slump Archives - The Automatic Earth

Home prices picked up steam in the first few months of the year, according to a report out Tuesday, defying expectations of a slowdown in price growth after years of scorching-hot gains and the industry-damaging effects of a tax bill that reduced preferential treatment for homeowners. The Home Price Index from real estate data provider CoreLogic showed national yearly price growth of 6.7% in February. That’s up from a 6.1% annual price gain in the prior three months, 6.0% annual price gain in the four months before that and 5.9% growth the month before that… you get the idea. Prices aren’t just rising, they’re accelerating. And that stirs uncomfortable questions about how long such gains can go on, what could happen when they end and what it all means for the housing market.

(It’s worth noting that CoreLogic’s findings are corroborated by price data from the National Association of Realtors, which found year-over-year price changes had increased every month since last October.) After so many years of robust home-price growth, CoreLogic considers nearly half of the 50 largest metropolitan areas “overvalued,” it said in a release. “Family income is rising more slowly than home prices and mortgage rates, meaning that the mortgage payment takes a bigger bite out of income for new homebuyers,” said Frank Martell, CoreLogic’s president and CEO. “Often buyers are lulled into thinking these high-priced markets will continue, but we find that overvalued markets will tend to have a slowdown in price growth.”

[..] Some housing analysts think that surging price gains that exceed what normal macro fundamentals call for suggest that the housing market is more dysfunctional than might be apparent. As one industry veteran told MarketWatch last December, everything from homeowners reluctant to sell because they think they’ll never find such a low mortgage rate again, to institutional investors who buy entry-level homes to rent out could be pressuring prices upward in ways that analysts can’t quantify — and that leave buyers frustrated.

Intellectual property.

• US Plans Tariffs On $50bn In Chinese Imports To Protest Alleged Tech Theft (G.)

The Trump administration has raised the stakes in a growing trade showdown with China by placing 25% tariffs on some 1,300 industrial technology, transport and medical products to try to force changes in Beijing’s intellectual property practices. The US announcement targets about $50bn of estimated 2018 imports and is aimed at hampering China’s efforts to upgrade its manufacturing base. The goods include electronics, aircraft parts, medicine and machinery. The move comes a day after Beijing imposed duties on about $3bn in US exports, itself prompted by Donald Trump’s decision to place tariffs on imports of Chinese steel and aluminium.

“The proposed list of products is based on extensive interagency economic analysis and would target products that benefit from China’s industrial plans while minimizing the impact on the US economy,” the office of the US trade representative, Robert Lighthizer, said in a statement. The list identifies roughly 1,300 goods but remains subject to a 30-day public review process before it can take effect. China’s ministry of commerce condemned the US decision. “Disregarding strong representations by China, the United States announced the tariff proposals that are completely unfounded, a typical unilateralist and protectionist practice that China strongly condemns and firmly opposes,” the ministry said in a statement on Wednesday, according to Xinhua.

“We have the confidence and ability to respond to any US trade protectionist measures,” a spokesperson said. “As the Chinese saying goes, it is only polite to reciprocate.” The ministry did not reveal any specific countermeasures, but economists widely view imports of US soybeans, aircraft and machinery as prime targets for trade retaliation.

Intellectual property and soybeans. An odd couple.

• China Hits Soybeans, Aircraft in Counter-Punch to Trump Tariffs (BBG)

China said it would levy an additional 25 percent tariff on imports of 106 U.S. products including soybeans, automobiles, chemicals and aircraft, in response to proposed American duties on its high-tech goods. Matching the scale of proposed U.S. tariffs announced the previous day, the Ministry of Commerce in Beijing said the charges will apply to around $50 billion of U.S. imports. Officials signaled that the implementation of the proposed measures will depend on when the U.S. applies its own after a period of public consultation.

The step ratchets up tension in a brewing trade war between the world’s two largest trading nations, with the Trump administration’s latest offensive based on alleged infringements of intellectual property in China. In targeting high-tech sectors that Beijing is openly trying to promote, the U.S. has provoked furious rhetoric from Beijing and stronger threats of retaliation than many had anticipated. “China’s response was tougher than what the market was expecting – investors didn’t foresee the country levying additional tariffs on sensitive and important products such as soybeans and airplanes,” said Gao Qi, Singapore-based strategist at Scotiabank. “Investors believe a trade war will hurt both countries and their economies eventually.”

Too big to fail/bail.

• China’s Financial Opening Isn’t Quite What It Seems (BBG)

Although trade tensions between the U.S. and China show no signs of abating, there are some reasons for cautious optimism. One is that the Americans have finally gotten around to giving the Chinese a concrete list of demands – and, on at least one score, China is prepared to deal. The Chinese financial market has long been closed to foreign ownership, despite widespread criticism from the U.S. and others. In November, following Donald Trump’s state visit to Beijing, China’s finance ministry announced that this was set to change in 2018, and now the Trump team is pushing China to make good on that promise. The catch, of course, is that the practical impact of this opening will be minimal – and for China, that’s the point.

It will accelerate its financial opening not because the Americans are demanding it, but because foreign financial firms no longer pose much of a threat. Chinese banks are now too big and too dominant domestically for foreign financial institutions to genuinely compete with them. Consider that the four largest banks in the world are all Chinese state-owned institutions. Together they have $11.9 trillion in assets. The world’s next five biggest banks roughly match up to China’s Big Four, accounting for $11.8 trillion, but they represent the largest institutions in four separate countries – Japan, the U.S., the U.K. and France. No single country has financial firepower on China’s scale.

Just taking America’s banking sector – where the concept of “too big to fail” originated – it would require the combined balance sheets of the top 10 lenders to equal the assets of just China’s top four. Within China, foreign firms own slightly more than 1 percent of total bank assets, compared to a full 36 percent owned by the five major state-owned institutions. Similarly, foreign banks account for less than 1 percent of annual earnings, or the equivalent of about 5 percent of the yearly profit made by just the Industrial & Commercial Bank of China. Starting from such a minuscule base, and up against such huge incumbents, foreign banks will always be relegated to the minor leagues in China, whether market restrictions are eased or not.

The word ‘precise’ is meaningless here, and merely used to keep suspicion alive even as the story fails.

• UK Experts Unable To Verify Precise Source Of Novichok (G.)

British scientists at the Porton Down defence research laboratory have not established that the nerve agent used to poison Sergei and Yulia Skripal was made in Russia, it has emerged. Gary Aitkenhead, the chief executive of the government’s Defence Science and Technology Laboratory (DSTL), said the poison had been identified as a military-grade novichok nerve agent, which could probably be deployed only by a nation state. Aitkenhead said the government had reached its conclusion that Russia was responsible for the Salisbury attack by combining the laboratory’s scientific findings with information from other sources.

The UK government moved quickly to make it clear that the prime minister, Theresa May, had always been clear the assessment from Porton Down was “only one part of the intelligence picture”. The comments came hours before an extraordinary meeting in The Hague of the executive council of the Organisation for the Prohibition of Chemical Weapons (OPCW), called by Russia. Speaking to Sky News, Aitkenhead said it was not possible for scientists alone to say precisely where the novichok had been created. He said: “It’s a military-grade nerve agent, which requires extremely sophisticated methods in order to create – something that’s probably only within the capabilities of a state actor.”

He denied Russian claims that the substance could have come from Porton Down, which is eight miles from Salisbury, saying: “There’s no way that anything like that would ever have come from us or leave the four walls of our facilities.” Aitkenhead said: “We were able to identify it as novichok, to identify it was a military-grade nerve agent. We have not verified the precise source, but we have provided the scientific information to the government, who have then used a number of other sources to piece together the conclusions that they have come to.”

[..] two weeks ago Boris Johnson was asked by an interviewer on Deutsche Welle, Germany’s public international broadcaster, how the UK had been able to find out the novichok originated from Russia so quickly. He replied: “When I look at the evidence, the people from Porton Down, the laboratory, they were absolutely categorical. I asked the guy myself, I said: ‘Are you sure?’ And he said: ‘There’s no doubt.’ So we have very little alternative but to take the action that we have taken.”

The British should demand an explanation from May. Can Boris Johnson keep his job?

• Russia Says Spy Poisoning ‘Grotesque Provocation’ By UK, US (AFP)

The head of Russia’s SVR foreign intelligence agency said Wednesday the poisoning of a Russian former double agent in Britain was a “grotesque provocation” by the British and US security services. “Even when it comes to the grotesque provocation with the Skripals that was crudely concocted by the British and American security services, a number of European countries are in no rush to unquestioningly follow London and Washington but prefer to look into what has happened in detail,” SVR chief Sergei Naryshkin said at a security conference. He also warned that Moscow and the West must avoid the risk of escalating their current standoff to the dangerous levels reached at the height of the Cold War.

“It’s important to stop the irresponsible game of raising stakes and to stop the use of force in relations between states, not to bring matters to a new Cuban Missile Crisis,” he said, referring to the 1962 standoff between the Soviet Union and the United States that brought the world to the brink of nuclear war. Naryshkin said that for Washington, “fighting the non-existent so-called Russian threat has become a real fixation” comparable in scale to the Cold War era. “It has reached such proportions and developed such ludicrous characteristics, that it’s time to talk about the return of the grim times of the Cold War,” Naryshkin said.

[..] Putin’s spokesman Dmitry Peskov said on a visit to Ankara late Tuesday that Britain’s “theory will not be confirmed in any case because it is not possible to confirm it.” “The British foreign secretary who has made accusations against President Putin, (and) the British prime minister will have to somehow look their EU colleagues… in the eye,” Peskov said. “Somehow they will have to apologise to the Russian side,” Peskov added. “It will certainly be a long story, the idiocy has gone too far.”

“The meeting comes after Moscow also received and analysed samples of the Novichok agent used in the attack.”

• Chemical Watchdog To Meet Over Spy Nerve Agent Claims (AFP)

The world’s chemical watchdog is to meet behind closed doors Wednesday, after a British laboratory said it had not proved that Russia manufactured a deadly nerve agent used to poison a former Russian spy. The talks at the Organisation for the Prohibition of Chemical Weapons (OPCW) have been requested by Moscow which said it wanted to “address the situation around the allegations… in regards to the incident in Salisbury.” “We hope to discuss the whole matter and call on Britain to provide every possible element of evidence they might have in their hands,” Russia’s ambassador to Ireland, Yury Filatov, told reporters.

On Tuesday, the British military facility analysing the nerve agent used on former Russian double agent Sergei Skripal and his daughter Yulia, said it was not in a position to say where the substance had originated. Skripal, who has lived in Britain since a spy swap in 2010, and his daughter have been in hospital since the March 4 poisoning that London and its major Western allies have blamed on Russia. The 41 member states of the OPCW’s executive council are to convene at 10:00 am (0800 GMT) at the organisation’s headquarters in The Hague. The meeting comes after Moscow also received and analysed samples of the Novichok agent used in the attack. “Russia is interested in establishing the whole truth of the matter,” Filatov said.

But Britain’s foreign ministry accused Russia of requesting the meeting to undermine the OPCW’s investigation. “This Russian initiative is yet again another diversionary tactic, intended to undermine the work of the OPCW in reaching a conclusion,” the ministry said in a statement. “Of course, there is no requirement in the Chemical Weapons Convention for the victim of a chemical weapons attack to engage in a joint investigation with the likely perpetrator,” it said.

“..a distinction without a difference..”

• It’s The Trump Slump – But Don’t Blame The Donald! (Stockman)

[..] the Donald is definitely not guilty because he hasn’t been around nearly long enough to take the blame or the praise for anything related to the economy. The phony stock market boom has been gestating for three decades owing to central bank monetary madness; the up-leg since election day reflects nothing more than the final phase of an horribly metastasized financial bubble that has now reached its sell-by date. In fact, our clueless medicine show impresario has confused the last gasp of the robo-machines and dip-buyers for an endorsement of his cockamamie brew of protectionism, nationalism, populism and unhinged Keynesian borrow and spend.

So rather than puncturing the bubble he accurately identified during the campaign, he’ll soon be dripping with implosion splatter from comb-over to toe. Likewise, the market’s post-election rip has nothing to do with a putative Trump economic boom because there hasn’t been one. A 2.0% or lower real GDP growth rate is now virtually baked into the cake for Q1 based on the economic releases to date. That would amount to a $75 billion gain over the Q4 annualized level of real GDP. Accordingly, the first five quarters of the Trump Economy will have generated an average real GDP gain of $102 billion per quarter. Then again, during the previous three years (2014-2016) the quarterly growth rate was $99 billion per quarter.

We’d call that a distinction without a difference. Indeed, the notion that there has been some-kind of Trump fostered economic acceleration is, well, Fake News. In fact, what we have is a plodding business expansion that is freighted down by debt and financial engineering—both gifts of a rogue central bank that has been inflicting harm on the main street economy for decades.

Your privacy is not up to him to decide. That is just crazy.

• Facebook CEO Stops Short Of Extending European Privacy Globally (R.)

Facebook Chief Executive Mark Zuckerberg said on Tuesday that he agreed “in spirit” with a strict new European Union law on data privacy but stopped short of committing to it as the standard for the social network across the world. As Facebook reels from a scandal over the mishandling of personal information belonging to millions of users, the company is facing demands to improve privacy and learn lessons from the landmark EU law scheduled to take effect next month. Zuckerberg told Reuters in a phone interview that Facebook was working on a version of the law that would work globally, bringing some European privacy guarantees worldwide, but the 33-year-old billionaire demurred when asked what parts of the law he would not extend worldwide.

“We’re still nailing down details on this, but it should directionally be, in spirit, the whole thing,” Zuckerberg said. He did not elaborate. His comments signal that U.S. Facebook users, many of them still angry over the company’s admission that political consultancy Cambridge Analytica got hold of Facebook data on 50 million members, could find themselves in a worse position than Europeans. The European law, called the General Data Protection Regulation (GDPR), is the biggest overhaul of online privacy since the birth of the internet, giving Europeans the right to know what data is stored on them and the right to have it deleted. Apple and some other tech firms have said they do plan to give people in the United States and elsewhere the same protections and rights that Europeans will gain.

[..] When GDPR takes effect on May 25, people in EU countries will gain the right to transfer their data to other social networks, for example. Facebook and its competitors will also need to be much more specific about how they plan to use people’s data, and they will need to get explicit consent. GDPR is likely to hurt profit at Facebook because it could reduce the value of ads if the company cannot use personal information as freely and the added expense of hiring lawyers to ensure compliance with the new law. Data is central to Facebook’s advertising business, and it has not yet sketched out a satisfying plan for how it plans to comply, said Pivotal Research analyst Brian Wieser. “I haven’t heard any solutions from Facebook to get ahead of the problem yet,” Wieser said. Failure to comply with the law carries a maximum penalty of up to 4% of annual revenue.

I would have understood this better if it had been published on April 1. Now I’m thinking: some idiot is actually going to do this.

• Developing Nations To Study Ways To Dim Sunshine, Slow Warming (R.)

Scientists in developing nations plan to step up research into dimming sunshine to curb climate change, hoping to judge if a man-made chemical sunshade would be less risky than a harmful rise in global temperatures. Research into “solar geo-engineering”, which would mimic big volcanic eruptions that can cool the Earth by masking the sun with a veil of ash, is now dominated by rich nations and universities such as Harvard and Oxford. Twelve scholars, from countries including Bangladesh, Brazil, China, Ethiopia, India, Jamaica and Thailand, wrote in the journal Nature on Wednesday that the poor were most vulnerable to global warming and should be more involved.

“Developing countries must lead on solar geo-engineering research,” they wrote in a commentary. “The overall idea (of solar geo-engineering) is pretty crazy but it is gradually taking root in the world of research,” lead author Atiq Rahman, head of the Bangladesh Centre for Advanced Studies, told Reuters by telephone. The solar geo-engineering studies would be helped by a new$400,000 fund from the Open Philanthropy Project, a foundation backed by Dustin Moskovitz, a co-founder of Facebook, and his wife, Cari Tuna, they wrote.

[..] Rahman said the academics were not taking sides about whether geo-engineering would work. Among proposed ideas, planes might spray clouds of reflective sulfur particles high in the Earth’s atmosphere. “The technique is controversial, and rightly so. It is too early to know what its effects would be: it could be very helpful or very harmful,” they wrote. A U.N. panel of climate experts, in a leaked draft of a report about global warming due for publication in October, is skeptical about solar geo-engineering, saying it may be “economically, socially and institutionally infeasible.”

Article says “..hunted to the edge of extinction..”. Graph says healthy population. Source for both is AFP.

• Bowhead Whales Are The Coolest Cats (AFP)

How do bowhead whales in the unbroken darkness of the Arctic’s polar winter keep busy during breeding season? They sing, of course. From late autumn to early spring, off the east coast of Greenland, some 200 bowheads, hunted to the edge of extinction, serenade each other with compositions from a vast repertoire of song, according to a study published on Wednesday. “It was astonishing,” said the lead author, Kate Stafford, an oceanographer at the University of Washington’s Applied Physics Laboratory in Seattle, who eavesdropped on these subaquatic concerts. “Bowhead whales were singing loudly, from November until April” – non-stop, 24/7 – “and they were singing many, many different songs.”

Stafford and three colleagues counted 184 distinct melodies over a three-year period, which may make bowheads one of the most prolific composers in the animal kingdom. “The diversity and inter-annual variability in songs of bowhead whales in this study are rivalled only by a few species of songbirds,” the study found. Unlike mating calls, songs are complex musical phrases that are not genetically hard-wired but must be learned. Only a handful of mammals – some bats and a family of apes called gibbons, for example – vocalise in ways akin to bird song, and when they do it is quite repetitive.

The only other whale that produces elaborate songs is the humpback, which has been extensively studied in its breeding grounds near Hawaii and off the coast of Mexico. The humpback’s melody is shared among a given population over a period of a year, and gives way to a new tune each spring. Bowhead whales, it turns out, are far more versatile and would appear to improvise new songs all the time. “If humpback whale song is like classical music, bowheads are jazz,” Stafford said in a statement. “The sound is more free-form.”

Debt Rattle February 5 2018

Feb 052018

February 5, 2018 Posted by Raúl Ilargi Meijer at 11:10 am Finance Tagged with: bonds, equities, immunology, inflation, oil rigs, overworked, panic, plastics, sharks, slump, speculation, Syriza, whales, Yellen 11 Responses »

Horacio Coppola Calle Corientes at the corner of Reconquista, Buenos Aires 1936

• Global Equity Slump Deepens as Rate Fears Grow (BBG)

• Stocks Punished As Inflation Shadow Spooks Bonds (R.)

• The Grand Crowded Trade Of Financial Speculation (Noland)

• Don’t Panic. This Slump’s Just a Blip (BBG)

• This Isn’t the Start of a Major Downturn – JPMorgan (BBG)

• Gundlach: ‘Hard To Love Bonds At Even 3%’ Yield (R.)

• Oil Rally Is Unraveling On Fears Over A Rise In US Production (BBG)

• Yellen Says Prices ‘High’ for Stocks, Commercial Real Estate (BBG)

• Overworked Americans Are Stuck In A Financial Groundhog Day (MW)

• SYRIZA’s “Success Story”: Austerity By A Different Name (MintPress)

• The Beautiful Cure – Immunology And The Heroes Of The Resistance (G.)

• Whale And Shark Species At Increasing Risk From Microplastic Pollution (G.)

Out of stocks but into what?

• Global Equity Slump Deepens as Rate Fears Grow (BBG)

Asian equities fell and U.S. stock futures headed lower, extending the biggest selloff for global stocks in two years as investors adjusted to a surge in global bond yields. Shares sank across the region, with Japan’s benchmarks falling the most in 15 months. S&P 500 Index futures pared a drop of as much as 0.9%, signaling Friday’s rout won’t extend for another day. Shares in Hong Kong and Shanghai trimmed declines after China’s securities regulator urged brokerages to help stem the rout. Australia’s 10-year bond yield surged as the 10-year Treasury yield neared 2.87% after solid jobs data on Friday showed rising wages. The yen advanced. “It’s likely the pullback has further to go as investors adjust to more Fed tightening than currently assumed,” said Shane Oliver at AMP Capital Investors.

“The pullback is likely to be just an overdue correction, with say a 10% or so fall, rather than a severe bear market – providing the rise in bond yields is not too abrupt and recession is not imminent in the U.S. with profits continuing to rise.” The re-pricing of markets has come as investors question whether the Federal Reserve will keep to a gradual pace of monetary tightening, and whether it may need to end up boosting interest rates by more than previously expected in coming years. A higher so-called terminal rate for the Fed’s target implies higher long-term yields – raising borrowing costs across the economy. Yields on 10-year Treasuries have climbed to a four-year high from 2.40% at the start of the year. Last week’s decline for global stocks follows one of the best starts to a year on record amid hopes for ever-expanding corporate profits and growth in the world economy that’s broadening. The MSCI All Country World Index tumbled 3.4% last week, its biggest such slide since January 2016.

If anyone’s scared of inflation, they’re scared of the wrong thing. But perhaps that’s a fitting way to end a make-believe world.

• Stocks Punished As Inflation Shadow Spooks Bonds (R.)

Wall Street had already been flashing expensive by many historical measures and sold off in reaction. “It has to be remembered that U.S. shares were priced for perfection at around 19 times earnings,” said Craig James, chief economist at fund manager CommSec, noting the historic average is around 15 times. “Still, U.S. companies have produced stellar earnings over the reporting period. So it is understandable that some ‘irrational exuberance’ would emerge.” With half of the S&P 500 companies having reported, 78% have beaten expectations against an average 64%. Chris Weston, chief market strategist at broker IG, noted the sudden spike in volatility caused some rules-based funds to automatically dump stock as their models required.

“There is talk that volatility targeting annuity funds could have to sell a further $30 billion of stock this week and another $40 billion should realized volatility not retreat lower,” he warned. The lift in U.S. yields provided some initial support to the dollar after a rocky start to the year, though it was starting to lose altitude again in Asian trade. Against a basket of currencies, the dollar was down a fraction at 89.123 having climbed 0.6% on Friday for its biggest single day gain in three months. The dollar backed off to 109.95 yen from an early 110.29, while the euro was barely changed at $1.2461. Any rally in the U.S. dollar is considered a negative for commodities priced in the currency, with the Thomson Reuters CRB index down 0.5%. Gold was off a touch at $1,332.04 an ounce after losing 1% on Friday.

Minskian fragility pops up its head.

• The Grand Crowded Trade Of Financial Speculation (Noland)

Even well into 2017, variations of the “secular stagnation” thesis remained popular within the economics community. Accelerating synchronized global growth notwithstanding, there’s been this enduring notion that economies are burdened by “insufficient aggregate demand.” The “natural rate” (R-Star) has sunk to a historical low. Conviction in the central bank community has held firm – as years have passed – that the only remedy for this backdrop is extraordinarily low rates and aggressive “money” printing. Over-liquefied financial markets have enjoyed quite a prolonged celebration. Going back to early CBBs, I’ve found it useful to caricature the analysis into two distinctly separate systems, the “Real Economy Sphere” and the “Financial Sphere.”

It’s been my long-held view that financial and monetary policy innovations fueled momentous “Financial Sphere” inflation. This financial Bubble has created increasingly systemic maladjustment and structural impairment within both the Real Economy and Financial Spheres. I believe finance today is fundamentally unstable, though the associated acute fragility remains suppressed so long as securities prices are inflating. [ZH: This week’s sudden burst of volatility across all asset-classes highlights this Minskian fragility]. The mortgage finance Bubble period engendered major U.S. structural economic impairment. This became immediately apparent with the collapse of the Bubble. As was the case with previous burst Bubble episodes, the solution to systemic problems was only cheaper “money” in only great quantities.

Moreover, it had become a global phenomenon that demanded a coordinated central bank response. Where has all this led us? Global “Financial Sphere” inflation has been nothing short of spectacular. QE has added an astounding $14 TN to central bank balance sheets globally since the crisis. The Chinese banking system has inflated to an almost unbelievable $38 TN, surging from about $6.0 TN back in 2007. In the U.S., the value of total securities-to-GDP now easily exceeds previous Bubble peaks (1999 and 2007). And since 2008, U.S. non-financial debt has inflated from $35 TN to $49 TN. It has been referred to as a “beautiful deleveraging.” It may at this time appear an exquisite monetary inflation, but it’s no deleveraging. We’ll see how long this beauty endures.

People need to be reassured, apparently.

• Don’t Panic. This Slump’s Just a Blip (BBG)

Is it a blip, a correction or the end of days? Stock markets in Asia tumbled Monday, extending the biggest global selloff in two years. Equity investors are fretting as Treasury yields approach 3%. On Friday, 10-year returns touched 2.85%, and the dollar rallied 0.9%. Some context, however. While the MSCI Asia ex-Japan Index’s 7.5% return in January was good, it’s not unprecedented. In January 2001, the benchmark soared 12.8%. Also, U.S. government bond yields have been on a steady rise since the start of the year, and that hasn’t stopped Asia from partying. A currency’s strength is dictated by interest rate differentials, in theory at least. And it’s unclear the dollar will get much stronger. Based on the Bloomberg Dollar Spot Index, which determines currency weights according to their relative importance to the U.S. in terms of international trade, one-third of the dollar’s value is dictated by the euro.

[..] But five-year bunds finally offered you something last week, after being negative since 2015. Next in line is the Japanese yen, which dictates 18% of the dollar’s value. There have been plenty of murmurings, from this columnist included, that the Bank of Japan will start stealth tightening, especially in a world of rising U.S. interest rates. After all, Japan’s central bank already owns an unprecedented 45% of the nation’s bond market; how much more entrenched can it get? Interest rates have been climbing in emerging Asia as well. Malaysia and Pakistan have both embarked on tightening cycles while the Philippines is expected to hike by 50 basis points this year. Interest rates in China and India are also on the up, as Beijing limits credit expansion and Delhi can’t stop spending. You get my point: Just because U.S. rates are strengthening doesn’t mean the dollar will necessarily follow suit.

Life in a fantasy world paid for by the Fed through taxpayers.

• This Isn’t the Start of a Major Downturn – JPMorgan (BBG)

Equities still feel like the right place to be relative to bonds for multi-asset investors, according to JPMorgan Asset Management. The pullback in risk assets among overbought conditions and stretched sentiment doesn’t look like the start of a major downturn, the money manager said. With economic and earnings growth remaining solid amid a real macro deterioration, “stretched valuations just aren’t enough to cause a big market sell-off,” said Patrik Schowitz, global multi-asset strategist at JPMorgan Asset, in a note. The firm oversees $1.7 trillion in assets. Asian equities fell and U.S. stock futures headed lower Monday, extending the biggest selloff for global stocks in two years as investors adjusted to a surge in global bond yields.

Investors are questioning whether the Federal Reserve will keep to a gradual pace of monetary tightening, and whether it may need to boost interest rates by more than previously expected in coming years. To be sure, the biggest “endogenous” risk the firm has been pointing to is rising bond yields. “The level of yields in absolute terms is not the issue, rather the velocity of the yield moves is what matters. Investors should continue to watch this closely,” said Schowitz. He said the firm has for some time flagged rising risks of a correction in risk assets on the back of increasingly more stretched positive sentiment in markets. “This move may yet turn out to be the start of something more significant, but so far it is pretty limited and it is likely that buyers will step in before we get near ‘real’ correction levels,” he said.

Because of accelerating US economic growth. Just wait five minutes.

• Gundlach: ‘Hard To Love Bonds At Even 3%’ Yield (R.)

Jeffrey Gundlach, the chief executive of DoubleLine Capital, says “it is hard to love bonds at even 3%” yield, given the backdrop for accelerating economic growth in the U.S. “It seems the tradable buy on bonds will need a flight-to-safety bid on a wave of fear washing over risk markets,” Gundlach told Reuters late on Saturday. “Hard to love bonds at even 3% when GDPNow for Q1 2018 is suggesting annualized nominal GDP growth above 7%.” The 10-year Treasury yield hit a four-year high on Friday after the latest jobs report showed solid wage gains, effectively confirming the expected rate increase at the Federal Reserve’s next meeting in March. Friday’s selloff contributed to the broad decline in U.S. government paper within the last week as inflation fears, strong economic data and an announcement of bigger Treasury auctions drove yields higher.

The yield on the 10-year Treasury note climbed 7.9 basis points to 2.852%, the highest since January 2014. “Treasury yields have been rising at a pace above 200 basis points annualized on parts of the (yield) curve since September,” said Gundlach, known as Wall Street’s Bond King. “This is partly caused by the manic mood and partly caused by the falling dollar and related rising commodities. Rates up significantly and dollar down significantly with exploding deficits is a dangerous cocktail reminiscent of 1987.” Last month, Gundlach predicted the S&P 500 may go up 15% in the first part of the year, but “I believe, when it falls, it will wipe out the entire gain of the first part of the year with a negative sign in front of it.”

On Saturday, Gundlach said: ”What matters to success this year is understanding that we entered a mania phase in 2017 that went completely out of control after September with the Bitcoin blowoff exhibiting exactly the same lunacy as the dot com blow off back in late 1999. “Similar to that period, but even more excessive this time -who’d have thought it possible – is the explosion of bullish sentiment, with some surveys registering 96%, 97%, even 100% bullish respondents. Long Island Blockchain. Kodakcoin. Cryptokitties. Sheer madness.” Gundlach said overall, the U.S. stock market is an odds-on favorite to turn in a negative return for 2018. “Whether Friday is the start of a crash or just the first chapter in the topping process is not the issue,” he said.

Highest production in 40 years.

• Oil Rally Is Unraveling On Fears Over A Rise In US Production (BBG)

Oil’s rally is unraveling on fears over a rise in U.S. production after crude’s best January in more than a decade. Futures in New York are extending declines for a second session as Baker Hughes data showed American explorers last week raised the number of rigs drilling for crude to the highest in almost six months. Short-sellers betting against West Texas Intermediate oil increased their positions for a third week, according to figures from the U.S. Commodity Futures Trading Commission. Crude has remained above $60 a barrel this year, extending a rally driven by the extension of an output deal until the end of 2018 by OPEC and its allies. While oil’s best start to the year since 2006 was also helped by falling U.S. inventories and a weaker greenback, Citigroup says the market is underestimating U.S. output growth as a bigger surge is forecast along with an increase capital spending.

“With the higher U.S. oil rig counts and higher oil production sustaining into February, the concerns in the market seem to be valid at this point,” Barnabas Gan, an economist at Oversea-Chinese Banking Corp., said by phone from Singapore. “As these worries resurface, prices are edging lower.” [..] U.S. drillers last week added 6 rigs to raise the number of machines drilling for crude to 765, the highest since Aug. 11, Baker Hughes data showed Friday. That may lead to a further increase in U.S. crude production, which breached 10 million barrels a day to the highest level in more than four decades in November.

