NYWT & Sun Newspaper Fire in oil storage tanks, Texas City, Texas April 17, 1947
The latest IPCC report is out, and as predictable as clockwork the reactions are the same old same old lip service, and only that. ‘There is no time to lose’, ‘if we don’t act now, we’re too late’, yada yada. Go do some digging and look for quotes from 10, 20, 40 years ago and you won’t be able to tell the difference. And just like back in those days, nothing real or serious will actually be done to stop the planet from going down the bottomless pit in a handbasket.
At some point, instead of insisting on repeating those same stale quotes over and over again, it may be a wise thing to try and figure out why we are, as a species, acting the way we are. I think that the essence is quite simple, though we might want to take the detour of noting that man is an expert at discounting the future and anything that lies far enough away into the future simply doesn’t attract our attention other than perhaps in theory. And since for any theory, as long as there’s a nanometer of doubt about it, there’s always an alternative, so it’s been remarkable simple for people from several different angles to cast doubt on the issue of climate change as a whole.
But to get back to the essence: we destroy the planet because there’s a profit in it. The vast majority of people in the west have gotten a bit of that profit, while some have gotten a lot, and lately other parts of the world have gotten their taste of what has been labeled progress. Today, our entire societies have been firmly built on destroying the world they are based in. And the choice between a society and a planet is never going to be an easy one. Certainly not when the destruction of the planet is a slower process whose worst consequences are at least perceived as being relatively far into the future, and the further something is away, the more it is discounted. By everyone, mind you, not just by doubters or deniers; it’s a basic human quality, and that means you have it too.
The discounting mechanism is also at the heart of the entire model we’ve built our societies on, and that’s something we can really blame ourselves for. 150 years ago, Mark Twain wrote about the Mississippi that the river cleans itself every 10 miles. That had been true for time immemorial, but was for only a few more years after. Then we started dumping acid in it, and anything else we wanted to get rid of. We’ve limited the dumping of toxins and other materials somewhat since, but our rivers haven’t been clean since, and it seems like a crazy idea to even suggest that they ever will be again. And even then, we may not be dumping acid in our own rivers anymore, but we all know our corporations have no problem doing it in far away lands. So that’s all just reshuffling chairs.
We’ve done some commendable things, like halt CTFCs, but those are just incidents in an unstoppable tidal wave of increasing use of energy that won’t stop until we simply run out. Today’s “answer” to less oil and gas of the conventional kind is to either start digging harder and deeper for energy that costs far more energy to harvest, or to start waxing futuristic about wind turbines and solar panels. It’s very rare to see ideas and policies be raised that are based on drastically reducing the use of energy, period. We’re addicted to the use of ever greater amounts of energy, and we’re as much in denial as any addict you’ll ever meet.
The politicians in charge of this doomed undertaking are either firmly on the payroll of the people who profit most from the damage done, or, in 99% of cases, they’re simply not intelligent and educated enough to understand. Since our education system has been turned into a machine that only churns out pawns for the big game instead of encouraging independent and critical thought, that shouldn’t be surprising. Without a complete and sweeping overhaul of what is still called education that’s not going to change. But then there’s so much that solidly engrained and inert in our world that will need to go before we can make ourselves stop doing what we do. It seems obvious by now that most of us won’t live to see that do.
At any single point in the process that brought us where we are, we had, and we still have, the ability to think things over and make adjustments. But all we ever do is things that are aimed at inducing maximum feel good factors and, even more importantly, minimum cost. Our economic, and societal, systems, know no limits, no checks and balances, and no feedback mechanisms other than runaway ones. We dig and haul first and look at the damage done later. We could first assess the damage we might do, beforehand, but it’s a generally accepted practice to not do that.
We are therefore literally going for broke, and broke we will be. It’s a built in and foregone conclusion. And neither we nor our schooling systems have any excuse: the 2nd Law of Thermodynamics has been known for a very long time. It’s just that for the sake of making a few bucks we’re more than willing to ignore it. The 2nd Law tells us that the use of energy has grave consequences. In the words of Herman Daly and Kenneth Townsend, those consequences are defined thusly: “A corollary of this statement is that an organism cannot live in a medium of its own waste products“. We’re not going to escape the laws of physics, but it won’t be for a lack of trying.
All of this is based in our economic systems, that once had limits, checks and balances, but those have been thrown out because they got in the way of potential profits. No more debt jubilees, no more gold standard, no more Glass Steagall. And no more limits to what treasury departments and central banks will do to make sure a nation’s biggest banks will survive and prosper. Necessarily at the cost of domestic populations, though these are for now kept quiet by both ignorance and the dream of better days just around the corner.
