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Sunday, August 31, 2014 6:20 PM

Putin Calls for Eastern Ukraine Statehood

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Putin threw fat into the Ukrainian fire today by calling for Talks on Eastern Ukraine Statehood.

The question at hand is" What precisely does Putin mean by "statehood" ?

Russian President Vladimir Putin called on Sunday for immediate talks on the "statehood" of southern and eastern Ukraine, although his spokesman said this did not mean Moscow now endorsed rebel calls for independence for territory they have seized.

The Kremlin leader's remarks, two days after a public appearance in which he compared the Kiev government with Nazis and warned the West not to "mess with us", came as Europe and the United States prepared possible further sanctions to halt what they say is direct Russian military involvement in the war in Ukraine.

Germany aired suspicions that Moscow might be trying to create a land corridor to supply Crimea, which it annexed from Ukraine in March, while the four-month conflict moved onto the sea for the first time on Sunday. The separatists said they had fired on a Ukrainian vessel in the Azov Sea using land-based artillery, and a military spokesman in Kiev said a rescue operation was under way.

Ukrainian troops and local residents were reinforcing the port of Mariupol on Sunday, the next big city in the path of pro-Russian fighters who pushed back government forces along the Azov Sea this past week in an offensive on a new front.

Talks should be held immediately "and not just on technical issues but on the political organization of society and statehood in southeastern Ukraine", Putin said in an interview with Channel 1 state television, his hair tousled by wind on the shore of a lake.

Moscow, for its part, he said, could not stand aside while people were being shot "almost at point blank".

Putin's spokesman Dmitry Peskov said there was no new endorsement from Moscow for rebel independence. Asked if "New Russia", a term pro-Moscow rebels use for their territory, should still be part of Ukraine, Peskov said: "Of course."

"Only Ukraine can reach an agreement with New Russia, taking into account the interests of New Russia, and this is the only way to reach a political settlement."
Federation or Totally Independent Eastern State?

If one takes the statements from Russia at face value, it appears Putin is calling for a loose federation of some sort, with far more autonomy for the regions. Regardless, previous statements from Kiev shows Ukraine will not go for that.

Perhaps the threat of outright victory by the rebels will change their mind.

Mike "Mish" Shedlock

11:06 AM

Eurozone Currency Dispute Intensifies: France Wants More ECB Action to Correct Overvalued Euro, Germany Doesn't

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The currency and fiscal battleground front lines in Europe remains the same. France wants QE, fiscal stimulus, and more leeway on meeting fiscal deficit targets. Germany doesn't. And the fighting has strengthened.

The idea that ECB can produce nirvana by devaluing the euro is ridiculous. Yet, that's the battle cry of the day.

Bloomberg reports France Asks for More Action From ECB to Correct Overvalued Euro.

French Prime Minister Manuel Valls called for more action from the European Central Bank to lower the value of the euro, amid concerns the 18-nation region might be headed toward deflation.

“The monetary policy has started to change,” Valls said today in a speech made at the Socialist Party’s summer school in La Rochelle, France. While he called the ECB’s package of measures taken in June a “strong signal,” he also said that “one will have to go even further.”

Valls’s comments come after ECB President Mario Draghi, who’ll meet French President Francois Hollande tomorrow in Paris, signaled that declining inflation expectations are pushing the central bank toward introducing quantitative easing. Policy makers will gather in Frankfurt on Sept. 4 for their monetary-policy meeting.  

Inflation in the currency bloc slowed to 0.3 percent in August from a year earlier, the lowest since 2009, compared with an ECB target for price growth of just under 2 percent. Draghi has said that the ECB stands ready to embark on unconventional measures such as broad-based asset purchases to avoid a deflationary spiral of falling prices and households postponing their spending plans.  

In his speech, Draghi also called for complementary action on a European level and “a large public investment program.” German Chancellor Angela Merkel was disgruntled with the comments and called Draghi to ask if the ECB had changed course on austerity, Der Spiegel reported, without saying where it got the information.

The magazine’s assertion that Merkel “demanded answers” from Draghi “in no way corresponds to the facts,” Merkel spokesman Steffen Seibert said in a text message.
Inflation Won't Cure France

Contrary to popular belief, inflation will not spur consumer spending. Nor will inflation create any jobs or cause wage inflation.

Nonetheless, France demands the ECB wizards fix something that cannot be fixed by monetary policy.

Problem number one is the eurozone itself. The euro is fatally flawed. In addition, France's problem is that it is not competitive with Germany and arguably even Spain, not that the Euro is too high.

France desperately needs structural reforms.

  • It is nearly impossible to fire someone in France, so businesses are reluctant to hire. 
  • Government and union rules on everything are sheer madness.  
  • France seeks to save local bookstores by taxing online retailers and elimination of free shipping. 
  • Agricultural subsidies to save inefficient French farms (at great expense to the rest of Europe) are inane. 
  • Pension rules need fixes, and the retirement age needs to increase.
  • The "French way of life" is incompatible with rising productivity, especially on a relative basis, so France is increasingly left behind.

How is QE supposed to fix all that? It can't and it won't, but it increasingly looks as if the ECB may give it a try.

Mike "Mish" Shedlock

Saturday, August 30, 2014 11:58 PM

More Mindless Sanctions? Merkel a Liar or a Fool?

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As the tide in the Ukraine civil war turns, the EU threatens Russia with more mindless sanctions.

Bloomberg reports EU Vows More Russia Sanctions If War in Ukraine Worsens.

European Union leaders agreed to impose tougher sanctions on Russia, possibly targeting energy and finance, if the war in Ukraine worsens.

Leaders early today gave the European Commission a week to deliver proposals for the penalties. The EU left open the precise trigger for further sanctions, contrasting with a four-point ultimatum issued to Russian President Vladimir Putin on June 27 that preceded the latest curbs.

“We are close to the point of no return,” Ukrainian President Petro Poroshenko told reporters at the EU summit. “Thousands of foreign troops and hundreds of foreign tanks are now on the territory of Ukraine.” 

Earlier, EU leaders selected Polish Prime Minister Donald Tusk as the bloc’s next president and Italian Foreign Minister Federica Mogherini as chief diplomat after a bitter contest that showed the 28-nation EU’s divisions on how to deal with the Kremlin. Tusk has pushed for tougher sanctions on Russia while Mogherini has favored diplomacy. Leaders also met with Poroshenko.

The EU and the U.S. have already slapped visa bans and asset freezes on Russian individuals and companies, and since July have imposed steadily tougher sanctions targeting the country’s energy, finance and defense industries.

Merkel said the EU is looking at more measures to target Russia’s energy and finance industry.

Leaders disagreed about possible military assistance to Ukraine, with Lithuanian President Dalia Grybauskaite telling reporters before the meeting: “We need militarily to support and send military materials to Ukraine.”
Disagreements Everywhere

The entire, yet unstated, gist of the above article is there are disagreements everywhere: On sanctions, on military aid, on diplomacy vs. sanctions, and on triggers.

If this is a bluff, it is easily transparent. If it's not a bluff, it's economically stupid.

Merkel a Liar or a Fool?

Who is fooling whom when it comes to Merkel's claims "the EU is looking at more measures to target Russia’s energy and finance industry."

Merkel is either a liar or a fool. I believe Merkel knows full well sanctions are a losing game.

Target Russian energy and Russia will likely shut off natural gas supplies to Europe.

It was reckless enough to suggest that possibility in April. This is September. Winter is on the horizon. Want to risk it now?

My guess is that Merkel is a liar. If you prefer, call it an "obvious bluff".

Politically, Merkel has played her hand very well at every turn, with countless lies, bluffs, reversals, and opportunistic moves along the way, on countless eurozone issues.

Why should this time be any different?

Mike "Mish" Shedlock

12:49 PM

Obamacare Fine Print: Beware the Medicaid and Medi-Cal Clawbacks and Liens

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Obamacare greatly expanded Medicaid coverage, but there is a hidden gotcha that may come back and haunt your heirs for benefits you receive from age 55-64.

This is not new news, but few read and understand the "fine print".

In a warning about the "fine print" and in response to Moral Dilemma: Should a Libertarian Who Does Not Need Food Stamps, but Qualifies for Them, Take Them? reader "TL" writes ...

Hello Mish,

Your friend Steven may want to carefully research taking Medi-Cal benefits.

Medi-Cal, and many other state Medicaid programs include a ‘claw-back’ provision for recovery of costs incurred by the state to provide medical care.  While there is much variation in particulars from one state to another, the bottom line is these costs include a monthly ‘administrative fee’

The ‘claw-back’ mechanism functions via the state placing ‘liens’ on individual assets at the point the Medicaid recipient reaches age 55, then recovers the money at the point the Medicaid recipient dies by ‘seizing’ the money from the estate.

When first put into effect, these ‘claw-back’ provisions were primarily intended to recover costs to the state of providing long term nursing home care for older recipients. 

ObamaCare’s expanded Medicaid has, of course, now waived the assets portion of the ‘means test’.  But under current law, those assets are subject to ‘claw-back’. 

