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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May 292016
 
 May 29, 2016  Posted by at 9:12 am Finance Tagged with: , , , , , , , ,  3 Responses »


Matt Black/Magnum Photos USA. El Paso, Texas. 2015

Iceland Puts Freeze on Foreign Investors (WSJ)
Japan’s Abe To Delay Sales Tax Hike Until 2019 (R.)
Fade The Oil Bounce (CNBC)
Trade Deals Going Nowhere (DR)
Schrödinger’s Cat Gets a Playmate (CSM)
The Geography of American Poverty (G.)
Miracle In Athens As Greek Tourism Numbers Keep Growing (Observer)
The EU Has Turned Greece Into a Prison for Refugees (Nation)
13,000 People Rescued In Mediterranean In One Week (G.)
Rescued Migrants Say Ship Sank Off Italy With Hundreds Aboard (R.)

Recovering from debt addiction: “We don’t need the money..”

Iceland Puts Freeze on Foreign Investors (WSJ)

Iceland has spent eight years locking down its financial markets to keep foreign investors in. Now some are complaining the island nation is trying to shove them out. A law passed May 22 by Iceland’s parliament offers the foreign holders of about $2.3 billion worth of krona-denominated government bonds a Hobson’s choice: Sell out in June at a below-market exchange rate, or have the money they receive when their bonds mature impounded indefinitely in low-interest bank accounts. Investors, including Boston-based mutual-fund companies Eaton Vance and Loomis Sayles, a unit of Natixis, don’t want to go. They say they will reject the government’s offer. “We would like to stay invested,” said Patrick Campbell, a global bond analyst at Eaton Vance.

The dispute is the result of a wholesale turnaround in Iceland’s relationship with foreign investors. The country became synonymous with financial alchemy after its banks ballooned by borrowing in bond markets and attracting foreign depositors with high interest rates. That system imploded in 2008 when depositors made a run on the banks just as their bonds fell due, causing the krona to sharply devalue against the euro. Yet a growing number of fund managers are now buying Icelandic government bonds, including those that were marooned on the island when it applied capital controls. The country is now one of the few offering a combination of high interest rates and strong economic growth prospects.

Eaton Vance and another holder of the legacy debt, also called “offshore” debt, hedge fund Autonomy Capital LP, have been courting the government for months to allow them to keep their cash on the island, even offering to swap their holdings into long-term bonds that they would pledge to hold on to.But the country isn’t interested. Instead, officials behind the law say they aim to keep the $16.7 billion economy of the island with a population of 327,386 from being swamped anew by the ebb and flow of offshore funds. “We don’t need the money,” said Mar Gudmundsson, governor of Iceland’s central bank. “These are remnants from the last boom and bust, and we are not going to repeat that mistake.”

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“..Japan “must reignite powerfully the engine of Abenomics”..”

Japan’s Abe To Delay Sales Tax Hike Until 2019 (R.)

Japanese Prime Minister Shinzo Abe plans to delay an increase in sales tax by two and a half years, a government official said on Sunday, as the economy sputters and Abe prepares for a national election. Abe told Finance Minister Taro Aso and the secretary general of his ruling Liberal Democratic Party, Sadakazu Tanigaki, on Saturday of his plan to propose delaying the tax hike for a second time, until October 2019, said the official, who was briefed on the meeting. The prime minister, who has promised to announce steps on Tuesday to spur economic growth and promote structural reform, is also expected to order an extra budget to fund stimulus measures, just two months into the fiscal year and on the heels of a supplementary budget to pay for recovery from recent earthquakes in southern Japan.

After chairing a summit of Group of Seven leaders on Friday, Abe said Japan would mobilize “all policy tools” – including the possibility of delaying the tax hike – to avoid what he called an economic crisis on the scale of the global financial crisis that followed the 2008 Lehman Brothers bankruptcy. “There is a risk of the global economy falling into crisis if appropriate policy responses are not made,” Abe told a news conference after the summit. To play its part, Japan “must reignite powerfully the engine of Abenomics,” he said, referring to his easy-money policies aimed at getting Japan out of two decades of deflation and fitful growth. Abe has long said he would proceed with a plan to raise the tax rate to 10% from 8% next April unless Japan faced a crisis on the magnitude of the Lehman shock.

He said the G7 “shares a strong sense of crisis” about the global outlook, with the most worrisome risk being a global contraction led by a slowdown in emerging economies like China. Other G7 leaders, however, appeared to differ with Abe on the risk of a global crisis, fuelling comment that Abe was using the G7 to justify delaying the painful tax hike.

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Interesting graph.

Fade The Oil Bounce (CNBC)

This week, oil broke above the key $50 level for the first time since October 2015. Yet rather than interpret the move as a sign to buy, one top technician is warning investors not to chase the rally. “I think it’s all about risk-reward and there’s probably no more important chart right now than the oil chart,” Chris Verrone, a technician at Strategas Research Partners, told CNBC’s “Fast Money” this week. According to Verrone, it’s the steepness of the move that bothers him most. In the past 72 days, oil has moved 20% above its 200-day moving average. “It looks excessive to us, we think there’s a higher likelihood you come back and retest the 200 near 39, 40 bucks,” said Verrone.

Also troubling to Verrone is the fact that while crude has surged to new highs, energy stocks and the Mexican peso — both of which are closely tied to oil — have not made new highs in a month. Energy names have fallen since peaking on April 27, whereas crude has surged 12%. Since peaking back April 29, the peso’s gains are still lagging those in oil. They are up 8% and 33%, respectively, this year. Indeed, analysts at Bank of America Merrill Lynch warned this week that continued strength in the dollar could trigger a series of knock-on effects that may push crude off its new highs. The bank said a “black swan event” such as Saudi Arabia removing its currency peg could lead to a collapse of Brent crude to as deep as $25 per barrel, and it expects oil prices to average $46 per barrel this year. On Friday, crude ended the session above $49 per barrel.

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Pretty soon exactly zero people outside of the elite will want these deals.

Trade Deals Going Nowhere (DR)

As the politics of this election year heat up, the chances of Congress debating — let alone passing — either of the White House’s marque trade deals continue to melt away. Oh, there’s plenty of talk about the westward-looking Trans-Pacific Partnership and the Euro-centered Transatlantic Trade and Investment Partnership, or TPP and TTIP, respectively. Most of the yakking, however, flows from Obama Administration officials; nary a word trickles out of Congress. Worse than Capitol Hill silence is the vocal pounding free trade takes when any of Obama’s would-be successors talk trade.

Bernie Sanders, a Democrat by name but socialist by heart, makes it crystal clear that he would rather eat glass than back “free” trade. Hillary Clinton, who three years ago called the TPP “exciting,” “innovative” and “ambitious,” now sees it as an agreement that has “failed to provide the basic safety net support needed” for American workers. Take that as an “innovative” no. And the Donald? He’s against TPP because, as he noted in one Republican debate this spring, “It’s a deal that was designed for China to come in, as they always do, through the back door … ” China, however, is not part of the Trans-Pacific Partnership, so whatever Trump meant must have been more of a “suggestion” than a fact. Whatever.

[..] Big Ag’s big push for the pending trade deals is understandable, given the two changed realities of today’s election year politics. First, even as we lean on the EU to alter its biotech food rules, the U.S. Senate still can’t agree on how to write a biotech food labeling law here. Members know the tide has turned on labeling; 89 out of 100 Americans want it. Majority Republicans, however, don’t and they continue to search for a way to be anti-labeling without becoming anti-incumbents. Second, not one presidential contender sees free trade as a vote-winning issue. Taken together, it’s hard to see how any trade deal goes anywhere this year. After that, you have to take the word of Hillary or Bernie or Donald. Well, maybe not Donald. Or Hillary. Bernie’s solid, though.

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Entanglement is poorly understood, and poorly explained.

Schrödinger’s Cat Gets a Playmate (CSM)

Schrödinger’s cat is something many of us have heard of, but perhaps fewer actually understand. The idea was first dreamed up by an Austrian physicist, Erwin Schrödinger, who wanted to illustrate the mind-bending nature of quantum mechanics. He created a thought experiment in this world to illustrate the point, which would allow a cat to be both dead and alive in a box at the same time. Now, scientists have added another box. And another cat. And the first cat being dead and alive simultaneously in the first box, so this causes the second cat in the second box to also be dead and alive at the same time. Makes perfect quantum sense, right? “It’s understandable that people don’t understand it,” lead author Chen Wang of Yale University told The Washington Post.

“You can’t understand it using common sense. We can’t either.” But here’s the premise: A cat sits in a box. Alongside the cat, there’s poison. That poison will only be released upon the decay of a radioactive subatomic particle. According to quantum mechanics, and specifically the theory of “superposition,” these particles actually exist in all possible states at the same time – until, that is, someone takes a measurement. At that point, the particle falls into a single, known state. So, the particles could be decaying, and not decaying, simultaneously. As a consequence, the poison is being released – and not released. And so the cat is both dead and alive. Until someone opens the box, of course, and is observed. Then, the cat can’t be doing both things at once.

What Dr. Wang and his team have done is to add another dimension: the concept of “entanglement.” This proposes that two objects can be intimately linked, even if billions of light-years separate them, and any change that happens to one will happen to the other instantaneously, a relationship Einstein once described as “spooky action at a distance.” For our cat, this means, quite simply, that there’s a twin, in another box. And everything that happens to one, happens to the other. In Wang’s experiment, there were no cats, just light. He used two aluminum cavities, each with a wave of light bouncing around inside. The researchers induced such a state so that the light existed in two different wavelengths at the same time, in both boxes.

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‘Poverty Is Often Looked At In Isolation, But It Is An American Problem’

The Geography of American Poverty (G.)


USA. Allensworth, California. 2014. Fence post. Allensworth has a population of 471 and 54% live below the poverty level. Matt Black/Magnum Photos

Last summer Matt Black left the Central Valley of California, where he lives, to travel 18,000 miles across the US on a road trip that took him through 30 states and 70 of the poorest towns in America. The startling image of a hand resting on a fence post against a barren backdrop was taken in the small town of Allensworth, California, where 54% of the population of 471 people live below the poverty level. “California always seemed special and unique in terms of how it symbolised promise and progress,” says Black, 45, during a break in shooting landscapes in Idaho, where he’s working on another stage of the same series, Geography of Poverty. “So it seemed somehow symbolic to begin there and travel east, but what has surprised me is the similarities I have encountered as I travelled from one community to another.

All these diverse communities are connected, not least in their powerlessness. In the mainstream media, poverty is often looked at in isolation, but it is an American problem. It seems to me that it goes unreported because it does not fit the way America sees itself.” As if to bear this out, Black tells me that the route he took was mapped out in advance using geotagged photographs found online alongside census information to identify the poorest areas. In each instance, the communities he visited were never more than a two-hour drive apart. “I was able to drive from California to the east coast and back without ever leaving these poor areas.” Black’s striking images are on show in a group exhibition, New Blood, at the Magnum Print Room in London…


USA. El Paso, Texas. 2015. El Paso has a population of 649,121 and 21.5% live below the poverty level. Matt Black/Magnum Photos

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More tourists, more refugees.

Miracle In Athens As Greek Tourism Numbers Keep Growing (Observer)

It’s been a busy winter in downtown Athens, where scaffolding, tarpaulins and dust have been symbols of hope: a mini construction boom heralding a tourist renaissance. Nine hotels are being built or restored around the city centre. Their arrival correlates with the huge upturn in holidaymakers visiting the Greek capital since a low point in late 2008, when Athens erupted into riots after the police killing of a teenage boy. “It’s a miracle, what’s been happening in Athens,” Greece’s tourism chief, Andreas Andreadis, told the Observer. “The tourist industry in Greece grew two to three times faster than in Spain, Portugal, Italy or France last year. This year we expect around 4.5 million visitors in Athens alone.”

For an economy stuck in depression-era recession, dependent on emergency bails and seemingly locked in a perpetual fiscal vice, tourism is vital. A record 23.5 million holidaymakers visited Greece in 2015 – generating €14.2bn in direct receipts, or 24% of GDP. In 2010, at the start of the country’s debt crisis – which has seen it struggle to avert default and remain in the euro – revenues from tourism were €10bn, or 15% of GDP. The Greek Tourism Confederation, Sete, is predicting another bumper season for an industry that has long been the single biggest contributor to the economy and job market. Arrivals could reach 25 million (27.5 million including cruise ship passengers), which is more than twice the country’s population. Economic recovery will depend on the sector to a great degree.

Andreadis said: “If we get 1.5 million more visitors it will produce an additional €800m in direct receipts. Such a positive kick that would come in the third and fourth quarters.” Much of the upsurge is linked to Greece’s safety record. Tourists are staying away from resort in Egypt, Tunisia, Turkey and elsewhere in the wake of high-profile attacks. Countries whose economies are also dependent on holidaymakers have suffered incalculable damage following a severe drop in arrivals. Travel advice from governments and fears of fresh violence are simply keeping tourists away. But other countries’ loss could be Greece’s gain. And it could not come at a better time: tourism provides one in five jobs in Greece, at a time when unemployment in the effectively bankrupt nation has hovered stubbornly around 25%. Youth unemployment stands at an astonishing 67%.

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And Greece has no way of dealing with it.

The EU Has Turned Greece Into a Prison for Refugees (Nation)

In the port-side café before the sun comes up, a group of men are talking. “In the beginning, when there were maybe 40 of them in the boats, all wet, we helped them. Now they’re too many. They steal chickens. They shit in the fields. They threw stones at a woman.” “Do you think it’s chance that they’re all coming here? The NGOs, the whatever they’re called, are making money off it. It’s a plan. A racket.” “Eventually they’ll set off a bomb and sink the island.” “Sink or float, what difference does it make? Are we happy, now we’re floating?” Chios, my grandfather’s island in the northeast Aegean Sea, has become an open-air prison for more than 2,000 refugees. Almost all of them arrived after the March 20 “statement” signed by the EU and Turkey, designed to stop the flow of people from Turkey to the Greek islands and then to mainland Europe.

The statement, which followed the unilateral closure by Central European countries of the western Balkans route, cut time and space like a guillotine, arbitrarily separating those who’d arrived before it from those who landed after, trapping more than 50,000 refugees and migrants in Greece. These late arrivals can’t leave the islands until their cases have been decided by the Greek asylum system, which is overloaded to the point of paralysis. The refugees are supposed to prove not only that they’re at risk in their home country but that they’d be at risk in Turkey, which the EU (but not Greece) considers a “safe third country,” if they want to have their asylum claim heard in Greece. Otherwise, they will be returned to Turkey.

Of the 8,500 women, children, and men who have landed on the islands since the agreement was signed, 400 have been returned so far, some to be detained for weeks without legal representation. About 200 have been granted asylum in Greece. The rest are rotting in overcrowded camps, “hot spots,” and locked detention centers, without information, adequate food, medical care, or security. And the boats from Turkey, though many fewer than before, continue to come in.

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Are we going to keep acting as if this will stop when we simply look away?

13,000 People Rescued In Mediterranean In One Week (G.)

A flotilla of ships saved 668 people from boats in the Mediterranean Sea on Saturday, authorities in Italy said, bringing the week’s total of refugees plucked from the sea to 13,000 people. The rescues by the Italian coast guard and navy ships, aided by Irish and German vessels and humanitarian groups, are the latest by a multinational patrol south of the Italian island of Sicily. Warner spring weather has led to a surge of people attempting the perilous crossing from Africa to Europe. The Irish military said the vessel Le Roisin saved 123 people from a 12m-long (40-ft) rubber dinghy and recovered a male body. A German ship was involved in four separate rescue operations, the Italian coast guard said on Saturday evening.

Meanwhile, with shelters filling up in Sicily, the Italian navy vessel Vega headed toward Reggio Calabria, a southern Italian mainland port, bringing 135 survivors and 45 bodies from a rescue a day earlier. The Vega was due to dock on Sunday. Other survivors who arrived on Saturday in the Sicilian port of Pozzallo told authorities they had witnessed a fishing boat filled with“ hundreds” of people sink on Thursday, a Save The Children spokeswoman, Giovanna Di Benedetto, told The Associated Press by telephone from Sicily. According to survivors, two smugglers’ fishing boats and a dinghy set sail on Wednesday night from Libya’s coast. Di Benedetto said the survivors were among 500 or so aboard the one fishing boat that didn’t sink and the dinghy. “All of this must be verified, of course,” said Di Benedetto, but if the survivors’ accounts bear out, as many as 400 people could have drowned, with only a very few of those on the vessel that sank able to reach the other boats.

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Not an isolated incident.

Rescued Migrants Say Ship Sank Off Italy With Hundreds Aboard (R.)

Migrants rescued from two boats in the Mediterranean this week told humanitarian workers in Italy that they saw another vessel carrying some 400 migrants sink, Save the Children said on Saturday. Three vessels carrying migrants already are confirmed to have sunk or capsized this week. More than 60 bodies are said to have been recovered, including those of three infants, and hundreds are believed to be missing. But the possible sinking of a fourth vessel on Thursday had not been reported, said Giovanna Di Benedetto, spokeswoman for Save the Children in Italy. That ship along with another fishing boat and a rubber boat left Sabratha in Libya late Wednesday night, according to interviews on Saturday with some of the more than 600 survivors from the two other vessels in the Sicilian port of Pozzallo.

They said the rubber boat had its own motor, but the smaller fishing boat, carrying some 400 migrants, did not. It was towed by the larger fishing vessel, which held about 500 others. Eventually the smaller boat began to take on water and, when the captain of the larger boat ordered the tow line cut, sank with most of its passengers, the survivors told Save the Children. Those aboard the other two vessels were not rescued until much later. “There were many women and children on board,” the survivors said, according to Di Benedetto. “We collected testimony from several of those rescued from both (the rubber and fishing) boats. They all say they saw the same thing.”

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May 282016
 


Jack Delano Row houses, Baltimore 1940

Yellen Leans Toward Near-Term Rate Rise Without Detailing Timing (BBG)
Trump: Only ‘Dummies’ Believe Fed’s Unemployment Figure (Crudele)
Japan’s Abe Plans Up to $90.7 Billion Stimulus (BBG)
US Farm Belt Banks Tighten the Buckle (WSJ)
Companies Go on Worldwide Bond Bender With $236 Billion of Sales (BBG)
Clinton Lurks in Shadows When Sparring With Sanders on Banks (BBG)
Toronto’s Red-Hot Market Sends Property Values Soaring (Star)
UK House Prices Compared With Earnings ‘Close To Pre-Crisis Levels’ (G.)
Paris and Berlin Ready ‘Plan B’ For Life After Brexit (FT)
Neoliberalism Increases Inequality and Stunts Economic Growth: IMF (Ind.)
How the Deadly Sin of Avarice Was Rehabilitated as Self Interest (Evon.)
Silencing the United States as It Prepares for War (Pilger)
ISIS Advance Traps 165,000 Syrians at Closed Turkish Border (HRW)

“The economy is continuing to improve..” Nuff said.

Yellen Leans Toward Near-Term Rate Rise Without Detailing Timing (BBG)

Federal Reserve Chair Janet Yellen threw her support behind a growing consensus at the central bank in favor of another interest rate increase soon, while steering clear of specifying the timing of such a move. “It’s appropriate – and I’ve said this in the past – for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said Friday during remarks at Harvard University in Cambridge, Massachusetts. “Probably in the coming months such a move would be appropriate.” Yellen will host her colleagues on the Federal Open Market Committee in Washington June 14-15, when they will contemplate a second interest-rate increase following seven years of near-zero borrowing costs that ended when they hiked in December.

A series of speeches by Fed officials and the release of the minutes to their April policy meeting have heightened investor expectations for another tightening move either next month or in July. “The economy is continuing to improve,” she said in a discussion with Harvard economics professor Gregory Mankiw. She added that she expects “inflation will move up over the next couple of years to our 2% objective,” provided headwinds holding down price pressures, including energy prices and a stronger dollar, stabilize alongside an improving labor market.

Several regional Fed presidents, ranging from Boston Fed President Eric Rosengren to San Francisco’s John Williams, have in recent weeks urged financial market participants to take more seriously the chances of a rate hike in the next two months, pointing to continued signs of steady if unspectacular growth in the U.S. economy and the waning of risks posed by global economic and financial conditions. Yellen suggested that a rate rise would be appropriate if economic growth picks up and the labor market continues to improve – two developments that she said she expects to happen.

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Trump sees a whole other world than Yellen does. Take your pick.

Trump: Only ‘Dummies’ Believe Fed’s Unemployment Figure (Crudele)

Donald Trump, if elected president, will investigate the veracity of US economic statistics produced by Washington — including “the way they are reported.” I caught up with Trump, the presumptive Republican nominee, by phone Tuesday morning, and we had a frank talk about the economy and what is making his campaign tick. “When you look at some of these [economic] numbers they give out and then you go out and see people dying to get a job all over the country, I mean, it’s not jibing with what’s really going on,” Trump said. “The economy is not doing well,” Trump said. “You know, John, I’m getting 20,000 to 25,000 people every time I make a speech, and they are not there just because of the border,” he added, referring to his vow to build a wall between the US and Mexico.

“They are there because — and you know — if you put out a job notice, you’ll get thousands of people showing up to pick up a job,” Trump said. As I’ve mentioned before, I first met Trump decades ago and we used to talk once in a while, but haven’t for many years. Trump says he thinks the US unemployment rate is close to 20% and not the 5% reported by the Labor Department. Anyone who believes the 5% is a “dummy,” he said. The Federal Reserve, of course, always quotes the 5% figure and may raise interest rates based on that belief in the coming months. But even the Fed must not be too certain since it produces its own version of the jobless number, something I’ve already written about. Trump has said in the past that the Fed is also in his cross hairs for an audit. (I would recommend he look into how the Fed interferes with the markets.)

As I’ve been reporting for years, the official unemployment rate is conveniently reduced by a number of factors — each in place during both Democratic and Republican administrations. One of these factors, for example, is out-of-work people who have stopped looking for work for more than a year because they may have grown frustrated by the lack of jobs. They are not counted in the unemployment rate. A less popular unemployment stat, called the U-6, which measures some of these idled souls plus others who are forced to work part-time because they can’t find a 40-hour-a-week gig, stands at 9.7%. The truly frustrated aren’t counted at all.

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It’s stunning, really, that this man still gets to dig his country ever deeper in. He hasn’t delivered on f**k all.

Japan’s Abe Plans Up to $90.7 Billion Stimulus (BBG)

Japan Prime Minister Shinzo Abe plans to propose a fiscal stimulus package of as much as 10 trillion yen ($90.7 billion) after warning Group of Seven leaders that the global economy faces significant risk of another crisis, according to the Nikkei newspaper. Abe will seek a second supplementary budget worth 5 trillion yen to 10 trillion yen after July’s upper-house election, the Nikkei reported Saturday without attribution. Proposals will include accelerating the construction of a magnetic-levitation train line from Nagoya to Osaka, issuing vouchers to boost consumer spending, increasing pay for child-care workers and setting up a scholarship fund, the Nikkei said. “When you want to get the economy going, as long as demand in Asia is weak, you need additional public spending,” Martin Schulz at Fujitsu Research Institute in Tokyo, said by phone.

“Since private spending is still not picking up, the government is simply taking up the slack.” Abe is getting closer to delaying an increase in Japan’s sales tax, saying Friday he’ll make a decision before an upper-house election this summer on whether to go ahead with a planned hike in the levy next April to 10%, from 8%. A formal announcement of a two-year delay is expected Wednesday at the close of the parliamentary session, the Nikkei reported. This would be the second postponement by Abe, as the tax was initially scheduled to be raised in October 2015. An increase in the levy in 2014 pushed Japan into a recession. Abe had previously said the tax hike would be delayed only if there was a shock on the scale of a major earthquake or a corporate collapse like that of Lehman Brothers.

Since the previous tax hike, the economy has swung between contraction and growth, with consumer spending remaining weak. Bank of Japan Governor Haruhiko Kuroda has struggled to spur inflation despite record asset purchases and negative interest rates. Consumer prices excluding fresh food fell 0.3% in April from a year earlier, after dropping by the same amount in March, data released Friday showed. Meanwhile, the yen has surged about 9% versus the dollar this year, threatening profits for exporters including Toyota and weighing on the nation’s stock market. The benchmark Topix index has fallen 13% in 2016.

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Compliments of the globalized and chemicalized food industry.

US Farm Belt Banks Tighten the Buckle (WSJ)

Banks are tightening credit for U.S. farmers amid a rise in delinquencies, forcing some growers to turn to alternative sources of loans. When U.S. agriculture was booming this decade, banks doled out ample credit to strong performers and weaker growers alike, said Michael Swanson, an agricultural economist at Wells Fargo. But with the farm slump moving into its third year, banks have become pickier, requiring some growers to cough up more collateral and denying financing outright to some customers who need it to pay for seeds, crop chemicals and rent. Farmers this year have been grappling with low commodity prices, mounting debt and weaker incomes.


Claude Sem, chief executive of Farm Credit Services of North Dakota, said he asked some farmers to put up more land or machinery to back loans this spring. Collateral requirements could increase for more farmers if crop prices remain low, he said, noting that the cash price for wheat in northern North Dakota recently was about $4.50 a bushel, roughly a dollar below what it costs many farmers to raise the crop. “Below break-even, everything tightens up,” Mr. Sem said, adding that falling land values also have spurred lenders to boost collateral requirements, with cropland prices down as much as 20% in some parts of North Dakota.

With traditional bank loans harder to come by, farmers are turning to sources like CHS Inc., a large farmer-owned cooperative in the U.S., which operates grain elevators and retail stores across the Midwest. CHS said its loans to farmers increased 48% in both number and volume in the 12 months to March and have more than doubled since 2014. It “suggests there are many farmers struggling to obtain financing,” said Randy Nelson, president of the co-op’s financing subsidiary, CHS Capital.

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Lemmings ‘R’ Us.

Companies Go on Worldwide Bond Bender With $236 Billion of Sales (BBG)

A borrowing binge by companies globally is poised to make May one of the the busiest months ever, thanks to investors who continue to devour the relatively juicy yields on corporate debt in a negative-rate world.\ Global issuance of non-financial company debt will be in excess of $236 billion by month-end, according to data compiled by Bloomberg, led by computer maker Dell, which sold $20 billion of bonds to back its takeover of EMC in the year’s second-biggest corporate offering. In Europe, companies sold €48.5 billion ($54.2 billion) making it the busiest May on record. U.S. borrowers including Johnson & Johnson and Kraft Heinz did deals of more than €1 billion.

The surge in issuance is unlikely to satisfy investors who hoped to boost their income by buying company debt when easy-money monetary policies push yields on more than $9 trillion of bonds worldwide below zero. The extra yield investors demand to hold company debt globally relative to safer government bonds remains near year-to-date lows, while concessions on newly issued notes have fallen over the course of the month. “Deals continue to be very much oversubscribed,” said Travis King, head of investment-grade credit at Voya Investment Management, which oversees $203 billion. “It is very difficult to get bonds, especially in the hotter deals.” For investors who placed more than $80 billion of orders for Dell’s bond sale, the problem may get worse next month.

Seasonal declines in issuance, combined with decisions by some companies to accelerate debt sales to May, indicate June volumes in the U.S. will be in the $75 billion to $85 billion range, about half of this month’s supply, according to Bank of America. Vincent Murray, who heads U.S. fixed-income syndicate at Mizuho in New York, said the flow of new deals kept his team kept busy all month. While bond issuance will be less than $100 billion in June, some opportunistic companies may take advantage of low rates in the weeks ahead to issue debt, he said. “The market has remarkably weathered the storm of all this supply,” Murray said. “The fact that supply hasn’t affected the spreads in the marketplace may attract some more issuers that were thinking of passing.”

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“..until the mid-1990s, the sum of runnable liabilities was steady at about 40% of U.S. GDP. That number peaked in early 2008 at 80%, but remains above historical levels, at about 60% of GDP.” And that does not include derivatives.

Clinton Lurks in Shadows When Sparring With Sanders on Banks (BBG)

There is no universal definition for “shadow bank.” At its broadest, it’s any institution that borrows money and invests in financial assets, but is neither a bank, nor regulated like one. This can include insurance companies, hedge funds, private equity firms, and government-sponsored entities such as Fannie Mae and Freddie Mac. In debates, Clinton brings up hedge funds and insurance companies. But her published plan hints at a more precise definition: if it’s runnable, it’s a shadow bank. A research note last year from economists at the Federal Reserve Board in Washington describes “runnables” – short-term funds at financial institutions that can evaporate in a panic. Bank deposits over $250,000 are uninsured, and therefore runnable.

So are shares in money-market mutual funds; they should be considered investments, but in practice are not expected to lose principal. Repurchase agreements, also on the list, allow a borrower to sell a stock or bond, along with a promise to buy it back, often in a day or two. Short-term corporate debt, called “paper,” is similarly runnable. According to the Fed economists’ research, until the mid-1990s, the sum of runnable liabilities was steady at about 40% of U.S. GDP. That number peaked in early 2008 at 80%, but remains above historical levels, at about 60% of GDP. The definitions differ slightly, but this is consistent with patterns measured by Morgan Ricks at the Vanderbilt University Law School in Nashville, and by the the Financial Stability Oversight Council, a group of representatives from several regulators.

Runnables, said Ricks, are the “central unsolved problem of financial reform.” Ricks, who was a senior policy adviser at the Treasury Department in 2009 and 2010, takes a historical view of financial runs. Before the U.S. began insuring bank deposits in 1933, bank runs happened about once a decade. Since then, even during the financial crisis, they’ve been rare. But the risk moved outside the banks. Paul McCulley coined the term “shadow bank” during the Kansas City Fed’s 2007 Jackson Hole conference on economic policy. Then the chief economist of Pimco, McCulley laid out the systemic danger hidden in bank-like firms that relied on uninsured short-term funding. By the end of the next year, Bear Stearns, Lehman Brothers, and Merrill Lynch all collapsed. None of these were banks, but all had seen runs on short-term funding. “These are all species of the same genus,” said Ricks.

