Sep 232016
 
 September 23, 2016  Posted by at 8:05 am Finance Tagged with: , , , , , , , , ,  


Harris&Ewing “Slaves reunion DC. Ages: 100, 104, 103; Rev. Simon P. Drew, born free.” 1921

World Trade Grinds Lower, Hits 2014 Levels (WS)
‘When I Think Of Central Banks, I Think Of Alchemists’: Marc Faber (CNBC)
Central Bankers Are The Arsonists That Create The Fire: Bill Fleckenstein (ZH)
Bad Debts In Chinese Banking System 10 Times Higher Than Admitted: Fitch (AEP)
The Coming Wave of Defaults Will Be Devastating (CH Smith)
Time to ‘Be Alarmed’ about Emerging Market Debt: UN (DQ)
The Ted Spread Is Dead, Baby. The Ted Spread Is Dead (WSJ)
UK Councils ‘Building Up Dangerous Levels Of Debt And Risk’ (Ind.)
You’re Not as Rich as You Think (Satyajit Das)
Deutsche Bank Woes Sparks Concern Among German Lawmakers (BBG)
Regulators Expect Monte Dei Paschi To Ask Italy For Help (R.)
How Does A 60% Increase In NYC Homelessness Constitute A Recovery? (ZH)
Pope Francis: Journalism Based On Gossip And Lies Is A Form Of Terrorism (G.)
Indigenous Australians The Oldest Living Culture; It’s In Our Dreamtime (G.)

 

 

Rising health care costs prop up US GDP. We all know that’s not a good thing.

World Trade Grinds Lower, Hits 2014 Levels (WS)

World trade in merchandise is a reflection of the global goods-producing economy. And it just can’t catch a break. The CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just released the preliminary data of its Merchandise World Trade Monitor for July. The index fell 1.1% from June to 113.4, the lowest since May 2015 – a level it had first reached on the way up it in September 2014. The chart shows that merchandise world trade isn’t falling off a cliff, as it had done during the financial crisis, when global supply chains suddenly froze up. But it’s on a slow volatile grind lower. And compared to the fanciful growth after the Financial Crisis, it looks outright dismal:

This time – after the big adjustment in values months ago – we have another statistical note. In this data release, the CPB shifted the base year of the series from 2005 to 2010, so the values of the entire index shifted down. Hopefully, the change made the series more representative of reality – because getting a good grip on reality these days is really hard, when entire data systems are carefully designed to conceal more than they reveal (such as the official inflation data). The decline in trade was sharper in the emerging economies than the advanced economies. That makes sense: The US, on whose demand the health of the entire world economy seems to depend, experienced falling imports in July, according to the data.

Data point after data point document that the goods-based economy in the US is in trouble – manufacturing, wholesale, retail… nothing is firing on all or even most cylinders. But the service-based economy is not doing all that badly. Its biggest sector – and the biggest sector overall in the US – healthcare, is doing quite well, actually. Among the health-care companies in the S&P 500, revenues rose 5.2% in the second quarter, year over year, when revenues for all S&P 500 companies fell 3.1%. Revenues rose not because people are getting more health care; they rose because health care has been getting more expensive at a breath-taking pace for many years as the industry has been consolidating into oligopolies and as outrageous prices increases on pharmaceutical products regularly grace the headlines.

Read more …

“They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed..”

‘When I Think Of Central Banks, I Think Of Alchemists’: Marc Faber (CNBC)

Central bankers trying to spur growth are like alchemists trying to make gold and they’re just as likely to fail, said Marc Faber, the publisher of the Gloom, Boom & Doom report. “When I think of central banks, I think of alchemists,” Faber, also known as Dr. Doom for his pessimistic views, told CNBC’s “Squawk Box” on Thursday. “They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed,” he said, although he noted that some alchemists did produce other useful chemicals during their ill-fated search for the precious metal. “But the central banks are just mixing water, in other words, paper money, and the results cannot be a favourable outcome in the long run.”

Faber noted that from the 1970s to the mid-1980s, people believed inflation was “forever,” but now the same central banks that were fighting inflation were now fighting deflation. This fight was a mistake, he said, claiming that across Asia, price rises were exceeding income gains. “It’s possible that suddenly inflationary pressures will be there, that central banks should then act but they cannot because the system is so overleveraged,” he said. At the same time, Faber noted that the low and negative interest rates globally were hurting pension funds. “Pension funds, even in these beautiful years of returns, 2009 to today, they have become less funded, they have become more underfunded,” he said. “With interest rates at zero and this low, their portion that’s in bonds is never going to meet the expected returns of 7.5%. It’s physically not possible.”

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Alchemists and arsonists.

Central Bankers Are The Arsonists That Create The Fire: Bill Fleckenstein (ZH)

Having been invited on to CNBC to discuss his views of the market, famous short-seller Bill Fleckenstein explained rather eloquently that QE4 is coming and people will wake up to the fact that central bankers “are the arsonists that create the fire, not the firemen that put it out.” This non-mainstream view was treated with disdain by CNBC host Tim Seymour who slammed Fleckenstein for “missing out” on the “artificial market’s” (because even CNBC now admits that’s what it is) gains. The response was epic. “Don’t be such a jerk… I don’t ask to come on this show, you invited me… and don’t get in my face because I won’t join your party…”

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A $2 trillion black hole.

Bad Debts In Chinese Banking System 10 Times Higher Than Admitted: Fitch (AEP)

Bad debts in the Chinese banking system are ten times higher than officially admitted, and rescue costs could reach a third of GDP within two years if the authorities let the crisis fester, Fitch Ratings has warned. The agency said the rate of non-performing loans (NPLs) has reached between 15pc and 21pc and is rising fast as the country delays serious reform, relying instead on a fresh burst of credit to put off the day of reckoning. It would cost up to $2.1 trillion to clean up this toxic legacy even if the state acted today, and much of this would inevitably land in the lap of the government. “There are already signs of stress that point to NPLs being much higher than official estimates (1.8pc), most obviously the increased frequency with which the banks are writing off or offloading loans,” it said.

The banks have been shuffling losses off their balance sheets through wealth management vehicles or by classifying them as interbank credit, seemingly with the collusion of the regulators. Loans are past 90 days overdue are not always deemed bad debts. “The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” said Fitch. Capital shortfalls are currently 11pc to 20pc of GDP, but this threatens to hit 33pc in a worst case scenario by the end of 2018. “Defaults in China could lead to mutual credit guarantees in the background pulling other firms into distress. A large increase in real defaults risks triggering a chain of bankruptcies that magnifies the potential for financial instability,” it said.

“Mid-tier banks have the weakest buffers, and are the most vulnerable to funding stress,” said the report, by Jonathan Cornish and Grace Wu. The damage eclipses losses during the global financial crisis in Britain and the US, where the direct costs of bank rescues were roughly 8pc of GDP. It would be closer to the trauma suffered by Ireland, Greece, and Cyprus when their banking systems collapsed, but on a vastly greater scale. The Chinese state has deep pockets but strains are mounting. Public debt has reached 55pc of GDP following the bail-out of local governments. This is now higher than among ‘A’ rated peers, mostly in the developing world. “Pressure on China’s sovereign rating could emerge if general government indebtedness were to rise significantly,” said the Fitch report.

China let rip with a fresh burst of credit growth from the middle of last year after a series of policy errors triggered a recession – with ‘Chinese characteristics’ – in early 2015. It ditched any serious effort to reform the economy and opted for stimulus as usual, cutting interest rates and the reserve requirement ratio. Credit reached 243pc of GDP by the end on last year, double the level in 2008. Banking system assets have grown by $21 trillion over that time, 1.3 times greater than the entire US commercial banking nexus.

Read more …

“Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.”

The Coming Wave of Defaults Will Be Devastating (CH Smith)

In an economy based on borrowing, i.e. credit a.k.a. debt, loan defaults and deleveraging (reducing leverage and debt loads) matter. Consider this chart of total credit in the U.S. Note that the relatively tiny decline in total credit in 2008 caused by subprime mortgage defaults (a.k.a. deleveraging) very nearly collapsed not just the U.S. financial system but the entire global financial system. Every credit boom is followed by a credit bust, as uncreditworthy borrowers and highly leveraged speculators inevitably default. Homeowners with 3% down payment mortgages default when one wage earner loses their job, companies that are sliding into bankruptcy default on their bonds, and so on. This is the normal healthy credit cycle.

Bad debt is like dead wood piling up in the forest. Eventually it starts choking off new growth, and Nature’s solution is a conflagration–a raging forest fire that turns all the dead wood into ash. The fire of defaults and deleveraging is the only way to open up new areas for future growth. Unfortunately, central banks have attempted to outlaw the healthy credit cycle. In effect, central banks have piled up dead wood (debt that will never be paid back) to the tops of the trees, and this is one fundamental reason why global growth is stagnant. The central banks put out the default/deleveraging forest fire in 2008 with a tsunami of cheap new credit. Central banks created trillions of dollars, euros, yen and yuan and flooded the major economies with this cheap credit.

