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06/28/2014

For the week 6/23-6/27

[Posted 11:00 PM ET, Friday]

Edition 794

The Middle East in Flames

In a New York Times/CBS News poll, 58% of Americans disapprove of the way President Obama is handling foreign policy, a jump of 10 points in the last month to the highest level since Obama took office in 2009. 52% of Americans say they disapprove of how the president is dealing with the current violence in Iraq; 37% approve. A Fox News poll has 32% approving of Obama’s foreign policy, 60% disapproving. A poll for NBC News/Wall Street Journal had 71% saying the 2003 Iraq War was not worth it, only 22% felt it was.

The Iraqi parliament will meet on Monday or Tuesday to begin the process of forming a new government, this as ISIS strengthens its grip on wide swaths of northern and western Iraq, including border crossings with Syria.

Prime Minister Nouri al-Maliki, despite the personal pleas of U.S. Secretary of State John Kerry, is showing zero signs of compromise in sharing political power with minority groups, including Sunnis and ethnic Kurds. Oh, he claims he is open to forming a coalition government, but reality says otherwise and he is not about to forego a third term as prime minister.

Maliki’s State of Law party controls at least 92 of parliament’s 328 seats, with no other party having more than 33. It will also be tough to remove him when he controls the army and has Iran’s support.

On Wednesday he said calls for a “national salvation” government, as put forward by rival Shiite leader Ayad Allawi (my personal fave), were nothing more than a “coup against the constitution and an attempt to end the democratic experience.”

But some of his supporters are beginning to express concern, and powerful Shiite cleric Moqtada al-Sadr made a televised statement on Wednesday calling for a national unity government of “new faces” representing all groups. But Sadr, who fought fiercely against both U.S. forces and Sunni extremists, can never be trusted, even as he vows to “shake the ground” under the feet of ISIS.

In the north, the president of Iraq’s Kurdish autonomous region, Massoud Barzani, said the Kurds were prepared to commit all of their forces to defend Kirkuk, which Kurdish forces took control of when the Iraqi army fled in the face of the ISIS offensive.

This has allowed Iraqi Kurds to begin realizing long-held territorial dreams, moving their forces into disputed areas the federal government has long opposed them adding to their autonomous region.

Barzani said on Thursday: “Iraq is suffering from clear collapse. We cannot remain hostages to the unknown, and it is time to identify the Kurdish identity and draw our own future.”

Back to Maliki, in an interview with the BBC’s Arabic language service, he said the Iraqi army would have been able to block the insurgents’ advance if the U.S. had moved more quickly to deliver fighter planes that Baghdad had purchased, referring to the purchase of 36 F-16 jets that U.S. officials have said wouldn’t arrive before September.

“I’ll be frank and say that we were deluded when we signed the contract,” he said. “We should have sought to buy other jet fighters like British, French and Russian, to secure the air cover for our forces. If we had air cover, we would have averted what has happened.”

Maliki said he was acquiring fighter jets from Russia and Belarus that should arrive in days.

He also confirmed that Syrian forces had carried out air strikes against Islamist militants at a border crossing between Iraq and Syria, adding he “welcomed” them.

“They carry out their strikes and we carry out ours and the final winners are our two countries,” Maliki said.

What he didn’t mention is that a reported 57 civilians were killed in the strikes. [Syria has also been bombing suspected ISIS sites in Aleppo.]

Editorial / The Economist

“ISIS is riding high for the moment. The glee may not last. Syria’s regime, perhaps perturbed by ISIS’ success and suddenly keen to portray itself as an ally of the West in the fight against jihadist monsters, has for the first time mounted sustained aerial attacks on the group. In Iraq it is probably a matter of time before rival Sunnis decide that ISIS’ notoriety is bad for their cause.”

Meanwhile, China is among the nations evacuating its workers, with authorities in Beijing saying it would relocate 1,250 in the coming days. Most are arriving in Baghdad from northern Iraq where they have been working in various plants, but China is actually the largest investor in Iraq’s oil industry – with more than 10,000 workers on a wide range of projects, officials say, although most are in the south, far from the current fighting.

[China imports about 60% of its crude oil and holds a 25% stake in Iraq’s oil reserves.]

As for the United States, it has been urging Saudi Arabia, Jordan and the United Arab Emirates to do what they can to encourage Maliki to form an inclusive government.

But while the U.S. has stepped up its intelligence gathering on potential targets in Iraq, with armed drones now in the air, John Kerry told European leaders in Paris at week’s end that no decision on airstrikes has been made.

In accepting the Congressional Gold Medal in Washington the other day, outgoing Israeli President Shimon Peres said:

“The artificial structure in the Middle East, built by previous empires, is now falling apart. The rules governing the world are being rewritten. Security and prosperity are no longer mainly national issues....

“The terrorists are the enemies of both of us. Terrorists spread danger over the entire region. The region must come together to stop them.”

Elsewhere, President Obama requested $500 million from Congress to train and equip what the White House is calling “appropriately vetted” members of the Syrian opposition. This is laughable. Again, this is what should have been done in 2012.

Syria claimed to surrender the final chemical arms it admitted to holding this week, but any secret arsenal may allow gas attacks to continue.

British Foreign Secretary William Hague said the Syrian government’s “history of lies and obstruction make it impossible to take its claims at face value.”

In Lebanon there were a series of bomb attacks in Beirut, including one at a hotel I am familiar with. A suicide bomber blew himself up in his room as police, tipped off, were about to confront him. Needless to say this shook up tourists in a big way. Earlier, terror suspects were rounded up in two other hotels.   Guests have checked out, bookings are plummeting.

Hizbullah’s involvement in Syria is being blamed for Lebanon’s security problems.

Turning to Iran and the nuclear talks, a Russian diplomat said U.N. sanctions personnel are undermining negotiations by making unfounded allegations.

Ambassador Vitaly Churkin told the U.N. Security Council, “Any information not backed up by concrete facts...could have a negative impact on the conduct of negotiations,” but council analysts have suggested Tehran is attempting to violate international ballistic-missile sanctions. [More than attempting. I’m just reporting the story.]

And there was a report Iran is close to signing a deal with Russia for two new reactors for its Bushehr nuclear-power plant.

Iranian Foreign Minister Zarif urged negotiators to “abandon excessive demands which will not be accepted by Iran.”

A high-level U.S. insider told Reuters, “There are very, very difficult decisions to be taken here by Iran.”

Zarif did say that Washington has met its commitment to lift restrictions on $4.2 billion in Iranian funds.

The P5+1 is launching two weeks of discussions on July 2 in a final attempt to hammer out a long-term deal by July 20, when the interim accord is set to expire.

In Israel, a new poll finds a clear majority of Palestinians in the West Bank and Gaza now oppose a two-state solution...60% of those polled, including 55% in the West Bank and 68% in Gaza, reject permanently accepting Israel’s existence and instead suggest their leaders “work toward reclaiming all of historic Palestine, from the river to the sea.”

Two-thirds support continued “resistance” against the Jewish state. The poll was commissioned by the Washington Institute for Near East Policy and conducted June 15-17. 

The Washington Institute characterized the survey as a sudden, hardline shift within the Palestinian community. That said, there are elements of pragmatism: 80% of Palestinians would “definitely” or “probably” be in favor of greater job opportunities in Israel, and 70% of Gaza residents strongly favor Hamas’ maintaining its ceasefire with the IDF (Israel Defense Forces) – despite generally favoring resistance.” [Jerusalem Post]

Separately, Israel launched air strikes on Syrian army positions in response to an explosion that killed an Israeli teenage civilian in the Golan Heights. Sunday’s attack and the response represented the most serious clash between the two countries since the start of the civil war in Syria in 2011. The Syrian government said four were killed by the Israeli strikes.

As to the ongoing search for three missing Israeli teenagers, last I saw over 360 Palestinians had been detained with no success.

An Egyptian court confirmed the death sentences of more than 180 Islamists, including the top leader of the Muslim Brotherhood, though lawyers said it can be overturned on appeal. And then three journalists for Al-Jazeera English were convicted on terrorism-related charges and sentenced to seven years in prison each.

Opinion...on all the above...

George Melloan / Wall Street Journal

“ ‘What would America fight for?’ asked a cover story last month in The Economist magazine. Coming from a British publication, the headline has a tone of ‘let’s you and him fight.’ But its main flaw is that it greatly oversimplifies the question of how the U.S. can recover from its willful failure to exert a positive influence over world events.

“That failure is very much on display as Iraq disintegrates and Russia revives the ‘salami tactics’ of 1930s aggressors, slicing off parts of Ukraine. Both disasters could have been avoided through the exercise of more farsighted and muscular American diplomacy. A show of greater capability to manage ‘domestic’ policy would have aided this effort.

“The U.S. is still militarily powerful and has a world-wide apparatus of trained professionals executing its policies, overt and covert... Although confidence in America has waned significantly, it is still looked to for leadership in thwarting the designs of thugs like Russia’s Vladimir Putin, Syria’s Bashar Assad and Iran’s Ayatollah Khamenei.

“Yet President Obama has followed a deliberate policy of disengagement from the world’s quarrels. He failed to bluff Assad with his ‘red line’ threat and then turned the Syrian bloodbath over to Mr. Putin, showing a weakness that no doubt emboldened the Russian president to launch his aggression against Ukraine. The errant Iraqi Prime Minister Nouri al-Maliki, beset by a Sunni-al Qaeda insurgency, has been told, in effect, to seek succor from his Shiite co-religionists in Iran. Meanwhile, Secretary of State John Kerry amazingly urges America’s only real friends in the area, the Iraqi Kurds, not to abandon the ill-mannered Mr. Maliki in favor of greater independence and expanded commerce (mainly oil) with our NATO ally, Turkey.

“Mr. Obama cites opinion polls purportedly showing that Americans are ‘war weary.’ Probably what the polls really reflect is something else entirely, dismay at the wasted blood and treasure that resulted from Mr. Obama’s unilateral declaration of defeat in Iraq and Afghanistan.

“Instead of whining about ‘war weariness,’ an American president should understand his historical role. The U.S. can’t just withdraw from the responsibilities that have derived from its enormous success in making itself the look-to nation for peoples aspiring to safer, freer and more prosperous lives. The costs of failure are too high, as we have seen in the many thousands of lives lost in Syria....

“U.S. interests in the Middle East, Asia and Europe are threatened as aggressors and terrorists become bolder. An American president doesn’t have to sit back and watch. The Economist asked a mischievous question, but it revealed a disappointment of the world’s expectations of America.”

Editorial / The Economist

“The Middle East’s imperial boundaries are flawed – but so is every other plausible set of lines. The break-up of the Balkans showed how much blood is spilled when people redraw their borders using force. In Iraq and Syria the process could take years – and would feed sectarianism and global terrorism. It might spread to other countries, such as Lebanon and Jordan, created by the same imperial geographers. And when at last peace comes, it will inevitably require an acceptance that people have more to gain from accommodation than from shutting each other out. Better on balance to aim for that now, within today’s flawed borders, than to sit back and watch Iraq go up in flames.”

Peggy Noonan / Wall Street Journal

“The American people believe Barack Obama viewed Iraq as a personal political problem. He won the presidency being antiwar, so he had to anti-the-war before his re-election. He did it without appropriate care and commitment, which probably guaranteed we’d wind up where we are. He is out of his depth. Amazingly, he radiates a sense that he isn’t all that invested, that he doesn’t drag himself to the golf course to get a break and maintain balance, but plays golf because at the end of the day Iraq, like other problems, challenges and scandals, isn’t making him bleed inside.

“And the people don’t like any of this. Americans hate incompetence, but most of all and in a separate class they hate bloody incompetence. They’ve seen it now from two administrations.

“The bright spot; the earnest professionalism of our troops, still unsurpassed.

“But the loss of life, the financial cost, the loss of prestige, the sense that somehow after 9/11 we squandered the sympathy and support of the world, the danger to the world when America gets beat or looks beat, the inspiration that is to evil-minded men – these things the American people would hate....

“There is a growing disconnect between the American people and their government, a freshened resentment. We are not talking about Iraq when we talk about Iraq, we are also talking about ourselves. We are not only talking about the past, we are talking about the future.

“The architects of the Iraq invasion always said the decision to invade was crucial, consequential, a real world-changer. They had no idea.”

Former Ambassador Ryan Crocker / Washington Post

“We would be foolish to think that ISIS will not plan attacks against the West now that it has the space and security to do so. This is a more formidable force than Osama bin Laden’s group that brought us 9/11. Its fighters are experienced, completely committed to their cause, well-armed and well financed. As many as 2,000 of them hold Western passports, including U.S. ones, so there’s no need for visas. This is global jihad, and it will be coming our way....

“The wisdom of the 2003 invasion will be debated endlessly. I certainly had doubts about it. But the point I made during my tenure there was that once you are in, you are in. You cannot undo an invasion. You can, by contrast, undo an unfortunate disengagement by reengaging forcefully before it’s too late.

“History will be unforgiving if we allow this exceptionally virulent manifestation of al-Qaeda to take root across northern Iraq and begin planning its next phase of operations. This is a determined enemy, and it will not stop where it is now.”

Mortimer B. Zuckerman / U.S. News Weekly

“The perception of American waffling and timidity has provoked our allies in the Gulf to take matters into their own hands. Saudi Arabia, Qatar, and the United Arab Emirates have all recently ordered huge arsenals, according to The Economist. Nobody believes America would interdict China’s efforts to become the dominant power in Asia.

“Where will Obama make a stand? Nobody knows. In the Financial Times recently, (Richard) Haass calls it government by equivocation. The president is against too much military intervention, but he is also against too little of it. He goes on to say that America must be multilateral except when it must act alone. And he adds: ‘Such generalities are more fitting for someone starting out in office than for an incumbent in his sixth year.’ Obama’s tenure brings to mind the adage that experience is a wonderful thing since it enables you to recognize a mistake when you make it again.

“Obama may think he’s giving Americans what they think they want, withdrawal from the global stage. The current mood of the country is febrile, disgusted and disillusioned with the result of our sacrifices. Our idealism seems to be in direct proportion to our distance from the problem. It’s natural for Americans to want no more to do with distant states that have no core unity, riven by archaic feuds. But as the headline of a piece in The New Republic by Robert Kagan of the Brookings Institution notes: ‘Superpowers don’t get to retire.’....

“Nobody is looking to have us enter into conflicts casually, but we cannot so easily abandon American national interests. Lost credibility is hard to rebuild. At this point, it is nearly impossible to perceive a coherent U.S. foreign policy. We sense only that we are unraveling American national interests of many decades.

“Maybe Obama will surprise us with the smack of firm government. But at present, he is certainly not a candidate for Mount Rushmore.”

Try Mount Trashmore, mused your editor.

