Raúl Ilargi Meijer

Sep 292016
 
 September 29, 2016  Posted by at 8:38 am Finance Tagged with: , , , , , , , , , ,  No Responses »
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DPC “Wood Street, Pittsburgh, Pennsylvania.” 1905


OPEC Agrees Modest Oil Output Curbs In First Deal Since 2008 (R.)
Congress Rejects Obama Veto, Saudi 9/11 Bill Becomes Law (R.)
Desperate Central Bankers (Stephen Roach)
Disturbing Facts About The Fed’s Phony Housing “Recovery” (Adler)
China’s Richest Man: Country’s Real Estate Is ‘Biggest Bubble In History’ (CNN)
Beige Book Sounds Warning Over Chinese Economy (WSJ)
China Property Bubble In Global Perspective (BBG)
‘Radioactive’ Deutsche Bank Could Go Nuclear At Any Time (Exp.)
Europe’s Banks ‘Not Investable’ Says Credit Suisse CEO (G.)
Rep. Gowdy Questions FBI Director Comey (USHouseJudiciary)
Varoufakis: UK Should Activate Article 50 Now, Create Space And Time (CityAM)
Hard Brexit Looms As 28 Red Lines Turn Deeper Shade Of Scarlet (BBG)
Greece Approves Plan To Transfer State Utilities To New Asset Fund (DW)
The Planned Destruction Of Greece Continues … (Mitchell)
Brussels Pushes Greece For Action On Migrants Before Dublin Pact Reboot (Kath.)

 

 

Entirely meaningless. No-one’s committed to any specific cuts. In the end it’s all about market share and nobody wants to lose any.

OPEC Agrees Modest Oil Output Curbs In First Deal Since 2008 (R.)

OPEC agreed on Wednesday modest oil output cuts in the first such deal since 2008, with the group’s leader Saudi Arabia softening its stance on arch-rival Iran amid mounting pressure from low oil prices. “OPEC made an exceptional decision today … After two and a half years, OPEC reached consensus to manage the market,” said Iranian Oil Minister Bijan Zanganeh, who had repeatedly clashed with Saudi Arabia during previous meetings. He and other ministers said the OPEC would reduce output to a range of 32.5-33.0 million barrels per day. OPEC estimates its current output at 33.24 million bpd.

“We have decided to decrease the production around 700,000 bpd,” Zanganeh said. The move would effectively re-establish OPEC production ceilings abandoned a year ago. However, how much each country will produce is to be decided at the next formal OPEC meeting in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia. Oil prices jumped more than 5% to trade above $48 per barrel as of 2015 GMT. Many traders said they were impressed OPEC had managed to reach a compromise after years of wrangling but others said they wanted to see the details.

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Wonder how this plays into the OPEC ‘agreement’.

Congress Rejects Obama Veto, Saudi 9/11 Bill Becomes Law (R.)

Congress on Wednesday overwhelmingly rejected President Barack Obama’s veto of legislation allowing relatives of the victims of the Sept. 11 attacks to sue Saudi Arabia, the first veto override of his presidency, just four months before it ends. The House of Representatives voted 348-77 against the veto, hours after the Senate rejected it 97-1, meaning the “Justice Against Sponsors of Terrorism Act” will become law. The vote was a blow to Obama as well as to Saudi Arabia, one of the United States’ longest-standing allies in the Arab world, and some lawmakers who supported the override already plan to revisit the issue. Obama said he thought the Congress had made a mistake, reiterating his belief that the legislation set a dangerous precedent and indicating that he thought political considerations were behind the vote.

“If you’re perceived as voting against 9/11 families right before an election, not surprisingly, that’s a hard vote for people to take. But it would have been the right thing to do,” he said on CNN. Obama’s 11 previous vetoes were all sustained. But this time almost all his strongest Democratic supporters in Congress joined Republicans to oppose him in one of their last actions before leaving Washington to campaign for the Nov. 8 election. “Overriding a presidential veto is something we don’t take lightly, but it was important in this case that the families of the victims of 9/11 be allowed to pursue justice, even if that pursuit causes some diplomatic discomforts,” Senator Charles Schumer, a top Senate Democrat, said in a statement.

Schumer represents New York, site of the World Trade Center and home to many of the nearly 3,000 people killed in the 2001 attacks, survivors and families of victims. The law, known as JASTA, passed the House and Senate without objections earlier this year. Support was fueled by impatience in Congress with Saudi Arabia over its human rights record, promotion of a severe form of Islam tied to militancy and failure to do more to ease the international refugee crisis. The law grants an exception to the legal principle of sovereign immunity in cases of terrorism on U.S. soil, clearing the way for lawsuits seeking damages from the Saudi government.

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“..it is strikingly reminiscent of the so-called liquidity trap of the 1930s, when central banks were also “pushing on a string.”

Desperate Central Bankers (Stephen Roach)

As in Japan, America’s subpar recovery has been largely unresponsive to the Fed’s aggressive strain of unconventional stimulus – zero interest rates, three doses of balance-sheet expansion (QE1, QE2, and QE3), and a yield curve twist operation that seems to be the antecedent of the BOJ’s latest move. (The BOJ has just announced that it is targeting zero interest rates for ten-year Japanese government bonds.) Notwithstanding the persistent growth shortfall, central bankers remain steadfast that their approach is working, by delivering what they call “mandate-compliant” outcomes. The Fed points to the sharp reduction of the US unemployment rate – from 10% in October 2009 to 4.9% today – as prima facie evidence of an economy that is nearing one of the targets of the Fed’s so-called dual mandate.

But when seemingly solid employment growth is juxtaposed against weak output, the story unravels, revealing a major productivity slowdown that raises serious questions about America’s long-term growth potential and an eventual buildup of cost and inflationary pressures. The Fed can’t be faulted for trying, argue the counter-factualists who insist that only unconventional monetary policies stood between the Great Recession and another Great Depression. That, however, is more an assertion than a verifiable conclusion. While policy traction has been notably absent in the real economies of both Japan and the US, asset markets are a different story. Equities and bonds have soared on the back of monetary policies that have led to rock-bottom interest rates and massive liquidity injections.

The new unconventional monetary policies in both countries are obviously missing the disconnect between asset markets and real economic activity. This reflects the aftermath of wrenching balance-sheet recessions, in which aggregate demand, artificially propped up by asset-price bubbles, collapsed when the bubbles burst, leading to chronic impairment of overleveraged, asset-dependent consumers (America) and businesses (Japan). Under such circumstances, the lack of response at the zero bound of policy interest rates is hardly surprising. In fact, it is strikingly reminiscent of the so-called liquidity trap of the 1930s, when central banks were also “pushing on a string.”

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The Fed kills the American homeownership dream.

Disturbing Facts About The Fed’s Phony Housing “Recovery” (Adler)

But the Fed got the result it intended. It wanted to inflate prices to save the banks from their stupidity and criminality. Decisions were made at the highest levels of the Fed and the Federal Government to not only let the banks off the hook, but to rescue them. The only way to do that was to forego prosecution of massive criminal wrongdoing, and to engineer price inflation, so that the criminal perpetrators of the fraud that drove the Great Bubble would be free to re-offend. The Fed’s claim of trying to help the typical consumer is hogwash. The benefits of the low interest rate policy have flowed only to the upper income strata. In our monthly updates of our “Thanks Fed For Helping the Average Guy” we see that the chance of the “average guy” to buy a new home remains virtually nil.

Not only has there been no recovery in homes priced under $200,000, sales in that price range have essentially disappeared in spite of the world’s major central banks pushing mortgage rates down. Builders no longer have any interest in producing product in that price range because demand has weakened so much at that level. People at the reported median US household income simply can’t afford to buy houses regardless of the fact that they may be borderline qualified. Prior to the housing crash, most new homes sold were in the under $200,000 price range.Since 2007, mortgage rates have been cut nearly in half. Yet production and sales of homes in the under $200,000 range have continued falling, now down 61% since 2007.

Builders have shifted their efforts to the $200-$400k range, where they still have some margin, and can move enough inventory to earn a profit. The higher the price of the home, the more profitable it is for a builder. Unfortunately, homes priced above $230,000 are beyond the reach of households earning the reported median household income of $56,000, a figure which itself we believe is overstated. Because of central bank driven housing inflation, and suppression of household income growth (also partly attributable to ZIRP) home ownership is increasingly out of reach for an ever growing percentage of US households If monetary policy were helping the housing market, the rate of homeownership should be at least stable. Instead, as mortgage rates have been consistently suppressed since 2007, homeownership has fallen concurrently.

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The bubble made him a billionaire.

China’s Richest Man: Country’s Real Estate Is ‘Biggest Bubble In History’ (CNN)

Chinese billionaire Wang Jianlin made his fortune in the country’s real estate market – and now he’s warning that it’s spiraling out of control. It’s the “biggest bubble in history,” he told CNNMoney in an exclusive interview Wednesday. Bubble is a sensitive word in China after the dramatic rise and spectacular crash in the country’s stock market last year, which wiped out the savings of millions of small investors who thought Beijing wouldn’t allow the market to drop. After struggling to contain the fallout from the stock market debacle, China’s leaders could face a similar headache in the real estate sector. The big problem, according to Wang, is that prices keep rising in major Chinese metropolises like Shanghai but are falling in thousands of smaller cities where huge numbers of properties lie empty.

“I don’t see a good solution to this problem,” he said. “The government has come up with all sorts of measures – limiting purchase or credit – but none have worked.” It’s a serious worry in China, where the economy is slowing at the same time as high debt levels continue to increase rapidly. There are massive sums at stake in the real estate market: direct loans to the sector stood at roughly 24 trillion yuan ($3.6 trillion) at the end of June, according to Capital Economics.

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“Deteriorating corporate finances and a rebalancing reversal seem a high price to pay for a quarter’s worth of stability..”

Beige Book Sounds Warning Over Chinese Economy (WSJ)

Recent stability in the Chinese economy masks deep-seated problems that threaten to rattle global markets in advance of a leadership change next year, according to a survey. Ignoring these risks is shortsighted, said authors of the China Beige Book International, a quarterly survey that tracks the world’s second-largest economy. Data from the group’s third-quarter survey of 3,100 Chinese firms and 160 bankers point to some potential problems. New growth engines intended to shift the economy away from investment toward consumption-led growth are increasingly wobbly as corporate cash flow is squeezed and Beijing doubles down on traditional engines to stabilize output, the China Beige Book says.

“I’d find it earth-shatteringly surprising if we don’t have a significant problem between now and China’s leadership change” in the fall of 2017 when the 19th Party Congress convenes, said Leland Miller, China Beige Book’s president. “This is not a stable economy. It’s one that twists and turns and happens to end up at the same spot. There are real problems below the surface.” Growth in China’s service industry, a cornerstone of its planned transition to a new and more sustainable economic model, weakened during the third quarter as financial services, private healthcare, telecommunications, media and other subsectors flagged, the group’s data showed. In retail, the apparel, luxury goods and food sectors slowed, it said, as online retailers continued to cannibalize brick-and-mortar sales.

Despite Beijing’s pledge to reduce excess Industrial capacity and pare debt, China remains heavily dependent on government spending to power traditional debt-fueled growth engines, the group said. Much of the economic momentum during the third quarter came from infrastructure, manufacturing, commodities and real estate and many of these sectors are in danger of losing momentum, it said. While property sales remained strong in major cities, cash flow in the sector tightened and borrowing increased, a sign that investors should “think about getting off this train sooner rather than later,” the China Beige Book said. “Deteriorating corporate finances and a rebalancing reversal seem a high price to pay for a quarter’s worth of stability,” the group added.

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“..the real-estate boom is leading couples to divorce, as a move to pay less property-related taxes..”

China Property Bubble In Global Perspective (BBG)

China is turning Japanese. That’s the increasingly held view of observers comparing China’s frenzied real-estate market with the epic bust that more than two decades ago hobbled one of its biggest economic rivals. While the two scenarios aren’t a carbon copy, similarities between China’s record credit boom in recent years and Japan’s bubble era have been made at various times by a number of economists and investors. Now, those voices are being heard more often – even within China. Huang Yiping, a Peking University professor who advises China’s central bank, warned Saturday about leverage that continues to climb, saying that the top risk is more and more investment generates less growth. “That’s exactly the story that unfolded in Japan.”

[..] Hardly a week goes by without a warning that China is stoking a new bubble only a year after a $5 trillion stock market crash that rocked policy makers. Curbs to cool demand have struggled for traction, and Chinese media outlets carry reports of panic buying. A commentary published by a WeChat account affiliated to the People’s Daily, the Communist Party’s mouthpiece, on Monday said the real-estate boom is leading couples to divorce, as a move to pay less property-related taxes. It also said companies risk losing competitiveness as they focus on gaining from real estate rather than focusing on their own industry.

One example of a company benefiting from property: Nanjing Putian Telecommunication-B, a loss-making telecommunication equipment manufacturer, which is selling two apartments in the heart of Beijing’s school district to shore up its balance sheet. The value of the residences is estimated to have risen more than 10-fold since the firm bought them in 2004. At least 73 listed companies said they’re planning to sell or have sold properties to shore up cash. “I am big on the parallels,” said Roy Smith, the New York University academic who as a banker in 1990 anticipated Japan’s decline. Japan’s market crash “led to a financial crisis that they never recovered from. China probably faces a debt-led financial crisis too, which could have significant consequences,” he said.

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“..it’s the interconnectedness with the rest of the system that is the problem.”

‘Radioactive’ Deutsche Bank Could Go Nuclear At Any Time (Exp.)

Germany’s biggest bank reportedly has a $45 TRILLION portfolio of underlying assets that its clients are taking a position in – which equates to more than 10 times Germany’s entire GDP. And the problem is that no one really knows what’s makes up Deutsche’s book of exposure and so-called derivatives book because it’s so opaque and complicated, according to Michael Hewson, chief market analyst at CMC Markets UK. He told Express.co.uk: “Deutsche has the biggest derivatives book in the world, and people will say that its hedged to a greater or lesser extent, but it’s the interconnectedness with the rest of the system that is the problem. “There doesn’t seem to be transparency about what’s in its book. No one really knows what the ripple-out effects would be.”

“That makes Deutsche radioactive about whether or not I would want to invest in it. “A bank becomes a risk to the financial system as a whole when the degree to which it is interconnected with other institutions increases. Deutsche Bank is currently a counterparty to virtually every major bank in the world, in virtually all asset classes. Deutsche Bank denies it has the biggest derivatives exposure – its portfolio of financial contracts based on the value of other assets – and insists that 85% of its exposure is to investment grade counter-parties. Investor confidence in Deustsche has been shaken over the last two days after German Chancellor Angela Merkel said it would not step in to rescue the bank if needed. But experts claim Berlin could be left with little choice but to intervene.

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“..there was doubt that European banks still had a viable business model…”

Europe’s Banks ‘Not Investable’ Says Credit Suisse CEO (G.)

One of Europe’s most senior bankers has said the embattled sector is “not really investable”, in remarks that underline the difficulties the continent’s big banks could face if they have to raise new funds. Tidjane Thiam, chief executive of Credit Suisse, issued the warning about the problems the sector faces as the focus remained on Deutsche Bank and its battle to reduce a $14bn (£10.5bn) penalty from the US authorities for mis-selling mortgage bonds. On Wednesday the German government raced to deny a report that it was preparing a bailout plan under which it might take a 25% stake in Deutsche Bank, which is the country’s biggest bank. With assets half the size of the German economy it is regarded as the bank that poses the biggest risk to global financial stability.

Shares in Deutsche Bank have plunged to near-30-year lows this week amid reports – which were then denied – that it had asked for German government intervention to help reduce the punishment from the US Department of Justice (DoJ). Their decline was arrested on Wednesday, when the bank sold a UK insurance company for €1bn; they closed 2% higher at €10.76. Thiam told a Bloomberg conference that Europe’s banks were in a “very fragile situation” and said there was doubt that European banks still had a viable business model. Concerns about rock-bottom interest rates and how much capital banks should hold meant returns to investors were too low, making banks “not really investable”.

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Comey’s back in the Senate. A few painful minutes of that here. He’ll either have to come clean or resign.

Rep. Gowdy Questions FBI Director Comey (USHouseJudiciary)

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Get out of the EU while you can!

Varoufakis: UK Should Activate Article 50 Now, Create Space And Time (CityAM)

Academic, EU-tormenter, former Greek finance minister and leather-jacket-wearing big thinker Yanis Varoufakis has blasted George Osborne and told the UK to get a move on with triggering Article 50. In an interview with the Today programme, Varoufakis, who resigned from the Syriza-led government last summer after he helped prime minister Alexis Tsipras take Greece to the edge of leaving the single currency, also outlined his latest thinking on what he sees as the doomed European project. Echoing statements made to the Institute of Directors yesterday, Varoufakis said the UK was about to travel into unchartered waters, and would discover just how difficult and inflexible the European institutions can be.

You can check out any time you like, as the Hotel California song says, but you can’t really leave. The proof is Theresa May has not even dared to trigger Article 50. It’s like Harrison Ford going into Indiana Jones’ castle and the path behind him fragmenting. You can get in, but getting out is not at all clear.

On what strategy the UK should adopt, Varoufakis, who was an academic before entering parliament for the first time in 2015 and diverting his considerable attention to anti-austerity campaigning, said: “My advice is simple: Activate Article 50, use those years as best you can and then strike a deal for the three or four years after Britain should be associated in a Norway-style agreement, and then use that period to have a robust debate on what’s to become later. “You need to create space and time during which to prepare yourself as a nation and a government. “The discussion before Brexit was very low quality, verging between scare-mongering on the one side and xenophobia on the other. There was no debate about a post-Brexit Britian.”

Varoufakis also suggested the Eurozone was on the brink of a breaking up and, despite calls from academics, politicians, economists and people on both the left and right that the European project is unsustainable, he believes not enough people are aware of its failures. He added: “Given these centrifugal forces, Brexit inspires several forces within the Eurozone to go it alone. The trouble with the euro … given it was very very badly constructed, is that it was always going to lead to a rupture which would make the EU totally and utterly unsustainable. “My great fear is that if the Eurozone goes, the EU goes. The repercussions are going to be dire.”

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An entire list of threats.

Hard Brexit Looms As 28 Red Lines Turn Deeper Shade Of Scarlet (BBG)

EU governments are refusing to grant the U.K. any leeway on the link between immigration and trade as it prepares to leave the bloc, raising the likelihood of a “hard Brexit.” Almost 100 days since a referendum signaled the end of Britain’s four decades of EU membership, a Bloomberg News analysis has identified a hardening of positions with even the U.K.’s traditional allies such as Ireland insisting it cannot “cherry pick” in the looming divorce talks. The U.K. “cannot have the advantages of the EU without carrying out the obligations,” Irish Finance Minister Michael Noonan said. Such intransigence may mean PM Theresa May ends up favoring a clean break from the EU to secure her goal of tougher immigration controls even if that costs the country access to the single market, a scenario dreaded by bankers and business executives.

“The dynamics within the government give the upper hand at the moment to the hard Brexit supporters,” former Foreign Secretary David Miliband told Bloomberg TV. The analysis is based on interviews and public comments from officials in all 28 EU governments. Among the other demands listed is that Britain must have “inferior” terms to what it currently enjoys as an EU member for fear that too many concessions will fan calls to leave from elsewhere in the region. Some want the U.K. to keep contributing to the EU budget in return for what benefits it does secure. Central eastern European countries are particularly animated on ensuring that the rights of their citizens to work in the U.K. are protected, with some threatening to veto any Brexit deal that doesn’t allow for that. Others are worried the U.K. will seek to slash corporate taxes.

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Treason. “We think this is a crime because it involves basic public services.”

Greece Approves Plan To Transfer State Utilities To New Asset Fund (DW)

Greece’s parliament passed new reforms on Tuesday night to cut pension expenditure and transfer control of public utilities to a new asset fund. The reforms seek to unlock €2.8 billion in financial loans as part of the country’s latest bailout program. The reforms were passed by a narrow 152-141 majority vote in Greece’s 300-seat parliament, after 152 parliamentary members of the ruling Syriza-Independent Greeks coalition approved the reform bill. Only one member of the coalition voted against the bill, along with all opposition members. The reforms will see public assets transferred to a new asset fund created by Greece’s creditors. Assets include airports and motorways, as well as water and electricity utilities.

The holding company groups together these state entities with the country’s privatization agency, the bank stability fund and state real estate. It will be led by an official chosen by Greece’s creditors, although Greece’s Finance Ministry will retain overall control. The reforms sparked significant backlash among demonstrators and public sector workers. Ahead of the vote, protestors outside of the parliament in Athens chanted, “Next you’ll sell the Acropolis!” Greece’s public sector union criticized the reforms, saying that the transfer of public assets paved the way for a fire-sale to private investors. “Health, education, electricity and water are not commodities. They belong to the people,” the union said in a statement.

Workers at Greece’s public water utility companies in Athens and Thessaloniki walked out on Tuesday to protest the reforms. “They are handing over the nation’s wealth and sovereignty,” George Sinioris, head of the water company workers association said. “We think this is a crime because it involves basic public services. We will respond with court challenges, strikes, building occupations and other forms of protest.”

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” If an organisation can exhibit psychopathy then the IMF has it!”

The Planned Destruction Of Greece Continues … (Mitchell)

After all the hoopla last year with the rise and fall of Syriza one’s attention span strays from what is happening in Greece at present and how it demonstrates the continued (and permanent) failure of the Eurozone. We also become inured to badness after badness is normalised. I was reminded of the depth of the malaise in that nation last week when I was in Kansas City. I won’t disclose confidences but an influential person (in the Greek context) I spoke to now regard their previous support for remaining within the Eurozone as a mistake and they consider my assessment of the situation (which they opposed at the time) to be closer to reality.

That was an interesting conversation and credit to them for being able to recognise an error of judgement. I was also reminded of the absurdity of the Eurozone when the IMF released its latest – Greece: Staff Concluding Statement of the 2016 Article IV Mission (September 23, 2016). This is normalisation of badness in bold! The current thinking is that the Greek unemployment rate will remain in double figures until at least 2050, that business investment has collapsed, real GDP is around 27% below its pre-GFC level – and – more significant and accelerated austerity is required. If an organisation can exhibit psychopathy then the IMF has it!

Conclusion: I haven’t written about Greece (or the Eurozone) for a while – it is depressing thinking about it really and I cannot imagine how the citizens in Greece are dealing with the planned destruction of their prosperity by highly paid officials in Brussels, Frankfurt and, particularly Washington. The scale of the destruction is beyond belief really and constitutes in my non-legal brain a crime against humanity. Someone in the IMF and Brussels should be paying for the professional incompetence that has created this human disaster.

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The world on its head. We all understand that it’s Brussels that has failed to live up to its commitments. Not Greece. But let them try out that Dublin reboot on Italy, see what happens.

Brussels Pushes Greece For Action On Migrants Before Dublin Pact Reboot (Kath.)

European officials are calling on Athens to take action by the end of this year ahead of the review and reactivation of the Dublin Regulation, which would lead to EU member-states returning migrants to Greece. The European Commission on Wednesday asked Athens to improve reception facilities, accelerate the processing of asylum claims and create separate facilities for unaccompanied minors. European Migration Commissioner Dimitris Avramopoulos said there will be no returns to Greece in the months leading up to the review of the pact, which stipulates that migrants lodge their asylum appeals in the first EU country they enter.

He said the goal remains a “gradual resumption” of migrant transfers to Greece but that “we need to avoid that an unsustainable burden be put on Greece.” Meanwhile the Commission aims to relocate 30,000 migrants from Greece to other EU countries by the end of next year. The presense of migrants in Greece has fuelled tensions with protests on Chios and in Rethymno on Wednesday.

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Sep 282016
 
 September 28, 2016  Posted by at 9:20 am Finance Tagged with: , , , , , , , , ,  5 Responses »
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DPC Heart of Chinatown, San Francisco, after earthquake and fire 1906


Small Army Of Fed Speakers, OPEC On Tap For Wednesday (CNBC)
“Negative Growth” of Real Wages is Normal for Much of the Workforce (WS)
Grocery Prices Are Plunging (BBG)
EU Banking Mayhem, One Bank at a Time, then All at Once (WS)
Deutsche Bank Troubles Cast Long Shadow Over European Banking (BBG)
IMF Warns Central Banks Could Lose Deflation Fight (AFP)
A Legal Barrier to Higher US Interest Rates (WSJ)
Global Container Volume on Track for Worst Year Since 2009 (WSJ)
Wells Fargo Executives Forfeit Millions, CEO To Forgo Salary (G.)
Worries Grow Over Greek Economic Forecast (WSJ)
Germany’s Hypocrisy Over Greece Water Privatisation (G.)
China Wants GMOs. The Chinese People Don’t. (BBG)
Single Clothes Wash May Release 700,000 Microplastic Fibres (G.)

 

 

And the MH17 report that lost all credibility long ago. Got to keep the customer entertained.

Small Army Of Fed Speakers, OPEC On Tap For Wednesday (CNBC)

A flurry of Fed speakers, including the Fed chair, will keep markets busy Wednesday. There are also mortgage applications at 7 a.m. EDT, durable goods data at 8:30 a.m. EDT and oil inventory data at 10:30 a.m. EDT. OPEC, meanwhile, is meeting in Algeria and could continue to create volatility in oil prices after headlines from there triggered a near 3% plunge Tuesday. Fed Chair Janet Yellen appears before the House Financial Services Committee at 10 a.m. on supervision and regulation. The Fed chair was personally criticized in the presidential debate Monday night by GOP candidate Donald Trump, who said the Fed’s decision to keep rates low was political and that it’s creating a bubble in the stock market.

“It has to worry the markets that potentially you could have a president getting into a nasty dispute with the chairman of the Fed in early 2017. That’s something the market would not like to see. I think the Fed has not done a very good job communicating. It’s a cacophony of confusing comments. There’s reason to criticize the Fed, but the personal attack on Yellen is unprecedented,” said Greg Valliere, chief global strategist at Horizon Investments. Traders are watching to see if Yellen is in the political hot seat on banking regulation and supervision when she appears before the committee.

