American business investment


Americans are spending and hiring. So why aren’t firms investing?

THE American economy is in a befuddling state. Firms are on a six-year hiring spree that shows little sign of abating; payrolls swelled by an average of 190,000 a month between May and July.

Competition for workers is pushing up wages. The median pay rise in the year to July was 3.4%, according to the Federal Reserve Bank of Atlanta. Americans are spending that cash; in the second quarter, consumption per person grew at an annual pace of 5.5%, equalling its fastest growth in a decade. Yet real GDP is expanding by only 1.2% a year. The culprit seems to be business investment, which has fallen for three consecutive quarters. It is now 1.3% lower than a year ago—the biggest annual decline since early 2010 when the country was staggering out of the financial crisis. If firms are hiring and consumers are spending, why is investment weak?

Initially, the decoupling was caused by the prolonged fall in oil prices. Cheaper petrol benefited Americans by about $1,300 per household, boosting consumption. Simultaneously, it caused investment in the oil industry to fall by more than half in 2015, as shale oil and gas firms stopped drilling. Investment elsewhere carried on merrily, rising by 4.3%. But the malaise is no longer so contained. Even excluding oil, investment shrank slightly in the first half of 2016 (see chart).

Some of this reflects contagion. When energy firms tighten their belts, their suppliers feel the squeeze. Yet other sectors with little exposure to oil have also pulled back. Financial firms, for instance, invested about 21% less in the first quarter of 2016 than a year earlier. Investment is even down in the consumer-staples industry.

There are three potential explanations for this widespread reluctance to invest. The first is weak demand for the firms’ goods. This explains exporters’ restraint, given lacklustre global demand and a pricey dollar. But it makes less sense at home, with consumer spending strong, and firms happy to hire and to raise wages.

The second is tighter credit. Since the Federal Reserve raised interest rates in December, the average rate banks charge firms to borrow is up by about half a percentage point. After five years of loosening standards, more banks have tightened than eased credit standards for business lending in 2016, according to a Fed survey. In February, financial-market turmoil caused credit spreads in bond markets, the best measure of credit conditions, to surge.

Yet it is unlikely that slightly tighter credit has substantially crimped investment, because American firms are flush with cash. At the end of last year they had $1.7 trillion on hand, enough to pay for Hillary Clinton’s infrastructure plan six times over (though much of this cash is held overseas for tax reasons). Indeed, firms are accumulating cash at the fastest rate since July 2011, according to the Association for Finance Professionals, an industry group.

That leaves the third explanation: that in spite of strong spending, slow trend growth is reducing opportunities for profitable long-term investments. On this view, the recent downturn in business investment was less of a cyclical blip than a sign of things to come.

Economies get bigger when they add people or get more from their existing workforce. America is doing less of both. The Bureau of Labour Statistics projects that the labour force will grow by an average of 0.5% a year from 2014 to 2024, down from 1.2% annually from 1994 to 2004, because of ageing baby-boomers and low fertility. And productivity growth has stalled. From 2005 to 2015, output per hour worked grew by only 1.3% a year, down from growth of 3% a year between 1995 and 2005. In the year to the second quarter of 2016, productivity actually fell, by 0.4%.

Optimists argue that this is part of a lengthy hangover from the recession, which should soon end. One contributor to productivity is the amount of capital—for example, machinery or computers—that each worker has at their disposal. The recession sent this ratio soaring as firms laid off workers and left machines sitting idle. Why would firms invest again before they had replenished their payrolls?

But this explanation is becoming less convincing. The capital-to-worker ratio returned to its long-run trend in 2014 (the last year for which data are available). It is past time for productivity growth to have recovered; instead, it is sinking further.

Pessimists think the productivity problem is chronic. Technological advances, they say, are ever-less revolutionary: Uber is less of an advance than the car itself, the smartphone has not changed office work the way the PC did. Nonsense, reply “techno-optimists”, who foresee huge advances in machine learning and robotics.

For now, the data support the pessimists. The best measure of technological advance is total factor productivity, which measures output after controlling for both the number of workers and the amount of capital. In 2015 it grew by just 0.2%, compared with an average of 1.1% in the two decades prior to the financial crisis.

The economy has gradually become more stale. The number of startups per 100,000 people halved from 160 in 1977 to 80 in 2013, according to data from the Kauffman Foundation, a think-tank.

Disruption thrives in hubs like the Bay Area and New York, but workers have become less geographically mobile (perhaps due to high housing costs in many such areas). Notwithstanding pockets of disruption, the market share of the biggest firms is rising in most industries, suggesting a dearth of competition. A recent analysis by Goldman Sachs, a bank, found that the fraction of workers in innovative occupations, defined as those growing more than three percentage points faster than overall employment, is falling.

Businesses anticipating slower long-term growth cannot be expected to invest much. And politicians cannot easily conjure up technological progress. But they can boost competition, simplify taxes and regulation, and invest in infrastructure and education, all of which would help to raise American productivity.

Negative-yielding bonds: Why buy them? Why sell them?

