Week in Review

---

Week in Review

05/31/2014

For the week 5/26-5/30

Edition 790

Washington and Wall Street

“Something peculiar is happening in western capital markets. This month almost every measure of volatility has tumbled to unusually low levels. If you look at the degree of actual (or ‘realized’) price swings – and projected (or ‘implied’) future movements – investors are behaving as if the world is utterly boring.

“This is bizarre. Financial history suggests that at this point in an economic cycle, volatility normally jumps... And aside from economics, there are plenty of geopolitical issues right now that should make investors jumpy. European elections have just propelled populist leaders into power, and events in Ukraine and the Middle East are tense.

“But investors are acting as if they were living in a calm and predictable universe....

“ ‘There is no demand for protection [against turbulence],’ observes Mandy Xu, an equity derivatives strategist at Credit Suisse. ‘[Investors in] the options markets are not pricing in any big macro risks. This is very unusual.’....

“(But) while ultra-low volatility might sound like good news in some respects (say, if you are a company trying to plan for the future), there is a stumbling block: as the economist Hyman Minsky observed, when conditions are calm, investors become complacent, assume too much leverage and create asset-price bubbles that eventually burst. Market tranquility tends to sow the seeds of its own demise and the longer the period of calm, the worse the eventual whiplash.

“That pattern played out back in 2007. There are good reasons to suspect it will recur, if this pattern continues, particularly given the scale of bubbles now emerging in some asset classes. Unless you believe that western central banks will be able to bend the markets to their will indefinitely. And that would be a dangerous bet indeed.”

Yes, it’s been dullsville in financial markets, save for watching global interest rates continue to decline. Some volatility should return next week when the European Central Bank meets for a crucial policy vote; and with the U.S. receiving a labor update for the month of May next Friday that could influence some on the Federal Reserve’s Open Market Committee, let alone the stock and bond pits.

But before I get into some of the issues Ms. Tett addressed above, namely the European Parliament vote and geopolitics, a few U.S. economic data points.

The second look at first-quarter GDP was far softer than expected...down 1.0% after an initial view showed a gain of 0.1%. Yes, the weather was awful last winter, and it bears its share of the blame, but all of it? We’ll see what kind of rebound we get in the second quarter, but already the range of estimates has widened from a standard 3% to 4% a month ago, to anywhere from just 1.5% to 4%+.

Certainly the figure on April durable goods (i.e., second quarter) wasn’t good. Yes, the gross number, up 0.8%, was solid, but it turns out it was basically all defense-related, including a large nuclear submarine order that fell on the books for the month. Taking out defense, orders were down 0.8%.

And on Friday, personal income for April came in as expected, up 0.3%, but consumption (consumer spending) was well below expectations, down 0.1% when a gain of 0.2% had been anticipated.

At least a figure from the Chicago Purchasing Managers Index for May was a robust 65.5, much better than expected, and the S&P/Case-Shiller home price data for March (I always feel obligated to note this one lags) was pretty solid, with prices in the 20-city survey group up 12.4% over March 2013, though it was the smallest gain since July. Mortgage rates are at a 7-month low but lending standards are still tight.

Q1 2014... -1.0%
Q4 2013... 2.6%
Q3 2013... 4.1%
Q2 2013... 2.5%
Q1 2013... 1.1%

After the inevitable rebound for the April-June period, what of the second half? What of forecasts for GDP growth of 3.0% for the year when you start out with a negative print for Q1?

And what do you make of these record- or cycle-low interest rates around the world? Inflation indicators in the U.S. are actually ticking up (as has been my thesis on why we’ll have a 10-year Treasury yield much higher than today’s 2.48% by year end), but global growth remains punk, you still have highly accommodative monetary policy in the likes of Europe (about to get more so) and the United States, less supply and more demand, and geopolitical worries. [Plus traders were caught with their pants down and had to cover their bets, as I would have, had I been said trader.]

I just feel, as Ms. Tett infers, that things are about to change in a big way, though we all would probably disagree over what the trigger might be.

But I need to switch gears. I watched President Obama’s commencement speech for graduates of the U.S. Military Academy at West Point on Wednesday; what was billed as a major foreign policy address for the remainder of his term.

The president said America has never been stronger relative to the rest of the world and that those who see otherwise are misreading history or engaging in partisan politics.

“The United States is the one indispensable nation. That has been true for the century passed, and will likely be true for the century to come.”

“The military that you have joined is, and always will be, the backbone of that leadership, but U.S. military action cannot be the only – or even primary – component of our leadership in every instance. Just because we have the best hammer does not mean that every problem is a nail.”

“A strategy that involves invading every country that harbors terrorist networks is naïve and unsustainable. I believe we must shift our counter-terrorism strategy – drawing on the successes and shortcomings of our experience in Iraq and Afghanistan – to more effectively partner with countries where terrorist networks seek a foothold.”

So the president announced a $5 billion fund to help countries combat terrorism; money that would require congressional approval.

Obama is concerned with his legacy and criticism that he’s been too timid, so the West Point speech and others coming up in Europe are designed to combat that image.

The president, for example, continues with his focus on working through international institutions such as NATO and the United Nations.

“These institutions are not perfect, but they have been a force multiplier. They reduce the need for unilateral American action and increase restraint among other nations....

“Now, there are a lot of folks, a lot of skeptics, who often downplay the effectiveness of multilateral action. For them, working through international institutions like the U.N. or respecting international law is a sign of weakness. I think they’re wrong.”

“When any president speaks, he engages in more than academic analysis. But playing with words, at which Mr. Obama excels, improves nothing in his record. Inattention to foreign threats and challenges as diverse as Islamic terrorism or China’s increasing belligerence in the East Asian littoral; inconsistency and ineptitude in pursuing his own policies, as in Syria and Libya; and indecisiveness in confronting threats like Russia’s pressure on Ukraine and Iran’s nuclear-weapons program all hang like albatrosses around his presidential tenure. Mr. Obama’s speech only further muddled the administration’s contradictory messages on foreign policy....

“What explains Mr. Obama’s too-little, too-late Syria policy? Or his determination in Afghanistan to replicate his mistake in exiting Iraq? Or his neglect of Iranian and North Korean nuclear proliferation?”

“The speech President Obama delivered Wednesday at West Point was intended to be a robust defense of his foreign policy, about which even our liberal friends are starting to entertain doubts. But as we listened to the president chart his course between the false-choice alternatives of ‘American isolationism’ and ‘invading every country that harbors terrorist networks,’ we got to thinking of everything that wasn’t in his speech.

“No mention of the Reset. ‘The reset button has worked,’ Mr. Obama avowed in a 2009 meeting with Dmitry Medvedev, Russia’s figurehead president. That was the same year Mr. Obama announced in Moscow that, ‘The days when empires could treat sovereign states as pieces on a chessboard are over.’

“No mention of the Pivot or ‘rebalance’ to Asia. This was billed by Hillary Clinton in 2011 as ‘among the most important diplomatic efforts of our time’ and meant as proof that America’s withdrawal from Iraq and Afghanistan wasn’t simply a retreat from the world. But as assistant secretary of defense Katrina McFarland admitted in March, following the latest round of Pentagon cuts, ‘Right now, the pivot is being looked at again, because candidly it can’t happen.’

“No mention of Mr. Obama’s Red Line in Syria against the use of chemical weapons. No mention, either, of the ostensible success of using diplomacy to disarm Bashar Assad. The president was fond of boasting of this achievement until recently, when it emerged that Assad continues to use chlorine bombs to kill his enemies. Somehow that also didn’t make it into the speech.

“No mention of the Israeli-Palestinian peace process... which has now collapsed as Mahmoud Abbas patches up his differences with the terrorists of Hamas.

“No mention of Mr. Obama’s effort to seek ‘a world without nuclear weapons,’ as he said in Prague in 2009, or of his arms-control treaty with Russia. No mention that Russia is widely believed to be cheating on the 1987 INF Treaty on medium-range nuclear weapons, and no mention that North Korea may be gearing up for another nuclear test.

“We know that no foreign policy speech can cover the entire world. But listening to Mr. Obama trying to assemble a coherent foreign policy agenda from the record of the past five years was like watching Tom Hanks trying to survive in ‘Cast Away’: Whatever’s left from the wreckage will have to do.”

“There were as many straw men as cadets. The president railed against ‘critics who think military intervention is the only way for America to avoid looking weak’ and insisted that ‘U.S. military action cannot be the only – or even primary – component of leadership.’ He kindly informed us that ‘a strategy that involves invading every country that harbors terrorist networks is naïve and unsustainable.’ He thanked himself for the decision ‘that we should not put American troops into the middle of this increasingly sectarian civil war’ in Syria, as if anyone anywhere had suggested doing so.

“Once again, the president caricatures the views of his critics rather than addressing them fairly – not much of a contribution to a good national debate over foreign policy. And on Syria, the new plan he announced – vaguely saying he’ll ‘work with Congress to ramp up support’ for some Syrian rebels – is precisely the proposal that many members of his own Cabinet, and scores of analysts outside the administration, have been making for two years. He offered no explanation whatsoever for why he is now accepting advice he has been rejecting for all that time.