At the moment, the monthly ‘administrative fee’ amount for Medi-Cal is $611.  Those who sign up for Medicaid may not be doing themselves any favors.
Medi-Cal Clawbacks and Liens

The California Healthcare Foundation explains the rules in Estate Recovery Under Medi-Cal
Medi-Cal estate recovery refers to state action to reclaim certain Medi-Cal costs from the estates of beneficiaries after their death. This program, which has been in place for decades, has received renewed attention from policymakers because of reports that some individuals newly eligible for Medi-Cal as expanded under the Affordable Care Act (ACA) may not enroll for fear that their house and assets could later be seized.

... States also have the option to take a more expansive approach and seek recovery of costs for other covered services, not just LTSS, provided to beneficiaries age 55 and older. California has chosen this option and seeks recovery of Medi-Cal costs for all covered services provided to beneficiaries age 55 and over, with the exception of personal care services provided through the state’s In-Home Supportive Services (IHSS) program.  California has elected to use property liens to protect its claim in cases where the beneficiary was permanently institutionalized and not expected to return home. Medi-Cal places a lien against the beneficiary’s property while the beneficiary is still alive so it can seek recovery when the individual passes away or when the property is sold. 
Medicaid Fine Print

The Seattle Times discusses the fine print in Expanded Medicaid’s fine print holds surprise: ‘payback’ from estate after death
With an estimated 223,000 adults seeking health insurance headed toward Washington’s expanded Medicaid program over the next three years, the state’s estate-recovery rules, which allow collection of nearly all medical expenses, have come under fire.

Medicaid, in keeping with federal policy, has long tapped into estates. But because most low-income adults without disabilities could not qualify for typical medical coverage through Medicaid, recovery primarily involved expenses for nursing homes and other long-term care.

The federal Affordable Care Act (ACA) changed that. Now many more low-income residents will qualify for Medicaid, called Apple Health in Washington state.

But if they qualify for Medicaid, they’re not eligible for tax credits to subsidize a private health plan under the ACA, which requires all adults to have health insurance by March 31.

Unclear rules

One reason this snafu has become so troublesome is that ACA rules appear to give those who qualify for Medicaid little choice but to accept the coverage.

People cannot receive a tax credit to subsidize their purchase of a private health plan if their income qualifies them for Medicaid, said Bethany Frey, spokeswoman for the Washington Health Benefit Exchange.
Obama Care "Final Payment"

Paul Craig Roberts chimes in with Obamacare: The Final Payment–Raiding the Assets of Low-Income and Poor Americans

Kevin Knauss highlights Expanded Medi-Cal costs $611 per member per month

California Math

Under California recovery rules, $611 per month for 10 years (age 55-64), amounts to $73,320 (minimum) that would come from the estate.

Those signing up thinking Medicaid is free, better learn the rules.

It appears that Steven who now gets foods stamps is also trapped in a Medi-Cal program with claw-back rules, when he would simply prefer his prior medical plan, at his old rate.

Obamacare gotchas keep piling on.

Mike "Mish" Shedlock

Friday, August 29, 2014 9:53 PM

Moral Dilemma: Should a Libertarian Who Does Not Need Food Stamps, but Qualifies for Them, Take Them?

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Here's the moral dilemma of the day:

Suppose you are a staunch Libertarian, doing reasonably well and you don't need food stamps. Yet, under perverse rules, you qualify for them. Should you take them?

Reader Steven faces that exact question. Steven writes ...

Hi Mish

In response to your article 40% of U.S. on Welfare; Obamacare Expands Welfare by 23 Million; More on Welfare Than Full-Time-Employed I confess my own moral dilemma.

I am the beneficiary of trusts left to me by my parents. They are not huge, but they sustain me and my children. I prefer to spend time with my kids rather than pursue regular employment.

Until the beginning of this year, I was purchasing my own health insurance under a high deductible plan, that cost nearly $300 per month. It had risen steadily from $169 when I first obtained it two years ago. On December 31, my plan was essentially made illegal, with another plan costing nearly $600 put in its place.

I didn't have that much of a medical budget so I cancelled the plan. Three months later and in desperation for coverage, I spoke with an insurance agent who was sure, based on what I was telling her, that I would not qualify for Obamacere subsidies, but I would qualify for Medicaid which was a "better' program as it covers more services. She told me to march down to Medicaid with all my documentation and apply for coverage, which I did.

Because my trusts make all the money, my personal income is well below poverty line. Nevertheless I live quite comfortably. All the same, they eliminated the asset test for both Medicaid and food stamps, and am now receiving both.

I told my social worker the truth. I do not want to deal with a benefits fraud rap.

Because I have two dependent teens in my home, I now receive almost $500 per month for food in addition to the Medicaid coverage, which is pretty convenient. You should see the look on the cashiers' faces when, after paying for my food with the EBT card, I then pay for the non-food items with an American Express card, or even my black Visa card.

On the minus side, there are very few doctors in San Francisco worth visiting who accept Medi-Cal. I have yet to choose a doctor or a plan, and have been on the phone with state assemblymen and the Medi-cal ombudsman seeking better healthcare alternatives.

I wish I could just go back to my old, lousy plan that didn't pay for more than half of anything but which was accepted almost everywhere.

As a Libertarian, I face a moral dilemma. Should I accept benefits I don't really need?

In the case of Medicaid, I have to, or else live without coverage and/or be penalized by the IRS. But in regards to free food money, I am in a quandary.

This is also is a great story, which is why I am relating it to you now. Nothing says "broken" more than a welfare system that gives trust fund kids EBT cards.

Thanks for your awesome blog. I read it regularly.

Do What's Best For Your Family

My advice is simple: In general, you should do what is best for you and your family as long as it is legal.

I offered the same advice in regards to "Walking Away".

Comments from a Staunch Libertarian

I pinged Steven's question off Pater Tenebrarum at the Acting Man blog. Pater is one of the staunchest libertarians one could possibly find.

Pater replies ...
Ayn Rand has once addressed this question in the context of "should you accept research grants from the government". Essentially, her point is this: If the government has taken your taxes, you have every right to receive some restitution. Why should only the supporters of redistribution and statism get something, and you be left nothing but a paying victim?

So if your correct libertarian viewpoint is that you have been robbed, then getting something back is nothing but you claiming back some of what has been looted from you. You weren't in agreement with your wealth being appropriated by force, so it is only fair to get some restitution, however small.
Take the Money and Run

There is no moral dilemma. Take the money and run.

Mike "Mish" Shedlock

11:46 AM

"Economic Pilot in Reverse": US Consumer Spending Unexpectedly Dips; Zero for 79

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Mainstream media headlines in the last two days offer an amusing look at GDP forecasts.

GDP Stronger Than Expected

Yesterday, the Financial Times reported US Rebound Stronger than First Thought.

The US economy’s second quarter bounce was stronger than previously thought, with the official annualised growth estimate increased from 4 per cent to 4.2 per cent.

The revision is more evidence of robust underlying growth in the world’s biggest economy as it swung back from a weather affected 2.1 per cent fall in the first quarter.
"Economic Pilot in Reverse"

Today, the Wall Street Journal reported U.S. Consumer Spending Declines 0.1% in July.
Consumer spending fell in July and income growth was weak, signs that cautious consumers could restrain economic growth in the second half of the year.

Personal spending, which measures what Americans pay for everything from sneakers to doctor visits, declined a seasonally adjusted 0.1% in July from a month earlier, the Commerce Department said Friday. It was the first time spending fell in a month since January.

Personal income, reflecting income from wages, investment, and government aid, rose 0.2% in July—the smallest monthly increase of the year.

"Looks like the pilot threw the economy's engines into reverse at the start of the third quarter," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. Forecasts that the economy would grow at a strong 3% clip in the third quarter "look increasingly unrealistic if consumers don't return to the shops and malls."

Economists surveyed by The Wall Street Journal had predicted personal spending would increase 0.1% and incomes would rise 0.3% in July.

Barclays lowered its forecast for third-quarter growth by a half-percentage point to a 2.2% pace. Goldman Sachs economists lowered their estimate to a 3.1% annual rate from a 3.3% pace.
Diving Into the Numbers

Please consider Personal Income and Outlays: July 2014 by the BEA.
Personal income increased $28.6 billion, or 0.2 percent, and disposable personal income (DPI) increased $17.7 billion, or 0.1 percent, in July, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) decreased $13.6 billion, or 0.1 percent. In June, personal income increased $67.1 billion, or 0.5 percent, DPI increased $62.9 billion, or 0.5 percent, and PCE increased $50.5 billion, or 0.4 percent, based on revised estimates.
Real PCE Highlights

  • Real PCE -- PCE adjusted to remove price changes -- decreased 0.2 percent in July, in contrast to an increase of 0.2 percent in June.
  • Purchases of durable goods decreased 0.6 percent, in contrast to an increase of 0.5 percent.  Purchases of motor vehicles and parts accounted for most of the July decrease. 
  • Purchases of nondurable goods decreased 0.2 percent in July, in contrast to an increase of 0.3 percent in June. 
  • Purchases of services decreased 0.1 percent, in contrast to an increase of 0.1 percent.
  • The price index for PCE increased 0.1 percent in July, compared with an increase of 0.2 percent in June. 
  • The PCE price index, excluding food and energy, increased 0.1 percent in July, the same increase as in June.