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One side of US deflation is falling wages…

“Negative Growth” of Real Wages is Normal for Much of the Workforce (WS)

The chart below shows the%age change of real wages (left, y-axis) as these men aged (horizontal, x-axis). As young adults, their wages soared by up to 10% a year. Then the rate of growth fell off sharply. When the men in this cohort turned 40 in the 1990s, wage growth disappeared. By around the year 2000, the real wage peak in the US, when the oldest men in this cohort turned 50, wages had begun to decline for most of them. By the time these men were in the mid-50s, their wages across the board were heading south – and for many of them, rapidly. Hence this colorful, drooping spaghetti:

This “negative real wage growth” – devastating as it may be for those experiencing it – is nothing special, according to the New York Fed. And it crushes not just white men, but everyone: “Real wages tend to rise early in a worker’s career, flatten out mid-career, and then decline as the worker approaches retirement. This inverted U-shape pattern is a well-established feature in the labor economics literature.” The report explained it further: “Labor economists explain the rapid real wage growth early in a worker’s career as a combination of on-the-job learning and better matching of workers to jobs. A large portion is due to job matching as workers change jobs in search of a position that better utilizes their skills. As workers age, the decline in the pace of their real wage growth reflects a diminished incentive to invest in new skills (because their remaining work life is shorter) and fewer job changes (because they have found a good job match).”

The report divides life for its purposes into three phases, terms of wage growth: • Fast growth, up to age 40, • Flat growth, ages 41-54, • “Negative growth,” age 55 and older. Now there’s another problem mucking up the overall and ever-elusive real-wage growth miracle everyone has been counting on: demographics. The US population is aging. There are more people aged 40 and over in the workforce, and their incomes are now flat or declining. The portion of the population in the first phase when wages are growing fast has plunged from close to 60% in the 1980s to the mid-40% range currently. And the portion of workers with wages in the “negative growth” phase has ballooned. Given the demographics, real wage declines among workers over 50 will continue to hammer the national averages.

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…and when wages are falling, so must prices.

Grocery Prices Are Plunging (BBG)

Call it the Great Grocery-Store Giveaway of 2016. In Austin, Texas, Randalls slashed prices for boneless beef ribs by 40%, to $3.99 a pound. Not to be outdone, the H-E-B grocer down the street charged $1 a pound less. Not long ago, Albertsons advertised a deal you don’t normally see on your finer cuts of meat: “buy 1 get 1 free” specials on “USDA Choice Petite Sirloin Steak.” And what does $1 buy these days? In North Bergen, New Jersey, you could pick up a dozen eggs at Wal-Mart. OK, the price was actually $1.14. A mile away, check out Aldi, the German supermarket discounter, which can actually break the buck – 12 eggs for 99 cents. A year ago, you would have paid, on average, three times that price.

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 – with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters. Consumers are winning out; grocery chains, not so much. Their margins and, in some cases, their stock prices, are taking a hit. Eggs and beef have have grown especially inexpensive, and it isn’t only an American phenomenon: In England, Aldi recently offered its prized 8-ounce wagyu steaks from New Zealand for about $6.50 – a little more than the price of a pint of beer. “The severity of what we’re seeing is completely unprecedented,” said Scott Mushkin at Wolfe Research, who has studied grocery prices around the country for more than ten years. “We’ve never seen deflation this sharp.”

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“The can has been kicked down the road for years. Now negative interest rates appear to have inadvertently crushed the can.”

EU Banking Mayhem, One Bank at a Time, then All at Once (WS)

Here are the 29 banks in the ESTX Banks Index of Eurozone banks (so Swiss and UK banks, for example are not included). It shows the percentage drop from their 52-week high. But for some of these banks, particularly for Italian and Portuguese banks, that 52-week high was just about last year’s 52-week low, so relentless has their decline been over the years. Some of them had already been reduced to penny stocks years ago, and for them, in euro terms, the biggest losses occurred back then. So these mayhem banks, color coded by country:

If a bank stock plunges from €0.04 to €0.01 over the 52-week period, such as Banco Comercial Português in Portugal, it has been toast for longer than 52 weeks, and the percentage plunge is essentially meaningless because shares were worthless to begin with. The shares of five of these banks trade under €1. Another 8 banks trade under €3. These 29 banks form a big part of the European financial system. It includes some of the world’s largest banks, such as Deutsche Bank, Societe Generale, and BNP Paribas. It includes a slew of other “systemically important financial institutions,” such as Unicredit, ING, and Santander. They’re troubled at the same time. The can has been kicked down the road for years. Now negative interest rates appear to have inadvertently crushed the can.

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Deutsche won’t go alone. Just like saving only Deutsche is far from enough. The dominoes suppart each other.

Deutsche Bank Troubles Cast Long Shadow Over European Banking (BBG)

The turmoil swirling around Deutsche Bank has brought simmering concerns about the health of Europe’s banks back to a boil. Germany’s largest lender extended losses to a record low this week, dragging down European financial stocks, after the U.S. Department of Justice requested $14 billion to settle claims tied to fraudulent mortgage-backed securities. While the bank said it won’t pay anywhere close to that amount, the dust-up fueled doubts over its capital levels and refocused investors on the industry’s faults. “One word – Deutsche,” David Moss at BMO Global Asset Management in London, said when asked to sum up the recent slump in European banks. “That’s the biggest thing – it’s reignited the risk around regulation, fines and litigation.”

Dismissing concern about the bank’s finances, Chief Executive Officer John Cryan told Bild in an interview published late Tuesday that capital “is currently not an issue,” and accepting government support is “out of the question for us.” Deutsche Bank has tumbled almost 20% this month, while Royal Bank of Scotland – which also faces a looming Justice Department fine – fell 13%, and Italy’s UniCredit slumped 12%. The Bloomberg Europe 500 Banks and Financial Services Index has declined 4.2% in September, making it the worst month since June, when Britain’s vote to exit the European Union roiled markets and sent bank shares plunging.

[..] European banks are grappling with tougher regulatory requirements, sputtering economic growth and negative interest rates, which squeeze lending margins and crimp investment returns. In Italy, where banks are burdened with some €360 billion of soured loans, UniCredit is working on a plan to boost capital that may include asset sales and a stock offering, according to people familiar with the matter. In Germany, Commerzbank scaled back its full-year profit goals and may announce thousands of job cuts this week,

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They already have.

IMF Warns Central Banks Could Lose Deflation Fight (AFP)

The IMF warned Tuesday that central banks are struggling to beat back deflationary forces and that governments need to spend to help them succeed. In a new assessment of global economic conditions, the IMF said many countries worldwide are battling disinflation – low and slowing inflation – due to weak global economic growth.If central banks around the world cannot halt this stall, and if companies and people increasingly believe they can’t halt it, their economies risk sinking into a deflationary spiral – where prices generally start to fall and companies and consumers hold back spending and investment, stalling the economy. In this case, “countries can’t afford to be complacent,” the Fund warned. The report said deflationary pressures in many countries are coming from abroad, in the form of sinking prices of both commodities and manufactured goods.

“The breadth of the decline in inflation across countries and the fact that it is stronger in the tradable goods sectors underscore the global nature of disinflationary forces,” the IMF said. Weak inflation challenges central banks’ ability to use monetary policy to stimulate demand, the IMF notes, because interest rates are likely to already be very low, giving them little room to cut further. That has been the case with top central banks including the Fed, the ECB and the BOJ, with the latter two already having taken some interest rates negative. “Eventually, ‘persistent’ disinflation can lead to costly deflationary cycles – as we have seen in Japan – where weak demand and deflation reinforce each other, and end up increasing debt burdens and hindering economic activity and job creation.”

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How to politicize the Fed?!

A Legal Barrier to Higher US Interest Rates (WSJ)

Defending the Fed’s recent decision to put off raising interest rates again, Fed Chair Janet Yellen told reporters last week that she and other Fed governors wanted “to see some continued progress” before taking that step. Politics, she insisted, had nothing to do with it. What Ms. Yellen didn’t say is that the Fed couldn’t raise its rates without breaking the law. Since when are Fed rate increases illegal? Since the 2007-08 subprime meltdown and financial disaster, actually. Until then the Fed could set any target it liked for the federal-funds rate—the interest rate banks pay for overnight loans of cash reserves. To keep the fed-funds rate from rising above target, the Fed pumped more reserves into the banking system. To keep it from dropping below, it took reserves away.

But after Lehman Brothers failed in 2008, the Fed’s efforts to keep the fed-funds rate from dropping below its target proved futile. To set a floor on how far the rate could go, the Fed started paying interest on banks’ reserve balances with the Fed, taking advantage of the 2006 Financial Services Regulatory Relief Act giving it permission to do so. Alas, it didn’t work. Government-sponsored enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which also kept deposit balances at the Fed but weren’t eligible for interest on reserves (IOR), started making overnight loans to banks at rates below the IOR rate. In effect, this turned what the Fed hoped would be a floor on the fed-funds rate into a ceiling. To raise rates now, the Fed increases the rate on reserves.

So what’s to keep the Fed from raising rates this way again? The 2006 Financial Services Regulatory Relief Act is what. For that law only allows the central bank to pay interest on reserves “at a rate or rates not to exceed the general level of short-term interest rates.” The rub is that the Fed’s IOR rate of 50 basis points (0.5%) already exceeds the closest comparable market rates: those on shorter-term Treasury bills. At the start of this month, the four-week T-bill rate was just 26 basis points; since then it has slid even lower, all the way down to 10 basis points. Judging by these numbers, the Fed is already flouting the law. Another hike would mean flouting it all the more flagrantly. Lawmakers will be duty-bound to object. The law can only be stretched so far. Unless “general short-term rates” rise markedly, Congress can be expected to question the legality of any Fed rate increase. If it comes to that, Ms. Yellen will find it very hard to dissemble her way out of it.

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2016 will be known as the good old days.

Global Container Volume on Track for Worst Year Since 2009 (WSJ)

Global container volumes are on track for zero growth this year, which would mark the sector’s worst performance since the 2009 economic crisis and a sure catalyst for further bankruptcies and possible acquisitions in the beleaguered shipping industry, shipping executives said. Freight rates, the predominant source of income for shipping companies, fell 20% in the benchmark Asia to Europe trade route this week compared with last week to $767 per container. Rates have mostly stayed well below $1,000 since the start of the year and operators say anything below $1,400 is unsustainable. They aren’t expected to turn around soon.

China’s Golden Week holiday starts at the beginning of October, marking the slow season for operators as many Chinese factories cut production levels after an output frenzy in the summer months when western importers stack up products for the year-end holidays. “The industry faces its worst year since the Lehman Brothers collapse,” said Jonathan Roach, an analyst at London based Braemar ACM. “Demand is around zero and any moves to increase freight rates will likely fail.” Hanjin, South Korea’s biggest operator and the world’s seventh largest in terms of capacity, filed for bankruptcy protection last month and is under court order to sell its own ships and returning chartered ships to their owners. Container operators, which move everything from clothes and shoes to electronics and furniture, are burdened by 30% more capacity in the water than demand.

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And they’ll keep their jobs?

Wells Fargo Executives Forfeit Millions, CEO To Forgo Salary (G.)

Wells Fargo executives will forfeit millions of dollars in the wake of revelations that the bank’s sales quotas led to the creation of more than 2m unauthorized accounts. The bank’s chief executive John Stumpf will forgo his salary for the coming months as independent directors launch a new investigation into Wells Fargo’s retail banking and sales practices. Last year, Stumpf made about $19.3m. Stumpf will also forfeit unvested equity awards worth about $41m. Carrie Tolstedt, who oversaw the retail banking at Wells Fargo while the unauthorized accounts were opened, was slated to receive as much as $124.6m after retiring this summer, according to Fortune. The bank said on Tuesday that she would not receive an undisclosed severance and would forfeit about $19m in unvested awards.

Less than three weeks ago, Wells Fargo announced that it had agreed to pay $185m in penalties after an audit found that its employees opened as many as 1.5m deposit accounts and 565,000 credit card accounts without customers’ consent. The accounts were opened by the bank’s staff in hopes of meeting their monthly sales quota and earning their incentive bonuses. Wells Fargo workers have tried to draw attention to the “unreasonable” quotas before – some even staged a protest in front of the bank’s headquarters last year. When Stumpf testified in front of the US Senate last week, he drew ire from US lawmakers. Many of them called for the bank to recoup pay from Stumpf and Tolstedt and hold them accountable.

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The EU has made Greek recovery impossible. Spending power has been murdered, and a whole generation of younger people is 50-60% long-term unemployed. It makes no difference what anyone forecasts.

Worries Grow Over Greek Economic Forecast (WSJ)

Greece’s economic recovery is proving elusive, challenging the forecasts of the country’s government and foreign creditors still counting on growth reviving this year. The IMF said last week that the economy is stagnating, in the first admission from creditors that Greece’s recovery is off track again. Growth will only restart next year, the head of the IMF’s team in Greece said on a conference call with reporters, without offering details. Of particular concern is that exports, which are supposed to lead Greece out of trouble, are on a slow downward trajectory, hampered by capital controls, taxes and a lack of credit. “There is no chance we will see a rebound unless we see some bold political decisions that would introduce a more stable business environment,” said Dimitris Tsakonitis, general manager at mining company Grecian Magnesite.

The bailout agreement between Greece and its German-led creditors assumes rapid growth from late 2016 onward, including an official forecast of 2.7% growth in 2017. Private-sector economists believe next year’s growth could be closer to 0.6%. Weaker growth would undermine the budget, likely leading to fresh arguments with lenders about extra austerity measures. Greece is still grappling with the measures it has already agreed to. Late on Tuesday the country’s parliament approved pension overhauls and other policy changes that have been delayed for months, holding up bailout funding.

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Good to note. Berlin buys back its water, and forces Athens to sell it. “It’s not any more a democracy or equality in the EU. It’s a kind of business..”

No society should ever agree to sell its basic needs to foreigners. Leaders who do that anyway should be fired.

Germany’s Hypocrisy Over Greece Water Privatisation (G.)

Greek activists are warning that the privatisation of state water companies would be a backward step for the country. Under the terms of the bailout agreement approved by the Greek parliament today, Greece has pledged to support an existing programme of privatisation, which includes large chunks of the water utilities of Greece’s two largest cities – Athens and Thessaloniki. There is ongoing debate about water privatisation and the role of business. Across Europe a wave of austerity-driven privatisation proposals has led to protests in Ireland, Italy, Greece and Spain. At the same time, some of northern Europe’s largest cities, including Paris and Berlin, are buying back utilities they sold just last decade.

President of the Thessaloniki water company trade union George Argovtopoulos said a move to a for-profit model would raise prices for consumers and degrade services. “It’s not any more a democracy or equality in the EU. It’s a kind of business,” he said, adding that austerity measures that require water privatisation smacked of a “do as I say, but not as I do” approach from Germany. “We know that in Berlin, just two years ago they remunicipalised the water there, although they paid just under €600m to Veolia [to buy back its stake]. It’s clear that the model of privatisation of water has failed all around the world,” he said. The German finance ministry refused to comment ahead of a Eurogroup meeting in Brussels on Friday where the third bailout deal looked set to be signed.

[..] Austerity-led changes to water supply have been fiercely resisted across Europe’s most indebted countries. In Dublin this year, huge protests erupted over plans to directly charge water users who previously paid for water through their taxes. This was seen as a first step towards selling off Ireland’s water supply. A water privatisation push by former Italian prime minister Silvio Berlusconi was crushed by a 95% referendum vote in 2011. A similar referendum in Thessaloniki last year delivered a 98% vote against. A 2014 report by the Transnational Institute’s Satoko Kishimoto found that across the world 180 cities had bought back (or remunicipalised) their water supply. She said this was a response to almost universally higher water prices and the loss of control over a fundamental resource.

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Another author claiming that “..the scientific consensus within and outside of China is that GMOs are safe..”

China Wants GMOs. The Chinese People Don’t. (BBG)

The latest food safety scandal in China might be its most damaging. Earlier this week, a former doctoral student at one of the country’s national testing centers for genetically modified organisms went public with allegations of scientific fraud, including claims that records were doctored extensively, that unqualified personnel were employed under illegal contracts and – most seriously – that authorities refused to take action when his concerns were aired privately. On Wednesday, China’s Ministry of Agriculture responded to a social media storm by suspending operations at the center. That might take care of the current scandal, but the Chinese public’s hostility toward GMOs won’t go away so easily.

Those concerns have only grown over the past decade as the government has increased its support of GMOs, including approval of the state-owned ChinaChem Group’s $43 billion takeover offer for the Swiss seed giant Syngenta. These efforts have galvanized a very public opposition that transcends China’s typical political fault lines, and created one of the government’s most intractable headaches. Feeding China’s huge population has never been easy. But over the last three decades, the challenges have become considerably greater as urbanization devoured farmland, and pollution made even more of it unusable. Today, the government is faced with the task of feeding 21% of the world’s population with 9% of its arable land. Its reliance on foreign goods has made China the world leader in imports since 2011.

Officials now fear the country could become dependent on foreigners for its food supply and the government remains committed to maintaining self-sufficiency in rice, wheat, and other key grains. As a result, the political pressure to increase yields is considerable. In fact, this pressure is centuries-old. Domesticated rice first appeared in the Yangtze River Valley at least 8,000 years ago, and Chinese farmers and scientists have been innovating ever since. In 1992, China became the first country to introduce a GMO crop into commercial production, when it sowed a virus-resistant tobacco plant on 100 acres. Since then, the government has issued safety certificates for a wide range of GMO crops, ranging from chili peppers to petunias. Yet, so far at least, only cotton has gone into wide cultivation. Other GMOs – especially rice, a staple of the Chinese diet – are still awaiting approval to be domestically cultivated.

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The blessings of plastic.

Single Clothes Wash May Release 700,000 Microplastic Fibres (G.)

Each cycle of a washing machine could release more than 700,000 microscopic plastic fibres into the environment, according to a study. A team at Plymouth University in the UK spent 12 months analysing what happened when a number of synthetic materials were washed at different temperatures in domestic washing machines, using different combinations of detergents, to quantify the microfibres shed. They found that acrylic was the worst offender, releasing nearly 730,000 tiny synthetic particles per wash, five times more than polyester-cotton blend fabric, and nearly 1.5 times as many as polyester. “Different types of fabrics can have very different levels of emissions,” said Richard Thompson, professor of marine biology at Plymouth University, who conducted the investigation with a PhD student, Imogen Napper.

“We need to understand why is it that some types of [fabric] are releasing substantially more fibres [ than others].” These microfibres track through domestic wastewater into sewage treatment plants where some of the tiny plastic fragments are captured as part of sewage sludge. The rest pass through into rivers and eventually, oceans. A paper published in 2011 found that microfibres made up 85% of human-made debris on shorelines around the world. The impact of microplastic pollution is not fully understood but studies have suggested that it has the potential to poison the food chain, build up in animals’ digestive tracts, reduce the ability of some organisms to absorb energy from foods in the normal way and even to change the behaviour of crabs.

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Sep 272016
 
 September 27, 2016  Posted by at 8:32 am Finance Tagged with: , , , , , , , , , ,  1 Response »
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Arnold Genthe “Chinatown, San Francisco. The street of the gamblers at night” 1900


Why I Switched My Endorsement from Clinton to Trump (Scott Adams)
When America Was Great, Taxes Were High, Unions Strong, and Government Big (A.)
Global Debt Reaches Fresh High As Companies And Countries Keep Borrowing (Tel.)
When Small Is Evil (DQ)
Structural Growth and Dope Dealers on Speed-Dial (Hussman)
Treasury Market’s Biggest Buyers Are Selling as Never Before (BBG)
Deutsche Bank Crisis Could Take Angela Merkel Down – And The Euro (Tel.)
China’s Runaway Housing Market Poses Latest Challenge for Yuan (BBG)
Sydney Home Prices Need To Drop 25% To Help First Time Buyers (Abc)
Don’t Blame “Baby Boomers” For Not Retiring – They Can’t Afford To (Roberts)
Saudi Lobbyists Plot New Push Against 9/11 Bill As Veto Override Looms (Pol.)
Over 90% Of World Breathing Bad Air-WHO (AFP)
Canadians Are Embracing Syrian Refugees. Why Can’t We? (G.)

 

 

The most interesting and thought-provoking thing I’ve read about the election amidst a river of blubber.

Why I Switched My Endorsement from Clinton to Trump (Scott Adams)

5. Pacing and Leading: Trump always takes the extreme position on matters of safety and security for the country, even if those positions are unconstitutional, impractical, evil, or something that the military would refuse to do. Normal people see this as a dangerous situation. Trained persuaders like me see this as something called pacing and leading. Trump “paces” the public – meaning he matches them in their emotional state, and then some. He does that with his extreme responses on immigration, fighting ISIS, stop-and-frisk, etc. Once Trump has established himself as the biggest bad-ass on the topic, he is free to “lead,” which we see him do by softening his deportation stand, limiting his stop-and-frisk comment to Chicago, reversing his first answer on penalties for abortion, and so on.

If you are not trained in persuasion, Trump looks scary. If you understand pacing and leading, you might see him as the safest candidate who has ever gotten this close to the presidency. That’s how I see him. So when Clinton supporters ask me how I could support a “fascist,” the answer is that he isn’t one. Clinton’s team, with the help of Godzilla, have effectively persuaded the public to see Trump as scary. The persuasion works because Trump’s “pacing” system is not obvious to the public. They see his “first offers” as evidence of evil. They are not. They are technique. And being chummy with Putin is more likely to keep us safe, whether you find that distasteful or not. Clinton wants to insult Putin into doing what we want. That approach seems dangerous as hell to me.

6. Persuasion: Economies are driven by psychology. If you expect things to go well tomorrow, you invest today, which causes things to go well tomorrow, as long as others are doing the same. The best kind of president for managing the psychology of citizens – and therefore the economy – is a trained persuader. You can call that persuader a con man, a snake oil salesman, a carnival barker, or full of shit. It’s all persuasion. And Trump simply does it better than I have ever seen anyone do it. The battle with ISIS is also a persuasion problem. The entire purpose of military action against ISIS is to persuade them to stop, not to kill every single one of them. We need military-grade persuasion to get at the root of the problem. Trump understands persuasion, so he is likely to put more emphasis in that area.

Most of the job of president is persuasion. Presidents don’t need to understand policy minutia. They need to listen to experts and then help sell the best expert solutions to the public. Trump sells better than anyone you have ever seen, even if you haven’t personally bought into him yet. You can’t deny his persuasion talents that have gotten him this far. In summary, I don’t understand the policy details and implications of most of either Trump’s or Clinton’s proposed ideas. Neither do you. But I do understand persuasion. I also understand when the government is planning to confiscate the majority of my assets. And I can also distinguish between a deeply unhealthy person and a healthy person, even though I have no medical training. (So can you.)

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The Dream ended decades ago, it’s just a matter of picking which decade.

When America Was Great, Taxes Were High, Unions Strong, and Government Big (A.)

There is plenty about GOP hopeful Donald Trump to which potential primary voters respond. He’s successful. He’s plainspoken. At a time when politicians are historically unpopular, he’s not a politician. And he has a great slogan. That slogan resonates with his supporters, according to Republican pollster Frank Luntz, who ran a recent focus group, the results of which were written about in Time. “I used to sleep on my front porch with the door wide open, and now everyone has deadbolts,” one man told Luntz. “I believe the best days of the country are behind us.” Luntz concluded that people see Trump as a “real-deal fixer-upper,” able to make repairs that others have bungled. “We know his goal is to make America great again,” one woman astutely observed. “It’s on his hat.”

It could be on your hat too—Trump has begun selling “Make America Great Again” merchandise—if you can find one, that is. They have a tendency to sell out. As Russell Berman pointed out in The Atlantic earlier this month, many white Americans these days are pessimistic to the point of despair: “White Americans—and in particular those under 30 or nearing retirement age—have all but given up on the American Dream. More than four out of five younger whites, and more than four out of five respondents between the ages of 51 and 64 said The Dream is suffering.” No wonder Trump’s message is so powerful—it’s a sugar pill coated with nostalgia. He is not promising to make America great, he’s promising to make it great again. But to what era does he intend to take the nation back?

And what would that look like, practically speaking? The boundaries of America’s “golden age” are clear on one end and fuzzy on the other. Everyone agrees that the midcentury boom times began after Allied soldiers returned in triumph from World War II. But when did they wane? The economist Joe Stiglitz, in an article in Politico Magazine titled “The Myth Of The American Golden Age,” sets the endpoint at 1980, a year until which “the fortunes of the wealthy and the middle class rose together.” Others put the cut-off earlier, at the economic collapse of 1971 and the ensuring malaise. Regardless of when it ended, it would not be unfair to use the ’50s as shorthand for this now glamorized period of plenty, peace, and the kind of optimism only plenty and peace can produce.

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Ever more debt is the only way to keep the facade upright enough that people believe in it.

Global Debt Reaches Fresh High As Companies And Countries Keep Borrowing (Tel.)

Global debt issuance is on course to hit a record high in 2016 as figures showed sales this year topped $5 trillion (£3.9 trillion) at the end of September. Debt issuance rose to $5.02 trillion in the nine months to September 22, according to Dealogic, putting 2016 on course to beat the all-time high of $6.6 trillion recorded in 2006. Record low interest rates have encouraged countries and companies to issue debt as central banks around the world try to stimulate growth. The data also showed corporate issuance of investment-grade debt reached a record high of $1.54 trillion since the start of the year, up from $1.41 trillion in the same period a year earlier. Dealogic’s figures also highlighted the impact of the Brexit vote.

Sterling-denominated investment grade debt rose to $21.3bn in the first nine months of the year, up slightly from $20.9bn raised in the same period of 2015. Volumes in July fell to their lowest since 2000 as the referendum result slowed issuance, with just $564m issued, according to Dealogic. However, issuance is expected to pick up later this year following the Bank of England’s decision to buy £10bn of corporate debt as part of its revamped bond-buying programme. Sterling issuance in August jumped to six times the average following the Bank’s announcement. Green bonds – which raise money for environmentally friendly projects and often carry tax exemptions – are also rising in popularity.

Activity surpassed full-year 2015 levels in September as volumes reached a record high, worth $48.2bn. Mark Carney, the Governor of the Bank of England, has spoken out in favour of green finance, describing it as a “major opportunity” for investors. In a speech last week, he said long-term financing of green projects in emerging markets could help to promote financial stability. “By ensuring that capital flows finance long-term projects in countries where growth is most carbon intensive, financial stability can be promoted,” he said. More than $13 trillion of global sovereign and corporate debt trades at negative yields, highlighting the influence of central banks.

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Draghi’s comments on small banks remind me of Ken Rogoff’s war on cash.

When Small Is Evil (DQ)

There are plenty of reasons to be worried about the state of Europe these days, but if one had to choose one thing above all others, it would be the gaping disconnect between reality and senior European policy makers’ willful misperception of reality. A perfect case in point was a speech given in Frankfurt by ECB president Mario Draghi. He was addressing a conference of the European Systemic Risk Board (ERSB), an organization created in 2010 by the European Commission to warn about and mitigate systemic financial risks in Europe. During his address Draghi discussed what he saw as the biggest threats to Europe’s financial system.

