DPC Bromfield Street in Boston 1908
More and more people figure out what I wrote ten days ago: in the end it’s all about credibility, which the Fed is rapidly losing through its (non-)actions.
• The “QE Infinity Paradox”, Or “The Emperor Is Naked, Long Live The Emperor” (ZH)
Perhaps the most important thing to understand about what was widely billed as the most important FOMC decision in recent history, is that by “removing the fourth wall” (to quote Deutsche Bank), the Fed effectively reinforced the reflexive relationship between its decisions, economic outcomes, and financial market conditions. In simpler terms, differentiating between cause and effect is now more difficult than ever as Fed policy affects markets which in turn affect Fed policy and so on. This sets the stage for any number of absurdly self-referential outcomes. For instance, the Fed needs to remain on hold to guard against the possibility that a soaring dollar triggers an EM meltdown that would then feed back into developed markets, forcing the FOMC to reverse itself.
But delaying liftoff sends a downbeat message about the state of the US economy which triggers the selling of domestic risk assets. Hiking would solve this as it would signal the Fed’s confidence in the outlook for the US economy, but that would be USD-positive which is bad news for EM. A similarly absurd circular dilemma presents itself if we take the view that the Fed missed its window to hike and is now creating more nervousness and uncertainty with each meeting that passes without liftoff. Here’s how former Treasury economist Bryan Carter put it to Bloomberg: “short-end rates move higher as the Fed gets closer to hiking, and that causes the dollar to strengthen, and that causes global funding stresses.
They are creating the conditions that are causing the external environment to be weak, and then they say they can’t hike because of those same conditions that they have created.” When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market’s natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies.
Keeping everyone hanging in suspension eventually will backfire.
• Yellen Expects Fed To Raise Interest Rates By End Of Year (Guardian)
Federal Reserve chair Janet Yellen has made clear that she expects US interest rates to be raised from their current record low before the end of the year.In an extensive 40-page speech Yellen set out the case for raising rates – for the first since 2006 – as she expects inflation will gradually move up to the Fed’s target rate of 2% as the unusually low oil price rises and strong dollar weakens.“I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective,” she said during a speech in Amherst, Massachusetts, on Thursday.
Her comments come just a week after Fed policymakers voted to keep interest rates at near-zero – where they have been since the 2008 financial crisis – and she warned that the US economy was not yet strong enough to withstand “recent global economic and financial developments” following a worldwide markets slump due to concerns about the health of the Chinese economy. On Thursday Yellen suggested that the current global economic weakness will not be “significant” enough to alter the Fed’s plans to raise its key short-term rate from zero by December. “Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal,” Yellen said.
“But I expect that inflation will return to 2% over the next few years as the temporary factors weighing on inflation wane.” Yellen also warned that if rates were kept low it could lead to excessive risk taking. “Continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability,” she said. “The more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.”
Look out below. America’s benchmark stock is cratering.
• Caterpillar, Crunched By Commodities Collapse, To Slash 10,000 Jobs (Forbes)
That machinery and manufacturing giant Caterpillar has suffered its fair share of disappointing sales and earnings in recent years is no secret and yet an announcement it made Thursday morning still proved to be an unpleasant surprise for both its employees and its shareholders. Caterpillar said Thursday that its full-year sales and revenue for 2015 and 2016 have weakened, with 2016 revenue now projected to be 5% lower than 20152 s already-diminished levels. In an attempt to soften this blow to shareholders, the company also announced that it will undergo significant restructuring and cost savings initiatives, an effort that could see as many as 10,000 job cuts over the next three years.
Caterpillar said Thursday that it now expects 2015 revenue to come in around $48 billion, down from the prior forecast of $49 billion. For 2016, it said, sales and revenue are expected to be 5% lower than 2015 levels. The company admitted that this year’s decline in sales is its third consecutive down year for sales and revenues; if this trend continues, 2016 would mark the first time in the company s 90-year history that sales and revenues have decreased four years in a row. In an effort to compensate for these declines and save $1.5 billion annually, Caterpillar also said Thursday that it will undergo “significant restructuring and cost reduction actions” and these actions include a significant number of job cuts. Specifically, as many as 10,000 layoffs by the end of 2018.
The bulk of the cuts will come in the short-term, though: the company said it expects to permanently reduce its salaried and management workforce by 4,000 to 5,000 positions by the end of 2016, with most of those cuts occurring this year. The additional 5,000 to 6,000 cuts could occur as Caterpillar gradually closes and consolidates certain manufacturing facilities over the next three years. “We are facing a convergence of challenging marketplace conditions in key regions and industry sectors. namely in mining and energy”, Doug Oberhelman, Caterpillar chairman and CEO, said in a statement. “While we’ve already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don’t make these decisions lightly, but I’m confident these additional steps will better position Caterpillar to deliver solid results when demand improves.”
