Jack Delano Truck service station on US 1, NY Avenue, Washington DC Jun 1940
Is there still hope and sanity in the world?
• Growth Isn’t God in Indonesia (Bloomberg)
Joko Widodo’s rise from nowhere to Jakarta governor and then the presidential palace showed the wonders of Indonesia’s democracy. Now, he wants to democratize the economy as well, focusing as much on the quality of growth as the quantity. Sixteen years ago, Indonesia was cascading toward failed statehood. In 1998, as riots forced dictator Suharto from office, many wrote off the world’s fourth-most populous nation. Today, Indonesia is a stable economy growing modestly at 5%, with quite realistic hopes of more. There’s plenty for Widodo, known by his nickname “Jokowi,” to worry about, of course. Indonesia still ranks behind Egypt in corruption and near Ethiopia in ease-of-doing-business surveys. More than 40% of the nation’s 250 million people lives on less than $2 a day.
A dearth of decent roads makes it more cost-effective to ship goods to China than across the archipelago. Retrograde attitudes abound: to this day, female police recruits are subjected to humiliating virginity tests. But this week, Jokowi reminded us why Indonesia is a good-news story — one from which Asian peers could learn. His move to cut fuel subsidies, saving a cash-strapped nation more than $11 billion in its 2015 budget, showed gumption and cheered investors. Even more encouraging is a bold agenda focusing not just on faster growth, but better growth that’s felt among more than Jakarta elites. This might seem like an obvious focus in a region that’s home to a critical mass of the world’s extreme poor (those living on $1 or $2 a day).
But grand rhetoric about “inclusive growth” hasn’t even come close to meeting the reality on the ground. In India, for example, newish Prime Minister Narendra Modi boasts that he will return gross domestic product to the glory days of double-digit growth rates, as if the metric mattered more than what his government plans to do with the windfall. The “Cult of GDP,” the dated idea that booming growth lifts all boats, has long been decried by development economists like William Easterly. The closer growth gets to 10%, the more likely governments are to declare victory and grow complacent. In many cases rapid GDP growth masks serious economic cracks. In her recent book, “GDP: A Brief but Affectionate History,” Diane Coyle called the figure a “familiar piece of jargon that doesn’t actually mean much to most people.”
Janet Yellen lives in virtual reality.
• Federal Reserve In Easy Decision To End Stimulus (BBC)
Although the US Federal Reserve was worried about turmoil in emerging markets, the central bank reached an easy consensus to end its stimulus programme, its latest minutes reveal. Minutes from the central bank’s October meeting show officials were concerned about stock market fluctuations and weakness abroad. However, they worried that saying so could send the wrong message. Overall, officials were confident the US economy was on a strong footing. That is why they decided to end their stimulus programme – known as quantitative easing (QE) – in which the Fed bought bonds in order to keep long-term interest rates low and thus boost spending. “In their discussion of the asset purchase programme, members generally agreed … there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment,” read the minutes, referring to the decision to end QE. US markets reacted in a muted way to the news, with the Dow Jones briefly rising before falling once more into the red for the day.
However, to reassure markets that the Fed would not deviate from its set course, the central bank decided to keep its “considerable time” language in reference to when the Fed would raise its short term interest rate. That interest rate – known as the federal funds rate – has been at 0% since late 2008, when the Fed slashed rates in the wake of the financial crisis. Most observers expect that the bank will begin raising that rate in the middle of 2015, mostly in an effort to keep inflation in check as the US recovery gathers steam. However, US Fed chair Janet Yellen has sought to reassure market participants that the bank will not act in haste and remains willing to change its timeline should economic conditions deteriorate in the US. The minutes also show that the Fed is still concerned about possibly lower-than-expected inflation, particularly as oil prices continue to decline and wage growth remains sluggish.
They’re going to do it. Screw the real economy, it’s dead anyway.
• Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)
U.S. central bankers are weighing whether they should communicate more of their views about the probable pace of interest-rate increases after they lift off zero next year. “A number of participants thought that it could soon be helpful to clarify the committee’s likely approach” to the pace of increases, according to minutes of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. The discussion last month underscored how much officials will rely on forward guidance on the pace of tightening in the future. After bond purchases ended last month, guidance may be the most practical option left to assure investors that policy won’t become overly restrictive if officials decide to take a stand against inflation seen as too low. The pace of rate increases is “going to be slow until they are really convinced that inflation’s sustainably at target and the labor market’s in really, really good shape,” said Guy Berger, a U.S. economist at RBS Securities. “They are going to take their sweet time.”