But for the planet, it’s obvious, and has been for decades, that no such thing as better days are coming. The 2nd Law of Thermodynamics dictates that, whether people understand it or not. For the economic system, there is still more brewing in the spirit of denial, but there too a variation on the 2nd law will eventually be found to rule the day. A healthy planet needs space and good living conditions for 99.9% of the life it hosts, and a healthy economic system simply needs to provide a living for the vast majority of people living under its umbrella. We are very far from any such situation, in both cases, and we’re moving further away at lightning speed.
I have long ago understood that I don’t care for being rich, since I can’t be rich without inflicting serious damage to both the people I share this planet with, and all other forms of life whose existence allowed for humans to evolve, and without which there will be no humans. I have also decided quite a while ago that I don’t think it’s fun, or useful, or even possible, to continue living on a planet that no longer harbors lions or elephants or polar bears or little green tree frogs. I’ll happily cede my place; it’s not about me.
Last week Congress overwhelmingly passed a bill approving a billion dollars in aid to Ukraine and more sanctions on Russia. The bill will likely receive the president’s signature within days. If you think this is the last time US citizens will have their money sent to Ukraine, you should think again. This is only the beginning.
This $1 billion for Ukraine is a rip-off for the America taxpayer, but it is also a bad deal for Ukrainians. Not a single needy Ukrainian will see a penny of this money, as it will be used to bail out international banks who hold Ukrainian government debt. According to the terms of the International Monetary Fund (IMF)-designed plan for Ukraine, life is about to get much more difficult for average Ukrainians. The government will freeze some wage increases, significantly raise taxes, and increase energy prices by a considerable margin. But the bankers will get paid and the IMF will get control over the Ukrainian economy.
The bill also authorizes more US taxpayer money for government-funded “democracy promotion” NGOs, and more money to broadcast US government propaganda into Ukraine via Radio Free Europe and Voice of America. It also includes some saber-rattling, directing the US Secretary of State to “provide enhanced security cooperation with Central and Eastern European NATO member states.”
The US has been “promoting democracy” in Ukraine for more than ten years now, but it doesn’t seem to have done much good. Recently a democratically-elected government was overthrown by violent protestors. That is the opposite of democracy, where governments are changed by free and fair elections. What is shocking is that the US government and its NGOs were on the side of the protestors! If we really cared about democracy we would not have taken either side, as it is none of our business.
Unlike in the West, being a kleptocratic crook in China is now becoming a higher risk proposition. One gets the sense that as the credit monster collapses in China, and as auntie’s wealth management product is shown to be a loss, out will come the pitch forks. Seizures, arrests and even executions will become the order of the day.
It is not too difficult to understand how these kleptocrats stuffed an estimated $1 to 4 trillion into overseas banking accounts, which I’ve dubbed “the ratline.” In the real estate part of the equation, first corrupt local officials seize the land of farmers. The windfall extraction occurs when the land is effectively rezoned for constructing ghost buildings and cities. Then, in an greatly expanded version of the U.S. savings and loan fraud of the 1980s, cronies in Chinese banks make shady loans to “developers.” In turn, the developers throw up pie-in-the-sky projects. It’s a facade to collect fees and soft dollars, leaving the largely unsecured debt to be dealt with by other cronies and friends in government.
The story around the Zhou racket is illustrative: “Chinese authorities have seized assets worth at least $14.5bn from family members and associates of retired domestic security chief Zhou Yongkang, who is at the centre of China’s biggest corruption scandal in more than six decades, according to Reuters news agency. More than 300 of Zhou’s relatives, political allies, proteges and staff have also been taken into custody or questioned in the past four months.” As some examples, such as Li Peiying, are executed and the Chinese economy implodes, it is even more imperative for kleptocrats to get their ill-gotten gains and banal personas into the global offshore ratlines.
In recent years, one of those ratlines was in Canada, but that country has grown weary of the inflated, high-end real estate bubble prices and the behavior endemic of kleptocratic criminals and decided to pull the plug [see South China Morning Post] on its investor visa scheme. More than 45,500 waiting in the queue will need to seek other destinations aka refuge.
Will Maidan optimism be extinguished as the citizens of Ukraine realize their economic plight means considerable imminent hardship? Ukraine is bankrupt. It has wavered on the cusp for some time. However, it is about to suffer the cruelest indignity: discovering that Western politicians who promised prosperity have been encouraging the IMF to deliver a leveraged poisoned chalice. Maidan dreams are turning abruptly into a nightmare as coup gives way to penury. Siren voices from the West have lured the Ukrainian economic ship on to the rocks with the IMF about to launch a lifeboat – replete with economic subjugation as bondholders get paid and citizens suffer.