Washington and Wall Street

Just how well isthe U.S. economy doing? On Wednesday, we received the last of two revisions to first-quarter GDP and the figure, down an annualized rate of 2.9%, shocked the Street and confounded every single expert that expected a further downward revision, but only to -1.8%.

How bad was the decline from a previously reported -1.0%? Aside from the -2.9% being the fastest rate of decline since the recession, and the largest drop recorded since the end of World War II that wasn’t part of a recession, it was the biggest downward revision from a second GDP estimate since such records began being tracked in 1976.

Economists who were expecting the economy to rebound 3.5% in the second quarter were left scrambling to lower their forecasts. Call it now 3.0% in Q2.

Here is what was so disconcerting. Consumer spending rose a revised 1.0% in the first quarter after a prior estimate of up 3.1%. Reminder, the consumer is 70% of the U.S. economy and this is the worst consumption reading in five years. The next day, Thursday, we received the May figure for consumption and it was up only 0.2% vs. an expected 0.4% and if you adjust for inflation, in May consumer spending actually fell 0.1%. Goodness gracious. [Personal income in May rose an expected 0.4%.]

So you take the Q1 consumption number and May’s desultory reading and it shouldn’t give you a warm and fuzzy feeling.

We also learned that healthcare spending actually declined in the first quarter after earlier projections of an increase, so what does this mean?

Editorial / Wall Street Journal

“Financial markets shrugged off Wednesday’s punch-in-the-stomach report that first quarter GDP shrank by 2.9% on an annual basis... Optimists blame the weather and point to faster growth in the current quarter, which is reasonable but still shouldn’t overlook ObamaCare’s role in nearly sending the economy back into recession.

“January saw the formal launch of the Affordable Care Act, and its attempt to transform U.S. health insurance and medical practice. So it’s notable that a major cause of the sharp downward revision in first-quarter GDP was a decline in consumer spending on health care....

“Health spending is nearly always a positive contributor to GDP, and in the fourth quarter of 2013 it contributed 0.62%. But health spending fell so sharply in the first quarter that it subtracted 0.16% from economic growth....

“The decline is especially shocking given that the arc of health spending is always up. The explanation can’t be that Americans suddenly had less demand for health care, or had a healthier winter. Our guess is that the turmoil caused by the disastrous ObamaCare rollout confused many consumers into delaying their health purchases. ObamaCare also caused millions of Americans to lose insurance they liked, and it no doubt took time for many to find new policies that suited them and they could afford.

“Perhaps health spending will bounce back in the second quarter and beyond, but the first quarter plunge shows what happens when you try to ‘transform’ one sixth of the U.S. economy.”

So think about it. When you start off the year with a negative 3% number, it sure takes a lot of growth for the economy to rise 3% for the entire year. As in, forget that number. We’ll be lucky to hit 2% for all of 2014, which would be less than I thought beginning of the year.

But there was some other economic news of note this week.

May existing home sales rose a better than expected 4.9% to 4.89 million units on an annualized basis, the best pace in three years, though the record level of 7.08 million in 2005 is but a pipe dream. May new home sales soared to 504,000, the highest figure since May 2008, with the 18.6% one-month gain the best since 1992.

At the same time, the S&P/Case-Shiller 20-city home price index for April rose 0.2% over March, up 10.8% year-over-year, which shows a weakening, or prices rising at a slower rate, which isn’t all bad. The 10.8% gain is the smallest in more than a year and comes after a 12.4% price rise in March. [Las Vegas led the way, up 18.8% yoy, with San Francisco up 18.2%. But Cleveland’s home prices rose only 2.7%.]

Add it all together and the housing picture, after a fall/winter slump on the sales front, is rebounding and prices are leveling off some.

The figure on May durable goods (big-ticket items) was not good, down 1.0%.

And then you have the Fed’s preferred inflation barometer, the personal consumption expenditures index, which in May was up 1.8% over the past year, the highest rate since October 2012 and well up from February’s 0.8% pace.

Now the Fed’s Janet Yellen would remind us not to worry, that this is still below the Fed’s 2% target and that there is a lot of noise in the inflation numbers, but you know where your editor stands. Where’s there’s noise there’s probably a party. OK, I just made that up...but it sounds good.

No, Ms. Yellen, there is more than noise these days on the inflation front, but then if the economy isn’t growing nearly as fast as we expected, including the Fed, maybe prices will stabilize. You all know that when it comes to food, for one, prices are skyrocketing in relative terms.

I just think it’s a lock the Fed is raising interest rates sooner than most expect. This inflation scare we see in some sectors will prove to be real.

Lastly, it’s earnings season, boys and girls, starting in about two weeks for real, while next week we have key data on manufacturing as well as June’s jobs report (Thursday instead of the traditional first Friday, due to the holiday). Coupled with the ever-changing geopolitical picture, there could be some early fireworks.

Europe and Asia

A composite flash reading on the eurozone’s manufacturing and service sectors came in at 52.8 for June vs. 53.5 in May, but with manufacturing ticking down to 51.9 from the prior month’s 52.2.

The report, however, breaks out only Germany and France and the manufacturing PMI for the former was 52.4 vs. 52.3 in May, while the picture in France continues to get worse; the manufacturing PMI there at just 47.8 vs. 49.6 in May. 

But the big news for the European Union was the nomination of Jean-Claude Juncker, the former Luxembourg prime minster, to become the next president of the European Commission, which as I’ve been writing is exactly what British Prime Minister David Cameron did not want.

Juncker must now be approved by the European Parliament, which is scheduled to vote in mid-July and it’s a certainty he will win.

But Cameron forced a vote among the European Commission, comprised of the 28 individual leaders, which normally nominates the president by unanimous consent, and while the vote was 26-2, Cameron joined in opposition by Hungary’s Viktor Orban, Cameron did what he had to do in addressing his home constituency.

Cameron has been warning of “consequences” if Britain’s objections to Junker were ignored. He is under pressure back home to take a tough line on Europe unless Brussels shows it is serious about reform and addressing Britain’s issues, including making policy concessions before his planned 2017 in-out referendum on EU membership. For her part, German Chancellor Angela Merkel is trying to smooth things over between Cameron and the rest of the EU, but it is going to be tough to give Cameron what he wants...more independence, not less, which has been the goal of the EU’s “ever-closer union.” Deeper integration at the economic, single currency level, has come at the expense of national sovereignty, according to some in Britain (and of course Britain has refused to adopt the euro).

A recent poll in the U.K. found that 48% of Brits would “definitely” or “probably” vote to leave the EU, while 37% said they would definitely or probably vote to stay in.

So Cameron has vowed to renegotiate the U.K.’s relationship with Brussels before staging the in/out vote (assuming he is re-elected next year...and that’s looking dicey).

The poll found that if Cameron was successful in securing a deal that “redefined the terms of Britain’s membership” then 42% would definitely or probably vote to remain in the EU, with 36% saying they would sever ties with Brussels. 

A lot more to come on this topic.

On July 1, Italian Prime Minister Matteo Renzi takes over the six-month presidency of the European Union, separate from the EC, which is important for setting the agendas at future EU summits and such, but Renzi wants to accomplish big things...three big things, specifically. First he wants a weakening of the official fiscal rules. The second is a change to the fiscal compact, a multilateral treaty signed by all the EU members except the U.K., Croatia and the Czech Republic. And third he wants a jointly funded investment program.

Renzi will get some of what he wants, like fiscal flexibility (think budget deficit targets of no greater than 3% of GDP), but he won’t get it all.

More importantly, Renzi is trying to bring his country back from the brink. It needs growth yet is only expected to expand about 0.3% for 2014.

And as I’ve written, Italy has a humongous public debt. Try $2.9 trillion, the same size as Germany’s, only the German economy is much larger. In the first four months of this year, Italy tacked on debt of 77 billion euros, almost as much as the entire total of 79.8 billion for 2013, according to the central bank. [Lorenzo Totaro / Bloomberg]

It’s why I harp on the historically low bond yields for the likes of Italy and Spain, in Italy’s case finishing the week at 2.83% on the 10-year, just 30 basis points over U.S. Treasuries.

Italy’s debt to GDP is rising to nearly 135% this year from 132.6% last year. It is forecast to drop to 125% by 2017, which, again, requires growth a helluva lot more than 0.3%.

Last month the International Monetary Fund said Italy’s “fiscal policy needs to strike a delicate balance between setting the debt ratio on a downward path while avoiding excessive tightening that derails the fragile recovery. More needs to be done to bring down the high level of public debt and strengthen the resilience of public finances.”

A few other items. Spanish leaders announced sweeping tax cuts to both corporate and personal income, from 30% to 25% by 2016 on the corporate side, while for high wage earners, the income tax rate will fall from 52% (one of the highest in the EU)  to 45%. But some in the middle will see their rates rise a bit because the number of brackets is being reduced.

Spain’s recovery is going more smoothly than Italy’s, but with growth forecast to rise 1.2% this year, it is hardly robust here either and many are questioning whether the government’s forecasts of rising revenues will come to fruition with the tax cuts.

Meanwhile, in the U.K., Bank of England governor Mark Carney said a “new normal” for interest rates in his country is likely to be about 2.5% vs. an historic rate of 5%, as he attempts to reassure individuals and businesses that while Brits should prepare for rate hikes above the current 0.5% benchmark, sooner than later, as Carney put it, we will raise rates “in a gradual and limited fashion.”

And lastly, back to the European Parliament, France’s National Front leader Marine Le Pen was not able to cobble together a coalition of seven nations in time for the opening session next week. To gain funds and speaking time you need representatives from seven EU member states to be represented in an official parliamentary group and Le Pen attracted parliamentarians from only the Netherlands, Italy, Belgium and Austria.

Le Pen’s issues with her father did not help matters. She can apply for group status later in the Parliament’s five-year term.

Turning to China, an independent analysis of the economy, the beige book, notes that in the second quarter capital spending has slowed and fewer companies applied for credit. As the director of the report said, “overinvestment has been an addition and withdrawal symptoms will not be pretty.” Additionally, commercial and residential realty has been “pummeled.”

But HSBC’s flash reading on manufacturing in China for the month of June showed a nice rise to 50.8 from 49.4 in May. The index was estimated to come in at 49.7, 50 being the dividing line between growth and contraction. HSBC’s figures have long been viewed as more reliable than the government’s readings, plus HSBC focuses on the private sector, while China’s bureau of statistics emphasizes state-run enterprises, so, again, while I would never focus on a single figure, it will be interesting to see if the 50.8 is really the start of a trend.

In Japan, the inflation numbers for May are in and core inflation, ex-fresh food, rose at its fastest pace in 32 years, up 3.4%, owing to utility price hikes and the sales-tax increase from 5% to 8% back on April 1. Overall, consumer prices rose 3.7%.

After decades of deflation, the government’s target has been inflation of 2% (the universal target level these days, sports fans), but officials expect core inflation to fall back to 1% this summer before reaccelerating. 

Looking ahead to second-quarter GDP, which is expected to plunge after the 6.7% annualized growth rate of the first (owing to heavy consumer spending ahead of the tax hike), in May, household expenditures dropped a whopping 8% year-over-year.

Meanwhile, Prime Minister Shinzo Abe finally revealed the “third arrow” in his economic recovery program, the first two launched last year focusing on fiscal and monetary policy.

Abe has proposed a cut in the country’s corporate tax rate from a current 36% to below 30% in several stages starting next year.

The prime minister is in a box. He needs economic growth and rising prices, but he also has to convince the markets he is serious about paring down Japan’s world-class public debt – 230% of GDP, the highest, by far, among industrialized nations.

That’s why he raised the sales tax from 5% to 8%, with another hike to 10% set for October 2015. The increases are designed to cover rising social welfare costs linked to Japan’s rapidly aging population. It has the world’s highest ratio of elderly to young people, with one of the lowest birth rates in the world.

There is a cure for this...immigration...but, you know, the Japanese historically have had none of this.

Street Bytes

--Stocks were mixed on the week, with the Dow Jones losing 0.6% to 16851, while the S&P 500 lost 0.1% and Nasdaq gained 0.7%. At 4397, Nasdaq is just 650 points shy of its all-time closing mark of 5048 set back on March 10, 2000.

Speaking to the recent lack of volatility, the S&P has failed to post a gain or loss of 1% for 50 straight days, the longest such stretch since 1995.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.46% 10-yr. 2.53% 30-yr. 3.37%

--Investors and brokers are cutting ties with Barclays PLC and its stock-trading venue, as the firm battles allegations of fraud and misleading its customers.

On Wednesday, New York Attorney General Eric Schneiderman accused Barclays of allegedly telling customers it would protect them from high-frequency traders even as it was catering to the same firms.

“The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,” said Schneiderman.

Barclays LX runs a dark pool that handles hundreds of millions of shares a week on behalf of big investment firms, with the U.K. bank’s executives referring to it internally as the Franchise, according to Schneiderman’s suit. Barclay’s shares fell 6.5% in response.

Dark pools are intended to help investors trade large blocks anonymously, attracting high-speed traders as well, which then rival traditional stock exchanges but with less transparency, particularly when it comes to price discovery. According to one analysis, “About 14.4% of all stock trading took place in dark pools and another 22.5% took place in other off-exchange venues during the first quarter of 2014.” [Wall Street Journal]

Advocates say they offer cheaper trading alternatives.

The suit alleges Barclays executives misled large institutional investors about how much of its trading was done in the pool compared with the volume done with high-frequency firms, yet this wasn’t the case.

The bank also misled ordinary investors by claiming it would use a stock exchange or dark pool that “would best execute their trades” at any given time, but in fact the trades were “nearly always” routed to Barclays’ own dark pool so the bank could make more money.

The New York AG is also looking into dark pools run by the likes of Credit Suisse and Goldman Sachs Group.

Two years ago, Barclays was fined a total of $450 million by U.S. and U.K. authorities to settle allegations it manipulated interest rates. CEO Bob Diamond resigned over that mess.

His successor, Antony Jenkins, has held training sessions with the bank’s entire 140,000 workforce to guard against ethical and legal breaches.

But New York authorities say the current scandal is recent, under Jenkins’ watch.

--BNP Paribas SA is said to be near a settlement with the U.S. as part of a deal that would have the bank paying $8.9 billion and accept other punishment on evidence it violated sanctions in laundering some $30 billion in funds linked to companies and government agencies in Sudan. As part of the deal, more than 30 bank employees would be dismissed. BNP also facilitated transfers of funds for Iran and other sanctioned countries.

--General Motors announced yet another recall, this one of 29,000 Chevy Cruze vehicles from the 2013 and 2014 model years because of air bag issues. Earlier in the week, GM issued a ‘stop-sale’ order on all Cruzes, but then narrowed the order once they identified where an improper part was coming from, beleaguered bag supplier Takata.

This is unrelated to the defective ignition switch issue at the heart of February’s massive recall of 2.6 million small cars from the last decade.

