International Investing

With the Yen collapsing vs. all other currencies, inquiring minds may be wondering how prime minister Shinzo Abe's inflation policy is working out in practice. Let's start with a look at the Yen. Yen Daily Chart for One Year In the last year, the Yen has fallen from 124.79 to 97.56. That is a decline of 21.82%. Recall that Abe's policy is an attempt to raise inflation and spur exports. Japan Still in Deflation On May 19, Reuters reported Japan's Amari: core core CPI showing signs of turning positive due to BOJ. Japanese Economics Minister Akira Amari said on Monday that core-core consumer prices, which exclude fresh food and energy, are showing signs of turning positive due to the Bank of Japan's aggressive monetary easing. Amari, speaking to reporters, also said the government still judges Japan to be in mild deflation as other measures of consumer prices are still falling when compared to the same period a year ago. Fancy that. Consumer prices are still falling in spite of a 21% plunge in the currency. OK, but what about exports and imports? Good question. I'm Glad you asked. Japan Exports Disappoint Please consider Japan Exports Disappoint, Full Benefits of Weak Yen Yet to Show Japan's exports rose less than expected in April from a year earlier due to weak demand from Europe and China, highlighting the challenges confronting the world's third-biggest economy as policymakers try to engineer a sustained revival. The 3.8 percent annual increase in exports in April was below the median estimate for a 5.9 percent rise and followed a 1.1 percent increase in the year to March. The result also underscores the limitations of a weak yen in bolstering the trade sector, especially as external headwinds crimp demand for exports. The uncertainty was underlined recently by a string of weak data from the United States and China, Japan's major export markets. Imports jumped 9.4 percent year-on-year in April, up for a sixth straight month, due to an increase in liquefied natural gas purchases, compared with a 6.7 percent gain expected by economists. That has brought the country's trade balance into a deficit of 879.9 billion yen, the biggest trade gap for the month of April under comparable data series going back to 1979, according to the finance ministry. It compared with the economists' forecast for 621.1 billion yen deficit, leaving the trade balance in the red for ten months in a row, the longest such run since 1979-1980 when Japan was hit by surging oil prices. Abenomics Synopsis Year-over-year the is Yen down 21.82% vs. the US Dollar Japanese consumer prices are still falling Imports jumped 9.4%, up for a sixth straight month Exports up 3.8% Trade balance negative for 10 straight months Largest April trade deficit since 1979 People think Shinzo Abe is a hero because the Nikkei is up. I think Abe is an absolute economic nutcase who is going to create a currency crisis in Japan if he succeeds in changing the constitution like he desires (and quite possibly even if he doesn't). For further discussion, please see Will Shinzo Abe Succeed with Constitutional Changes to Militarize Japan and Further Destroy the Yen? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

An interesting article on a recently passed law in California came my way today regarding Obamacare secrecy in California. Please consider California exchange granted secrecy. A California law that created an agency to oversee national health care reforms granted it broad authority to conceal spending on the contractors that will perform most of its functions, potentially shielding the public from seeing how hundreds of millions of dollars are spent. The degree of secrecy afforded Covered California appears unique among states attempting to establish their own health insurance exchanges under President Barack Obama's signature health law. An Associated Press review of the 16 other states that have opted for state-run marketplaces shows the California agency was given powers that are the most restrictive in what information is required to be made public. It's routine in government to keep bids secret until contracts are awarded, so one vendor does not get an unfair advantage over others. After a bid is awarded, contracts generally become fully public. In setting up the California exchange, lawmakers gave it the authority to keep all contracts private for a year and the amounts paid secret indefinitely. "Except for the portion of a contract that contains the rates of payment, contracts entered into pursuant to this title shall be open to inspection one year after their effective dates," reads the code specifying what exchange records are exempt from public disclosure. According to agency documents, Covered California plans to spend nearly $458 million on outside vendors by the end of 2014, covering lawyers, consultants, public relations advisers and other functions. Other exchange records that are allowed to be kept secret include those that reveal recommendations, research, strategy of the board or its staff, or those that provide instructions, advice or training to employees. Minutes of the board meetings also are exempt from disclosure. So what does California have to hide? More specifically what do the legislators (especially California Assembly Speaker John Perez, D-Los Angeles) have to hide? Contracts awarded to the non-low bidder? Contracts awarded to friends and family of legislators? Kickbacks? With $458 million on outside vendors by the end of 2014, there are plenty of non-legitimate reasons for wanting to keep everything a secret. With all the secrecy it's hard to say precisely who is covering up for whom, or why, but one thing is crystal clear: This secrecy is good for someone on the take and bad for taxpayers. