Arthur Rothstein Boy living in shanty at city dump, Herrin, IL. January 1939
It’s somehow eerily comforting to know that an entire Boeing 777 plane can completely disappear from everybody’s view, leading to an area from Kazachstan to Australia now being searched, in the days when it’s become common knowledge that the NSA and its global sister organizations track billions of phone calls and internet communications on a daily basis.
Still, much as the idea is appealing, it’s so comfortably comforting that the little man inside doesn’t quite know what to believe. Did the Bermuda triangle just get a hundred times bigger in this age where communication got a thousand times better than in the days where ships would vanish in the triangle? The sheer number of different theories alone for what happened to the plane that have been offered in the reality TV mood media have become so over the top we can’t help wondering what on earth (or beyond) we’re witnessing here. Really, high tech in 2014 means all those Asian guys we see on TV with binoculars peering through airplane windows staring at waves looking for debris that might as well be 5000 miles away? That’s all we got?
And for all we can see, we might as well be watching the birth of a Crimea Triangle as well. What one side deems illegal, the other says is in full accordance with international law and UN. And vice versa.
What occurred to me is that the Ukraine situation, if anything, would seem to call for a government of national unity, the best option to keep tensions and differences from flaring up. And I knew that there had been talk of such a government, so I backtracked a bit:
• November 2013 : Yanukovych rejects EU/US deal, accepts Russian alternative. Maidan protests start. Presumably Yanukovych only turned to Russia after EU/US proposals for financial support and the carrot of EU membership proved much less attractive than what Putin offered. One gets the impression that perhaps EU/US overplayed their hand.
• Friday February 21 : “Peace Deal” agreed between Yanukovych, the opposition (Yatsenyuk, Klitschko, Svoboda Party’s Oleh Tyahnybok), and the foreign ministers of Poland, Germany and France, that strongly limits democratically elected Yanukovych’ powers.
Interestingly, an AP report that day said Leonid Slutsky, a Russian legislator who oversees relations with ex-Soviet states, told reporters the deal is “entirely in the interests of the United States and other powers, who want to split Ukraine from Russia.”
• Saturday February 22 : Yanukovych flees, fearing for his life (any comments ever from EU people?). Parliament speaker Oleksander Turchinov is appointed temporary leader. He announces a vote on a national unity government to take place Tuesday, February 25.
• Sunday February 23 : The Ukrainian parliament on February 23 declared the law on the basic principles of the government’s language policy void. Speaker Turchinov vetoed that decision, but the intentions were revealed and the harm done: Russian speaking people in Ukraine were now convinced that their rights would be trampled.
• Tuesday February 25 : Parliament delays national unity vote. Speaker Turchinov says it’ll take place “later this week”, and cites “dangerous signs of separatism”.
• Thursday February 27 : The national unity vote has disappeared. Yatsenyuk is appointed PM, and a new government installed. “Yats” in his first speech announce Ukraine will turn into Greece: “The treasury is empty. We will do everything not to default. If we get the financial support from the IMF, the U.S., we will do it. I’m going to be the most unpopular prime minister in the history of my country,” he said. “But this is the only solution. I would never promise any kind of huge achievements. First and the most important issue is to stabilize the situation.”
It’s perhaps good to note that everyone seems to agree that “Yats” would have had no chance of being elected PM, simply because he isn’t a very popular man in Ukraine. So the question remains, no matter what else happens, how “Yats” got the job. We know US kingmakers Victoria Nuland and Geoffrey Pyatt favored him for the job.
But even more interesting is the question what happened to the parliamentary vote for a national unity government. On Saturday 22 it was announced for Tuesday 25. On that day is was delayed until “later this week”, but a mere 2 days later it had vanished and a government was installed that was heavily stacked in favor of western Ukraine and the West in general.
And when as a reaction to that the majority Russian speaking Crimea announces a ballot to decide its own fate, it’s immediately declared against international law despite the UN-declared right to self-determination for every people.
Right wing ultranationalist leader Dmitry Yarosh’s threat to destroy Ukraine pipelines to deprive Russia of gas export income, is the essence of both what the whole conflict is about, and of where it’s going to go. The only things Putin ever wanted from Ukraine was peace for its Russian population and uninterrupted access to the pipelines (for which Ukraine was aptly rewarded). If that access comes under threat, Russia is not going to sit still.
Combine that knowledge with the fast depleting physical and monetary resources and political prowess of western major oil companies, and you get an idea of what lies under the surface of the soon to be announced sanctions against Russian diplomats, politicians and oligarchs, which will be followed by Russian sanctions against those same western major oil companies. Shell and Exxon are more than willing to shed blood to maintain their nevertheless inevitably declining positions in the world. And their governments are more than willing to help them, because oil is power, and less oil is less power, something politicians are allergic to, on both sides of the divide.
The west seems to have ignored to what extent Russia has prepared for all this. Putin et al. have always detested the way Boris Yeltsin sold out to western interests, giving away oil assets to oligarchs and Big Oil and letting Ukraine go, and have been acutely aware that EU/US would at some point try to obtain more power and more resources on Russia’s doorstep. None of this should have been a surprise to anyone.
Looking through the media, which more and more approach the level of pure propaganda, it becomes clear what it is that disappears in the Crimea Triangle; it’s not ships, it’s the truth.
• In-the-know insiders are dumping stocks (MarketWatch)
Corporate insiders are more bearish than they have been in almost 25 years. That isn’t good news for the stock market, since these insiders — corporate officers and directors— know more about their companies’ prospects than the rest of us. In fact, you may want to take their pessimism as a signal to ditch some of your stocks or shift into industries in which insiders aren’t heavily selling, such as energy, financials and basic industrials.
Just be aware that this record bearishness isn’t evident from the insider indicator that gets widespread attention on Wall Street — the ratio of shares of company stock that insiders have recently sold versus the number they have bought. According to the Vickers Weekly Insider Report, published by Argus Research, this sell-to-buy ratio, when applied to transactions over the previous eight weeks, is higher than average but no higher today than it was one year ago — when the S&P 500 was poised to produce an impressive double-digit gain.
And in late 2003, just as the 2002-07 bull market was gathering steam, the insiders’ sell-to-buy ratio rose to even higher levels than it is today. But this measure is misleading, says Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior. That is because it uses a government definition of insiders that includes a group of investors whose past transactions, on average, have shown no correlation with subsequent market moves: those who own more than 5% of a company’s shares.
Though on rare occasions a large shareholder also will be an officer or director, in almost all cases it will be an institutional investor — such as a mutual fund or a hedge fund. Because the transactions of these big shareholders often involve a far greater number of shares than those of the insiders who do show more insight — officers and directors — the raw sell-to-buy ratio is heavily dominated by insiders with the least forecasting ability. For example, Seyhun found that far from being a laggard, the average stock sold by these largest shareholders actually outperformed the market by 0.7% over the subsequent 12 months.
For his calculation, Seyhun strips out the largest shareholders from the sell-to-buy ratio. Currently that adjusted figure shows a record level of insider bearishness. According to this measure, corporate officers and directors in recent weeks have sold an average of six shares of their company’s stock for every one that they bought. That is more than double the average adjusted ratio since 1990, which is when Seyhun’s data begin.
