Oct 032016
 
 October 3, 2016  Posted by at 9:37 am Finance Tagged with: , , , , , , , ,  7 Responses »


NPC Congressman John C. Schafer of Wisconsin 1924

Is the U.S. Dollar Set to Soar? (CH Smith)
Pound Nears Three-Decade Low as May Sets Date for Brexit Trigger (BBG)
China Seeking To Succeed Where Japan Failed In Reserve Currency Push (BBG)
Deutsche Bank Races Against Time To Reach US Settlement (R.)
German Economy Minister Accuses Deutsche Bank Of Hypocrisy (Pol.)
It’s Not Just Deutsche. European Banking is Utterly Broken (Tel.)
Kuroda Blamed For Abenomics Failure, Ruins Chance Of Second Term (BBG)
BOJ Deploys US World War II Tactics That Failed to Spur Prices (BBG)
Canada’s Big Bet on Stimulus Draws Global Attention (WSJ)
Jail Wells Fargo CEO and Chairman John Stumpf! (Nomi Prins)
The Government Is Turning the Entire United States into a Debtors Prison (TAM)
Fukushima Has Contaminated The Entire Pacific Ocean, Going To Get Worse (TA)
Hungary’s Refugee Referendum Not Valid After Voters Stay Away (G.)
Vulnerable Refugees To Be Moved From ‘Squalid’ Camps On Greek Islands (G.)
Germany Wants Migrants Sent Back To Greece, Turkey (AFP)

 

 

As the Automatic Earth has said for many years, he USD won’t be the first to go. It’s about dollar-denominated debt.

Is the U.S. Dollar Set to Soar? (CH Smith)

Which blocs/nations are most likely to face banking/liquidity crises in the next year? Hating the U.S. dollar offers the same rewards as hating a dominant sports team: it feels righteous to root for the underdogs, but it’s generally unwise to let that enthusiasm become the basis of one’s bets. Personally, I favor the emergence of non-state reserve currencies, for example, blockchain crypto-currencies or precious-metal-backed private currencies – currencies which can’t be devalued by self-serving central banks or the private elites that control them. But if we set aside our personal preferences and look at fundamentals and charts, odds seem to favor the U.S. dollar making a major move higher in the next few months. Let’s start with a national index of finance-power which combines GDP, military spending, banking, foreign direct investment (FDI) and foreign exchange:

The key take-away is the preponderance of the U.S. and the Anglo-American alliance, a.k.a. the special relationship of Great Britain and the U.S. The U.S. exceeds Germany, China, Japan and France combined, and the U.S.-Great Britain alliance is roughly equal to the next 10 nations: the four listed above plus The Netherlands, Switzerland, Italy, Spain, Canada and the Russian Federation. We don’t have to like it, but as investors it’s highly risky to act like it isn’t reality.

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If the whining about Beautiful Brexit would finally stop in the UK, maybe they could do something constructive.

Pound Nears Three-Decade Low as May Sets Date for Brexit Trigger (BBG)

The pound approached the three-decade low set in the days following the Brexit referendum after U.K. Prime Minister Theresa May said she’ll begin the process of withdrawal from the European Union in the first quarter of 2017. Sterling dropped to the weakest level since July 6, the day it reached its 31-year low of $1.2798, and slipped against all of its 31 major peers. Hedge-fund data showed speculators raised bets that the currency would fall. May told delegates at her Conservative Party’s annual conference that she’ll curb immigration, stoking speculation the nation is headed toward a so-called hard Brexit. Stocks of U.K. exporters rose, boosted by the weaker currency. “We’re back to the Brexit risks,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. in Singapore. “Sterling has taken a bit of a knock.”

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Let’s see large-scale global issuance of debt in yuan. Then we talk.

China Seeking To Succeed Where Japan Failed In Reserve Currency Push (BBG)

Like the yuan, the yen’s march toward liberalization was gradual and marked with ambivalence. Under the Bretton Woods system after World War II, the Japanese currency was fixed at 360 a dollar, before a trading band was introduced in 1959 to make it slightly more flexible. For three decades, all capital flows except those explicitly permitted were banned, making it easier for the government to achieve policy goals. It wasn’t until 1998 that approval or notification requirements for financial transactions and outward direct investments were abolished. The push to internationalize the yen initially came from the U.S., which wanted greater global use to fuel appreciation and reduce Japan’s trade surplus with America. China’s situation now isn’t dissimilar.

Having thrived on an economic model of closed borders and accumulation of reserves for decades, its capital account is still closed, individuals’ foreign-exchange conversions are capped and inter-country money flows occur mainly through specific programs. Policy makers have tightened controls on outflows in the past year after the yuan’s August 2015 devaluation exacerbated depreciation pressures. The currency was little changed Friday at 6.68 per dollar. Lowering the hurdles to create a true freely traded currency might risk a flight of capital during times of weakness, a concept China doesn’t always seem comfortable with. “Everyone wants this thing called ‘exorbitant privilege,’ but if you try to give it to them, they get furious and they tell you to stop,” said Michael Pettis, a finance professor at Peking University.

“Countries like China that are running huge surpluses because of insufficient domestic demand – basically they are creating the role of the dollar as the dominant reserve currency.” The term “exorbitant privilege,” coined by former French finance minister Valery Giscard D’Estaing in 1965, referred to the benefits the U.S. received for the dollar’s status. Daniel McDowell, a Syracuse University political science assistant professor who studies international finance, made the point that the appeal of a nation’s sovereign debt market plays a key role in a currency’s internationalization. The yen never became a major reserve currency because its government bonds weren’t as attractive or as plentiful as the U.S., he said.

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Everyone’s just trying to save face by now. Merkel, Obama, DOJ.

Deutsche Bank Races Against Time To Reach US Settlement (R.)

Deutsche Bank is throwing its energies into reaching a settlement before next month’s presidential election with U.S. authorities demanding a fine of up to $14 billion for mis-selling mortgage-backed securities. The threat of such a large fine has pushed Deutsche shares to record lows, and a cut-price settlement is urgently needed to reverse the trend and help to restore confidence in Germany’s largest lender. Its shares won’t trade in Germany on Monday because of a public holiday, but they will resume trading on the U.S. market later on Monday. A media report late on Friday that Deutsche and the U.S. Department of Justice were close to agreeing on a settlement of $5.4 billion lifted the stock 6% higher, but that report has not been confirmed.

The Wall Street Journal reported on Sunday that the bank’s talks with the DOJ were continuing. Details are in flux, with no deal yet presented to senior decision makers for approval on either side, the paper said, citing people familiar with the matter. “Clearly, so long as a fine of this order of magnitude ($14 billion) is an even remote possibility, markets worry,” UniCredit Chief Economist Erik F. Nielsen wrote in a note on Sunday. Ratings agency Moody’s said it would be positive for bondholders if the lender could settle for around $3.1 billion, while a fine as high as $5.7 billion would dent 2016 profitability but not significantly impair the bank’s capital position.

[..] The Bild am Sonntag newspaper wrote on Sunday that Deutsche’s chairman had informed Berlin just before it disclosed the potential $14 billion fine but had not asked for help. The same newspaper quoted the president of the Bavarian Finance Centre, Wolfgang Gerke, as saying that the German government should step in and buy a 20% stake in the bank before its value fell any further. The group represents financial services companies in the southern German state. “Fundamentally, I’m against state interventions,” he told the newspaper, but added that in this case a government stake would be “a signal that could turn the whole market”.

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Making Merkel’s day, no doubt. It wasn’t nearly hard enough for her yet.

German Economy Minister Accuses Deutsche Bank Of Hypocrisy (Pol.)

Germany’s economy minister has highlighted the irony of Deutsche Bank blaming speculators for its falling share price when the bank itself has built its business on speculation. “I did not know if I should laugh or get angry that the bank that made speculation a business model is now saying it is a victim of speculators,” Sigmar Gabriel told journalists on a plane to Tehran on Sunday, Der Spiegel reported. The threat of a $14 billion fine by U.S. authorities over the sales of mortgage-backed securities before the financial crisis sent Deutsche Bank’s shares to new lows this month. Gabriel was responding to a letter sent by Deutsche Bank CEO John Cryan to staff Friday blaming “new rumors” for causing the plunge in share prices and saying “forces” wanted to weaken trust in Germany’s largest bank.

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“US banks won’t be nearly as badly hit by the measure as their European counterparts, which is no doubt why their regulators are gunning so hard for it.”

It’s Not Just Deutsche. European Banking is Utterly Broken (Tel.)

[..] as is evident from the events of the last week, the banking crisis itself is far from over. Nine years after the initial eruption, it still rumbles on, with the epicentre now moved from the US to Europe. Only it’s not the same crisis; in large measure, it is completely different. Today’s mayhem is not so much the result of reckless bankers and asleep at the wheel regulators, but rather of the public policy response to the last crisis itself – that is to say, regulatory over-reach and central bank money printing. All eyes are naturally focused on the specific problems of Deutsche Bank, but Deutsche is in truth no more than the canary in the coal mine. As Tidjane Thiam, chief executive of Credit Suisse, observed last week, as an entire sector, European banks are still “not really investable”.

Much the same disease as afflicts Continental banks also applies to British counterparts, including RBS, Barclays and even Lloyds. All are fast being enveloped by a perfect storm of negatives, and this time around, it is substantially the policymakers and law enforcers who are to blame. There are essentially four factors at work here. First, it’s virtually impossible to make money out of banking in a zero interest rate environment, frustrating attempts to rebuild capital buffers after the bad debt write-downs of recent years. In circumstances where central banks have bought right along the yield curve, flattening it down to virtually nothing, the margin from maturity transformation all but disappears. Much the same thing has happened to the once lucrative returns of investment banking.

Even Goldman Sachs has been forced to admit that it is struggling to cover its cost of capital. Second is ever tougher international capital requirements, the latest instalment of which is dubbed Basel IV. The renewed crackdown is understandable, given what occurred nine years ago, but also ill-conceived and discriminatory, unfairly penalising European banks against their American counterparts. The technical details need not concern us too much here, suffice it to say that in order to stop banks gaming the system, regulators are attempting to impose a so-called “output floor”, tightly limiting the scope for easier capital requirements on risk weighted assets. US banks won’t be nearly as badly hit by the measure as their European counterparts, which is no doubt why their regulators are gunning so hard for it.

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That is so convenient for Abe…

Kuroda Blamed For Abenomics Failure, Ruins Chance Of Second Term (BBG)

Governor Haruhiko Kuroda has ruined his chances of getting a second full term, according to Nobuyuki Nakahara, who has advised the prime minister on the economy and was an intellectual father of the Bank of Japan’s first run at quantitative easing in 2001. The central bank’s switch to yield-curve targeting compounds its earlier error of adopting negative interest rates and is a disappointing move away from monetary-base expansion, Nakahara, 81, said in an interview on Sept. 30. In a stinging attack on the BOJ’s recent actions, he said the decision to conduct a comprehensive review of monetary policy had invited defeat on reflationist efforts and would raise questions about Abenomics as a whole.

Prime Minister Shinzo Abe’s economic program consists of three so-called arrows: the first being aggressive monetary policy, the second fiscal spending and the third structural reform. The central bank’s program, which began when Abe tapped Kuroda for the BOJ role in early 2013, has been the most prominent and highly debated aspect of Abenomics. “They are trying to clean up the mess of negative rates. It’s impossible to do a stupid thing like keeping the yield curve under government control,” said Nakahara. “They changed the regime to rates from quantity, meaning those who support quantitative easing were defeated. Reflationists on the BOJ policy board lost. An exit from deflation is going to be far away.”

After being greeted with fanfare when he took the helm, Kuroda, 71, now faces a reversal of fortunes on multiple fronts. Markets have moved against him and critics are growing more vocal. The extended honeymoon he enjoyed with a rising stock market and falling yen are long gone and his 2% inflation goal is nowhere in sight. Kuroda has less than 19 months to go in his term. While no BOJ governor has been tapped for a second five-year term since the 1960s, Kuroda’s central role in Abenomics has led to speculation that he may be different.

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If you don’t know what deflation is, you can’t fight it.

BOJ Deploys US World War II Tactics That Failed to Spur Prices (BBG)

In deciding to target bond yields, Japan is deploying a monetary strategy to combat deflation used by its former enemy in World War II. The trouble is that America’s experience back then suggests that the tactics probably won’t work on their own. Economists who have studied that period say that it was increased government spending, along with heightened inflation expectations, that eventually led to a stepped-up pace of U.S. price increases more than a half century ago. Once inflation was humming along, the Federal Reserve’s strategy of pegging long-term interest rates did nothing to put a lid on it, which is why the central bank pushed for a 1951 agreement with the Treasury to abandon the long-term yield fix.

If inflation expectations are contained, simply targeting yields won’t necessarily spur price pressures, according to Barry Eichengreen, a professor at the University of California at Berkeley who co-wrote a paper on U.S. monetary and financial policy from 1945 to 1951. But if people already expect faster inflation, then the tool can help promote it. That’s not a helpful conclusion for Bank of Japan Governor Haruhiko Kuroda and his colleagues, who last month switched the focus of their monetary stimulus to controlling yields across a range of maturities, after simply expanding the monetary base through debt purchases. It set the target for the yield on the 10-year Japanese government bond at around 0%.

Another piece of their new framework: trying to shock inflation expectations higher by pledging to keep stimulus in place until prices are rising even faster than their 2% target. Their struggle is to overturn subdued household and corporate expectations that have been set hard by decades of deflation. For the Fed in World War II and its aftermath, capping long-term yields at 2.5% had nothing to do with inflation per se. Its goal was to limit the government’s borrowing costs and so support the war effort. Inflation was held down by price controls during the war, then spiked higher after hostilities ended, hitting a high of 19.7% in 1947. The surge proved short-lived, as an economic recession that began late the following year produced a return of the deflation that had plagued the country during the Great Depression.

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And if successful, they’re all going to do it? Oops, too late.

Canada’s Big Bet on Stimulus Draws Global Attention (WSJ)

In the global struggle to boost growth, a Canadian experiment in fiscal spending is providing a test case for some of the world’s biggest economies. PM Justin Trudeau’s Liberal government unveiled a plan last spring to spend heavily on tax benefits and infrastructure, with $120 billion CAD (US$91.39 billion) going into infrastructure over the next decade, including about one-tenth of that on short-term projects. It’s a bold bet to inject life into an economy struggling with a rout in commodity prices, especially crude oil, which was once Canada’s top export. It also highlights the limits of monetary stimulus, since the country’s central bank cut rates twice in 2015, to 0.5%, and has acknowledged—as its counterparts around the world have—that monetary policy becomes a less powerful tool when interest rates are already low.

Mr. Trudeau’s big infrastructure spend will be largely financed by a bigger deficit, which is projected to reach C$29.4 billion this fiscal year, or about 1.5% of GDP. That’s a sharp turn from the balanced-budget promise of his Conservative predecessor, who hewed the austerity path Mr. Trudeau is now shunning. Canada’s efforts stand in contrast to many of the world’s economies, whose finance ministers and central bankers meet this week in Washington for semiannual meetings of the International Monetary Fund and World Bank. Some—like Australia, also hit by the commodity rout—are trying to use coordinated fiscal and monetary policy. But larger advanced economies are holding firm to tight budgets, making Canada’s embrace of debt-fueled stimulus unusual.

“The eyes of the world—the economists—will be watching to see how Canada performs,” said Martin Eichenbaum, a Northwestern University economist who is also an international fellow at the C.D. Howe Institute, a Canadian think tank. “We’re all watching to see: Will they get it right?”

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Yeah. Not going to happen….

Jail Wells Fargo CEO and Chairman John Stumpf! (Nomi Prins)

Consider this. You’re a mob boss. You run a $1.8 trillion network of businesses across state lines and continents. Many of these are legit, but a select subset of them – not so much. Every so often the illegal components flare up; some Washington commission launches an investigation, someone blows a whistle, people lose their homes, a pack of investors sheds a ton of money and lawsuits fly. You get reprimanded and have to pay lawyers and accountants overtime to deal with the paperwork. You settle on fines with the government — $10 billion worth. Then you keep going with no one the wiser, no wings clipped, no hard time. After all of that — you say you’re sorry, forfeit some money you didn’t even make yet, and (maybe) resign with boatloads more of it.

This is what we’re dealing with regarding Wells Fargo CEO and Chairman John Stumpf. He could be a really nice guy and wears some lovely tailored attire. (Hell, even Al Capone cared about proper milk expiration date labels.) But he’s also a crook, plain and simple. He’s cheated shareholders and taxpayers and customers, and used a stockpile of FDIC-backed deposits as fodder for illicit activities that have been repeatedly investigated and fined. And he made hundreds of millions of dollars doing it. This is not conjecture, nor sour grapes from the nonmillionaire swath of the population. It’s based on documented facts. But by no means is Wells the only guilty bank on the street, or Stumpf the only “apologetic” CEO. Apologies are cheap, and so is money when it’s a small piece of a much larger pie.

Somewhere, Jamie Dimon and Lloyd Blankfein are sighing in relief that this time it was Stumpf and not one of them, the other two of the three (of the Big Six bank) CEOs left standing since the crisis. These are just some highlights of those nearly $10 billion in total fines Wells agreed to, rather than take matters to court, since 2009. The sheer sum of those fines reveal a recidivist attitude toward ethics, regulations and the law. The associated transgressions were all committed under Stumpf’s leadership. There’s no way a regular citizen committing a fraction of a fraction of anything like these wouldn’t be in jail. Complexity is no excuse for criminal behavior. Nor is calling these practices “abuses” rather than felony fraud for misleading, at the very least, investors and shareholders in a publicly traded mega-company that violates securities laws.

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… but if not the Wells Fargo CEO, at least some people will go to jail…

The Government Is Turning the Entire United States into a Debtors Prison (TAM)

Since the United States was founded, citizenship has represented a safe haven from oppressive regimes around the world. By preserving the principles of small government and free markets, those who were willing to work hard found success, and America became a magnet for innovation. But as the U.S. continues to erode personal and economic freedom, more people than ever before are handing over their U.S. passports to seek better opportunities abroad. The staggering amount of debt held by the American empire ensures the public will be working it off for generations to come. The government has already begun its campaign to make it more difficult to leave the country, and it has also begun to crack down on the finances of the eight million Americans living abroad.

Regardless of whether you’re a millionaire with multiple foreign bank accounts or a recent college graduate with a boatload of debt, the status of being a United States citizen brings with it a burden that will only grow heavier over time. Since 2008, the number of individuals giving up their citizenship has increased by almost 560%, setting new records each of the past three years. Some of these expats are motivated by the extra tax load paid when working abroad, while others are trying to avoid student loan debt. Others have just had enough of the encroaching police state. Every taxpayer left in the country now owes more than $149,000 of the national debt, so it’s no surprise the tide is beginning to turn. By hook or by crook, in the coming years, citizens will be fleeced of that money through higher taxes, savings that are inflated away, and an overall drop in their standard of living.

Many can see the writing on the wall and have become determined to protect themselves from the years of economic repression coming down the pipe. Draconian steps have already been taken to slow the rate of expatriation. For one, the IRS has broadened its reach into foreign bank accounts through the Foreign Account Tax Compliance Act. Through agreements with over 100 nations, the law is able to require all financial institutions abroad to report the account details of any American customers they have. With access to this new information, the IRS can revoke the passports of potential tax evaders and hinder their ability to travel using yet another additional power the agency was granted last year.

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The gift that keeps on contaminating.

Fukushima Has Contaminated The Entire Pacific Ocean, Going To Get Worse (TA)

What was the most dangerous nuclear disaster in world history? Most people would say the Chernobyl nuclear disaster in Ukraine, but they’d be wrong. In 2011, an earthquake, believed to be an aftershock of the 2010 earthquake in Chile, created a tsunami that caused a meltdown at the TEPCO nuclear power plant in Fukushima, Japan. Three nuclear reactors melted down and what happened next was the largest release of radiation into the water in the history of the world. Over the next three months, radioactive chemicals, some in even greater quantities than Chernobyl, leaked into the Pacific Ocean. However, the numbers may actually be much higher as Japanese official estimates have been proven by several scientists to be flawed in recent years.

If that weren’t bad enough, Fukushima continues to leak an astounding 300 tons of radioactive waste into the Pacific Ocean every day. It will continue do so indefinitely as the source of the leak cannot be sealed as it is inaccessible to both humans and robots due to extremely high temperatures. It should come as no surprise, then, that Fukushima has contaminated the entire Pacific Ocean in just five years. This could easily be the worst environmental disaster in human history and it is almost never talked about by politicians, establishment scientists, or the news. It is interesting to note that TEPCO is a subsidiary partner with General Electric (also known as GE), one of the largest companies in the world, which has considerable control over numerous news corporations and politicians alike.

Could this possibly explain the lack of news coverage Fukushima has received in the last five years? There is also evidence that GE knew about the poor condition of the Fukushima reactors for decades and did nothing. This led 1,400 Japanese citizens to sue GE for their role in the Fukushima nuclear disaster. Even if we can’t see the radiation itself, some parts of North America’s western coast have been feeling the effects for years. Not long after Fukushima, fish in Canada began bleeding from their gills, mouths, and eyeballs. This “disease” has been ignored by the government and has decimated native fish populations, including the North Pacific herring. Elsewhere in Western Canada, independent scientists have measured a 300% increase in the level of radiation.

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It won’t stop Orban.

Hungary’s Refugee Referendum Not Valid After Voters Stay Away (G.)

The Hungarian prime minister, Viktor Orbán, has failed to convince a majority of his population to vote in a referendum on closing the door to refugees, rendering the result invalid and undermining his campaign for a cultural counter-revolution within the European Union. More than 98% of participants in Sunday’s referendum sided with Orbán by voting against the admission of refugees to Hungary, allowing him to claim an “outstanding” victory. But more than half of the electorate stayed at home, rendering the process constitutionally null and void.

Orbán himself put a positive spin on the low turnout. He argued that while “a valid [referendum] is always better than an invalid [referendum]” the extremely high proportion of no-voters still gave him a mandate to go to Brussels next week “to ensure that we should not be forced to accept in Hungary people we don’t want to live with”. He argued that the poll would encourage a wave of similar votes across the EU. “We are proud that we are the first,” he said.

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NOTE: Less than 2 weeks ago, the EU refused Greece permission to move the refugees to the mainland, because they might try to travel north.

“Athens will be overwhelmed, [as will] the mainland, people will be forced to live in fields, there will be scenes we’ll never have imagined.”

Vulnerable Refugees To Be Moved From ‘Squalid’ Camps On Greek Islands (G.)

Greece is poised to transfer thousands of refugees from overcrowded camps on its Aegean islands to the mainland amid escalating tensions in the facilities and protests from irate locals. The government said unaccompanied minors, the elderly and infirm would be among the first to be moved as concerns mounted over the future of a landmark EU-Turkey deal to stem migrant flows. “The situation on the islands is difficult and needs to be relieved,” said deputy minister for European affairs Nikos Xydakis. “Accommodation on the mainland will be more suitable. We will start with transfers of those who are most vulnerable, always in the sphere of implementing and protecting the EU-Turkey agreement.”

The operation, expected to be put into motion this week, came as Ankara warned the pact would not hold if Brussels failed to honour its pledge to allow Turks visa-free travel to the bloc. In a fiery speech before the newly reconvened parliament at the weekend, Turkish president Erdogan gave his clearest signal yet that the six-month-old agreement was in danger of collapse because of slow progress over visa liberalisation. [..] Refugee flows, although rising again, have dropped by 90% since the deal was signed. [..] Western diplomats in the Greek capital raised the spectre of chaos if the agreement collapsed. “If it does, there will be an influx of a million or more and this country is totally unprepared,” one European ambassador confided. “Athens will be overwhelmed, [as will] the mainland, people will be forced to live in fields, there will be scenes we’ll never have imagined.”

[..] Acknowledging that camp conditions were far from ideal, Xydakis blamed the backlog in asylum applications on the EU’s failure to dispatch promised staff and push ahead with an agreed relocation scheme to other parts of the continent. “We were promised 400 experts in asylum procedures but so far only have around 29 on the islands. We are continuing to recruit and look for more staff but it is not easy,” he said. “The deal is not only in the hands of Turkey but Europe … some EU states are not respecting but neglecting their responsibilities.”

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To reiterate what I said yesterday on this topic:

“It was Germany that last year declared Dublin null and void. They will say that was only temporaray, but regulations like this are not light switches that selected parties can flick on and off when it suits them.

What happens now is quite simply that both the refugees and Greece are the victims of Angela Merkel’s falling poll numbers. And that is insane. It’s cattle trade. Athens should take Berlin to court over this.

Greece is already little more than a greatly impoverished holding pen for the unwanted, and it threatens to fall much deeper into the trap. That’s why the Automatic Earth effort to support the poorest people is not just still needed, but more now than ever. We will soon start a new campaign to that end. In the meantime, please do continue to donate through our Paypal widget in amounts ending in $.99 or $.37.”

Germany Wants Migrants Sent Back To Greece, Turkey (AFP)

Germany called Sunday for asylum seekers who entered the European Union via Greece to be forced to return there, while also urging Athens to send more migrants back to Turkey. In an interview with a Greek daily, German interior minister Thomas de Maiziere said he wants to reinstate EU rules which oblige asylum seekers to be sent back to Greece as the first EU country they reached. “I would like the Dublin convention to be applied again… we will take up discussions on this in a meeting with (EU) interior ministers” later in October, he told the Greek daily Kathimerini. The Dublin accord gives responsibility for asylum seekers’ application to the first country they reach – which put Greece on the frontline of more than a million migrants who arrived in the EU last year.

The accord also says asylum seekers should be sent back to the first country they arrived in if they subsequently reach another EU state before their case is examined. A huge proportion of the migrants ended up in Germany. But this clause was suspended for Greece in 2011 after the country lost an EU legal complaint which condemned the mistreatment of migrants seeking international protection. “Since then, the EU has provided substantial support, not only financially,” to Greece to improve its asylum seeker procedures, the German minister said. In an interview on German television Sunday evening, De Maiziere also criticised Athens for failing to fully implement an EU agreement with Turkey to return migrants there.

The EU reached a deal with Turkey in March to stop the influx to the Greek islands in return for financial aid and eased visa conditions for its citizens. But the deal has looked shaky in the wake of a coup attempt in Turkey in July. “Greece must carry out more expulsions,” he told the ARD television station.

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Aug 262016
 
 August 26, 2016  Posted by at 9:17 am Finance Tagged with: , , , , , , , , ,  5 Responses »


G. G. Bain On beach near Casino, Asbury Park 1911

Japan July Consumer Prices Post Biggest Annual Fall In 3 Years (R.)
Dollar Stores’ Admission: Half Of US Consumers Are In Dire Straits (ZH)
QE Infinity: Are We Heading Into The Unknown? (CNBC)
A Less Weird Time at Jackson Hole? (John Taylor)
There May Not Be Too Many Tricks Left For The ECB and Bank of England (BBG)
China’s Great Divide: A New Cultural Revolution? (CH Smith)
Backlash Against Chinese Investment Abroad Grows Ahead Of G-20 Summit (BBG)
China Has Returned To Reform Mode (BBG)
Australia’s Hunger Games (BBG)
Fannie, Freddie, Regulator Rolls Out Refinance Program For Homeowners (R.)
Eurozone Banks See Net Profit Fall 20% In First Quarter (R.)
Deposits at Bank of Ireland To Face Negative Interest Rates (O’Byrne)
It Was a Union for the Ages, Until Suddenly It Wasn’t. Is Europe Lost? (BBG)
The Broken Chessboard: Brzezinski Gives Up on Empire (Whitney)
2000 Finns to Get Basic Income in State Experiment Set to Start 2017 (BBG)
Greece Grapples With More ‘Fugitives’, Seeks To Avoid Tensions With Ankara (K.)

