Andreas Feininger Production of B-17 Flying Fortress bomber, Seattle March 1936
Economists are stupid because they have studied economics. Which doesn’t mean they weren’t born stupid, but that’s hardly relevant. Economists are useless because, well, they have studied economics. And economists are dangerous because they have studied economics, and people still listen to them; entire government policies are built around what they say. Now, you may think: isn’t that a bit harsh?, but don’t worry, I have proof.
In economics, growth is regarded as a physical law, similar to gravity. Never mind that in physics, eternal growth is prohibited. If there occurs an absence of growth in an economic system, it must be, by default, because the wrong policies have been applied. Economists will then prescribe the right policies. After which growth is certain to return. Unless the right policies turn out to be wrong, in which case the right policies will be applied. It’s foolproof. This set of ideas can lead to hilarious statements. Which would be quite alright if they were exclusively meant for entertainment purposes, but we have no such luck.
The Associated Press apparently conducts a monthly survey of a group of 30 economists – carefully selected, no doubt -, something Bloomberg can’t get enough of either for some reason, even if the predictions provided are far too often plain embarrassing. But this is the AP survey:
Economists Back Increased US Oil And Gas Exports
Whether to allow more exports of U.S. oil and natural gas has become a matter of political debate in Washington. But to economists, the answer is clear: The nation would benefit. The vast majority of economists surveyed this month by The Associated Press say lifting restrictions on exports of oil and natural gas would help the economy even if it meant higher fuel prices for consumers. More exports would encourage investment in oil and gas production and transport, create jobs, make oil and gas supplies more stable and reduce the U.S. trade deficit, they say.
As domestic energy production has boomed, drilling companies have pushed to be allowed to sell crude oil and natural gas overseas, where they can command higher prices. Such exports are restricted by decades-old energy security regulations. Those opposed to opening trade say exports could make it more expensive for Americans to heat their homes and fill up their cars. But even economists who think exports might increase fuel prices for U.S. consumers — an open question — say the overall benefit to the economy would outweigh any possible harm.
It would be better to allow the exports and use tax breaks or other methods to help those struggling with higher prices, they say. “The economy in general is better off if we can sell something to someone and bring money into the economy,” said Jerry Webman, chief economist at Oppenheimer Funds. “I’d rather deal with any side effects directly than limit our ability to do business with the world.” The AP survey collected the views of private, corporate and academic economists on a range of issues. Of the 30 economists who participated, nearly 90% responded that more exports of oil and gas would help the U.S. economy. [..]
For economists, there is no such thing as a possible scarcity. And even if there were, that would just be something to maximize profits on. You could perhaps choose to keep it for yourself, but only if and when higher profits were ensured. One may need to presume that this panel of “experts” get their supply numbers from the industry and possibly the EIA (but now I’m repeating myself). And as for the 3 or 4 “dissidents”, they have AP Energy Writer Jonathan Fahey to deal with:
Robert Johnson, director of economic analysis at Morningstar, doesn’t embrace the idea of unfettered natural gas exports. “We’ve already got a few industries building on the concept that we’re going to have a long-term energy advantage here, and I’d hate to interrupt those plans,” Johnson said. He also argues that higher energy prices would disproportionally hurt those with lower incomes, who spend a relatively large portion of their paychecks on energy. That leaves them with less cash for other things, which, in turn, hampers consumer spending — by far the biggest portion of the U.S. economy.
Fahey is having no part of that. As long as it isn’t sure that exports raise prices, those dissidents should shut up. There’s money to be made, and growth to be targeted. And come on, when you need to make a choice between consumers and the economy, isn’t it obvious?
But it is far from clear that exports would raise fuel prices or eliminate the country’s competitive advantage. Exports are even less likely to affect prices of fuels made from oil, such as gasoline and diesel. U.S. crude oil prices have been about 10% cheaper than global oil prices in recent years. But consumers don’t enjoy most of that benefit because exports of gasoline and diesel are not restricted.
I find it strange to see discussions like this one. If it’s fine to let Americans pay more as long as the economy benefits, why not simply raise prices? Presumably that would grow the economy as well. And not addressing possible future scarcity issues is just as strange. I guess economists may have heard of peak oil, but discarded it because it doesn’t fit their models. And it probably won’t until a replacement for oil and gas is found. Have mercy on the lot of them if that fails to materialize.
It looks as if in that same survey, AP asked about China as well. Interestingly, the following article is not from Jonathan Fahey, whose list of specialties seems limited to not understanding energy issues, but from Chris Rugaber, presumably AP’s Asia expert.
China’s Lending Bubble Seen As Global Threat
Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it. That’s the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing’s high-stakes drive to reform its economy — the world’s second-largest — will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run.
I find that confusing right off the bat. But then I’m not trained to see growth beneath every rock. And it gets weirder:
“They’ve really got to change the way they do business,” said William Cheney, chief economist at John Hancock Asset Management. “But they have a good track record of doing just that. I’m an optimist about their ability to make this transition.” The source of concern is a surge in lending by Chinese banks. The lending was initially encouraged by the government during the 2008 global financial crisis to fuel growth. Big state-owned banks financed construction of homes, railroads and office towers. But much of the lending was directed by local officials for pet projects rather than to meet business needs.
Wait, China has “a good track record of changing the way they do business”? And we know that because they went from Communist to dollar store in record time, the last 6 years of which pumped by a $14 trillion government stimulus arrangement amplified by an $X trillion push from an absurdly highly leveraged underground finance system? And what do you mean “The source of concern is a surge in lending by Chinese banks.” Isn’t it a lot more than that? Isn’t the shadow banking system at least as mush of a concern, given that Beijing has a very hard time getting a grip on it? Oh, wait:
On Monday, the International Monetary Fund issued a warning about China’s private debt. It released a report citing “rising vulnerabilities” in China’s financial system, including lending outside traditional banks. Lending by that “shadow” banking system now equals one-quarter of China’s economy, the report said. The IMF also pointed to recent defaults in credit card and other debt sold to investors by banks and heavy debts owed by local governments. If it continues, “this could spark adverse financial market reaction both in China and globally,” the IMF said. The bubble has caused land prices in China to double in five years, according to an estimate by Nomura, a Japanese bank. Outstanding credit surged from 130% of the economy in 2008 to 200% in 2013, according to a forecasting firm.
