Oct 092015
 
 October 9, 2015  Posted by at 9:21 am Finance Tagged with: , , , , , , , , , ,  


DPC H.A. Testard Bicycles & Automobiles, New Orleans 1910

September Liquidity Crisis Forced Fed Into Massive Reverse Repo Operation (IRD)
Bank Of England Warns Financial Institutions Over Commodities Exposure (Guardian)
If You Thought China’s Equity Bubble Was Scary, Check Out Bonds (Bloomberg)
CEO: Deutsche Isn’t Worth What It Once Was And Can’t Pay What It Used To (BBG)
Day After Deutsche Says Not All’s Well, Credit Suisse Also Admits Trouble (ZH)
Bruised Germany Is Canary in Coal Mine for Europe Economic Woes (Bloomberg)
Saudi Arabia Orders Deep Spending Curbs Amid Oil Price Slump (Bloomberg)
Former IMF Chief Economist Blanchard Backs ‘People’s QE’ (Reuters)
Hong Kong High Street Shop Rents Fall Up To 43% From Their Peaks (SCMP)
Bill Gross Sues Pimco For At Least $200 Million (NY Times)
Ponzi Suspect’s 17 Accounts Raise Questions Over Bank Safeguards (Bloomberg)
Why This Feels Like A Depression For Most People (Jim Quinn)
VW Exec Blames ‘A Couple Of’ Rogue Engineers For Emissions Scandal (LA Times)
VW Facilities, Worker Homes Raided in Diesel Investigation (Bloomberg)
US House Slams Regulators For Not Catching VW For Years (Reuters)
Four More Carmakers Join ‘Dieselgate’ Emissions Row (Guardian)
Merkel Slams Eastern Europeans On Migration (Politico)
542 People Rescued In 24 Hours Off Greece (AP)
Baby Dies After Migrant Boat Breaks Down Off Greek Island Lesbos (Reuters)

Behind the curtain.

September Liquidity Crisis Forced Fed Into Massive Reverse Repo Operation (IRD)

Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market. Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate. However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008. You can also see from this graph that the size of the “spike” occurrences in reverse repo operations has significantly increased since 2014 relative to the spike up in 2008. In fact, the latest two-week spike is by far the largest reverse repo operation on record.

Besides using repos to manage term banking reserves in order to target the Fed funds rate, reverse repos put Treasury collateral on to bank balance sheets. We know that in 2008 there was a derivatives counter-party default melt-down. This required the Fed to “inject” Treasury collateral into the banking system which could be used as margin collateral by banks or hedge funds/financial firms holding losing derivatives positions OR to “patch up” counter-party defaults (see AIG/Goldman).

What’s eerie about the pattern in the graph above is that since 2014, the “spike” occurrences have occurred more frequently and are much larger in size than the one in 2008. This would suggest that whatever is imploding behind the scenes is far worse than what occurred in 2008. What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period. You’ll note that this is around the same time that a crash in Glencore stock and bonds began. It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.

The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates. However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out of sight in the general liquidity functions of the global banking system. Without a doubt, the graphs above are telling us that something “broke” in the banking system which necessitated the biggest injection of Treasury collateral in history into the global banking system by the Fed.

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BoA says $100 billion exposure to Glencore alone, and Bernstein says 6 UK traders have only $6 billion? Hard to believe.

Bank Of England Warns Financial Institutions Over Commodities Exposure (Guardian)

The Bank of England has told major banks to check the impact of falling commodity prices on their lending positions. Threadneedle Street has been asking for information from the major players in light of the rout in the shares in Glencore, the commodity trading and mining firm. Glencore’s shares plunged by 29% a week ago on Monday to 68.62p. Although they have subsequently recovered to 120p, the shares are trading far below their 2011 flotation price of 530p. The fall in Glencore stock came amid concerns about its debt position and fears that the Chinese economy was on the cusp of a hard landing that would further reduce already softening global demand for commodities.

The demand for information by the Bank of England has emerged at a time when banking analysts have been questioning the exposure of banks to the the fallout in the commodity sector. In a research note entitled The $100bn Gorilla in the Room, Bank of America analysts said: “The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market.” Analysts at Bernstein, the broking firm, have conducted a wider analysis of UK banks’ exposure to six commodity trading houses, including Glencore, and concluded about $6bn (£3.9bn) worth of loans are outstanding. Standard Chartered, the Asian-focused London-based bank, was given the highest exposure of $1.9bn.

The move by the Bank to ask financial institutions to check their exposure to commodities follows similar health checks during the Greek crisis and amid Chinese stock market volatility in the summer. The requests are made through the Prudential Regulation Authority, the Bank of England’s regulatory arm. The Bank of England is launching stress tests on the major lenders and has said China is among the factors that will be included in the financial health check. The results are expected to be published in December.

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Bubble after bubble, until there’s none left.

If You Thought China’s Equity Bubble Was Scary, Check Out Bonds (Bloomberg)

As a rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another. So says Commerzbank, which puts the chance of a crash by year-end at 20%, up from almost zero in June. Industrial Securities and Huachuang Securities are warning of an unsustainable rally after bond prices climbed to six-year highs and issuance jumped to a record. The boom contrasts with caution elsewhere. A selloff in global corporate notes has pushed yields to a 21-month high, and credit-derivatives traders are demanding near the most in two years to insure against losses on Chinese government securities.

While an imminent collapse isn’t yet the base-case scenario for most forecasters, China’s 42.1 trillion yuan ($6.6 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago: stretched valuations, a surge in investor leverage and shrinking corporate profits. A reversal would add to challenges facing China’s ruling Communist Party, which has struggled to contain volatility in financial markets amid the deepest economic slowdown since 1990. “The Chinese government is caught between a rock and hard place,” said Zhou Hao, a senior economist in Singapore at Commerzbank, Germany’s second-largest lender. “If it doesn’t intervene, the bond market will actually become a bubble. And if it does, the market could crash the way the equity market did due to fast de-leveraging.”

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Deutsche equals tens of trillions in derivatives exposure. Why is it getting scared, and why now?

CEO: Deutsche Isn’t Worth What It Once Was And Can’t Pay What It Used To (BBG)

Deutsche Bank’s new boss delivered a harsh message to shareholders and employees: Europe’s biggest investment bank isn’t worth what it once was and can’t pay them what they’re used to. Co-CEO John Cryan decided to mark down the value of the securities unit because of rules that will force the company to hold more capital, Deutsche Bank said in a statement late Wednesday. Higher equity requirements have hurt profitability. Cryan is preparing to shrink the trading empire built by his predecessor, Anshu Jain, to lower costs, lift capital levels and raise Deutsche Bank from its position as the worst-valued stock among global banks. That could mean giving up the aspiration to remain a top global investment bank and rolling back parts of the expansion it pursued over the last two-and-a-half decades.

“This perhaps is the beginning of the new chief executive taking a close look and saying, ‘actually, are we better off being the German champion bank, or do we want to maintain this ambition of being a global player?”’ Robert Smithson at THS Partners said. Deutsche Bank said it wrote down goodwill, a measure of the value a company expects to extract from acquisitions, to zero at both its investment- and consumer-banking units. The charge at the securities business relates in part to the $9 billion purchase of Bankers Trust in 1998, Cryan said in a memo to staff. That deal was a major step in the company’s transformation into a global investment bank because it expanded access to the U.S., home to the world’s biggest capital markets. Paul Achleitner, Deutsche Bank’s supervisory board chairman, advised the bank on the purchase while at Goldman Sachs.

The writedown at the securities unit, as well as charges at the company’s retail-banking division and legal costs, will probably cause a third-quarter net loss of €6.2 billion, Deutsche Bank said. The bank may cut or eliminate this year’s dividend, and employees, by way of compensation, will have to share the pain with investors, Cryan said. The stock fell 1.8% to €25.03. Cryan isn’t alone in writing down the value of acquisitions that failed to deliver anticipated returns. UniCredit, Italy’s biggest bank, posted a record loss for the fourth-quarter of 2013 after taking more than 9 billion euros of impairments, including those on the goodwill of units in Italy, central and eastern Europe and Austria. Investors were already valuing Deutsche Bank at less than it says its assets are worth. The company trades at about 0.6 times book value, the lowest ratio among its global peers.

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Deutsche, Credit Suisse and UniCredit. Dominoes starting to drop.

