Week in Review

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Week in Review

08/10/2013

For the week 8/5-8/9

Washington and Wall Street

I’m going to spend just a little time on economic news this go ‘round because, as I’ve been warning, foreign policy, or a lack thereof on the part of the Obama administration, is increasingly going to make its way back into the conversation whether Wall Street likes it or not.

It would seem the markets are largely on hold until the next meeting of the Federal Reserve’s Open Market Committee, Sept. 17-18, when as three Fed officials said this week, it’s possible if not probable the Fed will begin to taper its $85 billion a month in bond purchases. Charles Evans, the president of the Chicago Fed, Dennis Lockhart, president of the Atlanta Fed bank, and Dallas Fed president Richard Fisher all spoke of either tapering or not ruling it out come September. We’re only five weeks away, with another key labor report and some other data points before then that could play a role in what the Fed decides to do.

A reading on the service sector this week, the ISM, came in hotter than expected at 56.0 for July after hitting a 3-year low in June. That dovetailed nicely with the prior week’s big ISM manufacturing number. And a reading on the June trade deficit showed it narrowing to the smallest gap since October 2009, which presages an upward revision to the flash estimate on second quarter GDP from last week’s reported 1.7% to 2.2% or higher. Such a number will be known before the next Fed meeting so a print of 2% or higher will make it easier for Ben Bernanke’s Band of Merry Pranksters to taper, one would think.

Jobless claims this week also came in at 333,000, with the four-week average down to 335,000, the least since November 2007. Goodness gracious. Why it’s enough to make one want to celebrate with a Shiner Bock...the premium domestic.

But it’s not all hunky-dory. We know the makeup of the labor force is atrocious, distressing and depressing. 

It’s also not like the stock market is cheap these days, with revenues for the S&P 500 companies reporting thus far for the second quarter coming in flat at best vs. year ago levels (ex-financials). Talk about pathetic. [The bottom line, on the other hand, earnings, is up around 4.5%, with a similar increase for the third quarter currently forecast.]

The thing is you need to see revenues before companies really begin to hire again.    If we do see a pickup in this category in 2014, great! Rock and roll! Though interest rates will be rising rapidly should that be the case. Just remember this, bond fund holders. Check your duration, sports fans.

One last item. On Monday, the government reports the budget picture for July and the result will very much enter the picture for the looming discussions to come when Congress returns in September. Because of some special situations, covered below, the administration may continue to catch a break. Republicans also can’t talk about $1 trillion deficits if they are more in the $600 billion to $700 billion range, as bad as that figure is. But far more on this next time.

For now, let’s talk about the latest terror threat, the move to close the embassies, and President Obama’s decision to blow off Vladimir Putin.

Once again this week we saw a perfect example of my dictum ‘wait 24 hours.’ 

We were first told that the closure of embassies and the travel alerts across the Middle East was prompted by an intercepted call between al-Qaeda leader Ayman al-Zawahiri and Nasser al-Wuhayushi, his top counterpart in Yemen, discussing Zawahiri’s wish to see a terrorist attack launched from the region. Then, days later, it seems it was actually a conference call between top leadership of al-Qaeda across the region, during which Wuhayushi was promoted to a “general manager” position, giving him control over most of the group’s smaller operations in the region. Al-Qaeda was already in place for an attack, though the target was vague, as reported by Connor Simpson of The Atlantic Wire [and Global Security Newswire.]

So Zawahiri didn’t order the attack. We learned later it was proposed by Wuhayushi. As a senior U.S. official told the Wall Street Journal, “Zawahiri’s giving his blessing for a plot is very different from ordering that plot or being able to launch a 9/11-style attack.”

Then, in the wake of American warnings, officials in Yemen claimed to have thwarted a major terrorist plot involving their oil facilities and the taking of some of the ports and other cities. As Dashiell Bennett of The Atlantic Wire points out, the claim was parroted by everyone in the world, but then experts realized how preposterous this was. For starters, al-Qaeda in the Arabian Peninsula doesn’t have the manpower to carry out such an operation, to capture large cities, though al-Qaeda does control portions of Yemen.

One thing we do know. The U.S. has sharply escalated its drone war in Yemen, with officials saying at least 34 suspected al-Qaeda types have been taken out in the past week or so, but we’ve also learned by now, how the heck do we really know? [Sorry to be increasingly cynical. But we’ve been told in the past, numerous times, that al-Qaeda’s number one bomb maker in Yemen had been killed, only to find out he’s still alive and incredibly dangerous to Western interests today.]

“Pity Edward Snowden. He was accused of revealing valuable information allowing terrorist groups to learn that the United States was eavesdropping on their communications. Today, with U.S. embassies in the region closed because electronic ‘chatter’ suggested an attack was imminent, terrorists know this by listening to American officials.

“The Obama administration has pursued leaks aggressively, except when these advance its agenda. The news that the U.S. discovered (Zawahiri’s involvement in a plot) is useful to President Barack Obama. It allows him to defend American surveillance programs, after Congress recently failed by a narrow margin to defund the National Security Agency’s program to collect metadata and other information domestically.

“That is not to say that the latest threat was contrived to serve such a purpose. Rather, the closure of several embassies was portrayed as an effort to stray on the side of caution, and members of Congress from both sides of the aisle have praised the move.

“Perhaps they were right, but the American reaction must have especially pleased Zawahiri and his acolytes. Nineteen embassies in the Arab world were closed for a week, American and British citizens left Yemen hurriedly, and the United States looked as if it had lost its nerve. And all Zawahiri had to do was to pick up the phone and say a few words.

“Not surprisingly the Yemenis were unhappy. They decried the evacuations as a step that ‘serves the interests of the extremists and undermines the exceptional cooperation between Yemen and the international alliance against terrorism.’ Jihadist websites, in contrast, were delighted with the havoc the apparent threat had created.

“The dangers to the United States and other Western countries are real and should be taken seriously. However, when episodes like the latest embassy closures occur, it’s difficult not to feel that the responses are out of proportion with reality. After the Sept. 11, 2001, attacks, the U.S. rightly concluded that the best way to combat terrorism was to show that Americans could go on with their lives as if nothing had happened. Since that time American actions have proven the contrary, so that those who claim that Osama bin Laden won may be right.”

“The State Department has shuttered 19 embassies for a week, fearing terrorist attacks. Hundreds of prisoners, including senior al-Qaeda operatives, have busted loose in prison breaks in Iraq, Libya and Pakistan. At Bagram air base in Afghanistan, The Post’s Kevin Sieff reports, U.S. forces are holding 67 non-Afghan prisoners, many of whom can’t be tried in court but are too dangerous to release.

“Meanwhile President Obama says he wants to ‘refine and ultimately repeal’ the mandate Congress has given him to fight the war on terror. What’s going on here?....

“From the beginning of his tenure, the president has been reluctant to build a legal framework that would assume that the fight against al-Qaeda and like-minded groups might go on for a long time....

“The president also has sought to minimize U.S. involvement in dangerous countries as much and as quickly as possible. He failed to negotiate a follow-on force in Iraq, where violence is again spiraling out of control. He has resisted engagement in Syria, where vicious brigades associated with al-Qaeda are establishing beachheads. He has provided little assistance to Tunisia or Libya, where emerging democracies are struggling to contain Islamist militias. He surged troops to Afghanistan but simultaneously announced a timetable for their withdrawal, which is underway.

“Mr. Obama’s preferred approach has been to rely on intelligence and drone strikes, but last week Secretary of State John F. Kerry said ‘the president has a very real timeline’ for ending drone strikes in Pakistan, ‘and we hope it’s going to be very, very soon.’....

“Mr. Obama is right to worry about the corrosive effect, for example on civil liberties, of perpetual war. But like all wars, this one will end only if one party is defeated or both agree to lay down their weapons. Neither appears likely any time soon, and the president’s eagerness to disengage, while understandable and in sync with U.S. public opinion, may in the end lengthen the conflict.”

“In May, Barack Obama told an audience at the National Defense University that the core of al-Qaeda was ‘on the path to defeat.’ The ‘future of terrorism,’ Mr. Obama predicted, would involve ‘more localized threats,’ on the order of ‘the types of attacks we faced before 9/11,’ such as the 1988 Lockerbie bombing or the 1983 attack on the Marine barracks in Beirut. ‘Dealt with smartly and proportionately,’ he added, ‘these threats need not rise to the level that we saw on the eve of 9/11.’ He ended by calling for repeal of the 2001 Authorization to Use Military Force – Congress’ declaration of war on al-Qaeda.

“On Monday, the front page of The Wall Street Journal ran with this headline: ‘Regrouped al-Qaeda Poses Global Threat.’ The second shortest distance in Washington now runs between an Obama speech and its empirical disproof.

“The news, of course, is that 19 U.S. embassies and consulates in Africa and the Middle East will be shuttered until Saturday. This is on account of electronic intercepts of terrorist communications, collected by Edward Snowden’s former employers at the National Security Agency....

“After 11 years of taking our shoes off at airports, seven years of being forced to throw away tubes of toothpaste and cans of hair spray, five years of assuming the surrender position at the X-ray machine, three years of don’t-touch-my-junk anthems, eight season of TV’s ‘24’ and two seasons of ‘Homeland,’ it takes a lot to get Americans worked up about a speculative terrorist threat....