Henkel and Sanofi broke new ground this week in selling negative-yielding bonds in Europe

by: Gavin Jackson

This week two public companies took free euros offered to them by investors, when they became the first to sell bonds with a negative yield-to-maturity.

Henkel, a German maker of Persil laundry detergent, sold €500m of two-year bonds with a yield of minus 0.05 per cent while Sanofi, a French pharmaceuticals manufacturer, sold €1bn of three-and-a-half year debt with a yield of minus 0.05 per cent.

Some eurozone government bonds have traded at prices which imply negative yields for two years, but lending to companies is supposed to be much more risky. The sales from Henkel and Sanofi are the latest step in an incremental process where more and more risky types of debt start to be sold at negative yields.
How can debt be negative yielding?

A bond is a promise to pay a principal and a coupon. Principal is what lenders get when the debt is repaid, while the coupon is a regular interest payment due to the bondholder.
As coupons and principal payments are fixed at the time of issue, the market price of the bond will fluctuate depending on how attractive its income is when compared with other bonds. An investor may pay £110 for debt with a face value of £100.

The way bonds are compared in the market is by their yield, the effective income from buying the bond at its current price. So the higher the price, the lower the yield.

For negative yielding bonds, the market price is greater than the remaining coupon and principal payments. If an investor holds the bond until it matures, they will lose money.

Why would people buy negative yielding debt?

The European Central Bank cut its deposit rate below zero for the first time in 2014. This is the amount commercial banks are paid (or rather, they now pay) on money they leave overnight at the central bank.

Banks have passed this cost on to customers, particularly companies and pension funds with large account balances. In March, the ECB cut the deposit rate even lower, to minus 0.4 per cent.

The cost of leaving their cash on deposit with a bank has led companies and investors to seek out other safe assets. Bonds with negative yields become attractive, so long as these yields are less punitive than those for keeping cash in the bank.

Short-dated investment grade corporate bonds, while still offering negative yields, pay more than cash (and government bonds) as well as being relatively safe.

Additionally, some investors may speculate that yields can fall even further, which will push up the prices of corporate bonds. So investors in the Henkel and Sanofi bonds may be able to sell them on at an even higher price later.

One reason to think yields could go lower it that the ECB is buying corporate bonds. One of the criteria for bonds being eligible for such purchases is they must yield more than the ECB’s deposit rate of minus 0.4 per cent, leaving room for the central bank to change its criteria and buy debt with a more negative yield.

What does the ECB hope to achieve?

The ECB’s ultimate goal is to boost inflation and growth in the eurozone. By lowering the cost of financing it can help persuade companies to spend more money and ldirectly lift demand.

However corporate treasurers say that small changes in the interest rate are unlikely to make much difference to their investment or strategic plans like acquiring a competitor.

But the ECB also has in mind something called the “portfolio rebalancing effect” which means investors shifting their asset holdings away from very safe and unproductive assets, like cash, into riskier assets like corporate debt.

Having cash is a problem for banks, investors and companies as this means finding something to do with it and passing it on to someone else to spend.

And now Henkel and Sanofi themselves have this problem. Having sold negative yielding debt, they now hold even more deeply negative-yielding cash on their balance sheets. While they are being paid to borrow, they pay even more to sabe.

Getting Technical

Gold Stocks Undervalued and Set to Spring Higher

After a sharp August pullback, gold stocks look refreshed and set to shine once again, charts say.

By Michael Kahn             

After a strong seven-month performance to start the year, gold stocks and exchange-traded funds ran into a buzz saw in August. Using the standard, and quite frankly lazy definition, the group fell into “bear market territory” by falling 20%.

It is very interesting that the decline erased exactly one third of the prior 2016 gain for the VanEck Vectors Gold Miners ETF. That is a textbook correction in my book (see Chart 1).

Chart 1

Last week, after the tepid August jobs report was released, the ETF scored a bullish one-day reversal bar by falling to a new low for the decline and then closing well into the green for the day. That tells us there was a sudden change of heart in the market, and what was once shunned was now back in favor.

To be sure, there are contrary technical factors that should be on everyone’s minds. First, the bounce so far has not been able to take the ETF back above its 50-day moving average.

And second, there is the double-edged sword of gold itself. The metal held quite steady for the past two months yet gold mining stocks fell with ferocity. Stocks tend to lead their commodity so this could be a negative for both. But on the other hand, the rising trends for gold, silver and platinum remain intact.

I will give the benefit of the doubt to the trend any time.

Plus, there are many other bits of bullish technical evidence to be found. For example, the VanEck Vectors Junior Gold Miners ETF, which tracks smaller capitalization stocks in the sector, sports on-balance, or cumulative volume levels on par with its July and August price peaks.

That suggests that all the money that flowed out during the August decline already flowed back in, even though prices remain depressed. Put another way, volume traded during the recovery was greater than volume during the decline telling us that bulls were more aggressive than bears. That’s demand.