They also lowered yields on savings to zero so banks could pocket profits rather than pay depositors interest. This enabled the banks to rebuild their cash and balance sheets – at the expense of everyone with cash, of course. Having unleashed tens of trillions of dollars in new credit since 2008, the central banks have simply increased the likelihood and scale of the coming default conflagration. Now the amount of deadwood that’s piled up is many times greater than it was in 2008. Very few observers explore what happens after defaults start cascading through the system. Defaults mean loans and bonds won’t be paid back. The owners of the bonds and debt (mortgages, auto loans, etc.) will have to absorb massive losses.

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We’ve been alarmed about it for years.

Time to ‘Be Alarmed’ about Emerging Market Debt: UN (DQ)

[..] It was the peak of the emerging market bubble, when the amount of debt that low-income developing economies could have sold to eager investors seemed almost limitless. The main reason for this unprecedented surge in appetite for EM debt was the huge monetary expansion unleashed in many of the world’s major economies, led by the Fed’s QE program. The result was the now-all-too-familiar reality of anemic (at best) yield opportunities in developed markets, prompting investors to seek out much riskier emerging market assets. The moment the Fed turned off the spigot, in mid-2014, the flow of funds began to reverse, according to the report, creating ripe conditions for a “prolonged commodity price shock, steep currency depreciations and worsening growth prospects,” which have “quickly driven up borrowing costs and debt-to-GDP ratios.”

For the first time since the Latin American debt crisis in the second half of the 1980s, aggregate net capital flows entered negative territory. Aggregate outflows reached $656 billion in 2015 and $185 billion in the first quarter of 2016. The capital flight was particularly pronounced in China and other parts of Asia. Note how capital flight heated up in 2014 toward the end of the Fed’s “QE Infinity”.

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More consequences of unbridled manipulation of financial markets.

The Ted Spread Is Dead, Baby. The Ted Spread Is Dead (WSJ)

A measure of stress in financial markets, whose alarm bells heralded the 2008 financial crisis, just hit its highest level in over seven years. But don’t worry. It turns out the so-called Ted Spread might be dead, an unlikely casualty of the recent changes in U.S. money-market regulation. This spread charts the difference between the London interbank offered rate and the yield on three-month U.S. Treasury bills. Libor is a dollar-denominated global gauge of private-sector credit strength, particularly that of banks, and three-month bills measure an ultrasafe bet—the U.S. government’s creditworthiness. Ted stands for Treasury-Eurodollar rate, the Eurodollar being the greenback denominated lending reflected in the Libor rate.

If the difference, or spread, between what banks charge each other increases compared with yields on safe government debt, that reflects an elevated risk of defaults in the private sector that the banking sector lends to. For the past year and a half the spread has been creeping higher, rising from 0.2 of a percentage point at the turn of 2015, to 0.653 of a percentage point on Wednesday. That is the highest it has been since May 2009, in the aftermath of the global financial crisis, surpassing other moments of extreme stress, like the euro sovereign-debt crisis around 2011. But there is a problem with that. Looming U.S. regulation of money-market funds has driven Libor higher, meaning that it isn’t quite the indicator that it once was.

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Blair and Cameron’s scorched earth.

UK Councils ‘Building Up Dangerous Levels Of Debt And Risk’ (Ind.)

Cash-strapped local councils are building up dangerous levels of risk and debt as they turn to commercial ventures in a bid to raise funds, credit agencies and campaigners have warned. Moody’s, the credit agency, warned that a series of ambitious plans to boost revenue by setting up businesses could put council tax payers at risk should they run into difficulties. The warning, in a report into local government finance, comes amid mounting evidence that local authorities are increasingly turning to borrowing after a run of tough settlements with central Government. Roshana Arasaratnam, a senior credit officer at Moody’s, said in the wake of the report’s publication:

“Borrowing to invest in commercial projects exposes local authorities to additional credit risk, as the revenues that flow from these projects are inherently uncertain. “Those adopting this strategy also face increased project execution risk, and greater competition from the private sector.” Ms Arasaratnam said such borrowing contrasted sharply with local authorities’ traditional investments in schools, housing and transport which are underpinned by government grants and do not depend on generating revenues from commercial activities. The report highlights a series of business ventures set up by councils, some of which are now on negative credit watch. They include Warrington Borough Council, which in 2015 issued £150m of bonds to support an economic development plan aimed at increasing business rate revenues.

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Paper wealth is not wealth.

You’re Not as Rich as You Think (Satyajit Das)

The idea that the world is awash in savings – one factor driving the theory of secular stagnation – is, on the surface, a persuasive one. Too bad it may not be true. Yes, the postwar generation is wealthier than any before it. But the ultimate value of any investment depends upon being able to convert it into cash and thus generate purchasing power. In fact, the world’s accumulated wealth – around $250 trillion, according to Credit Suisse’s Global Wealth Report – is almost certainly incapable of realization at its paper value. The headline number thus vastly overstates the supposed savings glut. Most of these savings are held in two forms: real estate, primarily principal residences, and retirement portfolios that are invested in stocks and bonds.

Both are rising in value. A combination of population growth, higher incomes, increased access to credit, lower rates and, in some cases, limited housing stock have driven up home prices; those who got in early have done especially well. Meanwhile, increased earnings and dividends, driven by economic growth and inflation, have boosted equity values. So have loose monetary policies designed to counteract the Great Recession since 2009. Yet the appreciating value of one’s own home doesn’t automatically translate into purchasing power. A primary residence produces no income. Indeed, maintenance costs, utility bills and property taxes – which often rise along with home prices – mean that houses are cash-flow negative.

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As soon as they understand the magnitude of the numbers, they’ll look the other way.

Deutsche Bank Woes Sparks Concern Among German Lawmakers (BBG)

Deutsche Bank’s finances, weakened by low profitability and mounting legal costs, are raising concern among German politicians after the U.S. sought $14 billion to settle claims related to the sale of mortgage-backed securities. At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Participants discussed the U.S. fine and the financial reserves at Deutsche Bank’s disposal if it had to cover the full amount, according to the people, who asked not to be identified because the meeting on Tuesday was private. While the participants – members of the junior party in Angela Merkel’s government – didn’t reach any conclusions on the likely outcome, the discussion signals that the risks have the attention of Germany’s political establishment.

The German Finance Ministry last week called on the U.S. to ensure a “fair outcome” for Deutsche Bank, citing cases against other banks where the government settled for reduced fines. Pressure on Germany’s biggest lender has increased since German Finance Minister Wolfgang Schaeuble told Bloomberg Television on Feb. 9 that he has “no concerns about Deutsche Bank.” Germany’s biggest bank was already ranked among the worst-capitalized lenders in European stress tests before U.S. authorities demanded $14 billion during initial talks to settle a probe into how it handled mortgage securities during the 2008 financial crisis. The announcement led Deutsche Bank’s riskiest bonds to plunge.

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Never ending story. Because it can’t end well.

Regulators Expect Monte Dei Paschi To Ask Italy For Help (R.)

European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses. Less than two months after the Tuscan lender announced an emergency plan to raise €5 billion of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short. While the bank is determined to see through the capital raising, if it were to disappoint, it would be left with a capital hole. Now euro zone authorities are considering whether state support would have to be tapped after what bankers have described as slack interest in the bank’s share offer.

“There is clearly an execution risk to the capital raising,” said one official with knowledge of the rescue attempt, adding that the bank’s value, about one ninth the size of the planned €5 billion cash call, would be a turn-off for investors. That person said a “precautionary recapitalization by the Italian state” could be used to make up any shortfall once attempts to raise fresh cash from investors had concluded in the coming months. [..] Monte dei Paschi faces a considerable challenge in convincing investors to back its third recapitalisation in as many years. Further complicating the picture, a constitutional referendum, expected to be held by early December that could decide the future of Renzi, is likely to push the bank’s fund-raising into next year, the officials say. The bank’s fragile state poses a threat to confidence in other Italian lenders and even to heavily-indebted Italy, the euro zone’s third-largest economy.

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There’s 24/7 propaganda and then there’s reality. It’s about air time more than anything else.

How Does A 60% Increase In NYC Homelessness Constitute A Recovery? (ZH)

[..] ..courtesy of data from the New York City Department of Homeless Services, we have a couple of additional charts to add to the list like the one below that shows a ~60% increase in the number of NYC families living in homeless shelters over the past five years. Aside from an increse during the “great recession”, the number of New York City families living in homeless shelter remained fairly constant at around 8,000 from July 2008 through July 2011. That said, over the following 5 years beginning in August 2011 through today, NYC has experienced a nearly 60% increase in the number of families living in homeless shelters to nearly 13,000. Ironically, the increase in homelessness experienced during the “great recession” was just a blip on the radar compared to the past five years as residential rental rates in NYC have soared.

Alternatively, we offer up the following statistics from Mayor Bill De Blasio’s Fiscal 2016 “Mayor’s Management Report” highlighting a 42% increase in applications for “Emergency Rent Assistance” from New York City families at risk of losing their housing. If this is what a “recovery” looks like to Obama we would certainly like to better understand how he would define a recession.

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“..journalism should not be used as a “weapon of destruction against persons and even entire peoples..“

Pope Francis: Journalism Based On Gossip And Lies Is A Form Of Terrorism (G.)