--The U.S. has now broken its annual record for auto recalls in less than half a year, 31.4 million vehicles as of this week vs. the old record of 30.8 million in all of 2004.

But wait...there’s more! Late Friday, GM recalled another 428,211 cars! So make it 31.8 million for the industry.

--The German government is ending a contract with Verizon Communications Inc., directly related to the controversy surrounding the U.S. National Security Agency and access of information from the networks of U.S. companies, including Verizon’s. Germany in particular was most upset over U.S. spying overseas and the Interior Ministry said in a statement:

“The relationships between foreign intelligence agencies and companies revealed in the course of the NSA affair show that especially high demands must be made of federal government communications infrastructure that is critical for security.”

--Shares of video camera maker GoPro Inc. rose 23% on their first day of trading Thursday. Priced at $24, the stock closed at $31.35, up nearly 31%. It then rose a further $4.50 on Friday to end the week at $35.85. The company reported a profit of $61 million last year, up 88%, while revenue rose 87% to $986 million.

There have been 144 U.S. IPOs this year, the fastest pace in over two decades. Dollar volume, $30 billion thus far, is trending toward the busiest year since 2000, according to Dealogic.

Speaking of volume, Alibaba Group Holding Ltd. plans to list its shares on the New York Stock Exchange, where its IPO is expected to raise as much as $20 billion, with the company currently valued at nearly $170 billion. The announcement was a blow to Nasdaq, which is still paying the price for the botched Facebook debut.

It appears Alibaba will go public in early August.

--The Supreme Court ruled that streaming Internet provider Aereo violated broadcasters’ copyrights on their programming, which spells the end for the company.

Aereo uses thousands of tiny antennas to pick-up TV signals and transmit them to subscribers for as little as $8 a month in 12 major U.S. cities, but the networks sued over the firm’s business model and the court, by a 6-3 vote, ruled “Aereo is not simply an equipment provider,” as Justice Stephen Breyer wrote in an opinion. “Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.”

IAC chairman Barry Diller, who backed Aereo from its inception, said the ruling meant: “It’s over now.” Aereo executives, however, aren’t giving up just yet.

--The Supreme Court in a 7-2 ruling, with conservatives Justice John Roberts and Justice Antonin Scalia joining the majority, gave the Obama administration a victory in ruling the Environmental Protection Agency’s rule requiring new or rebuilt factories and power plants to use the “best available technology” to limit their emissions of carbon dioxide and other greenhouse gases was constitutional.

It was the third time the high court has upheld the use of the 1970s-era Clean Air Act to limit greenhouse gases.

In April, the court upheld the cross-state air pollution law that requires states in the Midwest to do more to reduce emissions that drift east.

--The Obama administration cleared the way for the first exports of unrefined American oil in nearly four decades, with small shipments beginning as soon as August.

The rulings apply narrowly to just two companies, Pioneer Natural Resources Co. and Enterprise Products Partners LP, which sought to export processed condensate from a south Texas shale formation. The buyers can then turn the oil into gasoline, jet fuel and diesel.

--Nike shares rose after the company reported revenues increased 11% for the three months to May 31, fueled by strong sales of apparel and footwear in North America and western Europe. Earnings beat Street forecasts by three pennies as well. Total revenues for the fiscal year were up 10%.

Nike has been spending a ton on marketing costs and administrative expenses related to the World Cup as it goes after arch-rival Adidas for the hearts, minds and wallets of futbol fans.

--Shares in Bed Bath & Beyond plunged 10% as earnings missed badly vs. expectations and revenues rose just 1.7%.

--It came to light this week that recently, Yahoo CEO Marissa Mayer showed up two hours late for a private dinner arranged for her by Interpublic Group for Mayer to meet leading media buyers and advertisers. She overslept and by the time she arrived, many of the attendees had departed.    Why she wasn’t woken up by an assistant is more than a mystery. [Suzanne Vranica / Wall Street Journal]

--As reported by the Wall Street Journal’s Gregory Zuckerman, university endowments and corporate pension funds have missed out on much of the stock rally since the bottom of 2009. For example, “The average college endowment had 16% of its investment portfolio in U.S. stocks as of the end of June 2013, the most recent academic year...down from 23% in 2008 and 32% a decade ago. The 18% allocation to foreign stocks didn’t change in that period.”

Harvard University had an average annual return of 10.5% on its endowment over the past three years through June 2013, well below returns of 18.45% for the S&P 500, including dividends, over that same period. But over the past 10 years, the return was 9.4%, bettering the 7.3% of the S&P.

--Even though China is not a participant in the World Cup, the nation, following President Xi Jinping’s lead, is glued to their television sets – Xi being a known soccer enthusiast.

So, this has some saying gambling revenues in Macau for the month of June could decline year over year as a result.

--It appears General Electric gave up quite a bit in gaining France’s blessing to buy most of engineering giant Alstom SA. GE promised to create French jobs and to allow the French government to take a stake in a number of businesses; thus the concessions will mean a smaller boost to GE’s bottom line and fewer cost savings than initially anticipated.

But as analyst Nicholas Heymann of Williams Blair & Co. put it, the purchase of Alstom’s power business does “accelerate the shift back to their industrial infrastructure roots.” [Wall Street Journal]

GE is most interested in Alstom’s steam turbine business, which will give the former greater access to not only Europe, but also China and Africa.

The deal will not close until next year as GE has to consult with Alstom’s labor unions, as well as gaining the approval of regulators and shareholders.

--Australian authorities issued a warning after a young woman wearing headphones and holding her laptop was found dead with burns on her ears and chest, in an apparent electrocution from using a rip-off USB charger that did not meet safety standards. It was probably sold at a kiosk in Sydney. Authorities are now realizing how many cheap chargers are available for sale.

--Sales of bison meat in restaurants and grocery stores jumped more than 12% last year, as the U.S. bison business neared $280 million in total sales at the retail and food-service level. [High Plains Journal]

--Inflation Alert: The cost of my favorite yogurt rose from 98 cents to $1.09...or 11%. And hog futures hit a record this week, $1.283 a pound and up 50% this year, owing to deadly swine disease that has cut into supplies of slaughter-ready animals. Bacon lovers are not happy.

--An American dentist and his partner thought they booked first-class tickets to fly to the Spanish city of Granada, and instead, nine hours later, ended up in Grenada in the Caribbean. British Airways has refused to reimburse the cost of their tickets, so the dentist is suing, claiming he made it “absolutely clear” to BA’s booking agent in Florida that he wanted to travel to the Granada in Spain from London.

“Why on earth would I want to go to Grenada in the Caribbean if I was flying back to America from Lisbon?”

I just wonder what he was thinking when he first heard over the intercom that the flight was nine hours rather than two?

--In television land, ABC cleaned house on “The View,” leaving Whoopi Goldberg solo after Sherrie Shepherd and Jenny McCarthy announced they were leaving. Barbara Walters remains executive producer.

--ABC News announced Diane Sawyer was stepping down as anchor of the network’s evening newscast in August, replaced by David Muir, while George Stephanopoulos will become the lead anchor for all breaking news coverage, such as election nights. Stephanopoulos will continue on “Good Morning America.”

Muir is only 40 years old. Sawyer is 68. Sawyer will become a full-time anchor for investigative reports and major interviews.

--Tiger Woods missed the cut in his first tournament since back surgery.

--But it’s now all about USA-Belgium, Tuesday...right folks?

Foreign Affairs, cont’d

Ukraine: The European Union set a deadline of Monday for Russia to take concrete steps towards implementing a peace plan in eastern Ukraine or risk sanctions against entire sectors of its economy, such as energy, finance and defense.

Ukrainian President Petro Poroshenko told EU leaders in Brussels that a cease-fire, which was to end Friday, had failed to stop attacks by militants backed by Moscow. [Tuesday, pro-Russian rebels shot down a Ukrainian military helicopter, killing all nine on board.]

“Russia is doing nothing. One and a half hours ago an additional five soldiers were killed,” Poroshenko said in a press conference on Friday. “Can you imagine, we announce a ceasefire and they send tanks?”

Late Friday, the cease-fire, such as it is, was apparently extended three days.

German Chancellor Merkel hardened her position this week, as the EU called for the Organization for Security and Cooperation in Europe to be allowed to verify both the ceasefire and border controls, to stop the flow of Russian munitions and fighters. EU leaders also called for talks on a longer-term peace plan, as well as the return of three key border crossings to Ukrainian troops and the release of 180 hostages.

[The UN estimates more than 420 have been killed in fighting in eastern Ukraine since mid-April.]

Washington has said one of the first steps that could be taken early next week would be to block the export of oil and gas equipment to projects in Russia.

Earlier in the week, Ukraine, Georgia and Moldova signed partnership agreements with the European Union, a pact binding the three more closely to the West both economically and politically. The Kremlin said it would take “all the necessary measures” against Ukraine.

A survey by Kiev’s Democratic Initiatives Foundation has 53% of Ukrainians supporting EU integration initiatives, but 73% in the breakaway east instead back closer ties to Russia.

Thus far, sanctions have had a minimal impact on the Russian economy. The EU is the origin of 42% of Russia’s imports and the destination of 53% of its exports, according to 2012 data out of the European Commission. And in light of Europe’s dependence on Russian energy, as one Russian expert told the Moscow Times, “Do you really want to hurt yourself for a question of principle?”

By week’s end, Ukrainian border guards reported miles-long lines of cars at one crossing into Russia.

Russia: Well this is disturbing. The Moscow Times reported that another one of Russia’s early-warning satellites has ceased working, thus increasing the odds of a nuclear-arms miscalculation.

The defense ministry revealed that its last geostationary satellite, which remains in permanent orbit above the United States, stopped functioning. This is an issue I have covered over the years. Russia has other satellites capable of detecting ICBM launches, but they travel in elliptical orbits with blind spots.

The satellite in question actually may have had issues right after it was first launched in 2012.

China: From Chris Luo / South China Morning Post

“China has published its first official vertical national map incorporating the vast South China Sea, with equal weight given to both land and sea, in its latest move emphasizing its claims of sovereignty over the disputed waters....

“The South China Sea area is more prominent in the new map and is marked out by a nine-dash line, a demarcation line that encompasses the islands and their immediate surrounding waters that China claims.”

The government bureau that published the map said it was of “great significance in safeguarding the nation’s water sovereignty and territorial integrity.”

I must say it’s an impressive looking map, albeit kind of scary if you follow these things.

Premier Li Keqiang said the other day:

“China will unswervingly follow the path of peaceful development and firmly oppose any act of hegemony in maritime affairs.

“Developing the oceans through cooperation has helped many nations flourish, while resorting to conflict to fight over the sea has only brought disaster for humanity.” [South China Morning Post]

Meanwhile, the situation between the mainland and Hong Kong is not good. China has promised that in 2017 Hongkongers will be allowed to vote for their chief executive, rather than the person being selected by a handpicked committee of 1,200, as is the case today. But China is insisting the candidates be selected by the “worthies,” as the 1,200 are known.

So last weekend a referendum was held whereby Hongkongers had three choices, all of which give them the right to choose the candidates. A group called Occupy Central said it will promote the most popular action. China has said this is unacceptable.

I wrote the other day about Beijing’s “white paper” on Hong Kong that reminded residents they were part of “one China.” [“One Country, Two Systems” is the official policy, but it is morphing into the former.]

Dissatisfaction with the way Beijing is managing its rule over the territory is at its highest level in a decade, with 82% of those aged 21 to 29 expressing dissatisfaction. [New York Times]

As I’ve said before, you want to see world-class riots? [I hope you don’t...but this is what you’ll get there if the people are not allowed to democratically elect their local leader. And Hong Kong can be one explosive place, lighting a torch for others on the Chinese mainland.]

China launched a cyberattack on the online voting platform for the unofficial referendum, the most severe of its kind ever seen, according to the San Francisco-based security company CloudFare, which was tasked with protecting it.

Lastly, there are a reported 1,000 Chinese jihadists receiving military training in Pakistan, with an indeterminate number already fighting in Syria.

Afghanistan: It’s fighting season and the Taliban are doing what they do best...fight...attacking Afghan government troops and civilians across five districts this week. As of Wednesday, the government said at least 35 civilians, 40 government troops and more than 100 Taliban attackers had been killed since Sunday.

As for the presidential election dispute, a shootout between supporters of the two candidates killed five. President Hamid Karzai is calling on the U.N. to get involved on the issue of voting irregularities.

Pakistan: I’m surprised how little press this story got, but then there’s a lot happening these days.

“Gunmen fired on a Pakistani International Airlines plane as it was landing in the northern Pakistani city of Peshawar on Tuesday night, killing a woman on board and injuring three crew members in the third incident at a Pakistani airport this month.

“Flight PK 756 was carrying 178 passengers travelling from Saudi Arabia...

“The plane was hit by six bullets.”

The captain of the plane narrowly escaped. Said a police official, “It would have been a disaster had he been hit.” I’ll say.

India: A disturbing report from IHS Jane’s has India moving to develop a covert uranium enrichment plant that could support the development of thermonuclear weapons. The new units are part of the Indian Rare Metals Plant. The report was corroborated by other analysts and as Mark Fitzpatrick, director of the non-proliferation program at the International Institute for Strategic Studies, said:

“Whether or not India uses the plant mainly for fuel for reactors and naval vessels as is sometimes surmised, it adds to India’s already far greater advantage over Pakistan in terms of nuclear weapons production potential. It also brings India closer to matching China, which is how most Indians would probably see it.” [South China Morning Post]

Nigeria: Boko Haram struck again in Nigeria’s capital, Abuja, with a bomb attack killing at least 21 in a busy shopping district. In April more than 70 died at a bus stop on the outskirts of the capital.

Malaysia: There appeared to be a consensus among some, though not all, investigating the disappearance of flight MH370 that the plane was on autopilot as it flew south across the Indian Ocean until running out of fuel, with the likeliest scenario being that the crew was unresponsive, possibly suffering from hypoxia, or oxygen deprivation. [Think Payne Stewart.] At least this best fits, as a report from the Australian Transport Safety Bureau put it. But someone onboard switched on the autopilot system after it veered off its assigned course from Kuala Lumpur to Beijing.

So the questions then are: Why did the plane deviate from its planned route, and what caused the hypoxia?

Britain: Former News of the World editor Andy Coulson was found guilty of conspiracy to hack the phones of hundreds of celebrities and political figures, but his predecessor, Rebekah Brooks, was cleared of all charges in the trial.

Coulson went on to become communications director for Prime Minister David Cameron, who has apologized, saying the hiring of him was “the wrong decision.”

Random Musings

--Michael Gerson / Washington Post

“Noted management expert and Internal Revenue Service Commissioner John Koskinen was apparently called out of retirement – like the Ted Williams of evasive, unapologetic bureaucrats – to destroy what is left of his agency’s credibility.

“At immediate issue is two years of subpoenaed e-mails from former IRS official Lois Lerner to outside agencies, lost in a convenient computer crash....