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The wholesale destruction of cities and communities is not done.

Toronto’s Red-Hot Market Sends Property Values Soaring (Star)

Toronto’s blistering housing market has prompted a 30% jump in residential property values over the last four years, according to the company that assesses real estate in the province. City homeowners will receive assessment notices — their first since 2012 — from the Municipal Property Assessment Corp. (MPAC) beginning next week showing a 7.5% annual increase in their property values. That’s well above the 4.5% provincial average, but lower than the double-digit increases in some 905-area communities such as Richmond Hill and Markham. The average assessed value for a single-family detached home in Toronto is $770,000, up about $200,000 on average from the last assessment in 2012. Toronto condo values increased 2.9% on average to $363,000, about $35,000 higher than four years ago.

Although assessments are linked to property taxes, homeowners should not panic about a steep rise in taxes, says MPAC. “Just because the assessment does increase doesn’t necessarily mean that this is going to have an impact on their taxes,” said Greg Martino, director of valuation and customer relations MPAC. Municipalities, not MPAC, determine property tax rates. How much an individual owner pays depends on where their assessment ranks compared to the city average. Owners whose properties are assessed above the 7.5% average will pay more. Those with below-average assessments pay less. In Toronto, virtually every property will be assessed at a higher rate than it was in 2012. If two properties were assessed at $500,000 in 2012, each would share an equal portion of the city’s tax burden. But if they are reassessed and one home remains at $500,000 but the other is now valued at $600,000, the higher valued property now carries a bigger tax responsibility.

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Force interest rates up by just 1% and you have mayhem.

UK House Prices Compared With Earnings ‘Close To Pre-Crisis Levels’ (G.)

House prices as a multiple of average earnings are “within a whisker” of record levels set before the financial crisis, a City consultancy has warned. The average UK house price is now 6.1 times average earnings, close to the peak of 6.4 it hit before the downturn, Fathom Consulting said. A rise in interest rates from their current low of 0.5% would lead to a correction, it said, although a return to “normal” rates was some way off. Prices have been pushed up by the availability of cheap home loans, and would need to fall by 40% to bring the ratio back to the pre-2000 average of 3.5 times earnings, it added. During the financial crisis, banks and building societies withdrew from lending, particularly to borrowers with small deposits.

But since then, the government’s funding for lending scheme made loans cheaper for borrowers with substantial equity, and then help to buy brought back 95% mortgages. Lenders are now cutting ratesand easing lending criteria. Fathom said this cheap borrowing had been the biggest driver for demand for homes. “Since 2013, the demand for housing has been turbocharged by chancellor [George] Osborne’s help-to-buy policy and the search for yield – which has resulted in the accumulation of housing wealth as an investment alternative for low-yielding financial assets,” it said. “As a consequence, house prices are now close to an all-time high of more than six times disposable income.”

The firm said couples buying together were increasingly taking on large loans relative to their income. Before the crisis fewer than 30% of joint mortgages were taken at more than 2.75 times income , but now that proportion has risen to more than a third. Fear of destabilising the “fragile arithmetic” that underpinned the housing market meant the Bank of England was unlikely to increase the base rate from its current record low of 0.5% until at least 2018, it said, regardless of the EU referendum result. “If it were to tighten Bank rate, it could trigger a rapid correction in the UK housing market and compound the slowdown in economic growth,” it said.

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“Making Brexit a success will be the end of the EU. It cannot happen.” Brexit, period, will be the end.

Paris and Berlin Ready ‘Plan B’ For Life After Brexit (FT)

European leaders have stepped-up secret discussions about a future union without Britain, drawing-up a “plan-B” focused on closer security and defence co-operation in the event of a UK vote to leave the EU. At several overlapping meetings in recent weeks — in Hanover, Rome and Brussels — EU leaders and their most trusted aides have discussed how to mount a common response to Brexit, which would be the bloc’s biggest setback in its 60-year history. More than a dozen politicians and officials involved at various levels have sketched out to the Financial Times the ideas for concerted action to “double down on the irreversibility of our union” — as well as the many internal divisions that stand in their way.

Rather than attempt a sudden lurch to integrate the eurozone, Chancellor Angela Merkel and President François Hollande are instead eyeing a push to deepen security and defence co-operation, a less contentious initiative that has appeal beyond the 19-member euro area. Foremost is the challenge of managing expected financial and political turmoil in the aftermath of a Brexit vote. Beyond the first statements to reassure markets, officials expect a special gathering of EU leaders — without Britain — to discuss the bloc’s response. A summit of all 28 leaders is already scheduled for June 28-29. “Everybody will say: ‘We’re sorry, this is a historical disaster but now we have to move on.’ And then they will say ‘OK, David [Cameron], goodbye, because now we have to meet as 27 leaders,’” said one senior diplomat intimately involved in the planning.

“That will be rather a decisive moment: will the 27 find the energy, the convergence of views to define a common agenda or whether it will be only the 19?” French officials are wary of Brexit contagion spreading to other member states and the lift it would provide to anti-EU insurgents like the National Front’s Marine Le Pen. They are determined to send a tough and punitive message to show divorce will be costly for Britain. “Playing down or minimising the consequences would put Europe at risk,” said one senior French official. “The principle of consequences is very important — to protect Europe.” Another leading European politician central to the Plan B process said: “Making Brexit a success will be the end of the EU. It cannot happen.”

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There are a few smart people working at the IMF. But they don’t make policy. Neoliberals do.

Neoliberalism Increases Inequality and Stunts Economic Growth: IMF (Ind.)

Key parts of neoliberal economic policy have increased inequality and risk stunting economic growth across the globe, economists at the IMF have warned. Neoliberalism – the dominant economic ideology since the 1980s – tends to advocate a free market approach to policymaking: promoting measures such as privatisation, public spending cuts, and deregulation. It is generally antipathetic to the public sector and believes the private sector should play a greater role in the economy. The ideology was initially championed by Margaret Thatcher and Ronald Reagan in Britain and America, but was ultimately also adopted by centre-left parties worldwide, under “third way” figures like Tony Blair.

The approach has long been the target of criticism from the radical left and parts of the reactionary right – but has been endorsed as common sense by centrist parties across the world for decades. Now a paper published in June 2016’s issue of the IMF’s Finance and Development journal warns that, after nearly forty years of neoliberalism, the approach is jeopardising the future of the world economy. “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardising durable expansion,” the senior IMF economists who drew up the paper said. The authors say that while the liberalisation of trade has helped lift people out of poverty in the developed world and some privatisations have raised efficiency, other aspects of the policy platform had seriously misfired.

“There are aspects of the neoliberal agenda that have not delivered as expected,” they said, focusing specifically on austerity and the freedom of capital to move across borders. “The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries. “The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda. “Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.”

They go on to say that throwing open national borders to multinational corporations has had “uncertain” growth benefits but quite clear costs – due to “increased economic volatility and crisis frequency” which they say is more evident under neoliberalism. On the issue of austerity, the authors say there is strong evidence that there is no reason for countries like Britain to inflict austerity on themselves. “Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand – and thus worsen employment and unemployment,” they say. “In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed.”

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“During the Middle Ages, avarice had been considered to be among the most mortal of the seven deadly sins..”

How the Deadly Sin of Avarice Was Rehabilitated as Self Interest (Evon.)

In the aftermath of the stock market crash of 1987, the New York Times headlined an editorial “Ban Greed? No: Harness It,” It continued: “Perhaps the most important idea here is the need to distinguish between motive and consequence. Derivative securities attract the greedy the way raw meat attracts piranhas. But so what? Private greed can lead to public good. The sensible goal for securities regulation is to channel selfish behavior, not thwart it.” The Times, surely unwittingly, was channeling the 18th century philosopher David Hume: “Political writers have established it as a maxim, that in contriving any system of government . . . every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest. By this interest we must govern him, and, by means of it, make him, notwithstanding his insatiable avarice and ambition, cooperate to public good.”

The idea that base motives could be harnessed for the public good is what I term economic alchemy. And in Hume’s time it was definitely a new way of thinking about how society could be governed. During the Middle Ages, avarice had been considered to be among the most mortal of the seven deadly sins, a view that became more widespread with the expansion of commercial activity after the twelfth century. So it is surprising that self-interest would eventually be accepted a respectable motive, and even more surprising that this change owed little to the rise of economics, at least at first. How this came about, you will see, is a remarkable story, one that is finally running its course in light of mounting evidence not only that people are not really all that knavish, but also that treating citizens as if they were knaves may lead them to act is if they really were knaves! But I am getting ahead of the story.

It all began in the sixteenth century with Niccolò Machiavelli. “Anyone who would found a republic and order its laws” he wrote in his Discourses, “must assume that all men are wicked [and] . . . never act well except through necessity . . . It is said that hunger and poverty make them industrious, laws make them good.” Hume, it seems was channeling Machiavelli! It was the shadow of war and disorder that made self-interest an acceptable basis of good government. During the seventeenth century, wars accounted for a larger share of European mortality than in any century for which we have records, including what Raymond Aron called “the century of total war,” which happily is now finished.

Writing after a decade of warfare between English parliamentarians and royalists, Hobbes (in 1651) sought to determine “the Passions that encline men to Peace” and found them in “Feare of Death; Desire of such things as are necessary to commodious living; and a Hope by their Industry to obtain them.” Knaves might be preferable to saints or at least likely to be more harmless. The year before Adam Smith wrote in his Wealth of Nations (1776) about how the self-interest of the butcher, the brewer, and the baker would put our dinner on the table, James Boswell’s Dr. Johnson gave Homo economicus a different endorsement: “There are few ways in which a man can be more innocently employed than in getting money.”

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“[One] great myth we’re seeing play out is that of Obama as some kind of peaceful guy who’s trying to get rid of nuclear weapons. He’s the biggest nuclear warrior there is. He’s committed us to a ruinous course of spending a trillion dollars on more nuclear weapons. Somehow, people live in this fantasy that because he gives vague news conferences and speeches and feel-good photo-ops that somehow that’s attached to actual policy. It isn’t.”

Silencing the United States as It Prepares for War (Pilger)

Returning to the United States in an election year, I am struck by the silence. I have covered four presidential campaigns, starting with 1968; I was with Robert Kennedy when he was shot and I saw his assassin, preparing to kill him. It was a baptism in the American way, along with the salivating violence of the Chicago police at the Democratic Party’s rigged convention. The great counter revolution had begun. The first to be assassinated that year, Martin Luther King, had dared link the suffering of African-Americans and the people of Vietnam. When Janis Joplin sang, “Freedom’s just another word for nothing left to lose”, she spoke perhaps unconsciously for millions of America’s victims in faraway places.

“We lost 58,000 young soldiers in Vietnam, and they died defending your freedom. Now don’t you forget it.” So said a National Parks Service guide as I filmed last week at the Lincoln Memorial in Washington. He was addressing a school party of young teenagers in bright orange T-shirts. As if by rote, he inverted the truth about Vietnam into an unchallenged lie. The millions of Vietnamese who died and were maimed and poisoned and dispossessed by the American invasion have no historical place in young minds, not to mention the estimated 60,000 veterans who took their own lives. A friend of mine, a marine who became a paraplegic in Vietnam, was often asked, “Which side did you fight on?” A few years ago, I attended a popular exhibition called “The Price of Freedom” at the venerable Smithsonian Institution in Washington.

The lines of ordinary people, mostly children shuffling through a Santa’s grotto of revisionism, were dispensed a variety of lies: the atomic bombing of Hiroshima and Nagasaki saved “a million lives”; Iraq was “liberated [by] air strikes of unprecedented precision”. The theme was unerringly heroic: only Americans pay the price of freedom. The 2016 election campaign is remarkable not only for the rise of Donald Trump and Bernie Sanders but also for the resilience of an enduring silence about a murderous self-bestowed divinity. A third of the members of the United Nations have felt Washington’s boot, overturning governments, subverting democracy, imposing blockades and boycotts. Most of the presidents responsible have been liberal – Truman, Kennedy, Johnson, Carter, Clinton, Obama.

The breathtaking record of perfidy is so mutated in the public mind, wrote the late Harold Pinter, that it “never happened …Nothing ever happened. Even while it was happening it wasn’t happening. It didn’t matter. It was of no interest. It didn’t matter … “. Pinter expressed a mock admiration for what he called “a quite clinical manipulation of power worldwide while masquerading as a force for universal good. It’s a brilliant, even witty, highly successful act of hypnosis.”

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Is Russia the only party to turn to?

ISIS Advance Traps 165,000 Syrians at Closed Turkish Border (HRW)

There are two walls on the Turkey-Syria border. One is manned by Turkish border guards enforcing Turkey’s 15 month-old border closure who, according to witnesses, have at times shot at and assaulted Syrian asylum seekers as they try to reach safety in Turkey – abuses strongly denied by the Turkish government. The other is a wall of silence by the rest of the world, including the United Nations, which has chosen to turn a blind eye to Turkey’s breach of international law which prohibits forcing people back to places, including by rejecting them at the border, where their lives or freedom would be threatened. Both walls are trapping 165,000 displaced Syrians now scattered in overcrowded informal settlements and fields just south of Turkey’s Öncupınar/Bab al-Salameh border crossing and in and around the nearby Syrian town of Azaz.

In April, 30,000 of them fled ISIS advances on about 10 informal displacement camps to the east of Azaz, which came under ISIS attack, and one of which has since been hit by an airstrike that killed at least 20 people and injured at least 37 more. Turkish border guards shot at civilians fleeing ISIS and approaching the border. Now aid agencies operating in the area say that between May 24 and 27, another 45,000 fled a new ISIS assault on the area east of Azaz and are now stuck in and around Azaz too. Aid agencies say there is no question all 165,000 would seek asylum in Turkey if the border were open to them.

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May 232016
 


Harris&Ewing Hancock’s, the Old Curiosity Shop, 1234 Pennsylvania Avenue 1914

Japan April Imports Fall 23.3%, Exports Drop 10.1% (BBG)
Japan May Factory Activity Shrinks Most In Over Three Years (R.)
Investors Check Out of Europe (WSJ)
US Dollar Will Be The Winner When The EU Volcano Erupts (CNBC)
Saudi Financial Crisis ‘Could Leave Oil At $25’ As Bills Get Paid In IOUs (AEP)
The IMF And Calling Berlin’s Bluff Over Greece (Münchau)
Athens Agrees Fiscal Measures In Exchange For Debt Relief Talks (FT)
China Steps Up War On Banks’ Bad Debt (FT)
We MUST Quit The EU, Says Cameron’s Guru (DM)
Support For EU Falls Sharply In Britain’s Corporate Boardrooms (G.)
Swiss To Vote On $2,500 a Month Basic Income (BBG)
Snowden Calls For Whistleblower Shield After Claims By New Pentagon Source (G.)
R.I.P., GOP: How Trump Is Killing the Republican Party (Taibbi)
Turks Won’t Get EU Visa Waiver Before 2017: Bild (R.)
Greek Police Poised To Evacuate Idomeni Refugee Camp (Kath.)

In praise of Abenomics…

Japan April Imports Fall 23.3%, Exports Drop 10.1% (BBG)

Japan’s exports fell for a seventh consecutive month in April as the yen strengthened, underscoring the growing challenges to Prime Minister Shinzo Abe’s efforts to revive economic growth. Overseas shipments declined 10.1% in April from a year earlier, the Ministry of Finance said on Monday. The median estimate of economists surveyed by Bloomberg was for a 9.9% drop. Imports fell 23.3%, leaving a trade surplus of 823.5 billion yen ($7.5 billion), the highest since March 2010. Even after coming off an 18-month high earlier this month, the Japanese currency has gained 9% against the dollar this year, eroding the competitiveness of the nation’s products overseas and hurting the earnings of exporters.

Concern about the impact of the yen was on show over the weekend as Finance Minister Taro Aso and his U.S. counterpart disagreed over the seriousness of recent moves in the foreign-exchange market. “Exports are getting a hit from the yen’s gains and weakness in overseas demand, especially in emerging nations,” said Yuichi Kodama at Meiji Yasuda Life Insurance in Tokyo, who added that last month’s earthquakes in Kumamoto also will likely slow exports. “There’s a high chance that Japan’s economy will return to contraction in the April-June period as domestic consumption and exports look weak.”

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Calling Peter Pan!

Japan May Factory Activity Shrinks Most In Over Three Years (R.)

Japanese manufacturing activity contracted at the fastest pace in more than three years in May as new orders slumped, a preliminary survey showed on Monday, putting fresh pressure on the government and central bank to offer additional economic stimulus. The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 47.6 in May on a seasonally adjusted basis, from a final 48.2 in April. The index remained below the 50 threshold that separates contraction from expansion for the third month and showed that activity shrank at the fastest since December 2012. The index for new orders fell to a preliminary 44.1 from 45.0 in the previous month, also suggesting the fastest decline since December 2012.

The aftermath of earthquakes in southern Japan in April may still be weighing heavily on some producers, a statement from Markit said, while foreign demand also contracted sharply. Japan escaped a technical recession in the first quarter, GDP data showed last week, but economists warned the underlying trend for consumer spending remains weak. There are also concerns that companies have already started to delay business investment due to uncertainty about overseas economies. Speculation is growing that Prime Minister Shinzo Abe will delay a nationwide sales tax hike scheduled for next April to focus on measures that will strengthen domestic demand. Economists also expect the Bank of Japan will ease monetary policy even further by July as a strong yen and still-sluggish economy threaten its ability to meet its ambitious inflation target, a Reuters poll showed.

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“Banks are Europe’s worst-performing sector, having fallen nearly 19%.”

Investors Check Out of Europe (WSJ)

Investors are fleeing Europe. Fund managers are pulling cash out of European equity and debt markets in response to concerns about the continent’s fractious politics, ultralow interest rates and weak banks, and relentless economic malaise. Investors have sold exchange-traded funds tracking European shares for nearly 15 weeks—the longest stretch since 2008—according to UBS. Meanwhile, annual net outflows from eurozone bonds were running at over half a trillion euros as of the end of March, according to a Pictet Wealth Management analysis of data from the ECB. That is happening as investors are turning away from Europe’s growing pool of negative-yielding debt. The money is finding a home in places from U.S. Treasurys to emerging economies, helping to push up prices in those markets.

Just last year, Europe was a top pick by global fund managers as it recovered from the sovereign-debt crisis of 2010 to 2012. The current retreat shows that this rehabilitation has faded, and fast. “It’s a one-way flow out of Europe,” said Ankit Gheedia, equity and derivatives strategist at BNP Paribas SA. “You buy something that doesn’t give you a return, you sell.” Last year, ECB monetary stimulus and a fledgling economic recovery brought investors back to Europe after they fled during the eurozone debt crisis. The Stoxx Europe 600 gained 6.8% in 2015, while the S&P 500 lost almost 1%. Now people are leaving again. In recent weeks, investors have been selling equities around the world over concerns about the global economy. But the selling in Europe has been particularly pronounced.

Funds have sold around $22.6 billion worth of ETFs that track European equity since March, which is equivalent to roughly 9.4% of the total held of these investments, according to Mr. Gheedia. Meanwhile, global fund managers’ allocation to eurozone equities dropped to 17-month lows in May, according to a survey by Bank of America Merrill Lynch. When prospects seemed sunnier last year, a net 55% of fund managers favored the region. This is already taking a toll on European markets. The Stoxx Europe 600 is down nearly 8% this year, compared with a roughly flat S&P 500. Banks are Europe’s worst-performing sector, having fallen nearly 19%.

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And when the China Ponzi bursts.

US Dollar Will Be The Winner When The EU Volcano Erupts (CNBC)

Europe’s apparent inability to secure its monetary union leaves the world without any credible dollar alternatives. Those who were expecting that a legal tender of an economic system nearly matching the size of the American economy would offer an effective instrument of portfolio diversification have to accept a simple reality: The dollar remains an irreplaceable global transactions currency and, by far, the world’s most important reserve asset. The pious hopes of the French President François Mitterrand and the German Chancellor Helmut Kohl that a common currency would bond their countries and the rest of Europe into a peaceful and prosperous union could soon be dashed. Their political offspring has become a symbol of European discord and a cause of seemingly irreconcilable French-German economic and political divisions.

These historical divides are now aggravated by violent street demonstrations and frightening civil war rhetoric in France, where the country’s mainstream politicians are trying to fight off extreme right and left parties, commanding nearly half of the popular vote and demanding an immediate exit from the EU and the euro. Investors would be well advised to take this seriously. Even if relatively moderate French center-right forces were able to keep the anti-EU parties at bay, a long-brewing clash with Germany appears inevitable. For many French politicians of all stripes, Germany has gone too far in bossing the rest of Europe around, and in causing a huge economic, social and political damage to France, Italy, Spain, Portugal and Greece with the imposition of its mean-spirited and misguided fiscal austerity.

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It’s a bout the dollar peg, again. Said ages ago it would be untenable.

Saudi Financial Crisis ‘Could Leave Oil At $25’ As Bills Get Paid In IOUs (AEP)

Saudi Arabia faces a vicious liquidity squeeze as capital continues to leak out the country, with a sharp contraction of the money supply and mounting stress in the banking system. Three-month interbank offered rates in Riyadh have suddenly begun to spiral upwards, reaching the highest since the Lehman crisis in 2008. Reports that the Saudi government is to pay contractors with tradable IOUs show how acute the situation is becoming. The debt-crippled bin Laden group is laying off 50,000 construction workers as austerity bites in earnest. Societe Generale’s currency team has advised clients to short the Saudi riyal, betting that the country will be forced to ditch its long-standing dollar peg, a move that could set off a cut-throat battle for global share in the oil markets.

Francisco Blanch, from Bank of America, said a rupture of the peg is this year’s number one “black swan event” and would cause oil prices to collapse to $25 a barrel. Saudi Arabia’s foreign reserves are still falling by $10bn (£6.9bn) a month, despite a switch to bond sales and syndicated loans to help plug the huge budget deficit. The country’s remaining reserves of $582bn are in theory ample – if they are really liquid – but that is not the immediate issue. The problem for the Saudi central bank (SAMA) is that reserve depletion automatically tightens monetary policy. Bank deposits are contracting. So is the M2 money supply. Domestic bond sales do not help because they crowd out Saudi Arabia’s wafer-thin capital markets and squeeze liquidity. Riyadh now plans a global bond issue.

While crude prices have rallied 80pc to almost $50 a barrel since mid-February, this has not yet been enough to ease Saudi Arabia’s financial crunch. The rebound in crude is increasingly fragile in any case as tough talk from the US Federal Reserve sends the dollar soaring, and Canada prepares to restore 1.2m barrels a day (b/d) of lost output. “We feel that markets have moved too high, too far, too soon. We still face a large inventory overhang and supply outages are reversible,” said BNP Paribas. Total chief Patrick Pouyanne told the French senate last week that prices could deflate as fast as they rose. “The market won’t come back into balance until the end of the year,” he said.

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Germany is blowing up the EU, step by step. There is no other way out of this. Berlin has become the schoolyard bully. And not everyone bends over for the bully.

The IMF And Calling Berlin’s Bluff Over Greece (Münchau)

At one level, the recurring Greek crises fit the idea from Karl Marx of history repeating itself, first as tragedy then as farce. Greece came close to a eurozone exit last summer. While it will probably come close this year, it is unlikely to leave. But prepare for some tense moments in the next few weeks and months as Greece and its creditors struggle to agree the first review of last year’s bailout. The IMF has concluded that Greek public debt, at 180% of GDP is unsustainable; as is the agreed annual primary budget surplus, before interest payments, of 3.5% of GDP. The fund insists on debt relief, but Germany resists. A year ago Angela Merkel and Wolfgang Schäuble, her finance minister, sold the Greek bailout to their party and parliament as a loan only. They argued that once you accept a debt writedown, you turn a loan into a transfer.

And once you accept the principle of a one-off transfer to Greece, you are on a slippery road to what the Germans call a transfer union, one where they pay and others receive. In private, senior German government officials agree that Athens needs debt relief. They are not blind. But they are trapped in the lie that Greece is solvent, which is what their own backbenchers were told. Without that lie, Greece would no longer be a eurozone member. But the lie cannot be sustained. IMF insistence on debt relief is what could expose this lie. Christine Lagarde, managing director, last year set debt relief talks as a condition for the fund’s participation in a bailout. Mr Schäuble reluctantly agreed yet managed to insert the words “if needed”, which give him wriggle room. But Berlin imposed another condition: the IMF must participate in the bailout, too. This is what makes the German position vulnerable.

We know IMF staff are steadfast in their opposition to being involved in a bailout without an agreement on debt relief. The trouble is that the policies are not determined by the staff but by the IMF shareholders. The Europeans and the US are the dominant shareholders so the outcome of this battle will depend to a large extent on the view taken by Washington. To get himself out of a hole, Mr Schäuble recently made a counterproposal: Germany accepts debt talks in principle but only from 2018. The date was chosen with care. It is well after the next federal elections. It is not clear whether he will still be finance minister or indeed in government. I suspect the Christian Democratic Union, his party, will lead the next government; the electoral arithmetic makes other constellations improbable. Nevertheless, he is proposing to commit any successor to this course of action. Such a commitment has no credibility.

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Why Tsipras keeps doing these things is hard to fathom.

Athens Agrees Fiscal Measures In Exchange For Debt Relief Talks (FT)

Alexis Tsipras has defended his leftwing government’s adoption of new fiscal measures in return for talks on debt relief, saying Greece was “turning a page” after an unprecedented six-year recession “Spring may be almost over but we are looking forward to an economic spring and a return to growth this year,” the prime minister told parliament, wrapping up a two-day debate on a €1.8bn package of indirect tax increases. As expected, all 153 legislators from the premier’s Syriza party and its coalition partner, the rightwing Independent Greeks, backed the bill, while 145 opposition deputies voted against. There were two abstentions. The latest measures complete a €5.4bn package of fiscal reforms aimed at ensuring a primary budget surplus, before payments of principal and interest on debt, amounting to 3.5% of national output by 2018.

But the legislation also included a provision for “contingency” measures, including wage and pension cuts, that would take effect automatically if budget targets were derailed next year. An upbeat Mr Tsipras insisted that budget projections would be outperformed, saying: “Greece has shown it keeps its promises..I’m certain [contingency] measures will not have to be put into effect.” A senior Greek official said after the vote he was confident that eurozone finance ministers would unlock up to €11bn from Greece’s €86bn third bailout at a meeting scheduled for Tuesday. The funding, to be disbursed in several tranches linked to implementing the reforms, would enable Athens to meet sovereign debt repayments for the remainder of the year and also channel funds to public services such as the healthcare system.

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This is getting weird. It’s like Beijing is reinventing finance. The government is paying off debt to the shadow banks.

China Steps Up War On Banks’ Bad Debt (FT)

Beijing has stepped up its battle against bad debt in China’s banking system, with a state-led debt-for-equity scheme surging in value by about $100bn in the past two months alone. The government-led programme, which forces banks to write off bad debt in exchange for equity in ailing companies, soared in value to hit more than $220bn by the end of April, up from about $120bn at the start of March, according to data from Wind Information. Industry watchers have fiercely debated how far Beijing will go to recapitalise the financial system, with bad loans taking up an ever higher percentage of banks’ balance sheets — as much as 19% by some estimates. The latest figures for the debt-to-equity swap, and a debt-to-bonds swap initiated last year, show a subtle bailout is already under way.

“One can argue the government-led recapitalisation is already happening in an atypical way and thus reducing the need for recapitalisation in its written sense,” said Liao Qiang at S&P Global Ratings in Beijing. Chinese media reported that up to Rmb4tn ($612bn) had been approved in 2015 for the debt-to-bonds swap, which has seen state-controlled banks trade short-term loans to companies connected to local governments in exchange for bonds with much longer maturities. That programme has been hailed a success in that it relieved the pressure on local governments that were forced to take out bank loans to proceed with public works projects in the absence of municipal bond markets.

The debt-to-equity project has received far less enthusiasm from analysts, who say that coercing banks to become stakeholders in companies that could not pay back loans will further weigh down profits this year. Instead of underpinning stability at banks, Mr Liao says the efforts undermine it. The programmes are just two fronts in Beijing’s battle against bad debt. The state-controlled asset management companies that bailed out the country’s four national commercial banks 15 years ago have become increasingly active over the past two years in buying up portfolios of bad debt. Regional asset managers run by provincial governments are doing the same business on a local level. The government is also reopening the market for securitising bad debt with two deals worth Rmb534m due this month.

The efforts have even gone online, with debt managers hawking off bad loans on China’s biggest online retail site. The average rate of non-performing loans at China’s commercial banks hit an official 1.75% at the end of March, according to the banking regulator. That marks the 11th straight quarter that the government-approved figures have risen. But the official data does not include a much larger stockpile of so-called zombie loans that some analysts say could in future require a more formal bailout for the banks. Francis Cheung, analyst at CLSA, estimates that bad debt accounted for 15-19% of banks’ loan books at the end of last year and that the government may have to add Rmb10.6tn of new capital to the banking system, or 15.6% of GDP.

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“As I say to my American friends who don’t really get what the EU is: ‘All you need to know is that it has three presidents, none of whom is elected.’”

We MUST Quit The EU, Says Cameron’s Guru (DM)

David Cameron’s closest friend in politics today breaks ranks to say Britain must leave the ‘arrogant and unaccountable’ EU. In a shattering blow to the Prime Minister, Steve Hilton claims the UK is ‘literally ungovernable’ as a democracy while it remains in a club that has been ‘corruptly captured’ by a self-serving elite. And in an attack on Project Fear, the former No 10 adviser dismisses claims by Mr Cameron, the IMF and the Bank of England that being in the EU makes us more secure. In an exclusive Daily Mail article, Mr Hilton – who persuaded Mr Cameron to stand for Tory leader – also delivers a devastating assessment of the PM’s referendum deal. He says Mr Cameron made only ‘modest’ demands of Brussels – and that even these were swatted contemptuously aside.

