Crisis In Ukraine Set To Hit Us All With Gas Prices Set To Rise

Bangkok blast injures two protesters

Two anti-government protesters in Thailand have been injured in an explosion outside the prime minister’s office in the capital, Bangkok.
According to local media reports, unidentified attackers threw a grenade at anti-government protesters around midnight on Sunday outside the Government House, but it has not been confirmed if a grenade caused the explosion.
“It was an explosion that slightly hurt two protesters but we can’t confirm whether it was a grenade,” a district police officer was cited as saying in media reports.
The incident occurred as the caretaker government loyal to Yingluck Shinawatra, the unseated prime minister, is struggling to hold on to power and hoping to survive until an election set for July to restore authority.
Opponents of the government demand the upper house of parliament, the courts and the Election Commission to appoint a new prime minister.
Source and full story: Press TV, 11 May 2014

Pfizer's bid for AstraZeneca shows that big pharma is as rotten as the banks

Global pharmaceutical companies are dodging the risks by loading R&D costs on to taxpayers

Every one of Pfizer’s patented drugs benefited from decades of taxpayer funds. Photograph: Canadian Press/Rex

Countries around the world are seeking long-run, innovation-led growth in the "real economy". This is born of a wish to move away from speculative growth led by short-term financial markets. For this reason, industrial policy is back on the agenda after years of being a near blasphemy.
The life-sciences industry is top of the list, for both Barack Obama and David Cameron, of "real" industries to nurture through such policy. But this month they have been reminded of an uncomfortable truth: big pharma is just as sick as the banks. And, like speculative finance, it is hurting taxpayers in the process.
Pfizer wants to buy AstroZeneca, a British firm, to cuts its high overheads and especially to pay the lower UK tax rate (20%) – the cheap way the UK attracts "capital"– rather than the 40% US tax rate. This is nothing new as Google and Apple have been shifting profits around the world to avoid tax. Even within the US, Apple moved one of its subsidiaries to Reno, Nevada to avoid paying higher tax in Cupertino, California. Let's call it a race to the bottom.
What makes this dynamic particularly problematic for the taxpayer is that the knowledge behind Apple and Pfizer products – the key to their long-run profits – has been virtually bankrolled by that same taxpayer. As I discuss in my book The Entrepreneurial State: Debunking Private vs Public Sector Myths, every technology behind the iPhone was publicly funded (internet, GPS, touch-screen, Siri) and every one of Pfizer's patented drugs benefited from decades of taxpayer funds through the US National Institutes of Health, which in 2012 alone spent £32bn (£19bn).
Indeed, Pfizer's recent shift of one of its largest R&D laboratories from Sandwich in Kent to Boston was not due to the lower taxes or regulation in Boston but to be closer to this pot of gold. Coming back to the UK only to suck more blood out of the system should warn the government of the kind of image it wants to present of itself. Is it happy to be played front and back?
And what is happening to big pharma's research and development? In the name of "open innovation" – the admission that most of their knowledge comes from small biotech and large public labs – big pharma have been closing down their own R&D (reducing total numbers of researchers), as well as moving the remaining ones to be close to those labs.
Big pharma is no longer in the innovation business, using its own resources to fund the high-risk ideas, most of which will fail. It has become more risk-averse and prefers to focus on the D of R&D and please shareholders. Mergers and acquisition strategies reduce expensive overheads and costs (of which research infrastructure is the highest).
Things become even clearer when we look at the numbers behind one of their biggest expenditures: share buybacks. These are geared to boost stock prices, stock options and executive pay. Indeed it is this type of dynamic that has been driving the extreme inequality described by Thomas Piketty. The calculations of Professor William Lazonick suggest that in 2011, along with $6.2bn paid in dividends, Pfizer repurchased $9bn in stock, equivalent to 90% of its net income and 99% of its R&D expenditures.
While the justification for such buybacks is often that there are no "opportunities for investment", the increased public funds in pharma research shows who is funding the opportunities and who is free-riding. Though in the end both lose since without an engaged private partner, innovation suffers.
To make matters worse, these "innovative" companies advising governments on their "life-sciences" strategies are constantly seeking handouts through R&D tax credits, or more recently through the UK  Patent Box tax scheme introduced in 2013 (as well as in the Netherlands, Belgium and Spain, and soon in the US), with a 10% tax for income earned on patented drugs.
Patents are already monopolies with 17 years' protection. There is no reason to increase profits even more during that time. Especially as what drives the research that leads to patents is not the "cost" of the research, but the opportunities that are perceived—historically driven by large amounts of risk-loving public funds.
Experts from the Institute for Fiscal Studies have argued that this policy will diminish government revenue by about £2bn a year, and have no effect on business investment in research – which was meant to be the point. Indeed, private investment tends to follow well-funded public investments, that are of course undermined by the constant bashing away at the ability of government to collect tax revenue. This not an innovation strategy but a City-like speculation strategy.
The parallel goes even further: just like the banks, big pharma socialises the risk, but privatises rewards. The few drugs that are coming out would not have emerged without taxpayer-funded research. Yet the taxpayer then pays twice: first for the research then for the high prices, justified by the supposedly high risk that big pharma is taking on. This is almost surreal: what risk? And what about taxpayer risk?
Rather than empty words on a life-sciences strategy, what is needed is for policymakers to become more confident in their negotiations with business. The 1980 Bayh-Dole act that allowed publicly funded research to be patented says that government should have a say on the prices of the drugs. The fact government has never exercised this right shows who has the upper hand.
But things can change. Innovation policy should be linked to corporate governance – why should companies that spend more on share buybacks than R&D benefit from public research funds? Then "intelligent" R&D tax credits could be created, linked not to the income generated from R&D but the research labour hired to conduct it (as introduced in the Netherlands).
Government could also retain a golden share of the intellectual property rights (patents) which public research produces, and/or make sure that the prices of the new drugs reflect how the taxpayer paid for the most high-risk research. And, finally, given the high dependence of the industry on publicly -funded R&D, do not allow acquisitions that undermine the underlying research base the companies themselves should commit to - and for which they constantly request handouts.
In short, we need to start fostering a more symbiotic innovation eco-system. It's time to put an end to the current, increasingly parasitic one. We could start by realising that government does have power to actively shape and create markets, and not just fix broken ones.