One year ago, Seyhun’s adjusted ratio was solidly in the bullish zone, he says. And in late 2003, the ratio was more bullish still. The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years,” he says.
What makes this development so ominous, he adds, is that, while no indicator is perfect, his research has shown that “the adjusted insider ratio does a better job predicting year-ahead returns than almost all of the better-known indicators that are popular on Wall Street.”
There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today — early 2007 and early 2011. The first came a half a year before the beginning of the worst bear market since the 1930s. While the market didn’t fall as much following the second of these two instances, the May-October decline in 2011 did satisfy — based on intraday levels of the S&P 500 index — the semiofficial definition of a bear market as a 20% drop.
Contrary to what many investors may think, insiders aren’t necessarily breaking the law when trading on material information unavailable to other investors. The courts generally have deemed an insider transaction to be illegal only if the insider was acting on information that his firm would itself have been required to disclose to the public — such as an imminent earnings report that is going to be much better or worse than expected or a takeover announcement. “In the absence of such announcements, insiders are considered to be trading on legal information,” Seyhun says.
• SocGen’s Edwards Says Ignore Copper’s Recent Rout At Your Peril (The Tell)
Are you feeling lucky? That’s the question Societe Generale’s uber-bear, Albert Edwards, says investors should be asking themselves in the wake of copper’s recent climb-down to levels not seen since 2010, sparked by concerns that China’s growth story is slowing more sharply than had been expected. Ignore that fall at your peril, he warns.
It’s not completely surprising that the tawny metal has caught the gaze of the SocGen’s strategist known for some dramatically dismal views. Already this year we’ve heard him warn that the world is on the cusp of deflation (which isn’t such a far-fetched notion in some corners of the globe right now) and how doomed emerging markets will bring on a “Freddie-Krueger” type nightmare of global recession. Here’s why he thinks markets and investors want to dismiss the slide in copper:
A “strong bullish consensus” that developed markets have decoupled from the increasing turmoil in emerging and commodity markets. Copper’s slump, goes the rationale, is due to some temporary local troubles in China, as authorities try to rein in excess credit in its shadow banking system.
If it does get nasty for the rest of us, western and Japanese central banks and their money-printing machines will ride to the rescue. Lower commodity prices are good news for developed economies, as they boost consumer purchasing power.
Alberts says he heard the “same sort of nonsense” in the run-up to the 2008 recession, when emerging markets and commodities were rocketing higher despite evidence that developed countries were headed toward recession and the S&P 500 SPX was weakening from its mid-2007 peak. No spillover effects then from developed markets to emerging markets, right? Last August, Edwards warned the EM rout hitting markets then was the “final tweet in the coal mine.” Today, copper just might be reflecting “the sound of the tunnel supports giving way.” He makes the following points:
Industrial commodities are a timely straw in the wind of a changing pace of global economic activity. The recent 10% slump in copper price may have origins in China, but the weakness isn’t a recent phenomena. Moreover, it is carries across the industrial commodity universe.
It has become difficult to detach how much copper imports are due to “real” industrial demand and how much is due to China financing activities. And this it’s not just real-estate developers who do this, or just copper that is affected. Borrowers are using iron -ore, zinc, rubber, plastics and even tried palm oil for financing.
The carry trade going on in Chinese copper and iron-ore financing is unstoppable, and is slowing China credit growth, according to official data. Rising default risk is chipping away at Chinese investors’ confidence, and it will begin to inflect “real pain” on the economy. “The season of weak Chinese data has just begun,” warns Edwards. China’s GDP deflator, which gives a broader economy-wide measure of inflation, is undershooting CPI inflation, an unusual move and shows all isn’t well on the deflationary side.
• U.S. Banks’ $75 Billion Payout at Stake in Fed Tests (Bloomberg)
The biggest U.S. banks are about to learn whether they can pay out more than $75 billion in excess capital to investors as the Federal Reserve completes stress tests of their ability to survive new economic calamities. Wells Fargo & Co. and JPMorgan Chase & Co. would lead a 69% increase in dividends and stock buybacks over the next 12 months after the central bank releases results of its annual tests on March 20 and March 26, according to analysts’ estimates compiled by Bloomberg. That’s assuming the companies pass, which some of the analysts say is less than assured.
“We know the banks have enough capital, that’s not the question,” Todd Hagerman, an analyst at Sterne Agee & Leach Inc. in New York, said in an interview. “It’s more about whether there is something in the capital-planning process that the Federal Reserve might object to.”
Investors and analysts including Hagerman are confident the six biggest firms will pass because of the capital cushions and experience they’ve amassed since stress tests began in 2009. There’s more concern that some of the 12 smaller banks taking part for the first time might not pass and speculation the Fed could reject one or more firms of any size for flawed planning. “That’s the biggest risk,” said R. Scott Siefers, an analyst at Sandler O’Neill & Partners LP. “The regulators may simply choose to fail one or two guys qualitatively every year.”
In addition to the largest commercial lenders, the tests cover the biggest regional banks, securities firms including Goldman Sachs Group Inc. and Morgan Stanley (MS), credit-card issuers such as American Express Co. and custodial banks State Street Corp. and Bank of New York Mellon Corp. The tests of 30 companies are designed to prevent a repeat of the $700 billion bailout program during the 2008 crisis, and the Fed changes the dire economic scenarios that go into the decision each year.
This time, firms must show they can ride out a plunge in the value of high-risk business loans and another housing bust. Eight of the biggest banks also must demonstrate that they can handle the sudden demise of their trading partner with the potential for the greatest losses.
Bankers will have to describe in the “adverse” scenario what would happen to the value of their existing portfolio of riskier commercial loans should yields rise as high as 9.2% in the third quarter of 2014. In the Fed’s “severely adverse” scenario, the unemployment rate peaks at 11.25%, stocks fall almost 50% and U.S. housing prices slide 25%, while the euro area sinks into recession.
• Nasa-funded study: industrial civilisation headed for ‘irreversible collapse’? (Guardian)
A new study sponsored by Nasa’s Goddard Space Flight Center has highlighted the prospect that global industrial civilisation could collapse in coming decades due to unsustainable resource exploitation and increasingly unequal wealth distribution.
Noting that warnings of ‘collapse’ are often seen to be fringe or controversial, the study attempts to make sense of compelling historical data showing that “the process of rise-and-collapse is actually a recurrent cycle found throughout history.” Cases of severe civilisational disruption due to “precipitous collapse – often lasting centuries – have been quite common.”
The research project is based on a new cross-disciplinary ‘Human And Nature DYnamical’ (HANDY) model, led by applied mathematician Safa Motesharri of the US National Science Foundation-supported National Socio-Environmental Synthesis Center, in association with a team of natural and social scientists. The study based on the HANDY model has been accepted for publication in the peer-reviewed Elsevier journal, Ecological Economics.
It finds that according to the historical record even advanced, complex civilisations are susceptible to collapse, raising questions about the sustainability of modern civilisation:
“The fall of the Roman Empire, and the equally (if not more) advanced Han, Mauryan, and Gupta Empires, as well as so many advanced Mesopotamian Empires, are all testimony to the fact that advanced, sophisticated, complex, and creative civilizations can be both fragile and impermanent.”
By investigating the human-nature dynamics of these past cases of collapse, the project identifies the most salient interrelated factors which explain civilisational decline, and which may help determine the risk of collapse today: namely, Population, Climate, Water, Agriculture, and Energy.
