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Thursday, September 1, 2011

Tom Horn and pandemonium's engine

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China Developing 'Star Wars' Missile Defense Shield

China is developing a missile defense system in the highest layer of the atmosphere and outer space using high-end technologies like laser beams and kinetic energy intercept.

In 2007, China successfully tested a direct-ascent anti-satellite (ASAT) weapon against a weather satellite, demonstrating its ability to attack satellites in low-Earth orbit. It has also been developing other kinetic and directed-energy technologies for ASAT missions like lasers, high-powered microwave, and particle beam weapons, according to a report released by the U.S. Defense Department last week.

With its manned and lunar space programs, "China is improving its ability to track and identify satellites -- a prerequisite for effective, precise counterspace operations," the report said.

The Defense Department speculates that China already has the technology to counter low-flying cruise missiles or short-range ballistic missiles. It is believed to be using Russian-made SA-20 ground-to-air missiles or its own homegrown HQ-9 long-range SAM missiles.

"China is proceeding with the research and development of a missile defense 'umbrella' consisting of kinetic energy intercept at exo-atmospheric altitudes (>80 km), as well as intercepts of ballistic missiles and other aerospace vehicles within the upper atmosphere," the report says.

In January 2007, China joined the space war by launching an interceptor missile against a superannuated weather satellite floating 859 km above the earth. In January last year, it also successfully tested a ground-based midcourse defense (GMD) system, demonstrating its ability to intercept midcourse ballistic missiles at an altitude of 20 km.

Meanwhile, the U.S. obtained information at least two days before China's GMD test in January last year and notified allies like Australia, the U.K., New Zealand, and Canada of this, Hong Kong’s South China Morning Post reported Monday.

"A classified cable from the U.S. secretary of state to diplomats in allied countries on Jan. 9 last year indicated that Washington knew details of the sensitive missile test days before the launch," the daily said. "Xu Guangyu, a retired PLA general and a researcher with the China Arms Control and Disarmament Association, said the cable, if authentic, indicated the possibility that U.S. intelligence had reached into the heart of the Chinese government or military, or both."

The Chosun

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Is China Planning a Surprise Missile Attack?

A retired Chinese general recently revealed that his country might be planning a surprise missile attack on the United States. The public comment of Xu Guangyu came in response to WikiLeaks revelations that last year Washington had warned its allies beforehand of China’s test of a missile interceptor.

Secretary of State Hillary Clinton, in a classified cable sent last January 9th, instructed American embassies in Australia, Britain, Canada, and New Zealand to notify those countries of upcoming Chinese launches two days later. The cable included details of the launch sites for the interceptor and the target, the models of the missiles, the purpose of the test, and the test date.

Yesterday, Hong Kong’s South China Morning Post carried comments from Xu, now at the China Arms Control and Disarmament Association, to the effect that American satellites would have detected activity at the launch sites but that some of the information in the cables—specifically the types of missiles and the day of the test—must have come from a source on the ground. WikiLeaks’s release of this cable, revealing one or more American spies in China’s strategic missile corps, is perhaps the website’s most significant compromise of US security to date.

The Hong Kong paper noted that Xu said that “if China could no longer keep secret its missile launches, it would not be able to launch a surprise attack on the US.”

Is China really in the process of planning to destroy the American homeland with a preemptive barrage of nuclear-tipped missiles? Xu’s comment, of course, is not proof, but it does reveal that Chinese flag officers are thinking about doing so.

Unfortunately, Xu’s hostile sentiment fits within a worrisome trend. Especially since the beginning of last year, there has been a series of belligerent comments from China’s generals, admirals, and colonels, some talking about war with the US in the near future. Last February, for instance, Colonel Meng Xianging said the People’s Liberation Army would “qualitatively upgrade” its capabilities to force a showdown on US policy toward Taiwan within the decade “when we’re strong enough for a hand-to-hand fight with the US.”

