Week in Brief: June 5

June 5, 2015

Economic debate rages on. The week before last saw negative revisions to Q1 GDP. Bringing some to conclude that a weakening economy will lead to recession. Others believe that weakness will be temporary. That modest growth will continue. While others project that a robust rebound may be around the next corner.
The truth lay somewhere in the middle. While data has been weaker, Q1 tends to be the worst of the three quarters with seasonality and weather playing a hand. Moreover, labor disputes at West Coast ports further blunted the numbers. Last week's solid employment report underscored that theme. Revealing that employers were having a difficult time finding qualified applicants. Even as an increasing number of Americans entered the labor force. Wage growth, the sorely missing Sorcerer's Stone these last few years, may be on deck.
Take aways? Friday's strong May hiring report and wage gains are great news for Main Street. Not as much to Wall Street, where it may have sounded more like the tolling of a distant bell. Since 2009, stocks have push higher on the wings of low inflation, rock-bottom interest rates and Fed support. All forces that we knew would eventually end. Friday's jobs report provide another hint of the inevitable. All of which will be considered by, and continue to influence, the Fed's decision on when to raise interest rates.
Another influence is the International Monetary Fund (IMF). Having recently downgraded its forecast for U.S. economic growth to 2.5 percent from 3.1 percent, the IMF went on to "counsel" the Fed against raising interest rates prior to 2016. Should be equity positive, in this "bad-news-is-good news" environment. Of course, the IMF isn't as concerned about the U.S. economy as it is all of its emerging market client states. To which it has lent money. The IMF realizes that the beginning of a U.S. rate hike regime will impact all debtor nations. Perhaps hampering their abilities to pay their debts.
Recent data reveals that international investors cut their exposure to U.S. equities in May to the lowest level in seven years. The euro zone remains their largest equity allocation. Conversely, Warren Buffett's equity exposure, according to data from gurufocus, has crept higher these last few years. Even as his exposure to fixed income has declined markedly. Global investors leaving U.S. markets while Buffett dials up his exposure? Hmmm, wonder who's right -- Buffett or the herd?
Time will tell. We only know that as an increasing compendium of pundits, experts, rogues and naves forecast the market's top, they join an illustrious list of those having done so for much of the last six years. Because so long as the bulls remain in charge, this trend remains higher.
Remember Greece? Well, the Greeks owed the IMF a big loan payment last Friday. Which, they decided to delay to month's end. Negotiators continue to talk. Yet nothing has been accomplished. Already we've seen Greeks pulling money from banks, renewing fears of a full-scale bank run. And while the IMF, ECB and EC have additional bailout funds, they will not be released without additional economic concessions by the new Greek government. Concessions that Greek politicians have called too severe. So, expect more volatility to emanate from the birthplace of democracy.
Speaking of volatility, Secretary of State John Kerry recently broke his leg while riding a bike in France. The accident adds to a jeremiad of forces working against President Obama's signature foreign policy deal. Forcing Kerry to abort a European tour during which he was to corral support for U.S. positions in the pending Iranian nuclear deal. The accident will hinder an already delicate dance in which the secretary was engaged. Last week, Iran's supreme leader Ayatollah Khomeini raised tensions by saying that Iran would not allow foreigners to inspect sensitive military sites or speak with the nation's nuclear scientists. Describing any possible oversight as "an insult to their integrity."
Finally, a little scandal. FIFA, the governing organization for world soccer, has been accused by the FBI and Justice Department of illicit business activities. Most of which stem from ongoing bribery accusations. Seriously. Did anyone believe that either FIFA or the IOC was conducting a clean business? Because everyone was dying to attend the Winter Olympics in Sochi, Russia? Or, even better, who can resist the temptation of those balmy 140 degree days when the World Cup arrives in Qatar? "All in favor of hosting the world's biggest sporting event in a hellishly hot, difficult-to-reach nation boasting of a history of misogyny and abuse of foreign workers, say 'Ayy'!"
The Good
April's hotel numbers were among the best ever with nearly every hotel analytical metric showing strength... Pending home sales soundly beat expectations... Consumer confidence improved modestly... Prospects for the Trade Plan improved... PCE inflation remains tame... OPEC keeps production on track... Forward earnings growth stabilized... Best auto sales in ten years... ISM manufacturing beat expectations... Construction spending rose 2.2%... Employment gains were solid...
The Bad
Gas prices moved higher for the sixth consecutive week... Weekly jobless claims increased to 282k... There was no progress in the Greek debt negotiations... Durable goods continued their recent declines... Q1 GDP was revised into negative territory... ISM services missed expectations... Personal spending did not increase... Q1 productivity was revised downward... No progress in Greece... Factory orders revised lower...