These factors can lead to collapse when they converge to generate two crucial social features: “the stretching of resources due to the strain placed on the ecological carrying capacity”; and “the economic stratification of society into Elites [rich] and Masses (or “Commoners”) [poor]” These social phenomena have played “a central role in the character or in the process of the collapse,” in all such cases over “the last five thousand years.”
Currently, high levels of economic stratification are linked directly to overconsumption of resources, with “Elites” based largely in industrialised countries responsible for both:
“… accumulated surplus is not evenly distributed throughout society, but rather has been controlled by an elite. The mass of the population, while producing the wealth, is only allocated a small portion of it by elites, usually at or just above subsistence levels.”
The study challenges those who argue that technology will resolve these challenges by increasing efficiency:
“Technological change can raise the efficiency of resource use, but it also tends to raise both per capita resource consumption and the scale of resource extraction, so that, absent policy effects, the increases in consumption often compensate for the increased efficiency of resource use.”
Productivity increases in agriculture and industry over the last two centuries has come from “increased (rather than decreased) resource throughput,” despite dramatic efficiency gains over the same period. Modelling a range of different scenarios, Motesharri and his colleagues conclude that under conditions “closely reflecting the reality of the world today… we find that collapse is difficult to avoid.” In the first of these scenarios, civilisation:
“…. appears to be on a sustainable path for quite a long time, but even using an optimal depletion rate and starting with a very small number of Elites, the Elites eventually consume too much, resulting in a famine among Commoners that eventually causes the collapse of society. It is important to note that this Type-L collapse is due to an inequality-induced famine that causes a loss of workers, rather than a collapse of Nature.”
Another scenario focuses on the role of continued resource exploitation, finding that “with a larger depletion rate, the decline of the Commoners occurs faster, while the Elites are still thriving, but eventually the Commoners collapse completely, followed by the Elites.”
In both scenarios, Elite wealth monopolies mean that they are buffered from the most “detrimental effects of the environmental collapse until much later than the Commoners”, allowing them to “continue ‘business as usual’ despite the impending catastrophe.” The same mechanism, they argue, could explain how “historical collapses were allowed to occur by elites who appear to be oblivious to the catastrophic trajectory (most clearly apparent in the Roman and Mayan cases).” Applying this lesson to our contemporary predicament, the study warns that:
“While some members of society might raise the alarm that the system is moving towards an impending collapse and therefore advocate structural changes to society in order to avoid it, Elites and their supporters, who opposed making these changes, could point to the long sustainable trajectory ‘so far’ in support of doing nothing.”
However, the scientists point out that the worst-case scenarios are by no means inevitable, and suggest that appropriate policy and structural changes could avoid collapse, if not pave the way toward a more stable civilisation.
• China debt crisis to hit industrial metals (Telegraph)
Investors in vital industrial metals such as copper and iron ore will have their nerves tested again this week after China’s unfolding debt crisis caused volatility on commodity markets. All the warning signals are now pointing to a continuing slide in prices as the full extent of China’s economic problems emerges and bearish sentiment grips the large commodity trading houses.
Fears over a possible credit crunch in China have blown away previous assumptions that 2014 would be a year of steadily rising prices for industrial commodities as the global economy continued to recover. Copper prices have fallen 14pc so far this year to about $3 a pound on futures markets. Iron ore has tumbled to an 18-month low and closed the week at around $104 per tonne.
After years of turning a blind eye, China’s government is finally getting serious about reining in the country’s poorly regulated shadow banking system, which has grown so big that it could derail the world’s second-largest economy. Beijing has also moved to restrict credit to steel smelters at a time when real demand is slowing fast. Official data showed an 18pc drop in China’s exports last month.
Factory-gate consumption is equally weak. China imported a total of 380,000 tonnes of raw copper and copper products in February, down sharply from the 536,480 tonnes shipped into the country the previous month.
In addition to providing the raw material for China’s dramatic urbanisation over the past 20 years, metals such as copper and iron ore have been used as a form of collateral to enable companies and investors to borrow in China. This may have artificially driven up the price of industrial resources, creating vast stockpiles in warehouses and ports across China.
Analysts estimate that around 60pc of the copper in Chinese warehouses is held in storage as a form of collateral against debt. This system is now unravelling with dramatic consequences as the number of Chinese creditors defaulting increases and lenders rush to sell commodities they hold as collateral to recoup their losses while prices still hold up.
However, brokers are divided on the ultimate direction that prices are headed next. In a command economy such as China, much will depend on the response that policymakers in Beijing take to prevent domestic markets from completely seizing up.
Ziao Fu, a commodities markets strategist at Deutsche Bank, said: “In our view, the recent sell-off in copper prices has been primarily driven by speculators trying to anticipate the unwinding of financing deals, rather than actual widespread unwinding itself.”
According to Macquarie, one of the “sanity checks” the bank uses to gauge volatility in the iron ore market is iron’s price ratio to scrap metal. Currently, the price of an iron unit in scrap is 2.22 times that in iron ore, the highest level since September 2012 when prices last collapsed and the ratio hit 2.8 times. That ratio is well above the 1.86 times average to scrap that Macquarie has tracked over the past year.
“What this suggests is a degree of panic in iron ore, as scrap tends to be the more liquid transaction-backed spot price and better reflective of what a marginal iron unit buyer would be willing to pay,” wrote analysts at Macquarie late last week.
Deutsche Bank is also pessimistic about the prospects for iron ore in the near future and is forecasting that a tonne of the steel-making commodity will soon fall below the key threshold of $100 per tonne. “As a low value product with greater difficulty for storage, iron ore financing is not sustainable, in our view,” the bank wrote in a note to investors.
Regardless of whether industrial metals prices recover this week or sink further, the recent turmoil suggests that presumptions over China’s future consumption and reliance on Beijing to support prices may have to be reassessed.
• New doomsday poll: 99.9% risk of 2014 crash (Paul B. Farrell)
Global risks are accelerating. This is our fourth major poll update of industry leaders: A critical review of their warnings from early last year when we first predicted a 87% risk of a crash: Bernanke’s Fed saw an “unsustainable bubble” … Gross: “credit supernova” … Gundlach: “kaboom ahead” … Ellis: “Don’t own bonds” … Shilling: “shocker” … Roubini: “Prepare for perfect storm” … Shiller: “Irrational exuberance is back” … Schiff: “Doubling down” on “doomsday” prediction … InvestmentNews’ warning 90,000 advisers: “tick, tick … boom!”
A few weeks later the crash risk was up to 98%. Then a dramatic preholiday uptick in investor sentiment. America’s collective unconscious tired of negativity after a Halloween headline: “Economic guillotine dead ahead.” A week later, 2014 became the “Year of the Boom.” Bank of America’s chief strategist screamed: “Bet on the bulls now.” The Great Gatsby spirit was celebrating the holidays: “Even old grumpy Dr. Doom, celeb economist Nouriel Roubini, began humming a happy tune all over television: “A global recovery is going to occur, get into equities.”
What really happened? Fed politics. Short-term, Larry Summers withdrew as a candidate for the Fed chairman’s job. Dark cloud lifted as Janet Yellen become the pick. Wall Street cheered, Bernanke’s easy-money printing presses would not screw up their year-end bonuses. Plus Main Street was mentally exhausted, tired of the bad news, relentless political drama. We needed a holiday break.