Zero for 79

Bloomberg reports U.S. Consumer Spending Falls for First Time in Six Months.
Consumer spending in the U.S. unexpectedly dropped in July for the first time in six months, a sign households are lagging behind as wages fail to accelerate.

Household purchases decreased 0.1 percent after increasing 0.4 percent in June, Commerce Department figures showed today in Washington. None of the 79 economists in a Bloomberg survey projected a decrease.

Rounding out the differences between GDP analysis yesterday and today, ZeroHedge reports Here Come the Q3 GDP Downgrades.

Growth Engine

By the way, and in contrast to widespread economic thought, consumer spending is not the "engine of economic growth". Savings, investment, and production are.

Mike "Mish" Shedlock

12:36 AM

Japanese Household Spending Slumps 5.9%; Cries for More Monetary Stimulus

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Consumer spending in Japan slumped in June because of a tax hike pushed through by Prime Minister Shinzo Abe. Economists claimed it would be temporary and spending would quickly recover thanks to inflation.

Let's take a look at what actually happened.

Japanese Household Spending Slumps 5.9%

Yahoo!Finance reports Japan Household Spending Slumps, Output Flat as Tax Pain Persists

Japanese household spending fell much more than expected and factory output remained weak in July after plunging in June, government data showed, suggesting that soft exports and a sales tax hike in April may drag on the economy longer than expected.

Household spending fell 5.9 percent in July from a year earlier, nearly double the drop forecast in a Reuters poll, as the higher levy and bad weather kept consumers at home instead of going out shopping.

Weak exports left companies with a huge pile of inventories, forcing them to continue cutting back on factory output, separate data showed.

Industrial output rose 0.2 percent in July, much less than a 1.0 percent increase projected in a Reuters poll, data by the Ministry of Economy, Industry and Trade showed. That was a tepid rebound from a 3.4 percent fall in June, the fastest drop since the March 2011 earthquake.

Japan's economy shrank at an annualized 6.8 percent in the second quarter from the previous three months, more than erasing the 6.1 percent first-quarter surge in the run-up to the sales tax hike.

Analysts generally expect Abe to approve another tax hike in December, but that decision promises to be politically divisive, coming just as the government hammers out details of a promised corporate tax cut.
Amusing Details

The Financial Times has some amusing details in Japanese Economy Flounders After Sales Tax Rise
Consumer prices rose 3.4 per cent in July compared with a year earlier, including the added tax. Stripping out the tax effect as well as the impact of volatile fresh-food prices – the formula favoured by the Bank of Japan – showed underlying inflation was 1.3 per cent, a level unchanged from June.

The BoJ is facing a dilemma. The dramatic monetary expansion it embarked on in April last year has succeeded in reversing persistent consumer-price deflation, a goal the central bank had pursued fruitlessly for years.

But inflation is now both too high and too low: too high because wages have not kept pace with price rises, making the average worker worse off; but also too low, because the BoJ believes even larger price rises are needed to keep Japan out of deflation for good.

The bank has set a target for core inflation of 2 per cent but most private-sector economists believe that, unless demand in the economy picks up suddenly, more monetary stimulus will be needed to reach it. Yet simply printing more money could further widen the price-wage gap, in the short term if not the longer.

“It is important to recognise that the VAT hike has had a material impact on real income levels, suggesting that spending is now being held back mostly by a decline in real purchasing power,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse.
Inflation "Too High and Too Low"

Got that? Spending was supposed to pick up due to inflation. Instead it went south because of a decline in purchasing power, exactly the opposite of what Keynesian theory suggests.

The standard, Keynesian answer ... "more stimulus is needed" to raise prices to even more unaffordable levels.

Oh yeah! That will get everyone spending money they do not have to buy things they do not need.

And to top it off, Abe wants still more consumer tax hikes to rein in debt.

Keynesian Success

To be fair, I expect that someday Abe will succeed beyond his wildest dreams if he stays in office long enough. 

Want to know what success looks like?

Here's a recent example that depicts the ultimate in Keynesian Inflation Success.

I rather doubt it gets that far, but with politicians hell-bent on "success", one never knows.

Mike "Mish" Shedlock

Thursday, August 28, 2014 12:57 PM

Venezuelan Bolivar Plunges to Record Low on Black Market; Bond Default Coming Up in October?

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Please consider the "official" exchange rate of the Bolivar to the USD.

Bolivar vs. US Dollar

  • From 2005 to 2009 the official exchange rate was 2 bolivars to one US dollar.
  • In 2009 the official exchange rate soared to 4.3 to the dollar.
  • In 2013 the official exchange rate soared to 6.3 to the dollar.

Venezuela allows "very limited" trading at 50 to the US dollar in a parallel exchange called Sicad II.

On the black market today, it takes 89 bolivars to buy 1 US dollar. That is a 95% loss in value vs. the official exchange rate since 2013.

Black Market Record Low

Bloomberg reports Venezuela’s Black Market Bolivar Slides to Record Low.
Venezuela’s bolivar fell to a record low against the U.S. dollar on the black market today as the government tightens currency rationing to pay maturing debt.

A dollar fetched 89 bolivars on the Colombian border today, compared with the official exchange rate of 6.3 bolivars, according to dolartoday.com, a rate-tracking website. Two black market traders in Caracas, who asked not to be named because the trading isn’t legal, confirmed the record-low rate.

Inflation reached 60.9 percent in May, the last month for which figures are available, while according to economists surveyed by Bloomberg gross domestic product shrank 2.1 percent in the second quarter. The economic decline is pushing people to seek out dollars to protect the value of their savings, at the same time that the government tightens supply, Henkel Garcia, director of Caracas-based consulting firm Econometrica, said by telephone.

“The government has reduced disbursements of dollars at the secondary markets in recent weeks,” said Garcia, citing non-public data from the Venezuelan Banking Association. “They are trying to save up as many dollars as possible to meet obligations to bondholders.”

Venezuela has $4.5 billion of bonds maturing in October, according to data compiled by Bloomberg. The country’s foreign reserves reached an 11-year low of $20.1 billion on Aug. 21.

Officials have tried jailing traders, shuttering brokerages and setting up four parallel exchange systems to stem the rise of the unofficial rate in the 11 years since former President Hugo Chavez began controlling the bolivar’s price. Currency controls have failed to slow the world’s fastest inflation, while leading to shortages of everything from razors to cars.

Venezuela’s benchmark dollar bonds due in 2027 fell 0.44 cent at 12:37 a.m. in New York to 79.01 cents on the dollar. Yields on the note rose 8 basis points to 12.56 percent.
Bond Default Coming Up?

I wonder why 2027 bonds trade as high as 79 cents on the dollar, even with 12.56% interest rate.

On the $4.5 billion in bonds maturing in October, default seems likely enough.

If Venezuela makes the payment, its currency reserves will fall to about $15 billion. When that is gone, it's lights out. No more imports of anything.

Those who have the money to get out, do so.

But every day the cost goes up: Trapped in Venezuela: Looking to Get Out? Good Luck!

Mike "Mish" Shedlock

2:27 AM

Jane's Defense Caught With Pants Down: Ukraine Admits Rebel Counteroffensive, Including March to the Sea

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Jane's Defense vs. Colonel Cassad Take II

In response to Jane's Defense vs. Colonel Cassad: Someone Seriously Wrong, a close friend wrote ...

Jane’s has been in business giving good advice for a century and could only do so by giving good advice.  Everything I have read suggests that the rebels (who include a lot of Russian paramilitary) would have been about finished this past week, but for supplies coming in through Russian interference. The captured Russian soldiers two days ago day only make the interference look more like direct assault.  Colonel Cassad, on the other hand, appears to be a complete whack job who idolizes Joseph Stalin and thinks Putin is to weak.
My Response

The political views of Colonel Cassad, whether you like him or despise him are irrelevant. His military analysis, denied by Kiev for the past two weeks, took precisely one more day to prove correct.

March to the Sea

For several days, I have been commenting on a rebel "march to the sea", and the meaning of that march. On Wednesday, mainstream news verified the accuracy of my reports.

For no other reason than Ukraine could no longer hide the truth, Ukraine finally admitted what it could have and should have admitted a week ago: Rebels extend fight against Kiev to Ukraine’s south coast
Pro-Russian rebels entered a new town in southeast Ukraine on Wednesday while Kiev accused Russia of sending more troops into its territory, dispelling hopes of political progress after talks between the two countries’ presidents.

Rebels entered Novoazovsk, a strategically important town on the Sea of Azov 10km from the Russian border, the town’s mayor announced. It is on the road linking Russia to Crimea, the peninsula Moscow annexed in March, and is some distance south of the existing rebel strongholds of Donetsk and Lugansk.

