Jack Delano Thirst Stops Here: Durham, North Carolina May 1940
I should maybe start off by saying that we’ve seen so many blatant lies lately we might want to be careful what we label a ‘lie’ and what not. I want to point out a bunch of things that are perhaps more misinterpretations, or just different interpretations, than blatant lies. But the difference between the two is often paper thin and slippery. I just simply noticed a few issues on which opinions vary, for whatever reason. And it doesn’t always matter whether that originates in innocence, ignorance or purposeful deceit.
First, I was my impression lately that everyone could agree the lack of volatility in the financial markets was not a good thing. That we don’t have actual markets if and when these don’t reflect what happens in the economies they ‘represent’. That plane loads full of central bank largesse makes price discovery impossible, so nobody knows what anything is worth anymore.
Which is a bad thing, because you can’t tell whether you’re buying something really valuable or of you’re being ripped off. Ultra low interest rates enable individuals and companies to purchase certain things at such low prices, and at so little risk even if the underlying risk is massive, that everyone’s view gets distorted.
An individual can buy a home or a car at an ultra low rate that (s)he could never have bought otherwise, and that they will default on overnight when rates rise. Do that car and that home have the value paid for them in the situation distorted by the low interest rate? Not when rates go up they don’t, and rates can only go up from here.
Ultra low interest rates also allow companies to buy back their shares, and engage in all sorts of mergers and acquisitions, even if their balance sheets wouldn’t let them with higher rates. We’ll get to see yet, and soon, how corrupting and perverting the past 10-20 years of central bank policies have been. Not just the Fed, China and Japan have done more than their share too.
One thing that’s certain is the policies killed off volatility. Something investors may hate, but something without which markets can’t function. This lack of volatility has created fat paychecks for some, and years of added misery for the rest. Someone always has to pay. And in the end it’s always the men in the street who do.
Last week, volatility came back. And it’s here to stay. US/EU sanctions against Russia, combined with the unproven – and likely unfounded – accusations they are based on, make sure of that. Throw in the continuing Fed taper, and the dollar demand it will cause, and you got a situation the world won’t come out of for a while. The market’s no longer Mr. Nice Guy.
Anyone who had a return of volatility on their bucket list – and there were many – can cross that one off now. You’ll have so much volatility you’re going to wonder what you were thinking when you wished for it. Anything you saw last week was nothing compared with what’s ahead.
Predictable financial markets that set records against the backdrop of deteriorating real economies were never seen as long term viable, but the speed at which the tables turn will catch most of us off guard. As this silly CNBC bit proves:
Why Markets Are Drowning In Uncertainty?
Just as life guards warn not to swim in water you don’t know, does the same apply to guardians of funds, as the markets they’re being asked to trade look murky and unfamiliar? Central banks haven’t made decision-making any easier. Is the Federal Reserve still buoying asset prices to nurture recovery, or is it turning into a monster of the sea as it slows asset purchases and considers interest rate hikes? Historians know it is never a smooth ride as rates climb. “The number of times that the Federal Reserve has hiked interest rates without a negative economic or market impact has been exactly zero,” said Lance Roberts of STA Wealth Management.
What a load of baloney. As if a central bank’s task is to help investors make money. As if anyone has the right to demand that. People sure get used to things soon. What they mean is actually not ‘drowning in uncertainty’, but back to what it should have been all along. Where investing is a risk, not a handout. Where investors can lose their shirts, not taxpayers. Well, a lot of shirts will be lost, but taxpayers will still be on the hook.
But what a strange perception of reality that article demonstrates. Like a baby crying when its silver sugar spoon gets taken away.
Another issue in which points of view vary widely is that of the Argentina bonds. There is a sort of consensus in the western press that Argentina did it all to themselves, that they engaged in irresponsible government policies, and did so for the umpteenth time. The crucial issue at this point, from where I’m sitting, is whether the vulture funds led by Paul Singer’s Elliott bought credit default swaps to cash in even bigger on an Argentine default. Something Elliott representatives have denied in front of a judge.
The government in Buenos Aires seems convinced that was a lie. And has asked the Securities and Exchange Commission to investigate. But what are their chances there? The ISDA, the international body that decides whether something is a credit event, has ruled Argentina’s failure to pay its creditors is. It is of course at least a little suspect, or is that just unfortunate(?!), that the Elliott fund is on the board of ISDA, along with JPMorgan, Morgan Stanley et al. What’s impartial about that?
As the Telegraph reports, Argentina has chosen the attack, it accuses the vulture funds, the court appointed mediator, the judge and the US government and threatens to take the case before the and the International Court of Justice.
Argentina Accuses Default Hedge Funds Of ‘Fraudulent Manoeuvres’
Argentina will ask the US markets watchdog to probe two hedge funds involved in its $1.5bn default, saying that they used “fraudulent manoeuvres” to make “incredible profits”. Cabinet chief Jorge Capitanich has said he will urge the Securities and Exchange Commission to act after the unnamed funds allegedly made money from “privileged information”. [..] Mr Capitanich also called on “bondholders, trustees and clearing agencies” to take legal action against what his country has labelled “vulture funds”.
Last week, a US judge told Argentina to stop spouting “half truths” about its second default in 12 years and return to talks with bondholders. The South American nation has repeatedly denied it has defaulted, blaming the US government for stopping it agreeing a deal with creditors that would draw a line under its last default in 2002. “Let’s cool down any idea of mistrust [and] let’s go back to work,” US District Judge Thomas Griesa, who has jurisdiction over the bonds after Argentina agreed to hold talks under New York law, said on Friday.
He also ordered President Cristina Fernandez de Kirchner’s government to return to the negotiating table with bondholders, adding that the disparaging remarks should stop because nothing will eliminate Argentina’s obligations to pay bondholders – a fact that its government is ignoring.