“In recent congressional testimony, Koskinen admitted that the e-mails were irretrievably gone; that the ‘backup tapes’ had been erased; and that Lerner’s hard drive was apparently destroyed in an aggressive act of recycling. With that settled, Koskinen expressed his ‘hope that the investigations can be concluded in the very near future.’

“It is a mix of arrogance and delusion that seems designed to incense Republicans. Koskinen had delayed informing Congress of the lost e-mails for months, even while assuring members they would be provided. ‘It was my decision that we complete the investigation,’ he said, ‘so we could fully advise you as to what the situation was.’ Translation from management-speak: We wanted to get our story straight before we advised you of anything.”

Mary Kate Cary / U.S. News Weekly

“If a Republican administration had targeted liberal groups through the IRS, then refused to answer questions, then took nearly a year to announce that the relevant records were lost forever, then said further steps are ‘not warranted,’ the roar from the media would be deafening.

“There’s a double standard here. Voters know that using the IRS against political opponents is serious, and they don’t like the way the administration is reacting. As the president said from the start, Americans have a right to be angry.”

--Mississippi Republican Sen. Thad Cochran, facing defeat in a runoff with tea party challenger Chris McDaniel, adopted the tactic of appealing to black Democrats, through mailings and robo-calls, and the late switch in strategy worked; Mississippi’s open primary system allowing Democrats to vote in the GOP election who had not voted the first time. Cochran won, 51-49.

As reported by the Washington Post’s Rosalind Helderman and Philip Bump:

“In Mississippi’s 24 counties with a majority black population, turnout increased an average of 40 percent over the primary, according to a Washington Post analysis. In the state’s 58 other counties, the increase was only 16 percent.

“Just 12 percent of the nearly 375,000 votes cast Tuesday came from counties where African Americans make up at least 60 percent of the population. But Cochran’s overwhelming performance in those areas – winning 71 percent of the vote – provided an 18,000-vote margin that helped him grow his vote total by almost 40,000 ballots over the June 3 primary.

“Cochran won Tuesday by 6,693 votes.”

Needless to say, McDaniel and his supporters were furious as he contemplates a legal challenge, citing voter irregularities in efforts to bring Democrats to the polls.

African Americans make up one-third of the state’s electorate and Mississippi Republicans have long sought to gain at least a portion of that population.

Legitimately, over the years Cochran has supported some black causes in the state and the senator has long been one to bring in the pork.

Derrick Johnson, president of the Mississippi chapter of the NAACP, said African American voters were pleased – if skeptical – to see a Republican asking for their support.

It is now expected Cochran will win handily in November.

[Friday, an attorney and tea party activist arrested in connection with a scheme to take illicit photographs of Sen. Cochran’s infirm wife committed suicide.]

--In a total victory for privacy rights adherents, the Supreme Court ruled unanimously that police must get a warrant before searching the mobile phone of a person being arrested. Chief Justice John Roberts wrote for the court:

“Modern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans the privacies of life.”

The dispute centers around the Fourth Amendment and its ban on unreasonable searches, part of a debate that seems destined to include a showdown between the Supreme Court and the National Security Agency’s surveillance programs.

--The Supremes also ruled unanimously that President Obama lacked constitutional authority to make high-level government appointments while the Senate was in recess, and thus unable to act on his nominations.

Specifically, the case related to Obama’s appointments to the National Labor Relations Board in January 2012 at a time the Senate was holding pro forma sessions every three days, as allowed, to block the president’s power.

Justice Stephen G. Breyer, writing for the court, said, “When the Senate declares that it is in session and possesses the capacity, under its own rules, to conduct business,” that is sufficient to keep the president from making recess appointments.

The Constitution’s Recess Clause says the president “shall have power to fill up all vacancies that may happen during the recess of the Senate.” [Robert Barnes / Washington Post]

But, the Court also gave the president wide authority to make recess appointments when the Senate was in recess – which it defined as 10 days, minimum, and that was by a 5-4 vote.

Ergo, this decision is not quite as sweeping as some are making it out to be.

--Related to the above, House Majority Leader John Boehner sued President Obama for exceeding his reach when it comes to separation of powers and the issuance of executive orders.

Editorial / Wall Street Journal

“In a memo to the House, Mr. Boehner detailed the institutional injury Congress is suffering amid Mr. Obama’s ‘aggressive unilateralism,’ which is as good a description as any of his governing philosophy. When the executive suspends or rewrites laws across health care, drugs, immigration and so much else, elected legislators are stripped of their constitutional role....

“We’d prefer that Congress and President resolve their disputes through the normal political rough and tumble. The Constitution anticipates that the two ends of Pennsylvania Avenue will be in tension as they balance each other’s power. But the major reason to involve the judiciary in this case is Mr. Obama’s flagrant contempt for regular political order. For example, he has unilaterally revised, delayed or reinterpreted ObamaCare no fewer than 38 times.”

--Did you see President Obama’s new deal? Speaking of his remaining time in office and how he feels caged in the White House, Obama has taken to saying “The Bear is loose,” as he pathetically tries to reconnect with the people by ‘eluding’ security and going for ice cream breaks and such, while telling us he’s going to start saying what’s on his mind, no more handlers. Just shoot me. 

--Bill Clinton argued that his wife, Hillary, is “not out of touch,” following criticism she mishandled questions about her personal wealth, such as Hillary’s comment to ABC News that the couple were “dead broke” after leaving the White House.

In an interview with The Guardian last weekend, she said the Clintons are not “truly well off.”

“(We) pay ordinary income tax, unlike a lot of people who are truly well off, not to name names; and we’ve done it through dint of hard work.”

So Bill told NBC News’ David Gregory: “It is factually true that we were several million dollars in debt,” though tax returns released in 2007 showed the two had earned $109 million jointly since 2000.

Separately, an extensive Washington Post story by Philip Rucker, Tom Hamburger and Alexander Becker starts out thusly:

“Over seven frenetic days, Bill Clinton addressed corporate executives in Switzerland and Denmark, an investors’ group in Sweden and a cluster of business and political leaders in Austria. The former president wrapped up his European trip in the triumphant Spanish Hall at Prague Castle, where he shared his thoughts on energy to a Czech business summit.

“His pay: $1.4 million.”

“That lucrative week in May 2012 offers a glimpse into the way Clinton has leveraged his global popularity into a personal fortune.”

TD Bank, for one, has paid him about $1.8 million for 10 speeches over the years.

In 2012, Bill Clinton gave 72 paid speeches and earned $16.3 million, according to The Post’s review.

It all started just two weeks after he left office when Morgan Stanley paid him $125,000 for a speech on Feb. 5, 2001.

--Democratic Congressman Charles Rangel of New York beat back another primary challenge from Adriano Espaillat, 47-44 (two other candidates divided the remainder), so the 84-year-old Rangel returns for his 23rd and final term (according to him). Espaillat, who if elected would have become the first Dominican American congressman, nearly upset Rangel in 2012.

--New York’s highest court refused to reinstate Gotham’s controversial limits on sales of jumbo sugary drinks, thus ending the city’s last appeal and giving the soft-drink industry a major victory. A big loss for former Mayor Michael Bloomberg. Two lower courts had already sided against the city.

--The UN’s World Health Organization said the regional death toll from Ebola had reached 350 since February; the deadliest outbreak since Ebola first emerged in central Africa in 1976. New cases have cropped up in Guinea, Sierra Leone and Liberia and the risk of it spreading beyond this area are real.

--We note the passing of noted Lebanese-American scholar and author, Fouad Ajami, who once said the Arab world would “erupt in joy” when the U.S. overthrew Saddam Hussein. He was a member of the Council of Foreign Relations and later a director of Johns Hopkins University’s Middle East Studies program.

Ajami was a staple of American television and penned countless essays, many of which I have quoted in this space (though admittedly he was often a tough read).

But it was in August 2002, that Vice President Dick Cheney cited Ajami in an effort to reassure Americans about the coming war with Iraq.

“As for the reaction of the Arab street, the Middle East expert professor Fouad Ajami predicts that after liberation in Basra and Baghdad, the streets are sure to erupt in joy.”

--I love this story from the Star-Ledger:

“A NJ woman with serious commuter anxiety is suing her former employer after her bosses wouldn’t change her work schedule so she could avoid rush hour.

“According to a report in the Courier-Post, Andrea D. (no reason for me to include the last name) ‘began to feel great anxiety and depression, which was especially aggravated by crowded roadways experienced during the heavy traffic of rush hour,’ the suit says.

“Her medical condition qualified her as being disabled, according to the legal papers.

“She took a medical leave in August 2012, and when she returned in November 2012, she asked if she could come to work after the morning rush and leave before the evening rush....

“The company obliged her request, but changed her job, making it more clerical. (Ms. D.) objected. On May 17 she was fired.”

Let’s see. She’s working at least two hours less a day, but thought she was entitled to keep the same job. One hopes the federal court judge who hears this one dismisses it with a hearty laugh, leading to further laughter in the courtroom among all in attendance.

--Pope Francis traveled to the heart of Mafia country on Saturday, Calabria, and blistered Italy’s organized crime groups, calling it an example of “the adoration of evil” and saying Mafiosi “are excommunicated.” It was the first time a pope had used the word excommunication in direct reference to members of organized crime.

Francis told the crowd: “This evil must be fought against, it must be pushed aside. We must say no to it.”

--Nicole Ostrow / Bloomberg:

“People genetically prone to Alzheimer’s who went to college, worked in complex fields and stayed engaged intellectually held off the disease almost a decade longer than others, a study found.

“Lifelong intellectual activities such as playing music or reading kept the mind fit as people aged and also delayed Alzheimer’s by years for those at risk of the disease who weren’t college educated or worked at challenging jobs, the researchers said in the study published today in JAMA Neurology....

“ ‘Keeping your brain mentally stimulated is a lifelong enterprise,’ David Knopman, a study author and a professor of neurology at the Mayo Clinic in Rochester, Minnesota, said. ‘If one can remain intellectually active and stimulated throughout one’s lifespan, that’s protective against late-life dementia. Staying mentally active is definitely good for your brain.’”

--The Washington Post had an extensive report on the use of drones and the numbers that crashed, discovered in 50,000 pages of accident information reports obtained under the Freedom of Information Act.

To wit: “More than 400 large U.S. military drones have crashed in major accidents around the world since 2001, a record of calamity that exposes the potential dangers of throwing open American skies to drone traffic....

“No one has died in a drone accident, but the documents show that many catastrophes have been narrowly averted, often by a few feet, or a few seconds, or pure luck....

“The documents describe a multitude of costly mistakes by remote-control pilots. A $3.8 million Predator carrying a Hellfire missile cratered near Kandahar in January 2010 because the pilot did not realize she had been flying the aircraft upside-down. Later that year, another armed Predator crashed nearby after the pilot did not notice he had squeezed the wrong red button on his joystick, putting the plane into a spin.”

And this era is just starting.

--We note the passing of a great American, former Senator Howard Baker, Senate majority leader and White House of chief of staff under Ronald Reagan, who will forever be known for Watergate and his framing of the central question in the scandal, “What did the president know and when did he know it?” 

Baker later said of Watergate on “The NewsHour with Jim Lehrer”: “It was, indeed, a watershed time in American politics. And I guess I have to look back on it to realize how effective the system really was...the system worked.” Howard Baker was 88.

--Benjamin Summers, a captain in the U.S. Army, wrote of the danger of hero worship of the military in an op-ed for the Washington Post. In part:

“Over the past decade, a growing chasm between military and civil society has raised the pedestal upon which the United States places those who serve in its military. Too much hero-labeling reinforces a false dichotomy that’s commonly heard in our political discourse: You’re either for the troops or you’re against them. We badly need to find ways to bridge this civilian-military gap to cultivate a more nuanced appreciation of service and to produce better policy in Washington....

“During these years, it’s undeniable that veterans have received a hero’s embrace from their nation; one need look no further than the positive treatment of veterans in Super Bowl commercials or at emotional airport welcome-home events. While we veterans surely appreciate a supportive public, too much hero-labeling has unintended consequences.

“The past year offers an indication of the blinding effects of this problem. Defense spending is a prime example. Too often, policymakers frame discussion of whether to cut the military budget as being for or against the troops; the political battle over the military portion of the sequester is an example of this black-or-white mind-set. But any bureaucracy – particularly one that doesn’t function with a profit-and-loss mentality – can innovate and gain efficiencies when it’s forced to do more with less. If we’re not searching for opportunities to fix, clean and trim our organizations, we’re not being good stewards of them. When we can’t have political discussions that dig beneath the blanket of ‘for or against the troops,’ palatability wins over stewardship. And one of our nation’s most precious resources suffers the long-term consequences.

“The recent Department of Veterans Affairs scandals further illuminate this problem....

“The list goes on. We were all happy to see Sgt. Bowe Bergdahl released after being held prisoner in Afghanistan for so long, but to prematurely say that he served with honor and distinction diminishes those who did earn such accolades and illuminates the general mislabeling of military service. It isn’t that the U.S. public shouldn’t honor those who served in combat; it’s that a large civil-military divide prevents policymakers from even asking the right questions. Leaders inside and outside the military need to focus on bridging this gap.

“Not every service member is a hero. The quicker we realize that, the quicker we start creating a political environment that can foster genuine debate and answer the difficult policy problems we face.”

--Speaking of the VA, the White House conveniently released an interim report on the department late Friday afternoon that found the VA’s medical system is hobbled by management with little accountability and a “corrosive culture” that has led to widespread personnel problems.

--I was glancing through the June 30 edition of Army Times and I always read the stories behind those who gave their lives in Afghanistan. Such impressive looking kids. This week it was the five victims of the friendly fire incident in Gaza Village. So we remember Army Staff Sgt. Scott R. Studenmund, 24, of Pasadena, Calif. Army Cpl. Justin R. Clouse, 22, Sprague, Wash. Army Staff Sgt. Jason A. McDonald, 28, Butler, Ga. Army Pvt. Aaron S. Toppen, 19, Mokena, Ill. Army Spc. Justin R. Helton, 25, Beaver, Ohio. RIP.

---

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

God bless America.
---

Gold closed at $1320
Oil $105.74

Returns for the week 6/23-6/27

Dow Jones -0.6% [16851]
S&P 500 -0.1% [1960]
S&P MidCap +0.1%
Russell 2000 +0.1%
Nasdaq +0.7% [4397]

Returns for the period 1/1/14-6/27/14

Dow Jones +1.7%
S&P 500 +6.1%
S&P MidCap +6.3%
Russell 2000 +2.2%
Nasdaq +5.3%

Bulls 60.2
Bears 16.3 [Source: Investors Intelligence]

*With next week’s holiday being on a Friday, and with your editor really not wanting to work that day if he can help it, I’m aiming to post by Friday morning.

