DPC Looking south on Fifth Avenue at East 56th Street, NYC 1905
The only safe haven left, as we’ve been saying for a very long time. The inevitable outcome, because: “Corporate debt in dollars across Asia has jumped from $300bn to $2.5 trillion since 2005. More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars.”
• Dollar Smashes Through Resistance As Mega-Rally Gathers Pace (AEP)
The US dollar has surged to a four-year high against a basket of currencies and has punched through key technical resistance, marking a crucial turning point for the global financial system. The so-called dollar index, watched closely by traders, has finally broken above its 30-year downtrend line as the US economy powers ahead and the Federal Reserve prepares to tighten monetary policy. The index – a mix of six major currencies – hit 87.4 on Monday, rising above the key level of 87. This reflects the plunge in the Japanese yen since the Bank of Japan launched a fresh round of quantitative easing last week. Data from the Chicago Mercantile Exchange show that speculative dollar bets on the derivatives markets have reached a record high, with the biggest positions against sterling, the New Zealand dollar, the Canadian dollar, the yen and the Swiss franc, in that order.
David Bloom, currency chief at HSBC, said a “seismic change” is under way and may lead to a 20pc surge in the dollar over a 12-month span. The mega-rally of 1980 to 1985 as the Volcker Fed tightened the screws saw a 90pc rise before the leading powers intervened at the Plaza Accord to cap the rise. “We are only at the early stages of a dollar bull run. The current rally is unlike any we have seen before. The greatest danger for markets and forecasters is that they fail to adjust their behaviour to fully reflect a very different world,” he said. Mr Bloom said the stronger dollar buys time for other countries engaged in currency warfare to “steal inflation”, now a precious rarity that economies are fighting over. The great unknown is how long the US economy itself can withstand the deflationary impact of a stronger dollar. The rule of thumb is that each 10pc rise in the dollar cuts the inflation rate of 0.5pc a year later.
Hans Redeker, from Morgan Stanley, said the dollar rally is almost unstoppable at this stage given the roaring US recovery, and the stark contrast between a hawkish Fed and the prospect of monetary stimulus for years to come in Europe. “We think this will be a 4 to 5-year bull-market in the dollar. The whole exchange system is seeking a new equilibrium,” he said. “We think the euro will reach $1.12 to the dollar by next year and will be even weaker than the yen in the race to the bottom.” Mr Redeker said US pension funds and asset managers have invested huge sums in emerging markets without considering the currency risks. “They may be forced to start hedging their exposure, and that could catapult the dollar even higher in a self-fulfilling effect.” The dollar revival could prove painful for companies in Asia that have borrowed heavily in the US currency during the Fed’s QE phase, betting it would continue to fall.
Data from the Bank for International Settlements show that the dollar “carry-trade” from Hong Kong into China may have reached $1.2 trillion. Corporate debt in dollars across Asia has jumped from $300bn to $2.5 trillion since 2005. More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars. A chunk is unhedged in currency terms and is therefore vulnerable to a dollar “short squeeze”. The International Monetary Fund said $650bn of capital has flowed into emerging markets as a result of QE that would not otherwise have gone there.
Major reset on the way.
• WTI Falls to 3-Year Low on Saudi Price Cut as US Supply Climbs (Bloomberg)
West Texas Intermediate dropped to the lowest intraday level in three years as Saudi Arabia cut prices for crude exports to U.S. customers amid speculation that stockpiles increased. Brent extended losses in London. Futures fell as much as 3.7% to $75.84 a barrel, the weakest since Oct. 4, 2011. Saudi Arabian Oil Co. reduced December differentials for all grades it ships to the U.S., while supplies to Asia and Europe were priced higher, according to an e-mailed statement yesterday. U.S. crude inventories climbed by 1.9 million barrels last week to a four-month high, a Bloomberg News survey shows before government data tomorrow. Oil slid in October by the most since May 2012 as leading members of the Organization of Petroleum Exporting Countries resisted calls to cut output.
Global supplies are rising, with the U.S. pumping at the fastest pace in more than three decades. “Saudi Arabia isn’t inspiring the sentiment that they are trying to force customers to take less,” Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland, said by e-mail. “The only solution seen by the market to reduce the oversupplied outlook is an OPEC cut led by Saudi Arabia.”
Killing the competition.