Given the belicose statements coming from some of China’s military brass—along with China’s well-documented aggressive behavior in the South China Sea and other peripheral waters—it is difficult to imagine how Western observers can deny China’s intentions and the clashes that lie ahead. Thank you, General Xu.

World Affairs

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Greek debt 'out of control' - parliamentary committee

Greek Parliament

The dynamics of Greece's huge foreign debt has run "out of control," and government efforts to repair the country's crippled economy have proved unsuccessful, the Greek parliamentary budget committee said in its report issued on Wednesday.

"The steep debt rise, high primary deficit ... have exacerbated to the maximum the dynamics of debt, which is out of control," the report said.

"It is clear that the country's problem is not just the size of the public debt but the inability to consolidate the current fiscal management," it said. "Despite gigantic effort for fiscal adjustment, no primary surplus has been achieved, on the contrary the primary deficit widens."

The rising debt, which is currently estimated at more than 350 billion euros ($503 billion), coupled with ineffective anti-crisis measures are likely to neutralize benefits from a new EU bailout, the report said.

The EU approved in late July the allocation of a $109-billion loan to Greece in addition to the initial aid package of $110 billion approved in May 2010. Greece has promised to implement massive budget cuts in exchange.

However, according to the Greek Finance Ministry, the country's budget deficit increased to 15.5 billion euros (more than $22 billion) in January-July 2011 from 12.42 billion euros ($17.8 billion) in the same period on 2010. Budget incomes decreased by 6.4 percent, while expenditures rose by 7.1 percent in the first seven month of 2011.

Sarkozy warns against preventive strike on Iran

French President Nicolas Sarkozy

French President Nicolas Sarkozy said on Wednesday that a preventive strike on Iran could lead to a crisis in the region and called on world powers to toughen their sanctions on Tehran instead.

"Iran's military, nuclear and ballistic [missile] ambitions pose a growing threat that could lead to a preventive strike on Iranian facilities and provoke a serious crisis, which France wants to avoid by all means," Sarkozy told French diplomats at an annual ambassador conference.

The West suspects Iran of pursuing a secret nuclear weapons program, but the Islamic republic, which is already under four sets of international sanctions over its nuclear activities, insists it needs nuclear power solely for civilian purposes.

Talks between Iran and six world powers, including France, Russia and the United States, broke down in December last year.

"The international community can respond effectively [to Iranian nuclear threat] if it demonstrates unity, resoluteness and imposes even tougher sanctions," the French president said.

Israel has repeatedly signaled its readiness to attack Iran's nuclear facilities if diplomacy fails to dissuade Iran from moving forward with its uranium enrichment and ballistic missile development programs.

I am not interested in financial stocks

Marc Faber : I personally I am not interested in financial stocks because I am in the financial sector. the only exception to that is banks in asia are reasonably sound because they never went and dabbled in all kinds of Greek bonds and Portuguese bonds and so forth and so on and we had a horrendous crisis in 97- 98 and following that crisis we had a period of ten years during which there was deleveraging. the banks in asia are reasonably sound. I wouldn't necessarily buy them today. they move lower along with the markets but in general if I look at financial stocks and I would look at banks in emerging economies, in India, in Thailand and possibly at some point in China but not yet. - in CNBC 23 Aug 2011

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Economist Calls Entitlements A Massive Ponzi Scheme And Says US Is Actually $211 Trillion In Debt

lawrence kotlikoff

In an interview with NPR, former Reagan economic adviser Laurence Kotlikoff said the U.S.'s "true indebtedness" amounts to $211 trillion.

That's more than 15 times the $14 trillion official figure.

"We're focused just on the official debt, so we're trying to balance the wrong books," Kotlikoff said, naming Social Security, Medicare, and Medicaid for the skyrocketing unofficial figure.

If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That's the fiscal gap...

Why are these guys thinking about balancing the budget?...They should try and think about our long-term fiscal problems.

His comments were reminiscent of a Bloomberg editorial he wrote last year, where he called entitlements "a massive Ponzi scheme."

From the interview:

We've got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000 — you're talking about more than $3 trillion a year just to give to a portion of the population...That's an enormous bill that's overhanging our heads, and Congress isn't focused on it.

