The Growing Disconnect Between Stock Markets And Economies

  • Promises of additional monetary easing measures seem to arrive on a weekly basis.
  • At the same time, we’re seeing increasing signs of a global slowdown.
  • As a result, there is a growing disconnect between the stock market and the economy.

Promises of additional monetary easing measures seem to arrive on a weekly basis, providing a boost to share prices globally as investors are encouraged to take on more risk. At the same time, we're seeing increasing signs of a global slowdown. History has taught us that the "stock market is not the economy." We are seeing perhaps the most extreme example of this today.

Global Easing

China is the latest country to join the global easing party, lowering its one-year benchmark deposit rate by 25 basis points to 2.75%. Back in June, the ECB moved to negative interest rates. Mario Draghi is ramping up his "whatever it takes" rhetoric leading most to expect some form of quantitative easing to be announced in the coming months. Here in the U.S., we're approaching six years of 0% interest rates with the Federal Reserve continuing to promise to keep rates at 0% for a "considerable time."

Japan's central bank is now the exemplar of easing, having held interest rates near 0% for almost 20 years. Earlier this month, the Bank of Japan announced additional quantitative easing measures that included increased direct purchases of equities by the central bank.
With all of these easing measures in place, how is global growth faring? To get snapshot, let's take a look at the top five global economies in terms of GDP: The U.S., China, Japan, Germany, and France.


China is showing its slowest growth since 2009, with year-over-year real GDP down to 7.3%.

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China's manufacturing index is down to a 6-month low, teetering on the edge of contraction (50 level).

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Japan has entered its fourth recession since 2008, with year-over-year real GDP down to -1.2% and two consecutive quarters of negative growth.

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Household spending in Japan is showing continued declines on a year-over-year basis.

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Germany-France: The Eurozone

GDP in the Eurozone is running at 0.8% year-over-year.

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Leading indicators there show this growth is likely to slow considerably in the coming months, with the most recent PMI reading hitting a 16-month low.

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Retail sales in the Eurozone are also likely to move to negative territory on a year-over-year based on recent PMI sales data.

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That brings us to the U.S., which nearly everyone views as the best house. The U.S. is currently growing at 2.3% year-over-year. Not terrible but hardly an example of a booming economy. The current expansion that began in 2009 has been the slowest growth recovery in U.S. history.

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Great Expectations

Given this backdrop, why are so many economists and the Federal Reserve expecting growth rates to accelerate in 2015?

In my view it stems from the belief that the stock market is a good representation of the health of the economy. If stocks are hitting new all-time highs every day, then the economy must be strong. And if the economy is not strong today, then it must be signaling stronger growth to come.

While there certainly has been a relationship between the stock market and the economy in the past, they are anything but one in the same. And with unprecedented easing measures in place that are specifically targeting higher stock prices, this is truer today than ever before. We must now question whether some or all of the signaling power of stocks has been lost. For proof of this look no further than Japan whose economy is entering its fourth recession since 2008 while stocks are hitting new highs.

As for why the U.S. is considered to be the best house in the global economy, look no further than market prices. U.S. stocks have been, to put it mildly, crushing their global peers. In the chart below you can see that the S&P 500 Index has outperformed the rest of the world by over 60% in the past five years.

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The narrative created from this price action is that the U.S. economy is going to decouple from the world.

Perhaps, but an alternative scenario must also be considered and may warrant a higher probability than market participants are currently assigning to it. What if the stock market is wrong today and U.S. growth is set to slow here, catching the flu from its global peers? With an increasingly global economy and 40-50% of S&P 500 revenues coming from outside of the U.S., is decoupling a more realistic assumption than this?

Unconscious Re-coupling

We may be starting to see the early stages of a re-coupling. The growth rate in the ECRI Weekly Leading Index is quietly moving lower, in the opposite direction of the equity market. It recently turned below zero for the first time since 2012.

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The Flash PMI also came in at 54.7 this week, a 10-month low. While these figures are far from recessionary, they may be an early indication that growth in the U.S. is about to slow.

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Concluding Thoughts

The stock market is not the economy, particularly in the current environment of unprecedented monetary stimulus across the globe. The danger in assuming otherwise is twofold. First, from a signaling standpoint, similar to waiting for an inverted yield curve, it could lead investors awry who are buying stocks at extreme valuations on the belief that the economy is accelerating.

Second and more importantly, from a policy standpoint the assumption that the stock market is the economy is inherently dangerous. It can lead to the situation in which central bankers start targeting and pointing to higher stock prices as both proof that their policies are "working" (helping the real economy) and as an instrument of growth (wealth effect). If the public and fiscal policymakers buy into this unproven notion, they will sit idly by instead of engaging in true structural reforms that promote long-term economic and real wage growth.

They will also continue to incur higher debt loads, borrowing from the future to satisfy the whims of today, as the cost of money is too cheap to resist. A boom-bust economy is thus created that is increasingly dependent on central bankers continuing to inflate asset prices and propping them up indefinitely. This precisely where we stand today.

If we continue on the current path the end game is clear even if the timing is anything but: another bursting bubble and the economic fallout that comes with it. Perhaps this is what most people desire (I personally doubt that given its deleterious effect on the middle class) but shouldn't we at the very least be engaged in a national debate over it? Is this truly the economic and monetary policy we should be pursuing?