I read things like these two articles, and I find them terribly hard to understand, because all these questions pop into my head that I think need to be addressed, but then find they’re not. Here’s that IMF (all economists all the time) report as RT wrote it up:
Japan And China Threaten Asian Economic Growth: IMF
Asian growth will remain steady at 5.4% in 2014, however a steeper than expected slowdown in China and a failure in Japan’s “Abenomics” program could derail the region’s economic progress, says the IMF. Asia also faces risks from outside the region, including improving growth in the US, which could raise global interest rates the new IMF study said. “Bouts of capital flow and asset price volatility are likely along the way, with exchange rates, equity prices, and government bond yields affected by changes in global risk aversion and capital flows,” the IMF concludes.
The IMF raised its growth forecast for Asia this year due to a pickup in external demand alongside a recovery in advanced economies. Growth is also expected to improve slightly to 5.5% in 2015. Last year, the region grew 5.2%. However, the IMF predicts China will slowly decelerate to growth of 7.5% this year and 7.3% in 2015, to a “more sustainable path”.
A more sustainable path? Like what, Christine et al, 2%? Not what you had in mind, is it? That would break China. How about 4%? Would still break ’em, but is also ridicules to label “sustainable”. Not that 2% is not, but I need to remember you’re economists and therefore confused about growth issues. I don’t understand that bit about “a pickup in external demand”. From where? You can’t mean Japan, or continental Europe. Russia? Ha!, got you there for a moment. So that leaves the US?! The overall growth forecast for Asia as a whole is raised because US consumers will start buying more trinkets again? The same US that saw its new home sales and mortgage originations fall by 14% in March, while its biggest landlord, Blackrock, cut its purchases by 90%? Interestingly, a WSJ article today quotes Markus Rodlauer, deputy director for Asia and the Pacific at the IMF, as saying: “That model that Asia had of relying on the trade channel, that’s gone”. Take your pick.
2014 has been a bumpy start for China, due to financial sector vulnerabilities, and the temporary cost of reforms, along with the transition toward a more sustainable growth path would have significant adverse regional spillover. Domestic and global political tensions could also create trade disruptions and weaken investment and growth across the region. In some frontier economies, high credit growth has led to rising external and domestic vulnerabilities.
The IMF expects Japan’s growth to decrease to 1% in 2015 from 1.4% this year, due to a reduction in the stimulus effects from monetary and fiscal easing. Another barrier towards growth will be a need to reduce debt, the outlook said. “The advanced economies are turning a corner and many Asian economies which depend on exports as a main growth engine are in a good position to capitalize on the recovery. That’s the main reason why we are positive on the Asian region,” CNBC quotes Changyong Rhee, the director of Asia and Pacific Department at the IMF.
I’d say the IMF is cherry picking here, wanting to come up with positive messages and growth predictions no matter what. I guess maybe that’s in their job description. Free Kool Aid for everyone. reality doesn’t seem to be willing to cooperate, though (not that the IMF economists have a strong bond with reality, of course). Bloomberg:
China’s Provinces Miss Growth Goals Even After Targets Lowered (Bloomberg)
Almost all Chinese provinces failed to meet their growth targets in the first quarter even after scaling back their ambitions as the government instructs officials to focus on reining in debt and curbing pollution. 30 of 31 provinces and municipalities reported missing their goals, with the biggest shortfall in northeastern Heilongjiang, where an expansion of 4.1% compared with an 8.5% target for the year. Most localities’ targets are lower than in 2013. The latest data were released by government websites and newspapers. Premier Li Keqiang risks the nation sliding into a deeper slowdown as the government cracks down on overcapacity in the steel industry, wrestles with shadow banking risks and rolls out economic restructuring measures.
While the government has supported expansion with measures such as reserve-ratio cuts for rural banks, it has so far avoided broader stimulus as Li chases a national growth target of about 7.5%. “The central government will continue to refrain from all-out stimulus and the slowdown pressure may continue to rise,” said Zhu Haibin, the chief China economist with JPMorgan Chase & Co. in Hong Kong. After a 7.4% expansion in the first quarter, growth may sink closer to 7% during the second half of this year, Zhu said.
Well, Zhu, I think maybe it’s time to acknowledge that China’s growth may sink well below 7%. Obviously, being an economist, you have no reason to say that out loud until it actually happens, being a JPMorgan guy and all, but it sure doesn’t make you look any smarter. Heilongjiang’s growth is more than 50% below target, and I know for instance that so is Heibe, which is being whacked upside the head by the iron ore mess that’s only now coming to light in the west. FT:
China Plans Crackdown On Iron Ore Import Loans
China plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. The China Banking Regulatory Commission warned banks to tighten controls over letters of credit for iron ore imports in a document that caused iron ore futures in China to drop 5% on Monday. Rumours of the stricter measures, which are expected after the May 1 holiday, have been circulating in China for at least two months, after a hasty stock sale caused ore prices to tumble in late February.
Steel mills and traders have used iron ore imports to raise money as other sources of credit dry up, in yet another channel for off-book or “shadow” financing. Part of the attraction of the practice is that mills benefit from lower international interest rates compared to those in China. Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds.