The fighting around Novoazovsk creates a de facto new front in the conflict, close to Mariupol. This coastal city has been used by Ukraine as a logistical base to support its campaign against the rebels further north in Donetsk and Lugansk.

It could also signal that Moscow is seeking to establish a direct land link under its control between Russia and the seized Crimean peninsula nearly 300km away.

“Our forces are currently engaged with Russian forces with tanks that are on the territory of Ukraine near . . . Novoazovsk,” said Oleksander Danylyuk, an adviser to Ukraine’s defence minister. “We are also increasingly facing genuine Russian soldiers in addition to mercenaries armed by Russia on the other fronts in the Donetsk and Lugansk regions.
Genuine Russian Soldiers?

I am convinced this talk about direct military involvement by Russia is 90% hype if not more. A few soldiers captured and paraded about does not change that picture.

Is Russia looking the other way on military supplies? Of course. And if one understands Russia's fear of NATO, one should understand why.

Is it OK for the US to invade Iraq, but Russia to not send supplies to Russian speaking neighbors right on its border?

Would the US allow missiles in Cuba? Should Russia allow them in Ukraine?

Hey, just asking.

Jane Caught With Pants Down

My contacts informed me of the counteroffensive before it started. How is it that I could know of this counteroffensive before military experts?

Simply put, Jane got caught with her pants down, parroting complete nonsense from Kiev.

Was that good advice? Good intelligence? For whom? By whom?

The excuse that the war would have been over without Russia is ridiculous. Shouldn't Jane have known of that support?

There are no excuses, Jane clearly got caught parroting the view of Kiev.

I found this sentence by Jane particularly humorous: "Ukrainian army and national guard units appear to be better trained and motivated than the units that first engaged the rebels in the early days of the crisis back in April."

And these paragraphs are quite ironic ...
What has surprised many observers is the reluctance of Russian president Vladimir Putin to intervene directly to prop up the self-proclaimed People's Republics of Donetsk and Lugansk. So far the Russian armed forces do not seem to have been sent to fight openly alongside the rebels, although NATO claims Moscow is regularly allowing resupply convoys to cross the border.

This might indicate the threat of Western economic sanctions is having some impact, but it is more likely Putin is concerned about public reaction to heavy casualties among conscript soldiers in regular army units.
Someone Seriously Wrong ... Again

Two days ago I questioned whether Jane was wrong or Colonel Cassad. We now have the answer.

Today, and in reference to Russian troops, I ask: "Is Jane's Defense right or Kiev?"

The Southern Front Catastrophe

Let's move on. I have a new map update and history suggests Jane better pay attention.

Please consider The Southern Front Catastrophe – August 27, 2014

Detail Mariupol

Detail Lugansk

Novorossiya Military Briefing – Novorossiya Shall Be!

Please consider Novorossiya Military Briefing – Novorossiya Shall Be! translated from Colonel Cassad Live Journal by Daniel Mikhailovich.
We are currently witnessing an epic and in its own way historic event. The Ukrainian regular army and the punitive battalions are suffering a catastrophic defeat to the south of Donetsk. Only a short time ago the Republics were in dire straits: the DPR was hanging only by a thin supply thread, which the Ukrainian army was attempting to sever near Shakhtersk and Krasnyi Luch; the summit of Saur-Mogila has been abandoned, and Bolotov’s counteroffensive had failed to bring decisive victories.

To many it seemed that the Militia forces were on the ropes and just about to break, which would have led to the collapse of Novorossiya and a military victory for the fascist Junta. ...

The Junta did not conceal its plans, and the preparations for the assaults on Shakhtersk and Lugansk were openly discussed. The bravura level of the Junta’s triumphant reports that came with each new breakthrough of its mechanized battle groups was off the charts.
It's a lengthy and worthwhile read. Here are some more snips towards the end.
This new frontline is a gaping hole for the Junta, which has nothing to plug it with. The remnants of its forces, including Battalion Azov, fled to Mariupol, in the process abandoning several settlements virtually without a shot. As a result, the Militia rolled directly into the suburbs of Novoazovsk and onto the approaches to Mariupol. On the Junta’s side, there is virtually no front from the area south of Starobeshevo and up to Novoazovsk. The Milita’s lack of sufficient troops is the only thing slowing down the looming catastrophe.

Overall, it still is not quite clear how the Junta intends to avoid a complete defeat here. It will clearly not be able to restore the previous frontline, and the only question is whether the surrounded troops will be able to break out (and as they will have to do so on their own, it is likely that they will have to make that decision as soon as possible), and where the Militia’s offensive will stop – they still have fairly limited forces and they are now routing a larger force with a smaller force.

In the meantime, the once-solid front, which stretched from Marinovka to Yelenovka has now broken up into separate pockets of resistance with intercepted supply lines. After this disaster it became absolutely clear that the Junta does not have the capacity to destroy Novorossiya. By squandering the most combat-capable brigades in systematic offensive operations, the Junta sustained enormous losses and at the same time suffered a crushing, purely military defeat. The southern front has collapsed. Novorossiya shall exist!
About the Counter-Offensive

Also consider a few snips from About the Militia Counter-Offensive. Original Source: Colonel Cassad.

Note: These snips came out ahead of the meeting between Putin and Ukrainian President Petro Poroshenko.
1. The situation has become precarious for the Junta in the area of ​​Novoazovsk and Mariupol. The Militia forces that penetrated from the north, and also those that moved along the border with the Russian Federation, created an operational crisis in the area of Novoazovsk, which in itself implies a threat to Mariupol. The panic on the Junta-aligned websites is not without foundation. As we mentioned earlier, there are very few combat-capable units there – a hodgepodge of police, punitive troops, border guards and air defense personnel, clearly not the forces you can repel a serious Militia offensive with.

For now the Junta is saved by the fact that the Militia forces there are not so big and they are not achieving decisive results yet, although the threat has already become very serious.

[Mish: Let me interject here. Cassad does not offer a one-sided analysis. He was not a happy camper at the onset of the Kiev offensive, and he cautions repeatedly about over-euphoria. He notes that as of now, rebels have insufficient troops to take Mariupol, at least right now.]

Currently, the Junta faces a very unpleasant prospect – either it has to urgently find reserves for the new front that suddenly opened up, or else it risks losing Novoazovsk and may face a real threat of losing Mariupol. In general, this blow is very unpleasant for the Junta, and it is further complicated by the problems to the south of Donetsk.

2. The gap in the front to the south of Amvrosievka, which the Junta recklessly didn’t plug for a few days, led to a disaster as expected. Not only did the Militia use the gap to advance to Uspenka and Novoazovsk and to create a threat for Mariupol. Also, the Junta units that were drawn into the battle for Ilovaysk have spent their reserves, which resulted in a Militia advance onto those Junta battle groups’ communications and the threat of attacking Militia units taking Amvrosievka. An encirclement of a kind emerged, which is already the 3rd encirclement in the south. Although this one is more of a partial encirclement – the Militia intercepted a number of important roads to the south of the main forces of the Junta battle group, but there’s no talk yet about a complete encirclement across all paths, because the Militia are actually encircling a larger force with a smaller one. In the next few days the Junta will try to break out of this critical encirclement, but if they fail to do this, then the first two southern cauldrons will be chump change compared to this one.

3. The encirclement by Dyakovo is still not eliminated, the encircled forces were given standard terms – leave and be interned in Russia, handing over the vehicles and weapons – but their leadership refuses to accept those, for now. But overall, the elimination of that encirclement is just a matter of time and losses. Of course I would prefer for the Militia to get the vehicles. 

The very nature of the events in the Donbass is changing and now the argument is starting to shift from “will Novorossiya survive?” to “what consequences will there be of the Junta’s defeat in Donbass?”;  including the question of “what borders would be the starting point of negotiation?”. Perhaps the first diplomatic overtures will happen tomorrow in Minsk.
Ceasefire Proposal in Review

Wednesday's Ukraine announcement admitting rebel counteroffensive ties in quite nicely with questions I asked in Ukraine Seeks Ceasefire Following 'Very Tough and Complex" Talks With Putin.
What Changed?

  • Ukrainian resolve?
  • Ukraine is bankrupt and the IMF made it clear it won't fund wars?
  • Rebels are now winning?
  • Ukraine finally realizes war is a losing game?
  • Russian sanctions starting to bite harder than Ukraine admitted?

Advice for Jane

Pay less attention to Kiev proclamations and more attention to what Colonel Cassad says is happening.

By the way, it's safe to figure that whatever the losing side admits (in recent weeks, Kiev), the losses are way worse.

Mike "Mish" Shedlock

12:15 AM

Trapped in Venezuela: Looking to Get Out? Good Luck!

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Every day, the cost of a plane ticket out of Venezuela goes up. That assumes you can get a plane ticket, and you probably cannot, even if you booked three months ago.  Delta Air Lines, American Airlines, and Lufthansa cut the number of flights. Air Canada stopped all service.

