MARKET RISK - Everyone on the Same Side of the Boat!

There isn't much 'runway' left on a chart like this! Maybe a quarter? Likely a spring or early summer market shock.

HOUSING - Serious Housing & Household Spending Headwinds.

EMERGING MARKETS - Emerging World Poses More Danger Than in 1990s

Emerging World Poses More Danger Than in 1990s 03-06-14 Morgan Stanley via Bloomberg

Developed economies are less resilient to an emerging-market shock than they were in the 1990s, when crises from Thailand to Russia rattled investors without triggering a global recession. That’s according to an 81-page study released March 5 by Morgan Stanley economists and strategists.

They estimate a 1990s-style slump in emerging-market demand would create

• An average drag of 1.4 percent for four quarters on the growth of the U.S.,
• The euro area and Japan probably would be tipped into recession.

Reasons for the greater vulnerability include the fact that

• developing markets, and especially China, now have a stronger impact on the world’s economy, supply chains and trade.
• Emerging economies account for about half of global gross domestic product, up from 37 percent in 1997-1998.
• Developed economies are also more exposed to their smaller counterparts via exports, corporate revenue and banking, and
• the financial crisis of 2008 means they are weaker now than two decades ago.

The Federal Reserve and the Bank of Japan probably would respond by easing monetary policy, lowering commodity prices and bond yields as a result. That would help revive growth, although the recovery would be weak, they said.

“If an emerging-market shock materializes, we believe the impact on developed markets could be stronger than it was in the late 1990s and would most likely last longer,” the Morgan Stanley team wrote.

The study is based on a scenario in which:

• Emerging-market imports fall 15 percent for two quarters,
• Financial conditions deteriorate as they did in the 1990s and
• Commodity prices decline,
• Cost of oil dropping to about $80 a barrel.

Europe’s equity markets would be the most adversely affected among global stocks given its companies have derived 65 percent to 80 percent of their revenue growth from emerging markets in recent years.

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STRATEGIC MACRO INVESTMENT INSIGHTS

What is important in the Morgan Stanley work above is:

1. They would spend this amount of time and effort on a scenario of a EM imports falling 15 percent for two quarters,
2. They use oil at $80 a barrel

We have written extensively to our subscribers about the Echo Boom and this is exactly what Morgan Stanley is now actually assessing.

THE FINANCIAL MARKETS - Macro Answers

In LNG WARS: The Ukraine & Syrian Choke Points we stated:

Regarding our oil and gas trading, here is the central Macro Driver$ / Trigger$ / Bia$ issue we are grappling with at Trigger$:

See TRIGGER$ for Daily and 60 Minute Charts for HPTZ targets

From 2008 to 2013 we can see the market contracting, or winding / spiralling in on itself.� This changed in 2013 when OIL started to expand.� Previous resistance has now become support, however there is potential for the market to oscillate back down to the lows of 2008 as it “spirals out”. Andrew J. D Long MFTA (Master of Technical Analysis - IFTA), Publisher, Trigger$

�

We see a major inflection point coming near term at our Macro Trigger$ Zone "E" (see chart above and table right). After a three year consolidation the question is which way it will break? The answer lies in the MACRO Analysis.

• Morgan Stanley is suggesting the arrow is down. It may not be $80 per barrel but the probability is up not down.
• Additionally, the Ukraine crisis is for more likely to result in a collapsing Russian Ruble which would put downside pricing pressures on energy costs. This similar to what happened during the 2008 Georgia Crisis.

CHRONIC UNEMPLOYMENT - At its Core it is About a Lack of Private Investment

Investment-Unemployment Link Still On Track 02-05-14 John B Taylor

GEO-ECONOMIC RISK - Ukraine

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GEO-ECONOMIC RISK - Ukraine

Memo to Obama: This Was Their Red Line! 03-02-14 David Stockman, via his new blog Contra Corner via ZH

In 1783 the Crimea was annexed by Catherine the Great, thereby satisfying�the longstanding quest of the Russian Czars for a warm-water port. In fact, over the ages Sevastopol emerged as a great naval base at the strategic tip of the Crimean peninsula, where it became home to the mighty Black Sea�Fleet of the Czars and then the commissars.

For the next 171 years Crimea was an integral part of Russia—a span that exceeds the 166 years that have elapsed�since California was annexed by a similar thrust of “Manifest Destiny” on this continent, thereby providing, incidentally, the United States Navy with its own warm-water port in San Diego. While no foreign forces subsequently invaded the California coasts, it was most definitely not Ukrainian and Polish riffles, artillery and blood which famously annihilated The Charge Of The Light Brigade at the Crimean city of Balaclava in 1854;�they were Russians defending the homeland.

