William Henry Jackson Hospital Street, St. Augustine, Florida 1897
How much money was thrown into the system in those five years?
• Global Business Confidence Plunges To Post-Crisis Low (CNBC)
Worldwide business confidence slumped to a five-year low, with company hiring and investment intentions at or near their weakest levels in the post-global financial crisis era, according to a new survey. “Clouds are gathering over the global economic outlook, presenting the darkest picture seen since the global financial crisis,” said Chris Williamson, chief economist at Markit. The number of companies expecting their business activity to be higher in a years’ time exceeded those expecting a decline by just 28%. This was below the net balance of 39% recorded in the summer, the Markit Global Business Outlook Survey showed. The tri-annual survey, published on Monday, looked at expectations for the year ahead across 6,100 manufacturing and services companies worldwide. Optimism in manufacturing fell to its lowest since mid-2013 but remained ahead of that seen in services, where confidence about the outlook slumped to the lowest in the survey’s five-year history.
Global hiring intentions slid to within a whisker of the all-time low seen in June of last year, deteriorating in the U.S., Japan, the U.K., euro zone, Russia and Brazil. [..] Investment intentions also collapsed to a new post-crisis low across major economies. China and India bucked the trend, however, with capital expenditure plans in the two countries improving. The survey highlighted a growing list of concerns among companies about the outlook for the year ahead including a worsening global economic climate, the prospect of higher interest rates in countries such as the U.K. and U.S. and geopolitical risk emanating from crises in Ukraine and the Middle East. “Of greatest concern is the slide in business optimism and expansion plans in the U.S. to the weakest seen over the past five years. U.S. growth therefore looks likely to have peaked over the summer months, with a slowing trend signaled for coming months,” Williamson said.
‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular ..’
• Pope Francis Warns Greed Of Man Will ‘Destroy The World’ (Daily Mail)
Pope Francis has warned that planet earth could face a doomsday scenario if the world does not stop abusing its resources for profit The pontiff warned that nature would exact revenge, and urged the world’s leaders to rein in their greed and help the hungry. He told the Second International Conference on Nutrition (CIN2) in Rome: ‘God always forgives, but the earth does not. ‘Take care of the earth so it does not respond with destruction.’ The three-day meeting aimed at tackling malnutrition, and included representatives from 190 countries.
It was organised by the UN food agency (FAO) and World Health Organization (WHO) in the Italian capital. The 77-year old said the world had ‘paid too little heed to those who are hungry.’ While the number of undernourished people dropped by over half in the past two decades, 805 million people were still affected in 2014. ‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular,’ Francis said.
Britain’s new normal: ” .. the report showed a real change in UK society over a relatively short period of time.”
• Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs (Guardian)
Insecure, low-paid jobs are leaving record numbers of working families in poverty, with two-thirds of people who found work in the past year taking jobs for less than the living wage, according to the latest annual report from the Joseph Rowntree Foundation. The research shows that over the last decade, increasing numbers of pensioners have become comfortable, but at the same time incomes among the worst-off have dropped almost 10% in real terms. Painting a picture of huge numbers trapped on low wages, the foundation said during the decade only a fifth of low-paid workers managed to move to better paid jobs. The living wage is calculated at £7.85 an hour nationally, or £9.15 in London – much higher than the legally enforceable £6.50 minimum wage.
As many people from working families are now in poverty as from workless ones, partly due to a vast increase in insecure work on zero-hours contracts, or in part-time or low-paid self-employment. Nearly 1.4 million people are on the controversial contracts that do not guarantee minimum hours, most of them in catering, accommodation, retail and administrative jobs. Meanwhile, the self-employed earn on average 13% less than they did five years ago, the foundation said. Average wages for men working full time have dropped from £13.90 to £12.90 an hour in real terms between 2008 and 2013 and for women from £10.80 to £10.30.
Poverty wages have been exacerbated by the number of people reliant on private rented accommodation and unable to get social housing, the report said. Evictions of tenants by private landlords outstrip mortgage repossessions and are the most common cause of homelessness. The report noted that price rises for food, energy and transport have far outstripped the accepted CPI inflation of 30% in the last decade. Julia Unwin, chief executive of the foundation, said the report showed a real change in UK society over a relatively short period of time. “We are concerned that the economic recovery we face will still have so many people living in poverty. It is a risk, waste and cost we cannot afford: we will never reach our full economic potential with so many people struggling to make ends meet.
Central banks can’t create growth.