• Saudis Cut Crude Prices to US in December Amid Shale Boom (Bloomberg)
Saudi Arabian Oil Co. lowered the cost of its crude to the U.S., where production is the highest in three decades, deepening a selloff that sent prices to the lowest in more two years. The state-owned producer, known as Saudi Aramco, lowered the premium for Arab Light relative to U.S. Gulf Coast benchmarks by 45 cents a barrel to the smallest since December. medium and heavy grades were also down 45 cents and extra light oil 50 cents. Aramco increased the cost to Asia and Europe. Swelling supplies from producers outside OPEC drove oil prices into a bear market last month as global demand growth slowed. Middle Eastern producers are increasingly competing with cargoes from Latin America, North Africa and Russia for buyers, as well as with U.S. production that has jumped 54% in the past three years.
“The Saudi move speaks to them wanting to preserve market share in the U.S., where it has slipped recently,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said yesterday by phone. “It looks like the Saudis are comfortable with prices and demand.” West Texas Intermediate, the U.S. benchmark, fell 55 cents to $78.23 a barrel in electronic trading on the New York Mercantile Exchange at 7:02 a.m. London time. The contract slid $1.76 to $78.78 yesterday, the lowest settlement since June 28, 2012. Brent, the global benchmark, lost 79 cents to $83.99 a barrel on the ICE Futures Europe exchange. “The market is reacting as though Saudi Arabia is going to flood the Gulf and is going to compete with shale production,” Michael Hiley, head of energy OTC at LPS Partners Inc. in New York, said yesterday by phone.
” … governments worldwide are struggling to create inflation and stimulate growth.” They can’t and they won’t. There’s too much debt. And adding more will cause the opposite of what they see they want.
• Gross Says Deflation a ‘Growing Possibility’ Threatening Wealth (Bloomberg)
Bill Gross, in his second investment outlook since joining Janus Capital Group, said deflation is a “growing possibility” as governments worldwide are struggling to create inflation and stimulate growth. Central banks around the world have made “a damn fine attempt” at fueling inflation, yet their efforts have pushed up financial assets, rather than prices in the real economy, Gross wrote in his outlook titled “The Trouble with Porosity and Prosperity.” “The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side – from the dreaded government side – where deficits are anathema and balanced budgets are increasingly in vogue,” he wrote. Until then, the possibility of deflation is a challenge to wealth creation, according to Gross. The 70-year-old Gross, who last month started managing Janus Global Unconstrained Bond Fund, has forecast subdued market returns in what he calls the ‘new normal,’ a view he and Pimco first expressed in 2009 coming out of the financial crisis.
At Pimco, Gross ran the $201.6 billion Total Return fund, the world’s biggest bond mutual fund, which had trailed peers since the beginning of 2013 as he misjudged the timing and impact of the Federal Reserve’s tapering of its stimulus. Gross left the firm he co-founded in 1971 after his deputies threatened to quit and management debated his ouster, according to people familiar with the matter. Gross, whose investment commentaries are known for their colorful anecdotes and comparisons, in today’s outlook called himself a “philosophical nomad” with a foundation formed from sand. The 21st century economy is built on the sand of finance instead of the firmer foundation of investment and innovation, he wrote. “Stopping the printing press sounds like a great solution to the depreciation of our purchasing power but today’s printing is simply something that the global finance based economy cannot live without,” he wrote.
Nothing’s changed in a long time when it comes to points of view.
• Deep Divisions Emerge over ECB Quantitative Easing Plans (Spiegel)
To prevent dangerous deflation, the ECB is discussing a massive program to purchase government bonds. Monetary watchdogs are divided over the measure, with some alleging that central bankers are being held hostage by politicians. [..] At first glance, there’s little evidence of the sensitive deals being hammered out in the Market Operations department of Germany’s central bank, the Bundesbank. The open-plan office on the fifth floor of its headquarters building, where about a dozen employees are staring at their computer screens, is reminiscent of the simple set for the TV series “The Office”. There are white file cabinets and desks with wooden edges, there is a poster on the wall of football team Bayern Munich, and some prankster has attached a pink rubber pig to the ceiling by its feet. The only hint that these employees are sometimes moving billions of euros with the click of a mouse is the security door that restricts access to the room.
They trade in foreign currencies and bonds, an activity they used to perform primarily for the German government or public pension funds. Now they also often do it for the ECB and its so-called “unconventional measures. Those measures seem to be coming on an almost monthly basis these days. First, there were the ultra low-interest rates, followed by new four-year loans for banks and the ECB’s buying program for bonds and asset backed securities – measures that are intended to make it easier for banks to lend money. As one Bundesbank trader puts it, they now have “a lot more to do.” Ironically, his boss, Bundesbank President Jens Weidmann, is opposed to most of these costly programs. They’re the reason he and ECB President Mario Draghi are now completely at odds.
