The Top Four Events in 2014

By George Friedman

December 30, 2014 | 09:00 GMT

'Tis the season to make lists, and a list shall be made. We tend to see each year as extraordinary, and in some senses, each year is. But in a broader sense, 2014 was merely another year in a long chain of human triumph and misery. Wars have been waged, marvelous things have been invented, disease has broken out, and people have fallen in love. Nonetheless, lists are called for, and this is my list of the five most important events of 2014.

1: Europe's Persistent Decline

The single most important event in 2014 was one that did not occur: Europe did not solve its longstanding economic, political and social problems. I place this as number one because regardless of its decline, Europe remains a central figure in the global system. The European Union's economy is the largest in the world, taken collectively, and the Continent remains a center of global commerce, science and culture. Europe's inability to solve its problems, or really to make any significant progress, may not involve armies and explosions, but it can disrupt the global system more than any other factor present in 2014.

The vast divergence of the European experience is as troubling as the general economic malaise. Experience is affected by many things, but certainly the inability to find gainful employment is a central feature of it. The huge unemployment rates in Spain, Greece and southern Europe in general profoundly affect large numbers of people. The relative prosperity of Germany and Austria diverges vastly from that of southern Europe, so much so that it calls into question the European Union's viability.

Indeed, we have seen a rise of anti-EU parties not only in southern Europe but also in the rest of Europe as well. None have crossed the threshold to power, but many are strengthening along with the idea that the benefits of membership in a united Europe, constituted as it is, are outweighed by the costs. Greece will have an election in the coming months, and it is possible that a party favoring withdrawal from the eurozone will become a leading power. The United Kingdom's UKIP favors withdrawal from the European Union altogether.

There is significant and growing risk that either the European Union will have to be revised dramatically to survive or it will simply fragment. The fragmentation of the European Union would shift authority formally back to myriad nation states. Europe's experience with nationalism has been troubling, to say the least — certainly in the first part of the 20th century.

And when a region as important as Europe redefines itself, the entire world will be affected.

Therefore, Europe's failure to make meaningful progress in finding a definitive solution to a problem that began to emerge six years ago has overwhelming global significance. It also raises serious questions about whether the problem is soluble. It seems to me that if it were, it would have been solved, given the threat it poses. With each year that passes, we must be open to the possibility that this is no longer a crisis that will pass, but a new, permanent European reality.

This is something we have been pointing to for years, and we see the situation as increasingly ominous because it shows no signs of improving.

2: Ukrainian and Russian Crises

Historically, tensions between Russia and the European Peninsula and the United States have generated both wars and near wars and the redrawing of the borders of both the peninsula and Russia. The Napoleonic Wars, World War I, World War II and the Cold War all ended in dramatic redefinitions of Europe's balance of power and its map. Following from our first major event of the year, the events in Ukraine and the Russian economic crisis must rank as the second most important event.

Stratfor forecast several years ago that there would be a defining crisis in Ukraine that would be the opening to a new and extended confrontation between the European Peninsula and the United States on one side and Russia on the other. We have also forecast that while Russia has regional power, its long-term sustainability is dubious. The same internal factors that brought the Soviet Union crashing down haunt the Russian Federation. We assumed that the "little Cold War" would begin in the mid-2010s, but that Russian decline would not begin until about 2020.

We have seen the first act, and we continue to believe that the final act isn't imminent, but it is noteworthy that Russia is reeling internally at the same time that it is trying to cope with events in Ukraine. We do not expect Russia to collapse, nor do we expect the Ukrainian crisis to evolve into a broader war. Nevertheless, it seems to me that with this crisis we have entered into a new historical phase in which a confrontation with significant historical precedents is re-emerging.

The possibility of conflict is not insignificant; the possibility that the pressures on Russia, internally and externally, might not speed up the country's own crisis cannot be discounted. Certainly the consequences of oil prices, internal economic dislocation, the volatility of the ruble and sanctions all must give us pause.