 

 

Might as well give up on Japan. 3 years of horrible policy failure, and Abe’s as popular as ever.

Japan July Consumer Prices Post Biggest Annual Fall In 3 Years (R.)

Japan’s consumer prices fell in July by the most in more than three years as more firms delayed price hikes due to weak consumption, keeping the central bank under pressure to expand an already massive stimulus program. The gloomy data reinforces a dominant market view that premier Shinzo Abe’s stimulus program have failed to dislodge the deflationary mindset prevailing among businesses and consumers. The nationwide core consumer price index, which excludes volatile fresh food prices but includes oil products, fell 0.5% in July from a year earlier, the fifth straight month of declines, data showed on Friday. It exceeded a median forecast for a 0.4% decline and June’s 0.4% drop.

While falling energy costs were mainly behind the slide in consumer prices, rises in imported food prices and hotel room rates moderated in a sign that weak consumption is discouraging firms from passing on rising costs. A strong yen also pushed down import costs, offering few justifications for retailers to raise prices of their goods. “While economic activity is on the mend, the slump in import prices suggests that underlying inflation will continue to fall in coming months,” said Marcel Thieliant, senior Japan economist at Capital Economics. “The Bank of Japan will find it increasingly difficult to blame falling energy prices for the decline in overall consumer prices.”

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Where the propaganda fails.

Dollar Stores’ Admission: Half Of US Consumers Are In Dire Straits (ZH)

Both Dollar General and Dollar Tree said pressures on their core lower-income shoppers contributed to the same-store sales misses that both retailers reported. On today’s conference call, Dollar General CEO Todd Vasos said that he was surprised to admit that while on the surface things are supposed to be getting better, the reality is vastly different for low-income US consumers: “I know that when we look at globally the overall U.S. population, it seems like things are getting better. But when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that’s out there, that demographic, things have not gotten any better for her, and arguably, they’re worse. And they’re worse, because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip.”

Making matters worse, he added that the company’s core consumers base, 65% of which is comprised of lower-income shoppers, has been impacted by the recent reduction or elimination in foodstamps: “now couple that in upwards of 20 states where they have reduced or eliminated the SNAP benefit, and it has really put a toll on [the core consumer].” He elaborated that the reduction in foodstamps benefits promptly filtered through the entire business model, and culminated with Dollar General being forced to cut prices to remain competitive. This is what he said:

“That SNAP benefit reduction and/or elimination happened in April. That was the kickoff, and you could see it immediately in the numbers. So I believe that those are the things that are affecting her today. Again, our core customer, and by the way, we’ve seen this play out before. If you dial the clock back to October of 2013 and coming into November of 2013, when the last large SNAP benefit reduction happened, it happened almost exactly the same way on our comps and in how we saw traffic. Obviously, we’re up at a little higher level at that time, but rest assured, that our traffic slowed tremendously then, very similar to as it did now.

The difference here is we’re going to take aggressive price action to get that consumer back in the store. She needs a little motivation to get back in. We need to help her stretch her budget for a time period until she figures it out. Our core customer is very resilient. They’ll figure it out over time, but they need a little help as they tend to now try to figure out how to make ends meet with less money during the month.”

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No, we’ve been in the unknown for years. As soon as Bernanke said ‘Uncharted Territory’, we knew we were lost. Of course they’ve acted ever since as if they know what they’re doing, but that is bull.

QE Infinity: Are We Heading Into The Unknown? (CNBC)

Markets are currently riding on the wave of uncertainty and speculation over whether the world’s central banks will continue to pump in more and more cash into the economy though bond-buying programs known as quantitative easing (QE). But as we go deeper into the world of easy money from central banks, there are other areas of the economy that could see a knock-on effect. Alberto Gallo, manager of the Algebris Macro Credit Fund, describes this paradox as “QE infinity,” whereby low rates and seemingly endless rounds of bond-buying programs encourage cheap borrowing, and investment in financial markets – but not in the real economy. “The problem is rising debt and monetary easing comes with many collateral effects. One is the distortion of asset prices, leading to asset bubbles,” Gallo explained.

“Asset price distortion also has a ripple effect on wealth distribution, increasing inequality by benefitting the already-wealthy who are more likely to hold financial assets. Over time, low rates and QE can also encourage misallocation of resources to leverage-sensitive sectors, including real estate and construction.” Gallo further explained that for the global economy to exit this QE infinity trap, government action and reforms to improve productivity are needed. “But many governments are reluctant to accept the need for these measures, often instead implementing policies that win votes but compound the distortions of easy monetary policy e.g. housing affordability programmes, mortgage subsidies.” Without an adequate fiscal response from governments, growing imbalances make it harder to withdraw stimulus, warned Gallo.

“This is the paradox of current monetary policy: On one hand, it is the best possible response available to central bankers. On the other, it has long-term collateral effects which need to be confronted eventually.” Central banks have seen themselves come up with new ways of stimulating the economy ever since the world plunged into financial crisis in September 2008. Data from JPMorgan shows that the top 50 central banks around the world have cut rates 672 times between them since the collapse of Lehman Brothers, a figure that translates to an average of one interest rate cut every three trading days. This has also been combined with $24 trillion worth of asset purchases. This raises a big question: Will the global economy ever exit QE Infinity?

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Dream on. All they have left is weird.

A Less Weird Time at Jackson Hole? (John Taylor)

I’m on my way to join the world’s central bankers at Jackson Hole for the 35th annual monetary-policy conference in the Grand Teton Mountains. I attended the first monetary-policy conference there in 1982, and I may be the only person to attend both the 1st and the 35th. I know the Tetons will still be there, but virtually everything else will be different. As the Wall Street Journal front page headline screamed out on Monday, “Central Bank Stimulus Efforts Get Weirder”. I’m looking forward to it. Paul Volcker chaired the Fed in 1982. He went to Jackson Hole, but he was not on the program to give the opening address, and no one was speculating on what he might say. No other Fed governors were there, nor governors of any other central bank. In contrast, this year many central bankers will be there, including from emerging markets.

Only four reporters came in 1982 — William Eaton (LA Times), Jonathan Fuerbringer (New York Times), Ken Bacon (Wall Street Journal) and John Berry (Washington Post). This year there will be scores. And there were no television people to interview central bankers in 1982 (with the awesome Grand Teton as backdrop). It was clear to everyone in 1982 that Volcker had a policy strategy in place, so he didn’t need to use Jackson Hole to announce new interventions or tools. The strategy was to focus on price stability and thereby get inflation down, which would then restore economic growth and reduce unemployment. Some at the meeting, such as Nobel Laureate James Tobin, didn’t like Volcker’s strategy, but others did. I presented a paper at the 1982 conference which supported the strategy. The federal funds rate was over 10.1% in August 1982 down from 19.1% the previous summer.

Today the policy rate is .5% in the U.S. and negative in the Eurozone, Japan, Switzerland, Sweden and Denmark. There will be lot of discussion about the impact of these unusual central bank policy rates, as well the unusual large scale purchases of corporate bonds and stock, and of course the possibility of helicopter money and other new tools, some of which greatly expand the scope of central banks. I hope there is also a discussion of less weird policy, and in particular about the normalization of policy and the benefits of normalization. In fact, with so many central bankers from around the world at Jackson Hole, it will be an opportunity to discuss the global benefits of recent proposals to return to a rules-based international monetary system along the lines that Paul Volcker has argued for.

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Trapped.

There May Not Be Too Many Tricks Left For The ECB and Bank of England (BBG)

The European Central Bank and the Bank of England may soon find that their most powerful tool for overseeing lenders doesn’t pack the punch it once did. The European Union is overhauling the way supervisors set bank-specific capital levels for current and potential risks that aren’t covered by the minimum requirements in EU law. A proposal from the European Commission, the EU’s executive arm, would rein in supervisors and give banks the lead in determining their capital needs. The ECB has already followed directions from the commission in splitting its demands into binding requirements and non-binding guidance, reducing the capital burden on euro-area banks. This decision also made it less likely that banks will face restrictions on the payment of dividends, bonuses and additional Tier 1 bond coupons.

“What this boils down to is a complete disarming of the authorities,” said Christian Stiefmueller, a senior policy analyst at Finance Watch, a Brussels-based watchdog. “It makes it effectively impossible for the supervisor to set capital requirements for any risk except those that have already materialized.” Europe’s banks are starting to get some slack from policy makers after years of aggressive regulation. The Brussels-based commission has opened up the entire financial rule book for review, including contentious issues such as the cap on bankers’ bonuses. Faced with weak banks and an anemic economy, regulators have made clear that global standards will be adapted to suit Europe’s needs.

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Key: “The processes used to inflate the new bubble suffer from diminishing returns.”

China’s Great Divide: A New Cultural Revolution? (CH Smith)

The status quo solution (in China, the U.S., Japan, the E.U., etc.) to a weakening bubble-dependent economy is to inflate another even bigger bubble. If debt reached extremes that imploded, the solution is to expand debt far beyond the levels that triggered the implosion. If fudging the numbers triggered a loss of confidence, the solution is to fudge the numbers even more, so they no longer reflect reality at all. If the masses protest their powerlessness, the solution is to push them further from the centers of power. And so on. This blowing new bubbles to replace the ones that popped works for a while, but at the expense of systemic stability. Each new bubble requires pushing the system to new extremes that increase the risk of instability and collapse.

In other words, the stability of the new bubble is temporary and thus illusory. The processes used to inflate the new bubble suffer from diminishing returns. The nature of stimulus-response is that overuse of the stimulus leads to diminishing responses. This is a structural feature that cannot be massaged away. Goosing public confidence in the status quo with phony statistics and rigged markets works splendidly the first time, less so the second time, and barely at all the third time. Why is this so? The distance between reality and the bubble construct is now so great that the disconnection from reality is self-evident to anyone not marveling at the finery of the Emperor’s non-existent clothing. The system habituates to the higher stimulus. If the drug/debt has lost its effectiveness, a higher dose is needed.

This is the progression of serial bubbles. Then the system habituates to the higher dose/debt, and the next expansion of debt must be even greater. This dynamic can be visualized as The Rising Wedge Model of Breakdown, which builds on the well-known Ratchet Effect: the system is greased for easy expansion of debt, leverage, employees, etc., but it has no mechanism to allow contraction. Any contraction triggers systemic collapse. The only question left for China (and every other debt/bubble-dependent nation) is what socio-political consequences will manifest when the credit bubble finally bursts?

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More diminishing returns?!

Backlash Against Chinese Investment Abroad Grows Ahead Of G-20 Summit (BBG)

Forget about Yankee go home. Now it’s Chinese go home. From Australia blocking a bid for a power network to the U.K.’s review of a proposed Chinese-funded nuclear plant, opposition to China’s outward push is opening a thornier and potentially more treacherous front in the country’s economic tug-of-war with the rest of the world. And it’s coming as China prepares to host a Sept. 4-5 summit of Group of 20 leaders. Unlike festering frictions over trade, the new front is in an area – investment – where the global rules of engagement are more amorphous and where national security interests are more prominent. That raises the risk of a rapid escalation of tensions that can’t be so easily contained. “The implicit accusation when rejecting overseas direct investment is much stronger than trade,” said James Laurenceson, deputy director of the Australia-China Relations Institute in Sydney.

Using a national-security rationale to blocking outbound investment by China “is far more confronting. It suggests that China is untrustworthy and has potentially nefarious intentions. That’s what Beijing objects to.” But it’s not just security concerns that are driving the increased backlash against stepped-up Chinese investment abroad, especially by state-owned companies. It’s also the suspicion that the Communist-led government is trying to game the system by snapping up foreign firms in key areas of the economy while blocking others from doing the same in China. China “remains the most closed to foreign investment of the G-20 countries,” David Dollar, a senior fellow at the Brookings Institution and former U.S. Treasury attache to Beijing, said. “This creates an unfairness in which Chinese firms prosper behind protectionist walls and expand into more open markets such as the U.S.”

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China’s getting desperate to look like it’s in control of its own economy. It’s not.

China Has Returned To Reform Mode (BBG)

China has returned to reform mode. This week, plans have been unveiled to quicken the clean-up of excess capacity in state-backed companies, level the playing field for private and foreign investors with new access to previously off-limit sectors, and take the next step in a long-awaited fiscal shake up. Having stabilized the economy with a mix of fiscal support and easy monetary settings, China’s leaders appear to be reviving a stalled reform push that’s key to long-term growth prospects. The rush of announcements comes ahead of China’s hosting of leaders from the world’s 20 biggest economies in Hangzhou on Sept. 4 and 5, allowing it to show progress to officials from nations such as the U.S. and bodies like the IMF that have called for structural changes.

“The pace of reform had been slower than expected,” said Shen Jianguang at Securities in Hong Kong. “Now, policy makers want to speed it up again. With monetary easing proving less effective in propping up the economy, they have realized that there’s no way out if they don’t push forward on reform.” The People’s Bank of China has been upping its communication in recent weeks, signaling ongoing use of liquidity tools rather than big gun moves such as cuts to benchmark interest rates or the percentage of deposits banks must lock away as reserves. With businesses hoarding cash and reluctant to invest, further easing risks fueling financial risks without spurring a pick up in economic growth.

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More dividend priests liquidating themselves.

Australia’s Hunger Games (BBG)

If economies need animal spirits to thrive, what sort of beast is Australia in the aftermath of its mining boom? Something like a wounded bear that would rather hibernate than go hunting for food, if you listen to Treasurer Scott Morrison.Governments need to work at building an economy that “can coax private capital out of its cave,” he said at an event in Sydney Thursday. “Global capital is sitting dormant. How else do you interpret the absurdity of negative bond yields? “Though Australia’s 25 years without a recession represent a remarkable success story, it’s fair to say the country’s going through a rough patch. Interest rates are at a record-low 1.5%, and local businesses are showing more of a tendency to lick their wounds than search for new investment opportunities.

The huge splurge of capital expenditure that accompanied the mining boom helped cover for a while a fact that’s becoming embarrassingly clear as the resource spending recedes: Take out mining, and investment by Australian businesses has barely increased since the global financial crisis. So where’s the money going? Blame the baby boomers. Self-managed super funds – accounts that are controlled by their owners rather than professional fund managers – make up the biggest share of Australia’s pool of retirement savings.The funds, which have benefited from a range of overly generous tax breaks during the past decade, have an outsized influence on the Australian stock market, according to Hasan Tevfik, director of Australian equities research at Credit Suisse.

Retirees’ desire for a steady income from their investments helps explain why certain types of stocks tend to be overvalued in Australia relative to their performance elsewhere, and why local businesses so often fall over themselves to pay dividends above the levels found in other markets. [..] In the long term, companies that dedicate more of their free cash to shareholders rather than finding new ways of making money are robbing the future to pay the present. Countries where that becomes the predominant mode of corporate behavior are in even greater trouble.

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Everybody’s scared to death of falling home prices, which happen to be the only thing that can make the market somewhat healthier.

Fannie, Freddie, Regulator Rolls Out Refinance Program For Homeowners (R.)

The regulator of Fannie Mae and Freddie Mac unveiled on Thursday a program aimed at homeowners who are paying their mortgages on time but whose loan-to-value (LTV) ratios are too high to qualify for traditional refinance programs. To be eligible for this program, which Fannie and Freddie will implement, borrowers must have not missed any mortgage payments in the prior six months; must not have skipped more than one payment in the previous 12 months; must have a source of income and must receive a benefit from the refinance such as a reduction in their monthly loan payment, the Federal Housing Finance Agency said.

“This new offering will give borrowers the opportunity to refinance when rates are low, making their mortgages more affordable and thus reducing credit risk exposure for Fannie Mae and Freddie Mac,” said FHFA Director Melvin Watt in a statement. Because this program for high LTV borrowers will not be available until October 2017, the agency said it will extend the Home Affordable Refinance Program (HARP) until Sept. 30, 2017 as a bridge to the new high LTV program. HARP was introduced in 2009 to help underwater borrowers following the housing bust. More than 3.4 million homeowners have refinanced their mortgage through the program. More than 300,000 homeowners could still refinance through HARP, FHFA said.

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Portuguese and Italian banks cannot afford this. Many others can’t either. Question is where the next bailout (bail-in) will happen.

Eurozone Banks See Net Profit Fall 20% In First Quarter (R.)

Euro area banks saw their profits fall by a fifth in the first three months of this year as they made less money from trading and most other business areas, European Central Bank data showed on Wednesday. The ECB survey painted a gloomy picture, with all the main sources of profit for banks – lending, trading and fees – down from the year before. Net profit fell by 20% year on year to €18 billion ($20.25 billion). The net result from trading and foreign exchange was one of the main culprits for that drop as it fell by 41% to €10.8 billion. Other income streams – such as net interest on loans, dividends, and fees and commissions – also declined, albeit more modestly.

Banks have blamed the ECB’s policy of ultra-low rates, which includes charging banks for the excess cash they park at the central bank, for eating into their profits. In cash-rich Germany, several banks have responded by charging fees on bank accounts or charging corporate clients a percentage charge on large deposits. The ECB has maintained its policy has done more good than harm but it has acknowledged it comes with side effects.

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This can not end well.

Deposits at Bank of Ireland To Face Negative Interest Rates (O’Byrne)

Deposits at Bank of Ireland are soon to face charges in the form of negative interest rates after it emerged on Friday that the bank is set to become the first Irish bank to charge customers for placing their cash on deposit with the bank. This radical move was expected as the ECB began charging large corporates and financial institutions 0.4% in March for depositing cash with them overnight. Bank of Ireland is set to charge large companies for their deposits from October. The bank said it is to charge companies for company deposits worth over €10 million. The bank was not clear regarding what the new negative interest rate will be but it is believed that a negative interest rate of 0.1% will initially be charged to such deposits by Ireland’s biggest bank.

BOI was identified as one of the most vulnerable banks in Europe in the recent EU stress tests – along with Banca Monte dei Paschi di Siena (MPS), AIB and Ulster Bank’s parent RBS. All the banks clients, retail, SME and corporates are unsecured creditors of the bank and exposed to the new bail-in regime. Only larger customers will be affected by the charge for now. The bank claims that it has no plans to levy a negative interest rate on either personal or SME customers but negative interest rates seem likely as long as the ECB continues with zero% and negative interest rates. Indeed, they are already being seen in Germany where retail clients are being charged 0.4% to hold their cash in certain banks such as Raiffeisenbank Gmund am Tegernsee.

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Europe is not lost, but the EU sure is.

It Was a Union for the Ages, Until Suddenly It Wasn’t. Is Europe Lost? (BBG)

The U.K.’s vote to quit the EU is the enterprise’s worst setback since it was conceived in the 1950s. Until now, the EU has always grown in scale and ambition. For the first time, Brexit shows that Europe’s manifest destiny—ever closer union—may not be destiny after all. Merely knowing that European integration can be reversed is a threat: It makes the unthinkable thinkable. But this isn’t the only danger. The union is increasingly unpopular not only in the U.K. but also in other European countries. Its political capital is depleted. Working through the mechanics of Brexit may deepen divisions, severely testing the union’s ability to adapt. Brexit could conceivably spur support for the union. But this will demand consensus, flexibility, and farsighted calculation, none of which can be taken for granted.

If governments can’t rise to this challenge, Brexit may be the beginning of the end of the European dream. In one way, today’s discontent is nothing new. There has often been a gap between the grandest designs of Europe’s leaders and the readiness of the continent’s citizens to go along. The EU’s remarkable achievements in securing peace and prosperity in the postwar era required brave, visionary leadership, and voters were rarely up to speed. For years, that was fine. The model was top-down institution-building, followed by good results, then popular backing—in that order. It all worked beautifully. Europe’s postwar political and economic reconstruction was a modern miracle. But now the model is failing. The Brits aren’t the proof. They’ve always been uncomfortable in the EU, late to the party and a nuisance throughout; their vote to quit was a shock, but probably shouldn’t have been.

Lately, though, the disenchantment has spread far more widely. According to one recent poll, the EU is less popular in France—France!—than in the U.K. So what went wrong? [..] Even at the design stage, many economists said the euro’s political underpinnings were too weak. Monetary union, they argued, demanded a commitment to a form of fiscal union. (If currency devaluation with respect to other EU currencies was going to be ruled out, fiscal transfers would be needed to help cushion economies from downturns.) This would require a widely shared sense of common purpose—in effect, a more fully developed European identity. Without it, member states would balk at collective fiscal action. And balk they did: Fiscal union, with the need for fiscal transfers across the union’s internal borders, wasn’t part of the plan.

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Worried about his legacy?

The Broken Chessboard: Brzezinski Gives Up on Empire (Whitney)

The main architect of Washington’s plan to rule the world has abandoned the scheme and called for the forging of ties with Russia and China. While Zbigniew Brzezinski’s article in The American Interest titled “Towards a Global Realignment” has largely been ignored by the media, it shows that powerful members of the policymaking establishment no longer believe that Washington will prevail in its quest to extent US hegemony across the Middle East and Asia. Brzezinski, who was the main proponent of this idea and who drew up the blueprint for imperial expansion in his 1997 book The Grand Chessboard: American Primacy and Its Geostrategic Imperatives, has done an about-face and called for a dramatic revising of the strategy. Here’s an excerpt from the article in the AI:

“As its era of global dominance ends, the United States needs to take the lead in realigning the global power architecture. Five basic verities regarding the emerging redistribution of global political power and the violent political awakening in the Middle East are signaling the coming of a new global realignment. The first of these verities is that the United States is still the world’s politically, economically, and militarily most powerful entity but, given complex geopolitical shifts in regional balances, it is no longer the globally imperial power.” (Toward a Global Realignment, Zbigniew Brzezinski, The American Interest)

Repeat: The US is “no longer the globally imperial power.” Compare this assessment to a statement Brzezinski made years earlier in Chessboard when he claimed the US was ” the world’s paramount power.” ““…The last decade of the twentieth century has witnessed a tectonic shift in world affairs. For the first time ever, a non-Eurasian power has emerged not only as a key arbiter of Eurasian power relations but also as the world’s paramount power. The defeat and collapse of the Soviet Union was the final step in the rapid ascendance of a Western Hemisphere power, the United States, as the sole and, indeed, the first truly global power.” (“The Grand Chessboard: American Primacy And Its Geostrategic Imperatives,” Zbigniew Brzezinski, Basic Books, 1997, p. xiii)

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A basic income for just 2000 people seems to miss the whole idea.

2000 Finns to Get Basic Income in State Experiment Set to Start 2017 (BBG)

Finland is pushing ahead with a plan to test the effects of paying a basic income as it seeks to protect state finances and move more people into the labor market. The Social Insurance Institution of Finland, known as Kela, will be responsible for carrying out the experiment that would start in 2017 and include 2,000 randomly selected welfare recipients, according to a statement released Thursday. The level of basic income would be €560 per month, tax free, and mandatory for those picked. “The objective of the legislative proposal is to carry out a basic income experiment in order to assess whether basic income can be used to reform social security, specifically to reduce incentive traps relating to working,” the Social Affairs and Health Ministry said.

To asses the effect of a basic income, the participants will be held up against a control group, the ministry said. The target group won’t include people receiving old-age pension benefits or students. The level of the lowest basic income to be tested will correspond with the level of labor market subsidy and basic daily allowance. The idea of a basic income, or paying everyone a stipend, has gained traction in recent years. It was rejected in a referendum in Switzerland as recently as June, where the suggested amount was 2,500 francs ($2,587) for an adult and a quarter of that sum for a child. It has also drawn interest in Canada and the Netherlands. Finnish authorities were clear on one thing as they embark on their study: “An experiment means that, at this point, basic income will not be paid to the whole population.”

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Whatever the US do, Greece will follow. Unless Berlin decides against it.

Greece Grapples With More ‘Fugitives’, Seeks To Avoid Tensions With Ankara (K.)

As Greece struggles to strike a balance between international law and Turkey’s demand for the extradition of eight Turkish officers, it was confronted with a fresh challenge this week after seven civilians from the neighboring country arrived in Alexandroupoli and Rhodes late Wednesday and are expected to request asylum. The new arrivals have been charged with illegally entering Greece. According to officials, they include a couple, both university professors, and their two children, who arrived in Alexandroupoli, reportedly via the northeastern border, possibly crossing the Evros River by boat. All four were said to be holding Turkish passports, though only the man’s is valid.

The other three individuals – of whom only one has a valid passport – said they are businessmen, but it was not clear how they made it to the southeastern Aegean island. One of the passports has been listed as stolen by Interpol. Initial reports suggested they are possibly supporters of the self-exiled cleric Fethullah Gulen, whom Turkey claims orchestrated the failed coup attempt in July. Their case is set to put yet more strain on already tense relations between the traditional rivals after eight Turkish officers fled to Greece in the aftermath of the attempted coup. Ankara has demanded their immediate extradition to stand trial as “traitors” and coup plotters. Greece has said the decision will lie with its independent court.

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Aug 152016
 
 August 15, 2016  Posted by at 8:45 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


NPC R.P. Andrews fire, 628 D Street N.W, Washington, DC 1912

Younger Generation In UK Face Overwhelming Pensions Bill (G.)
British Millennials Are ‘Collateral Damage’ as Pension Gap Grows (BBG)
A Simple Test to Dispel the Illusion Behind Stock Buybacks (NYT)
The Bank of Japan’s Unstoppable Rise to Shareholder No. 1 (BBG)
Japan’s Economy Stalls In April-June, Casts Doubts On Abe’s Policies (R.)
China Is Hoarding Cash At The Fastest Pace Since Lehman (ZH)
China Signals Growth, Not Political Disputes, Should Dominate G20 (R.)
Cheap Money Fuels Boom In Germany, But Fails To Lift France And Italy (CNBC)
Enough Austerity. More Fiscal Stimulus, Please (BBG Ed.)
London Set To Bear Brunt Of Post-Brexit Downturn (G.)
Give Us EU Visa Freedom In October Or Abandon Migrant Deal, Turkey Says (R.)
Britain’s Vast National Gamble On Wind Power May Yet Pay Off (AEP)

 

 

“.. it leaves young people paying twice, saving for their own pensions while also paying for the pensions of older generations through taxation.”

“Since 2007, the real disposal income of pensioners has risen by almost 10%. Those over the age of 65 have harvested fully two-thirds of that £2.7tn increase in national wealth. By contrast, since 2007, working-age households with children have achieved income gains of only about 3%, while the incomes of those without children have fallen by 3%,” he said.