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.comMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Investors in the Gold ETF - GLD liquidated 300 tons of the metal this year. The reason? People are tired of losing money watching gold sink while the S&P soars. Tom Lydon, the editor of ETF Trends, says the disposal of over 600,000 pounds of gold so far this year "amazing" and "incredible." Click on above link for a video interview with Lydon. Gold vs. S&P 500 GLD data by YCharts Reflections on Momentum Trading Since late 2012 the S&P 500 has been on a nonstop rise, while gold has gone the other way. People have thrown in the towel on gold in favor of momentum trading in stocks. It seems nearly everyone is a momentum trader now, one of the consequences of inept central bank bubble-blowing policy. Louise Yamada says it's Time for Gold Bulls to Abandon Hope. See my response in Wild Swings in Gold and Silver; Time to Give Up Hope? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

UK prime minister, David Cameron, promised to hold a referendum on whether Great Britain should remain in the EU, but only on two conditions. The first condition, that Cameron be re-elected as prime minister is iffy enough. The second condition, that Cameron renegotiate the Lisbon Treaty, I said would never happen. And it won't. German Chancellor Angela Merkel sealed the fate on that score as Berlin plans to streamline EU but avoid wholesale treaty change. Berlin is drawing up plans for treaty changes to streamline decision-making in the eurozone, while stopping short of any wholesale renegotiation that would allow the UK to repatriate powers from Brussels. Although Angela Merkel, German chancellor, has expressed her desire to keep the UK inside the EU, the move being discussed in Berlin would thwart a plan by David Cameron, UK prime minister, to piggyback on eurozone reforms to renegotiate the British relationship with Brussels. Mr Cameron had hoped to exploit renewed interest in Berlin for wholesale EU treaty changes as a way to renegotiate the UK’s membership terms. But Berlin’s strategy for a new, narrowly focused treaty could force the UK premier into a repeat of the dilemma he faced in December 2011, when Mr Cameron rejected the fiscal compact treaty but most other EU countries went along without him. Senior German officials acknowledged that they were isolated on treaty change, which is fraught with political landmines in several countries – particularly France, which would probably require a national referendum if major changes were made to EU law. The timing of treaty changes remains a matter of debate but it could come as early as next year, after elections to the European parliament in May. The way ahead is due to be discussed at a summit next month. Pinned in the Corner The sooner Merkel proceeds with her strategy, the better for everyone involved, especially UK citizens. Merkel has effectively preempted Cameron's strategy in a way he cannot realistically deny. Since there is now no possible hope of wholesale renegotiation (not that there ever really was in the first place), there is no reason for the UK to avoid a referendum now. Will Cameron bury his head in the sand like an ostrich once again? We will find out shortly. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.comMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Here's the question of the day: If you have a choice (and you many not for long because companies are abandoning grandfathered plans) Should you skip Obamacare and keep your old plan? Any policy in place on March 23, 2010, the day health reform was enacted, falls under the grandfather exemption. As the Obama administration put it, if you like your plan, your doctor or both, you can keep them. Last year some 60 percent of employers, large and small, offered at least one grandfathered plan during open enrollment, according to the Kaiser survey. New employees can also join a grandfathered plan so long as the company has maintained consecutive enrollment in it. For old plans as well as new ones, premiums are likely to rise next year - though the old plans still could be considerably more affordable than the newer ones. Technically, a plan can stay grandfathered indefinitely, but few, if any, will. Most grandfathered plans have gone away already, according to the human-resources consultancy Mercer, which estimates only about a third of employers are expected to offer one in 2013. Across the board, it is costs that will lead to the disappearance of most grandfathered plans. If employers or individual plans want to keep grandfathered status, they will have little leeway to pass higher costs along to policyholders. Any policy that increases co-payments, deductibles or co-insurance forfeits its grandfathered status. Comparison Points Grandfathered plans don't have to provide full, co-payment-free coverage of preventive services, such as flu shots, mammograms and cholesterol screenings. Grandfathered plans don't have to cover a government-designated "essential benefits package" of procedures and treatments. Grandfathered plans may require prior authorization for out-of-network emergency care, unlike with new plans. Grandfathered policies bought by individuals carry their own exclusions, like a $750,000 annual cap on reimbursement for the