Sunday, July 7, 2013

Genetic Engineering: The Global Food and Agricultural Crisis

By: Global_Research

Colin Todhunter writes: In 2012, Professsor Seralini of the University of Caen in France led a team that carried out research into the health impacts on rats fed GMOs (genetically modified organisms) (1). The two-year long study concluded that rats fed GMOs experienced serious health problems compared to those fed non GM food. Now comes a new major peer-reviewed study that has appeared in another respected journal. This study throws into question the claim often forwarded by the biotech sector that GMO technology increases production and is beneficial to agriculture.

Researchers at the University of Canterbury in the UK have found that the GM strategy used in North American staple crop production is limiting yields and increasing pesticide use compared to non-GM farming in Western Europe. Led by Professor Jack Heinemann, the study’s findings have been published in the June edition of the International Journal of Agricultural Sustainability (2). The research analysed data on agricultural productivity in North America and Western Europe over the last 50 years.

Heinemann states his team found that the combination of non-GM seed and management practices used by Western Europe is increasing corn yields faster than the use of the GM-led package chosen by the US. The research showed rapeseed (canola) yields increasing faster in Europe without GM than in the GM-led package chosen by Canada. What is more, the study finds that it is decreasing chemical herbicide and achieving even larger declines in insecticide use without sacrificing yield gains, while chemical herbicide use in the US has increased with GM seed.

According to Heinemann, Europe has learned to grow more food per hectare and use fewer chemicals in the process. On the other hand, the US choices in biotechnology are causing it to fall behind Europe in productivity and sustainability.

The Heinemann team’s report notes that incentives in North America are leading to a reliance on GM seeds and management practices that are inferior to those being adopted under the incentive systems in Europe. This is also affecting non GM crops. US yield in non-GM wheat is falling further behind Europe, “demonstrating that American choices in biotechnology penalise both GM and non-GM crop types relative to Europe,” according to Professor Heinemann.

He goes on to state that the decrease in annual variation in yield suggests that Europe has a superior combination of seed and crop management technology and is better suited to withstand weather variations. This is important because annual variations cause price speculations that can drive hundreds of millions of people into food poverty.

The report also highlights some grave concerns about the impact of modern agriculture per se in terms of the general move towards depleted genetic diversity and the consequently potential catastrophic risk to staple food crops. Of the nearly 10,000 wheat varieties in use in China in 1949, only 1,000 remained in the 1970s. In the US, 95 percent of the cabbage, 91 percent of the field maize, 94 percent of the pea and 81 percent of the tomato varieties cultivated in the last century have been lost. GMOs and the control of seeds through patents have restricted farmer choice and prevented seed saving. This has exacerbated this problem.

Heinemann concludes that we need a diversity of practices for growing and making food that GM does not support. We also need systems that are useful, not just profit-making biotechnologies, and which provide a resilient supply to feed the world well.

Despite the evidence, governments capitulate

Given the mounting evidence that questions the efficacy and safety of GMOs (3,4,5,6,7), it raises the issue why certain governments are siding with the biotech sector to allow GMOs to be made available on commercial markets. It is simply not the case that country after country is accepting GMOs on the basis of scientific evidence, as scientists-*****-lobbyists for the GM sector often state (8). If scientific evidence were to be determining factor, few if any countries would have sanctioned GMOs.

Part of the answer lies in the fact that the powerful US biotech sector continues to forward its agenda that GMOs are a frontier technology that will save humanity from famine and hunger. This is despite evidence that most of the world’s hunger is the product of profiteering industrial chemical agriculture and the global structuring of food production and distribution under the banner of ‘free trade’ and ‘structural adjustment’ (9,10), or as many of us know it brow beating and structural dependency.

Yet, the mantra of GM as the saviour of humanity persists courtesy of the GM sector’s puppet politicians and regulatory bodies (11). The US is pushing for lop-sided bilateral trade agreements with other countries not only to generally tie economies into US economic hegemony in an attempt to boost its ailing economy and flagging currency, but more specifically to get nations to ‘accept’ GMOs. Through behind-closed-door deals (12,13) coercion (14) or the hijack of regulatory bodies (15), there has been some success, and many think it could be just a matter of time before other countries, not least India, capitulate to allow GM food crops onto the commercial market.

In fact, regardless of any legal statute, it may be and probably is already happening in India, not least via contamination (16). However, if contamination by means of illegal planting and open field ‘testing’ fails to get GMOs on to the commercial market via the back door, the GM sector is attempting to cover all angles. Immediately after a moratorium on BT Brinjal was announced in 2010, a Biotechnology Regulatory Authority of India (BRAI) Bill suddenly emerged. The BRAI Bill could not be passed in 2010 and 2011 because of objections, but it has surfaced again as a 2013 Bill. Environmentalist Vandana Shiva argues that it not so much constitutes a Biotechnology Regulation Act, but a Biotechnology Deregulation Act, designed to dismantle the existing bio-safety regulation and give the green-light to the GM sector to press ahead with its agenda in the country.

By highlighting the GM sector interests behind the proposed legislation, Shiva says that the goal is to give the sector’s corporations immunity by freeing them of courts and democratic control under India’s federal structure. For those who follow such developments in India, it doesn’t take a great deal of imagination to appreciate that the future of Indian agriculture is in the wrong hands. Certain key scientists and top politicians have already been ideologically (or otherwise) ‘bought and paid for’ by proponents of the ‘Green Revolution’ and more recently the GM sector (7).

On a global level, with reports of wheat (17), rice (18) and maize (19) having been widely contaminated with GMOs, there seems to be a conscious ploy to contaminate so much of the world’s crops so that eventually GMOs take over regardless and render the pro/anti GM debate almost academic (20).