Brian Trumbore



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Week in Review

06/28/2014

For the week 6/23-6/27

[Posted 11:00 PM ET, Friday]

Edition 794

The Middle East in Flames

In a New York Times/CBS News poll, 58% of Americans disapprove of the way President Obama is handling foreign policy, a jump of 10 points in the last month to the highest level since Obama took office in 2009. 52% of Americans say they disapprove of how the president is dealing with the current violence in Iraq; 37% approve. A Fox News poll has 32% approving of Obama’s foreign policy, 60% disapproving. A poll for NBC News/Wall Street Journal had 71% saying the 2003 Iraq War was not worth it, only 22% felt it was.

The Iraqi parliament will meet on Monday or Tuesday to begin the process of forming a new government, this as ISIS strengthens its grip on wide swaths of northern and western Iraq, including border crossings with Syria.

Prime Minister Nouri al-Maliki, despite the personal pleas of U.S. Secretary of State John Kerry, is showing zero signs of compromise in sharing political power with minority groups, including Sunnis and ethnic Kurds. Oh, he claims he is open to forming a coalition government, but reality says otherwise and he is not about to forego a third term as prime minister.

Maliki’s State of Law party controls at least 92 of parliament’s 328 seats, with no other party having more than 33. It will also be tough to remove him when he controls the army and has Iran’s support.

On Wednesday he said calls for a “national salvation” government, as put forward by rival Shiite leader Ayad Allawi (my personal fave), were nothing more than a “coup against the constitution and an attempt to end the democratic experience.”

But some of his supporters are beginning to express concern, and powerful Shiite cleric Moqtada al-Sadr made a televised statement on Wednesday calling for a national unity government of “new faces” representing all groups. But Sadr, who fought fiercely against both U.S. forces and Sunni extremists, can never be trusted, even as he vows to “shake the ground” under the feet of ISIS.

In the north, the president of Iraq’s Kurdish autonomous region, Massoud Barzani, said the Kurds were prepared to commit all of their forces to defend Kirkuk, which Kurdish forces took control of when the Iraqi army fled in the face of the ISIS offensive.

This has allowed Iraqi Kurds to begin realizing long-held territorial dreams, moving their forces into disputed areas the federal government has long opposed them adding to their autonomous region.

Barzani said on Thursday: “Iraq is suffering from clear collapse. We cannot remain hostages to the unknown, and it is time to identify the Kurdish identity and draw our own future.”

Back to Maliki, in an interview with the BBC’s Arabic language service, he said the Iraqi army would have been able to block the insurgents’ advance if the U.S. had moved more quickly to deliver fighter planes that Baghdad had purchased, referring to the purchase of 36 F-16 jets that U.S. officials have said wouldn’t arrive before September.

“I’ll be frank and say that we were deluded when we signed the contract,” he said. “We should have sought to buy other jet fighters like British, French and Russian, to secure the air cover for our forces. If we had air cover, we would have averted what has happened.”

Maliki said he was acquiring fighter jets from Russia and Belarus that should arrive in days.

He also confirmed that Syrian forces had carried out air strikes against Islamist militants at a border crossing between Iraq and Syria, adding he “welcomed” them.

“They carry out their strikes and we carry out ours and the final winners are our two countries,” Maliki said.

What he didn’t mention is that a reported 57 civilians were killed in the strikes. [Syria has also been bombing suspected ISIS sites in Aleppo.]

Editorial / The Economist

“ISIS is riding high for the moment. The glee may not last. Syria’s regime, perhaps perturbed by ISIS’ success and suddenly keen to portray itself as an ally of the West in the fight against jihadist monsters, has for the first time mounted sustained aerial attacks on the group. In Iraq it is probably a matter of time before rival Sunnis decide that ISIS’ notoriety is bad for their cause.”

Meanwhile, China is among the nations evacuating its workers, with authorities in Beijing saying it would relocate 1,250 in the coming days. Most are arriving in Baghdad from northern Iraq where they have been working in various plants, but China is actually the largest investor in Iraq’s oil industry – with more than 10,000 workers on a wide range of projects, officials say, although most are in the south, far from the current fighting.

[China imports about 60% of its crude oil and holds a 25% stake in Iraq’s oil reserves.]

As for the United States, it has been urging Saudi Arabia, Jordan and the United Arab Emirates to do what they can to encourage Maliki to form an inclusive government.

But while the U.S. has stepped up its intelligence gathering on potential targets in Iraq, with armed drones now in the air, John Kerry told European leaders in Paris at week’s end that no decision on airstrikes has been made.

In accepting the Congressional Gold Medal in Washington the other day, outgoing Israeli President Shimon Peres said:

“The artificial structure in the Middle East, built by previous empires, is now falling apart. The rules governing the world are being rewritten. Security and prosperity are no longer mainly national issues....

“The terrorists are the enemies of both of us. Terrorists spread danger over the entire region. The region must come together to stop them.”

Elsewhere, President Obama requested $500 million from Congress to train and equip what the White House is calling “appropriately vetted” members of the Syrian opposition. This is laughable. Again, this is what should have been done in 2012.

Syria claimed to surrender the final chemical arms it admitted to holding this week, but any secret arsenal may allow gas attacks to continue.

British Foreign Secretary William Hague said the Syrian government’s “history of lies and obstruction make it impossible to take its claims at face value.”

In Lebanon there were a series of bomb attacks in Beirut, including one at a hotel I am familiar with. A suicide bomber blew himself up in his room as police, tipped off, were about to confront him. Needless to say this shook up tourists in a big way. Earlier, terror suspects were rounded up in two other hotels.   Guests have checked out, bookings are plummeting.

Hizbullah’s involvement in Syria is being blamed for Lebanon’s security problems.

Turning to Iran and the nuclear talks, a Russian diplomat said U.N. sanctions personnel are undermining negotiations by making unfounded allegations.

Ambassador Vitaly Churkin told the U.N. Security Council, “Any information not backed up by concrete facts...could have a negative impact on the conduct of negotiations,” but council analysts have suggested Tehran is attempting to violate international ballistic-missile sanctions. [More than attempting. I’m just reporting the story.]

And there was a report Iran is close to signing a deal with Russia for two new reactors for its Bushehr nuclear-power plant.

Iranian Foreign Minister Zarif urged negotiators to “abandon excessive demands which will not be accepted by Iran.”

A high-level U.S. insider told Reuters, “There are very, very difficult decisions to be taken here by Iran.”

Zarif did say that Washington has met its commitment to lift restrictions on $4.2 billion in Iranian funds.

The P5+1 is launching two weeks of discussions on July 2 in a final attempt to hammer out a long-term deal by July 20, when the interim accord is set to expire.

In Israel, a new poll finds a clear majority of Palestinians in the West Bank and Gaza now oppose a two-state solution...60% of those polled, including 55% in the West Bank and 68% in Gaza, reject permanently accepting Israel’s existence and instead suggest their leaders “work toward reclaiming all of historic Palestine, from the river to the sea.”

Two-thirds support continued “resistance” against the Jewish state. The poll was commissioned by the Washington Institute for Near East Policy and conducted June 15-17. 

The Washington Institute characterized the survey as a sudden, hardline shift within the Palestinian community. That said, there are elements of pragmatism: 80% of Palestinians would “definitely” or “probably” be in favor of greater job opportunities in Israel, and 70% of Gaza residents strongly favor Hamas’ maintaining its ceasefire with the IDF (Israel Defense Forces) – despite generally favoring resistance.” [Jerusalem Post]

Separately, Israel launched air strikes on Syrian army positions in response to an explosion that killed an Israeli teenage civilian in the Golan Heights. Sunday’s attack and the response represented the most serious clash between the two countries since the start of the civil war in Syria in 2011. The Syrian government said four were killed by the Israeli strikes.

As to the ongoing search for three missing Israeli teenagers, last I saw over 360 Palestinians had been detained with no success.

An Egyptian court confirmed the death sentences of more than 180 Islamists, including the top leader of the Muslim Brotherhood, though lawyers said it can be overturned on appeal. And then three journalists for Al-Jazeera English were convicted on terrorism-related charges and sentenced to seven years in prison each.

Opinion...on all the above...

George Melloan / Wall Street Journal

“ ‘What would America fight for?’ asked a cover story last month in The Economist magazine. Coming from a British publication, the headline has a tone of ‘let’s you and him fight.’ But its main flaw is that it greatly oversimplifies the question of how the U.S. can recover from its willful failure to exert a positive influence over world events.

“That failure is very much on display as Iraq disintegrates and Russia revives the ‘salami tactics’ of 1930s aggressors, slicing off parts of Ukraine. Both disasters could have been avoided through the exercise of more farsighted and muscular American diplomacy. A show of greater capability to manage ‘domestic’ policy would have aided this effort.

“The U.S. is still militarily powerful and has a world-wide apparatus of trained professionals executing its policies, overt and covert... Although confidence in America has waned significantly, it is still looked to for leadership in thwarting the designs of thugs like Russia’s Vladimir Putin, Syria’s Bashar Assad and Iran’s Ayatollah Khamenei.

“Yet President Obama has followed a deliberate policy of disengagement from the world’s quarrels. He failed to bluff Assad with his ‘red line’ threat and then turned the Syrian bloodbath over to Mr. Putin, showing a weakness that no doubt emboldened the Russian president to launch his aggression against Ukraine. The errant Iraqi Prime Minister Nouri al-Maliki, beset by a Sunni-al Qaeda insurgency, has been told, in effect, to seek succor from his Shiite co-religionists in Iran. Meanwhile, Secretary of State John Kerry amazingly urges America’s only real friends in the area, the Iraqi Kurds, not to abandon the ill-mannered Mr. Maliki in favor of greater independence and expanded commerce (mainly oil) with our NATO ally, Turkey.

“Mr. Obama cites opinion polls purportedly showing that Americans are ‘war weary.’ Probably what the polls really reflect is something else entirely, dismay at the wasted blood and treasure that resulted from Mr. Obama’s unilateral declaration of defeat in Iraq and Afghanistan.

“Instead of whining about ‘war weariness,’ an American president should understand his historical role. The U.S. can’t just withdraw from the responsibilities that have derived from its enormous success in making itself the look-to nation for peoples aspiring to safer, freer and more prosperous lives. The costs of failure are too high, as we have seen in the many thousands of lives lost in Syria....

“U.S. interests in the Middle East, Asia and Europe are threatened as aggressors and terrorists become bolder. An American president doesn’t have to sit back and watch. The Economist asked a mischievous question, but it revealed a disappointment of the world’s expectations of America.”

Editorial / The Economist

“The Middle East’s imperial boundaries are flawed – but so is every other plausible set of lines. The break-up of the Balkans showed how much blood is spilled when people redraw their borders using force. In Iraq and Syria the process could take years – and would feed sectarianism and global terrorism. It might spread to other countries, such as Lebanon and Jordan, created by the same imperial geographers. And when at last peace comes, it will inevitably require an acceptance that people have more to gain from accommodation than from shutting each other out. Better on balance to aim for that now, within today’s flawed borders, than to sit back and watch Iraq go up in flames.”

Peggy Noonan / Wall Street Journal

“The American people believe Barack Obama viewed Iraq as a personal political problem. He won the presidency being antiwar, so he had to anti-the-war before his re-election. He did it without appropriate care and commitment, which probably guaranteed we’d wind up where we are. He is out of his depth. Amazingly, he radiates a sense that he isn’t all that invested, that he doesn’t drag himself to the golf course to get a break and maintain balance, but plays golf because at the end of the day Iraq, like other problems, challenges and scandals, isn’t making him bleed inside.

“And the people don’t like any of this. Americans hate incompetence, but most of all and in a separate class they hate bloody incompetence. They’ve seen it now from two administrations.

“The bright spot; the earnest professionalism of our troops, still unsurpassed.

“But the loss of life, the financial cost, the loss of prestige, the sense that somehow after 9/11 we squandered the sympathy and support of the world, the danger to the world when America gets beat or looks beat, the inspiration that is to evil-minded men – these things the American people would hate....

“There is a growing disconnect between the American people and their government, a freshened resentment. We are not talking about Iraq when we talk about Iraq, we are also talking about ourselves. We are not only talking about the past, we are talking about the future.

“The architects of the Iraq invasion always said the decision to invade was crucial, consequential, a real world-changer. They had no idea.”

Former Ambassador Ryan Crocker / Washington Post

“We would be foolish to think that ISIS will not plan attacks against the West now that it has the space and security to do so. This is a more formidable force than Osama bin Laden’s group that brought us 9/11. Its fighters are experienced, completely committed to their cause, well-armed and well financed. As many as 2,000 of them hold Western passports, including U.S. ones, so there’s no need for visas. This is global jihad, and it will be coming our way....

“The wisdom of the 2003 invasion will be debated endlessly. I certainly had doubts about it. But the point I made during my tenure there was that once you are in, you are in. You cannot undo an invasion. You can, by contrast, undo an unfortunate disengagement by reengaging forcefully before it’s too late.

“History will be unforgiving if we allow this exceptionally virulent manifestation of al-Qaeda to take root across northern Iraq and begin planning its next phase of operations. This is a determined enemy, and it will not stop where it is now.”

Mortimer B. Zuckerman / U.S. News Weekly

“The perception of American waffling and timidity has provoked our allies in the Gulf to take matters into their own hands. Saudi Arabia, Qatar, and the United Arab Emirates have all recently ordered huge arsenals, according to The Economist. Nobody believes America would interdict China’s efforts to become the dominant power in Asia.

“Where will Obama make a stand? Nobody knows. In the Financial Times recently, (Richard) Haass calls it government by equivocation. The president is against too much military intervention, but he is also against too little of it. He goes on to say that America must be multilateral except when it must act alone. And he adds: ‘Such generalities are more fitting for someone starting out in office than for an incumbent in his sixth year.’ Obama’s tenure brings to mind the adage that experience is a wonderful thing since it enables you to recognize a mistake when you make it again.

“Obama may think he’s giving Americans what they think they want, withdrawal from the global stage. The current mood of the country is febrile, disgusted and disillusioned with the result of our sacrifices. Our idealism seems to be in direct proportion to our distance from the problem. It’s natural for Americans to want no more to do with distant states that have no core unity, riven by archaic feuds. But as the headline of a piece in The New Republic by Robert Kagan of the Brookings Institution notes: ‘Superpowers don’t get to retire.’....

“Nobody is looking to have us enter into conflicts casually, but we cannot so easily abandon American national interests. Lost credibility is hard to rebuild. At this point, it is nearly impossible to perceive a coherent U.S. foreign policy. We sense only that we are unraveling American national interests of many decades.

“Maybe Obama will surprise us with the smack of firm government. But at present, he is certainly not a candidate for Mount Rushmore.”

Try Mount Trashmore, mused your editor.

