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Tuesday, November 25, 2014 5:00 PM

Merkel Will Blink First, Not Putin

The cold war took another twist last week when a Senior German Politician Endorsed Russian Takeover of Crimea.

Former state premier Matthias Platzeck, chairman of the German-Russian Forum business lobby and erstwhile Social Democrat (SPD) chief, is the first high-ranking German to say the West should endorse the annexation as a way to help resolve the Ukraine crisis.

Platzeck, 60, told the Passauer Neue Presse newspaper: "A wise man changes his mind - a fool never will... The annexation of Crimea must be retroactively arranged under international law so that it's acceptable for everyone."

Platzeck, Brandenburg's popular state premier from 2002 to 2013, struck a nerve in eastern Germany where there is far less support for sanctions against Russia than in the West.

"We have to find a resolution so that Putin won't walk off the field as the loser," said Platzeck, whose career was nurtured by ex-Chancellor Gerhard Schroeder - a friend of Putin. He said areas held by separatists will never be part of Ukraine.
Political Infighting

Platzeck's statement shocked a lot of people including German Foreign Minister Frank-Walter Steinmeier who stated Germany will Never Accept Crimea Annexation.

"We don't accept what has happened and we don't accept Europe's borders being changed again 70 years after the war," said Steinmeier.

Cracks Form

Der Spiegel reports Cracks Form in Berlin Over Russia Stance.
A political solution is more distant than ever in the Russia conflict, with the German government and EU having exhausted their diplomatic options. A rift may now be growing between Chancellor Merkel and her foreign minister over Berlin's tough stance against Moscow.
Dead End for Merkel

Today, Reuters reports Merkel Hits Diplomatic Dead-End With Putin.
Since February, when the pro-Russian president of Ukraine, Viktor Yanukovich, fled Kiev amid violent protests on the Maidan square, Germany has taken the lead in trying to convince Putin to engage with the West.

Merkel has spoken to him by phone three dozen times. Her Foreign Minister Frank-Walter Steinmeier, a member of the Social Democrats (SPD), traditionally a Russia-friendly party, has invested hundreds of hours trying to secure a negotiated solution to the conflict.

Now, German officials say, they have run out of ideas about how they might sway the Russian leader. The channels of communication with Putin will remain open, but Berlin is girding for a long standoff, akin to a second Cold War.
Explaining the Dead-End

Perhaps things are at a dead end precisely because of statements like "Germany will Never Accept Crimea Annexation" by Foreign Minister Steinmeier.

Does talking make any sense if that is the position of Germany?

Putin Peels Away at Sanction Support
Matthias Platzeck, a former leader of the SPD, broke ranks earlier this month and urged Germany to recognize Russia's annexation of Crimea.

This week, Russian Economy Minister Alexei Ulyukaev is being hosted by Russia-friendly businessmen in Stuttgart, the heart of German industry.

Russia also appears to be extending a hand to right-wing opposition parties in Europe. France's National Front confirmed at the weekend that it had secured a 9 million euro loan from a Moscow-based bank.

The first set of EU sanctions is due to expire in March and will need to be renewed. German officials say Italy, Hungary and Slovakia will be the most difficult countries to keep on board.

"Putin will be trying to peel countries away in the run-up to March," said one. Another described the battle to keep the EU united on Russia as a "Herculean task".
Slow Squeeze
Against the backdrop of this fragile EU consensus, ratcheting up economic sanctions further is seen as a "no go" in Berlin for now.

That would change, German officials say, if Russian-backed separatists carved out a corridor of control from eastern Ukraine to Crimea by taking the strategic city of Mariupol.

For Merkel however, the showdown seems to be evolving from a fast-moving tit-for-tat affair into a longer game in which the West slowly squeezes Russia's struggling economy in the hope that Putin eventually blinks.
Merkel Will Blink First

With support for sanctions eroding in several countries, with political infighting in Germany, and with German sentiment shifting more pro-Russia, the odds are that Merkel changes her tune first.

After all, she is the political chameleon, not Putin.

Mike "Mish" Shedlock

2:49 PM

Rents Heading Up? Will the CPI Follow?

Rents are up 6.5% in San Francisco, and 4.5% in numerous other cities. Is this a leading indicator for a stronger inflation as measured by the CPI.

Please consider the Variant Perception article Higher Rents in the US are a Strong Support for CPI.

Despite the subdued nature of US CPI, some large components are turning up.  Owners’ equivalent rent and rent of primary residence, which together account almost of a third of the CPI basket, are turning up strongly. A low vacancy rate and a relatively resilient US economy is helping to drive rents higher, with San Francisco seeing the greatest rent increases, at 6.4% over the last year, and with many other cities, such as Nashville, Seattle, Denver and Houston, all seeing increases of over 4.5%

Furthermore, our leading indicator for US Shelter CPI, which includes apartment vacancy rates and the growth in the working-age population among its inputs, shows that the trend should continue. Higher rents are a strong support for headline CPI in the US.
Owners' Equivalent Rent

Owners Equivalent Rent vs. CPI Shifted 18 Months

The red line in the above chart is not the CPI, but rather a "leading indicator for US Shelter CPI, which includes apartment vacancy rates"

I took the above chart, clipped out the red CPI line, made a layer out of it in Photoshop, and then shifted the line back 18 months with reduced opacity so you can see both lines. Here is my result.

