Mish's Global Economic Trend Analysis

Former Australia Prime Minister Chastises EU on Securing Borders, Economic Migration; Mish for President Review
Dirty Secrets, Hush Money, Conviction of Former US House Speaker Dennis Hastert; Was Justice Served? Could Gold or Bitcoin Have Helped?
Courage to Act; Reflections on Fed Hubris; What if Whatever it Takes is Not Enough? Fed Troika?
3rd Quarter Advance GDP Estimate +1.5%; December Hike Odds Up to 46.5%
Final 3rd Quarter GDPNow Forecast vs. Consensus Estimates Ahead of 3rd Quarter GDP Release

Former Australia Prime Minister Chastises EU on Securing Borders, Economic Migration; Mish for President Review

Posted: 29 Oct 2015 10:58 PM PDT

In a speech I almost completely agree with, former Australia prime minister Tony Abbott chastised the EU in an address at the Second Annual Margaret Thatcher Lecture in London on October 27, 2015.

Tony Abbott told the EU to shut its borders because "a country that cannot control its borders starts to lose control of itself".

The Sydney Morning Herald has the Transcript of Tony Abbott's Controversial Speech at the Margaret Thatcher Lecture. Here are a few select passages, emphasis mine.

All countries that say "anyone who gets here can stay here" are now in peril, given the scale of the population movements that are starting to be seen. There are tens – perhaps hundreds – of millions of people, living in poverty and danger who might readily seek to enter a Western country if the opportunity is there.

Who could blame them? Yet no country or continent can open its borders to all comers without fundamentally weakening itself. This is the risk that the countries of Europe now run through misguided altruism.

On a somewhat smaller scale, Australia has faced the same predicament and overcome it. The first wave of illegal arrivals to Australia peaked at 4000 people a year, back in 2001, before the Howard government first stopped the boats: by processing illegal arrivals offshore; by denying them permanent residency; and in a handful of cases, by turning illegal immigrant boats back to Indonesia.

The second wave of illegal boat people was running at the rate of 50,000 a year – and rising fast – by July 2013, when the Rudd government belatedly reversed its opposition to offshore processing; and then my government started turning boats around, even using orange lifeboats when people smugglers deliberately scuttled their vessels.

It's now 18 months since a single illegal boat has made it to Australia. The immigration detention centres have-all-but-closed; budget costs peaking at $4 billion a year have ended; and – best of all – there are no more deaths at sea. That's why stopping the boats and restoring border security is the only truly compassionate thing to do.

Now, while prime minister, I was loath to give public advice to other countries whose situations are different; but because people smuggling is a global problem, and because Australia is the only country that has successfully defeated it – twice, under conservative governments – our experience should be studied.

In Europe, as with Australia, people claiming asylum – invariably – have crossed not one border but many; and are no longer fleeing in fear but are contracting in hope with people smugglers. However desperate, almost by definition, they are economic migrants because they had already escaped persecution when they decided to move again.

Our moral obligation is to receive people fleeing for their lives. It's not to provide permanent residency to anyone and everyone who would rather live in a prosperous Western country than their own. That's why the countries of Europe, while absolutely obliged to support the countries neighbouring the Syrian conflict, are more-than-entitled to control their borders against those who are no longer fleeing a conflict but seeking a better life.

This means turning boats around, for people coming by sea. It means denying entry at the border, for people with no legal right to come; and it means establishing camps for people who currently have nowhere to go.

It will require some force; it will require massive logistics and expense; it will gnaw at our consciences – yet it is the only way to prevent a tide of humanity surging through Europe and quite possibly changing it forever.

We are rediscovering the hard way that justice tempered by mercy is an exacting ideal as too much mercy for some necessarily undermines justice for all.

The Australian experience proves that the only way to dissuade people seeking to come from afar is not to let them in. Working with other countries and with international agencies is important but the only way to stop people trying to gain entry is firmly and unambiguously to deny it – out of the moral duty to protect one's own people and to stamp out people smuggling.

Rock Solid Speech

There are parts of Abbott's speech I disagree with, but everything above is rock solid.

Mish Proposal

The selected text of Abbott's speech is remarkably similar to my own proposal made on Wednesday in Austria Announces Fence With Slovenia; Irony of German Whine; Cascading Fences; Mish Proposed Strategy.