Iron ore stocks at Chinese ports are at 109.55m tonnes, data from Steelhome showed on Friday, historically high in absolute terms but still relatively low in terms of the size of the industry’s import demand. Data from the first quarter of the year show that China is on track to produce 822m tonnes of steel this year, a rise of 5.5% from last year’s output, despite the rising debt levels, increased financing costs and the prospect of more environmental regulation. More capacity is still being built, lamented CISA vice-chairman Zhang Changfu, further squeezing margins in the industry. “With the industry in such a state, how can new capacity still be built?”
Saw that? “Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds.” One of those creative channels has been the use of iron ore to be used as collateral for leveraged loans to buy more iron ore and finance other endeavors. Which has been so lucrative that despite overcapacity and new regulations and rising debt, inventories are still rising.
And, predictable even for an economist, iron ore prices are falling. The combination of falling prices for an asset and leveraged loans that use the asset as collateral is a lethal one. Beijing is taking huge risks tackling the issue, it must therefore be pretty desperate to take a bite of the shadow banking’s power structure. What was it that John Hancock economist said? ‘China has “a good track record of changing the way they do business”‘ Well, I have no idea what that is based on, but I guess we can find out if it’s true pretty soon. As Chinese industries take advantage of the rise in external demand the IMF predicts but which seems to be the effect of the direct injection of Kool Aid into one’s veins.
The real job of an economist seems to be not to depict reality, but a version of it that looks reliable enough to induce people into spending their money (and trust) on whatever it is the economist’s employers – be they governments or corporations – are selling at any given point in time. The best way to achieve that is to make them believe their own nonsense, and by the look of things I would say there’s a much higher success rate there than in actual predictions. Regardless, whether they’re plain stupid or good liars, economists don’t have to tell the truth, they just have to be believed. Which is true for any con job.
PS Apologies to my friend Steve Keen: you know I’m not talking about you here.
“Almost every asset is overvalued”.
• ‘Deleveraging Of European Banks Will Dwarf Anything Else’ (CNBC)
Just because many forecasters predict the U.S. economy will continue to grow doesn’t mean it’s easy to make money. “The quantitative easing and the excess money and the low interest rates have driven pricing up of almost all financial assets to beyond what their intrinsic value might be,” Joshua Harris, co-founder and chief investment officer of $161 billion private equity firm Apollo Global Management, said Monday at the Milken Institute’s Global Conference in Los Angeles. “So even though we can all chat about the benevolent growth environment that exists in the U.S. and to a lesser extent globally, the ability to make money and invest wisely on that is very, very challenging right now because you’re starting at a point in the valuation cycle that is very, very aggressive.”
Harris added that it’s a “time to be cautious” and that Apollo is still looking for investments in sectors that are still relatively depressed. “Almost every asset is overvalued,” he said. At the same time, Harris predicted overall economic growth in the U.S. of about 3%. “I would characterize that as a reasonable and sustainable growth rate,” Harris said. One of the best investment opportunities, according to Harris, is buying assets from European banks, an opportunity long cited by private equity firms since the financial crisis. “The deleveraging of the banks in Europe will dwarf anything else really going on,” Harris said. “And the market’s ability to absorb the banks getting smaller and getting out of some of these risky businesses will create the valuation arbitrage where you can actually make interesting investments across Europe.”
Take this to heed, for it takes care of the “nominal value” debate over derivatives: ” … as we further explained both last year and every other time we have the displeasure of having to explain the reality of gross vs net, this accounting gimmick works in theory, however in practice the theory falls apart the second there is discontinuity in the collateral chain as we have shown repeatedly in the past (and certainly when shadow funding conduits freeze up), and not only does the €21.2 billion number promptly cease to represent anything real, but the netted derivative exposure even promptlier become the gross number, somewhere north of $75 trillion.”
• Deutsche Bank’s $75 Trillion In Derivatives Is 20 Times German GDP (Zero Hedge)
… for all the constant lies about improving NPLs and rising cash flows, banks – especially those which not even the ECB can bailout when push comes to shove – Deutsche is as bad as it was a year ago. So, just like last year when we decided to take a look inside the company’s financials to understand why DB was scrambling to dilute its shareholders and raise a few paltry billion in cash, so this year too, we had the pleasure of perusing the European megabank’s annual report. [..] … while America’s largest bank by assets, and certainly ego of its CEO, that would be JPMorgan of course, had a whopping $70.4 trillion in total notional of derivative holdings (across futures, options, forwards, swaps, CDS, FX, and so on), Deutsche Bank once again put it well in the dust. The number in question? €54,652,083,000,000 which, converted into USD at the current exchange rate, amounts to $75,718,274,913,180. Which is over $5 trillion more than JPM’s total derivative holdings.
As we explained last year, the good news for Deutsche Bank’s accountants and shareholders, and for Germany’s spinmasters, is that through the magic of netting, this number collapses to €504.6 billion in positive market value exposure (assets), and €483.4 billion in negative market value exposure (liabilities), both of which are the single largest asset and liability line item in the firm’s €1.6 trillion balance sheet mind you (and down from €2 trillion a year ago: a 20% deleveraging which according to DB “was predominantly driven by interest-rate derivatives and shifts in U.S. dollar, euro and pound sterling yield curves during the year, foreign exchange rate movements as well as trade restructuring to reduce mark-to-market, improved netting and increased clearing”), and subsequently collapses even further into a “tidy little package” number of just €21.2 in titak derivative “assets.”
And as we further explained both last year and every other time we have the displeasure of having to explain the reality of gross vs net, this accounting gimmick works in theory, however in practice the theory falls apart the second there is discontinuity in the collateral chain as we have shown repeatedly in the past (and certainly when shadow funding conduits freeze up), and not only does the €21.2 billion number promptly cease to represent anything real, but the netted derivative exposure even promptlier become the gross number, somewhere north of $75 trillion. The conclusion of this story has not changed one bit from last year: this epic derivative exposure is the primary reason why Germany, theatrically kicking and screaming for the past five years, has done everything in its power, even “yielding” to the ECB, to make sure there is no domino-like collapse of European banks [..]
