Mish's Global Economic Trend Analysis

Obama's Secret Letter to Iran About ISIS: Good Idea? Foolish Cooperation? Hidden Agenda?
Riots in Brussels: 100,000 Protest Austerity, Overturn Cars, Throw Fire Bombs; Wherefore Art Thou Austerity?
"Whatever It Takes" Stage Two; Headwinds Explain Why Draghi Will Fail This Time
Prepare for War: Obama Asks Congress for ISIS War Authorization; Republican Hawks Have War Plan Prepared; Clinton-McCain?!

Obama's Secret Letter to Iran About ISIS: Good Idea? Foolish Cooperation? Hidden Agenda?

Posted: 06 Nov 2014 06:14 PM PST

Big splash in the news today following the Wall Street Journal report Obama Wrote Secret Letter to Iran's Khamenei About Fighting Islamic State.

Obama's exact letter has not been published (yet), but the subject matter includes shared interests in combating ISIS coupled with hope of progress on nuclear talks.

The Journal reports "cooperation on Islamic State was largely contingent on Iran reaching a comprehensive agreement with global powers on the future of Tehran's nuclear program by a Nov. 24 diplomatic deadline" according to correspondents briefed on the letter.

As with Russia more recently, the sanctions against Iran did not work, and will never work. Sanctions in general don't work, period.

The Republican response is as one might expect. Worse yet, Senators Mark Kirk (R., Ill.) and Robert Menendez (D., N.J.) introduced bipartisan legislation to intensify sanctions.

"The best way to prevent Iran from getting a nuclear weapon is to quickly pass the bipartisan Menendez-Kirk legislation—not to give the Iranians more time to build a bomb," Mr. Kirk said Wednesday.

Good Idea to Open Dialog with Iran?

Was Obama's letter to Iran a good idea? Of course it was. Dialog is generally a good idea. Obama's letter opening up discussions with Iran is one of the few things he has done right.

Of course, this dialog comes on the heels of unwise sanctions, so all it does is get us back to where we should have been years ago.

In the meantime though, the odds of success have improved dramatically.

The Journal reports "U.S.-Iran relations have thawed considerably over the past year, following the election of President Hasan Rouhani. He and Mr. Obama shared a 15-minute phone call in September 2013, and Messrs. Kerry and Zarif have regularly held direct talks on the nuclear diplomacy and regional issues."

Foolish Cooperation

Instead of viewing dialog as an opportunity, Republican and Democrat economic illiterates attacked Obama.

The result was foolish bipartisan cooperation culminating in Menendez-Kirk legislation.

Lovely. Rest assured whenever Democrats and Republicans in Congress act fast on anything, the result can never be good.

Race is On

The race to snatch defeat from the jaws of victory is on. Can Obama secure a deal with Iran before November 24? Will the deadline be extended?

Will the above questions be moot thanks to unusual bipartisan cooperation?

Hidden Agenda?

Behind all the hyperbole, one has to wonder if Obama has a hidden agenda.

If sanctions on Iran lift, the price of crude will likely sink further. In turn, that would hurt Russia pretty badly.

For further discussion, please see Ruble Slide Continues; Russia Forced to Abandon Currency Intervention as Reserves Dwindle.

Right for Wrong Reason?

Obama and McCain have been somewhat united on sanctions on Russia, with the McCain accusing Obama of not doing nearly enough.

So even if Obama is doing the right thing, I have to wonder if he is doing the right thing for all of the right reasons.

Regardless, the right thing is the right thing, and for that, Obama sees bipartisan legislation in the opposite direction.

Such is the extremely sorry state of US foreign policy.

History Lesson on Sanction Criminality

Many will disagree with my thoughts on dialog with Iran and sanctions. They are wrong.

One of the best posts I have ever seen on the idiocy of sanctions was a guest post on ZeroHedge, whose origin is the Tanosborn Online article Sanctions: Diplomatic Weapons of Mass Criminality.

I highly encourage everyone to click on and read link in entirety.

Here are a few snips:

Obama finds himself looking at Russia in much the same way as FDR did looking at Japan in 1941. In July 1941 the US imposed an oil embargo on Japan, demanding that it get out of China, de facto curbing any hegemonic aspirations or influence that nation might have or hope to have in Asia. The economic reality forced by the American sanctions on Japan left the Land of the Rising Sun with just two options in the summer-fall of 1941: surrender its aspirations or resort to war.

Seventy-three years later, America once again inflicts economic sanctions on another nation, Russia; a nation solely trying to defend its borders, perhaps also exercising the natural desire to influence, help create economic synergy in the Eurasian geopolitical region. Those aspirations of self-preservation and economic success should be judged at face value, and not antagonistically, as the US is now doing with extreme, venomous propaganda.

Sanctions are just another form of warfare, where the weapons can inflict destruction and pain, and be just as explosive.

