Can the G.O.P. Senate Majority Survive Donald Trump?

The party’s most vulnerable down-ticket candidates try to escape the shadow of a presidential campaign that is imperiling their prospects in November.


On a Sunday morning in early June, Senator Mark Kirk rolled into an uptown Chicago bar in his wheelchair to take part in the city’s 47th annual L.G.B.T. Pride Parade, wearing a red polo shirt, charcoal khakis and the abashed half-smile of a 56-year-old man who has already assessed his long odds of blending in. He hoisted himself up and made his way into the crowd, leaning on the cane he has used since suffering a severe stroke four years ago.

A few young people wearing robin’s-egg blue Equality Illinois T-shirts approached him. They shook his hand and thanked him for being one of the few Republican senators to sponsor the Equality Act, which would extend the Civil Rights Act of 1964 to prohibit discrimination against L.G.B.T. people. The encounters tended to be brief, because even in the most favorable circumstances Kirk has always been a somewhat awkward conversationalist. Crowded up against a middle-aged woman wearing a rainbow tutu, he offered: “My friend has a 3-year-old granddaughter who wears nothing but tutus. It’d be good to get her one of those. Good for, er, political purposes.”

On his way out the door, Kirk found his path impeded by another wheelchair-using politician: Representative Tammy Duckworth, his Democratic opponent in November’s election, who lost both of her legs to a grenade as an Army helicopter pilot during the Iraq war. The two wincingly shook hands — “Whenever you run into your opponent,” he told me later, “there’s always that fake smile” — but said nothing.

Out on North Broadway, where the festivities were about to begin, Kirk climbed into the gray Mustang convertible that would ferry him through the parade. Before long, Duckworth materialized nearby. The 48-year-old congresswoman wore a rainbow-colored tie-dyed T-shirt, several beaded necklaces and a halo of flowers in her hair. “Woo hoo!” she hollered as onlookers called out her name. Meanwhile Kirk — a man who is palpably of, by and for the northern suburbs of Chicago — sat in the passenger seat of the Mustang and cast a pensive gaze at the gray clouds gathering overhead.

Kirk is refreshingly unvarnished as senators go and did not bother pretending to be in the parading spirit. Less than four months before Election Day, the first-term senator’s own polls have him 3 points behind Duckworth. More than a year ago, Beltway odds makers were already rating Kirk as one of the likeliest to lose among the senators up for re-election in 2016.
Illinois is a resolutely blue state that becomes even more so in a presidential cycle, when black and Hispanic turnout in the Chicago area is especially high; the last Republican from the state to hold a United States Senate seat for more than one term was Charles Percy, who left office in 1985. Although Kirk was a congressman for a full decade before winning in 2010 the Senate seat once held by Barack Obama, to this day he lacks a national or even statewide profile. And all of this was before a certain real estate tycoon decided to run for president.
In a more ordinary presidential election year, a vulnerable senator like Kirk would be inclined to look to the top of the ticket for campaign support. But what happens when that position is occupied by Donald Trump — a candidate who has proposed banning Muslim immigration, has made a seemingly endless series of statements offensive to Hispanics, Jews, blacks and women and, according to Gallup polls, currently enjoys a favorable rating (31 percent) not seen since the nadir of Jimmy Carter’s presidency? The Trump-led ticket has prompted gleeful Democrats to coalesce around a general-election message that will tie every Republican office­seeker to the nominee. Meanwhile, Republican leaders like Speaker Paul Ryan and the 2012 presidential candidate, Mitt Romney, have gone to the extreme of repeatedly condemning the behavior of their party’s standard-bearer, implicitly urging Republican candidates to do whatever is necessary to avoid an Election Day apocalypse.

The friction between the nominee and his party became jarringly apparent during a closed-door meeting at the Capitol Hill Club on July 7 between Trump and 41 Republican senators. A few of them accused Trump of jeopardizing the party’s prospects in November; Trump fired back with insults, labeling Kirk — who was not present but has publicly criticized Trump — a “loser.”

Last September, as the idea that the Trump candidacy was something more than an ephemeral novelty began to sink in, Ward Baker, the executive director of the National Republican Senatorial Committee, sent a memo to his senior staff. “Let’s face facts,” Baker wrote. “Trump says what’s on his mind, and that’s a problem. Our candidates will have to spend full time defending him or condemning him if that continues. And that’s a place we never, ever want to be.” Baker’s seven-page memo, which was leaked to The Washington Post, instructed candidates to “run your own race” and to “show your independence” from the man he described as a “mis­guided missile” — but at the same time, he cautioned, be mindful of the fact that “Trump has connected with voters on issues like trade with China and America’s broken borders.”