Journalism based on gossip or rumours is a form of “terrorism” and media that stereotype entire populations or foment fear of migrants are acting destructively, Pope Francis has said . The pope, who made his comments in an address to leaders of Italy’s national journalists’ guild, said reporters had to go the extra mile to seek the truth, particularly in an age of round-the-clock news coverage. Spreading rumours is an example of “terrorism, of how you can kill a person with your tongue“, he said. “This is even more true for journalists because their voice can reach everyone and this is a very powerful weapon.“ In Italy, a number of newspapers are highly politicised and are regularly used to discredit those with differing political views, sometimes reporting unsubstantiated rumours about their private lives.

In 2009 several media outlets owned by the family of then-prime minister Silvio Berlusconi came under fire from the journalists’ guild over stories questioning the trustworthiness of a magistrate who had ruled against a company owned by the Berlusconi family. The stories were filled with insinuations about the way he dressed, including the colour of his socks, and the way he took walks in the park. The pope, who has often strongly defended the rights of refugees and migrants, said journalism should not be used as a “weapon of destruction against persons and even entire peoples“. “Neither should it foment fear before events like forced migration from war or from hunger,” he added.

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A highly developed culture 10s of 1000s of years before anywhere else on the planet. Ignored as such by Europe and North American bias.

Indigenous Australians The Oldest Living Culture; It’s In Our Dreamtime (G.)

Australia’s Aboriginal people have already been using the tag of “world’s oldest living culture” before given scientific confirmation in a recent study of the DNA of Australia’s Indigenous people. One likely response to the finding from the subjects of the research is a satisfied, “I told you so”. Scientific research often reaffirms what is in an oral history. This has been particularly so in Australia where cultural stories – often referred to as Dreamtime stories – that describe land movements and floods fit in with what later becomes known about seismic and glacial shifts from the geological record. For example, Associate Professor Nick Reid and Professor Patrick D. Nunn have analysed stories from Indigenous coastal communities and have seen a thread of discussions about the rise of tidal waters that occurred between 6,000 and 7,000 years ago.

And these are the newer stories. Other stories collected from around Cairns showed that stories recalled a time when the land covered the area that is now the Great Barrier Reef and stories from the Yorke Peninsula reference a time when there was no Spencer Gulf (it is now 50m below sea level). Reid and Nunn hypothesise that this could make these stories over 12,000 years old. So oral history and observation can reinforce what the science says. Or science can confirm what we’ve been saying all along. For many older Indigenous people, the cultural stories will seem the more trustworthy. There are historic reasons why Indigenous people remain suspicious of science practiced by Europeans, who have not yet countered the legacy of their obsessions with head measuring and blood quantum.

Aboriginal culture and traditions have been often viewed through a Eurocentric gaze that has failed to see the wisdom contained within its values and teachings. Cultural stories were often illustrated for children without looking for deeper meanings and codes. These stories didn’t just tell a tale of how the echidna got its spikes, they contained – like parables in the bible – a set of messages about the importance of sharing resources in a hunter-gatherer society and the consequences of selfishness.

Read more …

May 232016
 
 May 23, 2016  Posted by at 8:56 am Finance Tagged with: , , , , , , , , , ,  


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

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

In praise of Abenomics…

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

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

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

Read more …

Calling Peter Pan!

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

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

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

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

Investors Check Out of Europe (WSJ)

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

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

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

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And when the China Ponzi bursts.

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

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

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

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

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

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

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

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

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

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

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

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

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

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Why Tsipras keeps doing these things is hard to fathom.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The vote is not done yet.

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

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

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

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Switzerland is notoriously expensive to live in.

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

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

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

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But it won’t materialize.

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

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

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

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Excellent Taibbi, once again.

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

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

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

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

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

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

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

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Another thing Tsipras should simply refuse to do.

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

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

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 November 1, 2015  Posted by at 10:52 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle November 1 2015


Unknown Drowned baby boy, Lesbos Oct 25 2015

New Tragedy In The Aegean, Sinking 11 Dead, 4 Babies (In.gr)
‘So Many Of Them Were Babies. We Saw At Least 30 Bodies In The Water’ (HRW)
Crunch Talks For Merkel On Refugee Crisis As Thousands More Arrive (Reuters)
Greek Banks Need Extra €14 Billion To Survive Dire Economic Downturn (Guardian)
Greek Bad Debt Rises Above 50% For The First Time, ECB Admits (Zero Hedge)
Cash Crisis ‘Could Close 50% Of UK Care Homes’ (Observer)
Crisis In UK Care Homes Set To ‘Dwarf The Steel Industry’s Problems’ (Observer)
China Bad Loans Estimated At 20% Or Higher vs Official 1.5% (Bloomberg)
China’s Official Factory Gauge Signals Contraction Continues (Bloomberg)
‘Lipstick’-ing The GDP Pig Amid An Epochal Global Deflationary Swoon (Stockman)
Fed Admits: ‘Something’s Going On Here That We Maybe Don’t Understand’ (ZH)
Fed Looks At Way To Shift Big-Bank Losses To Investors (AP)
Australia Should ‘Tell The Story Of The Pacific To The World’ (Guardian)

At dawn Sunday: “five are women, two are children and four infants..” Four more deaths reported since… (Google translation)

New Tragedy In The Aegean, Sinking 11 Dead (In.gr)

Without end continues the refugee drama in the Aegean Sea. This time 11 refugees died when the six meter plastic boat, which was carrying them sank while approaching rocky area in Samos Blue, in the six meters from the shore, just before they occupants disembark. From the dead five are women, two are children and four infants. Most of the dead were trapped in the cabin of plastic boat. The new wreck occurred at dawn Sunday. From the new wreck rescued 15 people. The point is boat of the Coast, volunteer groups and divers.

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Deaths of single often go unreported: “The ultimate death toll is no doubt even higher, since only families with surviving members were able to report their missing to the coast guard..”

‘So Many Of Them Were Babies. We Saw At Least 30 Bodies In The Water’ (HRW)

On Wednesday off the Greek island of Lesbos, a large Turkish fishing boat carrying some 300 people trying to reach Europe sank, causing at least seven to drown, including four children, with at least 34 still missing. The needless loss of life should be enough to outrage us all. But just as outrageous is the reality that months into Europe’s refugee crisis, Europe’s leaders still have not taken the steps necessary to help prevent such unnecessary tragedies, let alone adopt policies that could provide people fleeing war and repression with legal and safe alternatives to seek asylum in Western Europe. Turkish smugglers taking advantage of those desperately fleeing the horrors of war in Syria, Afghanistan, and Iraq promised the victims that the trip aboard a “yacht” would be safer than the more common trips in overloaded rubber dinghies.

They then packed the 300 people like sardines on both decks of the aging fishing vessel. Disaster unfolded as the boat hit rough seas and high winds at about 4 in the afternoon. Suddenly, the sheer weight of those packed on the upper deck caused it to collapse, crashing everyone down onto the lower deck. Spanish volunteer life guards, working on the beaches of Lesbos to bring in the boats safely, watched the tragedy unfold through their binoculars from a beachhead on the Greek island. A Syrian man who survived told one of the doctors who treated the survivors that the collapse of the upper deck injured many people and created a large hole in the bottom of the boat, which began filling with water. The Turkish smuggler driving the boat called his fellow smugglers, and a speedboat came to evacuate him, its occupants firing several times in the air to warn off the panicking people on the boat.

As it evacuated the skipper, the speedboat hit the fishing boat, causing it to sink almost immediately. “Suddenly, we just saw hundreds of lifejackets in the sea,” Gerard, one of the Spanish volunteer lifeguards, told me over the phone. “We rushed down to get our jet skis, and we were in the water in minutes.” For more than four hours, until long after nightfall, three Spanish lifeguards tried to rescue as many of the people in the water as they could, using only their jetskis in the rough water many kilometers offshore. They performed CPR on some right on their jetskis. Several local fishing boats also came to join the rescue efforts, pulling survivors out of the water until their decks were packed with shivering, traumatized survivors.

Both the Greek coast guard and boats under the coordination of FRONTEX, the EU’s external borders agency, joined the effort as well, but their large boats sitting high out of the water made it difficult to hoist survivors unto their decks in the rough seas. The Spanish lifeguards had to risk their lives to scramble onto the Greek coast guard ship to perform CPR on those who had lost consciousness, including a tiny baby. Their jetskis were damaged in the process. Long after nightfall, the Spanish volunteers returned to shore, themselves so chilled to the bone that they were risking hypothermia. “We passed so many lifeless bodies floating in the sea as we left the rescue area,” Gerard said, his voice still shaking a day later.

“So many of them were babies. We saw at least 30 bodies at the scene in the water.” By Thursday, 242 people had been rescued, and the Greek coast guard confirmed that at least 34 people remained missing, in addition to the seven bodies recovered from the water the evening before. The ultimate death toll is no doubt even higher, since only families with surviving members were able to report their missing to the coast guard.

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WIll Merkel pull to the right with her country?

Crunch Talks For Merkel On Refugee Crisis As Thousands More Arrive (Reuters)

Nearly 10,000 refugees continued to arrive in Germany daily, police said on Saturday, highlighting the scale of the challenge facing the country’s stretched border staff ahead of a crunch meeting between Angela Merkel and a Bavarian ally on the crisis. Chancellor Merkel will discuss refugee policy on Saturday evening with Bavarian premier Horst Seehofer, head of the Christian Social Union (CSU) and who has criticized her asylum policy and handling of the crisis. The CSU, sister party to Merkel’s Christian Democratic Union (CDU), has been outspoken about her “open doors” policy towards refugees, in part because its home state of Bavaria is the entry point for virtually all of the migrants arriving in Germany.