Crash-Proofing Your Portfolio (Hilarious Cartoon)

Wolf Richter www.testosteronepit.com  www.amazon.com/author/wolfrichter

“Is this safe?”

To give you a smile during these interesting times, when everything seems to be a bubble or manipulated or rigged. So, the firefighter in the cartoon asks the ultimate question: “Is this safe?” The answer is obvious (via Merk Investments.)

It happened in 2000 and in 2007. With spectacular consequences. Now, it happened again. And hidden beneath the blue-chip highs, parts of the market are already crashing. Read….The Last Two Times This Happened, The Stock Market Crashed

Amazon's 0.1% tax bill: MPs call for boycott after firm rakes in £4bn in UK... but hands taxman just £4m

• Amazon made sales of £4.3bn last year but paid just £4.2million in tax
• That means company paid a nominal tax rate of just 0.1 per cent
• Margaret Hodge, chairman of public accounts committee, calls for boycott
• Added figures were an 'outrage' and said she has stopped using company

By Peter Campbell, City Correspondent

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Margaret Hodge, chairwoman of the public accounts committee, has called for a boycott of Amazon after the company paid tax of just £4.2million on UK sales worth £4.3billion

Amazon paid just £4.2million in corporation tax last year despite record UK sales of £4.3billion – meaning it paid a nominal rate of just 0.1 per cent.
Margaret Hodge, Labour chairman of the Commons Public Accounts Committee branded the figures an ‘outrage’, and called on shoppers to boycott the firm.  
She said: ‘Amazon should pay their fair share of tax. I no longer shop at Amazon, people should shop elsewhere.’
Mrs Hodge recalled a boycott of Starbucks two years ago, after it emerged the company paid just £8.6million in corporation tax in 14 years of trading in Britain.
The action prompted the coffee chain to offer to pay the taxman £20million over two years – a move that has not yet been repeated by Amazon.
But Mrs Hodge suggested the firm could be pushed into reviewing its tax bill, saying: ‘What we demonstrated with Starbucks is the power of the consumer voice.’
Although British shoppers buy from Amazon’s UK website and purchases are delivered from UK warehouses, the company registers transactions in Luxembourg with a company called Amazon EU.
The arrangement, which has been branded ‘immoral’ by MPs, allows the company to legitimately lower its tax bill because the rate is lower in Luxembourg than in the UK.

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Amazon delivers from UK depots liek this one in Fife but payments are settled in Luxembourg.

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Despite customers buying products from a UK site which are delivered from UK warehouses, Amazon registers its sales in Luxembourg where tax is much lower

Last year the company’s UK division reported sales of £449million, up from £320million the year before. It posted a pre-tax profit of £17million and paid corporation tax of £4.2million.
But documents filed by Amazon in the US reveal the true size of its business in the UK, where sales rose 13 per cent to £4.3billion last year.