Origin of the Crisis

The origin of this mess is two-fold.

The US overthrow of Saddam Hussein that directly led to the power vacuum and the creation of ISIS
US support for Al Qaeda rebels in the Syrian civil war also destabilized Syria creating millions of refugees in the war-torn country.

The free handouts from Germany, Sweden and others bought the crisis to where we are now. It would help if Syria was stable, even under a leader we do not like. But Obama will have no part of that.

Mish Proposed Strategy

Block the border between Greece and Turkey
Stabilize Syria, even under Assad, but also seek promises of free Syrian elections
Eliminate or greatly reduce the free handouts
Return economic refugees to point of entry
Give Turkey some aid for US/UK role in this mess

US and EU bureaucrats have done none of the above.

Abbot made his speech on October 27. I made my proposal on October 28, but I was not aware of the lecture or Abbott's speech when I wrote my proposal.

Changes

After hearing Abbott's speech would I change anything? Yes. I would change point 3 to "Eliminate the free handouts entirely."

Unrelated to Abbott's speech is a point I intended to make, but didn't.

I now offer point 6: Halt all US support for alleged "moderate" Al Qaeda rebels. Instead, arm the Kurds now fighting ISIS.

The Kurds are the only ones doing a reasonable job against ISIS. US backed "moderates" have handed their weapons over to ISIS and in some cases joined ISIS outright.

Point 6, in conjunction with point 2 will help stabilize both Iraq and Syria, and that is something that is desperately needed.

Mish for President Review

With that six point foreign policy proposal, I once again throw my hat into the Republican debate.

For the rest of my proposals, please see Mish for President: Officially Throwing My Hat Into the Ring; 11 Questions, 11 Answers.

Mike "Mish" Shedlock

Dirty Secrets, Hush Money, Conviction of Former US House Speaker Dennis Hastert; Was Justice Served? Could Gold or Bitcoin Have Helped?

Posted: 29 Oct 2015 02:11 PM PDT

Reuters reports Ex-House Speaker Hastert Pleads Guilty in Hush-Money Case.

Former U.S. House Speaker Dennis Hastert pleaded guilty on Wednesday to a federal financial crime in a hush-money case stemming from allegations of sexual misconduct, marking the dramatic downfall of a once powerful politician.

In exchange for the guilty plea, federal prosecutors recommended a sentence of zero to six months imprisonment, although the judge could sentence Hastert to up to five years in prison and fine him $250,000.

Hastert, 73, pleaded guilty to one count of "structuring" - withdrawing funds from bank accounts in amounts below $10,000 to evade bank reporting rules on large cash movements. Those rules exist to detect money laundering.

In the agreement, Hastert admitted to paying $1.7 million in cash to someone he had known for decades to buy that person's silence and compensate for past misconduct toward that individual.

Prosecutors did not spell out what the misconduct was, but unnamed law enforcement officials have told media that it was sexual and involved someone Hastert knew when he was a high school teacher and coach in his hometown of Yorkville, Illinois in the 1960s and 1970s.

In the plea agreement Hastert admitted that he reached an agreement in 2010 with the individual who was a victim of his misconduct, to pay a total of $3.5 million in hush money.

From 2010-2012 Hastert made 15 withdrawals of $50,000 each from a number of banks, meeting with the individual every few months to pay the person an installment.

In April 2012, bank employees asked Hastert for an explanation of the withdrawals and told him they had to report large transactions. After that, he started to withdraw in lower increments. From mid-2012 until late 2014 he made 106 withdrawals of amounts under $10,000 while he kept paying the unnamed individual every few months, according to the plea agreement.

If there were any sex abuse it would not lead to criminal charges because the statute of limitations ran out long ago.

"This is one more time where a person with power and authority gets to keep dirty secrets hidden," said Barbara Blaine, founder of SNAP, an advocacy group for survivors of clerical abuse.

Hastert was the longest-serving Republican speaker in the history of the House. He left Congress in 2007 and became a lobbyist and consultant.

Sleazebag Hypocrite

Dennis Hastert is without a doubt a sleazebag of disgustingly high magnitude. He is also a flaming hypocrite.

Hastert was among the Republican leaders who hounded Bill Clinton for his sexual misconduct in the White House. Hastert voted to impeach Clinton.