Even eight months before Trump effect­ively claimed the nomination, Baker grasped the uniquely fraught terrain the party’s unexpected standard-bearer had laid out before the Republicans who would be sharing a ticket with him in November. The connection between presidential nominees and so-called down-ballot candidates is historically clear, and has become more so as the country has become more polarized. That’s especially the case when it comes to the Senate. With (for the most part) increasing frequency since 1913 — the year the 17th Amendment was passed, designating that senators would be elected by popular vote rather than by state legislatures — voters have tended to elect Senate candidates who belong to the same party as the presidential candidate they favor.

Both parties still hold close the memories of the exceptional examples of this phenomenon, the bonanza years and the catastrophes. In 1980, Ronald Reagan’s victory over Carter was the crest of a tidal wave that also gave Republicans 12 Senate seats and control over the upper chamber for the first time in almost three decades. In 1964, Barry Goldwater’s support for “extremism in the defense of liberty” cost Republicans two-thirds of both the Senate and the House.

But Trump presents a much more complex weather system for his ticket-mates to navigate than either of these cases. His views are not wedded to a coherent ideological movement within his party (as Goldwater’s were), nor is his unpopularity a simple judgment on his record (as Carter’s was). Instead, Trump is a sui generis figure who must be accepted or rejected on his own terms, not artfully hedged around in the way politicians are accustomed to doing. And while Trump was undoubtedly the most popular Republican primary contestant in a field of 17, it’s still not clear how many of his opponents’ supporters will vote for their party’s pick on Election Day. For an at-risk Republican senator this fall, to back away from Trump is, by extension, to snub his millions of die-hard loyalists, the one group of party voters that is sure to show up on Nov. 8. But to go all-in for Trump is to take leave of your Republican bona fides and embrace life as a Trump Mini-Me — a gamble that not a single Republican senator up for re-election this fall appears to have the stomach for.

None of this seems to overly concern Trump. When I asked him recently whether the party’s maintaining its majority in the Senate meant anything to him, he replied: “Well, I’d like them to do that. But I don’t mind being a free agent, either.” Trump has shown similarly little interest in helping his party’s committees build the sort of war chests typically required in a campaign year. After winning the presidential nomination on a shoestring budget and with fewer paid staff members than the average candidate for governor, he has been visibly reluctant to help build much in the way of national campaign infrastructure, sending a clear message to his fellow Republicans: This fall, you’re on your own. As Ryan Williams, a strategist with the 2012 Romney presidential campaign, told me: “Traditionally, the nominee has a robust campaign that absorbs the R.N.C. effort and works in tandem with the down-ballot campaigns. We did that with Romney in 2012. This time around, there’s a complete void at the presidential level. Trump’s trying to play a game of baseball and hasn’t put out an infield.”

In addition to Kirk, there are five Republican incumbents running in states that Obama won in 2012 whose fortunes are now lashed to those of the Trump campaign: Kelly Ayotte in New Hampshire, Ron Johnson in Wisconsin, Marco Rubio in Florida, Pat Toomey in Pennsylvania and Rob Portman in Ohio. In May, Ayotte offered her “support” for Trump, but a spokeswoman quickly clarified to reporters that Ayotte “hasn’t and isn’t planning to endorse anyone this cycle.” Johnson supplied messaging advice to the Trump campaign during the Wisconsin primary in April and declared the day after Trump vanquished Ted Cruz on May 3 that “I am going to certainly endorse the Republican nominee.” Two weeks later, however, Johnson ratcheted down his endorsement to Ayotte-esque “support,” warily adding that he would “be concentrating on the areas of agreement with Mr. Trump.”