This can only go horribly wrong, there is no other possible outcome, but it’s a topic politicians either don’t understand or don’t want to touch. Which is why I wrote Basic Income in The Time of Crisis a month ago. There is not much time left.

Younger Generation In UK Face Overwhelming Pensions Bill (G.)

Older people have saddled the younger generation with an excessive bill for state pensions while grabbing an ever-greater share of NHS spending, according to a report that calls for intergenerational rebalancing. The report from the Intergenerational Foundation (IF) said spending promises on state and public sector pensions are “overwhelming young people’s prospects”. The thinktank is calling on the prime minister, Theresa May, to abandon triple lock protection, which promises that the state pension will rise each year by whatever is highest out of inflation measured by the consumer price index, average earnings growth or 2.5%. The former pensions minister Ros Altmann has called for the triple lock to be scrapped. The Department for Work and Pensions has declined to rule out a review of the “totemic” policy in the coming months.

The report estimates that workers are paying £2,846 a year each to cover the cost of paying state pensions. Public sector pension liabilities, for schemes such as retired civil servants, have risen by 12% to nearly £44,000 per worker, with total liabilities at £1.4tn, it added. Angus Hanton, the co-founder of IF, said: “Public sector pensions represent one of the largest unfunded burdens for younger taxpayers, who will not retire at the same age, or on the same terms, while having to contribute more to their own pensions. “Increasing retirement ages and moving to career average pensions will not be enough to stall the pension burden avalanche that is bearing down on the young.

Auto-enrolment is an apparent success, except that it leaves young people paying twice, saving for their own pensions while also paying for the pensions of older generations through taxation.” But charity Age UK said the vast majority of pensioners have contributed throughout their life to the state pension, which remains lower than the amount paid in many other western countries. Caroline Abrahams, the charity director at Age UK, pointed out that 1.6 million older people live in poverty in the UK. “A strong pensions system that provides a decent quality of life in retirement is central to a civilised society and in the best interests of us all,” she said.

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“Postal-service operator Royal Mail said last week it may not be able to keep its program running beyond 2018. That’s because its annual contributions could more than double to over £900 million.”

British Millennials Are ‘Collateral Damage’ as Pension Gap Grows (BBG)

Britain’s millennials, already suffering for the economic mistakes of the past, now face the prospect of having to pay for the country’s future. Pension-fund liabilities in the U.K. increased to a record £1 trillion ($1.3 trillion) after the Bank of England’s interest-rate cut this month, hurt by quantitative easing and razor-thin yields. It’s Britain’s version of what Duquesne Chairman Stanley Druckenmiller calls “Generational Theft” in the U.S. Plunging bond yields have caused pension liabilities to balloon and it could get even worse because the BOE will probably reduce interest rates further this year. Deficits for defined-benefit-pension funds already rose by more than 40% in the two months through July, following the vote to leave the EU and the central bank’s subsequent decision to increase quantitative easing, according to consulting firm Mercer.

“The Bank of England clearly believes that the effect on our pension system is acceptable long-term collateral damage” to prevent a short-term recession, said David Blake, professor of pension economics at London’s Cass Business School. Younger workers will “have to save more – which they appear reluctant to do – or be prepared to work much longer.” The increased bond-purchase program has had a relatively limited impact on pension deficits, according to the minutes of the BOE’s Monetary Policy Committee meeting on Aug. 3. While the fund managers have to move into riskier assets, that helps to support the economy, Governor Mark Carney said Aug. 4. “That makes it less likely that we will have a very long period of high unemployment, low output, and very low interest rates,” Carney said.

Money managers, however, appear to be unwilling to offload their higher-yielding gilts because they’re worried about generating enough returns to pay their members. The BOE last week failed to find enough investors who were prepared to sell their longer-maturity gilts, a slice of the credit market dominated by pensions and insurers. Companies that run defined-benefit pension funds are also starting to worry. Postal-service operator Royal Mail said last week it may not be able to keep its program running beyond 2018. That’s because its annual contributions could more than double to over £900 million.

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“..who really wants to own a company in the process of liquidating itself?”

A Simple Test to Dispel the Illusion Behind Stock Buybacks (NYT)

Stock investors have had one sweet summer so far watching the markets edge higher. With the Standard & Poor’s 500-stock index at record highs and nearing 2,200, what’s not to like? Here’s something. As shares climb, so too do the prices companies are paying to repurchase their stock. And the companies doing so are legion. Through July of this year, United States corporations authorized $391 billion in repurchases, according to an analysis by Birinyi Associates. Although 29% below the dollar amount of such programs last year, that’s still a big number. The buyback beat goes on even as complaints about these deals intensify. Some critics say that top managers who preside over big stock repurchases are failing at one of their most basic tasks: allocating capital so their businesses grow.

Even worse, buybacks can be a way for executives to make a company’s earnings per share look better because the purchases reduce the amount of stock it has outstanding. And when per-share earnings are a sizable component of executive pay, the motivation to do buybacks only increases. Of course, companies that conduct major buybacks often contend that the purchases are an optimal use of corporate cash. But William Lazonick, professor of economics at the University of Massachusetts Lowell, and co-director of its Center for Industrial Competitiveness, disagrees. “Executives who get into that mode of thinking no longer have the ability to even think about how to invest in their companies for the long term,” Mr. Lazonick said in an interview. “Companies that grow to be big and productive can be more productive, but they have to be reinvesting.”

[..] The net profit test, said Gary Lutin, a former investment banker who heads the forum, “cuts through to the essential logic of comparing a process that grows a bigger pie – reinvestment – to a process that divides a shrunken pie among fewer people: share buybacks. “It’s pretty obvious,” he continued, “that even mediocre returns from reinvesting in the production of goods and services will beat what’s effectively a liquidation plan.” Investors may be dazzled by the earnings-per-share gains that buybacks can achieve, but who really wants to own a company in the process of liquidating itself? Maybe it’s time to ask harder questions of corporate executives about why their companies aren’t deploying their precious resources more effectively elsewhere.

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And if companies don’t buy stocks, central banks will. It’s the only way left to delay a giant crash.

The Bank of Japan’s Unstoppable Rise to Shareholder No. 1 (BBG)

The Bank of Japan’s controversial march to the top of shareholder rankings in the world’s third-largest equity market is picking up pace. Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year, according to estimates compiled by Bloomberg from the central bank’s exchange-traded fund holdings. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy. While bulls have cheered the tailwind from BOJ purchases, opponents say the central bank is artificially inflating equity valuations and undercutting efforts to make public companies more efficient.

Traders worry that the monetary authority’s outsized presence will make some shares harder to buy and sell, a phenomenon that led to convulsions in Japan’s government bond market this year. “Only in Japan does the central bank show its face in the stock market this much,” said Masahiro Ichikawa at Sumitomo Mitsui Asset Management. “Investors are asking whether this is really right.” While the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. Estimates of the central bank’s underlying holdings can be gleaned from the BOJ’s public records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan. Forecasts of the BOJ’s future shareholder rankings assume that other major investors keep their positions stable and that policy makers maintain the historical composition of their purchases.

[..] Japan’s government bond market offers a guide to the risks of further intervention in stocks, said Akihiro Murakami, the chief quantitative strategist for Japan at Nomura in Tokyo. JGB volatility soared to the highest level since 1999 in April, while trading volume has slumped as the central bank’s holdings swelled to about a third of the market. It’s still buying at an annual rate of 80 trillion yen. “If the BOJ does not sell stocks, then liquidity will disappear,” Murakami said. “As liquidity falls, the number of shares you can buy starts to decline – the same thing that’s happening in the JGB market.” The central bank owned about 60% of Japan’s domestic ETFs at the end of June, according to Investment Trusts Association figures, BOJ disclosures and data compiled by Bloomberg. Based on a report released on Friday by the Investment Trusts Association, that figure rose to about 62% in July.

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Abenomics is way beyond doubts.

Japan’s Economy Stalls In April-June, Casts Doubts On Abe’s Policies (R.)

Japan’s economic growth ground to a halt in April-June after a stellar expansion in the previous quarter on weak exports and capital expenditure, putting even more pressure on premier Shinzo Abe to come up with policies that produce more sustainable growth. The world’s third-largest economy expanded by an annualized 0.2% in the second quarter, less than a median market forecast for a 0.7% increase and a marked slowdown from a revised 2.0% increase in January-March, Cabinet Office data showed on Monday. The weak reading underscores the challenges policymakers face in putting a sustained end to two decades of deflation with the initial boost from Abe’s stimulus programs, dubbed “Abenomics,” fading. “Overall it looks like the economy is stagnating. Consumer spending is weak, and the reason is low wage gains.

There is a lot of uncertainty about overseas economies, and this is holding back capital expenditure,” said Norio Miyagawa, senior economist at Mizuho Securities. “The government has already announced a big stimulus package, so the next question is how the Bank of Japan will respond after its comprehensive policy review, which is sure to lead to a delay in its price target.” On a quarter-on-quarter basis, GDP marked flat growth in April-June, weaker than a median market forecast for a 0.2% rise. Private consumption, which accounts for roughly 60% of GDP, rose 0.2% in April-June, matching a median market forecast but slowing from a 0.7% increase in the previous quarter. Capital expenditure declined 0.4% in April-June after a 0.7% drop in the first quarter, the data showed, suggesting that uncertainty over the global economic outlook and weak domestic markets are keeping firms from boosting spending.

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One word: FEAR.

China Is Hoarding Cash At The Fastest Pace Since Lehman (ZH)

The last few months have seen trillions of dollars of fresh credit puked into existence in China to enable goal-seeked growth numbers to creep lower (as opposed to utterly collapse). The problem is… the Chinese are hoarding that cash at the fastest pace since Lehman as liquidity concerns flood through the nation. China’s M2, a broad gauge of money supply including savings deposits, rose at the slowest pace in 15 months and trailed the government’s full-year target of +11% in July. But, as Bloomberg details, by contrast, M1, the total of cash, checks and demand deposits, rose at the quickest pace in six years…

That shows companies “are holding all this cash, but investment returns are low and there are few options for projects,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen.

In fact, no matter what has been done since the Chinese stock market crashed, the Chinese have been hoarding cash…

In fact, the hoarding of cash in China corresponded with the top in 1999/2000, and the top in 2007…

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“..If people don’t feel like they are beneficiaries of economic development, if they don’t think their lot in life is improving, that’s when they start getting all kinds of ideas.” We wouldn’t want that, would we?

China Signals Growth, Not Political Disputes, Should Dominate G20 (R.)

China expects next month’s summit of the G20 which it is hosting will focus on boosting economic growth and other financial issues rather than disputes like the South China Sea, senior officials said on Monday. The summit of the world’s 20 biggest economies in the eastern city of Hangzhou will be the highlight of President Xi Jinping’s diplomatic agenda this year, and the government is keen to ensure it proceeds smoothly. The Sept 4-5 leaders’ meeting comes as clouds continue to hover over global growth prospects and worries about China’s own slowing economy. Last month’s meeting of G20 policymakers was dominated by the impact of Britain’s exit from Europe and fears of rising protectionism.

Yi Gang, a vice governor of the People’s Bank of China, said the summit will focus on how to stimulate sluggish global economic growth through open, inclusive trade and the development of robust financial markets. “We need to instil market confidence and ensure there are no competitive devaluations but rather let the market determine exchange rates,” Yi told a news briefing, adding this would be the first G20 to discuss foreign exchange markets in such detail. The G20 will also discuss how to better monitor and respond to risks presented by global capital flows, he said. Despite increasingly protectionist rhetoric around the world, the G20 is strongly opposed to anti-trade and anti-investment sentiment, Vice Finance Minister Zhu Guangyao said.

“We really do need to make sure that the people, the public, benefit from economic development and growth. If people don’t feel like they are beneficiaries of economic development, if they don’t think their lot in life is improving, that’s when they start getting all kinds of ideas.”

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Why the euro is hammering the EU. And will be the end of it.

Cheap Money Fuels Boom In Germany, But Fails To Lift France And Italy (CNBC)

Germany, for example, does not want zero interest rates and those trillions of euros created through ECB’s massive asset purchases. Germany is a fully-employed economy with balanced public finances and an exploding current account surplus of 9% of GDP. With a 1.8% annual growth in the first half of this year, the economy is running almost an entire percentage point above its potential and noninflationary growth. [..] Now, for a sharp contrast, take a look at Italy. On a quarterly basis, there has been virtually no growth in the first half of this year. In fact, the economy has been declining and stagnating over the last four years, and is currently experiencing a price deflation. Italy’s 3 million of unemployed in June (10.6% of the labor force) are only slightly below that level in the same month of last year. A shocking 36.5% of the country’s youth is out of work.

[..] Germany, close to one-third of the euro area’s products and services, does not need, and does not want, the ECB’s extraordinarily loose monetary policy. But the hard-pressed economies of France, Italy, Spain, Portugal and Greece – another 50% of the euro area output – need that oxygen to survive. Easy money is all they got. Their budget deficits of 2-5% of GDP, and their rising public debt of 120-185% of GDP, leave no room for fiscal policy to support demand, output and employment. The EU authorities, whoever they are, have relented from imposing penalties on Spain and Portugal – and have looked the other way in the case of France – for transgressing the euro area budget deficit commitments. But they continue to insist on labor market deregulations and on other socially and politically sensitive measures that act as short-term growth and employment killers.

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Bloomberg editorials blow wherever the wind does.

Enough Austerity. More Fiscal Stimulus, Please (BBG Ed.)

Budget deficits may be coming out of retirement. With economies all over the world growing too slowly and little scope left for new monetary stimulus, governments are turning their attention back to fiscal policy. This shift in thinking is overdue. In many countries, though not all, fiscal expansion is not just possible but also necessary. A resumption of budget activism, if it happens, won’t be riskless, so caution will be needed. A stubborn commitment to fiscal austerity, though, would be riskier still. The immediate response to the 2008 crash included fiscal easing – sometimes deliberate and sometimes the automatic consequence (higher public spending, lower tax revenues) of slumping activity. In most cases, expansionary budgets lessened the impact of collapsing demand, but they also pushed up public debt.

Before long, governments started tightening their budgets to get debt back under control. With demand still lacking, the hope was that monetary expansion would be enough to support recovery. It wasn’t. Governments have found that monetary policy is losing its potency. Interest rates are close to zero in many countries, and in some even negative. Huge bond-buying programs – QE – have delivered an additional monetary punch, but again with diminishing effects, and with a growing risk of financial instability as well. So fiscal policy, despite the recent growth of public debt, is back on the agenda. Central banks have been leading the call. In June, Fed Chair Janet Yellen told the Senate Banking Committee that U.S. fiscal policy had “not played a supportive role.”

In July, the ECB’s chief economist, Peter Praet, said “monetary policy cannot be the only remedy to our current economic challenges.” Governments are responding. Following the U.K.’s decision to quit the EU, the new Chancellor of the Exchequer, Philip Hammond, has promised a break with his predecessor’s approach and says he will “reset” fiscal policy. Added investment in infrastructure is under consideration as part of a new industrial strategy.

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Blame it on the bubble, not the Brexit. That would be shooting the messenger.

London Set To Bear Brunt Of Post-Brexit Downturn (G.)

London could bear the brunt of a post-Brexit vote downturn, according to economic indicators in the weeks since the EU referendum pointing to job cuts, falling house prices and a decline in business activity in the capital. London’s economy was relatively unaffected by the previous downturn, compared with other UK regions, but early signs from the latest bout of turmoil suggest that it might not get off so lightly again, economists have said. This could have consequences for the government’s tax receipts and overall growth, given the city’s contribution to the UK economy. One key concern about the impact on London of the vote to leave the EU stems from the capital’s dependence on financial services.

London could lose its status as Europe’s financial capital if the UK leaves the single market and City banks are stripped of their lucrative EU “passports” that allow them to sell services to the rest of the bloc. Samuel Tombs, the chief UK economist at consultancy Pantheon Macroeconomics, said: “London was unscathed by the last recession, but its dependence on finance now is its achilles heel.” He highlighted a potential change of fortunes for London in a note to clients after surveys showed that companies in the capital had taken a hit from the referendum result. London has been the UK’s growth star for the past two decades, outperforming the rest of the country, Tombs said. “Surveys since the referendum, however, indicate that the capital is at the sharp end of the post-referendum downturn.” added.

London was the worst performer out of 12 regions on one measure of business activity for the weeks following 23 June, the day of the referendum. Companies in the capital cut jobs and suffered the sharpest fall in output since early 2009, when the UK was mired in recession, according to the Lloyds Bank regional purchasing managers’ index. Clients appeared reluctant to commit to new contracts, London businesses said, leading to a slump in order books. “The capital was hit harder than any other UK region,” said Paul Evans, the regional director for London at Lloyds commercial banking.

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How deep a whole will Merkel dig this time around?

Give Us EU Visa Freedom In October Or Abandon Migrant Deal, Turkey Says (R.)

The EU should grant Turks visa-free travel in October or the migrant deal that involves Turkey stemming the flow of illegal migrants to the bloc should put be put aside, Foreign Minister Mevlut Cavusoglu told a German newspaper. Asked whether hundreds of thousands of refugees in Turkey would head to Europe if the EU did not grant Turks visa freedom from October, he told Bild newspaper’s Monday edition: “I don’t want to talk about the worst case scenario – talks with the EU are continuing but it’s clear that we either apply all treaties at the same time or we put them all aside.” Visa-free access to the EU – the main reward for Ankara’s collaboration in choking off an influx of migrants into Europe – has been subject to delays due to a dispute over Turkish anti-terrorism legislation and Ankara’s crackdown after a failed coup.

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When Ambrose starts talking about energy -or anything other than finance, for that matter- I brace myself. He tends to go into cheerleading mode. In this piece, the only problem he sees is intermittency, and even that mostly as not a real issue. Advancements in technology, don’t you know…

Britain’s Vast National Gamble On Wind Power May Yet Pay Off (AEP)

Wind power has few friends on the political Right. No other industry elicits such protest from the conservative press, Tory backbenchers, and free market economists. The vehemence is odd since wind generates home-made energy and could be considered a ‘patriotic choice’. It dates back to the 1990s and early 2000s when the national wind venture seemed a bottomless pit for taxpayer subsidies. Pre-modern turbines captured trivial amounts of energy. The electrical control systems and gearboxes broke down. Repair costs were prohibitive. Yet as so often with infant industries, early mishaps tell us little. Costs are coming down faster than almost anybody thought possible. As the technology comes of age – akin to gains in US shale fracking – the calculus is starting to vindicate Britain’s vast investment in wind power.

The UK is already world leader in offshore wind. The strategic choice now is whether to go for broke, tripling offshore capacity to 15 gigawatts (GW) by 2030. The decision is doubly-hard because there is no point dabbling in offshore wind. Scale is the crucial factor in slashing costs, so either we do it with conviction or we do not do it all. My own view is that the gamble is worth taking. Shallow British waters to offer optimal sites of 40m depth. The oil and gas industry knows how to operate offshore. Atkins has switched its North Sea skills seamlessly to building substations for wind. JDR in Hartlepool sells submarine cables across the world. Wind power is a natural fit.

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Aug 012016
 
 August 1, 2016  Posted by at 8:54 am Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle August 1 2016


Wyland Stanley Marmon touring car at Yosemite 1919

Abe’s Fiscal Plan Follows a Long Road of Packages That Failed (BBG)
China July Factory Activity Unexpectedly Dips (R.)
China’s Love Affair With U.S. Real Estate Fades (BBG)
For Social Security “Time’s Up – The Pain Must Begin Now” (CH)
Impact Of Poverty Costs The UK £78 Billion A Year (G.)
Did Germany Just Blink? (DQ)
US Shale Producers Weather Oil Price Storm (AEP)
Growing Oil Glut Shows Investors There’s Nowhere to Go But Down (BBG)
Amid Britain Nuclear Debacle, China’s Xinhua Decries ‘Suspicion’ (R.)
Greece Eases Back On Capital Controls In Bid To Reverse Currency Flight (G.)
Building a Progressive International (YV)
India Rescues 10,000 Starving Workers In Saudi Arabia (Sky)

 

 

There’s a hole in the bucket, dear Shinzo.

Abe’s Fiscal Plan Follows a Long Road of Packages That Failed (BBG)

Prime Minister Shinzo Abe’s “bold” plan to revive the economy with a $273 billion package leaves him traveling down a well-trod path: it marks the 26th dose of fiscal stimulus since the country’s epic markets crash in 1990, in a warning for its effectiveness. The nation has had extra budgets every year since at least 1993, and even with that extra spending, it has still had six recessions, an entrenched period of deflation, soaring debt and a rapidly aging population that has left the world’s third-largest economy still struggling to get off the floor. While some analysts say the latest round of spending may buy the economy time, few are convinced it will be enough to dramatically change the course.

First off, much of the 28 trillion yen announced by Abe last week won’t be spending, but lending. And if previous episodes are any guide, an initial sugar hit to markets and growth will quickly fade amid a realization that extra spending does little to cure the economy’s underlying problems. A Goldman Sachs study found that markets gave up their gains in the first month after the cabinet approved the stimulus in 18 of the 25 packages it studied since 1990. Skeptics of Abe’s latest plan aren’t hard to find. Instead of adding to a debt pile already more than twice the economy’s size, more should be done to tackle thorny structural problems such as a declining labor force and protected industries, according to Naoyuki Shinohara, a former Japanese finance ministry official.

“Looking at the history of the Japanese economy, there have been lots of fiscal stimulus packages,” according to Shinohara, who was a top official at the IMF until last year. “But the end result is that it didn’t have much impact on the potential growth rate.”

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A lot of seemingly contradictory reports today. Manufacturing PMI down, but services PMI up.

China July Factory Activity Unexpectedly Dips (R.)

Activity in China’s manufacturing sector eased unexpectedly in July as orders cooled and flooding disrupted business, an official survey showed, adding to fears the economy will slow in coming months unless the government steps up a huge spending spree. While a similar private survey showed business picked up for the first time in 17 months, the increase was only slight and the much larger official survey on Monday suggested China’s overall industrial activity remains sluggish at best. Both surveys showed persistently weak demand at home and abroad were forcing companies to continue to shed jobs, even as Beijing vows to shut more industrial overcapacity that could lead to larger layoffs.

And other readings on Monday pointed to signs of cooling in both the construction industry and real estate, which were key drivers behind better-than-expected economic growth in the second quarter. The official Purchasing Managers’ Index (PMI) eased to 49.9 in July from the previous month’s 50.0 and below the 50-point mark that separates growth from contraction on a monthly basis. While the July reading showed only a slight loss of momentum, Nomura’s chief China economist Yang Zhao said it may be a sign that the impact of stimulus measures earlier this year may already be wearing off. That has created a dilemma for Beijing as the Communist Party seeks to deliver on official targets, even as concerns grow about the risks of prolonged, debt-fueled stimulus.

“The government has realized the downward pressure is great but they’ve also realized that stimulus to stimulate the economy continuously is not a good idea and they want to continue to focus on reform and deleveraging,” Zhao said.

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Monopoly money running out.

China’s Love Affair With U.S. Real Estate Fades (BBG)

For David Wong, the business of selling homes isn’t as good this year as it was in 2015, and he’s blaming that on a decline in customers from China. “The residential-property market here, especially for those priced between $2.5 million to $3 million, has been affected by China’s measures to control capital flight,” said the New York City-based Keller Williams Realty Landmark broker. “You need to cut the price, or it may take a real long time.” Wong is not the only one who has felt the cooling in the U.S. real estate market for foreign buyers. Total sales to Chinese buyers in the 12 months through March fell for the first time since 2011, to $27.3 billion from $28.6 billion a year earlier, according to an annual research report released by the National Association of Realtors.

The number of properties purchased by Chinese also declined to 29,195 units from 34,327 units. While the total international sales saw its first decline in three years, the 1.25% pace is slower than 4.5% recorded for Chinese buying. In terms of U.S. dollar value, the total share of Chinese buying of international sales dropped from 27.5% to 26.7%. [..] The yuan began plummeting in August, driving the Chinese currency to a five-year low versus the U.S. dollar. The Chinese authorities have been compelled to increasingly tighten the noose on cross-border capital flows to defend the yuan and to slow down the burnout of the nation’s foreign-exchange reserves since then. This includes increasing scrutiny of transfers overseas, to closely check whether individuals send money abroad by breaking up foreign-currency purchases into smaller transactions.

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This is why I recently wrote that a basic income should replace old-age provisions.

For Social Security “Time’s Up – The Pain Must Begin Now” (CH)

In 2010, Social Security (OASDI) unofficially went bankrupt. For the first time since the enactment of the SS amendments of 1983, annual outlays for the program exceeded receipts (excluding interest credited to the trust funds). The deficit has grown every year since 2010 and is now up to 8% annually and is projected to be 31% in 2026 and 44% by ’46. The chart below highlights the OASDI annual surplus growth (blue columns) and total surplus (red line). This chart includes interest payments to the trust funds and thus looks a little better than the unvarnished reality. For a little perspective, the program pays more than 60 million beneficiaries (almost 1 in 5 Americans), OASDI (Old Age, Survivors, Disability Insurance) represents 25% of all annual federal spending, and for more than half of these beneficiaries these benefits represent their sole or primary source of income.

The good news is since SS’s inception in 1935, the program collected $2.9 trillion more than it paid out. The bad news is that the $2.9 trillion has already been spent. But by law, Social Security is allowed to pretend that the “trust fund” money is still there and continue paying out full benefits until that fictitious $2.9 trillion is burned through. To do this, the Treasury will issue another $2.9 trillion over the next 13 years to be sold as marketable debt so it may again be spent (just moving the liability from one side of the ledger, the Intergovernmental, to the other, public marketable). However, according to the CBO, Social Security will have burnt through the pretend trust fund money (that wasn’t there to begin with) by 2029.

Below, the annual OASDI surplus (in red) peaking in 2007, matched against the annual growth of the 25-64yr/old (in blue) and 65+yr/old (grey) populations. The impact of the collapse of the growth among the working age population and swelling elderly population is plain to see. And it will get far worse before it eventually gets better. [..] Americans turning 67 in 2030 will be told that after being mandated to pay their full share of SS taxation throughout their working lifetime, they will not see anything near their full benefits in their latter years. However, those in retirement now and those retiring between now and 2029 are being paid in full despite the shortfall in revenue. They will be paid in full until this arbitrary “trust fund” is theoretically drained.

I have no intention of funding, in full, current retirees benefits with my tax dollars only to know I will hit the finish line with a 30%+ reduction that will only worsen over time. My goal is to pay it forward to my kids and then do my best to never to be a burden to them. The SS (OASDI) benefits must be cut now to be in line with revenues. Raise taxes, lower benefits…your choice. But I’m not about to make the old whole so I can then subsequently see my generation go bankrupt in my latter years.

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Perfect fit for a basic income. But it won’t come. Austerity as controlled poverty is a power(ful) tool.

Impact Of Poverty Costs The UK £78 Billion A Year (G.)