It seems that secretive trade deals, the hijack of official bodies designed to ensure the ‘public interest’ and bullying or intimidation are not enough. Contamination strategies are but one more way of achieving through closed and non-transparent methods what could not be possible by transparent and democratic means – simply because hundreds of millions of people do not want GMOs.

A generation down the line (or much sooner), will we looking at the health and environmental consequences of GMOs in the same way we now regard the impacts of the original ‘Green Revolution’?

“There are very good reasons why we have never introduced a Green Revolution into Africa, namely because there is broad consensus that the Green Revolution in India has been a failure, with Indian farmers in debt, bound to paying high costs for seed and pesticides, committing suicide at much higher rates, and resulting in a depleted water table and a poisoned environment, and by extension, higher rates of cancer.” Paula Crossfield, food policy writer/activist (21).

We don’t have to take Paula Crossfield’s word for it, though. Punjab was the ‘Green Revolution’s’ original poster boy, but is fast becoming transformed from a food bowl to a cancer epicenter and now reels under an agrarian crisis marked by discontent, debt, water shortages, contaminated water, diseased soils and pest infested cops (22,23,24).

In the meantime, big ‘ag’ in collusion with big pharma will continue to control our food and define our healthcare by pushing their highly profitable ‘miracle solutions’ for the health and environmental problems which they conspired to create in the first place. It is all part of the wider corporate-elite agenda to colonise and control every facet of human existence.

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The Global Investment Climate

by Marc to Market

There are five main characteristics of the global investment climate: 1) the Federal Reserve has begun a protracted exit from the extraordinary monetary policy; while 2) other major central banks are not ready to follow suit.  This is encouraging 3) an unwind of structural positions, that were predicated on low US interest rates, and 4) the replacement of the dollar as funding currency, which is leading to 5) portfolio adjustments away from fixed income, emerging markets and some commodities, including precious metals.    The dollar, US and Japanese equities are favored by investors.

The end of the US payroll tax holiday and the sequester, while Europe relaxes its austerity drive in de jure as well as de facto meant that US fiscal policy was the tighter.  Now the Federal Reserve has signaled that barring new signs of weakness in the economy, it will likely slow its asset purchases this year and conclude them next year. 

A Reuters poll after the stronger than expected jobs report included 17 of the 21 primary dealers.  Eleven now look for the tapering to being in September, up from 7 in late June.  The poll found the median expectation that the first slowdown in purchases is $20 bln.  Most Primary dealers expect the first hike in the Fed funds rate in 2015, but the Fed funds futures strip suggests the market is discounting a move in late 2014. 

Fed officials appear somewhat surprised by the sharpness of the rise in interest rates and have tried to allay fears that tapering is tightening.  This warns that the FOMC minutes that will be released on Wednesday will likely be more hawkish than the subsequent soothing rhetoric.  The market will scrutinize Bernanke's speech the same day and Plosser, Bollard and Willams comments on Friday for clues into Fed thinking.

The US earnings season kicks off with Aloca on Monday.  According to Thomson Reuters, the ratio of negative to positive pre-announcements appears to be the largest since 2001.  This lowers the bar of expectations, which makes positive surprises more likely.  At the same time, the US Treasury will sell $64 bln worth of securities, starting Tuesday. 

The euro area economy has contracted for six consecutive quarters through Q1 13, and recent data suggest the pace may be lessening.  Industrial production figures due this week will likely support the view.  However, the unexpected weakness in industrial orders (-1.3% v 1.2% consensus), following a 2.2% decline in April warns of downside risks for Germany industrial output.  Recall the June manufacturing PMI slipped to 48.8 from 49.4 and has not been above the 50 boom/bust level since February. 

Politics may trump economics in the euro area.  Greece's next tranche payment is front and center. The Eurogroup meets on Monday and will likely sanction a compromise worked out over the weekend. The easing of the acute phase of the crisis has not alleviated the need to reach a compromise. Moreover, the rearguard action to minimize the impact of the backing up of US rates on Europe, will prove for naught if there is a renewed crisis in periphery.

It is also understandable why Germany would prefer an uneventful few months in the run-up to its election.  Circumstances may be favorable for this.  The risk that Portugal's government will collapse has receded with a new compromise between the coalition partners, making S&P's cut of Portugal's credit outlook to negative from stable due to "growing political uncertainties" ahead of the weekend look rushed.  There may be near-term scope for Portuguese stocks and bonds to outperform others as the situation normalizes. The Italian government's willingness to delay the VAT hike also appears to buy time for the grand coalition.

Japan reports its May current account balance on early Monday in Tokyo.   The reason it is in surplus is not because of the trade account, which remains deeply negative, but because of its investment income balance.  However, exports are recovering and the 10.1% year-over-year rise in May's merchandise exports (reported in mid-June) is the fastest pace since December 2010. 

The Bank of Japan is the only major central bank to meet in the week ahead.   It is highly unlikely that there will be change in policy, but the BOJ is expected to upgrade its economic assessment.  Japan appears to enjoy the fastest growth among the G7 in Q2.
In terms of portfolio flows, Japanese investors continue to liquidate their foreign bond and stock holdings on a net basis.  Foreign investors, for their part, not only were not shaken by the recent 20% slide in the Nikkei, but appear to have resumed their purchases.