That’s a lot of dough going Poof!
• The Stock Markets Of The 10 Largest Global Economies Are All Crashing (Snyder)
You would think that the simultaneous crashing of all of the largest stock markets around the world would be very big news. But so far the mainstream media in the United States is treating it like it isn’t really a big deal. Over the last sixty days, we have witnessed the most significant global stock market decline since the fall of 2008, and yet most people still seem to think that this is just a temporary “bump in the road” and that the bull market will soon resume. Hopefully they are right. When the Dow Jones Industrial Average plummeted 777 points on September 29th, 2008 everyone freaked out and rightly so. But a stock market crash doesn’t have to be limited to a single day.
Since the peak of the market earlier this year, the Dow is down almost three times as much as that 777 point crash back in 2008. Over the last sixty days, we have seen the 8th largest single day stock market crash in U.S. history on a point basis and the 10th largest single day stock market crash in U.S. history on a point basis. You would think that this would be enough to wake people up, but most Americans still don’t seem very alarmed. And of course what has happened to U.S. stocks so far is quite mild compared to what has been going on in the rest of the world. Right now, stock market wealth is being wiped out all over the planet, and none of the largest global economies have been exempt from this. The following is a summary of what we have seen in recent days…
#1 The United States – The Dow Jones Industrial Average is down more than 2000 points since the peak of the market.
#2 China – The Shanghai Composite Index has plummeted nearly 40% since hitting a peak earlier this year.
#3 Japan – The Nikkei has experienced extremely violent moves recently, and it is now down more than 3000 points from the 2015 peak.
#4 Germany – Almost one-fourth of the value of German stocks has already been wiped out, and this crash threatens to get much worse.
#5 The United Kingdom – British stocks are down about 16% from the peak of the market, and the UK economy is definitely on shaky ground.
#6 France – French stocks have declined nearly 18%.
#7 Brazil – Brazil is the epicenter of the South American financial crisis of 2015.
#8 Italy – Watch Italy. Italian stocks are already down 15%, and look for the Italian economy to make very big headlines in the months ahead.
#9 India – Stocks in India have now dropped close to 4000 points, a nd analysts are deeply concerned as global trade continues to contract.
#10 Russia – Even though the price of oil has crashed, Russia is actually doing better than almost everyone else on this list.
“If you really want to know what is going on in China’s markets, there is no better research method than walking down the street ..”
• Sweden’s Top Economist Puts China’s GDP Growth At 3% (Forbes)
China’s economy is officially growing at 7%, but few economists actually believe that number to be accurate. Mauro Gozzo, chief economist at Business Sweden – an organization jointly owned by the government and the business community – estimates that the real growth of China’s gross domestic product is just 3%.“China is wrestling with serious economic difficulties and our estimates place the actual growth at a much lower rate than the official data,” he said in a new report. “We have often pointed out that the official statistics should be taken with a grain of salt.”According to Gozzo, the slowdown is the result of failed economic policies, which has brought to light the impossibility of combining a market economy with central planning.
For example, the country has seen the real appreciation of the currency during the last two years, which is part of the government’s rebalancing of the economy from exports and investments to private consumption. But it has also weakened the industry.“The rebalancing may have been necessary,” he said. “But dealing with the imbalances between the various sectors of the economy has become a big headache for the Chinese administration.”He added that the devaluation of the yuan in August was not sufficient, and should rather be seen as a signal that China is no longer intent on following the upward movement of the dollar.At the same time, consumption is being held back by factors like a housing bubble, the system of resident permits, and the absence of social support systems.
Although the plunge in the stock market, which has more than wiped out all of the gains of this year, has had limited repercussions on many households, the negative effects on the financial system are hardly negligible, he said. Gozzo also said that China’s official growth of industrial production of around 6% is “strongly exaggerated.” A number of other indicators, like the consumption of electricity, domestic cargo volumes and manufacturing activity, indicate much lower production.“The industry is wrestling with difficulties, but services are doing better and one good reason why the economy as a whole is still growing.”“It is now clear that China is struggling with a number of economic deficiencies and we believe that the actual growth rate is more likely 3%, not 7%,” Gozzo concluded.
Also Oxford Economics, which has used a model based on alternative indicators, estimating the actual growth this year to around 3-4%. New York-based Evercore ISI, which is using its own GDP equivalent index, goes even further and puts the annual growth at -1.1%, or rather a contraction. The high level of uncertainty actually makes many economists say it’s more or less pointless to look at China’s economy data. Matthew Crabbe, author of the book “Myth-busting China’s number”, points out that the country has a century-long history of secrecy and number-fudging and that the top-line GDP figure is “increasingly meaningless” for China. “If you really want to know what is going on in China’s markets, there is no better research method than walking down the street and watching what really goes on”, he said.
