Week in Review

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Week in Review

06/15/2013

For the week 6/10-6/14

Wall Street and Washington

It’s been a wild six-week ride for global bond and currency markets, which has translated into increased volatility for equities, as investors deal with the central issue of the day...when will central banks begin taking away the punch bowl. Rates have been rising, whether it’s the yield on the 10-year Treasury, or yields in Asia and Europe.

Andrew Haldane, head of financial stability at the Bank of England, told MPs there was a danger of a rapid reversal in valuations of global bonds that had been pushed up by central banks and that he was carefully monitoring which parts of the financial system were most exposed.

“Let’s be clear. We have intentionally blown the biggest government bond bubble in history. That’s where we are. We have to be vigilant to the consequences of that bubbly deflating more quickly than we might otherwise have wanted.” [London Times]

The carnage in the fixed income markets has been substantial, as noted below in some of the return figures since the tide turned May 2.

“The big questions hanging over markets and the global economy now: Is this the inevitably bumpy beginning of a welcome return to normal – a world in which the U.S. economy doesn’t need big and repeated doses of monetary stimulus, Japan grows again and China’s economy gently slows to a sustainable speed?

“Or is it a harbinger of more volatility in financial markets – perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money – that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called ‘escape velocity’?

As the yield on the 10-year Treasury rose from 1.63% on May 2 to 2.27% on June 12, the bond market was saying they didn’t like the idea of the Federal Reserve tapering its $85 billion a month in mortgage-backed and Treasury purchases. Bernanke and various Fed governors had strongly hinted they might begin doing so soon, but they could not have been happy to see such a rapid rise in rates as a result of such talk, which for starters could halt the resurgent housing rebound in its tracks.

But as the volatility picked up in the equity market, Chairman Bernanke having pegged it as a key to his recovery hopes – rising stocks leading to a more confident consumer and home buyer, which spurs on economic activity that eventually leads to a robust jobs market – he sought to convince investors that an adjustment to quantitative easing won’t mean it will end all at once, let alone is the Fed anywhere near raising short-term interest rates, as Bernanke wanted to reiterate by going to one of his favorite reporters, Jon Hilsenrath of the Journal, to get the word out.

Many investors have been placing bets the Fed would start raising the funds rate – now near zero – sometime in 2014, rather than 2015. As Hilsenrath notes, some “are starting to doubt the Fed’s commitment to keep short-term rates down.”

But since last December, the Fed has promised it wouldn’t consider hiking until the jobless rate reaches 6.5%, still a considerable ways from the current 7.6%.

Jan Hatzius, chief economist at Goldman Sachs, offered, “The market is saying, ‘The fundamental economic outlook really hasn’t changed much, but we are getting more worried about Fed policy.’”

Heck, what the above tells you is that the Fed is just like every other part of government these days. We increasingly don’t trust it on anything. Benghazi, the IRS and AP scandals, the phone and Internet surveillance...you say you won’t raise rates until the unemployment rate is 6.5%, but we think you’ll do it sooner.

I mean, of course, 6.5% was never going to be an exact figure. Can you imagine the chaos that Friday, when the jobs report showed the unemployment rate going from 6.6% to 6.5%? Or 6.7% to 6.5%? Or 6.6% to 6.4%?!

No, Bernanke’s policies may have killed savers, but there has been unprecedented transparency. It’s just that he wants to be able to gradually warn the markets of his actions, only markets don’t act that smoothly.

So get used to the crazy volatility. It’s back...and it’s here to stay for years. That’s my guess.

And next week is a critical two-day Fed meeting, complete with a Bernanke press conference on June 19.

Meanwhile, the World Bank issued its semi-annual outlook for the global economy and it reduced its forecasted growth for Planet Earth to 2.2% this year vs. 2.4% previously projected; 3% for 2014. 

The World Bank is looking for the eurozone to contract 0.6%, the U.S. to grow 2.0%, India was reduced to 5.7%, Brazil to 2.9% and China to 7.7% from a previous estimate of 8.4%.

But one of the market-moving stories on Friday, as stocks slid, was the International Monetary Fund’s forecast that U.S. growth would still just be 1.9% this year, but with 2014 coming in at only 2.7% vs. an earlier forecast of 3%.

May retail sales came in stronger than expected, up 0.6%, which is good, but industrial production for the month was unchanged and a June preliminary reading on consumer sentiment was less than expected. Initial jobless claims for the week, however, fell 12,000.

Finally, S&P upgraded its outlook on the U.S. credit rating to “stable” from “negative,” though retains the AA+. It was back in August 2011 that S&P cut the rating from AAA. “We believe the U.S. economic performance will match or exceed its peers’ in the coming years,” said the ratings agency.   Moody’s and Fitch have maintained their AAA ratings but with negative outlooks. [Not that any of this matters anymore; the markets having totally ignored S&P back in 2011. The 10-year Treasury, for example, was 2.98% on July 14, 2011, when S&P first warned of a downgrade.]

The U.S. budget deficit for May came in at $138.7 billion compared with $124.6 billion in May 2012, but for the first eight months of the 2013 fiscal year that began Oct. 1, the nation’s deficit shrank to $626.3 billion compared with an $844.5 billion shortfall over the same period from a year before.

The Congressional Budget Office still forecasts a deficit of $642 billion for all of F-2013. The debt ceiling will be hit sometime in October or November, it would appear, and Congress is not about to reach a grand bargain on the budget for 2014. It’s too easy for them to take the easy way out with deficits continuing to decline...until they don’t.

Europe and Asia

Rates have been rising in Italy and Spain, with the former’s economy shrinking a 7th consecutive quarter, as confirmed by the government, with an estimated decline in 2013 GDP for Italy of 1.5%. April industrial production was down 0.3% over March.

In Spain, the government reported that home prices collapsed another 6.6% in the first quarter over the fourth and are now officially off 35% from the peak. Banks will continue to bleed, as I’ve been saying they would despite the happy talk the worst was over.