The minutes showed that many FOMC participants last month felt the committee should stay on the lookout for signs that inflation expectations were declining. Declining expectations could herald an actual fall in prices. Such deflation does economic damage by encouraging consumers to delay spending in anticipation of lower prices in the future. The potency of the first rate increase could be diminished or increased, depending on what the FOMC says about how it views its subsequent moves, said Laura Rosner, U.S. economist at BNP Paribas SA in New York. “It isn’t just the timing of liftoff the Fed cares about, but the whole path of federal funds rate,” said Rosner, a former New York Fed staff member. “I think they do probably want to limit the extent of tightening that people expect, at least at the beginning.” While telegraphing the future rate path may be attractive to some officials, it may also be unpopular with those, such as Chair Janet Yellen, who recall the Fed’s experience in 2004 with language saying the pace of increases would be “measured.”
“Positioning for a deflationary boom is a binary event.”
• The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)
Deflation. And not just deflation, but a deflationary bust! At least, such is the goalseeked logic of Cornerstone Marco, which has released a bullish (no really) note titled the Coming Deflationary Boom in the U.S. In it the authors throw in the towel on the most conventional concept in modern economics, namely that for growth one needs stable inflation which in turn causes earnings growth and is low enough not to pressure multiples too high. Well, according to the BLS’ hedonic adjustments and courtesy of Japan’s epic exporting of deflation, inflation is nowhere to be seen (except if one eats pork or beef, or drinks milks), so it is time to give ye olde paragidm shift a try. The paradigm that the only thing more bullish for stocks than inflation, is deflation. To wit:
The concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a prerequisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.
Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds. This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street … that and PE expansion since they typically go hand in hand. As always, we shall see.
Indeed we shall. Then again the only thing we will see is how every time there is deflation somewhere in the world, one after another central bank somewhere will admit its only mandate is to keep stocks at record highs and inject a few trillion in risk-purchasing power into what was once called a market.
Wait till shale implodes, then we can talk again.
• Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)
A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine. “A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup, said in an e-mail.
“Undoubtedly some of the geopolitical changes will be momentous.” They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead. Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor.
“It drives economies around the world” and is located in some “usually very volatile places.” Benchmark oil prices in New York have dropped more than 30% during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.
Petrobras was aiming to be the world’s first trillion-dollar company. Now it’s the most indebted company in the world.
• Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)
Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”. The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt. Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.
Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging. The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story – for different reasons – in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit. The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.
“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000. “They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said. A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs. The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.
They’ve all invested for continuing huge growth numbers. And now growth is gone.
• Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)
Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton, the world’s biggest mining company. BHP and rivals Rio Tinto and Vale are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil. Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer. “Our company has been very clear that the time for massive expansions of iron ore are over,” BHP CEO Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia. While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011.
It’s shifting investment into copper and petroleum, he said Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup forecasts. “At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.” Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.
The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said. Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile. If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting. In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.
Flash PMI at zero growth.
• China’s Factory Activity Stalls In November (CNBC)
China’s factory activity stalled in November as output shrank for the first time in six months, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) for November clocked in at the breakeven level of 50.0 that separates expansion from contraction, compared with a Reuters estimate for 50.3 and following the 50.4 final reading in October. Overall, new orders picked up slightly but new export orders slowed markedly, dragging on activity. The factory output sub-index fell to 49.5, the first contraction since May.
The Australian dollar eased against the greenback on the news, trading at $0.8607. But shares in China and Hong Kong appear unaffected by the data. The reading is the latest evidence that the world’s second biggest economy continues to lose traction. Recent data on housing prices and foreign direct investments also missed forecasts. “China is slowing and we think it will continue to slow. A lot of it is structural, and in our view, growth will slow to about 4.5% over the next 10 years. We see some sectors that are very challenged; clearly real estate is one,” Robin Bew, MD of Economist Intelligence Unit, told CNBC.
“They keep reporting such a low number for so many years, there’s only one way it can go – up …”
• Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)
Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management. The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders. Nonperforming loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125.3 billion), official statistics released earlier this month showed. The People’s Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.