Many component stocks of these ETFs echo the chart patterns above. Coeur Mining, for example, shows the sharp 2016 rally and equally as sharp August pullback (see Chart 2). It also shows two types of short-term reversal patterns that suggest a bottom was already reached.

Chart 2

First, it shows the familiar double bottom, or “W” pattern, so named for its look of that capital letter.

In a nutshell, downside power waned as the bears could not press their case. And it is further confirmed by rising momentum and cumulative volume indicators from the first price low to the second.

Next, another pattern familiar to investors is the head-and-shoulders, defined by a high – the head -- surrounded by two lower but equal highs – the shoulders. Normally, this is a sign that the major rally leading into the pattern was transitioning into a decline of comparable size.
When the stock dips below the bottom of the pattern, the sell signal is triggered and the bears win.

However, with this pattern the failure to break down tells us that the bulls win and prices normally head back higher. We can see variations on all of this in familiar names such as Newmont Mining and others.

Of course, there are gold stocks that do not fit this mold, including Kinross Gold and Goldcorp ( GG ). The former, for example, did not show strong performance starting in May as it traced out a triangle pattern (see Chart 3). That pattern broke to the downside last month and indicators such as on-balance volume and momentum did not show any positive signs as they did in Coeur and Newmont.

Chart 3

The major difference between stocks that look ready to resume their rallies and stocks that seem to have problems is the trend leading into the August decline. Those stocks with clear and strong rallies seem refreshed and ready to resume their advance. Those stocks with sideways patterns leading into August have much more work ahead just to get through the congestion zones set up by their floundering performances.

The wild card remains the uncertainty over the timing of the Federal Reserve’s next rate hike.
However, given that it seems inevitable and gold still trades near 52-week highs perhaps the market has already factored that in.

Don’t let the “bear market territory” comments used by the media turn you off. After all, every bull market starts after a significant price decline.

Did You See This Ominous Warning from the Stock Market?

By: Robert McHugh

This weekend I want to point out a market condition existing right now that is screaming that a stock market plunge is fast approaching. To do this, I present below several charts from our December 4th, 2015, issue 2729 to subscribers at that showed Bearish divergences that led to a stock market plunge in January 2016. The same condition exists right now, as the Bearish divergences we see this weekend are similar in time and extent as we saw back then. I also present the current charts below as well so you can see the comparison.

S&P500 versus Demand Power and Supply
NYSE 10-Day MA
NASDAQ100 versus Demand and Supply
NASDAQ100 10-Day MA
NYSE 10-Day MA
S&P500 Daily Chart
Secondary Trend Indicator

Back in December 2015, in that weekend report, we saw that over the prior two months the S&P 500, NASDAQ 100, and Russell 2000 price indices had formed formidable Bearish divergences with their 10 day average Advance/Decline Line Indicators, their Demand Power Measures, and our Secondary Trend Indicator. Those two month divergences led to a 13.5 percent, 285 point plunge in the S&P 500 and a 17.8 percent, 850 point crash in the NASDAQ 100.

This weekend, we have the exact same stock market set up. In the five charts below we see two-month, large extent, Bearish divergences between these same major stock indices and their 10 day average Advance/Decline Line Indicators, Demand Power measures, and our Secondary Trend Indicator.

NASDAQ100 versus Demand and Supply
NASDAQ100 10-Day MA
NASDAQ100 Daily Chart

Our S&P 500 versus 10 Day Average Advance / Decline Line Indicator (Identifying Bullish and Bearish Divergences for early detection of future trend turns)

Just like we saw from October 2015 through December 2015 just before a 285 point, 13.8 percent plunge in the S&P 500 in January 2016, we now see a similar size Bearish divergence between the S&P 500 and its 10 day average Advance/Decline Line Indicator.

S&P500 versus Demand And Supply

Our NASDAQ 100 versus 10 Day Average Advance / Decline Line Indicator (Identifying Bullish and Bearish Divergences for early detection of future trend turns)

Just like we saw from October 2015 through December 2015 just before an 850 point, 17.9 percent plunge in the NASDAQ 100 in January 2016, we now see a similar size Bearish divergence between the NASDAQ 100 and its 10 day average Advance/Decline Line Indicator.

Secondary Trend Indicator

Our NASDAQ 100 Demand Power / Supply Pressure Indicator (Identifying Medium term Buy and Sell Signals and alsoBullish and Bearish Divergences for early detection of future trend turns)
Just like we saw from October 2015 through December 2015 just before an 850 point, 17.9 percent plunge in the NASDAQ 100 in January 2016, we now see a similar size Bearish divergence between the NASDAQ 100 and its Demand Power Measure.

The appropriate usage of Bearish divergence charts is, once you see these divergences become large in time and extent, it is a late warning, but early enough, to prepare for a coming stock market plunge. It is not a signal that the plunge has started. It is a warning that one is coming.

It means we should be on high alert, and prepare for a plunge. Risks are high.

The signal that the plunge has started comes when our Purchasing Power Indicator and Secondary Trend Indicator (that we update daily and supply to our subscribers at each night) generate new Sell signals at the same time that the wave mapping and other predictive patterns we follow look complete.