• New Abnormal Means Relying on Central Banks for Growth (Bloomberg)
The “new normal” may be new. It’s hardly normal. The “new abnormal” would be more apt, according to reports published this month by Ed Yardeni and ING’s Mark Cliffe in London. “Dictionaries define ‘normal’ as regular, usual, healthy, natural, orderly, ordinary, rational,” Cliffe said Nov. 7. “It is hard to use those words to describe the current performance of the world economy and financial markets.” Among signs of irregularity since Pimco popularized the expression “new normal” in 2009 to describe an environment of below-average economic growth: Central banks are still deploying near-zero interest rates or quantitative easing six years after the financial crisis, yet output, inflation, business investment and wages remain mostly subpar. In financial markets, equities are hitting new highs as bond yields probe new lows. Even as the U.S. shows signs of strength, commodities are slumping.
The lesson for Yardeni is that by running to the rescue every time asset prices swooned in the past two decades, central bankers’ prescriptions distorted economies. “If a central bank moderates recessions, then speculative excesses are likely to build up much more during the booms and never get fully cleaned out,” Yardeni, a former chief economist at Deutsche Bank, said in a Nov. 19 report. “So each financial crisis gets progressively worse than the previous one, forcing the central bank to provide even more easy money to avert a financial meltdown.” Cliffe at ING is less willing than Yardeni to lambaste central banks, noting it’s hard to say how bad a recession may have occurred without their aid. Still, he agrees that policy makers now find themselves having to keep an eye on markets as much as the economies when setting policy.
“For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility.”
• Why We Can’t Afford Another Financial Crisis (Guardian)
A look into the future: David Cameron’s nightmare has come true; the slowdown in the global economy has turned into a second major recession within a decade. In those circumstances, there would be two massive policy challenges. The first would be how to prevent the recession turning into a global slump. The second would be how to prevent the financial system from imploding. These are the same challenges as in 2008, but this time they would be magnified. Zero interest rates and quantitative easing have already been used extensively to support activity, which would leave policymakers with a dilemma. Should they double down on QE or come up with more radical proposals – drops of helicopter money or using QE for specified purposes, such as investment in green energy?
For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility. They will deal with it if it happens, but are assuming it won’t. More explicit plans have been drawn up for the big banks. The concern here is obvious. The bailouts last time played havoc with the public finances and the still incomplete repair job has required unpopular austerity. Governments are not flush enough to contemplate a second wave of bailouts. Even if they had the money, they know just how voters would react if there was talk of bailing out the bankers a second time.
They’ll just cut again. Or maybe even just devalue the yuan overnight.
• PBOC Bounce Seen Short Lived as History Defies Bulls (Bloomberg)
China’s benchmark stock index rose to a three-year high after the central bank’s surprise interest rate cut late last week. Recent history suggests the gains won’t last long. While the Shanghai Composite Index climbed 1.9% today, six of the past seven cuts to interest rates and reserve requirements have been followed by declines in stock prices over the next two months. The last time the PBOC lowered lending and deposit rates, in July 2012, the benchmark index fell 7.4%, according to data compiled by Bloomberg. The rate cut, announced after the close of regular trading in China on Nov. 21, underlines concern that a slowdown in the world’s second-largest economy is deepening. Factory production rose 7.7% in October from a year earlier, the second-weakest pace since 2009, while retail sales missed economists’ forecasts.
China’s economy expanded 7.3% in the three months ended September and it’s projected to grow this year at the slowest pace since 1990 amid weakness in the property market and manufacturing. “In the short term, it’s positive, but in the long term, the economic slowdown is probably the main driver of the market,” Lucy Qiu, an emerging markets analyst at UBS Wealth Management, which has $1 trillion in invested assets, said by phone from New York on Nov. 21. “This announcement came after a slew of underperforming economic releases. It kind of shows the government is determined to support growth, but going forward we really have to look at the data.” The PBOC has cut reserve requirements for the nation’s largest lenders three times and lowered benchmark rates three times since late 2011.
Policy makers said in a Nov. 21 statement that the move in interest rates was “a neutral operation and doesn’t mean any change in monetary policy direction.” As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said. China’s retail inflation held at the slowest pace since January 2010 last month. Consumer prices increased 1.6%, matching September’s rate, while producer prices fell for a record 32nd month, slumping 2.2%.
Unintended consequences?!