“They keep reporting such a low number for so many years, there’s only one way it can go – up,” DAC co-founder Philip Groves said in an interview. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.” DAC manages about $400 million of its own and clients’ money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.
While China’s bad loan ratio is relatively small versus other countries in Asia – soured loans are equivalent to 1.16% of total advances compared with 3.88% in Vietnam and 0.86% in South Korea – their total is still in an order of magnitude greater than the funds raised by distressed investors, Groves said. There hasn’t been enough capital to soak up the nonperforming debt and much ends up being reabsorbed by the government, he said. That’s why distressed activity in China has been “sporadic” over the past 10 years and why some large investors aren’t participating. “It never became a market where you could put a billion dollars to work in a year,” Groves said. “But if the wave of bad debt comes, and there are things to buy, the money will follow.”
I’ve said it before, Japan is not going to be a nice place to be.
• The Yen Looks Like It’s Ready To Get Crushed (CNBC)
Japan has slipped back into recession, with the economy shrinking 1.6% in the third quarter, surprising economists who forecast it would grow 2%. The takeaway? Double down on the dollar versus the yen. How weak can the yen get? Forecasters are lowering their already bearish targets after the new disappointing economic data. “I’d expect another 20% drop next year, which would take us north of 140,” said Peter Boockvar of the Lindsey Group about the dollar-yen rate. The team at Capital Economics raised their forecast for dollar-yen to finish next year at 140 as well, up from 120 previously.
Those are bold calls, because it’s unusual for any currency to move more than 5% to 10% per year. Also, the yen has already tumbled 14% in the past 12 months and 19% the previous year, making it the worst-performing major currency against the dollar both years. But when it comes to the yen right now, it seems, no forecast is too bearish. “When I started in the business, dollar-yen was 230,” recalled David Rosenberg, chief economist and strategist at Gluskin Sheff. “For those that think this move is over, this is probably going to be a round trip, meaning that the dollar’s run-up against the yen has a lot further to go.”
Japan is a state of panic.
• BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)
If one were to look up the definition of hypocrisy, the image of BoJ head Kuroda should be front-and-center. Having tripled-down on his money-printing and ETF-buying largesse just last week, he came out swinging last night at the government’s fiscal irresponsibility blasting Abe’s policies by saying Japan’s fiscal health “is the responsibility of parliament and the government, not an issue for the central bank to be held responsible for.” Aside from the fact that he is directly monetizing all JGB issuance – thus enabling Abe’s arrogant fiscal stimulus plan (by issuing 30Y and 40Y debt), Bloomberg notes that “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ.” The world has truly gone mad. Seemingly paying the same lip-service as Bernanke and Yellen in the US and Draghi in Europe, BoJ’s Haruhiko Kuroda is carefully positioning the blame for lack of growth and economic chaos on the government’s lack of growth-oriented policies… and not the central bank’s enabling experiments… (via Bloomberg):
Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after PM Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. “It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said at a press conference in Tokyo. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse economist Hiromichi Shirakawa. “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ,” said Shirakawa, a former BOJ official. “This is true, but he used to highlight that the BOJ and the government were working together. Abe might have created an enemy by postponing the sales-tax hike.”
This is how you expose the madness in all those nonsensical plans and targets.
• Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)
The U.K. government needs to make radical changes to halt the slide in export growth, the head of British Chambers of Commerce told CNBC. “Exports are tailing off, the rate of growth is tailing off — it’s the one part of the economy we are failing on,” BCC’s Director- General John Longworth told CNBC Europe’s “Squawk Box” on Thursday. “They always say that the definition of madness is carrying on doing the same thing as before and expecting a different result. We need to do something radically different as a country.” His comments come as the BCC published its third-quarter Trade Confidence Index on Thursday. The survey, carried out with delivery company DHL Express, measures U.K. exporting activity and business confidence of more than 2,300 exporting firms.
It found that in the latest quarter, fewer exporters reported increased sales: 29% of exporters stated that sales had increased in the third quarter of 2014, a sharp drop from 47% in the second quarter. Of those exporters no longer seeing an increase in export sales, most said that sales have remained consistent. “There has a slowdown in the U.K.’s export potential because of the slowdown global economic circumstances,” Longworth said, or government export targets would be missed. The U.K. Prime Minister David Cameron said in his 2012 budget that he wanted the U.K. to double exports to £1 trillion ($1.5 trillion) by 2020. In order to achieve that, however, Longworth said the U.K. would have to see export growth of nearly 11% year-on-year growth every year. “So far since the beginning of the recovery in 2010, the total growth in those years has been 14%. So we’ve got a real issue and unless we do something different we’re not going to hit those targets.”
