Jun 222015
 
 June 22, 2015  Posted by at 10:40 am Finance Tagged with: , , , , , , , , ,  


Unknown Dutch Gap, Virginia. Picket station of Colored troops 1864

Five Horsemen Of The Euro’s Future (Politico)
The Three Victories Of The Greek Government (Jacques Sapir)
Greece and Germany Agree the Euro Can’t Work (Crook)
The Euro Was Doomed From The Start (Norman Lamont)
If Greece Defaults, Europe’s Taxpayers Lose (Bloomberg)
Why On Earth Is Greece In The EU? (Angelos)
EU Welcomes 11th-Hour Greek Proposals In ‘Forceps Delivery’ (Reuters)
EU Commission Gives Guarded Welcome To Greek Plan Before Talks Bloomberg)
Greece Creditors Aim To Strike Deal To Include 6-Month Extension (Guardian)
Pro-Greek Demos In Brussels, Amsterdam Before Crunch Summit (AFP)
The Flash-Crash Trader’s Kafkaesque Nightmare (Bloomberg)
China Regulator Official Fired After Husband Suspected of Illegal Trading (WSJ)
Australian Housing Market Facing ‘Bloodbath’ Collapse: Economists (SMH)
Canada’s Giant Pension Funds Are The New Masters Of The Universe (Telegraph)
EU Extends Economic Sanctions Against Russia For 6 Months (RT)
Ayn Rand Killed The American Dream (Mathieu Ricard)
Behind the Scenes With the Pope’s Secret Science Committee (Bloomberg)
UK Scientific Model Flags Risk Of Civilisation’s Collapse By 2040 (Nafeez Ahmed)

What a list of incompetent power hungry doofuses.

Five Horsemen Of The Euro’s Future (Politico)

The threat of an imminent Greek exit from the euro may be the talk of Brussels, but the EU is unveiling bold proposals this week to deepen political and financial integration inside the eurozone. A so-called “five presidents’ report” obtained by POLITICO includes calls for a eurozone finance minister and stricter controls over the budgets of the 19 countries, including Greece, that use the single currency. The glossy 24-page document — entitled “Completing Europe’s Monetary and Economic Union” — will be published on Monday. It’s to be discussed at the EU summit that begins Thursday in Brussels. Commission President Jean-Claude Juncker drafted the report with European Council chief Donald Tusk; Eurogroup head Jeroen Dijsselbloem; Mario Draghi, president of the ECB; and European Parliament President Martin Schulz.

Coming ahead of an emergency EU summit on Greece Monday night in Brussels, a report on the future of the eurozone may seem ill-timed. But several governments, including Berlin, are more open now than ever to at least discuss steps toward deeper integration proposed by the “five presidents,” seeing it as a signal of reassurance to financial markets that the euro will endure any outcome on Greece. The proposals mostly echo calls by Germany and other rich northern eurozone countries to enforce spending rules across the eurozone. It won’t go down well in Greece or the poorer southern rim states, which want more “solidarity” within the eurozone — in other words, financial support in times of trouble.

The report doesn’t foresee common lending (“euro bonds”) and only alludes to a “euro area-wide fiscal stabilisation function” in case national budgets are “overwhelmed.” The “five presidents” call their proposal for future eurozone governance a “roadmap that is ambitious yet pragmatic,” sketching out several stages to deepen the union. In a first “deepening by doing” stage, the EU would “build on existing instruments and make the best possible use of the existing Treaties” to enforce the eurozone’s fiscal rules. The second stage, which potentially could mean changes to the EU treaties that would cause difficult discussions about transferring more powers to the EU, is not supposed to start until 2017, the report says. A “genuine Fiscal Union” requires more joint decision-making on fiscal policy, the report says.

While not every aspect of each country’s spending and tax policies will be overseen by Brussels, “some decisions will increasingly need to be made collectively while ensuring democratic accountability and legitimacy,” report says. It calls for a “future euro area treasury“ that “could be the place for such collective decision-making.”

Read more …

“..the EU’s political and economic apparatus has openly demonstrated its harmfulness, incompetence and rapacity.”

The Three Victories Of The Greek Government (Jacques Sapir)

Whatever the outcome of the Eurogroup to be held on June 22, it is now clear that the Greek government – improperly called “government of the radical left” or “government of SYRIZA,” but in reality a government union (and the fact that this union was made with the sovereigntist party ANEL is significant) – has won spectacular successes. These successes show that Greece, where the people have regained their dignity, is the one European country where the example set by its government is now showing the way forward. But, and this is most important, this government – in the fight it has led against what is euphemistically called the “institutions”, ie mainly the political-economic apparatus of the EU, the Eurogroup, the ECB – has shown that the “Emperor has no cIothes.” 

The entire structure, complex and lacking in transparency of this politico-economic apparatus was challenged to respond to a political demand, and it has been unable to do so. The image of the EU has been fundamentally altered. Whatever kind of meeting next Monday, if it results in a failure or a surrender of Germany and “austéritaire” or even, which we can not exclude, in the defeat of the Greek government, the EU’s political and economic apparatus has openly demonstrated its harmfulness, incompetence and rapacity. The peoples of the European countries now know who is their worst enemy. The Greek government, in the course of the negotiations which started at the end of January, was faced with the inflexible position of these “institutions”.  But this inflexibility has reflected more a tragic lack of strategy, and the pursuit of conflicting objectives, than real will. 

Indeed, it was well understood that these “institutions” had no intention of yielding on the principle of Euro-austerity, an austerity policy at European level set up under the pretext of “saving the euro”. Therefore, they have refused the pIea of the Greek government whose proposals were reasonable, as many economists have stressed. The proposals made by these “institutions” have been described as the economic equivalent of the invasion of Iraq in 2003 by a columnist who is not listed on the left of the political spectrum. We must understand this as a terrible admission of failure. A position was publicly defended by the representatives of the EU which was in no way based in reality, with the soIe defense for this being a narrow ideology. These representatives were incapable of evoIving their positions and trapped themselves in false arguments, in the same way that the US government chained itself to the issue of weapons of mass destruction attributed to Saddam Hussein.

Read more …

The one thing they can agree on, but also the one thing neither acts on. Curious.

Greece and Germany Agree the Euro Can’t Work (Crook)

Ahead of Monday’s European Union summit, the only thing you can rule out is a happy ending. Whatever happens at the leaders’ meeting – even if a deal of some sort emerges – the EU has suffered lasting and perhaps irreparable damage. The available choices run from bad to terrible. The costs to Greece and to the EU of a default followed by Greece’s ejection from the euro system could be huge. But even if the worst doesn’t happen, Europe has suffered a total breakdown of trust and goodwill. That can’t easily be undone – and it’s a dagger pointed at the heart of the entire project. Two things, I believe, will strike historians as they look back on this collapse of European solidarity. The first is that the principals were able to draw such a poisonous dispute out of such an easily solvable problem.

The second helps to explain why that was possible: Greece and its partners fell out thanks to a delusion they have in common — the idea that sharing a currency can leave fiscal sovereignty intact. On the eve of the summit, the economic distance between Greece and its creditors is small. Differences over fiscal targets have narrowed down to timing — what happens next year rather than the year after — and fractions of a%age point of gross domestic product. There’s even tacit agreement that further debt relief will be needed as part of a successor bailout program, though the creditors won’t discuss the details until the current program is completed. That’s a procedural rather than substantive issue, and it simply shouldn’t matter.

The problem is that the creditors don’t trust Alexis Tsipras and his Syriza ministers to hit the targets they might sign up to. The creditors don’t even trust them to try. They want firm commitments to specific policy changes – tax increases and new retirement rules to cut pension spending – that Tsipras has promised not to accept. Again, the revenue these policies would generate is small in relation to the fiscal adjustment Greece has already achieved and to the forecasting errors involved in all such calculations. It isn’t the numbers that separate the two sides. Greece and the creditors are standing on principle, and oddly enough it’s essentially the same principle — that of sovereignty.

Greece has had enough of being dictated to by the rest of the EU. Of course, its government wants debt relief and a milder profile of fiscal adjustment – and that’s justified, because without them the Greek economy will recover too slowly, if at all. But more than debt relief and softer fiscal targets, Greece wants to be back in charge of its own policy. Its years under the creditors’ supervision have been terrible. Being force-fed any more of their medicine is what the country rejected when it voted for Syriza.

Read more …

Lamont was instrumental in keeping Britain out of the eurozone.

The Euro Was Doomed From The Start (Norman Lamont)

Next week will be a momentous one for Europe, with a string of crucial meetings including the summit at which the PM will table his renegotiation demands. We may be focused on our renegotiation but it is Greece which will dominate. For some time it has looked as though the Greek drama must reach its final denouement. But the Greeks have become highly skilled at managing to push back deadlines ever further into the future. Whether Greece leaves the euro or stays in, a decision surely cannot be delayed much longer. So what will this mean for the EU? I had the privilege of negotiating Britain’s opt-out from the then new European single currency in 1991. My abiding memory is how clear it was that the euro had nothing to do with economics and was a political project with a dubious rationale.