Through last week, the Australian dollar has depreciated by 12.8% this year, second only to the 14.2% decline of the Japanese yen, among major currencies.  The RBA is not satisfied yet and further currency depreciation is anticipated.  Two pieces of data, employment data due on July 11 in Sydney and the inflation data on July 23, will likely solidify expectations for an August rate cut.  In five of the seven months through May, Australia has lost jobs.   The Bloomberg consensus calls for a flat report, but a tick up in the unemployment rate to 5.6%. 

China's money markets have nearly normalized after the squeeze last month.  However, the underlying issues do not appear to have been addressed.  In fact, the higher interest rates appear to have attracted even more funds into the wealth management products that have an inherent maturity mismatch (investors get long-term interest rates in a short term investment product).  Press reports suggest that a record number of investment plans were sold by 70 banks over the past two weeks, a 50% increase from the previous two week period. China's Minsheng Banking Corp, China's first privately owned lender, for example, sold a 35-day wealth management product with a annualized yield of 7%, according to reports. 

Separately, China is expected to report inflation and trade figures in the week ahead.  Inflation is expected to have ticked up, helped by a rise in pork prices.   Headline CPI has been fairly steady in the 2.2%-2.4% range (3, 6 and 12 month averages), but the consensus calls for a 2.5% reading in June. 

China is also expected to report its June trade figures near mid-week.  It surplus is expected to rise from $20.4 bln to $27.8 bln.  Export growth is expected to have accelerated after a 1% increase (year-over-year) in May.  Imports had unexpectedly fallen in May, but are expected to have rebounded smartly in June (6.2% vs -0.3%).   This may lend some support to the numerous countries for whom China is their top export destination. 

The Chinese yuan appreciated about 1.9% against the US dollar from late February through late May.  The dollar has stabilized in a CNY6.12-CNY6.15 range.  Given the dollar's broad based strength, it should not be surprising to see the dollar rise toward the upper end of this range in the days ahead. 

There is host of central banks from emerging markets that meet in the week ahead.  Only two, Indonesia and Brazil are expected to hike rates.  The others, including Korea, Malaysia, Thailand, Russia, Chile and Mexico are expected to stand pat.  A 25 bp increase in key rates is expected by Indonesia's central bank.  A 50 bp hike by Brazil is widely expected, though there is some speculation of a larger move.

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The Politics of a Slowing China

by Minxin Pei

SINGAPORE – The recent financial turmoil in China, with interbank loan rates spiking to double digits within days, provides further confirmation that the world’s second-largest economy is headed for a hard landing. Fueled by massive credit growth (equivalent to 30% of GDP from 2008 to 2012), the Chinese economy has taken on a level of financial leverage that is the highest among emerging markets. This will not end well.

This illustration is by Paul Lachine and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

Illustration by Paul Lachine

Indeed, a recent study by Nomura Securities finds that China’s financial-risk profile today uncannily resembles those of Thailand, Japan, Spain, and the United States on the eve of their financial crises. Each crisis-hit economy had increased its financial leverage – the ratio of domestic credit to GDP – by 30 percentage points over five years shortly before their credit bubbles popped.

Economists who insist that China’s financial leverage is not too high are a dwindling minority. Certainly the People’s Bank of China, which engineered a credit squeeze in June in an attempt to discourage loan growth, seems to believe that financial leverage has risen to dangerous levels. The only questions to be answered now concern when and how deleveraging will occur.

At the moment, China watchers are focusing on two scenarios. Under the first, a soft economic landing occurs after China’s new leadership adopts ingenious policies to curb credit growth (especially through the shadow banking system), forces over-leveraged borrowers into bankruptcy, and injects fiscal resources into the banking system to shore up its capital base. China’s GDP growth, which relies heavily on credit, will take a hit. But the deleveraging process will be gradual and orderly.

Under the second scenario, China’s leaders fail to rein in credit growth, mainly because highly leveraged local governments, well-connected real-estate developers, and state-owned enterprises (SOEs) successfully resist policies that would cut off their access to financing and force them into insolvency. Consequently, credit growth remains unchecked until an unforeseen event triggers China’s “Lehman” moment. Should this happen, growth will collapse, many borrowers will default, and financial chaos could ensue.

Two intriguing observations emerge from these two scenarios. First, drastic financial deleveraging is unavoidable. Second, Chinese growth will fall under either scenario.

So, what impact will the coming era of financial deleveraging and decelerating growth have on Chinese politics?

Most would suggest that a period of financial retrenchment and slow GDP growth poses a serious threat to the legitimacy of the Chinese Communist Party (CCP), which is based on economic performance. Rising unemployment could spur social unrest. The middle class might turn against the party. Because economic distress harms different social groups simultaneously, it could facilitate the emergence of a broad anti-CCP coalition.

Moreover, massive economic dislocation could destroy the cohesion of the ruling elites and make them more vulnerable politically. Indeed, members of the ruling elite will be the most immediately affected by financial deleveraging. Those who borrowed recklessly during China’s credit boom are not small private firms or average consumers (household indebtedness in China is very low), but local governments, SOEs, and well-connected real estate developers (many of them family members of government officials). Technically, successful financial deleveraging means restructuring their debts and forcing some of them into bankruptcy.

By definition, such people have the political wherewithal to mount a fierce fight to preserve their wealth. But, given the huge size of China’s credit bubble and the enormous amounts of money needed to recapitalize the banking system, only some of them will be bailed out. Those who are not will naturally harbor resentment toward those who are.

Slower GDP growth undermines elite unity according to a different political dynamic. The current Chinese system is a gigantic rent-distributing mechanism. The ruling elites have learned to live with each other not through shared beliefs, values, or rules, but by carving up the spoils of economic development. In a high-growth environment, each group or individual could count on getting a lucrative contract or project. When growth falters, the food fight among party members will become vicious.

