Government.

So what is my guiding principle here? In situations like this, the best thing is to wait 24 hours. And especially in the heat of a campaign when Romney is not president yet, he should have paid his respects to the victims and their families and simply said he is withholding judgment until more facts are known.

I mean, imagine Romney in those first moments after Oklahoma City. So many got it wrong. No doubt he would have too.

Again, I cannot overemphasize the fact his staff is peopled with idiots. Oh, he’ll talk of having “advisors” like Condi Rice and George Schultz and Henry Kissinger….but it’s the two or three nudnicks, including Rich Williamson and Dan Senor, who call the day to day shots. 

Anyway, Romney stupidly gave President Obama an opening he in no way deserved, as Obama told CBS for an interview to be aired Sunday:

“There’s a broader lesson to be learnt here. Governor Romney seems to have a tendency to shoot first and aim later.”

Republican strategist and Romney pitbull, former Senator John Sununu, offered:

“They (the campaign) probably should have waited. You look at the way things unfolded, you look at the timing of it, they probably should have waited.”

Peggy Noonan noted that Romney “had not been doing himself any favors,” adding that in times of great drama and heightened crisis,” discretion is the better way to go.”

Noonan added:

“When you step forward in the midst of a political environment and start giving statements on something dramatic and violent that has happened, you’re always leaving yourself open to accusations that you are trying to exploit things politically.” [Alexandra Frean / The Times of London]

Editorial / Washington Post

“J. Christopher Stevens, the U.S. ambassador to Libya, was a skilled and courageous diplomat who repeatedly placed himself at risk to support the cause of a democratic Libya. His death, along with those of three other Americans…is a tragedy that should prompt bipartisan support for renewed U.S. aid to Libyans who are struggling to stabilize the country. That it instead provoked a series of crude political attacks on President Obama by GOP presidential nominee Mitt Romney is a discredit to his campaign….

“At a news conference [Ed. the next day], Mr. Romney claimed that the administration had delivered ‘an apology for America’s values.’ In fact, it had done no such thing: Religious tolerance, as much as freedom of speech, is a core American value. The movie that provoked the protests, which mocks the prophet Muhammad and portrays Muslims as immoral and violent, is a despicable piece of bigotry; it was striking that Mr. Romney had nothing to say about such hatred directed at a major religious faith….

“Mr. Romney would do well to consider the example of Republican former secretary of state Condoleezza Rice, who issued a statement Wednesday lamenting ‘the tragic loss of life at our consulate,’ praising Mr. Stevens as ‘a wonderful officer and a terrific diplomat’ and offering ‘thoughts and prayers’ to ‘all the loved ones of the fallen.’ That was the appropriate response.”

Again, people…wait 24 hours, especially when you are not the president.

--And what was Romney doing last week on “Meet the Press,” reversing some of his stated positions on ObamaCare?

Editorial / Wall Street Journal

“When Mitt Romney ventures into health care, political trouble usually follows. So it went this weekend, as the GOP standard-bearer made his own policy sound worse than it is.

“On ‘Meet the Press,’ the Republican was asked what he would do about people with pre-existing medical conditions who would supposedly ‘no longer be guaranteed health care’ if he repeals the Affordable Care Act. ‘I say we’re going to replace ObamaCare,’ Mr. Romney replied.   ‘And I’m replacing it with my own plan,’ without defining the substance of his own agenda.

“When pressed, Mr. Romney said that ‘I’m not getting rid of all of health-care reform. Of course, there are a number of things that I like in health-care reform that I’m going to put in place. One is to make sure that those with pre-existing conditions can get coverage.’

“Whether or not this rhetorical gambit was driven by polling, it did confuse political reporters who think that the only two ‘health-care reform’ choices are ObamaCare and the pre-2010 status quo. They were soon filing stories about a Romney ‘move to the middle.’ Meanwhile, certain quarters on the right – equally unversed in policy – went bonkers, while liberals gloated about a flip flop….

“Mr. Romney’s pre-existing political calculation seems to be that he can win the election without having to explain the economic moment or even his own policies. As this flap shows, such vagueness carries its own political risks.”

--Back to the president and this week’s chaos in the Middle East…

Editorial / Wall Street Journal

“The larger concern is that these attacks fit a pattern of declining respect for U.S. power and influence. The Obama Administration has been saying for four years that the U.S. needs to defer to the U.N. and other nations, and the world has taken notice and is more willing to ignore U.S. desires and interests.

“Across the Arab Spring, the U.S. has done little to shape events and is increasingly irrelevant. The U.S. angered Saudi Arabia by calling for the ouster of Egypt’s Hosni Mubarak and now has little sway in Bahrain. Mr. Obama has washed his hands of Syria, allowing Russia and Iran to keep their proxy in power and stir up trouble for Turkey and Lebanon. The Chinese have brazenly occupied disputed territories in the South China Sea, hinting at war if the U.S. intercedes on behalf of its Asian allies.

“The U.S. withdrew in toto from Iraq, and now its Prime Minister ignores Vice President Joe Biden’s request to stop Iranian arms flights to Damascus. Even America’s dependent in Kabul, Hamid Karzai, is refusing to honor his commitments on holding Taliban detainees. Perhaps he has heard Mr. Obama describe Afghanistan in his re-election campaign as if the U.S. is already halfway out the door.

“Most of all, Iran continues its march toward a nuclear weapon despite the President’s vow that it is ‘unacceptable.’   The U.S. says it has isolated Iran, but only last month the U.N. Secretary-General defied a U.S. plea and attended a non-aligned summit in Tehran….

“Meanwhile, the U.S. has engaged in repeated public arguments with Israel, supposedly its best ally in the region….

“Mr. Obama…came to office saying, and apparently believing, that a more deferential America would be better respected around the world. He will finish his term having disproved his own argument. The real lesson of the last four years – a lesson as much for Republican isolationists as for Democrats who want to lead from behind – is the ancient one that weakness is provocative.”

--As for the Chicago teachers strike, which appears to be on the verge of a settlement after 26,000 walked off the job for a week, leaving 350,000 children, and parents, scrambling, if Chicago Mayor Rahm Emanuel, former Obama chief of staff, is perceived to be the winner, what does this do to Obama’s image with his key base, organized labor? The American Federation of Teachers, after all, has 4.5 million members. For good reason, the administration is staying silent. The most contentious issue is a city proposal to raise the portion of a teacher’s evaluation that is based on improved test scores.

Emanuel has long had a reputation for being an asshole, and worse. Karen Lewis, the president of the teachers union, called him a “liar and a bully.” Your editor sides with the a-hole on this one.

By the way…a whopping 8 percent of 11th graders in Chicago meet college readiness standards.  

--At this point, I’ll be happy if Republicans can take the Senate and retain the House, and towards that end, Scott Brown is leading Democratic challenger Elizabeth Warren in Massachusetts, last I saw, by a 49-44 margin. And the Wall Street Journal reported on Connecticut Republican Linda McMahon of WWF fame, who lost her Senate race two years ago by 12 points but is running a tight race this go ‘round against her Democratic challenger, Rep. Christopher Murphy. One poll has her up by three; another has her down by four.

--At a congressional subcommittee hearing Wednesday, panelists at the House Homeland Security Subcommittee on Cybersecurity, Infrastructure Protection and Security Technologies, told Chairman Dan Lungren (R-Calif.) that there were serious flaws in the nation’s infrastructure that could allow for electromagnetic pulse events to shut down power and communications for extended periods of time.

If such an event occurred today, the Pentagon would be blind.

--California’s Death Valley now holds the world record for the hottest temperature ever recorded on Earth, 134 degrees on July 10, 1913. The previous record of 136 set in the Libyan desert in 1922 has been deemed invalid for a variety of reasons. A team of 13 atmospheric scientists from nine countries is responsible for the determination. One of the members of the team was a Libyan scientist who during the revolution last year amazingly discovered the original 1922 log sheet, which showed some discrepancies.

Death Valley receives only two inches of rain a year on average and during one 40-month period in 1931-34, received just over a half inch of rain, in total. [Doyle Rice / USA TODAY]

--Your editor won his rematch with Dr. Bortrum at the Summit Muni Golf Course. Don’t tell anyone, but both of us hit our tee shots on No. 9 over the fence…thankfully no drivers were killed on the nearby road. The championship is in two weeks.

--Planet Earth couldn’t suck more these days, but thankfully one can turn their thoughts to the Voyager I spacecraft, launched from Cape Canaveral in 1977, which is preparing to leave the solar system…though scientists aren’t sure if this event is days, months or even years away.

But in reading a story in the Los Angeles Times by Eryn Brown, she had this note on the journey.

“(In) February 1990, while 6 billion miles from Earth, Voyager 1 turned its cameras to take a family portrait of the solar system. Part of that image was the famous ‘Pale Blue Dot’ photograph, which depicted our planet as a tiny blip in the heavens.