And the portrait of the Russian�”hero” hanging in Putin’s office is that�of Czar Nicholas I—whose brutal 30-year reign brought the Russian Empire to its historical zenith, and who was�revered in Russian hagiography as the defender of Crimea, even as he lost the 1850s war to the Ottomans and Europeans. Besides that, there�is no evidence that Putin does historical apologies, anyway.

In fact,�its their Red Line. When the enfeebled Franklin Roosevelt made port in the Crimean city of Yalta in February 1945 he did know he was in Soviet Russia.�Maneuvering to cement his control of the Kremlin in the intrigue-ridden struggle for succession after Stalin’s death a few years later,�Nikita Khrushchev allegedly spent 15 minutes reviewing his “gift” of Crimea to his subalterns in Kiev in honor of the decision by their ancestors 300 years earlier to accept the inevitable and become a vassal of Russia.

Self-evidently, during the long decades of the Cold War, the West did nothing to liberate the “captive nation” of the Ukraine—with or without the�Crimean appendage bestowed upon it in 1954. Nor did it draw any red lines in the mid-1990?s when a financially desperate Ukraine rented back Sevastopol and the strategic redoubts of the Crimea to an equally pauperized Russia.

In short, in the era before we got our Pacific port in 1848 and in the 166-year interval since then, the security and safety of the American people�have depended not one wit on the�status of the Russian-speaking Crimea. Should the local population now choose fealty to the Grand Thief in Moscow over the ruffians and rabble who have seized Kiev, what’s to matter!� Worse still, how long can America survive the screeching sanctimony and mindless meddling�of Susan Rice and Samantha Power? Mr. President, send them back to geography class;�don’t draw any�new Red Lines. This one has been morphing for centuries among the�quarreling tribes, peoples, potentates, Patriarchs�and pretenders of a small region that is none of our damn business.

GEO-ECONOMIC RISK - Ukraine

Ukraine Crisis: Crimea in the Crosshairs 03-01-14 Geo-Political Monitor

What is unfolding between Ukraine and Russia on the Crimean Peninsula? The answer is ostensibly simple: Russia is defending its interests at the behest of the mostly ethnic Russian population in Crimea. And while there are reports of an imminent Russian invasion, the fact is that Russia already has troops on the ground in Crimea, given that they have leased a major military base in Sevastopol.

The port of Sevastopol serves as the headquarters of the Russian Black Sea Fleet, which oversees maritime operations throughout the Mediterranean. The base is leased through 2042, and the Russian fleet stationed there consists of 380 ships, 170 aircraft, and 25,000 troops. Crimea and Sevastopol in Ukraine represent a powerful means to exert pressure against Russia considering the fact that Moscow views the region as an indispensable strategic asset. In view of the street protests that have brought Ukrainian nationalists into power (not necessarily many ‘democrats’ here), and fearing a similar action on the part of the same political party in Crimea, Russia’s President Putin ordered a general mobilization of the western military region under the guise of ‘emergency exercises’ along with two districts of the central military region. This move masked a de facto preparation for some 2,000 troops to enter Crimea along with a squadron of helicopters. These steps give Russia a rapid response capability in the event that some battalions of the Ukrainian armed forces attempt to reach Crimea – they are also deploying air defense systems already in place at the base.

The arrival and deployment (even partial) of Russian troops has not been followed by shoot-outs with police departments in Crimea, nor has the new government in Kiev issued any orders to its armed forces, which continue to maintain a ‘passive’ attitude. Russia now has effective control of Simferopol, the naval base of Sevastopol, and Balaklava - every airport on the Crimean peninsula. Russian military units also surround regional support facilities for the Ukrainian armed forces, as well as an important air defense base north of Sevastopol.

How will the situation evolve?

Russian troops will continue to flow into Crimea if the Russian Duma – a bit of a rubber stamp – approves Putin’s request (it has already passed a resolution urging the government to consider all options to ensure the safety and stability of the Crimea). Approval would mean Russian helicopters could be deployed in greater numbers in order to further discourage a response from the Ukrainian army – which remains highly unlikely. In fact, even if Russia made a complete bid to take over Crimea, there is little chance of a Ukrainian military response.�Effectively, the Crimean peninsula is already being controlled by the Russian Federation and Putin’s recent moves are merely designed to protect or consolidate that control. Russia’s armed forces can be deployed so quickly and in such numbers that it will be impossible for the Ukrainian army to oppose.