Some representatives of other countries were openly sceptical, but their political masters were firmly in control. The creation of the euro has been an error of historic dimensions and done great harm to the EU, which in its first 40 years had brought economic prosperity to the citizens of the Continent. Then the less well-off countries benefited from the lowering of tariffs and the increase in internal trade. After the creation of the euro, however, economic growth slowed markedly. Poorer countries fared worse than the more prosperous countries, like Germany, which benefited from the new, weaker currency. The Greek crisis epitomises the complete mess that Europe has made of the single currency.

Greece should never have been admitted in the first place, though it was not the only country – Belgium and Italy were two others – that didn’t meet the strict criteria for membership. From the beginning, the rules put in place for the euro, relating to bail-outs, monetary financing and deficit levels, have been ignored. Europe claims to be a rule-based organisation. But however else the eurozone is run, it is not run strictly according to its own rules.

Read more …

Nice graphs! Let’s hope author Whitehouse understands this was not a mistake, but a plan. If Greece had restructured in 2010, the banks would have been on the hook. By waiting 2 years, most could be transferred to taxpayers.

If Greece Defaults, Europe’s Taxpayers Lose (Bloomberg)

The European creditors embroiled in a last-ditch effort to come to terms with Greece face a dilemma: If they can’t prevent a default, their taxpayers stand to lose a lot of money. Ever since the region’s sovereign-debt crisis first flared in 2010, European nations have been stepping in for Greece’s private creditors – largely German and French banks – by lending the country the money to pay them off. Thanks to this bailout, banks and investors have much less at stake than before. Here, for example, are the exposures of countries’ banks to Greece’s government, companies and financial institutions at the end of 2014, compared to the end of 2009:

On the flip side, European governments – and Germany in particular – have become the largest holders of Greece’s €313 billion in sovereign debt, through an alphabet soup of entities that are ultimately backed by taxpayers. Beyond that, as of April, the European Central Bank had lent the Bank of Greece about €115 billion to replace money being pulled out of the country – credit that can turn into losses for the ECB’s remaining shareholders if Greece leaves the euro. Here’s a breakdown of those exposures by country:

The lesson is that in a sovereign debt crisis, dithering can be costly. If European countries had pushed Greece to restructure its private debts back in 2010 (instead of waiting until 2012) and recapitalized banks that were in too deep, the whole region probably could have come out of the crisis much more quickly. As it stands, five years later, Greece and its creditors are back at the negotiating table, with more than 300 billion euros in taxpayer money hanging in the balance.

Read more …

Lofty ideals.

Why On Earth Is Greece In The EU? (Angelos)

Europe is a Greek word. After Greece applied to join the European Community in 1975, Konstantinos Karamanlis, the country’s prime minister, often emphasized this point to his European counterparts. The implication was clear: Greece, the font of Europe’s civilization, naturally belonged in the European club. As Karamanlis later put it, “the Greek spirit contributed the idea of Freedom, Truth and Beauty” to European culture. Some had their doubts about whether Greece belonged in the European club, however. The European Commission, in issuing its opinion on Greece’s membership bid, warned that the Greek economy had a weak industrial base, which would limit its capacity to “combine homogeneously” with other member states. German Chancellor Helmut Schmidt worried about Greece’s problematic public administration, and its inability to collect taxes from its wealthiest citizens.

European leaders ultimately found Karamanlis’ argument about Greece’s cultural import persuasive, and it was one reason they set aside their concerns and admitted Greece in 1981. As former French president Valéry Giscard d’Estaing later put it in his memoir, Greece is the “mother of all democracies,” and therefore could not be excluded. Two decades later, when Greece joined the euro, further cementing its place in the European project, it seemed only appropriate that the Greek two-euro coin would depict Europa, the beautiful maiden of Greek mythology who shares the continent’s name. Today, Europa’s place on the coin is in peril as Greece remains dangerously close to a default that could lead to a euro exit. Those considerable problems Europe once overlooked seem to have come back to haunt it.

Even Giscard seems to have had a change of heart. “Greece is basically an Oriental country,” he told the German magazine Der Spiegel in 2012. He was interviewed alongside Schmidt, his old counterpart, who had been more skeptical of Greece’s bid. “You were wiser than me,” Giscard told Schmidt. Europeans’ bipolar view of Greece — that it is both intrinsic to Europe and yet does not belong — has been evident since the nation’s modern founding. When the Greeks revolted against the centuries-long rule of the Ottoman Empire in 1821, European admirers of Ancient Greece rejoiced over the possibility of a resurrected Athens that might once again bestow upon Europe the glories of its classical heyday.

“We are all Greeks,” Shelley wrote, the year the Greek revolution broke out. Europe owed to Greece its civilization, he meant, and was therefore obliged to back the Greek cause. Philhellenic societies across Europe raised money for Greece, and European volunteers traveled there to join the fight.

Read more …

“In German: ‘eine Zangengeburt. (A birth that requires a pair of pliers).” The German language is full of very descriptive terms.

EU Welcomes 11th-Hour Greek Proposals In ‘Forceps Delivery’ (Reuters)

The European Union welcomed new proposals from Greek Prime Minister Alexis Tsipras as a “good basis for progress” at talks on Monday where creditors want 11th-hour concessions to haul Athens back from the brink of bankruptcy. EU chief executive Jean-Claude Juncker’s chief-of-staff spoke of a “forceps delivery” as officials worked late into the night to produce a deal ahead of a summit of euro zone leaders in Brussels that they hope can keep Greece in the currency bloc. Giving no detail of a proposal he said was also received by the ECB and IMF, German EU official Martin Selmayr tweeted: “Good basis for progress at … Euro Summit. In German: ‘eine Zangengeburt’.”

After four months of wrangling and with anxious depositors pulling billions of euros out of Greek banks, Tsipras’s leftist government showed a new willingness at the weekend to make concessions that would unlock frozen aid to avert default. It was not immediately clear how far the new proposal yielded to creditors’ demands for additional spending cuts and tax hikes, but the offer was a ray of hope that a last-minute deal may yet be wrangled before Athens runs out of cash. Tsipras spent much of Sunday holed up in a marathon cabinet meeting and discussed the new offer with the leaders of Germany, France and the European Commission by phone. “The prime minister presented the three leaders Greece’s proposal for a mutually beneficial agreement that will give a definitive solution and not a postponement of addressing the problem,” a statement from Tsipras’s office said.

Read more …

That’s a first.

EU Commission Gives Guarded Welcome To Greek Plan Before Talks Bloomberg)

A new proposal by Greek Prime Minister Alexis Tsipras drew a rare positive nod from European officials who indicated it could help break a months-long impasse during marathon talks on Monday. The new offer “was a good basis for progress” ahead of Monday’s emergency summit, European Commission spokesman Martin Selmayr, said in a Twitter posting. He also referred in German to the inception of the plan as “birth by forceps.” “These proposals go in the right direction,” European Economic Affairs Commissioner Pierre Moscovici said on Europe 1 radio. Reaching an accord is “very important for Greece, for the Greeks, important for the euro and for Europe. And this time around it’s decisive because we must be aware that the markets are watching.”

The euro gained as much as 0.5% against the dollar in Asian trading and was still trading higher in the early European session. Greek bonds inched higher in early trading Monday, with the yield on notes maturing in 2017 falling 38 basis points to 28.49% at 9:41 a.m. local time. Spanish and Italian government bonds were also trading higher. Before the start of the summit in Brussels, Tsipras will meet with representatives of the countries’ main creditors. He’ll sit down with European Council head Donald Tusk before they’re joined by ECB President Mario Draghi, IMF Managing Director Christine Lagarde, EU Commission President Jean-Claude Juncker and Eurogroup head Jeroen Dijsselbloem, an e-mailed statement from the Greek prime minister’s office said.

Read more …

“Democracy cannot be blackmailed, dignity cannot be bargained..”

Greece Creditors Aim To Strike Deal To Include 6-Month Extension (Guardian)

Greece’s creditors are aiming to strike a deal on Monday to stop Athens defaulting on its debt and possibly tumbling out of the euro, by extending its bailout by six months, supplying up to €18bn in rescue funds, and pledging later debt relief for the austerity-battered country. But EU officials, privately disclosing details of the proposed deal, stressed that a breakthrough hinged on the prime minister, Alexis Tsipras, making concessions on fiscal targets, pensions cuts and tax increases that he has resisted since he came to power five months ago. Following a cabinet meeting in Athens, Tsipras is believed to have offered Greece’s creditors concessions on tax and pensions reform. But it was not clear whether the offer went far enough to make a final agreement possible on Monday.