Berlin expects between 800,000 and a million refugees and migrants to arrive in Germany this year, twice as many as in any prior year. The huge numbers have fueled anti-immigration sentiment, with support for Merkel’s conservatives dropping to its lowest level in more than three years. There have also been a spate of right-wing attacks on shelters: police in Dresden reported two more arson attacks on Friday night on a hotel and a container, both of which were planned to house refugees and asylum seekers. On Sunday, Merkel and Seehofer will hold talks with Sigmar Gabriel, who leads the other party in her “grand coalition”, the Social Democrats (SPD).

Conservative officials believe it is likely Seehofer will come away from this weekend’s meetings with Merkel with a deal to introduce so-called ‘transit zones’ at border crossings to process refugees’ asylum requests. SPD politicians have rejected that idea, instead calling for faster registration and processing of asylum applications. The crisis has also prompted squabbling among EU states over how best to deal with the influx. European leaders last weekend agreed to cooperate to manage migrants crossing the Balkans but offered no quick fix. German Defence Minister Ursula von der Leyen said Europe needed to work together to come up with a solution to the crisis but that Germany would continue to welcome refugees. “We will not slam the door in the face of the refugees,” she said at a security conference in Bahrain.

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A lot less than was prviously announced.

Greek Banks Need Extra €14 Billion To Survive Dire Economic Downturn (Guardian)

Greece’s four main banks need to find another €14bn of reserves to ensure they could withstand an economic downturn, the ECB said on Saturday. The four banks – Alpha Bank, Eurobank, NBG and Piraeus Bank – have until 6 November to say how they intend to make up that shortfall, the ECB said. The money could come from private investors or from EU bailout funds. An ECB stress test known as a “comprehensive assessment” identified a capital shortfall of €4.4bn under a best-case scenario and €14.4bn in a worst-case situation. The shortfall is smaller than originally feared, with the most recent bailout deal setting aside up to €25bn to prop up Greece’s banks.

The ECB audit examined the quality of the banks’ assets and considered the “specific recapitalisation needs” of each institution under Greece’s EU bailout. “Overall, the stress test identified a capital shortfall across the four participating banks of €4.4bn under the baseline scenario and €14.4bn under the adverse scenario,” the ECB said. “The four banks will have to submit capital plans explaining how they intend to cover their shortfalls by 6 November. This will start a recapitalisation process under the economic adjustment programme that must conclude before the end of the year.” Increasing the banks’ capital reserves would “improve the resilience of their balance sheets and their capacity to withstand potential adverse macroeconomic shock”, the central bank added.

In August, eurozone finance ministers released €26bn of the €86bn in bailout funds that went to recapitalising Greece’s stricken banking sector and make a debt payment to the ECB. Greek banks have already been bailed out under earlier deals for the country. They suffered further losses as Greece headed towards a third bailout earlier this year. Depositors pulled billions out of the country fearing that Greece would be forced to leave the euro. Limits on withdrawals and transfers imposed in June to prevent Greek banks from collapsing remain in place, although they have been loosened.

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Now that’s a real ugly number. And austerity assures the number will get worse. What does that spell for Greek banks?

Greek Bad Debt Rises Above 50% For The First Time, ECB Admits (Zero Hedge)

According to the FT, “the bill states that bank rescue fund HFSF will have full voting rights on any shares it acquires from banks in exchange for providing state aid. Under the bill the bank rescue fund will have a more active role, assessing bank managements.

The exact mix of shares and contingent convertible bonds the HFSF will buy from banks in exchange for any fresh funds it will provide will be decided by the cabinet. The capital hole has emerged chiefly due to the rising number of Greeks unable or unwilling to repay their debt.

And therein lies the rub, because in the span of three months, Greek NPLs have risen from 47.6% of total to 51%: an increase of just over 1% in bad debt every month. Which means that whether or not the latest attempt to boost confidence by the ECB, ESM, and the Greek parliament succeeds is moot. Yes, a few hedge funds may invest funds alongside the ESM, but in the end, as the NPLs keep rising and as long as Greek debtors refuse – or simply are unable – to pay their debt or interest, the next Greek crisis is inevitable. The biggest wildcard is whether or not the Greek population will accept this latest promise of stability in its banking sector at face value: a banking sector which since July is operating under draconian capital controls.

Granted, we should point out that in the past two months the deposit outflow from banks has stopped, and even reversed modestly adding about €900 million in deposits in the past two months, although that is mostly due to the inability of households and corporations to withdraw any sizable amount of funds. The real answer whether Greek banks have been “saved” will wait until the shape of the final bank recapitalization takes place, even as NPLs continue to mount. Remember: Greek lenders are currently kept afloat only by the ECB’s ELA but there is a rush to get the recapitalization finished. If it is not done by the end of the year, new EU rules mean large depositors such as companies may have to take a hit in their accounts.

If the proposed recap is insufficient – and it will be since under the surface the Greek economy continues to collapse and NPLs continue to mount – and a bank bail-in of depositors takes place (a bail-in which took place immediately in the case of Cyprus back in 2013 when Russian oligarch savings were “sacrificed” to bail out the local insolvent banking system), the next leg in the Greek bank crisis will promptly unveil itself, only this time Greece will have some 200% in debt/GDP to show for its most recent, third, bailout. Finally, the real question is: having read all of the above, dear Greek readers, will you hand over what little cash you have stuffed in your mattress to your friendly, neighborhood, soon to be recapitalized bank?

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The entire western world get bogged down under this pressure.

Cash Crisis ‘Could Close 50% Of UK Care Homes’ (Observer)

Ministers are under mounting pressure to pump more money into care for the elderly as investigations by the Observer reveal how some of the largest providers may have to pull out of supplying services because of an escalating financial crisis. Before chancellor George Osborne’s autumn statement on 25 November, Sarah Wollaston, the Conservative chair of the all-party Commons select committee on health, is calling for the government to act, saying that social care providers are reeling from rising costs and declining fees from cash-strapped local authorities. Meanwhile, the head of Care England, which represents independent care providers, claims that the care home sector is heading for a bigger crisis than the steel industry, while Chai Patel, the boss of one of Britain’s largest care home operators, HC-One, says half of Britain’s care homes could go bust.

The warnings come as residents in the 470 homes and specialist centres run by leading provider Four Seasons face uncertainty about the future of the company. Four Seasons has to make a £26m interest payment in December, but is losing money under the weight of £500m of debt. Four Seasons has insisted that it can make the payment, but bosses at rival companies warned that the industry was under unsustainable pressure. In the home care sector, where specialists look after the elderly in their own properties, the United Kingdom Homecare Association cautioned that leading providers could pull out of 55,125 care hours and 33 contracts because of the shortfall between the cost of care and the amount local authorities were paying for the service. Wollaston, a former GP, said she supported the new national living wage and moves to pay transport costs to carers, but added that the government had to recognise that both measures would increase the costs of care.

“There has been a longstanding gap in funding for social care and this will become much more severe if there is not adequate recognition of the rising costs the sector will face as a result of the living wage. Otherwise, we will see more care providers pulling out of the sector,” she said. Many problems result from the fact that local authorities, which have suffered funding cuts of more than 40% since 2010, cannot offer enough to make contracts attractive or, in many cases, viable. Many providers are turning to the private market as an alternative, where they can. Martin Green, the head of Care England, said the crisis would lead to more people ending up in hospitals and Patel, whose company runs 250 care homes, said he had given research to the government that showed that half of care homes could disappear.

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So who’s going to pay, now and in 5 years, 10 years?

Crisis In UK Care Homes Set To ‘Dwarf The Steel Industry’s Problems’ (Observer)

The ghost of Southern Cross hangs over Britain’s care home industry. Four years ago the country’s largest care home group collapsed, sparking months of uncertainty and worry for its 31,000 residents and their families, until Southern Cross’s rivals stepped forward to agree rescue deals for its 750 homes. Now, however, the industry could be rewarded by facing an even bigger crisis. While it was a set of circumstances unique to Southern Cross that laid it low in 2011 – particularly high rents for its properties and the costs of a debt mountain left by its private equity owners – today care homes across the country are feeling the squeeze. Four Seasons, which has more than 22,000 beds spread among 470 homes nationwide, is at forefront of the new crisis.

The company is owned by private equity group Terra Firma, the organisation led by financier Guy Hands that has, at various times, controlled companies as diverse as Méridien hotels, Odeon cinemas and record label EMI. It is losing millions of pound a year and struggling under £500m of debt. Four Seasons needs to make a £26m interest payment in December to satisfy creditors who could put it into administration. Terra Firma insists it will be able to make the payment, but the private equity group, trade unions, and local authorities all agree this is only the start of the problems for the care home industry. Justin Bowden, national officer at the GMB union, which represents thousands of care home employees, said: “You are looking potentially at several Southern Crosses in the next 12 months if something drastic is not done.”