Day After Deutsche Says Not All’s Well, Credit Suisse Also Admits Trouble (ZH)

Not everything is “fine” in the land of European banks, in fact quite the opposite. One day after Deutsche Bank warned of a massive $7 billion loss and the potential elimination of the bank’s dividend which had been a German staple since reunification, a move which many said was a “kitchen sinking” of the bank’s problems (but not Goldman, which said it was “not a kitchen sinking, but a sign of the magnitude of the challenge” adding that “this development confirms our view that the task facing new management is very demanding. Litigation issues do not end with this mark down – we expect them to persist for a multi-year period. We do not see this as a “clean up” but rather an indication of what the “fixing” of Deutsche Bank will entail over the 2015-18 period), it was the turn of Switzerland’s second biggest bank after UBS, Credit Suisse, to admit it too needs more cash when moments ago the FT reported that the bank is “preparing to launch a substantial capital raising” when the new CEO Thiam unveils his strategic plan for the bank in two weeks’ time.

FT adds that “while not specifying an amount, they pointed to a poll published last week by analysts at Goldman Sachs concluding that 91% of investors expect the Swiss bank to raise more than SFr5bn in new equity.” The stock price did not like it, although just like with DB, we expect the “story” to quickly become that the Swiss bank is putting all its dirty laundry to rest, so an equity dilution is actually quite positive. Incidentally, with DB stock green on the day following a dividend cut, perhaps it would go limit up if Deutsche Bank had announced a negative dividend? The official narrative is well-known: the bank does not need the funds, it is simply a precaution ahead of new, more stringent capital requirements:

The capital is likely to be used to absorb losses triggered by a faster restructuring of the Swiss group, the people said. But Credit Suisse will also need higher capital ratios to comply with toughening demands from regulators. The Swiss authorities are expected to announce an increase of minimum capital ratios over the coming months, which could prove more challenging for the bank than its better capitalised local rival, UBS. Credit Suisse’s common equity tier one capital ratio of 10.3% compares with UBS’s 13.5%..

The real reason, of course, has nothing to do with this, and everything to do with the collapse of manipulation cartels involving Liebor, FX, commodities, bonds, equities, gold, and so on, because when banks can no longer collude with each other to push markets in any given direction, that’s when they start losing money. That and, of course, the fact that central bank intervention in capital markets has made it virtually impossible to trade any more. Or as they call it, “miss capital ratios.” Expect many more such announcements in the coming weeks.

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While Brussels insists there is a cyclical recovery…

Bruised Germany Is Canary in Coal Mine for Europe Economic Woes (Bloomberg)

The euro area’s pillar of economic strength is starting to show cracks. Germany’s manufacturing industry is taking a hit from cooling demand in emerging markets. Two of its icons – Deutsche Bank and Volkswagen – are in turmoil. And refugees are flooding across its borders at a rate of 10,000 a week. The strains are putting the resilience of Europe’s economic powerhouse to the test after exports in August fell the most since the height of the 2009 recession, and factory orders and industrial output unexpectedly declined. The flood of bad news is all the more troubling as the 19-nation euro area strives to sustain an economic revival that remains fragile. “Germany is the canary in the mine for Europe,” said Pau Morilla-Giner at London & Capital Asset Management in London.

“It is the most exposed country to what happens outside of the continent.” German exports slumped 5.2% in August from the previous month, the Federal Statistics Office in Wiesbaden said on Thursday. That’s the most since the recession of 2009. Imports slid 3.1%, shrinking the trade surplus to €15.3 billion from €25 billion. Weakening trade with China and Russia prompted Hamburger Hafen und Logistik, which handles about three in four containers at the city port, to cut its 2015 earnings forecast on declining container volume. Germany’s gateway to Asia serves as a major transfer hub for containers carried by deep-sea ships from the Pacific region and then reloaded onto smaller feeder vessels destined for Baltic Sea ports, including the Russian harbor of St. Petersburg.

BASF, whose dominance in the global chemical industry makes it a barometer for the German economy, is curbing spending and scrapped its 2020 profit and sales target on Sept. 28 after becoming more pessimistic on economic growth and chemical production. The risks for Germany’s steel producers “have increased significantly, especially in the area of foreign trade, in recent weeks and months,” the Wirtschaftsvereinigung Stahl industry group said on Thursday in a report showing crude steel production fell almost 4% in September. “One of the biggest pressure points for the euro zone’s fragile economic recovery is German export orders,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “News that they fell sharply throws the China-driven weakness in the global economy into sharp relief.”

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Problems mount for the House of Saud. Only option left is to increase pumping.

Saudi Arabia Orders Deep Spending Curbs Amid Oil Price Slump (Bloomberg)

Saudi Arabia is ordering a series of cost-cutting measures as the slide in oil prices weighs on the kingdom’s budget, according to two people with knowledge of the matter. The finance ministry told government departments not to contract any new projects and to freeze appointments and promotions in the fourth quarter, the people said, asking not to be identified because the information isn’t public. It also banned the buying of vehicles or furniture, or agreeing any new property rentals and told officials to speed up the collection of revenue, they said. With oil accounting for about 90% of revenue in the Arab world’s largest economy, a drop of more than 40% in crude prices in the past 12 months has combined with wars in Yemen and Syria to pressure Saudi Arabia’s finances.

While public debt is among the world’s lowest, with a gross debt-to-GDP ratio of less than 2% in 2014, that may rise to 33% in 2020, according to estimates from the IMF. “In order to demonstrate a bit of fiscal discipline the government needed to take some measures in 4Q to moderate spending,” John Sfakianakis, Middle East director at Ashmore Group, said. “Going forward Saudi Arabia will have to implement spending cuts and efficiencies in order to avoid a runaway fiscal deficit in 2016.” To help shore up its finances, authorities plan to raise between 90 billion riyals ($24 billion) and 100 billion riyals in bonds before the end of the year, people with knowledge of the matter said in August. The kingdom’s net foreign assets fell for a seventh month to $654.5 billion in August, the lowest level in more than two years.

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Maybe someone should define PQE. Would seem handy for future discussion.

Former IMF Chief Economist Blanchard Backs ‘People’s QE’ (Reuters)

“People’s QE” could be an option to help economies fight future crises, Olivier Blanchard, who has just stepped down as chief economist of the IMF, said on Wednesday. Quantitative easing, where central banks buy assets such as government bonds from banks in exchange for newly created money, has been used in the euro zone, the United States and Britain to increase financial market liquidity and stimulate growth. But the verdict is still out on whether central banks should be buying assets, as they do now, or instead tie up with governments to spend it on ‘real’ goods, known as “people’s QE”, as a way of stimulating the economy, Blanchard said during a lecture at the Cass Business School.

“There is clearly something else you can do if you get to zero (inflation) and still want to increase spending. You can buy goods.” “Which one should you choose? We haven’t asked the question in the crisis but we should,” he said. Blanchard said that this does not mean central banks would buy goods directly. Rather, governments can increase their fiscal deficits by spending on infrastructure projects. Central banks can then buy this debt with newly created money. He also stressed that these fiscal deficits should be “a certain size and not more”. People’s QE was a prominent part of the leadership election campaign for British Labour Party leader Jeremy Corbyn.

QE has come under popular criticism because banks, which were supposed to lend out the new money into the wider economy to stimulate growth, have not necessarily done so. Blanchard argues that buying goods rather than assets can get the money out into the economy another way. People’s QE has also been criticised because it may compromise central bank independence. Bank of England chief economist Andy Haldane said in September people should be “very cautious” about encroaching on the separation between fiscal and monetary policy.

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Any questions?

Hong Kong High Street Shop Rents Fall Up To 43% From Their Peaks (SCMP)

Hong Kong’s high street shop rents have fallen as much as 43% when compared with the peak levels in the fourth quarter of 2013, according to international property consultant DTZ/Cushman & Wakefield. Plagued by smaller growth in tourist arrivals and a decrease in sales of luxury products, retailers have been facing a challenging business environment and find the rents they are paying in prime street shops as too expensive. Some retailers requested landlords to cut rents while others opted to relocate. As a result, the retail high street rents in Causeway Bay, Tsim Sha Tsui, Central and Mongkok had gone down by 26-43% as of the third quarter from their respective peak levels in the fourth quarter of 2013, or during lease renewal compared to the last rent a few years ago, said Kevin Lam, DTZ/Cushman & Wakefield’s Head of Business Space, Hong Kong.