“Mr. Obama began the speech by reminding us, as he always does, that he inherited two wars and ‘the worst economic crisis since the Great Depression.’ If you thought he would also, to be fair, note his predecessor’s achievements, you were wrong. Discussing Africa, Mr. Obama said, ‘American assistance has made possible the prospect of an AIDS-free generation,’ but could not bring himself to say who undertook that effort: George Bush. When it came to Iran, Mr. Obama said, ‘At the beginning of my presidency, we built a coalition that imposed sanctions on the Iranian economy.’ This is not only ungracious but plain wrong: that coalition in the Security Council was built by the Bush administration, which won unanimous votes there repeatedly....

“Mr. Obama did present a new approach to international security, however – well, not too new. We’re going to build ‘a network of partnership’ to fight terror. We’re going to train forces that will help us achieve this goal: ‘having other nations maintain order in their own neighborhoods’ is the formula. Once upon a time this train-and-equip approach was known as the Nixon Doctrine. Today, it is very unclear who these nations are; Mr. Obama did not tell us.”

“When John Kennedy addressed West Point’s Class of 1962, he told them the burden of defending freedom ‘will require more from you than ever before in our history.’

“The nature of war had changed, said the young president, but this only increased America’s need for military officers of character, judgment and ability.

“How different from Barack Obama’s adolescent address Wednesday. Here the long gray line was reduced to a backdrop for a president shouting to the world: I’m not the weakling you think!

“His critics, he said, had no policy beyond invading other countries. This accusation was a petulant allusion to his predecessor. And he repeated it several times.

“ ‘A strategy that involves invading every country that harbors terrorist networks is naïve and unsustainable.’

“ ‘[My critics] think military intervention is the only way for America to avoid looking weak.’

“No one argued for U.S. troops in Syria; the argument was for arming democrats fighting Bashar al-Assad to keep al-Qaeda from taking the lead.

“No one argued for boots on the ground in Ukraine, either, though critics are pushing for missile defense for our East European allies. And no one is looking to invade Iran, much as people do worry Tehran is using talks to buy time to develop its nukes.

“On Wednesday, our commander-in-chief stood before some of America’s most selfless men and women. It was an opportunity to inspire these young West Pointers with a speech about national security – and their vital role in a dangerous world.

“Instead he opted for a campaign speech once again contrasting his own brilliance with a childish caricature of his critics.”

“We can all rest easy, because yesterday, the president of the United States assured the graduating cadets at West Point and the rest of America that, despite enormous pressure, he is not going to intervene militarily everywhere at all times.

“ ‘To say that we have an interest in pursuing peace and freedom beyond our borders is not to say that every problem has a military solution,’ the president said.

“I know what you’re thinking. You’re thinking: Whew! That was a close one! Because before he spoke, the consensus opinion was that every problem has a military solution. Now we know better! Thanks, President Obama!”

“By far, the most egregiously hypocritical comments concern Syria, in which Obama once again posits the choice as one between ‘American troops into the middle of this increasingly sectarian civil war’ and doing nothing. Almost no one has advocated the former, and he refused to do anything despite an array of alternatives. Worse yet, he speaks approvingly of actions he has rejected for years, thereby permitting the slaughter of 160,000 people and providing Iran with a huge psychological boost. (‘That does not mean we shouldn’t help the Syrian people stand up against a dictator who bombs and starves his people. And in helping those who fight for the right of all Syrians to choose their own future, we also push back against the growing number of extremists who find safe-haven in the chaos.’)

“Obama likewise acts as though we have restrained Russian President Vladimir Putin from capturing Crimea or as though Iran is not much closer to a nuclear weapons capability than when he took office. As to the latter, he concedes that a diplomatic deal is highly unlikely and is mum on the effects of lifting sanctions. On Iran, get a load of this self-contradiction: ‘The odds of success are still long, and we reserve all options to prevent Iran from obtaining a nuclear weapon. But for the first time in a decade, we have a very real chance of achieving a breakthrough agreement – one that is more effective and durable than what would be achieved through the use of force.’ It is real, but a long shot? Whatever. It’s just a flood of words, unconnected to reality and devoid of specific content.

“It was a depressing and cynical speech, one that presumes no one is aware of what Obama or the rest of the world is doing. Danielle Pletka of the American Enterprise Institute summed it up, ‘I don’t know what America or what world he thinks he’s living in. It is nothing more than rationalization and recasting failure as success – like saying an F is an A and congratulating yourself.’ And we have 2 ½ more years of this. Heaven help us.”

Europe and Asia

Before I get to the European Parliament vote and the resulting “earthquake,” as alluded to above, the European Central Bank meets this coming Thursday and ECB President Mario Draghi has already promised this time he will act to combat the threat of deflation.

As Draghi warned the other day, a “pernicious negative spiral” of low inflation and weak lending risks derailing the eurozone’s fledgling recovery. Speaking from Portugal, Draghi said credit constraints were “putting a break on the recovery in stressed countries, which adds to disinflationary pressures.” This is nothing new. I’ve been writing of the problem faced by small business in particular in the periphery countries for years, but it’s important Draghi seems to be saying he fully understands and is prepared not just to lower the ECB’s chief policy rate from 0.25% to zero, but also institute credit easing measures of the extraordinary kind. [If he doesn’t, Katy bar the door.]

On the country front, unemployment in Germany in May increased for the first time in six months, Spain’s National Statistics Office reaffirmed first-quarter growth was 0.4% over Q4 2013, and in the U.K., a key policymaker at the Bank of England called for rate increases of a “gradual and limited” nature as the economy continues to pick up speed, and as a way of combating the housing bubble. The situation in the London market is so crazy that Britain’s two state-owned banks (Lloyds and RBS) have drastically slowed the pace of lending there. [Other banks, though, continue to lend vast sums.]

Meanwhile, in France, the government has raised income tax, VAT and corporate tax rates since the election of President Francois Hollande, yet it now faces a 14bn-euro black hole in its budget after overestimating tax receipts for the last fiscal year.

Receipts from all three taxes amounted to an extra 16bn euros in 2013, but the government had forecast 30bn. [BBC News]

The French Court of Auditors seemed incredulous that the government could get it so wrong, almost comically so.

On to the European Parliament (EP) elections.  Needless to say, your editor has written a tremendous amount on both this topic and the rise of the far-right in the EU. The vote itself was indeed “a shock, an earthquake,” as French Prime Minister Manuel Valls described it. He immediately proposed tax cuts in response. German Chancellor Angela Merkel described the far right victories as “remarkable and regrettable.”

The anti-establishment, anti-immigration, anti-austerity, Eurosceptics did far better virtually across the board than expected.

In the U.K., Nigel Farage’s UKIP polled 27.5%, compared with the main opposition Labour Party’s 25% and the Conservatives (David Cameron) at 24%. UKIP won 24 of Britain’s 70 seats, Labour 20, Conservatives 19.

In France, Marine Le Pen’s National Front (FN) scored a full 25% of the vote, the Center-right UMP (think Sarkozy) got 21% and Francois Hollande’s ruling Socialists a pathetic 14%. The FN picked up 24 seats, compared with just three in the last EP election in 2009.

In Greece, far-left Syriza captured 26%, besting the ruling New Democracy party’s 23%. Neo-Nazi Golden Dawn scored three EP seats with 9% of the vote. Syriza gained 8.

Two fringe, leftist parties in Spain, Podemos and United Left, picked up five seats apiece, while the top two political parties, the ruling Popular Party and the Socialist Party, which have alternated power since 1982, saw their joint share go from 80% in 2009 to 49% this time. The Socialist leader immediately resigned.

In Germany, Chancellor Angela Merkel’s center-right European People’s Party (different label for this vote vs. Merkel’s formal Christian Democratic Union for home consumption) saw its support drop 7 points compared with five years ago to 35%, while the upstart Eurosceptic AfD (Alternative for Deutschland) scored a strong 7% and gained 7 seats.

The Freedom Party in Austria was third in voting there with 20% of the vote and received 4 seats. Geert Wilders’ Party for Freedom in the Netherlands was a disappointing third but got 4 seats.

Denmark’s anti-EU, far-right Danish People’s Party was the top vote-getter in that country (4 seats).

The biggest disappointment for the fringe element was Italy’s Five Star Party, which finished a distant second, 21%, to Prime Minister Matteo Renzi’s 40% (more than any Italian party since 1958), which gives Renzi the mandate to push through reforms that he was seeking, especially seeing as he was ‘unelected.’ [But now Renzi has to deliver, and that won’t be easy.]

So what does it all mean? The populists, from both the right and left, will make life very difficult for the two ruling, pro-EU blocs, and you’ll see more and more establishment pols courting the supporters of UKIP and the FN, adopting anti-EU positions that will stifle reform.

UKIP leader Farage said: “The inevitability of European integration ends tonight.”

Marine Le Pen said the night of her win, “The people have spoken loud and clear. They no longer want to be led by those outside our borders, by EU commissioners and technocrats who are unelected. They want to be protected from globalization and take back the reins of their destiny.”

