Week in Review

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Week in Review

09/06/2014

For the week 9/1-9/5

Edition 804

Washington and Wall Street

Last weekend, President Obama, speaking at a fundraiser, told an audience, “The world has always been messy.... If you watch the nightly news, it feels like the world is falling apart.”

Well it is, Mr. President. Obama also wants us to believe today’s geopolitical threats are far less perilous than those of the Cold War.

I would prefer to listen to Henry Kissinger, who wrote the following in an op-ed for the Wall Street Journal.

“The years from perhaps 1948 to the turn of the century marked a brief moment in human history when one could speak of an incipient global world order composed of an amalgam of American idealism and traditional European concepts of statehood and balance of power. But vast regions of the world have never shared and only acquiesced in the Western concept of order. These reservations are now becoming explicit, for example, in the Ukraine crisis and the South China Sea. The order established and proclaimed by the West stands at a turning point....

“For the U.S., (the) celebration of universal principles needs to be paired with recognition of the reality of other regions’ histories, cultures and views of their security. Even as the lessons of challenging decades are examined, the affirmation of America’s exceptional nature must be sustained. History offers no respite to countries that set aside their sense of identity in favor of a seemingly less arduous course. But nor does it assure success for the most elevated convictions in the absence of a comprehensive geopolitical strategy.”

I would argue having your head in the sand, a la our president today, is not a comprehensive geopolitical strategy that suits America’s exceptional nature.

Nicolas Burns, former U.S. ambassador to NATO, had a passage in an op-ed for the Financial Times that noted the NATO summit in Wales this week was, “in many ways, a generational leadership test for those assembled... this is, after all, the NATO of Adenauer, Churchill, Eisenhower and de Gaulle as well as Kohl, Thatcher and Reagan. NATO’s modern fortunes depend, in particular, on the steadfastness of Ms. Merkel and Mr. Obama.”

Last week I wrote I believed Vladimir Putin would at some point threaten the use of tactical nuclear weapons. About the time I posted, I didn’t realize the Washington Post’s Anne Applebaum had written some similar dire musings.

Regarding the situation in Ukraine, Ms. Applebaum wrote of Russia gradually carving out territory to create a rump state that eventually winds its way from eastern Ukraine to Transnistria, the Russian-occupied province of Moldova.

“A few days ago, Alexander Dugin, an extreme nationalist whose views have helped shape those of the Russian president, issued an extraordinary statement. ‘Ukraine must be cleansed of idiots,’ he wrote – and then called for the ‘genocide’ of the ‘race of bastards.’....

“(The) dissident Russian analyst Andrei Piontkovsky has recently published an article arguing...that Putin really is weighing the possibility of limited nuclear strikes – perhaps against one of the Baltic capitals, perhaps a Polish city – to prove that NATO is a hollow, meaningless entity that won’t dare strike back for fear of a greater catastrophe. Indeed, in military exercises in 2009 and 2013, the Russian army openly ‘practiced’ a nuclear attack on Warsaw.

“Is all of this nothing more than the raving of lunatics? Maybe. And maybe Putin is too weak to do any of this, and maybe it’s just scare tactics, and maybe his oligarchs will stop him. But ‘Mein Kampf’ also seemed hysterical to Western and German audiences in 1933. Stalin’s orders to ‘liquidate’ whole classes and social groups within the Soviet Union would have seemed equally insane to us at the time, if we had been able to hear them.

“But Stalin kept to his word and carried out the threats, not because he was crazy but because he followed his own logic to its ultimate conclusions with such intense dedication – and because nobody stopped him. Right now, nobody is able to stop Putin, either. So is it hysterical to prepare for total war? Or is it naïve not to do so?”

On the economic front, the August nonfarm payroll report was disappointing with just 142,000 jobs created, the first figure below 200,000 after six consecutive months above that level. The 142,000 was also well below expectations of 220,000-230,000. The unemployment rate ticked down from 6.2% to 6.1%, while average hourly earnings rose just 0.2%.

Separately, July construction spending was up a strong 1.8%, July factory orders rose 10.5% (not a misprint... 11.0% was expected), and the ISM readings for August on manufacturing, 59.0, and services, 59.7, were very solid; in the case of the latter the best reading since Aug. 2005.

The latest Fed beige book of regional economic activity in the Federal Reserve’s 12 districts showed growing economic activity across all 12, but none spoke of an acceleration into a new, more robust phase of the expansion.

Quantitative easing for the Fed ends in mid-October and Chair Janet Yellen has said that labor markets need more time to heal before higher interest rates would be warranted, so Friday’s labor report only helped her case. The dilemma is that the United States and Bank of England are nonetheless going to be increasing rates long before the Bank of Japan and European Central Bank, and so as we’ve already seen this week in the case of the euro-$ relationship, economic dislocations could grow, which I’ll address in a moment.

Also, geopolitics is the wild card these days. I can’t help but repeat Eurasia Group’s Ian Bremmer, who first noted, “Geopolitical tensions are underappreciated until they have to be appreciated.”

Europe and Asia

First, the latest on the eurozone economy before getting into the European Central Bank’s moves.

A few weeks ago former Treasury Secretary Lawrence Summers said Europe is at risk of “secular stagnation” and certainly the recent numbers have borne that out.

As released this week, July retail sales were down 0.4% over June for both the euro-18 and the European Union 28. Retail trade (as they call it) was off 1.4% in Germany, and for the EA18 is up just 0.8% year over year, which was down from June’s up 1.9%.

The final composite reading for the eurozone in August was 52.5 vs. 53.8 in July. [50 being the dividing line between growth and contraction.]

The final reading on manufacturing was 50.7, down from 51.8, a 13-month low, as new orders dwindled with rising tensions over Ukraine. Germany’s PMI was 51.4, an 11-month low. France’s was 46.9, a 15-month low. Even the U.K., at 52.5, was down from 54.8 in July, a 14-month low.

The EA18 reading on services was 53.1 for August, down from July’s 54.2. Germany was 54.9 vs. 56.7 (a 37-mo. high), France was at 50.3, the U.K. 60.5 (10-month high).

Germany did report industrial production jumped 1.9% in July and factory orders rose 4.6% in the month over June, both solid and encouraging.

I’ll get into Ireland and Spain in a bit, but this brings us to the ECB, which cut interest rates to a fresh record low on Thursday, slashing the main refinancing rate to 0.05% from 0.15%, and it now charges banks 0.20% (the deposit rate) to park funds with the central bank.

In addition, ECB President Mario Draghi launched a series of new measures designed to stimulate bank lending.

Draghi is highly concerned that inflation, running at just 0.3%, is now forecast to increase only  0.6% for all of 2014, rising to a mere 1.1% in 2015.

Draghi said if inflation looked like it was staying too low for too long, the ECB Governing Council was unanimous in its commitment to using other “unconventional instruments.”

The ECB president announced plans for an asset-backed securities (ABS) and covered bond purchase program on to help ease credit conditions. The amount was said to be in the neighborhood of $700 billion over three years. [Others say the program is closer to $1 trillion in stimulus.]

Covered bonds are similar to ABS but if the bank goes bust, the assets are still there, which makes them safer than ABS.

But these measures are not thought to have the clout of a large-scale U.S.-style asset purchase, or quantitative easing that buys government debt with new money.

IMF Managing Director Christine Lagarde said: “We strongly welcome the measures taken by the ECB, which will help to counteract the dangers posed by an extended period of low inflation.”

The initial impact of the moves was to hit the euro, sending it to a 14-month low of $1.2920 (before finishing the week at 1.2950). This has always been a goal of Draghi’s but until now hasn’t panned out. A weaker euro is better for European manufacturers selling their goods overseas. [And conversely bad for U.S. manufacturers doing the same.]

It’s hoped the new round of easing will stimulate consumer and capital spending.