Western promises from the barricades of immediate milk and honey were always palpably false. Ukraine is on the cusp of economic trauma, forced to account for 20 years of negligent democracy and decades of Communist economic cancer, all in one short, sharp, shock…or what may prove an IMF-induced coma. With Crimea returning to Russia’s secure embrace, the IMF has dusted off the package elected government first refused in 2010. One interesting point: if the IMF lends to Ukraine that affirms Crimea’s status: the IMF says it cannot lend money to a state illegally partitioned. The West has blinked on its ‘invasion’ rhetoric.
Unsurprisingly, the bailout fell primarily to the IMF as the EU, unable to support its failing currency zone, couldn’t afford a bailout. The EU remains an empire with multiple competing Presidential Emperors, but no clothes for any of them. Elsewhere, President Obama has become confused about Kosovo and offers token support. Therefore, Ukraine has been economically abandoned to IMF austerity before it even has a new president.
Russia’s lower chamber of parliament, the State Duma, has voted to denounce the Russian-Ukrainian agreements on the Black Sea Fleet. The MPs voted to halt the rent payments to Kiev for Sevastopol naval base and to cease writing off Ukraine’s debt. The State Duma censured a total of four agreements on the status of the naval base in Sevastopol on Monday. These include the 1997 agreements between Moscow and Kiev, according to which Russia officially received a part of the Soviet Black Sea Fleet and started renting the naval base of Sevastopol from Ukraine, as well as the 2010 agreement prolonging the rent of the naval base till 2042, with an option of extending it by a further five years.
As part of the agreements, Russia annually paid the Ukrainian government $526.5 million for the base, as well as writing off $97.75 million of Kiev’s debt for the right to use Ukrainian waters and radio frequencies, and to compensate for the Black Sea Fleet’s environmental impact. The Russian Navy was allowed to station up to 25,000 troops, 24 artillery systems, 132 armored vehicles and 22 military planes on the territory of Crimea in addition to the vessels. Crimea’s accession into Russia de facto terminated the deal, with Russia no longer obliged to pay the rent, the MPs decided.
As a result of the March 18 agreement, which marked the Black Sea region’s joining the Russian Federation, “the subject of the Russian-Ukrainian agreements ceased to exist,” said the head of the Duma Committee on the Affairs of the Commonwealth of Independent States (CIS), Leonid Slutsky. “From now on the status and the conditions of the Black Sea Fleet stationed in the city of Sevastopol will be regulated within the constitutional framework of the Russian Federation,” Slutsky said, calling the vote “historic.”
Chinese manufacturing gauges pointed to weakness in the world’s second-biggest economy that could prompt the Communist Party leadership to roll out additional support measures. A Purchasing Managers’ Index fell to 48 in March, the lowest reading since July, from 48.5 in February, HSBC Holdings Plc and Markit Economics said today. A separate PMI from the government, with a larger sample size, was at 50.3 from 50.2 the previous month.
The reports underscore what Premier Li Keqiang last week called “difficulties and risks” as he tries to control surging debt, default dangers and pollution that threatens to stoke public discontent. Li said the nation has policies in reserve to support economic growth after the cabinet said it would accelerate construction spending. “We expect Beijing to fine-tune policy sooner rather than later to stabilize growth,” said Qu Hongbin, chief China economist at HSBC in Hong Kong. He added that the pace of first-quarter growth is likely to have fallen below the nation’s full-year target of 7.5%.
The MSCI Asia Pacific Index of stocks rose 0.2% as of 1:40 p.m. in Tokyo. In Japan, an increase in a sales tax starting today is projected to cut gross domestic product this quarter, indicating that a gain in sentiment among large manufacturers may be short-lived. The Tankan (JNTSMFG) index was at 17 in March, the highest level since 2007, a report showed. Li said last week he was confident China will keep economic growth in a “reasonable range.” The nation will gradually introduce “powerful” measures, including speeding up construction of key investment projects and building railways, roads and irrigation infrastructure, he said.
Analysts are split over whether the central bank will cut banks’ reserve requirements for the first time since May 2012. Hu Yifan, chief economist at Haitong International Securities Group Ltd. in Hong Kong, said today that the government will do so to aid the broader economy, while JPMorgan Chase & Co.’s Zhu Haibin said he doesn’t expect such a move, which should depend on capital flows. “Fiscal and monetary policy are not too tight right now — the key is to boost the efficiency of fiscal and monetary policy,” said Zhu, who’s based in Hong Kong and formerly worked at the Bank for International Settlements. “Currently credit growth is not slow compared with GDP growth, but the efficiency of credit is declining.”