Tensions will definitely rise over the announced referendum on Crimean independence, scheduled for 30 March. This suggests that Russian troops will remain on high alert protecting the pro-Russian Crimean government until that time and beyond. In the unlikely event of a Ukrainian response, the much better equipped Russian troops would extend their reach and gain control of eastern Ukraine’s most important industrial and mining districts, replicating in a sense, though on a smaller scale, what happened in Georgia in 2008. For now we can say with relative certainty that the Russian Federation after sixty years – when a possibly drunken Khrushchev ‘donated’ it to Ukraine – has taken full control of the Crimean peninsula, and it will do whatever is necessary to keep it.

GEO-ECONOMIC RISK - Ukraine

"Welcome To The Era Of Failed States" 03-03-14 James H. Kunstler of Kunstler.com, via ZH

So, now we are threatening to start World War Three because Russia is trying to control the chaos in a failed state on its border — a state that our own government spooks provoked into failure? The last time I checked, there was a list of countries that the USA had sent troops, armed ships, and aircraft into recently, and for reasons similar to Russia’s in Crimea: the former Yugoslavia, Somalia, Afghanistan, Iraq, Libya, none of them even anywhere close to American soil. I don’t remember Russia threatening confrontations with the USA over these adventures.

The phones at the White House and the congressional offices ought to be ringing off the hook with angry US citizens objecting to the posturing of our elected officials. There ought to be crowds with bobbing placards in Farragut Square reminding the occupant of 1400 Pennsylvania Avenue how ridiculous this makes us look.

The saber-rattlers at The New York Times were sounding like the promoters of a World Wrestling Federation stunt Monday morning when they said in a Page One story:

“The Russian occupation of Crimea has challenged Mr. Obama as has no other international crisis, and at its heart, the advice seemed to pose the same question: Is Mr. Obama tough enough to take on the former K.G.B. colonel in the Kremlin?”

Are they out of their chicken-hawk minds over there? It sounds like a ploy out of the old Eric Berne playbook: Let’s You and Him Fight. What the USA and its European factotums ought to do is mind their own business and stop issuing idle threats. They set the scene for the Ukrainian melt-down by trying to tilt the government their way, financing a pro-Euroland revolt, only to see their sponsored proxy dissidents give way to a claque of armed neo-Nazis, whose first official act was to outlaw the use of the Russian language in a country with millions of long-established Russian-speakers. This is apart, of course, from the fact Ukraine had been until very recently a province of Russia’s former Soviet empire.

Secretary of State John Kerry — a haircut in search of a brain — is winging to Kiev tomorrow to pretend that the USA has a direct interest in what happens there. Since US behavior is so patently hypocritical, it raises the pretty basic question: what are our motives? I don’t think they amount to anything more than international grandstanding — based on the delusion that we have the power and the right to control everything on the planet, which is based, in turn, on our current mood of extreme insecurity as our own ongoing spate of bad choices sets the table for a banquet of consequences.

America can’t even manage its own affairs. We ignore our own gathering energy crisis, telling ourselves the fairy tale that shale oil will allow us to keep driving to WalMart forever. We paper over all of our financial degeneracy and wink at financial criminals. Our infrastructure is falling apart. We’re constructing an edifice of surveillance and social control that would make the late Dr. Joseph Goebbels turn green in his grave with envy while we squander our dwindling political capital on stupid gender confusion battles.

The Russians, on the other hand, have every right to protect their interests along their own border, to protect the persons and property of Russian-speaking Ukrainians who, not long ago, were citizens of a greater Russia, to discourage neo-Nazi activity in their back-yard, and most of all to try to stabilize a region that has little history and experience with independence. They also have to contend with the bankruptcy of Ukraine, which may be the principal cause of its current crack-up. Ukraine is deep in hock to Russia, but also to a network of Western banks, and it remains to be seen whether the failure of these linked obligations will lead to contagion throughout the global financial system. It only takes one additional falling snowflake to push a snow-field into criticality.

Welcome to the era of failed states. We’ve already seen plenty of action around the world and we’re going to see more as resource and capital scarcities drive down standards of living and lower the trust horizon. The world is not going in the direction that Tom Friedman and the globalists thought. Anything organized at the giant scale is now in trouble, nation-states in particular.� The USA is not immune to this trend, whatever we imagine about ourselves for now.�

GEO-ECONOMIC RISK - Ukraine

The Backstory to the Russia-Ukraine Confrontation: The U.S. and NATO Encirclement of Russia 03-03-14 George Washington Blog via ZH

The American press portrays Putin as being the bad guy and the aggressor in the Ukraine crisis.

Putin is certainly no saint. A former KGB agent, Putin's net worth is estimated at some $40 billion dollars ... as he has squeezed money out of the Russian economy by treating the country as his own personal fiefdom. And all sides appear to have dirt on their hands in the Russia-Ukraine crisis.