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It was all El-Erian after all.

Bill Gross Sues Pimco For At Least $200 Million (NY Times)

The man known as the bond king, William H. Gross, is suing the company that he built into one of the largest asset managers in the world, providing his own colorful version of an ugly feud that led to his departure last year. The lawsuit, filed on Thursday, represents a bold effort by Mr. Gross to repair the damage that was done to his reputation in the year before and after he was fired from Pimco. News media reports have portrayed Mr. Gross’s departure as a product of his erratic and domineering behavior at the firm he helped found in 1971. Mr. Gross is seeking “in no event less than $200 million” from Pimco for breach of covenant of good faith and fair dealing, among other causes of action.

But to underscore the degree to which the suit is motivated by Mr. Gross’s desire to correct the public record, he has promised to donate any money he recovers to charity, his lawyer, Patricia L. Glaser, said. The lawsuit presents a picture of Pimco — an asset manager based in California that is responsible for billions of dollars in retirement savings — as a den of intrigue riven by back stabbing and competing egos. The first sentence of the suit says that Mr. Gross was pushed out by a “cabal” of Pimco managing directors who were “driven by a lust for power, greed, and a desire to improve their own financial position.” “Their improper, dishonest, and unethical behavior must now be exposed,” the opening paragraph concludes.

The suit takes aim at the man who was once in line to succeed Mr. Gross, Mohamed El-Erian, and at the man who has succeeded Mr. Gross as Pimco’s group chief investment officer, Daniel J. Ivascyn. Mr. El-Erian is now the chief economic advisor at Allianz, Pimco’s parent company. Both men, the suit says, were eager to take Pimco away from its traditional focus on bond funds and into riskier investment strategies that would earn it higher fees and lead to bigger bonuses for top executives. Mr. Gross, on the other hand, is said in the suit to have consistently advocated for keeping the firm focused on lower-fee investment products.

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“If the banks had just Googled this guy, they would have known enough to stay away..”

Ponzi Suspect’s 17 Accounts Raise Questions Over Bank Safeguards (Bloomberg)

The U.S. requires banks to know their customers. Looks like several big ones, including Citigroup, JPMorgan and Wells Fargo, may have missed getting acquainted with Daniel Fernandes Rojo Filho. Filho, a 48-year-old Brazilian self-proclaimed billionaire living in Orlando, Florida, came under U.S. investigation in 2009 related to an alleged conspiracy involving drug trafficking, money laundering and a Ponzi scheme. Around then, he and others under the federal probe forfeited tens of millions of dollars worth of Lamborghinis, gold bars and other assets, according to court documents. He agreed in 2013 to forfeit another $25 million in accounts registered to his children and businesses. That was all a matter of public record in mid-2014, when Filho started opening new bank accounts.

He set up at least 17 of them in the name of his company – DFRF Enterprises, derived from his initials – and signed his own name. Filho’s banking flurry is detailed in several fresh cases against him, including an August criminal indictment alleging he used some of these accounts in a scheme that promised investors income from nonexistent gold-mining operations. Filho faces similar allegations in separate lawsuits filed this year by the Securities and Exchange Commission and by a group of investors. “If the banks had just Googled this guy, they would have known enough to stay away,” said Evans Carter, a Framingham, Massachusetts-based attorney who brought the investors’ class-action suit early this year. Filho, who was arrested in July, awaits a hearing today in Boston connected to the criminal charges against him.

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“Today, there are 46 million Americans in an electronic soup kitchen line..”

Why This Feels Like A Depression For Most People (Jim Quinn)

Everyone has seen the pictures of the unemployed waiting in soup lines during the Great Depression. When you try to tell a propaganda believing, willfully ignorant, mainstream media watching, math challenged consumer we are in the midst of a Greater Depression, they act as if you’ve lost your mind. They will immediately bluster about the 5.1% unemployment rate, record corporate profits, and stock market near all-time highs. The cognitive dissonance of these people is only exceeded by their inability to understand basic mathematical concepts. The reason you don’t see huge lines of people waiting in soup lines during this Greater Depression is because the government has figured out how to disguise suffering through modern technology. During the height of the Great Depression in 1933, there were 12.8 million Americans unemployed.

These were the men pictured in the soup lines. Today, there are 46 million Americans in an electronic soup kitchen line, as their food is distributed through EBT cards (with that angel of mercy JP Morgan reaping billions in profits by processing the transactions). These 46 million people represent 14% of the U.S. population. There are 23 million households on food stamps in a nation of 123 million households. Therefore, 19% of all households in the U.S. are so poor, they require food assistance to survive. In 1933 there were approximately 126 million Americans living in 30 million households. The government didn’t keep official unemployment records until 1940, but the Department of Labor estimated 12.8 million people were unemployed during the worst year of the Great Depression or 24.9% of the labor force.

By 1937 it had fallen to 14.3% or approximately 8 million people. The number of people unemployed during the 1930’s is an excellent representation of the number of households on government assistance during the Great Depression because 79% of all households were occupied by married couples with 4 people per household versus 48% married couple households today with 2.5 people per household. The unemployment rate averaged 19% during the heart of the Great Depression. Therefore, approximately 19% of all the households in the U.S. needed government assistance to feed themselves. That happens to be the exact %age of households currently needing food stamps to feed themselves.

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Do they really think this’ll fly? “..it sure does cause you to scratch your head that we have this software that just happens to be in 11 million cars and no one in the whole company noticed it.”

VW Exec Blames ‘A Couple Of’ Rogue Engineers For Emissions Scandal (LA Times)

A top Volkswagen executive on Thursday blamed a handful of rogue software engineers for the company’s emissions-test cheating scandal and told outraged lawmakers that it would take years to fix most of the nearly half million vehicles affected in the U.S. “This was a couple of software engineers who put this in for whatever reason,” Michael Horn, VW’s U.S. chief executive, told a House subcommittee hearing. “To my understanding, this was not a corporate decision. This was something individuals did.” Horn, chief executive of Volkswagen Group of America, revealed that three VW employees had been suspended in connection with software that detects and fools emissions testing equipment in the company’s diesel vehicles. The automaker said that the so-called defeat device is loaded onto as many as 11 million vehicles worldwide.

Horn’s testimony before the House Energy and Commerce Committee’s oversight and investigations panel coincided with a raid Thursday by German investigators at Volkswagen’s Wolfsburg headquarters. The exact number of engineers the company blames remained unclear. Horn said both “couple” and three, then said under questioning that he did not yet know the exact number. Regardless, the claim that such a small number of people could have pulled off such a massive fraud brought immediate skepticism from lawmakers and industry experts. “I cannot accept VW’s portrayal of this as something by a couple of rogue software engineers,” said Rep. Chris Collins (R-N.Y.). “Suspending three folks — it goes way, way higher than that.”

Auto industry veterans agreed. “There are not rogue engineers who unilaterally decide to initiate the greatest vehicle emission fraud in history. They don’t act unilaterally,” said Joan Claybrook, former administrator of the National Highway Traffic Safety Administration. “They have teams that put these vehicles together. They have a review process for the design, testing and development of the vehicles.” James Womack, an expert on the international auto industry, also expressed doubts. “It might not be reviewed and discussed leaving an email or voicemail trail,” Womack said, “but it sure does cause you to scratch your head that we have this software that just happens to be in 11 million cars and no one in the whole company noticed it.”

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The bosses knew. But will that come out?

VW Facilities, Worker Homes Raided in Diesel Investigation (Bloomberg)

Police and prosecutors swooped in on Volkswagen facilities and private homes on Thursday in a dawn raid to gather evidence about who was behind the carmaker’s decision to cheat on diesel emissions tests. Three prosecutors and some 50 state criminal investigators searched the carmaker’s factories and employees’ homes starting in the early morning and continuing through the afternoon in Wolfsburg, its headquarters city, and elsewhere, said Birgit Seel, a senior prosecutor in the German state of Lower Saxony. Investigators took documents and electronic media, and it may take several weeks to review the material, Seel said. She didn’t identify employees whose homes were searched.