Just as you’d expect from any senior central banker worth his or her salt, he did not point to the most obvious risk: the zombifying banks at the very top of the financial food chain — the same banks that coincidentally constitute the ECB’s number-one constituency and whose balance sheets are still filled to the rafters with toxic assets dating back to even before the last major crisis, in 2008. By now, virtually all of these banks are fully dependent on the never-ending and ever-growing welfare assistance provided by the ECB. Nor did Draghi mention the excessive complexity and interconnectedness of the banking system, routinely fingered as potential causes of the next global financial crisis.

Nor for that matter did he mention the destructive side effects of the ECB’s negative interest rate policy (NIRP), which – besides sacrificing millions of savers and retirees via their pension funds on the altar of rampant debt creation and completely undermining the crucial micro-economic role played by capital formation – is making it difficult for Europe’s largest banks to turn a meaningful profit. No, for Draghi, the biggest financial problem in Europe these days is that it is over-banked. “Over-capacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins,” he said. Put simply, there’s just too much competition from the thousands of smaller banks that are crowding out the profits for the big banks.

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“The weakness in real GDP growth is of greatest concern, because it’s largely the consequence of policies that encourage repeated cycles of bubbles and collapses..”

Structural Growth and Dope Dealers on Speed-Dial (Hussman)

In recent years, the U.S. equity market has scaled the third steepest cliff in history, eclipsed only by the 1929 and 2000 peaks, as investors rest their full confidence and weight on the protrusions of a structurally deteriorating economy, imagining that they are instead the footholds of a robust investment environment. The first of these is the current environment of low interest rates. While investors take this as quite a positive factor, it’s largely a reflection of a steep downturn in U.S. structural economic growth, magnified by reckless monetary policy. Over the past decade, the average annual nominal growth rate of GDP has dropped to just 2.9%, while real GDP growth has plunged to just 1.3%; both the lowest growth rates in history, outside of the Depression (see the chart below).

Indeed, probably the most interesting piece of information from last week’s FOMC meeting was that the Federal Reserve downgraded its estimate for the central tendency of long-run GDP growth to less than 2% annually. The weakness in real GDP growth is of greatest concern, because it’s largely the consequence of policies that encourage repeated cycles of bubbles and collapses, and chase debt-financed consumption instead of encouraging productive real investment. Indeed, growth in real U.S. gross domestic investment has collapsed since 2000 to just one-fifth of the rate it enjoyed in the preceding half-century, and has averaged zero growth over the past decade. While labor force growth has slowed, it’s really the self-inflicted collapse of U.S. productivity growth, enabled by misguided policy, that’s at the root of the problem.

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This is some investing tactic anymore. It’s about parties needing cash.

Treasury Market’s Biggest Buyers Are Selling as Never Before (BBG)

They’ve long been one of the most reliable sources of demand for U.S. government debt. But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market. Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record, based on the Federal Reserve’s official custodial holdings. The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields. For Jim Leaviss at M&G Investments in London, that’s cause for concern. A continued retreat could lead to painful losses in a market that some say is already too expensive.

But perhaps more important are the consequences for America’s finances. With the U.S. facing deficits that are poised to swell the public debt burden by $10 trillion over the next decade, foreign demand will be crucial in keeping a lid on borrowing costs, especially as the Fed continues to suggest higher interest rates are on the horizon. The selling pressure from central banks is “something you have to bear in mind,” said Leaviss, whose firm oversees about $374 billion. “This, as well as the Fed, all means we are nearer to the end of the low-yield environment.” Overseas creditors have played a key role in financing America’s debt as the U.S. borrowed heavily in the aftermath of the financial crisis to revive the economy.

Since 2008, foreigners have more than doubled their investments in Treasuries and now own about $6.25 trillion. Central banks have led the way. China, the biggest foreign holder of Treasuries, funneled hundreds of billions of dollars back into the U.S. as its export-based economy boomed. Now, that’s all starting to change. The amount of U.S. government debt held in custody at the Fed has decreased by $78 billion this quarter, following a decline of almost $100 billion over the first six months of the year. The drop is the biggest on a year-to-date basis since at least 2002 and quadruple the amount of any full year on record, Fed data show.

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“No one really knows where the losses would end up, or what the knock-on impact would be. It would almost certainly land a fatal blow to the Italian banking system, and the French and Spanish banks would be next.”

Deutsche Bank Crisis Could Take Angela Merkel Down – And The Euro (Tel.)

True, Merkel’s position is understandable. The politics of a Deutsche rescue are terrible. Germany, with is Chancellor taking the lead, has set itself up as the guardian of financial responsibility within the euro-zone. Two years ago, it casually let the Greek bank system go to the wall, allowing the cash machines to be closed down as a way of whipping the rebellious Syriza government back into line. This year, there has been an unfolding Italian crisis, as bad debts mount, and yet Germany has insisted on enforcing euro-zone rules that say depositors – that is, ordinary people – have to shoulder some of the losses when a bank is in trouble. For Germany to then turn around and say, actually we are bailing out our own bank, while letting everyone else’s fail, looks, to put it mildly, just a little inconsistent.

Heck, a few people might even start to wonder if there was one rule for Germany, and another one for the rest. In truth, it would become impossible to maintain a hard-line in Italy, and probably in Greece as well. And yet, if Deutsche Bank went down, and the German Government didn’t step in with a rescue, that would be a huge blow to Europe’s largest economy – and the global financial system. No one really knows where the losses would end up, or what the knock-on impact would be. It would almost certainly land a fatal blow to the Italian banking system, and the French and Spanish banks would be next. Even worse, the euro-zone economy, with France and Italy already back at zero growth, and still struggling with the impact of Brexit, is hardly in any shape to withstand a shock of that magnitude.

A rock and a hard place are hardly adequate to describe the options Merkel may soon find herself facing. The politics of a rescue are terrible, but the economics of a collapse are even worse. By ruling out a rescue, she may well have solved the immediate political problem. Yet when the crisis gets worse, as it may do at any moment, it is impossible to believe she will stick to that line. A bailout of some sort will be cobbled together – even if the damage to Merkel’s already fraying reputation for competence will be catastrophic. In fact, Merkel is playing a very dangerous game with Deutsche – and one that could easily go badly wrong. If her refusal to sanction a bail-out is responsible for a Deutsche collapse that could easily end her Chancellorship. But if she rescues it, the euro might start to unravel.

Read more …

Beijing purposely blows a giant bubble with money people don’t have.

China’s Runaway Housing Market Poses Latest Challenge for Yuan (BBG)

Here’s the latest uncertainty facing China’s currency: sky high house prices. A runaway boom in the largest cities will push investors to look for cheaper alternatives overseas, draining money out of China and putting downward pressure on the yuan in the process, according to analysis by Harrison Hu at Royal Bank of Scotland in Singapore. An “enlarged differential between domestic and foreign asset prices will lead to capital outflows and depreciation, until parity is restored,” Hu wrote in a note. He said that the 30% year-on-year price gain in Tier 1 and leading Tier 2 cities implies a 25% rise in dollar terms, which far outpaces the 5% gain in major U.S. cities. That ratio is here in red:

“It’s commonly believed that China’s policymakers will sacrifice the yuan exchange rate to avoid a sharp correction in domestic property prices, as the latter will more significantly derail China’s economy and the financial system,” Hu wrote. That’s because the importance of the property market in the world’s second largest economy far outweighs many sectors, including the stock market. Hu compares property as a percentage of economic output to the far lighter footprint of stocks. A real estate crash in China could have far reaching consequences and it would be a long time before investors regained their confidence, according to Hu.

That will put policy makers in a very difficult position. While the government has some cards in its hand, such as an ability to control land supply and enforce curbs on new home-buying, history shows that some tightening measures risk backfiring and only stoking speculative behavior such as “panic buying” like that seen in Shanghai earlier this year. Besides, the regulator’s handling of last year’s stock market turmoil did little to inspire confidence in the government’s ability to oversee the bubbly housing market. “No bubble has a happy ending,” Hu wrote.

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Someone should calculate the losses at a 25% price drop. And do 50% too. Losses for ‘owners’ and for lenders.

Sydney Home Prices Need To Drop 25% To Help First Time Buyers (Abc)

First home buyers are facing the biggest barrier in recent history to entering the housing market, with deposits at record high levels relative to incomes in the Sydney market. Research by Deutsche Bank’s chief Australian economist Adam Boyton shows it would take a 25% drop in Sydney home prices to bring the size of deposit required back to average levels over the past 20 years. Mr Boyton studied the Sydney market because it is the biggest, has seen rapid recent price growth and has the highest housing costs in the nation. In contrast to the record deposit needed – now estimated to be almost twice the typical annual earnings of a Sydney household – rising incomes over the early 2000s and falling interest rates since the global financial crisis have seen the burden of mortgage repayments remain comparatively stable relative to income.

Mr Boyton expresses this as “borrowing power”, which has broadly increased in line with Sydney home prices, albeit with prices jumping ahead somewhat during the most recent boom. At the low point in 2003, a Sydney household with a typical income could only borrow half what a typical house cost if their repayments were to be 30% of their gross incomes. At the best points for affordability, households could comfortably afford to borrow between 60-68% of the typical Sydney house price. Currently that figure is just over 50%.

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An epic clash unfolds before our eyes.

Don’t Blame “Baby Boomers” For Not Retiring – They Can’t Afford To (Roberts)

In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy where more than 2/3rds of the growth rate is driven by consumption, an even bigger imbalance of the “have” and “have not’s” presents a major headwind. I have often written about the disconnect between Wall Street and Main Street. As shown in the chart below, while asset prices were inflated by continued interventions of monetary policy from the Federal Reserve, it only benefited the small portion of the population with assets invested in the market.

Cheap debt, excess liquidity and a buyback spree, led to soaring Wall Street and corporate profits, surging executive compensation and rising incomes for those in the top 10%. Unfortunately, the other 90% known as “Main Street” did not receive many benefits. This divide is clearly seen in various data and survey statistics such as the recent survey from National Institute On Retirement Security which showed the typical working-age household has only $2500 in retirement account assets. Importantly, “baby boomers” who are nearing retirement had an average of just $14,500 saved for their “golden years.”

[..] The gap between the young and elderly population has shrunk dramatically in recent years as the demographic trends have shifted. Old people are living longer and young people are delaying marriage and children. This means fewer people paying into a social welfare system, while more or taking out. Of course, the burden on the social safety net remains the 800-lb gorilla in the room no one wants to talk about. But with the insolvency of the welfare system looming in less than a decade, I am sure it will become a priority soon enough.

Of course, as we will discuss in a moment, the problem is that while the “baby boom” generation may be heading towards retirement years, there is little indication a large majority of them will be actually retiring. With a large majority of individuals being dependent on the welfare system in retirement, the burden will fall on those next in line. Welcome to the “sandwich generation” when more individuals will be “sandwiched” between supporting both parents and children in the same household. It should be no surprise multi-generational households in the U.S. are at their highest levels since the “Great Depression.”

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Obama’s fist veto override?

Saudi Lobbyists Plot New Push Against 9/11 Bill As Veto Override Looms (Pol.)

Saudi Arabia is mounting a last-ditch campaign to scuttle legislation allowing families of victims of the Sept. 11, 2001 attacks to sue the kingdom — and they’re enlisting major American companies to make an economic case against the bill. General Electric, Dow Chemical, Boeing and Chevron are among the corporate titans that have weighed in against the Justice Against Sponsors of Terrorism Act, or JASTA, which passed both chambers unanimously and was vetoed on Friday, according to people familiar with the effort. The companies are acting quietly to avoid the perception of opposing victims of terrorism, but they’re responding to Saudi arguments that their own corporate assets in the kingdom could be at risk if the law takes effect.

Meanwhile, Trent Lott, the former Senate majority leader who now co-leads Squire Patton Boggs’ lobbying group, e-mailed Senate legislative directors on Monday warning that the bill could lead other countries to withdraw their assets from the United States and retaliate with laws allowing claims against American government actions. “Many foreign entities have long-standing, intimate relations with U.S. financial institutions that they would undoubtedly unwind, to the further detriment of the U.S. economy,” reads one of the attachments, obtained by POLITICO. “American corporations with interests abroad may be at risk of retaliation, a possibility recently expressed by GE and Dow.” Still, the Saudis and their agents face a significant uphill battle, with lawmakers loath to take a vote against victims of the 9/11 attacks right before an election.

There was little public opposition to the bill as it made its way through the Capitol, and even now, efforts to tweak the bill haven’t caught much traction. Senate Majority Leader Mitch McConnell (R-Ky.) announced Monday that the Senate will vote Wednesday on a motion to override President Barack Obama’s veto, and if override advocates are successful there, the House will take the same vote Thursday or Friday, a House Republican leadership aide said. But even if Obama receives the first veto override of his presidency, the story won’t end there: the Saudis will seek a new bill to scale back the law in the lame-duck session or in the next session, after lawmakers are relieved from the heat of the campaign, people familiar with the plans said. “It’s Washington at its finest,” one of the people said.

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How to kill off your own species.

Over 90% Of World Breathing Bad Air-WHO (AFP)

Nine out of 10 people globally are breathing poor quality air, the World Health Organization said Tuesday, calling for dramatic action against pollution that is blamed for more than six million deaths a year. New data in a report from the UN’s global health body “is enough to make all of us extremely concerned,” Maria Neira, the head of the WHO’s department of public health and environment, told reporters. The problem is most acute in cities, but air in rural areas is worse than many think, WHO experts said. Poorer countries have much dirtier air than the developed world, according to the report, but pollution “affects practically all countries in the world and all parts of society”, Neira said in a statement. “It is a public health emergency,” she said.

“Fast action to tackle air pollution can’t come soon enough,” she added, urging governments to cut the number of vehicles on the road, improve waste management and promote clean cooking fuel. Tuesday’s report was based on data collected from more than 3,000 sites across the globe. It found that “92% of the world’s population lives in places where air quality levels exceed WHO limits”. The data focuses on dangerous particulate matter with a diameter of less than 2.5 micrometres, or PM2.5. PM2.5 includes toxins like sulfate and black carbon, which can penetrate deep into the lungs or cardiovascular system. Air with more than 10 microgrammes per cubic metre of PM2.5 on an annual average basis is considered substandard.

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Funny little story against a very serious backdrop.

Canadians Are Embracing Syrian Refugees. Why Can’t We? (G.)

Nobody warned the Hendawis about Canadian girls. Wadah and Raghdaa Hendawi survived the civil war in Syria, fleeing the devastation of Aleppo with their children for the relative safety of Lebanon. For three years their teenage sons missed out on an education while they worked to support the family. Then they hit the immigration jackpot – Canada. They were greeted at Halifax airport not by immigration officials or social workers, but by their sponsors – a bunch of well-meaning locals whose fundraising efforts would support the family for the next 12 months. And so the Hendawis arrived in the small fishing town of Shelburne, Nova Scotia, swaddled in new ski jackets, blinded by the winter sunshine bouncing off fresh February snow.

They were the only Syrians in the village, and had no idea what was in store for them. The Rev. Joanne McFadden knew the names and ages of the family she was helping to sponsor, but apart from that she too didn’t know what to expect. She certainly wasn’t prepared for the phone call that came three days after Saed (18), Mohamad (16) and Ahmed (15) started attending Shelburne Regional High School. I get a phone call from the principal. ‘Uhhh, Joanne, we have a problem.’ ‘What’s the problem, Mary?’ ‘Well, all the girls in the school are chasing the boys.’ This hadn’t even crossed our mind, right, that this was even a possibility. It was like, pardon me, we’ve got some things to figure out.

Read more …

Sep 262016
 
 September 26, 2016  Posted by at 9:33 pm Finance Tagged with: , , , , , , , ,  10 Responses »
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Dorothea Lange Family of rural rehabilitation client, Tulare County, CA 1938

 

It’s over! The entire model our societies have been based on for at least as long as we ourselves have lived, is over! That’s why there’s Trump.

There is no growth. There hasn’t been any real growth for years. All there is left are empty hollow sunshiny S&P stock market numbers propped up with ultra cheap debt and buybacks, and employment figures that hide untold millions hiding from the labor force. And most of all there’s debt, public as well as private, that has served to keep an illusion of growth alive and now increasingly no longer can.

These false growth numbers have one purpose only: for the public to keep the incumbent powers that be in their plush seats. But they could always ever only pull the curtain of Oz over people’s eyes for so long, and it’s no longer so long.

That’s what the ascent of Trump means, and Brexit, Le Pen, and all the others. It’s over. What has driven us for all our lives has lost both its direction and its energy.

We are smack in the middle of the most important global development in decades, in some respects arguably even in centuries, a veritable revolution, which will continue to be the most important factor to shape the world for years to come, and I don’t see anybody talking about it. That has me puzzled.

The development in question is the end of global economic growth, which will lead inexorably to the end of centralization (including globalization). It will also mean the end of the existence of most, and especially the most powerful, international institutions.

In the same way it will be the end of -almost- all traditional political parties, which have ruled their countries for decades and are already today at or near record low support levels (if you’re not clear on what’s going on, look there, look at Europe!)

This is not a matter of what anyone, or any group of people, might want or prefer, it’s a matter of ‘forces’ that are beyond our control, that are bigger and more far-reaching than our mere opinions, even though they may be man-made.

Tons of smart and less smart folks are breaking their heads over where Trump and Brexit and Le Pen and all these ‘new’ and scary things and people and parties originate, and they come up with little but shaky theories about how it’s all about older people, and poorer and racist and bigoted people, stupid people, people who never voted, you name it.

But nobody seems to really know or understand. Which is odd, because it’s not that hard. That is, this all happens because growth is over. And if growth is over, so are expansion and centralization in all the myriad of shapes and forms they come in.

Global is gone as a main driving force, pan-European is gone, and whether the United States will stay united is far from a done deal. We are moving towards a mass movement of dozens of separate countries and states and societies looking inward. All of which are in some form of -impending- trouble or another.

What makes the entire situation so hard to grasp for everyone is that nobody wants to acknowledge any of this. Even though tales of often bitter poverty emanate from all the exact same places that Trump and Brexit and Le Pen come from too.

That the politico-econo-media machine churns out positive growth messages 24/7 goes some way towards explaining the lack of acknowledgement and self-reflection, but only some way. The rest is due to who we ourselves are. We think we deserve eternal growth.

And of course it’s confusing that the protests against the ‘old regimes’ and the growth and centralization -first- manifest in the rise of faces and voices who do not reject all of the above offhand. That is to say, the likes of Marine Le Pen, Donald Trump and Nigel Farage may be against more centralization, but none of them has a clue about growth being over. They don’t get that part anymore than Hillary or Hollande or Merkel do.

So why these people? Look closer and you see that in the US, UK and France, there is nobody left who used to speak for the ‘poor and poorer’. While at the same time, the numbers of poor and poorer increase at a rapid clip. They just have nowhere left to turn to. There is literally no left left.

Dems in the US, Labour in the UK, and Hollande’s ‘Socialists’ in France have all become part of the two-headed monster that is the political center, and that is (held) responsible for the deterioration in people’s lives. Moreover, at least for now, the actual left wing may try to stand up in the form of Jeremy Corbyn or Bernie Sanders, but they are both being stangled by the two-headed monster’s fake left in their countries and their own parties.

Donald Trump, and I say this mere hours before the first debate, may still lose the election, but it doesn’t truly matter. He’s just the figure head -dare we say bobble head?- for a development, even a revolution, that he doesn’t control any more than you and I do. He’s got a role to play but he didn’t write it.

If he wins, his program too, like all the others, will be targeted towards more growth, and there’s no such thing available. And while in a no-growth scenario it’ll be a good thing for America to bring jobs back home, as is trump’s message, they won’t spell anything that even comes close to growth.

‘Leaders’ such as Trump and Le Pen can only be seen as intermediate figures necessary for nations, and indeed the world, to adapt to an entirely different paradigm. One that is at best based on consolidation, on trying not to lose too much, instead of trying to conquer the world.

But also one that is likely to lead to warfare and mayhem, because nobody’s been willing to address even the possibility of no more growth, and therefore everyone will be looking to squeeze growth out of any available place, starting with their neighbors, and the globe’s weakest. It’s the Roman empire all over again, where the core strangled the periphery ever harder until the Barbarians and the Visigoths decided it was enough and then some.

That is the meaning of Donald Trump, and of Brexit. You’re not going to understand these things without taking a few steps back, and without looking at history, and especially without acknowledging the possibility that, in economics, perpetual growth may indeed be what physics has always said it was: an impossible pipedream.

Trump has a role to play in this whether he wins the election or not. He’s the big red flashing American warning sign that the increase in poverty that has so far been felt only among those who it has hit, will shake the familiar political landscape on its foundations, and that this landscape will never return.

Look at European political parties established for decades and you see the exact same thing. Only there you often have other ‘escape valves’, because new parties are easier to form and get onto national forums. But it’s still the same thing.

Centralization, globalization, UN, NATO, IMF, all these ‘principles’ and organizations will see their influence and support dwindle, and rapidly. It’s really over. Debt did it. Or rather, our doomed mission to hide our downfall behind a veil of ever more debt did.

And Donald Trump has a role to play in that. If Hillary wins, it’ll only be more, and ever more, and spastically more, attempts to convince everyone that more globalization is the way to go, and that going to war with Putin and sending young Americans into battle in fields lost before they enter is the way of the future.

Both will be failures. All we really get to do is try to decide who may be the lesser failure.

But anyway, that’s where Trump comes from, and he doesn’t understand the half of it. Trump is there because everything else failed. And he will fail too, win or lose.

 

 

Sep 262016
 
 September 26, 2016  Posted by at 8:50 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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NPC Fire at Thomas Somerville plant, Washington DC 1926


Asian Markets Drop As Pessimism Increases Ahead Of OPEC Meeting (MW)
Deutsche Bank Slumps to Fresh Record Low on Capital Concerns (BBG)
China’s Smaller Banks Are Funding Each Other’s Lending (BBG)
China Launches $52.5 Billion Restructuring Fund For State-Owned Firms (R.)
A Weaker Currency Is No Longer the Economic Elixir It Once Was (BBG)
US Home Prices Rose 76% Since 1999 As Real Income Grew Less Than 2% (BBG)
Justin Trudeau’s Canadian Honeymoon Is About to End (BBG)
The Know-Nothing Economists Who Created This Mess Blast Trump’s Plan (MW)
Amazon “Tweaks” Hillary Book Stats: ‘5-Star’ Reviews Double Overnight (ZH)
Cracks Showing In Germany’s Fragile Truce With The ECB (R.)
German Minister: Britain Won’t Stop EU Army (Pol.)
50% Of Guns In America Owned By Just 3% Of Population (ZH)
African Elephants ‘Suffer Worst Decline In 25 Years’ (AFP)

 

 

And Europe’s falling faster.

Asian Markets Drop As Pessimism Increases Ahead Of OPEC Meeting (MW)

Asian shares were broadly lower Monday, as relief over a delay by the U.S. Federal Reserve in raising interest rates wore off. Japan’s Nikkei was down 0.8%, while Hong Kong’s Hang Seng Index retreated 0.7%. South Korea’s Kospi slipped 0.4%. “Asia Pacific investors are bracing for a sell day after European and U.S. traders took some hard won risk off the table,” wrote Michael McCarthy, chief market strategist at CMC Markets, in a note. On Friday, the S&P 500 and Nasdaq both fell 0.6% and the Dow Jones Industrial Average shed 0.7% as energy stocks slid with oil prices Friday. Investors were also pessimistic on Monday over any breakthroughs in oil-production cuts when OPEC gathers for an informal meeting later this week.

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Merkel’s comments weigh in.

Deutsche Bank Slumps to Fresh Record Low on Capital Concerns (BBG)

Deutsche Bank shares dropped to a record low amid concerns that the lender’s capital buffers will be undermined by mounting legal charges including a settlement tied to the sale of U.S. securities The shares dropped 4.2% to €10.93 at 9:15 a.m. in Frankfurt, an all-time low. The 38-member Bloomberg Europe Banks and Financial Services Index slipped 1.5%, with Deutsche Bank the worst performer. A potential $14 billion bill to settle a U.S. probe into residential mortgage-backed securities is more than twice the €5.5 billion ($6.2 billion) Deutsche Bank has set aside for litigation. The lender also faces inquiries into legal issues including currency manipulation, precious metals trading and billions of dollars in transfers out of Russia, complicating CEO John Cryan’s efforts to bolster profitability and capital ratios.

Germany’s biggest bank would be “significantly under-capitalized” even assuming enough provisions to cover an eventual settlement with the U.S. Justice Department, Andrew Lim at Societe Generale said in a note earlier this month. A settlement range of $3 billion to $3.5 billion would leave the German lender room to settle other legal issues, while any additional $1 billion in litigation charges would erode 24 basis points in capital, JPMorgan analysts wrote. Chancellor Angela Merkel has ruled out any state assistance for Deutsche Bank in the year heading into the national election in September 2017.

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Big warning sign. Circle jerking tail eating snakes.

China’s Smaller Banks Are Funding Each Other’s Lending (BBG)

[..] China’s banking regulator told city banks last week to learn the lesson of the global financial crisis and get back to traditional businesses. CLSA estimates total debt may reach 321% of GDP in 2020 from 261% in the first half. “Contagion risks are definitely rising,” said Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings. “The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy.” Shanghai Pudong Development Bank said in an e-mailed response on Sept. 24 it has been using appropriate financing and its regular deposits and interbank borrowing have been developing properly and in synchronization.

Total liabilities will be kept under control in the long run and all liquidity gauges meet regulatory requirements, it said. Rising short-term borrowing doesn’t mean its risks have climbed as well, the bank said. “City commercial banks should change as soon as possible the situation of allocating more funds into investing than lending, and developing their off-balance-sheet businesses too fast,” Shang Fulin, chairman of the China Banking Regulatory Commission, said. The PBOC resumed longer-term reverse repos to boost borrowing costs in August and deputy governor Yi Gang said in a television interview earlier this month that the nation’s short-term goal is to curb leverage. It gauged demand for such auctions today. The benchmark 10-year government bond yield climbed slightly, to 2.73% from a decade low of 2.64% on Aug. 15.