He also warns that Brussels will take revenge on Britain for the referendum if it votes to stay, by imposing fresh diktats. Mr Hilton concludes: ‘A decision to leave the EU is not without risk. But I believe it is the ideal and idealistic choice for our times: taking back power from arrogant, unaccountable, hubristic elites and putting it where it belongs – in people’s hands.’ His declaration for Brexit with exactly a month to go until polling day will send tremors through No 10. Along with Michael Gove, he provided the intellectual heft behind Mr Cameron’s rise to power. Both men now argue that the PM is wrong to urge voters to remain in what Mr Hilton condemns as the ‘grotesquely unaccountable’ Brussels club.

[..] Mr Hilton, who remains close to the Prime Minister, had previously declined to be drawn into what is already a bitter ‘blue on blue’ row. But today he claims the key issue for him is that Britain cannot make its own laws and control its own destiny from inside the EU. Mr Hilton says Brussels directives have crept into every corner of Whitehall and that less than a third of the Government’s workload is the result of trying to fulfil its own promises and policies. The rest is generated either by the ‘anti-market, innovation-stifling’ EU or a civil service dancing to the tune of Brussels, he says. Mr Hilton continues: ‘It’s become so complicated, so secretive, so impenetrable that it’s way beyond the ability of any British government to make it work to our advantage.

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The vote is not done yet.

Support For EU Falls Sharply In Britain’s Corporate Boardrooms (G.)

The number of FTSE 350 company boards that believe EU membership is good for their business has dropped significantly over the past six months, with just over a third now saying the EU has a positive impact. The biannual FT-ICSA boardroom bellwether survey, which canvasses the views of the FTSE 350, reported a substantial fall in the number who believe their company benefits from EU membership to 37%, down from 61% in December 2015. It found many were indifferent to a Brexit, with barely half (49%) of boards having considered the implications of the UK leaving the EU. Approximately 43% said they believe a UK exit from Europe would be potentially damaging. Respondents from the FTSE 100 regarded EU membership more favourably than the 250, with more than twice as many (55%) of FTSE 100 companies believing that EU membership has a positive impact.

This compared with 24% of the FTSE 250. John Longworth, chairman of the Vote Leave business council, said the survey findings showed that the remain camp’s economic argument was failing. “The remain camp’s concerted campaign to do down the economy has failed. In fact it has had the opposite effect as the EU supporters have failed to make a positive case for continuing to hand Brussels more control of our economy, our democracy and our borders. He added: “Business recognises it is possible for Britain to continue trading across Europe, part of the free trade zone that exists from Iceland to Turkey, without handing Brussels £350m a week and EU judges ultimate power over our laws. On 23 June the safe option is to take back control.”

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Switzerland is notoriously expensive to live in.

Swiss To Vote On $2,500 a Month Basic Income (BBG)

The Swiss are discussing paying people $2,500 a month for doing nothing. The country will vote June 5 on whether the government should introduce an unconditional basic income to replace various welfare benefits. Although the initiators of the plan haven’t stipulated how large the payout should be, they’ve suggested the sum of 2,500 francs ($2,500) for an adult and a quarter of that for a child. It sounds good, but — two things. It would barely get you over the poverty line, typically defined as 60 percent of the national median disposable income, in what’s one of the world’s most expensive countries. More importantly, it’s probably not going to happen anyway. Plebiscites are a common part of Switzerland’s direct democracy, with multiple votes every year. The basic income initiative is taking place after the proposal gathered the required 100,000 signatures, though current polls suggest it won’t get any further.

The idea of paying everyone a stipend has also piqued interest in other countries, such as Canada, the Netherlands and Finland, where an initial study began last year. The initiators say the sum they’ve mentioned would allow for a “decent existence.” Still, on an annual basis, it would provide only 30,000 francs — just above the 2014 poverty line of 29,501 francs. Nearly one in eight people in Switzerland were below the level in that year, according to the statistics office. That’s more than in France, Denmark and Norway. Among those over 65, one in five were at risk of being poor. “It’s not like you see abject poverty in Switzerland,” said Andreas Ladner, professor of political science at the University of Lausanne. “But there are a few people who don’t have enough money, and there are some people who work and don’t earn enough.”

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But it won’t materialize.

Snowden Calls For Whistleblower Shield After Claims By New Pentagon Source (G.)

Edward Snowden has called for a complete overhaul of US whistleblower protections after a new source from deep inside the Pentagon came forward with a startling account of how the system became a “trap” for those seeking to expose wrongdoing. The account of John Crane, a former senior Pentagon investigator, appears to undermine Barack Obama, Hillary Clinton and other major establishment figures who argue that there were established routes for Snowden other than leaking to the media. Crane, a longtime assistant inspector general at the Pentagon, has accused his old office of retaliating against a major surveillance whistleblower, Thomas Drake, in an episode that helps explain Snowden’s 2013 National Security Agency disclosures. Not only did Pentagon officials provide Drake’s name to criminal investigators, Crane told the Guardian, they destroyed documents relevant to his defence.

Snowden, responding to Crane’s revelations, said he had tried to raise his concerns with colleagues, supervisors and lawyers and been told by all of them: “You’re playing with fire.” He told the Guardian: “We need iron-clad, enforceable protections for whistleblowers, and we need a public record of success stories. Protect the people who go to members of Congress with oversight roles, and if their efforts lead to a positive change in policy – recognize them for their efforts. There are no incentives for people to stand up against an agency on the wrong side of the law today, and that’s got to change.” Snowden continued: “The sad reality of today’s policies is that going to the inspector general with evidence of truly serious wrongdoing is often a mistake. Going to the press involves serious risks, but at least you’ve got a chance.”

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Excellent Taibbi, once again.

R.I.P., GOP: How Trump Is Killing the Republican Party (Taibbi)

If this isn’t the end for the Republican Party, it’ll be a shame. They dominated American political life for 50 years and were never anything but monsters. They bred in their voters the incredible attitude that Republicans were the only people within our borders who raised children, loved their country, died in battle or paid taxes. They even sullied the word “American” by insisting they were the only real ones. They preferred Lubbock to Paris, and their idea of an intellectual was Newt Gingrich. Their leaders, from Ralph Reed to Bill Frist to Tom DeLay to Rick Santorum to Romney and Ryan, were an interminable assembly line of shrieking, witch-hunting celibates, all with the same haircut – the kind of people who thought Iran-Contra was nothing, but would grind the affairs of state to a halt over a blow job or Terri Schiavo’s feeding tube.

A century ago, the small-town American was Gary Cooper: tough, silent, upright and confident. The modern Republican Party changed that person into a haranguing neurotic who couldn’t make it through a dinner without quizzing you about your politics. They destroyed the American character. No hell is hot enough for them. And when Trump came along, they rolled over like the weaklings they’ve always been, bowing more or less instantly to his parodic show of strength. In the weeks surrounding Cruz’s cat-fart of a surrender in Indiana, party luminaries began the predictably Soviet process of coalescing around the once-despised new ruler. Trump endorsements of varying degrees of sincerity spilled in from the likes of Dick Cheney, Bob Dole, Mitch McConnell and even John McCain.

Having not recently suffered a revolution or a foreign-military occupation, Americans haven’t seen this phenomenon much, but the effortless treason of top-tier Republicans once Trump locked up the nomination was the most predictable part of this story. Politicians, particularly this group, are like crackheads: You can get them to debase themselves completely for whatever’s in your pocket, even if it’s just lint.

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Greece should brace itself for a huge new influx of refugees.

Turks Won’t Get EU Visa Waiver Before 2017: Bild (R.)

The German government does not expect Turks to get visa-free entry into the European Union before 2017 because Ankara will not fulfil the conditions for that by the end of this year, newspaper Bild cited sources in Berlin as saying on Monday. Turkey and the EU have been discussing visa liberalisation since 2013 and agreed in March to press ahead with it as part of a deal to stop the flow of illegal migrants from Turkey to the EU. EU officials and diplomats say the EU is set to miss an end-June deadline due to a dispute over Turkish anti-terrorism law. [..] Turkey’s government says it has already met the EU’s criteria for visa-free travel.

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Another thing Tsipras should simply refuse to do.

Greek Police Poised To Evacuate Idomeni Refugee Camp (Kath.)

It appears that Greek authorities are poised to put into action a plan to evacuate the refugee camp in Idomeni, on the border with the Former Yugoslav Republic of Macedonia. According to sources, nine squads of riot police received orders on Monday to travel from Athens to Kilkis so they can take part in the operation if their contribution is needed. Authorities will attempt to move the refugees from the unofficial camp to other sites that have been made ready in various parts of northern Greece. Police sources told Kathimerini that the plan to remove people from Idomeni would be put into action in the coming days, although no decision has been as to exactly when the operation will take place. One source said that it is most likely the orders will be given on Wednesday.

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Apr 292016
 
 April 29, 2016  Posted by at 8:40 am Finance Tagged with: , , , , , , , , , , ,  1 Response »


Harris&Ewing Treasury Building, Fifteenth Street, Washington, DC 1918

Asia’s Two Biggest Stock Markets Have Become An $11 Trillion Headache (BBG)
Japan’s Abenomics ‘Dead In The Water’ After US Currency Warnings (AEP)
Debt Is Growing Faster Than Cash Flow By The Most On Record (ZH)
The Typical American Couple Has Only $5,000 Saved For Retirement (MW)
US Corporate Profits on Pace for Third Straight Decline (WSJ)
Dollar Drops to 11-Month Low as Asian Stocks Fall; Oil Near $46 (BBG)
Sluggish US Growth Part Of A Worrying Global Trend (G.)
Renting In London More Costly Than Living In Most European 4-Star Hotels (Ind.)
China Banks’ Profit Growth Stalls As Bad Debts Rise (R.)
China’s Central Bank Raises Yuan Fixing by Most Since July 2005 (BBG)
Puerto Rico Risks Historic Default as Congress Chooses Inaction (BBG)
El Niño Dries Up Asia As Its Stormy Sister La Niña Looms (AFP)
German Inflation Turns Negative In April (R.)
Greece’s Perfect Debt Trap (Kath.)
German Minister Proposes Law To Limit Social Benefits For EU-Foreigners (DW)
Finland Parliament, Pressured By Weak Economy, Debates Euro Exit (R.)
Italy Says Austria ‘Wasting Money’ In Migrant Border Row (AFP)
One Nation in Europe Wants Refugees But Is Failing to Get Enough (BBG)

$11 trillion is merely the start.

Asia’s Two Biggest Stock Markets Have Become An $11 Trillion Headache (BBG)

Asia’s two biggest stock markets are jostling for an ignominious prize. Japan’s Topix index and China’s Shanghai Composite Index have tumbled more than 13% in 2016 to rank along Nigerian and Mongolian shares as the world’s worst performers. In the two years through the end of December, the Asian gauges outperformed MSCI’s global measure by at least 20 percentage points. The Bank of Japan stood pat on monetary policy Thursday, sending Tokyo stocks tumbling, while the Shanghai measure fell to a one-month low. The benchmark gauges in two of the world’s largest stock markets, which have a combined value of almost $11 trillion, are declining as investors detect a reduced appetite from policy makers to boost monetary stimulus.

Thursday’s BOJ decision was the first under Governor Haruhiko Kuroda where a majority of economists expected easing that didn’t materialize, while strategists now see China’s central bank keeping its main interest rate on hold until the fourth quarter. “Neither China nor Japan have a solid plan on dealing with their slowing economies,” said Tomomi Yamashita at Shinkin Asset Management. “There is still scope for easing, and as for Japan there are fiscal policies they can carry out. There’s still hope. But today there was just too much hope on the BOJ.”

The Topix sank 3.2% on Thursday after the central bank kept bond-buying, interest rates and exchange-traded fund purchases unchanged. The stock gauge has fallen for four straight days, handing losses to foreign investors who piled the equivalent of $4.9 billion into the market last week, the most in a year. Overseas traders were net sellers of Japanese equities for the first 13 weeks of 2016. “I give up,” Ryuta Otsuka at Toyo Securities in Tokyo said. “It’s a really disappointing result and I feel like throwing in the towel. It cuts because we had so much hope.” The Topix posted four straight annual gains through 2015, while even a $5 trillion rout in Chinese shares last summer couldn’t stop the Shanghai Composite from being the world’s top-performing major market over the last two years. The declines for both gauges in 2016 compare with a 2.5% advance by the S&P 500, which is closing in on last year’s record.

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Sometimes I wonder why it takes people so long to figure things out. I’ve been saying ever since Abenomics was launched that it would fail. Because it was always pie in the sky only, not based on any understanding of what caused spending to plummet.

Japan’s Abenomics ‘Dead In The Water’ After US Currency Warnings (AEP)

The Bank of Japan has been forced to retreat from further emergency stimulus after a blizzard of criticism at home and abroad, and warnings that extreme measures may now be doing more harm than good. The climb-down by the world’s most radical central bank is the latest sign that the monetary experiments since Lehman crisis may have run their course. The authorities have not exhausted their ammunition but are hitting political and legal constraints. The yen surged 3pc against the US dollar in the biggest one-day move in eight months and equities skidded across Asia after the BOJ failed to take fresh action to stave off deepening deflation, catching markets badly off guard. Governor Haruhiko Kuroda dashed hopes for ‘helicopter money’, warning that direct monetary financing of spending would be “illegal”.

Mr Kuroda insisted that the BoJ still has plenty of firepower and can at any time push interest rates even deeper into negative territory or boost bond purchases beyond the current $74bn a month. “If additional easing is needed, we will do so promptly,” he said. The reality is that negative rates (NIRP) have backfired badly on every front. They have prompted bitter protests from banks and money market funds caught in a squeeze. The yen has appreciated by 10pc since the BoJ first embarked on the policy in January, the exact opposite of what was intended. The rising yen – ‘endaka’ – is pushing Japan deeper into a deflation trap and undercutting the whole purpose of ‘Abenomics’. Core inflation has fallen to minus 0.3pc. The Nikkei has dropped 13pc this year, with contractionary wealth effects that make the BoJ’s task even harder.

“Negative rates have completely failed,” said David Bloom from HSBC. Washington will not tolerate the use of NIRP in any case, deeming it a disguised attempt to drive down exchange rates and export problems to the rest of the world. Jacob Lew, the US Treasury Secretary, warned Japan and the eurozone at the G20 in Shanghai in February that the Obama administration is losing patience with use of beggar-thy-neighbour tactics by countries already running a current account surplus. They are in effect shifting their excess capacity abroad. Germany in particular is coming into the US cross-hairs. Richard Koo from Nomura said the US is now on the warpath against currency manipulators. Mr Lew’s threat effectively renders Abenomics “dead in the water”. The Japanese economy is contracting again, caught in a debt-deflation vice.

Growth has been negative for four of the last eight quarters. What was once a ‘Lost Decade’ is turning into a “Lost Quarter Century” with no remedy in sight. “Their options are diminishing. I can’t see any way out of the debt-trap, and it is an acid test for the western world,” said Neil Mellor from BNY Mellon. Public debt is rising fast on a shrinking economic base, pushing the public debt ratio to an estimated 250pc of GDP this year. “The debt will never be ‘repaid’ in the normal sense of the word,” said Lord (Adair) Turner from the Institute for New Economic Thinking. Olivier Blanchard, the former chief economist for the International Monetary Fund, warned recently that country is nearing the end-game as the pool of domestic funding for the bond market starts to dry up and the Japanese treasury is forced to rely on much more costly capital from global investors.

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The predictable culmination of decades of a failed system is a hockeystick.

Debt Is Growing Faster Than Cash Flow By The Most On Record (ZH)

By now it is a well-known fact that corporations have no real way of generating organic growth in this economy, so they are relying on two things to boost share prices: multiple expansion (courtesy of central banks) and debt-funded buybacks (courtesy of central banks), the latter of which requires the firm to generate excess incremental cash. Incidentally, as SocGen showed last year, all the newly created debt in the 21st century has gone for just one thing: to fund stock buybacks.

 

The problem with this is that if a firm is going to continue to add debt to its balance sheet in order to fund buybacks (and dividends), then it needs to be able to generate enough operational cash flow in order to service the debt. Even if one makes the argument that debt is cheap right now, which may be true, or that central banks are backstopping it, which is certainly true in Europe as of a month ago, the fact remains that principal balances come due eventually also, and while debt can be rolled over, at some point the inability to generate cash from the operations catches up with them; furthermore even a small increase in rates means the rolling debt strategy is dies a painful death, as early 2016 showed.

In the following chart we can see net debt growth skyrocketing nearly 30% y/y, while EBITDA (cash flow) has been contracting for the past year. In fact, as SocGen shows below, the difference in the growth rate between these two most critical data series is now over 35% – the biggest negative differential in recent history.

 

Of course, every finance 101 student knows that a firm which has to borrow more cash than it is able to produce from its core operations is not a sustainable business model, and yet today’s CFOs, pundits and central bankers do not. And the next question is: what happens if the Fed does raise rates, what happens to the feasibility of these companies servicing the debt while also spending on R&D and CapEx (assuming there is any), and who can only afford the rising interest expense as a result of ever smaller interest rates? The answer is, first, massive cost cutting, i.e. layoffs, which would be a poetic way for the Fed’s disastrous policies to be reintroduced to the real economy… and then, more to the point, mass defaults. 

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Our entire societies will have to change dramatically because of this. Parents will have to move in with their children again. The children who earn much less than the parents did.

The Typical American Couple Has Only $5,000 Saved For Retirement (MW)

When American companies began switching from traditional pensions to self-directed 401(k)-like plans in the 1980s and 1990s, it was supposed to lead to a golden age of retirement security. No longer would workers be at the mercy of the company’s generosity or of Social Security’s solvency; workers themselves would be responsible for saving enough for a comfortable retirement. Some 30 years later, the results are in: The median working-age couple has saved only $5,000 for their retirement, according to an analysis of the Federal Reserve’s 2013 Survey of Consumer Finances by economist Monique Morrissey of the Economic Policy Institute. The do-it-yourself pension system is a disaster.

Even as the traditional company-funded pension has nearly disappeared and even as Social Security benefits are being slowly eroded, most workers haven’t saved enough to offset those losses to their retirement income. 70% of couples have less than $50,000 saved. Even those on the cusp of retirement — the median couple in their late 50s or early 60s — has saved only $17,000 in a retirement savings account, such as a defined-contribution 401(k), individual retirement account, Keogh or similar savings account. How long does $5,000, or even $50,000, last? Until the first big medical bill? Morrissey figures that about 43% of working-age families have no retirement savings at all. Among those who are five to 10 years away from retirement, 39% have no retirement savings of their own.

The sad fact is that most Americans are less prepared for retirement than Americans were 30 years ago. Few have enough pension wealth to make much difference in their lives once they stop working. The lack of savings in 401(k) and individual retirement accounts wouldn’t be a such big deal if retirees could rely on other sources of income, such as a traditional defined-benefit pension or Social Security. But those other income sources are declining. Fewer and fewer newly retired people are covered by a regular pension that provides a guaranteed monthly check based on salary and years of service. In addition, Social Security benefits are already being reduced as the normal retirement age is gradually increased from 65 to 67. Further reductions in Social Security benefits — by limiting the cost-of-living adjustment or by increasing the normal retirement age to 70, for example – would be disastrous for tomorrow’s retirees.


The median working-age couple had $5,000 in a retirement savings account as of the most recent data. The top 10% of savers had accumulated $274,000, according to the Economic Policy Institute analysis of Federal Reserve survey data

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Forget growth. Think survival.

US Corporate Profits on Pace for Third Straight Decline (WSJ)

U.S. corporate profits, weighed down by the energy slump and slowing global growth, are set to decline for the third straight quarter in the longest slide in earnings since the financial crisis. Weakness was felt across the board, with executives from Apple to railroad Norfolk Southern and snack giant Mondelez saying the current quarter remains tough. 3M, which makes tapes, filters and insulation for consumer electronics, forecast continued weak demand for that industry. Procter & Gamble reported sales declines in its five business categories despite price increases. “It’s a difficult environment indeed,” said PepsiCo CEO Indra Nooyi. “Most of the developed world outside the United States is grappling with slow growth. GDP growth in developing and emerging markets is also challenged.”

The concerns from company executives echo weak economic data released Thursday morning, which showed U.S. gross domestic product rose just 0.5% in the first quarter. Business investment and consumer spending on goods slowed, while consumer spending on services climbed. “On the one hand, consumer spending continued to be the primary economic driver in the U.S. On the other hand, industrial production has been disappointing,” United Parcel Service Inc. CEO David Abney said Thursday after the delivery company reported a 3.1% revenue increase. Based on the 55% of companies in the S&P 500 index that had already reported results Thursday morning, Thomson Reuters expects overall earnings to decline by 6.1% in the first quarter compared with a year earlier.

Even excluding energy companies, which are expected to have their worst quarter since oil prices began to plunge in 2014, profits are on pace to fall by 0.5%. Revenues are expected to fall 1.4% overall, or rise 1.7% excluding energy, according to Thomson Reuters. This would mark the S&P 500’s third consecutive quarter of declining earnings—the longest streak since the financial crisis. Revenues will have declined for five quarters in a row, outstripping even the four-quarter slide in 2008 and 2009.

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The US dollar is set to rise like a mushroom cloud and break the global camel’s back.

Dollar Drops to 11-Month Low as Asian Stocks Fall; Oil Near $46 (BBG)

The dollar dropped against all of its G-10 peers after weaker-than-expected U.S. economic growth dimmed prospects for a Federal Reserve interest-rate increase at a time when monetary easing is being put on hold elsewhere. Asian stocks fell and crude oil traded near $46 a barrel. The Bloomberg Dollar Spot Index sank to an 11-month low, while the yen was headed for its biggest weekly jump since 2008 after the Bank of Japan unexpectedly refrained from adding to record stimulus on Thursday. Japanese financial markets are shut for a holiday and an MSCI gauge of shares in the rest of the Asia-Pacific region slid for the third day in a row. The greenback’s decline is proving a plus for commodities, which are poised for their best monthly gain since 2010. Crude has jumped 20% since the end of March, while gold and silver are at 15-month highs.

The BOJ’s surprise decision capped a week of fence-sitting for central banks, with the Fed keeping interest rates steady for a third straight meeting and policy makers from New Zealand to Brazil also holding the line. The slowest pace of American economic expansion in two years reignited some concern over the global outlook, and pushed out bets on the potential timeline for tighter Fed policy. “Central banks look like they have run out of bullets to a degree,” said Mark Lister at Wellington’s Craigs Investment Partners. “We’re getting to that point where there are limits to the results they can get from anything more they do. This points to a fragile outlook with still a lot of risks out there.”

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Worrying only if it surprises you perhaps?!

Sluggish US Growth Part Of A Worrying Global Trend (G.)

It would be easy to dismiss the slowdown in the US economy to near-stall speed as a piece of rogue data resulting from the inability of number crunchers at the Department of Commerce in Washington to take account of the fact that large parts of the country are blanketed by snow during the winter. Easy but wrong. Back in spring 2015, the world’s biggest economy was expanding at an annual rate of 3.9%. In the third quarter the growth rate halved to 2%, before falling again to 1.4% in the final three months of the year. Describing the further easing to 0.5% in the first three months of 2016 as a temporary aberration – which was the knee-jerk response of upbeat analysts on Wall Street – is pushing it a bit.

A better explanation is that the sluggishness of US growth is part of a global trend, in which all the major economies are expanding more weakly than they were in the middle of last year. That’s the story for China, the eurozone, Japan and the UK. Each quarter, the data company Markit compiles a global Purchasing Managers’ Index for JP Morgan, with the intention of providing an up-to-date picture of economic conditions. The result for the first three months of 2016 showed activity at its lowest level in more than three years. Nor is there much hint of an improvement in the near future. In the US, firms are hacking back at investment – normally the sign of a looming recession. Consumer confidence has weakened, in part because real incomes are being squeezed.

As export-driven economies, Japan and the eurozone rely on a thriving US to buy their goods, so it is no surprise to find both struggling. The Bank of Japan will be forced to revisit its decision not to provide additional stimulus, since the upshot of its inaction has been a sharp rise in the yen, which will lead to even slower growth. Mario Draghi may again have to lock horns with the Bundesbank president, Jens Weidmann, in order to force through measures aimed at boosting activity in Europe. But the law of diminishing returns is at work. Each cut in interest rates, each fresh dollop of quantitative easing, has less of an impact than the last. The global economy is running out of steam and the conventional weapons are increasingly ineffective. This is not about blizzards shutting factories in Michigan. It goes much deeper than that.

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Britain is a sad joke.

Renting In London More Costly Than Living In Most European 4-Star Hotels (Ind.)

It is now cheaper to live in a 4-star hotel in two-thirds of European capitals than it is to rent the average London flat. Latest figures show that the average rent for a London flat is now £1,676 per month – or £55 a night – having increased by 30% in the last four years. For the same amount of money you could live year round in a hotel in Dublin, Rome, Paris or Brussels. Among the hotels that are more affordable than the average London rent include the Mercure Warszawa Grand in Warsaw that boasts a fitness centre, business facilities and two restaurants.

The Best Western Plus Hotel in Paris, the Nordic Hotel Domicil in Berlin and the Relais Castrum Boccea in Rome can also all be booked for less than £55 a night on travel websites for the 5th May this year. The figures were highlighted by Labour’s Mayoral candidate Sadiq Khan. He said: “Renting a home shouldn’t be a luxury, but under the Tories Londoners could live in 4-star luxury in most of Europe for what they pay. “Rents have gone up by 30% with a Tory Mayor and it would be exactly the same under Zac Goldsmith – with rents soaring above £2,000 a month. Mr Khan said he would create a London-wide social letting agency as well as naming and shaming bad landlords and setting up a landlord licensing scheme.”

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And that’s before the bad debts are properly accounted for, and while the PBoC still issues record amounts of additional debt.

China Banks’ Profit Growth Stalls As Bad Debts Rise (R.)

Four of China’s five largest state-owned banks barely posted any growth in profit in the first quarter, as widely expected, with rising bad debt and narrower margins hitting their bottom lines. The country’s banks face challenges from both defaulting borrowers, who are struggling amid a slowing economy, and successive cuts in interest rates which have eaten away at margins. Industrial and Commercial Bank of China, China’s biggest lender by assets, announced a 0.6% rise in net profit on Thursday. Bank of Communications posted a 0.5% rise in net profit in the first quarter and Agricultural Bank of China a slightly better 1.1% rise in profit. On Tuesday, Bank of China recorded a 1.7% rise in net profit in the fist quarter.

Non-performing loan (NPL) ratios remained flat -or rose- at all four lenders, while bad loan volumes increased, helping to sink loan-loss allowance ratios. At ICBC, the volume of non-performing loans increased 14% in the three-month period to 204.66 billion yuan ($31.60 billion), from 179.52 billion yuan at the end of 2015, sending the bank’s NPL ratio to 1.66% from 1.5%. ICBC’s loan-loss allowance ratio fell to 141.21%, from 156.34% at the end of December. ICBC also pointed to “the continuing impact of five interest rate cuts by the People’s Bank of China” since 2015 as a source of stress. The bank reported its interest margin (NIM) – the difference between its lending rate and the cost of borrowing – fell to 2.28 at the end of the first quarter, from 2.47 at end-December.

At BoC, NIM fell to 1.97 at end-March from 2.12 at end-December. BoCom did not disclose its NIM, but reported a 2.78% decline in net interest income, even as the bank’s net income rose half a% to 19.07 billion yuan for the first quarter. AgBank also did not disclose its NIM. In a bid to relieve banks of the mounting pile of bad debts, China’s central bank is preparing regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms, sources told Reuters in February.

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Going through the motions.

China’s Central Bank Raises Yuan Fixing by Most Since July 2005 (BBG)

China’s central bank responded to an overnight tumble in the dollar by strengthening its currency fixing the most since a peg was dismantled in July 2005. The reference rate was raised by 0.6% to 6.4589 per dollar. A gauge of the greenback’s strength sank 1% on Thursday after the Bank of Japan’s decision to unexpectedly keep monetary policy unchanged sent the yen surging. The offshore yuan was little changed at 6.4834 after gaining 0.3% in the last session. While the change in the fixing is extreme relative to the small moves of recent years, analysts said it reflects increased volatility in the dollar against other major exchange rates rather than a policy shift by the People’s Bank of China. The yuan weakened against a basket of peers even as it climbed versus the greenback on Friday.

“The offshore yuan’s reaction is muted, so it seems the market was already expecting a much stronger fixing,” said Ken Cheung, a currency strategist at Mizuho Bank in Hong Kong. “This is a reaction to the dollar weakness overnight, and there’s not much in the way of policy intention to read into.” The dollar reached the lowest level since June after the yen jumped the most in almost six years and data showed U.S. gross domestic product expanded in the first quarter at the slowest pace in two years. A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 exchange rates, fell 0.2% to a 17-month low. The onshore yuan climbed less than 0.1%.

“The fixing is no surprise, the expectation for a stronger yuan fix was laid by the gains for the yen after the Bank of Japan announcement yesterday,” said Patrick Bennett at Canadian Imperial Bank of Commerce in Hong Kong. “The trade weighted basket continues to depreciate, albeit at a modest pace. But the key to the lower trade-weighted rate does not really lie with the PBOC, rather it is the dollar weakness against other major currencies which is the main driver.”

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May 1 is big, but still just a transfer station. July 1 is much bigger.

Puerto Rico Risks Historic Default as Congress Chooses Inaction (BBG)

Even if Puerto Rico manages to strike a last-minute deal to defer bond payments due in three days, the commonwealth’s financial collapse is about to enter an unprecedented phase. Anything short of making the $422 million payment that Puerto Rico says it can’t afford would be considered a technical default. More importantly, it opens the door to larger and more consequential defaults on debt protected by the island’s constitution, and raises the risk of putting efforts to resolve the biggest crisis ever in the $3.7 trillion municipal market into turmoil. Nearly 10 months after Governor Alejandro Garcia Padilla said the commonwealth was unable to repay all its obligations, Puerto Rico has failed to reach an accord on a broad restructuring deal presented to bondholders.