The people who should be most concerned with financial deleveraging and slower growth are President and CCP General Secretary Xi Jinping and Prime Minister Li Keqiang. If the deleveraging process is quick and orderly, they will emerge stronger in time for their reappointment in 2017 (the Chinese political calendar thus dictates that they turn the economy around by the first half of that year).

Xi and Li are inseparably linked with the CCP’s promise of economic prosperity and national greatness, embodied in the official catchphrase, “China dream.” What, then, will they do when faced with a political nightmare?

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Measuring the Costs of “Too Big To Fail”

by Mark Roe

CAMBRIDGE – The idea that some banks are “too big to fail” has emerged from the obscurity of regulatory and academic debate into the broader public discourse on finance. Bloomberg News started the most recent public discussion, criticizing the benefit that such banks receive – a benefit that a study released by the International Monetary Fund has shown to be quite large.

This illustration is by Pedro Molina and comes from <a href=""></a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

Illustration by Pedro Molina

Bankers’ lobbyists and representatives dismissed the Bloomberg editorial for citing a single study, and for relying on rating agencies’ rankings for the big banks, which showed that several would have to pay more for their long-term funding if financial markets didn’t expect government support in case of trouble.

n fact, though, there are about ten recent studies, not just one, concerning the benefit that too-big-to-fail banks receive from the government. Nearly every study points in the same direction: a large boost in the too-big-to-fail subsidy during and after the financial crisis, making it cheaper for big banks to borrow.

But a recent research report released by Goldman Sachs argues the contrary – and deserves to be taken more seriously than previous efforts to dismiss the problem. The report concludes that, over time, big banks’ advantage in long-term funding costs relative to smaller banks has been one-third of one percentage point; that this advantage is small; that it has narrowed recently (and may be reversing); that it comes from the big banks’ efficiency and their bonds’ liquidity; and that historically it has been mostly small banks, not big ones, that have failed.

Goldman is surely right that the United States has historically propped up small banks that it would not allow to fail. The savings-and-loan crisis of the 1980’s was a $100 billion problem. The banks that failed during the Great Depression of the 1930’s were small banks. More perniciously, because small banks, unlike big ones, paid for most of the costs of their failure through an insurance fund, small banks were given local monopolies, for fear that vigorous competition would lead too many to fail. Customers suffered because competition was weak.

The Goldman report seems to be aimed at a recent proposal by Senators Sherrod Brown and David Vitter to increase big banks’ capital requirements sharply, while exempting small banks (presumably to get the small banks’ political support, or out of nostalgia for local banking, or because the senators believe that small banks present no regulatory problems). Because small banks have historically been failure-prone, and have failed en masse, the Brown-Vitter proposal sidesteps a major problem – call it “too-many-to-fail.”

But, although Goldman is right to widen the focus to include small banks’ weakness, doing so undermines the logic underlying its view that the narrowing of the long-term funding-cost advantage implies that America’s banking problems are over. Goldman is right that small banks fail and have been protected by government insurance and bailouts; but that means that the big banks’ funding advantage over small banks needs to be added to whatever advantage the small banks themselves have.

Likewise, if big banks’ funding advantage is really not so large now as it was in the past, that narrowing may mean that others understand what the Goldman report is saying: small banks fail, too, and the government or the insurance fund bails them out. A narrowing gap in funding costs could just mean that financial markets recognize this.

Moreover, by measuring the too-big-to-fail subsidy on the basis of banks’ long-term bonds, the Goldman report misses much. It is a big bank’s short-term debt that sinks it in a crisis, and it is this debt that is bailed out first. Big banks, not small banks, are the major players in the market for short-term debt, which makes their bonds riskier than small banks’ bonds. So, if the market prices the big and small banks’ long-term debt similarly, even though the big banks’ debt is riskier, something must be giving the big banks’ riskier debt a boost.

US regulators are strongly hinting that they will allow long-term debt to default in a bank failure, while affirming that they will find a way to bail out short-term debt. If financial markets view them as likely to follow through, the too-big-to-fail boost may apply more to the big bank’s short-term debt than to any banks’ long-term debt.

And is it right to say that the amount involved – one-third of one percentage point in annual interest savings on long-term debt – is small? Big banks use so much debt nowadays and so much less equity – the ratio is typically ten to one – that a small financing advantage amounts to a large fraction of a bank’s profit. Depending on how much long-term debt a bank uses, a financing advantage of one-third of a percentage point can readily amount to 10% or more of its annual profit. That is not small change by anyone’s definition.

Finally, if we focus on the too-big-to-fail subsidy at any particular time, we miss too much. As the economy improves, failure is less likely. The banks may remain too big to fail, but, with their chance of failing lower in a more buoyant economy, the immediate subsidy declines. And the largest cost of major bank failures is not the subsidy, or the cost of a bailout. It stems from the economic havoc caused by too many financial institutions weakening and unexpectedly failing simultaneously, cutting back on lending, and degrading economic activity overall. Mass financial failure is costly, even if no one, big or small, is bailed out.

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Weighing the Week Ahead: Will Earnings Measure Up?

by Jeff Miller

In last week's prediction for the week ahead I raised the question of how would stocks do in an environment of rising rates? This kept alive my streak of guessing the market theme for the coming week, especially since rates took another leg higher and stocks seemed to cope with the news.

The coming week provides a new challenge. While many will dwell on the popular Fed theme (where so many have opinions without either supporting data or a track record) my own sense is that this theme is aging. The media will embrace a shift to news about corporate earnings, but in still with some competing themes.

Will earnings measure up?