Argentine officials deny the country has defaulted because they deposited $539m for creditors in a bank intermediary. But Mr Griesa blocked that deposit in June, saying it violated his ruling that Argentina must first pay $1.5bn to settle its dispute with holdout investors first. “To say that Argentina is in technical default is a ridiculous hoax,” Mr Capitanich said after last week’s deadline for talks had passed. He accused Judge Griesa of acting as an “agent” for what the country has labelled “vulture funds”.“There’s been mala praxis here by the US justice system, for which all three branches of the government are responsible. Argentina has tried to negotiate in good faith,” he added.
Mr Capitanich has previously warned that Argentina is considering calling for a debate at the United Nations and launching an appeal at the International Court of Justice in The Hague. “We can’t hold any positive expectations because [Mr Griesa] has always held the view of someone who is partial,” Mr Capitanich said on Friday. Mr Capitanich also announced on Monday that Buenos Aires has formally asked Mr Griesa to dismiss the mediator in the case, Daniel Pollack, accusing him of failing to be impartial.
Isn’t that cute? Depending on the beholder, where would you personally think the lie is?
I noticed a third intriguing case of differing interpretations this morning with regards to the failed Portuguese bank Espírito Santo, and its bail out by the government in Lisbon with EU funds. First, Bloomberg has this, an an article whose title magically changed to “What Crisis? EU Rules on Banks Lauded as Right After All” during the day, as if to hammer in their satisfaction a bit more.
Espirito Santo Sets Benchmark for Creditor Pain in EU Bank Rules
Portugal’s rescue of Banco Espirito Santo SA may have eased some doubts about Europe’s banking industry by showing investors how the European Union’s thinking has evolved on handling failing lenders. The decision shielding some creditors spurred a rally in bank stocks and Portuguese assets yesterday by demonstrating authorities were able to shutter a bank without sparking a fresh bout of market tensions that have roiled Europe since 2009.
Instead of forcing losses on unsecured depositors and other senior creditors, as was required of Cyprus, Portugal is following Spain’s gentler approach that focused losses on junior debt and stockholders. “This is bad for the bank’s shareholders and creditors, but it’s good for the wider banking industry,” said Stefan Bongardt, a European banking analyst at Independent Research GmbH in Frankfurt. “Everyone knows the rules of the game now and that draws uncertainty out of the market.” The yield on Portugal’s 2-year bonds closed at a record low yesterday.
“The systemic euro crisis is over,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a note to clients. “While the euro zone still has issues, it now has a well-oiled machine to deal with them. The vicious contagion risks, which were the hallmark of the euro crisis, can be kept at bay.” The Bank of Portugal unveiled a €4.9 billion ($6.6 billion) bailout over the weekend that will leave shareholders and junior bondholders with losses, while sparing senior creditors and unsecured depositors. Banco Espirito Santo, once the country’s largest lender by market value, will be split in two, with depositors and healthy assets joining the newly formed Novo Bank while bad loans and junior creditors stay with the old bank until it can be shut down.
The bank of the Holy Spirit, it turns out, has been a private and family led disaster for decades, and allegedly not always this side of the law. And that bail out, too, in a completely different take from what Bloomberg says, smells of last year’s sardines, says Ambrose Evans-Pritchard in a hard hitting piece. And not just him either:
Europe’s Tough New Regime For Banks Fails First Test In Portugal (AEP)
Portugal’s rescue of Banco Santo Espirito has left taxpayers on the hook for large potential losses, sparing senior bondholders in the first serious test of the EU’s tougher rules for bank failures. The controversial €4.9bn bailout over the weekend set off a relief rally on the Lisbon bourse, with bank stocks soaring.
It also set off a political furore as opposition parties accused premier Pedro Passos Coelho of bending to the banking elites. “We live in a democracy, not a bankocracy. It is unacceptable for the prime minister to take money from the salaries of workers and pensions, and funnel it to a private bank,” said Catarina Martins, leader of the Left Bloc.
European officials pledged last year that taxpayers will never again face losses from a bank failure until all creditors and unsecured depositors have been wiped out first. They seem to have backed away at the first sign of trouble, opting for soft terms rather than the draconian measures imposed on Cyprus.
The EU’s new “bail-in” rules do not come into force until 2016, but it was assumed the broad principle would be followed. Portugal’s decision to protect senior bondholders is incendiary in a country already near austerity fatigue. The rescue comes three weeks after the central bank said Espirito Santo’s problems were safely contained. Carlos Costa, the central bank’s governor, said Lisbon was forced to act after the crippled lender revealed shock losses from exposure to the Espirito Santo family empire.
He accused the management of “fraudulent schemes” involving the rotation of funds across the world to deceive regulators. “International experience shows that schemes of this kind are very hard to detect before they collapse,” he said. The rescue raises fresh doubts about the underlying health of the banks as Portugal grapples with debt deflation and a private and public debt burden near 380% of GDP, the highest ratio in Europe.
The plan splits Espirito Santo into a bad bank that retains the toxic assets, and a Banco Novo for normal depositors. The state will inject €4.5bn of public money, dipping into EU-IMF funds left over for bank recapitalisations. This will raise Portugal’s net debt by 3% of GDP. Mr Passos Coelho said the money would be recouped when the new bank is sold off, insisting that there will be no extra costs for the taxpayer. Other Portuguese banks will have to cover any shortfall through a resolution fund.
Megan Greene, from Maverick Intelligence, said this is wishful thinking: “The losses could be much larger than people think. This is eerily similar to what happened in Ireland, and I think taxpayers will end up footing the bill.” Frances Coppola, a banking expert at Pieria, said the plan fails to tackle moral hazard and will come back to haunt the Portuguese state. “Those who brought down Banco Espirito Santo will walk away with the proceeds, and ordinary people will pay,” she said.
