Russell Lee Proprietor of small store in market square, Waco, Texas Nov 1939
Bond investors, already stung by the biggest losses from U.S. energy company debt in six years, are facing more pain as the plunge in oil leads analysts to predict defaults may more than double. While bond prices suggest traders see defaults rising to 5% to 6%, UBS AG said it may actually end up being as high 10% if prices of West Texas Intermediate crude approach $50 a barrel and stay there. Debt research firm CreditSights predicts a jump to 8% from 4%. A borrowing binge by energy companies in recent years to finance new sources of oil has pushed a measure of leverage among the lowest-rated firms above its 2009 peak, according to CreditSights.
The $203 billion of bonds outstanding have lost 14% this quarter and are poised for their worst performance since the end of 2008, Bank of America Merrill Lynch index data show. More than $40 billion of value already has been wiped out, Bloomberg index data show. “The bid for yield caused a lack of discrimination across credits and sectors and people were buying whatever was available,” UBS AG credit strategist Matthew Mish said in a telephone interview from New York. “When you transform from a low-default regime to high default, the re-pricing of risk can be pretty aggressive.” Energy-sector bonds have delivered 14% losses to investors this quarter and are on track for the worst performance since the three months ended December 2008, Bank of America Merrill Lynch index data show.
The decline in the debt, which makes up 15% of the U.S. high-yield bond market, has pushed yields among all junk issues to 7.4%, up from a June low of 5.69% and the most in more than two years, the data show. The yield premium investors demand to hold energy company debt rather than government securities has surged to 10.5 percentage points on average, past the 10-point limit considered distressed, according to data compiled by Bloomberg. About $300 billion of securities linked to 512 bonds across all industries trade as distressed, compared with about 150 six months ago.
And not a word on their losses?
Despite the volatile swings in global equities, fund managers are still confident in stocks but the falling oil price is pushing them to add to their cash holdings, a leading industry survey has found. Cash now makes up 5% of fund manager portfolios on average, according to fund managers polled by the Bank of America Merrill Lynch. Almost a third of those surveyed have hiked their cash positions and are now overweight relative to their benchmarks, as they close out commodity positions. Some 36% of the 214 panelists surveyed for the bank’s monthly fund manager poll, who are collectively running $604 billion, now view oil as undervalued following its recent price crash.
This reading is up over 20 percentage points since October and reflects oil’s lowest level since 2009. Meanwhile, investors have bolstered their positions in European equities. “We are seeing capitulation out of energy and materials to the benefit of the dollar, cash, euro zone stocks and global tech and discretionary stocks,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “The prospect of European Central Bank (ECB) quantitative easing (QE) has brought growing consensus on European equities, but the weakening business cycle and falling commodity prices are working against true earnings recovery,” said European equity and quantitative strategist at the bank, Manish Kabra.
I say let the US subsidize exports and make the mess complete.
The U.S. Congress is talking about allowing unfettered oil exports for the first time in almost four decades. Its timing couldn’t be worse. There’s space in the global market for 1 million to 1.5 million barrels a day of U.S. crude if the ban vanishes, Energy Information Administration chief Adam Sieminski told a congressional subcommittee at a Dec. 11 hearing. That would be less than 2% of worldwide demand. With prices sliding amid a glut, the figure is bound to be even smaller, according to consultants including Wood Mackenzie. As members of Congress promise more hearings on repealing the restrictions on oil exports, the world is awash in the stuff. Global prices have fallen by almost half since June to the lowest in five years amid slower demand growth and rising supply.
What’s more, the kind of crude flowing in record volumes from U.S. shale plays is already abundant in the market. “If they dropped the export ban today, how much crude would get exported?” Harold York at WoodMacKenzie said. “Today? I say none. At these prices, why would a barrel leave?” Global crude prices have fallen 48% to below $60 for the first time since 2009. Producers say the U.S. shale boom may falter if they can’t reach overseas markets, while refiners fight to keep the limits, which have reduced domestic costs and allowed them to export record amounts of gasoline and diesel. [..] Congress will hold more discussions on repealing the law in 2015, Representative Ed Whitfield, a Republican and chairman of the House Energy and Power Subcommittee, said at the Dec. 11 hearing in Washington.
Sieminski said his export estimates, which come to about 15% of U.S. production at most, were based on demand at foreign refineries for light oil. About 15% of global refining capacity is designed for light oil, compared with about 30% of production, York and his colleague Michael Wojciechowski said by e-mail. During the meeting, Sieminski described the amount of potential shipments abroad as being “more to the lower end than to the upper end” of the range. “The kind of oil we have in surplus here is a light, sweet crude, and the market for that is not unlimited,” he said. “So the question is, how much of that could you put out on the global market” before it’s saturated, he said.