Dealing with the effects of poverty costs the public purse £78bn a year, or £1,200 for every person in the UK, according to the first wide-ranging report into the impact of deprivation on Britain’s finances. The Joseph Rowntree Foundation (JRF) estimates that the impact and cost of poverty accounts for £1 in every £5 spent on public services. The biggest chunk of the £78bn figure comes from treating health conditions associated with poverty, which amounts to £29bn, while the costs for schools and police are also significant. A further £9bn is linked to the cost of benefits and lost tax revenues. The research, carried out for JRF by Heriot-Watt and Loughborough universities, is designed to highlight the economic case, on top of the social arguments, for tackling poverty in the UK.

The prime minister, Theresa May, has made cutting inequality a central pledge. Julia Unwin, the chief executive of the foundation, said: “It is unacceptable that in the 21st century, so many people in our country are being held back by poverty. But poverty doesn’t just hold individuals back, it holds back our economy too. “Taking real action to tackle the causes of poverty would bring down the huge £78bn yearly cost of dealing with its effects, and mean more money to create better public services and support the economy. UK poverty is a problem that can be solved if government, businesses, employers and individuals work together.”

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“But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money? Banks, that is, with holes in their balance sheets visible from the Moon.”

Did Germany Just Blink? (DQ)

Put simply, the EU is a half-way house with too much democracy and nothing in the way of transfer union. “There are too many moving parts in the electoral politics of 28 nation states, and too many conceivable random-like events that could push political and economic developments in one direction or another, with impossible-to-predict consequences and timelines,” the agency added. The perfect case in point is Italy’s banking crisis. If the country’s struggling banks are not saved with a combination of public and private money — a process that, to all intents and purposes, began on Friday with the announcement of Monte dei Paschi’s suspension of the ECB’s stress test as well as a €5 billion capital expansion later this year — the resulting carnage could unleash not only a tsunami of financial contagion but also an unstoppable groundswell of political opposition to the EU.

For a taste of just how disastrous the political fallout would be for Italy’s embattled premier, Matteo Renzi, here’s an excerpt from a furious tirade given by Italian financial journalist Paolo Barnard on prime-time TV, addressing Renzi directly:

“You went to meet Mrs. Merkel to ask for a minor public funded bail-out of Italian banks and you got a sharp NO. But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money? “Banks, that is, with holes in their balance sheets visible from the Moon.

Germany bailed them out to the tune of €704 billion. It was all paid for by European taxpayers’ money, public funds that is. “It was done through the EU Commission of Mr Barroso and by Mr Mario Draghi at the ECB. Didn’t you know that Mr Renzi? Couldn’t you have barked this right into Ms Merkel’s face?”

Barnard rounded off his rant with a rallying call for Italians to follow the UK’s example and demand an exit from the EU — a prospect that should be taken very seriously given that one of the manifesto pledges of Italy’s rising opposition party, the 5-Star Movement, is to call a referendum on Italy’s membership of the euro.

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Ambrose has religion. He believes!

US Shale Producers Weather Oil Price Storm (AEP)

Opec’s worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has failed to break the back of the US shale industry. The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is an illusive victory. North America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.

Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last week – with some poetic licence – claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2.25 a barrel. “Definitely we can compete with anything that Saudi Arabia has. We have the best rock,” he said. Revolutionary improvements in drilling technology and data analytics that have changed the cost calculus faster than most thought possible. The “decline rate” of production over the first four months of each well was 90pc a decade ago for US frackers. This dropped to 31pc in 2012. It is now 18pc. Drillers have learned how to extract more. Mr Sheffield said the Permian is as bountiful as the giant Ghawar field in Saudi Arabia and can expand from 2m to 5m barrels a day even if the price of oil never rises above $55.

His company has cut production costs by 26pc over the last year alone. Pioneer is now so efficient that it already adding five new rigs despite today’s depressed prices in the low $40s, and it is not alone. The Baker Hughes count of North America oil rigs has risen for seven out of the last eight weeks to 374, and this understates the effect. Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012. Consultants Wood Mackenzie estimated in a recent report that full-cycle break-even costs have fallen to $37 at Wolfcamp and Bone Spring in the Permian, and to $35 in the South Central Oklahoma Oil Province. The majority of US shale fields are now viable at $60.

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Once again: demand.

Growing Oil Glut Shows Investors There’s Nowhere to Go But Down (BBG)

Money managers have never been more certain that oil prices will drop. They increased bets on falling crude by the most ever as stockpiles climbed to the highest seasonal levels in at least two decades, nudging prices toward a bear market. The excess supply hammered the second-quarter earnings of Exxon Mobil and Chevron. Inventories are near the 97-year high reached in April as oil drillers boosted rigs for a fifth consecutive week. “The rise in supplies will add more downward pressure,” said Michael Corcelli, chief investment officer at Alexander Alternative Capital, a Miami-based hedge fund. “It will be a long time before we can drain the excess.”

Hedge funds pushed up their short position in West Texas Intermediate crude by 38,897 futures and options combined during the week ended July 26, according to the Commodity Futures Trading Commission. It was the biggest increase in data going back to 2006. WTI dropped 3.9% to $42.92 a barrel in the report week, and traded at $41.75 at 12:20 p.m. Singapore time. WTI fell by 14% in July, the biggest monthly decline in a year. It’s down by 19% since early June, bringing it close to the 20% drop that would characterize a bear market.

U.S. crude supplies rose by 1.67 million barrels to 521.1 million in the week ended July 22, according to U.S. Energy Information Administration data. Stockpiles reached 543.4 million barrels in the week ended April 29, the highest since 1929. Gasoline inventories expanded for a third week to 241.5 million barrels, the most since April. “The flow is solidly bearish,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It reflects a recognition that the market is, at least for the time being, oversupplied.”

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Hinkley Point is about the worst British plan ever, and that’s saying something.

Amid Britain Nuclear Debacle, China’s Xinhua Decries ‘Suspicion’ (R.)

China will not tolerate “unwanted accusations” about its investments in Britain, a country that cannot risk driving away other Chinese investors as it looks for post-Brexit trade deals, China’s official Xinhua news agency said on Monday. British Prime Minister Theresa May was concerned about the security implications of a planned Chinese investment in the Hinkley Point nuclear plant and intervened to delay the project, a former colleague and a source said on Saturday.The plan by France’s EDF to build two reactors with financial backing from a Chinese state-owned company was championed by May’s predecessor David Cameron as a sign of Britain’s openness to foreign investment.

But just hours before a signing ceremony was due to take place on Friday, May’s new government said it would review the project again, raising concern that Britain’s approach to infrastructure deals, energy supply and foreign investment may be changing. China General Nuclear Power, which would hold a stake of about a third in the project, said on Saturday it respected the decision of the new British government to take the time needed to familiarise itself with the program. Xinhua, in an English-language commentary, said China understood and respected Britain’s requirement for more time to think about the deal. “However, what China cannot understand is the ‘suspicious approach’ that comes from nowhere to Chinese investment in making the postponement,” it said.

The project will create thousands of jobs and create much needed energy following the closure of coal-fired power plants, Xinhua added, dismissing fears China would put “back-doors” into the project. “For a kingdom striving to pull itself out of the Brexit aftermath, openness is the key way out,” it said.

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But please don’t think this means problems are over.

Greece Eases Back On Capital Controls In Bid To Reverse Currency Flight (G.)

More than a year after they were imposed, capital controls in Greece will be substantially eased on Monday in a bid to lure back billions of euros spirited out of the country, or stuffed under mattresses, at the height of the eurozone crisis. The relaxation of restrictions, whose announcement sent shockwaves through markets and the single currency, is aimed squarely at boosting banking confidence in the eurozone’s weakest member. The Greek finance ministry estimates around €3bn-€4bn could soon be returned to a system depleted of more than €30bn in deposits in the run-up to Athens sealing a third bailout to save it from economic collapse last summer.

“The objective is to re-attract money back to the banking system which in turn will create more confidence in it,” said Prof George Pagoulatos who teaches European politics and economy at Athens University. “And there are several billion that can be returned. People just need to feel safe.” As such the loosening of measures initially seen as an aberration in the 19-strong bloc is being viewed as a test case: of the faith Greeks have in economic recovery and the ability of their leftist-led government to oversee it. New deposits will not be subject to capital controls; limits on withdrawals of money brought in from abroad will also be higher; and ATM withdrawals will be raised to €840 every two weeks in a reversal of the policy that allowed depositors to take out no more than €420 every week.

[..] From 2008, the year before the country’s debt crisis erupted, until the end of 2015, an estimated 244,700 small- and medium-sized businesses have closed with many more expected to declare bankruptcy this year. The latest move, which follows easing of transactions abroad, is directed at small entrepreneurs, for years the lifeline of the Greek economy, and individual depositors. But while economists are calling the easing of restrictions a significant step to normalisation, Greek finances are far from repaired. Challenges for the prime minister, Alexis Tsipras, are expected to peak – along with social discontent – in the autumn when his fragile two-party coalition is forced to meet more milestones and creditor demands, starting with the potentially explosive issue of labour reform. Further disbursement of aid – €2.8bn – will depend exclusively on the painful measures being passed.

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The Great Deflation.

Building a Progressive International (YV)

Politics in the advanced economies of the West is in the throes of a political shakeup unseen since the 1930s. The Great Deflation now gripping both sides of the Atlantic is reviving political forces that had lain dormant since the end of World War II. Passion is returning to politics, but not in the manner many of us had hoped it would. The right has become animated by an anti-establishment fervor that was, until recently, the preserve of the left. In the United States, Donald Trump, the Republican presidential nominee, is taking Hillary Clinton, his Democratic opponent, to task – quite credibly – for her close ties to Wall Street, eagerness to invade foreign lands, and readiness to embrace free-trade agreements that have undermined millions of workers’ living standards.

In the United Kingdom, Brexit has cast ardent Thatcherites in the role of enthusiastic defenders of the National Health Service. This shift is not unprecedented. The populist right has traditionally adopted quasi-leftist rhetoric in times of deflation. Anyone who can stomach revisiting the speeches of leading fascists and Nazis of the 1920s and 1930s will find appeals – Benito Mussolini’s paeans to social security or Joseph Goebbels’ stinging criticism of the financial sector – that seem, at first glance, indistinguishable from progressive goals.
What we are experiencing today is the natural repercussion of the implosion of centrist politics, owing to a crisis of global capitalism in which a financial crash led to a Great Recession and then to today’s Great Deflation.

The right is simply repeating its old trick of drawing upon the righteous anger and frustrated aspirations of the victims to advance its own repugnant agenda. It all began with the death of the international monetary system established at Bretton Woods in 1944, which had forged a post-war political consensus based on a “mixed” economy, limits on inequality, and strong financial regulation. That “golden era” ended with the so-called Nixon shock in 1971, when America lost the surpluses that, recycled internationally, kept global capitalism stable.

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What a crazy story.

India Rescues 10,000 Starving Workers In Saudi Arabia (Sky)

The Indian government has come to the rescue of more than 10,000 of their starving citizens in Saudi Arabia. Some 16,000 kg of food was distributed on Saturday night by the consulate to penniless workers who’ve lost their jobs and not been paid. The issue came to light when a man tweeted India’s foreign minister Sushma Swaraj saying around 800 Indians had not eaten for three days in Jeddah, asking her to intervene. Investigations found that there were thousands starving across Saudi Arabia and Kuwait. Ms Swaraj instructed the consulate to make sure no unemployed worker is to go without food, and is said to have monitored the situation on an hourly basis.

She tweeted: “Large number of Indians have lost their jobs in Saudi Arabia and Kuwait. The employers have not paid wages, closed down their factories. “The number of Indian workers facing food crisis in Saudi Arabia is over ten thousand.” Many workers in Saudi Arabia and Kuwait have been living in inhumane conditions after losing their jobs. Hundreds have been laid off without being paid their wages. Indian newspapers reported that one firm – the Saudi Oger company – did not pay wages for seven months. Of its 50,000 employees, 4,000 were Indians. India’s Consul General Mohammad Noor Rehman Sheikh, told a news agency: “For the last seven months these Indian workers of Saudi Oger were not getting their salaries and the company had also stopped providing food to these workers.”

[..] India’s junior foreign minister VK Singh has been tasked to travel to Saudi Arabia to put in place an evacuation process which is due to begin soon. He had successfully led the evacuation of a large number of Indians from war-torn Yemen and most recently from South Sudan. There are more than three million Indians living and working in Saudi Arabia and more than 800,000 in Kuwait. Falling oil prices have hit the economy of Saudi Arabia and other Gulf countries.

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Jul 292016
 
 July 29, 2016  Posted by at 9:20 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


Dorothea Lange Crossroads grocery store and filling station, Yakima, Washington, Sumac Park 1939

IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)
Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)
Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)
Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)
Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)
Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)
Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)
US Homeownership Rate Falls to Five-Decade Low (WSJ)
Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)
Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)
In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)
Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

 

 

” They had no fall-back plans on how to tackle a systemic crisis in the eurozone [..] because they had ruled out any possibility that it could happen.”

“Some staff members warned that the design of the euro was fundamentally flawed but they were overruled..”

Ambrose on Twitter: ”IMF seems to have slipped leash of political control. Even its own watchdog in dark on EMU crisis. Astonishing saga..”

IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)

The IMF’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions. It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking break-down in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation. The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde.

It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the Fund to rescue their own rich currency union and banking system. The three main bail-outs for Greece, Portugal, and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000% of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the Fund between 2011 and 2014. In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff,” it said. The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen. “Before the launch of the euro, the IMF’s public statements tended to emphasize the advantages of the common currency, “ it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.


The forecasts for Greek growth compared to what actually happened Credit: IMF

[..] While the Fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bail-out sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability. A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced cut – what ex-finance minister Yanis Varoufakis called “fiscal water-boarding”. “The automatic stabilizers were not allowed to operate, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction,” said the report.

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Who says we need global growth?

Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)

Falling rates of global trade growth have attracted much comment by analysts and officials, giving rise to a literature on the ‘global trade slowdown’ (Hoekman 2015, Constantinescu et al. 2016). The term ‘slowdown’ gives the impression of world trade losing momentum, but growing nonetheless. The sense of the global pie getting larger has the soothing implication that one nation’s export gains don’t come at the expense of another’s. But are we right to be so sanguine? Using what is widely regarded as the best available data on global trade dynamics, namely, theWorld Trade Monitor prepared by the Netherlands Bureau of Economic Policy Analysis, the 19th Report of the Global Trade Alert, published today, evaluates global trade dynamics (Evenett and Fritz 2016).


Figure 1 World trade plateaued around the start of 2015

Our first finding that the rosy impression painted by some should be set aside. We demonstrate that: •World export volumes reached a plateau at the start of January 2015. The same finding holds if import volume or total volume data are used instead. •Both industrialised countries’ and emerging markets’ trade volumes have plateaued (Figure 1). •Except during global recessions, a plateau lasting 15 months is practically unheard of since the Berlin Wall fell. •In 2015 the best available data on world export volumes diverges markedly from that reported by the WTO, IMF, and World Bank, and probably explains why analysts at these organisations have missed this profound change in global trade dynamics (Table 1).


Table 1 Marked differences in reported global trade volume growth in 2015

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“The fight against sluggish growth rates..” Maybe we should stop that fight?

Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)

While monetary policy may be at — or beyond — the limits of its usefulness in stoking global growth, economists at Deutsche Bank say fiscal stimulus is unlikely to be much more effective. At least, not the kind that is politically possible. The fight against sluggish growth rates and low inflation has seen central banks from Europe to Japan buy up swaths of the bond market, and experiment with negative interest rates. Yet with growth still stubbornly slow, these efforts are seen either as ineffective or counterproductive, spurring calls for more active fiscal policy, whether it take the form of tax cuts or ‘helicopter money’ transfers to the private sector. Just this past weekend, finance ministers from the Group of Twenty meeting in China gave strong backing to this view.

“Monetary policy alone cannot lead to balanced growth,” they said. “Fiscal strategies are equally important to support our common growth objectives.” Those comments could signal a “new direction for fiscal policy,” according to Deutsche Bank economists led by Peter Hooper. Yet while they welcomed the potential dethroning of monetary policy as “the principal lever of support,” the economists expect that the boost to global growth from the most probable fiscal packages “is likely to be modest.” Europe is in greatest need of fiscal stimulus — even though the ECB has been gobbling up bonds since 2014, and has cut its deposit rate to minus 0.4% — and it’s also where fiscal stimulus would be most effective, according to the Deutsche Bank economists.

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Are Kuroda and Abe drifting apart?

Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)

Welcome to Japan, where a central bank plan to pump $26 billion a year more into stocks and continue buying 30 times that in debt sees equities struggle to advance and bonds plunge. The Topix index slid as much as 1.4% in Tokyo after the Bank of Japan boosted its annual exchange-traded fund budget to 6 trillion yen ($58 billion), from 3.3 trillion yen. Japanese government bonds headed for their steepest slump since 2008, as policy makers retained a plan to expand the monetary base by an annual 80 trillion yen. Speculation among investors and analysts that Friday’s policy announcement might even see the adoption of so-called helicopter money, as well as a cut to the negative deposit rate, resulted in a lukewarm reception for the expanded stimulus program.

The yen surged as much as 2.4%, the most since the U.K. decision to leave the European Union, even as BOJ Governor Haruhiko Kuroda hinted more easing might still be in the pipeline. “The BOJ had a choice of about five boxes to tick today, but only chose one,” said Sean Callow, a senior FX strategist at Westpac Banking in Sydney. “Buying more ETFs was as widely expected as balloons dropping on Hillary.” [..] In an unexpected development, Kuroda has ordered an assessment of the effectiveness of BOJ policy, to be undertaken at the next meeting, which is scheduled for Sept. 20-21.

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“The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)

The Bank of Japan has announced a modest expansion of its monetary easing programme, blaming Britain’s decision to leave the European Union as the biggest uncertainty facing world markets. The central bank acknowledged government pressure for more action to drive the yen lower and help Japan’s legion of exporters, but stopped short of upping its bond purchases or cutting interest rates. Instead the bank sanctioned an increase in purchases of exchange-traded funds as it attempted to accelerate inflation towards its 2% target. The moves disappointed the markets, which had expected another big influx of liquidity. The Nikkei stock average yo-yoed wildly in the aftermath of the move before falling nearly 2% in late afternoon trade.

Other stock markets in the region were also down while futures trading indicated the FTSE100 and Dow Jones would open slightly down on Friday morning. The yen rose 2% against the US dollar, which will frustrate government attempts to devalue the stubbornly high currency. [..] Some market experts said the lack of bold action suggested the bank had decided that the effectiveness of its huge monetary easing programme had reached its limits. “The BOJ did not live up to expectations … increasing ETF purchases makes no contribution to achieving 2% inflation,” said Norio Miyagawa, senior economist at Mizuho Securities. “The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

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After Abenomics has been running for 3 years, deflation continues unabated.

Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)

Japan reported further signs of weakness in its economy in June, with industrial output and consumer spending falling from the year before. The data released Friday were in line with expectations the central bank may follow the government’s lead in opting for more stimulus at a policy meeting that ends Friday. Core inflation excluding volatile food prices dropped 0.5% from 0.4% in May. The Bank of Japan and government have made scant progress toward a 2% inflation goal set more than three year ago, partly due to the prolonged slump in crude oil prices.

Household spending fell 2.2% from a year earlier, while industrial output slipped 1.9% on an annual basis. Earlier this week Prime Minister Shinzo Abe announced plans to propose 28 trillion yen ($267 billion) in spending initiatives to help support the sagging economic recovery. Household incomes rose 0.3% in June, weak for a month when workers commonly receive bonuses.

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Let’s not pretend there is a way out for Japan.

Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)

Japan has aimed a lot of firepower at keeping its currency weak, but a stronger yen might be just what the long moribund economy really needs, said Saxo Bank’s Chief Investment Officer Steen Jakobsen. “The government of Japan sort of quasi-promises to maintain a weak yen in order to support and buy time for the export companies,” Jakobsen said. “Having a focus only on the export sector takes away from [what] the focus should be: To reform the domestic economy.” Jakobsen’s comments came just as Japan appears set to level a double bazooka of easing at its sluggish economy, firepower that appears aimed, at least in part, at wiping out the recent gains in the newly resurgent yen.

The Bank of Japan was widely expected to announce another monetary easing bomb at the close of its two-day meeting on Friday, with analysts anticipating that the central bank would either cut interest rates deeper into negative territory or expand its asset purchase program or both. At the same time, fresh fiscal stimulus was expected to offer additional cross fire. News agency Jiji reported that Prime Minister Shinzo Abe had revealed a 28 trillion yen ($265 billion) injection, which Reuters estimated at 6% of Japan’s economy.

The double-barreled approach was in line with Abe’s plan to break Japan’s economy out of a decades-long deflationary spiral. That effort, dubbed Abenomics, was introduced in 2013 with a plan for three “arrows:” A first arrow of massive quantitative easing from the BOJ, followed by a second arrow of increased government spending and a third arrow of structural reforms, including immigration and labor changes. But Jakobsen noted that the latest plan for combined BOJ and fiscal easing just replayed the same strategy. “The present situation we’re talking about is just re-launching arrow one and two,” he said. “We’re still missing arrow number three, which is the reform side.”

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It didn’t take long to kill the dream.

US Homeownership Rate Falls to Five-Decade Low (WSJ)

The U.S. homeownership rate fell to the lowest level in more than 50 years in the second quarter of 2016, a reflection of the lingering effects of the housing bust, financial hurdles to buying and shifting demographics across the country. But the bigger picture also suggests more Americans are gaining the confidence to strike out on their own, albeit as renters rather than buyers. The homeownership rate, the proportion of households that are owner-occupied, fell to 62.9%, half a percentage point lower than the second quarter of 2015 and 0.6%age point lower than the first quarter 2016, the Census Bureau said on Thursday. That was the lowest figure since 1965.

There are many ways to interpret the numbers. Part of the story is the catastrophic housing market collapse, which was especially severe for Generation X—those born from 1965 to 1984. Younger households may struggle to save amid student debt, growing rents, rising home prices and limited inventories of starter homes. Indeed, the homeownership rate for 18- to 35-year-olds slipped to 34.1%, the lowest level in records dating to 1994. At 77.9%, the homeownership rate was highest for those 65 years and over.

But the broader picture suggests a degree of economic strength: Renters are spurring a steady increase in overall household formation. Renter-occupied housing units jumped by 967,000 from the same period a year earlier. Overall, household formation has been fairly steady since the early days of the expansion. A rising number of households suggests more people are optimistic enough to strike out on their own and helps further spur growth as they buy furniture, start families and move up the economic ladder. Indeed, moving into a rental unit has been entirely responsible for rising household formation since the recession began.

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“It’s probably going to take a little longer than they expected.” “Demand growth has faltered a bit.”

Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)

The bullish spirit that gripped oil traders as industry giants from Saudi Arabia to Goldman Sachs declared the supply glut over is rapidly ebbing away. Oil is poised for a drop of 20% since early June, meeting the definition of a bear market. While excess crude production is abating, inventories around the world are brimming, especially for gasoline, and a revival in U.S. drilling threatens to swell supplies further. As the output disruptions that cleared some of the surplus earlier this year begin to be resolved, crude could again slump toward $30 a barrel, Morgan Stanley predicts. “The tables are turning on the bulls, who were prematurely constructive on oil prices on the basis the re-balancing of the oil market was a done deal,” said Harry Tchilinguirian at BNP Paribas in London.

“It’s probably going to take a little longer than they expected.” Oil almost doubled in New York between February and June as big names from Goldman and the International Energy Agency to new Saudi Energy Minister Khalid Al-Falih said declining U.S. oil production and disruptions from Nigeria to Canada were finally ending years of oversupply. Prices retreated to a three-month low near $41 a barrel this week amid a growing recognition the surplus will take time to clear. “There’s lots of crude and refined products around,” said David Fransen, Geneva-based head of Vitol SA, the biggest independent oil trader. “Demand growth has faltered a bit.”

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Don’t worry, prices will come down.

Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)

Wholesale gasoline in California became the cheapest in the country this week, but that change has largely gone unseen at the pump, where consumers are still paying the highest prices in the continental United States to fill up their cars. Ample inventories along with relatively stable refinery operations and imports has driven down the spot value of gasoline in Los Angeles at the wholesale level by more than 60 cents since mid-June. However, that has not translated to similarly lower retail fuel prices for consumers because of peculiarities in California’s market. The declines in the state’s retail gasoline market over that period of time have averaged less than 14 cents, according to data from the U.S. Energy Information Administration.

On Thursday, wholesale California gasoline was trading below $1.20 a gallon. The spread between California’s wholesale and retail gasoline markets was about $1.50 a gallon the week to July 25, about 40 cents wider than a similar spread in the New York market. California is one of the most expensive places in the United States to produce gasoline because of the state’s unique blending requirements and its relative isolation from the rest of the country, which makes securing crude oil to refine pricier. Gasoline prices across the country have plunged as crude has also slumped in the past two years, pressured by a global supply glut. On the West Coast, gasoline stocks are at a five-year seasonal high of 29.6 million barrels, according to the EIA.

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Lots of reports due later today.

In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)

It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline since profits peaked over a year ago. What’s more analysts, renowned for their Pollyannish expectations, can’t seem to find it, either. So I thought it might be interesting to look at what the stock market has done in the past during earnings recessions comparable to the current one. And it’s pretty eye-opening. Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market. In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial wellbeing.

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Great idea. There should be one in Athens too.

Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

Spain’s seaside city of Barcelona on Thursday unveiled a large digital counter that will track the number of refugees who die in the Mediterranean, next to one of its popular beaches. “We are inaugurating this shame counter which will update all known victims who drowned in the Mediterranean in real time,” said Mayor Ada Colau. The monument consists of a large metal rectangular pillar that comes decked out with a digital counter above the inscription “This isn’t just a number, these are people.”

The counter kicked off with 3,034 — the number of migrants and refugees who have died trying to cross the Mediterranean to Europe in 2016, according to the International Organization for Migration (IOM). “We’re here to look the Mediterranean in the face and look at this number — 3,034 people who drowned because they were not offered a safe passage,” said Colau, as swimmers took advantage of the last rays of sunshine nearby.


Barcelona’s mayor Ada Colau poses in front a digital billboard that shows the number of refugees who died in the Mediterranean sea, named “the shame counter” (AFP Photo/Josep Lago)

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Jul 112016
 
 July 11, 2016  Posted by at 8:24 am Finance Tagged with: , , , , , , , , ,  7 Responses »


G.G. Bain Auto polo, somewhere in New York 1912

Will Merkel Hand Over The Keys To The Helicopter? (Napier)
Black Hole of Negative Rates Is Dragging Down Yields Everywhere (WSJ)
70% Of German Bonds Are No Longer Eligible For ECB Purchases (ZH)
Wall Street Monkeyshines – Look Ma, No Hands! (David Stockman)
China Pension Readies $300 Billion Warchest for Stock Market (BBG)
Massive Stockpile Means Oil Rebound Is Over: Barclays (CNBC)
Japan PM Abe To ‘Accelerate Abenomics’ After Huge Election Win (BBG)
Deutsche Bank Chief Economist Calls For €150 Billion Bailout Of EU Banks (ZH)
Bank Born Out of Black Death Struggles to Survive (BBG)
Australia First-Home Buyers Hit Lowest Level In A Decade (Domain)
The Great New Zealand Housing Down-Trou (Hickey)
The Media Against Jeremy Corbyn (Jacobin)
How the Corporate Food Industry Destroys Democracy (Hartmann)
10 Years (Or Less): Orwell’s Vision Coming True (SHTF)

 

 

Either Draghi gets to fly the chopper, or the EU falls to bits. Wait, it’ll do that anyway. So why give him the keys?