But we can only see the bigger picture if we take a step back and gain a little understanding of the history underlying the current tensions.

Indeed, the fact that the U.S. has allegedly paid billions of dollars to anti-Russian forces in Ukraine - and even purportedly picked the Ukrainian president - has to be seen in context.

Veteran New York Times reporter Steven Kinzer notes at the Boston Globe:

From the moment the Soviet Union collapsed in 1991, the United States has relentlessly pursued a strategy of encircling Russia, just as it has with other perceived enemies like China and Iran. [Background here, here and here.] It has brought 12 countries in central Europe, all of them formerly allied with Moscow, into the NATO alliance. US military power is now directly on Russia’s borders.

“I think it is the beginning of a new cold war,” warned George Kennan, the renowned diplomat and Russia-watcher, as NATO began expanding eastward. “I think the Russians will gradually react quite adversely, and it will affect their policies.”

Stephen Cohen - professor emeritus at New York University and Princeton University who has long focused on Russia - explained this weekend on CNN:

We are witnessing as we talk the making possibly of the worst history of our lifetime. We are watching the descending of a new cold war divide between west and east, only this time, it is not in far away Berlin, it's right on Russia's borders through the historical civilization in Ukraine. It's a crisis of historic magnitude. If you ask how we got in it, how we got into the crisis, and how therefore do we get out, it is time to stop asking why Putin - why Putin is doing this or that, but ask about the American policy, and the European Union policy that led to this moment.

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I don't know if you your listeners or views remember George Kennan. He was considered [a] great strategic thinker about Russia among American diplomats but he warned when we expanded NATO [under Bill Clinton], that this was the most fateful mistake of American foreign policy and that it would lead to a new Cold War. George lived to his hundreds, died a few years ago, but his truth goes marching on. The decision to move NATO beginning in the 90's continuing under Bush and continuing under Obama, is right now on Russia's borders.

And if you want to know for sure, and I have spent a lot of time in Moscow, if you want to know what the Russian power elite thinks Ukraine is about, it is about bringing it into NATO. One last point, that so-called economic partnership that Yanukovych, the elected president of Ukraine did not sign, and that set off the streets - the protests in the streets in November, which led to this violence in and confrontation today, that so-called economic agreement included military clauses which said that Ukraine by signing this so called civilization agreement had to abide by NATO military policy. This is what this is about from the Russian point of view, the ongoing western march towards post Soviet Russia.

Jonathan Steele writes at the Guardian

Both John Kerry's threats to expel Russia from the G8 and the Ukrainian government's plea for Nato aid mark a dangerous escalation of a crisis that can easily be contained if cool heads prevail. Hysteria seems to be the mood in Washington and Kiev, with the new Ukrainian prime minister claiming, "We are on the brink of disaster" as he calls up army reserves in response to Russian military movements in Crimea.

Were he talking about the country's economic plight he would have a point. Instead, along with much of the US and European media, he was over-dramatising developments in the east, where Russian speakers are understandably alarmed after the new Kiev authorities scrapped a law allowing Russian as an official language in their areas. They see it as proof that the anti-Russian ultra-nationalists from western Ukraine who were the dominant force in last month's insurrection still control it. Eastern Ukrainians fear similar tactics of storming public buildings could be used against their elected officials.

Kerry's rush to punish Russia and Nato's decision to respond to Kiev's call by holding a meeting of member states' ambassadors in Brussels today were mistakes. Ukraine is not part of the alliance, so none of the obligations of common defence come into play. Nato should refrain from interfering in Ukraine by word or deed. The fact that it insists on getting engaged reveals the elephant in the room: underlying the crisis in Crimea and Russia's fierce resistance to potential changes is Nato's undisguised ambition to continue two decades of expansion into what used to be called "post-Soviet space", led by Bill Clinton and taken up by successive administrations in Washington. At the back of Pentagon minds, no doubt, is the dream that a US navy will one day replace the Russian Black Sea fleet in the Crimean ports of Sevastopol and Balaclava.

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Vladimir Putin's troop movements in Crimea, which are supported by most Russians, are of questionable legality under the terms of the peace and friendship treaty that Russia signed with Ukraine in 1997. But their illegality is considerably less clear-cut than that of the US-led invasion of Iraq, or of Afghanistan, where the UN security council only authorised the intervention several weeks after it had happened. [Indeed, top American leaders admit that the Iraq war was for reasons different than publicly stated. And the U.S. military sticks its nose in other countries' business all over the world.� And see this.] And Russia's troop movements can be reversed if the crisis abates. That would require the restoration of the language law in eastern Ukraine and firm action to prevent armed groups of anti-Russian nationalists threatening public buildings there.