For Farage and Le Pen, the votes were also about their own national ambitions. Farage wants a seat in the British parliament with next year’s general election, and then gain the power to call for a referendum on the fate of Britain staying in the EU by 2017, while Le Pen hopes to run for president of France, again, and come out on top in 2017 as well.

But the protest movements show zero signs of unity, beginning with the fact Nigel Farage refuses to form an alliance with Marine Le Pen, and thus she needs the support of at least 25 legislators from seven countries – two more than she has today, to unlock funding and guaranteed speaking time, while Le Pen has ruled out joining forces with the likes of Golden Dawn or Hungary’s anti-Semitic Jobbik party. 

European leaders held a summit (already scheduled) in the wake of the elections. First they need to come up with a new EU Commission president to replace Jose Manuel Barroso. The post is important since the commission proposes legislation and runs much of the day-to-day affairs of the EU.

The frontrunner is Jean-Claude Juncker, the former prime minister of Luxembourg, but while he has the support of Merkel, David Cameron wants new names in the mix. The whole process could take several weeks. [Ditto Le Pen’s negotiations.]

“One should not read too much into the rise of populist anti-European Union parties, most of them right-wing....

“But one should not read too little into the results, either. The rise of anti-Europe politicians in the continent’s second- and third-largest countries, promoting simplistic messages tinged by xenophobia and Russophilia, is genuinely worrisome. Obviously demagogues have tapped into a deep vein of dissatisfaction, rooted in the continent’s strange but real mix of stagnation and crisis and, perhaps, in a sense that united Europe works well for prosperous Germany but not for anyone else....

“Voters have a right to be upset – angry, even – at the high levels of joblessness, especially for young people, that plague Europe. They have a right to participate in fashioning practical, home-grown solutions, such as the tax and regulatory reforms Mr. Renzi is bringing Italy, rather than just German-backed budget cuts and tax hikes.”

“Extreme Islam was the global scourge of the last decade or so. Will extreme nationalism be the scourge of the next?

“It is beginning to appear so. In Russia, across Europe and in Asia, nationalist movements and politicians are on the rise, reviving decades-old ethnic rivalries and grievances and calling into question internationally accepted borders and institutions.

“The most recent illustration came over the weekend, when nationalist parties opposed to European integration made dramatic advances in elections for the European Parliament. Most striking was France, where the far-right National Front, led by the fiery Marine Le Pen, won more than a quarter of the vote to defeat both the ruling Socialist party and its center-right rival.

“But it wasn’t just France where strains of nationalism – the classic belief that one’s own national or ethnic group must be protected or is superior to others – could be seen. Similar parties did well in Greece, Denmark and Britain as well, casting new doubts on decades-long efforts to foster broader European integration....

“The revival of nationalist movements in Europe inevitably revives memories of the forces that led to a world war in the 1940s. But the West European version of this trend isn’t even the most dangerous.

“In Russia, President Vladimir Putin has stoked nationalist sentiments in justifying his annexation of Crimea and his bullying of Ukraine. His implicit assertion that Mother Russia has a duty to defend the rights of Russian-speaking peoples anywhere could become a justification to trample internationally recognized borders elsewhere, particularly in the Baltic states....

“(Meanwhile), the rise of nationalism in Japan is colliding, literally and figuratively, with a similar trend in an increasingly assertive China, which seeks to settle old scores with its neighbors over, among other things, a series of disputed islands. The process has revived World War II-era grievances that still fester just beneath the surface and resulted in recent days in naval confrontations between Chinese and Vietnamese ships.”

“Elections to the European Parliament don’t usually garner, or merit, global attention. Not so after the strong showing of nativist and populist parties, led by France’s National Front. This should be a wake-up call for centrist European politicians and technocrats that current economic policy is a recipe for political extremism.”

“As for the populists, they have clearly done best where anger was greatest against the domestic political establishment. This was as much a rebellion against traditional national parties, as it was against some distant concept of ‘Europe.’

“Both in the UK and France, however, the dominant theme of both UKIP and the Front National was as much about controlling immigration as it was about opposition to something called ‘Brussels.’ In the old member states, many voters have yet to come to terms with the reality of a greatly enlarged EU.

“Politicians in many countries – not least in the UK, a passionate supporter of EU enlargement – failed to explain the consequences to their own electors. Now they are paying the price of their negligence in the European parliament.”

“The argument that the populist vote is still too weak and incoherent to merit a response does not really work. Anti-establishment parties have topped the polls in France and Britain – the EU’s second- and third-largest economies. The fringe parties have also made noteworthy gains in Spain, Italy and even Germany.

“And while the populists detest each other and advance bizarre or contradictory ideas, they do share a common theme: the strong belief the EU has become too powerful, at the expense of the nation state.

“To argue that the weekend’s vote was actually about immigration or the economy – and not about Europe – is to miss the point. Two of the basic functions of the nation state have traditionally been to control borders and national finances. Both functions have been largely ceded to the EU – particularly if, like France, you are a member of the Schengen border-free zone and the European single currency.

“The challenge for EU leaders now is to see if they can restore some national democratic control over these key areas without actually dismantling the union itself. That may not be do-able. But they are going to have to try.”

“On the view that there’s a silver lining to most things, consider the European election results. Yes, fascism is back, officially, ugly as ever. But at least Americans might be spared lectures from the bien-pensant about the crudeness of U.S. politics vis-à-vis Europe’s.

“Now, whenever I hear about the National Front, I’ll reach for my Second Amendment.

“Many are the blameworthy in this disgrace to a continent, but let’s start with the most blameworthy: the French electorate. Last week, Jean-Marie Le Pen, National Front founder and the party’s hyena in winter, suggested a method for how Europe could solve its ‘immigration problem’: ‘Monseigneur Ebola,’ he said, ‘could sort that out in three months.’

“One in four French voters cast their ballots for the National Front, edging out the center-right UMP and trouncing the governing Socialists. On election night Sunday, Mr. Le Pen’s daughter and current party leader, Marine Le Pen, declared: ‘Our people demand just one politics. The politics of the French, for the French.’...

“Ms. Le Pen is supposed to be the softer and smoother face of her father’s party, but the evidence of that is hard to see....

“A decade ago it was conventional wisdom to observe that Europe had become a zone of perpetual peace, an agent of soft power and international law, Venus to America’s Mars. But history is coming back to Europe, and not just at the far margin in places like Donetsk. The European Parliament may be mostly toothless as a political institution. But now there’s no blinking at the fact that fascism is no longer just a piece of Europe’s past but also a realistic possibility for its future.

“There will be a temptation to bury the implications of this vote for another five years. But if youth unemployment remains at 25% in France and 57% in Spain, these elections will only be the beginning of another ugly chapter in European civilization. Mr. Putin can sense that the ghosts hovering over the continent work in his favor.”

Turning to China, Nomura Holdings Inc. economists report that China’s mini-stimulus is beginning to morph into something larger, specifically pointing to central bank loans for low-income housing that are “starting to amount to something quite significant,” while UBS said the government “has quietly eased liquidity conditions.”

As reported by Bloomberg News, “The ruling Communist Party is trying to revive the economy without repeating the mistakes of its $586 billion stimulus begun in 2008, which caused a record buildup of debt and inflated property bubbles around the country.”

Premier Li Keqiang is urging local governments to “show real action,” as an economist at Mizuho Securities Asia Ltd. in Hong Kong put it.

In Japan, April retail sales fell 13.7% over March, down 4.4% from year ago levels, owing to the consumption-tax (or VAT) increase from 5% to 8% on April 1, basically as expected. The government still estimates GDP will fall 3.4% in the second quarter after a 5.9% annualized rise in the first. But there are signs the worst is already over in terms of consumer and business spending.

On the critical inflation front, it accelerated in April to a 23-year high, while industrial output and household spending fell. Consumer prices ex-fresh food (Japan’s core benchmark) rose 3.2% from a year earlier after a 1.3% increase in March. Production fell 2.5% from the prior month, again, both being in line with expectations considering the 3% tax hike. A key is wage gains continue to lag inflation. Household spending fell 4.6% in April vs. April 2013, while the unemployment rate stayed at 3.6% last month.

India’s GDP expanded at a disappointing 4.7% for the fiscal year ending March 31. In the latest quarter, manufacturing contracted 1.4% from a year earlier. More below.

Street Bytes

--The Dow Jones and S&P 500 hit new highs, with the Dow adding 0.7% on the week to a record 16717, while the S&P tacked on 1.2% to 1923. Nasdaq rose 1.4%.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.37% 10-yr. 2.48% 30-yr. 3.33%

The 10-year traded down to a yield of 2.40% on Thursday. It was 3.03% on 12/31. [1.63% in May 2013; 1.40% July 2012.]

--In a late report in the Wall Street Journal on Friday, the FBI and SEC are said to be examining the trading of Carl Icahn, golfer Phil Mickelson and Las Vegas bettor William “Billy” Walters and whether Mickelson and Walters took advantage of nonpublic information from Icahn, specifically shares in Clorox, which back in 2011 became a target of his.