João Rendeiro, former head of BPP bank, said the collapse of Espirito Santo will do far more damage than claimed. “The economic impact is gigantic. It could lead to a contraction of GDP by 7.6%. I don’t know of any parallel to this in our economic history,” he said.
Mr Passos Coelho took a major gamble by going for a “clean exit” at the end of Portugal’s EU-IMF Troika programme in April, refusing to accept a backstop credit line. He brushed aside warnings from the IMF, worried about debt redemptions over the next two years. He insisted that the country is safely out of the woods, able to borrow cheaply from the markets without having to accept dictates from Brussels.
It’s like a game of spot the differences, isn’t it? Given the evidence, I’m inclined to give Ambrose the game. An initial $6 billion in EU taxpayer funds (and perhaps more), a potentially much higher number from the Portuguese people, and an economy that could lose as much again as it did in the depths of the crisis. Plus, obviously, regulators who’ve been asleep for many years, not exactly a confidence booster either. But still, what was Bloomberg thinking when they published their take?
We’re going to see a lot of spectacle and theater as the Fed and PBoC are forced to wind down their insanity. And we’ll see tons of different interpretations coming from all angles. As you’ve seen from what happened and happens in Ukraine, and from so many other events, you can’t trust your governments or media to tell you the truth. There’s a lot of plain dumb asses among them, and even more lying bastards with agendas. So keep your eyes and your nose open. A lot of things will look good at first sight but come with a nasty odor.
• The US is Bankrupt: Liabilities Exceed Household Net Worth (TrimTabs)
There are many ways to look at the United States government debt, obligations, and assets. Liabilities include Treasury debt held by the public or more broadly total Treasury debt outstanding. There’s unfunded liabilities like Medicare and Social Security. And then the assets of all the real estate, all the equities, all the bonds, all the deposits…all at today’s valuations. But let’s cut straight to the bottom line and add it all up…$89.5 trillion in liabilities and $82 trillion in assets. There. It’s not a secret anymore…and although these are all government numbers, for some strange reason the government never adds them all together or explains them…but we will.
The $89.5 trillion in liabilities include:
- $20.69 trillion
- $12.65 trillion public Treasury debt (interest rate sensitive bonds sold to finance government spending)
- Fyi – $5.35 trillion of “intra-governmental” Treasury debt are not included as they are considered an asset of the particular programs (SS, etc.) and simultaneously a liability of the Treasury
- $6.54 trillion civilian and Military Pensions and Benefits payable
- $1.5 trillion in “other” liabilities https://www.fms.treas.gov/finrep13/note_finstmts/fr_notes_fin_stmts_note13.html.
- $69 trillion (present value terms what should be saved now to make up the present and future anticipated tax shortfalls vs. present and future payouts).
- $3.7 trillion SMI (Supplemental Medical Insurance)
- $39.5 trillion Medicare or HI (Hospital Insurance) Part B / D
- $25.8 trillion Social Security or OASDI (Old Age Survivors Disability Insurance)
- Fyi – $5+ trillion of additional unfunded state liabilities not included.
Source: 2013 OASDI and Medicare Trustees’ Reports. (pg. 183), https://www.gao.gov/assets/670/661234.p
These needs can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination. But since 1969 Treasury debt has been sold with the intention of paying only the interest (but never repaying the principal) and also in ’69 LBJ instituted the “Unified Budget” putting all social spending into the general budget reaping the gains in the present year absent calculating for the future liabilities. If you don’t know the story of how unfunded liabilities came to be and want to understand how this took place, please stop and read as USA Ponzi explains nicely… https://usaponzi.com/cooking-the-books.html
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• Why Markets Are Drowning In Uncertainty (CNBC)
It’s been a hot summer for some, with U.S. stock markets breaking out to fresh highs in July, and European investors debating whether to dip a toe in the water on the back of more European Central Bank (ECB) action. But as thunder clouds roll in, and after Wall Street suffered its worst week since mid 2012, a solo swim does not seem all that appealing. Just as life guards warn not to swim in water you don’t know, does the same apply to guardians of funds, as the markets they’re being asked to trade look murky and unfamiliar? Central banks haven’t made decision-making any easier. Is the Federal Reserve still buoying asset prices to nurture recovery, or is it turning into a monster of the sea as it slows asset purchases and considers interest rate hikes? Historians know it is never a smooth ride as rates climb. “The number of times that the Federal Reserve has hiked interest rates without a negative economic or market impact has been exactly zero,” said Lance Roberts of STA Wealth Management.
Short-term trading is no easier, based on musings from the boss of the Fed. Janet Yellen caused sweat on the brows of those long technology stocks when she warned that there is too much heat in social media stocks. But taking Yellen’s advice would have meant missing an earnings-inspired spike in Facebook, Twitter and LinkedIn, perhaps one of the sauciest trading opportunities of the summer. Gautam Batra of Signia Wealth accuses central banks of messing with the seasonals. He said we’re still witnessing the usual market roll over. “It was just delayed after the ECB launched fresh stimulus.” The ECB’s actions were welcomed initially, but the fresh liquidity has not been enough. Confidence about the pace of recovery is waning, particularly after the latest data cast a shadow over the summer. The inflation rate risks dragging Europe under, while PMIs for France, Italy, Germany, even the U.K. indicate a cooler breeze, as all faced choppier manufacturing conditions.