“ ‘That’s home. That’s us,’ astronomer Carl Sagan wrote of the picture. ‘On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives.’”

--Lastly, in a memorial service at the National Cathedral on Thursday, attended by 2,500, friends and colleagues remembered astronaut Neil Armstrong, who was buried at sea in the Atlantic Ocean on Friday.

Captain Gene Cernan, who is known as the last man on the Moon, talked of a man “who when he became your friend was a friend for a lifetime.” When Armstrong was picked to be the first man on the Moon, Cernan added, “no one, but no one” could have better supported the responsibility such an act carried with such grace and humility.

Bidding farewell, Cernan paraphrased the words of the American poet and aviator John Gillespie Magee:

“As you soar through the heavens, beyond where even the eagles dare to go, you can now finally put out your hand and touch the face of God.”

---

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

God bless America.
---

Gold closed at $1772
Oil, $99.01

Returns for the week 9/10-9/14

Dow Jones +2.1% [13593]
S&P 500 +1.9% [1465]
S&P MidCap   +2.2%
Russell 2000 +2.7%
Nasdaq +1.5% [3183]

Returns for the period 1/1/12-9/14/12

Dow Jones +11.3%
S&P 500 +16.5%
S&P MidCap +16.8%
Russell 2000 +16.7%
Nasdaq +22.2%

Bulls 51.1
Bears 25.5 [Source: Investors Intelligence]

Don’t forget the StocksandNews iPad app. Get it before Halloween and then scare the heck out of trick-or-treaters by showing them some of the gloomy forecasts for their planet and how their lives are likely to be filled with misery and despair.

Have a great week. I appreciate your support.

Brian Trumbore

 



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Week in Review

09/15/2012

For the week 9/10-9/14

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

As I watched the heart-breaking ceremony on Friday for the return of the bodies of the four Americans from the terror attack in Libya, it was a stark reminder of how those who ignore foreign policy do so at their own peril.

This has of course been a long-running theme of this column, but I summed it up rather well on 8/18/12, four weeks ago.

“Finally, the world is at an incredibly dangerous moment in history right now. The Middle East is on the verge of blowing sky high into a far wider spasm of violence than we’ve been witnessing in the likes of Syria….

“Plus it’s clear the lack of leadership in America today, from both sides of the political aisle, is on the verge of dragging us into the sewer.”

I have also continually warned, as I did again last week, that “China could opt for military action in one of the South China/East China Sea disputes” and the other day China briefly invaded Japan’s waters as part of the Senkaku/Diaoyu island affair (see below).

Philip Stephens / Financial Times

“Geopolitics (is never simple). The latest attacks on U.S. missions are a reminder that the scope of U.S. interests will demand it remains present more often than it is absent. Even as it seeks to loosen entanglements in the Middle East, its alliance with Israel and Iran’s nuclear ambitions promise to pull it back….

“But a world in which the U.S. abandons the role of convener and guarantor of international order in favor of that of selective superpower will transfer to allies and potential rivals alike responsibilities that they are reluctant to shoulder. The flip side of more competition will be increased instability and insecurity. The Pax Americana had its flaws, but its critics may well be among those who lament its passing.”

---

The European Central Bank got what it wanted this week when Germany’s highest court approved the European Stability Mechanism (ESM), which is to be the permanent bailout fund, but the court did two things. It said Germany’s exposure could only be 190 billion euro of the 500 billion in total, adding the ESM couldn’t be expanded beyond that without the approval of the German parliament, thus keeping an effective veto on the fund, and with this move you’re left with an ESM that doesn’t have the resources to deal with the potential bailouts of Spain and Italy.

It also needs to be noted that Germany’s high court is still conducting a full review of both the ESM and the Fiscal Pact, the mechanism agreed to in June that allows for a greater say in eurozone members’ budgetary processes. Plus the court’s president, Andreas Vosskuhle, said the court hadn’t decided on whether sovereign bond purchases on the secondary market by the ECB would infringe on the ESM as written. So that’s for December.

Meanwhile, Spain’s Prime Minister Mariano Rajoy is stalling for time until after Oct. 21 regional elections before requesting a bailout.

“Let’s see how the risk premium and financing spreads evolve going forward,” he said. “I don’t know if it’s necessary for Spain to ask (for a bailout).”

The initial response to the ECB’s bond-buying program (announced Sept. 6) and the German court ruling helped lower the yield on the Spanish 10-year bond to 5.60%, after touching 7.75% last July before ECB President Mario Draghi said he would do everything it takes to save the eurozone and the likes of Spain and Italy.

Only one thing. The bond-buying, whether from the ECB or ESM is only permanently in effect when Spain, for example, requests help, at which point Madrid has to deal with conditionality and losing some sovereignty. [By Friday’s close, the 10-year was back to 5.86% due to renewed uncertainty.]

Italy also doesn’t see a reason to seek aid because their rates have come way down after the ECB’s announcement of the preceding week and they had a successful 3-year debt auction the other day with the lowest 3-year yield, 2.75%, in two years and well below the 4.65% from the last auction July 13. But these gains could be ephemeral. Both Spain and Italy, after all, remain in deepening recessions.

So what of the actual firepower if the ESM is limited to 500 billion euro and there is about 200 billion euro left over from the European Financial Stability Facility, the first bailout mechanism, knowing that 100 billion is supposed to go to a preapproved bailout of Spain’s banks?

Some say the ESM will be leveraged by the ECB. But as Gavyn Davies observes in the Financial Times:

“There are some ironies in all this. By setting limits on the size of the ESM well below the potential calls on its resources, the German government has in effect forced the ECB to use its balance sheet to make the cross-border transfers which the political process has balked at. Although the ECB claims that it is not bailing out governments through monetization, which was the reason it originally declared proposals to leverage the ESM to be against the treaties, it has ended up doing almost exactly the same thing. It will now increase its balance sheet to buy government bonds, alongside the ESM’s activities. What is the difference between this and a leveraged ESM? Not much.

“And why is (German Chancellor Angela) Merkel supportive of the current plan, while she was against the leveraging of the ESM? The answer is political saleability…As a result, Germany has ended up with a plan which seems to combine some of its worst nightmares, including the monetization of deficits and the underwriting of its share of some very large ECB support operations, over which it has little or no control.”

Gideon Rachman / Financial Times

“The European Central Bank has fired its magic bullet. By promising ‘unlimited’ purchases of sovereign bonds, Mario Draghi, the ECB’s president, may have kept his pledge to do ‘whatever it takes’ to save the euro. But in rescuing the currency, Mr. Draghi’s magic bullet has badly wounded something even more important – democracy in Europe.

“As a result of the ECB’s actions, voters from Germany to Spain will increasingly find that crucial decisions about national economic policy can no longer be changed at the ballot box. In Germany, in particular, there is a growing realization that the ECB, an unelected body that prides itself on its independence from government, has just taken a decision that has profound implications for German taxpayers – but one that they cannot challenge or change….

“It is not just Germans who have reason to feel nervous about the democratic implications of what the ECB has done. To access the ECB’s unlimited firepower, the Spanish or Italians would have to agree to ‘enter a program’ – which sounds unpleasantly like the kind of condition that is laid down for the wayward drug addict. In reality, Madrid or Rome would have to accept International Monetary Fund-style supervision of their national budgets, directed from Brussels and Frankfurt. Such a humiliating and overt loss of national sovereignty, combined with a deep recession, would be the perfect formula to drive voters to the political extremes, as Greece is demonstrating.

“Of course, European idealists would argue that talk of a loss of national sovereignty is outmoded. The euro is a pan-European currency so its fate should be decided by European voters and institutions – not by individual nations.

“In practice, however, the eurozone crisis is increasingly polarizing European politics along national lines. In Italy and Spain there is now something close to a national position – uniting leftist and rightwing parties – against what are regarded as arrogant and self-centered German policies. In Germany, however, there is a left-right consensus that austerity in southern Europe must be the price of bailouts.

“So why has Mr. Draghi done it? The answer is that he faced a truly hideous dilemma. It was clear that the hundreds of billions of euros committed to European bailout funds have not been enough to ward off the threat of collapsing banks and sovereign defaults across the eurozone. A financial calamity could lead to another Depression, followed by political radicalization – and a threat to democracy that is much more direct and unsubtle than the menace posed by the ECB.

“By contrast, if Spanish and Italian borrowing costs come back under control – and their governments are prodded into making important structural economic reforms – then the ECB’s actions last week could yet be vindicated. Mr. Draghi would not only have saved the euro – he would have bought Europe the time it needs to return to growth.