Even with the latest approved measures not even implemented in full yet, experts at the ECB headquarters a few kilometers away are already devising the next monetary policy experiment: a large-scale bond buying program known among central bankers as quantitative easing. The aim of the program is to push up the rate of inflation, which, at 0.4%, is currently well below the target rate of close to 2%. Central bankers will discuss the problem again this week. It is a fundamental dispute that is becoming increasingly heated. Some view bond purchases as unavoidable, as the euro zone could otherwise slide into dangerous deflation, in which prices steadily decline and both households and businesses cut back their spending. Others warn against a violation of the ECB principle, which prohibits funding government debt by printing money. Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?
• Why The ECB May Not Want To Join The QE Dance (CNBC)
As one major central bank – the U.S. Federal Reserve – closes the quantitative easing door, markets are hoping another – the European Central Bank – will throw it wide open again. Many economists now expect that ECB President Mario Draghi will usher in a quantitative easing (QE) policy, involving buying up countries’ sovereign debt, early in the New Year. Something definitely needs to be done in the euro zone. Unemployment remains stubbornly high at 11.5% and inflation, at 0.4%, doesn’t look that far away from the deflation danger zone. Two of its biggest economies, France and Italy, are going to need extra wriggle room to meet their budgetary targets – and even Germany, the stalwart of recent years, looks less confident than for some time. Yet is QE that something? The most obvious problem with a bond-buying program, particularly when it involves buying up sovereign debt, is the potential political fallout.
How can you make sure that you’re not giving some countries in the single currency bloc an unfair advantage, particularly if they have already been helped out by tens of billions of euros in bailout aid during the financial crisis? No wonder Germany’s anti-European Union party, Alternative für Deutschland, is causing Angela Merkel almost as much trouble as the U.K. Independence Party is for David Cameron. And can QE really be that effective? In the U.K. and U.S., effectively printing money has helped to reduce credit spreads and, therefore, the cost of borrowing. Yet the euro zone already has low credit spreads and borrowing rates, after a series of actions by the ECB. The gap between the cost of short and long-term borrowing for Germany, for example, is already much smaller than it was in the U.S. before QE was introduced there. If funding does not seem to be filtering through to the real economy already, how could the ECB ensure that, by pumping more money into the system, it reached the right places?
Bubble, Ponzi, it’s all of the above. It’s setting the world ablaze as we speak.
• Japan Creates World’s Biggest Bond Bubble (Bloomberg)
Ten years from now, will Bank of Japan Governor Haruhiko Kuroda be regarded as a genius or a madman? Kuroda’s shock-and-awe stimulus move on Oct. 31 delighted markets and won him plaudits as a monetary virtuoso. Japan, the conventional wisdom tells us, has finally gotten serious about ending deflation, and isn’t it wonderful. But what happens when a central bank buys up an entire bond market? We’re about to find out as Kuroda, like some feverish hedge fund manager, corners Japan’s. Neglected in all the celebrating: To reach a 2% inflation goal that’s both arbitrary and meaningless, the BOJ is destroying Japan’s standing as a market economy. In announcing that it will boost purchases of government bonds to a record annual pace of $709 billion, the central bank has just added further fuel to the most obvious bond bubble in modern history — and helped create a fresh one on stocks. Once the laws of finance, and gravity, reassert themselves, Japan’s debt market could crash in ways that make the 2008 collapse of Lehman Brothers look like a warm-up.
Worse, because Japan’s interest-rate environment is so warped, investors won’t have the usual warning signs of market distress. Even before Friday’s bond-buying move, Japan had lost its last honest tool of price discovery. When a nation that needs 16 digits in yen terms to express its national debt (it reached 1,000,000,000,000,000 yen in August 2013) sees benchmark yields falling, you’ve entered the financial Twilight Zone. Good luck fairly pricing corporate, asset-backed or mortgage-backed securities. Considered in relation to gross domestic product, Kuroda’s purchases make the U.S. Federal Reserve’s quantitative-easing program look quaint. The Fed, of course, is already ending its QE experiment, while Japan is doubling down on one that dates back to 2001. Kuroda’s latest move means Japan’s QE scheme could last forever. The BOJ has willingly become the Ministry of Finance’s ATM; reversing the arrangement will be no small task.
All this liquidity has made for surreal events in Tokyo. Take the news that Japan’s $1.2 trillion Government Pension Investment Fund will dramatically rebalance its portfolio away from bonds. Japan has enormous public debt and a fast-aging population, and now the world’s biggest pension pool is shifting to stocks. Yet somehow, 10-year yields are just 0.43%. The explanation, of course, is that the parts of the market the BOJ doesn’t already own are sedated by its overwhelming liquidity. The BOJ is now on a financial treadmill that’s bound to accelerate, demanding ever more multi-trillion-dollar infusions to keep the market in line.