But if Draghi is trying to revive inflation, that can’t be good for euro bonds, should he prove successful. Plus German financial officials argue that some of the moves taken, let alone any QE in the future, risks inflating asset bubbles.

“In announcing a new round of extraordinary measures to support the euro-area recovery, the European Central Bank is sending three loud and unambiguous messages. Their implications extend well beyond Europe.

“First, it is committed to experimenting even more with its use of unconventional monetary policy, including by taking the deposit rate even more negative and starting a program to purchase asset-backed securities.

“Second, it is positioning itself for full-scale quantitative easing – but on the condition that European governments show more flexibility on fiscal policy and put into place the structural reforms needed to support healthy growth.

“Third, it isn’t too worried about a multitrack world of central banking, in which its policy loosening contrasts with moves by the U.S. Federal Reserve, the other systemically important central bank, to remove monetary stimulus.

“The ECB’s moves come in the context of legitimate concerns about the momentum of Europe’s already-sluggish economic recovery. They are part of a broader policy framework with four main elements:

“ 1. Force down bond yields and interest rates, hoping that this supports jobs and growth by restoring proper credit flow throughout the monetary union.

“ 2. If this doesn’t work fast enough, repeat with more aggressive use of bond purchases, hoping also to promote export growth by weakening the currency.

“ 3. Pressure governments, both privately and publicly, to implement much-needed measures to promote growth and avert deflation.

“ 4. In all this, hope that the costs and risks of experimental monetary policies don’t overwhelm their benefits.

“The success of the ECB’s strategy, and its impact on the rest of the world, depend heavily on the extent to which European governments do their part. And the longer these governments dither, the greater the risks.”

“Thursday’s action by the European Central Bank – a rate cut and a decision in principle to go ahead with private-sector asset purchases – constitute the penultimate step before the Big Bazooka: a multi-trillion heavy program to buy government bonds. The ECB will, for now, only buy private sector assets, of which the eurozone has some, but not many – and not nearly enough to lift it out of its misery. I still expect proper QE to happen before the end of the year. The trouble is that once the conditions for such a program materialize – a further weakening in inflation rates – we may get uncomfortably close to a situation in which even QE would no longer work....

“But the ECB has at least made a start. Mr. Draghi initiated his policy U-turn in his speech in Jackson Hole where he acknowledged that inflation expectations might become unhinged, and that the eurozone suffers from a shortage of aggregate demand. Commentators like myself say these things three times a day, but it is not often that one hears those words from a conservative European central banker.

“The big question is whether and over which period this new policy can work, and whether the eurozone’s political leaders can deliver accompanying fiscal expansion through a tax cut or an investment stimulus. For this to work, both fiscal and monetary policies need to expand. The ECB and Mr. Draghi deserve credit for making a start. But we should also be aware that we are still a long way from the halfway mark.”

“You can’t say Mario Draghi isn’t doing his part. The European Central Bank President once again fulfilled the pleas of European politicians Thursday with another round of rate cuts and the promise of more monetary easing to come. Too bad the politicians keep using Mr. Draghi as an excuse to dodge their responsibility to pass pro-growth reforms....

“Yet those reforms never arrive, and now the politicians have another excuse to delay as they wait for an ABS program to start next year. This has already happened once on Mr. Draghi’s watch, when his promise of unlimited sovereign bond purchases in 2012 pushed government bond yields so low so fast that it eased credit-market pressure on governments to reform.

“The other danger is that Europe will interpret the ECB’s opening for more fiscal policy stimulus as an excuse for more government spending. Mr. Draghi has hinted at easing the EU’s deficit limits. This would make sense if politicians followed through with pro-growth tax cuts as Spain has. But another burst of government spending won’t spur growth and would only set the eurozone up for more tax-raising austerity later.

“Europe’s main economic problem is a political class that doesn’t want to address the structural impediments to growth that have nothing to do with monetary policy. Mr. Draghi is being asked to perform miracles he can’t deliver.”

Well here’s my take. It hit Mario Draghi the other day, in Jackson Hole, that the European economy was not only a mess, it was dangerously so for reasons other than simple supply/demand issues, lack of credit, falling business confidence and few government reforms.

What has been scaring him (my guess) is the rise of extremists across the continent, helped in no small part by still sky-high unemployment rates, zero growth, and little optimism for the future among so many of Europe’s young people. If you think this is in itself an extreme idea of mine, you haven’t been paying attention.

Draghi, I believe, knows more radical measures are needed to get Europe out of its funk but not only may it be too late (and that’s where Lawrence Summers’ “secular stagnation” term comes into play), but that Europe’s cancer, the far-left and far-right, will only grow, exacerbated by tensions with Russia over Ukraine, let alone the burgeoning number of radicalized Islamists on the continent. 

Yes, it’s about more than those favoring austerity vs. those who now want to spend their way out of a looming triple recession, as well as a break on deficit-reduction targets.

German Chancellor Angela Merkel is right when she says that those nations that adopted austerity, along with reform, have done just fine. Look at Ireland, where its composite PMI for August was 61.8, the best level since Aug. 2000. Its manufacturing PMI was 57.3, best since 1999.   Ireland is going to grow 3% this year.

Spain is turning things around (better than I thought it would admittedly), as Prime Minister Rajoy bit the bullet on austerity and instituted some reforms and as a result it is showing positive GDP growth again, with a composite PMI of 56.9 in August, an 89-month high, while Italy, which isn’t doing anything right, remains stuck at 49.9. Spain’s service reading was a solid 58.1.

No, it’s about far more than what Spain and Ireland may be doing right. It’s about this sickening feeling that the eurozone, overall, won’t be able to get its act together to prevent the cancers from metastasizing. I keep looking at France. That country is a ticking time bomb...the far-right National Front vs. the Islamists, for one, while the current leader, Hollande, has an approval rating below 20%.

This is the theme I’m going to be harping on the next 12 months, I imagine. In Europe there is going to be a growing feeling governments can’t protect the people. And all the while, Vladimir Putin will be taking one piece of territory after another. A province here, a provincial capital there, though I still believe he may go too far to suit the oligarchs in Moscow and we may wake up one day to find him exiled or dead. [On this I was well before Anne Applebaum.]

Turning to China, the official state PMI on manufacturing for August came in at 51.1, down from July’s 51.7. HSBC’s final reading was 50.2, also down from 51.7.

An HSBC composite reading for August was up to 52.8 vs. 51.6, with the service figure, 54.1, being the highest in 17 months. The official government PMI for the service sector wsa 54.4, with services now making up 46.6% of GDP.

Separately, Gabriel Stein, a professor at the University of London, who also hangs his shingle at the economic consulting firm Oxford Economics, told a Sydney audience on Tuesday that Chinese authorities were understating the extent of bad loans on their banks’ books and faced tough choices in dealing with potential bank failures.

“We don’t know when there will be a China banking crisis and how it will play out but it is almost certain there will be one. We do think the financial risks are high...

“If you compare to 20 years ago, credit growth has been the same and the Chinese authorities owned up to about 30% of non-performing loans in the banking system. They currently claim it’s one percent.”

Meanwhile, in Japan, the Bank of Japan issued a statement on Thursday wherein it said it would stick to the aggressive monetary policy of buying enough long-term bonds to hopefully achieve a stable inflation rate of 2%.

But the BoJ’s assessment of the economy was hardly bullish, noting a decline in housing, with “weakness” in industrial production. The data recently simply hasn’t been good. Even the release of July wages, up 2.6% year over year, the most since 1997, was actually down when adjusted for inflation as companies marked prices up to deal with the 3% sales tax hike last April, which continues to be a drag. [Remember, the sales tax hike was needed to address Japan’s humongous fiscal deficit.]

Friday, finance minister Taro Aso said a back-up plan for stimulus needs to be prepared as the economy isn’t weathering the tax hike as well as expected.