She starts at Bernanke’s think tank today. Good riddance.

• Yellen Says Prices ‘High’ for Stocks, Commercial Real Estate (BBG)

Outgoing Federal Reserve Chair Janet Yellen said U.S. stocks and commercial real estate prices are elevated but stopped short of saying those markets are in a bubble. “Well, I don’t want to say too high. But I do want to say high,” Yellen said on CBS’s “Sunday Morning” in an interview recorded Friday as she prepared to leave the central bank. “Price-earnings ratios are near the high end of their historical ranges.” Commercial real estate prices are now “quite high relative to rents,” Yellen said. “Now, is that a bubble or is it too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.” Yellen, 71, stepped down as Fed chief on Saturday after one term, after President Donald Trump opted to replace her with Republican Jerome Powell, who’s been a Fed governor since 2012.

“I made it clear that I would be willing to serve, so yes, I do feel a sense of disappointment” about not being renominated, Yellen said. The only woman to serve as the head of the U.S. central bank described her work at the Fed as “the core of my existence.” Yellen said she’s supportive of former investment banker Powell, 64, whom she termed “thoughtful, balanced, and dedicated to public service.” The financial system is now “much better capitalized” and the banking system “more resilient” than they were entering the global financial crisis a decade ago, Yellen said. “What we look at is, if stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole?” Yellen said. “And I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system.”

Yellen’s final act at the Fed was to hit one of the largest U.S. banks, Wells Fargo, with an unusual ban on growth that follows the lender’s pattern of consumer abuses and compliance lapses. In the interview that aired Sunday, she warned that it would be a “grave mistake” to roll back the regulations put on banks after the previous economic collapse. The current U.S. economic expansion is now approaching nine years and is the third longest in duration since 1945, according to the National Bureau of Economic Research. Yellen said the economy can continue to grow. “Yes, it can keep going,” she said. “Recoveries don’t die of old age.”

Never no holiday, Try and explain that in Europe.

• Overworked Americans Are Stuck In A Financial Groundhog Day (MW)

The U.S. had the fastest wage growth since 2009 in January. But in many other ways, American workers feel like they are working harder to achieve the same result. Does today feel a bit like yesterday, and the day before that? Feb. 2 is Groundhog Day. In the 1993 movie of the same name, Phil (Murray) wakes up at 6 a.m. only to find out that his day is actually exactly the same as the day before and the day before that. “I think people place too much emphasis on their careers,” he says. There may be a reason why that resonates with people in 2018. “Americans are doomed to relive the same reality each year: Forfeited vacation time, burnout, less time for loved ones, and negative consequences for health and well-being,” according to a report by the U.S. Travel Association’s Project Time Off. More than half of Americans (53%) are burned out and overworked, according to this survey of more than 2,000 workers by Staples Advantage, a division of office supplier Staples.

“We found that low pay and more hours is burning employees out and it causes up to half of what employees quit,” says Dan Schawbel, founder of WorkplaceTrends.com. Even so, year after year, most Americans say they are one paycheck away from the street with no emergency savings for a car repair or emergency room visit. But one reason for this exhaustion does not look like it will be changing anytime soon. Some 42% of workers took a vacation last year, according to a separate survey of more than 2,000 American adults released last year by travel site Skift using Google Consumer Surveys. (Nearly 40% only took 10 days or less.) One theory: Roughly one in four workers don’t get any paid vacation from their employers. Many are low-income workers and are the least able to afford to take an unpaid vacation day. Under the The Fair Labor Standards Act, the U.S. is also one of the few developed countries that does not require employers to provide paid time off.

At least I’m not the only one constantly saying this. Recovery is a mathematical impossibility for Greece.

• SYRIZA’s “Success Story”: Austerity By A Different Name (MintPress)

Initially, in May 2016, the Greek parliament passed a 7,500 page omnibus bill, sans any parliamentary debate, that transferred control over all of the country’s public assets to a fund controlled by the EU’s European Stability Mechanism for a period of 99 years – that is, until the year 2115. Not even Marty McFly and Doc Brown traveled that far into the future! Second, Greece’s loan commitments to the “troika” of lenders are set to continue, at the current rate of repayment, until 2059, as reported recently by the German newspaper Handelsblatt. That is the year when Greece is expected to have repaid the balance of the loans it has received, as part of its so-called “bailouts,” since 2010. The same article pointed out that the Greek government has made commitments to implement further austerity measures through 2022.

These measures — totaling €5.5 billion and agreed upon in June 2017 in what is, in essence, a fourth memorandum — include no less than 113 demands on the part of the troika, encompassing new privatizations of public assets and pension reductions. Other measures foreseen as part of this deal include a reduction in the tax- free income threshold and the further dilution of already-decimated worker rights. No increase in the also-decimated minimum wage is foreseen, nor are any new social measures to be implemented until 2023, despite Tsakalotos’ promises to the contrary. In connection with this agreement, assets slated for privatization include such strategic holdings as 25% of Eleftherios Venizelos International Airport in Athens, the remaining regional airports that have not already been privatized, Greece’s national defense industry, and the Corinth Canal.

Third, the SYRIZA-led coalition government has committed to the maintenance of annual primary budget surpluses of 3.5% through 2023, and then 2% annually through 2060. In plain language, what this means is that the state will spend less than it earns in revenues. If revenues therefore decrease, expenditures will be slashed accordingly. And, as foreseen in the 2017 deal between the Greek government and the troika, should there be shortfalls in these fiscal targets, automatic budget and spending cuts are to be immediately implemented through at least 2022. Here it should be noted that the net revenues of the Greek state declined in 2017, falling to €51.27 billion from €54.16 billion in 2016, leading in turn to a reduction in the pre-tax primary budget surplus from €2.78 billion to €1.97 billion. With state expenditures having reached €55.51 billion, Greece now faces a post-interest deficit of €4.24 billion, resulting in an increase in the country’s public debt.

WHy do people never get smallpox and measles at the same time?

• The Beautiful Cure – Immunology And The Heroes Of The Resistance (G.)

In 1989, Charles Janeway, a scientist at Yale University, had an epiphany that would revolutionise immunology. For 50 years, immunologists had subscribed to the dogma that vaccines worked by training the body to recognise molecules that were foreign to the body – “non-self” in immunological jargon. The usual way of doing this was to use vaccines to expose people to a dead or harmless version of a microbe, prompting the activation of antibodies that would be ready to swamp the germ should they encounter the alien entity a second time. But there were exceptions to the rule: sometimes, proteins separated from originating germs proved ineffective as vaccines; at other times, vaccines required the addition of an adjuvant, such as aluminium, to kickstart an immune response and no one could explain why.

What if, wondered Janeway, the presence of something that had never been in your body before was not sufficient to trigger an immune reaction? What if a second signal was required? Today, that second something is known as a pattern-recognition receptor and it is understood that there are countless varieties of them, each equipped to detect specific types of germs and switch on the appropriate immune responses. Together with an alphabet soup of other specialised cells, hormones and proteins, they form part of our innate immune system, helping us to distinguish harmful bacteria and viruses from beneficial ones, such as gut microbes essential for digestion. For Daniel Davis, professor of immunology at the University of Manchester, they constitute a “beautiful cure” more powerful than any product of a pharmaceutical laboratory.

Yet it is only in the past 30 years that immunologists such as Davis and Janeway, who died in 2003, have begun to shed light on these “wonders taking place beneath the skin”. In the process, they have found new ways to treat cancer, diabetes, arthritis and other age-related diseases. Immunologists are even beginning to understand the way in which immune responses are dependent on emotional and psychological states and the role that stress and exposure to light play in fighting disease. Given this, you would have thought that research into the workings of the immune system would be a top scientific priority. But while billions have been poured into the pursuit of the Higgs boson, immunology lacks a similar programmatic call-to-arms. Instead, Davis argues, immunology has always been a curiosity-driven science, a matter of “a few individuals following their nose”.

Filter feeders. The big boys and girls. Meaning: they ingest lots of plastic.

• Whale And Shark Species At Increasing Risk From Microplastic Pollution (G.)

Large filter feeders, such as baleen whales and basking sharks, could be particularly at risk from ingesting the tiny plastic particles, say scientists Whales, some sharks and other marine species such as rays are increasingly at risk from microplastics in the oceans, a new study suggests. Species such as baleen whales and basking sharks, which feed through filtering seawater for plankton, are ingesting the tiny particles of indigestible plastic which now appear to permeate oceans throughout the world. Some of these species have evolved to swallow hundreds or even thousands of cubic metres of seawater a day, but taking in microplastic can block their ability to absorb nutrients, and may have toxic side-effects. The new study, published in the journal Trends in Ecology and Evolution, advises more research on the megafauna of the oceans, as the effects of microplastics on them is currently not well understood.

Scientists have found, for instance through examining the bodies of beached whales, large pieces of plastic in the guts of such creatures, but the effect of microplastics, though less obvious, may be just as harmful. Elitza Germanov, a researcher at the Marine Megafauna Foundation and co-author the study, said: “Despite the growing research on microplastics in the marine environment, there are only a few studies that examine the effects on large filter feeders. We are still trying to understand the magnitude of the issue. It has become clear, though, that microplastic contamination has the potential to further reduce the population numbers of these species, many of which are long-lived and have few offspring throughout their lives.” Many species of whale, filter-feeding shark and rays are already under threat from other problems, such as overfishing and pollution. The added stress from microplastics could push some species further towards extinction, the authors of the study warned.

Debt Rattle August 2 2017

Aug 022017

August 2, 2017 Posted by Raúl Ilargi Meijer at 9:04 am Finance Tagged with: bees, China, Fannie Mae, Monsanto, reactor, sanctions, slump, turtle, union, unmasking 1 Response »

Stanley Kubrick Men’s fashion show, New York 1948

• New Rule Makes It Easier To Get A Mortgage With Student Loan Debt (F.)

• US Auto Market Slump Persists (BBG)

• US Plans Trade Measures Against China (WSJ)

• US Begins Russia Drawdown After Kremlin Retaliates For Sanctions (R.)

• Former Obama Aide Rhodes A Person Of Interest In Unmasking Investigation (C.)

• For Sale: Two Half-Finished Nuclear Reactors -Never Used- (BBG)

• Nissan Runs One Of ‘Nastiest Anti-Union Campaigns’ In Modern US History (G.)

• Monsanto’s Sway Over Research Is Seen in Disclosed Emails (NYT)

• Pesticide ‘Drifting’ Wreaks Havoc Across US Crops (BBG)

• Bees Are Bouncing Back From Colony Collapse Disorder – A Little (BBG)

• 8 Migrants Dead Off Libya, 500 Rescued As Italy Prepares Naval Mission (AFP)

• EasyJet Passengers Left High And Dry In Greece Due to Mating Turtles (G.)

Desperately mining for a new generation of greater fools. Courtesy of government-owned Fannie Mae. What a world.

• New Rule Makes It Easier To Get A Mortgage With Student Loan Debt (F.)

For millions of Americans drowning in student loan debt, the prospect of getting a mortgage might seem out of reach. Last week, Fannie Mae changed underwriting rules that could make it much easier for people with student loan debt to qualify for a mortgage. The new rule impacts people with federal student loan debt who are currently on an income-driven repayment program. An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based upon your income and family size. Depending upon the plan, your monthly payment could be capped as low as 10% of your discretionary income. And if your discretionary income is low enough, your monthly payment could be as low as $0.

In order to qualify for a mortgage, a borrower needs to meet certain debt-to-income (DTI) requirements. That seems simple enough. However, there was confusion regarding federal student loan debt on an income-driven repayment program. When calculating a debt burden, should the underwriter include the standard student loan payment, the reduced payment, or something in between? The new statement from Fannie Mae makes it clear: the reduced payment can be used, even when the payment is $0. According to Fannie Mae, “if the lender obtains documentation to evidence the actual monthly payment is $0, the lender may qualify the borrower with the $0 payment as long as the $0 payment is associated with an income-driven repayment plan.”

This is important, because the payment calculation for a student loan (10% of the discretionary income) is different from the DTI requirement of a mortgage. Many Americans could find it easier to qualify for a mortgage while in student loan debt. Michigan-based mortgage broker Cassandra Evers told MagnifyMoney that the changes “allow a lot more borrowers to qualify for a home.” Previously, there was a lot of confusion among borrowers, lenders, and brokers, Evers said. “[The rules have] changed at least five or six times in the last five years.”

“You can’t jawbone the economy..”

• US Auto Market Slump Persists (BBG)

Here’s a bad sign for the U.S. economy: Auto sales just fell the most since August 2010, a year after the federal government’s “Cash for Clunkers” program to stimulate demand came to an end. Sales at General Motors plunged 15% in its home market in July, the biggest drop in more than a year. Its Detroit rivals didn’t fare much better: Ford reported its biggest sales decline since October and Fiat Chrysler had its second worst tumble this year. The disappointing showing underscores how Detroit has been struggling to live up to President Donald Trump’s prediction that it would become “the car capital of the world again.” The hometown automakers are instead laying off U.S. workers, particularly those who build passenger cars that have fallen out of favor with American consumers.

A demand slump has rendered spending on vehicles and parts a drag on U.S. economic growth, after years of contributing to expansion. “You can’t jawbone the economy,” said Diane Swonk, CEO and founder of DS Economics. “The auto industry was stronger than the rest of the economy for a while because they were giving credit to people who couldn’t pay loans. Sales crested sooner and now they are paying the price.” The traditional U.S. automakers each missed projections for declines that analysts gave in a Bloomberg News survey. While Nissan and Honda both beat projections, only Toyota posted a gain. Industrywide deliveries fell 7%, the steepest drop since the anniversary of “Cash for Clunkers,” a program that inflated U.S. sales in August 2009 as buyers traded in for more fuel-efficient wheels. The annualized pace of light-vehicle sales, adjusted for seasonal trends, slowed to 16.7 million in July, according to Autodata Corp., from 17.8 million a year earlier.

China is not liking this.

• US Plans Trade Measures Against China (WSJ)

The Trump administration is planning trade measures to force Beijing to crack down on intellectual-property theft and ease requirements that American companies share advanced technologies to gain entry to the Chinese market. The administration is considering invoking a little-used provision of U.S. trade law to investigate whether China’s intellectual-property policies constitute “unfair trade practices,” according to people familiar with the matter. That would pave the way for the U.S. to impose sanctions on Chinese exporters or to further restrict the transfer of advanced technology to Chinese firms or to U.S.-China joint ventures. American business frustration with Chinese trade and market-access practices has mounted in recent years, with U.S. business groups urging the government to take a tougher trade line with China.

Many organizations have complained that the Trump administration hasn’t pushed hard enough in areas like intellectual property, as it has focused more on Chinese manufacturing and China’s $347 billion trade surplus with the U.S. last year. That discontent has intensified as China’s economy continued to expand and its computer and software sectors became bigger competitors internationally. Western firms fear China will use the regulations to bar foreign investments in areas that Beijing targets for investment, including semiconductors, advanced-machine tools and artificial intelligence. One big question hanging over the White House review is whether the administration pursues any complaint through the World Trade Organization, or whether it chooses to impose penalties on its own without first seeking permission from the international body, which some Trump advisers have argued is incapable of dealing with China’s trade practices.

Has Trump even signed the new sanctions yet?

• US Begins Russia Drawdown After Kremlin Retaliates For Sanctions (R.)

The United States began removing furniture and equipment from a diplomatic property in Moscow on Tuesday in the first sign of compliance with a Kremlin order to slash its presence in Russia as retaliation for new U.S. sanctions. President Vladimir Putin has ordered the United States to cut around 60% of its diplomatic staff in Russia by Sept. 1, and said Moscow will seize two U.S. diplomatic properties in response to sanctions approved by Congress last week. The White House has said U.S. President Donald Trump will sign the sanctions bill, meant as a response to alleged Russian meddling in the 2016 U.S. presidential election and to further punish Moscow for its 2014 annexation of Crimea from Ukraine.

On Tuesday, removal men began dismantling play equipment and barbecues at a U.S.-owned dacha (country villa) on the outskirts of Moscow, after being refused access the day before, according to a Reuters journalist at the scene. The dacha, which is being confiscated along with a U.S. warehouse in the south of the Russian capital, was used by U.S. diplomatic staff at the weekends and to host parties for students, journalists and other diplomats. [..] The ultimatum issued by the Russian leader is a display to voters at home that he is prepared to stand up to Washington – but is also carefully calibrated to avoid directly affecting the U.S. investment he needs, or burning his bridges with Trump. One person at the embassy, who spoke on condition of anonymity because they are not authorized to talk to the media, said staff there were feeling depressed and despondent as they came to terms with the Kremlin’s order. “The mood in the office is very pessimistic,” the person said. “Everyone is just loitering, or sitting on job websites looking for a new job.”

Strange things were taking place.

• Former Obama Aide Rhodes A Person Of Interest In Unmasking Investigation (C.)

Former Obama White House National Security Adviser Ben Rhodes is now an emerging as a person of interest in the House Intelligence Committee’s unmasking investigation, according to a letter sent Tuesday by the committee to the National Security Agency (NSA). This adds Rhodes to the growing list of top Obama government officials who may have improperly unmasked Americans in communications intercepted overseas by the NSA, Circa has confirmed. The House Intelligence Committee Chairman Devin Nunes, R-CA, sent the letter to the National Security Agency requesting the number of unmaskings made by Rhodes from Jan. 1, 2016 to Jan. 20, 2017, according to congressional sources who spoke with Circa.

Rhodes, who worked closely with former National Security Adviser Susan Rice and was a former deputy national security adviser for strategic communications for President Obama, became a focus of the committee during its review of classified information to assess whether laws were broken regarding NSA intercepted communications of President Trump, members of his administration and other Americans before and after the election, according to congressional officials. The committee is requesting that the NSA deliver the information on Rhodes by August, 21. Former U.S. Ambassador to the United Nations Samantha Power, Rice and former CIA Director John Brennan have all been named in the House Intelligence Committee’s investigation into the unmasking of Americans.

A letter sent last week from Nunes to Dan Coats, the director of National Intelligence, suggested that top Obama aides made hundreds of unmasking requests during the 2016 presidential elections. The story, which was first reported by The Hill last week, stated that the requests were made without specific justifications as to why the unmasking was necessary. Rice and Brennan have confirmed they sought the unredacted names of Americans in NSA-sourced intelligence reports but insisted their requests were routine parts of their work and had no nefarious intentions. Power also has legal authority to unmask officials, though the practice has not reportedly been common for someone in her position. Rhodes also had legal authority to unmask Americans in NSA-source intelligence reports. But intelligence and congressional sources question the extent of the unmasking.

Testament to insanity and waste.

• For Sale: Two Half-Finished Nuclear Reactors -Never Used- (BBG)

Looking to buy two half-finished nuclear reactors? It may be your lucky day. U.S. utility owner Scana Corp. dropped a plan to build two reactors at the V.C. Summer power plant in South Carolina on Monday after the projected total costs exceeded $20 billion. The cancelation of the project is another blow to the much-hyped (and thus far non-existent) nuclear renaissance in the U.S. As cheap natural gas squeezes the margins of nuclear generators, there’s only one company currently building reactors in the country — Southern Co., at its Vogtle plant in Georgia. So what’s a utility to do with two unfinished nukes laying around in South Carolina? Scana CEO Kevin Marsh said in a call with analysts that he wants to keep the equipment in operating condition in case someone in China, India or the U.K. wants to buy it.

A sale like that is easier said than done. “The Chinese are developing a competitive product, the Brits are in trouble with their nuclear projects and the Indians want to develop their own supply chain,” said Chris Gadomski, a nuclear industry analyst for Bloomberg New Energy Finance. It’s more likely the South Carolina project is “mothballed,” he said. Reactors have found new buyers and new life in the past. In 2016, the Tennessee Valley Authority turned on its Watts Bar 2 reactor after work had been suspended in 1985. Franklin L. Haney bought an unfinished, decades-old nuclear plant in northern Alabama at an auction last November for $111 million. The Bellefonte plant came with two partially built nuclear reactors, one that’s about 55% complete and another about 35% finished.

Haney still has to get the mothballed station into working order, find customers for its power and qualify for a federal nuclear production tax credit. Perhaps a similar fate awaits the V.C. Summer plant. “It makes more sense to let them sit in place, maintain them, and see if they can be revisited,” Gadomski said.

What, there are still unions?

• Nissan Runs One Of ‘Nastiest Anti-Union Campaigns’ In Modern US History (G.)

Days before a potentially historic union vote at the Nissan plant in Canton, Mississippi, the car company has been accused of running one of the “nastiest anti-union campaigns in the modern history of the American labour movement”. The vote, a fiercely contested effort by the United Auto Workers (UAW) union to represent a foreign automaker’s US plant, is planned for Thursday and Friday this week. It comes as US unions are hopeful they can overturn a series of defeats as they seek to build membership in southern states, where manufacturers have moved to take advantage of lower wages and non-union workforces. In the closing days of the campaign, which has attracted support from the former presidential hopeful Bernie Sanders, UAW officials and their allies have become increasingly confident of victory even as managers have pressured workers to vote no.

“People are rallying,” says Frank Figgers, co-chair of the Mississippi Alliance for Fairness at Nissan. The UAW is undertaking an extensive door-to-door campaign to visit workers in their homes to discuss the union. The UAW has shipped in staff from all over the country to help in the effort. Other unions from around the south have shipped in organizers from across the country to assist in the outreach to the plant’s nearly 4,000 workers. Nissan has responded with fierce opposition. The company has blitzed local TV with anti-union ads and stands accused of both threatening and bribing workers to vote no. It requires workers to regularly attend anti-union roundtable group meetings as well as one-on-one meetings with their direct supervisors, some of whom have worn “vote no” T-shirts to work. The Republican governor, Phil Bryant, has also come out hard for Nissan. “If you want to take away your job, if you want to end manufacturing as we know it in Mississippi, just start expanding unions,” Bryant said last week.

Evil incorporated.

• Monsanto’s Sway Over Research Is Seen in Disclosed Emails (NYT)

Documents released Tuesday in a lawsuit against Monsanto raised new questions about the company’s efforts to influence the news media and scientific research and revealed internal debate over the safety of its highest-profile product, the weed killer Roundup. The active ingredient in Roundup, glyphosate, is the most common weed killer in the world and is used by farmers on row crops and by home gardeners. While Roundup’s relative safety has been upheld by most regulators, a case in federal court in San Francisco continues to raise questions about the company’s practices and the product itself. The documents underscore the lengths to which the agrochemical company goes to protect its image. Documents show that Henry I. Miller, an academic and a vocal proponent of genetically modified crops, asked Monsanto to draft an article for him that largely mirrored one that appeared under his name on Forbes’s website in 2015.

A similar issue appeared in academic research. An academic involved in writing research funded by Monsanto, John Acquavella, a former Monsanto employee, appeared to express discomfort with the process, writing in a 2015 email to a Monsanto executive, “I can’t be part of deceptive authorship on a presentation or publication.” He also said of the way the company was trying to present the authorship: “We call that ghost writing and it is unethical.” A Monsanto official said the comments were the result of “a complete misunderstanding” that had been “worked out,” while Mr. Acquavella said in an email on Tuesday that “there was no ghostwriting” and that his comments had been related to an early draft and a question over authorship that was resolved. The documents also show internal talk about Roundup’s safety.

“If somebody came to me and said they wanted to test Roundup I know how I would react — with serious concern,” one Monsanto scientist wrote in an internal email in 2001. Monsanto said it was outraged by the documents’ release by a law firm involved in the litigation. “There is a standing confidentiality order that they violated,” said Scott Partridge, vice president of global strategy for Monsanto. He said that while “you can’t unring a bell,” Monsanto would seek penalties on the firm. “What you’re seeing are some cherry-picked things that can be made to look bad,” Mr. Partridge said. “But the substance and the science are not affected by this.”

How does a farmer protect himself from Monsanto, DuPont and BASF?

• Pesticide ‘Drifting’ Wreaks Havoc Across US Crops (BBG)

Larry Martin in Illinois says he’s never seen anything like it in his 35 years of farming. Arkansas soybean grower Joe McLemore says he faces the loss of his life savings. They’re among farmers across the U.S. suffering from a pesticide “drifting” across from neighboring fields onto their crops, leaving behind a trail of damage. Although not a new problem, it’s re-emerged with a vengeance this year. At least 2.5 million acres (1 million hectares) have been damaged in this growing season through mid-July, according to estimates from Kevin Bradley, a professor of plant sciences at the University of Missouri. Dicamba, the offending herbicide, is produced by seed and crop-chemical giants Monsanto, DuPont and BASF.

It’s been around for decades, but in recent years it gained a new lease of life after the companies developed new dicamba-resistant soybean and cotton seeds, allowing farmers to spray crops later in the growing process. Dicamba is fine if you’re growing those genetically modified varieties, but not if you’re cultivating others and the chemical wafts over from another farm. The situation is so bad that states including Missouri, Arkansas, and Tennessee have placed restrictions on dicamba use at various times during the summer. Martin, a third-generation farmer, says an 80-acre soybean field of his has been damaged by dicamba. McLemore, who started out on his own eight years ago, after two decades working on someone else’s farm, says 800 of his 1,026 acres of soybeans have suffered damage.

3%? That’s hardly ‘bouncing back’.

• Bees Are Bouncing Back From Colony Collapse Disorder – A Little (BBG)

The number of U.S. honeybees, a critical component in the agriculture industry, rose in 2017 from a year earlier, and deaths of the insects attributed to a mysterious malady that’s affected hives in North America and Europe declined, according a U.S. Department of Agriculture honeybee health survey released Tuesday. The number of commercial U.S. honeybee colonies rose 3% to 2.89 million as of April 1, 2017 compared with a year earlier, the Agriculture Department reported. The number of hives lost to Colony Collapse Disorder, a phenomenon of disappearing bees that has raised concerns among farmers and scientists for a decade, was 84,430 in this year’s first quarter, down 27% from a year earlier. Year-over-year losses declined by the same%age in April through June, the most recent data in the survey.

Still, more than two-fifths of beekeepers said mites were harming their hives, and with pesticides and other factors still stressing bees, the overall increase is largely the result of constant replenishment of losses, the study showed. “You create new hives by breaking up your stronger hives, which just makes them weaker,” said Tim May, a beekeeper in Harvard, Illinois and the vice-president of the American Beekeeping Federation based in Atlanta. “We check for mites, we keep our bees well-fed, we communicate with farmers so they don’t spray pesticides when our hives are vulnerable. I don’t know what else we can do.” Environmental groups have expressed alarm over the 90% decline during the past two decades in the population of pollinators, from wild bees to Monarch butterflies. Some point to a class of pesticides called neonicotinoids as a possible cause, a link rejected by Bayer AG and other manufacturers.

In the USDA study, beekeepers who owned at least five colonies, or hives, reported the most losses from the varroa mite, a parasite that lives only in beehives and survives by sucking insect blood. The scourge, present in the U.S. since 1987, was reported in 42% of commercial hives between April and June this year, according to the USDA. That’s down from 53% in the same period one year earlier. Among other factors, beekeepers said 13% of colonies in the second quarter of this year were stressed by pesticides, 12% by mites and pests other than varroa and 4.3 by diseases. Bad weather, starvation, insufficient forage and other reasons were listed as problems with 6.6% of hives.

What does it mean to be human?

• 8 Migrants Dead Off Libya, 500 Rescued As Italy Prepares Naval Mission (AFP)

The bodies of eight migrants have been found at sea off the coast of Libya by rescuers coming to the aid of four rubber dinghies, the Italian coast guard said Tuesday. Some 500 survivors were pulled to safety, the coast guard told AFP, illustrating the huge challenge that continues to bedevil authorities as people try to reach Europe. The latest deaths came as the Italian government presented plans for a naval mission in Libyan territorial waters that aims to reduce the flow of migrants from the coast. Spanish NGO Proactiva Open Arms, which was taking part in the rescues, said the corpses were recovered by the Santa Lucia merchant ship.

“We are here to stop more people drowning, today eight dead and four drifting boats” in distress, Proactiva’s founder, Oscar Champs, said on Twitter. The charity said there were 79 women and 39 minors — including four young children — among those rescued. Nearly 95,000 people have been brought to safety in Italy this year, a rise of 1% on the same period last year, according to the interior ministry. The government intends to send a logistics ship that could support Libyan units and will also offer a patrol boat, Italian Defense Minister Roberta Pinotti told lawmakers on Tuesday. However, Italy has no intention to create a naval blockade, which would be a “hostile act,” she said, insisting that support for the Libyan mission was the aim and cooperation was necessary.

If you read between the whining, what a lovely story. Night curfew because turtles are important. Perhaps that’s what it means to be human.

• EasyJet Passengers Left High And Dry In Greece Due to Mating Turtles (G.)

Scores of easyJet passengers were stranded on the Greek island of Zakynthos (also known as Zante) after their plane developed technical difficulties and a replacement aircraft was prevented from flying in because of mating turtles. [..] The airline said the night curfew – apparently in place because of vulnerable loggerhead turtles breeding nearby – had prevented an alternative aircraft being sent out. The sea turtle breeding season is well under way in Zakynthos. According to Archelon, a group dedicated in protecting sea turtles in Greece, late June to early July see the highest levels of spawning. The group has recorded 500 nests on the island so far, but that is fewer than in previous years.

Debt Rattle November 8 2016

Nov 082016

November 8, 2016 Posted by Raúl Ilargi Meijer at 10:32 am Finance Tagged with: cash, debt slave, exports, hedges, Hillary, refugees, Robber Barons, slump, Trump, upset 1 Response »

DPC Engineer at his post, Michigan Central RR 1904

• US Stocks Have Best Day Since March On Clinton Relief Rally (MW)

• Investors Aren’t Ready to Dump Their Trump-Upset Hedges (BBG)

• Options Price In One of Biggest Stock Moves on Record for US Election (BBG)

• Vote As If Your Life Depended On It… Because It Does (Zuesse)

• What’s Driving The Recent Slump In US Imports? (WS)

• Portrait of the American Debt Slave, as of Q3 (WS)

• China’s Exports -7.3%, Imports -1.4%, on ‘Tepid Global Demand’ (BBG)

• China’s Investors Get Creative About Capital Controls (BBG)

• Yuan Heads Toward Six-Year Low as Capital Outflows Fuel Weakness (BBG)

• Cash Is Still King in Japan, and That is a Problem for the BOJ

• In “Seismic Shift”, Saudis Halt Egypt Oil Supplies As Cairo Turns To Iran (ZH)

• Tesco Bank Freezes Transactions After Cash Stolen From 20,000 Accounts (G.)

• Australia Returns To The Gilded Age Of Rent-Seekers And Robber Barons (RR.)

