Watch it Now: China Makes its Move in Ecuador

Dr. Moors was a guest on Chinese national television last night via a live satellite link. The topic was the increasing Chinese involvement in Ecuador

Long-time readers will recall that Kent has been advising on a refinery project in Ecuador for some time now. The Pacifico project, also known in country as Refineria
Project costs have swelled to about $13 billion with the government still saying that the 300,000 barrel per day complex will begin operations in 2017.
The real story, however, lies in the combination of interests surrounding the facility.
Kent explains what China is up to in the video below:

Greece: A Gathering Storm Threatens Europe and America

Greece: A Gathering Storm Threatens Europe and America

By Elliott Wave International/the Socionomics Institute

The similarities between Greece and pre-WWII Germany are striking.

• Nazi salutes.
• Praise for Adolf Hitler.
• Swastika-like banners.

Now, before you write off this warning as a run-of-the-mill, Nazi-name-dropping scare tactic, consider this recent report from the Socionomics Institute, a U.S.-based think tank that studies global trends in social mood. Here's an excerpt from the Institute's February publication of The Socionomist.

A rising political party known as Golden Dawn is resurrecting such practices, all hallmarks of Hitler's Third Reich, in modern-day Greece, which has suffered a dramatic, five-year stock market decline.
From 1927 to 1932, Germany suffered a disastrous stock market decline, falling 73% over five years. Six million people were unemployed, and the government was weak. Germany suffered outside financial pressure in the form of reparations required by the Versailles Treaty and consequences of its involvement in World War I.
Adolf Hitler argued that the German government betrayed its people by signing the Versailles Treaty. He promised that if he were elected, the nation would stop paying the reparations. The position appealed to the German people's anger and helped the Nazi leader become chancellor in January 1933.
Modern-day Greece has experienced an even larger five-year decline than 1920s-1930s Germany did, falling 88% since 2007, and the country has suffered a debt crisis. As a condition for bailouts aimed at helping Greece recover, the European Union has imposed tough austerity measures. The Greek government has implemented the measures. Meanwhile, the deepening negative social mood has fueled protests against them.
Nikos Zydakis, editor of the daily newspaper Kathimerini, says Greece is in an economic depression like that experienced by Germany in the 1930s. More than 90% of Greek households have experienced income reductions, with the average drop 38%. Unemployment in Greece now stands at a record 26.8% and is nearly 60% among Greece's young adults. In November the Greek Parliament imposed tax hikes and spending cuts demanded by creditors. Supermarket sales in the country declined by 500 million euros ($669 million) last year, and people are burning wood because the price of electricity has risen and taxes on heating oil have increased.

"History doesn't repeat itself, but it does rhyme," goes an old saying attributed to American author Mark Twain. And new research from the Socionomics Institute sees a disturbing pattern of rhymes between modern-day Greece and pre-WWII Germany.
To be sure, market and political developments in Greece will have a significant impact on the future of Europe, the Americas and beyond.

---

The Socionomics Institute is an independent research firm devoted to the study of social mood and social action. As a partner to the world's largest market forecasting firm, Elliott Wave International, the Institute puts the most important developing social trends around the world into context with Robert Prechter's socionomic theory, which posits that social mood drives social action (not the other way around). Read the rest the Institute's new February report to learn more about the developing threats out of Greece. The full report is available for free as part of a special promotion run by the Institute with EWI. Follow this link to read the full February issue of The Socionomist (a $19 value) - for free.

Aussie Dollar in a Copper Cauldron!

I keep thinking that any day now the Australian dollar will take a dirt nap. It took one back in mid-2008, falling a stunning 39 percent in just three months in the midst of the credit crunch. This shows just how vulnerable the Aussie can be to a growth accident that slams the world economy; it is the premiere risk currency among the major dollar currency pairs.

Global growth is fading fast again, and copper seems to be highlighting that story. It could be lights out for the Aussie again if that’s the case.

As you can see in the chart below, the copper futures weekly uptrend line is broken, and the primary trend is down. The yellow rectangular box shows what happened in the midst of the great credit crunch of 2008.

And as you may know, copper is considered a key industrial metal; its price movement is often used as an indicator of the direction of growth in the global economy.

Copper Has Taken on an
Important Role in Financing

An increasing number of Chinese firms have been stockpiling the metal and using it as collateral — because the government’s measures to curb inflation have limited the firms’ access to credit. Such financing links the price of copper to other key elements of the Chinese economy, including the growing speculative real estate bubble.

China’s tightening monetary policy has made it more difficult to access credit through official channels. As a result, Chinese small- and medium-size enterprises have increasingly turned to copper for use as collateral in loans, which are then funneled into other sectors of the economy.

The falling price of copper means that the collateral initially put up for the loans in yuan is no longer worth what it once was, decreasing the likelihood that the borrower will be able to pay back the loan.

If firms default on debts, then others connected in the chain will default — and determining where loans have been invested is nearly impossible.

Banks and state-owned enterprises (SOEs) are also potentially vulnerable. A high number of SOEs have also used copper as collateral. These firms are often involved in the real estate sector — even if their primary function is not always directly linked to it — and are therefore exposed to the country’s growing real estate bubble. 

The government would bail out the more politically favored SOEs if necessary. But that would leave fewer resources to be allocated to the private sector, which is crucially important to China’s growth.

It is all about feedback loops. And …

This One Could Turn Quite Vicious
for China and In Turn the Aussie Dollar!

The Australian economy is highly dependent on China for its own growth. For a while now, I’ve been saying that Australia has effectively become a satellite country of China. Take a look at this chart showing China’s imports from Australia thru September. 

Lower copper prices could put a real damper on Australia’s growth. Another major hit is already in play: Falling consumer demand from the euro zone and the U.S.

And if the bubble were to finally pop in Chinese real estate, it would be much uglier indeed.

So we have the potential for real demand in copper and other commodities to decline sharply. Toss in the added thumping from the internal Chinese speculation, which would likely push the metal back toward its credit crunch low, and you get another 50 percent decline in the red metal.

And guess which currency has been tightly correlated to the price of copper over the last few years? If you said the Aussie dollar, you were right on!

There are two key takeaways from the following chart of the Aussie/U.S. dollar vs. copper:

1) There is a very large divergence between the two price series; and

2) In the past the series have been highly correlated.

I suspect we will see a big move one way or the other. It could be copper soars. But for now, I’m betting the Aussie tanks.

Stay tuned.

Jack

Non-partisan gov't report shows the Federal Reserve is even worse than we thought

The non-partisan Government Accountability Office released a report today showing widespread corruption and conflicts of interest in the Federal Reserve.