The worst time to be alive in Earth’s history is unarguably the end-Permian, about 250 million years ago. It is the period when the greatest-ever extinction event recorded took place, killing 97% of all species, an event so severe it has been called The Great Dying.
This event has generally been blamed on massive volcanic eruptions that took place at the same time. But now, in a new analysis, researchers at the Massachusetts Institute of Technology (MIT) argue that the mass extinction event may have been instigated by microbes. These microbes led to a perturbation of the carbon cycle that caused environmental shocks, such as global warming and ocean acidification. The shocks wiped out species in great numbers over a period of tens of thousands of years – a blip on geological scales.
The end-Permian extinction, which took place about 260 million years ago, is the most severe of five known mass extinction events. It killed off the last of the trilobites – a hardy marine species that had survived two previous mass extinction. While land plants survived, almost all forests disappeared. Worse of all, it is the only known extinction event where even insects weren’t spared. For an event of this size to take place, a lot of things would have had to go wrong. At the time the world was made up of a single supercontinent called Pangea. This large landmass, by altering the dynamics of how carbon is cycled with subducting plates, may have pushed global temperatures to the highest they had ever been.
Then, over the course of about a million years, huge eruptions in Siberia created basalts that cover an area that was about seven times the size of France. This may have pushed the environment past a tipping point by sending even more carbon dioxide into the atmosphere. That would have caused the oceans to acidify, killing more marine life, and heat up, releasing frozen methane. The upshot of all this would have been a “runaway” climate that kept heating up and removing more oxygen from the environment.
For all the fears of a Japan-style era of deflation, a more likely threat for Europe is what International Monetary Fund officials are calling lowflation. A sustained period of ultra-low, albeit rising, inflation still has the potential to destroy output, hurt hiring and revive memories of the recent fiscal crisis by hammering the ability of governments to repay debts.
With data yesterday showing inflation about a quarter of the European Central Bank’s goal of just below 2%, President Mario Draghi is under pressure to respond. “It is imperative to return inflation to the target as quickly as possible,” said David Mackie, chief Western European economist at JPMorgan Chase & Co. in London. “The ECB needs to acknowledge having low inflation for a long time isn’t neutral.”
Draghi and fellow policy makers convene in Frankfurt on April 3 with gains in the consumer-price index having faded to 0.5% in March, the weakest in more than four years. That reinforced speculation Europe is increasingly at risk of deflation. Those fears may be misplaced, as suggested in recent speeches by Draghi and illustrated in a March 4 IMF blog. Prices fell in four countries — Greece, Cyprus, Portugal and Slovakia — in February compared with 12 in 2009. Four-fifths of the components in the region’s consumer-price index are rising, and energy-price declines explain a lot of the broader slowing.
Federal agents are investigating whether high-frequency trading firms break U.S. laws by acting on nonpublic information to gain an edge over competitors. The Federal Bureau of Investigation’s inquiry stems from a multiyear crackdown on insider trading, which has led to at least 79 convictions of hedge-fund traders and others. Agents are examining, for example, whether traders abuse information to act ahead of orders by institutional investors, according to an FBI spokesman. Even trades based on computer algorithms could amount to wire fraud, securities fraud or insider trading.
The FBI joins a roster of authorities examining high-frequency trading, in which firms typically use super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies. New York Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues give such traders improper advantages. Regulators have focused for years on whether high-speed trading hurts market stability. More recent law enforcement investigations are shifting the focus to unfair practices and possible criminal activity.
Critics including some investors and regulators have said such trading, which captured the spotlight in the May 2010 flash crash that shook U.S. equities, serves little purpose, may distort the market and may leave individual shareholders at a disadvantage.
How many times have we heard that the bank bonus system is needed in order for banks to attract “the best”, that pay levels are where they are because of the need to retain the best people? If the best could manage the debacle of 2008, I’d hate to see what a team of mediocre executives could do.
But that’s the great myth isn’t it? Because mediocre, or downright incompetent, is what we get a lot of the time.That might not be down to the bonus system, but it’s certainly down to the excessive short-term culture that grips the stock market. How much time and energy of senior executives in banks and fund management institutions is spent on the quarterly analyst report? Quarterly! For a concept that is supposed to be rooted in long term prospects, it’s the ultimate paradox that share prices are scrutinized on daily movements and quarterly reports.
And this heavy emphasis on the short term makes corporate executives risk averse and uncreative. It becomes all about the day-to-day share price, rather than planning over a long term time horizon. And these same corporate executives – in a great many industries, not just banking and finance – are overseen by theoretically independent directors who often are not experienced, let alone experts, in the business that they are supposedly steering towards sustained success.