“Given present supply and demand characteristics, oil in the $40 range is entirely plausible.”
Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy. But it’s no secret that not only will energy-related capital expenditures not grow next year, they are likely to drop significantly. The news is full of stories about companies slashing their production budgets. This means lower employment, with all of the knock-on effects. [..] This is a movie we’ve seen before, and we know how it ends. Texas Gov. Rick Perry has remarkable timing, slipping out the door to let new governor Greg Abbott to take over just in time to oversee rising unemployment in Texas. The good news for the rest of the country is that in prior Texas recessions the rest of the country has not been dragged down. [..]
With all that as a backdrop, let us return to our original task, which was to think about what will impact the US and global economies in 2015. I’ve been talking to friends and contacts who are serious players in the energy-production sector. This is my takeaway. The oil-rig count is already dropping, and it will continue to drop as long as oil stays below $60. That said, however, there is the real possibility that oil production in the United States will actually rise in 2015 because of projects already in the works. If you have already spent (or committed to spend) 30 or 40% of the cost of a well, you’re probably going to go ahead and finish that well. There’s enough work in the pipeline (pardon the pun) that drilling and production are not going to fall off a cliff next quarter. But by the close of 2015 we will see a significant reduction in drilling.
Given present supply and demand characteristics, oil in the $40 range is entirely plausible. It may not stay down there for all that long (in the grand scheme of things), but it will reduce the likelihood that loans of the nature and size that were extended the last few years will be made in the future. Which is entirely the purpose of the Saudis’ refusing to reduce their own production. A side benefit to them (and the rest of the world) is that they also hurt Russia and Iran. Employment associated with energy production is going to fall over the course of next year.
Brave talk, but those long term contracts and hedges may end up costing a lot of money.
Airlines around the world are poised for a $12 billion windfall as the global oil crash cuts bills for jet fuel, the biggest expense in an industry that was battered by surging commodity prices last decade. The savings promise to produce fatter profits and, in the U.S., rewards for shareholders through sweetened dividends or stock buybacks. Missing out so far are consumers, because many carriers are still filling seats without having to resort to discounts. Unlike 2008 and 2009, when sagging travel demand damped the boost from fuel plunging 51% from its peak, crude’s collapse to a five-year low is providing a tailwind for airlines posting record earnings. Profits in 2015 will swell 25% to $25 billion, according to the International Air Transport Association, the trade group for the world’s major airlines.
“They’re dancing in the aisles of their planes,” said George Hobica, president of ticket-price website Airfarewatchdog.com. “All the production in the United States, shale oil and the fact that OPEC has not increased production — maybe high oil was an aberration.” Investors are welcoming a respite from Brent crude that averaged more than $100 a barrel in 2012 and 2013. Led by China Eastern and Air China, the Bloomberg World Airlines Index has soared 25% this quarter while Brent tumbled 37%. “The price slump could hardly have come at a better time for Southeast Asian airlines,” said Peter Harbison, executive chairman of CAPA Centre for Aviation in Sydney. “They have got themselves to a stage where they can be profitable with $100 oil, so for the time being, they will be net beneficiaries.”
U.S. carriers strengthened by mergers since 2008 are also poised to take advantage of the new era. American Airlines, which doesn’t hedge its fuel purchases, said it may save more than $2 billion next year. Even with losses because of fuel contracts pegged to higher prices, Delta said it expects to pay about $1.7 billion less for jet kerosene in 2015 while Southwest forecast savings of $1 billion. “Falling oil prices are a fantastic thing,” Southwest Chief Executive Officer Gary Kelly said last week in an interview.
Glorious piece by Michael Lewis. Don’t miss.
It’s a wonderful life on Wall Street, yet here is a holiday wish list to make it even better.
1. The financial sector rids itself of anyone with even the faintest reason to believe that he or she is unusually clever.
All those who have scored highly on standardized tests, or been invited to join Mensa, or finished in the top quartile of any graduating class will be banned. Most of our recent financial calamities — collateralized debt obligations, credit default swaps on subprime mortgage bonds, trading algorithms that prey on ordinary investors, the gaming of rating companies’ models, the rigging of the Greek government’s books so the country might disguise its true indebtedness — required a great deal of ingenuity. Lesser minds would have been incapable of causing so much damage.