Two FBI agents approached Mickelson after the first round of the Memorial Tournament in Dublin, Ohio, Thursday, and he referred them to his attorney.

I’m not going to give an opinion, as much as I have one. Time to impose my ’24-hour rule.’

--Citigroup’s CFO warned on Tuesday that total trading revenue could drop as much as 25% in the current quarter from a year ago, echoing earlier comments from JPMorgan Chase, which forecast a decline of 20%.

--RBS (Royal Bank of Scotland Group PLC) is planning to cut hundreds of jobs in its U.S. trading businesses over the next 18 months, perhaps as many as 400, a blow primarily to the Stamford, Conn., area where most of the cuts will originate. Foreign banks are forced to hold more capital under the new regulatory environment, part of Dodd-Frank, and thus they are cutting costs.

--Yes, it’s a tough time to be a bank. According to data released by the FDIC, “A steep drop in mortgage lending and a slowdown in securities trading fueled a 7.6% drop in net income in the first quarter from the same period a year ago at the nation’s 6,730 commercial banks and savings institutions....just the second time in 19 quarters that financial firms reported a year-over-year profit fall, the FDIC said.” [Robin Sidel and Andrew R. Johnson / Wall Street Journal]

The second half of the year isn’t looking any better. While the mortgage business could eventually rebound, trading activity isn’t likely to. The FDIC said trading revenue from fixed-income, currencies, commodities and equities among its regulated banks fell 18% in the first quarter.

Gary Cohn, president of Goldman Sachs Group Inc., described the trading environment this week as “difficult.”

“If markets never move or don’t move, our clients really don’t need to transact. Our client base is a lot quieter today than they have been in a long period of time,” he said.

Oh well. At least the FDIC report noted the pace of lending picked up in the first quarter, a whopping 0.5 percent from the final 2013 quarter.

--The Justice Department is seeking more than $10 billion from BNP Paribas SA to settle federal and state investigations into the bank’s dealings with countries on the sanctions list, including Sudan and Iran. Shares in BNP fell 6% Friday in Paris. Initially the fine was estimated to be in the $2.5 billion area, though BNP previously said it had set aside just $1.1 billion.

Prosecutors argue the severe penalty is justified because BNP’s actions were egregious and the bank didn’t fully cooperate with the investigation.

--BlackRock Inc. CEO Larry Fink said that leveraged exchange-traded funds could “blow up” the whole industry one day. BlackRock, which has nearly $1 trillion in ETF assets, does not have a leveraged fund itself, but the SEC has issued warnings about such products, yet hasn’t done anything to curb their availability.

--General Electric CEO Jeffrey Immelt appeared before the French parliament in an attempt to win their support for his company’s bid for Alstom SA’s power-equipment business. Immelt said he was willing to partner with the government in an alliance, promising to create 1,000 jobs in the country (though few actual details were offered).

Siemens AG, Europe’s largest engineering company, is also going after Alstom’s energy assets, but then this week, Siemens said it was eliminating at least 11,600 positions as it cuts $1.34 billion in costs, which has German unions in an uproar after the CEO promised the French government he would guarantee jobs there for three years if the company bought Alstom’s assets.

--I have written on numerous occasions of IBM’s financial engineering when it came to its earnings reports, which look great despite the fact sales continue to decline.

So I loved a bit in BloombergBusinessweek that said IBM used the phrase “non-GAAP” (nonstandard) accounting 125 times in its 2013 annual statement, when it was cited zero times in 2009. Yup, I’d say that sums it all up. It’s a total crock.

--Apple agreed to buy Beats Electronics for $3 billion. Beats’ co-founders Jimmy Iovine and Dr. Dre, the hip hop star, will join Apple as part of the deal.

Beats, founded in 2008, makes most of its money from ‘premium-priced headphones’ and speakers (some would argue the ‘premium’ label is a bit of a misnomer, seeing as it’s cheapo plastic). The company’s products were already big sellers in Apple stores.

Beats also launched a music streaming service, though it is well behind industry leader Spotify.

The deal breaks with Apple’s tradition of developing its products in-house.

--So I last noted that Hillshire Brands Co. (think Jimmy Dean and Ball Park) had made a bid for Pinnacle Foods (Wish-Bone and Birds Eye), but this week Pilgrim’s Pride Corp. (think chicken) made a play for Hillshire. So Pilgrim’s Pride was looking to combine poultry with prepared meats. I’m very confused, though a slice of fried bologna on top of a baked chicken patty is not bad....not bad at all.

Heck, I’d pour a little Wish-Bone ranch on this as well, but not Pinnacle’s Log Cabin syrup. That would be a bit gross, I think you’d agree.

On Thursday, Tyson Foods Inc. unleashed an all-cash bid for Hillshire, two days after Pilgrim’s Pride’s bid.

Tyson offered to pay $50 a share for Hillshire, while the Pilgrim offer was for $45 a share.

Of course a Tyson-Hillshire combination would make the production of chicken franks all the easier.

--Google bowed to this month’s European Court of Justice decision that required search engines have to offer a “right to be forgotten” for users. How this will work is not yet known, but in an interview with the Financial Times, CEO Larry Page said the ruling against Google risks damaging the next generation of Internet start-ups and strengthening the hand of repressive governments looking to restrict online communications.

This whole issue exploded over the use of personal data and as Page admits, caught the company offguard.

--Pfizer admitted defeat in its pursuit of AstraZeneca, though while it’s possible the two parties could get back together after a mandated cooling-off period, Pfizer’s chairman and CEO, Ian Read, certainly didn’t act like this would be the case. I say they do eventually work things out, including with the British government.

--French economist Thomas Piketty defended an attack from the Financial Times on the findings of his bestseller, “Capital in the 21st Century,” which warned that income inequality is on the rise around the globe.

The FT, after examining Piketty’s data – which he had posted online for the public to scrutinize – “questioned whether the data supported two of the author’s conclusions: that wealth inequality has been on the rise for several decades, and that it is worse in the U.S. than in Europe.” [Wall Street Journal]

Piketty maintains that his data may contain minor mistakes, but: “Every wealth ranking in the world shows that the top is rising faster than average wealth. If the FT comes with a wealth ranking showing a different conclusion, they should publish it!”

The FT itself noted, “In (Piketty’s) spreadsheets...there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.

“For example, once the FT cleaned up and simplified the data, the European numbers do not show any tendency towards rising wealth inequality after 1970.”

--When I’m in Paris, I marvel at how packed a McDonald’s on the Champs-Elysees always is and then this week I saw a story that authorities in one small French town, near Lille, are clamoring for a McDonald’s that local officials have tried to stop from being built. But the citizens of Saint-Pol-sur-Temoise want the jobs, as well as the food, and social aspect a McDonald’s would bring.

It turns out France is now the second-biggest consumer of Big Macs outside the United States. [Sydney Morning Herald / The Telegraph]

--Fox Broadcasting’s entertainment chairman, Kevin Reilly, is stepping down after a terrible season for the network, including “American Idol,” the audience for which has shrunk 60% from its peak in the mid-2000s.

--New Jersey’s casinos and online gaming companies are “shocked,” as one executive put it, at the slowness of the start to online activity in the state. New Jersey forecast revenue of as much as $1 billion a year, when the monthly tally in April was $11.4 million, down from March. The operators are all slashing their advertising.

Sign up is not easy, it needs to be noted, in an attempt to deter play by minors, and some banks are refusing to process online gambling payments.

--In a new study, the National Highway Transportation Safety Administration says highway crashes cost the U.S. $871 billion a year. The total includes $277 billion in economic costs and $594 billion in societal harm from the loss of life and the pain and decreased quality of life because of injuries.

Looking at last year’s 32,999 highway fatalities, the study found drunk driving, speeding and distracted driving accounted for 56% of the economic loss and 62% of the societal harm.

--Former Microsoft CEO Steve Ballmer submitted a $2 billion bid for the Los Angeles Clippers, which was accepted by Donald Sterling’s wife, Shelly, but Donald said, ‘hold on’ as he sued the NBA for damages in excess of $1 billion, alleging the league committed antitrust violations, breached contracts and denied his constitutional rights. As for Ballmer’s bid, yes, it’s outrageous, but these days, who knows.

Foreign Affairs

Ukraine: Petro Poroshenko took 54.7% of the vote in last weekend’s presidential election, thus avoiding a run-off, and he immediately vowed to quash the rebellion in the east, “in hours,” not months. Vladimir Putin pledged to respect the election outcome. Russian Foreign Minister Sergei Lavrov said Moscow was “open to dialogue” but insisted military action against separatists must end.

In response to the election, pro-Russian rebels tried to seize Donetsk’s international airport, but the separatists say they lost up to 100 fighters when the Ukrainian army launched an attack to retake it. Not that they were surprised by the action, but they had to be by the ferocity of the Ukrainian military.

Thursday, pro-Russian rebels shot down an army helicopter, killing 14, including an army general. Poroshenko said, “These criminal acts of the enemies of the Ukrainian people will not go unpunished.”