• Winter is Coming for Refugees in Greece (HRW)

T’was the day before Brexit…

• US Stocks Have Best Day Since March On Clinton Relief Rally (MW)

U.S. stocks on Monday had their best day since March on a%age basis after the Federal Bureau of Investigation said its review of a new batch of Democratic presidential nominee Hillary Clinton’s emails won’t lead to charges. Gains were broad, with the Dow Jones Industrial Average reclaiming the key 18,000 level and the S&P 500 snapping its nine-day losing streak, the longest since 1980. The slide had been attributed partly to polls showing a closer contest between Clinton and Republican rival Donald Trump. The Dow Jones Industrial Average soared 371.32 points, or 2.1%, to close at 18,259.60. The Dow’s rally marks its best session before a presidential election since Nov. 7, 1932, when the blue chip index rose 3.5%, according to Dow Jones data.

The S&P 500 index rose 46.34 points, or 2.2%, to finish at 2,131.52. The Nasdaq Composite climbed 119.80 points, or 2.4%, to end at 5,166.17. FBI Director James Comey informed lawmakers on Sunday that there were no new findings in the additional emails discovered on the computer of former Rep. Anthony Weiner, whose estranged wife is Clinton aide Huma Abedin. News that the FBI had discovered the new batch of emails just over a week ago jolted the presidential election race, taking a toll on Clinton’s lead in polls. “The rally is all about Clinton having a better chance of winning, though I don’t think the market is celebrating her policies so much as reflecting how markets, like many Americans, are fearful of the unknown that comes with Trump,” said James Meyer, CIO at Tower Bridge Advisors.

As Reuters/IPSOS reports a 90% chance of a Hillary victory.

• Investors Aren’t Ready to Dump Their Trump-Upset Hedges (BBG)

Some of the biggest investors are holding tight to their hedges against market swings should Donald Trump be elected U.S. president, even after the FBI absolved Hillary Clinton a second time of committing a crime. Millennium Global Investments is sticking to its view that the Republican candidate still has a 35% chance of winning the vote Tuesday. Old Mutual Global Investors says it’s keeping its protection as prospects of a surprise victory by the political novice can’t be ruled out. Janus Capital International echoes that view. Together they manage more than $500 billion. Polls still show a tight race hours after the FBI said it adhered to an earlier finding that absolved Clinton of crime in handling e-mails as secretary of state.

While that signaled a boost for her to become the first female president, investors continue to hark to the scenario of the U.K. Brexit referendum in June, saying they’re focused on not getting burned by underestimating a resurgent underdog vote. “I’m not sure if this is a game changer,” said Richard Benson, a London-based money manager at Millennium Global. “I haven’t changed my positions because of this new development. It may halt the Trump momentum that had seen a sharp narrowing of the polls. The issue now is how many quiet Trump supporters are out there.” Benson declined to reveal details of his stakes, saying he has “a number of good/risk reward positions with limited downside established,” to hedge the election outcome.

But today everyone seems to think they already know?!

• Options Price In One of Biggest Stock Moves on Record for US Election (BBG)

Get ready for some volatility. With polls opening nationwide in less than 24 hours, Wall Street is trying to grapple with what different election outcomes would mean for markets across the globe. If options markets are correct, the S&P 500 could move 3.7%, or roughly 80 points, the day after the election. “Implied volatilities surged across asset classes last week as investors grappled with the increasing probability of a Trump presidency,” Mandy Xu of Credit Suisse wrote in a note the day before the election. “S&P 500 Nov 7th vs. 9th options are implying a 3.7% one-day move for the election, which if realized, would be the 3rd-largest move on record in the past 70 years.”

A range of different assets have betrayed sensitivity to the odds of a Republican victory. The Mexican peso, for instance, surged on the recent news that the FBI is sticking to its prior conclusion that Hillary Clinton’s handling of her e-mails as Secretary of State did not involve any criminal action. Other areas to watch are U.S. Treasuries, the U.S. dollar, and emerging-market stocks. Of course, there is reason to believe that these reactions will be short-lived. While the S&P 500 typically swings 1.5% the day after the vote, gains or losses over the first 24 hours predict the market’s direction 12 months later less than half the time, according to Bloomberg data.

“The CIA has been trying ever since 1949 to overthrow Syria’s Ba’athist government – the only remaining non-sectarian government in the Middle East other than the current Egyptian government.”

• Vote As If Your Life Depended On It… Because It Does (Zuesse)

Hillary has repeatedly said: “We should also work with the coalition and the neighbors to impose no-fly zones that will stop Assad from slaughtering civilians and the opposition from the air. Opposition forces on the ground, with material support from the coalition, could then help create safe areas where Syrians could remain in the country, rather than fleeing toward Europe.” This would mean that U.S. fighter-jets and missiles would be shooting down the fighter-jets and missiles of the Syrian government over Syria, and would also be shooting down those of Russia. The Syrian government invited Russia in, as its protector; the U.S. is no protector but an invader against Syria’s legitimate government, the Ba’athist government, led by Bashar al-Assad.

The CIA has been trying ever since 1949 to overthrow Syria’s Ba’athist government – the only remaining non-sectarian government in the Middle East other than the current Egyptian government. The U.S. supports Jihadists who demand Sharia law, and they are trying to overthrow and replace Syria’s institutionally secular government. For the U.S. to impose a no-fly zone anywhere in Syria would mean that the U.S. would be at war against Russia over Syria’s skies. Whichever side loses that conventional air-war would then have to choose whether to surrender, or instead to use nuclear weapons against the other side’s homeland, in order for it to avoid surrendering. That’s nuclear war between Russia and the United States. Would Putin surrender? Would Hillary? Would neither? If neither does, then nuclear war will be the result.

Let me think. Putin?

• What’s Driving The Recent Slump In US Imports? (WS)

The dollar has strengthened against other currencies since mid-2014 as the Fed was tapering QE Infinity out of existence, and as it began flip-flopping about rate increases. Dollar strength should have done two things in terms of international trade: 1) Weaken exports as US goods would become less competitive for buyers using other currencies; 2) Strengthen imports as imported goods would be cheaper compared to US-made goods. The first has happened. But the second has not happened: Imports have been in a down-trend since mid-2015. This is something that should not happen when the dollar is strong, and it has flummoxed the folks at the New York Fed’s Liberty Street Economics: “The growth in US imports of goods has been stubbornly low since the second quarter of 2015, with an average annual growth rate of 0.7%. Growth has been even weaker for non-oil imports, which have increased at an average annual rate of only 0.1%.”

So oil imports cannot be blamed. This is in sharp contrast to the pattern in the five quarters preceding the second quarter of 2015, when real [inflation adjusted] non-oil imports were growing at an annualized rate of 8% per quarter. The timing of the weakness in import growth is particularly puzzling in light of the strong US dollar, which appreciated 12% in 2015, lowering the price of imported goods relative to domestically produced goods. The “recent slump” in imports of non-oil goods becomes clear in this chart that shows imports as a ratio of GDP, adjusted for inflation. The ratio of non-oil imports = red line; the ratio of total goods imports (including oil) = blue line:

[..] Imports of capital goods are “very highly correlated” with investment by businesses in equipment. Alas: “Equipment investment has been unusually weak, with its four-quarter%age change falling into negative territory, which is unusual outside a recession period. These data suggest that the slowdown in import growth likely stems from whatever is behind the weakness in equipment, rather than from trade-specific factors such as trade policies or higher trade costs.” This chart shows the deterioration of imports of capital goods and equipment, adjusted for inflation. Note how the declines in the prior two cycles were followed by recessions:

The poisoned chalice inherited by the new president.

• Portrait of the American Debt Slave, as of Q3 (WS)

Consumer debt rose by $19.3 billion in September to $3.71 trillion, another record in a five-year series of records, the Federal Reserve’s Board of Governors reported on Monday. Consumer debt is up 6% from a year ago, at a time when wages are barely creeping up and when consumer spending rose only 2.4% over the same period. This follows the elegant principle of borrowing ever more to produce smaller and smaller gains in spending and economic growth. Which is a highly sustainable economic model with enormous future potential, according to the Fed. Consumer debt – the Fed uses “consumer credit,” which is the same thing but sounds a lot less onerous – includes student loans, auto loans, and revolving credit, such as credit cards and lines of credit. But it does not include mortgages. And that borrowing binge looks like this:

Diving into the components, so to speak: outstanding balances of new and used vehicle loans and leases jumped by $22.6 billion from Q2 to $1.098 trillion, another record in an uninterrupted four-year series of records. They’ve soared 38% from Q3 2012, the time when auto loans regained the glory levels from before the Financial Crisis:

Then to the next-generation debt slaves, many of whom might not even know yet what that term means since they haven’t started to make payments on it. Total student loans, owned by the US government and by private-sector lenders, were $1.396 trillion at the end of September. The portion owned by private-sector lenders fell during the third quarter by $4.8 billion to $357.6 billion, as they’re pulling back from this business. But student loans owned by the government jumped by $14.2 billion in September alone, and by $37.5 billion in Q3, to a new record of $1.039 trillion. So here’s what’s coming at these hapless debtors:

All you need to know about world trade.

• China’s Exports -7.3%, Imports -1.4%, on ‘Tepid Global Demand’ (BBG)

China’s exports fell for a seventh month, leaving policy makers reliant on domestic growth engines to hit their economic expansion goals. Overseas shipments dropped 7.3% from a year earlier in October in dollar terms. Imports slipped 1.4%. Trade surplus widened to $49.1 billion. A depreciation of about 9% in the yuan since August 2015 has cushioned the blow from tepid global demand, but failed to give shipments a sustained boost. Rising input costs and surging wages have flattened exporter profit margins to the point where many can no longer discount and may raise prices, according to interviews at the Canton Fair last month. With global demand tepid, policy makers are relying on infrastructure investment and a property led pick up in local demand to reach their expansion goal of at least 6.5% this year.

“External demand remains sluggish across the board,” said Julia Wang, an economist at HSBC in Hong Kong. “On the import side, commodities demand is still holding up well, suggesting that domestic infrastructure investment likely remains strong.” “Trade’s contribution to China’s economy is now diminishing as the economy increasingly depends on domestic demand,” said Zhu Qibing, chief macro economy analyst at BOCI International (China) in Beijing. “With both global and domestic growth unlikely to accelerate much further, the medium-term outlook for Chinese trade remains challenging,” said Julian Evans-Pritchard, an economist at Capital Economics in Singapore. “The ongoing cyclical rebound in China’s economy should support imports for another quarter or two but is unlikely to last.” Exports to U.S. slipped 5.6% in October and fell 8.7% to EU. Imports from U.S. fell 6.9%.

Is Beijing just going through the motions of stopping this?

• China’s Investors Get Creative About Capital Controls (BBG)

China’s policy makers are playing catch-up as investors get more creative in evading capital controls. The authorities are taking a series of steps to plug loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country, as well as a statement from UnionPay Co. limiting mainlanders from using its cards to buy insurance in Hong Kong. These add to more traditional measures, including an order seen as asking mainland banks to reduce foreign-exchange sales. These measures, all reported in the past two weeks, follow a period during which Chinese officials and state media stepped up efforts to talk up the yuan even as the currency fell to six-year lows at home and overseas.

While the exchange rate received some relief last week as the dollar dropped on concern over the U.S. presidential election, the onshore yuan is still down about 4.2% for the year in Asia’s worst performance. The nation’s foreign-exchange reserves plunged $45.7 billion in October, the most since January, according to data released Monday. “The People’s Bank of China is doing this now because data show capital outflow pressures remain significant and there are no signs of a reversal,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “It looks like the government will block outflow channels as and when they find them. This will slow the yuan’s internationalization and discourage foreign investment due to concern money will get locked up once invested.”

The yuan’s accelerated declines – it fell 1.53% last month in the biggest drop since a surprise devaluation in August last year – have worsened outflow pressures. This has prompted investors to find innovative ways to move their wealth overseas by bypassing a range of curbs set in place after the devaluation. A record $44.7 billion left the nation in September in yuan payments rather than in foreign exchange, official data show. Also, regulators have recently noticed that some investors bought bitcoins on local exchanges and sold them offshore, evading rules on foreign exchange and cross-border fund flows, according to people familiar with the matter.

Mainland investors have flocked to Hong Kong to buy insurance policies, which offer a way to skirt money controls. A Bloomberg News report in March this year cited an example from Hong Kong insurance agent Raymond Ng, who said he swiped the credit cards of a mainland Chinese client 800 times for the purchase of HK$28 million ($3.6 million) of insurance policies. Chinese firms have also accelerated overseas acquisitions, with spending on international acquisitions and investments reaching $222.8 billion so far this year, more than double last year’s amount.

The fall gets dramatic. And still exports fall.

• Yuan Heads Toward Six-Year Low as Capital Outflows Fuel Weakness (BBG)

The yuan weakened toward its lowest level in six years as the greenback strengthened and the government struggled to plug loopholes in capital controls. The exchange rate fell 0.03% to 6.7788 per dollar at 12:04 p.m. local time, extending a 0.3% slump on Monday that was the biggest in a month. The latest data show China’s foreign-exchange reserves dropped last month by the most since January while exports plunged 7.3%, adding pressure for further currency weakness. The yuan slid for a sixth day against a basket of peers. Officials have stepped up measures to curb outflows as investors seek to hedge against a weakening currency and traders ascribed a higher likelihood that Hillary Clinton will become the next U.S. president, boosting the dollar.

In recent weeks China limited the use of UnionPay’s cards to buy insurance products in Hong Kong, while Bloomberg News reported authorities are planning to curb transactions that use bitcoins to shift funds out of the country. “The larger-than-expected drop in reserves underscores capital outflows in October, and as we know central banks also intervene in the forward markets, the reserves data are hardly likely to give a full picture of fund exits,” said Fiona Lim, a senior currency strategist at Malayan Banking in Singapore. “And there is wide expectation for the yuan to weaken against the dollar beyond the U.S. presidential election result. So all in all, risks to the yuan really are to the downside.”

“More than 101 trillion yen ($966 billion) of cash was circulating at the end of October. It was used for more than 80% of transactions by value in 2014.”

• Cash Is Still King in Japan, and That is a Problem for the BOJ (BBG)

As anyone who has visited Japan knows, cash is still king. Even though many places now take credit cards, Apple Pay and other forms of cashless technology, the actual amount of notes and coins circulating in the country has doubled in 20 years. And that’s while the economy and population has shrunk. More than 101 trillion yen ($966 billion) of cash was circulating at the end of October. It was used for more than 80% of transactions by value in 2014. One problem with this preference for notes and coins is that it limits the central bank’s policy options. The tendency of Japanese to prefer cash means that any attempt to further lower negative interest rates or to impose them on private bank accounts might push people to take their money from the banking system and add it to their stash under the mattress.

The decision in Europe to stop printing the €500 note prompted concerns that governments were trying to make it harder to hold cash, and thus make it easier to impose deeper negative interest rates. In Sweden, where the vast majority of payments don’t use cash and many bank branches won’t even accept cash deposits and withdrawals, the central bank argued last year that negative rates function better in a cashless society. Rates are minus 0.5% in Sweden, but that isn’t an option in Japan, which “is a cash-based economy,” according to former BOJ board member Sayuri Shirai. The BOJ could maybe cut the negative interest rate to minus 0.2% or minus 0.3% at most, she said earlier this month. It’s currently minus 0.1%.

Keep your eye on this going forward.

• In “Seismic Shift”, Saudis Halt Egypt Oil Supplies As Cairo Turns To Iran (ZH)

While the proxy war in the middle-east rages, a curious, and largely under the radar pivot has been taking place in one of the countries directly impacted by Hillary Clinton’s foreign policy: Egypt. In mid-October, we reported that, for the first time ever, Russia and Egypt would conduct joint military drills. This followed news that Russia will sell attack helicopters to the North African nation and invest billions in Egyptian infrastructure. These items, along with the fact that Egypt is eager to be re-granted Russian tourism rights for its citizens after recent bad blood between the countries, lead one to the logical conclusion that Egypt has every incentive to cooperate with Russia going forward.

This means when the Russian fleet reaches the Mediterranean – whether the intent is to park in those waters and bombard Aleppo, as some believe, or merely to project Russian might to the world, as others suggest – it will be flanked by friendlies on three sides. Turkey to the north, Syria to the east, and Egypt to the south. It appears, however, that the quiet Egyptian pivot has not gone unnoticed by the US and its mid-east allies, and on Monday, Saudi Arabia informed Egypt that critical shipments of oil products expected under a $23 billion aid deal have been halted indefinitely, which according to Reuters suggests a deepening rift between the Arab world’s richest country and its most populous.

The official narrative is that while Saudi Arabia has been a major donor to Egypt since President Abdel Fattah al-Sisi seized power in a violent countercoup in mid-2013, Riyadh has become frustrated with Sisi’s lack of economic reforms and his reluctance to be drawn into the conflict in Yemen. During a visit by Saudi King Salman in April, Saudi Arabia agreed to provide Egypt with 700,000 tonnes of refined oil products per month for five years but the cargoes stopped arriving in early October as festering political tensions burst into the open. What is curious is that the deal fell apart just weeks after Cairo suddenly became friendly with Moscow.

While Egyptian officials said since that the contract with Saudi Arabia’s state oil firm Aramco remains valid and had appeared to expect that oil would start flowing again soon, on Monday, however, Egyptian Oil Minister Tarek El Molla confirmed it had stopped shipments indefinitely. Aramco has not commented on the halt and did not respond to calls on Monday. “They did not give us a reason,” an oil ministry official told Reuters. “They only informed the authority about halting shipments of petroleum products until further notice.”

Today 20,000 accounts are plundered. What is tomorrow it’s ten times as many, or 100 times? Who’s going to pay you back? How safe is your money in banks?

• Tesco Bank Freezes Transactions After Cash Stolen From 20,000 Accounts (G.)

Tesco Bank was scrambling to restore services for customers on Monday after it admitted 40,000 customers had been affected by an online heist over the weekend when money was stolen from half the number of accounts targeted. Tesco immediately froze online transactions and pledged to refund the 20,000 customers whose current accounts had been plundered in one of the largest cyber-thefts ever to hit a UK bank. Benny Higgins, chief executive of the supermarket chain’s banking arm, said the decision to suspend some banking activities was an attempt to protect customers from “online criminal activity”. The National Crime Agency (NCA) is one of a number of organisations scrutinising what has taken place at a bank with more than 7 million customers.

“We apologise for the worry and inconvenience that this has caused for customers, and can only stress that we are taking every step to protect our customers’ accounts,” said Higgins. Refunds to customers – some of whom claimed they had lost thousands of pounds – were under way on Monday but Higgins was facing demands from MPs for an explanation of what had gone wrong in the face of repeated warnings about cybersecurity from regulators in recent years. It is thought to be the first time such a large group of UK bank customers have lost money as a result of a single cyber-crime incident and could prove costly for its parent supermarket group in reputational as well as financial terms.

There were also concerns of collateral brand damage for other digital and online banks attempting to compete with established high street players, as Tesco raced to keep pace with the deluge of complaints on social media about difficulty reaching its call centres in Glasgow and Newcastle. Higgins provided little explanation for what had gone wrong over the weekend, when the bank started to text customers to warn them it had detected suspicious activity. However, he told the BBC it was “a systematic, sophisticated attack”.

Inevitable for a society built on bubbles.

• Australia Returns To The Gilded Age Of Rent-Seekers And Robber Barons (RR.)

With the world currently in the process of tearing itself apart piece by piece as the failed Western neoliberal project succumbs to the internal contradictions and terminal imbalances of unfettered globalisation, finance capitalism, and residual and covert imperialism, you’d be forgiven for missing the devastating and cynical betrayal of young Australians that recently happened right under our noses. It escaped the attention of our myopic and clueless presstitute media for nearly four months. But before I discuss that betrayal, which at first glance seems to be just garden variety political neglect and bastardry, let’s first remind ourselves of the report released earlier this year by the University of Melbourne into the state of income and wealth equality, retirement outcomes and home ownership in Australia.

The HILDA (Household, Income and Labour Dynamics in Australia Survey) report, which rightly garnered a huge amount of attention in the media and commentariat, laid bare exactly how far down the path of class warfare that Australia has travelled. Almost by stealth over several decades, short-sighted, self-interested and often corrupt decisions have been made in all offices of power in this nation to restructure our entire economy and society toward the extreme and nearly exclusive benefit of landowners, rentiers, and those that seek to extract unearned windfall gains from the fruits of our considerable prosperity. We have created a system wherein the tax burden for land speculators is less than that for workers, innovators and savers. Far less. Indeed, the tax burden on land is often negative.

We actually reward landowners and speculators while punishing workers, innovators and savers. This is a balance that has striking similarities with the Gilded Age of the late 19th century, wherein landowners, monopolists and creditors (the modern equivalent of the medieval ‘Robber Barons’) bled economies dry to such an extreme extent, that capitalism itself was reinvented, giving birth to the Progressive Era, which attempted to save the world from the grip of rentiers. Few today would recall that the origin of the term Progressive, as used in political context, was this tumultuous moment in the history of industrialisation. The leftwing or so-called progressive parties in today’s world have all but abandoned any pretence to protecting society and the economy from contemporary Robber Barons and rent-seekers.

Blame countries, blame the EU, for sure. But with €370 million having gone to (i)NGO’s, you MUST wonder what they have been doing with all that cash. Which is why the Automatic Earth supports O Allos Anthropos, which while it has no access to these funds, is far more effective. Give us just a fraction of that and we’ll be able to solve many of the issues that are still not being tackled.

I’m working on a Christmas fund raiser for Athens, but of course you can donate today as well. Any amount donated via our Paypal widget (top left corner) that end in $0.99 or $0.37 will as always go to Athens’ poor and homeless and refugees.

• Winter is Coming for Refugees in Greece (HRW)

“Winter is coming” has become an anxious refrain among asylum seekers living in tented refugee camps across Greece, that offer no shelter from damp and cold. Ali, a 25-year-old father of three very young children from Afghanistan, including a 6-year-old who has a disability, was living with his family in a tent pinned to the ground of Elliniko camp in Athens, when I met him in late October. “Now that winter is coming, the conditions are not good… When it rains water gets inside our tent. And every morning, the inside of our tent is wet because of the damp,” he explained. We heard similar testimonies across Greece. Ali’s predicament reflects Europe’s utter failure to respond collectively and compassionately to people seeking protection.

More than 60,000 women, men, and children are stranded in Greece as a result of Western Balkan border closures and a poorly executed EU relocation plan. Thousands are restricted to abysmal and volatile conditions on the islands, while tens of thousands face deplorable conditions without access to services in the camps on the mainland. As part of a winterization plan, the UN refugee agency (UNHCR) and Greek authorities are replacing tents with prefabricated housing units in some of the over 40 camps across Greece. At other sites, winter items are being distributed and in fifteen of them infrastructure improvements are planned, such as installing heating. However, many of the largest and worst camps where thousands of people live, will essentially remain unsuited for winter.

The government says it plans to close most of these facilities by January, but if the asylum seekers are not relocated to other appropriate sites, they will soon find themselves exposed to worsening weather conditions without proper shelter. On the islands, efforts are underway to transfer a small number of people, who are presently living in severely overcrowded and filthy conditions, to the mainland. But Greece is under pressure from the European Commission to contain most asylum seekers on the islands to prevent onward movement to other EU countries.

With winter approaching, there is an urgent need to transfer people to hardier facilities and in the short-term, fully adapt remaining camps for falling temperatures. In the long-term, the Greek authorities should end encampment. With almost €128 million provided by the European Commission to the Greek government and €370 million given to humanitarian aid agencies and international organizations, including the UNHCR, there’s no excuse for the failure to provide humane and dignified reception conditions to asylum seekers.

Why This Slump Has Legs

Jan 182016

January 18, 2016 Posted by Raúl Ilargi Meijer at 10:39 pm Finance Tagged with: bubble, central banks, China, debt, deleveraging, Eccles, Growth, Ponzi, slump, US 8 Responses »

Berenice Abbott Columbus Circle, Manhattan 1936

We’ve only really been in two weeks of trading in the new year, things are looking pretty bad to say the least, so predictably the press are asking -and often answering- questions about when the slump will be over. Rebound, recovery, the usual terminology. When will we get back to growth?

For me personally, but that’s just me, that last question sounds a bit more stupid every single time I hear and read it. Just a bit, but there’s been a lot of those bits, more than I care to remember. Luckily, the answer is easy. The slump will not be over for a very long time, there will be no rebound or recovery, and please stop talking about a return to growth unless you can explain what you want to grow into.

I’m sorry, I know that’s not what you want to hear, but life’s a bitch and so’s the economy. You’ve lived on pink fumes for a long time, most of you for their whole lives, but reality dictates that real ‘growth’ stopped decades ago, and you never figured that out because, and I quote here (see below), you and the world you’re part of became “addicted to borrowing money, spending it, and passing this off as ‘growth'”.

That you believed this was actual growth, however, is on you. You fell for a scam and you’re going to have to pay the price. If there’s one single thing people are good at, it’s lying. It’s as old as human history, and it happens every day, so you’re no exception to any rule. You’re perhaps just not particularly clever.

How do we know a ‘recovery’ is so far off it’s really no use to even talk about it? As I said, it’s easy. Let me lead this in with a graph I saw just today, which deals with a topic the Automatic Earth has covered a lot: marginal debt, or more precisely, the productivity/growth gained from each additional dollar of debt.

Please note, this particular graph deals with private non-financial debt only, we’ll get to other kinds of added debt, but that restriction is actually quite illuminating.

Now of course, you have to wonder about the parameters the St. Louis Fed uses for its data and graphs, and whether ‘growth’ was all that solid in the run up to 2008. There’s plenty of very valid arguments that would say growth in the 1960’s was a whole lot more solid than that in the naughties, after the Glass-Steagall repeal, and after the dot.com blubber.

However, that’s not what I want to take away from this, I use this to show what has happened since 2008, more than before, when it comes to “passing debt off as ‘growth'”.

But it’s another thing that has happened since 2008, or rather not happened, that points out to us why this slump will have legs. That is, in 2008 a behemoth bubble started bursting, and it was by no means just US housing market. That bubble should have been allowed to fully deflate, because that is the only way to allow an economy to do a viable restart.

Instead, all that has been done since 2008, QE, ZIRP, the works, has been aimed at keeping a facade ‘alive’, and aimed at protecting the interests of the bankers and other rich parties. That facade, expressed most of all in rising stock markets, has allowed for societies to be gutted while people were busy watching the S&P rise to 2,100 and the Kardashians bare 2,100 body parts.

It was all paid for, apart from western QE, with $28 trillion and change of newfangled Chinese debt. The problem with this is that if you find yourself in a bubble and you don’t go through the inevitable deleveraging process that follows said bubble in a proper fashion, you’re not only going to kill economies, you’ll destroy entire societies.

And that is not just morally repugnant, it also works as much against the rich as it does against the poor. It’s just that that is a step too far for most people to understand. That even the rich need a functioning society, and that inequality as we see it today is a real threat to everyone.

Recognizing this simple fact, and the consequences that follow from it, is nothing new. It’s why in days of old, there were debt jubilees. It’s also why we still quote the following from Marriner Eccles, chairman of the Federal Reserve under FDR and Truman from 1934-1948, in his testimony to the Senate Committee on the Investigation of Economic Problems in 1933, which prompted FDR to make him chairman in the first place.

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Everything would all be so much simpler if only more people understood this, that you need a – fleeting, ever-changing equilibrium- to prosper.

Instead, we’re falling into that same trap again. Or, more precisely, we already have. We have been fighting debt with more debt and built the facade put up by the Fed, the BoJ and the ECB, central banks that all face the same problems and all take the same approach: save the rich at the cost of the poor. Something Eccles said way back when could not possibly work.

Anyway, so here are the graphs that prove to us why the slump has legs. There’s been no deleveraging, the no. 1 requirement after a bubble bursts. There’s only been more leveraging, more debt has been issued, and while households have perhaps deleveraged a little bit, though that is likely strongly influenced by losses on homes etc. plus the fact that people were simply maxed out.

First, global debt and the opposite of deleveraging:

And global debt from a longer, 65 year, more historical perspective:

It’s a global debt graph, but it’s perhaps striking to note that big ‘growth’ spurts happened in the days when Reagan, Clinton and Obama were the respective US presidents. Not so much in the Bush era.

Next, China. What we’re looking at is what allowed the post 2008 global economic facade to have -fake- credibility, an insane rise in debt, largely spent on non-productive overinvestment, overcapacity highways to nowhere and many millions of empty apartments, in what could have been a cool story had not Beijing gone all-out on performance enhancing financial narcotics.

Today, the China Ponzi is on its last legs, and so is the global one, because China was the last ‘not-yet-conquered’ market large enough to provide the facade with -fleeting- credibility. Unless Elon Musk gets us to Mars very soon, there are no more such markets.

So US debt will have to come down too, belatedly, with China, and it will have to do that now. because there are no continents to conquer and hide the debt behind. We’re all going to regret engaging in the debt game, and not letting the bubble deflate in an orderly fashion when we still could, but all those thoughts are too late now.

What the facade has wrought is not just the idea that deleveraging was not needed (though it always is, after every single bubble), but that net US household worth rose by 55% in the 6-7 years since the bottom of the crisis, an artificial bottom fabricated with…more debt, with QE, and ZIRP.

Meanwhile, in today’s world, as stock markets go down at a rapid clip, China, having lost control of a market system it never had the control over that Politburos are ever willing to acknowledge they don’t have, plays a game of Ponzi whack-a-mole, with erratic ‘policies’ such as circuit breakers and CIA-style renditions of fund managers and the like.

And all the west can do is watch them fumble the ball, and another one, and another. And this whole thing is nowhere near the end.

China bad loans have now become a theme, but the theme doesn’t mean a thing without including the shadow banking system, which in China has been given the opportunity to grow like a tumor, on which Beijing’s grip is limited, and which has huge claims on local party officials forced by the Politburo to show overblown growth numbers. If you want to address bad loans, that’s where they are.

Chinese credit/debt graphs paint only a part of the picture if and when they don’t include shadow banks, but keeping their role hidden is one of Xi’s main goals, lest the people find out how bad things really are and start revolting. But they will anyway. That makes China a very unpredictable entity. And unpredictable means volatile, and that means even more money flowing out of, and being lost in, markets.

The ‘least worst’ place to be for what money will be left is US dollars, US treasuries and perhaps metals. But there’ll be a whole lot less left than just about anyone thinks. That’s the price of deleveraging.

The price of not deleveraging, on the other hand, is what we see in the markets today. And there is no cure. It must be done. The price for keeping up the facade rises sharply with each passing day, and the effort will in the end be futile. All bubbles have limited lifespans.

I’ll close this with a few recent words from Tim Morgan, who puts it so well I don’t feel the need to try and do it better.