One thing we can be sure of in modern times: sanctions will prove to yield long term ill will, in many cases providing multiplying seeds of vengeance and terrorism which we may not confront now but our children and their children certainly will. America has for decades plowed and seeded hostility with sanctions in fertile grounds where terrorism will thrive and come back to haunt us. And, foolishly, the US continues this idiotic practice.

America does not need a Sanctioner-in-Chief enacting foolish edicts from the White House, but a leader in international cooperation, a leader that will safeguard this nation's safety and legitimate interests, but also respect other nations… and their legitimate interests.

As of right now, the US has de facto declared war in Russia… and, unless Obama lifts the sanctions now in-place, the economic fate in Russia will soon likely determine that nation's willingness to bet all its nuclear chips and call America's bet at the political international poker table.

Sanction Idiocy

If you think I am wrong about sanctions, please read the article again and again until you comprehend. It provides a much needed history lesson on the idiocy of economic sanctions.

One more point: Events today have nothing in common with Hitler's "Final Solution" including a master race and extermination of Jews, so spare me the comparisons about Chamberlain ceding territory for peace.

Events today are a direct result of US meddling in Ukraine internal affairs with the usual bad consequences.

I strive to change opinions of others who see things differently, and Sanctions: Diplomatic Weapons of Mass Criminality is one of the best written arguments against sanctions I have ever seen.

Want more on the idiocy of sanctions? I can oblige: Mish Sanction Articles.

By the way, I had written everything above that snip and everything that follows before I read the article. My position on sanctions has not changed one bit as my previous articles show.

Question of Degree

Without a doubt, Obama is a warmonger. He is just not as big of a warmonger as Republican Senators McCain and Kirk, or Democrats Hillary Clinton and Senator Robert Menendez.

Unfortunately, the mid-term elections do not bode well for peace. Nor do prospects of Hillary winning the 2016 Democratic nomination.

Clinton-McCain?!

Hillary is every bit as bad as McCain. Political aspirations demand that position. They are a pair of like minds, made in hell, differing only on some social agendas.

As I said, Prepare for War: Obama Asks Congress for ISIS War Authorization; Republican Hawks Have War Plan Prepared; Clinton-McCain?!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Riots in Brussels: 100,000 Protest Austerity, Overturn Cars, Throw Fire Bombs; Wherefore Art Thou Austerity?

Posted: 06 Nov 2014 01:43 PM PST

In Search of Austerity

In spite of the fact there has been little-to-no austerity to speak of in Europe, or anywhere else in the world for that matter, (rising government debt proves that claim), France moans about austerity, Spain moans about austerity, Italy moans about austerity, and economists like Krugman moan about austerity.

There is certainly no austerity in Belgium either. Nonetheless, the BBC reports 100,000 Protest Austerity in Brussels.

Riot police have fired tear gas and water cannon during clashes with demonstrators as at least 100,000 people marched through Brussels in the first mass protests against government austerity measures.

Protesters overturned cars and threw paving stones and fireworks during the protest against economic reforms that will extend the pension age, contain wages and cut public services.

The government says the austerity measures are essential to keep the budget deficit within European Union constraints.

In the above link, the BBC has a nice video of overturned cars and trucks. The riots are actually far worse as the following images show.

Gallery of Riot Images

Please check out the Sky News Gallery of Riot Images Here are two of six images.

Wherefore Art Thou Austerity?

Austerity, austerity, wherefore art thou austerity?

Austerity is a curious thing. It's nowhere to be found. Nonetheless, economists and governments constantly complain about it. Citizens in Greece, Spain, France, and Belgium have taken to the streets to protest it.

Today we have riots in Brussels. I sense this is just the start of the protest against austerity even though it's nowhere to be found.

At the heart of the matter is a lack of jobs and rising income inequality. Austerity caused neither. Central banks and government policies did.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Whatever It Takes" Stage Two; Headwinds Explain Why Draghi Will Fail This Time

Posted: 06 Nov 2014 11:55 AM PST

"What's it all about Alphie" is a sing-along that most have heard.

Take out the word "Alphie" and substitute "Draghi" and the answer is "Assuage Investors" in yet another can-kicking exercise.

ECB president Mario Draghi hopes that if he continues with his kick-the-can tactics long enough, that something good will eventually happen.

Hope is really all the ECB has.

Meanwhile, Draghi Reinforces ECB Stimulus Momentum to Assuage Investors.

Having already cut interest rates to record lows and saying they can go no lower, Draghi is now focused on boosting the ECB's balance sheet. He told reporters today that he expects to increase assets back toward March 2012 levels. That's 3 trillion euros, or about 1 trillion euros [$1.2 trillion] more than the current level.

The ECB has issued long-term loans to banks and started buying covered bonds in the hope of flooding the economy with enough liquidity to ease credit constraints. Purchases of asset-backed securities are due to start this month.