“We will fully support the prosecutor’s office with its investigation into the facts of the case and into the people responsible to swiftly and completely get to the bottom of the matter,” Volkswagen said in an e-mailed statement. The company filed its own criminal complaint on Sept. 23. The raids come as pressure on Volkswagen intensifies. The company’s U.S. chief, Michael Horn, will face U.S. lawmakers Thursday in the first public hearing on the scandal. In Europe alone, Volkswagen will probably need to exchange or rebuild parts for about 3.6 million engines equipped with illegal software that turned on full pollution controls only during tests, German Transport Minister Alexander Dobrindt said. Volkswagen told German regulators the parts for 1.6-liter engines that need the fix won’t be available until September 2016, Dobrindt said.

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“.. I think the American people ought to ask that we fire you and hire West Virginia University to do our work.”

US House Slams Regulators For Not Catching VW For Years (Reuters)

Volkswagen US chief executive blamed “individuals” for using software to cheat on diesel emissions at a House hearing on Thursday as lawmakers attacked federal environmental regulators for failing to catch the fraud for years. Michael Horn, head of Volkswagen Americas, testified before a House of Representatives oversight and investigations panel about the emissions scandal that has chopped more than a third of the company’s market value and sent tremors through the global auto industry. Volkswagen’s use of defeat devices, software that evaded U.S. tests for emissions harmful to human health, was not a corporate decision, but something a few employees engineered, Horn said under oath. “This was a couple of software engineers who put this in for whatever reason,” Horn said about the software code inserted into diesel cars since 2009.

Volkswagen used different defeat devices in Europe and the United States, Horn said, as emissions standards are different in the two regions. “Some people have made the wrong decisions in order to get away with something,” Horn said when asked by lawmakers if Volkswagen cheated with defeat devices because it was cheaper than using special injection systems to cut emissions. Lawmakers slammed an Environmental Protection Agency official who testified after Horn for not catching Volkswagen. Representative Michael Burgess, a Texas Republican, questioned the size of EPA’s annual budget, noting that the cheating was uncovered by a West Virginia University study that had a budget of less than $70,000.

“I’m not going to blame our budget for the fact that we missed this cheating,” replied the EPA’s Christopher Grundler, who said his transportation and air quality office has an annual budget of roughly $100 million. “I do think we do a very good job of setting priorities.” Burgess replied: “With all due respect, just looking at the situation, I think the American people ought to ask that we fire you and hire West Virginia University to do our work.”

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“What we are seeing here is a dieselgate that covers many brands and many different car models..”

Four More Carmakers Join ‘Dieselgate’ Emissions Row (Guardian)

Mercedes-Benz, Honda, Mazda and Mitsubishi have joined the growing list of manufacturers whose diesel cars are known to emit significantly more pollution on the road than in regulatory tests, according to data obtained by the Guardian. In more realistic on-road tests, some Honda models emitted six times the regulatory limit of NOx pollution while some unnamed 4×4 models had 20 times the NOx limit coming out of their exhaust pipes. “The issue is a systemic one” across the industry, said Nick Molden, whose company Emissions Analytics tested the cars. The Guardian revealed last week that diesel cars from Renault, Nissan, Hyundai, Citroen, Fiat, Volvo and Jeep all pumped out significantly more NOx in more realistic driving conditions.

NOx pollution is at illegal levels in many parts of the UK and is believed to have caused many thousands of premature deaths and billions of pounds in health costs. All the diesel cars passed the EU’s official lab-based regulatory test (called NEDC), but the test has failed to cut air pollution as governments intended because carmakers designed vehicles that perform better in the lab than on the road. There is no evidence of illegal activity, such as the “defeat devices” used by Volkswagen. The new data is from Emissions Analytics’ on-the-road testing programme, which is carefully controlled and closely matches the real-world test the European commission wants to introduce. The company tested both Euro 6 models, the newest and strictest standard, and earlier Euro 5 models.

[..] “These new test results [from Emissions Analytics] prove that the Volkswagen scandal is just the tip of the iceberg. What we are seeing here is a dieselgate that covers many brands and many different car models,” said Greg Archer, an emissions expert at Transport & Environment. “The only solution is a strict new test that takes place on the road and verified by an authority not paid by the car industry.”

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“The eastern Europeans — and I’m counting myself as an eastern European — we have experienced that isolation doesn’t help..”

Merkel Slams Eastern Europeans On Migration (Politico)

German Chancellor Angela Merkel harshly criticized eastern European governments for not having learned from their own history in their responses to the migration crisis. “The eastern Europeans — and I’m counting myself as an eastern European — we have experienced that isolation doesn’t help,” she told members of the center-right European People’s Party Wednesday in a closed-door meeting, according to a recording of the session obtained by POLITICO. “It makes me a bit sad that precisely those who can consider themselves lucky that they have lived to see the end of the Cold War, now think that one can completely stay out of certain developments of globalization,” Merkel said, referring to the reluctance of some EU countries to accept refugees.

“It just strikes me as somehow very weird. And that’s why we have to keep talking about that, as friends,” Merkel said, speaking German, as she responded to a question from a Czech MEP on the refugee crisis. “A rejection [of taking refugees in] as a matter of principle, that is — excuse me for being that blunt — that’s a danger for Europe,” Merkel said.

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This just keeps going on as the EU discusses ‘fighting’ the smugglers.

542 People Rescued In 24 Hours Off Greece (AP)

The latest developments as hundreds of thousands of people seeking safety make an epic trek through Europe. All times local.

9:40 a.m. – Greece’s coast guard says it has rescued 542 people in 12 search and rescue incidents from Thursday morning to Friday morning. The rescues occurred off the coasts of the eastern Aegean islands of Lesbos, Chios, Samos, Agathonissi and Farmakonissi, the coast guard said. Hundreds of thousands of people fleeing war and poverty in their homelands have reached Greece so far this year, the vast majority on rickety boats or cheap inflatable dinghies from the nearby Turkish coast. Although a short sea journey, it can be fatal as the unseaworthy and overloaded boats sometimes sink.

9:30 a.m. – Greece’s coast guard says a wooden boat carrying a large number of refugees or other migrants has run aground on the small eastern Aegean island of Leros, while an infant died after the inflatable dinghy he was in partially sank off the coast of Lesbos island. The wooden boat, carrying about 100 people, ran aground Friday on the northeast coast of Leros, the coast guard said. Those on board were being taken to shore by coast guard and private vessels that arrived to help. In the Lesbos incident, the coast guard rescued 56 people from the sea Thursday night after the rear part of their dinghy burst, partially sinking the boat. A 1-year-old boy was recovered unconscious and transported to a hospital, but rescuers were unable to revive him.

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And so does this. No humanity, no shame, no decency.

Baby Dies After Migrant Boat Breaks Down Off Greek Island Lesbos (Reuters)

A baby died after the rubber boat carrying him and another 56 migrants broke down and was left adrift off the Greek island of Lesbos, the Greek coastguard said on Friday. The 1-year-old boy, whose nationality was not made known, was found unconscious on a rubber dinghy which had broken down and went adrift late on Thursday. The boy was taken to a hospital where he was pronounced dead. The coastguard rescued the rest of the migrants, some of whom were in the sea. The baby was one of thousands of refugees – mostly fleeing war-torn Syria, Afghanistan and Iraq – who attempt the short but perilous crossing from the Turkish coast to Greek islands by boat, often in rough seas.

Almost 400,000 people have arrived in Greece this year, the U.N. refugee agency UNHCR has said, overwhelming the crisis-stricken government’s ability to cope. Most have rapidly headed north towards Germany. The coastguard has rescued a total of 542 migrants and refugees off the Aegean islands of Lesbos, Chios, Samos, Farmakonisi and Agathonisi since early on Thursday. Europe’s migration commissioner, Dimitris Avramopoulos, and Luxembourg Foreign Affairs Minister Jean Asselborn are expected in Athens on Friday and will give a joint news conference on the refugee crisis on Saturday.