• China Rate-Cut Likely To Hurt Banks, Curb New Loans To Small Borrowers (Reuters)
China’s latest interest rate cut is set to dent the profitability of domestic lenders, especially mid-sized banks, which are already suffering from higher bad loans and a slowdown in profit growth. The central bank unexpectedly cut rates late on Friday, stepping up efforts to support small and medium-sized enterprises (SMEs) which are struggling to repay loans and access credit, as the economy slides to its slowest growth in nearly a quarter of a century. It slashed the one-year benchmark lending rate by 40 basis points to 5.6% while lowering the one-year benchmark deposit rate by 25 basis points to 2.75%. The narrowing of interest rate margins will eat into lenders’ profitability, with Cinda Securities’ chief strategist, Jiahe Chen, predicting it will cut profits by up to 5%. Interest margins generated from lending have already been shrinking for second-tier lenders, which have been squeezed by competition from online financiers and a rise in funding costs stemming from an industry tussle for deposits.
Fitch Ratings downgraded its credit rating of China Guangfa Bank, a medium-sized lender, two days before the rate-cut announcement, and said the level of off-balance-sheet lending among second-tier banks was a concern. The squeeze on profits will make it tougher for lenders to raise capital to meet new international rules designed to protect depositors from banking collapses. Retained profits are one way in which banks can build up regulatory capital. “In the past when Chinese banks disbursed loans, they mainly relied on profits from their own capital to replenish their capital,” Jiang Jianqing, chairman of China’s biggest commercial bank, the Industrial and Commercial Bank of China, told a conference in Beijing on Saturday. The PBoC said in announcing the rate cut that it wanted to help smaller firms gain access to credit. While the measures may ease the financing costs of these firms’ existing loans, it is unlikely to encourage banks to write new loans to lower-rung borrowers, bankers said.
Bad debt is China’s biggest conundrum. How can they ever get out other than through defaults?
• Bad News Mounts for Chinese Banks, Funds Grow More Bullish (Bloomberg)
China’s banks, already saddled with mounting bad debt, face the risk of sagging profit growth after an interest-rate cut slashed their margins on loans. The twist: some investors are getting more optimistic, not less, about the outlook for the industry’s shares. Victoria Mio, chief investment officer for China at Robeco Hong Kong, whose parent company oversees about €237 billion ($294 billion), said Nov. 21 that bank stocks were very attractive because they were priced at levels that assumed an economic “hard landing.” Hours later, the central bank cut the one-year lending rate by 0.4 percentage point and the one-year deposit rate by 0.25 percentage point. Afterward, Mio said sustained monetary easing may drive an economic rebound and a jump in banks’ share prices. She was “more positive” on the stocks.
Chinese banks are trading at an average 4.8 times estimated earnings for this year, the lowest globally for lenders with a market value of more than $10 billion, according to data compiled by Bloomberg. Another fund manager, Baring Asset Management Ltd.’s Khiem Do, said he was “still bullish” on banks after the rate move and that dividends of more than 6% would become even more attractive as interest rates fall. “You tell me which banks in the world are paying out this yield, and making money, and working in an environment where the economy is growing at about 7% per annum,” he said earlier by phone. Do helps oversee about $60 billion as Hong Kong-based head of Asian multi-asset strategy. Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co., has a buy rating on the industry. He said banks’ share prices have fallen even when earnings have exceeded expectations because investors have focused more on “perceived risks” than profits.
China’s economy doesn’t function without shadow banks. There might be a hard lesson for Beijing in the offing here.
• Property, Manufacturing Woes Help Trim China’s Shadow Banking (Reuters)
A bid by China to rein in its “shadow banking” activity is producing results, thanks to slowing economic growth and tighter regulation. But some success for a policy drive to curb risky lending is not all good news for Beijing, as smaller companies may face even bigger struggles to find funding. A cut in interest rates, announced by Beijing on Friday, is unlikely to help them much. Shadow banking includes off-balance-sheet forms of bank finance plus lending by non-traditional institutions, all of which is less regulated than formal lending and thus considered riskier. At the end of 2013, China had the world’s third-largest shadow banking sector, according to the Financial Stability Board, a task force set up by the G-20 economies. It estimated that Chinese assets of “other financial intermediaries” than traditional ones were then just under $3 trillion.
In the three months ended Sept. 30, the shadow banking portion of what China calls total social financing – a broad measure of liquidity in the economy – contracted for the first time on a quarterly basis since the 2008/09 financial crisis. Loans extended by trust companies fell by roughly 100 billion yuan ($16.33 billion). Bankers’ acceptances, a short-term method of financing regularly used by manufacturers, dropped 668.3 billion yuan, according to Reuters calculations based on central bank data. October lending data, released last week, showed further contractions in these types of shadow banking. Bankers’ acceptances and trust loans “fall into categories that have been squeezed by tightening regulations in the last few months, so it’s an ongoing trend,” said Donna Kwok, an economist at UBS in Hong Kong.