The Fed has become increasingly political, and they have taken their role within the Plunge Protection Team, their legislative right from the President's Working Group established in 1988 after the 1987 stock market crash, to greater heights, more frequent intervention, and intervention that occurs outside of a stock market crash environment which was the original intent. In other words, the Fed can print money, hand it to its Wall Street surrogates, and order the purchase of stock index futures to push the stock market higher, or to slow or stop declines.

With the establishment that empowered the current Fed Chair and open market committee members politically incented to make sure the stock market remains steady, and that no collapses occur before the November election, it is difficult to believe that a stock market plunge could occur before November 8th as these Bearish divergences warn is likely. We also are entering a period of time seasonally where stock market plunges and strong declines are more likely to occur than other periods of each year. So a rational analyst would expect the Fed to be goosing this stock market hard over the next two months, mitigating the possibility of a plunge.

However, the previous two times we had a U.S. presidential election where no incumbent president was up for reelection, we saw stock market plunges the adjacent months before the election, in 2000 and again in 2008. In both cases, the president that was elected came from the party previously out of power. So the next two months present a fascinating situation for the U.S. stock market. Knowing that a plunge is highly probable, will the Fed and Plunge Protection Team be working overtime to prevent that natural tendency for a free-market stock market? Or, are the divergences identifying an underlying Bearish condition so severe that they will overpower all the king's horses and all the king's men?

Speaking of goosing markets, The Labor Department's Bureau of Labor Statistics reported with a straight face that the U.S. economy created 151,000 non-farm payroll jobs in August 2016. However, they also reported that they included in that figure a guess, an uncounted fudge estimate, that 106,000 of those 151,000 reported new jobs were created by new businesses they hope started up in August and guess were hired by those new businesses in excess of lost jobs from business that ceased operations, their CES Birth/Death model report. In other words, the truth is closer to 45,000 new jobs were created in August, not the 151,000 they reported. The U.S. needs to create at least 150,000 new jobs each month just to break even, so it is clear the Fed has its excuse not to raise short-term interest rates in September and risk triggering a stock sell off. The guess here is nothing happens with interest rates until after November 8th. The labor force participation rate (the number of people who are either employed or are actively looking for work) came in at 62.8 percent in August, which means that 37.2 percent of the working eligible population is not working. Of course the political spin unemployment figure harboring all the headlines is 4.9 percent, not the real 37.2 percent. How, is this difference possible? The BLS simply decides not to consider 85 percent of the unemployed as unemployed for one reason or another. The bottom line: 95 million U.S. work eligible persons are not working.

Syria à la Carte

Turkish Invasion Highlights Rapidly Shifting Alliances

By Maximilian Popp and Christoph Reuter

    A Turkish tank on its way to Jarabulus in Syria.

The Turkish advance into northern Syria marks a turning point in the Syrian conflict. Its nominal target was Islamic State, but with large powers reconsidering their alliances in the region, the Kurds stand to lose the most.

One common description of chaos theory holds that the flapping of a butterfly's wings can trigger a tornado. And it could very well be that the theory is the best tool we currently have available to describe the complex situation in Syria. The butterfly wings in this case was the late July decision by the Syrian regime to recruit new tribal militia fighters in a remote northeastern province. The tornado it triggered four weeks later was threefold: the invasion of northern Syria by the Turkish army; the sudden expulsion of Islamic State from the border town of Jarabulus; and the US military suddenly finding itself on both sides of a new front in Syria -- that between the Turks and the Kurds.

"It is 3:30 p.m. and we have almost reached the center of Jarabulus and have suffered almost no casualties. But we only just crossed the border this morning!" Saif Abu Bakr, a defected lieutenant and commander with the rebel group Hamza Division, sounded on Wednesday as though he couldn't believe what had just happened. "We set off with 20 Turkish tanks and 100 Turkish troops from Karkamis" -- the border town in Turkey -- "and headed through the villages west of the city and then on to Jarabulus."

More than two-and-a-half years after Islamic State (IS) conquered the border city, displaying the heads of its adversaries on fence posts in the process, the jihadist tumor was removed in mere hours.

Jarabulus was one of the last IS bastions on the Turkish border and the group had long been able to use the border crossing there unchallenged, allowing them to funnel both men and materiel into the parts of Syria under their control. "Almost all of them fled three days ago, except for a few local followers and a couple of foreigners," Umm Chalid, a widow from the city, said of the IS fighters.

"All the residents left too. We knew that something would happen."

The invasion in the north is a turning point in the Syrian war, marking the first time that Turkey has become directly involved in the conflict. At the same time, many of the complicated alliances in the region are suddenly shifting, with some allies becoming estranged and some enemies discovering common interests.

Primary Goal

In the days leading up to the Turkish invasion, a bizarre procession could be witnessed traveling along the roads on the Turkish side of the border -- the product of the Turkish army's attack preparations, which involved bringing in rebels belonging to a variety of groups from Idlib and Aleppo in buses and pick-ups. The fighters were mostly from small, Pentagon-supported units, such as the Hamza Division, the Sultan Murad Brigade and the Levante Front.