“However, a great many things now have to go right simultaneously for Mr. Draghi’s plan to work. It is rather more likely that political and economic unhappiness will grow in Europe over the next year – as Germany slips into recession and Italy and Spain (not to speak of Greece) struggle with ever deeper austerity. If the euro were ever to break up, the direct financial cost to Germany and other creditor nations – and the resulting backlash – could also be much higher, because of the ECB’s bond-buying program. Certainly, for anyone with a sense of history, the sight of the German representative on the ECB being isolated and outvoted should be chilling. Since 1945, the central idea of the European project was never again to leave a powerful and aggrieved Germany isolated at the center of Europe. We are now dangerously close to that point.”

Financier George Soros told Germany it must lead the eurozone out of crisis or leave altogether.

“The ECB’s bond-buying program may save the euro, but it is also a step towards the permanent division of Europe into debtors and creditors. The fact that the debtor countries will have to submit to supervision by the troika [ECB, IMF and EU] but the creditors will not is in effect an asymmetric surrender of sovereignty; and the divergence in economic performance will be reinforced.”

Soros says the only solution is the pooling of eurozone debt. Failing that, the only thing to do would be for Germany and possibly other creditor nations to leave the euro, so that the remaining “countries’ real debt could devalue and their exports become more affordable.”

‘Whether Germany decides to lead or leave, either alternative would be better than to persist on the current course,” Soros said.

“When the European Union was created, it was the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the EU into something fundamentally different. The member countries are divided into two classes: creditors and debtors, with the creditors in charge. As the strongest creditor country, Germany is emerging as the hegemon.” [David Charter / London Times]

At the same time, a topic I have continually raised, the situation in Eastern Europe, has only worsened , with the new head of the European Bank for Reconstruction and Development calling for coordinated intervention in the region because the euro crisis was having a “frightening” impact on growth.

As reported by the London Times’ Sam Fleming:

“Sir Suma Chakrabarti…said that the region was being neglected in discussions over the euro crisis and that international financial institutions needed to develop an action plan to prevent flows of credit from drying up.”

Slovenia, for one, is close to seeking a bailout. 

Separately, you also have the issue of the single supervisor for the eurozone’s banks, part of the Fiscal Pact agreement reached in June. The proposal requires the approval of the European Union’s 27 member nations and would give the ECB power to withdraw banking licenses and require all 6,000 eurozone banks to join the system by Jan. 1, 2014, though the European Commission says it will seek approval for the mechanism by next January, a seemingly impossible timetable, especially given one important fact.

Germany will not allow the single supervisor to oversee all its banks. Instead, Germany wants the existing national supervisory system to remain in place and the new central banking regular would only be responsible for the 20 to 25 largest banks that Germany believes create the true systemic risk. Chancellor Merkel has made clear her country’s concern that it was unrealistic to expect the new central bank to be able to oversee all 6,000 banks effectively, as the plan proposes. “It is about quality and not quantity,” she says.

As for Greece, the troika reports Oct. 8 on whether it is doing everything necessary to warrant the next tranche of aid, 31.5 billion euro, from Greek Bailout II. Prime Minister Samaras has a very fragile coalition and the troika wants more civil service jobs eliminated. Samaras can only push so far. Strikes and demonstrations are to follow.

Lastly, Dutch voters voted in surprisingly large numbers for the two leading centrist parties in Wednesday’s parliamentary election, with current Liberal Prime Minister Mark Rutte’s party winning 41 seats in the 150-seat assembly and the center-left Labor Party picking up 39 seats. The far-right Freedom Party of Geert Wilders lost almost half of its seats, leaving it with just 13, while fellow euro-skeptic, Emile Roemer of the Socialist Party, saw his party’s support remain unchanged at 15.

Prime Minister Rutte has been a supporter of Angela Merkel in demanding Southern European countries implement austerity measures in return for bailout aid.

On to Washington and Wall Street

1/16/09…before the Obama inauguration…9/14/12 closing prices

Dow Jones…8281 (then)…13593 (now)… +64%
S&P 500…850…1465… +72%
Nasdaq…1529…3183… +108%
Oil…$35.94…$99.01… +175%
Gold…$843…$1772… +110%

Mr. Obama thus thanks the Fed for this gift, at least regarding the first three.

The Federal Reserve’s Open Market Committee met on Wednesday and Thursday and released some of the following after suggesting that “economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated.”

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.”

So….

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” [federalreserve.gov]

The Fed also said it would keep interest rates “exceptionally low” through mid-2015, extending its forecast from 2014.

Yippee! Kind of like those bank robbers in L.A. this week, who in their infinite wisdom thought tossing their newly gained loot out the window as they were pursued by 12 squad cars was a good thing.

Only this time the ones who continue to be held up are America’s savers, particularly the elderly, as well as those for whom filling up the gas tank is going to continue to be a huge financial burden, while the loot is being tossed to Wall Street and commodities traders.

The Fed and Chairman Ben Bernanke have thus launched an unprecedented, open-ended effort to spark a lasting and deeper recovery and for the first time are tying policy to developments in the economy; specifically Bernanke said the central bank wanted to see “ongoing sustained improvement in the labor market” before halting its asset purchases. “There is not a specific number we have in mind. But what we’ve seen in the last six months isn’t it.”

Bernanke spoke passionately about unemployment, currently at 8.1% officially, but more like 15% or 17% depending on your benchmark.

“The weak job market should concern every American,” he said. “High unemployment imposes hardship on millions of people and it entails a tremendous waste of human skills and talents.”

Editorial / Washington Post

“As so often in the past, our reaction to Mr. Bernanke is ‘yes, but.’ Yes: The economy is far from full employment and inflation is near the Fed’s 2 percent target. And yes: The Fed’s response blunted the Great Recession, so more easing might help more. But: Mortgage rates are already at all-time lows, so it’s unclear how much more home-buying and refinancing the Fed can stimulate; the longer zero-interest rates persist, the more it becomes apparent that they operate as a stealth tax on savers; the bigger the Fed’s balance sheet, the costlier it may be to reduce it when robust economic growth resumes.

“Finally, the biggest ‘but’ of all: In response to concerns about the impact of his policy on savers, Mr. Bernanke explained that ‘while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.’ His trade-off is defensible – but also an example of implicit value judgments, which an unelected Fed chairman is not necessarily better suited than anyone else to make….

“In short, Mr. Bernanke is buying time for the United States to restructure its finances, private and public, under relatively benign conditions. It’s up to Congress and the president to use that time wisely, despite the temptation to procrastinate. If they don’t, they may well be forced to deal with the budget in even tougher economic circumstances than they face now.”

Editorial / Wall Street Journal

“The irony is that, with this historic and open-ended easing, Mr. Bernanke is also tacitly admitting how lousy the Obama-Bernanke economy really is. For all the back-slapping by the Fed and the White House about how they’ve saved us from a Great Depression, four years later the Fed is acknowledging that the recovery is rotten, that job creation stinks, and that their policies haven’t helped the middle class. But, hey, it’s great for Wall Street.”

Early in the week, Moody’s Investors Service warned the issue of the fiscal cliff and budget negotiations during the 2013 congressional legislative session “will likely determine the direction of the U.S. government’s Aaa rating,” adding it must see stabilization followed by a downtrend in the ratio of federal debt. Moody’s also noted the debt limit is likely to be reached by the end of the year.

Editorial / Washington Post

“At their respective conventions over the past fortnight, warring Democrats and Republicans agreed on their determination to administer bitter medicine to the American people. ‘The work ahead will be hard,’ vowed Rep. Paul Ryan, the Republican vice-presidential nominee.  ‘I won’t pretend the path I’m offering is quick or easy,’ Mr. Obama chimed in.

“But as the dust settled over Tampa and Charlotte and we tried in vain to recall a single hard truth any of the candidates had told us, it occurred to us that maybe they were stressing their supposed courage to distract us from their true point of convergence: their mutual, utter and utterly depressing failure to grapple honestly with the nation’s biggest problem.

“That problem is the nation’s debt. We say so not because we think budgets matter more than anything else but because nothing else – nothing that really matters to people – will be unaffected if the nation does not get its long-term finances in order….

“It’s heartening, on one hand, to realize how fixable the problem is. Modest tax increases and challenging but manageable adjustments to Social Security and Medicare could buy a lot of time. Confidence would return, and along with it economic growth, which is what the country needs most of all. The United States is in a better position to handle the challenge than most developed countries. But that advantage will dissipate if the political system does not rise to the task.

“Mr. Romney professes to care deeply about the debt. But his tax cuts would cause more of it. He promises to counter them by limiting deductions and loopholes, but which ones and by how much? Mortgage interest? Charitable giving? He won’t say….

“Mr. Obama says that he cares, too. He will take ‘responsible steps to strengthen’ Social Security. Which steps? Raising the retirement age? Slowing cost-of-living adjustments? He doesn’t say.  He will save Medicare by controlling health-care costs. How, since he ruled out Mr. Ryan’s competition-driven plan? He won’t say….

