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US Labor Department: US worker productivity rose 3.3%

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Today the US Labor Department said that US worker productivity rose 3.3% on a seasonally adjusted annual rate during the last quarter. That is an annual rate last time seen in Q4-2013. The increase also beat expectations of economists, who estimated an increase of 3.0%. Compared to last year, productivity was up a mere 0.7%, which shows that productivity is still modest. Nevertheless, compared to last quarter’s 1.1% decline it is a vast improvement.

ADP miss, raise concerns on Friday’s NFP

ADP Research Institute reported that private payrolls grew with 190,000 in August and thus less than expected (204,000). Also previous July-figures were revised downward to 177,000 from 185,000. This may lead to lower expectations for coming Friday’s Non Farming Payrolls, were current estimates are an increase of 220,000 in August. Friday’s NFP figures are important data for the monetary decision later this month by the Federal Reserve. During the last statement, the Fed stated that it needed to see ‘some’ further improvement to warrant a first rate hike. Analysts see an increase of above 200,000 as a key level to say the data show ‘some’ improvement.

Still no wage pressure

The Fed will also look closely at wage pressure. Today’s figures showed that labor costs fell at a 1.4% annual rate in the second quarter. This is a result of the relative sluggish productivity growth. The long term mean increase in productivity is 2.2%. As long as the pace stays below this rate, wage pressure will be very modest. However, compared to a year earlier, labor costs were up with 1.7%. But Fed Chair Janet Yellen will likely be more interested in current pace then a comparison with a year earlier.

Rate hike uncertain

Today’s figures bring a rate hike at Septembers meeting not closer. Friday’s NFP may offer little more guidance, unless we see a strong beat. The latest statistical figures are not that convincing, plus the increased volatility on the markets don’t support a lift off. On the other hand, a number of Fed officials are leaning towards a move, judging to their recent statements. Probably we have to wait until the decision on September 17.

Is This The New Bear Market?

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With the market plunging nearly 500 points Tuesday, people are getting nervous again. Was last week’s recovery just a fluke? Early trading Wednesday has given only the most modest of bounces, it seems like everyone is now waiting for the next shoe to drop.

bear market capitalistreview.com

While we’ve predicted the current volatility would persist for awhile, it’s time to take a look at the broader question everyone now seems to be asking: Are we entering a new bear market driven by a deflationary commodity collapse in markets such as China, Russia, Canada, and Brazil?

A bear market, commonly defined as a 20% decline in a stock index off a recent high, would break the 6-year bull market we’ve had going since March 2009. In 2011, the market fell roughly 19% just about breaking the bull market, but shares recovered and the rally continued.

Since then, there haven’t been any severe drops that threatened to send us into a “new bear market”. Many pundits are saying this market breakdown may be the one that finally breaks the bull’s back. The stock market, as judged on an S&P 500 basis, peaked at 2134 and fell as low as 1820 in the recent decline, a 15% drop off the top.

With the recovery late last week the S&P rallied back up to 1950, which many took to mean the market was back into the all-clear zone. But now we have this week’s renewed selling. The possibility of dropping through 1820 and down toward 1700, which would trigger a new bear market, is back on the table.

The bear’s argument is that the market faces new problems, and that this correction will be different, so to speak. The previous corrections in this bull market have been driven by fairly insignificant factors.

Fretting about Greece (various times), political games about the debt ceiling, last year’s Ebola outbreak, these were the sorts of concerns that have previously caused investors to dump stocks.

But now, the bears argue, we have meaningful risks to the US economy in play. Most notably that emerging economies have largely stopped growing. China, the 1,000 pound gorilla, is in a notable slowdown, and the other BRICS (with the exception of India) are in contraction.

The collapse in commodity prices is spreading farther and farther. Now it’s moved beyond the emerging markets, and taking down other large developed economies. Plunges in Brazil and Russia are one thing, but the deflationary rot is spreading to more advanced economies.

Australia announced another disappointing GDP figure last night, the fifth consecutive quarter of slowing growth. The Aussie Dollar dove following the headline, falling under the .70 level to a US dollar, trading back to March 2009 levels. In Aussie terms, the current economic crisis has already taken 30% off the value of their currency, everything they recuperated in the post-2008 financial crisis recovery.

Canada, similarly, is deep in the throes of economic problems, with a collapsing housing bubble, a shrinking economy, and a currency that’s hit multi-decade lows. Even in 2008, things never looked as bleak for Canada as they do now.

The US’ southern neighbor, Mexico, finds itself with a stagnant economy, and its currency at all-time lows. As the US’ third largest trading partner, that inevitably hurts earnings for a large swath of the US multinationals.

Since the US trades primarily with countries like Mexico, Canada, and China, all of which are facing severe economic headwinds, the bears argue the US bull market will be felled. How can large US companies keep growing sales if all their international markets are sputtering?