Swiss vote provokes '6,000-year gold bubble' attack

'Save Our Swiss Gold' referendum is a primordial scream against a world of quantitative easing but would paralyze the Swiss National bank

By Ambrose Evans-Pritchard, International Business Editor

3:32PM GMT 27 Nov 2014

Stack of gold bars

The SNB warned that a ban on the gold sales would play havoc once the bank starts to shrink its balance sheet again Photo: Alamy
Five million Swiss voters will decide on Sunday whether to force the Swiss National Bank to repatriate all its gold from vaults in Britain and Canada, boost its holdings of bullion to 20pc of foreign reserves and then keep the metal forever. 
The “Save Our Swiss Gold” referendum is a valiant attempt by Switzerland’s army of gold bugs - and the populist Swiss People’s party (SVP) – to lead the world back to the halcyon days of the international Gold Standard. It is a primordial scream against a quantitative easing and money creation a l’outrance by the leading central banks.
Yet there is a snag. The Swiss National Bank (SNB) is the biggest printer of them all in relative terms, far outstripping the Bank of Japan, let alone the US Federal Reserve or the Bank of England – mere amateurs at this game.
The SNB has boosted its balance sheet to a colossal 83pc of GDP in a maniacal – but fully justified – effort to stop the Swiss franc appreciating beyond 1.20 to the euro, and to head off deflation. It vowed to print whatever is necessary to buy foreign bonds and defend the exchange rate. It has been true to its word since 2011.
At one stage it was mopping up half of the entire sovereign bond issuance of the eurozone each month, a scale of action that the European Central Bank’s Mario Draghi can only dream of. During the eurozone debt crisis, Standard & Poor’s even accused the SNB of becoming a conduit for capital flight, via Switzerland, to German, Dutch and French bonds, and therefore indirectly exacerbating Euroland's North-South rift.

You have to smile when you hear Swiss gold enthusiasts complaining that these foreign bonds – bought with electronic fiat francs created out of thin air – are now losing value as the euro slides against the dollar. But then we all suffer from congnitive dissonance.
The result of this buying blitz is that the SNB now has a balance sheet of 522bn francs (£345bn). Only 7.5pc of this is in gold, some 1,040 metric tonnes. It will have to buy 1,733 tonnes to reach the 20pc target mandate by 2019 if the vote passes.

Gold bulls are snorting. The world’s annual mine output is roughly 2,500 tonnes. We can all do the arithmetic. The SNB might persuade a friendly central bank to sell a few crates, but last year the central banks were net buyers. Led by Russia and other BRICS states, they bought 367 tonnes.
Citigroup’s Willem Buiter has poked fun at the Swiss plan, and at metal fetishism in general, in a lascerating report entitled Gold: a six thousand year-old bubble revisited.
“Making it illegal to ever sell any of the gold the central bank has now or acquires in the future would make the gold useless as an international reserve. The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral. The gold becomes useless as a store of value of any kind. Its value is therefore zero.”

Mr Buiter says gold is a “fiat commodity” of almost no intrinsic value, coveted only as an asset “to the extent that enough people believe it has value as an asset”.

Personally, I find this a rarefied argument, bordering on Jesuitical, a subjective preference dressed as science. Nothing has intrinsic value beyond what we give it, including the things that Mr Buiter likes. But let us not quibble.
“Gold is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store. It has no significant remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses,” Mr Buiter adds.
“The cost and waste involved in getting the gold out of the ground only to but it back underground in secure vaults is considerable. Historically, gold was extracted from its ores by using mercury, a toxic heavy metal, much of which was released into the atmosphere."
"Today, cyanide is used instead. Cyanide spills (which occur regularly) can wipe out life in the affected bodies of water. Runoff from the mine or tailing piles can occur long after mining has ceased. From a social efficiency perspective, the mining of new gold and the costly storage of existing gold for investment purposes are wasteful activities."

Mr Buiter compares gold with the stone money of the Isle of Yap in the Pacific Ocean. “This stone money, known as Rai, consists of large doughnut-shaped, carved disks, consisting usually of calcite.

Apparently, the total stock of Rai cannot be augmented any further. It also depreciates very slowly. This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world.”

Stone Rai coin: just as good as gold?

Mr Buiter is not calling a secular top in gold yet. “I don’t want to argue with a 6,000-year bubble. That bubble may well be good for another 6,000 years.”

Needless to say, the SNB is horrified by the referendum. “The initiative is dangerous. A ban on selling would very severely impair our manoeuvring room for monetary policy,” said Thomas Jordan, the bank’s president.
The SNB warned that a ban on the gold sales would play havoc once the bank starts to shrink its balance sheet again. It might ultimately have to engage in money creation because it would have no revenue from bond holdings, the exact opposite of what the gold enthusiasts intend.
“In a worst case scenario, the assets side of the SNB’s balance sheet would, over time, be largely comprised of unsellable gold. Managing the interest rate level and the money supply would only be possible via the liabilities side of the balance sheet; in practice by issuing the SNB’s own interest bearing debt certificates (SNB Bills). This would have serious financial consequences. The SNB could therefore find itself in a situation in which it could only finance its current expenses by means of money creation.”

These arguments border on Baroque but they sound plausible enough to laymen to chill Switzerland’s ardour for hard money. The latest poll shows the "No" side ahead at 47pc, to 38pc on the "Yes" side Yet gold bugs are determined, and turnout is what matters.
The gold revivalist wave is a window into our age, an anthropological phenomenon. Establishments are fighting a rear-guard battle as well-organised campaigns force a change in policy. The Dutch central bank has repatriated 122 tonnes from New York. The Bundesbank is shipping its gold home to placate the “Bring Back Our Gold” movement and its allies in the Bundestag.
What it shows is a breakdown in trust. A system of custodial holdings that survived the First World War and even the Second World War – to a high degree – is unravelling. When it comes to foreign reserves, Europe’s states are becoming even more nationalist than they were in the 20th century.

For gold bugs it has been a stressful three years. The gold price peaked at $1,921 an ounce in September 2011 after a rising almost eightfold since the late 1990s.

It has since fallen to $1,194 as Fed tightening and the rising dollar entirely change the global financial landscape. Societe Generale expects it tumble a lot further, averaging $826 from 2016-2019. 
For many gold enthusiasts it is an article of faith that QE would set off an inflationary spiral.

Yet years have passed and much of the world is languishing in near deflationary conditions. Their economic models are clearly wrong, yet hardcore gold mysticism is a closed-belief system, almost religious in character, and therefore not falsifiable by facts. Advocates merely dig in deeper.
The refrain is now changing. Zero rates, QE and extreme debt may have deferred the day of reckoning – they warn – but the deluge will be all the worse when it finally comes. On that they may be right.

The Two Colombias
Andrés Velasco
NOV 26, 2014

Funeral procession Bogota Colombia

BOGOTÁ – In Medellín, Colombia’s second-largest city, you can listen to an impressive presentation by the mayor’s office about emerging industrial parks and new technology firms.