The Ponzi Economy, Part 1

In order to set the Ponzi economy into some context, let’s put some figures on it. In the United States, total “real economy” debt (which excludes inter-bank borrowing) increased by $19.4 trillion – in real, inflation-adjusted terms – between 2000 and 2014, whilst real GDP expanded by only $3.7 trillion. Britain, meanwhile, added £1.9 trillion of new debt for less than £400bn on “growth” over the same period. I spent part of the holiday period unearthing quite how much debt countries added for each dollar of “growth” over a period starting at the end of 2000 and ending in mid-2015.

Unsurprisingly, the league is topped by Portugal ($5.65 for each $1 of growth), Ireland ($5.42) and Greece ($5.39). Britain’s ratio ($3.46) is somewhat flattering, in that the UK has used asset sales as well as borrowing to sustain its consumption. The average for the Eurozone ($3.54) covers ratios as diverse as Germany (just $1.87) and France ($4.22).

China’s $2.56 looks unexceptional until you note that the more recent (post-2007) number is much worse. Economies which seem to have been growing without too much borrowing (such as Brazil and Russia) are now experiencing dramatic worsening in their ratios, generally in the wake of tumbling commodity prices.

In the proverbial nutshell, then, the world has become addicted to borrowing money, spending it, and passing this off as “growth”. This is a copybook example of a pyramid scheme, which in turn means that the world’s most influential economic mentor is neither Keynes nor Hayek, but Charles Ponzi.

[..] How, in the absence of growth, can inflated capital values be sustained? The answer, of course, is that they can’t. Like all Ponzi schemes, this ends with a bang, not a whimper. This is why I find forecasts of a ‘big fall’ or ‘sharp correction’ in markets hard to swallow. Ponzi schemes don’t end gradually, any more than someone can fall off a cliff gradually, or be “slightly pregnant”.

The Ponzi economy simply continues for as long as irrationality prevails, and then implodes. Capital markets, though, are the symptom, not the cause. The fundamental problem is an inability to escape from an addictive practice of manufacturing supposed “growth” on the basis of borrowed money.

There may be shallow lulls in the asset markets, nothing ever only falls down in a straight line in the real world, but that debt I’ve described here will and must come down and be deleveraged.

The process will in all likelihood lead to warfare, and to refugee movements the likes of which the world has never seen just because of the sheer numbers of people added in the past 50 years.

When your children reach your age, they will not live in a world that you ever thought was possible. But they will still have to live in it, and deal with it. They will no longer have the facade you’ve been staring at for so long now, to lull them into a complacent sleep. And the Kardashians will no longer be looking so attractive either.

Debt Rattle January 18 2016

Jan 182016

January 18, 2016 Posted by Raúl Ilargi Meijer at 9:24 am Finance Tagged with: 1%, China, crash, housing, Iran, oil, pollution, refugees, Saudi, slump, stocks, VW 2 Responses »

DPC Chicago & Alton Railroad, Joliet, Illinois 1901

• Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)

• Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)

• Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)

• Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)

• Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)

• Stock Market Crash Could Burst UK Property Bubble (Express)

• It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)

• China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)

• China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)

• The Problem With Getting Money Out Of China (China Law Blog)

• Gloom Gathers Over The Challenges That Germany Faces (FT)

• “Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)

• Canadian Officials Under Pressure to Stimulate Economy (WSJ)

• Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)

• False Emissions Reporting Undermines China’s Pollution Fight (Reuters)

• Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)

• 66 Institutional Investors To Sue Volkswagen In Germany (FT)

• Obama Declares Emergency In Flint, But Not Disaster (DFP)

• When Peace Breaks Out With Iran… (Ron Paul)

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)

• The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

China contagion spreads.

• Asian Shares Drop To 2011 Levels As Oil Slump Intensifies (Reuters)

Asian shares slid to their lowest levels since 2011 on Monday after weak U.S. economic data and a massive fall in oil prices stoked further worries about a global economic downturn. Spreadbetters expected a subdued open for European shares, forecasting London’s FTSE to open modestly higher while seeing Germany’s DAX and France’s CAC to start flat-to-slightly-weaker. Crude prices faced fresh pressure after international sanctions against Iran were lifted over the weekend, allowing Tehran to return to an already over-supplied oil market. Brent oil futures fell below $28 per barrel touching their lowest level since 2003. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew at Columbia University’s Center on Global Energy Policy.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell to its lowest since October 2011 and was last down 0.5%. Japan’s Nikkei tumbled as much as 2.8% to a one-year low. It has lost 20% from its peak hit in June, meeting a common definition of a bear market. The volatile Shanghai Composite index initially pierced through intraday lows last seen in August before paring the losses and was last up 1%. It was still down 17% this month. On Wall Street, S&P 500 hit a 15-month low on Friday, ahead of Monday’s market holiday. “The fact that U.S. and European shares fell below their August lows, failing to sustain their rebound, is significant,” said Chotaro Morita at SMBC Nikko Securities.

They knew Iran was coming, so that’s not the main driver.

• Oil Slides To Lowest Since 2003 As Iran Sanctions Are Lifted (Reuters)

Oil prices hit their lowest since 2003 in early trading on Monday, as the market braced for a jump in Iranian exports after the lifting of sanctions against the country at the weekend. On Saturday, the U.N. nuclear watchdog said Tehran had met its commitments to curtail its nuclear program, and the United States immediately revoked sanctions that had slashed the OPEC member’s oil exports by around 2 million barrels per day (bpd) since their pre-sanctions 2011 peak to little more than 1 million bpd. “Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get,” said Richard Nephew, program director for Economic Statecraft, Sanctions and Energy Markets at Columbia University’s Center on Global Energy Policy.

Iran is ready to increase its crude exports by 500,000 bpd, its deputy oil minister said on Sunday. International Brent crude fell to $27.67 a barrel early on Monday, its lowest since 2003, before recovering to $28.25, still down more than 2% from their settlement on Friday. U.S. crude was down 58 cents at $28.84 a barrel after hitting a 2003 low of $28.36 earlier in the session. “The lifting of sanctions on Iran should see further downward pressure on oil and commodities more broadly in the short term,” ANZ said on Monday. “Iran’s likely strategy in offering discounts to entice customers could see further downward pressure on prices in the near term,” it added. Iran’s potential new exports come at a time when global markets are already reeling from a chronic oversupply as producers pump a million barrels or more of crude every day in excess of demand, pulling down crude prices by over 75% since mid-2014 and by over a quarter since the start of 2016.

And although analysts expect Iran to take some time before being able to fully revive its export infrastructure, suffering from years of underinvestment during the sanctions, it does have at least a dozen Very Large Crude Carrier super-tankers filled and in place to sell into the market. The oil price rout is also hurting stock markets, with Asian shares set to slide to near their 2011 troughs on Monday, stoking further worries about a global economic downturn. “Growth keeps slowing … Lower commodity prices, including oil, partly reflect weakening demand itself. In addition, the downturn in mining capex and the declining income of commodity producers is weighing on exports from Asia,” said Frederic Neumann at HSBC, Hong Kong.

Must be a crowded trade.

• Hedge Funds Are Betting The Commodities Collapse Isn’t Over Yet (BBG)

The commodity meltdown that pushed oil to a 12-year low and copper to the cheapest since 2009 isn’t over yet. At least, that’s how hedge funds see it. Money managers increased their combined net-bearish position across 18 raw materials to the biggest ever, doubling the negative bets in just two weeks. A measure of returns on commodities last week slid to the lowest in at least 25 years. Metals, crops and energy futures all slumped amid supply gluts and an anemic outlook for the global economy. Market turmoil in China, the biggest commodity buyer, is adding to worries over consumption. A stronger dollar is also eroding the appeal of raw materials as alternative investments. While Goldman Sachs predicts that the prolonged slump will start to spur more supply cuts, the bank doesn’t expect prices to rebound until later this year.

“There’s fear in the marketplace,” said Lara Magnusen at Altegris Investments. People are “very concerned about slower economic growth and what’s going on with China and the contagion effect,” she said. With a strong U.S. dollar and the Federal Reserve considering more interest-rate increases, “there’s not a lot of places where you can put your money right now,” she said. “Short commodities is a pretty good place.” The net-short position across 18 U.S.-traded commodities expanded to 202,534 futures and options as of Jan. 12, according to U.S. Commodity Futures Trading Commission figures published three days later. That’s the largest since the government data begins in 2006 and compares with 164,203 contracts a week earlier.

Add that to the low oil price losses.

• Gulf Stock Crash Wipes $38.5 Billion Off Markets As Iran Enters Oil War (Tel.)

Stock markets across the Middle East saw more than £27bn ($38.5 billion) wiped off their value as the lifting of economic sanctions against Iran threatened to unleash a fresh wave of oil onto global markets that are already drowning in excess supply. All seven stock markets in Gulf states tumbled as panic gripped traders. Dubai’s DFM General Index closed down 4.65pc to 2,684.9, while Saudi Arabia’s Tadawul All Share Index, the largest Arab market, collapsed by 7pc intraday, before recovering marginally to end down 5.44pc at 5,520.41, its lowest level in almost five years. The Qatar stock exchange, fell 7.2pc to close at 8,527.75, and the Abu Dhabi Securities Exchange shed 4.24pc to finish at 3,787.4. The Kuwait market returned to levels not seen since May 2004 as it slid 3.2pc lower, while smaller markets in Oman and Bahrain dropped 3.2pc and 0.4pc respectively.

The Iranian stock index gained 1pc, making it one of the best performing markets in the world with gains of 6pc since the start of the year. The dramatic moves came following the historic report from the UN nuclear watchdog, which showed that Iran has met its obligations under the nuclear deal, clearing the way for the lifting of sanctions. The Vienna-based International Atomic Energy Agency issued the landmark document late on Saturday evening, sparking mayhem as markets opened on Sunday, the first day of trading in the Middle East. The stock markets in Dubai and Saudi Arabia have been plunged into a painful bear market, losing 42pc and 38pc respectively, ever since Saudi Arabia decided to ramp up oil production in November 2014.

Oil prices fell below $30 for the third time last week as traders prepared for the prospect of Iranian oil flooding global markets. The Islamic Republic has vowed to return its oil production to pre-sanction levels, with estimates suggesting Tehran will add a further 500,000 barrels a day (b/pd) to the world’s bloated stockpiles within weeks. Fears that the Islamic Republic could quickly ramp up production sent Brent crude falling by 3.3pc to $29.43 on Friday – matching lows last seen in 2004. West Texas Intermediate also slipped back to $29.60, a decline of 4.5pc.

“..the wealth of the poorest 50% dropped by 41% between 2010 and 2015..”

• Richest 1% Now Wealthier Than The Rest Of Humanity Combined (BBG)

The richest 1% is now wealthier than the rest of humanity combined, according to Oxfam, which called on governments to intensify efforts to reduce such inequality. In a report published on the eve of the World Economic Forum’s annual meeting in Davos, Switzerland, the anti-poverty charity cited data from Credit Suisse in declaring the most affluent controlled most of the world’s wealth in 2015. That’s a year earlier than it had anticipated. Oxfam also calculated that 62 individuals had the same wealth as 3.5 billion people, the bottom half of the global population, compared with 388 individuals five years earlier. The wealth of the most affluent rose 44% since 2010 to $1.76 trillion, while the wealth of the bottom half fell 41% or just over $1 trillion.

The charity used the statistics to argue that growing inequality poses a threat to economic expansion and social cohesion. Those risks have already been noted in countries from the U.S. to Spain, where voters are increasingly backing populist political candidates, while it’s sown tensions on the streets of Latin America and the Middle East. “It is simply unacceptable that the poorest half of the world’s population owns no more than a few dozen super-rich people who could fit onto one bus,” said Winnie Byanima, executive director of Oxfam International. “World leaders’ concern about the escalating inequality crisis has so far not translated into concrete action.” Oxfam said governments should take steps to reduce the polarization, estimating tax havens help the rich to hide $7.6 trillion. Politicians should agree on a global approach to ending the practice of using offshore accounts, it said.

Or the other way around?

• Stock Market Crash Could Burst UK Property Bubble (Express)

Property seems to be immune from the fear now gripping the global economy, but that may not always be the case. If the share price meltdown continues and the global economy slows, eventually the UK’s house of cards may collapse as well. Chinese stock markets have plunged since the start of the year, with the FTSE 100 falling 6.5% so far. There seems no end in sight to the share sell-off, but still property powers on. The latest figures from Halifax show that property prices in the final quarter of 2015 were almost 10% higher than one year earlier. The growth seems unstoppable, with new figures from estate agency Your Move showing the average property in England and Wales has leapt £18,000 in the last year to £292,077, a growth rate of an incredible £1,500 a month.

Many Britons suspect the property market is overvalued, with the average UK home now costing more than 10 times earnings. Given that most lenders will not grant mortgages worth more than three or four times your income, this looks unsustainable. Yet few property experts are willing to say openly that the market is in peril. Most remain deaf to warnings of contagion from the share price rout, even though it has scared the life out of some investment experts. Last week, Andrew Roberts, research chief at Royal Bank of Scotland, warned investors to “sell everything except high-quality bonds” because the stock market and oil price crash has only just begun. He is worried about the growing public and company debt burden, and British households have plenty to worry about on that score.

All-time low interest rates have fuelled a borrowing spree that has seen Britons rack up a mind-boggling debt of £40billion. The latest figures show family that household debt rose by 42% in the last six months alone, according to research from Aviva. The average family now owes £13,520 on credit cards, personal loans and overdrafts, up from £9,520 last summer. Throw in a 20% increase in average mortgage debt to £62,739 over five years and households are more vulnerable than ever. Worse, family incomes are falling and many have lost the savings habit as their finances are stretched.

The entire issue is hugely distorted by insanely elevated home prices. Take those out, and you see how bad things truly are.

• It’s Not Time For Britain To Be ‘Intensely Relaxed’ Over Household Debt (Ind.)

There seem to be three main arguments against the idea we should be concerned about household leverage. The first is that the official statistics belie the claim that the aggregate debt burden of UK households is rising and the recovery has been fuelled by borrowing. Second, we’re told UK household debt is mainly mortgage debt and reflects high domestic house prices. For each of these liabilities there is an asset, so we must look at the overall balance sheets of households, which are healthy. Plus, with interest rates still on the floor, aggregate debt-servicing costs are comfortable. Finally, we’re assured that as long as the supply of new homes remains severely restricted, high debt presents no serious financial threat because house prices are pretty unlikely to collapse.

To illustrate this final point, it is pointed out that the banks failed in 2008 because of their dodgy overseas lending, not because of their dodgy UK mortgage books. There are problems with all three arguments. Let’s take them in turn. Measured as a share of household incomes, it is true that household debt has not actually been growing. Since 2008, when the debt to income ratio peaked at 170%, households have been deleveraging. Yet at 140% of gross income, debt levels are still very high, both by historic and international standards. In the G7 only Canada has a higher household leverage ratio today. There is potential fragility here if another economic shock were to hit, as the Bank of England itself admits. To point to the UK’s deleveraging in recent years as a reason for relief is akin to a mountaineer getting halfway down Everest in a vicious storm and saying “job done”.

Debt has not been rising as a share of income but the aggregate household savings ratio, excluding pension rights, has fallen from a peak of 6% in 2010 to less than zero today. That change in household behaviour has certainly helped the economy recover. So not a recovery fuelled by debt, but a recovery fuelled by a lower savings ratio. Incidentally, there was no such savings collapse envisaged by the Office for Budget Responsibility (OBR) in 2010, reflecting how unbalanced the recovery has been relative to hopes six years ago. Moreover, the OBR today predicts that the debt to income ratio is going to race back close to pre-crisis levels over the coming five years. Why? Because the Treasury’s official forecaster expects house prices to rise faster than incomes and for people to keep buying houses. The OBR is very far from being omniscient. But that is surely one of the more plausible assumptions from Robert Chote and his team, given the dismal evolution of the housing market in recent years and decades.

Lemme guess: anyone but Xi?!

• China’s Securities Czar Casts Wide Blame for Market Turmoil (WSJ)

What’s wrong with China’s stock market? Just about everything, according to a statement from Xiao Gang, the country’s chief securities regulator, delivered at a national meeting of Chinese securities officials and posted on his agency’s website Saturday. In the statement, Mr. Xiao defended his handling of successive market meltdowns, blaming the “abnormal volatility” on “an immature market, inexperienced investors, imperfect trading system, flawed market mechanisms and inappropriate supervision systems.” The turmoil in China’s stock market—which on Friday entered “bear” territory of 20% below its recent peak—has cast a harsh light on the performance of Mr. Xiao, 57, a former central banker and chairman of the Bank of China before he was appointed chairman of the China Securities Regulatory Commission in 2013.

During the summer, when Chinese stocks tumbled more than 40%, Mr. Xiao oversaw a slew of measures to prop up the market that many investors criticized as heavy-handed and interventionist. Those ranged from banning certain kinds of short selling and share sales to approving the purchase of hundreds of billions of yuan in equities by government-affiliated funds. Two weeks ago, Mr. Xiao was forced to abandon a circuit-breaker mechanism he’d championed as a way to halt big trading swings, when it instead ended up fanning panic selling. In his Saturday statement, Mr. Xiao defended his efforts, saying they were a successful attempt to stave off a bigger crisis.

“The response to the abnormal volatility in the stock market was essentially crisis management,” Mr. Xiao said. Various departments “addressed market dysfunctions and prevented a potential systemic risk through joint efforts.” Mr. Xiao did admit there had been “supervision and management loopholes” and he promised to crack down on illegal activities, increase market transparency and better educate investors, although he didn’t outline specific proposals. He briefly touched on the detention of some top-ranking officials in the securities industry in relation to a police investigation on alleged violation of rules, but without naming his own agency. Mr. Xiao chastised listed companies for “exaggerated storytelling” to hype up stock prices, and urged market participants to cultivate a stronger sense of social responsibility and to “huddle together for warmth”—or cooperate in the greater interest—when times are bad.

They want to take five years to do what should have been done already. Dangerous.

• China To Clean-up ‘Zombie’ Companies By 2020 (Reuters)

China’s top state-owned asset administrator has vowed to clean-up the country’s so-called “zombie” industrial companies by 2020, the official Xinhua News Agency has reported. Zhang Yi, Chairman of the State-owned Assets Supervision and Administration Commission (SASAC), told a central and local enterprise work conference convened at the weekend that the agency will “basically” resolve the problem of unproductive “zombie” firms over the next three years. Dealing with “zombie companies” is very difficult, Zhang said, according to the report, but “officials need to… use today’s ‘small tremors’ to prevent a future earthquake.” The central government last September rolled out the most ambitious reform program in two decades to resolve the problems at its hugely inefficient public sector companies, encouraging the greater use of “mixed ownership” while promoting more mergers to create globally-competitive conglomerates.

Zhang Xiwu, deputy head of SASAC, told a news briefing at the time that China would work to reorganize state firms to centralize state-owned capital in key industries, while restricting investment in industries not in line with national policies. Zhang said that China would use stock exchanges, property exchanges and other capital markets to sell the assets of low performing state owned enterprises. Profits at China’s state firms dipped 9.5% in the first 11 months of 2015 from a year earlier, led by profits at SASAC-controlled firms, which fell 10.4%, the Ministry of Finance said in December. On Friday, SASAC told state media that the steep decline in profits for the sector had been curtailed, and that 99 of the 106 SASAC-controlled enterprise groups achieved profitability in 2015.

Interesting angle via ZH.

• The Problem With Getting Money Out Of China (China Law Blog)

Regular readers of our blog probably know that our basic mantra about getting money out of China is that if you have consistently follow all of China’s laws, it ought to be no problem. Not true lately. In the last week or so, our China lawyers have probably received more “money problem” calls than in the year before that. And unlike most of these sorts of calls, the problems are brand new to us. It has reached the point that yesterday I told an American company (waiting for a large sum in investment funds to arrive from China) that two weeks ago I would have quickly told him that the Chinese company’s excuse for being unable to send the money was a ruse, but with all that has been going on lately, I have no idea whether that is the case or not. So what has been going on lately? Well if there is a common theme, it is that China banks seem to be doing whatever they can to avoid paying anyone in dollars. We are hearing the following:

1. Chinese investors that have secured all necessary approvals to invest in American companies are not being allowed to actually make that investment. I mentioned this to a China attorney friend who says he has been hearing the same thing. Never heard this one until this month.

2. Chinese citizens who are supposed to be allowed to send up to $50,000 a year out of China, pretty much no questions asked, are not getting that money sent. I feel like every realtor in the United States has called us on this one. The Wall Street Journal wrote on this yesterday. Never heard this one until this month.

3. Money will not be sent to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is real — in other words a lot more proof than required months ago. We heard this one last week regarding transactions with Indonesia, from a client with a subsidiary there. Never heard this one until this month.

4. Money will not be sent for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally. This is not exactly new, but it appears China is cracking down on this.

5. Get this one: Money will not be sent to any company on a services transaction unless that company can show that it does not have any Chinese owners. The alleged purpose behind this “rule” is again to prevent the sort of transactions ordinarily used to illegally move money out of China. Never heard this one until this month.

What are you seeing out there? No really, what are you seeing out there?

You just wait till the German economy starts stumbling.

• Gloom Gathers Over The Challenges That Germany Faces (FT)

This is going to be a difficult year for Germany, one in which the policies of the past may turn out to be unsustainable. The most unsustainable of all was Angela Merkel’s invitation to open the doors to Syrian refugees without limitation. The German chancellor must either have misjudged the effect or acted recklessly — or both. A few months and 1m refugees later, the discontent is growing inside the Christian Democratic Union, her party, and in the country at large. Gerhard Schröder, her Social Democratic predecessor, last week came out against the policy with exactly the same arguments as the right-wingers in Ms Merkel’s own party: Germany cannot absorb such a large number. More than 1m refugees arrived in the country in 2015. It could be twice as many this year and the same again next — more if you include family members who will eventually follow.

It is tempting to think of refugees and migrants as a new source of labour. But in this case this just is not true, at least not for now. The majority of those who arrive in Germany lack the skills needed in the local labour market. They will enter the low wage sector of the economy, and drive down wages, producing another deflationary shock. This is the last thing Germany and the eurozone need right now. I expect that this policy will change at some point this year. What I do not see, however, is a successful political coup against Ms Merkel from inside her own party. What protects her is the grand coalition with the Christian Social Union and the SPD. There is no majority to the right of her, or to the left for that matter.

The second challenge is the economic downturn in emerging markets. There are few large countries as dependent on the global economy as Germany, and few where there is so little awareness of that fact, at least in public debate. Germany has a current account surplus of 8% of gross domestic product. A global downturn tends to affect German industrial companies with a delay of one or two years because many operate in sectors like plant and machinery where multiyear contracts are customary. But eventually, the German and the global business cycles begin to synchronise once more. This will be the year when that starts to happen.

The third challenge for Germany in 2016 is the fallout from the Volkswagen emissions scandal. This could be the single biggest shock of all because Germany has been over-reliant on the car industry for far too long. Last week, suspicion fell on Renault, when the offices of the French carmaker were raided by the authorities. This is not the crisis of a single company, therefore, but of a whole industry. Nor is it just a German problem; it is a pan-European one. It appears that VW behaved more recklessly than the others, and it will pay a heavy price for its behaviour. Whether legal action in the US and in Germany will weaken VW or force it into outright bankruptcy is almost irrelevant, given the bigger picture.

Political capital rules the EU.

• “Everything Has Come to a Standstill”: Politics Hits Business in Spain (WS)

On Friday, Spain’s benchmark stock index, the Ibex 35, plumbed depths it had not seen since the worst days of 2013, the year that the country’s economy began its “miraculous” recovery. Of the 35 companies listed on the index, 15 (or 40%) are – to quote El Economista – “against the ropes,” having lost over a third of their stock value in the last 9 months. Only one of the 35 companies — the technology firm Indra — is still green for 2016. This doesn’t make Spain much different from other countries right now, what with financial markets sinking in synchronized fashion all over the world. What does make Spain different is that it has no elected government to try to navigate the country though these testing times, or at least take the blame for the pain.

Inevitable comparisons have been drawn with Belgium, which between 2011 and 2012 endured 541 days of government-free living. However, Spain is not Belgium: its democratic system of governance is younger, less firmly rooted, and more fragile, and its civil service is more politically compromised. To make matters worse, Spain’s richest region, Catalonia, which accounts for 20% of the country’s economy, bucked expectations last week by cobbling together a last-minute coalition government that seems intent on declaring independence within the next 15 months. Meanwhile, business confidence, the cornerstone of any economic recovery, is beginning to crumble. Spain’s leading index of business confidence, ICEA, just registered a drop of 1.3%, breaking a straight eleven-quarter run of positive results.

For the first time in almost three years more business leaders are pessimistic than optimistic about the economy’s outlook. This should come as little surprise in a country where unemployment is still firmly on the wrong side of the 20% mark, over a quarter of the new jobs created last year had a contract lasting less than one week, and public debt is higher than it’s ever been. And now that there’s no elected government in office, businesses that depend on public sector contracts, including the country’s heavily indebted construction and infrastructure giants, face weeks or perhaps even months of inertia. “Everything has come to a standstill,” a contact in a Madrid-based research consultancy told me. “No decisions are being made, no funds are being released. It’s a vacuum.”

For the moment, the political backdrop has had limited impact on the price of Spanish government debt. The 10-year yield is at 1.75%, below the 10-year US Treasury yield, though it’s up a smidgen since the general elections on December 20. In its latest update, S&P left Spain’s rating unchanged, predicting 2.7% growth for 2016, despite the prevailing mood of political and economic uncertainty. In a similar vein, Deutsche Bank has forecast growth of 2.5%, regardless of what happens within or beyond Spanish borders. In other words, every effort will be made to safeguard the economic order in Spain, including putting a ridiculously positive spin on a desperate situation. To paraphrase Europe’s chief financial alchemist, Mario Draghi: do not underestimate the amount of political capital that has been invested in the European project, in particular in the Eurozone’s fourth largest economy.

“General sentiment is downright toxic in Canada..”

• Canadian Officials Under Pressure to Stimulate Economy (WSJ)

Canadian policy makers are heading into a tough week as pressure mounts on them to revive an economy that has been among the hardest hit by the commodity rout. Prime Minister Justin Trudeau and his cabinet colleagues will convene in a seaside resort town on Canada’s east coast Monday amid more evidence growth may have stalled again after sputtering to life in last year’s third quarter. A recent string of dismal economic news—and a free-falling Canadian dollar—has led to calls for Mr. Trudeau’s government to move sooner rather than later on major infrastructure investments to stimulate growth.

On Wednesday, Bank of Canada Gov. Stephen Poloz will deliver his latest interest-rate decision, and economists are split not only on whether he will opt to cut rates, but whether such a move would do much to help the economy at this time. Analysts say the onus has shifted to Mr. Trudeau’s government to help mitigate the negative fallout from the oil-price rout. Last week the Canadian dollar hit near-13-year lows as prices for oil, a major Canadian export, continued to weaken. As of Friday, the currency has fallen 4.8% against the U.S. dollar since the start of the year and was down 17.8% year-to-year. The drop came as Canada’s stock market lost ground—it is now off 22.2% from its 2015 peak—and the central bank said Canadian companies’ investment and hiring intentions had recently weakened.

“General sentiment is downright toxic in Canada,” said Jimmy Jean, economist at Desjardins Capital Markets. Talk around Mr. Trudeau’s cabinet table likely will revolve around the appropriate response to an economic tailspin fueled by a fresh downturn in the price of crude. While the prime minister last week voiced optimism about Canada’s prospects despite disappointing growth, government officials have privately said they are very worried about the economy. Meanwhile, economists have told the government it should boost the amount of infrastructure spending planned for this year to help offset weak conditions.

But we’ll keep driving along. Soon, in our new clean cars powered by coal plants.

• Shock Figures To Reveal Deadly Toll Of Global Air Pollution (Observer)

The World Health Organisation has issued a stark new warning about deadly levels of pollution in many of the world’s biggest cities, claiming poor air quality is killing millions and threatening to overwhelm health services across the globe. Before the release next month of figures that will show air pollution has worsened since 2014 in hundreds of already blighted urban areas, the WHO says there is now a global “public health emergency” that will have untold financial implications for governments. The latest data, taken from 2,000 cities, will show further deterioration in many places as populations have grown, leaving large areas under clouds of smog created by a mix of transport fumes, construction dust, toxic gases from power generation and wood burning in homes. The toxic haze blanketing cities could be clearly seen last week from the international space station.

Last week it was also revealed that several streets in London had exceeded their annual limits for nitrogen dioxide emissions just a few days into 2016. “We have a public health emergency in many countries from pollution. It’s dramatic, one of the biggest problems we are facing globally, with horrible future costs to society,” said Maria Neira, head of public health at the WHO, which is a specialist agency of the United Nations. “Air pollution leads to chronic diseases which require hospital space. Before, we knew that pollution was responsible for diseases like pneumonia and asthma. Now we know that it leads to bloodstream, heart and cardiovascular diseases, too – even dementia. We are storing up problems. These are chronic diseases that require hospital beds. The cost will be enormous,” said Neira.

[..] According to the UN, there are now 3.3 million premature deaths every year from air pollution, about three-quarters of which are from strokes and heart attacks. With nearly 1.4 million deaths a year, China has the most air pollution fatalities, followed by India with 645,000 and Pakistan with 110,000. In Britain, where latest figures suggest that around 29,000 people a year die prematurely from particulate pollution and thousands more from long-term exposure to nitrogen dioxide gas, emitted largely by diesel engines, the government is being taken to court over its intention to delay addressing pollution for at least 10 years.

Follow the money, that’s all there’s to it. All the rest is window dressing and lip service, for Beijing as much as for Volkswagen.

• False Emissions Reporting Undermines China’s Pollution Fight (Reuters)

Widespread misreporting of harmful gas emissions by Chinese electricity firms is threatening the country’s attempts to rein in pollution, with government policies aimed at generating cleaner power struggling to halt the practice. Coal-fired power accounts for three-quarters of China’s total generation capacity and is a major source of the toxic smog that shrouded much of the country’s north last month, prompting “red alerts” in dozens of cities, including the capital Beijing. But the government has found it hard to impose a tougher anti-pollution regime on the power sector, with China’s energy administration describing it as a “weak link” in efforts to tackle smog caused by gases such as sulfur dioxide. No official data on the extent of the problem has been released since a government audit in 2013 found hundreds of power firms had falsified emissions data, although authorities have continued to name and shame individual operators.