Stating the obvious. But Faber doesn’t know what deflation is: “In some sectors of the economy you can have inflation, and in some sectors, deflation.” No, you cannot.
• Marc Faber: Japan Is Engaged in a Ponzi Scheme (Bloomberg)
What do you think about what Bill Gross is saying? Do you think deflation is a real possibility for the United States?
I think the concept of inflation and deflation is frequently misunderstood. In some sectors of the economy you can have inflation, and in some sectors, deflation. But if the investment implication of Bill Gross is that – and he is a friend of mine, i have high regards for him. If the implication is that one should be long US Treasury’s, to some extent i agree. The return on 10-year note’s will be miserable , 2.35% for the next 10 years if you hold them to maturity. However, if you compare that to french government bonds yielding today 1.21% , i think that’s quite a good deal. For japanese bonds, a country that is engaged in a ponzi scheme, bankrupt, they have government bond yields yielding 0.43%. go ahead. I think they are engaged in a Ponzi scheme in the sense that all the government bonds that the treasury issues are being bought by the bank of japan. I think the good news is for Japan, most countries are engaged in a ponzi scheme and it will not end well, but as Carlo Ponzi proved, it can take a long time until the whole system collapses.
Yeah, why not finish it off even faster?
• BOJ Easing Seen Boosting Chances Abe Will Raise Sales Tax (Bloomberg)
The Bank of Japan’s extra stimulus increases the chances of Prime Minister Shinzo Abe going ahead with a plan to raise the nation’s sales tax, a survey by Bloomberg News shows. Nine of 10 economists responding after the central bank’s surprise move on Oct. 31 expect Abe to increase the levy, which is currently 8% after a 3%age-point bump in April. A decision on whether to lift the tax to 10% in October next year is expected by the end of this year after the government takes account of economic data including gross domestic product figures for the third quarter. The BOJ’s easing may give Abe a firmer footing to pursue measures for longer-term fiscal deficit reduction, including an increase in the sales levy, Moody’s Investors Service said in an e-mailed report.
“Progress on those two policy fronts will ultimately determine the success or failure of Abenomics and its monetary policy strategy,” Moody’s said. The BOJ’s expansion of stimulus puts the spotlight back on Abe’s policies. He’s under pressure to accelerate efforts to strengthen corporate governance, deregulate agriculture, increase female participation in the workforce and secure trade agreements to fuel long-term growth. While deciding on whether Japan can handle another sales-tax hike to help rein in the world’s heaviest debt burden, he is also considering how much to lower company taxes.
The casino’s open for business.
• Japan Pension Fund Strategy Shift Adds $187 Billion To Stocks (Bloomberg)
Japan’s public retirement savings manager is set to pump $187 billion into stock markets across the globe as the world’s biggest pension fund implements a new investment strategy aimed at enhancing returns. The Government Pension Investment Fund will have to buy 9.8 trillion yen ($86 billion) of Japanese shares and 11.5 trillion yen of foreign equities to meet the asset-allocation targets it set last week, based on holdings in June. GPIF needs to cut 23.4 trillion yen of domestic debt, the data show. The Topix index soared 4.3% Oct. 31 in anticipation of the allocations and on the Bank of Japan’s unexpected stimulus boost, which included tripling purchases of exchange-traded funds. The measure jumped 2.6% today. The domestic bonds GPIF needs to pare could be bought by the BOJ in as little as two months. The fund will end up owning more than 6% of Japan’s equity market once it completes the strategy shift, with that investment enough to buy everything listed in New Zealand, Greece and Morocco combined.
“If you consider the amount of money that’s involved, this will probably have more impact on stocks than the BOJ’s buying of ETFs,” said Takashi Aoki, a Tokyo-based fund manager at Mizuho. “We can expect material support for the market.” Brokerages led gains among the Topix’s 33 industry groups today, soaring 9.4%. The broader gauge posted the highest close in six years, while the Nikkei 225 traded above 17,000 for the first time since 2007 before paring gains. GPIF will put half its assets in equities, equally split between Japanese and foreign markets, according to targets published Oct. 31 after markets closed. That’s up from 12% each under the fund’s previous strategy. The announcement came just hours after the BOJ expanded easing, saying it will buy 8 trillion yen to 12 trillion yen of sovereign debt per month. The pension manager allocated 35% of its holdings to domestic bonds, down from 60%, and boosted foreign debt to 15% from 11%. The new figures don’t include a target for short-term assets, while the previous ones did.
With the weaknesses ahead, the dumbest plan yet. Greek yields are already under heavy fire. And now they want to make us believe Greece can stand on its own, and still remain in the eurozone?