Street Bytes

--The Dow, S&P 500 and Nasdaq all rose for a fifth straight week, though gains were muted, with the Dow up 0.2% to 17137, a single point shy of its all-time high, while the S&P closed at a new high, 2007, up 0.2%, while Nasdaq added two points, or 0.1%, to finish at 4582.

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.51% 10-yr. 2.46% 30-yr. 3.23%

The yield on the 10-year rose 12 basis points (0.12%) this week, while the 30-year soared 15 bps. Hedge-fund king David Tepper said the bond bubble was history, including in Europe. Of course I agree, even as yields in Europe hit further record lows by week’s end on the ECB’s stimulus measures. The 10-year in Spain finished at 2.04%, while Italy’s 10-year was at a record low 2.25%, beyond absurd given its sick economy and over 130% debt to GDP ratio.

--Last week I said ‘watch defense spending’ given the geopolitical situation. It will explode. The past few days more and more are catching on to this. In an article for Defense One, Todd Harrison, senior fellow at the Center for Strategic and Budgetary Assessments, said, “We’re at a fork in the road,” citing a significant gap between the Defense Department’s likely future budgets and its long-term strategy.

Charles S. Clark for Defense One writes: “It’s not realistic to think Congress will accept the savings Obama proposed in his request for $560 billion as a base budget in 2015. ‘Either the Pentagon should start submitting budgets that are fully resourced and show us the gap, or it should adjust the strategy to fit the budget, despite the threat environment,’ said Harrison.”

This is going to be a big battle in Congress, including in the next few weeks. The Budget Control Act’s spending caps for 2015 simply don’t work.

--To repeat myself, my reason for including Ebola in this segment has been from day one that it’s an economic story as much as a human tragedy. The last death toll from the World Health Organization is 1,900+, with 3,500 confirmed or probable cases, though a week earlier one official was saying the number of cases could be four times that.

WHO head Margaret Chan said on Thursday that the outbreak is “the largest and most severe and most complex we have ever seen.”

Worrisomely, at least five people have now died in Nigeria, in the capital, Lagos, but the WHO is more concerned about some new cases in a second Nigerian city.

A new outbreak in the Democratic Republic of Congo has killed at least 31, though the WHO said it’s “contained.”

Gayle Smith, a senior director at the U.S. National Security Council, said, “This is not an African disease. This is a virus that is a threat to all humanity.”

The U.N. is now warning of “grave food security concerns” in those nations hardest hit because the epidemic has caused labor shortages and disrupted cross-border trade. There has been panic buying in parts of Guinea, Liberia and Sierra Leone.

“With the main harvest now at risk and trade and movements of goods severely restricted, food insecurity is poised to intensify in the weeks and months to come.

“The situation will have long-lasting impacts on farmers’ livelihoods and rural economies,” noted Bukar Tijani, Food and Agriculture Organization representative for Africa. [Sydney Morning Herald]

--Gazprom’s natural gas production fell 19.6% last month compared with the same period last year owing to the crisis in Ukraine, but also due to reduced demand at home. [Weakened industrial demand due to slowing economic growth.]

Russia’s budget, as you well know, is heavily dependent on the success of both Gazprom and state oil giant Rosneft.

--U.S. auto sales were at their highest level for an August in 11 years. Automakers sold nearly 1.6 million vehicles in the U.S. in August, a 5.5% increase from a year earlier, according to Autodata Corp., a 17.5 million annualized pace, the fastest since January 2006. [Seasonally adjusted]

Chrysler’s sales rose 19.8% over the same month in 2013, including up 45% with its Jeep brand. It was Chrysler’s 53rd consecutive month of year-over-year sales gains.

Toyota’s sales rose 6.3%, while Honda’s rose a mere 0.4%, but the Honda Accord had higher sales than Toyota’s Camry, making it the bestselling passenger car in America for one month.

Nissan’s U.S. sales increased 11.5%, while Hyundai’s rose 5.9% to 70,003 vehicles; only the second month in its history the South Korean automaker sold more than 70,000 here.

--Nevada landed electric car maker Tesla’s $5 billion battery factory, to be built in the western part of the state, near Reno. The “gigafactory” is expected to bring nearly $100 billion into Nevada’s economy, as well as 6,500 jobs. Estimates of the “incentives” Tesla was given to locate the plant there range from $650 million to $1.3 billion in tax breaks over 20 years that includes waiving sales and use taxes, as well as property and payroll taxes.

--The rate of growth on health spending rose 3.6% to $2.89 trillion in 2013, according to a forecast released by the Centers for Medicare and Medicaid Services, which would mark the fifth consecutive year of spending increases under 4%.

But the rate of spending is expected to accelerate as the economy expands and as ObamaCare takes hold. Spending is projected to grow 5.6% in 2014, 4.9% in 2015, and then 6%+ for 2016 through 2023.

Health care’s share of GDP is forecast to rise to 19.3% in 2023 from 17.2% in 2012. [Stephanie Armour / Wall Street Journal]

--Michael Bloomberg is returning to the company he founded, eight months after ending his lengthy term as mayor of New York. Daniel Doctoroff, CEO and a longtime friend and lieutenant, is stepping down so Bloomberg can take over.

Bloomberg had said he had no intention of returning full time, and that he might work a few hours out of an office at Bloomberg HQ every now and then, but by all accounts he got restless. As the New York Times’ Andrew Ross Sorkin reported, the former mayor had become “an increasing presence”. “Those ‘few hours’ soon turned into six and seven hours a day with Mr. Bloomberg taking a hands-on role in meetings and strategy decisions.”

--Apple confirmed that some celebrities’ iCloud accounts were broken into, but initially insisted there was no evidence this was caused by a breach of its security systems.

But a security expert told BBC News’ Joe Miller that Apple’s iCloud facility has a “fundamental security flaw.” Following a huge breach of celebrity photos stolen and leaked, including naked images of the likes of actress Jennifer Lawrence, Apple denied it had an issue.

According to Mr. Miller, “It has emerged that a security measure called two-step verification, which is recommended by Apple, can be bypassed using easily available software that allows access to iCloud back-ups....

“The program still requires hackers to know the user’s email address and password, and there is no clear evidence that it was used in the recent breaches....

“On Tuesday, Apple suggested its customers ‘always use a strong password and enable two-step verification’ after it acknowledged that some of its accounts had been compromised by a ‘very targeted attack.’

“But one expert said Apple had given people ‘a false sense of security.’

“Technology magazine Wired first reported that software from a Russian firm, ElcomSoft, was being mentioned on a hackers discussion group as a useful tool for infiltrating iCloud accounts.”

By week’s end, Apple said it would do more to warn customers. But this coming week, the company wants the focus on its new product launches.

--Meanwhile, Home Depot has called in authorities, including the U.S. Secret Service, to investigate a possible massive data breach. Supposedly the company just became aware of the situation. Some experts say the suspected theft of customer information could be larger than the Target fiasco back in May. This comes on the heels of a wave of cyberattacks against U.S. financial institutions.

--According to the American Chamber of Commerce in China, 60% of respondents to a survey last month said they feel China has become far less welcoming in the country than before, up from 41% in a late-2013 survey. 49% said foreign companies are being singled out in recent pricing or anti-corruption campaigns.

An official at the chamber noted China is targeting industries where it wants domestic companies to catch up. [Bloomberg]

--Shares in Yum Brands fell sharply after the company warned a food safety scandal in China had hit same-store sales at KFC and Pizza Hut restaurants there to the tune of about 13%. It was in July that a Shanghai TV station reported a leading supplier of chicken and beef to KFC and McDonald’s had repackaged the product long after its expiration date. McDonald’s previously reported a 7.3% drop in July sales at its restaurants in Asia.

--Chinese e-commerce giant Alibaba is planning to start its roadshow on Sept. 8, with the shares trading perhaps Sept. 18 or19. The company is looking to raise $21 billion. The stock will list under the symbol “BABA” on the New York Stock Exchange and on Friday it was announced the range would be $60-$66.