“With less than two months before the election, is there any hope of hearing fiscal truth from either candidate? Can reporters press harder for answers, or can debate questioners? Given their shared reticence, Mr. Obama and Mr. Romney may have an inclination not to press each other for honest answers about their plans. Maybe such fudging is tactically sound.   The country, though, deserves better.”

And a few words on China. I address the political issues down below, but the government released a slew of economic data for August and much of it was not good, with industrial production up just 8.9%, a 3-year low, exports up only 2.9% from a year earlier (they had been running at up 24.5% as recently as August 2011), with exports to the EU falling 12.7%, while imports were surprisingly down 2.6%, power output up only 2.7%, and auto sales up a disappointing 11%.

There were a few positives, however, with retail sales up 13.2%, matching estimates, while new loan lending was at its highest level ever for an August, and the inflation number, up 2% on consumer prices (3.4% on food), while above July’s 1.8% is not worrisome compared to the 5.5% figures of last year.

Add it all up and most analysts have lowered their third-quarter GDP target to the 7.0-7.5% range vs. the second quarter’s 7.6%.

Premier Wen Jiabao, though, speaking at a World Economic Forum meeting, was confident China would deliver on the full-year target of 7.5% growth.

“China’s economic development trend is good, economic growth still remains within the target range set at the beginning of the year and the economy is stabilizing.”

But speaking at an Asia-Pacific Economic Cooperation summit, Chinese President Hu Jintao said, “Economic growth is facing notable downward pressure, some small and medium enterprises are facing a hard time and exporters are facing more difficulties. We have an arduous task of creating jobs for new entrants to the labor force.”

Back to Wen, his appearance was his final swansong on the international stage after a decade in power (along with President Hu) and Wen highlighted some of the milestones, including the creation of 100 million jobs and an increase in per capita GDP from about $1,000 to $5,432.

How much credit does he deserve? One academic adviser to the government told the Financial Times:

“His has been basically a caretaker government that was just lucky to inherit the best growth period in modern Chinese history but their stimulus package spent too much money on all the wrong things and the next government will probably face the consequences of their mistakes in the form of an economic crisis and large-scale social unrest.”

Good thing this adviser sought anonymity.

Street Bytes

--The Dow Jones and S&P 500 closed the week at their highest levels since December 2007, with the Dow up 2.1% to 13593 and the S&P up 1.9%. Nasdaq is at its highest levels since 2000, up another 1.5% to 3183 and up 22.2% for the year.

On Sept. 24, UnitedHealth Group is replacing Kraft Foods in the Dow Jones Industrial Average; Kraft spinning off its North American grocery business and thus becoming too small for the Dow 30.

[I am not ignoring my 2012 market prediction that the major averages would decline 10% and that there would be a Crash somewhere over the course of the year. I admit I’m going to be wrong on the former, though I still believe we’ll see the latter.]

--U.S. Treasury Yields

6-mo. 0.12% 2-yr. 0.25% 10-yr. 1.87% 30-yr. 3.09%

So much for keeping interest rates low, Chairman Bernanke. Yeah, short rates were unchanged, but the yield on the 10-year was up 20 basis points and the 30-year rise of 27 bps from the prior week was the biggest surge since Aug. 2009. Why? Inflation concerns, because of the Fed’s even easier monetary policy.

Producer prices for August were up a whopping 1.7%, but up just 0.2% ex-food and energy. Year over year the figures are 2.0% and 2.5% on core. Consumer prices in the month rose a solid 0.6%, but up just 0.1% core, while for the past 12 months the numbers are 1.7% and 1.9%, ex-food and energy.

PIMCO’s Bill Gross predicted long-term bond yields will rise and the yield curve will be “very steep” for “a very long time” with a period of reflation now underway. Investors should “continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.” [Gross has been recommending gold. I held onto my signet ring.]

--The Fed lowered its GDP forecast for 2012 from a June projection of 1.9 to 2.4% to 1.7 to 2.0%. It also said unemployment in 2013 would be in the 7.6 to 7.9% range.

--Industrial production in the U.S. for the month of August was down 1.2%, worse than expected, but a September reading on consumer sentiment came in far higher than projected. Retail sales for August were also up, 0.9%, but much of this increase was due to the amount spent on rising gasoline.

--The Pentagon did a first-ever study of China’s holdings of U.S. debt, some $1.164 trillion as of June, and concluded the prospect that it might “suddenly and significantly” withdraw funds doesn’t pose a national security threat.

According to the report obtained by Bloomberg News, “China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities.”

I agree that China wouldn’t do anything today, especially with its economy so weak, but in different circumstances it could, like when it needs to play the nationalism card to appease the masses.

--Japan said its economy expanded at an annualized rate of only 0.7% in the second quarter, or half the initial estimate. Separately, the Japanese government is going to phase out nuclear power by 2040. Before last year’s disaster at Fukushima, the country derived about 30% of its electricity from this source and previously the government said it would halve it by 2030.

So Japan is saying it will be able to replace nuclear with renewable and increased imports of natural gas and other fuels. Business groups, on the other hand, say electricity will become less reliable and more expensive.

--Brazil cut its growth forecast for this year to 2%, down from its previous forecast of 3%. As recently as 2010, Brazil was growing at a 7.5% clip. It grew 2.7% last year.

--Nestle, the world’s largest food company, projects China sales will grow 20% this year due to rising wages and the government’s efforts to boost local consumption.

--In a huge deal, European defense industry giants BAE Systems and EADS are in discussions to merge in which the UK’s BAE would be the junior party. Both companies are touting potential cost savings from procurement and sourcing efficiencies. BAE is looking to reduce its dependence on the U.S. defense market, with BAE currently generating 45% of its revenue here, while EADS gets only 12% of its revenue from North America. EADS might gain a more receptive market for its Airbus aircraft.

In a combined company, BAE would account for a third of the sales and its shareholders would control 40%; this as defense spending slides in much of the world, save for some Middle Eastern countries.

But BAE is insisting it will walk away from talks unless the combined venture can operate without political interference. It’s about London vs. Paris and Berlin, the latter two each effectively controlling 22.5% of EADS. [The British government has no direct stake in London-based BAE.]

Investors, though, took down both companies’ shares as many were left scratching their heads why managements thought this was a good idea.

--French President Hollande is backtracking on his campaign promise to impose a 75% supertax on millionaires after facing pressure from some of the country’s wealthiest potential victims, such as Bernard Arnault, owner of the fashion house Dior and the LVMH group. He’s the country’s richest man and most highly paid boss, and now, after Arnault had a meeting with Prime Minister Jean-Marc Ayrault, there is talk Hollande is scaling back his 75% rate to 67% and only salaries would be taxed. Sports stars would also be exempt.

--Sign of the times. In Ireland, a thousand jobseekers went after just 20 jobs being provided by a pharmaceutical company, BioMarin, which had acquired a former Pfizer plant. A further 80 jobs may be available over the next two years.

But at the same time, the IT industry there said it had 1,500 vacancies that could not be filled.

--Australia cut its forecast for wheat production in the current year by 7% due to dry weather. Australia had a record 29.5 million ton wheat harvest last year but now it is calling for 22.5 million.

--India’s industrial production in July was flat, while the inflation rate accelerated in August to 7.55% from a year earlier vs. July’s increase of 6.87%. The reading was far higher than expected and hamstrings the central bank, which is forced to maintain a tight monetary stance even as the economy slows.

--Southern California’s housing market finished the month of August at a four-year high on the median home price with sales for the month at their best level in six years. Sales of foreclosed homes continued to fall in the region. The median home price hit $309,000 last month, up 10.8% from a year earlier.

--FedEx Corp. and United Parcel Service Inc. gained approval to start domestic courier businesses in some Chinese cities, with FedEx getting approval in eight cities and UPS, five, including Shanghai and Shenzhen for both; an encouraging sign.

--The U.S. Treasury has sold most of its remaining stake in AIG, earning the government some $12 billion after reducing Treasury’s stake from 53.4% to 21.5%. But now instead of being a majority owner, the government (read Federal Reserve) becomes its primary regulator. Treasury deserves credit in AIG’s restructuring of what used to be the world’s largest insurance group.

--Apple unveiled the iPhone 5. It becomes available in the U.S. Sept. 21 and, yes, it has an impact on the overall economy.  Some estimate sales will be over 46,000 an hour, or 770 handsets a minute, with perhaps ten million being sold in the last nine days of the quarter. Within hours Apple had to shut down preorders…sold out.

Shares in Apple hit another all-time high on Friday, $697, before closing at $692.

--Mark Zuckerberg finally spoke at a techie convention in San Francisco and admitted Facebook’s performance following its IPO “has obviously been disappointing.” His comments were well-received as he spoke of “A bunch of people” being guilty of underestimating the world’s largest social network. He also talked of building “a system that is deeply integrated in every major device,” adding that in decades to come he wants to connect “everyone in the world.” And he said Facebook handles a billion search inquiries a day “and we’re not even trying,” so search represents “a big opportunity – we need to go do that.” Whatever.