Again, we don't believe that there are angels on any side.� But we do believe that everyone has to take a step back, look at the bigger picture, calm down and reach a negotiated diplomatic resolution.

And see�this, this, this and this (interview with a 27-year CIA veteran, who chaired National Intelligence Estimates and personally delivered intelligence briefings to Presidents Ronald Reagan and George H.W. Bush and the Joint Chiefs of Staff).

CENTRAL BANK POLICY - Insider Says Central Banks Making it Up as They Go!

Former Central Banker Admits "[They] Are Making It Up As They Go Along" 03-03-14 Tim Price via Sovereign Man blog,via ZH

A few weeks ago, William White (former economist at the Bank of England, the Bank of Canada, and Bank of International Settlements) made a frank admission.

And while we search for assets whose prices are less obviously distorted by malign government intervention, it’s refreshing to hear a mea culpa from a member of the economics “profession”.

White said:

“The analytical underpinnings of what we [mainstream economists] do are actually pretty shaky. A reflection of that fact, is that virtually every aspect you can think of with respect to monetary policy, about best practice, has changed and changed repetitively over the course of the last 50 years. So, this stuff ain’t science.

“Think about what’s happened recently. One, its completely unprecedented. People are making it up as they go along. This is hardly science – building on the pillars of the past.

“Secondly, what they’ve been making up as they go along actually differs across central banks [The Bundesbank, for example, is fighting the threat of high inflation, whereas the Fed is more concerned about the prospect of deflation]. They can’t even agree amongst themselves about what’s the best way to do things.

“I’m becoming more and more convinced that all of the models we use are basically useless.

“It’s surprising that we’ve had this huge crisis that the mainstream didn’t predict. It’s gone on for years, which the mainstream absolutely didn’t predict. I would have thought this was a basis for a fundamental rethink about what we used to think we believed. But that hasn’t happened.

“The policies that we’ve followed – on the monetary side at least – since 2007 are just more of the same demand-stimulating policies that we’ve been following, I think, erroneously, for the last 30 years.

“We’ve got the potential to do so much harm by not getting the creation of fiat credit and money right. We’ve got the capacity to do so much harm that we should be focusing much more on making sure that doesn’t happen.”

Doctors at least have the Hippocratic Oath: first, do no harm. If only economists and central bankers had a similar ethic.

But they don’t. So they continue ‘making it up as they go along’, as Mr. White suggests, applying failed ideas with impunity and continued authority to an unquestioning public.

Warren Buffett famously compared financial markets to the card table, observing that if you’ve been playing poker for half an hour and you still don’t know who the patsy is, then you’re the patsy. It seems we are all patsies now.

You can listen to the full interview here:

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NO INVESTMENT GROWTH - NO JOB GROWTH!

IN THE ERA OF "LABOR ARBITRAGE"

PROFITS DOMINATED BY LABOR REDUCTION

KILLS THE "GOLDEN GOOSE"

GLOBALIZATION DEMAND - Household Share of GDP The Problem

Emerging Markets Still Face The "Same Ugly Arithmetic" 03-04-14 Michael Pettis, via ZH

Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.

Nothing fundamental has changed. Demand is weak because the global economy suffers from excessively strong structural tendencies to force up global savings, or, which is the same thing, to force down global consumption. Lower future consumption makes investment today less profitable, so that consumption and investment, which together comprise total demand, are likely to stagnate for many more years.

Squeezing out median households

Two processes bear most of the blame for weak demand.

First, because the rich consume less of their income than do the poor, rising income inequality in countries like the US – and indeed in much of the world – automatically force up savings rates.

Second, policies that forced down the household income share of GDP, most noticeably in countries like China and Germany, had the unintended consequence of also forcing down the household consumption share of GDP. This income imbalance automatically forced up savings rates in these countries to unprecedented levels.

For many years the excess savings of the rich and of countries with income imbalances, in the form of capital exports in the latter case, funded a consumption binge among the global middle classes, especially in the US and peripheral Europe, letting us pretend that there was not a problem of excess savings. The 2007-08 crisis, however, put an end to what was anyway an unsustainable process.

It is worth remembering that a structural tendency to force up the savings rate can be temporarily sidestepped by a credit-fueled consumption binge or by a surge in non-productive investment, both of which happened around the world in the past decade and more, but ultimately neither is sustainable. As I will show in my next blog entry in two weeks, in a closed economy, and the world is a closed economy, there are only two sustainable consequences of forcing up the savings rate. Either there must be a commensurate increase in productive investment, or there must be a rise in global unemployment.