Washington and Wall Street

Just how well isthe U.S. economy doing? On Wednesday, we received the last of two revisions to first-quarter GDP and the figure, down an annualized rate of 2.9%, shocked the Street and confounded every single expert that expected a further downward revision, but only to -1.8%.

How bad was the decline from a previously reported -1.0%? Aside from the -2.9% being the fastest rate of decline since the recession, and the largest drop recorded since the end of World War II that wasn’t part of a recession, it was the biggest downward revision from a second GDP estimate since such records began being tracked in 1976.

Economists who were expecting the economy to rebound 3.5% in the second quarter were left scrambling to lower their forecasts. Call it now 3.0% in Q2.

Here is what was so disconcerting. Consumer spending rose a revised 1.0% in the first quarter after a prior estimate of up 3.1%. Reminder, the consumer is 70% of the U.S. economy and this is the worst consumption reading in five years. The next day, Thursday, we received the May figure for consumption and it was up only 0.2% vs. an expected 0.4% and if you adjust for inflation, in May consumer spending actually fell 0.1%. Goodness gracious. [Personal income in May rose an expected 0.4%.]

So you take the Q1 consumption number and May’s desultory reading and it shouldn’t give you a warm and fuzzy feeling.

We also learned that healthcare spending actually declined in the first quarter after earlier projections of an increase, so what does this mean?

Editorial / Wall Street Journal

“Financial markets shrugged off Wednesday’s punch-in-the-stomach report that first quarter GDP shrank by 2.9% on an annual basis... Optimists blame the weather and point to faster growth in the current quarter, which is reasonable but still shouldn’t overlook ObamaCare’s role in nearly sending the economy back into recession.

“January saw the formal launch of the Affordable Care Act, and its attempt to transform U.S. health insurance and medical practice. So it’s notable that a major cause of the sharp downward revision in first-quarter GDP was a decline in consumer spending on health care....

“Health spending is nearly always a positive contributor to GDP, and in the fourth quarter of 2013 it contributed 0.62%. But health spending fell so sharply in the first quarter that it subtracted 0.16% from economic growth....

“The decline is especially shocking given that the arc of health spending is always up. The explanation can’t be that Americans suddenly had less demand for health care, or had a healthier winter. Our guess is that the turmoil caused by the disastrous ObamaCare rollout confused many consumers into delaying their health purchases. ObamaCare also caused millions of Americans to lose insurance they liked, and it no doubt took time for many to find new policies that suited them and they could afford.

“Perhaps health spending will bounce back in the second quarter and beyond, but the first quarter plunge shows what happens when you try to ‘transform’ one sixth of the U.S. economy.”

So think about it. When you start off the year with a negative 3% number, it sure takes a lot of growth for the economy to rise 3% for the entire year. As in, forget that number. We’ll be lucky to hit 2% for all of 2014, which would be less than I thought beginning of the year.

But there was some other economic news of note this week.

May existing home sales rose a better than expected 4.9% to 4.89 million units on an annualized basis, the best pace in three years, though the record level of 7.08 million in 2005 is but a pipe dream. May new home sales soared to 504,000, the highest figure since May 2008, with the 18.6% one-month gain the best since 1992.

At the same time, the S&P/Case-Shiller 20-city home price index for April rose 0.2% over March, up 10.8% year-over-year, which shows a weakening, or prices rising at a slower rate, which isn’t all bad. The 10.8% gain is the smallest in more than a year and comes after a 12.4% price rise in March. [Las Vegas led the way, up 18.8% yoy, with San Francisco up 18.2%. But Cleveland’s home prices rose only 2.7%.]

Add it all together and the housing picture, after a fall/winter slump on the sales front, is rebounding and prices are leveling off some.

The figure on May durable goods (big-ticket items) was not good, down 1.0%.

And then you have the Fed’s preferred inflation barometer, the personal consumption expenditures index, which in May was up 1.8% over the past year, the highest rate since October 2012 and well up from February’s 0.8% pace.

Now the Fed’s Janet Yellen would remind us not to worry, that this is still below the Fed’s 2% target and that there is a lot of noise in the inflation numbers, but you know where your editor stands. Where’s there’s noise there’s probably a party. OK, I just made that up...but it sounds good.

No, Ms. Yellen, there is more than noise these days on the inflation front, but then if the economy isn’t growing nearly as fast as we expected, including the Fed, maybe prices will stabilize. You all know that when it comes to food, for one, prices are skyrocketing in relative terms.

I just think it’s a lock the Fed is raising interest rates sooner than most expect. This inflation scare we see in some sectors will prove to be real.

Lastly, it’s earnings season, boys and girls, starting in about two weeks for real, while next week we have key data on manufacturing as well as June’s jobs report (Thursday instead of the traditional first Friday, due to the holiday). Coupled with the ever-changing geopolitical picture, there could be some early fireworks.

Europe and Asia

A composite flash reading on the eurozone’s manufacturing and service sectors came in at 52.8 for June vs. 53.5 in May, but with manufacturing ticking down to 51.9 from the prior month’s 52.2.

The report, however, breaks out only Germany and France and the manufacturing PMI for the former was 52.4 vs. 52.3 in May, while the picture in France continues to get worse; the manufacturing PMI there at just 47.8 vs. 49.6 in May. 

But the big news for the European Union was the nomination of Jean-Claude Juncker, the former Luxembourg prime minster, to become the next president of the European Commission, which as I’ve been writing is exactly what British Prime Minister David Cameron did not want.

Juncker must now be approved by the European Parliament, which is scheduled to vote in mid-July and it’s a certainty he will win.

But Cameron forced a vote among the European Commission, comprised of the 28 individual leaders, which normally nominates the president by unanimous consent, and while the vote was 26-2, Cameron joined in opposition by Hungary’s Viktor Orban, Cameron did what he had to do in addressing his home constituency.

Cameron has been warning of “consequences” if Britain’s objections to Junker were ignored. He is under pressure back home to take a tough line on Europe unless Brussels shows it is serious about reform and addressing Britain’s issues, including making policy concessions before his planned 2017 in-out referendum on EU membership. For her part, German Chancellor Angela Merkel is trying to smooth things over between Cameron and the rest of the EU, but it is going to be tough to give Cameron what he wants...more independence, not less, which has been the goal of the EU’s “ever-closer union.” Deeper integration at the economic, single currency level, has come at the expense of national sovereignty, according to some in Britain (and of course Britain has refused to adopt the euro).

A recent poll in the U.K. found that 48% of Brits would “definitely” or “probably” vote to leave the EU, while 37% said they would definitely or probably vote to stay in.

So Cameron has vowed to renegotiate the U.K.’s relationship with Brussels before staging the in/out vote (assuming he is re-elected next year...and that’s looking dicey).

The poll found that if Cameron was successful in securing a deal that “redefined the terms of Britain’s membership” then 42% would definitely or probably vote to remain in the EU, with 36% saying they would sever ties with Brussels. 

A lot more to come on this topic.

On July 1, Italian Prime Minister Matteo Renzi takes over the six-month presidency of the European Union, separate from the EC, which is important for setting the agendas at future EU summits and such, but Renzi wants to accomplish big things...three big things, specifically. First he wants a weakening of the official fiscal rules. The second is a change to the fiscal compact, a multilateral treaty signed by all the EU members except the U.K., Croatia and the Czech Republic. And third he wants a jointly funded investment program.

Renzi will get some of what he wants, like fiscal flexibility (think budget deficit targets of no greater than 3% of GDP), but he won’t get it all.

More importantly, Renzi is trying to bring his country back from the brink. It needs growth yet is only expected to expand about 0.3% for 2014.

And as I’ve written, Italy has a humongous public debt. Try $2.9 trillion, the same size as Germany’s, only the German economy is much larger. In the first four months of this year, Italy tacked on debt of 77 billion euros, almost as much as the entire total of 79.8 billion for 2013, according to the central bank. [Lorenzo Totaro / Bloomberg]

It’s why I harp on the historically low bond yields for the likes of Italy and Spain, in Italy’s case finishing the week at 2.83% on the 10-year, just 30 basis points over U.S. Treasuries.

Italy’s debt to GDP is rising to nearly 135% this year from 132.6% last year. It is forecast to drop to 125% by 2017, which, again, requires growth a helluva lot more than 0.3%.

Last month the International Monetary Fund said Italy’s “fiscal policy needs to strike a delicate balance between setting the debt ratio on a downward path while avoiding excessive tightening that derails the fragile recovery. More needs to be done to bring down the high level of public debt and strengthen the resilience of public finances.”

A few other items. Spanish leaders announced sweeping tax cuts to both corporate and personal income, from 30% to 25% by 2016 on the corporate side, while for high wage earners, the income tax rate will fall from 52% (one of the highest in the EU)  to 45%. But some in the middle will see their rates rise a bit because the number of brackets is being reduced.

Spain’s recovery is going more smoothly than Italy’s, but with growth forecast to rise 1.2% this year, it is hardly robust here either and many are questioning whether the government’s forecasts of rising revenues will come to fruition with the tax cuts.

Meanwhile, in the U.K., Bank of England governor Mark Carney said a “new normal” for interest rates in his country is likely to be about 2.5% vs. an historic rate of 5%, as he attempts to reassure individuals and businesses that while Brits should prepare for rate hikes above the current 0.5% benchmark, sooner than later, as Carney put it, we will raise rates “in a gradual and limited fashion.”

And lastly, back to the European Parliament, France’s National Front leader Marine Le Pen was not able to cobble together a coalition of seven nations in time for the opening session next week. To gain funds and speaking time you need representatives from seven EU member states to be represented in an official parliamentary group and Le Pen attracted parliamentarians from only the Netherlands, Italy, Belgium and Austria.

Le Pen’s issues with her father did not help matters. She can apply for group status later in the Parliament’s five-year term.

Turning to China, an independent analysis of the economy, the beige book, notes that in the second quarter capital spending has slowed and fewer companies applied for credit. As the director of the report said, “overinvestment has been an addition and withdrawal symptoms will not be pretty.” Additionally, commercial and residential realty has been “pummeled.”

But HSBC’s flash reading on manufacturing in China for the month of June showed a nice rise to 50.8 from 49.4 in May. The index was estimated to come in at 49.7, 50 being the dividing line between growth and contraction. HSBC’s figures have long been viewed as more reliable than the government’s readings, plus HSBC focuses on the private sector, while China’s bureau of statistics emphasizes state-run enterprises, so, again, while I would never focus on a single figure, it will be interesting to see if the 50.8 is really the start of a trend.

In Japan, the inflation numbers for May are in and core inflation, ex-fresh food, rose at its fastest pace in 32 years, up 3.4%, owing to utility price hikes and the sales-tax increase from 5% to 8% back on April 1. Overall, consumer prices rose 3.7%.

After decades of deflation, the government’s target has been inflation of 2% (the universal target level these days, sports fans), but officials expect core inflation to fall back to 1% this summer before reaccelerating. 

Looking ahead to second-quarter GDP, which is expected to plunge after the 6.7% annualized growth rate of the first (owing to heavy consumer spending ahead of the tax hike), in May, household expenditures dropped a whopping 8% year-over-year.

Meanwhile, Prime Minister Shinzo Abe finally revealed the “third arrow” in his economic recovery program, the first two launched last year focusing on fiscal and monetary policy.

Abe has proposed a cut in the country’s corporate tax rate from a current 36% to below 30% in several stages starting next year.

The prime minister is in a box. He needs economic growth and rising prices, but he also has to convince the markets he is serious about paring down Japan’s world-class public debt – 230% of GDP, the highest, by far, among industrialized nations.

That’s why he raised the sales tax from 5% to 8%, with another hike to 10% set for October 2015. The increases are designed to cover rising social welfare costs linked to Japan’s rapidly aging population. It has the world’s highest ratio of elderly to young people, with one of the lowest birth rates in the world.

There is a cure for this...immigration...but, you know, the Japanese historically have had none of this.

Street Bytes

--Stocks were mixed on the week, with the Dow Jones losing 0.6% to 16851, while the S&P 500 lost 0.1% and Nasdaq gained 0.7%. At 4397, Nasdaq is just 650 points shy of its all-time closing mark of 5048 set back on March 10, 2000.

Speaking to the recent lack of volatility, the S&P has failed to post a gain or loss of 1% for 50 straight days, the longest such stretch since 1995.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.46% 10-yr. 2.53% 30-yr. 3.37%

--Investors and brokers are cutting ties with Barclays PLC and its stock-trading venue, as the firm battles allegations of fraud and misleading its customers.

On Wednesday, New York Attorney General Eric Schneiderman accused Barclays of allegedly telling customers it would protect them from high-frequency traders even as it was catering to the same firms.

“The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit,” said Schneiderman.

Barclays LX runs a dark pool that handles hundreds of millions of shares a week on behalf of big investment firms, with the U.K. bank’s executives referring to it internally as the Franchise, according to Schneiderman’s suit. Barclay’s shares fell 6.5% in response.

Dark pools are intended to help investors trade large blocks anonymously, attracting high-speed traders as well, which then rival traditional stock exchanges but with less transparency, particularly when it comes to price discovery. According to one analysis, “About 14.4% of all stock trading took place in dark pools and another 22.5% took place in other off-exchange venues during the first quarter of 2014.” [Wall Street Journal]

Advocates say they offer cheaper trading alternatives.

The suit alleges Barclays executives misled large institutional investors about how much of its trading was done in the pool compared with the volume done with high-frequency firms, yet this wasn’t the case.

The bank also misled ordinary investors by claiming it would use a stock exchange or dark pool that “would best execute their trades” at any given time, but in fact the trades were “nearly always” routed to Barclays’ own dark pool so the bank could make more money.

The New York AG is also looking into dark pools run by the likes of Credit Suisse and Goldman Sachs Group.

Two years ago, Barclays was fined a total of $450 million by U.S. and U.K. authorities to settle allegations it manipulated interest rates. CEO Bob Diamond resigned over that mess.

His successor, Antony Jenkins, has held training sessions with the bank’s entire 140,000 workforce to guard against ethical and legal breaches.

But New York authorities say the current scandal is recent, under Jenkins’ watch.

--BNP Paribas SA is said to be near a settlement with the U.S. as part of a deal that would have the bank paying $8.9 billion and accept other punishment on evidence it violated sanctions in laundering some $30 billion in funds linked to companies and government agencies in Sudan. As part of the deal, more than 30 bank employees would be dismissed. BNP also facilitated transfers of funds for Iran and other sanctioned countries.

--General Motors announced yet another recall, this one of 29,000 Chevy Cruze vehicles from the 2013 and 2014 model years because of air bag issues. Earlier in the week, GM issued a ‘stop-sale’ order on all Cruzes, but then narrowed the order once they identified where an improper part was coming from, beleaguered bag supplier Takata.

This is unrelated to the defective ignition switch issue at the heart of February’s massive recall of 2.6 million small cars from the last decade.