Shares in Facebook finished the week at $22.00, a nice improvement from the recent low of $17.55. [The IPO was at $38.]

--Income for the top fifth of American households rose by 1.6% last year, while the middle class saw a decline and those at the very bottom stagnated.

Median household income after inflation fell to $50,054…8% lower than in 2007, according to the Census Bureau. [4.1% below when Obama took office in 2009.]

--According to the Kaiser Family Foundation and the Health Research & Educational Trust, the price of health insurance provided by employers rose a moderate 4% this year (after a 9% increase in 2011), but rates are expected to climb next year. Since 2002, U.S. health premiums have shot up 97%, three times as fast as wages and inflation nationwide, the survey found. Looking ahead to 2013, employers are reporting a 7% premium increase, on average. [Los Angeles Times]

--Hewlett-Packard announced it will slash 2,000 more jobs on top of the 27,000 previously announced. The cuts are to take place by October 2014. At the same time the company announced it is rolling out four new computers.

--Dutch giant Royal Philips Electronics announced it would cut another 2,200 jobs globally. Last year it announced plans to cut 4,500.

--Eastman Kodak Co. is cutting another 1,000 positions as it attempts to emerge from bankruptcy protection. The patent auction isn’t raising nearly as much money as the company had hoped for. Kodak previously announced 2,700 job cuts thus far in 2012. 13,400 employees will remain at a company that once employed 145,000.

--The IRS is awarding an ex-banker with $104 million in the largest amount ever paid to a whistleblower. Former Swiss banker Bradley Birkenfeld is credited with exposing widespread tax evasion at UBS.   Birkenfeld himself served 2 ½ years in prison related to the case, with UBS being fined $780 million. The IRS says it has recovered about $5 billion in taxes after UBS was forced to turn over thousands of names of suspected American tax dodgers.

--Morgan Stanley is buying the rest of Smith Barney from Citigroup, ending their joint venture by June 2015. After months of wrangling over the valuation, an independent advisor came up with $13.5 billion. Morgan Stanley will pay for the remaining 49% in three installments over the next three years.

--Manhattan’s apartment vacancy rate, while just 1.2%, has been rising amid record-setting rents, which averaged $3,460 in August. Two-bedroom units are now $4,030 on average.

--McDonald’s is going to begin showing calorie counts. A Big Mac weighs in at 550 calories, while the Big Breakfast with hotcakes and large biscuit is 1,150. My Stouffer’s lasagna dinner tonight was 650.

--Ferrari reported record sales and profits. The supercar manufacturer delivered 3,664 cars in the first six months of 2012 and profits of $128 million, up 10% on year ago levels. In 2011, Ferrari sold 7,195 cars, up 9.5% when compared with 2010. 7% of the sales are in Italy, 93% around the world.

Foreign Affairs

Libya: U.S. Ambassador Christopher Stevens and three other Americans were killed in what appears to have been a coordinated attack by an ultraconservative Salafist group, Ansar al-Sharia, which overwhelmed Libyan security guards outside the U.S. consulate in Benghazi on Tuesday night. A second attack took place at a safe house that Ansar al-Sharia and/or others had been tipped off to.

Islamists holding demonstrations throughout the region blamed an obscure video produced in the U.S. that blasted the prophet Muhammad, but it was far more than this.

While the Libyan government immediately condemned the attack, in Egypt, where a mob stormed the U.S. embassy in Cairo, though with no American casualties, it took Egyptian President Mohammed Morsi over a day to denounce the violence.

The embassy attack in Egypt comes at a time when the White House is looking to forgive $1 billion in debt owed it by the Egyptian government while continuing to supply at least $1.3 billion in military aid (part of up to $2 billion Egypt receives from the U.S. annually, second most next to Israel).

In an interview, President Obama said of Washington’s relationship with Cairo, “I don’t think that we would consider them an ally, but we don’t consider them an enemy. I think it’s still a work in progress, but certainly in this situation, what we’re going to expect is that they are responsive to our insistence that our embassy is protected, our personnel is protected.” 

Later, a State Department spokesman attempted to dial this back, saying Egypt remained “a major non-NATO ally.” Sen. John McCain jumped on the statement, saying it was an example of Obama’s “feckless foreign policy” and had undermined America’s global influence.

Robert Kagan / Washington Post

“As with many nascent democracies around the world, Islamic and non-Islamic, the transition in Egypt is incomplete. Some signs give reason for hope, but there are also signs of undemocratic tendencies. The Morsi government has been censoring media and hounding political opponents. Coptic Christians are justifiably scared. Women have reason to worry about whether their rights will be respected.

“The United States needs to strike an intelligent balance. If Egypt’s economy crumbles, is the nation going to become less radical? Is it more likely to uphold the peace treaty with Israel? Is it more likely to be a force for moderation in the greater Middle East?

“The United States and its friends in the region have a vital stake in the success of Egypt’s transition. U.S. policies should aim to support the forces in Egypt – and there are many – that want a democratic system and a healthy economy. That means providing aid, ideally even more aid than is planned. But it also means making clear to Egyptians what that aid is for. U.S. support should be conditioned on the Egyptian government’s behavior, both internationally and domestically. The Morsi government needs to understand that it will not get U.S. assistance, or much help from the rest of the international community, if it clamps down on freedoms at home, persecutes religious minorities such as the Copts or fails to meet its basic international obligations….

“Meanwhile, politicians and commentators would be wise to tone down the apocalyptic rhetoric. This is an election year, and there is much to criticize in the way the administration has handled events in the Middle East. But a toxic mix is brewing between the natural impulses of political warfare and a tendency, perhaps still on the fringes, to tar all Islamic governments with the same brush and tell them all to go to hell. Sorry, we can’t afford to.”

Jeffrey Goldberg / Bloomberg Businessweek…from an editorial posted days before the trouble in Libya and Egypt.

“The primary foreign policy task of an American president in the post-Sept. 11 era is to prevent jihadist organizations from obtaining weapons of mass destruction. It’s therefore impossible to ignore a region in which this acquisition would most likely take place.

“As for terrorism, the threat to the U.S. posed by the central al-Qaeda organization (currently headquartered in territory controlled by our ostensible ally, Pakistan) is dramatically lower than it was 11 years ago. Yet contrary to what Ron Paul might claim, no counterterrorism expert believes that a comprehensive American withdrawal from the Mideast would bring about an end to anti-American jihadist terrorism. There will be no ground invasions of Muslim countries in the near future; Iraq and Afghanistan have immunized the U.S. – its people and its government – against that level of interventionism. Yet it’s naïve to think that abandoning American responsibilities in the region would lead to anything but the further empowerment of radical ideologues.

“The Middle East is a continual source of woe. There is something seductive about the notion of pivoting away from it toward…well, anything, really. Yet it will be a terrible mistake for the U.S. to avert its eyes simply because what it sees constitutes nothing but trouble.”

Israel/Iran: By week’s end, Israeli Prime Minister Netanyahu was forced to deny accusations he was interfering in the U.S. presidential election after his fierce criticism of Washington earlier in the week.

“That’s nonsense,” he told one Israeli newspaper, “because what’s guiding me is not the election in the United States but the centrifuges in Iran….

“If the Iranians…had stopped enriching material and preparing a bomb until the U.S. election was over, I would have been able to wait.”

There is no love lost between the prime minister and President Obama, and the press in Israel is quick to point out close ties with the likes of casino kingpin Sheldon Adelson, one of Mitt Romney’s most generous financial backers who also bankrolls a right-wing Israeli daily.

So it was that last Sunday, Sec. of State Hillary Clinton said, “We’re not setting deadlines (with the Iranians)” when asked about the establishment of “red lines.”

Netanyahu then replied, “Now if Iran knows that there is no red line, if Iran knows that there is no deadline, what will it do? Exactly what it’s doing. It’s continuing, without any interference, toward obtaining nuclear weapons capability and from there, nuclear bombs.”

He later went on in a separate venue:

“The world tells Israel: ‘Wait. There’s still time.’ And I say, ‘Wait for what? Wait until when?’ Those in the international community who refuse to put red lines before Iran don’t have a moral right to place a red light before Israel.”

And there was the disagreement over the coming UN General Assembly and Netanyahu’s request for a meeting with Obama in New York later this month.

The Israeli Embassy in Washington said, “The White House informed Jerusalem that the meeting….wouldn’t be possible due to the president’s agenda.”

The White House said the two wouldn’t be in New York at the same time, with Obama departing New York immediately after his Sept. 25 address to the General Assembly and Netanyahu not arriving until Sept. 27 when he delivers his speech. The White House, in attempting to defuse the tension, said Obama and Netanyahu had spoken by phone for an hour Tuesday night.