The Russians think of this as an event triggered by the United States. In the newspaper Kommersant, I was quoted as saying that the American coup in Ukraine was the most blatant in history. What I actually said was that if this was a coup, it was the most blatant in history, since the United States openly supported the demonstrators and provided aid for the various groups, and it was quite open in supporting a change in government. The fact that what I said was carefully edited is of no importance, as I am not important in this equation. It is important in that it reveals a Russian mindset that assumes that covert forces are operating against Russia. There are forces operating against it, but there is nothing particularly covert about them.

The failures of Russian intelligence services to manage the Ukrainian crisis and the weakening of the Russian economy raise serious questions about the future of Russia, since the Russian Federal Security Service is a foundation of the Russian state. And if Russia destabilizes, it is the destabilization of a nation with a massive nuclear capability. Thus, this is our second most important event.

3: The Desynchronization of the Global Economy

Europe is predicted to see little to no growth in 2015, with some areas in recession or even depression already. China has not been able to recover its growth rate since 2008 and is moving sideways at best. The United States announced a revision indicating that it grew at a rate of 5 percent in the third quarter of 2014. Japan is in deep recession. That the major economic centers of the world are completely out of synch with each other, not only statistically but also structurally, indicates that a major shift in how the world works may be underway.

The dire predictions for the U.S. economy that were floated in the wake of the 2008 crisis have not materialized. There has been neither hyperinflation nor deflation. The economy did not collapse.

Rather, it has slowly but systematically climbed out of its hole in terms of both growth and unemployment. The forecast that China would shortly overtake the United States as the world's leading economy has been delayed at least. The forecast that Europe would demonstrate that the "Anglo-Saxon" economic model is inferior to Europe's more statist and socially sensitive approach has been disproven. And the assumption that Japan's dysfunction would lead to massive defaults also has not happened.

The desynchronization of the international system raises questions about what globalization means, and whether it has any meaning at all. But a major crisis is occurring in economic theory. The forecasts made by many leading economists in the wake of 2008 have not come to pass. Just as Milton Friedman replaced John Maynard Keynes as the defining theorist, we are awaiting a new comprehensive explanation for how the economic world is working today, since neither Keynes nor Friedman seem sufficient any longer. A crisis in economic theory is not merely an academic affair.

Investment decisions, career choices and savings plans all pivot on how we understand the economic world. At the moment, the only thing that can be said is that the world is filled with things that need explaining.

4: The Disintegration of the Sykes-Picot World

Sir Mark Sykes and Francois Georges-Picot were British and French diplomats who redrew the map of the region between the Mediterranean Sea and Persia after World War I. They invented countries like Lebanon, Jordan, Syria and Iraq. Some of these nation-states are in turmoil. The events in Syria and Iraq resemble the events in Lebanon a generation ago: The central government collapses, and warlords representing various groups take control of fragments of the countries, with conflicts flowing across international boundaries. Thus the Iraqi crisis and the Syrian crisis have become hard to distinguish, and all of this is affecting internal Lebanese factions.

This is important in itself. The question is how far the collapse of the post-World War I system will go. Will the national governments reassert themselves in a decisive way, or will the fragmentation continue? Will this process of disintegration spread to other heirs of Sykes and Picot? This question is more important than the emergence of the Islamic State. Radical Islamism is a factor in the region, and it will assert itself in various organizational forms. What is significant is that while a force, the Islamic State is in no position to overwhelm other factions, just as they cannot overwhelm it. Thus it is not the Islamic State, but the fragmentation and the crippling of national governments, that matters. Syrian President Bashar al Assad is just a warlord now, and the government in Baghdad is struggling to be more than just another faction.

Were the dynamics of the oil markets today the same as they were in 1973, this would rank higher. But the decline in consumption by China and the rise of massive new sources of oil reduce the importance of what happens in this region. It still matters, but not nearly as much as it did. What is perhaps the most important question is whether this presages the rise of Turkey, which is the only force historically capable of stabilizing the region. I expect that to happen in due course. But it is not clear that Turkey can take this role yet, even if it wished to.

Have a happy New Year's, and may God grant you peace and joy in your lives, in spite of the hand of history and geopolitics.

