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04/26/2014

For the week 4/21-4/25

[Posted 12:00 AM ET]

Edition 785

Washington and Wall Street

I thought I said a mouthful when it comes to the Federal Reserve, the U.S. economy and the deficit picture last week so I’m going to be brief this go ‘round.

We had a slew of corporate earnings, from United Technologies and McDonald’s, to Starbucks and 3M, to Amazon and Microsoft. I have individual details below but broadly speaking, the guidance for the rest of the year, when offered in any detail, was okay. Not great, but okay, which is in keeping with my belief business spending and revenues will gradually pick up, finally, baring a far worse geopolitical situation in Europe or a China-Japan tussle in the South or East China seas.

But overall, reported earnings for the first quarter among the S&P 500 set are up just 1% over the same period last year with revenues up only 3%, or basically in line with punk projections. At least the major industrials I looked at showed revenue gains...United Technologies up 2%, Caterpillar up 5%, 3M up 2.6%...with similar stories for most of the group below. Again, not great but at least headed in the right direction.

The problem is the earnings bar, which had been lowered big time for the first quarter, is now much higher the rest of the year, like double-digit earnings growth, and when it comes to the stock market, broadly speaking, I don’t see a lot of upside. The stocks I focused on this week, including the likes of Facebook, look fairly valued, while the highflyers with outrageous multiples continue to get taken out to the woodshed and shot.

As for economic data, durable goods orders for March were solid, up 2.6%. This is good as it’s a barometer of big-ticket items, cap-ex.

But existing- and new-home sales data for March was hardly exciting; a third straight monthly decline in the case of the former and a 14.5% decline in the latter.

Yes, median prices on both were up substantially, but that’s part of the problem. Prices are higher, but so are rates, with an average 30-year fixed now around 4.50% vs. 3.60% last May. Affordability is a big issue, particularly in an economy with virtually non-existent wage gains (I do look for this to change...which is part of my rising interest rate scenario that, rambling, isn’t necessarily good for housing!).

According to an industry newsletter Inside Mortgage Finance, mortgage lending was at its lowest level in 14 years in the first quarter, in case you needed further evidence of why the banks are slashing their lending staffs.

One other item. Last week I got into the healthcare cost assumptions for the Congressional Budget Office’s latest deficit outlook and how it was basically a crock that the White House was trumpeting supposed savings from the Affordable Care Act when no one really has a clue as to future costs, let alone the direction of the overall economy and the ability to pay for extra services and the like.

So Annie Lowrey had a piece in the New York Times over the weekend that read in part:

“(President Obama promoted) the success of the (ACA) in covering more Americans at less cost than anticipated.

“ ‘Under this law, real Medicare costs per person have nearly stopped growing,’ Mr. Obama said at a news conference (April 17)....

“ ‘Those savings add up to more money that families can spend at businesses, more money that businesses can spend hiring new workers,’ he said, adding that the government’s budget scorekeeper ‘now says that the Affordable Care Act will be cheaper than recently projected.’

“But some health care experts and economists said that an expanded use of the health system might start to have the opposite effect. Americans feeling more economically confident might demand more procedures from doctors and hospitals. Insurers paying more money for those procedures might, in time, increase premiums, cutting into wage gains. The government might end up spending more on the health law than current projections imply.

“ ‘We knew this was coming,’ said Douglas Holtz-Eakin, a former head of the Congressional Budget Office and a prominent Republican economist, of rising spending because of the coverage expansion and improving economy. ‘The question now is whether we can hold spending down.’...

“The question is whether health spending might grow moderately, with a one-time bump from new Affordable Care Act enrollees, or whether it might surge, with potentially damaging consequences for the fiscal deficit and wages. Economists from both the right and left – including in the White House – have said that there is no greater threat to the government’s budget than soaring health spending....

“A separate report from the Altarum Institute, a nonprofit research group, also shows that health spending started to climb last summer. This February, spending growth reached a seven-year high.

“Government data seem to paint a similar picture, with the annual pace of spending growth on health care increasing to 5.6 percent in the fourth quarter of 2013, from 1.3 percent in the first quarter. That 5.6 percent growth rate is the highest since 2004.”

Which is why I did my in-depth look behind the numbers last time. We’ve learned to take what our president says with a grain of salt, if we listen at all. Clearly few overseas listen to him as well these days, but I digress.

Europe and Asia

The eurozone’s flash estimate on the services and manufacturing sectors for April showed a manufacturing PMI of 53.3 vs. 53.0 in March, with services at 53.1 vs. 52.2, a 34-month high in the case of the latter.

In Germany, the flash PMI for manufacturing was 54.2 in April vs. 53.7 last month, with services at a strong 55.0 vs. 53.0.

But in France the numbers fell, manufacturing 51.6, down from March’s 53.3, while the service reading was barely in growth mode, 50.3 vs. 51.5 as service providers and manufacturers were cutting prices, exactly what the European Central Bank does not want to see.

The ECB’s next meeting is May 8 and with its concern over low inflation, which could be exacerbated should the situation in Ukraine worsen, it is committed to keep monetary policy loose while using unconventional instruments within the ECB mandate if needed.

Separately, Italy’s government approved an extensive income-tax cut that impacts 3/4s of the workforce, just in time for the European Parliament vote May 22-25, though Prime Minister Matteo Renzi hasn’t found corresponding savings in the budget.

Which leads me back to the topic of debt. Just last week I harped on this when it comes to Europe and the periphery, even as bond markets soar and yields plummet.

Well, on Wednesday the European Union’s statistical arm, Eurostat, released its latest debt update and it had the same figures I’ve been noting in terms of government debt to GDP and the dangers therein.

While Eurostat revealed the ‘government deficit’ for the euro area (EA18) was 3.0%, the ECB target, ‘government debt’ continued to rise, in the case of the EA18 from 85.5% of GDP in 2010 to 92.6% in 2013.

So for the record, at the end of 2013 you had the following government debt to GDP ratios.

Germany 78%, France 93%, Spain 94% (up from 62% in 2010), Greece 175%, Italy 133%, Portugal 129%, Ireland 124%, Cyprus 112% and Belgium 101%. [Non-euro U.K. is at 91%.]

Looking at the five periphery countries – Portugal, Spain, Italy, Greece and Ireland – yes, yields are falling and have eased borrowing costs, for now, but economic growth has been weak (if it exists at all) and budget deficits are still extensive, meaning the interest bill is continuing to grow.

Ebrahim Rahbari, a senior economist at Citi, told the Financial Times’ Robin Wigglesworth:

“High debt levels and economic misery is clearly a political problem. Even if we start to see their debt ratios stabilize and even begin to tick down, they will remain extremely high for a long time, which means they’re very vulnerable to future shocks.”

Think back to my favorite U.S. deficit topic...interest expense...and how it’s going to explode once rates normalize.

The IMF’s latest World Economic Outlook shows the debt servicing burden in the above five periphery nations will account for almost 10 cents in every euro of revenues taken in by the governments.

What does this mean? These same nations, joined no doubt by a few of the others (see France), won’t be able to meet social safety net costs and make investments. Robin Wigglesworth of the FT notes on this topic: “For example, Portugal’s 7.3bn euro interest bill this year exceeds its education spending and almost matches its health budget.”

Sound familiar? This has been my point on our own looming interest expense crisis and how if you think your pet government program is getting whacked today, just wait another 6-8 years.

Back to France, the restructured government of President Francois Hollande and new Prime Minister Manuel Valls announced this week that the 2015 fiscal deficit would be equivalent to 3% of GDP – in line with the EU’s mandate, as France has continually been given more time by the European Commission to hit this level.

Only one problem. France’s new finance minister, Michel Sapin, is projecting growth of 1% next year, rising to 2.25% in 2016 and 2017.

The folks in Brussels who look at such things are thus unlikely to believe the seemingly funny numbers. Remember, public spending in France is a humongous 57% of GDP and the above-noted debt to GDP figure of 93% is up from 65% at the start of the financial crisis.

Much of what I’m discussing spells major trouble politically unless the eurozone starts growing at 2%+ virtually across the board. The numbers just don’t work. And, again, it’s why something like Ukraine (that spreads, for example, to the Baltics) could kill any confidence that better days are yet ahead.

It’s also why I’ve spent so much time talking about populist movements across the Euro continent and the importance of the European Parliament vote.

Political economist Niall Ferguson had a column in the FT last weekend talking of today’s populists being a “motley crew of xenophobes, nationalists and cranks,” focused on anti-immigration and euroscepticism.

Ferguson is relatively optimistic the far-right parties won’t do as well in the May vote as others (read moi) say they could. Invariably, Ferguson writes, when push comes to shove, voters will skew to the center and mainstream parties. Nonetheless he’s still projecting 16% of the 751 seats in the Euro Parliament will go to the populists.

More on this important topic next week as I report to you from Paris.

A few brief words on China and Japan. The HSBC flash April reading on manufacturing in China came in at 48.3 vs. 48.0 in March, not good, still contraction territory, but if you want to be optimistic, possible stability.

In Japan, exports by value came in at a highly disappointing up 1.8% (down 2.5% by volume) while imports rose 18.1% on the heels of higher fuel costs (driven by the weak yen). Shipments to China were up only 4.3% vs. 27.6% in February, though just as on the mainland, China’s Lunar New Year holiday (which wrapped both January and February), probably skewed the numbers. We need another month to shake out the true picture on this front.

Meanwhile, an index of consumer prices in Tokyo rose 2.7% in April from a year earlier, reflective of the 3 percentage point sales-tax increase April 1. It was the biggest jump in the CPI in Tokyo since 1992.

The Bank of Japan releases updated national data on inflation and growth next week. 

Street Bytes

--Stocks were headed for a second straight up week until Friday’s sell-off over further distress in the tech sector as well as Ukraine concerns. The Dow Jones finished down 0.3% to 16361, while the S&P 500 lost a point, 0.1%, and Nasdaq fell 0.5%.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.43% 10-yr. 2.66% 30-yr. 3.44%

A little flight to safety at week’s end in the 10-year due to Russia’s moves.

The Fed’s Open Market Committee meets next week and they will continue tapering, another $10 billion.

--Apple reported revenue of $45.6 billion in the last quarter, up from $43.6 billion year earlier, earning $10.2 billion, up from $9.5 billion, so both figures, while huge, didn’t exactly exhibit the kind of growth the company reported just a few years ago.

Apple sold 43.7 million iPhones, above expectations and up from 37.4 million last year, but sales of its iPads were below expectations, 16.35 million, down from 19.5 million last year. So overall a rather modest growth story, at best.    Revenue from Greater China, including Hong Kong and Taiwan was up 13% to $9.3 billion, or about 20% of the company’s total.

But CEO Tim Cook announced the company was raising its quarterly dividend by 8 percent, that it would expand its buyback program another $30 billion to $90 billion, and, rather shockingly, split its stock 7-for-1. The shares promptly rose $46 to $571 by week’s end. Ah yes, the power of financial engineering.

Now the stock is far from being overvalued, but Apple has no new product initiatives in the immediate future, unless you’re fired up by the prospect of a larger screen for your iPhone.

--Facebook shares rallied, before falling off in Friday’s rout, on the news its first quarter profit increased to $642 million, up from $219 million a year earlier on revenue of $2.5 billion, up 70%+ from $1.46 billion. Not bad. Earnings of 34 cents a share handily beat expectations of 24.

Market researcher eMarketer said Facebook’s share of the $120 billion global digital advertising market increased to 5.8% last year, up from 4.1% in 2012, though Google still commands 32%.

Most importantly for analysts, mobile advertising accounted for 59% of Facebook’s revenue. It was 30% a year ago.   Facebook’s share of the mobile market is up to 7.4%, while Google’s fell to 40%. [Reed Albergotti / Wall Street Journal]

One figure I’ve always had a problem with, however, is “average users” on any given day, with the company pegging it at 802 million. This one is easily manipulated, sports fans.

--Microsoft reported higher than expected earnings, 68 cents vs. 63 cents, though total revenues were flat from year ago levels. Strong sales of Windows software and the Xbox gaming console were offset by the ongoing weakness in the PC market. Revenue from sales of Windows for enterprises rose a strong 19%.

Microsoft’s new CEO, Satya Nadella, has set a push into cloud computing as a major goal for the company and efforts on this front appear to be bearing fruit as Azure, its product in the area, grew 150%.

--Amazon earned $108 million in profits for the first quarter on stronger than expected revenue of $19.74 billion. Investors, though, were disappointed by rising expenses, up 23%, and weak guidance, as in an operating loss for the current quarter.

CEO Jeff Bezos has been aggressive in expanding into streaming video with the launch of its fire TV box, including a new deal with HBO.

The shares cratered $34 on Friday to $303, down from its high of $408 on Jan. 22.

--Netflix announced profits of $53 million for the first quarter that smashed expectations as the internet video streaming firm said it added 2.25 million new members during the period, bringing its global membership to 48 million. Revenue rose 24% to $1.27 billion. The company then announced it would probably increase monthly rates “one or two dollars” later this year which analysts like.

Shares initially soared on the news but then plummeted, largely because of Amazon’s announcement it was partnering with HBO. Netflix CEO Reed Hastings has always wanted to surpass HBO’s subscriber number of 130 million and he mentioned in a letter to shareholders “We are eager to close the gap.”

But, as was the case with Amazon, there are serious valuation concerns, at least in today’s environment. Netflix closed at $322, off its all-time high of $458 set on March 6.

--There was tumult in the global pharmaceutical industry as Novartis and GlaxoSmithKline announced plans for a multibillion-dollar asset swap, and then Botox maker Allergan received an unsolicited $48 billion offer from Valeant Pharmaceuticals and activist investor Bill Ackman. Allergan, late Tuesday, vowed to block the plan, though Ackman has built a nearly 10% stake in the company.

Meanwhile, Novartis is buying a portfolio of cancer therapies from Glaxo for $14.5 billion, while selling its vaccine business to Glaxo ($5.25 billion). Novartis is also selling its animal-drugs business to Eli Lilly for $5.4 billion.

It’s all part of a new trend with the drug companies focusing on specific sectors where they have the expertise and size to dominate. CEO John Lechleiter of Eli Lilly said, “It’s understanding what you’re good at, what your core competencies are and making sure you’re at scale to pursue opportunities in that space.”