“Yes, the president’s May speech contained all the required caveats about the abiding terrorist threat and the continued need for vigilance. But the gist of the address was clear, as was its purpose: to declare the war on terror won – or won well-enough – and go home. Facts and analysis were wrong.

“Specifically: Mr. Obama believed that killing Osama bin Laden was a strategic victory. In fact, it was mainly a symbolic one (further undercut by his use of it as a political prop). He thought that ending the war in Iraq would help refocus U.S. efforts on Afghanistan. In fact, it showcased America’s lack of staying power and gave the Taliban additional motivation to hold out during the president’s halfhearted Afghan surge. He thought that substituting the Bush administration’s approach to detainees with an approach heavy on drones would earn America renewed goodwill on the Arab street. In fact, there was no goodwill to renew in the first place, and the U.S. is more unpopular in Pakistan and Egypt today than it was six years ago.

“He believed that staying out – completely out – of the war in Syria would contain the war to Syria and spare American lives and efforts. In fact, the war has generated a brand new branch of al-Qaeda in the Nusra Front, helped regenerate the once-moribund Iraqi branch, and attracted jihadist recruits from Europe who may one day return to put their acquired skills into practice....

“It is the nature of wisdom that it is only truly learned after it’s been mostly forgotten. The lesson of 9/11 was to not go back to pre-9/11 thinking. We may learn soon enough what price we’ll have to pay for the benefit of rediscovering what we knew once before.”

Finally, on the issue of President Obama’s cancellation of his summit with Russian President Putin in Moscow prior to the G20 gathering in St. Petersburg that Obama will still attend, the White House stated, through spokesman Jay Carney:

“Given our lack of progress on issues such as missile defense and arms control, trade and commercial relations, global security issues, and human rights and civil society in the last twelve months, we have informed the Russian Government that we believe it would be more constructive to postpone the summit until we have more results from our shared agenda.”

The Kremlin responded it was “disappointed.” Russian foreign affairs adviser Yuri Ushakov said Russia was not to blame over the Snowden affair and the granting of asylum to the leaker.

“This decision (by Obama) is clearly linked to the situation with former agent of U.S. special services Snowden, which hasn’t been created by us.

“For many years, the Americans have avoided signing an extradition agreement,” Ushakov said, “and they have invariably responded negatively to our requests for extradition of people who committed crimes on the territory of Russia, pointing at the absence of such agreement.”

“Mr. Putin, who returned to office in May for a third term, has been carrying out a determined campaign to crush opposition at home, one dimension of which has been an ugly streak of anti-Americanism. He has harassed and attempted to destroy nongovernmental organizations that received funding from abroad, many of them for worthy civil-society goals. He pushed through parliament a ban on the adoption of Russian orphans by Americans in a fit of pique over a U.S. law that curtailed visas for Russians identified as human rights abusers. Mr. Putin also snubbed the United States by offering temporary asylum to Edward Snowden.... Mr. Putin’s policies seem driven most of all by a desire to show he is standing tall. His approach has thrown the relationship with Washington into a downward spiral....

“Skipping the summit is a tactic. A long-term strategy with Russia has to include engagement, including at the highest level, no matter how prickly and unpleasant that may be. But the engagement has to be faithful to the United States’ highest values. The bloggers and activists punished arbitrarily by Mr. Putin, the young women from the persecuted rock band Pussy Riot, the orphans whose hopes were dashed, the young Russians in urban coffeehouses who have taken to the streets in protest – all would benefit from hearing loud and clear not only that the U.S. president is skipping a summit, but that he also stands with them, that the highest aspirations of freedom and human dignity do not belong to one country or bloc of countries, but are universal and apply to all.”

“President Obama’s decision to cancel his one-on-one meeting with Vladimir Putin in Moscow next month is the right decision – politically, the only one he could make and not look like a patsy. The question is whether this is merely a symbolic rebuke or the beginning of a policy shift that recognizes the Putin regime’s hostility to American interests....

“We hope...Mr. Putin begins to understand that there are costs to his anti-American behavior. The Russian boss covets summits with U.S. presidents and the G-8 to cultivate the domestic illusion that Russia remains a great power. Speaking with reporters Wednesday, Kremlin aide Yuri Ushakov pleaded that the Snowden problem was ‘something that was created not by us’ and that the invitation to Mr. Obama remains open. The truth is that Mr. Putin knew exactly what he was doing in protecting Mr. Snowden.

“To drive home the message of the canceled summit...(Obama) could speak up about the kangaroo court treatment of opposition leader Alexei Navalny. As long as Mr. Putin’s Russia behaves as an adversary of the U.S., Mr. Obama should treat it accordingly.”

“Russia’s abrupt decision last week to give temporary asylum to U.S. intelligence leaker Edward Snowden caught many by surprise. After all, the Federal Migration Service had three months to decide after Snowden officially applied for asylum on July 16. Why the rush?

“Had Russia waited the full three months, the gesture would have sent a modest but friendly nod to U.S. President Barack Obama. Snowden would have still been in the no-man’s-land of the transit zone at Sheremetyevo Airport, technically, not Russian territory. Sure, this would have largely been a self-delusional game in semantics, but it would have saved Obama some political embarrassment and would have avoided a full-blown conflict with U.S. Republicans over his ‘soft policy’ toward Russia.

“Another more modest but still U.S.-friendly option for the Kremlin would have been to give Snowden documents to leave the airport but without a final decision on his asylum status. This would have at least kept Russia in neutral territory on the Snowden issue and left everyone guessing over whether Moscow would grant Snowden asylum.

“But by giving Snowden temporary asylum only 2 ½ weeks after he applied, Russia seems to have gone out of its way to snub the U.S. As it turns out, Putin’s now-famous statement that Snowden could stay in Russia only if he stopped damaging U.S. interests didn’t count for much in the end. Giving Snowden asylum status was, indeed, a significant blow to the U.S. At the very least, it damaged Obama’s reputation, as well as U.S.-Russian relations in the short-term....

“Obama may think that canceling the Moscow summit sent a strong message to Putin, particularly since Putin values these summits as a boost to his global prestige. Yet far from being a snub, Obama’s no-show is probably the best news Putin has received in a long time.”

Personally, I would have gone. And in the joint press conference, having made that a prerequisite, I would have done my best to embarrass Putin by bringing up cases such as Navalny’s and Mikhail Khodorkovsky’s, the way past U.S. presidents spoke of Andrei Sakharov and Yelena Bonner. 

Putin might have then replied: “Mr. President, Navalny is running for mayor of Moscow. What do you mean?”

To which Obama could have said, “Are you telling me you are not throwing him back in jail afterwards?”

Ah, what a delicious moment that would have been. Imagine the love an American president would have received in the Russian activist community.

I know some of you may think that this would then be too dangerous of a moment.

But I’ve been to Reykjavik.  I’ve been to the house where Reagan and Gorbachev staged their testy, and historic, summit in 1986 that helped change the world, even as the talks there collapsed.

I would have gone to Moscow, done my best to set Putin up, and then stuck it to him.

[As for Obama saying of Putin on Friday during his press conference that the Russian leader has the slouch of “a bored kid in the back of the classroom,” that was an incredibly stupid comment.]

Stability and bottoming are the watchwords here recently. This coming week, Aug. 14, however, brings second-quarter GDP figures for the eurozone and its individual members. The major focus will be on Germany, with its looming election Sept. 22.

The data out of Germany has been far better recently, with economists now expecting an increase in GDP for Q2 there of 0.6% to 1.0%. The Economy Ministry said, “The German economy grew briskly in the spring. After the weather dampened growth in the first quarter [Ed. for Europe a legitimate excuse, it truly sucked], there was a growth spurt in the second quarter due to catch-up effects.”

Growth the second half of the year will be less robust, however, the ministry added.

This week Germany reported increases in industrial production and factory orders for the month of June of 2.4% and 3.8% over May, respectively, better than expected, while June exports rose 0.6% over the prior month. [June retail sales did, however, slide 1.5%.]

The U.K. also continues to roll along and this can only help British Prime Minister David Cameron. While an election doesn’t have to be called before May 2015, when the highly contentious issue of Britain’s role in the European Union will come to the fore, Cameron, currently down in the polls, should see a nice bounce due to the economy.

Industrial production in the U.K. for June rose 1.1% over May, and its July services PMI soared to 60.2. London home prices also hit an all-time record, though to be fair, this is heavily skewed by foreign buying. Nonetheless it points to rising confidence.

Speaking of the service PMI, for the euro-area, the services index for July rose to 49.8 from 48.3 in June (vs. an initial estimate of 49.6), while the composite of services and factory output hit 50.5, the best since Jan. 2012.

But retail sales in the eurozone for June fell 0.5%, with Spain’s off 0.8%.

It was on Aug. 1 that European Central Bank President Mario Draghi said “risks surrounding the economic outlook for the euro area continue to be on the downside.” In the same vein we learned this week that the unemployment rate in Greece hit 27.6% for the month of May (they are always a little behind the rest in reporting data), while industrial production in France fell 1.4% in June from May, not good.

And you still have major political uncertainty in both Spain and Italy, though for now both leaders are riding it out.

So I’m holding off on the gloom talk for the most part in Europe this week. The negatives do indeed remain, like tragically high unemployment rates in the periphery, a continued freeze in lending to small- and medium-sized businesses in same, and still rising government debt levels that can provide the impetus for the next crisis.