• EU Leaders Weigh Plan For Greek Exit From Bailout (FT)
Euro zone leaders are weighing a plan to allow Greece to exit its four-year-old bailout at the end of the year by converting nearly €11 billion of unused rescue funds into a backstop for Athens for when it raises cash from the markets on its own. The plan, which will be discussed at a meeting of euro zone finance ministers in Brussels on Thursday,would allow Antonis Samaras, Greek prime minister, to declare an end to the quarterly reviews by the hated “troika” of bailout monitors ahead of parliamentary elections, which could come as early as March. At the same time, backers of the plan believe it would give financial markets the security of knowing Athens could draw on the credit line in an emergency.
The credit line would come from the euro zone’s €500 billion rescue fund, meaning it would still require monitoring from Brussels, albeit less onerous than at present. By tapping €11 billion originally earmarked for shoring up by Greek banks, euro zone officials hope to avoid political resistance from Germany. “In political terms, the money has already been made available to the Greek authorities,” said an EU official involved in the negotiations. Mr Samaras’s hopes of a “clean exit” from Greece’s €172 billion second bailout –which would mean no line of credit or additional outside monitoring – were dashed last month when Greek bonds were sold off in a mini-panic after he announced his intention to finish the bailout at the end of the year without any follow-on program. “A completely clean exit is highly unlikely,” said the EU official. [..]
The biggest remaining stumbling block remains the role of the International Monetary Fund in the plan. Unlike the EU, whose Greek bailout runs out of cash this year, the IMF program is due to run into 2016. The IMF has become a lightning rod for political anger in Greece – Poul Thomsen, the blunt Dane who heads the IMF’s Greek team, has to travel in Athens with a significant security detail – and Greek political leaders are eager to eject the Fund from the program. “It’s not helpful to have them camping in Athens,” said one Greek official, referring to prolonged negotiations over the last bailout review which took nine months to complete. But a group of euro zone countries led by Germany have insisted the IMF remain part of the program, arguing the Fund’s independence and credibility is essential to gaining support for a credit line in the Bundestag.
Disappointing development for all Greeks.
• Greek Far-Left PM-in-Waiting Smells Power, Moves To Center (Reuters)
Alexis Tsipras, leader of Greece’s far-left Syriza party, recently traveled to Frankfurt and Rome to meet European leaders. He is softening his confrontational tone with Greece’s international lenders. He has a drafted an agenda for the first 100 days of a future government. The 40-year-old former student Communist is acting like a prime minister in waiting. Syriza, once a fringe far-left movement, is now the most popular party in Greece, representing the many voters who feel punished by the country’s EU/IMF bailout. In May, the party easily won European elections and gained the governor’s seat for Greece’s most populous region. Today, it polls higher than any other party, leading by a margin of between 4 and 11 points over Prime Minister Antonis Samaras’s conservatives. One poll shows Tsipras as the most popular political leader in the country. “The big change has begun. The old is on its way out. The new is coming,” Tsipras thundered in a recent speech to parliament. “No one can stop it.”
Key to Syriza’s ascent, party officials say privately, is a calculated effort to moderate the radical leftist rhetoric that prompted German magazine Der Spiegel to name Tsipras among the most dangerous men in Europe in 2012. The party still rails against austerity measures and a bailout-driven “humanitarian crisis”. It wants to reverse minimum wage cuts, freeze state layoffs and halt state asset sales. But Syriza no longer threatens to tear up the bailout agreement or default on debt. Instead, officials say it supports the euro and wants to renegotiate the bailout by using the same pro-growth arguments of partners France and Italy. Syriza’s transformation mirrors the political progression of other anti-establishment fringe parties, such as the Northern League in Italy, that changed tactics after gaining parliamentary power and became more mainstream political forces.
It also reflects how Greece has turned a page on the dark days of the euro zone crisis four years ago, when Athens’ profligate spending risked bringing down the entire euro project. Then, a Tsipras victory at the polls was widely seen as a trigger for a bank run and Greece’s exit from the euro. Recently, however, Tsipras has held talks with European Central Bank chief Mario Draghi in Frankfurt and Austrian President Heinz Fischer. Syriza’s threadbare headquarters, where a portrait of Che Guevara once hung on the wall, is undergoing a makeover to include new desks and an expanded press room. “This is not the Alexis Tsipras of 2010,” said Blanka Kolenikova, European analyst for IHS Global Insight. “Since the last election Syriza’s rhetoric has calmed down. Tsipras is preparing for the fact that he might be leading a government so he needs to prove that he is approachable and flexible.”
Still want to join?