As analyst Denise Anderson told the Journal, the flurry of M&A activity “is not so much about R&D,” as “it’s more commercial... I think it’s a very positive move that companies are taking a hard look at those portfolios and saying, is this the best use of our capital?”

So now Novartis is going to concentrate on prescription pharmaceuticals, eye care and generic drugs. Glaxo said it will focus on respiratory, HIV, vaccines and nonprescription products.

Eli Lilly is going to be choice of the world’s cats and dogs for all their healthcare needs...or something like that. Woof woof!

--Ford Motor Co. announced that CEO Alan Mulally, 68, will leave the company, probably by summer rather than year end as first thought with Mark Fields, 53, a Ford veteran, succeeding him. Mulallay will no doubt move on to another corporation, either as CEO or chairman.

Ford had a net loss of $12.6 billion in 2006, the year Mulally took over. Last year the company’s net income was $7.16 billion.

Ford’s first-quarter estimates fell short of estimates.

--General Motors’ profits were hit by a $1.3 billion charge to cover the costs of its huge recall over defective ignition switches, though ex-charges it beat the Street’s earnings expectations. Revenue, however, fell short, though was up $500 million over the same period last year.

By the way, of the $1.3 billion charge, $300 million was to cover the cost of courtesy cars.

--Boeing’s revenues rose 8% in the first quarter as the company delivered 161 commercial aircraft, up 18% over a year earlier.

--JetBlue, the nation’s fifth-largest carrier, saw its 2,400 pilots vote to join the Air Line Pilots Association, ending JetBlue’s status as the biggest U.S. airline without a union.

--Delta Air Lines made $213 million in the first quarter despite the severe weather this winter, yet United Airlines lost $609 million during the same period as it said $200 million of its loss was attributable to the Polar Vortex and such. United is also still struggling to combine systems following its merger with Continental.

--During Iraq’s petroleum heyday, 1979, it produced 3.5 million barrels a day. This past February finally saw production exceed that level at 3.6 million on average, though due to various difficulties then fell back to about 3.25 million in March, according to the International Energy Agency and the Wall Street Journal.

The IEA forecasts Iraq will be the single largest contributor to global-production growth over the next 20 years.

Oil makes up 90% of Iraq’s budget and while production has been stronger than recent years, exporting it has been another matter, with underinvestment and mismanagement continuing to be major hindrances, let alone attacks on the infrastructure and personnel.

--The Supreme Court took up a dispute between broadcasters such as ABC, CBS and Fox and Internet startup Aereo Inc. and its service that gives subscribers in 11 U.S. cities access to television programs that, according to the broadcasters, is stolen by taking free television signals and sending them over the Net without paying redistribution fees. The broadcasters are right.

But Aereo, which is backed by Barry Diller, says the broadcasters can’t stand in the way of innovation. The broadcasters say Aereo’s competitive advantage lies in avoiding paying for its product.

A federal appeals court in New York ruled that Aereo did not violate copyright rules with its service, but judges in Los Angeles and Washington, D.C., have blocked Aereo.

A decision by the High Court is expected late June.

--A New York Times analysis reveals that the American middle class has fallen behind Canada as the most affluent in the world, with after-tax middle-class incomes being higher, while the poor in Europe earn more than poor Americans.

The figures are based on surveys taken over the past 35 years. Median income in Canada has moved ahead of the U.S., while median incomes in Western European nations still trail, though the gap in the likes of Britain and Sweden is much smaller than it was a decade ago.

Yes, the Times’ story is about rising income inequality. It’s bad enough for the middle class, but the poor in particular are really getting whacked.

The data was compiled by LIS, a group that maintains the Luxembourg Income Study Database. Lawrence Katz, a Harvard economist who is not associated with LIS, said, “The idea that the median American has so much more income than the middle class in all other parts of the world is not true these days. In 1960, we were massively richer than anyone else. In 1980, we were richer. In the 1990s, we were still richer.”

Since 2000, after adjusting for inflation, median per capita income in the U.S. is virtually unchanged while, for example, it rose about 20% in Britain between 2000 and 2010.

But here’s what may be most telling in the Times report by David Leonhardt and Kevin Quealy.

“Americans between the ages of 55 and 65 have literacy, numeracy and technology skills that are above average relative to 55- to 65-year-olds in the rest of the industrialized world, according to a recent study by the Organization for Economic Cooperation and Development....Younger Americans, though, are not keeping pace: Those between 16 and 24 rank near the bottom among rich countries, well behind their counterparts in Canada, Australia, Japan and Scandinavia and close to those in Italy and Spain.”

--In a somewhat related vein, as the New York Daily News’ Corinne Lestch reports, “Rents across (NYC) have skyrocketed over the past 12 years – leaving New Yorkers paying staggering sums while their incomes have declined.

“Median apartment rents in the city have increased 75% since 2000 – a rise 31 points greater than in the rest of the country, according to a report released by the city’s controller’s office.

“Median real incomes declined by nearly 5% during the same period.”

Ms. Lestch talks about a couple that made too much for a rent-stabilized apartment in Brooklyn... “roughly $41,000 together.”

“ ‘We’re put in a position of paying rent that is higher than we can afford,’ [said the wife]....

“She said they paid $920 a month for a two-bedroom apartment in Bedford-Stuyvesant until 2012, when they left because of an infestation of rats, mold and other building violations.

“Now, the average rent for a two-bedroom apartment in that building is $1,993 a month.”

On this issue I agree with some Democrats who note that “predatory private equity firms” try to force out tenants paying stabilized rents so they can then charge ‘market rates.’

--Starbucks reported same-store sales growth at U.S. stores were up 6% in the quarter and the company raised full-year guidance a smidge. Net profit was in line vs. expectations while revenues were down vs. estimates, though up 9% vs. year ago levels.

Global sales rose 6%, lower than the 7% reported in the previous quarter, but still very solid.

--The Food and Drug Administration has made a move to extend its regulatory authority to electronic cigarettes, the nicotine delivery system that has quickly grown into a multibillion-dollar business with zero oversight, let alone consumer protections.

I didn’t realize (not being a smoker myself), that the FDA will also regulate pipe tobacco and cigars for the first time. I don’t know why...I just kind of assumed they already were in some form.

So the sale of e-cigarettes, cigars and pipe tobacco to Americans under 18 will now be prohibited.

It’s going to be at least another year before the new regulations go into effect, but it could be a lot longer if affected companies try to block the move with lawsuits, which of course they’ll do.

As reported by the New York Times’ Sabrina Tavernise:

“Perhaps the biggest proposed change would require producers of cigars and e-cigarettes to register with the F.D.A., provide the agency with a detailed accounting of their products’ ingredients and disclose their manufacturing processes and scientific data. Producers would also be subject to F.D.A. inspections.”

--General Electric is rumored to be interested in France’s train and power plant builder Alstom, though the French government warned it is ready to protect national interests, Alstom employing 18,000 in France.

--A few state unemployment rates for March.

California 8.1%
Florida 6.3%
Nebraska 3.7%
Nevada 8.5%
New Jersey 7.2%
New York 6.9%
North Dakota 2.6% [lowest]
Pennsylvania 6.0%
Rhode Island 8.7% [highest]
South Dakota 3.7%
Texas 5.5%

National average 6.7%

--McDonald’s reported global comps rose a scant 0.5% in Q1. Same-store sales in the U.S. fell 1.7%.

Blame falls squarely on Ronald McDonald, who should be dumped, but instead they gave him new duds. I’m guessing they don’t ditch the guy because of Ronald McDonald House Charities. So keep the name, but throw the bum out. Plus Taco Bell wouldn’t be having so much fun at Ronald’s expense.

But here’s a nightmare. McDonald’s insists it is going to send its spruced-up creep onto the tube in a new ad campaign and remodeled restaurants will incorporate his image. I just want to eat my Big Mac in peace! [Don’t forget...2-for-1 sale until May 7, boys and girls.]

--Yum Brands, whose labels include Taco Bell and KFC, and which receives 50% or so of its total sales from China, read KFC, said sales there in the first quarter rebounded 9%, a nice number given past difficulties, including avian flu.

I was surprised to see, though, that Taco Bell sales in the U.S. fell 1%. Granted, this was prior to their new breakfast rollout.

--The Chinese are coming! The Chinese are coming! To New Zealand that is. China has become the country’s biggest source of long-term arrivals at 6,200 in the year through March, followed by India at 6,100 and 5,800 from Britain.

Heck, if you had money why would you want to stay in heavily polluted China when you can live in the land of hobbits and elves? Granted, Mordor is a drawback, but at the fork in the road where you have a choice between Mordor or Queenstown, choose Queenstown and you’ll be fine.

China, incidentally, surpassed Australia as New Zealand’s biggest trading partner last year. [South China Morning Post]

Actually, New Zealand has been aggressively going after wealthy Chinese, especially after Canada, a top destination for Chinese, began restricting its immigrant visas.

--Fish farming accounts for 47% of global fish production these days, compared to 9% back in 1980, according to the U.N. Norway has become the second-largest exporter of farmed fish behind China. Now if you trust what the label says, where would you rather buy your farmed fish from, Norway or China?

--I think we can agree that air travel can be rather difficult at times. The other day, a Qantas flight from Los Angeles to Melbourne was forced to turn back mid-air because of a fuel pump issue.

So get this, 4 ½ hours into the flight, having already passed Hawaii, the captain returned to Los Angeles. That, friends, is your basic nightmare.

Foreign Affairs

Ukraine: Tensions have been increasing all week, starting with the killing over the weekend of at least three pro-Russian activists in Slovyansk at a checkpoint manned by them. President Vladimir Putin wants nothing more than to destabilize the country and have a failing Ukraine ahead of the May 25 presidential election, or to have the election postponed outright.

Ukrainian Prime Minster Arseniy Yatsenyuk, appearing on NBC’s “Meet the Press,” said of Putin:

“Every day, he goes further and further. And God knows where is the final destination.”

For its part, the United States announced it would carry out small ground-force exercises in the Baltics and Poland, but no more than 600 troops total in the four when Poland’s Foreign Minister Sikorski called for 5,000 to 10,000 U.S. troops in his country alone.

As many as 1,300 pro-Russian gunmen continued to hold many of the buildings they seized in the past two weeks, which goes against the Geneva agreement reached between the U.S. and Russia to deescalate the crisis.

A leading local Ukrainian politician in the east was tortured and killed, his body found in a river.

Vice President Joe Biden, speaking from Kiev, said on Tuesday: “The most acute problem facing the Ukrainian people...[is] the ongoing threat to Ukraine’s sovereignty and its territorial integrity. Ukraine must remain one country. No nation has the right to simply grab land from another nation,”* Biden said, adding, “We will never recognize Russia’s illegal occupation of Crimea and neither will the world.”

*CNN’s Jake Tapper had a good line on reading this statement. “Tell that to the Native Americans.”

By Thursday, Putin was warning of unspecified “consequences” in retaliation for the security crackdown on pro-Russian separatists with as many as five reportedly killed in another clash in Slovyansk.

“If our interests, our legitimate interests, the interests of Russians have been attacked directly, like they were in South Ossetia [Ed. 2008, Georgia’s breakaway republic], I do not see any other way but to respond in full accordance with international law,” said Russian Foreign Minister Sergei Lavrov.

Russia announced new military exercises along the Ukrainian border. Putin said: “If the Kiev government is using the army against its own people this is clearly a grave crime.”

President Obama and Secretary of State Kerry threatened imminent new economic sanctions against Russia. Obama, in a joint news conference in Tokyo with Prime Minister Abe, said:

“I understand that additional sanctions may not change Mr. Putin’s calculus. How well they change his calculus in part depends on not only us applying sanctions but also the cooperation of other countries.”

Secretary Kerry said on Thursday: “Not a single Russian official has...called on the separatists to support the Geneva agreement, to support the stand-down, to give up their weapons and get out of the Ukrainian buildings.”

Kerry accused Russian media of promoting Putin’s “fantasy” about events in Ukraine and said Moscow continued to “fund, coordinate and fuel a heavily-armed separatist movement in Donetsk.”

Kerry said U.S. intelligence was confident Russia was “playing an active role in destabilizing eastern Ukraine” with personnel, weapons, money and operational planning.” Kerry added the window for Russia to change was closing.

The Geneva agreement clearly stated armed groups were to go home.

A U.S.-funded poll by a Gallup affiliate of 1,200 randomly selected Ukrainians in all sections of the country found a nationwide average of 85% against any Russian military intervention. [97% in the western provinces, 94% in the region including Kiev, were against; 69% in the eastern regions opposed.]

Late Friday we learned that pro-Russian forces took seven Organization for Security and Cooperation in Europe officials, along with five Ukrainian soldiers and their driver hostage in the separatist stronghold of Slovyansk, a highly worrisome development. I’m biting my tongue on this, having read some of the comments of the self-appointed mayor of the town.

Russia has also picked up the intensity of its drills across the border and fighter jets have flown into Ukraine’s airspace. U.S. Secretary of Defense Chuck Hagel’s calls to his Russian counterpart have been ignored.

For its part the G-7 announced they will levy new sanctions next week, though there is clear disagreement among the members just how tough they should be. Earlier, President Obama had said the tougher sanctions were “teed up” if Putin didn’t deescalate. Hardly.

One military tidbit from The Economist. Should Russia invade Ukraine, most of the latter’s forces are in the wrong place, positioned in the West “as if to counter an attack from NATO.”

For its part, the 40,000-50,000 Russian troops on the border of Ukraine can’t indefinitely maintain their high state of readiness.

In an interview with the Washington Post’s Lally Weymouth, Polish Foreign Minister Sikorski was asked how he’d explain why Ukraine matters to Westerners?

“It matters because for the first time since the Second World War, one European country has annexed a province from another European country. And that matters because it is a rejection of our entire legal system and international norms and treaties that we have regarded as the foundation of peace.

“Remember, there is not a country in Europe that does not have national minorities. If we went back to protecting them through changing borders, we would be back in the hell of the 20th century and before. This is why what President Putin has done in Crimea and is now doing in eastern Ukraine is so threatening to all of us.”

Editorial / Wall Street Journal

“The larger problem is that Mr. Obama can’t seem to admit that his assumptions about the world are being repudiated by the week. He came to office believing his own campaign rhetoric that the U.S. was unpopular mainly because of President George W. Bush. He would end these misunderstandings through diplomatic engagement, especially with our adversaries, who would respond in kind to our good will and moral example. Nowhere in the world has that happened.