Alibaba released the names of 27 partners, including founder and Executive Chairman Jack Ma, who collectively own about 15% of the company.

--Related to my earlier comment on Ireland, the Society of the Irish Motor Industry reported 4,200 new jobs have been created (directly and indirectly) in the country this year with 89,279 new cars having been sold so far in 2014 (thru August), 15,000 more than all of last year. 18,725 were sold in July alone.

And property sales have surged by 40% in the first half of the year. This is good.

--According to a revision in the data from S&P/Case-Shiller on the housing market, utilizing a more accurate data base, the crash in the U.S. property market was less severe than first thought; down 26% from the February 2007 peak to the December 2011 trough, not 34% as first thought. 

This doesn’t mean that some regions still didn’t suffer to the tune of 40% or so, such as in Las Vegas and Phoenix, but the average was 26%.

Nationally, home values have climbed 19.4% since the bottom, the new data shows. So they are now 11.6% off the prior peak vs. the previously reported 18.6% shortfall through the first quarter.

The new Case-Shiller data will be issued quarterly, not monthly, from here on.

--The New York Post first reported that the Trump Taj Mahal could be headed for bankruptcy, in what would be another huge blow for Atlantic City. This week, the Revel Casino Hotel closed, two days after the Showboat casino and hotel shut down. Trump Plaza is scheduled to close on Sept. 16. Back in January, The Atlantic Club folded.

Wednesday, thousands of laid-off casino workers assembled at the Atlantic City Convention Center for a mass unemployment filing. By mid-September, 8,000 will have lost their jobs this year.

--According to a study out of New York University, U.S.-based hotels are expected to collect a record $2.25 billion in guest fees in 2014, up 6% from 2013. [Hugo Martin / Los Angeles Times]

I didn’t realize hotels launched fees this year to let guests check in early and to hold luggage for a guest who has already checked out. 

--As noted in a report from the Federal Reserve, median income across America, adjusted for inflation, rose 2% to $223,200 for the wealthiest 10% of households from 2010 to 2013, but earnings stagnated or fell for the rest. The median income for all families fell 5% over that period.

--According to the California Budget Project, as reported by the Los Angeles Times’ Chris Kirkham:

“Even before the jobs crisis of the recession, low- and middle-wage workers in California had been contending with stagnating pay for decades. In 2006, low-wage workers were making 7.2% less than similar workers made in 1979, after adjusting for inflation.

“By contrast, high-wage workers in the top 20th percentile of wages made 17.4% more than similar workers in 1979.”

--A U.S. court ruled that BP acted with gross negligence and willful misconduct in the Deepwater Horizon disaster, which could result in further penalties of up to $18 billion, with the company having set aside $43 billion already for fines, settlements, clean-up costs and other penalties, though it had set aside only $3.5 billion for this particular ruling. The company “strongly disagrees” with the decision and said it would appeal.

--The PIMCO Total Return Fund managed By Bill Gross suffered its 16th straight month of net outflows in August; a net $60 billion of cash since May 2013. It is still the world’s biggest bond fund at $221.6 billion in assets.

--Update: Last week I noted Deere & Co. was laying off more workers in the Midwest due to slowing farm equipment sales. But Richard D. passed along (via an engineer friend who works at Deere) that part of the reason is a mandated price hike on each piece of equipment; a government mandated emission addition that when coupled with a tardy farm bill put a halt to sales (plus, as I’ve written, the commodity price slump isn’t helping). Sales should resume when “pre-emission” equipment is out of the dealerships and grain stabilizes, writes Richard, he of Iowa. [Now I’m salivating, thinking of the ‘pork on a stick’ at the Iowa State Fair. You haven’t lived until you’ve had this treat.]

--Andrew Madoff, Bernard Madoff’s last surviving son, died of cancer on Wednesday. He was 48. Andrew and his brother, Mark, both worked on the legitimate side of their father’s firm, removed from the private investment business where father Bernie carried out his $65 billion Ponzi scheme over several decades.

Exactly two years after Bernard’s December 2008 arrest, Mark Madoff hung himself in his Manhattan apartment.

Andrew was first diagnosed with a rare form of cancer in 2003, went into remission, but then relapsed in 2012 under the stress of dealing with his father’s scam.

--China and India announced they wouldn’t be attending the United Nations’ next summit on climate change; China being the world’s top greenhouse-gas emitter, and India third, behind the United States. Both are heavy users of coal. President Obama, as of now, plans to attend the UN meeting on Sept. 23.

--So I have a longstanding tradition of “Salmon Sunday” and was shocked to see the price on my salmon this past weekend, up over 40% from what I normally pay. Then I bring it home and I had forgotten to look where it was coming from...Honduras! Yikes. Gang-related salmon. 

--Japan is urging people to stock up on toilet paper, because more than 40% of the nation’s supply comes from a high-risk earthquake zone. Government officials are trying to get people to think of more than food and water as disaster items.

Remember, sports fans. “Lack of toilet paper could even cause further discomfort when people start using tissue paper, which is not water soluble and could clog up toilets.” [Irish Independent]

Foreign Affairs

Ukraine: Amid talk of a ceasefire (for which I’m invoking my ’24-hour rule’...seeing as it’s been in place about ten hours), Russian troops attacked Ukraine positions near the strategic port city of Mariupol, as its clear Russia wants to build a land bridge to supply annexed Crimea. Ukrainian military officials say there is little doubt they are being attacked not by rebel fighters but by Russian regulars. Some Ukrainian authorities believe Russia could have as many as 15,000 troops inside the country, as Russian President Putin said in an offhand remark to a European official this week that he could “take Kiev in two weeks” if he wanted to.

NATO Secretary-General Anders Fogh Rasmussen warned Russia against continuing support for the separatists:

“We are still witnessing, unfortunately, Russian involvement in destabilizing the situation in eastern Ukraine. So we continue to call on Russia to pull back its troops from Ukrainian borders, stop the flow of weapons and fighters into Ukraine, stop the support for armed militants in Ukraine and engage in a constructive political process.”

Prospects for a ceasefire were earlier enhanced (sort of) by Putin’s seven-point proposal on Wednesday, which starts with the withdrawal of Ukrainian troops from the two disputed regions in eastern Ukraine, Donetsk and Luhansk, thus handing Russia a major victory.

Ukrainian President Petro Poroshenko has said that the separatists must lay down their arms and relinquish seized territory in exchange for more autonomy in the east. To accept Putin’s plan is of course to accept a major defeat. Or as Prime Minister Arseniy Yatsenyuk said on Wednesday, Putin’s plan “would destroy Ukraine and bring back the Soviet Union.”

Over 2,600 have died in the fighting since April, with Ukraine’s military losing about 850 of that total. With the infusion of thousands of Russian troops and heavy arms, Ukraine’s military gains of the prior few weeks were immediately reversed.

On the sanctions front, the EU is preparing to bar state-owned energy giants Gazprom and Rosneft from raising funds on European capital markets. The same ban would apply to Russian defense companies. Putin’s peace plan was intended to blunt further sanctions.

For its part, the Kremlin warned that Ukraine better not join NATO, with Russian Foreign Minister Sergei Lavrov telling the United States not to impose its own will on Kiev. I don’t think the Kremlin needs to worry about that.

“With mounting evidence that Russian troops have helped open a new front between rebels and Ukrainian forces in the southeast of the country, Vladimir Putin has dramatically raised the stakes in the conflict – even as he jots down ceasefire plans on in-flight napkins.

“In so doing he has pushed Mr. Obama towards an unpalatable choice – to either escalate the conflict by sending arms to Kiev and risk NATO unity, or to pursue a diplomatic deal which many at home will see as a humiliating climb down. Just as in Syria, Mr. Obama’s options are all fraught.

“Until now, Mr. Obama has managed to split the difference between the hawks and the doves in his administration and among his allies by slowly raising the pressure on Russia through sanctions while saying he wants a diplomatic solution....