France had to deal with crippling dual strikes. Air traffic controllers went off the job for 48 hours over the issue of integrating the air traffic system across the continent, which only makes sense instead of the current country by country approach. Rail workers then followed in sympathy over changes to the rail system proposed by the government. If you were looking to take a train back to the airport from Paris (which saves you like $50 over a cab), you were screwed.

Separately, at least industrial production in April in France rose 2.2% over March, a positive surprise.

Germany’s industrial production in April rose 1.2%.

Britain’s unemployment rate fell to 7.8% in April. The economy should keep on improving from here.

Speaking of strikes, Greece’s two largest labor unions struck over the government’s decision to close the state television network, ERT. An estimated 1,400 of 2,600 workers there will be laid off as the government unveils a new, streamlined station in the future.

The eurozone’s inflation rate for May was just 1.4%, well below the ECB’s 2% target.

Finally, at month’s end, the European Union will be holding a critical summit in which an agreement on a banking union is to be finalized. By all accounts, however, it will be a disappointment.

“Almost everyone involved agrees that in theory a banking union ought to have three legs. The first is a single supervisor to write common rules and to enforce them uniformly. Next are the powers to ‘resolve’ failed banks, which is a polite term for deciding who takes a hit; these powers also require a pot of money (or at least a promise to pay) to clean up the mess left by bust lenders and to inject capital into those that can get back on their feet. The third leg is a credible euro-wide guarantee on deposits to reassure savers that a euro in an Italian or Spanish bank is just as safe as one in a German or Dutch bank. National insurance schemes offer scant reassurance to savers when sovereigns are wobbly and insured deposits make up a big chunk of annual GDP.

“Judged against these three requirements, Europe’s new plan is a miserly one. Its outlines emerged in a joint paper released on May 30 by France and Germany. The minimalism of the paper suggest the summit will offer little more than the establishment of a single supervisor and a promise to set up a vaguely defined ‘resolution mechanism.’....

“If Europe’s bail-out fund, the European Stability Mechanism (ESM), is referred to it is likely to be only as a last resort to recapitalize lenders after ailing countries have already bankrupted themselves standing behind their banks. A euro-wide deposit insurance fund is so controversial it isn’t polite to mention it....

“The legal challenges are also enormous. Each country in the euro has its own bankruptcy code. A change in the treaties governing the European Union would probably be needed to give a new resolution authority the power to seize bank assets and impose losses on creditors.”

Turning to Japan, talk about a roller-coaster. The market essentially rose without stopping nearly 80%, from mid-November through May 22, once it became clear Shinzo Abe was going to be elected prime minister and that he favored all kinds of stimulus, both from government spending and monetary policy.

But attitudes have been changing as to whether the stimulus would really get Japan out of its deflationary funk, and at what risk, so the Tokyo Nikkei index collapsed 21% from the May 23 intraday peak.

The yen has been strengthening, which is bad for Japanese exporters who were just beginning to feel the benefits of a weaker yen, as the Bank of Japan raised its assessment of the economy, stressing continued “resilience” in private consumption and the “pick up” in exports.

First quarter GDP was revised upward to an annualized rate of 4.1%. This is good.

But as Jeremy Warner wrote in the Daily Telegraph of Abenomics:

“Unfortunately, there is still plenty of scope for things to go seriously wrong. There are three major concerns....The chief one is that by destabilizing markets and raising bond yields, it threatens finally to tip the Japanese government into bankruptcy.

“A second is the effects on trade. Already Korea, which competes directly with Japan in many export markets, is screaming blue murder over the extent of Japan’s currency depreciation. For America, it’s a bit different.

“Given that it has been a pioneer in the application of ‘unconventional monetary policy,’ the U.S. is less inclined to complain and, in any case, it welcomes anything that might give the world economy a boost. Yet even in America, there are rumblings, particularly in the still recovering auto industry.

“And finally, it is not at all clear that Prime Minister Abe can deliver the structural reform the plan needs to work effectively. Without it, the time bought through monetary and fiscal accommodation will count for nothing in the long run. And what’s been announced to date has been distinctly underwhelming.”

But regarding Warner’s first concern, that instability threatens to send the Japanese government spiraling into bankruptcy, understand this.

“The trouble with Abenomics is that, by raising inflationary expectations, the Prime Minister threatens to deliver just such an outcome. This is one of the reasons the Bank of Japan has been so loathe to act in the past. If it stimulates the economy too much, it might trigger a fiscal crisis.

“Chris Watling of Longview Economics has crunched the numbers, and they are pretty terrifying. At an average interest rate of 1 percent, interest on central government debt consumes around 20 percent of central government revenues. It follows that if rates rise to 2 percent, the debt interest bill doubles to 40 percent and so on until at 5 percent, the normalized level for Western economies, the costs reach 100 percent of tax revenues.”

You can come out from under the covers now. I’ll try not to scare you like that anymore. 

And in China, exports in May rose a mere 1% over a year ago. Imports declined 0.3%. Both far less than forecast.

April exports had been up 14.7% year over year, but this was inflated and it was after this release that government officials cut down on false invoicing, obviously to good effect, even if bad. It would be nice, for once, to believe the data coming out of China.

Exports to the U.S. and EU were down 1.6% and 9.7%, respectively, in May.

Industrial production for the month was up 9.2% from a year earlier, the weakest since September. Fixed asset investment slowed to 20.4% for the first five months of 2013, the weakest since August.

Consumer prices rose only 2.1% in May, year over year. April’s figure was 2.4%.

Producer prices fell 2.9% (after declining 2.6% in April and 1.9% in March). Deflation is taking hold. Not good. Thus far, the government has been loathe to bail out the economy with either another round of large-scale bank lending or extra government spending.

Street Bytes

--Stocks fell for a third week in four, with the Dow Jones declining 1.2% to 15070, while the S&P 500 lost 1.0% and Nasdaq 1.3%.

--U.S. Treasury Yields

6mo. 0.07% 2-yr. 0.27% 10-yr. 2.13% 30-yr. 3.30%

The producer price index for May came in at a hotter than expected 0.5%, though up just 0.1% ex-food and energy. For the past 12 months, the PPI is up 1.8%, up 1.6% on the core.

