That Was The Weak That Worked: Part I

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knock-on effects on other statistics. Take poverty. The government says only 4.7% of the urban population is poor. Oddly, the UN Economic Commission for Latin America and the Caribbean has an even lower number, at 4.3%. But the Catholic University of Argentina calculates that, going by the true cost of living, the correct figure is 27%.

Source: Economist

Similarly, underestimating inflation has had the effect of bloating the official calculation of GDP since 2007 (see chart). In September the government raised eyebrows when it reported suspiciously buoyant quarterly growth figures.

That was despite the IMF’s warning and the fact that the official numbers could trigger a multi-billion-dollar payment to holders of GDP-linked bonds. The economy ministry’s forecast of 5.1% growth in 2013 exceeds that of most private analysts by more than two percentage points.

The problem of dodgy statistics goes much wider. For example, while INDEC claims construction expanded by 4.7% in the first ten months of 2013, EconViews, a consultancy which makes its own calculations, puts this number at just 0.5%. In 2008 and 2009 private and official estimates of the expansion in industrial production varied by up to ten percentage points. Although the deviation has since decreased, private economists still prefer to rely on their own numbers.

Farm-watchers were confused when their estimates for the 2013 maize harvest of around 25.5 billion tonnes trailed that of the agriculture ministry by more than 6 billion tonnes. It turned out the ministry had quietly included maize retained by farmers to feed their livestock, contrary to its previous practice. When it comes to official economic numbers, only those of the Central Bank still command some credibility….

*** ECONOMIST / LINK

The Rise and Fall of a Local Official Obsessed with GDP Growth

A November 27 statement by the Communist Party’s anti-corruption watchdog confirmed that the deputy governor of Hubei Province, Guo Youming, was being investigated for graft.

Three days later, Guo was removed from his post, becoming the 13th official with the rank of deputy minister or higher to fall from grace over corruption since the party’s 18th National Congress in November 2012.

Guo, 57, is a native of the central province of Hubei and has spent much of his career in the water industry. In 2000, Guo, then vice director of the Hubei water bureau, was named deputy party secretary of Yichang. He was later promoted to Yichang mayor and the city’s party general secretary. Since August 2011, Guo had been the deputy governor of Hubei, overseeing the province’s land, agriculture, forestry and water management. He is also in charge of works related to poverty relief, the Three Gorges Dam and the country’s major water transportation projects.

Several sources say Guo’s corruption was uncovered during a nationwide inspection launched by the party’s anti-corruption watchdog, the Central Discipline Inspection Commission. An entrepreneur in Yichang said the inspection team arrived at the city in June and visited dozens of companies.

An official at the Hubei anti-corruption bureau said Guo’s violations mainly occurred during his tenure in Yichang between 2000 and 2012. During that decade, Guo was known for his support in attracting outside investment and calls for aggressive economic growth. From 2008, when Guo became Yichang’s party boss, to 2011, the city’s GDP rose from 104 billion yuan to 214 billion yuan. The rapid growth attracted nationwide attention.

One of the most important projects supported by Guo was a 20 billion yuan investment in the Three Gorges Quantong Coated and Galvanized Plate Co., which opened in late 2008. Starting in mid-2011, the company has faced big debts and suspended production.

Guo graduated from college in 1982, and joined officialdom in 1993 by becoming human resources director of the Hubei water bureau.

An expert at the Hubei Academy of Environmental Science said the position was a springboard for Guo. At that time, he was believed to be one of the most promising young officials in the province.

Three years later, the 39-year-old Guo was appointed deputy director of the provincial water bureau. Later, he became Yichang’s deputy party chief.

Yichang carries a special weight in Hubei because two major water projects are in its territory: the Gezhou Dam and the Three Gorges Dam. Over the past two decades, Yichang has grown from a small town to a major city.

In 2004, Yichang’s GDP hit 54 billion yuan, which trailed only the province capital, Wuhan.