December 29, 2014 3:22 pm

Forgive the debt or earn the wrath of its victims

John Plender

A moralistic perception of creditors as virtuous and debtors as sinners blocks a solution

©Michael Debets/Getty
On the march: Alexis Tsipras, the leader of Syriza, with supporters in Athens

It could have been staged by the Ghost of Christmas Past. The scene in the Greek parliament on Monday was just the sort of vignette that Dickens’s supernatural hero might have enacted for the betterment of the mean-spirited. Its message: behold the consequences of rigid fiscal rectitude.

The spirit of Scrooge hangs over the eurozone. More than seven years after the onset of the credit crunch, austerity prevails and the threat of deflation looms. Any cost-benefit analysis of post-crisis fiscal stringency is dispiriting. Government debt continues to rise.
As a percentage of gross domestic product, government debt rose across the eurozone from 66 per cent in 2007 to 95 per cent in 2013 — with Greece, Italy, Portugal and Ireland all well above 100 per cent. Yet policy makers remain wilfully blind to the reality that the debt problem is unresolved, and that the eurozone’s outstanding public sector borrowings will never be repaid in full.
Perhaps Greece’s snap election, now scheduled for next month, will provide the necessary wake-up call. If the radical-left Syriza party scores a victory in that poll, it could precipitate a clash with international creditors. Whether or not that happens, the only remaining question on the debt overhang is how far default will occur through inflation, and how much through formal debt restructuring.

The eurozone has, in effect, followed the Japanese model of post-bubble crisis management, a muddle-through process that has saddled the country with gross government debt equivalent to about 240 per cent of GDP.

Despite a resort to quantitative easing on an unprecedented scale by the Bank of Japan this year under Abenomics, it is proving remarkably difficult to stoke up inflation. Some on the European Central Bank’s governing council fear that a proposed move to full QE, involving the purchase of government bonds, would be equally ineffective in imparting stimulus to the eurozone economy.
A reversion to 1970s-style inflation seems unlikely in the immediate future — not least because the present decade looks, in economic terms, like an upside-down version of those days. Back then inflation expectations were low, trade union power was strong, and the share of national income taken by labour was high, while energy and commodity prices were soaring.

Today bond markets are vigilant about inflation, the share of labour in national income is declining, and energy and commodity prices are plunging. At the same time the profit share has risen to record levels and inequality is, rightly, the bugbear du jour.

Low inflation is not cyclical. There are long-term structural issues, notably the decline of the bargaining power of labour, that depress both demand and inflation. This is because workers tend to consume more of their income than the rich. And central bank bond-buying is no panacea: the main effect is simply to raise asset prices, which benefits the rich. An uneven distribution of income and wealth thus makes it harder to galvanise the real economy.

Economists at the Bank for International Settlements, the central bankers’ bank, add that policy has exacerbated the problem because it has failed to lean against booms, and has eased aggressively during busts, inducing a downward bias in interest rates and an upward bias in debt levels. That, in turn, makes it harder to raise interest rates without damaging the economy, thereby creating a debt trap.
If that is where we are now, the logical way forward is debt forgiveness. Yet a moralistic perception of creditors as inherently virtuous and debtors as profligate sinners stands in the way (no matter that such “profligates” as Spain and Ireland entered the crisis with government debt way below the German level). So, too, does a selective German historical memory.

The paradox of the German view on debt is that Germany has been the biggest developed world beneficiary of debt forgiveness in recent memory. In the postwar London Debt Agreement, German external debt was substantially written off or deferred. The West German economic miracle was thus launched from a clean balance sheet while the Allies remained heavily indebted.

Just as Germans are obsessed with the consequences of the Weimar inflation but put less emphasis on the unemployment that brought Hitler to power, many cite the Marshall Plan as an act of American generosity, while the Allies’ larger act of macroeconomic mercy on debt has disappeared from political consciousness.

One result of all this is the rise of extremist anti-immigrant parties such as the French National Front and the Sweden Democrats, along with opponents of German-inspired austerity such as Syriza in Greece. The political consequences of a rise in extremism resulting from the moralistic German view of debt could be profoundly disturbing.