Economy class tickets to New York city cost as much as $3,000, if you can get them. And you probably can't. Instead, people take five-day rides to Lima, Peru as a means of escape. And that takes money as well.

The result is best described as Trapped in Venezuela

With the cash-strapped government holding back on releasing $3.8 billion in airline-ticket revenue because of strict currency controls, carriers have slashed service to Venezuela by half since January, adding another layer of frustration to daily life here.

The lack of flights is complicating family vacations, business trips and the evacuation plans of Venezuelans who want to leave the country, which is whipsawed by 60% inflation, crime, food shortages and diminishing job prospects. Steve H. Hanke, a Johns Hopkins University economics professor, says Venezuela tops his so-called "misery index," which takes into account inflation, unemployment, economic stagnation and other factors in 89 countries.

"In Venezuela, you have the sensation that you can't leave," says Virginia Hernández, a Venezuelan who is studying orthodontics in Argentina. During a recent trip to see family in Caracas, she wound up marooned. The Venezuelan state-run carrier Conviasa had no plane available to fly its scheduled Caracas-to-Buenos Aires route, and other airlines servicing Argentina had sold out their flights.

The Caracas polling company Datanalisis found that one in 10 citizens—most of them middle- and upper-class Venezuelans between 18 and 35—are seeking to leave the country, more than double the number who sought to abandon it in 2002, which was marked by an unsuccessful coup attempt against then President Hugo Chavez and a paralyzing oil strike.

Travel agents are swamped with requests but turn customers away because there are no tickets to sell. Some travelers are left taking the bus, with trips to Lima, Peru, a five-day journey, now packed with middle-class Venezuelans who used to fly.

Many Venezuelans who want to leave the country simply can't. Tickets for short flights to other transit hubs in the region, such as Panama City or Bogotá, are difficult to come by.

On top of that, stringent currency controls mean that Venezuelans have access to only $400 a year, making it nearly impossible to pay the high prices airlines demand for tickets on the Web.

"Just about all of my friends want to get out of here," said Roberto Villarroel, a 19-year-old university student who wants to move to Argentina. "I'm still looking for a ticket, though. The prices go up every day."

Some Venezuelans, particularly those who are affluent, are paying whatever price is required to leave.

Rafael Larrazabal, a 44-year-old businessman, could find only first-class tickets on Delta, and he purchased them months in advance. On a recent day, he, his wife and two young children boarded a flight to Atlanta and then Berlin, where they plan to start anew.

"What's the future here?" remarked Mr. Larrazabal at a tearful family send-off. "The country is not functioning. There's crime. I said, 'Let me see if I can get out of here alive and then see what happens.'"
Hyperinflation, Venezuela Style

That's hyperinflation folks, a complete collapse of faith in currency.

People think it's going to happen to the US. They are crazy.

Mike "Mish" Shedlock

Wednesday, August 27, 2014 3:07 PM

IMF Chief Under Investigation in French Fraud Case; Meet David Lipton (an Obama Clone), Lagarde's Possible Replacement

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IMF chief Christine Lagarde Under Formal Investigation in French fraud case.

IMF chief Christine Lagarde has been put under formal investigation by French magistrates for alleged negligence in a political fraud affair dating from 2008 when she was finance minister.

Lagarde was questioned by magistrates in Paris this week for a fourth time under her existing status as a witness in the long-running saga over allegations that tycoon Bernard Tapie won a large arbitration payout due to his political connections.

Under French law, magistrates place a person under formal investigation when they believe there are indications of wrongdoing, but that does not always lead to a trial.

Lagarde's lawyer, Yves Repiquet, told Reuters he would personally appeal the magistrates' decision. That means Lagarde would not have to return to Paris in the meantime, allowing her to continue her duties as managing director of the International Monetary Fund uninterrupted.

The inquiry relates to allegations that Tapie, a supporter of conservative former President Nicolas Sarkozy, was improperly awarded 403 million euros ($531 million) in an arbitration to settle a dispute with now defunct state-owned bank Credit Lyonnais.

The inquiry has already embroiled several of Sarkozy's cabinet members and France Telecom's chief executive, Stephane Richard, who was an aide to Lagarde when she was Sarkozy's finance minister.

In previous rounds of questioning, Lagarde has not recognized as her own the pre-printed signature to sign off on a document facilitating the payment, Repiquet told Reuters by telephone.
What's This Really About?

Politics. If Nicholas Sarkozy won the last presidential election instead of Francois Hollande, there would be no investigation.

Is Lagarde guilty of anything?

Not knowing the peculiarities of French laws (other than to know full well from personal experience, French laws are damn peculiar), it's hard to say.  For my experience, please see Mish Fined 8,000 Euros for Quoting French Blog.

In the US, it's safe to conclude that anyone who funneled funds for political purposes would be considered a hero by one side, with the other side demanding "justice".

In the US, individuals other than Bernie Madoff and Martha Stewart don't get prosecuted. And companies, especially banks, get off the hook with at most a small fine relative to the billions of dollars siphoned out of the system.

Does it Matter?

Does it matter if Lagarde is forced out of the IMF?

Not at all. I am quite certain the IMF can find someone equally incompetent, if not far worse, to take her place.

Isn't that the goal?

Meet David Lipton

Waiting in the wings to replace Lagarde is David Lipton, IMF First Deputy Managing Director, a US citizen who would likely replace Lagarde if she could not fulfill her duties.

Previously, Lipton was a Managing Director at Citi, where he was Head of Global Country Risk Management.

Lipton an Obama Clone on Income Inequality

Please consider Lipton's views on Fiscal Policy and Income Inequality.
Thank you for providing me the opportunity to present the key findings of a new IMF study on fiscal policy and income inequality.

Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many have faced in part stemming from the global financial crisis, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever degree of redistribution governments choose, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.

Based on these principles, we examine a range of options for achieving redistribution efficiently.

To start, countries could consider making their income tax systems more progressive. For example, in economies where a flat rate is used, there may be scope for more tax progression at the top.

There is also scope to more fully utilize property taxes, both as a source of revenue and as an efficient redistributive instrument.

On the VAT, the recommendation is thus to minimize exemptions and special rates, in order to efficiently raise revenues to help finance pro-poor spending. For instance, elimination of reduced VAT rates in the United Kingdom, and using the proceeds to increase social benefits, would significantly reduce inequality.

On the expenditure side, I would like to start first with education. Improving the access of low-income families to education is an efficient tool for boosting equality of opportunity, and over the long run, it can also reduce income inequality. In advanced economies, this entails increasing the access to tertiary education for low-income families, including through scholarships and loans. For developing economies, a strengthening of access to quality secondary education is also required, for example, by eliminating tuition fees.

The good news is that quite a lot is now known about how governments can best address the challenges of squaring their equity and efficiency concerns, a task on which the Fund stands ready to help.

Thank you.
Things Can Always Be Worse

If you thought Lagarde was bad, the on-deck alternative clearly shows things can always be much worse.

Common Sense Proposal

The IMF is far worse than useless. Ideally, it should cease to exist. At a bare minimum, the US should stop all funding of this socialist predator entity.

Unfortunately, and given the IMF plays the role of economic hit-man for US banks, don't expect my common sense proposal to be adopted.

Mike "Mish" Shedlock

1:32 PM

US 10-Year Treasury Cheapest in G7, Yield Spread Near Record High

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Saxo Bank chief economist Steen Jakobsen points out the 10-Year US treasury note is the cheapest 10-year government bond in the G7, with the interest rate spread near a record high.

Spread of US 10-Year Note Yield vs. G7 Average Yield

click on chart for sharper image

Via email Steen says ...

US 10 Year cheapest in G-7! This is one of the reasons for my change to US fixed income and short US Dollar.

US 10 Year spread vs. G-7 equivalent now at 79 bps - close to all time high. As the chart indicates there is considerable mean-reversion in this data series.

The market is long, very long the US dollar into ECB and FOMC meetings where consensus quietly is looking for 10 bps cut by the ECB, maybe even announcement of "private" ABS [Asset Backed Securities]. In the US the regional banks want the discount rate normalized, but reality is close by.

I remain long US fixed income - and will add on any sell off. Long investors could use IEF.

IEF is the Barclays 7-10 Year Duration Bond Fund.


The 10-Year Treasury currently yields 2.37%. For the spread to be +0.79%, the G-7 average 10-Year yield is 1.58%.

$USD - US Dollar Index

US dollar has been rising in belief Fed tapering will complete and rate hike will follow. Meanwhile, the consensus bet is that rate cuts will take place in Europe.

Are rate hikes that will not happen priced into the US dollar ? I believe so and that is what Steen believes as well.

Mike "Mish" Shedlock

3:47 AM

Ukraine Seeks Ceasefire Following 'Very Tough and Complex" Talks With Putin

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On August 10, Ukraine said No Cease-Fire Until Rebels Surrender.

Things changed.

This just in ... On August 26, Reuters reported Poroshenko Seeks Ceasefire After 'Very Tough' Talks With Putin.