We know that expectations have been lowered and that pre-announcements have been very negative. As I consider the coming week, I see several competing themes:

  • Technical Analysis. The TV commentators were breathlessly watching S&P 1625 as the market closed. At the start of Friday's trading it appeared that stocks would blow through this level. Art Cashin said there was a "delayed reaction" as bosses called in from the Hamptons to point out the increase in the ten-year note yield. Art was not around at the end of the day. He astutely noted that traders were consulting train schedules shortly after the opening, so no one knows for sure how to interpret the close.
  • FedSpeak background. There is an ongoing battle (see last week's discussion) between market participants, policymakers, academics, and journalists. Each has a different perspective and all have merit. I do not want to repeat last week's analysis, so let me highlight the best new idea. Tim Duy (another Kauffman friend whose brain I shamelessly picked at the conference) continues to do outstanding work on the Fed. He concludes that the Fed wants a responsible exit and is trying to communicate what this means. Traders who have a knee-jerk reaction to the first sign of a reduction in the rate of Fed easing will find it alarming. I recommend a more careful reading.
  • Street expectations remain very negative. Many big hedge fund players have gotten the market wrong, as Barry Ritholtz notes. Barry also highlights the continuing bearish views from the sell-side community, illustrated by this chart:


  • Earnings expectations are low, as noted in Barron's.

    "School's out and the report cards are on the way. More than a few parents have been warned that their kids' performances are falling short of expectations, so with Mom and Dad bracing for Cs and Ds, a B will be greeted like an A."

I have some thoughts on how the competing themes will play out. I'll comment on those in the conclusion.  First, let us do our regular update of last week's news and data.

Background on "Weighing the Week Ahead"
There are many good lists of upcoming events.  One source I regularly follow is the weekly calendar from For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.

In contrast, I highlight a smaller group of events.  My theme is an expert guess about what we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.

My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topic the week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.

This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

Last Week's Data

Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
  2. It is better than expectations.

The Good

This was a very good week on the economic front.

  • Home prices are up 12.2% year-over-year. Data from CoreLogic analyzed by Calculated Risk. See the entire post for analysis of this strong report.
  • The Eurozone PMI moved a little higher. The 48.7 reading is still in the contraction range, but the "Recession Eases" via the report from Global Economic Intersection.
  • Light vehicle sales continued to be strong – four years of double-digit growth. Scott Grannis has the story and this informative chart:

Auto Sales

  • Gas Prices declined again, now down 29 cents from the recent high in February. See the analysis from Doug Short, showing the relationship with the overall CPI index and his typically first-rate charts. Here is a good example:

Gas Prices

  • Employment gains beat expectations – but not by too much. Joe Weisenthal calls the report the "Mother of all Goldilocks." Here are the highlights from WSJ's Real Time Economics Blog. Even David Rosenberg finds 10 reasons to love the jobs report. Labor force participation also increased. Some criticized the gain in part-time jobs at the expense of full-time employment. The Bonddad Blog showed the error of that assertion by documenting the increase in aggregate hours worked.

The Bad

There was a little bad news.  Feel free to add in the comments anything you think I missed!

  • The June ISM Services index declined to 52.2, missing expectations. Steven Hansen analyzes the sub-indexes, concluding that the story is even worse.
  • Bullish sentiment spiked higher, the biggest one-week jump since March in the AAII index. Bespoke has the story, helpful commentary, and a chart showing the relationship with the S&P 500. Most observers see this as a contrarian indicator, so that is how I have scored it. Take a look for yourself:

AAII Bullish Sentiment 070513

  • The trade deficit for May was much higher than expected at $45 billion. Brian Wesbury sees the bright side in the resilience of the consumer and the overall increase in trade. Meanwhile, the decline in exports implies a reduction in real 2nd quarter GDP of almost one full point. We can expect consensus economic forecasts for the quarter to move lower.

The Ugly

ETF tracking may not be as expected. Investors may be losing on both entry and exit. Blackrock offers an explanation, but Izabella Kaminska at FTAlphaville is all over this story. The story also has important background links. She writes as follows:

"Anyway, it seems the lesson here from Blackrock is that if you've been left holding an illiquid muni security, EM or high-yield bond that you just can't shift, then you are the greater fool for not appreciating that price discovery no longer happens in these markets directly, but in related ETFs. Shame on you for not owning those instead."


There are occasionally items that do not fit my normal classification, but deserve our attention.

  • Small businesses get more time to implement ObamaCare. My Kauffman Conference friend Ezra Klein, in a great story on this subject, suggests that the delay in implementation should be made permanent. My own experience in public policy is consistent with his analysis. Complex programs include many elements that might not work or will have unforeseen consequences. Discovering this early and changing course is a good move which actually has a very small effect. As investors, we now need to figure out how this affects our health care positions – if at all.

The Indicator Snapshot

It is important to keep the current news in perspective. I am always searching for the best indicators for our weekly snapshot. I make changes when the evidence warrants. At the moment, my weekly snapshot includes these important summary indicators:

  • For financial risk, the St. Louis Financial Stress Index.
  • An updated analysis of recession probability from key sources.
  • For market trends, the key measures from our "Felix" ETF model.

Financial Risk

The SLFSI reports with a one-week lag. This means that the reported values do not include last week's market action. The SLFSI has recently edged a bit higher, reflecting increased market volatility. It remains at historically low levels, well out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a "warning range" that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.

The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.