Senator Sanders – who was instrumental in forcing the Fed to release some details of its lending operations – summarizes:

A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.

"The most powerful entity in the United States is riddled with conflicts of interest," Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year's Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.

The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves. "Clearly it is unacceptable for so few people to wield so much unchecked power," Sanders said. "Not only do they run the banks, they run the institutions that regulate the banks...

Read full article...

This Country's Banks Could Offer Europe's "Best Place to Hide" from the Euro Crisis

Nordic banks may offer investors the best protection against a recapitalization wave that threatens to dilute the share values of Europe's lenders, said UBS AG. (UBSN)

"It is a very attractive place for European investors to hide from the ongoing eurozone problems," Nick Davey, a London-based analyst at UBS, said in an interview.

Scandinavian banks, including Nordea Bank AB (NDA) and DnB NOR ASA (DNBNOR), have negligible holdings of bonds sold by Europe's most indebted nations and are better capitalized than most of their European peers. Nordea Chief Executive Officer Christian Clausen said this week his bank has no plans to sell shares. At the same time, Nordic governments have some of Europe's smallest budget deficits. Norway has the biggest budget surplus of any AAA rated nation, offering an extra layer of protection to investors.

Shares in DnB NOR rose 3.2 percent to trade at 62.95 kroner as of 10:59 a.m. in Oslo, outperforming the 46-member Bloomberg index of European financials, which gained 1.9 percent. Nordea rose as much as 1.8 percent, before trading 0.6 percent higher in Stockholm.

In Norway, "the banking industry has a good solvency position, satisfactory profitability and low loan losses," the head of the country's financial regulator, Morten Baltzersen, said in an interview. "These factors provide a good starting point to meet potential challenges."

'No Immediate Need'

Swedish Finance Minister Anders Borg said Oct. 18 he sees "no immediate need" for the country's banks to raise their capital buffers.

The European Union may require banks in the region to increase core capital ratios to 9 percent of their risk-weighted assets, according to a person with knowledge of the plans. The deadline for meeting the increased capital levels may be the middle of next year, German Finance Minister Wolfgang Schaeuble told a closed parliamentary committee this week, according to two lawmakers who attended the meeting. That's almost seven years ahead of the target set by the Basel Committee on Banking Supervision.

Nordea, the biggest Nordic lender, had a core Tier 1 capital ratio – a measure of financial strength – of 9.2 percent in the third quarter. DnB NOR had a capital adequacy ratio of 11.7 percent at the end of the second quarter, the most recent reported figures show.

Sidestepping EU

Nordea passed the European Banking Authority's July stress tests with a 9.5 percent capital ratio, almost twice the minimum requirement of 5 percent. DnB NOR passed with a 9 percent ratio. Another round of exams would help European leaders identify capital needs.

Sweden's lenders need to maintain higher capital levels than their foreign peers because the country's bank industry is four times the size of the economy, Financial markets Minister Peter Norman said in Stockholm today.

The country is also ready to sidestep European Union efforts to impose caps on capital buffers beyond minimum ratios set by the Basel Committee on Banking Supervision, said Lars Frisell, chief economist at the Financial Supervisory Authority.

Sweden "will of course use pillar 2," which focuses on risk management, to enforce higher capital requirements for its banks if the country is unable to do so under pillar 1, Frisell, who is also a member of the Basel Committee, said at an event in Stockholm today.

Tapping Debt Markets

Nordic banks are among the few in Europe still able to tap wholesale funding markets. Two Swedish lenders issued senior unsecured notes last week; SEB AB sold 750 million euros ($1.03 billion) in floating rate notes due in 2013, while Svenska Handelsbanken AB (SHBA) sold 1.25 billion euros in notes due in 2021.

"That sends a pretty clear message to the market: we are amongst the few funding safe havens still left standing in the European banking index," Davey said.

Besides Nordic lenders, Germany's Deutsche Bank AG and Commerzbank AG (CBK) have sold unsecured debt since September, as have London-based HSBC Holdings Plc (HSBA) and Rabobank International of the Netherlands.

Banks in Norway and Sweden "have very little that they need to demonstrate in this round of stress tests," Davey said. "Capital ratios already have extremely thick buffers above this required hurdle rate and they simply don't have a lot of exposure to volatility to sovereign debt prices."

Raising Capital

Europe's banks may need to raise 150 billion euros ($205 billion) to 230 billion euros to meet additional capital requirements, Kian Abouhossein, a JPMorgan Chase & Co. analyst in London, wrote in an Oct. 1 note.

The EBA estimates Europe's banks need to an additional 70 billion euros to 90 billion euros in capital, the Financial Times reported yesterday, citing people familiar with the talks.

Nordea has "no direct exposure" to bonds sold by Portugal, Italy, Ireland, Greece or Spain, it said on Oct. 19. Norway's six largest banks hold less than 1.3 percent of their managed capital in assets from those countries, the financial regulator said in June.

Norway, which channels most of its oil income into a $530 billion sovereign-wealth fund, has been shielded from the worst of the euro area's debt crisis, helping keep unemployment below 3 percent, Europe's lowest rate. This has allowed banks such as DnB NOR, the country's biggest, to benefit from lower risk premiums than the rest of Europe, the Financial Supervisory Authority said last month.

No Crisis

"The Norwegian banking industry is clearly not in a state of crisis," Baltzersen said.

Lenders including Deutsche Bank AG (DBK) have said they oppose recapitalization because it would dilute existing shareholders without addressing the risk of sovereign debt defaults. BNP Paribas SA and other banks have said they can meet increased capital requirements without cash injections.

Concerns over a potential default by Greece and contagion in other debt-ridden nations have pushed the 46-member Bloomberg Europe Banks and Financial Services Index down 31 percent this year. DnB has lost 23 percent and Nordea has dropped 24 percent.

Norwegian banks' "situation is quite solid, especially in relative terms compared to an average European bank," Oeystein Olsen, the governor of the central bank of Norway, said in an interview this week.

"The further down the road we get the more the Norwegian sovereign wealth looks like an attractive backdrop in which to operate," Davey said.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net.

Gold's Schizophrenia: Pulled Apart By Commodity And Safe Haven Status

Agustino Fontevecchia

www.forbes.com

Gold appears to have entered a new phase, acting as a hybrid, sometimes sympathizing with risk assets and other times acting like a safe haven, UBS' Edel Tully explains. While this makes it incredibly difficult to trade the yellow metal, the gold strategist remains bullish.