Not bad for WSJ.
• Asia’s Export Engine Sputters (WSJ)
For decades, Asia fueled its development by selling products to the West. That engine is now sputtering, threatening to sap the region’s economic expansion. Combined exports from Asia’s four export powerhouses China, Japan, South Korea and Taiwan slid 2% in the first three months of this year from the same period last year. China’s drop is particularly striking. Beijing reported Friday that its first-quarter current-account surplus, which measures all trade and one-time transfers, shrank to a three-year low. Exports have seen sharp downturns over the past two decades, after the 1997 Asian financial crisis and the 2001 bursting of the dot-com bubble. But they quickly rebounded to double-digit rates after little more than a year as the world’s economy healed.
Not this time. Exports jumped in 2010 in the wake of the global financial crisis. But they have slumped since and now are barely in positive territory, even as the U.S. economy has stirred back to life. This sluggishness reflects a sharp shift in the global economy. For decades, going back to the 1960s, Asian economies led by Japan, then South Korea, Taiwan and China, became the world’s factory floor, marshaling cheap labor to propel a wave of exports. Today, it is unclear whether exports can still provide that oomph. Overall growth is slowing in many Asian nations. “That model that Asia had of relying on the trade channel, that’s gone,” said Markus Rodlauer, deputy director for Asia and the Pacific at the IMF in Washington.
Theories for the shift proliferate. Prominent among them: The U.S. recovery this time is different. In the five years since emerging from recession, growth in all goods and services in the U.S. has averaged just 1.8%, half the pace of the previous three expansions. The recovery is gathering steam, but it is being powered by capital investment in areas like oil-and-gas exploration that don’t rely much on imports. Growth in U.S. consumer spending, meanwhile, has been stuck at roughly 2% for more than two years as Americans pay down debt, compared with well over 3% a decade ago. That means less demand for Asia’s exports. Imports by the U.S. from China, Japan, South Korea and Taiwan grew by just 1% in 2013, down from 13% in 2004.
• Economists Back Increased US Oil And Gas Exports (AP)
Whether to allow more exports of U.S. oil and natural gas has become a matter of political debate in Washington. But to economists, the answer is clear: The nation would benefit. The vast majority of economists surveyed this month by The Associated Press say lifting restrictions on exports of oil and natural gas would help the economy even if it meant higher fuel prices for consumers. More exports would encourage investment in oil and gas production and transport, create jobs, make oil and gas supplies more stable and reduce the U.S. trade deficit, they say. As domestic energy production has boomed, drilling companies have pushed to be allowed to sell crude oil and natural gas overseas, where they can command higher prices. Such exports are restricted by decades-old energy security regulations.
Those opposed to opening trade say exports could make it more expensive for Americans to heat their homes and fill up their cars. But even economists who think exports might increase fuel prices for U.S. consumers — an open question — say the overall benefit to the economy would outweigh any possible harm. It would be better to allow the exports and use tax breaks or other methods to help those struggling with higher prices, they say. “The economy in general is better off if we can sell something to someone and bring money into the economy,” said Jerry Webman, chief economist at Oppenheimer Funds. “I’d rather deal with any side effects directly than limit our ability to do business with the world.” Of the 30 economists who participated, nearly 90% responded that more exports of oil and gas would help the U.S. economy.
• China’s Lending Bubble Seen As Global Threat (AP)
Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it. That’s the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing’s high-stakes drive to reform its economy — the world’s second-largest — will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run.
“They’ve really got to change the way they do business,” said William Cheney, chief economist at John Hancock Asset Management. “But they have a good track record of doing just that. I’m an optimist about their ability to make this transition.” The source of concern is a surge in lending by Chinese banks. The lending was initially encouraged by the government during the 2008 global financial crisis to fuel growth. Big state-owned banks financed construction of homes, railroads and office towers. But much of the lending was directed by local officials for pet projects rather than to meet business needs.
On Monday, the International Monetary Fund issued a warning about China’s private debt. It released a report citing “rising vulnerabilities” in China’s financial system, including lending outside traditional banks. Lending by that “shadow” banking system now equals one-quarter of China’s economy, the report said. The IMF also pointed to recent defaults in credit card and other debt sold to investors by banks and heavy debts owed by local governments. If it continues, “this could spark adverse financial market reaction both in China and globally,” the IMF said. The bubble has caused land prices in China to double in five years, according to an estimate by Nomura, a Japanese bank. Outstanding credit surged from 130% of the economy in 2008 to 200% in 2013, according to Capital Economics, a forecasting firm.
• Japan And China Threaten Asian Economic Growth: IMF (RT)
Asian growth will remain steady at 5.4% in 2014, however a steeper than expected slowdown in China and a failure in Japan’s “Abenomics” program could derail the region’s economic progress, says the IMF. Asia also faces risks from outside the region, including improving growth in the US, which could raise global interest rates the new IMF study said. “Bouts of capital flow and asset price volatility are likely along the way, with exchange rates, equity prices, and government bond yields affected by changes in global risk aversion and capital flows,” the IMF concludes.
The IMF raised its growth forecast for Asia this year due to a pickup in external demand alongside a recovery in advanced economies. Growth is also expected to improve slightly to 5.5% in 2015. Last year, the region grew 5.2%. However, the IMF predicts China will slowly decelerate to growth of 7.5% this year and 7.3% in 2015, to a “more sustainable path”..