Recession Odds

I feature the C-Score, a weekly interpretation of the best recession indicator I found, Bob Dieli's "aggregate spread."  I have now added a series of videos, where Dr. Dieli explains the rationale for his indicator and how it applied in each recession since the 50's.  I have organized this so that you can pick a particular recession and see the discussion for that case.  Those who are skeptics about the method should start by reviewing the video for that recession.  Anyone who spends some time with this will learn a great deal about the history of recessions from a veteran observer.

I have promised another installment on how I use Bob's information to improve investing.  I hope to have that soon.  Meanwhile, anyone watching the videos will quickly learn that the aggregate spread (and the C Score) provides an early warning.  Bob also has a collection of coincident indicators and is always questioning his own methods.

I also feature RecessionAlert, which combines a variety of different methods, including the ECRI, in developing a Super Index.  They offer a free sample report.  Anyone following them over the last year would have had useful and profitable guidance on the economy.  RecessionAlert has developed a comprehensive package of economic forecasting and market indicators, well worth your consideration.

Georg Vrba's four-input recession indicator is also benign. Here is his latest update where he concludes, "Based on the historic patterns of the unemployment rate indicators prior to recessions one can reasonably conclude that the U.S. economy is not likely to go into recession anytime soon." Georg has other excellent indicators for stocks, bonds, and precious metals at iMarketSignals. This chart illustrates Georg's unemployment method:


Unfortunately, and despite the inaccuracy of their forecast, the mainstream media features the ECRI. Doug Short has excellent continuing coverageof the ECRI recession prediction, now over 18 months old.  Doug updates all of the official indicators used by the NBER and also has a helpful list of articles about recession forecasting.  His latest comment points out that the public data series has not been helpful or consistent with the announced ECRI posture.  Doug also continues to refresh the best chart update of the major indicators used by the NBER in recession dating.

The average investor has lost track of this long ago, and that is unfortunate.  The original ECRI claim and the supporting public data was expensive for many.  The reason that I track this weekly, emphasizing the best methods, is that it is important for corporate earnings and for stock prices.  It has been worth the effort for me, and for anyone reading each week.

Readers might also want to review my Recession Resource Page, which explains many of the concepts people get wrong.

Indicator snapshot 070613

Our "Felix" model is the basis for our "official" vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions.  Last week we switched to a bearish position, but it was a close call. This week we have switched back to neutral, and it is still a close call. The inverse ETFs are more highly rated than positive sectors by a small margin, but remain in the penalty box. These are one-month forecasts for the poll, but Felix has a three-week horizon.  Felix's ratings have improved a bit. The penalty box percentage measures our confidence in the forecast.  A high rating means that most ETFs are in the penalty box, so we have less confidence in the overall ratings.  That measure remains elevated, so we have less confidence in short-term trading.

[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

The Week Ahead

After last week's crowded data calendar, this week is much lighter.

The "A List" includes the following:

  • Initial jobless claims (Th).   Employment will continue as the focal point in evaluating the economy, and this is the most responsive indicator.
  • FOMC minutes (W). Because of the speeches in the aftermath of the last Fed meeting, there will be special interest in the official account of the deliberations.
  • Michigan sentiment index (F). This is the preliminary reading for July. It is a good concurrent indicator for employment and spending.

The "B List" includes the following:

  • PPI (F). Inflation has been so tame that it has little relevance – so far.

For those who need a weekly dose of speechifying from central bankers, we have Fed Presidents Bullard (St. Louis) and Plosser (Philadelphia) speaking on Friday. Bernanke is speaking on Wednesday after the market close, but the topic is the history of U.S. central banking.

The biggest news of the week will be the opening of earnings season, with reports and updates throughout the week, including JPM and WFC on Friday.

How to Use the Weekly Data Updates

In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a "one size fits all" approach.

To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances?

My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage.

Insight for Traders

Felix has shifted back to a neutral posture. Our trading accounts never actually went short. For some time we had no position. Then we were short bonds. Most recently we have been long oil via USO. We are doing a three-week forecast, but we update the model every day and trade accordingly. It is fair to say that Felix remains cautious about the next few weeks. Felix did well to avoid the premature correction calls that have been prevalent since the first few days of 2013, accompanied by various slogans and omens.

Insight for Investors

This is a time of danger for investors – a potential market turning point. My recent themes have been accurate and are still quite valid. If you have not followed the links, find time to give yourself a mid-year checkup. You can follow the steps below:

  • What NOT to do

Let us start with the most dangerous investments, especially those traditionally regarded as safe. Interest rates have been falling for so long that investors in fixed income are accustomed to collecting both yield and capital appreciation. An increase in interest rates will prove very costly for these investments. It has already started. Check out Georg Vrba's bond model, which continues to signal the risk. Other yield-based investments have also suffered, and it is not over.

  • Find a safer source of yield: Take what the market is giving you!

For the conservative investor, you can buy stocks with a reasonable yield, attractive valuation, and a strong balance sheet. You can then sell near-term calls against your position and target returns close to 10%. The risk is far lower than for a general stock portfolio. This strategy has worked well for over two years and continues to do so. I have had a number of questions about this suggestion, so I wrote an update last week. That post provides background as well as concrete examples showing how you can try this strategy yourself.

  • Balance risk and reward

There is always risk. Investors often see a distorted balance of upside and downside, focusing too much on news events and not enough on earnings and value. You need to understand and accept normal market volatility, as I explain in this post: Should Investors be Scared Witless?

  • Get Started

Too many long-term investors try to go all-in or all-out, thinking they can time the market. There is no reason for these extremes. Recent weeks have been tough for traders. Most were surprised by the market reaction to more FedSpeak and the spike in interest rates.