After falling about $20 on Tuesday in response to a stronger dollar, gold recovered its footing on Tuesday, hitting $1,693.90 an ounce, its highest level in two weeks. By 1:25 PM in New York, the yellow metal had given up some of those gains and was trading up $19.50 or 1.17% to $1,679.20 an ounce.

Gold's relentless climb, when any and all headlines seemed to fuel the precious metal's bull run, came to an end after peaking above $1,920 an ounce last August, falling almost 20% in a few weeks to bottom out around $1,562.

Still, the yellow metal remains up about 20% this year and most analysts remain bullish. It's as hard to explain gold's skyrocketing rise as it is its precipitous fall; UBS strategist Edel Tully notes gold is now behaving like a hybrid, acting as commodity or safe haven as investors try to find balance amid opposing forces.

Tully had said she expects gold to hit $1,920 in a month and $2,100 in three months, but recognizes gold's safe haven't status isn't keeping it afloat anymore. "Trading the yellow metal [has become] very challenging, as while one can have a view on an event such as US payrolls for example, deciphering how gold reacts has become a lot more difficult. And while buyers are nimbly returning, it is no surprise that there is caution given the struggle for conviction."

Regardless, gold will continue to react to macroeconomic news, particularly in Europe. While the yellow metal barely flinched in reaction to Slovakia's failure to ratify the EFSF (markets appear to factor in a positive vote sometime this week), the Merkel-Sarkozy "comprehensive package" could be setting investors up for a big disappointment, Tully says. "And considering how gold has been behaving recently, market reaction to euro-negative developments will not be as straightforward as it has been historically."

Gold miners have been an alternative to holding physical gold, either via an ETF or through the physical metal. Miners continue to under perform bullion, though, with the Market Vectors Gold Miners ETF flat in the last three months compared with a 5% gain for the GLD gold ETF. Barrick Gold, GoldCorp, and Freeport McMoran are among some of the underperformers within the mining group.

Q4 Commodity Outlook: Tricky Road Ahead as Dollar Strengthens

Commodity markets will continue to be driven by worries about the potential impact of a slowing global economy. A solution to the sovereign debt crisis has still not been found and with governments running out of fresh ideas this has caused tremendous stress on the financial system. Cyclical commodities like energy and base metals have suffered as a consequence while safe haven flows and adverse weather have been the main reasons for gains across precious metals and agricultural commodities.

We believe that renewed dollar strength during September will continue into the last quarter and this could potentially have a dampening effect on the performance of commodities, ensuring a relative flat 2011 performance of the major commodity indices.

Energy: The dramatic spike in oil prices earlier this year has been a major reason for the surprise slowdown in economic activity witnessed during the past six months. The price of Brent crude, which has taken on the role as a global benchmark for a majority of global transactions, has so far averaged 111 dollars in 2011, well above the averages for the previous three years. Despite not reaching the record levels seen in 2008 it has nevertheless already spent more days above 100 dollars during 2011, thereby squeezing private consumption.

Increased demand drove prices higher in 2008 while this time supply disruptions and constraints have been the culprit for higher prices. Libyan oil production will be limited for months while supply disruptions from Nigeria, Syria and the North Sea have ensured higher prices compared with WTI crude which has stayed at depressed levels over the summer.

All of the growth in oil demand is now stemming from Emerging Market (EM) economies and in order to determine future price movements the economic well-being of these economies will be the decider. We expect the price of Brent crude to remain range bound for the remainder of the year between 100 and 120 with an end of year target of 105 dollars.

Precious metals: The rally in gold, which has now lasted for more than 10 years and has returned nearly 21 percent annually, is undoubtedly the world’s most powerful trend. Investors and central banks have all been competing for the yellow metal over the past two years as the global financial crisis has triggered an exodus out of other asset classes into “safer assets”, such as gold and silver.

During the third quarter record high prices led to increased volatility which dented some of the lustre for gold as it became increasingly difficult to trade. As a result we saw investors pulling out of long positions, both in ETFs and futures during August and September and we began to see 100 to 200+ dollar corrections. The super trend however remains firmly intact and only a move below 1,500 could spoil the party for investors holding close to 3,000 metric tonnes through various investment vehicles. We believe that gold may have another push to the upside reaching the magical 2,000 dollar level in early 2012 before a period of consolidation sets in.
Continued volatility could trigger additional margin increases on the major futures exchanges and force some investors to scale back positions even further. We see gold trading in a 1,650 to 1,950 range with an end of year target of 1,900. Silver has gone from being a driver to a follower of gold since the April price collapse. Given the weakened outlook for industrial metals we see silver potentially weakening further relative to gold with the value of one ounce of gold going from 50 to 55 ounces of silver.

Agriculture: Despite record planted acreage this crop year poor weather and reduced quality has led to a reduced U.S. production of corn and soybeans. This has caused a strong rally of the two over the summer in order to force demand rationing through higher prices. This rationing now seems to have begun having an impact on both feed demand and export. On this basis we believe that the prices of soybeans and corn have already peaked and could settle into 13 to 14 and 6 to 7 dollar ranges respectively for the remainder, also given our forecast for a stronger dollar which could dampen exports even further.

Q4 Asia Feature: Is China Losing its Competitive Edge?

In the run up to the 2008 global financial crisis, China’s manufacturing sector was epitomised by a predominant focus on exports resulting in a constantly rising trade surplus and a hefty accumulation of FX reserves. In the aftermath of the crisis however, the situation has dramatically changed, partly due to a lack of external demand but also amid rising concerns that China appears to be losing its global competitive edge.

The main draw card for Chinese manufacturers to focus on these so-called “low-end”, labour-intensive production lines was the abundance of a readily available, “cheap” workforce and, as some would argue, a competitive advantage from an artificially suppressed currency.

A recent “Blue Book” report from China’s Academy of Social Science (CASS) acknowledged that since late 2008 China’s exports to the U.S. have been in decline (China was knocked off its perch as the lead exporter) and eventually China saw its first trade deficit in six years in March 2010. But what were the reasons behind this decline?

In its Blue Book report, CASS suggested the major factors were government policy directives, which increased the cost of manufacturing in China, and escalating raw material/energy costs. This forced a number of manufacturers out of business and hence exports suffered. Indeed, if we take a quick, broad look at some of the inputs for end-product pricing - cost of raw materials is one but wage costs, shipment costs and currency pricing can also all be influencing factors, though some of these are not particularly unique to China. Specifically, raw materials and shipment costs are the same for all exporters, regardless of location, so does it boil down to wages and currencies being the major influences for end-product pricing? The USA certainly has a view on this especially if you have been listening to the constant commentary about China’s undervalued currency for the past few years.