Then, a glance at your smartphone reveals that guerrillas have kidnapped an army general, and that negotiations to end a decades-long civil war with the Revolutionary Armed Forces of Colombia (FARC), Latin America’s oldest guerrilla group, are at a standstill.
Colombia is the only country in Latin America where you can attend seminars at world-class universities, learn about mushrooming multinationals, and chat with supremely competent policymakers, all the while knowing that citizens are confronting one another with machetes and bazookas just a few dozen miles away. In this sense, Colombia is two countries, which have been at war with each other for far too long.
On the one hand, there is the Colombia of rapid economic growth and booming foreign investment, of refurbished cities and innovative social policies. On the other hand, there is the Colombia of Gabriel García Márquez’s fictional Colonel Aureliano Buendía, who started 17 civil wars – and lost all of them.
The bad news is that the struggle between the two Colombias has taken a tremendous human toll, with many citizens having suffered through poverty, warfare, and human-rights violations for most, if not all, of their lives. The good news is that the modern Colombia, the country of peace and progress, is winning.
The fruits of that victory can be seen in places like Medellín, which, just 20 years ago, was synonymous with drug cartels and violence. Today, mayors and city planners from all over the world, eager to learn about urban renewal, flock to Medellín, which boasts public libraries that take culture to hillside shanties and gleaming cable cars that haul residents to and from work every day. It is difficult to think of a city that has undergone as dramatic a transformation as Medellín in recent years (though Dubai and Shanghai may be in the running).
The country as a whole has also experienced significant economic progress. Since the 2008 financial crisis, Colombia, along with Peru, has been South America’s top economic performer.

As growth slows throughout the region, owing to falling commodity prices and the end of quantitative easing in the United States, Colombia’s economy is actually accelerating. The International Monetary Fund expects growth to reach a respectable 4.8% this year and 4.5% in 2015.
To be sure, the sharp drop in world oil prices is bad for Colombia, which in recent years has become a major hydrocarbons producer. But strong budget rules, similar to Chile’s, keep fiscal policy well anchored. And the government has indicated that, if the need arises, it is prepared to raise taxes to achieve its goal of gradually reducing public debt and improving public services. The business community, despite some initial reluctance, seems willing to go along.
Colombia remains a highly unequal society, with the Gini coefficient, a common measure of inequality, hovering around 0.5 – in the same range as Brazil and Chile. The problem has many causes, one of which is a poorly functioning labor market that forces many Colombians to accept informal work or no work at all.
But the government does not shy away from talk of redistribution. Indeed, it has already initiated transfers (such as pension increases for poor retirees), and its policies have contributed to five consecutive years of declining unemployment.
As Finance Minister Mauricio Cárdenas observed in a spirited speech to a banking convention last week in Medellín, though President Juan Manuel Santos’ administration is historically rooted in Colombia’s center-right political forces, its fiscal prudence and activist social policy qualify it as an adherent of the social-democratic “third way.”
In the coming years, two factors could propel Colombia’s continued development. One is the Pacific Alliance, which also includes Mexico, Peru, and Chile. Firms learn to export new products by selling them in regional markets. But, in South America, the rhetoric of trade integration has often been stifled by the harsh reality of protectionism. Fortunately, with the consolidation of a free-trade bloc among the Pacific Rim countries – home to 215 million people and accounting for 37% of Latin America’s GDP – this is changing.
The second factor – which has yet to arrive – is peace, in the form of a definite cessation of hostilities with FARC. This is not the first time that talks have been suspended, and it might not be the last. But never before have negotiations progressed so far, reaching substantial agreements in several areas.
Nothing is more important than building a Colombia where citizens no longer fear being caught in a hail of bullets or being dragged from their homes in the middle of the night. At the same time, one should not underestimate the economic dividend of peace, which economists in Bogotá have estimated could boost GDP growth by as much as one percentage point annually for a decade or more.
A quarter-century ago, a safe and prosperous Colombia seemed impossible. Yet it is now within reach. At a time of intensifying political conflict and painfully few success stories, Colombians are giving the world reason for hope.

11/26/2014 02:27 PM

The Radical Pragmatist

Donald Tusk Provides Strong Voice for Eastern Europe

By Jan Puhl
Photo Gallery: Warsaw's Man for Global Affairs
With the appointment of Donald Tusk as president of the powerful EU Council, a politician from Eastern Europe will be placed in one of Brussels' most important positions for the first time. The former Polish leader could become a key voice in the crisis with Russia.

Donald Tusk is currently looking for an apartment. He has already viewed one in the diplomatic quarter of Brussels and he has excellent prospects of finding a nice new abode. The European Union, after all, is providing him with a monthly housing allowance of €3,800 ($4,700).

In just a few weeks' time, Tusk, 57, the new president of the European Council -- the powerful EU body that represents the leaders and ministers of the 28 member states -- will have an opportunity to tackle the euro crisis and the armed conflict in Ukraine. For now, though, the man who was until recently the Polish prime minister is dealing with the smaller problems that come with such a transition.

Before he takes office on Dec. 1, Tusk originally wanted to attend a language course on the Mediterranean island nation of Malta. His English is not bad, but his fellow Poles feel that it could use some polishing. In the end, he had no time for a trip, so an English teacher instead came to the prime minister's official residence in Warsaw, where boxes of books had been piling up for weeks.

Tusk was busy packing and clearing out his wardrobe. He even had his suits dry cleaned specifically for his new position. It remains unclear, however, exactly when he will head for Brussels, as officials are keeping a tight lid on this information.

Tusk is the first politician from a former East Bloc country to be appointed to a top EU post. The European Union "desperately needs an Eastern European perspective," Tusk said in Brussels after his nomination, adding that he wanted to ensure that Europe responded to Russian provocations with a single voice.

'A Great Success for Poland'

Tusk's origins appear to make him the right man for this new challenge. What's more, in contrast to his predecessor, Flemish politician Herman van Rompuy, who had not even been Belgium's prime minister for a year when he was elected to the top EU job, Tusk has governed 39 million Poles for nearly two complete terms in office.