Rocking the Ponzi.
• China Becomes Asia’s Biggest Securitization Market (WSJ)
China’s fledging securitization market is soaring, as Beijing looks for new ways to ease lending to firms amid the country’s slowest period of economic growth in more than two decades. In the past few months, Chinese officials have laid out new rules to expand and quicken the process for car makers and other lenders to issue debt by bundling together pools of underlying loans. Issuance of asset-backed securities in the world’s second largest economy rose by a quarter in the first eight months of 2015—to $26.3 billion from $20.8 billion in the same period last year, according to data publisher Dealogic. Though the Chinese securitization market took flight just last year, it has already become Asia’s biggest, outpacing other, more developed markets like South Korea and Japan.
Asset securitization helps free up capital from banks or financing firms to support smaller businesses and projects that typically have less credit available to them. Leading the drive are state-owned and medium-size lenders seeking to unload loans from their books by packaging them into products known as collateralized loan obligations. Such firms account for the bulk of the market—CLO issuance totaled $20.9 billion between January and August, a third more than $15.9 billion over the same period last year. While securities backed by auto loans comprise a smaller piece of the market, issuances from the financing units of car makers including Ford and Volkswagen have increased fivefold to $4 billion from January through August, compared with $1.8 billion over the same period last year.
The State Council, China’s cabinet—which sets the country’s total issuance of asset-backed securities—said in May it would allow companies to issue up to 500 billion yuan ($80 billion) of such securities. That compares with $49 billion in all of 2014. The central bank and the banking regulator also will speed up the process by allowing select borrowers to issue securities after registering with regulators. Previously, each issuance had to be approved on a deal-by-deal basis.
Lost it. A three-year gross failure leads to: “Tomorrow will definitely be better than today!”
• Japan’s Abe Airs Abenomics 2.0 Plan For $5 Trillion Economy (AP)
Japan’s prime minister Shinzo Abe, fresh from a bruising battle over unpopular military legislation, announced Thursday an updated plan for reviving the world’s third-largest economy, setting a GDP target of 600 trillion yen ($5 trillion). Abe took office in late 2012 promising to end deflation and rev up growth through strong public spending, lavish monetary easing and sweeping reforms to help make the economy more productive and competitive. So far, those “three arrows” of his “Abenomics” plan have fallen short of their targets though share prices and corporate profits have soared. “Tomorrow will definitely be better than today!” Abe declared in a news conference on national television.
“From today Abenomics is entering a new stage. Japan will become a society in which all can participate actively.” Abe recently was re-elected unopposed as head of the ruling Liberal Democratic Party. He has promised to refocus on the economy after enacting security legislation enabling Japan’s military to participate in combat even when the country is not under direct attack. Thousands of Japanese gathered for noisy street protests last weekend over the “collective self-defense” law, and Abe’s popularity ratings took a hit. “He has to deliver the message that he is so committed to achieving the economic agenda, that is, to make people’s lives better,” said analyst Masamichi Adachi of JPMorgan in Tokyo.
Abe said he was determined to ensure that 50 years from now the Japanese population, which is 126 million and falling, has stabilized at 100 million. He said his new “three arrows” would be a strong economy, support for child rearing and improved social security, to lighten the burden of child and elder care for struggling families. But with Japan also committed to reducing its massive public debt, it is unclear how he intends to achieve those goals. “There’s nothing wrong with him saying he wants to achieve a better life for everybody. But how to achieve it is a different matter,” Adachi said.
Europe is setting itself up for something truly epic.
• Refugees Keep Streaming In As Europe Seeks To Stem The Tide (Reuters)
A tide of refugees from the Middle East and Asia showed no sign of abating on Thursday, after European Union leaders began the task of trying to prevent tens of thousands of people fleeing war or poverty from streaming unchecked through the continent. After weeks of recrimination and buck-passing, a summit on Wednesday produced a glimmer of political unity on measures to help the refugees closer to home, or at least register their asylum requests as soon as they enter the EU. However, all attempts in recent weeks to stem the flow have only prompted more desperate people to make a dash for Europe before the doors are shut or winter makes the trip too perilous.
On Thursday, about 1,200 crossed from Turkey to the Greek island of Lesvos on 24 boats in under an hour, following the 2,500 who had made the dangerous crossing the previous day. Weeks ago, most would have found the quickest route into the EU and their preferred destination of Germany was from Serbia into Hungary. But since Hungary took unilateral action by sealing its border with razor-wire, an overwhelmed Serbia has passed the problem to the EU’s newest member, Croatia, which says it also cannot keep pace with the influx. Demanding that Serbia send at least some of the refugees and migrants to Hungary or Romania, Croatia barred all Serbian-registered vehicles from entering. Serbia compared those restrictions to racial laws enforced by a Nazi puppet state in Croatia in WWII.