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Oct 052015
 
 October 5, 2015  Posted by at 8:50 am Finance Tagged with: , , , , , , , , ,  


Jack Delano Cars being precooled at the ice plant, San Bernardino, CA 1943

Germany Now Expects Up To 1.5 Million Asylum Seekers In 2015 (Reuters)
Baby’s Body Washes Up On Greek Island Kos (AFP)
Two Children Drown Off Kos In Latest Refugee Tragedy (Kath.)
Caution: More Commodity Price Weakness Ahead (A. Gary Shilling)
Emerging Market Turmoil Flashes Warning Lights For Global Economy (FT)
Junk Bond Market Like A ‘Slow-Moving Train Wreck’ (CNBC)
Saudi Arabia Cuts Oil Prices Amid OPEC Price War (WSJ)
Russia PM Medvedev: Oil Prices Will Stay Low For Quite Long (WSJ)
China’s Middle-Class Dreams in Peril (WSJ)
Senior China Official Proposes Punitive FX Restrictions (Chang)
Volkswagen’s ‘Uniquely Awful’ Governance At Fault In Emissions Scandal (FT)
You Can Print Money, So Long As It’s Not For The People (Guardian)
Forest Fires In Indonesia Choke Much Of South-East Asia (Guardian)
Majority Of EU Nations Seek Opt-Out From Growing GMO Crops (Reuters)
How Monsanto Mobilized Academics to Pen Articles Supporting GMOs (Bloomberg)
Greece’s Euro Area Ties Risk More Strain Amid Refugee Crisis (Bloomberg)
EU And Turkey To Discuss Plan To Stem Flow Of Migrants (Reuters)
Hamburg, Bremen To Seize Commercial Property To House Refugees (BBC)

The estimate just doubled in two weeks time.

Germany Now Expects Up To 1.5 Million Asylum Seekers In 2015 (Reuters)

German authorities expect up to 1.5 million asylum seekers to arrive in Germany this year, the Bild daily said in a report to be published on Monday, up from a previous estimate of 800,000 to 1 million. Germany’s top-selling newspaper cited an internal forecast from authorities that it said had been classed as confidential. Many of the hundreds of thousands of people pouring into Europe to escape conflicts and poverty in the Middle East, Africa and beyond have said they are heading to Germany, Europe’s largest economy. Bild said the German authorities were concerned about the risk of a “breakdown of provisions” and that they were already struggling to procure enough living containers and sanitary facilities for the new arrivals. “Migratory pressures will increase further. We now expect seven to ten thousand illegal border crossings every day in the fourth quarter,” Bild cited the report as saying.

“This high number of asylum seekers runs the risk of becoming an extreme burden for the states and municipalities,” the report said. The authorities’ report also cited concerns that those who are granted asylum will bring their families over to Germany too, Bild said. Given family structures in the Middle East, this would mean each individual from that region who is granted asylum bringing an average of four to eight family members over to Germany in due course, Bild quoted the report as saying. German Finance Minister Wolfgang Schaeuble said on Sunday Europe needs to restrict the number of people coming to the continent. Chancellor Angela Merkel, who said Germany would grant asylum to those fleeing Syria’s civil war, has recently seen her popularity ratings slump to a four-year low.

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Give this baby the Nobel Peace Prize, not Merkel, who let it drown.

Baby’s Body Washes Up On Greek Island Kos

The decomposed body of a baby has been found on the shore of Greece’s Kos island, which is on the frontline of the asylum seeker influx coming from Turkey. The body of the baby boy, estimated to be 6 to 12 months old, was found dressed in green trousers and a white t-shirt on the beach of a hotel, the Greek coast guard said. Authorities believe the child was a member of an asylum seeker family that tried to reach Kos in a dinghy, according to local media reports. The body was transferred to Kos General Hospital for an autopsy. The grim discovery recalls the case of three-year-old Syrian boy Aylan Kurdi, whose body was found face down on a Turkish beach last month.

Pictures of the lifeless body of the Syrian toddler face down on a Turkish beach shocked the world and helped spur European nations to seek an effective response to the growing asylum seeker crisis. The Greek Coast Guard continues the grim job of recovering bodies from the sea and the shores of its islands, fearing that things will only get worse as winter approaches and the weather deteriorates. In September, at least 15 babies and children drowned when their overcrowded boat capsized in high winds off the Aegean island of Farmakonisi. [..] Nearly 3,000 others have died or disappeared during the crossing.

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Daily events.

Two Children Drown Off Kos In Latest Refugee Tragedy (Kath.)

The Greek coast guard has found the bodies of two children off the eastern Aegean island of Kos, which has been a main point of entry for refugees and migrants this year. Authorities said one of the dead children was aged between 6 and 12 months. The other is thought to be between three and five years old. Their nationalities were not immediately known. Last week the UN Refugee Agency (UNHCR) said that at least 102 people have died trying to reach Greece by sea this year. At least 3,000 have died in the Mediterranean as a whole. The UNHCR said on Friday that a total of 396,500 people have entered Greece by sea since January 1, more than 153,000 of them in September.

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“Prepare for further big declines.”

Caution: More Commodity Price Weakness Ahead (A. Gary Shilling)

It’s hard not to notice that commodity prices have been plummeting. It seems the price of everything that is grown or pulled out of the ground – from oil and gas to sugar and copper – has declined 46% since early 2011, causing bankruptcies and industry consolidation. Prepare for further big declines. Directly or indirectly, developed countries consume most commodities. Yet economic growth and demand for commodity-based products remain weak as North America and Europe continue to unwind their financial excesses. The earlier rapid expansion of debt, which helped fuel robust growth, is being reversed. US real GDP has risen at just a 2.2% annual rate since the business recovery began in mid-2009 – about half the rate you’d expect after a recession.

The euro area is limping along at a 1.2% annual growth rate, with recovery from the 2007-2009 recession interrupted by a mild downturn in 2011-2013. Economic gains in Japan’s stop-go economy have averaged only 1%. The world is now eight years into a deleveraging cycle. At this rate, it will probably take more than the historical average of 10 years to complete. Meanwhile, supplies of almost every commodity are huge and growing. China joined the World Trade Organization in late 2001 and, not by coincidence, commodity prices took off in early 2002. As manufacturing shifted from North America and Europe to China, it sucked up global commodity output. From 2000 to 2014, China’s share of global copper consumption leaped to 43% from 12%. China’s portion of iron ore purchases similarly zoomed to 43% from 16%, while aluminum went to 47% from 13%.

By the mid-2000s, industrial commodity producers were dazzled by China’s seemingly insatiable demand and made the same big mistake that always occurs in every economic cycle: They assumed surging demand from China would last indefinitely. Producers embarked on massive projects that often take a decade to complete. These included digging copper mines in Latin America, removing iron ore in Brazil and producing coal in Australia. All that new capacity began to come onstream in 2011, just as it became clear that the hoped-for post-recession return to rapid global economic growth wasn’t occurring. [..] But muted demand in North America and Europe for Chinese exports has slowed economic growth in China. Meanwhile, over-investment in ghost cities and building of excess infrastructure, in which China engaged to create jobs, has spawned huge debts. I estimate that the true rate of inflation-adjusted growth in China is about 3% to 4%, half the 7% official number.

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“The impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent..”

Emerging Market Turmoil Flashes Warning Lights For Global Economy (FT)

Emerging economies risk “leading the world economy into a slump”, with lower growth and a rout in financial markets, according to the latest Brookings Institution-FT tracking index. Released ahead of the annual meetings of the IMF and World Bank in Lima, Peru, the index paints a much more pessimistic outlook than the fund is likely to predict later this week. According to Eswar Prasad of Brookings, weak economic data across most poorer economies has created “a dangerous combination of divergent growth patterns, deficient demand, and deflationary risks”. Christine Lagarde, IMF managing director, said last week that the global economic patterns were “disappointing and uneven” with weaker growth than last year and the forecasts published on Tuesday showing only a “modest acceleration expected in 2016”.

The fund’s reasonably sanguine view stems from an expectation that China will succeed in transforming its economy slowly from investment and manufacturing towards consumption and services. By contrast, the Brookings-FT index, which summarises the latest figures, suggests the downturn is more serious alongside “sharp divergences in growth prospects between the advanced economies and emerging markets, and within these groups as well”. The Tiger index — Tracking Indices for the Global Economic Recovery — shows how measures of real activity, financial markets and investor confidence compare with their historical averages in the global economy and within each country.

The extreme weakness in the emerging market component of the Tiger growth index shows that data releases have been significantly weaker than their historic averages. Divergence is almost as important as a new trend highlighted in the index, however, with India emerging as a bright spot and commodity importers such as Brazil and Russia mired in recession. Because emerging economies are now much more important in the global economy and growth rates are still higher than their developed counterparts, global growth is still hovering around 3%, close to its long-term average. The concern, according to Mr Prasad is that the slump in emerging economies’ confidence will infect advanced economies in the months ahead.

[..] there are increasing concerns that monetary policy has become ineffective in providing the necessary boost, Mr Prasad said. “The impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent, especially when it is acting in isolation and when a large number of countries are resorting to the same limited playbook”, he said.