aforementioned essential benefits, including hospitalization, emergency services or pediatric care. The online insurance broker eHealthInsurance found that premiums were 47 percent higher and deductibles were 27 percent lower than for individual plans that will incorporate all of PPACA's new rules. Average monthly premiums for individuals in plans without the newly required benefits — the closest equivalent to grandfathered plans — were $190 versus $279. Average deductibles for individuals were $2,257 versus $3,079. Obamacare Lie: "You Can Keep Your Existing Plan" That difference in monthly premiums of $190 vs. $279 will entice many to keep their existing plan, assuming it is still offered. However, that setup won't last very long because companies cannot raise premiums on grandfathered plans. Simply put, Obama lied when he said "you can keep your existing plan", knowing full well the law was purposely written to make sure that would not happen over time. Eventually you will be stuck with a new Obamacare plan and higher premiums whether you like your existing plan or not. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.comMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Overnight action in gold and silver was interesting to say the least. Silver plunged 10% and was halted four times in a flash crash, of sorts, yet is now in the green. Silver 10-Minute Chart click on chart for sharper image Silver hit as low as $20.25 and as high as $23.24. The maximum rally from the low was 14.8% Gold 10-Minute Chart click on chart for sharper image Action in gold was also pronounced, but not quite as wild as silver. Gold fell $25 from the open but is now up $22 and and in the second-to-last 1--minute candle (about 10 minutes ago from this posting) was up another $10. Time to Give Up Hope? Louise Yamada says it's Time for Gold Bulls to Abandon Hope. Is it? I think most already have. There is amazing pessimism in the sector already, and abandonment of hope is what it takes to set a bottom. Are We There Yet? I don't know if we have reached the point of extreme pessimism yet, but nor does anyone else. Are we close? I believe so. Large Specs Trim Gold, Silver Net Longs Please consider Large Specs Trim Gold, Silver Net Longs. Large speculators continued to pare their net bullish positioning for gold and silver futures and options but increased it for platinum and palladium during the most recent reporting period for data compiled by the Commodity Futures Trading Commission. Money managers in the CFTC’s “disaggregated” report were net long by 39,216 contracts for futures and options combined, but this is down from 49,260 the prior week and is the lowest tally since this reporting format began in 2009. In the longer-running “legacy” report, the non-commercials – commonly referred to as the funds – cut their net long to 68,942 lots from 78,871 the prior week. This now stands at the lowest level since late 2008. Bank of America Merrill Lynch pointed out that large speculators continued to unwind long positions. The number of total longs in the disaggregated report fell by 2,986, while the number in the legacy report fell by 5,284. Further, speculators continue to add short positions, pointed out UBS and TD Securities. TDS said this is occurring amid concerns the Federal Reserve may taper its monetary stimulus, thereby weighing on sentiment. Money managers added 7,057 fresh shorts, while non-commercials added 4,645. UBS reported that total speculative gross short positions in gold are at a record high and double the level from the start of the year. Meanwhile, net speculative length rose for the platinum group metals. Standard Bank described these metals as “experiencing supply-side distress” that means more potential for increased investor demand. Money managers bumped up their platinum net length to 23,703 lots from 21,819 the previous week, while non-commercials increased this to 32,734 from 30,641. In both cases, this was largely due to fresh buying. Money managers added 1,421 new long positions, while non-commercials added 1,247. In percentage terms, the decline from just over 1900 to the $1325 area is just a normal looking correction. Yet, fund speculation is at the lowest level since 2008. While not a timing mechanism, pessimism seems rather extreme for such a normal looking correction. Nothing has changed fundamentally as irrational exuberance abounds in nearly all the equity and bond markets, all running on nothing but momentum and unwarranted faith in the Fed to keep the bubbles expanding. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

The OECD released on a report last week discussing rising income equality and poverty since the global financial crisis. The report noted that income inequality based on the gini coefficient actually increased in the past few years in developed countries. This is not surprising as the poor and middle-class suffer more as jobs disappeared and many governments implemented austerity programs to cut down on social welfare. On the other hand, as is usual in such situations, the affluent were to able to take advantage of the crisis and increase their wealth due to favorable tax treatments, buying assets at rock-bottom prices, borrow funds at cheap rates for investment purposes, etc. According to the OECD, income inequality has been rising in the OECD countries since the mid-1980s. From an article by Brian Keeley in OECD Insights: ‘There’s a lot of little kids going hungry round here,’ explained one friend, who works in a local community centre. Indeed, just