The Big Picture

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• Who Are We Killing with Drones?
• Global Carbon Footprint
• Best of the Best of 2014
• Josh Brown: Investment Fads and Themes, 1996-2014
• 10 Tuesday Reads
• Oil, Europe, good and bad & Spain

Who Are We Killing with Drones? Posted: 30 Dec 2014 10:30 PM PST West Uses Anti-Terror Laws to Murder Farmers, Small-Time Drug Dealers and Low-Level Taliban Members – Poppy Farmers, Drug Couriers and Drug Dealers Spiegel reported yesterday that drug dealers and low-level Taliban members were targeted for death by drone: NATO didn't just target the Taliban leadership, but also eliminated mid- and lower-level members of the group on a large scale. Some Afghans were only on the list because, as drug dealers, they were allegedly supporting the insurgents. *** The operations were based on the lists maintained by the CIA and NATO — Obama's lists. The White House dubbed the strategy "escalate and exit." McChrystal's successor, General David Petraeus, documented the strategy in "Field Manual 3-24″ on fighting insurgencies, which remains a standard work today. Petraeus outlined three stages in fighting guerilla organizations like the Taliban. The first was a cleansing phase …. Behind closed doors, Petraeus and his staff explained exactly what was meant by "cleansing." German politicians recall something that Michael T. Flynn, the head of ISAF intelligence in Afghanistan, once said during a briefing: "The only good Talib is a dead Talib." Under Petraeus, a merciless campaign began to hunt down the so-called shadow governors and local supporters aligned with the Islamists. *** According to the NSA document, in October 2008 the NATO defense ministers made the momentous decision that drug networks would now be "legitimate targets" for ISAF troops. "Narcotics traffickers were added to the Joint Prioritized Effects List (JPEL) list for the first time," the report reads. In the opinion of American commanders like Bantz John Craddock, there was no need to prove that drug money was being funneled to the Taliban to declare farmers, couriers and dealers as legitimate targets of NATO strikes. In early 2009, Craddock, NATO's Supreme Allied Commander for Europe at the time, issued an order to expand the targeted killings of Taliban officials to drug producers. *** The documents, [attorney Jennifer Gibson] notes, also show that the "war on terror" was virtually conflated with the "war on drugs." We've previously noted that even the architect of America's drone assassination program says it's gone too far … creating terrorists rather than eliminating them. And that drone attacks are a  war crime (more here and here). And that there is widespread murder of innocent civilians as "collateral damage".  For example, American University Professor Jeff Bachman reports: Strikes focused on the Kill List "killed on average 28 other people before they actually succeeded in killing their target." Indeed, even the process for deciding who to put on the "kill list" is flawed.     People are often targeted by the metadata on their phones, a process which a former top NSA official called the drone assassination program "undisciplined slaughter." And people are targeted for insanely loose reasons.  As the New York Times reported in 2012: Mr. Obama had approved not only "personality" strikes aimed at named, high-value terrorists, but "signature" strikes that targeted training camps and suspicious compounds in areas controlled by militants. But some State Department officials have complained to the White House that the criteria used by the C.I.A. for identifying a terrorist "signature" were too lax. The joke was that when the C.I.A. sees "three guys doing jumping jacks," the agency thinks it is a terrorist training camp, said one senior official. Men loading a truck with fertilizer could be bombmakers — but they might also be farmers, skeptics argued. And then there are "double taps" … where the family members, friends or neighbors who try to rescue someone hit by a drone missile are themselves targeted for assassination. The bigger picture is that anti-terror laws are being used for all sorts of purposes besides stopping terrorists: Mass surveillance is being used to prosecute drugs and other petty crimes Military tactics have been deployed against drug dealers and other petty criminals Everything outside of the status quo is now considered terrorism

Global Carbon Footprint Posted: 30 Dec 2014 04:30 PM PST Source: ScienceBlogs   Previously: Global Carbon "Footprint" by Nation

Best of the Best of 2014 Posted: 30 Dec 2014 11:00 AM PST Source: FiveThirtyEight