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“Contopoulos contended that the problem is much bigger than retail cash leaving the junk bond market. “This is fundamentals, and that actually, I would argue, is much worse, because it takes it from a technical story to a fundamental story.”

Junk Bond Market Like A ‘Slow-Moving Train Wreck’ (CNBC)

Billionaire investor Carl Icahn has long warned about the dangers of the high-yield market. Now, those sentiments are being echoed by a top strategist at a major bank who called the market for riskier bonds a “slow-moving train wreck.” In an interview on CNBC’s “Fast Money,” Michael Contopoulos, head of high-yield strategy at Bank of America, called high yield credit a “big, big problem,” and laid out the reasons why a turn in the credit cycle is currently underway. The dramatic rout of commodity prices is having a spillover effect on corporate bonds, especially those linked to energy. Last week, ratings agency Standard & Poor’s said the speculative-grade corporate default rate jumped to 2.5% in September, its highest level since 2013.

That figure is expected to rise to nearly 3% by the middle of next year, S&P added. “You’re going to see defaults pick up,” Contopoulos said. “This isn’t just a commodity story, this isn’t just metals and mining and energy. It’s broader than that. And the fundamentals are as poor as we have seen them.” The iShares High Yield Corporate Bond ETF has dropped nearly 5% in the past month, and is down more than 10% so far this year. On Friday, the ETF hit a 52-week low on an intraday basis. The lower oil prices go, the more stress is being placed on the high-yield bond sector. Evidence is mounting that the outlook is unlikely to improve anytime soon. Last week, ratings firm Moody’s said its high-yield Liquidity Stress Index fell in September amid a rash of energy company downgrades.

Meanwhile, in a recent note, Contopoulos wrote that 50% of sectors in Bank of America’s high-yield index have had negative price returns for the past five months in a row. “That’s the longest such streak since late 2008,” he said. A large part of the weakness over that period, he said, can be attributed to the end of the Fed’s quantitative easing program. The excess liquidity from the Fed’s massive bond buying and super-low interest rates “have created an environment where high yield corporates have been able to gather funding at incredibly cheap levels,” Contopoulos said. “At some point, unless you have meaningful earnings, you can’t sustain incredibly high leverage indefinitely.”

Since the Fed started tapering its bond purchases, Contopoulos said about $30 billion has flowed out of the high yield bond market. “Many of the weak hands have already been flushed out to the market, but that doesn’t mean that you can’t still have price loss,” he said. However, Contopoulos contended that the problem is much bigger than retail cash leaving the junk bond market. “This is fundamentals, and that actually, I would argue, is much worse, because it takes it from a technical story to a fundamental story.”

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Wars are expensive.

Saudi Arabia Cuts Oil Prices Amid OPEC Price War (WSJ)

Saudi Arabia on Sunday made deep reductions to the prices it charges for its oil, hard on the heels of cuts last month by rival producers in the Gulf. With U.S. production still increasing despite lower oil prices, members of the Organization of the Petroleum Exporting Countries are battling to keep their share of the last growing markets in Asia. In a list of official prices sent to customers, state-oil company Saudi Aramco cut the price of its light-crude deliveries to Asia by $1.7 a barrel. As a result, it switched to a discount of $1.6 a barrel against the rival Dubai benchmark from a premium of 10 cents a barrel previously. The company also cut its prices for heavy oil by $2 a barrel to the Far East and by 30 cents a barrel to the U.S.

The move come as Iran, Iraq and other countries in the Middie East made deeper cuts in their official prices than Saudi Arabia last month. Saudi Arabia has vowed to keep pumping at high levels as it hopes lower oil prices will stimulate Asian demand and hit rival production in the U.S. that is expensive to produce. But while Chinese economic growth is slowing, U.S. production rose by about 68,000 barrels a day in July, according to the U.S. Energy Information Administration.

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Realism.

Russia PM Medvedev: Oil Prices Will Stay Low For Quite Long (WSJ)

Russia should seek alternative sources for economic growth as its previous driver, oil prices, will stay at low levels for a long time, the Russian Prime Minister said Friday. “Because of prices for oil, that are likely to stay close to current levels for quite a long time, we will need to refocus the economy from commodities to other growth drivers as soon as possible,” Dmitry Medvedev said. As Russia’s economy has slid into recession for the first time since 2009 due to a drop in oil prices and Western sanctions, Moscow has started looking for ways to limit the economic and financial crisis. The consensus is that Russia’s oil-dependent economy needs diversification, but the idea lacks real initiatives and tools.

Speaking to state officials and top businessmen at an investment forum in the Black Sea town of Sochi, Mr. Medvedev reiterated that Russia needs to improve its business climate and work on import substitution. “Russia’s business climate leaves much to be desired. And unless we change it drastically, we will lose investment, revenue, pace of economic growth and our intellectual potential,” Mr. Medvedev said. He also said there has already been some import substitution in particular investment projects, referring to Moscow’s ban on food from states that imposed sanctions against Russia. Mr. Medvedev added that Russia shouldn’t impose a total ban on imports as it would fuel inflation and result in lower competition on the domestic market.

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The model has died.

China’s Middle-Class Dreams in Peril (WSJ)

Xinxiang, China—In this city of almost 6 million people, a successful English-language school illustrates the aspirations of an emerging middle class. Deng Yi’ou, its 38-year-old owner, owns a house and car, and her school is flourishing as more parents pay 650 yuan (around $100) a month for afternoon English classes for their children. “Parents all over China have the same dream, even in smaller cities like Xinxiang. They want their children to have a good education, a better future, see them become richer than they are,” said Ms. Deng, who is saving to buy a second, larger house. Xinxiang, originally a small market town that traces its roots back more than 1,000 years, is one of 1,600 smaller cities on the cusp of the economic transformation China is attempting. If it is to succeed, the ability of people like Ms. Deng to spend is crucial.

On the one hand, Xinxiang embodies the promise and potential for growth that still propels the Chinese economy, even in slowdown, with the spending power of millions waiting to be unlocked. But the perils of previous excesses are also more evident here: There is too much debt, too many factories and too many vacant apartments. Like many Chinese cities, Xinxiang built industrial parks, ornate bridges and six-lane roads during China’s boom years. Another mark of its furious pace of growth: In the May, Xinxiang was ranked as the city with the most polluted air in Henan province. The idea, widely embraced, was that its growth would turn its residents into stronger consumers. “Smart home, enjoy life,” says one of the hundreds of billboards trying to sell real estate by evoking the good life with images of designer bags, gold coins and wine bottles.

Even outside China, investors are keeping an eye on lower-tier Chinese cities as markets in Beijing and Shanghai become saturated. A key focus for U.S. companies hoping to lift sales of everything from shampoo to cars are the more than 74 million households poised to earn more than 9,000 yuan a month, according to consultancy McKinsey & Co., many of them in cities like Xinxiang. And many here have indeed ramped up their consumption. Now, however, Xinxiang’s growth is slowing: The city’s economy expanded 5.1% in the first half of 2015, down from 9.8% a year earlier. Residential towers in various stages of construction spread out from its city center. A new development area has almost no traffic on roads abutting huge empty lots. Whether the city’s many empty industrial zones that have sprung up over the last dozen years, some the size of small airports, will ever be filled is now an open question.

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With present outflows, what options does Beijing have left?

Senior China Official Proposes Punitive FX Restrictions (Chang)

Yi Gang, writing in China Finance, has just proposed that China impose a Tobin tax, specifically, a punitive levy on forex trades and “handling” fees to discourage currency trading. Most analysts think Beijing will not adopt such draconian measures, but the call for them, by a deputy governor of the People’s Bank of China in its official magazine, is bound to further shake confidence in China’s management of its currency and trigger even greater outflows of capital. Yi is obviously partial to the tax. He proposed its imposition about a year ago, when the renminbi appeared strong. Nobody, therefore, paid attention. Now, the currency is weak, and his endorsement of strict measures, in an article titled “Direction for the Reforms and Liberalization of Foreign-Exchange Management,” is significant.

