Glum Economic News Overshadowed by Implications of Paris Terrorist Attack

by Curmudgeon with Victor Sperandeo

Introduction (Curmudgeon) - The Week in Review:

This past week was chocked full of important economic and financial news - almost all of it negative. After reading the summary below, please ask yourself if there really is an economic recovery?

· IMF again warned of persistently weak global growth, as economist continue to reduce their GDP forecasts. The Organization for Economic Cooperation and Development (OECD) trimmed its global economic growth forecasts to 2.9% in 2015 and 3.3% in 2016, down from the OECD’s earlier forecasts of 3% and 3.6%, respectively.

· Oil tumbled to near $40 per barrel, capping a tumultuous negative week for other commodities. The S&P GSCI index which tracks 24 commodities lost 4% this week (see chart below).

· Gold, copper and other metals hit multi-year lows, which is astonishing if one believes there's been an economic recovery for the last 6+ years. In previous recoveries, strong industrial demand drove up metals and commodity prices.

· U.S. retail sales edged up a seasonally adjusted 0.1% last month, after being unchanged in September and August. Consumer spending at retailers was up only 1.7% since October 2014. Macy's and Nordstrom's issued disappointing outlook for holiday shopping which caused their stocks to tank.

· US import prices fell 0.5% in October, a bigger decline than expected as the strong US dollar and weak global demand continued to push down the prices of imported goods, including petroleum. For the 12 months through October, prices fell 10.5%.

· China’s trade volumes dropped in October, with both exports and imports falling substantially, reflecting weakness domestically and abroad. Exports declined 6.9%, while imports fell a steeper-than-expected 18.8% from a year earlier. China’s industrial output rose 5.6% in October from a year earlier, the weakest growth in seven years.

· Eurozone industrial output fell 0.3% in September, a second straight monthly decline. German output declined 1.2%, compared with increases of 1.4% in Spain and 0.2% in both France and Italy.

· Cisco unexpectedly offered lower revenue and profit guidance for the current quarter. CEO Chuck Robbins blamed the weak outlook on global economic frailty and the effects of the rising US dollar. That's important because Cisco is considered to be a tech bellwether that often gains an early glimpse of economic and industry trends.

· Thursday's Financial Times "big read" was on a subject near and dear to the Curmudgeon: "Silicon Valley ‘Unicorns’ Face Hard Reality." Readers are invited to listen to a podcast of that story here (if you're OK with a woman's British accent).

· On Friday, both the NY Times and WSJ rans stories indicated the Fed will definitely raise rates at the December FOMC meeting and might even raise rates more rapidly than they had earlier said. Not everyone agrees.

· In a note to subscribers the same day, Shadowstats.com John Williams wrote: "Weak Retail Sales and Falling Wholesale Inflation Did Not Reinforce “Certainty” of December FOMC Rate-Boost."

Weakness in commodities is clearly depicted in this 1 year chart of the GSCI index:

However, all of the above economic reports and information takes a back seat to the Islamic State (ISIS) terrorist bombings in Paris. After a short backgrounder on the Paris attacks, we devote this post to an analysis of that topic by Victor Sperandeo. All opinions expressed herein are his.

Summary of ISIS Attacks in Paris (Curmudgeon):

Three teams of Islamic State (ISIS) attackers acting in unison carried out the terrorist assault in Paris on Friday night, officials said on Saturday. One of the assailants may have traveled to Europe on a Syrian passport along with the flow of migrants, according to the NY Times.

“It is an act of war that was committed by a terrorist army, a jihadist army, Daesh¹, against France,” President François Hollande told the nation from the Élysée Palace, using a derogatory Arabic term for the Islamic State. “It is an act of war that was prepared, organized and planned from abroad, with complicity from the inside, which the investigation will help establish.”

Note 1. In Arabic the word "Daesh" can mean something like "a band of thugs," or "a bigot who imposes his view on others," or "to trample down and crush." The Islamic State despises that term and has reportedly threatened to cut out the tongues of anyone it hears using it.

..............................................................................................................

The attackers were all armed with assault rifles and suicide vests. Their assault began at 9:20 p.m. Friday, when one terrorist detonated a suicide bomb outside the gates of the soccer stadium on the northern outskirts of Paris. It ended at 12:20 a.m. Saturday when the authorities stormed a concert hall, the Bataclan. One attacker there was killed; two others detonated suicide vests. Inside the hall, 89 people, who had been listening to a rock band, had been shot to death.

Mr. Hollande declared three days of national mourning, and said that military troops would patrol the capital. France remained under a nationwide state of emergency. Mr. Hollande vowed to “be unforgiving with the barbarians from Daesh,” adding that France would act within the law but with “all the necessary means, and on all terrains, inside and outside, in coordination with our allies, who are, themselves, targeted by this terrorist threat.”

The ISIS massacre in Paris, following bombings in Beirut, Lebanon, and the downing of a Russian passenger jet over Egypt, reveals a terrorist organization that has changed in significant ways from the West’s initial understanding of it as a group focused on holding territory in Syria and Iraq and building a caliphate, or Islamic state.