Of course, it’s not easy to prevent clever people from working in finance, or from doing anything else they want to do. Perhaps now more than ever, clever people are habituated to being paid to ignore the spirit of any rule — which is one reason they have become such a problem on Wall Street. Upon seeing a new rule they do not think, “What social purpose does this serve, and how can I help it to do the job?” They think, “How can I game it?” If it pays to disguise their intellects, clever people will do it better than anyone else. Without further regulation, our entire society would soon be operating in the spirit of the Philadelphia 76ers: Kids tanking the SAT, parents choosing high schools that guarantee failure, intellectual prodigies scheming to gain entry to Chico State. No single rule, by itself, is capable of protecting the rest of us from their intellects. We’ll need more rules.
2. No person under the age of 35 will be allowed to work on Wall Street.
Upon leaving school, young people, no matter how persuasively dimwitted, will be required to earn their living in the so-called real economy. Any job will do: fracker, street performer, chief of marketing for a medical marijuana dispensary. If and when Americans turn 35, and still wish to work in finance, they will carry with them memories of ordinary market forces, and perhaps be grateful to our society for having created an industry that is not subjected to them. At the very least, they will know that some huge number of people — their former fellow street performers, say — will be seriously pissed off at them if they do risky things on Wall Street to undermine the real economy. No one wants a bunch of pissed-off street performers coming after them. To that end …
3. Women will henceforth make all Wall Street trading decisions.
It was a thoroughly planned strategy.
A top Democrat in the U.S. House of Representatives on Tuesday said unpopular Wall Street banks got a long-sought rollback to Dodd-Frank reforms through Congress last week partly by leveraging the influence of smaller banks that hold greater sway with lawmakers. “They have been working for a long time, trying different strategies on it,” California Representative Maxine Waters said in an interview. “The big banks are in trouble with most legislators… so they put the regional banks in front of them in order to gain more support.” Citigroup and JPMorgan wanted to turn back a provision in the Dodd-Frank law that would have forced banks to push derivatives trading into separate units. The “push out” rule would have boosted banks’ trading costs. The rollback was included in the $1.1 trillion spending package passed by Congress that funds most government agencies through September 2015. Wall Street banks launched a full-court press this year to get the provision into that bill, lawmakers and congressional aides said.
Banks wanted a vehicle most lawmakers would feel compelled to vote for before the rule took effect in July 2015. “They knew this was a must-pass bill,” Waters said. The derivatives rider, first offered by Kansas Republican Representative Kevin Yoder, was agreed on by a bipartisan team negotiating the omnibus spending package. Many Democrats criticized it as going easy on Wall Street. Appropriators said they fought off worse changes to the law and won higher funding for two key regulators. Jamie Dimon, chief executive of JPMorgan, personally called lawmakers before they voted on the package. President Barack Obama dispatched a top deputy Thursday to encourage House Democrats to vote for the compromise. But in interviews after the bill passed, bank lobbyists and Hill staffers said the words “Wall Street” were anathema to most lawmakers. They said banks such as SunTrust and Fifth Third, which had ties to local lawmakers, actually got the changes across the finish line.
“Hope is not a strategy when it comes to Russia at present.”
(Via Mint – Blain’s Extra Porridge, “Nazhmite Lyubuyu Stavku…“) Extra Comment – this might be getting serious. Russia’s markets have been spanked hard despite last night’s hike. 19% currency crash and 13% down stocks in a session. Ouch! Cumulatively, over the past few weeks stocks, oil and the Ruble are off 50% plus, and bonds off 40%. This morning felt like free-fall. Expect more action from the Russians to stave off economic catastrophe… imminent capital controls are rumoured, but markets are demonstrating a massive loss of confidence. Lots of old market hands are talking about how its similar to the Russia default and crash of ‘98 all over again.. Actually.. its worse. Much worse.
The scale and speed of the current collapse is a magnitude greater, and the effects are accelerated and magnified by the utter absence of liquidity, and by the political stakes at play. Lots of comments about how a Russian crisis might play out and what cornered Putin may do – or be forced into. Let’s not speculate, but it seems pretty clear that any Western support to calm the crisis and stabilise markets would come at a very high personal cost to Putin. That would be a good point to get selectively involved.
It’s too early. We’ve seen a few cautious buyers get wallpapered with Russian and Ukraine paper – and done decent amount of business, but generally none of the main distressed players feel it’s yet time to get involved. “Don’t expect a V-Shaped recovery – its different and aint going to happen..” said one manager. Hope is not a strategy when it comes to Russia at present. The big risk is whether the Russian meltdown can be contained within the borders of the Rodina. All kinds of no-see-ems suggest themselves. What are potential knock-ons into other markets? Perhaps Russians having to unwind London Property, (we understand Russians have been very big buyers in recent weeks prefiguring potential exchange controls), or further ructions in Europe? We’re already concerned European sovereign debt is poised on a knife-edge between brutal reality and over-inflated hopes for QE. A strong nudge from a conflagurating Russia and bang goes Italy?