It is very tough to defend sleazebag hypocrites, but one still must ask the key question:

Was justice served?

MarkeyWatch author Brett Arends offers this opinion: Why Dennis Hastert's Conviction is an Outrage.

If you aren't outraged by what just happened to "disgraced" former House Speaker Dennis Hastert, you're not paying attention. No, it doesn't matter if you think he's a raging hypocrite. No, it doesn't matter even if you think he's a personal or political sleazebag.

Dennis Hastert, now age 73, faces possible jail time after pleading guilty this week to making a series of illegal bank withdrawals and evading federal financial regulations. He denied a second charge of lying to federal investigators about it.

His crime? Withdrawing $1.7 million of his own money from his own bank accounts. His own money. His own bank accounts.

There are reports he was covering up an accusation of sexual misconduct with a former student dating from when he was a high school wrestling coach — about 30 years ago. The person demanding the payments may have been the student. The reports are unconfirmed and we don't have more details.

Hastert is not facing jail time for the sexual conduct, if any. No charges have been brought or answered. He is facing jail because he took his own money out of his own bank accounts in order to pay what amounts to blackmail.

When did we start supporting blackmailers in this country? When did that become OK? Did I miss the memo?

Is it wrong for me to point out that so far not one Wall Street crook has faced a day of jail time for stealing the country's money, but someone faces jail time for handling his own cash?

The $10,000 limit hasn't been changed in decades. Once it was a lot of money. Now it's not. Oh, and to make the law even more ridiculous, it's actually also illegal for you to get around it by acting legally. No, I'm not kidding. If you avoid the $10,000 limits by withdrawing, say, lots of $5,000 installments, they can still send you to jail.

One of the ironies is that Hastert could have avoided all of this if he'd simply paid his blackmailer in gold coins instead of greenbacks.

Gold is just as anonymous as cash. But it is essentially exempt from these financial regulations. Hastert could have called up any reputable gold dealer and purchased $50,000 worth of gold Eagles or Buffaloes or Krugerrands at a time, and no one would have asked any questions. All he then had to do was give the coins to his blackmailer, who could then call up a gold dealer and sell them.

I'm highly skeptical of gold's merit as an investment or an inflation hedge, but as a mechanism for avoiding Big Brother, it is hard to beat.

Speculation

After all these years, someone would have to have mighty strong evidence to blackmail a person for $3.5 million.

In my opinion, a blackmail of such magnitude would require written evidence (ex. signed love notes to a student), and possibly an out-of-wedlock child.

That's just my speculation, albeit quite logical. But even if so, one can ask: Why are we going after people spending their own money, but not those engaged in illegal blackmail?

Could Gold or Bitcoin Have Helped?

Arends wrote "gold is essentially exempt from these financial regulations."

Well, not really. Arends is wrong.

There are gift laws and gift taxes. The IRS explains in Frequently Asked Questions on Gift Taxes.

What is considered a gift?

Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

Pay particular attention to the the notion of getting "one's money's worth in return".

The gift exclusion was $11,000 between 2002-2005, $12,000 between 2006-2008, $13,000 between 2009-2012, and $14,000 since 2013.

Who pays the gift tax?

The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead.

Thus, even if those hush payments were considered a "gift", Hastert violated gift laws unless he could convince the court that by hushing someone up, he got his "money's worth".

If Hastert did indeed get his "money's worth" then it is the recipient, not Hastert who violated tax laws.

There are a lot of questions here: Is blackmail a gift, or payment for services? Was justice served? If so, for the right reason? If blackmail is payment for services, why aren't they going after the recipient?

Finally, gold could have helped, not in a legal sense, but rather in the sense it likely would not have been caught.

Mike "Mish" Shedlock

Courage to Act; Reflections on Fed Hubris; What if Whatever it Takes is Not Enough? Fed Troika?

Posted: 29 Oct 2015 11:49 AM PDT

This past week, Ben Bernanke was in London promoting his book "Courage to Act". Today, Albert Edwards at Societe Generale pinged me with his thoughts.

Edwards writes ...