For investors it was a different story. If you had your shopping list, there were good opportunities to buy stocks. For those following our enhanced yield approach you had both the chance to set new positions and to sell calls against old ones. I was also delighted to see recognition for Chuck Carnevale's F.A.S.T. Graphs site in this week's Barron's. I include a visit to his site as part of every stock evaluation and you should, too. Chuck graciously provides ideas as well as his more recent data in his frequent articles. This thoughtful post is a recent example.

And finally, we have collected some of our recent recommendations in a new investor resource page -- a starting point for the long-term investor.  (Comments and suggestions welcome.  I am trying to be helpful and I love feedback).

Final Thought

As usual I share my thinking and conclusions with the understanding that each point deserves more discussion. While I am "thinking out loud" I always try to elaborate in the comments when there are questions.

  • I expect the normal pattern of companies beating reduced expectations.
  • I really like the Friday market action. It is especially encouraging that last year's relationship of weak dollar, strong stocks disappeared. The dollar is at a three-year high.
  • Many analysts are looking forward – on the economy and on earnings.

I continue to emphasize a likely destination for the economy and financial markets. This is helpful in avoiding excessive focus on any single variable in a world where so many things are correlated. I expect the economy to improve, interest rates to move higher (starting with the long end), PE ratios to increase (as is usually the case when rates go to 4% or so), profit margins to decrease somewhat, and the U.S. deficit to decrease. This climate will be very negative for some stocks and sectors and very positive for others. (I provide more detail here.)

A key element is to avoid the fixation on the Fed. The idea that the Fed determines long-term interest rates is rapidly being proven wrong. James Hamilton shows (It's not just the Fed) that interest rates actually increased after the announcement of both QE2 and QE3. He writes, "It's worth emphasizing that the recent rise in interest rates has been a global phenomenon, not just something seen in the United States."

I have demonstrated that Fed buying is only 1% of daily trading in the cash markets. Nearly everyone confuses net new issuance of debt, total new issuance, and the float. This is a big mistake, and it can be a costly one.

The takeaway for investors is to look for companies that will thrive in an environment of rising interest rates and a strong dollar.

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(Broke) Italy “Would Love To” But Can't Pay Its Bills This Year

by AuthorWolf Richter

In most countries, it would be an act of mind-bending chutzpah, or perhaps a display of political insanity, but in Italy it barely made ripples: for a government official, a minister no less, to declare that the country cannot pay its long overdue bills, and not for a month or two, but for the rest of this year! Due to "technical" problems.

The Italian government is out of money. Not that the US government is in any better shape in that respect, or the Japanese government for that matter, but they have central banks that print the missing moolah with lavish abandon. Italy doesn't. It has the ECB which is run by an Italian who promised last year to print with lavish abandon to keep countries like Italy afloat. But that promise is not the same thing as having your own central bank.

On July 4, Italy's budget fiasco came to light once again. Wracked by the pretense of austerity, expenditures rose 1.3% in the first quarter, while revenues remained flat. So the deficit rose to 7.3% of GDP, up from 6.6% last year, bringing the national debt to 130% of GDP. Ballooning debt and deficits in a shriveling economy – Italy has been in recession since the fourth quarter of 2011 – is a toxic combination in the Eurozone.

How will Italy force its deficit under 3% of GDP, the line in the sand that would trigger the Eurozone’s excessive deficit procedure? The government is desperately trying. Economy Minister Fabrizio Saccomanni announced that he’d identified a1,600 “unused” properties that could be dumped. In the near term, this could haul in about €600 million, he said, though former Prime Minister Mario Monti's plan to do that had run aground on the reefs of the declining property market.

In any case, despite appearances to the contrary, "the trend of public finances in the first half is consistent with the achievement of a net deficit of 2.9%," he said. But €600 million, if they materialize, would be a drop in the rusty Italian budget bucket. Much more would be needed.

Hence, a eurocratic deus ex machina: Jos̩ Manuel Barroso, president of the European Commission, told the European Parliament on Wednesday that the budget rules would be reinterpreted for 2014 so that some public spending on infrastructure projects could be excluded from the deficit figures Рsomething Italy has long pushed for in its valiant efforts to keep its deficit under 3%. If all else fails, monkey with the rules. Abracadabra.

“For countries with high levels of public debt,” such as Italy, “this will be of limited use in the short term,” an EU official cautioned to appease any remaining Germanic deficit hawks. But these kinds of details didn't stop Italian Prime Minister Enrico Letta from declaring victory. “We made it!” he tweeted triumphantly. It would give “more flexibility in coming budgets for countries like Italy” that had their “accounts in order.”

What exactly he meant with “accounts in order,” given Italy’s deficit and debt spiral, remains a mystery – particularly in light of the fact that it cannot even pay its past-due bills.

Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector.

The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers. Once again, abracadabra.

But it’s strangling businesses. So, paying a portion of those past-dues, namely €40 billion, has been kicked around. Most recently, Renato Brunetta, leader of the House and member of Silvio Berlusconi’s PDL party, demanded at a coalition meeting that payment be made by the end of the year. In a surrealist show of noble governance, Letta himself jumped into the fray and committed to pay those debts even faster – not in July or August, but sometime in the fall! Rousing applause!

"I would love to" pay the past-due debt of the Public Administration by 2013, "but I don’t know if it can be done," retorted Economic Development Minister Flavio Zanonato the next morning. "It's not ill will, but there is a technical problem,” he said. “The government has removed the obstacle; now all the various sources of expenditure must take action to pay." They don’t have the money, apparently. To say that it’s difficult to pay the debts of the Public Administration is "obvious and true," he conceded.