This argument has merit, but it’s far from a foregone conclusion that the bull market is ending. Much of the global slowdown has been driven by the Fed’s policies that have driven to the dollar to the moon and collapsed the commodity markets. Any softening of the Fed’s current hawkish positions could revive the emerging and commodity-based markets.

As it has for awhile, the market hangs in the balance, awaiting further direction from the Fed. If they headstrongly insist on a rate hike in the wake of a steep global economic decline, stocks will likely take another push downward.

If the Fed relents, then hopefully the global deflationary bust story, highlighted by pictures of empty Chinese skyscrapers, can disappear from our memories as quickly as last year’s people wearing gas masks Ebola scared did.

The Moon Is as far away from Russia as it ever was

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For the Russian space program, it is the best of times, and it is the worst of times.

It is the best of times because Russia is doing a bang-up business transporting astronauts from the United States and other countries as well as private space travelers willing to pay the hefty fee for a ticket to space to the International Space Station. The American space shuttles have become museum pieces, and the government-funded, commercially-operated spacecraft that were supposed to have followed lie in the future, thanks largely to funding problems.

Once at the ISS, Russian cosmonauts work alongside astronauts from the United States, Europe, Canada, Japan, and other countries conducting experiments in the orbiting laboratory. The arrangement is part of a deal consummated in the 1990s by then-President Bill Clinton that made the Russian Federation full partners in the space station project first started by President Ronald Reagan.

It is the worst of times because Russia cannot seem to do anything else in space outside the partnership with the United States and her allies.  A case in point is Russia’s desire to land a cosmonaut on the moon by the year 2030, reported in various media in late 2014 and early 2015.

The reason that Russia would want to accomplish its own moon landing stems from the 1960s Apollo race to the moon, started by President John. F. Kennedy in 1961 and accomplished just over eight years later. The Apollo 11 moon landing represented an abject humiliation for the Soviet Union, casting doubt on the assumed superiority of the communist system. Apollo instilled in Soviet leaders a keen awe of American technological prowess, which redounded until the end of the Cold War. Apollo informed Soviet reaction to President Reagan’s SDI project. The theory was that if the Americans could land a man on the moon, they could erect a space-based missile defense system that would neutralize the Soviet nuclear arsenal.

A Russian moon landing would serve to balance the scales, to wipe out, just a little, the humiliation of July 20, 1969.

Unfortunately, as NDTV Gadget reported recently, the Russian moon program has run into an inconvenient truth. Russia does not have the money to land a man on the moon, at least by itself. The budget for the Russian moon program has been slashed, and the project is in peril of cancelation.

Russia lacks money for its space program for three reasons.

First, the price of oil, Russia’s single exportable commodity, has collapsed. The fracking boom and the worldwide economic slowdown have combined to depress oil prices to around $40 a barrel. The price collapse means less money coming into Russian coffers.

Second, Russia is involved in a low-intensity war to conquer parts of the Ukraine. Wars, even semi-covert ones, cost a lot of money.

Finally, the kleptocrats who infest the Russian government and industry are siphoning off what money is left. Graft and corruption are endemic in Vladimir Putin’s Russia. Indeed, Putin turns away from such skimming (while taking his share) as part of the price of staying in power.

The only way that a Russian is going to walk on the moon under the current circumstances is if Russia were to form a partnership with another country. Both China and the European Union harbor lunar ambitions. President Obama has foresworn an American return to the moon, but the next president is likely to set NASA’s sights back there once he or she is sworn in.

The major problem Russia has in forming a new space partnership is derived from Putin’s imperialist adventures in the Ukraine, which have rubbed the international community the wrong way. Europe and the United States will be ill-disposed to take Russia on as a partner for a lunar effort so long as Russia is trying to swallow up large parts of the Ukraine and is threatening Poland and the Baltic States, all members of NATO. Unless some arrangement with China can be made, Russia will be forced to decide between acquiring territory on Earth and exploring the moon.

Samsung Introduces 3G Watch, Goes After Apple

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Today Korean Samsung Electronics said it will introduce the Gear S2 Smartwatch later this week. The smartwatch will be shown to the public at the IFA in Berlin on Thursday. Interestingly, the new Gear S2 will come in a 3G variant, and thus would be able to operate as a stand-alone phone. This is a huge advantage compared to the rest of the market, especially compared to the Apple Watch.

Threat for Apple?

Samsung chooses for a more traditional watch design with a ‘round face’ model, as opposed to Apple’s square display. The traditional design may provide a more familiar feeling to people wearing watches. However, the question is how many people in the focus groups are wearing watches and those who do, will they see a smartwatch as an alternative? Most people who don’t wear a watch might be less interested in the round vs square discussing, though squared may provide better graphical options. Those who wear a watch, might be not interesting in replacing it by a smartwatch, since a watch is more of an exquisite accessory. Playing the slicker design card might be less important for customers.