The 94% Plunge That Shows Abenomics Losing Global Investors

Foreign investors have had just about enough of Abenomics.

After pumping record amounts of cash into Japanese shares last year, they’ve hardly added to holdings in 2014. Inflows are down 94 percent this year to 898 billion yen ($7.5 billion), on pace for the smallest annual amount since the 2008 global financial crisis. The month of April 2013 alone registered almost three times as much foreign investment in the stock market as all of 2014.

These figures provide the clearest look at how global investors have become disillusioned with Prime Minister Shinzo Abe after he pushed through a tax increase in April that sent Japan into recession. Fund managers from Sumitomo Mitsui Trust Bank Ltd. to MV Financial say to lure investors back, Abe needs to move beyond short-term stimulus and start enacting the structural changes he laid out in his initial plan, dubbed Abenomics, to end Japan’s two-decade economic malaise.
“We need to see a framework where growth isn’t dependent on monetary easing,” Ayako Sera, a market strategist at Sumitomo Mitsui Trust, which oversees $325 billion in assets. “If not growth, then at least a way to increase productivity. For now there’s nothing like that, so I imagine it’ll be hard for stocks to keep going higher and for foreigners to take an interest in them.”

Purchases of the nation’s shares through Dec. 19 by investors outside Japan were less than a tenth of the 15.1 trillion yen they bought last year, according to data from the Tokyo Stock Exchange. Trust banks, which typically trade on behalf of pension funds, added 2.7 trillion yen, after offloading about 4 trillion yen of equities in 2013. Individuals were net sellers for a fourth straight year.

‘Buy Abenomics’

“Where is the Japanese Facebook? Where is the Japanese Google?” Katrina Lamb, head of investment strategy and research at MV Financial in Bethesda, Maryland, said in a phone interview.

The firm oversees $500 million and has been avoiding Japanese stocks in its international portfolios. “They have lost their place as global leaders. The potential exists in Japan for recapturing some of that, but it requires profound changes and changes are just not something that Japanese are good at.”
Foreigners were more optimistic in 2013, making record purchases of Japanese equities as Abe embarked on his economic policies of monetary easing, fiscal stimulus and structural overhaul, known as the three arrows. The Topix index soared 51 percent to crown Japan as the best-performing developed market.

Economy Stalls

The premier has courted international investors, exhorting Wall Street in a September 2013 speech to “buy my Abenomics.” A year later, the higher consumption levy had pushed the nation back into recession. Non-domestic investors were net sellers of equities this year until the central bank’s surprise easing on Oct. 31. While the Topix has climbed 9.4 percent in 2014, a weakening yen means that in dollar terms, the share gauge is poised for a 4.4 percent loss.

“The sales-tax hike hit Japan before Abe’s third arrow could emerge, and the economy completely stalled,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. in Tokyo, which oversees about $857 million. “It hasn’t been a market where foreigners had reasons to aggressively buy stocks, and it’s difficult to paint a strong growth story from this point onwards as well.”

With overseas demand for shares drying up, domestic policy changes are filling the gap with state and pension-fund cash. The Government Pension Investment Fund, the world’s largest manager of retirement savings with 130.9 trillion yen in assets, pledged on Oct. 31 to more than double its target allocation for domestic shares. At the time, that implied buying another 9.8 trillion yen of Japanese stocks, according to calculations by Bloomberg.

BOJ Easing

The same day, the Bank of Japan unveiled an expansion of its asset-purchasing program, including tripling investments in exchange-traded funds to about 3 trillion yen a year.

While the Topix soared 4.3 percent on Oct. 31, the rally was short-lived compared with gains spurred by the round of BOJ easing in April 2013.

The gauge climbed 13 percent from the last day of October through a December peak, adding 62 trillion yen in value. Last year, it surged 26 percent from the announcement on April 4 through a May high, which made investors 92 trillion yen richer. Average daily trading volume on the Topix was 40 percent lower this time.

“It’s the foreigners who pull Japanese stocks up,” said Tatsushi Maeno, head of Japanese equities at Pinebridge Investments Japan in Tokyo, which oversees about $3.1 billion. “If we start off next year with modest gains, foreign investors might come back. But it won’t be as extreme as when Abenomics first began.”