--The 25 largest bond ETFs fell an average 3.2% since May 2 thru June 10, according to CapitalIQ. Emerging market bond funds took the biggest hit, with PowerShares Emerging Markets Sovereign Debt falling 11.1% over this time. Yikes.

--The city of Detroit defaulted on some debt on Friday and proposed paying most creditors as little as ten cents on the dollar in an effort to avoid the largest municipal bankruptcy filing in U.S. history.

--The UN Food and Agriculture Organization said record crop harvests are likely to force global grain prices lower this year. Favorable weather could lead to a 6.5% jump in global grain production to a record 2.460 million tons. The surge would be led by a bumper wheat harvest and a recovery in U.S. corn output. Global demand is expected to rise just 3%. So the FAO forecasts stocks hitting a 12-year high.

Of course it really comes down to the weather in the U.S. Midwest for July, August and September. Lord knows there is no longer a drought in much of the area, though key parts of Kansas, Oklahoma, Texas and Colorado remain in one.

--According to a report from the New York Times, “The percentage of homes bought with cash has shot up in many markets across the nation. Nearly a third of all homes purchased in Los Angeles during the first quarter of this year went for all cash, compared with just 7 percent in 2007. In Miami, 65 percent of homes sold were for cash deals, compared with 16 percent six years ago.”

--Speaking of Southern California, the median home price in the six-county Southland reached $368,000 in May, a whopping 24.7% increase from the same month a year earlier and the highest price in five years. The number of sales, 23,034, hit the highest level for May in seven years.

--According to an annual report put out by BP, U.S. crude-oil production grew by more than one million barrels a day last year, the largest increase in U.S. history and the biggest in the world; up 14% to 8.9 million.

BP CEO Bob Dudley said, “The growth in U.S. output was a major factor in keeping oil prices from rising sharply, despite a second consecutive year of large oil supply disruptions.”

Most of the new production is coming from shale-rock formations, such as the Bakken Shale in North Dakota and the Eagle Ford Shale in Texas.

The U.S. is the third-largest global crude producer behind Saudi Arabia and Russia and is still a large importer of oil.

Meanwhile, U.K. production fell 13.4% in 2012, as some of its North Sea fields continue to run dry.

--China is consuming the majority of the world’s coal for the first time.

--49 states in the U.S., all except Connecticut, saw growth in GDP last year, according to a Bureau of Economic Analysis report. Thanks to the shale oil boom, North Dakota’s surged 13.4%. The U.S. as a whole came in at 2.5% last year. Connecticut’s declined 0.1% because of government cutbacks and turmoil in financial and real estate businesses that have led to less than expected tax revenues.

--McDonald’s is always a good barometer of trends both in the U.S. and overseas. Global same-store sales rose a stronger-than-expected 2.6% in May, helped by an expanded menu. Same-store sales in the U.S. rose 2.4%, while sales in Europe were up 2%. The new range of chicken options and the Premium McWraps are helping.

I took advantage of McDonald’s recent two-for-one Big Mac sale over Memorial Day weekend and was totally underwhelmed by the service experience...as in the attitude of the workers sucked.

As opposed to my Dunkin’ Donuts downstairs, where everyone knows my name. “Norm!” [You don’t think I’d give my real name, do you?]

--As noted above, a strike by French air traffic controllers led to thousands of flights being canceled around Europe over the issue of having a single air traffic system versus individual ones. The European Commission estimates that inefficiencies in the way Europe’s air traffic is managed add 26 miles to the average flight, forcing planes to burn more fuel and generate more emissions. The system causes delays and costs airlines and customers $7.3 billion annually, it says.

--Barcelona footballer and World Player of the Year, Lionel Messi, and his father are being investigated for allegedly defrauding Spain of more than $5 million in taxes. The accusation is that Messi and his father used firms based outside Spain, where he lives and plays football, for his promotional activities. Assuming the facts are right, it’s just an example of what European governments are facing as they try to balance their budgets against a culture of tax evasion (as opposed to tax ‘avoidance’).

[A late report has Messi paying a huge fine, like over $20 million, in order to avoid prison.]

--IBM fired at least 1,300 workers in a round of U.S. job cuts this week, part of a plan to eliminate 6,000 to 8,000 around the world.

--As noted in a piece for TIME magazine, the number of international trips by Chinese travelers has increased from 10 million in 2000 to 83 million in 2012. The Chinese spent $102 billion on international tourism, a 40% jump from 2011.

--Hilton Worldwide announced plans to add about 40,000 employees in China over the next few years to staff its various new properties. It has 13,000 employees in China currently.

--I’ll always have a certain fondness (fascination) for Beirut and when I was there last, in 2010, wrote of my astonishment at some of the high-end apartment and shopping complexes that were going up despite the potential for chaos and war in a city that experienced a raging civil war from 1975-1990 and periodic clashes since.

Well, now that the civil war in Syria has spilled over into Lebanon, and with some violent sectarian incidents in Beirut recently, business leaders warned this week of total economic and financial collapse, in both Beirut and throughout the country.

Tourism is down 17.5% and foreign investment has plunged 69% in recent months. It’s going to get a lot worse.

--Singapore has seen a big rise in dengue fever, the mosquito-borne disease. More than 9,000 have fallen ill since January and two have died; twice the number of cases for all of 2012. In 2005, Singapore had 25 deaths from dengue.

--Actually, Thailand also reported this week it is experiencing a record-breaking number of dengue fever cases. 44 have died in the country, year to date.

The mosquito is last on the All-Species List, by the way. Dog is No. 1. Man is about No. 289.

--Google is acquiring map-software provider Waze Inc. for about $1.1 billion. Google is looking to extend its dominance in maps over Apple and Facebook.

--The “PBS NewsHour” is facing its first significant round of layoffs in nearly two decades, as reported by the New York Times’ Brian Stelter.

While this shouldn’t be surprising, producers have cited “a steady drop in corporate revenue.”