“The doves argue that Russia’s effective invasion of Ukraine shows there can never be a military solution to the conflict that involves the outright defeat of the rebels – a view endorsed by Berlin. Because he is next door and because he sees Ukraine as a vital interest, Mr. Putin will always be prepared to escalate the conflict beyond western comfort levels. He simply wants it more.

“Winter is on the horizon, bringing with it the potential for Russia to cut off gas supplies to Ukraine and Europe. Meanwhile, the rising economic and social pressures within Ukraine mean that it is in no position to pursue a lengthy military stand-off in the east....

“For Washington’s hawks, Mr. Putin’s latest move must be met with a decisive western response. Tougher sanctions on the biggest banks are part of the proposed package. But they also recommend giving anti-tank and other heavy weapons to the Ukrainian units fighting in the east, so that they can take the battle back to the Russian-backed forces. Mr. Putin will only backtrack, the argument goes, once the Russian public sees the body-bags of dead soldiers returning home.”

“At his first press briefing after the beheading of American James Foley, President Obama stunned the assembled when he admitted that he had no strategy for confronting ISIS, a.k.a. the Islamic State, in Syria. Yet it was not nearly the most egregious, or consequential, thing he said.

“Idiotic, yes. You’re the leader of the free world. Even if you don’t have a strategy – indeed, especially if you don’t – you never admit it publicly.....

“We’ll see whether Obama comes up with an ISIS strategy. But he already has one for Ukraine: Write it off. Hence the more shocking statement in that Aug. 28 briefing: Obama declaring Russia’s invasion of Ukraine...to be nothing new, just ‘a continuation of what’s been taking place for months now.’

“And just to reaffirm his indifference and inaction, Obama mindlessly repeated his refrain that the Ukraine problem has no military solution. Yes, but does he not understand that diplomatic solutions are largely dictated by the military balance on the ground?

“Vladimir Putin’s invasion may be nothing new to Obama. For Ukraine, it changed everything. Russia was on the verge of defeat. Now Ukraine is. That’s why Ukraine is welcoming a ceasefire that amounts to capitulation....

“(Obama’s) stunning passivity in the face of a dictionary-definition invasion has not just confounded the Ukrainians. It has unnerved the East Europeans....

“(NATO) is touting a promised rapid-reaction force of about 4,000 to be dispatched to pre-provisional bases in the Baltics and Poland within 48 hours of an emergency. (Read: Russian invasion.)

“First, we’ve been hearing about European rapid-reaction forces for decades. They’ve amounted to nothing.

“Second, even if this one comes into being, it is a feeble half-measure....the alliance is famous for its reluctant, slow and fractured decision-making. (See: Ukraine.) By the time the Rapid Reactors arrive, Russia will have long overrun their yet-to-be-manned bases.

“The real news from Wales is what NATO did not do. It did not create the only serious deterrent to Russia; permanent bases in the Baltics and eastern Poland that would act as a tripwire....

“Which is how we kept the peace in Europe through a half-century of Cold War. U.S. troops in West Germany could never have stopped a Russian invasion. But a Russian attack would have instantly brought America into a war – a war Russia could not countenance.

“That’s what deterrence means. And what any rapid-reaction force cannot provide. In Wales, it will nonetheless be proclaimed a triumph. In Estonia, in Poland, as today in Ukraine, it will be seen for what it is – a loud declaration of reluctance by an alliance led by a man who is the very embodiment of ambivalence.”

“Putin’s serial amputations of portions of Ukraine, which began with his fait accompli in Crimea, will proceed, and succeed, until his appetite is satiated. Then the real danger will begin....

“(Suppose) Putin, reprising his Ukrainian success, orchestrates unrest among the Russian-speaking minorities in Latvia, Lithuania or Estonia. Then, recycling Hitler’s words that his country ‘could not remain inactive,’ Putin invades one of these NATO members. Either NATO invokes Article 5 – an attack on any member is an attack on all – or NATO disappears and the Soviet Union, NATO’s original raison d’etre, is avenged.

“Although no one more thoroughly detested the regime that Gen. Erwin Rommel served, Winston Churchill acknowledged in January 1942 in the House of Commons the talent of Britain’s enemy: ‘We have a very daring and skillful opponent against us and, may I say across the havoc of war, a great general.’ Putin is, the West should similarly acknowledge, more talented and dangerous than either Nikita Khrushchev or Leonid Brezhnev.  Their truculence was not fueled by fury. Putin’s essence is anger. It is a smoldering amalgam of resentment (of Russia’s diminishment because of the Soviet Union’s collapse), revanchist ambitions (regarding formerly Soviet territories and spheres of influence), cultural loathing (for the pluralism of open societies) and ethnic chauvinism that presages ‘ethnic cleansing’ of non-Russians from portions of Putin’s expanding Russia.

“This is more than merely the fascist mind; its ethnic-cum-racial component makes it Hitlerian.”

Senator John McCain (R-Az.): “Give (Ukraine) the weapons they need. Give them the wherewithal they need. Give them the ability to fight.”

Rep. Mike Rogers, chairman of the House Intelligence Committee: “If we don’t provide ‘small and effective’ now, you’re going to get very big and very ugly later.”

--Separately, as a further sign of NATO weakness, leaders failed to agree on binding targets to raise defense expenditures, though they agreed to freeze further cuts.

France did suspend the delivery of the first of two Mistral warships to Russia as a result of Russia’s direct actions in eastern Ukraine, with a government statement saying Russia had “contravened the basis of security in Europe.”

There are now over one million refugees in eastern Ukraine as a result of the fighting, including 814,000 Ukrainians in Russia, according to the UN refugee agency.

Finally, I firmly believe opposition to Putin will emerge within Russia in a big way far sooner than believed today. It has started with the Committee of Soldiers’ Mothers, an organization representing the families of the Russia military. Said one leader of the group, Valentina Melnikova, on the topic of losing touch with their sons:

“Our officials just don’t care. They are bringing back dead bodies and burying them in secret.”

They are also lying about how they died. Reporters from independent news publications have found graves of soldiers identified as Russian paratroopers that would have otherwise been kept secret. This is what Russia did with the dead from Afghanistan in the 1980s (ditto Chechnya in the 90s)...bury them in secret, without any indication of cause of death or place. [Jack Farchy / Financial Times]

Melnikova estimates that through those contacting her group, some 10,000 Russians have fought in Ukraine.

But now her group has been labeled by the government as “foreign agents,” a term requiring them to note this status in fundraising and information efforts.

As for Russia holding the 2018 World Cup, many European nations are insisting the site be changed. “The idea of taking the World Cup away from Russia has come up in talks between European leaders. Britain especially has pushed it as a way of taking broader and more imaginative measures against Russia,” a senior European official told the Daily Telegraph.

Iraq / Syria / ISIS: Speaking at a news conference on Wednesday in Estonia, President Obama addressed the beheading of a second American citizen by ISIS, Steven Sotloff, saying his goal is to diminish the extremist group to “a manageable problem.” This immediately was placed on the shelf with ‘the U.S. doesn’t yet have a strategy’ in dealing with the terrorists in Syria, as he had said about six days earlier.

“We know that if we are joined by the international community, we can continue to shrink ISIL’s sphere of influence, its effectiveness, its financing, its military capabilities to the point where it is a manageable problem. And the question is going to be making sure we’ve got the right strategy, but also making sure we’ve got the international will to do it.”

Last weekend Democratic Sen. Dianne Feinstein said of Obama: “I have learned one thing about this president: He is very cautious. Maybe, in this instance, too cautious.” Feinstein described the Islamic State group “a major varsity team,” not a “JV team,” as it was described earlier this year by Obama.

[Vice President Joe Biden on Wednesday promised more direct action to avenge the deaths of Foley and Sotloff: “When people harm Americans we don’t retreat, we don’t forget. We take care of those who are grieving and when that’s finished, they should know we will follow them to the gates of hell until they are brought to justice. Because hell is where they will reside.”]