Read more: http://www.businessinsider.com/economist-says-us-is-actually-211-million-in-debt-2011-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheMoneyGame+%28The+Money+Game%29&utm_content=Google+Reader#ixzz1WimqGqmF

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Choice for EU: Bail Out Greece or Bail Your Banks

Not only does this suggest default is now all but certain and will come soon, it also implies that the terms of the default will be particularly brutal for investors, with recovery rates possibly even lower than the currently anticipated 50%.

European governments are being forced to face up to the significance of a Greek default. This is perhaps the underlying message from International Monetary Fund Managing DirectorChristine Lagarde's warning that Europe's banks "need urgent recapitalization." She may have been warning about the costly alternative to a solution to the Greek sovereign crisis. But it could well be too late.

Finnish insistence on additional collateral against any further bailout loans it makes to Greece threatens to scupper Europe's rescue vehicle, the European Financial Stability Facility. Without EFSF funds, Greece will almost certainly have no choice but to default on its obligations.

And default will damage Europe's already fragile banks.

Getting to the nub of their exposure to Greece is tricky. On the face of it, their direct holdings of Greek government debt as a fraction of existing capital is probably not too scary. UBS estimates the exposure of European banks, except Greek banks, to Greek sovereign debt at €46 billion (£66 billion), with French and German institutions holding €9.4 billion and €7.9 billion, respectively.

Although these exposures are fairly significant for some banks—for instance, Dexia's exposure to Greek government debt is estimated at 39% of its equity capital, and Commerzbank's at 27%—most outside of Greece have much more manageable positions.

But these crises are seldom neatly contained.

"The problem with situations like this is that it is hard to quantify what the second- and third-round effects will be," warns Stephen Lewis, economist at Monument Securities.

Any default would hit the Greek economy more generally and banks have considerably more exposure to Greece than simply to its sovereign debt. According to the Bank for International Settlements, European banks have a total exposure of €94 billion to the Greek economy, with French institutions on the hook for €40 billion and Germany's €24 billion.

Given that in mid-August, the 32 members of the Stoxx euro-zone banks index had a total market capitalization of some €240 billion, Greece has the potential to put a huge dent in their balance sheets. What's more, the International Accounting Standards Board is worried that European financial institutions have been fudging their exposure to Greece in their recent results by underproviding against potential losses on these assets. When the default finally hits and banks are forced to recognize their true positions, the results could look very ugly indeed.

But that's not where it ends. These estimates don't include the exposure to Greece by non-banking institutions such as insurers. As they're damaged by the Greek fallout, domestic banks will be affected further still.

Ms. Lagarde argued that the "most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary."

Unfortunately, the time for private-sector recapitalization has probably passed. European banks might have raised sufficient funds a year ago when the first round of stress tests left investors feeling a warm glow, but there's much less enthusiasm about the banking sector these days.

And if investors are likely to be reluctant to pump more capital into banks, governments will be equally nervous.

It's unlikely any will have forgotten the painful lesson Ireland learned when it offered its banking sector a blanket guarantee in the midst of the financial crisis. Not only did it fail to shore up the banks but they dragged the Irish economy down with them when they sank.

European politicians have been weighing the unpalatability of rescuing their banks relative to that of rescuing peripheral European economies. The advantage of the Greek rescue has been that it mostly involved promises and guarantees rather than actual taxpayer money. Bank recapitalizations, on the other hand, are likely to go straight onto the national balance sheets.

Of course, banks unable to recapitalize either through the private or public sector face the third alternative of having to limp along as best they can. This would result in a significant credit contraction, which would depress growth in core Europe.

And because one of the few positives for peripheral euro-zone countries has been to expand exports to the healthy bits of Europe, a slowdown in the core could cause a downward spiral throughout the single-currency region.

European governments are unlikely to reach a consensus on how to respond to their domestic banking problems. Some are likely to do everything they can to encourage a private-sector recapitalization. Others will use public funds. And still others will stand back, hoping the European Central Bank comes up with something.