His appointment fills many Poles with pride and satisfaction that they are finally playing an important role in Europe. "A great success for Poland," wrote Warsaw's Polityka newsmagazine, and the daily Gazeta Wyborcza raved that all of Eastern Europe has been ennobled. Populist politician Janusz Palikot even made a statement that bordered on blasphemy in the eyes of many Poles when he compared Tusk's appointment with the election of Pope John Paul II.

When Karol Wojtyla, a modest priest from southern Poland, became pope in the fall of 1978, it encouraged the population in its resistance against the communist regime, and hence against Soviet domination.

In the fall of 2014, Poland feels threatened once again and sees itself as the last bastion of the West against Russian expansion -- and now a Pole is once again assuming a position of global importance: Donald Tusk, a modest man from Gdansk.

But what can Tusk accomplish in this role? "The office of EU Council president gains its power from the skill of those who occupy it," says Jan Krzysztof Bielecki, who was himself a Polish prime minister and serves as one of Tusk's key advisers. Bielecki says the trick is to facilitate the conflicting interests of the 28 heads of state and government, and then propose the right compromise at the right moment in the Justus Lipsius Building in Brussels.

Solid Record

This role fits with Tusk's political style, which is hardly surprising since he is cut from the same political mould as German Chancellor Angela Merkel: He's pro-European, pragmantic and consensus-oriented -- with a fine sense of possible majorities and political feasibility. His past has taught him to be skeptical of grand ideologies, and it is precisely this that makes him an excellent facilitator.

Tusk is leaving home after all these years with an admirably strong record. He has shielded his country from the aftermath of the financial crisis. The Polish economy grew at a time when the rest of Europe was mired in a deep recession. Tusk has transformed Poland from an outsider to a respectable partner in the EU. Under his nationalist predecessors, the Poles had a reputation as troublemakers in Brussels. Before it even entered the EU, Poland demanded special regulations for its farmers and particularly favorable voting weights for European Council decisions.

But Tusk has been unobtrusive and predictable in Brussels. Three years ago, when the EU passed the so-called "six pack," a series of measures to enhance financial stability in the euro zone, Tusk ranked among the proponents, despite the fact that Poland still uses the zloty as its currency. Tusk wanted to prove that his country was a responsible EU member -- and he succeeded.

Another reason for his successful foreign policy is Poland's good relationship with Germany. Right at the beginning of his term in office, Tusk defused the historic tensions between the two countries.

Merkel was a kindred spirit in this respect. "I am incapable of getting angry with Angela Merkel," Tusk once said in a SPIEGEL ONLINE interview. They both have in common that they grew up in a socialist system. Merkel remembers Poland from her youth, and she can even say "There are no more eggs" in Polish, and Tusk speaks passable German. They both belong to the liberal-conservative political camp.

Like Merkel, Tusk only makes decisions when he is sure that he enjoys majority support -- a political style that is required for his new position. Janusz Reiter, a former Polish ambassador to Germany, has known the future council president for decades. "Merkel and Tusk are similar in that they do not allow themselves to be guided by grand visions," he says. The Warsaw magazine Polityka even calls Tusk a "radical pragmatist."

Dialogue Pays Off

A glance at his life provides some insight into why he doesn't think much of ideologies. Tusk experienced how socialism, neoliberalism and nationalism successively failed in his country.

He came of age politically in the 1970s. At the time, workers in the country's industrial centers were staging strikes to protest against the power of the communist state, which in their eyes was not "Polish," but rather a symbol of Soviet foreign domination. The regime hit back hard, for example, in 1970 in Tusk's home city of Gdansk. He was only 13 years old, a schoolboy from a humble background, when the army opened fire on protesting shipyard workers, killing 41 and wounding 1,200.

Tusk joined the student organization of the Solidarity trade union, which conducted roundtable negotiations with the regime in the 1980s to usher in a transfer of power. Dialogue pays off -- that, at least, is the lesson Tusk must have learned from this chapter in Polish history.

After the fall of the Iron Curtain, Tusk became one of the main proponents of what was known as "Gdansk liberalism." He and his fellow activists believed that only the free market could save the ailing Polish state economy, but this ideology also turned to dust before Tusk's eyes. The privatization sparked deep political discord and drove up the unemployment rate as high as 20 percent. The state companies that were sold off often didn't end up in the hands of entrepreneurs, but were instead seized as booty by corrupt apparatchiks.

The profiteers of this deplorable situation were Tusk's domestic political rivals: The twins Lech and Jaroslaw Kaczynski were conservative nationalists, and they preached that the Poles had to stand together and resist the turmoil of the modern age -- as Catholics and as a nation with a tragic yet heroic history. But by campaigning for a special role in Europe, they made Poland into an outsider within the EU.

'Politics of Love'

In 2007, Tusk won the election against the Kaczynski brothers. The country was longing for tranquility and was thoroughly fed up with the dramatic tone adopted by the twins. Tusk instinctively capitalized on this yearning for harmony. During the election campaign, he kicked soccer balls around on small town playing fields and cultivated a friendly image, while showing that he could also play defense.

The media in Warsaw dubbed his style the "politics of love." He has remained true to this approach, and even in the face of Putin's hegemonic ambitions, he refrains from polemic attacks.
"Of course, we Eastern Europeans are particularly sensitive because of our past," says his adviser Bielecki. Still, as council president Tusk will not become the spokesman for an anti-Russian hardliner faction from Eastern Europe.

The Sunday before last, at the Baltic Sea resort of Sopot, Tusk made one of his now rare public appearances. Tusk, his wife Malgorzata and their daughter Katarzyna, Poland's foremost fashion blogger, went to Elementary School No. 8 to cast their votes in the municipal elections. On that day, Tusk's liberals clearly lost to Kaczynski's national conservatives.