Martin Green, chief executive of Care England, the body that represents independent care providers, warned that the crisis in the sector would dwarf the problems in the steel industry. “We are looking at Redcar happening twice a month if care homes go down,” he said. “These people can only be looked after in care homes and hospitals. If Jeremy Hunt thinks he has a problem with bed blocking now, it is nothing on what it is going to be like if these care homes start to close. Hospitals won’t be able to do elective care because they will be full of old people.” The problems for care homes are rooted in the gap between the costs of care and the amounts local authorities are paying for residents. There are staggering variations in fees across the country, ranging from £350 a week to as high as £750, according to consumer watchdog Which?

The Local Government Association itself estimates that there will be a £2.9bn annual funding gap in social care by the end of the decade. This gap will widen with the introduction of the national living wage next April, which will add another £1bn to the costs of care homes between now and 2020.

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“China is confronting a massive debt problem, the scale of which the world has never seen.”

China Bad Loans Estimated At 20% Or Higher vs Official 1.5% (Bloomberg)

Corporate investigator Violet Ho never put a lot of faith in the bad loan numbers reported by China’s banks. Crisscrossing provinces from Shandong to Xinjiang, she’s seen too much — from the shell game of moving assets between affiliated companies to disguise the true state of their finances to cover-ups by bankers loath to admit that loans they made won’t be recovered. “If I have one piece of advice for people worrying about the financial status of Chinese companies, it’s this: it’s right to be worried,” said Ho, senior managing director in Hong Kong for Kroll Inc., a U.S. risk consultancy. “Often a credit report for a Chinese company is not worth the paper it’s written on.”

As China’s banking industry persists with publishing delinquent-debt numbers that few have faith in – a survey in 2014 indicated that even lenders didn’t believe them – some financial analysts, too, have turned detectives to try to work out what the real numbers may be. The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst. Bank of China Ltd. reported on Thursday its biggest quarterly bad-loan provisions since going public in 2006. While the analysts interviewed for this story differ in their approaches to calculating likely levels of soured credit, their conclusion is the same: The official 1.5% bad-loan estimate is way too low.

Charlene Chu, who made her name at Fitch Ratings making bearish assessments of the risks from China’s credit explosion since 2008, is among those crunching the numbers. While corporate investigator Ho relies on her observations from hitting the road, Chu and her colleagues at Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions. While traditional bank loans are not Chu’s prime focus – she looks at the wider picture, including shadow banking – she says her work suggests that nonperforming loans may be at 20% to 21%, or even higher.

The Bank for International Settlements cautioned in September that China’s credit to gross domestic product ratio indicates an increasing risk of a banking crisis in coming years. “A financial crisis is by no means preordained, but if losses don’t manifest in financial sector losses, they will do so via slowing growth and deflation, as they did in Japan,” said Chu. “China is confronting a massive debt problem, the scale of which the world has never seen.”

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But there’s still plenty voices willing to paint rosy picstures.

China’s Official Factory Gauge Signals Contraction Continues (Bloomberg)

China’s first key indicator this quarter, an official factory gauge, missed analysts’ estimates, signaling that the manufacturing sector has yet to bottom out as global demand falters and deflationary pressures deepen. The official purchasing managers index was unchanged at 49.8 in October, the National Bureau of Statistics said Sunday, compared with the median estimate of 50 in a Bloomberg survey. It was the third straight reading below 50, the line between expansion and contraction. The official non-manufacturing PMI, a barometer of services and construction, fell to 53.1 from 53.4 in September, the weakest since December 2008. “The manufacturing sector is still contracting, though stabilizing,” and the report indicates economic momentum remains sluggish, said Liu Ligang at Australia & New Zealand Banking Group.

“We still believe the Chinese economy will experience modest rebound supported by faster infrastructure investment in November and December.” The newest data highlight the challenges confronting China’s old growth drivers. The nation’s leaders have reiterated priorities of both reforming the economy and maintaining medium- to high-speed growth in the next five years, according to a communique released by Xinhua News Agency on Thursday. The readings suggest continued monetary easing by the central bank hasn’t yet boosted smaller businesses as much as their larger, state-owned counterparts, which are able to borrow at reduced rates. “Big companies are stabilizing, while smaller ones continue to perform below the contraction-expansion line,” Zhao Qinghe, a senior statistician at NBS, wrote in a statement interpreting the data on Sunday.

“The percentage of small companies facing a financial strain is considerably higher than that of bigger companies.” The unchanged manufacturing PMI suggests “managed stabilization” as policy makers strive to balance growth, reform, and market stability, according to Zhou Hao at Commerzbank in Singapore. The manufacturing sector stabilized “somewhat” due to monetary policy easing, Zhou said, while slowing power generation, steel production and housing sales are “suggesting that the overall economy is still under downward pressure.” The employment gauges of both manufacturing and non-manufacturing sectors remained mired in contraction zone, Sunday’s report showed. China’s survey-based unemployment rate picked up slightly to around 5.2% in September, while a ratio of job supply and demand rose in the third quarter.

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Stop confusing inflation with rising prices, and things get a lot clearer.

‘Lipstick’-ing The GDP Pig Amid An Epochal Global Deflationary Swoon (Stockman)

The talking heads were busy yesterday morning powdering the GDP pig. By averaging up the “disappointing” 1.5% gain for Q3 with the previous quarter they were able to pronounce that the economy is moving forward at an “encouraging” 2% clip. And once we get through this quarter’s big negative inventory adjustment, they insisted, we will be off to the ‘escape velocity’ races. Again. No we won’t! The global economy is in an epochal deflationary swoon and the US economy has already hit stall speed. It is only a matter of months before this long-in-the-tooth 75-month old business expansion will rollover into outright liquidation of excess inventories and hoarded labor. That is otherwise known as a recession.

Its arrival will be a thundering repudiation of the lunatic monetary policies of the last seven years; and it will send into panicked shock all those buy-the-dip speculators and robo-traders who still presume the central bank is omnipotent. So forget all the averaging and seasonally maladjusted noise in yesterday’s report and peak inside at the warning signs. To begin, the year/year gain of just 2.0% was the weakest result since the first quarter of 2014. And that’s only if you believe that inflation during the last 12 months was just 0.9%, as per the GDP deflator used by the Commerce Department statistical mills. Needless to say, there are about 90 million households in America below the top 20%, which more or less live paycheck to paycheck, that would argue quite vehemently that their cost of living including medical care, housing, education, groceries, utilities and much else – has gone up a lot more than 0.9%.

So put a reasonable “deflator” on the reported “real” GDP number, and you are getting pretty close to stall speed – even before you look inside at the internals. Indeed, even before you get to the components of the “deflated” GDP figure, you need to examine an even more important number contained in yesterday’s report that was not mentioned by a single talking head. To wit, the year/year gain in nominal GDP was only 2.9%, and it represented a continuing deceleration from 3.7% in the year ending in Q2 2015 and 3.9% in the years ending in Q1 2015 and Q4 2014, respectively. In short, the US economy is sitting there with $59 trillion of credit market debt outstanding, but owing to the tides of worldwide deflation now washing up on these shores, nominal GDP growth is sinking toward the flat line.

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QE accelerates deflation.

Fed Admits: ‘Something’s Going On Here That We Maybe Don’t Understand’ (ZH)

In a somewhat shocking admission of its own un-omnipotence, or perhaps more of a C.Y.A. moment for the inevitable mean-reversion to reality, Reuters reports that San Francisco Fed President John Williams said Friday that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand. With Japan having been there for decades, and the rest of the developed world there for 6 years… Suddenly, just weeks away from what The Fed would like the market to believe is the first rate hike in almost a decade, Williams decides now it is the time to admit the central planners might be missing a factor (and carefully demands better fiscal policy)… (as Reuters reports)

“I see this as more of a warning, a red flag that there’s something going on here that isn’t in the models, that we maybe don’t understand as well as we think, and we should dig down deep deeper and try to figure this out better,” said San Francisco Federal Reserve President John Williams on Friday pointing out that low neutral interest rates are a warning sign of possible changes in the U.S. economy that the central bank does not fully understand.

Williams, who is a voting member of the Fed’s policy-setting panel through the end of the year, has said the central bank should begin to raise interest rates soon but thereafter go at a gradual pace; ironically adding that the low neutral interest rate had “pretty significant” implications for monetary policy, and put more focus on fiscal policy as a response.

“If we could come up with better fiscal policy, find a way to have the economy grow faster or have a stronger natural rate of interest, then that takes the pressure off of us to try to come up with other ways to do it, like through a large balance sheet or having a higher inflation target,” Williams said. “It also means we don’t have to turn to quantitative easing and other policies as much.”

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As long as the investors are not the big banks?!

Fed Looks At Way To Shift Big-Bank Losses To Investors (AP)

In their latest bid to reduce the chances of future taxpayer bailouts, federal regulators are proposing that the eight biggest U.S. banks build new cushions against losses that would shift the burden to investors. The Federal Reserve’s proposal put forward Friday means the mega-banks would have to bulk up their capacity to absorb financial shocks by issuing equity or long-term debt equal to prescribed portions of total bank assets. The idea is that the cost of a huge bank’s failure would fall on investors in the bank’s equity or debt, not on taxpayers. The Fed governors led by Chair Janet Yellen voted 5-0 at a public meeting to propose the so-called “loss-absorbing capacity” requirements for the banks, which include JPMorgan Chase, Citigroup and Bank of America.