“There is no guarantee of avoiding under-reporting (of emissions) at local plants located far away from supervisory bodies. Coal data is very fuzzy,” said a manager with a state-owned power company, who did not want to be named because he is not authorized to speak to the media. The manager said firms could easily exaggerate coal efficiency by manipulating their numbers. For example, power companies that also provided heating for local communities could overstate the amount of coal used for heat generation, which is not subject to direct monitoring, and understate the amount used for power. “Data falsification is a long-standing problem: China will not get its environmental house in order if it does not deal with this first,” said Alex Wang, an expert in Chinese environmental law at UCLA.

Money trumps laws.

• Weak EU Tests For Diesel Emissions Are ‘Illegal’ (Guardian)

Planned new ‘real driving emissions’ (RDE) test limits that would let cars substantially breach nitrogen oxide (NOx) standards are illegal under EU law, according to new legal analysis seen by the Guardian. The proposed ‘Euro 6’ tests would allow diesel cars to emit more than double the bloc’s ‘80 mg per km’ standard for NOx emissions from 2019, and more than 50% above it indefinitely from 2021. The UK supported these exemptions. But they contradict the regulation’s core objective of progressively scaling down emissions and improving air quality, according to an opinion by the European Parliament’s legal services, which the Guardian has seen. In principle, the exemptions and loopholes “run counter [to] the aims and content of the basic regulation as expressed by the Euro 6 limit values,” says the informal paper prepared for MEPs on the parliament’s environment committee.

“The commission has taken a political decision to favour the commercial interests of car manufacturers over the protection of the health of European citizens,” adds a second analysis by the environmental law firm ClientEarth, also seen by the Guardian. “The decision is therefore illegal and should be vetoed by the European Parliament,” the ClientEarth advice says. Catherine Bearder, a Liberal Democrat MEP on the environment committee, told the Guardian that as well as being morally unjustifiable, the agreement to water down the emissions limits was now “legally indefensible”. “This was a political decision, not a technical one, and so it should have been subject to proper democratic accountability,” she told the Guardian. “MEPs must veto this shameful stitch-up and demand a stronger proposal, based on the evidence and not on pressure from the car industry.”

Might as well close it down.

• 66 Institutional Investors To Sue Volkswagen In Germany (FT)

Sixty-six institutional investors are to take legal action against Volkswagen in its German home market after the carmaker cheated emissions tests in the US. The first claim will be made within the next seven days. The legal action will heap further pressure on Volkswagen, which earlier this month said its annual sales fell last year for the first time in more than a decade. Klaus Nieding, a lawyer at Nieding and Barth, the German law firm, said a capital market model claim, which is similar to a collective lawsuit in the US, will be filed “within the next week” in Germany on behalf of a US institutional investor that has suffered a “big loss”. The other 65 institutional investors are expected to join that claim.

Investors have been nursing heavy losses after the US’s Environmental Protection Agency revealed last September that the world’s second-largest carmaker had cheated US emissions tests by fitting vehicles with “defeat devices” designed to bypass environmental standards. Billions of euros have been wiped off the value of Volkswagen as a result. Nieding and Barth is working with MüllerSeidelVos, a fellow German firm, and Robbins Geller Rudman and Dowd, a US law firm, to represent investors that have contacted DSW, a German shareholder protection association. Mr Nieding said the law firms collectively represent “many foreign institutional investors, primarily from the US, with claims of several hundred million euros”. He added: “We are representing, as far as we know, the largest number of claims and of shareholders [in Germany].”

Bentham Europe, a litigation finance group backed by Elliott Management, the US hedge fund, and Australian-listed IMF Bentham, is also expected to file a damages claim in Germany. Volkswagen is facing additional legal action outside its home market. Class actions against the carmaker, which allow one person to sue on behalf of a group of individuals or companies, have already been filed in the US and Australia. Last week, the Arkansas State Highway Employees Retirement System, a $1.4bn pension fund, was named the lead plaintiff in a class action against VW in the US. “We will be prosecuting the claims on behalf of the class vigorously,” said Jeroen van Kwawegen, a lawyer at Bernstein Litowitz Berger and Grossmann. The law firm is acting on behalf of investors who put money in Volkswagen’s American depositary receipts, a type of stock that represents shares in a foreign corporation.

Snyder should be taken to court over his decisions that led to the mayhem. Instead, Wshington sends HIM the money to solve the issue.

• Obama Declares Emergency In Flint, But Not Disaster (DFP)

President Barack Obama on Saturday declared a federal emergency in Flint, freeing up to $5 million in federal aid to immediately assist with the public health crisis, but he denied Gov. Rick Snyder’s request for a disaster declaration. A disaster declaration would have made larger amounts of federal funding available more quickly to help Flint residents whose drinking water is contaminated with lead. But under federal law, only natural disasters such as hurricanes and floods are eligible for disaster declarations, federal and state officials said. The lead contamination of Flint’s drinking water is a manmade catastrophe. The president’s actions authorize the FEMA to coordinate responses and cover 75% of the costs for much-needed water, filters, filter cartridges and other items for residents, capped initially at $5 million.

The president also offered assistance in finding other available federal assistance, a news release Saturday from the White House said. Snyder, who on Thursday night asked Obama for federal financial aid in the crisis through declarations of both a federal emergency and a federal disaster, said in a news release Saturday he appreciates Obama granting the emergency request “and supporting Flint during this critical situation.” “I have pledged to use all state resources possible to help heal Flint, and these additional resources will greatly assist in efforts under way to ensure every resident has access to clean water resources,” he said. U.S. Rep. Dan Kildee, D-Flint, welcomed the emergency declaration and issued a statement: “I welcome the president’s quick action in support of the people of Flint after months of inaction by the governor,” Kildee said.

“The residents and children of Flint deserve every resource available to make sure that they have safe water and are able to recover from this terrible manmade disaster created by the state.” On Friday, Kildee led a bipartisan effort in support of the request for federal assistance. Kildee had long called for Snyder to request federal aid. Typically, federal aid for an emergency is capped at $5 million, though the president can commit more if he goes through Congress. Snyder’s application said as much as $55 million is needed in the near term to repair damaged lead service lines and as much as $41 million to pay for several months of water distribution and providing residents with testing, water filters and cartridges.

In what’s become a huge government scandal, garnering headlines across the country and around the world, Flint’s drinking water became contaminated with lead after the city temporarily switched its supply source in 2014 from Lake Huron water treated by the Detroit Water and Sewerage Department to more corrosive and polluted Flint River water, treated at the Flint water treatment plant. The switch was made as a cost-cutting move while the city was under the control of a state-appointed emergency manager.

Dr. Paul has been consistently on the case for years.

• When Peace Breaks Out With Iran… (Ron Paul)

This has been the most dramatic week in US/Iranian relations since 1979. Last weekend ten US Navy personnel were caught in Iranian waters, as the Pentagon kept changing its story on how they got there. It could have been a disaster for President Obama’s big gamble on diplomacy over conflict with Iran. But after several rounds of telephone diplomacy between Secretary of State John Kerry and his Iranian counterpart Javad Zarif, the Iranian leadership – which we are told by the neocons is too irrational to even talk to – did a most rational thing: weighing the costs and benefits they decided it made more sense not to belabor the question of what an armed US Naval vessel was doing just miles from an Iranian military base. Instead of escalating, the Iranian government fed the sailors and sent them back to their base in Bahrain.

Then on Saturday, the Iranians released four Iranian-Americans from prison, including Washington Post reporter Jason Rezaian. On the US side, seven Iranians held in US prisons, including six who were dual citizens, were granted clemency. The seven were in prison for seeking to trade with Iran in violation of the decades-old US economic sanctions. This mutual release came just hours before the United Nations certified that Iran had met its obligations under the nuclear treaty signed last summer and that, accordingly, US and international sanctions would be lifted against the country. How did the “irrational” Iranians celebrate being allowed back into the international community?

They immediately announced a massive purchase of more than 100 passenger planes from the European Airbus company, and that they would also purchase spare parts from Seattle-based Boeing. Additionally, US oil executives have been in Tehran negotiating trade deals to be finalized as soon as it is legal to do so. The jobs created by this peaceful trade will be beneficial to all parties concerned. The only jobs that should be lost are the Washington advocates of re-introducing sanctions on Iran. Events this week have dealt a harsh blow to Washington’s neocons, who for decades have been warning against any engagement with Iran. These true isolationists were determined that only regime change and a puppet government in Tehran could produce peaceful relations between the US and Iran.

Instead, engagement has worked to the benefit of the US and Iran. Proven wrong, however, we should not expect the neocons to apologize or even pause to reflect on their failed ideology. Instead, they will continue to call for new sanctions on any pretext. They even found a way to complain about the release of the US sailors – they should have never been confronted in the first place even if they were in Iranian waters. And they even found a way to complain about the return of the four Iranian-Americans to their families and loved ones – the US should have never negotiated with the Iranians to coordinate the release of prisoners, they grumbled. It was a show of weakness to negotiate! Tell that to the families on both sides who can now enjoy the company of their loved ones once again!

What they flee.

• Syria 4 Years On: Shocking Images Of A Post-US-Intervention Nation (ZH)

While US intervention in its various forms has likely been ongoing for decades, March 2011 is often cited as the start of foreign involvement in the Syrian Civil War (refering to political, military and operational support to parties involved in the ongoing conflict in Syria, as well as active foreign involvement). Since then the nation has collapsed into chaos with an endless array of superlatives possible to describe the economic and civilian carnage that has ensued. However, while a picture can paint a thousand words, these four shocking images describe a canvas of US foreign policy “success” that few in the mainstream media would be willing to expose… Mission un-accomplished?

I’m getting a bit antsy seeing people presenting arguments as new that I’ve made umpteen times in the past. We move far too slow.

• The Economics Of The Refugee Crisis Lay Bare Our Moral Bankruptcy (Guardian)

The Germans want to introduce a pan-European tax to pay for the refugee crisis. The Danish want to pass a law to seize any jewellery worth more than £1,000 as refugees arrive – apart from wedding rings. That’s what marks you out as a civilised people, apparently, that you can see the romance in a stranger’s life and set that aside before you bag them up as a profit or a loss. In Turkey people smugglers are charging a thousand dollars for a place in a dinghy, $2,500 in a wooden boat, with more than 350,000 refugees passing through one Greek island – Lesbos – alone in 2015. The profit runs into hundreds and millions of dollars, and the best EU response so far has been to offer the Turkish government more money to either hold refugees in their own country or – against the letter and the spirit of every pledge modern society has made on refugees – send them back whence they came.

Turkey is a country of 75 million that has already taken a million refugees, accepting impossible and cruel demands from a continent of more than 500 million people that, apparently, can’t really help because of the threat to its “social cohesion”. Our own government has pledged to take 20,000 refugees but only the respectable ones, from faraway camps: the subtext being that the act of fleeing to Europe puts refugees outside the purview of human sympathy, being itinerant, a vagrant, on the take. Institutions and governments represent an ever narrower strain of harsh opinion. The thousands of volunteers in Greece, the Guardian readers who gave more at Christmas to refugee charities than to any appeal before, the grassroots organisations springing up everywhere to try and show some human warmth on this savage journey to imagined safety – none of these are represented, politically, in a discourse that takes as its starting point the need to make the swarms disappear, to trick them into going somewhere else.

It’s those neutral-sounding, just-good-economics ideas that give the game away: if a million people in any given European nation suffered a natural disaster, nobody would be talking about how to raise a tax so that help could be sent. We would help first and worry about the money second. When the EU wants to rescue a government, or the banks of a member state (granted, at swingeing cost for the rescued), it doesn’t first float a “rescue tax”. The suggestion that the current crisis needs its own special tax may well be an attempt to force individual governments to confront the reality of their current strategy, which is to have no strategy. Yet it sullies the underlying principle of the refugee convention: that anyone fleeing in fear for their life be taken in on that basis, not pending a whip-round.

To repudiate that is essentially to say that human rights are no longer our core business. But without that as an organising principle, the ties that bind one nation to another begin to fray: alliances must at the very least be founded on ideas you’re not ashamed to say out loud.

Debt Rattle November 4 2015

Nov 042015

November 4, 2015 Posted by Raúl Ilargi Meijer at 10:51 am Finance Tagged with: aluminum, China, coal, death, debt, emissions, Greece, panic, refugees, slump, VW, Xi 1 Response »

Lesvos town hall mourns the dead Nov 4 2015

• China’s Slump Might Be Much Worse Than We Thought (Bloomberg)

• China Burns Much More Coal Than Reported (NY Times)

• Investors Are Way More Scared of China Than of Janet Yellen (Bloomberg)

• Corporate Debt in China: Above Cruising Altitude (CEW)

• A 127-Year-Old US Industry Collapses Under China’s Weight (Bloomberg)

• Xi Says China Needs at Least 6.5% Growth in Next Five Years (Bloomberg)

• China’s Xi Says 6.5% Annual Growth Enough To Meet Goals: Xinhua (AFP)

• China’s Money Exodus (Bloomberg)

• Standard Chartered’s Bad Loans Reveal Cracks in Asian Economies (Bloomberg)

• VW Admission Suggests Cheats Went Much Further Than Diesel Emissions (Guardian)

• VW Emissions Issues Spread to Gasoline Cars (Bloomberg)

• VW Says Fuel Usage Understated On Some Models; Porsche Warns (Reuters)

• Hugh Hendry: “Today We Would Advise You That You Don’t Panic!” (Zero Hedge)

• Hugh Hendry Says “Don’t Panic”; Paul Singer Says You May Want To (Zero Hedge)

• Europe’s Biggest Banks Are Cutting 30,000 Jobs, More To Come (Bloomberg)

• Wall Street/Washington Revolving Door More Dangerous Than Ever: Prins (Yahoo)

• Gathering Financial Storm Just One Effect Of Corporate Power Unbound (Monbiot)

• Merkel Warns Of Balkans Military Conflicts Amid Migrant Influx (AFP)

• European Union States Have Relocated Just 116 Refugees Out Of 160,000 (Guardian)

• Greek Coast Guard Says 5 Refugees Die In Boat Accident Tuesday Night (AP)

As I’ve said a thousand times now.

• China’s Slump Might Be Much Worse Than We Thought (Bloomberg)

The unreliability of Chinese official economic data has become almost a cliche. A few years before he became China’s premier, Li Keqiang said that the country’s numbers were “man-made” and “for reference only.” If the top economic policy maker of a country says that the numbers aren’t reliable … well, you believe him. But how unreliable? [..] Economic number-fudging is a cheap way to prevent jittery investors from making a stampede for the exits. Of course, knowing this, a number of people have tried to estimate China’s true growth rate. Tom Orlik, Bloomberg’s chief Asia economist, recently rounded up a number of independent figures, and collected them in the following chart:

The numbers range from Lombard Street’s pessimistic figure of a bit more than 3% to Bloomberg Intelligence’s optimistic number of just under 7%. In other words, there is a wide band of uncertainty here. But I would like to suggest a scenario even more pessimistic than the lowest of the numbers above. After reading reports by Peking University professor Chris Balding on the state of China’s financial sector, I think there’s a possibility that China’s growth is lower even than 3%. Chinese electricity usage is growing at more like 1%. Rail freight traffic, though volatile, has suffered some dizzying drops in recent months. These are traditional proxies for heavy industry output. That they are barely growing, if at all, implies that much of Chinese industry has ground to a halt.

China bulls, of course, will argue that the country is merely in the middle of a transition from industry to services, and from wasteful power usage to greater efficiency. That is probably true. But the speed of the transition would have to be incredible to make up for the precipitate drop in industrial activity. Why would China’s service sector and energy efficiency suddenly skyrocket immediately following the bursting of a major stock bubble? One reason is government spending. A stealth stimulus is underway. But another big part of the equation is the financial sector, which has logged stunning growth in recent months despite the stock crash. Why are Chinese financial services growing? Loan growth alone will not do the trick – banks need to be paid in order to log revenue. Or do they? Chris Balding reports:

“[S]ome Chinese researchers…compared the loan payments made by firms to the amount owed to banks…[Their findings imply] that Chinese firms are paying only half the financial costs they should be paying…The amount of revenue that banks are recording from loans is nearly four times the cost firms are associating with those loans…[B]ank revenue [has been] outpacing firm financial cost growth by a factor of almost four.” In other words, the amount of loan payments Chinese banks say they are receiving is a whole lot more than the amount Chinese borrowers say they are paying. If Balding’s numbers are to be believed – and of course, they are only one glimpse into a murky financial system – a large portion of the recent growth surge of China’s financial services sector may simply be fake.

Rounding error: “.. the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.”

• China Burns Much More Coal Than Reported (NY Times)

China, the world’s leading emitter of greenhouse gases from coal, is burning far more annually than previously thought, according to new government data. The finding could vastly complicate the already difficult efforts to limit global warming. Even for a country of China’s size and opacity, the scale of the correction is immense. China has been consuming as much as 17% more coal each year than reported, according to the new government figures. By some initial estimates, that could translate to almost a billion more tons of carbon dioxide released into the atmosphere annually in recent years, more than all of Germany emits from fossil fuels. Officials from around the world will have to come to grips with the new figures when they gather in Paris this month to negotiate an international framework for curtailing greenhouse-gas pollution.

The data also pose a challenge for scientists who are trying to reduce China’s smog, which often bathes whole regions in acrid, unhealthy haze. The Chinese government has promised to halt the growth of its emissions of carbon dioxide, the main greenhouse pollutant from coal and other fossil fuels, by 2030. The new data suggest that the task of meeting that deadline by reducing China’s dependence on coal will be more daunting and urgent than expected, said Yang Fuqiang, a former energy official in China who now advises the Natural Resources Defense Council. “This will have a big impact, because China has been burning so much more coal than we believed,” Mr. Yang said. “It turns out that it was an even bigger emitter than we imagined.

This helps to explain why China’s air quality is so poor, and that will make it easier to get national leaders to take this seriously.” The adjusted data, which appeared recently in an energy statistics yearbook published without fanfare by China’s statistical agency, show that coal consumption has been underestimated since 2000, and particularly in recent years. The revisions were based on a census of the economy in 2013 that exposed gaps in data collection, especially from small companies and factories. Illustrating the scale of the revision, the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.

“..concern over growth in China and the rest of the developing world coincided with a rise in the share of investors who think deflation is a larger risk to the markets than inflation.”

• Investors Are Way More Scared of China Than of Janet Yellen (Bloomberg)

China—not the prospect of the first rate hike from the Federal Reserve in almost a decade—is what keeps investors up at night. Barclays surveyed 651 of its clients around the world to glean their biggest fears, as well as their thoughts on commodities, yields, currencies, and other questions about the market outlook. “Only 7% sees Fed normalization as the main risk for markets over the next 12 months, compared with 36% whose main worry is China,” said Guillermo Felices, head of European asset allocation. The share of investors who judged softness in China and other developing economies to be the biggest risk to markets spiked in the third quarter, the period in which Beijing unexpectedly moved to devalue the yuan. The elevation in concern over growth in China and the rest of the developing world coincided with a rise in the share of investors who think deflation is a larger risk to the markets than inflation.

China’s devaluation sparked similar moves from other nations that had pegged their currencies to the greenback. All else being equal, this process engenders a stronger U.S. dollar and weaker commodity prices, thereby exerting downward pressure on headline inflation rates. As such, investors’ reactions to the Fed’s Oct. 28 statement, which resulted in an increase in the implied odds of a December rate hike, may not fully be reflected in its results. Nonetheless, roughly 40% of those surveyed indicated that they expected the Fed to initiate its tightening phase before the year was out. A plurality of respondents think liftoff will be a negative for risk assets, though only for a short period. “Indeed, the risk of Fed policy withdrawal is at a two-year low, suggesting complacency about the threat of higher rates,” warned Felices.

Pon Zi.

• Corporate Debt in China: Above Cruising Altitude (CEW)

By far the most worrying debt in China is held by the corporate sector. Total borrowing by the nonfinancial sector shows that the total debt-to-GDP ratio has reached 240% of GDP as of the first quarter of 2015. The corporate debt-to-GDP ratio was 160% of GDP, or $16.7 trillion as of the first quarter of 2015, and total corporate liabilities up to 200% of GDP when including corporate debt securities (bonds). For some perspective, the corporate debt-to-GDP ratio in the United States is 70%, less than half that of China’s. China’s economy has seen some cyclical scares this year (think stock market and currency), but high corporate debt is a structural issue, potentially leading to a period of slower expansion of credit in an effort to reduce the debt-to-GDP ratio weighing on rapid growth.

Corporate debt has risen faster than expected. As noted in an earlier blog post, in 2013, Standard & Poor’s predicted that China’s corporate debt would be between 136 and 150% of GDP by 2017. This year Standard & Poor’s said China’s corporate debt has already reached 160% of GDP, a figure in line with data from the Bank of International Settlements. Yu Yongding, a senior fellow at the Chinese Academy of Social Sciences (CASS), has calculated that without any fundamental change in the current situation, the corporate debt-to-GDP ratio will reach 200% by 2020. Increased borrowing by state-owned enterprises (SOEs) has contributed significantly to this rise, and SOEs account for around half of all the corporate debt in China. But problematically, SOEs have a much lower return on assets than private firms, as low as one-third.

Which begs the question: If a large SOE is unable to pay its interest payments, what will the government do? Will it take control of the debt, and will the debt therefore be counted as government rather than corporate debt? This would do nothing to the overall credit-to-GDP ratio but may cause moral hazard. Besides corporate debt from bank loans, China has seen dramatic growth of the corporate bond market. Overall this growth is seen as a positive move, as it means the firms are either refinancing old loans with bonds at lower yields or simply expanding their balance sheets using the bond market rather than bank loans. Also helpful is that the majority of corporate bonds in China are in renminbi, protecting them from foreign exchange fluctuations. The IMF reports that total bond issuance in China in 2014 was over $600 billion.

Real estate, construction, mining, and energy production have been leading the increase in leverage. These cyclical sectors loaded up on credit after the 2008 financial crisis and have some of the most highly leveraged firms in China. The rise in corporate debt in China is one of the most pressing issues for future growth. A drop in corporate revenue could prompt a number of defaults, lowering overall economic growth and reducing revenue further—a vicious cycle. Potential headwinds include normalizing interest rates in the United States, decreasing capital efficiency, disinflation, or a property market slowdown. Moreover, banks lend about half of their loans to corporations, so a rise in corporate defaults could have broader banking implications, including liquidity concerns and nonperforming loans.

“If prices don’t recover, the researcher predicts almost all U.S. smelting plants will close by next year..”

• A 127-Year-Old US Industry Collapses Under China’s Weight (Bloomberg)

Alcoa’s latest aluminum-making cutback is signaling the end of the iconic American industry. For 127 years, the New York-based company has been churning out the lightweight metal used in everything from beverage cans to airplanes, once making it a symbol of U.S. industrial might. Now, with prices languishing near six-year lows, it’s wiping out almost a third of domestic operating capacity, Harbor Intelligence estimates. If prices don’t recover, the researcher predicts almost all U.S. smelting plants will close by next year. While that’s a big deal for the U.S. industry and the people it employs, it doesn’t mean much for global supplies. Alcoa’s decision to eliminate 503,000 metric tons of smelting capacity accounts for about 31% of the U.S. total for primary aluminum, but less than 1% of the global total, according to Harbor.

For more than a decade, output has been moving to where it’s cheaper to produce: Russia, the Middle East and China. A global glut has driven prices down by 27% in the past year, rendering American operations unprofitable and accelerating the pace of the industry’s demise. “You’ve seen a fair clip of closures in the U.S., that is just unfortunate, but a development that’s very difficult to change,” Michael Widmer at Bank of America said. “It means you’ll just have to purchase from somewhere else.” That’s exactly what Jay Armstrong, the president of Trialco is doing. The company, which turns aluminum into finished manufactured products, now buys about 80% of the supplies it turns into car wheels from overseas. That’s up from 40% five years ago, he said. “It’s not the kind of business where we’re going to pay more and buy all American,” Armstrong said in a telephone interview. “It’s too competitive a business to do that.”

Not.Going.To.Happen. So what then?

• Xi Says China Needs at Least 6.5% Growth in Next Five Years (Bloomberg)

China’s president signaled policy makers will accept slower growth, but not much slower, as details of a blueprint set to define his term as leader were released Tuesday. Annual growth should be no less than 6.5% in the next five years to realize the goal to double 2010 gross domestic product and per capita income by 2020, President Xi Jinping said Tuesday, according to the official Xinhua News Agency. The 13th five-year plan, details of which were announced Tuesday, is the first to confront an era of sub-7% economic growth since Deng Xiaoping opened the nation to the outside world in the late 1970s. “Policy makers still want to maintain a high growth pace, while the policy expectation is tuned slightly lower,” said Tao Dong at Credit Suisse in Hong Kong.

“The stance of policy makers is to gradually transform to a ’new normal.’ But to maintain the peoples’ confidence, the bar is set relatively high.” China will seek to increase the yuan’s convertibility in an orderly manner by 2020 and change the way it manages currency policy, according to the Communist Party’s plan. Authorities will opt for a “negative list” foreign-exchange system – an approach that lets companies do anything that’s not specifically banned – and open the finance industry as it promotes the yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights basket, Xinhua reported. The proposals coincide with heightened anxiety over China’s economic outlook following a stock market slump and a surprise yuan devaluation in August that roiled global markets.

China will target medium- to high-speed growth during the period, and officials pledged to reduce the income gap, further open up to overseas investment and boost consumption, according to the draft. Officials said they will accelerate financial system reform and promote transparent and healthy capital markets while also overhauling stock and bond sales. They’ll continue reforms of the fiscal and tax systems and transfer some state capital to pension funds. [..] Xi’s growth baseline matches guidance provided by Premier Li Keqiang, who said Sunday that China needs average growth of more than 6.5% in the next five years to meet the goal of achieving a “moderately prosperous” society by 2020. Xi and Li are managing the priorities of both reforming the economy and keeping short-term growth fast enough so that structural changes don’t cause a hard landing.

“..Xinhua cited Xi as saying that annual growth should be no less than 6.5% in the next five years to achieve the Communist Party’s aim of doubling GDP per capita from 2010 by the end of the decade..”

• China’s Xi Says 6.5% Annual Growth Enough To Meet Goals: Xinhua (AFP)

Growth of only 6.5% a year in 2016-2020 will be enough for China to meet its wealth goals, President Xi Jinping said on Tuesday according to the official news agency Xinhua. The report came as the ruling Communist party issued guidelines for the next five-year plan for the world’s second-largest economy, whose slowing growth has alarmed investors worldwide. The first documents released by the leadership conclave did not include a numerical growth target. But Xinhua cited Xi as saying that annual growth should be no less than 6.5% in the next five years to achieve the Communist Party’s aim of doubling GDP per capita from 2010 by the end of the decade. It said he made the remarks in a speech, without giving direct quotes. The doubling target is part of achieving what China’s ruling party calls a “moderately prosperous society” in time for the 100th anniversary of its foundation.

The comments are the clearest indication yet that Beijing will reduce its target growth rate from the current “around 7%”, after expansion slowed last quarter to its lowest in six years. Some economists say that the current figure is unattainable going forwards, and that trying to do so risks derailing painful but necessary markets reforms. The country has faced economic turbulence in recent months as it attempts to transition its economy from years of super-charged growth to a more modest pace it has dubbed the “new normal”. Botched stock market interventions and a sudden currency devaluation have rattled confidence in the country’s leadership, which has staked its legitimacy on maintaining an aura of economic infallibility.

“..during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left.”

• China’s Money Exodus (Bloomberg)

The ranks of China’s wealthy continue to surge. As their economy shows signs of weakness at home, they’re sending money overseas at unprecedented levels to seek safer investments — often in violation of currency controls meant to keep money inside China. This flood of cash is being felt around the world, driving up real estate prices in Sydney, New York, Hong Kong and Vancouver. The Chinese spent almost $30 billion on U.S. homes in the year ending last March, making them the biggest foreign buyers of real estate. Their average purchase price: about $832,000. Same trend in Sydney, where Chinese investors snap up a quarter of new homes and are forecast to double their spending by the end of the decade. In Vancouver, the Chinese have helped real estate prices double in the past 10 years.

In Hong Kong, housing prices are up 60% since 2010. In total, UBS Group estimated that $324 billion moved out last year. While this year’s numbers aren’t yet in, during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left. So how do these volumes of cash get out when Chinese are limited by rules that allow them to convert only $50,000 per person a year? The methods include China’s underground banks, transfers using Hong Kong money changers, carrying cash over borders and pooling the quotas of family and friends – a practice known as “smurfing.” The transfers exist in a gray area of cross-border legality: What’s perfectly legitimate in another country can contravene the law in China.

“It’s not legal for people to use secret channels to move money abroad, because this is smuggling,” says Xi Junyang, a finance professor at Shanghai University of Finance & Economics. “But the government has kept a laissez-faire attitude until recently.” Now, policy makers are starting to take the outflow seriously. While it’s not about to run out of money, China has intensified a crackdown on underground banks that illegally channel cash abroad. It’s also trying to capture officials suspected of fleeing overseas with government funds. Longer term, China has pledged to remove its currency controls and make the yuan fully convertible by 2020.

There’s so much more of this in the pipeline.

• Standard Chartered’s Bad Loans Reveal Cracks in Asian Economies (Bloomberg)

As China’s growth sputters, the troubles at Standard Chartered are another bad omen for what were once Asian economic darlings. The bank, which generates most of its income in the region, had gambled on success in emerging markets such as India, which instead saddled the lender with delinquent loans. As a result, the company which opened its offices in Mumbai under Queen Victoria is now axing 15,000 jobs and is asking investors for $5.1 billion. “Standard Chartered are Asian specialists and are in all the main markets in the region, so in looking at them you can get a good sense for credit direction and lending appetite,” said Mark Holman at TwentyFour Asset Management. For now, Asia still has fewer corporate debt defaults than other developing countries, but rising leverage from India to Indonesia point to the risk of further nonpayments.

More stringent conditions from banks like Standard Chartered are slowing loan growth in the region, exposing more fissures in the corporate credit market. “The picture that emerges is that Asian credit cycles are far more advanced than those in Europe and loan losses and impairment charges are mounting,” Holman said. Like other developing nations, Asian companies took advantage of low interest rates overseas to go on a borrowing binge. The move is backfiring as slower economic growth makes it more difficult to pay back the obligations. Fitch Ratings warned on Nov. 2 that 11% of India’s loans will fall into the category of “stressed assets” in the fiscal year ending in March 2016 and only improve “marginally” the next year. In China, Sinosteel, a state-owned steelmaker, missed an interest payment last month, becoming the latest firm that teeters on the verge of default.

It’s still only about money: “VW said it estimated the “economic risks” of the latest discovery at €2 billion..”