“To the contrary, Mr. Obama’s second term has been marked by the advance of revisionist powers seeking to rewrite the post-Cold War global order. Iran is attempting to do this on nuclear weapons, retaining a capability just short of exploding a weapon with a goal of dominating the Middle East. China is pressing its territorial claims in the East and South China seas. And now Russia is marching west with a goal of reclaiming the influence and perhaps the territory it lost with the collapse of the Soviet Union.

“Mr. Obama dismisses Russia as a mere ‘regional’ power, but more than one global threat began as a regional one. Unless he faces forceful opposition, Mr. Putin will not stop at neutralizing or digesting Ukraine. He will set his sights at discrediting NATO, perhaps with a play on the Baltic states.

“Nothing that Mr. Obama and Western Europe have done so far comes close to meeting the magnitude of this new threat. Their military gestures have been token deployments of NATO jets, their economic sanctions have been weak, and their diplomacy more pleading than forceful.

“Mr. Putin sees Western leaders preoccupied with domestic concerns with no appetite for a great power showdown. He sees European leaders unwilling to pay any economic price to sanction Russia. And he sees that Mr. Obama cares more about securing Russia’s help to strike a nuclear détente with Iran than about keeping Ukraine out of Russia’s clutches. Until that changes, Mr. Putin will march on.”

Editorial / Washington Post

“For weeks Mr. Obama has held back on forceful measures against Mr. Putin’s aggression in Ukraine on the theory that a measured approach matched with diplomacy would yield results. The policy has failed. Now Mr. Obama must act – or doom Ukraine to dismemberment.”

Israel: The Israeli government of Prime Minister Benjamin Netanyahu suspended peace talks with the Palestinians and their leader Mahmoud Abbas in response to a unity deal between Hamas and Fatah. The Palestinian factions have vowed to hold elections following formation of a unity government in five weeks or so.

The Palestinian Authority has been at odds with Hamas since the latter won parliamentary elections in 2006 and set up a rival government in the Gaza Strip a year later following clashes between it and Abbas’ Fatah organization.

Netanyahu, following a six-hour cabinet meeting on Thursday, said Abbas and Fatah “could have peace with Israel or a pact with Hamas – he can’t have both.”

Israel, said Netanyahu, will only resume talks with Palestinians “when they decide to abandon the course of terror.”

“As long as I’m prime minister of Israel, I will never negotiate with a Palestinian government that is backed by Hamas terrorists that are calling for our liquidation,” the prime minister added.

Palestinian spokesman Saeb Erekat said “Israel had no right to interfere in” Palestinian reconciliation efforts.

Netanyahu coalition member Yair Lapid said: “Hamas is a jihadi terror organization that is proud of killing civilians – women, children, the elderly – just because they’re Jewish. If the Palestinians really want a treaty with Israel, how did they not demand from Hamas to say it is abandoning terror and committing to not hurt innocent people and to follow international law?”

Lapid, the leader of Yesh Atid and the finance minister, added: “Creating a state – and we know this better than most nations – comes from the lack of drama [inherent] in normalcy, from building an electric company, collecting taxes, fighting corruption, building streets and schools, fighting terror. For the last two decades, the Palestinians were given endless opportunities to do all that, and they avoided them all.” [Jerusalem Post]

Needless to say, this week’s developments could spell the end of any U.S.-brokered peace talks, which had resumed after a three-year hiatus. They were already on the ropes before the Palestinian announcement.

Israel will now continue to take steps such as deducting Palestinian debt payments from tax revenues Israel collects for it.

For its part a spokesman for the European Union said it “has consistently called for intra-Palestinian reconciliation behind Palestinian president Mahmoud Abbas.”

April 29 is a deadline that was set for brokering a deal.

Secretary of State Kerry said he expressed his disappointment in a phone call with Abbas, with the U.S. caught off guard by the Fatah-Hamas move.

Iran: The government of President Hassan Rohani moved to bolster its finances battered by the sanctions in cutting state subsidies on oil by up to 75%, which, needless to say, had Iranians rushing to fill their gas tanks before the midnight deadline, Friday. While the cost of gasoline remains dirt cheap, the people aren’t happy.

On the nuclear talks front, an Iranian Atomic Energy Agency spokesman said the country is preparing a “comprehensive document” on its nuclear efforts, though it would not be finished for eight months!

Understand, July 20 is the goal date set for completion of a nuclear pact between Iran and the P5+1. A long-term deal would remove international sanctions if Tehran adopts appropriate measures.

Bottom line it’s coming to a head very shortly, though it would be easy for the parties involved to punt and just extend the November accord for another six months, which would mean the sanctions would remain in place. Iran needs to hoodwink its negotiating partners and convince them it will comply with a longer-term arrangement to get the desired relief.

Syria: A presidential election is slated for June 3 and it’s assumed President Bashar Assad will win a third term, though how the heck Damascus can even hold a vote in this hellhole is beyond me.

This week the war continued unabated. In the northern city of Aleppo, scores were killed in airstrikes, including at least 29 in a single neighborhood according to a monitoring group. Another 14 were killed in a barrel bomb attack on a separate part of the city. 

Over 150,000 have died in the three-year war thus far and in a report to the U.N. Security Council, Secretary-General Ban Ki-moon criticized both the Syrian government and rebel forces for their failure to allow humanitarian aid for those needing it most, two months after a Security Council resolution was to ensure this occurred.

Ban said: “Almost 3.5 million civilians remain largely without access to essential goods and services.” The call to lift the siege on populated areas “has not been heard and I consider it shameful that nearly a quarter of a million people are being deliberately forced to live under such conditions.”

Separately, the U.S. is finally supplying a small number of advanced antitank missiles for rebel groups, working with Saudi Arabia, though this is far too late.

And on the chemical weapons front, London’s Guardian reports that British government insiders claim the Assad regime is concealing chemical-weapon assets from disarmament personnel, including rockets used to deliver munitions.

Yemen: The U.S. and the Yemeni government launched an aggressive campaign against Al Qaeda after a video released by the group taunted the U.S. Supposedly at least 55 militants were killed, though it would appear the prime target, master bomb maker Ibrahim Hassan Asiri, was not taken out.

Afghanistan: According to the latest vote count in the presidential election, officials say Dr. Abdullah Abdullah leads with 43.8% followed by Ashraf Ghani at 32.9%. About 82% of the vote has been counted and these two are headed to a runoff to be held on May 28.

And in a sign of the ongoing threat to Americans, an Afghan policeman shot and killed three American doctors at a missionary hospital in Kabul that specialized in treating disabled Afghans, as well as having a maternal care unit for support of premature babies. The policeman tried to shoot himself with his own weapon after and ended up being treated in the same hospital. Just weeks earlier, an Afghan officer shot and killed a photographer for the AP, while wounding a correspondent.

China / Japan: Despite President Obama’s personal presence in Japan, talks on a free trade deal between the two nations failed as agreement on issues including market access for autos and agricultural products continue to stand in the way of an accord. Without such a deal, a U.S.-led free trade initiative involving 12 nations in the Pacific (the so-called “Trans-Pacific Partnership”) is not possible.

So while Obama was in Japan, he failed to get a trade deal and the Middle East peace process broke down, plus Ukraine grew worse.

Obama did declare that the United States was obligated to protect Japan in its confrontation with China over the islands in the East China Sea, called Senkaku in Japan and Diaoyu in China, that both claim, though Obama was careful not to antagonize China.

“The policy of the United States is clear – the Senkaku Islands are administered by Japan and therefore fall within the scope of Article 5 of the U.S.-Japan Treaty of Mutual Co-operation and Security,” Obama wrote in a piece for a Japanese newspaper.

Obama added that with regards to China, which has been aggressive in its own sovereignty claims: “Disputes need to be resolved through dialogue and diplomacy – not intimidation and coercion.”

China’s Xinhua news agency responded that the U.S.-Japan alliance was part of “a carefully calculated scheme to cage the rapidly developing Asian giant.” A foreign ministry spokesman said: “We resolutely oppose applying the Diaolyu Islands to the Japan-U.S. security treaty.”

The United States, on the other hand, welcomes Shinzo Abe’s efforts to build up its military to play a greater role in regional security.

But in this instance it’s important to note that in 2007, a Pew Research Center Global Attitudes Project survey had 67% of Japanese expressing negative views toward China. By 2013, that number had risen to 93%. [TIME]

Prime Minister Shinzo Abe has never had a summit with his Chinese counterpart Xi Jinping.

Separately, a Japanese cabinet minister and about 150 lawmakers visited the controversial Yasukuni Shrine, further enraging China (and South Korea), a day after Prime Minister Abe made an offering to the place, where some of the country’s war criminals are honored. [Justin Bieber also visited the shrine...only this idiot had no idea as to the damage he was doing to his increasingly tattered global brand.]

Joseph Nye and Kevin Rudd / Washington Post

“Japanese and Chinese leaders have said repeatedly that they do not want war.   And there is no reason not to believe them. They recognize that disruption of the economic interdependence between the world’s second- and third-largest economies would radically disrupt their development plans and internal stability. The real dangers are not in the intentions of the countries’ leaders but in the potential for miscalculation at lower levels, limited experience in ‘incident management’ and escalation in a climate of competitive nationalism.

“In this situation, the best we can aim for is to revive the wisdom of the original [Chinese Premier Zhou Enlai – Japanese Prime Minister Kakuei Tanaka] formula [of 1972, where the two agreed to leave the issue of the disputed islets for future generations]. One way of doing this, as some have suggested, might be to declare the islands a maritime ecological preserve dedicated to the larger good of the region. There would be no habitation and no military use of the islands or the surrounding seas. Ideally, China and Japan would agree, but that may be unlikely in the current climate. Other mechanisms could be explored to produce the same end. Both sides might commit to revisit their 2008 agreement on joint gas exploration. This proposal would not resolve the issue, but it could move it from the front of the stove, where it threatens to boil over, to a back burner, where it can quietly simmer for another half-century.”

Lastly, there was an interesting Reuters piece concerning China’s efforts in the search for flight MH370; as in the deployment of Chinese naval vessels has highlighted “a strategic headache for Beijing – its lack of offshore bases and friendly ports to call on.”

Remember my trips to Yap in Micronesia? As I’ve seen firsthand, mark my words, China has its eyes on such territories with deep-water port facilities. As U.S. post-World War II support for many of these islands has largely dried up, China will move in. These territories are also disconcertingly close to Guam and the huge U.S. military buildup on that island.

North Korea: There have been conflicting reports all week concerning Pyongyang’s nuclear intentions with President Obama in the region, particularly his visit to Seoul. The latest was that South Korean officials believe the North sealed a tunnel to its nuclear test site, a major sign it was preparing a fourth nuclear test, soon.

If this is true, if the materials were loaded into the tunnel and it was sealed, according to experts that means a detonation must be carried out “within seven to 14 days” or the tunnel must be unsealed and the materials removed. Some believe a test has to be conducted by May 6.

Others think the activity is a bluff. North Korea conducted prior nuclear tests in 2006, 2009 and 2012.

Also, on Friday we learned a 24-year-old American man was detained for improper behavior while he was being processed to enter the country as a tourist, according to state media, when he tore up the visa, shouting he wanted to seek asylum.

China, part II: The government announced the broadest changes to pollution laws in 25 years, as Beijing recognizes what I’ve long said; this issue is capable of bringing down the ruling elite unless there is rapid improvement in the contamination of the air, soil and water. Period.

Polluters will now be severely punished unless they come into compliance, while it seems whistle-blowers will be encouraged to come forward, at least more so than before.

But it’s up to regulators to act. The mood in China’s rapidly growing middle class is darkening, anxiety deepening. As a story in The Economist’s April 19 China survey put it:

“The possibility of revolution still appears remote, but the risk of larger-scale social unrest in urban areas is growing. To divert attention from trouble at home, China’s leaders may be tempted to flex their muscles abroad.”

Russia: Opposition leader Alexei Navalny was found guilty Tuesday of libel as he is clearly headed from house arrest to jail. A local court in Moscow ruled Navalny had defamed the head of a Moscow district in a Twitter post earlier this month.

Navalny has been barred from communicating with the outside world since late February, though I’ve seen some of his surreptitious posts, only not recently as authorities cracked down on him further.

His next case, which started at week’s end, concerns trumped up accusations Navalny and his brother Oleg stole more than $815,000 from the Russian unit of French cosmetics company Yves Rocher.

Also, as Vladimir Putin’s crackdown on dissent continues, the founder of Russia’s largest social networking website, Pavel Durov, fled the country on Tuesday, the day after he refused to share his users’ personal data with law enforcement officials.

Durov created Vkontakte seven years ago and said in his resignation letter that the social network would fall under the “full control” of none other than Kremlin-linked Rosneft CEO Igor Sechin, the man I’ve long said may one day take out Putin.

No doubt, Putin is trying to gain control of the content on Russia’s leading sites by cleansing management.

In a different matter, it’s kind of bizarre that amidst all the distrust, Russian experts visited Malmstrom Air Force Base in Montana on April 9 to ensure that the U.S. eliminated 18 U.S. missile sites under the New START arms control treaty. The trip was one of eight annual checks Moscow can conduct at U.S. installations. The United States has similar access.

South Korea: We learned this week that the captain of the ferry that sank, leaving more than 300 missing or dead, was arrested on suspicion of negligence and abandoning people in need, as investigators looked at whether the ship’s 25-year-old third mate, who was in control, ordered a turn so sharp it caused the vessel to list. The woman had never navigated the waters where the accident occurred.

President Park Geun-hye condemned the conduct of the crew, calling it “akin to murder” and that those who had broken the law or “abandoned their responsibilities” would be held to account regardless of their rank. The captain could face life in prison.

The timing of this shameful accident with the arrival of President Obama could not be worse. As a scholar with the Asian Institute for Policy Studies in Seoul told the Los Angeles Times’ Barbara Demick:

“We are supposed to be a prosperous middle power, but the fundamentals are still weak. There was no control tower, nobody in charge.”

As Ms. Demick observes: “The botched rescue also has cast a harsh light on a Confucian culture in which young people are taught to respect the older generation,” which in this instance failed the children catastrophically. Many of the kids followed instructions, after all, to stay put rather than abandon ship.

India: The nation’s rolling six-week parliamentary election continues, with results expected on May 16.   On Thursday, Maoist rebels killed five paramilitary soldiers and four polling officials in one restive eastern state.