At the moment, the Chinese currency, also informally known as the yuan, is on a troubled path. On August 11, Beijing shocked global markets by devaluating it 1.9% against the dollar. In August, it fell 2.9% in the domestic market. Since the end of that month, the currency has strengthened 0.5%. The renminbi has apparently stabilized. So why the need for a Tobin tax, among the worst ideas ever proposed by a Nobel laureate? The PBOC, the central bank, has been selling dollars at an unprecedented rate to support its money. The country’s foreign exchange reserves, as reported by the State Administration of Foreign Exchange, fell by a record $93.9 billion in August. That number, as large as it is, could be an underreporting. Some had thought the reserves in fact fell by $150 billion that month.

In any event, China at one point was spending about $20 billion a day defending the yuan, and it is no surprise the burn rate was that high. Beijing was not only intervening in the onshore renminbi market—something it had been doing for decades—but for the first time was intervening in offshore markets. Assuming no inflows of cash, China will exhaust its foreign reserves in a year at the current rate of intervention. There will be inflows, but on the other side of the ledger burn rates skyrocket as crises progress. No one expects Beijing will allow the current crisis to exhaust its reserves, so it will undoubtedly impose measures to halt the outflow of cash. In fact, it has already started.

A month ago, the central bank required financial institutions to set aside a reserve, for a year at no interest, equal to 20% of renminbi forward and swap contracts as well as a 10% reserve for options. Moreover, just a little over a month ago SAFE, which Yi Gang heads, ordered banks to scrutinize currency trading. One result of the edict is that bank branches now must obtain approval from their Beijing headquarters for purchases of foreign currencies in amounts over $1 million. Last week, the central bank turned its attention to UnionPay cards, imposing limitations on withdrawals of cash outside China. Now, a cardholder can take out only a total of 50,000 yuan ($7,854) in the last three months of this year and 100,000 yuan next year. UnionPay processes virtually all card transactions in China..

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Time for Merkel to stand up. But she’s notoriously slow to do that.

Volkswagen’s ‘Uniquely Awful’ Governance At Fault In Emissions Scandal (FT)

Volkswagen’s decision to nominate a long-serving executive as chairman has once more highlighted the carmaker’s corporate governance and culture, which some experts argue were a root cause of the diesel-emissions scandal. Top directors on Thursday announced that Hans-Dieter Pötsch, VW’s chief financial officer since 2003, would become chairman in the coming weeks, filling the spot vacated by patriarch Ferdinand PiIch, who resigned in April. Hans-Christoph Hirt, a director of Hermes Equity Ownership Services, an adviser to pension fund investors in companies including VW, said the appointment created a “serious conflict of interest”. “[Potsch] was a key VW executive for more than a decade and under German law the management board has a collective responsibility … The lawyers will surely demand that he recuse himself from any supervisory board meetings when management’s role is discussed,” Mr Hirt said.

VW’s response has been compared with the way Siemens dealt with a huge bribery scandal in 2006. For the first time in its 150-year history the German engineering conglomerate appointed an outside chairman (Gerhard Cromme from ThyssenKrupp) and chief executive (Peter Loscher from Merck in the US). Together they transformed Siemens’ culture and Mr Cromme took legal action against former Siemens executives for not stopping the bribery. “How is Mr Pötsch supposed to do that?” said Mr Hirt. VW has admitted installing software in engines over several years so they passed laboratory emission tests but belched out dangerous nitrogen oxides when on the road. Martin Winterkorn resigned last month as chief executive, insisting he knew nothing of the cheating, which analysts fear could cost VW billions of euros in fines, lawsuits and recall costs.

[..] governance experts argue the cheating was predictable because of VW’s lax boardroom controls and peculiar corporate culture. “The scandal clearly also has to do with structural issues at VW …There have been warnings about VW’s corporate governance for years, but they didn’t take it to heart and now you see the result,” says Alexander Juschus, director at IVOX, the German proxy adviser. Even before the diesel scandal, VW’s shares traded at a discount to other carmakers partly because of governance concerns. A former chairman of a large German industrial company says “Germany has corporate governance problems but VW has long been uniquely awful”.

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“..we do have a magic money tree, it’s called the Bank of England”

You Can Print Money, So Long As It’s Not For The People (Guardian)

In its broadest sense, the phrase “there’s no magic money tree” is just a variation on “money doesn’t grow on trees”, a thing you say to children to indicate that wealth comes not from the beneficence of a magical universe, but from hard graft in a corporeal reality. The pedantic child might point to the discrepant amounts of work required to yield a given amount of money, and say that its value is a social construction. Over time, that loose, rather weak-minded meaning has ceded to a specific economic critique; Jeremy Corbyn – along with anyone who challenges the prevailing fiscal narrative – is dangerous and wrong, since he wants to print money. Money cannot be created from nowhere, because there’s no magic money tree. End of. The flaw in that argument is that all money is created from nowhere.

In normal circumstances, it is created from nowhere as credit, by private banks, and lent to us, usually (85% of the time) in the form of a mortgage on an existing residential property. Decades of credit extension have perverted the housing market to turn a mortgage into a lifetime’s bonded servitude. The economists Jordá, Schularick and Taylor argued convincingly last year that the causes of this economic crisis, the next and the one before are all, fundamentally, the extension of credit and its impact on house prices. So the magic money tree isn’t gushing cash in a socially responsible fashion (if it were used responsibly, it wouldn’t be magic) but the idea that we have a centrally planned, carefully stewarded monetary policy, with finite creation and demonstrable long-term aims, which some loonie leftie wants to come along and unravel, is simply wrong.

In abnormal circumstances, such as the ones we’ve lived through since the financial crisis, central banks are also magic money trees. In the bizarre construction of current economic orthodoxy, you’re not allowed to say so, even though the Bank of England has created £375bn in quantitative easing (QE); the Fed bought $1.25tn worth of mortgage-backed securities in its first round of QE; the ECB had as a core principle that it couldn’t create money until, suddenly, in awesome amounts, it could; the Bank of Korea has a stimulus package, as does the People’s Bank of China; and Japan started it. Central banks typically justify money creation on the basis that it’s temporary, it’s unfortunate, it’s driven by the crisis and it will ultimately get back to normal.

None of that alters the fact that no bank had that money in savings. I recently said out loud, “we do have a magic money tree, it’s called the Bank of England” in a Newsnight debate with a former adviser to Blair, John McTernan. He made a face like a politician accidentally talking to a member of the public but what the camera didn’t catch was Evan Davis, who stuck his tongue out, like a cat taking a pill. It was days ago, and people are still tweeting me pictures of the Zimbabwean dollar and the Weimar Republic, saying “is this what you want? IS IT?”

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Mankind at its best.

Forest Fires In Indonesia Choke Much Of South-East Asia (Guardian)

The illegal burning of forests and agricultural land across Indonesia has blanketed much of south-east Asia in an acrid haze, leading to one of the most severe regional shutdowns in years. Malaysian PM Najib Razak said Indonesia needs to convict plantation companies for the noxious smoke, created by the annual destruction of plants during the dry season. Burning the land is a quick way to ready the soil for new seed. “We want Indonesia to take action,” he was quoted as saying by the state news agency Bernama, adding the smog was affecting the economy. “Indonesia alone can gather evidence and convict the companies concerned.” In Singapore, races for the FINA swimming world cup were cancelled on Saturday. A marathon in Malaysia on Sunday was also abandoned and all schools were closed on Monday and Tuesday.

Tens of thousands of people in Indonesia and Malaysia have sought medical treatment for respiratory problems. The annual burning is decades old and Indonesia has faced mounting pressure to end the practice. Scientists say the pollution could surpass 1997 levels when the haze created an environmental disaster that cost an estimated US$9 billion in damage. “If the forecasts for a longer dry season hold, this suggests 2015 will rank among the most severe events on record,” said Robert Field, a Columbia University scientist based at NASA’s Goddard Institute for Space Studies. In Singapore, news websites post near-hourly updates on the danger of being outside. Some shops were providing free masks for children and elderly people.

The National Environment Agency in Singapore said Monday’s haze will enter the “unhealthy range”. “Healthy persons should reduce prolonged or strenuous outdoor physical exertion … Persons who are not feeling well, especially the elderly and children, and those with chronic heart or lung conditions, should seek medical attention,” it said.

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Just make it EU-wide then. You’re talking 2/3 of all countries.