[..] The higher the reliance on wholesale funds and investment in illiquid assets, the greater the risk of a liquidity crunch, said Christine Kuo at Moody’s. “When banks face fund withdrawals by other financial institutions, this will in turn prompt them to call back their own funds,” she said. Banks are also buying each others’ wealth-management products and accounting for the transactions as investment receivables. A record 26.3 trillion yuan of WMPs were outstanding as of June 30, doubling over two years, official data showed. Investment receivables at 25 listed banks grew 13.4% in the first half to 11 trillion yuan.

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Doesn’t sound like real restructuring.

China Launches $52.5 Billion Restructuring Fund For State-Owned Firms (R.)

A private equity fund worth 350 billion yuan ($52.5 billion) has been launched in China to help with the restructuring of state firms, a newspaper run by Xinhua news agency reported on Monday. The China State-owned Enterprises Restructuring Fund will be managed by the State-owned Assets Supervision and Administration Commission (SASAC), according to the Economic Information Daily. The report said 10 state-owned enterprises have established the fund to help with restructuring of state firms, including M&A deals, as part of government efforts to advance supply side reform. The 10 firms have provided initial registered capital of 131 billion yuan, the newspaper said.

No detail was provided on the source of the rest of the equity fund. The 10 firms include China Mobile, China Railway Rolling Stock, China Petroleum & Chemical and China Chengtong, a restructuring platform supervised by SASAC that will lead the fund. China is embarking on a revamp of its massive but debt-ridden state sector, which has struggled under a system that requires firms to maximize economic gains while fulfilling government policy objectives. The government has vowed to create innovative and globally competitive enterprises through mergers, asset swaps and management reforms.

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Caveat: a weak currency doesn’t automatically spur more exports. But they should also ask where exports would be if the currency had remained strong. Maybe they would have plummeted. Maybe global trade is falling fast.

A Weaker Currency Is No Longer the Economic Elixir It Once Was (BBG)

A weaker currency, once the cure-all for ailing economies around the world, isn’t the panacea it once was. Just look at Japan, where the yen plunged 28% in the two years through 2014, yet net exports to America still fell by 10% in the span. Or at the U.K., where the pound’s 19% tumble in the two years through 2009 couldn’t stave off a 26% decline in shipments to the U.S. In fact, since the turn of the century, the ability of exchange-rate movements to affect trade and growth in major economies has fallen by more than half, according to Goldman Sachs. The findings suggest that weaker currencies may not provide much assistance to officials in countries like Japan and the U.K. that are relying on unprecedented easy-money policies to help boost tenuous growth and inflation.

On the flip side, the data also indicate that concerns U.S. growth will be derailed as rising interest rates drive investors into the dollar are also overblown. A shift in the structure of advanced-economy trade to less price-elastic goods and services, combined with the prolonged effects of the financial crisis, have stunted the sensitivity of trade volumes relative to global exchange rates, according to Goldman Sachs analysts led by Jari Stehn. “If you’re a central banker, yes you’re paying attention to currency levels, but the more-developed market economies aren’t reacting to currency debasing policies like they used to,” said Philippe Bonnefoy, the founder of hedge fund Eleuthera. “The impact has been diluted.”

Global central banks have cut policy rates 667 times since 2008, according to Bank of America Corp. During that period, the dollar’s 10 main peers have fallen 14%, yet Group-of-Eight economies have grown an average of just 1%. Since the late 1990s, a 10% inflation-adjusted depreciation in currencies of 23 advanced economies boosted net exports by just 0.6% of GDP, according to Goldman Sachs. That compares with 1.3% of GDP in the two decades prior. U.S. trade with all nations slipped to $3.7 trillion in 2015, from $3.9 trillion in 2014.

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“Since 1999 year-end through 2015 home prices have risen 76% while household mean real income has grown less than 2%..”

US Home Prices Rose 76% Since 1999 As Real Income Grew Less Than 2% (BBG)

U.S. home prices appear to be getting out of hand again as the gap between home price growth and household real income growth is close to where it was just before the housing collapse. It’s also notable, and worrying, that the housing market is back in a “flipping frenzy” with non-bank actors climbing aboard to fund the speculation. Since 1999 year-end through 2015 home prices have risen 76% while household mean real income has grown less than 2%; the millennium-to-date gap between the two growth rates peaked at 84% during 2005-2006 and has risen back to 74% as of 2015 year-end. Gap at year-end 2007 was 75%. This millennium through 2015 has seen average new and existing home sale prices rise 84% and 55%, respectively, despite the lack of income growth.

Existing and new home sales average prices peaked at $280.2k in June 2015 and $384k in Oct. 2014, respectively; both peaks exceeded levels seen during housing boom. Over the same period outstanding home mortgage debt has risen 14%, though it’s notable that with the end of easy mortgage credit it has fallen 11% from its June 2008 peak. Concurrent with this 11% fall, the homeownership rate (63.8% at 2015 year-end) has slid back to levels last seen in the mid-1960s. Monthly U.S. single-family home price y/y growth hit a post-crisis peak of 10.85% in Oct. 2013 and has since leveled off at ~5% each month since July 2015; this is still easily outpacing growth in real income.

The disconnect between home price growth and the lack of real income growth has led homebuilders’ to turn to the higher-end of the market and for Ginnie Mae to take the lead in mortgage lending. GNMA offers taxpayer-guaranteed loans to first-time homebuyers who have lower credit scores and smaller down payments than those who obtain loans through Fannie Mae or Freddie Mac. Whereas from 2005-2007 GNMA pct share of net MBS issuance was ~2% each year, during 2014, 2015 and 2016 YTD it is ~67%, according to BofAML data. Another severe downturn in home prices would be unlikely to play out in the agency MBS market in like manner to 2007-2008 as the Fed now holds ~33% of the outstanding universe and the U.S. taxpayer now guarantees almost all of the market with Fannie and Freddie remaining under government conservatorship.

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A big bad hornet’s nest. And that’s before the economic poisoned chalice is served.

Justin Trudeau’s Canadian Honeymoon Is About to End (BBG)

Along Canada’s evergreen-draped west coast, the fate of a multi-billion-dollar energy project and a nation’s reconciliation with its dark, colonial past hang in the balance. Beating rawhide drums and singing hymns, occupiers of Lelu Island—where Malaysia’s state oil company plans a $28 billion liquefied natural gas project—assert indigenous claims to the area where trees bear the markings of their forefathers and waters run rich with crimson salmon they fear the project will obliterate. “The blood of my ancestors is on my hands if I don’t defend this land,” says Donald Wesley, 59, a hereditary chief of the Gitwilgyoots tribe which has inhabited the area for more than 6,000 years.

That claim is about to test Justin Trudeau, the country’s telegenic 44-year-old prime minister, who swept to power a year ago vowing to be many things to many people—to tackle climate change, revive the economy, and reset Canada’s fraught relationship with its indigenous communities. Those pledges are set for collision in British Columbia—home to more First Nations communities than any other province and the crucible where a resource economy seeks to reinvent itself. Trudeau has promised to decide on the LNG project on Lelu Island by Oct. 2. He has big spending plans to spur growth in a commodities downturn, and B.C., the birthplace of Greenpeace, is where most energy projects able to support that growth are located.

Indigenous groups, essential to public support, are divided, with some seeking to preserve their habitat and traditions, and others arguing that the projects offer a path out of poverty, addiction and suicide. Facing five major energy initiatives in B.C., Trudeau will choose which constituency to abandon. He’s allowed a hydroelectric dam to proceed; pending are decisions on Enbridge’s Northern Gateway crude pipeline, Petroliam Nasional’s LNG project on Lelu Island, a pipeline expansion by Kinder Morgan, as well as a ban on crude oil tankers. He’s said to want at least one pipeline, and favor Kinder Morgan. Trudeau says regularly it’s a prime minister’s job to get the country’s resources to market, and a pipeline approval would demonstrate Canada can get major projects completed as warnings mount that the complex web of regulatory rules is spurring a flight of capital.

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“It was refreshing to hear that Trump economic adviser Stephen Moore responded to a question from Pethokoukis about all the red ink in Trump’s plan with, “Whether it’s going to pay for itself, I don’t really care.”

The Know-Nothing Economists Who Created This Mess Blast Trump’s Plan (MW)

Establishment economists ranging from austere neoliberals to spendthrift Keynesians are united in branding Donald Trump’s proposed economic policies as “disastrous.” He must be on to something. These economists are the distinguished experts, after all, who have championed the globalization that gutted American manufacturing, promoted the offshoring and outsourcing of American jobs, encouraged American companies to keep trillions (trillions!) of dollars of profit abroad, and enabled the tax inversions allowing American companies to move to the country most willing to beggar its neighbor. These are the celebrity academics who have championed the deficit-reducing, budget-balancing, tax-cutting policies that have crippled our infrastructure, degraded our schools, and cut public services from police and fire protection to garbage collection.

And now this gaggle of Washington insiders is warning us that Trump’s policies will throw the country into recession, ignite a trade war, launch the national debt into the stratosphere, and create more unemployment rather than jobs. Why, really, should anyone listen to them? There is Mark Zandi, whose title as chief economist of Moody Analytics makes this sometime adviser to Barack Obama and backer of Democratic nominee Hillary Clinton seem nonpartisan, even though he clearly is not. Not surprisingly, Zandi had his team at Moody’s produce some modeling this summer that concluded that Trump’s economic proposals would result in a less global economy, lead to larger government deficits and more debt, will largely benefit very high-income households, and will result in a weaker U.S. economy.

The implication is that these are all bad things. Those for whom Trump’s economic message resonates might consider a less global U.S. economy a good thing. To brand deficits and debts as terrible you would first have to prove that they do more harm than good.

[..] those establishment economists who through several administrations have served so ably on the president’s Council of Economic Advisers, in the Treasury Department and the Federal Reserve — the people, in short, who have delivered us into the economic morass they blithely call secular stagnation — are training their heavy artillery on poor, dumb Trump. Progressive economist Joseph Stiglitz, who chaired the CEA under President Bill Clinton, gives Trump an “F” in economics because the nominee apparently doesn’t understand the principle of comparative advantage in global trade — as if we lived in a world where currency manipulation, dumping subsidies, and substandard environmental and labor conditions don’t keep this pristine economic principle from working its magic.

And conservative analyst James Pethokoukis, a fellow at the American Enterprise Institute, labeled Trump’s economic plan “a complete and utter joke” as he took the Republican nominee to task for potentially adding $2.6 trillion to $3.9 trillion to the national debt over the next 10 years — even though the $9 trillion in debt added during the 7.5 years of the Obama administration has caused no detectable harm. It was refreshing to hear that Trump economic adviser Stephen Moore responded to a question from Pethokoukis about all the red ink in Trump’s plan with, “Whether it’s going to pay for itself, I don’t really care.” High time someone influencing policy fully appreciated the dynamic flexibility of a fiat currency in government finance. We don’t really need to care whether the plan “pays for itself” in the short term, if it does indeed produce the accelerated growth promised.

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For entertainment purposes only.

Amazon “Tweaks” Hillary Book Stats: ‘5-Star’ Reviews Double Overnight (ZH)

Two short weeks ago, we exposed the gaping difference between Amazon reader reviews of Hillary Clinton’s “Stronger Together” book (14% 5-Stars) and Donald Trump’s “Great Again” book (74% 5-Stars)… As The New York Times reported at the time, the book was a disaster. Both Mrs. Clinton and her running mate, Senator Tim Kaine, have promoted the book on the campaign trail, but the sales figure, which tallies about 80% of booksellers nationwide and does not include e-books, firmly makes the book what the publishing industry would consider a flop. [..] So, as with everything else in this ‘new normal rigged’ world, something had to be done and WaPo-owner Jeff Bezos’ Amazon reviews appear to have been ‘tweaked’ – more than doubling Hillary’s top reviews.

But, as WND.com explains, Amazon’s steps to ‘fix’ Hillary’s book rviews has resulted in 5-star ratings with scathingly negative comments… If you can’t even win when the rules are changed in your favor, things must be REALLY bad. That’s how it looks for Hillary Clinton’s new 2016 campaign book, “Stronger Together,” co-authored with running mate Tim Kaine. WND reported just days ago when the book was being savaged on Amazon.com with negative reviews, with 81% one-star ratings and an average of only 1.7. Clinton supporters lashed out at “trolls” they said were criticizing the book only because they oppose the Democrat’s presidential candidacy. WND previously reported there were more than 1,200 reviews, and the number grew to than 2,000.

But Thursday afternoon, there were only 255, with many of the most critical reviews removed by Amazon, whose CEO, Jeff Bezos, owns the Washington Post, which created an army of 20 reporters and researchers to investigate the life of Donald Trump. Victory for the Clinton book, however, remains out of grasp, with the negative, one-star responses, outnumbering positive, five-star responses nearly 2-1. The one-star ratings Thursday were 62%, to 35% for five-star ratings.

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“..the political landscape in Germany has become decidedly more toxic for the ECB over the past months.”

Cracks Showing In Germany’s Fragile Truce With The ECB (R.)

Michael Stuebgen, a conservative member of the German parliament, was speaking with the head of a local savings bank recently about the ECB’s QE program. “He told me the bond market was being emptied out,” Stuebgen recalled. “He likened it to going into a supermarket where everything has been bought up. You might find a shriveled old carrot or potato. Pretty soon you’re starving.” Stuebgen, a spokesman on European affairs for Chancellor Angela Merkel’s party in the Bundestag, credits the ECB and its President Mario Draghi with saving the euro zone from collapse four years ago. But conversations like the one with the banker have convinced him that its policies, in particular the massive bond-buying program known as QE, have gone too far. He is not alone.

[..] Instead of changing course, as Stuebgen and his colleagues want, the ECB is widely expected to announce an extension of its QE program by the end of the year. The program is due to expire in March. As early as next month, it could also announce steps to broaden the scope of what it can buy in response to a dwindling pool of available assets. The most controversial change would be abandoning the so-called “capital key”, which limits the proportion of government bonds the ECB can buy from any given member state, based on its size and economic weight. “The big challenge for Mario Draghi will be to prepare the Bundestag and German public for a further easing of monetary policy,” said Marcel Fratzscher, head of the DIW economic institute and a former senior official at the ECB.

That message is unlikely to go down well in Berlin. In addition to concerns about the distorting effects of QE on financial markets and the impact of low interest rates on German savers and insurers, the political landscape in Germany has become decidedly more toxic for the ECB over the past months.

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Better get rid of the EU before they acutally do this.

German Minister: Britain Won’t Stop EU Army (Pol.)

Ursula von der Leyen, Germany’s defense minister, does not believe the U.K. will stand in the way of deepened defense cooperation between EU member countries, she told Reuters in an interview Sunday night. Von der Leyen said she was confident Britain would “make good its promise that it will not hinder important EU reforms.” Michael Fallon, Britain’s defense secretary, said earlier this month Britain will veto measures to build an EU army for as long as it remains a member of the bloc. Von der Leyen said she told Fallon the plans were not directed against Britain, but “designed for a strong Europe” instead.

Martin Schulz, the president of the European Parliament, said during a speech in London last week that a British veto was “counterproductive and anyway not possible in this case.” EU defense ministers will discuss common military proposals on Monday and Tuesday. Federica Mogherini, the European Commission’s foreign policy chief, said earlier this month that member countries could combine their defense capabilities via a so-far unused provision in the Lisbon Treaty.

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Feel safe?

50% Of Guns In America Owned By Just 3% Of Population (ZH)

A recent Harvard study of the demographics of gun ownership in the United States yielded a fairly shocking discovery, namely the emergence of the Obama gun “Super Owner.” The study, entitled “The Stock and Flow of US Firearms: Results from the 2015 National Firearms Survey”, was conducted by the Harvard School of Public Health and found that just 14% of all gun owners, or 7.6mm adults and 3% of the total U.S. population, possessed 50% of all guns owned by civilians in the country. Moreover, with a total stock of 270mm civilian-owned guns in the U.S., that implies that these “super owners” possess an average of nearly 18 guns per person.

“Gun owning respondents owned an average of 4.85 firearms (range: 1-140); the median gun owner reported owning approximately two guns. As can be seen in Figure 3, approximately half (48%) of gun owners report owning 1 or 2 guns, accounting for 14% of the total US gun stock, while those who own 10 or more guns (8% of all gun owners), own 39% of the gun stock. Put another way, one half of the gun stock (~130 million guns) is owned by approximately 86% of gun owners, while the other half is owned by 14% of gun owners (14% of gun owners equals 7.6 million adults, or 3% of the adult US population).”

Another startling discovery in the data, though “oddly” not highlighted in the report, is that the surge in gun ownership per capita seemed to coincide with the start of the Obama presidency and growing rhetoric over new gun regulations. Per the chart below, over the past 20 years, gun ownership per U.S. adult hovered around 1 from 1993 through 2007 but then surged starting in 2008 as an Obama presidency became increasingly likely. This trend is also reflected in annual guns sales which floated between 4-6mm units per year before surging in 2008.

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Tears. I still have tears left.

African Elephants ‘Suffer Worst Decline In 25 Years’ (AFP)

Africa’s elephant population has suffered its worst drop in 25 years, the International Union for Conservation of Nature (IUCN) said Sunday, blaming the plummeting numbers on poaching. Based on 275 estimates from across the continent, a report by the conservation group put Africa’s total elephant population at around 415,000, a decline of around 111,000 over the past decade. It is the first time in 25 years that the group’s African Elephant Status Report has reported a continental decline in numbers, with the IUCN attributing the losses in large part to a sharp rise in poaching. “The surge in poaching for ivory that began approximately a decade ago – the worst that Africa has experienced since the 1970s and 1980s – has been the main driver of the decline,” said IUCN in a statement.

Habitat loss is also increasingly threatening the species, the group said. IUCN chief Inger Andersen said the numbers showed “the truly alarming plight of the majestic elephant”. “It is shocking but not surprising that poaching has taken such a dramatic toll on this iconic species,” she said. The IUCN report was released at the world’s biggest conference on the international wildlife trade, taking place in Johannesburg. Thousands of conservationists and government officials are seeking to thrash out international trade regulations aimed at protecting different species. A booming illegal wildlife trade has put huge pressure on an existing treaty signed by more than 180 countries – the Convention on International Trade in Endangered Species (CITES).

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Sep 252016
 
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Harris&Ewing Boy Scout farm 1917


The Market Is In Line With History. The History Of Crashes (Stockman)
How to Suffocate Your Economy: Drown it in Massive Private Debt (Vague)
Vancouver Property Sales To Foreigners Crash 96% (ZH)
Merkel Rules out State Assistance for Deutsche Bank (BBG)
EU Must Turn Off the Dividend Spigot at Under-Capitalized Banks (PS)
China Continues to Battle Massive Capital Flight Problem (Brink)
Naked Shorts Can’t Stay Naked Forever (Dayen)
Whistleblower Describes Years Of Fraudulent, Criminal Culture At Wells Fargo (BB)
Former Employees File Class Action Against Wells Fargo (R.)
Clinton Server Tech Told FBI Of Colleagues’ Worries About System (R.)
America’s War On Its Own Children (G.)
Death Toll In Migrant Shipwreck Off Egypt Rises To 300 (G.)

 

 

The level of high grade corporate debt is more than 2X its pre-crisis peak. As Capex is down 10%, and net fixed business investment is 20% below 2000 levels. Corporations are burning and bleeding cash left right and center. Question: what has the debt been used for?

The Market Is In Line With History. The History Of Crashes (Stockman)

By punting again [this week], our dithering money printers at the Fed are continuing to fuel a monumental orgy of corporate bond issuance. It only enables companies to speculate in their own stocks with borrowed money, while heaping windfall gains on the fast money traders who hound corporate boards into strip-mining their own balance sheets. The level of high grade corporate debt outstanding has gone nearly parabolic in the last few years and now stands at more than 2X its pre-crisis peak. Yet even Yellen admitted during yesterday’s mindlessly meandering presser that business capital expenditure (CapEx) has been extraordinarily weak. In fact, non-defense CapEx orders excluding aircraft peaked in mid-2104 and are now down by 10%.

Even more to the point, real net fixed business investment after depreciation is still 20% below the level it reached way back in early 2000. That is, two bubbles ago. Perhaps the question about where all this hand-over-fist corporate borrowing is going might have occurred to at least one of the geniuses who voted to stand pat. But apparently it didn’t because once again Yellen insisted that “valuations are largely in line with their historical trends.” What in the world is our clueless school marm talking about? At the closing price yesterday, the S&P 500 traded at 25X the $87 per share reported for the last twelve month (LTM) period ending in June. And that was in the face of earnings that have plunged 19% since peaking in the September 2014 LTM period.

Yellen is right about the historical trends, of course. But not at all in a good way. In fact, on the eve of the last crash when the market peaked in October 2007 at about 1550, S&P 500 earnings during the most recent LTM period had posted at $79 per share. That means the peak pre-crash multiple was substantially lower than today at 19.7X. Even when S&P earnings peaked at $54 per share in September 2000, the multiple was only a tad higher than today at 26.5X. So, yes, the market is in line with history. That is, the history of crashes! The truth is, the Fed is inherently, relentlessly and radically in the financial bubble business. But the Keynesian school marm who runs it wouldn’t know a bubble if one transported her to the moon and back.

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The role of debt has been growing for a long time.

How to Suffocate Your Economy: Drown it in Massive Private Debt (Vague)

[..] if a country’s private debt to GDP ratio is low, let’s say 50%, then the households and businesses in that country generally have low loan-to-income ratios and are well positioned to power growth through increased leverage. And if a country’s private debt to GDP ratio is high, let’s say 200%, then the households and businesses in that country are generally overleveraged, with, on average, very high debt ratios. They are much less likely to be able to boost growth through more borrowing.

Chart 2 showed that private debt to GDP in major economies has been growing rapidly since World War II. However, it has been growing in size relative to GDP for a lot longer than that. It’s part of a process often described by economists as “financialization” or “financial deepening,” an increase in the size of a country’s debt and equity markets usually explained as simply the maturation of a market. But as we have seen, when it comes to debt, it is much more than that—it is the path from low leverage to overleverage for the participants in that economy. The benefit of increasing leverage from low levels has played a central role in the miraculous gains in incomes over the 200-plus years since the Industrial Revolution.

You can see this clearly in Chart 3. I have made a concerted effort to reconstruct more than 200 years of private debt history for the six countries in this chart—China, Japan, Germany, Britain, France, and the United States—because collectively, they have accounted for roughly 50% or more of global GDP since the Industrial Revolution. So studying the data of these six countries during this period gives us a fairly solid proxy for the world during the most important era of economic history. (This chart is a work-in-progress which will be augmented and refined in preparation for an upcoming book on this same subject.)

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Auckland, Sydney, London etc. should do the same.

Vancouver Property Sales To Foreigners Crash 96% (ZH)

China’s favorite offshore money laundering hub is officially no longer accepting its money. According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value. According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks.

[..] As Bloomberg notes, the plunge in foreign participation joins other signs of a slowdown in Canada’s most expensive property market. The silver lining is that while transactions may have ground to a halt, the government did pick up some extra tax revenues: British Columbia has raised C$2.5 million in revenue from the new levy since it took effect. Budget forecasts released last week indicated that the Pacific coast province expects foreign investors to scoop up about C$4.5 billion of real estate through March 2019. That may prove optimistic, because as reported two weeks ago as Chinese buyers wave goodbye to Vancouver, they have set their sights on another Canadian city: Toronto. According to the Star, sales of $1-million-plus Toronto-area single-family homes rose 83% year over year in July and August. That’s 3,026 homes, with 55% of them inside Toronto’s borders.

[..] if they are looking in Canada, we believe Toronto will be the most logical place for people to consider. Montreal and Calgary will probably also get a look-see,” Henderson said. Or maybe not. As CBC reported earlier this week, economist Benjamin Tal of CIBC said that Ontario will have little choice but to copy Vancouver and implement a tax on foreign house buyers. In a recent note to clients, the economist said the biggest problem facing policymakers with regard to hot housing markets in Toronto and Vancouver is a limit on the supply of new homes. “The main reason behind higher prices in the [Greater Toronto Area] is a policy-driven lack of land supply,” Tal said. “And with no change on that front, policymakers have to use demand tools to deal with what is essentially a supply problem.”

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I’m going to have my doubts here.

Merkel Rules out State Assistance for Deutsche Bank (BBG)

Chancellor Angela Merkel has ruled out any state assistance for Deutsche Bank in the year heading into the national election in September 2017, Focus magazine reported, citing unidentified government officials. The German leader also declined to step into the bank’s legal imbroglio with the U.S. Justice Department, which may seek as much as $14 billion in sanctions against Deutsche Bank’s mortgage-backed securities business, the magazine said. The finances of Germany’s biggest lender, which has lost almost half of its market value this year, are raising concern among German politicians.

At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Germany’s government expects a “fair outcome” in the U.S. probe, the Finance Ministry said on Sept. 16. Deutsche Bank has said it’s unwilling to pay the maximum amount sought by U.S. authorities as investors fret about the bank’s capital. Chief Executive Officer John Cryan, 55, has struggled to boost profitability by selling riskier assets and eliminating jobs as unresolved legal probes and claims add to concerns that the lender will be forced to raise capital.

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Cut off dividends and share prices will fall through the floor.

EU Must Turn Off the Dividend Spigot at Under-Capitalized Banks (PS)

Dividend payments made by under-capitalized banks amount to a substantial wealth transfer from subordinated bondholders to shareholders, because it is bondholders who will suffer the losses in a crisis. Moreover, it is potentially a wealth transfer from taxpayers to private shareholders, because under new banking rules government bailouts are possible after bondholders have covered (bailed in) 8% of a bank’s equity and liabilities. By contrast, undercapitalized banks in the US are forced to halt all forms of capital distribution if they fail a stress test. Fortunately, following the 2016 round of stress tests, the EBA is now also considering this type of regulatory sanction. Thus, “competent authorities may also consider requesting changes to the institutions’ capital plan,” which “may take a number of forms such as potential restrictions on dividends required for a bank to maintain the agreed trajectory of its capital planning in the adverse scenario.”

We estimate that if European regulators had adopted this approach and forced banks to stop paying dividends in 2010 – the start of the sovereign debt crisis in Europe – the retained equity could have paid for more than 50% of the 2016 capital shortfalls. The figure above shows our calculated capital shortfalls, using the EBA stress test’s “adverse scenario” losses and the cumulative dividends these banks have distributed since 2010. Dividends paid out by some banks, such as BNP Paribas and Barclays, actually exceed the current capital shortfalls, while at others – such as Deutsche Bank, Commerzbank, and Société Générale – capital shortfalls far exceed dividends that would have been retained. The latter banks would still require substantial capital issuances on top of dividend restrictions to make up the difference. Nonetheless, our findings suggest a simple first step toward preventing bank capital erosion: stop banks with capital shortfalls from paying dividends (including internal dividends such as employee bonuses).