Rubio, meanwhile, has remained in a state of Trump-induced torment ever since his drubbing in the presidential primaries. Before announcing that he would run again for the Senate, Rubio said that he would be “honored” to help his party’s nominee, but later hedged, saying he did not expect to speak at the Republican convention on Trump’s behalf — and finally declaring he would not attend the convention at all. “I think that the Senate needs to fulfill its role as a check and balance on the president, no matter who it is,” he said last month. This was clearly intended to suggest that, if re-elected, he would not blindly do the bidding of a President Trump — a notion that has prompted belittlement from Rubio’s Democratic opponents. “What’s so funny about that premise is that Rubio’s the only Senate candidate we’re running against who has proven he’s ineffective at standing up to Donald Trump,” Sadie Weiner, the Democratic Senatorial Campaign Committee’s communications director, told me.

Asset management: Actively failing

As investors pour into index funds, asset managers are seeking new strategies to keep them on side
To an audience of financial advisers who had come to hear the hottest stock tips from the big stars of the fund management industry, it was a startling thing to say: “If somebody asked me to make the argument for active management, I would find it difficult given the statistics.”
The speaker, Dennis Lynch, is stockpicking royalty. The son of the founder of Lynch & Mayer, a pioneering money manager from the 1970s, has his own $3.4bn mutual fund — the Morgan Stanley Institutional Growth fund — which has put money into the likes of Twitter, Netflix and Tesla. It has outperformed the S&P 500 by more than 2 percentage points annually for the past decade, putting him in the top 6 per cent of his peers and accumulating substantial extra profits for his investors.
But active managers, those whose funds must try to beat the market rather than simply track the index, are facing something approaching a crisis.
A majority fail to beat the index over any significant period, and most of those that do ultimately find their outperformance to be fleeting. New competitors are claiming any insight they actually possess can be replicated by a computer. Clients are shifting en masse to index-based funds — active funds have lost $213bn in assets in the year to the end of May, Morningstar says, while passive funds took in $240bn. Profit margins, traditionally among the best in the finance world, are under threat and it seems only a matter of time before there is pressure on managers’ pay. Sporadic lay-offs at some money managers this year may be a harbinger of more to come, say consultants, especially if a newfound willingness to discuss mergers triggers a wave of cost-cutting deals.

The panel at the Morningstar Investment Conference, held in Chicago last month, was titled “Ultimate Stockpickers”, but it began with a challenge to participants to, in effect, justify their existence. Mr Lynch said that perhaps only 15 per cent of active managers are persistent market-beaters.
“The managers that tend to outperform have certain characteristics in common,” he said.

“They tend to be longer term in nature, not traders. They are willing to be different to the benchmark. Most importantly, they also tend to have a lot of skin in the game.”

Overturning underperformance

Some see the changes as an opportunity. Stephen Yacktman, another second-generation fund manager on the panel, who runs Yacktman Asset Management in Austin, Texas with his father Donald, said talk of the death of active management “makes us smile”. With mediocre managers driven out, and investors piling into passive funds, there will be more opportunities for those who go looking for under-appreciated stocks.

charts: asset management

The comments are a reminder that stockpicking as a career has always required an uncommon degree of self-belief. Never more so than now. Clients have imbibed the evidence of studies such as the latest annual Spiva survey from S&P, which shows that 83 per cent of US mutual funds and 86 per cent of European funds have underperformed the market over the past decade, and Morningstar’s own work suggesting that today’s top performing managers are no more or less likely to be among the top performers of the next few years.

The result: index-trackers already account for 40 per cent of the $9tn in US equity mutual funds and exchange traded funds, and the shift is accelerating.
Savers who have paid high fees and failed to get even market returns will hardly be upset if the industry emerges from a period of upheaval with fewer businesses, lower profits and fewer people, if they end up paying less and getting better returns.

There are debates, however, about whether fair prices for assets can be discovered if too high a proportion of the money is simply tracking the index. And active management remains a large employer, running and supporting 100,000 mutual funds around the world and countless more portfolios for institutional investors — a veritable Lake Wobegon of practitioners who all believe they are above average.

charts: asset management

As Will Riley, portfolio manager at Guinness Asset Management in London, puts it: “You have to believe [when] getting out of bed that you have a chance of outperforming, otherwise you wouldn’t bother.”

Asset management remains an uncommonly profitable business, with operating margins of 37 per cent in 2015 and profits that topped $100bn globally, according to Boston Consulting. But growth appears to have stalled. The ultra-low fees on passive funds do not make up for the outflows and fee cuts on the active side.