Ukrainian President Petro Poroshenko promised after late-night talks with Russia's Vladimir Putin to work on an urgent ceasefire plan to defuse the separatist conflict in the east of his former Soviet republic.

The first negotiations between the two leaders since June were described by Putin as positive, but he said it was not for Russia to get into the details of truce terms between the Kiev government and two rebel eastern regions.

"We didn't substantively discuss that, and we, Russia, can't substantively discuss conditions of a ceasefire, of agreements between Kiev, Donetsk and Luhansk. That's not our business, it's up to Ukraine itself," he told reporters early on Wednesday.

Poroshenko, after two hours of one-to-one talks which he described as "very tough and complex", told reporters: "A roadmap will be prepared in order to achieve as soon as possible a ceasefire regime which absolutely must be bilateral in character."

Despite the positive tone, it remained unclear how the rebels would respond to the idea of a ceasefire, how soon it could be agreed and how long it might stick.

And with Putin insisting the details were an internal matter for Kiev, there was no sign of progress on a fundamental point of disagreement: Ukraine's charges that Moscow is sending arms and fighters to help the rebels, and Russia's adamant denials.

The leaders shook hands at the start of their meeting in the Belarussian capital Minsk just hours after Kiev said it had captured Russian soldiers on a "special mission" on Ukrainian territory.

In a televised statement at the start of the talks, Putin urged Poroshenko not to step up his offensive against the pro-Moscow rebels, and threatened to slap economic penalties on Kiev for signing a trade accord with the European Union that he said would squeeze Russian goods out of its market.

Poroshenko replied by demanding a halt to arms shipments from Russia to the separatist fighters.

In his comments after the meetings, Putin said the two presidents agreed to talks on a resumption of gas supplies to Ukraine, which Russia severed in mid-June in a dispute over pricing and debt.

"We need to resume our energy dialogue, including about gas problems. Sincerely speaking, this is a complicated issue, it has reached a dead end, but we still need to talk about it. We agreed to resume these consultations," Putin said.
What Changed? 

  • Ukrainian resolve?
  • Ukraine is bankrupt and the IMF made it clear it won't fund wars?
  • Rebels are now winning?
  • Ukraine finally realizes war is a losing game?
  • Russian sanctions starting to bite harder than Ukraine admitted?

It's hard to say what, but something changed. Most likely a combination of things.

It will be interesting now to see what demand the rebels place for a ceasefire.They wanted one on August 10. Do they want one now? At what price?

Mike "Mish" Shedlock

Tuesday, August 26, 2014 9:40 PM

Jane's Defense vs. Colonel Cassad: Someone Seriously Wrong

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Given misinformation and outright lies by all involved, it's important to consider both sides of the story.

Military Endgame?

Jane's Defense claims Ukrainian Military Moves to Endgame.

Ukrainian troops have continued their offensive aimed at clearing pro-Russian rebels from the Donetsk and Lugansk regions despite strong resistance.

Both the Ukrainian and rebel forces are using tracked armour, heavy artillery, and rockets in the heaviest fighting seen in Europe since the Balkan conflicts of the 1990s.

The operation by Ukrainian troops, underway for more than a month, has pushed deep into rebel-held regions, with fighting now reported in the suburbs of the cities of Donetsk and Lugansk for several days. Reports on 20 August indicated that in Lugansk, Ukrainian troops had recaptured a central city police station.

Ukrainian forces appear to be trying to cut rebel forces in the two cities off from each other, as well as severing land routes to the Russian border to block supplies and reinforcements from reaching them.

The rebel setbacks of the past weeks have prompted three prominent rebel leaders - including their military commander, Igor Girkin, known as Strelkov; the political leader in Donetsk, Alexander Borodai; and the rebel head in Lugansk, Valery Bolotov - to step down. 


The continued determination of the Kiev government to prosecute its offensive into eastern Ukraine appears to be bearing fruit, although at a heavy cost in human life and damage to civilian property.

Ukrainian army and national guard units appear to be better trained and motivated than the units that first engaged the rebels in the early days of the crisis back in April.

The Ukrainian Interior Ministry has reported that about 25 battalions of national guard volunteers were fighting on the Donbas front and appear to be performing better than expected, considering they were only formed a few months ago. However, the OSCE reports a number of these units have been implicated in the abuse of civilians.

What has surprised many observers is the reluctance of Russian president Vladimir Putin to intervene directly to prop up the self-proclaimed People's Republics of Donetsk and Lugansk. So far the Russian armed forces do not seem to have been sent to fight openly alongside the rebels, although NATO claims Moscow is regularly allowing resupply convoys to cross the border.

This might indicate the threat of Western economic sanctions is having some impact, but it is more likely Putin is concerned about public reaction to heavy casualties among conscript soldiers in regular army units.
Someone Seriously Wrong


That Jane's Defense report is vastly different from what I presented earlier today in Outright Military Victory by Rebels? Ukraine Offensive in Donetsk and Lugansk Fails (representing the military situation from August 10-25). 

Who do you believe? Jane's Defense or. Colonel Cassad? Neither?

Is Jane's Defense unwittingly (or wittingly) spreading pro-Ukraine propaganda?

I cannot say for sure, but those are the hugely conflicting views.

Let me add, that if Colonel Cassad has the better version, Jane's Defense is seriously discredited.

Also, it's somewhat curious that contrary to mainstream media reports Jane's Defense says "So far the Russian armed forces do not seem to have been sent to fight openly alongside the rebels, although NATO claims Moscow is regularly allowing resupply convoys to cross the border."

That said, the Jane's Defense article is from August 22, while mainstream media articles on active Russia involvement started appearing within the past few days.

Nonetheless, Jane's Defense appears to have completely missed the Rebel Counteroffensive and what I call the "March to the Sea".

Is that not underway?
Are several Ukrainian cauldrons trapped and in serious trouble?  Or not?

Three day's timeline difference cannot possibly explain the totality of these huge reporting differences.

Someone is seriously wrong.

Mike "Mish" Shedlock

4:05 PM

Outright Military Victory by Rebels? Ukraine Offensive in Donetsk and Lugansk Fails

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Outright Military Victory by Rebels?

Militarily, if the rebel site maps and discussion are correct, the war may conclude with outright military victory by the rebels.

Whether or not you believe these maps or such talk, please note the mainstream media silence on the civil war in the last two weeks. At best, one can safely assume Kiev has nothing good to report.

Ukraine Offensive in Donetsk and Lugansk Fails

Rebel sites now proclaim Ukraine offensive in Donetsk and Lugansk have failed. Let's take a look at a translated map of major military operations August 10-25, 2014.

The map source is Colonel Casad. Translation by Kot Ivanov and Anthony Hartin on SLAVYANGRAD.org.

click on map for sharper image

Major Points (Condensed)

1. In the Olenvka Cauldron, Nation Guard units trapped. The Militia [rebels] continues to eliminate surrounded forces, destroying up to 8 tanks and 19 armored vehicles.

2. Part of Batalion Dnepr-2 is surrounded. It's commander is pleading for assistance.

10. Militia destroyed the military base in Sedovo [on the Azov Sea]

11. Battle in the area of Novoazovsk [near the Azov Sea]

20. Southern Cauldron continues to hold but Junta [Ukrainian] losses substantial. [Possible] Military trophies substantial. Encircled troops offered exit to Russia if they surrender military hardware.

August 22 Briefing

From the Novorossiya Military Briefing – Situation as of August 22, 2014 in English, by Anthony Hartin.

Emplasis in italics is mine

1. By August 22nd, 2014 it became completely obvious that the Junta will not be able to occupy Donetsk either by August 24th, 2014 or by September 1st, 2014. The general offensive that began on July 1st, 2014, and which was intended to crush Novorossiya, has chocked. The junta suffered key defeats near Shakhtersk and Krasniy Luch, when it was unable to cut off the DPR from the LPR, following which it became mired in bloody battles for Ilovaysk and Yasinovataya. At the same time, the southern battlegroup was crushed and routed in the Southern Cauldron.

2. It may still be too early to tell, but, overall, there is every indication that the army of Novorossiya is winning the strategic defensive operation. In the last several days, there has been a clear weakening of the Junta’s onslaught on the People’s Republics, as evidenced by the convulsive attempts to advance on Ilovaysk at all cost and the meandering of the semi-encircled troops to the south-west of Lugansk.

3. The fact that Yasinovataya and Ilovaysk were able to withstand the Junta’s onslaught completely derailed the announced assault on Donetsk. And the column of white trucks [Note: the Russian humanitarian aid convoy] that passed in the direction of Lugansk on August 22, 2014 vividly demonstrated that the plan of complete encirclement of Lugansk had failed and the breakthrough to Novosvetlovka and Khryashchevatoye had been pushed back. At the same time, the situation is worsening daily for the enemy troops that operated to the south-west and south of Lugansk, as the self-defense militia forces are conducting increasingly bolder and more decisive actions aimed at creating a new cauldron, which threatens to trap various units of three separate brigades and the attached support assets. Remember that only 4-5 days ago they were shouting that they were already in the center of Lugansk, sweeping the city.     