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Not everyone believes the omnipotency tale Beijing likes to spread.

China Continues to Battle Massive Capital Flight Problem (Brink)

Last summer, China’s stock market collapse and unexpected devaluation deepened its capital outflow problem and accelerated the fall of reserves, which had started in mid-2014. Since February, reserves have started to stabilize. While the situation is clearly better, China continues to struggle in terms of stabilizing its massive capital outflows. Within that context, foreign reserves seem to have become a policy target. Although capital outflows are still large, it’s not enough for reserves to start falling again. In 2015, the largest net outflows stemmed from the repayment of bank loans (close to $500 billion in “other investment” outflows), followed by unrecorded outflows of residents amounting to nearly $200 billion.

Portfolio flows (equity and bond) were also negative, but smaller. The situation has hardly improved in 2016, based on first quarter data. In fact, all types of capital recorded outflows, even net foreign direct investment (FDI), which was not the case in 2015. It’s important to note that Chinese residents have been driving capital outflows for years. The difference in 2015 is that non-residents stopped investing in China and started to move their capital out. Still, the bulk of the outflow was made by residents. These are unrecorded outflows and also include the investment of Chinese companies, as well as the loans of Chinese banks abroad (increasingly in the emerging world).

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SEC? FBI? Who can be trusted to investigate?

Naked Shorts Can’t Stay Naked Forever (Dayen)

A few years into his personal quest to understand how he had lost a million dollars on a penny stock, Chris DiIorio developed a sweeping hypothesis involving Knight Capital, the mammoth brokerage company that frequently traded in them. Knight earned $333 million in pre-tax profits in 2008, and another $232 million in 2009. But DiIorio didn’t think Knight was making that kind of money simply from executing transactions for clients. As a market maker, Knight was in the rare position of being able to legally sell a stock it didn’t have (the principle being that it will get that stock soon, so no worries). That’s called naked shorting. It’s illegal when regular people do it. DiIorio suspected that Knight, either on its own behalf or on behalf of clients, made a practice of artificially increasing the number of shares available in a stock through naked shorting, thereby depressing the price.

His suspicion grew when he noticed that Knight often traded in securities that were red-flagged on the Depository Trust Company’s “chill list.” The DTC is an obscure financial industry-owned company that manages the custody of more than $1 quadrillion in securities annually, recording the transfers with journal entries and guaranteeing the trade. The company makes it easy for people to buy and sell securities without needing to exchange paper stock But when the DTC senses trouble, it will stop clearing trades on a stock temporarily. A chilled stock can still trade — as long as the market participants handle the physical certificates themselves. But it can be a sign that something is gravely wrong. The DTC states on its website that it chills stocks “when there are questions about an issuer’s compliance with applicable law.” That doesn’t stop Knight from buying and selling them, though.

Its chief legal officer, Thomas Merritt, acknowledged at a 2011 Securities and Exchange Commission roundtable that the company actively traded chilled stocks, saying that as long as the security still trades, “we are going to be involved in that business.” And DiIorio found numerous examples of Knight trading chilled penny stocks. “I didn’t know they did that,” said Jim Angel, a Georgetown University business school professor. “I’m kind of shocked to think that Knight would be working with paper stock certificates.” He suggested that Knight might simply want to accommodate customers trying to get out of chilled stocks. “Or maybe they feel there’s enough interest in a security that they can trade profitably, even if they have to shuffle the certificates.” Because most other market makers flee chilled stocks, however, this means Knight can assume even more control over the stock price.

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Upper management should be dragged before a public committe.

Whistleblower Describes Years Of Fraudulent, Criminal Culture At Wells Fargo (BB)

Beth Jacobson was a Wells Fargo loan officer who blew the whistle on the bank’s predatory, racist loan-fraud in the runup to the 2008 financial crisis, which tanked the world’s economy and nearly wiped out Wells Fargo (they were rescued with a $36B taxpayer-funded bailout). Eight years later, Wells Fargo has fired 5,300 employees for participating in a scam that involved opening 2,000,000 fake accounts in its customers’ names, stealing their money and crashing their credit-ratings – the exec who oversaw this a $125M taxpayer-subsidized bonus, and CEO John Stumpf, who took home $200M in bonuses based on profits from the fraud, will keep the money and his job, but the whistleblowers who reported the fraud starting in 2011 were all illegally fired.

Jacobson describes how Stumpf – now CEO, then a top exec – was complicit in the fraud that helped precipitate the crash and the worst recession since the Great Depression. She pins blame for the loan-fraud on the bank’s aggressive sales targets – the same thing that caused the current fraud, suggesting that the bank hasn’t learned a fucking thing since 2008, except that it can get away with crime, every time. “One means of falsifying loan applications that I learned of involved cutting and pasting credit reports from one applicant to another. I was aware of A reps who would ‘cut and paste’ the credit report of a borrower who had already qualified for a loan into the file of an applicant who would not have qualified for a Wells Fargo subprime loan because of his or her credit history.

I was also aware of subprime loan officers who would cut and paste W-2 forms. IDs deception by the subprime loan officer would artificially increase the creditworthiness of the applicant so that Wells Fargo’s underwriters would approve the loan. I reported this conduct to management and was not aware of any action that was taken to correct the problem. “High-ranking Wells Fargo managers knew that this practice was going on, because after about a year of these standby explanations being given, underwriters in the underwriting department were told to call the customers directly rather than contact the loan officer who was working with the customer. The loan officers quickly figured out how to work around this by warning customers that underwriters might call them and then coaching the customers about what to say.

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CEO gone.

Former Employees File Class Action Against Wells Fargo (R.)

Two former Wells Fargo employees have filed a class action in California seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. The lawsuit on behalf of people who worked for Wells Fargo in California over the past 10 years, including current employees, focuses on those who followed the rules and were penalized for not meeting sales quotas. “Wells Fargo fired or demoted employees who failed to meet unrealistic quotas while at the same time providing promotions to employees who met these quotas by opening fraudulent accounts,” the lawsuit filed on Thursday in California Superior Court in Los Angeles County said.

Wells Fargo has fired some 5,300 employees for opening as many as 2 million accounts in customers’ names without their authorization. On Sept. 8, a federal regulator and Los Angeles prosecutor announced a $190 million settlement with Wells. The revelations are a severe hit to Wells Fargo’s reputation. During the financial crisis, the bank trumpeted being a conservative bank in contrast with its rivals. The lawsuit accuses Wells Fargo of wrongful termination, unlawful business practices and failure to pay wages, overtime, and penalties under California law. Former employees Alexander Polonsky and Brian Zaghi allege Wells Fargo managers pressed workers to meet quotas of 10 accounts per day, required progress reports several times daily and reprimanded workers who fell short.

Polonsky and Zaghi filed applications matching customer requests and were counseled, demoted and later terminated, the lawsuit said. While executives at the top benefited from the activity, the blame landed on thousands of $12-per-hour employees who tried to meet the quotas and were often required to work off the clock to do so, the lawsuit said.

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It’s time to scrutinize the FBI’s role in the whole ‘affair’. That the Hillary people have not been fully honest is now so obvious one wonders why Comey et al have granted many immunity and let them off the hook in general.

Clinton Server Tech Told FBI Of Colleagues’ Worries About System (R.)

A technician hired by Hillary Clinton to run the private email system she used while U.S. secretary of state told investigators he tried to pass on colleagues’ concerns that the system might not comply with records laws, FBI interview summaries show. Bryan Pagliano, the technician Clinton hired when she joined the State Department in 2009, told federal investigators he relayed the concerns to Cheryl Mills, then Clinton’s chief of staff. Mills has previously testified under oath she could not recall anyone alerting her to potential problems with Clinton’s email arrangement.

The episode had not been disclosed until the Federal Bureau of Investigation released on Friday night nearly 200 pages of additional records from its year-long investigation into the handling of classified government documents by Clinton and her staff via an unauthorized email server in the basement of her New York home. Clinton has said the decision to use a private email system was a mistake, but the controversy has dogged her campaign as the Democratic candidate for the presidency and raised public doubts about her trustworthiness, public opinion polls show. Republicans have criticized her for putting national security at risk. The FBI closed the year-long investigation in July, recommending no charges, although FBI Director James Comey said Clinton and her staff had been “extremely careless” in handling classified government secrets.

Pagliano has declined to answer questions by Republican lawmakers about his work on Clinton’s server, but spoke to federal investigators after securing a form of immunity from prosecution. He told investigators two colleagues from the technology office approached him with concerns during Clinton’s first year after learning about the email system. One said it could lead to a “federal records retention issue,” Pagliano told investigators, and urged him to raise the concern with Clinton’s “inner circle.” A colleague also warned Pagliano “he wouldn’t be surprised” if classified information was being sent through Clinton’s unsecure system, Pagliano told the FBI.

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“Every day, on average, seven children and teens are killed by guns in America.”

America’s War On Its Own Children (G.)

It was just another day in America. And as befits an unremarkable Saturday, 10 children and teens were killed by gunfire. They died in altercations at gas stations, accidents in bedrooms, standing on stairwells and walking down the street, in gangland hits and by mistaken identity. Like the weather, none of them would make the national news because, like the weather, their deaths did not disturb the accepted order of things. Every day, on average, seven children and teens are killed by guns in America. Firearms are the leading cause of death among black children under 19, and the second greatest cause of death for all children of the same age, after car accidents. I picked this day at random, and spent two years trying to find out who these children were.

I searched for their parents, pastors, baseball coaches, and scoured their Facebook and Twitter feeds. The youngest child was nine, the oldest 19. Four years ago, for a moment, there was considerable interest in the fact that large numbers of Americans were being fatally shot. On 14 December 2012, 20-year-old Adam Lanza shot his mother, then drove to Sandy Hook Elementary School and shot 20 small children and six staff dead. Mass shootings comprise a small proportion of gun violence, but they disturb America’s self-image in a way that the daily torrent of gun deaths does not. “Seeing the massacre of so many innocent children … it’s changed America,” said the Democrat senator Joe Manchin, who championed a tepid gun-control bill. “We’ve never seen this happen.”

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“At the current rate, the death toll for 2016 is expected to easily surpass the figure for 2015 of 3,771..”

Death Toll In Migrant Shipwreck Off Egypt Rises To 300 (G.)

A record number of migrants is expected to drown in the Mediterranean in 2016, after the estimated death toll in this week’s latest shipwreck rose to about 300 on Friday. Egyptian officials have rescued about 160 survivors from Wednesday’s shipwreck off the country’s north coast, leaving about 150 people still unaccounted for, according to the International Organisation for Migration (IOM). Those confirmed dead include 10 women and a baby, taking the estimated number of migrants to die in the Mediterranean so far this year to more than 3,500. At the current rate, the death toll for 2016 is expected to easily surpass the figure for 2015 of 3,771, which was the highest ever recorded. By this stage in 2015, 2,887 people had drowned.

The number of people trying to reach Europe has fallen significantly since last year’s record levels, as a result of the deal struck between the EU and Turkey and the closure of a humanitarian corridor between Greece and Germany. The flow of migrants from the three main departure points – Libya, Turkey and Egypt – stands at roughly the same level as 2014.

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Sep 242016
 
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DPC “Unloading fish at ‘T’ wharf, Boston, Mass.” 1903

 


Austerity Only Benefits Germany But Destroys Europe, Renzi Says (BBG)
€18 In ECB QE Generated Just €1 In GDP Growth (ZH)
IMF Calls For More Greek Pension Cuts, Greater Debt Relief (Kath.)
Plunging Velocity of Money Closes Fed Window (Roberts)
Russia’s Central Bank Criticizes The Easy Money Policies Of Its Peers (CNBC)
BIS, OECD Warn On Canadian Housing Bubble Debt, See No Exit (WS)
Oil Slumps 4% As No Output Deal Expected For OPEC (R.)
Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class (WSJ)
Health Warning! “Realism” Virus Afflicting Mainstream Economists (Steve Keen)
Obama Vetoes 9/11 Saudi Bill, Sets Up Showdown With Congress (R.)
EU Refuses To Revise Canada CETA Trade Deal (BBC)
NATO’s Expansion Parade Makes America Less Secure (Forbes)

 

 

Renzi should have made these statements years ago. Now they look like cynical ways to get votes.

Austerity Only Benefits Germany But Destroys Europe, Renzi Says (BBG)

Italian Prime Minister Matteo Renzi had some fighting words for German leader Angela Merkel: Your obsession with austerity is strangling Europe and your country is the only one profiting. That view, held by others in the EU, rarely gets aired publicly quite so forcefully. Especially by Renzi, who until recently had deployed priceless ancient Roman art and Ferraris in some of Merkel’s recent visits to Italy. But Brexit, which exposed cracks in the European project, has made the EU more vulnerable to jabs. In New York for the United Nations General Assembly, while Merkel hung back at home to face an angry electorate, Renzi lashed out. “Stressing austerity means destroying Europe,” Renzi told an audience of policy experts at the Council on Foreign Relations.

”Which is the only country which receives an advantage from this strategy? The one which exports the most: Germany.” The 41-year-old premier has staked his political future on a referendum on constitutional reform that polls show he could narrowly lose. Confronted with an economy in trouble, he’s stepped up criticism of the EU’s rigid budget deficit limits and of the nations seen as wielding the most power in the 28-nation bloc: Germany and France. His appeal for more flexibility has grown more strident as pressure mounts for him to pick a date for when Italians will vote on cutting back the Senate with the aim of making governments more stable and simplifying the passage of legislation. The referendum is expected to take place by the end of the year, and Renzi has said he would quit if he loses.

Read more …

“..€80 billion have been wasted almost every month!..”

€18 In ECB QE Generated Just €1 In GDP Growth (ZH)

After almost two years of the quantitative easing program in the Euro Area, economic figures have remained very weak. As GEFIRA details, inflation is still fluctuating near zero, while GDP growth in the region has started to slow down instead of accelerating. According to the ECB data, to generate €1.0 of GDP growth, €18.5 had to be printed in the QE, which means that €80 billion have thus been wasted almost every month! This year, the ECB printed nearly €600 billion within the frame of asset purchase programme (QE). At the same time, GDP has increased by… €31 billion; even if up to the end of 2015 the ECB issued €650 billion during its QE program. Needless to say that the Greek debt is “only” €360 billion and there has been no chance of a relief, so far.

The question is where this money from the QE goes and who benefits from it. Clearly it is not the real sector, the so called Main Street of French, Italian or Portuguese cities (Greece is not under the QE program). European stocks are still weak, too, while stock exchanges in the USA are hitting their records. So, is the ECB serving Europeans?

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More pension cuts is an immoral demand.

IMF Calls For More Greek Pension Cuts, Greater Debt Relief (Kath.)

The International Monetary Fund called for Greece to cut pensions and taxes and for its lenders to provide significant debt relief in order for the country to make a convincing exit from the crisis. In its annual report on the Greek economy, following so-called Article Four consultations in Athens, the Fund described the country’s pension system as “unaffordable” despite recent reforms. It argued that the pension system’s deficit remains too high at 11%, compared to a 2.5% average in the eurozone, and that too much of a burden has been placed on Greeks currently in work, while existing pensioners have largely been protected. The Fund also said that Greece’s tax credit system was too generous, exempting around half of salary earners compared to a euro area average of 8%.

The IMF proposes a reduction in taxes and social security contributions, arguing that recent increases created incentives for undeclared work. “Greece needs less austerity, not more,” said IMF mission chief Delia Velculescu as she presented the report in a teleconference with journalists. The Fund, whose role in Greece’s third bailout program has yet to be clarified, also stressed the need for European lenders to deliver on their debt relief pledge as “growth prospects remain weak and subject to high downside risks.” “Even with full implementation of this demanding policy agenda, Greece requires substantial debt relief calibrated on credible fiscal and growth targets,” the report said.

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Plunging velocity is the most important deflation indicator.

Plunging Velocity of Money Closes Fed Window (Roberts)

The problem for the Federal Reserve remains the simple fact there is NO evidence that “Quantitative Easing” actually works as intended. The artificial suppression of interest rates was supposed to spur economic activity by encouraging lending activities through the banks. Such an outcome should have been witnessed by an increase in monetary velocity. As the velocity of money accelerates, demand rises and inflationary pressures increase. However, as you can clearly see, the demand for money has been on the decline since the turn of the century.

The surge in M2V during the 90’s was largely driven by the surge in household leverage as consumers turned to debt to fill the gap between falling wage growth and rising standards of living. The issue for the Fed is the decline in the “unemployment rate,” caused solely by the shrinking labor force, is obfuscating the difference between a “real” and “statistical” full employment level. While it is expected that millions of individuals will retire in the coming years ahead; the reality is that many of those “potential” retirees will continue to work throughout their retirement years. In turn, this will have an adverse effect by keeping the labor pool inflated and further suppressing future wage growth.

[..] It is quiet evident the financial markets, and by extension, the economy, have become tied to Central Bank interventions. As shown in the chart below, the correlations between Federal Reserve interventions and the markets is quite high. Of course, this was ALWAYS the intention of these monetary interventions. As Ben Bernanke suggested in 2010 as he launched the second round of Quantitative Easing, the goal of the program was to lift asset prices to spur consumer confidence thereby lifting economic growth. The problem was the lifting of asset prices acted as a massive wealth transfer from the middle class to the top-10% providing little catalyst for a broad-based economic recovery. Unwittingly, the Fed has now become co-dependent on the markets. If they move to tighten monetary policy, the market sells off impacting consumer confidence and pushes economic growth rates lower. With economic growth already running below 2%, there is very little leeway for the Fed to make a policy error at this juncture.

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The smartest kid on the block.

Russia’s Central Bank Criticizes The Easy Money Policies Of Its Peers (CNBC)

Russia’s economy is facing a different range of issues than those facing the U.S., Japan and the euro zone and so the central bank has to take a different approach, Russia’s central bank governor told CNBC, questioning whether other central banks still had the means to influence their economies. “Whether (other) central banks still have in their possession the types of tools to influence this situation (is the subject of a very broad discussion),” Russia Central Bank Governor Elvira Nabiullina told CNBC in Moscow. “Whether they are already finding themselves on the brink of negative interest rates and some are already in negative interest rate territory. These are most certainly not trivial problems. But as far as the Russian economy is concerned, we find ourselves in a totally different situation,” she said.

Nabiullina was critical of the environment of easy monetary policy that other central banks have created in recent years with their quantitative easing (QE) programs. These were aimed at boosting liquidity, investment and economic growth but they have not necessarily translated into investment in the real economy. Rather, there has been increased liquidity in financial markets, prompting concerns of an equity and bond bubble that will burst when QE programs are eventually wound down and monetary policy “normalized.” Nabiullina warned that “because of the continued easing of monetary policy in many countries there is also the possibility that a higher level of financial market volatility will persist.”

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Tragedy waiting in the wings.

BIS, OECD Warn On Canadian Housing Bubble Debt, See No Exit (WS)

Everyone is fretting about the Canadian house price bubble and the mountain of debt it generates – from the IMF on down to the regular Canadian. Now even the Bank for International Settlement (BIS) and the OECD warn about the risks. Every city has its own housing market, and some aren’t so hot. But in Vancouver and Toronto, all heck has broken loose in recent years. In Vancouver, for example, even as sales volume plunged 45% in August from a year ago – under the impact of the new 15% transfer tax aimed at Chinese non-resident investors – the “benchmark” price of a detached house soared by 35.8%, of an apartment by 26.9%, and of an attached house by 31.1%. Ludicrous price increases!

In Toronto, a similar scenario has been playing out, but not quite as wildly. In both cities, the median detached house now sells for well over C$1 million. Even the Bank of Canada has warned about them, though it has lowered rates last year to inflate the housing market further – instead of raising rate sharply, which would wring some speculative heat out of the system. But no one wants to deflate a housing bubble. During the Financial Crisis, when real estate prices in the US collapsed and returned, if only briefly, to something reflecting the old normal, Canadian home prices barely dipped before re-soaring. And this has been going on for years and years and years.

The OECD in its Interim Economic Outlook warned: “Over recent years, real house prices have been growing at a similar or higher pace than prior to the crisis in a number of countries, including Canada, the United Kingdom, and the United States. The rise in real estate prices has pushed up price-to-rent ratios to record highs in several advanced economies.” Canada stands out. Even on an inflation-adjusted basis, Canadian home prices have long ago shot through the roof. The OECD supplied this bone-chilling chart. The top line (orange) represents Canadian house price changes, adjusted for inflation.

[..] Real estate is highly leveraged. It’s funded with debt. Many folks cite down-payment requirements in rationalizing why the Canadian market cannot implode, and why, if it does implode, it won’t pose a problem for the banks. However, an entire industry has sprung up to help homebuyers get around the down-payment requirements. So household debt has been piling up for years, driven by mortgage debt. Statistics Canada reported two weeks ago that the ratio of household debt to disposable income has jumped to another record in the second quarter, to a breath-taking 167.6%:

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Even if there were a deal, global output would barely fall.

Oil Slumps 4% As No Output Deal Expected For OPEC (R.)

Oil prices tumbled 4% on Friday on signs Saudi Arabia and arch rival Iran were making little progress in achieving preliminary agreement ahead of talks by major crude exporters next week aimed at freezing production. Also weighing on sentiment was data showing the United States was on track to add the most number of oil rigs in a quarter since the crude price crash began two years ago. Lower equity prices on Wall Street and other world stock markets was another bearish factor. Brent crude futures settled down $1.76, or 3.7%, at $45.89 a barrel. For the week, it rose 0.3%, accounting for gains in the past two sessions. U.S. West Texas Intermediate (WTI) crude futures fell $1.84, or 4%, to settle at $44.48. On the week, WTI gained 3%.

Crude futures slumped after sources said Saudi Arabia did not expect a decision in Algeria where the OPEC and other big oil producers were to convene for Sept 26-28 talks. “The Algeria meeting is not a decision making meeting. It is for consultations,” a source familiar with Saudi oil officials’ thinking told Reuters. Earlier in the day, the market rallied when Reuters reported that Saudi Arabia had offered to reduce production if Iran caps its own output this year. Oil prices are typically volatile before OPEC talks and Friday’s session was tempered with caution despite market sentiment on a high this week after the U.S. government reported on Wednesday a third straight weekly drop in crude stockpiles. “A ‘No Deal’ result in our definition will be one where OPEC not only failed to get an explicit deal out of the meetings, but also failed to develop a forward plan,” Macquarie Capital said, referring to the Algeria talks. “This would be another epic fail by OPEC.”

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People keep on suggesting that SA has a choice, without acknowledging that any output cut would promptly be filled by some other producer. Cutting output equals losing market share.

Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class (WSJ)

[..] a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems. Saudi Arabia heads into next week’s meeting of major oil producers in a tight spot. With a slowing economy and shrinking foreign reserves, the kingdom is coming under pressure to take steps that support the price of oil, as it did this month with an accord it struck with Russia. The sharp price drop is mainly because of a glut in the market, in part caused by Saudi Arabia itself. The world’s top oil producer continues to pump crude at record levels to defend its market share.

One option to lift prices that could work, some analysts say, is to freeze output at a certain level and exempt Iran from such a deal, given that its push to increase production to pre-sanction levels appears to have stalled in recent months. Saudi Arabia has previously refused to sign any deal that exempts arch-rival Iran. As its people start feeling the pain, that could change. The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction companies suffer from drying up government funding. Those spending cuts are now hitting the Saudi working middle class.

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Funny. What I wonder about is, the criticism of mainstream economics is going mainstream, but the ‘solutions’ are not the same.

Health Warning! “Realism” Virus Afflicting Mainstream Economists (Steve Keen)

Some papers that are remarkably critical of mainstream economics have been published recently, not by the usual suspects like myself, but by prominent mainstream economists: ex-Minneapolis Fed Chairman Narayana Kocherlokata, ex-IMF Chief Economist Olivier Blanchard, and current World Bank Chief Economist Paul Romer. I discuss these papers in a tongue-in-cheek introduction to another key problems of unrealism in economics–the absence of any role for energy in both Post Keynesian and Neoclassical production functions. I also address Olivier Blanchard’s desire for a “widely accepted analytical macroeconomic core”, explain the role of credit in aggregate demand and income, and identify the countries most likely to face a credit crunch in the near future. I gave this talk to staff and students of the EPOG program at the University of Paris 13 on Friday September 23rd.

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He’s stuck. Allowing it would open up one Pandora’s Box, not allowing it opens yet another.

Obama Vetoes 9/11 Saudi Bill, Sets Up Showdown With Congress (R.)

President Barack Obama on Friday vetoed legislation allowing families of victims of the Sept. 11 attacks to sue Saudi Arabia, which could prompt Congress to overturn his decision with a rare veto override, the first of his presidency. Obama said the Justice Against Sponsors of Terrorism Act would hurt U.S. national security and harm important alliances, while shifting crucial terrorism-related issues from policy officials into the hands of the courts. The bill passed the Senate and House of Representatives in reaction to long-running suspicions, denied by Saudi Arabia, that hijackers of the four U.S. jetliners that attacked the United States in 2001 were backed by the Saudi government. Fifteen of the 19 hijackers were Saudi nationals.

Obama said other countries could use the law, known as JASTA, as an excuse to sue U.S. diplomats, members of the military or companies – even for actions of foreign organizations that had received U.S. aid, equipment or training. “Removing sovereign immunity in U.S. courts from foreign governments that are not designated as state sponsors of terrorism, based solely on allegations that such foreign governments’ actions abroad had a connection to terrorism-related injuries on U.S. soil, threatens to undermine these longstanding principles that protect the United States, our forces, and our personnel,” Obama said in a statement. Senator Chuck Schumer, who co-wrote the legislation and has championed it, immediately made clear how difficult it will be for Obama to sustain the veto. Schumer issued a statement within moments of receiving the veto, promising that it would be “swiftly and soundly overturned.”

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Sure, why don’t you, against the will of your own people. Should work just fine.

EU Refuses To Revise Canada CETA Trade Deal (BBC)

The European Commission has ruled that a controversial EU-Canada free trade deal – CETA – cannot be renegotiated, despite much opposition in Europe. “CETA is done and we will not reopen it,” said EU Trade Commissioner Cecilia Malmstrom. Ms Malmstrom was speaking as EU trade ministers met in Slovakia to discuss CETA and a similar deal with the US, TTIP, which has also faced criticism. A draft CETA deal has been agreed, but parliaments could still delay it. Thousands of activists protested against CETA and TTIP in Germany on Saturday and thousands more in Brussels – outside the EU’s headquarters – on Tuesday. Activists fear that the deals could water down European standards in the key areas of workers’ rights, public health and the environment.