During that time the administration has delayed payments to suppliers, postponed tax refunds, grabbed revenue originally used to repay other bonds and missed payments on smaller agency debt. With its options drying up, no bondholder agreement in sight and Congressional action delayed, defaulting may be the next step for Puerto Rico. “It’s a game changer because it starts an actual legal process with teeth on both sides that can finally advance settlement negotiations,” said Matt Fabian at Municipal Market Analytics. “Pre-default negotiations are really not going anywhere. Post default might have a better chance.” Puerto Rico and its agencies racked up $70 billion in debt after years of borrowing to fill budget deficits and pay bills as its economy shrunk and residents left the island for work on the U.S. mainland.

The island’s Government Development Bank, which lent to the commonwealth and its municipalities, is in talks with creditors to avoid defaulting on the $422 million that’s due May 1. The commonwealth may use a new debt moratorium law if it cannot defer that GDB payment, Jesus Manuel Ortiz, a spokesman for Garcia Padilla, said. While a GDB default would be the largest yet by Puerto Rico, a missed payment on its general obligations would signal to investors that the commonwealth is finally executing on its warnings that it cannot pay its debts. Puerto Rico and its agencies owe $2 billion on July 1, including a $805 million payment on its general-obligation bonds, which are guaranteed under the island’s constitution to be paid before anything else.

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“..60 million people worldwide requiring “urgent assistance..”..

El Niño Dries Up Asia As Its Stormy Sister La Niña Looms (AFP)

Withering drought and sizzling temperatures from El Nino have caused food and water shortages and ravaged farming across Asia, and experts warn of a double-whammy of possible flooding from its sibling, La Nina. The current El Nino which began last year has been one of the strongest ever, leaving the Mekong River at its lowest level in decades, causing food-related unrest in the Philippines, and smothering vast regions in a months-long heat wave often topping 40 degrees Celsius (104 Fahrenheit). Economic losses in Southeast Asia could top $10 billion, IHS Global Insight told AFP. The regional fever is expected to break by mid-year but fears are growing that an equally forceful La Nina will follow.

That could bring heavy rain to an already flood-prone region, exacerbating agricultural damage and leaving crops vulnerable to disease and pests. “The situation could become even worse if a La Nina event — which often follows an El Nino — strikes towards the end of this year,” Stephen O’Brien, UN under-secretary-general for humanitarian affairs and relief, said this week. He said El Nino has already left 60 million people worldwide requiring “urgent assistance,” particularly in Africa. Wilhemina Pelegrina, a Greenpeace campaigner on agriculture, said La Nina could be “devastating” for Asia, bringing possible “flooding and landslides which can impact on food production.” El Nino is triggered by periodic oceanic warming in the eastern Pacific Ocean which can trigger drought in some regions, heavy rain in others.

Much of Asia has been punished by a bone-dry heat wave marked by record-high temperatures, threatening the livelihoods of countless millions. Vietnam, one of the world’s top rice exporters, has been particularly hard-hit by its worst drought in a century. In the economically vital Mekong Delta bread basket, the mighty river’s vastly reduced flow has left up to 50% of arable land affected by salt-water intrusion that harms crops and can damage farmland, said Le Anh Tuan, a professor of climate change at Can Tho University. More than 500,000 people are short of drinking water, while hotels, schools and hospitals are struggling to maintain clean-water supplies. Neighbouring Thailand and Cambodia also are suffering, with vast areas short of water and Thai rice output curbed.

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You would think the reason to continue executing a policy lies in its success rate. Not so, you poor innocent you. In reality, the very failure of a policy is reason to continue it: if the strongest eurozone economy with low unemployment does not show any signs of inflationary pressures, the ECB after all might have a point in continuing its ultra-loose monetary policy

German Inflation Turns Negative In April (R.)

German consumer prices unexpectedly fell in April, data showed on Thursday, illustrating the scale of the task the ECB faces in trying to propel inflation back to its target range. The eurozone has struggled with little or no inflation for the past year and the ECB expects the bloc-wide figure to turn negative again before slowly ticking up, undershooting its goal of just under 2% for years to come. The ECB unveiled a surprisingly large stimulus package in March but falling inflation expectations have fueled expectations of even more easing, possibly as early as June, when the bank’s staff present new growth and inflation forecasts. “It might be hard for some German ECB critics to digest, but if the strongest eurozone economy with low unemployment does not show any signs of inflationary pressures, the ECB after all might have a point in continuing its ultra-loose monetary policy,” ING Bank economist Carsten Brzeski said.

Separate data on Thursday showed unemployment unexpectedly fell in April, with the jobless rate remaining at its lowest in more than 25 years. German consumer prices, harmonized to compare with other European countries (HICP), fell by 0.1% on the year after a 0.1% rise in March, the Federal Statistics Office said. The Reuters consensus forecast was for a zero reading. On a non-harmonized basis, consumer prices fell 0.2% on the month and inched up 0.1% on the year. A breakdown showed energy remained the main drag while the food, services and rental costs increased at a slower pace. Analysts said the German data suggested that the April inflation rate for the whole eurozone, due out on Friday, would also turn negative again.

Read more …

It’s high time now to see how the Greek debt trap is linked to the article above about German deflation. The link continues with the article below this one: Germany monopolizes the benefits of being in the EU.

Greece’s Perfect Debt Trap (Kath.)

The longer we spend in the hole the harder it is to get out. As long as the negotiations with the troika are not finished and the economy is starved of cash, as long as businesses cannot plan for the next day and citizens remain wary of returning cash to the banks, recovery becomes even more difficult. The government promises that after a positive evaluation by creditors the economy will bounce back like a spring released. Even if we were to accept this theory – which would also demand huge investments – a positive evaluation is still the prerequisite. Despite the progress made in the talks, the economy is deteriorating. Indicative of this is a growing inability to pay taxes. Today outstanding tax debts exceed €87 billion. At the end of 2012 they were at €55.1 billion.

They have grown by 32 billion euros since then, equaling the amount raised by tax rate increases over the same period (as Kathimerini reports on Friday). In the first quarter of 2016, outstanding debts increased by €3.22 billion and, by the end of the year, may exceed last year’s total of €13.48 billion. Nonperforming bank loans, which were at 8.2% of the total at the start of 2010, were at 36.4% at the end of 2015. Unpaid dues to social security funds came to €15.78 billion at the end of the first quarter, from €13.02 billion last September. The swelling of these debts did not begin under this government. Previous governments and opposition parties, as well as creditors, all played a role in this. From the start of the crisis, citizens/taxpayers have been buffeted by uncertainty, despair and anger.

The expectation of debt relief encouraged delays in payments, while excessive taxation meant that outstanding payments multiplied. Also, the state, unable to meet its own obligations, held back on paying what it owed to taxpayers. With the worsening economy and the lack of trust, capital controls were inevitable and, of course, drove us deeper into trouble. This anxiety is set to continue. The government cannot undertake the burden of what creditors demand, and the creditors, in turn, appear disinclined to help out. As the Federation of Greek Industries noted in its weekly bulletin on Thursday: “The government’s insistence on raising taxes instead of cutting expenses, and the recessionary impact that this will have on the economy, leads to the troika’s shortsighted persistence on contingency measures which, unfortunately, increase further the recessionary wave and will be the final blow to the economy.”

We are caught in the perfect trap. As long as the negotiations drag on, the instability and lack of confidence will increase outstanding debt at all levels, prevent growth and, in turn, demand even harsher measures. The only way out is for both the government and creditors to show good will and trust each other. After the past year this seems a most unlikely leap of faith.

Read more …

Dividing and demolishing the Union brick by brick. Germany wants to be left with the benefits of that union only, and to shed the drawbacks. Not going to work out well.

German Minister Proposes Law To Limit Social Benefits For EU-Foreigners (DW)

EU foreigners living in Germany may soon have to wait five years before qualifying for social benefits, reported newspapers on Thursday, in reference to a new proposed law from German Labor Minister Andrea Nahles. “We have to stop immigration into the social security system,” Nahles said during an interview in December when she announced plans to restrict social benefits for non-German EU citizens. She added that the restrictions were a matter of “self defense” for Germany. Should the law pass, foreigners from fellow EU member states will be strictly excluded from social assistance if they do not work in Germany or have not acquired social security rights through previous work in Germany. With those same conditions, EU foreigners would also be shut out from Germany’s benefit system for the unemployed, which is known as “Hartz IV.”

EU citizens can eventually gain access to social benefits – but only if they have been living in Germany for five years without state assistance. The draft law, however, provides so-called “transition benefits” for those EU foreigners who no longer qualify for social assistance in Germany. For a maximum of four weeks, those affected will receive assistance to cover the costs of food, housing, and health care. They will also be given a loan to cover costs for a return trip to their home country, where they can then apply for social benefits. The new measures are a direct response to a decision by Germany’s Federal Social Court late last year concerning immigrants from EU countries. In December 2015, the court ruled that EU-foreigners would only acquire entitlement to social benefits after living in the country for at least six months. The decision led to backlash from local authorities, who feared the social system would be overburdened.

Read more …

This is something we’ll see a lot of. It’s over. What’s left is pretense.

Finland Parliament, Pressured By Weak Economy, Debates Euro Exit (R.)

Finnish lawmakers on Thursday held a rare debate on whether the Nordic country should quit the euro after 53,000 people signed a petition to force the issue into parliament. The petition, although very unlikely to lead to Finland’s exit of the 19-member currency bloc, highlights the growing level of frustration over the country’s economic performance amid rising unemployment, weak outlook and government austerity. The initiative demands a referendum on euro membership, but this would only go ahead if parliament backed such a vote. Although no political group has proposed a euro exit, some euro-sceptic parliamentarians cited lack of independent monetary policy as a problem and said Finland should have held a referendum before adopting the euro in 1998.

Nordic neighbors Sweden and Denmark voted against adopting the euro a few years later. “The euro is too cheap for Germany and too expensive for the rest of Europe, it does not fulfill requirements of an optimal currency union,” said Simon Elo, an MP from the co-ruling euro-sceptic Finns party. The Finnish economy grew by just 0.5% last year after three years of contraction. The stagnation stemmed from a string of problems, including high labor costs, the decline of Nokia’s former phone business and a recession in neighboring Russia. This year, Finland’s economy is expected to grow slower than in any other EU country, except Greece. Some economists say the country’s prospects would improve if it returned to the markka currency which could then devalue against the euro.

Read more …

Union? What union?! Get real.

Italy Says Austria ‘Wasting Money’ In Migrant Border Row (AFP)

Italy told Austria Thursday it would prove Vienna was “wasting money” on anti-migrant measures and closing the border between the two countries would be “an enormous mistake”. Austrian Interior Minister Wolfgang Sobotka, who has vigorously defended the controversial package which was driven by a surge of the far right, met his counterpart Angelino Alfano over the plans, which have infuriated Italians. Alfano said “the numbers do not support” fears of a mass movement of migrants and refugees across the famous Brenner Pass in the Alps. Sobotka said preparations would continue for the construction of a 370-metre (yard) barrier which would be up to four metres (13 foot) high in places, but Alfano said the feared-for crisis would not materialise and “we will show them it is money wasted”.

Italian Premier Matteo Renzi has warned that closing the pass would be a “flagrant breach of European rules” and is pushing the European Commission to force Austria to hold off on a move many fear could symbolise the death of the continent’s Schengen open border system. On Thursday he described the bid to close the border as being “utterly removed from reality”. A European Commission spokesman said the body had “grave concerns about anything that can compromise our ‘back to Schengen’ roadmap”. Its chairman Jean-Claude Juncker is expected to discuss the issue with Renzi at talks in Rome on May 5. The Vienna government is under intense domestic pressure to stem the volume of asylum seekers and other migrants arriving on its soil with the far-right surging in polls.

UN chief Ban Ki-moon hit out Thursday at what he called “increasingly restrictive” refugee policies in Europe, saying he was “alarmed by the growing xenophobia here” and elsewhere in Europe, in a speech to the Austrian parliament. More than 350,000 people, many of them fleeing conflict and poverty in countries like Syria, Iraq and Eritrea, have reached Italy by boat from Libya since the start of 2014, as Europe battles its biggest migration crisis since World War II. Wedged between the Italian and Balkan routes to northern Europe, Austria received 90,000 asylum requests last year, the second highest in per capita terms of any EU country. Legislation approved Wednesday by the Austrian parliament enables the government to respond to spikes in migrant arrivals by declaring a state of emergency which provides for asylum seekers to be turned away at border points.

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Portugal sees what Canada sees too. Question is how deliberate is the EU policy of being so slow in relocating refugees to countries asking for them? Portugal wants 10,000. Canada will take a multiple of that.

One Nation in Europe Wants Refugees But Is Failing to Get Enough (BBG)

Portugal has offered to host 10,000 of the refugees who’ve landed on Europe’s shores from the globe’s war-torn zones. So far, it has taken in 234. Not because it doesn’t want to. Rather, because few have come knocking at its door. “It’s difficult to quickly find refugees that can come to Portugal,” President Marcelo Rebelo de Sousa said on Friday as he met migrants in Evora, southern Portugal. As the refugee crisis stretches the struggling Greek government and rattles politics in Germany and beyond, Portugal’s willingness to share the burden isn’t getting a lot of attention. While the country blames a lack of coordination in Europe and administrative roadblocks, the contrast between its economic performance and that of Germany, which admitted more than 1 million migrants in 2015 alone, may also be playing a role.

Although the Portuguese economy recovered in 2014 and accelerated last year after shrinking for three years through 2013, joblessness remains high. Unemployment, which has eased to 12.3% after peaking at 17.5% in 2013, is still almost triple the German rate of 4.3%, and that may continue to dent Portugal’s allure. “It’s not a very appealing destination given the unemployment rate,” said Rui Serra, chief economist at Caixa Economica Montepio Geral in Lisbon. “It’s easier for an immigrant to go to the center of Europe where there is a more concentrated market than in some countries of the periphery like Portugal. In the center of Europe income per capita is higher.” Prime Minister Antonio Costa says there are structural problems in the euro zone that aggravate the disparities.

“That structural problem has to do with the asymmetry between the different economies,” he said in Athens on April 11. “It’s necessary to give a new impulse to the convergence of our economies with the more developed economies of the euro zone.” With the country’s demographics in mind, the Portuguese government has laid out the welcome mat for refugees. Portugal’s population has declined and aged every year from the end of 2011 to about 10.37 million at the end of 2014 as a weak economy has led many working-age residents to leave. Germany’s population, while also aging, still increased overall every year in the same period.

Read more …

Feb 212016
 
 February 21, 2016  Posted by at 10:50 pm Finance Tagged with: , , , , , , , , , ,  6 Responses »


“6 gals for 99c”, Roosevelt and Wabash, Chicago 1939

That the world’s central bankers get a lot of things wrong, deliberately or not, and have done so for years now, is nothing new. But that they do things that result in the exact opposite of what they ostensibly aim for, and predictably so, perhaps is. And it’s something that seems to be catching on, especially in Asia.

Now, let’s be clear on one thing first: central bankers have taken on roles and hubris and ‘importance’, that they should never have been allowed to get their fat little greedy fingers on. Central bankers in their 2016 disguise have no place in a functioning economy, let alone society, playing around with trillions of dollars in taxpayer money which they throw around to allegedly save an economy.

They engage solely, since 2008 at the latest, in practices for which there are no historical precedents and for which no empirical research has been done. They literally make it up as they go along. And one might be forgiven for thinking that our societies deserve something better than what amounts to no more than basic crap-shooting by a bunch of economy bookworms. Couldn’t we at least have gotten professional gamblers?

Central bankers who moreover, as I have repeatedly quoted my friend Steve Keen as saying, even have little to no understanding at all of the field they’ve been studying all their adult lives.

They don’t understand their field, plus they have no idea what consequences their next little inventions will have, but they get to execute them anyway and put gargantuan amounts of someone else’s money at risk, money which should really be used to keep economies at least as stable as possible.

If that’s the best we can do we won’t end up sitting pretty. These people are gambling addicts who fool themselves into thinking the power they’ve been given means they are the house in the casino, while in reality they’re just two-bit gamblers, and losing ones to boot. The financial markets are the house. Compared to the markets, central bankers are just tourists in screaming Hawaiian shirts out on a slow Monday night in Vegas.

I’ve never seen it written down anywhere, but I get the distinct impression that one of the job requirements for becoming a central banker in the 21st century is that you are profoundly delusional.

Take Japan. As soon as Abenomics was launched 3 years ago, we wrote that it couldn’t possibly succeed. That didn’t take any extraordinary insights on our part, it simply looked too stupid to be true. In an economy that’s been ‘suffering’ from deflation for 20 years, even as it still had a more or less functioning global economy to export its misery to, you can’t just introduce ‘Three Arrows’ of 1) fiscal stimulus, 2) monetary easing and 3) structural reforms, and think all will be well.

Because there was a reason why Japan was in deflation to begin with, and that reason contradicts all three arrows. Japan sank into deflation because its people spent less money because they didn’t trust where their economy was going and then the economy went down further and average wages went down so people had less money to spend and they trusted their economies even less etc. Vicious cycles all the way wherever you look.

How many times have we said it? Deflation is a b*tch.

And you don’t break that cycle by making borrowing cheaper, or any such thing, you don’t break it by raising debt levels, and try for everyone to raise theirs too. Which is what Abenomics in essence was always all about. They never even got around to the third arrow of structural reforms, and for all we know that’s a good thing. In any sense, Abenomics has been the predicted dismal failure.

Now, I remember Shinzo Abe ‘himself’ at some point doing a speech in which he said that Abenomics would work ‘if only the Japanese people would believe it did’. And that sounded inane, to say that to people who cut down on spending for 2 decades, that if only they would spend again, the sun would rise in concert. That’s like calling your people stupid to their faces.

The reality is that in global tourism, the hordes of Japanese tourists have been replaced by Chinese (and we can tell you in confidence that that’s not going to last either). The Japanese economy simply dried out. It sort of functions, still, domestically, albeit it on a much lower level, but now that global trade is grasping for air, exports are plunging too, the population is aging fast and there’s a whole new set of belts to tighten.

So last June, the desperate Bank of Japan governor Haruhiko Kuroda did Abe’s appeal to ‘faith’ one better, and, going headfirst into the fairy realm, said:

I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it’. Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.

And that’s not just a strange thing to say. In fact, when you read that quote twice, you notice -or I did- that’s it’s self-defeating. Because, when paraphrasing Kuroda, we get something like this: ‘the moment the Japanese people doubt whether their government can save the economy, they cease forever to believe that it can’.

Now, I’m not Japanese, and I’m not terribly familiar with the role of fairy tales in the culture, but just the fact that Kuroda resorted to ‘our’ Peter Pan makes me think it’s not all that large. But I also think the Japanese understood what he meant, and that even the few who hadn’t yet, stopped believing in him and Abe right then and there.

Then again, Asian cultures still seem to be much more obedient and much less critical of their governments than we are, for some reason. The Japanese don’t voice their disbelief, they simply spend ever less. That’s the effect of Kuroda’s Peter Pan speech. Not what he was aiming for, but certainly what he should have expected, entirely predictable. Why hold that speech then, though? Despair, lack of intelligence?

In a similar vein, we chuckled out loud on Friday, first when president Xi demanded ‘Absolute Loyalty’ from state media when visiting them, an ‘Important Event’ broadly covered by those same media. Look, buddy, when you got to go on TV to demand it, someone somewhere’s bound to to be thinking you don’t have it…

And we chuckled also when the South China Morning Post (SCMP) broke the news that the People’s Bank of China, in its monthly “Sources and Uses of Credit Funds of Financial Institutions” report has stopped publishing the “Position for forex purchase”, which is that part of capital movements -and in China’s case today that stands for huge outflows- which goes through ‘private’ banks instead of the central bank itself.

It’s like they took a page, one-on-one-, out of the Federal Reserve’s playbook, which cut its M3 money supply reporting back in March 2006. What you don’t see can’t hurt you, or something along those lines. The truth is, though, that if you have something to hide, the last thing you want to do is let anyone see you digging a hole in the ground.

But the effect of this attempt to not let analysts get the data is simply that they’re going to get suspicious, and start digging even harder and with increased scrutiny. And they have access to the data anyway, through other channels, so the effect will be the opposite of what’s intended. And that too is predictable.

First, from Fortune, based on the SCMP piece:

Is China Trying to Hide Capital Outflows?

China’s central bank is making it harder to calculate the size of capital outflows afflicting the economy, just as investors have started paying closer attention to those mounting outflows, which in December reached almost $150 billion and in January around $120 billion. The central bank omitted data on “position for forex purchase” during its latest report, the South China Morning Post reported today.

The unannounced change comes at a time pundits are questioning whether outflows have the potential to cripple China’s currency and economy. Capital outflows lead to a weaker currency, which concerns the hordes of Chinese companies that borrowed debt in foreign currencies over the past few years and now have to pay it back with a weaker yuan.

The news of the central bank withholding data is important because capital outflow figures aren’t released as line items. They are calculated by analysts in a variety of ways, one of which includes using the omitted data. The Post quoted two analysts concluding the central bank’s intention was to hide the true amount of continuing outflows.

The impulse to hide bad news shouldn’t come as a surprise. China’s government has been evasive about economic matters from this summer’s stock bailout to its efforts propping up the value of the yuan. Analysts still have a variety of ways to estimate the flows, but the central bank is making it ever more difficult.

And then the SCMP:

Sensitive Financial Data ‘Missing’ From PBOC Report On Capital Outflows

Sensitive data is missing from a regular Chinese central bank report amid concerns about capital outflow as the economy slows and the yuan weakens. Financial analysts say the sudden lack of clear information makes it hard for markets to assess the scale of capital flows out of China as well as the central bank s foreign exchange operations in the banking system.

Figures on the “position for forex purchase” are regularly published in the People’s Bank of China’s monthly report on the “Sources and Uses of Credit Funds of Financial Institutions”. The December reading in foreign currencies was US$250 billion. But the data was missing in the central bank’s latest report. It seemed the information had been merged into the “other items” category, whose January figure was US$243.9 billion -a surge from US$20.4 billion the previous month.

[..] “Its non-transparent method has left the market unable to form a clear picture about capital flows,” said Liu Li-Gang, ANZ’s chief China economist in Hong Kong. “This will fuel more speculation that China is under great pressure from capital outflows. It will hurt the central bank’s credibility.”

[..] All forex-related data released by the central bank is closely monitored by financial analysts. They often read item by item from the dozens of tables and statistics to try to spot new trends and changes. China Merchants Securities chief economist Xie Yaxuan said the PBOC would not be able to conceal data as there were many ways to obtain and assess information on capital movements.

“We are waiting for more data releases such as the central bank’s balance sheet and commercial banks’ purchase and sales of foreign exchange released by the State Administration of Foreign Exchange for a better understanding of the capital movement and to interpret the motive of the central bank for such change,” Xie said.

It’s like they’ve landed in a game they don’t know the rules of. But then again, that’s what we think every single time we see Draghi and Yellen too, who are kept ‘alive’ only by investors’ expectations that they are going to hand out free cookies, and lots of them, every time they make a public appearance.

And what’s going on in Japan and China will happen to them, too: they will achieve the exact opposite of what they’re aiming for. They arguably already have. Or at least none of their desperate measures have achieved anything close to their stated goals.

They may have kept equity markets high, true, but their economies are still as bad as when the QE ZIRP NIRP stimulus madness took off, provided one is willing to see through the veil that media coverage and ‘official’ numbers put up between us and the real world. But they sure as h*ll haven’t turned anything around or caused a recovery of any sorts. Disputing that is Brooklyn Bridge for sale material.

Eh, what can we say? Stay tuned?! There’ll be a lot more of this lunacy as we go forward. It’s baked into the stupid cake.


Professor Steve Keen and Raúl Ilargi Meijer discuss central banking, Athens, Greece, Feb 16 2016

Feb 142016
 
 February 14, 2016  Posted by at 9:59 am Finance Tagged with: , , , , , , , ,  6 Responses »


Dorothea Lange Water supply in squatter camp near Calipatria CA 1937

China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)
Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)
BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)
Swedish Central Bank Move Creates a Global Shudder (NY Times)
Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)
There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves
Former Dallas Fed President Calls Out Central Banks (CNBC)
Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)
Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)
This is How Financial Chaos Begins (WS)
Pension Funds See 20% Spike In Deficit (AP)

A Debt Rattle largely filled with central banks and various opinions and assumptions about them. Just happened that way.

China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)

China’s central bank governor said there was no basis for continued depreciation of the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, according to an interview published Saturday in Caixin magazine. Zhou Xiaochuan dismissed speculation that China planned to tighten capital controls and said there was no need to worry about a short-term decline in foreign-exchange reserves, adding that the country had ample holdings for payments and to defend stability. The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday.

The country’s foreign-exchange reserves shrank to the smallest since 2012 in January, signaling that the central bank sold dollars as the yuan fell to a five-year low. The weakening exchange rate and declining share markets in China have fueled global turmoil and helped send world stocks to their lowest level in more than two years. The bank will not let “speculative forces dominate market sentiment,” Zhou said, adding that a flexible exchange rate should help efforts to combat speculation by effectively using “our ammunition while minimizing costs.”Policy makers seeking to support the yuan amid slower growth and increasing outflows have been using up reserves. The draw-down has continued since the devaluation of the currency in August and holdings fell by $99.5 billion in January to $3.23 trillion, according to the central bank on Feb. 7.

The stockpile slumped by more than half a trillion dollars in 2015. China has no incentive to depreciate the currency to boost net exports and there’s no direct link between the nation’s GDP and its exchange rate, Zhou said. Capital outflows need not be capital flight and tighter controls would be hard to implement because of the size of global trade, the movement of people and the number of Chinese living abroad, he added. The country will not peg the yuan to a basket of currencies but rather seek to rely more on a basket for reference and try to manage daily volatility versus the dollar, Zhou said. The bank will also use a wider range of macro-economic data to determine the exchange rate, he said.

Read more …

By his own admission, no clue: “..what we have to do is to devise new tools, rather than give up the goal..”

Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)

Bank of Japan Gov. Haruhiko Kuroda once awed the markets. Now he looks like just another central banker running out of options. Mr. Kuroda took the helm of the BOJ in March 2013, vowing to do whatever it takes to vault Japan out of more than a decade of deflation. He fired one “monetary bazooka” and then another, seeming to bend markets to his will both times. Japanese stocks rose, and the yen sank, key developments for “Abenomics,” Prime Minister Shinzo Abe’s growth program. But the introduction of negative interest rates two weeks ago failed to impress—except in the minds of some as confirmation that what the BOJ had been doing for three years wasn’t working. Japan’s economy is sputtering and Mr. Kuroda’s primary target—2% inflation—is as far away as ever, heightening skepticism about the limits of monetary policy and the fate of Abenomics.

It is an ominous development for Mr. Kuroda. He sees Japan’s long bout of deflation as a psychological disorder as much as an economic disease. His job as BOJ chief has been part central banker, part national psychologist. It has been all about creating confidence. From the start, many said he was attempting the impossible. Deflation is notoriously difficult to escape, and had taken deep root in Japan after years of policy missteps. Last summer he invoked a fairy tale to describe his task. “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it,’” Mr. Kuroda said in June last year. “Yes, what we need is a positive attitude and conviction.”

Answering questions in parliament Friday, Mr. Kuroda dismissed claims that the introduction of negative interest rates were to blame for the recent stock market selloff. He pointed to global market volatility, and said the negative rates have had their intended effects, driving down yields on short- and long-term government bonds. “I believe those effects will steadily spread through the economy and prices going forward,” he said. Mr. Kuroda has also repeatedly rejected the notion that the central bank is running out of ammunition, insisting that there is “no limit” to its policy options. “If we judge that existing measures in the tool kit are not enough to achieve the goal, what we have to do is to devise new tools, rather than give up the goal,” he said.

Read more …

Peter Pan rules.

BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)

The deputy governor of the Bank of Japan has called on the country’s government to pull its weight, as the central bank strains to haul the world’s third-largest economy decisively out of deflation. Last month the BoJ embarked on its latest round of easing, saying it would start charging for excess reserves deposited at the central bank. At the time, it said it wanted to provide a shot of stimulus at a critical moment, just ahead of the annual Spring round of wage negotiations between companies and workers’ groups. In a speech in New York on Friday, deputy governor Hiroshi Nakaso said that the government now needed to do more to boost Japan’s growth potential. He referred to a joint statement on overcoming deflation, signed by the BoJ and the government in January 2013, a few months before the bank embarked on its first round of easing under the current governor, Haruhiko Kuroda.

In it, the central bank pledged to stimulate demand through ultra-aggressive monetary policy while the government promised to pursue ‘all possible’ supply-side reforms. Now that the Bank of Japan has taken monetary easing one step further … I think that the original third arrow of Abenomics, the growth strategy, must also fly faster, he said. The unusually candid speech comes as the success of the mix of the policies pursued by prime minister, Shinzo Abe, remains in the balance. After three separate bursts of monetary stimulus from the BoJ, inflation has gained some momentum while corporate profits have been boosted by a sharp drop in the value of the yen. However, Japan’s potential growth rate remains so low — around or slightly below 0.5%, according to the BoJ’s estimate – that any setback has the potential to tip the country into recession.

Economists at Goldman Sachs expect that the first reading of GDP figures for the fourth quarter, due on Monday, will show an annualised contraction of 1.2% from the third quarter, hit by a slump in consumer spending due to a mild weather and smaller winter bonuses. The BoJ now fears that many cash-hoarding companies are set to resist calls for higher wages, as they assume that inflation will be kept in check by a combination of weak demand, a lower oil price and a stronger currency. The national trades union group, Rengo, has already signalled a less aggressive stance in this year’s negotiations, saying it is aiming at an across-the-board increase of “around 2%” — less than the 2015 demand for “at least” 2%. That could threaten progress toward the BoJ’s sole policy target: an inflation rate of 2%. In December Japan’s consumer price index stood at 0.1%, excluding fresh food, and 0.8% excluding energy.