“What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”
• The Consequences of Imposing Negative Interest Rates (Tenebrarum)
Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about. At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road. However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.
Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action. Mises warns however that if interest payments are abolished by decree, or even a negative interest rate is imposed by decree, owners of capital will indeed begin to consume their capital – precisely because want satisfaction in the present will continue to be preferred to want satisfaction in the future regardless of the decree. This threatens to eventually impoverish society and reduce it to a state of penury:
If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.
The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction. Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”
Because they’re desperate.
• Why Countries Wage Currency Wars (A. Gary Shilling)
The U.S. dollar has been on a tear this year, rising against the currencies of virtually all major developed economies. What we’re seeing around the world is intense – and in some cases, deliberate – devaluations. What’s going on and what are the investment implications? One reason for the devaluations is that, when economic growth is weak – as it has been globally for five years – governments feel tremendous pressure to increase exports and reduce imports to restore growth. Often that means lowering the value of the currency so that products sent abroad are relatively less expensive and those coming into the country more so. The European Central Bank, for example, wants to depress the euro to keep deflation at bay. The euro’s earlier strength drove down import prices, forcing domestic producers who compete with imports to slash their prices. As a result, consumer price inflation moved steadily toward zero. It was a mere 0.4% in October versus a year earlier.
The euro-zone economy remains stagnant, with a third recession since 2007 a possibility. Unemployment is high. Youth unemployment tops 25% in many countries; it exceeds 50% in Spain and Greece. Meanwhile, consumer sentiment, which never recovered from the last recession, is again dropping. In early June, the ECB responded by cutting its benchmark interest rate from 0.25% to 0.15% and introducing a penalty charge of 0.1% on reserves it holds for member banks. While these measures were more symbolic than substantive, the euro slid in reaction. In September, the ECB started to make up to €1 trillion in cheap, four-year loans available to member banks, provided they made more credit available to the private sector. Still, these actions didn’t seriously depress the euro, so ECB President Mario Draghi in September announced a further cut in the overnight interest rate to 0.05% and an increase in the penalty rate for member-bank deposits to 0.2%.
In October, the ECB purchased a broad array of securities, including bonds backed by auto loans, home mortgages and credit-card debt, to encourage lenders to offer more credit to companies. Again, these actions have proved more symbolic than substantive, but the euro has weakened a bit further. While the ECB will probably end up with outright quantitative easing in one form or another, keep in mind that QE is less effective in the euro area. Financing is concentrated in the banks, which account for 70% of corporate financing, not in bond markets as in the U.S., where QE works its way into the economy rapidly. Also, weak euro-zone banks are weighed down by bad loans, anemic profits and the need to raise capital to meet new regulatory requirements. In addition, there are 18 euro-area countries and, therefore, 18 separate bond markets for the ECB to consider.
Magic?!
• How the EU Plans to Turn $26 Billion Into $390 Billion (Bloomberg)
The European Union is planning a €21 billion ($26 billion) fund to share the risks of new projects with private investors, two EU officials said. The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s €300 billion investment program, said the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week. The commission will pledge as much as €16 billion in guarantees for the vehicle, which will also include €5 billion from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.
Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said. Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8% this year, according to EU forecasts, while the region’s unemployment rate of 11.5% masks rates of about 25% in Greece and in Spain. While the Juncker proposal involves seeding investment in infrastructure and other fields, the €21 billion sum with a proposed leverage rate of 15 times risks disappointing markets.
EU consumer data coming this week.
• Draghi’s About to Find Out How Urgent His Call for Action Has Become (Bloomberg)
Mario Draghi is about to find out just how urgent his call for action has become. One week after the European Central Bank president vowed to revive inflation “as fast as possible,” policy makers will receive a glimpse on just how feeble cost pressures are now in the euro region. Economists forecast data on Nov. 28 will show consumer-price growth matching the weakest since 2009. That would add to the drumroll for a stimulus debate at the Dec. 4 meeting as panels of officials study possible new measures and prepare to cut their economic outlook. While Draghi has stoked pressure toward sovereign-bond buying, colleagues from Germany to the Netherlands are unconvinced quantitative easing is warranted, and his vice president suggested at the weekend that the ECB might hold off until next year. Spanish government bond yields fell today on speculation the ECB will start buy sovereign debt.