These are the two paths the world faces today. As the developing world cuts back on wasted investment spending, the world’s excess manufacturing capacity and weak consumption growth means that the only way to increase productive investment is for countries that are seriously underinvested in infrastructure – most obviously the US but also India and other countries that have neglected domestic investment – to embark on a global New Deal.

Otherwise the world has no choice but to accept high unemployment for many more years until countries like the US redistribute income downwards and countries like China increase the household share of GDP, neither of which is likely to be politically easy. But until ordinary households around the world regain the share of global GDP that they lost in the past two decades, the world will continue to face the same choices: an unsustainable increase in debt, an increase in productive investment, or higher global unemployment, that latter of which will be distributed through trade conflict.

Emerging markets may well rebound strongly in the coming months, but any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.

Read more here

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WHY IS HOUSEHOLD SHARE OF GDP SHRINKING?

READ BELOW

GLOBALIZATION DEMAND - Household Share of GDP The Problem

50% Profit Growth & Historical Realities 03-04-14 Lance Roberts of STA Wealth Management via ZG

As the markets push once again into record territory the question of valuations becomes ever more important.� While valuations are a poor timing tool in the short term for investors, in the long run valuation levels have everything to do with future returns.� The reason I bring this up is that in 2013 reported earnings per share for the S&P 500 rose by 15.9% to a record of $100.28 per share with roughly 40% of that increase occurring in the 4th quarter alone.� That late surge in corporate profits was a bit of a surprise as estimates had been lowered going into the end of last year.� The question, however, remains the ongoing sustainability of that growth rate of earnings going forward.� John Hussman,�via Hussman Funds, made an interesting point in this regard in a recent note:

"I’ve noted frequently that after-tax corporate profits as a share of national income are about 70% above historical norms; that these profit shares are heavily mean-reverting and strongly (inversely) associated with subsequent profit growth over the following 3-4 year period; and that the current surplus of corporate profits is the mirror-image of corresponding deficits in household and government savings (a relationship detailed in prior weekly comments). Recent profits data, as well as the entire historical record, are tightly explained by these factors.

Notably, this data is derived from the national income accounts computed by the Bureau of Economic Analysis, and it’s worth understanding how the BEA computes profits. Specifically, the BEA points out, 'Because national income is defined as the income of U.S. residents, its profits component includes income earned abroad by U.S. corporations and excludes income earned in the United States by foreigners.'”

The chart below shows corporate profits, per the BEA, divided by GDP.��(You can substitute GNP but the result is virtually identical between the two measures.)

The current levels of profits, as a share of GDP, are at record levels.� This is interesting because corporate profits should be a reflection of the underlying economic strength.� However, in recent years, due to financial engineering, wage and employment suppression and increase in productivity, corporate profits have become extremely deviated.

This deviation begs the question of sustainability.� Currently, according to the�S&P website, reported corporate earnings are expected to grow by 20.26% in 2014, and by an additional 20.28% in 2015.� In total,�reported earnings are expected to grow by almost 50%($100.28/share as of 2013 to $147.50/share in 2015)�over the next two years.

If we assume that these projections are accurate, and we assume a continued growth rate of 2% annually in the economy�(as has been witness the average since 1999)�we can put the current environment into perspective.� The chart below shows real, inflation adjusted, GDP and reported earnings, both actual and estimates, through 2015.

I also notated the previous earnings trendline estimates that existed prior to each market peak. �

The sustainability of corporate profits is dependent on two primary factors; sustained revenue growth and cost controls.� From each dollar of sales is subtracted the operating costs of the business to achieve net profitability.� The chart below shows the percentage change of sales, what happens at the top line of the income statement, as compared to actual earnings�(reported and operating)�growth.�

Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression.� The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth.� This has been achieved by increases in productivity, technology and offshoring of labor.� However, it is important to note that benefits from such actions are finite.

As asset prices continue to surge higher in hopes of an�"economic revival,"�the question of"sustainability"�of corporate profitability looms large.

As John Hussman concludes:

"Given the economic landscape of recent years, large offsetting sectoral deficits and surpluses are not surprising, but they should not be taken as evidence that the long-term profitability of the corporate sector has permanently shifted higher. Stocks are not a claim to a few years of cash flows, but decades and decades of them. By pricing stocks as if current profits are representative of the indefinite future, investors have ensured themselves a rude awakening over time. Equity valuations are decidedly a long-term proposition, and from present levels, the implied long-term returns are quite dim.

The chart below (CPATAX/GNP) provides a good summary of the present situation, and a reasonable sense of what we expect for corporate profit growth over the coming several years."