Foreign Affairs

Syria: I wrote the following in this space five weeks ago...5/11/13:

“Lastly, Syria is one or two steps removed from devolving into the total catastrophe category. It obviously has not been a market mover to date. I never said it deserved to be thus far. But the next three months are critical for the fate of the entire region. If the spillover continues, eventually Wall Street will be forced to take notice.”

We’re getting closer. [Oil prices are inching up.] With the White House finally admitting the Syrian regime had crossed the red-line, concluding Assad’s forces had indeed used chemical weapons, and President Obama telling Congress the United States would arm the rebels (though zero details have been forthcoming), yes, the coming weeks and months are critical for the fate of the entire region.

Speaking at a private event in the U.S. on Thursday, Bill Clinton said of Obama’s reluctance to act on Syria and arm the rebels – that failure to do so risks leaving him looking “lame” and like “a wuss.” 

“Some people say, ‘See what a mess it is. Stay out.’ I think that’s a bad mistake. I agree with you about this,” he told Sen. John McCain, according to Politico.

300 U.S. Marines are reportedly in Jordan to facilitate weapons transfers. We will learn a lot more in coming days.

The UN now estimates at least 93,000 people have been killed in Syria since the start of the conflict, with at least 5,000 dying every month since last July. The UN also says these statistics mask the true carnage because many deaths have not been reported, and the head of the Office of the High Commissioner for Human Rights stated the UN has documented the deaths of more than 1,700 children under the age of 10, many of whom were tortured and executed, with entire families, including babies, being massacred.

Needless to say, any thought of peace talks in the coming weeks would appear to be a pipe dream.

Iran: The people went to the polls on Friday to elect a new president, the field having been reduced to six candidates after two dropped out. By week’s end, moderates and reformists were coalescing around a cleric and former nuclear negotiator, Hassan Rouhani, with Rouhani having received the endorsement of former presidents Mohammad Khatami and Ali Akbar Rafsanjani.

Early reports have Rouhani with 46% of the vote, which is a shock to yours truly, as turnout appears to have been strong...far stronger than expected.

My guess had been that the current chief nuclear negotiator, Saeed Jalili, would eventually become president, probably after a run-off with Mohammed Baqer Qalibaf, the mayor of Tehran. Both are hard-core conservatives. But Qalibaf is said to be second in the early returns, with Jalili third.

Meanwhile, the fact is it really doesn’t matter. Power resides with Supreme Leader Ayatollah Ali Khamenei and the nation’s nuclear weapons strategy should continue unabated.

At a conference in Israel the other day, Johns Hopkins University Professor Steven David said: “There is no doubt that an Iran with nuclear weapons could destroy Israel; just taking out Tel Aviv and Haifa would be enough to destroy the Jewish state.”

David also explained that because Iran worries about a decapitating strike on its leadership, it could give the nuclear firing codes to a wide range of people to deter an attack on the leadership, which would increase the likelihood that a fanatic would get his hands on the trigger. [Ariel Ben Solomon / The Jerusalem Post]

Israel’s Intelligence Minister, Yuval Steinitz, said Iran was “very close” to crossing the red line laid out by Prime Minister Netanyahu last year; Steinitz saying they have close to 420 pounds of 20% enriched uranium. Once they hit 500 or so pounds (250 kilos), “this is enough to make the final rush to 90%,” the level required for a nuclear warhead. Steinitz maintains Iran is building up a capacity to produce up to 30 weapons a year.

Lebanon: President Michel Sleiman and the Lebanese Army vowed to respond to repeated cross-border violations of its sovereignty by the Syrian military, following a helicopter strike against the Bekaa Valley town of Arsal. Syria admitted it conducted the strike and said it “targeted terrorist groups trying to flee toward Lebanese territory.”

Former Prime Minister Rafik Hariri launched a scathing attack against Hizbullah leader Nasrallah, accusing him of endangering Lebanon through its sending of fighters to Syria.

“What Lebanon is facing at present approaches the brink of existential danger and threatens Lebanon’s message and the values of cultural and religious diversity. This has made me sound the alarm, to reach the ears of all Lebanese without exception, especially those groups who classify us as adversaries and sometimes charge us with treason or dependence on the outside,” Hariri said in a written address to the Lebanese people.

“Our nation, dear Lebanese, is in danger. This is the truth that all religious, sectarian and political groups should contemplate and reflect upon the original sources of this danger.” [Daily Star]

Turkey: After further protests in Istanbul and other cities in Turkey, Prime Minister Erdogan issued a “final warning” to protesters to leave Gezi Park in Istanbul, next to Taksim Square.

But then on Thursday night, he met with protest leaders on the issue at the heart of the initial demonstrations, development of Gezi, which is one of the few green spaces in the city.

Erdogan apparently has agreed to allow the courts to decide if the plan for a shopping complex can go forward, and if it says yes, then the city would be polled, a referendum that Erdogan said he would abide by. There is already a court decision ordering the suspension of work in Gezi.

I would also still label this situation ‘fluid.’ Erdogan told party members on Friday that the protesters in the park had “stayed long enough.” After all, it was nearly 20 years ago that Erdogan, then mayor of Istanbul, told a journalist that democracy was like a tram. “You ride it until you arrive at your destination. Then you get off.” [London Times]

Afghanistan: A suicide car bomber struck outside the Supreme Court in Kabul on Tuesday, killing at least 17 in the second consecutive day of militant attacks in the heart of the capital. Kabul has been a relative safe haven, but the attacks are coming far more frequently these days. The Taliban took responsibility for this week’s carnage.

Last Saturday, an Afghan soldier opened fire on U.S. troops in eastern Afghanistan, killing two service members and a civilian; the deadliest insider attack in the country this year.  The same day, an Italian soldier was killed in an attack in the west.

China: Regarding the Xi-Obama summit, Chinese President Xi Jinping said he and Obama believe the two countries can approach each other in a way “that is different from the inevitable confrontation and conflict.”

Xi said the China-U.S. relationship was at a new starting point.