The main Hindu opposition party, Bharatiya Janata, led by Narendra Modi, is expected to handily defeat the governing Congress party after ten years in power.

Turkey: On the eve of the 99th anniversary of the mass deportation of Armenians in 1915, Turkish Prime Minister Erdogan said those events had “inhumane consequences,” striking a rare conciliatory tone, though he stopped short of using the term “genocide” to describe the mass killings...Armenia long claiming up to 1.5 million people were killed.

Erdogan added that while the events during the First World War “should not prevent Turks and Armenians from establishing compassion and mutually humane attitudes towards one another,” it was “inadmissible” for Armenia to use the 1915 events “as an excuse for hostility against Turkey” and to turn the issue “into a matter of political conflict.” [BBC News]

Australia: The government is making one of its largest ever military purchases, $12 billion for an order of 58 Joint Strike Fighters in a move that lifts its combat capability significantly, bringing its fleet of the cutting-edge aircraft to 100. Aussie Aussie Aussie!!!

Brazil: There has been extensive violence in Rio and Sao Paulo ahead of the World Cup, with numerous deaths. The event takes place at sites across Brazil from June 12 – July 13.

Meanwhile, a scandal has erupted over the finances of one of Brazil’s representatives on the Fifa executive committee (soccer/football’s ruling body). The daughter of Ricardo Teixeira, who stepped down from the committee in 2012 and recently moved to Miami, received over $3 million into a savings account set up in her name. She is 10 years old.

Ricardo fled when he came under investigation, an inquiry that now raises questions about the finances of some Fifa officials involved in the decision to award Russia and Qatar the 2018 and 2022 tournaments. Teixeira supported Qatar’s bid, which has come under fierce criticism because at the time of year when the competition is to be held, the temperatures are over 100F. [You can’t reschedule the Cup to another time of year without screwing up the regular football schedules of the leagues around the world.]

Random Musings

--George Will / Washington Post

“Recently, Barack Obama – a Demosthenes determined to elevate our politics from coarseness to elegance; a Pericles sent to ameliorate our rhetorical impoverishment – spoke at the University of Michigan. He came to that very friendly venue – in 2012, he received 67% of the vote in Ann Arbor’s county – after visiting a local sandwich shop, where a muse must have whispered in the presidential ear. Rep. Paul Ryan (R-Wis.) had recently released his budget, so Obama expressed his disapproval by calling it, for the benefit of his academic audience, a ‘meanwich’ and a ‘stinkburger.’

“Try to imagine Franklin Roosevelt or Dwight Eisenhower or John Kennedy or Ronald Reagan talking like that. It is unimaginable that those grown-ups would resort to japes that fourth-graders would not consider sufficiently clever for use on a playground....

“Celebrating the (Affordable Care Act’s) enrollment numbers, Obama, referring to Republicans, charged: ‘They said nobody would sign up.’ Of course, no one said this. Obama often is what political philosopher Kenneth Minogue said of an adversary – ‘a pyromaniac in a field of straw men.’

“Adolescents also try to truncate arguments by saying that nothing remains of any arguments against their arguments. Regarding the ACA, Obama said the debate is ‘settled’ and ‘over.’ Progressives also say the debate about catastrophic consequences of man-made climate change is ‘over,’ so everyone should pipe down. And they say the debates about the efficacy of universal preschool, and the cost-benefit balance of a minimum-wage increase, are over. Declaring an argument over is so much more restful than engaging with evidence....

“Finally, the real discussion-stopper for the righteous – and there is no righteousness like an adolescent’s – is an assertion that has always been an Obama specialty. It is that there cannot be honorable and intelligent disagreement with him. So last week, less than two minutes after saying that the argument about the ACA ‘isn’t about me,’ Obama said some important opposition to the ACA is about him, citing ‘states that have chosen not to expand Medicaid for no other reason than political spite.’

“This, he said, must be spiteful because expanding Medicaid involves ‘zero cost to these states.’ Well. The federal government does pay the full cost of expansion – for three years. After that, however, states will pay up to 10% of the expansion’s costs, which itself will be a large sum. And the 10% figure has not been graven on stone by the finger of God. It can be enlarged whenever Congress wants, as surely it will, to enable more federal spending by imposing more burdens on the states. Yet Obama, who aspired to tutor Washington about civility, is incapable of crediting opponents with other than base motives.”

--Michael Goodwin / New York Post

“As a young reporter, I once expressed shock at how routinely and reflexively government officials lied to the press. A savvy newspaper vet who overheard me just smiled and told me not to take it personally.

“ ‘Why shouldn’t they lie to you?’ the late, great Murray Kempton asked. ‘They lie to themselves all the time.’

“His observation came back to me as I read about President Obama’s trip to Asia. He’s going, the White House says, to tell our allies face to face that America is committed more than ever to their security and prosperity....

“Consider that it’s been three years since Obama first declared a ‘pivot’ to Asia as part of a strategic rebalancing of American interests, but the promise proved hollow. Asia is not alone in feeling misled.

“Ask the Syrians about Obama’s promise to act if their government crossed his ‘red line’ and used chemical weapons. Or ask Israelis, Saudis, Jordanians and others in the Mideast about Obama’s pledge that America would never allow Iran to get a nuclear weapon. Or ask Ukrainians about his pledge that we will stand with them as they fight for democracy against Vladimir Putin....

“Worst of all, Obama lies to his fellow Americans. All the time....

“Abraham Lincoln, supposedly an Obama hero, warned about the corrosive effect of failing to be honest. As he famously put it, ‘You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.’

“That more or less sums up where we are, or, rather, where Obama is. Nearly six years in office, much of the world is united only in not trusting his word....

“The result is that, while the United States remains the lone superpower, we are not feared by the world’s most malevolent forces.

“We are witnessing the making of a tragic history. The fact that America’s leader lacks credibility among friend and foe alike is creating peril without precedent. Absent a sudden stiffening of spine and a president whose word is his bond, the world is heading toward a catastrophe.

“That’s the truth.”

--Bret Stephens / Wall Street Journal

“ ‘What would happen,’ Samuel Huntington once wondered, ‘if the American model no longer embodied strength and success, no longer seemed to be the winning model?’

“The question, when the great Harvard political scientist asked it in 1991, seemed far-fetched. The Cold War was won, the Soviet Union was about to vanish...

“A quarter-century later, the dictators are back in places where we thought they had been banished. And they’re back by popular demand....

“Has the West been performing well lately? If the average Turk looks to Greece as the nearest example of a Western democracy, does he see much to admire? Did Egyptians have a happy experience with the democratically elected Muslim Brotherhood? Should a government in Budapest take economic advice from the finance ministry of France? Did ethnic Russians prosper under a succession of Kiev kleptocrats?

“ ‘Sustained inability to provide welfare, prosperity, equity, justice, domestic order, or external security could over time undermine the legitimacy of even democratic governments,’ Huntington warned. ‘As the memories of authoritarian failures fade, irritation with democratic failures is likely to increase.’....

“A West that prefers debt-subsidized welfarism over economic growth will not offer much in the way of an attractive model for countries in a hurry to modernize. A West that consistently sacrifices efficiency on the altars of regulation, litigation and political consensus will lose the dynamism that makes the risks inherent in free societies seem worthwhile. A West that shrinks from maintaining global order because doing so is difficult or discomfiting will invite challenges from nimble adversaries willing to take geopolitical gambles.

“At some point the momentum will shift back. That, too, is inevitable. The dictators will err; their corruption will become excessive; their cynicism will become transparent to their own rank-and-file. A new democratic wave will begin to build.

“Whether that takes five years or 50 depends on what the West does now. Five years is a blip. Fifty is the tragedy of a lifetime.”

--Susan Milligan / U.S. News Weekly

“Mitt Romney took just 27% of the Latino vote in the last presidential contest, far short of the 40-plus percentage points pollsters say a GOP presidential candidate needs to win. Immigration reform is stalled on Capitol Hill, largely because of opposition from Republicans who insist the borders must be demonstrably secured before they will talk about the status of the 11 million undocumented immigrants now in the country. Other issues not directly related to ethnicity or immigration status – such as income inequality – are also working for Democrats, who are casting themselves as the party of the struggling middle class. With Latinos becoming important not only in the Southwest and Mountain West, but also in key battleground states like North Carolina and New Jersey, the GOP needs to change its image among Hispanics if it wants to succeed, says Brian Ballard, who worked on Romney’s finance committee in 2012 and John McCain’s in 2008.

“ ‘Our party, if we don’t get back the Hispanic vote, we are going to be on the ash heap of history,’ Ballard says. ‘If that’s what we’ve become – angry white males – we’re not going to have another [Republican] president in my lifetime.’ Ballard, like a segment of others in his party, sees Jeb Bush as the potential savior. Bush would be favored in Latino-rich Florida. He has a Mexican-born wife and Hispanic children. He speaks Spanish fluently (‘better than he speaks English,’ Ballard quips). And in a stark separation from the rest of the emerging 2016 field, Bush has talked about the importance of immigration reform and hasn’t demonized undocumented immigrants.....

“(Bush told the Conservative Political Action Conference last month) that the party needs to be more positive and inclusive. ‘Too often we’re associated with being ‘anti’ everything,’ he said. ‘Way too many people believe Republicans are anti-immigrant, anti-woman, anti-science, anti-gay, anti-worker... and the list goes on and on and on. Many voters are simply unwilling to choose our candidates even though they share our beliefs because those voters feel unloved, unwanted and unwelcome in our party.’

“That approach could be a huge advantage for the GOP in a general election, experts say. But what about the primaries?”

--Well, rancher Cliven Bundy has had his fifteen minutes of fame on Fox, as conservatives of all stripes now flee the idiot following racist comments he made this week, wondering aloud whether blacks would be better off as slaves picking cotton, while alleging people of color are “against us.”

Thankfully, I didn’t fall for the guy.

--According to the Bureau of Alcohol, Tobacco, Firearms and Explosives, between 2005 and 2013, select firearms applications (including machine guns, pistols with silencers, and short-barreled shotguns) “skyrocketed by more than 380%” to nearly 200,000, which has contributed to a backlog of more than 70,000 applications as an internal ATF memo noted.

Overall, firearm production was more than 8.5 million guns in 2012, the most recent year for such data. [Kevin Johnson / USA TODAY]

--The Supreme Court left in place a 2006 Michigan ballot initiative where voters ended race-based admissions at its public universities. In a 6-2 ruling, Justice Anthony Kennedy wrote in backing the law, “Democracy does not presume that some subjects are either too divisive or too profound for public debate.”

But universities in states without bans can still consider race as one factor among others in admissions.

Eight states, including California, have ended affirmative action since 1996. But many select schools, including U.S. military academies and Ivy League institutions, employ affirmative action.

Justice Stephen Breyer split from two liberals to side with Michigan. Liberal Elena Kagan, recused herself, presumably because she was involved in the case when she was U.S. solicitor general.

--Crain’s New York Business had a little blurb on New York Mayor Bill de Blasio and his wife Chirlane McCray having an effective tax rate of 8.3% - “significantly less than the 14% tax rate that Mitt Romney was criticized for in 2011.”

--Madeleine McCann, then aged three, disappeared from her room at a resort in Portugal’s Algarve in May 2007 in a case that gripped the world. But this week British police announced what could be the true cause; Madeleine may have been among the victims of a series of sexual assaults on British children in Portugal committed by one individual.

British and Portuguese police are investigating a string of such cases on children there from 2004 to 2010. One assault, which was only just reported following a public appeal for information, occurred at the same resort Madeleine was at with her parents two years earlier. Police are also now saying some of the victims have given a similar description of the attacker.

Madeleine’s parents had been named as official suspects by the Portuguese police four months after Madeleine’s disappearance but were cleared in 2008. [Reuters]

-- The Wall Street Journal’s Robert Lee Hotz did a piece on the number of microbes living on cash.

“In the first comprehensive study of the DNA on dollar bills, researchers at New York University’s Dirty Money Project found that currency is a medium of exchange for hundreds of different kinds of bacteria as bank notes pass from hand to hand.

“By analyzing genetic material on $1 bills, the NYU researchers identified 3,000 types of bacteria in all – many times more than in previous studies that examined samples under a microscope....

“Easily the most abundant species they found is one that causes acne. Others were linked to gastric ulcers, pneumonia, food poisoning and staph infections, the scientists said.”

Curiously, the researchers also found “a snippet or two of white rhino DNA.”

Kind of makes you want to treat them with more respect.

--A group of former NASA astronauts is on a mission to save the world, specifically, finding $250 million for an asteroid telescope to identify space rocks on a collision course with Earth, hopefully providing several years or even decades worth of notice to get your house in order before we are extinguished.

Oh, sorry...that’s several years or even decades to deflect a disaster.

Apollo 9 astronaut Rusty Schweickart said on Earth Day, when the B612 Foundation unveiled its plans, “We are literally in a shooting gallery. That’s the message we want people to understand...the big ones will come. It’s just a matter of when.”

--John Houbolt died. He was 95. From the Associated Press:

“As NASA describes on its websites, while under pressure during the U.S.-Soviet space race, Houbolt was the catalyst in securing U.S. commitment to the science and engineering theory that eventually carried the Apollo crew to the moon and back safely.

“His efforts in the early 1960s are largely credited with convincing NASA to focus on the launch of a module carrying a crew from lunar orbit, rather than a rocket from Earth or other method.

“Houbolt argued that a lunar orbit rendezvous, or LOR, would not only be less mechanically and financially onerous than building a huge rocket to take man to the moon or launching a craft while orbiting the Earth, but LOR was the only option to meet President Kennedy’s challenge to reach the moon before the end of the decade.”

John Houboldt was born in Altoona, Iowa. RIP.
---

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

God bless America.
---

Gold closed at $1300
Oil $100.60

Returns for the week 4/21-4/25

Dow Jones -0.3% [16361]
S&P 500 -0.1% [1863]
S&P MidCap -0.3%
Russell 2000 -1.3%
Nasdaq -0.5% [4075]

Returns for the period 1/1/14-4/25/14

Dow Jones -1.3%
S&P 500 +0.8%
S&P MidCap +0.4%
Russell 2000 -3.5%
Nasdaq -2.4%

Bulls 51.6
Bears  
21.7 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Next week from Paris.