You also have that German vote. Chancellor Merkel has purposefully not rocked the boat when it comes to bailouts such as in Greece and Portugal. All-for-one, one-for-all, has been the mantra.

For now. Germans, and many of their northern European brethren, are not likely to be as sanguine about future bailouts as they have been in the past and the likes of Greece and Portugal will surely need more assistance, let alone the still unfolding picture in Italy and Spain.

China and Japan

Continuing with the theme of stability, China released a slew of data this week that, if you believe the numbers, perhaps points to a bottoming in the economy, though I would argue we’d need at least another month of such activity to be reasonably assured this is the case. When it comes to China, forget the lion’s share of the raw data...you’re looking for trends.

The government announced the non-manufacturing purchasing managers’ index for July was 54.1, up from June. HSBC’s services PMI was 51.3, unchanged from June.

July exports rose a better than expected 5.1%, with iron ore (the main ingredient for steel) imports up to a record level, probably owing to a surge in long-delayed projects such as some of the skyscrapers I’ve talked about recently.

Industrial production in China was up a solid 9.7% in July. Fixed-asset investment rose 20.1%. Retail sales were up 13.2% for the month.

Consumer prices for July rose 2.7%, with food prices up 5% from a year earlier (the CPI was up 2.4% for the first six months of 2013).

Producer prices continued to decline, down 2.3% in July, reflecting severe overcapacity in some industries.

So inflation isn’t an issue the government has to concern itself with and that’s a good thing. [The 5% increase in food prices is in line with past figures and certainly not the double-digit rates faced in previous years, that can lead to major social unrest.]

But perhaps one of the 2 or 3 most important barometers that is as good an indicator as any of actual growth, electricity output, rose 8.1% in July over a year earlier, according to the National Statistical Bureau. In June it grew 6% and 4.1% in May.

So, yes, you add all the above up and you can build a case China’s economy is bottoming. But, again, we need more data.

And when it comes to the big picture and China’s use of commodities, Daniel Yergin had some of the following thoughts in a Wall Street Journal op-ed on Friday.

“What is giving Russia and many other countries the shivers is the China Chill that is the result of the slowing Chinese economy. It means a recalibration for the world’s exporters, who have come to count on vigorous Chinese demand. It will be a particular challenge for commodity exporters. Over the past decade, they have been the great beneficiaries of the commodity ‘supercycle’ – the combination of accelerating demand and rising commodity prices that have delivered GDP growth. With China’s slowing, the supercycle is over, meaning tough choices ahead.

“The supercycle began a decade ago, in the middle of 2003. China had already reported two decades of 10% annual economic growth. In 2000, its growth began to speed up, fueled by a tilt toward heavy industry. The rapid pace of industrialization and urbanization led to accelerating demand for copper, iron ore and other commodities. China’s economy grew almost two and a half times from 2003-2012. Hence it’s gargantuan appetite for commodities to fuel its industrial machine and support the shift of 20 million people a year ago from the countryside to cities.

“The world’s commodity-supply system, accustomed to excess capacity and weaker demand for its products, was not ready. Something had to give, and that something was price. Commodity prices took off at a breathtaking pace.”

But the growth in demand and prices wasn’t sustainable. China has also run into “what Premier Li Keqiang has described as the ‘serious structural problems’ that ‘middle income’ countries encounter. China can no longer depend upon exports as the main driver of growth. Rapidly rising wages – 15% to 20% a year in coastal provinces – are eroding the labor-cost advantage that lifted exports.”

“Just as China did so much to fuel the supercycle, so its slowdown, more than anything else, is what has brought the supercycle to an end. The change is registered in prices. Copper prices are down 30% from their 2011 peak, iron ore 32%.”

But commodities “no longer march in lock-step with each other.”

Look at oil. A decade ago it was in the $20-$28 range, and today it’s more like $100-$110; so oil has remained immune to China’s slowdown and the general weakening in commodity prices, writes Yergin.

But with oil the supply picture is changing, witness booming production in the U.S. As the International Energy Agency observed on Friday, only unrest and supply disruptions in the Middle East have kept the price of crude high because clearly the United States is helping to pick up the slack in supply.

So while this week commodity producers generally rallied some because of the firmer economic news from China, as Daniel Yergin concludes:

“The cooling of global commodity markets will heat up the politics of the countries that had done so well during the now-defunct supercycle. Facing economic turmoil, politicians in Australia, Brazil, South Africa and many other countries – including Mr. Putin’s Russia – will have to face the tough questions about market reforms and economic and tax policies that the supercycle once let them avoid.”

Turning to Japan...the debate over the looming April sales-tax increase that could send the economy back into recession is heating up. Prime Minister Shinzo Abe needs to proceed with fiscal tightening or risk losing credibility in financial markets, the consequence of which would be higher bond yields that would kill the positives of his monetary and stimulus policies. But Abe is walking a tightrope.

This week, Bank of Japan Governor Haruhiko Kuroda warned against delaying implementation of the sales-tax increase, even as he pledges the central bank will continue to do all it can to meet its two-year, 2% inflation target.

“Ending deflation and raising the sales tax are achievable at the same time,” said Kuroda. “Restoring fiscal health is absolutely necessary and important by itself, but once fiscal discipline is loosened, it’s true that that will indirectly make a negative impact on monetary measures.” [Bloomberg]

And why is international confidence in Japan’s efforts to deal with its finances such a big deal? It’s about Japan’s humongous government debt level.

The IMF warned this week that if the government doesn’t bring its red ink under control, it will lead to financial turmoil.

This week the Tokyo stock market fell 6% over fears Abe’s cabinet seems split on the sales-tax increase. Again, it’s about credibility. If holders of Japanese paper flee and yields soar, Japan will be right back into recession in a heartbeat

As it is, the Bank of Japan has pledged to buy Japanese government bonds, JGBs, amounting to 70% of newly issued debt. The IMF estimates Japan’s public liabilities will reach 250% of GDP this year; easily the largest in the developed world.

This week, by the way, it was announced that as of June 30, Japan’s national debt exceeded 1,000 trillion yen for the first time, or 1 quadrillion (nearly $10.5 trillion); larger than the economies of Germany, France and the U.K. combined. [Mayumi Otsuma / Bloomberg]

Regarding the sales-tax hike from 5% to 8% in April, followed by an increase to 10% in October 2015, Abe said he would reach a decision on or around Sept. 9, following the release of revised second-quarter GDP data. If he concludes the economy cannot withstand the increase, he can cancel the measure. Boy that could be an interesting day. It’s also when Congress returns, which will shine a light on the United States’ own looming fiscal issues all over again.

Street Bytes

--The Dow Jones’ winning streak was stopped at six this week, with the Dow declining 1.5% to 15425. The S&P 500 lost 1.1% and Nasdaq 0.8%. Trading volume has been beyond pathetic. Many of us were glad we had the opportunity to watch the first two rounds of the PGA Championship rather than CNBC.

--U.S. Treasury Yields

6-mo. 0.07% 2-yr. 0.30% 10-yr. 2.58% 30-yr. 3.63%

At the Friday presser, President Obama said he’s looking at a “range of outstanding candidates” for Fed chief, including Lawrence Summers and Janet Yellen, and that he’ll make a decision “in the fall.”

--The U.S. Justice Department is investigating JPMorgan Chase over mortgage-backed investments it sold prior to the financial crisis. In a regulatory filing, JPM said it was responding to potential criminal activity. Back in May, the civil division informed the bank it had “preliminarily concluded” that the bank had violated securities laws for investments sold from 2005 to 2007.

It’s hard to keep track of all the probes JPMorgan has been facing. I mean Jamie Dimon is such a terrific CEO....how can this be? [He typed, mischievously.]

Last month JPM agreed to pay $410 million to settle allegations it was manipulating electricity prices in California and the Midwest.

An investigation by the SEC into the $6 billion trading loss, the “London Whale” case, is nearing its final stages with more charges on the way. The SEC is seeking an admission of wrongdoing in this one as part of any settlement. Should the bank agree to this, it could encourage shareholder lawsuits against JPM.

--The Department of Justice and SEC filed parallel civil actions against Bank of America Corp., alleging it defrauded investors when it sold $850 million worth of mortgage-backed securities and understated the risks. BofA has set aside more than $42 billion in litigation expenses, payouts and reserves for both prior and future settlements. The government would probably settle the above for about $100 million. [My guess.]

--Mortgage giant Fannie Mae earned $10.1 billion in the second quarter as it continues to be aided by the recovery in the housing market. Fannie said it would pay a dividend of $10.2 billion to the United States Treasury next month.

The rise in home prices enabled it to reduce reserves set aside for losses on mortgages. The company earned by comparison $5.1 billion in the second quarter of 2012 and has turned a profit six consecutive quarters.

Earlier, sibling Freddie Mac reported $5 billion in second-quarter earnings, saying it would make a $4.4 billion dividend payment to Treasury. [Freddie will have paid back $41 billion of the $71 billion in bailout money it received.]

Fannie and Freddie received loans totaling $187 billion and once the second-quarter dividends are paid, Fannie will have repaid $105 billion of the roughly $116 billion it received from taxpayers. Fannie had paid a first-quarter dividend of $59.4 billion to the Treasury and, along with Freddie, the two will have paid back $146 billion of their government loans by next month. Of course this is a huge reason, $146 billion worth, why the federal budget deficit for the fiscal year ending Sept. 30 is the smallest during Obama’s term in office.