The Ugly
Last week's IRS data breach saw the data of over 100,000 taxpayers stolen. Placing birthdates, Social Security numbers, addresses and a host of other sensitive data points into the hands of thieves... Of course, The Office of Personnel Management was not to be outdone. Announcing that it has lost up to 2.1M employee records to Chinese hackers.
National (In)Security
U.S. government incompetence continues to astound. Despite four years of warning indicators and security breaches. Foreign cyber security attacks on major U.S. corporations like Target, Wal-Mart, and Anthem and Aetna. After foreign cyber attacks on major government agencies like the I.R.S. in which 100k identities were nabbed. After Bradley Manning. And Edward Snowden. Last week the Obama administration announced that Chinese hackers made off with up to 2.1 million personal files for current and former federal employees. Realize that nine months prior, The Office of Personnel Management (OPM) had lost background check data to the Chinese and yet the federal government had still not locked the front door.
What goes on in our nation's capital? Where incompetent, hypocritical politicians harangue companies like Target for not protecting their customer data. And yet, the U.S. government has been the biggest, easiest target for foreign hackers for years. And still it has not seen anyone step forward to take responsibility for the losses, or to effectively solve the problem. Total fiasco.
The Chinese are waging cyber war against the U.S., its universities, corporations and public agencies. Meanwhile, the Obama administration has responded with diplomacy and indictments against Chinese hackers whom the Chinese government doesn't even acknowledge. Let alone stop, arrest and extradite to the U.S.
The U.S. must get in the game. Immediately. Because right now, cyber threats from adversaries like Russia, China and Iran are stealing our technology, identities, and the upper hand.
College Board Teaches Deformed Version of U.S. History
Here is the deformed version of American history the U.S. educational bureaucracy teaches high school and college students. Purely social propaganda trumping an otherwise beautiful American narrative in an effort to shape students' views and opinions. Article.
America in Retreat
According to Ian Bremmer's new book, "Superpower," America currently lacks a coherent geopolitical strategy. Choosing instead to conduct foreign policy in an a la carte fashion. Which could have dangerous implications down the road. Bremmer says that the U.S. must choose between three strategic directions. Each of which bring consequences for allies and enemies the world over. Interview here.
NSA Restricted from Snooping -- For Now
For the first time since Sept. 11, 2001, the Congress curtailed the National Security Agency's authority to track suspected terrorists as lawmakers struggled to restore approval for mass collection of phone records and other surveillance methods. Story.
The Horrors of Population Growth?
Even at the age of 83, Stanford biologist Paul Erlich continues to speak of a dystopian future in which the world pays for over populating the planet. His bleak portrayal, popularized in his 1968 book, "The Population Bomb," portrayed an increasing global citizenry competing for a depleting array of natural resources. While many of his critics continue to shake their heads, Dr. Erlich continues to stick by his dark prognostications, stating that his wording of the problems would be much darker today. Article.
As Economy Slides, White House Excuses Grow
While the U.S. economy appears increasingly tepid, the White House continues to employ a number of excuses to account for what is an increasingly bleak picture. Article.
Only Business Can Cure Fifa's Woes
Amid increasing scandal within the ranks of the world's governing soccer body, Fifa re-elected its corruption-plagued president to another term. It will likely take the threat of a loss of the organization's advertising fortunes before Fifa decides to clean house. For that to happen, multinational corporations will have to step up and do the right thing. Even if those actions do not align with their best financial interests. Article.
The Economist Who Realized How Crazy We Are
To economist Richard Thaler, it was always obvious that human beings are not maximizers, or optimizers, or logical, or even all that sensible. In the early 1970s, when Thaler was a student, his professors didn't argue that human beings were perfectly rational. They argued that human irrationality didn't matter, for the purpose of economic theory, because it wasn't systematic. It could be treated as self-cancelling noise. Yet Thaler would go on to become the father of behavioral economics. And his new biography shows that he would help to prove that human irrationality is, in fact, systematic. As much a part of the human fabric as every other habit and tendency. Story.
Weekly Results
Major markets finished mixed last week. The DJIA fell 0.90%, the S&P 500 dropped 0.69%, and the Nasdaq lost 0.03%. Small cap stocks rose 1.16%. And the 10-year Treasury bond gained 28 basis points to 2.41%. Gold fell $18.73 per ounce, or 1.57%.

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