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• Espirito Santo Sets Benchmark for Creditor Pain in EU Bank Rules (Bloomberg)
Portugal’s rescue of Banco Espirito Santo SA may have eased some doubts about Europe’s banking industry by showing investors how the European Union’s thinking has evolved on handling failing lenders. The decision shielding some creditors spurred a rally in bank stocks and Portuguese assets yesterday by demonstrating authorities were able to shutter a bank without sparking a fresh bout of market tensions that have roiled Europe since 2009. Instead of forcing losses on unsecured depositors and other senior creditors, as was required of Cyprus, Portugal is following Spain’s gentler approach that focused losses on junior debt and stockholders. “This is bad for the bank’s shareholders and creditors, but it’s good for the wider banking industry,” said Stefan Bongardt, a European banking analyst at Independent Research GmbH in Frankfurt. “Everyone knows the rules of the game now and that draws uncertainty out of the market.” The yield on Portugal’s 2-year bonds closed at a record low yesterday.
“The systemic euro crisis is over,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a note to clients. “While the euro zone still has issues, it now has a well-oiled machine to deal with them. The vicious contagion risks, which were the hallmark of the euro crisis, can be kept at bay.” The Bank of Portugal unveiled a €4.9 billion ($6.6 billion) bailout over the weekend that will leave shareholders and junior bondholders with losses, while sparing senior creditors and unsecured depositors. Banco Espirito Santo, once the country’s largest lender by market value, will be split in two, with depositors and healthy assets joining the newly formed Novo Bank while bad loans and junior creditors stay with the old bank until it can be shut down. EU leaders vowed in 2012 to create a banking union within the euro zone so that taxpayers would no longer shoulder the burden of repairing banks for investors’ benefit. Five of the currency bloc’s 18 members required aid during the worst of the crisis, which was fueled by bouts of contagion between sovereign debt and banks.
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• Crédit Agricole Loses Big On 14.6% Espírito Santo Stake (MarketWatch)
Crédit Agricole has reported a slump in second-quarter net profit, hit by the crisis facing Portuguese lender Banco Espírito Santo SA, in which the French bank owns a 14.6% stake. France’s second largest listed bank by assets said on Tuesday it has booked a €502 million ($673 million) loss related to its stake in Banco Espírito Santo, which reported a record €3.49 billion second-quarter loss after its troubled parent found ways to use the bank to raise funds that are now largely unrecoverable. The French bank also wrote off the entire €206 million value of its stake in Banco Espírito Santo in its books after Portugal’s central bank late Sunday unveiled a plan to break up the local lender and pump in billions of euros of state money. The combined impact of Banco Espírito Santo’s woes on Crédit Agricole in the quarter was €708 million. The Paris-based lender reported a net profit of €17 million in the three months to end-June, compared with a EUR698 million net profit a year ago. Revenue fell by 6% to €3.93 billion in the second-quarter.
Crédit Agricole’s misadventure in Portugal points to yet another misstep by the French bank in southern Europe, where it once had big ambitions. After sinking billion of euros into extricating itself from an ill-fated acquisition in Greece, and unloading its stake in Spanish lender Bankinter. Under the central bank’s plan, Crédit Agricole, along with other shareholders, will stay with a bad bank, set up with toxic assets from the lender, including the loans given to Espírito Santo entities that could be unrecoverable. The bad bank will be wound down. The French lender said it didn’t expect to book additional losses related to its stake in the Portuguese lender. Crédit Agricole CEO Jean-Paul Chifflet said the bank would take part in any legal action Banco Espírito Santo’s new management may choose to bring against the Portuguese lender’s former management. “We can only deplore having being cheated by a family with whom Crédit Agricole tried to build a real partnership to create Portugal’s largest private bank,” said Mr. Chifflet [..]
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• Europe’s Tough New Regime For Banks Fails First Test In Portugal (AEP)
Portugal’s rescue of Banco Santo Espirito has left taxpayers on the hook for large potential losses, sparing senior bondholders in the first serious test of the EU’s tougher rules for bank failures. The controversial €4.9bn (£3.9bn) bailout over the weekend set off a relief rally on the Lisbon bourse, with bank stocks soaring. It also set off a political furore as opposition parties accused premier Pedro Passos Coelho of bending to the banking elites. “We live in a democracy, not a bankocracy. It is unacceptable for the prime minister to take money from the salaries of workers and pensions, and funnel it to a private bank,” said Catarina Martins, leader of the Left Bloc.
European officials pledged last year that taxpayers will never again face losses from a bank failure until all creditors and unsecured depositors have been wiped out first. They seem to have backed away at the first sign of trouble, opting for soft terms rather than the draconian measures imposed on Cyprus.
The EU’s new “bail-in” rules do not come into force until 2016, but it was assumed the broad principle would be followed. Portugal’s decision to protect senior bondholders is incendiary in a country already near austerity fatigue. The rescue comes three weeks after the central bank said Espirito Santo’s problems were safely contained. Carlos Costa, the central bank’s governor, said Lisbon was forced to act after the crippled lender revealed shock losses from exposure to the Espirito Santo family empire. [..] João Rendeiro, former head of BPP bank, said the collapse of Espirito Santo will do far more damage than claimed. “The economic impact is gigantic. It could lead to a contraction of GDP by 7.6pc. I don’t know of any parallel to this in our economic history,” he said.
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Oh yes it is. But then, so is everybody’s.
• Asia’s Next Crisis Is a Flood of Debt (Bloomberg)
Asia is still traumatized by the great financial crisis of 1997, when Thailand’s devaluation of the baht set off a region-wide collapse in markets. Could it happen here again? The mere question will strike many as odd, given Asia’s rapid growth and progress in strengthening financial systems, improving transparency and amassing trillions of dollars of currency reserves. But Asia now faces three risks that could quickly undo those gains: Federal Reserve tapering, a Chinese crash and an explosion of household debt. The danger of the Fed pulling too much liquidity out of markets has been well documented. So have China’s rising vulnerabilities. Debt, though, deserves far more scrutiny. As economists survey the scene, Thailand once again tops the worry list. Debt there has risen rapidly, underwriting standards appear loose and nonperforming loans are rising.