But also on Thursday, pro-Russian fighters backed by armored personnel carriers, seized the separatist headquarters in Donetsk. The surprise move was by a group called the Vostok Battalion, a heavily armed unit that has been involved in fighting against the Ukrainian army.

So it was an internal coup within the rebel movement. The self-declared prime minster of the Donetsk Peoples’ Republic wasn’t in the building at the time and said afterward, “There is no coup. Everything is under control.”

One thing is clear. The Vostok Battalion includes fighters from Russia and said they were acting against the lawlessness exhibited by some in the separatist movement. Apparently, the looting of a supermarket following the battle for Donetsk airport triggered the Vostok Battalion’s response.

The leaders of the Battalion also dropped all pretenses about the makeup of their fighting force, saying they were repatriating the bodies of Russian fighters killed in the airport battle, 33 by one count.

For its part, Russia has withdrawn thousands from the Ukrainian border, according to Defense Secretary Chuck Hagel, who labeled the withdrawal “promising,” but said thousands remained. [Ukraine defense officials announced 20,000 remained, along with heavy equipment that was left for those who went back to their bases...making it easier for them to return.]

In his speech at West Point, President Obama said “American leadership” had effectively blocked Russia in the international arena.

“Our ability to shape world opinion helped isolate Russia right away,” the president said.

Hardly, countered Russian Foreign Minister Lavrov, who cited last week’s economic forum in St. Petersburg as proof of Russia’s continuing global integration. Russian energy giant, Rosneft, for one, cut a number of deals at the forum, while earlier you had the Gazprom deal with China worth $400 billion.

Putin signed a treaty with his counterparts from Kazakhstan and Belarus creating a trading bloc of more than 170 million people to challenge the U.S. and the European Union. Two others, Kyrgyzstan and Armenia, are slated to join later in the year, in what is called the Eurasian Economic Union.

Meanwhile, Ukraine’s energy crisis continues, with Gazprom claiming the debt Kiev owes is $3.5 billion, while Ukraine says its $2.2 billion. Ukraine has said it would pay it down if Gazprom agrees to a contract price far below the average paid by European buyers of Russian gas...$268 per thousand cubic meters vs. $380 per thousand paid by Europe and Gazprom’s proposed price for Ukraine of $485.

President Obama will be meeting with Poroshenko during Obama’s trip to Europe next week, including for a D-Day anniversary, which Putin is slated to attend.

Poroshenko said he wants some time before committing to any major political and economic deals with the European Union.

Iran: As reported by Paul Richter of the Los Angeles Times:

“The United Nations is unlikely to complete its assessment of whether Iran has conducted research on nuclear weapons before the deadline set by six world powers for a deal to curb the country’s nuclear activities, a new complication in the international negotiations....

“The scope of the study [Ed. by the International Atomic Energy Agency] probably means that the United States and the five other world powers won’t have the U.N.’s final judgment on Iran’s disputed activities by July 20, when they hope to have completed an agreement with Iran.

“Instead, the world powers will have to determine whether Iran has sought nuclear weapons capability, adding a further challenge to a negotiation that is already difficult, said David Albright, a nuclear weapons specialist who is president of the Institute for Science and International Security....

“U.S. officials say they won’t agree to a deal unless Iran answers the IAEA’s questions about its nuclear activities, including any military dimension.”

As I’ve written for years now, however, Iran is still not allowing the IAEA access to the Parchin military site, which the IAEA suspects has been used for weapons research.   That’s all you need to know.

For its part, France said Iran is acting “too slowly” to answer IAEA questions. A critical five-day negotiating session is slated to begin June 16.

“(At the end) of the current negotiations, Iran will be left as a threshold nuclear power with very grave consequences and it won’t stop there. It will continue to develop nuclear military capacity.

“How do we know this? Because deceit is where Iran really excels. What it is doing today is just another version of what it has done in the past, a portent of the future. It hid a nuclear program in the side of a mountain for four years before we found out about it. Iran is, as we write, developing inter-continental missiles whose only purpose would be to threaten the U.S. The notion that Iran will give up its missile program is simply naïve to the point of idiocy. Yes, it has reduced its production of fissile material, but this sounds better than it really is as it delays by only 24 days Iran’s ability to produce enough for nuclear weapons. It has not stopped its research and development on centrifuges, which puts it even closer to a nuclear breakout when the constraint period is over....

“The Israelis are not ready to commit suicide. They will not accept any agreement that leaves the country with an existential nuclear threat by a neighbor who espouses not just radicalism but suicidal radicalism.

“There’s only one solution here: a total dismantlement of Iran’s uranium enrichment program....

“The waffling U.S. policy is not encouraging Iran to take the negotiations seriously. In the past 20 years we have learned how expertly the Iranian regime can deceive, defraud and mislead the West. That is why Israel is preparing to launch a military strike; unless and until Iran feels that threat, all we have is (President) Rohani’s rhetoric....

Syria: Big election on June 3...Bashar al-Assad will be reelected president to a third seven-year term. How you conduct an election in this hellhole is a good question, with 9 million displaced.

“For more than three years, President Obama has resisted advice from inside and outside his administration to abandon his passivity and do something to help Syria – not to send ground troops, the straw man his spokesmen regularly erect to fend off criticism, but rather to train and equip the rebels or to help patrol a safe zone for those seeking to evade Mr. Assad’s depredations. Mr. Obama’s excuses have varied: Mr. Assad’s downfall was inevitable with or without U.S. involvement; the rebels weren’t deserving of U.S. help; anything the United States did would make things worse.

“But without U.S. involvement, the worst-case predictions are coming true: More than 160,000 people have been killed, more than 9 million have been displaced from their homes, and terrorists allied with al-Qaeda are establishing safe zones from which they can attack Europe and the United States. Mr. Assad, stronger than ever, has given up much of his chemical weapons arsenal. But he continues to launch chemical attacks and to drop barrel bombs full of shrapnel on schools, bakeries and apartment buildings in rebel-controlled neighborhoods. With a few shoulder-fired missiles, the rebels could discourage those helicopter assaults. The United States won’t furnish the weaponry.”

Egypt: Turnout was so pathetic in the presidential election, due largely to the boycott of it by the Muslim Brotherhood and its sympathizers, that the military-backed government extended voting  another day so that presumptive winner Abdel Fattah Al Sisi could appear to have had more of a mandate, though Sisi’s campaign wasn’t happy with the manipulation, as much as it wanted a better result.

Regardless, Egypt is his.  Sisi ended up with 93.3% of the votes cast, but turnout, at 46%, was lower than expected. Sisi himself had called for 80% turnout the week before.  I’m going to be optimistic on this one. Give Sisi a year. But the lower-than-expected turnout does make it much harder for him to enact required economic reforms, like ending energy subsidies, if he is to gain the support of international institutions and investors.

Sisi does have the support of businessmen who thrived under Hosni Mubarak, as well as that of the armed forces and the Interior Ministry. He also has the support of Saudi Arabia, the UAE and Kuwait.

First and foremost, Sisi needs to create a climate that encourages tourists to return.

“Responding to the gloom that now prevails among the young, secular-minded Egyptians who spearheaded the revolt of 2011 and who largely view Mr. Sisi as the leader of a counter-revolution, one well-known blogger offers a ray of hope. If Mr. Sisi succeeds, says Mahmoud Salem in a recent column, well and good.   And if he fails, then maybe Egypt, having rejected the Islamist Brothers and been cured of its adulation for the army as well, may at last be ready for a real revolution.”

Israel: Prime Minister Benjamin Netanyahu accused European leaders of “hypocrisy” for failing to adequately condemn a suspected anti-Semitic attack on the Jewish museum in Brussels that killed four, including two Israelis. Netanyahu blamed the incident on “constant incitement” against Israel by “elements in the Middle East and Europe.”

Speaking on his arrival in Israel, Pope Francis referred to the attack as “this criminal act of anti-Semitic hatred.”

Netanyahu told a meeting of the Israeli cabinet: “We appreciate the Pope’s strong stand against anti-Semitism, especially in light of the surging Jew hatred that we have witnessed in recent days.

“There are elements in Europe that rush to condemn the construction of a flat in Jerusalem but not rush to condemn – or offer only weak condemnations of – the murder of Jews here or in Europe itself and, even worse, welcome unity with a terrorist element such as Hamas, which calls for the destruction of the State of Israel.” [Daily Telegraph]

Separately, Fatah and Hamas agreed on the make-up for a national unity government. Mahmoud Abbas will remain president.

Libya: The State Department recommended Tuesday that Americans leave Libya immediately as the security situation went from bad to worse. It’s a civil war, to put it succinctly. Many of the militias controlling various regions have al-Qaeda ties. The looting of Gaddafi’s arsenals hasn’t helped the situation. 1,000 Marines are on an amphibious assault ship off the coast to help if needed, according to the Pentagon.

Afghanistan: President Obama announced Tuesday that he will withdraw all but 9,800 troops from Afghanistan by the end of this year, with the rest gone by the end of 2016, as our leader once again set a timetable that was totally unnecessary and only beneficial to our enemies. Currently, there are about 32,800 troops in the country.