Or will it come from safe-haven flight triggering sell-offs across every asset class in a replay of 2008? Could a Russia default that will outspook the Lehman apocalypse be on the cards? So much for dull Christmas markets…
This is why Russia started trading in gold.
Global banks are curtailing the flow of cash to Russian entities, a response to the ruble’s sharpest selloff since the 1998 financial crisis. Such banks as Goldman Sachs Group Inc. this week started rejecting requests from institutional clients to engage in certain ruble-denominated repurchase agreements and other transactions designed to raise cash, according to people familiar with the matter. Bankers and traders say the moves to restrict some ruble transactions have become increasingly widespread among major Western financial institutions this week, even as the same institutions continue to try to profit from the ruble’s wild swings. The moves, which the banks are deploying to protect themselves against further swings in the currency, have the potential to add to the strain on Russia’s financial system. Goldman in recent days largely stopped doing longer-term ruble-denominated repurchase agreements, or repos, in which securities or other assets are swapped in exchange for cash, said a person familiar with the matter.
The Wall Street bank is still doing short-duration ruble repos, those that mature in less than a year, this person said. Online foreign-exchange broker FXCM said Tuesday that, due to the ruble’s volatility, it will stop trading services for the ruble against the dollar as of Wednesday. In a statement, FXCM said it was halting the services in part because “most Western banks have stopped pricing USD/RUB.” Other banks, including Bank of America and Citigroup, haven’t changed their trading with Russia or in rubles, according to people familiar with those banks. The volatility in the ruble exchange rate, which reached a record level above 80 rubles to the dollar before retreating to about 71, is starting to take a toll on the currency markets’ infrastructure. Traders said Tuesday that liquidity in the market had largely evaporated, as speculators refrained from trading. In one sign of the banking industry’s hasty retreat, the London-based manager of an emerging-markets hedge fund said Tuesday that he couldn’t get any banks to trade Russian government bonds with him.
Oil and Yellen.
An uneasy hush settled over Asian markets on Wednesday as a brewing financial crisis in Russia and the rout in oil prices sent investors scurrying for the cover of top-rated bonds. Yields on British, German and Japan sovereign debt had all hit record lows while long-dated U.S. and Australian yields reached their lowest since 2012. Asian share markets were mixed with Japan’s Nikkei recouping a sliver of its recent hefty losses. MSCI’s index of Asia-Pacific shares outside Japan slipped 0.6% to a nine-month trough. In Europe, the FTSE is seen opening down 0.9%, the DAX 1.2% and the CAC 1.6%. The stakes were all the greater as the U.S. Federal Reserve’s last policy meeting of the year could well see it drop a commitment to keeping rates low for a “considerable period”.
That would be taken as a step toward raising interest rates, even as growth in the rest of the world sputters and falling commodity prices add to the danger of disinflation. A new wrinkle was the risk of financial contagion spreading from Russia where an emergency hike in interest rates failed to stop the ruble’s descent to new lows. It was quoted around 68.00 to the dollar, having been as far as 80.00 at one stage on Tuesday as speculation mounted that Moscow will have to tighten further or perhaps impose capital controls. The urge to close leveraged positions caused collateral damage to the dollar as investors had been very long of the currency in anticipation of further gains, and helped the euro up to $1.2510.
The rush from risk tended to benefit the safe haven yen, with the dollar back at 116.79 having been atop 118.00 on Tuesday. The commodity linked Australian dollar also took a dive to a five-year trough of $0.8157. A year-end dearth of liquidity was leading to wild moves in even the most staid of assets. The oil-exposed Norwegian crown for instance, hit an all time low by one measure on Tuesday after carving out the widest daily trading range since the global financial crisis. “The combination of the rouble crisis and poor liquidity broadly resulted in a period of total dysfunction across global FX and rate markets,” reported analysts at Citi.
Exposure to Russia is huge for European banks, when compared to US banks. Europe may well turn on the US over sanctions.
Raiffeisen Bank and Societe Generale, the European banks with most at stake in Russia, led European lenders lower as the ruble continued its slide today, defying a surprise rate increase. Raiffeisen fell as much as 10.3% to 11.40 euros in Vienna, the lowest level since it went public in 2005. Societe Generale dropped as much as 7.3% to €31.85, hitting the lowest intraday level since August 2013. The STOXX 600 Banks index was 1.4% lower at 2:25 p.m. in London. “More fundamental concerns are building over the outlook for Russia’s economy and the likely policy response,” Neil Shearing, an economist at Capital Economics in London, wrote in a note to clients.