Thailand has plenty of company in Asia, Oxford Economics warns in a new report. Financially conservative Singapore has seen credit growth in the last six years exceed that of the U.S. in the run-up to its 2008 subprime meltdown. Several nations now have private-debt ratios of between 150% and 200% of gross domestic product. They include the higher-income set – Australia, Hong Kong, South Korea and Taiwan – as well as China, Malaysia, Thailand and Vietnam. Even where debt levels are lower, Indonesia and the Philippines, the trajectory is troublesome. “Debt surges of this kind often end badly,” says Oxford economist Adam Slater.
Even more worrisome than the absolute levels of debt, says Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC, is the pace of increase. For all its rapid growth and buoyant markets, Asia isn’t as healthy as it appears on the surface, and might take on even more debt to support growth. As leverage exceeds the peak before the 1997 crash, is a sharp correction on the way? “The optimists argue that’s unlikely to occur in Asia, where people tend to be more prudent and save more of their monthly income,” Neumann says. “Well, not necessarily.” All this fresh debt leaves Asia highly exposed to financial shocks and economic shifts. Any destabilizing event – Fed Chairman Janet Yellen over-tightening, renewed turmoil in Europe, a Chinese credit crunch, surging oil prices, troubles in Japan’s bond market – could push Asia back to the brink. And it’s not as though export markets are booming to provide a cushion.
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Yeah, he has clout.
• Hollande Calls On ECB To Fight Deflationary Risk In Europe (CityAM)
French President Francois Hollande has implored the European Central Bank (ECB) to do more to support growth and employment and combat a “real deflationary risk” in Europe. In an interview with LeMonde, Hollande argued that “weak inflation too has negative fiscal consequences on revenues as well as debt. A lot will depend on the level of the euro, which has weakened over the past few days but not enough.” Germany was also subjected to the French President’s pleas. “We are not asking for any leniency from Germany, but we are asking it to do more to boost growth,” Hollande said.
If Hollande is expecting a dramatic shift in ECB policy, he will most likely be disappointed, according to Bank of America Merrill Lynch. BoAML says it expects no action from ECB and believes Mario Draghi is likely to downplay the surprise in inflation on the downside. The French President said the time had come for the ECB to pump more liquidity into the European economy. The comments come only a day after Moody’s warned that measures being taken tackle France’s deficit and revive the stagnating economy were falling behind rivals such as the UK.
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Oh wait, he doesn’t.
• ECB ‘Won’t Move A Muscle’ Despite Deflation Fears (CNBC)
The European Central Bank (ECB) is expected to hold fire at its monetary policy meeting this week, despite a shock fall in inflation reigniting deflation concerns. It came as something of a shock to most economists – and likely the ECB – when official figures released last week showed that euro zone inflation fell more than expected in July. Inflation rose by 0.4% compared to the same period last year, failing to match expectations of 0.5%. It was the lowest level seen since October 2009 and below last month’s reading of 0.5%. The region’s continuing sluggish growth saw the ECB unveil a host of measures at its June meeting designed to give the euro zone’s recovery a boost.
But July’s disappointing inflation data has boosted concerns that the region is heading towards a period of deflation, with even French President Francois Hollande telling Le Monde newspaper on Monday: “There is a real deflation risk in Europe… The ECB must take all the necessary measures to inject liquidity into the economy.” Despite calls for action by Hollande and numerous economists, ECB President Mario Draghi is unlikely to unveil any further stimulus at the bank’s policy meeting on Thursday, as he waits for June’s interest rate cuts and a new loan program – dubbed the TLTRO – to take effect. “The ECB seems bound to not move a muscle at the Thursday meeting following June’s easing package, whose centerpiece (the TLTRO program) starts in September,” Daiwa economists said in a note.
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Is it trying?
• Can China Fight The Fed? (MarketWatch)
While global markets fret about the end of the U.S. Federal Reserve’s multi-year quantitative easing, China appears to be following its own path. Speculation is mounting its central bank has quietly launched its own version of quantitative easing, helping lift Chinese stocks to their biggest monthly gain since 2012. You might ask why shouldn’t China join in the QE party? But as the world’s second-largest economy still more or less pegs its currency to the U.S. dollar, moving in the opposite direction could set its financial and currency markets up for a shock. At the moment, analysts are trying to make sense of the chunky new 1 trillion yuan ($162 billion) loan in question, extended by the central bank to policy lender China Development Bank, as details trickle out in the press. But with the new pledged lending facility (PLF) reportedly directed at the ailing property sector, this at least offers timely relief; as worries over extended debt levels leading to a property unraveling can be pushed out for another day.
[..] Last weekend, the PBoC warned that debt is rising quickly and credit expansion is high, yet it is simultaneously choosing this moment to adopt unconventional monetary policy. Standard Chartered in a note last week said the PLF is technically quantitative easing, although there seems little clarity on whether loans have already been made and on what collateral has been pledged. The facility appears to offer China Development Bank access to funds at below-market rates, with the intent to target urban redevelopment and social housing. Standard Chartered reckons the ultimate beneficiaries of the new lending will likely be local governments’ investment vehicles. Economists at Société Générale see another role for the PLF, as it also helps the PBOC offer guidance on preferred long-term borrowing costs, indicating a push lower for funding costs.