“It’s time to turn the page on more than a decade in which so much of our foreign policy was focused on...wars in Afghanistan and Iraq,” Obama said in the Rose Garden.

“We have to recognize Afghanistan will not be a perfect place, and it is not America’s responsibility to make it one,” Obama added. “The future of Afghanistan must be decided by Afghans.”

House Armed Services Committee Chairman Howard P. ‘Buck’ McKeon (R-Calif.) said he was “pleased” with the decision to leave troops in Afghanistan but that “holding this mission to an arbitrary egg-timer doesn’t make a lick of sense strategically.”

“We are in Afghanistan because it was the spawning ground of al-Qaeda and the devastating attack on American soil,” McKeon said. “Those threats still exist. We leave when the Afghans can manage that threat, rather than on convenient political deadlines that favor poll numbers over our security.” [Karen DeYoung / Washington Post]

“We’ll try to assume that the 2016 date is driven by something other than political motives and Mr. Obama’s quest to be remembered as the president who ended wars. Likewise, we’ll resist the conclusion that the 9,800 number – U.S. commanders had made a lowball request for 10,000 to 12,000 troops – has a military justification beyond giving Mr. Obama the chance to say, as he did in his Rose Garden remarks on Monday, ‘less than 10,000.’....

“Mr. Obama’s total withdrawal is all the more dismaying given the hard-won gains he now puts at risk....

“But as in Iraq, these gains can be reversed, and the odds of reversal increase without a credible U.S. military presence to help the next Afghan president fend off the Taliban and its allies in Tehran and Islamabad....

“With such a small presence, the next Afghan president might well wonder, as Iraq’s Nouri al-Maliki did, whether it’s even worth signing the Bilateral Security Agreement (BSA) that is a precondition for maintaining any force levels....

“For years the Taliban have sustained their cause despite battlefield defeats with the refrain that ‘Americans have the watches but we have the time.’ By announcing another arbitrary deadline for withdrawal, Mr. Obama has given them renewed reason to believe they are right.”

“You can’t fault President Obama for inconsistency. After winning election in 2008, he reduced the U.S. military presence in Iraq to zero. After helping to topple Libyan dictator Moammar Gaddafi in 2011, he made sure no U.S. forces would remain. He has steadfastly stayed aloof, except rhetorically, from the conflict in Syria. And on Tuesday he promised to withdraw all U.S. forces from Afghanistan by the end of 2016.

“The Afghan decision would be understandable had Mr. Obama’s previous choices proved out. But what’s remarkable is that the results also have been consistent – consistently bad. Iraq has slid into something close to civil war, with al-Qaeda retaking territory that U.S. Marines once died to liberate. In Syria, al-Qaeda has carved out safe zones that senior U.S. officials warn will be used as staging grounds for attacks against Europe and the United States. Libya is falling apart, with Islamists, secularists, military and other factions battling for control.

“We hope Afghanistan can avoid that fate. But the last time the United States cut and ran from there, after the Soviet Union withdrew, the result was the Taliban takeover, al-Qaeda’s safe havens and, eventually, the Sept. 11, 2001, terrorist attacks, after which everyone said, well, we won’t make that mistake again.”

James F. Jeffrey and Ronald E. Neumann, former ambassadors to Iraq and Afghanistan, respectively, on the decision to keep almost 10,000 U.S. troops in Afghanistan beyond 2014 but then withdraw them all by the end of 2016.

“This lacks logic. We are committing people to a mission that could require their lives and which is supposedly essential to us, all the while declaring that in less than three years none of this will be in effect. First, this will undercut the desired global impact of the ‘troops stay’ decision by signaling reluctance, not will. Second, the plan in Afghanistan explicitly replicates the Iraq model of putting the training, equipping and counterterrorism functions inside an embassy and an office of military cooperation. This is a route to failure.

“When we attempted this in Iraq in 2011, bureaucratic obstacles ranging from legal-immunity questions involving diplomats and soldiers to budget and authority battles among different U.S. agencies and their congressional supporters tied up our efforts in knots.  The Iraqis saw the effort as a half-measure and were reluctant to allow ‘intrusive’ U.S. monitoring and advising through a diplomatic establishment as opposed to a military partnership.

“Even worse, without a force ‘at risk’ and a commander to mobilize Pentagon and interagency attention, Washington lost focus. This compounded the bureaucratic and host-nation problems. Today in Iraq, we are again trying to cope with a surging al-Qaeda presence by strengthening the embassy model. In Afghanistan, without a U.S.-led military presence, the loss of bureaucratic focus would make it even more difficult to obtain funding for the Afghan army and civilian development, and Afghanistan lacks the oil money of Iraq to compensate.

“Alternative arrangements in Afghanistan are likely to fail, as they are still at risk of failing in Iraq. Being able to say that the Obama White House ‘totally ended two wars by the end of 2016’ – whatever has transpired during the interim – risks undermining more than a decade of effort and deepening international questions about the staying power of the Obama administration. The fix is easy: Change the 2016 deadline to ‘when the end of the mission that these troops have risked their lives for is accomplished.’”

China: Vietnam accused China of sinking a Vietnamese fishing boat near the disputed Paracel Islands, near where China placed an oil rig in a move sparking the worst crisis in Sino-Vietnamese relations in years.

On a different issue...from the Wall Street Journal: “China’s Internet espionage capabilities are deeper and more widely dispersed than the U.S. indictment of five army officers last week suggests, former top government officials say, extending to a sprawling hacking-industrial complex that shields the Chinese government but also sometimes backfires on Beijing.

“Some of the most sophisticated intruders observed by U.S. officials and private-sector security firms work as hackers for hire and at makeshift defense contractors, not the government, and aren’t among those named in the indictment....

“Sometimes freelancers appear to take orders from the military, at other times from state-owned firms seeking a competitive advantage, U.S. security firms say.”

Separately, the government is strongly urging domestic banks to remove high-end servers made by IBM and replace them with domestic brands, with the People’s Bank of China and the Ministry of Finance saying the reliance on IBM compromises the country’s financial security, as reported by Bloomberg.

IBM had previously announced sales in China fell 20% in the first quarter. In January it announced it would sell its low-end server business to Beijing-based Lenovo Group Ltd.

The Financial Times reported China ordered state-owned companies to cut ties with U.S. consulting firms.

In yet another move restricting online freedom of expression, the government is targeting smartphone instant messaging services, particularly by intellectuals, journalists and activists, including those posting news reports not reported on by the mainstream media. This comes days before the 25th anniversary of Tiananmen Square.

It’s all about controlling access and preventing “rumormongering” that the government fears could destabilize the Communist Party.

Japan: At a regional summit in Singapore, Japanese Prime Minister Shinzo Abe promoted Japan as a counterbalance to China, with heightened tensions in the South and East China Seas.   As an example, Japan criticized China over two recent incidents in which Chinese fighter jets came “dangerously” close to Japanese surveillance aircraft in the East China Sea. Beijing said it scrambled its aircraft when Japan flew into a ‘no fly’ area that it had declared around a naval exercise with Russia.

Separately, in a potential breakthrough in relations between Japan and North Korea, Pyongyang agreed to reopen an investigation into Japanese citizens it abducted in the 1970s and 80s, in return for sanctions relief and possible aid. Pyongyang years ago admitted to abducting 13 Japanese it used to train its spies.

South Korea: President Park Geun-hye warned if North Korea conducts a new nuclear test it could have a domino effect, leading to the proliferation of nukes around the region (read South Korea and Japan). Ms. Park said, “North Korea would effectively be crossing the Rubicon if they were to conduct another nuclear test.” Pyongyang’s previous three tests were conducted in 2006, 2009 and 2013.

Of course as I’ve been writing, the fear is North Korea is much closer to having the ability to mount a small warhead on a ballistic missile than many want to believe.

South Korean officials maintain an analysis of satellite imagery leads to the conclusion a test is imminent. One player who does not want to see this is China. Beijing, after all, wouldn’t want Japan and South Korea going nuclear in response. Chinese President Xi is scheduled to visit Seoul this summer.

On the other hand, Japan and the U.S. might not be that comfortable with warming ties between Seoul and Beijing. Along these lines, on Tuesday, South Korea rejected calls by American lawmakers to join a U.S.-led antimissile framework in East Asia that would aim for greater data sharing and system integration among the U.S., Japan and South Korea. Seoul clearly doesn’t want to antagonize China, which views the U.S.-led framework as aimed at containing its military rise. Seoul is also leery of entering defense agreements with Japan. [Global Security Newswire / Korea Times]

Thailand: Peter Hartcher / Sydney Morning Herald:

“Let’s stop pretending about Thailand. There is a polite international fiction that last week’s military coup is just a temporary interruption to democratic rule.

“No. The evidence of this century is that Thailand is not a democracy at all.

“The latest coup is confirmation that this is a country which fundamentally rejects the central precept of representative democracy – that the people choose their rulers.

“Since 2001, the people have chosen their rulers decisively. In six consecutive elections, they have voted for the party of Thaksin Shinawatra or his allies.....