“The sluggish increase in nominal wages is thought to reflect low productivity growth and the strong deflationary mindset,” said Mr Nakaso. “My answer to what kind of policies are needed, is that both monetary and fiscal policies and structural reforms are indispensable.” Mr Nakaso is likely to make similar remarks during a speech to business leaders next month in Okinawa, according to people familiar with his thinking, imploring the government to take bolder measures to unlock growth. Takuji Okubo, managing director at Japan Macro Advisors, a research boutique, said that the government’s ‘third arrow’ record has been poor, citing a lack of true reform of the labour market, the service sector or the public pension system. He added that the sharp sell-off in the Japanese stock market since the beginning of the year, coupled with a renewed appreciation of the yen, seems strong enough to put an end to the Abenomics boom. “The expiry date has now come to pass,” he said.

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“What central bankers are doing now feels like a Jedi trick..”

Swedish Central Bank Move Creates a Global Shudder (NY Times)

What if the bazooka is shooting blanks? Since the financial crisis, it has been gospel for many investors that some combination of actions by central banks — bond buying, bold promises or flirtations with negative interest rates — would be enough to keep the global economy out of recession. But investors’ distress over the latest volley by a major central bank, the surprise decision on Thursday by the Swedish central bank to lower its short-term rate to minus 0.50% from minus 0.35%, has heightened fears that brazen actions by central bankers are now making things worse, not better. Global stock markets sank, the price of oil plunged to a 13-year low and investors fled to safe haven instruments like gold and United States Treasury bills.

Markets generally embrace conviction and run away from indecision — which is what many see in the policy making of some of the large central banks these days. The Swedish central bank, the Riksbank, for example, has been criticized in the past for prematurely raising rates, and Thursday’s rate cut was opposed by two bank deputies. At the ECB Jens Weidmann, the head of the powerful German Bundesbank, remains at odds with the president, Mario Draghi, in terms of how loose the central bank’s policies should be. And in the United States, the Federal Reserve is seen by some market participants to be wavering in its commitment to higher rates in light of the market turmoil.

[..] “What central bankers are doing now feels like a Jedi trick,” said Albert Edwards, global strategist for Société Générale in London. “Everyone is in a currency war and inflation expectations are collapsing.” In other words, drastic steps by central bankers in Europe, Japan and China to keep their currencies weak and exports strong may not only be counterproductive in terms of stimulating global growth — someone has to buy all those Chinese and Japanese goods — but has other consequences as well. Negative interest rates, for example, are not only bad for bank profits and lending prospects, they can also make savers more fearful, hampering the central aim, which is to get people to spend, not hoard. All of which can lead to a global recession.

A perma-bear like Mr. Edwards is always in possession of a multitude of negative economic indicators to prove his thesis, which, in his case, is a fall of 75% in the S.&P. 500 from its peak last summer. Some are obvious and have been highlighted by most economists, like the increasing interest rates on corporate bonds in the United States — both investment grade and junk. But he also pointed to a recent release from the Fed that showed that loan officers at United States banks said that they had been tightening their loan standards for two consecutive quarters. “You tend to see that in a recession,” Mr. Edwards said. His prediction of a so-called deflationary ice age is still considered a fringe view of sorts, although he did say that a record 950 people (up from 700 the year before) attended his annual conference in London last month. Still, the notion that the global economy has not responded as it should to years of shock policies from central banks is more or less mainstream economic thinking right now.

[..] The well-known bond investor William H. Gross of Janus Capital took up this theme in his latest investment essay, arguing that there was no evidence to show that the financial wealth (and increased levels of debt) created by a long period of extra-low interest rates would spur growth in the real economy. As proof, he cited Japan’s persistent struggles to grow despite near-zero interest rates; subpar growth in the United States; and emerging market problems in China, Brazil and Venezuela. “There is a lot of risk in the global financial marketplace,” Mr. Gross said in an interview on Thursday. “It is incumbent on me to focus on safe assets now.”

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Debt is king, and Draghi its oracle.

Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)

Investors will look next week for a whiff of confirmation from Mario Draghi that they weren’t wrong to push bond yields to record lows in anticipation of fresh stimulus from the ECB. The ECB president’s speech to European lawmakers in Brussels on Monday will come after a turbulent five days in which global markets exposed a schism in the euro region’s debt markets. German 10-year bund yields approached their record low from April while Portugal’s jumped by the most since May 2012, before Draghi made his famous “whatever it takes” speech in July that year. Investor demand for havens at these lower yields faces a challenge on Feb. 17 when Germany auctions €5 billion ($5.6 billion) of 10-year bonds.

That’s followed the next day by France selling up to €8.5 billion of conventional and inflation-linked bonds. The offerings come while the prospects of slowing growth and depressed inflation are prompting investors to pile into the region’s safer fixed-income assets, driving yields down toward levels that triggered a selloff last April and May. “Investors will keep a close eye for any hints for what type of policy easing will be forthcoming,” said Nick Stamenkovic at broker RIA Capital Markets. “People are plumping for safety, core government bonds and demanding a higher risk premium on peripherals in particular, and also some semi-core bonds. The upcoming auctions outside of Germany will be a good test of sentiment.”

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“Pessimism is unwarranted.” Darn, and I though it was time to panic. Finally. They can’t even agree on that.

There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves

If one line of reasoning for the plunge in bank stocks is that monetary policy has lost its punch, investors would do well to recall a law of modern investing: “Don’t fight the Fed.” As the week draws to a close, some Wall Street economists and strategists say monetary authorities have plenty more tricks up their sleeve – even after more than 635 interest-rate cuts since the financial crisis by Bank of America’s reckoning and with central banks now sitting on more than $23 trillion of assets. “Time and time again policy makers have shown themselves to be bolder and more inventive than asset markets give them credit for,” Stephen Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, said in a report to clients late on Thursday. “Pessimism is unwarranted.”

His proposal is that officials focus their policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it. While he thinks targeted lending could help achieve that, he advocates what he calls “cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds. “The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that will be anathema otherwise,” Englander said. In a similar vein, Hans Redeker at Morgan Stanley in London, is declaring it’s time for central banks to begin using quantitative easing to buy private assets having previously focused on government debt.

“I would actually look into the next step of the monetary toolbox,” Redeker said in a Bloomberg Television interview. “We need to fight demand deficiency.” Critics say that’s the source of the problem. There’s little more bond-buying and rate cutting can do to stoke the real economy. And markets, they say, now recognize that. Part of this week’s pain in markets has stemmed from the concern that the negative interest rates increasingly embraced by the likes of the Bank of Japan and European Central Bank do more harm than good by hitting bank profits. That hasn’t stopped JPMorgan economists led by Bruce Kasman suggesting central banks could cut much deeper without any major side effects so long as they limit the reserves they are targeting. Citigroup said yesterday that Israel, the Czech Republic, Norway and perhaps Canada could also join the subzero club in the next couple of years.

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“Look, these are very smart people..”

Former Dallas Fed President Calls Out Central Banks (CNBC)

Are central banks’ aggressive monetary policies to blame for the today’s economic woes? Former Dallas Federal Reserve President Robert McTeer says yes. Speaking to CNBC’s “Fast Money” this week, McTeer explained that while the Fedis comprised of smart and carefully minded individuals, they dropped the ball when it comes to their current approach. “[The Fed] waited too long to begin the tightening process,” noted the former FOMC member and 36-year veteran of the Federal Reserve system. The central banker’s critique echoed that of other economists, whom have argued that the trillions of cheap dollars flooding the system have exacerbated the current downturn, and made the market addicted to the liquidity.

Known for his prolific writing and plain-speaking style while at the Fed, McTeer has been a critic of the Fed’s ultra-loose monetary policy, which he previously argued stayed too low for too long. However, McTeer admitted that bad luck and unfortunate timing has compounded the current undesirable circumstances. He told CNBC that “as soon as they took the first step [to tighten], international developments overwhelmed the situation.” At that time, China’s slowdown became more pronounced, upsetting markets. McTeer further believes that the Fed’s delay enabled other central banks—from Japan to the European Central Bank—to enact negative interest rates, a policy move with which he disagreed. Now, with international markets in crisis, McTeer says Fed chair Janet Yellen needs to take a more proactive approach in addressing global concerns.

The former central banker advised that “she should probably show more concern [related] to recent market turmoil” when speaking in the future. On Friday, international markets saw a sell-off in Asia where the Nikkei dropped 4.8% to 14,952, its lowest close since October, 2014. Additionally, the yen ended the week down 11%, unwinding some of the massive flight to safety buying that has recently boosted Japan’s currency. The Dow Jones Industrial Average, S&P 500 Index and Nasdaq all posted big gains, and snapped a five day losing streak. At the same time, the market’s latest mantra has become negative interest rates, which have been introduced in Japan and Europe. Earlier this week, Yellen refused to rule out the policy move for the world’s largest economy, but acknowledged the issue needed more study.

Negative rates, however, is an idea McTeer does not endorse. The central bank “is not going to do it, but furthermore they can’t do it,” he noted, speaking of the Fed’s next potential move. In McTeer’s interpretation, negative rates are not an options because the Fed has adopted a new mechanical procedure for establishing the Fed funds rate, which is the interest rate that banks use to calculate overnight loans to other institutions. The rate currently calls for a positivity on bank deposits. McTeer believes that if the Fed tries to go negative, it would take years to re-work the system.

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Buybacks then! Solves everything.

Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)

It’s as if Abenomics never happened for Japan’s biggest brokerages. Nomura and Daiwa Securities fell for an eighth straight day in Tokyo as the deepening stock-market rout continues to pummel investment banks around the world. Nomura is now trading below its price when Shinzo Abe became prime minister in December 2012, ushering in an economic-stimulus policy that sparked a stock-market rally and a profit rebound at Japan’s largest securities firm. The selloff may be overdone because brokerages remain stronger than they were before the Abe administration, according to SBI Securities analyst Nobuyuki Fujimoto. “Their fundamentals haven’t deteriorated that much,” Fujimoto said by phone. “The tide will turn as overseas investors in particular decide whether their profitability is really worse than it was before Abenomics.”

Shares of Tokyo-based Nomura closed 9.2% lower Friday, extending their decline to 33% since the company posted worse-than-estimated earnings on Feb. 2. At 446.6 yen, the price is the lowest since Dec. 21, 2012. Daiwa dropped 8.2% to 591.1 yen, the weakest since the month before Bank of Japan Governor Haruhiko Kuroda unveiled his first round of monetary easing in April 2013. An index of securities firms was the third-worst performer on the benchmark Topix, which slumped 5.4%. Investors continued dumping Nomura shares even after Chief Executive Officer Koji Nagai said this week that the company is considering buying back stock while it’s cheap. “The brokerage must also be advising Japanese firms to consider share buybacks, if the CEO’s remarks are any guide,” said Fujimoto. “I wouldn’t be surprised to see companies start announcing such plans soon, which will be beneficial to brokerages.”

Nomura has announced five share buybacks since May 2013, including two last year. The company is now trading at 0.57 times the book value of its assets, the cheapest since November 2012, according to data compiled by Bloomberg. Daiwa has a price-to-book ratio of 0.80 “We’re considering returning profit appropriately” to shareholders, Nagai said in an interview on Tuesday. “There’s no doubt that it’s better for us to do it when they’re cheap,” he said, declining to comment on the timing and size of any buyback.

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Oh wait, not everything…

Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)

Investors who scooped up bonds sold by Deutsche Bank last month are pushing for better terms in the bank’s $5.4 billion debt buyback plan, saying they were misled because the German lender failed to disclose its true financial position before the sale, according to people with knowledge of the matter. Some of the bondholders who participated in the $1.75 billion, two-part offering say the bank, which announced a fourth-quarter earnings loss less than two weeks after the sale, should’ve made that disclosure before selling the bonds, the people said, asking not to be identified as the discussions are private. Some investors are so upset that they may raise the issue with regulators, the people said.

The money managers are planning to hold discussions next week to explore their options on how best to challenge the bank, the people said. In addition to raising concern about disclosure, the bondholders are pushing for greater priority and better terms in the bank’s buyback offer announced Friday. Deutsche Bank’s buyback comes as the lender attempts to reassure investors who dumped European bank bonds and shares this week amid concerns over declining earnings and slowing global growth. The lender’s debt in a Bloomberg investment-grade bond index have dropped 2.7% in the past month compared with a 0.4% decline for all bank debt. The $750 million of 4.1% notes sold in January slumped 5.7%.

The firms that bought the biggest piece of the January offering at 100 cents on the dollar are now getting an offer to sell them back to the bank at as much as 97.3 cents, according to calculations by Bloomberg Intelligence analyst Arnold Kakuda. The securities traded at 95.6 cents on Thursday. Deutsche Bank, which unveiled the sale of the bonds on Jan. 8, said on Jan. 21 that it would post a €2.1 billion loss for the fourth quarter after setting aside more money for legal matters and taking a restructuring charge. Moody’s Investors Service cut its long-term debt rating on the bank to Baa1 from A3, citing structural issues that contributed to “weak profitability,” and the expense of maintaining a global capital-market footprint, the ratings firm said in a Jan. 25 statement.

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Junk bonds will be back.

This is How Financial Chaos Begins (WS)

There are over $1.8 trillion of US junk bonds outstanding. It’s the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was “contained.” Yet contagion has spread from energy, metals, and mining to other industries and up the scale. According to UBS, about $1 trillion of these junk bonds are now “stressed” or “distressed.” And the entire corporate bond market, which is far larger than the stock market, is getting antsy. The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy. Today, that average yield is nearly 22%! Today even the average yield spread between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:

At this cost of capital, companies can no longer borrow. Since they’re cash-flow negative, they’ll run out of liquidity sooner or later. When that happens, defaults jump, which blows out spreads even further, which is what happened during the Financial Crisis. The market seizes. Financial chaos ensues. It didn’t help that Standard & Poor’s just went on a “down-grade binge,” as S&P Capital IQ LCD called it, hammering 25 energy companies deeper into junk, 11 of them into the “substantial-risk” category of CCC+ or below. Back in the summer of 2014, during the peak of the wild credit bubble beautifully conjured up by the Fed, companies in this category had no problems issuing new debt in order to service existing debt, fill cash-flow holes, blow it on special dividends to their private-equity owners, and what not. The average yield of CCC or lower rated bonds at the time was around 8%.

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Beware: “.. which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%..”

Pension Funds See 20% Spike In Deficit (AP)

Oregon Treasurer and Portland mayoral candidate Ted Wheeler issued a statement last week noting that the state pension fund’s investment returns were 2.1% in 2015. That beat the Standard & Poor’s 500 index and topped the performance of 88% of comparable institutional investment funds. What Wheeler’s statement didn’t mention was that investment returns for the year still fell 5.6 percentage points below the system’s 7.75% assumed rate of return for 2015. That’s terrible news for public employers and taxpayers. It means the pension system’s unfunded liability just increased by another 20% — growing from $18 billion at the end of 2014 to between $21 and $22 billion a year later. That will put renewed upward pressure on payments the system’s 925 public-sector employers are required to make.

Public employers had already been warned to expect maximum increases over the next six years, which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%, redirecting billions of dollars out of public coffers and into the retirement system. In reality, those “maximum” increases could be a lot bigger. Milliman Inc., the actuary for the Public Employees Retirement System, told board members at their regular meeting Feb. 5 that the pension fund now has 71 to 72 cents in assets for every $1 in liabilities. That’s an average number across the entire system. Some individual employers’ accounts, including the system’s school district rate pool, are flirting with the 70% threshold that triggers larger maximum rate increases.

Here’s how it works: To prevent rate spikes, PERS limits the biennial change in employers’ payments to 20% of their existing rate. For example, if an employer is required to make contributions equal to 20% of payroll, the rate increase is “collared” to 20% of that number, or a 4 percentage-point increase. That 20% increase is what employers have been warned to expect every other year for the next six years. But when an employer’s funded status falls below 70%, that collar begins to widen on a sliding scale — up to a maximum of 40%.

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Feb 132016
 
 February 13, 2016  Posted by at 10:09 am Finance Tagged with: , , , , , , , , ,  6 Responses »


DPC New Orleans milk cart1903

Abenomics Is In Poor Health After Nikkei Slide, And It May Be Terminal (G.)
Yen’s Best Two-Week Run Since 1998 Just the Start (BBG)
The World’s Hottest Trade Has Suddenly Turned Ice-Cold (CNBC)
Credit Default Swaps Are Back As Investors Look For Panic Button (BBG)
‘Austrians Need Constitutional Right to Pay in Cash’ (BBG)
The Shipping Industry Is Suffering From China’s Trade Slowdown (BBG)
China Central Bank: Speculators Should Not Dominate Sentiment (Reuters)
America’s Big Banks Are Fleeing The Mortgage Market (MW)
Large Increase in Debts Held by Americans Over Age 50 (WSJ)
The Eurozone Crisis Is Back On The Boil (Guardian)
Schäuble Says Portugal Debt Woes Trump ‘Strong’ Deutsche Bank (BBG)
European Banks Are In The Eye Of A New Financial Storm (Economist)
150,000 Penguins Die After Giant Iceberg Renders Colony Landlocked (Guardian)
Four Billion People Face Severe Water Scarcity (Guardian)
Merkel Turns to ‘Coalition of Willing’ to Tackle Refugee Crisis (BBG)
EU Is Poised To Restrict Passport-Free Travel (AP)
80,000 Refugees Arrive In Europe In First Six Weeks Of 2016 (UNHCR)

It was terminal when it began.

Abenomics Is In Poor Health After Nikkei Slide, And It May Be Terminal (G.)

Not long ago, Shinzo Abe was being heralded for the early success of his grand design to bring Japan out of a deflationary spiral that had haunted the world’s third-biggest economy for two decades. Soon after Abe became prime minister in December 2012, the first two of the three tenets of his ‘Abenomics’ programme – monetary easing and fiscal stimulus – were having the desired effect. In the first year of the programme, the Nikkei index jumped nearly 60%, and the strong yen, the scourge of the country’s exporters, finally ceded ground to the US dollar. And in April 2013 came the appointment of Haruhiko Kuroda, a Bank of Japan governor who shared Abe’s zeal for deflation busting through ever looser monetary policy.

But by Friday, at the end of a dismal week for the Nikkei share index, market volatility caused by renewed fears over the health of the global economy has left Abe’s prescription for economic recovery in jeopardy. While, as some suggest, it is too early to read the last rites for Abenomics, few would disagree that its symptoms are in danger of becoming terminal. There is damning evidence for that claim; enough, in fact, for Abe to reportedly summon key economic advisers on Friday to discuss a way out of the impasse. Japanese shares registered their biggest weekly drop for more than seven years after shedding 4.8% for the Nikkei s lowest close since October 2014. That took the index below the 15,000 level investors regard as a psychological watershed, and erased all the gains made since the Bank of Japan made the shock decision in October 2014 to inject 80tn yen into the economy.

To compound the problem, another pillar of Abenomics – a weak yen – is also crumbling, with the Japanese currency rising to its strongest level for more than a year on Friday. The intention was for a weak yen to push up corporate earnings and help generate inflation by raising import prices; instead, companies are now cutting earnings forecasts as speculation mounts that Japan will again intervene to rein in the yen’s surge. In recent weeks, slumping oil costs and soft consumer spending – the driving force behind 60% of Japan’s economic activity – have brought inflation to a halt. Official data released last month showed that Japan’s inflation rate came in at 0.5% in 2015, way below the Bank of Japan’s 2% target, as the government struggled to convince cautious firms to usher in big wage rises to stir spending and drive up prices.

In response, the Bank of Japan extended the deadline for achieving its 2% inflation target to the first half of the fiscal year 2017, from its previous estimate of the second half of fiscal 2016. In fairness, Abe is partly the victim of factors beyond his control, namely China’s slowdown, weak overseas demand and plunging oil prices. The problem for Abe and Kuroda is that they are quickly running out of options: witness how the market boost from last week’s surprise decision to adopt negative interest rates ended after a couple of days with barely a whimper. By the time Japan hosts G7 leaders this summer, Abe could be forced to concede defeat in his principal aim of dragging Japan out of deflation and boosting growth.

But higher share prices and a weaker yen were only part of the scheme. He has barely started to address the structural reforms comprising the “third arrow” of Abenomics: a shrinking and ageing workforce and the urgent need to boost the role of women in the economy. Next year, he is expected to introduce a highly controversial increase in the consumption tax – a move that will help Japan tackle its public debt and pay for rising health and social security costs, but which could also dampen consumer spending, the driving force behind 60% of the economy. He may be inclined to disagree after a month of upheaval that also saw the resignation of his economics minister, but Abe’s troubles may be only just beginning.

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When you lose the currency war.

Yen’s Best Two-Week Run Since 1998 Just the Start (BBG)

When the going gets tough, foreign-exchange traders turn to the yen. Japan’s currency may extend its biggest two-week rally since 1998 as investors continue to seek out refuge assets amid market turmoil, according Citigroup Inc. State Street Global Advisors Inc., which oversees about $2.4 trillion, says it’s buying yen and selling dollars as the tumult gripping financial markets bolsters the Japanese currency’s appeal. “We’re not counting on the market mood shifting any time soon,” said Steven Englander at Citigroup. Citigroup, world’s biggest foreign-exchange trader according to Euromoney magazine, expects haven currencies including the yen, euro and Swiss franc to appreciate in the near term, even though it said investors are being overly pessimistic about the prospects for economic growth in the U.S. and monetary stimulus elsewhere.

The yen has defied predictions to weaken this year while its biggest counterpart, the dollar, has upended forecasts for gains. Currency traders are questioning the idea that the U.S. economy is strong enough for the Federal Reserve to raise interest rates while central bankers in Tokyo and Frankfurt consider adding to stimulus. Japan’s currency rose 3.2% this week to 113.25 per dollar, adding to last week’s 3.7% gain. Its strength contrasts with a median forecast for the currency to drop to 123 against the dollar by the end of the year. Global equities fell into a bear market this week, and commodities declined, amid growing signs that central-bank policy tools were losing their stimulative effects. Fed Chair Janet Yellen signaled financial-market volatility may delay rate increases as the central bank assesses the impact of recent turmoil on domestic growth.

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“In 2009, the ETF enjoyed average daily volume of just 10,000 to 20,000 shares. By 2012, about 200,000 shares were being traded each day. The DXJ rallied tremendously in the next half a year, and by mid-2013 was seeing about 7 million to 8 million shares trade daily..”

The World’s Hottest Trade Has Suddenly Turned Ice-Cold (CNBC)

An international trade that once looked like a no-brainer has turned into a major headache. The WisdomTree Japan Hedged Equity Fund (DXJ), which combines a long position on Japanese stocks with a short position on the Japanese yen, sounds like a niche product. But as that trade played out beautifully over the past few years, with Japanese stocks soaring as the yen tanked, the ETF has become downright mainstream. In 2009, the ETF enjoyed average daily volume of just 10,000 to 20,000 shares. By 2012, about 200,000 shares were being traded each day. The DXJ rallied tremendously in the next half a year, and by mid-2013 was seeing about 7 million to 8 million shares trade daily, a pace it has maintained up to the present.

The product plays into a popular macro thesis: Expansive policies from the Bank of Japan should help Japanese stocks and hurt the yen. This trend indeed played out powerfully for a time, leading the DXJ to nearly double from November 2012 to June 2015. But the good times didn’t last. In the eight months after hitting that June peak, the ETF lost nearly all of its gain, falling back to its lowest level in more than three years. This as both legs of the trade failed, with Japanese stocks sliding and the yen strengthening amid a global sell-off in risk assets. What may make this especially frustrating is that Japanese monetary authorities haven’t exactly given up on their plan to send the yen lower in order to foster long-dormant inflation and to boost exports.

To the contrary, the BOJ has introduced a negative interest rate policy — which utterly failed in halting the yen’s rise. In fact, the currency is enjoying its best week in years.

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Omen.

Credit Default Swaps Are Back As Investors Look For Panic Button (BBG)

As markets plunge globally, investors are seeking refuge in an all-but-forgotten place. Trading volumes in the credit-default swaps market — where banks and fund managers go to hedge against losses on corporate and government debt — have surged. Transactions tied to individual entities doubled in the four weeks ended Feb. 5 to a daily average of $12 billion, according to a JPMorgan analysis of trade repository data. The volume of contracts on benchmark indexes in the market increased two-fold during that period to an average of $87 billion a day. The growth could represent a shift. The credit derivatives market has contracted for almost a decade, after loose monetary policies triggered a big rally in assets including corporate bonds, which made investors less eager to protect against the worst.

Regulators have also urged banks to curb their risk taking, reducing the appetite for at least some dealers to trade the instruments. Now, stock markets are selling off and junk bond prices are plunging, increasing investor demand for protection. “The surge we’ve seen in trading is likely to stay with us for the foreseeable future,” said Geraud Charpin at BlueBay Asset Management, which has traded more credit-default swaps on individual credits in the past three months. “The credit cycle has turned, so there’s more appetite to go short and buy protection.” Risk measures fell on Friday after soaring this week to the highest levels since at least 2012 in the U.S., and 2013 in Europe. The cost of insuring Deutsche Bank’s subordinated debt dropped from a record after the German lender said it planned to buy back about $5.4 billion of bonds to allay investor concerns about its finances. The bank’s shares have lost about a third of their value this year.

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The EU just gets crazier by the day. But currency in circulation is way up.

‘Austrians Need Constitutional Right to Pay in Cash’ (BBG)

Austrians should have the constitutional right to use cash to protect their privacy, Deputy Economy Minister Harald Mahrer said, as the EU considers curbing the use of banknotes and coins. “We don’t want someone to be able to track digitally what we buy, eat and drink, what books we read and what movies we watch,” Mahrer said on Austrian public radio station Oe1. “We will fight everywhere against rules” including caps on cash purchases, he said. EU finance ministers vowed at a meeting in Brussels on Friday to crack down on “illicit cash movements.” They urged the European Commission to “explore the need for appropriate restrictions on cash payments exceeding certain thresholds and to engage with the ECB to consider appropriate measures regarding high denomination notes, in particular the €500 note.” Ministers told the commission to report on its findings by May 1.

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“..orders for new vessels dropped 40% in 2015 [..] The demolition rate for unwanted vessels jumped 15%.”

The Shipping Industry Is Suffering From China’s Trade Slowdown (BBG)

When business slows and owners of ships and offshore oil rigs need a place to store their unneeded vessels, Saravanan Krishna suddenly becomes one of the industry’s most popular executives. Krishna is the operation director of International Shipcare, a Malaysian company that mothballs ships and rigs, and these days he’s busy taking calls from beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number a year ago. More are on the way. “There’s a huge demand,” he says. “People are calling us not to lay up one ship but 15 or 20.” Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom.

Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8% in 2015, while its imports tumbled 13.2%. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76% since August and is now at a record low. Shipping rates for Asia-originated routes have dropped, too, and traffic at some of the region’s major ports is falling. In Singapore, the world’s second-largest port, container traffic fell 8.7% in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5% last year. Beyond Asia, the giant port of Rotterdam in the Netherlands recorded a dip in containerized traffic for the year. Globally, orders for new vessels dropped 40% in 2015, to $69 billion, according to Clarksons Research. The demolition rate for unwanted vessels jumped 15%.

Just a few years ago, as the global economy improved and oil prices rose, many companies ordered more fuel-efficient ships. There were more than 1,200 orders for bulk carriers that transport iron ore, coal, and grain in 2013, compared with just 250 last year, according to Clarksons. Many of the ships ordered are now in operation, says Tim Huxley, chief executive officer of Wah Kwong Maritime Transport Holdings, a Hong Kong-based owner of bulk carriers and tankers. “You have a massive oversupply,” he says. The damage is especially severe in China, the world’s leading producer of ships. New orders for Chinese shipbuilders fell by nearly half last year, according to the Ministry of Industry and Information Technology. In December, Zhoushan Wuzhou Ship Repairing & Building became the first state-owned shipbuilder to go bankrupt in a decade.

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Beijing wants monopoly on sentiment.

China Central Bank: Speculators Should Not Dominate Sentiment (Reuters)

Speculators should not be allowed to dominate market sentiment regarding China’s foreign exchange reserves and it was quite normal for reserves to fall as well as rise, central bank governor Zhou Xiaochuan was quoted as saying on Saturday. China’s foreign reserves fell for a third straight month in January, as the central bank dumped dollars to defend the yuan and prevent an increase in capital outflows. In an interview carried in the Chinese financial magazine Caixin, Zhou said yuan exchange reform would help the market be more flexible in dealing with speculative forces. There was a need to distinguish capital outflows from capital flight, and tight capital controls would not be effective for China, he said. China has not fully liberalized its capital account.

Zhou added that there was no basis for the yuan to keep depreciating, and China would keep the yuan basically stable versus a basket of currencies while allowing greater volatility against the U.S. dollar. The government also needed to prevent systemic risks in the economy, and prevent “cross infection” between the stock, debt and currency markets, he said. The comments come after China reported economic growth of 6.9% for 2015, its weakest in 25 years, while depreciation pressure on the yuan adds to the case for the central bank to take more economic stimulus measures over the near-term. A slew of economic indicators has sent mixed signals to markets at the start of 2016 over the health of China’s economy. Activity in the services sector expanded at its fastest pace in six months in January, a private survey showed on Feb. 3, while manufacturing activity fell to the lowest since August 2012.

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“..the four largest commercial banks will “downsize or exit entirely from the business of originating and servicing residential mortgages.”

America’s Big Banks Are Fleeing The Mortgage Market (MW)

When it comes to residential mortgages, big banks are waving the white flag. Banks originated 74% of all mortgages in 2007, but their share fell to 52% in 2014, the most recent data available from the Mortgage Bankers Association. And it could go even lower. But even at these levels, the big bank backtrack is reshaping a lending landscape that’s already undergone seismic shifts since the housing bubble burst. While there’s widespread agreement that banks should have been reined in — and perhaps punished — after playing a major role in the housing bubble that helped tank the economy, the past few years have been tough for banks’ mortgage businesses. They now face a regulatory environment so strict that many are afraid to lend, even to customers with the most pristine credit.