Overall Chinese exports to the US averaged $30.41 bn in 2010 and $31.15 bn in the first 7 months of 2011 (Source US Census Bureau) yet the CNY has risen 5.7 percent  versus USD in the same period – hardly a compelling argument that the exchange rate is a dominant factor affecting exports. However, when the trade surplus is compared as a share of GDP it has actually been falling since 2007 (some two years after the first “de-pegging” of the USDCNY rate).

Yet, if we were to break down the exports in the so-called “light manufacturing” sector, one that is perhaps more susceptible to labour issues, then China’s market share of US imports has been in steady decline (as mentioned above) with a noticeably faster decline since late 2010.

A report from the Boston Consulting Group in May this year suggested that the wage gap between the U.S. and China is currently shrinking rapidly and is expected to converge within the next five years. Chinese wages are currently rising between 15-20 percent per year and any other workplace with more flexible practices could eat further into China’s competitiveness. But is the U.S. the only “threat” to China’s competitiveness? In the above-mentioned “low-end” manufacturing categories, it would appear that China’s lower-income neighbours such as Vietnam, Bangladesh and to a lesser extent Indonesia are slowly eating into China’s export pie (with regard to the U.S. and European export destinations) while Mexico is also seeing greater gains in certain “higher-value” categories such as furniture and precision instruments. So it would appear that wage costs are playing a significant role in affecting China’s competitiveness and, with inflation currently running above 6 percent annually, the pressures are unlikely to disappear soon.

When it comes to the Chinese economy, exports have accounted for as much as 42 percent of China’s GDP in 2008 (subsequently easing to 37 percent in 2010) (source US BEA) and loss of competitiveness may have serious growth implications. Is it possible that the Chinese recognised this and that is why they have switched to lower, more sustainable growth targets in the country’s latest five-year plan?

The 12th Five-Year-Plan has shifted focus from “quality growth” to “inclusive growth”. Outright promotion of exports has been dropped as a byline (in response to declining competitiveness?) and replaced by enhancing households’/citizens’ abilities to consume, redistributing wealth and aiming for slower but higher quality growth. Investment in industry is now targeted towards the energy generation and alternatives (sustainable power bases rather than pure manufacturing) and is perhaps testimony to Chinese authorities acknowledging falling external competitiveness and recognising the need for more internal-focused policies.

In summary, China is facing an erosion of its global competitiveness with wage pressures linked to high-flying inflation being the dominant factors. The Chinese currency, and its gradual revaluation, is also playing its part and China’s loss of competitiveness may be seen as a helpful factor in the global rebalancing process. But Chinese authorities do not see any need to panic. If (and some may argue it is a big “if”) they can succeed in pulling off the latest Five-Year-Plan then this development, and its impact on the trade balance, will not be a major issue.

Q4 Monetary Policy

U.S. monetary policy
As we had previously suggested was possible at its 20/21 September meeting, the Federal Reserve announced that it would indulge in a so-called ‘Twist’ operation-selling $400 bn of its holdings of under 3-year Treasuries and buying $400bn of 6-30 year maturities in an attempt to lower long-term yields - given their direct correlation with mortgage rates and also the discount rates used by commercial enterprises to evaluate the viability of long-term business ventures.

The post-meeting statement noted “continuing weakness in overall labour market conditions” and “only a modest pace” of growth in consumer spending and repeated the committee’s belief that inflation will “settle...at levels at or below those consistent with the Committee’s dual mandate”. As a result, 30-year yields fell below 3.00 percent - one of our ’10 Outrageous Predictions for 2011’, made last December.

Our feeling continues to be that risk markets will continue to be underwhelmed by the Fed’s actions and that ‘Operation Twist’ is but the next step in an inexorable move towards what we long ago dubbed ‘QE Infinite’- repeated QE’s with diminishing returns.

The next instalments in the saga will be QE3 - probably in Q1 2012, as the economy fails to revive and stock markets languish. A reduction in the rate the Fed pays banks on excess reserve holdings from 25 bp to 10 bp is also highly likely within that timeframe, in a desperate attempt to encourage banks to lend to the real economy.

Eurozone monetary policy
As predicted in our Q3 Outlook, the ECB duly raised its main refinancing rate to 1.5 percent at its July meeting and, at the time, markets expected that this was the beginning of an inexorable march higher in rates over the coming months and years. However, unfortunately the world economic situation in general and that of the Eurozone in particular, has exhibited a marked deterioration since then.
In addition to the general gloom which has descended upon the world’s largest economy, as discussed above, the main developments in the Eurozone have been as follows:

• July saw the announcement of a further package of measures from the European Council aimed at easing the Greek crisis and halting contagion into Spain and Italy. As has become the norm over the last 18 months the market was at first reasonably impressed, but enthusiasm quickly evaporated. This was principally because the European Financial Stability Facility (although newly authorised to intervene in the secondary bond markets of all European Monetary Union countries if the European Central Bank judged that ‘exceptional financial market circumstances’ posed a threat to financial stability) was not increased in size, and so would be completely inadequate should it become necessary to support Spain and Italy.
• Therefore, it finally dawned on the markets that the only solution that would bring an end to the debt crisis was a fiscal union, and speculation quickly arose that the natural precursor to this, the issuance of Eurobonds for which EZ governments would be jointly and severally liable, was now on the cards.
• Germany quickly and resolutely made it clear that it would not support the issuance of Eurobonds and the German Constitutional Court ruling on 7 September also underlined this position.
• A surprise fall in EZ core CPI in July from 1.6 percent to 1.2 percent, a level maintained in August.
• Weak business sentiment surveys.

Given the climate created by all of the above, it came as no surprise when fear did indeed spread to Spain and Italy (taking their 10-year bond yields well above 6 percent), so the ECB had to reluctantly revive its bond buying programme or securities markets programme (SMP) in the face of a divided ECB Governing Council, with the Bundesbank implacably opposed to the measure.
It therefore also came as no surprise when ECB President Trichet adopted a much more dovish tone at the news conference following the 8 September meeting of the Governing Council. Although it was apparently too embarrassing to reverse the recent rate hikes so soon, he made it clear that further increases were now firmly off the agenda and left the door wide open for decreases in the near future.