Brian Trumbore



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-04/26/2014-      
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Week in Review

04/26/2014

For the week 4/21-4/25

[Posted 12:00 AM ET]

Edition 785

Washington and Wall Street

I thought I said a mouthful when it comes to the Federal Reserve, the U.S. economy and the deficit picture last week so I’m going to be brief this go ‘round.

We had a slew of corporate earnings, from United Technologies and McDonald’s, to Starbucks and 3M, to Amazon and Microsoft. I have individual details below but broadly speaking, the guidance for the rest of the year, when offered in any detail, was okay. Not great, but okay, which is in keeping with my belief business spending and revenues will gradually pick up, finally, baring a far worse geopolitical situation in Europe or a China-Japan tussle in the South or East China seas.

But overall, reported earnings for the first quarter among the S&P 500 set are up just 1% over the same period last year with revenues up only 3%, or basically in line with punk projections. At least the major industrials I looked at showed revenue gains...United Technologies up 2%, Caterpillar up 5%, 3M up 2.6%...with similar stories for most of the group below. Again, not great but at least headed in the right direction.

The problem is the earnings bar, which had been lowered big time for the first quarter, is now much higher the rest of the year, like double-digit earnings growth, and when it comes to the stock market, broadly speaking, I don’t see a lot of upside. The stocks I focused on this week, including the likes of Facebook, look fairly valued, while the highflyers with outrageous multiples continue to get taken out to the woodshed and shot.

As for economic data, durable goods orders for March were solid, up 2.6%. This is good as it’s a barometer of big-ticket items, cap-ex.

But existing- and new-home sales data for March was hardly exciting; a third straight monthly decline in the case of the former and a 14.5% decline in the latter.

Yes, median prices on both were up substantially, but that’s part of the problem. Prices are higher, but so are rates, with an average 30-year fixed now around 4.50% vs. 3.60% last May. Affordability is a big issue, particularly in an economy with virtually non-existent wage gains (I do look for this to change...which is part of my rising interest rate scenario that, rambling, isn’t necessarily good for housing!).

According to an industry newsletter Inside Mortgage Finance, mortgage lending was at its lowest level in 14 years in the first quarter, in case you needed further evidence of why the banks are slashing their lending staffs.

One other item. Last week I got into the healthcare cost assumptions for the Congressional Budget Office’s latest deficit outlook and how it was basically a crock that the White House was trumpeting supposed savings from the Affordable Care Act when no one really has a clue as to future costs, let alone the direction of the overall economy and the ability to pay for extra services and the like.

So Annie Lowrey had a piece in the New York Times over the weekend that read in part:

“(President Obama promoted) the success of the (ACA) in covering more Americans at less cost than anticipated.

“ ‘Under this law, real Medicare costs per person have nearly stopped growing,’ Mr. Obama said at a news conference (April 17)....

“ ‘Those savings add up to more money that families can spend at businesses, more money that businesses can spend hiring new workers,’ he said, adding that the government’s budget scorekeeper ‘now says that the Affordable Care Act will be cheaper than recently projected.’

“But some health care experts and economists said that an expanded use of the health system might start to have the opposite effect. Americans feeling more economically confident might demand more procedures from doctors and hospitals. Insurers paying more money for those procedures might, in time, increase premiums, cutting into wage gains. The government might end up spending more on the health law than current projections imply.

“ ‘We knew this was coming,’ said Douglas Holtz-Eakin, a former head of the Congressional Budget Office and a prominent Republican economist, of rising spending because of the coverage expansion and improving economy. ‘The question now is whether we can hold spending down.’...

“The question is whether health spending might grow moderately, with a one-time bump from new Affordable Care Act enrollees, or whether it might surge, with potentially damaging consequences for the fiscal deficit and wages. Economists from both the right and left – including in the White House – have said that there is no greater threat to the government’s budget than soaring health spending....

“A separate report from the Altarum Institute, a nonprofit research group, also shows that health spending started to climb last summer. This February, spending growth reached a seven-year high.

“Government data seem to paint a similar picture, with the annual pace of spending growth on health care increasing to 5.6 percent in the fourth quarter of 2013, from 1.3 percent in the first quarter. That 5.6 percent growth rate is the highest since 2004.”

Which is why I did my in-depth look behind the numbers last time. We’ve learned to take what our president says with a grain of salt, if we listen at all. Clearly few overseas listen to him as well these days, but I digress.

Europe and Asia

The eurozone’s flash estimate on the services and manufacturing sectors for April showed a manufacturing PMI of 53.3 vs. 53.0 in March, with services at 53.1 vs. 52.2, a 34-month high in the case of the latter.

In Germany, the flash PMI for manufacturing was 54.2 in April vs. 53.7 last month, with services at a strong 55.0 vs. 53.0.

But in France the numbers fell, manufacturing 51.6, down from March’s 53.3, while the service reading was barely in growth mode, 50.3 vs. 51.5 as service providers and manufacturers were cutting prices, exactly what the European Central Bank does not want to see.

The ECB’s next meeting is May 8 and with its concern over low inflation, which could be exacerbated should the situation in Ukraine worsen, it is committed to keep monetary policy loose while using unconventional instruments within the ECB mandate if needed.

Separately, Italy’s government approved an extensive income-tax cut that impacts 3/4s of the workforce, just in time for the European Parliament vote May 22-25, though Prime Minister Matteo Renzi hasn’t found corresponding savings in the budget.

Which leads me back to the topic of debt. Just last week I harped on this when it comes to Europe and the periphery, even as bond markets soar and yields plummet.

Well, on Wednesday the European Union’s statistical arm, Eurostat, released its latest debt update and it had the same figures I’ve been noting in terms of government debt to GDP and the dangers therein.

While Eurostat revealed the ‘government deficit’ for the euro area (EA18) was 3.0%, the ECB target, ‘government debt’ continued to rise, in the case of the EA18 from 85.5% of GDP in 2010 to 92.6% in 2013.

So for the record, at the end of 2013 you had the following government debt to GDP ratios.

Germany 78%, France 93%, Spain 94% (up from 62% in 2010), Greece 175%, Italy 133%, Portugal 129%, Ireland 124%, Cyprus 112% and Belgium 101%. [Non-euro U.K. is at 91%.]

Looking at the five periphery countries – Portugal, Spain, Italy, Greece and Ireland – yes, yields are falling and have eased borrowing costs, for now, but economic growth has been weak (if it exists at all) and budget deficits are still extensive, meaning the interest bill is continuing to grow.

Ebrahim Rahbari, a senior economist at Citi, told the Financial Times’ Robin Wigglesworth:

“High debt levels and economic misery is clearly a political problem. Even if we start to see their debt ratios stabilize and even begin to tick down, they will remain extremely high for a long time, which means they’re very vulnerable to future shocks.”

Think back to my favorite U.S. deficit topic...interest expense...and how it’s going to explode once rates normalize.

The IMF’s latest World Economic Outlook shows the debt servicing burden in the above five periphery nations will account for almost 10 cents in every euro of revenues taken in by the governments.

What does this mean? These same nations, joined no doubt by a few of the others (see France), won’t be able to meet social safety net costs and make investments. Robin Wigglesworth of the FT notes on this topic: “For example, Portugal’s 7.3bn euro interest bill this year exceeds its education spending and almost matches its health budget.”

Sound familiar? This has been my point on our own looming interest expense crisis and how if you think your pet government program is getting whacked today, just wait another 6-8 years.

Back to France, the restructured government of President Francois Hollande and new Prime Minister Manuel Valls announced this week that the 2015 fiscal deficit would be equivalent to 3% of GDP – in line with the EU’s mandate, as France has continually been given more time by the European Commission to hit this level.

Only one problem. France’s new finance minister, Michel Sapin, is projecting growth of 1% next year, rising to 2.25% in 2016 and 2017.

The folks in Brussels who look at such things are thus unlikely to believe the seemingly funny numbers. Remember, public spending in France is a humongous 57% of GDP and the above-noted debt to GDP figure of 93% is up from 65% at the start of the financial crisis.

Much of what I’m discussing spells major trouble politically unless the eurozone starts growing at 2%+ virtually across the board. The numbers just don’t work. And, again, it’s why something like Ukraine (that spreads, for example, to the Baltics) could kill any confidence that better days are yet ahead.

It’s also why I’ve spent so much time talking about populist movements across the Euro continent and the importance of the European Parliament vote.

Political economist Niall Ferguson had a column in the FT last weekend talking of today’s populists being a “motley crew of xenophobes, nationalists and cranks,” focused on anti-immigration and euroscepticism.

Ferguson is relatively optimistic the far-right parties won’t do as well in the May vote as others (read moi) say they could. Invariably, Ferguson writes, when push comes to shove, voters will skew to the center and mainstream parties. Nonetheless he’s still projecting 16% of the 751 seats in the Euro Parliament will go to the populists.

More on this important topic next week as I report to you from Paris.

A few brief words on China and Japan. The HSBC flash April reading on manufacturing in China came in at 48.3 vs. 48.0 in March, not good, still contraction territory, but if you want to be optimistic, possible stability.

In Japan, exports by value came in at a highly disappointing up 1.8% (down 2.5% by volume) while imports rose 18.1% on the heels of higher fuel costs (driven by the weak yen). Shipments to China were up only 4.3% vs. 27.6% in February, though just as on the mainland, China’s Lunar New Year holiday (which wrapped both January and February), probably skewed the numbers. We need another month to shake out the true picture on this front.

Meanwhile, an index of consumer prices in Tokyo rose 2.7% in April from a year earlier, reflective of the 3 percentage point sales-tax increase April 1. It was the biggest jump in the CPI in Tokyo since 1992.

The Bank of Japan releases updated national data on inflation and growth next week. 

Street Bytes

--Stocks were headed for a second straight up week until Friday’s sell-off over further distress in the tech sector as well as Ukraine concerns. The Dow Jones finished down 0.3% to 16361, while the S&P 500 lost a point, 0.1%, and Nasdaq fell 0.5%.

--U.S. Treasury Yields

6-mo. 0.04% 2-yr. 0.43% 10-yr. 2.66% 30-yr. 3.44%

A little flight to safety at week’s end in the 10-year due to Russia’s moves.

The Fed’s Open Market Committee meets next week and they will continue tapering, another $10 billion.

--Apple reported revenue of $45.6 billion in the last quarter, up from $43.6 billion year earlier, earning $10.2 billion, up from $9.5 billion, so both figures, while huge, didn’t exactly exhibit the kind of growth the company reported just a few years ago.

Apple sold 43.7 million iPhones, above expectations and up from 37.4 million last year, but sales of its iPads were below expectations, 16.35 million, down from 19.5 million last year. So overall a rather modest growth story, at best.    Revenue from Greater China, including Hong Kong and Taiwan was up 13% to $9.3 billion, or about 20% of the company’s total.

But CEO Tim Cook announced the company was raising its quarterly dividend by 8 percent, that it would expand its buyback program another $30 billion to $90 billion, and, rather shockingly, split its stock 7-for-1. The shares promptly rose $46 to $571 by week’s end. Ah yes, the power of financial engineering.

Now the stock is far from being overvalued, but Apple has no new product initiatives in the immediate future, unless you’re fired up by the prospect of a larger screen for your iPhone.

--Facebook shares rallied, before falling off in Friday’s rout, on the news its first quarter profit increased to $642 million, up from $219 million a year earlier on revenue of $2.5 billion, up 70%+ from $1.46 billion. Not bad. Earnings of 34 cents a share handily beat expectations of 24.

Market researcher eMarketer said Facebook’s share of the $120 billion global digital advertising market increased to 5.8% last year, up from 4.1% in 2012, though Google still commands 32%.

Most importantly for analysts, mobile advertising accounted for 59% of Facebook’s revenue. It was 30% a year ago.   Facebook’s share of the mobile market is up to 7.4%, while Google’s fell to 40%. [Reed Albergotti / Wall Street Journal]

One figure I’ve always had a problem with, however, is “average users” on any given day, with the company pegging it at 802 million. This one is easily manipulated, sports fans.

--Microsoft reported higher than expected earnings, 68 cents vs. 63 cents, though total revenues were flat from year ago levels. Strong sales of Windows software and the Xbox gaming console were offset by the ongoing weakness in the PC market. Revenue from sales of Windows for enterprises rose a strong 19%.

Microsoft’s new CEO, Satya Nadella, has set a push into cloud computing as a major goal for the company and efforts on this front appear to be bearing fruit as Azure, its product in the area, grew 150%.

--Amazon earned $108 million in profits for the first quarter on stronger than expected revenue of $19.74 billion. Investors, though, were disappointed by rising expenses, up 23%, and weak guidance, as in an operating loss for the current quarter.

CEO Jeff Bezos has been aggressive in expanding into streaming video with the launch of its fire TV box, including a new deal with HBO.

The shares cratered $34 on Friday to $303, down from its high of $408 on Jan. 22.

--Netflix announced profits of $53 million for the first quarter that smashed expectations as the internet video streaming firm said it added 2.25 million new members during the period, bringing its global membership to 48 million. Revenue rose 24% to $1.27 billion. The company then announced it would probably increase monthly rates “one or two dollars” later this year which analysts like.

Shares initially soared on the news but then plummeted, largely because of Amazon’s announcement it was partnering with HBO. Netflix CEO Reed Hastings has always wanted to surpass HBO’s subscriber number of 130 million and he mentioned in a letter to shareholders “We are eager to close the gap.”

But, as was the case with Amazon, there are serious valuation concerns, at least in today’s environment. Netflix closed at $322, off its all-time high of $458 set on March 6.

--There was tumult in the global pharmaceutical industry as Novartis and GlaxoSmithKline announced plans for a multibillion-dollar asset swap, and then Botox maker Allergan received an unsolicited $48 billion offer from Valeant Pharmaceuticals and activist investor Bill Ackman. Allergan, late Tuesday, vowed to block the plan, though Ackman has built a nearly 10% stake in the company.

Meanwhile, Novartis is buying a portfolio of cancer therapies from Glaxo for $14.5 billion, while selling its vaccine business to Glaxo ($5.25 billion). Novartis is also selling its animal-drugs business to Eli Lilly for $5.4 billion.

It’s all part of a new trend with the drug companies focusing on specific sectors where they have the expertise and size to dominate. CEO John Lechleiter of Eli Lilly said, “It’s understanding what you’re good at, what your core competencies are and making sure you’re at scale to pursue opportunities in that space.”