This week Obama called for replacing Fannie and Freddie with a new system of guaranteeing certain mortgages in order to ensure access to long-term, fixed-rate loans. The White House does still favor a limited federal backstop to keep such mortgages widely available.

“Housing is where the Great Recession began, yet Congress and President Obama still haven’t untangled the complex ties among government, business and home buyers that fed into that economic calamity. After five years, though, there is movement toward reforming a big part of the system.

“At the moment, the market for new mortgages is almost entirely government-backed through Fannie Mae, Freddie Mac or the Federal Housing Administration. In Phoenix on Tuesday, Mr. Obama rightly argued that the situation must change, that private finance should again be the ‘backbone’ of the system. He supported slowly but steadily winding down Fannie and Freddie, so-called government-backed enterprises meant to drive investment to mortgages, and replacing them with a more modest government role in the market.

“Simply hearing the president argue for ending Fannie and Freddie is important. Sen. Bob Corker (R-Tenn.), a major advocate for a bipartisan restructuring plan, said his office saw a wave of interest in reform from other lawmakers following Mr. Obama’s speech. Members of both houses of Congress had already been working on proposals. With both political branches engaged in good faith, there is a real chance something will pass in the next few months.”

Of course it isn’t that easy, and there are big differences between House and Senate proposals, particularly when it comes to bank capital levels, but this will be a big topic this fall.

--Jeff Bezos, Amazon’s founder, is buying the Washington Post newspaper for $250 million, joining the likes of Boston Red Sox team owner John Henry, who is purchasing the Boston Globe, and Warren Buffett, who is adding to his portfolio of local newspapers.

Bezos is acquiring the Washington Post title and some affiliated companies and becomes the newspaper’s sole owner.

He is currently worth about $25 billion, so in the grand scheme of things this isn’t that risky a move given the Post’s sizable losses, but we’ll see over time what he really has in mind.

Bezos is taking the company private so he won’t be subjected to shareholder demands and he certainly has a deserved reputation for patience, given Amazon’s huge growth with little accompanying profit.

“The Internet is transforming almost every element of the news business: shortening news cycles, eroding long-reliable revenue sources, and enabling new kinds of competition, some of which bear little or no news-gathering costs. There is no map, and charting a path ahead will not be easy. We will need to invent, which means we will need to experiment. Our touchstone will be readers, understanding what they care about – government, local leaders, restaurant openings, scout troops, businesses, charities, governors, sports – and working backwards from there. I’m excited and optimistic about the opportunity for invention.”

Amazon attracted nearly $610 million in advertising revenue last year, according to eMarketer, and that figure is expected to jump 37% this year to $835 million.

U.S. newspaper ad revenue, on the other hand, is expected to decline 4.3% to $21.4 billion in 2013, also according to the researcher.

--In June, the U.S. International Trade Commission (ITC) ruled that Apple infringed a patent of rival Samsung. But this week President Obama’s trade representative vetoed the decision because of its “effect on competitive conditions in the U.S. economy.”

The South Korean trade ministry said in a statement: “We express concerns about the negative impact that such a decision would have on the protection of patent rights.”

Apple and Samsung have been locked in a global patent war since 2011.

--IBM shares took a header after a downgrade by a leading analyst. Separately, the company announced it was requiring the majority of U.S. employees in its hardware unit to take a week off with reduced pay due to slowing demand for products such as servers. Executives in the division will take no pay during the week of Aug. 24 or 31. In the second quarter, IBM slashed more than 3,300 jobs in the U.S. and Canada. Hardware accounted for 16% of IBM’s 2012 revenue.

--McDonald’s reported its July comps and same-store sales globally rose 0.7%, up 1.6% in the U.S., but down 0.9% in Europe.

--New York City Mayor Michael Bloomberg warned the Big Apple can be the next Detroit in a speech this week, excerpted in the New York Post.

“It would be easy to think that what happened in Detroit couldn’t happen in New York City. But it did almost happen here, back in 1975. And while we’ve traveled a long way since then, we’d be foolish to ignore the factors that drove Detroit to bankruptcy.

“One major reason Detroit couldn’t stop its downward spiral was that its labor costs, especially its retiree costs, crowded out its ability to invest in the things that make a city an attractive place to live and visit. In New York City, that risk is still very real. And the primary driver is the same factor present in Detroit: the explosion in pension and health-care costs.

“In Fiscal Year 2002, New York City’s pension costs are $1.4 billion. By Fiscal Year 2009, even after one of the strongest bull markets ever and before any impact from the financial meltdown, pension costs had grown to $6.3 billion.

“Clearly, our increase in annual pension costs wasn’t driven primarily by poor market returns. It was the result of a benefit structure that promises retirees too much too soon, and requires them to contribute too little to pay for it....

“Today, much of the city’s civilian workforce contributes only 3 percent of salary for the first 10 years of employment toward their pensions, and nothing after that. You’d be hard-pressed to find a single company in the private sector with that kind of pension plan. For that matter, you’d be hard-pressed to find many governments with that kind of plan.”

Bloomberg’s reason for the speech was to warn New York’s mayoral candidates, as well as the voters, that there are incredibly difficult negotiations looming with the municipal unions facing the new mayor.

But... “My successor will enter negotiations with enormous leverage, because union leaders will have gone four years without new contracts, which has never happened before; they won’t be willing to wait another four years. That puts the next mayor in a position of strength in negotiating not only salaries, but also pension and health-care reforms....

“It will be up to you, the voters, to make sure that we elect a mayor who understands how important this opportunity is.”

--California Gov. Jerry Brown averted a second strike by BART workers in the Bay Area for now, but the debate ignited by last month’s five-day job action by rapid transit workers only heats up further. 53% of Bay Area residents now believe BART workers are overcompensated as management asks workers to contribute more to medical plans and pension accounts. What people are increasingly talking about is the fact “a teacher in San Francisco earns, on average, $5,000 less than the $66,000 a BART agent collects for sitting in a booth, eyeballing automated ticket machines,” as reported by Sandy Banks in the Los Angeles Times.

--Russia’s second quarter GDP came in at just 1.2% on an annualized basis, the slowest pace of growth since Q4 2009.

--Canada’s unemployment rate ticked up to 7.2% in July.

--Last week I gave an update on Macau’s casino revenues. On Thursday, the Financial Times’ Lex column had its own thoughts:

“Macau continues to confound its skeptics. Its casinos do not, alas, look anything like the one James Bond visited in Skyfall but they are enticing to the higher end of China’s mass market. That is the ultimate sweet spot for the territory’s casino operators: the customers are not VIPs expecting freebies and credit, but those happy to splash cash. Mass-market gaming revenues are growing at 30 percent a year, three times that for VIPs....

“Will the boom ever end? Sure, China’s pool of would-be gamblers has limits, eventually. And regional rivals – Singapore, Sydney, the Philippines – are also eying mainland tourists....But with all operators looking, for now, at rising free cash flow and enjoying resilient demand, it will take a big shock before gamblers give up on these growth bets.”

--Depending on eventual overseas receipts, Walt Disney Company reported that losses on its film “The Lone Ranger” will cost it $160 million to $190 million.

Disney’s overall profit for the second quarter was flat with the same period a year ago, while revenues rose 4%. ESPN continues to drive the company’s performance, with revenue in the unit rising 8% to $2.3 billion. Operating income at theme parks increased 9%.

--In the first half of 2013, total paid and verified magazine subscriptions declined by 1 percent, but newsstand sales plunged 10 percent. Vogue and Vanity Fair, victims of rival online content, saw their newsstand sales decline 10.4 percent and 11 percent, respectively.

Time Inc., however, surprisingly saw its newsstand sales rise 1.2 percent. Newsweeklies have been struggling as much as the rest. [Or like in the case of Newsweek, just disappearing.]

--Shares in Tesla soared after the electric carmaker reported it had delivered 5,150 vehicles in the second quarter, above its forecast of 4,500, as Tesla expands into Europe and Asia. The stock finished the week at $153. It was as low as $35 back in mid-March.

--Hedge fund operator Bill Ackman, a big investor in struggling JC Penney, wrote a letter urging fellow directors to find a new chief executive quickly and released it to the media. The CEO is Mike Ullman, a member of the Starbucks board. Howard Schultz, CEO of Starbucks, then accused Ackman of being a “destroyer of companies,” adding he thought Ackman’s move bypassed established corporate governance procedures and furthermore was “disgusting.”

--According to a survey by Semper Secure, workers in the cybersecurity industry make an average of $116,000 a year.

“A third of the workers were drawn to cybersecurity in college, and a majority said they’ve been driven by the interesting challenge of defending computer systems from hackers. Less than half had a bachelor’s degree in computer science, math or electrical engineering.”

--Tests have shown the Mers coronavirus that emerged in Saudi Arabia last year may be circulating among dromedary camels, according to a study in the journal Lancet Infectious Diseases. Scientists say more research is needed to confirm the findings. So far there have been 94 confirmed cases and 46 deaths, including one reported in the kingdom this week.

--The British Medical Journal reported the first case of human-to-human transmission of the new strain of bird flu, H7N9, that has emerged in China. A 32-year-old woman was infected after caring for her father. Both later died.

While there is zero reason for panic, what makes this situation a bit worrisome is the woman had no known exposure to live poultry but fell ill six days after her last contact with her father. The strains were almost genetically identical, supporting the theory he infected her directly.