[..] … what of the risk foreign capital flows will now not just slow, but reverse? This is a question that cannot be ignored as the Fed nears the end of QE. This would present the PBOC with a real policy headache, as it would have to choose between defending its de-facto peg to the U.S. dollar and contracting money supply, or else letting the currency weaken. But letting the currency weaken risks triggering an outflow of foreign exchange. Furthermore, arguments that China is immune to capital flows due to its closed capital account no longer hold. Its recent credit spree has also pulled in substantial foreign-exchange funding with, by some estimates, Hong Kong at the center of a $1.2-trillion carry trade to mainland Chinese companies. If we do reach a situation of a yuan under pressure, then QE is only likely to exacerbate matters. One way or another, China looks as if it is getting closer to the end-point of its debt party.
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• Real Estate Oversupply Becoming Bigger Problem For China (Forbes)
If you build it they will come. Eventually. That’s been the mantra of Chinese real estate developers and their lenders who have been throwing them buckets filled with yuan for the past several years. Now, an oversupply problem in second and third tier cities promises to derail the economy by as much as one%age point, the International Monetary Fund has warned. How important is real estate to the Chinese economy? In the year 2000, real estate accounted for around 5% of China’s GDP. By 2012 it rose three times to 15%, according to the IMF’s calculations. It certainly did not decline in 2013 and 2014, despite Beijing working overtime in forcing a market correction. The IMF did not have data for the last two years. The real estate market appears to be undergoing a correction. While a slowing of investment and construction by as much as 10% would definitely reduce growth from 7.5% to 6.5%, an orderly adjustment is still factored into the IMF’s baseline scenario.
The IMF said in a report released on Friday that oversupply was already a big problem in the industrial northeast and in coastal cities in the north. China’s real estate bubble is different from the price inflation that took out the U.S. economy in 2008. There is no subprime or foreclosure crisis in China. And there is not the additional worry of a mortgage backed securities bubble in the works either. But despite those two key differences, China housing has undergone a major growth spurt in the last decade. Rich Chinese are buying up second homes as investments. And local LOCM +2.58% municipalities have been funding local builders to erect housing in order to create jobs. The problem is, Chinese urbanization trends have not sped up enough to account for the new high-rises, many of which are not fully sold. Unsold properties mean less money for developers who in turn have less revenue to pay off debts. For now, many municipal lenders have been either forgiving or rolling over those debts to extend the life of the loans.
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It’s market thing: it it pays, there’s demand.
• Russia Scraps Ruble Bond Sale as Yields Jump to Five-Month High (BW)
Russia canceled its third ruble bond auction in a row as U.S. and European Union sanctions drive the nation’s borrowing costs to the highest levels since March. The Finance Ministry pulled tomorrow’s sale, citing “unfavorable market conditions” in a statement on its website. The yield on Russia’s 10-year bonds rose six basis points to reach 9.72%, the highest since March 14. The rate on the notes increased 109 basis points since a day before a Malaysian passenger jet crashed in Ukraine on July 17. The U.S. and EU last week expanded sanctions against Russia for what they see as President Vladimir Putin’s destabilizing role in Ukraine. Switzerland added new people and companies to its list of sanctions today.
Russia has now axed 11 auctions since the start of the year and voided four more after bidders sought higher yields than the ministry was prepared to offer.The government won’t sell bonds when borrowing costs are too high, Finance Minister Anton Siluanov said April 1. Russia has raised 124 billion rubles ($3.5 billion) from selling OFZ bonds this year and has placed 100 billion rubles in untraded GSO bonds with the Pension Fund. Next year the ministry plans to increase the gross borrowings on the local market to about 1 trillion rubles, Konstantin Vyshkovsky, head of the Finance Ministry’s debt department, said last month.
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• Russia’s Eurasian Vision Contest (Roubini)
The escalating conflict in Ukraine between the Western-backed government and Russian-backed separatists has focused attention on a fundamental question: what are the Kremlin’s long-term objectives? Though Russian President Vladimir Putin’s immediate goal may have been limited to regaining control of Crimea and retaining some influence in Ukrainian affairs, his longer-term ambition is much bolder. That ambition is not difficult to discern. Putin once famously observed that the Soviet Union’s collapse was the greatest catastrophe of the 20th century. Thus, his long-term objective has been to rebuild it in some form, perhaps as a supra-national union of member states like the European Union. This goal is not surprising: declining or not, Russia has always seen itself as a great power that should be surrounded by buffer states. Under the czars, imperial Russia extended its reach over time. Under the Bolsheviks, Russia built the Soviet Union and a sphere of influence that encompassed most of central and eastern Europe.
And now, under Putin’s similarly autocratic regime, Russia plans to create, over time, a vast Eurasian Union (EAU). While the EAU is still only a customs union, the European Union’s experience suggests that a successful free-trade area leads over time to broader economic, monetary, and eventually political integration. Russia’s goal is not to create another North American Free Trade Agreement (Nafta); it is to create another EU, with the Kremlin holding all of the real levers of power. The plan has been clear: start with a customs union – initially Russia, Belarus, and Kazakhstan – and add most of the other former Soviet republics. Indeed, now Armenia and Kyrgyzstan are in play. Once a broad customs union is established, trade, financial, and investment links within it grow to the point that its members stabilise their exchange rates vis-à-vis one another. Then, perhaps a couple of decades after the customs union is formed, its members consider creating a true monetary union with a common currency (the Eurasian ruble?) that can be used as a unit of account, means of payment, and store of value.
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It’s regulations that spoil the party.
• Moody’s Downgrades Outlook On UK Banks To Negative (Reuters)
Moody’s Investors Service has revised down its outlook on British banks, citing new regulations designed to prevent taxpayers having to stump up funds to rescue failing banks. Moody’s said on Tuesday it had downgraded its view of the sector to ‘negative’ from ‘stable’. It also raised concerns over British banks’ continued exposure to litigation and misconduct charges.