We now expect that, at the very least, before year-end the ECB will reintroduce the provision of unlimited, fixed rate, long-term liquidity to banks, thus flushing the system with liquidity and forcing actual market rates lower than the refinance rate, if it chooses to keep this at 1.5 percent to save face, but probably also a reduction in same back to 1 percent and in the deposit rate from 0.75 percent to 0.25 percent. If the real economic decline accelerates, or the EZ debt crisis spirals out of hand, or interbank funding dries up, then these moves could come very quickly and we may even see the refinance rate reduced to 0.5 percent.

Japanese monetary policy
Mindful of the worsening economic situation, The Bank of Japan increased its Asset Purchase Programme by Yen 10 trn at its meeting on 4 August. The measure was also no doubt intended to reinforce that day’s foreign exchange market intervention, aimed at weakening the yen. Although this achieved initial success, with the yen dropping from approx 77.00 to the dollar to 80.24 on the day, global financial turmoil has since fostered investors’ continued search for safe-havens, quickly taking the dollar back below 77.00.
We maintain our call for unchanged Japanese rates throughout 2011, and indeed also through 2012, and feel further quantitative easing is very likely.

UK monetary policy
The minutes of the 8 September Bank of England’s Monetary Policy Committee (MPC) meeting revealed that the decision to leave rates unchanged at 0.5 percent was of course unanimous. This came as no surprise to us or to the markets and, although Adam Posen remained the only member calling for increased asset purchases, (voting again for an additional £50 bn), “some” other members also moved towards QE2 - “This meant that the balance of risks to inflation in the medium term was likely to have shifted further to the downside. Most of these members thought that it was increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point”
As a result, we now feel that QE2 before Christmas is extremely likely, and rates are certainly not going to rise before 2013. 

Market Preview - 11 October 2011

Forex Overnight: EUR trading weaker against USD
The EUR has weakened against the USD, this morning, ahead of Slovakia’s final vote on the enlarged European Financial Stability Facility later in the day. Reports suggest that Slovakia’s ruling coalition was unable to end a dispute over participation in the euro-area bailout fund. The GBP has lost ground against the USD, this morning, ahead of a report, scheduled for release later today, which is expected to show that the U.K. industrial production declined in August. At 6 am, the EUR and the GBP have declined 0.1 percent and 0.3 percent against the USD, to trade at $1.3632 and $1.5618, respectively.
The JPY is trading 0.1 percent higher against the EUR, while it has edged marginally higher against the USD, ahead of the release of the minutes of the Federal Reserve’s (Fed) September meeting, later today.

UK Stocks: Likely to open in negative territory
The FTSE 100 is likely to open 6 to 8 points in the red.
Key economic indicators scheduled for release today include Industrial & Manufacturing Production, NIESR Gross Domestic Product Estimate and DCLG U.K. House Prices.
N Brown Group, Edinburgh Dragon Trust, Epistem Holdings and Fusion IP are scheduled to report their results later today.
Royal Dutch Shell has announced force majeure on its exports of Nigerian Forcados crude, following a leak on the Trans Forcados pipeline.
In an interview with the Financial Times, Steve Bertamini, the Head of retail and SME banking at Standard Chartered, has criticised western regulators for using the wrong mechanisms to handle the financial crisis.
Ian Cheshire, the CEO of Kingfisher, has forecast a “broadly flat” retail market in the U.K. for 2012, and added that it would be “more robust” in France.

Asia: Trading in the green
Asian markets are trading in positive territory this morning, amid continued optimism that European leaders would be able to stem the region’s debt crisis.
In Japan, markets are trading higher, with Sumitomo Mitsui Financial and Mitsubishi UFJ Financial Group trading up, amid renewed optimism over the prospectus of a solution to the European debt crisis. Toyota Motor has jumped, after it reported a rise in Chinese sales in September. Nidec Corporation has soared, after it announced an increase in its share buyback plan. At 6 am, the Nikkei 225 is trading 2.1 percent higher, at 8,787.5.
In China, Industrial & Commercial Bank of China, China Construction Bank Corporation, Bank of China and Agricultural Bank of China have added value, after state-run Central Huijin Investment bought shares in these banks. In South Korea, Shinhan Financial Group and KB Financial Group Inc have risen, amid optimism that the Eurozone debt crisis will be resolved. Shinsegae Company and Hyundai Department Store have gained, after South Korean wholesale inflation in September eased. In Hong Kong, markets are trading in positive territory, following China’s support for banking stocks.

US Stocks: Futures trading in the red
At 6 am, S&P 500 futures are trading 3.1 points weaker.
NFIB Small Business Optimism and IBD/TIPP Economic Optimism are the key economic indicators scheduled for release today. Investors also await the release of minutes of the Fed’s 20 September 2011 FOMC Meeting.
Alcoa, WD 40 Co, Synergetics USA, Century BanCorp, and Joe’s Jeans are scheduled to announce their results later today.
Felcor Lodging Trust, the top gainer in after hours trading session yesterday, soared 7.0 percent. Standard Pacific, Amylin Pharmaceuticals and Sotheby’s featured amongst the other major gainers, advancing 5.6 percent, 3.9 percent and 3.9 percent, respectively. Mistras Group advanced 3.3 percent, after its first quarter results surpassed market expectations. Sally Beauty Holdings declined 4.3 percent, after it announced a secondary offering of 15.0 million shares of common stock. Amongst the other key laggards, GNC Holdings, La-Z-Boy and CME Group plunged 9.8 percent, 9.3 percent and 4.6 percent, respectively.
Yesterday, the S&P 500 index surged 3.4 percent, after German and French leaders pledged to present a comprehensive plan to tackle the Eurozone debt crisis and recapitalise European banks. Denbury Resources, the top gainer on the S&P 500 index, rallied 9.6 percent. Record breaking pre-orders for iPhone 4S helped Apple to climb 5.1 percent. Higher metal prices led Alpha Natural Resources, Cliffs Natural Resources and Freeport-McMoRan Copper & Gold to surge 8.9 percent, 8.6 percent and 5.9 percent, respectively. Banking sector stocks, Citigroup, Morgan Stanley, Wells Fargo & Co and Bank of America Corporation soared 7.6 percent, 7.4 percent, 6.5 percent and 6.4 percent, respectively, as risk appetite amongst investors increased. Micron Technology jumped 4.2 percent, after a broker upgraded its rating on the stock to “Buy” from “Hold”. Sprint Nextel Corporation plunged 7.9 percent, after a broker downgraded its rating on the stock to “Neutral” from “Buy”. Netflix declined 4.8 percent, even as it abandoned plans to breakup its DVD-by-mail and online streaming services.