It blocked Croatian goods and cargo vehicles in the escalating dispute, which has dragged relations between the former Yugoslav republics to their lowest ebb since the overthrow of Serbian strongman Slobodan Milosevic in 2000. Money for middle east. In an attempt to forestall such rows, EU leaders on Wednesday night pledged at least €1 billion for Syrian refugees in the Middle East and closer cooperation to stem the flow of people. The summit also decided that EU-staffed “hotspots” would be set up in Greece and Italy by November to register and fingerprint new arrivals and start the process of relocating Syrians and others likely to win refugee status to other EU states, while deporting those classed as economic migrants.
All cowards lack vision.
• EU Refugee Deal Barely Scratches Surface Of Crisis Still In Infancy (Guardian)
Following a bruising fight this week to agree a new quotas regime sharing 120,000 refugees across Europe, EU policymakers say that by Christmas member states will be embroiled in much bigger battles over how to distribute up to a million newcomers. The signals emerging from two days of summitry in Brussels on Tuesday and Wednesday and days of non-stop negotiations behind the scenes suggest that the EU’s biggest refugee crisis is but in its infancy, and that Europe’s agony has barely begun. The meetings of leaders and interior ministers produced breakthrough decisions in EU policy terms, but at the same time they hardly scratched the surface of an emergency whose scale is predicted to balloon by the end of the year.
A Brussels summit that ended early on Thursday began to heal the divisions and cool the tempers that have flared for months over what to do about immigration, fragmenting the union between east and west, north and south, big and small. The leaders did not decide very much but managed to communicate more civilly with one another, unlike in June when they engaged in an unseemly bout of recrimination until 3.30am. The breakthrough came on Tuesday when EU interior ministers employed the blunt instrument of a majority vote to impose refugee quotas against the will of four central European countries and despite the strong reservations of many others and widespread doubts over whether compulsory sharing will work. “We don’t believe it will ever be implemented,” said a senior diplomat in Brussels.
It was a damaging and divisive exercise in which Berlin, Brussels, and Paris prevailed. The European commission, the initiator of the quotas idea, thinks it has set a precedent for future action. But the experience was traumatic for some and the question is will it ever be repeated, especially when the numbers are likely to be much higher the next time. Donald Tusk, the conservative Polish politician and European Council president who chaired the summit, did not convene the emergency session until he had visited the camps holding four million Syrians in Jordan, Lebanon, and Turkey. He seems to have been shocked by what he found. Following the summit he said the “tide” of refugees coming to Europe would get much bigger. He seems certain that almost all of those in the camps are determined to head for the EU and that the refugees have convinced themselves they are welcome.
Here’s wondering what to think of the entire EU throwing €1 billion at the issue this week, but Germany spending much more than that at home.
• German Government Boosts Funding To States For Refugees (Reuters)
The German government agreed on Thursday to give its 16 regional states around €4 billion next year to help them cope with a record influx of refugees that is straining their budgets and resources. Chancellor Angela Merkel made the announcement after meeting state premiers to discuss ways of helping the states, which are struggling to look after 800,000 asylum seekers expected this year alone. Merkel said the government would pay the states €670 each month for every asylum seeker they took in. Sources from her SPD coalition partner indicated that the package could be worth around €4 billion once extra payments for providing social housing and looking after unaccompanied young refugees were taken into account.
The government had previously pledged to offer the states €3 billion for next year to help cover the additional costs of housing and caring for the refugees and asylum seekers. German public opinion has been divided on the rising numbers of new arrivals, with some warmly welcoming people fleeing conflict in the Middle East and Africa but others concerned about how easily they can be integrated. Merkel told the German parliament earlier on Thursday that the European Union needed the support of the United States, Russia and countries in the Middle East to help tackle the underlying causes of the refugee crisis. Merkel has been criticized by some eastern EU neighbors for what they see as actions that have fueled the influx of people trying to reach Germany.
As well as feeding and housing the newcomers, Germany is also weighing their impact on Europe’s largest economy. Finance Minister Wolfgang Schaeuble said he still aimed to maintain a balanced budget next year. Some lawmakers have questioned whether that will be possible given the rising costs associated with the migrant crisis.
How much worse could timing get? Has Merkel shifted to “attack is the best defense”?
• Germany Battles Past Ghosts as Merkel Urges Greater Global Role (Bloomberg)
Europe’s dominant country is stepping out from its own shadow. Seventy years after Germany’s defeat at the end of World War II, Chancellor Angela Merkel’s government is signaling a willingness to assume a bigger role in tackling the world’s crises without fear of offending allies like the U.S. Spurred into more international action by the refugee crisis, Merkel on Wednesday prodded Europe to adopt a “more active foreign policy” with greater efforts to end the civil war in Syria, the source of millions fleeing to safety. As well as enlisting the help of Russia, Turkey and Iran, Merkel said that will mean dialogue with Bashar al-Assad, making her the first major western leader to urge talks with the Syrian president.