And so must Italy, Greece, and many others. Let the people debate it, and give them alll the information, not just choice bits.
• Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)
Michael Pettis has a very interesting article on the Spanish news site ABC regarding a possible default of Spain and the eventual breakup of the eurozone. [..] What follows is my heavily modified translation of key portions of Pettis’ article after reading both of the above translations.
In the Panic of 1837, two-thirds of the US, including several of the richest states, suspended payment of external debt. The United States survived. If the European Union is to survive, it will have to find a solution to the European debt. The more hope instead of action, the more likely there’s a permanent breakdown of the euro and the European Union. In a gesture more of faith than economic or historical data, Madrid assures us that with the right reforms, it will eventually be able to get out of debt. Other countries in debt crises have made the same promise, but the promise is rarely fulfilled. Excessive debt itself impedes growth. Even without the straitjacket of the euro, Spain probably cannot afford its debt. Even those who are against debt cancellation recognize that the only thing that shielded Germany from a Spanish default was the European Central Bank.
Despite their obnoxious policies, far-right parties across Europe flourish more than ever because the ECB protects the euro and European banks at enormous costs for the working and middle classes. These extremists exploit the refusal of European leaders to acknowledge their errors. The longer the economic crisis, greater their chances of winning, and then comes an end to Europe. The only thing that prevented a suspension of payments by Spain and other countries was the promise of the European Central Bank in 2012 to do “whatever it takes” to protect the euro. But debt continues to grow faster than GDP in Europe, and the ECB load increases inexorably month after month. There will come a time when rising debt and a weakening of the German economy will jeopardize the credibility of the guarantee of the ECB (which will be useless), little by little at first, and then suddenly later. In a matter of months Spain will suspend payments.
For now, with debt settlement postponed, German banks strengthen capital to protect themselves from bankruptcy that many predict. Berlin is playing the same game as Washington during the crisis in Latin America in the 1980s. Then US banks actively strengthened their capital, mainly at the covert expense of ordinary Americans, while insisting that Latin American countries needed further reforms and no debt forgiveness. However, multiple reforms led to extremely high rates of unemployment and enormous social upheaval throughout Latin America. From 1987 to 1988, when US banks finally had enough capital, Washington officially recognized that full payment of the debt in 1990 was impossible and forgave the debt of Mexico. In the years following, US banks forgave almost the entire debt of other Latin American countries.
It’s getting painful. Stop the experiment, it’s failed beyond repair.
• Eurozone PMI Falls To 16-Month Low In November (MarketWatch)
Activity in the eurozone’s private sector slowed in November, according to surveys of purchasing managers, an indication the currency area’s economy will continue to grow weakly, if at all, in the final quarter of the year. The surveys also found that businesses again cut their prices in the face of weak demand, a development that will concern the European Central Bank, which is struggling to raise the currency area’s inflation rate from the very low level it has settled at for more than a year. Data firm Markit on Thursday said its composite purchasing managers index – a measure of activity in the manufacturing and services sectors in the currency bloc – fell to 51.4 from 52.1 in October, reaching a 16-month low. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.
Preliminary results from Markit’s survey of 5,000 manufacturers and service providers also showed that a significant pickup in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged. The surveys also found that businesses continued to cut their prices, although at a slightly less aggressive pace. “The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously announced initiatives,” said Chris Williamson, chief economist at Markit.
• French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)
French manufacturing shrank more than analysts forecast in November and demand fell, signaling that an economic rebound seen in the third quarter might be short lived. A Purchasing Managers Index fell to 47.6, the lowest in three months, from 48.5 in October, London-based Markit Economics said today. That’s below the 50-point mark that divides expansion from contraction and compares with the median forecast of 48.8 in a Bloomberg News survey. A separate index showed services also contracted, while new business across both industries fell the most in 17 months. The euro area’s second-largest economy has barely grown in three years and recent data suggests that 2014 will be little different. With unemployment near a record and the budget deficit widening, President Francois Hollande is under pressure to deliver on his promises of business-friendly reforms.