--The U.S. has now broken its annual record for auto recalls in less than half a year, 31.4 million vehicles as of this week vs. the old record of 30.8 million in all of 2004.

But wait...there’s more! Late Friday, GM recalled another 428,211 cars! So make it 31.8 million for the industry.

--The German government is ending a contract with Verizon Communications Inc., directly related to the controversy surrounding the U.S. National Security Agency and access of information from the networks of U.S. companies, including Verizon’s. Germany in particular was most upset over U.S. spying overseas and the Interior Ministry said in a statement:

“The relationships between foreign intelligence agencies and companies revealed in the course of the NSA affair show that especially high demands must be made of federal government communications infrastructure that is critical for security.”

--Shares of video camera maker GoPro Inc. rose 23% on their first day of trading Thursday. Priced at $24, the stock closed at $31.35, up nearly 31%. It then rose a further $4.50 on Friday to end the week at $35.85. The company reported a profit of $61 million last year, up 88%, while revenue rose 87% to $986 million.

There have been 144 U.S. IPOs this year, the fastest pace in over two decades. Dollar volume, $30 billion thus far, is trending toward the busiest year since 2000, according to Dealogic.

Speaking of volume, Alibaba Group Holding Ltd. plans to list its shares on the New York Stock Exchange, where its IPO is expected to raise as much as $20 billion, with the company currently valued at nearly $170 billion. The announcement was a blow to Nasdaq, which is still paying the price for the botched Facebook debut.

It appears Alibaba will go public in early August.

--The Supreme Court ruled that streaming Internet provider Aereo violated broadcasters’ copyrights on their programming, which spells the end for the company.

Aereo uses thousands of tiny antennas to pick-up TV signals and transmit them to subscribers for as little as $8 a month in 12 major U.S. cities, but the networks sued over the firm’s business model and the court, by a 6-3 vote, ruled “Aereo is not simply an equipment provider,” as Justice Stephen Breyer wrote in an opinion. “Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.”

IAC chairman Barry Diller, who backed Aereo from its inception, said the ruling meant: “It’s over now.” Aereo executives, however, aren’t giving up just yet.

--The Supreme Court in a 7-2 ruling, with conservatives Justice John Roberts and Justice Antonin Scalia joining the majority, gave the Obama administration a victory in ruling the Environmental Protection Agency’s rule requiring new or rebuilt factories and power plants to use the “best available technology” to limit their emissions of carbon dioxide and other greenhouse gases was constitutional.

It was the third time the high court has upheld the use of the 1970s-era Clean Air Act to limit greenhouse gases.

In April, the court upheld the cross-state air pollution law that requires states in the Midwest to do more to reduce emissions that drift east.

--The Obama administration cleared the way for the first exports of unrefined American oil in nearly four decades, with small shipments beginning as soon as August.

The rulings apply narrowly to just two companies, Pioneer Natural Resources Co. and Enterprise Products Partners LP, which sought to export processed condensate from a south Texas shale formation. The buyers can then turn the oil into gasoline, jet fuel and diesel.

--Nike shares rose after the company reported revenues increased 11% for the three months to May 31, fueled by strong sales of apparel and footwear in North America and western Europe. Earnings beat Street forecasts by three pennies as well. Total revenues for the fiscal year were up 10%.

Nike has been spending a ton on marketing costs and administrative expenses related to the World Cup as it goes after arch-rival Adidas for the hearts, minds and wallets of futbol fans.

--Shares in Bed Bath & Beyond plunged 10% as earnings missed badly vs. expectations and revenues rose just 1.7%.

--It came to light this week that recently, Yahoo CEO Marissa Mayer showed up two hours late for a private dinner arranged for her by Interpublic Group for Mayer to meet leading media buyers and advertisers. She overslept and by the time she arrived, many of the attendees had departed.    Why she wasn’t woken up by an assistant is more than a mystery. [Suzanne Vranica / Wall Street Journal]

--As reported by the Wall Street Journal’s Gregory Zuckerman, university endowments and corporate pension funds have missed out on much of the stock rally since the bottom of 2009. For example, “The average college endowment had 16% of its investment portfolio in U.S. stocks as of the end of June 2013, the most recent academic year...down from 23% in 2008 and 32% a decade ago. The 18% allocation to foreign stocks didn’t change in that period.”

Harvard University had an average annual return of 10.5% on its endowment over the past three years through June 2013, well below returns of 18.45% for the S&P 500, including dividends, over that same period. But over the past 10 years, the return was 9.4%, bettering the 7.3% of the S&P.

--Even though China is not a participant in the World Cup, the nation, following President Xi Jinping’s lead, is glued to their television sets – Xi being a known soccer enthusiast.

So, this has some saying gambling revenues in Macau for the month of June could decline year over year as a result.

--It appears General Electric gave up quite a bit in gaining France’s blessing to buy most of engineering giant Alstom SA. GE promised to create French jobs and to allow the French government to take a stake in a number of businesses; thus the concessions will mean a smaller boost to GE’s bottom line and fewer cost savings than initially anticipated.

But as analyst Nicholas Heymann of Williams Blair & Co. put it, the purchase of Alstom’s power business does “accelerate the shift back to their industrial infrastructure roots.” [Wall Street Journal]

GE is most interested in Alstom’s steam turbine business, which will give the former greater access to not only Europe, but also China and Africa.

The deal will not close until next year as GE has to consult with Alstom’s labor unions, as well as gaining the approval of regulators and shareholders.

--Australian authorities issued a warning after a young woman wearing headphones and holding her laptop was found dead with burns on her ears and chest, in an apparent electrocution from using a rip-off USB charger that did not meet safety standards. It was probably sold at a kiosk in Sydney. Authorities are now realizing how many cheap chargers are available for sale.

--Sales of bison meat in restaurants and grocery stores jumped more than 12% last year, as the U.S. bison business neared $280 million in total sales at the retail and food-service level. [High Plains Journal]

--Inflation Alert: The cost of my favorite yogurt rose from 98 cents to $1.09...or 11%. And hog futures hit a record this week, $1.283 a pound and up 50% this year, owing to deadly swine disease that has cut into supplies of slaughter-ready animals. Bacon lovers are not happy.

--An American dentist and his partner thought they booked first-class tickets to fly to the Spanish city of Granada, and instead, nine hours later, ended up in Grenada in the Caribbean. British Airways has refused to reimburse the cost of their tickets, so the dentist is suing, claiming he made it “absolutely clear” to BA’s booking agent in Florida that he wanted to travel to the Granada in Spain from London.

“Why on earth would I want to go to Grenada in the Caribbean if I was flying back to America from Lisbon?”

I just wonder what he was thinking when he first heard over the intercom that the flight was nine hours rather than two?

--In television land, ABC cleaned house on “The View,” leaving Whoopi Goldberg solo after Sherrie Shepherd and Jenny McCarthy announced they were leaving. Barbara Walters remains executive producer.

--ABC News announced Diane Sawyer was stepping down as anchor of the network’s evening newscast in August, replaced by David Muir, while George Stephanopoulos will become the lead anchor for all breaking news coverage, such as election nights. Stephanopoulos will continue on “Good Morning America.”

Muir is only 40 years old. Sawyer is 68. Sawyer will become a full-time anchor for investigative reports and major interviews.

--Tiger Woods missed the cut in his first tournament since back surgery.

--But it’s now all about USA-Belgium, Tuesday...right folks?

Foreign Affairs, cont’d

Ukraine: The European Union set a deadline of Monday for Russia to take concrete steps towards implementing a peace plan in eastern Ukraine or risk sanctions against entire sectors of its economy, such as energy, finance and defense.

Ukrainian President Petro Poroshenko told EU leaders in Brussels that a cease-fire, which was to end Friday, had failed to stop attacks by militants backed by Moscow. [Tuesday, pro-Russian rebels shot down a Ukrainian military helicopter, killing all nine on board.]

“Russia is doing nothing. One and a half hours ago an additional five soldiers were killed,” Poroshenko said in a press conference on Friday. “Can you imagine, we announce a ceasefire and they send tanks?”

Late Friday, the cease-fire, such as it is, was apparently extended three days.

German Chancellor Merkel hardened her position this week, as the EU called for the Organization for Security and Cooperation in Europe to be allowed to verify both the ceasefire and border controls, to stop the flow of Russian munitions and fighters. EU leaders also called for talks on a longer-term peace plan, as well as the return of three key border crossings to Ukrainian troops and the release of 180 hostages.

[The UN estimates more than 420 have been killed in fighting in eastern Ukraine since mid-April.]

Washington has said one of the first steps that could be taken early next week would be to block the export of oil and gas equipment to projects in Russia.

Earlier in the week, Ukraine, Georgia and Moldova signed partnership agreements with the European Union, a pact binding the three more closely to the West both economically and politically. The Kremlin said it would take “all the necessary measures” against Ukraine.

A survey by Kiev’s Democratic Initiatives Foundation has 53% of Ukrainians supporting EU integration initiatives, but 73% in the breakaway east instead back closer ties to Russia.

Thus far, sanctions have had a minimal impact on the Russian economy. The EU is the origin of 42% of Russia’s imports and the destination of 53% of its exports, according to 2012 data out of the European Commission. And in light of Europe’s dependence on Russian energy, as one Russian expert told the Moscow Times, “Do you really want to hurt yourself for a question of principle?”

By week’s end, Ukrainian border guards reported miles-long lines of cars at one crossing into Russia.

Russia: Well this is disturbing. The Moscow Times reported that another one of Russia’s early-warning satellites has ceased working, thus increasing the odds of a nuclear-arms miscalculation.

The defense ministry revealed that its last geostationary satellite, which remains in permanent orbit above the United States, stopped functioning. This is an issue I have covered over the years. Russia has other satellites capable of detecting ICBM launches, but they travel in elliptical orbits with blind spots.

The satellite in question actually may have had issues right after it was first launched in 2012.

China: From Chris Luo / South China Morning Post

“China has published its first official vertical national map incorporating the vast South China Sea, with equal weight given to both land and sea, in its latest move emphasizing its claims of sovereignty over the disputed waters....

“The South China Sea area is more prominent in the new map and is marked out by a nine-dash line, a demarcation line that encompasses the islands and their immediate surrounding waters that China claims.”

The government bureau that published the map said it was of “great significance in safeguarding the nation’s water sovereignty and territorial integrity.”

I must say it’s an impressive looking map, albeit kind of scary if you follow these things.

Premier Li Keqiang said the other day:

“China will unswervingly follow the path of peaceful development and firmly oppose any act of hegemony in maritime affairs.

“Developing the oceans through cooperation has helped many nations flourish, while resorting to conflict to fight over the sea has only brought disaster for humanity.” [South China Morning Post]

Meanwhile, the situation between the mainland and Hong Kong is not good. China has promised that in 2017 Hongkongers will be allowed to vote for their chief executive, rather than the person being selected by a handpicked committee of 1,200, as is the case today. But China is insisting the candidates be selected by the “worthies,” as the 1,200 are known.

So last weekend a referendum was held whereby Hongkongers had three choices, all of which give them the right to choose the candidates. A group called Occupy Central said it will promote the most popular action. China has said this is unacceptable.

I wrote the other day about Beijing’s “white paper” on Hong Kong that reminded residents they were part of “one China.” [“One Country, Two Systems” is the official policy, but it is morphing into the former.]

Dissatisfaction with the way Beijing is managing its rule over the territory is at its highest level in a decade, with 82% of those aged 21 to 29 expressing dissatisfaction. [New York Times]

As I’ve said before, you want to see world-class riots? [I hope you don’t...but this is what you’ll get there if the people are not allowed to democratically elect their local leader. And Hong Kong can be one explosive place, lighting a torch for others on the Chinese mainland.]

China launched a cyberattack on the online voting platform for the unofficial referendum, the most severe of its kind ever seen, according to the San Francisco-based security company CloudFare, which was tasked with protecting it.

Lastly, there are a reported 1,000 Chinese jihadists receiving military training in Pakistan, with an indeterminate number already fighting in Syria.

Afghanistan: It’s fighting season and the Taliban are doing what they do best...fight...attacking Afghan government troops and civilians across five districts this week. As of Wednesday, the government said at least 35 civilians, 40 government troops and more than 100 Taliban attackers had been killed since Sunday.

As for the presidential election dispute, a shootout between supporters of the two candidates killed five. President Hamid Karzai is calling on the U.N. to get involved on the issue of voting irregularities.

Pakistan: I’m surprised how little press this story got, but then there’s a lot happening these days.

“Gunmen fired on a Pakistani International Airlines plane as it was landing in the northern Pakistani city of Peshawar on Tuesday night, killing a woman on board and injuring three crew members in the third incident at a Pakistani airport this month.

“Flight PK 756 was carrying 178 passengers travelling from Saudi Arabia...

“The plane was hit by six bullets.”

The captain of the plane narrowly escaped. Said a police official, “It would have been a disaster had he been hit.” I’ll say.

India: A disturbing report from IHS Jane’s has India moving to develop a covert uranium enrichment plant that could support the development of thermonuclear weapons. The new units are part of the Indian Rare Metals Plant. The report was corroborated by other analysts and as Mark Fitzpatrick, director of the non-proliferation program at the International Institute for Strategic Studies, said:

“Whether or not India uses the plant mainly for fuel for reactors and naval vessels as is sometimes surmised, it adds to India’s already far greater advantage over Pakistan in terms of nuclear weapons production potential. It also brings India closer to matching China, which is how most Indians would probably see it.” [South China Morning Post]

Nigeria: Boko Haram struck again in Nigeria’s capital, Abuja, with a bomb attack killing at least 21 in a busy shopping district. In April more than 70 died at a bus stop on the outskirts of the capital.

Malaysia: There appeared to be a consensus among some, though not all, investigating the disappearance of flight MH370 that the plane was on autopilot as it flew south across the Indian Ocean until running out of fuel, with the likeliest scenario being that the crew was unresponsive, possibly suffering from hypoxia, or oxygen deprivation. [Think Payne Stewart.] At least this best fits, as a report from the Australian Transport Safety Bureau put it. But someone onboard switched on the autopilot system after it veered off its assigned course from Kuala Lumpur to Beijing.

So the questions then are: Why did the plane deviate from its planned route, and what caused the hypoxia?

Britain: Former News of the World editor Andy Coulson was found guilty of conspiracy to hack the phones of hundreds of celebrities and political figures, but his predecessor, Rebekah Brooks, was cleared of all charges in the trial.

Coulson went on to become communications director for Prime Minister David Cameron, who has apologized, saying the hiring of him was “the wrong decision.”

Random Musings

--Michael Gerson / Washington Post

“Noted management expert and Internal Revenue Service Commissioner John Koskinen was apparently called out of retirement – like the Ted Williams of evasive, unapologetic bureaucrats – to destroy what is left of his agency’s credibility.

“At immediate issue is two years of subpoenaed e-mails from former IRS official Lois Lerner to outside agencies, lost in a convenient computer crash....