“And on six occasions, a constellation of establishment forces has conspired to veto the people’s decision. Last week’s was just the latest.”

Among the developments this week, former prime minister Yingluck Shinawatra and members of her family were banned from leaving the country, among 200 key political figures in all. Separately, two dozen professors and writers were ordered to turn themselves over to the military authorities.

Army chief Gen. Prayuth received the endorsement of Thailand’s 86-year-old king. Prayuth said elections would take place as soon as possible, but gave no timetable.

Russia: Moscow is being distracted by a crisis in Abkhazia, the statelet it has kept afloat since the 2008 Georgia war; one of the two breakaway Georgian territories, the other being South Ossetia. Thousands have been protesting against corruption and economic stagnation.

So will Georgia “re-emerge as a thorn that would have to be dealt with” as the Carnegie Moscow Centre’s Dmitri Trenin put it in The Economist the other day?

“The United States must lead in articulating a new Western strategy, beginning with a presidential speech that explains why, after decades of efforts to integrate Russia into Western institutions, Putin’s regime must be treated as an adversary. Debunking Putin’s pseudohistorical claims and reminding people that the Soviet Union was a ‘prison of nations’ and that numerous Central and Eastern European countries have joined NATO and the European Union precisely to maintain their independence from Moscow should be at the core of the speech. It should also expose the moral pathologies of Putin’s government, including its authoritarianism, xenophobia, religious intolerance and bigotry against the lesbian, gay, bisexual and transgender community.

“Such a speech also would convey to Russia’s people that Putin’s doctrine is incongruous with true Russian interests. Putin’s propaganda and suppression of press freedoms have allowed Moscow to misrepresent the treatment of Russian speakers in Ukraine and hide its role in instigating unrest in that country. They are obscuring the extent to which Russia’s hostile foreign policy is undermining the Russian people’s aspirations to live in a modernized country, with a diversified economy that does not depend predominantly on gas exports. The contrast between Putin’s support for federalism in Ukraine and centralized control in Russia should be a key part of this speech. Russian citizens, after all, possess fewer freedoms than ethnic Russians enjoy in virtually all of Russia’s neighboring countries....

“If Putin’s blatant instigation of ethnic unrest and aggression is left unchallenged, the international system will be destabilized, some countries will seek to acquire nuclear weapons as the only guarantee of their security and other states may invade or dismember their neighbors.”

India: Narendra Modi was sworn in as prime minister on Monday and among the guests was Pakistan’s premier, Nawaz Sharif, a positive sign. The two met for an hour after the inauguration. Terrorism appears to have been the main topic of discussion, with Modi calling on Pakistan not to allow its territory to be used as a launching pad for strikes on India, a la Mumbai.

Modi said in his speech to the people, “Together we will script a glorious future for India. Let us together dream of a strong, developed and inclusive India that actively engages with the global community to strengthen the cause of world peace and development.”

“There are three main dangers. One is that Mr. Modi turns out to be more of a Hindu nationalist than an economic reformer. He has spoken of ‘bringing everyone along.’ But while he has already worshipped at the Ganges since his victory, promising to clean up the river sacred to Hindus, he has not brought himself to mention Muslims, who make up 15% of the population.

“A second danger is that he is defeated by the country’s complexity. His efforts at reform, like all previous reformers’ efforts, may be overwhelmed by a combination of politics, bureaucracy and corruption. If that happens, India will be condemned to another generation or two of underachievement.

“A third is that Mr. Modi’s strength will go to his head, and he will rule as an autocrat, not a democrat – as Indira Gandhi did for a while. There are grounds for concern. After years of drift under Congress [Ed. the Congress party], some of the country’s institutions have rotted. The main police investigator is politically directed, the media can be bought, the central bank, which does not have statutory independence, has been bullied before, and Mr. Modi has authoritarian tendencies.

“The risks are there, but this is a time for optimism. With a strong government committed to growth and a population hungry for it, India has its best chance of making a break for prosperity since independence.”

Malaysia: The pings believed to have come from missing Malaysia Airlines flight 370 are now thought to have come from one of the searching ships itself or equipment used to detect the pings, a U.S. Navy official says. They did not come from the missing passenger jet’s black boxes. At least CNN got some commercials out of it.

France: If former president Nicolas Sarkozy still harbors dreams of a comeback in 2017, it would appear he can kiss them goodbye as his center-right UMP party has become embroiled in another campaign finance scandal related to the 2012 election. The party president, Jean-Francois Cope, was forced to resign after his chief of staff admitted to faking invoices to cover up overspending by Sarkozy’s campaign, which exceeded the legal limit, perhaps by as much as 50%.

Needless to say, as this came to light just days after Marine Le Pen’s National Front defeated the UMP in the European Parliament elections, she lit into the UMP on Tuesday, accusing Sarkozy of “cheating on an industrial scale” and saying the scandal undermined the legitimacy of the 2012 vote in which she came in third behind Sarkozy and Francois Hollande. The affair “widens the gap between the French people and the political class,” said Le Pen.

Earlier this year, Sarkozy denied charges he had received millions of euros in illicit funding from Moammar Gaddafi during his successful 2007 election campaign.

Random Musings

--Gen. Eric Shinseki resigned on Friday as secretary of Veterans Affairs in an inevitable move, especially after an interim VA inspector general’s report, issued Wednesday, prompted new calls for him to step down.

“The report found that 1,700 veterans using a Phoenix VA hospital were kept on unofficial wait lists, a practice that helped officials avoid criticism for failing to accommodate former service members in an appropriate amount of time.

“A review of 226 veterans seeking appointments at the hospital in 2013 found that 84 percent had to wait more than two weeks to be seen. But officials at the hospital had reported that fewer than half were forced to wait that long, a false account that was then used to help determine eligibility for employee awards and pay raises.” [Wesley Lowery and Josh Hicks / Washington Post]

Shinseki told an audience Friday morning, before his resignation, that his own officials lied to him when it came to the scheduling issue. President Obama, pathetically, blamed the VA scandal in part on old computers that made scheduling difficult. Really.   He said that.

The following opinions were granted before Friday, but I’m keeping them in for the record, and the archives.

“Memorial Day is a sacred observance in America’s democracy – the day that the nation honors and thanks those who have worn the uniform of the United States and have served and sacrificed in its defense. We all love our country and the values it embodies. But there is no greater demonstration of that love in a democracy than those who freely bear arms and head into harm’s way, willing to lay down their lives for the sake of their fellow citizens. For the citizens on whose behalf this sacrifice is made, there is no greater responsibility than to care for those who have returned from the fight, to help them bind up their wounds and carry on.

“It is therefore the height of shame and tragedy that on this Memorial Day the nation is seized with the unfolding scandal of the government’s failure to meet its highest responsibility to veterans and wounded warriors. At least 26 Department of Veterans Affairs health-care facilities are under investigation for chronic mismanagement, deceitful and self-serving behavior, and inadequate provision of care. Whistleblowers allege that these and other failures at VA facilities may have led to the deaths of some 40 veterans. Simply put, America’s veterans are losing confidence in the one government agency that exists solely to care for them.

“This is more than a government failure. It is a violation of a solemn vow. And the buck stops with the president of the United States.

“Unfortunately, as this scandal at the VA escalated for nearly two months, President Obama was nowhere to be seen. There were expressions of anger through presidential proxies, but nothing from the commander in chief himself. And when the president finally did speak about the crisis on Wednesday, there was only a recitation of talking points, expressions of confidence in the system, without a real sense of emotion and urgency....

“What is needed now is real action and systemic reform of the VA. As a first step, Secretary of Veterans Affairs Eric Shinseki – a career soldier, a Vietnam combat veteran and a man whose career of service I have long admired – needs to carefully consider whether the best thing he can do now to help restore the nation’s confidence in the agency he leads is to stand down from his post....

“Veterans have earned the right to choose where and when they get their medical care, and it is our responsibility to afford them this option. Continuing to require that they rely on a system riddled with dysfunction, while waiting for broader reform, is patently unacceptable....

“(Let) us all remember Abraham Lincoln’s challenge to the country, an axiom that describes the VA’s solemn obligation today, ‘to care for him who shall have borne the battle and for his widow, and his orphan.’

“Today, the president, our nation and government are failing that test. We must all do better tomorrow – much better.”

“In a world of faux outrage, finally we have something about which to be scandalized. It is hard to imagine leaving our veterans to wither and die after they’ve survived enemy fire and war. As we celebrate Memorial Day weekend, it must be particularly painful for the families of those who never reached the top of the list.

“The deepest cut is knowing that the president, who as a candidate promised that veterans’ care would be among his highest priorities, hasn’t burdened himself with keeping this promise.”

“The president’s inattention to management – his laxity, his failure to understand that government isn’t magic, that it must be forced into working, clubbed each day into achieving adequacy, and watched like a hawk – is undercutting what he stands for, the progressive project that says the federal government is the primary answer to the nation’s ills.

“He is allowing the federal government to become what any large institution will become unless you stop it: a slobocracy....

“Mr. Obama said, when he first ran for president in 2008, that the VA system was a mess and he’d clean it up. It has gotten worse under his watch. He must be shocked. He told it to get better! He said the words!”