Large and powerful hardcore Islamist groups like the former Nusra Front were not part of the operation.

Once the Turkish tanks had established their position on a hill west of Jarabulus, they began firing on the fragmented IS units in the city. But they also fired on those troops that had likewise been seeking to liberate Jarabulus from IS: the Kurdish-controlled SDF militia, which had advanced on the city from the south. For the Turks, it was a two-fold success: For one, they attacked IS, which Ankara believes was behind the attack last weekend on a wedding in Gaziantep which killed over 50 people. For another, Turkey was able to pursue its primary goal of stopping the advance of the Kurds, who are seeking to establish a contiguous territory stretching across all of northern Syria. That is something Ankara wants to prevent at all costs.

The events are consistent with the pattern that seems to govern the involvement of most powers active in Syria. Each party is fighting its own war: It's Syria à la carte. The Turks are interested in battling the Kurds. The Americans are only interested in defeating Islamic State.

The Kurds are seeking to establish their own state. And the Russians are primarily intent on demonstrating to the world that they are once again a global power.

The Turkish army's new invasion partnership with Syrian rebels -- car-sharing included -- is just the latest of the rapidly shifting alliances of convenience used by all to pursue their interests. Taken together, they have transformed this horrific war into a completely unpredictable battlefield. The cards have been reshuffled -- and one of the catalysts was local skirmishes in the remote northeastern province of Hasakah.

Rapid Escalation

But first, a bit of background. For years, a tense alliance of convenience had existed in Hasakah between troops loyal to Syrian ruler Bashar Assad and Kurds with close ties to the PKK, the Kurdish militant group in Turkey. The Kurds have continually founded new PKK offshoots in the region, an alphabet soup of groups including most importantly the YPG (which stands for People's Protection Units in Syria) and, more recently, the SDF, or Syrian Democratic Forces.

All the groups share personnel, funding and leadership and the image of PKK leader Abdullah Öcalan can be seen everywhere. The YPG did not participate in the uprising against Assad and in exchange, the group was allowed to expand its control in Kurdish areas with Assad's unspoken acquiescence. There have been occasional skirmishes between the YPG and Assad troops, but the conflicts have always been rapidly resolved.

Because it is running out of troops, however, Assad's army in July began recruiting a new militia as part of the "National Defense Force" from Sunni tribes in Hasakah -- fighters from the same clans that were involved in earlier plundering and killing of local Kurds when they rose briefly in 2004.

The Kurds haven't forgotten and within days, the situation escalated, with the two sides firing on each other and the Kurds conquering almost the entire provincial capital, likewise named Hasakah. Then on August 18, the Syrian air force bombed Kurdish positions in the region for the first time in five years.

The air strikes didn't have much impact on the local fighting, but they completely altered the international balance of power. Though Turkey has long been fighting against Syrian President Assad, Turkish President Recep Tayyip Erdogan recognized that the Syrian strikes against the Kurds could be useful. As a leading member of Erdogan's Justice and Development Party formulated it in June: "Ultimately, Assad is a killer and tortures his own population. But he doesn't support Kurdish autonomy. We abhor one another, but in this respect, we are pursuing similar policies."

Assad's attack on the Kurds also facilitated rapprochement between the Turkish and Russian governments on the Syrian question. Ankara and Moscow have long been far apart on Syria.

Erdogan has been demanding Assad's deposition since 2011 and finances some rebel groups.

Russian President Vladimir Putin, meanwhile, has preferred to prop up the Assad regime in the hopes of a more orderly transition of power. But the ice age between Erdogan and the West, which has only become colder since the recent putsch attempt in Turkey, has once again made Russia a potential ally for the Turks.

Dropping the Kurds

On the other hand, the Kremlin is no longer making much progress towards its own vision for Syria.

The Russian air force, to be sure, has been effective in propping up Assad's rump empire despite ground troops from Iran, Afghanistan and elsewhere doing their best to defeat him. But Bashar Assad has refused to make even the tiniest of concessions. His renewed military strength is entirely the product of Russian support and Moscow's plan was not to dump him, but to present him as an example of their own successful strategy of intervention.

Were Turkey to accept a transition goverment under Assad's leadership, this would be easier to achieve. Assad would never step down on his own, but the Russians would be in a position to swap him out with a favorable general at their convenience. That would clear the way for an international agreement -- with the West likely footing the bill for Syrian reconstruction -- and for Russia's departure from Syria.

Turkish support would make the plan easier to achieve -- and such support appears to be forthcoming: Turkish Prime Minister Binali Yildirim said last weekend that Turkey would tolerate an Assad-led transition government. The deal would involve concessions for Turkey in exchange for Ankara's agreement that Assad could remain in power for the time being. Russia, meanwhile, would then drop the Kurds as an ally, a partnership that only came into being last autumn.