‘Momentum Jockeys’

Trust banks bought 972 billion yen in shares from Oct. 27 through the most recent data on Dec. 19, while foreign investors added 2 trillion yen. Individuals sold 2.7 trillion yen during that period, as the Topix gained 12 percent.

Foreigners are “momentum jockeys” who tend to follow the trend, while individuals usually do the opposite, buying when the market is weak, said Jonathan Allum, a London-based strategist at SMBC Nikko Capital Markets Ltd. “The interesting group are the trust banks, who seem to be on something of a buying spree, which I expect to continue into the new year.”

Fund flows from the central bank and GPIF underpin Morgan Stanley MUFG Securities Co.’s forecast for the Topix to climb to 1,680 by the end of 2015, an 18 percent jump from the last close. A lower currency will buoy earnings and return on equity is improving, according to the brokerage. The median projection of 10 analysts and investors surveyed by Bloomberg is for the Topix to gain 16 percent to 1,650.

Earnings Forecasts

Companies have been slow to adjust earnings forecasts to the weakening yen, which has declined 12 percent this year against the greenback and touched a seven-year low Dec. 8.

Japanese businesses expect the currency at 103.88 per dollar in the fiscal year ending March, the BOJ’s quarterly Tankan survey showed this month, despite the yen trading at an average level of 118.24 during the period the survey was conducted.

“Companies that haven’t already revised their earnings forecasts will probably do so by the end of this fiscal year,” said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities Group Inc. “With yen weakness expected to continue next year, businesses with overseas demand will provide a tailwind for the market.”

Aggregate net income will rise 16 percent to a record 21.4 trillion yen this fiscal year at 219 of the country’s largest firms, based on analyst estimates compiled by Bloomberg.

Abe’s Focus

After winning a second term from voters earlier this month, Abe’s initial focus in 2015 will be a fiscal-stimulus package and lower corporate taxes.

The government approved 3.5 trillion yen of extra spending to aid the economy over the weekend, including shopping vouchers, subsidized heating fuel for the poor and low interest loans for small businesses hurt by rising input costs. A panel will submit a draft plan for a company tax cut of “slightly more than” 2.5 percentage points for the next fiscal year, NHK reported Dec. 26.

Investors are also waiting for a loosening of labor rules, agreement on the Trans-Pacific Partnership trade pact and for companies to buy into Abenomics by raising wages and spending record cash hoards on business investment.

“If an eye-opening growth strategy was proposed, foreigners might come back and start buying again,” Sumitomo Mitsui Trust’s Sera said. “But if we haven’t seen one by now, there’s almost no chance we ever will.”

Financing Climate Safety
Jeffrey D. Sachs
DEC 26, 2014

 Ricardo Hausmann resource rich countries like .Latin America victimized by those with superior technology

NEW YORK – The purpose of the global financial system is to allocate the world’s savings to their most productive uses. When the system works properly, these savings are channeled into investments that raise living standards; when it malfunctions, as in recent years, savings are channeled into real-estate bubbles and environmentally harmful projects, including those that exacerbate human-induced climate change.
The year 2015 will be a turning point in the effort to create a global financial system that contributes to climate safety rather than climate ruin. In July, the world’s governments will meet in Addis Ababa to hammer out a new framework for global finance.
The meeting’s goal will be to facilitate a financial system that supports sustainable development, meaning economic growth that is socially inclusive and environmentally sound.