“Our two countries have vast convergence of shared interests, from promoting our respective economic growth at home to ensuring the stability of the global economy; from addressing international and regional hotspot issues to dealing with all kinds of global challenges.”

“I stated very clearly to President Obama that China will be firmly committed to the path of peaceful development,” Xi added. “By the Chinese dream we seek to have economic prosperity, national renewal and people’s well-being...It is connected to the American dream and the beautiful dreams people in other countries may have.”

Obama endorsed the goal of seeking ways to avoid conflict, saying he hoped for “more extended” and informal talks leading to a “new model of cooperation.”

Regarding cybersecurity, Obama said it was critical that the U.S. and China reach a “firm understanding” on cyber issues. But he stopped short of accusing China of orchestrating hacking attacks on American government and business computers.

Xi claimed no responsibility for China’s alleged actions. He said his nation was also a victim of cyber-spying.

The whole discussion was obviously hurt by the revelations that the Obama administration is collecting data from U.S. phone and Internet companies.

“What both President Xi and I recognize is that because of these incredible advances in technology, that the issue of cybersecurity and the need for rules and common approaches to cybersecurity are going to be increasingly important as part of bilateral and multilateral relationships,” Obama said.

“In some ways these are uncharted waters and you don’t have the kinds of protocols that cover military issues for example and arms issues where nations have a lot of experience in trying to negotiate what’s acceptable and what’s not.”

Obama’s national security adviser Tom Donilon said resolving cybersecurity issues would be “key to the future” of the relationship.

Obama told Xi that “if it’s not addressed, if it continues to be this direct theft of United States property, that this is going to be a very difficult problem in the economic relationship and was going to be an inhibitor to the relationship really reaching its full potential,” Donilon said.

Xi’s senior foreign policy adviser, Yang Jiechi, said, “Cybersecurity should not become the root cause of mutual suspicion and frictions between our two countries. Rather, it should be a new bright spot in our cooperation.”

Now I wanted to get down all these quotes for the archives, but let’s face it. Nothing changed when it comes to this explosive topic. China will keep on stealing our intellectual property for the foreseeable future.

I also took note of an article by the Los Angeles Times’ Barbara Demick concerning Xi and attempts to determine what kind of leader he’ll be the next decade.

“(During) his first months in power, Xi has proved himself more hardline on a number of issues than his recent predecessors. He has tightened censorship in academia and the media, and spearheaded China’s territorial assertions in the South China and East China seas. His first trip upon ascending to the presidency was to Russia.

“Many analysts still believe that Xi, leader of the Communist Party for seven months and president for fewer than 100 days, is at heart a reformer, and they predict that side of him will emerge after he is established in office. But so far, the reformist element of the Communist Party is bitterly disappointed....

“At a Politburo meeting in April, Xi announced an effort to reeducate party cadres, using language that harked back to Mao’s ‘rectification’ campaigns of the 1940s when he was consolidating power at this revolutionary base in Yanan.

“Trying to boost morale in the military, Xi decreed all generals and officers above the rank of lieutenant colonel must do stints of at least 15 days as rank-and-file soldiers. Mao used almost exactly the same tactic in 1958.

“In public speeches, Xi tends to elevate the Communist Party above the nation and even above the Chinese people. He’s tried to clamp down on criticism of Mao....

“ ‘Xi Jinping is very good at public relations, much better than Hu (Jintao), who acted like a robot,’ said Willy Lam, a political analyst based in Hong Kong. ‘But ideologically he is really a Maoist, who wants to maintain tight control over the party and the military and to put a freeze on Western values.’”

North/South Korea: Pyongyang canceled high-level talks slated to begin on Wednesday because of what it called Seoul’s “arrogant obstructions.” North Korea was seemingly upset over the composition of South Korea’s delegation. The whole thing, as is everything else in this relationship, was absurd. Seoul was going to lead with its Unification Minister and asked Pyongyang to send an adviser to Kim Jong-un, which North Korea refused to do. Seoul then named its vice-minister as its chief negotiator instead, and the North said this was an insult.

Meanwhile, the hot line between the two had supposedly been restored prior to this latest tiff, but the North refuses to answer the phone.

Russia: President Vladimir Putin warned the government will receive less revenue than was expected before and budgeting needs to reflect this. Revenues from natural resources are declining, while the plan to diversify the economy hasn’t been bearing fruit. Putin said the share of federal revenues coming from oil and gas sales rose from 30% in 2004 to 46% in 2013. Putin was also putting his ministers on notice...do your job. Putin would like to see more public-private infrastructure projects.

Putin was a busy beaver this week. He was elected leader of his new All-Russia People’s Front.  This is the first time he has formally been affiliated with any political organization since the collapse of the Communist Party of the Soviet Union in 1991. Putin told the party’s first congress:

“The goal of the People’s Front is to give everyone a way to create, create a great country, a great Russia. And we are ready to work with everybody who shares our goals and values and who is ready to share common responsibility for the historic success of our Motherland.”

And if you don’t share those values, it’s the gulag for you, baby!

Some 10,000 marched through Moscow chanting anti-Putin slogans. But this is nothing compared to the 100,000 who turned out a year ago in protests. Demonstrators decried those opposition activists in prison or facing criminal charges, such as leader Alexei Navalny, facing charges of embezzlement.

But there was also this shocking development. The State Duma unanimously passed a bill introducing stiff fines for portraying homosexuality in a positive light to children, the bill passing 436-0. If you are caught propagandizing “non-traditional” sexual relations for those under age 18, you can be fined up to $3,100. German Foreign Minister Guido Westerwelle, himself gay, said attempts to stigmatize same-sex relationships had no place in a democracy.

What the bill essentially does, in cloaking it under language related to minors, is ban all gay rights rallies.

Czech Republic: The country is in crisis as prosecutors charged seven people following  unprecedented raids on government and private offices by police. A senior aide to Prime Minister Petr Necas was charged with corruption and abuse of office. Other former MPs and ministers, plus the current and former heads of military intelligence were also detained. Necas denies neither he nor his colleagues did anything wrong as pressure for him to resign builds. The aide allegedly bribed the former MPs with offers of posts in state-owned firms after they had threatened to bring down Necas’ government over VAT increases. The aide also allegedly ordered military intelligence to spy on three people, including Necas’ estranged wife.