Managers have been keeping a lid on costs by limiting the growth and pay of sales forces and cutting operating expenses. But Brent Beardsley, Boston Consulting’s senior partner, says the squeeze could soon start to affect the portfolio managers themselves.
A year ago, Johnson Associates said the average US equity fund manager could expect to earn about $690,000 a year in pay and performance bonuses, but it predicts industry pay could fall by between 5 and 10 per cent in 2016. That sort of downward pressure has been felt in investment banking since the credit crisis, but asset managers’ pay had only been going up until last year.

Pimco, BlackRock and GMO have made lay-offs this year, and although most of the cuts were sales or back-office staff, Pimco also dropped some fund managers in its equities business.

“Firms will keep a sharper eye on where there are products and areas where they are sub-scale, and think whether they should close them, since they will not see the same margin or the same upside now,” Mr Beardsley says.

The open question is whether the industry will respond with mergers and acquisitions aimed at cutting costs faster. Chief executives have traditionally scoffed at the idea of megadeals, saying it is important to preserve unique cultures. However, there has been a notable change of tone among some industry leaders. Greg Johnson, chief executive of Franklin Resources, whose funds have suffered some of the heaviest outflows of the past year, says consolidation is coming, echoing comments by BlackRock boss Larry Fink.
charts: asset management
Joe Sullivan, chief executive of Baltimore-based Legg Mason, predicts that retail and institutional investor specialists could merge, while managers with a US focus could acquire those with big overseas operations.

“This is as disruptive a time as I have seen in this industry. Every CEO has to take a step back,” he says. “There are a lot more conversations out there about what could happen than has ever been the case. This is an industry that arguably has excess capacity, particularly when the performance of active management has been inconsistent.”

Much will depend on the attitudes of shareholders, and whether they are willing to tolerate lower margins in return for higher dividends and share buybacks, or whether they will force companies to keep profits up.

“We all have to try to protect our margins, but the reality is they [margins] are going to come down,” Mr Sullivan says. “Stack up those margins against industrial companies or service companies. Asset managers have margins in the 30s or low 40s. Really? How many businesses do you know that throw off those kinds of margins?”

Money managers are still willing to invest in areas where they see growth opportunities. These are often one stage up from the traditional fund level, however. Instead of touting individual products, they approach clients offering to use their funds as building blocks, charging them instead for asset allocation expertise, risk management consulting or other services.

charts: asset management
David Hunt, chief executive of PGIM, the asset management arm of New Jersey insurer Prudential, says that instead of trying to eke out a little outperformance against a benchmark such as the S&P 500 — outperformance that is known as “alpha” in the industry — managers will be expected to make bolder bets, going big on fewer stocks. Their “active share”, the amount of the portfolio that deviates from the benchmark, will need to be higher. “The link between pay and performance will continue to be very close,” he says.
Human struggle
Standing out from the human crowd is one thing to worry about. Another is the race against the machine. Even alpha — or at least a good deal of it — can be replicated by computers, academics claim. The analytical work and gut instincts of the consistently successful stockpickers might actually boil down to simple bias for value stocks, momentum investing or one of the other factors that have been proven to outperform market capitalisation-weighted stock indices.

The “quants” — who build investing algorithms rather than form opinions on company prospects — are as bullish as the traditional active managers are nervous for their futures.

QMA, a quant asset manager, uses the latest issue of the Journal of Portfolio Management to publicise its own research on what it calls “closet quants”, active managers whose outperformance can be explained by mathematically proven market factors: “Why choose a closet quant fund, when you can have the real thing, an actual quant fund?”
charts: asset management
While insisting on great respect for active managers, some fund management groups have gone down this route themselves. Janus Capital has distilled its active small-cap equity strategy into a mathematical formula and launched it as an ETF. Franklin Templeton has launched a similar range of what its billboard ads proclaim to be “ETFs built on the most important factor: the human factor”.

For the humans, it can be an exhausting race up the value chain. Marketfield Asset Management’s Michael Aronstein, who this year marks 30 years as an active fund manager, has often invested more like a hedge fund manager, running a mutual fund with the ability to bet against stocks as well as buy them. Taking bold bets is hard, and the bigger prizes are in hedge funds proper, where clients are more willing to accept the risk than mutual fund investors.

“You could be betting your career, and the bias in our industry is that there is very little incentive to do that,” he says.

Mr Aronstein’s fund has seen bouts of strong performance and huge inflows and, more recently after mistakenly predicting global inflation, weak performance and outflows. But he remains indefatigable.