“There remains a huge amount of uncertainty at this juncture, but the key point is that there are no benign scenarios. Even if the ruble does stabilize over the coming weeks, the economic crisis facing Russia has much further to run.” Societe Generale is the bank that has the biggest absolute exposure to Russia, at €25 billion ($31 billion), according to Citigroup analysts. That’s equivalent to 62% of the Paris-based bank’s tangible equity. Raiffeisen has €15 billion at risk in Russia, almost twice its tangible equity, and it also has the biggest exposure to Ukraine, with €4.9 billion, according to Citigroup. UniCredit, the third European bank strongly invested in the former Soviet Union, has €18 billion at stake in Russia, or 40% of its tangible book value, Citigroup said.
As Russian President Vladimir Putin has ratcheted up the conflict with the West for most of the year, the economic fallout on ordinary Russians has been limited. Suddenly, though, the plunging ruble is reawakening fears of rising prices and the kind of financial crisis Mr. Putin has sought to put behind his country. As the ruble hit a record low, falling as much as 20% against the dollar Tuesday, Moscow residents rushed to buy electronics and other big-ticket items and drained rubles from ATMs to swap them for dollars and euros – signaling a new feeling of vulnerability among Russians and a fresh challenge to their leader. From St. Petersburg to Siberia, money changers ran out of foreign currency and were raising exchange rates. Sberbank , Russia’s state savings bank, and Alfa Bank, Russia’s largest private lender, said they were experiencing a rush for dollars and euros. “
The demand is enormous. People are bringing piles, huge piles of cash. It is madness,” said Kamila Asmalova, a manager at Sberbank. The branch ran out of foreign currency by 2 p.m., she said. Lanta Bank, a midsize Moscow lender, said its foreign counterparts would be unable to send foreign currency Wednesday as aircraft that typically transport cash are full. Apple said it halted online sales in the country because of the ruble’s volatility, and IKEA announced it would raise prices there. The ruble’s continued fall despite the Russian central bank’s move to raise interest rates to 17% rippled across global markets Tuesday, fueling a selloff in emerging market currencies and stocks. [..] economists say the Russian central bank’s rate gambit is certain to push the country’s faltering economy into recession by raising borrowing costs. Even before the rate increase, the central bank estimated the economy could contract as much as 4.7% next year if oil remains around $60 a barrel.
And those trusts were very important in developing the country.
China’s once high-flying trust industry has seen its fortunes reverse this year as a slowing economy and competition for investor funds curb growth. Trust loans outstanding increased for 33 straight months through June this year, helping China’s trust sector surpass the insurance industry as the largest category of financial institution by assets, behind commercial banks. But figures released on Friday showed trust loans falling for a fifth straight month, the longest run of declines since 2010. Overall trust assets, which include loans, publicly traded securities and private equity-style investments, rose at their slowest pace in over two years in the third quarter, figures from the China Trustee Association show.
“The economy has cooled down,” said Deng Jugong, a senior trust industry executive who asked that his employer not be named. “Companies’ demand for finance isn’t very intense.” Just a year ago, trust companies were riding a wave of growth. In 2010, as regulators tried to rein in the explosion in bank credit resulting from the country’s 4 trillion yuan ($645 billion) economic stimulus plan, banks turned to trusts to help them comply with lending controls. Trust companies bought loans from banks and packaged them into high-yielding wealth management products, which they marketed to bank clients as a higher yielding substitute for traditional savings deposits. Trust assets surged to 10.3 trillion yuan at the end of 2013, from just 2.9 trillion yuan in 2011.
Now, however, the central bank has cut interest rates and is urging banks to lend more in a bid to temper an investment slowdown in real estate and manufacturing. “We can’t even push our own loans out the door,” said a banker in Shanghai. “Where are we going to find projects to make trust loans?” At the same time, trust companies are facing increased competition from upstart firms offering savers new forms of high-yielding investment products. Ironically, trust companies — which were often accused of regulatory arbitrage for performing bank-like functions free from the regulatory limits on traditional banks — are warning about the risks of even more lightly regulated peer-to-peer lenders. “As long as there’s profit to be made, people will swarm towards it like wasps,” said Mr Deng. “This P2P market looks very chaotic. But we trust companies have to get approval from the bank regulator.”
That would be something. The numbers are wild: “The number of people moving to cities has slowed to 17 or 18 million annually, down from 20 million at the peak ..” Try that 10 years in a row.