Time is also running out for the Greek banking system, with Reuters reporting on Sunday that €1bn worth of withdrawal orders had been lodged with Greek banks over the weekend – on top of the €4bn that left the Greek banking system last week – and that the ECB is set to discuss extending financial help to those institutions on Monday morning, amid fears that Greek banks will be unable to open on Tuesday. A hectic round of telephone diplomacy took place on Saturday and Sunday between leaders in Athens, Berlin, Paris, and Brussels while technocrats on both sides sought to hammer out the small print of the fiscal arithmetic forming the basis for a last-minute agreement days before Greece’s bailout expires. Greece must pay €1.6bn owed to the International Monetary Fund by Tuesday 30 June.

With time running out, the only way an IMF default could now be avoided was for the ECB to raise the ceiling on the short-term debt or T-bills Athens is allowed to sell, the officials said. This would need to happen by Monday next week. The sources also signalled moves to assuage Tsipras’s key demand – that the creditors need to offer debt relief to Greece. Some form of debt restructuring would be promised to Athens, but it would come with strings attached and not as part of the current bailout package, they said. Yanis Varoufakis, the outspoken Greek finance minister, said Greece’s fate hinged on the German chancellor, Angela Merkel, and told her she faced a stark decision. He added that there would be no agreement that did not include the prospect of debt relief for Greece.

Varoufakis’s spokesman reacted sceptically to suggestions of creditor promises on eventual debt relief, describing the eurozone as “pathological liars”. [..] “Democracy cannot be blackmailed, dignity cannot be bargained,” the party said in a statement on Sunday. “Workers, the unemployed, young people, the Greek people and the rest of the peoples of Europe will send a loud message of resistance to the alleged one-way path of austerity, resistance to the blackmail and scaremongering.”

Read more …

Too late and especially too little.

Pro-Greek Demos In Brussels, Amsterdam Before Crunch Summit (AFP)

Several thousand demonstrators gathered in Brussels on Sunday and several hundred in Amsterdam to plead for solidarity with cash-strapped Greece on the eve of a make-or-break summit with European leaders. Addressing the crowd in Amsterdam, veteran Greek MEP Manolis Glezos urged Athens’ creditors to give the country «one more year» to resolve its debt crisis. “This crisis was caused by the financial sector, not by the Greek people,» said Glezos, a Greek resistance hero against Nazi occupation in World War II, who at 92 years old remains a firebrand politician. “It’s the financial sector that has to pay, not the Greek people,» Glezos said to the loud applause of around 350 demonstrators at Amsterdam’s historic Dam Square. Some of the protesters waved Greek flags while others carried placards saying: «No more EU austerity» and «Stop EU blackmail.”

Demonstrator Sotiris Dialas, 32, told AFP he was «worried about tomorrow» when EU leaders will attend an emergency summit aimed at staving off a Greek default. “I have many friends in Greece and nobody knows what’s going to happen,» he said, draped in a Greek flag. In Brussels, demo organiser Sebastien Franco told Belgian national television channel La Une that austerity was not the answer to Greeces problems. “Austerity is not working, it reduces the income of poor people in the name of reimbursement to creditors… who continue to enrich themselves,» he said. Some 3,500 people turned out for the demo in the Belgian capital, according to Belga news agency, citing police figures. Sunday’s rallies came a day after thousands of people demonstrated in France, Germany and Italy to express solidarity with migrants in Europe and austerity-hit Greece.

Read more …

“A U.K. judge has declared the 36-year-old a flight risk and set his bail at $5 million, which is roughly what Sarao says his net worth is. The problem is that his assets are frozen and the judge refuses to accept his family home as surety..”

The Flash-Crash Trader’s Kafkaesque Nightmare (Bloomberg)

How do you prove you don’t have $35 million of ill-gotten gains parked in an offshore account? That’s the dilemma facing Navinder Singh Sarao, known variously as the “Flash-Crash Trader” and the “Hound of Hounslow” and currently residing at Her Majesty’s pleasure in London’s Wandsworth prison. Sarao is accused of contributing to -but not causing, mind you; the Commodity Futures Trading Commission is adamant about that- the so-called “flash crash” that briefly wiped $1 trillion off the value of U.S. stocks on May 6, 2010. You can read the U.S. Justice Department’s case here. He faces a maximum prison term of 20 years for wire fraud, 25 years for commodities fraud, and 10 years for market manipulation and spoofing. The case against Sarao smells strongly of scapegoating.

First, there’s the issue of whether the misdeed he is accused of -“spoofing” the market- is a crime at all, as my colleague Matt Levine has explained at length, including here and here. (Importantly, if a London judge decides it’s not a crime in the U.K. to rapidly trade and cancel $3.5 billion worth of futures contracts in the space of two hours, then Sarao can’t be extradited.) Second, there are the financial machinations that are keeping Sarao in a prison cell, bringing to mind Franz Kafka’s novel, “The Trial.” A U.K. judge has declared the 36-year-old a flight risk and set his bail at $5 million, which is roughly what Sarao says his net worth is. The problem is that his assets are frozen and the judge refuses to accept his family home as surety, meaning Sarao may end up languishing in prison until he is extradited to the U.S. to face his accusers, which could take years.

What’s more, the CFTC is convinced he’s got money hidden away that he hasn’t declared. The regulator says Sarao made more than $40 million of profit, which is “stashed in a variety of offshore accounts and vehicles, as well as other apparently speculative foreign business ventures and are in danger of being concealed and/or dissipated.” That sounds pretty damning – until you get to the financial evidence presented in the U.S. complaint. A change in U.K. tax law created a heavy tax liability under his existing offshore accounts. To mitigate that, he created something called International Guarantee Corporation in 2012 in Anguilla in the British West Indies. (He also had a company, Nav Sarao Milking Markets, which he had set up two years earlier in Nevis.) Sarao seems to have been borrowing money from his company to fund his trading and reinvesting the profits in the company -a perfectly legal structure some of my wealthy friends have used in the past.

Read more …

A country corrupted from head to toe.

China Regulator Official Fired After Husband Suspected of Illegal Trading (WSJ)

China’s stock-market regulator said Saturday it had dismissed the head of the bureau that monitors share issuance after her husband was suspected of illegal stock trading. The China Securities Regulatory Commission said in a statement on its official Weibo microblog account that the official, Li Zhiling, was suspected of breaking the law and had been turned over to police. Her husband’s name wasn’t given. In the statement, the oversight body vowed to “investigate and deal severely with” any irregularities or legal violations without providing further detail. Calls to the regulatory commission went unanswered. The Wall Street Journal has been unable to contact Ms. Li or her husband. According to the website of the business magazine Caixin, Ms. Li was named to her post in 2012 and remained in charge after a reorganization in April 2014 that saw several departments combined.

The oversight agency said Saturday in its Weibo statement that it would redouble efforts to enhance control. “She’s suspected of breaking the law by taking advantage of her position,” it said. “Once we discover such violations, we will immediately take action to punish them. We do not take this lightly.” The commission’s pledge to root out malfeasance came as China’s benchmark Shanghai Composite Index suffered its worst weekly decline in years, with China’s largest market falling 13% over the past five trading sessions, including more than 6% on Friday. This follows a more than doubling of the market over the past year, fueled in part by a sharp increase in margin trading.

Read more …

Better wake up. Sell!

Australian Housing Market Facing ‘Bloodbath’ Collapse: Economists (SMH)

The Australian real estate market is in the grip of the biggest housing bubble in the nation’s history and Melbourne will be at the epicentre of an historic “bloodbath” when it bursts, according to two housing economists. Lindsay David and Philip Soos, who have authored books on the overheated housing market, have berated the housing industry and politicians who refuse to acknowledge the existence of a bubble due to a perceived shortage of housing in the major capitals. In a blunt submission to the upcoming parliamentary inquiry into home ownership, the pair claim there is actually an oversupply of housing, just as there was in the United States just before the market collapse that precipitated the global financial crisis.

And the largest oversupply is in Melbourne, where they forecast available homes outstrip demand by 123,000. “Contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record. Policymakers are caught between a rock and a hard place, as implementing needed reforms will likely burst the bubble,” Mr David and Mr Soos state in a submission on behalf of real estate and financial services research house, LF Economics. They believe the current bubble is worse than those in the 1880s, 1920s, mid-1970s and late 1980s. “Australian economic history and recent international events illustrate collapsing housing bubbles can quickly increase the number of unsold properties (stale stock), shattering the pervasive myth of a deleterious dwelling shortage,” they wrote.

“Should this occur alongside rising unemployment and underemployment, reduced aggregate demand and falling net overseas migration, the combination of declining population growth and an oversupply of investment properties would place further downwards pressure on rental prices. Falling housing and rental prices, including sales, would be a doomsday trifecta for investors as they suffer losses in both capital prices and net rental incomes. “This calamitous outcome is especially likely in Melbourne where rents have not increased in real terms since 2010. Melbourne is primed to become the epicentre of a legendary housing market crash due to the combination of a staggering boom in real housing prices (178%). Perth is also in a serious predicament.”