“Investing methods that were obscure back in the early days, such as distressed debt investing or convertible arbitrage, are now well known. With the amount of data available, the idea that there is a particular insight that is not already incorporated by the market is pretty difficult.”

This may be the new lot of the active fund manager, driven to take more concentrated risks. It is what successful stockpickers like Mr Lynch may already be familiar with, but for others it will be uncomfortable territory.

As for the investors, there are no guarantees that results will end up being any better on average, and every chance that the ride will be scarier for them, too. Ironically, just before its conference this year, Morningstar stripped Mr Lynch’s fund of its gold rating — because it was more volatile than its peers.

View from Westminster: Active funds offer intellectual curiosity

Passive funds are “boring”, says Tim Guinness, the founder of Guinness Asset Management, a boutique fund manager managing $1bn from a townhouse in London’s Westminster. “What do people want to own? If your portfolio is constructed so that it can never outperform, that is less attractive than one that can.”

The industry veteran, who sold his first company to Investec in 1998, is still so bullish on asset managers that he even runs a little fund which invests in their shares — and he does not shy away from active managers. In fact, his fund buys shares in firms whose funds have seen strong performance, on the belief that client inflows, and higher revenues, will soon follow and boost the share price.

Tim Guinness, seated, and Will Riley of Guinness Asset Management

What is it that gives Mr Guinness a spring in his step, despite talk that active managers like him could be replaced with robots? “What makes me look forward to it every day is [that] I’m curious, I’m interested,” he says. “Being a fund manager and trying to do well is rather like doing the crossword.”

Will Riley, Mr Guinness’s protégé and lead manager on the asset management sector fund, highlights “the intellectual challenge of putting together an investment process you think is repeatable and can give you an edge through the cycle”.

He does not doubt that stockpicking success will be rewarded. “When do people buy funds?

When they have a track record that is better than the next guy’s,” he says. “For all the academic studies that say past performance does not equal future performance, I don’t think that aspect of human nature is going to change.”

Additional reporting by Robin Wigglesworth and James Fontanella-Khan

domingo, julio 24, 2016



Unstoppable Bulls
post animated GIF

Named in the Top 10 ETF Blogs Every Serious ETF Investor Should Read in 2016. 

It seems this bullish trend has plenty of momentum while ignoring any negative news. One issue which had launched the higher trend was a sharp move higher in energy prices but this now has reversed course. This reversal hasn’t put a dent in this newfound trend higher.

And no, there hasn’t been much in the way of great news on the earnings or economic front supportive on the news. Sure, we’ve seen isolated earnings from MSFT but nothing good from energy, airlines and banks.

Economic data has been mixed at best. If this bullish trend is durable the news must, as always, follow the trend.

So record stock market highs must support higher PE’s which are currently near 25 for the S&P 500—nothing cheap there.     

Below is the heat map from Finviz reflecting those ETF market sectors moving higher (green) and falling (red). Dependent on the day (green) may mean leveraged inverse or leveraged short (red).

7-22-2016 4-02-44 PM

Volume is very low while breadth per the WSJ was positive once again.

7-22-2016 4-46-19 PM

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12-17-2015 9-04-44 PM Chart of the Day

Charts of the Day















    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.


    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.


    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation has changed due to a variety of new factors including HFTs, new VIX linked ETPs and a multitude of new products to leverage trading and change or obscure prior VIX relevance.


ust one more week of posting for the Fryguy and it could be a doozy!.

Let’s see what happens. 

How Long Can Buybacks Continue to Support a Market Which is Standing on a Fundamentally Flawed Premise?

By: Gordon Long

FRA Co-Founder Gordon T.Long and Jeffrey Snider, Head of Global Investment Research at Alhambra Investment Partners discuss earnings, the Chinese Yuan, Japanese Yen and the falling credibility of central banks.

As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra's client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor's degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process.

In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000's he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market's resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research.


Economic Slowdown

"It is no doubt that earnings have been under-performing."
What's even more concerning is that not even is the top line falling off, but the cash flow is falling dramatically and this impacts credit along with everything else. With no earnings and no cash flow it puts us in a high risk environment. The only thing that has been holding up the market has been excessive corporate buybacks which has come out of cash flow, and to a lesser degree, borrowing. But to borrow is tough when you don't have the cash flow to justify the credit ratings.
"How long can buybacks continue to support a market which is standing on a fundamentally flawed premise?"