Majority Of EU Nations Seek Opt-Out From Growing GMO Crops (Reuters)

Nineteen EU member states have requested opt-outs for all or part of their territory from cultivation of a Monsanto genetically-modified crop, which is authorised to be grown in the EU, the European Commission said on Sunday. Under a law signed in March, individual countries can seek exclusion from any approval request for genetically modified cultivation across the 28-nation EU. The law was introduced to end years of stalemate as genetically modified crops divide opinion in Europe. Although widely grown in the Americas and Asia, public opposition is strong in Europe and environmentalists have raised concerns about the impact on biodiversity. Commission spokesman Enrico Brivio on Sunday confirmed in an email the Commission had received 19 opt-out requests following the expiry of a deadline on Saturday.

The requests are for opt-outs from the approval of Monsanto’s GM maize MON 810, the only crop commercially cultivated in the EU, or for pending applications, of which there are eight so far, the Commission said. The requests have been or are being communicated to the companies, which have a month to react. Under the new law, the European Commission is responsible for approvals, but requests to be excluded also have to be submitted to the company making the application. In response to the first exclusion requests in August from Latvia and Greece, Monsanto said it was abiding by them, even though it regarded them as unscientific.

The new EU law has critics from both sides. The industry has said it breaks rules on free movement, while environment campaigners say it is a weak compromise open to court challenges from biotech companies. The Commission spokesman said the number of requests proved that the new law provides “a necessary legal framework to a complex issue”. The 19 requests are from Austria, Belgium for the Wallonia region, Britain for Scotland, Wales and Northern Ireland, Bulgaria, Croatia, Cyprus, Denmark, France, Germany (except for research), Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland and Slovenia.

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You don’t have to be smart to be a scientist.

How Monsanto Mobilized Academics to Pen Articles Supporting GMOs (Bloomberg)

Monsanto’s undisclosed recruitment of scientists from Harvard University, Cornell University and three other schools to write about the benefits of plant biotechnology is drawing fire from opponents. The company’s role isn’t noted in the series of articles published in December by the Genetic Literacy Project, a nonprofit group that says its mission is “to disentangle science from ideology.” The group said that such a disclosure isn’t necessary because the the company didn’t pay the authors and wasn’t involved in writing or editing the articles. Monsanto says it’s in regular contact with public-sector scientists as it tries to “elevate” public dialog on genetically modified organisms, or GMOs.

U.S. Right to Know, a nonprofit group funded by the Organic Consumers Association that obtained e-mails under the Freedom of Information Act, says correspondence revealing Monsanto’s actions shows the “corporate control of science and how compliant some academics are.” The articles have become the latest flashpoint in an information war being waged over plant biotechnology by its supporters, who sometimes have corporate funding, and its opponents, some of whom are funded by the fast-growing organic food industry. The challenge for the pro-GMO lobby is the yawning gulf between scientific consensus and public perception. A Pew Research Center poll in January found 88% of scientists believed GMOs to be “generally safe” versus 37% of U.S. adults.

That gap was the widest among 13 questions asked by Pew, surpassing divides on climate change and evolution. The articles in question appeared on the Genetic Literacy Project’s website in a series called “GMO – Beyond the Science.” Eric Sachs, who leads Monsanto’s scientific outreach, wrote to eight scientists to pen a series of briefs aimed at influencing “public policy, GM crop regulation and consumer acceptance.” Five of them obliged. “I need to step aside so I don’t compromise the project,” Sachs said in an Aug. 8, 2013, e-mail obtained by U.S. Right to Know. He suggested specific topics for each scientist before turning the project over to CMA Consulting, a public relations firm paid by Monsanto. “I am keenly aware that your independence and reputations must be protected,” Sachs wrote.

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EU tries to blame refugee crisis on Greece too.

Greece’s Euro Area Ties Risk More Strain Amid Refugee Crisis (Bloomberg)

First overwhelmed by debt and now overwhelmed by refugees, Greece offers a tempting target for European leaders left to handle the fallout. With wounds only just healing after the euro area agreed to throw Greece another financial lifeline, the country’s inability to process tens of thousands of refugees turning up at its doorstep threatens to reopen them all over again. Local Greek authorities are inundated by some 3,000 arrivals a day, most of whom are allowed to head north through the Balkans toward Germany and Scandinavia, sewing political tensions as they go. Patience is already thin after years subsidizing the Greek economy and months of chaotic bailout talks this year, so EU leaders haven’t had far to look to find a scapegoat for their latest emergency.

The risk is that by vilifying the Greek authorities, EU officials may jeopardize the fragile political settlement that is the foundation for the country’s economic recovery and continued membership in the euro. “There are very low levels of trust and a lot of baggage,” said Mark Leonard, director of the European Council on Foreign Relations in London. “It’s inevitable that when you have so many major crises going on at the same time with the same cast of characters you will get read-across from one crisis to the other.” Finance ministers of the euro area’s 19 economies gather in Luxembourg on Monday for the first time since Alexis Tsipras’s September election victory, and are due to pick over the 48 milestones Greece needs to meet to qualify for its next bailout payouts.

For all his railing against the European establishment, Tsipras is the first Greek leader to win re-election after signing a bailout deal. With all eyes on his Syriza-led government’s efforts to stick to the reform path, the unprecedented refugee crisis adds another layer of uncertainty. Greece finds itself the first EU port of call for people fleeing war and civil strife from countries such as Syria, many of whom pay traffickers to take them across the short sea passage from the Turkish coast to one of the Greek islands sprinkled throughout the Aegean Sea. Greece, which also shares a land border with Turkey, has seen almost 400,000 migrants arrive by sea in 2015 compared to 43,500 in the whole of 2014, the Office of the United Nations High Commissioner for Refugees said on Friday.

The Syriza government’s inability to cope with the sheer numbers involved “will only provide further fodder to its critics, as well as increase the pressure for the government to deliver on reforms or die,” said Dimitrios Triantaphyllou, chairman of the department of international relations at Kadir Has University in Istanbul. “Greece’s image as a functioning state has already hit rock bottom.”

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Leave them all in Turkey? if they had wanted that, wouldn’t they have stayed to begin with?

EU And Turkey To Discuss Plan To Stem Flow Of Migrants (Reuters)

The European Commission has worked out an action plan with Turkey to stem the flow of refugees to Europe, a German newspaper cited sources in the Commission and the German government as saying on Sunday. Frankfurter Allgemeine Sonntagszeitung said that according to the plan, Turkey would be obliged to better protect its border with Greece – a frontier that many migrants have crossed on perilous boat journeys. It said the Turkish and Greek coastguards would work together to patrol the eastern Aegean, coordinated by Frontex, the European Union’s border control agency, and send all refugees back to Turkey. In Turkey, six new refugee camps for up to two million people which would be set up, partly financed by the EU, the newspaper said.

The EU states would commit to taking some of the refugees so that up to half a million people could be relocated to Europe without having to use traffickers or take the dangerous journey across the Mediterranean, the newspaper said. It said the Commission and representatives had agreed on this plan last week and that EC President Jean-Claude Juncker also coordinated on this with German Chancellor Angela Merkel and French President Francois Hollande. Turkish President Tayyip Erdogan is due to meet with Juncker on Monday.

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Most cities will do this; no choice.

Hamburg, Bremen To Seize Commercial Property To House Refugees (BBC)

Hamburg has become the first German city to pass a law allowing the seizure of empty commercial properties in order to house migrants. The influx of migrants has put pressure on the authorities of the northern city to find accommodation. Some migrants are sleeping rough outdoors. Hamburg’s law takes effect next week. In a separate development, prosecutors filed charges of inciting racial hatred against a co-founder of the anti-Islamic Pegida movement. The prosecutors in the eastern city of Dresden said they acted after Lutz Bachmann had on Facebook described asylum seekers “trash” and “animals”. Pegida (Patriotic Europeans Against the Islamisation of the Occident) members have staged a number of rallies in recent months, attracting tens of thousands of people.

Meanwhile, a new survey by broadcaster ARD said 51% of people admitted the influx of migrants scared them. It suggests a four-year low in Chancellor Angela Merkel’s popularity. She has said Germany can accommodate migrants who have genuinely fled war or persecution – a humanitarian gesture towards the many thousands risking their lives to reach Europe this year. But many politicians – including her conservative Bavarian CSU allies and various EU partners – have criticised the open-door policy. Hamburg’s new law is described as a temporary, emergency measure. Owners of empty commercial properties will be compensated. The law does not include residential properties. The authorities in Bremen, a city just west of Hamburg, are considering passing a similar law. Germany expects to host at least 800,000 asylum seekers this year – about four times the number it had last year.

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