There is also great anxiety about proposed special courts where investors will be able to sue governments if they feel that legislation hurts their business unfairly. Critics say the mere existence of such courts – an alternative to national courts – will have a “chilling” effect on policymakers, leading to slacker regulation on the environment and welfare. Ms Malmstrom said CETA would dominate Friday’s meeting in Bratislava. The Commission hopes the deal can be signed with Canada at the end of October, so that it can then go to the European Parliament for ratification. But it will also need to be ratified by national parliaments across the EU. “What we are discussing with the Canadians is if we should make some clarifications, a declaration so that we can cover some of those concerns,” Ms Malmstrom said. She acknowledged fears in some countries that politicians might see their “the right to regulate” diluted. “Maybe that [right] needs to be even clearer in a declaration,” she said, admitting that the CETA negotiations were still “difficult”.

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Surprisingly lucid overview. Not everyone’s turned into a Putin basher yet.

NATO’s Expansion Parade Makes America Less Secure (Forbes)

The transatlantic alliance was created in 1949 to protect war-ravaged Western Europe from the Soviet Union, an opportunistic predator after its victory over Nazi Germany. The threat to America reflected both Moscow’s control over Eastern and Central Europe and the USSR’s role as an ideologically hostile peer competitor. The end of the Cold War changed everything. The Soviet subject nations were freed, a humanitarian bonanza. More important, the successor state of Russia went from hostile superpower to indifferent regional power. NATO lost its essential purpose, since the U.S. no longer needed to shield Western Europe from Moscow. Yet the alliance proved to be as resilient as other government bureaucracies. NATO officials desperately sought new reasons to exist.

Explained Vice President Al Gore: “Everyone realizes that a military alliance, when faced with a fundamental change in the threat for which it was founded, either must define a convincing new rationale or become decrepit.” The latter was viewed as inconceivable, not even worth considering. So the alliance expanded both its mission (to “out-of-area” activities) and membership (inducting former Warsaw Pact members). Washington’s military obligations multiplied even as the most important threat against it dissipated. Objections to this course were summarily rejected. Not a single Senator voted against admitting the three Baltic states. Then no one imagined that the U.S. might be expected to fight on their behalf. The alliance was seen as the international equivalent of a gentleman’s club, to which everyone who is someone belongs.

Those who pointed to possible conflicts with Moscow were dismissed as scaremongers. Expansion was expected to be all gain, no pain. Alas, Russia did not perceive moving the traditional anti-Moscow alliance up to its borders as a friendly act. Despite coming from the KGB, Vladimir Putin originally didn’t seem to bear the U.S. or West much animus. However, NATO compounded expansion with an unprovoked war against Serbia, a traditional Slavic ally of Moscow, and proposals to include Georgia and Ukraine, the latter which long had especially close historical, cultural, economic, and military ties with Russia. Over time Putin, as well as many of his countrymen, came to view the transatlantic alliance as a threat.

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Sep 232016
 
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Harris&Ewing “Slaves reunion DC. Ages: 100, 104, 103; Rev. Simon P. Drew, born free.” 1921


World Trade Grinds Lower, Hits 2014 Levels (WS)
‘When I Think Of Central Banks, I Think Of Alchemists’: Marc Faber (CNBC)
Central Bankers Are The Arsonists That Create The Fire: Bill Fleckenstein (ZH)
Bad Debts In Chinese Banking System 10 Times Higher Than Admitted: Fitch (AEP)
The Coming Wave of Defaults Will Be Devastating (CH Smith)
Time to ‘Be Alarmed’ about Emerging Market Debt: UN (DQ)
The Ted Spread Is Dead, Baby. The Ted Spread Is Dead (WSJ)
UK Councils ‘Building Up Dangerous Levels Of Debt And Risk’ (Ind.)
You’re Not as Rich as You Think (Satyajit Das)
Deutsche Bank Woes Sparks Concern Among German Lawmakers (BBG)
Regulators Expect Monte Dei Paschi To Ask Italy For Help (R.)
How Does A 60% Increase In NYC Homelessness Constitute A Recovery? (ZH)
Pope Francis: Journalism Based On Gossip And Lies Is A Form Of Terrorism (G.)
Indigenous Australians The Oldest Living Culture; It’s In Our Dreamtime (G.)

 

 

Rising health care costs prop up US GDP. We all know that’s not a good thing.

World Trade Grinds Lower, Hits 2014 Levels (WS)

World trade in merchandise is a reflection of the global goods-producing economy. And it just can’t catch a break. The CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just released the preliminary data of its Merchandise World Trade Monitor for July. The index fell 1.1% from June to 113.4, the lowest since May 2015 – a level it had first reached on the way up it in September 2014. The chart shows that merchandise world trade isn’t falling off a cliff, as it had done during the financial crisis, when global supply chains suddenly froze up. But it’s on a slow volatile grind lower. And compared to the fanciful growth after the Financial Crisis, it looks outright dismal:

This time – after the big adjustment in values months ago – we have another statistical note. In this data release, the CPB shifted the base year of the series from 2005 to 2010, so the values of the entire index shifted down. Hopefully, the change made the series more representative of reality – because getting a good grip on reality these days is really hard, when entire data systems are carefully designed to conceal more than they reveal (such as the official inflation data). The decline in trade was sharper in the emerging economies than the advanced economies. That makes sense: The US, on whose demand the health of the entire world economy seems to depend, experienced falling imports in July, according to the data.

Data point after data point document that the goods-based economy in the US is in trouble – manufacturing, wholesale, retail… nothing is firing on all or even most cylinders. But the service-based economy is not doing all that badly. Its biggest sector – and the biggest sector overall in the US – healthcare, is doing quite well, actually. Among the health-care companies in the S&P 500, revenues rose 5.2% in the second quarter, year over year, when revenues for all S&P 500 companies fell 3.1%. Revenues rose not because people are getting more health care; they rose because health care has been getting more expensive at a breath-taking pace for many years as the industry has been consolidating into oligopolies and as outrageous prices increases on pharmaceutical products regularly grace the headlines.

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“They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed..”

‘When I Think Of Central Banks, I Think Of Alchemists’: Marc Faber (CNBC)

Central bankers trying to spur growth are like alchemists trying to make gold and they’re just as likely to fail, said Marc Faber, the publisher of the Gloom, Boom & Doom report. “When I think of central banks, I think of alchemists,” Faber, also known as Dr. Doom for his pessimistic views, told CNBC’s “Squawk Box” on Thursday. “They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed,” he said, although he noted that some alchemists did produce other useful chemicals during their ill-fated search for the precious metal. “But the central banks are just mixing water, in other words, paper money, and the results cannot be a favourable outcome in the long run.”

Faber noted that from the 1970s to the mid-1980s, people believed inflation was “forever,” but now the same central banks that were fighting inflation were now fighting deflation. This fight was a mistake, he said, claiming that across Asia, price rises were exceeding income gains. “It’s possible that suddenly inflationary pressures will be there, that central banks should then act but they cannot because the system is so overleveraged,” he said. At the same time, Faber noted that the low and negative interest rates globally were hurting pension funds. “Pension funds, even in these beautiful years of returns, 2009 to today, they have become less funded, they have become more underfunded,” he said. “With interest rates at zero and this low, their portion that’s in bonds is never going to meet the expected returns of 7.5%. It’s physically not possible.”

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Alchemists and arsonists.

Central Bankers Are The Arsonists That Create The Fire: Bill Fleckenstein (ZH)

Having been invited on to CNBC to discuss his views of the market, famous short-seller Bill Fleckenstein explained rather eloquently that QE4 is coming and people will wake up to the fact that central bankers “are the arsonists that create the fire, not the firemen that put it out.” This non-mainstream view was treated with disdain by CNBC host Tim Seymour who slammed Fleckenstein for “missing out” on the “artificial market’s” (because even CNBC now admits that’s what it is) gains. The response was epic. “Don’t be such a jerk… I don’t ask to come on this show, you invited me… and don’t get in my face because I won’t join your party…”

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A $2 trillion black hole.

Bad Debts In Chinese Banking System 10 Times Higher Than Admitted: Fitch (AEP)

Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned. The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning. It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government. “There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,” it said.

The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts. “The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” said Fitch. Capital shortfalls are currently 11pc to 20pc of GDP, but this threatens to hit 33pc in a worst case scenario by the end of 2018. “Defaults in China could lead to mutual credit guarantees in the background pulling other firms into distress. A large increase in real defaults risks triggering a chain of bankruptcies that magnifies the potential for financial instability,” it said.

“Mid-tier banks have the weakest buffers, and are the most vulnerable to funding stress,” said the report, by Jonathan Cornish and Grace Wu. The damage eclipses losses during the global financial crisis in Britain and the US, where the direct costs of bank rescues were roughly 8pc of GDP. It would be closer to the trauma suffered by Ireland, Greece, and Cyprus when their banking systems collapsed, but on a vastly greater scale. The Chinese state has deep pockets but strains are mounting. Public debt has reached 55pc of GDP following the bail-out of local governments. This is now higher than among ‘A’ rated peers, mostly in the developing world. “Pressure on China’s sovereign rating could emerge if general government indebtedness were to rise significantly,” said the Fitch report.

China let rip with a fresh burst of credit growth from the middle of last year after a series of policy errors triggered a recession – with ‘Chinese characteristics’ – in early 2015. It ditched any serious effort to reform the economy and opted for stimulus as usual, cutting interest rates and the reserve requirement ratio. Credit reached 243pc of GDP by the end on last year, double the level in 2008. Banking system assets have grown by $21 trillion over that time, 1.3 times greater than the entire US commercial banking nexus.

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“Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.”

The Coming Wave of Defaults Will Be Devastating (CH Smith)

In an economy based on borrowing, i.e. credit a.k.a. debt, loan defaults and deleveraging (reducing leverage and debt loads) matter. Consider this chart of total credit in the U.S. Note that the relatively tiny decline in total credit in 2008 caused by subprime mortgage defaults (a.k.a. deleveraging) very nearly collapsed not just the U.S. financial system but the entire global financial system. Every credit boom is followed by a credit bust, as uncreditworthy borrowers and highly leveraged speculators inevitably default. Homeowners with 3% down payment mortgages default when one wage earner loses their job, companies that are sliding into bankruptcy default on their bonds, and so on. This is the normal healthy credit cycle.

Bad debt is like dead wood piling up in the forest. Eventually it starts choking off new growth, and Nature’s solution is a conflagration–a raging forest fire that turns all the dead wood into ash. The fire of defaults and deleveraging is the only way to open up new areas for future growth. Unfortunately, central banks have attempted to outlaw the healthy credit cycle. In effect, central banks have piled up dead wood (debt that will never be paid back) to the tops of the trees, and this is one fundamental reason why global growth is stagnant. The central banks put out the default/deleveraging forest fire in 2008 with a tsunami of cheap new credit. Central banks created trillions of dollars, euros, yen and yuan and flooded the major economies with this cheap credit.

They also lowered yields on savings to zero so banks could pocket profits rather than pay depositors interest. This enabled the banks to rebuild their cash and balance sheets – at the expense of everyone with cash, of course. Having unleashed tens of trillions of dollars in new credit since 2008, the central banks have simply increased the likelihood and scale of the coming default conflagration. Now the amount of deadwood that’s piled up is many times greater than it was in 2008. Very few observers explore what happens after defaults start cascading through the system. Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.

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We’ve been alarmed about it for years.

Time to ‘Be Alarmed’ about Emerging Market Debt: UN (DQ)

[..] It was the peak of the emerging market bubble, when the amount of debt that low-income developing economies could have sold to eager investors seemed almost limitless. The main reason for this unprecedented surge in appetite for EM debt was the huge monetary expansion unleashed in many of the world’s major economies, led by the Fed’s QE program. The result was the now-all-too-familiar reality of anemic (at best) yield opportunities in developed markets, prompting investors to seek out much riskier emerging market assets. The moment the Fed turned off the spigot, in mid-2014, the flow of funds began to reverse, according to the report, creating ripe conditions for a “prolonged commodity price shock, steep currency depreciations and worsening growth prospects,” which have “quickly driven up borrowing costs and debt-to-GDP ratios.”

For the first time since the Latin American debt crisis in the second half of the 1980s, aggregate net capital flows entered negative territory. Aggregate outflows reached $656 billion in 2015 and $185 billion in the first quarter of 2016. The capital flight was particularly pronounced in China and other parts of Asia. Note how capital flight heated up in 2014 toward the end of the Fed’s “QE Infinity”.

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More consequences of unbridled manipulation of financial markets.

The Ted Spread Is Dead, Baby. The Ted Spread Is Dead (WSJ)

A measure of stress in financial markets, whose alarm bells heralded the 2008 financial crisis, just hit its highest level in over seven years. But don’t worry. It turns out the so-called Ted Spread might be dead, an unlikely casualty of the recent changes in U.S. money-market regulation. This spread charts the difference between the London interbank offered rate and the yield on three-month U.S. Treasury bills. Libor is a dollar-denominated global gauge of private-sector credit strength, particularly that of banks, and three-month bills measure an ultrasafe bet—the U.S. government’s creditworthiness. Ted stands for Treasury-Eurodollar rate, the Eurodollar being the greenback denominated lending reflected in the Libor rate.

If the difference, or spread, between what banks charge each other increases compared with yields on safe government debt, that reflects an elevated risk of defaults in the private sector that the banking sector lends to. For the past year and a half the spread has been creeping higher, rising from 0.2 of a percentage point at the turn of 2015, to 0.653 of a percentage point on Wednesday. That is the highest it has been since May 2009, in the aftermath of the global financial crisis, surpassing other moments of extreme stress, like the euro sovereign-debt crisis around 2011. But there is a problem with that. Looming U.S. regulation of money-market funds has driven Libor higher, meaning that it isn’t quite the indicator that it once was.

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Blair and Cameron’s scorched earth.

UK Councils ‘Building Up Dangerous Levels Of Debt And Risk’ (Ind.)

Cash-strapped local councils are building up dangerous levels of risk and debt as they turn to commercial ventures in a bid to raise funds, credit agencies and campaigners have warned. Moody’s, the credit agency, warned that a series of ambitious plans to boost revenue by setting up businesses could put council tax payers at risk should they run into difficulties. The warning, in a report into local government finance, comes amid mounting evidence that local authorities are increasingly turning to borrowing after a run of tough settlements with central Government. Roshana Arasaratnam, a senior credit officer at Moody’s, said in the wake of the report’s publication:

“Borrowing to invest in commercial projects exposes local authorities to additional credit risk, as the revenues that flow from these projects are inherently uncertain. “Those adopting this strategy also face increased project execution risk, and greater competition from the private sector.” Ms Arasaratnam said such borrowing contrasted sharply with local authorities’ traditional investments in schools, housing and transport which are underpinned by government grants and do not depend on generating revenues from commercial activities. The report highlights a series of business ventures set up by councils, some of which are now on negative credit watch. They include Warrington Borough Council, which in 2015 issued £150m of bonds to support an economic development plan aimed at increasing business rate revenues.

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Paper wealth is not wealth.

You’re Not as Rich as You Think (Satyajit Das)

The idea that the world is awash in savings – one factor driving the theory of secular stagnation – is, on the surface, a persuasive one. Too bad it may not be true. Yes, the postwar generation is wealthier than any before it. But the ultimate value of any investment depends upon being able to convert it into cash and thus generate purchasing power. In fact, the world’s accumulated wealth – around $250 trillion, according to Credit Suisse’s Global Wealth Report – is almost certainly incapable of realization at its paper value. The headline number thus vastly overstates the supposed savings glut. Most of these savings are held in two forms: real estate, primarily principal residences, and retirement portfolios that are invested in stocks and bonds.

Both are rising in value. A combination of population growth, higher incomes, increased access to credit, lower rates and, in some cases, limited housing stock have driven up home prices; those who got in early have done especially well. Meanwhile, increased earnings and dividends, driven by economic growth and inflation, have boosted equity values. So have loose monetary policies designed to counteract the Great Recession since 2009. Yet the appreciating value of one’s own home doesn’t automatically translate into purchasing power. A primary residence produces no income. Indeed, maintenance costs, utility bills and property taxes – which often rise along with home prices – mean that houses are cash-flow negative.

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As soon as they understand the magnitude of the numbers, they’ll look the other way.

Deutsche Bank Woes Sparks Concern Among German Lawmakers (BBG)

Deutsche Bank’s finances, weakened by low profitability and mounting legal costs, are raising concern among German politicians after the U.S. sought $14 billion to settle claims related to the sale of mortgage-backed securities. At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Participants discussed the U.S. fine and the financial reserves at Deutsche Bank’s disposal if it had to cover the full amount, according to the people, who asked not to be identified because the meeting on Tuesday was private. While the participants – members of the junior party in Angela Merkel’s government – didn’t reach any conclusions on the likely outcome, the discussion signals that the risks have the attention of Germany’s political establishment.

The German Finance Ministry last week called on the U.S. to ensure a “fair outcome” for Deutsche Bank, citing cases against other banks where the government settled for reduced fines. Pressure on Germany’s biggest lender has increased since German Finance Minister Wolfgang Schaeuble told Bloomberg Television on Feb. 9 that he has “no concerns about Deutsche Bank.” Germany’s biggest bank was already ranked among the worst-capitalized lenders in European stress tests before U.S. authorities demanded $14 billion during initial talks to settle a probe into how it handled mortgage securities during the 2008 financial crisis. The announcement led Deutsche Bank’s riskiest bonds to plunge.

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Never ending story. Because it can’t end well.

Regulators Expect Monte Dei Paschi To Ask Italy For Help (R.)

European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses. Less than two months after the Tuscan lender announced an emergency plan to raise €5 billion of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short. While the bank is determined to see through the capital raising, if it were to disappoint, it would be left with a capital hole. Now euro zone authorities are considering whether state support would have to be tapped after what bankers have described as slack interest in the bank’s share offer.

“There is clearly an execution risk to the capital raising,” said one official with knowledge of the rescue attempt, adding that the bank’s value, about one ninth the size of the planned €5 billion cash call, would be a turn-off for investors. That person said a “precautionary recapitalization by the Italian state” could be used to make up any shortfall once attempts to raise fresh cash from investors had concluded in the coming months. [..] Monte dei Paschi faces a considerable challenge in convincing investors to back its third recapitalisation in as many years. Further complicating the picture, a constitutional referendum, expected to be held by early December that could decide the future of Renzi, is likely to push the bank’s fund-raising into next year, the officials say. The bank’s fragile state poses a threat to confidence in other Italian lenders and even to heavily-indebted Italy, the euro zone’s third-largest economy.

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There’s 24/7 propaganda and then there’s reality. It’s about air time more than anything else.

How Does A 60% Increase In NYC Homelessness Constitute A Recovery? (ZH)

[..] ..courtesy of data from the New York City Department of Homeless Services, we have a couple of additional charts to add to the list like the one below that shows a ~60% increase in the number of NYC families living in homeless shelters over the past five years. Aside from an increse during the “great recession”, the number of New York City families living in homeless shelter remained fairly constant at around 8,000 from July 2008 through July 2011. That said, over the following 5 years beginning in August 2011 through today, NYC has experienced a nearly 60% increase in the number of families living in homeless shelters to nearly 13,000. Ironically, the increase in homelessness experienced during the “great recession” was just a blip on the radar compared to the past five years as residential rental rates in NYC have soared.

Alternatively, we offer up the following statistics from Mayor Bill De Blasio’s Fiscal 2016 “Mayor’s Management Report” highlighting a 42% increase in applications for “Emergency Rent Assistance” from New York City families at risk of losing their housing. If this is what a “recovery” looks like to Obama we would certainly like to better understand how he would define a recession.

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“..journalism should not be used as a “weapon of destruction against persons and even entire peoples..“

Pope Francis: Journalism Based On Gossip And Lies Is A Form Of Terrorism (G.)

Journalism based on gossip or rumours is a form of “terrorism” and media that stereotype entire populations or foment fear of migrants are acting destructively, Pope Francis has said . The pope, who made his comments in an address to leaders of Italy’s national journalists’ guild, said reporters had to go the extra mile to seek the truth, particularly in an age of round-the-clock news coverage. Spreading rumours is an example of “terrorism, of how you can kill a person with your tongue“, he said. “This is even more true for journalists because their voice can reach everyone and this is a very powerful weapon.“ In Italy, a number of newspapers are highly politicised and are regularly used to discredit those with differing political views, sometimes reporting unsubstantiated rumours about their private lives.

In 2009 several media outlets owned by the family of then-prime minister Silvio Berlusconi came under fire from the journalists’ guild over stories questioning the trustworthiness of a magistrate who had ruled against a company owned by the Berlusconi family. The stories were filled with insinuations about the way he dressed, including the colour of his socks, and the way he took walks in the park. The pope, who has often strongly defended the rights of refugees and migrants, said journalism should not be used as a “weapon of destruction against persons and even entire peoples“. “Neither should it foment fear before events like forced migration from war or from hunger,” he added.

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A highly developed culture 10s of 1000s of years before anywhere else on the planet. Ignored as such by Europe and North American bias.

Indigenous Australians The Oldest Living Culture; It’s In Our Dreamtime (G.)

Australia’s Aboriginal people have already been using the tag of “world’s oldest living culture” before given scientific confirmation in a recent study of the DNA of Australia’s Indigenous people. One likely response to the finding from the subjects of the research is a satisfied, “I told you so”. Scientific research often reaffirms what is in an oral history. This has been particularly so in Australia where cultural stories – often referred to as Dreamtime stories – that describe land movements and floods fit in with what later becomes known about seismic and glacial shifts from the geological record. For example, Associate Professor Nick Reid and Professor Patrick D. Nunn have analysed stories from Indigenous coastal communities and have seen a thread of discussions about the rise of tidal waters that occurred between 6,000 and 7,000 years ago.

And these are the newer stories. Other stories collected from around Cairns showed that stories recalled a time when the land covered the area that is now the Great Barrier Reef and stories from the Yorke Peninsula reference a time when there was no Spencer Gulf (it is now 50m below sea level). Reid and Nunn hypothesise that this could make these stories over 12,000 years old. So oral history and observation can reinforce what the science says. Or science can confirm what we’ve been saying all along. For many older Indigenous people, the cultural stories will seem the more trustworthy. There are historic reasons why Indigenous people remain suspicious of science practiced by Europeans, who have not yet countered the legacy of their obsessions with head measuring and blood quantum.

Aboriginal culture and traditions have been often viewed through a Eurocentric gaze that has failed to see the wisdom contained within its values and teachings. Cultural stories were often illustrated for children without looking for deeper meanings and codes. These stories didn’t just tell a tale of how the echidna got its spikes, they contained – like parables in the bible – a set of messages about the importance of sharing resources in a hunter-gatherer society and the consequences of selfishness.

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Sep 222016
 
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Harris&Ewing Harding inauguration 1921


The Global Economic Outlook: Dark Clouds Ahead (Guardian Ed.)
UN Fears Third Leg Of Global Financial Crisis – With Epic Debt Defaults (AEP)
Major Trend Forecast For The Rest Of 2016 (Celente)
Report Highlights Rising US Poverty (D&C)
In Places With Fraying Social Fabric, a Political Backlash Rises (WSJ)
Greek Bakers Unite To Give Away Bread To Those Too Poor To Afford It (KTG)
Young Britons Live In ‘Suspended Adulthood’ (G.)
It’s Not Just Consumers That Are Living Paycheck To Paycheck (BBG)
Divided Fed Holds Fire, Signals 2016 Rate Increase Still Likely (BBG)
Bank of Japan’s Inflation Overshoot Deepens Policy Innovation (BBG)
Real Estate Gets Its Seat At The S&P 500 Table (Forbes)
With Mortgage Rates So Low, Why Are So Many People Still Renting? (Time)
House-Flippers Are Back, With Anonymous Funding (BBG)
China Chalks Up $667-Billion Debt Pile Over Toll Roads (R.)
Wells Fargo Too Arrogant To Own Up To Its Fraudulent Ways (WaPo)
27 US Senators Rebel Against Arming Saudi Arabia (I’Cept)
A First Step for Syria? Stop the Killing (Jimmy Carter)
Apologizing to My Daughter for the Last 15 Years of War (Van Buren)

 

 

Actually not all that bad from the Guardian Ed. staff. Though they predictably conclude with plain silliness: In the long run, this failed globalisation needs to be turned into something more sustainable and more inclusive, built on higher wages, robust tax systems and strong public safety nets.

The Global Economic Outlook: Dark Clouds Ahead (Guardian Ed.)

Eight years ago this month, a bank collapsed, Wall Street went into meltdown and the world economy plunged into crisis. Trillions were lost in output ($22tn in the US, within just five years), millions of workers were made redundant (8.8 million in America’s great recession, 1.2 million in the UK) and thousands of promises were made by politicians and policymakers – everyone from Barack Obama and Gordon Brown to David Cameron and Christine Lagarde – that things would change. Yet, nearly a decade later, what is most striking is how little has changed. In the US, the UK and the rest of the developed world, policymakers talk of the “new mediocre”, so tepid is economic performance. And in the developing world things look even worse.

Such is the message from two of the world’s leading economic thinktanks, the OECD and the UN Conference on Trade and Development (Unctad). Both their reports on Wednesday were thick with cloud and short on silver lining. Yes, the OECD believes that Brexit Britain will have a slightly easier time this year – but that will be followed by a far choppier 2017. And the Unctad report is even more troubling. The biggest single warning it makes is that the world is on the verge of “entering a third phase of the financial crisis”. What began in the US subprime housing market before roiling Europe’s governments is likely to rear its head again – this time in Latin America, Africa and other poor countries. What will do for them, believe the Unctad researchers, is what also did for America and Europe: debt.

Much of the cheap money created by the Fed, the BOE and the ECB has been pushed by financial speculators into the higher-yielding markets of South Africa, Brazil and India, among others. Economists at the Bank for International Settlements, the central banks’ central bank, reckon that $9.8tn was pumped out in foreign bank loans and bonds in the first half-decade after the Lehman Brothers collapse. Unctad calculates that around $7tn of that was pushed through to emerging markets. By any standards, that is a flood of credit – one that was encouraged by panicky policymakers.

Wasn’t it the turn of China and the rest to pick up the slack in the global economy? Except now developing countries are lumbered with a gigantic private debt mountain to pay down. The private, non-financial sector across the developing world has debt service obligations worth nearly 150% of its income. The comparable figure for the developed world, by contrast, is just above 80%. And now developing countries are hobbling along rather than sprinting ahead, while commodity prices have tanked. To make matters worse, companies will typically have borrowed in US dollars and invested in their local currencies – but the strength of the dollar will make those loans all the harder to repay.