European Stocks: Expected to open marginally higher
The DAX and CAC are expected to open 7 to 8 points and 3 points, firmer, respectively.
No major economic indicators are scheduled for release today.
Givaudan SA, Banco Espanol De Credito SA, Vilmorin & Cie SA and CropEnergies AG are scheduled to report their results later today.
Roche Holding AG has indicated that a small early-stage study has revealed that its experimental drug showed promise in the treatment of Alzheimer’s disease.
Louis Gallois, the CEO of EADS, has stated that the company has not been affected by the difficulties French banks are facing in securing dollar financing.
Reuters has reported that the European Commission would not include over-the-counter derivatives in its review of Deutsche Boerse AG’s planned takeover of NYSE Euronext.

Macro Update
Japan's current account surplus drops
Japan's current account surplus has dropped 64.3 percent Y-o-Y to ¥407.5 billion in August, and sharply lower from the ¥990.2 billion surplus in July.
UK retail sales increase
On a monthly basis, overall retail sales in the U.K., as measured by the British Retail Consortium, have climbed 2.5 percent in September, compared to a 1.5 percent rise in August.
Optimistic on stimulus impact, says Miles
Bank of England policy maker, David Miles, has stated that there are “good reasons” to think that the Central Bank’s expansion of stimulus will aid economic recovery.
ECB backs bond guarantee option
The European Central Bank (ECB) has indicated that it favours government guarantees rather than the Central Bank’s money market operations to strengthen European bailout fund.
Greece pledges to keep creditor promises
The Greek Finance Minister, Evangelos Venizelos, has stated that the Greek government will keep promises to international creditors on pension and wage cuts.
European leaders postpone summit
European leaders have pushed back a debt crisis summit from October 18 to October 23, amid opposition to the German Chancellor, Angela Merkel’s drive for deeper-than-planned write-downs of Greek bonds.

The "End of America" is Beginning in California

One of the more controversial aspects of Porter's "End of America" thesis is his prediction that – as the financial crisis deepens – many government services people have come to rely on will stop. The government simply won't collect enough tax revenue to pay the pensions, benefits, and salaries of government employees. States and municipalities will declare bankruptcy. Huge cutbacks will take place. Riots and protests (like those going on in New York City and Greece right now) will become commonplace.

This is a problem that runs through the system at all levels: local, state, and federal. It's going to cripple the government's ability to pick up garbage, police communities, and fight fires.

We're in this situation because public employees – and a good portion of the public they serve – have discovered that they can vote themselves the Treasury. Rather than viewing the government as an entity that should set and enforce rules and protect the public in times of war, many people see it as a gravy train.

As Michael Lewis writes in his latest article for Vanity Fair, the gravy train is crashing in California. Lewis, who in our opinion is the best financial journalist in the world, recently traveled to California to investigate the state's financial crisis.

He notes that in the city of Vallejo (which is next to San Francisco), you can park anywhere you like. There aren't any meter maids around to write tickets. Police and fire departments have been cut in half. The city declared bankruptcy in 2008. The pay and benefits of "public safety" workers consumes 80% of its budget. The city's finances have been crushed because too many promises were made for too many years.

This story is playing out in many California cities… and others across America. It's playing out in the private sector as well. Lewis notes his thoughts while talking to Vallejo city manager, Phil Batchelor…

... as he talked about the bankrupting of Vallejo, I realized that I had heard this story before, or a private-sector version of it. The people who had power in the society, and were charged with saving it from itself, had instead bled the society to death. The problem with police officers and firefighters isn't a public-sector problem; it isn't a problem with government; it's a problem with the entire society. It's what happened on Wall Street in the run-up to the subprime crisis. It's a problem of people taking what they can, just because they can, without regard to the larger social consequences.

It's not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They'd been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans.

Lewis' article also contains an interesting section on former California Governor Arnold Schwarzenegger, who he interviewed for the piece. It details the suffocating bureaucracy and incredible power of special interest groups that control California... and prevent any meaningful change from taking place.

The story of Vallejo, the section on Schwarzenegger, and the story of a fat pheasant named Henry all make for a great article. It's long... So you might want to print it off and save it for weekend reading. Right now, the article is free on Vanity Fair's website. You can read it here.

More on the "End of America":

You can watch the two-part video interview below:

Click here to watch Part 1

Click here to watch Part 2 

 

Positive Start to the Week But Still Many Unanswered Questions

As London left for the weekend on Friday, ratings agency Fitch was busy downgrading Italy by one notch to A+ (outlook negative) and Spain by two notches to AA- (watch negative). Further warnings for Portugal and Belgium added to the gloom and after a day of what had been relatively positive (from a risk point of view) after a better than expected employment report from the U.S., sentiment soured into the close.

Q3 earnings focus - impact of slowdown on corporate America
In reality, whilst the U.S. data was above expectations a monthly payroll rise of 103k is only at half the level needed to keep the unemployment rate static and hence any relief rally on the back of the data should have been just that – a relief – however the backdrop is still fragile. As the week progresses the focus will move clearly towards equity market sentiment as the Q3 earnings season in the U.S. begins in earnest and the market gets the chance to digest the ‘real’ impact on corporate America of the global economic slowdown that has plagued confidence and consumer spending.

Righting the wrongs of the Eurozone
The real news over the weekend however was the Franco German summit where once again Merkel and Sarkozy met with the aim of righting the wrongs of the Eurozone (despite the fact that until now all they have succeeded in doing is ‘writing’ the wrongs of the Eurozone).
Merkel and Sarkozy claimed that they have a plan ready for the G20 summit on 3 November, a plan that “will confront the crisis”.  Germany and France declared their will to turn the Eurozone into a ‘stability union’, agreeing to defend banks, keep Greece in the Eurozone and have joint responsibility for the euro.  Herein lays the issue – responsibility. 

Potential hurdles ahead
Whilst the ‘Merkozy’ plan to solve the banking crisis appears acceptable to them, the market will quickly want comprehensive answers to many questions surrounding the ‘plan’.  Initially a couple of potential hurdles spring to my mind (i) Merkel stated that “EU treaty changes will be required” – This in itself leads to uncertainty as we have witnessed with the ‘agreement’ on the expansion of the flexibility of the EFSF, which was agreed on 21 July and has still not been ratified through the EU national parliaments. (The Slovakian vote will be watched very closely this week in this regard.); (ii) Merkozy has also stated that they have agreed on a bank capital ‘total’. This invites the market to dream up scenarios where the ‘total’ will not be sufficient – much like the EFSF and the concern that it would not be big enough to support Italy or Spain (let alone both); (iii) Finally, in financial markets, three weeks is a very long time and until a plan is announced and the implications can be understood by the markets, uncertainty remains and as I have discussed on many occasions over recent weeks, uncertainty is the biggest drag on confidence and hence global activity at the moment. Fear will remain.
“Mismanagement of Europe’s Sovereign Debt crisis may cause a regional slump worse than a regular recession” – Fiat CEO
Initially, the announcement that there ‘is’ a plan for Europe (and the action taken on Dexia to nationalise and split the bank up), has been seen as a positive for risk assets. As the week progresses I would imagine that the market will begin to need more detail on the proposals and U.S. earnings data will become the key focus for risk assets. On the data front U.S. retail sales and the U.K. employment report will also be keenly watched.