“In recent congressional testimony, Koskinen admitted that the e-mails were irretrievably gone; that the ‘backup tapes’ had been erased; and that Lerner’s hard drive was apparently destroyed in an aggressive act of recycling. With that settled, Koskinen expressed his ‘hope that the investigations can be concluded in the very near future.’

“It is a mix of arrogance and delusion that seems designed to incense Republicans. Koskinen had delayed informing Congress of the lost e-mails for months, even while assuring members they would be provided. ‘It was my decision that we complete the investigation,’ he said, ‘so we could fully advise you as to what the situation was.’ Translation from management-speak: We wanted to get our story straight before we advised you of anything.”

Mary Kate Cary / U.S. News Weekly

“If a Republican administration had targeted liberal groups through the IRS, then refused to answer questions, then took nearly a year to announce that the relevant records were lost forever, then said further steps are ‘not warranted,’ the roar from the media would be deafening.

“There’s a double standard here. Voters know that using the IRS against political opponents is serious, and they don’t like the way the administration is reacting. As the president said from the start, Americans have a right to be angry.”

--Mississippi Republican Sen. Thad Cochran, facing defeat in a runoff with tea party challenger Chris McDaniel, adopted the tactic of appealing to black Democrats, through mailings and robo-calls, and the late switch in strategy worked; Mississippi’s open primary system allowing Democrats to vote in the GOP election who had not voted the first time. Cochran won, 51-49.

As reported by the Washington Post’s Rosalind Helderman and Philip Bump:

“In Mississippi’s 24 counties with a majority black population, turnout increased an average of 40 percent over the primary, according to a Washington Post analysis. In the state’s 58 other counties, the increase was only 16 percent.

“Just 12 percent of the nearly 375,000 votes cast Tuesday came from counties where African Americans make up at least 60 percent of the population. But Cochran’s overwhelming performance in those areas – winning 71 percent of the vote – provided an 18,000-vote margin that helped him grow his vote total by almost 40,000 ballots over the June 3 primary.

“Cochran won Tuesday by 6,693 votes.”

Needless to say, McDaniel and his supporters were furious as he contemplates a legal challenge, citing voter irregularities in efforts to bring Democrats to the polls.

African Americans make up one-third of the state’s electorate and Mississippi Republicans have long sought to gain at least a portion of that population.

Legitimately, over the years Cochran has supported some black causes in the state and the senator has long been one to bring in the pork.

Derrick Johnson, president of the Mississippi chapter of the NAACP, said African American voters were pleased – if skeptical – to see a Republican asking for their support.

It is now expected Cochran will win handily in November.

[Friday, an attorney and tea party activist arrested in connection with a scheme to take illicit photographs of Sen. Cochran’s infirm wife committed suicide.]

--In a total victory for privacy rights adherents, the Supreme Court ruled unanimously that police must get a warrant before searching the mobile phone of a person being arrested. Chief Justice John Roberts wrote for the court:

“Modern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans the privacies of life.”

The dispute centers around the Fourth Amendment and its ban on unreasonable searches, part of a debate that seems destined to include a showdown between the Supreme Court and the National Security Agency’s surveillance programs.

--The Supremes also ruled unanimously that President Obama lacked constitutional authority to make high-level government appointments while the Senate was in recess, and thus unable to act on his nominations.

Specifically, the case related to Obama’s appointments to the National Labor Relations Board in January 2012 at a time the Senate was holding pro forma sessions every three days, as allowed, to block the president’s power.

Justice Stephen G. Breyer, writing for the court, said, “When the Senate declares that it is in session and possesses the capacity, under its own rules, to conduct business,” that is sufficient to keep the president from making recess appointments.

The Constitution’s Recess Clause says the president “shall have power to fill up all vacancies that may happen during the recess of the Senate.” [Robert Barnes / Washington Post]

But, the Court also gave the president wide authority to make recess appointments when the Senate was in recess – which it defined as 10 days, minimum, and that was by a 5-4 vote.

Ergo, this decision is not quite as sweeping as some are making it out to be.

--Related to the above, House Majority Leader John Boehner sued President Obama for exceeding his reach when it comes to separation of powers and the issuance of executive orders.

Editorial / Wall Street Journal

“In a memo to the House, Mr. Boehner detailed the institutional injury Congress is suffering amid Mr. Obama’s ‘aggressive unilateralism,’ which is as good a description as any of his governing philosophy. When the executive suspends or rewrites laws across health care, drugs, immigration and so much else, elected legislators are stripped of their constitutional role....

“We’d prefer that Congress and President resolve their disputes through the normal political rough and tumble. The Constitution anticipates that the two ends of Pennsylvania Avenue will be in tension as they balance each other’s power. But the major reason to involve the judiciary in this case is Mr. Obama’s flagrant contempt for regular political order. For example, he has unilaterally revised, delayed or reinterpreted ObamaCare no fewer than 38 times.”

--Did you see President Obama’s new deal? Speaking of his remaining time in office and how he feels caged in the White House, Obama has taken to saying “The Bear is loose,” as he pathetically tries to reconnect with the people by ‘eluding’ security and going for ice cream breaks and such, while telling us he’s going to start saying what’s on his mind, no more handlers. Just shoot me. 

--Bill Clinton argued that his wife, Hillary, is “not out of touch,” following criticism she mishandled questions about her personal wealth, such as Hillary’s comment to ABC News that the couple were “dead broke” after leaving the White House.

In an interview with The Guardian last weekend, she said the Clintons are not “truly well off.”

“(We) pay ordinary income tax, unlike a lot of people who are truly well off, not to name names; and we’ve done it through dint of hard work.”

So Bill told NBC News’ David Gregory: “It is factually true that we were several million dollars in debt,” though tax returns released in 2007 showed the two had earned $109 million jointly since 2000.

Separately, an extensive Washington Post story by Philip Rucker, Tom Hamburger and Alexander Becker starts out thusly:

“Over seven frenetic days, Bill Clinton addressed corporate executives in Switzerland and Denmark, an investors’ group in Sweden and a cluster of business and political leaders in Austria. The former president wrapped up his European trip in the triumphant Spanish Hall at Prague Castle, where he shared his thoughts on energy to a Czech business summit.

“His pay: $1.4 million.”

“That lucrative week in May 2012 offers a glimpse into the way Clinton has leveraged his global popularity into a personal fortune.”

TD Bank, for one, has paid him about $1.8 million for 10 speeches over the years.

In 2012, Bill Clinton gave 72 paid speeches and earned $16.3 million, according to The Post’s review.

It all started just two weeks after he left office when Morgan Stanley paid him $125,000 for a speech on Feb. 5, 2001.

--Democratic Congressman Charles Rangel of New York beat back another primary challenge from Adriano Espaillat, 47-44 (two other candidates divided the remainder), so the 84-year-old Rangel returns for his 23rd and final term (according to him). Espaillat, who if elected would have become the first Dominican American congressman, nearly upset Rangel in 2012.

--New York’s highest court refused to reinstate Gotham’s controversial limits on sales of jumbo sugary drinks, thus ending the city’s last appeal and giving the soft-drink industry a major victory. A big loss for former Mayor Michael Bloomberg. Two lower courts had already sided against the city.

--The UN’s World Health Organization said the regional death toll from Ebola had reached 350 since February; the deadliest outbreak since Ebola first emerged in central Africa in 1976. New cases have cropped up in Guinea, Sierra Leone and Liberia and the risk of it spreading beyond this area are real.

--We note the passing of noted Lebanese-American scholar and author, Fouad Ajami, who once said the Arab world would “erupt in joy” when the U.S. overthrew Saddam Hussein. He was a member of the Council of Foreign Relations and later a director of Johns Hopkins University’s Middle East Studies program.

Ajami was a staple of American television and penned countless essays, many of which I have quoted in this space (though admittedly he was often a tough read).

But it was in August 2002, that Vice President Dick Cheney cited Ajami in an effort to reassure Americans about the coming war with Iraq.

“As for the reaction of the Arab street, the Middle East expert professor Fouad Ajami predicts that after liberation in Basra and Baghdad, the streets are sure to erupt in joy.”

--I love this story from the Star-Ledger:

“A NJ woman with serious commuter anxiety is suing her former employer after her bosses wouldn’t change her work schedule so she could avoid rush hour.

“According to a report in the Courier-Post, Andrea D. (no reason for me to include the last name) ‘began to feel great anxiety and depression, which was especially aggravated by crowded roadways experienced during the heavy traffic of rush hour,’ the suit says.

“Her medical condition qualified her as being disabled, according to the legal papers.

“She took a medical leave in August 2012, and when she returned in November 2012, she asked if she could come to work after the morning rush and leave before the evening rush....

“The company obliged her request, but changed her job, making it more clerical. (Ms. D.) objected. On May 17 she was fired.”

Let’s see. She’s working at least two hours less a day, but thought she was entitled to keep the same job. One hopes the federal court judge who hears this one dismisses it with a hearty laugh, leading to further laughter in the courtroom among all in attendance.

--Pope Francis traveled to the heart of Mafia country on Saturday, Calabria, and blistered Italy’s organized crime groups, calling it an example of “the adoration of evil” and saying Mafiosi “are excommunicated.” It was the first time a pope had used the word excommunication in direct reference to members of organized crime.

Francis told the crowd: “This evil must be fought against, it must be pushed aside. We must say no to it.”

--Nicole Ostrow / Bloomberg:

“People genetically prone to Alzheimer’s who went to college, worked in complex fields and stayed engaged intellectually held off the disease almost a decade longer than others, a study found.

“Lifelong intellectual activities such as playing music or reading kept the mind fit as people aged and also delayed Alzheimer’s by years for those at risk of the disease who weren’t college educated or worked at challenging jobs, the researchers said in the study published today in JAMA Neurology....

“ ‘Keeping your brain mentally stimulated is a lifelong enterprise,’ David Knopman, a study author and a professor of neurology at the Mayo Clinic in Rochester, Minnesota, said. ‘If one can remain intellectually active and stimulated throughout one’s lifespan, that’s protective against late-life dementia. Staying mentally active is definitely good for your brain.’”

--The Washington Post had an extensive report on the use of drones and the numbers that crashed, discovered in 50,000 pages of accident information reports obtained under the Freedom of Information Act.

To wit: “More than 400 large U.S. military drones have crashed in major accidents around the world since 2001, a record of calamity that exposes the potential dangers of throwing open American skies to drone traffic....

“No one has died in a drone accident, but the documents show that many catastrophes have been narrowly averted, often by a few feet, or a few seconds, or pure luck....

“The documents describe a multitude of costly mistakes by remote-control pilots. A $3.8 million Predator carrying a Hellfire missile cratered near Kandahar in January 2010 because the pilot did not realize she had been flying the aircraft upside-down. Later that year, another armed Predator crashed nearby after the pilot did not notice he had squeezed the wrong red button on his joystick, putting the plane into a spin.”

And this era is just starting.

--We note the passing of a great American, former Senator Howard Baker, Senate majority leader and White House of chief of staff under Ronald Reagan, who will forever be known for Watergate and his framing of the central question in the scandal, “What did the president know and when did he know it?” 

Baker later said of Watergate on “The NewsHour with Jim Lehrer”: “It was, indeed, a watershed time in American politics. And I guess I have to look back on it to realize how effective the system really was...the system worked.” Howard Baker was 88.

--Benjamin Summers, a captain in the U.S. Army, wrote of the danger of hero worship of the military in an op-ed for the Washington Post. In part:

“Over the past decade, a growing chasm between military and civil society has raised the pedestal upon which the United States places those who serve in its military. Too much hero-labeling reinforces a false dichotomy that’s commonly heard in our political discourse: You’re either for the troops or you’re against them. We badly need to find ways to bridge this civilian-military gap to cultivate a more nuanced appreciation of service and to produce better policy in Washington....

“During these years, it’s undeniable that veterans have received a hero’s embrace from their nation; one need look no further than the positive treatment of veterans in Super Bowl commercials or at emotional airport welcome-home events. While we veterans surely appreciate a supportive public, too much hero-labeling has unintended consequences.

“The past year offers an indication of the blinding effects of this problem. Defense spending is a prime example. Too often, policymakers frame discussion of whether to cut the military budget as being for or against the troops; the political battle over the military portion of the sequester is an example of this black-or-white mind-set. But any bureaucracy – particularly one that doesn’t function with a profit-and-loss mentality – can innovate and gain efficiencies when it’s forced to do more with less. If we’re not searching for opportunities to fix, clean and trim our organizations, we’re not being good stewards of them. When we can’t have political discussions that dig beneath the blanket of ‘for or against the troops,’ palatability wins over stewardship. And one of our nation’s most precious resources suffers the long-term consequences.

“The recent Department of Veterans Affairs scandals further illuminate this problem....

“The list goes on. We were all happy to see Sgt. Bowe Bergdahl released after being held prisoner in Afghanistan for so long, but to prematurely say that he served with honor and distinction diminishes those who did earn such accolades and illuminates the general mislabeling of military service. It isn’t that the U.S. public shouldn’t honor those who served in combat; it’s that a large civil-military divide prevents policymakers from even asking the right questions. Leaders inside and outside the military need to focus on bridging this gap.

“Not every service member is a hero. The quicker we realize that, the quicker we start creating a political environment that can foster genuine debate and answer the difficult policy problems we face.”

--Speaking of the VA, the White House conveniently released an interim report on the department late Friday afternoon that found the VA’s medical system is hobbled by management with little accountability and a “corrosive culture” that has led to widespread personnel problems.

--I was glancing through the June 30 edition of Army Times and I always read the stories behind those who gave their lives in Afghanistan. Such impressive looking kids. This week it was the five victims of the friendly fire incident in Gaza Village. So we remember Army Staff Sgt. Scott R. Studenmund, 24, of Pasadena, Calif. Army Cpl. Justin R. Clouse, 22, Sprague, Wash. Army Staff Sgt. Jason A. McDonald, 28, Butler, Ga. Army Pvt. Aaron S. Toppen, 19, Mokena, Ill. Army Spc. Justin R. Helton, 25, Beaver, Ohio. RIP.

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

God bless America.
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Gold closed at $1320
Oil $105.74

Returns for the week 6/23-6/27

Dow Jones -0.6% [16851]
S&P 500 -0.1% [1960]
S&P MidCap +0.1%
Russell 2000 +0.1%
Nasdaq +0.7% [4397]

Returns for the period 1/1/14-6/27/14

Dow Jones +1.7%
S&P 500 +6.1%
S&P MidCap +6.3%
Russell 2000 +2.2%
Nasdaq +5.3%

Bulls 60.2
Bears 16.3 [Source: Investors Intelligence]

*With next week’s holiday being on a Friday, and with your editor really not wanting to work that day if he can help it, I’m aiming to post by Friday morning.

Brian Trumbore