Germany: Chancellor Angela Merkel is so upset over the revelations concerning U.S. Internet spying that she will raise the topic with President Obama when he visits Berlin next week.

The country’s justice minister wrote an op-ed for Der Spiegel, suggesting that the U.S. was backsliding on basic freedoms and calling the program so “alarming” that Germany has a responsibility to address it.

“The more a society monitors, controls and observes its citizens, the less free it is. The suspicion of excessive surveillance of communication is so alarming that it cannot be ignored. For that reason, openness and clarification by the U.S. administration itself is paramount at this point. All facts must be put on the table.”

“Obama is popular in Germany, but it’s tough to overstate the country’s sensitivity to electronic surveillance, particularly by the government. The Stasi routinely invaded citizens’ privacy, using everything from microphones installed in homes to secret informants, to find and root out dissent and activists.”

Germany has been sparring with the likes of Facebook and Google over the years to protect citizens’ privacy online. “A German court ordered Facebook to delete any data it had collected from German users’ photos in developing its facial recognition tool, for example.” [Fisher]

Brazil: I’ve been saying that this nation appears to be totally unprepared for both the 2014 World Cup and the 2016 Olympics. This week we learned the stadium in Rio de Janeiro that will be used for track and field and the opening and closing ceremonies will remain closed until 2015 because of structural problems with the roof. City authorities said it would take nearly 18 months to fix.

It is also disturbing to learn that five journalists have been killed in Brazil this year, all with an apparent link between the crime and the victim’s work. The reporters wrote stories on corruption and organized crime. This week, the head of a newspaper known for reporting on these topics was assassinated while drinking at a neighborhood bar.

Random Musings

--The head of the National Security Agency, Gen. Keith Alexander, said the surveillance programs exposed by 29-year-old Edward Snowden were critical to unraveling terrorist plots at home and abroad. Specifically, he cited the cases of Najibullah Zazi, an Afghan American who pleaded guilty to planning suicide attacks in New York, and a Pakistani American who was arrested for his role in the Mumbai terror attack. Alexander told the Senate Appropriations Committee, “I think what we’re doing to protect American citizens here is the right thing. Our agency takes great pride in protecting this nation and our civil liberties and privacy.”

Alexander was forced to respond to Snowden’s claims the government has been collecting the call records of millions of Americans and scooping up e-mails and other Internet material from nine leading technology companies, including Google and Facebook.

Snowden, in an interview with Hong Kong’s South China Morning Post, said he was neither a hero nor a traitor and that:

--The NSA’s PRISM program, which allows the NSA to collect videos, photos, emails, documents and connection logs for foreign users thought to be located overseas, extends to people and institutions in Hong Kong and mainland China;

--The U.S. is exerting ‘bullying’ diplomatic pressure on Hong Kong to extradite him;

--He is in constant fear for his own safety and that of his family.

Regarding this last one, I hope he does fear for his safety. He also totally screwed his family. What an ass.

Snowden told the SCMP that he believed there had been more than 61,000 NSA hacking operations globally.

“We hack network backbones – like huge internet routers, basically – that give us access to the communications of hundreds of thousands of computers without having to hack every single one,” he said.

“Last week the American government happily operated in the shadows with no respect for the consent of the governed, but no longer. Every level of society is demanding accountability and oversight.”

Snowden said he was releasing the information to demonstrate “the hypocrisy of the U.S. government when it claims that it does not target civilian infrastructure, unlike its adversaries.”

“Not only does it do so, but it is so afraid of this being known that it is willing to use any means, such as diplomatic intimidation, to prevent this information from becoming public.”

Snowden said, “I’m neither traitor nor hero. I’m an American,” adding that he was proud to be an American. “I believe in freedom of expression. I acted in good faith but it is only right that the public form its own opinion.”

U.S. officials said criminal charges are being prepared against Snowden, but the timing, let alone the nature of the charges, hasn’t been divulged.

Alexander said he pledged to reveal details of the surveillance programs “over the next week....I want the American people to know we’re being transparent here.”

Alexander said it is important to allay concerns the government was exceeding constitutional bounds.

“Grave harm has already been done by opening this up. There is no doubt in my mind that we will lose capabilities as a result of this, and that not only the United States but those allies that we would help will no longer be as safe as they were two weeks ago.”

Sen. Jon Tester (D-Mont.), summed up what many of us are thinking, regarding Snowden and his apparent extensive access to highly sensitive data.

Alexander lamely replied: “That is of serious concern to us and something that we have to fix.”

“In March, James Clapper was asked at a Senate hearing if the U.S. government collected information on millions of Americans. The director of national intelligence looked at the desk, scratched his bald head and answered: ‘No, sir.’ He then added: ‘Not wittingly.’

“After a week of revelations that have focused intense scrutiny on the surveillance activities of the intelligence services and have reignited a debate about privacy in the digital age, Mr. Clapper is in the spotlight because it is hard not to conclude that he lied.”

--Charles Krauthammer / Washington Post...on the PRISM program.

“The problem here is not constitutionality. It’s practicality. Legally this is fairly straightforward. But between intent and execution lies a shadow – the human factor, the possibility of abuse. And because of the scope and power of the NSA, any abuse would have major consequences for civil liberties.

“The real issue is safeguards. We could start by asking how an Edward Snowden – undereducated, newly employed, rootless and grandiose – could have been given such access and power.  We need a toughening of both congressional oversight and judicial review, perhaps even some independent outside scrutiny....

“The object is not to abolish these vital programs. It’s to fix them. Not exactly easy to do amid the current state of national agitation – provoked largely because such intrusive programs require a measure of trust in government, and this administration has forfeited that trust amid an unfolding series of scandals and a basic problem with truth-telling.”