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“What is clear is that world will soon need a massive and coordinated spending push by governments to create demand and bring the broken global system back into equilibrium. UNCTAD is entirely right about that. If this does not happen, it is sauve qui peut.”

UN Fears Third Leg Of Global Financial Crisis – With Epic Debt Defaults (AEP)

The third leg of the world’s intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history. It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity. “Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,” said the annual report of the UN Conference on Trade and Development (UNCTAD). We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare.

What is less understood is just how destructive this has been. Much of the money was wasted, skewed towards “highly cyclical and rent-based sectors of limited strategic importance for catching up,” it said. Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the “profit-investment nexus” that ultimately drives growth and prosperity. The extraordinary result is that some countries are slipping backwards, victims of “premature deindustrialisation”. Many of them have fallen further behind the rich world than they were in 1980 despite opening up their economies and following the global policy script diligently.

The middle income trap closed in on Latin America and the non-oil states of the Middle East a long time ago, but now it is beginning to close in such countries as Malaysia and Thailand, and in some respects China. “The benefits of a rushed integration into international financial markets post-2008 are fast evaporating,” it said. Yet the suffocating liabilities built up over the QE years remain. UNCTAD says corporate debt in emerging markets has risen from 57pc to 104pc of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution. “If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system,” it said.

“There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market,” it said. These are deeply-disturbing assertions. The combined US subprime and ‘Alt-A’ property exposure before the Lehman crisis was just $2 trillion, and Greece’s debts were trivial. What UNCTAD is talking about is an order of magnitude larger.

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Haven’t featured Celente in ages…

Major Trend Forecast For The Rest Of 2016 (Celente)

Central bank policies rule the financial world. Their never-in-the-history-of-the-world negative and historically low interest rate policies, plus massive government and corporate bond buying schemes have enriched equity markets but not the general economy… “In fact, what we have been forecasting and reporting since 2010, the Bank for International Settlements confirmed this week with its warning that central bank behavior, not economic fundamentals, hold sway over markets. Claudio Borio, head of the monetary and economic department of the BIS questioned whether “market prices fully reflect the risk ahead,” and “doubts about valuations seem to have taken hold in recent days.” Indeed true price discovery is dead.

Despite massive Federal Reserve intervention in the US that has driven the Dow and NASDAQ to new highs, S&P 500 companies reported five straight quarters of year-over-year declines. Also on the market fundamental front, with retail sales down 0.3% in August, there was no back-to-school-splurge. The service sector, the main economic driver of the United States economy, fell to its lowest level since 2010. Despite “experts” forecasting US GDP to rise 3% in 2016, it’s slogged along at an annualized 1% for the first two quarters. Just yesterday it was reported that housing starts in the US came in at an annualized rate of 1.14 million in August, well below the expected 1.19 million while construction permits fell 0.4% to a 1.14 million-unit rate last month.

And while President Obama chastised “Anyone claiming that America’s economy is in decline is peddling fiction,” US economic growth since the recession ended is tracking at its weakest pace of any expansion since 1949. As the BIS report concludes, “A more balanced policy mix is essential to bring the global economy into a more robust, balanced and sustainable expansion.” Yet, today, all equity eyes are concentrated more on central bank maneuvers than market fundamentals. In Japan, with new data showing exports falling 9.6% and imports down 17.3% in August, the focus is on what new schemes the Bank of Japan will invent to boost the economy despite its long proven track record of failure.

Similarly, later today in the US, the markets await news of if, and when, the Fed will raise interest rates. Yet, as the data proves since the Panic of ’08, central banks’ “policy mix” has failed …and we forecast despite pending measures, they will continue to fail to generate true economic growth. Thus we forecast continued equity market volatility with increasing prospects for a market meltdown.

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There should have been much more of this. People would have understood the world they live in so much better. The lack of this sort of analysis gives birth to Brexit and the Donald.

Report Highlights Rising US Poverty (D&C)

Among the troubling statistics in a new report released Tuesday was the rising concentration of poverty in city neighborhoods, and expanding number of census tracts where the poverty rate stood at 40% or higher. The count of high-poverty census tracts has nearly doubled in the city, from 19 to 37 since 2000. Fully one-third of Rochester residents live in poverty, and nearly another third require some outside assistance to get by, according to estimates in the ACT Rochester and Rochester Area Community Foundation update to its 2013 report on the state of poverty and self-sufficiency across the Greater Rochester region. The numbers are a near mirror-image of the suburbs, where more than two-thirds of residents are self-sufficient. And while the poverty rate in the nine-county Greater Rochester region continues to creep upward, it remains below state and national averages, the report shows.

“We don’t really have a poverty problem,” said Edward Doherty, a Strategic Community Intervention associate who served as project manager and editor of the report, and is active in local efforts to combat poverty. “We have a concentration of poverty problem.” Rochester has the third-highest concentration of poverty in the nation. And a significant segment of that population is female-headed families with children younger than 18. Though accounting for 17% of the population, the report found, the city has 36% of such households, and that population has a staggering poverty rate of 59.9%. Doing the math, the report estimates these families account for nearly half of all people living in poverty in the city, and these children account for more than 80% of all poor children in the city.

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This is changing the world, all over the world. Poverty and loss hidden from us by media and political propaganda.

In Places With Fraying Social Fabric, a Political Backlash Rises (WSJ)

Reading, Pa.— The buckling of social institutions fundamental to American civic life is deepening a sense of pessimism and disorientation, while adding fuel to this year’s rise of political populists like Donald Trump and Bernie Sanders. Here and across the U.S., key measures of civic engagement ranging from church attendance to civic-group membership to bowling-league participation to union activity are slipping. Unlocked doors have given way to anxiety about strangers. In Reading, tension between longtime white residents and Hispanic newcomers has added to the unease. For Mr. Martin, social and economic setbacks led him to support Mr. Sanders, who he figured would stick it to the big businesses Mr. Martin feels have sold out working people.

Other people here find resonance in Mr. Trump’s message that the U.S. has skidded so far off course that it needs to lock out immigrants and block imports to recover an era of greatness. “When you lose the family unit and you lose the church community, you are losing a whole lot,” says Bonnie Stock, a retired teacher in Reading and Trump supporter, who says the church where she was baptized is dying from lack of young members. “People are looking at Trump because most of us see this [country] isn’t working,” she says. Ms. Stock figures Mr. Trump’s business experience would help him better attack societal problems like drug addiction.

Across the U.S., the Republican presidential nominee has his firmest support among the white working class. In the Republican primaries, he carried all but nine of the country’s 156 counties where at least 85% of the adult population was whites without four-year college degrees. Mr. Trump won 64% of the vote in Berks and Schuylkill counties, where noncollege whites were 66% of the adult population as of 2014. In Berks County, once famous for the Reading Railroad stop on the Monopoly board game, social ills have been exacerbated by a 30% decline in manufacturing jobs and 6% fall in inflation-adjusted median income since 1995.

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In case you’re wondering why the Automatic Earth tries so hard to help the poorest Greeks. These are the very people your generous donations assist. The problem is their numbers are rising fast.

But we’re not going to give up. I’m breaking my head over the next steps in the process. We need to do something big for Christmas. Meanwhile, please keep donating through our Paypal widget, top left corner of the site, in amounts that end in $0.99 or $0.37.

Greek Bakers Unite To Give Away Bread To Those Too Poor To Afford It (KTG)

Did you know that there are people in Greece who cannot afford to buy even a loaf of bread at a cost of €0.60 – €0.70? Almost a year after Greece surrendered into the arms of the international lenders and the IMF and the austerity cuts started to affect people’s lives, a bakery in our neighborhood was offering a bread at a special price for pensioners and unemployed. The special price was just half a euro. At one point, I remember that more and more people were going to this bakery and asking for bread from the previous day for a couple of cents or even free of charge. Two days ago, the grim Greek reality hit me again. I was at the bakery sometime at noon. All different kinds of bread loafs were waiting for customers, nicely set in order, one by one, next to each other.

Yet, somewhere, in a corner at one of the lower shelves there was a group of breads: several loaves, long and round, white and wholewheat, a couple of baguettes. “What are these?” I asked the baker and he answered “This is bread from yesterday, for the poor. We give it free of charge.” He told me further, that he had 6-7 returning customers who come every second day for the bread from yesterday. Mostly elderly, pensioners. And “maybe 2-3 people per day,” people he does not know who just step in and ask for “old bread for free.” The problem of poverty is not widespread only in Athens, where the cost of living is much higher than in the countryside. Today, I read about the action of the Bakers’ Association in Kozani, in Northern Greece. Customers can buy extra bread for those in need, while the bakers will keep records of the “Bread on the waiting” – as they call their action – and give it to those who cannot afford it.

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As I’ve written before: and still everyone says they love their kids.

Young Britons Live In ‘Suspended Adulthood’ (G.)

Despair, worries about the future and financial pressures are taking a toll on millions of young Britons, according to a poll which found young women in particular were suffering. Low pay and lack of work in today’s Britain are resulting in “suspended adulthood”, with many living or moving back in with their parents and putting off having children, according to the poll of thousands of 18 to 30-year-olds. Large numbers describe themselves as worn down (42%), lacking self-confidence (47%) and feeling worried about the future (51%).

The Young Women’s Trust, the charity that commissioned the polling by Populus Data Solutions, warned that Britain was facing a “generation of young people in crisis” as it called on the government to take steps including creating a minister with responsibility for overall youth policy. Young women are being particularly affected. The percentage of women reporting that they lacked self-confidence was 54%, compared with 39% of young men. While four in 10 young people said they felt worn down, the percentage for young women was 46% compared with 38% of men. One in three said they were worried about their mental health, including 38% of young women and 29% of young men.

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US small business dances on the edge. They account for 50% of GDP and more than 50% of new job creation.

It’s Not Just Consumers That Are Living Paycheck To Paycheck (BBG)

As Federal Reserve officials gather to issue their monthly assessment of the world’s largest economy, a new study lays bare the extent to which many small firms are pressed for cash. “Most small businesses are operating on very small margins,” Diana Farrell, CEO of the JPMorgan Chase Institute, an in-house think tank that uses data from the bank to analyze the economy. “The small business sector is less full of future Googles and Ubers and tons and tons of very small operators living month to month,” she said in a phone interview. The companies in question may be small, but they represent an outsized share of the U.S. economy.

According to the Small Business and Entrepreneurship Council, they account for roughly 50% of GDP and more than 50% of new job creation — a metric that’s closely watched by the Fed in determining whether the economy can withstand a constriction in financing conditions. Yet even though they’re contributing a great deal to the economy there remains ignorance about their financial health, Farrell added. On average, the companies surveyed have just 27 days worth of cash reserves — or money to cover expenses if inflows suddenly stopped — according to the JPMorgan study, which analyzed 470 million transactions by 570,000 small business last year. Restaurants typically hold the smallest cash buffers, with just 16 days of reserves, while the real-estate sector boasts the biggest, at 47 days.

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These people get far too much attention. That makes them feel much too important. We should ignore them. After taking their undemocratic powers away.

Divided Fed Holds Fire, Signals 2016 Rate Increase Still Likely (BBG)

A divided Federal Reserve left its policy interest rate unchanged to await more evidence of progress toward its goals, while projecting that an increase is still likely by year-end. “Near-term risks to the economic outlook appear roughly balanced,” the Federal Open Market Committee said in its statement Wednesday after a two-day meeting in Washington. “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” The sixth straight hold extends U.S. central bankers’ run of getting cold feet amid risks from abroad and inconsistent signs of economic strength.

Now the focus will shift to December as the Fed’s likely last chance to raise interest rates in 2016 – a move that depends on how the economy, inflation and markets fare in the months surrounding a contentious presidential election. “The statement is much more hawkish than I thought it would be,” said Stephen Stanley at Amherst Pierpont Securities in New York, who said he expects a rate increase in December. “That just tells you they are revving up the engines.” Three officials, the most since December 2014, dissented in favor of a quarter-point hike. Esther George, president of the Kansas City Fed, voted against the decision for a second straight meeting. She was joined by Cleveland Fed President Loretta Mester – in her first dissent – and Eric Rosengren, head of the Boston Fed, whose previous dissents called for easier policy.

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Uh, no: The need for yet another overhaul of the BOJ’s policy framework [..] speaks to the deep-seated challenges facing policy makers. Actually, it speaks to the utter failure of all ‘policies’ up till now.

Bank of Japan’s Inflation Overshoot Deepens Policy Innovation (BBG)

The first major central bank to adopt quantitative easing in the modern era has innovated again. BOJ Governor Haruhiko Kuroda and his colleagues adopted a pledge of “overshooting” their 2% inflation target, an idea floated by central bankers including Federal Reserve Bank of Chicago President Charles Evans, but not formally adopted up to now. They also unveiled a strategy of targeting short- and longer-term rates to provide the economy with cheap borrowing costs. Since taking the helm in 2013, Kuroda had previously pursued a QE-on-steroids policy to shock Japan out of deflation. Yet after three and a half years, he was running into increasing concerns about the sustainability of the purchases of government bonds, which have run at about 15% of gross domestic product annually.

The adoption of a negative interest rate on some bank reserves resulted in an outcry from banks, and – for a time – an alarming plunge in yields even on longer-dated securities. The Federal Reserve had a cap on long-term yields back in the 1940s, as part of the U.S. government’s efforts to keep down wartime and postwar debt financing. But a strategy of targeting the yield curve as a reflation initiative is new to the major central banks of today. “The BOJ had to do something revolutionary out of necessity – they are concerned about sustainability,” said Yuji Shimanaka at Mitsubishi UFJ Morgan Stanley Securities. The need for yet another overhaul of the BOJ’s policy framework – this is the third iteration under Kuroda alone – speaks to the deep-seated challenges facing policy makers. Japan’s consumer prices slumped 0.5% in July from a year before, far from the 2% gains targeted “at the earliest possible time.”

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There are still scores of greater fools out there… This time lured by low rates.

Real Estate Gets Its Seat At The S&P 500 Table (Forbes)

In case you haven’t noticed, the S&P 500 Index is looking a little different these days. Once a sub-industry of the financial sector, real estate now has its own zip code in the universe of blue chip stocks. It’s the first time since 1999 that such a change has been made to the S&P’s composition. The new sector has a weighting of nearly 3%, all of it taken out of financials. Real estate’s promotion should attract more institutional and individual investors to the space. It tells them this is no longer a niche market but one with a distinct and significant presence, with its own unique business drivers.

This has been a long time coming, to be perfectly honest. Ever since the housing and financial crisis, real estate investment trusts (REITs) have been pulling in some serious cash as more become available for trading on the New York Stock Exchange and elsewhere. Altogether, REITs currently have a market cap of over $1 trillion, according to REIT.com. With investors on the hunt for yield, it’s not hard to see why. As of August 31, the FTSE NAREIT All Equity REITs Index yielded an average of 3.61%, compared to the S&P 500’s 2.11%. During 2015, stock exchange-listed REITs paid out a whopping $46.5 billion in dividends.

Looking just at the residential housing market, business is definitely booming. With 30-year mortgage rates at below 3.5%, the market is scorching hot in many parts of the U.S.—so much so, some builders are reporting a shortage in construction workers to meet demand. New construction starts rose to 1.2 million in July, beating analysts’ forecasts and suggesting the U.S. housing market appears to have finally made a full recovery eight years following the recession, with Bloomberg calling this the “strongest home sales since the start of the economic expansion.”

Trouble could be brewing, however. As I shared with you last month, millennials just aren’t buying homes at the same rate we’ve historically seen from 18- to 34-year-olds. There are many theories as to why this is, from millennials delaying starting families to focus on careers, to a loss of trust in homeownership as a reliable investment or even as an institution, to a preference to rent. This trend has contributed to the lowest U.S. homeownership rate in five decades. How can this be? How could there be both massive housing demand and yet declining home ownership?

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“On average, homeowners paid 28% more in mortgage payments than renters did in monthly rent.”

With Mortgage Rates So Low, Why Are So Many People Still Renting? (Time)

With interest rates lower than they have been for years, many people still find that renting is more budget-friendly than a monthly mortgage payment. This is not true in all parts of the U.S., but a study by Robert W. Baird & Co. shows that living in one of the biggest housing markets in the country is often more expensive. The study looked at 28 different cities, and found that U.S. homeowners in 24 of the cities paid more than those who rent. On average, homeowners paid 28% more in mortgage payments than renters did in monthly rent. The study looked at properties with ratings of four or five stars to keep variables to a minimum.

The study also made some assumptions, such as that all mortgages were 30-year fixed loans, that all homeowners made a down payment of 15%, and that all mortgages included private mortgage insurance, homeowners’ insurance, and taxes. Of the 28 different markets examined, it was more affordable to own than to rent in Baltimore, Maryland, Tampa, Florida, Jacksonville, Florida, and Norfolk/Richmond, Virginia. Of the remaining 24 cities, 15 showed a 20% or higher difference in the cost of renting versus the cost of owning. These differences were due to factors such as the increase in housing prices and the fact that there are few houses on the market in many of these areas.

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More fallout from the war on interest rates.

House-Flippers Are Back, With Anonymous Funding (BBG)

Alex Sifakis never raised this much money this fast. The house flipper from Jacksonville, Florida, crowdfunded nine deals totaling more than $9 million through RealtyShares over the last two and a half years. A July deal for $1 million took him just 12 hours. “Generally, raising money takes so much time,’’ said Sifakis, 33. “This offers so much flexibility and time savings. It’s so much better than going to family offices, banks or Wall Street firms.’’ House flippers and property developers are increasingly crowdfunding — tapping the virtual wallets of anonymous internet backers on platforms such as RealtyShares, LendingHome, PeerStreet and Patch of Land. For riskier ventures, such as building new homes and buying, renovating and selling existing ones, they’re finding quick financing can be easier to get online than from banks.

That’s contributed to an increase in home flipping. In the second quarter, 39,775 investors bought and sold at least one house, the most since 2007, according to ATTOM Data Solutions. The crowdfunding sites are part of the multibillion-dollar ecosystem of marketplace lenders, like LendingClub Corp. and Prosper Marketplace Inc., that match users who need money with people who want to provide it for anything from debt consolidation to elective medical procedures. That business hasn’t always run smoothly. LendingClub is going through a rough stretch after years of rapid growth. In May, its founder and chief executive officer resigned amid an internal probe into a botched loan sale, sending LendingClub’s shares tumbling. So far, there have been few defaults in real estate crowdfunding deals. When they happen, the platforms say they’ll pay investors the proceeds from property sales.

The business has other potential pitfalls. When it comes to real estate, faster isn’t always better. Wall Street’s home-mortgage machine of the mid-2000s valued speed over accuracy, with disastrous results, though most crowdfunding sites cater to investors and not homebuyers. Also, clicking for capital can be exploited by fraudsters who may not be who they say they are, according to Sara Hanks, co-founder and CEO of CrowdCheck, which provides due-diligence services for online investors. “We’ve seen some things where the entity that’s supposed to own the property doesn’t actually own it,’’ she said.

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“..40% of China’s expressways were built between 2010 and 2015..”

China Chalks Up $667-Billion Debt Pile Over Toll Roads (R.)

China’s toll roads have stacked up a debt pile of 4.45 trillion yuan ($666.96 billion), with almost 80% of their annual income last year going to repay loans, the transport ministry said, as the country accelerates road building. Beijing has cranked up state spending on infrastructure to support economic growth as private sector investment falters, and efforts to lure investors into private-public partnerships to build projects such as toll roads have had few successes. The ministry published the 2015 figures late on Tuesday in a report that comes as global investors express growing concern over China’s overall credit, much of which has gone to build infrastructure. The toll road network’s debt grew an annual 15.7% last year, far outpacing income growth of 4.6%, the ministry said in the report.

“Although China’s toll road debt is relatively large, this is just a phase,” state newspaper the People’s Daily quoted Sun Yonghong, an official of the ministry’s highway division, as saying. “In the long run, the risks are controllable.” About three-quarters of 2015 revenue of 409.78 billion yuan went to paying down debt and interest, as banks sought payment of the principal one year after project completions, Sun said. Toll roads make up less than 4% of China’s road network, which stretches 4.5 million km (2.8 million miles). Sun said much of the debt was incurred to build expressways, and accumulation would slow as the road network matured. Almost 40% of China’s expressways were built between 2010 and 2015, at a cost of 3.32 trillion yuan, about 2.23 trillion yuan of which was paid through loans, he said.

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Sickening.

Wells Fargo Too Arrogant To Own Up To Its Fraudulent Ways (WaPo)

The 2008 financial collapse was eight years ago this month — and the big banks are back to their old shenanigans. Venerable Wells Fargo has engaged in behavior that would have made a robber baron blush: It pressured low-wage workers with unrealistic sales targets, so these workers created 2 million bogus accounts over five years, causing customers to be hit with fees and damage to their credit ratings. About 5,300 workers have been fired and $185 million in penalties assessed to the bank, but not a single high-level executive has been sacked or even forced to give back the tens of millions of dollars in pay earned based on the fraud. When Wells Fargo chairman and CEO John Stumpf sat before the Senate Banking Committee this week, he represented a bank too big to fail, too sprawling to manage and too arrogant to own up to its failures.

Can’t Wells Fargo take back some of the executive payouts? “I’m not an expert in compensation,” Stumpf said. Would he commit to investigate whether the fraud began in earlier years? “I can’t tell you that today.” Did he learn about the fraud before reading about it in the Los Angeles Times? “I don’t remember the exact time frame.” Stumpf informed the senators that what Wells Fargo did “was not a scam,” disputed that “this is a massive fraud” and said he had no idea “why people did this.” Sen. Jerry Moran, R-Kan., encouraged Stumpf to “make certain that the employees are not the scapegoat for behavior at higher levels.” Stumpf repeated that “the 5,300, for whatever reason, they were dishonest, and I’m not scapegoating.” If high-level bankers didn’t go to prison for the subprime high jinks that caused the 2008 crash, it’s a safe bet that none will in the Wells Fargo scandal either.

But if arrogance were a criminal offense, Stumpf would be looking at a life sentence. The bank’s fraud, and the executive’s insolence, may have one salutary result: It takes off the agenda any plan to dismantle the Consumer Financial Protection Bureau, one of the post-2008 regulatory creations and a top target of Donald Trump and congressional Republicans. The Los Angeles city attorney and the Los Angeles Times may deserve more credit for exposing the wrongdoing, but the audacity at Wells Fargo shows that the industry isn’t about to police itself. Stumpf also managed to create rare bipartisan unity on the Banking Committee – in condemnation of his actions. Sherrod Brown, D-Ohio, was “stunned.” Dean Heller, R-Nev., compared him to Sgt. Schultz of “Hogan’s Heroes.” Robert Menendez, D-N.J., called the actions “despicable.” Patrick J. Toomey, R-Pa., told Stumpf: “This isn’t cross-selling, this is fraud.”

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“Let’s ask ourselves whether we are comfortable with the United States getting slowly, predictably, and all too quietly dragged into yet another war in the Middle East.”

27 US Senators Rebel Against Arming Saudi Arabia (I’Cept)

A Senate resolution opposing a $1.15 billion arms transfer to Saudi Arabia garnered support from 27 senators on Wednesday, a sign of growing unease about the increasing number of civilians being killed with U.S. weapons in Yemen. A procedural vote to table the resolution passed 71-27. The Obama administration announced the transfer last month, the same day the Saudi Arabian coalition bombed a potato chip factory in the besieged Yemeni capital. In the following week, the Saudi-led forces would go on to bomb a children’s school, the home of the school’s principal, a Doctors Without Borders hospital, and the bridge used to carry humanitarian aid into the capital. Saudi Arabia began bombing Yemen in March 2015, four months after Houthi rebels from Northern Yemen overran the capitol, Sanaa, and deposed the Saudi-backed ruler, Abdu Rabbu Mansour Hadi.

In addition to providing Saudi Arabia with intelligence and flying refueling missions for its air force, the United States has enabled the bombing campaign by supplying $20 billion in weapons over the past 18 months. In total, President Obama has sold more than $115 billion in weapons to the Saudi kingdom – more than any other president. After the White House failed to respond to a letter from 60 members of Congress requesting that the transfer be delayed, Sens. Chris Murphy, D-Conn., and Rand Paul, R-Ky., introduced a resolution condemning the arms sale. Paul and Murphy said they had planned to pursue binding legislation if their resolution was successful. “It’s time for the United States to press ‘pause’ on our arms sales to Saudi Arabia,” Murphy said. “Let’s ask ourselves whether we are comfortable with the United States getting slowly, predictably, and all too quietly dragged into yet another war in the Middle East.”

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Carter’s a real man. No Clinton, Bush or Obama is fit to shine his shoes.

A First Step for Syria? Stop the Killing (Jimmy Carter)

The announcement this month of a new cease-fire agreement in Syria is good news. But a lack of trust among the Syrian belligerents and their foreign supporters means this agreement, like the one that came before it, is vulnerable to collapse. It is already showing severe signs of strain. Over the weekend, the United States accidentally bombed Syrian government troops. On Monday, the Syrian military declared it would no longer respect the deal, resumed airstrikes on Aleppo, and even a humanitarian aid convoy was bombed. Still, there is reason for hope. If Russia and the United States were willing to come far enough in their negotiations to reach this deal, these setbacks can be overcome. The targeting of the humanitarian convoy, a war crime, should serve as an added impetus for the United States and Russia to recommit to the cease-fire.

The two parties were well aware of the difficulties as they spent a month negotiating the cease-fire’s terms. The agreement can be salvaged if all sides unite, for now, around a simple and undeniably important goal: Stop the killing. It may be more likely than it sounds. Reliable sources estimate the number of Syrians killed to date at almost half a million, with some two million more people wounded. Well over half of the country’s 22 million prewar population has been displaced. These shocking numbers alone should convince all concerned that war itself is the greatest violation of human rights and the ultimate enemy of Syria. If this cease-fire is to last, the United States and Russia must find ways to work beyond the lack of trust that undermined the previous cease-fire, in February.

The countrywide cessation of hostilities that began then started to crumble within two months, with battles in much of the countryside around Damascus, central and northern Syria, and Aleppo. The resumption of the conflict led in April to the suspension of UN-sponsored peace talks in Geneva. However, a strong effort was made earlier in the year when the United States and Russia pressed their respective allies to pause the fighting and give the negotiations a chance. But the American and Russian expectation that they reach an agreement on issues of transitional governance by Aug. 1 was unrealistic. After five years of killing, and before any semblance of trust could be established, pushing the Syrian parties and their supporters to agree on power-sharing was seen as too threatening by some and too inadequate by others. Unsurprisingly, they reverted to violence.