Will Merkel Hand Over The Keys To The Helicopter? (Napier)

Now only one question matters for global investors – Wo ist der Hubschrauber? (Where is the helicopter?). The decline of European commercial bank share-prices before Brexit made it clear that a monetary reflation of Europe was failing. The collapse in these same share-prices post-Brexit means that even the politicians now realise that the ECB acting alone cannot stabilize the European economy. Indeed, given the evident political strains in the European Union, saving the economy from recession is now key to saving the European political union project itself. So, will Mrs Merkel abolish fiscal austerity across Europe and permit each of the states of the European political union expand their debt mountains at the same time that the ECB is buying that debt?

Are the keys to der Hubschrauber to be handed over? To save the European political union Germany must now confront its greatest fear and enfranchise the political union’s central bank to conduct outright monetary financing of all its constituent governments. Investors need to remain very cautious indeed as it is in no way clear that Mrs Merkel will hand over the keys to der Hubschruaber. Should she do so, however, major changes in investment allocation are necessary as helicopter money will be raining from the skies in Japan, the Eurozone, the UK and even in the USA if President Clinton also wins the House and the Senate.

This form of reflation will likely work and in due course work too much. Few things are binary in investment, but this huge decision to be taken in Berlin is the biggest binary event for investors this analyst has yet come across. The repercussions will reverberate throughout this century. This analyst would like to present you with a firm forecast as to the possibility of ‘helicopter money’ coming to the European political union. However, it is too close to call. Even if that assertion is correct, this is truly dire news for financial markets.

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What? “..the global yield grab is raising questions about whether rates can prove reliable economic indicators.” That’s an actual question?

Black Hole of Negative Rates Is Dragging Down Yields Everywhere (WSJ)

The free fall in yields on developed-world government debt is dragging down rates on global bonds broadly, from sovereign debt in Taiwan and Lithuania to corporate bonds in the U.S., as investors fan out further in search of income. The ever-widening rush for yield could create problems if interest rates snap back, which would cause losses on investors’ low-yielding portfolios, or if credit quality falls. And the global yield grab is raising questions about whether rates can prove reliable economic indicators. Yields in the U.S., Europe and Japan have been plummeting as investors pile into government debt in the face of tepid growth, low inflation and high uncertainty, and as central banks cut rates into negative territory in many countries.

Even Friday, despite a strong U.S. jobs report that helped send the S&P 500 to nearly a record, yields on the 10-year Treasury note ultimately declined to a record close of 1.366% as investors took advantage of a brief rise in yields on the report’s headlines to buy more bonds. Yields move in the opposite direction of price. As yields keep falling in these haven markets, investors are looking for income elsewhere, creating a black hole that is sucking down rates in ever longer maturities, emerging markets and riskier corporate debt. “What we are seeing is a mechanical yield grab taking place in global bonds,” said Jack Kelly at Standard Life Investments. “The pace of that yield grab accelerates as more bond markets move into negative yields and investors search for a smaller pool of substitutes.”

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Self-fulfilling perversity.

70% Of German Bonds Are No Longer Eligible For ECB Purchases (ZH)

Back in April of 2015, we warned that the biggest risk facing the ECB is running out of eligible securities which the central bank can monetize. Draghi’s recent launch of the CSPP, in which the ECB has been buying not only investment grade but also junk bonds, is an indirect confirmation of that. A direct one comes courtesy of a Bloomberg calculation according to which following a seventh straight week of gains in German bunds, the yields on securities of all maturities has plunged to unprecedented lows, which has left about $801 billion of debt out of the statutory reach of the ECB. As noted earlier, there is now $13 trillion of global negative-yielding debt. That compares with $11 trillion before the Brexit vote.

The surge in sovereign debt since Britain’s vote to exit the European Union last month has pushed yields on about 70% of the securities in the $1.1-trillion Bloomberg Germany Sovereign Bond Index below the ECB’s -0.4% deposit rate, making them ineligible for the institution’s quantitative-easing program. For the euro area as a whole, the total rises to almost $2 trillion. As Bloomberg adds, following a rush for safety and a scramble for capital appreciation ahead of more ECB debt purchases, the yield on German 10-year bunds to a record-low, and those on securities due in up to 15 years below zero, even though – paradoxically – the rush to buy these bonds has made them no longer eligible for direct ECB purchases as they now have a yield lower than the ECB’s deposit rate threshold.

Or rather, they are ineligible for the time being. As a result, the rally has boosted the same concerns we warned about for the first time in the summer of 2014, namely that the ECB’s Public Sector Purchase Programme could run into scarcity problems well before its completion date of March 2017, prompting speculation policy makers may tweak their plan.

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“..the economic gods created market-based price discovery for a reason. It was to insure that in the great arena of financial market supply and demand, the forces of fear and greed would contend on a level playing field..”

Wall Street Monkeyshines – Look Ma, No Hands! (David Stockman)

The boys and girls on Wall Street are now riding their bikes with no hands and eyes wide shut. That’s the only way to explain Friday’s lunatic buying spree in response to another jobs report that proves exactly nothing about an allegedly resurgent economy. When the S&P 500 first hit 2130 back in May 2015, reported LTM earnings were $99.25 per share, and that was already down 6.4% from the cyclical high of $106 per share in September 2014. Thus, stocks were being valued at a nosebleed 21.5X in the face of falling earnings. During the four quarters since then, reported LTM earnings have slumped by a further 12.3% to $87 per share. So that brings the “cap rate” to 24.5X earnings that have shrunk by 18% over the last six quarters. Wee!

You have to use the parenthetical because the casino is not capitalizing anything rational. It’s just drifting higher in daredevil fashion until something big and nasty stops it. That something would be global deflation and US recession. Both are racing down the pike at accelerating speed. Needless to say, when these lethal economic forces finally hit home, the puppy pile-up on Wall Street is going to be one bloody mess. But that’s the price you pay when you have destroyed honest price discovery entirely, and have transformed the money and capital markets into robo-machine driven venues of rank speculation. Janet Yellen and the other 100 clowns who run the world’s central banks, of course, have no clue as to the financial doomsday machine they have enabled. Indeed, they apparently think efficient pricing and allocation of capital doesn’t matter.

After all, their entire modus operandi is to peg the price of money, bonds and the yield curve sharply below market-clearing levels – so that households and business will borrow and spend more than otherwise. Likewise, they aim to goose stock prices to ever higher levels. That’s so the top 10% and the top 1%, who own the preponderant share of equities, will feel the wealth(effects) and then spend-up and invest-up a storm. But the economic gods created market-based price discovery for a reason. It was to insure that in the great arena of financial market supply and demand, the forces of fear and greed would contend on a level playing field. Short-sellers and contrarians heading south were to intercept the lemmings of greed heading north before they reached the edge of the cliff. Now there is nothing but cliff.

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The idea is that simply because pensions buy stocks, these will go up in ‘value’. Yeah, that should work.. For a week.

China Pension Readies $300 Billion Warchest for Stock Market (BBG)

China’s pension funds are about to become stock investors. The country’s local retirement savings managers, which have about 2 trillion yuan ($300 billion) for investment, are handing over some of their cash to the National Council for Social Security Fund, which will oversee their investments in securities including equities. The organization will start deploying the cash in the second half, according to China International Capital and CIMB Securities. Chinese policy makers announced the change last year in a bid to boost yields for a pension system that has long suffered low returns by limiting its investments to deposits and government bonds.

For the nation’s equity markets – which are dominated by retail investors and among the world’s worst performers this year – the state fund’s presence is even more valuable than its cash, said Hao Hong, chief China strategist at Bocom International Holdings. The NCSSF has “such a good reputation in being a value investor that if they take the lead, the signaling effect is actually quite strong,” said Hong, who had predicted the start and peak of China’s equity boom last year. “It’s almost like Warren Buffett saying he is buying a stock.” The NCSSF, which oversees 1.5 trillion yuan in reserves for China’s social security system, has returned an average 8.8% a year since 2000, the Securities Daily reported earlier this year, citing official data. The larger pension system, on the other hand, has been locally managed and made just 2.3% annually through 2014, the newspaper said.

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Is someone overestimating demand perhaps?

Massive Stockpile Means Oil Rebound Is Over: Barclays (CNBC)

A massive global stockpile of oil could mean trouble ahead for the global crude market, according to Barclays. Crude oil prices dropped to a two month low on Thursday, after the Energy Information Administration reported a smaller-than-expected decrease in oil stockpiles. That may be a canary in the coalmine, a top energy market watcher explained. “For the last 6 quarters there’s been this discrepancy between global supply and global demand,” Michael Cohen, head of energy commodities research at Barclays, said last week on CNBC’s “Futures Now.” Cohen said Barclays is bearish on oil for the next six to eight months, because the current stockpile could increase in an economic downturn, likely to drive prices lower.

In the summer months, increased travel often increases the demand for gasoline, and drags up crude oil by default. Yet once that season ends, inventory levels may continue to rise. Looking at a chart of the expected crude oil supply compared with the current amount, Cohen said the disconnect is staggering. The chart accounts for oil supply from the 38 countries in the Organization for Economic Cooperation and Development (OECD), which includes the U.S., U.K., France, Germany and Canada, among others. During the recent financial crisis, crude production overhang was 138 million barrels. Now, the overhang is twice that, at 383 million barrels among the OECD, Cohen said.

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Given what a disaster Abenomics is, one wonders: how inept can Japan’s opposition be? Abe wins a two-thirds majority?! Can also change the constitution so Japan can go back to war.

Japan PM Abe To ‘Accelerate Abenomics’ After Huge Election Win (BBG)

Japanese Prime Minister Shinzo Abe’s conservative coalition scored a convincing upper house election win, putting it on course for a two-thirds majority that would allow Abe to press ahead with plans to revise the country’s pacifist constitution. The Liberal Democratic Party secured 56 of the 121 seats in contention, public broadcaster NHK said, while junior coalition partner Komeito had 14. Alongside others who support Abe’s view on constitutional revision, plus uncontested seats, the prime minister is set for a super majority, it said. The results raise questions over whether Abe will switch his focus to altering the postwar U.S.-imposed constitution, a potentially time-consuming process that could expend his political capital and distract the government from its economic program.

Abe vowed during the campaign to focus on policies aimed at expanding the size of the economy to 600 trillion yen ($6 trillion) from 500 trillion yen. “If Prime Minister Abe’s coalition scores a hot, two-thirds majority on Sunday, it might be tempted to pass constitutional changes, draining political capital away from urgently needed economic reforms,” Frederic Neumann at HSBC in Hong Kong, wrote in an e-mailed note before the election. Tokyo shares headed for their biggest gain in almost three months after the upper house election result and as jobs data eased concerns over the U.S. economy. The Topix index added 2.8% to 1,243.93 at 9:43 a.m. in Tokyo.

“Abe said he’ll continue to put together his economic policy package, so that optimism is going to continue to support Japanese shares,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center. Abe’s coalition, which previously held 136 of the 242 seats in the chamber, fended off a challenge from opposition parties that had sought to unify the anti-government vote by avoiding running candidates against one another in many districts. “I think this means I am being told to accelerate Abenomics, so I want to respond to the expectations of the people,” Abe told TBS television after early results were announced.

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But EU demands bail-ins these days?

Deutsche Bank Chief Economist Calls For €150 Billion Bailout Of EU Banks (ZH)

The cards have been tipped, and it appears Italy’s Prime Minister may have been right. In the aftermath of Brexit, much of the investing public’s attention has turned to Italian banks which are in desperate need of a bailout as a result of €360 billion in bad loans growing worse by the day (and not a bail-in, as European regulations mandate, as that would lead to an immediate bank run) to avoid a freeze and/or collapse of Italy’s banking sector. This has pushed stock prices – and default risk – on Italian banks to record levels. So far Italy’s bailout requests have mostly fallen on deaf ears, as Germany’s political leaders have resisted Renzi’s recurring pleas for a taxpayer funded rescue.

However, as we have alleged, and as the Italian Prime Minister admitted last week, the core risk for Europe is not just the Italian banking sector but the biggest bank of all in Europe: Deutsche Bank. Recall last Thursday, when Matteo Renzi said other European banks had much bigger problems than their Italian counterparts. “If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred,” Renzi said. He was, of course, referring to the tens of trillions of derivatives on Deutsche Bank’s books. Today, we got the most definitive confirmation yet that the noose is tightening not only around Italy, but Germany itself [..], when none other than David Folkerts-Landau, the chief economist of Deutsche Bank, has called for a multi-billion dollar bailout for European banks.

Speaking to Germany’s Welt am Sonntag, the economist said European institutions should get fresh capital for a recapitalization following a similar bailout in the US. What he didn’t say is that the US bailout took place nearly a decade ago, in the meantime Europe’s financial sector was supposed to be fixed courtesy of “prudent” fiscal and monetary policy. It wasn’t. As Landau says the US helped its banks with $475 billion dollars, and such a program is now needed in Europe, especially for Italian banks. In other words, just because the US did it, now it’s Europe’s turn to ask for more of the same.

“In Europe, the bailout does not need to be so large. A €150 billion program should be enough to help European banks recapitalize,” said David Folkerts-Landau. He adds that the decline in bank stocks is only the symptom of a much larger problem, namely a fatal combination of low growth, high debt and a “dangerous” deflation. “Europe is seriously ill and needs to address very quickly the existing problems, or face an accident,” said the chief economist.

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Good read. “It’s the inevitable consequence of medieval governance falling prey to the fangs of Wall Street..”

Bank Born Out of Black Death Struggles to Survive (BBG)

Siena, the medieval city renowned for its Palio horse races, is home to the world’s oldest bank. Within its aging walls lies a distinctly 21st-century tale of devastation wrought by local politicians and global financiers. Banca Monte dei Paschi di Siena, Italy’s third-largest lender, is struggling to survive as it seeks to repay a second bailout or face nationalization. Its downfall proved a boon to global investment banks. They offered merger and investment advice to executives beholden to politicians that helped wipe out 93 percent of Monte Paschi’s value. Then they sold it complex derivatives that hid, even worsened the losses. Efforts to rescue the 541-year-old lender have cost Italian taxpayers €4.1 billion.

The investment banks, including Merrill Lynch, JPMorgan and Deutsche Bank, earned more than $200 million in fees from 2008 through 2011, filings and deal memos show. “These international banks come to exploit, and Italy is vulnerable,” said former Senator Elio Lannutti, who heads Adusbef, a consumer group for Italian bank customers. “On one side, there’s the local incompetence, and on the other side the bad faith of the international investment banks.” Franco Debenedetti, a former CEO of Olivetti, was even blunter. “It’s the inevitable consequence of medieval governance falling prey to the fangs of Wall Street,” said Debenedetti, now chairman of Italy’s Bruno Leoni Institute, a pro-free-market research group in Turin.

[..] ..the heritage of a bank with 2,300 branches and 28,500 employees that traces its origins to combating excessive loan rates. Siena officials founded Monte Paschi in 1472, after the Black Death wiped out more than half the city’s population. They modeled it on the pawnshops Franciscan monks had set up to counter usury. As it grew, the lender helped fuel the Renaissance in Tuscany that pulled Europe from the Middle Ages.

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Well, they did it. Congrats! Young people can’t afford to live in their own communities any more. Is there a govenment responsibility here somewhere?

Australia First-Home Buyers Hit Lowest Level In A Decade (Domain)

First-home buyers are now at their lowest levels in more than a decade, data released on Monday shows. As a proportion of all home buyers, first-home buyers dropped to 13.9% in May, according to housing finance data released by the Australian Bureau of Statistics. Down from 14.4% in April, this latest result is the lowest since 2004. At that time, the proportion fell to a record low 12.8% as grants for first-home buyers came to an end. For first-home buyers to make a significant return prices would have to fall, BIS Shrapnel senior manager of residential Angie Zigomanis said. “A drop in prices of some sort is needed, but we’ll also need a reduction in expectations in terms of what [first-home buyers] are looking for,” Mr Zigomanis said.

“At some point they have to come back, in theory … but for now the market is tough.” And a slowdown might be on the cards. While month-to-month figures can be volatile, overall lending figures are slowing from the frenzied levels of 2015, HSBC chief economist Paul Bloxham said. “We’re seeing a pullback in [housing finance] that has been going on since late last year, which is consistent with the idea that the housing market is set to cool,” he said. “[It’s a result of] tighter prudential settings and is also a sign that the exuberance has come out of the market … there was concern that strong activity from investors was overheating the market.”

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Same in Kiwiland: “The leader of the Government is more worried about the short-term fates of leveraged-up speculators and developers than the long-term fate of Generation Rent.”

The Great New Zealand Housing Down-Trou (Hickey)

Former Reserve Bank Chairman Arthur Grimes essentially undressed our politicians in front of us this week when he challenged them to embrace a 40% fall in Auckland house prices. He exposed them as emperors without clothes. “What I do is whenever I find a politician who says they want affordable housing, I ask them a very simple question: ‘How much do you want house prices to fall by overall?’ “And not one of them has been able to answer that very simple question,” Grimes said this week. He was talking about the extraordinary response to his suggestion 150,000 houses be built in six years to push Auckland prices down. Prime Minister John Key’s response was immediate – and betrayed where he stands on the issue of using a supply shock to make housing affordable.

It was “crazy”, would leave people in the market with huge losses and put pressure on developers. So there we have it. The leader of the Government is more worried about the short-term fates of leveraged-up speculators and developers than the long-term fate of Generation Rent. Despite years of saying the only way to improve housing affordability is to increase supply, his position is any increase in supply that hurts the investors who have bought in the past couple of years is out of the question. The Prime Minister who boasts his Government is aspirational had this to say about going for a really big response to the challenge: “Where you’d get 150,000 homes from overnight, I don’t know.”

Key said he hoped house-price inflation could be slowed by the Government’s measures, with the implication affordability would somehow creep up on everyone with wage increases. The Treasury forecasts wages will rise by an average of 2.2% over the next six years. It also forecasts house prices will rise by an average of 5.7% over the same period. The Government’s own forecasts show this magical affordability catch-up is not going to happen – and is expected to get much worse. Auckland houses cost nearly 10 times household income. That’s double what it was in the early 2000s and almost double the rest of the country. The accepted model for affordability around the world is closer to three times income.

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British media are anti-journalism.

The Media Against Jeremy Corbyn (Jacobin)

The British media has never had much time for Jeremy Corbyn. Within a week of his election as Labour Party leader in September, it was engaging in a campaign the Media Reform Coalition characterized as an attempt to “systematically undermine” his position. In an avalanche of negative coverage 60% of all articles which appeared in the mainstream press about Corbyn were negative with only 13% positive. The newsroom, ostensibly the objective arm of the media, had an even worse record: 62% negative with only 9% positive. This sustained attack had itself followed a month of wildly misleading headlines about Corbyn and his policies in these same outlets. Concerns about sexual assaults on public transport were construed as campaigning for women-only trains.

Advocacy for Keynesian fiscal and monetary policies was presented as a plan to “turn Britain into Zimbabwe.” An appeal to reconsider the foreign policy approach of the last decade was presented as an association with Putin’s Russia. In the months which followed the attacks continued. Particularly egregious examples, such as the criticism of Corbyn for refusing to “bow deeply enough” while paying his respects on Remembrance Day, stick in the memory. But it is the insidious rather than the ridiculous which best characterizes the British media’s approach to Corbyn. One example of this occurred in January when it was revealed that the BBC’s political editor Laura Kuenssberg had coordinated the resignation of a member of Corbyn’s shadow cabinet so that it would occur live on television. Planned for minutes before Corbyn was due to engage in Prime Minister’s Questions, it was a transparent attempt to inflict the maximum damage possible to his leadership.

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“..political bribes aren’t free speech and corporations aren’t persons.”

How the Corporate Food Industry Destroys Democracy (Hartmann)

On July 1, Vermont implemented a law requiring disclosure labels on all food products that contain genetically engineered ingredients, also known as genetically modified organisms or GMOs. Wenonah Hauter, executive director of Food and Water Watch, hailed the law as “the first law enacted in the US that would provide clear labels identifying food made with genetically engineered ingredients. Indeed, stores across the country are already stocking food with clear on-package labels thanks to the Vermont law, because it’s much easier for a company to provide GMO labels on all of the products in its supply chain than just the ones going to one state.”

What that means is that the Vermont labeling law is changing the landscape of our grocery stores, and making it easier than ever to know which products contain GMOs. And less than a week later after that law went into effect, it is under attack. Monsanto and its bought-and-paid-for toadies in Congress are pushing legislation to override Vermont’s law. Democrats who oppose this effort call the Stabenow/Roberts legislation the “Deny Americans the Right to Know” Act, or DARK Act. This isn’t the first time that a DARK Act has been brought forward in the Senate, and one version of the bill was already shot down earlier this year. The most recent version of the bill was brought forward by Michigan Democratic Sen. Debbie Stabenow and Kansas Republican Sen. Pat Roberts, both recipients of substantial contributions from Big Agriculture.

Stabenow has received more than $600,000 in campaign contributions since 2011 from the Crop Production and Basic Processing Industry, and Pat Roberts has received more than $600,000 from the Agricultural Services and Products industry. When Senator Stabenow unveiled the industry-friendly legislation, she boasted that, “For the first time ever, consumers will have a national, mandatory label for food products that contain genetically modified ingredients.” Which sounds great, and it would be great, if it were true. But the fact is, the DARK Act would set up a system of voluntary labeling that would overturn Vermont’s labeling law and replace it with a law that’s riddled with so many loopholes and exemptions that it would only apply to very few products, and there’s no enforcement mechanism and no penalties or consequences of any kind for defying the bill.

[..] If our democracy actually worked, this bill never would have seen the light of day, because people overwhelmingly want to know what’s in their food and support GMO labeling. But our democracy doesn’t work, because our lawmakers are bought and paid for by special interests like Monsanto. If we want our lawmakers to pass popular laws that actually work, we need to get money out of politics, we need to overturn Citizens United and we need to amend the Constitution to make it clear that political bribes aren’t free speech and corporations aren’t persons.

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” It’s not the independence of Britain from Europe, but the independence of Europe from the USA.”

10 Years (Or Less): Orwell’s Vision Coming True (SHTF)

In the wake of all of the Brexit vote, a chilling blurb made headlines and it went largely unnoticed and uncommented upon. The line was couched within comments made by Boris Titov, an economic policy maker for Russia’s Kremlin. Actually all of the following merits attention, but one line stands out. The source for this excerpt is a Facebook post by Titov. Here it is: “…it seems it has happened — UK out!!! In my opinion, the most important long-term consequence of all this is that the exit will take Europe away from the anglo-saxons, meaning from the USA. It’s not the independence of Britain from Europe, but the independence of Europe from the USA. And it’s not long until a united Eurasia — about 10 years.”

This is a very revealing post to show how unfavorably the past 50 years of post-World War II American imperialism has been viewed. The tipping point, as mentioned in a previous article was the outright 180º that George H.W. Bush pulled on Mikhail Gorbachev: the promise of NATO membership upon reunification of the two Germany’s and the dissolution of the Soviet Union, and then not fulfilling that promise.

The American corporate interests inserted themselves, as the communist government shattered, leaving in its wake oligarchs, the Russian mafia, and a “Wild West” environment within Russia proper and the ex-SSR’s, the former Soviet satellite nations. A tremendous amount of chaos occurred for a decade that was both enabled and further fostered by the United States. The perception in Russia even before the Soviet Union came into being was that Russians were in an economic war with Great Britain, and the United States was looked upon as an “extension” of Britain: a country with language, law, and cultural parallels,especially in terms of expansion.

As of the past several years, the United States has been encroaching upon Russian territory and economic interests. That encroachment has intensified into a U.S.-created “Cold War Resurrection” stance with the bolstering of NATO forces in the Baltic states. The U.S. is virtually thumbing its nose at Russia with the distribution of the “anti-ballistic missile systems” emplaced in places such as Moldova. As Putin pointed out, it takes not even a sneeze and a couple of hours to convert those platforms into use for Tomahawks with nuclear capability. The Russians did not exercise “en passant” with such an opener, and are placing missiles of their own to face the U.S. assets.

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Jun 212016
 


NPC District National Bank, Dupont branch, Washington, DC 1924

The Big Guns Are Out: Soros, Rothschild Warn Of Brexit Doom (ZH)
When Brexit Has Come And Gone, The Real Problems Will Remain (ZH)
IMF Calls On Japan To ‘Reload’ Abenomics (Nikkei)
India’s Rockstar Central Banker Defeated As Modi Revolution Stalls (AEP)
Yellen Makes ‘Uncertainty’ New Mantra (R.)
“Whatever It Takes” Wasn’t Enough (Noland)
The World’s Newest “Reserve” Currency Is Anything But (Balding)
China’s Developers Can’t Stop Overpaying for Property (WSJ)
China’s ‘Land Kings’ Return as Housing Prices Rise (WSJ)
Energy-Related Loan Losses Rising (B.)
California Power Grid Prepares For Heatwave, Power Outages (R.)
Australia Whistleblower Loses Job After Speaking Out On Refugee Camps (G.)

Vested interests at stake.

The Big Guns Are Out: Soros, Rothschild Warn Of Brexit Doom (ZH)

Just yesterday, we recounted the story of “Black Wednesday” when on September 16, 1992, the UK was forced out of the EU’s exchange-rate mechanism, or ERM, when the BOE tapped out and allowed the British pound to float freely, leading to 15% losses in the sterling. As we noted, this was George Soros’ infamous trade which “broke the Bank of England” and made the Hungarian richer by over $1.5 bilion. 24 years later Soros is back, and this time he is warning against the kind of devaluation that made him a billionaire and which he believes will be unleashed by Brexit, when in a Guardian Op-Ed he wrote that U.K. voters are “grossly underestimating” the true costs of a vote to leave the EU, saying that there would be an “immediate and dramatic impact on financial markets, investment, prices and jobs.”

[..] It is notable that Soros’ warning comes just days after that of Jacob Rothschild himself who said in another Op-Ed, this time for The Times, that leaving the EU could lead to a “damaging and disorderly situation” in the UK as he urged Britons to vote ‘remain’. Just like Soros, Lord Rothschild, suddenly exhibiting a rare strain of humanitarian concern, said readers should not “risk the wellbeing of our country”and European countries are “better off together”. He said that “at present we enjoy being a permanent member of the UN security council and we are essential to the G8 and Commonwealth. But diplomacy, defence, the environment and our values of being a liberal democracy will all be at risk” adding that “I can see no good reason why we should accept our playing a diminished role on the world stage,” especially if his own personal fortune would be jeopardized.

Finally, completing the doom loop, was none other than Chancellor George Osborne who, according to the Telegraph, “refused to rule out suspending trading on the London stock market if Britons vote to leave the EU on Friday morning… The threat from the Chancellor, made in an LBC radio interview on Monday evening, after the market had closed could force shares down in London as early as Tuesday morning.”