If It Looks Like a Bear ... Is This a Bear Market or What ?

On Tuesday, when the Standard & Poor's 500-stock index sank below 1100, market pundits were champing at the bit to declare that a bear market had officially begun. They had to eat their words before they could say them, as the market promptly jumped up by more than 5% by week's end.

Those who think they can predict bear markets, and anyone foolish enough to listen to them, might be humbler and wiser if they realized that the term "bear market" has been in flux for a century. Investors who rely on labels like "bear market" to guide their decisions are clinging to conventions with no real meaning.

There is no such thing as an "official" bear market. For convenience, based on a rough consensus among analysts, The Wall Street Journal and others define it as a 20% decline from a closing high to a closing low on the Dow or the S&P 500.

But that definition is surprisingly new.

The term "bear," for someone who profits when stocks fall, dates to the early 1700s. "To sell the bear's skin before one has caught the bear" was an early description of a short seller, who borrows shares and then sells them, hoping to buy them back at a lower price. "Bear market" originated from the same metaphor, but the term was "seldom used" before the 1880s, says lexicographer Barry Popik.

The book "The ABC of Wall Street," by S.A. Nelson, published in 1900, didn't include "bear market" in its glossary. William C. Moore's 1921 book "Wall Street: Its Mysteries Revealed, Its Secrets Exposed" defined "bear market" only as "one in which selling preponderates and prices decline."

From the 1920s through the 1940s, the Journal regularly described even a 4% decline in a single day's trading as a "bear market."

Until at least the 1940s, many analysts believed a bear market occurred whenever the three major Dow averages—the industrials, the railroads and the utilities—all hit new lows.

In his book "Bear Markets: How to Survive and Make Money in Them," published in 1964, investment adviser Harry D. Schultz listed "all probable bear markets" up to that point in the 20th century. Of the 17 he identified, four fell less than 20%: 1923 (nearly 19% in seven months), 1926 (17% over two months), 1953 (14% over nine months) and 1960 (18% in 10 months). Mr. Schultz also counted the 1934 decline, when the Dow lost 24% over nine months, but noted that it was "rarely included among bear markets" by other experts.

In 1990, an article in the Journal noted that "Investment pros usually define a bear market as a fall in stock prices that lasts at least two months and drags down prices at least 20%." More recently, the Journal has dropped the "at least two months" part. (That makes the 23% drop in the Dow on Oct. 19, 1987 a "crash" rather than a bear market.)

In short, the definition of "bear market" is a chameleon. But that ever-changing nature reflects what happens in the real world. Depending on when you start counting, stocks are always in either a bull or a bear market. Oddly, in fact, they are often in both at once. Over the five years ending Sept. 30, for example, U.S. stocks have lost an annual average of 1.2%, and they fell 13.9% in the third quarter of 2011; those are bear markets in spirit, regardless of the 20% metric. Over the past 20 years, however, U.S. stocks have gained an annual average of 7.6%—a bullish rate of return that still doesn't feel quite like a bull market.

Slapping the "bear" label onto a market that is down 20% makes it feel more predictable and controllable. But that's an illusion; anything can happen. Stocks could keep on dropping until they lose 89%, as they did from 1929 to 1932, or they could change course instantly and go straight up. The declaration of a bear market tells us a little about the past, nothing about the future.

What you can know is that declining markets are good—not bad—for savers who have the luxury of steadily accumulating stocks at depressed prices, so long as they have the guts to hang on. They should rejoice over bear markets.

Conversely, a falling market is bad for retirees, who face the necessity of having to wring cash out of continually shrinking portfolios. They should fear bear markets.

But in either case, you should stick to your plan instead of scrambling to change your strategy just because an index crossed some arbitrary numerical threshold.

 
— intelligentinvestor@wsj.com; twitter.com/jasonzweigwsj

Leaders Step Up Pressure on China : U.S Intensifies Criticism of China's Yuan Policy

U.S. leaders took swipes at China on Thursday, as the Senate voted to advance a bill to penalize countries said to be manipulating their currencies and President Barack Obama accused the country of manipulating the yuan.

WSJ's Michael Crittenden looks at a proposed U.S. Senate bill that would compel the Obama Administration to levy tariffs against China and other countries for their 'misaligned' currencies. Photo: STR/AFP/Getty Images

U.S. Trade Representative Ron Kirk separately demanded that China disclose details to the World Trade Organization on a large number of government subsidies to ensure it is complying with global trade rules. The U.S. notified the WTO of almost 200 subsidy programs China has failed to disclose, as well as 50 India measures.

The Senate's currency bill would compel the Obama administration to levy tariffs and other penalties against China and other countries for having "misaligned" currencies. The measure reflects lawmakers' concerns that China holds down the value of its currency, the yuan, in an effort to boost the country's exports.

The Senate was expected to vote to pass the currency measure Thursday night, but Democrats and Republicans got into a scuffle over how to wind down debate on the bill and finish voting on amendments to the measure. The breakdown occurred after Senate Majority Leader Harry Reid (D., Nev.) attempted to limit the ability of Republicans to bring up politically sensitive amendments, prompting objections from Senate Minority Leader Mitch McConnell (R., Ky.). The vote is now scheduled for Tuesday at the earliest.

Mr. Obama's rare public criticism of China came at a White House news conference earlier in the day where he accused China of manipulating the yuan and taking other actions to bolster its growth at the expense of the rest of the world.

"China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States," Mr. Obama said. But the president also expressed reservations about the Senate's bill, suggesting it could violate America's international treaty obligations on trade. He also acknowledged China has allowed some appreciation in the yuan but said "it's not enough."

The growing focus on China comes as lawmakers worry about the faltering U.S. economy and its role in the elections, a scant 13 months away. China's management of the yuan has long bothered policy makers, particularly those from manufacturing states, who insist that Beijing holds down the value of its currency to benefit Chinese exports to the detriment of U.S. companies.