--Jay Carney stepped down after more than three years as President Obama’s press secretary. Deputy Josh Earnest will replace him. 

--In an interview with Brian Williams of NBC News in Moscow, Edward Snowden claimed his accomplishments and qualifications were being unfairly diminished by the administration.

“I was trained as a spy in sort of the traditional sense of the word, in that I lived and worked undercover overseas – pretending to work in a job that I’m not – and even being assigned a name that was not mine.”

Snowden also claimed he was in Moscow because of the State Department.

“I had a flight booked to Cuba and onwards to Latin America and I was stopped because the United States government decided to revoke my passport and trap me in the Moscow Airport.”

Secretary of State John Kerry said Snowden is no patriot and that he should come home and face the music.

“If Mr. Snowden wants to come back to the United States, we’ll have him on a flight today. We’d be delighted for him to come back. And he should come back, and that’s what a patriot would do.”

Following the interview, the NSA released an email exchange it says proves that Snowden questioned its legal training programs, but provides no evidence he had complained internally about vast surveillance programs he later leaked to the media.

Snowden replied in an email to the Washington Post: “If the White House is interested in the whole truth, rather than the NSA’s clearly tailored and incomplete leak today for a political advantage, it will require the NSA to ask my former colleagues, management, and the senior leadership team about whether I, at any time, raised concerns about the NSA’s improper and at times unconstitutional surveillance activities. It will not take long to receive an answer.”

Some are wondering why he didn’t retain copies of the emails he says he sent. 

Snowden said he would like to return home but clearly wants to cut a deal before he does so, knowing he has been charged with three felonies.

--Talk about pathetic...the White House blew the cover of the CIA station chief in Afghanistan last weekend, when his name and title were released in an e-mail to reporters traveling with President Obama on his surprise trip to Afghanistan. The CIA officer’s identity was part of a list of officials attending a military briefing with Obama at Bagram Air Field.

But the list was not just sent to reporters traveling with Obama, but it was then further distributed in a “pool report” to those not taking part in the trip, including members of foreign press agencies. Some 6,000 in all saw the identity of the Chief of Station. Not only was the individual and his family suddenly put at risk, it ruined his career.

You might be thinking, well, any government would know who the station chief is in their city, and that’s probably the case, but that doesn’t mean the likes of the Taliban have figured it out.

--Texas Republican Cong. Ralph Hall, the oldest-serving member of Congress, lost a primary challenge on Tuesday to a tea party-backed candidate, the first incumbent House lawmaker to do so this year. John Ratcliffe, a former U.S. attorney, raised questions about whether the 91-year-old Hall was still fit to hold office. That should not have been difficult to prove.

But Hall’s defeat means there will be no World War II veterans serving in Congress, with Rep. John D. Dingell (D-Mich.) having previously announced his retirement.

--A federal judge allowed Michigan Democratic Congressman John Conyers to be put back on the ballot after elections officials had struck him from it. He had initially been kept off for not having enough valid petition signatures. Conyers was first elected in 1964. The primary is Aug. 5.

--Matthew Dolan / Wall Street Journal: “A White House-initiated task force surveying decay in (Detroit) recommends spending $850 million to fix or tear down 80,000 run-down structures and clean garbage-strewn vacant lots in the city’s neighborhoods.”

93% of the structures in government-owned hands are worthy of being torn down.

It has to be done, but all the above doesn’t include the cost of taking down the mammoth idled plants, such as the Packard facility.

--We note the passing of Gen. Wojciech Jaruzelski of Poland. He was 90.

Gen. Jaruzelski was the last Communist leader of Poland, who from Dec. 13-16, 1981, crushed the Solidarity trade union movement, firing at striking workers on the 16th, killing nine. It was a truly depressing time as thousands protested in Western Europe and President Ronald Reagan moved to isolate the country.

I’ll never forget sitting in church that Christmas season with an awful feeling. It was scary. I remember how hard we prayed for the Poles.

Solidarity was outlawed, and would remain so for seven years, though by the end of 1983, Gen. Jaruzelski began to turn. Most of his repressive measures were eased and thousands of detainees released. By the time Mikhail Gorbachev emerged in the Soviet Union, after it had gone through three leaders in 26 months, Jaruzelski quickly became Gorbachev’s favorite and Jaruzelski allied himself with Gorby.

By 1989, Gen. Jaruzelski had become a true reformer, and although he was elected to the presidency in the first democratic elections in any Communist state, Jaruzelski deferred to Prime Minister Mazowiecki of Solidarity.

Jaruzelski had come full circle. While he had a six-year term, he resigned after just one, paving the way for a new presidential election, won by Solidarity leader Lech Walesa. [Michael T. Kaufman and Nicholas Kulish / New York Times]

--Billionaire Elon Musk took the wraps off a spacecraft dubbed Dragon V2 that is designed to ferry up to seven astronauts to the International Space Station. Other private companies are rushing to build “space taxis” for NASA to replace the retired space shuttle fleet, and to reduce our dependence on Russian rockets.

--Jon Frankel, a reporter for HBO’s “Real Sports with Bryant Gumbel,” recently did a report on prior Olympic venues and the “white elephants” left behind. You can say the same for some World Cup sites, as they’ll be doing in Brazil during (and after) the upcoming World Cup.

Greece, for one, continues to pay a heavy price for holding the 2004 Summer Olympics, an event that put the nation $billions in debt “for what’s turned into dandelion-pocked modern ruins,” as noted by Soraya Nadia McDonald in the Washington Post.

So now the issue is, who is going to host the 2022 Winter Olympics, with the likes of Krakow, Poland, Stockholm and St. Moritz taking themselves out of the running. More and more are learning to say ‘no.’

Stockholm just came out and said: “Arranging a Winter Olympics would mean a big investment in new sports facilities, for example for the bobsleigh and luge. There just isn’t any need for that type of facility after an Olympics.”

Now I really couldn’t care less about the Games. I’ve always felt each sport should do more with the world championships, and in these days of paying premium for live sports, there’s no reason why track and field, swimming, and Alpine couldn’t capture large television audiences for their separate events. Bring it all back to the essence of the sport.

--According to a study first reported on in Science magazine, the Arctic Ocean may hold trillions of small pieces of plastic and other synthetic trash, and, as the polar ice cap melts, they are being released into the world’s oceans, though the consequences to marine life are not known.

What is amazing is the concentration of plastic debris “is 1,000 times greater than that floating in the co-called Great Pacific Garbage Patch.” [Michael Winter / USA TODAY]

While rayon is not a plastic, it is a synthetic material that was the most common found in core samples of ice. Rayon is used in cigarette filters, clothing and hygiene products.   Polyester was next, followed by nylon.

The authors of the study called the ice trap “a major historic global sink of man-made particulates,” and as Science points out, 288 million tons of plastics were produced in 2012.

--A study out of the University of Washington finds that 29% of the world’s population, 2.1 billion people, was either obese or overweight, rising by 47.1% for children between 1980 and 2013. The United States has the most obese people, 86.9 million, followed by China with 62 million.

As for percentages, 52.4% of the men in Tonga are obese.

I also can’t help but note that more than 50% of the women in the Federated States of Micronesia are obese as well. That includes the island of Yap, with which I am most familiar. No surprise here. The people get zero exercise and drink too much soda. [The men, too much beer, including moi when I’m there.]

--Depressing piece in the May 24 issue of The Economist concerning the Caribbean and thriving drug gains. To wit: The State Department’s senior anti-drugs official, William Brownfield, says that 16% of cocaine imports into the United States came through the Caribbean Islands last year, up from 4% in 2011. For European cocaine imports, the proportions are even higher.

This isn’t good for the Caribbean. International gangs are becoming more entrenched, such as Mexico’s Sinaloa group. More gangs means more local officials to bribe. The Islands’ already high murder rates are thus only going to explode ever upward. Tourists, always have your guard up.

--Finally, one of the great ambassadors for my alma mater, Maya Angelou, died at the age of 86. What an asset for Wake Forest University in Winston-Salem, N.C., where Angelou served as a professor since 1982, after all she had accomplished beforehand. Angelou befriended the likes of Martin Luther King, Jr., Nelson Mandela and Oprah Winfrey. Singer, actress, author, poet, Maya Angelou did it all. RIP.

Pray for the men and women of our armed forces.

God bless America.

Gold closed at $1246...lowest in four months
Oil $102.71

Returns for the week 5/26-5/30

Dow Jones +0.7% [16717]
S&P 500 +1.2% [1923]
S&P MidCap +0.6%
Russell 2000 +0.7%
Nasdaq +1.4% [4242]

Returns for the period 1/1/14-5/30/14

Dow Jones +0.9%
S&P 500 +4.1%
S&P MidCap +2.6%
Russell 2000 -2.5%
Nasdaq +1.6%

Bulls 58.3
Bears 17.3 [Source: Investors Intelligence...spread over 40, seen as danger level, but this can last a while before there’s a hiccup.]

Catch me on Twitter @stocksandnews

Brian Trumbore

---