Owners Equivalent Rent vs. CPI Shifted 18 Months and Not Shifted

Straight up (no shift) caught most of the action correctly, except for years 2005-2006, right at the peak of the housing bubble. Also recall the energy spike in 2007.

Perhaps a shift forward some smaller number of months other than 18 would fit better. Let's dive into the CPI data to see what if anything a bump in OER might mean.

CPI Housing Component

Here's the Housing Component of the CPI straight from the October 2014 BLS CPI Report.


The last column above is the year-over-year increase in various housing components. Numbers are national. On average, if the largest cities are up 4.5% or so (excluding San Francisco), the national average of 2.7% for OER and 3.3% for rent seems reasonable enough.

CPI-U Consumer Price Index for All Urban Consumers is up 1.7% year-over-year even though housing is up 2.7%. So other things had to go down. Price for energy did just that.

Nonetheless, CPI will tend to move with OER simply because OER is the single largest component.

If rents continue to rise, CPI will likely go along for the ride, but I fail to see any leading direction in the OER itself (first chart) unless one can accurately project "planned rent hikes".

With that thought in mind, let's return once again to the claim "Our leading indicator for US Shelter CPI, which includes apartment vacancy rates and the growth in the working-age population among its inputs, shows that the trend should continue."

If vacancy rates are a leading indicator of planned rents hikes (a reasonable presumption), then the statement made by Variant Perception is likely an accurate one.

Yet, the overall impact on the CPI will at best be subdued, especially if wages do not follow. If more money goes for rent and Obamacare, less money will go elsewhere.

Consumers feeling the squeeze? You bet!

Mike "Mish" Shedlock

12:19 AM

War on Terror: Drones Target 41 but Kill 1,147 Mostly Innocent men, Women, and Children

The US calls it a war on terror. In reality it's a war of terror. And for every innocent person killed, hundreds of friends and family members hold it against the US.

The Guardian reports 41 Men Targeted but 1,147 People Killed in US Drone Strikes.

New analysis of data conducted by human rights group Reprieve shared with the Guardian, raises questions about accuracy of intelligence guiding ‘precise’ strikes.

The drones came for Ayman Zawahiri on 13 January 2006, hovering over a village in Pakistan called Damadola. Ten months later, they came again for the man who would become al-Qaida’s leader, this time in Bajaur.

Eight years later, Zawahiri is still alive. Seventy-six children and 29 adults, according to reports after the two strikes, are not.

However many Americans know who Zawahiri is, far fewer are familiar with Qari Hussain. Drones first came for Hussain years before, on 29 January 2008. Then they came on 23 June 2009, 15 January 2010, 2 October 2010 and 7 October 2010. Finally, on 15 October 2010, Hellfire missiles fired from a Predator or Reaper drone killed Hussain, the Pakistani Taliban later confirmed. For the death of a man whom practically no American can name, the US killed 128 people, 13 of them children, none of whom it meant to harm.

The human-rights group Reprieve, indicates that even when operators target specific individuals – the most focused effort of what Barack Obama calls “targeted killing” – they kill vastly more people than their targets, often needing to strike multiple times. Attempts to kill 41 men resulted in the deaths of an estimated 1,147 people, as of 24 November.

Some 24 men specifically targeted in Pakistan resulted in the death of 874 people. All were reported in the press as “killed” on multiple occasions, meaning that numerous strikes were aimed at each of them. The vast majority of those strikes were unsuccessful. An estimated 142 children were killed in the course of pursuing those 24 men, only six of whom died in the course of drone strikes that killed their intended targets.

There is nothing precise about intelligence that results in the deaths of 28 unknown people, including women and children, for every ‘bad guy’ the US goes after,” said Reprieve’s Jennifer Gibson, who spearheaded the group’s study.

In Yemen, 17 named men were targeted multiple times. Strikes on them killed 273 people, at least seven of them children. At least four of the targets are still alive.

Available data for the 41 men targeted for drone strikes across both countries indicate that each of them was reported killed multiple times.

An analytically conservative Council on Foreign Relations tally assesses that 500 drone strikes outside of Iraq and Afghanistan have killed 3,674 people.

We don’t just fire a drone at somebody and think they’re a terrorist,” the secretary of state, John Kerry, said at a BBC forum in 2013.

“President Obama needs to be straight with the American people about the human cost of this programme. If even his government doesn’t know who is filling the body bags every time a strike goes wrong, his claims that this is a precise programme look like nonsense, and the risk that it is in fact making us less safe looks all too real,” Gibson said.
Why Do You Kill My Family?

Does US Drone Policy Make Any Sense?

We have not killed the 41 we are after, but we have made thousands, if not tens-of-thousands of new enemies in the process.

Does this make any sense?

You know the unfortunate answer. For those who want perpetual war, the policy is a blazing success.

Mike "Mish" Shedlock

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