They’re still paying up for misdeeds done during the bubble. There’s essentially no private bond market to whom to sell mortgages. And fighting those battles on behalf of their least-profitable divisions means residential lending just isn’t worth it for many banks. “We can’t make money in the business,” BankUnited CEO John Kanas said when he announced a mortgage retreat on a January earnings call. “We realized that this was the lowest-margin, most volatile business we had and we decided that we should exit.” Of the top 10 originators in 2015, banks lent 28.6% of all mortgages, according to data from Inside Mortgage Finance. That’s about half their share in 2012, when banks among the top 10 originators accounted for 54.4% of all mortgages.

For many analysts, that step is only natural. “The fact is that the cost of capital and compliance has convinced many bankers that making home loans to American families is not worth the risk,” said Chris Whalen, a long-time bank analyst now with Kroll Bond Rating Agency, in a speech early in February. Whalen expects the four largest commercial banks will “downsize or exit entirely from the business of originating and servicing residential mortgages.”

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Boomers. They’re supposed to be the richest Americans. “..the aggregate debt of the average Baby Boomer has soared 169% since 2003..”

Large Increase in Debts Held by Americans Over Age 50 (WSJ)

Americans in their 50s, 60s and 70s are carrying unprecedented amounts of debt, a shift that reflects both the aging of the baby boomer generation and their greater likelihood of retaining mortgage, auto and student debt at much later ages than previous generations. The average 65-year-old borrower has 47% more mortgage debt and 29% more auto debt than 65-year-olds had in 2003, according to data from the Federal Reserve Bank of New York released Friday. The result: U.S. household debt is vastly different than it was before the financial crisis, when many younger households had taken on large debts they could no longer afford when the bottom fell out of the economy.

The shift represents a “reallocation of debt from young [people], with historically weak repayment, to retirement- aged consumers, with historically strong repayment,” according to New York Fed economist Meta Brown in a presentation of the findings. Older borrowers have historically been less likely to default on loans and have typically been successful at shrinking their debt balances. But greater borrowing among this age group could become alarming if evidence mounted that large numbers of people were entering retirement with debts they couldn’t manage. So far, that doesn’t appear to be the case. Most of the households with debt also have higher credit scores and more assets than in the past.

“Retirement-aged consumers’ repayment has shown little sign of developing weakness as their balances have grown,” according to Ms. Brown. The data were released in conjunction with the New York Fed’s quarterly report on household debt, that aggregates millions of credit reports from the credit-rating agency Equifax. The report was launched in 2010 to track the changing debt behaviors of U.S. households after the financial crisis. For the last two years, household debts have been slowly rising, although they remain well below where they were in 2008. That trend continued in the final quarter of 2015, with overall household indebtedness rising by $51 billion to $ 12.1 trillion.

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Timber!

The Eurozone Crisis Is Back On The Boil (Guardian)

Greece is back in recession. Italy is barely growing. Portugal expanded but only at half the expected rate. The message could hardly be clearer: the next phase of the eurozone crisis is about to begin. On the face of it, the performance of the eurozone economy in the final three months of 2015 looks solid if unspectacular, with growth as measured by GDP up by 0.3%. But scratch beneath the surface and the picture looks far less rosy. The beneficial impacts of the European Central Bank’s quantitative easing programme have started to wear off, as has the effect of the big drop in oil prices in the second half of 2014. The eurozone peaked in the second quarter of 2015 and the trend was starting to weaken even before the recent turbulence on the financial markets.

Three individual countries bear closer examination. The first is Germany, for which growth of 0.3% in the fourth quarter of 2015 and 1.4% for the year as a whole is as good as it gets. Exports – the mainstay of the German economy – are going to face a much more challenging international climate in 2016, particularly with the euro strengthening on the foreign exchanges. Finland is noteworthy, not just because it is officially back in recession after two successive quarters of negative growth and still has a smaller economy than it did when the financial crisis erupted in 2008, but because its performance is worse than that of Denmark and Sweden, two Scandinavian EU members not in the single currency.

But by far the most worrying country is Greece, where a crumbling economy and the attempts to impose even more draconian austerity is leading, unsurprisingly, to violent protests on the streets. A contraction in growth makes it even harder for Greece to achieve the already ridiculously ambitious deficit and debt reduction targets set for it by its creditors, and on past form that will lead sooner or later (sooner in this case) to a fresh financial crisis and the imposition of further austerity measures. After six months out of the headlines, Greece is coming back to the boil. The danger is that other weak countries on the eurozone’s periphery – most notably Italy and Portugal – suffer from contagion effects.

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He’s trying so hard to boost Deutsche confidence it’ll backfire. People are going to say: ‘let’s see what you got’.

Schäuble Says Portugal Debt Woes Trump ‘Strong’ Deutsche Bank (BBG)

The volatile Portuguese bond market is more alarming than plunging confidence in Deutsche Bank AG, Europe’s largest lender, according to German Finance Minister Wolfgang Schaeuble. Even as a global rout in stocks has driven down European bank shares by 27% this year, Schaeuble warned on Friday after a meeting of EU finance ministers in Brussels that Portugal doesn’t have enough “resilience.” “Portugal must do everything to counter uncertainty in financial markets,” he said. The German finance minister’s comments come after the yield on Portugal’s 10-year bond fluctuated in a range of 143 basis points this week, the largest five-day swing since July 2013. Prime Minister Antonio Costa, who was sworn in at the end of November, has rolled back reform measures introduced during the nation’s bailout program that ended in 2014.

Deutsche Bank, which issued a statement Friday reassuring investors it has enough reserves to service debt obligations, “has sufficient capital and is well positioned,” Schaeuble said. In an effort to allay anxieties, the Frankfurt-based lender announced plans to buy back about $5.4 billion of bonds in euros and dollars Friday. The move comes after the cost of insuring its senior debt via credit-default swaps rose to the highest since 2011. Deutsche Bank isn’t alone as confidence in banks’ abilities to return profits in a low interest rate environment is waning. Global banks including Citigroup, Bank of America, Credit Suisse and Deutsche Bank have all plunged more than 32%. European finance ministers, when asked about the negative sentiment around European banks, remained upbeat, citing confidence in the safeguards put in place after Lehman Brothers went under in 2008. “We have taken precautions to make banks more resilient after the lessons from the financial and banking crisis,” Schaeuble said.

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The chain is as strong as…

European Banks Are In The Eye Of A New Financial Storm (Economist)

If the start of the year has been desperate for the world’s stockmarkets, it has been downright disastrous for shares in banks. Financial stocks are down by 19% in America. The declines have been even steeper elsewhere. Japanese banks’ shares have plunged by 36% since January 1st; Italian banks’ by 31% and Greek banks’ by a horrifying 60%. The fall in the overall European banking index of 24% has brought it close to the lows it plumbed in the summer of 2012, when the euro zone seemed on the verge of disintegration until Mario Draghi, the president of the ECB, promised to do “whatever it takes” to save it. The distress in Europe encompasses big banks as well as smaller ones. It has affected behemoths within the euro area such as Société Générale and Deutsche Bank – both of which saw their shares fall by 10% in hours this week – as well as giants outside it such as Barclays (based in Britain) and Credit Suisse (Switzerland).

The apparent frailty of European banks is especially disappointing given the efforts made in recent years to make them more robust, both through capital-raising and tougher regulation. Euro-zone banks issued over €250 billion ($280 billion) of new equity between 2007, when the global financial crisis began, and 2014, when the ECB took charge of supervising them. Before taking on the job, it combed through the books of 130 of the euro zone’s most important banks and found only modest shortfalls in capital. Some of the recent weakness in European banking shares arises from wider worries about the world economy that have also driven down financial stocks elsewhere. A slowdown in global growth is one threat. Another is that the negative interest rates being pursued by central banks to try to prod more life into economies will further sap banks’ profits.

A retreat in Japanese bank shares turned into a rout following such a decision in late January. Investors in European banks fret not just about lacklustre growth but also a possible move deeper into negative territory by the ECB in March. On February 11th Sweden’s central bank cut its benchmark rate from -0.35% to -0.5%, prompting shares in Swedish banks to tumble. But the malaise of European banking stocks has deeper roots. The fundamental problem is both that there are too many banks in Europe and that many are not profitable enough because they have clung to flawed business models. European investment banks lack the deep domestic capital markets that give their American competitors an edge. Deutsche, for instance, has only just resolved to hack back its investment bank in the face of a less hospitable regulatory environment following the financial crisis.

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What to say?

150,000 Penguins Die After Giant Iceberg Renders Colony Landlocked (Guardian)

An estimated 150,000 Adelie penguins living in Antarctica have died after an iceberg the size of Rome became grounded near their colony, forcing them to trek 60km to the sea for food. The penguins of Cape Denison in Commonwealth Bay used to live close to a large body of open water. However, in 2010 a colossal iceberg measuring 2900sq km became trapped in the bay, rendering the colony effectively landlocked.Penguins seeking food must now waddle 60km to the coast to fish. Over the years, the arduous journey has had a devastating effect on the size of the colony. Since 2011 the colony of 160,000 penguins has shrunk to just 10,000, according to research carried out by the Climate Change Research Centre at Australia’s University of New South Wales. Scientists predict the colony will be gone in 20 years unless the sea ice breaks up or the giant iceberg, dubbed B09B, is dislodged.

Penguins have been recorded in the area for more than 100 years. But the outlook for the penguins remaining at Cape Denison is dire. “The arrival of iceberg B09B in Commonwealth Bay, East Antarctica, and subsequent fast ice expansion has dramatically increased the distance Adélie penguins breeding at Cape Denison must travel in search of food,” said the researchers in an article in Antarctic Science. “The Cape Denison population could be extirpated within 20 years unless B09B relocates or the now perennial fast ice within the bay breaks out” “This has provided a natural experiment to investigate the impact of iceberg stranding events and sea ice expansion along the East Antarctic coast.” In contrast, a colony located just 8km from the coast of Commonwealth Bay is thriving, the researchers said. The iceberg had apparently been floating close to the coast for 20 years before crashing into a glacier and becoming stuck.

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The next trigger for mass migrations.

Four Billion People Face Severe Water Scarcity (Guardian)

At least two-thirds of the global population, over 4 billion people, live with severe water scarcity for at least one month every year, according to a major new analysis. The revelation shows water shortages, one of the most dangerous challenges the world faces, is far worse previously than thought. The new research also reveals that 500m people live in places where water consumption is double the amount replenished by rain for the entire year, leaving them extremely vulnerable as underground aquifers run down. Many of those living with fragile water resources are in India and China, but other regions highlighted are the central and western US, Australia and even the city of London. These water problems are set to worsen, according to the researchers, as population growth and increasing water use – particularly through eating meat – continues to rise.

In January, water crises were rated as one of three greatest risks of harm to people and economies in the next decade by the World Economic Forum, alongside climate change and mass migration. In places, such as Syria, the three risks come together: a recent study found that climate change made the severe 2007-2010 drought much more likely and the drought led to mass migration of farming families into cities. “If you look at environmental problems, [water scarcity] is certainly the top problem,” said Prof Arjen Hoekstra, at the University of Twente in the Netherlands and who led the new research. “One place where it is very, very acute is in Yemen.” Yemen could run out of water within a few years, but many other places are living on borrowed time as aquifers are continuously depleted, including Pakistan, Iran, Mexico, and Saudi Arabia. Hoekstra also highlights the Murray-Darling basin in Australia and the midwest of the US. “There you have the huge Ogallala acquifer, which is being depleted.”

He said even rich cities like London in the UK were living unsustainably: “You don’t have the water in the surrounding area to sustain the water flows” to London in the long term. The new study, published in the journal Science Advances on Friday, is the first to examine global water scarcity on a monthly basis and at a resolution of 31 miles or less. It analysed data from 1996-2005 and found severe water scarcity – defined as water use being more than twice the amount being replenished – affected 4 billion people for at least one month a year. “The results imply the global water situation is much worse than suggested by previous studies, which estimated such scarcity impacts between 1.7 billion and 3.1 billion people,” the researchers concluded. The new work also showed 1.8 billion people suffer severe water scarcity for at least half of every year.

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Making deals with Turkey while blaming Greece is just plain wrong on many different levels.

Merkel Turns to ‘Coalition of Willing’ to Tackle Refugee Crisis (BBG)

German Chancellor Angela Merkel is turning to a subgroup of European Union members to tackle the region’s refugee crisis as the bloc as a whole bickers over how to handle the biggest influx of migrants into Europe since World War II. Merkel plans to meet again with a “coalition of the willing” in Brussels ahead of an EU summit in the city next week. Turkish Prime Minister Ahmet Davutoglu will attend the talks, which have taken place at previous EU gatherings. Turkey is the main country from which migrants enter the EU. “This doesn’t have to do with a permanent distribution mechanism but rather a group of countries that are willing to consider” taking refugees once the illegal trafficking has been stopped, Merkel said Friday at a Berlin press conference with her Polish counterpart Beata Szydlo.

“We will then report quite transparently to all 28 member states where things stand.” Merkel traveled earlier this week to Turkey to discuss the crisis with Davutoglu. Merkel said on Monday the only way to end the flood of illegal migration across the Aegean Sea from Turkey into Greece was to replace it with a legal avenue. That would involve the EU resettling allotments of mostly Syrian refugees directly from Turkey in return for Turkey halting the flow of migrants, she said. The chancellor has thus far failed to secure a wider EU deal to share in housing and caring for those who have already reached the bloc.

Germany, which took in more than 1 million refugees last year, has pushed to implement a quota system to distribute migrants among EU members – something that a number of the bloc’s states, in particular in the east, argue should only be done on a voluntary basis. “For Poland, a permanent mechanism of relocating migrants is currently not acceptable,” Szydlo said at the press conference with Merkel. “I think we will continue talking about this. But I want to stress that Poland wants to actively participate in solving the migrant crisis because it’s very important for the EU as a whole.”

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They’re too thick to see that this means the end of the union.

EU Is Poised To Restrict Passport-Free Travel (AP)

EU countries are poised to restrict passport-free travel by invoking an emergency rule to keep some border controls for two more years because of the migration crisis and Greece’s troubles in controlling its border, according to EU documents seen by AP. The switch would reverse a decades-old trend of expanding passport-free travel in Europe. Since 1995, people have been able to cross borders among Schengen Area member countries without document checks. Each of the current 26 countries in the Schengen Area is allowed to unilaterally put up border controls for a maximum of six months, but that time limit can be extended for up to two years if a member is found to be failing to protect its borders.

The documents show that EU policy makers are preparing to make unprecedented use of an emergency provision by declaring that Greece is failing to sufficiently protect it border. Some 2,000 people are still arriving daily on Greek islands in smugglers’ boats from Turkey, most of them keen to move deeper into Europe to wealthier countries like Germany and Sweden. A European official showed the documents to the AP on condition of anonymity because the documents are confidential. Greek government officials declined to comment on the content of documents not made public. In Brussels on Friday, EU nations acknowledged that the overall functioning of Schengen “is at serious risk” and said Greece must make further efforts to address “serious deficiencies” within the next three months.

European inspectors visited Greek border sites in November and gave Athens until early May to upgrade the border management on its islands. Two draft assessments forwarded to the Greek government in early January indicated Athens was making progress, although they noted “important shortcomings” in handling migrant flows. But with asylum-seekers still coming at a pace ten times that of January 2015, European countries are reluctant to dismantle their emergency border controls. And if they keep them in place without authorization, EU officials fear the entire concept of the open-travel zone could be brought down. A summary written by an official in the EU’s Dutch presidency for a meeting of EU justice and home affairs ministers last month showed they decided that declaring Greece to have failed in its upgrade was “the only way” for Europe to extend the time for border checks.

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“..more than in the first four months of 2015..”

80,000 Refugees Arrive In Europe In First Six Weeks Of 2016 (UNHCR)

Despite rough seas and harsh winter weather, more than 80,000 refugees and migrants arrived in Europe by boat during the first six weeks of 2016, more than in the first four months of 2015, the UN Refugee Agency, UNHCR, announced today. In addition it said more than 400 people had lost their lives trying to cross the Mediterranean. However, despite the dangers over 2,000 people a day continue to risk their lives and the lives of their children attempting to reach Europe. Comparable figures for 2015 show such numbers only began arriving in July. “The majority of those arriving in January 2016, nearly 58%, were women and children; one in three people arriving to Greece were children as compared to just 1 in 10 in September 2015,” UNHCR’s Chief spokesperson Melissa Fleming told a press briefing in Geneva.

Fleming added that over 91% of those arriving in Greece come from the world’s top ten refugee producing countries, including Syria, Afghanistan and Iraq. “Winter weather and rough seas have not deterred those desperate enough to make the journey, resulting in near daily shipwrecks,” she added. When surveyed upon arrival, most of them cite they had to leave their homeland due to conflict. More than 56% of January arrivals to Greece were from Syria. However, UNHCR stressed that solutions to Europe’s situation were not only eminently possible, but had already been agreed by States and now urgently needed to be implemented. Stabilization is essential and something for which there is also strong public demand.

“Within the context of the necessary reduction of dangerous sea arrivals, safe access to seek asylum, including through resettlement and humanitarian admission, is a fundamental human right that must be protected and respected,” Fleming added. She said that regular pathways to Europe and elsewhere were important for allowing refugees to reach safety without putting their lives in the hands of smugglers and making dangerous sea crossings. “Avenues, such as enhanced resettlement and humanitarian admission, family reunification, private sponsorship, and humanitarian and refugee student/work visas, should be established to ensure that movements are manageable, controlled and coordinated for countries receiving these refugees,” Fleming added.

Vincent Cochetel, UNHCR’s Director Bureau for Europe, added that faced with this situation, UNHCR hoped that EU Member States would implement at a faster pace all EU-wide measures agreed upon in 2015, including the implementation of hotspots and the relocation process for 160,000 people already in Greece and Italy and the EU-Turkey Joint-Action Plan. “If Europe wants to avoid the mess of 2015, it must take action. There is no plan B,” he also told the briefing.

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Dec 292015
 
 December 29, 2015  Posted by at 9:40 am Finance Tagged with: , , , , , , , ,  2 Responses »


DPC Sloss City furnaces, Birmingham, Alabama 1906

Weak Demand, Vessel Surplus Mean Horror 2016 For Commodities Shipping (Reuters)
Energy Stocks Fall Along With Oil Prices (WSJ)
Saudi Riyal In Danger As Oil War Escalates (AEP)
Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge (BBG)
Saudi Arabia Plans Subsidy Cuts as King Unveils 2016 Budget (BBG)
Where Next For The Three Arrows Of Abenomics? (Telegraph)
Record Merger Boom Won’t Stop In 2016, Because Money Is Still Cheap (Forbes)
China Control Freaks (BBG)
China Clamps Down on Online Lenders, Vows to Cleanse Market (BBG)
China Central Bank Says To Keep Reasonable Credit Growth, Yuan Stable (Reuters)
Cost Of UK Floods Tops £5 Billion, Thousands Face Financial Ruin (Guardian)
UK Factories Forecast To Shed Tens Of Thousands Of Jobs In 2016 (Guardian)
Questions and Answers (Jim Kunstler)
Qatari Royals Rush To Switzerland In Nine Planes After Emir Breaks Leg (AFP)
Freak Storm In Atlantic To Push Arctic Temps Over 50º Above Normal (WaPo)
German States To Spend At Least €17 Billion On Refugees In 2016 (Reuters)
Schaeuble Slams Greece Over Refugee Crisis, Aims For Joint EU Army (Reuters)
Selfishness On Refugees Has Brought EU ‘To Its Knees’ (IT)
Refugee Arrivals In Greece Rise More Than Tenfold In A Year (Kath.)

Forward looking.

Weak Demand, Vessel Surplus Mean Horror 2016 For Commodities Shipping (Reuters)

Shipping companies that transport commodities such as coal, iron ore and grain face a painful year ahead, with only the strongest expected to weather a deepening crisis caused by tepid demand and a surplus of vessels for hire. The predicament facing firms that ship commodities in large unpackaged amounts – known as dry bulk – is partly the result of slower coal and iron ore demand from leading global importer China in the second half of 2015. The Baltic Exchange’s main sea freight index – which tracks rates for ships carrying dry bulk commodities – plunged to an all-time low this month. In stark contrast, however, tankers that transport oil have in recent months enjoyed their best earnings in years. As crude prices have plummeted, bargain-buying has driven up demand, while owners have moved more aggressively to scrap vessels to head off the kind of surplus seen in the dry bulk market.

Symeon Pariaros, chief administrative officer of Athens-run and New York-listed shipping firm Euroseas, said the outlook for the dry bulk market was “very challenging”. “Demand fundamentals are so weak. The Chinese economy, which is the main driver of dry bulk, is way below expectations,” he added. “Only companies with very strong balance sheets will get through this storm.” The dry bulk shipping downturn began in 2008, after the onset of the financial crisis, and has worsened significantly this year as the Chinese economy has slowed. The Baltic Exchange’s main BDI index – which gauges the cost of shipping such commodities, also including cement and fertiliser – is more than 95% down from a record high hit in 2008. The index is often regarded as a forward-looking economic indicator. With about 90% of the world’s traded goods by volume transported by sea, global investors look to the BDI for any signs of changes in sentiment for industrial demand.

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Very thin trading.

Energy Stocks Fall Along With Oil Prices (WSJ)

A fresh selloff in the oil market weighed down U.S. stocks, with energy shares posting sharp losses. Major U.S. indexes pared their steepest declines but still ended the day in negative territory, returning some of last week’s gains. The Dow Jones Industrial Average lost 23.90 points, or 0.1%, to 17528.27, after falling as much as 115 points intraday. The S&P 500 index fell 4.49, or 0.2%, to 2056.50. The Nasdaq Composite Index declined 7.51, or 0.1%, to 5040.99. Just 4.8 billion shares changed hands Monday, marking the lowest full day of U.S. trading volume this year, in a holiday-shortened week. Markets in London and Australia were closed Monday for Boxing Day. The U.S. stock market will be closed Friday for New Year’s Day. Energy stocks notched some of the steepest declines across the market. Chevron posted the heaviest loss among Dow components, falling $1.69, or 1.8%, to $90.36.

Marathon Oil shed 95 cents, or 6.8%, to 12.98. “We’re just following the price of oil,” said Peter Cardillo, chief market economist at brokerage First Standard Financial. December has been marked by unusually wide swings in U.S. stocks. A long-awaited interest-rate increase by the Federal Reserve earlier in the month has failed to quiet the recent volatility. A respite from the decline in oil prices last week helped lure investors into the energy sector. U.S. stocks last week posted their biggest weekly gains in more than a month, driven by the energy sector. But both oil prices and energy stocks remain sharply lower this year, even with last week’s rally. A global glut of crude oil has contributed to a 30% fall in U.S. oil prices this year. On Monday, U.S. crude prices fell 3.4% to $36.81 a barrel. Energy stocks in the S&P 500 are down 23% so far in 2015, while the S&P 500 is on track for a loss of 0.1%.

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if the dollar stays strong, the peg is history.

Saudi Riyal In Danger As Oil War Escalates (AEP)

Saudi Arabia is burning through foreign reserves at an unsustainable rate and may be forced to give up its prized dollar exchange peg as the oil slump drags on, the country’s former reserve chief has warned. “If anything happens to the riyal exchange peg, the consequences will be dramatic. There will be a serious loss of confidence,” said Khalid Alsweilem, the former head of asset management at the Saudi central bank (SAMA). “But if the reserves keep going down as they are now, they will not be able to keep the peg,” he told The Telegraph. His warning came as the Saudi finance ministry revealed that the country’s deficit leapt to 367bn riyals (£66bn) this year, up from 54bn riyals the previous year. The IMF has suggested Saudia Arabia could be running a deficit of around $140bn.

Remittances by foreign workers in Saudi Arabia are draining a further $36bn a year, and capital outflows were picking up even before the oil price crash. Bank of America estimates that the deficit could rise to nearer $180bn if oil prices settle near $30 a barrel, testing the riyal peg to breaking point. Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances. Concern has become acute after 12-month forward contracts on the Saudi Riyal reached 730 basis points over recent days, the highest since the worst days of last oil crisis in February 1999. The contracts are watched closely by traders for signs of currency stress. The latest spike suggests that the riyal is under concerted attack by hedge funds and speculators in the region, risking a surge of capital flight.

A string of oil states have had to abandon their currency pegs over recent weeks. The Azerbaijani manat crashed by a third last Monday after the authorities finally admitted defeat. The dollar peg has been the anchor of Saudi economic policy and credibility for over three decades. A forced devaluation would heighten fears that the crisis is spinning out of political control, further enflaming disputes within the royal family. Foreign reserves and assets have fallen to $647bn from a peak of $746bn in August 2014, but headline figures often mean little in the complex world of central bank finances and derivative contracts. Dr Alsweilem, now at Harvard University, said the Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals. “The thinking that lower oil prices will bring down the US oil industry is just nonsense and will not work.”

The policy is contentious even within the Saudi royal family. Optimists hope that this episode will be a repeat of the mid-1980s when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preperaring the ground for recovery in prices. But the current situation is sui generis. The shale revolution has turned the US into a mid-cost swing producer, able to keep drilling at $50bn a barrel, according to the latest OPEC report. US shale frackers can switch output on and off relatively quickly, acting as a future headwind against price rises.

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End of free money.

Saudis Plan Unprecedented Subsidy Cuts to Counter Oil Plunge (BBG)

Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defense and security. Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatize some state-owned entities and introduce value-added taxation as well as a levy on tobacco. The biggest shake-up of Saudi economic policy in recent history coincides with growing regional unrest, including a war in Yemen, where a Saudi-led coalition is battling pro-Iranian Shiite rebels.

In attempting to reduce its reliance on oil, the kingdom is seeking to put an end to the population’s dependence on government handouts, a move that political analysts had considered risky after the 2011 revolts that swept parts of the Middle East. “This is the beginning of the end of the era of free money,” said Ghanem Nuseibeh, founder of London-based consulting firm Cornerstone Global Associates. “Saudi society will have to get used to a new way of working with the government. This is a wake-up call for both Saudi society and the government that things are changing.” This is the first budget under King Salman, who ascended to the throne in January, and for an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman.

In its first months in power, the new administration brought swift change to the traditionally slow-moving kingdom, overhauling the cabinet, merging ministries and realigning the royal succession. The new measures are the beginning of a “big program that the economic council will launch,” Economy and Planning Minister Adel Fakeih told reporters in Riyadh. The subsidy cuts won’t have a “large effect” on people with low or middle income, he said.

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Immediate danger for House of Saud.

Saudi Arabia Plans Subsidy Cuts as King Unveils 2016 Budget (BBG)

Saudi Arabia said it plans to gradually cut subsidies and sell stakes in government entities as it seeks to counter a slump in oil revenue. The government expects the 2016 budget deficit to narrow to 326 billion riyals ($87 billion) from 367 billion in 2015. Spending, which reached 975 billion riyals this year, is projected to drop to 840 billion. Revenue is forecast to decline to 513.8 billion riyals from 608 billion riyals. The budget is the first under King Salman, who ascended to the throne in January, and an economic council dominated by his increasingly powerful son, Deputy Crown Prince Mohammed bin Salman. The collapse in oil prices has slashed government revenue, forcing officials to draw on reserves and issue bonds for the first time in nearly a decade.

“The budget was approved amid challenging economic and financial circumstances in the region and the world,” the Finance Ministry said. “The deficit will be financed through a plan that considers the best available options, including domestic and external borrowing.” The 2015 deficit is about 16% of GDP, according to Alp Eke, senior economist at National Bank of Abu Dhabi. The median estimate of 10 economists in a Bloomberg survey was a shortfall of 20%. Oil made up 73% of this year’s revenue, according to the Finance Ministry. Non-oil income rose 29% to 163.5 billion riyals. The government has managed to reign in “some spending in the second half of the year,” Monica Malik at Abu Dhabi Commercial Bank said. “With the further fiscal retrenchment that we expect in 2016, we think that the fiscal deficit should narrow to about 10.8% of GDP.”

For 2016, the government allocated 213 billion riyals for military and security spending, the largest component of the budget as the kingdom fights a war in Yemen against Shiite rebels. “In terms of defense expenditure in particular there’s the burden of the war in Yemen,” Nasser Saidi, president of Nasser Saidi & Associates, said by phone. The outcome for 2016 depends on “the course of the war in Yemen, oil prices, how much will subsidies actually get reduced, how effective are they in reigning in public spending and rationalizing some of the spending on large projects, and finally how good are they at reigning in current spending,” he said.

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” Japan’s debt pile is huge, at around 240pc of GDP, and the OECD warned this year that it could balloon to 400pc of GDP..”

Where Next For The Three Arrows Of Abenomics? (Telegraph)

The last sales tax increase threw the world’s third largest economy into recession. For this reason, things may start getting more complicated at the checkout. Policymakers announced last week that they plan to exempt food from the next hike. This would be the first time Japan has adopted different consumption tax rates since it was introduced in 1989. The government estimates this will cost about one trillion yen (£5.5bn) in lost revenues – equivalent to about a fifth of what it expects the increase to bring in. While cynics highlight the move as a ploy to win votes ahead of next year’s upper house elections, it is also a reminder that steering Japan out of its two-decade malaise remains a challenge. It’s been three years since prime minister Shinzo Abe took power with a promise to smash deflation and “take back Japan”.

Under the stewardship of Bank of Japan governor Haruhiko Kuroda, the country launched a multi trillion yen quantitative easing programme in 2013 that was beefed up to ¥80 trillion (£446bn) annually last October. Pessimists argue that Japan’s monetary steroids have had little impact. As economists at BNP Paribas highlight, real GDP has grown by just 2.2pc between the fourth quarter of 2012 and the third quarter of this year – or an average of just 0.8pc per year – a poor performance compared with its G7 peers. Japan’s recovery has been lacklustre since the 2008 crisis, and the economy would currently be in a quintuple-dip recession if growth for the third quarter of 2015 had not been revised up this month. This month, the Bank of Japan revised down its growth forecast for the year ending next March to 1.2pc, from 1.7pc, citing weaker global growth.