However, the stand alone feature may be a key advantage. For example, when jogging, cycling or working out, you don’t want to wear a smartwatch AND carry the smartphone with you. So a watch with direct connectivity has an huge advantage. For most people, the requirement of needing a smartphone to use a smartwatch is an huge threshold. So Samsung has for now a big advantage. Nevertheless, with the next Apple Event scheduled for September 9, it will be interesting how long this advantage will last.

The market for smartwatches is growing rapidly. Compared to Q2 last year, the number of shipments tripled in Q2-2015. Estimations by research firm IDC suggest that last quarter saw 18.1 million units shipped, compared to 5.6 in the same period last year (source WSJ). Market leader is still San Francisco based Fitbit with 4.4 million units shipped.

Apple still going strong, but what about the stock

The key advantage Apple holds compared to its competitors are its record margins. No other player in the industry is able to book similar high profits. During the previous quarter, it recorded a net income of USD 10.7bn (up approx. 40% YoY), with a 12month bottom line margin of 22.6%. Nevertheless, Apple’s share price became under pressure. Many analysts are worrying how long Apple can maintain these record profits. With China cooling and no real new margin champions in the pipeline, other than fresh updates for its flagship iPhone etc, we might see a justification for these concerns. Next week’s event may offer a better insight on the future. Apple watchers are counting on a fresh iPhone 6s and 6s Plus, a new iPad Pro and an update Apple TV. The latter product could be placed higher in the market than its predecessor, which benefits bottom-line margin. Question is how customers will run to the shop for this product, since competition is fierce.

For now, let’s wait for Samsung’s Gear S2 specs on Thursday and the Apple Event on September 9.

How The Iranian Nuclear Weapons Deal Could Lead To Catastrophe

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One of the remarkable aspects of President Barack Obama’s Iranian nuclear weapons deal is the length and breadth of the opposition to it. The Washington Free Beacon noted that Americans oppose the deal 55 percent to 25 percent, according to a Quinnipiac Poll. The Democratic National Committee declined to pass a resolution supporting the deal on the behest of DNC Chair Debbie Wasserman-Schultz. Sen Ted Cruz, R-Texas and Donald Trump, both candidates for president, are scheduled to headline a rally in Washington against the deal sponsored by a number of Tea Party and Jewish groups.

Nevertheless, the betting among political analysts is that Obama will be about to suborn enough Democrats in the Senate to sustain a presidential veto of a congressional disapproval resolution. An outside chance exists that the president may get enough Democrats to filibuster the resolution in the Senate. So, the deal will go on unimpeded by any of the normal constitutional checks against agreements with foreign countries. The question arises, what happens next?

Despite Obama administration protestations, the Iranian nuclear weapons agreement will only have two effects. President Obama will pretend that he has stopped the Iranians from getting nuclear weapons. The Iranians will pretend that they are not building a nuclear bomb. The last is not a stretch. The Iranians have always claimed that their nuclear program was peaceful, despite ample intelligence to the contrary.

A cat and mouse game will ensue as the IAEA will attempt to inspect Iranian nuclear facilities and the Iranians will impede the inspectors, continuing to build a nuclear bomb as before. Israel, which has the most to lose from a nuclear Iran, will use all of its covert assets, including targeted assassinations of Iranian nuclear scientists, cyber warfare, and outright sabotage to impede the development of an Iranian nuclear bomb. An outside chance exists that Israel, with the tacit assistance of Iran’s Arab neighbors who feel just as threatened by an Iranian bomb, will try a military strike to take out the Islamic Republic’s nuclear program.

Will Iran be able to build the Bomb before Obama leaves office? The mullahs know that if a Republican is elected president, the deal will be scrapped and sanctions will be reimposed in a more damaging fashion than before. America has a great many tools with which it can damage Iran unilaterally. The United States will also initiate covert operations to support Iran’s opposition groups, comprised of young people who chafe under the tyranny of the mullahs. Iran has every incentive to get the Bomb before that happens.

Obama has maintained that if the Iranians are caught cheating, sanctions will snap back on instantly. But is that so? Imagine if, months before his presidency is to conclude, Barack Obama was presented with incontrovertible proof that Iran is cheating on the agreement? He would have every incentive to ignore the warning and pretend that all is well with what he will consider his signature foreign policy accomplishment.

In that case, the world had better hope that Iran does not get the Bomb before a new administration that is less enamored of pieces of paper to protect the world from a nuclear weapon used by the religious zealots who run Iran. The best case scenario would be a nuclear bomb test in an isolated part of Iran, heralding a certain war that would have to be waged to destroy that country’s nuclear arsenal and effect regime change. The worst case would involve the first test of an Iranian bomb will happen when it is dropped on Tel Aviv or exploded in New York harbor.

The absolute worse outcome would be the explosion of an Iranian nuclear bomb fired by a missile from a freighter offshore to explode in the upper atmosphere over the United States. The resulting Electromagnetic Pulse would take down the power grid and fry every electronic device it touches. Restoring the grid would take upwards to a year, during which millions would die. That is the risk that Barack Obama is taking in order to have a fleeting foreign policy win.