Nevertheless, as the former prime minister exited the polling station, he was hardly asked any questions about the recent defeat. After all, he's now Poland's man for global politics. Tusk says he is glad that Putin discovered at the G20 summit in Brisbane just how much the world disapproves of his machinations in Ukraine. The situation with Russia has taken a dramatic turn for the worse. And Tusk says he expects the crisis to become one of the "key issues" during his term of office in Brussels and at the first EU summit under his leadership in December. "This is all the more important because we are dealing with a new wave of invasions in Ukraine, with an open war," he says.

His most important project is the plan for an "energy NATO," in which the EU and other states would form a gas procurement union and provide mutual assistance. He says this would mean that Moscow could no longer divide the community by turning off the tap for certain countries.

"Without solidarity, there is no freedom," says Tusk's adviser Bielecki: "That's something we Poles have learned."

Translated from the German by Paul Cohen

Research Report

The Secret to Resisting Temptation

People Who Excel at Resisting Temptation Deliberately Avoid Tempting Situations, Says a Study

By Ann Lukits      

Nov. 24, 2014 1:16 p.m. ET

          Izhar Cohen        
People who excel at resisting temptation might have a secret strategy: They deliberately avoid situations in which their self-control might fail, says a study in the February issue of Personality and Individual Differences.

Highly disciplined individuals often make decisions that minimize their exposure to temptations and distractions, the study suggests.

Effective self-control has been linked to happiness and success in life while failures of self-control can have costly consequences, researchers said. The latest study suggests people with good self-control may use so-called proactive avoidance to avoid resisting temptation.

Researchers at Florida State University recruited 38 students ages 18 to 23 years old. Self-control was rated using a scale that included 13 statements about the participants’ discipline.

Half the students were ranked as above average in self-control and half were below average.

The students were told they would be solving an anagram and could work in a noisy student lounge or wait for a quiet lab that wasn’t immediately available. Of those with below-average self-control, 37% chose the lab and 63% chose the lounge. By comparison, 53% of the subjects with above-average self-control chose the lab and 47% chose the lounge.

The finding suggests high self-control is associated with avoiding, rather than overcoming, distraction, the researchers said.

In another experiment, 53 subjects ages 18 to 60 were recruited to take an online intelligence test in one of two formats: a standard black-and-white version or a stylized version with artwork on both sides of the screen.

The subjects were told the artwork would change frequently and might be distracting. Participants’ self-control was rated on the 13-point scale.

Of those with relatively low self-control, 43% picked the standard version and 57% picked the stylized version. But among high-self-control subjects, 67% chose the standard version and 33% chose the stylized version.

Caveat: It isn’t known if high self-control is associated with avoiding other types of distractions and temptations, such as high-calorie foods while dieting, researchers said.

Thyroid damage: Having an overactive or underactive thyroid significantly increases the risk of dying, despite medications to correct the condition, says a study in PLoS One. Undetected thyroid disease may cause irreversible biological damage in patients before treatment begins, researchers suggest.

An estimated 20 million Americans have some type of thyroid disorder but two-thirds aren’t aware of it, according to the American Thyroid Association. The disease is associated with various adverse health conditions before and after diagnosis, but it also occurs in healthy individuals, researchers said.

Thyroid function is assessed by measuring levels of thyroid stimulating hormone (TSH) in the blood: low TSH indicates an overactive thyroid or hyperthyroidism, while elevated TSH means the thyroid is underactive, called hypothyroidism.

Researchers in Denmark analyzed data from 239,768 men and women, 62 years old on average, who had at least one TSH test from 1995 to 2011. Thyroid function was overactive in 3.8% and underactive in 3.5%. Over approximately 7½ years of followup, 39,964 subjects died.

Compared with normal-TSH patients, the risk of dying was 23% higher in subjects with low TSH and 7% higher for those with elevated TSH, according to the study. Men with low TSH had a higher risk of dying than women, possibly due to male reluctance to seek medical attention, the researchers said. The findings indicate the importance of reducing exposure to abnormal TSH, they said.

Caveat: The study was based on a single TSH measurement, which may have been affected by the normal circadian fluctuation of the hormone, researchers said.

Silent strokes: As much as 40% of patients with atrial fibrillation, a common heart rhythm disorder in older people, had brain lesions due to silent strokes but no outward signs of stroke, according to a meta-analysis published this month in Annals of Internal Medicine.

Silent strokes, called silent cerebral infarctions, are caused by blood clots in areas of the brain unrelated to speech or motor function, which are typically affected by stroke. The prevalence of silent strokes in the general population ranges from 8% to 28%, researchers said.

More than 2.7 million Americans suffer from atrial fibrillation, a rapid and irregular heartbeat that can cause palpitations and weakness, according to the American Heart Association. The association estimates 15% of strokes are due to untreated atrial fibrillation, but most people aren’t aware they have the arrhythmia. Magnetic resonance imaging (MRI) has improved detection of silent cerebral infarctions in patients with atrial fibrillation, researchers said.

The analysis, at Massachusetts General Hospital in Boston, pooled the results of nine studies conducted in six countries from 1989 to 2013. The studies involved 4,407 patients ages 50 to 84 years old, including 505 with atrial fibrillation. Silent cerebral infarctions were diagnosed in 46% of patients with atrial fibrillation and 16% of those without the arrhythmia. The likelihood of suffering a silent stroke was 2.6 times greater in patients with all forms of atrial fibrillation, the adjusted results showed.

Caveat: Use of stroke-prevention drugs, such as low-dose aspirin, was inconsistently reported, researchers said. Only lesions greater than 3 millimeters were included, which may have underestimated lesion prevalence, they said.

Healing gel: Topical applications of petroleum gel, or Vaseline, healed second-degree burns more than one day faster on average than conventional treatment with medicated dressings, according to a report in the November issue of Burns.

Second-degree burns affect the top two layers of skin, the epidermis and dermis, and often cause blisters. Treatment usually involves dressings containing silver sulfadiazine, a type of antibiotic, but the drug can’t be used on certain patients, such as pregnant and breastfeeding women, and newborns, researchers said.

Use of petroleum gel, which is inexpensive and widely available, may be an alternative treatment, especially for patients in areas where access to health-care facilities makes return visits for dressing changes more difficult, the study suggests.