"We are quite confident that the impact on our balance sheet size will be adequate, will be significant, will be sizable," Draghi said. "The main message is that our balance sheet will keep expanding in the coming months and will continue expanding while the balance sheets of other central banks is bound to contract."

Berenberg Bank economist Christian Schulz said he sees a 60 percent chance the ECB will enter the 1.4 trillion euro market for investment grade non-financial corporate bonds next month.

"Whatever It Takes" Revisited

Draghi's famous "Whatever it takes ... And believe me, it will be enough" statement in July of 2012, resolved the Eurozone sovereign bond crisis (for now) (see Eurozone Target2 Imbalances Rise Again, Led by Italy), but it did not spur lending.

His move to boost the balance sheet of the ECB will not spur lending either. Headwinds explain why.

Headwinds

No structural problems in the eurozone have been fixed.
A lower Euro may help exports in general but it will do nothing to help the competitiveness of Spain, Italy, or France as compared to Germany.
Europe is a demographic mess. With an aging population and low birthrates, pension promises cannot possibly be met.
France and Germany are increasingly at odds.
The rise of Marine LePen in France, Beppe Grillo in Italy, and euroscepticism in general elsewhere.
The UK threatens to leave the EU.
There has been little real reform or austerity anywhere. Government spending accounts for 56% of French GDP. France, Italy and Spain fail year after year to meet budget requirements.
European banks are way over-leveraged, especially in so-called risk-free sovereign bonds. No one really believes the latest round of stress tests.
The global economy, especially China is slowing. Export growth will slow accordingly.
There is no juice, only risk associated in the ECB buying sovereign government bonds.

Let's explore point number 10 in more detail starting with a look at government bond yields.

10-Year Government Bond Yields

Spain: 2.16%
France: 1.19%
Italy: 2.38%
Germany: 0.83%
US: 2.37%.

Note that nearly all of Europe has lower borrowing costs than the US.

Spain 10-Year Bond Yield

click on chart for sharper image

Question of the Day

If a decline in yield from 7.74% in July of 2012 to 2.16% today did not spur lending, then why would any further decline, even to 0% spur lending?

The answer is "It Won't".

If you think otherwise, please note that German bonds have negative yields in every timeframe two years or shorter.

Germany 2-Year Yield

As remarkable as it may sound, you actually have to pay money (receive negative interest rates) for the privilege of lending money to Germany for two years.

Yet, economic dunderheads want Draghi to buy sovereign bonds.

Should the ECB do that (and it probably will), the ECB faces two risks.

European sovereign bonds are already way overpriced thanks to "Whatever it Takes" phase 1.
Buying bonds could trigger a constitutional crisis in Germany. Such actions are against Germany's constitution and the treaties that created the eurozone.

Of course, in these "Whatever It Takes" moments, no one gives a damn about constitutions, treaties, or anything else.

Worse yet, economic fools embark on policies that cannot possibly work even if they were legal. The higher inflation Draghi seeks is actually counterproductive! Europe's demographics make the matter worse.

For a discussion of that absolute absurdity in seeking higher inflation, I have some suggested reading.

Suggested Reading

Sisyphean Fed Struggle to Create Inflation

Here are a few snips from my Monday commentary Sisyphean Fed Struggle to Create Inflation.

My comments are in response to a statement made by Bill Gross in his Janus Investment Outlook that "simple math" shows the "real economy needs money printing".

Gross needs to replace "simple math" with "exponential math" coupled with the fact central banks can (for a while) target prices in general, but they cannot target wages or the prices they want.

Back to the Drawing Board

The Fed expanded money supply by $4 trillion dollars and the CPI is up less than 2%!

What's the Fed going to do for an encore when the global economy slumps, US jobs with it, and prices of goods services, and assets sink?

Expand money supply by $8 trillion? $16 trillion? $32 trillion? Buy equities? Buy more than 100% of debt issuance like Japan?

How nuts does it get?

Gross concludes with "The real economy needs money printing". I suggest Gross go back to the drawing board and come up with a different answer.

With Japan, Europe, and the US central banks all in economic wonderland, a currency crisis of immense proportions and a breakup of the eurozone are on deck.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Prepare for War: Obama Asks Congress for ISIS War Authorization; Republican Hawks Have War Plan Prepared; Clinton-McCain?!

Posted: 06 Nov 2014 12:37 AM PST

Prepare for war. Where? Syria, Iraq, Russia, Iran, China, anywhere and everywhere.

Warmonger in chief, senator John McCain wants troops in Syria, arms for Ukraine, an examination of "China's continued encroachment in the south China Sea", and an investigation into warming relations with Iran.

McCain is set to take over as head of the Senate Armed Services Committee.

Expect the other party of war, the Democrats, to cooperate. On Wednesday, Obama Asked Congress to Authorize Islamic State War.