In the tactical shifting of alliances in Syria, the Kurds had hoped to be the cleverest player.

Now, however, it looks as though they may have risked too much.

To make matters worse for the Kurds, their relations with the US have likewise deteriorated rapidly, despite being Washington's closest ally in the fight against Islamic State. After pushing IS out of its own areas, Kurdish fighters did not, as had been agreed with the US, turn their attentions to the de facto IS capital of Raqqa but opted instead to head in the opposite direction and push IS out of the Arab city of Manbij before heading north to Jarabulus, another predominantly Arab city.

From the Turkish perspective, any further Kurdish advance west of the Euphrates River crosses a red line -- and the Turkish name for the tank operation in northern Syria, Euphrates Shield, indicates as much. The US is likewise uninterested in seeing the Kurds conquer additional Arab cities. "We've put a lid on the Kurds moving north," a US government official told the Wall Street Journal this week, "or at least doing so if they want any support from us, which I think is a fairly significant piece of leverage."

The Turkish operation in Jarabulus also received US air support and US Special Forces are thought to have participated. Furthermore, just hours after the invasion, US Vice President Joe Biden landed in Ankara in an attempt to smooth over tense relations between the two countries. The upshot, though, was that on the ground south of Jarabulus, the sudden change of course very nearly led to two American-supported groups firing on each other.


The recent events mark an unfortunate example of history repeating itself -- of the PKK allowing itself to be used by the Syrian regime only to be dropped at the whim of Damascus.

For many years beginning in the 1980s, Assad's father and predecessor Hafez Assad allowed the PKK to maintain a presence in the Syrian-occupied Bekaa Valley in Lebanon. But when Turkish tanks appeared on Syria's northern border in 1998, Hafez turned his back on the Kurds and the PKK had to abandon its Bekaa Valley camps. That marked the beginning of Öcalan's odyssey across the world, which ended with his arrest by Turkish special forces in Kenya.

Now, it looks as though the PKK has once again miscalculated. The group had hoped to take advantage of the US and Russian battle against IS to establish a Kurdish state in northern Syria. And Russia had been happy to use the Kurds to pressure the Turks. Now that Moscow has achieved its goal, though, it looks to be abandoning the PKK.

On Wednesday, Shirwan Darwish, spokesman for the Kurdish military leadership in Manbij, issued a threat to Turkey during a conversation with DER SPIEGEL. "We have established our defensive lines on the Sajur River (west of the Euphrates) and will defend ourselves against anyone who even comes close to this line. It has been drawn with the blood of our martyrs."

Most of the residents who fled Jarabulus, the majority of whom are Arabs, see the situation a bit differently. "If you liberate an area, that doesn't mean that it subsequently belongs to you," says Darwish Chalifa, a local politician. "The majority of the people here are for the Free Syrian Army and against Assad. We hope that our Kurdish brothers understand that and don't begin fighting against us."

The fact that Assad's air strikes targeting the YPG were close to a US Special Forces camp has finally moved the US to prevent all Syrian planes from flying into the region -- "that is extremely positive," says Chalifa.

"As soon as the situation has calmed down, we want to go back home," says Ahmed Abd al-Hossein, a member of the city's former municipal government. "We've been preparing for months and have established a stabilization committee for several villages. First, we intend to evaluate the damage that has been done and then to meet with international aid organizations next week to determine what is needed. The FSA has promised to withdraw, with the exception of one small unit, and then we plan to open up a police station."

Under the Eyes of the Russians

City elections are expected to be held soon. A naive hope maybe, but it at least offers a clear perspective. For the larger protagonists in the region, it isn't yet clear whether they will profit from the recent changes or not.
  • Islamic State, which all sides insist is the true enemy, has lost Jarabulus and will quickly be forced to give up its last bastions on the Turkish border
  • That will likely mean that the willingness of the Kurds to attack the IS stronghold of Raqqa on behalf of the West has sunk dramatically.
  • Syrian rebels are rejoicing over the successful invasion. But a rude awakening could be on the horizon when Turkey turns its back on them so it can join Assad in the battle against the Kurds.
  • Turkey has improved its relations with Russia and the US and put a halt to the Kurdish advance. But the conflict may now flare in Turkey. Already, several hundred people have been killed there in recent months in skirmishes between the Turkish military and the PKK.
  • Bashar Assad has now added the Kurds to his list of enemies, but Turkey isn't as great of an enemy as it used to be. His fate, though, remains in the hands of Moscow.
  • And the US now has the problem of having two allies in Syria who actually would like to shoot at each other.
The Russians would seem to have gained the most, and the Kurds look to be on the opposite end of that spectrum.

The fighting in Hasakah, where it all began, was hastily brought to an end on Tuesday. Emissaries from the government in Damascus and YPG representatives agreed to put a stop to the skirmishes.

Furthermore, the only road to Qamishli is to be reopened: Assad's troops still control part of the town in addition to its airport, which is the only airfield in northeastern Syria.