Dr. James Rudege, of the London School of Hygiene and Tropical Medicine, told BBC News, “It would be a worry if we start to see longer chains of transmission between people, when one person infects someone else, who in turn infects more people, and so on.”

I guarantee if you ever see a headline indicating the above has indeed occurred, it will move markets, if only for a day or two until more facts are known.

--In yet another report by Oceana, the environmental advocacy group, seafood mislabeling can lead consumers to pay up to twice as much for certain fish.

After a study six months ago found that one-third of seafood sold in the U.S. is mislabeled, according to the group, “consumers who order an 8-ounce fillet of grouper in a restaurant, which sells on average for $27, but are instead given a tilapia fillet, worth $15, lose $12.”

That sucks. Seafood fraud can cost a fish lover hundreds of dollars a year. As one Oceana scientist put it to the Los Angeles Times, it’s like ordering a filet mignon and getting a hamburger instead.

--Tourism in France represents 7% of the economy, but bookings were down 4.5% last year, which was down 6% compared with 2011, and this year, they are down about 3% in Paris and the French Riviera, 6% in regions such as Normandy and Brittany. An official with the hotel and restaurant owners association said bookings fell 10% in July compared with the same period in 2012.

The reason? It’s largely about the ongoing economic crisis. So this would be a good barometer for the recovery we are told we are in the midst of.

--Related to the above, it doesn’t help that there have been headlines in China on how Asian visitors to Paris have been targeted by muggers, with the interior and tourism ministers announcing 200 police had been added to patrols around the Louvre and Eiffel Tower to protect tourists.   A Paris police official conceded petty crimes against Chinese nationals had jumped 22% in the first quarter from a year earlier. Asian tourists are targeted because they are known to carry a lot of cash. It was in April that workers at the Louvre staged a one-day strike over a surge in pickpockets there.

Some 1.4 million Chinese visited France last year, up 23% from 2011. Boy, if that isn’t a sign of economic growth in China, despite some of the recent warnings on same, I don’t know what is. [South China Morning Post]

--Google’s Sergey Brin has been revealed as the person behind the project by Dutch scientists to create synthetic meat from muscle stem cells taken out of cows. Hopefully I’ll be dead before this is commonly accepted, let alone feasible on a mass scale. [It’s not thought that it will be for decades.  Of course I need the Mets to win another World Series and the Jets to win a Super Bowl before I exit the stage, so I’ll be around a while it would seem, fake burgers or not.]

--Imagine being a Time Warner Cable subscriber and, with its dispute with CBS, not being able to watch the PGA Championship this weekend, if you were so inclined.

--So my car got whacked a second time in ten weeks, this one in a parking lot as I stood there watching incredulously. ‘He knows my car is there...he has to....’ I mused, observing the wreck in slow motion.

Unreal. My new best friend, Jeff, at Summit Truck and Auto Body, had a good laugh at my expense. As did Chris, who helps with the repairs. Another outstanding job on their part.

And kudos to Enterprise after my second experience with them.

--With the talk of the Federal Reserve ‘tapering’ its bond purchases at some point, it has shined a light on the Brazilian tapir, the cute anteater cousin. Alas, during a supervised visit at the Dublin Zoo on Thursday, a tapir, normally said to be docile, attacked a young girl and her mother, leaving the child in serious condition with awful wounds.

The female tapir, who had just given birth, was said to be panicked at the sight of people in its enclosure.

Undoubtedly, this is a sign of market turmoil to come. The Fed says, ‘tapering isn’t tightening.’ The market knows otherwise. Panic will ensue...or maybe not.

Foreign Affairs

Iran: Hasan Rohani took over as president and strongly hinted he wants to resume negotiations on Iran’s nuclear program, specifically the issue of uranium enrichment. Russia’s foreign minister, Sergei Lavrov, is saying Tehran will accept a level below 20 percent, the goal of the West.

In his inauguration speech, Rohani promised moderation based on tolerance, but was critical of international sanctions.

“If you want an adequate response, you shouldn’t speak the language of sanctions, you should speak the language of respect.”

Regarding the nuclear program he said: “We will not do away with the right of the nation. However, we are for negotiations and interaction. We are prepared, seriously and without wasting time, to enter negotiations which are serious and substantive with the other side.”

Rohani added the people had voted “yes” to moderation and hope, promising to advance women’s rights and freedoms and to reduce the government’s interference in people’s lives.

But his first immediate task is to turn around an ailing economy, with inflation running at 40%.

Israeli Prime Minister Benjamin Netanyahu reiterated his call for the world not to be “taken in” by his “moderate” words and demeanor.

“The president there has changed, but the goal of the regime has not: to achieve nuclear weapons in order to threaten Israel, the Middle East and the peace and security of the entire world. A country that threatens the destruction of the state of Israel must not be allowed to possess weapons of mass destruction.”

Netanyahu has pointed out that since Rohani was elected, Iran has installed 7,000 centrifuges.

“Of course he wants more talks,” Netanyahu said after meeting with a group of U.S. congressmen this week. “He wants to talk and talk and talk. And while everybody is busy talking to him, he’ll be busy enriching uranium. The centrifuges will keep on spinning. This isn’t a secret. The new Iranian president boasts that that is his strategy. He says, ‘I talk and I smile and I enrich uranium.’”

Netanyahu also said Iran was pursuing an alternative process, “the plutonium route.” U.S. and European officials confirm Netanyahu’s warning on this front, which would greatly complicate international talks.

Russia says new negotiations with the P5+1 and Iran should take place by mid-September. It is now believed Rohani will meet with President Putin that same month.

In a Journal op-ed by Linda Frum and Michael Ledeen, the two observe in part:

“Mr. Rohani may prove to be the reformer his supporters claim, but the luxury of such optimism isn’t available to the hundreds of dissidents who have run afoul of the Islamic Republic and are trapped in its prisons.

“Since Mr. Rohani’s election in mid-June, the regime’s executions of prisoners – a good barometer of a government’s inclinations – have increased in frequency. Between June 20 and July 20, at least 97 Iranian prisoners were executed. That’s the regime’s official count; as a rule, the actual numbers are higher. By contrast, in July 2012 there were 29 confirmed executions.”

Syria: Iranian President Rohani expressed his country’s support for Syrian President Bashar Assad. “The Islamic Republic of Iran aims to strengthen its relations with Syria and will stand by it in facing all challenges,” Rohani was quoted as saying. “The deep, strategic and historic relations between the people of Syria and Iran...will not be shaken by any force in the world.”

Meanwhile, Charles Lister, an analyst at IHS Jane’s Terrorism and Insurgency Center, told the AP, “There is no doubt that as a distinct single entity, Syria has ceased to exist.  Considering the sheer scale of its territorial losses in some areas of the country, Syria no longer functions as a single all-encompassing unitarily-governed state.”

Syria is now essentially three states, even as the opposition is fractured with increasing infighting between moderate rebel groups and al-Qaeda affiliated extremists. And while Assad’s forces have made headway in strategic Homs, securing a pathway from Damascus to Assad strongholds on the coast, Assad’s overstretched and war-weary troops are incapable of clawing back vast territories they have lost to rebels and jihadists.

As to the refugee crisis impacting Syria’s neighbors, Iraq appears to have slammed the door after taking in 160,000; Jordan has 512,000 and is beginning to shut its doors; and Lebanon has taken in 669,000 and is stepping up efforts to halt entry.

Egypt: Thousands of supporters of ousted Islamist president Mohammed Morsi continue to defy government calls for them to go home, but as I go to post there is no sign as yet the government is preparing to carry out its threat to remove them from their protest camps in Cairo as they continue to demand Morsi’s reinstatement.

But in talking of an impending showdown with the Muslim Brotherhood, a government daily on Thursday ran the headlines “Final warning” and “The hour of battle approaches.”

On Wednesday, the interim presidency said that Western and Arab efforts to mediate an end to the political deadlock had failed, and that it “holds the Muslim Brotherhood completely responsible for the failure of these efforts, and for consequent events and developments relating to violations of the law and endangering public safety.”

U.S. Deputy Secretary of State William Burns left Cairo on Tuesday without having made any progress.

U.S. Republican Senators John McCain and Lindsey Graham were also in Cairo this week. McCain said in one interview, “Oh my God, I didn’t know it was this bad.   These folks are just days or weeks away from all-out bloodshed.”

“There is only one way to bring about a peaceful Egypt and that is the process of negotiation and reconciliation between the major players,” McCain added.

Asked by CBS News if the two senators thought Egypt “might fail,” McCain responded, “I think it might. I wouldn’t be here if I didn’t think that it might and I think the events in the next few weeks will determine that.”

Graham added: “I’ll go one step further. I think it’s going to fail if something doesn’t change. And to the American people, failure in Egypt matters to us.” [Reuters]

Earlier, both referred to the military’s removal of Morsi as a “coup,” something the White House has been reluctant to do as it has legal implications for $1.3 billion in U.S. aid to Egypt. [The $1.3 billion of the $1.5 billion in total aid that goes to the Egyptian military.]

Meanwhile, in an interview with the Washington Post, his first since overthrowing Morsi, Egypt’s commanding general, Gen. Abdel Fatah al-Sisi, said of the U.S. government:

“You left the Egyptians. You turned your back on the Egyptians, and they won’t forget that. Now you want to continue turning your backs on Egyptians?”