• China’s Provinces Miss Growth Goals Even After Targets Lowered (Bloomberg)
Almost all Chinese provinces failed to meet their growth targets in the first quarter even after scaling back their ambitions as the government instructs officials to focus on reining in debt and curbing pollution. 30 of 31 provinces and municipalities reported missing their goals, with the biggest shortfall in northeastern Heilongjiang, where an expansion of 4.1% compared with an 8.5% target for the year. Most localities’ targets are lower than in 2013. The latest data were released by government websites and newspapers. Premier Li Keqiang risks the nation sliding into a deeper slowdown as the government cracks down on overcapacity in the steel industry, wrestles with shadow banking risks and rolls out economic restructuring measures.
While the government has supported expansion with measures such as reserve-ratio cuts for rural banks, it has so far avoided broader stimulus as Li chases a national growth target of about 7.5%. “The central government will continue to refrain from all-out stimulus and the slowdown pressure may continue to rise,” said Zhu Haibin, the chief China economist with JPMorgan Chase & Co. in Hong Kong. After a 7.4% expansion in the first quarter, growth may sink closer to 7% during the second half of this year, Zhu said.
• China Plans Crackdown On Iron Ore Import Loans (FT)
China plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. The China Banking Regulatory Commission warned banks to tighten controls over letters of credit for iron ore imports in a document that caused iron ore futures in China to drop 5% on Monday. Rumours of the stricter measures, which are expected after the May 1 holiday, have been circulating in China for at least two months, after a hasty stock sale caused ore prices to tumble in late February.
Steel mills and traders have used iron ore imports to raise money as other sources of credit dry up, in yet another channel for off-book or “shadow” financing. Part of the attraction of the practice is that mills benefit from lower international interest rates compared to those in China. Chinese firms have developed a number of creative channels for raising money thanks to years of capital controls meant to starve the real estate sector of speculative funds.
• China’s Iron Ore Inventory Rises to Record on Output, Financing (Bloomberg)
Iron ore stockpiles in China, the world’s biggest buyer, surged to the highest ever amid demand to use the steel-making ingredient as collateral to get credit and as mills ramped up production in a peak season. Inventories at ports rose 1.4% to 109.55 million metric tons in the week ended April 25 from a week earlier, according to data tracked by Shanghai Steelhome Information Technology Co. Stockpiles climbed 25% this year. Spot ore prices in China declined 17% this year as inventory climbed amid slowing economic growth in the world’s biggest producer of steel. Iron ore is among the commodities used in the so-called financing deals in the country, in which they are used as collateral for traders or companies to get funding for other businesses.
“We remained bearish on iron ore’s long-term outlook given the high supply although we rule out an imminent collapse in prices as a port inventory increase coincides with a steel output expansion,” said Gao Bo, chief iron ore analyst at Mysteel.com, a researcher in Shanghai. Crude steel output reached 202.7 million tons in the first quarter, up from 191.9 million tons a year earlier, according to the National Bureau of Statistics. Iron ore shipments into China, which accounts for more than 60% of the seaborne trade, were a record 820 million tons last year, according to China Iron & Steel Association estimate. Imports rose 19% to about 222 million tons in the first quarter, customs said on April 10.
• Iron Ore Drops in China Amid Reports of Financing Curbs (Bloomberg)
Iron ore futures in China, the biggest buyer of the steel-making commodity, fell the most in more than a month after a report that banks will raise the cost of financing for purchasing the raw material. The contract for September delivery on Dalian Commodity Exchange retreated 4.4% to 760 yuan ($122) per metric ton, the largest loss since March 10 and lowest close since March 27. Steel reinforcement-bar and hot-rolled coil futures also declined. Banks will increase the size of deposits required “by large measure” from May 1 for letters of credit used to finance purchasing iron ore, the Guangzhou-based Southern Metropolis Daily reported, citing sources it didn’t identify.
Iron ore stockpiles at Chinese ports jumped to a record amid demand to use the ingredient as collateral to get credit while spot ore prices declined 17% this year. “If traders are unable to get more financing, they may sharply cut prices on the inventory they hold to obtain cash, and that will cause ore price to plummet,” Ren Xinlei, an analyst at Luzheng Futures Co., said today by phone from Jinan. The China Banking Regulatory Commission has issued a statement asking banks to report exposure against iron ore import financing and warned them about the risks, Market News International reported.
• China’s Income Inequality Surpasses US, Posing Risk for Xi (Bloomberg)
The income gap between the rich and poor in China has surpassed that of the U.S. and is among the widest in the world, a report showed, adding to the challenges for President Xi Jinping as growth slows. A common measure of income inequality almost doubled in China between 1980 and 2010 and now points to a “severe” disparity, according to researchers at the University of Michigan. The finding conforms to what many Chinese people already say they believe — in a 2012 survey, they ranked inequality as the nation’s top social challenge, above corruption and unemployment, the report showed.
The growing wealth disparity that accompanied China’s breakneck growth in the decade through 2011 has increased the risk of social instability in the world’s most populous nation. Xi is engineering a slowdown in economic expansion to below 8% and leading a campaign against corruption as he grapples with rising unrest, credit risks, and pollution choking the country’s biggest cities. “The main economic risk of the growing income equality in China is that it will spill over into popular political dissent,” said Glenn Levine, an economist at Moody’s Analytics in Sydney. “The challenge for the administration and Xi Jinping is to keep the economy growing and keep employment growing at a rate that keeps the populace satisfied with the existing political and economic model.”
I doubt this thesis.
• Are Financial Crises The Cost Of Progress? (FT)
The history of financial crises is long and undistinguished. Bubbles, panics and crashes have been carrying on repetitively at least since the Ancient Greeks. Does this mean we are doomed to repeat them? That is the uncomfortable implication of a new addition to the literature on crises, written by the hedge fund manager and academic cosmologist Bob Swarup. He offers a welter of historical examples – starting with the Emperor Augustus (“history’s first Keynesian”) and Rome’s credit-fuelled expansions, crashes, debt-deflation and hyperinflations – of financial folly.