After insisting for months that he has all the authority he needs to launch the airstrikes already under way against the radical Sunni group, Obama reversed course and called for a new authorization for the use of military force a day after his party lost control of the Senate.

"The world needs to know we are united behind this effort and the men and women of our military deserve our clear and unified support," Obama said yesterday at a White House news conference.

The Senate Foreign Relations Committee will hold hearings on the U.S. role in Iraq and Syria beginning next week, Senator Robert Menendez, the panel's chairman, said in a statement.

The New Jersey Democrat has said a congressional authorization should be "appropriate in scope and duration to meet the threat and sustain the fight" without having an "indefinite duration."

Obama has approved airstrikes against the extremists who have seized swaths of Iraq and Syria, and he's deployed U.S. military teams to assess and advise the Iraqi military.

The administration has said it's carrying out the offensive under the use-of-force authorization Congress approved after the Sept. 11, 2001, terrorist attacks, as well as under his constitutional powers as commander in chief.

Bill to Authorize Perpetual War

President Obama previously said that he does not need authorization to strike ISIS because of his "constitutional powers as commander in chief".

Excuse me for asking but what powers are those? Since when does the president get to declare war?

I guess it's time to formalize the transfer of power to declare war from Congress to the president.

Menendez wants a bill "appropriate in scope and duration to meet the threat and sustain the fight" without having an "indefinite duration."

Translation: Menendez wants an indefinite duration, an open ended agenda, and no cost limits. McCain will surely see the bill gets revised that way.

No president would ever refuse to sign such a bill. And when it happens, the power to declare war will formally be handed over from Congress to the president. Not that it matters in the least. Presidents do what they want, when they want.

Republican Hawks Have War Plan Prepared

The American public surely does not want war, and we cannot afford more wars either. But who gives a damn about that?

Multiple wars are now baked in the cake as Republican Hawks Already Have a War Plan for ISIS, Ukraine, and Obama.

The Republican victory in the 2014 midterms is less than 24 hours old. But already, the hawkish wing of the GOP is planning an ambitious battle plan to revamp American foreign policy: everything from arming Ukraine's military to reviewing the ISIS war to investigating the U.S. intelligence community's role in warming relations with Iran.

In an interview Wednesday, Sen. John McCain, the incoming chairman of the Senate Armed Services Committee, said he has already discussed a new national security agenda with fellow Republicans Bob Corker and Richard Burr, the likely incoming chairmen of the Senate Foreign Relations Committee and Senate Select Committee on Intelligence.

"Burr and Corker and I will be working closely together on everything," McCain said. "For example, arms for Ukraine's [government], examination of our strategy in the Middle East, our assets with regard to [Russian President Vladimir] Putin in the region, China's continued encroachment in the south China Sea."

McCain said his first order of business as chairman of the Senate Armed Services Committee will be to end the budget rule known as sequestration, which requires the U.S. military to cut its budget across the board. "I want to start an examination of our policies in the world and then find out whether we have the capability to meet these expectations," McCain said.

Rep. Devin Nunes, the Republican likely to replace Rep. Mike Rogers as the next chairman of the House Intelligence Committee, told The Daily Beast Wednesday that he would like to begin digging into the administration's Iran talks—in particular, the role played in those talks by the U.S. intelligence community. "There is going to be real scrutiny from the House and Senate in what's taken place on the entire Obama administration's tenure dealing with the Iranians," Nunes said.

On Wednesday Obama said he would ask Congress to vote on the new war against ISIS during the lame duck session of Congress that starts in December.

"I think it's time for an AUMF [Authorization for the Use of Military Force], I do," McCain said. "The one passed after 9-11 specifically talks about the perpetrators of the 9-11 attacks and ISIS has exceeded that definition."

Budget-hypocrite McCain never says how he is going to pay for these wars. McCain even voted for sequestration.

To be fair, he called that his worst vote ever. But also to be fair, he should say how we pay for all this.

McCain Prefer Hillary Over Rand Paul?

Curiously, in a 2013 New Republic interview, McCain said "Tough Choice" Between Hillary Clinton and Rand Paul should those be the two nominees.

McCain answered "tough choice", when asked who he would support in 2016 should it come down to Hillary Clinton and Rand Paul.

Senior editor Isaac Chotiner who conducted the interview stated "in a way he seemed to be joking a little bit, but he didn't correct it at all."

Here's the video with Chotiner's explanation.

Clinton-McCain Axis

Said McCain of Hillary when asked about her performance as Secretary of State "I think she did a fine job. She's a rock star. She has, maybe not glamour, but certainly the aura of someone widely regarded throughout the world."

Distancing herself from president Obama, Hillary has since recommended nearly the same strategy as McCain when it comes to dealing with Syria and ISIS.

Clinton-McCain 2016 Anyone?

So which is the party of war? They both are.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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