By Thanksgiving, “irrational exuberance” was accelerating in full holiday tilt: Headline: “Shiller’s hot P/Es will power a roaring bull till 2017,” and 2014 got branded the “Katy Perry market!” A week later, a Thanksgiving headline added: “10 reasons to be a bull in 2014.”
But long term? What’s really ahead for America in 2014? Warning, something bigger is hiding in the deep shadows of our collective brain. At a recent lunch with an old friend, one of the world’s more successful commodities traders, he confirmed that “something” was dead ahead. But not just another brief statistical shift in sentiment. Not a medium-term volatility shift. America, the world, are in a historic transition, a paradigm shift, a mysterious upheaval that few will grasp till it moves further along.
More losses? How bad? Worse than 2000 and 2008? Yes. Wall Street, Main Street, Washington, the global economy, will all be knocked off-center. Traders are focusing on St. Patrick’s Day for guidance, below S&P 1,850, Dow 16,400, with a downturn accelerating after a macroeconomic news event in mid-April. For Wall Street’s short-term thinkers, all easy to dismiss, they make money on the action, up or down.
But this trader’s track-record says listen. His predictions fit our polls. The underlying reason is simple: Yellen’s policy is to keep printing cheap money. Remember last summer: Bernanke still in power? Wall Street feared Summers would hurt bonuses. Gross screamed, “QE must end.” Yet market kept rising. Pimco lost. Gross was off-center. His partner Mohamed El Erian left. Gross’s confusion was just one of many signs of a fundamentally flawed monetary policy dating back to Greenspan and Reaganomics
What’s ahead is even bigger: A black swan. Unpredictable. A macroeconomic catastrophe in China, Russia? Something politically dramatic, like the fall of the Berlin Wall? Oil wars? What do you see? Dismiss? Comment: Will 2014 continue the bull? Correction? Bear? The “big one” predicted for last year? Finally coming? Our poll resembles the one we reported on from 2004 to 2008, summarized shortly before the collapse.
There hasn’t really been a fire-sale, only a relocation of assets. It comes down to same thing in how it works out, really, but it’s not the same.
• Fire-Sale Of US Treasuries Is A Warning Of Acute Stress Across The World (AEP)
Somebody is a selling a fistful of US Treasuries. It could be Russia, or China, Turkey, South Africa, or Indonesia, or all frantically selling bonds at the same time for different reasons. We don’t yet know. All we know is that the US Federal Reserve’s custody holdings on behalf of foreign central banks plunged by $106bn in the week ending March 12, the biggest one-week drop on record.
Russia’s central bank is undoubtedly liquidating reserves at a breakneck pace to prevent a collapse of the rouble, as foreign companies scramble to get all their spare cash out of Russian accounts before the G7 guillotine comes down on the Putin clan next week. It is certainly trying to remove its assets beyond the jurisdiction of the US authorities – though that will not be easy. The SEC takes no prisoners. In the end, the world is more frightened of US regulators than it is of Putin’s tanks or his polonium. Soft power can trump hard power.
One investor told me that clients in Russia are literally loading up cars with computers, machinery, and anything that will fit, and rushing them out of the country for fear that assets will nationalised. Whatever happens, nobody will forget this in a hurry. Yet the latest financial ructions go beyond Russia, they reek of stress in the international system. “Countries are intervening all over the place to defend their currencies, (which means they are tightening). Their central banks built up huge war chests of reserves for a rainy day, and now it is raining,” said David Bloom, currency chief at HSBC.
Indeed it is. The international order is unravelling. Russia is of course smashing the post-Cold War order by seizing Ukraine, and blowing up the global architecture of nuclear non-proliferation. Let us not forget that Ukraine agreed to give up its nuclear weapons – the world’s third biggest arsenal at the time – in exchange for a guarantee by the great powers in 1994 that its territorial integrity would be upheld. Russia was one of the signatories.
China is laying claim to large parts of the East China and South China Seas, and has established an air identification control zone over the Japanese-controlled Senkaku islands. China and Japan are one blow – or misjudgement – away from outright military conflict. The battle on the Pacific Rim is ultimately even more dangerous than the West’s clash with Russia over Ukraine. Whether or not the wheels really are falling off the Chinese economy remains to be seen, but the discussion has crept into the market. You can smell the beginnings of fear.
“The global situation is extremely serious,” Lars Christensen from Danske Bank. “Russia is committing economic suicide, there is a massive corruption scandal in Turkey, and capital outflows from China threaten to have huge ramifications.” “If the US dollar were to strengthen drastically at this point, we would go straight into a global recession.” That is indeed the risk. Let us hope the Fed can pull its head out of its closed-economy macro model for once and take a look at the world before it tightens again next week. Tread very carefully Madame Chairman.
• Fed Custody Holdings Record Decline Fuels Russia Speculation (Bloomberg)
The record drop in U.S. government securities held in custody at the Federal Reserve is fueling speculation that Russia may have shifted its holdings out of the U.S. as Western nations threaten sanctions. Treasuries held by foreign central banks dropped by $104 billion to $2.86 trillion in the week ending March 12, according to Fed data released yesterday, as the turmoil in Ukraine intensified.
As of December, Russia held $138.6 billion of Treasuries, making it the ninth largest country holder. Russia’s holdings are about 1% of the $12.3 trillion in marketable Treasuries outstanding, according to data compiled by Bloomberg. “The timing of the drop in custody holdings makes Russia a more likely suspect,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. in a telephone interview. “If Russia did it, then they may have transferred the holdings to another bank outside of the U.S.”
Crimea is preparing for a March 16 referendum on splitting from Ukraine after Russia seized the peninsula. Secretary of State John Kerry warned Russia that the U.S. and Europe could take serious action after the referendum should there be no sign of a resolution to the Ukraine crisis. Kerry, who told a Senate panel in Washington that “nobody doubts” Crimea will vote to leave Ukraine, met with Russian Foreign Minister Sergei Lavrov in London today. “Escalating talk of sanctions over the Ukraine conflict would give it every reason to move those holdings to an off-shore custodian,” according to Wrightson ICAP, referring to Russia.
The previous biggest drop in Fed custody holdings was $32 billion in June after the central bank indicated they may reduce purchases of Treasuries. Andrea Priest, a spokeswoman for the Fed Bank of New York, declined to comment. “How much more room it has to go depends on who’s doing the shift,” said Shyam Rajan, rates strategist in New York at Bank of America Corp. “It could just be a shift in where they hold Treasuries as opposed to outright selling. If they had sold we would have been much higher in yields this week. We’ve seen a rally.”
• Markets Fear Russia Has Cut US Treasury Bill Holding Over Ukraine Crisis (Guardian)
Financial markets were on high alert last night over the Ukraine crisis amid speculation that the Kremlin had pulled its vast US treasury bill holdings out of New York. News that more than $100bn had been shifted out of the US in the past week – at least three times more than at any time since the financial crisis – prompted fears that Russia is preparing for a western backlash in the form of sanctions and is moving its funds to safe havens beyond US influence.