Josh Brown: Investment Fads and Themes, 1996-2014 Posted: 30 Dec 2014 07:00 AM PST Another year in the books and I've updated my Investing Fads and Themes by Year guide accordingly. It begins with 1996 because that was my first summer working on The Street and my earliest exposure to the market. I do this every December because I agree with the eminent philosopher Bob Marley in that "If you know your history, then you would know where you're coming from." If we don't document and learn from the lunacy that grips us from year to year, how can we truly say that we've grown as investors? By documenting this stuff, it becomes a permanent part of my knowledge base, a reference to draw from in times to come as similar trends play out and the great wheel spins past an endless parade of fear and greed. So what was 2014 about? I would point to four major fads and themes that each captivated the investment community and had some overlapping influence on each other: Disinflation General economic weakness in the European economy along with the continued China slowdown and a surprise mid-year technical recession in Japan helped drive prices and demand for commodities. This led to a push back of inflation expectations across the board and the resumption of yield-chasing among investors. Treasury yields hit astounding new lows – the exact opposite of what all of Wall Street's strategists predicted as the year started. Consumer discretionary stocks and consumer staples stocks were big beneficiaries, as were bond funds and utilities. USA! The US stock market – specifically the S&P 500 – outperformed almost every other investable asset class in the universe this year. Investors piled into US large cap stocks as this trend became more and more apparent. The S&P 500's year-to-date total return of 10.5 percent beat the Barclays Aggregate Bond index by 40 percent in 2014 and doubled the return of the Nikkei. In the meanwhile, MSCI EAFE (developed markets ex-US) was down 7.75 percent this year and the MSCI World Index has barely squeezed out a positive gain of less than 1 percent. Removing US stocks from the world index and its a loss of 7.65 percent for global stocks. Alibaba One global market that did manage to perform well was a market that almost no one can participate in – the Shanghai Composite of mainland Chinese stocks. The Shanghai Comp rose 40 percent this year, outperforming Hong Kong, India and the rest of the Asian markets after having underperformed for years. This awakening was brought about through a combination of renewed Bank of China stimulus along with the China Stock Connect (or Through train) plan that linked Hong Kong's brokerage firms and markets with their mainland counterparts to allow for easier flow of funds back and forth. With foreign investors getting an expanded entrance to the Chinese bourses, the large discount between valuations narrowed a great deal. The bright spot for China bulls, however, took place on the New York Stock Exchange in September, as Alibaba listed it's shares in the largest US IPO in history. Jack Ma led his company's coming-out party on The Street and virtually every major hedge fund jumped in to play the theme. King Dollar In some way, the incredible strength of the US dollar figured into virtually all of the popular investment themes in the market this year. The dollar rose some 12% versus the yen this year and appreciated all year against the basket. It was on everyone's lips, skewed the returns of investors in foreign asset classes and informed a great deal about how we went about allocating assets. *** So those were the big stories of the year that investors and traders bought into. Below is my updated guide to the Investing Fads and Themes by Year, 1996 – 2014.  Enjoy!   See previous years below! 2013 2012 2011 2010 2009

10 Tuesday Reads Posted: 30 Dec 2014 04:30 AM PST My morning pre-holiday reads: • 14 Meaningless Phrases That Will Make You Sound Like A Stock-Market Wizard (BI) • Here is how low oil prices will shake things up in 2015 (Quartz) see also This Era of Low-Cost Oil Is Different (BV) • "Buy Europe" (TRB) • Genius Must Be Proven (A Wealth of Common Sense) • Here Come Small Caps (Irrelevant Investor) • The Year in White-Collar Crime (NYT) • The worst journalism of 2014: A recap of this year's most cringeworthy news blunders (Columbia Journalism Review) • A Dozen Things I've Learned from Steve Jobs about Business (25IQ) • Five Ways Obama Can Mess with Republicans in 2015 (Bloomberg Politics) • Inadvertent Algorithmic Cruelty (Meyer) see also Well, That Escalated Quickly (Meyer) What are you reading?     Seeking to Ride on China's Stock Market Highs   Source: Dealbook