Western governments have put in place banking regulations that could be “mutually destructive” and undermine efforts to prevent bust banks from costing taxpayers billions of pounds, according to a report by the International Monetary Fund. Policymakers representing the world’s biggest financial centres have failed to make the banking sector stand on its own feet by ending implicit subsidies and co-ordinating rescue plans when multinational banks go bust, the Washington-based lender of last resort said.
In a hard-hitting report, it accused policymakers of falling short in their efforts to protect taxpayers from banks that are still too big to fail. Subsidies to the banking sector in some countries are as high as they were before the crash, amounting to $590bn (£355bn), with the eurozone the worst affected. The IMF praised efforts to make banks more secure, particularly by forcing them to hold more capital and through rules that restrict them from making risky loans. It said the US had limited its implicit subsidy to the banking sector to $70bn (£42bn) at most.
A week before vital meetings of G20 ministers in Washington, it said efforts such as the Dodd-Frank Act in the US and the Vickers report in the UK limited the scope for banks to embark on reckless lending and then need a taxpayers’ bailout if they went bust. But in its Global Financial Stability Report, the IMF said the impact of a bank crash would still be severe and could destabilise the international financial system. It said the implicit subsidy for banks in the eurozone could be as much as $300bn (£181bn).
Manhattan U.S. Attorney Preet Bharara argued Monday that the government had gone too easy on corporations in recent years, and that corporate felony charges could be in the offing. “You can expect before too long a significant financial institution will be charged with a felony or made to plead guilty to a felony where the conduct warrants it,” Bharara said at the Securities Industry and Financial Markets Association annual compliance and legal society seminar in Orlando, Fla.
Invoking prosecutors’ widespread hesitancy to file criminal charges since the accounting firm Arthur Andersen went out of business after being indicted in 2002, he added that “the pendulum has swung too far” toward what he called “a presumption of prosecutorial immunity” on the part of corporations. Bharara’s office has already indicted at least one significant player: SAC Capital, the Stamford, Conn., hedge fund that pleaded guilty late last year to securities fraud after a rash of current and former employees were charged with insider trading.
More recently, Bharara and his colleagues at the Justice Department have tangled with JPMorgan Chase, which in November paid a record $13 billion to settle charges that it misled investors about the quality of certain mortgages. Other cases against the large bank are still pending. On many occasions, Bharara said, Wall Street firms being targeted by his office in investigations argue that terrible consequences will follow if tough sanctions are levied—a huge drop in the stock, for instance, or executives walking away from their leadership roles.
Another night, another disaster for Abe. Japan’s all-important Tankan Business conditions forecast dropped to a one-year low and missed by the most since Lehman (but apart from that Abenomics is “nailing it”). China’s “official” Manufacturing PMI beat expectations modestly and printed at a stimulus-busting 50.3 (expanding) as imports and new export orders jumped rather cough-notably-cough given external conditions and all other economic data. Rather remarkably, the New Order sub index of the Steel Industry PMI report showed a huge surge from 32.4 to 46.1 as New Export orders tumbled – this is the biggest jump in new Steel orders in.. well as far back as we have data…Then HSBC’s PMI hit. Printing at 48.0 – worse than the flash print at 48.1 and still firmly in contraction territory leaving China once again in Schrodinger baffle ’em with bullshit economic growth mode.
Japan’s Tankan Large Enterprise Busines Outlook Survey is losing its hope…
Then China followed up with the ubiquitous Schrodinger economy with the official PMI data beating expectations and showing an improved expansion while HSBC’s manufacturing PMI (broader-based survey of less SOEs) remained firmly in contraction territory… and worse than the Flash data!!
So HSBC lowest in 8 months and missed and Official highest in 3 months and beat – Stimulus or no?
Guinea faces an Ebola epidemic on an unprecedented scale as it battles to contain confirmed cases now scattered across several locations that are far apart, the medical charity Médecins sans Frontières said. The warning from an organisation used to tackling Ebola in central Africa came after Guinea’s president appealed for calm as the number of deaths linked to an outbreak on the border with Liberia and Sierra Leone passed 80. The outbreak of one of the world’s most lethal infectious diseases has alarmed a number of governments with weak health systems, prompting Senegal to close its border with Guinea and other neighbours to restrict travel and cross-border exchanges.
Figures released overnight by Guinea’s health ministry showed that there had been 78 deaths from 122 cases of suspected Ebola since January, up from 70. Of these, there were 22 laboratory-confirmed cases of Ebola, the ministry said. “We are facing an epidemic of a magnitude never before seen in terms of the distribution of cases in the country,” said Mariano Lugli, the co-ordinator of Médecins sans Frontières’ project in Conakry, the capital of Guinea.