“The purpose of the surveillance is enhanced security, a necessary goal to say the least. The price is a now formal and agreed-upon acceptance of the end of the last vestiges of Americans’ sense of individual distance and privacy from the government. The price too is a knowledge, based on human experience and held by all but fools and children, that the gleanings of the surveillance state will eventually be used by the mischievous, the malicious and the ignorant in ways the creators of the system did not intend. For all we know that’s already happened. But of course we don’t know: It’s secret. Only the intelligence officials know, and they say everything’s A-OK.

“The end of human confidence in a zone of individual privacy from the government, plus the very real presence of a system that can harm, harass or invade the everyday liberties of Americans. This is a recipe for democratic disaster....

“Trust in government, historically, ebbs and flows, and currently, because of the Internal Revenue Service, the Justice Department, Benghazi, etc. – and the growing evidence the executive agencies have been reduced to mere political tools – is at an ebb that may not be fully reversible anytime soon. It is a great irony, and history will marvel at it, that the president most committed to expanding the centrality, power, prerogatives and controls of the federal government is also the president who, through lack of care, arrogance, and an absence of any sense of prudential political boundaries, has done the most in our time to damage trust in government....

“I feel that almost everyone who talks about America for a living – politicians and journalists and even historians – is missing a huge and essential story: that too many things are happening that are making a lot of Americans feel a new distance from, a frayed affiliation with, the country they have loved for half a century and more, the country they loved without ever having to think about it, so natural was it....but talk to older Americans – they feel they barely know this country anymore. In governance its crucial to stay within parameters, it’s important not to strain ties, push too far, be extreme. And if you think this does not carry implications for down the road, for our healthy continuance as a nation, you are mistaken. Love keeps great nations going....

“The other day on Fox News Channel I saw 79-year-old Eugene Cernan, the Apollo astronaut. Mr. Cernan’s indignation about the state of things was so sincere, so there. China had just blasted into space, bringing its pride and sense of nationhood with it. America doesn’t do that anymore, said Mr. Cernan, we’re not achieving big things. Now we go nowhere.

“The interviewer, Neil Cavuto, threw in a question about the spying.

“Yes, we’re under attack, said Mr. Cernan, but ‘we can handle it,’ we can go after ‘the bad guys’ without hurting ‘the good guys,’ you can’t give up your own liberty and your own freedom.

“No one objects to balancing security against liberty. No one objects to seeking warrants for targeted monitoring based on probable cause. We’ve always done this.

“What is objectionable is a system in which government has unlimited and privileged access to the details of our private affairs, and citizens are simply supposed to trust that there won’t be any abuse of power. This is an absurd expectation. Americans should trust the National Security Agency as much as they do the IRS and Justice Department.

“Monitoring the records of as many as a billion phone calls, as some news reports have suggested, is no modest invasion of privacy. It is an extraordinary invasion of privacy. We fought a revolution over issues like generalized warrants, where soldiers would go from house to house, searching anything they liked. Our lives are now so digitized that the government going from computer to computer or phone to phone is the modern equivalent of the same type of tyranny that our Founders rebelled against....

“The administration has responded to the public uproar by simply claiming that it is allowed to have unlimited access to all Americans’ private information. This response is a clear indication that the president views our Constitutional ‘right of the people to be secure in their persons, houses, papers, and effects’ as null and void.

“If this is the new normal in America, then Big Brother certainly is watching and it’s not hyperbolic or extreme to say so. Nor is it unreasonable to fear which parts of the Constitution this government will next consider negotiable or negligible.”

“Here is Barack Obama commenting last Friday on the National Security Agency’s antiterrorist surveillance programs: ‘We’ve got congressional oversight and judicial oversight. And if people can’t trust not only the executive branch but also don’t trust Congress and don’t trust federal judges to make sure that we’re abiding by the Constitution, due process and rule of law, then we’re going to have some problems here.’

“Herewith a partial list of political groups that said they were subjected to over-the-top audits by the Internal Revenue Service:

“Greenwich Tea Party Patriots, Greater Phoenix Tea Party Patriots, Laurens County Tea Party, Northeast Tarrant Tea Party, Mytrle Beach Tea Party, Albuquerque Tea Party, San Antonio Tea Party, Richmond Tea Party, Manassas Tea Party, Honolulu Tea Party, Waco Tea Party, Chattanooga Tea Party and American Patriots Against Government Excess.

“What that target list shows is there was never one ‘tea party.’ It was collections of citizens spontaneously gathering all over the country under one easy-to-remember name. Their purpose was to do politics. For that, their government hit them hard.

“In January the pollsters at the Pew Research Center reported that for the first time a majority of Americans – 53% - now agree that ‘the federal government threatens your own personal rights and freedoms.’

“This is far beyond concerns about the size of government. A majority of people now see the government of Madison, Jefferson and Franklin as a direct, personal threat.

“The goal of the IRS audits was to suppress politics, to shut up those ‘conservative’ tea-party groups to increase the odds that Mr. Obama’s side would win. One doubts that Mr. Obama’s supporters were distressed about it. But this week they’re stressed about ‘an alarming age of surveillance.’

“Whatever inchoate anxieties predated this presidency are now worse: a politics rife with suspicion and retribution, and most of the people believing the government, for starters, threatens their freedom.

“One may hope Mr. Obama has sufficient political skill to protect the antiterrorism structures he inherited. It will be the job of the next president to prevent the public’s sense of personal political threat from heading toward 60% and beyond.”

--I’ve long had a lack of respect for FBI Director Robert Mueller, who thankfully is retiring soon. The guy has become a laughingstock, witness his performance on Thursday at a congressional hearing.

“Rep. Jim Jordan, R-Ohio, seemed to rattle (Mueller) for not knowing the specifics surrounding the IRS probe.

“ ‘You’ve had a month now to investigate,’ Jordan said. ‘This has been the biggest story in the country and you can’t even tell me who the lead investigator is. You can’t tell me the actions the inspector general took which are not typically how investigations are done. You can’t tell me if that’s appropriate or not. This is not speculation. This is what happened.’