“The stakes are high and the risks are asymmetric,” said Frederik Ducrozet, an economist at Credit Agricole in Paris. “A drop in inflation, even a small one, could push the ECB to do something more in December. On the other hand if there is an upside surprise, that buys them time.” Inflation data for November are forecast to show a dip to 0.3% from 0.4%, while economic confidence is seen declining and October unemployment staying at 11.5%, according to economists surveyed by Bloomberg News before those reports this week.
Deflation at work.
• UK Supermarket War Turns Smaller Food Suppliers Into ‘Cannon Fodder’ (Guardian)
Food producers have become cannon fodder in the bitter supermarket price war, according to accountancy firm Moore Stephens, which found 28% more specialist manufacturers have gone into insolvency this year than last. In the year to September, 146 food producers went into insolvency, including wholesale bakeries, pasta makers, fish processors and ready meal manufacturers. In one of the larger cases, 170 jobs were lost when Sussex-based fresh pasta maker Pasta Reale went into administration in August after it lost three major supermarket contracts in a year. Duncan Swift, head of the food advisory group at Moore Stephens, said: “The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder. UK supermarkets are trying to compete on price with Aldi and Lidl but with profit margins that are far higher than these discount chains.
“To try and make the maths work, the big supermarkets are putting food producers under so much pressure that we have seen a sharp increase in the number of producers failing.” The rise in insolvencies among food suppliers is in stark contrast to the 8% fall in liquidations in the economy as a whole over the same period. Swift said that because supermarket buyers’ bonuses were based on securing cash contributions from suppliers, they were being hit with “spurious deductions”, cancellations at short notice and threats to take them off the supplier list.
Highlighting contracts where suppliers contribute to supermarkets’ costs, he said: “Supplier contributions cause major cashflow problems for food producers and can tip them into insolvency. It’s a raw deal for food producers, who need the supermarkets to reach the public, but who can’t afford the terms of business that the supermarkets foist on them.” The extent of these contributions has come into the spotlight this year after Tesco admitted it had found a £263m black hole in its accounts relating to the way it booked payments from suppliers.
This is OPEC’s biggest problem, followed closely by infighting within the cartel. Agreements won’t be worth the paper they’re written on. Who’s going to check production?
• ‘OPEC’s Easy Days Setting Oil Production Are Over’ (Bloomberg)
The days when OPEC members could all but guarantee consensus when deciding production levels for oil are long gone, according to a veteran of almost two decades of the group’s meetings. The global glut of crude, which has contributed to a 30% decline in prices since June 19, has left the organization disunited and dependent on non-members to shore up the market, said former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah. The 12-member Organization of Petroleum Exporting Countries is scheduled to meet in Vienna on Nov. 27. “OPEC can’t balance the market alone,” Al Attiyah, who participated in the group’s policy meetings from 1992 to 2011, said in a Nov. 19 phone interview. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”
Sounds very bearable.
• Russia Losing ‘Up To $140 Billion’ From Sanctions, Oil Drop (Reuters)
Russia is suffering losses at a rate of about $40 billion per year because of Western sanctions and $90-100 billion from the drop in the oil price, Finance Minister Anton Siluanov said on Monday. The admission came on the same morning that a central bank official said that banking profits could be 10% lower in 2014, compared to the previous year. External markets are largely closed for Russian banks and companies, some of which – including top banks Sberbank and VTB – are under Western sanctions over Moscow’s role in the Ukraine crisis. Banks’ profits and margins are also under pressure because they have to serve increased domestic demand for loans, while their sources of capital and liquidity are limited.
That’s what you get in a world run on zombie money.
• Demand Set to Outstrip the $100 Trillion Bond Market Again in 2015 (Bloomberg)
Even in the $100 trillion market for bonds worldwide, one of the most persistent dilemmas facing potential buyers is a dearth of supply. Demand for debt securities has surpassed issuance five times in the past seven years, according to data compiled by JPMorgan. The shortfall is set to continue into 2015, with the New York-based firm predicting demand globally will outstrip supply by $400 billion as central banks in Japan and Europe step up their own debt purchases. The mismatch helps to explain why bond yields worldwide have fallen by more than half since the financial crisis in 2008 to a record-low 1.51% in October, even as borrowing by governments, businesses and consumers added $30 trillion to the market for debt securities. Now, with a global economic slowdown threatening to hold back the U.S. recovery and few signs of inflation anywhere in the developed world, the shortage of bonds may temper the rise in yields forecasters project next year.