Germany’s position as Europe’s biggest economy allowed Merkel and her finance minister, Wolfgang Schaeuble, to assume a leading role during the euro-area debt crisis centered on Greece, but the change in focus to beyond Europe’s borders is very much political. After decades of relying on industrial prowess – now under international scrutiny as a result of the Volkswagen scandal – globalization and the necessity to keep Europe relevant are opening up options for Merkel to make Germany a less reluctant hegemon. Syria has spurred “a rethink in German foreign policy,” Magdalena Kirchner at the German Council on Foreign Relations in Berlin, said. “As the refugee crisis developed, the view took hold that this conflict can no longer be fenced off or ignored. With her stance on the crisis, Merkel may be prodding other European leaders toward a bigger international engagement.”
Merkel will address the United Nations General Assembly in New York on Friday as she and key members of her cabinet begin to leverage Germany’s economic might and turn it into a force for global policy-making. Having been at the forefront of Ukraine peace talks, Merkel can also point to Germany’s part in forging a nuclear deal with Iran and efforts to spur the U.S. and others into action against climate change. “There is a rising awareness in the political class and even to some extent in the public that Germany has to assume more responsibility, especially in and around Europe,” said Kai-Olaf Lang, a senior fellow at the German Institute for International and Security Affairs in Berlin.
How to put the Union in danger. Greece should adopt similar measures.
• ECB Faces Defiance on Bank Oversight as Germany Hoards Power (Bloomberg)
vThe ECB faces increasing defiance from euro-area governments reluctant to cede control over their lenders, highlighted by a German bill that chips away at the ECB’s supervisory powers.vThe Bundestag, the lower house of parliament, votes Thursday on an amendment to Germany’s banking act that would allow the Finance Ministry in Berlin to issue rules on banks’ recovery plans, risk management and internal decisions under a bill implementing European Union rules for winding down failing banks.vThe Frankfurt-based ECB, which assumed supervisory powers over euro-area banks last November, is considering complaining at the European Commission, asking the EU’s executive arm to take Germany to court over the legislation.
“It will take a long time for euro-area member states to reach full acceptance that banking-sector policy is no longer in their hands,” said Nicolas Veron, a senior fellow at the Brussels-based Bruegel think tank. “National regulations, as in this German case, are essentially rearguard actions. But this kind of skirmish diverts” the ECB’s “attention from its important tasks of ensuring European banks are safe and sound.” Two weeks ago, German Finance Minister Wolfgang Schaeuble chided other countries in the bloc for putting the “cart before the horse” by pushing for a European deposit-guarantee system before they had fully implemented measures already on the books. At the same time, less than a year into the new era of centralized bank supervision in the euro area, Schaeuble’s ministry is chipping away at the authority of the ECB.
The central bank is trying to unify an array of national banking systems with strong historical roots, such as the savings and mutual banks in Germany and Austria. And Germany’s not alone in pushing back against the ECB. Fabio Panetta, Italy’s member of the ECB’s Supervisory Board, has warned that the central bank risks criticism for “unwarranted” and “arbitrary” decisions over higher capital requirements for euro-area lenders that could harm the fragile economy. One point of contention is “early intervention” rules enshrined in the EU’s Bank Recovery and Resolution Directive. The law gives supervisors the power to order capital increases, call shareholder meetings or oust managers in certain cases Yet triggers for early intervention vary widely in national laws implementing BRRD. The German rules are cast so narrowly that it’s practically impossible to use them unless a bank is already on the brink of collapse, negating the purpose of the law.
Better do it well. Fire the right people, not scapegoats.
• Volkswagen To Start Firings Over Emissions Scandal On Friday (Reuters)
Volkswagen will start firing people responsible for rigging U.S. emissions tests and shake up management on Friday, two sources familiar with the plans said, as the German carmaker tries to get to grips with the biggest scandal in its 78-year history. The supervisory board of Europe’s biggest automaker is meeting on Friday to decide a successor to chief executive Martin Winterkorn, who resigned on Wednesday. The sources said it would give initial findings from an internal investigation into who was responsible for programming some diesel cars to detect when they were being tested and alter the running of the engines to conceal their true emissions. Top managers could also be replaced, even if they did not know about the deception, with U.S. chief Michael Horn and group sales chief Christian Klingler seen as potentially vulnerable.