The eight banks would have to issue a total of about $120 billion in new long-term debt to meet the requirements of the proposal, the Fed staff estimates. If formally adopted, most of the requirements wouldn’t take effect until 2019, and the remainder not until 2022. The new cushions would come atop rules adopted by the Fed in July for the eight banks to shore up their financial bases with about $200 billion in additional capital — over and above capital requirements for the industry. And they would be in addition to 2014 rules directing all large U.S. banks to keep enough high-quality assets on hand to survive during a severe downturn. Combined with the regulators’ previous actions, the new proposal “would substantially reduce the risk to taxpayers and the threat to financial stability stemming from the failure of these (banks),” Yellen said at the start of the meeting.

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Problem is: Australia would need to address its own role.

Australia Should ‘Tell The Story Of The Pacific To The World’ (Guardian)

Australia should “tell the story of the Pacific to the world” when global leaders sit down to climate change talks in Paris at the end of this month, Labor has said. The impact of climate change on the nations of the Pacific is a focus for both the government and opposition ahead of COP21, where governments of more than 190 nations will gather to discuss a possible new global climate accord. The opposition leader, Bill Shorten, accompanied by foreign affairs spokeswoman Tanya Plibersek and immigration spokesman Richard Marles, will visit Papua New Guinea, the Marshall Islands, and Kiribati over four days this week, while the government’s minister for international development and the Pacific, Steve Ciobo, will travel to New Caledonia, Fiji and Niue. The Labor leaders said climate change was an existential threat to some countries in the region.

“The dangerous consequences of climate change is no more evident than in the Pacific region. Pacific leaders have consistently identified climate change as the greatest threat to their livelihoods, food production, housing, security and wellbeing. “This is a serious problem that demands serious attention.” Marles, the former parliamentary secretary for Pacific island affairs, told Guardian Australia that it was important for Australia to have strong and constructive relations with its Pacific neighbours. He praised Pacific leaders, in particular Kiribati’s president, Anote Tong, for highlighting the issues being faced by Pacific nations on the international stage. “It is crucial that, in the lead-up to Paris, the world understands the problems being faced by the Pacific. And it’s important that Australia plays a role in telling that story of the Pacific to the world.”

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Nov 202014
 
 November 20, 2014  Posted by at 12:26 pm Finance Tagged with: , , , , , , , , , , ,  


Jack Delano Truck service station on US 1, NY Avenue, Washington DC Jun 1940

Growth Isn’t God in Indonesia (Bloomberg)
Federal Reserve In Easy Decision To End Stimulus (BBC)
Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)
The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)
Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)
Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)
Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)
China’s Factory Activity Stalls In November (CNBC)
Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)
The Yen Looks Like It’s Ready To Get Crushed (CNBC)
BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)
Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)
Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)
Eurozone PMI Falls To 16-Month Low In November (MarketWatch)
French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)
Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)
Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)
Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)
Goldman Fires Staff For Alleged NY Fed Breach (FT)
Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)
New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

Is there still hope and sanity in the world?

Growth Isn’t God in Indonesia (Bloomberg)

Joko Widodo’s rise from nowhere to Jakarta governor and then the presidential palace showed the wonders of Indonesia’s democracy. Now, he wants to democratize the economy as well, focusing as much on the quality of growth as the quantity. Sixteen years ago, Indonesia was cascading toward failed statehood. In 1998, as riots forced dictator Suharto from office, many wrote off the world’s fourth-most populous nation. Today, Indonesia is a stable economy growing modestly at 5%, with quite realistic hopes of more. There’s plenty for Widodo, known by his nickname “Jokowi,” to worry about, of course. Indonesia still ranks behind Egypt in corruption and near Ethiopia in ease-of-doing-business surveys. More than 40% of the nation’s 250 million people lives on less than $2 a day.

A dearth of decent roads makes it more cost-effective to ship goods to China than across the archipelago. Retrograde attitudes abound: to this day, female police recruits are subjected to humiliating virginity tests. But this week, Jokowi reminded us why Indonesia is a good-news story — one from which Asian peers could learn. His move to cut fuel subsidies, saving a cash-strapped nation more than $11 billion in its 2015 budget, showed gumption and cheered investors. Even more encouraging is a bold agenda focusing not just on faster growth, but better growth that’s felt among more than Jakarta elites. This might seem like an obvious focus in a region that’s home to a critical mass of the world’s extreme poor (those living on $1 or $2 a day).

But grand rhetoric about “inclusive growth” hasn’t even come close to meeting the reality on the ground. In India, for example, newish Prime Minister Narendra Modi boasts that he will return gross domestic product to the glory days of double-digit growth rates, as if the metric mattered more than what his government plans to do with the windfall. The “Cult of GDP,” the dated idea that booming growth lifts all boats, has long been decried by development economists like William Easterly. The closer growth gets to 10%, the more likely governments are to declare victory and grow complacent. In many cases rapid GDP growth masks serious economic cracks. In her recent book, “GDP: A Brief but Affectionate History,” Diane Coyle called the figure a “familiar piece of jargon that doesn’t actually mean much to most people.”

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Janet Yellen lives in virtual reality.

Federal Reserve In Easy Decision To End Stimulus (BBC)

Although the US Federal Reserve was worried about turmoil in emerging markets, the central bank reached an easy consensus to end its stimulus programme, its latest minutes reveal. Minutes from the central bank’s October meeting show officials were concerned about stock market fluctuations and weakness abroad. However, they worried that saying so could send the wrong message. Overall, officials were confident the US economy was on a strong footing. That is why they decided to end their stimulus programme – known as quantitative easing (QE) – in which the Fed bought bonds in order to keep long-term interest rates low and thus boost spending. “In their discussion of the asset purchase programme, members generally agreed … there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment,” read the minutes, referring to the decision to end QE. US markets reacted in a muted way to the news, with the Dow Jones briefly rising before falling once more into the red for the day.

However, to reassure markets that the Fed would not deviate from its set course, the central bank decided to keep its “considerable time” language in reference to when the Fed would raise its short term interest rate. That interest rate – known as the federal funds rate – has been at 0% since late 2008, when the Fed slashed rates in the wake of the financial crisis. Most observers expect that the bank will begin raising that rate in the middle of 2015, mostly in an effort to keep inflation in check as the US recovery gathers steam. However, US Fed chair Janet Yellen has sought to reassure market participants that the bank will not act in haste and remains willing to change its timeline should economic conditions deteriorate in the US. The minutes also show that the Fed is still concerned about possibly lower-than-expected inflation, particularly as oil prices continue to decline and wage growth remains sluggish.

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They’re going to do it. Screw the real economy, it’s dead anyway.

Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

U.S. central bankers are weighing whether they should communicate more of their views about the probable pace of interest-rate increases after they lift off zero next year. “A number of participants thought that it could soon be helpful to clarify the committee’s likely approach” to the pace of increases, according to minutes of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. The discussion last month underscored how much officials will rely on forward guidance on the pace of tightening in the future. After bond purchases ended last month, guidance may be the most practical option left to assure investors that policy won’t become overly restrictive if officials decide to take a stand against inflation seen as too low. The pace of rate increases is “going to be slow until they are really convinced that inflation’s sustainably at target and the labor market’s in really, really good shape,” said Guy Berger, a U.S. economist at RBS Securities. “They are going to take their sweet time.”

The minutes showed that many FOMC participants last month felt the committee should stay on the lookout for signs that inflation expectations were declining. Declining expectations could herald an actual fall in prices. Such deflation does economic damage by encouraging consumers to delay spending in anticipation of lower prices in the future. The potency of the first rate increase could be diminished or increased, depending on what the FOMC says about how it views its subsequent moves, said Laura Rosner, U.S. economist at BNP Paribas SA in New York. “It isn’t just the timing of liftoff the Fed cares about, but the whole path of federal funds rate,” said Rosner, a former New York Fed staff member. “I think they do probably want to limit the extent of tightening that people expect, at least at the beginning.” While telegraphing the future rate path may be attractive to some officials, it may also be unpopular with those, such as Chair Janet Yellen, who recall the Fed’s experience in 2004 with language saying the pace of increases would be “measured.”

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“Positioning for a deflationary boom is a binary event.”

The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

Deflation. And not just deflation, but a deflationary bust! At least, such is the goalseeked logic of Cornerstone Marco, which has released a bullish (no really) note titled the Coming Deflationary Boom in the U.S. In it the authors throw in the towel on the most conventional concept in modern economics, namely that for growth one needs stable inflation which in turn causes earnings growth and is low enough not to pressure multiples too high. Well, according to the BLS’ hedonic adjustments and courtesy of Japan’s epic exporting of deflation, inflation is nowhere to be seen (except if one eats pork or beef, or drinks milks), so it is time to give ye olde paragidm shift a try. The paradigm that the only thing more bullish for stocks than inflation, is deflation. To wit:

The concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a prerequisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.

Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds. This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street … that and PE expansion since they typically go hand in hand. As always, we shall see.

Indeed we shall. Then again the only thing we will see is how every time there is deflation somewhere in the world, one after another central bank somewhere will admit its only mandate is to keep stocks at record highs and inject a few trillion in risk-purchasing power into what was once called a market.

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Wait till shale implodes, then we can talk again.

Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine. “A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup, said in an e-mail.

“Undoubtedly some of the geopolitical changes will be momentous.” They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead. Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor.

“It drives economies around the world” and is located in some “usually very volatile places.” Benchmark oil prices in New York have dropped more than 30% during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.