“The continued softness in private-sector activity signaled by the PMIs suggests an ongoing drag on growth during the fourth quarter,” said Jack Kennedy, senior economist at Markit. “Another round of job shedding by companies during November meanwhile provides little hope of bringing down the high unemployment rate.” An index of services activity rose to 48.8 this month from 48.3 in October, while a composite gauge for the whole economy increased to 48.4 from 48.2, according to today’s report. Employment across both manufacturing and services fell for 13th month, though the rate of decline slowed compared with the previous month. The French economy grew 0.3% in the three months through September as a jump in public spending offset a fourth quarterly decline in investment. The unemployment rate stood at 10.5% in September, more than double than Germany’s 5%, according to Eurostat. Hollande, whose popularity is among the lowest ever registered for a French president, has said he won’t run for a second term if he is unable to bring down joblessness.
Please, let’s have some violent infighting in Brussels.
• Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)
In Luxembourg, corporate income taxes are as low as 1% for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn’t joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1%, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. That’s why it came across as obscene to many when Juncker defended Luxembourg’s tax arrangements on Wednesday as “legal”. They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis – that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.
But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries’ national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU’s interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg’s neighbors of tax money, is supposed to be the main face representing the EU. It’s also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.
Kudos Crapo. Let’s cut the crap, not reintroduce it.
• Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)
A controversial housing-finance proposal quickly came under fire during a Wednesday Capitol Hill hearing, with a top committee Republican questioning whether it’s a good idea to allow federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back mortgages with very low down payments. “I’m troubled,” said Idaho Sen. Mike Crapo, the leading Republican member of the Senate Banking, Housing and Urban Affairs Committee, by a plan from the Federal Housing Finance Agency to enable Fannie and Freddie to buy mortgages with down payments as low as 3%. “After the problems we’ve seen” it could be risky for Fannie and Freddie to buy loans when borrowers have little equity, Crapo said.
In response, Mel Watt, who became FHFA’s director in January and was the sole witness at the agency-oversight hearing, told senators that mortgages with low down payments will require insurance, and that borrowers will be required to have relatively strong credit profiles otherwise. He added that FHFA will provide more details in December about the types of borrowers who would be eligible for such mortgages. “We are not making credit available to people that we cannot reasonably predict, with a high degree of certainty,” will make their mortgage payments, Watt said. Decisions over who can qualify for loans bought by Fannie and Freddie can have a large impact on the housing market. Together Fannie and Freddie back about half of new U.S. mortgages. The FHFA must carefully craft rules that support the housing market’s somewhat erratic recovery without creating too much risk.
This could make plenty waves, it’s a high stakes game.
• Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)
The explosion of brokers plowing into the lucrative junk-bond underwriting business may be fading. The number of firms managing U.S. high-yield bond sales isn’t growing for the first year since 2008, according to data compiled by Bloomberg. The ranks will likely thin in upcoming years as yields rise, making it more expensive for speculative-grade companies to borrow, according to Charles Peabody, a banking analyst at research firm Portales Partnersin New York. “You’re going to see fewer and fewer deals,” he said in a telephone interview. “Underwriting volumes are probably going to decline from here and you’re going to see more of a consolidation or exodus.” So far, the decline has been small, with 87 firms managing high-yield bond sales this year, down from the record 92 in the same period in 2013, Bloomberg data show.
The number of underwriters is still about twice as many as in 2009, when a slew of bankers founded their own firms to grab business from Wall Street firms that were shrinking as the credit crisis caused trillions of dollars of losses and writedowns. The new firms sought to win assignments managing smaller deals that bigger banks didn’t have the appetite for anymore. Five years later, the scene is changing. The least-creditworthy companies have borrowed record amounts of debt, spurred by central-bank stimulus that pushed borrowing costs to all-time lows. Now, the Federal Reserve is preparing to raise rates and junk-bond buyers are getting jittery.