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Everyone’s broke.

When Brexit Has Come And Gone, The Real Problems Will Remain (ZH)

In a few days, Brexit will come and go, and just a few days later it will be forgotten, as either outcome will be far less dramatic than has been widely predicted by the same fearmongering economist pundits who have been wrong about everything else for the past 8 years. Ironically, the better outcome for the market is precisely a Brexit as the panic selloff will prompt central banks around the globe to boost enough monetary stimulus to send risk assets to new all time highs. What will remain, however, are the real problems. Here is SocGen with a useful reminder of just what those are, and why the market may have already forgotten that just one week ago the Fed threw in the towel when addressing precisely these problems. From SocGen’s Andrew Lapthone:

“Global equity markets continued to struggle last week, with the MSCI World index off 1.8% pushing the index back into red for the year. Big losses were seen in Japan with the Topix 500 down 6% and the volatile Mothers index crashing 18.5% over the week as the yen continued to strengthen. According to the BOE measure, the trade-weighted yen is now up more than 20% over the past year and back to where it stood three years ago. In the battle for the weakest currency, Japan looks to have thrown in the towel.

Whatever the outcome of the Brexit vote this week investors will still be facing the prospect of negative rates and negative yields on a huge range of bonds, massive corporate leverage with worryingly rising delinquencies and of course expensive equity markets and falling profits. To that extent these political events are a distraction from the main event, weak global economic growth and perverse asset markets. So whilst the market preference for the status quo might be celebrated in the short-term, actually when the fog clears all of the problems will still be there.”

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Forcing companies to raise wages?!

IMF Calls On Japan To ‘Reload’ Abenomics (Nikkei)

Japan needs bolder income policies such as penalizing profitable companies that do not increase wages, the IMF said on Monday after concluding its annual economic assessment of the country. Despite initial success, progress under Abenomics, Prime Minister Shinzo Abe’s trademark economic policies, has stalled in recent months. The inflation rate has dropped to negative territory again, while economic growth has remained anemic.The IMF now expects Japan’s economy to grow by about 0.5% in 2016, before slowing to 0.3% in 2017, with potential growth sliding to close to zero by 2030, due to the declining demographic. “Abenomics needs to be reloaded,” the IMF said in its report and argued that income policies combined with labor market reforms should “move to the forefront” of the country’s fight against lagging growth.

“The government can introduce a ‘comply or explain’ mechanism for profitable companies to ensure that they raise base wages by at least 3% and back this up by stronger tax incentives or – as a last resort – penalties,” the IMF wrote. Promoting intermediate contracts that balance job security and wage increases will “reinforce income policies,” it added. “Our perception is that much of the stasis of inflation [in Japan] comes from the legacy, the history of having negative inflation,” said David Lipton, first deputy managing director at the IMF, in a press conference in Tokyo. “Certainly firms have at this point the cash flow and resource at hand to provide some wage increases. There are wage increases evident in a wide range of companies across this economy, so our thought is to suggest that this be a broader practice and that it be more uniform.”

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“..Mr Rajan has been an acerbic critic of zero rates and quantitative easing by the western central banks…”

India’s Rockstar Central Banker Defeated As Modi Revolution Stalls (AEP)

India’s bid to become the ‘economic super-tiger’ of Asia is in serious doubt after an assault on the independence of the central bank and failure to deliver on promised reforms. The country has been the darling of the emerging market universe since the Hindu nationalist Narendra Modi swept into power in May 2014 promising a blitz of Thatcherite reform and a bonfire of the diktats, but key changes have been blocked in the legislature. The government has turned increasingly populist. Matters have come to a head with the de facto ouster of Raghuram Rajan, the superstar governor of the Reserve Bank of India (RBI), rebuked for keeping monetary policy too tight. It is part of a pattern of attacks on central banks by politicians across the world, and the latest sign that the glory days of the monetary overlords are waning.

Mr Rajan has been battling criticism for months but threw in the towel over the weekend, sending tremors through the Indian financial markets and provoking a flurry of warnings from global investors. “He has decided not to wait until he is refused a second term,” said Lord Desai from the London School of Economics. “This is ‘Rexit’ – India’s equivalent of ‘Brexit. It looks very bad for India and will not go down well in financial markets. He was defeated by the crony capitalists up against him,” he said. The government has dampened the impact with by relaxing barriers to foreign investment in the country, but it may have underestimated the totemic status of Mr Rajan outside India. He is seen by funds as the guarantor of good practice and market integrity. Mr Rajan is a former chief economist for the IMF, famed for warning that the US subprime debt bubble was out of control long before the Lehman crisis blew up in 2008.

[..] Mr Rajan has been an acerbic critic of zero rates and quantitative easing by the western central banks. He blames them for flooding the international system with excess liquidity that emerging markets could not easily control. This fueled dangerous boom-bust asset cycles. While QE might have ‘worked’ for the US, UK, and Europe – the jury is out even for them – Mr Rajan argues that the policy is a “Pareto sub-optimal” for the world as a whole, and ultimately increases the danger of a deflation-trap in the future. The Fed and the leading central banks of the West have never really answered his critique.

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I was going to say the Empress has no clothes, but I don’t want that image lingering on my retina.

Yellen Makes ‘Uncertainty’ New Mantra (R.)

The U.S. Federal Reserve’s dwindling confidence in its own outlook and resulting confusion among investors are creating a policy problem that may require chief Janet Yellen to lay out her own views more forcefully. The Fed chair’s next communications test comes on Tuesday and Wednesday during her semi-annual testimony to U.S. lawmakers, less than a week after the central bank kept interest rates unchanged near record lows and lowered its projections for hikes in 2017 and 2018. A self-described consensus builder, Yellen sees her job as reflecting the whole committee’s views rather than setting an agenda for others to follow.

“I think that’s a very laudable intent, but sometimes that produces a lack of clarity,” said former Fed staffer and current partner at Cornerstone Macro LLC Roberto Perli. “Sometimes there is a consensus for one reason and then next time there is a consensus for a different reason so the story shifts and people get confused.” In fact, Fed policymakers’ deepening uncertainty about their own projections has resulted in the central bank sending mixed messages – repeatedly ratcheting up rate hike expectations only to tone them down later.

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Important point: “Whatever it takes” was orchestrated specifically to expel any market doubt with regard to the viability and sustainability of European monetary integration.

“Whatever It Takes” Wasn’t Enough (Noland)

Back in 2012, Mario Draghi recognized how even the notion that a country might exit the euro could unleash market dynamics that would rather quickly place Europe’s markets and banking system in peril. “Whatever it takes” was orchestrated specifically to expel any market doubt with regard to the viability and sustainability of European monetary integration. On the back of a wall of liquidity and inflating securities markets, Draghi’s gambit held things together for a few years. That said, the ECB bet the ranch – and was compelled to ante up in response to market instability early this year. The outcome of the game is very much in doubt. While Britain is not even a member of the euro, Brexit provides a test of ECB policymaking. Is Europe robust or fragile?

Has relative financial stability been nothing more than a brittle ECB-fabricated façade? Are the forces mounted against integration and cooperation too powerful to disregard? Is European integration – along with the euro currency – viable long-term? It’s an untimely test, with confidence in Europe’s banks already waning. It’s furthermore an untimely test because of faltering confidence in the ECB and contemporary global central banking more generally. Global market instability has again resurfaced and there will be no resolution next week. The FOMC has confounded Fed watchers with its abrupt pivot back to ultra-dovishness. There shouldn’t be much confusion. Global market fragility has reemerged, and the Fed’s rapid retreat has confirmed the seriousness of what’s unfolding.

Central banks have thrown everything at the problem, yet markets remain as vulnerable as ever. At least the world was not facing the downside of China’s historic Credit Bubble back in 2012. The Fed has never admitted that global concerns have been dictating U.S. monetary policy since 2012. It has now become clear, throwing the analysis of policymaking into disarray. The harsh reality is also increasingly apparent: global monetary management is dysfunctional and central bankers have become perplexed – without a backup plan. Such an uncertain backdrop is pro-currency market instability and pro-de-risking/deleveraging.

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Nobody has a reason to use the yuan.

The World’s Newest “Reserve” Currency Is Anything But (Balding)

Last week’s decision by MSCI not to include Chinese shares in its primary emerging-markets stock index has been viewed – widely and rightly – as a blow to China’s hopes of internationalizing its financial sector. There’s worse news, though: Even the progress China’s made thus far is in danger of going into reverse. MSCI’s choice is a sharp contrast to the one made by the IMF last December, when it promised to begin including the Chinese yuan in its basket of “special drawing rights.” The move essentially conferred global reserve status on the currency, despite the fact that China arguably didn’t meet the conditions for inclusion: It was debatable whether the yuan could be considered “freely usable,” and in any case, it was hardly used. At its peak in August 2015, the yuan accounted for 2.79% of global payments, compared to 44.8% for the U.S. dollar.

The idea was that compromising now would encourage leaders in China to fulfill their pledges to liberalize the yuan fully by 2020. In fact, since the IMF’s decision, the yuan has if anything grown less international, not more. Since March 2015, yuan deposits in the three largest offshore centers – Hong Kong, Taiwan and Singapore – have fallen 16%, to a total of 1.24 trillion yuan or about $188 billion. The currency is being used in even fewer international transactions than before: Its share of global payments stood at 1.82% in April 2016. The fact that only a quarter of those international payments included a partner other than China or Hong Kong means that only about 0.5% of all yuan transactions are truly international in scope. This places the currency somewhere between those of Scandinavian powerhouses Norway and Denmark.

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Absolutely completely madness. The casino keeps adding new slot machines and crap tables.

China’s Developers Can’t Stop Overpaying for Property (WSJ)

If the cost of flour is higher than the price of bread, what should a baker do? Chinese property developers are choosing to buy more flour. Prices for land, the main ingredient of the property world, have hit record highs in auctions this year in many Chinese cities. The average land price per square meter for the top 100 cities in the first five months of this year jumped nearly 50% from the same period last year, according to Wind Information. Some land prices are even higher than housing prices nearby.

State-owned developer Poly Real Estate, for instance, bought a piece of land in a Shanghai suburb for 5.5 billion yuan ($835.5 million) last month. This translates to roughly 44,000 yuan per square meter of buildable space. Houses in the region meanwhile go for around 40,000 yuan per square meter. After taking into account construction costs, taxes and other expenses, property prices would have to nearly double for the developer to make money. Prime land in the biggest cities always costs a lot, but increasingly the voracious buyers are showing up in less prime locations and smaller cities. In Suzhou, a city near Shanghai, with a population of 1.1 million, land sales in the first five months of this year have already exceeded the total of last year. And average prices have doubled.

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It’s the same they do with raw materials: “..After winning an auction, financial firms with access to cheap funding can apply for a loan with the land as collateral..”

China’s ‘Land Kings’ Return as Housing Prices Rise (WSJ)

The “land kings” are back. That had been a nickname for Chinese developers paying sky-high prices for land parcels during China’s property boom earlier this decade, which left so-called ghost cities of unsold housing across China. Now, with housing prices in China’s larger cities again rising rapidly, frothy bids for land parcels are back. On June 8, Logan Property Holdings agreed to pay 14.1 billion yuan ($2.14 billion) for a piece of land in Shenzhen’s Guangming district, the largest-ever price tag in the southern Chinese city. Logan says it didn’t overpay, calling the price “relatively favorable” in a hot market. Earlier in June, a joint venture between two firms, one of which is backed by state-owned Power Construction Corp. of China, outbid 17 rivals with an 8.3 billion yuan offer for a plot in Shenzhen’s Longhua district.

The soaring land prices show the challenges facing the government as it tries to prevent property bubbles. Moves to stimulate China’s slowing economy and to trim excess housing in smaller cities across the country—such as interest-rate cuts and eased mortgage rules—have fed into speculative demand for homes in top-tier cities that are now scrambling to cool prices. Average housing prices in 70 Chinese cities were about 5% higher in May than a year earlier, the fifth straight month of increases. In top-tier cities, prices were up 19% to 53%. But land prices are shooting up not just in Shenzhen, Shanghai and Beijing, but also in lower-profile cities such as Hangzhou, Hefei and Zhengzhou. Officials face a dilemma in trying to tame land prices: Land is commonly used as debt collateral; a sharp drop in valuation could trigger defaults and produce a wave of bad loans, hurting the economy. On the other hand, runaway land prices make it harder for ordinary Chinese to afford apartments.

[..] There is also concern that financial firms with little experience as builders are viewing land as an opportunity for arbitrage. After winning an auction, financial firms with access to cheap funding can apply for a loan with the land as collateral, and use that to extend a construction loan at a higher rate to a partner, which is typically a property developer.

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“Like an oil lease, you’re easily disposable..”

Energy-Related Loan Losses Rising (B.)

“Like an oil lease, you’re easily disposable,” the villainous J.R. Ewing quipped to his beauty queen wife in the 1970s television series Dallas. Readers of the latest edition of the Federal Reserve Bank of Dallas’s quarterly southwest economy publication might want to keep that quote in mind. News from the oil patch — the 11th Fed district that encompasses the shale heartland — is not encouraging, as it reveals a sharper rise in souring energy-related loans. “The persistence of relatively low oil prices has begun taking a toll on district bank customers,” the Dallas Fed said in its report.

“Oil-price hedges become less effective the longer prices stay low, and the cushion built by energy firms during the good times gets thinner. Cash flow becomes stretched and collateral loses its value, further pressuring borrowers.” That forces them closer to default unless banks are able to keep their lending spigots open. Many of these loans fall under the umbrella of commercial and industrial (C&I) lending — a category which has been surging in conjunction with commercial real estate (CRE) lending in recent years. While regulators have kept a somewhat lazy eye on rising CRE loans since even before the 2008 financial crisis (and certainly after it), the boom in C&I lending has been met with far less scrutiny — resulting in charts which look like this:

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“..millions of electric customers in Southern California were warned they could suffer power outages of up to 14 days this summer..”

California Power Grid Prepares For Heatwave, Power Outages (R.)

California will have its first test of plans to keep the lights on this summer following the shutdown of the key Aliso Canyon natural gas storage facility as temperatures in the Los Angeles area are forecast to hit triple digits this week. With record-setting heat and air conditioning demand expected in Southern California, the state’s power grid operator issued a so-called “flex alert,” urging consumers to conserve energy to help prevent rotating power outages – which could occur regardless. Electricity demand is expected to rise during the unseasonable heatwave on Monday and Tuesday, with forecast system-wide use expected to top 45,000 megawatts, said the California Independent System Operator (ISO), which manages electricity flow through the state.

That compares with a peak demand of 47,358 MW last year and the all-time high of 50,270 MW set in July 2006. That could put stress on the power grid, particularly with the shut-in of Aliso Canyon, following a massive leak at the underground storage facility in October. The facility, in the San Fernando Valley, is the second largest storage field in the western United States, according to federal data, and therefore crucial for power generation. All customers, including homes, hospitals, oil refineries and airports are at risk of losing power at some point this summer because a majority of electric generating stations in California use gas as their primary fuel. In April, millions of electric customers in Southern California were warned they could suffer power outages of up to 14 days this summer due to the closure.

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“The Border Force Act gives the Australian government the power to jail, for up to two years, anybody employed by the department..”

Australia Whistleblower Loses Job After Speaking Out On Refugee Camps (G.)

The trauma specialist who condemned the treatment of asylum seekers and refugees in Australia’s offshore detention regime as the worst “atrocity” he has seen has had his contract to work on Nauru terminated. Psychologist Paul Stevenson, whom the Australian government awarded an Order of Australia for his work counselling victims of the Bali bombings, had undertaken 14 deployments to Nauru and to Manus Island in Papua New Guinea. He was due to return to Nauru on Thursday. But after he spoke publicly to the Guardian about his experiences working within Australia’s offshore detention regime – describing conditions in the camps as “demoralising … and desperate” – he was told his contract had been summarily cancelled.

PsyCare, the company through which he was employed to provide counselling to guards working in offshore detention, informed him by email his employment had been terminated. Stevenson said the news was not unexpected. “But the public needs to hear about the consequences people face for speaking out, and to understand the level they go to in minimising access.” [..] The Border Force Act gives the Australian government the power to jail, for up to two years, anybody employed by the department or its contractors who speaks publicly about conditions inside the offshore detention regime, including doctors advocating for better healthcare, or other workers exposing sexual and physical abuse of detainees.

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Jun 202016
 
 June 20, 2016  Posted by at 9:02 am Finance Tagged with: , , , , , , ,  1 Response »


Harris&Ewing Car exterior. Washington & Old Dominion R.R. 1930

IMF Calls For Overhaul Of Abenomics (R.)
The Economy Is Not What It Seems (Roberts)
Asking Prices For Homes In England And Wales Rise To Record High (G.)
City of London Fears Brexit Will End Golden Age (BBG)
Brexit Is The Best Outcome (Gambles)
Brexit – The End of the Universe (Rose)
The Progressive Argument For Leaving The EU Is Not Being Heard (G.)
Economic Gauges Raise Specter of Recession (WSJ)
Italy PM Renzi Suffers Setback As 5-Star Makes Breakthrough (R.)
China’s Housing Market in Flux as Price Recovery Tapering Off (BBG)
Chinese Bare All for Credit (BBG)
World Refugee Day: 65.3 Million People Displaced (R.)
Turkish Border Guards Shoot and Kill 8 Syrian Refugees, 3 Children (G.)

The amount of nonsense that can be held in just a few words is breathtaking. Nobody knows what deflation is. The IMF and Shinzo Abe: the deaf and the blind.

IMF Calls For Overhaul Of Abenomics (R.)

The IMF on Monday urged Japan’s government to overhaul its stimulus policies by moving income policies and labor market reform to the forefront, supported by more monetary and fiscal stimulus. “Under current policies, the high nominal growth goal, the inflation target, and the primary budget surplus objective all remain out of reach within the timeframe set by the authorities,” the IMF said in a statement after “Article 4” annual consultations on economic policy with Japan.

The global lender called for a more flexible monetary policy framework with the Bank of Japan abandoning a specific calendar date for achieving its 2% inflation target. It added that Japan would need to raise the sales tax to at least 15% to strike the right balance between growth and fiscal sustainability. “Without bolder structural reforms and credible fiscal consolidation, domestic demand could remain sluggish, and any further monetary easing could lead to overreliance on depreciation of the yen,” the IMF said.

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Strong graphs.

The Economy Is Not What It Seems (Roberts)

Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, can not be repealed. More importantly, while there is currently “no sign of recession,” what is going on with the main driver of economic growth – the consumer? The chart below shows the real problem. Since the financial crisis, the average American has not seen much of a recovery. Wages have remained stagnant, real employment has been subdued and the actual cost of living (when accounting for insurance, college, and taxes) has risen rather sharply. The net effect has been a struggle to maintain the current standard of living which can be seen by the surge in credit as a percentage of the economy.

To put this into perspective, we can look back throughout history and see that substantial increases in consumer debt to GDP have occurred coincident with recessionary drags in the economy.

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A nation built on debt.

Asking Prices For Homes In England And Wales Rise To Record High (G.)

Asking prices for homes in England and Wales have risen to a new record high, and sales are being agreed quicker than at any point since 2010, according to latest figures from the property website Rightmove. The site, which measured asking prices for just under 150,000 properties listed over the past month, said they had risen by 0.8% in June, to an average of £310,471 – 5.5% higher than in June 2015. Asking prices have risen every month so far in 2016, and Rightmove said the rush for properties ahead of April’s stamp duty increase for second homes and the availability of cheap mortgages had supported the market. As a result of increased buyer demand, the average time taken to sell a property dropped to 57 days, compared with 60 in May and 65 in June 2015.

The headline figures do not suggest that the looming EU referendum is having an impact on buyers’ decisions, but Rightmove said there were signs that sellers were sitting tight until the outcome is known. “Fewer new sellers are coming to market, with this month’s numbers being 5.3% below the monthly average for this time of year since 2010,” the monthly report said. “The most reluctant are owners of larger homes, those with four or more bedrooms, with 6.6% fewer sellers over the same time period. Given the well-documented structural shortages of housing supply any longer-term reluctance of owners to come to market would be a worrying trend.”

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Far too big.

City of London Fears Brexit Will End Golden Age (BBG)

Gooses don’t come much more golden than the City of London. The narrow lanes of the Square Mile, lined with handsome neoclassical stone and gleaming modern glass, are at the heart of a British financial sector that paid 66 billion pounds ($94 billion) in tax last year and employs more than 2 million people nationwide. It is oft-resented, has helped push the capital’s house prices out of reach for many, and required a bailout of more than 100 billion pounds from taxpayers less than a decade ago. It is also without a doubt the country’s most lucrative industry. Yet ahead of a June 23 referendum on European Union membership, many of the City’s leading lights are deeply worried about its future.

Since almost exactly 30 years ago, when Conservative Prime Minister Margaret Thatcher liberalized finance through a package of reforms so dramatic they were dubbed the “Big Bang,” London has become the undisputed financial capital of a united Europe – a status that now hangs in the balance. “Just because the City is strong at the moment doesn’t mean that it has a perpetual right to remain so,” said Marcus Agius, 69, the chairman of Barclays during the 2008 global financial crisis. “Brexit would be an act of supreme folly. In the future we would look back and wonder: ‘Why the hell did we do that? What were we thinking?’”

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“..remaining in a collapsing tower of bad debt will guarantee a far worse economic outcome and catastrophic confrontations between Europe’s ever narrowing core and ever widening periphery..”

Brexit Is The Best Outcome (Gambles)

Imagine this week that the exit vote prevails, the U.K. government stands down and in a ripple effect not seen in Europe since the fall of the Berlin Wall, the immediate dissolution of the EU is announced and there is a return to national currencies. Equities would plunge and trading in the euro currency would be suspended. European bourses would go into free-fall, continuing even after the U.K., the U.S. and others initially appear to stabilize. Each country’s no longer fungible euro would be converted into national currencies and chaos would reign until many EU national governments bail out banks. The uncertainty caused would puncture China’s debt bubble, hitting emerging and developed markets.

After a few years of global pain, by 2018 to 2020 peripheral Europe, the U.K., the U.S. and ‘healthier” emerging economies might begin to recover. Recovery in Germany and China, however, may take far longer. Until now Germany has successfully re-imposed the costs of the reckless euro borrowing spree on debtor banks, individuals, corporations and even governments. A break-up of either the euro or the EU would expose German banks’ vulnerable underbellies, having effectively underwritten the euro project in exchange for German control over sovereign budgets. Sounds scary? In my view, this would be the best long term outcome.

However, it’s extremely unlikely to happen. Either U.K. voters will decide to remain or, if the leave campaign wins, the U.K. government and Eurocrats will desperately cling on to power. This may delay the collapse but would leave a far more painful journey with a much more severe conclusion ahead. [..] The EU has already facilitated the destruction of private and sovereign balance sheets with reckless levels of record debt that can never be repaid. This is why leaving now will precipitate a global economic drama. It’s also why remaining in a collapsing tower of bad debt will guarantee a far worse economic outcome and catastrophic confrontations between Europe’s ever narrowing core and ever widening periphery.

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“The EU elite feel too secure and have too much to lose.”

Brexit – The End of the Universe (Rose)

[..] The EU spends millions every year maintaining the illusion that it is one of the great European achievements. The problem is that it has not been the case for a long time. It has become the enforcer of a now-liberal agenda, converting the particular interests of big business into European law. So we have an anti-democratic EU under German hegemony furthering the interests of large corporations – I doubt this is what the people of Europe want or deserve. The words of the British playwright Dennis Potter apply to the current situation in the EU: “They are not interested in our development or emancipation. That is the quality of an occupying force.” This is a conclusion the Greeks reached years ago.

It has been interesting to follow the stages of the Brexit campaign. Initially it seemed to be a referendum concerning David Cameron’s government. Then the role of immigration took centre stage. Now the question of national sovereignty and the lack of democracy in the EU has become an important debating point. There is even a nascent debate among the British left if the EU can be re-democratised, which is rather odd, seeing that it never was a democratic organisation. There seems to be little hope of the EU being reformed. The EU elite feel too secure and have too much to lose. A democratic EU is completely useless for them, especially for the Germans.

Schäuble has recently joined those calling for a stop to further EU integration. Germany no longer needs integration, which implies compromise, when it is already calling the shots. As I was recently in Brussels a member of an NGO explained that Germany is very content with the current EU situation. They dictate policy. There may be resistance here and there, but these cases are never existential for Germany and its clients. Brexit however offers Britain a unique opportunity. Once out of the EU, who are the Tories going to blame when it becomes clear that it is mainly they who are ruining Britain, not the EU or the immigrants?

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The closer they try to make the union, the more violent the reactions will be.

The Progressive Argument For Leaving The EU Is Not Being Heard (G.)

The British economy has become increasingly dominated by the fortunes of the financial sector, with the bankers responsible for the worst slump since the 1930s escaping pretty much scot free. London and the rest of the UK have become two countries, which explains why hostility to the EU increases with distance from the capital. Nor is this phenomenon confined to the UK. It has become commonplace to bracket growing support for leave in poorer parts of Britain with Donald Trump’s emergence as the Republican candidate in this year’s US presidential election, but populist and anti EU sentiment is on the rise across Europe.

The US research company Pew conducted a survey earlier this year to test sentiment towards the EU. In Britain, 48% said they had an unfavourable view of the EU and 44% said they had a favourable view. In France, the anti-EU sentiment was much more pronounced at 61% and 38% in favour, while in Germany there had been an eight-point drop in support for the EU in the past year, leaving those in favour only narrowly ahead at 50% against 48% . The impact of the great recession in Europe has been exacerbated by monetary union, a policy blunder of catastrophic proportions. The euro has been responsible for the slow growth and high unemployment that has angered the French, and the high debts and that have alarmed the Germans.

Stir in the unexpectedly large flows of refugees from the Middle East and North Africa, and you have a toxic mix. Last summer, when the Greek debt crisis was at its most intense, Europe’s leaders came up with a plan. The “five presidents’ report” laid down a step-by-step approach to a United States of Europe, with banking union followed by a common budget and finally political union. Getting even the least controversial part of this agenda – banking union – past sceptical European electorates has proved impossible. Yet the alternative approach, breaking up the euro and giving countries more control over their own economic destiny, is seen as not just potentially dangerous but also a betrayal of the idea of ever-closer union.

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Useless talk about how hard forecasting is.

Economic Gauges Raise Specter of Recession (WSJ)

Gut-wrenching gyrations in financial markets early in the year helped summon the specter of a new recession. Now, warning signs are coming mostly from the U.S. economy itself. Hiring is slowing, auto sales are slipping and business investment is dropping. America’s factories remain weak and corporate profits are under pressure. All are classic signs of an economic downturn, and forecasters have certainly noticed. In a Wall Street Journal survey this month, economists pegged the probability of a recession starting within the next year at 21%, up from just 10% a year earlier. Some economists think the risk is even higher. Whether this proves to be the precursor to a recession or yet another false alarm could take years to sort out.