It also pushed back its expectation of achieving 2pc inflation to the second half of the year or early 2017, from a previous forecast of mid-2016. This is the second time the target date has been moved since Mr Kuroda pledged in April 2013 to lift consumer inflation to 2pc in “around two years”. Policymakers are already talking down their chances of reflating the economy. Consumer prices rose by just 0.3pc in the year to October, while core inflation, which strips out the impact of volatile food and energy prices, stood at 0.7pc. “If consumer prices were rising more than 1.5pc then I don’t think you could complain when talking about the price target,” said Akira Amari, Japan’s economy minister.

On a brighter note, nominal GDP, or the cash size of the economy, has risen at a more robust pace. This is important because nominal GDP determines a country’s ability to pay down its debt, most of which is fixed in cash terms. Japan’s debt pile is huge, at around 240pc of GDP, and the OECD warned this year that it could balloon to 400pc of GDP unless policymakers implemented vital structural reforms.

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M&A as a means to hide one’s indebtedness.

Record Merger Boom Won’t Stop In 2016, Because Money Is Still Cheap (Forbes)

It was a year for the record books when it comes to merger and acquisition activity. Nearly $5 trillion in deals were cut globally, a new all-time high, as dealmakers used consolidation to uncover cost cuts, bolster their scale and take advantage of historically low borrowing costs. Though 2016 may be a tougher year if emerging market growth slows further and the impact of a sharp rout in commodities hits North America, few expect today’s merger boom to slow. After all, most of the reasons M&A climbed from $3 trillion to $4 trillion and now a rounding error below $5 trillion remain. Corporations are using cheap debt financing to buy competitors and wrench out synergies that can quickly grow their earnings. Amid a mostly halting economic recovery in the United States, M&A has proven far more attractive and easy to pitch to investors than an expansion, which might require increased plant and equipment and rising expenses.

For the nation’s largest companies, there’s also been a race to increase market power, or respond to consolidation among competitors. In pharmaceuticals, these trends have manifest themselves in the race to merge with European-domiciled drugmakers who can access cash stockpiles without triggering repatriation tax and aren’t charged at U.S. rates globally. This has spurred a pharma merger wave that hit new records in 2015 and it isn’t expected to slow anytime soon. In technology, mergers are yet to hinge on tax savings. Instead, semiconductors facing tectonic shifts such as the adoption wireless devices and cloud computing are merging in an effort to round out their services. Consolidation in cable and telecommunications is being used to adapt to the commoditization of once lucrative services like video and data bundles.

The combination of overlapping wireless and broadband networks is also seen as an efficient way to build the infrastructure that’s needed to serve consumers’ shift to streaming media. Spongy financing markets have aided the M&A boom. Low economic growth, modest inflation and weak pricing power are all causing CEOs to look at engineering profits through share buybacks and mergers. Meanwhile, activist shareholders are putting pressure on C-Suites to provide a clear plan on how they reinvest profits. Bold bets have to be justified with credible return expectations and these days it seems the returns by way of M&A, not capital expenditure or expansion.

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Casino control.

China Control Freaks (BBG)

Can authorities in China really take a back seat? In the midst of a bull market (stocks are up more than 20% from their August lows), Beijing appears to be handing control over to companies for all new initial public offerings from March onward. The shift toward a more U.S.-style disclosure system, where any company can list so long as they provide the requisite information, has been a long time coming. In a more market-oriented system, the regulator concentrates on supervising publicly traded firms rather than acting as a gatekeeper. Such a system would give China’s cash-strapped corporates a funding alternative to shadow banks and online peer-to-peer lenders, and help clear a logjam of almost 700 companies waiting to sell shares for the first time. The question is, can Beijing truly stop its tinkering?

According to KPMG, China has imposed moratoriums on IPOs nine times in the A-share market’s relatively short 25-year history – four of those in the last decade during periods when things were heading south. The most recent halt, enforced in July after several blockbuster share sales and some stomach-churning stock declines, ended only last month when a government-engineered rally revived the market.Even when IPOs have been approved, social policy dominates. A few years ago, when China was trying to cool its then-heady real estate sector and rein in burgeoning bad loans, no developer or city commercial bank would have stood a chance getting listing approval. Instead, some went to Hong Kong to raise funds. The conundrum for the China Securities Regulatory Commission is that letting any (qualified) company sell shares would result in a glut and damp appetite for the state-owned firms that dominate the market.

However, rationing admittance to the IPO market means bureaucrats rather than investors are making the decisions, and has resulted in an insatiable demand for new stock. An even bigger challenge for the CSRC, whose seven-member listing committee currently vets IPO applications, is managing investor expectations. In a nation where investment options tend to be limited to volatile wealth management products, equally choppy real estate or low-yielding bank accounts, people have little recourse for their some $22 trillion in savings beyond stocks. That explains why retail investors own about 80% of publicly traded companies’ tradeable shares unlike the U.S., where institutional investors dominate. Such a prevalence of individuals, who don’t have class action lawsuits to fall back on in cases of corporate malfeasance, also makes for a stock market more akin to a casino than a funding tool.

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Shadow banking clamp down.

China Clamps Down on Online Lenders, Vows to Cleanse Market (BBG)

China’s banking regulator laid out planned restrictions on thousands of online peer-to-peer lenders, pledging to “cleanse the market” as failed platforms and suspected frauds highlight risks within a booming industry. Online platforms shouldn’t take deposits from the public, pool investors’ money, or guarantee returns, the China Banking Regulatory Commission said on Monday, publishing a draft rule that will be its first for the industry. The thrust of the CBRC’s approach is that the platforms are intermediaries – matchmakers between borrowers and lenders – that shouldn’t themselves raise or lend money. It rules out P2P sites distributing wealth-management products, a tactic that some hoped would diversify their revenue sources, and limits their use for crowdfunding.

“The rule is quite strict,” Shanghai-based Maizi Financial Services, which operates a P2P site and other investment platforms, said in a statement. “The industry’s hope of upgrading itself with wealth management products and adopting a diversified business model is completely dashed.” The banking regulator issued its plan at the same time as the central bank put out a rule to tighten oversight of online-payment firms. The looming clampdown – the regulator asked for feedback by Jan. 27 – comes as the police probe Ezubo, an online site that raised billions of dollars from investors according to Yingcan Group, a company which provides industry data. It also follows a stock boom and bust that was fueled by leverage, including some channeled through online lenders.

China had 2,612 online lending platforms operating normally as of November, with more than 400 billion yuan ($61.7 billion) of loans outstanding, while another 1,000 were “problematic,” the CBRC said. Firms such as Tiger Global Management, Standard Chartered and Sequoia Capital are among those to invest in the industry, which China initially allowed to develop without regulation. Under the planned rule, P2P platforms will need to register with local financial regulators and cannot help borrowers who want to raise money to invest in the stock market. They’re banned from crowdfunding “for equities and physical items,” a description that wasn’t clarified in the CBRC statement. “Many online lenders have strayed from the role of information intermediary,” the CBRC said in a separate statement, adding that it wanted to protect consumers and “cleanse the market.”

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Control clowns: “..a goal of doubling GDP and per capita income by 2020 from 2010..”

China Central Bank Says To Keep Reasonable Credit Growth, Yuan Stable (Reuters)

China’s central bank said on Monday that it would “flexibly” use various policy tools to maintain appropriate liquidity and reasonable growth in credit and social financing. The People’s Bank of China will keep the yuan basically stable while forging ahead with reforms to help improve its currency regime, it said in a statement summarizing the fourth-quarter monetary policy committee meeting. The PBOC said it would maintain a prudent monetary policy, keeping its stance “neither too tight nor too loose”. The prudent policy has been in place since 2011. “We will improve and optimize financing and credit structures, increase the proportion of direct financing and reduce financing costs,” it said. The central bank said it would closely watch changes in China’s economy and financial markets, as well as international capital flows.

Top leaders at the annual Central Economic Work Conference pledged to make China’s monetary policy more flexible and expand its budget deficit in 2016 to support a slowing economy as they seek to push forward “supply-side reform”. The PBOC has cut interest rates six times since November 2014 and lowered banks’ reserve requirements, or the amount of cash that banks must set aside as reserves. But such policy steps have yielded limited impact on the economy, as the government has been struggling to reach its growth target of about 7% this year. President Xi Jinping has said China must keep annual average growth of no less than 6.5% over the next five years to hit a goal of doubling GDP and per capita income by 2020 from 2010.

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Betcha Cameron is more concerned right now with London’s flood control than Lancashire’s.

Cost Of UK Floods Tops £5 Billion, Thousands Face Financial Ruin (Guardian)

The cost of the UK’s winter floods will top £5bn and thousands of families and businesses will face financial ruin because they have inadequate or non-existent insurance, a leading accountant has warned, as the government defended its record on flood defences. The prime minister faced growing anger from politicians in the north of England who accused the government of creating “a north-south gap” in financial support for flood-prevention schemes. On a tour of the region, David Cameron defended spending levels amid mounting criticism from MPs and council leaders. “We are spending more in this parliament than the last one and in the last parliament we spent more than the one before that,” he said during a stop in York.

“I think with any of these events we have to look at what we are planning to spend and think: ‘Do we need to do more?’ We are going to spend £2.3bn on flood defences in this parliament but we will look at what’s happened here and see what needs to be done. We have to look at what’s happened in terms of the flooding, what flood defences have worked and the places where they haven’t worked well enough.” But Judith Blake, leader of Leeds city council, said a flood prevention scheme for the city was ditched by the government in 2011, and warned that there was “a very strong feeling” across the region that the north was being short-changed.

“I think there’s a real anger growing across the north about the fact that the cuts have been made to the flood defences and we’ll be having those conversations as soon as we are sure that people are safe and that we start the clean-up process and really begin the assess the scale of the damage. “So there are some very serious questions for government to answer on this and we’ll be putting as much pressure on as possible to redress the balance and get the funding situation equalised so the north get its fair share.” Labour MP Ivan Lewis, meanwhile, challenged Cameron to back up his vision of the Northern Powerhouse by sending immediate help to residents and businesses in his Bury South constituency.

[..] On Monday, as the waters receded in the worst hit areas, residents began to face up the scale of the damage. In York telephone lines and internet connections were down and some cash machines were not working. Many of the bars and shops that were open were only taking cash. In Hebden Bridge in Calderdale, volunteers spent the day clearing out schools, shops and homes that had been overwhelmed by filthy floodwater – a scene repeated in scores of towns and cities across the region. Forecasters warned another storm – Storm Frank – is expected to bring more rain to the west and north of the UK on Wednesday. It is feared that up to 80mm (3in) will fall on high ground and as much as 120mm (4.7in) in exposed locations, accompanied by gale force winds..

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Oh yeah, an economy others are jealous of.

UK Factories Forecast To Shed Tens Of Thousands Of Jobs In 2016 (Guardian)

British manufacturers will shed tens of thousands of jobs next year as they battle a tough export market, the fallout from steel plant closures and a collapse in demand from the embattled North Sea oil industry, an industry group has forecast. The manufacturers’ organisation EEF said the factory sector will shrug off this year’s recession and eke out modest growth in 2016 but it warned a number of risks loom on the horizon, chief among them a sharper downturn in China that could trigger a global slump. A cautious mood has prompted many firms to plan cuts to both jobs and investment in a further blow to George Osborne, after the latest official figures showed UK economic growth had faltered and that his “march of the makers” vow had failed to translate into a manufacturing revival.

EEF said its latest snapshot of manufacturers’ mood shows some bright spots for 2016, however, particularly in the car, aerospace and pharmaceutical sub-sectors. They will be the main drivers behind overall manufacturing growth of 0.8% in 2016, following an expected 0.1% contraction this year. Those sub-sectors will also buck the wider manufacturing trend of job cuts with an employment increase in 2016, EEF predicts. “Some of the headwinds have been a consistent theme over 2015 – the collapse in oil and gas activity, weakness in key export markets, and strong sterling. Others, like disappointing construction activity and the breakdown in the steel industry, have piled on the pain since the second quarter of 2015,” said EEF’s chief economist, Lee Hopley, in the report. “It’s not all doom and gloom however, with the resilience of the transport sectors and the rejuvenation of the pharmaceuticals industry providing reasons for cheer in UK manufacturing.”

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“..it would require dedication to clear goals and the hard work of altering all our current arrangements – and giving up these childish fantasy distractions about space and technology.”

Questions and Answers (Jim Kunstler)

The really big item in last night’s 60-Minutes newsbreak was that the latest Star Wars movie passed the billion dollar profit gate a week after release. That says just about everything you need to know about our floundering society, including the state of the legacy news media. The cherry on top last week was Elon Musk’s SpaceX company’s feat landing the first spent stage of its Falcon 9 rocket to be (theoretically) recycled and thus hugely lowering the cost of firing things into space. The media spooged all over itself on that one, since behind this feat stands Mr. Musk’s heroic quest to land humans on Mars. This culture has lost a lot in the past 40 years, but among the least recognized is the loss of its critical faculties. We’ve become a nation of six-year-olds.

News flash: we’re not going Mars. Notwithstanding the accolades for Ridley Scott’s neatly-rationalized fantasy, The Martian (based on Andy Weir’s novel), any human journey to the red planet would be a one-way trip. Anyway, all that begs the question: why are we so eager to journey to a dead planet with none of the elements necessary for human life when we can’t seem to manage human life on a planet superbly equipped to support us? Answer: because we are lost in raptures of techno-narcissism. What do I mean by that? We’re convinced that all the unanticipated consequences of our brief techno-industrial orgy can be solved by… more and better technology! Notice that this narrative is being served up to a society now held hostage to the images on little screens, by skilled people who, more and more, act as though these screens have become the new dwelling place of reality.

How psychotic is that? All of this grandstanding about the glories of space goes on at the expense of paying attention to our troubles on this planet, including the existential question as to how badly we are fucking it up with burning the fossil fuels that power our techno-industrial activities. Personally, I don’t believe that any international accord will work to mitigate that quandary. But what will work, and what I fully expect, is a financial breakdown that will lead to a forced re-set of human endeavor at a lower scale of technological activity. The additional question really is how much hardship will that transition entail and the answer is that there is plenty within our power to make that journey less harsh.

But it would require dedication to clear goals and the hard work of altering all our current arrangements – and giving up these childish fantasy distractions about space and technology. Dreaming about rockets to Mars is easy compared to, say, transitioning our futureless Agri-Biz racket to other methods of agriculture that don’t destroy soils, water tables, ecosystems, and bodies. It’s easier than rearranging our lives on the landscape so we’re not hostage to motoring everywhere for everything. It’s easier than educating people to both think and develop real hands-on skills not dependent on complex machines and electric-powered devices.

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Wild theories welcome.

Qatari Royals Rush To Switzerland In Nine Planes After Emir Breaks Leg (AFP)

Unidentified individuals travelling in as many as nine planes belonging to Qatar’s royal family made an emergency trip to Switzerland over the weekend for medical reasons, according to a Swiss official. A spokesman for Switzerland’s federal office of civil aviation confirmed local media reports that multiple aircraft made unscheduled landings at the Zurich-Kloten airport overnight from 25 to 26 December and that the planes were part of the Qatari royal fleet. He gave no details as to who was on board or who any of the potential patients may have been. “The emergency landing clearance was given by the Swiss air force,” he told AFP, explaining that the civil aviation office was closed during the hours in question.

Qatari authorities later said that the country’s former ruler, Sheikh Hamad bin Khalifa Al Thani, had been flown to Switzerland over the weekend for surgery after breaking a leg. The Qatari government’s communications office said early on Tuesday that Sheihk Hamad suffered “a broken leg while on holiday” and was flown to Zurich on Saturday to receive treatment. The office says the 63-year-old sheikh underwent a successful operation and was in Zurich “recovering and undergoing physiotherapy.” The government declined to say how or where Sheikh Hamad broke his leg but the royal family had reportedly been on holiday in Morocco at a resort in the Atlas mountains. Night landings and takeoffs are typically forbidden at Zurich-Kloten to avoid disturbing local residents.

Swiss foreign ministry spokesman Georg Farago told AFP in an email that the federation was informed about the “stay of members of Qatar’s royal family in Switzerland”, without giving further details. According to Zurich’s Tages Anzeiger newspaper, the first Qatari plane, an Airbus, landed in Zurich from Marrakesh shortly after midnight on 26 December. A second flight landed at Zurich-Kloten at 5am (0400 GMT) on 26 December, with a third plane coming 15 minutes later, both having originated in Doha, the paper reported. According to Tages Anzeiger, the medical emergency in question was so significant that six more planes linked to the Qatari royal family and government landed in Zurich through the weekend. Sheikh Hamad is believed to have been in poor health for years. He ruled the oil-and-gas-rich Qatar from 1995 until handing over power to his son, Sheikh Tamim, in 2013.

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“It’s as if a bomb went off. And, in fact, it did.”

Freak Storm In Atlantic To Push Arctic Temps Over 50º Above Normal (WaPo)

The vigorous low pressure system that helped spawn devastating tornadoes in the Dallas area on Saturday is forecast to explode into a monstrous storm over Iceland by Wednesday. Big Icelandic storms are common in winter, but this one may rank among the strongest and will draw northward an incredible surge of warmth pushing temperatures at the North Pole over 50 degrees above normal. This is mind-boggling. And the storm will batter the United Kingdom, reeling from recent flooding, with another round of rain and wind. Computer model simulations show the storm, sweeping across the north central Atlantic today, rapidly intensifying along a jet stream ripping above the ocean at 230 mph. The storm’s pressure is forecast by the GFS model to plummet more than 50 millibars in 24 hours between Monday night and Tuesday night, easily meeting the criteria of a ‘bomb cyclone’ (a drop in pressure of at least 24 mb in 24 hours),

By Wednesday morning, when the storm reaches Iceland and nears maximum strength, its minimum pressure is forecast to be near 923 mb, which would rank among the great storms of the North Atlantic. (Note: there is some uncertainty as to how much it will intensify. The European model only drops the minimum pressure to around 936 mb, which is strong but not that unusual). Winds of hurricane force are likely to span hundreds of miles in the North Atlantic. Environmental blogger Robert Scribbler notes this storm will be linked within a “daisy chain” of two other powerful North Atlantic low pressure systems forming a “truly extreme storm system.” He adds: “The Icelandic coast and near off-shore regions are expected to see heavy precipitation hurled over the island by 90 to 100 mile per hour or stronger winds raging out of 35-40 foot seas. Meanwhile, the UK will find itself in the grips of an extraordinarily strong southerly gale running over the backs of 30 foot swells.”

[..] Ahead of the storm, the surge of warm air making a beeline towards the North Pole is astonishing. [..] It’s as if a bomb went off. And, in fact, it did. The exploding storm acts a remarkably efficient heat engine, drawing warm air from the tropics to the top of the Earth. The GFS model projects the temperature at the North Pole to reach near freezing or 32 degrees early Wednesday. Consider the average winter temperature there is around 20 degrees below zero. If the temperature rises to freezing, it would signify a departure from normal of over 50 degrees.

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Hope some of that goes toward giving them jobs.

German States To Spend At Least €17 Billion On Refugees In 2016 (Reuters)

Germany’s federal states are planning to spend around €17 billion on dealing with the refugee crisis in 2016, newspaper Die Welt said on Tuesday, citing a survey it conducted among their finance ministries. The sum, bigger than the €15.3 billion that the central government planned to allocate to its education and research ministry in 2015, is a measure of the strain that the influx is causing across the country as a whole. Germany is the favoured destination for many of the hundreds of thousands of refugees fleeing conflict and poverty in the Middle East and Africa, partly due to the generous benefits that it offers.

The German states have repeatedly complained that they are struggling to cope, and Chancellor Angela Merkel’s open-door policy has caused tensions within her conservative camp. Die Welt said that excluding the small city state of Bremen, which did not provide any details, current plans suggested the states’ combined expenditure would be €16.5 billion. The paper said actual costs would probably be even higher because the regional finance ministries had based their budgets on an estimate from the federal government that 800,000 refugees would come to Germany in 2015. In fact, 965,000 asylum seekers had already arrived by the end of November.

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Finance ministers have no place intervening in politics.

Schaeuble Slams Greece Over Refugee Crisis, Aims For Joint EU Army (Reuters)

Germany’s finance minister Wolfgang Schaeuble and a senior Bavarian politician criticized Greece on Sunday over the way it is managing its role in Europe’s biggest migration crisis since World War Two. Schaeuble, who has clashed repeatedly with Greek officials this year over economic policy, told Bild am Sonntag that Athens has for years ignored the rules that oblige migrants to file for asylum in the European Union country they arrive in first. He said German courts had decided some time ago that refugees were not being treated humanely in Greece and could therefore not be sent back there. “The Greeks should not put the blame for their problems only on others, they should also see how they can do better themselves,” Schaeuble said.

Greece, a main gateway to Europe for migrants crossing the Aegean sea, has faced criticism from other EU governments who say it has done little to manage the flow of hundreds of thousands of people arriving on its shores. Joachim Herrmann, the interior minister of the southern state of Bavaria, that has taken the brunt of the refugee influx to Germany, criticized the way Greece is securing its external borders. “What Greece is doing is a farce,” Herrmann said in an interview with Die Welt am Sonntag newspaper, adding any that any country that does not meet its obligations to secure its external borders should leave the Schengen zone, where internal border controls have been abolished.

[..] In contrast to his criticism of Greece, Schaeuble sought to offer to compromise with eastern European countries that have voiced reluctance to accept migrants under EU quotas. “Solidarity doesn’t start by insulting each other,” Schaeuble said. “Eastern European states will also have to take in refugees, but fewer than Germany.” The influx of hundreds of thousands of migrants, many fleeing war and poverty in the Middle East, also means that European countries will have to increase spending on defense, he said. “Ultimately our aim must be a joint European army. The funds that we spend on our 28 national armies could be used far more effectively together,” Schaeuble said.

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No, EU indifference on refugees has brought it down.

Selfishness On Refugees Has Brought EU ‘To Its Knees’ (IT)

The “ruinously selfish” behaviour of some member states towards refugees has brought the European Union to its knees, former attorney general Peter Sutherland has said. In a sharp denunciation of Europe’s failures on migration and social integration, Mr Sutherland, who is special representative to the United Nations secretary general for migration, said political “paralysis and ambivalence” was threatening the future of the EU and resulting in the rise of xenophobic and racist parties. With a population of 508 million, the EU should have had no insuperable problem welcoming even a million refugees “had the political leadership of the member states wanted to do so and had the effort been properly organised,” Mr Sutherland said. “But instead, ruinously selfish behaviour by some member states has brought the EU to its knees.”

There were several “honourable exceptions”, most notably German chancellor Angela Merkel, who he described as “a heroine” for showing openness and generosity towards refugees. Mr Sutherland made the remarks in the Littleton memorial lecture, which was broadcast on RTÉ radio on St Stephen’s Day. More than a million refugees and migrants arrived in the EU by land and sea in 2015, according to the International Organisation for Migration, making this the worst crisis of forced displacement on the continent since the second World War. Half of those arriving were Syrians fleeing a conflict that has left almost 250,000 people dead and displaced half the country’s pre-war population. A European Commission plan to use quotas to relocate asylum seekers arriving in southeastern Europe was adopted in the autumn against strong opposition from several states, including Hungary, Poland and the Czech Republic.

Slovakia said it would take in only a few hundred refugees, and they would have to be Christians. Mr Sutherland said the razor and barbed wire fences being erected on the Hungarian border to keep out migrants and refugees “are not just tragic but they are also particularly ironic, as Hungarians were for so long confined by the Iron Curtain.” He recalled that in 1956, after their failed revolution, 200,000 Hungarian refugees were immediately given protection throughout Europe and elsewhere. “Yet now, prime minister Viktor Orbán is the most intransigent and vociferous opponent of taking refugees in the EU.” Mr Sutherland accused some heads of government of “stoking up prejudice” by speaking of barring Muslim migrants and said the absence of EU agreement on a refugee-sharing scheme meant a Europe of internal borders was increasingly likely to become a reality across the continent.

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Waiting for the next surge as soon as the weather gets better.

Refugee Arrivals In Greece Rise More Than Tenfold In A Year (Kath.)

Over 800,000 refugees and migrants entered Greece between the start of the year and the end of November, with the number of arrivals increasing more than tenfold compared to last year’s total of 72,632, data published by the Greek Police showed Monday. The number tallies with figures from the United Nations High Commission for Refugees (UNHCR), which puts total arrivals in Greece from January 1 to December 24 at 836,672. The UNHCR also reported that in the three-day period from December 24 to 26, daily arrivals in Greece came to 2,950, with the monthly average at 3,400 per day, a significant drop from November’s average of 5,040. Most arrivals continue to enter Greece via the islands close to Turkey, the main transit point for refugees and migrants fleeing strife in the Middle East and South Asia and trying to enter the European Union.

On Lesvos alone, authorities estimate that they continue to receive from 2,000 to 2,500 arrivals every day, down from an average of over 5,000 in November. Police on the eastern Aegean island on Monday said that more than 3,500 refugees and migrants were waiting to be ferried to the mainland by this afternoon, while at the island’s main registration center in Moria, there are a further 4,000 people waiting to be processed and granted permission to leave for Athens, from where they will continue their journey north. In the capital, meanwhile, the Asylum Service of the Citizens’ Protection Ministry on Monday published data showing that only 82 of the 449 applications it has submitted so far for the relocation of refugees from Syria, Iraq and Eritrea to other parts of the European Union have been successful.

The initial plan drawn up by European authorities was for a total of 66,400 refugees to be transferred from Greece to other EU member-states, though only 13 countries have come forward, offering to take in a total of 565 asylum seekers. The repatriations that have been successful have been to Luxembourg, which took in 30 people, Finland (24), Portugal (14), Germany (10) and Lithuania, which accepted four relocations.

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Dec 282015
 
 December 28, 2015  Posted by at 9:55 am Finance Tagged with: , , , , , , , ,  2 Responses »


DPC Gillender Building, corner of Nassau and Wall Streets, built 1897, wrecked 1910 1900

Japan Output, Retail Sales Slump, Dampen Recovery Prospects (Reuters)
Japan Business Lobby Head Won’t Commit To Higher Wages (Reuters)
China Industrial Profits Fall For Sixth Straight Month (Reuters)
Head Of China Telecom ‘Taken Away’ As Probe Launched (AFP)
World Steel Chief Calls Chinese Glut ‘Serious And Critical’ (USA Today)
Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure (BBG)
End Of Easy Money For Mini-Refiners Splitting US Shale? (Reuters)
China Fines Eight Shipping Lines $63 Million for Price Collusion (BBG)
The Danger Of Safety (Tengdin)
Britain Needs Dutch-Style Delta Plan To Stem Tide Of Floods (Guardian)
US Sees Bearable Costs, Key Goals Met For Russia In Syria So Far (Reuters)
US Foreign Arms Deals Increased Nearly $10 Billion in 2014 (NY Times)
Britain’s New, Open Way to Sell Arms (BBG)
China Passes Antiterrorism Law That Critics Fear May Overreach (NY Times)
China Approves New Two-Child Birth Policy (WSJ)
Greek Construction Sector Shrinks By 63% Since 2011 (Kath.)
Germany Hires 8,500 Teachers To Teach German To 196,000 Child Refugees (AFP)
Refugee Crisis Creates ‘Stateless Generation’ Of Children In Limbo (Guardian)

Oh, sure: “Manufacturers surveyed by the trade ministry expect to increase production by 0.9% in December and raise it by 6.0% in January. Zero Hedge take: ” • Household Spending plunges 2.9% YoY – worst since March (post-tax-hike) • Jobless Rate jumps to 3.3% (from 3.1%) • Industrial Production drops 1.0% MoM – worst in 3 months • Retail Trade tumbles 1.0% YoY – biggest drop since March (post-tax-hike) • Retail Sales plunges 2.5% MoM – Worst drop since Fukushima Tsunami (absent tax-hike)

Japan Output, Retail Sales Slump, Dampen Recovery Prospects (Reuters)

Japan’s factory output fell for the first time in three months in November and retail sales slumped, suggesting that a clear recovery in the world’s third-largest economy will be delayed until early in 2016. While manufacturers expect to increase output in coming months, the weak data casts doubt on the Bank of Japan’s view that an expected pick-up in exports and consumption will help jump-start growth and accelerate inflation toward its 2% target. Industrial output fell 1.0% in November from the previous month, more than a median market forecast for a 0.6% decline, data by the trade ministry showed on Monday. Separate data showed that retail sales fell 1.0% in November from a year earlier, more than a median forecast for a 0.6% drop, as warm weather hurt sales of winter clothing.

“We’re finally seeing signs of pick-up in exports, but the economy has yet to make a clear turnaround,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “There’s a risk consumption will remain sluggish and prevent economic growth from picking up,” he said. Japan’s economy narrowly dodged recession in July-September and analysts expect only modest growth in the current quarter, as consumption and exports lack steam. Some analysts warn the economy may suffer a contraction in October-December if household spending remains weak. Taro Saito, senior economist at NLI Research Institute, expects consumption in the current quarter to have risen less than a 0.4% quarter-on-quarter increase in July-September.

Wary of soft growth, the government plans nearly $800 billion in record spending in the budget for the fiscal year that will begin on April 1. The BOJ has signalled readiness to expand stimulus if risks threaten Japan’s recovery prospects. The central bank fine-tuned its stimulus programme on Dec. 18 to ensure it can keep up or even accelerate its money-printing. While sluggish emerging market demand dims the export outlook, analysts expect output to gradually increase early in 2016 as automakers ramp up production of new models. Manufacturers surveyed by the trade ministry expect to increase production by 0.9% in December and raise it by 6.0% in January.

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Abe can still go nuttier. Just watch him. He has one policy only, has been pumping it for 3 years now, and it has failed miserably (as we always said it must). So that’s his career. Next: panic.