13. Overall, unless there is some sort of political conspiracy, the war will continue in September with the same ferocity, and its significance will gradually move away from the question of “Will Novorossiya survive or not” to the question of “What will the borders of Novorossiya be after the war”. In general, all of our sources in Novorossiya in the last days radiate optimism, and some even euphoria. Nevertheless, it is worth remembering that the Junta, though it lost some battles, did not lose the war yet, and after pulling up new forces and regrouping, it can either carry out a new attack or begin to build a strategic defensive line to leave Novorossiya as a war-torn stub, which it would be systematically destroying with artillery.

14. It should be understood that if the Junta puts together another offensive battlegroup somewhere, it could easily organize a new operational crisis for the Militia. So try not to indulge in excessive euphoria, winning the battle does not mean winning the war. There is a long and bloody struggle ahead of us.

15. In general, things we are improving, the trend is favorable. And yes, thanks to those who have already started to send us the first parcels with autumn-winter uniforms. Soon those will be needed.
August 24 Briefing

Overview of the Situation in the Donbass Region – August 24, 2014, in English, translated by Daniel Mikhailovich.

Condensed, emphasis is mine.
The Fighting in the Coastal Area

Even recently, it might have seemed laughable, but today the fighting has begun in the area of Novoazovsk, where a powerful anti-aircraft defense node and a hodgepodge of different units of questionable combat capability have been stationed since April to cover the border with Russia. After the Southern Encirclement 2.0 was created, the Militiamen began to probe the other checkpoints to the south-west of Marinovka, and were surprised to find out that there are almost no defenses. All the forces were drawn up to the main front line, creating a gap to the south of Amvrosievka, which was only partially covered with the covering forces. At first, the Militia’s saboteur-reconnaisance groups (“SRG”) began to infiltrate to the south-west, which has led to the capture of the “Uspenka” border checkpoint. After that, the Militia broke-out to the coast, as there were no serious forces of the Junta. As a result, several SRGs moved almost to Novoazovsk and the towns of Holodnoe and Sedovo, firing and attacking some checkpoints.

The Militia obviously doesn’t have enough forces there to seize and hold the towns (let alone capturing Novoazovsk or Mariupol); but judging by the reports that a bomb shelter has been opened in Mariupol, the command of the Junta in this area lost their nerve. It is not only that the gap along the border continues to expand, there is also a threat (even if remote for now) to Novoazovsk and Mariupol; as there are few Junta’s forces there, and nobody knows what can appear from across the border. Moreover, the gap in the front, to the south of Amvrosievka, also does not seem optimistic. In general, what is happening now is not yet an offensive with definite goals, but just a distracting raid in the rear of the enemy, which turned out to be an unpleasant surprise for the Junta. To be honest, very few people expected the fighting on the coast of the Sea of ​​Azov to start so soon. In general, the trend is favorable for us.


Today near Ilovaysk the Junta has continued its attempts “to break through the wall with its head”, sending almost all of the combat-ready forces to attack Ilovajsk. The attack bogged down even before the Junta talking heads could declare that Ilovajsk has been taken once again. This is a very weird stubbornness, given that a more effective plan would involve encircling and taking Mospino, and the gaps in the front to the south of Amvrosievka. The strategic point of the attack is long gone; it is an attempt to reverse the situation with insufficient forces – because even if by some miracle the Junta takes the ruins of Ilovaysk and pushes out the Militia, it will not go beyond one tactical success against the backdrop of the bleak strategic situation.

Saur-Mogila, Schachtersk and Torez

Fighting continued, with both sides largely staying on their positions. The Junta’s mechanized units tried to move towards Miner and Thorez, but didn’t make it far.

Theoretically, these battles are good for the Militia, as the Junta spends reserves there quite aimlessly.  That has made the punitive battalions (volunteer units made up of activists/neo-nazis/released criminals) suspect that the Junta command deliberately drives the southern battlegroup into a meat grinder. (That is one version – that they are agents of the Kremlin – another, because that is how Poroshenko gets rid of radical elements). All in all, another week or so of such operations, and the Junta there will be in for a surprise.  Southern Encirclement 2.0 has held out so far, but the Junta losses and the Militia trophies there will be considerable – the Militia is currently attacking on Dyakovo and offering the surrounded forces the same conditions as before – retreat to Russia, leaving the vehicles to the Militia.


In the north of Donetsk the Junta seems absolutely exhausted, only pretending that the failed offensive is proceeding via the SRGs’ forces and continuing shelling; whereas the self-defense Militia forces managed to start an offensive towards Uglegorsk which, although not yet taken, hardly looks like a springboard for the Junta’s attack on Yenakievo anymore. The Militia will try to take it in the coming days to protect Gorlovka and Yenakievo and prevent the bisection Donetsk-Gorlovka battlegroup. In general, it is now possible to say conclusively that the attack on Donetsk has failed, and there is no direct threat to the city.


To the north of Debalcevo, the self-defense forces delivered an unexpected blow to the Junta, towards the north-west, with the result that the forward units were able to move to the vicinity of Severodonetsk. There were overly optimistic statements that the Militia had been about to take back Severodonetsk and Lisichansk, but in fact, there is a lack of Militia forces there, and taking two major cities at once would be quite problematic, especially with the advance SRGs alone.


The Junta offensive against Lugansk failed. The enemy has been driven off from Hryaschevatoe; they are still holding by Novosvetlovskaya, but this is a purely defensive action. The self-defense militia forces have already started an offensive against Lutugino and Chast’e. The loss of either one of these would be a complete disaster for the battlegroup besieging Lugansk, as it would be dissected into several parts; although some of it is actually in operational encirclement even now. Today, predictably, there was an attack from the south in the Volnuhino area, and as a result, there is a direct threat to Lutugino; there are already militia combat recon groups on the outskirts. The general meaning of combat here is that if the militia take back Lutugino, they will then be able to fully control the route Lugansk-Krasny Luch, which would greatly enhance the connectivity of Novorossiya’s territory and the coordination of its armed forces. In this regard, Lutugino and Debalcevo are the key nodes of the transport network in the region, and control over them is a part of the struggle for the operational initiative.

In general, the situation, even though it is still difficult, is obviously improving. In a number of areas, the militia are now on the offensive, while the Junta offensive has petered out and stopped almost everywhere.

These excerpts do not seem irrational, euphoric, or overly-optimistic. 

And while I cannot assess the accuracy of the reports and maps, I can repeat: "If these assessments are anywhere close to accurate,  Kiev is in serious trouble".

Rebel forces talk of outright military victory, and that certainly does not seem to be out of the question.

Mike "Mish" Shedlock

1:40 PM

Incentives Up to $325K in China's Housing Market; Shopping on Taobao, China's "eBay-Like" Portal

Mish Moved to MishTalk.Com Click to Visit.

Developers in China are offering up to $325,000 in incentives to home buyers.

The catch? Incentives come in the form of a credit on Alibaba’s Taobao, an e-commerce platform similar to eBay. More modest discounts, some of them retroactive, are offered by other developers to combat sinking purchase volumes.

Sinking Sales Volumes , Prices

Sales are down 9.4% as measured by floor space compared to the same 7-month period last year. Prices are down in 55 of 70 cities in June vs. May, and in 35 of 70 cities in May vs. April.

Hefty Discounts

Please consider Developers Offer Hefty Discounts in Strained China Homes Market.

In the latest sign of Chinese developers’ desperation to unload inventory into a weak property market, China Vanke Co is offering discounts of up to $325,000 to homebuyers who shop on Alibaba’s Taobao, an e-commerce platform.

The country’s biggest developer will give discounts that match shoppers’ spending of up to Rmb2m ($325,000) on the eBay-like service. Homes in real estate developments in Beijing, Shanghai, Guangzhou and Chongqing, among other cities, will qualify, according to an advertisement on Taobao’s website.

While few would-be homebuyers could afford to spend millions of renminbi on Taobao in a single year, Vanke is offering a more modest discount of Rmb50,000 to those who have spent smaller sums on Taobao over the past year.

Gemdale Corp, the sixth-largest [property developer], reported a 50 per cent decline in net profit, even as operating revenue rose 3 per cent, after falling prices hit profit margins. Profit at China Merchants Property, the eighth-largest, declined 30 per cent on flat revenues.

The inventory build-up may get worse before it gets better. Several developers noted in their recent half-year reports that September and November will be a peak period for new housing completions. That will add to the supply overhang and increase pressure on developers to cut prices.
Inside Alibaba’s Taobao

The Financial Times reported "discounts of up to $325,000" but the discounts seem more like unrelated incentives than home price discounts.

Inquiring minds may be interested in a look at an English version of Alibaba’s Taobao to see how one might spend $325,000 (2,000,000 Rmb).

Here are a few examples

Let's put 50,000 Rmb discounts into perspective. Converted to dollars, it's a mere $8,127. That's not much of an incentive to buy a house. 

With a flood of inventory coming up, and prices falling already, discounts have only just begun.