Last weekend, King Abdullah of Saudi Arabia warned the West will be the next target of the jihadists sweeping through Syria and Iraq, unless there is “rapid” action.

“If we ignore them, I am sure they will reach Europe in a month and America in another month,” he said in remarks to a welcoming ceremony for new ambassadors, including a new envoy from the United States.

“Terrorism knows no border and its danger could affect several countries outside the Middle East...

“You see how they [jihadists] carry out beheadings and make children show the severed heads in the street...

“It is no secret to you, what they have done and what they have yet to do. I ask you to transmit this message to your leaders; ‘Fight terrorism with force, reason and [necessary] speed.’” [Daily Star]

At the NATO summit, the U.K. and France said they would help the United States form a military coalition to take on ISIS, including providing more arms to the Kurds in northern Iraq. Speaking at the summit, Jordan’s King Abdullah urged world leaders to create a “coalition of the committed” to fight the Islamic State. Australia has already committed to the cause. British Prime Minister David Cameron said he was considering joining the U.S. in airstrikes against ISIS in Iraq.

For its part, ISIS issued a threat to President Putin, vowing to oust him and “liberate” the Caucasus over his support for the Syrian regime.

“This is a message to you, oh Vladimir Putin, these are the jets that you have sent to Bashar, we will send them to you, God willing, remember that,” said one fighter in Arabic on a YouTube posting that Russia’s General Prosecutor’s Office demanded be blocked. 

On a totally different topic, U.S. ambassador to the United Nations, Samantha Power, said Syria’s government may still have undeclared chemical weapons, with the fear being they fall into the hands of the Islamists. A U.N. official overseeing Syria’s chemical weapons disarmament said Damascus had yet to address what Sigrid Kaag described as “some discrepancies or questions.” She also said Syria had yet to destroy seven hangars and five tunnels used for mixing and storing the weapons, as required under the treaty Syria signed. [Rick Gladstone / New York Times]

Foreign Policy magazine reports that ISIS is trying to develop biological weapons, citing information found on a laptop seized from an IS operative.

“It is a muddle, a murk and a desperate-looking thing, the president on the subject of the Islamic State.

“The Islamic State is the junior varsity. No, it is a ‘cancer.’ We will ‘degrade and destroy’ it. No, we’ll render it ‘a manageable problem.’ It’s all so halting, herky-jerky and, for a great power, embarrassing. Ich bin ein Limiter of Spheres of Influence. Mr. Obama has been severely criticized and soon will change the story with a new statement. Actually to a degree he already has, in his joint op-ed piece Thursday with British Prime Minister David Cameron. Our countries ‘will not be cowed by barbaric killers.’ That’s good, not being cowed, but what does it mean and for how long?

“What is extraordinary in this moment of high, many-fronted peril is that the president’s true views and plans are not only unclear to the world but a mystery to his countrymen.”

“Easy answers (in combatting ISIS and other threats) don’t exist, but Mr. Obama ought to be guided by several principles. One is that the terrorist threat can be neutralized only by combating all of the forces destroying the region: That includes Assad’s criminal army as well as Iranian-backed Shiite militias. Fostering a representative and non-sectarian government must be the aim in Syria as well as Iraq. But political breakthroughs should not be a precondition for military measures. On the contrary: The starting point for achieving those political goals is providing the region’s beleaguered moderate forces – which include the government and militia of Iraqi Kurdistan and the Free Syrian Army – the substantial and sustained support they need to fight their enemies on an equal footing.

“Perhaps most importantly, Mr. Obama should stop attempting to minimize the threats in the Middle East or the U.S. role needed to combat them. Without American leadership in forging political solutions and assaulting the Islamic State’s strongholds, any strategy is doomed to fail.”

“There aren’t many Americans within ISIS’ reach – yet. That’s why they took journalists. But there are reportedly hundreds of Americans learning the terror craft under its aegis right now, and thousands of Europeans.

“The Obama vacuum is imploding America’s interests elsewhere in the Middle East, and North Africa as well.

“You probably didn’t hear the great sucking sound coming from Tripoli, Libya, last weekend as the grounds of our embassy there were raided and taken over by extremists....

“Remember this: That embassy is considered American territory under international law.

“Libya is the nation whose dictator we chose to help take out in the famous ‘leading from behind’ campaign, after which we promptly hightailed it out of there – creating the vacuum in which our ambassador and three other Americans were slaughtered two years ago.

“In that case, action followed by inaction created the vacuum. In Syria and Iraq, the great advance of ISIS is the result of inaction – the president’s announcement in August 2013 that he would bomb the Syrian regime’s assets because it had used chemical weapons, and then his failure to do so.

“If you want to know why ISIS might look at the United States and see what Osama bin Laden once called a ‘weak horse,’ and why it thought it could move into Iraq with impunity, you need look no further than that.

“The president decided America was through with war in the Middle East. The vacuum his fecklessness has created is sucking us back in – and in a far worse tactical and strategic condition than we were before.”

In an appearance on an Irish radio station, senior Amnesty International crisis adviser Donna Abu-Nasr:

“Islamic State group has managed to do what no other actor has been able to in the past where tension in communities has been rife for some time and ethnic minorities have been victims of oppression in the past.

“The fighters have managed to ethnic cleanse entire communities, ethnic communities that have lived there for hundreds or thousands of years have been forced to abandon their homes, villages, their life time possessions and today they remain displaced.

“They have seen members of their families murdered in cold blood, other members abducted, today these remain hostages in the hands of Islamic State group.”

Amnesty International is calling for a “swift and robust response” from “all concerned parties.” [Irish Independent]

At least 1,420 people were killed in Iraq in August, according to the U.N.

“After more than three years, almost 200,000 dead in Syria, the near collapse of Iraq, and the rise of the world’s most sinister terrorist army – the Islamic State in Iraq and Syria, which has conquered vast swaths of both countries – President Obama’s admission this week that ‘we don’t have a strategy yet’ to deal with this threat is startling. It is also dangerous.

“The president clearly wants to move deliberately and consult with allies and Congress as he considers what to do about ISIS. No one disputes that goal. But the threat ISIS poses only grows over time. It cannot be contained. It must be confronted. This requires a comprehensive strategy, presidential leadership and a far greater sense of urgency. If Mr. Obama changes course and adopts a strategic approach to defeat ISIS, he deserves support.

“Such a strategy would require our commander in chief to explain to war-weary Americans why we cannot ignore this threat. ISIS is now one of the largest, richest terrorist organizations in history. It occupies a growing safe haven the size of Indiana spanning two countries in the heart of the Middle East, and its ranks are filled with thousands of radicals holding Western passports, including some Americans. They require nothing more than a plane ticket to travel to United States cities....

“One of the hardest things a president must do is change, and history’s judgment is often kind to those who summon the courage to do so. Jimmy Carter changed his policy on the Soviet Union after it invaded Afghanistan. Bill Clinton changed his policy in the Balkans and stopped ethnic cleansing. And George W. Bush changed course in Iraq and saved America from defeat.

“ISIS presents Mr. Obama with a similar challenge, and it has already forced him to begin changing course, albeit grudgingly. He should accept the necessity of further change and adopt a strategy to defeat this threat. If he does, he deserves bipartisan support. If he does not, ISIS will continue to grow into an even graver danger to our allies and to us.”

Israel: The government officially banned the Islamic State and anyone associating with it, this as there were growing concerns over a growing ISIS and al-Qaeda presence near the Israeli-Syrian border.

On Aug. 28, 72 Filipino peacekeepers were surrounded and taken captive by Islamists, but later released. 45 “blue helmets” from Fiji, however, appear to be in al-Qaeda affiliate al-Nusra’s hands. The frontier between Syria and Israel is now largely in the hands of the terrorists.