Japan Business Lobby Head Won’t Commit To Higher Wages (Reuters)

The head of an influential Japanese business lobby won’t pass on the government’s requests to its members to raise salaries next year, a worrying sign that real wages may not increase fast enough to boost consumption in the country. Higher wages are crucial to policymakers’ efforts to break a decades-long cycle of weak growth and deflation. Prime Minister Shinzo Abe has won modest wage gains from the largest firms, but this has been slow to filter through the economy. Renewed concern about a slowdown in emerging markets and weak overseas demand could make more companies reluctant to raise wages. This could in turn scupper the government’s efforts to increase consumption and put the Bank of Japan’s 2% inflation target out of reach.

“The government is hoping for higher wages, but the Keizai Doyukai, as an organization that corporate executives personally belong to, is not going to tell its members what to do,” said Yoshimitsu Kobayashi, chairman of the Keizai Doyukai, which regularly participates in the government’s corporate policy panels and is one of Japan’s top three business lobbies. “Companies that don’t have money obviously won’t raise wages.” Since taking office in late 2012, Abe has repeatedly asked big business lobbies to encourage their members to raise wages at annual spring salary negotiations with unions. Abe will also raise the minimum wage by about 3% from next fiscal year to encourage salaries to rise more broadly throughout the economy.

Many companies have enjoyed record profits recently, so there is room for these companies to offer their workers higher pay, Kobayashi said. Japanese companies also have the funds needed to increase domestic investment in plants, research and develop their workers’ skills, he said. However, around 65% of people work at small and medium-sized enterprises, many of which are losing money and are therefore unlikely to raise salaries or spend extra money on training employees.

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“Profits of state-owned enterprises among major industrial firms saw a 23% slump in the first 11 months this year..”

China Industrial Profits Fall For Sixth Straight Month (Reuters)

Profits earned by Chinese industrial companies in November fell 1.4% from a year earlier, marking a sixth consecutive month of decline, statistics bureau data showed on Sunday. Industrial profits – which cover large enterprises with annual revenue of more than 20 million yuan ($3.1 million) from their main operations – fell 1.9% in the first 11 months of the year compared with the same period a year earlier, the National Bureau of Statistics (NBS) said on its website. The November profits of industrial firms have seen some improvement from the previous month. In October, profits fell 4.6% from a year earlier. “The November industrial profit data matched earlier output data and they showed some signs of stabilizing, which are in line with recent data from other Asian countries,” said Zhou Hao at Commerzbank in Singapore, adding the figures were slightly better than market expectations.

The NBS said investment returns for industrial companies in November increased from a year earlier by 9.25 billion yuan ($1.43 billion). The jump in November profits from the auto manufacturing and electricity sectors, up 35% and 51% from a year earlier, respectively, helped narrow overall declines, the statistics bureau said. “Declines in industrial profits narrowed in November, but uncertainties still exist,” said He Ping, an official of the Industry Department at NBS. He added that inventory of finished goods grew at a faster pace last month. Profits of state-owned enterprises (SOEs) among major industrial firms saw a 23% slump in the first 11 months this year from the same period in 2014. Mining remained the laggard sector, with profits falling 56.5% in the same period. Aluminum producer China Hongqiao Group said in early December it would cut annual capacity by 250,000 tonnes immediately to curb supplies.

Eight Chinese nickel producers including state-owned Jinchuan Group, said they would cut production by 15,000 tonnes of metal in December and reduce output next year by at least 20% from this year, in a bid to lift prices from their worst slump in over a decade. China’s producer prices have been in negative territory for nearly four years due to weak domestic demand and overcapacity. The country’s top leader last week outlined main economic targets for next year after they held the annual Central Economic Work Conference, where it said the government will push forward “supply-side reform” to help generate new growth engines in the world’s second-largest economy while tackling factory overcapacity and property inventories.

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Hotshots keep disappearing over there. Think they have a luxury resort they all gather in?

Head Of China Telecom ‘Taken Away’ As Probe Launched (AFP)

The head of China Telecom, one of the nation’s big three telecoms firms, is under investigation for “severe disciplinary violations”, the government said Sunday, the latest high-profile target in a corruption crackdown. News of the probe into Chang Xiaobing, 58, was given in a statement on the website of the Central Commission for Discipline Inspection, the watchdog of the ruling Communist Party. The term is normally a euphemism for graft. Chang had been “taken away”, according to an article in the respected business magazine Caijing, which added that he disappeared just days before a meeting of the state-owned company planned for December 28. A memo saying the meeting would be postponed was issued on the evening of the 26th, the article said.

Chang’s phone was switched off and he had not responded to multiple calls, it added. In August, after 11 years as chairman and party secretary of China’s second largest telecoms provider China Unicom, Beijing announced Chang would head China Telecom. That decision, Caijing said, was made despite widespread rumours that the executive was under investigation. It sparked speculation about an imminent tie-up between the two industry leaders and the third major player, China Mobile. In April the state news agency Xinhua reported that China was considering merging scores of its biggest state-owned companies to create around 40 national champions from the existing 111.

Authorities have been pursuing a hard-hitting campaign against allegedly crooked officials since President Xi Jinping took office in 2013, a crusade that some experts have called a political purge. Several high-profile business leaders have been caught up in the web of graft investigations after authorities pledged they would turn their efforts to the state-owned enterprise system, a bulwark of graft that has resisted multiple attempts at reform. The campaign is seen as an attempt to force executives of state firms, who jealously guard their prerogatives, to toe the party line, reducing resistance to structural reforms intended to bolster the slowing economy. Beijing announced it had begun investigations into the country’s telecom industry earlier this year, while Chang was still at China Unicom.

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2016 looks like a black year for steel. And not only steel.

World Steel Chief Calls Chinese Glut ‘Serious And Critical’ (USA Today)

The global steel industry is reeling amid a plunge in steel prices, a flood of low-priced imports from China and other countries, and a collapse in investment in pipes for oil drilling as a result of tumbling crude prices. USA TODAY economics reporter Paul Davidson spoke about these challenges with Wolfgang Eder, chairman of the World Steel Association and CEO of Austrian steel giant Voestalpine. The company has 46,000 employees worldwide and 2,500 workers and nearly two dozen factories in the USA.

Q: U.S. steelmakers are awaiting decisions on trade cases against China for illegally dumping steel below cost in this country. Is this a global problem? A: The current Chinese overcapacity problem affects all parts of the world. Chinese plants (are selling) not only to the U.S. but also to Europe. It’s an intensive discussion of what should be the reaction and an ongoing discussion to what extent Europe should follow the U.S. (in filing trade cases). The problem at the moment is enormous. I do hope we will find some balance again in the next months, but at the moment, the situation is a very serious and critical one.

Q: What’s the long-term solution? A: In the long run, a solution to the problem can only come from the reduction of capacities. According to OECD (countries in the Organization for Economic Cooperation and Development ), there are 600 to 700 million tons of overcapacity (worldwide), the largest part in China. That means permanent pressure on margins and prices.

Q: Is the plunge in steel prices affecting your company, Voestalpine? A: We are not (selling) any material via the spot market. We do have only high-quality steel, and this steel is only sold based on contracts. We are, of course, the (supplier) for the German auto producers — BMW, Mercedes, Audi, Porsche. So we are one of the largest suppliers for these car producers. They are only buying really high-tech, high-quality material where we can differentiate. Two-thirds (of production) is downstream — we make complete automotive components, exteriors of cars, we produce complete rail tracks.

Q: Still, you do make some raw steel, and the drop in prices has affected you, hasn’t it? A: We have started additional cost-cutting measures. We try to avoid layoffs because we do not want to lose highly qualified people. So for the time being, we have (cut staff) in only a very few locations — some in Germany, some in Brazil. And, of course, we try to extend our product range. We intend to sell more automotive parts.

Q: Have you been affected by the downturn in oil and gas drilling? A: We have not yet been affected by the weakness in the oil and gas market, but we do expect, looking forward … the second half (of the fiscal year) will be a really more difficult period. Inventories are extremely high now, of oil and gas, but also inventories for all the production equipment are at very high levels. We cannot expect oil and gas levels will come down quickly over the winter as they have reached levels we have never seen before. So it’s unlikely we’ll see recovery of this segment before the summer of next year.

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The same people eager to claim OPEC no longer functions are just as eager to say OPEC kills US shale.

Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure (BBG)

In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50% price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well. Those efforts, to the surprise of many observers, largely succeeded. As of this month, U.S. oil output remained within 4% of a 43-year high. The problem? Oil’s no longer at $50. It now trades near $35. For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes at Wood Mackenzie in Houston.

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers. It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great. Drillers including Samson and Magnum Hunter have already filed for bankruptcy. About $99 billion in face value of high-yield energy bonds are trading at distressed prices, according to Bloomberg Intelligence analyst Spencer Cutter.

The BofA Merrill Lynch U.S. High Yield Energy Index has given up almost all of its outperformance since 2001, with the yield reaching its highest level relative to the broader market in at least 10 years. “You are going to see a pickup in bankruptcy filings, a pickup in distressed asset sales and a pickup in distressed debt exchanges,” said Jeff Jones at Blackhill Partners. “And $35 oil will clearly accelerate the distress.”

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“They also question how the new landscape will affect traders such as BP and Trafigura, which signed long-term contracts to buy all the output from those facilities.”

End Of Easy Money For Mini-Refiners Splitting US Shale? (Reuters)

Energy companies and oil trading firms that teamed up to build several mini-refineries that convert a swelling surplus of ultra-light U.S. crude into fuels for export seemed like a pretty safe investment bet for a while. The bet was built on several converging dynamics: an ever-rising supply of condensate; a U.S. refining system built to run heavier crudes; and a longstanding ban on crude exports that appeared unlikely to unwind amid partisan paralysis in Washington, D.C. Now, as U.S. oil output reverses its five-year rise and after lawmakers ended the 40-year-old export ban this month, oil executives and analysts question the wisdom of nearly $1 billion worth of so-called condensate splitters built over the past year, and the future of another $1.2 billion planned.

Traders are wondering what will happen with existing splitters run by companies such as Kinder Morgan. They also question how the new landscape will affect traders such as BP and Trafigura, which signed long-term contracts to buy all the output from those facilities. Other pending projects without guaranteed buyers could be abandoned, experts say. The once-restricted domestic crude not only faces increased competition. It also is hurt by the inversion of the global oil market, where once-abundant U.S. production is declining while global supplies are rising. This has eliminated the price discount that underpinned their model.

“It’s a much different competitive environment now that we don’t have distressed condensate,” said Sandy Fielden, an analyst with RBN Energy. While the same can be said of the nation’s larger, older fleet of full-scale refineries, splitters may be most exposed to the sudden changes, given their dependence on the most deeply discounted variety of oil. “Why would you distill it here if you can distill it elsewhere? The only reason you want to do it here is when it’s cheaper, but now it doesn’t make sense,” said Nick Rados, global business director of feedstocks for IHS Chemical.

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Peanuts.

China Fines Eight Shipping Lines $63 Million for Price Collusion (BBG)

China fined eight shipping lines 407 million yuan ($63 million) in total after finding them responsible for price collusion in the transportation of vehicles and heavy machinery. Japan’s Nippon Yusen, Mitsui OSK lines, Kawasaki Kisen Kaisha and Eastern Car Liner, Korea’s Eukor Car Carriers, Norway’s Wallenius Wilhelmsen, Chile’s Cia. Sud Americana de Vapores and its shipping line were the eight indicted after a year-long investigation, the National Development and Reform Commission said in a statement on its website Monday. The companies acknowledge wrongdoing, the top Chinese economic planning agency said. The probe follows similar investigations by the European Union in 2013 and Japan’s Fair Trade Commission.

Japanese regulators raided the offices of five shipping lines in 2013 over allegations they discussed raising rates together for transporting cars, and imposed fines on Nippon Yusen and Kawasaki Kisen in January 2014. AP Moeller-Maersk, CMA CGMand MSC Mediterranean Shipping were among companies in the European Union probe. Eukor will accept the Chinese decision and pay a fine of 284.7 million yuan, the company said in a statement on its website. The company also has implemented a competition law compliance program and corrective measures including antitrust compliance training, it said. Nippon Yusen has fully cooperated with the investigation by the Chinese agency and consequently received an immunity from the fine, the Japanese company said in a statement.

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Re: Minsky.

The Danger Of Safety (Tengdin)

The US Forest Service was created in 1905. Teddy Roosevelt signed the bill in response to a series of disastrous forest fires, like the Great Hinckley Fire of 1894. These fires threatened future commercial timber supplies, and the Federal Government had begun to establish national forest reserves. Why create them, people wondered, if they were just going to burn down? So the Forest Service established a systematic approach to fire control, building a network of roads, lookout towers, ranger stations, and communications. They also offered financial incentives for states to fight fires. With new technology, like airplanes, smokejumpers, and chemicals, they established their 10 am policy: every fire should be suppressed by 10 am the day following its initial report.

But a funny thing happened: by eliminating fire from the forest ecosystem, a lot of dead wood and other fuel accumulated over time. This insured that when fires did break out, they would become far more destructive. Moreover, scientists noted that fire was an essential part of many plant and tree life cycles. The Forest Service changed its approach from fire control to fire management-letting naturally occurring fires burn, unless they threatened developed areas. Is this part of what led to the Financial Crisis of 2007-2009? During the 25 years prior, economists had noted that more effective bank regulation and monetary policy had led to a “Great Moderation”-a significant dampening of the business cycle in the US and other developed nations.

It’s possible that reduced economic volatility led investors, homeowners, and banks to take on greater risks. In essence, the Fed’s policy of fire suppression allowed toxic assets to be created and distributed throughout the financial ecosystem. Highly regulated (and insured) banks were replaced by (uninsured) shadow banks. These assumed particular risks and contributed to a culture of increased systemic risk. When some of their assets began to unravel, it was impossible to contain the damage. We find a sort of risk-homeostasis in other areas. Anti-lock brakes encourage more aggressive driving; better skydiving gear allows hazardous high-speed maneuvers close to the ground. This is sometimes called the Peltzman effect: people behave as if they want a certain level of risk in their lives.

This appears to be the case with ecosystems and economies, too. Are safety measures useless, then? Absolutely not! The rate of accidental fatalities has fallen dramatically over time, and there are also fewer bank failures. But like the US Forest Service, we need to focus on risk management rather than risk reduction. Don’t assume government regulators will control your financial risks. Diversification, analysis, and-above all-not paying too much are still crucial, and always will be. The biggest risk, after all, is believing that we aren’t taking any risk. In a dynamic world, that’s guaranteed to fail.

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Britain lost decades not acting on what was already obvious all those years ago.

Britain Needs Dutch-Style Delta Plan To Stem Tide Of Floods (Guardian)

When more than 1,800 people died in the wake of the 1953 North Sea flood in the Netherlands, the national reaction was: never again. The resulting Delta programme to close off the south-western river delta from the sea was so bold that its name became synonymous with dealing with a crisis. If an issue needs a major response, you can be sure that a Dutch politician will call for a “Delta plan to tackle X”. It is time that the UK took some of that attitude and got a Delta plan to tackle flooding. Flooding has become an almost annual event in the UK. We are waiting for the next storm and flash flood to hit, with another group – or even the same group – of people evacuated, all followed by the promise of some money for a bit of flood defence work. As a nation, we can no longer afford to accept that.

Consider the personal misery for those affected, even in areas not traditionally flood-prone like Manchester and Leeds. Consider that the financial cost of these events will continue to rise – and not only for the government. Every home insurance policy now includes a £10.50 Flood Re levy to subsidise insurance for homes with a high risk of flooding. With the climate changing and becoming more volatile, we can expect heavier rain and more severe storms. Water management systems in the UK, and in particular in England, are unable to deal with what lies ahead. After almost every flood, journalists and policymakers go to the Netherlands to learn how they are adapting to climate change and what lessons there are for the UK. We see Dutch projects in the news, such as a neighbourhood with floating homes that forms part of a major national programme to create space for the rivers.

But those lessons never seem to be taken on board. Come the next flood, off they all go to Holland again. For the Dutch, water management goes to the core of their national identity. The country was forged in the battle against water. This common fight led to the pooling of resources and decision-making in regional water authorities – among the oldest democratic institutions in the world – which continue that work today. The national habit of consensus decision-making in tackling major issues became known internationally in the 90s as the “polder model”, echoing its water-based roots. No Dutch politician wants to be part of the generation that fails in the common endeavour against water, and no voter would accept someone caught sleeping on their watch.

The Netherlands has adapted to the changing nature of the threat. Today, the biggest danger is not the sea swallowing the land but the rain overwhelming it. The main focus no longer is building higher dykes and bigger dams, like they did after the 1953 flood. Instead, the Dutch have spent the past decade deepening and widening rivers, creating new side canals that provide extra capacity, and setting aside land as dedicated flood plains. This €2.3bn project is still ongoing. All this so that when the water does come, the swollen rivers can expand without flooding homes and causing misery. In Britain, we need to start to realise and accept that flooding is becoming an equally existential issue. There can be no northern powerhouse or sustainable prosperity anywhere if it risks being swept away by the rain.

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Putin won.

US Sees Bearable Costs, Key Goals Met For Russia In Syria So Far (Reuters)

Three months into his military intervention in Syria, Russian President Vladimir Putin has achieved his central goal of stabilizing the Assad government and, with the costs relatively low, could sustain military operations at this level for years, U.S. officials and military analysts say. That assessment comes despite public assertions by President Barack Obama and top aides that Putin has embarked on an ill-conceived mission in support of Syrian President Bashar al-Assad that it will struggle to afford and that will likely fail. “I think it’s indisputable that the Assad regime, with Russian military support, is probably in a safer position than it was,” said a senior administration official, who requested anonymity. Five other U.S. officials interviewed by Reuters concurred with the view that the Russian mission has been mostly successful so far and is facing relatively low costs.

The U.S. officials stressed that Putin could face serious problems the longer his involvement in the more than four-year-old civil war drags on. Yet since its campaign began on Sept. 30, Russia has suffered minimal casualties and, despite domestic fiscal woes, is handily covering the operation’s cost, which analysts estimate at $1-2 billion a year. The war is being funded from Russia’s regular annual defense budget of about $54 billion, a U.S. intelligence official said. The expense, analysts and officials said, is being kept in check by plummeting oil prices that, while hurting Russia’s overall economy, has helped its defense budget stretch further by reducing the costs of fueling aircraft and ships. It has also been able to tap a stockpile of conventional bombs dating to the Soviet era.

Putin has said his intervention is aimed at stabilizing the Assad government and helping it fight the Islamic State group, though Western officials and Syrian opposition groups say its air strikes mostly have targeted moderate rebels. Russia’s Syrian and Iranian partners have made few major territorial gains. Yet Putin’s intervention has halted the opposition’s momentum, allowing pro-Assad forces to take the offensive. Prior to Russia’s military action, U.S. and Western officials said, Assad’s government looked increasingly threatened.

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Let’s all buy shares!

US Foreign Arms Deals Increased Nearly $10 Billion in 2014 (NY Times)

Foreign arms sales by the United States jumped by almost $10 billion in 2014, about 35%, even as the global weapons market remained flat and competition among suppliers increased, a new congressional study has found. American weapons receipts rose to $36.2 billion in 2014 from $26.7 billion the year before, bolstered by multibillion-dollar agreements with Qatar, Saudi Arabia and South Korea. Those deals and others ensured that the United States remained the single largest provider of arms around the world last year, controlling just over 50% of the market. Russia followed the United States as the top weapons supplier, completing $10.2 billion in sales, compared with $10.3 billion in 2013.

Sweden was third, with roughly $5.5 billion in sales, followed by France with $4.4 billion and China with $2.2 billion. South Korea, a key American ally, was the world’s top weapons buyer in 2014, completing $7.8 billion in contracts. It has faced continued tensions with neighboring North Korea in recent years over the North’s nuclear weapons program and other provocations. The bulk of South Korea’s purchases, worth more than $7 billion, were made with the United States and included transport helicopters and related support, as well as advanced unmanned aerial surveillance vehicles. Iraq followed South Korea, with $7.3 billion in purchases intended to build up its military in the wake of the American troop withdrawal there.

Brazil, another developing nation building its military force, was third with $6.5 billion worth of purchase agreements, primarily for Swedish aircraft. The report to Congress found that total global arms sales rose slightly in 2014 to $71.8 billion, from $70.1 billion in 2013. Despite that increase, the report concluded that “the international arms market is not likely growing over all,” because of “the weakened state of the global economy.”

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What better sign is there of our collective insanity?

Britain’s New, Open Way to Sell Arms (BBG)

Champion cyclist Ryan Perry, a British army captain, was uncharacteristically tipsy the night of Nov. 25, but no one could blame him for enjoying the Champagne. Standing on the stage of a grand 15th century hall in London, the 28-year-old cradled a crystal plaque naming him the army’s sportsman of the year. Seated in front of him was one of the British military’s most influential officers, the chief of the general staff, or CGS. “Yesterday I was riding around Burnley in the wind and rain,” Perry told the crowd, referring to his seaside hometown. “Tonight I’m drinking Champagne with CGS.” Attending the banquet were executives from at least 20 contractors for the U.K.’s Ministry of Defence—including U.S.-based arms manufacturers Boeing, Lockheed Martin, and Raytheon.

They raised glasses with senior military officials, many of whom are directly involved in spending some of the $268 billion in defense procurement the U.K. has planned for the next decade. The contractors paid for the black-tie dinner in the historic Guildhall. The corporations are sponsoring the dinner through Team Army, a charity established in 2011 after an antibribery law went into effect in the U.K. The law was enacted following a string of high-profile corruption cases, including some in defense deals. Team Army’s role is to be in the middle of what were once unofficial big-dollar transactions between generals and defense companies. “It’s as clean as we can make the damn thing,” says Lamont Kirkland, a general who ran the army’s boxing, rugby, and winter sports programs before retiring to lead the charity.

Arms makers and other contractors pay Team Army as much as £70,000 ($104,000) for memberships. The members sponsor tables or buy tickets for Champagne receptions and other fêtes. Corporate suites at premier soccer games, rugby matches, and horse races are also used to raise money. Contractors are invited to spend time at the events with the top brass who buy their wares. The charity uses money from the contractors to fund military sports programs, Paralympics, and elite military athletes. Top-draw competitions, including the annual army-navy rugby match at London’s 82,000-seat Twickenham Stadium, are used for more fundraising. Although the official numbers won’t be public until 2016, Team Army raised a record amount this year, Kirkland says. Since 2011 the charity has amassed about $4.5 million for military sports.

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China, US, France, what’s the difference?!

China Passes Antiterrorism Law That Critics Fear May Overreach (NY Times)

China’s legislature approved an antiterrorism law on Sunday after months of international controversy, including criticism from human rights groups, business lobbies and President Obama. Critics had said that the draft version of the law used a recklessly broad definition of terrorism, gave the government new censorship powers and authorized state access to sensitive commercial data. The government argued that the requirements were needed to prevent terrorist attacks. Opponents countered that the new powers could be abused to monitor peaceful citizens and steal technological secrets. Whether the complaints persuaded the government to dilute the bill was not clear: State news media did not immediately publish the text of the new law.

But an official who works for the Standing Committee of the National People’s Congress indicated that at least some rules authorizing greater state access to encrypted data remained in the law. “Not only in China, but also in many places internationally, growing numbers of terrorists are using the Internet to promote and incite terrorism, and are using the Internet to organize, plan and carry out terrorist acts,” the official, Li Shouwei, told a news conference in Beijing. Mr. Li, a criminal law expert, said the antiterrorism law included a requirement that telecommunication and Internet service providers “shall provide technical interfaces, decryption and other technical support and assistance to public security and state security agencies when they are following the law to avert and investigate terrorist activities.”

The approval by the legislature, which is controlled by the Communist Party, came as Beijing has become increasingly jittery about antigovernment violence, especially in the ethnically divided region of Xinjiang in western China, where members of the Uighur minority have been at growing odds with the authorities. Chinese leaders have ordered security forces to be on alert against possible terrorist slaughter of the kind that devastated Paris in November. Over the weekend, the shopping neighborhood of Sanlitun in Beijing was under reinforced guard by People’s Armed Police troops after several foreign embassies, including that of the United States, warned that there were heightened security risks there around Christmas.

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“..Chinese people over the age of 65 will jump 85% to 243 million by 2030..”

China Approves New Two-Child Birth Policy (WSJ)

China’s lawmakers will allow all couples to have two children from the beginning of next year, implementing a new birth policy aimed at mitigating a potential demographic crisis. In a congressional meeting Sunday, Chinese lawmakers approved the new birth policy, which will take effect Jan. 1, 2016, Xinhua reported. Top Communist Party leaders had previously approved the new policy. The announcement sets a timeline for a policy that will replace the country’s controversial 35-year-old one-child policy. The National Health and Family Planning Commission, which implements China’s reproduction policy, said at the time it would move slowly to avoid population spikes. Demographers have warned China’s leaders for the past decade that falling birthrates in the nation may cause a future labor shortage that would endanger economic growth.

China has the world’s largest population at 1.37 billion, but its working-age population -those aged 15 to 64- is shrinking. The United Nations projects the number of Chinese people over the age of 65 will jump 85% to 243 million by 2030, up from 131 million this year. Many health experts say that while the new policy will likely enable up to 100 million couples to have additional children, they don’t expect a baby boom. Many Chinese couples say the cost of having children is prohibitive, and some will opt to have only one child. A previous relaxation of China’s one-child policy did not lead to a significant increase in baby numbers. Health officials previously said they are moving to simplify the birth application procedures for couples, who currently have to go through a complicated procedure that can often take months.

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This is actually an article on some grand projects that do still get built. I like the other side of the coin better.

Greek Construction Sector Shrinks By 63% Since 2011 (Kath.)

As construction continues to slump, the prevalent impression is that all building activity has come grinding to a halt. Yet this is only one side of the coin and mainly concerns private projects. According to data from the Hellenic Statistical Authority (ELSTAT), construction activity (measured by the number of permits issued) throughout the country dropped by 63.47% in the period from 2011 to 2014. Attica has been hit hardest by the economic crisis, with construction nosediving 73.10%, while the greatest losses have been seen in the residential property market. Up until the start of the crisis, 75% of investments in construction went toward residential property. In the third quarter of 2014, this had shrunk to 31%, with losses of €23.29 billion.

This is the “big picture” as a walk around any neighborhood in the Greek capital will attest. But there are also the shining exceptions, projects that were started well before the crisis or that defied the circumstances and forged ahead. The most important similarity between these projects is that they have progressed enough so they are no longer at risk of remaining on paper. And, irrespective of their scale, they are all important, if only on a symbolic level because they create a sense that something is happening, that there is movement in the works.

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Where did they find them?

Germany Hires 8,500 Teachers To Teach German To 196,000 Child Refugees (AFP)

Germany has recruited 8,500 people to teach child refugees German, as the country expects the number of new arrivals to soar past the million mark in 2015, Die Welt daily reported on Sunday. About 196,000 children fleeing war and poverty will enter the German school system this year, and 8,264 “special classes” have been created to help them catch up with their peers, Die Welt said, citing a survey carried out in 16 German federal states. Germany’s education authority says 325,000 school-aged children reached the EU country in 2015 during Europe’s worst migration crisis since the second world war.

Germany expects more than a million asylum seekers this year, which is five times more than in 2014. It has put a strain on its ability to provide services to all the newcomers. “Schools and education administrations have never been confronted with such a challenge,” Brunhild Kurth, who heads the education authority, told Die Welt. “We must accept that this exceptional situation will become the norm for a long time to come.” Heinz-Peter Meidinger, head of the DPhV teachers’ union, said Germany would need up to 20,000 additional teachers to cater for the new numbers. “By next summer, at the latest, we will feel that gap,” he said.

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Better solve this fast.

Refugee Crisis Creates ‘Stateless Generation’ Of Children In Limbo (Guardian)

Europe’s refugee crisis is threatening to compound a hidden problem of statelessness, with experts warning that growing numbers of children are part of an emerging “stateless generation”. Gender-biased nationality laws in Syria combined with ineffective legal safeguards in the EU states mean that many children born to Syrian refugees in Europe are at high risk of becoming stateless – a wretched condition of marginalisation that affects 10 million people worldwide. Under Syrian law, only men can pass citizenship on to their children. The UN estimates that 25% of Syrian refugee households are fatherless. “A lot of those who are resettled to Europe are women whose husband or partner was killed or lost and are being resettled with their kids or are pregnant at the time, so that is becoming a bigger problem,” said Zahra Albarazi of the Institute on Statelessness and Inclusion, based in the Netherlands.

Sanaa* is a 35-year-old single mother who gave birth to her daughter, Siba*, in Berlin last year. “I went to the Syrian embassy and explained my situation but they said they cannot give Siba a passport because the father should be Syrian, and the father and mother married,” Sanaa said. Germany, in common with the rest of Europe, does not automatically grant citizenship to children born there. This means Siba does not have citizenship of any country. Under international treaties including the UN convention on the rights of the child, governments are obliged to grant nationality to any child born on their soil who would otherwise be stateless. But few EU countries have adopted this principle into domestic law and those that have consistently fail to implement it.

The UNHCR refugee agency estimates that at least 680,000 people in Europe are without citizenship of any country, although experts say the true figure is likely to be far higher because stateless people are hard to count. The statelessness problem is particularly bad in south-east Asia: in Myanmar alone the UN estimates there are more than 810,000 stateless people. But the situation in Europe is about to get much worse as a result of the unprecedented migration. Up until now, groups such as the Roma and Russian-speaking people from the Baltics have been most affected, although the UN blames statelessness on a “bewildering array of causes”, with people from a wide range of backgrounds finding they are not legally entitled to citizenship of any country.

No research has been done into the scale of statelessness among the children of Syrian refugees in Europe, but it is thought that many are likely to be in the same position as Siba. Statelessness in Europe can pose huge problems. Experts say many parents are unaware that their children are stateless. Often the children realise they do not have legal citizenship only when they reach adulthood and find they cannot legally work, marry, own property, vote or even graduate from school. [..] The UN says more than 30,000 babies born to Syrian refugees in Lebanon are at risk of statelessness. And research by Refugees International (RI) this year found that many of the 60,000 children born to Syrian refugees in Turkey since 2011 could be in the same position.

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