There’s a whiff of desperation in Spain’s latest plan to naturalize descendants of the Jews the country’s rulers expelled back in 1492. The initiative — advertised as righting a historic wrong — began seven years ago, and since then Spain has granted citizenship to 746 Sephardic Jews, mostly from Venezuela and Turkey. A proposed bill is meant to ease the citizenship process for 3.5 million descendants, many of them living in Latin America and Israel.
The question is why now? Spain is barely clawing its way back from the deepest economic crisis in almost half a century. Unemployment hovers around 26% — youth joblessness is an eye-watering 50% — and the state has cut health, education and other entitlements. Plus, frustrated, unemployed Spaniards aren’t too welcoming of foreigners.
In reality, Spain’s immigration bill is the latest attempt to attract talent, ideas and money to an economy in need of all three. It’s almost poetic justice. After all, what is worse: kicking out Jewish people because of their faith, or calling them back more than 500 years later because of the notion — prevalent in Spain — that Jews are educated, industrious and excel at business? Spanish politicians would do well to explain why such a spirit of historic justice doesn’t extend to the descendants of the almost 300,000 Muslims Spain cast out in 1609.
In fairness, the bill is well-intentioned. For starters, it means Spain recognizes the need to shake up things and bring in new blood. The bill would also allow Jewish beneficiaries to keep other citizenships instead of asking them to renounce them. This suggests Spanish politicians are finally grasping that openness to national diversity makes countries such as the U.S. powerful magnets for international talent. Moreover, immigrants tend to have a solid work ethic; Spain’s Chinese community, for example, has thrived amid the country’s economic woes.
The WSJ article cited above – where it now seems that more than one-third of all Web traffic is fake, generated by bots and zombies to create ad click-throughs and fake popularity – is a good example of what I’m talking about. One-third of all Web traffic? Fake? How is that possible? I mean … I understand how it’s technologically possible, but how is it possible that this sort of fraud has been going on for so long and to such a gargantuan degree that I don’t know about it or somehow feel it? I’m sure that anyone in e-commerce or network security will chuckle at my naïveté, but I was really rocked by this article. What else have I been told or led to believe about the Web is a lie?
But then I remember conversations I have with non-investor friends when I describe to them how little of trading volume today is real, i.e., between an actual buyer and an actual seller. I describe to them how as much as 70% of the trading activity in markets today – activity that generates the constantly changing up and down arrows and green and red numbers they see and react to on CNBC – is just machines talking to other machines, shifting shares around for “liquidity provision” or millisecond arbitrage opportunities.
Even among real investors, individuals or institutions who own a portfolio of exposures and aren’t simply middlemen of one sort or another, so much of what we do is better described as positioning rather than investing, where we are rebalancing or tweaking a remarkably static portfolio against this generic risk or that generic risk rather than expressing an active opinion on the pros or cons of fractional ownership of a real-world company. Inevitably these non-investor friends are as slack-jawed at my picture of modern market structure as I am when I read this article about modern Web traffic structure. How can this be, they ask? I shrug. There is no answer. It just is.
My sense is that if you talk to a professional in any walk of life today, whether it’s technology or finance or medicine or law or government or whatever, you will hear a similar story of hollowness in their industry. The trappings, the facades, the faux this and faux that, the dislocation between public narrative and private practice … it’s everywhere. I understand that authenticity has always been a rare bird on an institutional or societal level. But there is something about the aftermath of the Great Recession, a something that is augmented by Big Data technology, that has made it okay to embrace public misdirection and miscommunication as an acceptable policy “tool”.
China’s biggest banks more than doubled the level of bad loans they wrote off last year, in a sign that financial strains are mounting as growth in the world’s second-largest economy slows. The five biggest Chinese banks, which account for more than half of all loans in the country, removed Rmb59bn ($9.5bn) from their books in debts that could not be collected, according to their 2013 results. That was up 127% from 2012, and the highest since the banks were rescued from insolvency, recapitalised and publicly listed over the past decade.
The sharp acceleration in write-offs is the latest indication of the turbulence now buffeting China’s financial system. The bond market suffered its first true default in March, two high-profile shadow bank investment products were spared from collapse by last-minute bailouts earlier this year, and a small rural lender suffered a brief bank run last week. Data also point to a deeper economic downturn in the first quarter than expected, putting China on track this year for its slowest growth since 1990.