From 2009 to 2010, researchers at the University of Philippines in Manila recruited 38 patients, mostly men in their early 30s, from a hospital burn center. The burns affected up to 10% of their body and most were caused by contact with flames or hot liquids. Half of the patients were assigned to treatment with a thin layer of white petroleum gel but no cover dressing. The other half received conventional treatment with a base layer of gauze laden with silver sulfadiazine cream. This was covered with several layers of moist gauze and an outer layer of dry gauze. Patients in both groups returned to the burn center daily for dressing changes.

The burned area of skin in petroleum-gel-treated patients healed in 6.2 days, on average, compared with 7.8 days in controls. Dressing removal was significantly easier and faster in the petroleum-gel group. No signs of infection or skin allergy were reported in either group.

Caveat: The cause of the burns may have affected healing times, researchers said. The study took place in one center and was relatively small.

Car-sick kids: Motion sickness seems to peak in children at age 9 and affects girls more than boys, says a study in the November issue of the European Journal of Pediatrics. Children with poor balance tend to be more susceptible to motion sickness, which strikes significantly more often in cars and buses compared with other moving objects, the research showed.

Motion sickness is caused by a disturbance in the body’s vestibular system, which is located in the inner ear and helps to regulate balance. Few studies have looked at motion sickness in children, researchers said.

Researchers recruited 831 children ages 7 to 12 years old from nine schools in the Brazilian city of Diamantina. Susceptibility to motion sickness was assessed with a questionnaire that listed 11 objects, such as vehicles, playground equipment and escalators. The children were asked to recall how often they had experienced queasiness, nausea, or vomiting when the objects were moving.

Symptoms of motion sickness were recorded during tests that measured the children’s balance under different conditions, such as spinning in both directions with the eyes open and closed.

Of the children, 43% reported feeling sick on cars and buses. By comparison, 11.7% got motion sickness on park swings, 11.6% on Ferris wheels and 7.1% on carousels. Motion sickness was rare on small boats, trains and planes.

Symptoms increased significantly from age 7 to 9 years old and then declined. Girls were more susceptible to motion sickness than boys, a sex difference also found in adults that may be due to hormonal cycles, researchers said.

Caveat: Motion sickness symptoms were self-reported.

November 25, 2014 6:17 pm

Radical cures for unusual economic ills

Martin Wolf

The crisis left a grim legacy, and the answers are likely to be unorthodox

Ingram Pinn illustration
The principal high-income economies – the US, the eurozone, Japan and the UK – have been suffering from “chronic demand deficiency syndrome”. More precisely, their private sectors have failed to spend enough to bring output close to its potential without the inducements of ultra-aggressive monetary policies, large fiscal deficits, or both. Demand deficiency syndrome has afflicted Japan since the early 1990s and the other economies since 2008 at the latest. What is to be done about it? To answer, you have to understand the ailment.
Crises are cardiac arrests of the financial system. They have potentially devastating effects on the economy. The role of the economic doctor is to keep the patient alive: preventing the financial system from collapse and sustaining demand. The time to worry about a patient’s lifestyle is not during a heart attack. The need is to keep them alive.
Like heart attacks, financial crises have long-lasting effects. One reason is the damage to the financial sector itself. Another is a loss of confidence in the future. Yet another is that it makes the debt accumulated in the run-up to the crisis no longer bearable. What happens then is a “balance-sheet recession” – a period when the indebted focus on paying down debt. Post-crisis policy has to offset or facilitate such private-sector deleveraging. Supportive monetary and fiscal policies can help do both. Without such policies enormous slumps are likely, as happened in crisis-hit eurozonee-member countries.
A complement to deleveraging is debt restructuring. Many economists have recommended such restructuring as an essential part of the solution. In the household sector at least, the US has done a far better job of this than the eurozone. But organising debt restructuring is extremely difficult so long as borrowers refuse to admit defeat. This is true of the private sector and even more so of the public sector. This is one reason why debt overhangs last so long.
Martin Wolf charts

Yet there are even more disturbing possibilities than debt overhangs. In my book, The Shifts and the Shocks, I suggest that a number of shifts in the world economy created chronically weak demand in the absence of credit booms. Among these were excess savings in emerging economies and shifts in income distribution, ageing and a secular decline in the propensity to invest in high-income countries.

Behind these shifts lay, among other things, globalisation, technological innovation and the growing role of the financial sector. It is not enough to clean up after the debt boom has collapsed. Policy makers also have to eliminate the dependence of demand on unsustainable credit.

Without that, even a radical clean-up will not deliver buoyant demand. True, if a country is small, it may be able to import the missing demand via the external account. But when huge parts of the world economy are afflicted, alternative solutions are needed. There are three broad alternatives: live with chronic demand weakness; run aggressive demand policies indefinitely (as Japan has done); or fix underlying structural demand weaknesses.

Martin Wolf charts

Hyper-aggressive monetary policy helps by delivering real interest rates that are well below zero. An alternative is fiscal deficits. But that risks putting debt on a permanently rising path.

Still more unorthodox is outright monetary financing of fiscal deficits, as Adair Turner, former chairman of the UK’s Financial Services Authority, has recommended. This means nationalising the creation of money now delegated to often-irresponsible private banks. This is a more direct (and probably more effective) way of using a central bank’s power to create money in order to expand demand than employing it indirectly, via manipulation of asset prices. Such direct monetisation of deficits seems particularly sensible in Japan.
The alternative is to address the sources of structurally weak demand. One policy would be to redistribute incomes from savers to spenders. Another would be to promote spending. This is why Japan’s consumption tax increase was so misconceived. Japan should tax savings instead. This violates the prejudice that thrift is valuable. But in a world suffering from demand deficiency syndrome, it is not. Unproductive savings should be discouraged.