• Euro Woes Pressuring Eastern EU States Into More Easing (Bloomberg)
Low inflation, flagging growth, and the European Central Bank’s stimulus bias will probably force eastern members of the European Union to cut interest rates to record lows this week. Reduced borrowing costs will be cemented in three monetary policy decisions on consecutive days before the outcome of the ECB’s deliberations on Nov. 6, economists predict. They forecast Romania and Poland will reduce rates today and tomorrow, while Czech officials will maintain their own benchmark close to zero a day later as they ponder their stance on stemming gains in the koruna. Prone to contagion from economic woes in the euro region, their main export market and source of funding, eastern European countries keep a close eye on policy moves in the single currency area.
Now they’re facing border-jumping deflation and ECB loosening that are making the zloty, the leu and their peers stronger and endangering slowing growth. “You have the disinflation trend passing through, you have the ECB policy driving the currency side,” Simon Quijano-Evans, the London-based head of emerging-market research at Commerzbank AG, said by phone yesterday. “If central banks were not to react correspondingly, you’d have downside pressure on growth appearing as well. We don’t really see any major inflation pressure, so there is no real need to keep rates on hold at these sorts of levels.”
Referendum in 5 days. Let’s hope it will be a peaceful one.
• Spain Bondholders Told Catalans Offer Best Chance of Repayment (Bloomberg)
Spanish bondholders would be well advised to engage with Catalan officials since they may hold the key to getting repaid, according to Oriol Junqueras, leader of the separatist group Esquerra Republicana. Bond investors should recognize that Spain will struggle to contain its public debt when interest rates rise, and that the alternative to dealing with Catalonian separatists may be the anti-establishment Podemos party, said Junqueras. Podemos, which topped a national opinion poll this week, plans to audit Spanish government debt to assess how much is legitimate. “We all suspect interest rates won’t stay low forever,” Junqueras, who heads the most popular group in Catalonia, said in an interview yesterday. “One good way to prepare for that would be to talk to Catalan politicians.”
Junqueras has identified Spain’s public debt of more than €1 trillion ($1.3 trillion) as a weakness for the central government, as his alliance of separatists tries to force Prime Minister Mariano Rajoy to negotiate over Catalan independence. A flashpoint looms on Nov. 9, when Catalans including Junqueras propose holding an informal ballot on secession. They scaled back their plans last month after Rajoy rallied the Constitutional Court to block a non-binding referendum. Even the goal of an informal consultation this weekend may be frustrated. Spain’s highest court is due to meet tomorrow to consider a second challenge to the Catalan plans by the central government. Catalonian President Artur Mas said last week he plans to push ahead with the ballot whatever the court says.
In the event of a split, Catalans might draw on the precedent of the Dayton Accords relating to the former Yugoslavia and offer to take on 9% of Spain’s public debt, or about 90 billion euros, said Junqueras. That equates to Catalonia’s share of Spanish public spending over the past 25 years, he said. “That’s a legitimate criteria,” said Junqueras. “We could propose that.” Alternatively, the liabilities of the Spanish sovereign could be divided up based on Catalonia’s 21% contribution to the state’s tax revenue, he said. That would see the Catalans take on about €210 billion. “It would be good for the markets to talk to Catalan society about this as soon as possible,” he said. “That would be better for everyone.”
A few more billions in taxpayer money will be paid in fines.
• JPMorgan Faces US Criminal Probe Into FX Trading (Bloomberg)
JPMorgan Chase said it faces a U.S. criminal probe into foreign-exchange dealings and boosted its maximum estimate for “reasonably possible” losses on legal cases to the highest in more than a year. The firm is cooperating with the criminal investigation by the Department of Justice as well as inquiries by regulators in the U.K. and elsewhere, it said yesterday in a quarterly report. The largest U.S. bank said it might need as much as $5.9 billion to cover losses beyond reserves for legal matters, up $1.3 billion from the end of June, and the most since since mid-2013. “In recent months, U.S. government officials have emphasized their willingness to bring criminal actions against financial institutions,” the bank wrote of the general legal environment. “Such actions can have significant collateral consequences for a subject financial institution, including loss of customers and business.”
Chief Executive Officer Jamie Dimon, 58, who led the New York-based firm through $23 billion in settlements last year, is contending with an international probe into whether traders at the biggest banks sought to profit by rigging currency rates. Citigroup and Zurich-based UBS disclosed last week they also face criminal inquiries by the Justice Department into their foreign-exchange dealings. Citigroup cut third-quarter results to include a $600 million legal charge. “These investigations are focused on the firm’s spot FX trading activities as well as controls applicable to those activities,” JPMorgan said its report. While the company is in talks to resolve the cases, “there is no assurance that such discussions will result in settlements,” it said. Banks are facing foreign-exchange probes by authorities on three continents, people with knowledge of the situation have said. Richard Usher, JPMorgan’s chief currency dealer in London, left the company amid efforts to settle a U.K. probe into allegations of foreign-exchange rigging. He hasn’t been accused of any wrongdoing.