Uneven economic growth throughout the seven-year expansion has delivered several such scares that passed. But plenty of gauges are pointing to a decent chance of a recession starting within the next 18 months. “Like everybody, I can see clouds on the horizon,” said Stanford University economist Robert Hall, chairman of the National Bureau of Economic Research committee that will—eventually—identify the start date of the next recession. But, he said, “Nobody’s very good at predicting. I don’t even try.” Financial-market convulsions at the start of the year stoked worries about a possible recession. But continued strength in the labor market reassured most economists about the resilience of the expansion, and markets largely calmed.

While the economy is still adding jobs, the recent hiring slowdown has spooked some forecasters. May’s growth in payrolls—just 38,000 jobs—was the weakest month of hiring since U.S. employers stopped shedding jobs in 2010. Barclays economist Michael Gapen noted that since 1960, persistently slower hiring compared with the recovery average, as seen in recent months, “more often than not” was followed by a recession in the next nine to 18 months.

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M5S won’t be happy about not getting Milan.

Italy PM Renzi Suffers Setback As 5-Star Makes Breakthrough (R.)

Italian Prime Minister Matteo Renzi was trounced by the anti-establishment 5-Star Movement in local elections in Rome and Turin on Sunday, clouding his chances of winning a do-or-die referendum in October. The result represented a major breakthrough for 5-Star, which feeds off popular anger over widespread corruption, with the party’s Virginia Raggi, a 37-year-old lawyer, making history by becoming the first woman mayor in the Italian capital. “A new era is beginning with us,” said Raggi, who won 67% of the vote in the run-off ballot. “We’ll work to bring back legality and transparency to the city’s institutions.”

As a consolation for Renzi, his center-left Democratic Party (PD) held on to power in Italy’s financial capital Milan and in the northern city of Bologna, beating more traditional, center-right candidates in both places. Renzi has said he would not step down whatever the results on Sunday. Instead, he has pinned his future on the referendum on his constitutional reform that, he says, will bring stability to Italy and end its tradition of revolving-door governments. But the losses in Rome and Turin suggest he might struggle to rally the nation behind him, with opposition parties lined up to reject his reform and even his own PD divided over the issue.

[..] The PD’s defeat in Rome had been expected after widespread criticism of its management of the city over the past three years, with its mayor forced to resign in 2015 in a scandal over his expenses. But the loss in Turin, a center-left stronghold and home of carmaker Fiat, was a major shock. The incumbent, Piero Fassino, a veteran party heavyweight, was swept aside by 5-Star candidate Chiara Appendino, 31, who overturned an 11-point gap after the first round to win 55% of the vote. “It will be difficult (for the PD) to downplay what happened,” wrote Massimo Franco, leading political commentator for the Corriere della Sera newspaper.

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How to make even Bizarro jealous: ..the recovery is almost hitting the ceiling.. That mortgages graph is frightening by the way.

China’s Housing Market in Flux as Price Recovery Tapering Off (BBG)

The recovery in China’s housing market that helped underpin the economy in the first half is showing signs of tapering off. New-home prices excluding government-subsidized housing climbed in 60 cities in May, down from 65 in April, among the 70 tracked, the National Bureau of Statistics said Saturday. With less of a boost from a recovering property market likely in the second half, the government will need to find other drivers such as infrastructure investment to meet its growth goal of at least 6.5% this year, according to Shen Jianguang at Mizuho. “The housing market is in flux,” Shen said. “The government is likely to step up policies to encourage home-buying in places where demand is weak and inventories of unsold housing are still high as the destocking policy didn’t yield the expected results.

” Faced with a massive pile of unsold homes in smaller cities, the government and central bank since late 2014 had unleashed a range of measures aimed at improving demand for homes to clear the overhang. While inventory levels may not have budged much, mortgage demand has, rising to a record last month, according to the latest data from the central bank. Still, the recovery in home prices last month abated as local governments put curbs in top economic centers like Shanghai and Shenzhen where prices have been surging, while they deployed home-buying stimulus in smaller cities to clear the glut of unsold residences. “This market rebound since last May has been fueled by credit and easing measures, making it unsustainable in some regions,” said Xia Dan at Bank of Communications. “Now the recovery is almost hitting the ceiling.”

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Some send nude selfies to get a better loan.

Chinese Bare All for Credit (BBG)

Talkative people pay back loans. The very talkative default. Too taciturn is no good either. Also, don’t take out a loan at 4 a.m. Those are lessons from online lenders in China that are tracking people’s behavior – via apps on their mobile phones – and taking it into account when deciding what their credit ratings should be. Chinese consumers don’t mind handing over personal details that would spark outrage in the West, in exchange for lower interest rates. The Chinese willingness to share is key to China’s plan to create the largest repository of online data on its citizens and their habits in the world. More than 80% of what’s collected is in the hands of the government, which will make it largely available for private sector use, Chinese Premier Li Keqiang recently told an audience in China that included Dell CEO Michael Dell.

WeLab Ltd., a Hong Kong-based online lender that makes loans in China, looks at what apps people have downloaded, where they go using the phone’s GPS tracker, their social networks and their school records. It offers discounted interest rates for each extra piece of personal information that helps profile customers for credit ratings. In Hong Kong, for example, giving WeLab access to a Facebook account gets a 5% discount on the cost of a loan, and access to LinkedIn gets you 10% off, on loans with interest rates that otherwise reach as high as 20%. “Chinese people have no issue handing over their personal data, giving you their credit card number, giving you their bank account,” said GGV Capital’s Jenny Lee, whose firm has invested in data-hungry tech giants such as Alibaba. “Look at the whole internet finance sector, people are giving you their bank statement so you can do profiling.”

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Another record. We’re number 1!

World Refugee Day: 65.3 Million People Displaced (R.)

A record 65.3 million people were uprooted worldwide last year, many of them fleeing wars only to face walls, tougher laws and xenophobia as they reach borders, the United Nations refugee agency said on Monday. The figure, which jumped from 59.5 million in 2014 and by 50% in five years, means that 1 in every 113 people on the planet is now a refugee, asylum-seeker or internally displaced in a home country. Fighting in Syria, Afghanistan, Burundi and South Sudan has driven the latest exodus, bringing the total number of refugees to 21.3 million, half of them children, the UNHCR said in its “Global Trends” report marking World Refugee Day.

“The refugees and migrants crossing the Mediterranean and arriving on the shores of Europe, the message that they have carried is that if you don’t solve problems, problems will come to you,” U.N. High Commissioner for Refugees Filippo Grandi told a news briefing. “It’s painful that it has taken so long for people in the rich countries to understand that,” he said. “We need action, political action to stop conflicts, that would be the most important prevention of refugee flows.” A record 2 million new asylum claims were lodged in industrialized countries in 2015, the report said. Nearly 100,000 were children unaccompanied or separated from their families, a three-fold rise on 2014 and a historic high.

Germany, where one in three applicants was Syrian, led with 441,900 claims, followed by the United States with 172,700, many of them fleeing gang and drug-related violence in Mexico and Central America. Developing regions still host 86% of the world’s refugees, led by Turkey with 2.5 million Syrians, followed by Pakistan and Lebanon, the report said.

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Our friend Erdogan.

Turkish Border Guards Shoot and Kill 8 Syrian Refugees, 3 Children (G.)

Eight Syrian refugees have been shot dead by Turkish border guards as they tried to escape war-torn northern Syria, a human rights watchdog has claimed. Three children, four women and one man were killed on Saturday night, according to the Syrian Observatory for Human Rights. It said a total of 60 Syrian refugees had been shot at the border since the start of the year. Six of this weekend’s casualties were from the same family, said the observatory’s founder, Rami Abdelrahman. “I sent our activists to hospital there, we have video [of the corpses], but we haven’t published it because there are children [involved],” he said.

The Local Coordination Committees, a network of activists inside Syria, supported the claim, reporting that one of the children was as young as six. Syrian refugees have been making illegal crossings of the Turkish border as Jordan, Turkey and Lebanon have made it virtually impossible for them to leave Syria legally. There have been reports of shootings on the border since at least 2013, and rights groups fear that the number of incidents has increased since European countries, including Britain, began pressing Turkey to curb migration flows towards Europe late last year.

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Jun 012016
 


Arthur Rothstein Steam shovels on flatcars, Cherokee County, Kansas 1936

China’s Debt Bubble Bigger Than Subprime Bubble (MW)
Yuan Tumbles As China PMI Miraculously Hugs Flatline (ZH)
Double Blow for China Banks as Fed Worry Meets June Cash Crunch (BBG)
Hong Kong April Retail Sales Fall 7.5%, 14th Straight Month (R.)
Abenomics “Death Cross” Strikes As Japan PMI Plunges To 40-Month Lows (ZH)
Pension Funds Pile on Risk Just to Get a Reasonable Return (WSJ)
Germany: Draghi v the Banks (FT)
The Most Powerful Man in Banking (WSJ)
Central Banks As Pawnbrokers Of Last Resort (M. Wolf)
Germany Considers Easing of Russia Sanctions (Spiegel)
Elephants In Tanzania Reserve Could Be Wiped Out By 2022 (AFP)
Mediterranean Death Toll Soars In First 5 Months Of 2016 (UNHCR)
Frontex Denies, Prevents Help To Refugees: Witnesses (MEE)

“The problem is that the banking sector in China has been pushing out new lending aggressively, but with slowing economic growth many loans have not gone to create more factories and jobs but to financial assets that have been leveraged to boost returns..”

China’s Debt Bubble Bigger Than Subprime Bubble (MW)

Unproductive debt in China—that is, debt that’s used to drive up asset prices—swelled in 2015, eclipsing the level seen in the U.S. in the run-up to the Great Financial Crisis, said Torsten Slok, chief international economist at Deutsche Bank, in a note to clients published Tuesday. Slok’s findings are illustrated in the chart below, where he compares the level of credit growth required in the U.S. and China to generate 1percentage point of GDP growth. (He notes that the red bar for 2015 also grew, suggesting more credit growth is now required in the U.S. to produce onepercentage point of GDP growth).

Chinese officials are partly responsible for the expansion of credit last year, analysts say, as the People’s Bank of China lessened requirements regarding the collateral lenders put up to borrow funds from the central bank, among other stimulus measures. The move was meant to spur economic growth, the pace of which slowed last year, stoking fears that it could precipitate a sharp global downturn. The world’s second-largest economy saw growth slow to 6.8% in 2015—missing the government’s target for 7% growth by a hair. In the first quarter of 2016, the country’s economy grew at an annual rate of 6.7%, its slowest pace since 2009.

It’s important to note, however, that many economists believe Chinese data overstates the strength of its economy. Over the past year, Chinese stocks, and more recently commodities like iron ore and steel rebar traded in China, have seen a series of dizzying rallies and frightening crashes as investors, emboldened by easy credit engage in speculation. “The problem is that the banking sector in China has been pushing out new lending aggressively, but with slowing economic growth many loans have not gone to create more factories and jobs but to financial assets that have been leveraged to boost returns,” Slok said.

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Everyone, US, Japan and EU too, needs that services PMI to flourish, but…

Yuan Tumbles As China PMI Miraculously Hugs Flatline (ZH)

Since May 2012, China Manufacturing PMI has miraculously stayed within a 1 point range of the knife-edge 50 level between contraction and expansion. May 2015 just printed 50.1, the same as April with New Orders weaker and business activity expectations (hope) tumbling to 4 month lows. The Steel Industry PMI collapsed from 57.3 to 50.9 with New Steel Orders collapsing from 65.6 to 52.7 – the biggest monthly drop in record. And while non-manufacturing PMI remained in ‘expansion territory at 53.1, it fell back from a brief bounce in April with employment and business expectations both weaker. For now, equity markets are unreactive but offshore Yuan is tumbling on the news, not helped by a sizable devaluation in the official fix. The magic of manufacturing data… as non-manufacturing slowly catches down…

Disappointment triggering more offshore Yuan selling… Not helped by yet another devaluation by PBOC…
*CHINA SETS YUAN FIXING AT 6.5889 VS 6.5790 DAY EARLIER
*PBOC CUTS YUAN FIXING TO LOWEST LEVEL SINCE 2011 FOR THIRD DAY

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Refinancing is becoming a major problem.

Double Blow for China Banks as Fed Worry Meets June Cash Crunch (BBG)

Shanghai’s money market is braced for higher borrowing costs as a credit-fueled economic recovery coincides with the prospect of higher U.S. interest rates in June, a month that has historically seen funding crunches in China. The overnight interbank lending rate averaged 1.99% in May, up from 1.18% a year ago, as Federal Reserve tightening weakened the yuan, spurring capital outflow pressures. That borrowing cost has climbed every June since 2011, as lenders hoard deposits ahead of quarter-end regulatory checks. The cost of fixing rates in the swap market is surging as data showed property leading a rebound in investment in the world’s second-biggest economy.

“The internal and external factors combined will certainly add pressure to the money market in June, driving interest rates higher,” said Liu Dongliang at China Merchants Bank, the nation’s sixth-largest lender. “We’re not optimistic about the bond market in the short term.” Any cash crunch would aggravate a rout in bonds that led to 190.6 billion yuan ($28.9 billion) in canceled sales this quarter, making it harder for issuers to refinance a record amount of maturing debt. The overnight money rate has been moving in tandem with the weakening currency in the past year after touching a six-year low, as estimated outflows reached $1 trillion in the past year, according to a gauge compiled by Bloomberg.

The yuan declined 1.5% in May as Federal Reserve Chair Janet Yellen said that evidence of strength in the U.S. economy means there could be an increase in borrowing costs in the coming months. The probability of Fed action in June has surged to 24% from 12% at the end of April, while the premium for China’s one-year sovereign yield over U.S. Treasuries has narrowed to a seven-week low. The People’s Bank of China has an incentive to keep monetary conditions relatively tight as it looks to control the yuan’s decline, rein in excessive lending by banks and keep a lid on inflation. The authority will create a neutral and appropriate monetary environment, it said in an article published in China Business News last week. The comments came after data showed the nation’s consumer price index maintained a 2.3% acceleration for the third month in April, a pace not seen since mid-2014.

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Mainland Chinese fail to appear.

Hong Kong April Retail Sales Fall 7.5%, 14th Straight Month (R.)

Hong Kong’s retail sales fell for the 14th successive month in April, as a drop in tourists and weak local consumption deepened the pain for retailers in the city. Retail sales in April slid 7.5% from a year earlier to HK$35.2 billion ($4.5 billion) in value terms, less than a 9.8% slump in March. In volume terms, April sales dropped 7.6%, government data showed on Tuesday. “Many types of retail outlet still recorded notable falls in sales, reflecting the continued drag from the slowdown in inbound tourism as well as the more cautious local consumer sentiment amid subpar economic conditions,” the government said in a statement.

Hong Kong is struggling with mounting economic challenges from the prospect of rising U.S. interest rates, which has stepped up capital outflows, and from China’s economic slowdown. Mainland tourists are avoiding the city amid political tensions with China and growing calls from radical activists for greater autonomy from Beijing. “The near-term outlook for retail sales will continue to depend on the performance of inbound tourism,” the government added.

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“Output tumbled at the fastest pace in 25 months and new orders are the worst since Jan 2013. This is the death cross for Abenomics..”

Abenomics “Death Cross” Strikes As Japan PMI Plunges To 40-Month Lows (ZH)

Since Abenomics was unleashed on the world (with QQE starting in April 2013), things have not worked out as the smartest men in the Japanese rooms predicted. In fact, with April’s final manufacturing PMI printing at 47.7, operating conditions in Japan worsened at the sharpest pace in 40 months… since Abe began his three arrows. Output tumbled at the fastest pace in 25 months and new orders are the worst since Jan 2013. This is the death cross for Abenomics… The weakest Japanese manufacturing PMI since the start of Abenomics…

Commenting on the Japanese Manufacturing PMI survey data, Amy Brownbill, economist at Markit, which compiles the survey, said: “The aftermaths of the earthquakes in one of Japan’s key manufacturing regions continued to weigh heavily on the manufacturing sector. Both production and new orders declined sharply midway through the second quarter of 2016. A marked fall in international demand also contributed to the drop in total new orders, as exports declined at the fastest rate since January 2013.” Flashing the “death cross” of Abenomics three arrows… As it is now clear that the massive expansion of the Bank of Japan balance sheet has done nothing… in fact worse than nothing… for the Japanese economy.

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Talk about a death cross…

Pension Funds Pile on Risk Just to Get a Reasonable Return (WSJ)

What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns. Thanks to rock-bottom interest rates in the U.S., negative rates in other parts of the world, and lackluster growth, investors are becoming increasingly creative—and embracing increasing risk—to bolster their performances. To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments: adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.

In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates, which advises large investors. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio. Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%. Nominal returns were used for the projections, but substituting in assumptions about real returns, adjusted for inflation, would have produced similar findings, said Jay Kloepfer, Callan’s head of capital markets research.

The amplified bets carry potential pitfalls and heftier management fees. Global stocks and private equity represent among the riskiest bets investors can make today, Mr. Kloepfer said. “Stocks are just ownership, and they can go to zero. Private equity can also go to zero,” said Mr. Kloepfer, noting bonds will almost always pay back what was borrowed, plus a coupon. “The perverse result is you need more of that to get the extra oomph.”

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How to destroy the euro from within.

Germany: Draghi v the Banks (FT)

In Dillingen an der Donau, a small town in rural Bavaria, the local Sparkasse savings bank is providing an unusual service. For customers who live a long way from a branch, it is giving out free bus tickets. And for those who cannot get to the bank at all — the old or sick, for example — it offers to send a member of staff directly to their homes to deliver small sums of cash. The Sparkasse came up with the idea to compensate for the fact that it was closing several branches as revenues dwindled due to interest rates being at a record low and customers visiting less frequently. “If your revenues are shrinking, then you have to do something about your costs,” says an official at the bank. “You have to economise.” The pressure on Germany’s army of savings banks is just one example of the increasing strains on the country’s financial system caused by the ultra-loose monetary policy of the Frankfurt-based ECB.

In a bid to jolt the eurozone’s lacklustre economy back to life , the central bank has, over the past five years, slashed interest rates to record lows and even pushed its deposit rate into negative territory. On top of this, it has launched a €1.7tn asset purchase programme, which has driven down bond yields across the continent. The measures have bought time for reform in the battered economies of southern Europe. Yet in Germany, they have met a blizzard of opposition. The country’s hawkish monetary policy establishment has always nurtured a degree of scepticism about the institution that succeeded the Bundesbank as the custodian of Germany’s monetary stability. But as savers, banks and insurers have been increasingly hurt by low interest rates — nominal yields on 10-year German bonds have fallen from about 4% in 2008 to less than 0.2% today — the criticism of the ECB has intensified.

The media has accused the central bank of fuelling a “social disaster”, while one bank has claimed that low interest rates will have deprived German households of €200bn between 2010 and the end of this year. Germany’s financial watchdog, BaFin, branded low rates a “seeping poison” for the country’s financial system. The most dramatic intervention, however, came from Wolfgang Schäuble, the hawkish finance minister, who blamed ECB president Mario Draghi for “half” the rise in support for Alternative for Germany, the rightwing, anti-immigration, anti-euro party. Mr Draghi hit back, archly noting that the ECB has a mandate “to pursue price stability for the whole of the eurozone, not only for Germany”, and argued that low borrowing costs were symptomatic of a glut in global savings for which Germany was partly to blame.

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“He’s judge and jury and everything else..”

The Most Powerful Man in Banking (WSJ)

The most important person in the banking business isn’t a banker. To most Wall Street executives, that title goes to Federal Reserve governor Daniel Tarullo, a brusque, white-haired former law professor who has come to personify Washington’s postcrisis influence over how banks do business. Mr. Tarullo heads the Fed’s Committee on Bank Supervision. On paper—and in practice for most of the previous decades—the post isn’t a hugely powerful one. But the 63-year-old took office at the Fed in 2009 at a moment of broad public support for a more aggressive tack and has pressed that advantage ever since. Financiers privately call Mr. Tarullo “the Wizard of Oz” for his behind-the-scenes sway over everything from corporate strategy to how many billions of dollars banks must maintain in capital.

Through the stress tests he championed to evaluate how banks might fare in another market shock, the Fed wields control over whether banks can raise the dividends they pay to shareholders. For a big bank in 2016, getting a stamp of approval from Mr. Tarullo is an effort consuming thousands of employees. The industry’s lawyers pore over transcripts of Mr. Tarullo’s dense speeches to grasp the meaning of every word. When Citigroup and Bank of America stumbled on the stress tests in recent years, each bank said it spent at least $100 million to correct the problems the Fed had called out. Peter Conti-Brown, a historian and author of “The Power and Independence of the Federal Reserve,” called Mr. Tarullo’s influence extraordinary. One former bank executive put a finer point on it: “He’s judge and jury and everything else,” he said.

Mr. Tarullo in an interview attributed his power to his longevity at the Fed and consensus with other regulators. And, he said, the full impact of the regulatory changes made on his watch have yet to be felt. “I think it likely that firms are going to have to change in some cases their size, in some cases their business model, and in some cases their organization,” he said. Mr. Tarullo’s influence illustrates the outsize role that government regulation now plays for banks. For most of the modern era, regulators took a more hands-off approach, monitoring the industry for abuses but stopping short of injecting themselves into bank operations. But the near collapse of the financial system in 2008 brought widespread criticism of regulators for not being more vigilant and changed the equation.

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“..governments try to make finance safer and finance exploits the support to make itself riskier.”

Central Banks As Pawnbrokers Of Last Resort (M. Wolf)

Will there be another huge financial crisis? As Hamlet said of the fall of a sparrow: “If it be now, ’tis not to come. If it be not to come, it will be now. If it be not now, yet it will come – the readiness is all.” So it is with banks. They are designed to fall. So fall they surely will. A recent book explores not only this reality but also a radical and original solution. What makes attention to this suggestion even more justified is that its author was at the heart of the monetary establishment before and during the crisis. He is Lord Mervyn King, former governor of the Bank of England. His book is called The End of Alchemy . The title is appropriate: alchemy lies at the heart of the financial system; moreover, banking was, like alchemy, a medieval idea, but one we have not as yet discarded. We must, argues Lord King, now do so.

As Lord King remarks, the alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”. This is a confidence trick in two senses: it works if, and only if, confidence is strong; and it is fraudulent. Financial institutions make promises that, in likely states of the world, they cannot keep. In good times, this is a lucrative business. In bad times, the authorities have to come to the rescue. It is little wonder, then, that financial institutions have become so large and pay so well. Consider any large bank. It will have a wide range of long-term and risky assets on its books, mortgages and corporate loans prominent among them. It will finance these with deposits (supposedly redeemable on demand), short-term loans and longer-term loans. Perhaps 5% will be financed by equity.

What happens if lenders decide banks might not be solvent? If they are depositors or short-term lenders, they can demand their money back immediately. Without aid from the central bank, the only institution able to create money without limit, banks will fail to meet that demand. Since a generalised collapse would be economically devastating, needed support is forthcoming. Over time, this reality has created a “Red Queen’s race”: governments try to make finance safer and finance exploits the support to make itself riskier. Broadly speaking, two radical solutions are on offer. One is to force banks to fund themselves with far more equity. The other is to make banks match liquid liabilities with liquid and safe assets. The 100% reserve requirements of the “Chicago plan”, proposed during the Great Depression, is such a scheme.

If liquid, safe liabilities finance liquid, safe assets — and risk-bearing, illiquid liabilities finance illiquid, unsafe assets — alchemy disappears. Finance would be safe. Unfortunately, the end of alchemy would also end much risk-taking in the system. Lord King offers a novel alternative. Central banks would still act as lenders of last resort. But they would no longer be forced to lend against virtually any asset, since that very possibility must create moral hazard. Instead, they would agree the terms on which they would lend against assets in a crisis, including relevant haircuts, in advance. The size of these haircuts would be a “tax on alchemy”. They would be set at tough levels and could not be altered in a crisis. The central bank would have become a “pawnbroker for all seasons”.

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The US will need to pressure a lot harder to keep the sanctions going.

Germany Considers Easing of Russia Sanctions (Spiegel)

As expected, G-7 leaders reiterated their hardline approach to Moscow in the Japan summit’s closing statement. Chancellor Angela Merkel complained last Thursday that there still isn’t a stable cease-fire in Ukraine and the law pertaining to local elections in eastern Ukraine, as called for by the Minsk Protocol, still hasn’t been passed. That, she said, is why “it is not to be expected” that the West will change its approach to Russia. What Merkel didn’t say, though, is that behind the scenes, her government has long since developed concrete plans for a step-by-step easing of the sanctions against Russia and that the process could begin as early as this year. Thus far, the message has been that the trade and travel restrictions will only be lifted once all the provisions foreseen by the Minsk Protocol have been fulfilled. 100% in return for 100%.

Now, however, Berlin is prepared to make concessions to Moscow – on the condition that progress is made on the Minsk process. “My approach has always been that sanctions are not an end in themselves. When progress is made on the implementation of the Minsk Protocol, we can also then talk about easing sanctions,” says Foreign Minister Frank-Walter Steinmeier. The Chancellery also supports the new approach. Thus far, it was the Social Democrats that were particularly vocal about rapprochement with Russia. Led by Economics Minister Gabriel, the SPD is Merkel’s junior coalition partner. While Steinmeier, also a senior SPD member, has never explicitly demanded the easing of sanctions, he has long supported Russia’s return to the G-7. Merkel, by contrast, had always maintained a hard line. Now, though, the Chancellery also appears to be changing course.

[..] more and more EU member states have begun questioning the strict penalty regime, particularly given that it hasn’t always been the Russians who have blocked the Minsk process. Despite Tusk’s apparent optimism, indications are mounting that getting all 28 EU members to approve the extension of the sanctions at the end of June might not be quite so simple. Berlin has received calls from concerned government officials whose governments have become increasingly skeptical of the penalties against Russia but have thus far declined to take a public stance against them. Members of some governments, though, have very clearly indicated that they are not interested in extending the sanctions in their current stringent form. Austrian Vice Chancellor Reinhold Mitterlehner is among the skeptics as is French Economics Minister Emmanuel Macron. So too are officials from Italy, Spain, Greece and Portugal.

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Time for the death penalty?! Time to put our armies to good use?

Elephants In Tanzania Reserve Could Be Wiped Out By 2022 (AFP)

Elephants in Tanzania’s sprawling Selous Game Reserve could be wiped out within six years if poaching continues at current levels, the World Wildlife Fund warned. Tanzania’s largest nature reserve was in the 1970s home to 110,000 elephants, but today only 15,000 remain and they are threatened by “industrial-scale poaching”. The Selous “could see its elephant population decimated by 2022 if urgent measures are not taken,” the WWF said. More than 30,000 African elephants are killed by poachers every year to supply an illegal trade controlled by criminal gangs that feeds demand in the Far East. Tanzania is among the worst-affected countries with a recent census saying the country’s elephant population fell by 60% in the five years to 2014.

The Selous reserve is a tourist draw contributing an estimated $6 million (5 million euros) a year to Tanzania’s economy, according to a study commissioned by WWF and carried out by advisory firm Dalberg. It is named after Frederick Selous, a British explorer, hunter and real-life inspiration for the H. Rider Haggard character Allan Quatermain in King Solomon’s Mines. “By early 2022 we could see the last of Selous’ elephants gunned down by heavily armed and well trained criminal networks,” the report said. The 55,000-square kilometre (21,000-square mile) reserve in southern Tanzania was named a World Heritage Site by UNESCO in 1982. But it was put on a watch list in 2014 as poaching spiked, with six elephants killed every day and industrial activities including oil and gas exploration, as well as mining, threatening the delicate environment.