As we know from repeatedly from history, extrapolated projections rarely happen.� Could this time be different?� Sure.��However, believing that historical tendencies have evolved into a new paradigm will likely have the same results as playing leapfrog with a Unicorn.�

There is mounting evidence, from valuations being paid in M&A deals, junk bond yields, margin debt and price extensions from long term means,�"irrational exuberance"�is once again returning to the financial markets.� However, that does not mean that a mean reversion process in imminent.� It was in 1996 when Alan Greenspan first uttered those famous words, it was 4 years later before investors regretted not paying attention them.� It is likely that the same will be true this time.� With the Federal Reserve still pushing liquidity into the markets, there is little to deter the�"bullish bias"�presently.� However, as John noted above, investors that fail to heed the warning signs will likely ensure themselves a rude awakening over time

WATER - EPA Defines "Water"

�

Abnormal heat and cold temperature is resulting in Water shortages. This in turn is resulting in Food price increases.

�

�

If you are an investor in the stock market, you may be in for a wild ride during the rest of this year. Think ROLLERCOASTER: slowly up, up, up, up and then, whoosh, way down fast. And, then, up again. Here’s why.

Liquidity determines the direction of asset prices; and the level of liquidity in the markets is going to change abruptly between the second and third quarter of this year. According to my calculations, liquidity will shift from being abundant – even excessive – in the second quarter to being tight in the third quarter and, then, very tight in the fourth quarter. This sudden change in liquidity conditions could whipsaw the markets.

�

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The Fed has begun tapering Quantitative Easing. Nevertheless, it still intends to create $145 billion new dollars during the second quarter. It will inject that liquidity into the markets by acquiring financial assets. On the other side, the government is unlikely to absorb any liquidity at all during that period. Americans pay their taxes in April. Therefore, the US Treasury will probably have all the cash it needs and won’t have to sell any new (liquidity-absorbing) bonds during the second quarter. That’s going to leave a lot of excess liquidity sloshing around the financial markets between now and the end of June. And, when there is excess liquidity, stock prices tend to rise.

By the third quarter, it will be a different story, however. The Fed will print much less and the government will borrow much more. During those three months, the Fed intends to create only $85 billion, whereas the government could have to borrow $180 billion or more. With the government borrowing more than the Fed is printing, there will no longer be any excess liquidity. In fact, there will be a liquidity drain. The markets have been spoiled by a great deal of excess liquidity since the end of 2012 when the Fed launched QE 3. They are going to find the reduction in liquidity very unpleasant. Bond yields are likely to begin moving up and stock prices are likely to begin moving down. It is in such moments that stock market panics often take hold.

If investors do manage to maintain their nerve throughout the third quarter, they may find it considerably more difficult to remain calm during the fourth. The Fed has signaled that it will only print $20 billion during those three months, while the government is likely to have to borrow something like $240 billion to fund its budget deficit. (The budget deficit tends to be highest during the fourth quarter.) With the government sucking out much more liquidity than the Fed is pumping in, liquidity will be drained from the markets. In that environment, bond yields will rise. That will push up the cost of mortgages, causing the property market to take a hit. All this would be too much for the stock market to bear. If share prices don’t fall in Q3, then, in the scenario being described here, they seem very likely to fall in Q4. Falling home prices and stock prices would cause a big drop in household sector wealth. Consumption would decline and the US would tumble back into recession, pulling the rest of the world down with it.

I write “would” instead of “will” because I don’t believe the Fed will allow that scenario to play out. The Fed has worked very hard to push up asset prices in order to make the economy grow. I don’t believe they will allow liquidity to tighten to the point where asset prices tumble again and drag the economy back into recession. That means that sometime during the third quarter, if not before, the Fed is going to have to announce it will stop tapering QE. That announcement may prove to be the biggest financial news story of the year.

If I am right about this, then stocks are likely to move higher – and perhaps significantly higher – between now and mid-year. They will then begin to correct – and, again, perhaps quite significantly - during the third quarter. At that point, the Fed will ride to the rescue by announcing that it will continue its program of Quantitative Easing on into the indefinite future. Stocks will rally again on that news.

This rollercoaster scenario is the one that strikes me as the most likely as of now. Of course, the future’s not ours to see. Things change unexpectedly. Big disruptions appear out of nowhere. So, we’ll have to wait and see. However, given what we know now, it looks to me that liquidity is going to tighten substantially. That suggests that either the stock market is going to buckle or, more probably, the Fed will backtrack again and keep its printing presses working overtime.

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Fight Inequality With Better Jobs 03-02-14 Mort Zuckerman WSJ

The anemic recovery has left millions still out of work or underemployed. The long-term solution: education.