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• Argentina Accuses Default Hedge Funds Of ‘Fraudulent Manoeuvres’ (Telegraph)
Argentina will ask the US markets watchdog to probe two hedge funds involved in its $1.5bn default, saying that they used “fraudulent manoeuvres” to make “incredible profits”. Cabinet chief Jorge Capitanich has said he will urge the Securities and Exchange Commission to act after the unnamed funds allegedly made money from “privileged information”. Argentina officially defaulted on Friday after the International Swaps and Derivatives Association ruled that its failure to pay $539m to its creditors earlier this week constituted a “credit event”. The ISDA’s move will almost certainly trigger credit default swaps on Argentina’s debt worth $1bn. Mr Capitanich also called on “bondholders, trustees and clearing agencies” to take legal action against what his country has labelled “vulture funds”. Last week, a US judge told Argentina to stop spouting “half truths” about its second default in 12 years and return to talks with bondholders.
The South American nation has repeatedly denied it has defaulted, blaming the US government for stopping it agreeing a deal with creditors that would draw a line under its last default in 2002. “Let’s cool down any idea of mistrust [and] let’s go back to work,” US District Judge Thomas Griesa, who has jurisdiction over the bonds after Argentina agreed to hold talks under New York law, said on Friday. He also ordered President Cristina Fernandez de Kirchner’s government to return to the negotiating table with bondholders, adding that the disparaging remarks should stop because nothing will eliminate Argentina’s obligations to pay bondholders – a fact that its government is ignoring. “What occurred this week did not extinguish or reduce the obligations of the Republic of Argentina.”
Argentine officials deny the country has defaulted because they deposited $539m for creditors in a bank intermediary. But Mr Griesa blocked that deposit in June, saying it violated his ruling that Argentina must first pay $1.5bn to settle its dispute with holdout investors first. “To say that Argentina is in technical default is a ridiculous hoax,” Mr Capitanich said after last week’s deadline for talks had passed. He accused Mr Griesa of acting as an “agent” for what the country has labelled “vulture funds”. “There’s been mala praxis here by the US justice system, for which all three branches of the government are responsible. Argentina has tried to negotiate in good faith,” he added.
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Which side are we supporting, you said?
• 730,000 Have Left Ukraine For Russia Due To Conflict (Reuters)
About 730,000 people have left Ukraine for Russia this year due to the fighting in eastern Ukraine, UNHCR’s European director Vincent Cochetel said on Tuesday. That figure implies a far higher exodus than the 168,000 who have fled and applied to Russia’s Migration Service. A further 117,000 people are displaced inside Ukraine, a number that is growing by about 1,200 per day, he said. UNHCR stripped out the seasonal figures and numbers for people who would normally have crossed the border in the course of trade or tourism to arrive at the 730,000 figure, Cochetel told a U.N. news briefing.
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One lone voice of reason. One.
• Why Won’t Obama Just Leave Ukraine Alone? (Ron Paul)
President Obama announced last week that he was imposing yet another round of sanctions on Russia, this time targeting financial, arms, and energy sectors. The European Union, as it has done each time, quickly followed suit. These sanctions will not produce the results Washington demands, but they will hurt the economies of the US and EU, as well as Russia. These sanctions are, according to the Obama administration, punishment for what it claims is Russia’s role in the crash of Malaysia Airlines Flight 17, and for what the president claims is Russia’s continued arming of separatists in eastern Ukraine. Neither of these reasons makes much sense because neither case has been proven. The administration began blaming Russia for the downing of the plane just hours after the crash, before an investigation had even begun. The administration claimed it had evidence of Russia’s involvement but refused to show it.
Later, the Obama administration arranged a briefing by “senior intelligence officials” who told the media that “we don’t know a name, we don’t know a rank and we’re not even 100% sure of a nationality,” of who brought down the aircraft. So Obama then claimed Russian culpability because Russia’s “support” for the separatists in east Ukraine “created the conditions” for the shoot-down of the aircraft. That is a dangerous measure of culpability considering US support for separatist groups in Syria and elsewhere. Similarly, the US government claimed that Russia is providing weapons, including heavy weapons, to the rebels in Ukraine and shooting across the border into Ukrainian territory. It may be true, but again the US refuses to provide any evidence and the Russian government denies the charge. It’s like Iraq’s WMDs all over again. Obama has argued that the Ukrainians should solve this problem themselves and therefore Russia should butt out.
I agree with the president on this. Outside countries should leave Ukraine to resolve the conflict itself. However, even as the US demands that the Russians de-escalate, the United States is busy escalating! In June, Washington sent a team of military advisors to help Ukraine fight the separatists in the eastern part of the country. Such teams of “advisors” often include special forces and are usually a slippery slope to direct US military involvement. On Friday, President Obama requested Congressional approval to send US troops into Ukraine to train and equip its national guard. This even though in March, the president promised no US boots on the ground in Ukraine. The deployment will be funded with $19 million from a fund designated to fight global terrorism, signaling that the US considers the secessionists in Ukraine to be “terrorists.” Are US drone strikes against these “terrorists” and the “associated forces” who support them that far off?
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There’s much more where this came from.
• New Drilling Largely Financed With Debt, Deferred Taxes (Oilprice.com)
Major oil and gas companies are taking on an increasing share of debt in order to maintain drilling momentum, according to data from the U.S. Energy Information Administration. Beginning around 2010, energy companies have been increasing their spending, particularly in the United States, as the tight oil revolution took off. Major firms snatched up acreage in oil-rich shale formations like the Bakken and the Eagle Ford and began drilling at a frenzied pace. The significant outlays required to ramp up such an operation were offset by the rising price of oil, which allowed oil companies to expand their operations without having to take on substantial volumes of debt. But after several years of increases, global oil prices began to plateau in mid-2011 and have stayed relatively steady since then. In fact, 2013 experienced the least oil price volatility since 2006.