The notes have declined 1.7% since the end of August as oil prices plunged, eroding the value of debt sold by speculative-grade energy companies, Bank of America Merrill Lynch index data show. While junk-bond sales are still on track for a new record this year, issuance has been choppy, with deals being canceled one week and then a flood of sales going through the next. For the past few years, high-yield underwriting has been a bright spot for banks, especially compared with flagging trading revenues. Speculative-grade companies have sold $1.2 trillion of dollar-denominated debt since the end of 2010 to lock in historically low borrowing costs. That’s also meant there have been a swelling number of firms elbowing each other out of the way for a chance to manage those deals, vying for fees that have been almost three times as much as those on higher-rated deals.
Pot and kettle.
• Goldman Fires Staff For Alleged NY Fed Breach (FT)
Goldman Sachs has fired an investment banker who allegedly accessed confidential information from the Federal Reserve Bank of New York, his former employer. Goldman said it had fired Rohit Bansal, a junior employee, in September and then fired his supervisor Joe Jiampietro, a better-known senior banker in the financial institutions group, which advises other banks. Mr Jiampietro was himself a former government official – a top adviser to Sheila Bair when she was chairman of the Federal Deposit Insurance Corporation. The New York Fed said: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”
The news, first reported by the New York Times, comes ahead of a congressional hearing on Friday that is examining whether there is too “cosy” a relationship between regulators and banks. Goldman has been nicknamed “Government Sachs” as the epitome of the “revolving door” between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman’s former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On Friday, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify.
A little skimpy perhaps, but who would doubt the premise?
• Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)
How do you tell if a group of bankers is dishonest? Simply by getting them all to toss a coin. That may not seem like in-depth research, but it is the basis of an academic paper published in Nature magazine this week, which investigates whether the financial sector’s culture encourages dishonesty – and concludes that it does. The academics from the University of Zurich used a sample of 128 employees of a large bank, and split them into two groups. The first set of bankers were primed to start thinking about their job, with questions such as “what is your function at this bank?”. They were then asked to toss a coin 10 times, in private, knowing which outcome would earn them $20 a flip. They then had to report their results online to claim any winnings. Unsurprisingly perhaps, there was cheating – with the percentage of winning tosses coming in at an incredibly fortunate 58.2% (although the research omitted to say how many bankers also trousered the coin).
Meanwhile, the second group completed a survey about their wellbeing and everyday life, that did not include questions relating to their professional life. They then performed the coin-flipping task, which threw up a quite astonishing finding: these bankers proved honest. Identical exercises in other industries did not produce the same skewing in results when participants were primed to start thinking about their work. The research does not reveal which institution took part in the survey, presumably to avoid it suing the authors for unearthing some decent behaviour among the cheating. “The effect induced by the treatment could be attributable to several causes,” the authors muse, “including the competitiveness expected from bank employees, the exposure to competitive bonus schemes, the beliefs about what other employees would do in the same situation or the salience of money in the questionnaire.”
Anti-tax rant. Simon Black knows quite a bit about moving abroad.
• New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)
This past month, a real-life guild of thieves was formed. With 51 governments pledging their support to each other for the protection of their ignoble craft of theft. And another 30 pledging to join by 2018. From day one, governments have been pilfering their citizens’ assets through taxation, claiming a monopoly on thievery. From the largest institution to the pettiest pickpocket, anyone else who tries to engage in theft is severely punished, as governments work to protect their exclusive right to steal. Frighteningly, they do this all out in the open, believing that they actually have a moral right to commit theft. You can see this delusion in the US government’s claims that last year they “lost out” on $337 billion from people avoiding taxes. As if they have some moral claim to the money they’d failed to pilfer. Nonetheless, they use this claim to justify actively hunting down and penalizing anyone who takes action to avoid being stolen from.
The ones that are doing this are the bankrupt countries, and the deeper they slide into debt, the more desperate they become. Which is why these broke governments are now joining forces, pledging to to collect and share information amongst themselves about citizens’ bank accounts, taxes, assets and income outside local tax jurisdictions. Basically – I’ll help you steal from your citizens if you help me steal from mine. Both the punishment and the likelihood of getting caught for tax evasion are growing. Don’t even bother trying. However that doesn’t mean that you have no choice but to sit there and let your self be stolen from. While there are still ways of legally reducing your tax burden from within a country, your best option is to move and diversify. Diversification is key, because if you have all your eggs in one bankrupt basket, you are really taking on extraordinary risk. Moving some assets abroad can legitimately reduce some of this risk. And an even greater strategy is considering moving yourself.
Home › Forums › Debt Rattle November 20 2014