• VW Admission Suggests Cheats Went Much Further Than Diesel Emissions (Guardian)

The crisis at Volkswagen has deepened after the carmaker found “irregularities” in the carbon dioxide levels emitted by 800,000 of its cars. An internal investigation into the diesel emissions scandal has discovered that CO2 and fuel consumption were also “set too low during the CO2 certification process”, the company admitted on Tuesday night. The dramatic admission raises the prospect that VW not only cheated on diesel emissions tests but CO2 and fuel consumption too. VW said it estimated the “economic risks” of the latest discovery at €2bn (£1.42bn). The company said the “majority” of cars involved have a diesel engine, which implies that petrol cars are involved in the scandal for the first time.

Matthias Müller, chief executive of VW, said: “From the very start I have pushed hard for the relentless and comprehensive clarification of events. We will stop at nothing and nobody. This is a painful process, but it is our only alternative. For us, the only thing that counts is the truth. That is the basis for the fundamental realignment that Volkswagen needs.” VW said it will now work with the authorities to clarify what took place during the CO2 tests and “ensure the correct CO2 classification for the vehicles affected”. Müller added: “The board of management of Volkswagen AG deeply regrets this situation and wishes to underscore its determination to systematically continue along the present path of clarification and transparency.”

VW has already admitted fitting a defeat device to 11m vehicles worldwide that allowed them to cheat tests for emissions of nitrogen oxides. The carmaker has put aside €6.7bn to meet the cost of recalling the 11m vehicles, but also faces the threat of fines and legal action from shareholders and customers. The company has hired the accountancy firm Deloitte and the law firm Jones Day to investigate who fitted the device into its vehicles. It is understood that the carmaker believes a group of between 10 and 20 employees were at the heart of the scandal.

“VW is leaving us all speechless..”

• VW Emissions Issues Spread to Gasoline Cars (Bloomberg)

Volkswagen said it found faulty emissions readings for the first time in gasoline-powered vehicles, widening a scandal that so far had centered on diesel engines. Separately, the company’s Porsche unit said it’s halting North American sales of a model criticized by U.S. regulators. Volkswagen said an internal probe showed 800,000 cars had “unexplained inconsistencies” concerning their carbon-dioxide output. Previously, the automaker estimated it would need to recall 11 million vehicles worldwide — more than Volkswagen sold last year. It was unclear how much overlap there was between the two tallies. The company said the new finding could add at least €2 billion to the €6.7 billion already set aside for fixes to the affected vehicles but not litigation, fines or customer compensation.

The crisis that emerged after Volkswagen admitted in September to cheating U.S. pollution tests for years with illegal software has shaved more than one-third of the company’s stock price and led to a leadership change. Today’s revelation adds to the pressure on Volkswagen’s new chief executive officer, Matthias Mueller, who replaced Martin Winterkorn and was previously head of Porsche. Volkswagen’s supervisory board said it will meet soon to discuss further measures and consequences. “VW is leaving us all speechless,” said Arndt Ellinghorst, a London-based analyst with Evercore ISI. [..] The 3.0-liter diesel motors targeted on Monday by a U.S. Environmental Protect Agency probe aren’t part of the latest finding. The company rejected allegations that its cheating on diesel-emissions tests included Porsche and other high-end vehicles.

The EPA said its new investigation centers on the Porsche Cayenne and VW Touareg sport utility vehicles and as well as larger sedans and the Q5 SUV from Audi. But then late Tuesday, Porsche’s North American division said it would voluntarily discontinue sales of diesel-powered Cayennes from model years 2014 to 2016 until further notice. The Atlanta-based unit’s statement reiterated that the EPA notice was unexpected and that owners can operate their vehicles normally. “We are working intensively to resolve this matter as soon as possible,” Porsche said in the statement.

Porsche is worried about ‘its results’. It should rethink that one.

• VW Says Fuel Usage Understated On Some Models; Porsche Warns (Reuters)

Volkswagen on Tuesday said it had understated the fuel consumption of 800,000 cars sold in Europe, while majority stakeholder Porsche Automobil Holding warned that VW’s latest findings could further weigh on its results. The latest revelation about fuel economy and carbon dioxide emissions, which Germany’s largest automaker said represented a roughly €2 billion economic risk, deepened the crisis at VW. The scandal initially centered on software on up to 11 million diesel vehicles worldwide that VW admitted vastly understated their actual emissions of smog-causing pollutant nitrogen oxide. U.S. environmental regulators said on Monday that similar “defeat devices” were installed on larger 3.0 liter engines used in luxury sport utility vehicles from Porsche and Audi, although VW has denied those allegations.

Porsche’s North American unit said it was discontinuing sales of Porsche Cayenne diesel sport utility vehicles until further notice, citing the allegations. The latest findings that VW understated fuel consumption and carbon dioxide emissions, areas which U.S. regulators have yet to address, were disclosed as VW continues a broad review of its handling of all pollution-related issues. While the findings mostly apply to smaller diesel engines, one gasoline-powered engine is also affected. “VW is leaving us all speechless,” said Arndt Ellinghorst of banking advisory firm Evercore ISI. “It seems to us that this is another issue triggered by VW’s internal investigation and potentially related to Europe.” The carmaker said it would immediately start talking to “responsible authorities” about what to do about the latest findings.

Will Hugh be the greater fool?

• Hugh Hendry: “Today We Would Advise You That You Don’t Panic!” (Zero Hedge)

In his latest letter, he valiantly trudges on down the path of bullish abandon and tries to convince if not so much others as himself why continuing his desertion of the bearish camp he did two years ago is the right thing to do, and how in the aftermath of the VIX explosion in August, he “learned to stop worrying and love the bomb.” Key highlights:

… it is ironic that we are perhaps best known for advising “that you panic”. However, if you are anxious at the wrong time it can prove very painful. Today, we would advise that you don’t panic!

… by withdrawing the “Greenspan put” and using their asset purchase schemes to eviscerate any notion of value, the authorities have paradoxically created a safer yet more paranoid market.

… first it was Europe, then the high yield credit space with the vulnerabilities of the shale oil issuers, and then it was back to Greece and then the mother of them all, China, with its falling property and stock prices seemingly knocking economic growth and making a sizeable devaluation inevitable. And yet nada… the weeping prophets have failed to force a crisis after one hell of a go.

… perhaps we are being premature and the cards are about to fall. Or perhaps there simply are no dead bodies in the system and the global economy has proven itself much more resilient to shocks. We certainly believe that if we had been forewarned two years ago that the dollar would rise versus selected EM currencies by 50% and that important commodities such as oil and iron ore would fall by 50% we would never have been able to predict just how orderly things have turned out at both the company and sovereign level. The turmoil it seems has remained contained within financial markets in a very curious way.

… perhaps it’s time to stop worrying and love the bomb?

Actually at last check, practically all the “bears” predicted exactly what happened: trapped by their own policies, central banks would have no choice than to unleash another onslaught of easing. This is precisely what happened when first the ECB previewed its QE2, then the PBOC cut rates, then Sweden boosted QE, then the BOJ said it would “not hesitate” to act (and would have done so had other central banks not pushed the Yen lower thanks to its carry trade status). The real question, Hugh, is how much time did the latest doubling down by the world’s central banks buy? We should know the answer in 2-4 months.

“What policymakers will do, in all likelihood, is hope and pray, and when that fails, they will likely double down on monetary extremism. ”

• Hugh Hendry Says “Don’t Panic”; Paul Singer Says You May Want To (Zero Hedge)

Businesspeople in today’s world are either concerned, actively sweating or oblivious to the rumblings and dangers around them. We recommend that both investors and businesspeople be highly alert to the implications of populism, the increasing concentration of power into the hands of unaccountable elites and the dissipation of the rule-of-law protections of liberty. It is very odd and dangerous that governments, satisfied with policies which, by raising asset prices (stocks, bonds, real estate, high-end art), are seemingly designed to make the rich richer, nevertheless simultaneously excoriate inequality as the cause of slow growth and societal disquiet. It is also strange that policymakers are not concerned by the obvious failure of monetary extremism to achieve the predicted levels of growth, or by the risks that may exist either in the continuation of the monetary experiment or in its ultimate unwinding.

Policymakers who are sticking with the failed policy mix have invented creative explanations for why growth has been so bad for such a long a period of time. The most prevalent (and tautological) of these explanations is “secular stagnation,” a theory that the developed world simply cannot grow faster due to ageing populations, growth-destructive technologies and competition from cheap labor around the world. We disagree with this theory, and assert that it can be examined for validity only after a full range of first-line “fiscal” policies (as we have defined them) has been put firmly and comprehensively in place. In contrast to the “secular stagnationistas,” we believe that there is a great deal of low-hanging fruit (that is, far higher rates of growth in incomes, jobs and national wealth) to be had from simple changes in leadership and policies.

The question of the day is: What will be the policy response of the developed world toward the currently deteriorating (at least in EMs and China) conditions, and the policy response if the deterioration spreads to Europe and the U.S.? If we know anything about the policy decision-making landscape in developed countries, it is that policymakers are all on super-keen-alert for signs of deflation (which they basically equate with credit collapse — a false and misleading connection, but that is a topic for another day). They will not remain passive in the face of a renewed global recession and/or financial crisis. So what will they do next, and how will it affect global markets? We can be reasonably certain that policymakers will not leap into action on the fiscal measures that we have described as the front-line policies needed to meaningfully quicken economic growth. Try to imagine more flexible and business-friendly tax, regulatory and labor policies being enacted by current political leadership in the U.S., Europe and Japan.

Sorry, our imaginations — never inert — just can’t get there. What policymakers will do, in all likelihood, is hope and pray, and when that fails, they will likely double down on monetary extremism. This landscape is essentially baked, unless you think that sometime in the near future the global economy will turn higher, either on its own or in anticipation of such policy measures in the future. To many policymakers today, jawboning seems like a magic button, since markets often create the desired result in anticipation of possible future actions. Consequently, governments may be able to get a particular outcome without requiring the central bankers to actually take any action.

This is nothing yet. Wait till next year’s pring cleaning.

• Europe’s Biggest Banks Are Cutting 30,000 Jobs, More To Come (Bloomberg)

Standard Chartered became the third European bank in less than two weeks to announce sweeping job cuts, bringing the total planned reductions to more than 30,000, or almost one in seven positions. The London-based firm said Tuesday it will eliminate 15,000 jobs, or 17% of its workforce, as soaring bad loans in emerging markets hurt earnings. Deutsche Bank last week announced plans for 11,000 job cuts, while Credit Suisse said it would trim as many as 5,600 employees. The three firms, which all named new chief executive officers this year, are undertaking the deepest overhauls since the financial crisis as stricter capital rules erode profitability. Standard Chartered and Credit Suisse will tap shareholders for funds, while Deutsche Bank scrapped its dividend for this year and next to conserve capital.

“It’s just further evidence that Europe’s banks didn’t adapt quickly enough to the post-crisis world and are now playing catch up,” said Christopher Wheeler at Atlantic Equities in London. More bloodletting may be on the way. UniCredit is considering as many as 12,000 job cuts as it seeks to improve profit and capital levels, people with knowledge of the discussions said last week. The numbers, which are still under review, increased from 10,000 a month ago and may change depending on the outcome of asset sales. The largest Italian bank reports earnings next week. Including jobs lost through asset sales, John Cryan, Deutsche Bank’s co-CEO since July, intends to eliminate 26,000 employees, or a quarter of the workforce, by 2018. Tidjane Thiam, Credit Suisse’s new CEO, will shed jobs in the U.S., U.K. and Switzerland.

“..the big six banks in this country control 97% of all trading assets in the U.S. and 93% of all derivatives.”

• Wall Street/Washington Revolving Door More Dangerous Than Ever: Prins (Yahoo)

What are the consequences of regulators leaving government work to join the financial services industry, and vice versa? Nomi Prins, a Senior Fellow at Demos, chronicles the problems of the revolving door between Washington and Wall Street in her latest book “All the Presidents’ Bankers.” “The difference is that now people know each other less in their personal lives before they make those transitions,” she says. “Now it’s a little more like ‘I know you from the industry of Wall Street and Washington’ as opposed to ‘We hung out and our dads smoked cigars together.’ Prins notes that there was more personal accountability in the relationships between Wall Street and Washington during the mid-20th century.

She points out that before the crash of 1929, the Morgan bank (predecessor of J.P. Morgan) had strong connections with Presidents Coolidge and Hoover. Yet, a shift in the relationships occurred during the Great Depression. “There was this accountability moment where the bankers that ascended to run these banks, to run Chase, to run Citibank & they wanted economic stability throughout the country,” she says. “They actually thought [stability] was important for confidence in the banking system & people would actually keep their money there and trust that they had a future with this bank, so the relationships with individuals and corporations and countries all mattered.” Prins says that the modern-day deterioration of the bank-customer relationship is a direct result of the growing size and risk profiles of bank behemoths.

“The banks are so big right now [and] they have access to so much of apercentage of the deposits of individuals, she says. “The leverage is so much higher on the back of those deposits, the bailouts that have happened for numerous reasons in the past 25 years have all been an indication that is okay to take more reckless bets.” And while the idea of banks being “too big to fail” caused widespread Main Street anger towards Wall Street, Prins believes the policy of government bailouts will continue post-Financial Crisis as banking has become more concentrated. She noted that the big six banks (J.P. Morgan, Citi, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo) in this country control 97% of all trading assets in the U.S. and 93% of all derivatives.

Prins also added that the anti-banking rhetoric of many U.S. Presidents (remember President Obama’s Wall Street “fat cats”?) has a long history, but one that is at odds with actual policy. It goes all the way back to Woodrow Wilson and the creation of the Federal Reserve, she said. “In practice Woodrow Wilson was behind the creation of the Fed, which we know now has substantiated a lot of Wall Street losses, has a $4.5 trillion book. It’s the largest hedge fund in the world right now…But [Dodd Frank] hasn’t fundamentally changed the concentration of power. The revolving door…influences the risk inherent to what’s going on on Wall Street. It hasn’t made the economy more stable with respect to the banking industry, which is an industry that infiltrates every aspect of our individual and political lives.

“..to force nations to accept new financial products and services, to approve the privatisation of public services and to reduce the standards of care and provision.”

• Gathering Financial Storm Just One Effect Of Corporate Power Unbound (Monbiot)

What have governments learned from the financial crisis? I could write a column spelling it out. Or I could do the same job with one word: nothing. Actually, that’s too generous. The lessons learned are counter-lessons, anti-knowledge, new policies that could scarcely be better designed to ensure the crisis recurs, this time with added momentum and fewer remedies. And the financial crisis is just one of the multiple crises – in tax collection, public spending, public health and, above all, ecology – that the same counter-lessons accelerate. Step back a pace and you see that all these crises arise from the same cause. Players with huge power and global reach are released from democratic restraint. This happens because of a fundamental corruption at the core of politics.

In almost every nation the interests of economic elites tend to weigh more heavily with governments than do those of the electorate. Banks, corporations and landowners wield an unaccountable power, which works with a nod and a wink within the political class. Global governance is beginning to look like a never-ending Bilderberg meeting. As a paper by the law professor Joel Bakan in the Cornell International Law Journal argues, two dire shifts have been happening simultaneously. On one hand governments have been removing laws that restrict banks and corporations, arguing that globalisation makes states weak and effective legislation impossible. Instead, they say, we should trust those who wield economic power to regulate themselves.

On the other hand, the same governments devise draconian new laws to reinforce elite power. Corporations are given the rights of legal persons. Their property rights are enhanced. Those who protest against them are subject to policing and surveillance – the kind that’s more appropriate to dictatorships than democracies. Oh, state power still exists all right – when it’s wanted. Many of you will have heard of the Trans-Pacific Partnership and the proposed Transatlantic Trade and Investment Partnership (TTIP). These are supposed to be trade treaties, but they have little to do with trade, and much to do with power. Theyenhance the power of corporations while reducing the power of parliaments and the rule of law. They could scarcely be better designed to exacerbate and universalise our multiple crises – financial, social and environmental.

But something even worse is coming, the result of negotiations conducted, once more, in secret: a Trade in Services Agreement (TiSA), covering North America, the EU, Japan, Australia and many other nations. Only through WikiLeaks do we have any idea of what is being planned. It could be used to force nations to accept new financial products and services, to approve the privatisation of public services and to reduce the standards of care and provision. It looks like the greatest international assault on democracy devised in the past two decades. Which is saying quite a lot.

Damn right. Damn late too.

• Merkel Warns Of Balkans Military Conflicts Amid Migrant Influx (AFP)

German Chancellor Angela Merkel warned that fighting could break out in the Balkans, along the main route of migrants trying to reach Europe, if Germany closed its border with Austria, in remarks published Tuesday. Amid ever-louder calls for Merkel to undertake drastic action to stem the tide of people entering her country, she again rejected the appeals, noting that tensions were already running high between the Western Balkans countries. With an eye to deep rifts exposed after Hungary closed its frontier with Serbia and Croatia, Merkel said blocking the border with Austria to refugees and migrants would be reckless. “It will lead to a backlash,” Merkel was quoted in media reports as saying late Monday in an address to members of her conservative Christian Democratic Union (CDU) in the western city of Darmstadt.

“I do not want military conflicts to become necessary there again,” Merkel added, referring to the Balkans. She said disputes in a region already ravaged by war in the 1990s could quickly escalate, touching off a cycle of violence “no one wants.” Germany has become the main destination for people fleeing war and poverty in the Middle East, Africa and Asia via the Balkans, with up to one million people expected this year. The EU vowed last month to help set up 100,000 places in reception centres in Greece and along the migrant route through the Balkans as part of a 17-point action plan devised with the countries most affected by the crisis. But just as Merkel attempts to convince European partners to share out the burden more fairly, she has faced a revolt from within her own conservative alliance against the welcome she has extended to people escaping violence and persecution.

Must take this out of the hands of the EU. All it is is a facade for sociopaths to hide behind.

• European Union States Have Relocated Just 116 Refugees Out Of 160,000 (Guardian)

EU member states have so far relocated only 116 refugees of the 160,000 they are committed to relocating over the next two years, according to new figures. EU members states agreed in September to relocate 160,000 people in “clear need of international protection” through a scheme set up to relocate Syrian, Eritrean, and Iraqi refugees from the most affected EU states – such as Italy and Greece – to other EU member states. So far 116 people have been relocated, and only 1,418 places have been made available by 14 member states, according to data released on Tuesday by the European Commission. A total of 86 asylum seekers have been relocated from Italy, and 30 asylum seekers will travel from Athens to Luxembourg on Wednesday.

Denmark, Ireland and the UK have an opt-out from the scheme, but Britain is the only member state that has said it will not contribute to the relocation. The EU’s emergency relocation mechanism is only one facet of the broader refugee crisis. Syria, Iraq and Eritrea account for the majority of those crossing the Mediterranean. According to the UNHCR, more than one in two are fleeing from Syria. While 6% of those arriving via the Mediterranean are originally from Iraq, and 5% from Eritrea. Not all those seeking asylum remain or travel via Italy or Greece. About 770,000 asylum applications were lodged across the EU in the first nine months of 2015, compared to 625,920 in all of 2014 and 431,090 in 2013. This has contributed to a backlog of applications.

At the end of last year there were just under 490,000 pending applications across EU member states. In July of this year, the figure stood at 632,000. The backlog is not showing signs of receding any time soon: for every asylum decision made there are 1.8 new applications. Approximately 240,000 applications were processed between January and June this year. Over the same six months, 432,345 applications were filed. However, the European Commission data also reveals that beyond the logistical challenges, a “large number of member states has yet to meet financial commitments” and “too few member states” have responded to calls to help Serbia, Slovenia and Croatia; among the most used routes by asylum seekers, with essential resources such as beds and blankets.

What happened to numb the rich west the way it did?

• Greek Coast Guard Says 5 Refugees Die In Boat Accident Tuesday Night (AP)

Greece’s coast guard says the total number of people rescued from a boat carrying people from Turkey to the nearby Greek island of Lesvos has increased to 65, while a total of five bodies were recovered from the water. The coast guard said Wednesday that the bodies were those of three children and two men. There were no further missing people reported. The migrant boat ran into trouble north of Lesvos Tuesday night. The coast guard says a total of 457 people were rescued between Tuesday morning and Wednesday morning in 13 separate incidents. More than 600,000 people have arrived in Greece so far this year, with most arriving on Lesbos. From there, they make their way to the Greek mainland on ferries and then head overland to more prosperous EU countries in the north. Thousands of migrants are stranded on Lesvos due to a ferry strike that began Monday.

Debt Rattle August 20 2015

Aug 202015

August 20, 2015 Posted by Raúl Ilargi Meijer at 9:37 am Finance Tagged with: Australia, Calais, China, Greece, Macedonia, Nicaragua, refugees, Shanghai, slump 1 Response »

NPC “Largest electric locomotive and Congressman John C. Schafer” 1924

• China Stocks Slump Again Despite Government Support (Reuters)

• China Strengthens Yuan By Most In 2 Months; Massive Liquidity Injection (ZH)

• China Central Bank Injects Most Funds Since February (Bloomberg)

• Is This The Great Crash Of China? (Steve Keen)

• China’s August Scare Is A False Alarm As Fiscal Crunch Fades (AEP)

• Should We Be Afraid Of China’s ‘Value Chain’? (CNBC)

• Eurozone: The Case Against ‘Cash For Reform’ (Martin Sandbu)

• Greece’s First Privatization Deal Since Third Bailout Hits Snag (Bloomberg)

• Fresh Doubts Raised Over Privatization Of 14 Greek Airports (Xinhua)

• Stiglitz: “Deep-Seatedly Wrong” Economic Thinking Is Killing Greece (Parramore)

• Dutch Lambast Greece For Creating ‘Complete Chaos’ (Telegraph)

• European Bailout Fund To Disburse First Greek Tranche On Thursday (Reuters)

• The Fisherman’s Lament – A Way of Life Drowned by Greece’s Crisis (WSJ)

• Get Used To Cheap Oil, Derivatives Markets Say (Reuters)

• As Canada’s Oil Debt Soars to Record, an Industry Shakeout Looms (Bloomberg)

• Cheap Oil’s Making It Tough for Ethanol to Pay the Bills (Bloomberg)

• Banks Have Treated Our Housing Market Like A Ponzi Scheme (David)

• Rebels In Ukraine’s Donetsk Plan Referendum On Joining Russia (Xinhua)

• China’s Building a Huge Canal in Nicaragua, But We Couldn’t Find It (Bloomberg)

• British Police Head To Calais To Stymie Migrant Smuggling Activity (Guardian)

• Refugee Chaos in Macedonia: ‘Life-Threatening for Women and Children’ (Spiegel)

Shanghai closed down another 3.42%. Capital is taking the Concorde out of the country.

• China Stocks Slump Again Despite Signs Of Government Support (Reuters)

China stocks tumbled again in late trading on Thursday, underscoring fragile investor confidence in the market as worries about the world’s second largest economy persist. Trading volumes were thin, suggesting many investors stayed on the sidelines. Shares were marginally lower in the morning, as statements by a slew of companies that the government had invested in them boosted some counters. But in mid-afternoon, prices began to drop. The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 3.2%, to 3,761.45, while the Shanghai Composite Index lost 3.4%, to 3,664.29 points.

The SSEC is now down about 7% since China devalued the yuan by nearly 2% on Aug. 11. On Wednesday, the indexes had reversed sharp losses to end higher, as roughly 30 Chinese listed companies, many small caps, disclosed holdings by government-backed investors in an apparent attempt to sooth market panic following the previous session’s 6% tumble. “Even as the government has the will to put a floor under the market, whether it has the ability to do so is in doubt,” said Hou Yingmin, analyst at AJ Securities, citing adversities including an anaemic economy, capital outflows and ugly technical patterns. “Without fresh money inflows, any rebound is not sustainable.”

Most sectors fell, with transport and real estate shares leading the decline. Analysts have said further yuan depreciation would trigger fresh capital outflows, putting pressure on the property market. But investors nevertheless bet on companies with investments from state-backed investor Central Huijin, and state margin lender China Securities Finance Corp (CSFC), which was tasked with propping up share prices during crisis.

Not looking good for Beijing.

• China Strengthens Yuan By Most In 2 Months; Massive Liquidity Injection (ZH)

The PBOC set the Yuan fix 0.08% stronger – the biggest ‘strengthening in 2 months, which is interesting because following The IMF’s confirmation of a delay to Yuan inclusion in the SDR basket to Oct 2016 (pending a year-end decision and asking for more flexibility), Offshore Yuan forwards notably devalued (shifting 350pips higher to 6.65, the highest/weakest Yuan in a week) pricing a 20 handle (or 3%) devaluation by August 2016. Overnight saw another CNY110bn liquidity injection rescue from The PPT in the afternoon session (saving SHCOMP from a close below the 200DMA) and tonight we see promise to recap Ag Bank along with another CNY 120bn reverse repo injection. Shanghai margin debt declined for a 2nd day in a row and Chinese stocks look set to open weaker.

“Authorities have to walk a thin line between boosting exports and satisfying the IMF’s requirements for the yuan to obtain reserve status, while at the same time ensuring financial stability.”

• China Central Bank Injects Most Funds Since February (Bloomberg)

China’s central bank injected the most funds in open-market operations since February as intervention to prop up the yuan strained the supply of cash and drove a key money-market rate to a four-month high. The People’s Bank of China pumped a net 150 billion yuan ($23 billion) into the financial system this week, data compiled by Bloomberg show. That’s the most since before the Chinese New Year holiday, when seasonal demand for cash spikes. The authorities are providing another 170 billion yuan through loans and an auction of deposits. The injections come after China surprised investors by devaluing the yuan last week and shifting to a more market-oriented exchange rate. Under the new system, PBOC intervention has partly replaced the daily reference rate’s role in guiding currency moves.

Yuan purchases risk driving borrowing costs higher at a time of slowing economic growth unless the monetary authority releases additional cash. “Front-end rates have been edging up, likely resulting from tighter liquidity conditions amid intervention,” said Frances Cheung at Societe Generale in Hong Kong. “The PBOC needs to step up its open-market operations to offset the liquidity withdrawal on the foreign-exchange side.” Authorities have to walk a thin line between boosting exports and satisfying the IMF’s requirements for the yuan to obtain reserve status, while at the same time ensuring financial stability. The overnight repurchase rate, a gauge of liquidity in the banking system, rose three basis points to 1.80% as of 1 p.m. in Shanghai, according to a weighted average from the National Interbank Funding Center. That’s the highest since April 23 and reflects increased demand for cash.

“..it is more heavily indebted than America was when its crisis began—even relying on official statistics which undoubtedly understate the real situation..”

• Is This The Great Crash Of China? (Steve Keen)

Banks in the West effectively ignore what the government wants: in the West, the political class is effectively subservient to the financial class. But in China, despite its economic transformation, the political class remains dominant: any Chinese entity that ignores a government directive does so at its peril. Things are not as they were in the 1980s, when every answer to every question that I and my group of touring Australian journalists asked began with “We followed the directives of the Central Committee of the Communist Party of China”.

But it’s still not good for your health to flout Central Committee policy. So the Chinese banking system and its satellites lent like crazy to any company and many individuals, and one of the biggest credit bubbles in history—possibly the biggest ever—took off. In 2010, the increase in private debt in China was equivalent to 35% of GDP. That dwarfs the rate of growth of credit in both Japan and the USA prior to their crises: Japan topped out at just over 25% per year, and the USA reached a “mere” 15% of GDP per year.

As I have argued for a decade now, crises begin when the rate of growth of credit slows down in heavily indebted countries. China was not heavily indebted in 2008, which is why it could take the credit growth path out of the Global Financial Crisis. But now it is more heavily indebted than America was when its crisis began—even relying on official statistics which undoubtedly understate the real situation—and the momentum of debt may well carry it past the peak level reached by Japan after its Bubble Economy collapsed in the early 1990s.

So China is having its first fully-fledged capitalist crisis. To date its response to it has been to try to sustain the unsustainable: to transfer the bubble from housing to the stockmarket, and to keep the stockmarket rising like some production target for wheat from the bad old days before the fall of the Gang of Four. It can’t be done. At some point, the Chinese government is going to have to make the transition from generating a credit bubble to trying to contain its aftermath.

Ambrose is the odd one out.

• China’s August Scare Is A False Alarm As Fiscal Crunch Fades (AEP)

The situation in China is desperate but not serious, to borrow an old Viennese saying. Countries with a tight exchange controls and state banking systems may come to grief in the long-run, but they do not face the sort of financial collapse seen in the US and Europe in 1931 or 2008. China’s central bank (PBOC) has already warned that it will deploy the coercive might of the Communist regime to stop anybody smuggling money abroad under false pretexts, invoking laws covering “money laundering and terrorist financing.” It said violators will be “severely punished”. They will be sent to the proverbial asbestos mines of Sichuan. This is the sort of liberalisation that Xi Jinping does best. Given the sanctions and given that China has a trade surplus of $600bn or 6pc of GDP – and is therefore accumulating foreign exchange at blistering pace, ceteris paribus – there is no chance whatsoever that reserve losses will spin out of control.

Jens Nordvig from Nomura says China has $3.65 trillion reserves to cover foreign currency debts of $1.135 trillion, a ratio of 322pc. This a far cry from the East Asia Crisis in 1997-1998 when the ratio was 59pc in Malaysia, 33pc in Thailand, 27pc in Indonesia, and 22pc in Korea. All these countries had current account deficits. China most emphatically does not. “We think the authorities will remain in control of the situation. This may mean that the worst shock effect is behind us, although ultimately the economic data will provide the final verdict,” he said. On cue, the economy is already coming back to life after hitting a brick wall over the winter. Credit growth jumped to a 31-month high in July. The monetary base has grown at a 20pc rate over the last three months, implying an economic spike later this year.

It is worth remembering what has just happened in China. The country is recovering from a ferocious monetary and fiscal shock. The authorities refused to react as falling inflation caused one-year lending rates to ratchet up to 5pc in real terms from zero in late 2011. This was deliberate, of course. Premier Li Keqiang intended to break the back of the property bubble and wean the country off its $26 trillion credit dependency. But pricking bubbles is no easy task. The authorities overshot. The crunch came just as fiscal policy went awry. Budget spending contracted in the first quarter. This was certainly not intended. While details remain murky, it appears that banks refused to roll over short-term loans used by local governments to finance a raft of existing projects.

They feared that these loans were no longer covered by a state guarantee under new rules. “It caused huge disruption,” said Capital Economics. At the same time, the regions saw a sudden-stop in lending for new projects as well. Local governments were prohibited from fresh bank borrowing in January. Under the so-called “debt swap” plan there was supposed to be a seamless transition from loans to bond issuance, but the bond market was not up and running until May. This is why China crashed into a recession in the first half of the year. Wisely or not – depending on your economic religion – the Communist Party has now reverted to stimulus as usual. The local governments issued almost $200bn of bonds over the two months of July and August. Beijing coyly describes its fiscal spending as “proactive”. Turbo-charged would be another way of putting it.

I’m not.