the other day she had spoken to a family where the child had been chewing wallpaper at night. ‘He didn’t want to tell his mum because he knew she didn’t have the money for supper,’ she explained.” That’s not from Dickens or George Orwell’s Down and Out in  Paris or London, but from a recent column by Gillian Tett in the Financial Times. And she’s writing not about Lagos or Lahore, but Liverpool, a modern city in one of the world’s wealthiest countries. Of course, the presence of poverty amid plenty – inequality – is not new. In reality, it’s hard to imagine any society functioning without some sort of  wealth gap. But the past few decades have seen inequality rise in much of the world. That’s causing concern, and not just for reasons of social justice: A number of economists, most notably, perhaps, Joe Stiglitz, argue that excessive inequality undermines the foundations of growth by restricting the ability of poorer people to develop their human capital and by encouraging what economists call “rent seeking” – in essence, instead of creating a bigger economic pie, the well-off use their economic and political strength to take a bigger slice of the existing pie. The following chart shows the level of income inequality among OECD countries: Click to enlarge Source: Income Distribution and Poverty at the OECD,  OECD From the report: Income inequality increased especially in Spain, where Gini coefficient increased from 0.31 to 0.34. On the other hand, after having increased since the early 2000s, income inequality fell substantially in Iceland, moving down eleven places on an OECD countries’ inequality ranking to the lowest level (Figure 4). Consolidation policies appear to have been designed in an overall equalising manner. Disposable income inequality also declined in Portugal and New Zealand, although by a smaller amount. The higher the gini coefficient, the higher the income inequality. Chile has the highest gap between the rich and poor. It is interesting that Iceland has the lowest gini coefficient. The tiny country of Iceland became the basket case of greed and recklessness when some of its banks collapsed and the bankers brought the economy to its knees at the start of the financial crisis. Fortunately unlike other developed countries, Icelandic politicians were smart and actually cared about their country. Iceland implemented some of the boldest policies to rescue the economy and in fact sent some of the crooked bankers to prison in the process. Compared to that, not one banker in the US or UK for example has been sent to prison. As a result ordinary people in these countries continue to pay the price while the bankers and politicians who perpetrated the crisis have moved on with their lives. Or to put it differently they are continuing to enjoy the high life. No one would be surprised to see the U.S. at the fourth place in the above ranking. Since Turkey, Chile and Mexico are actually emerging countries, in reality the U.S. has the highest income inequality among developed

The threat by the EU to impose huge tariffs on solar panels from China has run into staunch opposition. The Financial Times reports Germany warns EU solar tariffs would be ‘grave mistake’ Germany’s vice-chancellor and economy minister put Berlin on a collision course with Brussels by warning that imposing anti-dumping duties on solar panels from China would be a “grave mistake”. Philipp Rösler’s statement came as Germany’s leading manufacturing industry organisation also called for urgent negotiations with China to head off the threatened import duties, which are expected to be announced formally by the European Commission in early June. The comments risk undermining Karel De Gucht, the trade commissioner, as he faces off against Beijing in the EU’s largest ever trade case, based on the €21bn of solar products China exported to Europe in 2011. Mr De Gucht has recommended that such products face duties averaging 47 per cent after concluding that Chinese manufacturers illegally dumped their products, or sold them below cost, in Europe. In an interview with the Welt am Sonntag newspa per, Mr Rösler said that “punitive duties are the wrong instrument” to deal with the dispute. “German industry is quite rightly very concerned” about the threatened action, he said, and its potential for retaliatory action by China affecting German exports. A study commissioned by a group known as the Alliance of Affordable Solar Energy claimed that more than 242,000 jobs would be put at risk in Europe if punitive tariffs were imposed. The commission’s own review, seen by the Financial Times, heaped doubt on those figures, predicting the negative impact would be far more limited. Damage of Tariffs I do not believe it is possible to accurately predict the damage caused by inane tariffs. Much depends on how China would respond. But even if China did not respond, there is no advantage to artificially forcing up prices. Tariffs are simply a bad idea, period. As I have pointed out, much of the European overcapacity that led to the price crash was caused by European subsidies. Somehow it is OK for Europe to offer subsidies but not China. EU policy is also hypocritical in regards to its stated emphasis on clean energy. For further discussion, please see Paul Krugman "Was" Right. Yet Another Reason for UK to Exit EU Note the continual bickering by Germany with the EU and with France over trade, over eurobonds, over a political union, over agricultural policy, over everything. Why Cameron wants the UK to stay in the EU is a complete mystery, especially when the UK fears additional nannycrat idiocies like financial transaction taxes. Fortunately the UK tide is changing, as a recent Poll Shows 46% in UK Want to Exit EU, 30% Want to Stay In. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Earlier this year I wrote an article discussing the pathetic state of the airline industry in the U.S. due to consolidation of carriers. For travelers it has become a nightmare flying from Point A to Point B. Equity investors have treated most airline stocks like rotten fish that are best avoided at all costs. A recent journal article noted that years of mergers in the industry is adversely affecting travelers and local economies: If you’re having trouble finding flights to Memphis, Pittsburgh or a host of other cities, you’re not alone. A decade of restructuring in the U.S. airline industry has produced a sharp reduction in air service that is curtailing traveler choice and some local economies even as it improves the industry’s health, new research shows. The study, by Massachusetts Institute of Technology, shows that from 2007 through last year, U.S. airlines cut the number of scheduled domestic flights by 14%. The number of seats offered fell by slightly less, as airlines pushed passengers onto bigger planes, says the study, which was prepared by MIT’s International Center for Air Transportation and is expected to be made public Wednesday. Source:  Leaner Airlines Mean Fewer Routes, Study Shows, The Wall Street Journal, May 7, 2013 Unlike Europe where thriving competition in the industry gives consumers plenty of options at cheap rates, in the U.S. the major carriers hate competition and the state encourages the attitude of these airlines despite the existence of scores of anti-trust laws. The blame can be attributed to all including greedy investors, corrupt politicians, toothless regulators and of course the voting public. While the London underground travelers term the travel experience during peak times as “cattle class”, the U.S. airline industry considers the travelling public as the “Sheeple class” – a combination of sheep and people. As a result fleecing of the public in broad daylight right under the nose of Uncle Sam is common. For example, U.S. airline “collected” a whopping $3.50 billion in 2012 in baggage fees alone according to a report published by not the industry but the government that tracks this figure. The irony of this is incredible to say the least. The Journal article further added: Even the nation’s busiest 29 airports lost nearly 9% of their scheduled domestic flights as the major airlines focused on weeding out unprofitable flights and reducing their use of gas-guzzling small jets. Remaining flights also have become more crowded, with the percentage of seats filled—known as the load factor— soaring to a record of nearly 83% in 2012, from not quite 80% in 2007. Industry executives say that the changes have helped reduce overcapacity and revive the fortunes of the industry after years of losses and bankruptcies, which they say benefits travelers. But the changes have also affected convenience and cost for fliers. Overall, average domestic round-trip fares have inched up 4% to $374 in 2012 from 2007, adjusted for inflation. Competition on busy routes between big cities and new flights from discount carriers have held some fares down. But at some midsize and smaller airports, the recent service cuts have reduced competition and caused fares to shoot up. With the proposed merger of American and U.S. Airways, 70% of the U.S. air travel market will be controlled by just four companies: Delta, Southwest, United-Continental and the merged airline according to one study by by Diana L. Moss of American Antitrust Institute. The Journal noted that the four carriers will control 85% of the domestic market.

Lloyds Banking Group (LYG) and Royal Bank of Scotland(RBS) are two of the top five banks based in the U.K. Both these banks used to have solid dividend yields and performed well up until the credit crisis of 2008-09 hit. In order to prevent the banks from collapsing due to heavy losses the British government stepped in and bailed these “Too-Big-To-Fail” banks. Even though many years have passed since the rescue these two banks have yet to return to profitability. Royal Bank of Scotland has been the worst performed compared to Lloyds Bank. Here is a five-year chart showing the performance of the two banks against FTSE 100: Click to enlarge Source: Yahoo Finance Lloyds Bank is up about 20% so far this year based on positive developments such as increasing lending and expectations to post a profit this year. It should be noted however that the bank is 39% owned by the British government. Since the share price has increased and is getting closer to the price paid at the time of bailout, the state may dump its stake at any time. Hence investors need not get too excited about buying shares at the current levels.  Llyods has also not reinstated its suspended dividend payments since it hasn’t earned a profit and has not repaid the state. Founded in 1727, Edinburgh-based Royal Bank of Scotland(RBS) seems to have lost its conservative roots during the bubble years.Currently the state owns 81% of the bank. On Friday the ADR closed at $10.33. But that price is a bit misleading since the company implemented a reverse split in the ratio of 1:20 in late 2008. The stock has fallen heavily from around $16.00 after the split to the current price. RBS also has not paid a dividend since 2009. Disclosure: Long LYG