In the Senate, 62 lawmakers, including a dozen Republicans who broke with their leadership, voted to end debate and move to the final stages of debate on the China bill. "We are in a trade war. We have our clocks cleaned every day and lose jobs every day because of unfair Chinese practices," Sen. Charles Schumer (D., N.Y.) said on the Senate floor.

Thursday's vote was much closer than a similar tally taken Monday, when 79 senators voted to move ahead with the legislation. The bill lost significant Republican support because of GOP anger at being unable to offer amendments to the bill. Led by Mr. McConnell, 19 of the 31 Republican lawmakers that had voted in favor of the measure on Monday switched to vote against it. But Mr. McConnell was unable to sway enough Republicans to defeat the measure.

Sen. Jeff Sessions (R., Ala.), a supporter of the legislation, said it was one of the first times he had split with his leadership to vote with Democrats. He said he expected more Republicans to vote for the bill when it comes to a final vote.

In the House, the China issue is resonating with both Republicans and Democrats; a total of 226 lawmakers, which would be enough to pass the bill, have signed on to a House version of the currency bill. They include 61 Republicans who have bucked warnings from House Speaker John Boehner (R., Ohio) that the legislation is "dangerous."

Mr. Boehner and Republican leaders are trying to tamp down an effort to bring the bill to the floor via a so-called discharge petition, which allows a majority of rank-and-file lawmakers to override leadership and bring legislation up for a floor vote.

A number of influential business groups, ranging from the U.S. Chamber of Commerce to the Business Roundtable, have warned taking action against China could result in retaliation, undermining any potential gains to the U.S. economy.

"I don't think now is the right time to embrace a trade war," said Sen. Claire McCaskill (D., Mo.), who opposes the currency bill.

 
—Tom Barkley and Siobhan Hughes
contributed to this article.

The Bank of Japan Leaves its Monetary Policy Steady in October

The Bank of Japan released today its decision about interest rates, where the Japanese monetary policy makers have decided to keep the rates unchanged in one of the government's efforts to give more supports for the economic recovery. 

Mr. Shirakawa, governor of the Bank of Japan and his board, left the benchmark interest rate to "virtually zero" a range of 0.0% to 0.10%, after the meeting of the bank, while this decision came compatible with anticipations which noted that. 

On the other hand, the leaders of BOJ decided to leave the amount of asset-purchase fund at 15 trillion yen along with keeping the credit-loan program unchanged at 35 trillion yen to encourage the banks lending. 

Moreover, the Bank of Japan noted that the economic recover bas returned to normal level and now is picking up amid the sluggish global economy, while the economy is facing a downward pressure as the European financial crisis beside the sluggish US economy. 

Japanese economy success to start the recovery phase this quarter as the industry sector continued to introduce more cheerful signs these days after manufacturers restored their production cycle after the massive quake that hit the nation during the first quarter of this year. 

Meanwhile, Japanese companies have restored their facilities that damaged by the March 11 quake, while Toyota Motor Co. is one of the world's biggest carmakers and it's the Japan's first largest automakers, reported that the domestic demand for vehicle sales has advanced by 1.7% in September, which is the first increase in 13 months. 

On the other hand, Japanese economy witnessed a first drop for its retail trade in three months as Japan's economy is in a critical phase these days amid the current events that threaten the global economic growth along with the yen's appreciation crisis that is a concern to major Japanese companies, adding that Japanese economic growth needs time and more stimuli to rebound. 

Further, the ECB leaders would reintroduce purchases of covered bonds and yearlong loans for banks to support markets rattled by the region’s sovereign-debt crisis and they announced that EU plans to coordinate recapitalization of European banks, reducing European debt crisis concern. 

On the contrary, Goldman Sachs Group Inc. cut its forecast for Japan’s growth to 2.1% from 2.5% in the fiscal year starting April 2012 and to 0.1% from 0.2% for this fiscal year, due to a slowdown in global expansion.

Secret panel can put Americans on "kill list'

 
(Reuters) - American militants like Anwar al-Awlaki are placed on a kill or capture list by a secretive panel of senior government officials, which then informs the president of its decisions, according to officials.

There is no public record of the operations or decisions of the panel, which is a subset of the White House's National Security Council, several current and former officials said. Neither is there any law establishing its existence or setting out the rules by which it is supposed to operate.

The panel was behind the decision to add Awlaki, a U.S.-born militant preacher with alleged al Qaeda connections, to the target list. He was killed by a CIA drone strike in Yemen late last month.

The role of the president in ordering or ratifying a decision to target a citizen is fuzzy. White House spokesman Tommy Vietor declined to discuss anything about the process.
Current and former officials said that to the best of their knowledge, Awlaki, who the White House said was a key figure in al Qaeda in the Arabian Peninsula, al Qaeda's Yemen-based affiliate, had been the only American put on a government list targeting people for capture or death due to their alleged involvement with militants.

The White House is portraying the killing of Awlaki as a demonstration of President Barack Obama's toughness toward militants who threaten the United States. But the process that led to Awlaki's killing has drawn fierce criticism from both the political left and right.
In an ironic turn, Obama, who ran for president denouncing predecessor George W. Bush's expansive use of executive power in his "war on terrorism," is being attacked in some quarters for using similar tactics. They include secret legal justifications and undisclosed intelligence assessments.

Liberals criticized the drone attack on an American citizen as extra-judicial murder.
Conservatives criticized Obama for refusing to release a Justice Department legal opinion that reportedly justified killing Awlaki. They accuse Obama of hypocrisy, noting his administration insisted on publishing Bush-era administration legal memos justifying the use of interrogation techniques many equate with torture, but refused to make public its rationale for killing a citizen without due process.

Some details about how the administration went about targeting Awlaki emerged on Tuesday when the top Democrat on the House Intelligence Committee, Representative Dutch Ruppersberger, was asked by reporters about the killing.

The process involves "going through the National Security Council, then it eventually goes to the president, but the National Security Council does the investigation, they have lawyers, they review, they look at the situation, you have input from the military, and also, we make sure that we follow international law," Ruppersberger said.

LAWYERS CONSULTED

Other officials said the role of the president in the process was murkier than what Ruppersberger described.

They said targeting recommendations are drawn up by a committee of mid-level National Security Council and agency officials. Their recommendations are then sent to the panel of NSC "principals," meaning Cabinet secretaries and intelligence unit chiefs, for approval. The panel of principals could have different memberships when considering different operational issues, they said.

The officials insisted on anonymity to discuss sensitive information.
They confirmed that lawyers, including those in the Justice Department, were consulted before Awlaki's name was added to the target list.

Read Full Story