Wednesday, Netanyahu said:

“As prime minister of Israel, it is my duty to uphold the vital interests of the State of Israel, to ensure its security and its future. I uphold these interests, not that it’s easy, because leadership is tested in upholding them even if there are disagreements with friends, even the best of friends.”

Charles Krauthammer / Washington Post

“There are two positions one can take regarding the Iranian nuclear program: (a) it doesn’t matter, we can deter them; or (b) it does matter, we must stop them.

“In my view, the first position – that we can contain Iran as we did the Soviet Union – is totally wrong, a product of wishful thinking and misread history. But at least it’s internally coherent.

“What is incoherent is President Obama’s position. He declares the Iranian program intolerable – ‘I do not have a policy of containment; I have a policy to prevent Iran from obtaining a nuclear weapon’ – yet stands by as Iran rapidly approaches nuclearization.

“A policy so incoherent, so knowingly and obviously contradictory, is a declaration of weakness and passivity. And this, as Anthony Cordesman, James Phillips and others have argued, can increase the chance of war. It creates, writes Cordesman, ‘the same conditions that helped trigger World War II – years of negotiations and threats, where the threats failed to be taken seriously until war became all too real.’…

“The Obama policy is in shambles….

“(Made) all the more shocking (by) Secretary of State Hillary Clinton’s dismissal last Sunday of the very notion of any U.S. red lines. No deadlines. No bright-line action beyond which Iran must not go. The sleeping giant continues to slumber. And to wait – as the administration likes to put it, ‘for Iran to live up to its international obligations.’

“This is beyond feckless.   The Obama policy is a double-game: a rhetorical commitment to stopping Iran, yet real-life actions that everyone understands will allow Iran to go nuclear.

“Yet at the same time that it does nothing, the administration warns Israel sternly, repeatedly, publicly, even threateningly not to strike the Iranian nuclear program. With zero prospect of his policy succeeding, Obama insists on Israeli inaction, even as Iran races to close the window of opportunity for any successful attack.

“Not since its birth six decades ago has Israel been so cast adrift by its closest ally.”

And one side note on tensions in the West Bank.   Mass demonstrations have been held protesting the Palestinian Authority’s leadership, as the economy collapses amid a cash crisis due to a shortfall in donor contributions, particularly from Arab states. Civil service employees aren’t going to receive their full salaries this month. Unemployment is 57%. The UN estimates one in two Palestinians live in poverty. The government had reached its credit limits as well.

Syria: The UN’s official refugee figure is now over 253,000, but the unofficial toll is far higher. Actress Angelina Jolie, a special UN ambassador, gave an impassioned plea for the world community to do something in this crisis after she visited a camp in Jordan, but global support has been minimal, especially from the United States.

The Times of London reported a massive shipment of arms, some 400 tons worth (including a bit of humanitarian aid) made its way from Benghazi, Libya, to Turkey, and then into Syria where surface-to-air missiles and rocket-propelled grenades are now being fought over by the various rebel factions, as well as the Muslim Brotherhood, which took control of the shipment when it arrived in Turkey. The Brotherhood is trying to play a larger role in Syria and knew the weapons would help their cause.

Lebanon: Pope Benedict XVI arrived on Friday amid neighboring Syria’s civil war and the week’s events in Libya, Egypt and elsewhere. Saturday has been declared a national holiday in honor of the Pope’s visit, with tens of thousands being given the day off to greet him. 

Pope Benedict will be addressing the plight of Christians in the Middle East, though is likely to meet supporters of Hizbullah, and he may also meet with Syrian refugees. The main public event is Mass on Sunday on the Beirut waterfront.

Separately, a former General Security head, Jamil al-Sayyed, was caught on tape saying Druze leader Walid Jumblatt “must be killed,” part of the probe into former MP Michel Samaha, a close ally of Syrian President Bashar Assad who was charged in August with plotting to carry out terrorist attacks in Lebanon. The recordings were taken from Samaha’s car.

While in Paris, former Prime Minister Saad Hariri met with French President Hollande, with Hariri saying Hizbullah is sending arms and fighters to Syria and that while they are “free to take a political position…killing the Syrian people is a crime.”

Citing recent assassination attempts against various politicians in Lebanon, Hariri reiterated he was out of the country for security reasons but would take part in the 2013 parliamentary elections. “I will participate…and I will win them, if the elections are not rigged. All those who bet on the end of my political career are wrong.”

Return home, Saad. You can just as easily be killed in Paris.

Iraq: Insurgents killed at least 109 across the country in a wave of attacks on Sunday, mostly against security forces. Also that day, a court sentenced to death the most senior Sunni Arab politician, Tariq al-Hashemi, for organizing terror attacks. Hashemi fled earlier in the year to Turkey when the charges were first announced hours after the final withdrawal of U.S. troops. Hashemi, in a press conference, said the death sentence passed on him in absentia was “politically motivated.” It’s all the work of our good friend, Prime Minister Maliki.

We won the war and lost the peace. Thank you, Barack.

Afghanistan:  Regarding the attacks on U.S. interests in Libya and Egypt, President Hamid Karzai condemned the video but not the killings. He’s another real winner.

James Carafano of the Heritage Foundation told Army Times that troop reductions in Iraq and Afghanistan do not necessarily equate to success.

Iraq “still looks unstable, making it, at best, a shaky ally for America. Since the U.S. goal was to leave the Middle East less, not more, dangerous, this is nothing to boast about,” he said.

“As for Afghanistan, Mr. Obama gave the commanders on the ground half the troops and half the time they needed to do the job right. There is a real prospect that, in a few years, the country will look a lot like it did on Sept. 10, 2001.”

[It already does in some parts.]

Also, Osama bin Laden’s death “was an incontrovertible act of justice,” Carafano said, “but one that had little impact on al-Qaeda’s operational capabilities.”

Meanwhile, 51 Afghans were killed in a collision between a bus and truck in the eastern part of the country on Friday.

Two U.S. soldiers were killed at the same base where Prince Harry is stationed as the Taliban launched a large-scale attack. Captain Wales was in no danger.

Pakistan: The death toll from two devastating factory fires in Pakistan’s two biggest cities soared to at least 314, as many of the victims were trapped in buildings lacking emergency exits, alarms and sprinklers. The toll from a garment factory in Karachi hit 289, a place with no fire exits, while workers on upper floors struggled to make it out windows with metal bars.

Yemen: Security forces here, and/or a U.S. drone, were responsible for the death of Said al-Shihri, the second-in-command of al-Qaeda in the Arabian Peninsula (AQAP), the group having been labeled by the U.S. as the most dangerous offshoot of al-Qaeda.

China: China claims nearly all the South China Sea; and East China Sea as well. But on Tuesday, Japan announced it had nationalized three of the islands known as Senkaku in Japan and Diaoyu in China, buying them from their private owner. Communist Party mouthpiece The People’s Daily called Tokyo’s actions a violation of China’s territorial sovereignty and an affront to its citizens.

“Is Japan prepared to pay the price for its vicious actions? They will be regarded as an invasion of China’s inherent territory and thus China will resolutely strike back.”

Premier Wen Jiabao said Beijing would “never yield an inch” in its territorial dispute with Japan.   The Foreign Ministry office said “This is a serious infringement of China’s sovereignty and has seriously hurt the feelings of 1.3 billion Chinese.”

So on Friday, six Chinese maritime patrol ships entered Japanese waters. Japan asked them to leave. China said they had a right to be there. Eventually, the ships left.

Japan summoned the Chinese ambassador to protest and Prime Minister Noda met with a crisis team at his office. A government spokesman said this latest episode represented an “unprecedented scale of invasion into Japanese contiguous waters.”

Trade between the two nations is already suffering, China being Japan’s largest trading partner, some $345 billion worth in 2011.  Chinese visitors to Japan may decline as much as 20%, according to the Japan National Tourism Organization; a significant figure given Japan is still looking to recover from the tsunami and nuclear-power crises.

The Japanese foreign ministry has warned its nationals to be aware of anti-Japanese demonstrations on the mainland and to avoid drawing attention to themselves. At least six “serious” cases of assault or harassment are being cited by Japanese diplomats as of Friday. In Shanghai, where 60,000 Japanese live, a group of Japanese diners was attacked though no one was seriously injured.

China’s foreign ministry was also forced to respond to the Philippines renaming waters off its coast the West Philippine Sea.

“South China Sea is a name that has all along been accepted by countries across the world as well as by the United Nations and other international organizations,” said a spokesman.

Philippine President Benigno Aquino said he had approved the name change “to clarify which of the areas we are claiming.”

As for the mystery surrounding the whereabouts of Chinese president-in-waiting Xi Jinping, he has suddenly reappeared after an absence of 12 days, with no explanation given. 

Russia: Prime Minister Medvedev said Wednesday he believed the three members of punk rock group Pussy Riot had been held long enough. 