Ben Bernanke is in London to publicise his book 'The Courage to Act'. Although the various open events would have been fascinating, I thought it best not to attend. I would not have been able to control myself. In a repeat of the protest at the April ECB press conference I would have probably stormed the stage, thrown confetti money at him and been unceremoniously dragged out by security. But speaking to people who were there and reading the pre-vetted Q&A on the web, reminded me just how overconfident central bankers are to their very core – even after their actions are clearly ruinous. Bernanke again paraded his lack of insight of the Fed's leading role in causing the 2008 crisis. Indeed he was self-congratulatory about the Fed's success in averting another Great Depression, not accepting that they almost actually caused it! Central bankers are doomed to repeat the same mistake until they acknowledge their role in the last crisis and stop blaming everybody else. Unfortunately it now appears from recent comments that ECB President Mario Draghi is also demonstrating the same hubris. Indeed it is becoming clear that ECB QE is already failing.

It should not be forgotten that after Draghi's 2012 whatever it takes comment, he also said in the next breath "and believe me, it will be enough" in another demonstration of central bank overconfidence. Regular readers will know I have long been an extreme critic of central bank policies, particularly of the Fed and the Bank of England with their negligent pursuit of ultra-loose money policy in the mid-noughties policies that ultimately proved ruinous in the 2008 Global Financial Crisis. I believe the Fed and BoE have learned practically nothing from their previous mistakes and we are heading down exactly the same road to catastrophe as the financial markets creak and groan under the strain of QE-inspired, excess valuations. I would definitely now also put the Draghi ECB firmly in that same camp. Contrary to the Pavlovian salivations of the markets, the evidence is mounting that "whatever it takes" is not going to be enough.

Private Lending

Edwards cites private sector lending as evidence of ECB failure.

The goal of the ECB was to spur private lending and increase inflation. The ECB succeeded at neither, but it did create huge, destabilizing asset bubbles, as did the Fed.

Reader Comments

Reader Randy pinged me this morning with a question: "Have you read Bernanke's book yet? Seriously Mish, I've never witnessed someone willingly display such hubris in my life. And it's scary as hell."

No, I haven't read the book and do not intend to. I do not want one dime going to Bernanke.

Fed Troika

In a blog response to Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself? Reader John, offered these comments.

I watched Ben Bernanke today at the London Pimco Investment Summit. His comments were surprisingly frank: It takes ~80k jobs created a month to maintain unemployment, and if the two jobs reports between now and the December meeting are of the order of 150,000 or more the Fed should/will hike.

Interestingly, he was also made a number of snide remarks about the Regional Fed presidents, with an implicit shot Minneapolis Fed president at Narayana Kocherlakota. Bernanke stated that market participants should only take notice of 'the Troika' (his term, not mine) of the Chair, Vice President and NY Fed President.

In the event of another recession, Bernanke stated negative interest rates would be likely.

Stanley Fischer Vice-Chairman Background

With those comments (thanks John!), inquiring minds may be interested in the background of Stanley Fischer. On June 14, 2014 Forbes explained Why The Fed's New Vice Chairman Will Be A Disaster For the U.S. Economy.

The U.S. Senate finally confirmed former Bank of Israel governor Stanley Fischer as vice chairman of the Federal Reserve on Thursday. As the second-most influential Fed board member, Fischer will play a key role in advising and assisting Fed chairwoman Janet Yellen.

As the governor of the Bank of Israel from 2005 to 2013, Stanley Fischer earned praises for his management of Israel's economy during and after the Global Financial Crisis. In 2009, 2010, 2011 and 2012, Global Finance magazine's Central Banker Report Card gave Fischer an "A" rating. Bank of Israel was ranked the world's most efficiently functioning central bank under Fischer's leadership in 2010.

Contrary to popular belief, Israel's so-called economic strength is the byproduct of a temporary economic bubble that Fischer helped to inflate rather than the result of sound and sustainable monetary policies. Stanley Fischer is a member of the New Keynesian school of – a group that is notorious for using incredibly stimulative monetary policies (to create artificial economic growth, while virtually ignoring the existence of obvious economic bubbles and the risks of monetary policy-induced inflation.

During his tenure as governor of the Bank of Israel from 2005 to 2013, Stanley Fischer's New Keynesian policies caused the country's M1 money supply to surge by an astounding 250 percent:

Israel's money supply growth during this period caused consumer prices to increase by approximately 25 percent according to the official CPI. The Israeli public wasn't fooled by these questionable inflation figures, however, when hundreds of thousands of people flooded the streets in 2011 and 2012 to protest the soaring cost of living.