It would normally be an admission of default. But not for the Italian government. For them, it’s just another illustration of a budget absurdity: staying by hook or crook on this side of the 3% line in the sand – even if it strangles companies and the economy and makes the deficit and debt spiral worse.

Italy has become legendary about tax evasion, which is part of its budget absurdity. So now the G-8 wants to crack down. The first four items at the recent meeting dealt with the need for governments to share information to “fight the scourge of tax evasion.” If only their primary targets were multinationals, banks, and hedge funds. But they’re going after the little guy. Read.... Beware, the Borderless Taxman Cometh

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Implied rate hike date moves to October of 2014

by SoberLook

The Fed Funds futures curve steepened again on Friday, bringing forward the implied date of the first rate hike by the Fed.

Fed Funds futures curve shift as a result of Friday's employment report

The date is now closer to October of 2014 as opposed to May of 2015 discussed about a month ago (see post) - an immense steepening in such a short time. That means the market now expects the current securities purchase program to end before the start of the fourth quarter of 2014.

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Stock Market (Bernanke) Demand Cannot be Sustained As Is

By: Michael_Noonan

If central planners were put in charge of managing the Mohave Desert, out West, it would eventually run out of sand. When central planners manage anything, they distort natural market forces, and that ultimately creates an exaggerated effect in the opposite direction. At some point, and now sooner rather than later, the Fed's [Bernanke] interference with the stock market is going to make the 2008 crash seem like a minor correction.

There is one thing, and one thing only, driving the stock market, and that is debt. It is not new capital. It is not new investment in plants and machinery, the "old fashion" way of creating a sustained bull market. It is borrowed money, and the cost of cheap money is going to become dear. When that happens, the [overly] leverage factor is going to destroy everyone who is leveraged. This "party" to the upside will end, and when it does, those who chose to believe in the lies will suffer dire financial consequences.

Friday's "positive" jobs "growth" is a lie, plain and simple. More and more Americans are leaving the work force, [not by choice], joining those who have already left, but are considered "invisible" by the Bureau of Lies and Statistics. More and more Americans receive some form of welfare from the Federal teat...Food stamps, an example of the government's latest "growth industry." Full-time jobs are disappearing; part-time jobs ascending, mostly all minimum wage, offering no health care. "Thank you, Obamacare."

The government, on every level, is financial dead weight. Every cent spent by government comes from the public, and now, more so than ever, from deficit spending. Guess who is responsible for all deficit spending? Read the 14th Amendment. With almost zero rates of interest, Congress has zero reason to exercise fiscal "responsibility." They do not care.

Why mention all this? The charts are distorted, based on lies, just like those of gold and silver, where the COMEX has been used as a sledge-hammer against rising precious metal prices, the antithesis of fiat creation. The government hates anything that exposes its lies. Federal Reserve Notes are not dollars, not by law, and even according to their issuer, the Federal Reserve itself. Federal Reserve Notes, [FRN], are debt instruments.

Here is a shocker for everyone: Debt cannot be money, yet almost everyone treats it as though it were money, believing in the lie. When presented with the truth, it is not believed because it goes against the lie, which is believed as true. Do not take our word for it. DYODD. [Do your own due diligence]. Cognitive dissonance reigns.

We see the lies in the charts, and that is why the above lesson in reality was provided.

Mention has been previously made that volume has been greater on declines, an indication of increasing seller activity. The addition of the dark channel lines show the weekly chart to be stronger than expected. The last swing high reached the upper supply channel, and the swing low of two weeks ago stayed well above the lower demand channel line, and also above recent lows from March and April, all appearances of underlying strength.

The amount of time and price for the last swing lows are labeled. The current decline was similar in point value to the middle swing correction, but the decline accelerated in just half the time, an indication that sellers moved the market down with greater ease.

Price has rallied to the upper supply line of the down channel, seen in more detail on the daily chart. We get to see the how of price approaching a potential resistance area on both time frames when the market opens on Monday, [Sunday evening].

The LL and first LH are used to create the down channel. A line connects the high and the LH, extended lower into the future, the dashed portion, and a parallel line is drawn from the LL, extended into the future, also represented by the dash spaced portion. A new LL was formed at an oversold condition, and now price is retesting the upper channel.

The dashed horizontal line off the wide-range bar down, in mid-June, usually offers some resistance, just not in this case. The ease of upward movement from the correction low of Thursday and continuing in Friday's rally would suggest a higher price on Monday.

An intra day inspection of the wide-range bar from 19 June, on this 90 minute chart, tells us price accelerated lower starting at 1638, and it can act as resistance on a retest, if price does go higher on Monday. The high of the entire bar is labeled at 1646, just below the 1650 area swing high, and it, too, can be a potential resistance.

The volume on the left hand side of the chart, as price was declining, is about twice the volume on the right hand side, as price rallied. There has been ample evidence of this out of line supply v demand activity in the past. This happens to show the disparity quite clearly. It is why this commentary began with the editorial caveat. No market can ignore the basic laws of nature without eventually succumbing to natural order.

The lesser volume "demand" side comes from the Fed, injecting unlimited fiat into the market, overwhelming the natural inclination to sell. The forces of supply and demand remain distorted. Central planners can keep it that way longer than rational opposing forces can remain solvent, so sellers simply stay out of the way. They will have their day.

Monday's activity can be telling for the immediate term as price goes into the obvious resistance areas, as shown on all three time frames. The daily and intra day time frames have been down, and a few attempts were made from the short side, resulting in small losses.

If price weakens against support, expect a reversal to the downside. If price stays around the resistance area, its ability to hold is the market's way of telling us buys are absorbing the sellers, and price will continue higher. Plan accordingly.

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