Also this week, Israel said it would earmark 990 acres of West Bank land for a new settlement city, a move immediately condemned by the U.S. and the European Union (and yours truly). This is the kind of move that harms Israel in the long run in terms of international support and the timing could not be worse. It’s been described as Israel’s biggest land grab in 30 years.

Israeli Prime Minister Benjamin Netanyahu is under fierce pressure from the far-right after his ceasefire with Hamas, so for him this was the politically expedient thing to do. The leader of the pro-settler Jewish Home party, Naftali Bennett, praised the decision to appropriate the land.

A poll conducted by the Ramallah-based Palestinian Center for Policy and Survey Research in the West Bank and the Gaza Strip found overwhelming support for Hamas and its leadership. 79% of respondents said that Hamas had won the Gaza war, while only 3% believe Israel did. Only 5% believe Hamas was responsible for the breakout of the war.

Meanwhile, Fatah’s Central Committee strongly condemned Hamas for its actions during the 50-day war, accusing it of committing the “ugliest crimes and encroachments” during this time against Fatah members in the Gaza Strip. [Jerusalem Post]

As for the ceasefire, it’s holding, with further negotiations planned for Cairo in the coming weeks.

Lebanon: There are growing fears this is ISIS’ next target...Lebanon being part of the Levant, after all...ISIL...the Islamic State in Iraq and the Levant. ISIS has already kidnapped more than 30 Lebanese soldiers and security personnel, beheading at least one.

But as much as Lebanon has a totally dysfunctional political system these days, there is nonetheless a power-sharing arrangement among all parties, and the Lebanese army has the support of the country.

The Cabinet, for example, announced on Thursday the military had a free hand to do what it thinks is necessary to free the captured soldiers, rejecting demands by the jihadists to swap prisoners. Such a tough stance is encouraging.

Iran: Yes, with all the other news in the region, Iran and the fate of its suspected nuclear weapons program is getting lost in the shuffle, even though nothing is more important to global peace than keeping nukes out of the mullahs hands.

So Israeli Prime Minister Netanyahu is reminding the world, as talks are set to resume Sept. 18:

“Iran is the No. 1 threat, because an Iran with nuclear weapons changes history,” according to an official government message. An Israeli spokesman, when asked about concerns the threat from ISIS may bring the U.S. and other countries in the West to ease up pressure on Iran in order to gain its cooperation in the fight against the Islamic State, the spokesman said:

“We don’t’ believe the Iranians should be able to exploit ISIS to take the pressure off of them, which is what they are trying to do.” [Reuters]

Friday, the International Atomic Energy Agency said Iran had missed a deadline to provide information on its past nuclear work. The IAEA said Tehran has addressed only one of the 13 main areas of concern.

The IAEA did say Iran was meeting its commitments to reduce its stockpile of enriched uranium.

India: Al-Qaeda announced it was going to conduct jihad operations in South Asia, including India, as leader Ayman al-Zawahiri spelled out in a 55-minute video released Sept. 3. Zawahiri said the goal was to end the suffering of Muslims in the region, including Kashmir and Myanmar. The video indicated two Pakistani militants would lead the effort.

This comes at a time of increased violence on the border between India and Pakistan in disputed Kashmir and Jammu states, with the Indian government saying it was committed to building two large air force bases in the region.

Somalia: American airstrikes succeeded in killing the leader of al-Qaeda-linked group al-Shabaab, Ahmed Abdi Godane. The Pentagon called the death “a major symbolic and operational loss” to the organization.

China / Hong Kong: Editorial / Washington Post

“ ‘One country, two systems’ was the People’s Republic of China’s promise to the people of Hong Kong, Britain and the world as Beijing prepared for the scheduled reversion of the former British colony to Chinese sovereignty in 1997. As explained by Deng Xiaoping during the talks with London in 1984, China’s policy was that Hong Kong’s ‘current social and economic systems will remain unchanged, its legal system will remain basically unchanged, its way of life and its status as a free port and an international trade and financial center will remain unchanged.’ The People’s Liberation Army would occupy the place but only ‘to safeguard our national security, not to interfere in Hong Kong’s internal affairs. Our policies with regard to Hong Kong will remain unchanged for 50 years, and we mean this.’

“For those of us who support a democratic transition for all of China, the ‘one country, two systems’ notion held out the hope that Hong Kong’s well-developed freedoms and rule of law, and the prosperity they so manifestly fostered, would serve as a model of sorts for the rest of the nation – that Hong Kong’s system would gradually spread to the People’s Republic, not the other way around.

“Alas, the Beijing government has made it clear that it has no intention of letting such a thing happen. Any political convergence between tiny Hong Kong and the party that rules the vast mainland will occur on the latter’s terms. A newly promulgated electoral law all but guarantees that the next chief executive of Hong Kong will be chosen by voters in 2017 from a short list selected, for all intents and purposes, by a Beijing-dominated, 1,200-member committee....

“The decision is of a piece with President Xi Jinping’s general squeeze on dissent of all kinds since his accession to power at the end of 2012. It bluntly rejects the demands of Hong Kong’s democrats, grouped under the banner of Occupy Central. It sets the stage for greater divisions and possible unrest in Hong Kong, where Beijing has already mobilized large crowds to counter Occupy Central’s even larger and – so far – peaceful demonstrations. In the pursuit of spurious ‘stability,’ China’s leaders may actually be endangering the special atmosphere that helped make Hong Kong a wealthy financial center in the first place.

“The fact that Mr. Xi would rather take that economic risk than allow Chinese citizens to practice democracy in even a small corner of his realm speaks volumes about his values and priorities.”

Last Sunday’s decision by the Basic Law Committee under the Standing Committee allows for only two or three candidates in 2017, with those two or three first needing the approval from a simple majority of a 1,200-strong nominating committee before going to the public vote. But the 1,200 are largely handpicked by Beijing. It’s a sham all the way around.

The head of a British parliamentary inquiry into Hong Kong said China appeared to have breached the terms of the Sino-British Joint Declaration, though lawmaker Richard Ottaway admitted the U.K. was in a “weak” position to sanction China over an agreement reached 30 years ago. China has tried to block the British inquiry, warning MPs need to “bear in mind the larger picture of China-U.K. relations.” 

The pro-democracy movement is gearing up for further protests, with Occupy Central’s co-founder, Benny Tai, saying, “Today may be the darkest day of Hong Kong’s democratic movement.”

Alan Leong, a pro-democracy legislator, said: “After having lied to Hong Kong people for so many years, it finally revealed itself today. Hong Kong people are right to feel betrayed.  It’s certain now that the central government will be effectively appointing Hong Kong’s chief executive.”

Beijing warned countries not to meddle in Hong Kong’s politics and that using Hong Kong as a “bridgehead to subvert the mainland” would not be tolerated.

Occupy Central is promising a new “era of civil disobedience,” staging mass sit-ins to cripple the city’s financial district. It is expected such demonstrations will commence in weeks.

Professor Larry Diamond, senior fellow at Stanford’s Hoover Institution, said in an email with the South China Morning Post:

“This is a sad day for Hong Kong, and for democracy. This seems to be about the worst outcome imaginable. No progress toward democracy, not even a timetable toward democracy, and frankly, not even an effort or gesture toward democracy.

“It is difficult to see how, under this Iranian-style rigged system, pro-democracy forces will have any chance of nominating a candidate of their own.”

I told you months ago this will not end well... demonstrations of horrific violence, I wrote, are a certainty. This week’s developments make it even more so.

Scotland: On Sept. 18, voters here go to the polls to decide if the nation of 5.3 million should break away from the rest of the United Kingdom and become fully independent. The referendum could then lead to the dissolution of a 307-year-old union. Turnout is expected to be high, perhaps 80%.