And oil prices in 2014 have remained remarkably consistent, especially taking into account record levels of global demand and the abundance of geopolitical tension around the globe, from Ukraine to Iraq and Syria. As a result of oil prices trading in a narrow band – roughly between $100 and $120 for Brent Crude and $90 and $105 for WTI – revenues for oil and gas companies flattened out even as their costs continued to rise. From 2012 through the beginning of 2014, average cash from drilling operations increased by $59 billion over the same average seen in 2010-2011. But spending rose at a faster clip: up more than $136 billion. The yawning gap that opened up between spending and revenues has largely been closed by the acquisition of more debt.
For shale drillers in particular, debt has doubled over the last four years while revenues grew at a meager 5.6%. As the EIA points out, taking on debt is not necessarily a bad thing, especially if it is used to invest in new sources of production and growth. But a new report from Taxpayers for Common Sense points to one other factor that may be contributing to the rise in spending long after earnings flat-line. Under the U.S. tax code, oil and gas companies can defer billions of dollars in taxes by maintaining elevated levels of spending. That is partly by design. Drilling new oil and gas wells is capital intensive, and thanks to a provision in the 2009 stimulus bill, energy companies can use what is known as “bonus depreciation” to write off all depreciation in a single year, as opposed to spreading it out over future tax cycles.
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And then there’s plain greed.
• Colorado Fracking Opponents Losing Local Control Fight (Bloomberg)
Colorado’s compromise with drilling opponents has dealt a blow to environmentalists’ expanding battle to give local communities more control to limit fracking. Governor John Hickenlooper and Representative Jared Polis agreed to a deal that weakened the prospects for two proposed ballot initiatives aimed at restricting oil and gas activity, the two men said at a news conference in Denver yesterday. Polis, who was expected to help finance the campaign for the measures, agreed to withdraw his support after Hickenlooper promised to create a task force to study the industry’s impact on local communities.
“Responsible oil and gas development in Colorado is critical to our economy, our environment, our health and our future,” said Hickenlooper. The Democrat, who told a Senate committee last year that he drank fracking fluid to prove its safety, has been a strong proponent of drilling. Colorado crude output grew faster than in any other state in 2013. Ballot initiative proponents said they planned to proceed with their proposals to restrict fracking unless the backers of two competing measures supported by the energy industry agreed to drop their plans. “Until we receive confirmation that the industry is withdrawing Initiatives 121 and 137, we are continuing to move forward,” said Mara Sheldon, a spokeswoman for the anti-drilling group, Safe. Clean. Colorado.
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• 300 Million Self-Hating Americans Need A New Dr. Freud (Paul B. Farrell)
Yes, America has a deep, dark self-destructive secret: We hate ourselves. We hate America. Yes, Americans are consumed with self-hatred. Can’t face our demons. In denial, destroying our great nation. Basic psychology: A dangerous virus infects America’s collective unconscious. We project our self-hatred on our enemies, the world “out there,” blaming leaders, bosses, neighbors, family. American souls are in so much pain, we attack everyone, anyone, those closest. Yes, basic psychology. Freud, Jung warned us. Self-haters must blame. Can’t stand the darkness festering within. Project on “them,” blaming others, anyone. Self-haters carry a deep secret the therapist seeks, to help free them from their self-destructive pain. The big problem is, this virus is spreading fast. Millions of self-hating Americans collect and dump their secrets in our one big collective unconscious.
Hidden deepest: Our fear America has “peaked.” America is declining. To 1% GDP. Wars will accelerate. Do-nothing politics. Widening inequality. All hiding under the disappearing myth of the American Dream, a future where if you just work hard, tomorrow will be better than today, for our children, ourselves, everyone in this great nation. Gone. An illusion. Yes, deep within our souls is America’s new collective reality. No longer leader of the free world, we’re falling behind, falling into a self-hatred so painful we block it from our conscious mind. In denial, we won’t take personal responsibility for our pain, our recovery. Instead, we get rid of it … get someone else to take our pain … someone to blame … someone “out there” to take these overwhelming feelings. Americans can’t stand who we’ve become, what we’re done to ourselves, must blame someone, find someone to take away our painful self-hatred secret.
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We keep seeing real heroes in the Ebola case.
• Ebola Drug Made From Tobacco Plant Saves US Aid Workers (Bloomberg)
A tiny San Diego-based company provided an experimental Ebola treatment for two Americans infected with the deadly virus in Liberia. The biotechnology drug, produced with tobacco plants, appears to be working. In an unusual twist of expedited drug access, Mapp Biopharmaceutical Inc., which has nine employees, released its experimental ZMapp drug, until now only tested on infected animals, for the two health workers. Kentucky BioProcessing LLC, a subsidiary of tobacco giant Reynolds American Inc., manufactures the treatment for Mapp from tobacco plants. The first patient, Kent Brantly, a doctor, was flown from Liberia to Atlanta on Aug. 2, and is receiving treatment at Emory University Hospital. Nancy Writebol, an aid worker, is scheduled to arrive in Atlanta today and will be treated at the same hospital, according to the charity group she works with. Both are improving, according to relatives and supporters.
Each patient received at least one dose of ZMapp in Liberia before coming to the U.S., according to Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases. “There’s a very scarce number of doses,” and it’s not clear how many each patient needs for treatment, Fauci said. “I’m not sure how many doses they’ll get.” [..] The antibody work came out of research projects funded more than a decade ago by the U.S. Army to develop treatments and vaccines against potential bio-warfare agents, such as the Ebola virus, Arntzen said in a telephone interview. The tobacco plant production system was developed because it was a method that could produce antibodies rapidly in the event of an emergency, he said. To produce therapeutic proteins inside a tobacco plant, genes for the desired antibodies are fused to genes for a natural tobacco virus. The tobacco plants are then infected with this new artificial virus.
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