Adecade ago, before "income inequality" became a political watchword, the World Bank issued a report called "Beyond Economic Growth." The 2004 study concluded with this message: "An excessively equal distribution can be bad for economic efficiency. Take, for example, the experience of socialist countries where deliberately low inequality deprives people of the incentives needed for their active participation in economic activities." Among the consequences, the report noted, is "slower economic growth leading to more poverty."

That insight is in danger of being lost nowadays, when many Americans, encouraged by their political leaders, have come to view the U.S. economy as a winner-take-all system. The disequilibrium in the distribution of wealth today is not hard to discern: The wealthiest 1% has captured 95% of the growth of wealth between 2009 and 2013, while the bottom 90% has become poorer in real terms.

Yet these facts can distort the fundamental economic issue facing America. That issue is jobs—their scarcity and the quality of those that people manage to find.

The unemployment rate is about 13% if you take into account people "marginally attached" to the workforce. The Bureau of Labor Statistics reports that at the end of 2013

• There were about 27.3 million part-time jobs, making up about 18% of the workforce.
• Youth unemployment is a stunning 14%.
• It is particularly distressing that the labor participation rate has hit a 35-year low of 63.2%.
• This rate has dropped most noticeably for men and women in their prime earning years between the ages of 25 and 54 and is up only slightly for those 55 and over.

No wonder recovery is a dirty word to millions of Americans who continue to experience hardship five years after the Great Recession of 2008-09. On Friday, the Commerce Department announced that fourth-quarter economic growth for 2013 was even lower than predicted, coming in at a desultory 2.4%. That is bad news for Americans who need work.

Job losses in the low-wage and minimum-wage category is the critical issue of our day: Too many of the poor are not working full time or at all. Income inequality isn't so much the problem as income inadequacy.

A more robust economy, stoked by growth-oriented policies from Washington, would help produce the jobs and opportunities that millions of Americans need to climb the economic ladder.

A landmark new study by Harvard economics professor Raj Chetty asserts that advances in opportunity provided by expanded social programs have been offset by increased global trade and advanced technology that in turn have limited the traditional sources of middle-income jobs. But there is a simpler reason that the country remains mired in the weakest recovery from a recession since World War II: Government has diminished animal spirits by displaying a hostile attitude toward business.

That attitude is evident in everything from excessive corporate taxes to the incompetence and dishonesty of the ObamaCare rollout. Government is perpetually establishing economic policies and rules that business perceives as overregulation, dampening the willingness to invest—as witnessed by the slowest rate of capital investment in decades on corporate plant equipment and machinery.

What is to be done to restore upward mobility with more and better jobs? The key is education, and that is where policy makers should focus. The two main sectors seeing healthy job growth today are education and health care—where having a college education is essential. Those with less than a high-school diploma have an unemployment rate triple those with a college degree (3.2%).

Hoping for a return of manufacturing jobs for less-skilled workers is a pipe dream. Since 1979, the U.S. economy has added 45 million workers but has lost eight million manufacturing jobs. Technology has transformed the very nature of many industries:

Eastman Kodak an iconic photography company that in its heyday had 145,000 employees, filed for bankruptcy in 2012—the same year that Facebook paid $1 billion to buy the photo-related business Instagram, which had 13 employees.

Silicon Valley companies and others across the country report that many tech jobs go unfilled because they can't find knowledgeable workers. Firms are offshoring their science, technology, engineering and math (STEM) jobs given the lack of qualified technical workers at home. There is a shortage of skilled labor generally: Nearly one in four small businesses, according to a February 2014 National Federation of Independent Business survey, have at least one position open because they have few or no qualified applicants.

When technology jobs go begging, we inhibit startups in a field where each new job creates another five in the nearby community. As Enrico Moretti points out in "The New Geography of Jobs," a half-million new tech startup jobs translate into 2.5 million other new jobs.

Federal and state education policy should step up support for science, technology, engineering and mathematics, in tandem with organizations such as Project Lead the Way, Achieve and Techbridge in building interest in these subjects. Not every tech job requires a college education: Better job-training can prepare young people for these good-paying jobs. The Department of Commerce's Economics and Statistics Administration has found that employees in STEM jobs earn 26% more than workers in non-STEM positions.

We must also welcome people from abroad who are trained in STEM disciplines. That means restoring the H1-B visa admissions program to the higher levels of earlier years—195,000 a year compared with only 65,000 today. A high proportion of these immigrants start new businesses, which are the source of some three million new jobs a year. Another way to encourage startups would be a tax holiday for their first three years of business.

The political system is failing us.

Washington doesn't seem to be listening, as our political parties are focused more on ideological conflict than the good of the country. Their inability to respond forcefully and practically to America's needs is no longer tolerable. Our national leadership must respond before more lives are ruined.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

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