• Should We Be Afraid Of China’s ‘Value Chain’? (CNBC)

The devaluation of the yuan may have a tougher impact on global companies than previously imagined, as China’s drive to produce and consume higher-quality goods intensifies. The shockwaves of the People’s Bank of China’s devaluation of its currency are still resonating around the world’s markets, but in the medium to long-term, it’s manufacturers who may hurt the most. Western companies from Apple to Burberry will face a tough time finding out whether they can rely on their cachet in China even when their goods becoming more expensive. China’s wealth has grown by leaps and bounds since the gradual opening up of its economy began in the 1980s.

Its per capita GDP in 2014 was $12,608.87, when adjusted for purchasing power, more than double what it had been just a decade before. The Chinese leadership’s current five-year economic plan (2011 to 2015) is specifically aimed at moving the economy’s fast-paced growth away from the low-cost manufacturing it had become famous for, towards consumption. Tactics included greater investment in research and development, higher-end manufacturing, and services targeted at the country’s burgeoning middle class.

In May, the Made in China 2025 plan has been billed by Premier Li Keqiang as an attempt to “redouble our efforts to upgrade China from a manufacturer of quantity to one of quality.” He pledged in May to “seek innovation-driven development, apply smart technology, strengthen foundations, pursue green development” – all of which is aimed at avoiding the “middle income trap”, where a country gets stuck at a certain level of economic development. Worryingly for those countries which have done well out of exporting to China in recent years, the plan includes sourcing 70% of key components within China’s borders by 2025.

“Euro area policymakers have lived on one myth after another..”

• Eurozone: The Case Against ‘Cash For Reform’ (Martin Sandbu)

“Euro area policymakers have lived on one myth after another,” says Ashoka Mody, a former deputy director at the International Monetary Fund. “A process of groupthink coalesces around these myths: ‘We know it’s not going to work but we need to make it work and we need to seem supportive’ — and before you know it they start to believe it. And because there is no democratic accountability, they are free to make one error after another in terms of economic and political logic.” The eurozone establishment has largely internalised the idea that “cash for reform” is necessary to keep the euro together.

The most direct challenge to it, from Greece’s Syriza party, was defeated when other countries — most notoriously Germany — made clear they would rather force Greece out of the euro than consider alternatives to offering refinancing in return for control over fiscal and reform policies. The idea that “there is no alternative” also motivates the efforts to “complete” Europe’s economic and monetary union. These efforts at deeper integration, epitomised most recently in the so-called “Five Presidents’ Report” — written by the heads of the most influential eurozone and EU institutions — proceed from the notion that the euro was flawed at birth and needs significant repairs to function properly. [..]

This article examines four widely-held preconceptions about Europe’s single currency. First, that the euro eroded the export competitiveness of the weaker countries. Second, that the resulting debt made official bailouts necessary. Third, that a monetary union can work only in the presence of a “fiscal union” — large budget transfers between countries to insure against downturns. And fourth, that the weaker countries must undergo deep structural reforms to be able to stay in the euro.
Each of these claims has had an outsize influence on policy. The research reported below shows that they should not be taken for granted.

Fraport is rumored not to have paid its Greek VAT in many years.

• Greece’s First Privatization Deal Since Third Bailout Hits Snag (Bloomberg)

Greece’s first privatization agreement since the country’s third bailout hit a snag just one day after the government announced the deal’s approval. A government council overseeing state asset sales said on Tuesday that Fraport AG and a unit of Greece’s Copelouzos Group had won a 40-year concession to operate 14 regional airports for €1.2 billion. Fraport commented afterward that the decision was “not tantamount to the conclusion of a contract but rather offers a basis for the resumption of negotiations.” The Greek government said Wednesday that it had approved the contract based on previous agreements, and that any effort to seek a renegotiation “wouldn’t be limited to the issues raised by the company.”

Fraport is “working toward a positive outcome,” said Joerg Machacek, a company spokesman. The airport deal is meant to be the first in a series of privatizations that Prime Minister Alexis Tsipras agreed to undertake in return for the third bailout package worth as much as €86 billion. The most pressing matter is obtaining funding to avoid a default Thursday when Greece must pay €3.2 billion to the ECB. Under the current proposal, Fraport would invest €1.4 billion to upgrade the airports by the end of the concession. The German company would also pay an annual lease of €22.9 million for the airports, which include the holiday islands of Mykonos and Santorini.

It’s simply a bad bad deal. Strike it.

• Fresh Doubts Raised Over Privatization Of 14 Greek Airports (Xinhua)

Fresh doubts were raised on Wednesday after the government finalized a €1.23 billion deal with the German consortium Fraport-Slentel on Tuesday to privatize 14 regional airports in Greece. The sale of the airports’ operation rights for 40 years was the first privatization to be concluded under the third bailout that was ratified by the Greek parliament on Friday. It was also the first privatization to be carried out since the left-led government coalition assumed power after the general elections in January. The announcement sparked mixed reactions in Greece. Some members of opposition parties welcomed the deal as a step towards boosting development. At the same time, they criticized the government for wasting precious time by delaying decisions for months.

Meanwhile, the ruling SYRIZA party’s hardliners denounced the “sell off” in a statement. Left Platform accused the government of “handing a great gift to the German government in return for the new catastrophic bailout.” The president of the Federation of Greek Civil Aviation Workers (OSYPA), Vassilis Alevizopoulos, warned of strike actions and lawsuits in Greek and European courts to “safeguard Greek public interests,” speaking to local VIMA radio station on Wednesday. Critics argued that the funds the German consortium would invest in the upgrade of the airports under the contract were insufficient and the cost will undoubtedly be transferred to travelers. In this climate of prolonged economic and political uncertainty in Greece, the German investors would most likely seek “more guarantees” from the government, Kathimerini reported.

However, Greek government sources stressed that if the consortium should wish to renegotiate the contract, there would be an in-depth dialogue on all issues. The agreement on the concession of the 14 airports that included the airports of Thessaloniki in northern Greece, and airports on islands such as Corfu and Mykonos, was initially scheduled to close in late 2014, but was frozen in the pre-election period. SYRIZA, which initially opposed the entire privatization program since the beginning of Greek bailouts in 2010, had previously said that the terms of the tender would be reviewed. But according to Tuesday’s official announcement, no amendments were made on the finalization of the privatization. [..]Greek ministers argued that privatizations would take place under changed conditions in comparison to the past “to benefit Greek economy and people.”

“..the MoU is really a “surrender document” that eclipses the country’s economic sovereignty and ensures that Greece’s depression — already deeper than America’s Great Depression — will get worse.”

• Stiglitz: “Deep-Seatedly Wrong” Economic Thinking Is Killing Greece (Parramore)

Bad economic ideas inflict untold human suffering. When they come cloaked in a fog of Orwellian obfuscation, their poison and effects can spread with little hindrance. The public is misled. Power plays are hidden from view. In Greece, where suicide rates have risen sharply in the wake of austerity measures, people lose hope. Joseph Stiglitz, who has been following the Greek crisis closely and is recently returned from Athens, sets himself to the task of cutting through the fog. His plain English and fearless use of moral language to expose the ugliness behind economic and political abstractions lend clarity to a situation that is not just bringing a nation to its knees, but threatening to destroy the European project and bring on a future of conflict and hardship.

In discussing Greece’s Third Memorandum of Understanding (MoU) and its draconian terms, Stiglitz observes that the MoU is really a “surrender document” that eclipses the country’s economic sovereignty and ensures that Greece’s depression — already deeper than America’s Great Depression — will get worse. An economy that is seeing youth unemployment reaching up to 60% is likely to lose another 5% in GDP. That is over and beyond the 25% plunge in GDP the country has been hit with since the imposition of austerity measures. Socially conservative Germans, Stiglitz warns, are doubling down on the discredited notion that austerity policies help economies recover in times of crisis.

In reality, the insistence on keeping wages down, stripping away bargaining power from workers, forcing small business owners to pay taxes a year in advance, and cutting pensions will only hamper demand and lead to a deepening spiral of debt. (Stiglitz emphasizes that hardly any of the money loaned to Greece has actually gone to help the Greeks themselves, but rather private-sector creditors – namely German and French banks). Reflecting on a recent panel at Columbia University with Finance Minister Wolfgang Schäuble followed by a dinner, Stiglitz said, “My heart goes out to Greece, even more so after meeting Schäuble.”

The Dutch are clueless. They blame SYRIZA for what’s ailing Greece. For Pete’s sake, get a life.

• Dutch Lambast Greece For Creating ‘Complete Chaos’ (Telegraph)

German MPs voted to back a third bail-out for Greece on Wednesday as Dutch prime minister Mark Rutte fought back a no confidence vote over his decision to support the €86bn rescue plan. After a three-hour debate, Berlin’s Bundestag approved a new rescue package for Greece with a majority of 454 votes to 113. Eighteen MPs also abstained, marking Angela Merkel’s biggest insurrection during her decade in office. Of her ruling CDU/CSU parliamentarians, 63 MPs voting against the package, more than the 60 coalition MPs who voted “no” in an initial vote in July. But the approval was enough to secure the disbursement of €13bn from the European Stability Mechanism (ESM) – the eurozone’s bail-out fund.

However, less than €1bn will go directly to the Greek government and €3.2bn will be used to immediately pay back a maturing bond held by the ECB on Thursday. It is the first injection of rescue cash to the Greek economy since August 2014 after eight months of ill-tempered talks and political crisis in the eurozone. EU policymakers hailed the agreement on Wednesday evening. Pierre Moscovici, the euro’s economics chief, said the deal would mark a “new chapter based on reforms, fairness and shared trust” between Greece and its creditors. Ratification from the German parliament was crucial in securing the deal. Wolfgang Schaeuble, Germany’s finance minister, told lawmakers that a deal was in the “interest of Europe”, but admitted that backing for a third bail-out deal was “not easy” and there was “no guarantee of success”.

“If Greece stands by its obligations and the programme is completely and resolutely implemented, then the Greek economy can grow again,” he said. “The opportunity is there. Whether it will be used, only the Greeks can decide.” Dutch finance minister Jeroen Dijsselbloem, who is also president of the Eurogroup, said reaching an accord was difficult. “Greece has seen decades of bad policies and six months of complete chaos,” he told his parliament. The Dutch backlash was led by right-wing politician Geert Wilders, who has called for the Netherlands to withdraw from the European Union. “Today we are here to prevent Dutch PM Rutte from indulging in his favorite hobby: sending money to Greece, this time €5bn,” Mr Wilders told the Dutch parliament on Wednesday.

Mr Wilders said Mr Rutte had reneged on a pledge in September 2012 that “enough is enough” and that Greece would get no more financial help from the country. “He’s the Pinocchio of the low countries. This is betrayal,” said Mr Wilders. “We need this money to support health care and the elderly. This government hates the elderly.” Mr Rutte said he took “responsibility” for his comments, but defended the government’s decision to back a bail-out, claiming that “no-one could have foreseen” in 2012 how the situation in Greece would evolve. “The new Greek government has caused great damage,” he said.

Crucial for Greece: bank recapitalization. The rest is circle jerk only.

• European Bailout Fund To Disburse First Greek Tranche On Thursday (Reuters)

The European Stability Mechanism will disburse the first tranche of funds from Greece’s bailout loan on Thursday, the Greek finance ministry said after the ESM board approved a rescue of up to €86 billion on Wednesday. Athens will receive €13 billion on Thursday morning, the ministry said, of which about €12 billion will be used to pay down debt, including an earlier bridge loan and money owed to the ECB. “Nearly one billion euros will be made available to the Greek state, a sum that can be used to pay arrears,” the finance ministry said in a statement.

The new bailout package of up to €86 billion for 32.5 years includes up to €25 billion to recapitalize Greek banks, of which 10 billion will be immediately available, according to the ministry. Athens needed the funds in time to make a €3.2 billion debt payment to the ECB on Thursday. The initial €13 billion tranche will be paid in cash, while the €10 billion euros for the recapitalization of banks will be sent to a segregated account in the form of ESM notes.

“..economic pain was designed into the Greek rescue. Unable to devalue Greece’s currency, the bailouts’ architects—other eurozone countries and the IMF—tried to push down prices and wages in a process called “internal devaluation.”

• The Fisherman’s Lament – A Way of Life Drowned by Greece’s Crisis (WSJ)

Dimitris Stathakis, 75 years old and wearing no shoes, is at work on the aft deck of the North Aegean, a fishing boat docked in the Greek port of Nea Michaniona. The boat’s 14-man crew is prepping for a night at sea. Bags of ice are tossed aboard. Someone brings a delivery of white Styrofoam boxes. It is baking hot. Mr. Stathakis has his shirt on his head to keep the sun off. He is mending nets with flicks of a plastic shuttle and assessing the state of a profession he took up in his teens. “This is the end,” he says. “This is the worst. There is no life anymore.” The fisherman’s lament is as old as the seas. And Greeks have earned a living from fish for eons. It is the country’s second-largest agricultural export, behind fruit and nuts but ahead of olive oil and cheese.

Six years of economic crisis, however, have left this way of life in a shambles. A collapse in household buying power has demolished demand for fish, and with it fishermen’s income. Aquaculture companies, once a shining star in the marine economy, are drowning in debts. Fish processors are struggling with high costs for finance and relentless price pressure among strapped shoppers. Few think the woes will end soon. The Greek government has signed up to a new bailout, with more years of belt-tightening ahead. The first notches came last month, in laws rushed through parliament at the behest of Greece’s creditors: Fishermen face higher pension contributions, while fish processors face new, higher taxes on processed food.

Meantime, Greek banks are only dribbling out cash to customers—further strangling already weak demand. Sales at North Aegean Sea Canneries SA, one of Greece’s largest fish processors, dropped 20% at the beginning of the crisis. The company is facing a long recovery. Nikolaos Tzikas, an owner, says he had hoped to crawl back to 2011 levels this year. “Now,” he says, “I don’t know.” The travails of Greece’s fish industry show how years of crisis and bailouts have left the country’s economy in worse shape than before—and why the next episode may well meet the same fate. In a way, economic pain was designed into the Greek rescue. Unable to devalue Greece’s currency, the bailouts’ architects—other eurozone countries and the IMF—tried to push down prices and wages in a process called “internal devaluation.”

The hope was that lower costs would make Greek industries nimbler and more competitive, juicing a sustained economic recovery. Instead, the loss of income has killed consumption. People are too poor to buy stuff and the banks too weak to give them credit, and the effects ripple up the economic chain. “Internal devaluation did not do any good for the Greek fishing, aquaculture and processing sector,” says Lamprakis Avdelas, a fishing expert at a government-affiliated institute in Athens.

“..the price of oil in five years’ time has collapsed in recent months.”

• Get Used To Cheap Oil, Derivatives Markets Say (Reuters)

Oil prices will stay low for years to come, derivatives markets say, keeping a lid on inflation and helping boost global growth. Oil has more than halved in value over the last year, thanks to huge oversupply, and many oil companies, particularly in the United States, say they may soon have to rein in production, tightening supply, unless the market recovers. That has led many analysts to predict that oil – on average around 5% of companies’ costs – will see price rises later this year or in 2016, pushing up inflation. But oil derivatives tell another story. Contracts for delivery of crude oil in the future on the big commodities markets such as the New York Mercantile Exchange and the InterContinental Exchange show the price of oil in five years’ time has collapsed in recent months.

U.S. crude now costs around $42 a barrel for delivery next month, and only about $20 more for delivery in 2020. Prices of oil for future delivery are usually much more stable than volatile near-term prices, holding their value even when the spot market crashes. But the recent oil-price rout looks different. Prices for all futures months for years to come, also known as the futures price “curve”, have come down sharply. “The curve is saying prices will stay low for some time,” said Amrita Sen, oil analyst at consultancy Energy Aspects.

All that’ll be left is the lethal tailings ponds.

• As Canada’s Oil Debt Soars to Record, an Industry Shakeout Looms (Bloomberg)

Canadian energy companies’ debt loads are the heaviest in at least a decade, boosting concern that some won’t survive the collapse in crude prices. Trican Well Service, Canada’s largest fracking service provider, said last week it may be unable to continue because it’s in danger of breaching the terms of its debt. It’s the latest firm to see crude’s descent to a six-year low sap the cash flow needed to meet financial obligations. Oil’s plunge has pushed a measure of the average debt burden among Canadian energy firms to the highest since at least 2002, and another measure of their ability to make interest payments to the third-lowest level in a decade, according to data compiled by Bloomberg.

Facing some of the highest production costs in the world and carrying more debt than U.S. peers, the Canadian industry has become ripe for acquisitions. “Your ability to be an ongoing entity is certainly decreased,” said Jason Parker, head of fixed-income research at Bank of Montreal. “You’ll see larger, more financially affluent entities coming in and picking away at those properties.” Energy companies in the Standard & Poor’s/TSX Composite Index had an average of 3.1 times more debt than earnings as of their latest quarterly report, the highest ratio in Bloomberg data going back to the middle of 2002. That measure, a gauge of a firm’s ability to repay its obligations where a higher number indicates greater difficulty, has surged this year amid the global oil glut that’s depressed prices and earnings.

Another ratio, measuring how much greater earnings are than interest expenses, plummeted to the third least in a decade at the end of last year, suggesting there’s less money to service the borrowings. The heavy crude that many Canadian firms pump sells at almost the widest discount in a year relative to the U.S. benchmark. At $24.22 per barrel on Wednesday, the price is below the cost of production for many companies. For James Jung, who rates the debt of Canadian oil companies at DBRS Ltd. in Toronto, that divides the country’s industry into winners and losers, with those who have stronger balance sheets and lots of cash in a position to take advantage as more peers struggle with debt.

That’s one Ponzi industry I wouldn’t mind seeing killed off.

• Cheap Oil’s Making It Tough for Ethanol to Pay the Bills (Bloomberg)

Cheap crude oil may make it hard for ethanol companies to pay their bills on time. The lowest oil prices in six years are hitting biofuel producers two ways: They’re making ethanol less attractive as a blend for gasoline, and emboldening the arguments of petroleum backers who say the U.S. law mandating consumption of the fuel alternative is obsolete, Standard & Poor’s Ratings said in a report Wednesday. “The most noteworthy trend in the energy industry during the past year has been the precipitous decline in commodity prices, and chief among these has been plummeting oil prices,” Michael Ferguson, a credit analyst at S&P, wrote. “The lower oil prices may present a difficult rationale for blending ethanol.”

Crude oil has fallen 57% in the past year to $40.80 a barrel on the New York Mercantile Exchange, the lowest since March 2009. Gasoline has plunged 42% and ethanol has dropped 31%. Regulatory support has also waned. In May, the Environmental Protection Agency proposed reducing the amount of ethanol required to be mixed with gasoline from statutory levels set in 2007, citing changing driving habits and fuel use since then. That’s not reason enough to abandon the policy, according to Growth Energy, a Washington-based trade group. “Cheap gas and cheap oil is never a certainty, and often it is the exception,” Tom Buis, chief executive officer of the lobby, said in an e-mailed statement.

The Renewable Fuels Association, also a Washington-based trade group, said the S&P report “is really out of step with the realities of the market place today.” Low-priced crude oil lowers gasoline costs and makes ethanol less attractive for blending beyond government mandates. An additive, ethanol is used to boost gasoline supply and lower prices. “Consumers are saying, ‘I’ve already got cheap gas, why do I need this ethanol?’” Ferguson, the report’s author, said in a telephone interview Wednesday.

Australia.

• Banks Have Treated Our Housing Market Like A Ponzi Scheme (David)

Australia’s big four banks are among the largest and most profitable financial institutions in the world. Despite this, it is mathematically impossible that these banks, primarily focused on domestic retail operations, could be as big and profitable as they currently are without one of the following taking place: either each of these banks, in their individual capacity, has solved (at the same time, in the same country, and as a first in the history of banking) the ultimate recipe for infinitely profiting from an exponentially-growing stock of private debt; or they are all engaged in activity which is incredibly risky. Looking at the balance sheets of these four banking leviathans they have clearly taken on abnormal sums of risk to invest in a single, all-in, one-way bet on the housing market.

As my colleague Philip Soos and I told the House of Representatives’ economics committee inquiry into home ownership last week, the evidence suggests that on the back of irrational exuberance, Australia is experiencing what can only be described as a classic debt-financed speculative housing bubble with every metric that evidenced the bubble in the US and Ireland present within our economic system today. Between 2002 and 2015, the mortgage books of National Australia Bank, ANZ, Commonwealth Bank and Westpac grew by 388%, 435%, 475% and 554% respectively. Put another way, the big four’s mortgage books escalated from a combined $242bn to a whopping $1.13tn, surging at such a consistent rate it would make Bernie Madoff proud.

What the Australian banking system has developed is an uninterrupted growth model which shares a similar risk profile as a Ponzi or pyramid scheme by lending ever-larger sums of debt to homebuyers and property investors year after year. If this growth model is interrupted, however, and banks cannot expand their mortgage books further, housing price inflation halts and will then plunge.

Only choice left that will stop the shelling.

• Rebels In Ukraine’s Donetsk Plan Referendum On Joining Russia (Xinhua)

Leaders of the self-proclaimed “Donetsk People’s Republic” are planning to hold a referendum on seceding from Ukraine and joining Russia, the Donetsk-based Ostrov news agency reported Wednesday. The referendum is scheduled to be held in two to four weeks after the Oct. 18 local elections, said the news agency. The ballot papers for the referendum designed in the colors of the Russian flag have already been printed, it said. Neither the rebel leadership nor the Ukrainian authorities have commented on the report yet.

In July, leaders of pro-independence insurgents in Donetsk region said they would hold local elections on Oct. 18 without Kiev’s supervision as they believed that the Ukrainian government has not fulfilled its obligations under the Minsk peace agreement. Last week, violence in eastern Ukraine has sharply escalated after several weeks of relative calmness. On Sunday night, at least 11 people, including nine civilians, were reportedly killed in Donetsk region, marking the worst casualties in the conflict since early June.

Hilarious.

• China’s Building a Huge Canal in Nicaragua, But We Couldn’t Find It (Bloomberg)

Deep on the southeastern side of Lake Nicaragua, along a bumpy dirt road that climbs gently through lush-green forest, sits the tiny town of El Tule. It is quintessential rural Central America: Chickens roam outside tin-roofed homes while pigs stand tied to trees, awaiting slaughter; the sound of drunk locals singing along to ranchera music greeted visitors on a recent rain-soaked afternoon. The village, if you listen to Nicaraguan officials, is a key point in what will be the biggest infrastructure project the region has ever seen, the construction of a $50 billion canal slated to run 170 miles from the country’s east to west coast. Awarded two years ago by President Daniel Ortega to an obscure Chinese businessman named Wang Jing, the concession calls for El Tule to be ripped up, erased essentially, in order to make way for the canal right before it plunges into the lake and then meets the Pacific Ocean a few miles later.

The idea is that the waterway will attract many of the larger vessels that the Panama Canal — located just 300 miles to the southeast — has historically struggled to accomodate. A construction deadline of 2020 has been set. Yet a four-day tour through El Tule and surrounding areas slated for crucial initial development only seemed to corroborate the belief, harbored by many analysts inside and outside Nicaragua, that this project isn’t going to get done. The townspeople haven’t seen any signs of canal workers in months. And the work that was done was marginal. A handful of Chinese engineers were spotted late last year making field notations on the east side of the lake; early this year, a dirt road was expanded and light posts were upgraded at a spot on the west side where a port is to be built.

Juharling Mendoza, a 32-year-old local entrepreneur, is so convinced that the project won’t proceed that he’s constructing a two-story house with three guest rooms and an attached convenience store just outside of El Tule. He says bluntly: “There isn’t going to be a canal.”

These people are completely nuts. Sending dogs on refugees says it all.

• British Police Head To Calais To Stymie Migrant Smuggling Activity (Guardian)

British police will be deployed to Calais to target people-smuggling gangs as part of a new agreement aimed at alleviating the ongoing migrant crisis at the French port. In the first visit to Calais by a UK government minister since the crisis escalated at the start of the summer, home secretary Theresa May will travel to the town on Thursday to confirm a joint declaration with Bernard Cazeneuve, the French minister of the interior. Their deal will see officers from the UK based in a new command and control centre in Calais alongside their French counterparts and Border Force personnel. The work of the police contingent will be led by two senior commanders – one from the UK and one from France. They will report regularly to May and Cazeneuve on the extent of immigration-related criminal activity on both sides of the Channel.

Officials said the move was aimed at disrupting organised criminals, who attempt to smuggle migrants illegally into northern France and across the Channel into Britain, by ensuring intelligence and enforcement work is more collaborative. Britain and France will also work jointly to ensure networks are dismantled and prosecutions are pursued, sources said. Fresh measures included in the new agreement include: • The deployment of extra French policing units and additional freight search teams, including detection dogs • The investment of UK resources including fencing, CCTV, flood lighting and infrared detection technology to secure the Eurotunnel railhead • The tightening of security within the tunnel itself, with Eurotunnel helping to increase the number of guards protecting the site • The creation of a new “integrated control room” covering the railheads at Coquelles • A security audit to be carried out by specialist French and British police teams to underpin the design of the improvements.

The moral bankruptcy of Europe.

• Refugee Chaos in Macedonia: ‘Life-Threatening for Women and Children’ (Spiegel)

A dangerous bottleneck has formed in the Macedonian border town of Gevgelija, an important hub for refugees traveling to Western Europe. Those trying to reach the trains here face extreme heat, dangerous crowds and police bullying. It’s Monday, earlier this week, and what can be seen unfolding along the route to Macedonia is no less than mass migration, with around 200 people making their way along the Balkans route to Western Europe on this day alone. They have come here from Aleppo, Homs, Kobani, Tartus, Hama and Damascus. Indeed, much of Syria’s population appears to be fleeing at the moment, as they attempt to make their way to safety. The group walks along the railway tracks that lead from the Greek village of Idomeni to the town of Gevgelija in Macedonia.

“Good luck, Kobani!” a family from Damascus calls out as they pass by a group of Syrian Kurds. “Good luck, Damascus,” they respond. But they don’t make it very far. They soon encounter five Macedonian police officers waiting along the tracks on the dusty, trampled earth. They order the people to wait without telling them why or for how long. The Syrians take off their backpacks and set them on the ground. Women and children look for a place in the shade. Over the next five hours, the waiting group swells to around 400 people. Not all are Syrians. A few Iraqis have also made it here. Some are now claiming to be Syrian, which would give them greater chances of success with their asylum applications and expedited procedures. A Syrian man points to eight young men and women from Africa.

“Everyone here is from Syria now, even those people over there,” he says, grinning. The people here all have at least one thing in common: They arrived in Europe during recent days via one of the Greek islands located near the Turkish coast – Kos, Lesbos or Chios. Each day, around 1,000 to 1,500 people arrive on the islands, a greater number than ever seen before. Most want to continue on to Western Europe as quickly as possible. The massive surge of refugees has created a dangerous bottleneck on the main route through the Balkans.

Debt Rattle August 3 2015

Aug 032015

August 3, 2015 Posted by Raúl Ilargi Meijer at 9:47 am Finance Tagged with: Asia, Banks, Canada, China, Galbraith, Greece, Puerto Rico, refugees, slump, stocks, Varoufakis 2 Responses »

Alexander Gardner Ruins of Gallego Mills after Great Fire, Richmond, VA 1865

• Asian Stocks Selloff Deepens To 2015 Lows On China Worry (Reuters)

• Greek Stock Market Opens 23% Down After Five-Week Shutdown (Reuters, AFP)

• Banks Lead Greek Stock Slump In First Day Of Trading After Closure (Bloomberg)

• Greek Shares ‘Set To Plunge 20%’ As Stock Exchange Reopens (BBC)

• Greek Manufacturing Slumps at Record Pace as Crisis Takes Toll (Bloomberg)

• French Finance Minister Takes Aim At Schäuble Over Grexit Idea (Reuters)

• Germans Fret Over Europe’s Future But Still Believe (Reuters)

• Head Of Greek Statistics Office ELSTAT Steps Down (Reuters)

• In Conversation With El Pais (Varoufakis)

• Varoufakis Warns Spain Could ‘Become Greece’ (AFP)

• “They Bury The Values Of Democracy”- Varoufakis (Stern)

• Debt Traders Flee Junkyard’s Dogs as Oil Rout Extends Yield Gap (Bloomberg)

• Galbraith Denies Being Part Of Plan B For Greece ‘Criminal Gang’ (Telegraph)

• Emerging Markets’ Material Difficulties (Economist)

• Puerto Rico Set For Debt Default (FT)

• Harper Calls October 19 Election With Canada’s Economy On The Ropes (Bloomberg)

• Training Officers to Shoot First, and He Will Answer Questions Later (NY Times)

• They Are Not Migrant Hordes, But People, And Probably Nicer Than Us (Mirror)

All gains are gone. And they were big.

• Asian Stocks Selloff Deepens To 2015 Lows On China Worry (Reuters)

An index of Asian shares outside Japan fell close to this year’s lows on Monday thanks to a deepening selloff in commodities and fresh concerns over slowing growth in China, while the dollar held its ground against a basket of currencies. In line with weaker Asian stocks, financial spreadbetters expected a slightly lower open for Britain’s FTSE, Germany’s DAX and France’s CAC. In a blow to risk sentiment, a private survey showed China’s factory activity shrank more than initially estimated in July, contracting by the most in two years as new orders fell. “We believe the stock market panic in early July chilled economic activity, which is what the manufacturing PMIs picked up,” ING economist Tim Condon said in a research note ahead of the Caixin PMI release.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell more than 1% before paring losses to be down 0.9%. The biggest losers were financials and cyclicals. The index’s low for this year was on July 8. Closely-watched Shanghai shares shed 1.9%. Japan’s Nikkei slid 0.3% and South Korea’s Kospi fell 1%. Australian stocks dropped 0.4%. “We believe the macro environment remains challenging for emerging market assets amid headwinds of low commodity prices, concerns over China and a looming Fed tightening cycle,” Barclays strategists wrote in a daily note in clients. Recent flows data confirmed that trend. Net foreign selling from emerging Asia has reached nearly $10 billion over the past two months with only India seeing some tiny inflows. Although outflows have pummeled stock markets from Korea to Taiwan, valuations suggest more downside is likely.

No surprises here.

• Greek Stock Market Opens 23% Down After Five-Week Shutdown (Reuters, AFP)

Greece’s stock market fell sharply on Monday after being shut down for five weeks under capital controls imposed by the government in Athens to stop a flight of euros from the country. The main index was down nearly 23% in early trading. National Bank of Greece, the country’s largest commercial bank, was down 30%, the daily limit. The overall banking index was also down its limit. “Naturally, pressure is expected, markets will not fail to comment on such an extensive shutdown,” Constantine Botopoulos, head of the capital markets commission, told Skai radio. “But we must not get carried away. We must wait until the end of the week to see how the reopening will begin to be dealt with more coolly.” The bourse was last open for trading on June 26.