The bills were transferred out of the US central bank’s deposit vaults last week, as the Obama administration increased the threat of sanctions in response to the growing crisis in east Ukraine. Last year the most moved in a week was $32bn. Analysts said that if the switch can be credited to Russia, it represents about 80% of the country’s holdings in US Treasury bonds.
The Russian central bank is likely to be behind the move, though wealthy Russian business figures are also expected to be concerned that Washington-imposed sanctions will freeze funds they have parked with the US central bank. Alexei Miller, the boss of energy firm Gazprom, and Igor Sechin, who runs oil company Rosneft, are likely to be among the many senior figures in Moscow adversely affected by any targeted sanctions imposed on Russia. The switch came to light after the US central bank reported that its weekly custody holdings of Treasury bonds – investments it keeps on behalf of outside investors – dropped $105bn for the week ending 12 March to $2.85tn from $2.96tn.
• Russia Wields $160 Billion Stick in Crimea Sanctions Standoff (Bloomberg)
Vladimir Putin’s control over $160 billion in oil and natural gas exports may be his most potent weapon in Russia’s face-off with Europe and the U.S. over Ukraine. As Crimea prepares to vote Sunday on whether to return to Russian control, the U.S. and its European allies have few levers to deter Putin’s Ukrainian venture. Threats of visa bans and asset freezes haven’t rattled the Kremlin thus far — six hours of face-to-face talks between the top U.S. and Russian diplomats ended yesterday without a deal.
Russia, the world’s largest oil producer, exported $160 billion worth of crude, fuels and gas-based industrial feedstocks to Europe and the U.S. in 2012. While shutting the spigot on Russian energy exports would starve the Moscow government of essential flows of foreign cash, the price may be too high for European consumers and it may not alter Putin’s plans, said Jeff Sahadeo, director of Carleton University’s Institute of European, Russian and Eurasian Studies. “In the short term, this would be very difficult to do and it’s not clear it would even affect Russian behavior,” Sahadeo said in a phone interview from Ottawa. If the West “puts down the card of energy sanctions, it becomes a question of who blinks first.”
German Chancellor Angela Merkel, leader of the EU’s biggest economy, said yesterday her nation is prepared to bear the economic pain that would accompany Russian retaliation to any sanctions. Analysts from Goldman Sachs, Bank of America and Morgan Stanley have said Europe probably won’t back sanctions that limit flows of Russia’s oil and gas. European members of the Paris-based International Energy Agency imported 32% of their raw crude oil, fuels and gas-based chemical feedstocks from Russia in 2012.
Collectively, the EU, Turkey, Norway, Switzerland and the Balkan countries got 30% of the natural gas they burned from Russia last year, much of it pumped through pipelines that cross Ukrainian territory [..] Europe risks a replay of its failed attempt six years ago to punish the Kremlin for going to war with the Republic of Georgia, when it was unable to impose sanctions after acknowledging its dependence on Russian energy.
[..] Russian Foreign Minister Sergei Lavrov said yesterday the nation has no plans to invade eastern Ukraine. “Our partners understand that sanctions are a counterproductive instrument,” he told reporters after meeting with U.S. Secretary of State John Kerry. A spokesman for the Russian embassy in Washington didn’t immediately respond to a request for comment on potential sanctions.
While the ruble, Ukrainian hryvnia and other regional currencies have tumbled as the conflict escalated, global oil markets aren’t reacting to the potential for a sanctions-induced supply disruption. Brent crude futures traded in London, the benchmark for more than half the world’s oil, are little changed at about $109 a barrel since the Crimean regional assembly announced the referendum on March 6.
The U.S. and Europeans will likely disagree over any energy sanctions and how much should be curtailed, said Seva Gunitsky, an assistant professor at the University of Toronto’s Munk School of Global Affairs. “In order to get any traction with sanctions you have to bring the EU in and I think that will be a difficult task because of their dependence on Russian oil and gas resources,” Gunitsky said. The European Union’s bill for Russian oil and gas amounted to $156.5 billion in 2012, 38 times what the U.S. spent for Russian energy [..]
• Right Sector leader: Kiev should sabotage Russian pipelines in Ukraine (RT)
The leader of ultranationalist group Right Sector, Dmitry Yarosh, has threatened to destroy Russian pipelines on Ukrainian territory if a diplomatic solution is not reached with Moscow. In a fiery address loaded warmongering rhetoric, Yarosh told his followers they should be ready to resist the Russian “occupiers.” The leader of the Right Sector made his address to the coup-appointed government in Kiev, as Crimeans made their way to ballots Sunday to vote to join with Russia or to remain within Ukraine.
“We cannot allow the enemy to carry out a blitzkrieg attack on Ukrainian territory. We mustn’t forget that Russia makes money sending its oil through our pipelines to the West. We will destroy these pipelines and deprive our enemy of its source of income,” Yarosh said. Continuing the bellicose rhetoric, Yarosh appealed to his followers, urging them to take up arms against Russia, if a diplomatic solution cannot be reached.
Yarosh said that Crimea was too small to satisfy the appetite of the “Russian Empire,” and that the Kremlin would seek to take over the whole of Ukraine. “Let the ground burn under the feet of the occupiers! Let them choke on their own blood when they attack our territory! Not one step back! We will not allow Moscow’s beserk, totalitarian regime to spark a Third World War!”
The phrase “Not one step back!” was used in a famous order by Joseph Stalin during WWII and became a popular slogan for the Soviet people’s resistance against the Nazis. Yarosh’s use of this particular rhetoric attracted attention from many observers, given that the members of his Right Sector group are known to use Nazi insignia. Russia put Yarosh on an international wanted list and charged him with inciting terrorism after he urged Chechen terrorist leader Doku Umarov to launch attacks on Russia over the Ukrainian conflict.
Yarosh has declared his intentions of running for Ukrainian president in May. The Right Sector movement, an amalgamation of several far-right groups, was formed in November 2013. Members of the radical movement were very active in the violence which triggered the ouster of President Viktor Yanukovich. The Right Sector refused to recognize the Feb. 21 agreement between Yanukovich and the opposition leaders, and declared that they would fight him until his ouster.
Right Sector’s fighters used clubs, petrol bombs and firearms against the Ukrainian police. Even after the coup, some members of the movement continued to use rifles and pistols. Last week, a proposal was submitted to the Ukrainian parliament, suggesting that Right Sector be transformed into a regular unit of the armed forces.
• Putin: Crimea ballot in full accordance with international law, UN Charter (RT)
The referendum in Crimea was fully consistent with international law and UN Charter, Russian President Vladimir Putin told Barack Obama, after the overwhelming majority of Crimeans expressed their willingness to join Russia. The citizens of the peninsula have been given an opportunity to freely express their will and exercise their right to self-determination, the Russian president said in a phone conversation with his US counterpart, according to Kremlin’s press service.
With a record-breaking turnout of over 80%, according to preliminary results, over 95% of the Crimean population said ‘yes’ to the reunion of the republic with Russia. International observers have not reported any violations or anything resembling any kind of pressure during the vote.
However, Obama said the Unites States and the “international community” will “never recognize” the results of the referendum “administered under threats of violence and intimidation,” according to White House spokesman. Obama “emphasized that Russia’s actions were in violation of Ukraine’s sovereignty and territorial integrity” and that the US in coordination with its European partners is “prepared to impose additional costs on Russia,” the White House added.