“What has already happened – that this well-known group of girls have been in prison quite a long time – is a very serious punishment for everything they did, regardless of the sentence. …So prolonging their time in conditions of imprisonment seems not to be productive.”

And on Friday, a leading opponent of Vladimir Putin, Gennady Gudkov, was thrown out of the Duma; the first member of parliament to be stripped of his seat in 17 years. The vote was 293 to 150.

Gudkov is a former KGB colonel who has been one of Putin’s fiercest critics and a prominent figure in street protests. The expulsion was orchestrated by the pro-Kremlin United Russia party. Gudkov called his removal a “political vendetta and extrajudicial repression.” Later he said, “Everything happening here is a lawless show trial.” Others warned of the start of a witchhunt.

Gudkov could be arrested as he is now stripped of his immunity from prosecution.

Needless to say, with protests scheduled today in Moscow and elsewhere, reaction to this latest incident bears watching.

Mexico: The Mexican Navy claimed to have arrested the top leader of the Gulf Cartel, Jorge Eduardo Costilla Sanchez, or El Coss, who was paraded in front of cameras on Thursday; a huge coup (though sometimes these guys turn out not to be who we were first told). President Felipe Calderon’s six-year term ends in December and security forces are trying to deliver Joaquin Guzman, El Chapo, the most wanted drug lord of them all as well.

Random Musings

--Some post Democratic National Convention polls (daily tracking polls from early in the week where applicable).

Reuters/Ipsos…Obama ahead of Romney, 47-43
Gallup…Obama leading Romney, 49-44
Rasmussen…Obama leading Romney, 46-44
CNN/ORC…Obama leading Romney, 52-46
New York Times/CBS News…Obama leading Romney, 49-46 [Obama winning over women by 12 points; Romney leading among men by 8 points.]
Washington Post/ABC News…Obama leading Romney, 49-48, among likely voters. [Among “registered voters” the margin is 50-44, Obama.]

The Post/ABC survey shows Obama leading Romney by 21 points in addressing women’s issues; by 15 points in advancing the interests of the middle class; and social issues such as abortion and same-sex marriage, 11 points.

Obama’s overall approval rating in the above poll, however, is still just 48 percent.  [In the New York Times/CBS poll, Obama’s approval rating climbed to 51%.]

--In an NBC/Wall Street Journal survey of key battleground states…Obama leads Romney in all three.

Virginia 49-44
Florida 49-44
Ohio 50-43

[The polls were conducted Sept. 9-11.]

--And in the key question, “Are you better off than four years ago?” a CNN/ORC survey revealed that among registered voters, 37% said they were better off, 44% worse off, and 19% the same.

Among Democrats, though, it’s 55-20, better off/worse off, while with Republicans it’s 16-70. Importantly, among independents it’s 33% better off, 49% worse off.

In the same survey, despite the above, by a 50-49 margin people feel President Obama would do a better job handling the economy.

--Obama outraised Romney in August, $114 million to $111 million. Obama had raised $75 million in July, which was the third straight month he trailed Romney in monthly fundraising.

--I have argued since the campaign began in earnest that Mitt Romney’s foreign policy message has been a mess. He is also clearly getting awful advice. So the other day the Washington Post’s Jennifer Rubin, who is rapidly becoming my favorite political reporter, had her take on Romney’s speech on 9/11 to the National Guard Association conference, which ended with an account by Romney of how on Memorial Day, 2006, after visiting Iraq and Afghanistan along with two other governors, he made some phone calls to Guardsmen’s spouses. He was proud he “made 63 calls on Memorial Day.”

Rubin:

“And that was about it.

“Sorry, that is a weak and defensive response to criticism that he didn’t say the word ‘Afghanistan’ in his convention speech. It’s worse than that, actually. It suggests that he thinks writing letters [or making calls] to soldiers’ families is preparation for being commander-in-chief.

“This was a wasted opportunity when he could have shown some mettle. His foreign policy message, not unlike his domestic policy message, is getting put through the Boston blender, it seems, coming out mush. That would be mush with no flavor.

“Romney wants to rise above the fray, which might work if he had a hatchet man at the ready. But so far he’s not unleashed VP nominee Rep. Paul Ryan to hit Obama where he is most vulnerable. [Ed. Rubin wrote this before Friday, when Ryan went after Obama on foreign policy.]

“What can Romney say on foreign policy? To begin with he might quote a Democratic insider. ‘Judgment will trump experience.’ That would be David Axelrod in the 2008 campaign. And that it seems is where Romney could do some real damage. Obama showed poor judgment in missing many of his national security briefings where he might have heard candidly from his advisers. He showed poor judgment in trying to offload our Syria policy to the United Nations and releasing aid without strings attached to the Muslim Brotherhood government of Egypt. Time and again – assessing Russian ‘reset’ a success or being mute during Iran’s Green Revolution, to name two more – he has made the wrong call and misjudged the situation, our foes and the influence of the United States.

“It’s also about time to take the president to task for being a rotten steward of a first rate military and top notch military intelligence apparatus that could find and kill Osama bin Laden, win in Iraq and complete every mission asked of them in Afghanistan. What is Obama leaving to his successor, who will have his own challenges? A hollowed out military (which he cut, cut some more and then put on the chopping block in sequestration) and a culture of rampant leaking. Other presidents have done heavy lifting on national security, often overriding showboaters (who opposed the surge, for example) to look out for the long-term interests of the U.S. regardless of the political circumstances. I can’t think of a single instance in which Obama has sacrificed his political popularity or trimmed his grandiose domestic ambitions to do the work of maintaining the U.S. as a superpower.

“And finally, Romney should come out and say it: Obama has failed in the most critical foreign policy challenge we face, foreclosing the potential of a nuclear-armed Iran….Sanctions haven’t slowed progress on a nuclear weapon. And Israel feels so imperiled it may have to act on its own.”

--Senator John McCain expressed my feelings exactly on the topic of foreign policy, a few days before the incidents in Libya, Egypt and Yemen. In an interview with the Associated Press, McCain said some of the following.

On the issue of Iran and its nuclear efforts: “In a way it’s almost like watching a train wreck.”

On the issue of the lack of discussion on foreign policy at the Republican National Convention: “Yup, it was” absent. “The election is about jobs and the economy, but a failed…national security policy over time is going to lead to significant domestic problems.

“It’s the job of presidents and candidates to lead and articulate their vision for America’s role in the world. The world is a more dangerous place than it’s been since the end of the Cold War, and so I think candidates for the presidency should lead and talk about it, and I’m disappointed that there hasn’t been more.”

--So back to Mitt Romney, he caught some heat, and deservedly so, for the timing of comments such as the following:

“I think it’s a terrible course for America to stand in apology for our values. When our grounds are being attacked and being breached, the first response of the United States must be outrage at the breach of the sovereignty of our nation. And apology for America’s values is never the right course.”

The thing is, this statement was made in response to the initial statement issued by the Embassy in Cairo on Tuesday evening, denouncing the makers of the stupid movie:

“The Embassy of the United States in Cairo condemns the continuing efforts by misguided individuals to hurt the religious feelings of Muslims, as we condemn efforts to offend believers of all religions.”

But the White House quickly disavowed the embassy statement and made it clear it did not reflect the views of the United States Government.

So what is my guiding principle here? In situations like this, the best thing is to wait 24 hours. And especially in the heat of a campaign when Romney is not president yet, he should have paid his respects to the victims and their families and simply said he is withholding judgment until more facts are known.

I mean, imagine Romney in those first moments after Oklahoma City. So many got it wrong. No doubt he would have too.

Again, I cannot overemphasize the fact his staff is peopled with idiots. Oh, he’ll talk of having “advisors” like Condi Rice and George Schultz and Henry Kissinger….but it’s the two or three nudnicks, including Rich Williamson and Dan Senor, who call the day to day shots. 

Anyway, Romney stupidly gave President Obama an opening he in no way deserved, as Obama told CBS for an interview to be aired Sunday:

“There’s a broader lesson to be learnt here. Governor Romney seems to have a tendency to shoot first and aim later.”

Republican strategist and Romney pitbull, former Senator John Sununu, offered:

“They (the campaign) probably should have waited. You look at the way things unfolded, you look at the timing of it, they probably should have waited.”

Peggy Noonan noted that Romney “had not been doing himself any favors,” adding that in times of great drama and heightened crisis,” discretion is the better way to go.”

Noonan added:

“When you step forward in the midst of a political environment and start giving statements on something dramatic and violent that has happened, you’re always leaving yourself open to accusations that you are trying to exploit things politically.” [Alexandra Frean / The Times of London]

Editorial / Washington Post

“J. Christopher Stevens, the U.S. ambassador to Libya, was a skilled and courageous diplomat who repeatedly placed himself at risk to support the cause of a democratic Libya. His death, along with those of three other Americans…is a tragedy that should prompt bipartisan support for renewed U.S. aid to Libyans who are struggling to stabilize the country. That it instead provoked a series of crude political attacks on President Obama by GOP presidential nominee Mitt Romney is a discredit to his campaign….