Makes one wonder what would have happened if ‘we’ had supported Venezuela, instead of hindering it every possible step of the way
• Venezuela, With World’s Largest Reserves, Imports Oil (USA Today)
For the first time in its 100-year history of oil production, Venezuela is importing crude – a new embarrassment for the country with the world’s largest oil reserves. The nation’s late president Hugo Chávez often boasted the South American country regained control of its oil industry after he seized joint ventures controlled by such companies as ExxonMobil and Conoco. But 19 months after Chávez’s death, the country can’t pump enough commercially viable oil out of the ground to meet domestic needs — a result of the former leader’s policies. The dilemma — which comes as prices at U.S. pumps fall below $3 per gallon — is the latest facing the government, which has been forced to explain away shortages of basic goods such as toilet paper, food and medicine in the past year.
“The government has destroyed the rest of the economy, so why not the oil industry as well?” says Orlando Rivero, 50, a salesman in Caracas. “How much longer do we have to hear that the government’s economic policies are a success when all we see is one industry after another being affected?” While Venezuela has more than 256 billion barrels of extra-heavy crude, the downside is that grade contains a lot of minerals and sulfur, along with the viscosity of molasses. To make it transportable and ready for traditional refining, the extra-heavy crude needs to have the minerals taken out in so-called upgraders, or have it diluted with lighter blends of oil. The latter tactic is what state oil company Petroleos de Venezuela SA (PDVSA) is using since it doesn’t have the money to build upgraders, which perform a preliminary refining process, and its partners have been unwilling to pony up cash because of the risk of doing business in the country.
Ambrose tries to deny the obvious.
• Lingering Slump In Real UK House Prices Outside London Belies Bubble Fears (AEP)
British house prices have fallen 35pc in real terms since the peak in 2007 and remain stuck at levels last seen at the start of the century once London is excluded, according to hard data from the Land Registry. “We are not in a bubble or anywhere near it. We’re still climbing out of a trough. The number of mortgages as a share of all homes is the lowest in almost thirty years,” said Michael Saunders from Citigroup. A study by consultants London Central Portfolio said average prices for the country as a whole were £133,538 in September, if London is stripped out. They are down from a peak in £158,494 in 2007. This is a 16pc fall in nominal terms but the full scale of the correction has been disguised by accumulated inflation over these years, deliberately engineered by the Bank of England to avoid a debt-deflation trap. Prices in absolute terms are back to 2004 levels. The drop in real house prices from the peak has been closer to 35pc. This is comparable to the sort of house price shock seen in large parts of the eurozone but the social and economic effects are entirely different.
House prices in central London have decoupled from the British economy and reflect vast concentrations of wealth in the hands of rich foreigners looking for a safe-haven. There are indications that some of the money coming from Asia is leveraged tenfold and falsely designated as cash, but this is chiefly a problem for banks in Hong Kong or China rather than for British regulators. “I do not think it is a policy issue for the Bank of England if foreigners want to overpay for property in London,” said Mr Saunders. Real house prices in Britain are still hovering at levels reached in 2002 during the dotcom bust and the 9/11 attacks in the US, when much of the developed world was in recession. “Fears of a national house price bubble have been wildly premature,” said Naomi Heaton, head of London Central Portfolio. Mrs Heaton said the worry is that the Bank of England will be bounced into interest rate rises too early by a chorus of warnings about eye-watering prices in London, which have distorted perceptions of the broader picture.
While eight million people live in the property zone classified as London, some 56m people live elsewhere. “The furore about a house price bubble over recent months has been totally unhelpful. It is simply not justified outside London,” she said. The parallel between the property cycle in Britain and the Netherlands is illuminating. Both had similar house price and credit surges before the Lehman crisis, and both have seen steep falls in real terms since then. The difference is that Holland has not been able to take countervailing measures to stop a deep slide in nominal prices due to the constraints of EMU membership. The result is that a third of all mortgages are now underwater and household debt ratios are rising. Negative equity in Britain is just 8pc. The picture is far worse in Spain where house prices have dropped 44pc in nominal terms, and where over half of all mortgages are in negative equity by some estimates.
The Living Wage debate in the UK. Too late?