“Mueller repeatedly declined to answer Jordan’s questions, saying he couldn’t because the investigation was ongoing or that he’d have to get back to the lawmakers with answers.

“When Jordan asked again, ‘Can you tell me who the lead investigator is?’ Mueller responded, ‘Off the top of my head, no.’”

What an embarrassment. Pin a name tag on his windbreaker and send him home.

“Forget skinny ties and retro hats: The surest way to attain super-cool status (and fame) today is to betray your country.

“The impossibly self-important NSA contractor, Edward Snowden, who ‘exposed’ two vital intelligence programs, isn’t a leftie Paul Revere. He’s Kim Kardashian with stubble.

“He revealed very highly classified programs, alerting our enemies about our most sophisticated intelligence-collection capabilities (programs designed to keep us safe, not spy on us). He broke his oath to protect the information with which we entrusted him, lied about who we target and aided those who want to kill Americans. And he hints he could do more damage.

“To this old-fashioned American, that’s plain treason.

“It’s always been a hipster thing to trash government, but the left’s generations-long effort to destroy the positive image of patriotism has made betraying our country a fashion statement. Snowden is a copycat who ‘admires’ Pfc. Bradley Manning, another now-famous young man who knew better than those who serve dutifully for decades. He’s also enamored of Julian Assange, the left’s favorite accused rapist....

“It may disappoint conservatives, but I’m a fan of Sen. Dianne Feinstein (D-Calif.). I don’t agree with all of her positions, but I respect her integrity. Protective of civil liberties, she’s an excellent litmus test on intelligence matters. And Feinstein believes the NSA programs in question help keep us safe.

“Again to my leftist friends: Do you really think Snowden or Manning or Assange care more about your freedom than Sen. Feinstein?

“There is a scandal here, though, one that’s overdue for serious attention: the out-of-control use of contractors to perform vital government services.

“This is a mess for which Republicans bear the chief blame. For a generation, they’ve insisted that the private sector can perform all government work cheaper and better – even when it comes to national security. But as I’ve seen myself, from the Pentagon to Iraq, it ain’t cheaper and it’s rarely better.

“This spoiled-brat, dropout Benedict Arnold claims he was pulling down a $200,000 salary for his NSA contract work. A direct NSA employee on the government payroll might get between $75,000 and $90,000 for the same work. And the contractor adds on exorbitant overhead, so Snowden probably cost us at least $500,000 per year. Wonder why we’ve seen the defense and intelligence budgets soar?”

“Back in 2007, Obama said he would not want to run an administration that was ‘Bush-Cheney lite.’ He doesn’t have to worry. With prisoners denied due process at Gitmo starving themselves, with the C.I.A. not always aware who it’s killing with drones, with an overzealous approach to leaks, and with the government’s secret domestic spy business swelling, there’s nothing lite about it.”

--A Washington Post/Pew Research Center poll found 56% of Americans consider the NSA’s accessing of telephone call records of millions of Americans through secret court orders “acceptable,” while 41% call the practice “unacceptable.”

45% say the government should be able to monitor everyone’s online activity if doing so would prevent terrorist attacks. 52% say no such broad-based monitoring should occur.

--A Fox News poll has President Obama’s approval rating down to 44%. 

--It really is absurd that New Jersey Gov. Chris Christie opted to fill Democratic Sen. Frank Lautenberg’s seat with both a special August primary and then a special general election in October, rather than waiting for the November election, a mere three weeks later. But as discussed before, there were political reasons for Christie doing so. He didn’t want Newark Mayor Cory Booker running for the senate and on the ballot at the same time Christie is running for reelection. More Democrats turning out for Booker would have undoubtedly led to more support for Christie’s Democratic opponent, state Sen. Barbara Buono. [Booker not on the ballot in November also helps Republicans running for the state Senate and the General Assembly.]

Booker, in a Monmouth University poll, receives 63% among Democrats, while his next primary opponent comes in at 10%. For October, Booker beats the probable Republican nominee, Steve Lonegan, 53-37.

--Hillary Clinton arrived on Twitter. Maureen Dowd had an amusing piece on how Hillary then massaged her first post, obviously generated (and tested) by her staff.

Clinton has big problems when she runs in 2016.   Benghazi will haunt her. The flat-out fact she was not a good secretary of state will emerge more and more over the coming years as well. I have praised both her and Obama when it came to Burma/Myanmar, but aside from that one, name one success of her tenure at State. Time’s up.

--According to a Washington Post-ABC News poll, 76% oppose allowing universities to consider race when selecting students, the key element in affirmative-action programs in universities nationwide.

63% of Americans support extending federal benefits to gay couples who are legally married in states where they reside, and 57% support legal same-sex marriage in general. 

The Supreme Court is about to rule on both, related to the Defense of Marriage Act and the University of Texas at Austin’s admissions policy.

An NBC News/Wall Street Journal poll released this week found support for broader affirmative action programs – not specifically in college admissions – at a historic low. Just 45% said the programs are a good idea. [Scott Clement / Washington Post]

--Japan’s Jiroemon Kimura, recognized by Guinness World Records as the oldest man in recorded history, died at the age of 116. 

--According to the U.S. Census Bureau, the number of non-Hispanic white Americans who died in the year ended June 2012 exceeded the number who were born during that period by about 12,400, the first ‘natural decrease’ for this group.

Overall, non-Hispanic whites make up an all-time low 63% of the population. It was 80% in 1980, 69% in 2000.

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

Gold closed at $1389
Oil, $97.88

Returns for the week 6/10-6/14

Dow Jones -1.2% [15070]
S&P 500 -1.0% [1626]
S&P MidCap -0.8%
Russell 2000 -0.6%
Nasdaq -1.3% [3423]

Returns for the period 1/1/13-6/14/13

Dow Jones +15.0%
S&P 500 +14.1%
S&P MidCap +14.9%
Russell 2000 +15.5%
Nasdaq +13.4%

Bulls 43.8
Bears 22.9 [Source: Investors Intelligence...was 55.2 / 18.8 just three weeks earlier.]

Happy Father’s Day!

Brian Trumbore

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