Gen. Sisi is upset the United States is not fully endorsing what he describes as “a free people who rebelled against an unjust political rule.”

Sisi said Defense Secretary Chuck Hagel calls him “almost every day” but that President Obama has not called since Morsi’s ouster.

Israel: A poll by the Israel Democracy Institute and Tel Aviv University found that 79% of Israeli Jews think the new round of negotiations with the Palestinians has a low chance of success, while 18% believe it has a high chance of succeeding. 60% of Israeli Jews trust Prime Minister Netanyahu to conduct negotiations in a way that safeguards Israel’s security, while 37% do not. [Jerusalem Post]

The next round of talks between the two sides is slated for Aug. 14 in Jerusalem. The Palestinian leadership is fractured and several factions refuse to take part.

Lebanon: So you know how I’ve told you in the past how dangerous the road from Beirut’s airport to the main part of the city is, seeing as it goes through a Hizbullah stronghold, and how Hizbullah sets up roadblocks on a whim?

From the AP: “Lebanese officials say gunmen have kidnapped two crew members – a pilot and a co-pilot – for Turkish Airlines in Beirut.

“Security officials say the two men, both Turkish nationals, were seized as they were travelling in a van with other crew members from the Beirut International Airport to a hotel early Friday.

“The officials say six gunmen ambushed the car on an airport road, snatched the two men from the vehicle and let the rest continue on....

“The incident is likely related to neighboring Syria’s conflict – Turkey backs Syria’s Sunni rebels while Lebanese Shiite support the regime (Ed. read Hizbullah).”

[In response, Turkey urged its citizens to leave Lebanon.]

And in a further sign of the looming clash in Lebanon, Lebanese Christian leader Samir Geagea accused Hizbullah of “dragging the country into war against the wishes of its leaders.”

“Whoever desires stability in Lebanon doesn’t send aircraft to fly over Israel and doesn’t launch a disastrous war against Israel that is likely to end with heavy casualties,” Geagea said.

Hizbullah leader Sheikh Nasrallah then emerged from his hiding place in southern Beirut to address a rally there in support of the Palestinian conflict against Israel.

“Israel poses a danger on all people of this region...including Lebanon, and removing it is a Lebanese national interest.”

Imagine the security around Nasrallah, who fears assassination, as he should.

India / Pakistan: Plans to restart peace talks between these two nuclear-armed rivals are in jeopardy after an alleged border “ambush” killed five Indian military personnel at the disputed Kashmir border. India’s defense minister said some of the attackers were wearing Pakistani military uniforms. Pakistan claims it was sabotage carried out by war lobbies, those not interested in peace and normalization of talks.

But Pakistan itself has been the scene of a tremendous amount of violence in the past week, even by its awful standards. Quetta saw two separate attacks claim at least 38 lives, while nearby an attack on a bus killed 13 passengers. 

In no small part because of the recent activity, the United States ordered staff pulled from its consulate in Lahore, citing a specific terrorist threat, and also advised Americans against traveling to Pakistan.

Afghanistan: As in Pakistan, bombs go off all the time here but one on Thursday was noteworthy. 14 women and children were killed as they gathered at a cemetery to honor a deceased family member, Someone planted an explosive in the graveyard. It isn’t suspected it was an act of terror but one of personal revenge.

Meanwhile, Taliban leader Mullah Omar warned against keeping U.S.-led foreign troops in Afghanistan after the coalition’s military mission ends in 2014.

In a statement he releases annually, Mullah Omar said, “The occupying countries should learn from the bitter experiences of the past 12 years. They should not try their fate once more by prolonging the occupation or by establishing permanent bases.”

Those looking for an active peace process are sadly mistaken.

China: A report by the United Nations Environment Program (UNEP) warned:

“China’s dramatic economic growth over the past few decades has increased demands for natural resources within and beyond the country itself in ways that are unprecedented in human history. While that growth has lifted millions out of poverty, it has also come with rising environmental challenges.”

The report cautioned that while the pace of China’s efforts at improving resource efficiency are “exceptionally good,” the improvement was insufficient to offset the environmental damage from extracting, processing and consuming natural resources.

You’ve noticed in just the past few months a drumbeat of reports on China’s environment and I have reached the conclusion, in all seriousness and after much thought, it will take down the government.

Understand, that as the report further cautions, the degradation will only get worse as President Xi and Premier Li pursue a new round of urbanization over the next ten years and beyond. The central government plan today is to move another 390 million people from the countryside to cities by 2030. That means a further plundering of the globe’s resources and a catastrophe for China’s environment.

If you look at the use of minerals, fossil fuels and other primary materials, China consumed 22.6 billion tons of same in 2008 – nearly a third of the world’s total and four times as much as the United States. And the numbers of course have only grown since then. [Li Jing / South China Morning Post]

[The issue of using up resources has spread to food. The government of Zhuhai plans to impose fines as high as $1,700 on restaurants that allow customers to waste food, a local newspaper reported. The draft law does not mention how much leftover food constitutes a breach of the rules. According to media reports, the volume of leftover food in restaurants across China is enough to feed 200 million people annually.]

Last week I wrote of the Wall Street Journal report on the severe damage to China’s arable land due to heavy metal exposure. This week, He Huifeng had the following in the South China Morning Post.

“The Xianghe Chemical plant in the farming town of Zhentou in Hunan province closed four years ago, but every few months villagers living nearby add another name to their list of neighbors and friends who have died from heavy metal exposure.

“Anyone able to move away did so years ago; only the elderly, the ill and the very young remain. Farmers dare not sell their crops – the soil is toxic and the rain is poison, they say....

“The plant ostensibly made an animal-feed additive, zinc sulphate, but in fact it produced indium – used in solar panels and liquid crystal displays. It discharged untreated effluent containing cadmium and indium, which poisoned wells and seeped into the soil of farmers’ fields.”

Authorities spent about $3 million cleaning the soil and then proclaimed, “The case should be filed and the villagers should move on with their lives.” The villagers know better.

“Every year, they say, seasonal rains wash even more toxic soil from the plant site onto their fields. In August of last year, Luo collected soil samples from her farmland, which sits no more than 100 meters from the plant. She sent the samples to a laboratory at Nanjing University for analysis. Testing found the cadmium level was 93.8 milligrams per kilogram. National standards state farmland should contain no more than 0.3 to 0.6 milligrams of cadmium per kilogram.”

After the factory closed in 2009, Luo sent samples and they contained only 1.6 milligrams per kilogram at that time.

This is but one very small example of what happens all over the country.

“The nightmare of dead-pig dumping in waterways near Shanghai has returned to haunt China’s river inhabitants, despite government vows to crack down on the practice.”

Oh well, some local residents now earn more than five times what they used to make fishing by picking carcasses from the water.

“I recently found myself hauling a bag filled with 12 boxes of milk powder and a cardboard container with two sets of air filters through San Francisco International Airport. I was heading to my home in Beijing at the end of a work trip, bringing back what have become two of the most sought-after items among parents here, and which were desperately needed in my own household.

“China is the world’s second largest economy, but the enormous costs of its growth are becoming apparent. Residents of its boom cities and a growing number of rural regions question the safety of the air they breathe, the water they drink and the food they eat. It is as if they were living in the Chinese equivalent of the Chernobyl or Fukushima nuclear disaster areas.”

After the milk scandal of 2008, that killed six babies and left 300,000 ill from drinking milk products tainted with melamine, a toxic chemical, Edward Wong notes, “So widespread is the phenomenon of Chinese buying milk powder abroad that it has led to shortages in at least a half-dozen countries.”

Mr. Wong wrote his essay days before the latest milk scandal. On Wednesday, China announced it had fined six milk suppliers a total of $108 million for price-fixing, but that’s a relatively minor issue compared to a separate recall of milk supplies from New Zealand dairy giant Fonterra due to possible contamination...and fears of botulism. [Nearly 90% of China’s $1.9 billion in milk powder imports last year originated in New Zealand, by the way.]

Finally, on a totally different matter, according to an online survey, more than half of mainland Chinese wanted to have a second child, this as the nation’s watchdogs for family planning indicated they might loosen their grip on the one-child policy. By 2015, a leading business daily in the country said China would move to a two-child policy by 2015.

China needs this to ensure economic growth (and to take care of the growing elderly population).

But per all the above, that also means using more resources. And why would you want to live there?

North Korea: Pyongyang announced it would reopen the shuttered Kaesong industrial complex, an encouraging step. It was four months ago Kaesong was shut amid mounting tensions between North and South. 53,000 North Koreans are employed by about 120 South Korean firms.

But the following is not encouraging. A study of satellite images by the Institute for Science and International Security, a nonproliferation-monitoring group, found that the area of the Yongbyon reactor complex responsible for enriching uranium is now twice as large as it was in the past. The expanded facility could produce enough weapons-grade uranium to manufacture two nuclear weapons per year, according to the ISIS.

Japan: Since the March 2011 earthquake and tsunami, the description of the Fukushima nuclear plant as being “crippled” has certainly been an apt one and this week we’ve learned contaminated groundwater has breached an underground barrier and is rising towards the surface....a possible new emergency, according to Japan’s nuclear watchdog. Tokyo Electric Power (Tepco) can’t cope.

Tepco has denied for months that contaminated water was reaching the ocean, but it admitted the other day this was not true.