Corporate Cash Flow

We have had 4 to 5 quarters of falling revenue but the US market seems to ignore it. At some point reality has got to set in. But it is also important to note that trade problems are a systemic factor to the decline in earnings. China's imports are down 17% year over year, but these imports are coming from basically the emerging markets and commodity markets. They have also borrowed upwards of 9 trillion USD in the last 7 years that has suddenly gotten very expensive for them, I think there is more pain to come.

 Chinese Yuan
"The health of the Yuan is tied into the global economy and the fact that the global economy is stumbling."
Chinese Yuan

Less growth in China combined with less growth around the world again increases financial risk which fuels more reluctance to funnel dollars into China; it has become a vicious cycle. The Chinese have no choice but to continue going in one direction, they are in a rock in a hard place. As the Chinese Yuan has been falling, the Yen has been rising in strength. This has become a huge issue for Japan to add to their already lost list of issues to deal with. A fracture is likely around the corner, China and Japan cannot go long without devaluing the Yen.

The markets are reassessing what central banks can actually do. And what markets found was that central banks aren't actually as powerful as everyone believes them to be and Japan is a perfect example of that. No matter what the BOJ does that Yen continues to move on up. It fits into the paradigm of the economy, the financial risk, everyone reevaluating what central banks are capable of etc. The markets are reevaluating central banks because they see that a tight money environment despite efforts from central banks to fuel stimulation.

Japanese Yen

"Some major European bank stocks are indicative of an incoming banking crisis. We see already low interest rates around the world getting lower with each passing day; this is indicative of tight money conditions. Low rates are not stimulating."

 Troubling Matters of Debate
"Most troubling thing to me currently is that there are not many answers available."
What I see is an unstable global currency regime which we are completely unprepared for.

There is no solution that has been presented that would allow for a stable currency to take over Euro dollars which clearly doesn't work. Generally the central banks can fix liquidity problems, but they cannot fix solvency problems. We see that the credit cycle has turned from non-performing loans so on and so forth.

The idea behind QE for Japan, America and Europe was to kick start a robust recovery. Now that central banks has lost credibility as well as support. Then you have all the unintended consequences that come with almost zero money. We have nearly zero price discoveries and risk is greatly mispriced.
"Policy makers and economists have simply run out of ideas."
Desperation is a big role of why markets are reevaluating central banks. If we go back 20 years where Alan Greenspan was a genius and he didn't even do anything, all he did was talk and he made a career out of not talking. No matter what he did he was taken as a genius. Whereas 20 years later, Janet Yellen sounds like a fumbling idiot no matter what she does. All her actions come across as desperate because the credibility has been blown away. The Fed has been forced into action and by being forced into action it has only highlighted what the Fed can't do.
"Resource allocation is the main benefit of price discovery; it is the life blood of the economy. The more we damage price discovery the more fatal situations will become."
We need to look at this as an opportunity in the long run. Now that the power of central banks has come to surface and credibility has been shot, it in turn opens the door to credible solutions. The fact of the matter is that the economy is nothing like what it should be and people know that something is wrong and change is needed.