The billionaire behind shopping mall developer Dalian Wanda says China’s era of rapid urbanization will end within a decade, so he is speeding up his company’s shift toward tourism and entertainment after a $3.7 billion initial public offering. Wang Jianlin became China’s fourth-richest man in part by following the migration of 300 million people into cities. His Dalian Wanda Commercial Properties, which debuts on the Hong Kong stock exchange on Dec. 23, owns 159 Wanda Plaza shopping centers across 109 Chinese cities, including 88 projects under construction. “The industry has to seize the last 10 years to transform,” Wang told a business summit in Beijing on Saturday. “Once the urbanization rate hits around 70%, urbanization will be basically completed. Then there may be no more chances.” About 54% of China’s 1.4 billion people now live in cities, and Beijing has set a target of 60% by 2020.
City dwellers earn and spend more, which is critical as China shifts to consumption-led growth instead of manufacturing. Wang’s view is more bearish than some of his property industry peers who see the benefits of urbanization lasting longer. Yu Liang, president of China’s biggest residential developer,China Vanke, said in May that the “golden era” was over although migration to cities would boost the industry for another 15 years. The number of people moving to cities has slowed to 17 or 18 million annually, down from 20 million at the peak, said Tang Wang, a China economist at UBS in Hong Kong. A big obstacle for workers wanting to move to cities from the countryside is that the government restricts the number of people who can obtain “hukou” residency benefits such as affordable housing and schooling in metropolitan areas. “It’s not really about people going to the city but people staying in the city,” Tang said.
In the boom years, Dalian Wanda opened malls primarily in fast-growing provincial cities instead of focusing on Shanghai and Beijing. Close ties with local governments helped Wang obtain cheap land for malls, and he expanded quickly. Dubbed “Nouveau Riche Plaza” by netizens, Wanda Plazas – which typically house a cinema, children’s arcade, karaoke bar and hypermarket – are dominated by premium local and mid-tier international fashion brands. A 27% drop in first-half 2014 revenue illustrates why Dalian Wanda is keen to change course now. The company blamed fewer project completions and lower selling prices, a symptom of China’s weakening property market. “This path (of rapid expansion) cannot be sustained,” Wang said. “China’s land resources, China’s fiscal resources and China’s markets won’t be able to support it.”
The world as a whole isn’t.
As China’s first full year of rebalancing draws to close, how has President Xi Jinping done? Reasonably well, it seems. Growth appears to be moderating gently, stocks continue to soar and most economists still foresee a soft landing rather than market-shaking meltdown for the world’s second-largest economy. Next year, however, Xi’s team will have to get to the hard stuff: taming an opaque, unwieldy financial system. My question isn’t so much whether China will or won’t crash. It’s whether the rest of Asia is ready for the possibility of 5% or even 4% Chinese growth, as predicted by pundits like Larry Summers and Marc Faber. It’s almost certainly not. Historically, hedge funds betting against China haven’t done very well. This week, in fact, the government is expected to revise 2013 GDP figures upward by as much as $275 billion, which on paper should help meet its target of 7.5% growth for the year.
For anyone who thinks China is operating even close to that number, though, I have two words: iron ore. Even more than the precipitous drop in oil, the halving of prices for these pivotal rocks and minerals as well as a 44% plunge in oil and tumble in coal and other commodities suggests that China may be braking rapidly. It’s important to remember that however large, China’s economy is no more developed than South Korea’s was when it imploded in 1997. The Chinese financial system is less evolved than that of the Philippines and less open than Indonesia’s. Beijing’s $3.9 trillion of currency reserves are useful when market turmoil hits, as has happened in emerging markets this week. But that stash is dwarfed by the $19 trillion in credit extended by the banking system since the 2008 Lehman crisis, according to Charlene Chu of Autonomous Research Asia. And remember: China’s vast and opaque shadow-banking system obscures Beijing’s true liabilities.
We have hope.
Greece is back in the epicenter of a political drama, with fears that the latest development could spread to the rest of the eurozone. After the Greek government decided to push forward the date of a presidential vote, now scheduled for Wednesday, investors have been forced to consider the implications of a deadlock in parliament, which could end up leading to snap elections in January. The biggest fear is that far-left party Syriza could win an early-2015 election, fueling fresh concerns about Greece’s bailout program and whether the country will stay in the eurozone. “Recent developments in Greece are worrisome to investors. Many fear that the political challenges in Greece could lead to its ultimate exit from the monetary union and default,” analysts at Brown Brothers Harriman said in a research note earlier this week. Just how worrisome these developments are to investors is illustrated in the chart below.
Traders in Europe first got a chance to react to the news on Tuesday morning last week and the initial reaction was run. In that one day, Greece’s Athex Composite index tanked 13%, marking the worst day ever for the benchmark, according to FactSet data. It also dragged down the pan-European Stoxx Europe 600 index, which took a 2.3% dive. For the full week, the Greek index plunged 20%, making it the worst performer in Europe. The wider market rout in Europe was also partly due to the continued slump in oil prices.
Anything to stay in power.