In 2008, in the face of a slowdown linked to the Global Financial Crisis and the completion of the Three Gorges Dam, Guo pushed forward a number of major industrial and infrastructure projects, attracting investors in a bid to maintain the city’s growth.

During the first half of 2009, city officials traveled the country aiming to promote the city and invite investors. Tens of billions of yuan in agreements were signed, the biggest being the Quantong galvanized plate project, which started out as an 11 billion yuan deal.

In 2010, Guo said the city should have GDP of 400 billion yuan by 2016, emphasizing chemical, equipment manufacturing, electricity, food and medicine industries.

Guo’s economic success led to a promotion to the provincial level. In August 2011, he was promoted to deputy governor of Hubei and in July the next year he left Yichang.

His successor soon ran into trouble. Quantong, once the pride of Yichang, faced a crisis….

*** CAIXIN / LINK

What’s Behind the Khodorkovsky Pardon?

A few weeks ago, Maxim Dbar, the spokesman for jailed Russian oligarch Mikhail Khodorkovsky, was sitting in a Moscow café and talking about the former oil tycoon’s current situation. Dbar said it boiled down to the old struggle between the hardliners surrounding Russian President Vladimir Putin and the relatively liberal politicians in Prime Minister Dmitry Medvedev’s camp.

For months now, Russian judicial authorities have been preparing a third trial against the former magnate. The public prosecutor has also targeted German law professor Otto Luchterhandt, who has criticized the verdicts handed down against Khodorkovsky.

Then Dbar lowered his voice: “We have a glint of hope again.” And he dropped another hint: “Ten years behind bars of course take their toll, even on a man with Khodorkovsky’s enormous willpower and energy.” It’s very possible that Khodorkovsky’s lawyers and closest aides already realized back then that he was about to abandon his long-standing policy of not seeking a pardon.

On Friday morning, Mikhail Khodorkovsky walked out of a prison camp in northern Russia a free man for the first time in a decade. Putin signed a decree pardoning him on the basis of “humanitarian principles,” officially releasing the staunch Kremlin critic and former oil magnate who was once Russia’s richest man. Hours later, Russian prison authorities reported he was being flown to Germany.

The decree came just one day after Putin made the surprise announcement that he planned to pardon Khodorkovsky following his marathon annual press conference on Thursday, adding that the prisoner had already submitted a request for his release. The news hit like a bombshell.

Kremlin critic and nationalist-communist writer Eduard Limonov called the upcoming release the “sensation of the decade.” Sergei Guriev — the former rector of Moscow’s New Economic School who fled to Paris in April — was also quick to comment on the news. “Khodorkovsky was released because Russia’s image has continuously deteriorated lately,” he said. There has been widespread speculation that Guriev will also be charged in a third trial against the oligarch.

The timing of Putin’s announcement of the Khodorkovsky pardon is clever. For weeks now, he has been criticized for his handling of the situation with Ukraine. The United States and the European Union allege that the Russian leader exerted massive pressure on Kiev to reject an association agreement with the EU — all in a bid to pull the neighboring country back into Russia’s sphere of power. Critics say Putin’s actions disregard the nearly 50 percent of Ukrainians who favor closer relations with Europe.

With his decision to release Khodorkovsky, Putin intends to show that he knows how to use not only the stick, but also the carrot — and that the West’s allegations that Russia is a profoundly undemocratic country do not line up with reality. Given this situation, it’s not surprising that Putin has explicitly pointed out that he was moved to issue the pardon by humanitarian concerns: In his speech, he cited the critical condition of Khodorkovsky’s 78-year-old mother.

Svetlana Bakhmina, a former legal executive who worked for Khodorkovsky and has herself spent four years in prison, confirmed on Thursday that the poor health of his mother “is the only possible reason Mikhail could have asked for a pardon. Nothing else could have forced him to yield.”