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A lovely letter.

Apologizing to My Daughter for the Last 15 Years of War (Van Buren)

I recently sent my last kid off for her senior year of college. There are rituals to such moments, and because dad-confessions are not among them, I just carried boxes and kept quiet. But what I really wanted to say to her — rather than see you later, call this weekend, do you need money? – was: I’m sorry. Like all parents in these situations, I was thinking about her future. And like all of America, in that future she won’t be able to escape what is now encompassed by the word “terrorism.” Terrorism is a nearly nonexistent danger for Americans. You have a greater chance of being hit by lightning, but fear doesn’t work that way. There’s no 24/7 coverage of global lightning strikes or “if you see something, say something” signs that encourage you to report thunderstorms.

So I felt no need to apologize for lightning. But terrorism? I really wanted to tell my daughter just how sorry I was that she would have to live in what 9/11 transformed into the most frightened country on Earth. Want the numbers? Some 40% of Americans believe the country is more vulnerable to terrorism than it was just after September 11, 2001 – the highest%age ever. Want the apocalyptic jab in the gut? Army Chief of Staff General Mark Milley said earlier this month that the threat remains just as grave: “Those people, those enemies, those members of that terrorist group, still intend – as they did on 9/11 – to destroy your freedoms, to kill you, kill your families, they still intend to destroy the United States of America.” All that fear turned us into an engine of chaos abroad, while consuming our freedoms at home.

And it saddens me that there was a different world, pre-9/11, which my daughter’s generation and all those who follow her will never know. [..] After the last cardboard boxes had been lugged up the stairs, I held back my tears until the very end. Hugging my daughter at that moment, I felt as if I wasn’t where I was standing but in a hundred other places. I wasn’t consoling a smart, proud, twenty-something woman, apprehensive about senior year, but an elementary school student going to bed on the night that would forever be known only as 9/11. Back home, the house is empty and quiet. Outside, the leaves have just a hint of yellow. At lunch, I had some late-season strawberries nearly sweet enough to confirm the existence of a higher power. I’m gonna really miss this summer.

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Harris&Ewing Preparations for the inauguration of Woodrow Wilson, Court of Honor before White House 1913


Unlike in 1986, This Time US Might Not Dodge a Recession: Deutsche Bank (BBG)
Get Ready For The Mother Of All Stock Market Corrections (Tel.)
Japan Exports Fall 11th Straight Month, 9.6% YoY, Imports Plunge 17.3% (R.)
Bank of Japan Overhauls Policy Framework, Sets Yield Curve Target (R.)
Bank of Japan Introduces Rate Target for 10-Year Government Bonds (WSJ)
Could Germany Allow Deutsche Bank To Go Under? (Golem XIV)
Keynesian Deflation Humbug (Mish)
Nobody Has Ever Shut Down The World’s Best Drilling Rigs – Until Now (BBG)
Crude Slips As Venezuela Says Market Is 10% Oversupplied (Dow Jones)
SEC Probes Exxon Over Asset Valuation, Climate Change Accounting (WSJ)
Court Says Hanjin Shipping Rehab Plan ‘Realistically Impossible’ (R.)
Elizabeth Warren to Wells Fargo CEO: Resign, Return Earnings, Face Inquiry (G.)
Mexico Police Raid Sawmills To Rescue Monarch Butterfly Refuge (AFP)
Italy PM Renzi: Merkel Is ‘Lying To The Public’, Europe Is a ‘GHOST’ (Exp.)
EU: Refugees Must Stay On Greek Islands Despite Lesbos Fire (AP)

 

 

There are few things more nonsensical than ‘experts’ saying things like “..there’s a 30% probability that the U.S. will succumb to a recession over the next 12 months..” Yet, people keep listening.

Unlike in 1986, This Time US Might Not Dodge a Recession: Deutsche Bank (BBG)

Falling corporate margins, weakness in the U.S. labor market and rising corporate default rates — all features of the U.S. economy in 1986, a year it avoided a recession. Even if this year markets are largely shrugging off the deterioration in those key indicators and betting grim readings are down to temporary forces, Deutsche Bank strategists say to take little hope from a 30-year old precedent. Investors jittery over bleak readings on a slew of macro and corporate data have seized on 1986, when the same signals for a U.S recession were in place but the economy ended up growing 3.5% after inflation.

But bets on the continued expansion in U.S. output over the next year might be misplaced, according to European equity strategists at Deutsche Bank, since the economy is on a significantly weaker footing compared to the year that saw the release of Ferris Bueller’s Day Off. They restate the bank’s call that there’s a 30% probability that the U.S. will succumb to a recession over the next 12 months. That compares pessimistically with the 20% that is the average expectations of analysts surveyed by Bloomberg — and even with other analysts at the bank.

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…when central banks stop printing…

Get Ready For The Mother Of All Stock Market Corrections (Tel.)

[..] According to Chris Watling at Longview Economics, a wide range of indicators confirm the message: recession risks are rising. And if a recession is indeed looming, it almost certainly means a bear market in equities. Looking at all the US recessions of the last 77 years, Mr Watling finds that there is only one (1945) which has not been accompanied by a stock market correction. Complicating matters further is an ever more worrisome phenomenon – that both bond and equity markets are being artificially propped up by central bank money printing. Further easing this week from the Bank of Japan would only deepen the problem. Yet eventually it must end, and when it does, share prices globally will return to earth with a bump. Only lack of alternatives for today’s ever rising wall of money seems to hold them aloft.

Over the last year, central bank manipulation of markets has reached ludicrous levels, far beyond the “quantitative easing” used to mitigate the early stages of the crisis. Through long use, “unconventional monetary policy” of the original sort has become ineffective, and, well, simply conventional in nature. To get pushback, central banks have been straying ever further onto the wild-west frontiers of monetary policy. Today it’s not just government bonds which are being bought up by the lorry load, but corporate debt, and in the case of the Bank of Japan and the Swiss National Bank (SNB), even high risk equities. [..] For global corporations at least, credit has never been so free and easy, encouraging aggressive share buy-back programmes.

This in turn further inflates valuations already in danger of losing all touch with underlying fundamentals. By the by, it also helps trigger lucrative executive bonus awards. Where’s the real earnings and productivity growth to justify the present state of stock markets? As long as the central bank is there to do the dirty work, it scarcely seems to matter. In any case, the situation seems ever more precarious and unsustainable. Conventional pricing signals have all but disappeared, swept away by a tsunami of newly created money. Globally, the misallocation of capital must already be on a par with what happened in the run-up to the financial crisis, and possibly worse given the continued build-up of debt since then.

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World trade summed up.

Japan Exports Fall 11th Straight Month, 9.6% YoY, Imports Plunge 17.3% (R.)

Japan’s exports fell 9.6% in August from a year earlier, posting an 11th straight month of decline, Ministry of Finance data showed on Wednesday, underscoring sluggish external demand. The fall compares with a 4.8% decrease expected by economists in a Reuters poll. It followed a 14.0% drop in July, the data showed. Imports fell 17.3% in August, versus the median estimate for a 17.8% decline. The trade balance swung to a deficit of 18.7 billion yen ($184 million), versus the median estimate for a 202.3 billion yen surplus. It was a first trade deficit in three months.

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Who says Kuroda has no sense of humor? After failing to lift inflation for years, he now says he will “..allow inflation to overshoot its target..

Bank of Japan Overhauls Policy Framework, Sets Yield Curve Target (R.)

The Bank of Japan added a long-term interest rate target to its massive asset-buying program on Wednesday, overhauling its policy framework and recommitting to reaching its 2% inflation target as quickly as possible. The central bank also said it will allow inflation to overshoot its target by maintaining an ultra-loose policy – beefing up its previous commitment to keep policy easy until the target was reached and kept in a stable manner. At the two-day rate review that ended on Wednesday, the BOJ maintained the 0.1% negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.

But it abandoned its base money target and instead adopted “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero %. The BOJ said it would continue to buy long-term government bonds at a pace that ensures its holdings increase by 80 trillion yen ($781 billion) per year. Under the new framework that adds yield curve control to its current quantitative and qualitative easing (QQE), the BOJ will deepen negative rates, lower the long-term rate target, or expand base money if it were to ease again, the central bank said in a statement announcing the policy decision. “The BOJ will seek to lower real interest rates by controlling short-term and long-term interest rates, which would be placed as the core of the new policy framework,” it said.

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But seriously, historians will look back on today wondering how on earth we could have all swallowed this continuing gibberish.

Bank of Japan Introduces Rate Target for 10-Year Government Bonds (WSJ)

Japan’s central bank took an unexpected step Wednesday, introducing a zero interest-rate target for 10-year government bonds to step up its fight against deflation, after an internal review of previous measures that fell short of expectations. he adoption of a long-term target, the first such attempt in the BOJ’s history, came as global central banks struggle to find ways to get prices rising. Financial markets gyrated following the Bank of Japan’s announcement of what it called a “new framework” to overcome deflation. Some thought it illustrated the limits of the BOJ’s powers, since the decision didn’t include any direct new stimulus measures, while others were encouraged by the BOJ’s tone.

“Investors are showing a positive response as they got the feeling that the BOJ will do whatever it can do to tackle deflation,” said Kengo Suzuki at Mizuho Securities in reference to the yen’s fall following the BOJ action. The dollar was around 102.60 yen in afternoon Tokyo trading, compared with around 101.90 yen before the decision. The 10-year Japanese government bond yield had already been near zero in recent weeks. It was minus 0.06% just before the decision and was minus 0.03% in Tokyo afternoon trading hours after the decision. The new framework puts 10-year interest rates at the center of policy, a contrast to the BOJ’s approach for the last 3 1/2 years under Gov. Haruhiko Kuroda, when asset purchases and expanding the monetary base were the key policy tool.

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Smart from Golem.

Could Germany Allow Deutsche Bank To Go Under? (Golem XIV)

[..] public bail outs are supposed to be strictly temporary. No holding 80% of RBS for most of a decade. Really? But that’s not the point which is important for Deutsche Bank. The important point is that in any sale of the viable parts of Germany’s only G-SIB, the brutal fact of the matter is that there is no other German financial institution that could afford to buy any of it. Commerzbank? Allianz? Letting an insurer buy a bank? So imagine the situation for Germany. They lose their seat at the top table and then they watch as France, England, American or perhaps China buy the crown of German financial might. So I don’t think it will ever happen. Or at least it will only happen when Germany is truly out of any other options. So if Deutsche is not going to be declared “no longer viable” what are the alternatives?

One option is the UniCredit route. UniCredit was a trillion euro bank. It was Italy’s flag carrier. It had bought Bavaria’s banks and some of Austria’s as well. And yet it’s share price was always paltry. Just 7.6 Euros at the market top in May ’07. And since then it has been a hollow and enfeebled giant. Lumbering and ineffectual. It has been the laughing stock of European banks. But Italy doesn’t seem to mind. They seem content to let UniCredit be the quintessential Zombie bank. Would Germany be as sanguine to leave Deutsche to go the same way? This would, I suggest, be almost as injurious to German pride and industrial policy as letting Deutsche go down completely.

But if Germany decided it could not face the financial consequences of obeying the letter of the resolution law nor leave the bank to be a bloated and useless zombie then the alternatives bring in their train even greater political upheavals. Imagine the German government decides that not bailing out Deutsche just inflicts too much damage on Germany – potentially reducing Germany from the front rank of globally significant nations to something lesser. It becomes a matter of national pride if not of survival. So Germany ignores all the FSB rules and regulations and bails Deutsche bringing it into government ownership/protection – call it what you like. In so doing it demolishes the entirety of European policy regarding bail outs, government debts and austerity.

Where then all the German insistence on fiscal discipline it has forced upon Greece, Ireland, Portugal, Spain and Italy? The Bundesbank, Berlin and the ECB would have no authority at all. Every country would have a green light to do the same for their flag carriers. It would be the end the European experiment. Or the European system would have to try to continue without Germany. And that could only happen if all debts to Germany were repudiated. I realise all this is speculation. But Deutsche has lost 90% of its value. Only RBS has lost more. Deutsche has 7000 legal cases against it. Frau Merkel is losing her grip, Brexit rocked the complacent rulers of Euroland and Madame Marine Le Pen would like to push France to do the same.

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Mish restates the obvious: “Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it’s precisely the opposite.”

Keynesian Deflation Humbug (Mish)

Hip, hip, hooray! The CPI is up more than expected, led by a huge 1.1% month-over-month surge in medical care supplies. Medical care services jumped 0.9%, and shelter jumped 0.3%. This will not help the economy. And it will subtract from consumer spending other than Obamacare and rent, but economists are cheering.

Real World Happiness

  • Food at home -1.9%
  • Energy -9.2%
  • Gasoline -17.3%
  • Fuel Oil -12.8%
  • Electricity -.07%
  • Used cars -4.0%

Unreal World Happiness

  • Food Away From Home +2.8%
  • Medical Care Commodities +4.5%
  • Shelter +3.4%
  • Transportation Services +3.1%
  • Medical Care Services +5.1%

Keynesian Theory vs. Practice Keynesian theory says consumers will delay purchases if prices are falling. In practice, all things being equal, it’s precisely the opposite. If consumers think prices are too high, they will wait for bargains. It happens every year at Christmas and all year long on discretionary items not in immediate need.

Reality Check Questions

  • If price of food drops will people stop eating?
  • If the price of gasoline drops will people stop driving?
  • If price of airline tickets drop will people stop flying?
  • If the handle on your frying pan falls off or your blow-dryer breaks, will you delay making another purchase because you can get it cheaper next month?
  • If computers, printers, TVs, and other electronic devices will be cheaper next year, then cheaper again the following year, will people delay purchasing electronic devices as long as prices decline?
  • If your coat is worn out, are you inclined to wait another year if there are discounts now, but you expect even bigger discounts a year from now?
  • Will people delay medical procedures in expectation of falling prices?
  • If deflation theory is accurate, why are there huge lines at stores when prices drop the most?

Bonus Question

If falling prices stop people from buying things, how are any computers, flat screen TVs, monitors, etc., ever sold, in light of the fact that quality improves and prices decline every year?

Anyone who thinks soaring Obamacare and rent is a good thing and will help the economy is crazy.

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Forget the OPEC output cut talks, here’s what’s really happening in oil.

Nobody Has Ever Shut Down The World’s Best Drilling Rigs – Until Now (BBG)

In a far corner of the Caribbean Sea, one of those idyllic spots touched most days by little more than a fisherman chasing blue marlin, billions of dollars worth of the world’s finest oil equipment bobs quietly in the water. They are high-tech, deepwater drillships – big, hulking things with giant rigs that tower high above the deck. They’re packed tight in a cluster, nine of them in all. The engines are off. The 20-ton anchors are down. The crews are gone. For months now, they’ve been parked here, 12 miles off the coast of Trinidad & Tobago, waiting for the global oil market to recover. The ships are owned by a company called Transocean Ltd., the biggest offshore-rig operator in the world. And while the decision to idle a chunk of its fleet would seem logical enough given the collapse in oil drilling activity, Transocean is in truth taking an enormous, and unprecedented, risk.

No one, it turns out, had ever shut off these ships before. In the two decades since the newest models hit the market, there never had really been a need to. And no one can tell you, with any certainty or precision, what will happen when they flip the switch back on. It’s a gamble that Transocean, and a couple smaller rig operators, felt compelled to take after having shelled out millions of dollars to keep the motors running on ships not in use. That technique is called warm-stacking. Parked in a safe harbor and manned by a skeleton crew, it typically costs about $40,000 a day. Cold-stacking – when the engines are cut – costs as little as $15,000 a day. Huge savings, yes, but the angst runs high.

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OPES helps the US bring Maduro to his knees.

Crude Slips As Venezuela Says Market Is 10% Oversupplied (Dow Jones)

Oil prices dipped to a new one-month low Tuesday as hopes for any deal between OPEC countries and Russia to freeze production continued to fade. U.S. crude for October delivery recently fell 14 cents, or 0.3%, to $43.18 a barrel on the New York Mercantile Exchange. The October contract expires at settlement, and the more actively traded November contract recently fell 27 cents, or 0.6%, to $43.59 a barrel. Brent, the global benchmark, fell 42 cents, or 0.9%, to $45.53 a barrel on ICE Futures Europe. Recent trade has been marked by fears that more OPEC members are intent on increasing production, even as leaders discuss the possibility of an output cap. Libya, Iran and Nigeria combined want to increase their output by about 1.5 million barrels a day this year.

Even Venezuela is raising exports, despite financial and production troubles, and the moves from all these countries are a clear message that none would be interested in agreeing to a cap, said Bjarne Schieldrop from Sweden’s SEB bank. He added that any deal would probably allow exceptions for Nigeria, Libya, Venezuela and Iran to lift production, possibly nullifying any agreement. “It doesn’t seem like any oil producers outside of North America are doing anything to control their production levels,” said Gene McGillian, research manager at Tradition Energy. Oil has been in a steady downtrend for the better part of two weeks with concerns over lingering oversupply. Prices are down 9.4% since they hit a high point for nearly the past month on Sept. 8.

The biggest drop came in two days last week after the International Energy Agency said a slowdown in global oil demand growth accelerated this quarter, sinking to 800,000 barrels a day – 1.5 million barrels a day lower than the third quarter of 2015. Despite that and talks of an output cap, data show OPEC members broadly producing near-record amounts of crude. “Fundamentals suggest the oil market is likely to remain in surplus for longer than many expected,” strategists at ING Bank said in a note.

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Exxon has not: 1) written down valuations of reserves as prices plunged, and 2) accounted for the financial consequences of climate change regulations.

SEC Probes Exxon Over Asset Valuation, Climate Change Accounting (WSJ)

The U.S. Securities and Exchange Commission is investigating how Exxon Mobil values its assets in a world of increasing climate-change regulations, a probe that could have far-reaching consequences for the oil and gas industry. The SEC sought information and documents in August from Exxon and the company’s auditor, PricewaterhouseCoopers, according to people familiar with the matter. The federal agency has been receiving documents the company submitted as part of a continuing probe into similar issues begun last year by New York Attorney General Eric Schneiderman, the people said.

The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects. The decision to step into an Exxon investigation and seek climate-related information represents a moment in the effort to take climate change more seriously in the financial community, said Andrew Logan, director of the oil and gas program at Ceres, a Boston-based advocacy organization that has pushed for more carbon-related disclosure from companies.

“It’s a potential tipping point not just for Exxon, but for the industry as a whole,” he said. As part of its probe, the SEC is also examining Exxon’s longstanding practice of not writing down the value of its oil and gas reserves when prices fall, people familiar with the matter said. Exxon is the only major U.S. producer that hasn’t taken a write down or impairment since oil prices plunged two years ago. Peers including Chevron have lowered valuations by a collective $50 billion.

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Shipping prices will plummet.

Court Says Hanjin Shipping Rehab Plan ‘Realistically Impossible’ (R.)

The South Korean court overseeing Hanjin Shipping’s receivership said a rehabilitation plan is “realistically impossible” if top priority debt such as backlogged charter fees exceed 1 trillion won ($896 million), South Korea’s Yonhap newswire reported on Wednesday. Hanjin Shipping, the world’s seventh-largest container carrier, filed for receivership late last month in a South Korean court and must submit a rehabilitation plan in December. With debt of about 6 trillion won ($5.4 billion) at the end of June and the South Korean government’s unwillingness to mount a rescue, expectations are low that Hanjin Shipping will be able to survive. Top priority debt means claims for public interests, which are paid first to creditors and include cargo owners’ damages and unpaid charter fees, Yonhap reported citing the Seoul Central District Court.

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Shouldn’t such an inquiry be as obvious as common sense??

Elizabeth Warren to Wells Fargo CEO: Resign, Return Earnings, Face Inquiry (G.)

Wells Fargo chief executive John Stumpf should resign, return his pay and be criminally investigated over the bank’s illegal sales practices, Senator Elizabeth Warren said on Tuesday. The Massachusetts senator’s comments came moments after Stumpf said he was “deeply sorry” for the more than 2m unauthorized accounts his staff opened for the bank’s customers. The accounts, ranging from credit cards to checking accounts, were opened by thousands of the bank’s employees in an effort to meet Wells Fargo’s sales quotas and have already led to a record $185m fine. While testifying in front of the Senate banking committee, Stumpf said he was “deeply sorry” that the bank let down its customers and apologized for violating their trust.

“I accept full responsibility for all unethical sales practices in our retail banking business, and I am fully committed to doing everything possible to fix this issue, strengthen our culture, and take the necessary actions to restore our customers’ trust,” Stumpf said in his prepared remarks. Warren accused Stumpf of “gutless leadership”, telling him that his definition of being accountable is to push the blame on lower-level employees who do not have a PR firm to defend them. Warren questioned Stumpf’s compensation, asking him: “Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?” “The board will take care of that,” Stumpf said after attempting to duck the question. He also told Warren that this “was not a scam”.

Warren pointed out that during the time that the unauthorized accounts were being opened, the share price of Wells Fargo went up by about $30. Stumpf personally owns about 6.75m shares of Wells Fargo stock and made more than $200m just off his stock during that time, Warren said. [..] At the hearing Stumpf pointed out that the lowest paid employees at Wells Fargo earn $12 an hour and that the employees let go for opening unauthorized accounts were making “good money”, earning $30,000 to $60,000 a year. “How much money did you make last year?” New Jersey senator Robert Menendez asked Stumpf. “$19.3m,” said Stumpf. “Now that’s good money,” said Menendez.

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Kudo’s.

Mexico Police Raid Sawmills To Rescue Monarch Butterfly Refuge (AFP)

A special Mexican police unit has raided seven sawmills near the monarch butterfly’s mountain sanctuary in a bid to prevent illegal logging threatening the insect’s winter migration, officials said Tuesday. Backed up by a helicopter, some 220 members of the country’s police force and 40 forestry inspectors participated in the September 12 operation in the western state of Michoacan. North American governments have taken steps since last year to protect the monarch butterfly, which crosses Canada and the United States each year to hibernate on the fir and pine trees of Mexico’s western mountains. Last week’s raid was the first since the government decided in April to add the police to protection efforts for the brilliant orange and black monarchs.

The force has been conducting foot patrols day and night, using drones and helicopters for surveillance when weather permits, Abel Corona, director of the special units, said at a news conference. [..] Illegal logging dropped by 40% between the 2014-2015 and 2015-2016 butterfly season, environmental protection authorities said last month. But March storms killed seven% of the monarchs. The cold spell came after authorities had reported a rebound in the 2015-2016 season, with the butterfly covering 4.01 hectares (9.9 acres) of forest, more than tripling the previous year’s figure.

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Renzi in his referendum desperation finally tells the truth, somewhat.

Italy PM Renzi: Merkel Is ‘Lying To The Public’, Europe Is a ‘GHOST’ (Exp.)

Angela Merkel has been lying to the public about European unity, Italian Prime Minister Matteo Renzi has said. In a brutal attack on his fellow EU members, he said the first EU summit without the UK amounted to no more than “a nice cruise on the Danube”. Having been excluded from a joint news conference by the German Chancellor, Mrs Merkel and French President Francois Hollande, he said he was dissatisfied with the Bratislava summit’s closing statement. The outspoken Italian premier hit out at the lack of commitments on the economy and immigration in the summit’s conclusions, despite signing it himself. In a fiery interview in Italian daily Corriere della Sera, Mr Renzi intensified his criticisms, although he remained vague on what commitments he would have liked the summit to produce.

The Prime Minister has staked his career on a referendum this autumn over plans for constitutional reform, promising to resign if he loses. Talking about his fellow leaders, he said: “If we want to pass the afternoon writing documents without any soul or any horizon they can do it on their own. “I don’t know what Merkel is referring to when she talks about the ‘spirit of Bratislava’. “If things go on like this, instead of the spirit of Bratislava we’ll be talking about the ghost of Europe.” Mr Renzi said he is preparing a 2017 budget which he claims will cut taxes despite a slowing economy and record high public debt. He added: “At Bratislava we had a nice cruise on the Danube, but I hoped for answers to the crisis caused by Brexit, not just to go on a boat trip.”

He was similarly belligerent about the Italian budget to be presented next month, saying there would be “no negotiation” with Brussels, and money he planned to spend on tackling immigration and making Italy safer from earthquakes would be excluded from EU rules on deficit limits. Other countries were more guilty than Italy of breaking budget rules and Italy had met its commitments on tackling the inflows of migrants crossing the Mediterranean, Renzi said. He said: “I’m not going to stay silent for the sake of a quiet life. “If someone wants to keep Italy quiet they have picked the wrong place, the wrong method and the wrong subject.”

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In case anyone still had any doubts about this, here’s more proof that it’s the EU, not Greece, that is responsible for the expanding misery. Europe wants the islands to serve as holding pens, so richer Europe doesn’t have to face the consequences of the policies it itself dictates.

“To avoid secondary movement to the rest of Europe, that means keeping asylum seekers on the islands..”

EU: Refugees Must Stay On Greek Islands Despite Lesbos Fire (AP)

Authorities on the island of Lesvos called for the immediate evacuation Tuesday of thousands of refugees to the Greek mainland after a fire gutted a detention camp following protests. But EU officials appeared cool to the idea. More than 4,000 people were housed at the camp in Moria on Lesvos where the fire broke out late Monday, destroying or damaging tents and trailers. No injuries were reported at the camp, about 8 kilometers north of the island’s main town. Nine migrants were arrested on public disturbance charges after the chaotic scenes. Families with young children hastily packed up their belongings and fled into the nearby fields as the fire raged after nightfall. Many were later given shelter at volunteer-run camps. “We have been saying for a very long time that overcrowding on the islands must be eased,” regional governor Christiana Kalogirou said.

“On the islands of the northeast Aegean, official facilities have a capacity of 5,450 places, but more than 10,500 people are there. There is an immediate need to take people off the islands because things will get even more difficult,” she said. More than 60,000 migrants and refugees are stranded in transit in Greece, and those who arrived after March 20 have been restricted to five Aegean islands under an EU-brokered deal to deport them back to Turkey. But the agreement has been fraught with delays. In Brussels, a spokeswoman for the European Commission, Natasha Bertaud, said the Greek government had described the situation as being under control. Transfers to the mainland, she said, would remain limited. “To avoid secondary movement to the rest of Europe, that means keeping asylum seekers on the islands for the most part,” Bertaud said.

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