Volkswagen shares have plunged around 20% since U.S. regulators said on Friday the company could face up to $18 billion in penalties for falsifying emissions tests. The company said on Tuesday 11 million of its cars globally were fitted with engines that had shown a “noticeable deviation” in emission levels between testing and road use. Regulators in Europe and Asia have said they will also investigate, while Volkswagen faces criminal inquiries and lawsuits from cheated customers. When he resigned, Winterkorn denied he knew of any wrongdoing but said the company needed a fresh start. “There will be further personnel consequences in the next days and we are calling for those consequences,” Volkswagen board member Olaf Lies told the Bavarian broadcasting network, without elaborating.
This will go global.
• VW Faces Deluge Of UK Legal Claims (Guardian)
Volkswagen could face a barrage of legal claims from British car owners over the emissions tests scandal, according to top law firms. Lawyers say they have been indundated with enquiries from VW drivers whose cars may have been far more polluting than claimed, after the German carmaker admitted installing defeat devices to cheat tests. The CEO of Volkswagen, Martin Winterkorn, quit on Wednesday, with the group facing criminal investigation in the US and other countries, plus potential legal claims worldwide, with 11m vehicles directly affected. Leigh Day, a London law firm specialising in personal injury and product liability claims, says it has been “inundated” by inquiries; the number of potential claimants they were talking to would number “in the thousands – it’s constant enquirers at the moment.”
Another law firm, Slater & Gordon, said it was fielding calls from concerned drivers. The firm’s head of group litigation, Jacqueline Young, said both owners and car dealerships would have viable legal claims for breach of contract, with the value of vehicles falsely boosted by VW’s misrepresentations. Shareholders might also have a case, Young said, after the 30% fall in its share price since the scandal erupted. Young said a huge class-action lawsuit was possible: “If the Volkswagen scandal applies to cars in the UK then this has the potential to be one of the largest group action lawsuits this country has seen.” The German transport minister, Alexander Dobrindt, has now confirmed that Volkswagen vehicles containing software to fix emissions standards were also sold across Europe.
VW has put aside an initial €6.5bn to deal with the costs of the crisis, although that sum could be dwarfed by fines from US regulators. The carmaker has enlisted Kirkland & Ellis – the US law firm employed by BP in the Deepwater Horizon oil disaster – to deal with its mounting legal claims. Concerns over true pollution levels have also spread to fuel consumption, with consumer group Which? having long reported discrepancies between official miles per gallon test figures and their own results, with the VW Golf the second-worst offender in their research. Richard Lloyd, the Which? executive director, said: “Our research has consistently showed that the official test used by carmakers is seriously in need of updating as it contains a number of loopholes that lead to unrealistic performance claims.”
Pressure has grown on the UK government to follow up its call for a European commission inquiry, after it was revealed that the Department for Transport had been lobbying in private for less rigorous tests. Environmental law organisation ClientEarth has written to the DfT demanding it take action to establish whether VW’s use of defeat devices was part of wider industry practice, and to release all information held on the real-world emissions performance of cars licensed for sale on UK roads.
The stats in the graph are devastating. Does anyone believe Germany or France will volunteer to break their car industries?
• Europe Claims It Will Embrace Real-World Emissions Testing (WSJ)
For years, EU researchers have warned that diesel cars emit more nitrogen oxides, or NOx, than the regulations allow. A 2011 report said road tests of 12 diesel vehicles showed NOx levels exceeded European limits by as much as a factor of 14. A 2013 follow-up report by the same researchers said many modern cars used “defeat devices,” sensors or software that detects the start of an emissions test in a laboratory. The report suggested testing cars on the road, rather than in laboratories, was the best way of thwarting the use of such deviceswhich falsify results. Politicians are now calling for a review of testing protocols, while car makers attempt to calm the public by claiming their cars are as clean as advertised.
The EC, the EU’s executive arm, on Thursday asked governments to examine how many cars now on the road have software or sensors that can mask true emissions. “It is fundamental that the French authorities can guarantee…that the vehicles on the road in France respect the rules,” said Ségolène Royal, the French environment minister, Thursday after meeting with auto executives. French officials said they would form an independent commission to test around 100 cars and deliver results in a matter of weeks. The U.K. also said it would conduct random emissions tests on cars. The regulators will compare emissions from tests done in laboratories with those done in real-world situations, using relatively new portable testing equipment.
Potentially explosive: “..it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.“
• German Greens Claim Merkel Government Knew Emissions Tests Were Rigged (Ind.)
The German Green party has claimed that the German Government, led by Chancellor Angela Merkel, knew about the software car manufacturers used to rig emissions tests in the US. The Green party has said it asked the German Transport Ministry in July about the devices used to deceive regulators and received a written response as follows, the FT reports: “The federal government is aware of [defeat devices], which have the goal of [test] cycle detection.” The Transport Ministry denied knowing that the software was being used in new vehicles, however. The timing of the questions has raised concerns over whether the German government knew about the activities at Volkswagen stretching back to 2009.