What's almost certain is that it will create further strain within the euro zone. Tensions over whether further lending to Greece can be collateralized are "just a foretaste of how serious the friction could be" once the issue turns to bank rescues, especially if a country feels it is disadvantaged by another, Monument Securities' Mr. Lewis adds.

The post-Lehman banking crisis could yet prove to have been just the foreshock.


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European Banks Need Bigger Writedowns on Greek Bonds, Standards Board Says

Some European banks haven’t sufficiently written down the value of Greek government bonds and other “distressed sovereign debt” they own, the organization that sets accounting rules in the region said.

Banks and other financial institutions are valuing the bond holdings in a way that, in some cases, reflects internal models instead of market prices, the International Accounting Standards Board said in a letter published on its website today.

“It is hard to imagine that there are buyers willing to buy these bonds at the prices indicated,” the IASB said in the letter, dated Aug. 4 and sent to the European Securities and Markets Authority. “This is a matter of great concern to us.”

Governments and banks in the 27-nation European Union are negotiating the details of a second international rescue for Greece. On July 21, EU leaders agreed bondholders should contribute about 50 billion euros ($72 billion) to the package. The IASB didn’t name the banks which have incorrectly applied the rules in valuing their bond holdings.

“It is an area that quite clearly needs to be addressed, because historically there has been a perceived lack of consistency” in how the assets are valued, said Bob Penn, a financial regulation partner at law firm Allen & Overy LLP in London.

International accounting rules prioritize “the use of quoted prices in active markets over the use of valuation models developed using internal assumptions,” Hans Hoogervorst, the IASB’s chairman, said in the letter. These rules were being applied in a “visibly inconsistent way,” he said.
Relevant Data

“Although the level of trading activity in Greek government bonds has decreased, transactions are still taking place,” meaning market prices can be assessed, Hoogervorst said. “A company cannot ignore relevant market data.”

The Financial Times yesterday reported BNP Paribas (BNP) SA and CNP Assurances were among the institutions that had write downs of Greek government debt considered too small by the IASB.

“BNP Paribas has provisioned its exposure to Greece in full agreement with its auditors and relevant authorities” following the July 21 European Union aid plan for the country, according to a statement read by BNP Paribas spokeswoman Carine Lauru by phone.
21 Percent Loss

BNP Paribas, France’s largest bank, wrote down its Greek government-debt holdings by 534 million euros on Aug. 2, the same day it reported a 1.1 percent increase in second-quarter profit. The EU aid plan requires investors to take a 21 percent loss on holdings that mature by 2020.

CNP Assurances (CNP) made a provision in line with the July 21 EU plan and approved by its auditors, a spokeswoman said.

ESMA attaches “great importance to these issues,” Victoria Powell, a spokeswoman for the authority, said in an e- mailed statement. The authority is investigating “whether differences exist” between banks in the treatment of sovereign debt, she said.

“ESMA maintains a close and regular dialogue with the IASB and the general findings will be shared with them,” Powell said.


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The Rescue That Missed Main Street

FOR the last three years we have been told repeatedly by government officials that funneling hundreds of billions of dollars to large and teetering banks during the credit crisis was necessary to save the financial system, and beneficial to Main Street.

But this has been a hard sell to an increasingly skeptical public. As Henry M. Paulson Jr., the former Treasury secretary, told the Financial Crisis Inquiry Commission back in May 2010, “I was never able to explain to the American people in a way in which they understood it why these rescues were for them and for their benefit, not for Wall Street.”

The American people were right to question Mr. Paulson’s pitch, as it turns out. And that became clearer than ever last week when Bloomberg News published fresh and disturbing details about the crisis-era bailouts.

Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fedhad provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.

The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again.

Such a move does not appear imminent; on Friday Ben S. Bernanke, the Fed chairman, told attendees at the Jackson Hole, Wyo., conference that the Fed would take necessary steps to help the economy, but didn’t outline any possibilities as he has done previously.