Martin Wolf charts
Beyond both the post-crisis malaise and persistently weak demand lies the possibility of structurally weak supply. The solution is encouragement to work, invest and innovate. But policies designed to promote supply must not simultaneously weaken demand. This is one of the difficulties with the boilerplate recommendation of labour market reform, which entails lowering wages for a large proportion of the labour force and making it easier for employers to hire and fire. This is likely to lower consumption at least in the medium term – precisely Germany’s experience in the first decade of the 2000s. Reforms should promote demand. That is why the eurozone must settle on a balanced package, not excessive reliance on structural reforms.
The crisis left a grim legacy. The eurozone has done a worse job of dealing with this than, say, the US. But the origins of the crisis are to be found in longer-term structural weaknesses. Policy has to address these failings, too, if exit from the crisis is not to be the beginning of a journey into the next one. The answers are likely to be unorthodox. But so, too, is today’s economic condition. Rare ailments need unusual treatments. So look for them.

Copyright The Financial Times Limited 2014.


The Meaning of the Ferguson Riots
NOV. 25, 2014

      Dellwood, Mo., on Tuesday. Credit Justin Sullivan/Getty Images       

First, he refused to step aside in favor of a special prosecutor who could have been appointed by Gov. Jay Nixon of Missouri. He further undermined public confidence by taking a highly unorthodox approach to the grand jury proceeding. Instead of conducting an investigation and then presenting the case and a recommendation of charges to the grand jury, his office shifted its job to the grand jury. It made no recommendation on whether to indict the officer, Darren Wilson, but left it to the jurors to wade through masses of evidence to determine whether there was probable cause to file charges against Officer Wilson for Mr. Brown’s killing.
Under ordinary circumstances, grand jury hearings can be concluded within days. The proceeding in this case lasted an astonishing three months. And since grand jury proceedings are held in secret, the drawn-out process fanned suspicions that Mr. McCulloch was deliberately carrying on a trial out of public view, for the express purpose of exonerating Officer Wilson.

If all this weren’t bad enough, Mr. McCulloch took a reckless approach to announcing the grand jury’s finding. After delaying the announcement all day, he finally made it late in the evening, when darkness had placed law enforcement agencies at a serious disadvantage as they tried to control the angry crowds that had been drawn into the streets by news that the verdict was coming. Mr. McCulloch’s announcement sounded more like a defense of Officer Wilson than a neutral summary of the facts that had led the grand jury to its conclusion.
For the black community of Ferguson, the killing of Michael Brown was the last straw in a long train of abuses that they have suffered daily at the hands of the local police. News accounts have strongly suggested, for example, that the police in St. Louis County’s many municipalities systematically target poor and minority citizens for street and traffic stops — partly to generate fines — which has the effect of both bankrupting and criminalizing whole communities.

In this context, the police are justifiably seen as an alien, occupying force that is synonymous with state-sponsored abuse.
We get a flavor of this in Officer Wilson’s grand jury testimony, when he describes Michael Brown, as he was being shot, as a soulless behemoth who was “almost bulking up to run through the shots, like it was making him mad that I’m shooting at him.”
President Barack Obama was on the mark last night when he said, “We need to recognize that this is not just an issue for Ferguson, this is an issue for America.” The rioting that scarred the streets of St. Louis County — and the outrage that continues to reverberate across the country — underlines this inescapable point. It shows once again that distrust of law enforcement presents a grave danger to the civic fabric of the United States.


Dear Reader,

Most of you will recall our recent warning to prepare for the Crash of 2014. In that communication, I alerted you to the extreme danger facing global markets and the technical indicators pointing toward an imminent and significant market correction.

Our recommendations were to:

  • trim your portfolio to only its strongest stocks, the issues with the most emphatic fundamental reasons for owning them;
  • hold the resulting cash in US dollars;
  • keep your gold;
  • but buy "gold insurance," in the form of puts on GLD, to counter potential weakness in precious metals and related stocks; and
  • buy long-term Treasuries as a speculation that interest rates would move still lower.

As of today, the Crash of 2014 I warned of hasn't happened. Yet.

Everyone at Casey Research knows that we don't have a crystal ball. We do have solid analytical skills and a realistic view of the world on our side, but we can't predict the exact timing of a market crash. We can only assess the risk of one occurring. We continue to rate the risk as high, given the now worldwide folly of limitless QE, currency debasement, spiraling government debt and investor leverage, and the metastasizing tangle of financial derivatives. It is not going to end well for conventionally thinking buy-and-hold stock market investors.

Adding a sense of urgency to long-held concerns about such fundamentals was the number of critical technical indicators that turned bearish this fall.

All of a sudden last month, market players seemed to wake up to the geopolitical and economic worries they'd been ignoring. They got spooked.
Sentiment turned extremely bearish, but it wasn't just a matter of volatile investor emotions, and it wasn't just the long-scheduled wind-up of the Fed's Quantitative Easing. The market seemed to be waking up to the plain facts and recognizing them as frightening.

Then the Federal Reserved started backpedaling on its plan to end QE immediately. That was no great surprise, but the announcement from the Bank of Japan that quickly followed was a surprise to almost everyone: a commitment to purchase all the bonds that Japan's high-deficit government wanted to issue, i.e., QE from here to over the rainbow. The largest Japanese pension fund promptly announced that it would diversify into equities - and not just Japanese stocks, but US stocks as well. That was all it took for Wall Street bulls to come raging back. Mario Draghi topped it all by signaling that the European Central Bank would jump on the QE infinity bandwagon. Now, a few weeks later, markets are making new highs.

So while 2014 isn't over yet, it appears I was early with the warning of a crash. Of course I was. An early warning is the only kind likely to do any good.

It's not fun - and for some subscribers it's been painful - to watch the stocks they sold keep rising. But the alternative to getting out early is to stay fully invested and hope you'll get out at the last moment, just as the crash is starting. Many investors are telling themselves they're going to do just that - so many, in fact, that the eventual result will resemble one of those horrible stories of soccer fans getting crushed as thousands stampede and jam the stadium exits. If you judge that trouble is coming, leave the stadium early, even though that means missing part of the match.

Leaving early entails a cost in foregone profits, but all in all, for most readers the cost has been modest. Our call for asset deflation, including commodities and energy, has been correct; we've avoided losses in that area. Staying in US dollars rather than any of the competing paper currencies has also saved us some losses. By holding on to our strongest stocks, we've profited from the market's overall rise. And we still expect long-term Treasuries to do well next year.