Read more …

No more safe investments.

Canada’s Giant Pension Funds Are The New Masters Of The Universe (Telegraph)

Since 1790, the United States has suffered 16 banking crises, while Canada, a country that counts the US as its largest trading partner, has experienced none — not even during the Great Depression. How has Canada achieved such an extraordinary feat? Two reasons, according to the IMF: limited exposure to international banking operations, which meant far fewer foreign liabilities than many of their overseas peers and less globally integrated banking systems; and, Canada’s restrictions on mergers of major domestic banks, where rules prohibit a single shareholder – domestic or foreign – from owning more than 20pc of voting rights in a major bank. The World Economic Forum described Canada’s banking system as the most sound in the world, and Mark Carney was appointed Bank of England Governor largely on the basis of his impressive work at the Bank of Canada.

As one Canadian banker once put it, the country’s financial system, unlike those of many other countries, has always been well-capitalised, well-managed, well-diversified and well-regulated. By avoiding the financial crisis, Canada’s experience of recession in the years that followed 2008 was much more forgiving than the rest of the industrialised world, and it led the G-7 pack in terms of growth. As a result, Canada found the confidence to flex its muscles globally. Leading the charge overseas has been a pack of colossal public pension funds taking part in a remarkable spending spree, snapping up prime assets all over the world. According to reports, one of its largest, Borealis Infrastructure, is planning another big swoop.

The infrastructure arm of the $57bn Ontario Municipal Employees Retirement System is eyeing a second bid for Severn Trent, the UK FTSE 100 water company. Borealis made a move for Severn Trent two years ago, but as part of a consortium involving investors from the US and Kuwait. This time it isn’t clear whether the Canadians still have partners or are operating alone – the reports are unconfirmed but a solo bid for a company of Severn Trent’s size would be hugely ambitious – the last time a FTSE 100 constituent was taken private was when KKR swooped on Alliance Boots in 2007 – the largest European buyout so far. Still, if anyone could pull off such a deal, it is probably one of the Canadian pension fund beasts. The country’s four largest funds manage more than $600bn between them and rank among the 40 largest in the world. Only the US can make similar claims.

Read more …

How the EU will split.

EU Extends Economic Sanctions Against Russia For 6 Months (RT)

The European Union has extended economic sanctions against Russian for a further six months, an EU official said. This follows the EU’s decision Friday to extend sanctions against Crimea for another year. The decision to extend the sanctions against Russia was announced by the EU Council’s press officer for foreign affairs, Susanne Kiefer. The sanctions are being maintained until January 31, 2016 to ensure the Minsk agreement is implemented, she wrote in her Twitter account. The European Union will review the sanctions regime against Russia in six or seven months, Italian Foreign Minister Paolo Gentiloni told reporters in Luxembourg. Dialogue with Russia, especially on Libya and Syria, is “crucially important” for the EU, Gentiloni added.

Agreement on the extension of sanctions was reached at a meeting of the EU Permanent Representatives Committee on June 17. In March, the EU Summit adopted a political declaration of intent to extend economic sanctions against Russia for another six months. In the document, the lifting of sanctions was linked to the full implementation of the conditions of the Minsk agreement, for the period up until the end of the year. EU sanctions against Russia include restrictions on lending to major Russian state-owned banks, as well as defense and oil companies. In addition, Brussels imposed restrictions on the supply of weapons and military equipment to Russia as well as military technology, dual-use technologies, high-tech equipment and technologies for oil production. No sanctions were imposed against Russia’s gas industry.

Read more …

Nice exposé.

Ayn Rand Killed The American Dream (Mathieu Ricard)

The billionaire investor and philanthropist George Soros uses the term “free market fundamentalism” to describe the belief that the free market is not only the best but the only way of managing an economic system and preserving civil liberties. “The doctrine of laissez-Faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest,” he writes. If the laissez-faire attitude of an entirely deregulated free market were based on the laws of nature and had some scientific value, if it were anything other than an act of faith pronounced by the champions of ultraliberalism, it would have stood the test of time. But it hasn’t, since its unpredictability and the abuses it has permitted have led to the financial crises with which we are only too familiar.

For Soros, if the doctrine of economic laissez- faire — a term dear to philosopher Ayn Rand — had been submitted to the rigors of scientific and empirical research, it would have been rejected a long time ago. The free market facilitates the creation of businesses; innovation across many fields, for example in new technology, health, the Internet, and renewable energy; and affords undeniable opportunities to young entrepreneurs wishing to start up business activities that will further society. We have also seen that commercial exchange between democratic nations considerably reduces the risk of armed conflict between them. Yet, in the absence of any safeguard, the free market permits a predatory use of financial systems, giving rise to an increase in oligarchies, inequality, exploitation of the poorest producers, and the monetization of several aspects of human life whose value derives from anything other than money.

In his book What Money Can’t Buy: The Moral Limits of Markets, Michael Sandel, one of the United States’ most high-profile philosophers and an adviser to President Obama, says that neo-liberal economists understand the price of everything and the value of nothing. In 1997, he ruffled a lot of feathers when he questioned the morality of the Kyoto Protocol on global warming, the agreement that removed the moral stigma attached to environmentally harmful activities by simply introducing the concept of buying the “right to pollute.” In his view, China and the United States are the least receptive countries to his outspoken objections to free market fundamentalism: “In other parts of east Asia, Europe and the UK, and India and Brazil, it goes without arguing that there are moral limits to markets, and the question is where to locate them.”

Read more …

They’re not that secret…

Behind the Scenes With the Pope’s Secret Science Committee (Bloomberg)

Several dozen of the world’s most prominent scientists sprang from their seats and left the Vatican hall where they were holding a conference on the environment in May 2014. They were bound for a meet-and-greet with Pope Francis at the modest Vatican hotel where he lives, the Domus Sanctae Marthae. Among the horde was Veerabhadran Ramanathan, a climate scientist at the Scripps Institution of Oceanography. Since 2004, he has also been a member of a 400-year-old collective, one that operates as the pope’s eyes and ears on the natural world: the Pontifical Academy of Sciences. He had a message for Pope Francis. Only it was too long The academy’s chancellor, Archbishop Marcelo Sánchez Sorondo, suggested to Ramanathan that he condense his thoughts to just two sentences — and deliver them to Francis in Spanish.

Ramanathan, who speaks no Spanish, spent the balance of the eight-minute jaunt committing the words to memory. He got it down with moments to spare. The phrases vanished as soon as he caught a glimpse of Pope Francis himself. The pope has that effect on people. Ramanathan, who is Hindu, reassembled his message in time, and in English. No pressure. All he had to do was sum up more than a century of thought and research that in the past two decades has been validated repeatedly by climate scientists globally. “We are concerned about climate change,” he told Francis. “The poorest 3 billion people are going to suffer the worst consequences. Ramanathan is one of many scientists and other advisers who have, over the last several decades, conveyed the urgency of climate change to the Vatican.

Now, Francis is responding. On Thursday the Vatican will release an encyclical letter, essentially a teaching document for bishops, on climate change and poverty. It draws on and elevates the utterances and writings of previous popes, particularly John Paul II and Benedict XVI. Yesterday, the Italian magazine L’Espresso published an unauthorized draft of the letter, called “Laudato Sii” or “Praised Be.” “Worth noting is the weakness of the international political response” to environmental decay, Francis writes, according to a Bloomberg translation of the draft. Political leaders bow too readily to technology and finance, he writes, and the results are apparent in their failure to protect natural systems: “There are too many special interests, and economic interest very easily comes to prevail over the common good and to manipulate information so that its plans are not hurt.”

Read more …

“The model does not account for the reality that people will react to escalating crises by changing behavior..” How useful is it then?

UK Scientific Model Flags Risk Of Civilisation’s Collapse By 2040 (Nafeez Ahmed)

New scientific models supported by the British government’s Foreign Office show that if we don’t change course, in less than three decades industrial civilisation will essentially collapse due to catastrophic food shortages, triggered by a combination of climate change, water scarcity, energy crisis, and political instability. Before you panic, the good news is that the scientists behind the model don’t believe it’s predictive. The model does not account for the reality that people will react to escalating crises by changing behavior and policies. But even so, it’s a sobering wake-up call, which shows that business-as-usual guarantees the end-of-the-world-as-we-know-it: our current way of life is not sustainable.

The new models are being developed at Anglia Ruskin University’s Global Sustainability Institute (GSI), through a project called the ‘Global Resource Observatory’ (GRO). The GRO is chiefly funded by the Dawe Charitable Trust, but its partners include the British government’s Foreign & Commonwealth Office (FCO); British bank, Lloyds of London; the Aldersgate Group, the environment coalition of leaders from business, politics and civil society; the Institute and Faculty of Actuaries; Africa Development Bank, Asian Development Bank, and the University of Wisconsin. This week, Lloyds released a report for the insurance industry assessing the risk of a near-term “acute disruption to the global food supply.” Research for the project was led by Anglia Ruskin University’s GSI, and based on its GRO modelling initiative.