 

It means the company is now in a similar league to Argos, Dixons and the non-food arm of Marks & Spencer.
Amazon’s UK accounts, filed yesterday at Companies House, also show the company used a multi-million pound tax credit to reduce its bill even further.
It had been due to pay £9.7million in corporation tax – but used a £5.6million tax credit to slash its bill in half.
On top of this it received a £2.1million government grant – although it did not say what it was for.

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Ms Hodge recalled the boycott of Starbucks after it emerged the company paid £8.6million in tax in 14 years, saying it had shown the 'power of the consumer'

And despite coming under public scrutiny, it decided to hike the pay of a top director, believed to be UK managing director Chris North, from £211,000 to £413,000 a year.
John O’Connell, director of the TaxPayers’ Alliance, said: ‘Our 17,000-page tax code makes it too easy for large companies to exploit loopholes and run rings around the taxman.
‘The power to make our tax system simpler and fairer lies squarely in the hands of politicians.
'They must stop pontificating about tax avoidance and actually do something to fix the system that they created and have been tinkering with ever since.’
A spokesman for Amazon said: ‘Amazon pays all applicable taxes in every jurisdiction that it operates within.
‘Amazon EU serves tens of millions of customers and sellers throughout Europe from multiple consumer websites in a number of languages dispatching products to all 28 countries in the EU.
'We have a single European headquarters in Luxembourg with hundreds of employees to manage this complex operation.’
 

Explosive Hidden Leverage Threatens To Blow Up The Markets

Wolf Richter www.testosteronepit.com  www.amazon.com/author/wolfrichter

We don’t know what hedge fund manager Steven Cohen will do with the money he’s borrowing from Goldman Sachs’s GS Private Bank. We don’t even know how much he’s borrowing. But it’s a lot, given that the personal loan is backed by his collection of impressionist, modern, and contemporary art estimated to be worth $1 billion. The only reason we know about the loan at all is because Bloomberg dug up a notice Goldman filed with the Connecticut Secretary of the State, claiming he’d pledged “certain items of fine art” as part of a security agreement.

Goldman and Cohen go back a long ways. It provided prime brokerage services to his hedge fund, SAC Capital Advisors that pleaded guilty last year to insider trading charges and agreed to pay $1.8 billion in penalties and stop managing money for outsiders, which will reduce the fund to a family office managing $9 billion to $11 billion of Cohen’s personal fortune.

Cohen made $2.4 billion in 2013, according to Institutional Investor’s Alpha List of hedge fund managers, in second place, behind David Tepper ($3.5 billion) and ahead of John Paulson ($2.3 billion). Wouldn’t that be enough without having to borrow more? And what might he be doing with all this borrowed moolah? He won’t need that much to make ends meet when his electricity bill comes due.

In the rarefied air where these art loans take place, they have unique advantages: clients get to keep their art on the wall, and interest rates are about 2.5% – thanks to the Fed’s indefatigable efforts to come up with policies that enrich this very class of success stories. This is where the Fed’s otherwise illusory “wealth effect” is actually effective.

So why borrow money?

“A number of hedge fund guys who manage their money wisely, they look to put their art collections to work,” explained Michael Plummer, co-founder of New York-based consultant Artvest Partners and former COO at Christie’s Financial Services. “If you can get liquidity out of your collection and pay only 250 basis points,” he said, “it just makes sense.”

So Cohen will invest it. Cheap leverage, the holy grail these days. It’s the driver behind the asset bubbles all around. It’ll goose otherwise minuscule returns. He might invest this borrowed money in his fund, which might for example buy Collateralized Loan Obligations. Banks that carry them on their books have to dump them to satisfy new regulations. But prices have dropped, and so banks are lending hedge funds cheap money so that they buy these CLOs. Some banks are offering to lend as much as nine times the amount that the hedge fund itself would invest. More massive and cheap leverage.

CLOs are similar to subprime-mortgage-backed Collateralized Debt Obligations that turned into toxic waste during the financial crisis. But they’re backed by junk-rated corporate loans, some of them malodorous “leveraged loans” that private equity firms use to strip-mine their portfolio companies. These already overleveraged companies borrow money from banks and pay it out as a special dividend to the PE firms. It pushes the company deeper into the hole, loads up the PE firm with cash, and saddles the bank with a dubious asset, the “leveraged loan.” The bank can then package it with other low-rated corporate debt into an enticing CLO [read.... Banks And Hedge Funds Make Curious Deal On New Structured Toxic-Waste Securities].