Despite the existing differences in the assessment of the situation in Ukraine, the leaders of Russia and US have agreed that they must jointly seek to help stabilize the situation in the country, the Kremlin said. “Putin drew attention to the inability and unwillingness of the current Kiev authorities to curb rampant ultra-nationalist and radical groups, destabilizing and terrorizing civilians, including Russian-speaking population, and our fellow citizens,” Kremlin statement reads.
In this context, the possibility of sending an OSCE monitoring mission to Ukraine was discussed, the press office reported. The Russian President believes such a mission should be extended to all Ukrainian regions.
• Crimean ‘referendum at gunpoint’ is a myth – international observers (RT)
The referendum on Crimea’s status is going peacefully, with record-breaking turnout, international observers report. Most of them told RT that the referendum is credible and the vote of the Crimean people should be respected.
No violations at the Crimea referendum have been reported by the international observers currently present in the republic. “It’s all quiet so far,” Mateus Psikorkski, the leader of the European observers’ mission and Polish MP told Itar-Tass. “Our observers have not registered any violations of voting rules.” Another observer, Ewald Stadler, member of the European Parliament, dispelled the “referendum at gunpoint” myth, by saying he felt people were free to make their choice. “I haven’t seen anything even resembling pressure,” he said. “People themselves want to have their say.”
Many were impressed by the turnout, which appeared to be so high as to have people stand in lines to get to the ballot box in the morning. The turnout for the referendum in Crimea at 17.00 local time (15.00 GMT) was 70%, the referendum’s website said. “The lines are very long, the turnout is big indeed,” a member of the international observer mission, Bulgarian parliament member Pavel Chernev, said. “Organization and procedures are 100% in line with the European standards,” he added.
135 international observers have arrived from 23 countries, including Austria, Belgium, Bulgaria, France, Germany, Hungary, Italy, Latvia and Poland, Crimean authorities said. Among those monitoring the referendum are members of the EU and national European parliaments, international law experts and human rights activists.
• Woodrow Wilson’s Ukraine Failure Foreshadows West’s Dilemmas (Bloomberg)
Woodrow Wilson didn’t care much for an independent Ukraine. Wilson went to the post-World War I peace conference committed to “self-determination” for other parts of eastern Europe, while keeping Ukraine tied to Moscow in the hope that a rebuilt Russian empire would reverse the Bolshevik takeover. Wilson’s tactics in 1919, and the West’s ambivalence toward Ukraine after it finally broke free of Soviet control in 1991, show the limited options available to the U.S. and its allies in response to Vladimir Putin’s claim — backed up by armed force – – on Ukraine’s southern region of Crimea.
“Catherine the Great conquered the Crimea in the 18th century just to make Russia a great power,” said Carole Fink, emeritus professor at the Ohio State University and author of “Cold War: An International History.” “Putin is responding to the tumult in Ukraine in a similarly great power strategic fashion.”
The next act in Crimea’s history comes tomorrow, when voters in the majority Russian-speaking region decide whether to sever links with Ukraine’s central government and pledge allegiance to the Kremlin. Western powers have denounced the hastily organized referendum as illegal. Some 59% of Crimea’s 2 million inhabitants are ethnic Russians, incubating the same conflicts between majority rights and minority rule that bedeviled the nation-builders — and empire-dismantlers — at the Paris peace conference after World War I.
That war felled the Russian, Austro-Hungarian and Ottoman empires, bequeathing to the Allied victors a panoply of ethnic and cultural identities clamoring for statehood. The peace pitted Wilson’s “imperative principle” of self-government for formerly subject peoples against what the U.S. president dismissed as the European diplomatic ritual of drawing lines on maps in secret.
Wilson was less principled on Ukraine. His opposition to a sovereign Ukrainian state was backed by the British and French, supporters of anti-Bolshevik forces in the civil war that followed the communist seizure of power in Moscow in 1917. British Prime Minister David Lloyd George said he had glimpsed a Ukrainian only once in his life “and I am not sure that I want to see any more,” Margaret MacMillan wrote in her 2001 book, “Peacemakers.”
While the Paris peacemakers bestowed statehood on the likes of Czechoslovakia and Hungary, Ukraine was left to be fought over by Poland and Russia. Poland seized swathes of Ukraine’s territory and the rest became part of the Soviet Union when it was founded in 1922.
• Russian Richest Face Margin Calls With Billions at Stake (Bloomberg)
Alexander Lebedev is concerned. “Russian businessmen are very scared,” the 54-year-old former billionaire, who served in the Soviet embassy in London during the Cold War and owns Russia’s National Reserve Corp., said by phone. “There are risks to the Russian economy. There could be margin calls, reserves might be drawn down, exchange rates may fall and prices will rise. This worries me.”
Billionaires in Russia and Ukraine risk further losses as market volatility and the threat of Iran-style economic sanctions intensify following Russia’s incursion into Crimea. Since Feb. 28, the day unidentified soldiers took control of Simferopol Airport in southern Ukraine, Russia’s 19 richest people have lost $18.3 billion, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 richest wealthiest people.
“The instability caused by the situation in Crimea could be a problem for the oligarchs,” Yulia Bushueva, who helps manage $500 million at Arbat Capital in Moscow, said in a telephone interview. “If a billionaire pledged their stakes in publicly traded companies as collateral for a line of credit, they could face margin calls and have to re-negotiate with banks.”
The U.S. and the European Union are threatening sanctions against Russia if it doesn’t back down from annexing the Black Sea province, which is holding a referendum in two days to join Ukraine’s former Soviet-era master. “All sides now understand each other’s positioning and understand the constraints each other face,” Michael O’Sullivan, chief investment officer of Credit Suisse Private Banking, said in a telephone interview. “It’s now clear as well that an escalation would have negative consequences on pretty much all the players.”
The European Union last week froze the assets of 18 Ukrainians, including “hundreds of millions of euros” in the Netherlands controlled by former President Viktor Yanukovych and his son, Oleksandr, Dutch Finance Minister Jeroen Dijsselbloem said March 6 on the television show Pauw & Witteman.
Dmitry Firtash, a 48-year-old Ukrainian billionaire who made his fortune importing Russian natural gas, was arrested in Vienna Wednesday by an organized-crime unit of the Austrian police on a warrant issued by the U.S. Federal Bureau of Investigation, according to a statement by the country’s Interior Ministry. He is alleged to have paid bribes and formed a criminal organization, according to the warrant, issued after an FBI investigation that began in 2006, the ministry said.
One Russian billionaire, who asked not to be identified because of the sensitivity of the situation, said he was concerned about the effect potential sanctions might have on business. He said he’d consider buying assets outside of Russia if sanctions were imposed. [..]
• China warns of dangerous Russia sanctions ‘spiral’ (Reuters)
China’s top envoy to Germany has warned the West against punishing Russia with sanctions for its intervention in Ukraine, saying such measures could lead to a dangerous chain reaction that would be difficult to control. In an interview with Reuters days before the European Union is threatening to impose its first sanctions on Russia since the Cold War, ambassador Shi Mingde issued the strongest warning against such measures by any top Chinese official to date. “We don’t see any point in sanctions,” Shi said. “Sanctions could lead to retaliatory action, and that would trigger a spiral with unforeseeable consequences. We don’t want this.”