Five months later, in Paris, the world’s governments will sign a new global agreement to control human-induced climate change and channel funds toward climate-safe energy, building on the progress achieved earlier this month in negotiations in Lima, Peru. There, too, finance will loom large.
The basics are clear. Climate safety requires that all countries shift their energy systems away from coal, oil, and gas, toward wind, solar, geothermal, and other low-carbon sources. We should also test the feasibility of large-scale carbon capture and sequestration (CCS), which might enable the safe, long-term use of at least some fossil fuels. Instead, the global financial system has continued to pump hundreds of billions of dollars per year into exploring and developing new fossil-fuel reserves, while directing very little toward CCS.
Many investments in new fossil-fuel reserves will lose money – lots of it – owing to the recent fall in world oil prices. And many of the fossil-fuel reserves that companies are currently developing will eventually be “stranded” (left in the ground) as part of new global climate policies. The simple fact is that the world has far more fossil-fuel resources than can be safely burned, given the realities of human-induced climate change.
Though market signals are not yet very clear, this year’s more successful investors were those who sold their fossil-fuel holdings, thereby avoiding the oil-price crash. Perhaps they were just lucky this year, but their divestment decision makes long-term sense, because it correctly anticipates the future policy shift away from fossil fuels and toward low-carbon energy.
Several major pension funds and foundations in the United States and Europe have recently made the move. They have wisely heeded the words of the former CEO of oil giant BP, Lord Browne, who recently noted that climate change poses an “existential threat” to the oil industry.
More governments around the world are now introducing carbon pricing to reflect the high social costs inherent in the continued use of fossil fuels. Every ton of carbon dioxide that is emitted into the atmosphere by burning coal, oil, or gas adds to long-term global warming, and therefore to the long-term costs that society will incur through droughts, floods, heat waves, extreme storms, and rising sea levels. While these future costs cannot be predicted with precision, recent estimates put the current social cost of each added ton of atmospheric CO2 at $10-100, with the US government using a middle-range estimate of about $40 per ton to guide energy regulation.
Some countries, like Norway and Sweden, long ago introduced a tax on CO2 emissions to reflect a social cost of $100 per ton, or even higher. Many private companies, including major oil firms, have also recently introduced an internal accounting cost of carbon emissions to guide their decisions regarding fossil-fuel investments. Doing so enables companies to anticipate the financial consequences of future government regulations and taxation.
As more countries and companies introduce carbon pricing, the internal accounting cost of carbon emissions will rise, investments in fossil fuels will become less attractive, and investments in low-carbon energy systems will become more appealing. The market signals of CO2 taxation (or the cost of CO2 emission permits) will help investors and money managers steer clear of new fossil-fuel investments. Carbon taxes also offer governments a crucial source of revenue for future investment in low-carbon energy.
With international oil prices dropping – by a whopping $40 per barrel since the summer – this is an ideal moment for governments to introduce carbon pricing. Rather than let the consumer price of oil fall by that amount, governments should put a carbon tax in place.
Consumers would still come out ahead. Because each barrel of oil emits roughly 0.3 tons of CO2, a carbon tax of, say, $40 per ton of CO2 implies an oil tax of just $12 per barrel. And, because oil prices have declined by more than triple the tax, consumers would continue to pay much less than they did just a few months ago.
Moreover, new revenues from carbon taxes would be a boon for governments. High-income countries have promised to help low-income countries invest in climate safety, both in terms of low-carbon energy and resilience against climate shocks. Specifically, they have promised $100 billion in climate-related financing per year, starting in 2020, up from around $25-30 billion this year. New revenues from a CO2 tax would provide an ideal way to honor that pledge.
The math is simple. High-income countries emitted around 18 billion tons of CO2 this year – roughly half of all global emissions. If these countries earmarked just $2 per ton of CO2 for global financing organizations like the new Green Climate Fund and the regional development banks, they would transfer around $36 billion per year. By using part of that money to mobilize private-sector financing, the full $100 billion of climate financing could be reached.
Both Big Oil and Big Finance have made major mistakes in recent years, channeling funds into socially destructive investments. In 2015, these two powerful industries, and the world as a whole, can start to put things right. We have within our reach the makings of a new global financial system that directs savings where they are urgently needed: sustainable development and climate safety, for ourselves and for future generations.


What's Really Going on Inside the Latest GDP Number

By Shah Gilani, Capital Wave Strategist, Money Morning

December 30, 2014

Sit down before you read this.

It's going to make your head spin and, worse, change the way you think about what's real in America.

Christmas came early this year, for the market that is, by way of a gift from the U.S. Bureau of Economic Analysis.