Dutch tulip mania is well covered, along with a less well-known but similar Roman mania for red mullet. So are less well-known crises, such as the 18th-century London bank run that inspired the British to try to tax tea exports to their American colonies, indirectly sparking the Boston Tea Party and the American Revolution. Plenty of new technologies were met by their own investment bubbles. To the internet and dotcom stocks must be added railroads, canals, and even bicycles.
And why not. Let ’em eat bonuses.
• European Bank CEO Pay Surges In 2013 (CNBC)
Chief executives in some of Europe’s biggest banks saw huge gains in their pay packets in 2013, with a number of bosses seeing hikes in excess of 10% from the previous year, data compiled exclusively for CNBC reveals. Of the European banks surveyed by data analysis firm Equilar, chief executives of French bank Credit Agricole and Swiss lender Credit Suisse saw the biggest spikes in their take home pay, as each saw gains of 43% and 28% respectively from 2012. Credit Agricole CEO Jean-Paul Chifflet’s pay rise to $2.8 million coincided with the bank swinging back into full-year profit for this first time in two years. However, his total compensation pales in comparison to that of Stuart Gulliver, CEO of London listed bank HSBC.
Gulliver took home more money in 2013 than any other chief reviewed by Equilar for CNBC, at $12.7 million, which includes base salary, a cash bonus, stock awards as well as other payments. Gulliver was closely followed by Lloyds Banking Group chief António Horta-Osório, who got paid $12.5 million. Both Gulliver’s and Horta-Osório’s bonuses were significantly larger than their base salaries with both receiving $1.95 million and $1.65 compared to $2.86 million in bonuses respectively. Of the 14 European banks surveyed by Equilar, average CEO pay in 2013 amounted to $8.7 million, up 16% from an average pay packet of $7.5 million a year earlier.
What more proof do you need that nothing functions anymore in the global economy? Make big loss, pay big dividend.
• BP Profits Fall As Costs Rise, Hikes Dividend (CNBC)
Oil giant BP is hiking its dividend after announcing a fall in profit in the first quarter fall due to higher costs in searching for oil. The company said it was “too early” to assess the effects of the crisis in Ukraine on its Russian assets in a statement Tuesday. The oil major plans to keep its investment in Russia’s Rosneft, despite a decision by the United States to impose sanctions against the Russian energy company’s chief executive Igor Sechin. BP’s underlying replacement cost profit fell to $3.2 billion in the first quarter of 2014, down from $4.2 billion at the same time in 2013. Its dividend will rise to 9.75 cents per share for the first quarter, up 8% from last year.
Profits were expected to come in at $3.1 billion for the quarter by analysts. The company has paid out $42.7 billion to date over the disastrous Deepwater Horizon accident, which led to a major oil spill in the Gulf of Mexico. The final bill for the crisis is still uncertain. It recently started three new projects: two in the Gulf of Mexico and one in Azerbaijan. Production at BP has been hit by planned maintenance work in major oil fields including the North Sea and Gulf of Mexico areas. It is set to fall further in the second quarter.
• Wall Street’s Overlords Always Win (Bloomberg)
Larry Stone is just your typical wealthy businessman who trusted millions of his hard-earned dollars to Colin P. Gordon, a hedge-fund manager at the now defunct Bear Stearns, and then lost most of those millions when the hedge fund crashed and burned in 2007. Understandably peeved, Stone wanted to see if he could recover some of his losses from Bear Stearns, so he filed an arbitration claim against Bear’s successor, JPMorgan Chase & Co., under the auspices of the Financial Industry Regulatory Authority, known as Finra. The Finra arbitration system forces millions of people to forgo their legal rights — and most of them don’t even realize it. If you have the misfortune of ending up in a monetary dispute with a Wall Street firm (as I once did) and you either work on Wall Street or have a brokerage account with a Wall Street firm, your only redress is a Finra arbitration.
Of course, Finra arbitrations are rigged against the plaintiffs who bring the cases because the arbitrators who decide the cases work for Finra, which of course owes its very existence to the Wall Street firms that control it and provide much of its $1 billion in annual revenue. Needless to say, if you are an arbitrator who has an inclination to reward plaintiffs against the Wall Street overlords, you are not going to be an arbitrator for long, as I have previously written. In July 2011, after a series of hearings in Philadelphia, Stone lost his arbitration. He had asked for $7.6 million, a figure that included both his lost principal and forgone interest. (He recovered about $3.5 million of his $9 million investment.) His basic argument in the arbitration was that Gordon had invested a portion of his hedge fund in subprime mortgage-backed securities without informing him or the other investors. Stone claimed he was therefore unaware of the risks inherent in that kind of investment.
I think she knows, Michael.
• Don’t Look Now, Dr. Yellen, But The Wealth Effect Is Over (Michael Pento)
The government’s “ingenious” solution to end the Great Recession was to recreate the same wealth effect that engendered the credit crisis to begin with: The definition of the wealth effect is an increase in spending that comes from an increase in the perception of wealth generated from equities and real estate. Our Treasury and Federal Reserve figured the best way to accomplish this was to rescue the banking system by; taking interest rates to zero%, buying banks’ troubled assets, and recapitalizing the financial system. Most importantly, our government loaded banks with excess reserves. This process, known as quantitative easing (QE), pushed lower long-term interest rates through the buying of Treasury Notes, Bonds and Agency MBS. It is imperative to understand the QE process in order to fully understand why the tapering of asset purchases will lead to a collapse in asset prices and a severe recession.