The deterioration has fuelled expectations that Beijing will act soon to shore up the economy. “Increasing downward pressure on the economy should not be neglected,” Li Keqiang, China’s premier, said last week. “We have policies in store to counter economic volatility.” China’s banks built up strong defensive walls over the past decade of their turbocharged growth that are now being tested. Since they had already set aside large reserves against possible losses, they were able to double their loan-write offs without undercutting their profitability or their capital cushions.
Profits for the five biggest banks, including Industrial and Commercial Bank of China, rose 7 to 15% in 2013, slower than 2012 but still healthy. Thanks to the write-offs, the banking sector’s bad loan ratio edged up just slightly last year, to 1% from 0.95%. However, the market valuation of Chinese bank shares shows that investors believe their bad loans might be as much as five times higher than officially reported.
Liao Qiang, China banks analyst with rating agency Standard & Poor’s, said lenders appeared to have adequate provisions for a downturn. But he expressed concern that banks were using write-offs to keep their non-performing loan (NPL) ratios artificially low.= “Some banks fear that if the NPL ratio is undesirably high, there may be some negative publicity, and so they are more active in write-offs,” he said.
This has been particularly the case with midsized lenders, which bore the brunt of a cash crunch last June when interbank borrowing rates spiked to double digit levels. Minsheng Bank, which reported its 2013 results on Sunday, said its bad-loan ratio rose to a mere 0.85% last year from 0.76% in 2012. But had it not been for aggressive write-offs and transfers of bad debt to third parties, Minsheng’s underlying NPL formation rate would have been 135% higher, according to analysts at Citi. Regulators have recently relaxed write-off rules to make it easier for banks to strip out bad debts, allowing them to free up space on their balance sheets to absorb a fresh wave of defaults. Mr Liao said he expected the pace of write-offs would accelerate this year.
China is the greatest construction boom and credit bubble in recorded history. An entire nation of 1.3 billion has gone mad building, borrowing, speculating, scheming, cheating, lying and stealing. The source of this demented outbreak is not a flaw in Chinese culture or character—nor even the kind of raw greed and gluttony that afflicts all peoples in the late stages of a financial bubble. Instead, the cause is monetary madness with a red accent. Chairman Mao was not entirely mistaken when he proclaimed that political power flows from the end of a gun barrel – he did subjugate a nation of one billion people based on that principle.
But it was Mr. Deng’s discovery that saved Mao’s tyrannical communist party regime from the calamity of his foolish post-revolution economic experiments. Just in the nick of time, as China reeled from the Great Leap Forward, the famine death of 40 million and the mass psychosis of the Cultural Revolution, Mr. Deng learned that power could be maintained and extended from the end of a printing press. And that’s the heart of the so-called China economic miracle. Its not about capitalism with a red accent, as the Wall Street and London gamblers have been braying for nearly two decades; its a monumental case of monetary and credit inflation that has no parallel.
At the turn of the century credit market debt outstanding in the US was about $27 trillion, and we’ve not been slouches attempting to borrow our way to prosperity. Total credit market debt is now $59 trillion—-so America has been burying itself in debt at nearly a 7% annual rate. But move over America! As the 21st century dawned, China had about $1 trillion of credit market debt outstanding, but after a blistering pace of “borrow and build” for 14 years it now carries nearly $25 trillion. But here’s the thing: this stupendous 25X growth of debt occurred in the context of an economic system designed and run by elderly party apparatchiks who had learned their economics from Mao’s Little Red Book! [..]
In short, the flip-side of the China’s giant credit bubble is the most massive malinvesment of real economic resources—-labor, raw materials and capital goods—ever known. Effectively, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods with glass, cement and rebar erections that can’t possibly earn an economic return, but all of which has become “collateral” for even more “loans” under the Chinese Ponzi. [..] So China is on the cusp of the greatest margin call in history. Once asset values start falling, its pyramids of debt will stand exposed to withering performance failures and melt-downs.
Three of the world’s largest banks have warned that the flood of “hot money” into China is at risk of sudden reversal as the yuan weakens and the US Federal Reserve brings forward plans to raise interest rates, with major implications for global finance. A new report by Citigroup told clients to brace for a second phase of the “taper tantrum” that rocked emerging markets last year, but this time with China at the eye of the storm. “There’s a dangerous scenario in which the combination of rising US short-term rates and a more volatile RMB (yuan) could lead to a rather large capital outflow from China,” said the report, by Guillermo Mondino and David Lubin.
They argue that China’s credit boom has become a “function” of external dollar funding, mostly through offshore lending in Hong Kong and Singapore to circumvent internal curbs. It is a powerful side-effect of super-loose policies by the Fed, which the Chinese have been unable to control. If so, this may snap back abruptly as dollar liquidity dries up and fickle money returns to the US.