The Paris attacks by ISIS promised to further traumatize France and other European countries already fearful of violent jihadists radicalized by the conflicts in Syria, Iraq, Egypt, Libya, Yemen, Lebanon, and elsewhere.

ISIS Attack on France Could be a Game Changer (Victor):

Six coordinated terrorist attacks took place in Paris, France on the night of 11/13/15 (Friday the 13th). It's estimated the attacks killed 129 people. 350+ were hospitalized with 80 of those in critical condition. Why did this occur and what consequences does it portend for the future of France and the EU?

The attackers might have been seeking revenge for the 9/27/15 bombing by France (along with the U.S.) of ISIS targets in Syria. This was declared before and during the attacks, along with the infamous "ALLAHU AKBAR" (God is Great) slogan of Jihad or the religious duty of Muslims to maintain the religion of Allah as propounded by the Prophet Mohammad in the "Hadith."

The Paris terrorist attacks were caused, in part, by western foreign policy towards and involvement in, the Middle East. The results are mainly economic as the politics stay the same. Islam is still Islam!

When George W. Bush invaded Iraq in 2003, because of the assumption that Sadam Hussein had weapons of mass destruction, he set off a chain reaction of events that were indirectly the cause of France's Friday the 13th massacre. The failed nation building of Iraq, and pulling out all troops by President Obama without any real Iraqi leader in place created a vacuum that ISIS filled.

ISIS hits back strongly, with deadly force when it's attacked or threatened. Russia, Lebanon, Jordan, Egypt and now France were all targeted by ISIS.

Why France did not prepare for these consequences is a mystery? President Hollande certainly does not know his enemy- be it Al Qaeda or ISIS! After the Charlie Hebdo shooting in Paris (which was organized by Al Qaeda) Hollande looks like Inspector Clouseau, not Monsierur Hercule Poirot!

Paris will suffer great economic damage from this attack for not taking seriously its actions in bombing Syria. Many Parisians and other French people will hesitate going out to dinner, going to malls, night clubs or soccer games. With two deadly terrorist attacks in one year, tourism will decrease. The GDP of France will surely slow from its barely positive +0.3% in the third quarter of 2015. A recession is highly likely.

More importantly, the event will truly change the next election in France. I'm laying 8:5 odds that Marine Le Pen (of the National Front) wins that election in May 2017. Her ideology is described as "far more democratic and republican" than her nationalist father Jean-Marie Le Pen, who was expelled from the party he founded.

Ms. Le Pen wants to considerably reduce -illegal immigration. She also wants to establish a referendum to oppose the European Union's information campaign for same-sex marriage (although she did not take part in the mass demonstrations against same-sex marriage in 2013). Ms. Pen is against euthanasia, and "trivialization" of abortion." She in effect wants France to be traditional and leave the EU. If France leaves the EU, the union itself would certainly collapse.

The immigration issue in the past suggests France is naive about the risks from Islam. According to Jean-Paul Gourévitch, there were 7.7 million Muslims (about 11% of the population) in metropolitan France in 2011. Can you imagine what it is today?

Moreover, the absurd allowance of hundreds of thousands of Arab immigrants (who are not-vetted to enter Europe, and who can go anywhere in the EU) implies how easy it is for them to initiate terrorist attacks in France.

What can be done? This is the hard part even though the answer is easy to me. I refer you to the dialogue in the movie "The Untouchables" for the answer.

Sidebar: Relevant dialog from The Untouchables movie

Jim Malone is the realistic strong arm cop played by Sean Connery while Elliott Ness is played by Kevin Costner.

Malone: "You said you wanted to get Capone. Do you really wanna get him? You see what I'm saying is, what are you prepared to do?

Ness: Anything within the law.

Malone: And *then* what are you prepared to do? If you open the can on these worms you must be prepared to go all the way. Because they're not gonna give up the fight, until one of you is dead.

Ness: I want to get Capone! I don't know how to do it.

Malone: You wanna know how to get Capone? They pull a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue. *That's* the *Chicago* way! And that's how you get Capone. Now do you want to do that?"

Conclusions:

The principle of winning a war is to go all the way - kill the enemy (ISIS) where they live. Also, evacuate from France all Arabs who are not French citizens- period! Anyone who is a French citizen and has been to Syria, Iraq, Libya, and Afghanistan in the last five years should be questioned as to why they travelled there.

Will this be done? No way. So it begs the question: what is France (as a nation) prepared to do? In my view their agenda of political correctness, open borders and immigration will continue to promote the trend of terror we have seen this year. Therefore, the EU will continue to decline and nothing will be done till the people demand what Malone said above.

Perhaps this gives us a clue to the resolution of the problem as articulated by a great French author:

"Everybody feels the evil, but no one has courage or energy enough to seek the cure.” ― Alexis de Tocqueville, Democracy in America.

Good luck and till next time...

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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