As analyst Denise Anderson told the Journal, the flurry of M&A activity “is not so much about R&D,” as “it’s more commercial... I think it’s a very positive move that companies are taking a hard look at those portfolios and saying, is this the best use of our capital?”

So now Novartis is going to concentrate on prescription pharmaceuticals, eye care and generic drugs. Glaxo said it will focus on respiratory, HIV, vaccines and nonprescription products.

Eli Lilly is going to be choice of the world’s cats and dogs for all their healthcare needs...or something like that. Woof woof!

--Ford Motor Co. announced that CEO Alan Mulally, 68, will leave the company, probably by summer rather than year end as first thought with Mark Fields, 53, a Ford veteran, succeeding him. Mulallay will no doubt move on to another corporation, either as CEO or chairman.

Ford had a net loss of $12.6 billion in 2006, the year Mulally took over. Last year the company’s net income was $7.16 billion.

Ford’s first-quarter estimates fell short of estimates.

--General Motors’ profits were hit by a $1.3 billion charge to cover the costs of its huge recall over defective ignition switches, though ex-charges it beat the Street’s earnings expectations. Revenue, however, fell short, though was up $500 million over the same period last year.

By the way, of the $1.3 billion charge, $300 million was to cover the cost of courtesy cars.

--Boeing’s revenues rose 8% in the first quarter as the company delivered 161 commercial aircraft, up 18% over a year earlier.

--JetBlue, the nation’s fifth-largest carrier, saw its 2,400 pilots vote to join the Air Line Pilots Association, ending JetBlue’s status as the biggest U.S. airline without a union.

--Delta Air Lines made $213 million in the first quarter despite the severe weather this winter, yet United Airlines lost $609 million during the same period as it said $200 million of its loss was attributable to the Polar Vortex and such. United is also still struggling to combine systems following its merger with Continental.

--During Iraq’s petroleum heyday, 1979, it produced 3.5 million barrels a day. This past February finally saw production exceed that level at 3.6 million on average, though due to various difficulties then fell back to about 3.25 million in March, according to the International Energy Agency and the Wall Street Journal.

The IEA forecasts Iraq will be the single largest contributor to global-production growth over the next 20 years.

Oil makes up 90% of Iraq’s budget and while production has been stronger than recent years, exporting it has been another matter, with underinvestment and mismanagement continuing to be major hindrances, let alone attacks on the infrastructure and personnel.

--The Supreme Court took up a dispute between broadcasters such as ABC, CBS and Fox and Internet startup Aereo Inc. and its service that gives subscribers in 11 U.S. cities access to television programs that, according to the broadcasters, is stolen by taking free television signals and sending them over the Net without paying redistribution fees. The broadcasters are right.

But Aereo, which is backed by Barry Diller, says the broadcasters can’t stand in the way of innovation. The broadcasters say Aereo’s competitive advantage lies in avoiding paying for its product.

A federal appeals court in New York ruled that Aereo did not violate copyright rules with its service, but judges in Los Angeles and Washington, D.C., have blocked Aereo.

A decision by the High Court is expected late June.

--A New York Times analysis reveals that the American middle class has fallen behind Canada as the most affluent in the world, with after-tax middle-class incomes being higher, while the poor in Europe earn more than poor Americans.

The figures are based on surveys taken over the past 35 years. Median income in Canada has moved ahead of the U.S., while median incomes in Western European nations still trail, though the gap in the likes of Britain and Sweden is much smaller than it was a decade ago.

Yes, the Times’ story is about rising income inequality. It’s bad enough for the middle class, but the poor in particular are really getting whacked.

The data was compiled by LIS, a group that maintains the Luxembourg Income Study Database. Lawrence Katz, a Harvard economist who is not associated with LIS, said, “The idea that the median American has so much more income than the middle class in all other parts of the world is not true these days. In 1960, we were massively richer than anyone else. In 1980, we were richer. In the 1990s, we were still richer.”

Since 2000, after adjusting for inflation, median per capita income in the U.S. is virtually unchanged while, for example, it rose about 20% in Britain between 2000 and 2010.

But here’s what may be most telling in the Times report by David Leonhardt and Kevin Quealy.

“Americans between the ages of 55 and 65 have literacy, numeracy and technology skills that are above average relative to 55- to 65-year-olds in the rest of the industrialized world, according to a recent study by the Organization for Economic Cooperation and Development....Younger Americans, though, are not keeping pace: Those between 16 and 24 rank near the bottom among rich countries, well behind their counterparts in Canada, Australia, Japan and Scandinavia and close to those in Italy and Spain.”

--In a somewhat related vein, as the New York Daily News’ Corinne Lestch reports, “Rents across (NYC) have skyrocketed over the past 12 years – leaving New Yorkers paying staggering sums while their incomes have declined.

“Median apartment rents in the city have increased 75% since 2000 – a rise 31 points greater than in the rest of the country, according to a report released by the city’s controller’s office.

“Median real incomes declined by nearly 5% during the same period.”

Ms. Lestch talks about a couple that made too much for a rent-stabilized apartment in Brooklyn... “roughly $41,000 together.”

“ ‘We’re put in a position of paying rent that is higher than we can afford,’ [said the wife]....

“She said they paid $920 a month for a two-bedroom apartment in Bedford-Stuyvesant until 2012, when they left because of an infestation of rats, mold and other building violations.

“Now, the average rent for a two-bedroom apartment in that building is $1,993 a month.”

On this issue I agree with some Democrats who note that “predatory private equity firms” try to force out tenants paying stabilized rents so they can then charge ‘market rates.’

--Starbucks reported same-store sales growth at U.S. stores were up 6% in the quarter and the company raised full-year guidance a smidge. Net profit was in line vs. expectations while revenues were down vs. estimates, though up 9% vs. year ago levels.

Global sales rose 6%, lower than the 7% reported in the previous quarter, but still very solid.

--The Food and Drug Administration has made a move to extend its regulatory authority to electronic cigarettes, the nicotine delivery system that has quickly grown into a multibillion-dollar business with zero oversight, let alone consumer protections.

I didn’t realize (not being a smoker myself), that the FDA will also regulate pipe tobacco and cigars for the first time. I don’t know why...I just kind of assumed they already were in some form.

So the sale of e-cigarettes, cigars and pipe tobacco to Americans under 18 will now be prohibited.

It’s going to be at least another year before the new regulations go into effect, but it could be a lot longer if affected companies try to block the move with lawsuits, which of course they’ll do.

As reported by the New York Times’ Sabrina Tavernise:

“Perhaps the biggest proposed change would require producers of cigars and e-cigarettes to register with the F.D.A., provide the agency with a detailed accounting of their products’ ingredients and disclose their manufacturing processes and scientific data. Producers would also be subject to F.D.A. inspections.”

--General Electric is rumored to be interested in France’s train and power plant builder Alstom, though the French government warned it is ready to protect national interests, Alstom employing 18,000 in France.

--A few state unemployment rates for March.

California 8.1%
Florida 6.3%
Nebraska 3.7%
Nevada 8.5%
New Jersey 7.2%
New York 6.9%
North Dakota 2.6% [lowest]
Pennsylvania 6.0%
Rhode Island 8.7% [highest]
South Dakota 3.7%
Texas 5.5%

National average 6.7%

--McDonald’s reported global comps rose a scant 0.5% in Q1. Same-store sales in the U.S. fell 1.7%.

Blame falls squarely on Ronald McDonald, who should be dumped, but instead they gave him new duds. I’m guessing they don’t ditch the guy because of Ronald McDonald House Charities. So keep the name, but throw the bum out. Plus Taco Bell wouldn’t be having so much fun at Ronald’s expense.

But here’s a nightmare. McDonald’s insists it is going to send its spruced-up creep onto the tube in a new ad campaign and remodeled restaurants will incorporate his image. I just want to eat my Big Mac in peace! [Don’t forget...2-for-1 sale until May 7, boys and girls.]

--Yum Brands, whose labels include Taco Bell and KFC, and which receives 50% or so of its total sales from China, read KFC, said sales there in the first quarter rebounded 9%, a nice number given past difficulties, including avian flu.

I was surprised to see, though, that Taco Bell sales in the U.S. fell 1%. Granted, this was prior to their new breakfast rollout.

--The Chinese are coming! The Chinese are coming! To New Zealand that is. China has become the country’s biggest source of long-term arrivals at 6,200 in the year through March, followed by India at 6,100 and 5,800 from Britain.

Heck, if you had money why would you want to stay in heavily polluted China when you can live in the land of hobbits and elves? Granted, Mordor is a drawback, but at the fork in the road where you have a choice between Mordor or Queenstown, choose Queenstown and you’ll be fine.

China, incidentally, surpassed Australia as New Zealand’s biggest trading partner last year. [South China Morning Post]

Actually, New Zealand has been aggressively going after wealthy Chinese, especially after Canada, a top destination for Chinese, began restricting its immigrant visas.

--Fish farming accounts for 47% of global fish production these days, compared to 9% back in 1980, according to the U.N. Norway has become the second-largest exporter of farmed fish behind China. Now if you trust what the label says, where would you rather buy your farmed fish from, Norway or China?

--I think we can agree that air travel can be rather difficult at times. The other day, a Qantas flight from Los Angeles to Melbourne was forced to turn back mid-air because of a fuel pump issue.

So get this, 4 ½ hours into the flight, having already passed Hawaii, the captain returned to Los Angeles. That, friends, is your basic nightmare.

Foreign Affairs

Ukraine: Tensions have been increasing all week, starting with the killing over the weekend of at least three pro-Russian activists in Slovyansk at a checkpoint manned by them. President Vladimir Putin wants nothing more than to destabilize the country and have a failing Ukraine ahead of the May 25 presidential election, or to have the election postponed outright.

Ukrainian Prime Minster Arseniy Yatsenyuk, appearing on NBC’s “Meet the Press,” said of Putin:

“Every day, he goes further and further. And God knows where is the final destination.”

For its part, the United States announced it would carry out small ground-force exercises in the Baltics and Poland, but no more than 600 troops total in the four when Poland’s Foreign Minister Sikorski called for 5,000 to 10,000 U.S. troops in his country alone.

As many as 1,300 pro-Russian gunmen continued to hold many of the buildings they seized in the past two weeks, which goes against the Geneva agreement reached between the U.S. and Russia to deescalate the crisis.

A leading local Ukrainian politician in the east was tortured and killed, his body found in a river.

Vice President Joe Biden, speaking from Kiev, said on Tuesday: “The most acute problem facing the Ukrainian people...[is] the ongoing threat to Ukraine’s sovereignty and its territorial integrity. Ukraine must remain one country. No nation has the right to simply grab land from another nation,”* Biden said, adding, “We will never recognize Russia’s illegal occupation of Crimea and neither will the world.”

*CNN’s Jake Tapper had a good line on reading this statement. “Tell that to the Native Americans.”

By Thursday, Putin was warning of unspecified “consequences” in retaliation for the security crackdown on pro-Russian separatists with as many as five reportedly killed in another clash in Slovyansk.

“If our interests, our legitimate interests, the interests of Russians have been attacked directly, like they were in South Ossetia [Ed. 2008, Georgia’s breakaway republic], I do not see any other way but to respond in full accordance with international law,” said Russian Foreign Minister Sergei Lavrov.

Russia announced new military exercises along the Ukrainian border. Putin said: “If the Kiev government is using the army against its own people this is clearly a grave crime.”

President Obama and Secretary of State Kerry threatened imminent new economic sanctions against Russia. Obama, in a joint news conference in Tokyo with Prime Minister Abe, said:

“I understand that additional sanctions may not change Mr. Putin’s calculus. How well they change his calculus in part depends on not only us applying sanctions but also the cooperation of other countries.”

Secretary Kerry said on Thursday: “Not a single Russian official has...called on the separatists to support the Geneva agreement, to support the stand-down, to give up their weapons and get out of the Ukrainian buildings.”

Kerry accused Russian media of promoting Putin’s “fantasy” about events in Ukraine and said Moscow continued to “fund, coordinate and fuel a heavily-armed separatist movement in Donetsk.”

Kerry said U.S. intelligence was confident Russia was “playing an active role in destabilizing eastern Ukraine” with personnel, weapons, money and operational planning.” Kerry added the window for Russia to change was closing.

The Geneva agreement clearly stated armed groups were to go home.

A U.S.-funded poll by a Gallup affiliate of 1,200 randomly selected Ukrainians in all sections of the country found a nationwide average of 85% against any Russian military intervention. [97% in the western provinces, 94% in the region including Kiev, were against; 69% in the eastern regions opposed.]

Late Friday we learned that pro-Russian forces took seven Organization for Security and Cooperation in Europe officials, along with five Ukrainian soldiers and their driver hostage in the separatist stronghold of Slovyansk, a highly worrisome development. I’m biting my tongue on this, having read some of the comments of the self-appointed mayor of the town.

Russia has also picked up the intensity of its drills across the border and fighter jets have flown into Ukraine’s airspace. U.S. Secretary of Defense Chuck Hagel’s calls to his Russian counterpart have been ignored.

For its part the G-7 announced they will levy new sanctions next week, though there is clear disagreement among the members just how tough they should be. Earlier, President Obama had said the tougher sanctions were “teed up” if Putin didn’t deescalate. Hardly.

One military tidbit from The Economist. Should Russia invade Ukraine, most of the latter’s forces are in the wrong place, positioned in the West “as if to counter an attack from NATO.”

For its part, the 40,000-50,000 Russian troops on the border of Ukraine can’t indefinitely maintain their high state of readiness.

In an interview with the Washington Post’s Lally Weymouth, Polish Foreign Minister Sikorski was asked how he’d explain why Ukraine matters to Westerners?

“It matters because for the first time since the Second World War, one European country has annexed a province from another European country. And that matters because it is a rejection of our entire legal system and international norms and treaties that we have regarded as the foundation of peace.

“Remember, there is not a country in Europe that does not have national minorities. If we went back to protecting them through changing borders, we would be back in the hell of the 20th century and before. This is why what President Putin has done in Crimea and is now doing in eastern Ukraine is so threatening to all of us.”

Editorial / Wall Street Journal

“The larger problem is that Mr. Obama can’t seem to admit that his assumptions about the world are being repudiated by the week. He came to office believing his own campaign rhetoric that the U.S. was unpopular mainly because of President George W. Bush. He would end these misunderstandings through diplomatic engagement, especially with our adversaries, who would respond in kind to our good will and moral example. Nowhere in the world has that happened.