So Cohen, using these multiple layers of leverage, might earn a return of 8% a year on his art loan that costs him 2.5% a year. Multiply that out to a billion, and it’s a money machine. That would be on top of the art itself that has seen phenomenal increases in value under the Fed’s money-printing binge.

Absurd? Sure, but this sort of absurdity, an outgrowth of the biggest credit bubble in history, has become the lifeblood of the US economy and its lopsided income distribution.

It’s not just a few people at the top that can benefit from multiple layers of leverage. After the run-up in home prices over the past two years, many homeowners have equity. So it didn’t take the financial media long to encourage them to leverage that equity – through home-equity lines of credit or “cash-out refinancing” – and buy stocks with the proceeds (always buy, buy, buy!).

A homeowner might cash out $100,000 and put it into a brokerage account. To goose his returns like Cohen, he might buy $150,000 worth of securities, with the remainder coming from margin debt. And the security might be IBM, a highly leveraged outfit with $123 billion in debt and tangible stockholder equity of minus $18.3 billion [read.... Stockholders Got Plundered In IBM’s Hocus-Pocus Machine].

Absurd? Heloc originations soared 42% in the fourth quarter. The average credit line for “super-prime” borrowers was $120,000. Even “deep subprime” borrowers got an average credit line of $60,000. And “cash-out refinancing” is hot again, making up about 25% of all new refis in the first quarter, according to Quicken Loans.

Strung-out consumers might blow this money on a car and food and other things and some might consolidate debt and pay off their maxed-out credit cards so that they can charge more in their heroic effort to keep consumer spending from collapsing altogether. But the gorgeously mediatized stock market gains over the last few years, and especially last year, seduced many people to step back into the this craziness, all guns blazing, after having missed the entire run-up. And they’re doing it at precisely the worst possible moment.

This kind of hidden leverage pervades the investment scene at all levels. When multiple layers of debt are used to finance a chain of speculation, with very little equity involved, returns on equity can be eye-popping, as long as everything soars without ever as much as hesitating. But once progression beings to totter, and many feverishly hyped stocks, like Twitter, lose more than half their value in a matter of months, the bloodletting starts and margin calls go out, and banks are suddenly worried about their collateral, and some of the art gets dumped into a market with no buyers, and junk bonds plunge, and “leveraged loans” default, and it kicks off another bout of forced selling into an illiquid market, and the cross-connections and tie-ins and the whole counterparty spaghetti of these layers of leverage get knotted up, and all heck breaks lose. And as the whole construct tumbles down, Cohen and his ilk will once again press their cronies at the Fed and the Treasury to bail out their investments just one more time.

For years, nothing could slow the tsunami of junk debt. But suddenly, something happened, and investors in leveraged-loan mutual funds, where the crappiest junk debt accumulates, ran scared and started pulling their money out. Consequences were immediate. Read….Biggest Credit Bubble in History Cracks, Trips Up The Smart Money

How the Middle Class Lifestyle Became Unaffordable

by Charles Hugh-Smith

There are four structural drivers behind the soaring costs of the middle class lifestyle.

Why have the costs of a middle class lifestyle soared while income has stagnated?Though it is tempting to finger one ideologically convenient cause or another, there are four structural causes to this long-term trend:

1. Baumol’s Cost Disease

2. Systemic headwinds to the current version of capitalism

3. Dominance of global corporate capital

4. Financialization

The key take-away here is that the first two causes are structural and cannot be changed by passing a law or funding another state bureaucracy. Though many believe they can tax global corporate capital to eliminate wealth inequality, capital is mobile and will move to where it can expand. The dominance of money in politics also means that the political machinery is for sale to the highest bidder, which just so happens to be global capital.

Since financialization rewards both capital and the central state that depends on tax revenue, reversing financialization politically is a non-starter.

No wonder the middle class is evaporating. These trends are far more powerful than the proposed solutions.

Let’s start with Baumol’s cost disease, named after economist William J. Baumol, whose work with William G. Bowen I described in Productivity, Baumol’s Disease and the Cliff Just Ahead (December 8, 2010).

Baumol examined the relationship between productivity and cost, and found that productivity in labor-intensive services (for example, nursing and teaching) had intrinsically lower rates of productivity increases than goods-producing industries.

The performing arts offers a striking example: it takes the same time to learn and play a Mozart concerto now as it did in 1790, so productivity gains will be modest.