If the Fed reprises some of its emergency lending programs, we will at least know what they will involve and who will be on the receiving end, thanks to Bloomberg.

For instance, its report detailed the surprisingly sketchy collateral — stocks and junk bonds — accepted by the Fed to back its loans. And who will be surprised if foreign institutions, which our central bank has no duty to help, receive bushels of money from the Fed in the coming months? In 2008, the Royal Bank of Scotland received $84.5 billion, and Dexia, a Belgian lender, borrowed $58.5 billion from the Fed at its peak.

Walker F. Todd, a research fellow at the American Institute for Economic Research and a former assistant general counsel and research officer at the Federal Reserve Bank of Cleveland, said these details from 2008 confirm that institutions, not citizens, were aided most by the bailouts.

“What is the benefit to the American taxpayer of propping up a Belgian bank with a single New York banking office to the tune of tens of billions of dollars?” he asked. “It seems inconsistent ultimately to have provided this much assistance to the biggest institutions for so long, and then to have done in effect nothing for the homeowner, nothing for credit card relief.”

Mr. Todd also questioned the Fed’s decision to accept stock as collateral backing a loan to a bank. “If you make a loan in an emergency secured by equities, how is that different in substance from the Fed walking into the New York Stock Exchange and buying across the board tomorrow?” he asked. “And yet this, the Fed has steadfastly denied ever doing.”

If these rescues were intended to benefit everyday Americans, as Mr. Paulson contended, they have failed. Main Street is in a world of hurt, facing high unemployment, rampant foreclosures and ravaged retirement accounts.

This important topic of bailout inequities came up in Congress earlier this month. Edward J. Kane, professor of finance at Boston College, addressed a Senate banking panelconvened on Aug. 3 by Sherrod Brown, the Ohio Democrat. “Our representative democracy espouses the principle that all men and women are equal under the law,” Mr. Kane said. “During the housing bubble and the economic meltdown that the bursting bubble brought about, the interests of domestic and foreign financial institutions were much better represented than the interests of society as a whole.”

THIS inequity must be eliminated, Mr. Kane said, especially since taxpayers will be billed for future bailouts of large and troubled institutions. Such rescues are not really loans, but the equivalent of equity investments by taxpayers, he said.

As such, regulators who have a duty to protect taxpayers should require these institutions to provide them with true and comprehensive reports about their financial positions and the potential risks they involve. These reports would counter companies’ tendencies to hide their risk exposures through accounting tricks and innovation and would carry penalties for deception.

“Examiners would have to challenge this work, make the companies defend it and protect taxpayers from the misstatements we get today,” Mr. Kane said in an interview last week. “The banks really feel entitled to hide their deteriorating positions until they require life support. That’s what we have to change. We must put them in position to be punished for an intent to deceive.”

Given the degree to which financial regulators are captured by the companies they oversee, prescriptions like Mr. Kane’s are going to be fought hard. But the battle could not be more important; if we do nothing to protect taxpayers from the symbiotic relationship between the industry and their federal minders, we are in for many more episodes like the one we are still digging out of.

EVALUATING bailout programs like the Troubled Asset Relief Program and the facilities extended by the Fed against “the senseless standard of doing nothing at all,” Mr. Kane testified, government officials tell taxpayers that these actions were “necessary to save us from worldwide depression and made money for the taxpayer.” Both contentions are false, he said.

“Bailing out firms indiscriminately hampered rather than promoted economic recovery,” Mr. Kane continued. “It evoked reckless gambles for resurrection among rescued firms and created uncertainty about who would finally bear the extravagant costs of these programs. Both effects continue to disrupt the flow of credit and real investment necessary to trigger and sustain economic recovery.”

As for making money on the deals? Only half-true, Mr. Kane said. “Thanks to the vastly subsidized terms these programs offered, most institutions were eventually able to repay the formal obligations they incurred.” But taxpayers were inadequately compensated for the help they provided, he said. We should have received returns of 15 percent to 20 percent on our money, given the nature of these rescues.