“To the contrary, Mr. Obama’s second term has been marked by the advance of revisionist powers seeking to rewrite the post-Cold War global order. Iran is attempting to do this on nuclear weapons, retaining a capability just short of exploding a weapon with a goal of dominating the Middle East. China is pressing its territorial claims in the East and South China seas. And now Russia is marching west with a goal of reclaiming the influence and perhaps the territory it lost with the collapse of the Soviet Union.

“Mr. Obama dismisses Russia as a mere ‘regional’ power, but more than one global threat began as a regional one. Unless he faces forceful opposition, Mr. Putin will not stop at neutralizing or digesting Ukraine. He will set his sights at discrediting NATO, perhaps with a play on the Baltic states.

“Nothing that Mr. Obama and Western Europe have done so far comes close to meeting the magnitude of this new threat. Their military gestures have been token deployments of NATO jets, their economic sanctions have been weak, and their diplomacy more pleading than forceful.

“Mr. Putin sees Western leaders preoccupied with domestic concerns with no appetite for a great power showdown. He sees European leaders unwilling to pay any economic price to sanction Russia. And he sees that Mr. Obama cares more about securing Russia’s help to strike a nuclear détente with Iran than about keeping Ukraine out of Russia’s clutches. Until that changes, Mr. Putin will march on.”

Editorial / Washington Post

“For weeks Mr. Obama has held back on forceful measures against Mr. Putin’s aggression in Ukraine on the theory that a measured approach matched with diplomacy would yield results. The policy has failed. Now Mr. Obama must act – or doom Ukraine to dismemberment.”

Israel: The Israeli government of Prime Minister Benjamin Netanyahu suspended peace talks with the Palestinians and their leader Mahmoud Abbas in response to a unity deal between Hamas and Fatah. The Palestinian factions have vowed to hold elections following formation of a unity government in five weeks or so.

The Palestinian Authority has been at odds with Hamas since the latter won parliamentary elections in 2006 and set up a rival government in the Gaza Strip a year later following clashes between it and Abbas’ Fatah organization.

Netanyahu, following a six-hour cabinet meeting on Thursday, said Abbas and Fatah “could have peace with Israel or a pact with Hamas – he can’t have both.”

Israel, said Netanyahu, will only resume talks with Palestinians “when they decide to abandon the course of terror.”

“As long as I’m prime minister of Israel, I will never negotiate with a Palestinian government that is backed by Hamas terrorists that are calling for our liquidation,” the prime minister added.

Palestinian spokesman Saeb Erekat said “Israel had no right to interfere in” Palestinian reconciliation efforts.

Netanyahu coalition member Yair Lapid said: “Hamas is a jihadi terror organization that is proud of killing civilians – women, children, the elderly – just because they’re Jewish. If the Palestinians really want a treaty with Israel, how did they not demand from Hamas to say it is abandoning terror and committing to not hurt innocent people and to follow international law?”

Lapid, the leader of Yesh Atid and the finance minister, added: “Creating a state – and we know this better than most nations – comes from the lack of drama [inherent] in normalcy, from building an electric company, collecting taxes, fighting corruption, building streets and schools, fighting terror. For the last two decades, the Palestinians were given endless opportunities to do all that, and they avoided them all.” [Jerusalem Post]

Needless to say, this week’s developments could spell the end of any U.S.-brokered peace talks, which had resumed after a three-year hiatus. They were already on the ropes before the Palestinian announcement.

Israel will now continue to take steps such as deducting Palestinian debt payments from tax revenues Israel collects for it.

For its part a spokesman for the European Union said it “has consistently called for intra-Palestinian reconciliation behind Palestinian president Mahmoud Abbas.”

April 29 is a deadline that was set for brokering a deal.

Secretary of State Kerry said he expressed his disappointment in a phone call with Abbas, with the U.S. caught off guard by the Fatah-Hamas move.

Iran: The government of President Hassan Rohani moved to bolster its finances battered by the sanctions in cutting state subsidies on oil by up to 75%, which, needless to say, had Iranians rushing to fill their gas tanks before the midnight deadline, Friday. While the cost of gasoline remains dirt cheap, the people aren’t happy.

On the nuclear talks front, an Iranian Atomic Energy Agency spokesman said the country is preparing a “comprehensive document” on its nuclear efforts, though it would not be finished for eight months!

Understand, July 20 is the goal date set for completion of a nuclear pact between Iran and the P5+1. A long-term deal would remove international sanctions if Tehran adopts appropriate measures.

Bottom line it’s coming to a head very shortly, though it would be easy for the parties involved to punt and just extend the November accord for another six months, which would mean the sanctions would remain in place. Iran needs to hoodwink its negotiating partners and convince them it will comply with a longer-term arrangement to get the desired relief.

Syria: A presidential election is slated for June 3 and it’s assumed President Bashar Assad will win a third term, though how the heck Damascus can even hold a vote in this hellhole is beyond me.

This week the war continued unabated. In the northern city of Aleppo, scores were killed in airstrikes, including at least 29 in a single neighborhood according to a monitoring group. Another 14 were killed in a barrel bomb attack on a separate part of the city. 

Over 150,000 have died in the three-year war thus far and in a report to the U.N. Security Council, Secretary-General Ban Ki-moon criticized both the Syrian government and rebel forces for their failure to allow humanitarian aid for those needing it most, two months after a Security Council resolution was to ensure this occurred.

Ban said: “Almost 3.5 million civilians remain largely without access to essential goods and services.” The call to lift the siege on populated areas “has not been heard and I consider it shameful that nearly a quarter of a million people are being deliberately forced to live under such conditions.”

Separately, the U.S. is finally supplying a small number of advanced antitank missiles for rebel groups, working with Saudi Arabia, though this is far too late.

And on the chemical weapons front, London’s Guardian reports that British government insiders claim the Assad regime is concealing chemical-weapon assets from disarmament personnel, including rockets used to deliver munitions.

Yemen: The U.S. and the Yemeni government launched an aggressive campaign against Al Qaeda after a video released by the group taunted the U.S. Supposedly at least 55 militants were killed, though it would appear the prime target, master bomb maker Ibrahim Hassan Asiri, was not taken out.

Afghanistan: According to the latest vote count in the presidential election, officials say Dr. Abdullah Abdullah leads with 43.8% followed by Ashraf Ghani at 32.9%. About 82% of the vote has been counted and these two are headed to a runoff to be held on May 28.

And in a sign of the ongoing threat to Americans, an Afghan policeman shot and killed three American doctors at a missionary hospital in Kabul that specialized in treating disabled Afghans, as well as having a maternal care unit for support of premature babies. The policeman tried to shoot himself with his own weapon after and ended up being treated in the same hospital. Just weeks earlier, an Afghan officer shot and killed a photographer for the AP, while wounding a correspondent.

China / Japan: Despite President Obama’s personal presence in Japan, talks on a free trade deal between the two nations failed as agreement on issues including market access for autos and agricultural products continue to stand in the way of an accord. Without such a deal, a U.S.-led free trade initiative involving 12 nations in the Pacific (the so-called “Trans-Pacific Partnership”) is not possible.

So while Obama was in Japan, he failed to get a trade deal and the Middle East peace process broke down, plus Ukraine grew worse.

Obama did declare that the United States was obligated to protect Japan in its confrontation with China over the islands in the East China Sea, called Senkaku in Japan and Diaoyu in China, that both claim, though Obama was careful not to antagonize China.

“The policy of the United States is clear – the Senkaku Islands are administered by Japan and therefore fall within the scope of Article 5 of the U.S.-Japan Treaty of Mutual Co-operation and Security,” Obama wrote in a piece for a Japanese newspaper.

Obama added that with regards to China, which has been aggressive in its own sovereignty claims: “Disputes need to be resolved through dialogue and diplomacy – not intimidation and coercion.”

China’s Xinhua news agency responded that the U.S.-Japan alliance was part of “a carefully calculated scheme to cage the rapidly developing Asian giant.” A foreign ministry spokesman said: “We resolutely oppose applying the Diaolyu Islands to the Japan-U.S. security treaty.”

The United States, on the other hand, welcomes Shinzo Abe’s efforts to build up its military to play a greater role in regional security.

But in this instance it’s important to note that in 2007, a Pew Research Center Global Attitudes Project survey had 67% of Japanese expressing negative views toward China. By 2013, that number had risen to 93%. [TIME]

Prime Minister Shinzo Abe has never had a summit with his Chinese counterpart Xi Jinping.

Separately, a Japanese cabinet minister and about 150 lawmakers visited the controversial Yasukuni Shrine, further enraging China (and South Korea), a day after Prime Minister Abe made an offering to the place, where some of the country’s war criminals are honored. [Justin Bieber also visited the shrine...only this idiot had no idea as to the damage he was doing to his increasingly tattered global brand.]

Joseph Nye and Kevin Rudd / Washington Post

“Japanese and Chinese leaders have said repeatedly that they do not want war.   And there is no reason not to believe them. They recognize that disruption of the economic interdependence between the world’s second- and third-largest economies would radically disrupt their development plans and internal stability. The real dangers are not in the intentions of the countries’ leaders but in the potential for miscalculation at lower levels, limited experience in ‘incident management’ and escalation in a climate of competitive nationalism.

“In this situation, the best we can aim for is to revive the wisdom of the original [Chinese Premier Zhou Enlai – Japanese Prime Minister Kakuei Tanaka] formula [of 1972, where the two agreed to leave the issue of the disputed islets for future generations]. One way of doing this, as some have suggested, might be to declare the islands a maritime ecological preserve dedicated to the larger good of the region. There would be no habitation and no military use of the islands or the surrounding seas. Ideally, China and Japan would agree, but that may be unlikely in the current climate. Other mechanisms could be explored to produce the same end. Both sides might commit to revisit their 2008 agreement on joint gas exploration. This proposal would not resolve the issue, but it could move it from the front of the stove, where it threatens to boil over, to a back burner, where it can quietly simmer for another half-century.”

Lastly, there was an interesting Reuters piece concerning China’s efforts in the search for flight MH370; as in the deployment of Chinese naval vessels has highlighted “a strategic headache for Beijing – its lack of offshore bases and friendly ports to call on.”

Remember my trips to Yap in Micronesia? As I’ve seen firsthand, mark my words, China has its eyes on such territories with deep-water port facilities. As U.S. post-World War II support for many of these islands has largely dried up, China will move in. These territories are also disconcertingly close to Guam and the huge U.S. military buildup on that island.

North Korea: There have been conflicting reports all week concerning Pyongyang’s nuclear intentions with President Obama in the region, particularly his visit to Seoul. The latest was that South Korean officials believe the North sealed a tunnel to its nuclear test site, a major sign it was preparing a fourth nuclear test, soon.

If this is true, if the materials were loaded into the tunnel and it was sealed, according to experts that means a detonation must be carried out “within seven to 14 days” or the tunnel must be unsealed and the materials removed. Some believe a test has to be conducted by May 6.

Others think the activity is a bluff. North Korea conducted prior nuclear tests in 2006, 2009 and 2012.

Also, on Friday we learned a 24-year-old American man was detained for improper behavior while he was being processed to enter the country as a tourist, according to state media, when he tore up the visa, shouting he wanted to seek asylum.

China, part II: The government announced the broadest changes to pollution laws in 25 years, as Beijing recognizes what I’ve long said; this issue is capable of bringing down the ruling elite unless there is rapid improvement in the contamination of the air, soil and water. Period.

Polluters will now be severely punished unless they come into compliance, while it seems whistle-blowers will be encouraged to come forward, at least more so than before.

But it’s up to regulators to act. The mood in China’s rapidly growing middle class is darkening, anxiety deepening. As a story in The Economist’s April 19 China survey put it:

“The possibility of revolution still appears remote, but the risk of larger-scale social unrest in urban areas is growing. To divert attention from trouble at home, China’s leaders may be tempted to flex their muscles abroad.”

Russia: Opposition leader Alexei Navalny was found guilty Tuesday of libel as he is clearly headed from house arrest to jail. A local court in Moscow ruled Navalny had defamed the head of a Moscow district in a Twitter post earlier this month.

Navalny has been barred from communicating with the outside world since late February, though I’ve seen some of his surreptitious posts, only not recently as authorities cracked down on him further.

His next case, which started at week’s end, concerns trumped up accusations Navalny and his brother Oleg stole more than $815,000 from the Russian unit of French cosmetics company Yves Rocher.

Also, as Vladimir Putin’s crackdown on dissent continues, the founder of Russia’s largest social networking website, Pavel Durov, fled the country on Tuesday, the day after he refused to share his users’ personal data with law enforcement officials.

Durov created Vkontakte seven years ago and said in his resignation letter that the social network would fall under the “full control” of none other than Kremlin-linked Rosneft CEO Igor Sechin, the man I’ve long said may one day take out Putin.

No doubt, Putin is trying to gain control of the content on Russia’s leading sites by cleansing management.

In a different matter, it’s kind of bizarre that amidst all the distrust, Russian experts visited Malmstrom Air Force Base in Montana on April 9 to ensure that the U.S. eliminated 18 U.S. missile sites under the New START arms control treaty. The trip was one of eight annual checks Moscow can conduct at U.S. installations. The United States has similar access.

South Korea: We learned this week that the captain of the ferry that sank, leaving more than 300 missing or dead, was arrested on suspicion of negligence and abandoning people in need, as investigators looked at whether the ship’s 25-year-old third mate, who was in control, ordered a turn so sharp it caused the vessel to list. The woman had never navigated the waters where the accident occurred.

President Park Geun-hye condemned the conduct of the crew, calling it “akin to murder” and that those who had broken the law or “abandoned their responsibilities” would be held to account regardless of their rank. The captain could face life in prison.

The timing of this shameful accident with the arrival of President Obama could not be worse. As a scholar with the Asian Institute for Policy Studies in Seoul told the Los Angeles Times’ Barbara Demick:

“We are supposed to be a prosperous middle power, but the fundamentals are still weak. There was no control tower, nobody in charge.”

As Ms. Demick observes: “The botched rescue also has cast a harsh light on a Confucian culture in which young people are taught to respect the older generation,” which in this instance failed the children catastrophically. Many of the kids followed instructions, after all, to stay put rather than abandon ship.