Greek Prime Minister Antonis Samaras faces the first real test of sentiment among lawmakers today as he begins the process of trying to elect a new head of state. Lawmakers will hold the first of three possible votes at about 7 p.m. in Athens, with Samaras needing the support of 200 members in the 300-seat chamber to confirm his nominee, Stavros Dimas. The prime minister, whose governing coalition controls 155 votes in the parliament, needs to secure the appointment to avoid a snap election and will have his best chance of success on Dec. 29 when he’ll need the backing of just 180 lawmakers. “Most of them will be keeping their cards close to their chest,” Costas Panagopoulos, chief executive officer at Alco, an Athens-based polling company, said. “
If Dimas gets below 160 votes then things are really difficult. But essentially we’re talking about 30 or so that we’re not sure about, and they won’t reveal their intentions on the first vote.” Samaras triggered a selloff in the country’s stocks and bonds last week when he decided to bring forward the vote on a new president. Opinion polls indicate that the opposition party Syriza, which wants to roll back many of the budget cuts Samaras pushed through to obtain international aid, would start favorite. The yield on benchmark Greek 10-year bonds rose to 9.06% yesterday. Still, that was eclipsed by three-year notes yielding 10.83%, a sign that investors are concerned the government may default.
The Athens Stock Exchange index, which dropped 20% last week, fell 0.3%. A tally of more than 170 votes for Samaras’s candidate would be positive for markets, according to Athanasios Vamvakidis, head of G-10 foreign-exchange strategy at Bank of America Merrill Lynch in London. “What could improve the government’s chances is if they promise early elections in September,” he said. “That could give some independents and smaller parties an excuse to argue they just want to address the negative market reaction.”
“Exploiting the democratic deficit means turning a rubber stamp into a genuine bludgeon to impoverish society.”
With remarkable timing as nations look at belt tightening, the EU decides to expand its contentious budget once again… Exploiting the democratic deficit means turning a rubber stamp into a genuine bludgeon to impoverish society. Nowhere is this more apparent than in that most detached of anti-democratic institutions – the EU – where the political class are locked in a consistently pointless “something must be done” spiral, creating endless edicts, red tape, and spending which almost, but not quite, entirely fails to sustainably help anybody or anything. When it comes to absurdly mismanaged institutions, the EU is a perfect storm of incompetence colliding with the defiantly ill-conceived zeitgeist of a swaggeringly arrogant caste who believe they can better spend other people’s money than the overtaxed citizens themselves.
This train crash of fiscal mismanagement on a broad European canvas has resulted in the EU racking up unpaid bills of 23.4 billion euros ($29 billion). Even as recently as 2010, the EU only owed five billion euros! To be clear, this isn’t borrowing. That is the mega-curse of spendthrift national governments after decades of indulging in unsustainable spending programs. Rather, this is just unpaid bills – you know, for multiple presidents and their motorcades or private jets – not to mention subsidizing nebulous projects across the EU and indeed beyond (half a billion on puppet theaters and agitprop in Ukraine in recent years, for instance). Oddly enough, the EU’s own auditors remain spectacularly unimpressed by the lack of sound financial controls. They have to date failed to sign off any EU accounts for the past 19 years (out of 19 audits…at least Brussels is somehow consistent).
The whole issue underpins not merely the sheer fecklessness of the dysfunctional EU apparatus, but this rampant incompetence clearly sews the seeds for the pompous “union’s” upcoming demise. After months of wrangling and demands by national government leaders that the EU budget must be clipped to reflect the straitened times, European politicians have just reached an agreement on a new budget for 2015 which neatly demonstrates the remoteness of the Brussels bubble from the reality of life stranded in Europe’s lost decade amongst the continent’s unemployed millions. The blob wins again – and in true EU fashion, the MEPs will rubber stamp the deal next week when the EuroParliament spends another wasteful week in Strasbourg.
The UK has placed an insane bet on being the no. 1 finance center. The degree of insanity shows in state-backed banks barely passing a moderate stress test.
Lloyds and Royal Bank of Scotland have barely managed to pass stress tests by the Bank of England examining their resilience in a doomsday scenario of plunging house prices and rising rates. Meanwhile, the Co-op Bank, which had warned that it was likely to fail, was the only one of eight lenders involved to slip up, RBS secured what amounted to a pass only by taking measures to update its capital plan while the tests were held in April. Co-op is working on a new set-up, but it is not expected to have to raise fresh funds even though the tests found its capital would be all but exhausted in the Bank’s stress scenario. Threadneedle Street does not like to talk in terms of pass and fail, but the wafer-thin margins by which the two state-backed banks got through raised concerns in the City over how long it will take for them to start paying dividends again. Both will have to secure permission from the Prudential Regulation Authority, which will make the decision at board level.