This can be clearly seen in this chart of the consumer price index, 1977-2005:

Note how manufactured goods such as TVs, clothing and autos fell in price while education and healthcare soared. Baumol foresaw the crunch that his theory predicted: as healthcare and education took a larger share of the national income/GDP, taxes would have to rise substantially to pay for those services.

He described the social choices we faced in a seminal 1993 paper: Health care, education and the cost disease: A looming crisis for public choice.

Baumol under-estimated the power of the low-productivity sectors such as healthcare and higher education to exploit political capture to increase their share of the national income. In other words, the extraordinary rise in healthcare and higher education costs arise not just from the low productivity of these sectors, but from their cartel power to obscure the true costs of their bloat and push prices higher.

Baumol also failed to appreciate how the state (government) is the willing partner in this exploitation of low productivity. The state enforces the monopoly pricing power of these cartels. As a result, potential gains in productivity from technology are suppressed to protect the cartels from any real competition. (The same can be said of the military-industrial complex and other state-protected cartels.)

That’s how we end up with college degrees and medical procedures that cost more than a house.

The second set of systemic cost drivers were identified by Immanuel Wallerstein, who views these forces as threats to capitalism’s prime directive, which is to accumulate more capital:

1. Urbanization, which increases the cost of labor

2. Externalized costs (dumping private waste into the Commons, environmental damage and depletion, etc.) are finally having to be paid

3. Rising taxes as the Central State responds to unlimited demands by citizens for more services (education, healthcare, etc.) and economic security (pensions, welfare)

I covered these headwinds to capitalism in Is This the Terminal Phase of Global Capitalism 1.0? (February 8, 2013).

In brief, urbanization drives wages higher, regardless of the era or economic system, and external costs such as pollution and depletion must eventually be paid out of labor and capital alike. The demand for more state services is unquenchable, and the state responds by buying off key constituencies with more benefits.

Wallerstein is one of the few who clearly understands the State’s role as enabler and enforcer of monopolies and cartels. High profit margins are most easily maintained by persuading politicians to create/regulate quasi-monopolies and cartels.

The State has two core mandates: enforce quasi-monopolies and cartels for private capital, and satisfy enough of the citizenry’s demands for more benefits to maintain social stability.

If the State fails to maintain monopolistic cartels, profit margins plummet and capital is unable to maintain its spending on investment and labor. Simply put, the economy tanks as profits, investment and growth all stagnate.

If the State fails to satisfy enough of the citizenry’s demands, it risks social instability.

That is the nation-state’s quandary everywhere. With growth slowing and parasitic cartels increasingly difficult to maintain and justify, the State has less tax income to fund its ever-expanding social spending.

In response, the State raises taxes and borrows the difference between its spending and its revenues. This further squeezes spending as the cost of servicing debt rises along with the debt. The rising cost of debt service is an ever-tightening noose that cannot be escaped.

Here are two charts: the first is productivity, the second is corporate profits. Note that while wages have stagnated, the cost of benefits (healthcare and pensions) has absorbed much of the increase in productivity. The rest has gone to corporate profits:

And this leads us straight to financialization, the parasitic extraction of profits from the real economy by finance and the state. Remember Wallerstein’s key insight: the state depends on cartel pricing to sustain high labor costs, investment and the taxes that flow from high wages and profits. As the real economy stagnated, the state (which includes the Federal Reserve) incentivized financialization and speculative credit bubbles to keep the money flowing to feed its own spending.

In other words, the state isn’t just a passive patsy in financialization–it is a willing partner, because financialization funds the state. Just look at the enormous expansion of property taxes and income taxes that flowed from the housing and stock market bubbles.

Asking the state to limit financialization is like asking the fox guarding the henhouse to stop eating plump hens. If the fox stops consuming the plump hens, it dies. If the state stops financialization, the state’s enormously expensive programs and its debt machine all die, too.

In essence, the state has no choice: to save itself, the middle class must be sacrificed.From the point of view of global capital, the ideal partner is a powerful central state that imposes cartel pricing on the economy: $200 million a piece F-35 fighter jets, $100,000 college diplomas, $200,000 medical procedures, $1,000 a pill medications, etc.

From the point of view of the state, it’s more important to protect corporate profits and preserve the ability to borrow another trillion dollars at near-zero interest rates than it is to restore a vibrant middle class.

Debt-serfdom works just fine for the financial sector and the central state that enforces the serfdom. Food stamps (bread) and distracting entertainment (circuses) are cheap. What’s not to like about debt-serfdom to those in power? Not only is it an ideal arrangement, it’s the only one left to the state and its partner, global capital.