The interview was conducted on Wednesday, the same day that the EU agreed a framework for sanctions that would slap travel bans and asset freezes on people and companies accused by Brussels of violating the territorial integrity of Ukraine. German Chancellor Angela Merkel, who has taken the lead in trying to mediate in the crisis, has said the measures, which mirror steps announced by the United States, will be imposed on Monday unless Russia accepts the idea of a “contact group” to resolve the crisis diplomatically.
Using her toughest rhetoric since the crisis began, she warned in a speech in parliament on Thursday that Russia risked “massive” political and economic damage if it did not change course in the coming days. Russia’s Deputy Economy Minister Alexei Likhachev responded by promising “symmetrical” sanctions by Moscow.
But Shi urged patience, saying the door for talks should remain open even after a referendum on Sunday in which Ukraine’s southern region of Crimea could vote to secede and join Russia. Merkel and other western leaders have denounced the referendum as illegal and demanded that it be canceled. “We still see a chance to avoid an escalation. The door to talks is still open. We should use this possibility, also after the referendum,” Shi said.
Chinese President Xi Jinping, who will visit Berlin and other European capitals later this month, held separate phone calls on the Ukraine crisis with Merkel and U.S. President Barack Obama earlier this week. But beyond urging restraint and dialogue, China has shown little public interest in becoming involved diplomatically, a stance that is in keeping with its low-key approach to many international crises. Still, Ukraine presents Beijing with a dilemma. On the one hand it is a traditional ally of Moscow and has routinely sided with its northern neighbor in major international conflicts. On the other hand, the question of territorial integrity is a tricky issue for the Chinese because of Tibet and Taiwan.
If the West’s confrontation with Russia over Ukraine worsens in the coming weeks, Xi’s visit, the first by a Chinese president to Germany in eight years, risks being overshadowed by the crisis. Before coming to Berlin, Xi is due to attend a nuclear security summit in the Netherlands which Obama, Merkel and dozens of other world leaders will attend. He is also due to visit Paris and Brussels.
• Finland Trapped in Recession as Investment Fades (Bloomberg)
Finland is shuttering factories that make up the backbone of its export industry faster than it’s investing in new companies. “The overall weak development of investments is worrying,” Juhana Brotherus, an economist at Danske Bank in Helsinki, said by phone. “Future growth potential is eroding.”
Finland is losing its industrial base as the government commits to austerity policies designed to protect a AAA credit rating and keep borrowing costs down. Budget cuts have coincided with the loss of some of Finland’s biggest growth engines as erstwhile technology giant Nokia Oyj falters and a paper industry that used to provide thousands of jobs is overtaken by electronic media. The strains on the economy are driving public debt higher, and Finland estimates it will breach the European Union’s 60% limit of gross domestic product for the first time this year.
The yield on Finland’s benchmark 10-year bond traded at about 1.9% yesterday, compared with a Feb. 3 low of 1.76%. Though it costs less to insure against losses on Finnish debt than it does on bonds issued by Germany, five-year credit-default swaps on Finland have risen to 22.2 basis points from a low of about 18 in October, according to data compiled by Bloomberg.
The government of Prime Minister Jyrki Katainen has struggled to find ways to jumpstart growth without abandoning austerity policies that he’s championed since Europe’s debt crisis started. So far he’s failed to stop the losses. Finnish industrial investments have been outpaced by depreciations since 2008, according to data by Statistics Finland. The economy, which shrank 0.3% in the fourth quarter, has contracted for three years of the past five years and unemployment jumped to 8.5% in January from 7.9% at the end of last year.
Investments will drop 4.4% this year, the Confederation of Finnish Industries forecast last month. Industrial production fell an annual 7.5% in January, the 15th consecutive month of contraction, the nation’s statistics office said on March 10. Fixed investment has dropped more in Finland than in neighboring Sweden and Denmark, according to the Organization for Economic Cooperation and Development. “Everything hinges on exports,” Brotherus said. He estimates Finland’s sales abroad should start to pick up by the end of the first half of the year.
Finland faces a similar loss of competitiveness to that seen in Italy and France, European Commissioner for Economic and Monetary Affairs Olli Rehn said in an interview with newspaper Kauppalehti today.
• City was like a giant hedge fund before crisis, says BOE official (Guardian)
The City operated like a “giant hedge fund” in the runup to the financial crisis, and the resulting crash could leave the British economy with permanent low productivity and stagnant earnings, according to a senior Bank of England official. Charlie Bean, the Bank’s deputy governor responsible for monetary policy, added that the UK’s foreign investment hot streak had cooled and was unlikely to fully recover. A shrinking surplus on investment income from abroad could spook markets and trigger a sharp fall in sterling, he said.
Asked whether Britain could be stuck in a “new normal” of a low-productivity and low-investment economy, Bean said: “It is always possible. We do not fully understand the current weakness of productivity. We have done a lot of work on it down to company level to try to get a better picture. There have been some plausible explanations, one of which, of course, is the possibility that the official data may understate the position.”
Bean, who leaves the Bank on 30 June after 14 years of service, said the Office for National Statistics was “doing its best”, but some surveys suggested that the British economy was growing more strongly. “Business surveys suggest output growth is a bit stronger than the official data. Employment growth suggests the same. There may be a measurement error in the data. This should not be taken as a criticism of the ONS. Inevitably, the ONS numbers are just estimates. The division of labour is that the ONS does its best to measure what is happening, and we interpret.”
Bean added that a sustainable recovery requires three pillars: a rise in business investment, a pick-up in productivity growth and an expansion in exports. Britain’s current account was last in balance or surplus in 1983, but, Bean said, while the foreign investment figure is the most important, its apparent health belies a contribution from the City that is unsustainable.
“Despite our having run deficits for many years, this net position is close to balance … in large part that is a result of our having run a surplus on investment income’ In other words, our investments abroad produced better returns than foreign investors achieved in Britain. Up to the crisis, we were a bit like a giant hedge fund.”
• Blackstone’s Home Buying Binge Ends as Prices Surge (Bloomberg)
Blackstone Group is slowing its purchases of houses to rent amid soaring prices after a buying binge made it the biggest U.S. single-family home landlord. Blackstone’s acquisition pace has declined 70% from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm. After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando and Tampa.
“The institutional wave has passed,” Gray, who oversees almost $80 billion in property investments, said in a telephone interview. “It’s at a much lower level than it was 12 or 24 months ago.”
Private-equity firms, hedge funds, real estate investment trusts and other institutional investors have spent more than $20 billion to buy as many as 200,000 rental homes in the last two years. They snapped up properties after prices fell as much as 35% from the 2006 peak and rental demand rose from the almost 5 million owners who went through foreclosure since 2008. President Barack Obama credited the investors for helping put a floor under the plunging housing market and consumer advocates such as the National Community Reinvestment Coalition later blamed them for soaring prices in some cities.
American Homes 4 Rent and Colony American Homes, the second- and third-largest single-family landlords, also have been scaling back as bargains dry up. Home prices have risen 24% since a post-bubble low in March 2012, which was about when corporate buyers started their buying spree, according to the S&P/Case-Shiller index. The rate of U.S. foreclosure starts fell to its lowest level in eight years in the fourth quarter as higher prices allowed more delinquent homeowners to sell without taking a loss, according to the Mortgage Bankers Association.