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The sadness just intensifies.

Mediterranean Death Toll Soars In First 5 Months Of 2016 (UNHCR)

At least 880 people are believed to have drowned last week in a spate of shipwrecks and boat capsizings on the Mediterranean, the UN Refugee Agency said today. “For so many deaths to have occurred just in a matter of days and months is shocking and shows just how truly perilous these journeys are,” said UN High Commissioner for Refugees Filippo Grandi. UNHCR told a press briefing in Geneva that the latest figures were arrived at following new information received through interviews with survivors brought ashore in Italy.

“As well as three shipwrecks that were known to us as of Sunday, we have received information from people who landed in Augusta over the weekend that 47 people were missing after a raft carrying 125 people from Libya deflated,” UNHCR spokesperson William Spindler detailed. He added that eight others were reported separately to have been lost overboard from another boat, and four deaths were reported after fire on board another. “Thus far 2016 is proving to be particularly deadly. Some 2,510 lives have been lost so far compared to 1,855 in the same period in 2015 and 57 in the first five months of 2014,” Spindler added.

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“Everything started after the EU agreement,” he said. “These people are no longer refugees to them [the authorities]. They are prisoners and are being detained. But they have left the humanitarian aspect out of the story.”

Frontex Denies, Prevents Help To Refugees: Witnesses (MEE)

Frontex denied aid to refugees including a baby and kept them floating in the sea off Greece for nearly two hours, according to aid workers. Eyewitnesses told MEE that Frontex officers prevented aid workers helping 50 people as they landed on the northern shore of the Greek island of Lesbos early on Monday. Their tactic was to take them directly into detention “without any aid, even the injured,” one aid worker said. Witnesses also told MEE that officers from the Maltese branch of the European border control police prevented a doctor tending to a baby that was “unresponsive”. In a written statement to MEE, Frontex said the crew on the Maltese ship had followed a Hellenic Coast Guard officer’s instructions and that none of the volunteers identified themselves as a doctor.

The reports come as the UN says that more than 2,500 people have died trying to make the perilous journey across the Mediterranean to Europe so far in 2016, a sharp jump from the same period last year. In the past week alone, at least 880 people are believed to have died in a series of shipwrecks – but thousands of people have also been rescued in the last seven days, with some 90 rescue operations launched. Frontex, supported by a series of national fleets and coast guards as well as several NGOs and some private volunteers, is charged with carrying out rescue operations in the Mediterranean. However, witnesses told MEE that the boat crammed with refugees was made to float out at sea until Frontex ground units came to take the passengers away in buses, after the Greek coastguard granted permission for the landing at the fishing hamlet of Skala Skiaminias on Lesbos’s north coast.

Esther Camps, from Spanish NGO Proactiva, which provides aid and rescue operations at sea, was at the scene. She said the incident took place at around 01:00 on Monday morning – the arrivals, she said, included around 10 children, as well as women who were crying out for help. “We were told to do nothing and to ‘stay away’,” she told MEE. “As they [the refugees and migrants] were disembarking, we saw there was a baby that was not making any noise. One of the officers said the baby was ‘fine’ and kept us away. We said, ‘how do you know it is OK? You are not doctors.'” Camps, who has been working with Proactiva since December, said that babies normally cry when they are brought ashore, but that in this case the child was not making any noise. MEE understands that a doctor from the aid organisation Waha was also at the scene but was denied access.


Handout photo released as courtesy by German humanitarian NGO Sea-Watch shows a crew member holding a drowned baby as dead bodies were recovered after a wooden boat transporting migrants capsized off the Libyan coast on 27 May, 2016 (AFP)

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May 312016
 
 May 31, 2016  Posted by at 9:14 am Finance Tagged with: , , , , , , ,  6 Responses »


Jack Delano Long stairway in mill district of Pittsburgh, Pennsylvania 1940

Mizuho Chief: Tax Delay Means Abenomics Has Failed (WSJ)
One-Minute Plunge Sends Chinese Stock Futures Down by 10% Limit (BBG)
The Big Short Is Back in Chinese Stocks (BBG)
You’re Witnessing The Death Of Neoliberalism – From Within (G.)
Australia’s Big Four Banks Are Much More Vulnerable Than They Appear (Das)
Ceta: The Trade Deal That’s Already Signed (G.)
Britain Is ‘World’s Most Corrupt Country’, Says Italian Mafia Expert (ES)
The Untold Story Behind Saudi Arabia’s 41-Year US Debt Secret (BBG)
Eric Holder Says Edward Snowden Performed A ‘Public Service’ (CNN)
Vague Promises of Debt Relief for Greece (NY Times Ed.)
Glitch In Greek Bailout Talks Fuels Fears Of Delay (Kath.)
German Unemployment Rate Falls to Record Low (BBG)
Majority Of Athens Homeless Ended Up On Street In Past 5 Years (Kath.)
More Than 45 Million Trapped In Modern Slavery (AFP)

Damned if you do, doomed if you don’t.

Mizuho Chief: Tax Delay Means Abenomics Has Failed (WSJ)

The chief of Mizuho Financial Group said Japan risks a credit-rating downgrade if Prime Minister Shinzo Abe delays a scheduled sales-tax increase without explaining how the government plans to cut its deficit. Yasuhiro Sato, president of Japan’s second-largest bank by assets, said Mr. Abe’s framing of such a decision would determine whether it sparked concerns about the government’s credibility regarding its plans for fiscal consolidation. “The worst scenario is [the government] will just announce a delay in the tax increase. That could send a message that Abenomics has failed or Japan is heading for a fiscal danger zone and then it will harm Japanese government bonds’ credit ratings,” Mr. Sato said in an interview, referring to the prime minister’s growth program.

Mr. Abe acknowledged for the first time Friday that he was considering delaying an increase in the sales tax to 10% from 8% scheduled to take effect in April next year. He said he would decide before an upper house election to be held in July, but Japanese media have reported that a decision could come this week. Mr. Abe has delayed the tax increase once, after the rise to 8% in April 2014 derailed an economic recovery. Consumer spending has yet to fully rebound, and some economists say the prospect of another tax increase next year is already weighing on spending. Mr. Sato acknowledged that raising the tax again would pose a risk to Japan’s economy. “There will be a risk in either case of raising the tax or not, so as long as the government demonstrates a clear road map for fiscal reconstruction, Japanese credibility likely won’t be hurt so much,” he said.

Some bankers say Japan could damage its international credibility if it fails to raise taxes on schedule. The tax increases are part of long-standing efforts to reach a primary government surplus by 2020. A primary surplus is a balanced budget excluding interest payments on government debt. Japan’s government debt is among the largest in the world relative to the size of its economy. Moody’s Investors Service said in a March report, “Postponing the next [sales-tax] increase regardless of the reason would pose a big fiscal burden for Japan.”

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Last year, “Volumes shrank by more than 90% from their peak”. But there’s simply money in shorting China; you can’t stop that.

One-Minute Plunge Sends Chinese Stock Futures Down by 10% Limit (BBG)

Chinese stock-index futures plunged by the daily limit before snapping back in less than a minute, the second sudden swing to rattle traders this month. Contracts on the CSI 300 Index dropped as much as 10% at 10:42 a.m. local time, recovering almost all of the losses in the same minute. More than 1,500 June contracts changed hands in that period, the most all day, according to data compiled by Bloomberg. The China Financial Futures Exchange is investigating the tumble, said people familiar with the matter, who asked not to be named because they aren’t authorized to speak publicly. The swing follows a similarly unexplained drop in Hang Seng China Enterprises Index futures in Hong Kong on May 16, a move that heightened anxiety among investors facing slower Chinese economic growth and a weakening yuan.

Volume in China’s stock-index futures market, which was the world’s most active as recently as July, has all but dried up after authorities clamped down on what they deemed excessive speculation during the nation’s $5 trillion equity crash last summer. Tuesday’s volatility had little impact on the underlying CSI 300, which rose 3%. “Liquidity in the market is really thin at the moment,” Fang Shisheng at Orient Securities said by phone. “So the market will very likely see big swings if a big order comes in. The order looks like it’s from a hedger.” Chinese policy makers restricted activity in the futures market last summer because selling the contracts is one of the easiest ways for investors to make large wagers against stocks. Volumes shrank by more than 90% from their peak after officials raised margin requirements, tightened position limits and started a police probe into bearish wagers.

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Xi Jinping is one nervous man right now.

The Big Short Is Back in Chinese Stocks (BBG)

Chinese equities are once again in the cross hairs of short sellers. Short interest in one of the largest Hong Kong exchange-traded funds tracking domestic Chinese stocks has surged fivefold this month to its highest level in a year, according to data compiled by Markit and Bloomberg. The last time bearish bets were so elevated, such pessimism proved well-founded as China’s bull market turned into a $5 trillion rout. While trading in the Shanghai Composite has become subdued this month amid suspected state intervention, pessimists are betting that equities face renewed selling amid a slumping yuan. The Chinese currency is heading for its biggest monthly loss since last year’s devaluation as the nation’s economic outlook worsens and the Fed prepares to raise borrowing costs, driving a rally in the dollar.

“Some macro funds are seeking opportunities to short index futures to play the currency movement,” said Wenjie Lu at UBS. “A higher chance of a Fed rate hike means there’s pressure for the yuan to soften.” Short interest in the CSOP FTSE China A50 ETF climbed to 6.1% on May 25, the highest level since April 2015, two months before Chinese equities peaked, and up from 1.3% at the end of last month. Bearish bets in the U.S. traded iShares China Large-Cap ETF jumped to a two-year high of 18% of shares outstanding on the same day, up from 3% a month ago. Even as Chinese equities rallied on Tuesday, traders were rattled by a sudden plunge in index futures. Contracts on the CSI 300 Index dropped as much as 10% at around 10:42 a.m. local time, recovering almost all of the losses in the same minute. The move had little effect on the underlying stock gauge, which rose 2.6% at the break.

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I think there’s more to it than that.

You’re Witnessing The Death Of Neoliberalism – From Within (G.)

You hear it when the Bank of England’s Mark Carney sounds the alarm about “a low-growth, low-inflation, low-interest-rate equilibrium”. Or when the Bank of International Settlements, the central bank’s central bank, warns that “the global economy seems unable to return to sustainable and balanced growth”. And you saw it most clearly last Thursday from the IMF. What makes the fund’s intervention so remarkable is not what is being said – but who is saying it and just how bluntly. In the IMF’s flagship publication, three of its top economists have written an essay titled “Neoliberalism: Oversold?”. The very headline delivers a jolt. For so long mainstream economists and policymakers have denied the very existence of such a thing as neoliberalism, dismissing it as an insult invented by gap-toothed malcontents who understand neither economics nor capitalism.

Now here comes the IMF, describing how a “neoliberal agenda” has spread across the globe in the past 30 years. What they mean is that more and more states have remade their social and political institutions into pale copies of the market. Two British examples, suggests Will Davies – author of the Limits of Neoliberalism – would be the NHS and universities “where classrooms are being transformed into supermarkets”. In this way, the public sector is replaced by private companies, and democracy is supplanted by mere competition. The results, the IMF researchers concede, have been terrible. Neoliberalism hasn’t delivered economic growth – it has only made a few people a lot better off. It causes epic crashes that leave behind human wreckage and cost billions to clean up, a finding with which most residents of food bank Britain would agree.

And while George Osborne might justify austerity as “fixing the roof while the sun is shining”, the fund team defines it as “curbing the size of the state … another aspect of the neoliberal agenda”. And, they say, its costs “could be large – much larger than the benefit”. Two things need to be borne in mind here. First, this study comes from the IMF’s research division – not from those staffers who fly into bankrupt countries, haggle over loan terms with cash-strapped governments and administer the fiscal waterboarding. Since 2008, a big gap has opened up between what the IMF thinks and what it does. Second, while the researchers go much further than fund watchers might have believed, they leave in some all-important get-out clauses.

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You kidding me? They’re overloaded to their necks in overvalued property loans.

Australia’s Big Four Banks Are Much More Vulnerable Than They Appear (Das)

Today they face little competition in their home market and have benefited tremendously from Australia’s strong growth, underpinned by China’s seemingly insatiable demand for the country’s gas, coal, iron ore and other raw materials. During the 2012 European debt crisis, Australia’s banks were worth more than all of Europe’s. But Australian financial institutions have made the same fundamental mistake the rest of the country has, assuming that growth based on “houses and holes” – rising property prices and resources buried underground – can continue indefinitely. In fact, despite a recent rebound in Chinese demand, commodities prices look set to remain weak for the foreseeable future. Banks’ exposure to the slowing natural resources sector has reached nearly $70 billion in loans outstanding – worryingly large relative to their capital resources.

If anything, their exposure to the property sector is even more dangerous. Mortgages make up a much bigger proportion of bank portfolios than before – more than half, double the level in the 1990s. And they’re riskier than they used to be: many loans are interest-only, while around 80% have variable rates. With a downturn likely – everything from price-to-income to price-to-rent ratios suggests houses are massively overvalued – losses are likely to rise, especially if economy activity weakens. Australian banks are also more vulnerable to outside shocks than they may first appear. Their loan-to-deposit ratio is about 110%. Domestic deposits fund only around 60% of bank assets; the rest of their financing has to come from overseas. While that hasn’t been a problem recently, Australia’s external position is deteriorating.

The current account deficit is expected to climb to 4.75% in the year ending June 30. Weak terms of trade, a rising budget deficit, slower growth and a falling currency are likely to drive up the cost of funds. If Australia’s economy or the financial sector’s performance falters, or international markets are disrupted, banks’ access to external funds could be threatened.

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“..only 18% of Americans and 17% of Germans support TTIP..”

Ceta: The Trade Deal That’s Already Signed (G.)

The US-Europe deal TTIP (the Transatlantic Trade and Investment Partnership) is the best known of these so-called “new generation” trade deals and has inspired a movement. More than 3 million Europeans have signed Europe’s biggest petition to oppose TTIP, while 250,000 Germans took to the streets of Berlin last autumn to try to bring this deal down. A new opinion poll shows only 18% of Americans and 17% of Germans support TTIP, down from 53% and 55% just two years ago. But TTIP is not alone. Its smaller sister deal between the EU and Canada is called Ceta (the Comprehensive Economic and Trade Agreement). Ceta is just as dangerous as TTIP; indeed it’s in the vanguard of TTIP-style deals, because it’s already been signed by the European commission and the Canadian government. It now awaits ratification over the next 12 months.

The one positive thing about Ceta is that it has already been signed and that means that we’re allowed to see it. Its 1,500 pages show us that it’s a threat to not only our food standards, but also the battle against climate change, our ability to regulate big banks to prevent another crash and our power to renationalise industries. Like the US deal, Ceta contains a new legal system, open only to foreign corporations and investors. Should the British government make a decision, say, to outlaw dangerous chemicals, improve food safety or put cigarettes in plain packaging, a Canadian company can sue the British government for “unfairness”. And by unfairness this simply means they can’t make as much profit as they expected. The “trial” would be held as a special tribunal, overseen by corporate lawyers.

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Would anyone doubt it?

Britain Is ‘World’s Most Corrupt Country’, Says Italian Mafia Expert (ES)

Britain has been described as the most corrupt country in the world, according to a journalist and expert on the Italian Mafia. Roberto Saviano, who wrote best-selling exposés Gomorrah and ZeroZeroZero, made the claim at the Hay Literary Festival. The 36-year-old has been living under police protection for 10 years since revelations were published about members of the Camorra, a Neapolitan branch of the mafia. Mr Saviano told the audience at Hay-on-Wye: “If I asked you what is the most corrupt place on Earth you might tell me well it’s Afghanistan, maybe Greece, Nigeria, the South of Italy and I will tell you it’s the UK. “It’s not the bureaucracy, it’s not the police, it’s not the politics but what is corrupt is the financial capital. 90% of the owners of capital in London have their headquarters offshore.

“Jersey and the Cayman’s are the access gates to criminal capital in Europe and the UK is the country that allows it. “That is why it is important why it is so crucial for me to be here today and to talk to you because I want to tell you, this is about you, this is about your life, this is about your government.” David Cameron came under pressure for the UK to reform offshore tax havens operating on British overseas territories at an anti-corruption summit earlier this month. Mr Saviano also weighed in on the EU referendum debate, warning a vote to leave the union would see Britain even more exposed to organised crime. He added: “Leaving the EU means allowing this to take place. It means allowing the Qatari societies, the Mexican cartels, the Russian Mafia to gain even more power and HSBC has paid £2 billion in fines to the US government, because it confessed that it had laundered money coming from the cartels and the Iranian companies. “We have proof, we have evidence.”

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How power rules.

The Untold Story Behind Saudi Arabia’s 41-Year US Debt Secret (BBG)

Failure was not an option. It was July 1974. A steady predawn drizzle had given way to overcast skies when William Simon, newly appointed U.S. Treasury secretary, and his deputy, Gerry Parsky, stepped onto an 8 a.m. flight from Andrews Air Force Base. On board, the mood was tense. That year, the oil crisis had hit home. An embargo by OPEC’s Arab nations—payback for U.S. military aid to the Israelis during the Yom Kippur War—quadrupled oil prices. Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin. Officially, Simon’s two-week trip was billed as a tour of economic diplomacy across Europe and the Middle East, full of the customary meet-and-greets and evening banquets.

But the real mission, kept in strict confidence within President Richard Nixon’s inner circle, would take place during a four-day layover in the coastal city of Jeddah, Saudi Arabia. The goal: neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth. And according to Parsky, Nixon made clear there was simply no coming back empty-handed. Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world. It “wasn’t a question of whether it could be done or it couldn’t be done,” said Parsky, 73, one of the few officials with Simon during the Saudi talks.

At first blush, Simon, who had just done a stint as Nixon’s energy czar, seemed ill-suited for such delicate diplomacy. Before being tapped by Nixon, the chain-smoking New Jersey native ran the vaunted Treasuries desk at Salomon Brothers. To career bureaucrats, the brash Wall Street bond trader—who once compared himself to Genghis Khan—had a temper and an outsize ego that was painfully out of step in Washington. Just a week before setting foot in Saudi Arabia, Simon publicly lambasted the Shah of Iran, a close regional ally at the time, calling him a “nut.” But Simon, better than anyone else, understood the appeal of U.S. government debt and how to sell the Saudis on the idea that America was the safest place to park their petrodollars.

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Inappropriate, illegal, and a public service, all at the same time.

Eric Holder Says Edward Snowden Performed A ‘Public Service’ (CNN)

Former U.S. Attorney General Eric Holder says Edward Snowden performed a “public service” by triggering a debate over surveillance techniques, but still must pay a penalty for illegally leaking a trove of classified intelligence documents. “We can certainly argue about the way in which Snowden did what he did, but I think that he actually performed a public service by raising the debate that we engaged in and by the changes that we made,” Holder told David Axelrod on “The Axe Files,” a podcast produced by CNN and the University of Chicago Institute of Politics. “Now I would say that doing what he did – and the way he did it – was inappropriate and illegal,” Holder added. Holder said Snowden jeopardized America’s security interests by leaking classified information while working as a contractor for the National Security Agency in 2013.

“He harmed American interests,” said Holder, who was at the helm of the Justice Department when Snowden leaked U.S. surveillance secrets. “I know there are ways in which certain of our agents were put at risk, relationships with other countries were harmed, our ability to keep the American people safe was compromised. There were all kinds of re-dos that had to be put in place as a result of what he did, and while those things were being done we were blind in certain really critical areas. So what he did was not without consequence.” Snowden, who has spent the last few years in exile in Russia, should return to the U.S. to deal with the consequences, Holder noted. “I think that he’s got to make a decision. He’s broken the law in my view. He needs to get lawyers, come on back, and decide, see what he wants to do: Go to trial, try to cut a deal. I think there has to be a consequence for what he has done.”

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Times editors’ curious timing.

Vague Promises of Debt Relief for Greece (NY Times Ed.)

European leaders congratulated themselves last week for reaching an agreement to provide more loans to Greece and eventually ease the terms of the country’s huge debt. But there is little to celebrate. Greece is bankrupt in all but name. The country has a debt of more than €300 billion, or about 180% of its GDP, a sum it cannot hope to repay in full. Most of that money is owed to Germany, France, Italy and other countries in the eurozone. After an 11-hour meeting last week, the eurozone finance ministers said that they would lend another €7.5 billion to Greece next month to help it pay off debt and grant it some relief, possibly including lower interest rates and extended payment periods, but not until mid-2018.

The reality is that Greece can’t be squeezed any harder. But the finance ministers are seeking still more spending cuts and increased taxes. They want to see a budget surplus of 3.5% of GDP before interest payments by 2018. A stable and fast-growing country might be able to hit that target, but it is preposterous to expect that from Greece. The IMF wants to see a more realistic surplus of 1.5%. Delaying meaningful debt relief until 2018 will further harm the struggling Greek economy. The Greek unemployment rate was 24.4% in January, and Greece’s economy shrunk in the first three months of the year. The I.M.F., which has also lent Greece money, recently estimated that at its current trajectory, the country’s debt would eventually grow to 250% of GDP.

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Forcing Greece into foolish measures: “..Schaeuble described the decision to raise value-added tax in Greece as “economic foolishness” but noted that Athens was obliged to take that route due to a revenue shortfall.”

Glitch In Greek Bailout Talks Fuels Fears Of Delay (Kath.)

There was fresh concern on Monday that there could be further delays in the disbursement of much-need bailout money to Greece owing to a disagreement between Athens and its creditors, who have demanded changes to prior actions passed in Parliament earlier this month. EU officials on Monday appeared to dismiss Greece’s refusal to implement some of these changes, saying that these are issues that have already been agreed with the Greek government. The country’s lenders had given the green light for the disbursement of a tranche of 10.3 billion euros last week, on the condition the government made amendments to recent legislation it passed on pension, bad loans and privatizations.

However, Finance Minister Euclid Tsakalotos had informed the European Commission representative and the IMF in a letter last week that their demands could not be met, neither could Athens fulfill the demands enshrined in the bailout deal signed last summer to privatize ADMIE, the country’s grid operator, and to freeze the wages of essential services, like those of the coast guard and police. Greece desperately needs the new bailout money to pay state arrears as well as debt repayments to the IMF and European Central Bank in the coming weeks. There were reports on Monday that the government is planning to submit its own amendments on Wednesday to Parliament. If the disagreement between Greece and its creditors persists, then it is likely it will be discussed at the Euro Working Group on Thursday.

In comments on Monday, German Finance Minister Wolfgang Schaeuble described the decision to raise value-added tax in Greece as “economic foolishness” but noted that Athens was obliged to take that route due to a revenue shortfall. “This is why Greece needs an effective public administration,” Schaeuble told a conference on fiscal sustainability, observing that Greek tax collection must be improved to bring in the higher revenues that are being targeted.

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Germany has exported its unemployment to Greece and Spain.

German Unemployment Rate Falls to Record Low (BBG)

German unemployment declined more than economists estimated, pushing the jobless rate to the lowest level since reunification. The number of people out of work fell by a seasonally adjusted 11,000 to 2.695 million in May, data from the Federal Labor Agency in Nuremberg showed on Tuesday. The median estimate in a Bloomberg survey was for a decline of 5,000. The jobless rate dropped to 6.1 percent. The report comes two days before ECB officials convene in Vienna to set monetary policy and assess whether they’ve done enough to sustain an economic recovery in the 19-nation euro region.

The ECB is expected to keep its stimulus plan unchanged after President Mario Draghi announced an expansion of quantitative easing by a third to €80 billion in March and cut the deposit rate further below zero. Unemployment dropped by 8,000 in western Germany and declined by 3,000 in the eastern part of the country, the report showed. Growth momentum in Europe’s largest economy remains strong after gross domestic product expanded at the fastest pace in two years in the first quarter. German business sentiment rose to the highest level in five months in May and consumer prices unexpectedly halted their decline. The Bundesbank predicts the economy will retain its underlying strength, even though expansion will probably slow somewhat this quarter.

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Obviously not a surprise for me, or Automatic Earth readers. And lest we forget: Norway does a lot of good in silence. But more austerity is definitely not going to fix anything at all.

Majority Of Athens Homeless Ended Up On Street In Past 5 Years (Kath.)

71% of the Greek capital’s homeless population has ended up on the streets in the last five years and 21.7% in the last year alone, a study by the City of Athens’s Homeless Shelter (KYADA), funded by the Norwegian government and other European countries, has found. According to the study, which was conducted as part of the “Fighting Poverty and Social Exclusion” program and whose findings were presented by Athens Mayor Giorgos Kaminis on Monday evening, 62% of the capital’s homeless are Greeks, the overwhelming majority (85.4%) are men and most (57%) are aged between 35-55. Of the 451 respondents questioned by KYADA workers from March 2015 until the same month this year, 47% said they ended up on the street after losing their job and 29% said they do not want to move to a shelter or other organized facility.

Less than half of the respondents (41.2%) admitted to using drugs, 7.3% to alcohol and 2% to both. Kaminis also said that in the one-year period, the solidarity program helped distribute 46,156 supermarket food coupons worth around 1.85 million euros to nearly 9,000 beneficiaries in over 3,700 families. “Through its social structures and strong alliances with agencies, partners and simple citizens, the City of Athens help give support to more than 25,000 residents,” Kaminis said at the presentation, which was also attended by Norwegian Ambassador to Athens Jorn Eugene Gjelstad.

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Who we are. Not including debt slaves.

More Than 45 Million Trapped In Modern Slavery (AFP)

More than 45 million men, women and children globally are trapped in modern slavery, far more than previously thought, with two-thirds in the Asia-Pacific, a study showed Tuesday. The details were revealed in the 2016 Global Slavery Index, a research report by the Walk Free Foundation, an initiative set up by Australian billionaire mining magnate and philanthropist Andrew Forrest in 2012 to draw attention to the issue. It compiled information from 167 countries with 42,000 interviews in 53 languages to determine the prevalence of the issue and government responses. It suggested that there were 28% more slaves than estimated two years ago, a revision reached through better data collection and research methods.

The report said India had the highest number of people trapped in slavery at 18.35 million, while North Korea had the highest incidence (4.37% of the population) and the weakest government response. Modern slavery refers to situations of exploitation that a person cannot leave because of threats, violence, coercion, abuse of power or deception. They may be held in debt bondage on fishing boats, against their will as domestic servants or trapped in brothels. Some 124 countries have criminalised human trafficking in line with the UN Trafficking Protocol and 96 have developed national action plans to coordinate the government response.

In terms of absolute numbers, Asian countries occupy the top five for people trapped in slavery. Behind India was China (3.39 million), Pakistan (2.13 million), Bangladesh (1.53 million) and Uzbekistan (1.23 million). As a %age of the population, Uzbekistan (3.97%) and Cambodia (1.65%) trailed North Korea, which the study said was the only nation in the world that has not explicitly criminalised any form of modern slavery.

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