I want you to know that all of us at Casey Research drink our own Kool-Aid and invest according to the recommendations we publish. We believe that the last round of unprecedented central bank actions has - at most - only postponed the inevitable for a little while longer and has done so at the cost of making the inevitable even messier.

We are confident that we and our subscribers are positioning themselves well by owning the best companies in recession-proof sectors, and lots of cash and gold. That way, we won't risk getting crushed in the exits, and while we wait for the crash, we'll have a free hand to exploit the speculative opportunities that Casey Research works diligently to identify.

The best of those opportunities may soon come to us from the resource sector. We likely are close to a final market capitulation for junior resource stocks, which could coincide with tax-loss season in the Canadian markets and the need for junior stock funds to raise cash to pay for year-end redemptions by their investors.

But don't let those opportunities draw you back toward a portfolio that is fully invested, with little or no cash. The unprecedented market backdrop of QE everywhere and QE all the time is pushing the world economy toward more and more leverage and hence exposing the markets to more and more danger.

Fear's brief October appearance on Wall Street wasn't a false alarm. All the most serious market crashes have been preceded by such early tremors.

Remember that the October 2008 crash triggered by the Lehman bankruptcy was preceded by: (i) Bear Stearns' $2 billion loss reported in June 2007; (ii) the Northern Rock collapse three months later; (iii) the distress sale of Bear Stearns to JP Morgan in March 2008; and (iv) the bankruptcy of IndyMac in July 2008. The markets, encouraged by Federal Reserve assurances, shrugged off every one of those warning signs. Then the market cracked.

So while today the urgency of the matter seems to have subsided, it would be a grave mistake not to prepare for a crisis that will make 2008 look like a walk in the park. We'll be ready.

On behalf of Casey Research, I wish all our American subscribers a happy Thanksgiving, and to all of our subscribers, I extend my best wishes for the coming holiday season.
Olivier Garret
Chief Executive Officer

Europe’s German Ball and Chain
Daniel Gros
NOV 24, 2014

 Euro Coins
BRUSSELS – A storm-tossed ship near dangerous cliffs needs a strong anchor to avoid finishing on the rocks. In 2012, when a financial storm engulfed the eurozone, it was Germany that kept the European ship off the shoals of financial disaster. But now Europe’s anchor has become a brake, hindering forward movement.
Of course, German Chancellor Angela Merkel acted in 2012 only when she could tell her domestic constituency that there was no alternative. But in the end, Merkel agreed to a permanent bailout fund for the eurozone. She also backed the formation of a banking union, which remains incomplete but still represents a key step toward a financial system supervised by the European Central Bank.
Thanks to these measures, and ECB President Mario Draghi’s vow, which Germany tacitly approved, to do “whatever it takes” to save the euro, the financial storm abated.
But now the eurozone seems incapable of escaping near-deflation, with little economic growth and prices barely moving upwards.
That was not supposed to happen. When the crisis struck, the economies of the eurozone periphery were buffeted by the twin shocks of spiking risk premiums and a collapsing housing market. At the same time, the German economy benefited from the return of capital fleeing the periphery. Real (inflation-adjusted) interest rates in Germany became substantially negative, triggering a housing boom. It was assumed that this would generate strong domestic demand in Germany, helping the periphery to export more.
Instead, the German economy has barely grown; indeed, weaker world trade threatens to put it in recession. The current-account surplus, which was supposed to decline sharply, has actually increased, as savings have remained higher – and investment lower – than expected.
Another problem, at least from the point of view of the rest of the eurozone, is that inflation in Germany remains too low. With German prices rising at less than 1% annually, the eurozone periphery needs falling prices in order to regain the competitiveness lost during the pre-2008 boom years.
This lack of dynamism at the core of the eurozone has now become its key problem. With no growth in Germany, the rest of the eurozone might not be able to reduce debt via external surpluses. And there might be no solution short of a magic button to increase German domestic demand.
Obviously, the German government is in charge of the country’s public finances. But fiscal policy has been roughly neutral in recent years, and thus cannot be blamed for the German economy’s lack of dynamism. This year, the public-sector budget might move from a small deficit to what German officials call a “black zero” – a very small surplus. But this tightening by a fraction of a percentage point of GDP implies no adverse effect on growth.
The root cause of Germany’s sluggish economic performance in recent years is the continuing unwillingness of its households and enterprises to consume and invest. And it is difficult to see what the government can do about this.
Indeed, investment has fallen despite financing conditions for enterprises that have never been easier, both in terms of ultra-low interest rates and banks’ willingness to lend. Yet Germany’s corporate sector remains reluctant to borrow and invest in the country, because it sees little reason to expect long-term economic growth, given that the population is set to decline and productivity gains remain anemic.
With investment unlikely to become a motor for the German economy, consumption holds the key to stronger demand growth in Germany. Its weakness is somewhat surprising: real incomes are up, and the coalition government that came to power last year has introduced a series of generous welfare measures, including a large increase in the minimum wage, a reduction of the retirement age, and a special top-up pension for women with children.
But even these measures, which foreign observers have largely overlooked, have failed to boost consumer demand. So what more could the German government do to wean the Germans off their abstemious habits?
Public investment is the one area where the government could act. But the growth fillip from public-sector infrastructure spending can only be modest. Increasing infrastructure spending by a quarter, which would represent a huge administrative effort, would lift GDP growth by just 0.4 percentage points.
The main danger now is political. A weak German economy makes the necessary structural adjustments in the eurozone periphery much more difficult. That, in turn, fuels the perception that responsibility lies with the German government, which is seen as unwilling to take the steps needed to strengthen domestic demand – even as it prohibits the periphery governments from spending more themselves. As unemployment remains stubbornly high and incomes stagnate in much of the eurozone, the temptation to blame “the Germans” is becoming ever stronger.
The German government, no surprise, does not even acknowledge that there is a problem. With unemployment remaining near record lows, the lack of demand growth is simply dismissed, and the absence of inflation is taken as a sign of success.
This is a mistake. Europe’s German anchor has become stuck, and the rising tide of anxiety among Germany’s partners should not leave its government indifferent.