The QE scheme forces banks to sell much higher-yielding assets (Treasuries and MBS) to the Fed, and in return the banks receive something know as Fed Credit, which pays just 0.25%. For example, the Five-year Note currently yields 1.75% and the Seven-year Note offers a yield of 2.30%. The Fed is currently buying $30 billion worth of such Treasuries per month and $25 billion of higher-yielding MBS. In fact, the Fed has purchased a total of $3.5 trillion worth of MBS and Treasuries since 2009 in a direct attempt to boost equity and real estate prices. QE escalated in intensity as the years progressed. The year 2013 began with the Fed promising to purchase over a trillion dollars’ worth of bank debt–without any indication of when the QE scheme would end…if ever.
Therefore, financial institutions did exactly what rational would dictate. These banks bought bonds, stocks and real estate assets with the Fed’s credit because not only were the yields higher, but they also understood there would be a huge buyer behind them—one that was indifferent to price and had an unlimited balance sheet. Since these assets offered a yield that was much greater than the 25 basis points provided by the Fed and were nearly guaranteed to increase in price, it was nearly a riskless transaction for banks to make. This QE process also sent money supply growth rates back up towards 10% per annum, as opposed to the contractionary rates experienced in 2009 and 2010. [..]
Real estate and equity values have already lost their momentum, as the Fed is removing its massive support for these assets. In a further sign of real estate weakness, the Commerce Department recently announced that New Home Sales fell three months in a row and plummeted 14.5% in March from the prior month’s pace. But Wall Street will try to convince investors that the spring allergy season—also known as the pollen vortex–is unusually bad this year. Therefore, nobody wanted to go outside and purchase a new home, even after all the snow melted.
The bottom line is as the central bank stops buying assets from private banks, these institutions won’t have the need or the incentive to replace them, and the direct result will be a contraction in the money supply. But nearly every market strategist believes the Fed’s taper will have an innocuous effect on markets. They believe this because of their conviction that new bank lending will supplant the money creation currently being done for the purpose of buying new assets. But what would cause banks to suddenly start lending to the public?
We’ve warned you of this a thousand times.
• Time to Act: Pension Funds are Drying Up (Money Morning)
Peter Krauth writes: On numerous occasions, I’ve told you to remain on lookout for threats to your savings, including the proposed new MyRA account. If you’ve been counting on your pension, whether from work or even Social Security, you may want to revise those plans, as most are way underfunded. Research by Bridgewater Associates, the world’s largest hedge fund, estimates that 85% of public pensions could go bust within 30 years. Public pension funds currently have about $3 trillion in assets, but will need to pay out nearly $10 trillion over the next several decades. That would require average annual returns around 9%, but Bridgewater estimates they’ll only earn about 4%, leaving pensions severely underfunded as paid benefits exceed contributions and returns.
Here and elsewhere, governments have bought votes by overpromising benefits that will never be honored… A recent announcement by the world’s largest public pension fund, the $1.26 trillion Japanese Government Pension Investment Fund (GPIF), is very telling. Prime Minister Abe has made good on his promise to reform the GPIF. The Japanese government just reorganized the pension fund’s Investment Committee, with the ultimate goal of taking on riskier investments. Clearly, Japanese officials recognize the lack of returns from low-yield government bonds, and the growing requirements of paying benefits to the world’s second-oldest population.
But that’s created a serious dilemma in Japan, and well beyond. If one of the country’s largest sources of demand for its own government bonds dries up, who will buy them? It’s enough to cause one to suspect that Japan’s massive $1.4 trillion, two-year QE program to buy government bonds is in large part to compensate for GPIF’s decreasing demand. The World Pensions Council has warned that QE-prompted artificially low government bond yields would hurt pension funds, saying “without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years.”
And designed as such.
• This Is A Low-Pay ‘Recovery’ Built On The Back Of The Working Poor (Guardian)
The economic headlines have been rosy for the coalition in recent weeks. Expect more of the same on Tuesday, when growth figures are widely expected to show the recovery accelerated during the first three months of this year. We have already heard real pay is growing again – albeit only in average terms. We have also been treated to the more dubious claim, from work and pensions secretary Iain Duncan Smith, that his welfare cuts have revived Britain’s “entrepreneurial spirit”, rather than forced thousands into low-paid self-employment. But while Britain’s rise up the growth rankings has attracted plenty of attention, its position near the top of a much less appealing record table remains little discussed. Britain is a leader at low pay too.
One in five workers earns less than the living wage – higher than the minimum wage but the figure deemed by campaigners to be the actual bare minimum for getting by. The incidence of low pay in the UK puts it high on a league table of mostly rich countries watched by the Organisation for Economic Co-operation and Development. That record will be highlighted in a new report from the Joseph Rowntree Foundation this week into improving employees’ working lives. As the research says, low pay is just one of many serious issues lurking behind the seemingly positive headlines from Britain’s labour market: the charity’s research coincides with official statistics due out on zero-hours contracts.
We have low pay, insecure zero-hours jobs and surge in underemployment – where people work fewer hours than they would like. Britain has a growing problem of in-work poverty – a problem more likely to hit the less-qualified, young people, women and ethnic minorities. This presents a conundrum for politicians, and sits uncomfortably with the widely espoused principle that work is the surest route out of poverty. The reality is that, for many families, work and poverty are not mutually exclusive. In fact, more than half of households in poverty are now ones where someone works.
Banks stand to collect a potential $681 billion in tax free income from life insurance proceeds on their workers.
• Suspicious Deaths of Bankers Now Classified as “Trade Secrets” (P&R Martens)
It doesn’t get any more Orwellian than this: Wall Street mega banks crash the U.S. financial system in 2008. Hundreds of thousands of financial industry workers lose their jobs. Then, beginning late last year, a rash of suspicious deaths start to occur among current and former bank employees. Next we learn that four of the Wall Street mega banks likely hold over $680 billion face amount of life insurance on their workers, payable to the banks, not the families. We ask their Federal regulator for the details of this life insurance under a Freedom of Information Act request and we’re told the information constitutes “trade secrets.”