Then on Wednesday, the government pledged to take action, saying up to 300 tons of highly radioactive water could be flowing into the sea every day.

I’ve read the material has a half-life of 12 years. 

The thing is, I always assumed the government had a role in containing the leak, working with Tepco.

Nope. The government made sure Tepco had the capital but had not taken any direct action as far as containment. Understand, 400 tons of groundwater is pumped into the plant every day to cool the reactors. A proposal to build a “wall of frozen ground” around the reactor buildings would cost $400 million. [Or $125 million more than A-Rod’s current contract....sorry, that was totally inappropriate.]

On a different issue, Japan and the Philippines have unveiled plans to expand their warship fleets, amid escalating tensions with China over territorial claims in the South and East China seas. China warned Manila and Tokyo not to be emboldened by Washington in disputes with Beijing.

Russia: Moscow’s mayoral election is Sept. 8 and activist Alexei Navalny’s backers say they would be thrilled with 20%. It’s more likely he ends up with just 10%, after which we’ll see if Vladimir Putin throws him back in jail. Navalny is expected to lose his appeal on an embezzlement conviction for which he could serve five years in prison.

Navalny, as I wrote a few weeks back, is being used by the Kremlin to make it appear as if the vote is free and fair, but as fellow opposition politician Boris Nemtsov told the Wall Street Journal, “We all know that this is not an election. It is an imitation.”

The landslide winner will be former Putin aide Sergei Sobyanin, the acting mayor.

Separately, business owners have not voiced their support for opposition candidates since the jailing in 2003 of former Yukos billionaire Mikhail Khodorkovsky. But as the Moscow Times reports, “37 entrepreneurs representing primarily Internet businesses are doing exactly that in an open letter” for Navalny.

“We expect that Navalny will defend rule of law, support the independence of the judiciary and ensure real accountability of officials to society,” reads the letter in part.

Meanwhile, back to the Edward Snowden situation, Guardian reporter Glenn Greenwald claims he has received more than 15,000 secret U.S. government documents from Snowden. Disturbingly, Greenwald told this to Brazil’s Senate foreign relations committee this week. 

“The stories we have published are a small portion. There will certainly be more revelations on the espionage activities of the U.S. government and allied governments...on how they have penetrated the communications systems of Brazil and Latin America,” said Greenwald.

And on the issue of the Sochi Winter Olympics, representatives of 200 New York bars and restaurants refused to serve Russian liquor and poured Russian vodka into the street on Monday to protest Russia’s anti-gay propaganda law, one of dozens of similar demonstrations in recent weeks amid calls to boycott the upcoming Games.

Lady Gaga called the Russian government “criminal” on Twitter.

The International Olympic Committee is trying to reassure the LGBT community that it is engaged in “quiet diplomacy” with the Russian government to ensure the anti-gay propaganda law does not affect the Olympics.

The law stipulates fines of between $124 and $31,000 for promoting homosexuality among minors and was signed by President Putin in late June. Critics say the wording gives police too much leeway in enforcing it.

Lastly, in an interview in a Russian magazine, the Kremlin’s chief doctor revealed that Putin apparently distrusts medicine and instead puts his faith in traditional Russian folk remedies such as tea with honey, massage and the banya, or Russian sauna.

Zimbabwe: With all the results in from the parliamentary and presidential elections, 89-year-old President Robert Mugabe’s Zanu-PF party has claimed a landslide victory, extending Mugabe’s 33-year rule. The Electoral Commission said Mugabe garnered 61% to rival Morgan Tsvangirai’s 34%, with Zanu-PF taking a 2/3s majority in parliament. Tsvangirai’s MDC alleged massive fraud.

The London Times had an extensive piece on the elaborate lengths Mugabe went to rig the vote. Among other things he used $750 million of diamond money on the election, with documents showing how “Chinese and Zimbabwean diamond companies pumped cash into a war chest used by Mugabe to manipulate the results and intimidate the population.”

Mugabe also used an Israeli firm to help rig the voting rolls. Zanu was then able to create millions of ghost voters.

An investigation by the Research and Advocacy Unit, whose report was blocked by the High Court weeks before the election, said “900,000 duplicate names with identical addresses and dates of birth but different ID numbers” were created. The Israeli company added the duplicate names.

One company seeking to buy concessions in the diamond mining sector provided 500 vehicles to the president’s campaign for “transport and mobilization.”

Mugabe’s intelligence service spied on communications between foreign diplomats in the run up to the vote.

The MDC is breaking up over the result with infighting over how they let all this happen, let alone depression.

Add it all up and as Paul Collier, director of the Center for the Study of African Economies at Oxford University concluded, “Mugabe’s now got a license to loot.”

[By week’s end, the Electoral Commission admitted massive irregularities, but this isn’t going to change the results.]

Kenya: There was a devastating fire at Nairobi’s international airport that gutted the arrivals hall. While 24 hours later some flights were resuming, operations are hardly normal. One thing is clear...the emergency response was pathetic, with some fire trucks getting stuck in Nairobi’s notorious traffic. Other engines quickly ran out of water. Soldiers and police used buckets. Last month, an investigation by a Kenyan newspaper disclosed that there was not a single working fire engine in Nairobi’s fire brigade. The Daily Nation newspaper described the situation as “a disgrace of biblical proportions.”

Thousands of safari-going tourists had their plans disrupted at the height of the tourism season. About 18,000 Britons use the airport for this purpose in August.

One thing I didn’t realize is that a third of Europe’s flower imports and many fresh vegetables come from Kenya. Local farmers are devastated.

Curiously, the fire came on the 15th anniversary of the bombings by al-Qaeda of the U.S. embassies in Nairobi and Dar es Salaam, Tanzania, though Kenyan officials say the blaze was not connected to terrorism.

Random Musings

“Jen Psaki, blameless State Department spokeswoman, explained that the hasty evacuation of our embassy in Yemen was not an evacuation but ‘a reduction in staff.’ This proved a problem because the Yemeni government had already announced (and denounced) the ‘evacuation’ – the word normal folks use for the panicky ordering of people onto planes headed out of the country.

“Thus continues the administration’s penchant for wordplay, the bending of language to fit a political need. In Janet Napolitano’s famous formulation, terror attacks are now ‘man-caused disasters.’ And the ‘global war on terror’ is no more. It’s now an ‘overseas contingency operation.’

“Nidal Hasan proudly tells a military court that he, a soldier of Allah, killed 13 American soldiers in the name of jihad. But the massacre remains officially classified as an act not of terrorism but of ‘workplace violence.’

“The U.S. ambassador to Libya and three others are killed in an al-Qaeda-affiliated terror attack – and for days it is waved off as nothing more than a spontaneous demonstration gone bad. After all, famously declared Hillary Clinton, what difference does it make?

“Well, it makes a difference, first, because truth is a virtue. Second, because if you keep lying to the America people, they may seriously question whether anything you say – for example, about the benign nature of NSA surveillance – is not another self-serving lie.

“And third, because leading a country through yet another long twilight struggle requires not just honesty but clarity. This is a president who to this day cannot bring himself to identify the enemy as radical Islam. Just Tuesday night, explaining the U.S. embassy closures across the Muslim world, he cited the threat from ‘violent extremism.’

“But for President Obama, the word ‘Islamist’ may not be uttered....

“The result is visible ambivalence that leads to vacillating policy reeking of incoherence. Obama defends the vast NSA data dragnet because of the terrible continuing threat of terrorism. Yet at the same time, he calls for not just amending but actually repealing the legal basis for the entire war on terror, the 2001 Authorization for Use of Military Force....

“This incoherence of policy and purpose is why an evacuation from Yemen must be passed off as ‘a reduction in staff.’ Why the Benghazi terror attack must be blamed on some hapless Egyptian-American videographer. Why the Fort Hood shooting is nothing but some loony Army doctor gone postal.

“In the end, this isn’t about language. It’s about leadership. The wordplay is merely cover for uncertain policy embedded in confusion and ambivalence about the whole enterprise.

[Ed. I take issue with Mr. Krauthammer on the ‘benign nature’ of NSA surveillance. I don’t trust our government....period. Its ‘heart’ may be in the right place, but there are too many rogue dirtballs who no doubt are abusing the system. I also couldn’t care less about Obama’s new initiatives in this regard, as announced on Friday.]

--Among comments President Obama made to Jay Leno on Tuesday (his sixth appearance on the show...fourth as president), the president defended National Security Agency surveillance programs.

“We don’t have a domestic spying program,” he said, describing the NSA efforts as “mechanisms that can track a phone number or an e-mail address that is connected to a terrorist attack... That information is useful.”

--New Jersey holds a special primary on Tuesday as part of the process for replacing the late Democratic Sen. Frank Lautenberg, who died on June 3.

For the Democrats, Newark Mayor Cory Booker will romp, Booker polling at 54% in the latest Quinnipiac survey, 37 points ahead of his closest rival. And in a matchup vs. the expected Republican challenger, Steve Lonegan, Booker leads 54% to 29%.

--In the New Jersey gubernatorial race, Gov. Chris Christie leads his Democratic challenger, Barbara Buono, 58% to 30%, according to Quinnipiac.

--A New York Times/Siena College poll finds with a month to go before the Sept. 10 primary, Christine Quinn leads the Democratic race for New York City mayor with 25%, followed by 16% for William Thompson and 14% for Bill de Blasio. Anthony Weiner has drooped to 10%. In the city comptroller race, Eliot Spitzer has a nine-point lead over Scott Stringer, 44-35.