Jade Rahmani, an analyst for Keefe, Bruyette & Woods Inc., said large investors are focusing on fewer locations as they gain experience and prices go up. “Home prices have increased, which narrows the acquisition opportunity,” Rahmani said. “In addition, these companies have done this for a certain amount of time and there are lessons learned.”
While institutional purchases nationwide fell to a 22-month low in January, corporate investors were more active in the Atlanta region, buying 25% of homes sold, according to data firm RealtyTrac. That helped drive up Atlanta prices 37% since the March 2012 trough. Last week, a group of 80 tenant and neighborhood advocacy organizations, including the California Reinvestment Coalition, the National Community Reinvestment Coalition and the National Consumer Law Center, asked federal regulators “to address first-time homebuyers being outbid, tenants being displaced, and neighborhoods undergoing dramatic changes as private equity and investor cash continues flooding into local housing markets.”
Gray, 44, said the influence of corporate investors on home prices has been exaggerated. They represent at most 10% of the 2 million homes bought by investors in the last two years, according to Rahmani, the analyst. “There’s a narrative out there that institutional buyers are driving the market,” Gray said. “But the reality is that institutional buyers are in a relatively limited number of markets, their buying is tapering and yet home prices continue to go up at a pretty strong clip nationally — even in markets where institutional buyers haven’t purchased a single home.”
• The G20’s Lords Of Finance Will Magically Conjure Up Growth. Really? (Satyajit Das)
Advanced economies committed to a co-ordinated push to boost growth by more than $2 trillion (£1.2 trillion) over the next five years at last month’s G20 meeting in Sydney. This additional growth would be driven by “concrete” macroeconomic policies and structural reforms. But there were no specific initiatives, other than a call for additional investment, especially in infrastructure.
The only specific undertaking was that monetary policy would remain accommodative. But this too was dependent on the outlook for prices and growth of individual member nations, a concession to the US central bank’s QE “taper” which has created volatility in financial markets.
The targeted additional 2 per cent of economic activity equates to around 0.4 per cent a year. In practice, this would mean real gross domestic product in the G20 would grow by about 3.8 per cent in both 2014 and 2015, above the 3.3 per cent achieved in the past two years. But this would still leave the GDP of the G20 around 8 per cent below its long-term trend, in effect failing to reverse the output losses following the global financial crisis.
In any case, given the poor forecasting record of authorities, the base rate of expansion is uncertain, meaning any additional growth target is meaningless. The IMF and central banks have repeatedly downgraded growth forecasts over recent years. They have discovered what Sebastian Faulks identified in his novel Engleby: “Time makes us pointless.”
Apart from well-worn homilies to “fiscal sustainability” and other economic shibboleths, there was little detail on how high debt levels, weak public finances, global imbalances, deflationary pressures, exchange rate instability and other vulnerabilities would be managed. There were only vague reference to exiting from current policies and the normalisation of interest rates.
The commitment to infrastructure investment failed to address how over-indebted governments would finance expenditure in a deleveraging world. There was no acknowledgement of deep structural issues such as ageing populations, climate change, social stresses and political instability, or their effect on the target. Crucially, the G20 failed to confront one of the major threats to global recovery identified by the IMF: the fragility of many emerging markets. Emerging market instability has been driven, in part, by the decision of the US Federal Reserve to scale back. [..]”
• China announces plans to expand cities (AP)
China has announced plans to expand its cities and improve public services to support economic growth by allowing millions more rural residents to migrate to urban jobs. The Cabinet plan issued Sunday calls for raising the share of China’s population of almost 1.4 billion people living in cities to 60% from 53.7% now, a shift of about 90 million people. The ruling Communist Party sees allowing people to migrate into cities for higher-paid jobs as a pillar of more sustainable growth based on domestic consumption instead of trade and investment.
China’s evolution from a mostly rural society began with market-oriented economic reform in the 1980s. Cities such as Beijing and Shanghai have grown to become among the world’s largest but migrants are hampered by a household registration system that binds them to their hometowns. That limits access to schools, health care and pensions even for those who live in cities for years.
Sunday’s announcement of the “National New Type Urbanization Plan” for 2014-2020 gave no financial or other details. But plans announced earlier call for improving housing for 100 million people who live in dilapidated shantytowns. “Domestic demand is the fundamental impetus for China’s development, and the greatest potential for expanding domestic demand lies in urbanization,” the report said, according to the official Xinhua News Agency.
The ruling party has promised in its latest five-year development blueprint to make the economy more productive by giving entrepreneurs and market forces a bigger role and overhauling banking and other industries. The urbanization plan says railways will reach cities with more than 200,000 residents by 2020 and those with more than 500,000 people will be linked by high-speed rail, according to Xinhua.
It promises to pursue a “human-centered and environmentally friendly path,” according to Xinhua. “A scientific and reasonable urban development model should be adopted, with green production and consumption becoming the mainstream in urban economic activities,” it said. “China should strive to push for harmonious and pleasant living conditions.”
Longer-term, authorities expect 300 million people from the countryside to become city dwellers by 2030, the equivalent of migration by the entire U.S. population. The latest plan promises to give permanent urban status to 100 million rural migrants, according to Xinhua. A study by Tsinghua University in Beijing found only 27.6% of China’s people have urban status with full claims to education, health and other public services, while hundreds of millions of city dwellers with rural status have limited benefits.
• Greenland ice loss is accelerating (IANS)
Sea levels are set to rise perceptibly as the last remaining stable bit of the Greenland ice sheet has turned unstable, a new study has found. The findings of the study, which could lead to higher estimates of expected sea level rise in the future, appears in the latest edition of the journal ‘Nature Climate Change’. The study focuses on ice loss due to a retreat of an “outlet glacier” connected to a long “river” of ice, or the “ice stream”, that drains ice from the interior of the ice sheet.
This ice stream, called the Zachariae ice stream, has retreated about 20 km over the past decade, the study found. That’s bad news. For, in comparison, one of the fastest-moving glaciers, the Jakobshavn in southwest Greenland, has retreated just 35 km over the last 150 years. Ice streams drain ice basins, the same way rivers drain water basins. Zachariae is the largest ice stream in a drainage basin that covers 16 percent of the Greenland ice sheet — an area twice as large as the one drained by Jakobshavn.
The study represents the latest finding from GNET, short for “Greenland GPS Network”, which measures ice loss by weighing the ice sheet as it presses down on the bedrock. “Northeast Greenland is very cold. It used to be considered the last stable part of the Greenland ice sheet,” GNET lead investigator Michael Bevis of Ohio State University has been quoted as saying. “This study shows that ice loss in the northeast is now accelerating. So, now it seems that all of the margins of the Greenland ice sheet are unstable.
“This suggests a possible positive feedback mechanism whereby retreat of the outlet glacier, in part due to warming of the air and in part due to glacier dynamics, leads to increased dynamic loss of ice upstream. This suggests that Greenland’s contribution to global sea level rise may be even higher in the future,” said Bevis.
Study leader Shfaqat Abbas Khan, a senior researcher at the National Space Institute at the Technical University of Denmark, said the finding was a cause for concern. “The fact that the mass loss of the Greenland Ice Sheet has generally increased over the last decades is well known,” Khan said, “but the increasing contribution from the northeastern part of the ice sheet is new and very surprising.”
This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!
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