Negotiations for the agreement took place at the Russian air force base at Khmeimim, which has long since become a second center of power for the Assad regime. It is here where the government leads talks with all manner of Syrian groups -- under the close watch of the Russians.

All Is Calm, All Is Not Right

By: Doug Wakefield

With every passing year since 2008, support for the idea of free markets and open competition without constant intervention by central banks has been declining. The idea of trust your central banker to always "assist" the markets has lead the public at large into the false illusion that stocks can always be engineered to return to all time highs in the US, even if just reaching these levels recently.

Take for instance today. A few minutes before US markets opened, futures were flat across every major stock index. Then this headline appeared, and US stock indices jumped in the opening minutes of trading.

Remember, Yellen hadn't said anything. Everything was merely a reaction by high speed computers to a small number of words in a headline, followed by short term traders looking for scalping opportunities, and the conventional long term investor who almost subconsciously or consciously has come to believe that "they" will "always" keep it up. Constant intervention by the state (i.e. central bank) is good, right?

Why have an exit or sell strategy? Why believe that risk levels have risen substantially with price?

There is always more central planning of markets that can be done....right?

Can systemic risk be removed merely by individuals placing their "faith" in more debt, more futures bought by central banks, and more high speed games that have replaced the long held idea that free markets and competition were better than "leave the driving" to central bankers.

But does anyone really think this is the right road?

It is no longer 2009, 2011, or 2014. It is now August 2016. Where will we go from the current all time highs in August? The S&P 500's current all time high is only 2.7% higher than its May 2015 high, and we had to go through 2 declines of more than 12% each to get here.

Why Seek Capitalism Anymore? Financial Socialism Can 'Always' Levitate My Stocks!

The majority view is that this statement is too extreme. The minority view, while growing ever larger, is that this is exactly what we have and must continue to monitor.

If you are reading this article, you are thinking. So let's engage our brains.

Why do we in the West think that state owned businesses in China are a bad model if we don't see problems coming from the actions of central banks in Japan, Europe, and the US? I forgot, these central banks are only "assisting" the markets on a temporary basis after almost 8 years.

How could things possible get better with less debt and a declining role of the state, ie central banks?

As an American there are many reasons I had rather live in the US than China. However, if the European Central Bank prints up money to buy up bonds directly from a European corporation in a private placement, is that really much different than the People's Bank of China continuing to make loans to massive state owned businesses?

In this short piece, we are going to look at Japan. Europe and the US will be discussed in the September issue of The Investor's Mind released next week to subscribers.

This is not to discuss economic theory. This is to address the incredible challenge going forward for both bull and bear, and why we must all ask the question, "What dates and events are central banks using to continue to foster the image of 'things are under our control.'"

This has now become as critical as fundamental and technical analysis.

Bank of Japan: Land of Rising Stock Ownership

Whether you are an investor, advisor, or corporate leader, understanding this massive shift in global finance since 2008 is key to surviving the next major bust, which is running way behind, and could happen any time at these levels.

Japan continues to lead the race in centrally planned markets. Back in April, Bloomberg released a piece called The Tokyo Whale in which it was revealed that the Bank of Japan's "print more debt, buy more stocks" strategy had brought it to a level where it was a top 10 stockholder of more than 200 companies that make up the Nikkei 225.

BOJ is Top 10 Shareholder in about 90% of Nikkei 225

At the time, the article also stated that the Bank of Japan also used this strategy to buy up 55% of the Japanese Exchange Traded Funds. That's right, the whale investor.

Bank of Japan: The ETF Whale

Now leap forward to this month. CLSA's equity strategist for Japan, Nicolas Smith, wrote that the "BOJ is nationalizing the stock market". Now let that sink in. Remember when one big insurance company called AIG was in such dire straits that it had to be nationalized?

U.S. To Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash As Credit Dries Up, WSJ, Sept 16, 2008

If we are nationalizing a market in an attempt to make certain the bull fever never dies, what happens when big buyers don't want to be left holding the bag, and gladly sell down their positions to the BoJ?

If AIG plunged in 2008 and was then nationalized, what will happened to the Nikkei when it goes into its next "correction"? Remember, it has been nationalized for years by massive sums of debt created out of thin air.

Akihiro Murakami, chief quantitative strategist for Japan at Nomura in Tokyo, stated this month in another Bloomberg article about the BOJ, that "if the Bank of Japan does not sell, then liquidity will disappear".

Who in the future will be large enough to replace the Bank of Japan as the buyer of last resort in Japanese stocks? Does the chart below reveal that global investors have shown complete trust in the actions of the BoJ over the last year?

Nikkei Daily Chart

In my opinion, this global drama continues to wait on US equity markets at these all time highs, a watermark seen this month in 5 of the largest stock indices. Current records have only moved 2-3% above their 2015 highs.

SPX Daily Chart

The NASDAQ cannot flat line at its March 2000 high indefinitely. Will financial socialism come to the rescue very soon to extend the patient's bull life, or is it down we go from the August "all time high" headlines?