The report explores the scenario of a near-term global food supply disruption, considered plausible on the basis of past events, especially in relation to future climate trends. The global food system, the authors find, is “under chronic pressure to meet an ever-rising demand, and its vulnerability to acute disruptions is compounded by factors such as climate change, water stress, ongoing globalisation and heightening political instability.” Lloyd’s scenario analysis shows that food production across the planet could be significantly undermined due to a combination of just three catastrophic weather events, leading to shortfalls in the production of staple crops, and ensuing price spikes. In the scenario, which is “set in the near future,” wheat, maize and soybean prices “increase to quadruple the levels seen around 2000,” while rice prices increase by 500%.

Read more …

Nov 052014
 
 November 5, 2014  Posted by at 2:34 pm Finance Tagged with: , , , , , , , , , , ,  


Mathew Brady Units of XX Army Corps, Army of Georgia on Pennsylvania Avenue, Washington DC May 24 1865

Ayn Rand vs Adam Smith: The Only Midterm Election That Counts (Paul B. Farrell)
Singer’s Elliott: U.S. Growth Optimism Unwarranted as Data ‘Cooked’ (Bloomberg)
This Stock Market Rally Is For Suckers (MarketWatch)
BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More (Reuters)
US Will Benefit Most From Japan’s Pension Fund Reform (CNBC)
Draghi To Face Challenge On ECB Leadership Style (Reuters)
EU Cuts Growth Outlook as Inflation Seen Below ECB Forecast (Bloomberg)
Euro Area Limping Toward Deflation Fuels QE Calls as ECB Meets (Bloomberg)
ECB Needs Japanese Lessons (Bloomberg)
Look Out Below! Oil Is Not Done Falling (CNBC)
Oil Continues To Slide, With Brent At Lowest In Over Four Years (MarketWatch)
T. Boone Pickens: The Real Problem With Oil (CNBC)
Russia-Ukraine Crisis Shields EU Gas From Oil Price Rout (Bloomberg)
New Junk-Bond Derivatives Are Hot as Traders Get Creative (Bloomberg)
IMF Gave Richer Countries Wrong Austerity Advice: Internal Auditor (Reuters)
China Home Buyers Rushing Online to Finance Downpayments (Bloomberg)
25 Years Since The Wall Fell, Germany’s Best Days Are Behind It (MarketWatch)
A Crazy Idea About Italy (Jim O’Neill)
Signs, Wonders and QE Heroics (James Howard Kunstler)

To the extent there’s any actual choices to be made in these kinds of elections. Why waste your time?

Ayn Rand vs Adam Smith: The Only Midterm Election That Counts (Paul B. Farrell)

Forget who controls the Senate. There is one and only one election that matters, an election that will decide the global balance of power this century. Specific candidates on any other ballot are irrelevant. The one race will be decided by the only two real candidates that count. All other candidates, regardless of political party, are merely pawns, surrogates, proxies for the two real candidates in this grand battle. And the winner not only wins for their party,but also gets to promote their brand of capitalism. They win the future. Get it? The winner between these two key candidates gets more than domination of the American political system. These two candidates are in a battle to dominate the world, gain control of the world’s natural resources in a totally unrestricted free market—to drill with Russia in the Arctic Ocean, drill for oil on America’s public lands and national forests, to export domestic oil, to build pipelines, haul oil in rail tankers across state lines, to frack for oil under public rivers, risk fresh water supplies, and so much more.

Yes, the only two candidates in the only election that counts today and in every other election this century are: Adam Smith, a moral philosopher and father of American capitalism thanks to the publication of his classics on economics, “The Wealth of Nations,” and its companion “The Theory of Moral Sentiments.” Adam Smith’s opponent on the ballot is his archrival, Ayn Rand, author of several 20th century works on capitalism, including “Atlas Shrugged” and “The Fountainhead.” But remember: all other candidates, on every ballot, are just proxy votes for these two candidates who will decide the balance of power in the world and the survival of the planet. Yes, it’s that simple. These two icons face off in a brutal battle for the soul of capitalism and control of the collective conscience of America.

Read more …

Not a fan of the man, but he’s dead on here.

Singer’s Elliott: U.S. Growth Optimism Unwarranted as Data ‘Cooked’ (Bloomberg)

Paul Singer’s Elliott Management Corp. said optimism on U.S. growth is misguided as economic data understate inflation and overstate growth, and central bank policies of the past six years aren’t sustainable. The market turmoil in the first half of October may be a “coming attractions” for the next real crash that could turn into a “deep financial crisis” if investors lose confidence in the effectiveness of monetary stimulus, Elliott wrote in a third-quarter letter to investors, a copy of which was obtained by Bloomberg News. “Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” New York-based Elliott wrote. “When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.” Six years of near-zero interest rates and three rounds of asset purchases by the Federal Reserve have fueled economic growth and helped U.S. stocks more than triple from their 2009 low when including dividends.

The stock market has rebounded 8.3% through yesterday from a six-month low on Oct. 15, fueled by better-than-forecast economic data and improving earnings reports. The 70-year-old Singer, one of the biggest backers of Republican politicians, reiterated criticism that monetary policies won’t create lasting growth. While the U.S. is doing better than the rest of the world, the acceleration in the second quarter only reversed a “terrible” first quarter and has yet to be sustained in the remainder of the year, Elliott wrote. “We do not think this optimism is warranted, and we think a lot of the data is cooked or misleading,” Elliott, which manages $25.4 billion and was founded by Singer in 1977, wrote. “A good deal of the economic and jobs growth since the crisis has been fake growth, with very little chance of being self-reinforcing and sustainable.” Elliott said that the reported growth numbers are too high because the official inflation number is understating actual inflation by as much as 1% a year.

That’s because economists focus on measures such as core inflation or make “hedonic adjustments” for improvements in the quality of consumer goods. Inflation is also distorted “by the increasing gap between the spending basket of the well-off and that of the middle class,” the firm said. “The inflation that has infected asset prices is not to be ignored just because the middle-class spending bucket is not rising in price at the same rates as high-end real estate, stocks, bonds, art and other things that benefit from” quantitative easing, Elliott wrote. The unemployment rate, at 5.9% in September, doesn’t reflect that the workforce participation rate is at a 35-year low, according to Elliott, and that full-time jobs have been replaced by part-time jobs, and high-paying jobs by relatively low-paying jobs. Real wages, the firm said, have been stagnant since the financial crisis.

Read more …

And it’s a very well executed set-up too.

This Stock Market Rally Is For Suckers (MarketWatch)

After last week’s remarkable U.S. stock market rally, a lot of investors are cheering. After all, the Dow made an all-time high, won back the lost 1,000 points, and ignored the 8% pullback. I hate to be a party-pooper, but this is not a time to celebrate, but rather to be cautious. What could go wrong? Let’s begin by analyzing last week’s hollow Halloween rally:

1. On Friday, Oct. 31, five stocks were primarily responsible for Dow’s advance. The previous day, Visa had accounted for around 123 points of the 221-point rally. Take away Visa and the rally was a lot less impressive.

2. Friday’s surge was prompted by the Bank of Japan, which promised more stimuli (I’m guessing they are on QE 35, but who’s counting?) Since March 2000, the Nikkei 225 has tumbled from 20,000 to 16,000, so maybe more stimuli from the BOJ is needed (just kidding).

3. On Friday, there were no plus-1000 ticks on the NYSE Tick, which tells you that the rally was another head-fake without institutional involvement. Typically, you will see at least four or five plus-1000 ticks on bullish days.

4. In addition, volume was low, especially for the last day of the month.

5. Moreover, the S&P 500 that day did not rise above its overnight high, which is generally a sign of domestic weakness. During the day, it did not take out the previous all-time high. If this were a true bull market, breadth, volume, and institutional presence would have been a lot stronger.

6. Only five out of 20 stocks led the transports. If this were a broad-based rally, more of the transports would have participated.

Read more …

You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.

BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More (Reuters)

Bank of Japan Governor Haruhiko Kuroda, who last week stunned global financial markets by expanding a massive monetary stimulus program, said the central bank is ready to do more to hit its 2% price goal and recharge a tottering economy. Kuroda stressed the BOJ is determined to do whatever it takes to hit the inflation target in two years and vanquish nearly two decades of grinding deflation. “There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind,” the central bank chief said in a speech at a seminar on Wednesday. “There are no limits to our policy tools, including purchases of Japanese government bonds,” he said in response to a question from a private analyst after the speech. The BOJ shocked global financial markets last week by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after a sales tax hike in April.

Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set. “In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms,” he said. Kuroda repeated the BOJ’s projection that Japan will likely hit the bank’s price target sometime in the next fiscal year beginning in April 2015, supported by the expanded quantitative and qualitative easing (QQE) program. While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.

Read more …

See The Revenge Of A Government On Its People

US Will Benefit Most From Japan’s Pension Fund Reform (CNBC)

U.S. assets will be the biggest benefactor of the Japanese Government Investment Pension Fund’s (GPIF) decision to more than double its target allocation of foreign stocks to 25%, analysts say. The changes to the $1.1 trillion pension fund coincided with the Bank of Japan’s shocking decision to ramp up stimulus on Friday, which sent global equity markets soaring. “The shift for international equities going to 25% of pension fund holdings is fairly big news,” said Tobias Levkovich, chief equities strategist at Citigroup in a note published on Friday. “It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary,” he said. The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, said Citigroup’s Levkovich, noting that stocks on Wall Street should start to feel the benefit this year.

“Foreign investors typically buy large cap stocks which have greater index impact,” he said. “Thus, one cannot ignore the possibility that stock prices jump above our year-end 2014 S&P 500 target on this news.” Other analysts agree. “It’s pretty realistic [that the U.S. will receive most of the benefit] if you look at where the Japanese feel comfortable investing their money,” Uwe Parpart, managing director and head of research at Reorient Financial Markets told CNBC. “This is a pension fund making the investment they are not going to punt into small caps or anything of that sort they need large, liquid stocks that over decades have had a reliable return,” he said. But Parpart is not convinced the inflows would make a huge difference to stock market performance. “$30 billion sounds like a lot of money, but stretched over a period of time it’s not going to move markets,” he said. “But obviously it’s a nice shot in the arm.”

Furthermore, an increase in the pension fund’s international bond allocation to 15% from 11% should boost demand for Treasurys, driving further inflows into the U.S., analysts at HSBC said in a note published Tuesday. Meanwhile, the GPIF will reduce is domestic bond allocation to 35% from 60%. “The BoJ’s increase in asset purchases should be more than enough to cover the aggressive reduction in Japanese Government Bond (JGB) holdings planned by the GPIF, allowing JGB yields to stay pinned down,” said Andre de Silva, head of global emerging market rates research at HSBC. “Ultra-low JGB yields imply that the relative valuations for other core rates ie. U.S. Treasuries and other bond substitutes have been further enhanced,” he said. “Demand for yield-grabbing would intensify amongst Japanese investors, boosting overseas investments.”

Read more …

“… the Italian ECB chief has acted increasingly on his own or with just a handful of trusted aides, sidelining even key heads of department.” Hey, you wanted a Goldman guy, now sit on it!

Draghi To Face Challenge On ECB Leadership Style (Reuters)

National central bankers in the euro area plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources said. The bankers are particularly angered that Draghi effectively set a target for increasing the ECB’s balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public, the sources said. “This created exactly the expectations we wanted to avoid,” an ECB insider said. “Now everything we do is measured against the aim of increasing the balance sheet by a trillion (euros)… He created a rod for our own backs.” Irritation among national governors who hold a majority on the 24-member council could limit Draghi’s space for bolder policy action in the coming months as the bank faces crucial choices about whether to buy sovereign bonds to combat falling inflation and economic stagnation.

Some members intend to raise their concerns with Draghi at the governors’ traditional informal working dinner on Wednesday before their formal monthly rate-setting meeting on Thursday, the sources interviewed by Reuters said. Many people at the central bank, which manages a single currency for 18 European Union member states, welcomed Draghi’s greater informality when he took over from Jean-Claude Trichet of France in 2011. His efforts to keep meetings short, delegate and brainstorm more, were received as a breath of fresh air. However, as decisions to loosen monetary policy and resort to further unconventional measures have become more contentious, insiders say the Italian ECB chief has acted increasingly on his own or with just a handful of trusted aides, sidelining even key heads of department. “Mario is more secretive… and less collegial. The national governors sometimes feel kept in the dark, out of the loop,” said one veteran ECB insider. “Jean-Claude used to consult and communicate more,” another ECB source said. “He worked a lot to build consensus.”

Read more …

So what? Every forecast everywhere gets revised downwards all the time. It’s simply the way things work.

EU Cuts Growth Outlook as Inflation Seen Below ECB Forecast (Bloomberg)

The European Commission cut its growth forecasts for the euro area as the bloc’s largest economies struggle to put the ravages of the debt crisis behind them after two recessions in six years. Gross domestic product in the 18-nation region will rise by 0.8% this year and 1.1% in 2015, down from projections for 1.2 and 1.7% in May, the Brussels-based commission said today. It lowered its projections for Germany, Europe’s largest economy, and said inflation in the euro area will be even weaker than the European Central Bank predicts. “The legacy of the global financial and economic crisis lingers on,” said Marco Buti, the head of the commission’s economics department. “Slack in the EU economy remains large and is weighing on inflation, which is also being dragged down by tumbling energy and food prices.”

The bleaker outlook highlights the fledgling nature of the euro area’s recovery and the deflation threat that has compelled the ECB to take unprecedented stimulus measures. While unemployment is beginning to decline from a record high, core economies such as Germany and France are facing some of the growth challenges that afflicted the periphery at the start of the debt crisis. Today’s report forecasts inflation at 0.8% in 2015, less than half the ECB goal of just under 2%. That’s more pessimistic than the central bank’s own projection of 1.1%. The commission sees inflation quickening to 1.5% in 2016, compared with the ECB outlook for 1.4%.

European stocks declined for a second day and German, French and Italian bonds rose. The yield on the German 10-year bund fell 4 basis points to 0.81% at 11:17 a.m. London time. The Italian yield dropped 5 basis points to 2.37%. The Stoxx Europe 600 Index slipped 0.1%. The grim assessment for the euro region comes just days before the ECB Governing Council led by President Mario Draghi gathers in Frankfurt for its monthly policy meeting. The ECB has cut its benchmark rate to a record-low 0.05% and began buying covered bonds to boost inflation and rekindle growth. “Country-specific factors are contributing to the weaknesses of economic activity in the EU and the euro area in particular,” Jyrki Katainen, commission vice president for competitiveness, told reporters in Brussels. These include “deep-seated structural problems” and “public and private debt overhang,” he said.

Read more …

The never ending Bloomberg promo.

Euro Area Limping Toward Deflation Fuels QE Calls as ECB Meets (Bloomberg)

The euro area is edging closer to the moment that deflation risks become reality. Companies cut selling prices by the most since 2010 as they attempted to boost sales in the face of a flagging economy and slowing new orders, Markit Economics said today. This in turn is squeezing profit margins and reducing resources for hiring and investing, damping chances of an economic rebound, the London-based company said. The European Central Bank is pumping money into the banking system to fuel inflation that hasn’t met policy makers’ goal since early last year.

With a gauge of manufacturing and services activity pointing to sluggish growth at best, it is under pressure to add to long-term loans and already announced asset-purchase plans to prevent a spiral of price declines in the 18-nation currency bloc. “This month’s data make for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life,” said Chris Williamson, Markit’s chief economist. “The combined threat of economic stagnation and growing deflationary risks will add to pressure on the ECB to do more to stimulate demand in the euro area, strengthening calls for full-scale quantitative easing.”[..] While Markit said the data are in line with gross domestic product expanding 0.2% in the fourth quarter, new orders slowed to the weakest level in 15 months and employment declined for the first time in almost a year. That “suggests that the pace of growth may deteriorate in coming months,” said Williamson.

Read more …

Sometimes I wonder what the job requirements are for Bloomberg staff. Like now. Europe should do what Japan does? That highly successful role model?

ECB Needs Japanese Lessons (Bloomberg)

Economists like to warn about Japanification, the risk that a country will follow the desultory experience of Japan, which slumped into deflation in 1999 and for all intents never climbed out. As Europe slides closer to deflation, the European Central Bank should heed the historical experience and the current efforts by the Bank of Japan to resuscitate growth. The euro area is perilously close to deflation. The ECB target – consumer price inflation of just under 2% – grows more distant. The European Commission said yesterday it sees euro-area inflation running at just 0.8% in 2015, as it cut its prediction for the region’s growth this year to 0.8% from the 1.2% it anticipated in May. And yet, the ECB’s balance sheet has been shrinking as the BoJ’s has swollen.

The Bank of Japan announced last week that it’s boosting purchases of Japanese government bonds to a record annual amount of 80 trillion yen, or more than $700 billion. My colleague William Pesek points out that the Japanese central bank has now effectively cornered the domestic market in government debt, creating a bubble in the bond market. He’d prefer more economic reforms than increased quantitative easing. Europe would also benefit from more labor-market changes and fiscal stimulus. But neither the ECB nor the Bank of Japan has a mandate to overhaul fiscal policy or employment practices. In the absence of government action, central banks can only fill the void. The shock-and-awe that BoJ Governor Haruhiko Kuroda sprang on investors isn’t likely to be repeated at tomorrow’s ECB meeting, even though there is scant prospect that the central bank’s inflation target will be met anytime soon.