“It will keep global yields lower than they would be otherwise,” Chris Low, the New York-based chief economist at FTN Financial, said in a telephone interview on Nov. 19. The demand for bonds “reflects disappointing global growth and that’s been a consistent theme.” Potential bond buyers are poised to spend $2.4 trillion next year on a net basis, while borrowers will issue an estimated $2 trillion of debt, according to JPMorgan, the top-ranked firm for fixed-income research in the U.S. and Europe by Institutional Investor magazine. Since the end of 2007, JPMorgan estimates the potential bond demand has exceeded supply by more than $2.5 trillion, including a gap almost a half-trillion dollars this year. The Bank for International Settlements estimates the amount of bonds outstanding has surged more than 40% since 2007 as countries such as the U.S. increased deficits to pull their economies out of recession and companies locked in low-cost financing as central banks dropped interest rates. Even so, a shortfall emerged.
How to shoot yourself in the foot: tell banks they need more deposits, but enact low interest policies that drain them away. All part of the same brilliant plan. They had a visit from Krugman, didn’t they?
• Swedish Banks Face Deposit Drain as Interest Rates Slump (Bloomberg)
Sweden’s biggest banks could see deposits plunge as record-low interest rates prod households to start seeking higher returns elsewhere. Net deposit inflows declined to 4.4 billion kronor ($589 million) in the third quarter from 44.3 billion kronor the prior quarter, according to Statistics Sweden. While the period typically sees a seasonal decline, deposits were less than half the 10.2 billion kronor recorded a year earlier. While the financial crisis initially saw an influx of deposits into Nordea Bank and other Swedish lenders amid a flight to safety, record-low interest rates are now driving savers into riskier assets. Swedish bank depositors earn on average about 0.4%, while the country’s benchmark stock index has returned more than 8% this year. “We’ve never had such big savings in rates but they have now hit the floor and will return very little in the coming five to seven years,” Claes Hemberg, an economist at Avanza Bank, which offers online trading accounts as well as deposit accounts, said by phone Nov. 20.
“That knowledge hit home when the Riksbank cut rates to zero and it’s now obvious that there is nothing there to fetch. It’s a real U-turn.” The trend threatens to erode a cheap and stable funding source for banks just as regulators demand more. Swedes have about 60% to 65% of their savings in bank accounts or bonds and the rest in stocks, down from about 70% in 2000, according to Avanza. The shift comes amid a campaign by policy makers, including former Finance Minister Anders Borg, to urge banks to reduce their reliance on market funding and increase deposits. The Financial Stability Council, comprised of the Riksbank, the government, the debt office and the regulator, earlier this year said risks that need to be kept under surveillance include bank reliance on market funding in foreign currency.
1.5°C is lowballing it. There is no doubt we’re looking at 2ºC minimum.
• World Locked Into ‘Alarming’ Global Warming: World Bank (CNBC)
The world is locked into 1.5°C global warming, posing severe risks to lives and livelihoods around the world, according to a new climate report commissioned by the World Bank. The report, which called on a large body of scientific evidence, found that global warming of close to 1.5°C above pre-industrial times – up from 0.8°C today – is already locked into Earth’s atmospheric system by past and predicted greenhouse gas emissions. Such an increase could have potentially catastrophic consequences for mankind, causing the global sea level to rise more than 30 centimeters by 2100, droughts to become more severe and placing almost 90% of coral reefs at risk of extinction. The World Bank called on scientists at the Potsdam Institute for Climate Impact Research and Climate Analytics and asked them to look at the likely impacts of present day (0.8°C), 2°C and 4°C warming on agricultural production, water resources, cities and ecosystems across the world.
Their findings, collated in the Bank’s third report on climate change published on Monday, specifically looked at the risks climate change poses to lives and livelihoods across Latin America and the Caribbean, Eastern Europe and Central Asia, and the Middle East and North Africa. In the report entitled “Turndown the heat – Confronting the new climate normal,” scientists warned that even a seemingly slight rise in global warming could have dramatic effects on us all. “A world even 1.5°C [warmer] will mean more severe droughts and global sea level rise, increasing the risk of damage from storm surges and crop loss and raising the cost of adaptation for millions of people,” the report with multiple authors said. “These changes are already underway, with global temperatures 0.8 degrees Celsius above pre-industrial times, and the impact on food security, water supplies and livelihoods is just beginning.”
Home › Forums › Debt Rattle November 24 2014