--Republican six-term Congressman Rodney Alexander, La., announced that he would not run for re-election, citing the inability of congress to get things done.

“Rather than producing tangible solutions to better this nation, partisan posturing has created a legislative standstill,” Alexander said. “Unfortunately, I do not foresee this environment to change anytime soon. I decided not to seek re-election, so that another may put forth ideas on how to break through the gridlock and bring about positive change for our country.”

Alexander was first elected as a Democrat in his northeastern Louisiana district but near the end of his first term, he switched to the Republican Party. It does not appear a Democrat can win this seat in 2014. [Paul Singer / USA TODAY]

--A WMUR/UNH poll of likely primary voters in New Hampshire has Hillary Clinton slaughtering Joe Biden 62-8! I mean Biden is vice president. He’s deserving of a little more respect.

On the Republican side, Chris Christie is at 21%, Rand Paul 16%.

--In a Fox News poll, President Obama’s approval rating has fallen to 42%, with 52% disapproving. The latest Gallup tracking survey has Obama with only a 45% approval mark, 48% disapproving.

--Former President George W. Bush had stent surgery to clear a blocked heart artery. Bush had no symptoms but the blockage was discovered as part of a normal physical that included a stress test. The EKG turned up signs of an abnormality.

But Paul Chan of the Mid-America Heart Institute in Kansas City, Missouri, questioned why Bush would have undergone a stress test at all if he didn’t have symptoms, Chan adding, ‘there’s no evidence showing it’s beneficial.’

Michelle Fay Cortez of Bloomberg wrote an interesting piece on the national debate on the best way to treat early cardiac concerns.

“The discussions have been ongoing since 2007, when the trial known as Courage first found that less costly drug therapy averted heart attacks, hospitalizations and deaths just as well as stents in patients with chest pain. The results were confirmed two years later in a second trial.

“The debate has centered on both the cost of stenting, which can run as high as $50,000 at some hospitals, and its side effects, which can include excess bleeding, blood clots and, rarely, death. Opponents say the overuse of procedures like stenting for unproven benefit has helped keep U.S. medical care on pace to surpass $3.1 trillion next year, according to the U.S. Centers for Medicare and Medicaid Services.

“ ‘This is really American medicine at its worst,’ said Steven Nissen, head of cardiology at the Cleveland Clinic in Ohio, in a telephone interview. ‘It’s one of the reasons we spend so much on health care and we don’t get a lot for it. In this circumstance, the stent doesn’t prolong life, it doesn’t prevent heart attacks and it’s hard to make a patient who has no symptoms feel better.’”

Stents, according to some cardiologists, are lifesavers for someone suffering a heart attack, but for those who aren’t, the benefits are sketchy.

“In the Courage trial, all 2,287 patients were given medicine to lower their cholesterol, cut their blood pressure and prevent clots. Half also received stents to treat blockages that cut off at least 70% of at least one artery. After five years, there was no difference in deaths, heart attacks, or hospitalizations for chest pain between the two groups.”

A second trial two years later confirmed the Courage results.

--According to the National Oceanic and Atmospheric Administration, 2012 was one of the 10 hottest on record for global temperatures. Arctic sea ice also reached record lows during the summer thaw. In Greenland, about 97% of its ice sheet melted in the summer.

“Greenhouse gas emissions continued to rise. In early May, the ratio of carbon dioxide in the Earth’s atmosphere surpassed 400 parts per million in an average daily reading at Hawaii’s Mauna Loa Observatory, thought to be the highest concentration in millions of years.” [Neela Banerjee / L.A. Times]

Nine of the 10 hottest years have been recorded since the late 1990s. In January, NOAA reported that 2012 was the hottest year on record for the lower 48 states.

--The Republican National Committee blasted NBC and CNN for promoting the presidential candidacy of Hillary Clinton, threatening to blackball them from future GOP primary debates if they air upcoming programs on her; in NBC’s case a miniseries starring Diane Lane. CNN’s is a documentary.

Note to my Republican friends. Bitch about the programs after they come out if you see fit. You’re not going to stop them so it just looks incredibly childish beforehand.

--I stumbled on the following in the Sydney Morning Herald. It represents reason No. 847 why I struggle to be positive about the future of Planet Earth.

“I’m a 23-year-old psychology student from Sydney and in June this year, I was subjected to a horrific torrent of abusive tweets from fans of touring American rapper Tyler Okonma. I challenged Okonma’s lyrics which encourage rape and violence against women by vocally supporting a petition on change.org that suggested he shouldn’t be playing all-age shows.

“At Tyler’s concert in Sydney the next day, he told his fans he hoped my children got STDs, and ‘dedicated’ songs to me that included lyrics like ‘punch a bitch in her mouth just for talkin’ s---‘.

“The abuse started almost instantly. First a drip, then a rush, then a flood. I felt physically sick. He had 1.7 million fans, and it felt like every single one of them had some violence stored up for me – a promise to assault me, the threat that they would rape me, an expression of hatred for my life and my freedom.”

Talitha’s story gets a lot worse. One wrote to say he was going to mutilate her. She then explains all the steps she took with Twitter, but its “rules and processes are badly broken.”

“Public discourse shouldn’t be something anyone should have to ‘learn to deal with.’ Twitter can, and must, play an active role in being a positive voice among the multitude of violent tweets some of its users dish out. Twitter’s actions here can have life-saving consequences – but it needs to act, swiftly and effectively.”

--A study in the journal Obesity, conducted by researchers at Tel Aviv University in Israel, found that consuming the heaviest meal of the day at breakfast and the lightest at dinner can lead to significant weight loss. The breakfast group subjects lost an average 19.1 pounds over 12 weeks, while the dinner group shed 7.9 pounds.

Total cholesterol slightly decreased in both groups but HDL levels, the good cholesterol, increased significantly only in the breakfast group. [Ann Lukits / Wall Street Journal]

--Here’s to Michelle Knight. That tiny young woman, one of the three abducted by Ariel Castro, is revealing herself to be a true giant. 

--There’s an interesting debate going on in Detroit, given the city’s bankruptcy filing, and what to do with all the great art that resides in the Detroit Institute of Arts, a world-class museum. According to the Detroit Free Press, the 38 most important pieces, which include works by Van Gogh and Rembrandt, have a market value of about $2.5 billion.

So Kevyn Orr, the Detroit emergency manager, is paying Christie’s to appraise part of the city-owned collection.

No decision about whether to sell the art to satisfy creditors has been made, though all the city’s assets are being evaluated. The appraisal won’t be completed until mid-October. [That would be a fun job, mused the editor.]

Christie’s is only appraising pieces that are clearly owned by the city and not bound by donor restrictions.

What would you do? I agree with the following from the Wall Street Journal’s Terry Teachout.

“Too many (art lovers) believe that the value of high art should be self-evident to all right-thinking people. It’s not an ‘argument’ to suggest that anyone who advocates selling off the DIA’s masterpieces is an art-hating philistine. Even if they’re wrong, as I think they are, the sell-the-art crowd is making a morally serious case that can’t be countered by name-calling.

“How best can it be opposed – and who should be doing the opposing? Any argument to keep Detroit’s masterpieces in Detroit has got to make sense to Detroiters who think that pensions are more important than paintings. Fortunately, such arguments do exist.

“ -- Contrary to popular belief, any money derived from the sale of the DIA’ art collection would not be used to turn on the streetlights of Detroit. It would go straight into the bottomless pockets of the city’s Wall Street bondholders. Why slaughter a world-famous museum for their sake?

“ -- If you truly believe that Detroit has a post-crisis future, then it’s your duty to preserve at least some of the things that help make the city worth living in – and visiting. Would you auction off the National Archives’ original copy of the Declaration of Independence to help pay down the national debt?

“The catch is that such arguments shouldn’t be coming from me. They’ve got to come from Detroit’s leaders – and not the corrupt, swinish pols who recklessly mortgaged its future in the first place, but the serious men and women who have to make the hard choices without which the city has no hope. If a no-sale consensus emerges among Detroit’s leadership class, and if the smartest and most articulate members of that class can sell it to the public, then it could become politically difficult for Mr. Orr to dispose of any of the DIA’s major pieces. But if they shirk their responsibility to the city’s future, then Detroit can kiss ‘The Visitation’ goodbye.”

--Alex Rodriguez went 0-for-4 in his return to Yankee Stadium Friday night....hehe.

As much as I love the Big Apple, though, it truly is filled with morons...like the ones carrying signs at the stadium that read “We’re Behind You A-Rod” and “We Love A-Rod.”

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

Gold closed at $1312
Oil, $105.97

Returns for the week 8/5-8/9

Dow Jones -1.5% [15425]
S&P 500 -1.1% [1691]
S&P MidCap -1.3%
Russell 2000 -1.1%
Nasdaq -0.8% [3660]

Returns for the period 1/1/13-8/9/13

Dow Jones +17.7%
S&P 500 +18.6%
S&P MidCap +21.3%
Russell 2000 +23.4%
Nasdaq +21.2%

Bulls 51.6
Bears 18.5 [Source: Investors Intelligence...huge gap between the two normally a warning sign for this contrarian indicator, but that hasn’t proved to be the case this year.]

Have a great week. I appreciate your support.

Brian Trumbore

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