According to the Centers for Disease Control and Prevention, the life expectancy of a 25 year old male with a Bachelor’s degree or higher as of 2006 was 81 years of age. But in the past five months, five highly educated JPMorgan male employees in their 30s and one former employee aged 28, have died under suspicious circumstances, including three of whom allegedly leaped off buildings – a statistical rarity even during the height of the financial crisis in 2008. There is one other major obstacle to brushing away these deaths as random occurrences – they are not happening at JPMorgan’s closest peer bank – Citigroup. Both JPMorgan and Citigroup are global financial institutions with both commercial banking and investment banking operations. Their employee counts are similar – 260,000 employees for JPMorgan versus 251,000 for Citigroup.
Both JPMorgan and Citigroup also own massive amounts of bank-owned life insurance (BOLI), a controversial practice that pays the corporation when a current or former employee dies. (In the case of former employees, the banks conduct regular “death sweeps” of public records using former employees’ Social Security numbers to learn if a former employee has died and then submits a request for payment of the death benefit to the insurance company.) Wall Street On Parade carefully researched public death announcements over the past 12 months which named the decedent as a current or former employee of Citigroup or its commercial banking unit, Citibank. We found no data suggesting Citigroup was experiencing the same rash of deaths of young men in their 30s as JPMorgan Chase. Nor did we discover any press reports of leaps from buildings among Citigroup’s workers. [..]
As it turns out, the $10.4 billion significantly understates the amount of money JPMorgan has tied up in seeking to profit from workers’ deaths. [..] Four of Wall Street’s largest banks hold a total of $68.1 billion in BOLI assets. Using Michael Myers’ approximate 10 to 1 ratio, that would mean that over time, just these four banks could potentially collect upwards of $681 billion in tax free income from life insurance proceeds on their current and former workers.
“the mass of men lead lives of quiet desperation”
• 49 Million Americans Are Dealing With Food Insecurity (Michael Snyder)
If the economy really is “getting better”, then why are nearly 50 million Americans dealing with food insecurity? In 1854, Henry David Thoreau observed that “the mass of men lead lives of quiet desperation”. The same could be said of our time. In America today, most people are quietly scratching and clawing their way from month to month. Nine of the top ten occupations in the U.S. pay an average wage of less than $35,000 a year, but those that actually are working are better off than the millions upon millions of Americans that can’t find jobs. The level of employment in this nation has remained fairly level since the end of the last recession, and median household income has gone down for five years in a row.
Meanwhile, our bills just keep going up and the cost of food is starting to rise at a very frightening pace. Family budgets are being squeezed tighter and tighter, and more families are falling out of the middle class every single day. In fact, a new report by Feeding America (which operates the largest network of food banks in the country) says that 49 million Americans are “food insecure” at this point. Approximately 16 million of them are children. It is a silent epidemic of hunger that those living in the wealthy areas of the country don’t hear much about. But it is very real.
• At Least 4% Of US Prisoners Sentenced To Die Are Innocent (Guardian)
At least 4.1% of all defendants sentenced to death in the US in the modern era are innocent, according to the first major study to attempt to calculate how often states get it wrong in their wielding of the ultimate punishment. A team of legal experts and statisticians from Michigan and Pennsylvania used the latest statistical techniques to produce a peer-reviewed estimate of the “dark figure” that lies behind the death penalty – how many of the more than 8,000 men and women who have been put on death row since the 1970s were falsely convicted. The team arrived at a deliberately conservative figure that lays bare the extent of possible miscarriages of justice, suggesting that the innocence of more than 200 prisoners still in the system may never be recognised.
The study concludes that were all innocent people who were given death sentences to be cleared of their offences, the exoneration rate would rise from the actual rate of those released – 1.6% – to at least 4.1%. That is equivalent in the time frame of the study, 1973 to 2004, of about 340 prisoners – a much larger group than the 138 who were exonerated in the same period. “This is a disturbing finding,” said Samuel Gross, a law professor at the University of Michigan law school who is the lead author of the research. “There are a large number of people who are sentenced to death, and despite our best efforts some of them have undoubtedly been executed.”
Bit old, but good read.
• High Speed Trains are Killing the European Railway Network (LowTechMag Dec ’13)
The section between Paris and Amsterdam is a busy trajectory with a long history. The first direct train between Paris and Amsterdam was established in 1927. The Étoile du Nord, a train operated by the Belgian Compagnie Internationale des Wagon-Lits, covered the 545 km long route in about eight hours. There was one train per day in each direction. During the subsequent decades, the rolling stock was modernised, the capacity of the line was extended with extra trains, and the length of the journey was gradually reduced.
By 1957, travel time had been shortened to five and a half hours, by 1971 it was five hours, and in 1995, the last year of its operation, the Étoile du Nord did the trip in four hours and 20 minutes. At that time, the route was also covered by a night train which took eight hours. The itinerary of these services is indicated by the red line in the illustration on the right. In 1996, the Étoile du Nord was retired and replaced by a high speed train which is still running today: the Thalys. It takes another, somewhat longer route via Lille, which is depicted by the blue line on the illustration.
By 2011, when the whole section was equipped with new high speed track, the travel time of the Thalys had come down to 3h19, about one hour faster than the 1995 Étoile du Nord. Some years after the arrival of the high speed service, the direct night train between Paris and Amsterdam was also abolished. The relatively modest time gain of the Thalys has a steep price. The fare for the Étoile du Nord was a fixed amount calculated according to a rate per kilometre. Converted to the current kilometre charges of the Belgian, French and Dutch railways, a single ticket Paris-Amsterdam over the same route (the blue line) would now cost 66 euro, regardless of whether you buy it two months in advance or right before you leave.
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