The South China Sea Is Not China’s

Gareth Evans

MELBOURNE – To no one’s surprise, the Permanent Court of Arbitration (PCA) in The Hague has upheld all the key arguments of the Philippines in its case against China on the application of the United Nations Convention on the Law of the Sea (UNCLOS) in the South China Sea. In its ruling, which employed even tougher language than most expected, the tribunal cut the legal heart out of China’s claim that the sea is, in effect, a Chinese lake.
The PCA ruled that China’s “nine-dash line,” a 1940s-era delineation that implies ownership by China of 80% of the South China Sea, is legally meaningless. It also made clear that China’s recent land-reclamation activity, turning submerged or otherwise uninhabitable reefs into artificial islands with airstrips or other facilities, confers no new rights to the surrounding waters or any authority to exclude others from sailing or flying nearby.
Official Chinese statements on the nine-dash line have never stated precisely what it is intended to encompass. Some refer to “historic rights,” others to “traditional Chinese fishing grounds,” while still others suggest that it is merely shorthand for describing all the land features in the South China Sea over which China claims sovereignty. But every variation has provoked others in the region, by signaling China’s willingness to encroach on perceived fishing rights (as with Indonesia), rights to exploit resources (as with Vietnam), or their own rights to the land-features in question.
The PCA’s decision punctures any notion that international law now recognizes “traditional” or “historic” maritime claims not directly associated with recognized sovereign ownership of relevant types of land. Recognized ownership of a habitable island, as with mainland territory, includes a 12-nautical-mile territorial sea, a 200-nautical-mile exclusive economic zone or EEZ and rights over any associated continental shelf (subject to any overlapping rights of others).
Recognized ownership of an uninhabitable rock or permanently protruding reef includes the surrounding 12-nautical-mile territorial sea. Nothing more. Without land, a state cannot claim rights to the sea.
China can and will continue to claim that, despite competing claims by Vietnam, the Philippines, and others to the land features in question, it is the sovereign owner of habitable islands and permanently protruding rocks or reefs in the Spratly and Paracel Island groups and elsewhere. In making its case, it can invoke accepted legal criteria like effective occupation or acquiescence. When added to its own coastal entitlements, China might well end up with a sizeable and entirely defensible set of rights in the South China Sea.
But the PCA addressed none of these underlying sovereignty issues in the Philippines case.
And, crucially, even if all of China’s sovereignty claims in the South China Sea were one day accepted – whether through negotiation, arbitration, or adjudication – the total area, including territorial sea, EEZs, and continental-shelf rights, would still not approach the size of the vast zone encompassed by the nine-dash line.
The PCA’s decision also rules out China’s claim to an unlimited right to pursue and stare down any close surveillance of its massive reclamation activity and construction of military-grade airstrips, supply platforms, communications facilities, and in some cases gun emplacements.
Such construction has occurred on seven previously unoccupied locations in the Spratlys: Mischief Reef, Subi Reef, Gaven Reef, and Hughes Reef (all previously submerged at high tide), and Johnson South Reef, Cuarteron Reef, and Fiery Cross Reef (all previously part-exposed at high tide, but uninhabitable).
Under UNCLOS, states may construct artificial islands and installations within their own EEZs, and also on the high seas (but only for peaceful purposes). In neither case can this have the legal effect of turning a previously submerged reef into a “rock” (which might allow a 12-mile territorial sea to be claimed), or an uninhabitable rock into an “island” (which might allow for a 200-mile EEZ as well).
The Philippines case confirmed these basic principles.
In doing so, the PCA also made clear that China had no right whatsoever – at least in the case of the previously submerged Mischief Reef – to engage in any construction activity, as the territory it claims is within the Philippines’ EEZ.
China seems unlikely to abandon occupancy of any island, reef, or rock where it currently has a toehold, or to stop insisting on its sovereign ownership of most of the South China Sea’s land features. But everyone with an interest in ensuring regional stability should encourage China to take several steps that would not cause it to lose face.
These steps include a halt to overtly military construction on its seven new artificial islands in the Spratlys; not starting any new reclamation activity on contested features like the Scarborough Shoal; ceasing to refer to the “nine-dash line” as anything other than a rough guide to the land features over which it continues to claim sovereignty; submitting these claims at least to genuine give-and-take negotiation, and preferably to arbitration or adjudication; advancing negotiations with ASEAN on a code of conduct for all parties in the South China Sea; and an end to dividing and destabilizing ASEAN by putting pressure on its weakest links, Cambodia and Laos, on this issue.
The alternative course, already being promoted by hotheads in the People’s Liberation Army, is to take a dramatically harder line by, say, renouncing UNCLOS altogether and declaring an Air Defense Identification Zone (ADIZ) over most of the South China Sea. Declaring an ADIZ, which the United States would certainly ignore, would sharply increase the likelihood of military incidents, with wholly unforeseeable consequences.
Walking away from UNCLOS would also be wrongheaded. China would still be effectively bound by its terms, now almost universally recognized as customary international law, irrespective of who adheres to it. The gesture of defiance would damage both its reputation and other territorial interests, not least its claims against Japan in the East China Sea, which rely on UNCLOS’s continental-shelf provisions.
If China takes a hardline path, or fails to moderate its behavior significantly in the months ahead, the case for further international pushback by countries like mine – including freedom-of-navigation voyages within 12 nautical miles of Mischief Reef and other artificial islands in that category – will become compelling. But right now it is in everyone’s interest to give China some space to adjust course and to reduce, rather than escalate, regional tensions.