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Petrobras was aiming to be the world’s first trillion-dollar company. Now it’s the most indebted company in the world.

Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”. The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt. Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.

Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging. The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story – for different reasons – in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit. The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.

“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000. “They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said. A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs. The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.

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They’ve all invested for continuing huge growth numbers. And now growth is gone.

Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton, the world’s biggest mining company. BHP and rivals Rio Tinto and Vale are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil. Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer. “Our company has been very clear that the time for massive expansions of iron ore are over,” BHP CEO Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia. While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011.

It’s shifting investment into copper and petroleum, he said Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup forecasts. “At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.” Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.

The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said. Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile. If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting. In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.

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Flash PMI at zero growth.

China’s Factory Activity Stalls In November (CNBC)

China’s factory activity stalled in November as output shrank for the first time in six months, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) for November clocked in at the breakeven level of 50.0 that separates expansion from contraction, compared with a Reuters estimate for 50.3 and following the 50.4 final reading in October. Overall, new orders picked up slightly but new export orders slowed markedly, dragging on activity. The factory output sub-index fell to 49.5, the first contraction since May.

The Australian dollar eased against the greenback on the news, trading at $0.8607. But shares in China and Hong Kong appear unaffected by the data. The reading is the latest evidence that the world’s second biggest economy continues to lose traction. Recent data on housing prices and foreign direct investments also missed forecasts. “China is slowing and we think it will continue to slow. A lot of it is structural, and in our view, growth will slow to about 4.5% over the next 10 years. We see some sectors that are very challenged; clearly real estate is one,” Robin Bew, MD of Economist Intelligence Unit, told CNBC.

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“They keep reporting such a low number for so many years, there’s only one way it can go – up …”

Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management. The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders. Nonperforming loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125.3 billion), official statistics released earlier this month showed. The People’s Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.

“They keep reporting such a low number for so many years, there’s only one way it can go – up,” DAC co-founder Philip Groves said in an interview. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.” DAC manages about $400 million of its own and clients’ money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.

While China’s bad loan ratio is relatively small versus other countries in Asia – soured loans are equivalent to 1.16% of total advances compared with 3.88% in Vietnam and 0.86% in South Korea – their total is still in an order of magnitude greater than the funds raised by distressed investors, Groves said. There hasn’t been enough capital to soak up the nonperforming debt and much ends up being reabsorbed by the government, he said. That’s why distressed activity in China has been “sporadic” over the past 10 years and why some large investors aren’t participating. “It never became a market where you could put a billion dollars to work in a year,” Groves said. “But if the wave of bad debt comes, and there are things to buy, the money will follow.”

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I’ve said it before, Japan is not going to be a nice place to be.

The Yen Looks Like It’s Ready To Get Crushed (CNBC)

Japan has slipped back into recession, with the economy shrinking 1.6% in the third quarter, surprising economists who forecast it would grow 2%. The takeaway? Double down on the dollar versus the yen. How weak can the yen get? Forecasters are lowering their already bearish targets after the new disappointing economic data. “I’d expect another 20% drop next year, which would take us north of 140,” said Peter Boockvar of the Lindsey Group about the dollar-yen rate. The team at Capital Economics raised their forecast for dollar-yen to finish next year at 140 as well, up from 120 previously.

Those are bold calls, because it’s unusual for any currency to move more than 5% to 10% per year. Also, the yen has already tumbled 14% in the past 12 months and 19% the previous year, making it the worst-performing major currency against the dollar both years. But when it comes to the yen right now, it seems, no forecast is too bearish. “When I started in the business, dollar-yen was 230,” recalled David Rosenberg, chief economist and strategist at Gluskin Sheff. “For those that think this move is over, this is probably going to be a round trip, meaning that the dollar’s run-up against the yen has a lot further to go.”

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Japan is a state of panic.

BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

If one were to look up the definition of hypocrisy, the image of BoJ head Kuroda should be front-and-center. Having tripled-down on his money-printing and ETF-buying largesse just last week, he came out swinging last night at the government’s fiscal irresponsibility blasting Abe’s policies by saying Japan’s fiscal health “is the responsibility of parliament and the government, not an issue for the central bank to be held responsible for.” Aside from the fact that he is directly monetizing all JGB issuance – thus enabling Abe’s arrogant fiscal stimulus plan (by issuing 30Y and 40Y debt), Bloomberg notes that “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ.” The world has truly gone mad. Seemingly paying the same lip-service as Bernanke and Yellen in the US and Draghi in Europe, BoJ’s Haruhiko Kuroda is carefully positioning the blame for lack of growth and economic chaos on the government’s lack of growth-oriented policies… and not the central bank’s enabling experiments… (via Bloomberg):

Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after PM Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. “It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said at a press conference in Tokyo. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse economist Hiromichi Shirakawa. “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ,” said Shirakawa, a former BOJ official. “This is true, but he used to highlight that the BOJ and the government were working together. Abe might have created an enemy by postponing the sales-tax hike.”

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This is how you expose the madness in all those nonsensical plans and targets.

Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

The U.K. government needs to make radical changes to halt the slide in export growth, the head of British Chambers of Commerce told CNBC. “Exports are tailing off, the rate of growth is tailing off — it’s the one part of the economy we are failing on,” BCC’s Director- General John Longworth told CNBC Europe’s “Squawk Box” on Thursday. “They always say that the definition of madness is carrying on doing the same thing as before and expecting a different result. We need to do something radically different as a country.” His comments come as the BCC published its third-quarter Trade Confidence Index on Thursday. The survey, carried out with delivery company DHL Express, measures U.K. exporting activity and business confidence of more than 2,300 exporting firms.

It found that in the latest quarter, fewer exporters reported increased sales: 29% of exporters stated that sales had increased in the third quarter of 2014, a sharp drop from 47% in the second quarter. Of those exporters no longer seeing an increase in export sales, most said that sales have remained consistent. “There has a slowdown in the U.K.’s export potential because of the slowdown global economic circumstances,” Longworth said, or government export targets would be missed. The U.K. Prime Minister David Cameron said in his 2012 budget that he wanted the U.K. to double exports to £1 trillion ($1.5 trillion) by 2020. In order to achieve that, however, Longworth said the U.K. would have to see export growth of nearly 11% year-on-year growth every year. “So far since the beginning of the recovery in 2010, the total growth in those years has been 14%. So we’ve got a real issue and unless we do something different we’re not going to hit those targets.”

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And so must Italy, Greece, and many others. Let the people debate it, and give them alll the information, not just choice bits.

Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

Michael Pettis has a very interesting article on the Spanish news site ABC regarding a possible default of Spain and the eventual breakup of the eurozone. [..] What follows is my heavily modified translation of key portions of Pettis’ article after reading both of the above translations.

In the Panic of 1837, two-thirds of the US, including several of the richest states, suspended payment of external debt. The United States survived. If the European Union is to survive, it will have to find a solution to the European debt. The more hope instead of action, the more likely there’s a permanent breakdown of the euro and the European Union. In a gesture more of faith than economic or historical data, Madrid assures us that with the right reforms, it will eventually be able to get out of debt. Other countries in debt crises have made the same promise, but the promise is rarely fulfilled. Excessive debt itself impedes growth. Even without the straitjacket of the euro, Spain probably cannot afford its debt. Even those who are against debt cancellation recognize that the only thing that shielded Germany from a Spanish default was the European Central Bank.

Despite their obnoxious policies, far-right parties across Europe flourish more than ever because the ECB protects the euro and European banks at enormous costs for the working and middle classes. These extremists exploit the refusal of European leaders to acknowledge their errors. The longer the economic crisis, greater their chances of winning, and then comes an end to Europe. The only thing that prevented a suspension of payments by Spain and other countries was the promise of the European Central Bank in 2012 to do “whatever it takes” to protect the euro. But debt continues to grow faster than GDP in Europe, and the ECB load increases inexorably month after month. There will come a time when rising debt and a weakening of the German economy will jeopardize the credibility of the guarantee of the ECB (which will be useless), little by little at first, and then suddenly later. In a matter of months Spain will suspend payments.

For now, with debt settlement postponed, German banks strengthen capital to protect themselves from bankruptcy that many predict. Berlin is playing the same game as Washington during the crisis in Latin America in the 1980s. Then US banks actively strengthened their capital, mainly at the covert expense of ordinary Americans, while insisting that Latin American countries needed further reforms and no debt forgiveness. However, multiple reforms led to extremely high rates of unemployment and enormous social upheaval throughout Latin America. From 1987 to 1988, when US banks finally had enough capital, Washington officially recognized that full payment of the debt in 1990 was impossible and forgave the debt of Mexico. In the years following, US banks forgave almost the entire debt of other Latin American countries.

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It’s getting painful. Stop the experiment, it’s failed beyond repair.

Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

Activity in the eurozone’s private sector slowed in November, according to surveys of purchasing managers, an indication the currency area’s economy will continue to grow weakly, if at all, in the final quarter of the year. The surveys also found that businesses again cut their prices in the face of weak demand, a development that will concern the European Central Bank, which is struggling to raise the currency area’s inflation rate from the very low level it has settled at for more than a year. Data firm Markit on Thursday said its composite purchasing managers index – a measure of activity in the manufacturing and services sectors in the currency bloc – fell to 51.4 from 52.1 in October, reaching a 16-month low. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.