The seamlessness between Putin’s announcement and his signing of the decree probably indicates that the president himself is pulling the strings when it comes to Khodorkovsky’s fate. This approach is reminiscent of the case of prominent opposition politician and blogger Alexey Navalny. In July 2013, Navalny was convicted of embezzlement by a court in Kirov and sentenced to five years in prison, effectively making him ineligible to hold any political office. One day later, he was surprisingly released, and was later even allowed to run in the Moscow mayoral election.

Putin had a major hand in that decision, as well. He had arranged the pardon of sorts with Moscow’s incumbent mayor to take the wind out of the sails of the opposition and Western critics. Putin publicly stated he found Navalny’s initial verdict “strange,” because a co-defendant had received a suspended sentence, but not Navalny. The intervention suggests there must have been divergent opinions on this issue among the Kremlin elite….

*** DER SPIEGEL / LINK

U.S. Stocks: Heading For A Bubble?

A global resynchronized recovery is good news for corporate profits. But better profit growth is no longer news for the stock market because the S&P 500 has already discounted a 10% increase in forward earnings in the next 12 months. Therefore, if stock prices make continued advances, the expected price gains will have to primarily come from a multiple expansion.

U.S. equity prices are no longer cheap. Various valuation indexes suggest the market is either fairly valued or borders on slight overvaluation. Nonetheless, macroeconomic and financial conditions are conducive for further P/E inflation. There is a clear link between equity multiples and the yield curve. A steeper yield curve is indicative of better growth and very easy monetary policy. As such, it often coexists with expanding equity multiples.

If our macroeconomic story of synchronized global growth with low inflation plays out, then the yield curve will likely stay rather steep for a while longer: the long end of the curve will be held high by real economic growth and better profitability, while the short end of the curve will be suppressed by the Fed. This creates fertile ground for asset price inflation.

In addition, once in a liquidity trap where interest rates reach the zero boundary, the linkage between monetary policy and the real economy is asset markets: zero rates act to subsidize corporate profits, drive up asset prices and encourage risk-taking.

At present, we could be at the very early stages of a broad transition from strengthening asset values to better spending power by businesses and consumers. Nonetheless monetary policy will stay extremely easy to ensure this process takes hold firmly.

Bottom Line: We are still operating in an environment where monetary conditions are hyper stimulative and inflation is extremely low, and corporate profits will accelerate. This environment ferments asset bubbles, and underscores why there are high odds that equity prices move into bubbly territory next year.

*** BCA RESEARCH / LINK

Miss Japan joins battle against mafia in the media

A softly spoken, willowy beauty who weeps when she describes her ordeal, Ikumi Yoshimatsu seems an unlikely figure to lead a fight against one of Japan’s most powerful talent agencies. Yet she has become the heroine in a drama that her supporters say has exposed one of the nation’s dirtiest secrets: claims that the Yakuza helps to run the entertainment industry.

Since she became the first Japanese woman to win the Miss International title, Ms Yoshimatsu says she has been blackballed by the industry, stalked and threatened for refusing to join a talent agency. She is now in hiding after filing a criminal complaint against a top executive with the firm. “I am afraid for my life,” she said in a telephone interview.

Last week, Ms Yoshimatsu went public and accused the executive, Genichi Taniguchi, of starting a campaign of intimidation against her shortly after she was crowned Miss International Japan in 2012. She claimed she refused to sign a contract with Mr Taniguchi when an internet search revealed allegations that his company had alleged links to the Yamaguchi-gumi — Japan’s largest crime syndicate. “I told them, morally and ethically I cannot work with such people,” she said.

In documents and tape recordings submitted to the police, Ms Yoshimatsu claims Mr Taniguchi threatened her and used his industry connections to hound her out of modelling and acting work. At one point, he allegedly burst into a television studio and, she claims, tried to abduct her. Ms Yoshimatsu’s lawyer, Norio Nishikawa, said: “We have recordings proving all this.” He has filed civil and criminal complaints demanding his client be left alone. Calls to Mr. Taniguchi and the talent agency went

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