“At a news conference [Ed. the next day], Mr. Romney claimed that the administration had delivered ‘an apology for America’s values.’ In fact, it had done no such thing: Religious tolerance, as much as freedom of speech, is a core American value. The movie that provoked the protests, which mocks the prophet Muhammad and portrays Muslims as immoral and violent, is a despicable piece of bigotry; it was striking that Mr. Romney had nothing to say about such hatred directed at a major religious faith….

“Mr. Romney would do well to consider the example of Republican former secretary of state Condoleezza Rice, who issued a statement Wednesday lamenting ‘the tragic loss of life at our consulate,’ praising Mr. Stevens as ‘a wonderful officer and a terrific diplomat’ and offering ‘thoughts and prayers’ to ‘all the loved ones of the fallen.’ That was the appropriate response.”

Again, people…wait 24 hours, especially when you are not the president.

--And what was Romney doing last week on “Meet the Press,” reversing some of his stated positions on ObamaCare?

Editorial / Wall Street Journal

“When Mitt Romney ventures into health care, political trouble usually follows. So it went this weekend, as the GOP standard-bearer made his own policy sound worse than it is.

“On ‘Meet the Press,’ the Republican was asked what he would do about people with pre-existing medical conditions who would supposedly ‘no longer be guaranteed health care’ if he repeals the Affordable Care Act. ‘I say we’re going to replace ObamaCare,’ Mr. Romney replied.   ‘And I’m replacing it with my own plan,’ without defining the substance of his own agenda.

“When pressed, Mr. Romney said that ‘I’m not getting rid of all of health-care reform. Of course, there are a number of things that I like in health-care reform that I’m going to put in place. One is to make sure that those with pre-existing conditions can get coverage.’

“Whether or not this rhetorical gambit was driven by polling, it did confuse political reporters who think that the only two ‘health-care reform’ choices are ObamaCare and the pre-2010 status quo. They were soon filing stories about a Romney ‘move to the middle.’ Meanwhile, certain quarters on the right – equally unversed in policy – went bonkers, while liberals gloated about a flip flop….

“Mr. Romney’s pre-existing political calculation seems to be that he can win the election without having to explain the economic moment or even his own policies. As this flap shows, such vagueness carries its own political risks.”

--Back to the president and this week’s chaos in the Middle East…

Editorial / Wall Street Journal

“The larger concern is that these attacks fit a pattern of declining respect for U.S. power and influence. The Obama Administration has been saying for four years that the U.S. needs to defer to the U.N. and other nations, and the world has taken notice and is more willing to ignore U.S. desires and interests.

“Across the Arab Spring, the U.S. has done little to shape events and is increasingly irrelevant. The U.S. angered Saudi Arabia by calling for the ouster of Egypt’s Hosni Mubarak and now has little sway in Bahrain. Mr. Obama has washed his hands of Syria, allowing Russia and Iran to keep their proxy in power and stir up trouble for Turkey and Lebanon. The Chinese have brazenly occupied disputed territories in the South China Sea, hinting at war if the U.S. intercedes on behalf of its Asian allies.

“The U.S. withdrew in toto from Iraq, and now its Prime Minister ignores Vice President Joe Biden’s request to stop Iranian arms flights to Damascus. Even America’s dependent in Kabul, Hamid Karzai, is refusing to honor his commitments on holding Taliban detainees. Perhaps he has heard Mr. Obama describe Afghanistan in his re-election campaign as if the U.S. is already halfway out the door.

“Most of all, Iran continues its march toward a nuclear weapon despite the President’s vow that it is ‘unacceptable.’   The U.S. says it has isolated Iran, but only last month the U.N. Secretary-General defied a U.S. plea and attended a non-aligned summit in Tehran….

“Meanwhile, the U.S. has engaged in repeated public arguments with Israel, supposedly its best ally in the region….

“Mr. Obama…came to office saying, and apparently believing, that a more deferential America would be better respected around the world. He will finish his term having disproved his own argument. The real lesson of the last four years – a lesson as much for Republican isolationists as for Democrats who want to lead from behind – is the ancient one that weakness is provocative.”

--As for the Chicago teachers strike, which appears to be on the verge of a settlement after 26,000 walked off the job for a week, leaving 350,000 children, and parents, scrambling, if Chicago Mayor Rahm Emanuel, former Obama chief of staff, is perceived to be the winner, what does this do to Obama’s image with his key base, organized labor? The American Federation of Teachers, after all, has 4.5 million members. For good reason, the administration is staying silent. The most contentious issue is a city proposal to raise the portion of a teacher’s evaluation that is based on improved test scores.

Emanuel has long had a reputation for being an asshole, and worse. Karen Lewis, the president of the teachers union, called him a “liar and a bully.” Your editor sides with the a-hole on this one.

By the way…a whopping 8 percent of 11th graders in Chicago meet college readiness standards.  

--At this point, I’ll be happy if Republicans can take the Senate and retain the House, and towards that end, Scott Brown is leading Democratic challenger Elizabeth Warren in Massachusetts, last I saw, by a 49-44 margin. And the Wall Street Journal reported on Connecticut Republican Linda McMahon of WWF fame, who lost her Senate race two years ago by 12 points but is running a tight race this go ‘round against her Democratic challenger, Rep. Christopher Murphy. One poll has her up by three; another has her down by four.

--At a congressional subcommittee hearing Wednesday, panelists at the House Homeland Security Subcommittee on Cybersecurity, Infrastructure Protection and Security Technologies, told Chairman Dan Lungren (R-Calif.) that there were serious flaws in the nation’s infrastructure that could allow for electromagnetic pulse events to shut down power and communications for extended periods of time.

If such an event occurred today, the Pentagon would be blind.

--California’s Death Valley now holds the world record for the hottest temperature ever recorded on Earth, 134 degrees on July 10, 1913. The previous record of 136 set in the Libyan desert in 1922 has been deemed invalid for a variety of reasons. A team of 13 atmospheric scientists from nine countries is responsible for the determination. One of the members of the team was a Libyan scientist who during the revolution last year amazingly discovered the original 1922 log sheet, which showed some discrepancies.

Death Valley receives only two inches of rain a year on average and during one 40-month period in 1931-34, received just over a half inch of rain, in total. [Doyle Rice / USA TODAY]

--Your editor won his rematch with Dr. Bortrum at the Summit Muni Golf Course. Don’t tell anyone, but both of us hit our tee shots on No. 9 over the fence…thankfully no drivers were killed on the nearby road. The championship is in two weeks.

--Planet Earth couldn’t suck more these days, but thankfully one can turn their thoughts to the Voyager I spacecraft, launched from Cape Canaveral in 1977, which is preparing to leave the solar system…though scientists aren’t sure if this event is days, months or even years away.

But in reading a story in the Los Angeles Times by Eryn Brown, she had this note on the journey.

“(In) February 1990, while 6 billion miles from Earth, Voyager 1 turned its cameras to take a family portrait of the solar system. Part of that image was the famous ‘Pale Blue Dot’ photograph, which depicted our planet as a tiny blip in the heavens.

“ ‘That’s home. That’s us,’ astronomer Carl Sagan wrote of the picture. ‘On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives.’”

--Lastly, in a memorial service at the National Cathedral on Thursday, attended by 2,500, friends and colleagues remembered astronaut Neil Armstrong, who was buried at sea in the Atlantic Ocean on Friday.

Captain Gene Cernan, who is known as the last man on the Moon, talked of a man “who when he became your friend was a friend for a lifetime.” When Armstrong was picked to be the first man on the Moon, Cernan added, “no one, but no one” could have better supported the responsibility such an act carried with such grace and humility.

Bidding farewell, Cernan paraphrased the words of the American poet and aviator John Gillespie Magee:

“As you soar through the heavens, beyond where even the eagles dare to go, you can now finally put out your hand and touch the face of God.”

---

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

God bless America.
---

Gold closed at $1772
Oil, $99.01

Returns for the week 9/10-9/14

Dow Jones +2.1% [13593]
S&P 500 +1.9% [1465]
S&P MidCap   +2.2%
Russell 2000 +2.7%
Nasdaq +1.5% [3183]

Returns for the period 1/1/12-9/14/12

Dow Jones +11.3%
S&P 500 +16.5%
S&P MidCap +16.8%
Russell 2000 +16.7%
Nasdaq +22.2%

Bulls 51.1
Bears 25.5 [Source: Investors Intelligence]

Don’t forget the StocksandNews iPad app. Get it before Halloween and then scare the heck out of trick-or-treaters by showing them some of the gloomy forecasts for their planet and how their lives are likely to be filled with misery and despair.

Have a great week. I appreciate your support.

Brian Trumbore