Preliminary results from Markit’s survey of 5,000 manufacturers and service providers also showed that a significant pickup in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged. The surveys also found that businesses continued to cut their prices, although at a slightly less aggressive pace. “The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously announced initiatives,” said Chris Williamson, chief economist at Markit.

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France toast.

French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

French manufacturing shrank more than analysts forecast in November and demand fell, signaling that an economic rebound seen in the third quarter might be short lived. A Purchasing Managers Index fell to 47.6, the lowest in three months, from 48.5 in October, London-based Markit Economics said today. That’s below the 50-point mark that divides expansion from contraction and compares with the median forecast of 48.8 in a Bloomberg News survey. A separate index showed services also contracted, while new business across both industries fell the most in 17 months. The euro area’s second-largest economy has barely grown in three years and recent data suggests that 2014 will be little different. With unemployment near a record and the budget deficit widening, President Francois Hollande is under pressure to deliver on his promises of business-friendly reforms.

“The continued softness in private-sector activity signaled by the PMIs suggests an ongoing drag on growth during the fourth quarter,” said Jack Kennedy, senior economist at Markit. “Another round of job shedding by companies during November meanwhile provides little hope of bringing down the high unemployment rate.” An index of services activity rose to 48.8 this month from 48.3 in October, while a composite gauge for the whole economy increased to 48.4 from 48.2, according to today’s report. Employment across both manufacturing and services fell for 13th month, though the rate of decline slowed compared with the previous month. The French economy grew 0.3% in the three months through September as a jump in public spending offset a fourth quarterly decline in investment. The unemployment rate stood at 10.5% in September, more than double than Germany’s 5%, according to Eurostat. Hollande, whose popularity is among the lowest ever registered for a French president, has said he won’t run for a second term if he is unable to bring down joblessness.

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Please, let’s have some violent infighting in Brussels.

Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

In Luxembourg, corporate income taxes are as low as 1% for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn’t joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1%, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. That’s why it came across as obscene to many when Juncker defended Luxembourg’s tax arrangements on Wednesday as “legal”. They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis – that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.

But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries’ national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU’s interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg’s neighbors of tax money, is supposed to be the main face representing the EU. It’s also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.

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Kudos Crapo. Let’s cut the crap, not reintroduce it.

Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

A controversial housing-finance proposal quickly came under fire during a Wednesday Capitol Hill hearing, with a top committee Republican questioning whether it’s a good idea to allow federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back mortgages with very low down payments. “I’m troubled,” said Idaho Sen. Mike Crapo, the leading Republican member of the Senate Banking, Housing and Urban Affairs Committee, by a plan from the Federal Housing Finance Agency to enable Fannie and Freddie to buy mortgages with down payments as low as 3%. “After the problems we’ve seen” it could be risky for Fannie and Freddie to buy loans when borrowers have little equity, Crapo said.

In response, Mel Watt, who became FHFA’s director in January and was the sole witness at the agency-oversight hearing, told senators that mortgages with low down payments will require insurance, and that borrowers will be required to have relatively strong credit profiles otherwise. He added that FHFA will provide more details in December about the types of borrowers who would be eligible for such mortgages. “We are not making credit available to people that we cannot reasonably predict, with a high degree of certainty,” will make their mortgage payments, Watt said. Decisions over who can qualify for loans bought by Fannie and Freddie can have a large impact on the housing market. Together Fannie and Freddie back about half of new U.S. mortgages. The FHFA must carefully craft rules that support the housing market’s somewhat erratic recovery without creating too much risk.

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This could make plenty waves, it’s a high stakes game.

Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

The explosion of brokers plowing into the lucrative junk-bond underwriting business may be fading. The number of firms managing U.S. high-yield bond sales isn’t growing for the first year since 2008, according to data compiled by Bloomberg. The ranks will likely thin in upcoming years as yields rise, making it more expensive for speculative-grade companies to borrow, according to Charles Peabody, a banking analyst at research firm Portales Partnersin New York. “You’re going to see fewer and fewer deals,” he said in a telephone interview. “Underwriting volumes are probably going to decline from here and you’re going to see more of a consolidation or exodus.” So far, the decline has been small, with 87 firms managing high-yield bond sales this year, down from the record 92 in the same period in 2013, Bloomberg data show.

The number of underwriters is still about twice as many as in 2009, when a slew of bankers founded their own firms to grab business from Wall Street firms that were shrinking as the credit crisis caused trillions of dollars of losses and writedowns. The new firms sought to win assignments managing smaller deals that bigger banks didn’t have the appetite for anymore. Five years later, the scene is changing. The least-creditworthy companies have borrowed record amounts of debt, spurred by central-bank stimulus that pushed borrowing costs to all-time lows. Now, the Federal Reserve is preparing to raise rates and junk-bond buyers are getting jittery.

The notes have declined 1.7% since the end of August as oil prices plunged, eroding the value of debt sold by speculative-grade energy companies, Bank of America Merrill Lynch index data show. While junk-bond sales are still on track for a new record this year, issuance has been choppy, with deals being canceled one week and then a flood of sales going through the next. For the past few years, high-yield underwriting has been a bright spot for banks, especially compared with flagging trading revenues. Speculative-grade companies have sold $1.2 trillion of dollar-denominated debt since the end of 2010 to lock in historically low borrowing costs. That’s also meant there have been a swelling number of firms elbowing each other out of the way for a chance to manage those deals, vying for fees that have been almost three times as much as those on higher-rated deals.

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Pot and kettle.

Goldman Fires Staff For Alleged NY Fed Breach (FT)

Goldman Sachs has fired an investment banker who allegedly accessed confidential information from the Federal Reserve Bank of New York, his former employer. Goldman said it had fired Rohit Bansal, a junior employee, in September and then fired his supervisor Joe Jiampietro, a better-known senior banker in the financial institutions group, which advises other banks. Mr Jiampietro was himself a former government official – a top adviser to Sheila Bair when she was chairman of the Federal Deposit Insurance Corporation. The New York Fed said: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”

The news, first reported by the New York Times, comes ahead of a congressional hearing on Friday that is examining whether there is too “cosy” a relationship between regulators and banks. Goldman has been nicknamed “Government Sachs” as the epitome of the “revolving door” between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman’s former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On Friday, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify.

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A little skimpy perhaps, but who would doubt the premise?

Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

How do you tell if a group of bankers is dishonest? Simply by getting them all to toss a coin. That may not seem like in-depth research, but it is the basis of an academic paper published in Nature magazine this week, which investigates whether the financial sector’s culture encourages dishonesty – and concludes that it does. The academics from the University of Zurich used a sample of 128 employees of a large bank, and split them into two groups. The first set of bankers were primed to start thinking about their job, with questions such as “what is your function at this bank?”. They were then asked to toss a coin 10 times, in private, knowing which outcome would earn them $20 a flip. They then had to report their results online to claim any winnings. Unsurprisingly perhaps, there was cheating – with the percentage of winning tosses coming in at an incredibly fortunate 58.2% (although the research omitted to say how many bankers also trousered the coin).

Meanwhile, the second group completed a survey about their wellbeing and everyday life, that did not include questions relating to their professional life. They then performed the coin-flipping task, which threw up a quite astonishing finding: these bankers proved honest. Identical exercises in other industries did not produce the same skewing in results when participants were primed to start thinking about their work. The research does not reveal which institution took part in the survey, presumably to avoid it suing the authors for unearthing some decent behaviour among the cheating. “The effect induced by the treatment could be attributable to several causes,” the authors muse, “including the competitiveness expected from bank employees, the exposure to competitive bonus schemes, the beliefs about what other employees would do in the same situation or the salience of money in the questionnaire.”

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Anti-tax rant. Simon Black knows quite a bit about moving abroad.

New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

This past month, a real-life guild of thieves was formed. With 51 governments pledging their support to each other for the protection of their ignoble craft of theft. And another 30 pledging to join by 2018. From day one, governments have been pilfering their citizens’ assets through taxation, claiming a monopoly on thievery. From the largest institution to the pettiest pickpocket, anyone else who tries to engage in theft is severely punished, as governments work to protect their exclusive right to steal. Frighteningly, they do this all out in the open, believing that they actually have a moral right to commit theft. You can see this delusion in the US government’s claims that last year they “lost out” on $337 billion from people avoiding taxes. As if they have some moral claim to the money they’d failed to pilfer. Nonetheless, they use this claim to justify actively hunting down and penalizing anyone who takes action to avoid being stolen from.

The ones that are doing this are the bankrupt countries, and the deeper they slide into debt, the more desperate they become. Which is why these broke governments are now joining forces, pledging to to collect and share information amongst themselves about citizens’ bank accounts, taxes, assets and income outside local tax jurisdictions. Basically – I’ll help you steal from your citizens if you help me steal from mine. Both the punishment and the likelihood of getting caught for tax evasion are growing. Don’t even bother trying. However that doesn’t mean that you have no choice but to sit there and let your self be stolen from. While there are still ways of legally reducing your tax burden from within a country, your best option is to move and diversify. Diversification is key, because if you have all your eggs in one bankrupt basket, you are really taking on extraordinary risk. Moving some assets abroad can legitimately reduce some of this risk. And an even greater strategy is considering moving yourself.

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