However, this branch of the U.S. Department of Commerce didn't put its gift under anybody's tree. They put it over all of us.

The gift was headline news that the "third revision" of the third-quarter gross domestic product (GDP) number showed the U.S. economy grew at a whopping 5% annualized rate, not the 3.9% rate posted in the "second revision."

That sounds like good news, right?

Well, here's what's scary…

The Bureau of Economic Analysis Is the "Bad Santa"

"Ho! Ho! Ho!" said the stock market. Good news is now good news on top of bad news being good news for stocks.

And so, with just enough time before Christmas for the stock markets to react, we got a 5% "print" from the BEA, which pushed the Dow Jones Industrial Average above 18,000 while the S&P 500 made yet another all-time high.

Too bad the BEA is lying. The latest revision was a "put-on." The folks at the BEA put it over on all of us.

What they did to get to that 5% number – to make us all feel gifted by a robustly recovering economy, to get us to go out and spend spend spend, to get stocks to soar – was pure prestidigitation. It was pure legerdemain.

It was pure BS.

I'll prove it to you. Here's what the BEA posted on its own website:

"The GDP estimate released today is based on more complete source data than were available for the 'second' estimate issued last month. In the second estimate, the increase in real GDP was 3.9 percent. With the third estimate for the third quarter, both personal consumption expenditures (PCE) and nonresidential fixed investment increased more than previously estimated (see 'Revisions' on page 3).

"The increase in real GDP in the third quarter primarily reflected positive contributions from PCE, nonresidential fixed investment, federal government spending, exports, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

"The acceleration in the percent change in real GDP reflected a downturn in imports, an upturn in federal government spending, and an acceleration in PCE that were partly offset by a downturn in private inventory investment and decelerations in exports, in state and local government spending, in residential fixed investment, and in nonresidential fixed investment."

In the second paragraph, the BEA says the increase "primarily reflected positive contributions from PCE, nonresidential fixed investment, federal government spending, exports, state and local government spending, and residential fixed investment." Then in the very next paragraph, it says that "an upturn in federal government spending, and an acceleration in PCE that were partly offset by a downturn in private inventory investment and decelerations in exports, in state and local government spending, in residential fixed investment, and in nonresidential fixed investment."


How can you have an increase in PCE and the other stuff that was "partly offset by a downturn" in the same stuff the BEA said had increased?

I'll tell you what's going on.

Do Look This Gift Horse in the Mouth

The increase in personal consumption expenditures is all that matters. The BEA increased that number so much in the revision that nothing else matters.

Of course, its double-talk matters, but that's just minor rubbish.

What the BEA gift-givers did in their revisionist juggling act was knock down personal savings by revising savings down over previous months by almost 20% and magically put all that money, about $140 billion, to work in the economy.

And presto, we had 5% GDP growth.

It gets funnier and freakier.

They said most of the increase in spending was on Obamacare. How many people do you know who bought into Obamacare last month?

They said last month we increased our gasoline and energy consumption by a whopping 4.1%. However, I recall oil prices falling almost 50% and gas prices falling more than 20% since late summer.

Go figure.

And about that PCE increase. We whooped it up spending on what? Christmas presents in July, August, and September, long before Black Friday sales and Cyber Monday?

Maybe we did spend $140 billion earlier than we planned to spend on the holidays. Because we sure didn't spend much on them.

According to most analysts, we saw disappointing Black Friday sales. And ShopperTrack had expected a $10 billion Super Saturday this year, but according to that analyst, sales on the last Saturday before Christmas were up only 0.5% from last year's $9.1 billion.

RetailNext just said spending at specialty stores and large footprint retailers was down 8.9% over the weekend before Christmas versus a year ago. And traffic was down 10.2%.

We better be shopping online!

Okay, that's getting ahead of the third-quarter numbers I'm talking about. But you get the point. How could we have spent $140 billion more in Q3 before the holiday season when the holiday season looks like a mini-bust?

Don't even get me started on home sales.

Just say "Ho! Ho! Ho!" and enjoy the market rally while it lasts. The fabricators in our government bureaus are beholden to the powers that manipulate us all.