Bank lending to emerging markets has surged by $1.2 trillion (£720bn) over the last five years to $3.5 trillion. The banks have funded most of these loans from short-term sources, leaving the whole nexus extremely vulnerable as the US prepares to tighten. The Fed caught markets badly off guard earlier this month when it suggested that interest rates would jump from near-zero to 1pc next year and 2.25pc the year after, a much faster pace than expected. Half of this foreign lending is linked to China, where dollar loans have jumped by $620bn since 2009. Roughly 80pc are at maturities of less than one year. The report warned that higher rates might “erode bank’s willingness to roll over their cross-border loans to borrowers in China”.
Speculators have been borrowing dollars to buy Chinese assets, a flow known as the “carry trade”. They often do so with leverage and through convoluted means, some involving use of copper or iron ore as collateral. The bet is that the yuan will strengthen, generating a near certain profit on the exchange rate. This has gone badly wrong as the central bank intervenes to force down the exchange rate, causing the yuan to fall 2.5pc against the dollar since January. Nomura issued a client note on Friday warning that the carry trade is “reversing gear”, describing a break-down of discipline in which almost everybody in China from investors, to manufacturers, exporters, and commercial banks have been playing the game. Most of the borrowing has been in dollars and yen on the Hong Kong market.
Private loan balances in the euro area continue to decline. Last month’s drop of 2.2% from the previous year was worse than had been expected by economists.
The area’s banks are undergoing a sharp deleveraging exercise with balance sheets shrinking due to both loan write-downs and extraordinarily weak lending. Maturing loans are not being fully replaced with new credit. Pressure from the ECB’s 2014 stress testing of banks (similar to what the Fed just completed) is also discouraging credit expansion.
Reuters: – Lending to households and firms in the euro zone shrank further in February and money supply growth remained subdued, adding to the European Central Bank’s list of concerns ahead of its policy meeting next week.
The ECB’s health check of the euro zone’s largest banks’ balance sheets before it takes over banking supervision in November is exacerbating the situation, with lenders reluctant to take on more risk and trying to slim their loan books instead.
Bank balance sheets declined by around 20 percentage points of gross domestic product last year, partly in anticipation of the health check, ECB President Mario Draghi said on Tuesday. And more is to come this year. UniCredit, for example, posted a record €14 billion loss this month due to huge writedowns on bad loans and past acquisitions as it moved to clean up its balance sheet. The ECB welcomed the move and encouraged other banks to not to wait with any corrective measures until the review’s results are released in October.
Some have pointed to a “glimmer of hope” in the household lending balances which showed a small uptick in credit expansion.
The increase however came from a slightly slower decline in consumer credit (credit cards, auto loans, etc.), which continues to fall (year-on-year change is firmly in the red). This contraction to a large extent is driven by weak demand.
Furthermore, growth in mortgage loans remains anemic, making this household lending uptick less of a reason to celebrate.
Moreover, the area’s corporate loan balances are continuing to see sharp declines – down 3.1% from the same time last year. Weak demand remains the culprit here as well.
In February Mario Draghi blamed credit weakness on banks’ “window dressing” exercise of trimming balance sheets before year-end financial reporting.
Draghi: – “One would not rule out a certain behavior by the banks that would like to present their best data by the end of 2013, which means that this is going to affect credit flows, which means that we may have different figures in the coming weeks …”
It would be interesting to see what Mr. Draghi will come up with this time to explain the ongoing contraction in euro area’s private credit.
Japan’s factory output unexpectedly fell in February at the fastest pace in eight months, leaving the economy in a precarious position as an impending sales tax hike threatens to choke consumption and undermine the government’s revival plan. Analysts say that with the national sales tax rising to 8% from 5% on Tuesday, the Bank of Japan will probably need to inject more stimulus to safeguard a recovery amid a recent loss of momentum.
Ministry of Economy, Trade and Industry (METI) data showed on Tuesday industrial output fell 2.3% in February from the previous month, versus a 0.3% rise seen by economists in a Reuters poll. That followed a solid 3.8% gain in January, which was driven by brisk production of cars and household appliances. Manufacturers surveyed by the ministry expect output to rise 0.9% in March but decrease 0.6% in April, the METI said, shrugging off the weak February reading as a one-off factor due to unusually heavy snow that disrupted factory activity.
Still, analysts said the outlook for the economy remains challenging at best, noting a recent string of soft data and a separate survey on Monday showing manufacturing activity grew at a slower pace in March. “Companies are curbing production to keep inventories low because they are worried about demand after the sales tax hike,” said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting Co. “This suggests the economy may not rebound quickly, and the burden may fall on the BOJ as the government has already committed to fiscal stimulus spending.”