“The federal government admitted in July, to an inquiry from the Greens, that the [emissions] measurement practice had shortcomings. Nothing happened,” said Oliver Krischer, a German Green party lawmaker. Alexander Dobrindt, the German transport minister, has denied the government knew about emissions rigging. “I have made it very clear … that the allegations of the Greens party are false and inappropriate. We are trying to clear up this case. Volkswagen has to win back confidence,” he said. Governments and manufacturers are both aware that diesel vehicles emit up to five times the amount of poisonous nitrogen dioxide that they are limited to under law, but this is the first time a manufacturer has admitted to deceiving the authorities.
Note: in the graph, every other brand does worse than VW.
Commodity economies.
• Canadian Dollar Hits 11-Year Low And Just Keeps Falling (FinPo)
The Canadian dollar touched its weakest level in more than 11 years against the greenback on Wednesday and kept falling today, following July domestic retail sales figures that fell short of expectations and another plunge in volatile oil prices. New car and clothing sales helped push Canadian retail sales higher for the third month in a row in July, up 0.5% and in line with economists polled by Reuters, but sales were flat and below expectations when automotive figures were excluded. Volumes were also weaker than the headline, while figures from the previous month were revised lower.
“People had been thinking that we’d get a decent contribution to the next quarter’s GDP growth and show some positive data,” said Don Mikolich at CIBC World Markets, adding that the soft data also underscored the interest rate differential between Canada and the United States. “In a quiet week of data, that one sticks out as having a bit of a negative sentiment around the economy here. (Oil’s) the other big driver.” The loonie has plunged some 25% since last summer, along side the price of crude, a key Canadian export, but had been mostly rangebound over the last month after hitting a previous 11-year low at 75.18 U.S. cents. The price of crude, a key Canadian export, reversed course during the session to give up an earlier rally after large gasoline builds raised concerns about high autumn fuel supplies.
More of the same.
• Australia Pays the Price for Depending on China (Bloomberg)
Throughout Australia’s industrial heartland, factories are closing. About an eight-minute car ride from the center of Melbourne, a General Motors plant that in 1948 produced the first automobile wholly made in the country is scheduled to shut for good in 2017, victim of a rising Australian dollar that caused labor costs to nearly double from 2001 to 2011. Toyota and Ford factories are set to close within two years, leaving Australia without any domestic auto production. Down the road from the GM plant is a facility operated by Boeing. In 2010 it sold the plant’s equipment for making metal aircraft parts to Mahindra & Mahindra, an Indian company that’s shipping the machinery to Bengaluru. Last year, Alcoa closed a nearby aluminum smelter.
Until recently the sad decline of heavy industry had little impact on the country’s highflying economy. Australia’s factories were closing, but its mines were booming. Chinese demand for Australian iron ore and other resources kept the economy humming. The country hadn’t suffered through a recession since the early 1990s. The boom is over as the Chinese economy slows, and the woes of the manufacturing sector are complicating the job of new Prime Minister Malcolm Turnbull. Lawmakers from the right-of-center Liberal Party on Sept. 14 chose the former Goldman Sachs banker to be their new leader, ousting Prime Minister Tony Abbott amid concerns that Australia’s long run of economic growth was in danger. Gross domestic product in the second quarter expanded just 0.2% over the first quarter, worse than the 0.4% expected by economists.
The unemployment rate is at 6.2%, holding near a 13-year high. Turnbull, who was communications minister under Abbott, is promising action. “My government has a major focus on tax reform,” he told reporters on Sept. 20. That will mean less reliance on income taxes and more on consumer levies. An early investor in technology startups before entering politics, Turnbull in March co-authored an article in the Australian newspaper with Vivek Kundra, executive vice president of Salesforce.com and former chief information officer for President Obama. The pair lauded companies like Uber and Airbnb. “The most successful businesses in the 21st century will be those that embrace digital disruption as an opportunity, and not something to guard against,” they wrote.
Behold: deflation at work.
• Time To Dig Deep? Big Miners Face A Big Problem (Guardian)
How severe is the crisis in the world of over-borrowed big miners? Here’s an illustration. Anglo-American, a company founded in 1917, employing 148,000 people around the world and generating sales last year of almost £20bn, now has a stock market value of £8.7bn. By contrast, Next, the clothing chain with a £4bn turnover, is worth £11bn. Even Whitbread, pumping out Costa Coffees rather than digging for diamonds, coal and iron ore, is within a whisker of Anglo’s market value. Or try this one. Glencore, Ivan Glasenberg’s trading-cum-mining house, has seen its share price fall 20% since it raised £1.6bn last week to make its balance sheet “bullet proof”. Thursday’s closing price was 98.6p, versus a flotation price of 530p in 2011. Glencore is now worth just £14bn, even after consuming Xstrata in 2013 in a merger worth £55bn at the time.