The rest of the week is more interesting: will they recover?

• Banks Lead Greek Stock Slump In First Day Of Trading After Closure (Bloomberg)

Lenders led a record plunge in Greek equities as the Athens Stock Exchange reopened after a five-week shutdown, with restrictions in place due to capital controls. Piraeus Bank and National Bank of Greece sank 30%, the maximum allowed by the Athens bourse. The benchmark ASE Index slumped a record 22% to 622.6 at 11:09 a.m. in Athens. “The situation in Greek equity markets will have to get a lot worse before it gets better,” said Luca Paolini, Pictet Asset Management’s chief strategist in London. “There are still critical risks to be resolved.” The exchange suspension came as Greek stocks had begun enjoying some renewed optimism after losing 85% of their value since 2007. The ASE rebounded 17% from its almost three-year low in June through the suspension.

That trimmed its loss to 3.5% this year until June 26, the last day the exchange was open. The Greek market came to a halt in June as Prime Minister Alexis Tsipras ended bailout talks with creditors by asking voters to decide in a referendum whether to accept the terms offered in exchange for emergency loans. The nation was forced to shut banks and impose capital controls. The stock exchange remained closed, recording its longest halt since the 1970s, even after lenders reopened on July 20 with limited services, as Greek officials worked on rules to reopen the bourse with capital controls in place.

With bank withdrawals limited, Greek traders will only be able to buy stocks, bonds, derivatives and warrants with new money such as funds transferred from abroad, cash-only deposits, money earned from the future sale of shares or from existing investment account balances held at Greek brokerages, the Finance Ministry said in a decree on Friday. No such constraints will apply to foreign investors, provided they were already active in the market before the imposition of capital controls. During the shutdown, investors used a U.S.-listed exchange- traded fund as a proxy for Greek stocks. The Global X FTSE Greece 20 ETF fell 17% from June 26 through Friday. The fund plunged a record 19% the first day stocks in Athens were suspended. It advanced 2.6% on Friday.

The BBC predicted it last night.

• Greek Shares ‘Set To Plunge 20%’ As Stock Exchange Reopens (BBC)

The Athens Stock Exchange is set to plunge by as much as 20% on Monday when trading finally resumes after a five-week closure, traders have predicted. The bourse was shut just before the Greek government imposed capital controls at the height of the debt crisis. Traders said they expect sharp losses as a result of pent-up trading and fears about Greece’s worsening economy. Takis Zamanis, chief trader at Beta Securities, is among the pessimists. “The possibility of seeing even a single share rise in tomorrow’s session is almost zero,” he said. “There is a lot of uncertainty about the government’s ability to sign the… bailout on time and for possible snap elections.” Shares in banks are likely to be particularly hard-hit because Greece’s financial sector needs to be recapitalised.

A report in Avgi newspaper, which is close to the government of Prime Minister Alexis Tsipras, suggested Athens was asking for about 10 billion euros (£7bn) this month for bank recapitalisation. Banks account for about a fifth of the main Athens index. National Bank of Greece’s US-listed stock has fallen about 20% while the Athens exchange has been closed. One asset manager at a Greek fund said: “The focus will be in the bank shares – they will suffer more because their investors have to face a dilution from the [expected] recapitalisation of the sector.” Greek banks will not be make a profit this year and are suffering from an increase in bad loans due to the crisis, the manager said. “It would be realistic to expect a decline of about 15-20% at the opening of the market on Monday,” he added.

Part of suffocating an economy.

• Greek Manufacturing Slumps at Record Pace as Crisis Takes Toll (Bloomberg)

Greece’s manufacturing industry shrank at a record pace last month as demand collapsed amid capital controls introduced in an attempt to contain the nation’s crisis. Markit Economics said its factory Purchasing Managers’ Index fell to 30.2 from 46.9 in June. A reading below 50 indicates contraction. A gauge of new orders plunged to 17.9 from 43.2, also a record low. Markit said survey respondents blamed capital controls and a “generally uncertain operating environment” for the loss of business. The plunge in the index reflects heightened concerns last month about Greece’s future in the euro area after a temporary breakdown in negotiations on a bailout deal.

“Although manufacturing represents only a small proportion of Greece’s total productive output, the sheer magnitude of the downturn sends a worrying signal for the health of the economy as a whole,” said Phil Smith, an economist at Markit in London. “Bank closures and capital restrictions badly hampered normal business activity.” The weak factory reading highlights the challenge Prime Minister Alexis Tsipras faces in reviving the shattered Greek economy, which has shrunk by about a quarter in the past six years. The country has already fallen back into a recession and the economy is forecast to contract this year.

France should grow a pair.

• French Finance Minister Takes Aim At Schäuble Over Grexit Idea (Reuters)

French finance minister Michel Sapin has criticized his German counterpart Wolfgang Schaeuble for suggesting that Greece could temporarily leave the euro zone, but said the Franco-German relationship is “not broken”. In an interview with German business daily Handelsblatt, Sapin said Schaeuble was wrong to suggest the euro zone “time-out” – an idea the German finance minister floated last month during talks to clinch a deal to keep Greece in the bloc. “I think that Wolfgang Schaeuble is wrong and is even getting into conflict with his deep European volition,” Sapin said in an interview to run in Handelsblatt’s Monday edition.

“This volition, and it is also mine, involves strengthening the euro zone,” he said, adding that this ruled out the possibility of a temporary exit from the 19-member currency union. “If you allow a temporary departure, that means: every other country that finds itself in difficulties will want to get out of the affair via an adjustment of its currency,” Sapin added. The French minister said he nonetheless wanted to work with Schaeuble to foster closer euro zone integration by strengthening economic policy governance. However, treaty changes to introduce a European finance minister and a budget for the euro zone would not be possible before 2017, the paper reported Sapin as saying.

How democratic is Europe? It just takes the first sentence of this article to know: “The battle for Europe will be won or lost in Germany.” A useless discussion from there on in.

• Germans Fret Over Europe’s Future But Still Believe (Reuters)

The battle for Europe will be won or lost in Germany. On some days recently, it has looked like it might be lost. But that is to underestimate the deep German commitment to the success of European integration based on the rule of law. If the EU falls apart, it will likely be due to a return of nationalism and a refusal by the French, British and Dutch to share more sovereignty, rather than to German insistence on fiscal discipline and respect for the rules. “If the euro fails, then Europe fails,” Chancellor Angela Merkel has repeatedly warned parliament. The aftermath of the euro zone’s ugly all-night summit on the Greek debt crisis that ended on July 13 with a deal on stringent, intrusive terms for negotiating a third bailout has sent shockwaves across Europe, especially in Germany.

It was the second time in weeks that EU leaders had clashed over fundamental problems they seem unable to solve, after an acrimonious June summit on how to cope with a wave of migrants – many of them refugees from conflict – desperate to enter Europe. And it has prompted intensive head-scratching in Berlin about how to strengthen European institutions and underpin the euro more durably – an intellectual ferment unmatched in most other EU capitals. “When you tour European countries, there aren’t many that are thinking as hard as Germany about how to make an integrated Europe work better,” says a senior German official. Perhaps due to its World War Two history, Berlin is more open than most EU nations to offering shelter to war victims and accepted the largest quota of asylum seekers.

Nor was Merkel as tough as creditors such as Finland, the Netherlands, Latvia, Lithuania and Slovakia in insisting on humiliating conditions for any further assistance to Greece. Yet like all leaders, Germany cops most of the blame. And due to its past, that is often laced with references to the Nazi tyranny that make present-day Germans cringe. That outcry was compounded when German Finance Minister Wolfgang Schaeuble breached a taboo by suggesting that Greece should leave the euro zone, at least temporarily, if it could not meet the conditions. After decades of trying to be an unobtrusive team player in Europe or co-steering integration through the Franco-German tandem, Berlin was catapulted into an unwelcome solo leadership role by the euro zone debt crisis that began in 2010.

That extra burden of responsibility, due more to French weakness and British indifference than Teutonic ambition, has weighed heavily on Germans who fear it means others trying to pick their pockets without doing their own fair share.

Curious to say the least.

• Head Of Greek Statistics Office ELSTAT Steps Down (Reuters)

The head of the Greek statistics office stepped down on Sunday, adding new complexity to Greece’s bailout negotiations with its EU partners. A veteran IMF statistician, Andreas Georgiou was appointed head of ELSTAT in 2010 in an effort to restore the credibility of Greek statistics a few months after the country’s debt crisis erupted. “I have informed the finance minister of my decision not to accept the extension of my term … that ends today,” Georgiou told Reuters. Georgiou could have stayed on until a replacement was appointed, but he said he was not interested in having the finance minister renew his term and that it was a personal choice to leave.

He said he and his team had worked to make the statistics office independent, impartial, objective and transparent, sometimes against a series of “unsubstantiated and totally unfounded accusations”. In 2013, a prosecutor brought felony charges against Georgiou and two other agency employees, accusing them of falsifying 2009 fiscal data. A former ELSTAT employee had claimed that Georgiou had inflated the deficit numbers to justify austerity measures. He denied the accusation and the charge was dropped last month. In the run-up to joining the eurozone, which it did as a founder member in 2001, Greece under-reported its budget deficit for years.

Since then, unreliable statistics with frequent revisions were blamed in part for pushing the country to a financial crisis. Since Georgiou took over, however, the EU’s statistics office Eurostat has fully accepted the debt figures provided by Greece. The independence of ELSTAT remains a key concern as Greece seeks a new bailout from its EU partners. Prime Minister Alexis Tsipras agreed last Monday to the “safeguarding of the full legal independence of ELSTAT” as one of the conditions to achieve a third bailout.

“Closing down the banks of a monetized economy is the worst form of monetary terrorism. It instills fear in people.”

• In Conversation With El Pais (Varoufakis)

Fiscal waterboarding: I am very proud of this term. It is a precise, an accurate description of what has been happening for years now. What is waterboarding? You take a subject, you push his head in the water until he suffocates but, at some point, before death comes you stop. You pull the head out just in time, before asphyxiation is complete, you allow the subject to take a few deep breaths, and then you push the head again in the water. You repeat until he… confesses. Fiscal waterboarding, on the other hand, is obviously not physical, it’s fiscal. But the idea is the same and it is exactly what happened to successive Greek governments since 2010. Instead of air, Greek governments nursing unsustainable debts were starved of liquidity.

Facing payments to their creditors, or meeting its obligations, they were denied liquidity till the very last moment just before formal bankruptcy, until they ‘confessed’’; until they signed on agreements they knew to add new impetus on the real economy’s crisis. At that moment, the troika would provide enough liquidity, like they did now with the 7 billion the Greek government received in order to repay the… ECB and the IMF. Just like waterboarding, this liquidity, or ‘oxygen’, is calculated to be barely enough to keep the ‘subject’ going, without defaulting formally, but never more than that. And so the torture continues with the effect that the government remains completely under the troika’s control. This is how fiscal waterboarding functions and I cannot imagine a better and more accurate term to describe what has been going on.

On my use of the word ‘terror’, take the case of the referendum. On the 25th of June we were presented with a comprehensive proposal by the troika. We studied it with an open mind and concluded that it was a non-viable proposal. If we signed it, we would have definitely failed within 4-5 months and then Dr. Schäuble would say “See, you accepted conditions you could not fulfill”. The Greek government cannot afford to do this anymore. We need to reclaim our credibility by only signing agreements we can fulfill. So I said to my colleagues in the Eurogroup, on the 27th, that our team convened and decided that we could not accept this proposal, because it wouldn’t work. But at the same time, we are Europeanists and we don’t have a mandate, nor the will or interest, to clash with Europe. So we decided to put their proposal to the Greek people to decide.

And what did the Eurogroup do? It refused us an extension of a few weeks in order to hold this referendum in peace and instead they closed down our banks. Closing down the banks of a monetized economy is the worst form of monetary terrorism. It instills fear in people. Imagine if in Spain tomorrow morning the banks didn’t open because of a Eurogroup decision with which to force your government to agree to something untenable. Spaniards would be caught up in a vortex of monetary terror. What is terrorism? Terrorism is to pursue a political agenda through the spread of generalized fear. That is what they did. Meanwhile the Greek systemic media were terrorizing people to think that, if they voted No in the referendum, Armageddon would come. This was also a fear-based campaign. And this is what I said. Maybe people in Brussels don’t like it to hear the truth. If they refrained from trying to scare the Greek, then I would have refrained from using this term.

Just vote Podemos.

• Varoufakis Warns Spain Could ‘Become Greece’ (AFP)

Spain could become like Greece if the same austerity policies are imposed on the country, former Greek finance minister Yanis Varoufakis said in an interview published Sunday. “Spaniards need to look at their own economic and social situation and based on that evaluate what their country needs, independently of what happens in Greece or wherever,” he told center-left daily El Pais. “The danger of becoming Greece is always there and it will become reality if the same mistakes that were imposed on Greece are repeated,” he added. Varoufakis, an economist with unorthodox ideas about the euro and Greece’s debt restructuring, resigned the day after Greeks voted against creditor bailout terms in a July 5 referendum.

The Greek government later accepted even harsher terms in a deal at an all-night eurozone summit on July 12-13. With a general election looming later this year, Spanish Prime Minister Mariano Rajoy has used the economic turbulence in Greece as a chilling backdrop to promote his own government’s crisis management. Rajoy’s conservative Popular Party says that if new far-left party Podemos – a close ally of Greece’s ruling Syriza – forces a change of course on the economy after the election, Spain could plunge back into crisis. Asked about the Spanish government’s statements, Varoufakis said Greece “has become a sort of football for right-wing politicians, who insist on using Greece to frighten their population.”

They have already.

• “They Bury The Values Of Democracy”- Varoufakis (Stern)

We tried to implement an emergency food programme for the poor – but the troika disallowed it. We tried to take action against the wealthy, the oligarchs and the sharks – that was also disallowed. I’ve asked for help in these issues from my dialogue partners in Berlin, Brussels and Paris. But that wasn’t forthcoming. Instead, the Eurogroup told us unceremoniously that we shouldn’t do anything on our own initiative. If we did, they would punish us. We didn’t have a chance. They wanted to stonewall us. When we nevertheless took action against the oligarchs, the troika simply protected them. From the very beginning the aim was to cause our government to collapse or to overthrow it.

You’re talking about a country in 21st century Europe?
Yes. I had high expectations when I first entered politics. But then the big surprise for me was how little the concept of democracy means to the most important players. How indifferent they are to the tangible impact of their policies. When I wanted to address the issue in the Eurogroup, Dijsselbloem just snapped at me, saying: “We don’t talk about that. It’s too political!”

You sound bitter.
No. Throughout this euro-crisis, the question is never whether the structure of the eurozone is the reason why everything has become unstable. The fact that surplus countries have been forced into the straitjacket of a common currency with importing countries. All one hears is that the lazy Mediterraneans have lived beyond their means and that they should simply be as hardworking and frugal as the Germans. That is the mantra.

And what’s wrong with that?
It’s all about the balance of power. Who was responsible for awarding all those loans? The BMW Bank. The Mercedes-Benz Bank. Purchase! Enjoy! Here’s a loan, you don’t need your own money! But every reckless borrower is faced with a ruthless lender. The bankers were fully aware that they were taking an immense gamble – but they were driven by wanton greed.

For the past five years, hundreds of experts, economists and politicians have been busy tinkering with the Greek crisis, repeatedly promising that things were going uphill. But the situation is worse than ever.
The fundamental question remains: are the powers that be really interested in ending this crisis? I beg your pardon? This crisis of the century is too good to leave it unexploited. Right at the outset, Schäuble told me that we could no longer afford our welfare state. In this sense, they are unashamedly taking advantage of the humanitarian catastrophe. Thanks to this crisis, they can now implement all these painful things – wage cuts, pension cuts, privatisation – that would never win them any votes at an election.

Beware the junk bond: “Spreads got insanely tight because of that reach for yield a lot of people were going for regardless of ratings..”

• Debt Traders Flee Junkyard’s Dogs as Oil Rout Extends Yield Gap (Bloomberg)

Debt investors are abandoning the bottom rungs of the speculative-grade market as commodity prices at their lowest level in more than a decade pummel borrowers in the energy and mining industries. The yield gap between higher- and lower-rated junk bonds expanded to the widest in more than three years, with the large number of energy and mining companies ranked CCC and lower – the riskiest bets – driving the dichotomy, said Martin Fridson at Lehmann Livian Fridson When removing those companies, the yield on CCC bonds barely changed in July, creating “an industry effect in disguise,” he said. “When you see the index, you think you’re buying all the CCCs cheaper,” New York-based Fridson said. “But outside of energy and metals, which look too scary to buy, the others are trading where they were.”

The yield gap between BB-rated bonds – the top of the junk pile – and those ranked CCC and lower expanded to 7.91 percentage points, the most since December 2011, according to Bank of America Merrill Lynch index data. The yield premium for energy companies rated junk versus all high-yielders expanded to 3.61 percentage points after touching the highest ever last week. The gaps have widened as the price of oil plunged by more than 50% in the past year. The plight of these high-yield energy companies may next be seen in default rates, which could reach 25% in the next year in the B and CCC categories, assuming current commodity prices, according to a UBS research report Thursday. “In a troublesome environment, there’s going to be a few companies that fall off the wagon,” said Jody Lurie, a corporate-credit analyst at Janney Montgomery Scott.

“Their ability to withstand such pressures in a longer period of time is low compared to the higher-rated peers.” The crude drop has caused losses for investors who just a few months ago bought bonds from petroleum companies such as Energy XXI and Comstock Resources that flooded the market. The yield gap reached its narrowest point this year March 3 as oil prices recovered in February. “Spreads got insanely tight because of that reach for yield a lot of people were going for regardless of ratings,” said Zach Jonson at Icon Advisers. Now, with oil prices mired by a global glut, investors are intent on moving toward the lower-risk level of higher-rated junk bonds.

No need for him to defend himself.

• Galbraith Denies Being Part Of Plan B For Greece ‘Criminal Gang’ (Telegraph)

A world-renowned US economist who was part of a secret “Plan B” team devised by Greece’s former finance minister, has denied being involved in a “criminal gang” intent on bringing the drachma back to the country. James K. Galbraith, a professor of government at the University of Texas and long-time friend of Yanis Varoufakis, co-ordinated a five-man effort which advised Athens on the emergency measures it could take if Greece was forced out of the eurozone. The clandestine plans were made public last week following the airing of a private coversation between Mr Varoufakis and international investors in London. Greece’s supreme court has since lodged two private lawsuits against the former minister with the to the country’s parliament. They are said to be related to charges of treason and the formation of a “criminal gang”.

But speaking to The Telegraph, Mr Galbraith said he has received no official communication from Greek authorities about his own involvement and does not expect an extradition order to face trial in the country. “If questions come my way I’ll be happy to answer them” said Mr Galbraith. “We will see what happens, but I would be surprised if there is anything more than a fact finding mission [from Greek authorities] at this stage.” The US economist spent five months working on the plans until May and was not paid for his efforts. The identity of the other three members has not been revealed, but Mr Varoufakis currently enjoys parliamentary immunity from criminal prosecution. “We were content to stay completely out of view” said Mr Galbraith, who described his work as “precautionary troubleshooting” as Greece was threatened with a collapse of its banking system by Europe’s creditors.

“It was a situation where any leaks would have done harm, and so we proceeded carefully with that very much in mind. No leaks occurred, we were not involved in any policy discussions and we had no role in the negotiating strategy.” Mr Galbraith also distanced himself from a separate finance ministry operation to devise a system of “parallel liquidity” allowing the government to continue paying its suppliers in the face of the cash squeeze. Mr Varoufakis courted controversy after telling investors he asked a childhood friend and professor at Columbia University to “hack” into the computer system of the equivalent of Greece’s inland revenue body, to set up the payments network. Varoufakis said the system could be denominated in drachma at the “flick of a button”.

The revelation that he sought access to private taxpayer information has sparked fury among opposition parties in Greece, who have called for an inquiry into the operation. Mr Varoufakis said the system, which was denominated in euros, could be switched to drachmas at the “flick of a button”. But Mr Galbraith, who has never met the Columbia professor, downplayed the implications of the plan as an “administrative” matter for the finance ministry. “It could have been implemented within the eurozone, and had no implications for the exit strategy”, he said. “It would have facilitated payments between the state and its counterparties and possibly could have been extended to private sector liquidity”.

Something tells me the Economist doesn’t quite get it yet.: “The big question is whether this weakness tells us anything about the global economy.”

• Emerging Markets’ Material Difficulties (Economist)

Five years ago, two views were fairly common. The future belonged not to the sluggish, ageing advanced economies but to the emerging markets. Furthermore, those economies had such demand for raw materials that a “commodity supercycle” was well under way and would last for years. Commodity prices peaked in 2011, and have been heading remorselessly downwards ever since. Their decline of more than 40% so far is a huge bear market; had it happened in equities, the talk would be of calamity and collapse. News coverage in the Western media tends to view the decline in commodity prices as a benign phenomenon, as indeed it is for countries that are net importers. But it is not good for commodity exporters, many of which are emerging markets.

That helps explain why emerging-market equities have had only one positive year since 2011, and have underperformed their rich-country counterparts by a significant margin in recent years (see chart). The latest sign of trouble came in China, where the Shanghai Composite fell by 8.5% on July 27th. The growth rate of emerging economies is likely to slow in 2015 for the fifth consecutive year, according to the IMF. Of the BRICs, Brazil and Russia will see their output decline this year, while China is slowing. Only the Indian economy is set to accelerate. Developing economies were boosted in the first decade of the 21st century by the rapid expansion of Chinese demand, as the world’s most populous country underwent an investment boom. This was good news for commodity exporters; China comprises almost half of global demand for industrial metals.

But the fall in commodity prices indicates that Chinese demand has slowed in recent years. It also shows that high prices did their job, by bringing forth new sources of supply, such as shale oil and gas. At the same time, China has shifted its manufacturing industry from the assembly of components made abroad to the creation of finished products from scratch. This has hit other Asian economies. Emerging-market exports are down 14% over the past year in dollar terms. In terms of volume, they continued to grow, but only by 1.1%, according to Capital Economics. Such anaemic growth is becoming a trend. World trade, which was expanding faster than global GDP before the financial crisis, is no longer even keeping pace: last year, it grew by 3.2% while GDP advanced 3.4%.

“The reason is simple: they don’t have it. Investors were warned in the documents that were issued with the bonds, so their claim may be a weak one.”

• Puerto Rico Set For Debt Default (FT)

Puerto Rico defaulted on some of its debts this weekend after years of battling to stay current on its obligations, signalling the start of a long and contentious restructuring process for the US commonwealth’s $72bn debt pile. The territory, which successfully scrambled to make a $169m payment on debts owed by the Government Development Bank on Friday, did not make a $58m payment on Public Finance Corporation bonds, according to Victor Suarez, chief of staff for Puerto Rico’s governor. “We don’t have the money,” he said on Friday, according to newswire reports. “The PFC payment will not be made this weekend.” The missed payment will push Puerto Rico formally into default after the close of business on Monday said credit rating agency analysts.

The PFC bonds are the first to fall into arrears, and a government “working group” is racing to come up with a plan to restructure the territory’s debts and overhaul its economy. Puerto Rico governor Alejandro Garcia Padilla startled investors earlier this year when he said the commonwealth would not be able to pay off all of its debts and required a restructuring, a move many bondholders – especially creditors to the government itself –are loath to accept. The PFC bonds hold fewer protections than “general obligation” bonds issued by the Puerto Rican government. The US commonwealth is likely to prioritise which bond payments it makes over the remainder of the year, said traders and portfolio managers. Peter Hayes at BlackRock said the missed payment would be an “awakening” for investors who were holding Puerto Rican debt to generate income.

“It gives you an indication of how [Puerto Rico] is going to proceed going forward,” he said. “They will have some interruption to debt payments, potentially a moratorium of debt service. It is indicative of their solvency situation.”Mr Hayes added that economic activity would have to grow “substantially” in a very short time to avoid a haircut of $30bn to $40bn, which is necessary to get Puerto Rico “out from underneath this debt”. Nonetheless, litigation may start as early as next week, predicted David Kotok, CIO of Cumberland Advisors. “A moral obligation requires an appropriation, and the Puerto Rican legislature failed to appropriate the money,” he said. “The reason is simple: they don’t have it. Investors were warned in the documents that were issued with the bonds, so their claim may be a weak one.”

Harper’s still the only game in town after 9 years. Canada’s a country in a coma.

• Harper Calls October 19 Election With Canada’s Economy On The Ropes (Bloomberg)

Prime Minister Stephen Harper fired the starting gun early on Canada’s election campaign amid polls showing his Conservative government’s nine-year reign is threatened by a leftist party that’s never held power nationally. Harper, 56, met with Governor General David Johnston, Queen Elizabeth II’s representative in Canada, on Sunday morning. He requested the dissolution of parliament and formally began campaigning for an Oct. 19 vote, making it the longest electoral contest since 1872. “Now is most certainly not the time for higher taxes, reckless spending and permanent deficits,” Harper told reporters at Ottawa’s Rideau Hall. “Now is the time to stay on track, now is the time to stick to our plan.”

The incumbent prime minister faces the toughest fight of his political life after almost a decade in power, as an oil shock ransacks the economy and voters grow increasingly weary of his government. Polls show Harper’s Conservatives in a tight three-way race with the left-leaning New Democratic Party and the centrist Liberals. The narrow contest suggests Canada is poised return to a minority government, in which no party can unilaterally push through its agenda and elections are more frequent. It would be the country’s fourth minority government in the past five elections. However by starting the campaign early, Harper – whose Conservatives have continued to easily outpace their opponents in fundraising – may tilt the scale in his favor.

“The government is trying at this stage to line up clearly as many advantage touch points as possible,” said John Wright, managing director of polling firm Ipsos Reid. Polling suggests Harper’s biggest challenge will come from the New Democrats, Canada’s official opposition party with the second highest number of seats in the House of Commons. The NDP was averaging 32.6% of popular support, ahead of the Conservatives at 31.6% and the Liberals at 25.6%, according to national averages compiled July 28 by polling aggregator ThreeHundredEight.com for the Canadian Broadcasting Corp.

Psychos rule.

• Training Officers to Shoot First, and He Will Answer Questions Later (NY Times)

The shooting looked bad. But that is when the professor is at his best. A black motorist, pulled to the side of the road for a turn-signal violation, had stuffed his hand into his pocket. The white officer yelled for him to take it out. When the driver started to comply, the officer shot him dead. The driver was unarmed. Taking the stand at a public inquest, William J. Lewinski, the psychology professor, explained that the officer had no choice but to act. “In simple terms,” the district attorney in Portland, Ore., asked, “if I see the gun, I’m dead?” “In simple terms, that’s it,” Dr. Lewinski replied.

When police officers shoot people under questionable circumstances, Dr. Lewinski is often there to defend their actions. Among the most influential voices on the subject, he has testified in or consulted in nearly 200 cases over the last decade or so and has helped justify countless shootings around the country. His conclusions are consistent: The officer acted appropriately, even when shooting an unarmed person. Even when shooting someone in the back. Even when witness testimony, forensic evidence or video footage contradicts the officer’s story. He has appeared as an expert witness in criminal trials, civil cases and disciplinary hearings, and before grand juries, where such testimony is given in secret and goes unchallenged.

In addition, his company, the Force Science Institute, has trained tens of thousands of police officers on how to think differently about police shootings that might appear excessive. A string of deadly police encounters in Ferguson, Mo.; North Charleston, S.C.; and most recently in Cincinnati, have prompted a national reconsideration of how officers use force and provoked calls for them to slow down and defuse conflicts. But the debate has also left many police officers feeling unfairly maligned and suspicious of new policies that they say could put them at risk. Dr. Lewinski says his research clearly shows that officers often cannot wait to act. “We’re telling officers, ‘Look for cover and then read the threat,’ ” he told a class of Los Angeles County deputy sheriffs recently. “Sorry, too damn late.”

“There was a building in Calais where asylum seeker claims could be processed. Health was checked, children were fed, women were protected from rape [..] In 2002, we told the French to close it.”

• They Are Not Migrant Hordes, But People, And Probably Nicer Than Us (Mirror)

They do not have names. They do not have needs, or rights, or jobs, or a tax code, or a passport. They are your choice of collective noun: a swarm, a flood, a tide, a horde. They are not Bob, or Sue, or David or Kate or Charlotte or Adrian. They are not like us. They are Them. They are stateless and helpless, foodless and friendless. Why should we share? The migrant crisis sounds so much more threatening than the humanitarian crisis . The need for usterity sounds more important than the need for common sense . Let’s put to one side for a moment any arguments about space and what we ll do if the entire population of the world wants to move to these few cold, wet, paedophile-producing square miles of rock. Let’s look at the facts.

1) There are about 5,000 stateless people in Calais. And 64.1 million people in the UK. That means if we let in every single person who’d currently like us to, the population would explode by 0.000078%. That’s not a flood. It’s barely a drip.

2) They would not cost very much . Total UK welfare spending is expected to be £217 billion this year, 29% of our overall budget. It includes benefits, tax credits, and pensions. That works out to £3,385 per head of current population, or £7,406 per taxpayer. If we let in those 5,000 extra people, and we assume they get benefits and pay taxes at the same rates as everyone else, we’d turn a profit. They’d cost us about £17m, but make us at the current rate of GDP £100m extra. Divide that, carry the one… Even if they didn’t work, that £17m divided by all the taxpayers is an extra 57p each. That’s not a drain on resources. And when you consider that over their lifetimes those immigrants are more likely than those born here to work harder for longer while taking less out of the system, it might even turn into a plus.

3) Most people don’t want to come here The argument that letting these people in would mean everyone else would do the same is common, but unreasonable. Yes, each immigrant may have family members who would join them but if you multiplied their numbers by five, 10, or 20, they still have virtually no impact on our population or finances. Most of those trying to come to Britain are from Syria, Libya, Somalia and Eritrea, which have a combined population of 45m. Those 5,000 immigrants represent 0.01% of them. That s not a horde. [..]

5) It’s our fault. There was a building in Calais where asylum seeker claims could be processed. Health was checked, children were fed, women were protected from rape. No-one had to die under trains or drown in the world s busiest shipping lane. Unworthy claims were thrown out before they set foot on British soil, and the ones who genuinely needed help got it. In 2002, we told the French to close it. And we put up a fence. Then we bombed Libya, were unable to pick a side in Syria, complained about Somalia, did nothing at all about Eritrea while mining it of resources and watched the Arab Spring install schismatic warlords all over the Middle East. It’s hardly a surprise some of them want to come here, if only to lodge a formal complaint.