Israel experienced the largest property price increase of all OECD nations during Stanley Fischer's time as Bank of Israel governor, which has made the country's housing market more overvalued and less affordable than ever before.

The fact that rapid increases of the money supply lead to inflation and bubbles is obvious to nearly everyone but heavily indoctrinated Keynesian and neoclassical economists like Stanley Fischer, who are greatly overrepresented on the boards of central banks, unfortunately. Austrian economist Murray Rothbard may as well have been describing Israel's current economy when he stated in 1962 that "Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of 'prosperity.'"

The accolades that the international economics community have heaped on Stanley Fischer are the result of a temporary bubble-driven economic boom that will end in a crisis when it finally ends.

Hubris Coupled with Stupidity

Ben Bernanke is nothing but a self-promotional charlatan. Contrary to the title of his book, it did not take courage to act, it took courage to do nothing! It also takes courage to admit mistakes.

Bernanke failed twice.

Instead of letting excesses settle in a painful, but short-term fashion, wiping out excesses and clearing out the bank CEOs who contribute to the problem, Bernanke bailed out the banks and here we are back in an even bigger asset bubble than we had prior to the great recession.

Fed sponsored boom-bust cycles clearly have increasing amplitudes and troughs.

Does that represent "courage" or "stupidity"? I strongly suggest the latter.

Mike "Mish" Shedlock

3rd Quarter Advance GDP Estimate +1.5%; December Hike Odds Up to 46.5%

Posted: 29 Oct 2015 10:08 AM PDT

The third quarter advance (initial) GDP estimate came in at 1.5% a bit under the Econoday Consensus of 1.7%, a bit over the Atlanta Fed GDPNow Forecast of 1.1%, and well below the Blue Chip consensus of 2.1%.

Steady domestic spending helped to prop up GDP growth in the third-quarter which came in at an annualized 1.5 percent, just shy of expectations. Final sales rose a very respectable 3.0 percent in the quarter in a gain that points to underlying momentum for the fourth quarter. Both residential and nonresidential investment slowed in the third quarter with both net exports and especially inventories also pulling down GDP. The price index came in a little lower than expected at plus 1.2 percent.

Personal consumption expenditures slowed 4 tenths but are still a major highlight at a plus 3.2 percent rate. Service spending, an area insulated from global factors, continues to show solid resilience. But it was spending on durables, including vehicles, that was the strongest consumer category in the quarter. Government purchases, another area of domestic-centered spending, also contributed to the quarter's growth.

The quarter's 1.5 percent rate is only 2 tenths lower than the average growth of the prior four quarters and comes against a difficult 3.9 percent comparison in the second quarter. Not a great result but not bad either.

Final GDPNow Forecast for 3rd Quarter

December Hike Odds Up to 46.5%

This is a muddling along estimate, signifying nothing has changed. In light of the Fed's complete reversal yesterday, muddling through was enough to send the CME Fedwatch December rate hike odds to 46.5%.

click on chart for sharper image

For discussion of the Fed's complete reversal yesterday to a much more hawkish viewpoint, please see Fed Drops Risk Warnings, Opens Door for December Hike: Who's the Fed Fooling? You, the Bond Market or Itself?

Mike "Mish" Shedlock

Final 3rd Quarter GDPNow Forecast vs. Consensus Estimates Ahead of 3rd Quarter GDP Release

Posted: 29 Oct 2015 12:23 AM PDT

The initial 3rd Quarter GDP release is due at 8:30AM on Thursday. Inquiring minds may be interested in the GDPNow forecast vs. the Blue Chip estimates vs. the Bloomberg Consensus estimate.

GDPNow vs. Blue Chip Consensus

Bloomberg Econoday Consensus

GDPNow: 1.1%
Blue Chip: 2.1%
Econoday: 1.7%

If you are up in time, place your bets.

Bear in mind, GDP is so heavily revised, we will not know the true winner for another two to three months at the earliest. The "preliminary" winner will be announced at 8:30 AM. Bets taken until 8:26:30.

Mike "Mish" Shedlock

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Thursday, October 29, 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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