• Scandalously Low Pay Should Not Be The New Normal (Guardian)
There’s the man who comes into the west London food bank, ashamed he can’t feed his children this week, though he works full-time at the Charing Cross hospital. There’s the trainee childcare worker I met there last Friday, who certainly can’t feed and heat herself on her pay. They leave with basic dry food in carrier bags, but no answer to an economy that ordains lifetimes of pay no family can live on. They are members of a growing army of 5.28 million – the 22% – paid less than a living wage to keep body and soul together. “Predistribution” was Ed Miliband’s much mocked word, by which he meant fair pay from employers, not benefit top-ups from government. Making employers pay the living wage once looked set to become Labour’s signature theme. The simple message that a week’s pay should be enough to keep a family out of poverty resonated with the public. Polls strongly support it. Fair pay, not benefits or subsidies to miserly employers, brought Labour into being – so why is the party in danger of letting this strong emblematic policy slip away?
The voluntary living wage rate has now risen 20p to £7.85 an hour (£9.15 in London) for companies that have signed up. But that improvement contrasts with a crisis of shrinking pay that is draining the Treasury of tax receipts and leaving taxpayers to pick up the benefit top-up bill for mean employers. Not for 140 years has pay fallen so far and for so long. Worse, this looks increasingly like the new normal. The pay gap between women and men is growing again too: women form the bulk of the lowest paid. Another 250,000 fell below the living wage in the last year, but the true state of pay is hidden by official figures, which ignore the 1.7 million self-employed, most not entrepreneurs but minicab drivers. The number of people on the minimum wage has doubled since 1999: it is becoming the norm not the floor.
The rising USD makes many victims.
• Australia Trade Deficit More Than Doubles On Commodity Prices (BBC)
Australia’s trade deficit more than doubled to A$2.26bn (£1.2b; $1.96bn) in September, data showed. Exports rose just 1% in the month, while imports were up 6% as Australia brought in more fuel. The deficit, a balance of goods and services, widened a lot more than market expectations of A$1.95bn and compared to a revised deficit of A$1.013bn in July. Falling prices of key commodities like iron ore is being blamed for the jump. “The trade deficit for September came in worse than expected with falling commodity prices clearly weighing on export values,” said AMP Capital chief economist Shane Oliver. Export earnings in Australia, home to some of the world’s biggest miners like BHP Billiton and Rio Tinto, have been impacted by the slump in prices.
The price of iron ore is down 40% this year, while thermal coal prices are hovering near five-year lows of A$63 a ton on oversupply in the market and slower demand from China. The two commodities are Australia’s top two exports. Added to the ballooning trade deficit on Tuesday was revised employment data, which showed a weaker labour market. New figures showed that 9,000 jobs were lost in August, compared to previous estimated rise of 32,100. But, the number of jobs lost in September was revised to 23,700, less than an initial estimate of 29,700. The unemployment rate, however, was up to 6.2% in September from a previous estimate of 6.1%. Mr Oliver of AMP said the economic data showed a mixed picture of the economy, which resulted in the Reserve Bank of Australia (RBA) leaving interest rates at a record low of 2.5% in its policy meeting today. “Revised jobs data up to September now shows a slightly weaker jobs market over the last two months than previously reported with unemployment now drifting up,” he said.
Y’all sing along now: ‘This is America, can’t you see, little pink houses for you and me.’
• Rich Guys Running for Office Struggle With Voters in Land of Frozen Wages (Bloomberg)
Two millionaires vying for governor in Florida are bickering over who’s had the more cushy life. “You grew up with plenty of money, Charlie,” Florida Republican Governor Rick Scott said to Charlie Crist, the Democrat, a line he would repeat five times during a recent hour-long debate. But it’s Scott who flies around in a private jet and is “worth about $100 or $200 million,” countered Crist, arguing that such wealth has made Scott “out of touch” with Florida. Five years into an economic recovery that has sent stocks and corporate profits soaring while weekly wages stagnate, millionaire candidates are fending off attacks on their bank accounts and business records in races from Connecticut to Georgia to Kentucky. “We shouldn’t be too surprised that politicians are coming under fire for their wealth,” said Nicholas Carnes, a public policy professor at Duke University in Durham, North Carolina, who studies the occupations and earnings of elected officials.
“We’re still recovering from the effects of the recession. There are still a lot of people facing hard economic times.” Wealth hasn’t been much of an impediment to U.S. electoral success in the past. Former Presidents Franklin Roosevelt, John F. Kennedy, George W. Bush and his father, George H.W. Bush are among the millionaire office-holders from both parties. In recent years, a strain of economic populism that also has a long history in U.S. politics has seen a revival in the wake of the 18-month recession that ended in June 2009. In part that’s because it accelerated a trend of rising income inequality in the country: Average income for the top 5% of households grew 38% from 1989 to 2013, compared with an increase of less than 10% for all others, according to the Federal Reserve. The median usual pay for Americans employed full-time was $790 per week in the third quarter, about a dollar less per week than just before the start of the recession, Labor Department figures show.
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