India: The nation’s rolling six-week parliamentary election continues, with results expected on May 16.   On Thursday, Maoist rebels killed five paramilitary soldiers and four polling officials in one restive eastern state.

The main Hindu opposition party, Bharatiya Janata, led by Narendra Modi, is expected to handily defeat the governing Congress party after ten years in power.

Turkey: On the eve of the 99th anniversary of the mass deportation of Armenians in 1915, Turkish Prime Minister Erdogan said those events had “inhumane consequences,” striking a rare conciliatory tone, though he stopped short of using the term “genocide” to describe the mass killings...Armenia long claiming up to 1.5 million people were killed.

Erdogan added that while the events during the First World War “should not prevent Turks and Armenians from establishing compassion and mutually humane attitudes towards one another,” it was “inadmissible” for Armenia to use the 1915 events “as an excuse for hostility against Turkey” and to turn the issue “into a matter of political conflict.” [BBC News]

Australia: The government is making one of its largest ever military purchases, $12 billion for an order of 58 Joint Strike Fighters in a move that lifts its combat capability significantly, bringing its fleet of the cutting-edge aircraft to 100. Aussie Aussie Aussie!!!

Brazil: There has been extensive violence in Rio and Sao Paulo ahead of the World Cup, with numerous deaths. The event takes place at sites across Brazil from June 12 – July 13.

Meanwhile, a scandal has erupted over the finances of one of Brazil’s representatives on the Fifa executive committee (soccer/football’s ruling body). The daughter of Ricardo Teixeira, who stepped down from the committee in 2012 and recently moved to Miami, received over $3 million into a savings account set up in her name. She is 10 years old.

Ricardo fled when he came under investigation, an inquiry that now raises questions about the finances of some Fifa officials involved in the decision to award Russia and Qatar the 2018 and 2022 tournaments. Teixeira supported Qatar’s bid, which has come under fierce criticism because at the time of year when the competition is to be held, the temperatures are over 100F. [You can’t reschedule the Cup to another time of year without screwing up the regular football schedules of the leagues around the world.]

Random Musings

--George Will / Washington Post

“Recently, Barack Obama – a Demosthenes determined to elevate our politics from coarseness to elegance; a Pericles sent to ameliorate our rhetorical impoverishment – spoke at the University of Michigan. He came to that very friendly venue – in 2012, he received 67% of the vote in Ann Arbor’s county – after visiting a local sandwich shop, where a muse must have whispered in the presidential ear. Rep. Paul Ryan (R-Wis.) had recently released his budget, so Obama expressed his disapproval by calling it, for the benefit of his academic audience, a ‘meanwich’ and a ‘stinkburger.’

“Try to imagine Franklin Roosevelt or Dwight Eisenhower or John Kennedy or Ronald Reagan talking like that. It is unimaginable that those grown-ups would resort to japes that fourth-graders would not consider sufficiently clever for use on a playground....

“Celebrating the (Affordable Care Act’s) enrollment numbers, Obama, referring to Republicans, charged: ‘They said nobody would sign up.’ Of course, no one said this. Obama often is what political philosopher Kenneth Minogue said of an adversary – ‘a pyromaniac in a field of straw men.’

“Adolescents also try to truncate arguments by saying that nothing remains of any arguments against their arguments. Regarding the ACA, Obama said the debate is ‘settled’ and ‘over.’ Progressives also say the debate about catastrophic consequences of man-made climate change is ‘over,’ so everyone should pipe down. And they say the debates about the efficacy of universal preschool, and the cost-benefit balance of a minimum-wage increase, are over. Declaring an argument over is so much more restful than engaging with evidence....

“Finally, the real discussion-stopper for the righteous – and there is no righteousness like an adolescent’s – is an assertion that has always been an Obama specialty. It is that there cannot be honorable and intelligent disagreement with him. So last week, less than two minutes after saying that the argument about the ACA ‘isn’t about me,’ Obama said some important opposition to the ACA is about him, citing ‘states that have chosen not to expand Medicaid for no other reason than political spite.’

“This, he said, must be spiteful because expanding Medicaid involves ‘zero cost to these states.’ Well. The federal government does pay the full cost of expansion – for three years. After that, however, states will pay up to 10% of the expansion’s costs, which itself will be a large sum. And the 10% figure has not been graven on stone by the finger of God. It can be enlarged whenever Congress wants, as surely it will, to enable more federal spending by imposing more burdens on the states. Yet Obama, who aspired to tutor Washington about civility, is incapable of crediting opponents with other than base motives.”

--Michael Goodwin / New York Post

“As a young reporter, I once expressed shock at how routinely and reflexively government officials lied to the press. A savvy newspaper vet who overheard me just smiled and told me not to take it personally.

“ ‘Why shouldn’t they lie to you?’ the late, great Murray Kempton asked. ‘They lie to themselves all the time.’

“His observation came back to me as I read about President Obama’s trip to Asia. He’s going, the White House says, to tell our allies face to face that America is committed more than ever to their security and prosperity....

“Consider that it’s been three years since Obama first declared a ‘pivot’ to Asia as part of a strategic rebalancing of American interests, but the promise proved hollow. Asia is not alone in feeling misled.

“Ask the Syrians about Obama’s promise to act if their government crossed his ‘red line’ and used chemical weapons. Or ask Israelis, Saudis, Jordanians and others in the Mideast about Obama’s pledge that America would never allow Iran to get a nuclear weapon. Or ask Ukrainians about his pledge that we will stand with them as they fight for democracy against Vladimir Putin....

“Worst of all, Obama lies to his fellow Americans. All the time....

“Abraham Lincoln, supposedly an Obama hero, warned about the corrosive effect of failing to be honest. As he famously put it, ‘You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.’

“That more or less sums up where we are, or, rather, where Obama is. Nearly six years in office, much of the world is united only in not trusting his word....

“The result is that, while the United States remains the lone superpower, we are not feared by the world’s most malevolent forces.

“We are witnessing the making of a tragic history. The fact that America’s leader lacks credibility among friend and foe alike is creating peril without precedent. Absent a sudden stiffening of spine and a president whose word is his bond, the world is heading toward a catastrophe.

“That’s the truth.”

--Bret Stephens / Wall Street Journal

“ ‘What would happen,’ Samuel Huntington once wondered, ‘if the American model no longer embodied strength and success, no longer seemed to be the winning model?’

“The question, when the great Harvard political scientist asked it in 1991, seemed far-fetched. The Cold War was won, the Soviet Union was about to vanish...

“A quarter-century later, the dictators are back in places where we thought they had been banished. And they’re back by popular demand....

“Has the West been performing well lately? If the average Turk looks to Greece as the nearest example of a Western democracy, does he see much to admire? Did Egyptians have a happy experience with the democratically elected Muslim Brotherhood? Should a government in Budapest take economic advice from the finance ministry of France? Did ethnic Russians prosper under a succession of Kiev kleptocrats?

“ ‘Sustained inability to provide welfare, prosperity, equity, justice, domestic order, or external security could over time undermine the legitimacy of even democratic governments,’ Huntington warned. ‘As the memories of authoritarian failures fade, irritation with democratic failures is likely to increase.’....

“A West that prefers debt-subsidized welfarism over economic growth will not offer much in the way of an attractive model for countries in a hurry to modernize. A West that consistently sacrifices efficiency on the altars of regulation, litigation and political consensus will lose the dynamism that makes the risks inherent in free societies seem worthwhile. A West that shrinks from maintaining global order because doing so is difficult or discomfiting will invite challenges from nimble adversaries willing to take geopolitical gambles.

“At some point the momentum will shift back. That, too, is inevitable. The dictators will err; their corruption will become excessive; their cynicism will become transparent to their own rank-and-file. A new democratic wave will begin to build.

“Whether that takes five years or 50 depends on what the West does now. Five years is a blip. Fifty is the tragedy of a lifetime.”

--Susan Milligan / U.S. News Weekly

“Mitt Romney took just 27% of the Latino vote in the last presidential contest, far short of the 40-plus percentage points pollsters say a GOP presidential candidate needs to win. Immigration reform is stalled on Capitol Hill, largely because of opposition from Republicans who insist the borders must be demonstrably secured before they will talk about the status of the 11 million undocumented immigrants now in the country. Other issues not directly related to ethnicity or immigration status – such as income inequality – are also working for Democrats, who are casting themselves as the party of the struggling middle class. With Latinos becoming important not only in the Southwest and Mountain West, but also in key battleground states like North Carolina and New Jersey, the GOP needs to change its image among Hispanics if it wants to succeed, says Brian Ballard, who worked on Romney’s finance committee in 2012 and John McCain’s in 2008.

“ ‘Our party, if we don’t get back the Hispanic vote, we are going to be on the ash heap of history,’ Ballard says. ‘If that’s what we’ve become – angry white males – we’re not going to have another [Republican] president in my lifetime.’ Ballard, like a segment of others in his party, sees Jeb Bush as the potential savior. Bush would be favored in Latino-rich Florida. He has a Mexican-born wife and Hispanic children. He speaks Spanish fluently (‘better than he speaks English,’ Ballard quips). And in a stark separation from the rest of the emerging 2016 field, Bush has talked about the importance of immigration reform and hasn’t demonized undocumented immigrants.....

“(Bush told the Conservative Political Action Conference last month) that the party needs to be more positive and inclusive. ‘Too often we’re associated with being ‘anti’ everything,’ he said. ‘Way too many people believe Republicans are anti-immigrant, anti-woman, anti-science, anti-gay, anti-worker... and the list goes on and on and on. Many voters are simply unwilling to choose our candidates even though they share our beliefs because those voters feel unloved, unwanted and unwelcome in our party.’

“That approach could be a huge advantage for the GOP in a general election, experts say. But what about the primaries?”

--Well, rancher Cliven Bundy has had his fifteen minutes of fame on Fox, as conservatives of all stripes now flee the idiot following racist comments he made this week, wondering aloud whether blacks would be better off as slaves picking cotton, while alleging people of color are “against us.”

Thankfully, I didn’t fall for the guy.

--According to the Bureau of Alcohol, Tobacco, Firearms and Explosives, between 2005 and 2013, select firearms applications (including machine guns, pistols with silencers, and short-barreled shotguns) “skyrocketed by more than 380%” to nearly 200,000, which has contributed to a backlog of more than 70,000 applications as an internal ATF memo noted.

Overall, firearm production was more than 8.5 million guns in 2012, the most recent year for such data. [Kevin Johnson / USA TODAY]

--The Supreme Court left in place a 2006 Michigan ballot initiative where voters ended race-based admissions at its public universities. In a 6-2 ruling, Justice Anthony Kennedy wrote in backing the law, “Democracy does not presume that some subjects are either too divisive or too profound for public debate.”

But universities in states without bans can still consider race as one factor among others in admissions.

Eight states, including California, have ended affirmative action since 1996. But many select schools, including U.S. military academies and Ivy League institutions, employ affirmative action.

Justice Stephen Breyer split from two liberals to side with Michigan. Liberal Elena Kagan, recused herself, presumably because she was involved in the case when she was U.S. solicitor general.

--Crain’s New York Business had a little blurb on New York Mayor Bill de Blasio and his wife Chirlane McCray having an effective tax rate of 8.3% - “significantly less than the 14% tax rate that Mitt Romney was criticized for in 2011.”

--Madeleine McCann, then aged three, disappeared from her room at a resort in Portugal’s Algarve in May 2007 in a case that gripped the world. But this week British police announced what could be the true cause; Madeleine may have been among the victims of a series of sexual assaults on British children in Portugal committed by one individual.

British and Portuguese police are investigating a string of such cases on children there from 2004 to 2010. One assault, which was only just reported following a public appeal for information, occurred at the same resort Madeleine was at with her parents two years earlier. Police are also now saying some of the victims have given a similar description of the attacker.

Madeleine’s parents had been named as official suspects by the Portuguese police four months after Madeleine’s disappearance but were cleared in 2008. [Reuters]

-- The Wall Street Journal’s Robert Lee Hotz did a piece on the number of microbes living on cash.

“In the first comprehensive study of the DNA on dollar bills, researchers at New York University’s Dirty Money Project found that currency is a medium of exchange for hundreds of different kinds of bacteria as bank notes pass from hand to hand.

“By analyzing genetic material on $1 bills, the NYU researchers identified 3,000 types of bacteria in all – many times more than in previous studies that examined samples under a microscope....

“Easily the most abundant species they found is one that causes acne. Others were linked to gastric ulcers, pneumonia, food poisoning and staph infections, the scientists said.”

Curiously, the researchers also found “a snippet or two of white rhino DNA.”

Kind of makes you want to treat them with more respect.

--A group of former NASA astronauts is on a mission to save the world, specifically, finding $250 million for an asteroid telescope to identify space rocks on a collision course with Earth, hopefully providing several years or even decades worth of notice to get your house in order before we are extinguished.

Oh, sorry...that’s several years or even decades to deflect a disaster.

Apollo 9 astronaut Rusty Schweickart said on Earth Day, when the B612 Foundation unveiled its plans, “We are literally in a shooting gallery. That’s the message we want people to understand...the big ones will come. It’s just a matter of when.”

--John Houbolt died. He was 95. From the Associated Press:

“As NASA describes on its websites, while under pressure during the U.S.-Soviet space race, Houbolt was the catalyst in securing U.S. commitment to the science and engineering theory that eventually carried the Apollo crew to the moon and back safely.

“His efforts in the early 1960s are largely credited with convincing NASA to focus on the launch of a module carrying a crew from lunar orbit, rather than a rocket from Earth or other method.

“Houbolt argued that a lunar orbit rendezvous, or LOR, would not only be less mechanically and financially onerous than building a huge rocket to take man to the moon or launching a craft while orbiting the Earth, but LOR was the only option to meet President Kennedy’s challenge to reach the moon before the end of the decade.”

John Houboldt was born in Altoona, Iowa. RIP.
---

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

God bless America.
---

Gold closed at $1300
Oil $100.60

Returns for the week 4/21-4/25

Dow Jones -0.3% [16361]
S&P 500 -0.1% [1863]
S&P MidCap -0.3%
Russell 2000 -1.3%
Nasdaq -0.5% [4075]

Returns for the period 1/1/14-4/25/14

Dow Jones -1.3%
S&P 500 +0.8%
S&P MidCap +0.4%
Russell 2000 -3.5%
Nasdaq -2.4%

Bulls 51.6
Bears  
21.7 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Next week from Paris.

Brian Trumbore