Government officials rewarded imprudent institutions with stupefying amounts of free money. Even so, we are still in economically stormy seas. Doesn’t that indicate that it’s time to try a different tack?


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Israel planning for the worst

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Stagflation Is Knocking On The Door

Investopedia defines stagflation as a condition of slow economic growth and relatively high unemployment accompanied by a rise in prices, or inflation.

Given the economic data reports that I have observed thus far in 2011 (not just over the past two weeks), I believe that it is fair to say that stagflation is knocking on the door.
To understand my current stagflation forecast, consider the numerous data points that point to a slow, future economic growth and a stalling economic recovery:
UNEMPLOYMENT: A national U-3 unemployment rate that remains above 9% and a national U-6 unemployment rate (which counts not only people without work seeking full-time employment as seen in the more publicized U-3 rate, but also counts marginally attached workers and those working part-time for economic reasons) that remains above 16%.
INITIAL JOBLESS CLAIMS: A continued trend of weekly initial jobless claims of 400,000 or greater. The four-week moving average of the key data point currently stands at 402,500 according to the United States Department of Labor. Many analysts believe that claims below the 400,000 point towards a stable labor market. Hence, reports that show claims below 400,000 are generally received positively by the market and we have only seen 8 reports showing claims below 400,000 in a given week over the first 33 weeks of 2011.
GDP GROWTH: Gross Domestic Product (GDP) growth rates that have been revised downward for both the first and second quarters; 0.40% and 1.30% respectively, of 2011. According to Trading Economics.com, GDP Growth in the U.S. has experience a quarterly average gain of 3.28% from 1947 until 2011.
HOUSING: The National Association of Realtors (NAR) recently reported a 3.5% month-to-month fall in existing home sales and suggested that 2011 is shaping up to be the worst year in terms of mortgage applications for new home purchases in over 14 years. Perhaps even more concerning, according to the NAR, 16% of all housing contracts that were signed in July were cancelled. This rate is above the historic average of 10% and suggests to me that the few buyers that were in the market perhaps got cold feet given the heighted concerns with respect to the economy.
PHILLY FED SURVEYS: One part of the August 2011 Business Outlook Survey conducted by the Federal Reserve Bank of Philadelphia showed that the business activity index for the Mid-Atlantic region dropped to -30.7 from +3.2 in August. The reading was well below economists’ expectations for a reading of +3.7 and was the biggest month-over-month drop in the index since October of 2008 and the index now stands at its lowest level since March of 2009. The plunge in the headline index of the Philly Fed survey, to -30.7 in August from +3.2 in July, was simply awful. It leaves it at a level last seen in March 2009, when the US was last in recession. The new orders index plunged (-26.8 vs. +0.1), the shipments index dropped (-13.9 vs. +4.3) and the employment index fell (-5.2 vs. +8.9).

Combine these anemic, economic growth highlights with rising commodity prices; such as wheat, oil, gasoline and precious metals, and recent reports of an increase in core inflation readings, and it is hard to argue that stagflation is not upon us or at least worthy of further consideration. In my view, even if demand for commodities from Developed Markets softens for the balance of the year, demand for commodities from Emerging Markets should help to compensate and prevent any material reductions in commodity prices.

I would also contend that there is a higher probability of the economy entering a period of stagflation than entering a double-dip recession as I still believe that the U.S. truly has not emerged from the most recent “Great Recession.” Hence, a continued lack of economic growth would suggest a continuation of the current recession as opposed to a dip back into a new recession.

As opposed to allowing fear and emotion to drive critical investment decisions, we, at Hennion & Walsh, believe that investors would be wise to revisit their asset allocation strategies with their financial advisors and look to incorporate a wide range of asset classes, such as Domestic Equities, International-Developed Market Equities, International-Emerging Market Equities, Fixed Income, Alternative Investments and Cash & Cash Equivalents, as appropriate, to help ensure that their portfolios are structured to both accommodate an economy leaning towards a period of stagflation and to weather anticipated periods of further market volatility.