Oil, Europe, good and bad & Spain Posted: 30 Dec 2014 03:30 AM PST Oil, Europe, good and bad & Spain David R. Kotok December 29, 2014     Less than two months ago, Oxford Economics modeled sensitivity to the oil price by conducting simulations on 47 countries. Their baseline then was an "$84 Brent crude price average in 2015… gradually recovering to $106 in 2019." Their updated work has tested further simulations with $70, $60, $50, and $40 per barrel oil against that baseline. In Europe, they projected "negative inflation," which is not exactly the same as "deflation," in the Eurozone. In this instance, however, negative inflation might just as well be deflation, since we are talking about declines in price levels or changes in direction of prices such that they have a downward bias. Of course, the simulations require that the decline in the oil price persist, in order for behavioral changes to occur in these economies. The simulations attempt to measure the imbalances among countries and how these grow wider (with conditions worsening for some and improving for others) as the oil price sustains a lower level. Impacts on bond yields are projected for these diverse scenarios. The takeaway is how remarkable the disparities among countries become as the oil price falls.  For those with falling yields, the levels are extraordinary.  For those with rising yields due to credit issues, the mirror image is true. In Asia, the Philippines is potentially one of the largest beneficiaries of low oil prices. So is Japan. Both are in Cumberland's international portfolios. Russia, Venezuela and others of similar ilk, as expected, are severely penalized. Cumberland does not own them. Spain is a big beneficiary in Europe. Out of the 45 countries Oxford considered, at the baseline oil price ($84), Spain is the only country to have negative inflation in 2015. As the price falls, more and more countries make this list. At $40 per barrel, 21 countries (47%) make the list. The leaders are all in Europe and mostly in the Eurozone. In order of impact as measured by negative inflation, they are Spain, Bulgaria, Italy, Poland, Portugal, Sweden, and Switzerland (which is now pegging its currency to the euro). At $60 per barrel for Brent, a majority of the Eurozone countries make the list. At $50 the entirety of the Eurozone does.  Remember that "negative inflation" from an external shock acts as a rise in real income for Europeans. Simply put, low oil prices mean no inflation in the Eurozone, and there is nothing the European Central Bank can do to change that outcome. It also means that the potential for massive quantitative easing by the central bank is growing daily. We expect the ECB to announce large programs and to fulfill their goal of taking their balance sheet above 3 trillion euros. They will find a way to do it by linking the sovereign debt of each country to the creditworthiness of that country so that a combination package pairs debt and credit enhancement. The pairing can be used as collateral in a QE structure. Mario Draghi is about to deliver on his "whatever it takes" promise. We expect this development very soon. Meanwhile, the composition of the ECB Governing Council is about to change. It will become harder and harder for Germany to block a QE program. Cumberland's international ETF portfolios favor the use of currency-hedged exposures and include Europe. We do not expect growth to become robust. Euro-sclerosis is still rampant. But conditions will improve over the present recession levels, and the stock markets in Europe are likely to reflect that improvement as the QE unfolds. Michael McNiven, Bill Witherell, and Matt McAleer coordinate the analysis of international economics at Cumberland and incorporate some momentum work to assist in the selection of markets and ETFs. Mike acts as the portfolio manager; Bill does the economic modeling; and Matt's expertise is with the momentum work. My job is to stir up trouble. DonnaMarie Valles and Maribel Echevarria complete the team, so six pairs of eyes are on the actual trades. Let me say a word about Spain. First, Cumberland is overweight (120%) against its benchmark. Spain is a small weight, so we can go that high. We use a currency-hedged ETF structure to get to that position. Bill likes the outlook for Spain in economic terms, and Matt supports the decision with his momentum analysis. A few weeks ago (on December 16), we reproduced an email from a reader in Spain. He was harshly critical of the government and the intrusion that he saw into the Spanish economy. He wrote:   I live in Spain, and it saddens me no end to read what you and others say about Europe and why it isn't working. You talk of central banks, monetary policy, more or less QE, the Bundesbank, etc., etc. You should live here, and the problems and their solutions are easy and everywhere to see, unless you are a politician or financial expert. In Spain, I know a father who is a skilled motor mechanic, but he is 66 years old. He son runs a very busy, successful garage, but as a small business he would like a break or a holiday or a little help from time to time, and his father would be ideal. But the police, yes the police, visit this business regularly to check his employment records. If they found his father working even 5 minutes in that business, they would not only fine him but he would lose his pension. I know a cleaner lady who earns less than 100 euros per week, who took on a little extra work to help her budget “on the black” and was caught and fined 10K euros. Self-employed people have to pay 250 euros a month “tax” every month simply because they are self-employed. That represents for many over 40% of their total earnings. No wonder they don't work self-employed willingly.I could go on and on and on. Well, it seems there is another side to the story. A prestigious global economist, who asked to remain anonymous, wrote the response I have reproduced below. On reflection after reading it, I wonder whether Spain might just surprise to the upside. I found this informative article after reading your letter writer's venting on self-employment. His 40% simply doesn't ring true, as that would suggest an income of just 7500 euro a year – well below poverty level, so in Europe you simply wouldn't work. The 250 euro a month self employment fee is little different than the extra 7.65% a self-employed person in the US pays for FICA – however it is a flat rate as their pensions are defined contribution. It also covers medical, which the US does not.  In the example given in this article, the total effective tax rate is 22% on 30,000 euro (36,000-6000 in expenses). It is 18.6% of the full 36000 euro. This is higher than it would be in the US for a married one child earner at $45,000 (assuming a 1.25 exchange rate). We assume the same 559 euro in straightforward business expenses or $8385 a year. $36,615 would face the FICA @ 15.3% or $5602. Half of that ($2801) is exempt from federal tax. Married couples get a $12,400 standard deduction, plus three exemptions (married one kid) for $12,000. Taxable income is $9,414 at 10% (up to $18150) or $941. This assumes no child care (the kid is 13) or EITC or state taxes (TN or FL not NY or NJ). Total in US would be $6543 ($5602 + $941) or 14.5% (or less) of the full $45,000, a savings of about $1800. They would not have medical coverage – but at that income would qualify for Obamacare, likely with a heavy subsidy. We thank our good friend (who remains anonymous by request) for making the opposing case. Now back to a bottom line:  2015 is shaping up to be a challenging year for investors and their advisors. We expect higher volatilities in many markets, surprises from unanticipated corners, and a lot of monetary stimulus in Europe. At the same time, the US will lead the world, and our growth rate now looks likely to be closer to 3.5% for the year. Cheaper oil is a wonderful thing for the winners. The gap between them and the losers will certainly widen. ~~~ David R. Kotok, Chairman and Chief Investment Officer

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