Two weeks into the covered-bond purchase program designed to flood cash into the economy, the ECB has purchased just 4.8 billion euros ($6 billion) so far. Draghi said earlier this week that the scope for buying asset-backed securities is “rather large,” yet I can’t find a single market participant who expects the plan to succeed in swelling the ECB balance sheet by enough to do the job – unless it repeats the government bond purchases it made between 2010 and 2012, and on a much grander scale:

Read more …

Huh? “What the Saudis are doing is business as usual. They change the price formula each month. The problem is there’s an implication that it’s business as usual in terms of production. The problem is if they continue to produce what they’ve been producing in the last two months, the market is headed for trouble”

Look Out Below! Oil Is Not Done Falling (CNBC)

Oil prices could have a hard time finding a floor after Saudi Arabia trimmed prices in the face of growing North American oil production. The market took the price cut this week as another sign the kingdom is willing to use pricing as a lever to preserve its market share, rather than cut production in what is now an oversupplied market. Even if it was not the intention, some traders took the Saudi move as a sign the kingdom would like falling prices to slow U.S. shale production. U.S. West Texas Intermediate fell sharply on Tuesday, dipping close to the psychologically key $75-a-barrel level, before closing at a three-year low of $77.19, off $1.59 per barrel. Brent fell along with it to $82.82 a barrel, the lowest settle since October 2010, after Saudi Arabia set a new price in the U.S. 45 cents lower than November’s level. “The managed money longs still outnumber shorts 3.5-to-1. If this isn’t a heavy exodus of the money manager longs, we could still have a significant drop, especially if all these factors that are driving us lower continue to weigh on the markets,” he said.

“The dollar strength and also fears of slowing economic conditions in Europe and China are still continuing to play a role.” There was initially a muted reaction to the Saudi announcement Tuesday as the market focused on dollar strength and other factors. “I don’t think the probability is we’re looking at a meltdown or collapse. If there was a global price war, it could go between $30 and $50 a barrel but more realistically, we’re within 10% of the bottom,” said Tom Kloza, senior oil analyst at Gasbuddy.com. “What the Saudis are doing is business as usual. They change the price formula each month. The problem is there’s an implication that it’s business as usual in terms of production. The problem is if they continue to produce what they’ve been producing in the last two months, the market is headed for trouble, and downward pressure will be more significant than upward pressure,” said Kloza.

Read more …

Nobody loves you when you’re down and out.

Oil Continues To Slide, With Brent At Lowest In Over Four Years (MarketWatch)

Crude-oil futures extended losses in Asian trade Wednesday, with the U.S. oil benchmark at its lowest in more than three years and Brent at its lowest in over four years. On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $76.81 a barrel, down $0.38 in the Globex electronic session. December Brent crude on London’s ICE Futures exchange fell $0.60 to $82.22 a barrel. Crude oil finished at a 3-year low on Tuesday. A steady stream of weak economic data from Europe is weighing on Brent crude oil prices, pushing it lower along with the drop in U.S. oil prices, analyst Tim Evans at Citi Futures said.

“The downward revision in the eurozone macroeconomic outlook and the further decline in prices were both more of a confirmation that a bearish trend remains than any stunning new development,” he said. Mr. Evans said a psychological limit of $80 a barrel may help limit the drop in Brent crude prices. Financial markets are looking to Thursday’s European Central Bank meeting for a boost. Meanwhile, oil markets are still pressured by a strong U.S. dollar, weak demand projections and oversupply concerns. “Yesterday’s support levels were shattered likely due to markets anticipating further cuts from other OPEC countries,” analyst Daniel Ang at Phillip Futures said. He pegged support for Brent crude at $82 a barrel and that for WTI at $75.84 a barrel.

Read more …

“Domestic oil companies need to stop drilling for oil … ” Why not tell the Saudis that? How about we discuss: The Real Problem With T. Boone Pickens instead?

T. Boone Pickens: The Real Problem With Oil (CNBC)

Many energy investors think there’s a powerful force working against them in the market. Investor T. Boone Pickens thinks they’re right, but the problem isn’t what they think. Pickens says that the big issue in the energy market isn’t OPEC or the strong dollar; he says it’s supply and he also says domestic drillers are to blame. “Domestic oil companies need to stop drilling for oil,” Pickens insisted on CNBC’s “Street Signs.” “We’ve overdrilled oil (in the U.S). Now we’ve gotten ourselves in a spot. We need to slow down.” In other words, the abundance of oil that’s now accessible in North America because of improved technology has generated a supply imbalance. However, Pickens does not expect that dynamic to last; ultimately he expects markets to balance out, with drillers reducing supply.

“Of course nobody wants to be the first to blink,” Pickens added. “But, when the domestic drillers start feeling real pain (from low prices), they will blink.” In fact, Pickens thinks the dynamics are shifting, already. Not only does he anticipate a reduction in domestic supply but he said markets are moving into a bullish time of year. “November and December are good months,” he said. Therefore, Pickens believes supply will decrease, at a time when demand increases. Given the potential catalysts, Pickens isn’t looking for oil to sit at historic lows for long. “I can see this lasting through year end. But in the first quarter of next year I think we hit the low and then I expect prices to recover.”

Read more …

‘Shields’? Curious choice of words.

Russia-Ukraine Crisis Shields EU Gas From Oil Price Rout (Bloomberg)

The risk of disruptions to Russian natural gas flows through Ukraine this winter is protecting European prices from the rout that sent oil to a four-year low. U.K. gas for next quarter fell 13% since mid-June, less than half the 29% plunge in Brent crude over that time. While Brent is typically the benchmark used to set the price on almost half the gas supply in Europe, the Russia-Ukraine conflict and demand fundamentals in the market are having a bigger impact on prices than the decline in oil. First-quarter supply interruptions are still possible as Ukraine may struggle to pay Russia the full $3.1 billion by year-end under an agreement brokered by the European Union last week for gas already consumed, according to Societe Generale SA.

Gazprom said it received the first tranche of payments today. The EU, which gets 15% of its fuel from Russia via Ukraine, sought to avoid repeats of 2006 and 2009, when supplies to the bloc were disrupted amid freezing weather. “Right now, gas prices in Europe are really linked to the Russian-Ukrainian crisis, so I don’t think the impact from oil is as big as it could be,” Edouard Neviaski, chief executive officer of GDF Suez Trading, a unit of France’s biggest utility, said in an interview in London. “Gas prices have gone down a little bit, but nothing of the same magnitude.”

Read more …

Whenever the financial world gets ‘creative’, things blow up and we pay.

New Junk-Bond Derivatives Are Hot as Traders Get Creative (Bloomberg)

When it gets tough to maneuver in the junk-bond market, traders can either give up or get creative. Many of them are opting for creativity these days. There’s been a surge in demand for a relatively new index of derivatives that aims to replicate the risk and return of high-yield bonds. As volatility soars to the most in more than a year, trading in a total-return swaps index reached a record $4 billion in September from almost nothing in May, according to data compiled by Morgan Stanley. The demand is in part coming from fund managers who are looking for ways to be agile as individual investors become more fickle, pulling money out and then putting it back in, said Sivan Mahadevan, a credit strategist at Morgan Stanley. For example, investors have yanked $24 billion from high-yield bond mutual funds this year, with sentiment turning particularly sour in the three months ended Sept. 30, data compiled by Wells Fargo show. Yet they poured $2.5 billion into the funds in the week ended Oct. 29.

Investors also face a harder environment to maneuver in. The volume of dollar-denominated junk bonds outstanding has swelled 81% since 2008, but the market’s structure hasn’t evolved much. It still consists of thousands of individual bonds governed by unique documents, traded much the way they were a decade ago. “Market fragmentation and liquidity constraints in a large part of the bond market make managing fund-flow volatility particularly challenging,” Mahadevan wrote in a report. The concern is that after six years of near-zero interest rates from the Federal Reserve and a largely one-way trade into bonds, a reversal of that demand will cause debt values to plunge as there won’t be many willing and available buyers on the other side. So it’s no wonder investors are turning to derivatives to quickly adjust their holdings in a market that policy makers have said looks like a bubble.

Read more …

Sure, Lagarde, why not simply make your own auditing office look like a bunch of inept fools?

IMF Gave Richer Countries Wrong Austerity Advice: Internal Auditor (Reuters)

The International Monetary Fund ignored its own research and pushed too early for richer countries to trim budgets after the global financial crisis, the IMF’s internal auditor said on Tuesday. The Washington-based multilateral lender, concerned about high debt levels and large fiscal deficits, urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries, the Independent Evaluation Office, or IEO, said in a report that analyzed the IMF’s crisis response. “This policy mix was less than fully effective in promoting recovery and exacerbated adverse spillovers,” the IEO wrote. The IMF advises its 188 member countries on economic policy, and provides emergency financial assistance to its members on the condition they get their economies back on track.