The latest polls have those voting ‘no’ well ahead of those favoring independence, though Scotland’s First Minister Alex Salmond has performed well in the debates and this could sway many to opt for going it alone. The other day Salmond said British Prime Minister Cameron is right to be nervous, saying the pro-independence campaign is gaining momentum.

Meanwhile, Sir Paul McCartney has pleaded with Scotland not to vote for independence. “What unites us is much greater than what divides us. Let’s stay together,” McCartney wrote in an open letter, according to the Guardian.

But from a security standpoint, there is a huge issue. Britain’s nuclear program is based in Scotland and should the Scots vote ‘yes,’ the nuclear-armed subs no longer have a home and this is the last thing European security needs in the face of Putin’s Russia. Many NATO officials have said a vote for independence would be “cataclysmic” for Western security.

Britain has 160 deployed Trident missiles based in Scotland and it would not be easy to find a new home for the four Vanguard-class submarines that can be used to launch them. Experts say building a suitable home would take at least a decade at a cost of $billions of dollars that the government doesn’t have.

Britain is also already slated to slash 30,000 troops by 2020.

An independence vote would, however, lead to years of negotiation and transition, and the Scots need to remember they would then have to build their own defense forces.

[One sidebar: Should Scotland vote for independence, it would be a huge boost for Catalan efforts in Spain to do the same.]

Random Musings

--According to the latest Gallup poll, President Obama’s job approval rating has fallen to 38%, the lowest of his administration, though the seventh time it has hit that level.

--A new Pew Research Center survey shows increased public support for a more active U.S. foreign policy.  Last November, for example, those wanting the United States to do less outnumbered those who wanted a more active policy by 51%-17%. But now it’s roughly a third who say the U.S. does too little, while a third say the U.S. is too deeply involved.

“President Obama has recently shown that his understanding of the economy and world is very different from that of most Americans.

“At his afternoon news conference last Thursday, for example, Mr. Obama hailed the report of 4.2% second-quarter growth. ‘Companies are investing,’ the president said. ‘Consumers are spending. Over the past four and a half years, our businesses have now created nearly 10 million new jobs. So there are reasons to feel good about the direction we’re headed.’

“Except Americans don’t. In the Aug. 4 Wall Street Journal/NBC poll, only 22% said they thought the country is headed in the right direction while 71% said it is going in the wrong direction. Only 35% were very or somewhat satisfied with the economy while 64% were somewhat or very dissatisfied.

“Then there was Mr. Obama’s observation at a Democratic fundraiser in Purchase, N.Y., on Friday that ‘the world has always been messy,’ a startling assertion that what Americans are witnessing in Iraq, Syria, Ukraine and elsewhere is nothing out of the ordinary. They’re not buying that either.

“The Aug. 24 Pew Research/USA TODAY poll found that 65% thought they were living in ‘a more dangerous world’ than they did ‘several years ago,’ while 27% said ‘things have not changed very much.’....

“Mr. Obama was once thought to be in touch with the concerns of the American people. Those days are over. A great gulf now exists between the president and the citizenry – between how he perceives the economy and world and how they do. This disconnect could well cost his party this November. Whether it does, the policies crafted from Mr. Obama’s worldview are already costing the country its full measure of prosperity and security.”

--Gaining the six seats required to take back the U.S. Senate is no lock for the GOP. A CNN poll this week has Republican Senate Minority Leader Mitch McConnell leading Democratic challenger Alison Grimes by only four points, 50-46, while in Kansas, the Democratic candidate left the senate race, which actually hurts incumbent Republican Sen. Pat Roberts, because much of the Democratic support will now go to an independent, Greg Orman, who also happens to be 33 years younger than Roberts (45 to 78).

Back to McConnell, it didn’t help that his campaign manager, Jesse Benton, was forced to resign over a federal probe looking into a 2012 presidential campaign he oversaw (Ron Paul’s) and efforts to get a staffer on Rep. Michele Bachmann’s campaign to defect. [I think I have this correct.]

“President Obama is considering a delay of his most controversial proposals to revamp immigration laws through executive action until after the midterm elections in November, mindful of the electoral perils for Democratic Senate candidates, according to allies of the administration who have knowledge of White House deliberations.

“The president vowed in late June to act unilaterally, declaring a deep frustration with what he termed Republican obstruction in Congress. He pledged to act to reshape the immigration system soon after he received recommendations from senior advisers at the end of the summer.

“But now Mr. Obama and his aides appear to be stepping back from a firm commitment to that timing, a move that could draw fire from immigration advocacy groups who are expecting decisive action soon....

“For Mr. Obama, talk of a delay is politically explosive among Hispanics, who are one of his most loyal constituencies and twice helped him win the presidency. Long upset by Mr. Obama’s inability to successfully push comprehensive immigration overhaul in Congress, immigration rights advocates said Friday that a delay would be unconscionable.”

At risk if Obama acted prior to the midterm vote are Democratic Senate candidates running in Arkansas, Louisiana, North Carolina and perhaps Iowa.

Senator Rand Paul, Republican of Kentucky, told the Times: “If he acts unilaterally right now and goes in and grants five million people status in the country, I think he blows up the debate, destroys the debate. He is going to ignite a furor in the country if he thinks he can do that by executive fiat.”

--Republicans in the House and Senate are squelching any talk of a government shutdown come end of September. As Rep. Paul Ryan (R-Wis.) wrote in his new book, last year’s shutdown was a grievous mistake. “No core principles were advanced. And the reputation of the GOP dropped to new lows. It was a suicide mission.” [Jennifer Rubin / Washington Post]

--Former Virginia governor Robert McDonnell was convicted of 11 corruption-related counts, while his wife, Maureen, was convicted of eight, along with obstruction of justice; an incredible fall from grace for the governor, who was once looked at as a Republican presidential candidate in 2016.

--According to a story in the Los Angeles Times, 235,000 Chinese students enrolled in American colleges last year, but some in China are not happy with the SAT because it imposes American values on its best and brightest. The U.S. College Board announced last spring it was including key historical documents in one portion of the test, including the Declaration of Independence and the Bill of Rights.

“Including content from America’s founding documents in a revised U.S. college entry exam has drawn attention in China, with worries the materials may impose the American values system on students,” China’s official New China News Agency said last week.

As the Los Angeles Times notes: “(Those) are the exact values that the Chinese Communist Party has deemed as threatening to its rule; Chinese activists who have tried to promote such values have been silenced or jailed. Human rights advocate Xu Zhiyong, who initiated the New Citizens Movement to promote such values, was sentenced in January to four years in prison.”

In a statement, the College Board said: “The vital issues central to these documents – freedom, justice, and human dignity among them – have motivated numerous people in the United States and around the globe.”

In 2010, China overtook India as the country that sends the largest number of foreign students to the U.S.

To improve their chances of getting into U.S. undergraduate programs, many Chinese students take the SAT in Hong Kong because government policy prohibits it from being administered to students in mainland China.

After my own experiences in China, you shouldn’t be surprised I’m far from sympathetic with Beijing’s stance. Otherwise I’ll bite my tongue for now.

--Finally, Poland marked the 75th anniversary of the start of World War II on Monday, Sept. 1st. Referring to the current conflict between Russia and Ukraine, Polish Prime Minister Donald Tusk said it was not a time for “naïve optimism.” Europeans must learn the lesson of World War II, he added.

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

Gold closed at $1267
Oil $93.29

Returns for the week 9/1-9/5

Dow Jones +0.2% [17137]
S&P 500 +0.2% [2007]
S&P MidCap +0.1%
Russell 2000 -0.4%
Nasdaq +0.1% [4582]

Returns for the period 1/1/14-9/5/14

Dow Jones +3.4%
S&P 500 +8.6%
S&P MidCap +7.3%
Russell 2000 +0.6%
Nasdaq +9.7%

Bulls 56.1
Bears 13.3

Dr. Bortrum has a new column posted.

Have a great week. I appreciate your support.

Catch me on Twitter @StocksandNews. 

Brian Trumbore

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