Critics said the tests demonstrated that the taxpayer will still ultimately have to act as back-stop in a repeat of the financial crisis of 2007-08. The tests gauged banks’ ability to withstand a 35% fall in house prices and a spike in inflation leading to a rise in interest rates to 4.2%. They were significantly tougher than those imposed by Europe last year. RBS, Lloyds and Co-op were always going to find them difficult because they are more exposed to the housing market than other British banks and are still rebuilding their capital. The trio said they are stronger than they were at the start of the process. Bank of England governor Mark Carney described the exercise as “a demanding test”. He added: “The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited.”
“Philanthropy points to weaknesses in the taxation system in redistributing wealth and financing social projects.”
In an environment of concern about growing inequality, plutocrats, the top 1% or perhaps 0.1% of the population, argue that philanthropy can address the issue of income and wealth distribution, financing initiatives in a variety of social and cultural areas. In reality, it is an exercise in damage control against any backlash by the less well-off. Its perspectives are self-serving, promoting views beneficial to the business and financial interests of the wealthy. The paradox of philanthropy is that enrichment by various means paves the way for conspicuous generosity. A blogger put it more bluntly: “The uber-rich try to do good once they have done their damage… I admire [Bill] Gates and [Warren] Buffett for their generosity… but loathe the system that put them at the top of the food chain.” It is trickle-down economics.
As the humourist Will Rogers joked during the Great Depression: “Money was all appropriated for the top in hopes that it would trickle down to the needy.” Few individuals or corporations “give away” their money. It is placed in tax-efficient trusts or foundations, with the donor retaining substantial control. Contributions are generally tax deductible or protect wealth from the ravages of death, inheritance or estate duties. The trust or foundation also provides employment and status for the donor, his or her family and associates. Donations and good works ensure business advantages and a post-retirement role. Many legally reduce their tax liabilities. Increasingly, sophisticated international tax planning allows profits to be shifted from high-tax to low-tax jurisdictions, using licensing of registered patents, copyrights or trademarks, or intra-group financing arrangements.
Stateless and virtual internet-based firms have become masters of tax as well as information technology. They claim that they are not “doing evil”, rather engaging in “self-taxation”, substituting philanthropic contributions for taxes. This allows them to target areas of specific interest to their owners and managers. In effect, private interests, rather than elected governments, determine how our taxes should be spent. Philanthropy points to weaknesses in the taxation system in redistributing wealth and financing social projects. It undermines government policy, allowing private interests to determine priorities. Donors are free to channel funds to their chosen causes, some noble, some hubristic and some just plain odd. The investment banker Ace Greenberg donated $1m to a hospital so that homeless men could get free Viagra.
Time to start a camel import business.
Scientists have assessed the scale of the epic California drought and say it will require more than 40 cubic km of water to return the US state to normal. The figure was worked out by weighing the land from space. The American West Coast has been hit by big storms in recent days, but this rainfall is only expected to make a small dent in California’s problems. Researchers described their research at the American Geophysical Union’s Fall Meeting in San Francisco. The US space agency (Nasa) used its Gravity Recovery and Climate Experiment (Grace) satellites in orbit to help make the calculations. These spacecraft measure the very subtle variations in Earth’s gravity as they fly around the globe. This shifting tug results from changes in mass, and this is influenced by the rise and fall in the volume of water held in the land.
Figures quoted by Nasa on Tuesday are for California’s Sacramento and San Joaquin river basins – the state’s “water workhorses”. Grace data indicates total water storage in these basins – that is all snow, surface water, soil moisture and ground water combined – has plummeted by roughly 15 cubic km a year. This number is not far short of all the water that runs through the great Colorado River (nearly 20 cubic km), which is one of the primary sources for import into the state. Jay Famiglietti from Nasa’s Jet Propulsion Laboratory (JPL) in Pasadena, California said: “We’ve shown that it’s now possible to explicitly quantify previously elusive drought indictors like the beginning of the drought or the end of the drought, and importantly the severity of the drought in any point in time.
“That is, we can now begin to answer the question: how much water will it take to end the drought? “We show for the current drought this quantity peaked in 2014 at 42 cubic km of water. That’s 11 trillion gallons, or about one-and-a-half times the volume of Lake Mead. “So, no – the recent rains have not put an end to the current drought at all, but they are certainly welcome.” Rather worryingly, a lot of the deficit – two-thirds – is accounted for by reductions in ground water, which constitutes an unsustainable level of extraction. “Ground water is a strategic reserve in times of drought and we need to be very careful how we manage it,” Dr Famiglietti told BBC News.