The internal auditor said the IMF should have known that the combination of tight fiscal policy and expansionary monetary policy would be less effective in boosting growth after a crisis. Evidence showed that the private sector’s focus on reducing debt made it less susceptible to monetary stimulus. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis. IMF Managing Director Christine Lagarde said the IMF’s advice was reasonable, given the information and economic growth forecasts it had in 2010. “I strongly believe that advising economies with rapidly rising debt burdens to move toward measured consolidation was the right call to make,” Lagarde said in a statement.

Read more …

So much for the Chinese having no housing debt.

China Home Buyers Rushing Online to Finance Downpayments (Bloomberg)

Qian Kaishen and his wife almost gave up in August on buying a bigger home. As apartments at Shanghai Villa, a project they liked near the city’s Hongqiao Airport, started selling, the money they had saved for the deposit was tied up in a 5%-return investment. Then property agency E-House China Holdings Ltd. offered the couple a 280,000 yuan ($45,546) one-year bridge loan at zero interest. The loan came from online investors through E-House’s Internet finance website. It covered about half the down payment and was just enough to make up the shortfall. “Now we’re good both on our investment and home purchase plan,” Qian, 31, who works for a local logistics company, said by phone from Shanghai.

“We would’ve given up if it weren’t for the loan. I don’t like borrowing from my parents or relatives, especially because we have the money.” E-House is joining peer-to-peer lenders to finance down payments for buyers struggling to scrape together a deposit after home prices had tripled since 2000. Mortgage lending remains tight, even after the central bank eased its policy in September, as banks anticipate an extended property market decline because of a high supply of housing, according to Standard Chartered.Home prices in China are now equivalent to 40 years’ average income for a 100-square-meter (1,076-square-foot) apartment. That compares with 26 years’ median income in New York for an apartment of the same size. The average price of a typical 900-square-foot home in Singapore is 11 times the median household income, while that for a 50-square-meter flat in Hong Kong is 14 times, according to local official data.

In China, homebuyers need to pay a minimum down payment of 30% of the purchase price for a first home, and at least 60% for a second before they can take out a mortgage. The limits are the result of a four-year campaign to stem property speculation. Those restrictions have helped drive demand for the down payment loans. “The phenomenon emerged in the past year or two largely because of mortgage restrictions and high down-payment requirements,” said Zhang Haiqing, a Shanghai-based research director at Centaline Group, China’s biggest property agency. The central bank on Sept. 30 eased some mortgage rules to make it easier to purchase second properties in a bid to revive the market. “We can’t exclude the possibility that as the market recovers, more people will want to buy and some of them will still have to use this channel because they don’t have the money,” Zhang said.

Read more …

Every nation’s best days are behind it. That is, if you focus on economic growth. As they all do.

25 Years Since The Wall Fell, Germany’s Best Days Are Behind It (MarketWatch)

On Sunday, Nov. 9, it will be a quarter of a century since the Berlin Wall came down. The reunification that followed was a triumph for the German nation. The scars of World War Two were finally healed, and Germany became one of the richest and most successful countries in the world. Certainly compared to much of its history, there was never a better time to be a German. And yet, as that anniversary is rightly celebrated, it is possible that the next quarter century will not be nearly as good. In fact, Germany faces a series of daunting problems. Its population is about to shrink sharply, threatening its prosperity. Its export-driven economic model look increasingly dated, based on huge trade surpluses, and driving down real wages. Education is poor, there is little investment, and no signs that it can compete in new technologies the way it did in industries such as automobile and chemicals.

Worse, it is threatened by a belligerent Russia on one side, and a resentful, impoverished, resentful eurozone periphery on the other, which is likely to increasingly blame Germany for its economic troubles. The European Union, the linchpin of its security and foreign policy, is under huge pressure as a result of the eurozone crisis, which the German elite has terribly mismanaged. The chances are that the next quarter of a century will not be nearly as good for Germany as the last 25 years were. When David Hasselhoff — of Knight Rider fame, and for some mysterious reason a huge star in Germany — performed at the Berlin Wall on New Year’s Eve in 1989, he was presiding over a moment when two halves of a divided nation came together. There were plenty of doubts at the time, both about whether West Germany could cope with a bankrupt East, and about whether the rest of Europe could cope with a reunited Germany.

Read more …

Interesting views from ‘former’ Goldmanite O’Neill. Have Italy impose punitive taxes on the Germans.

A Crazy Idea About Italy (Jim O’Neill)

I’ve spent a good deal of my 35 years as an economic and financial analyst puzzling over Italy. Studying its economy was my first assignment in this business – as a matter of fact, Italy was the first foreign country I ever flew to. I’m just back from a vacation in Puglia and Basilicata. Over the decades, the question has never really changed: How can such a wonderful country find it such a perpetual struggle to succeed? All the while, Italy has pitted weak government against a remarkably adaptable private sector and a particular prowess in small-scale manufacturing. An optimist by nature, I’ve generally believed these strengths would prevail and Italy would prosper regardless. In the days before Europe’s economic and monetary union, though, it had one kind of flexibility it now lacks: a currency, which it could occasionally devalue. These periodic injections of stronger competitiveness were a great help to Fiat and other big exporters, and to smaller companies too. The rest of Europe had mixed feelings about this readiness to restore competitiveness through devaluation – meaning at their expense.

When discussions began about locking Europe’s exchange rates and moving to a single currency, opinions divided among the other partners, notably Germany and France, on what would be in their own best interests. Many German conservatives, including some at the Bundesbank, doubted Italy’s commitment to low inflation, which they wanted to enshrine as Europe’s chief monetary goal. On the other hand, leaving Italy outside the euro would leave their own competitiveness vulnerable to occasional lira devaluations. In the end, of course, the decision was made to bring Italy in. The fiscal rules that were adopted at the same time – including the promise to keep the budget deficit below 3 percent of gross domestic product — can be seen as an effort to force Italy to behave itself. Now and then I wondered if some saw them as a way to make it impossible for Italy to join at all. In any event, Italy found itself doubly hemmed in, with no currency to adjust and severely limited fiscal room for maneuver.

The results haven’t been good. It’s ironic that between 2007 and 2014 Italy has done better than most in keeping its cyclically adjusted deficit under control – yet its debt-to-GDP ratio has risen sharply. The reason is persistent lack of growth in nominal GDP, itself partly due to an overvalued currency and tight budgetary restraint. Italy is the euro area’s third-largest economy and its third-most populous country. Given this, the scale of its debts and everything we’ve learned about Europe’s priorities during the creation of the euro and since, I’ve always presumed that, in the end, Germany would do whatever was necessary to protect Italy from the kind of financial blow-up that hit Greece in 2010. Now I am starting to wonder.

Read more …

” .. the Potemkin stock market, a fragile, one-dimensional edifice concealing the post-industrial slum that the on-the-ground economy has become behind it.”

Signs, Wonders and QE Heroics (James Howard Kunstler)

“Holy smokes,” Janet Yellen must have barked last week when Japan stepped up to plug the liquidity hole left by the US Federal Reserve’s final taper trot to the zero finish line of Quantitative Easing 3. The gallant samurai Haruhiko Kuroda of Japan’s central bank announced that his grateful nation had accepted the gift of inflation from the generous American people, which will allow the island nation to fall on its wakizashi and exit the dream-world of industrial modernity it has struggled through for a scant 200 years.

Money-printing turns out to be the grift that keeps on giving. The US stock markets retraced all their October jitter lines, and bonds plumped up nicely in anticipation of hot so-called “money” wending its digital way from other lands to American banks. Euroland, too, accepted some gift inflation as its currency weakened. The world seems to have forgotten for a long moment that all this was rather the opposite of what America’s central bank has been purported to seek lo these several years of QE heroics — namely, a little domestic inflation of its own to simulate if not stimulate the holy grail of economic growth. Of course all that has gotten is the Potemkin stock market, a fragile, one-dimensional edifice concealing the post-industrial slum that the on-the-ground economy has become behind it.

Then, as if cued by some Satanic invocation, who marched onstage but the old Maestro himself, Alan Greenspan, Fed chief from 1987 to 2007, who had seen many a sign and wonder himself during that hectic tenure, and he just flat-out called QE a flop. He stuck a cherry on top by adding that the current Fed couldn’t possibly end its ZIRP policy, either. All of which rather left America’s central bank in a black box wrapped in an enigma, shrouded by a conundrum, off-gassing hydrogen sulfide like a roadkill ‘possum. Incidentally, Greenspan told everybody to go out and buy gold — which naturally sent the price of gold spiraling down through its previous bottom into the uncharted territory of worthlessness. Gold is now the most unloved substance in the history of trade, made even uglier by the overtures of Mr. Greenspan.

Read more …