Price inflation? Apparently not on Taobao. Unfortunately, I cannot get the site to work well. Clicking on any of the following links ...

... returns this exact message "this category can't be show,please goto taobao and find item you need.then come back to our site and use quick order to buy items you want."

User friendly? Not at all, at least for English-speaking shoppers.

Mike "Mish" Shedlock

Monday, August 25, 2014 11:10 PM

Burger King Flips Obama the Bird; BK, Warren Buffet, Greg Mankiw, Barry Ritholtz, Mish on Corporate Tax Inversion "Fairness"

Mish Moved to MishTalk.Com Click to Visit.

Obama Condemns CEOs

President Obama is fed up with corporations not paying their "fair tax".

On August 24, Bloomberg reported Inversion Express Slows to Crawl as Obama Condemns CEOs

On July 24 Obama referred to companies looking to shift their domicile as “corporate deserters” and aides pledged to curtail the practice with or without Congressional approval.

Since then, no companies have announced any of these deals -- known as inversions -- and it’s no coincidence, according to lawyers and investment bankers. The presidential rhetoric has caused several companies exploring inversions to put on the brakes to see what emerges from the political debate, people familiar with the preparations said.

Between mid-June and late-July, when Obama ramped up his criticism of the deals by calling companies that strike them “corporate deserters,” at least five large American companies announced plans for inversions, including AbbVie Inc. and Medtronic Inc. (MDT) Since the start of 2012, 21 U.S. companies have announced or completed such deals, or almost half the total of 51 such transactions in the last three decades.

After Obama called for “economic patriotism” from business leaders in July, Treasury Secretary Jack Lew said the agency was examining options for new rules that wouldn’t require Congressional sign-off.
Burger King Tax Bonanza

The Bloomberg headline "Inversion Express Slows to Crawl" was good for precisely 1 day.

Today we see this Bloomberg headline: Burger King in Talks to Buy Tim Hortons in Tax-Saving Move
Burger King Worldwide Inc., the second-largest U.S. burger chain, is in talks to buy Tim Hortons Inc. and move its headquarters to Canada, becoming the latest American company seeking to relocate to a lower-tax country.

Burger King would create the world’s third-largest fast- food chain by merging with Canada’s biggest seller of coffee and doughnuts, the companies said in a statement. The Canadian corporate tax rate is typically 26.5 percent, compared with 40 percent in the U.S., according to auditing and tax firm KPMG.

The deal renews debate over American companies shifting their headquarters internationally in search of lower corporate tax bills. The trend drew criticism last month from President Barack Obama, and his aides vowed that the administration would take action to curtail the practice.

“There’s some modest political risk to the deal, but it’s difficult to say because we haven’t seen the administration move to block one of these yet,” said Will Slabaugh, an analyst at Stephens Inc. in Little Rock, Arkansas.
Burger King Dares Obama To Stop It From Fleeing To Canada

The Huffington Post had an Obama-mocking headline: Burger King Dares Obama To Stop It From Fleeing To Canada
Burger King’s plan to scurry across the Canadian border to avoid U.S. taxes could be seen as the corporate equivalent of flipping President Barack Obama the bird.

The White House vowed earlier this month to use an executive order to curb tax inversions -- deals in which U.S. companies buy smaller foreign firms in countries with lower taxes, then renounce their U.S. corporate citizenship and re-incorporate in that country.

Still, Burger King said late Sunday night that it was in talks to merge with Tim Hortons, Canada’s popular bakery and coffee chain. The new, combined company would be headquartered in Canada.

In a research note, Potomac Research Group political strategist Greg Valliere said Burger King’s move challenges regulators at the White House and Treasury to back up threats to crack down on inversions.

“So much for the theory that Treasury could chill future inversion deals by hinting of possible action,” Valliere wrote in the note. “We still don’t expect regulations to be finalized until early next year, after a deliberative comment period, but we think there’s a good chance that Treasury will get a phone call today from the White House, urging quicker action.”

The White House did not immediately respond to a request for comment. A Treasury spokesperson and Radina Russell, a Burger King spokeswoman, both declined to comment.
Warren Buffet the Hypocrite?

The Wall Street Journal reports Warren Buffett Enters Tax Fray With Plan to Finance Burger King Deal for Tim Hortons
Investor Warren Buffett is helping finance Burger King's planned takeover of Canadian coffee-and-doughnut chain Tim Hortons Inc. according to people familiar with the matter, in a surprise twist that thrusts the billionaire into a debate over U.S. taxes.

Mr. Buffett's Berkshire Hathaway Inc. would invest in the deal in the form of preferred shares, some of the people said. Berkshire is expected to provide about 25% of the deal's financing, one of the people said. The exact structure of Mr. Buffett's participation remains unclear and the discussions are ongoing.

The investment would also thrust Mr. Buffett, known for championing American companies like Coca-Cola Co. and for advocating that wealthy individuals pay their fair share of taxes, into an uncomfortable position at the center of a spirited debate over U.S. tax policy. The deal is to be structured as a so-called inversion that would move the new company's headquarters to Canada. Such deals, which can help companies sidestep taxes, have drawn stiff opposition in Washington.
Barry Ritholtz, Mish on Corporate Tax Inversion "Fairness"

I commented on corporate taxes many times, most recently on July 14 in Reader Emails and Other Reflections On the "U.S. Corporate Tax Dodge"

Ritholtz proposes 5 measures that would promote "fair taxes".

  1. Kick them out of U.S. stock indexes
  2. Create a one-time tax holiday that allows companies to repatriate off-shore cash at a reduced tax rate of 15 percent.
  3. Require “publicly traded U.S. companies and U.S. subsidiaries of publicly traded foreign companies to disclose two numbers from the tax returns they file with the IRS: their U.S. taxable income for a given year, and how much income tax they owed.”
  4. Lower the top tax rate from 35% 25% or 20% but close all the loopholes
  5. Stop single-company legislation: Thanks to K Street’s army of lobbyists, tax legislation, loopholes and giveaways are concocted that benefit single industries or companies.

"The U.S. provides an outstanding place for these companies to operate and for their employees and executives to live and work. They should pay their fair share," says Ritholtz.

I replied "Ritholtz wants uniformity and fairness. I agree. Taxation at 0% would not only provide it, businesses would come to the US instead of escape from the US. How bad would that be?"

One Way to Fix the Corporate Tax: Repeal It

I was somewhat shocked that Greg Mankiw, a monetarist who I have blasted on numerous occasions regarding monetary policy came to a near-correct answer on this debate.

Greg Mankiw says One Way to Fix the Corporate Tax: Repeal It.
“Some people are calling these companies ‘corporate deserters.’ ”

That is what President Obama said last month about the recent wave of tax inversions sweeping across corporate America, and he did not disagree with the description. But are our nation’s business leaders really so unpatriotic?

Such tax inversions mean less money for the United States Treasury. As a result, the rest of us end up either paying higher taxes to support the government or enjoying fewer government services. So the president has good reason to be concerned.

Yet demonizing the companies and their executives is the wrong response. A corporate chief who arranges a merger that increases the company’s after-tax profit is doing his or her job. To forgo that opportunity would be failing to act as a responsible fiduciary for shareholders.

Of course, we all have a responsibility to pay what we owe in taxes. But no one has a responsibility to pay more.

The great 20th-century jurist Learned Hand — who, by the way, has one of the best names in legal history — expressed the principle this way: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.

Some may worry that a flat consumption tax is too easy on the rich or too hard on the poor. But there are ways to address these concerns. One possibility is to maintain a personal income tax for those with especially high incomes. Another is to use some revenue from the consumption tax to fund universal fixed rebates — sometimes called demogrants. Of course, the larger the rebate, the higher the tax rate would need to be.

I do not support a VAT, but as long as we are going to have taxes at all (and we are), then we need to make them as fair as possible. A broad-based consumption tax on everything but food and medicine would do exactly that.

Everyone eats, everyone pays zero% on what they eat. At times we all need medical services, and everyone would pay zero% on that in my plan.

There is no favoritism, everyone pays a percentage on everything but those items. Perhaps we should limit food to groceries, not restaurants.

Given that the poor spend a far greater percentage of their income on food and medicine we can eliminate or reduce Mankiw's concern about being "too easy on the rich or too hard on the poor".

Big Fear: Tax Neutrality 

The US really needs to get spending under control. My big fear is the plan would not be tax neutral, and that Washington would take this as a chance to bring in more revenue.

Regardless, this talk about "Economic patriotism" and "Corporate Tax Fairness" is complete nonsense.

Reflections On Patriotic Duty

If there is a patriotic duty, it should be to pay taxes in accordance with the law. Anything beyond that is ridiculous.

Corporations have an even more stringent responsibility to shareholders. Patriotic duty above what is required by law, to the detriment of shareholders, should be (and likely already is) against the law.

The correct approach is exactly as I suggested earlier on numerous occasions and Mankiw stated two days ago: Abolish Corporate Income Taxes.

Mike "Mish" Shedlock

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