Beleaguered mining executives speak despairingly of the deterioration in “market sentiment”, especially in the past fortnight. By that, they mean investors are terrified by every piece of weak economic data that emerges from China – the latest was a slowdown in manufacturing for the seventh consecutive month. The US Federal Reserve also spooked everybody by failing to raise interest rates last week; by fretting about “global economic and financial developments,” the Fed, in effect, invited others to do the same. If you are even slightly optimistic on China, you can find a parade of analysts arguing that mining shares are now cheap. The trouble is, many of the same voices were singing the same tune when Glencore and Anglo were at twice their current share prices earlier this year.
Predicting commodity prices – and thus miners’ cash-flows – is a mug’s game when nobody can really know the true state of affairs in China, the biggest customer. The only rough certainty is that most industrial commodities are over-supplied. But judging whether demand for copper, say, comes into balance in 2017, 2018 or 2019 is pure guesswork.
Must. Restructure.
• US Energy Lending Caught in a Squeeze (WSJ)
Banks are clashing with regulators over loan reviews that could crimp the flow of new credit to the oil patch. The dispute is focused on the relatively narrow issue of loans secured by oil and gas companies’ reserves, but it highlights the much broader point of how postcrisis regulation of the financial industry is affecting sectors far from Wall Street. On one side are the bankers who have been grappling with the plunge in oil prices and the need to shore up billions of dollars in credit extended to the energy industry. On the other are regulators eager to prevent another financial crisis while not knowing what it might be. Caught in the middle are the small- and medium-size exploration and production companies that rely on credit lines that use their energy reserves as collateral.
Banks are now beginning their fall reviews of the quality of that collateral and worry regulators could ding them for making loans the banks think are prudent. “We’re concerned about it,” said Matt McCaroll, CEO of Fieldwood Energy. “These are challenging times for our business…and to have additional pressure on the relationship between borrower and lender is going to be very problematic.” The oil and gas exploration company has about $1.75 billion of reserve-based loans with 23 banks. Mr. McCaroll said he has voiced his concerns with congressmen.
The issue came to a head this month when a dozen regulators from the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp. flew to Houston to meet with about 40 energy bankers from J.P. Morgan, Wells Fargo, Bank of America, Citigroup and Royal Bank of Canada. In the spring and fall, regulators conduct a review of large corporate loans shared by multiple banks. Several industry officials said the meeting, held at Wells Fargo’s offices in downtown Houston, was the first of its kind. The bankers and regulators sat around tables in a large room with a screen displaying the OCC’s agenda that largely focused on examining and rating the loans.
Desperation: “Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually..”
• Oil Companies in Europe Seek Creative Funding as Lenders Retreat (Bloomberg)
Oil services companies in Europe are finding alternative ways to raise cash and repay debt after falling crude prices made it difficult for them to get funding from traditional sources. Dolphin Group AS has sought to persuade private-equity and hedge funds to finance projects exploring and mapping seabeds in return for interest tied to sales, according to people familiar with the matter. At least two Norwegian drillers are planning to sell and lease back ships to raise cash and fund operations as they struggle to access loan and bond markets, said the people, who asked not to be identified because the matters are private. Energy companies are being shut out of bond markets and lenders are reducing credit lines after prices dropped about 60% from last year’s peak.
Services companies in Europe are starting to run out of cash as producers from Shell to Petrobras cut their own investments and delay projects. “Bond markets are closed for these companies, especially small ones, and banks may not be lending to them at this stage,” said Nigel Thomas, partner at law firm Watson Farley & Williams in London. “Services companies need to buy time to survive during the downturn and alternative investors are able to give them that, albeit at a very expensive cost.” Bonds issued by oil-services businesses globally dropped to $6.7 billion this year, on pace for the least in a decade, according to data compiled by Bloomberg. French oilfield surveyor CGG said it had to cancel a loan in July because banks had offered unfavorable terms.
Energy-services companies are searching for new investors and funding strategies as even lenders of last resort pull back. Hedge funds and private-equity firms that previously sought to lend at high rates are becoming reluctant to step in after getting stuck with losing positions. Dolphin approached hedge funds and private-equity investors last month for a $50 million loan that would return about 15% annually, people familiar with the matter said. The Bergen-based company is working with a potential lender for a deal that will pay interest linked to data sales, Chief Executive Officer Atle Jacobsen said this month. “We have never seen this type of funding in the industry before,” said Hakon Johansen at Fondsfinans in Oslo. “The market remains very weak, but Dolphin’s management wants to expand operations, hoping that someone in the end will buy their data.”
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