NASDAQ100 Daily Chart

If we replace free markets with state controlled markets are we not embracing socialism? Is this really a better option than free markets? Are you ready for the next big shift, or waiting for Yellen, Draghi, or Kuroda to signal you or your advisor when it is about to start?

Yellen Tweet

Be a Contrarian, Remember Your History

What mind games must all investors, advisors, and money managers deal with in this global financial/political game we now live in? How does one combine dates and events, financial history, and technical and fundamental analysis in order to gain confidence in this game where we are lead to believe contrarians will never win, and central bankers have overcome gravity? Find out in the September issue of The Investor's Mind, released next week.

Bulls become bears, and bears become bulls. Trends always end; always begin.

US economic growth revised down to 1.1%

CHICAGO, IL - JULY 29: Consumers hold shopping bags as they walk along Michigan Avenue on July 29, 2016 in Chicago, Illinois. The US economy grew by 1.2% in the second quarter weaker than economists expected. (Photo by Joshua Lott/Getty Images)©Getty

The US economy grew at a slightly slower rate than initially forecast in the second quarter, underscoring a weak performance in the first half of 2016.

The economy expanded at an annualised rate of 1.1 per cent, rather than the predicted estimate of 1.2 per cent, the Department of Commerce said.

Consumer spending rebounded sharply in the three-month period to a growth rate of 4.4 per cent from 1.6 per cent in the first quarter.

However, a fall in inventories among businesses weighed heavily on gross domestic product, knocking the figure down by 1.3 percentage points. Investment was weak more broadly as energy groups cut back on capital spending on structures such as oil rigs in light of the decline in the price of crude. Residential investment, which encompasses new-home construction, also fell after several quarters of strong gains.

“Business investment remains soft, with structures investment continuing to reflect the lagged effects of declines in energy prices, and residential investment looks to have taken a breather after very strong growth throughout 2015,” Michael Gapen, chief US economist at Barclays, said.

The weakness in the second quarter capped a disappointing first half of 2016 for the biggest developed-market economy, which expanded at a slim 0.8 per cent rate in the first three months of the year.

Economists reckon the economy may have picked up steam more recently. Indeed, the growth rate has accelerated to 3.4 per cent in the third quarter, according to a running forecast by the Atlanta Federal Reserve.

In particular, the “drawdown in inventories is largely complete”, Mr Gapen said, noting that the category may “add modestly to growth in the coming quarters”.

The more upbeat outlook for economic output that is coupled with a tightening labour market and signs that inflation is firming has increased expectations that the Fed may increase interest rates at least one time this year following the December 2015 rate rise.

Markets pin the odds of a 2016 rate rise at 55.8 per cent, according to federal funds futures, up dramatically from late June when the fierce reaction to the UK’s Brexit vote sent the probability plunging to essentially nil.

China’s Private Investment Crash May Be Mirage, but Pain Is Still Real

China’s drop in private investment may look worse than it is because of the distorting effects of last year’s stock market bailout.

By Alex Frangos

A worker at a privately-owned steel factory in Changzhou, in China's eastern Jiangsu province, in May 2016. Photo: Getty Images

It may seem like good news that China’s private investment spending isn’t completely falling off a cliff. The bad news is, it’s because “private” companies aren’t private anymore—and maybe never were.

To the great worry of China economy watchers, private fixed-asset investment in things such as buildings and factories looked like it took a steep fall this year. Since the private sector contributes two-thirds of all investment, this is a major concern. So much so that China’s State Council ordered an investigation into the situation. In June, Premier Li Keqiang spoke out against local officials blocking private investment projects.

But there’s another explanation for why the data showed the private-sector crunch. It has to do with the after effects of last year’s government stock-market bailout, which still reverberate.

Beijing’s one trillion yuan ($150 billion) stock-buying exercise caused many companies previously classified as “private” to now be classified as state owned, because state investment funds now own significant parts of those companies, suggests analysis by Nicholas Lardy and Zixuan Huang of the Peterson Institute.

Spending that would have last year been classified as private is now considered state spending, by virtue of the classification change. Worryingly, that could indicate a backtracking on years in which more and more economic activity was supposedly generated from the private sector, which tends to be more efficient and offer higher returns on equity.

It is also possible these companies weren’t all that private in the first place, says Andrew Coflan of the Rhodium Group. It could be that so-called mixed-ownership companies were previously classified as private, even if the state held, say, a 49% stake. The bailout caused them to go above 50%. This might have been done to show, falsely, that the economy was making progress in leaning away from state support.

One takeaway for investors is that China’s government has been spending less than it seems this year.

The fall in private investment, according to the numbers, had been counteracted somewhat with fresh government spending. Since government spending tends to be infrastructure focused, the rally in iron ore, steel, coal and other commodities this year might have been driven by what turned out to be a false wind.

The reinterpretation of the numbers doesn’t mean China’s private sector is all of a sudden in fine shape. Investment spending overall, government and private, is at its lowest point in years, and took another leg down in July. Like like the data itself, China’s economy remains something of a murky mess.